PIONEER FINANCIAL SERVICES INC /DE, S-3/A, 1996-03-12

PIONEER FINANCIAL SERVICES INC /DE
S-3/A, 1996-03-12
ACCIDENT & HEALTH INSURANCE

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<PAGE>

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 12, 1996

REGISTRATION NO. 333-1119
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------

AMENDMENT NO. 1

TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
PIONEER FINANCIAL SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
DELAWARE 36-2479273
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
1750 EAST GOLF ROAD
SCHAUMBURG, ILLINOIS 60173
(847) 995-0400
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
PETER W. NAUERT, CHAIRMAN AND CHIEF EXECUTIVE OFFICER
1750 EAST GOLF ROAD
SCHAUMBURG, ILLINOIS 60173
(847) 995-0400
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
STANLEY H. MEADOWS, P.C. WILLIAM R. KUNKEL
MCDERMOTT, WILL & EMERY SKADDEN, ARPS, SLATE, MEAGHER & FLOM
227 WEST MONROE STREET 333 WEST WACKER DRIVE, SUITE 2100
CHICAGO, ILLINOIS 60606-5096 CHICAGO, ILLINOIS 60606
(312) 372-2000 (312) 407-0700
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [_]
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, please 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 [_]

---------------
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 THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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- -------------------------------------------------------------------------------
<PAGE>

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

SUBJECT TO COMPLETION, DATED MARCH 12, 1996

PROSPECTUS

$65,000,000
LOGO PIONEER FINANCIAL SERVICES, INC.
% CONVERTIBLE SUBORDINATED NOTES DUE 2003

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

The % Convertible Subordinated Notes Due 2003 (the "Notes") will mature
on , 2003, unless previously redeemed. Interest on the Notes is
payable on and of each year, commencing , 1996. The
Notes are convertible into shares of Common Stock of the Company, at any time
prior to maturity, unless previously redeemed, at a conversion price of
$ per share, subject to adjustment in certain events as described
herein.

The Notes are subordinated in right of payment to all Senior Indebtedness (as
defined herein) of the Company. The Indenture (as defined herein) will not
restrict the incurrence of Senior Indebtedness or other indebtedness by the
Company or any of its subsidiaries. Senior Indebtedness was approximately $38.6
million at March 1, 1996. After giving effect to the incurrence of additional
Senior Indebtedness in connection with the acquisition of Universal Fidelity
Life Insurance Company and the expected use of the estimated proceeds of this
offering, at March 1, 1996, Senior Indebtedness would have been approximately
$24.4 million. See "Capitalization." The Company is a holding company and,
accordingly, the Notes will also be subordinated to all existing and future
liabilities of the Company's subsidiaries. See "Description of the Notes--
Subordination." The Notes are redeemable, in whole or in part, at the option of
the Company at any time on or after , 1999, at the redemption
prices set forth herein plus accrued and unpaid interest. No sinking fund is
provided for the Notes. Subject to certain conditions, following the occurrence
of a Change of Control (as defined herein), each holder has the right to cause
the Company to repurchase the Notes at 101% of the principal amount thereof,
plus accrued and unpaid interest to the date of such repurchase. See
"Description of the Notes."

On March 11, 1996, the last reported sale price of the Common Stock on the
New York Stock Exchange ("NYSE"), where it is traded under the symbol "PFS,"
was $15 7/8 per share. See "Price Range of Common Stock and Dividend Policy."
Application has been made to list the Notes on the NYSE under the symbol
"PFS03."

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

SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE NOTES OFFERED
HEREBY.

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

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.

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- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC(1) COMMISSIONS(2) COMPANY(3)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Note................................... % % %
- ---------------------------------------------------------------------------------------------------
Total(4)................................... $65,000,000 $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

(1) Plus accrued interest, if any, from , 1996.
(2) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(3) Before deducting expenses payable by the Company, estimated at $500,000.
(4) The Company has granted to the Underwriters an option, exercisable within
30 days of the date hereof, to purchase up to an additional $9,750,000
aggregate principal amount of Notes, on the same terms as set forth above,
solely to cover over-allotments, if any. If such option is exercised in
full, the total Price to Public, Underwriting Discounts and Commissions and
Proceeds to Company will be $ , $ and $ ,
respectively. See "Underwriting."

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

The Notes are being offered by the Underwriters, subject to prior sale, when,
as and if delivered to and accepted by them, subject to approval of certain
legal matters by their counsel and subject to certain other conditions. The
Underwriters reserve the right to withdraw, cancel or modify this offering and
to reject any order in whole or in part. It is expected that delivery of the
Notes will be made against payment therefor on or about , 1996,
at the offices of Bear, Stearns & Co. Inc., 245 Park Avenue, New York, New York
10167.

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

BEAR, STEARNS & CO. INC.
EVEREN SECURITIES, INC.
OPPENHEIMER & CO., INC.

The date of this Prospectus is , 1996
<PAGE>

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SECURITIES
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

For North Carolina Investors: The Commissioner of Insurance of the State of
North Carolina has not approved or disapproved this offering, nor has such
Commissioner passed upon the adequacy or accuracy of this Prospectus.

The Company owns, directly or indirectly, all of the shares of stock of
certain life and health insurance companies domiciled principally in Illinois.
Illinois insurance regulatory laws require prior approval by the Illinois
Director of Insurance of any acquisition of control of an Illinois insurance
company or of any company which controls an Illinois insurance company. Under
Illinois insurance regulatory laws, "control" is presumed to exist through the
ownership of 10% or more of the voting securities of a domestic insurance
company or of any company which controls a domestic insurance company. Any
purchaser of 10% or more of the shares of Common Stock of the Company, whether
by conversion or otherwise, will be presumed to have acquired control of the
Illinois domestic insurance subsidiaries unless the Illinois Director of
Insurance, following application by such purchaser, determines otherwise.
Accordingly, any purchase, whether by conversion or otherwise, of 10% or more
of the Common Stock of the Company, would require prior action by the Illinois
Director of Insurance.

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The following documents heretofore filed by the Company with the Commission
are incorporated herein by reference: (i) the Company's Annual Report on Form
10-K for the year ended December 31, 1995, (ii) the description of the
Company's Common Stock contained in the Company's Registration Statement on
Form 8-A for such securities, including any amendments or reports filed for
the purpose of updating such description and (iii) the Company's description
of its Rights to Purchase Series A Junior Preferred Stock contained in the
Company's Registration Statement on Form 8-A dated December 14, 1990.

All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior
to the termination of the offering of the Notes shall be deemed to be
incorporated by reference in this Prospectus and to be a part hereof from the
date of filing of such documents. Any statement contained in this Prospectus,
or in a document incorporated or deemed to be incorporated by reference
herein, shall be deemed to be modified or superseded for purposes of this
Prospectus to the extent that a statement contained herein or in any
subsequently filed document that also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this Prospectus.

The Company will provide without charge to each person to whom a copy of
this Prospectus is delivered, upon the written or oral request of such person,
a copy of any and all of the documents incorporated by reference herein (other
than exhibits to such documents, unless such exhibits are specifically
incorporated by reference in such documents). Requests for such copies should
be directed to the Director of Investor Relations, Pioneer Financial Services,
Inc., 1750 East Golf Road, Schaumburg, Illinois 60173, telephone number (847)
995-0400.

2
<PAGE>

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and financial statements,
including the notes thereto, appearing elsewhere in this Prospectus or
incorporated herein by reference. Unless otherwise indicated, all information
contained herein assumes no exercise of the Underwriters' over-allotment
option. Unless the context requires otherwise, all references herein to the
"Company" mean Pioneer Financial Services, Inc. and its subsidiaries,
collectively. For a discussion of certain factors that should be considered by
prospective purchasers of the Notes offered hereby, see "Risk Factors."

THE COMPANY

The Company underwrites and markets health insurance, life insurance and
annuities and provides medical utilization management services throughout the
United States. In the nine years since it became public, the Company's total
revenue has grown from $75.2 million in 1986 to $800.1 million in 1995; total
assets have increased from $165.0 million at December 31, 1986 to over $1.5
billion at December 31, 1995; and stockholders' equity has increased from $33.5
million at December 31, 1986 to $144.6 million at December 31, 1995. The
Company sells its products and services through four marketing divisions:
Senior Health and Life Division, Group Medical Division, Life Insurance
Division and Medical Utilization Management Division.

OPERATIONS

Senior Health and Life Division. The Senior Health and Life Division markets
a wide range of specialty health insurance and life insurance and annuities for
individuals age 65 and older. Products which are underwritten by this division
include Medicare supplement, long-term care, home health care and specialty
health. In addition, this division markets cash burial life policies and
annuities which are underwritten by the Company's Life Insurance Division. The
Company's Medicare supplement policies provide coverage for many of the
expenses which the federal Medicare program does not fully cover and its long-
term care and home health care policies provide coverage, within various
prescribed benefit limits, for nursing home and in-home care. During 1995, the
Company issued over 47,000 senior health insurance policies and over 35,000
senior life insurance policies, increases of 21% and 137%, respectively,
compared to the number of policies issued in 1994.

The Company is the fourth largest issuer of individual Medicare supplement
insurance in the nation, excluding Blue Cross and Blue Shield-related entities,
based on direct premiums earned. The Company sells products designed for senior
citizens through a distribution network which has grown from approximately
15,000 agents at the end of 1994 to nearly 22,000 agents at the end of 1995.
This growth was primarily the result of the formation, in mid-1995, of Markman
International, a 50/50 joint venture with Markman Company, which, prior to the
joint venture, had established itself as a leading independent marketer of
long-term care policies. Markman International serves as the national marketing
and distribution arm of the Senior Health and Life Division.

Group Medical Division. The Group Medical Division underwrites and markets
hospital and medical policies, primarily to self-employed individuals and small
business owners. In 1995, approximately 82% of this division's business was
sold through a sales force of approximately 1,700 career agents and the
remaining 18% was sold through a brokerage system of 6,000 independent agents.
This division uses the services provided by the Medical Utilization Management
Division, unaffiliated preferred provider organizations ("PPOs") and other
managed care operations to help control claims costs. In 1995, approximately
70% of hospital stays covered by

3
<PAGE>

policies issued by the Group Medical Division used PPO facilities, an increase
from 32% in 1993 and 54% in 1994. The Company believes that the Group Medical
Division's use of managed care services, provided by both the Medical
Utilization Management Division and unaffiliated companies, resulted in
significant claims savings for the Company in 1995, with most of these savings
being passed on to customers in the form of more competitive premium rates.

Life Insurance Division. The Life Insurance Division underwrites and markets
traditional life (term and whole life), universal life, and interest sensitive
life insurance and annuities targeted primarily to the middle income market.
The Life Insurance Division sells its products through a nationwide network of
brokerage general agents ("BGAs") and managing general agents ("MGAs") who in
turn contract with multiple brokers and general agents. This division grew
significantly when the Company acquired Connecticut National Life Insurance
Company ("CNL") in January 1995. This division also underwrites, issues and
administers the life insurance products marketed by the Senior Health and Life
Division.

Medical Utilization Management Division. The Medical Utilization Management
Division provides health care coordination services to assist in the management
of medical costs for insurance companies, government agencies, self-insured
businesses, unions, third-party administrators, health maintenance
organizations ("HMOs") and PPOs, as well as for the Group Medical Division.
Such services include precertification of inpatient and outpatient medical
care, case management, and the development and management of provider networks.
During 1995, approximately 81% of this division's revenues were derived from
services provided to unaffiliated organizations.

Investment Portfolio. The Company has maintained and intends to continue to
maintain a diversified portfolio of medium-term investment-grade fixed income
securities. As of December 31, 1995, 83% of the Company's invested assets were
fixed income securities and the weighted average quality of the fixed income
portfolio was "AA."

STRATEGY

Senior Health and Life Division. The Company believes it has an opportunity
to expand its position as a leading provider of health and life insurance
products to the growing senior market. Demographic trends indicate that the
number of Americans age 65 and over will increase significantly. According to
the U.S. Census Bureau, the age 65 and over population group is estimated to
grow from approximately 33 million in 1994 to approximately 37 million by the
year 2005 and to over 53 million by 2020. Industry sources estimate that
currently approximately 10% of persons age 65 and over own long-term care
insurance, while approximately 43% of such individuals are expected to require
the use of nursing care at least once in their lives. These same sources also
estimate that the number of long-term care policies sold industry-wide has
increased at a rate of approximately 27% per year since 1987, to a total of
approximately 3.4 million long-term care policies sold through 1994. The
Company believes the growth of this senior health insurance market could be
enhanced if future government regulation continues to move toward more personal
financial responsibility, with less reliance on government payments, possibly
in the form of additional reductions in Medicare benefits and/or the
establishment of tax deductibility for long-term care insurance premiums.

The Company intends to expand its position in the growing senior market by
increasing the number of agents who sell its senior products, and by increasing
the number of products agents sell to each customer through cross-selling.
Through Markman International, the Company has increased its agency force by
nearly 45% since the end of 1994 and expects further increases in 1996. In
1995, approximately 2.5% of the Senior Health and Life Division's Medicare
supplement policyholders owned one of the Company's long-term care or home
health care policies. Through increased training of its agents as to the full
range of products offered by the Company and the development of pre-approved
(already underwritten for issue) add-on products that can easily be coupled

4
<PAGE>

with certain existing products, the Company intends to increase its cross-
selling efforts and thereby increase the number of its products owned by each
customer. Additionally, the Company believes that the market for senior managed
care products will grow as health care expenditures continue to grow. It is
estimated that approximately 10% of Medicare beneficiaries in the nation
participate in HMOs. There are many states with very low penetration of managed
care in the senior market, including states with a high concentration of
Medicare beneficiaries. The Company intends to take advantage of this
opportunity by utilizing its position in the senior market and its managed care
capability, to market managed care products to senior citizens.

Group Medical Division. The Group Medical Division intends to focus its
efforts on increasing administrative efficiency and claims-cost containment on
its existing block of business through, among other things, increased use of
the Medical Utilization Management Division's services, continued development
of medical provider networks and continued migration of its fee-for-service
indemnity health insurance customers to managed care products. As the
regulatory environment evolves, the Company will evaluate growth opportunities
in this market.

Life Insurance Division. The Life Insurance Division's strategy is to expand
its distribution channels and products and to continue to lower its
administrative unit costs. The acquisition of CNL in 1995 has given the Company
the opportunity to initiate new distribution strategies, including consumer-
direct sales over the Internet. Also, at year-end 1995, the Company entered
into an agreement with a national marketing organization to market a new term
life insurance product with an income benefit rider. With 25,000 agents
nationwide, this marketing organization gives the Company the potential to
increase significantly the sales of life insurance.

Medical Utilization Management Division. The Medical Utilization Management
Division intends to grow through cross-selling additional managed care services
to existing clients. In addition, this division is currently developing PPOs,
exclusive provider organizations ("EPOs") and HMOs in selected market areas.

Acquisitions. The Company believes that current trends in the life and health
insurance industry will continue to provide the Company with opportunities for
additional acquisitions and consolidations. The Company further believes that
its ability to integrate acquisitions into its existing operations and its
flexibility in developing and marketing new products should enable it to
capitalize on these opportunities.

The Company was organized in Delaware in 1982 as a successor to an Illinois
holding company formed in 1957. The executive offices of the Company are
located at 1750 East Golf Road, Schaumburg, Illinois 60173 and its telephone
number is (847) 995-0400.

5
<PAGE>

THE OFFERING

Securities Offered..............
$65,000,000 principal amount ($74,750,000 if
the over-allotment option is exercised in
full) of % Convertible Subordinated
Notes Due 2003 to be issued under an
indenture (the "Indenture") between the
Company and The First National Bank of
Chicago, as trustee (the "Trustee").

Maturity Date................... , 2003

Interest Payment Dates.......... and of each year
commencing, , 1996

Conversion Rights............... The Notes are convertible, at the holder's
option, into shares of Common Stock, at any
time at or prior to maturity unless
previously redeemed, at a conversion price of
$ per share, subject to adjustment in
certain events as described herein.
Accordingly, each $1,000 in principal amount
of Notes is convertible into shares of
Common Stock, subject to adjustment.

Redemption at the Option of the The Notes are not redeemable prior to
Company......................... , 1999. Thereafter, the Notes are
redeemable, in whole or in part, at the
option of the Company, at the redemption
prices set forth herein, plus accrued and
unpaid interest to the date of redemption.

Redemption at the Option of the
Holders......................... In the event that a Change of Control (as
defined herein) occurs, subject to certain
conditions, each holder of a Note shall have
the right, at the holder's option, to require
the Company to repurchase all or any part of
such holder's Notes at 101% of the principal
amount thereof, plus accrued and unpaid
interest to the date of repurchase.

Subordination...................
The Notes will be general unsecured
obligations of the Company and will be
subordinated in right of payment to all
Senior Indebtedness (as defined herein) of
the Company. Senior Indebtedness was
approximately $38.6 million at March 1, 1996.
After giving effect to the incurrence of
additional Senior Indebtedness in connection
with the acquisition of Universal Fidelity
Life Insurance Company ("Universal Fidelity")
and the expected use of the estimated net
proceeds of this offering, at March 1, 1996,
Senior Indebtedness would have been
approximately $24.4 million. See
"Capitalization." The Company is a holding
company and, accordingly, the Notes will also
be subordinated to all existing and future
liabilities of the Company's subsidiaries.
The Indenture will not restrict the Company
or any of its subsidiaries from incurring
additional Senior Indebtedness or other
obligations.

Use of Proceeds................. The net proceeds from the sale of the Notes
offered hereby are estimated to be
$62,062,500 ($71,446,875 if the Underwriters'
over-allotment option is exercised in full).
The Company intends to use a portion of the
net proceeds to redeem its $2.125 Cumulative
Exchangeable Convertible Preferred Stock

6
<PAGE>

(the "$2.125 Preferred Stock"). As of
December 31, 1995, approximately $21.9
million ($25.85 per share of $2.125 Preferred
Stock) would have been required to redeem all
of the outstanding shares of the $2.125
Preferred Stock (assuming no shares of $2.125
Preferred Stock are converted prior to
redemption). The remaining net proceeds will
be used to repay borrowings under the
Company's March 1995 Term Loan and the August
1995 Term Loan and to reduce, or, to the
extent available, repay borrowings under the
Credit Facility (each as defined herein). Any
remaining net proceeds will be used for
working capital and general corporate
purposes, including, without limitation, the
contribution of capital to the Company's
insurance subsidiaries and future
acquisitions. Other than the purchase of
Universal Fidelity, the Company has no
commitments or agreements with respect to any
such acquisitions as of the date of this
Prospectus. Pending application, the net
proceeds will be invested in short-term
interest-bearing obligations. See "Use of
Proceeds" and "Business--Acquisitions."

Listing.........................
Application has been made to list the Notes
on the NYSE under the symbol "PFS03"

Common Stock Symbol............. "PFS"

Rating..........................

7
<PAGE>

SUMMARY FINANCIAL AND OPERATING DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1991 1992 1993 1994 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Premiums and policy charges:
Accident and health.......... $593,236 $559,894 $601,684 $659,180 $625,951
Life and annuity............. 33,321 35,219 39,282 44,929 61,092
-------- -------- -------- -------- --------
Total premiums and policy
charges................... 626,557 595,113 640,966 704,109 687,043
Net investment income......... 47,974 43,555 40,242 42,786 70,975
Other income.................. 26,310 17,352 19,256 27,643 38,073
Realized investment gains
(losses)..................... 7,897 (47) (1,336) (383) 3,993
-------- -------- -------- -------- --------
Total revenues............. 708,738 655,973 699,128 774,155 800,084
Benefits:
Accident and health.......... 376,820 368,046 397,963 407,249 398,971
Life and annuity............. 46,128 47,622 39,419 42,947 76,846
-------- -------- -------- -------- --------
Total benefits............. 422,948 415,668 437,382 450,196 475,817
Insurance and general expense. 173,806 162,837 162,831 192,810 218,388
Interest expense.............. 2,916 2,189 3,276 5,054 4,958
Amortization of deferred
policy acquisition costs(1).. 95,748 100,715 76,875 100,073 69,199
-------- -------- -------- -------- --------
Total benefits and
expenses.................. 695,418 681,409 680,364 748,133 768,362
-------- -------- -------- -------- --------
Income (loss) before income
taxes........................ 13,320 (25,436) 18,764 26,022 31,722
Income taxes (benefit)........ 4,448 (8,477) 6,619 8,873 10,754
-------- -------- -------- -------- --------
Net income (loss)............. 8,872 (16,959) 12,145 17,149 20,968
Preferred stock dividends..... 2,039 2,039 2,021 1,904 1,805
-------- -------- -------- -------- --------
Income (loss) applicable to
common stockholders.......... $ 6,833 $(18,998) $ 10,124 $ 15,245 $ 19,163
======== ======== ======== ======== ========
PER SHARE DATA:
Net income (loss) per common
share:
Primary...................... $ 1.02 $ (2.85) $ 1.51 $ 2.36 $ 2.44
Fully diluted................ 1.02 (2.85) 1.26 1.58 1.85
Average common and common
equivalent shares outstanding
(in thousands):
Primary...................... 6,699 6,660 6,724 6,459 7,839
Fully diluted................ 8,234 8,195 10,731 12,734 12,608
Ratio of earnings to fixed
charges(2)................... 5.0x -- 5.7x 5.3x 6.1x
</TABLE>
- --------

(1) Includes the effect of a write-off of deferred policy acquisition costs in
1992 and 1994 of approximately $30.0 million and $16.7 million,
respectively. See "Risk Factors--Recoverability of Deferred Policy
Acquisition Costs" and "Management's Discussion and Analysis of Results of
Operations and Financial Condition--Deferred Policy Acquisition Costs." The
write-offs were primarily related to certain major medical policies.

(2) Fixed charges consist of interest expense on indebtedness, amortization of
debt issuance costs and the portion of operating leases that are
representative of the interest factor. Fixed charges do not include
interest on annuities and financial products. Earnings are computed by
adding interest expense on indebtedness, amortization of debt issuance
costs and the interest portion of rent expense to pre-tax earnings from
continuing operations. The earnings were inadequate to cover fixed charges
by $25.4 million in 1992.

8
<PAGE>

<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------------------------
1995 1995
1991 1992 1993 1994 ACTUAL AS ADJUSTED(1)
-------- -------- --------- --------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total investments....... $528,725 $568,349 $ 674,206 $ 723,837 $1,042,592 $1,055,642
Deferred policy
acquisition costs...... 313,453 269,674 260,432 225,618 219,874 219,874
Total assets............ 969,190 978,689 1,108,271 1,075,700 1,558,921 1,574,909
Policy liabilities...... 776,571 805,696 903,105 868,608 1,214,465 1,214,465
Short-term notes
payable................ 6,371 12,931 5,575 20,093 13,534 4,191
Long-term notes payable. 21,600 25,170 1,125 2,520 21,504 3,779
8% Convertible
Subordinated
Debentures............. -- -- 57,477 57,427 9,695 9,695
Convertible Subordinated
Notes Due 2003......... -- -- -- -- -- 65,000
$2.125 Preferred Stock.. 23,990 23,990 23,675 21,682 21,222 --
Stockholders' equity.... 75,470 62,732 68,872 68,328 144,574 143,852
Book value per share.... 11.39 9.21 10.86 11.55 14.35 14.28
Debt and preferred stock
as a percentage of
total capitalization
(2).................... 40.8% 49.7% 56.1% 59.8% 31.3% 36.5%
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1991 1992 1993 1994 1995
---------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
SUPPLEMENTAL DATA:
Statutory capital &
surplus (3)............ $ 72,600 $ 82,432 $ 106,567 $ 124,284 $ 115,423
Risk based capital
ratios (3)(4)
Pioneer Life Insurance
Company of Illinois... -- -- 336% 342% 287%
National Group Life.... -- -- 386% 410% 350%
Manhattan National
Life.................. -- -- 566% 866% 571%
Connecticut National
Life.................. -- -- 449% 984% 943%
Accident & Health Ratios
(5)
Major Medical:
Loss ratio............. 59.9% 66.3% 67.1% 63.0% 63.1%
Expense ratio.......... 42.3 48.9 34.5 41.4 38.0
---------- ----------- ----------- ----------- ----------
Total Major Medical.. 102.2% 115.2% 101.6% 104.4% 101.1%
Senior:
Loss ratio............. 67.1% 66.5% 63.5% 61.1% 65.9%
Expense ratio.......... 33.4 33.0 34.5 36.5 34.1
---------- ----------- ----------- ----------- ----------
Total Senior......... 100.5% 99.5% 98.0% 97.6% 100.0%
Collected cash premium
Major Medical.......... $ 289,622 $ 298,015 $ 401,891 $ 426,117 $ 393,450
Senior................. 308,496 270,915 258,145 234,595 226,489
Life & Annuity......... 47,305 41,679 57,411 71,310 80,493
Gross life insurance in-
force (3).............. 9,141,000 10,339,000 11,823,000 12,582,000 17,743,000
Pre-tax operating income
(loss) (6)............. 9,223 (25,389) 20,100 26,404 32,889
</TABLE>
- --------

(1) Adjusted to give effect to the sale of the Notes offered hereby and the use
of the estimated net proceeds therefrom. See "Use of Proceeds." Does not
give effect to the acquisition of Universal Fidelity. See "Use of Proceeds"
and "Capitalization."

(2) Debt represents the aggregate of long-term notes payable, short-term notes
payable and the 8% Convertible Subordinated Debentures and, as adjusted,
the Notes. Total capitalization represents debt, preferred stock and
stockholders' equity. On a pro forma basis, after giving effect to the sale
of the Notes offered hereby, the use of the estimated proceeds therefrom
and the incurrence of indebtedness in connection with the acquisition of
Universal Fidelity, debt and preferred stock as a percentage of total
capitalization at December 31, 1995 would have been 39.9%. See
"Capitalization."

(3) Calculated at the end of the period shown.
(4) Risk based capital rules were adopted for annual reporting beginning
December 31, 1993. The calculated ratios are based on the authorized
control level as filed in the Company's individual insurance subsidiaries'
annual statutory financial statements.
(5) Expense amounts include principally renewal commissions, amortization of
deferred policy acquisition costs, general insurance expenses and premium
taxes. The expense and loss ratios are calculated based on earned premium
and exclude the effects of net investment income, realized investment gains
(losses), policy fees and the financial results of the Company's non-
insurance subsidiaries.
(6) Represents the Company's income or loss before income taxes calculated on a
GAAP basis excluding the effects of realized investment gains and losses.
The 1995 amount also excludes approximately $5.2 million in payments made
to converting bondholders and other expenses relating to the conversion of
the 8% Convertible Subordinated Debentures.

9
<PAGE>

RISK FACTORS

In addition to the information contained elsewhere in this Prospectus, a
prospective purchaser of the Notes should carefully consider, among other
things, the following risk factors before making an investment in the Notes
offered hereby.

HOLDING COMPANY STRUCTURE

The Company is an insurance holding company whose assets principally consist
of the capital stock of its operating subsidiaries. The ability of the Company
to redeem or make interest payments on the Notes, to pay dividends on its
Common Stock and $2.125 Preferred Stock and to make required debt service
payments, is dependent upon the ability of its subsidiaries to pay cash
dividends or make other cash payments to the Company. The Company's insurance
subsidiaries are subject to state laws and regulations which restrict their
ability to pay dividends and make other payments to the Company. Certain of
the Company's credit arrangements also limit its ability to pay dividends. The
total amount of dividends that could be paid by the Company's insurance
subsidiaries in 1996 without regulatory approval is approximately $3.7
million. Liquidity requirements of the holding company have historically been
met through dividends from the non-insurance subsidiaries which receive
payments primarily from fees charged for administrative and marketing services
provided to the Company's insurance subsidiaries and other unaffiliated
companies. The Company intends to use a portion of the net proceeds of this
offering to redeem all of the outstanding shares of $2.125 Preferred Stock.
See "Use of Proceeds," "Price Range of Common Stock and Dividend Policy,"
"Management's Discussion and Analysis of Results of Operations and Financial
Condition," "Business--Government Regulation" and Notes to Consolidated
Financial Statements.

SUBORDINATION

The Notes will be subordinated in right of payment to all existing and
future Senior Indebtedness of the Company, including all indebtedness under
the Company's Credit Facility and other credit agreements. By reason of such
subordination, in the event of an insolvency, liquidation or other
reorganization of the Company, the Senior Indebtedness must be paid in full
before the Company may make any payments with respect to the principal of,
premium, if any, and interest on the Notes (and any other obligations ranking
pari passu with the Notes, including, without limitation, the 8% convertible
subordinated debentures due 2000 (the "8% Debentures")). Senior Indebtedness
was approximately $38.6 million at March 1, 1996. After giving effect to the
incurrence of additional Senior Indebtedness in connection with the
acquisition of Universal Fidelity and the expected use of the estimated net
proceeds from this offering, at March 1, 1996, Senior Indebtedness would have
been approximately $24.4 million. See "Capitalization." Because the Company's
operations are conducted through subsidiaries, claims of the creditors of the
subsidiaries (including policyholders) will have priority with respect to the
assets and earnings of such subsidiaries over the claims of the creditors of
the Company, including holders of the Notes, even though such obligations do
not constitute Senior Indebtedness. The Company's subsidiaries had
indebtedness for borrowed money of approximately $8.0 million at March 1,
1996.

The Notes will not be secured by any of the assets of the Company or its
subsidiaries. In addition, certain obligations of the Company are secured by
pledges of certain assets of the Company or its subsidiaries. The Indenture
will not restrict the ability of the Company or any of its subsidiaries to
incur additional Senior Indebtedness or to pledge their assets in the future.
See "Description of the Notes" and Notes to Consolidated Financial Statements.

INSURANCE REGULATION

10
<PAGE>

business, including premium rate levels, premium rate increases, policy forms,
minimum loss ratios, dividend payments, claims settlement, licensing of
insurers and their agents, capital adequacy, transfer of control, and the
amount and type of investments the Company may have. Such regulations are
primarily intended to protect policyholders and not investors. Further, the
states in which the Company is licensed have the authority to change the
minimum mandated statutory loss ratios to which the Company is subject, the
manner in which these ratios are computed and the manner in which compliance
with these ratios is measured and enforced. In the event the Company is not in
compliance with minimum statutory loss ratios mandated by regulatory
authorities with respect to certain policies, the Company may be required to
reduce or refund premiums, which could have a material adverse effect upon the
Company. See "Business--Government Regulation."

From time to time there are also significant federal and state legislative
developments with respect to group, long-term care and Medicare coverage. Most
legislative proposals at the state level are specifically directed at the
small group health care market, a significant portion of the Company's health
business. A number of states have passed or are considering legislation that
would limit the differentials in rates that insurers could charge between new
business and renewal business with respect to similar demographic groups.
State legislation also has been adopted or is being considered that would make
health insurance available to all small groups by requiring coverage of all
employees and their dependents, limiting the applicability of pre-existing
conditions exclusions, requiring insurers to offer a basic plan exempt from
certain mandated benefits as well as a standard plan and establishing a
mechanism to spread the risk of high risk employees to all small group
insurers. Among the proposals currently pending in the U.S. Congress are the
implementation of certain minimum consumer protection standards for inclusion
in all long-term care policies, including guaranteed renewability, protection
against inflation and limitations on waiting periods for pre-existing
conditions. These proposals would also prohibit "high pressure" sales tactics
in connection with long-term care insurance and would guarantee consumers
access to information regarding insurers, including lapse and replacement
rates for policies and the percentage of claims denied. In addition, the
National Association of Insurance Commissioners (the "NAIC") has recently
adopted model long-term care policy language providing nonforfeiture benefits
and has proposed a rate stabilization standard for long-term care policies.
The Company cannot predict with certainty the effect any proposals, if
adopted, or legislative developments could have on its business and
operations. Health care reform may require the Company to make significant
changes to the way it conducts its health insurance business and could impose
limitations on the profitability of certain of the Company's insurance
products, which could have a material adverse effect on the Company. See
"Business--Health Care Reform."

IMPORTANCE OF RATINGS

The Company's ability to expand and attract new business is affected by the
ratings assigned to its insurance subsidiaries by various independent
insurance rating agencies including A.M. Best Company, Inc. ("A.M. Best") and
Duff & Phelps Credit Rating Company ("Duff & Phelps"). A.M. Best ratings for
the industry currently range from "A++ (Superior)" to "C- (Fair)" and some
companies are not rated. Four of the Company's insurance subsidiaries are
currently rated by A.M. Best: Pioneer Life Insurance Company of Illinois
("Pioneer Life") is rated "B+ (Very Good);" Manhattan National Life Insurance
Company is rated "A- (Excellent);" National Group Life Insurance Company
("National Group Life") is rated "B (Good)"; and CNL is rated "A-
(Excellent)." Duff & Phelps ratings for the industry currently range from
"AAA" to "DD." Three of the Company's insurance subsidiaries are currently
rated by Duff & Phelps: Pioneer Life is rated "A;" Manhattan National Life is
rated "A+;" and CNL is rated "A+." In evaluating a company's financial and
operating performance, the rating agencies review the company's profitability,
leverage and liquidity as well as the company's book of business, the adequacy
and soundness of its reinsurance, the quality and estimated market value of
its assets, the adequacy of its reserves and the experience and competency of
its management. Such ratings are based upon factors primarily relevant to
policyholders, agents, insurance brokers and intermediaries and are not
directed to the protection of investors. If the ratings of the Company's
insurance subsidiaries were downgraded from their current levels, sales of
their products could be adversely affected.

