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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2003

OR

For the transition period from                      to                      .

Commission file number 000-50041

U.S.I. Holdings Corporation

(Exact name of registrant as specified in its charter)

555 Pleasantville Road

Suite 160 South

Briarcliff Manor, New York 10510

(Address of principal executive offices, including zip code)

(914) 749-8500

(Registrant’s telephone number, including area code)

Securities registered pursuant to 12(b) of the Act

None

Securities registered pursuant to section 12(g) of the Act:

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).  Yes  x    No  ¨

The aggregate market value of the Registrant’s voting common stock held by non-affiliates of the Registrant, computed by reference to the closing price of such stock on June 30, 2003, was approximately $419,848,088.

As of March 3, 2004, the number of outstanding shares of the Registrant’s common stock, $.01 par value, was 46,662,032 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s definitive Proxy Statement to be filed for its 2004 annual meeting of stockholders are incorporated by reference into Part III of this Form 10-K.

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U.S.I. HOLDINGS CORPORATION

INDEX

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Forward Looking Statements

This report contains forward-looking statements within the meaning of that term in the Private Securities Litigation Reform Act of 1995 found at Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Additional written or oral forward-looking statements may be made by the Company from time to time in filings with the Securities Exchange Commission, press releases, or otherwise. Statements contained in this report that are not historical facts are forward-looking statements made pursuant to the safe harbor provisions of the Act. Forward-looking statements may include, but are not limited to, discussions concerning revenues, expenses, earnings, cash flow, capital structure, financial losses, as well as market and industry conditions, premium rates, financial markets, interest rates, contingencies and matters relating to the Company’s operations and income taxes. In addition, when used in this report, the words “anticipates,” “believes,” “should,” “estimates,” “expects,” “intends,” “plans” and variations thereof and similar expressions are intended to identify forward-looking statements. Such forward-looking statements are based on available current market and industry material, experts’ reports and opinions and long-term trends, as well as management’s expectations concerning future events impacting us.

Forward-looking statements are not historical facts, but instead represent the Company’s belief regarding future events, many of which, by their nature, are inherently uncertain and outside of the Company’s control. It is possible that the Company’s actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these forward-looking statements. Further information concerning the Company and its business, including factors that potentially could materially affect the Company’s financial results, are contained in the Company’s filings with the Securities and Exchange Commission. Some factors include: the Company’s ability to grow revenues organically and expand its margins; successful acquisition integration; errors and omissions claims; future regulatory actions; the Company’s ability to attract and retain key sales and management professionals; the Company’s level of indebtedness and debt service requirements; downward commercial property and casualty premium pressures; the competitive environment; and general economic conditions around the country. The Company’s ability to grow has been enhanced through acquisitions, which may or may not be available on acceptable terms in the future and which, if consummated, may or may not be advantageous to the Company. Accordingly, actual results may differ materially from those set forth in the forward-looking statements.

Readers are cautioned not to place undue reliance on any forward-looking statements contained in this report, which speak only as of the date set forth on the signature page hereto. The Company does not undertake any obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect events or circumstances after such date or to reflect the occurrence of anticipated or unanticipated events.

PART I

Item 1.    Business

We are a distributor of insurance and financial products and services to small and mid-sized businesses. Founded in 1994, we have grown organically and through acquisitions to become the ninth largest insurance broker in the United States and a provider of employee health and welfare products and related consulting and administration services. We currently have approximately 60,000 small and mid-sized business clients. We have two operating segments, Insurance Brokerage and Specialized Benefits Services and an administrative segment, Corporate. Information regarding our historical financial results is set forth in our consolidated financial statements included in Part II, Item 8 of this report. The products and services we distribute and offer through our two operating and administrative segments can be categorized as:

Insurance Brokerage Segment

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Specialized Benefits Services Segment

Corporate Segment

Approximately 85% of our revenues for the year ended December 31, 2003 was derived from our Insurance Brokerage segment. Within this segment, approximately 68% relates to P&C insurance and 32% to Group Employee Benefits insurance. Approximately 15% of our revenues in 2003 was derived from our Specialized Benefits Services segment. Within this segment, approximately 47% relates to core benefits, 30% to benefits enrollment and communication and 23% to executive and professional benefits. Please read Note 14—“Segment Reporting” to our consolidated financial statements. Our Corporate segment had less than 0.2% of our revenues.

We have approximately 370 sales professionals and product specialists based in 59 offices in 19 states.

Our History

Since our inception in 1994, we have built a national distribution system through the acquisition, consolidation and integration of over 100 insurance brokers and related businesses. Substantially all of these acquisitions were completed before December 31, 1999. Our early acquisition growth strategy was financed primarily by equity investments by private investment firms and large insurance and financial services companies, or their respective affiliates.

In 2001 and 2002, we shifted our focus mostly toward integrating these operations. We committed significant resources to establishing operating and financial reporting standards and conforming the technology platforms utilized by our various business units. In 2003, we expanded our focus and efforts toward implementing a disciplined acquisition strategy.

In 1999, we raised equity capital from Capital Z Financial Services Fund II, L.P., and its affiliates (Capital Z), along with other investors, the proceeds of which were used towards managing our capital structure and funding the growth of our business.

On October 25, 2002, we completed an initial public offering of 9,000,000 shares of our common stock at a price of $10.00 per share. The proceeds from our initial public offering, net of the underwriting discount and expenses, of approximately $78.4 million were used to repay indebtedness under our credit facility.

Capital Z is our largest investor. Capital Z is a leading private equity investment firm focused on the financial services sector, with significant experience in the insurance area. Capital Z, together with its representative on our board, own 20.7% of our common stock at December 31, 2003. One member of our board of directors is a Capital Z partner.

