PREFERRED EMPLOYERS HOLDINGS INC, SB-2, 1998-07-29

PREFERRED EMPLOYERS HOLDINGS INC
SB-2, 1998-07-29
INSURANCE AGENTS, BROKERS & SERVICE

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 29, 1998

REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

PREFERRED EMPLOYERS HOLDINGS, INC.
(Name of small business issuer in its charter)

<TABLE>
<CAPTION>
DELAWARE 6411 65-0698779
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<S> <C> <C>
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>

10800 BISCAYNE BOULEVARD
MIAMI, FLORIDA 33161
(305) 893-4040
(Address and telephone number
of principal executive offices)

WILLIAM R. DRESBACK
PREFERRED EMPLOYERS HOLDINGS, INC.
10800 BISCAYNE BOULEVARD
MIAMI, FLORIDA 33161
(305) 893-4040
(Name, address and telephone number
of agent for service)

COPIES OF ALL COMMUNICATIONS, INCLUDING COMMUNICATIONS
SENT TO AGENT FOR SERVICE, SHOULD BE SENT TO:
Donald J. Bezahler, Esq.
Baer Marks & Upham LLP
805 Third Avenue
New York, New York 10022
(212) 702-5700

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after this Registration Statement becomes effective.

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / / ______

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ______

If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ______

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /

CALCULATION OF REGISTRATION FEE

<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1)(2) PER SHARE(3) OFFERING PRICE(3) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, $.01 par value 1,524,356 $8.94 $13,627,742.64 $4,021
</TABLE>

(1) Includes the registration of all of the shares of the Company's Common Stock
issuable upon (a) the conversion of, or otherwise in respect to, the
Company's 7% convertible subordinated promissory notes due 2003
(collectively, the "Notes") issued in a private placement in May 1998 and
(b) the exercise of warrants (collectively, the "Warrants") to purchase an
aggregate of 348,800 shares of Common Stock. Estimated solely for purposes
of calculating the registration fee and assumes that all of the outstanding
principal with respect to the Notes ($10,580,000 as of July 24, 1998) was
converted into shares of Common Stock on July 24, 1998, based on a
conversion price of $9.00 per share.

(2) Pursuant to Rule 416 under the Securities Act of 1933, as amended, such
number of shares of Common Stock registered hereby shall include an
indeterminate number of additional shares of Common Stock which may be
issued upon the occurrence of certain events in accordance with the
applicable terms and provisions relating to the Notes and the Warrants,
including stock splits, stock dividends and similar transactions and
anti-dilution adjustments.

(3) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933, as amended, based
upon the average of the high and low sale price of the Common Stock on the
Nasdaq SmallCap Market on July 24, 1998.

------------------------------

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.

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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
PROSPECTUS

SUBJECT TO COMPLETION, DATED JULY 29, 1998

1,524,356 SHARES OF COMMON STOCK

PREFERRED EMPLOYERS HOLDINGS, INC.

This prospectus (the "Prospectus") relates to the offer and sale (the
"Offering") by the selling securityholders listed herein (the "Selling
Securityholders") of shares (collectively, the "Shares") of common stock, par
value $0.01 per share (the "Common Stock"), of Preferred Employers Holdings,
Inc., a Delaware corporation (the "Company"), all of which are issuable upon (i)
the conversion of, or otherwise in respect to, 7% convertible subordinated
promissory notes due 2003 (the "Notes") issued by the Company in a private
placement in May 1998 and (ii) the exercise of warrants (collectively, the
"Warrants") to purchase an aggregate of 348,800 shares of Common Stock. See
"Selling Securityholders," "Plan of Distribution" and "Description of
Securities."

The Company will not receive any proceeds from the sale by the Selling
Securityholders of the Shares offered hereby. However, 348,800 shares of the
Shares offered hereby are issuable upon the exercise of outstanding Warrants to
purchase Common Stock (subject to adjustments). If all of the Warrants were
exercised in full, the Company estimates that it would receive gross cash
proceeds of approximately $2.9 million (assuming none of the Warrants were
exercised pursuant to the cashless exercise provisions contained therein). In
addition, the Company will bear expenses from this Offering, which the Company
estimates to be approximately $125,000 in the aggregate. The Company is required
to effectuate this Offering pursuant to agreements between the Company and the
Selling Securityholders. See "Selling Securityholders" and "Description of
Securities."

The Common Stock is listed on the Nasdaq SmallCap Market under the symbol
"PEGI." On July 24, 1998, the closing sale price of the Common Stock as reported
on the Nasdaq SmallCap Market was $9.25 per share.

THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND LIMITED
LIQUIDITY. PROSPECTIVE PURCHASERS SHOULD CAREFULLY CONSIDER THE FACTORS SET
FORTH UNDER THE CAPTION "RISK FACTORS" BEGINNING ON PAGE 5 OF THIS PROSPECTUS.
---------------------

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.
------------------------

The Selling Securityholders and any other person participating in the
distribution of the Shares offered hereby will be subject to applicable
provisions of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and the rules and regulations promulgated thereunder, including Rules 101
through 104, and such provisions may limit the timing of purchases and sales of
the Common Stock. The Shares offered hereby may be offered and sold from time to
time pursuant to Rule 415 under the Securities Act of 1933, as amended (the
"Securities Act"), by the Selling Securityholders in one or more transactions
through the Nasdaq SmallCap Market or another market which lists the Common
Stock, negotiated transactions, or a combination of such transactions. The
Shares may be sold at market prices prevailing at the time of sale, at prices
related to such prevailing market prices or at negotiated prices. The Selling
Securityholders may effect such transactions by selling the Shares directly to
purchasers or through underwriters or broker-dealers who may effect such
transactions by selling the Shares directly to purchasers or through
underwriters or broker-dealers who may act as agents or principals. Underwriters
or broker-
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dealers may receive compensation in the form of discounts, concessions or
commissions from the Selling Securityholders or the purchasers of the Shares for
whom the underwriters or broker-dealers may act as agent or to whom they sell as
principal or both.

The date of this Prospectus is , 1998
<PAGE>
PROSPECTUS SUMMARY

THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
STATEMENTS, INFORMATION AND FINANCIAL STATEMENTS (INCLUDING THE NOTES THERETO)
APPEARING ELSEWHERE IN THIS PROSPECTUS, INCLUDING THE STATEMENTS AND INFORMATION
IN THE PROSPECTUS UNDER THE CAPTIONS "RISK FACTORS," "MANAGEMENT'S DISCUSSION
AND ANALYSIS" AND "BUSINESS." UNLESS THE CONTEXT OTHERWISE REQUIRES, THE TERM
THE "COMPANY" AS USED HEREIN MEANS PREFERRED EMPLOYERS HOLDINGS, INC., TOGETHER
WITH ITS WHOLLY-OWNED SUBSIDIARIES, PREFERRED EMPLOYERS GROUP, INC. ("PEGI"),
P.E.G. REINSURANCE COMPANY, LTD. ("PREFERRED REINSURANCE") AND PREFERRED
HEALTHCARE STAFFING, INC. ("PREFERRED STAFFING").

THE COMPANY

GENERAL. The Company is a multi-service oriented provider currently engaged
in business as: (i) a provider of workers' compensation and business insurance
products and risk management services designed for the American franchise
industry, particularly fast food, family style restaurants and convenience
stores; (ii) a reinsurer with respect to certain workers' compensation and
employer's liability insurance policies sold by the Company; and (iii) a
provider of temporary registered nurses and other professional medical
personnel, primarily to client hospitals.

It has been estimated that current 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 representing approximately $1.6 billion of this
amount. The Company's insurance products and services are specifically designed
to provide clients with substantial cost savings and reduce the time required of
these clients in managing this element of their business. In order to assist
clients in managing their workers' compensation costs, the Company seeks to
offer competitive rates and an opportunity for a client to receive dividends,
based upon its claims experience, and provides risk management services,
including cost containment and claims management programs. It is the Company's
belief that this innovative approach to cost containment has succeeded in
helping its clients achieve claims costs which are among the lowest in the
workers' compensation insurance industry.

The franchise industry is considered potentially to be among the safest
insurance risks. However, a substantial number of businesses within this
industry have not instituted formal risk and safety awareness programs and
consequently do not receive price advantages which should arise from their
favorable safety attributes. The Company believes segments of this industry
suffer from premium redundancy or an over charge in workers' compensation
insurance rates. Insurance programs offered by the Company are specifically
designed to reduce the impact of redundancy on this segment of the industry
while emphasizing loss control and cost containment. The Company utilizes its
proprietary information and claims analysis systems and custom-designed loss
reports in an effort to motivate client management to promote safety and control
claims expense. It further seeks to limit the number of disputes between the
insured and its employees arising from insurance claims, and as one of the only
national providers specializing in workers' compensation insurance for the
franchise industry, the Company believes it is uniquely positioned to accomplish
this goal.

The Company has launched several new business campaigns and marketing
programs. One of these programs is a workers' compensation program for motor
vehicle related franchises, including automobile, motorcycle and recreational
vehicle dealerships as well as auto service providers. Motor vehicle
dealerships, while not true franchises, are quite similar from dealer to dealer
and are viewed by the Company as businesses into which it can apply its
expertise in cost containment gained in the franchise industry. Another Company
program involves workers' compensation insurance designed to target certain
smaller businesses located in approximately 23 states which pay annual premiums
of between approximately $5,000 and $50,000. The underwriting process under this
program has been simplified, thus enabling the Company to respond promptly to
businesses with competitively priced quotes. The Company believes that many
broker/agents, regardless of size, have accounts that are eligible to
participate in the program and

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therefore can be potentially attractive to broker/agents. A new marketing
program has also been launched by the Company which involves direct mail,
telemarketing and field sales targeted directly at the consumer and follows the
Company's goal of writing low risk policies.

REINSURANCE. Prior to the consummation of its initial public offering in
February 1997, the Company acted solely as a general agent on behalf of various
major insurance carriers for workers' compensation and other forms of property
and liability insurance for franchise businesses through its own sales staff as
well as through independent broker/agents. As a general agent, the Company
assumes none of the risks associated with the insurance business it produces. In
December 1996, the Company formed P.E.G. Reinsurance Company, Ltd. ("Preferred
Reinsurance"). Preferred Reinsurance acts as a reinsurer with respect to certain
workers' compensation and employer's liability insurance policies sold by the
Company. Although Preferred Reinsurance assumes the risks associated with being
a reinsurer, its reinsurance agreement limits the liability of Preferred
Reinsurance for losses and certain defined expenses to the first $300,000 per
occurrence and limits its aggregate liability for all coverage to an amount not
to exceed 70% of the gross written premiums for each individual underwriting
year.

TRAVELING NURSES. Consistent with the Company's growth strategy to enter
into complimentary lines of business, in March 1998 Preferred Healthcare
Staffing, Inc., a wholly-owned subsidiary of the Company ("Preferred Staffing"),
purchased substantially all of the assets of HSSI Travel Nurse Operations, Inc.
("Travel Nurse"), a provider of temporary registered nurses and other
professional medical personnel, primarily to client hospitals. For the year
ended November 30, 1997, Travel Nurse generated revenues of approximately
$15,000,000 and placed in excess of 700 nurses. As of June 30, 1998, Preferred
Staffing had orders for approximately 1,800 nurses. Unlike daily or other very
short-term supplemental staff, travel nurses serve the client for a long enough
period to function as permanent hospital staff. The Company believes that the
ability of travel nurses to function as permanent staff improves the continuity
and consistency of patient care and reduces the overall administration,
orientation and supervisory requirements of the clients' permanent staff.

For the three months ended March 31, 1998, the Company's total revenues were
$5,545,660 as compared to $3,037,480 for the three months ended March 31, 1997.
For the year ended December 31, 1997, the Company's total revenues were
$15,999,112 as compared to total revenues of $3,341,130 for the year ended
December 31, 1996, representing a net increase of $12,657,982. Approximately 17%
and 13%, respectively, of the Company's total revenues (excluding staffing
income) for the year ended December 31, 1997 and three months ended March 31,
1998 were derived from writing insurance as a general agent and approximately
83% and 87%, respectively, of these revenues were derived from its reinsurance
business. For the three months ended March 31, 1998, the Company's staffing
revenues were $1,411,030, representing approximately 25% of the Company's total
revenues for such period.

STRATEGY. The Company believes there are substantial opportunities for
growth by leveraging its considerable capabilities and expertise in workers'
compensation and claims cost management. In particular, the Company believes
that by combining its existing expertise in insurance matters with strategic
acquisitions of professional employer organizations ("PEOs") it can reduce the
operating expenses typically associated with PEOs and increase the products
offered by the Company to its existing clients. PEOs provide employee leasing
services to their clients. Employee leasing generally is a contractual
arrangement through which a business transfers its payroll and human resource
responsibilities to a firm specializing in these functions. The leasing firm
typically provides health, unemployment, and workers' compensation insurance,
plus safety training, while the worksite employer retains full operational
control over the employee's activities. It is believed that many of the problems
faced by existing PEOs stem from their lack of underwriting, actuarial and cost
containment expertise. The Company's current strategy for growth includes: (i)
continuing to capitalize on its business of selling insurance and risk
management products to franchise companies; (ii) entering into the PEO market by
making selective acquisitions; (iii) growing its existing business by offering
its workers' compensation and business insurance products,

2
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along with risk management services to an expanding base of PEO clients; (iv)
offering employee leasing related products and services to its existing
franchise clients; and (v) focusing its PEO operations on specific industry
segments without regard to geographic boundaries.

RECENT DEVELOPMENTS. In May 1998, the Company consummated a private
placement of 7% convertible subordinated notes due May 2003 (the "Notes") in the
aggregate principal amount of $10,580,000. The principal amount of the Notes is
convertible into shares of the Company's common stock, par value $.01 per share
(the "Common Stock"), at a conversion price of $9.00 per share (the "Conversion
Price") at any time prior to the earlier of May 12, 2003 (the "Maturity Date")
or ten business days after the receipt of a Termination Notice (as described
below). See "Management's Discussion and Analysis--Liquidity and Capital
Resources."

On July 10, 1998, the Company and Preferred Staffing executed a definitive
agreement to exchange, through a "pooling of interests," all of the outstanding
capital stock of National Explorers and Travelers Healthcare, Inc. ("NET") for
shares of the Company's Common Stock not to exceed $10 million. NET provides
registered nurses and other professional medical personnel primarily to client
hospitals in the United States and the Caribbean on a contractual basis, for
periods generally ranging from 8 to 52 weeks. For the year ended December 31,
1997, NET generated revenues of approximately $11,594,000. The exchange ratio is
based upon a multiple of NET's after tax net income on an annualized basis,
based upon the first four months of 1998, less outstanding debt. The closing is
expected to occur by the end of July 1998, and is contingent upon numerous
closing conditions, which may or may not occur.

The Company's principal executive offices are located at 10800 Biscayne
Boulevard, Miami, Florida 33161 and the Company's telephone number at that
location is (305) 893-4040.

THE OFFERING

All of the 1,524,356 shares of Common Stock being offered hereby are being
offered by the Selling Securityholders. The Company will not receive any of the
proceeds from the sale of the shares offered hereby. However, 348,000 shares of
the Shares offered hereby are issuable upon the exercise of the Warrants. If all
of the Warrants were exercised, the Company estimates that it would receive
gross cash proceeds of approximately $2.9 million (assuming none of the Warrants
were exercised pursuant to the cashless exercise provisions contained therein).
See "Use of Proceeds" and "Selling Securityholders."

RISK FACTORS

Prospective purchasers are urged to consider the information set forth under
the caption "Risk Factors" beginning on page 5 of this Prospectus in evaluating
an investment in the Common Stock offered hereby.

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SUMMARY FINANCIAL DATA

The following summary financial data concerning the Company for the years
ended December 31, 1997 and 1996 and as of and for the three months ended March
31, 1998 and 1997 are derived from the consolidated financial statements of the
Company. The Company's consolidated financial statements have been prepared in
accordance with generally accepted accounting principles. The data presented as
of and for the years ended December 31, 1997 and 1996 have been derived from the
audited consolidated financial statements of the Company which appear elsewhere
in this Prospectus. The data presented as of and for the three months ended
March 31, 1998 and 1997 have been derived from the unaudited consolidated
financial statements of the Company which appear elsewhere in this Prospectus.
The results of operations of the Company for any interim period are not
necessarily indicative of the Company's results of operations for the full year.
The following summary financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and the consolidated financial statements and notes
thereto of the Company included elsewhere in this Prospectus.
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<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31
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(UNAUDITED)

<CAPTION>
1997 1996 1998 1997
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<S> <C> <C> <C> <C>
OPERATING DATA:
Total revenues............................................. $ 15,999,112 3,341,130 $ 5,545,660 3,037,480
Net income................................................. 1,209,418 104,266 313,756 220,653
Net diluted income per share............................... $ 0.27 $ -- $ 0.07 $ 0.06
</TABLE>

<TABLE>
<CAPTION>
AT DECEMBER 31, 1997 AT MARCH 31, 1998
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<S> <C> <C>
(UNAUDITED)
BALANCE SHEET DATA:
Total assets............................................................. $ 29,700,203 $ 34,106,132
Total liabilities........................................................ 17,711,791 21,803,964
Net shareholders' equity................................................. 11,988,412 12,302,168
</TABLE>

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RISK FACTORS

THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. PRIOR TO MAKING AN
INVESTMENT DECISION, PROSPECTIVE PURCHASERS SHOULD CAREFULLY CONSIDER THE
FOLLOWING RISK FACTORS IN ADDITION TO THE OTHER INFORMATION CONTAINED ELSEWHERE
IN THIS PROSPECTUS RELATING TO THE COMPANY AND THIS OFFERING.

REINSURANCE LIABILITY

Prior to its initial public offering in February 1997, the Company acted
solely as a general agent on behalf of various major insurance carriers for
workers' compensation and other forms of property and liability insurance for
franchise businesses through its own sales staff as well as through independent
broker/agents. As a general agent, the Company assumes none of the risks
associated with the insurance business it produces. However, in December 1996,
the Company formed Preferred Reinsurance which acts as a reinsurer with respect
to certain workers' compensation and employer's liability insurance policies
sold by the Company. Preferred Reinsurance assumes certain risks associated with
being a reinsurer. However, its reinsurance agreement limits the liability of
Preferred Reinsurance for losses and certain defined expenses to the first
$300,000 per occurrence and limits its aggregate liability for all coverage to
an amount not to exceed 70% of the gross written premiums for each individual
underwriting year. Liabilities incurred by the operations of Preferred
Reinsurance could have a material adverse effect on the Company.

DEPENDENCE ON REINSURANCE BUSINESS; TERMINATION OF REINSURANCE AGREEMENT

For the three months ended March 31, 1998 and for the year ended December
31, 1997, approximately 87% and 83%, respectively, of the Company's total
revenues (excluding staffing income) were derived from its reinsurance business.
The Company's reinsurance operations are governed by the terms of a reinsurance
agreement between Preferred Reinsurance and insurance companies affiliated with
the American International Group of Companies (collectively, the "AIG
Affiliates"). The reinsurance agreement may be terminated by either of the
parties on the first day of any calendar quarter by giving the other party 180
days prior written notice. In addition, the reinsurance agreement may be
terminated immediately if, among other things, the performance of the
reinsurance agreement is prohibited or rendered impossible DE JURE or DE FACTO;
or the other party becomes insolvent, suffers impairment of capital, files a
petition for
bankruptcy or is acquired or controlled by any other insurance company or
organization. In the event the reinsurance agreement is terminated or the
Company's reinsurance operations are otherwise adversely affected, the Company's
results of operations may be materially and adversely affected.

UNDERWRITING AND LOSS CONTROL

The financial condition and results of operations for the Company depends in
large part on its ability to effectively reinsure workers' compensation
insurance written by the Company. Failure to correctly assess the risks
associated therewith could impact the Company's loss experience, increase the
need for claims management and materially and adversely affect the Company. The
Company has and will continue to use certain underwriting procedures thought to
be effective in assessing the risks associated with reinsurance coverage. The
Company generally has not and will not provide workers' compensation insurance
coverage to companies or industries that have higher than average claim
incidence, such as explosives, nuclear or hazardous waste, asbestos removal and
crop dusting, among others. In addition to such limitations on companies and
industries, the Company seeks to control such exposure through underwriting
procedures, including examinations of claims history and credit worthiness,
requirements of minimum premium levels and number of employees and regular
inspections by loss control engineers. These criteria may be used in evaluating
prospective insureds submitted to the Company by independent agents. In addition
to these underwriting procedures, the Company seeks to manage its risks through
loss control efforts. Loss control efforts include working directly with the
insureds at their worksite to design safety programs and make recommendations
that will decrease the frequency of injury. Implementation by the Company of
these underwriting and loss control procedures is believed to have resulted in
loss ratios among the lowest in the

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workers' compensation insurance industry. However, failure of the Company to
effectively implement underwriting and loss control procedures may cause
increased incidence of claims among the Company's insureds, which could
materially and adversely affect the Company.

NEW PRODUCTS

The Company has recently launched several new business campaigns. One of
these programs is a workers' compensation program for motor vehicle related
franchises, including automobile, motorcycle and recreational vehicle
dealerships as well as auto service providers. Motor vehicle dealerships, while
not true franchises, are quite similar from dealer to dealer and are viewed by
the Company as businesses into which it can apply its expertise in cost
containment gained in the franchise industry. Another Company program involves
workers' compensation insurance designed to target certain smaller businesses
located in approximately 23 states which pay annual premiums of between
approximately $5,000 and $50,000. The success of these new programs will depend
on various factors, including the unpredictable nature of the insurance industry
generally, the generation of sufficient volume and premiums, loss experience,
losses (if such programs are reinsured by Preferred Reinsurance), 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 this strategy or that its strategy will
result in profitable operations.

REGULATIONS

As a general agent, the Company is subject to regulations 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 general agent, and certain other requirements. Penalties may
be imposed for violations of such regulations. Any change in such regulations
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 state legislatures, and influenced by the political processes in each state.
Several states have mandated that employers receive coverage only from funds
operated by the state. 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. Certain states, such as
Hawaii and Maine, have promulgated regulations that place onerous assessments on
commercial insurers to subsidize state assigned risk programs. These state
regulations generally preclude commercial insurers from offering their workers'
compensation programs in such states because of excessive costs and cause
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.

Preferred Reinsurance, the Company's wholly-owned reinsurance subsidiary, is
a registered Bermuda insurance company and is subject to the regulations and
supervision of 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
Preferred Reinsurance 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 its operations and financial condition. These statutes and regulations, in
effect, restrict the ability of Preferred Reinsurance 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 Preferred Reinsurance,
it may require infusions of capital from the Company, which could be significant
and adversely affect the Company.

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<PAGE>
Preferred Reinsurance is neither registered nor licensed as an insurance
company in any jurisdiction in the United States. It conducts business through
its offices in Bermuda and does not maintain an office, and its personnel do not
solicit, advertise, settle claims or conduct other insurance activities in the
United States. Accordingly, the Company believes that Preferred Reinsurance is
not generally subject to the insurance laws of any jurisdiction in the United
States, except with respect to its status as a foreign insurer. There can be no
assurance, however, that inquiries or challenges to the insurance activities of
Preferred Reinsurance 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
business or the Company's operations in the future. Although it conducts its
operations from Bermuda, Preferred Reinsurance is not authorized to underwrite
local risks in Bermuda.

Premiums on the reinsurance operations of Preferred Reinsurance are derived
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 Preferred Reinsurance, as a
condition for the insurer being permitted to recognize the reinsurance contract
as an admitted asset or as a deduction from liabilities on its statutory
financial 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 state insurance regulators, to meet certain
capital requirements, or to comply with other conditions. Accordingly, failure
of Preferred Reinsurance to comply with the requirements imposed by a particular
state may reduce the interest of insurers in that state in ceding reinsurance to
the Company's reinsurance subsidiary.

Recently, the insurance and reinsurance regulatory framework has been
subject to increased scrutiny in many jurisdictions, including the United States
and various states within the United States. Many states have recently created
employee class codes that distinguish fast food restaurants from other types of
restaurants. The Company currently 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 laws or regulations on the
operations of the Company. Such changes could, however, have a material adverse
effect on the Company.