11
<PAGE>

COMPETITION

The Company operates in a highly competitive industry. The Company competes
with large national insurers, regional insurers and specialty insurers, many
of which are larger, have substantially greater financial resources or higher
A.M. Best ratings than the Company. In addition to claims paying ratings,
insurers compete on the basis of price, breadth and flexibility of coverage,
ability to attract and retain agents and brokers and the quality and level of
agent and policyholder services provided. See "--Insurance Regulation."

RECOVERABILITY OF DEFERRED POLICY ACQUISITION COSTS

Under generally accepted accounting principles, a deferred policy
acquisition cost ("DAC") asset is established to match properly the costs of
writing new business against the expected future revenues and profits from
those policies. The amortization schedule is generally based on the expected
pattern of future revenues or gross profits and on the expected persistency of
the policies. The Company continues to monitor the profitability and
persistency of its policies on a monthly basis. In reviewing the
recoverability of DAC related to medical insurance products, the Company has
made assumptions relative to future rate increases, medical claim trends,
lapse rates, expenses and investment income. Although there is significant
variability inherent in these estimates, management believes these assumptions
are reasonable. Increased lapses or revised estimates of profitability
anticipating future losses could result in an increase in the amortization
rate or a write-off of DAC, which would adversely impact earnings. See
"Management's Discussion and Analysis of Results of Operation and Financial
Condition--Deferred Policy Acquisition Costs."

MEDICAL COST INFLATION

Inflationary trends in health care costs may cause the defined benefits
provided by the Company's policies to cover less of the actual costs of such
health care. This may require the Company to increase policy benefits under
new policies to remain competitive in marketing its products and to implement
corresponding increases in premiums. The Company's future growth may be
limited to the extent that state or federal regulations restrict premium rate
increases or increased premium rates make its policies less attractive to
prospective customers.

ADEQUACY OF LOSS RESERVES

The reserves for losses established by the Company are estimates of amounts
needed to pay reported and unreported claims based on facts and circumstances
known at the time the reserves are established. Reserves are based on
historical claims information, industry statistics and other factors. The
establishment of appropriate reserves is an inherently uncertain process, and
there can be no assurance that the ultimate liability will not materially
exceed the Company's claim reserves and have a material adverse effect on the
Company's results of operations and financial condition. Due to the inherent
uncertainty of estimating reserves, it has been necessary, and may over time
continue to be necessary, to revise estimated future liabilities as reflected
in the Company's reserves for claims. See "Management's Discussion and
Analysis of Results of Operations and Financial Condition."

INVESTMENT PORTFOLIO

The Company's investment portfolio primarily consists of fixed income
securities such as investment grade publicly traded debt securities and
mortgage-related securities, including collateralized mortgage obligations. At
December 31, 1995, 83.3% of the Company's invested assets was invested in
fixed maturity obligations and approximately 39.1% was invested in mortgage-
related securities. Certain risks are inherent in connection with fixed income
securities, including loss upon default and price volatility in reaction to
changes in interest rates and general market factors. Certain additional risks
are inherent with mortgage-related securities, including the risks associated
with reinvestment of proceeds due to prepayments of such obligations. See
"Business--Investments."

12
<PAGE>

DEPENDENCE UPON MANAGEMENT

The success of the Company is dependent to a significant degree upon its
senior management, including Peter W. Nauert, Chairman and Chief Executive
Officer of the Company. Mr. Nauert is also the beneficial owner of 16.4% of
the outstanding Common Stock. Although the Company believes it has established
its own reputation in the industry, the loss of members of its senior
management could have a material adverse effect on the Company's business. See
"Management and Directors."

PROVISIONS LIMITING CHANGES IN CONTROL

Certain provisions in the Company's Certificate of Incorporation, By-laws
and Rights Agreement could discourage potential acquisition proposals and
could delay or prevent a change in control. See "Description of Capital
Stock."

ABSENCE OF PUBLIC MARKET

There is currently no public market for the Notes and there can be no
assurance that an active public market for the Notes will develop. Application
will be made to list the Notes on the NYSE under the symbol "PFS03."

13
<PAGE>

USE OF PROCEEDS

The net proceeds from the sale of the Notes offered hereby are estimated to
be $62,062,500 ($71,446,875 if the Underwriters' over-allotment option is
exercised in full). The Company intends to use a portion of the net proceeds
to redeem its $2.125 Preferred Stock. As of December 31, 1995, approximately
$21.9 million ($25.85 per share of $2.125 Preferred Stock) would have been
required to redeem all of the outstanding shares of $2.125 Preferred Stock
(assuming no shares of the $2.125 Preferred Stock are converted prior to
redemption). Each share of $2.125 Preferred Stock is convertible into 1.6
shares of the Company's Common Stock. The remaining net proceeds will be used
to (i) repay borrowings under the Company's March 1995 Term Loan (as defined
below) which were incurred primarily in connection with the acquisition of CNL
in 1995; (ii) repay borrowings under the Company's August 1995 Term Loan (as
defined below) which were incurred primarily to fund payments made to
converting bondholders and other expenses relating to the conversion of $46.9
million of the Company's 8% Debentures; and (iii) reduce, or, to the extent
available, repay borrowings incurred under the Company's Credit Facility (as
defined below), including additional borrowings that will be incurred in
connection with the proposed acquisition of Universal Fidelity prior to the
completion of this offering. As of March 1, 1996, an aggregate of
approximately $30.6 million was outstanding under the March 1995 Term Loan,
the August 1995 Term Loan and the Credit Facility. The Company estimates that
it will borrow approximately $26.0 million to complete the Universal Fidelity
acquisition, of which $6.0 million will be in the form of notes issued by the
Company to the former stockholders of Universal Fidelity.

The Company's $15.0 million term loan, incurred in March 1995 (the "March
1995 Term Loan"): (i) bore interest at 5% per annum at March 1, 1995; (ii)
requires principal payments of $0.5 million plus interest per quarter; and
(iii) matures on December 31, 1999. The Company's $11.1 million term loan,
incurred in August 1995 (the "August 1995 Term Loan"): (i) bore interest at
the rate of 8.25% per annum at March 1, 1996; (ii) requires principal payments
of $0.9 million plus interest per quarter; and (iii) matures on August 31,
1998. The Company's line of credit arrangement (the "Credit Facility") bore
interest at the rate of 8.25% per annum at March 1, 1996 and matures in April
1996. The Company expects that the Credit Facility will be extended at
maturity. See "Management's Discussion and Analysis of Results of Operations
and Financial Condition--Liquidity and Capital Resources."

Any net proceeds remaining after the redemption of the $2.125 Preferred
Stock and the repayment of indebtedness described above will be used by the
Company for working capital and general corporate purposes, including, without
limitation, the contribution of capital to the Company's insurance
subsidiaries and future acquisitions. Other than the purchase of Universal
Fidelity, the Company has no commitments or agreements with respect to any
such acquisitions as of the date of this Prospectus. Pending application, the
net proceeds will be invested in short-term interest-bearing obligations.

14
<PAGE>

PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY

The Common Stock is traded on the NYSE and the Chicago Stock Exchange under
the symbol "PFS." The following table sets forth for the fiscal periods
indicated the high and low last reported sale prices per share of the Common
Stock, as reported by the NYSE and the dividends declared per share of the
Common Stock.

<TABLE>
<CAPTION>
HIGH LOW DIVIDEND
------- ------- --------
<S> <C> <C> <C>
1994
First Quarter.................................. $14 3/4 $11 1/8 $.0375
Second Quarter................................. 12 10 .0375
Third Quarter.................................. 10 1/2 8 3/4 .0375
Fourth Quarter................................. 10 8 3/4 .0375
1995
First Quarter.................................. 11 1/4 8 7/8 .045
Second Quarter................................. 15 1/2 10 3/4 .045
Third Quarter.................................. 15 3/8 13 1/8 .045
Fourth Quarter................................. 18 1/2 13 7/8 .045
1996
First Quarter (through March 11, 1996)......... 18 3/8 15 5/8 .055
</TABLE>

On March 11, 1996, the last reported sale price of the Common Stock on the
NYSE was $15 7/8 per share.

All cumulative dividends on the $2.125 Preferred Stock have been paid by the
Company when due. The ability of the Company to pay dividends will depend
primarily on the receipt of cash dividends and other cash payments from its
subsidiaries. The Company's insurance subsidiaries are subject to state laws
and regulations which limit their ability to pay dividends or make other
payments to the Company. Certain of the Company's credit arrangements also
limit its ability to pay dividends. Furthermore, the Company's Certificate of
Incorporation prohibits the Company from paying dividends on the Common Stock
if the Company is not current in its dividend payments on the Preferred Stock.
See "Management's Discussion and Analysis of Results of Operations and
Financial Condition--Liquidity and Capital Resources."

15
<PAGE>

CAPITALIZATION

The following table sets forth the consolidated short-term indebtedness and
capitalization of the Company (i) at December 31, 1995, actual, (ii) pro forma
to give effect to the acquisition of Universal Fidelity, and (iii) pro forma,
as adjusted to give effect to the sale of the Notes offered hereby and the use
of the estimated net proceeds therefrom. See "Use of Proceeds" and
"Management's Discussion and Analysis of Results of Operations and Financial
Condition--Liquidity and Capital Resources." The following table should be
read in conjunction with the Consolidated Financial Statements and the Notes
thereto appearing elsewhere in this Prospectus.

<TABLE>
<CAPTION>
AT DECEMBER 31, 1995
----------------------------
PRO
PRO FORMA AS
ACTUAL FORMA ADJUSTED
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Short-term debt:
Short term notes payable.................... $ 13,534 $ 36,534 $ 7,191
Long-term debt:
Long-term notes payable..................... 21,504 24,504 13,729
8% Convertible Subordinated Debentures due
2000....................................... 9,695 9,695 9,695
% Convertible Subordinated Notes due 2003... -- -- 65,000
-------- -------- --------
Total debt................................ 44,733 70,733 95,615
Redeemable preferred stock, without par value:
5,000,000 shares authorized;
$2.125 Preferred Stock; 848,900 issued and
outstanding................................ 21,222 21,222 --
-------- -------- --------
Total debt and $2.125 Preferred Stock..... 65,955 91,955 95,615
Stockholders' equity:
Common stock, $1 par value; 20,000,000
shares authorized; 11,207,591 shares issued
and outstanding, including shares in
treasury(1)................................ 11,208 11,208 11,208
Additional paid-in capital.................. 72,198 72,198 72,198
Unrealized appreciation of available-for-
sale securities............................ 4,518 4,518 4,518
Retained earnings........................... 66,870 66,870 66,148
Less treasury stock at cost (1,132,300
shares).................................... (10,220) (10,220) (10,220)
-------- -------- --------
Total stockholders' equity................ 144,574 144,574 143,852
-------- -------- --------
Total capitalization...................... $210,529 $236,529 $239,467
======== ======== ========
</TABLE>
- --------

(1) Does not include (a) 1,358,000 shares which are issuable upon conversion
of the $2.125 Preferred Stock, (b) 1,893,000 shares reserved for issuance
pursuant to outstanding options granted under the Company's stock option
plans, (c) shares reserved for issuance pursuant to future grants of
options under the Company's Omnibus Stock Incentive Program, Employee
Stock Purchase Plan and Career Agent Stock Purchase Plan and (d) shares
which are issuable upon conversion of the 8% Debentures or the Notes
offered hereby. The Company intends to use a portion of the net proceeds
of this offering to redeem all of the outstanding shares of $2.125
Preferred Stock. See "Use of Proceeds."

16
<PAGE>

SELECTED FINANCIAL AND OPERATING DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

The selected operating statement and balance sheet data set forth below for
each of the years in the five-year period ended December 31, 1995 are derived
from the audited consolidated financial statements of the Company. The
selected financial data should be read in conjunction with the Consolidated
Financial Statements and the Notes thereto and Management's Discussion and
Analysis of Results of Operations and Financial Condition included herein.

(1) Includes the effect of a write-off of DAC in 1992 and 1994 of
approximately $30.0 million and $16.7 million, respectively. See "Risk
Factors--Recoverability of Deferred Policy Acquisition Costs" and
"Management's Discussion and Analysis of Results of Operations and
Financial Condition--Deferred Policy Acquisition Costs." The write-offs
were primarily related to certain major medical policies.

17
<PAGE>

<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------------------------
1995 1995
1991 1992 1993 1994 ACTUAL AS ADJUSTED(1)
-------- -------- --------- --------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total investments....... $528,725 $568,349 $ 674,206 $ 723,837 $1,042,592 $1,055,642
Deferred policy
acquisition costs...... 313,453 269,674 260,432 225,618 219,874 219,874
Total assets............ 969,190 978,689 1,108,271 1,075,700 1,558,921 1,574,909
Policy liabilities...... 776,571 805,696 903,105 868,608 1,214,465 1,214,465
Short-term notes
payable................ 6,371 12,931 5,575 20,093 13,534 4,191
Long-term notes payable. 21,600 25,170 1,125 2,520 21,504 3,779
8% Convertible
Subordinated
Debentures............. -- -- 57,477 57,427 9,695 9,695
Convertible Subordinated
Notes Due 2003......... -- -- -- -- -- 65,000
$2.125 Preferred Stock.. 23,990 23,990 23,675 21,682 21,222 --
Stockholders' equity.... 75,470 62,732 68,872 68,328 144,574 143,852
Book value per share.... 11.39 9.21 10.86 11.55 14.35 14.28
Debt and preferred stock
as a percentage of
total
capitalization(2)...... 40.8% 49.7% 56.1% 59.8% 31.3% 36.5%
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1991 1992 1993 1994 1995
---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
SUPPLEMENTAL DATA:
Statutory capital &
surplus(3)............. $ 72,600 $ 82,432 $ 106,567 $ 124,284 $ 115,423
Risk based capital
ratios(3)(4)
Pioneer Life Insurance
Company of Illinois... -- -- 336% 342% 287%
National Group Life.... -- -- 386% 410% 350%
Manhattan National
Life.................. -- -- 566% 866% 571%
Connecticut National
Life.................. -- -- 449% 984% 943%
Accident & Health
Ratios(5)
Major Medical:
Loss ratio............. 59.9% 66.3% 67.1% 63.0% 63.1%
Expense ratio.......... 42.3 48.9 34.5 41.4 38.0
---------- ----------- ----------- ----------- -----------
Total Major Medical.. 102.2% 115.2% 101.6% 104.4% 101.1%
Senior:
Loss ratio............. 67.1% 66.5% 63.5% 61.1% 65.9%
Expense ratio.......... 33.4 33.0 34.5 36.5 34.1
---------- ----------- ----------- ----------- -----------
Total Senior......... 100.5% 99.5% 98.0% 97.6% 100.0%
Collected Cash Premium:
Major Medical.......... $ 289,622 $ 298,015 $ 401,891 $ 426,117 $ 393,450
Senior................. 308,496 270,915 258,145 234,595 226,489
Life & Annuity......... 47,305 41,679 57,411 71,310 80,493
Gross life insurance in-
force(3)............... 9,141,000 10,339,000 11,823,000 12,582,000 17,743,000
Pre-tax operating income
(loss)(6).............. 9,223 (25,389) 20,100 26,404 32,889
</TABLE>
- --------

(1) Adjusted to give effect to the sale of the Notes offered hereby and the
use of the estimated net proceeds therefrom. See "Use of Proceeds." Does
not give effect to the acquisition of Universal Fidelity. See "Use of
Proceeds" and "Capitalization."

(2) Debt represents the aggregate of long-term notes payable, short-term notes
payable and the 8% Debentures, and, as adjusted, the Notes. Total
capitalization represents debt, preferred stock and stockholders' equity.
On a pro forma basis, after giving effect to the sale of the Notes offered
hereby, the use of the estimated proceeds therefrom and the incurrence of
indebtedness in connection with the acquisition of Universal Fidelity,
debt and preferred stock as a percentage of total capitalization at
December 31, 1995 would have been 39.9%. See "Capitalization."

(3) Calculated at the end of the period shown.

(4) Risk based capital rules were adopted for annual reporting beginning
December 31, 1993. The calculated ratios are based on the authorized
control level as filed in the Company's individual insurance subsidiaries'
annual statutory financial statements.

(5) Expense amounts include principally renewal commissions, amortization of
DAC, general insurance expenses and premium taxes. The expense and loss
ratios are calculated based on earned premium and exclude the effects of
net investment income, realized investment gains (losses), policy fees and
the financial results of the Company's non-insurance subsidiaries.

(6) Represents the Company's income or loss before income taxes calculated on
a GAAP basis excluding the effect of realized investment gains and losses.
The 1995 amount also excludes approximately $5.2 million in payments made
to converting bondholders and other expenses relating to the conversion of
the 8% Debentures.

18
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION

RESULTS OF OPERATIONS

Overview

Fiscal Year 1995 Compared to Fiscal Year 1994

The information set forth below is based on the Company's major product
lines.

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1994 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Revenue
Group Medical (1)........................................ $457,633 $430,885
Senior Health and Life (2)............................... 235,031 236,556
Life Insurance........................................... 71,075 115,545
Medical Utilization Management........................... 10,416 17,098
-------- --------
Total.................................................. $774,155 $800,084
======== ========
Pre-tax operating income (3)
Group Medical (1)........................................ $ 12,065 $ 20,344
Senior Health and Life (2)............................... 12,469 11,604
Life Insurance........................................... 8,695 7,669
Medical Utilization Management........................... 2,026 739
-------- --------
Total pre-tax operating income before corporate expense
and interest (3)...................................... 35,255 40,356
Corporate expense and interest........................... (8,851) (7,467)
-------- --------
Total (3).............................................. $ 26,404 $ 32,889
======== ========
</TABLE>
- --------
(1) Excludes revenues from life insurance products marketed by the Group
Medical Division but issued by the Life Insurance Division. For purposes
of the discussion set forth herein, the Company has included the revenue
and pre-tax income generated from the sale of a policy in the results of
operation of the division which issued the policy.

(2) Excludes revenues from life insurance products marketed by the Senior
Health and Life Division but issued by the Life Insurance Division. For
purposes of the discussion set forth herein, the Company has included the
revenue and pre-tax income generated from the sale of a policy in the
results of operations of the division which issued the policy.

(3) Represents the Company's income before taxes, excluding the effects of
realized investment gains and losses. The 1995 amount also excludes
approximately $5.2 million in payments made to converting bondholders and
other expenses relating to the conversion of the 8% Debentures.

Group Medical Division

Revenue. Total revenue in the Group Medical Division decreased $26.7
million, or 6%, from $457.6 million to $430.9 million. The decrease was
primarily due to a reduction of premium revenue on the Company's major medical
products of $26.9 million, or 6%, from $431.8 million to $404.9 million. A
major portion of the decrease in major medical premium revenue was due to the
Company's decision to market unaffiliated companies' HMO products in states
such as California, where competitive pressures and state reforms made it
difficult to underwrite the Company's indemnity products on a profitable
basis. In connection with the Company's decision to cease selling new products
in these states, the Company's career agency force submitted $31.8 million of

19
<PAGE>

annualized HMO premiums to unaffiliated companies during 1995. While these
premiums are not received by the Company, the Company receives marketing
commission overrides from the unaffiliated companies for this production. The
remaining decrease in major medical premium revenue was due to lower average
premiums on new issues due to the increased use of managed care products.

Net investment income decreased $2.7 million, or 26%, from $10.4 million to
$7.7 million, due to a reduction in invested assets caused by the decrease in
major medical in-force business and the general decline in interest rates.
Total realized investment losses decreased $0.6 million or 50% from $1.2
million to $0.6 million.

Other income increased $1.9 million, or 11%, from $16.6 million to $18.5
million, due to marketing commission overrides received from the sale of HMO
products of unaffiliated companies.

Benefits. The following table sets forth the earned premium, benefits, and
loss ratios for products issued by the Group Medical Division:

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1994 1995
-------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Earned premium (1).................................... $443,599 $414,160
Benefits (1).......................................... 279,419 261,336
Loss ratio............................................ 63.0% 63.1%
</TABLE>
- --------

(1) In the Company's statement of consolidated income, earned premium
represents premiums written, adjusted for reinsurance; the changes in
unearned premium are reflected in benefits.

The Company has historically held reserve margins in its accident and health
claims reserve to provide for potential adverse deviation. Based on a review
of prior year reserve developments, the Company reduced margins in the major
medical claims reserves in 1994 by approximately $10.4 million. Excluding the
reduction in claim reserve margins, the 1994 major medical loss ratio was
65.3%. Improvement in the loss ratio in 1995 was due to continued increases in
PPO penetration and higher claim costs in 1994.

Insurance and General Expenses. Insurance and general expenses increased
$2.6 million, or 2%, from $116.9 million to $119.5 million. The expense ratio
increased in 1995 due to system development costs, consolidation of claim
operations, and the 6% drop in premium revenue.

The amortization of DAC decreased $24.3 million, or 39%, from $62.3 million
to $38.0 million. The decrease was due to a $16.7 million write-off of DAC in
1994, the lower 1995 new business levels, and the decline in first-year
commission rates.

Senior Health and Life Division

Revenue. Total revenue in the Senior Health and Life Division remained
relatively constant. Senior health premium decreased $6.3 million, or 3%, from
$227.3 million to $221.0 million. While the total new Medicare supplement
business and new long-term care business increased, these increases were
offset by a decrease in the total senior health premium due to lapses from the
current in-force block of business and the fact that a greater percentage of
the in-force block of business consisted of standardized Medicare supplement
products on which the average premium per policy was lower due to benefit and
agent compensation changes.

Net investment income increased $3.2 million, or 57%, from $5.6 million to
$8.8 million, primarily due to a 10-basis point improvement in yields and
increased invested assets. The total realized gains increased $4.2 million
from $0.9 million to $5.1 million.

20
<PAGE>

Benefits. The following table sets forth the earned premium, benefits, and
loss ratios for senior health products:

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1994 1995
-------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Earned premium (1).................................... $225,604 $217,382
Benefits (1).......................................... 137,853 143,226
Loss ratio............................................ 61.1% 65.9%
</TABLE>
- --------

(1) In the Company's statement of consolidated income, earned premium
represents premiums written, adjusted for reinsurance; the changes in
unearned premium are reflected in benefits.

The loss ratio on the Senior Health and Life Division's major products,
Medicare supplement policies, was higher during the first two quarters of 1995
due to increased utilization on the standardized Medicare supplement products.

Insurance and General Expenses. The expense ratio remained relatively
unchanged. The decline in administrative expense levels was offset by an
increase in marketing expenses associated with new marketing initiatives. See
"Business--Products and Services."

The amortization of DAC decreased $8.2 million, or 28%, from $29.8 million
to $21.6 million. The decreased level of amortization was due to a decline in
the level of first-year costs deferred due to lower agent compensation levels
and improved persistency on the in-force Medicare supplement business.

Life Insurance Division

Revenue. Total revenue in the Life Insurance Division increased $44.4
million, or 62%, from $71.1 million to $115.5 million. The increase was due
primarily to the acquisition of CNL in the first quarter of 1995 which added
$5.8 million in premium and $23.2 million in investment income. The remaining
increase was due to increased sales of the senior life insurance product
marketed in conjunction with Medicare supplement and long-term care policies.

Net investment income increased $27.5 million, or 102%, from $26.9 million
to $54.4 million. This increase was primarily due to the acquisition of CNL.

Benefits. Total life and annuity policy benefits increased $33.9 million, or
79%, from $42.9 million to $76.8 million. Approximately $24.4 million of this
increase was due to the acquisition of CNL and the remaining amount was due to
increased senior life insurance in-force. The senior life mortality experience
exceeded that which was developed in pricing and the Company has initiated
rate increases and modification to underwriting procedures to improve
profitability. The mortality experience on the remaining block of business was
less than projected.

Insurance and General Expenses. Insurance and general expenses increased
$10.4 million, or 90%, from $11.6 million to $22.0 million. The increase in
general expenses and commissions was primarily due to the increase in the in-
force block of business, legal fees associated with reinsurance litigation
which was settled in 1995, and the acquisition of CNL. The unit cost of
administration per policy in-force remained relatively constant in 1995.

The amortization of DAC remained relatively unchanged, with the increase in
senior life amortization offsetting a decrease in the amortization on the
traditional term life block of business.

21
<PAGE>

Medical Utilization Management Division

Total revenue increased $6.7 million, or 64%, from $10.4 million to $17.1
million. The increase in revenue was primarily due to expanded sales and the
acquisition of ACMG in the third quarter of 1995.

Pre-tax income decreased $1.3 million, or 65%, from $2.0 to $0.7 million.
The decrease in profitability was due to expenses related to the development
of PPOs and HMOs in selected states. The division expects continued pressure
on earnings during 1996 as it continues development of these managed care
programs. The Company has targeted its managed care development efforts in
geographic locations where it already has high concentrations of policyholders
and sales agents.

Corporate Expenses

Corporate expenses decreased $1.4 million, or 16%, from $8.9 million to $7.5
million (excluding the $5.2 million paid to holders of the Company's 8%
Debentures and other expenses in connection with the conversion of the 8%
Debentures, in the third quarter of 1995). Interest expense decreased $0.3
million, or 6%, from $4.9 million to $4.6 million, primarily due to the
utilization of a portion of the Company's Credit Facility beginning in the
fourth quarter of 1994, offset in part by a decrease in interest expense due
to the conversion of the Company's 8% Debentures.

Consolidated Financial Condition and Results of Operations

Fiscal Year 1995 Compared to Fiscal Year 1994

Net income. The Company's consolidated net income increased $3.9 million, or
23%, from $17.1 million to $21.0 million. This increase was due primarily to
improved profitability in the Group Medical Division as a result of improved
loss ratios and a lower level of DAC amortization.

Premiums and policy charges. Total premiums and policy charges decreased
$17.1 million, or 2%, from $704.1 million to $687.0 million. This decrease was
due primarily to the decrease in accident and health premiums of $33.2
million, or 5%, which was due primarily to a decrease in premiums from major
medical products of $26.9 million, or 6%. The decrease in premiums was
primarily due to the Company's decision to market unaffiliated companies' HMO
products in states such as California, where competitive pressures and state
reforms made it difficult to underwrite the Company's indemnity products on a
profitable basis. Total health insurance premiums attributable to Medicare
supplement and long-term care products remained relatively constant. Life
insurance premiums increased $16.2 million, or 36%, primarily due to the
acquisition of CNL and new business sales.

Net investment income. Net investment income increased $28.2 million, or
66%, from $42.8 million to $71.0 million. Invested assets increased 44% to
$1,043 million and annualized investment yields increased from 6.3% to 7.0%.
These increases were primarily due to the acquisition of CNL.

Other revenue. Other income and realized investment gains and losses
increased $14.8 million, or 54%, from $27.3 million to $42.1 million. The
increase in other income was due to increased sales by the Medical Utilization
Management Division and the acquisition of ACMG in July 1995. The remaining
other income generated by the Company's non-insurance subsidiaries remained
relatively unchanged.

Benefits. Total benefits increased $25.6 million, or 6%, from $450.2 million
to $475.8 million. Accident and health benefits, which include the change in
unearned premiums, decreased $8.2 million, or 2%, from $407.2 million to
$399.0 million. Life and annuity benefits increased $33.9 million, or 79%.
This increase was due to the acquisition of CNL and increased senior life
insurance in-force.

Insurance and general expenses. Insurance and general expenses (which
includes non-deferred commission compensation to agents) increased $25.6
million, or 13%, from $192.8 million to $218.4 million. Expenses for

22
<PAGE>

the Medical Utilization Management Division increased due to the increase in
sales and the acquisition of ACMG. Expenses in the insurance divisions
increased due to the development of new marketing and sales incentive
programs, system development costs, and the acquisition of CNL. Corporate
expenses increased $4.0 million primarily due to $5.2 million in payments made
to converting bondholders and other expenses relating to the August 1995
conversion of the Company's 8% Debentures.

Amortization of DAC. Amortization of DAC decreased $30.9 million, or 31%,
from $100.1 million to $69.2 million. The decrease was primarily due to an
adjustment in 1994 to the DAC asset related to certain group and individual
medical business, a lower level of group major medical new business and
improved persistency on Medicare supplement business.

Income tax rate. The effective federal income tax rate was 34% due to the
increased investment in tax-exempt securities included in the Company's
portfolio.

Other. Investments, premiums and other receivables, amounts on deposit and
due from reinsurers, accrued investment income and other assets increased
principally due to the acquisition of CNL. The decrease in short-term notes
payable and the increase in long-term notes payable resulted from the
conversion of the Company's line of credit agreement at December 31, 1994 to a
term loan during the first quarter of 1995. General expenses and other
liabilities, and amounts due to reinsurers increased due primarily to the
acquisition of CNL. The remaining balance sheet amounts remained relatively
consistent with the amounts at December 31, 1994.

Fiscal Year 1994 Compared to Fiscal Year 1993

Net income. The Company's net income increased $5.0 million, or 41%, from
$12.1 million to $17.1 million. The increase was due to profits from
Continental Life & Accident Company ("CLAC"), improved health loss ratios in
the Senior Health and Life Division, expense reductions and improved spreads
in the Life Insurance Division, and increased revenue and margins in the
Medical Utilization Management Division. Total revenues increased $75.0
million, or 11%. The increase in revenue was primarily due to the increase in
premiums and policy charges of $63.1 million.

Premiums and policy charges. Accident and health insurance premiums
increased $57.5 million, or 10%. Premiums from major hospital plans increased
$81.5 million, primarily due to the acquisition of CLAC completed in August
1993. Total premiums attributable to the remaining mix of Medicare supplement
and long-term care products decreased $24.0 million, or 10%.

Net investment income. Net investment income increased $2.5 million, or 6%.
Annualized investment yields decreased from 6.8% to 6.3%. The decrease in the
investment yield was principally due to the shortening of the Company's
average duration and the increased emphasis on tax-exempt securities included
in the Company's portfolio.

Other revenue. Other income and realized investment gains and losses
increased $9.3 million, or 52%. The increase in other income was due to the
acquisitions of Healthcare Review Corporation ("HRC") and CLAC in August 1993.
In addition, the Company realized increased sales to unaffiliated customers by
the Medical Utilization Management Division and by its marketing subsidiaries.
Realized investment losses decreased $0.9 million, or 69%, from $1.3 million
to $0.4 million. The remaining other income generated by the Company's other
non-insurance subsidiaries remained relatively unchanged.

Benefits. Total benefits increased $12.8 million, or 3%. Life and annuity
benefits increased $3.5 million, or 9%, due to higher mortality on a closed
block of universal life and an increase in in-force business. Accident and
health benefits, which include the change in unearned premiums, increased $9.3
million, or 2%. The increase was due primarily to the increased amount of
collected premiums. The accident and health loss ratios decreased to 62% from
66%. The improved loss ratios were due primarily to a reduction in the group
medical claim reserve margins.

23
<PAGE>

Insurance and general expenses. General expenses as a percent of premiums
decreased due to the continued emphasis on cost reduction in the Senior Health
and Life Division, the Group Medical Division and the Life Insurance Division.
However, insurance and general expenses (which includes non-deferred
commission compensation to agents) increased $30.0 million, or 18%. The
increase was primarily caused by the increase in premium and policy charges
and the acquisitions of HRC and CLAC.

Interest expense. Interest expense increased due to the issuance of the 8%
Debentures in July 1993 and the increase in other notes payable in 1994.

Amortization of DAC. Amortization of DAC increased $23.2 million, or 30%.
The increase was due primarily to a write-down in the DAC asset on certain
group and individual medical business issued in recent years. Future losses
were projected on these blocks of business due primarily to mandated state
healthcare reforms. The Company continues to monitor the profitability of its
business. Increased lapses or unprofitability on the business could result in
an increase in the amortization rate of DAC, which would adversely impact
future earnings.

Income tax rate. The effective tax rate of the Company decreased to
approximately 34% from 35%. The decrease was due to the increased investment
in tax-exempt securities included in the Company's portfolio.

Other. The Company acquired the building containing its corporate
headquarters in Schaumburg, Illinois, in January 1994 resulting in the
increase in investment real estate. Cash decreased due to increased investment
in short-term investments. Reinsurance receivables decreased due to the timing
of payments due from reinsurers. DAC decreased as a result of a write-down in
the asset for certain medical business and the decrease in new business issued
in 1994. General expenses and other liabilities decreased due to the timing of
payments for federal income taxes and amounts due to reinsurers. Notes payable
increased due to the utilization of the line of credit by the Company.

DEFERRED POLICY ACQUISITION COSTS

Under generally accepted accounting principles, a DAC asset is established
to match properly the costs of writing new business against the expected
future revenues or gross profits from the policies. The costs which are
capitalized and amortized consist of first-year commissions in excess of
renewal commissions and certain home office expenses related to selling,
policy issue, and underwriting.

The deferred acquisition costs for accident and health policies and
traditional life policies are amortized over future premium revenues of the
business to which the costs are related. The rate of amortization depends on
the expected pattern of future premium revenues for the block of policies. The
scheduled amortization for a block of policies is established when the
policies are issued. However, the actual amortization of DAC will reflect the
actual persistency and profitability of the business. For example, if actual
policy terminations are higher than expected or if future losses are
anticipated, DAC could be amortized more rapidly than originally scheduled or
written-off, which would reduce earnings in the applicable period. See "Risk
Factors--Recoverability of Deferred Policy Acquisition Costs."

EFFECT OF INFLATION

In pricing its insurance products, the Company gives effect to anticipated
levels of inflation; however, the Company believes that the high rate of
medical cost inflation during recent years has had an adverse impact on its
major hospital accident and health claims experience. The Company continues to
implement rate increases, as permitted by state regulations, in response to
this experience.