Operations

We are currently organized into five geographic regions and one product line unit. Each of these businesses is managed by a chief executive officer and a chief financial officer. Through this organizational structure, we seek to maintain day-to-day management responsibility and controls at the regional unit level, enabling employees at that level to be responsive to our clients’, product manufacturers’ and employees’ needs. At the same time, however, through the policies and procedures we instituted, senior management is able to effectively monitor our nationwide operations. These policies and procedures include preparing monthly operating, financial and sales reports for each region to corporate management.

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Sales

Our sales strategy is to be a single distribution point to middle-market businesses, serving their insurance and financial products and services needs. Of our approximately 370 sales professionals, 340 are in the Insurance Brokerage segment and 30 are in the Specialized Benefits Services segment. We evaluate our sales professionals by measuring the revenues they generate from new business and cross-selling and the revenues they are able to retain from existing clients. We utilize sales force automation, or SFA, software to manage and track the progression and status of sales prospects.

We originate sales opportunities through a number of channels. We focus primarily on selling products and services to new and existing clients on a direct basis. In addition, we sell through approximately 160 professional associations and affinity groups. We have also found that forming practice groups focused on specific industries, such as environment, entertainment and construction, generates sales opportunities by virtue of the recognition we develop in those industries.

Products and Services

Our Insurance Brokerage segment includes the placement of general and specialty P&C insurance, as well as Group Employee Benefits insurance. Through our Specialized Benefits Services segment, we offer related core benefits (retirement services and health and welfare), benefits enrollment and communications services and executive and professional benefits. A description of how we are compensated for these services can be found under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Part II, Item 7, Business”.

The chart below lists a selection of the principal insurance and financial products and services that we distribute and offer.

Insurance Brokerage Segment

Specialized Benefits Services Segment

Property and Casualty Insurance.    We place P&C insurance, including general commercial liability, workers’ compensation, fidelity and surety bonds, professional liability and personal lines. Revenues generated from the sales of these products and services accounted for approximately 58% of our revenues for the year ended December 31, 2003.

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Group Employee Benefits Insurance.    We place individual and group health, life, disability and dental insurance, as well as individual long-term care insurance. These policies are underwritten by life and health insurance carriers and health maintenance organizations, or HMOs. Revenues generated from the sales of these products and services accounted for approximately 27% of our revenues for the year ended December 31, 2003.

Core Benefits.    Core Benefits covers a broad spectrum of benefit and retirement plan related consulting and administration services. Employee benefits services include plan design and related outsourcing services and related legal and compliance consulting. Retirement plan services include plan design, communication and administration (both defined contribution and defined benefit). Revenues generated from the sales of these products and services accounted for approximately 7% of our revenues for the year ended December 31, 2003.

Benefits Enrollment and Communication.    We administer the annual employee benefits open enrollment function for some of our business clients. In conjunction with the administrative services we provide, our enrollment counselors sell voluntary supplementary insurance products such as life or disability insurance to our clients’ employees. Revenues generated from the sales of these products and services accounted for approximately 5% of our revenues for the year ended December 31, 2003.

Executive and Professional Benefits.    Our Executive and Professional Benefits division provides consulting, administration and funding strategies for executive benefits programs. Our primary line of business is in the design and implementation of supplemental executive retirement plans and other non-qualified executive benefits programs. We are also a distributor of bank-owned life insurance programs. Lastly, we provide other executive benefits services to individuals or corporate clients such as executive disability benefits planning, estate planning, individual financial planning and executive benefits communications. Revenues generated from the sales of these products and services accounted for approximately 3% of our revenues for the year ended December 31, 2003.

Insurance Carriers

We maintain relationships with over 200 insurance carriers in the United States and no single insurance carrier’s products represented a material portion of our total commissions and fees in 2003.

Customers

We currently have approximately 60,000 small and mid-sized business clients. Revenues generated by our ten largest clients accounted for 4.7% of our commissions and fees in 2003, while no single client in this group represented more than 1.0% of our commissions and fees in 2003.

Competition

The insurance brokerage industry is highly competitive. We face competition from other brokerages, insurance companies, banks and other financial services companies. In addition to direct competition from the insurance companies, new sources of competition are emerging as commercial banks accelerate their efforts to diversify their financial services to include insurance brokerage services (often through the acquisition of established insurance brokerages) for greater flexibility to create and market insurance products.

We compete for clients on the basis of reputation, client service, program and product offerings and the ability to tailor our products and risk management services to the specific needs of a client. We believe that most of our competition is from numerous local and regional insurance brokerage firms and, to a lesser extent, from national insurance brokerage firms that pursue a similar strategy, which include Arthur J. Gallagher, Brown & Brown and Hilb Rogal & Hobbs.

Our Specialized Benefits Services segment competes with consulting firms, brokers, third-party administrators, producer groups and insurance companies. A number of our competitors offer attractive alternative programs. We believe that most of our competition is from large, diversified financial services organizations that are willing to expend significant resources to enter our markets.

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Regulation

Our activities in connection with insurance brokering and related administrative and other services are subject to regulation and supervision by state authorities. Although the scope of regulation and form of supervision may vary from jurisdiction to jurisdiction, insurance laws are often complex and generally grant broad discretion to supervisory authorities in adopting regulations and supervising regulated activities. This supervision generally includes the licensing of insurance brokers and agents and the regulation of the handling and investment of client funds held in a fiduciary capacity. Our continuing ability to provide insurance products and related employee benefits services in the jurisdictions in which we currently operate is dependent upon our compliance with the rules and regulations promulgated from time to time by the regulatory authorities in each of these jurisdictions.