DEPENDENCE ON INDEPENDENT INSURANCE BROKER/AGENTS; PRODUCTS AND SERVICES

The Company's programs are predicated upon the successful marketing of its
products and services through independent insurance broker/agents. Although its
programs have been structured to increase revenues for the independent
broker/agents, there can be no assurance that independent broker/agents will
offer the Company's products or services. These broker/agents are not obligated
to promote the Company's products or services and may sell competitors'
insurance products and services. Therefore, the Company's operations depend 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 successfully market the Company's
products and services 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 that by offering superior products and services to this
segment of the business community, which is considered potentially 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, however, that these programs will
continue or that the rates offered for these products will remain competitive.
In the event the Company

7
<PAGE>
discontinues any of these programs or the rates offered are not competitive, the
Company's results of operations may be materially and adversely affected.

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, 1997, the
Company provided services and products to approximately 973 separate insureds,
none of which accounted for more than 3% of annual revenues, approximately 22%
of the Company's revenues were 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 Company. Similarly,
endorsements from franchisors to franchisees suggesting the manner in which
franchisees obtain workers' compensation insurance could have a material adverse
effect on the Company.

DEPENDENCE ON LIMITED NUMBER OF CARRIERS

The Company is primarily engaged in the property and casualty insurance
business as a general agent ("GA") on behalf of the American International Group
of Companies ("AIG"), the General Accident Insurance Company ("GAIC") and the
Kemper Insurance Companies ("Kemper") and as a reinsurer for certain workers'
compensation insurance policies written by the Company on behalf of AIG
Affiliates. Pursuant to general agency agreements, 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 general agency agreements, gross
commissions on its business at rates which range from approximately 5% to 20%.
The Company has written workers' compensation insurance since its inception in
1988 and in late 1995 began writing other forms of property and casualty
insurance for family style and fast food restaurants as a GA. In the event that
any of the Company's general agency agreements are terminated, it may have a
material adverse effect on the Company's operations.

DEPENDENCE ON INVESTMENT INCOME

The Company's results of operations depend, in part, on the income derived
from the investment of premiums by Preferred Reinsurance. The Company believes
that the risks inherent in the reinsurance business of Preferred Reinsurance
should not be augmented by a speculative investment policy and, therefore, its
investment strategy is partially defined by the need to safeguard its capital.
Because of the unpredictable nature of losses that may arise under insurance
policies, the liquidity needs of Preferred Reinsurance may be substantial. The
Company's investment policy has been established by the Company's Investment
Committee, and is subject to, among other factors, the Company's liquidity
requirements. The Company's investments consist primarily of cash or
fixed-income securities (none of which has 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, which would
adversely affect the required capital resources necessary to conduct its
business.

INTEREST RATE FLUCTUATIONS

The Company maintains most of its cash in the form of short-term, fixed
income securities, the value of which is subject to fluctuation depending on
changes in prevailing interest rates. The Company generally does not hedge its
cash investments against interest rate risk. Accordingly, changes in interest
rates would result in fluctuations in the income derived from the Company's
investments.

8
<PAGE>
RELIANCE UPON KEY PERSONNEL

The Company's success depends to a substantial extent upon the continuing
efforts and abilities of Mr. Mel Harris, the Company's Chairman of the Board,
President and Chief Executive Officer, and upon the efforts and abilities of
other management and key personnel. The Company has an employment agreement with
Mr. Harris. The loss of the services of Mr. Harris or any other key Company
personnel could have a material adverse effect on the Company.

POTENTIAL IMPACT OF HOLDING COMPANY STRUCTURE ON DIVIDENDS

The Company conducts a significant amount of its operations through its
subsidiaries, particularly its reinsurance business through Preferred
Reinsurance. The Company may need to rely on cash dividends and other payments
from its subsidiaries to, among other things, pay creditors, maintain capital
and other operating requirements and pay cash dividends, if any, to the
Company's stockholders. Certain of the Company's subsidiaries are subject to
regulations and may be subject to certain taxes and regulations that could limit
the amount or restrict or prohibit the payment of dividends to the Company. If
the Company is unable to receive cash dividends from its subsidiaries which are
required, the Company may be materially and adversely affected. Pursuant to The
Bermuda Insurance Act of 1978 and related regulations, Preferred Reinsurance is
required to maintain a certain minimum solvency margin and liquidity ratio in
order to avoid restrictions on its retained earnings available for distribution.
At June 30, 1998, Preferred Reinsurance was in compliance with these
requirements. There can be no assurance that Preferred Reinsurance will be able
to maintain these minimum levels in the future.

UNITED STATES FEDERAL INCOME TAX RISKS

As a Bermuda domiciled corporation, Preferred Reinsurance does not file
United States tax returns. The Company believes that the reinsurance subsidiary
operates in such a manner that it is not directly 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 does not engage in business or
have a permanent establishment in the United States. However, Preferred
Reinsurance does constitute a "controlled foreign corporation" ("CFC") for
United States federal income tax purposes. As a result, the Company includes 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. Substantially all of Preferred Reinsurance's income is subpart F
income. The Company is considering an election under section 953(d) of the
Internal Revenue Code (the "Code") to tax Preferred Reinsurance as a domestic
corporation for U. S. income tax purposes. The Company believes this election,
if made, will not have a material effect on its income tax expense.

COMPETITION

The workers' compensation insurance industry is highly competitive. The
Company competes with other general agents, 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
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 or results
of operations.

9
<PAGE>
After a period of absence from the market, traditional national insurance
companies have 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.

INDUSTRY CYCLICALITY; POTENTIAL FLUCTUATIONS IN FINANCIAL RESULTS

The financial results of companies in the reinsurance industry historically
have been subject to significant fluctuations and may fluctuate significantly in
the future. Results of operations may fluctuate due to a variety of factors,
including competitive pricing pressures, unpredictable developments in loss
trends, changes in loss reserves, market acceptance of new coverages or
enhancements, competitive conditions in the industry, changes in operating
expenses, fluctuations in interest rates and other changes in investment markets
which affect market prices of investments and income from such investments, and
changes in levels of general business activity and economic conditions. The
Company has experienced increased competitive pricing pressures in its workers'
compensation insurance line of business during the past year. In addition,
insureds are eligible for renewal of their policies on different anniversary
dates, subject to underwriting and loss control criteria applied by the Company.
If a large number of insureds were to decline to renew their policies or if
their policies were not renewed in a given calendar quarter, the Company's
results of operations could be materially adversely affected. In addition, in
the event the Company's operating results are below expectations, the price of
shares of Common Stock could be materially adversely affected.

SIGNIFICANT INDUSTRY CONCENTRATION; SPECIALTY INDUSTRY RISKS

Due to the Company's focus on insuring specialty industries, such as the
franchise industry and the employee leasing and staffing industry, its
operations could be more exposed than diversified competitors to the effects of
changes in economic conditions and regulations affecting such specialty
industries. These changes may include economic downturns that may adversely
impact the franchise industry, as well as small to medium-size businesses served
by employee leasing and staffing companies; the degree of enactment and
enforcement of federal and state regulations; and the adoption of federal or
state regulations governing the licensing and operation of employee leasing and
staffing companies.

RISKS ASSOCIATED WITH GROWTH STRATEGY

The Company's growth strategy includes making selective acquisitions, as
well as continued internal growth, particularly through its franchise insurance
programs and development of new insurance programs. If the Company is unable to
implement its growth strategy effectively, the Company's business, financial
condition and results of operations could be materially adversely affected. Any
future acquisition made by the Company would be accompanied by risks commonly
encountered in acquisitions. Such risks include, among other things, the
difficulty in assimilating the operations and personnel of an acquired company
or business; the potential disruption of the Company's ongoing business; the
inability to successfully integrate acquired systems and insurance programs into
the Company's operations; the maintenance of uniform standards, controls and
procedures; and the possible impairment of relationships with employees and
insureds. In addition, there can be no assurance that the Company will be able
to successfully implement its strategy for continued internal growth.

COMPETITION IN THE PEO MARKET; LIABILITIES FOR CLIENT AND EMPLOYEE ACTIONS

One of the components of the Company's business strategy is to enter into
the professional employer organization ("PEO") market by making selective
acquisitions. The PEO industry is highly competitive with limited barriers to
entry. In the event the Company enters into the PEO market, it will compete with
national, regional and local companies offering full service and specialized PEO
staffing. A significant

10
<PAGE>
number of companies in the PEO industry have greater marketing, financial and
other resources than the Company. In addition, a number of legal issues
concerning the PEO industry with respect to the co-employment arrangements
between a PEO and its worksite employees remain unresolved, including questions
concerning the ultimate liability for violations of employment and
discrimination laws. In the event the Company enters into the PEO market and
acts as a co-employer, it may be subject to liability for violations of these or
other laws, even if it does not participate in such violations. Further, even
though the Company may seek indemnification from its client for any liability
attributable to the conduct of its clients, the Company may not be able to
collect on such claims and thus may be responsible for satisfying such
liabilities. In addition, worksite employees may be deemed to be agents of the
Company, subjecting the Company to liability for the actions of such worksite
employees.

LIABILITY FOR WORKSITE EMPLOYEE PAYROLL

Under standard PEO client agreements, the PEO becomes a co-employer of
worksite employees and assumes the obligations to pay the salaries, wages and
related benefit costs and payroll taxes of such worksite employees. As such, a
co-employer would assume obligations as a principal, not merely as an agent of
the client company. In the event the Company engages in the PEO business, the
Company's obligations could include responsibility for (i) payment of the
salaries and wages for work performed by worksite employees, regardless of
whether the client company makes timely payment to the Company of the associated
service fee, and (ii) providing benefits to worksite employees even if the costs
incurred by the Company to provide such benefits exceed the fees paid by the
client company. There can be no assurance that the Company's ultimate liability
for worksite employee payroll and benefits costs would not have a material
adverse effect on its financial condition or results of operations.

GOVERNMENT REGULATION OF PEOS

While many states do not explicitly regulate PEO activities, many states
have passed laws that have licensing or registration requirements for PEO
companies and other states are considering such regulation. Such laws vary from
state to state but generally provide for monitoring the fiscal responsibility of
PEO companies. In the event the Company engages in the PEO business, there can
be no assurance that the Company would be able to satisfy the licensing
requirements or other applicable regulations of any particular state in which
the Company commences PEO operations.

In the event the Company engages in the PEO business, the Company may assume
certain obligations and responsibilities of an employer. However, laws
applicable to the employment situation (such as ERISA and federal and state
employment tax laws) do not specifically address the obligations and
responsibilities of non-traditional employers such as PEO companies. In
addition, many states have not addressed the PEO relationship for purposes of
compliance with applicable state laws governing the employer/employee
relationship. If these or other federal or state laws are adverse to the PEO
industry, they could adversely affect the Company's results of operations or
financial condition.

The Internal Revenue Service ("IRS") has established an Employee Leasing
Market Segment Group for the purpose of identifying specific compliance issues
prevalent in certain segments of the PEO industry. One issue that has arisen is
whether a PEO can be a co-employer of worksite employees, including officers and
owners of client companies, for various purposes under the Code, including
participation in the PEOs 401(k) plan. Should the IRS conclude that a PEO is not
a "co-employer" of worksite employees for purposes of the Code, worksite
employees could not continue to make salary deferral contributions to a 401(k)
Plan or pursuant to a cafeteria plan or continue to participate in certain other
employee benefit plans which may be established by the PEO. The Company believes
that were there to be an application of such a conclusion, the employees' vested
account balances under the 401(k) Plan would become taxable and the PEO would
lose its tax deductions to the extent its matching contributions and profit
sharing contributions were not vested, the PEO's Plan trust would become a
taxable trust and the PEO would be subject to liability with respect to trust
earnings and its failure to withhold applicable taxes with respect to

11
<PAGE>
certain contributions. In the event the Company engages in PEO operations,
application by the IRS of an adverse conclusion could have a material adverse
effect on the Company's financial position or results of operations.

VOLATILITY OF TRADING PRICE

The trading price of the Common Stock could fluctuate widely in response to
variations in the Company's quarterly operating results, changes in earnings
estimates by securities analysts, changes in the Company's business and changes
in industry, general market or economic conditions. In addition, in recent years
the stock market has experienced extreme price and volume fluctuations. These
fluctuations have significantly affected the trading prices of the securities of
many companies without regard to their specific operating performance. Such
market fluctuations could have a material adverse effect on the price of the
Common Stock.

YEAR 2000 ISSUES

There is significant uncertainty regarding the impact of Year 2000 issues
which arise when computer systems do not properly recognize date sensitive
information beyond December 31, 1999, thereby generating erroneous data or
failing altogether. The Company believes that its computer equipment and
software will function properly in all material respects with respect to dates
in the Year 2000 and thereafter. However, third parties that have relationships
with the Company, including suppliers, customers and creditors, may experience
significant Year 2000 issues. These issues may have a serious adverse impact on
the operations of such third parties, including a shut-down of operations for a
period of time, which may, in turn, have a materially adverse effect on the
Company's business, financial condition or results of operations.

CONTROL BY PRINCIPAL STOCKHOLDERS

As of July 29, 1998, the Company's Chairman of the Board, President and
Chief Executive Officer, Mr. Mel Harris, may be deemed to beneficially own
approximately 58.7% of the Company's outstanding Common Stock. Accordingly, Mr.
Harris has the ability to control the management and policies of the Company,
including matters requiring approval by the stockholders, such as the election
of directors, amendments to the Company's charter and by-laws and approval of
significant corporate transactions.

SHARES ELIGIBLE FOR FUTURE SALE

As of July 29, 1998, the Company had 4,725,000 shares of Common Stock
outstanding, of which (i) 1,725,000 shares have been registered under the
Securities Act, and, except for shares held by "affiliates" of the Company
within the meaning of Rule 144 under the Securities Act ("Rule 144"), are freely
tradeable and (ii) 3,000,000 shares of Common Stock are "restricted securities"
as defined under Rule 144, and currently may be sold under Rule 144, subject to
the terms thereof. In addition, all of the 1,524,356 shares of Common Stock
included in this Offering when issued and sold pursuant to this Prospectus will
be freely tradeable. The sale of a substantial number of shares of Common Stock
or the availability of such stock for sale could adversely affect the price of
the Common Stock prevailing from time to time.

POSSIBLE ISSUANCES OF PREFERRED STOCK; ANTI-TAKEOVER PROVISIONS

As of July 29, 1998, 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"), however, the Company plans to seek
stockholder approval to increase such number of authorized shares of Preferred
Stock to 2,000,000 shares. 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),

12
<PAGE>
preferences as to dividends and liquidation, conversion and redemption rights
and sinking fund provisions. No Preferred Stock is currently outstanding and the
Company has no current plans to issue 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 holders of Preferred Stock could restrict
the Company's ability to merge with, or sell its assets to, a third party,
thereby providing those stockholders with additional rights concerning a change
of control of the Company. The ability of the Board of Directors to issue
preferred stock could have the effect of delaying, deferring or preventing a
change in control of the Company. Certain provisions of Delaware law may also
discourage third party attempts to acquire control of the Company.

EFFECT OF CONVERSION OF THE CONVERTIBLE SECURITIES

STATE REGISTRATION REQUIRED FOR SALES OF SHARES

Under the securities laws of certain states, the Shares may not be sold
unless they are qualified for sale or are exempt from registration under the
state securities laws of the state in which the prospective purchaser resides.
The Company has agreed to register and qualify the Shares under applicable state
securities laws in such jurisdictions as may be reasonably requested by the
Selling Securityholders.

DIVIDENDS

The Company has never declared or paid any dividends on its Common Stock and
does not anticipate that any cash or other dividends will be paid in the
foreseeable future, as it intends to follow a policy of retaining earnings, if
any, to finance future growth. See "Market for Common Equity and Related
Stockholder Matters--Dividend Policy."

FORWARD-LOOKING STATEMENTS

Certain statements contained in this Prospectus, including without
limitation, statements containing the words "believes," "anticipates," "may,"
"intends," "expects" and words of similar import constitute "forward-looking"
statements within the meaning of the Private Litigation Reform Act of 1995. Such
statements involve known and unknown risks, uncertainties and other factors
which may cause actual Company results to differ materially from expectations.
Such factors include the following: (1) circumstances which could affect the
writing of workers' compensation, liability and property insurance, (2)
economic, business and competitive conditions in the insurance industry and the
economy in general and innovations of new insurance products, (3) the enactment
of new regulations and laws, and the amendment of existing regulations and laws
which could affect the Company's business, (4) changes in the Company's business
strategy or development plans, and (5) the Company's ability to obtain
sufficient financing. Certain of these factors are discussed in more detail
elsewhere in this Prospectus.

13
<PAGE>
USE OF PROCEEDS

The Selling Securityholders will receive all of the proceeds from the sale
of the Shares offered hereby. The Company will not receive any proceeds from the
sale of the Shares offered hereby. However, 348,800 shares of the Shares offered
hereby are issuable upon the exercise of outstanding Warrants to purchase Common
Stock (subject to adjustments). If all of the Warrants were exercised, the
Company estimates that it would receive gross cash proceeds of approximately
$2.9 million (assuming none of the Warrants were exercised pursuant to the
cashless exercise provisions contained therein). The Company expects to use the
proceeds it receives from the exercise of the Warrants, if any, for general
corporate purposes. See "Selling Securityholders" and "Plan of Distribution."

14
<PAGE>
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET INFORMATION

The Company's Common Stock is currently listed on the Nasdaq SmallCap Market
under the trading symbol "PEGI." The Company first listed its Common Stock on
the Nasdaq SmallCap Market in February 1997. During the period from February
1997 to August 1997, the Common Stock was also listed on the Boston Stock
Exchange. The following table sets forth the high and low closing sale prices of
the Common Stock as reported on the Nasdaq SmallCap Market and the Boston Stock
Exchange for each calendar quarter commencing in February 1997 through July 24,
1998 (through August 1997 in the case of the Boston Stock Exchange).

<TABLE>
<CAPTION>
NASDAQ SMALLCAP
MARKET
CLOSING SALE PRICES
--------------------
<C> <S> <C> <C>
YEAR PERIOD HIGH LOW
- --------- -------------------------------------------------------------------------------- --------- ---------
1997 First Quarter (Commencing February 6, 1997)..................................... $ 9.38 $ 7.50
Second Quarter.................................................................. 7.75 6.00
Third Quarter................................................................... 12.25 7.00
Fourth Quarter.................................................................. 10.75 7.00
1998 First Quarter................................................................... 8.50 7.00
Second Quarter.................................................................. 9.75 7.62
Third Quarter (through July 24, 1998)........................................... 9.88 6.13
</TABLE>

<TABLE>
<CAPTION>
BOSTON STOCK
EXCHANGE
CLOSING SALES PRICES
--------------------
<C> <S> <C> <C>
YEAR PERIOD HIGH LOW
- --------- ----------------------------------------------------------------------------------- --------- ---------
1997 First Quarter (Commencing February 6, 1997)........................................ $ 8.38 $ 7.13
Second Quarter..................................................................... 7.14 6.00
Third Quarter (Ending August 9, 1997).............................................. 7.75 6.50
</TABLE>

As of July 24, 1998, the closing sale price of the Common Stock on the
Nasdaq SmallCap Market was $9.25 and there were approximately 15 stockholders of
record. A high percentage of the shares of Common Stock held of record are
registered in the names of brokerage firms and depository trusts.

DIVIDEND POLICY

The Company has neither declared nor paid any dividends on its Common Stock
and does not anticipate paying dividends in respect of its Common Stock in the
foreseeable future. Any payment of future dividends will be at the discretion of
the Company's Board of Directors and will depend upon, among other things, the
Company's earnings (if any), financial condition, cash flows, capital
requirements and other relevant considerations, including applicable contractual
restrictions and governmental regulations with respect to the payment of
dividends. See "Risk Factors" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."

15
<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
Company's consolidated financial statements and notes related thereto contained
elsewhere in this Prospectus.

GENERAL

The Company is engaged in the property and casualty insurance business as a
general agent ("GA") on behalf of the American International Group of Companies
(the "AIG Affiliates"), the General Accident Insurance Company ("GAIC") and the
Kemper Insurance Companies ("Kemper") and as a reinsurer for certain workers'
compensation insurance policies written by the Company on behalf of the AIG
Affiliates. Pursuant to general agency agreements, 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 general agency agreements, gross
commissions on its business at rates which range from approximately 5% to 20%.
The Company has written workers' compensation insurance since its inception in
1988 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. In June
1996, GAIC advised the Company that it would no longer accept Package insurance
risks for fast food restaurants, but would continue to do so for family style
restaurants. As a result, the Company became a GA for Kemper during March 1997,
through which it writes package as well as other forms of property and casualty
insurance and workers' compensation insurance.

In December 1996, the Company formed a reinsurance subsidiary ("Preferred
Reinsurance") under the laws of Bermuda and entered into a reinsurance agreement
with the AIG Affiliates pursuant to which Preferred Reinsurance acts as the
reinsurer with respect to certain workers' compensation and employer's liability
insurance policies in force with policy inception dates as of January 1, 1996
and subsequent which are written by the Company on behalf of the AIG Affiliates.
Preferred Reinsurance is required to provide the AIG Affiliates, as security for
the payment of losses, a combination of cash, United States government
securities and/or an irrevocable letter of credit in an aggregate amount equal
to 51.5% of the net written premiums ceded to Preferred Reinsurance pursuant to
the reinsurance agreement less the amount of losses paid. Preferred Reinsurance
receives as compensation pursuant to the terms of the reinsurance agreement the
related net written premiums less certain program expenses and commissions and
the losses paid associated with the business. Although Preferred Reinsurance
assumes the risks associated with being a reinsurer, the reinsurance agreement
limits the liability of Preferred Reinsurance for losses and certain defined
expenses to the first $300,000 per occurrence. In addition, the reinsurance
agreement limits the aggregate liability of Preferred Reinsurance for all
coverage to an amount not to exceed 70% of the gross written premiums for each
individual underwriting year. Because the reinsurance agreement is effective for
all business written on or after January 1, 1996, the policies written prior to
the execution of the contract and formation of Preferred Reinsurance were
accounted for as retroactive reinsurance. Refer to Note 1(c) to the Company's
consolidated financial statements for the year ended December 31, 1997 and the
three months ended March 31, 1998 contained elsewhere in this Prospectus for a
more detailed explanation of the accounting related thereto. The reinsurance
agreement with Preferred Reinsurance is terminable by either party upon the
occurrence of certain events. See "Risk Factors--Dependence on Reinsurance
Business; Termination of Reinsurance Agreement."

The Company collects workers' compensation premiums from the insureds and
remits the ceding commission (net of the Company's commission) and reinsurance
charge to the AIG Affiliates and remits the net premium to Preferred
Reinsurance. 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

16
<PAGE>
collects to the Company monthly. Commission income on Package business is
recognized as income when premiums are due. Reinsurance premiums received by
Preferred Reinsurance are earned on a pro-rata basis over the term of the
related coverage.

In March 1998, Preferred Healthcare Staffing, Inc., a wholly-owned
subsidiary of the Company ("Preferred Staffing"), consummated the purchase of
substantially all of the assets of HSSI Travel Nurse Operations, Inc. ("Travel
Nurse"), a wholly-owned subsidiary of Hospital Staffing Services, Inc., for $5.0
million in cash. As a result, Preferred Staffing provides registered nurses and
other professional medical personnel to client hospitals in the United States
and the Caribbean on a contractual basis for periods ranging from 8 to 52 weeks.

Preferred Staffing negotiates billing rates with the client hospitals to
provide for the recovery of its cost of payroll, housing, utilities, travel and
insurance for its professional medical personnel, plus a profit margin and bills
client hospitals at negotiated rates. Preferred Staffing records revenue at the
time staffing services are provided.