24
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

The Company's consolidated liquidity requirements are created and met
primarily by operations of its subsidiaries. The insurance subsidiaries'
primary sources of cash are premiums, investment income, and investment sales
and maturities. The insurance subsidiaries' primary uses of cash are operating
costs, policy acquisition costs, payments to policyholders and investment
purchases. In addition, liquidity requirements of the holding company are
created by the dividend requirements of the $2.125 Preferred Stock, Common
Stock dividends, interest payments on the 8% Debentures and other debt service
requirements. The Company intends to use a portion of the net proceeds of this
offering to redeem all of the outstanding shares of $2.125 Preferred Stock.

The ability of the insurance subsidiaries to pay dividends and make other
payments to the Company is subject to state insurance department regulations
which generally permit dividends and other payments to be paid for any twelve
month period in amounts equal to the greater of (i) net gain from operations
in the case of a life insurance company or net income in the case of all other
insurance companies for the preceding calendar year or (ii) 10% of surplus as
of the preceding December 31st. Any dividends in excess of these levels
require the prior approval of the Director or Commissioner of the applicable
state insurance department. The amount of dividends that the Company's
insurance subsidiaries could pay in 1996 without prior approval is
approximately $3.7 million. The liquidity requirements of the holding company
have historically been met through dividends from the non-insurance
subsidiaries which receive payments primarily from fees charged for
administrative and marketing services provided to the Company's insurance
subsidiaries and other unaffiliated companies. Dividends from the insurance
subsidiaries could be required in the future to meet such liquidity
requirements.

Notwithstanding the foregoing, if insurance regulators otherwise determine
that payment of a dividend or any other payment to an affiliate would be
detrimental to an insurance subsidiary's policyholders or creditors because of
the financial condition of the insurance subsidiary or otherwise, the
regulators may block dividends or other payments to affiliates that would
otherwise be permitted without prior approval.

The Company's insurance subsidiaries require capital to fund acquisition
costs incurred in the initial year of policy issuance and to maintain adequate
surplus levels for regulatory purposes. These capital requirements have been
met principally from internally generated funds, including premiums and
investment income, and capital contributions from the holding company.

The Company has offered commission advances to certain of its agents and
marketing organizations which consist primarily of annualization of first year
commissions. This means that when the first year premium is paid in
installments, the Company will advance a percentage of the commissions that
the agent would otherwise receive over the course of the first policy year.
The Company, through a subsidiary, has entered into agreements with an
unaffiliated corporation to provide financing for a portion of its agent
commission advance program through the sale of agent receivables. Proceeds
from such sales for 1995 and 1994 were $20.9 million and $24.4 million,
respectively. The termination date of the current program is December 31,
1997, subject to extension or termination as provided therein. The Company has
retained approximately $13.8 million of agent advances at December 31, 1995.

In July 1993, the Company issued $57.5 million of its 8% Debentures. Net
proceeds from the offering totaled approximately $54.0 million. Interest on
the 8% Debentures is payable semi-annually on July 15 and January 15 of each
year. The 8% Debentures are convertible into the Company's Common Stock at any
time prior to maturity, unless previously redeemed, at a conversion price of
$11.75 per share. In August 1995, the Company accepted the conversion of $46.9
million of the outstanding 8% Debentures. The effect of the conversion was an
increase in stockholders' equity of $45.3 million and a charge to income of
$3.5 million, net of taxes, for payments made to converting bondholders and
other expenses relating to the conversion. The 8% Debentures are not
redeemable prior to August 15, 1996. After August 15, 1996, the 8% Debentures
are redeemable, in whole or in part, at the Company's option, at 100% of the
principal amount thereof plus accrued and unpaid interest to the redemption
date, if the closing sale price of the Company's Common Stock on the

25
<PAGE>

NYSE is greater than or equal to 135% of the then effective conversion price
for the 8% Debentures for the 30 consecutive days immediately preceding the
date of the notice of the redemption. In addition, the 8% Debentures are
redeemable, in whole or in part, at the Company's option, after July 15, 1998
at a rate of 104% of the principal amount thereof and after July 15, 1999 at a
rate of 103%, in each case, plus accrued and unpaid interest to the redemption
date. The terms and conditions of the 8% Debentures are set forth in full in
the Indenture between the Company and Harris Trust and Savings Bank, as
Trustee, a copy of which was filed as an exhibit to the Company's Registration
Statement on Form S-2 relating thereto.

In August 1993, a non-insurance subsidiary of the Company borrowed $1.5
million from a commercial bank to finance the acquisition of HRC. Interest on
the unsecured note is payable quarterly at the lending bank's prime rate of
interest. The note requires principal repayments of $0.08 million per quarter
plus interest through July 31, 1998.

In December 1994, a non-insurance subsidiary of the Company borrowed $0.4
million from a commercial bank to finance the purchase of certain equipment.
The note, which is secured by the equipment purchased, bears interest at the
lending bank's prime rate of interest and is payable quarterly, with principal
payments of $0.02 million, through December 1, 1999.

In January 1995, an insurance subsidiary of the Company issued a note in the
amount of $1.7 million as a portion of the acquisition price of CNL. The
principal balance of the note may be reduced by the amount of capital losses
incurred by the Company on mortgage loan and real estate holdings of CNL.
Interest is payable on the note at the average earnings rate of these
investments, currently 8%.

Under the March 1995 Term Loan, the Company borrowed $15.0 million from a
group of banks to repay amounts borrowed under the Company's Credit Facility
in conjunction with the acquisition of CNL. Interest on the March 1995 Term
Loan is payable quarterly and is based upon either a prime rate, LIBOR or a CD
rate, plus a margin. The March 1995 Term Loan bore interest at 5% per annum at
March 1, 1996. The March 1995 Term Loan is unsecured and requires principal
payments of $0.5 million plus interest per quarter with a final payment on
December 31, 1999.

In June 1995, a non-insurance subsidiary of the Company borrowed $1.2
million from a commercial bank in order to fund HMO development. Interest on
this secured facility is payable monthly at a fixed rate of 8.8%, with
principal due at maturity. This facility matures in June, 1996.

In June 1995 a non-insurance subsidiary of the Company entered into a $1.0
million line of credit arrangement with a commercial bank in order to finance
the subsidiary's working capital needs. Interest on this secured facility is
payable monthly at the lending bank's prime rate of interest. This facility
matures in June 1996.

Under the August 1995 Term Loan, the Company borrowed $11.1 million from a
group of banks to repay amounts borrowed under the Company's Credit Facility
to, among other things, fund payments to converting bondholders and other
expenses relating to the conversion of the 8% Debentures. Interest on the
August 1995 Term Loan is based on either a prime rate, LIBOR or a CD rate,
plus a margin. The August 1995 Term Loan bore interest at 8.25% per annum at
March 1, 1996. The unsecured note requires principal repayments of $0.9
million plus interest per quarter through August 31, 1998.

In September 1995, a non-insurance subsidiary of the Company borrowed $3.3
million from a finance company to finance the purchase of certain equipment.
The note, which is secured by the equipment purchased, bears interest at a
fixed rate of 7.81% and has principal and interest payments of $0.04 million
payable monthly through August 2005.

The Company's Credit Facility provides a line of credit arrangement for
short-term borrowings of up to $27.0 million through April 1996, of which $3.5
million was used at December 31, 1995. Amounts borrowed under the Credit
Facility accrue interest at a rate per annum based upon either a prime rate,
LIBOR or a CD rate,

26
<PAGE>

plus a margin. At March 1, 1996, the Credit Facility bore interest at 8.25%
per annum. The line of credit arrangement can be terminated, in accordance
with the agreement, at the Company's option. The Company expects that the
Credit Facility will be extended at its maturity.

The Company's debt agreements include provisions requiring maintenance of
minimum working capital and risk based capital and limiting the Company's
ability to incur additional indebtedness. The Company's debt agreements also
restrict the amount of retained earnings which is available for dividends and
require the maintenance of certain minimum insurance company ratings at the
Company's subsidiaries.

In March, June, September and December 1995, the Company's Board of
Directors announced a quarterly Common Stock dividend of $.045 per share, for
a total of 18 cents per share in 1995. In February 1996, the Board of
Directors announced a quarterly stock dividend of $.055 per share.

Management believes that the diversity of the Company's investment portfolio
and the liquidity attributable to the large concentration of investments in
highly liquid United States government agency securities provide sufficient
liquidity to meet foreseeable cash requirements. See "Business--Investments."
Because the Company's insurance subsidiaries experience strong positive cash
flows, including monthly cash flows from mortgage-backed securities, the
Company does not expect its insurance subsidiaries to be forced to sell the
held to maturity investments prior to their maturities and realize material
losses or gains. Although the Company has the ability and intent to hold those
securities to maturity, there could occur infrequent and unusual conditions
under which it would sell certain of these securities. Those conditions would
include a significant deterioration of the issuer's creditworthiness,
significant changes in tax law affecting the taxation of securities, a
significant business acquisition or disposition, and changes in regulatory
capital requirements or permissible investments.

Life insurance and annuity liabilities are generally long-term in nature
although subject to earlier surrender as a result of the policyholder's
ability to withdraw funds or surrender the policy, subject to surrender and
withdrawal penalties. The Company believes its policyholder liabilities should
be backed by an investment portfolio that generates predictable investment
returns. The Company seeks to limit exposure to risks associated with interest
rate fluctuations by concentrating its invested assets principally in high
quality, readily marketable debt securities of intermediate duration and by
attempting to balance the duration of its invested assets with the estimated
duration of benefit payments arising from contract liabilities. See
"Business--Investments."

The Company has entered into an agreement to purchase all of the outstanding
stock of Universal Fidelity for a total purchase price of approximately $26.0
million. In order to finance the acquisition, the Company intends to incur $26
million of additional indebtedness, including $6 million of notes to be issued
to the sellers. These notes will bear interest at an annual rate 6%, will be
due in two equal installments on the first and second anniversary of the
closing and are to be backed by letters of credit. The transaction is expected
to close in March 1996. Universal Fidelity's business is primarily senior
health insurance, including Medicare supplement, long-term care and other
supplemental insurance.

RECENTLY ISSUED ACCOUNTING STANDARDS

For a discussion of a new long-lived assets accounting standard, a new
stock-based employee compensation accounting standard and the impact of these
standards on the financial statements of the Company, see Note 2 of Notes to
Consolidated Financial Statements.

27
<PAGE>

BUSINESS

PRODUCTS AND SERVICES

The Company markets and underwrites health insurance, life insurance and
annuities and provides medical utilization management services throughout the
United States. The Company sells products and provides its services through
four marketing divisions: Senior Health and Life Division, Group Medical
Division, Life Insurance Division and Medical Utilization Management Division.
The Company's distribution systems for its products have increased from
approximately 12,000 agents in 1986 to nearly 45,000 agents at the end of
1995.

Senior Health and Life Division

The products marketed by the Senior Health and Life Division include
Medicare supplement, long-term care, home health care, various specialty
health coverages, life insurance and annuities. This division markets these
products to individuals age 65 and older and underwrites and issues all such
products, except the life insurance and annuity products which are
underwritten and issued by the Life Insurance Division.

The following table sets forth the earned premium, losses and loss
adjustment expenses incurred and loss ratios for the Company's senior health
products. Senior health premiums have been impacted by federally mandated
standardization of Medicare supplement policies. This standardization began in
1992 and included fixed benefits and reductions in agent commissions,
especially in the case of replacement of an existing Medicare supplement
policy. During this same period, the Company altered its marketing emphasis,
reducing the number of products available for sale in selected states until
new products were developed and priced. The combination of these changes had
the effect of decreasing new sales revenue for these policies.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1993 1994 1995
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Earned premium (1)................................ $243,482 $225,604 $217,382
Benefits (1)...................................... 154,561 137,853 143,226
Loss ratio........................................ 63.5% 61.1% 65.9%
</TABLE>
- --------

(1) In the Company's statement of consolidated income, earned premium
represents premiums written, adjusted for reinsurance; the changes in
unearned premium are reflected in benefits.

In the Senior Health and Life Division, the Company may adjust health
insurance premium rates by class, policy form and state in which the policy is
issued, subject to applicable regulation, in order to maintain anticipated
loss ratios. Since premium rate increases can increase policy lapses,
conservation and customer service activities are emphasized. The Senior Health
and Life Division follows a proactive approach involving the examination of
health premium rates on a monthly basis, including comparisons of pricing
structure to actual claims experience by product line and state. This ongoing
analysis provides lead time for the orderly adjustment of premiums.

Medicare Supplement. Since the inception of the federal Medicare program in
1966, the Company has offered policies designed to supplement Medicare
benefits and is now the fourth largest issuer of individual Medicare
supplement insurance in the nation, excluding Blue Cross and Blue Shield-
related entities, based on direct premiums earned. Medicare supplement
policies provide coverage for many of the medical expenses which the Medicare
program does not cover, such as deductible and coinsurance costs and specified
losses which exceed the federal program's maximum benefits.

28
<PAGE>

In 1991, the NAIC defined ten model Medicare supplement policies. In states
which have adopted the NAIC model, only those ten policies can be sold. In
most states, the Company markets eight of the ten model policies-- those which
the Company believes are most applicable to its target market. All states have
adopted either the NAIC model or similar legislation which specifically
defines policy models. Sales of the Company's Medicare supplement products
increased 20% in 1995 on an annualized premium basis.

The federal government began a test program in 1992, allowing 15 specified
states to participate in a "Medicare Select" program. Medicare Select policies
combine the cost advantages of a preferred provider organization with a
Medicare supplement policy to provide a reduced premium cost for
policyholders. Utilization of specified hospitals, which waive certain
deductibles covered by the Medicare supplement policy, allows the Company to
reduce the premium charged. In 1995, the federal government expanded the
Medicare Select program to all states. Although the market for this product is
just developing, the Company sells Medicare Select policies in a number of
states and has plans to expand sales nationally.

Long-Term Care and Home Health Care. The Senior Health and Life Division
also offers long-term care and home health care products designed principally
for senior citizens. Long-term care policies generally provide specified per
day benefits for nursing home confinements, within prescribed limits. Home
health care policies provide specified per day benefits for required health
services received in the home and comprehensive coverages which provide
benefits for all levels of nursing home care, home health care and adult day
care. In 1995, the Company developed and introduced a new series of
"Independent Choice" long-term care and home health care plans which provide
greater flexibility of benefit use and include care coordination features to
help lower benefit costs. In 1995, annualized sales of the Company's long-term
care and home health care products increased by nearly 288% from $3.4 million
to $13.2 million. The Company's strategy is to cross-sell these products to
customers who have already purchased the Company's Medicare supplement
product.

The Company believes that the market for long-term care and home health care
insurance could increase if the federal government were to enact proposed tax
legislation to provide tax deductibility for long-term care insurance
premiums. While these changes have been proposed, the Company cannot predict
if or when they will be enacted. See "--Health Care Reform."

Specialty Health and Other. The Senior Health and Life Division offers
various specialty health products which typically are sold in conjunction with
the Company's principal health products. These policies include hospital
indemnity, private duty nursing and cancer plans. Additionally, the Company
intends to develop and market managed care organizations for seniors as the
demand for such products expands. The Company believes that the market for
senior managed care products will grow as health care costs continue to grow.
It is estimated that approximately 10% of Medicare beneficiaries in the nation
participate in HMOs. There are many states with very low penetration of
managed care in the senior market, including states with a high concentration
of Medicare beneficiaries. The Company intends to take advantage of this
opportunity by utilizing its position in the senior market and its managed
care capability to market managed care products to senior citizens.

Life Insurance and Annuities. The Senior Health and Life Division markets
life insurance and annuities which are issued by the Life Insurance Division
to individuals age 65 and over. In 1994, the Company began selling smaller
face-amount whole life insurance policies specifically designed to cover final
expenses for senior citizens, including funeral expenses and other expenses
that otherwise would be paid by the insured's family. During 1995, sales of
these products increased 121% on an annualized premium basis to $16.8 million
from $7.6 million. As part of its cross-selling strategy, the Company
automatically offers a pre-approved (already underwritten for issue) cash
burial life insurance policy with all Medicare supplement policies issued to
customers age 66-79. The Company also offers annuity products specifically
designed for seniors. These products provide an attractive investment
alternative to seniors, offering higher interest rates than bank savings
accounts and certificates of deposit and the ability to receive monthly
payouts during retirement years.

29
<PAGE>

Marketing. The Senior Health and Life Division markets its products and
services primarily to individuals age 65 and older through a distribution
system which, in 1995, grew from approximately 15,000 agents to nearly 22,000
agents, primarily as a result of the formation in mid-1995 of Markman
International, a 50/50 joint venture with Markman Company, which, prior to the
joint venture, had established itself as a leading independent marketer of
long-term care policies. Markman International serves as the national
marketing and distribution arm of the Senior Health and Life Division. The
Company intends to increase further the number of agents used by the Senior
Health and Life Division in 1996 and to enhance the Company's cross-selling
capabilities through increased agent training and packaging of products. The
agents receive extensive product and marketing information from the Company.
They also have access, through the Company, to lists of prospective customers
turning age 65 in their respective geographic areas and to a direct-mail lead-
generation system. By providing its agents with training, sales materials,
lead-generation programs and a full range of health and life insurance
products designed for senior citizens, the Company intends to increase both
sales to new customers and cross-sales to existing policyholders. The agents
receive commissions on each sale based on the type of product sold.

Group Medical Division

The Group Medical Division underwrites and markets small group and
individual hospital and medical products, including major hospital and
specialty health insurance policies, individually underwritten and issued. For
1993, 1994 and 1995, this division produced health insurance premium revenue
of approximately $354.4 million, $435.9 million, and $404.9 million,
respectively. This division also derives marketing commission revenue and
other fee income through marketing insurance and other products of
unaffiliated companies and associations with whom the Company has a marketing
relationship. This division's products and services are targeted primarily to
self-employed individuals and small business owners. The insureds in this
division also become prospects for the Senior Health and Life Division--when
they reach age 65, the Company automatically provides for conversion to a
Medicare supplement policy.

Pre-tax income increased in this division in 1995, as the Company continued
to make improvements in its management of the division's block of business
through close monitoring of claims costs, increased use of medical provider
networks and case management and the implementation of premium rate
adjustments as necessary.

The following table sets forth the earned premium, losses and loss
adjustment expenses incurred and loss ratios for the Group Medical Division's
products. The Company's loss ratios have varied over the years reflecting
changes in medical claim costs and the frequency of benefit utilization by its
insureds.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1993 1994 1995
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Earned premium (1)............................ $375,275 $443,599 $414,160
Benefits (1).................................. 251,955 279,419 261,336
Loss ratio.................................... 67.1% 63.0% 63.1%
</TABLE>
- --------

(1) In the Company's statement of consolidated income, earned premium
represents premiums written, adjusted for reinsurance; the changes in
unearned premium are reflected in benefits.

As in the Senior Health and Life Division, the Company may, in the Group
Medical Division, adjust health insurance premium rates by class, policy form
and state in which the policy is issued, subject to applicable regulation, in
order to maintain anticipated loss ratios. Since premium rate adjustments can
have the tendency to increase policy lapses, conservation and customer service
activities are emphasized. As with the Senior Health and Life Division, the
Group Medical Division follows a proactive approach involving the examination
of health

30
<PAGE>

premium rates on a monthly basis. The matching of pricing structure with
actual claims experience varies by product line and state. This ongoing
analysis provides lead time for the orderly adjustment of premiums.

The Group Medical Division intends to focus its efforts on increasing
administrative efficiency and claims-cost containment on its existing block of
business through, among other things, increased use of the Medical Utilization
Management Division's services, continued development of medical provider
networks and continued migration of its fee-for-service indemnity health
insurance customers to managed care products. As the regulatory environment
evolves, the Company will evaluate growth opportunities in this market.

Major Hospital. The Company offers major hospital insurance plans on an
individual basis and on a group trust (multiple employer trust) and
association basis and has issued master policies for such plans to several
trusts and associations. These plans are designed to cover in-hospital
expenses for self-employed individuals, small business owners, employees and
their families. Hospital, surgical and other medical expenses are covered on
an expense incurred basis with certain benefit limits after a prescribed
deductible. The Company provides products with alternatives such as increased
deductibles and different benefit structures designed to enable policyholders
to maintain insurance protection without increased premium rates. In 1994, the
Company introduced "ChoicePlus," a product which combines HMO-type wellness
features within a specific provider network along with in-network and out-of-
network indemnity benefits.

In December 1991, the NAIC adopted the Small Employers Availability Act (the
"SEA Act"). The SEA Act affects the rating and underwriting methodology that
can be applied to insurance coverage sold to small employers, generally
categorized as those employing 25 people or less. In response to the SEA Act,
the Company has modified and continues to modify its new products for sale in
those states that have adopted or are adopting the SEA Act or other health
care reforms.

Other. The Group Medical Division also derives revenue through sales of
products of unaffiliated insurance companies and other associations with whom
the Company has a marketing relationship. These products include medical
insurance for medium-sized groups (50 or more), employer self-funded plans,
flexible premium universal life insurance, disability income protection and
annuities. The Group Medical Division also markets HMO products in areas where
these products have a significant competitive advantage over traditional
indemnity insurance products. The HMO products are sold in selected states
through marketing relationships with regional HMOs. In addition to commission
revenue, sales of these HMOs provide the sales force with opportunities to
cross-sell the Company's other products. This division also markets membership
benefit packages to various national associations. These packages include
discounts on dental services, hotels/motels, airfares, prescription drugs,
vision and hearing aid equipment and other services.

Marketing. The Group Medical Division markets its products and services
primarily to self-employed individuals and small business owners. In 1995,
approximately 82% of this division's products was sold through a sales force
of approximately 1,700 career agents, and the remaining 18% was sold through a
brokerage system of 6,000 independent agents. These agents receive leads
through the Company's telemarketing subsidiary and compensation in the form of
commissions.

The Company's acquisition of Continental Marketing Corporation in connection
with the 1993 acquisition of CLAC added an efficient broker-to-broker
telemarketing distribution system to the Group Medical Division. This system
utilizes experienced sales representatives who contact brokers by phone to
promote the Company's products and provide the brokers with sales and
marketing assistance. The brokers are compensated for their sales through
commissions; the telemarketing representatives receive salaries from the
Company and bonuses based on meeting certain sales objectives.

Life Insurance Division

The Life Insurance Division's products include traditional life (term and
whole life), universal life and interest sensitive insurance and annuities.
Substantially all of the Company's life insurance policies are individually
underwritten and issued. This division's products and services are targeted
primarily to the middle

31
<PAGE>

income market. In addition, this division underwrites, issues and administers
the life insurance and annuity products marketed by the Senior Health and Life
Division. This division grew significantly when the Company acquired CNL in
January 1995.

The following table sets forth the breakdown of collected premium (computed
on a statutory-basis) among traditional life policies, interest sensitive and
universal life policies and annuities for the years shown:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1993 1994 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Traditional............................................. $26,353 $32,238 $44,276
Interest Sensitive and
Universal Life Policies................................ 16,300 17,590 21,215
Annuities............................................... 10,004 22,807 19,639
------- ------- -------
Total............................................... $52,657 $72,635 $85,130
======= ======= =======
</TABLE>

For the fiscal year 1993, premiums collected from the Company's life
insurance products were approximately 24% first year and 76% renewal, the
fiscal year 1994 premiums were approximately 28% first year and 72% renewal,
and the fiscal year 1995 premiums collected were approximately 32% first year
and 68% renewal.

The Company's gross life insurance in force was as follows at the dates
shown:

<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------
1993 1994 1995
------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C>
Traditional............................................. $10,320 $10,803 $14,863
Interest Sensitive and
Universal Life Policies................................ 1,503 1,779 2,880
------- ------- -------
Total............................................... $11,823 $12,582 $17,743
======= ======= =======
</TABLE>

Traditional Life. The largest portion of the Life Insurance Division's
business is in term life insurance. The Company specializes in face amounts of
$100,000 to $500,000, sold to middle income families. Marketed under the name
"Super Saver Term," this series features low cost 5-, 10- and 15-year term
life insurance products.

For a number of years, the Company has offered individually underwritten
insurance on lives of persons who, to varying degrees, do not meet the
requirements of standard insurability. Higher premiums are charged for these
"impaired" or "substandard" lives, and, where the amount of insurance is large
or the risk is significant, a portion of the risk is reinsured. Approximately
10% of the Company's in-force life insurance could be categorized as "impaired
risk."

Interest Sensitive Life and Universal Life. The Company's interest sensitive
and universal life insurance products provide life insurance with rates of
return which are adjusted in relation to prevailing interest rates. The
policies permit the Company to change the rate of interest credited to the
policy from time to time, subject to certain minimum guaranteed rates.
Universal life insurance products credit current interest rates to cash value
accumulations, permit adjustments in benefits and premiums at the
policyholder's option, and deduct mortality and expense charges monthly. Under
other interest sensitive policies, premiums are flexible, allowing the
policyholders to vary the frequency and amount of premium payments, but
typically death benefit changes are not made by the policyholders. Some
universal life products offer lower premiums for non-smokers in good health.
For both universal life and other interest sensitive policies, surrender
charges, if any, are deducted from the policyholder's account value at the
time of surrender. No surrender charges are deducted if death benefits are
paid or if the policy remains in-force for a specified period.

32
<PAGE>

The Company's "Interest Sensitive Series" includes whole life policies
ideally suited for the impaired risk market. This product series provides
permanent protection with a fixed, guaranteed level premium and an interest
rate persistency bonus. The "Financial Lifestyle II" is a highly flexible
back-load universal life policy providing low-cost protection with tax-
deferred cash accumulation.

Annuities. The Company offers single and flexible premium deferred
annuities. An annuity contract generally involves the accumulation of premiums
at a compound interest rate until the maturity date, at which time the
policyholder can choose one of the various payment options. Options include
periodic payments during the annuitant's lifetime or the lifetime of the
annuitant and spouse, with or without a guaranteed minimum period; periodic
payments for a fixed period regardless of the survival of the annuitant; or
lump sum cash payment of the accumulated value. The Company's annuities
typically provide for the crediting of interest at rates set from time to time
by the Company, subject to certain minimum guaranteed rates.

Marketing. The Life Insurance Division markets its products primarily to
individuals in middle income levels through a nationwide network of
approximately 100 BGAs and MGAs who in turn contract with approximately 15,000
brokers and general agents. In addition, at the end of 1995, the Company
signed a marketing agreement with a national marketing company with
approximately 25,000 agents to distribute a new term insurance product with an
income benefit rider. The Company's BGAs, MGAs and agents receive compensation
through sales commissions.

Medical Utilization Management Division

The Medical Utilization Management Division provides a number of health care
coordination services to assist in the management of medical costs for
insurance companies, government agencies, self-insured businesses, unions,
third-party administrators, HMOs and PPOs, as well as the Company's Group
Medical Division. The services provided by this division include
precertification of inpatient and outpatient medical care, case management,
high-risk maternity review, long-term care case management and the development
and management of HMOs and PPOs. These services are designed to provide
negotiated medical provider rates along with close review of utilization in
order to impact positively total medical costs without adversely affecting the
quality of care.

The July 1995 purchase of ACMG, an Ohio-based healthcare management company,
increased revenues by $5.2 million in 1995 and provided the Company with the
capacity and expertise to develop and manage PPOs, HMOs and EPOs. During 1996,
the Company currently expects to have a limited number of HMOs and EPOs
operational in selected states where the Company has significant
concentrations of policyholders and the market for managed care is
undeveloped, although no assurance to that effect can be given. These HMOs and
EPOs will be marketed by the Company's Group Medical Division as part of the
Company's strategy to migrate its fee-for-service indemnity insurance
customers to managed care products. In addition, the Company will use a
similar strategy to develop PPOs and HMOs (Medicare risk contracts) for the
Senior Health and Life Division.

This division also provided significant claims expense savings for the Group
Medical Division in 1995 through programs such as utilization review and case
management. These savings were primarily passed on to customers in the form of
more competitive premium rates.

Revenues for this division increased 64% to $17.1 million in 1995, compared
to $10.4 million in 1994, due primarily to the July 1995 acquisition of ACMG
as well as to increased sales.

Marketing. This division markets its services to insurance companies,
government agencies, self-insured businesses, unions, third-party
administrators, HMOs and PPOs. Utilization management professionals conduct
direct selling activities and respond to requests for proposals from insurance
companies, large employers and consulting companies.

33
<PAGE>

PREMIUM DISTRIBUTION

The Company's insurance subsidiaries collectively are licensed to sell
insurance in 49 states and the District of Columbia. The importance to the
Company of particular states may vary over time as the composition of its
agency network changes. The geographic distribution of collected premiums
(before reinsurance) of the Company's subsidiaries in 1995 was as follows:

<TABLE>
<CAPTION>
TOTAL PERCENT
-------- -------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Texas.................................................... $ 71,127 9.4%
Florida.................................................. 67,149 8.9
California............................................... 51,935 6.9
Illinois................................................. 51,615 6.8
North Carolina........................................... 33,617 4.5
New Jersey............................................... 24,802 3.3
Ohio..................................................... 24,072 3.2
Georgia.................................................. 23,911 3.2
Pennsylvania............................................. 23,782 3.1
Mississippi.............................................. 23,670 3.1
Other (1)................................................ 359,427 47.6
-------- -----
Total................................................ $755,107 100.0%
======== =====
</TABLE>
- --------
(1) Includes 39 other states, the District of Columbia, and certain U.S.
territories and foreign countries, each of which accounts for less than 3%
of collected premiums.

UNDERWRITING

A major portion of the Company's insurance coverages are individually
underwritten to assure that policies are issued by the Company's insurance
subsidiaries based upon the underwriting standards and practices established
by the Company. Applications for insurance are reviewed to determine if any
additional information is required to make an underwriting decision, which
depends on the amount of insurance applied for and the applicant's age and
medical history. Such additional information may include medical examinations,
statements from doctors who have treated the applicant in the past and, where
indicated, special medical tests. If deemed necessary, the Company uses
investigative services to supplement and substantiate information. For certain
coverages, the Company may verify information with the applicant by telephone.
After reviewing the information collected, the Company either issues the
policy as applied for, issues the policy with an extra premium charge due to
unfavorable factors, issues the policy excluding benefits for certain
conditions for a period of time or rejects the application. For certain of its
coverages, the Company has adopted simplified policy issue procedures in which
the applicant submits a simple application for coverage typically containing
only a few health related questions instead of a complete medical history.

In common with other life and health insurance companies, the Company may be
exposed to the risk of claims based on AIDS. The Company's AIDS claims to date
have been insignificant. Because of its emphasis on policies written for the
senior citizen market and its underwriting procedures and selection processes,
the Company believes its risk of AIDS claims is less than the risk to the
industry in general.

REINSURANCE

The Company's insurance subsidiaries reinsure portions of the coverages
provided by their insurance products with other insurance companies on both an
excess of loss and co-insurance basis. Co-insurance generally transfers a
fixed percentage of the Company's risk on specified coverages to the
reinsurer. Excess of loss insurance generally transfers the Company's risk on
coverages above a specified retained amount. Under its excess of loss
reinsurance agreements, the maximum risk retained by the Company on one
individual in the case of life insurance and accident and health insurance is
$250,000.

34
<PAGE>

Reinsurance agreements are intended to limit an insurer's maximum loss on
the specified coverages. The ceding of reinsurance does not discharge the
primary liability of the original insurer to the insured, but it is the
practice of insurers (subject to certain limitations of state insurance
statutes) to account for risks which have been reinsured with other approved
companies, to the extent of the reinsurance, as though they are not risks for
which the original insurer is liable. See Note 7 of Notes to Consolidated
Financial Statements.

The Company has occasionally used assumption reinsurance to acquire blocks
of business from other insurers. In addition, the Company has from time to
time entered into agreements to assume certain insurance business from
companies for which it is marketing insurance products. The Company intends to
continue these programs if they assist in expanding product lines and
marketing territories and contribute to profitability.

ACQUISITIONS

The Company believes that current trends in the life and health insurance
industry will provide opportunities for continued acquisitions and
consolidations. Larger companies are reducing administrative costs by
divesting divisions and blocks of life and health insurance business which do
not fit their overall strategies and are focusing on two or three core product
lines to improve efficiency and gain competitive advantage. Additionally,
smaller, less efficient companies with less capital at their disposal are
experiencing increasing difficulty in remaining competitive; regulatory
requirements add significant costs which may not be able to be absorbed by
smaller companies; capital requirements have increased due to the imposition
of risk-based capital ratios by regulatory agencies; state healthcare reform
programs are squeezing health insurance profit margins; the costs of necessary
information processing systems have increased; and smaller companies cannot
access capital markets to finance additional growth.

The following table summarizes the recent significant acquisitions made by
the Company:

<TABLE>
<CAPTION>
DATE OF
ACQUISITIONS ACQUISITION TYPE OF BUSINESS
------------ ------------ ----------------
<C> <C> <S>
Continental Life & Accident Company.................... August 1993 Small group medical
insurance; became part
of the Group Medical
Division.
Healthcare Review Corporation.......................... August 1993 Health care management
company; became part of
the Medical Utilization
Management Division.
Connecticut National Life Insurance Company............ January 1995 Interest sensitive and
universal life
insurance; became part
of the Life Insurance
Division.
Western Fidelity Insurance Company (block of business). July 1995 Major medical products;
became part of the Group
Medical Division.
ACMG, Inc. ............................................ July 1995 Health care management
company; became part of
the Medical Utilization
Management Division.
Universal Fidelity Life Insurance Company.............. pending Medicare supplement
carrier; to become part
of the Senior Health and
Life Division.
</TABLE>

In August 1993, the Company acquired, and added to the Group Medical
Division, CLAC, a small group medical insurer. In 1994 and 1995, the
administration of this subsidiary was consolidated with the Company's other
health insurance operations. In addition to CLAC, this acquisition included
the purchase of Continental Marketing Corporation which added an efficient
broker-to-broker telemarketing distribution system to the Group Medical
Division.