USI Securities, Inc., our subsidiary, is a broker/dealer for mutual funds, variable insurance contracts and securities regulated by the National Association of Securities Dealers, Inc., and the SEC, and is a Registered Investment Advisor regulated by the SEC. Under SEC regulations, USI Securities, Inc. must maintain minimum net capital reserves.

Employees

At December 31, 2003, we had approximately 2,250 employees, of which approximately 370 are sales professionals. We are not involved in any material disputes with our employees and believe that relations with our employees are good.

The ten top revenue producing sales professionals during 2003 represented 10.8% of our commissions and fees for the year. No single salesperson was responsible for more than 1.4% of our commissions and fees in 2003.

Risks Related to Our Business

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Website

We maintain a website at www.usi.biz. Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and related amendments are available free of charge through our website as soon as reasonably practicable after such reports are filed or furnished electronically with the SEC. Our website and the information contained in it and connected to it shall not be deemed incorporated by reference into this Form 10-K.

Item 2.    Properties

The Company leases its principal corporate office in Briarcliff Manor, New York, and its operating unit offices in various states. Information regarding lease commitments is set forth in Note 11 “Lease Commitments” in the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report. The disclosure set forth in Note 11 “Lease Commitments” is incorporated herein by reference.

Item 3.    Legal Proceedings

Information regarding legal proceedings is set forth in Note 15 “Contingencies” in the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report. The disclosures set forth in Note 15 “Contingencies” is incorporated herein by reference.

Item 4.    Submission of Matters to a Vote of Security Holders

None.

PART II

Item 5.    Market for Registrant’s Common Equity and Related Stockholder Matters

Market Information and Holders

The Company’s common stock is quoted on the Nasdaq Stock Market under the symbol “USIH.” The following table sets forth the intra-day high and low sales prices for the common stock for the periods indicated below:

As of March 3, 2004, there were 46,662,032 shares of the Company’s common stock outstanding, held by approximately 150 stockholders of record. The closing price of the Company’s stock on March 3, 2004 was $14.03 per share.

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We have never declared or paid cash dividends on our common stock and presently have no plans to pay any cash dividends on our common stock. Under the Company’s existing credit facility, it is currently limited in the amount of dividends it can pay and the shares of its capital stock that can be repurchased. The terms of the Company’s credit facility limit any cash dividends to the aggregate amount of: (i) cash received during a fiscal year from the exercise of options to purchase common stock; and (ii) the sum of a designated percentage (0% for 2003; 10% for 2004; 12.5% for 2005; 15% for 2006; 20% for 2007; and 25% for 2008) multiplied by the Company’s consolidated net income plus amortization for the preceding fiscal year and $5.0 million.

Equity Compensation Plan Information

Recent Sales of Unregistered Securities

On October 1, 2003, the Company issued 506,429 shares of common stock at $13.13 per share in connection with the acquisition of BMI Insurance Services, Inc. The private placement of these securities was exempt from registration under the Securities Act of 1933, as amended, pursuant to Section 4(2) thereof.

On December 1, 2003, the Company issued 147,378 shares of common stock at $12.89 per share in connection with the acquisition of O’Leary-Kientz, Inc. The private placement of these securities was exempt from registration under the Securities Act of 1933, as amended, pursuant to Section 4(2) thereof.

On January 15, 2004, the Company issued 61,910 shares of common stock at $12.92 per share in connection with the acquisition of The Benefits Team, Inc. The private placement of these securities was exempt from registration under the Securities Act of 1933, as amended, pursuant to Section 4(2) thereof.

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Item 6.    Selected Financial Data

You should read the selected consolidated financial data set forth below in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and accompanying notes included elsewhere in this filing. We derived the financial information as of December 31, 2003 and 2002 and for each of the years ended December 31, 2003, 2002 and 2001 from our audited financial statements and the related notes included elsewhere in this filing. Financial information as of December 31, 2001, 2000 and 1999 and for the years ended December 31, 2000 and 1999 was derived from audited financial statements and related notes that are not included in this filing. In 2003, 2000 and 1999 we acquired the assets or stock of 6, 2 and 13 businesses, respectively. As a result, the financial data for each of the five years set forth below are not directly comparable. There is no single acquisition that materially affects the comparability of the financial information presented.

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(Continued from previous page)

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with our consolidated financial statements and accompanying notes included in Part II-Item 8. Certain information contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are forward-looking statements that involve risks and uncertainties. See “Forward Looking Statements” included in this report. Our actual results may differ materially from the results discussed in the forward-looking statements because of various factors, including those discussed above and elsewhere herein.

Management Overview

Business

We are a distributor of insurance and financial products and services to approximately 60,000 small and mid-sized business clients.

We generate revenues primarily from:

Commissions on P&C, health, group life and group disability insurance, are typically calculated as a percentage, ranging from approximately 3% to 20%, of the annual premium. These commissions generally recur at the same rate as long as the insurance is in force. Commissions earned from the placement of individual and corporate-owned life and individual disability insurance are calculated as a percentage of corresponding premiums over the duration or term of the underlying policies. Traditionally, most of the commission revenue on these life and individual products, as well as on other traditional voluntary benefit products such as critical illness insurance, is recognized in the first year the insurance is placed, with the commissions paid in renewal years being relatively insignificant. We also receive contingent commissions, which are incremental compensation for achieving specified premium volume and/or loss experience goals set by the insurance companies for the business we place with them. Contingent commissions are recorded on the earlier of receipt of cash or when we receive data from the insurance companies that allow us to reasonably determine the amount. Fee-based revenues related to employee benefits services are generally billed as services are rendered and may vary with factors such as the client’s headcount or assets under management.