17
<PAGE>
RESULTS OF OPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997

TOTAL REVENUES. Total revenues for the three months ended March 31, 1998
was $5,546,000 compared to $3,037,000 for the 1997 comparable period,
representing a net increase of $2,509,000, or 82.6%. The following table
provides a comparison of revenues for the three months ended March 31, 1998 and
1997 by category:

<TABLE>
<CAPTION>
NET PERCENTAGE
1998 1997 CHANGE CHANGE
------------ ---------- ---------- -------------
<S> <C> <C> <C> <C>
Net commission income:
Workers' compensation....................................... $ 416,000 432,000 (16,000) (3.7%)
Package..................................................... 89,000 102,000 (13,000) (12.7%)
Other, net.................................................. 38,000 100,000 (62,000) (62.0%)
------------ ---------- ---------- -----
Total net commission income............................... 543,000 634,000 (91,000) (14.4%)
Premiums earned............................................... 3,067,000 2,044,000 1,023,000 50.0%
Net investment income......................................... 386,000 214,000 172,000 80.4%
Staffing income............................................... 1,411,000 -- 1,411,000 *
Other income.................................................. 139,000 145,000 (6,000) (4.1%)
------------ ---------- ---------- -----
Total revenues............................................ $ 5,546,000 3,037,000 2,509,000 82.6%
------------ ---------- ---------- -----
------------ ---------- ---------- -----
Workers' compensation:
Premiums collected.......................................... $ 4,732,000 4,219,000 513,000
------------ ---------- ----------
------------ ---------- ----------
Ratio of net commission income/premiums collected........... 8.8% 10.2% (3.1%)
------------ ---------- ----------
------------ ---------- ----------
</TABLE>

- ------------------------

* The percentage change is insignificant or not meaningful for comparative
purposes.

Workers' compensation commission income decreased $16,000 or 3.7% for the
quarter ended March 31, 1998 as compared to the prior year as a result of an
increase in commission expense related to the mix of business produced by
brokers as depicted in the above table. Package commission income decreased
$13,000 or 12.7% for the quarter ended March 31, 1998 as compared to the prior
year as a result of the lack of product availability as described above. Other
net commission income decreased $62,000 or 62% for the quarter ended March 31,
1998 as compared to the prior year as a result of the reduction in volume of
audit and small business plan premiums collected. Premiums earned increased
$1,023,000 or 50% for the quarter ended March 31, 1998 as compared to the prior
year as a result of new business and renewals of prior year business. Net
investment income increased $172,000 or 80.4% for the quarter ended March 31,
1998 as compared to the prior year as a result of premiums received and invested
by Preferred Reinsurance. Staffing income was $1,411,000 for the quarter ended
March 31, 1998 as a result of the acquisition on March 6, 1998 of the assets of
Travel Nurse by Preferred Staffing and the inclusion of its results of
operations. Other income decreased $6,000 or 4.1% for the quarter ended March
31, 1998 as a result of the effects of the retroactive insurance accounting
treatment of Preferred Reinsurance as discussed more fully in Note 1(c) to the
Company's unaudited consolidated financial statements for the three months ended
March 31, 1998 contained elsewhere in this Prospectus.

TOTAL EXPENSES. Total expenses for the quarter ended March 31, 1998 were
$5,182,000 compared to $2,687,000 for the 1997 comparable period, representing
an increase of $2,495,000, or 92.9%. The

18
<PAGE>
following table provides a comparison of total expenses for the quarters ended
March 31, 1998 and 1997 by category:

<TABLE>
<CAPTION>
NET PERCENTAGE
1998 1997 CHANGE CHANGE
------------ ---------- ---------- -------------
<S> <C> <C> <C> <C>
Losses and loss adjustment expenses incurred.................. $ 1,656,000 1,103,000 553,000 50.1%
Amortization of deferred acquisition costs.................... 981,000 737,000 244,000 33.1%
Staffing costs................................................ 1,279,000 -- 1,279,000 *
Other expenses................................................ 1,266,000 847,000 419,000 49.5%
------------ ---------- ---------- ---
Total expenses............................................ $ 5,182,000 2,687,000 2,495,000 92.9%
------------ ---------- ---------- ---
------------ ---------- ---------- ---
</TABLE>

- ------------------------

* The percentage change is insignificant or not meaningful for comparative
purposes.

Losses and loss adjustment expenses increased $553,000 or 50.1% for the
quarter ended March 31, 1998 as compared to the previous year. This increase is
consistent with the increase in premiums earned in 1998 as discussed above. For
the quarter ended March 31, 1998, the Company's ratio of losses incurred to
premiums earned was approximately 54%. Amortization of deferred acquisition
costs increased $244,000 or 33.1% for the quarter ended March 31, 1998 as
compared to the previous year. This increase is consistent with the increase in
premiums earned in 1998 as discussed above. For the quarter ended March 31,
1998, the Company's ratio of amortization of deferred acquisition costs to
premiums earned was approximately 32%. Staffing costs increased $1,279,000 for
the quarter ended March 31, 1998 as a result of revenues generated from staffing
as discussed above. Other expenses increased $419,000 or 49.5% for the quarter
ended March 31, 1998 as compared to the previous year.

The following table provides a comparison of other expenses for the quarters
ended March 31, 1998 and 1997 by category:

<TABLE>
<CAPTION>
NET PERCENTAGE
1998 1997 CHANGE CHANGE
------------ --------- --------- -------------
<S> <C> <C> <C> <C>
Personnel expenses................................................ $ 779,000 560,000 219,000 39.1%
Occupancy expenses................................................ 66,000 78,000 (12,000) (15.4%)
Professional fees................................................. 116,000 10,000 106,000 *
Interest expense.................................................. -- 7,000 (7,000) *
Amortization of goodwill.......................................... 21,000 -- 21,000 *
Other operating expenses.......................................... 284,000 192,000 92,000 47.9%
------------ --------- --------- -----
Total other expenses.......................................... $ 1,266,000 847,000 419,000 49.5%
------------ --------- --------- -----
------------ --------- --------- -----
</TABLE>

- ------------------------

* The percentage change is insignificant or not meaningful for comparative
purposes.

Personnel expenses increased $219,000 or 39.1% for the quarter ended March
31, 1998 as compared to the previous year as a result of the hiring of two
marketing employees and one marketing executive with aggregate annual
compensation of $400,000 together with the increased staff related to the
acquisition of the assets of Travel Nurse. Occupancy expenses decreased $12,000
or 15.4% for the quarter ended March 31, 1998, principally as a result of
decreased telephone charges. Professional fees increased $106,000 for the
quarter ended March 31, 1998, principally as a result of increased legal fees.
Interest expense decreased $7,000 for the 1998 quarter as a result of the payoff
in 1997 of a loan from a stockholder. Amortization of goodwill increased $21,000
for the quarter ended March 31, 1998 consistent with acquisition as discussed
above. Other operating expenses increased $92,000 or 47.9% for the quarter ended
March 31, 1998 as compared to the previous year, primarily related to the
following: (i) increased insurance expense of $43,000, (ii) increased corporate
fees and services of $42,000, and (iii) increased taxes other than income taxes
of $14,000. Insurance expense increased as a result of the purchase of
additional

19
<PAGE>
coverage (i.e., directors and officers liability insurance) and increased
premiums due to increased limits. Corporate fees and services and taxes other
than income taxes increased as a result of the expansion of the business.

FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996

TOTAL REVENUES. Total revenues for the year ended December 31, 1997 was
$15,999,000 compared to $3,341,000 for the year ended December 31, 1996,
representing a net increase of $12,658,000. The following table provides a
comparison of revenues for the years ended December 31, 1997 and 1996 by
category:

<TABLE>
<CAPTION>
PERCENTAGE
1997 1996 NET CHANGE CHANGE
------------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Net commission income:
Workers' compensation................................... $ 1,401,000 1,680,000 (279,000) (16.6%)
Package................................................. 483,000 577,000 (94,000) (16.3%)
Other, net.............................................. 475,000 206,000 269,000 130.6%
------------- ------------ ------------ -----------
Total net commission income........................... 2,359,000 2,463,000 (104,000) (4.2%)
Premiums earned........................................... 11,675,000 525,000 11,150,000 *
Net investment income..................................... 1,395,000 217,000 1,178,000 *
Other income.............................................. 570,000 136,000 434,000 *
------------- ------------ ------------ -----------
Total revenues........................................ $ 15,999,000 3,341,000 12,658,000 *
------------- ------------ ------------ -----------
------------- ------------ ------------ -----------
Workers' compensation:
Premiums collected...................................... $ 14,929,000 16,746,000 (1,817,000) (10.9%)
------------- ------------ ------------ -----------
------------- ------------ ------------ -----------
Ratio of net commission income/premiums collected....... 9.39% 10.03% (0.64%)
------------- ------------ ------------
------------- ------------ ------------
</TABLE>

- ------------------------

* The percentage change is insignificant or not meaningful for comparative
purposes.

Workers' compensation commission income decreased $279,000 or 16.6% for the
year ended December 31, 1997 as compared to the prior year as a result of the
decrease in premiums collected of $1,817,000, which was attributable to the
decrease in the workers' compensation book of business. The decrease in workers'
compensation commission income was also due to an increase in commission expense
related to the mix of business produced by brokers. Package commission income
decreased $94,000 or 16.3% for the year ended December 31, 1997 as compared to
the prior year as a result of the lack of product availability as described
above. Other net commission income increased $269,000 for the year ended
December 31, 1997 as compared to the prior year mostly as a result of the
introduction of the Company's small business plan which accounted for $264,000
of the increase. Premiums earned increased $11,150,000 for the year ended
December 31, 1997 as compared to the prior year as a result of the entry by
Preferred Reinsurance into the reinsurance business in 1997 and reflects a full
year of operations. Net investment income increased $1,178,000 for the year
ended December 31, 1997 as compared to the prior year as a result of the
investable funds raised by the Company in its 1997 initial public offering and
premiums received by Preferred Reinsurance. Other income increased $434,000 for
the year ended December 31, 1997 as a result of the effects of the retroactive
insurance accounting treatment of Preferred Reinsurance as discussed more fully
in Note 1(c) to the Company's consolidated financial statements for the years
ended December 31, 1997 and 1996 contained elsewhere in this Prospectus.

20
<PAGE>
TOTAL EXPENSES. Total expenses for the year ended December 31, 1997 were
$14,581,000 compared to $3,427,000 for the year ended December 31, 1996,
representing an increase of $11,154,000. The following table provides a
comparison of total expenses for the years ended December 31, 1997 and 1996 by
category:

<TABLE>
<CAPTION>
PERCENTAGE
1997 1996 NET CHANGE CHANGE
------------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
Losses and loss adjustment expenses incurred............... $ 6,257,000 270,000 5,987,000 *
Amortization of deferred acquisition costs................. 4,162,000 178,000 3,984,000 *
Other expenses............................................. 4,162,000 2,979,000 1,183,000 39.7%
------------- ---------- ------------ -----------
Total expenses......................................... $ 14,581,000 3,427,000 11,154,000 *
------------- ---------- ------------ -----------
------------- ---------- ------------ -----------
</TABLE>

- ------------------------

* The percentage change is insignificant or not meaningful for comparative
purposes.

Losses and loss adjustment expenses increased $5,987,000 for the year ended
December 31, 1997 as compared to the previous year. The increase is consistent
with the increase in premiums earned in 1997 as discussed above. For the year
ended December 31, 1997, the Company's ratio of losses incurred to premiums
earned was approximately 54%. Amortization of deferred acquisition costs
increased $3,984,000 for the year ended December 31, 1997 as compared to the
previous year. This increase is consistent with the increase in premiums earned
in 1997 as discussed above. For the year ended December 31, 1997, the Company's
ratio of amortization of deferred acquisition costs to premiums earned was
approximately 36%.

Other expenses increased $1,183,000 or 39.7% for the year ended December 31,
1997 as compared to the previous year. The following table provides a comparison
of other expenses for the years ended December 31, 1997 and 1996 by category:

<TABLE>
<CAPTION>
PERCENTAGE
1997 1996 NET CHANGE CHANGE
------------ ---------- ----------- -------------
<S> <C> <C> <C> <C>
Personnel expenses............................................ $ 2,464,000 2,056,000 408,000 19.8%
Occupancy expenses............................................ 307,000 212,000 95,000 44.8%
Professional fees............................................. 281,000 81,000 200,000 *
Interest expense.............................................. 17,000 42,000 (25,000) (59.5%)
Other operating expenses...................................... 1,093,000 588,000 505,000 85.6%
------------ ---------- ----------- -----
Total other expenses...................................... $ 4,162,000 2,979,000 1,183,000 39.7%
------------ ---------- ----------- -----
------------ ---------- ----------- -----
</TABLE>

- ------------------------

* The percentage change is insignificant or not meaningful for comparative
purposes.

Personnel expenses increased $408,000 or 19.8% for the year ended December
31, 1997 as compared to the previous year as a result of the hiring of three
executives in 1997 with aggregate annual compensation of $543,000 together with
a 2% aggregate annual salary increase in 1997 for all other employees plus the
retroactive effects of the salary increases. Occupancy expenses increased
$95,000 for the year ended December 31, 1997, principally as a result of the
Company's relocation to larger quarters to accommodate the Company's expansion.
Professional fees increased $200,000 for the year ended December 31, 1997,
principally as a result of increased legal fees associated with various
corporate, reinsurance and acquisition matters. Interest expense decreased
$25,000 as a result of a decrease in the principal balance of a loan from a
shareholder. Other operating expenses increased $505,000 for the year ended
December 31, 1997 as compared to the previous year, primarily related to the
following: (i) increased insurance expense of $190,000, (ii) increased
relocation expense of $115,000, (iii) increased sales promotion expense of
$75,000, (iv) increased travel expenses of $55,000 and (v) increased supplies
expense of $45,000. Insurance expense increased as a result of the purchase of
additional coverage (i.e., directors and officers liability insurance) and
increased premiums due to increased limits. Relocation expense increased due to
the three executives hired as discussed above. Sales promotion, travel expenses
and supplies expense increased as a result of the expansion of the business.

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. In
February 1997, the Company consummated an initial public offering of 1,725,000
shares of Common Stock (including the underwriters' over-allotment option) and
received gross cash proceeds of approximately $12,506,000.

At March 31, 1998, net cash and investments were $19,715,000 (net of
premiums payable of $3,756,000). Net cash provided by operating activities
decreased to $1,385,000 at March 31, 1998 from $7,071,000 in the first quarter
of 1997, a decrease of $5,686,000. This decrease resulted primarily from a
decrease in reinsurance premiums collected of $4,679,000, and an increase in
accounts receivable of $2,577,000. The decrease in reinsurance premiums
collected was the result of the collection by Preferred Reinsurance during the
first quarter of 1997 of the net proceeds related to the 1996 underwriting year
reinsurance balances. The increase in accounts receivable for the quarter ended
March 31, 1998 is associated with the acquisition of the assets of Travel Nurse
and the receivables generated by Preferred Staffing during the first quarter of
1998.

Cash used in investing activities decreased to $2,571,000 for the quarter
ended March 31, 1998 from $7,422,000 for the quarter ended March 31, 1997, a
decrease of $4,851,000. This decrease resulted primarily from the acquisition of
the assets of Travel Nurse as discussed in the Note 1(b) to the unaudited
consolidated financial statements of the Company for the three months ended
March 31, 1998 contained elsewhere in this Prospectus. Cash from financing
activities in 1997 reflect the net proceeds received by the Company of its
initial public offering as discussed above.

In May 1998, Preferred Healthcare Staffing, Inc., a wholly-owned subsidiary
of the Company, obtained a $3 million unsecured revolving line of credit from a
bank (the "Credit Facility"). Outstanding borrowings under the Credit Facility
bear interest at the bank's base rate of interest. Interest under the Credit
Facility is due and payable monthly commencing June 2, 1998 and all unpaid
principal and interest is due on May 2, 1999. Outstanding borrowings under the
Credit Facility are secured by a guarantee of the Company. As of June 1, 1998,
Preferred Staffing had outstanding borrowings of approximately $1,780,000 under
the Credit Facility, which borrowings bear interest at the rate of 8 1/2% per
annum.

In May 1998, the Company consummated a private placement of 7% convertible
subordinated notes due May 2003 (the "Notes") in the aggregate principal amount
of $10,580,000. The principal amount of the Notes is convertible into shares of
the Company's Common Stock, at a conversion price of $9.00 per share at any time
prior to the earlier of May 12, 2003 (the "Maturity Date") or ten business days
after the receipt of a Termination Notice (as defined below). In the event (i)
the closing bid price of the Common Stock equals or exceeds $13.50 per share for
twenty consecutive trading days during any period commencing upon satisfaction
of one of the conditions contained in clause (ii) immediately below and (ii)
either a registration statement covering the shares of Common Stock issuable
upon conversion of the Notes has been declared effective by the Securities and
Exchange Commission and remains effective or at least two years has elapsed
since the issuance date of the Notes and the shares of Common Stock issuable
upon conversion of the Notes are saleable, without restriction, under Rule
144(k) promulgated under the Securities Act of 1933, as amended, then the
holders' right to convert the outstanding principal amount of the Notes shall be
terminated by the Company by delivering to the holders a notice of termination
(the "Termination Notice"), in which event (a) holders have the right at any
time during the ten business days after receipt of the Termination Notice, in
their sole discretion, to convert the outstanding principal amount of the Notes
into shares of Common Stock at the Conversion Price, and (b) thereafter, the
holders' option to convert shall terminate and the Notes may be prepaid by the
Company, at any time prior to the Maturity Date, in whole or in part for the
face amount thereof, together with all accrued and unpaid interest through the
date of prepayment.

The Company believes that its existing cash balances and cash flows from
activities will be adequate to meet its current operations, including expected
capital expenditures, for at least the next twelve months. In connection with
the Company's current business strategy, it may seek additional funds through
equity and/ or debt financings. There can be no assurance that any such
additional debt or equity financings will be available to the Company, or if
available, will be on terms acceptable to the Company.

22
<PAGE>
BUSINESS

INTRODUCTION

23
<PAGE>
with the insurance business it produces. In December 1996, the Company formed
P.E.G. Reinsurance Company, Ltd. ("Preferred Reinsurance"). Preferred
Reinsurance acts as a reinsurer with respect to certain workers' compensation
and employer's liability insurance policies sold by the Company. Although
Preferred Reinsurance assumes the risks associated with being a reinsurer, its
reinsurance agreement limits the liability of Preferred Reinsurance for losses
and certain defined expenses to the first $300,000 per occurrence and limits its
aggregate liability for all coverage to an amount not to exceed 70% of the gross
written premiums for each individual underwriting year. See "Risk Factors".

24
<PAGE>
business days after the receipt of a Termination Notice (as described above).
See "Management's Discussion and Analysis--Liquidity and Capital Resources."

On July 10, 1998, the Company and Preferred Staffing executed a definitive
agreement to exchange, through a "pooling of interests," all of the outstanding
capital stock of National Explorers and Travelers Healthcare, Inc. ("NET") for
shares of the Company's Common Stock not to exceed $10 million. NET provides
registered nurse and other professional medical personnel primarily to client
hospitals in the United States and the Caribbean on a contractual basis, for
periods generally ranging from 8 to 52 weeks. For the year ended December 31,
1997, NET generated revenues of approximately $11,594,000. The exchange ratio is
based upon a multiple of NET's after tax net income on an annualized basis,
based upon the first four months of 1998, less outstanding debt. The closing is
expected to occur by the end of July 1998, and is contingent upon numerous
closing conditions, which may or may not occur.

The Company's principal executive offices are located at 10800 Biscayne
Boulevard, Miami, Florida 33161 and the Company's telephone number at that
location is (305) 893-4040.

INDUSTRY OVERVIEW

WORKERS' COMPENSATION. 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 one of the major risk management issues of this
decade. 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, employer's workers' compensation costs increased
significantly over the last decade. Between 1984 and 1990, workers' compensation
costs increased an average of 9.6% per annum, and from 1990 through 1995 costs
increased by about 2.9% per annum. Certain additional intangible losses also
directly relate to increased workers' compensation costs such as higher
incidents of employee turnover, the cost or retraining new employees and
litigation expenses. It has been estimated that current annual premiums paid for
workers' compensation insurance by the franchise industry exceed $2.5 billion,
with annual premiums by the fast food and family style restaurant and
convenience store segment representing approximately $1.6 billion of this
amount. 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 for 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 may 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 may be charged the same
workers' compensation rates, their claims experience is typically significantly
higher. Consequently, most franchise companies generally suffer

25
<PAGE>
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.

REINSURANCE. Preferred Reinsurance acts as a reinsurer with respect to
certain workers' compensation and employer's liability insurance policies sold
by the Company. Reinsurance is an arrangement in which an insurance company, the
reinsurer, agrees to indemnify another insurance company, the ceding company,
against all or a portion of the insurance risks underwritten by the ceding
company under one or more insurance policies. The two basic types of reinsurance
arrangements are treaty and facultative reinsurance. In treaty reinsurance, the
ceding company is obligated to cede, and the reinsurer is obligated to assume, a
specified portion of a type or category of risk insured by the ceding company.
In facultative reinsurance, the ceding company cedes and the reinsurer generally
assumes all or part of the risk under a single insurance policy.

Both treaty and facultative reinsurance can be written on either a pro-rata
(also known as quota share or proportional) basis or an excess of loss basis.
For reinsurance written on a pro-rata basis, the reinsurer, in return for a
predetermined portion or share of the insurance premium charged by the ceding
company, indemnifies the ceding company against a predetermined portion of the
losses and the allocated portion of loss adjustment expenses ("ALAE") of the
ceding company under the covered insurance policy or policies. For reinsurance
written on an excess of loss basis, the reinsurer generally indemnifies the
ceding company against all or a specified portion of losses and ALAE on
underlying insurance policies in excess of a specified dollar amount, known as
the ceding company's retention or attachment point, subject to a negotiated
limit.

PROFESSIONAL EMPLOYER ORGANIZATIONS. Professional Employer Organizations
provide employee leasing services to their clients. Employee leasing generally
is a contractual arrangement through which a business transfers its payroll and
human resource responsibilities to a firm specializing in these functions. The
leasing firm typically provides health, unemployment, and workers' compensation
insurance, plus safety training, while the work site employer retains full
operational control over the employee's activities.

The employee leasing industry is rapidly expanding. According to a recent
article in Crain's New York Business, it is expected that the PEO industry will
increase revenues and earnings by approximately 30% per annum for up to the next
ten years.

BUSINESS STRATEGY

The Company believes there are substantial opportunities for growth by
leveraging its considerable capabilities and expertise in workers' compensation
and claims cost management. In particular, the Company believes that by
combining its existing expertise in insurance matters with strategic
acquisitions of PEOs it can reduce the operating expenses typically associated
with PEOs and increase the products offered by the Company to its existing
clients. The Company's current strategy for growth includes: (i) continuing to
capitalize on its business of selling insurance and risk management products to
franchise companies; (ii) entering into the PEO market by making selective
acquisitions; (iii) growing its existing business by offering its workers'
compensation and business insurance products, along with risk management
services to an expanding base of PEO clients; (iv) offering employee leasing
related products and services to its existing franchise clients; and (v)
focusing its PEO operations on specific industry segments without regard to
geographic boundaries. It is believed that many of the problems faced by
existing PEOs stem from their lack of underwriting, actuarial and cost
containment expertise.

The Company also seeks to continue 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. It believes this goal can be
accomplished by devising and implementing programs on a state-by-state basis to:
(i) accumulate the latest approved rate information and information on
legislative changes affecting the industry; (ii) obtain approved carrier rate
filings; (iii) ascertain current factors affecting pricing in the voluntary
market and interact with insurance carriers to encourage competitive pricing
(while respecting

26
<PAGE>
the carriers need for profitability and to remain viable in the marketplace);
(iv) present insured clients with effective methods of monitoring, reducing and
containing claims costs; (v) monitor claims handling procedures of claims
administrators and interact with them to produce cost effective results; (vi)
market
programs designed to reward preferred risks with incentives to purchase and
renew insurance coverage; and (vii) become a "one-stop" provider of commercial
insurance to 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. 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.

PRODUCTS AND SERVICES

Workers' compensation and business insurance products and risk management
services are provided by the Company for the American franchise industry. Its
insurance programs are designed specifically to reduce the impact of redundancy
on franchise businesses while also emphasizing loss control and cost
containment. By taking advantage of this business segment's good safety records
and by providing risk management services, including loss control and claims
management, the Company affords its clients the opportunity to effectively lower
their cost of claims. It has also developed proprietary information and claims
analyses systems and custom-designed loss reports which explain the claims
procedure and motivate client management to promote safety and control claims
expense.

Insurance programs are custom designed to be offered only through nationally
recognized carriers with the highest industry ratings. The Company 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, it 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.