35
<PAGE>

In August 1993, the Company also acquired, and added to the Medical
Utilization Management Division, HRC, a health care management company
headquartered in Louisville, Kentucky. HRC's largest client is the Kentucky
Medicaid program. In addition to adding to the revenue and client base of the
Medical Utilization Management Division, HRC's Louisville facility has become
the division's headquarters.

In January 1995, the Company acquired, and added to the Life Insurance
Division, CNL, a $350 million asset company, which had issued primarily
interest sensitive and universal life insurance products. This acquisition
increased the distribution system of the Life Insurance Division.

In July 1995, the Company acquired, and consolidated into the Group Medical
Division's administrative facility in Dallas, Western Fidelity Insurance
Company's $42 million block of major medical policies. The Company was able to
integrate substantially all of this business into its operations within one
month.

In July 1995, the Company also acquired, and added to the Medical
Utilization Management Division, ACMG, an Ohio-based health care management
company. This acquisition is expected to increase the annual revenue of the
Medical Utilization Management Division and to enhance the Company's capacity
to establish HMOs and EPOs. See "--Products and Services."

In March 1996, the Company expects to acquire Universal Fidelity, a company
which markets and underwrites primarily Medicare supplement products to senior
citizens in Oklahoma and Texas. Universal Fidelity generated approximately $33
million in premium revenue in 1995 (on a statutory basis). The approximately
30,000 Universal Fidelity Medicare supplement policyholders also provide
potential for increased profitability through cross-selling of long-term care,
home health care and other products.

INVESTMENTS

The Company's investment policy is to balance its portfolio between long-
term and short-term investments so as to achieve investment returns consistent
with preservation of capital and maintenance of liquidity adequate to meet
payment of policy benefits and claims. Current policy is to invest primarily
in fixed income securities of the U.S. government and its agencies and
authorities, and in fixed income corporate securities with investment grade
ratings of Baa3 and/or BBB- or better. At December 31, 1995, less than 1.3% of
the Company's total investment portfolio and less than 1.2% of its statutory
admitted assets were below investment grade or unrated. The Company has a
policy to invest no more than 4% of its statutory admitted assets in fixed
income securities below investment grade or unrated. At December 31, 1995, the
Company had invested assets of $1,042.6 million, compared to $723.8 million at
December 31, 1994. The Company manages all of its investments internally with
resource and evaluation assistance provided by independent investment
consultants.

36
<PAGE>

The following table provides information on the Company's investments as of
December 31, 1995.

<TABLE>
<CAPTION>
AT DECEMBER 31, 1995
-------------------------------------
CARRYING VALUE (1) FAIR VALUE (1)
------------------ ------------------
AMOUNT PERCENT AMOUNT PERCENT
---------- ------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
TYPE OF INVESTMENT:
Fixed maturities to be held to
maturity:
U.S. Treasury........................ $ 26,897 3% $ 27,172 3%
States and political subdivisions.... 4,669 * 4,896 *
Corporate securities................. 51,608 5 53,386 5
Mortgage-backed securities........... 162,867 16 167,274 16
---------- --- ---------- ---
Total fixed maturities to be held
to maturity....................... 246,041 24 252,728 24
Fixed maturities available for sale:
U.S. Treasury........................ 34,084 3 34,084 3
States and political subdivisions.... 26,976 3 26,976 3
Foreign governments.................. 3,018 * 3,018 *
Corporate securities................. 313,501 30 313,501 30
Mortgage-backed securities........... 245,087 23 245,087 23
---------- --- ---------- ---
Total fixed maturities available
for sale.......................... 622,666 59 622,666 59
---------- --- ---------- ---
Total fixed maturities............. 868,707 83 875,394 83
Equity securities...................... 15,570 1 15,570 1
Real estate............................ 18,250 2 18,250 2
Mortgage loans......................... 9,253 1 9,253 1
Policy loans........................... 79,122 8 78,230 8
Short-term investments................. 51,690 5 51,690 5
---------- --- ---------- ---
Total Investments.................. $1,042,592 100% $1,048,387 100%
========== === ========== ===
</TABLE>
- --------
* less than one percent
(1) Carrying value for fixed maturity investments designated as available for
sale equals fair value.

37
<PAGE>

The following table provides information on the credit quality and average
lives of the Company's fixed maturity portfolio as of December 31, 1995.

FIXED MATURITY PORTFOLIO
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
AT DECEMBER 31,
1995
----------------
CARRYING
VALUE PERCENT
-------- -------
<S> <C> <C>
Credit Quality--S&P (or equivalent) rating:
AAA...................................................... $411,128 48%
AA+, AA, AA-............................................. 67,408 8
A+, A, A-................................................ 262,837 30
BBB+, BBB, BBB-.......................................... 113,815 13
Below investment grade................................... 12,719 1
In default............................................... 800 *
-------- ---
Total................................................ $868,707 100%
======== ===
Average Lives
One year or less......................................... $ 58,048 7%
Over one year through five years......................... 301,657 35
Over five years through ten years........................ 437,209 50
Over ten years........................................... 71,793 8
-------- ---
Total................................................ $868,707 100%
======== ===
</TABLE>
- --------
* Less than one percent.

Fixed Maturity Investments. With the adoption of risk-based capital rules
and consumer concerns over insurance company solvency and financial stability,
the asset quality of insurance companies' investment portfolios has become of
greater concern to policyholders and has come under closer scrutiny by
insurance regulators and investors. The investment objectives of the Company
are to maximize investment yield without sacrificing high investment quality
and matched liquidity.

Investments in below-investment grade fixed maturity securities generally
have greater risks (and potentially greater returns) than other corporate
fixed maturity investments. Risk of loss upon default by the issuer is
significantly greater for these securities because they are often unsecured
and are often subordinated to other creditors of the issuer, and because these
issuers usually have high levels of indebtedness and are more sensitive to
adverse economic conditions, such as recession or increasing interest rates,
than are investment grade issuers. Also, the market for below-investment grade
securities is less liquid and not as actively traded as the market for
investment grade securities.

The Company continually evaluates the creditworthiness of each issuer of
securities held in its portfolio. When the fair value of an individual
security declines materially, or when the Company's ongoing evaluation
indicates that it may be likely that the Company will be unable to realize the
carrying value of its investment, a determination is made as to the extent to
which such declines are attributable to changing market expectations regarding
general interest rates and inflation and other factors, such as a perceived
increase in the credit risk of the issuer, a general decrease in a particular
industry sector or an overall economic decline. If the decline in value is
other than temporary, and the carrying amount of the investment is reduced to
its fair value based principally on available market prices, the amount of the
reduction is reported as a realized loss on investments and the net fair value
becomes the new cost basis of the investment. In addition, the Company
reverses any accrued interest income previously recorded for the investment
and records future interest income only when cash is received.

38
<PAGE>

Yields recognized in future periods on such investments may be less than
yields recognized on other investments and will be less than the yield
expected when the fixed maturity security was originally purchased. The effect
on net income from declines in interest income and portfolio yield from
impaired securities in future periods will depend on many factors, including,
for life insurance business, the level of interest rates credited to
policyholder account balances. In as much as interest rates credited to the
Company's policyholders are typically only guaranteed for one year, the
Company does not expect any material adverse effect on net income in future
periods from declines in yields from impaired securities.

Mortgage-Related Securities. At December 31, 1995, the Company had $408.0
million (or 47% of its fixed maturities portfolio) in mortgage-related
securities compared to $288.7 million at December 31, 1994 (or 48% of its
fixed maturities portfolio). The mortgage-related securities are invested
primarily in U.S. government agency and non-agency pass-through certificates
and various components of U.S. government agency and non-agency collateralized
mortgage obligations ("CMOs"). CMOs are bonds that are collateralized by U.S.
government agency or non-agency whole loan mortgages and mortgage pass-through
securities. The yield characteristics of mortgage-related securities differ
from those of traditional fixed income securities. The major differences
typically include more frequent interest and principal payments, usually
monthly, and the possibility that prepayments of principal may be made at any
time. Prepayment rates are influenced by changes in current interest rates and
a variety of economic, geographic, social and other factors and cannot be
predicted with certainty. The yields to maturity of the mortgage-related
securities will be affected by the actual rate of payment (including
prepayments) of principal of the underlying mortgage loans. In general,
prepayments on the underlying mortgage loans, and subsequently the mortgage-
related securities backed by these loans, increases when the level of
prevailing interest rates declines significantly below the interest rates on
such loans. When declines in interest rates occur, the proceeds from the
prepayment of such securities may be reinvested at lower rates than the
Company was earning on such securities.

The Company's mortgage-related securities portfolio is diversified as to
collateral, maturity, duration and other characteristics. The majority of the
mortgage-related securities portfolio has the guarantee or backing of agencies
of the United States government. Generally, the mortgage-related securities
consist of pools of single-family, residential mortgages. At December 31,
1995, the Company's mortgage-related securities portfolio included $136.9
million of CMOs and pass-through certificates issued by non-government
agencies (33.6% of total mortgage-backed securities) compared to $83.9 million
at December 31, 1994 (29.1% of total mortgage-backed securities). The majority
of these holdings are senior securities in the CMO structures which are
collateralized by first mortgage liens on single family residences and which
have investment grade ratings of Baa3 and/or BBB- or higher. The
creditworthiness of these securities is based solely on the underlying
mortgage loan collateral and credit enhancements in the form of
senior/subordinated structures, letters of credit, mortgage insurance or
surety bonds. The underlying mortgage loan collateral principally consists of
whole loan mortgages that exceed the maximum imposed by both the Federal
National Mortgage Association and the Federal Home Loan Mortgage Corporation.
Therefore, the collateral tends to be concentrated in states with the greatest
number of higher priced single family residences, including California, New
York, New Jersey, Maryland, Virginia and Illinois.

At December 31, 1995, the Company held $10.3 million carrying value ($10.3
million fair value) of inverse floater and interest-only tranches of CMOs.
These derivative securities were acquired to protect the Company in the event
of adverse interest rate fluctuations. The yields and fair values of these
securities are generally more sensitive to changes in interest rates and
prepayments than other mortgage-related securities.

39
<PAGE>

The following table summarizes the components of the Company's mortgage-
related securities portfolio at December 31, 1994, and December 31, 1995:

<TABLE>
<CAPTION>
AT DECEMBER 31, AT DECEMBER 31,
1994 1995
----------------- -----------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Inverse floaters and interest-only CMO
tranches.................................. $ 14,961 $ 8,940 $ 10,258 $ 10,258
Other CMOs:
U.S. government agency................... 148,366 137,138 207,637 211,507
Non-agency............................... 29,299 27,404 73,784 73,793
-------- -------- -------- --------
Total other CMOs....................... 177,665 164,542 281,421 285,300
U.S. government agency pass-through........ 41,444 39,414 53,136 53,664
Non-agency pass-through.................... 54,601 50,555 63,139 63,139
-------- -------- -------- --------
Total mortgage-backed securities....... $288,671 $263,451 $407,954 $412,361
======== ======== ======== ========
</TABLE>

POLICY LIABILITIES

The Company records reserves for future policy benefits to meet future
obligations under outstanding policies. These reserves are amounts which are
calculated to be sufficient to meet policy and contract obligations as they
mature. The amount of reserves for insurance policies is calculated using
assumptions for interest, mortality and morbidity, expenses and withdrawals.
Reserves are established at the time the policy is issued and adjusted
periodically based on reported and unreported claims or other information. See
Note 2 of Notes to Consolidated Financial Statements. See "Risk Factors--
Adequacy of Loss Reserves."

COMPETITION

The insurance business is highly competitive and includes a large number of
insurance companies, many of which have substantially greater financial
resources and larger and more experienced staffs than the Company. The Company
competes with other insurers to attract and retain the allegiance of its
independent agents and marketing organizations who at this time are
responsible for a significant portion of the Company's premiums. Methods of
competition include the Company's ability to offer competitive products and to
service these programs efficiently. Other competitive factors applicable to
the Company's business include policy benefits, service to policyholders and
premium rates.

HEALTH CARE REFORM

Many proposals have been introduced in Congress and various state
legislatures to reform the present health care system. Most of these proposals
are specifically directed at the small group health care market, a significant
portion of the Company's health business. At present, most health care reform,
other than that related to the Medicare program, is taking place at the state
level. A number of states have passed or are considering legislation that
would limit the differentials in rates that insurers could charge between new
business and renewal business with respect to similar demographic groups.
State legislation also has been adopted or is being considered that would make
health insurance available to all small groups by requiring coverage of all
employees and their dependents, by limiting the applicability of pre-existing
conditions exclusions, by requiring insurers to offer a basic plan exempt from
certain mandated benefits as well as a standard plan and by establishing a
mechanism to spread the risk of high risk employees to all small group
insurers.

At the federal level, the current focus of healthcare reform is on the
federal Medicare program and efforts to control expenditures. From time to
time there are significant federal legislative developments with respect to
long-term care and Medicare coverage. The Federal Omnibus Budget
Reconciliation Act of 1990 ("COBRA

40
<PAGE>

'90") required that Medicare supplement policies provide for guaranteed
renewability and waivers of pre-existing condition coverage limitations under
certain circumstances. In addition, the NAIC has recently adopted model long-
term care policy language providing nonforfeiture benefits and has proposed a
rate stabilization standard for long-term care policies. Various bills are
pending in the U.S. Congress which would provide for the implementation of
certain minimum consumer protection standards for inclusion in all long-term
care policies, including guaranteed renewability, protection against inflation
and limitations on waiting periods for pre-existing conditions. These
proposals would also prohibit "high pressure" sales tactics in connection with
long-term care insurance and would guarantee consumers access to information
regarding insurers, including lapse and replacement rates for policies and the
percentage of claims denied. Other pending legislation would permit premiums
paid for long-term care insurance to be treated as tax-deductible medical
expenses, with the amount of the deduction increasing with the age of the
taxpayer. The Company cannot predict with certainty the effect any such
proposals, if adopted, or legislative developments could have on its business
and operations. It is likely that health care reform at the federal and state
levels will require the Company to make significant changes to the way it
conducts its health insurance business. See "Risk Factors--Insurance
Regulation." The Company has already initiated activity to prepare for
expected legislation. For example, the Company has begun to establish HMOs for
Medicare managed care programs which are expected to be included in federal
Medicare reform programs.

GOVERNMENT REGULATION

The Company and its insurance subsidiaries are subject to extensive
governmental regulation and supervision in each of the jurisdictions in which
it or its subsidiaries conduct business. Such regulation vests in governmental
agencies broad regulatory, supervisory and administrative power with respect
to the Company's business, including premium rate levels, premium rate
increases, policy forms, minimum loss ratios, dividend payments, claims
settlement, licensing of insurers and their agents, capital adequacy, transfer
of control, the amount and type of investments the Company may have, reserve
requirements, solvency standards, trade practices and periodic examinations.
Such regulations are primarily intended to protect policyholders and not
investors. The Company's accident and health coverages generally are subject
to rate regulation by state insurance departments which in certain cases
require that certain minimum loss ratios be maintained.

The states in which the Company is licensed have the authority to change the
minimum mandated statutory loss ratios to which the Company is subject, the
manner in which these ratios are computed and the manner in which compliance
with these ratios is measured and enforced. Loss ratios are commonly defined
as incurred claims and increases in policy reserves divided by earned
premiums. Most states in which the Company writes insurance have adopted the
loss ratios recommended by the NAIC. The Company is unable to predict the
impact of (i) any changes in the mandatory statutory loss ratios for
individual or group policies to which the Company may become subject, (ii) any
changes in the minimum loss ratios for individual, group or Medicare
supplement policies, or (iii) any change in the manner in which these minimums
are computed or enforced in the future. The Company has not been informed by
any state that it does not meet mandated minimum ratios, and the Company
believes that it is in compliance with all such minimum ratios. In the event
the Company is not in compliance with minimum statutory loss ratios mandated
by regulatory authorities with respect to certain policies, the Company may be
required to reduce or refund premiums, which could have a material adverse
effect upon the Company.

Certain states also have insurance holding company laws which require
registration and periodic reporting by insurance companies controlled by other
corporations licensed to transact business within their respective
jurisdictions. The Company's insurance subsidiaries are subject to such laws
and are registered as controlled insurers in those jurisdictions in which such
registration is required. Such laws vary from state to state but typically
require periodic disclosure concerning the corporation which controls the
registered insurers and all subsidiaries of such corporation, and prior notice
to, or approval by, the state insurance department of intercorporate transfers
of assets and other transactions (including payments of dividends in excess of
specified amounts by the insurance subsidiary) within the holding company
system.

41
<PAGE>

EMPLOYEES

As of December 31, 1995, the Company employed approximately 1,830 persons on
a full-time basis. The Company considers its employee relations to be good.

LEGAL PROCEEDINGS

The Company and its subsidiaries are named as defendants in various legal
actions, some claiming significant damages, arising primarily from claims
under insurance policies, disputes with agents, and other matters. The
Company's management and its legal counsel are of the opinion that the
disposition of these actions will not have a material adverse effect on the
Company's financial position.

PROPERTIES

The principal executive offices of the Company are located in Schaumburg,
Illinois in a building purchased by the Company in January 1994. The Company,
through a subsidiary, owns three buildings in Rockford, Illinois and, through
another subsidiary, also owns a building in the Dallas, Texas metropolitan
area which currently serves as the main administrative office for the Group
Medical Division. The Company leases the offices of its other regional service
centers. The executive and administrative offices of Manhattan National Life
are located in Cincinnati, Ohio in leased space. The headquarters of the
Company's Medical Utilization Management Division are located in Louisville,
Kentucky in leased space. The Company believes these facilities will
adequately serve its needs for the foreseeable future and could accommodate
expansion of the Company's business.

MANAGEMENT AND DIRECTORS

The executive officers and directors of the Company are as follows:

<TABLE>
<S> <C> <C>
Peter W. Nauert......... 52 Chairman, Chief Executive Officer and Director
Charles R. Scheper...... 43 President--Life Insurance Operations and Director
Thomas J. Brophy........ 60 President--Health Insurance Operations and Director
Ernest T. Giambra, Jr... 48 Executive Vice President and Chief Marketing Officer
William B. Van Vleet.... 71 Director and General Counsel Emeritus
Anthony J. Pino......... 48 Executive Vice President
Philip J. Fiskow........ 39 Senior Vice President and Chief Investment Officer
David I. Vickers........ 34 Vice President, Treasurer and Chief Financial Officer
Mark S. Fischer......... 39 Vice President
Michael A. Cavataio..... 52 Director and Vice Chairman
Richard R. Haldeman..... 53 Director
R. Richard Bastian, III. 49 Director
Karl-Heinz Klaeser...... 64 Director
Michael K. Keefe........ 51 Director
Robert F. Nauert........ 71 Director
Carl A. Hulbert......... 73 Director
</TABLE>

All executive officers are elected annually and serve at the pleasure of the
Board of Directors. Certain of the executive officers have employment
agreements with the Company. The Company's Board of Directors is divided into
three classes, each of which serves for a three-year term.

Peter W. Nauert has been Chief Executive Officer and a director of the
Company since its incorporation in 1982. He was President of the Company from
1982 to 1988 and 1991 to 1995, and became Chairman of the Company in 1988.
Since 1968, Mr. Nauert has been employed in an executive capacity by one or
more of the Company's insurance subsidiaries.

42
<PAGE>

Charles R. Scheper was elected President--Life Insurance Operations of the
Company in March 1995. He was Vice President of the Company from 1991 to March
1995 and was Chief Financial Officer from May 1993 to December 1993. In March
1992, he was elected Executive Vice President. Since February 1992, he has
been President and Vice Chairman of the Board of Manhattan National Life, a
subsidiary of the Company. Prior to the Company's acquisition of Manhattan
National Life, Mr. Scheper was Manhattan National Life's Senior Vice President
and Chief Financial Officer, a position which he held from May 1987 until the
acquisition. Prior to joining Manhattan National Life, Mr. Scheper was with
Union Central Life Insurance Company from 1979, having served as Vice
President and Controller since 1985.

Thomas J. Brophy was elected President--Health Insurance Operations of the
Company in March 1995. He was Senior Vice President since joining the Company
in November 1993. Prior to joining the Company, Mr. Brophy was President and
Chief Operating Officer of Southwestern Life Insurance Company from June 1990
to September 1993. Mr. Brophy also held senior executive positions with
various I.C.H. Corporation (now known as Southwestern Life Corp.) subsidiaries
from March 1974 to his joining the Company in November 1993.

Ernest T. Giambra, Jr. was elected Executive Vice President of the Company
in May 1994. Prior to joining the Company as Chief Marketing Officer in June
1993, Mr. Giambra had been with Bankers Life Holding Corporation since 1969
where he had served as Vice President of Sales since 1988.

William B. Van Vleet has been Executive Vice President of the Company since
1986 and a director of the Company since 1982. He was General Counsel of the
Company from 1982 to 1988. In June 1991, he was again elected General Counsel
and served until his retirement from that position in 1995. He now serves as
the Company's General Counsel Emeritus. Mr. Van Vleet had served Pioneer Life
Insurance Company, a subsidiary of the Company, from 1948 until 1995 as
General Counsel and a director. Mr. Van Vleet also serves as a director of
other subsidiaries of the Company.

Anthony J. Pino was elected Executive Vice President of the Company in May
1993. He was Senior Vice President of the Company from March 1992 to May 1993
and was President of National Group Life Insurance Company, a subsidiary of
the Company, from July 1991 to June 1992. Mr. Pino has served as President of
National Health Services, a subsidiary of the Company, since 1992. Prior to
joining the Company, Mr. Pino was Chief Operating Manager of American Postal
Workers' Union Health Plan, a position which he held from October 1982.

Philip J. Fiskow has been Senior Vice President since May 1993 and the Chief
Investment Officer since joining the Company in 1991. He was Vice President of
the Company from June 1991 until May 1993. He is also an officer of other
subsidiaries of the Company. Mr. Fiskow was with Asset Allocation and
Management Company as an Investment Advisory Portfolio Manager from January
1989 to June 1991. From May 1987 to December 1988 he was an Investment Advisor
with Van Kampen Merritt and a Portfolio Manager with Aon Corporation from May
1981 to May 1987.

David I. Vickers has been with the Company since June 1992 and has been a
Vice President of the Company since December 1992, Treasurer since May 1993
and Chief Financial Officer since January 1994. He is also an officer and
director of several subsidiaries of the Company. Prior to joining the Company,
he was with the public accounting firm of Ernst & Young LLP since 1983 where
he was a Senior Manager in the Insurance Division.

Mark S. Fischer has been a Vice President of the Company since December 1994
and has been a Vice President of one of the Company's subsidiaries since May
1993. Prior to joining the Company, he had been a consultant to the Company
and was with the public accounting firm of Ernst & Young LLP from May 1978 to
October 1992 where he was a Senior Manager in the Insurance Division.

Michael A. Cavataio has been a director of the Company since 1986 and Vice
Chairman since December 1995. Mr. Cavataio is a real estate developer in
Northern Illinois and Southern Wisconsin. His business experience also
includes 25 years as an owner and manager of a regional clothing store chain.
He has also been a member of the board of directors of Today's Bank East since
1987.

43
<PAGE>

Richard R. Haldeman has been a director of the Company since 1986 and was
Secretary from 1988 to June 1990. Mr. Haldeman has been a partner of Haldeman
& Associates, a law firm, since June 1990. He was a partner of Williams &
McCarthy, P.C., a law firm, from 1975 to May 1990.

R. Richard Bastian, III has been a director of the Company since December
1994. Mr. Bastian is a management consultant, specializing in strategic
planning and organizational development. Mr. Bastian's career includes over 28
years in the financial services industry, most recently as President and Chief
Executive Officer of Heritage Bank & Trust of Racine, Wisconsin. Prior to
Heritage, he served as Chairman, President and Chief Executive Officer of Bank
One, Rockford and its predecessor, First Community Bancorp, an $800 million
multi-bank holding company. He has also held management positions at banks in
Tulsa and Philadelphia where his banking career began in 1966.

Karl-Heinz Klaeser has been a director of the Company since 1986. Mr.
Klaeser has also been a director of LSW Holding Corporation and Insurance
Investors Life Insurance Company and the Chairman of the Board of Life
Insurance Company of the Southwest since 1989 and a director of Personal
Assurance Company PLC (United Kingdom) since 1991.

Michael K. Keefe has been a director of the Company since March 1994. Mr.
Keefe has been Chief Executive Officer and Chairman of the Board of Keefe Real
Estate, Inc., a family owned real estate brokerage operation since 1982. Mr.
Keefe has also been Chairman of the Board of Southern Wisconsin Bankshares,
Inc. since 1988.

Robert F. Nauert has been a director of the Company since November 1991. Mr.
Nauert is also a director and officer of various subsidiaries of the Company.
Mr. Nauert is the brother of Peter W. Nauert.

Carl A. Hulbert was elected director of the Company in March 1995. Mr.
Hulbert is a management consultant, specializing in the insurance industry.
Mr. Hulbert is a past Insurance Commissioner of the state of Utah. He has also
been a director for numerous insurance companies during his 49 year business
career.

44
<PAGE>

PRINCIPAL HOLDERS OF SECURITIES

The following table sets forth, as of March 5, 1995, information with
respect to the beneficial ownership of Common Stock and $2.125 Preferred Stock
of the Company by (i) each person who is known to the Company to be the
beneficial owner of more than 5% of the outstanding shares of Common Stock,
(ii) each of the Company's directors and certain of its executive officers and
(iii) all of the Company's directors and executive officers as a group. Unless
otherwise indicated, the address of each stockholder listed is at the
Company's principal place of business.

<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF BENEFICIAL
OWNERSHIP(1) PERCENT OF CLASS
---------------------------------- ----------------
COMMON PREFERRED COMMON PREFERRED
NAME OF BENEFICIAL OWNER STOCK STOCK STOCK STOCK
- ------------------------ --------- --------- ------ ---------
<S> <C> <C> <C> <C>
Peter W. Nauert............ 1,702,635(2) -- 16.4% --
U.S. Bancorp............... 582,510(3) -- 5.8 --
Charles R. Scheper......... 81,035(4)(5) -- * --
Thomas J. Brophy........... 35,381(4)(5)(7) 400 * *
Ernest T. Giambra, Jr...... 19,069(4)(5) -- * --
William B. Van Vleet....... 54,269(4) -- * --
Anthony J. Pino............ 25,907(4)(5) -- * --
Michael A. Cavataio........ 216,759(4)(6) 7,482 2.1 *
Richard R. Haldeman........ 17,300(4) -- * --
R. Richard Bastian, III.... 31,846(4) -- * --
Karl-Heinz Klaeser......... 61,271(4) -- * --
Michael K. Keefe........... 37,200(4) -- * --
Robert F. Nauert........... 18,212(4)(5) -- * --
Carl A. Hulbert............ 25,000(4) -- * --
All directors and executive
officers as a group
(16 persons).............. 2,341,006(2)(4)(5)(6)(7) 7,882 21.6 *
</TABLE>
- --------
* Less than 1.0%
(1) Unless otherwise indicated, each person has sole voting and investment
power with respect to all such shares. Shares of Common Stock underlying
options exercisable within 60 days are deemed to be outstanding for the
purposes of calculating the percentage owned by the holder.

(2) Includes (i) 86,000 shares held by Mr. Nauert's children or by Mr. Nauert
as custodian or as trustee for his children and 2,000 shares held of
record by Mr. Nauert's wife, (ii) 215,000 shares which may be acquired
pursuant to presently outstanding stock options, (iii) shares held in
Employee Savings and Stock Ownership Plan accounts and (iv) shares which
are issuable upon conversion of 8% Debentures.
(3) The address for this stockholder is 111 S.W. Fifth Avenue, Suite 3500,
Portland, Oregon 97204. U.S. Bancorp has sole voting power with respect to
579,210 shares, sole power to dispose of 549,816 shares and shared power
to dispose of 32,694 shares. This information is based upon a Schedule 13G
dated February 13, 1996.

(4) Includes shares of Common Stock which such directors and executive
officers have the right to acquire within 60 days upon the exercise of
stock options as follows: Mr. Scheper, 70,000 shares; Mr. Brophy,

45
<PAGE>

25,000 shares; Mr. Giambra 10,000 shares; Mr. Van Vleet, 50,000 shares; Mr.
Pino, 15,000 shares; Mr. Cavataio, 116,354 shares; Mr. Haldeman, 14,500
shares; Mr. Bastian, 27,923 shares; Mr. Keefe 33,000 shares; Mr. Klaeser,
55,500 shares; Mr. Robert Nauert, 15,000 shares; Mr. Hulbert, 25,000
shares.

(5) Includes shares of Common Stock held in Employee Savings and Stock
Ownership Plan accounts.

(6) Includes 11,971 shares of Common Stock issuable upon conversion of 7,482
shares of $2.125 Preferred Stock held by Mr. Cavataio and members of Mr.
Cavataio's immediate family.

(7) Includes 640 shares of Common Stock issuable upon conversion of 400 shares
of $2.125 Preferred Stock held by Mr. Brophy.

CERTAIN TRANSACTIONS

In July 1994, the Company loaned $75,000 to Mr. Pino to finance moving
expenses. The principal amount of the loan accrues interest at a rate of 7%
per annum and interest and principal are due in July 1998.

In 1995, a marketing subsidiary of the Company paid rent of approximately
$78,054 to a partnership in which Mr. Peter Nauert held a 50% interest. The
lease for this property expired during 1995 and was not renewed. The Company
believes that the rates charged to the Company's subsidiary were the same as
those charged to unaffiliated third parties.

In 1995, Mr. Cavataio was engaged by the Company as an investment advisor to
help manage the Company's investment portfolio. Pursuant to this arrangement,
Mr. Cavataio received compensation of $100,000 in 1995.

In 1995, Mr. Van Vleet was engaged by the Company as a consultant. Mr. Van
Vleet is to receive compensation of $75,000 per year. The engagement commenced
on July 31, 1995 and will continue through June 30, 1997.

Effective September 1, 1995, Mr. Peter Nauert entered into an employment
agreement (the "Nauert Employment Agreement") with the Company. The Nauert
Employment Agreement superseded Mr. Nauert's then existing employment
agreements except that a loan which was extended to Mr. Nauert under the
previous agreements was continued under the Nauert Employment Agreement. This
loan is in the amount of $1.3 million, matures on December 31, 1996 and
accrues interest at an annual rate of 3.71%. Up to 50% of the principal amount
of this loan may be forgiven if certain corporate performance goals are
achieved. If the Company has aggregate fully diluted net income per common
share of $4.50 during the period from January 1, 1994 to December 31, 1996,
then $325,000 in principal amount of the loan shall be forgiven. If, during
this same period, the Company has aggregate fully diluted net income per
common share in excess of $4.50, then, in addition to the $325,000 to be
forgiven, an amount of the loan equal to the amount by which net income per
common share exceeds $4.50, divided by $3.00 and multiplied by $975,000 shall
be forgiven, provided that in no event shall more than $650,000 of the loan be
forgiven.

Any future transactions between the Company and its officers, directors,
principal stockholders or the affiliates of any of them will be on negotiated
terms no less favorable to the Company than could be obtained from
unaffiliated parties.

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<PAGE>

DESCRIPTION OF THE NOTES

The Notes will be issued under an Indenture to be dated as of ,
1996 (the "Indenture"), between the Company and The First National Bank of
Chicago, as Trustee (the "Trustee"), a copy of the form of which is filed as
an exhibit to the Registration Statement of which this Prospectus is a part.
The terms of the Notes include those set forth in the Indenture and those made
part of the Indenture by reference to the Trust Indenture Act of 1939, as
amended (the "Trust Indenture Act"). The Notes are subject to all such terms,
and holders of Notes are referred to the Indenture and the Trust Indenture Act
for a statement thereof. The following summary of certain provisions of the
Indenture does not purport to be complete and is qualified in its entirety by
reference to the Indenture, including the definitions therein of certain
capitalized terms used below and not otherwise defined herein. As used in this
Section, the "Company" refers to Pioneer Financial Services, Inc., exclusive
of its subsidiaries.

GENERAL

The Notes will be unsecured, subordinated obligations of the Company, will
be limited to $65.0 million aggregate principal amount ($74.75 million if the
Underwriters' over-allotment option is exercised in full) and will mature on
, 2003. See "--Subordination." The Notes will bear interest at the
rate of % per annum from the date of issuance, or from the most recent
interest payment date to which interest has been paid or provided for, payable
semi-annually on and of each year to the person in
whose name the Note (or any predecessor Note) is registered at the close of
business on the preceding and , as the case may be
(each a "Record Date"). Interest will be computed on the basis of a 360-day
year of twelve 30-day months. Principal of, premium, if any, and interest on
the Notes will be payable, the Notes will be convertible and the transfer of
Notes will be registrable, at the office or agency maintained for such purpose
in the Borough of Manhattan, City of New York. In addition, payment of
interest may, at the option of the Company, be made by check mailed to the
address of the person entitled thereto as it appears in the register of
Noteholders. Until otherwise designated by the Company, the Company's office
or agency in New York will be the office of the Trustee maintained for such
purpose.