We have two operating segments: Insurance Brokerage and Specialized Benefits Services, and a third administrative segment: Corporate. For 2003, approximately 85% of our revenues were derived from our Insurance Brokerage segment. Within this segment, approximately 68% related to P&C insurance and 32% to Group Employee Benefits. Approximately 15% of our revenues in 2003 were derived from our Specialized Benefits Services segment. Within this segment, approximately 47% related to core benefits (retirement and Health & Welfare services), 30% to benefits enrollment and communication and 23% to executive and professional benefits (deferred compensation and executive benefit programs). All of Specialized Benefits Services revenue and our Group Employee Benefits revenue are considered Health & Welfare. Our Corporate segment had less than 0.2% of our revenues in 2003.

The majority of our operating expenses relate to compensation and employee benefits, which amounted to approximately 56% of consolidated revenues in 2003. We refer to the balance of our operating expenses as other operating expenses, which includes selling-related expenses, rent, communication expenses and other items. Other operating expenses were approximately 22% of consolidated revenues in 2003.

For more discussion on our business please refer to Item 1. “—Business” in this report.

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Market

Property & Casualty

Approximately 58% of our consolidated revenues in 2003 related to P&C business.

Premium pricing within the commercial P&C insurance industry has historically been cyclical, based on the underwriting capacity of the insurance industry and economic conditions. From 1987 through 1999, the commercial P&C insurance industry was in a “soft market,” which is an insurance market characterized by a period of flat to declining premium rates, which negatively affected commissions earned by insurance brokers. Years of underwriting losses for insurance companies combined with the downward turn in the equity markets and interest rates caused insurers to increase premium rates starting in mid- to late 2000, creating what we call a “hard market”. A hard market is an insurance market characterized by a period of rising premium rates which, absent other changes, positively affects commissions earned by insurance brokers. Additionally, the insurance industry was affected by the events of September 11, 2001, resulting in the largest insurance loss in America’s history, which accelerated increases in premium rates for particular lines of commercial P&C insurance. In response to rising premiums, some of our customers increased their deductibles and/or reduced their insurance coverage in order to reduce the impact of the premium increases, which negatively impacted our revenues. The hard market, for many lines of coverage, began to slow in the second half of 2002 and throughout 2003. In the second half of 2003, we began seeing premiums in most lines of coverage flatten and for some, even a decrease. We are not able to predict whether this trend of moderating or declining premiums will continue, however, if it does, our P&C brokerage revenues may be negatively impacted.

Health & Welfare

Approximately 42% of our consolidated revenues in 2003 related to Health & Welfare business.

Premium rates in the health insurance industry have generally realized a consistent upward trend due to increasing health care delivery costs. In recent years, however, the upward trend in health care insurance premiums has been somewhat offset by the impact of the economic downturn and its resulting negative impact on employment levels of our customers. Additionally, reduced discretionary spending by our corporate clients has led to benefit cut-backs and lower expenditures on consulting and other fee-based services. Decreases in balances of assets invested within our clients’ retirement benefit plans and on new investments into those plans, on which we are paid commissions, has negatively impacted our retirement services business. Our Health & Welfare business is most affected by employment levels and by the strength of the economy. Factors such as a tight labor market increase employers’ spending on benefits; high employment increases the numbers of lives covered within the benefit plans that we broker; and a strong stock market increases both existing assets under management and new investments. In 2003 and into 2004, we have seen the signs of an improving economy, although we have yet to see the benefits of increasing labor ranks or spending on benefits. While we can not predict whether the economy will continue to improve or if employment and spending on employee benefits will increase, if they do, then our Health & Welfare revenue may be positively impacted.

Primary Financial Measures

The financial measures that we use to evaluate our performance are:

You should not consider these financial measures as alternatives to other financial measures determined in accordance with accounting principles generally accepted in the United States of America, which we refer to as

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GAAP or as alternatives to cash flows from operating activities, investing activities or financing activities or as a measure of liquidity. In addition, please note that because not all companies calculate these financial measures similarly, the presentation of these measures in this report is not necessarily comparable to those of other companies.

We strongly urge investors or potential investors in our stock to review the calculation of EBITDA and EBITDA Margin and the related reconciliation to Net Income (Loss) presented in accordance with GAAP in “Results of Operations”, below.

Management’s Strategic Objectives

Our business strategy focuses on generating organic growth in revenues, creating efficiencies in our operations and making disciplined and accretive acquisitions. Specifically, our stated goals are as follows:

Organic Revenue Growth

We believe that internally generated growth is more valuable than acquired growth. Our strategy for achieving our long-term goal of 5% – 10% organic growth includes:

We monitor and manage to a number of different operating statistics, including, but not limited to, sales pipeline by producer, cross-selling within our 400 largest accounts, client retention rates, and revenue mix by operating company. All of these metrics are tracked and reported monthly and form the basis of our agenda, among other items, for our monthly operations meetings with each of our business unit executive management teams.

Margin Improvement

Our EBITDA margins are currently among the lowest of our peers. We have publicly stated that we believe we can improve our margins by 100 – 200 basis points per year up to a consolidated margin, including corporate, of at least 28%. We currently benchmark all expense categories and work with operating management to develop and implement remediation plans for business units performing below our standards. We are focused on increasing margins by restructuring the mix of incentive versus guaranteed compensation, consolidation of office space, implementation of best practices in operations and lowering the cost of our information technology by the consolidation of data centers. Additionally, we continue to capitalize on opportunities to leverage our fixed costs across a greater revenue base by acquiring “fold-in” and other accretive businesses within our current geographic footprint.