The Company has recently launched several new business campaigns and
marketing programs. One of these programs is a workers' compensation program for
motor vehicle related franchises, including automobile, motorcycle and
recreational vehicle dealerships as well as auto service providers. Motor
vehicle dealerships, while not true franchises, are quite similar from dealer to
dealer and are viewed by the Company as businesses into which it can apply its
expertise in cost containment gained in the franchise industry. Another Company
program involves workers' compensation insurance designed to target certain
smaller businesses located in approximately 23 states which pay annual premiums
of between approximately $5,000 and $50,000. The underwriting process under this
program has been simplified, thus enabling the Company to respond promptly to
businesses with competitively priced quotes. The Company believes that many
broker/agents, regardless of size, have accounts that are eligible to
participate in the program and therefore can be potentially attractive to
broker/agents promoting the program. A new marketing program has also been
launched by the Company which involves direct mail, telemarketing and field
sales targeted directly at the consumer and follows the Company's goal of
writing low risk policies.

Using early intervention techniques, the Company seeks to limit the number
of disputes with injured employees. Through a third-party administrator, 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-

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<PAGE>
week. The third-party administrator has a trained medical staff available 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. The Company believes in the
prompt settlement of meritorious claims, but it will aggressively defend against
non-meritorious claims. It attempts to resolve cases prior to litigation and, if
litigation ensues, aggressively seeks to settle reasonable claims.

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.

The Company has created a new, innovative, comprehensive and aggressive
approach to safety/loss control, blending 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 telephone to the Company's clients at no
additional cost.

The Company believes its safety programs help reduce workers' compensation
claims costs. The basic elements of its safety programs, as recommended to its
clients, include: (i) a written safety policy with safety rules; (ii) regularly
scheduled safety meetings; (iii) new employee hiring practices and training of
all new and transferred employees; (iv) supervisor responsibility and
accountability; (v) a regular self-inspection program administered by identified
supervisors; (vi) an incentive program that rewards safety awareness; (vii) a
team safety committee program; (viii) a timely accident reporting and
investigation program; (ix) a monitored record keeping system for all accidents;
(x) a policy to implement corrective action for unsafe conditions and acts; and
(xi) 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 have approved safety
programs. 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

The Company markets its products primarily to the franchise industry through
broker/agents. Its customers typically are 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, 1997, the Company provided products and services to
approximately 973 separate insureds, none of which accounted for more than 3% of
its 1997 annual revenues.

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<PAGE>
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 quality customer service and, most
importantly, providing loss control and cost containment services.

The Company conducts regional safety seminars showing how to contain costs
and reduce losses. Although not a sales effort, it is one of the ways the
Company generates new business while continuing to educate its existing clients.

Each franchisee is provided with its own personal 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.

SALES AND MARKETING

The Company's sales and marketing programs are varied. It engages in
multiple targeted direct mail programs each year. These direct mail programs,
designed to introduce the Company's products and services to franchise owners
and insurance agents, are complimented by an extensive telemarketing effort. The
Company utilizes multiple databases of franchises and insurance agents in its
direct mail and telemarketing efforts. The Company's marketing programs identify
prospective clients, client's agents and new agents to represent the Company. A
Company representative then quotes prices to identified prospective clients
and/or their agents.

The Company's marketing programs are designed to generate new prospects for
both high revenue broker/agents (those whose client bases produce workers'
compensation annual premiums in excess of $2 million) as well as smaller
broker/agents who operate in small towns. Generally, agents must have the
ability to produce $300,000 in annualized workers' compensation premiums to
receive a contract to represent the Company.

The Company's programs relieve the broker/agent of administrative and claims
tasks as the Company and/or the insurance carrier 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 third-party
administrator, with respect to reporting, processing, reviewing and evaluating
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 the
broker/agent include (i) increasing the geographic area in which the
broker/agent can generate business, (ii) reducing the likelihood of the
broker/agent losing larger multiple store and multiple state franchisees because
the broker/agent will have many more states in which it is able to write
business, (iii) providing the broker/agent with the option of offering the
Company's other property and casualty products to its clients, and (iv)
providing the broker/agent's clients with the benefit of the Company's loss
control and cost containment programs to reduce the clients' losses.

POLICY RENEWALS

Client policy renewals are critical to the Company's operations. The Company
seeks to maintain favorable renewal rates by (i) providing its clients with
quality 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. It seeks to
communicate with each client at least four times each year in order to maintain
close relationships and to learn of any real or perceived problems and concerns
on a timely basis. All written and telephone communications initiated by the
client are responded to promptly. The Company believes that its quality service
is a major factor in its client retention rate, which is currently approximately
70%.

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<PAGE>
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 also
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 also identifies 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.

PREFERRED REINSURANCE

Historically, the Company has acted as a general agent on behalf of various
major insurance carriers for workers' compensation and other forms of property
and liability insurance for franchise businesses through its own sales staff as
well as through independent broker/agents. As a general agent, the Company
assumes none of the risks associated with the insurance business it produces. In
December 1996, the Company formed Preferred Reinsurance under the laws of
Bermuda. Preferred Reinsurance acts as the reinsurer with respect to certain
workers' compensation and employer's liability insurance policies written by the
Company. Although Preferred Reinsurance assumes the risks associated with being
a reinsurer, its liabilities are limited for losses and certain defined expenses
to the first $300,000 per occurrence and its aggregate liability is limited for
all coverage to an amount not to exceed 70% of the gross written premiums for
each individual underwriting year. The reinsurance arrangements are governed by
the terms of a reinsurance agreement between Preferred Reinsurance and insurance
companies affiliated with the American International Group of Companies
(collectively, the "AIG Affiliates"). The reinsurance agreement with Preferred
Reinsurance is terminable by either party upon the occurrence of certain events.
For the year ended December 31, 1997 and the three months ended March 31, 1998,
approximately 83% and 87%, respectively, of the Company's total revenues
(excluding staffing income) were derived from its reinsurance business. See
"Risk Factors--Dependence on Reinsurance Business; Termination of Reinsurance
Agreement."

The purchase of excess and aggregate reinsurance by the AIG Affiliates and
the stated aggregate limit of liability in the reinsurance agreement caps the
liability of Preferred Reinsurance for losses and loss adjustment expenses and
permits it 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 is fundamental
to the ability of Preferred Reinsurance to manage its losses.

Pursuant to the terms of the reinsurance agreement, the AIG Affiliates are
obligated to cede to Preferred Reinsurance 100% of the net written premium less
certain expenses and commissions associated with the policies covered thereby.
The affiliates retain a commission allowance of 28.83% based on the net written
premiums, and Preferred Reinsurance retains the premiums ceded by the AIG
Affiliates to Preferred Reinsurance together with the risks and potential for
profitability associated therewith. Accordingly, the Company believes that the
operations of Preferred Reinsurance provide it with the opportunity to retain
the underwriting profitability that was previously retained by the AIG
Affiliates, while creating a relatively limited risk exposure under the
reinsurance agreement.

Preferred Reinsurance is required to provide the AIG Affiliates, as security
for the payment of losses, a combination of cash, United States government
securities and/or an irrevocable letter of credit in an aggregate amount equal
to 51.5% of the net written premiums ceded to Preferred Reinsurance pursuant to
the reinsurance agreement less the amount of losses paid. See "Risk Factors".

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<PAGE>
INVESTMENT POLICIES. The Company's results of operations depend, in part,
on the income derived from the investment of premiums by Preferred Reinsurance.
The Company believes that the risks inherent in the reinsurance business should
not be augmented by a speculative investment policy and therefore its investment
strategy is partially defined by the need to safeguard its capital. Because of
the unpredictable nature of losses that may arise under insurance policies, the
liquidity needs of Preferred Reinsurance may be substantial. The Company's
investment policy has been established by its Investment Committee, and is
subject to, among other factors, the Company's liquidity requirements. Its
investments consist primarily of cash or fixed-income securities (none of which
has 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.

DATA MANAGEMENT

The Company has management information systems which consist of, among other
things, a central database to keep it abreast of market trends, current premium
rates, rate filings, renewal dates and information on its competition. The
management information systems 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.

COMPETITION

The workers' compensation insurance industry is highly competitive. The
Company competes with other general agents, numerous large insurance companies,
managed health care companies, state sponsored insurance pools, risk management
consultants and non-Company affiliated broker/agents, many of which have
significantly larger operations and greater financial, marketing, human and
other resources than the Company. Such competitors may have material advantages
over the Company as a result of forms of insurance and services they offer in
addition to workers' compensation products and services. Competitive factors
include product lines, premium rates, personalized service and effective cost
containment measures.

REGULATIONS

GENERAL. As a general agent, 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 general agent, and certain other requirements.
Penalties may be imposed for violations of such regulations. Changes in such
regulations, if any, may have a material adverse effect on the Company's
business.

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.

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<PAGE>
REINSURANCE BUSINESS. Preferred Reinsurance is registered as a Class 3
insurer in Bermuda and, accordingly, is subject to the provisions of the Bermuda
Insurance Act 1978, as amended, and the regulations promulgated thereunder. The
Bermuda Insurance Act provides that no person shall carry on insurance business
in or from within Bermuda unless registered as an insurer under the Bermuda
Insurance Act by the Minister of Finance. The Minister of Finance has broad
discretion to act in the public's interest. The Minister of Finance is required
by the Bermuda 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 of Finance may impose conditions relating to the
writing of certain types of insurance business.

The Bermuda Insurance Act imposes on Bermuda insurance companies such as
Preferred Reinsurance solvency and liquidity standards and auditing and
reporting requirements and grants to the Minister of Finance powers to
supervise, investigate and intervene in the affairs of insurance companies.
Significant aspects of the Bermuda insurance regulatory framework are set forth
below.

- Preferred Reinsurance is required to maintain a principal office in
Bermuda and appoint and maintain a principal representative in Bermuda.
The Bermuda Insurance Act places a duty on the principal representative to
report to the Minister of Finance 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 of Finance
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 of Finance, Preferred Reinsurance may not terminate the
appointment of its principal representative, and the principal
representative may not cease to act as such, unless 30 days' advance
notice in writing to the Minister of Finance is given of the intention to
do so.

- Preferred Reinsurance is required to appoint an independent auditor to
conduct an annual audit of the statutory-basis financial statements.

- Preferred Reinsurance is required to maintain share capital (the aggregate
par value of issued shares) of at least $120,000.

- Preferred Reinsurance must maintain statutory capital and surplus
exceeding the greater of the following three criteria: (a) $1,000,000; (b)
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.); and (c) 15% of reserves for losses and
loss expenses.

- Preferred Reinsurance is required to maintain liquid 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.

- Preferred Reinsurance is required to obtain the approval of the Minister
of Finance 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.

- Preferred Reinsurance 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 Preferred Reinsurance will continue to maintain the required
statutory capital and surplus and liquid assets as summarized above.

- Preferred Reinsurance is required to have a copy of its statutory
financial statements available at its principal office for production to
the Registrar of Companies and to file the statutory financial

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<PAGE>
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 of Companies, on application, may allow).

- Preferred Reinsurance is required to include in its annual statutory
financial statements the opinion of a loss reserve specialist in respect
of its loss and loss adjustment expense reserves.

- The Minister of Finance may appoint an inspector with extensive powers to
investigate the affairs of an insurer or reinsurer if the Minister of
Finance 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 of Finance 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. Preferred
Reinsurance is not subject to stamp or other similar duty on the issue, transfer
or redemption of its shares of common stock.

The Company has obtained an assurance from the Minister of Finance under the
Exempted Undertakings Tax Protection Act of 1966 that if any legislation is
enacted in Bermuda imposing tax on profits or income, or 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 insofar 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 that effect the business
operations of Preferred Reinsurance. 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 ability of Preferred Reinsurance to pay insured workers'
compensation claims out of the premium revenue generated from Preferred
Reinsurance'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 could have a material adverse effect on the Company.

ACQUISITION OF TRAVEL NURSE BUSINESS

On March 6, 1998 Preferred Healthcare Staffing, Inc., a wholly-owned
subsidiary of the Company ("Preferred Staffing," formerly Preferred Employers
Acquisition Corp.), purchased substantially all of the assets of HSSI Travel
Nurse Operations, Inc. ("Travel Nurse") for an aggregate purchase price of $5.0
million in cash. Travel Nurse provided registered nurses and other professional
medical personnel, often referred to as "Travelers," primarily to client
hospitals on a contractual basis for periods generally ranging from 8 to 52
weeks, with the average being approximately 17 weeks (standard assignments are
usually for

33
<PAGE>
durations of thirteen or twenty-six weeks). Clients utilize Travelers to provide
cost effective interim staff to meet predictable fluctuations in staffing
requirements. In addition, unlike daily or other very short-term supplemental
staff, Travelers serve the client for a long enough period to function as
permanent hospital staff. The ability of the Travelers to function as permanent
staff improves the continuity and consistency of patient care and reduces the
overall administration, orientation and supervisory requirements of the clients'
permanent staff. Travelers are typically employed on a full-time basis for the
period of each assignment. Each Traveler is generally provided with housing (or
a housing subsidy) while on assignment, travel allowance, and other employee
benefits, including malpractice, health and dental insurance at favorable cost
to the Traveler.

For the year ended November 30, 1997, Travel Nurse placed in excess of 700
nurses. As of June 30, 1998, Preferred Staffing has orders for approximately
1,800 nurses.

CUSTOMERS. As of June 30, 1998, active clients of Preferred Staffing
consisted of approximately 151 hospitals and other clients located in
approximately 34 states and the U.S. Virgin Islands. Travelers serve both
for-profit and not-for-profit entities which range from small rural hospitals to
major teaching and research institutions. A typical client is a hospital with
approximately 250 beds which is located in or near a major metropolitan area.

MARKETING. Preferred Staffing currently markets Travelers principally
through in-house sales personnel. Historically, the marketing approach used by
Travel Nurse targeted hospitals in major metropolitan areas and in other areas
which were attractive from a patient census perspective and which appealed
geographically to Travelers. Historically, marketing activities have been
conducted primarily by telephone contact, direct mail, attendance at national
and regional conventions, seminars, and direct contact with providers of
healthcare services. Preferred Staffing has an extensive computer database of
available, qualified personnel, which enhances its ability to match personnel
with a client's specific needs.

RECRUITMENT. Preferred Staffing currently recruits personnel through its
in-house recruiting department. Recruiting methods historically have included
national and local advertising, attendance at national and regional conventions,
personal and professional referrals and the sponsoring of local seminars in
selected cities throughout the United States and Canada.

Preferred Staffing's current database contains information on pre-screened
personnel classified by skill, experience, and choice and availability for
assignments. The database is updated on a regular basis. When called upon to
fill an assignment, its recruiters can access this database to match a client's
staffing needs with available personnel. Nurses and other medical personnel
listed in the database generally do not work exclusively for any one employer.

SEASONALITY. Historically, Travel Nurse's business has been seasonal, with
the demand for Travelers being the highest in the first and fourth quarters of
the fiscal year (September through March), due largely to increased demand
particularly during the peak tourist and winter home period in Florida.

BACKLOG OF ORDERS. As of June 30, 1998, Preferred Staffing had
approximately 1,800 unfilled requests for travel nurses.

YEAR 2000

Year 2000 issues arise because most computer systems and programs were
designed to handle only a two-digit year, not a four-digit year. Thus, the Year
2000 could be interpreted as the year 1900 by such computer systems and
programs, resulting in the incorrect processing of data. The Company has
developed a plan to address Year 2000 issues and recently completed the
conversion of its computer systems to be Year 2000 compliant. The Company
believes that any issues which may arise with respect to Year 2000 issues will
not have a material adverse effect on the Company's operations. However, there
can be no assurance that the Company will not be adversely affected by Year 2000
issues.

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<PAGE>
EMPLOYEES

As of June 30, 1998, excluding Preferred Staffing, the Company had
approximately 50 full-time employees, of whom 4 were executive officers, 5 were
managers, 8 were sales personnel and 33 were accounting, clerical, loss control
or underwriting staff. As of June 30, 1998, Preferred Staffing employed
approximately 309 Travelers and 44 administrative personnel. These Travelers do
not necessarily work full-time shifts. None of the Company's employees are
subject to a collective bargaining agreement. The Company believes that its
relationships with its employees are good.

DESCRIPTION OF PROPERTY

The Company leases approximately 12,600 square feet of office space in
Miami, Florida for use as its corporate headquarters. The Company's initial
lease term expires in 2002, but the Company has two five-year renewal options.
Pursuant to the Travel Nurse acquisition, Preferred Staffing assumed a six-month
lease for a portion of Travel Nurse's premises located in Fort Lauderdale,
Florida consisting of approximately 6,000 square feet. The Company anticipates
that its existing leases will be renegotiated as they expire or that alternative
properties can be leased on acceptable terms. The Company believes that its
present facilities are in good condition and are suitable for its needs for the
foreseeable future.

LEGAL PROCEEDINGS

The Company is a party to various legal proceedings arising in the ordinary
course of business. As of July 27, 1998, the Company was not a party to any
legal proceeding, which if adversely determined, would have a material adverse
effect on the financial condition or operations of the Company.

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MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth certain information, as of July 27, 1998,
concerning the Company's directors, executive officers and key employees:

<TABLE>
<CAPTION>
NAME AGE POSITIONS WITH THE COMPANY
- ----------------------------------- --- ----------------------------------------------------------------------
<S> <C> <C>
Mel Harris......................... 58 Chief Executive Officer, President and Chairman of the Board of
Directors
William R. Dresback................ 50 Senior Vice President, Chief Financial Officer and Secretary
Jack Coppersmith................... 69 Senior Vice President of Mergers and Acquisitions
Nancy Ryan......................... 41 Vice President and Assistant Secretary
Stuart J. Gordon................... 67 Director
Jack D. Burstein................... 52 Director
Maxwell M. Rabb.................... 87 Director
D. Mark Olson...................... 49 President and Chief Executive Officer of PEGI
Peter E. Kilissanly................ 51 President and Chief Executive Officer of Preferred Staffing
</TABLE>

The business experience of each of the persons listed above for at least the
last five years is as follows:

MEL HARRIS has been a director of the Company since its inception in 1988
and has been Chairman of the Board of Directors and Chief Executive Officer of
the Company since April 1993. In May 1998, Mr. Harris was appointed as President
of the Company. 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. Mr. Harris currently serves as President of
International Insurance Group, Inc., an insurance brokerage company located in
Miami, Florida and New York, New York and, since September 1996, has been a
director of Koo Koo Roo, Inc., a casual dining chain. Mr. Harris is also a
director and shareholder of Strategica Capital Corp., a merchant banking firm
("Strategica Capital"). Mr. Jack D. Burstein, a director of the Company, is the
President of Strategica Capital. 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.

WILLIAM R. DRESBACK has been Chief Financial Officer and Secretary of the
Company since May 1993 and Senior Vice President of the Company since February
1997. From 1986 to 1992, Mr. Dresback 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, Mr. Dresback was employed by KPMG Peat Marwick LLP where he was
responsible for managing the firm's South Florida Insurance Practice.

NANCY RYAN has been a Vice President and the Assistant Secretary of the
Company since July 1992. Ms. Ryan has over 12 years of experience in the
commercial insurance industry. 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. Since 1984, Ms. Ryan has also served as
a Vice President of International Insurance Group, Inc. Ms. Ryan devotes
approximately 75% of her business time to the affairs of the Company.

36
<PAGE>
JACK COPPERSMITH has been Senior Vice President of Mergers and Acquisitions
of the Company since July 1998. For in excess of five years prior to July 1998,
Mr. Coppersmith has been engaged primarily as a private investor and an
independent financial consultant.

STUART J. GORDON has been a director of the Company since 1995. Mr Gordon
has been of counsel to the law firm of Duane, Morris and Heckscher since March
1997. From 1989 until March 1997, Mr. Gordon was a partner at the law firm of
Metzger, Hollis, Gordon & Alprin. Previously, Mr. Gordon served as the 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 serves as 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, an affiliate of
Strategica Group and a merchant bank, since 1992. Mr. Harris is a director and
shareholder of Strategica Capital. 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 and employee 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.

D. MARK OLSON has been President and Chief Executive Officer of Preferred
Employers Group, Inc., a wholly-owned subsidiary of the Company ("PEGI"), since
June 1998 and Chief Operating Officer from July 1997 to June 1998. Prior to his
employment with PEGI, from 1996 to 1997 Mr. Olson served as President, Chief
Executive Officer and a director of PCA Solutions, Inc., a workers' compensation
third party administration company. From 1987 to 1993, Mr. Olson served as
Chairman, President and Chief Executive Officer of Invest Financial Corporation,
a Kemper Financial Services ("KFS") subsidiary, and later as national director
of sales for KFS. From 1993 to 1996, he served as a consultant to several of the
nation's largest insurance and asset management companies.

PETER E. KILISSANLY has been President and Chief Executive Officer of
Preferred Staffing since March 1998. Prior to his employment with the Company,
from 1987 to 1997, Mr. Kilissanly served as President and Chief Operating
Officer of Physicians Corporation of America. In 1986, he served as Senior Vice
President of Corporate Marketing and Communications of Equicor Health Plans.
From 1984 to 1986, Mr. Kilissanly served as Senior Vice President of Corporate
Marketing and Communications of HCA Health Plans.

All directors of the Company serve until the next annual meeting of
stockholders or until their successors are duly elected and qualified. All
officers of the Company serve at the discretion of the Board of Directors,
subject to rights, if any, under contracts of employment with the Company. See
"Management--Employment Agreement." There are no family relationships among the
directors and executive officers of the Company.

37
<PAGE>
EXECUTIVE COMPENSATION

The following summary compensation table sets forth the aggregate
compensation paid to, or earned by, the Company's Chief Executive Officer and
each of the other most highly compensated executive officers of the Company for
the three years ended December 31, 1997 whose total annual salary and bonus
exceeded $100,000 (collectively the "Named Executive Officers").

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION ----------------
------------------------------------------ SECURITIES
OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) COMPENSATION ($) OPTIONS/SARS(#)
- -------------------------------------------- --------- ----------- ----------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>

Mel Harris(1)............................... 1997 116,729 -- --(2) 275,000
Chairman of the Board, Chief Executive 1996 250,000 -- -- --
Officer and President 1995 -- -- 270,000 --

William R. Dresback......................... 1997 150,000 -- -- 50,000
Senior Vice President, Chief Financial 1996 125,000 -- -- --
Officer and Secretary 1995 100,000 -- -- --

Howard Odzer(3)............................. 1997 190,000 -- --(2) --
Former President of PEGI 1996 100,000 -- -- --
1995 100,000 -- 270,000 --
</TABLE>

- ------------------------

(1) Mr. Harris serves as Chairman of the Board and Chief Executive Officer of
the Company pursuant to an employment agreement. See "Management--Employment
Agreement."

(2) Reflects cash dividends paid to such person pursuant to that certain Amended
and Restated Shareholders Agreement dated as of May 15, 1995, by and among
the Company, Mr. Harris and Mr. Odzer.

(3) Effective May 30, 1998, Mr. Odzer resigned from his positions as President
of PEGI and a director of the Company.

OPTION GRANTS IN 1997

The following table sets forth certain information concerning the grant of
stock options in 1997 to each of the Named Executive Officers.

<TABLE>
<CAPTION>
NUMBER OF
SECURITIES PERCENTAGE TO TOTAL
UNDERLYING OPTIONS GRANTED TO EXERCISE PRICE
NAME OPTIONS GRANTED EMPLOYEES IN 1997 ($/SHARE) EXPIRATION DATE
- ----------------------------------- ------------------- ------------------- ----------------- --------------------
<S> <C> <C> <C> <C>
Mel Harris(1)...................... 275,000 34.7% 7.75 August 20, 2004
William R. Dresback(2)............. 25,000 3.2 7.25 February 5, 2002
William R. Dresback(3)............. 25,000 3.2 7.25 February 5, 2001
Howard Odzer(4).................... -- -- -- --
</TABLE>

- ------------------------

(1) No options are immediately exercisable. 275,000 options are exercisable in
five equal installments of 55,000, commencing August 20, 1998, subject to
the terms of the option agreement issued pursuant to the Company's 1996
Employee Stock Option Plan.

38
<PAGE>
(2) Pursuant to the terms of a stock option agreement issued pursuant to the
Company's 1996 Employee Stock Option Plan, 15,000 of such options are
immediately exercisable, and 10,000 options are exercisable in two equal
installments commencing on February 5, 1999 and on the next anniversary
thereof.

(3) Pursuant to the terms of a stock option agreement issued pursuant to the
Share Escrow Agreement, 18,750 of such options are immediately exercisable,
and 6,250 options are exercisable on February 5, 1999.

(4) Effective May 30, 1998, Mr. Odzer resigned from his positions as President
of PEGI and a director of the Company.