The Notes will be issued only in fully registered form, without coupons, in
denominations of $1,000 and any integral multiple thereof.

CONVERSION RIGHTS

The Notes will be convertible (in denominations of $1,000 and any integral
multiple thereof) into Common Stock of the Company, at the option of the
holder, at any time on or prior to the redemption or repurchase date or
, 2003, at the conversion price then in effect. The conversion
price is set forth on the cover page of this Prospectus, subject to
adjustments, as described below. The right to convert Notes called for
redemption will terminate at the close of business on the date prior to the
date fixed for such redemption, unless the Company shall default on payment of
the redemption price. For information as to notices of redemptions, see "--
Optional Redemption."

The registered holders of Notes at the close of business on a Record Date
will be entitled to receive the interest payable on the Notes on the
corresponding interest payment date notwithstanding the conversion of the
Notes after the Record Date or, subject to certain provisions applicable to
defaulted interest, the Company's default in payment of the interest due on
the interest payment date. Notwithstanding the foregoing, Notes surrendered
for conversion during the period from the close of business on any Record Date
to the opening of business on the corresponding interest payment date (except
Notes or portions thereof called for redemption on a redemption date during
such period) must be accompanied by payment of an amount equal to the interest
payable on that interest payment date. The interest payment with respect to a
Note called for redemption on a redemption date during the period from the
close of business on or after any Record Date to the opening of business on
any corresponding interest payment date will be payable on that corresponding
interest payment date to the registered holder at the close of business on
that Record Date (notwithstanding the conversion of such Note before such
corresponding interest payment date) and the Noteholder who elects to convert
need not include funds equal to

47
<PAGE>

the interest paid. Noteholders on a Record Date who convert Notes on or after
the corresponding interest payment date will receive the interest payable by
the Company on that date and need not include payment in the amount of such
interest payable by the Company on that date and need not include payment in
the amount of such interest upon surrender of those Notes for conversion.
Except as described above, no payment or adjustment is to be made on
conversion for interest accrued on the Notes or for dividends on the Common
Stock issued on conversion.

The Company will not issue fractional shares of Common Stock upon conversion
of Notes and, in lieu thereof, will pay a cash adjustment based upon the
current market price of the Common Stock (determined as set forth in the
Indenture) on the close of business on the day prior to the date of
conversion.

The conversion price is subject to adjustment upon the occurrence of certain
events, including (i) the issuance of Common Stock as a dividend or as a
distribution on any class of the capital stock of the Company, or a
subdivision, combination or reclassification of Common Stock; (ii) the
issuance to all holders of Common Stock of certain rights, warrants or other
securities convertible into Common Stock entitling them to subscribe for
Common Stock at less than the then current market price per share (as
determined in the manner set forth in the Indenture); (iii) the distribution
to all holders of Common Stock of any shares of capital stock or evidences of
indebtedness of the Company or cash or other assets (excluding any dividend
paid out of current or retained earnings payable solely in cash); (iv) the
issuance of Common Stock to an Affiliate at less than the current market
price, other than pursuant to an employee benefit plan approved by the
Company's board of directors; and (v) the purchase of Common Stock pursuant to
a tender offer made by the Company or any of its subsidiaries which involves
an aggregate consideration that, together with (x) any cash and the fair
market value of any other consideration payable in any other tender offer by
the Company or any of its subsidiaries for Common Stock expiring within the 12
months preceding the expiration of such tender offer in respect of which no
adjustment has been made and (y) the aggregate amount of dividends paid out of
current or retained earnings referred to in clause (iii) above to all holders
of Common Stock within the 12 months preceding the expiration of such tender
offer in respect of which no adjustments have been made, exceeds 15% of the
Company's market capitalization on the expiration of such tender offer.
Notwithstanding the foregoing (i) if the rights, warrants or other securities
described in clause (ii) of the preceding paragraph are exercisable only upon
the occurrence of certain triggering events, then the conversion price will
not be adjusted until such triggering events occur; (ii) the distribution to
holders of Common Stock of separate certificates representing Rights (as
described below) will not require an adjustment in the conversion price until
the Rights become exercisable as described under "Description of Capital
Stock-- Rights to Purchase Series A Junior Preferred Stock;" (iii) if rights
or warrants expire unexercised, the conversion price shall be readjusted to
take into account only the actual number of such rights, warrants or other
securities which were exercised; and (iv) in the event of a distribution to
holders of Common Stock generally of shares of capital stock or rights to
acquire capital stock (in either case, other than Common Stock), the Company
may, instead of making any adjustment in the conversion price, make proper
provision so that each holder of a Note who converts such Note (or any portion
hereof) after the record date for such distribution and prior to the
expiration or redemption of such rights, if applicable, shall be entitled to
receive upon such conversion, in addition to the shares of Common Stock
issuable upon such conversion, the kind and amount of such shares of capital
stock or rights which the holder would have been entitled to receive had such
Note (or portion thereof) been converted immediately prior to such record
date. No adjustment in the conversion price will be required unless such
adjustment would require an increase or decrease of at least one percent of
the conversion price, but any adjustment that would otherwise be required to
be made shall be carried forward and taken into account in any subsequent
adjustment.

In case of any reclassification or change of outstanding shares of Common
Stock (with certain exceptions) or the Company's consolidation with, or merger
with or into, any other entity that results in a reclassification, change,
conversion, exchange or cancellation of outstanding shares of Common Stock
(with certain exceptions) or any sale, transfer or lease of all or
substantially all the assets of the Company, the holder of any Note after such
reclassification, change, consolidation, merger, sale, transfer or lease will
have the right to convert such Notes only into the kind and amount of
securities, cash and other property which the holder would have been entitled
to receive upon such reclassification, change, consolidation, exchange,
merger, sale, transfer or lease if

48
<PAGE>

the holder had held the Common Stock issuable upon the conversion of such
Notes immediately before the effective date of such transaction. See "Certain
Federal Income Tax Consequences."

The Company from time to time may to the extent permitted by law reduce the
conversion price by any amount for any period of at least 20 days, in which
case the Company shall give at least 15 days' notice of such decrease, if the
Board of Directors has made a determination that such decrease would be in the
best interests of the Company, which determination shall be conclusive. The
Company may, at its option, make such reductions in the conversion price, in
addition to those set forth above, as the Company deems advisable to avoid or
diminish any income tax to its stockholders resulting from any dividend or
distribution of stock (or rights to acquire stock) or from any event treated
as such for income tax purposes.

SUBORDINATION

The payment of principal of, premium, if any, and interest on the Notes
will, to the extent set forth in the Indenture, be subordinated in right of
payment to the prior payment in full of all existing or future Senior
Indebtedness. Upon any distribution to creditors of the Company in a
liquidation or dissolution of the Company or in a bankruptcy, reorganization,
insolvency, receivership or similar proceeding related to the Company or its
property, in an assignment for the benefit of creditors or any marshalling of
the Company's assets and liabilities, the holders of all Senior Indebtedness
will first be entitled to receive payment in full of all amounts due or to
become due thereon before the Noteholders will be entitled to receive any
payment in respect of the principal of or premium, if any, or interest on the
Notes or on account of the redemption or repurchase provisions of the Notes
(except that holders of Notes may receive securities that are subordinated at
least to the same extent as the Notes to Senior Indebtedness and any
securities issued in exchange for Senior Indebtedness).

The Company also may not make any payment upon or in respect of the Notes
(except in such subordinated securities) if (a) a default in the payment of
the principal of, premium, if any, or interest on Senior Indebtedness occurs
and is continuing beyond any applicable period of grace or (b) any other
default occurs and is continuing with respect to Senior Indebtedness that
permits holders of the Senior Indebtedness as to which such default relates to
accelerate its maturity and the Trustee receives a notice of such default (a
"Payment Blockage Notice") from the representative or representatives of
holders of at least a majority in principal amount of Senior Indebtedness then
outstanding. Payments on the Notes may and shall be resumed, (i) in the case
of a payment default, upon the date on which such default is cured or waived;
or (ii) in the case of a nonpayment default, 179 days after the date on which
the applicable Payment Blockage Notice is received, unless the maturity of any
Senior Indebtedness has been accelerated. No new period of payment blockage
may be commenced within 360 days after the receipt by the Trustee of any prior
Payment Blockage Notice. No nonpayment default that existed or was continuing
on the date of delivery of any Payment Blockage Notice to the Trustee shall
be, or be made, the basis for a subsequent Payment Blockage Notice unless such
default shall have been cured or waived for a period of not less than 180
days.

A significant portion of the Company's operations are conducted through
subsidiaries. The rights of the Company and its creditors, including the
holders of Notes, to participate in the assets of any such subsidiary upon any
liquidation or reorganization of such subsidiary or otherwise will be subject
to prior claims of creditors of such subsidiary, including policyholders,
except to the extent that the Company may itself be a creditor with recognized
claims against the subsidiary. At March 1, 1996, indebtedness of the Company's
subsidiaries was approximately $8.0 million. The Company's ability to pay
principal and interest on the Notes will be dependent upon the payment to it
of dividends, interest and other amounts by its subsidiaries. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" and "Risk Factors--Holding Company Structure."

Because of these subordination provisions, in the event of a liquidation,
bankruptcy or insolvency of the Company, Noteholders may recover less,
ratably, than the holders of Senior Indebtedness. Senior Indebtedness was
approximately $38.6 million at March 1, 1996. After giving effect to the
incurrence of additional Senior Indebtedness in connection with the
acquisition of Universal Fidelity and the expected use of the estimated net
proceeds from this offering, at March 1, 1996, Senior Indebtedness would have
been approximately $24.4 million. See "Capitalization."

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<PAGE>

"Senior Indebtedness" with respect to the Notes means the principal of,
premium, if any, and interest on, and any fees, costs, expenses and any other
amounts (including indemnity payments) related to the following, whether
outstanding on the date of the Indenture or thereafter incurred or created:
(a) indebtedness, matured or unmatured, whether or not contingent, of the
Company for money borrowed, (b) any interest rate contract, interest rate swap
agreement or other similar agreement or arrangement designed to protect the
Company or any of its subsidiaries against fluctuations in interest rates, (c)
indebtedness, matured or unmatured, whether or not contingent, of the Company
evidenced by notes, debentures, bonds or similar instruments or letters of
credit (or reimbursement agreements in respect thereof), (d) obligations of
the Company as lessee under capitalized leases and under leases of property
made as part of any sale and leaseback transactions, (e) indebtedness of
others of any of the kinds described in the preceding clauses (a) through (d)
assumed or guaranteed by the Company and (f) renewals, extensions,
modifications, amendments and refundings of, and indebtedness and obligations
of a successor person issued in exchange for or in replacement of,
indebtedness or obligations of the kinds described in the preceding clauses
(a) through (e), unless the agreement pursuant to which any such indebtedness
described in clauses (a) through (e) is created, issued, assumed or guaranteed
expressly provides that such indebtedness is not senior or superior in right
of payment to the Notes; provided, however, that the following shall not
constitute Senior Indebtedness: (i) any indebtedness or obligation of the
Company in respect of the Notes; (ii) the 8% Debentures; (iii) any
indebtedness of the Company to any of its subsidiaries or other affiliates;
(iv) any indebtedness of the Company that is subordinated or junior in any
respect to any other indebtedness of the Company other than Senior
Indebtedness; (v) any indebtedness of the Company incurred for the purchase of
goods or materials in the ordinary course of business; and (vi) indebtedness
of the Company that by its terms is pari passu with or subordinate or subject
in right of payment to the Notes.

The Company expects from time to time to incur indebtedness constituting
Senior Indebtedness. The Indenture does not prohibit or limit the incurrence
of additional indebtedness, including Senior Indebtedness, by the Company or
its subsidiaries.

OPTIONAL REDEMPTION

The Notes are to be redeemable, for cash, at the option of the Company, at
any time on or after , 1999, in whole or in part, upon not less
than 30 or more than 60 days' notice, at the following redemption prices
(expressed as percentages of principal amount), plus accrued and unpaid
interest to the date fixed for redemption if redeemed during the 12-month
period beginning:

<TABLE>
<CAPTION>
REDEMPTION
DATE PRICE
---- ----------
<S> <C>
, 1999............................................... %
, 2000............................................... %
, 2001............................................... %
, 2002............................................... %
</TABLE>

If less than all of the outstanding Notes are to be redeemed, the Trustee
will select those to be redeemed pro rata or by a method the Trustee considers
fair and appropriate. Any Notes for which a notice of redemption has been
given may be converted into shares of Common Stock at any time before the
close of business on the date prior to the date fixed for redemption.

Except as set forth under "--Change of Control" the Company will not be
required to make mandatory redemption payments with respect to the Notes.
There are no sinking fund payments with respect to the Notes.

CHANGE OF CONTROL

Upon the occurrence of a Change of Control, each holder of Notes will have
the right to require the Company to repurchase all or any part (equal to
$1,000 or an integral multiple thereof) of such holder's Notes pursuant to the
offer described below (the "Change of Control Offer") at an offer price in
cash equal to 101% of the aggregate principal amount thereof plus accrued and
unpaid interest, if any, to the date of purchase (the "Change of Control
Payment"). Within 10 days following any Change of Control, the Company will
issue a press release and mail a notice via first class mail, postage prepaid
to each holder stating: (a) that the Change of Control Offer is being made
pursuant to the covenant entitled "Offer to Repurchase Upon Change of Control"

50
<PAGE>

and that all Notes tendered will be accepted for payment; (b) the purchase
price and the purchase date, which will be a business day no earlier than 30
days nor later than 60 days from the date such notice is mailed (the "Change
of Control Payment Date"); (c) that any Note not tendered will continue to
accrue interest; (d) that, unless the Company defaults in the payment of the
Change of Control Payment, all Notes accepted for payment pursuant to the
Change of Control Offer will cease to accrue interest after the Change of
Control Payment Date; (e) that holders electing to have any Notes purchased
pursuant to a Change of Control Offer will be required to surrender the Notes,
with the form entitled "Option of Holder to Elect Purchase" on the reverse of
the Notes completed, to the Paying Agent at the address specified in the
notice prior to the close of business on the third Business Day preceding the
Change of Control Payment Date; (f) that holders will be entitled to withdraw
their election if the Paying Agent receives, not later than the close of
business on the second Business Day preceding the Change of Control Payment
Date, a telegram, telex, facsimile transmission or letter setting forth the
name of the holder, the principal amount of Notes delivered for purchase, and
a statement that such holder is withdrawing his election to have such Notes
purchased; and (g) that holders whose Notes are being purchased only in part
will be issued new Notes equal in principal amount to the unpurchased portion
of the Notes surrendered, which unpurchased portion must be equal to $1,000 in
principal amount or an integral multiple thereof. The Company will comply with
the requirements of Rule 13e-4 and 14e-1 under the Exchange Act and any other
securities laws and regulations thereunder to the extent such laws and
regulations are applicable in connection with the repurchase of the Notes in
connection with a Change of Control.

On the Change of Control Payment Date, the Company will, to the extent
lawful, (a) accept for payment Notes or portions thereof tendered pursuant to
the Change of Control Offer; (b) deposit with the Paying Agent an amount equal
to the Change of Control Payment in respect of all Notes or portions thereof
so tendered; and (c) deliver or cause to be delivered to the Trustee the Notes
so accepted together with an Officers' Certificate stating the Notes or
portions thereof tendered to the Company. The Paying Agent shall promptly mail
to each holder of Notes so accepted the Change of Control Payment for such
Notes, and the Trustee shall promptly authenticate and mail to each holder a
new Note equal in principal amount to any unpurchased portion of the Notes
surrendered, if any; provided, that each such new Note shall be in a principal
amount of $1,000 or an integral multiple thereof. The Company will publicly
announce the results of the Change of Control Offer on or as soon as
practicable after the Change of Control Payment Date.

Except as described above with respect to a Change of Control, the Indenture
does not contain provisions that permit the holders of the Notes to require
that the Company repurchase or redeem the Notes in the event of a takeover,
recapitalization or similar restructuring.

"Change of Control" means an event or series of events in which (i) any
"person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the
Exchange Act) acquires "beneficial ownership" (as determined in accordance
with Rule 13d-3 under the Exchange Act), directly or indirectly, of more than
50% of the total Voting Stock of the Company at an Acquisition Price (each
terms as defined herein) less than 105% of the conversion price then in effect
with respect to the Notes; and (ii) the holders of the Common Stock receive
consideration which is not all or substantially all common stock that is (or
upon consummation of or immediately following such event or events will be)
listed on a United States national securities exchange or approved for
quotation on the Nasdaq National Market or any similar United States system of
automated dissemination of quotations of securities prices; provided, however,
that any such person or group shall not be deemed to be the beneficial owner
of, or to beneficially own, any Voting Stock tendered in a tender offer until
such tendered Voting Stock is accepted for purchase under the tender offer.
"Voting Stock" means stock of the class or classes pursuant to which the
holders thereof have the general voting power under ordinary circumstances to
elect at least a majority of the board of directors, managers or trustees of a
corporation (irrespective of whether or not at the time stock of any other
class or classes shall have or might have voting power by reason of the
happening of any contingency). "Acquisition Price" means the weighted average
price paid by the person or group in acquiring the Voting Stock.

The Change of Control purchase feature of the Notes may in certain
circumstances make it more difficult or discourage a takeover of the Company,
and thus the removal of incumbent management, and may have an

51
<PAGE>

adverse impact on the market value of the Common Stock. Subject to the
limitations discussed below, the Company could, in the future, enter into
certain transactions, including acquisitions, refinancings or other
recapitalizations, that would not constitute a Change of Control under the
Indenture, but that could increase the amount of debt outstanding at such time
or otherwise affect the Company's capital structure, credit ratings or Common
Stock price.

The right to require the Company to repurchase Notes as a result of the
occurrence of a Change of Control could create an event of default under
Senior Indebtedness as a result of which any repurchase could, absent a
waiver, be blocked by the subordination provision of the Notes. See "--
Subordination." Failure of the Company to repurchase the Notes when required
would result in an Event of Default with respect to the Notes whether or not
such repurchase is permitted by the subordination provisions. There can be no
assurance that the Company will have sufficient resources to purchase Notes
upon a Change of Control.

LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING INSURANCE
SUBSIDIARIES

The Company will not, and will not permit any of its insurance subsidiaries
to, directly or indirectly, create or otherwise cause or suffer to exist or
become effective any consensual encumbrance or restriction on the ability of
any insurance subsidiary of the Company to (i) pay dividends or make any other
distributions on its capital stock or with respect to any other interest or
participation in, or measured by, its profits, or pay any indebtedness owed
to, the Company or any subsidiary of the Company; (ii) make loans or advances
to the Company or any subsidiary of the Company; or (iii) transfer any of its
properties or assets to the Company, except for such encumbrances or
restrictions existing under or by reason of (q) the Term Loan dated August 30,
1995 between the Company and American National Bank and Trust Company of
Chicago, Firstar Bank Milwaukee, Bank One, Rockford and LaSalle National Bank
as in effect on the date the Indenture is executed; (r) the Term Loan dated
March 22, 1995 between the Company and American National Bank and Trust
Company of Chicago, Firstar Bank Milwaukee and Bank One, Rockford as in effect
on the date the Indenture is executed; (s) the Credit Facility dated March 22,
1995 between the Company and American National Bank and Trust Company of
Chicago, Firstar Bank Milwaukee, Bank One, Rockford and Fleet National Bank of
Connecticut; (t) any amendments, modifications, restatements, renewals,
increases, supplements, refundings, replacements or refinancings of the
agreements described in clauses (q), (r) and (s) hereof, provided that such
amendments, modifications, restatements, renewals, increases, supplements,
refundings, replacements or refinancings are no more restrictive with respect
to such dividend and other payment restrictions than those contained in such
agreements as in effect on the date the Indenture is executed; (u) bank credit
facilities of any insurance subsidiary of the Company, as in effect from time
to time; (v) any instrument governing indebtedness of any insurance subsidiary
of the Company evidenced by industrial revenue bonds (provided that such
encumbrances or restrictions set forth in the agreements or instruments
described in clauses (u) and (v) hereof are no more restrictive with respect
to such dividend and other payment restrictions than those contained in the
agreements described in clauses (q), (r) and (s) hereof as in effect on the
date the Indenture is executed); (w) customary provisions restricting the
transfer of property or assets contained in any conditional sales contract or
capitalized lease of any insurance subsidiary of the Company; (x) applicable
law; (y) customary provisions restricting subletting or assignment of any
lease governing a leasehold interest of the Company or any insurance
subsidiary of the Company which lease was entered into in the ordinary course
of business and consistent with past practice; or (z) any instrument governing
indebtedness of a person acquired by the Company or any insurance subsidiary
of the Company at the time of such acquisition, which encumbrance or
restriction is not applicable to any person, or the properties or assets of
any person, other than the person, or the property or assets of the person, so
acquired.

MERGERS AND CONSOLIDATIONS

The Indenture will provide that the Company may not, in a single transaction
or series of transactions, consolidate with or merge with or into, or sell,
lease, convey or otherwise dispose of all or substantially all of its assets
to, another corporation, person or entity unless (i) the entity or the person
formed by or surviving any

52
<PAGE>

such consolidation or merger (if other than the Company) or to which such
sale, lease, conveyance or other disposition shall have been made is a
corporation organized or existing under the laws of the United States, any
state thereof or the District of Columbia; (ii) the corporation formed by or
surviving any such consolidation or merger (if other than the Company) or to
which such sale, lease, conveyance or other disposition shall have been made
assumes all the obligations of the Company pursuant to a supplemental
indenture under the Notes and the Indenture; and (iii) immediately after such
transaction no Default or Event of Default exists. The Company must deliver to
the Trustee prior to the consummation of the proposed transaction an Officers'
Certificate to the foregoing effect and an opinion of counsel stating that the
proposed transaction and such supplemental indenture, if any, comply with the
Indenture.

EVENTS OF DEFAULT

The following will be Events of Default under the Indenture: (a) failure to
pay principal of or premium, if any, on any Note when due at maturity, upon
redemption or otherwise, including failure by the Company to purchase the
Notes when required as described under "Change of Control" (whether or not
such payment shall be prohibited by the subordination provisions of the
Indenture); (b) failure to pay any interest on any Note when due, continued
for 30 days (whether or not such payment shall be prohibited by the
subordination provisions of the Indenture); (c) failure to perform any other
covenant or agreement of the Company in the Notes or the Indenture for 60 days
after written notice as provided in the Notes or the Indenture; (d) certain
events of bankruptcy, insolvency or reorganization with respect to the Company
and its significant subsidiaries; (e) default under any mortgage, indenture or
instrument under which there may be issued or by which there may be secured or
evidenced any indebtedness for money borrowed by the Company or any of its
subsidiaries (or the payment of which is guaranteed by the Company or any of
its subsidiaries) whether such indebtedness or guarantee now exists, or is
created after the date of the Indenture, which default (i) is caused by a
failure to pay principal or interest on such indebtedness prior to the
expiration of the grace period provided in such indebtedness (a "Payment
Default") or (ii) results in the acceleration of such indebtedness prior to
its express maturity and, in each case, the principal amount of any such
indebtedness, together with the principal amount of any other such
indebtedness under which there has been a Payment Default or the maturity of
which has been so accelerated, aggregates $10 million or more; and (f) final
judgments or decrees shall be entered against the Company or any significant
subsidiary involving liabilities of $10 million or more (singly or in the
aggregate) (after deducting the portion of such liabilities accepted by a
reputable insurance company) and such final judgments or decrees shall not
have been vacated, discharged, satisfied or stayed pending appeal within 60
days from the entry thereof. Subject to the provisions of the Indenture
relating to the duties of the Trustee in case an Event of Default shall occur
and be continuing, the Trustee will be under no obligation to exercise any of
its rights or powers under the Indenture at the request or direction of any of
the Noteholders, unless such Noteholders shall have offered to the Trustee
reasonable security or indemnity. The holders of a majority in aggregate
principal amount of the outstanding Notes will have the right to direct the
time, method and place of conducting any proceeding for any remedy available
to the Trustee or exercising any trust or power conferred on the Trustee
(subject to certain exceptions).

If an Event of Default (other than an Event of Default resulting from
bankruptcy, insolvency or reorganization with respect to the Company) occurs
and is continuing, either the Trustee or the holders of at least 25% in
aggregate principal amount of the outstanding Notes may declare the principal
of and premium, if any, on the Notes to be due and payable immediately.
However, if the Company shall cure all defaults within 30 days thereof (except
the nonpayment of interest on and premium, if any, and principal of any Notes
which have become due by acceleration) and no other Event of Default has
occurred during such 30-day period which has not been cured or waived, and
certain other conditions are met, such declaration may be cancelled and past
defaults may be waived by the holders of a majority in principal amount of the
Notes then outstanding. In case an Event of Default resulting from bankruptcy,
insolvency or reorganization of the Company shall occur, all unpaid principal
of, premium, if any, and accrued interest on the Notes then outstanding will
be due and payable immediately without any declaration or other act on the
part of the Trustee or the holders of Notes. The Indenture provides that in
case an Event of Default shall occur (which shall not be cured), the Trustee
will be required, in the exercise of its own powers, to use the degree of care
of a prudent person in the conduct of his or her own affairs.

53
<PAGE>

No holder of any Note will have any right to institute any proceeding with
respect to the Indenture or for any remedy under the Indenture unless the
holder previously has given to the Trustee written notice of a continuing
Event of Default and unless also the holders of at least 25% in aggregate
principal amount of the outstanding Notes have made written request, and
offered reasonable indemnity to the Trustee to institute proceedings as
trustee, and the Trustee has not received from the holders of a majority in
aggregate principal amount of the outstanding Notes a direction inconsistent
with the request and has failed to institute such proceeding within 60 days.
However, these limitations do not apply to a suit instituted by a holder of a
Note for the enforcement of payment of the principal of and premium, if any,
or interest on such Note on or after the respective due dates expressed in
such Note or of the right to convert the Notes in accordance with the
Indenture.

The Company will be required to furnish to the Trustee annually a statement
as to the performance by the Company of certain of its obligations under the
Indenture and as to any default in the performance of the obligations.

The Indenture will provide that the Trustee will, within 90 days after the
occurrence of default, mail to all Noteholders notice of all defaults known to
it; but, except in the case of a default in the payment of the principal or
premium, if any, or interest on any of the Notes, the Trustee shall be
protected in withholding such notice if it in good faith determines that the
withholding of such notice is in the interests of such holders.

MODIFICATION AND WAIVER

The Indenture contains provisions permitting the Company and the Trustee,
with the consent of the holders of not less than a majority of the aggregate
principal amount of the Notes then outstanding, to execute a supplemental
indenture to add provisions to, or change in any manner or eliminate any
provisions of, the Indenture or modify in any manner the rights of the holders
of the Notes; provided that no such supplemental indenture may, among other
things, (i) extend the time for payment of principal of, premium, if any, or
interest on any Note or reduce the principal amount thereof, premium, if any,
or interest thereon or any amount payable upon the redemption or required
purchase thereof or impair the right of any holder to institute suit for
payment of the Notes after the same shall become due and payable, or make the
principal thereof or any premium or interest thereon payable in any coin or
currency other than that provided in the Indenture, or modify the
subordination provisions of the Indenture in a manner adverse to the holders
of Notes or impair the right to convert the Notes into Common Stock or to
impair the obligation of the Company to purchase the Notes upon the occurrence
of a Change of Control; or (ii) reduce the aforesaid percentage of the
aggregate principal amount of Notes, the holders of which must consent to
authorize any such supplemental indenture, without the consent of the holders
of all outstanding Notes affected thereby.

The holders of a majority in aggregate principal amount of the Notes also
may, on behalf of the holders of all Notes, waive any past default under the
Indenture, except a default in the payment of the principal of, premium, if
any, or interest on any Note, a failure to convert Notes into Common Stock or
in respect of a provision under the Indenture which cannot be modified or
amended without the consent of each holder of Notes.

Notwithstanding the foregoing, without the consent of any holder of Notes,
the Company and the Trustee may amend or supplement the Indenture or the Notes
to cure any ambiguity, defect or inconsistency, to provide for uncertificated
Notes in addition to or in place of certificated Notes, to provide for the
assumption of the Company's obligations to holders of the Notes in the case of
a merger or consolidation, to make provision with respect to the conversion
rights of holders in the case of a merger or consolidation, to make any change
that would provide any additional rights or benefits to the holders of the
Notes or that does not adversely affect the legal rights under the Indenture
of any such Holder, or to comply with requirements of the Commission in order
to effect or maintain the qualification of the Indenture under the Trust
Indenture Act.

54
<PAGE>

TRANSFER AND EXCHANGE

A holder may transfer or exchange the Notes in accordance with the
procedures set forth in the Indenture. No service charge will be made for any
registration of transfer or exchange of Notes, but the Company may require
payment of a sum sufficient to cover any tax or other governmental charge
payable in connection with any such transaction. The Registrar is not required
to transfer or exchange any Note selected for redemption. Also, the Registrar
is not required to transfer or exchange any Note for a period of 15 days
before a selection of the Notes to be redeemed.

SATISFACTION AND DISCHARGE

The Company may terminate its obligations under the Indenture at any time by
delivering all outstanding Notes to the Trustee for cancellation. After all
the Notes have been called for redemption or mature in one year, the Company
may terminate all of its obligations under the Indenture, other than its
obligations to pay the principal of, premium, if any, and interest on the
Notes, to convert the Notes and certain other obligations, at any time, by
irrevocably depositing with the Trustee money or noncallable U.S. Government
Obligations sufficient to pay all remaining indebtedness on the Notes, after
complying with certain other procedures set forth in the Indenture.

CONCERNING THE TRUSTEE

The Indenture will contain certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases or to realize on certain property received in respect of any
such claim as security or otherwise. Subject to the Trust Indenture Act, the
Trustee will be permitted to engage in other transactions; however, if it
acquires any conflicting interest, as described in the Trust Indenture Act, it
must eliminate such conflict or resign.

The First National Bank of Chicago will be the Trustee under the Indenture.
The Company may in the future maintain deposit accounts and conduct other
banking transactions with the Trustee in the ordinary course of business.

DESCRIPTION OF CAPITAL STOCK

The Company's authorized capital stock consists of 20,000,000 shares of
Common Stock, par value $1 per share, and 5,000,000 shares of Preferred Stock,
no par value. The Board of Directors is authorized to determine the number and
designation of one or more series of Preferred Stock and the voting powers,
rights, preferences, qualifications, limitations or restrictions and the
shares of any such series. The Board has designated a series of $2.125
Cumulative Convertible Exchangeable Preferred Stock, consisting of 1,000,000
shares, 848,900 of which are currently outstanding.

COMMON STOCK

The holders of Common Stock are entitled to one vote for each share held of
record on each matter submitted to a vote of stockholders and to vote on all
matters on which a vote of stockholders is taken, except as otherwise provided
by statute. The shares of Common Stock do not have cumulative voting rights.
Therefore, the holders of a majority of shares voting for the election of
directors can elect all of the directors then standing for election, if they
choose to do so. Holders of Common Stock are entitled to receive such
dividends as may be declared by the Board of Directors out of funds legally
available therefor and, in the event of liquidation, dissolution or winding up
of the Company, are entitled to share ratably in all assets remaining after
payment of liabilities. The ability of the Company to pay dividends on its
Common Stock will depend primarily on the receipt of dividends and other
payments from its subsidiaries. The Company's insurance subsidiaries are
subject to state laws and regulations which limit their ability to pay
dividends or make other payments. In addition,

55
<PAGE>

certain of the Company's credit agreements also limit its ability to pay
dividends. See "Management's Discussion and Analysis of Results of Operations
and Financial Condition--Liquidity and Capital Resources." Furthermore, the
Company's Certificate of Incorporation prohibits the Company from paying
dividends on the Common Stock if the Company is not current in its dividend
payments on the Preferred Stock. The Preferred Stock will rank prior to the
Common Stock as to the payment of dividends and distributions upon
liquidation, dissolution or winding up. See "--Preferred Stock." The shares of
Common Stock are not subject to liability for calls or assessments and have no
conversion rights, sinking fund privileges or preemptive rights.

PREFERRED STOCK

The Board of Directors has the authority, without action by the
stockholders, to issue shares of Preferred Stock in one or more series and,
within certain limitations, to determine the dividend rights, dividend rate,
rights and terms of redemption, liquidation preferences, sinking fund terms,
conversion and voting rights of any series of Preferred Stock, the number of
shares constituting any such series, the designation thereof and the price
therefor. The Company believes that the ability of its Board of Directors to
issue one or more series of Preferred Stock will provide the Company with
flexibility in structuring possible future financings and acquisitions, and in
meeting other corporate needs which might arise. The authorized shares of
Preferred Stock, as well as Common Stock, will be available for issuance
without further action by the Company's stockholders, unless such action is
required by applicable law or the rules of any stock exchange or automated
quotation system on which the Company's securities may be listed or traded.
The issuance of a series of Preferred Stock with voting or conversion rights
may adversely affect the voting power of the holders of Common Stock. The
issuance of Preferred Stock may also have the effect of delaying, deferring or
preventing a change in control of the Company. The Company has no present
plans to issue any shares of Preferred Stock.