Acquisition Strategy

Each year, our goal is to acquire companies with revenues equal to at least 10% of our prior year’s consolidated total revenues.

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In most acquisitions, we issue a combination of cash, seller notes and common stock. We also frequently structure our acquisition agreements to include contingent purchase price payments (contingent upon reaching specified financial targets), commonly referred to as “earn-outs,” which are paid in a combination of cash, seller notes and equity and are treated as adjustments to purchase price when the contingency is resolved. Additionally, many of our acquisitions have provisions for reduced consideration based on the failure to meet certain revenue and EBITDA targets. All acquistions require approval of our board of directors and, if greater than $1.5 million in aggregate purchase price, also require the approval of our bank lenders. Please read Note 2, “Acquisitions” to our consolidated financial statements for more information on acquisitions.

We centrally manage our acquisition pipeline from the point of initial contact through to integration within our operations. We only consider deals that are accretive to our earnings per share, and sellers must take a portion of their purchase price in our common stock. All acquisitions are subject to a rigorous due diligence process, including an introduction to our culture and business strategy and the seller’s commitment to both our sales and client service model and to a post-acquisition integration plan. Currently, we are looking to expand only within our current geographic footprint of operations to maximize efficiencies and continue to build-out the balanced revenue mix of P&C and Health & Welfare business.

In 2003, we completed six acquisitions of retail insurance brokers. In the first year of ownership we expect these acquisitions to add in excess of $25.0 million in revenues, $7.7 million in EBITDA and $2.6 million in Net Income in accordance with GAAP.

Quarterly Fluctuations

Our quarterly revenues and EBITDA may be volatile. This is attributable to the following:

Quarterly fluctuations in revenues and EBITDA make our performance less predictable than our peers who have less seasonal and non-recurring revenues, which may negatively impact the value of our stock. We have implemented various strategies to reduce the impact of seasonal and non-recurring revenue, such as negotiating alternative commission schedules with insurance companies on products that have historically paid most commissions in the first policy year and diversification of our business model for enrollment business to drive more revenue in the first three quarters of the year. We continue to focus on strategies that will provide a more predictable revenue stream, however, we cannot predict if we will be successful in these efforts or if market or other changes will result in a similar or greater level of unpredictability. All revenues are recorded in accordance with GAAP.

Critical Accounting Estimates and Policies

Our consolidated financial statements are prepared in accordance with GAAP, which require management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Some of our accounting policies require management’s judgment to estimate values of assets, liabilities, revenues or expenses. In addition, it may require significant judgment to apply complex principles of accounting to certain transactions, such as acquisitions, to determine the most appropriate accounting treatment. We believe the following significant accounting estimates and policies are material to our financial condition or results of operations and are subject to a higher degree of subjectivity and/or complexity. We continually evaluate our estimates, which are based on historical experience and on various other

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assumptions that we believe to be reasonable under the circumstances. If actual performance should differ from historical experience or if our assumptions were to change, it may materially impact our financial condition and results of operations.

Please read Note 1, “Nature of Operations and Summary of Significant Accounting Policies” to our consolidated financial statements for a description of other significant accounting policies.

Revenue Recognition

We record premiums and commissions receivable from clients, premiums payable to insurance companies and the related commissions income, on the later of the effective date of the policy or the billing date. We record installment premiums and related commissions periodically as billed. Commissions earned from the placement of individual and corporate-owned life and individual disability insurance are calculated as a percentage of corresponding premiums over the duration or term of the underlying policies. Traditionally, most of the commission revenue on these life and individual products, as well as on other traditional voluntary benefit products, such as critical illness insurance, is recorded in the first year the insurance is placed, with the commissions recorded in renewal years being relatively insignificant.

We record commissions on premiums billed and collected directly by insurance companies and contingent commissions when we receive data from the insurance companies that allows us to reasonably determine these amounts. We are able to reasonably determine these amounts when we receive the cash, the notification of the amount due or the insurance policy detail from the insurance companies. We receive contingent commissions from insurance companies based on premium volume goals and/or the loss experience of the insurance placed with the insurance company.

We record fees for consulting and administrative services over the period in which services are rendered.

We record fees and/or commissions related to benefit enrollment services when earned. We consider the earnings cycle complete when we have substantially completed our obligations under the service contract, we can reasonably estimate the revenue earned and when there is no significant collection risk. At the completion of an enrollment we record an estimate of first year fee and/or commission income less an estimate of policy cancellations.

We maintain an allowance for bad debts and estimated policy cancellations based on our premiums and commissions receivable. The policy cancellations component represents a reserve for future reversals of commission revenue on insurance policies in force at year-end and is established through a charge to revenues, while the bad debt component is established through a charge to other operating expenses. The allowance is determined based on estimates and assumptions using historical data to project future experience, and, in the case of bad debts, a specific identification of questionable items. We periodically review the adequacy of the allowance and make adjustments as necessary. Future additions to the allowance may be necessary based on changes in the trend of write-offs or cancellations which could increase due to changes in economic conditions and/or our clients’ financial condition and which may have a negative impact on our financial position or results of operations.