AGGREGATE OPTION EXERCISES IN 1997 AND 1997 YEAR-END OPTION VALUES

The following table sets forth certain information concerning the Named
Executive Officers with respect to the number of shares covered by exercisable
and unexercisable stock options at December 31, 1997 and the aggregate value of
exercisable and unexercisable "in-the-money" options at December 31, 1997. No
options were exercised by the Named Executive Officers in 1997.

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL IN-THE MONEY OPTIONS
NAME YEAR-END AT FISCAL YEAR-END(1)
- ----------------------------------------------------------------- ------------------------ -----------------------
<S> <C> <C>
EXERCISABLE/ EXERCISABLE/
UNEXERCISABLE UNEXERCISABLE
------------------------ -----------------------
Mel Harris....................................................... --/275,000 --/--
William R. Dresback.............................................. 33,750/16,250 --/--
Howard Odzer(2).................................................. -- --
</TABLE>

- ------------------------

(1) The value of unexercised "in-the-money" options is equal to the difference
between the closing bid price of the Common Stock on the Nasdaq SmallCap
Market as of December 31, 1997 ($7.00) and the option exercise price per
share, multiplied by the number of shares subject to options.

(2) Effective May 30, 1998, Mr. Odzer resigned from his positions as President
of PEGI and a director of the Company.

DIRECTOR COMPENSATION

Directors do not receive compensation for their services as directors of the
Company, but are reimbursed for all reasonable out-of-pocket expenses incurred
in connection with each Board of Directors meeting attended. In addition, all
directors are eligible for grants of stock options pursuant to the Company's
1996 Employee Stock Option Plan and the Share Escrow Agreement dated February 5,
1997 by and among the Company, Mr. Odzer and the escrow agent named therein (the
"Share Escrow Agreement"). During 1997, the Company granted options to three of
its outside directors under the 1996 Employee Stock Option Plan and the Share
Escrow Agreement, representing options to purchase an aggregate of 75,000 shares
of Common Stock. In February 1997, pursuant to the 1996 Employee Stock Option
Plan, each of Messrs. Gordon, Burstein and Rabb received options to purchase
12,500 shares of Common Stock at an exercise price of $7.25 per share,
exercisable until February 7, 2002. All of the stock options granted to the
outside directors in 1997 pursuant to the 1996 Employee Stock Option Plan vest
at a rate of 20% per year, over a period of five years commencing in February
1998. In February 1997, pursuant to the Share Escrow Agreement, each of Messrs.
Gordon, Burstein and Rabb received options to purchase 12,500 shares of Common
Stock at an exercise price of $7.25 per share, exercisable until February 7,
2001. All of the stock options granted to directors in 1997 pursuant to the
Share Escrow Agreement vest at a rate of 25% per year, over a period of four
years commencing in February 1998.

39
<PAGE>
EMPLOYMENT AGREEMENT

In January 1997, the Company entered into a one-year employment agreement
with Mr. Harris pursuant to which he serves as Chairman of the Board of
Directors and Chief Executive Officer of the Company. The agreement is subject
to automatic one-year extensions absent notice of non-renewal from either party.
In January 1998, the agreement was automatically renewed for an additional
one-year period. Pursuant to the agreement, Mr. Harris is entitled to 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 and
reimbursement for all business expenses related to the Company. In July 1997,
Mr. Harris voluntarily reduced the annual salary payable to him during the term
pursuant to his employment agreement, until further notice, in order to lower
the Company's increased operating expenses arising from hiring additional
management personnel. 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. The agreement contains, among other things, customary non-compete and
non-solicitation provisions.

1996 EMPLOYEE STOCK OPTION PLAN

In September 1996, the Board of Directors adopted and the stockholders of
the Company approved the 1996 Employee Option Plan (the "Plan"). The Plan
provides for the grant to qualified employees (including officers and directors
of the Company) of options to purchase shares of Common Stock. In August 1997,
the Board of Directors adopted, subject to the approval of the stockholders of
the Company at its next annual meeting, an increase in the total number of
shares of Common Stock reserved by the Company for issuance upon the exercise of
stock options granted or which may be granted under the Plan, from 300,000 to
1,000,000 shares of Common Stock.

The Plan may be administered by the Board of Directors or the Compensation
Committee (the "Committee"). The Committee has complete discretion to select the
optionee and to establish the terms and conditions of each option, subject to
the provisions of the Plan. Options granted under the Plan may or may not be
"incentive stock options" as defined in Section 422 of the Code ("Incentive
Options") depending upon the terms established by the 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 Plan, shares subject to cancelled or terminated options may be
available 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. As of July 22, 1998, options to purchase an aggregate of 891,500
shares of Common Stock were outstanding under the Plan.

SHARE ESCROW AGREEMENT

Pursuant to a Share Escrow Agreement by and among Howard Odzer, the escrow
agent, and the Company (the "Share Escrow Agreement"), Mr. Howard Odzer placed
300,000 shares of Common Stock beneficially owned by him in escrow for issuance
upon the exercise of stock options granted to certain executives, officers and
directors designated by the Committee, in its sole discretion (the "Escrow
Options"). Mr. Odzer will receive all proceeds from any exercise of the Escrow
Options. In addition, any exercise of Escrow Options must occur, if at all,
within five years from February 1997. After such date the balance of the shares
of Common stock held in escrow pursuant to the Share Escrow Agreement, if any,
shall revert to Mr. Odzer. See "Certain Transactions."

40
<PAGE>
As of July 22, 1998, options to purchase an aggregate of 251,500 shares of
Common Stock were outstanding under the Share Escrow Agreement.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth information as of July 29, 1998 with respect
to the beneficial ownership of (i) any person known to the Company to be the
beneficial owner of more than 5% of any class of voting securities of the
Company, (ii) each director of the Company, (iii) each of the Named Executive
Officers of the Company (named in the Summary Compensation Table of this
Prospectus under the heading "Management--Executive Compensation") and (iv) all
directors and executive officers of the Company as a group (7 persons).

<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES(2) CLASS(2)
- -------------------------------------------------------------------------------- ---------- -------------
<S> <C> <C>
Mel Harris(1)(3)................................................................ 2,806,764 58.7%
Howard Odzer(4)................................................................. 1,111,765 23.5
William R. Dresback(1)(5)....................................................... 33,750 *
Stuart J. Gordon(6)............................................................. 5,625 *
Jack D. Burstein(7)............................................................. 30,625 *
Maxwell M. Rabb(8).............................................................. 5,625 *
All directors and executive officers as a group (7 persons)..................... 3,020,889 60.8
</TABLE>

- ------------------------

* Less than 1%.

(1) The business address of each such person is Preferred Employers Holdings,
Inc., 10800 Biscayne Boulevard, 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 sixty days from the
date of determination upon the exercise of warrants or options. Each
beneficial owner's number of shares and percentage ownership as set forth
above is determined by assuming that options or warrants that are held by
such person (but not those held by any other person) which are exercisable
within sixty days from the date listed above have been exercised. See
"Certain Relationships and Related Transactions."

(3) Includes (i) 88,235 shares held of record by Ms. Francine Harris, the wife
of Mr. Harris, (ii) 88,235 shares held of record by Ms. Harris, as custodian
for Jamie Jo Harris, the daughter of Mr. and Ms. Harris, (iii) 1,111,765
shares held of record by Mr. Howard Odzer pursuant to which Mr. Harris has
an irrevocable proxy to vote such shares, subject to the terms thereof, (iv)
123,529 shares held of record by Mr. Ronald Rothstein, the step-brother of
Mr. Odzer, pursuant to which Mr. Harris has an irrevocable proxy to vote
such shares, subject to the terms thereof and (v) options to purchase 55,000
shares of Common Stock issued pursuant to the Company's 1996 Employee Stock
Option Plan which are exercisable within 60 days from July 29, 1998. Mr.
Harris may be deemed to have voting control over such shares and may be
deemed to be the beneficial owner thereof. Mr. Harris disclaims beneficial
ownership of (a) 88,235 shares held of record by Ms. Harris, and (b) 88,235
shares held of record by Ms. Harris, as custodian for Jamie Jo Harris. The
shares of Common Stock owned by each of Mr. Harris and Mr. Odzer are subject
to the terms and provisions of a stockholders' agreement among the parties
which includes, among other things, a right of first refusal to purchase the
other's shares subject to certain exceptions contained therein. See "Certain
Relationships and Related Transactions." Does not include options to
purchase 220,000 shares of Common Stock which vest over a four year period
ending August 2002.

41
<PAGE>
(4) Mr. Harris has voting control over the 1,111,765 shares held of record by
Mr. Odzer, of which 300,000 shares have been placed in escrow pursuant to
the terms of the Share Escrow Agreement. As a result, such shares have been
included in the 2,806,764 shares which may be deemed to be beneficially
owned by Mr. Harris. The Compensation Committee of the Board of Directors of
the Company has investment power over the 300,000 shares placed in escrow
under the Share Escrow Agreement. See "Certain Relationships and Related
Transactions." Effective May 30, 1998, Mr. Odzer resigned from his positions
as President of PEGI and a director of the Company. Mr. Odzer's address is
1399 N.E. 103rd Street, Miami Shores, Florida 33138.

(5) Represents (a) options to purchase 15,000 shares of Common Stock issued
pursuant to the Company's 1996 Employee Stock Option Plan and (b) options to
purchase 18,750 shares of Common Stock issued pursuant to the Share Escrow
Agreement, all exercisable within 60 days from July 29, 1998.

(6) Represents (a) options to purchase 2,500 shares of Common Stock issued
pursuant to the Company's 1996 Employee Stock Option Plan and (b) options to
purchase 3,125 shares of Common Stock issued pursuant to the Share Escrow
Agreement, all exercisable within 60 days from July 29, 1998. Mr. Gordon's
business address is Duane Morris and Heckscher, 1667 K Street, Suite 700,
Washington D.C. 20006.

(7) Represents (a) options to purchase 2,500 shares of Common Stock issued
pursuant to the Company's 1996 Employee Stock Option Plan, (b) options to
purchase 3,125 shares of Common Stock issued pursuant to the Share Escrow
Agreement and (c) warrants to purchase an aggregate of 25,000 shares of
Common Stock issued to Strategica Group, all exercisable within 60 days from
July 29, 1998. Mr. Burstein's business address is Strategica Capital Corp.,
1221 Bickell Avenue, Suite 2600, Miami, Florida 33131. See "Certain
Relationships and Related Transactions."

(8) Represents (a) options to purchase 2,500 shares of Common Stock issued
pursuant to the Company's 1996 Employee Stock Option Plan and (b) options to
purchase 3,125 shares of Common Stock issued pursuant to the Share Escrow
Agreement, all exercisable within 60 days from July 29, 1998. Mr. Rabb's
business address is Kramer, Levin, Naftalis, Nessen, Kamin & Frankel, 919
3rd Avenue, 40th Floor, New York, New York 10022.

42
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Mr. Burstein, a director of the Company, is the Chairman and President of
Strategica Group and Strategica Capital. Mr. Harris, Chairman of the Board,
Chief Executive Officer and President of the Company, is a director and
shareholder of Strategica Capital, an affiliate of Strategica Group. In March
1997, the Company paid to Strategica Group a fee of $50,000 as compensation for
its financial advisory and planning services provided in connection with the
Company's initial public offering of 1,725,000 shares of Common Stock (which was
consummated in February 1997). In April 1998, the Company paid to Strategica
Group a fee of $150,000 as compensation for its financial advisory and planning
services provided in connection with the acquisition of substantially all of the
assets used or pertaining to the business of HSSI Travel Nurse Operations, Inc.
In July 1998, the Company issued to Strategica Group a warrant to purchase an
aggregate of 25,000 shares of Common Stock at an exercise price of $7.88 per
share for consulting services. See "Business."

In February 1997, the then existing stockholders (the "Exchanging
Stockholders") of PEGI, a corporation which conducted certain of the Company's
operations, effected a recapitalization whereby the Company exchanged 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
became a wholly-owned subsidiary of the Company. Pursuant to the Exchange, Mr.
Harris, Mr. Odzer (the former President of PEGI) and Ms. Ryan, a Vice President
and the Assistant Secretary of the Company, received 1,450,000, 1,111,765 and
25,000 shares of Common Stock, respectively.

In February 1997, the Company, Mr. Harris and Mr. Odzer entered into a
Shareholders Agreement which provides for certain arrangements regarding
restrictions on the transferability of shares owned by them or by members of
their respective families and other matters (the "1997 Shareholders Agreement").
Under the 1997 Shareholders Agreement, the parties have agreed to reciprocal
rights of first refusal under certain circumstances with respect to the
disposition of shares of Common Stock held by Messrs. Harris and Odzer, and
certain registration and indemnification rights. The 1997 Shareholders Agreement
also reaffirms the irrevocable proxy granted to Mr. Harris to vote all of the
shares held of record by Mr. Odzer, which was granted by Mr. Odzer to Mr. Harris
in May 1995. The proxy expires upon the earlier of (a) the termination of the
1997 Shareholders Agreement or (b) at such time as Mr. Odzer owns less than
fifteen percent of the outstanding Common Stock of the Company.

Pursuant to a Share Escrow Agreement dated February 5, 1997, Mr. Odzer
placed 300,000 shares of the Company's Common Stock beneficially owned by him in
escrow for issuance upon the exercise of stock options granted to certain
directors, executives and other officers of the Company, as designated by the
Compensation Committee. See "Management."

In January 1996, the Company entered into a Cost Sharing Agreement with
International Insurance Group, Inc. ("IIG"), pursuant to which the Company
provides office space, equipment and other administrative services to IIG. IIG
is an insurance brokerage company which is wholly-owned by Mr. Harris, the
Chairman of the Board, Chief Executive Officer and President of the Company.
Under the Cost Sharing Agreement, the Company is entitled to receive from IIG
approximately $2,400 per month for rendering such services. Prior to January
1996, the Company provided these services without reimbursement. For the year
ended December 31, 1997, the Company billed an aggregate of approximately
$40,737 and received an aggregate of $26,889 from IIG pursuant to the Cost
Sharing Agreement.

In 1995, PEGI 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 PEGI agreed to repurchase from them
an aggregate of 30 shares of common stock of PEGI (529,412 shares of Common
Stock, as adjusted for the Exchange). The aggregate purchase price for such
shares was $600,000 (including interest) to be paid in 24 installments of
$25,000. In July 1995, pursuant to a subsequent letter agreement by and between
PEGI and Mr. Odzer, it was agreed that PEGI would not pay monthly installments
for the months of August 1995 through January 1996 and that payment of monthly

43
<PAGE>
installments of $25,000 (including interest) would resume in February 1996. As
of December 31, 1997, PEGI paid the total amount of the balance of the purchase
price outstanding to Mr. Odzer which was $300,000.

The Company is also a party to certain employment, stock option and other
arrangements with its directors and executive officers. See "Management."

SELLING SECURITYHOLDERS

The following Selling Securityholders beneficially own as of July 24, 1998
and may offer hereby the number of shares of Common Stock set forth opposite
their respective names (assuming as of July 24, 1998 (i) the conversion of all
of the outstanding principal amount of the Notes ($10,580,000 as of July 24,
1998) held by such holders into shares of Common Stock based on the conversion
price of $9.00 per share and (ii) the exercise of warrants (collectively, the
"Warrants") to purchase an aggregate of 348,800 shares of Common Stock for
cash). The Shares offered pursuant to this Prospectus may be offered from time
to time by the Selling Securityholders named below or their nominees. The
Selling Securityholders are under no obligation to sell all or any portion of
the Shares pursuant to this Prospectus. In addition, because the Selling
Securityholders are not obligated to sell all or a portion of their Shares
pursuant to this Prospectus, the Company is unable to ascertain the number of
shares of Common Stock that will be beneficially owned by each Selling
Securityholder following the termination of the Offering.

The Company will incur expenses in respect of this Offering in an amount
estimated to be $125,000 in the aggregate. Except as otherwise provided in this
Prospectus, no Selling Securityholder has held any position or office or had any
other material relationship with the Company within the past three years. The
Selling Securityholders will receive all of the proceeds from the sale of the
Shares offered hereby. The Company will not receive any proceeds from the sale
of such Shares. However, 348,800 shares of the Shares offered hereby are
issuable upon the exercise of the Warrants (subject to adjustments). If all of
the Warrants were exercised, the Company estimates that it would receive gross
cash proceeds of approximately $2.9 million (assuming none of the Warrants were
exercised pursuant to the cashless exercise provisions contained therein). See
"Use of Proceeds" and "Plan of Distribution."

The information in the table below concerning the Selling Securityholders is
based on the records of the Company. Information concerning the Selling
Securityholders may change from time to time after the date of this Prospectus.
See "Risk Factors," "Plan of Distribution" and "Description of Securities."

<TABLE>
<CAPTION>
SHARES OF SHARES OF
COMMON STOCK OWNED COMMON STOCK OFFERED
PRIOR TO PURSUANT TO
NAME OF SELLING SECURITYHOLDER OFFERING(1)(2) OFFERING(1)(2)
- ----------------------------------------------------------------- ---------------------- ----------------------
<S> <C> <C>
I. Thomson....................................................... 1,666 1,666
Anker Bank....................................................... 33,333 33,333
Ashford Capital Partners, L.P.................................... 111,111 111,111
The Bald Eagle Fund Ltd.......................................... 4,638 4,638
Clariden Bank.................................................... 111,110 111,110
Jay John Beyrouti................................................ 11,111 11,111
Harvey Bibicoff.................................................. 5,555 5,555
Christopher Binyon Sarofim 1976 Trust............................ 16,666 16,666
Burr Family Trust, Robert Z. Burr and Catherine W. Burr,
Trustees....................................................... 5,555 5,555
Alex T. Chalmers................................................. 1,666 1,666
Dr. David Cohen.................................................. 11,111 11,111
Harriet H. Cohen................................................. 2,777 2,777
Julia Cole....................................................... 11,111 11,111
Chris Conway..................................................... 5,555 5,555
</TABLE>

44
<PAGE>
<TABLE>
<CAPTION>
SHARES OF SHARES OF
COMMON STOCK OWNED COMMON STOCK OFFERED
PRIOR TO PURSUANT TO
NAME OF SELLING SECURITYHOLDER OFFERING(1)(2) OFFERING(1)(2)
- ----------------------------------------------------------------- ---------------------- ----------------------
<S> <C> <C>
Gerald B. Cramer 1997 Charitable Remainder Trust................. 55,555 55,555
DW Trustees (B.V.I.) Limited as Trustee of the Rectory Farm
Settlement Main Fund........................................... 5,555 5,555
DW Trustees (B.V.I.) Limited as Trustee of the Rectory Farm
Settlement Children's Fund..................................... 2,777 2,777
Joseph Esformes.................................................. 38,888 38,888
Falk Family Foundation........................................... 11,111 11,111
Austin Gleason Pension Fund...................................... 11,111 11,111
Paul Goldenheim.................................................. 2,777 2,777
William O.E. Henry............................................... 5,555 5,555
Jeffries Switzerland............................................. 55,555 55,555
JJM Investments, Inc............................................. 2,777 2,777
Peggy S. Jordan.................................................. 11,111 11,111
E. Stanley Kardatzke Revocable Trust............................. 22,222 22,222
Fred Kassner..................................................... 27,777 27,777
Kensington Partners L.P.......................................... 48,111 48,111
Kensington Partners II L.P....................................... 2,805 2,805
Peter E. Kilissanly(3)........................................... 77,777 77,777
Lynka Adams Kroll................................................ 11,111 11,111
Douglas Levine................................................... 5,555 5,555
Charles Loegering................................................ 11,111 11,111
Lloyd A. Moriber M.D............................................. 11,111 11,111
Larry Palini..................................................... 5,555 5,555
Banque Piguet & Cie SA........................................... 11,111 11,111
Putnam Capital Appreciation Fund................................. 222,222 222,222
Lawrence J. Rodler............................................... 2,777 2,777
Christopher Rolin................................................ 2,777 2,777
Richard Rosenblatt............................................... 5,555 5,555
Ben Rosenbloom................................................... 5,555 5,555
Hare & Co........................................................ 55,555 55,555
J.F. Shea Co., Inc. as nominee 1998-34........................... 111,111 111,111
Commonwealth Associates(4)....................................... 113,136 113,136
Mark Danieli(5).................................................. 733 733
Richard Campanella(5)............................................ 662 662
Anthony Giardina(5).............................................. 1,537 1,537
Craig Leppla(5).................................................. 830 830
James Walker(5).................................................. 500 500
Mario Marsillo(5)................................................ 600 600
Ronald Moschetta(5).............................................. 1,632 1,632
Christopher Krecke(5)............................................ 1,000 1,000
Brad Van Siclen(5)............................................... 3,500 3,500
Inder Tallur(5).................................................. 1,270 1,270
Laurant Ashenden(5).............................................. 1,920 1,920
Cornelia Eldridge(5)............................................. 4,988 4,988
Joseph P. Wynne(5)............................................... 4,905 4,905
Basil Asciutto(5)................................................ 8,308 8,308
Seth Elliott(5).................................................. 2,500 2,500
Eric Handler(5).................................................. 3,500 3,500
</TABLE>

45
<PAGE>
<TABLE>
<CAPTION>
SHARES OF SHARES OF
COMMON STOCK OWNED COMMON STOCK OFFERED
PRIOR TO PURSUANT TO
NAME OF SELLING SECURITYHOLDER OFFERING(1)(2) OFFERING(1)(2)
- ----------------------------------------------------------------- ---------------------- ----------------------
<S> <C> <C>
Eric Rubenstein(5)............................................... 7,467 7,467
Robert O'Sullivan(5)............................................. 8,075 8,075
Keith Rosenbloom(5).............................................. 25,985 25,985
Michael S. Falk(5)............................................... 124,428 124,428
Edmund Shea(5)................................................... 6,897 6,897
Robert Priddy(5)................................................. 5,558 5,558
Robert Beuret(5)................................................. 4,166 4,166
Michael Lyall(5)................................................. 2,917 2,917
Vincent Labarbara(5)............................................. 2,724 2,724
Alvin Mirman(5).................................................. 2,334 2,334
Eric Rand(5)..................................................... 1,151 1,151
Murray Segal(5).................................................. 963 963
Andres Bello(5).................................................. 915 915
Estate of Daniel Parker(5)....................................... 770 770
Robert Tucker(5)................................................. 770 770
Cathy Ross(5).................................................... 750 750
Scott Rickman(5)................................................. 500 500
Michael Volpe(5)................................................. 419 419
Lisa Letteri(5).................................................. 250 250
Richard Galterio(5).............................................. 86 86
Al Legere(5)..................................................... 86 86
Marco Guidice(5)................................................. 68 68
</TABLE>

- ------------------------

(1) The beneficial ownership and shares offered data included in this table
assumes conversion of all of the principal amount of the Notes outstanding
as of July 24, 1998 ($10,580,000) into shares of Common Stock at the
conversion price of $9.00 per share.

(2) The beneficial ownership and shares offered data included in this table
assumes that (a) 150,000 shares of Common Stock (subject to adjustments) are
issuable upon the exercise of warrants to purchase such shares, and (b)
198,800 shares of Common Stock (subject to adjustments) are issuable upon
the exercise of warrants to purchase such shares of Common Stock.

(3) Mr. Peter E. Kilissanly is the President and Chief Executive Officer of
Preferred Staffing. See "Management."

(4) In February 1997, the Company consummated an initial public offering of
1,725,000 shares of Common Stock at a price to the public of $7.25 per
share. Commonwealth Associates ("Commonwealth") acted as the managing
underwriter of the offering and received commissions of approximately
$875,000 and a non-accountable expense allowance of $236,000, as well as
warrants to purchase an aggregate of 150,000 shares of Common Stock, which
includes the shares offered hereby (the "IPO Warrants"). In May 1998, the
Company consummated a private placement of the Notes and Commonwealth acted
as the Company's placement agent. In connection therewith, the Company paid
Commonwealth approximately $900,000 in commissions and fees and issued to
Commonwealth a warrant to purchase 198,800 shares of Common Stock with an
exercise price of $9.00 per share (the "PPM Warrants"). In July 1998,
Commonwealth transferred a portion of the IPO Warrants and PPM Warrants to
certain persons.

(5) In July 1998, Commonwealth transferred the warrants to purchase such shares
of Common Stock to such Selling Securityholder.