$2.125 Preferred Stock and Related Subordinated Debentures

Holders of the $2.125 Preferred Stock are entitled to cumulative dividends
at the rate of $2.125 per annum per share. The $2.125 Preferred Stock is
convertible into Common Stock at the option of the holder at any time, unless
previously redeemed, at the rate of 1.6 shares of Common Stock for each share
of $2.125 Preferred Stock, subject to adjustment under certain circumstances.
The $2.125 Preferred Stock is also exchangeable in whole at the sole option of
the Company on any quarterly dividend payment date for the Company's 8 1/2%
Convertible Subordinated Debentures due 2014 (the "8 1/2% Debentures") at the
rate of $25 principal amount of 8 1/2% Debentures for each share of $2.125
Preferred Stock. The $2.125 Preferred Stock is redeemable for cash at any
time, in whole or in part, at the option of the Company, at redemption prices
declining from $25.85 on the date of this Prospectus to $25 on July 15, 1999,
plus accrued and unpaid dividends to the redemption date. In addition, the
$2.125 Preferred Stock is redeemable at the option of the holder upon certain
stock acquisitions or business combinations at a redemption price of $25 per
share, plus accrued and unpaid dividends to the redemption date.

Upon any liquidation dissolution or winding up of the Company, the holders
of the $2.125 Preferred Stock will be entitled to receive $25 per share, plus
cumulative accrued dividends. The holders of the $2.125 Preferred Stock are
not entitled to vote on any matters unless the Company shall be in arrears in
an amount equal to at least six quarterly dividends, in which case the holders
of the $2.125 Preferred Stock will be entitled to vote for the election of two
additional directors.

The Company intends to use a portion of the net proceeds of this offering to
redeem all of the outstanding shares of $2.125 Preferred Stock. Each share of
$2.125 Preferred Stock is convertible into 1.6 shares of the Company's Common
Stock. See "Use of Proceeds."

RIGHTS TO PURCHASE SERIES A JUNIOR PREFERRED STOCK

In 1990, the Company distributed one Right to Acquire Series A Junior
Preferred Stock (a "Right") to each holder of its Common Stock. In addition,
each share of Common Stock subsequently issued automatically carries with it a
Right. Subject to certain exceptions, the Rights generally become exercisable
and separately

56
<PAGE>

tradeable if a person or group (an "Acquiring Person") acquires 20% or more of
the Common Stock. An Acquiring Person is not deemed to include any stockholder
who, on December 14, 1990, already owned 20% of the outstanding Common Stock.
Upon such an event, each holder of a Right will be entitled to purchase one-
tenth of a share of Series A Junior Preferred Stock at a purchase price of
$4.50, subject to certain adjustments. Such preferred shares, of which
2,000,000 are authorized, would be voting and would be entitled to
distributions that are ten times the distributions on the Common Stock.
Subject to exercise of the Rights, in the event of certain business
combinations involving the Company, a holder of a Right would have the right
to receive Common Stock with a value of ten times the exercise price of the
Right.

The terms and conditions of the Rights are set forth in full in the Rights
Agreement between the Company and First Chicago Trust Company of New York,
dated December 12, 1990 (the "Rights Agreement"). The summary description of
the Rights set forth herein does not purport to be a complete description of
the terms and conditions of the Rights and is qualified in its entirety by
reference to the Rights Agreement, a copy of which was filed as an exhibit to
the Company's Registration Statement on Form 8-A filed with the Commission on
December 14, 1990, which is incorporated herein by reference. The Rights will
expire on December 14, 2000, and until they become exercisable, may be
redeemed by the Company for $.01 per Right.

CERTAIN CHARTER AND STATUTORY PROVISIONS

The Company's Certificate of Incorporation provides for a maximum of fifteen
directors and the division of the directors into three classes, each of which
serves for a staggered three-year term. These provisions could help to effect
perpetuation of current management.

Section 203 of the Delaware General Corporation Law contains certain
restrictions on the ability of an "interested stockholder" (defined as a
stockholder owning 15% or more of a corporation's voting stock) to engage in a
business combination with such corporation. Since the Company has not amended
its Certificate of Incorporation or Bylaws to prohibit the application of
Section 203, such Section may inhibit an interested stockholder's ability to
acquire additional shares of Common Stock or otherwise engage in a business
combination with the Company.

INSURANCE REGULATION CONCERNING CHANGE OF CONTROL

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Common Stock and the $2.125
Preferred Stock is First Chicago Trust Company of New York.

57
<PAGE>

CERTAIN FEDERAL INCOME TAX CONSEQUENCES

The following summary sets forth the principal federal income tax
consequences of holding and disposing of Notes. This summary is based upon
laws, regulations, rulings and judicial decisions now in effect, all of which
are subject to change, possibly on a retroactive basis. This summary is
presented for informational purposes only and relates only to Notes or Common
Stock received upon conversion thereof that are held as "capital assets"
(generally, property held for investment within the meaning of Section 1221 of
the Internal Revenue Code of 1986, as amended (the "Code")). The summary
discusses certain federal income tax consequences to holders of Notes that are
citizens or residents of the United States. It does not discuss state, local
or foreign tax consequences, nor does it discuss tax consequences to
categories of holders of Notes that are subject to special rules, such as tax-
exempt organizations, insurance companies, financial institutions and dealers
in stocks and securities. Tax consequences may vary depending on the
particular status of an investor.

THIS SUMMARY DOES NOT PURPORT TO DEAL WITH ALL ASPECTS OF FEDERAL INCOME
TAXATION THAT MAY BE RELEVANT TO AN INVESTOR'S DECISION TO PURCHASE NOTES.
EACH INVESTOR SHOULD CONSULT HIS OR HER OWN TAX ADVISOR AS TO THE PARTICULAR
TAX CONSEQUENCES TO SUCH PERSON HOLDING AND DISPOSING OF THE NOTES, INCLUDING
THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS AND ANY
RECENT PROPOSED CHANGES IN APPLICABLE TAX LAWS.

STATED INTEREST

A holder of Notes using the accrual method of accounting for tax purposes
generally will be required to include interest in income as such interest
accrues, while a cash basis holder will be required to include interest in
income when cash payments are made available to such holder.

CONVERSION OF NOTES

Except as otherwise indicated below, no gain or loss will be recognized for
federal income tax purposes upon the conversion of Notes into shares of Common
Stock. Cash paid in lieu of fractional shares of Common Stock will be taxed as
if the fractional shares of Common Stock were issued and then redeemed for
cash which should result in capital gain or loss, if any (measured by the
difference between the cash received for the fractional share and the holder's
basis therein). The tax basis of the shares of Common Stock received upon
conversion will be equal to the tax basis of the Notes converted reduced by
the portion of such basis, if any, allocable to any fractional share interest
exchanged for cash. The holding period of the shares of the Common Stock
received upon conversion will include the holding period of the Notes
converted.

If at any time the Company makes a distribution of property to its
stockholders that would be taxable to such stockholders as a dividend for
federal income tax purposes (e.g. distributions of cash, evidences of
indebtedness or assets of the Company, but generally not stock dividends or
rights to subscribe for Common Stock) and, pursuant to the anti-dilution
provisions of the Indenture, the conversion price of the Notes is reduced, or
if the Company voluntarily reduces the conversion price, such reduction will
be deemed to be the payment of a stock distribution to a holder of a Note
which may be taxable as a dividend. Holders of Notes could, therefore, have
taxable income as a result of an event pursuant to which they received no cash
or property that could be used to pay the related income tax.

DISPOSITION OF NOTES OR COMMON STOCK

In general, the holder of a Note or the Common Stock into which it is
converted will recognize gain or loss upon the sale, redemption, retirement or
other taxable disposition of the Note or Common Stock in an amount equal to
the difference between the amount of cash and the fair market value of
property received (except to the extent attributable to the payment of accrued
interest) and such holder's adjusted tax basis in the Note or Common Stock.
The holder's tax basis in a Note generally will be such holder's cost,
increased by the amount of accrued market discount with respect to the Note
(discussed below), and reduced by the amount of any

58
<PAGE>

amortizable bond premium the holder elects to amortize with respect to the
Note. Such gain or loss will be a capital gain or loss except to the extent of
any accrued market discount. See "--Market Discount and Bond Premium."

MARKET DISCOUNT AND BOND PREMIUM

If a Holder acquires a Note subsequent to its original issuance and the
Note's stated redemption price at maturity exceeds the Holder's initial tax
basis in the Note by more than a de minimis amount, the Holder should
generally be treated as having acquired the Note at a "market discount" equal
to such excess. In addition, if a Holder's initial tax basis in a Note exceeds
the stated redemption price at maturity of the Note, the Holder should
generally be treated as having acquired the Note with "bond premium" in an
amount equal to such excess. Holders should consult their tax advisers
regarding the existence, if any, and tax consequences of market discount and
bond premium.

BACKUP WITHHOLDING

Under the "backup withholding" provisions of federal income tax law, the
Company, its agents, a broker or any paying agent, as the case may be, will be
required to withhold a tax equal to 31% of any payment of (1) principal,
premium, if any, and interest on the Notes, (2) proceeds from the sale or
redemption of the Notes, (3) dividends on the Common Stock, and (4) proceeds
from the sale or redemption of the Common Stock, unless the holder (i) is
exempt from backup withholding and, when required, demonstrates this fact to
the payor or (ii) provides a taxpayer identification number to the payor,
certifies as to no loss of exemption from backup withholding and otherwise
complies with applicable requirements of the backup withholding provisions.
Certain holders of Notes (including corporations, tax-exempt organizations,
individual retirement accounts and, to a limited extent, nonresident aliens)
are not subject to the backup withholding reporting requirements. Holders
should consult their own tax advisers to determine whether they are subject to
these backup withholding rules. A nonresident alien must submit a statement,
signed under penalties or perjury, attesting to that individual's exemption
from backup withholding. A holder of Notes or Common Stock that is otherwise
required to but does not provide the Company with a correct taxpayer
identification number may be subject to penalties imposed by the Code. Any
amounts paid as backup withholding with respect to Notes or Common Stock will
be credited to the income tax liability of the person receiving the payment
from which such amount was withheld.

59
<PAGE>

UNDERWRITING

Bear, Stearns & Co. Inc., EVEREN Securities, Inc. (formerly Kemper
Securities, Inc.), and Oppenheimer & Co., Inc. (the "Underwriters") have
severally agreed, subject to the terms and conditions of the Underwriting
Agreement (the form of which is filed as an exhibit to the Registration
Statement), to purchase from the Company the following aggregate principal
amount of Notes (assuming no exercise of the Underwriters' over-allotment
option):

<TABLE>
<CAPTION>
PRINCIPAL
UNDERWRITERS AMOUNT
------------ -----------
<S> <C>
Bear, Stearns & Co. Inc.......................................
EVEREN Securities, Inc........................................
Oppenheimer & Co., Inc........................................
-----------
Total..................................................... $65,000,000
===========
</TABLE>

The Underwriting Agreement provides that the obligations of the Underwriters
to purchase Notes are subject to certain conditions, and that if any of the
Notes are purchased by the Underwriters pursuant to the Underwriting
Agreement, all of the Notes agreed to be purchased by the Underwriters must be
so purchased.

The Company has been advised that the Underwriters initially propose to
offer the Notes to the public at the offering price set forth on the cover
page of this Prospectus and to certain dealers at such price less a concession
not in excess of % of such principal amount of the Notes. The Underwriters
may allow, and such dealers may reallow, a discount not in excess of % of
such principal amount of the Notes on sales to certain other dealers. After
the offering, the offering price and the concession and discount to dealers
may be changed.

The Company has granted to the Underwriters an option to purchase up to an
additional $9,750,000 principal amount of Notes at the offering price less
underwriting discounts and commissions. To the extent that this option to
purchase is exercised, each Underwriter will become obligated, subject to
certain conditions, to purchase approximately the same percentage of such
additional principal amount of Notes being sold to the Underwriters as the
number set forth next to such Underwriter's name in the preceding table bears
to the total aggregate principal amount of Notes in such table. Such option
may be exercised to purchase Notes solely for the purpose of covering over-
allotments, if any, incurred in the sale of Notes in this offering. Such
option may be exercised at any time and from time to time up to 30 days after
the date of this Prospectus.

The Company has agreed not to offer, issue, sell, contract to sell, grant
any option for the sale of, or otherwise dispose of ("Transfer"), directly or
indirectly, any shares of its Common Stock or any securities convertible into
or exchangeable or exercisable for its Common Stock or any rights to acquire
Common Stock for a period of 120 days after the date of this Prospectus,
without the prior written consent of Bear, Stearns & Co. Inc. ("Bear
Stearns"), subject to certain limited exceptions. In addition, each of the
Company's executive officers and directors has agreed not to Transfer,
directly or indirectly, any shares of Common Stock or any securities
convertible into or exchangeable or exercisable for Common Stock or any rights
to acquire Common Stock in excess of 10% of such executive officer's holdings
in the Common Stock or any securities convertible into or exchangeable or
exercisable (currently or in the future) for Common Stock or any rights to
acquire Common Stock as of the date of this Prospectus for a period of 120
days after the date of this Prospectus, without the prior written consent of
Bear Stearns, subject to certain limited exceptions.

The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute
to payments that the Underwriters may be required to make in respect thereof.

In June 1995, the Company engaged Bear Stearns to act as its financial
advisor to provide investment banking and advisory services for which it has
and will receive customary fees and expenses. In 1993, EVEREN Securities, Inc.
provided investment banking and advisory services to the Company in connection
with the Company's acquisition of CLAC.

60
<PAGE>

AVAILABLE INFORMATION

Pioneer Financial Services, Inc. is subject to the informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith files reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission").
Such reports, proxy statements and other information filed by the Company can
be inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
following Regional Offices of the Commission: 7 World Trade Center, Suite
1300, New York, New York 10048; and Suite 1400, 500 West Madison, chicago,
Illinois 60606. Copies of such material can also be obtained from the Public
Reference Section of the Commission, Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. The Common Stock is
traded on the NYSE and the Chicago Stock Exchange. Such reports, proxy
statements and other information can also be inspected at the offices of the
New York Stock Exchange, Inc., 20 Broad Street, New York, New York.

This Prospectus constitutes a part of a registration statement on Form S-3
(together with all amendments and exhibits, the "Registration Statement")
filed with the Commission under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to this offering. This Prospectus does not
contain all of the information included in the Registration Statement.
Statements contained herein concerning the provisions of documents filed with,
or incorporated by reference in, the Registration Statement are not
necessarily complete, and each such statement is hereby qualified in its
entirety by reference to the copy of the applicable documents filed with the
Commission. reference is made to the Registration Statement for further
information with respect to the Company, the Notes offered hereby and the
Common Stock.

LEGAL MATTERS

The validity of the issuance of the securities being offered hereby will be
passed upon by McDermott, Will & Emery, Chicago, Illinois. Certain legal
matters in connection with the Notes will be passed upon for the Underwriters
by Skadden, Arps, Slate, Meagher & Flom, Chicago, Illinois.

EXPERTS

The consolidated financial statements of Pioneer Financial Services, Inc.
appearing in or incorporated by reference (including financial statement
schedules incorporated by reference) in this Prospectus and Registration
Statement have been audited by Ernst & Young LLP, independent auditors, to the
extent indicated on their reports thereon also appearing elsewhere herein and
in the Registration Statement or incorporated by reference. Such consolidated
financial statements have been included herein or incorporated herein by
reference in reliance upon such reports given upon the authority of such firm
as experts in accounting and auditing.

61
<PAGE>

PIONEER FINANCIAL SERVICES, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors............................................ F-2
Statements of Consolidated Income for the years ended December 31, 1993,
1994 and 1995............................................................ F-3
Consolidated Balance Sheet as of December 31, 1994 and 1995............... F-4
Statements of Consolidated Stockholders' Equity for the years ended
December 31, 1993, 1994 and 1995......................................... F-6
Statements of Consolidated Cash Flows for the years ended December 31,
1993, 1994 and 1995...................................................... F-7
Notes to Consolidated Financial Statements................................ F-8
</TABLE>

F-1
<PAGE>

REPORT OF INDEPENDENT AUDITORS

Board of Directors
Pioneer Financial Services, Inc.

We have audited the accompanying consolidated balance sheets of Pioneer
Financial Services, Inc. and subsidiaries as of December 31, 1995 and 1994,
and the related statements of consolidated income, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Pioneer
Financial Services, Inc. and subsidiaries at December 31, 1995 and 1994, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles.

As discussed in Note 3 to the consolidated financial statements, in 1994,
the Company changed its method of accounting for investments in debt and
equity securities.

ERNST & YOUNG LLP

Chicago, Illinois

March 8, 1996

F-2
<PAGE>

PIONEER FINANCIAL SERVICES, INC. AND SUBSIDIARIES

STATEMENTS OF CONSOLIDATED INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
REVENUES
Premiums and policy charges (Note 7):
Accident and health.............................. $601,684 $659,180 $625,951
Life and annuity................................. 39,282 44,929 61,092
-------- -------- --------
640,966 704,109 687,043
Net investment income (Note 5)..................... 40,242 42,786 70,975
Other income and realized investment gains and
losses (Note 5)................................... 17,920 27,260 42,066
-------- -------- --------
699,128 774,155 800,084
BENEFITS AND EXPENSES
Benefits:
Accident and health.............................. 397,963 407,249 398,971
Life and annuity................................. 39,419 42,947 76,846
-------- -------- --------
437,382 450,196 475,817
Insurance and general expenses..................... 162,831 192,810 218,388
Interest expense (Notes 10 and 13)................. 3,276 5,054 4,958
Amortization of deferred policy acquisition costs
(Note 11)......................................... 76,875 100,073 69,199
-------- -------- --------
680,364 748,133 768,362
-------- -------- --------
Income before income taxes......................... 18,764 26,022 31,722
Income taxes (benefit) (Note 6):
Current.......................................... 10,858 6,570 7,407
Deferred......................................... (4,239) 2,303 3,347
-------- -------- --------
6,619 8,873 10,754
-------- -------- --------
Net income......................................... 12,145 17,149 20,968
Preferred stock dividends (Note 14)................ 2,021 1,904 1,805
-------- -------- --------
Income applicable to common stockholders........... $ 10,124 $ 15,245 $ 19,163
======== ======== ========
Net income per common share:
Primary.......................................... $ 1.51 $ 2.36 $ 2.44
Fully diluted.................................... 1.26 1.58 1.85
Dividends declared per common share................ -- .15 .18
Average common and common equivalent shares
outstanding:
Primary.......................................... 6,724 6,459 7,839
Fully diluted.................................... 10,731 12,734 12,608
</TABLE>

See notes to consolidated financial statements.

F-3
<PAGE>

PIONEER FINANCIAL SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share and Per Share Amounts)

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
ASSETS 1994 1995
------ ---------- ----------
<S> <C> <C>
Investments (Notes 5 and 20):
Securities available-for-sale:
Fixed maturities, at fair value........................ $ 218,748 $ 622,666
Equity securities, at fair value....................... 15,440 15,570
Fixed maturities held-to-maturity, at amortized cost..... 378,650 246,041
Real estate--at cost, less accumulated depreciation...... 16,959 18,250
Mortgage loans--at unpaid balance........................ 1,806 9,253
Policy loans--at unpaid balance.......................... 23,082 79,122
Short-term investments--at cost, which approximates fair
value................................................... 69,152 51,690
---------- ----------
Total investments.................................... 723,837 1,042,592
Cash..................................................... 8,612 20,274
Premiums and other receivables, less allowance for
doubtful accounts
(Notes 8 and 19)........................................ 20,102 23,429
Reinsurance receivables and amounts on deposit with
reinsurers
(Note 7)................................................ 41,426 184,719
Accrued investment income................................ 8,873 13,307
Deferred policy acquisition costs (Note 11).............. 225,618 219,874
Land, building, and equipment--at cost, less accumulated
depreciation
(Note 19)............................................... 20,314 26,433
Deferred federal income taxes (Note 6)................... 7,262 --
Other.................................................... 19,656 28,293
---------- ----------
$1,075,700 $1,558,921
========== ==========
</TABLE>

See notes to consolidated financial statements.

F-4
<PAGE>

<TABLE>
<CAPTION>
DECEMBER 31,
LIABILITIES, REDEEMABLE PREFERRED ----------------------
STOCK, AND STOCKHOLDERS' EQUITY 1994 1995
--------------------------------- ---------- ----------
<S> <C> <C>
Policy liabilities:
Future policy benefits:
Life............................................... $ 246,953 $ 591,093
Annuity............................................ 210,132 216,431
Accident and health................................ 163,477 153,603
Unearned premiums.................................... 76,266 71,150
Policy and contract claims (Note 9).................. 155,373 166,111
Other................................................ 16,407 16,077
---------- ----------
868,608 1,214,465
General liabilities:
General expenses and other liabilities............... 31,793 48,580
Amounts due to reinsurers (Note 7)................... 5,249 82,954
Deferred federal income tax (Note 6)................. -- 2,393
Short-term notes payable (Notes 10, 22 and 23)....... 20,093 13,534
Long-term notes payable (Notes 10, 20, 22 and 23).... 2,520 21,504
Convertible subordinated debentures (Notes 13 and
20)................................................. 57,427 9,695
---------- ----------
Total liabilities.................................. 985,690 1,393,125
Commitments and contingencies (Notes 6 to 12 and 17)
Redeemable Preferred Stock, no par value (Note 14):
$2.125 cumulative convertible exchangeable preferred
stock:
Authorized: 5,000,000 shares
Issued and outstanding: (1994--867,300 shares;
1995--848,900 shares)............................. 21,682 21,222
Stockholders' equity (Notes 6 and 12 to 16):
Common Stock, $1 par value:
Authorized: 20,000,000 shares
Issued, including shares in treasury
(1994--6,996,157; 1995--11,207,591)............... 6,996 11,208
Additional paid-in capital......................... 29,299 72,198
Unrealized appreciation (depreciation) of
available-for-sale securities (Notes 3 and 5)..... (7,193) 4,518
Retained earnings.................................. 48,960 66,870
Treasury stock at cost (1994--1,078,400 shares;
1995--1,132,300 shares)........................... (9,734) (10,220)
---------- ----------
Total stockholders' equity....................... 68,328 144,574
---------- ----------
$1,075,700 $1,558,921
========== ==========
</TABLE>

See notes to consolidated financial statements.

F-5
<PAGE>

PIONEER FINANCIAL SERVICES, INC. AND SUBSIDIARIES

STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
UNREALIZED
ADDITIONAL APPRECIATION TOTAL
COMMON PAID-IN (DEPRECIATION) RETAINED TREASURY STOCKHOLDERS
STOCK CAPITAL OF SECURITIES EARNINGS STOCK EQUITY
------- ---------- -------------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1993................... $ 6,820 $28,399 $ 3,044 $24,521 $ (52) $ 62,732
1993 transactions:
Net income............. -- -- -- 12,145 -- 12,145
Cash dividends--
Preferred Stock
($2.125 per share).... -- -- -- (2,021) -- (2,021)
Stock options exercised
(72,000 shares)....... 72 379 -- -- -- 451
Appreciation of equity
securities............ -- -- 241 -- -- 241
Purchase of treasury
stock (546,200
shares)............... -- -- -- -- (4,720) (4,720)
Issuance of shares
pursuant to Agent
Stock Purchase Plan
(8,057 shares)........ 8 36 -- -- -- 44
------- ------- -------- ------- -------- --------
Balance at December 31,
1993................... 6,900 28,814 3,285 34,645 (4,772) 68,872
1994 transactions:
Net income............. -- -- -- 17,149 -- 17,149
Cash dividends--
Preferred Stock
($2.125 per share).... -- -- -- (1,904) -- (1,904)
Cash dividends--Common
Stock ($.15 per
share)................ -- -- -- (930) -- (930)
Stock options exercised
(85,500 shares)....... 86 409 -- -- -- 495
Conversion of
convertible
subordinated
debentures (4,255
shares)............... 4 46 -- -- -- 50
Cumulative effect of
change in accounting
principle (Note 3).... -- -- 3,605 -- -- 3,605
Depreciation of
available-for-sale
securities............ -- -- (14,083) -- -- (14,083)
Purchase of treasury
stock (521,600
shares)............... -- -- -- -- (4,962) (4,962)
Issuance of shares
pursuant to Agent
Stock Purchase Plan
(6,332 shares)........ 6 30 -- -- -- 36
------- ------- -------- ------- -------- --------
Balance at December 31,
1994................... 6,996 29,299 (7,193) 48,960 (9,734) 68,328
1995 transactions:
Net income............. -- -- -- 20,968 -- 20,968
Cash dividends--
Preferred Stock
($2.125 per share).... -- -- -- (1,805) -- (1,805)
Cash dividends--Common
Stock ($.18 per
share)................ -- -- -- (1,253) -- (1,253)
Stock options exercised
(147,000 shares)...... 147 1,373 -- -- -- 1,520
Conversion of
convertible
subordinated
debentures (4,062,418
shares)............... 4,063 41,517 -- -- -- 45,580
Appreciation of
available-for-sale
securities............ -- -- 11,711 -- -- 11,711
Purchase of treasury
stock (53,900 shares). -- -- -- -- (486) (486)
Issuance of shares
pursuant to Agent
Stock Purchase Plan
(2,016 shares)........ 2 9 -- -- -- 11
------- ------- -------- ------- -------- --------
Balance at December 31,
1995................... $11,208 $72,198 $ 4,518 $66,870 $(10,220) $144,574
======= ======= ======== ======= ======== ========
</TABLE>

See notes to consolidated financial statements.

F-6
<PAGE>

PIONEER FINANCIAL SERVICES, INC. AND SUBSIDIARIES

STATEMENTS OF CONSOLIDATED CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.................................... $ 12,145 $ 17,149 $ 20,968
Adjustments to reconcile net income to
net cash provided by operating activities:
Decrease (increase) in premiums receivable.. (3,912) 4,981 (2,321)
Increase (decrease) in policy liabilities... 31,132 (34,498) (30,922)
Deferral of policy acquisition costs........ (67,633) (65,258) (65,036)
Amortization of deferred policy
acquisition costs (Note 11)................ 76,875 100,073 69,199
Deferred income tax expense (benefit)....... (4,239) 2,303 3,347
Change in other assets and liabilities...... (13,423) 21,392 17,154
Depreciation, amortization, and accretion... 9,795 (102) 7,541
Realized losses (gains) (Note 5)............ 1,336 383 (3,993)
--------- --------- ---------
Net cash provided by operating activities..... 42,076 46,423 15,937
INVESTING ACTIVITIES
Securities available-for-sale:
Purchases--fixed maturities................. (120,228) (110,416) (247,746)
Sales--fixed maturities..................... 51,780 99,865 189,882
Maturities--fixed maturities................ 18,836 44,116 19,099
Purchases--equity securities................ (5,532) (4,609) (14,854)
Sales--equity securities.................... 14,845 2,558 18,585
Securities held-to-maturity:
Purchases................................... (256,579) (84,010) (13,369)
Sales....................................... 126,072 9,427 4,710
Maturities.................................. 102,538 21,472 28,865
Purchase of investment real estate............ -- (17,442) (1,903)
Net decrease (increase) in other investments.. 26,038 (21,499) 15,593
Net purchases of property and equipment....... (3,956) (2,957) (6,650)
Purchase of subsidiaries (Note 4)............. (9,685) -- (8,314)
--------- --------- ---------
Net cash used by investing activities......... (55,871) (63,495) (16,102)
FINANCING ACTIVITIES
Net proceeds from issuance of convertible
subordinated debentures (Note 13)............ 54,055 -- --
Increase in notes payable..................... -- 21,225 14,219
Repayment of notes payable.................... (31,401) (5,362) (1,794)
Proceeds from sale of agent receivables (Note
8)........................................... 25,376 24,393 20,851
Transfer of collections on previously sold
agent
receivables (Note 8)......................... (22,981) (28,743) (18,978)
Dividends paid--preferred..................... (2,021) (1,904) (1,805)
Dividends paid--common........................ -- (930) (1,253)
Stock options exercised....................... 451 495 1,520
Purchase of treasury stock.................... (4,720) (4,963) (486)
Retirement of preferred stock................. (315) (1,993) (460)
Other......................................... 44 87 13
--------- --------- ---------
Net cash provided by financing activities..... 18,488 2,305 11,827
--------- --------- ---------
Increase (decrease) in cash................... 4,693 (14,767) 11,662
Cash at beginning of year..................... 18,686 23,379 8,612
--------- --------- ---------
Cash at end of year........................... $ 23,379 $ 8,612 $ 20,274
========= ========= =========
</TABLE>

See notes to consolidated financial statements.

F-7
<PAGE>

PIONEER FINANCIAL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. NATURE OF OPERATIONS

Pioneer Financial Services, Inc. (PFS) through its subsidiaries markets and
underwrites life insurance and annuities, health insurance, and provides
medical utilization management services in selected niche markets throughout
the United States. PFS bases its operations on four core businesses: Life
Insurance, Senior Health, Group Medical, and Medical Utilization Management.

Life insurance products include traditional life (term and whole life),
universal life, and interest sensitive life insurance and annuities sold
primarily to the middle income market. Senior health products include Medicare
supplement, long-term care, home health care and specialty health for
individuals age sixty-five and older. Group medical business consists of small
group and individual hospital and medical policies marketed primarily to self-
employed individuals and small business owners. Medical utilization management
services provided to underwriters, self insured businesses, provider
organizations, and others include pre-certification of in-patient and out-
patient medical care, case management, and development and management of
provider networks. Approximately 40% of PFS' premiums are written in six
states.

2. ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles (GAAP) and include
the accounts and operations, after intercompany eliminations, of Pioneer
Financial Services, Inc. (PFS) and its subsidiaries.

USE OF ESTIMATES

The preparation of the financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual results could
differ from those estimates, and such differences may be material to the
financial statements.

INVESTMENTS

Investments in fixed maturities include bonds and mortgage-backed securities
with contractual maturities greater than one year. Fixed maturities classified
as "available for sale" are carried at fair value and fixed maturities
classified as "held to maturity" are carried at amortized cost.

Although PFS has the ability and intent to hold held-to-maturity securities
to maturity, there could occur infrequent and unusual conditions under which
it would sell certain of those securities. Those conditions would include
unforeseen changes in asset quality, significant changes in tax law affecting
the taxation of securities, a significant business acquisition or disposition,
and changes in regulatory capital requirements or permissable investments.

Changes in fair values of available-for-sale securities, after adjustments
including deferred policy acquisition costs ("DAC"), if any, and deferred
income taxes, are reported as unrealized appreciation or depreciation directly
in stockholders' equity and, accordingly, have no effect on net income. DAC
offsets to the unrealized appreciation or depreciation represent valuation
adjustments or reinstatements of DAC that would have been required as a charge
or credit to operations had such unrealized amounts been realized.

The amortized cost of fixed maturity investments is adjusted for
amortization of premiums and accretion of discounts. That amortization or
accretion is included in net investment income.

F-8
<PAGE>

PIONEER FINANCIAL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

For the mortgage-backed portion of the fixed maturity securities portfolio,
PFS recognizes income using a constant effective yield based on anticipated
prepayments and the estimated economic life of the securities. When actual
prepayments differ significantly from anticipated prepayments, the effective
yield is recalculated to reflect actual payments to date and anticipated
future payments. The net investment in the security is adjusted to the amount
that would have existed had the new effective yield been applied since the
acquisition of the security. That adjustment is included in net investment
income.

On December 1, 1995, as a result of recently issued guidance from the
Financial Accounting Standards Board ("FASB"), PFS transferred held-to-
maturity fixed maturities with an amortized cost of $222,482,000 to available-
for-sale, and also transferred $110,152,000 of available-for-sale fixed
maturities to held-to-maturity. These transfers resulted in a $8,290,000
decrease to unrealized appreciation of securities.

For equity securities, changes in unrealized appreciation or temporary
depreciation, after deferred income tax effects, are reported directly in
stockholders' equity.

Realized gains and losses on the sale of investments, and declines in value
considered to be other-than-temporary, are recognized in operations on the
specific identification basis.

Short term investments have maturities of three months or less and are
carried at cost which approximates fair value.

REVENUES

Revenues for interest-sensitive life insurance and annuities consist of
charges assessed against policy account values. For accident and health and
other life insurance, premiums are recognized as revenue when due. Accident
and health group association dues and fees, included in other revenues, are
recognized as revenue when received.

FUTURE POLICY BENEFITS

The liabilities for future policy benefits related to the annuity and
interest-sensitive life insurance policies are calculated based on accumulated
fund values. As of December 31, 1995, interest credited during the contract
accumulation period ranged from 2.5% to 11.25%. Investment spreads and
mortality gains are recognized as profits when realized, based on the
difference between actual experience and amounts credited or charged to
policies.

The liabilities for future policy benefits on other life insurance and
accident and health insurance policies have been computed by a net level
method based on estimated future investment yield, mortality or morbidity, and
withdrawals, including provisions for adverse deviation. Interest rate
assumptions range from 2.5% to 9.25% depending on the year of issue. The
provisions for future policy benefits and the deferral and amortization of
policy acquisition costs are intended to result in benefits and expenses being
associated with premiums proportionately over the policy periods.

UNEARNED PREMIUMS

Unearned premiums are calculated using the monthly pro-rata basis.

DEFERRED POLICY ACQUISITION COSTS

Costs that vary with, and are primarily related to, the production of new
business are deferred. Such costs are primarily related to accident and health
business and principally include the excess of new business commissions over
renewal commissions and underwriting and sales expenses.