Goodwill and Other Intangible Assets Impairment

We assess the recoverability of our goodwill and other intangible assets at least once a year or as required based on triggering events. A triggering event is a change in business circumstances that indicates that the carrying value of the assets may not be recoverable. Examples of a triggering event include poor financial results or projections, deterioration of client base, loss of key employees or changes in the marketplace. Reviews for triggering events are performed at the operating company level, one level below our segments, and require the use of management’s judgment. Upon identification of a triggering event we perform an analysis to determine the fair value of the operating unit using either market valuation data, such as recent transaction multiples of revenue or EBITDA, or present value techniques. Both methods require substantial judgment. If, as a result of an

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impairment review, we find that the carrying value of an asset is in excess of the fair value, we would be required to take a charge against current earnings. The results of our reviews disclosed no such asset impairments in 2003 and 2002.

Future events could cause us to conclude that impairment of our goodwill or other intangible assets exists, which may have a material adverse effect on our financial position or results of operations.

Business Acquisitions and Purchase Price Allocations

All of our acquisitions have been accounted for using the purchase method, and the net assets and results of operations of the acquired companies were included in our financial statements on their respective acquisition dates. Frequently, our acquisitions have provisions for a reduction in consideration if the acquired company does not meet targeted financial results. Additionally, the acquisitions frequently have provisions for contingent additional consideration if the acquired company achieves financial targets. Additional or reduced consideration related to acquisition contingency provisions is reflected as an adjustment to goodwill when the contingency is resolved.

For significant acquisitions, we obtain an independent appraisal of the fair value of intangible assets acquired. For others, we use a methodology based on an estimate of discounted future cash flows derived from acquired client lists and attrition rates to estimate the fair value of the expiration rights and other intangible assets at the date of the acquisition. The methodology is derived from independent appraisals obtained in connection with our earlier acquisitions. Expiration rights are amortized on a straight-line basis over their estimated lives of five to ten years (with ten years used in most cases), based on historical attrition that has generally been consistent year over year. Non-compete agreements are typically valued at their stated contractual amount and are amortized on a straight-line basis over the terms of the agreements, which range from four to seven years. Goodwill is not subject to amortization. Both the allocation of purchase price and estimation of useful lives require management’s judgment. If historical fact patterns were to change, such as the rate of attrition of acquired client accounts, we may be required to allocate more purchase price to goodwill or accelerate the amortization of expiration rights, which may have a material impact on our financial position or results of operations.

Income Taxes

Determining the consolidated provision for income tax expense, deferred tax assets and liabilities and any related valuation allowance involves judgment. GAAP requires deferred tax assets and liabilities (“DTAs” and “DTLs,” respectively) to be recognized for the estimated future tax effects attributed to temporary differences and carry-forwards based on provisions of the enacted tax law. The effects of future changes in tax laws or rates are not anticipated. Temporary differences are differences between the tax basis of an asset or liability and its reported amount in the financial statements. For example, we have a DTA because the tax bases of our accrued liabilities are smaller than their book bases. Similarly, we have a DTL because the book basis of our goodwill exceeds its tax basis. Carry-forwards primarily include items such as net operating losses (“NOLs”), which can be carried forward subject to certain limitations. A summary of the significant DTAs and DTLs relating to our temporary differences and carry-forwards is included in Note 10, “Income Taxes” to our consolidated financial statements.

At December 31, 2003, our DTAs total $13.4 million, and our DTLs total $8.2 million. We are required to reduce DTAs (but not DTLs) by a valuation allowance to the extent that, based on the weight of available evidence, it is “more likely than not” (i.e., a likelihood of more than 50%) that any DTAs will not be realized. Recognition of a valuation allowance would decrease reported earnings on a dollar-for-dollar basis in the year in which any such recognition was to occur. The determination of whether a valuation allowance is appropriate requires the exercise of management’s judgment. In making this judgment, management is required to weigh the positive and negative evidence as to the likelihood that the DTAs will be realized.

Prior to the fourth quarter of 2003, we carried a valuation allowance for our net DTA based on our history of net losses and the resulting uncertainty as to whether we would generate enough taxable income in the future to

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utilize our DTA. In the fourth quarter of 2003, based on five consecutive quarters of profitability, our improved financial condition following our initial public offering, restructuring our credit facility and on forecasted future results, management determined that it is more likely than not that our DTA will be realized in future periods so we reversed the valuation allowance resulting in a deferred income tax benefit of $8.1 million in 2003. In the event of adverse developments in our projections of taxable income or if our estimates and assumptions were to change, management might be required to reach a different conclusion about the realization of our DTA and re-establish a valuation allowance through a charge to earnings.

Litigation Matters

We are subject to various claims, lawsuits and proceedings that arise in the normal course of business. We do not believe we are a party to any claims, lawsuits or legal proceedings that will have a material adverse effect on our reported financial position and results of operations. As further discussed in Note 15, “Contingencies” to our annual financial statements, we have accrued a liability for our best estimate of the probable cost of the resolution of these claims. This estimate has been developed in consultation with internal and external counsel that is handling our defense in these matters and is based upon a combination of litigation and settlement strategies. It requires management’s judgment to establish reserves for claims and litigation. To the extent additional information arises or our strategies change, it is possible that our estimate of our accrued liability in these matters may change, which could have a material adverse effect on our financial position and results of operations for any particular quarterly or annual period.

Debt Covenants

Our existing credit facility requires us to maintain financial covenants, which we set, with our lenders, based on our estimates of future operating results at that time. Future operating results and continued compliance with our debt covenants cannot be assured and our lenders’ actions are not controllable by us. Currently, based on our projections of future operating results, we do not expect to violate any such covenants. If our projections of future operating results are not achieved, resulting in a violation of our financial covenants for which our lenders do not provide a waiver or amendment, we could experience a material adverse effect on our reported financial position and results of operations for any particular quarterly or annual period.