46
<PAGE>
DESCRIPTION OF SECURITIES

COMMON STOCK

The Company is authorized to issue 10,000,000 shares of Common Stock, par
value $.01 per share, of which, as of July 24, 1998, 4,725,000 shares are
outstanding and held of record by 15 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 Company has never declared or paid any dividends on its Common
Stock and does not anticipate that any cash or other dividends will be paid in
the foreseeable future, as it intends to follow a policy of retaining earnings,
if any, to finance future growth. See "Risk Factors--Dividends." 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 Principal
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 currently authorized to issue up to 1,000,000 shares of
Preferred Stock, however, the Company plans to seek stockholder approval to
increase its authorized Preferred Stock to 2,000,000 shares. 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."

47
<PAGE>
PLAN OF DISTRIBUTION

The sale of the Shares may be effected directly to purchasers by the Selling
Securityholders as principals or through one or more underwriters, brokers,
dealers or agents from time to time in one or more transactions (which may
involve block transactions). Any sales of the Shares may be effected through the
Nasdaq SmallCap Market, in private transactions or otherwise, and the Shares may
be sold at market prices prevailing at the time of sale, at prices related to
such prevailing market prices or at negotiated prices. If the Selling
Securityholders effect sales through underwriters, brokers, dealers or agents,
such firms may receive compensation in the form of discounts, concessions or
commissions from the Selling Securityholders or the purchasers of the Shares for
whom they may act as agent, principal or both. Those persons who act as
broker-dealers or underwriters in connection with the sale of the Shares may be
selected by the Selling Securityholders and may have other business
relationships with, and perform services for, the Company. Any Selling
Securityholder, underwriter or broker-dealer who participates in the sale of the
Shares may be deemed to be an "underwriter" within the meaning of Section 2(11)
of the Securities Act. Any commissions received by any underwriter or
broker-dealer and any profit on any sale of the Shares as principal may be
deemed to be underwriting discounts and commissions under the Securities Act.

The anti-manipulation provisions of Rules 101 through 104 under the Exchange
Act may apply to purchases and sales of shares of Common Stock by the Selling
Securityholders. In addition, there are restrictions on market-making activities
by persons engaged in the distribution of the Common Stock.

Under the securities laws of certain states, the Shares may be sold in such
states only through registered or licensed brokers or dealers. In addition, in
certain states the Shares may not be able to be sold unless the Common Stock has
been registered or qualified for sale in such state or an exemption from
registration or qualification is available and is complied with.

The Company is required to pay expenses incident to the registration,
offering and sale of the Shares pursuant to this Offering. The Company estimates
that its expenses in connection with the Offering will be approximately $125,000
in the aggregate. The Company and each Selling Securityholder have agreed to
indemnify each other and certain other persons against certain liabilities,
including liabilities under the Securities Act.

The Company has advised the Selling Securityholders that if a particular
offer of Shares is to be made on terms constituting a material change from the
information set forth above, then to the extent required, a Prospectus
Supplement must be distributed setting forth such terms and related information
must be used.

LEGAL MATTERS

The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Baer Marks & Upham LLP, New York, New York.

EXPERTS

The consolidated financial statements of the Company as of December 31, 1997
and for each of the years in the two year period then ended have been included
herein in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing.

48
<PAGE>
AVAILABLE INFORMATION

The Company has filed with the Securities and Exchange Commission under the
Securities Act a Registration Statement on Form SB-2 (the "Registration
Statement"), of which this Prospectus is a part, with respect to the Shares
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, certain items of which are contained in exhibits and schedules as
permitted by the rules and regulations of the Securities and Exchange
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 contract, agreement or other document filed as an
exhibit to the Registration Statement or in a filing incorporated by reference
herein, reference is made to the exhibit for a more complete description of the
matters involved, and each statement shall be deemed qualified in its entirety
by this reference.

The Company is subject to the informational requirements of the Exchange Act
and, in accordance therewith, files certain periodic reports, proxy statements
and other information with the Securities and Exchange Commission. Reports and
other information filed by the Company may be inspected and copied at the public
reference facilities maintained by the Securities and Exchange Commission at its
principal offices located at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, and at the following regional offices of the Securities
and Exchange Commission: Seven World Trade Center, 13th Floor, New York, New
York 10048, and 500 West Madison Street, Suite 1400, Chicago, Illinois 60601.
Copies of such material may be obtained by mail from the Public Reference
Section of the Securities and Exchange Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. In addition, the Securities and
Exchange Commission maintains a Web site at http://www.sec.gov containing
reports, proxy and information statements and other information regarding
registrants that file electronically with the Securities and Exchange
Commission, including the Company. Material filed by the Company can also be
inspected at the offices of the National Association of Securities Dealers,
Inc., 1735 K Street, N.W., Washington, D.C. 20006.

49
<PAGE>
PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Audited Financial Statements for the year ended December 31, 1997

Independent Auditors' Report.......................................................................... F-2

Consolidated Balance Sheet as of December 31, 1997.................................................... F-3

Consolidated Statements of Operations for the years ended December 31, 1997 and 1996.................. F-4

Consolidated Statements of Shareholders' Equity for the years ended December 31, 1997 and 1996........ F-5

Consolidated Statements of Cash Flows for the years ended December 31, 1997 and 1996.................. F-6

Notes to Consolidated Financial Statements............................................................ F-7

Unaudited Financial Statements for the three months ended March 31, 1998

Consolidated Balance Sheets as of March 31, 1998 and December 31, 1997................................ F-18

Consolidated Statements of Operations for the three months ended March 31, 1998 and 1997.............. F-19

Consolidated Statements of Cash Flows for the three months ended March 31, 1998 and 1997.............. F-20

Notes to Consolidated Financial Statements............................................................ F-21
</TABLE>

F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT

The Board of Directors

Preferred Employers Holdings, Inc.:

We have audited the accompanying consolidated balance sheet of Preferred
Employers Holdings, Inc. and subsidiaries as of December 31, 1997 and the
related consolidated statements of operations, shareholders' equity, and cash
flows for the years ended December 31, 1997 and 1996. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

We conducted our audit 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 audit provides 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 subsidiaries as of December 31, 1997 and 1996, and
the results of their operations and their cash flows for each of the years then
ended in conformity with generally accepted accounting principles.

/s/ KPMG Peat Marwick LLP

Miami, Florida

March 27, 1998

F-2
<PAGE>
PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

DECEMBER 31, 1997

<TABLE>
<S> <C>
ASSETS
Investments:
Held-to-maturity securities, at amortized cost (fair value of $8,237,669).... $8,015,105
Held-to-maturity securities, at amortized cost--restricted (fair value of
$7,947,981)................................................................ 7,877,444
Short-term investments....................................................... 7,090,550
----------
Total investments.......................................................... 22,983,099

Cash........................................................................... 4,125,147
Accrued investment and interest income......................................... 311,934
Commissions and premiums receivable, net....................................... 585,072
Deferred acquisition costs..................................................... 903,880
Property and equipment, net.................................................... 478,826
Deferred tax assets............................................................ 252,837
Deposits....................................................................... 24,921
Other assets................................................................... 34,487
----------
Total assets................................................................. $29,700,203
----------
----------

LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Unpaid losses and loss adjustment expenses..................................... $6,107,613
Unearned premiums.............................................................. 2,671,831
Premiums payable............................................................... 3,064,103
Commissions payable............................................................ 330,055
Other liabilities.............................................................. 4,750,082
Accounts payable and accrued expenses.......................................... 508,127
Deferred reinsurance income.................................................... 279,980
----------
Total liabilities.............................................................. 17,711,791
----------
Shareholders' equity:
Common stock, $0.01 par value; authorized 10,000,000 shares; issued 5,254,412
shares..................................................................... 52,544
Additional paid-in capital................................................... 10,367,074
Retained earnings............................................................ 2,074,351
----------
Total shareholders' equity................................................. 12,493,969
Treasury stock, at cost, 529,412 shares...................................... (505,557)
----------
Net shareholders' equity................................................... 11,988,412
----------
Total liabilities and shareholders' equity................................. $29,700,203
----------
----------
</TABLE>

See accompanying notes to consolidated financial statements.

F-3
<PAGE>
PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 1997 AND 1996

<TABLE>
<CAPTION>
1997 1996
------------- ----------
<S> <C> <C>
Revenues:
Premiums earned..................................................................... $ 11,674,659 524,760
Net investment income............................................................... 1,394,544 217,314
Net commission income............................................................... 2,359,445 2,462,625
Other income........................................................................ 570,464 136,431
------------- ----------
Total revenues.................................................................... 15,999,112 3,341,130
------------- ----------
Expenses:
Losses and loss adjustment expenses incurred........................................ 6,257,095 270,251
Amortization of deferred acquisition costs.......................................... 4,161,884 177,526
Other expenses...................................................................... 4,161,735 2,979,087
------------- ----------
Total expenses.................................................................... 14,580,714 3,426,864
------------- ----------
Operating income (loss) before income taxes........................................... 1,418,398 (85,734)
Non operating income.................................................................. -- 190,000
------------- ----------
Income before income taxes............................................................ 1,418,398 104,266
Income taxes.......................................................................... 208,980 --
------------- ----------
Net income........................................................................ $ 1,209,418 104,266
------------- ----------
------------- ----------
Net basic income per share............................................................ $ .27
-------------
-------------
Net diluted income per share.......................................................... $ .27
-------------
-------------
Common shares and common share equivalents used in computing net income per share..... 4,513,562
-------------
-------------
Proforma information (unaudited):
Historical income before income taxes............................................... $ 104,266
Proforma income tax provision....................................................... 38,891
Proforma net income................................................................. 65,375
Proforma basic income per share .02
Proforma diluted income per share .02
Weighted average shares outstanding................................................. 3,000,000
</TABLE>

See accompanying notes to consolidated financial statements.

F-4
<PAGE>
PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

YEARS ENDED DECEMBER 31, 1997 AND 1996

<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Common stock-number of shares:
Balance at beginning of period................................................... 3,529,412 3,529,412
Issuance of common shares........................................................ 1,725,000 --
------------- -------------
Balance at end of period......................................................... 5,254,412 3,529,412
------------- -------------
------------- -------------
Common stock:
Balance at beginning of period................................................... $ 35,294 35,294
Issuance of common shares........................................................ 17,250 --
------------- -------------
Balance at end of period......................................................... 52,544 35,294
------------- -------------
Additional paid-in capital:
Balance at beginning of period -- --
Issuance of common shares........................................................ 10,367,074 --
------------- -------------
Balance at end of period......................................................... 10,367,074 --
------------- -------------
Retained earnings:
Balance at beginning of period................................................... 864,933 760,667
Net income....................................................................... 1,209,418 104,266
------------- -------------
Balance at end of period......................................................... 2,074,351 864,933
------------- -------------
Treasury Stock:
Balance at end of period......................................................... (505,557) (505,557)
------------- -------------
Total shareholders' equity....................................................... $ 11,988,412 394,669
------------- -------------
------------- -------------
</TABLE>

See accompanying notes to consolidated financial statements.

F-5
<PAGE>
PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 1997 AND 1996

<TABLE>
<CAPTION>
1997 1996
-------------- -----------
<S> <C> <C>
Cash flow from operating activities:
Net income........................................................................ $ 1,209,418 104,266
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization................................................... 150,341 161,132
Amortization of deferred acquisition costs...................................... 4,161,884 177,526
Deferred income taxes........................................................... (252,837) --
Change in:
Accrued investment and interest income........................................ (311,934) --
Commissions and premiums receivable........................................... 3,344,344 (3,583,802)
Unpaid losses and loss adjustment expenses.................................... 5,908,223 199,390
Unearned premiums............................................................. 782,854 1,888,977
Deferred reinsurance income................................................... (1,054,421) 1,334,401
Premiums payable.............................................................. (521,487) 1,231,676
Commissions payable........................................................... (179,302) 212,769
Accounts payable and accrued expenses......................................... 135,437 367,215
Other, net.................................................................... (1,857,061) 1,083,264
-------------- -----------
Net cash provided by operating activities................................... 11,515,459 3,176,814
-------------- -----------
Cash flow from investing activities:
Purchase of fixed maturities...................................................... (15,892,549) --
Increase in short-term investments................................................ (7,090,550) --
Purchase of property and equipment................................................ (82,677) (130,503)
-------------- -----------
Net cash used in investing activities....................................... (23,065,776) (130,503)
-------------- -----------
Cash flow from financing activities:
Proceeds from sale of common stock................................................ 10,384,324 --
Repayment of shareholder loan..................................................... (300,000) (275,000)
-------------- -----------
Net cash provided by (used in) financing activities......................... 10,084,324 (275,000)
-------------- -----------
Net increase (decrease) in cash..................................................... (1,465,993) 2,771,311
Cash at beginning of period......................................................... 5,591,140 2,819,829
-------------- -----------
Cash at end of period............................................................... $ 4,125,147 5,591,140
-------------- -----------
-------------- -----------
Supplemental disclosure of cash flow information:
Income taxes paid................................................................. $ 202,300 --
-------------- -----------
-------------- -----------
</TABLE>

See accompanying notes to consolidated financial statements.

F-6
<PAGE>
PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1997 AND 1996

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(A) BASIS OF PRESENTATION

The accompanying consolidated financial statements of Preferred Employers
Holdings, Inc. (the "Company") and its subsidiaries, as described below, are
prepared in accordance with generally accepted accounting principles. These
principles vary in certain respects from statutory accounting practices
prescribed or permitted by regulatory authorities. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates, based on the best information available, in
recording transactions resulting from business operations. The balance sheet
amounts that involve a greater extent of accounting estimates and actuarial
determinations subject to future changes are the Company's liabilities for
unpaid losses and loss adjustment expenses. As additional information becomes
available (or actual amounts are determinable), the recorded estimates may be
revised and reflected in operating results. While management believes that the
liability for unpaid losses and loss adjustment expenses is adequate to cover
the ultimate liability, such estimates may be more or less than the amounts
actually paid when claims are settled.

(B) ORGANIZATION

Preferred Employers Holdings, Inc. is the successor company to Preferred
Employers Group, Inc. ("PEGI"). In February, 1997, the Company completed an
initial public offering of 1,725,000 shares of common stock (including the
underwriter's over-allotment option) at a price of $7.25 per share. Immediately
prior to the Company's initial public offering, the Company and the stockholders
of PEGI (the "Exchanging Stockholders") effected a recapitalization whereby the
Company exchanged 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 became 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 group of international
insurance carriers, 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. On June 11, 1996, GAIC
advised the Company that it would no longer write Package insurance for
fast-food restaurants; however, on March 20, 1997, the Company was appointed as
a GA by the Kemper Group of Insurance Companies with the authority to write
workers' compensation and other forms of commercial property and casualty
business for family style and fast-food restaurants and convenience stores.

F-7
<PAGE>
PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997 AND 1996

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
insurance policies from AIG with policy inception dates as of January 1, 1996
and subsequent. Although the Reinsurer will assume the risks associated with
being a reinsurer, the Agreement limits the liability of the Reinsurer for
losses and certain defined expenses to the first $300,000 per occurrence. In
addition, the Agreement limits the aggregate liability of the Reinsurer for all
coverage to an amount not to exceed 70 percent of the gross written premium for
each individual underwriting year.

Because the Agreement is effective for all business written on or after
January 1, 1996, the policies written prior to the execution of the Agreement
and formation of the Reinsurer are accounted for as retroactive reinsurance.

The principal difference between the accounting for retroactive and
prospective reinsurance is that revenue and costs of retroactive reinsurance are
deferred and accreted into income over the claim-settlement period, rather than
over the period for which contractual coverage is provided, as would be the case
under prospective reinsurance.

Retroactive insurance accounting does not change the amount of income to be
recognized, but rather extends the period of recognition from one year--the
period of coverage, to six years--the period over which claims liabilities from
the business are expected to be settled. Cash flows from the reinsurance
transactions are not affected by the accounting treatment.

The accompanying financial statements reflect a composite
retroactive/prospective accounting treatment with business written prior to
October 1, 1996, being accounted for as retroactive and business written
subsequent thereto accounted for as prospective.

The effects of prospective and retroactive reinsurance accounting treatment
are illustrated below. The prospective method assumed that the Agreement
incepted on January 1, 1996, and provides for a loss ratio of 51.5%, acquisition
costs of 33.38%, aggregate net premiums written of approximately $15 million
($12,600,000 relating to the period January 1 through September 30, 1996) and an
investment yield of 6.5% on net cash flows. The retroactive (deposit) method
uses the same assumptions except that since the Agreement was not executed until
October 1996, any investment income on net cash flows earned for the period from
January through September 1996 are deferred and recognized as "other income"
over the payment period of the remaining claim liabilities.

Income before income taxes recognized, and estimated to be recognized in the
calendar year indicated below is as follows:

<TABLE>
<CAPTION>
PROSPECTIVE COMPOSITE
METHOD RETROACTIVE/PROSPECTIVE
YEARS (PRO FORMA) (ACTUAL)
- --------------------------------------------------------- ------------ ---------------------
<S> <C> <C>
1996..................................................... $ 1,658,000 324,000
1997..................................................... 1,288,000 1,372,000
1998-2001................................................ 1,314,000 2,564,000
------------ ----------
$4,260,000... 4,260,000
------------ ----------
------------ ----------
</TABLE>

F-8
<PAGE>
PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997 AND 1996

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
and timing of aggregate loss and loss expense payments, available investment
yields and acquisition and other costs associated with the provision of
insurance protection. Actual results may vary, perhaps materially, from those
illustrated above. No assurance is given or may be taken that subsequent
revisions of estimates will not have a material impact on the illustration
above.

Prospective reinsurance premiums are earned on a pro-rata basis over the
term of the related coverage. The reserve for unearned premiums represents the
portion of the net premiums written relating to the unexpired term of coverage.

Acquisition costs are deferred and amortized over the period in which the
related prospective reinsurance premiums are earned.

Losses and loss adjustment expenses are charged to income as incurred. The
reserve for unpaid claims represents the accumulation of estimates for reported
losses and includes provisions for losses incurred but not reported. The methods
of determining such estimates and establishing resulting reserves are
continually reviewed and updated. Adjustments, if any, resulting therefrom are
reflected in income, currently. The Company does not discount its loss reserves.

(D) INVESTMENTS

Fixed maturity securities which the Company has the positive intent and
ability to hold to maturity are classified as "held to maturity" and are
reported at amortized cost. Fixed maturity and equity securities that are bought
and held principally for the purpose of selling them in the near term are
classified as "trading" and are reported at fair value, with unrealized gains
and losses included in income. Fixed maturity and equity securities not
classified as either held to maturity or trading are classified as "available
for sale" and are reported at fair value, with unrealized gains and losses (net
of deferred taxes) charged or credited as a separate component of shareholders'
equity.

Investment income is recorded as earned on the accrual basis and includes
amortization of premiums and accretion of discounts relating to investments
acquired at other than par value. Realized gains or losses on disposal of
investments are determined on a specific identification basis and are included
in revenues.

The Company does not own any on-balance sheet or off-balance sheet
derivative instruments.

(E) 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.

(F) 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-9
<PAGE>
PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997 AND 1996

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(G) COMMISSION INCOME

Commission income is recognized when premiums are received. Any subsequent
commission adjustments, including policy cancellations, are recognized upon
notification from the insurance carrier or broker.

(H) 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 related to 1996. However, subsequent to the formation of
the Company, PEGI is taxed as a C corporation under the provisions of the
Internal Revenue Code. As such, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.

(I) NET INCOME PER SHARE

Net income per common share is based upon the weighted average number of
common shares outstanding during each year. In February 1997, SFAS No. 128,
"Earnings per Share" was issued. This statement requires specific computations,
presentations and disclosures for earnings per share (EPS) amounts in order to
make EPS amounts more compatible with international accounting standards. The
Company adopted SFAS No.128 for the period ended December 31, 1997. This
statement requires that any prior period EPS amounts be restated. The adoption
of SFAS No. 128 had no effect on diluted EPS amounts reported for any periods
presented.

(J) ACCOUNTING PRONOUNCEMENTS

SFAS No. 129, Disclosures of Information about Capital Structure, was also
issued in February 1997 and is also effective December 31, 1997. This statement
establishes standards for disclosing information about an entity's capital
structure.

On June 30, 1997, the FASB released SFAS No. 130, Reporting Comprehensive
Income. This statement establishes standards for reporting and displaying
comprehensive income and its components in a full set of financial statements.
SFAS No. 130 requires that all components of comprehensive income be reported in
a financial statement that is displayed with the same prominence as other
financial statements. An example of an item that will be included in the
Company's presentation of comprehensive income, in addition to net income, is
unrealized gains and losses on securities available for sale. This statement is
effective beginning in 1998.

Management believes that there will be no significant impact on the
Company's financial reporting or disclosures as a result of these
pronouncements.

F-10
<PAGE>
PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997 AND 1996

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(K) RECLASSIFICATIONS

Certain items in the 1996 financial statements have been reclassified to
conform with the 1997 presentation.

(2) INVESTMENTS

Net investment income for the years ended December 31, 1997 and 1996 is
summarized as follows:

<TABLE>
<CAPTION>
1997 1996
------------ ---------
<S> <C> <C>
Fixed maturities..................................................... $ 973,839 --
Short-term investments and cash...................................... 420,705 217,314
------------ ---------
Net investment income................................................ $ 1,394,544 217,314
------------ ---------
------------ ---------
</TABLE>

At December 31, 1997, the Company did not hold fixed-maturity securities
which individually exceeded 10% of shareholders' equity except U.S. government
and government agency securities.

Bonds with an amortized cost of $7,877,444 were held in a restricted account
for the benefit of the ceding company (AIG) as unauthorized reinsurance at
December 31, 1997, in accordance with statutory requirements.

The amortized cost and estimated fair values of investments at December 31,
1997 are as follows:

<TABLE>
<CAPTION>
AMOUNT AT
WHICH SHOWN
GROSS GROSS ESTIMATED IN THE
AMORTIZED UNREALIZED UNREALIZED FAIR BALANCE
COST GAINS LOSSES VALUE SHEET
------------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Securities held to maturity:
Fixed maturities:
Obligations of states and political
subdivisions.......................... $ 8,015,105 222,564 -- 8,237,669 8,015,105
Obligations of states and political
subdivisions -restricted.............. 7,877,444 70,537 -- 7,947,981 7,877,744
------------- ----------- ----------- ------------ -------------
Total fixed maturities................ $ 15,892,549 293,101 -- 16,185,650 15,892,549
------------- ----------- ----------- ------------ -------------
------------- ----------- ----------- ------------ -------------
</TABLE>

F-11
<PAGE>
PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997 AND 1996

(2) INVESTMENTS (CONTINUED)
The amortized cost and fair value of securities at December 31, 1997, by
contractual maturity date, are presented below:

<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
------------- ------------
<S> <C> <C>
Fixed maturities held-to-maturity:
Due in one year or less.......................................... $ -- --
Due after one year through five years............................ 6,941,072 7,139,209
Due after one year through five years--restricted................ 6,803,411 6,849,521
Due after five years through ten years........................... -- --
Due after ten years.............................................. 1,074,033 1,098,460
Due after ten years--restricted.................................. 1,074,033 1,098,460
------------- ------------
15,892,549 16,185,650
Short-term investments........................................... 7,090,550 7,090,550
------------- ------------
Total...................................................... $ 22,983,099 23,276,200
------------- ------------
------------- ------------
</TABLE>

(3) FINANCIAL INSTRUMENTS

The carrying amounts for short-term investments, cash, commissions and
premiums receivable, accrued investment income, and accounts payable and accrued
expenses approximate their fair values due to the short-term nature of these
instruments.

Estimated fair values for fixed maturities were provided by outside
consultants using market quotations, prices provided by market makers or
estimates of fair values obtained from yield data relating to investment
securities with similar characteristics.

(4) STOCKHOLDER LOAN

In May 1995, the Company entered into a repurchase agreement with
stockholders (the "Agreement") whereby the Company agreed to repurchase from
them an aggregate of 30 shares of common stock (529,412 shares as adjusted) (the
"Shares") of the Company. The aggregate purchase price for the Shares was
$600,000 (including interest) to be paid in 24 installments of $25,000. The
closing of the 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.

Pursuant to a subsequent agreement made with the stockholders, the
outstanding loan balance at December 31, 1995 was to be repaid in 23 monthly
installments of $25,000 (including interest) commencing in February 1996. The
outstanding balance of the above-referenced stockholder loan was paid in full
during 1997.