F-9
<PAGE>

PIONEER FINANCIAL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

For annuities and interest-sensitive life insurance policies, deferred costs
are amortized generally in proportion to expected gross profits arising from
the difference between investment and mortality experience and amounts
credited or charged to policies. That amortization is adjusted retrospectively
when estimates of current or future gross profits (including the impact of
realized investment gains and losses) to be realized from a group of products
are revised. For other life and accident and health policies, costs are
amortized over the premium-paying period of the policies, using the same
mortality or morbidity, interest, and withdrawal assumptions that are used in
calculating the liabilities for future policy benefits.

The unamortized cost of purchased insurance in force is included in DAC
($21,291,000 and $26,681,000 at December 31, 1994 and 1995, respectively).
Amortization of these amounts is in relation to the present value of estimated
gross profits over the estimated remaining life of the related insurance in
force.

POLICY AND CONTRACT CLAIMS

The liabilities for policy and contract claims, principally accident and
health, are determined using case-basis evaluations and statistical analyses
based on past experience and represent estimates of the ultimate net cost of
incurred claims and the related claim adjustment expenses. Although
considerable variability is inherent in such estimates, management believes
that these liabilities are adequate. The estimates are continually reviewed
and adjusted as necessary; such adjustments are included in current
operations. PFS maintains an additional provision for adverse deviation in its
accident and health claim liability estimates.

REINSURANCE

Reinsurance premiums, commissions, expense reimbursements, and receivables
related to reinsured business are accounted for on bases consistent with those
used in accounting for the original policies issued and the terms of the
reinsurance contracts. Premiums reinsured to other companies have been
reported as reductions of premium revenues. Amounts recoverable for
reinsurance related to future policy benefits, unearned premium reserves, and
claim liabilities have been reported as reinsurance receivables; expense
allowances received in connection with reinsurance have been accounted for as
a reduction of the related DAC and are deferred and amortized accordingly.

FEDERAL INCOME TAXES

Federal income tax provisions are based on income or loss reported for
financial statement purposes and tax laws and rates in effect for the years
presented. Deferred income taxes have been provided for the effects of
temporary differences between financial reporting and tax bases of assets and
liabilities and are measured using enacted tax rates. A valuation allowance
for deferred tax assets is provided where it is more likely than not that a
portion of the asset will not be realized.

DEPRECIATION

Building, equipment and investment real estate are recorded at cost and are
depreciated using principally the straight-line method.

NET INCOME PER COMMON SHARE

Primary net income per share of Common Stock is determined by dividing net
income, less dividends on Preferred Stock, by the weighted-average number of
Common Stock and Common Stock equivalents (dilutive

F-10
<PAGE>

PIONEER FINANCIAL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

stock options) outstanding. Where the effect of Common Stock equivalents on
net income per share would be antidilutive, they are excluded from the average
shares outstanding. Fully diluted net income per share is computed as if the
Preferred Stock and Convertible Subordinated Debentures had been converted to
Common Stock.

COST IN EXCESS OF NET ASSETS OF COMPANIES ACQUIRED

The cost in excess of net assets of companies acquired (goodwill)
($5,317,000 and $5,017,000 at December 31, 1994 and 1995, respectively) is
included in other assets and is being amortized principally on a straight-line
basis over periods from five to forty years. Goodwill is periodically
evaluated for impairment based principally on projected undiscounted net cash
flows of the acquired companies.

TREASURY STOCK

The board of directors has authorized PFS to buy back shares of its own
common and preferred stock on the open market from time to time. During 1993,
1994 and 1995 PFS repurchased 546,200, 521,600 and 53,900 shares,
respectively, of their common stock. During 1993, 1994 and 1995, PFS
repurchased 13,400, 78,900 and 18,400 shares of their preferred stock.
Treasury stock is accounted for using the cost method.

CASH FLOW INFORMATION

Cash includes cash on hand and demand deposits.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

In March 1995, the FASB issued Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of",
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. Statement 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. PFS will adopt Statement 121 in
the first quarter of 1996 and, based on current circumstances, does not
believe the effect of adoption of the new standard will be material.

In October 1995, the FASB issued Statement No. 123, "Accounting for Stock-
Based Compensation," which the Company must adopt in 1996. This statement
establishes accounting and reporting standards for stock-based employee
compensation plans. The statement defines a fair value method of accounting
which would result in an income statement charge, or to continue using the
current accounting method for such compensation plans. If PFS elects to
continue using the current treatment, the pro-forma results of the new
provisions must be disclosed in the financial statements. PFS is in the
process of reviewing this statement.

RECLASSIFICATIONS

Certain amounts in the 1993 and 1994 financial statements have been
reclassified to conform to the 1995 presentation.

3. CHANGES IN ACCOUNTING PRINCIPLES

In 1995 PFS adopted FASB Statements 114 and 118 which relate to accounting
by creditors for impairment of mortgage loans. Implementation of these
statements did not have an effect on PFS' financial statements.

F-11
<PAGE>

PIONEER FINANCIAL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

FASB Statement 115, "Accounting for Certain Investments in Debt and Equity
Securities" was adopted by PFS as of January 1, 1994. Under Statement 115,
securities are classified as available-for-sale, held-to-maturity, or trading.
PFS classified a portion of its fixed maturity securities portfolio as
available-for-sale with the remainder classified as held-to-maturity.
Securities classified as available-for-sale are carried at fair value and
unrealized gains and losses on such securities are reported as a separate
component of stockholders' equity. Securities classified as held-to-maturity
are carried at cost, adjusted for amortization of premium or discount.

With the classification of a portion of the portfolio as available-for-sale,
the January 1, 1994, balance of stockholders' equity was increased by
$3,605,000 (net of adjustments to deferred income taxes) to reflect the net
unrealized gains on fixed maturity securities classified as available-for-sale
that were previously carried at amortized cost. The adoption of Statement 115
had no effect on net income or PFS' accounting policy for equity securities.

4. BUSINESS COMBINATIONS

On January 31, 1995, Pioneer acquired for cash of $24,000,000 (purchase
price $23,700,000 and $300,000 of additional costs), the outstanding common
shares of Connecticut National Life Insurance Company (CNL).

The acquisition was accounted for by the purchase method and, accordingly,
the purchase price was allocated to assets and liabilities acquired based on
estimates of their fair values.

<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Assets Acquired
Cash..................................................... $ 16,371
Investments.............................................. 274,263
Value of insurance in force.............................. 1,570
Receivables and amounts on deposit with reinsurers....... 87,213
Other assets............................................. 6,904
Liabilities Assumed
Policy liabilities....................................... (354,307)
Other liabilities........................................ (8,014)
--------
Total purchase price................................... $ 24,000
========
</TABLE>

The value of insurance in force will be amortized over the estimated
remaining life of the insurance in force.

The following unaudited pro-forma consolidated results of operations have
been prepared as if the acquisition had been made as of January 1, 1994:

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1994
--------------------
(IN THOUSANDS EXCEPT
PER SHARE AMOUNTS)
<S> <C>
Revenues............................................. $809,500
Net income........................................... 18,700
Net income per share
Primary............................................ 2.60
Fully-diluted...................................... 1.70
</TABLE>

The foregoing pro-forma information is not necessarily indicative of either
the results of operations that would have occurred had the acquisition been
effective on January 1, 1994, or of future results of operations of the
consolidated companies.

F-12
<PAGE>

PIONEER FINANCIAL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

In July 1995, PFS purchased ACMG, Inc., a managed care company, principally
for cash of $1,584,000. The total assets acquired at the purchase date were
approximately $2,600,000.

In August 1993, PFS purchased 80% of the outstanding common stock of
Continental Life & Accident Company and 100% of the outstanding common stock
of Continental Marketing Corporation for $7,100,000 in cash. The total assets
acquired at the purchase date were approximately $80,000,000.

Also in August 1993, PFS purchased Healthcare Review Corporation, a managed
care company, for $1,566,000 in cash. The total assets acquired at the
purchase date were approximately $2,000,000.

Revenues included in PFS' 1993 consolidated statement of income relating to
these acquired entities were $25,671,000. The operations of the entities did
not have a material effect on PFS' 1993 net income.

5. INVESTMENTS

Realized investment gains (losses), including provisions for other-than-
temporary impairments on investments held, and the change in unrealized
appreciation (depreciation) on fixed maturities, equity securities, and other
investments during the years shown are summarized as follows:

<TABLE>
<CAPTION>
FIXED EQUITY
MATURITIES SECURITIES OTHER TOTAL
---------- ---------- ----- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1993
Realized............................... $ (1,638) $ 293 $ 9 $ (1,336)
Unrealized............................. 3,864 442 -- 4,306
-------- ------- ----- --------
$ 2,226 $ 735 $ 9 $ 2,970
======== ======= ===== ========
1994
Realized............................... $ (94) $ 211 $(500) $ (383)
Unrealized............................. (58,705) (2,098) -- (60,803)
-------- ------- ----- --------
$(58,799) $(1,887) $(500) $(61,186)
======== ======= ===== ========
1995
Realized............................... $ (301) $ 4,605 $(311) $ 3,993
Unrealized............................. 86,406 (719) -- 85,687
-------- ------- ----- --------
$ 86,105 $ 3,886 $(311) $ 89,680
======== ======= ===== ========
</TABLE>

The cost of equity securities was $12,484,000 at December 31, 1994 and
$13,332,571 at December 31, 1995. At December 31, 1994, gross unrealized
appreciation on equity securities was $3,514,000 and gross unrealized
depreciation was $558,000. At December 31, 1995, gross unrealized appreciation
on equity securities was $2,781,000 and gross unrealized depreciation was
$544,000.

In 1995, sales of two held-to-maturity securities with an amortized cost of
$5,490,000 resulted due to a significant deterioration in creditworthiness.
Sales of these securities resulted in a realized loss of $780,000. Sales of
two held-to-maturity securities in 1994 with an amortized cost of $9,803,000
resulted after discussions with an insurance rating agency regarding specific
investments of PFS' insurance subsidiaries and evidence of a significant
deterioration in credit worthiness. Sales of these securities, all of which
were owned at January 1, 1994, resulted in a realized loss of $376,000.

F-13
<PAGE>

PIONEER FINANCIAL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

A comparison of amortized cost to fair value of fixed maturity investments
by category is as follows:

<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
At December 31, 1994:
Held to Maturity
U.S. Treasury......... $ 8,891 $ 25 $ (840) $ 8,076
States and political
subdivisions......... 8,888 -- (810) 8,078
Foreign governments... 2,992 -- (197) 2,795
Corporate securities.. 147,419 90 (13,158) 134,351
Mortgage-backed
securities........... 210,460 558 (25,778) 185,240
-------- ------- -------- --------
$378,650 $ 673 $(40,783) $338,540
======== ======= ======== ========
Available for Sale
U.S. Treasury......... $ 23,207 $ 2 $ (1,357) $ 21,852
States and political
subdivisions......... 26,579 -- (760) 25,819
Foreign governments... 4,024 -- (559) 3,465
Corporate securities.. 95,939 -- (6,538) 89,401
Mortgage-backed
securities........... 83,020 37 (4,846) 78,211
-------- ------- -------- --------
$232,769 $ 39 $(14,060) $218,748
======== ======= ======== ========
At December 31, 1995:
Held to Maturity
U.S. Treasury......... $ 26,897 $ 319 $ (44) $ 27,172
States and political
subdivisions......... 4,669 227 -- 4,896
Corporate securities.. 51,608 1,797 (19) 53,386
Mortgage-backed
securities........... 162,867 4,599 (192) 167,274
-------- ------- -------- --------
$246,041 $ 6,942 $ (255) $252,728
======== ======= ======== ========
Available for Sale
U.S. Treasury......... $ 31,781 $ 2,303 $ -- $ 34,084
State and political
subdivisions......... 26,260 716 -- 26,976
Foreign governments... 3,072 -- (54) 3,018
Corporate securities.. 294,950 19,523 (972) 313,501
Mortgage-backed
securities........... 241,015 7,824 (3,752) 245,087
-------- ------- -------- --------
$597,078 $30,366 $ (4,778) $622,666
======== ======= ======== ========
</TABLE>

The carrying amount of PFS' available for sale fixed maturity investments
can increase or decrease significantly in the near term as a result of changes
in market interest rates. Unrealized appreciation on available-for-sale
securities at December 31, 1995 of $4,518,000 included gross appreciation of
$27,150,000 less unrealized appreciation of $17,397,000 on investments in
escrow trust accounts pursuant to agreements with certain reinsurers (See Note
7) and net of deferred taxes and DAC adjustments of $5,235,000. At December
31, 1994, the net depreciation of available-for-sale securities consisted of
gross depreciation of $11,066,000 net of deferred tax assets of $3,873,000.

The amortized cost and fair value of fixed maturities at December 31, 1995,
by contractual maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without prepayment penalties.

F-14
<PAGE>

PIONEER FINANCIAL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
--------- --------
(IN THOUSANDS)
<S> <C> <C>
Held to Maturity:
Due in 1996......................................... $ 6,691 $ 6,784
Due 1997-2001....................................... 73,794 75,903
Due 2002-2006....................................... 2,225 2,217
Due after 2006...................................... 464 550
Mortgage-backed securities.......................... 162,867 167,274
-------- --------
$246,041 $252,728
======== ========
Available for Sale:
Due in 1996......................................... $ 7,639 $ 7,732
Due 1997-2001....................................... 114,199 119,818
Due 2002-2006....................................... 152,423 159,179
Due after 2006...................................... 81,802 90,850
Mortgage-backed securities.......................... 241,015 245,087
-------- --------
$597,078 $622,666
======== ========
</TABLE>

Proceeds from sales of investments (principally fixed maturities) during
1993, 1994 and 1995 were $192,697,000, $111,850,000 and $213,177,000,
respectively. Gross gains of $10,834,000, $1,448,000 and $1,537,000 and gross
losses of $12,472,000, $1,542,000 and $1,838,000 were realized on fixed
maturity sales in 1993, 1994 and 1995, respectively. Gross gains of $315,000,
$217,000 and $4,762,000 and gross losses of $22,000, $6,000 and $157,000 were
realized on sales of equity securities in 1993, 1994 and 1995, respectively.

Major categories of net investment income are summarized as follows:

<TABLE>
<CAPTION>
1993 1994 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Fixed maturities............................... $34,529 $40,172 $61,076
Short-term investments......................... 2,691 1,549 3,623
Other.......................................... 4,069 4,189 9,550
------- ------- -------
Total investment income........................ 41,289 45,910 74,249
Investment expenses............................ (1,047) (3,124) (3,274)
------- ------- -------
Net investment income.......................... $40,242 $42,786 $70,975
======= ======= =======
</TABLE>

At December 31, 1995, securities with a carrying value of $104,294,000 were
on deposit with various government authorities to meet regulatory requirements
and securities with a carrying value of $201,898,000 are held in escrow trust
accounts pursuant to reinsurance agreements (See Note 7).

At December 31, 1995, the amortized cost of fixed maturity investments in
any one entity, other than the U.S. government or a U.S. government agency or
authority, which exceeded 10% of PFS' consolidated stockholders' equity were
as follows:

<TABLE>
<S> <C>
GE Capital Mortgage Services, Inc. .......................... $29,072,000
Prudential Home.............................................. 14,763,000
</TABLE>

Investment real estate (net of accumulated depreciation of $483,000 in 1994
and $1,095,000 in 1995) consists principally of land and a building used, in
part, as PFS' corporate headquarters.

At December 31, 1995, PFS held unrated or less-than-investment-grade
securities with a carrying value of $13,519,000. Those holdings amounted to
less than 1.3% of PFS' total investments at December 31, 1995.

F-15
<PAGE>

PIONEER FINANCIAL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

At December 31, 1995, fixed maturities with a carrying value of $10,472,000
had been non-income producing for the preceding 12-month period.

6. FEDERAL INCOME TAXES

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of PFS' deferred tax liabilities and assets are as follows:

<TABLE>
<CAPTION>
DECEMBER 31
----------------
1994 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred Tax Liabilities
Deferred policy acquisition costs.................... $72,306 $66,458
Net unrealized appreciation on available-for-sale
securities.......................................... -- 2,625
Other................................................ 1,537 9,075
------- -------
Total deferred tax liabilities....................... 73,843 78,158
------- -------
Deferred Tax Assets
Policy liabilities................................... 69,101 70,550
Financial reinsurance................................ 3,788 --
Loss carryforwards................................... 2,000 9,940
Net unrealized depreciation on available-for-sale
securities.......................................... 3,873 --
Other................................................ 6,213 11,775
------- -------
Total deferred tax assets............................ 84,975 92,265
Valuation allowance for deferred tax assets.......... (3,870) (16,500)
------- -------
Deferred tax assets net of valuation allowance....... 81,105 75,765
------- -------
Net deferred tax asset (liability)................... $ 7,262 $(2,393)
======= =======
</TABLE>

The nature of PFS' deferred tax assets and liabilities are such that the
reversal pattern for these temporary differences should generally result in
realization of PFS' deferred tax assets. PFS establishes a valuation allowance
for any portion of the deferred tax asset that management believes may not be
realized. In 1995 the valuation allowance increased $12,630,000 principally
due to the acquisition of Connecticut National Life Insurance Company (See
Note 4). There was no change in the valuation allowance in 1994 and in 1993
the valuation allowance increased $1,221,000.

PFS' effective federal income tax rate varied from the statutory federal
income tax rate as follows:

<TABLE>
<CAPTION>
1993 1994 1995
------------ ------------ -------------
AMOUNT % AMOUNT % AMOUNT %
------ ---- ------ ---- ------- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Statutory federal income tax rate
applied to income before income
taxes.............................. $6,567 35.0% $9,108 35.0% $11,103 35.0%
Nontaxable investment income........ (112) (.6) (384) (1.5) (473) (1.5)
Nondeductible goodwill amortization. 319 1.7 109 .4 60 .2
Other............................... (155) (.8) 40 .2 64 .2
------ ---- ------ ---- ------- ----
Income taxes and effective rate..... $6,619 35.3% $8,873 34.1% $10,754 33.9%
====== ==== ====== ==== ======= ====
</TABLE>

Taxes paid amounted to $5,735,000, $9,731,000 and $8,257,000 for 1993, 1994,
and 1995, respectively.

F-16
<PAGE>

PIONEER FINANCIAL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Under pre-1984 life insurance company income tax laws, a portion of a life
insurance company's "gain from operations" was not subjected to current income
taxation but was accumulated, for tax purposes, in a memorandum account
designated as the "policyholders' surplus account." The balance in this
account at December 31, 1995 for PFS' life insurance subsidiaries was
$10,000,000. Should the policyholders' surplus accounts of PFS' life insurance
subsidiaries exceed their respective maximums, or should distributions in
excess of their tax-basis shareholders' surplus account be made by the life
insurance subsidiaries, such excess or distribution would be subject to
federal income taxes at rates then in effect. Deferred taxes of $3,500,000
have not been provided on amounts included in the policyholders' surplus
accounts, since PFS contemplates no such taxable events in the foreseeable
future.

As of December 31, 1995, PFS' life insurance subsidiaries had combined tax-
basis shareholders' surplus accounts of $63,700,000. Distributions up to that
amount would result in no income tax liability.

Certain of PFS' life insurance subsidiaries have tax basis operations loss
carryforwards of $28,400,000 expiring in years 2003 through 2008.

7. REINSURANCE

PFS' insurance subsidiaries reinsure risks with other companies to permit
the recovery of a portion of the direct losses. These reinsured risks are
treated as though, to the extent of the reinsurance, they are risks for which
the subsidiaries are not liable. PFS remains liable to the extent that the
reinsuring companies do not meet their obligations under these reinsurance
treaties.

PFS' premiums were reduced for reinsurance premiums by $40,592,000,
$37,273,000 and $66,193,000 in 1993, 1994, and 1995, respectively. Under
various reinsurance arrangements, PFS' premiums were increased by $19,338,000,
$16,928,000 and $13,474,000 in 1993, 1994, and 1995, respectively. PFS' policy
benefits have been reduced for reinsurance recoveries of $21,871,000 in 1993,
$23,319,000 in 1994 and $33,739,000 in 1995. At December 31, 1995,
approximately 29% of PFS' reinsurance receivables and amounts on deposit with
reinsurers were due from Lincoln National Life Insurance Company, 23% from
Employers Reinsurance Corporation and 15% from Reassurance Company of
Hannover.

Prior to the acquisition by PFS in January 1995, CNL had entered into
certain reinsurance arrangements. PFS retains the assets and related policy
liabilities associated with the reinsured business. In accordance with the
reinsurance contracts, PFS does not participate in the realized gains and
losses on the assets held in escrow under these agreements. Accordingly, PFS
has established an amount due to reinsurers at December 31, 1995 and a
corresponding reduction in unrealized appreciation on available-for-sale
securities for investments held in escrow trust accounts pursuant to these
agreements.

8. SALE OF AGENT RECEIVABLES

In 1993, 1994, and 1995 a subsidiary of PFS sold agent receivables to an
unaffiliated company for proceeds of $25,376,000, $24,393,000 and $20,851,000,
respectively. The outstanding balances of such agent receivables sold that
remained uncollected at December 31, 1994 and 1995 were $7,937,000 and
$11,360,000, respectively. PFS remains subject to a maximum credit exposure
under this agreement amounting to 10% of agent receivables at December 31,
1995.

F-17
<PAGE>

PIONEER FINANCIAL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

9. RECONCILIATION OF LIABILITY FOR POLICY AND CONTRACT CLAIMS

The following table provides a reconciliation of the beginning and ending
policy and contract claim liability balances reported in PFS' balance sheets:

<TABLE>
<CAPTION>
1993 1994 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Policy and contract claim
liability at beginning of year............. $148,141 $189,389 $155,373
Incurred claims related to:
Current year.............................. 431,357 482,449 469,881
Prior years............................... (20,750) (36,655) (26,282)
-------- -------- --------
Total claims paid......................... 410,607 445,794 443,599
-------- -------- --------
Deduct claims paid related to:
Current year.............................. 260,702 350,210 322,210
Prior years............................... 108,657 129,600 110,651
-------- -------- --------
Total claims paid......................... 369,359 479,810 432,861
-------- -------- --------
Policy and contract claim
liability at end of year................... $189,389 $155,373 $166,111
======== ======== ========
</TABLE>

Claim reserves are estimates of amounts needed to pay reported and
unreported claims based on facts and circumstances known at the time the
reserves are established. Reserves are based on historical claims information,
industry statistics and other factors. The establishment of appropriate
reserves is an inherently uncertain process, and there can be no assurance
that the ultimate liability will not exceed recorded claim reserves.

PFS holds margins in its accident and health claim reserves to provide for
potential adverse deviation. Claim reserves estimates are continually reviewed
and adjusted as necessary.

10. NOTES PAYABLE

Short-term notes payable included $3,500,000 at December 31, 1995, drawn
under a line of credit arrangement. The borrowings are due in 1996 and bear
interest at prime and payable quarterly (See Note 22). The remaining balance
under the line of credit is due in April 1996.

At December 31, 1995 PFS had a loan of $13,393,000 which replaced the line
of credit utilized at December 31, 1994. The portion of the loan due in 1996
of $2,143,000 was included in short-term notes payable and the remainder was
included in long-term notes payable. Interest on the note is payable quarterly
currently at 5%. The note requires principal repayments of $535,000 per
quarter with a final payment on December 31, 1999. The Company holds
certificates of deposit at the bank in an amount equal to the outstanding
principal balance.

At December 31, 1995, PFS had an unsecured loan of $10,175,000. The portion
of the loan due in 1996 of $3,700,000 was included in short-term notes payable
and the balance was included in long-term notes payable. The note bears
interest currently at prime and is payable quarterly with the final payment
due August 1998.

At December 31, 1995, a PFS subsidiary had an unsecured loan of $825,000.
The portion of the loan due in 1996 of $300,000 is included in short-term
notes payable. The remainder of the note is included in long-term notes
payable. The note bears interest at prime and is payable quarterly with the
final payment due July 1998.

F-18
<PAGE>

PIONEER FINANCIAL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

At December 31, 1995, a PFS subsidiary had two loans totaling $3,565,000.
The portion of these loans due in 1996 of $311,000 are included in short-term
notes payable. The remainder of the notes are included in long-term notes
payable. The notes bear interest at prime and are payable quarterly with the
final payment due December 1999. PFS has guaranteed payment of the notes.

At December 31, 1995, PFS had $720,000 of short-term debt liability for
which a PFS agency subsidiary's future renewal commissions were pledged as
collateral.

At December 31, 1995 a PFS subsidiary had a short-term note payable in the
amount of $1,660,000 as a portion of the acquisition price of CNL. The
principal balance of the note may be reduced by the former parent of CNL for
capital losses incurred on mortgage loan and real estate holdings. Interest is
payable at the average earnings rate of the investments, currently 8%.

At December 31, 1995 a PFS subsidiary had a loan of $1,200,000. The loan
bears interest at 8.8% and is due in July 1996.

The weighted average interest rate on short-term notes payable at year end
was 5.0%, 7.7% and 8.4% in 1993, 1994 and 1995, respectively.

Interest paid amounted to $1,023,000, $4,950,000 and $6,629,000 for 1993,
1994, and 1995, respectively.

11. ACCIDENT AND HEALTH BUSINESS

In making the determination that policy liabilities, future premiums, and
anticipated investment income will be adequate to provide for future claims
and expenses (including the amortization of deferred policy acquisition
costs), PFS has made assumptions with regard to each of these items. Although
there is significant variability inherent in these estimates, management
believes that these assumptions are reasonable.

The amortization of deferred policy acquisition costs is generally based on
the expected pattern of future revenues or gross profits and on the expected
persistency of the policies. PFS monitors the profitability and persistency of
its policies on a monthly basis. In reviewing the recoverability of deferred
policy acquisition costs related to medical insurance products, PFS has made
assumptions relative to future rate increases, medical claim trends, lapse
rates, expenses and investment income. Increased lapses or revised estimates
of profitability anticipating future losses could result in an increase in the
amortization rate or a write-off of deferred policy acquisition costs, which
would adversely impact results of operations and financial condition.

Pursuant to a 1994 actuarial study, PFS revised certain of these assumptions
to reflect present and anticipated future experience. This study resulted in
increased amortization of deferred policy acquisition costs in 1994 of
$16,700,000.

12. STATUTORY-BASIS FINANCIAL INFORMATION

The following tables compare combined net income and stockholders' equity
for PFS' insurance subsidiaries determined on the basis as prescribed or
permitted by regulatory authorities (statutory basis) with consolidated net
income and stockholders' equity reported in accordance with GAAP. Statutory
basis accounting emphasizes solvency rather than matching revenues and
expenses during an accounting period. The significant differences between
statutory basis accounting and GAAP are as follows:

Deferred Policy Acquisition Costs. Costs of acquiring new policies are
expensed when incurred on a statutory basis rather than capitalized and
amortized over the term of the related policies in the GAAP financial
statements.

F-19
<PAGE>

PIONEER FINANCIAL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Policy Liabilities. Certain policy liabilities are calculated based on
statutorily required methods and assumptions on a statutory basis rather
than on estimated expected experience or, for annuity and interest-
sensitive life insurance, actual account balances for GAAP.

Financial Reinsurance. The effects of certain financial reinsurance
transactions are included in the statutory basis financial statements but
are eliminated from the GAAP financial statements.

Deferred Federal Income Taxes. Deferred federal income taxes are not
provided on a statutory basis for differences between financial statement
and tax return amounts.

Surplus Notes. Surplus notes are reported in capital and surplus on a
statutory basis rather than as liabilities in the GAAP financial
statements.

Non-insurance Companies' Equity. Contributions by PFS to the capital and
surplus of its insurance subsidiaries increases the stockholders' equity of
those insurance subsidiaries on a statutory basis but does not effect the
consolidated stockholders' equity on a GAAP basis.

Unrealized Appreciation/Depreciation On Fixed Maturities Available-For-
Sale. Fixed maturity securities classified as available-for-sale are
carried principally at amortized cost on a statutory basis rather than at
fair value with unrealized gains and losses on such securities reported as
a separate component of stockholders' equity in the GAAP financial
statements.

<TABLE>
<CAPTION>
1993 1994 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Combined net income on a statutory basis...... $10,155 $ 6,986 $ 9,576
Adjustment for:
Deferred policy acquisition costs........... (12,842) (34,814) (12,579)
Policy liabilities.......................... (18,494) 26,544 18,413
Financial reinsurance....................... 34,017 17,544 12,748
Deferred federal income taxes............... 4,239 (2,303) (3,347)
Non-insurance companies, eliminations, and
other adjustments.......................... (4,930) 3,192 (3,843)
------- ------- -------
Consolidated net income in accordance with
GAAP....................................... $12,145 $17,149 $20,968
======= ======= =======
</TABLE>

F-20
<PAGE>

PIONEER FINANCIAL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1994 1995
-------- --------
<S> <C> <C>
Combined stockholders' equity on a statutory basis... $124,284 $115,423
Adjustments for:
Deferred policy acquisition costs.................. 225,618 219,874
Policy liabilities................................. (180,422) (156,141)
Financial reinsurance.............................. (12,748) --
Deferred federal income taxes...................... 7,262 (2,393)
Non-admitted assets................................ 10,813 15,354
Surplus notes...................................... (4,436) (4,756)
Unrealized appreciation (depreciation) on
available-for-sale fixed maturities............... (14,021) 25,588
Other.............................................. (12,296) (18,710)
-------- --------
Combined insurance subsidiaries stockholders'
equity on a GAAP basis.............................. 144,054 194,239
Non-insurance companies equity, eliminations and
other adjustments................................... (75,726) (49,665)
-------- --------
Consolidated stockholders' equity in accordance
with GAAP........................................... $ 68,328 $144,574
======== ========
</TABLE>

Dividends from PFS' insurance subsidiaries unassigned surplus are limited
principally to the greater of the prior-year statutory-basis net gain from
operations or 10% of statutory-basis surplus. The total amount of dividends
that could be paid in 1996 without regulatory approval is $3,711,000. At
December 31, 1995, PFS' retained earnings was $61,231,000 in excess of the
combined statutory-basis unassigned surplus of the insurance subsidiaries.

PFS is required to maintain adequate amounts of statutory-basis capital and
surplus to satisfy regulatory requirements and provide capacity for production
of new business. Acquisition costs relating to the production of new business
result in a reduction of statutory-basis net income and capital and surplus.

13. CONVERTIBLE SUBORDINATED DEBENTURES

In July 1993 PFS issued $57,477,000 of 8% convertible subordinated
debentures due in 2000. Interest on the debentures is payable in January and
July of each year. Net proceeds from the offering totaled approximately
$54,000,000 and were used, in part, to repay long-term notes payable. The
debentures are convertible into PFS' Common Stock at any time prior to
maturity, unless previously redeemed, at a conversion price of $11.75 per
share.

In August 1995, the Company accepted the conversion of $46,900,000 of the
outstanding 8% convertible subordinated debentures. The effect of the
conversion was an increase in stockholders' equity of $45,300,000 and a charge
to income of $3,500,000, net of taxes. Had the conversion occurred at the
beginning of the year, primary earnings per share would have decreased to
$2.02.

The debentures are redeemable by PFS under certain conditions after July
1996.

At December 31, 1995, 825,106 shares of PFS' Common Stock were reserved for
conversion of the outstanding convertible subordinated debentures.

F-21
<PAGE>

PIONEER FINANCIAL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

14. REDEEMABLE PREFERRED STOCK

In 1989, PFS issued 1,000,000 shares of $2.125 Cumulative Convertible
Exchangeable Preferred Stock. The proceeds of the public offering were
$23,337,000 after reduction for expenses of $1,663,000, which expenses were
charged to additional paid-in capital. The Preferred Stock is carried on PFS'
balance sheet at the redemption and liquidation value of $25 per share. Each
share of Preferred Stock is convertible by the holders at any time into 1.6
shares of PFS Common Stock. Annual cumulative dividends of $2.125 per share
are payable quarterly. The preferred stock is nonvoting unless dividends are
in arrears. At December 31, 1995, 1,358,240 shares of PFS' Common Stock were
reserved for conversion of the outstanding preferred stock. The Preferred
Stock is redeemable at the option of the holders upon certain acquisitions or
other business combinations involving PFS Common Stock.

The Preferred Stock is redeemable by PFS at redemption prices of $25.85 per
share in 1995, declining to $25 in 1999. The Preferred Stock is exchangeable
in whole at PFS' option on any dividend payment date for PFS' 8 1/2%
Convertible Subordinated Debentures due in 2014 at the rate of $25 principal
amount of Subordinated Debentures for each share of Preferred Stock.

15. SHAREHOLDER RIGHTS AGREEMENT

In 1990, PFS distributed one preferred share purchase right for each
outstanding share of Common Stock. The rights are intended to cause
substantial dilution to a person or group that attempts to acquire PFS on
terms not approved by PFS' directors. The rights expire in 2000 or PFS may
redeem the rights prior to exercise for $.01 per right.

The rights are not exercisable unless a person or group acquires, or offers
to acquire, 20% or more of PFS' Common Stock under certain circumstances. The
rights, when exercisable, entitle the holder to purchase one-tenth of a share
of a new series of PFS Series A Junior Preferred Stock at a purchase price of
$45. Such preferred shares, of which 2,000,000 are authorized, would be voting
and would be entitled to distributions that are ten times the distributions to
common shareholders. Subsequent to exercise of the rights, in the event of
certain business combinations involving PFS, a holder of rights would have the
right to receive PFS Common Stock with a value of two times the exercise price
of the rights.