New Accounting Pronouncements

Please read Note 1, “Nature of Operations and Summary of Significant Accounting Policies” to our consolidated financial statements for a discussion on the impact of the adoption of new accounting pronouncements.

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Results of Operations

A reconciliation of EBITDA to Net income (loss) in accordance with GAAP.

We present EBITDA because we believe that it is a relevant and useful indicator of our operating profitability. We believe EBITDA is relevant due to our leveraged capital structure and resulting significant amount of interest expense and due to our acquisition strategy and resulting significant amount of amortization of intangible assets. We present EBITDA Margin because we believe it is a relevant and useful indicator in understanding how we view our operating efficiency. We present Organic Revenue Growth and feel it is relevant because it allows us to discern year-over-year growth in revenues related to the success or failure of our ability to execute on our sales and client retention strategies.

We understand that analysts and investors regularly rely on non-GAAP financial measures, such as EBITDA and EBITDA Margin to provide a financial measure by which to compare a company’s assessment of its operating profitability against that of its peers. Additionally, investors use Organic Revenue Growth to provide a financial measure by which to compare a company’s internally generated (as opposed to acquired) revenue growth to that of its peers. EBITDA and EBITDA Margin may be helpful in more clearly reflecting our operating performance that may not otherwise be apparent when relying solely on GAAP financial measures, because EBITDA and EBITDA Margin eliminate from earnings financial items that have less bearing on our operating performance. Organic Revenue Growth may be helpful by eliminating the impact of acquired revenue from revenue growth.

Year Ended December 31, 2003 Compared with Year Ended December 31, 2002

Please read the information under the caption “Integration Efforts and Other Charges” below for more details.

Revenues.    Revenues increased $26.6 million, or 8.1%, to $354.8 million in 2003 from $328.2 million in 2002. In 2003, Organic Revenue Growth was 4.7%, comprised of new business written, the positive impact of

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higher premium rates on renewal commissions and increased contingent commissions of $3.1 million in our Insurance Brokerage segment, partially offset by the impact of lost and non-recurring business. The impact of acquisitions contributed approximately $11.0 million and zero to revenues in 2003 and 2002, respectively.

Compensation and Employee Benefits Expenses.    Compensation and Employee Benefits Expenses decreased $0.8 million, or 0.4%, to $200.2 million in 2003 from $201.0 million in 2002. In 2003, we had integration efforts and other charges of $0.4 million compared to $8.1 million in 2002. Also in 2003, we had $6.1 million of Compensation and Employee Benefits Expenses attributable to the impact of acquisitions, compared to zero in 2002. As a percentage of revenues, Compensation and Employee Benefits Expenses were 56.4% in 2003 compared to 61.2% in 2002. The decrease in 2003, as a percentage of revenues, is primarily due to the $8.1 million integration efforts and other charges in 2002, the positive affects of our integration efforts and improvements in performance in our Insurance Brokerage segment. To reduce compensation expense, in the first quarter of 2002, we terminated 32 employees and renegotiated compensations arrangements for four sales professionals.

Other Operating Expenses.    Other Operating Expenses increased $8.7 million, or 12.7%, to $77.5 million in 2003 from $68.8 million in 2002. The increase is primarily attributable to (i) $2.9 million in expenses related to the move of our corporate offices from San Francisco to New York and for consulting fees related to Sarbanes-Oxley Section 404 compliance preparation, (ii) the increase in costs generally associated with being a public company and (iii) $1.6 million of other operating expense attributable to the impact of businesses acquired in 2003, partially offset by (iv) integration efforts and other charges of $1.6 million in 2002, compared to zero in 2003. As a percentage of revenues, Other Operating Expenses were 21.8% in 2003 compared to 21.0% in 2002.

Income From Continuing Operations.    Income from Continuing Operations increased $24.4 million, or 222.9%, to $35.3 million in 2003 from $10.9 million in 2002, due to (i) a reduction in Compensation and Employee Benefits Expenses principally due to the expenses attributable to our integration efforts and other charges in 2002, (ii) continued improvement in performance in our Insurance Brokerage segment, (iii) the reduction in interest expense principally due to the restructuring of our credit facility and lower borrowings in 2003, (iv) the net increase in income tax benefit due to the reversal of the valuation allowance on our net deferred tax asset in 2003, and (v) the positive impact of acquisitions, partially offset by (vi) a $7.7 million gain recorded in the third quarter of 2002 related to our pre-IPO capital structure. The effective tax rate from continuing operations in 2003 was (12.4)% compared to (5.0)% in 2002. The decrease in the effective tax rate and corresponding increased benefit in 2003 resulted from the reversal of the deferred tax asset valuation allowance, offset by the impact of state income taxes.

Year Ended December 31, 2002 Compared with Year Ended December 31, 2001

Revenues.    Revenues increased $16.6 million, or 5.3%, to $328.2 million in 2002 from $311.6 million in 2001. In 2002, Organic Revenue Growth was 5.3%, primarily due to positive new business and increased premium rates on renewal commission, partially offset by lost business and non-recurring business from 2001. In addition, we generated increased revenues from the sales production of recently hired sales professionals. Offsetting the increase in revenues from new business production, increasing premium rates and additional sales production from recently hired sales professionals in 2002, was a $7.7 million reduction in revenues from eliminating low margin business, which contributed $1.1 million in 2002 versus $8.8 million in 2001.