F-12
<PAGE>
PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997 AND 1996

(5) NONOPERATING INCOME

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

(6) INCOME TAXES

U.S. Federal and state income tax expense consists of the following
components:

<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
---------- ---------- ---------
<S> <C> <C> <C>
December 31, 1997.......................................... $ 461,817 (252,837) 208,980
December 31, 1996.......................................... -- -- --
</TABLE>

State income tax aggregated $97,833 for the year ended December 31, 1997.

Income tax expense for the years ended December 31, 1997 and 1996 differed
from the amount computed by applying the U.S. Federal income tax rate of 34% to
income before Federal income taxes as a result of the following:

<TABLE>
<CAPTION>
1997 1996
---------- ---------
<S> <C> <C>
Expected income tax expense............................................ $ 482,255 35,450
State income tax, net.................................................. 41,993 --
Tax-exempt interest.................................................... (209,237) --
S Corporation income................................................... (164,281) (35,450)
Other, net............................................................. 58,249 --
---------- ---------
Total income tax expense......................................... $ 208,980 --
---------- ---------
---------- ---------
</TABLE>

Deferred income taxes are based upon temporary differences between the
financial statement and tax bases of assets and liabilities. The following
deferred taxes are recorded for 1997:

<TABLE>
<S> <C>
Deferred tax assets:
Reserve for unpaid claims....................................... $ 427,414
Other, net...................................................... 44,348
---------
Gross deferred tax assets..................................... 471,762
---------
Deferred tax liabilities:
Commissions receivable.......................................... (151,454)
Commissions payable............................................. (67,471)
---------
Gross deferred tax liabilities................................ (218,925)
---------
Net deferred tax asset...................................... $ 252,837
---------
---------
</TABLE>

A valuation allowance has not been established as the Company believes it is
more likely than not that the deferred tax asset will be realized.

F-13
<PAGE>
PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997 AND 1996

(6) INCOME TAXES (CONTINUED)
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 does not engage in business or have a
permanent establishment in the United States.

The Reinsurance Subsidiary does, however, constitute a "controlled foreign
corporation" ("CFC") for United States federal income tax purposes. As a result,
the Company includes 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. Substantially all of the Reinsurance
Subsidiary's income is subpart F income.

The Company is considering an election under section 953(d) of the Internal
Revenue Code to tax the Reinsurance Subsidiary as a domestic corporation for
U.S. Income Tax purposes. The Company believes this election, if made, will not
have a material effect on its income tax expense.

(7) STATUTORY SOLVENCY REQUIREMENTS

The Bermuda Insurance Act of 1978 and related regulations (the "Act")
requires the Company to meet a minimum solvency margin. Statutory capital and
surplus as of December 31, 1997 was $7,309,143 and the amounts required to be
maintained by the company was $3,300,000. In addition, a minimum liquidity ratio
must be maintained whereby relevant assets, as defined by the Act, must exceed
75% of relevant liabilities. Once these requirements have been met, there is no
restriction on the retained earnings available for distribution. At December 31,
1997, the Company was in compliance with this requirement.

(8) LIABILITY FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES

Activity in the liability for unpaid losses and loss adjustment expenses is
summarized as follows for the years ended December 31, 1997 and 1996:

<TABLE>
<CAPTION>
1997 1996
------------ ---------
<S> <C> <C>
Net unpaid losses and loss adjustment expenses at beginning of
year............................................................... $ 199,390 --
------------ ---------
Incurred related to:
Current year....................................................... 5,284,268 270,251
Prior year......................................................... 972,827 --
------------ ---------
Total incurred................................................... 6,257,095 270,251
------------ ---------
Paid related to:
Current year....................................................... -- 70,861
Prior year......................................................... 348,872 --
------------ ---------
Total paid....................................................... 348,872 70,861
------------ ---------
Net unpaid losses and loss adjustment expenses at end of year........ $ 6,107,613 199,390
------------ ---------
------------ ---------
</TABLE>

F-14
<PAGE>
PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997 AND 1996

(9) STOCK OPTIONS

The following table summarizes stock option activity for 1997:

<TABLE>
<CAPTION>
OPTION WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- -----------------
<S> <C> <C>
Granted.......................................................... 511,500 $ 7.48
Exercised........................................................ -- --
--------- -----
Outstanding at December 31, 1997................................. 511,500 $ 7.48
--------- -----
--------- -----
</TABLE>

The Company had no options outstanding prior to 1997.

The following table summarizes information about stock options outstanding
at December 31, 1997:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------- OPTIONS EXERCISABLE
WEIGHTED ------------------------
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- -------------------------------- ----------- --------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$7.00........................... 75,000 9.52 $ 7.00 -- $ 7.00
7.25............................ 160,000 9.64 7.25 35,000 7.25
7.75............................ 276,500 9.10 7.75 300 7.75
----------- --- ----- ----------- -----
$7.00-7.75...................... 511,500 9.45 $ 7.48 35,300 $ 7.48
----------- --- ----- ----------- -----
----------- --- ----- ----------- -----
</TABLE>

The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options as allowed pursuant
to FASB Statement No. 123, "Accounting for Stock Based Compensation" (FASB
Statement 123). FASB Statement 123 requires use of option valuation models that
require the input of highly subjective assumptions, including expected stock
price volatility. Because the Company's employee stock options have
characteristics significantly different from traded options and because changes
in the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable measure of the fair value of its employee stock options.

Had compensation cost for the Company's stock option plans been determined
based on the fair value at the grant date for awards under those plans,
consistent with FASB Statement No. 123, the reduction in the Company's 1997 net
income and net income per share would have been insignificant. The effect of
applying the fair method of accounting for stock options on reported net income
and net income per share for 1997 may not be representative of the effects for
future years because outstanding options vest over a period of several years and
additional awards are generally made each year.

F-15
<PAGE>
PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997 AND 1996

(9) STOCK OPTIONS (CONTINUED)
The fair value of options granted was estimated at the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions for 1997:

<TABLE>
<S> <C>
Risk-free interest rate............................................ 6.46%
Expected Life...................................................... 7 years
Expected volatility................................................ 25%
Expected dividend yield............................................ 0
</TABLE>

(10) LEASES

In August 1994, the Company entered into an office lease agreement which
became effective on April 1, 1995. The 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, 1997:

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, TOTAL
- -------------------------------------------------------------------------------- ------------
<S> <C>
1998............................................................................ $ 191,000
1999............................................................................ 199,000
2000............................................................................ 211,000
2001............................................................................ 214,000
Thereafter...................................................................... 54,000
------------
$ 1,052,000
------------
------------
</TABLE>

Rent expense for the years ended December 31, 1996 and 1997 was $135,018 and
$80,078, respectively.

(11) LITIGATION

The Company is a defendant in various litigation matters considered to be in
the normal course of business. While the outcome of these matters cannot be
estimated with certainty, it is the opinion of management (after consultation
with legal counsel) that the resolution of such litigation will not have a
material adverse effect on the Company's financial statements.

(12) UNAUDITED PRO FORMA INFORMATION

Pro forma adjustments for income taxes represent the difference between
historical income taxes and income taxes that would have been reported had the
Company filed income tax returns as a taxable C corporation for 1996.

(13) YEAR 2000

Year 2000 issues are the result of computer programs being written using two
digits rather than four to define the applicable year. The Company developed a
plan to address Year 2000 issues and has recently completed the conversion of
its computer systems to be Year 2000 compliant. The cost associated with the
project was immaterial.

F-16
<PAGE>
PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997 AND 1996

(14) SUBSEQUENT EVENT

In March 1998, the Company consummated the purchase of substantially all of
the assets of HSSI Travel Nurse Operations, Inc., a wholly-owned subsidiary of
Hospital Staffing Services, Inc. for $5.0 million in cash. Based in Ft.
Lauderdale, Florida since 1981, Travel Nurse has provided registered nurse and
other professional medical personnel, often referred to as "travelers,"
primarily to client hospitals in the United States and the Caribbean on a
contractual basis for periods generally ranging from 8 to 52 weeks. During 1997,
Travel Nurse placed in excess of 700 nurses.

F-17
<PAGE>
PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 (UNAUDITED) AND DECEMBER 31, 1997

<TABLE>
<CAPTION>
MARCH 31, 1998 DECEMBER 31, 1997
-------------- -----------------
<S> <C> <C>
(UNAUDITED)
ASSETS
Investments:
Held-to-maturity securities, at amortized cost (fair value of $7,310,231 in
1998 and $8,237,669 in 1997).............................................. $ 7,144,658 8,015,105
Held-to-maturity securities, at amortized cost--restricted (fair value of
$8,846,055 in 1998 and $7,947,981 in 1997)................................ 8,728,146 7,877,444
Short-term investments...................................................... 4,659,119 7,090,550
-------------- -----------------
Total investments......................................................... 20,531,923 22,983,099
Cash.......................................................................... 2,938,719 4,125,147
Accrued investment and interest income........................................ 243,960 311,934
Accounts, commissions and premiums receivable, net............................ 3,161,759 585,072
Deferred acquisition costs.................................................... 1,052,259 903,880
Property and equipment, net................................................... 467,666 478,826
Deferred tax assets........................................................... 604,608 252,837
Goodwill and other intangible assets, net..................................... 4,979,167 --
Deposits...................................................................... 30,684 24,921
Other assets.................................................................. 95,427 34,487
-------------- -----------------
Total assets.............................................................. $ 34,106,132 29,700,203
-------------- -----------------
-------------- -----------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Unpaid losses and loss adjustment expenses.................................. $ 7,763,582 6,107,613
Unearned premiums........................................................... 3,244,629 2,671,831
Premiums payable............................................................ 3,755,813 3,064,103
Commissions payable......................................................... 300,105 330,055
Other liabilities........................................................... 5,312,027 4,750,082
Accounts payable and accrued expenses....................................... 1,147,828 508,127
Deferred reinsurance income................................................. 279,980 279,980
-------------- -----------------
Total liabilities......................................................... 21,803,964 17,711,791
-------------- -----------------
Shareholders' equity:
Common stock, $0.01 par value; authorized 10,000,000 shares; issued
5,254,412 shares.......................................................... 52,544 52,544
Additional paid-in capital.................................................. 10,367,074 10,367,074
Retained earnings........................................................... 2,388,107 2,074,351
-------------- -----------------
Total shareholders' equity................................................ 12,807,725 12,493,969
Treasury stock, at cost, 529,412 shares..................................... (505,557) (505,557)
-------------- -----------------
Net shareholders' equity.................................................. 12,302,168 11,988,412
-------------- -----------------
Total liabilities and shareholders' equity................................ $ 34,106,132 29,700,203
-------------- -----------------
-------------- -----------------
</TABLE>

See accompanying notes to consolidated financial statements.

F-18
<PAGE>
PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED)

<TABLE>
<CAPTION>
1998 1997
------------ ----------
<S> <C> <C>
Revenues:
Premiums earned...................................................................... $ 3,066,609 2,044,430
Net investment income................................................................ 385,985 213,652
Net commission income................................................................ 543,130 634,314
Staffing income...................................................................... 1,411,030 --
Other income......................................................................... 138,906 145,084
------------ ----------
Total revenues................................................................... 5,545,660 3,037,480
------------ ----------
Expenses:
Losses and loss adjustment expenses incurred......................................... 1,655,969 1,103,317
Amortization of deferred acquisition costs........................................... 981,315 737,309
Staffing costs....................................................................... 1,278,651 --
Other expenses....................................................................... 1,265,630 846,611
------------ ----------
Total expenses................................................................... 5,181,565 2,687,237
------------ ----------
Income before income taxes............................................................. 364,095 350,243
Income taxes........................................................................... 50,339 129,590
------------ ----------
Net income....................................................................... $ 313,756 220,653
------------ ----------
------------ ----------
Net basic income per share............................................................. $ .07 $ .06
------------ ----------
------------ ----------
Net diluted income per share........................................................... $ .07 $ .06
------------ ----------
------------ ----------
Common shares and common shares equivalents used in computing net income per share..... 4,725,000 3,867,500
------------ ----------
------------ ----------
</TABLE>

See accompanying notes to consolidated financial statements.

F-19
<PAGE>
PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED)

<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Cash flow from operating activities:
Net income........................................................................ $ 313,756 220,653
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization..................................................... 54,401 36,319
Amortization of deferred acquisition costs........................................ 981,315 737,309
Deferred income taxes............................................................. 351,771 --
Change in:
Accrued investment and interest income........................................ 67,974 --
Accounts, commissions and premiums receivable................................. (2,576,687) 3,419,805
Deferred acquisition costs.................................................... (651,604) --
Unpaid losses and loss adjustment expenses.................................... 1,655,969 1,016,082
Unearned premiums............................................................. 572,798 (603,435)
Deferred reinsurance income................................................... -- (360,374)
Premiums payable.............................................................. 691,710 366,024
Commissions payable........................................................... (29,950) (27,767)
Accounts payable and accrued expenses......................................... 639,701 587,189
Other, net.................................................................... (686,390) 1,678,905
------------- -------------
Net cash provided by operating activities................................... 1,384,764 7,070,710
------------- -------------
Cash flow from investing activities:
Purchase of subsidiary............................................................ (5,000,000) --
Sale (purchase) of short-term investments, net.................................... 2,451,176 (7,405,936)
Purchase of property and equipment................................................ (22,368) (15,741)
------------- -------------
Net cash used in investing activities......................................... (2,571,192) (7,421,677)
------------- -------------
Cash flow from financing activities:
Proceeds from sale of common stock................................................ -- 10,402,129
Repayment of shareholder loan..................................................... -- (75,000)
------------- -------------
Net cash provided by financing activities..................................... -- 10,327,129
------------- -------------
Net decrease in cash................................................................ (1,186,428) (23,838)
Cash at beginning of period......................................................... 4,125,147 5,591,140
------------- -------------
Cash at end of period............................................................... $ 2,938,719 5,567,302
------------- -------------
------------- -------------
Supplemental disclosure of cash flow information:
Income taxes paid................................................................. $ 280,000 --
------------- -------------
------------- -------------
</TABLE>

See accompanying notes to consolidated financial statements.

F-20
<PAGE>
PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 1998 (UNAUDITED)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A) BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments, consisting
of normal recurring accruals, considered necessary for a fair presentation have
been included. Operating results for the three-month period ended March 31, 1998
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1998. These consolidated financial statements and notes
should be read in conjunction with the financial statements and notes included
in the audited consolidated financial statements of the Company for the year
ended December 31, 1997, appearing elsewhere herein.

(B) ORGANIZATION

Preferred Employers Holdings, Inc. is the successor company to Preferred
Employers Group, Inc. ("PEGI"). In February 1997, the Company completed an
initial public offering of 1,725,000 shares of common stock (including the
underwriter's over-allotment option) at a price of $7.25 per share. Immediately
prior to the Company's initial public offering, the Company and the stockholders
of PEGI (the "Exchanging Stockholders") effected a recapitalization whereby the
Company exchanged 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 became 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.

In March 1998, the Company, through a wholly owned subsidiary, consummated
the purchase of the operations of HSSI Travel Nurse Operations, Inc., a
wholly-owned subsidiary of Hospital Staffing Services, Inc. for $5.0 million in
cash. Based in Ft. Lauderdale, Florida since 1981, Travel Nurse has provided
registered nurse and other professional medical personnel, often referred to as
"Travelers," primarily to client hospitals in the United States and the
Caribbean on a contractual basis for periods generally ranging from 8 to 52
weeks. During 1997, Travel Nurse placed in excess of 700 nurses. The goodwill
associated with the acquisition is amortized consistent with the expected future
revenue stream of the hospital contracts purchased, or 15 years.

F-21
<PAGE>
PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 1998 (UNAUDITED)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
write workers' compensation and other forms of commercial property and casualty
business for family style and fast-food restaurants and convenience stores.

In 1996, the Company formed a Bermuda licensed reinsurance subsidiary (the
"Reinsurer") and entered into a reinsurance agreement (the "Agreement") with AIG
during the fourth quarter of 1996. The Agreement provides that the Reinsurer
assume certain workers' compensation and employer's liability insurance policies
from AIG with policy inception dates as of January 1, 1996 and subsequent.
Although the Reinsurer will assume the risks associated with being a reinsurer,
the Agreement limits the liability of the Reinsurer for losses and certain
defined expenses to the first $300,000 per occurrence. In addition, the
Agreement limits the aggregate liability of the Reinsurer for all coverage to an
amount not to exceed 70 percent of the gross written premium for each individual
underwriting year.

F-22
<PAGE>
PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 1998 (UNAUDITED)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income before income taxes recognized, and estimated to be recognized in the
calendar year indicated below is as follows:

<TABLE>
<CAPTION>
COMPOSITE
PROSPECTIVE RETROACTIVE/
METHOD PROSPECTIVE
YEARS (PRO FORMA) (ACTUAL)
- -------------------------------------------------------- ------------ ------------------
<S> <C> <C>
1996.................................................... $ 1,658,000 324,000
1997.................................................... 1,288,000 1,372,000
1998.................................................... 400,000 840,000
1999.................................................... 332,000 658,000
2000.................................................... 300,000 563,000
2001.................................................... 282,000 503,000
------------ ----------
$ 4,260,000 4,260,000
------------ ----------
------------ ----------
</TABLE>

It should be noted that the table presented above is for illustrative
purposes only to highlight that the basis of accounting used only impacts the
timing of the net revenue recognition and not the aggregate economic results.
Further, it should be noted that the above table is based on estimates as to the
amount and timing of aggregate loss and loss expense payments, available
investment yields and acquisition and other costs associated with the provision
of insurance protection. Actual results may vary, perhaps materially, from those
illustrated above. No assurance is given or may be taken that subsequent
revisions of estimates will not have a material impact on the illustration
above.

Acquisition costs are deferred and amortized over the period in which the
related prospective reinsurance premiums are earned.

Losses and loss adjustment expenses are charged to income as incurred. The
reserve for unpaid claims represents the accumulation of estimates for reported
losses and includes provisions for losses incurred but not reported. The methods
of determining such estimates and establishing resulting reserves are
continually reviewed and updated. Adjustments, if any, resulting therefrom are
reflected in income currently. The Company does not discount its loss reserves.

(D) INVESTMENTS

F-23
<PAGE>
PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 1998 (UNAUDITED)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Investment income is recorded as earned on the accrual basis and includes
amortization of premiums and accretion of discounts relating to investments
acquired at other than par value. Realized gains or losses on disposal of
investments are determined on a specific identification basis and are included
in revenues.

The Company does not own any on-balance sheet or off-balance sheet
derivative instruments.

(E) PROPERTY AND EQUIPMENT, NET

(F) PREMIUMS PAYABLE

(G) COMMISSION INCOME

(H) 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.
However, subsequent to the formation of the Company, PEGI is taxed as a C
corporation under the provisions of the Internal Revenue Code. As such, deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.

(I) NET INCOME PER SHARE

Net income per common share is based upon the weighted average number of
common shares outstanding during each year. In February 1997, SFAS No. 128,
"Earnings per Share" was issued. This statement requires specific computations,
presentations and disclosures for earnings per share (EPS) amounts in order to
make EPS amounts more compatible with international accounting standards. The
Company adopted SFAS No.128 for the period ended December 31, 1997. This
statement requires that any prior period EPS amounts be restated. Stock options
outstanding at March 31, 1998 and 1997 of 616,500 and 250,000, respectively, had
no effect on diluted earnings per share amounts.

F-24
<PAGE>
PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 1998 (UNAUDITED)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(J) RECLASSIFICATIONS

Certain items in the 1997 financial statements have been reclassified to
conform with the 1998 presentation.

(2) INVESTMENTS

At March 31, 1998 and December 31, 1997, the Company did not hold
fixed-maturity securities which individually exceeded 10% of shareholders'
equity except U.S. government and government agency securities.

Bonds with an amortized cost of $8,728,146 and $7,877,444 were held in a
restricted account for the benefit of the ceding company (AIG) as unauthorized
reinsurance at March 31, 1998 and December 31, 1997, respectively, in accordance
with statutory requirements.

The amortized cost and estimated fair values of investments at March 31,
1998 and December 31, 1997 are as follows:

<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED AMOUNT AT WHICH
AMORTIZED UNREALIZED UNREALIZED FAIR SHOWN IN THE
COST GAINS LOSSES VALUE BALANCE SHEET
------------- ----------- ----------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
Securities held to maturity:
March 31, 1998:
Fixed maturities:
Obligations of states and political
subdivisions....................... $ 7,144,658 165,573 -- 7,310,231 7,144,658
Obligations of states and political
subdivisions-- restricted.......... 8,728,146 117,909 -- 8,846,055 8,728,146
------------- ----------- ----------- ------------ ----------------
Total fixed maturities................... $ 15,872,804 283,482 -- 16,156,286 15,872,804
------------- ----------- ----------- ------------ ----------------
------------- ----------- ----------- ------------ ----------------
December 31, 1997:
Fixed maturities:
Obligations of states and political
subdivisions....................... $ 8,015,105 222,564 -- 8,237,669 8,015,105
Obligations of states and political
subdivisions--restricted............... 7,877,444 70,537 -- 7,947,981 7,877,744
------------- ----------- ----------- ------------ ----------------
Total fixed maturities................... $ 15,892,549 293,101 -- 16,185,650 15,892,549
------------- ----------- ----------- ------------ ----------------
------------- ----------- ----------- ------------ ----------------
</TABLE>

F-25
<PAGE>
PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 1998 (UNAUDITED)

(2) INVESTMENTS (CONTINUED)
The amortized cost and fair value of securities at March 31, 1998 and
December 31, 1997, by contractual maturity date, are presented below:

<TABLE>
<CAPTION>
MARCH 31, 1998 DECEMBER 31, 1997
--------------------------- --------------------------
<S> <C> <C> <C> <C>
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
------------- ------------ ------------ ------------
Fixed maturities held-to-maturity:
Due in one year or less................................. -- -- -- --
Due after one year through five years................... $ 6,074,128 2,216,641 6,941,072 7,139,209
Due after one year through five years-restricted........ 7,657,616 7,752,465 6,803,411 6,849,521
Due after five years through ten years.................. -- -- -- --
Due after ten years..................................... 1,070,530 1,093,590 1,074,033 1,098,460
Due after ten years-restricted.......................... 1,070,530 1,093,590 1,074,033 1,098,460
------------- ------------ ------------ ------------
15,872,804 16,156,286 15,892,549 16,185,650
Short-term investments.................................. 4,659,119 4,659,119 7,090,550 7,090,550
------------- ------------ ------------ ------------
Total............................................. $ 20,531,923 20,815,403 22,983,099 23,276,200
------------- ------------ ------------ ------------
------------- ------------ ------------ ------------
</TABLE>

(3) FINANCIAL INSTRUMENTS

The carrying amounts for short-term investments, cash, accounts, commissions
and premiums receivable, accrued investment and interest income, premiums
payable, commissions payable and accounts payable and accrued expenses
approximate their fair values due to the short-term nature of these instruments.

(4) STOCKHOLDER LOAN

F-26
<PAGE>
PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 1998 (UNAUDITED)

(5) INCOME TAXES

U.S. Federal and state income tax expense consists of the following
components:

<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
---------- ---------- ---------
<S> <C> <C> <C>
March 31, 1998............................................. $ 402,110 (351,771) 50,339
March 31, 1997............................................. $ 129,590 -- 129,590
</TABLE>

Income tax expense for the quarters ended March 31, 1998 and 1997 differed
from the amount computed by applying the U.S. Federal income tax rate of 34% to
income before Federal income taxes as a result of the following:

<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Expected income tax expense........................................... $ 123,792 119,082
State income tax, net................................................. 13,217 14,709
Tax-exempt interest................................................... (65,904) (19,061)
Other, net............................................................ (20,766) (14,860)
---------- ----------
Total income tax expense........................................ $ 50,339 $ 129,590
---------- ----------
---------- ----------
</TABLE>

Deferred income taxes are based upon temporary differences between the
financial statement and tax bases of assets and liabilities. The following
deferred taxes are recorded for March 31, 1998 and December 31, 1997:

<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Deferred tax assets:
Commission payable................................................ $ 112,930 --
Unearned premiums................................................. 112,441 --
Reserve for unpaid claims......................................... 584,287 427,414
Other, net........................................................ 44,348 44,348
---------- ----------
Gross deferred tax assets....................................... $ 854,006 471,762
---------- ----------
---------- ----------
Deferred tax liabilities:
Commissions receivable............................................ (249,398) (151,454)
Commissions payable............................................... -- (67,471)
---------- ----------
Gross deferred tax liabilities.................................. (249,398) (218,925)
---------- ----------
Net deferred tax asset........................................ $ 604,608 252,837
---------- ----------
---------- ----------
</TABLE>

A valuation allowance has not been established as the Company believes it is
more likely than not that the deferred tax asset will be realized.