F-22
<PAGE>

PIONEER FINANCIAL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

16. STOCK OPTIONS AND RIGHTS

PFS has a nonqualified stock option plan and certain stock incentive
programs principally for directors and key employees of PFS and its
subsidiaries. PFS' Board of Directors grants the options and specifies the
conditions of the options. The number of shares of common stock available for
benefits under the plan is equal to 15% of the average fully diluted shares
outstanding for the prior fiscal year. Options expire ten years after grant.
Information with respect to these options is as follows:

<TABLE>
<CAPTION>
1994 1995
----------------------- -----------------------
NUMBER EXERCISE NUMBER OF EXERCISE
OF SHARES PRICE SHARES PRICE
--------- ------------ --------- ------------
<S> <C> <C> <C> <C>
Options outstanding at
beginning of year............. 733,250 $5.50-$12.00 1,045,571 $5.50-$12.00
Granted........................ 480,321 8.88- 11.38 1,019,364 9.00- 22.25
Exercised...................... (85,500) 5.50- 11.00 (147,000) 5.50- 12.00
Canceled/repurchased........... (82,500) 5.50- 12.00 (25,000) 10.75
--------- ------------ --------- ------------
Options outstanding at end of
year.......................... 1,045,571 $5.50-$12.00 1,892,935 $5.50-$22.25
========= =========
Options exercisable at end of
year.......................... 561,250 692,566
========= =========
Unoptioned shares available for
granting of options........... 1,535,201 1,996,662
========= =========
</TABLE>

17. COMMITMENTS AND CONTINGENCIES

PFS and its subsidiaries are named as defendants in various legal actions,
some claiming significant damages, arising primarily from claims under
insurance policies, disputes with agents, and other matters. PFS' management
and its legal counsel are of the opinion that the disposition of these actions
will not have a material adverse effect on PFS' financial position.

PFS leases various office facilities furniture and equipment and computer
equipment under noncancelable operating leases. Rent expense was $4,516,000,
$4,530,000, and $7,140,000 in 1993, 1994, and 1995, respectively. Minimum
future rental commitments in connection with noncancelable operating leases
are as follows:

PFS has entered into employment agreements with certain officers.

PFS' insurance subsidiaries are subject to extensive governmental regulation
and supervision at both federal and state levels. Such regulation includes
premium rate levels, premium rate increases, policy forms, minimum loss
ratios, dividend payments, claims settlement, licensing of insurers and their
agents, capital adequacy transfer of control, and amount and type of
investments. Additionally, there are numerous health care reform proposals and
regulatory initiatives under consideration which if enacted could have
significant impact of PFS' revenues and results of operations.

The number of insurance companies that are under regulatory supervision has
increased, and that increase is expected to result in an increase in
assessments by state guaranty funds to cover losses to policyholders of
insolvent or rehabilitated companies. Those mandatory assessments may be
partially recovered through a reduction in future premium taxes in some
states. For all assessment notifications received, PFS has accrued for those
assessments net of estimated future premium tax reductions.

F-23
<PAGE>

PIONEER FINANCIAL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

18. BENEFIT PLANS

PFS has a defined-contribution employee benefit plan that covers
substantially all home office employees who have attained age 21 and completed
one year of service. Plan participants may contribute from 1% to 10% of their
total compensation subject to an annual maximum. The plan also provides for
PFS to match participants' contributions up to $1,000 per year and 50% of
participants, contributions above $1,000 up to the annual Internal Revenue
Service limit ($9,240 in 1995). PFS makes employer contributions to the plan
in cash or in PFS Common Stock at the discretion of PFS' Board of Directors.
At December 31, 1995, the Plan's assets included PFS Common Stock of
$7,561,912, at fair value. PFS' contributions charged to operations were
$1,073,000 in 1993, $1,365,000 in 1994, and $1,564,804 in 1995.

A PFS subsidiary, which owns insurance and agency companies, had a stock
purchase plan that allowed certain eligible agents to purchase common stock in
the subsidiary at the subsidiary's per share book value. The plan was
terminated in November 1992. In accordance with the plan's provisions, agents
became fully vested. Eligible agents were given the option to participate in a
new agent stock purchase plan. This new plan allows agents to purchase PFS
Common Stock. Stock purchases are limited to a specific percentage of the
agent's commission as determined by PFS but in no event to be less than 3%.
Under the plan the agents are also credited with additional shares of PFS
Common Stock as determined by PFS. In 1993, 1994, and 1995, 8,057 shares,
6,332 shares, and 2,016 shares, respectively, of PFS Common Stock were issued
under this plan.

19. ALLOWANCES AND ACCUMULATED DEPRECIATION

Allowances for doubtful accounts related to other receivables amounted to
$895,000 at December 31, 1994 and $1,548,000 at December 31, 1995.

Accumulated depreciation related to building and equipment amounted to
$19,235,000 at December 31, 1994 and $23,370,000 at December 31, 1995.

20. FAIR VALUE INFORMATION

The following methods and assumptions were used by PFS in estimating its
fair values for financial instruments:

Cash, short-term investments, short-term notes payable, and accrued
investment income: The carrying amounts reported in the balance sheets for
these instruments approximate their fair values.

Investment securities: Fair values for fixed maturity securities
(including redeemable preferred stocks) are based on quoted market prices,
where available. For fixed maturity securities not actively traded, fair
values are estimated using values obtained from independent pricing
services, or, in the case of private placements, are estimated by
discounting expected future cash flows using a current market rate
applicable to the yield quality, and maturity of the investments. The fair
values for equity securities are based on quoted market prices.

Mortgage loans and policy loans: The carrying amount of PFS' mortgage
loans approximates their fair values. The fair values for policy loans are
estimated using capitalization of earnings methods, using interest rates
currently being offered for similar loans to borrowers with similar credit
ratings.

Investment contracts: Fair values for PFS' liabilities under investment-
type insurance contracts are based on current cash surrender values.

Fair values for PFS' insurance policies other than investment contracts
are not required to be disclosed. However, the fair values of liabilities
under all insurance policies are taken into consideration in PFS'

F-24
<PAGE>

PIONEER FINANCIAL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
overall management of interest rate risk, which minimizes exposure to
changing interest rates through the matching of investment maturities with
amounts due under insurance policies.

Long-term notes payable: The fair value of PFS' long-term notes payable
approximates the carrying value.

Convertible subordinated debentures: The fair value of PFS' convertible
subordinated debentures is based on quoted market prices.

The fair values of certain financial instruments along with their
corresponding carrying values of December 31, 1994 and 1995 are as follows:

<TABLE>
<CAPTION>
1994 1995
----------------- -----------------
FAIR CARRYING FAIR CARRYING
VALUE VALUE VALUE VALUE
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Financial Assets:
Fixed Maturities:
Available-for-sale...................... $218,748 $218,748 $622,666 $622,666
Held-to-maturity........................ 338,540 378,650 252,728 246,041
Equity securities......................... 15,440 15,440 15,570 15,570
Mortgage loans............................ 1,806 1,806 9,253 9,253
Policy loans.............................. 22,025 23,082 78,230 79,122
Financial Liabilities:
Investment contracts...................... 194,072 203,654 205,160 214,573
Long-term notes payable................... 2,520 2,520 21,504 21,504
Subordinated debentures................... 54,843 57,427 14,833 9,695
</TABLE>

During 1994, PFS began using exchange-traded treasury futures contracts as
part of its overall interest rate risk management strategy for a portion of
its life and annuity business. The initial margin deposit paid for the futures
represents their cost basis which is adjusted to fair value in the financial
statements. Realized and unrealized gains and losses, which were immaterial in
1994 and 1995, are recognized as an adjustment to the carrying amount of the
asset being hedged. PFS had no futures contracts outstanding at December 31,
1995.

F-25
<PAGE>

PIONEER FINANCIAL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

21. SEGMENT INFORMATION

PFS has four business segments: Group Medical, Senior Health, Life
Insurance, and Medical Utilization Management. The segments are based on PFS'
main Divisions. Allocations of investment income and certain general expenses
are based on various assumptions and estimates, and reported operating results
by segment would change if different methods were applied. Assets are not
individually identifiable by segment and have been allocated based on the
amount of policy liabilities by segment and by other formulas. Depreciation
expense and capital expenditures are not considered material. Realized
investment gains and losses are allocated to the appropriate segment. General
corporate expenses are not allocated to the individual segments. Revenues,
income or loss before income taxes, and identifiable assets by business
segment are as follows:

<TABLE>
<CAPTION>
1993 1994 1995
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
REVENUES
Group Medical:
Unaffiliated.............................. $ 379,742 $ 457,633 $ 430,885
Inter-segment............................. 30,439 35,373 21,541
Senior Health............................... 247,100 235,031 236,556
Life Insurance.............................. 67,780 71,075 115,545
Medical Utilization Management:
Unaffiliated.............................. 4,506 10,416 17,098
Inter-segment............................. 4,358 4,927 4,007
---------- ---------- ----------
733,925 814,455 825,632
Eliminations................................ 34,797 40,300 25,548
---------- ---------- ----------
Total................................... $ 699,128 $ 774,155 $ 800,084
========== ========== ==========
INCOME (LOSS) BEFORE INCOME TAXES
Group Medical............................... $ 6,528 $ 10,889 $ 19,729
Senior Health............................... 12,255 13,420 16,753
Life Insurance.............................. 7,623 8,537 7,128
Medical Utilization Management.............. (1,211) 2,026 739
Corporate expenses.......................... (6,431) (8,850) (12,627)
---------- ---------- ----------
Total................................... $ 18,764 $ 26,022 $ 31,722
========== ========== ==========
IDENTIFIABLE ASSETS AT YEAR-END
Group Medical............................... $ 287,713 $ 245,763 $ 245,439
Senior Health............................... 301,700 291,703 337,789
Life Insurance.............................. 514,154 533,070 966,095
Medical Utilization Management.............. 4,704 5,164 9,598
---------- ---------- ----------
Total................................... $1,108,271 $1,075,700 $1,558,921
========== ========== ==========
</TABLE>

22. CREDIT ARRANGEMENTS

PFS has a line of credit arrangement for short-term borrowings with three
banks amounting to $17,000,000 through April 1996, of which $3,500,000 was
used at December 31, 1995. The line of credit arrangement can be terminated,
in accordance with the agreement, at PFS' option.

F-26
<PAGE>

PIONEER FINANCIAL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)

23. SUBSEQUENT EVENTS

PFS signed a letter of intent to purchase Universal Fidelity Life Insurance
Company (Universal) for approximately $26,000,000 in March 1996. For 1995
Universal had statutory-basis premium revenue of approximately $33,000,000,
assets of $40,000,000, and statutory basis capital and surplus of
approximately $18,000,000.

On February 21, 1996 PFS filed a Registration Statement with the Securities
and Exchange Commission for the issuance of approximately $65,000,000 of
convertible subordinated notes due 2003 plus up to $9,750,000 which may be
used for over-allotments. PFS intends to use the net proceeds from the
offering to call its outstanding redeemable preferred stock and repay
outstanding bank debt. Any remaining proceeds will be contributed to the
capital and surplus of the insurance subsidiaries.

24. QUARTERLY FINANCIAL DATA (UNAUDITED)

A summary of unaudited quarterly results of operations for 1994 and 1995 is
as follows (in thousands, except per share amounts):

<TABLE>
<CAPTION>
1994
-----------------------------------
1ST 2ND 3RD 4TH
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Premiums and policy charges........... $172,898 $176,803 $176,190 $178,219
Net investment income and other....... 18,367 16,926 17,674 17,079
Net income............................ 4,500 4,403 3,321 4,926
Net income per share:
Primary............................. .60 .59 .44 .73
Fully diluted....................... .40 .40 .32 .46
<CAPTION>
1995
-----------------------------------
1ST 2ND 3RD 4TH
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Premiums and policy charges........... $169,575 $162,706 $174,678 $180,084
Net investment income and other....... 24,444 27,546 27,065 33,986
Net income............................ 4,955 5,360 3,316 7,337
Net income per share:
Primary............................. .73 .78 .32 .60
Fully diluted....................... .47 .48 .30 .59
</TABLE>

F-27
<PAGE>

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

NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
COMPANY SINCE THE DATE HEREOF OR SINCE THE DATES AS OF WHICH INFORMATION IS
SET FORTH HEREIN. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR A
SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION
IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS
NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Incorporation of Certain Documents by Reference........................... 2
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 10
Use of Proceeds........................................................... 14
Price Range of Common Stock and Dividend Policy........................... 15
Capitalization............................................................ 16
Selected Financial and Operating Data..................................... 17
Management's Discussion and Analysis of Results of Operations and
Financial Condition...................................................... 19
Business.................................................................. 28
Management and Directors.................................................. 42
Principal Holders of Securities........................................... 45
Description of Notes...................................................... 47
Description of Capital Stock.............................................. 55
Certain Federal Income Tax Consequences................................... 58
Underwriting.............................................................. 60
Available Information..................................................... 61
Legal Matters............................................................. 61
Experts................................................................... 61
Index to Consolidated Financial Statements................................ F-1
</TABLE>

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

$65,000,000

PIONEER FINANCIAL SERVICES, INC.

% CONVERTIBLE SUBORDINATED

NOTES DUE 2003

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

PROSPECTUS

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

BEAR, STEARNS & CO. INC.

EVEREN SECURITIES, INC.

OPPENHEIMER & CO., INC.

, 1996

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following are the actual or estimated expenses in connection with the
issuance and distribution of the securities being registered:

<TABLE>
<S> <C>
Registration Fee................................................ $ 25,776
Printing of Registration Statement and Prospectus............... 100,000
Accounting Fees and Expenses.................................... 125,000
Legal Fees...................................................... 200,000
Trustees fees................................................... 15,000
NASD Filing Fee................................................. 7,975
Blue Sky fees and expenses...................................... 20,000
Miscellaneous................................................... 6,249
--------
Total....................................................... $500,000
========
</TABLE>

ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 145 of the Delaware General Corporation Law contains provisions
under which corporations organized thereunder are permitted or required in
certain circumstances to indemnify directors, officers and others against
certain liabilities and permitted to maintain insurance to cover such
liabilities and liabilities against which such corporations may not directly
indemnify such persons. Article Thirteenth of the Certificate of Incorporation
and the by-laws of the Registrant grant indemnification to such persons to the
extent permitted by Delaware law and authorize the purchase of such insurance.
The Registrant has purchased such insurance.

Reference is made to the Underwriting Agreement to be filed as Exhibit 1
which contains indemnification provisions between the Registrant and the
Underwriters against certain civil liabilities, including liabilities under
the Securities Act of 1933.

ITEM 16. EXHIBITS.

<TABLE>
<S> <C>
1 Form of Underwriting Agreement*
4(a) Certificate of Designations with respect to the Company's $2.125
Cumulative Convertible Exchangeable Preferred Stock ("Preferred Stock")
(filed as Exhibit 4(a) to Post-Effective Amendment No. 1 to the Company's
Registration Statement on Form S-1 (No. 33-30017) and incorporated herein
by reference)
4(b) Proposed form of Indenture with respect to the Company's 8 1/2%
Convertible Subordinated Debentures due 2014 into which the Preferred
Stock is exchangeable (filed as Exhibit 4(b) to Post-Effective Amendment
No. 1 to the Company's Registration Statement on Form S-1 (No. 33-30017)
and incorporated herein by reference)
4(c) Rights Agreement dated as of December 12, 1990 between the Company and
First Chicago Trust Company of New York as Rights Agent (including
exhibits thereto) (filed as Exhibit 1 to the Company's registration
statement on Form 8-A dated December 14, 1990 and incorporated herein by
reference)
4(d) Form of Indenture relating to the Company's 8% Convertible Subordinated
Debentures due 2000, between Pioneer Financial Services, Inc. and Harris
Trust and Savings Bank, as Trustee (filed as Exhibit 4(d) to the Company's
Registration Statement on Form S-2 (No. 33-62760) and incorporated herein
by reference)
</TABLE>

II-1
<PAGE>

<TABLE>
<S> <C>
4(e) Form of 8% Convertible Subordinated Debenture due 2000 (included in
Exhibit 4(d) to the Company's Registration Statement on Form S-2 (No. 33-
62760) and incorporated herein by reference)
4(f) Form of Indenture between Pioneer Financial Services, Inc. and The First
National Bank of Chicago, as Trustee*
4(g) Form of % Convertible Subordinated Note due 2003 (included in Exhibit
4(f))*
5 Opinion of McDermott, Will & Emery, counsel to the Company, as to the
legality of the securities being registered*
12 Statement regarding computation of ratio of earnings to Fixed charges.
23(a) Consent of Ernst & Young LLP
23(b) Consent of McDermott, Will & Emery (included in Exhibit 5)*
24 Power of Attorney (included on signature page)
25 Form T-1 Statement of Eligibility Under Trust Indenture Act of 1939 of The
First National Bank of Chicago.
</TABLE>
- --------
*To be filed by amendment.

ITEM 17. UNDERTAKINGS.

The undersigned Registrant hereby undertakes:

(1) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officer and
controlling persons of the Company pursuant to the foregoing provisions
described in Item 15, 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 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 public policy as expressed in the Act and will be governed by the
final adjudication of such issue.

(2) For the purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as a
part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this registration statement as of the time it was declared
effective.

(3) For the purposes of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus 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.

(4) For purposes of determining any liability under the Securities Act of
1933, each filing of the registrant's annual report pursuant to section
13(a) or section 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report
pursuant to section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the registration statement 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.

II-2
<PAGE>

SIGNATURES

PURSUANT TO 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 S-3 AND HAS DULY CAUSED THIS AMENDMENT TO
REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED,
THEREUNTO DULY AUTHORIZED, IN THE CITY OF CHICAGO, STATE OF ILLINOIS, ON THIS
12TH DAY OF MARCH, 1996.

Pioneer Financial Services, Inc.

/s/ Peter Nauert
By: _________________________________
Peter W. Nauert, Chairman, Chief
Executive Officer and Director

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
TO REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN
THE CAPACITIES AND ON THE DATES INDICATED.

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

<S> <C> <C>
/s/ Peter W. Nauert Chairman, Chief Executive March 12, 1996
____________________________________ Officer and Director
Peter W. Nauert

/s/ David I. Vickers Vice President, Treasurer March 12, 1996
____________________________________ and Chief Financial
David I. Vickers Officer (Chief Accounting
Officer)

* President--Life Insurance March 12, 1996
____________________________________ Operations and Director
Charles R. Scheper

* President--Health Insurance March 12, 1996
____________________________________ Operations and Director
Thomas J. Brophy

* Director and General Counsel March 12, 1996
____________________________________ Emeritus
William B. Van Vleet

* Director March 12, 1996
____________________________________
Robert F. Nauert

* Director March 12, 1996
____________________________________
Michael A. Cavataio

* Director March 12, 1996
____________________________________
Karl-Heinz Klaeser

* Director March 12, 1996
____________________________________
Richard R. Haldeman

</TABLE>

II-3
<PAGE>

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* Director March 12, 1996
____________________________________
R. Richard Bastain, III

* Director March 12, 1996
____________________________________
Michael K. Keefe

* Director March 12, 1996
____________________________________
Carl A. Hulbert
</TABLE>

/s/ David I. Vickers

*By: _____________________

Attorney-In-Fact

II-4
<PAGE>

INDEX TO EXHIBITS FILED
TO REGISTRATION STATEMENT ON
FORM S-3 OF PIONEER FINANCIAL SERVICES, INC.

<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBIT PAGE
------- ------- ------------
<C> <S> <C>
1 Form of Underwriting Agreement*......................
4 (f) Form of Indenture between Pioneer Financial Services,
Inc. and The First National Bank of Chicago, as
Trustee*.............................................
4 (g) Form of % Convertible Subordinated Note due 2003
(included in Exhibit 4(f))*..........................
5 Opinion of McDermott, Will & Emery, counsel to the
Company, as to the legality of the securities being
registered*..........................................
12 Computation of Ratios of Earnings to Fixed Charges...
23(a) Consent of Ernst & Young LLP.........................
23(b) Consent of McDermott, Will & Emery (included in Ex-
hibit 5)*............................................
25 Power of Attorney (included on signature page).......
26 Form T-1 Statement of Eligibility under Trust Inden-
ture Act of 1939 of , as Trustee...........
</TABLE>
- --------
* To be filed by amendment.

<PAGE>

EXHIBIT 12

PIONEER FINANCIAL SERVICES, INC.

STATEMENT OF COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(IN THOUSANDS, EXCEPT RATIOS)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1991 1992 1993 1994 1995
------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Computation of earnings:
Income (loss) before income taxes
per statement of consolidated
operations......................... $13,320 $(25,436) $18,764 $26,022 $31,722
Add Back Fixed Charges:
Interest on indebtedness,
amortization of debt issue costs
and interest portion of rent
expense............................ 3,335 2,387 4,025 6,098 6,225
------- -------- ------- ------- -------
Income (loss) (as adjusted).......... $16,655 $(23,049) $22,789 $32,120 $37,947
======= ======== ======= ======= =======
Fixed Charges:
Total fixed charges (interest on
indebtedness, amortization of debt
issue costs and interest portion of
rent expenses)..................... $ 3,335 $ 2,387 $ 4,025 $ 6,098 $ 6,225
======= ======== ======= ======= =======
Ratio of Earnings to Fixed Charges.. 4.99 N/A 5.66 5.27 6.10
======= ======== ======= ======= =======
</TABLE>

<PAGE>

EXHIBIT 23(A)

CONSENT OF INDEPENDENT AUDITORS

We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated March 8, 1996 in Amendment No. 1 to the
Registration Statement (Form S-3 No. 333-1119) and related Prospectus of
Pioneer Financial Services, Inc. for the registration of Convertible
Subordinated Notes Due 2003.

We also consent to the incorporation by reference therein of our report
dated March 8, 1996, with respect to the consolidated financial statements and
financial statement schedules of Pioneer Financial Services, Inc. and
subsidiaries included in its Annual Report (Form 10-K) for the year ended
December 31, 1995, filed with the Securities and Exchange Commission.

ERNST & YOUNG LLP

Chicago, Illinois

March 8, 1996

<PAGE>
Exhibit 26

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM T-1
--------

STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939
OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE

CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY
OF A TRUSTEE PURSUANT TO SECTION 305(b)(2)
------
---------------------------------

THE FIRST NATIONAL BANK OF CHICAGO
(EXACT NAME OF TRUSTEE AS SPECIFIED IN ITS CHARTER)

A NATIONAL BANKING ASSOCIATION 36-0899825
(I.R.S. EMPLOYER
IDENTIFICATION NUMBER)

ONE FIRST NATIONAL PLAZA, CHICAGO, ILLINOIS 60670-0126
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

THE FIRST NATIONAL BANK OF CHICAGO
ONE FIRST NATIONAL PLAZA, SUITE 0286
CHICAGO, ILLINOIS 60670-0286
ATTN: LYNN A. GOLDSTEIN, LAW DEPARTMENT (312) 732-6919
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)

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

PIONEER FINANCIAL SERVICES, INC.
(EXACT NAME OF OBLIGOR AS SPECIFIED IN ITS CHARTER)

DELAWARE 36-2479273
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)

1750 EAST GOLF ROAD
SCHAUMBURG, ILLINOIS 60173
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

DEBT SECURITIES
(TITLE OF INDENTURE SECURITIES)
<PAGE>

ITEM 1. GENERAL INFORMATION. FURNISH THE FOLLOWING INFORMATION AS TO
THE TRUSTEE:

(A) NAME AND ADDRESS OF EACH EXAMINING OR
SUPERVISING AUTHORITY TO WHICH IT IS SUBJECT.

Comptroller of Currency, Washington, D.C.,
Federal Deposit Insurance Corporation,
Washington, D.C., The Board of Governors of
the Federal Reserve System, Washington, D.C.

(B) WHETHER IT IS AUTHORIZED TO EXERCISE
CORPORATE TRUST POWERS.

The trustee is authorized to exercise corporate
trust powers.

ITEM 2. AFFILIATIONS WITH THE OBLIGOR. IF THE OBLIGOR
IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE EACH
SUCH AFFILIATION.

No such affiliation exists with the trustee.

ITEM 16. LIST OF EXHIBITS. LIST BELOW ALL EXHIBITS FILED AS A
PART OF THIS STATEMENT OF ELIGIBILITY.

1. A copy of the articles of association of the
trustee now in effect.*

2. A copy of the certificates of authority of the
trustee to commence business.*

3. A copy of the authorization of the trustee to
exercise corporate trust powers.*

4. A copy of the existing by-laws of the trustee.*

5. Not Applicable.

6. The consent of the trustee required by
Section 321(b) of the Act.

2
<PAGE>

7. A copy of the latest report of condition of the
trustee published pursuant to law or the
requirements of its supervising or examining
authority.

8. Not Applicable.

9. Not Applicable.

Pursuant to the requirements of the Trust Indenture Act of 1939, as
amended, the trustee, The First National Bank of Chicago, a national
banking association organized and existing under the laws of the United
States of America, has duly caused this Statement of Eligibility to be
signed on its behalf by the undersigned, thereunto duly authorized, all in
the City of Chicago and State of Illinois, on the 5th day of March, 1996.

THE FIRST NATIONAL BANK OF CHICAGO,
TRUSTEE,

BY /S/ JOHN R. PRENDIVILLE
JOHN R. PRENDIVILLE
VICE PRESIDENT

*Exhibits 1, 2, 3 and 4 are herein incorporated by reference to Exhibits
bearing identical numbers in Item 12 of the Form T-1 of The First National
Bank of Chicago, filed as Exhibit 26 to the Registration Statement on Form
S-3 of The CIT Group Holdings, Inc. filed with the Securities and Exchange
Commission on February 16, 1993 (Registration No. 33-58418).

3
<PAGE>

EXHIBIT 6

THE CONSENT OF THE TRUSTEE REQUIRED
BY SECTION 321(b) OF THE ACT

March 5, 1996

Securities and Exchange Commission
Washington, D.C. 20549

Gentlemen:

In connection with the qualification of an indenture between Pioneer Financial
Services, Inc. and The First National Bank of Chicago, the undersigned, in
accordance with Section 321(b) of the Trust Indenture Act of 1939, as amended,
hereby consents that the reports of examinations of the undersigned, made by
Federal or State authorities authorized to make such examinations, may be
furnished by such authorities to the Securities and Exchange Commission upon its
request therefor.

Very truly yours,

THE FIRST NATIONAL BANK OF CHICAGO

BY /S/ JOHN R. PRENDIVILLE
JOHN R. PRENDIVILLE
VICE PRESIDENT

4
<PAGE>

EXHIBIT 7
<TABLE>
<CAPTION>

Legal Title of Bank: The First National Bank of Chicago Call Date: 12/31/95 ST-BK: 17-1630 FFIEC 031
Address: One First National Plaza, Suite 0460 Page RC-1
City, State Zip: Chicago, IL 60670-0460
FDIC Certificate No.: 0/3/6/1/8

CONSOLIDATED REPORT OF CONDITION FOR INSURED COMMERCIAL AND STATE-CHARTERED SAVINGS BANKS FOR DECEMBER 31, 1995

All schedules are to be reported in thousands of dollars. Unless otherwise indicated, report the amount outstanding of the last
business day of the quarter.

SCHEDULE RC--BALANCE SHEET C400
Dollar Amounts in ------------
Thousands RCFD BIL MIL THOU [-
-------------------- ---- ------------ ----
<S> <C> <C> <C> <C>
ASSETS
1. Cash and balances due from depository institutions (from Schedule RC-A):
a. Noninterest-bearing balances and currency and coin(1)................ 0081 4,003,995 1.a.
b. Interest-bearing balances(2)......................................... 0071 9,240,284 1.b.
2. Securities
a. Held-to-maturity securities (from Schedule RC-B, column A)........... 1754 0 2.a.
b. Available-for-sale securities (from Schedule RC-B, column D)......... 1773 827,134 2.b.
3. Federal funds sold and securities purchased under agreements to
resell in domestic offices of the bank and its Edge and Agreement
subsidiaries, and in IBFs:
a. Federal Funds sold................................................... 0276 3,287,844 3.a.
b. Securities purchased under agreements to resell...................... 0277 612,400 3.b.
4. Loans and lease financing receivables:
a. Loans and leases, net of unearned income (from Schedule RC-C)........ RCFD 2122 16,463,126 4.a.
b. LESS: Allowance for loan and lease losses............................ RCFD 3123 353,777 4.b.
c. LESS: Allocated transfer risk reserve................................ RCFD 3128 0 4.c.
d. Loans and leases, net of unearned income, allowance, and
reserve (item 4.a minus 4.b and 4.c)................................. 2125 16,109,349 4.d.
5. Assets held in trading accounts 3545 12,379,396 5.
6. Premises and fixed assets (including capitalized leases)................ 2145 591,753 6.
7. Other real estate owned (from Schedule RC-M)............................ 2150 8,796 7.
8. Investments in unconsolidated subsidiaries and associated
companies (from Schedule RC-M).......................................... 2130 40,560 8.
9. Customers' liability to this bank on acceptances outstanding............ 2155 524,918 9.
10. Intangible assets (from Schedule RC-M).................................. 2143 101,011 10.
11. Other assets (from Schedule RC-F)....................................... 2160 1,633,056 11.
12. Total assets (sum of items 1 through 11)................................ 2170 49,360,496 12.
- ------------------
</TABLE>

(1) Includes cash items in process of collection and unposted debits.
(2) Includes time certificates of deposit not held in trading accounts.

5
<PAGE>

Legal Title of Bank: The First National Bank of Chicago Call Date: 12/31/95 ST-BK: 17-1630 FFIEC 031
Address: One First National Plaza, Suite 0460 Page RC-2
City, State Zip: Chicago, IL 60670-0460
FDIC Certificate No.: 0/3/6/1/8

SCHEDULE RC-CONTINUED
Dollar Amounts in
Thousands Bil Mil Thou
------------------ ------------
<S> <C> <C> <C> <C>
LIABILITIES
13. Deposits:
a. In domestic offices (sum of totals of columns A and C
from Schedule RC-E, part I)........................................ RCON 2200 15,174,243 13.a.
(1) Noninterest-bearing(1)......................................... RCON 6631 6,217,164 13.a.(1)
(2) Interest-bearing............................................... RCON 6636 8,957,079 13.a.(2)
b. In foreign offices, Edge and Agreement subsidiaries, and IBFs
(from Schedule RC-E, part II)...................................... RCFN 2200 14,435,503 13.b.
(1) Noninterest bearing............................................ RCFN 6631 625,206 13.b.(1)
(2) Interest-bearing............................................... RCFN 6636 13,810,297 13.b.(2)
14. Federal funds purchased and securities sold under agreements to
repurchase in domestic offices of the bank and of its Edge and
Agreement subsidiaries, and in IBFs:
a. Federal funds purchased......................................... RCFD 0278 2,449,282 14.a.
b. Securities sold under agreements to repurchase.................. RCFD 0279 880,215 14.b.
15. a. Demand notes issued to the U.S. Treasury........................ RCON 2840 93,942 15.a.
b. Trading Liabilities............................................. RCFD 3548 7,523,265 15.b.
16. Other borrowed money:
a. With original maturity of one year or less...................... RCFD 2332 1,897,370 16.a.
b. With original maturity of more than one year.................... RCFD 2333 383,807 16.b.
17. Mortgage indebtedness and obligations under capitalized leases..... RCFD 2910 280,522 17.
18. Bank's liability on acceptance executed and outstanding............ RCFD 2920 524,918 18.
19. Subordinated notes and debentures.................................. RCFD 3200 1,225,000 19.
20. Other liabilities (from Schedule RC-G)............................. RCFD 2930 1,444,364 20.
21. Total liabilities (sum of items 13 through 20)..................... RCFD 2948 46,312,431 21.
22. Limited-Life preferred stock and related surplus................... RCFD 3282 0 22.
EQUITY CAPITAL
23. Perpetual preferred stock and related surplus...................... RCFD 3838 0 23.
24. Common stock....................................................... RCFD 3230 200,858 24.
25. Surplus (exclude all surplus related to preferred stock)........... RCFD 3839 2,320,126 25.
26. a. Undivided profits and capital reserves.......................... RCFD 3632 519,849 26.a.
b. Net unrealized holding gains (losses) on available-for-sale
securities...................................................... RCFD 8434 7,315 26.b.
27. Cumulative foreign currency translation adjustments................ RCFD 3284 (83) 27.
28. Total equity capital (sum of items 23 through 27).................. RCFD 3210 3,048,065 28.
29. Total liabilities, limited-life preferred stock, and equity
capital (sum of items 21, 22, and 28).............................. RCFD 3300 49,360,496 29.

Memorandum
To be reported only with the March Report of Condition.
1. Indicate in the box at the right the number of the statement below that
best describes the most comprehensive level of auditing work performed Number
for the bank by independent external auditors as of any -------------------
date during 1993..................................................................... | RCFD 6724 N/A | M.1.
-------------------
1 = Independent audit of the bank conducted in accordance with generally accepted auditing standards by a certified public
accounting firm which submits a report on the bank
2 = Independent audit of the bank's parent holding company conducted in accordance with generally accepted auditing standards by a
certified public accounting firm which submits a report on the consolidated holding company (but not on the bank separately)
3 = Directors' examination of the bank conducted in accordance with generally accepted auditing standards by a certified public
accounting firm (may be required by state chartering authority)
4 = Directors' examination of the bank performed by other external auditors (may be required by state chartering authority)
5 = Review of the bank's financial statements by external auditors
6 = Compilation of the bank's financial statements by external auditors
7 = Other audit procedures (excluding tax preparation work)
8 = No external audit work

</TABLE>

------------------
(1) Includes total demand deposits and noninterest-bearing time and savings
deposits.