As a Bermuda domiciled corporation, the Reinsurance Subsidiary does not file
United States tax returns. The Company currently expects to operate in such a
manner that it is not directly 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

F-27
<PAGE>
PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 1998 (UNAUDITED)

(5) INCOME TAXES (CONTINUED)
tax on certain investment income from U.S. sources) because it does not engage
in business or have a permanent establishment in the United States.

(6) ANNUAL STATUTORY SOLVENCY REQUIREMENTS

(7) LIABILITY FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES

Activity in the liability for unpaid losses and loss adjustment expenses is
summarized as follows for the quarters ended March 31, 1998 and 1997:

<TABLE>
<CAPTION>
1998 1997
------------ ----------
<S> <C> <C>
Unpaid losses and loss adjustment expenses at beginning of
period........................................................... $ 6,107,613 199,390
------------ ----------
Incurred related to:
Current year................................................... 657,159 792,547
Prior year..................................................... 998,810 310,770
------------ ----------
Total incurred............................................... 1,655,969 1,103,317
------------ ----------
Paid related to:
Current year................................................... -- --
Prior year..................................................... -- 87,235
------------ ----------
Total paid................................................... -- 87,235
------------ ----------
Unpaid losses and loss adjustment expenses at end of period........ $ 7,763,582 1,215,472
------------ ----------
------------ ----------
</TABLE>

(8) LITIGATION

The Company is a defendant in various litigation matters considered to be in
the normal course of business. While the outcome of these matters cannot be
estimated with certainty, it is the opinion of

F-28
<PAGE>
PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 1998 (UNAUDITED)

(8) LITIGATION (CONTINUED)
management (after consultation with legal counsel) that the resolution of such
litigation will not have a material adverse effect on the Company's financial
statements.

(9) YEAR 2000

Year 2000 issues are the result of computer programs being written using two
digits rather than four to define the applicable year. The Company developed a
plan to address Year 2000 issues and has recently completed the conversion of
its computer systems to be, it believes, Year 2000 compliant. The cost
associated with the project was immaterial.

(10) SUBSEQUENT EVENTS

In May 1998, the Company obtained a $3 million unsecured revolving line of
credit from a bank. The terms of the loan provide for monthly interest payments
at the prime lending rate (currently 8 1/2% per annum). The loan is renewable on
an annual basis.

In May 1998, the Company concluded a private placement of $10,580,000 of 7%
convertible subordinated notes (the "Notes") due May 2003. The principal amount
of the Notes is convertible at any time upon the earlier of the maturity date
(May 12, 2003) or 10 business days after receipt of a termination notice at the
option of the holders into shares of the Company's common stock at a conversion
price of $9.00 (the "Conversion Price").

In the event (i) the closing bid price of the Company's common stock equals
or exceeds $13.50 per share for twenty consecutive trading days during any
period commencing upon satisfaction of one of the conditions contained in (ii)
hereof and (ii) either a registration statement covering the shares of common
stock issuable upon conversion of the Notes has been declared effective by the
Securities and Exchange Commission and remains effective or at least two years
has elapsed since the issuance date of the Notes and the shares of common stock
issuable upon conversion of the notes are saleable, without restriction, under
Rule 144(k) promulgated under the Securities Act of 1933, as amended, then the
holder's right to convert the outstanding principal amount of the Notes shall be
terminated by the Company by delivering to the holder a notice of termination
(the "Termination Notice"), in which event (a) the holder will have the right at
any time during 10 business days after receipt of the Termination Notice, in its
sole discretion, to convert the outstanding principal amount of the Notes into
shares of common stock of the Company at the Conversion Price, and (b)
thereafter, the holder's option to convert shall terminate and the Notes may be
prepaid by the Company, at any time prior to the Maturity Date, in whole or in
part for the face amount thereof, together with all accrued and unpaid interest
through the date of prepayment.

F-29
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFER MADE HEREBY, AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY THE COMMON STOCK OFFERED HEREBY IN ANY JURISDICTION TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF, OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE
DATE HEREOF.

------------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Summary.........................................
Risk Factors.................................... 5
Use of Proceeds................................. 14
Market for Common Equity and Related
Stockholders Matters.......................... 15
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 16
Business........................................ 23
Management...................................... 36
Security Ownership of Certain Beneficial Owners
and Management................................ 41
Certain Relationships and Related
Transactions.................................. 43
Selling Securityholders......................... 44
Description of Securities....................... 47
Plan of Distribution............................ 48
Legal Matters................................... 48
Experts......................................... 48
Available Information........................... 49
Index to Financial Statements................... F-1
</TABLE>

1,524,356 SHARES

COMMON STOCK

PREFERRED EMPLOYERS
HOLDINGS, INC.

---------------------

PROSPECTUS

---------------------

, 1998

ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Section 145 of the Delaware General Corporation Law, among other things, and
subject to certain conditions, authorizes the Company to indemnify its officers
and directors against certain liabilities and expenses incurred by such persons
in connection with claims made against them as a result of their being an
officer or director of the Company. 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 of the Delaware General Corporation Law.

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.

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 an officer, director, trustee, partner, agent or employee.

The Company maintains a policy of insurance under which the directors and
officers of the Company are 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 Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.

ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth the expenses to be incurred and borne by the
Company in connection with the sale of the Shares offered hereby. All amounts
shown are estimates, except for the Securities and Exchange Commission and
Nasdaq filing fees.

<TABLE>
<S> <C>
Securities and Exchange Commission filing fee..................... $ 4,021
Nasdaq SmallCap Market additional share listing fee............... $ 7,500
Legal fees and expenses........................................... $ 50,000
Accounting fees and expenses...................................... $ 15,000
Blue Sky fees and expenses........................................ $ 2,000
Printing and engraving expenses................................... $ 30,000
Miscellaneous..................................................... $ 16,479
Total fees and expenses....................................... $ 125,000
</TABLE>

II-1
<PAGE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES

The following paragraphs set forth certain information with respect to the
Common Stock sold by the Company within the past three years preceding the
filing of this Registration Statement, in transactions that were not registered
under the Securities Act pursuant to the provisions of Section 4(2) thereof:

Immediately prior to the Company's initial public offering, the Company and
the stockholders of Preferred Employers Group, Inc. ("PEGI") in February 1997,
(the "Exchanging Stockholders") effected a recapitalization whereby the Company
exchanged 17,647.06 shares of Common Stock for each share of common stock of
PEGI held by the Exchanging Stockholders (the "Exchange").

In May 1998, the Company consummated a private placement of 7% convertible
subordinated notes due May 2003 (the "Notes") in the aggregate principal amount
of $10,580,000.

ITEM 27. EXHIBITS.

The following is a list of Exhibits filed as a part of this Registration
Statement:

<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION OF DOCUMENT PAGE
- ----------- ------------------------------------------------------------------------------------------------- -----
<C> <S> <C>

3.1 Certificate of Incorporation of the Company (Incorporated herein by reference to Exhibit 3.1 to
the Company's Registration Statement on Form SB-2, No. 333-14103).

3.2 By-Laws of the Company (Incorporated herein by reference to Exhibit 3.2 to the Company's
Registration Statement on Form SB-2, No. 333-14103).

4.1 Form of Representative Warrants (Incorporated herein by reference to Exhibit 4.1 to the Company's
Registration Statement on Form SB-2, No. 333-14103).

4.2 Specimen Common Stock Certificate (Incorporated herein by reference to Exhibit 4.2 to the
Company's Registration Statement on Form SB-2, No. 333-14103).

4.3 Form of 7% Convertible Subordinated Note (Incorporated herein by reference to Exhibit 4.1 to the
Company's Current Report on Form 8-K, dated May 4, 1998 (filed on June 2, 1998)).

4.4 Form of Agent's Warrant (Incorporated herein by reference to Exhibit 4.2 to the Company's Current
Report on Form 8-K, dated May 4, 1998 (filed on June 2, 1998)).

10.1 Form of the Company's 1996 Employee Stock Option Agreement (Incorporated herein by reference to
Exhibit 10.1 to the Company's Registration Statement on Form SB-2, No. 333-14103).

10.2 Form of Share Escrow Agreement among the Company, Baer Marks & Upham LLP and Howard Odzer
together with the Letter Agreement Regarding Additional Terms (Incorporated herein by reference
to Exhibit 10.2 to the Company's Registration Statement on Form SB-2, No. 333-14103).

10.3 Employment Agreement, dated May 15, 1995, between the Company and Howard Odzer (Incorporated
herein by reference to Exhibit 10.3 to the Company's Registration Statement on Form SB-2, No.
333-14103).

10.4 Form of Employment Agreement between the Company and Mel Harris (Incorporated herein by reference
to Exhibit 10.4 to the Company's Registration Statement on Form SB-2, No. 333-14103).

10.5 Letter dated October 21, 1996, from the Company to New Hampshire Insurance Company regarding the
Reinsurance Agreement among P.E.G. Reinsurance Company, Ltd., The Insurance Company of the State
of Pennsylvania and other AIG Affiliates and Form of Reinsurance Agreement (Incorporated herein
by reference to Exhibit 10.5 to the Company's Registration Statement on Form SB-2, No.
333-14103).
</TABLE>

II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION OF DOCUMENT PAGE
- ----------- ------------------------------------------------------------------------------------------------- -----
<C> <S> <C>
10.6 Office Space Lease Agreement, dated August 1, 1994, between the Company and K/B Opportunity Fund
I, LP and PEGI (Incorporated herein by reference to Exhibit 10.6 to the Company's Registration
Statement on Form SB-2, No. 333-14103).

10.7 Form of Advisory Services Letter Agreement between the Company and the Representative
(Incorporated herein by reference to Exhibit 10.7 to the Company's Registration Statement on Form
SB-2, No. 333-14103).

10.8 Stock Repurchase Agreement dated as of May 15, 1995, among the Company, Howard Odzer and Ronald
Rothstein (Incorporated herein by reference to Exhibit 10.8 to the Company's Registration
Statement on Form SB-2, No. 333-14103).

10.9 Cost Sharing Agreement dated January 3, 1996, between the Company and International Insurance
Group, Inc. (Incorporated herein by reference to Exhibit 10.9 to the Company's Registration
Statement on Form SB-2, No. 333-14103).

10.10 Form of Share Exchange Agreement among the Company and certain stockholders of PEGI listed
therein (Incorporated herein by reference to Exhibit 10.10 to the Company's Registration
Statement on Form SB-2, No. 333-14103).

10.11 Amended and Restated Shareholders Agreement dated as of May 15, 1995, among the Company, Howard
Odzer and Mel Harris (Incorporated herein by reference to Exhibit 10.11 to the Company's
Registration Statement on Form SB-2, No. 333-14103).

10.12 Form of Employment Agreement between the Company and Howard Odzer (Incorporated herein by
reference to Exhibit 10.12 to the Company's Registration Statement on Form SB-2, No. 333-14103).

10.13 Agency Agreement dated September 1, 1994, among the Company, General Accident Insurance Company
of America ("GAIC") and certain affiliates of GAIC (Incorporated herein by reference to Exhibit
10.13 to the Company's Registration Statement on Form SB-2, No. 333-14103).

10.14 General Agency Agreement dated January 1, 1993, among the Company, The Insurance Company of the
State of Pennsylvania and certain affiliates of AIG (Incorporated herein by reference to Exhibit
10.14 to the Company's Registration Statement on Form SB-2, No. 333-14103).

10.15 The Company's 1996 Employee Stock Option Plan (Incorporated by reference to the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1997).

10.16 Employment Agreement dated July 7, 1997, between the Company and D. Mark Olson (Incorporated
herein by reference to the Company's Current Report on Form 8-K, dated July 7, 1997 (filed on
July 9, 1997)).

10.17 Asset Purchase Agreement dated as of January 21, 1998, among HSSI Travel Nurse Operations, Inc.,
Hospital Staffing Services, Inc. and Preferred Employers Acquisition Corp. (Incorporated herein
by reference to the Company's Current Report on Form 8-K, dated March 6, 1998 (filed on March 16,
1998)).

10.18 Shareholders Agreement dated as of February 11, 1997, among the Company, Howard Odzer and Mel
Harris (Incorporated hereby by reference to the Company's Annual Report on Form 10-KSB/A No. 1
for the year ended December 31, 1997).

10.19 Loan Agreement, dated May 4, 1998, between Preferred Healthcare Staffing, Inc. and City National
Bank of Florida (Incorporated herein by reference to Exhibit 10.1 to the Company's Current Report
on Form 8-K, dated May 4, 1998 (filed on June 2, 1998)).

10.20 Promissory Note and Security Agreement dated April 27, 1998, by Preferred Healthcare Staffing,
Inc. to City National Bank of Florida (Incorporated herein by reference to Exhibit 10.2 to the
Company's Current Report on Form 8-K, dated May 4, 1998 (filed on June 2, 1998)).
</TABLE>

II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION OF DOCUMENT PAGE
- ----------- ------------------------------------------------------------------------------------------------- -----
<C> <S> <C>
10.21 Continuous Guaranty, dated May 5, 1998, by the Company to City National Bank of Florida
(Incorporated herein by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K,
dated May 4, 1998 (filed on June 2, 1998)).

10.22 Stock Purchase Agreement, dated July 10, 1998, by and among Preferred Healthcare Staffing, Inc.,
Debbie Bender-Balazich, Steven Barth, Steven Jones and Stephen M. McLaughlin (Incorporated herein
by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K, dated July 10, 1998
(filed on July 28, 1998)).

*21.1 Subsidiaries of the Company.

*23.1 Consent of KPMG Peat Marwick LLP, Independent Accountants.

*24.1 Power of Attorney (Included on the signature page of this Registration Statement).

27.1 Finanical Data Schedule (not required).
</TABLE>

- ------------------------

* Filed herewith.

II-4
<PAGE>
ITEM 28. UNDERTAKINGS.

(a) The Company hereby undertakes the following:

(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement to include any
prospectus required by Section 10(a)(3) of the Securities Act, any material
information with respect to the plan of distribution not previously
disclosed in this Registration Statement or any material change to such
information in this Registration Statement.

(2) That, for the purpose of determining liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new
Registration Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
BONA FIDE offering thereof.

(3) To file a post-effective amendment to remove from registration any
of the securities that remain unsold at the termination of the Offering.

(b) 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 Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against the
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.

(1) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
prospectus filed by the Company under Rule 424(b)(1),or (4), or 497(h) under
the Securities Act as part of this Registration Statement as of the time the
Commission declared it effective.

(2) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration
statement, and that offering of the Common Stock at that time as the initial
BONA FIDE offering of those securities.

II-5
<PAGE>
SIGNATURES

In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, in the City of Miami,
State of Florida, on July 29, 1998.

<TABLE>
<S> <C> <C>
PREFERRED EMPLOYERS HOLDINGS, INC.

By: /s/ MEL HARRIS
-----------------------------------------
Mel Harris
Chairman, President and Chief Executive
Officer
</TABLE>

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each director and officer whose
signature appears below constitutes and appoints Mel Harris and William R.
Dresback or each of them, as his true and lawful attorneys-in-fact and agents,
with full powers of substitution and resubstitution, for him and in his name,
place and stead, to sign in any and all capacities any and all amendments
(including posteffective amendments) to this Registration Statement on Form SB-2
and to file the same, with all exhibits thereto and all other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that such attorneys-in-fact and agents, or any of
them, may lawfully do or cause to be done by virtue hereof.

In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates stated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------

<C> <S> <C>
Chairman of the Board,
/s/ MEL HARRIS President, Chief
- ------------------------------ Executive Officer and July 29, 1998
Mel Harris Director (Principal
Executive Officer)

Senior Vice President,
/s/ WILLIAM R. DRESBACK Chief Financial Officer
- ------------------------------ and Secretary (Principal July 29, 1998
William R. Dresback Financial and Accounting
Officer)

/s/ STUART J. GORDON
- ------------------------------ Director July 29, 1998
Stuart J. Gordon

/s/ JACK D. BURSTEIN
- ------------------------------ Director July 29, 1998
Jack D. Burstein

- ------------------------------ Director July 29, 1998
Maxwell M. Rabb
</TABLE>

II-6
<PAGE>
INDEX TO EXHIBITS FILED WITH
FORM SB-2 REGISTRATION STATEMENT

<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION OF DOCUMENT
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>

3.1 Certificate of Incorporation of the Company (Incorporated herein by reference to Exhibit 3.1 to the
Company's Registration Statement on Form SB-2, No. 333-14103).

3.2 By-Laws of the Company (Incorporated herein by reference to Exhibit 3.2 to the Company's Registration
Statement on Form SB-2, No. 333-14103).

4.1 Form of Representative Warrants (Incorporated herein by reference to Exhibit 4.1 to the Company's
Registration Statement on Form SB-2, No. 333-14103).

4.2 Specimen Common Stock Certificate (Incorporated herein by reference to Exhibit 4.2 to the Company's
Registration Statement on Form SB-2, No. 333-14103).

4.3 Form of 7% Convertible Subordinated Note (Incorporated herein by reference to Exhibit 4.1 to the
Company's Current Report on Form 8-K, dated May 4, 1998 (filed on June 2, 1998)).

4.4 Form of Agent's Warrant (Incorporated herein by reference to Exhibit 4.2 to the Company's Current Report
on Form 8-K, dated May 4, 1998 (filed on June 2, 1998)).

10.1 Form of the Company's 1996 Employee Stock Option Agreement (Incorporated herein by reference to Exhibit
10.1 to the Company's Registration Statement on Form SB-2, No. 333-14103).

10.2 Form of Share Escrow Agreement among the Company, Baer Marks & Upham LLP and Howard Odzer together with
the Letter Agreement Regarding Additional Terms (Incorporated herein by reference to Exhibit 10.2 to the
Company's Registration Statement on Form SB-2, No. 333-14103).

10.3 Employment Agreement, dated May 15, 1995, between the Company and Howard Odzer (Incorporated herein by
reference to Exhibit 10.3 to the Company's Registration Statement on Form SB-2, No. 333-14103).

10.4 Form of Employment Agreement between the Company and Mel Harris (Incorporated herein by reference to
Exhibit 10.4 to the Company's Registration Statement on Form SB-2, No. 333-14103).

10.5 Letter dated October 21, 1996, from the Company to New Hampshire Insurance Company regarding the
Reinsurance Agreement among P.E.G. Reinsurance Company, Ltd., The Insurance Company of the State of
Pennsylvania and other AIG Affiliates and Form of Reinsurance Agreement (Incorporated herein by
reference to Exhibit 10.5 to the Company's Registration Statement on Form SB-2, No. 333-14103).

10.6 Office Space Lease Agreement, dated August 1, 1994, between the Company and K/B Opportunity Fund I, LP
and PEGI (Incorporated herein by reference to Exhibit 10.6 to the Company's Registration Statement on
Form SB-2, No. 333-14103).

10.7 Form of Advisory Services Letter Agreement between the Company and the Representative (Incorporated
herein by reference to Exhibit 10.7 to the Company's Registration Statement on Form SB-2, No.
333-14103).
</TABLE>

II-7
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION OF DOCUMENT
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
10.8 Stock Repurchase Agreement dated as of May 15, 1995, among the Company, Howard Odzer and Ronald
Rothstein (Incorporated herein by reference to Exhibit 10.8 to the Company's Registration Statement on
Form SB-2, No. 333-14103).

10.9 Cost Sharing Agreement dated January 3, 1996, between the Company and International Insurance Group,
Inc. (Incorporated herein by reference to Exhibit 10.9 to the Company's Registration Statement on Form
SB-2, No. 333-14103).

10.10 Form of Share Exchange Agreement among the Company and certain stockholders of PEGI listed therein
(Incorporated herein by reference to Exhibit 10.10 to the Company's Registration Statement on Form SB-2,
No. 333-14103).

10.11 Amended and Restated Shareholders Agreement dated as of May 15, 1995, among the Company, Howard Odzer
and Mel Harris (Incorporated herein by reference to Exhibit 10.11 to the Company's Registration
Statement on Form SB-2, No. 333-14103).

10.12 Form of Employment Agreement between the Company and Howard Odzer (Incorporated herein by reference to
Exhibit 10.12 to the Company's Registration Statement on Form SB-2, No. 333-14103).

10.13 Agency Agreement dated September 1, 1994, among the Company, General Accident Insurance Company of
America ("GAIC") and certain affiliates of GAIC (Incorporated herein by reference to Exhibit 10.13 to
the Company's Registration Statement on Form SB-2, No. 333-14103).

10.14 General Agency Agreement dated January 1, 1993, among the Company, The Insurance Company of the State of
Pennsylvania and certain affiliates of AIG (Incorporated herein by reference to Exhibit 10.14 to the
Company's Registration Statement on Form SB-2, No. 333-14103).

10.15 The Company's 1996 Employee Stock Option Plan (Incorporated by reference to the Company's Annual Report
on Form 10-KSB for the year ended December 31, 1997).

10.16 Employment Agreement dated July 7, 1997, between the Company and D. Mark Olson (Incorporated herein by
reference to the Company's Current Report on Form 8-K, dated July 7, 1997 (filed on July 9, 1997)).

10.17 Asset Purchase Agreement dated as of January 21, 1998, among HSSI Travel Nurse Operations, Inc.,
Hospital Staffing Services, Inc. and Preferred Employers Acquisition Corp. (Incorporated herein by
reference to the Company's Current Report on Form 8-K, dated March 6, 1998 (filed on March 16, 1998)).

10.18 Shareholders Agreement dated as of February 11, 1997, among the Company, Howard Odzer and Mel Harris
(Incorporated hereby by reference to the Company's Annual Report on Form 10-KSB/A No. 1 for the year
ended December 31, 1997).

10.19 Loan Agreement, dated May 4, 1998, between Preferred Healthcare Staffing, Inc. and City National Bank of
Florida (Incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K,
dated May 4, 1998 (filed on June 2, 1998)).

10.20 Promissory Note and Security Agreement dated April 27, 1998, by Preferred Healthcare Staffing, Inc. to
City National Bank of Florida (Incorporated herein by reference to Exhibit 10.2 to the Company's Current
Report on Form 8-K, dated May 4, 1998 (filed on June 2, 1998)).
</TABLE>

II-8
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION OF DOCUMENT
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
10.21 Continuous Guaranty, dated May 5, 1998, by the Company to City National Bank of Florida (Incorporated
herein by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K, dated May 4, 1998
(filed on June 2, 1998)).

10.22 Stock Purchase Agreement, dated July 10, 1998, by and among Preferred Healthcare Staffing, Inc., Debbie
Bender-Balazich, Steven Barth, Steven Jones and Stephen M. McLaughlin (Incorporated herein by reference
to Exhibit 10.1 to the Company's Current Report on Form 8-K, dated July 10, 1998 (filed on July 28,
1998)).

*21.1 Subsidiaries of the Company.

*23.1 Consent of KPMG Peat Marwick LLP, Independent Accountants.

*24.1 Power of Attorney (Included on the signature page of this Registration Statement).

27.1 Financial Data Schedule (not required).
</TABLE>

- ------------------------

* Filed herewith.

II-9

<PAGE>
EXHIBIT 21.1

SUBSIDIARIES OF THE COMPANY

<TABLE>
<CAPTION>
JURISDICTION OF
NAME INCORPORATION
- -------------------------------------------------------------------------------------- --------------------------
<S> <C>
P.E.G. Reinsurance Company, Ltd. Bermuda
Preferred Employers Group, Inc. Florida
Preferred Healthcare Staffing, Inc. Delaware
</TABLE>

<PAGE>
EXHIBIT 23.1

CONSENT OF INDEPENDENT ACCOUNTANTS

The Board of Directors

Preferred Employers Holdings, Inc.:

We consent to the use of our reports included herein and to the reference to our
firm under the heading "Experts" in the prospectus.

/s/ KPMG Peat Marwick LLP

Miami, Florida
July 24, 1998