Compensation and Employee Benefits Expenses.    Compensation and Employee Benefits Expenses increased $0.8 million, or 0.4%, to $201.0 million in 2002 from $200.2 million in 2001. In 2002, we had integration efforts and other charges of $8.1 million compared to $11.2 million in 2001. As a percentage of revenues, Compensation and Employee Benefits Expenses were 61.2% in 2002 compared to 64.3% in 2001. The decrease, as a percentage of revenues, in 2002 was primarily due to the positive affects of our integration efforts and improvements in performance in our operations. Further, we terminated 32 employees and renegotiated four sales professionals compensation arrangements during the first quarter of 2002.

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Other Operating Expenses.    Other Operating Expenses decreased $7.6 million, or 9.9%, to $68.8 million in 2002 from $76.4 million in 2001. In 2002, we had integration efforts and other charges of $1.6 million compared to $11.3 million in 2001. As a percentage of revenues, Other Operating Expenses were 21.0% in 2002 compared to 24.5% in 2001, primarily due to the charges.

Income (Loss) From Continuing Operations.    Income (Loss) From Continuing Operations increased $45.6 million to $10.9 million in 2002 from a loss of $34.7 million in 2001, due to (i) a reduction in Other Operating Expenses principally due to the integration efforts in the fourth quarter of 2001, (ii) improvement in performance of operations, (iii) the gain from the reduction in the book value of the redeemable common stock warrants and the stock appreciation rights, (iv) a decrease in interest expense as a result of lower interest rates and a reduction in debt, and (v) a decrease in amortization of intangible assets principally due to the elimination of amortization on goodwill—please read Note 1, “Nature of Operations and Summary of Significant Accounting Policies” in our consolidated financial statements under “Goodwill and Other Intangible Assets.” The effective tax rate from continuing operations in 2002 was (5.0)% compared to (11.8)% in 2001. The increase in the effective tax rate and corresponding reduced benefit in 2002 resulted from the increase in the tax valuation allowance established in 2001, offset by the impact of state income taxes.

Our Segments

We have three reporting segments: Insurance Brokerage, Specialized Benefits Services and Corporate.

The Insurance Brokerage segment offers:

The Specialized Benefits Services segment offers:

The Corporate segment offers:

For the year ended December 31, 2003, no segment had any material dependence on a single client or group of similar clients. Please see Note 13, “Business Concentrations” to our consolidated financial statements.

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Insurance Brokerage

Comparisons for Years Ended December 31, 2003, 2002 and 2001

Revenues in the Insurance Brokerage segment increased $27.4 million, or 10.0%, to $301.7 million in 2003 from $274.3 million in 2002, and increased $16.2 million, or 6.3%, to $274.3 million in 2002 from $258.1 million in 2001. In 2003, revenues were positively impacted by approximately $11.0 million due to acquisitions. There were no businesses acquired in 2002 or 2001. Organic Revenue Growth in 2003 and 2002 was 6.0% and 6.3%, respectively, comprised of new business written and the positive impact of higher premium rates on renewal commissions, partially offset by the impact of lost and non-recurring business. Also, contingent commissions were $3.1 million greater in 2003 than in 2002. P&C revenues represented 57.8%, 55.1% and 53.7% of our total consolidated revenues in 2003, 2002 and 2001, respectively, and Group Employee Benefits revenues represented 27.2%, 28.5% and 29.2% of our total consolidated revenues in 2003, 2002 and 2001, respectively.

The Insurance Brokerage segment results reflect the following integration efforts and other charges: zero, $4.6 million and $16.3 million in 2003, 2002 and 2001, respectively.

EBITDA in the Insurance Brokerage segment increased $17.6 million or 25.8% to $86.0 million in 2003 from $68.4 million in 2002, and increased $24.4 million or 55.5% to $68.4 million in 2002 from $44.0 million in 2001. EBITDA Margin in the Insurance Brokerage segment was 28.5%, 24.9% and 17.0% in 2003, 2002 and 2001, respectively. The increase in EBITDA and EBITDA Margin in 2003 is attributable to (i) a decrease in Compensation and Employee Benefits Expenses as a percent of revenues, due to an improvement in performance in our operations and positive effects of our integration efforts, (ii) the positive impact of increased contingent commissions, (iii) the accretive impact of acquisitions, and (iv) the integration efforts and other charges in 2002. The increase in EBITDA and EBITDA Margin in 2002 compared to 2001 is attributable to (i) a decrease in Compensation and Employee Benefits Expenses as a percent of revenues, due to the positive effects of our integration efforts, (ii) improvement in performance in our operations and (iii) the decrease in integration efforts and other charges in 2002 compared to 2001.

Income From Continuing Operations Before Income Taxes in the Insurance Brokerage segment was $60.2 million, $41.9 million and $7.2 million for the years ended December 31, 2003, 2002 and 2001, respectively. The increase in 2003 was due to the reasons noted above along with the reduction in interest expense due to lower debt balances in 2003. The increase in 2002, compared to 2001, was due to (i) the reasons noted above, and (ii) a decrease in amortization of intangible assets, principally due to our adoption of SFAS No. 142. Please read Note 1, “Nature of Operations and Summary of Significant Accounting Policies” in our consolidated financial statements under “Goodwill and Other Intangible Assets.”

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Specialized Benefits Services

Comparisons for Years Ended December 31, 2003, 2002 and 2001

Specialized Benefits Services revenues decreased $0.7 million, or 1.4%, to $52.6 million in 2003 from $53.3 million in 2002, and increased $0.3 million, or 0.5%, to $53.3 million in 2002 from $53.0 million in 2001. The decrease in revenues in 2003 was due to a decrease in our core benefits product line primarily due to lost business, offset by an increase in our executive and professional benefits product line, principally due to the impact of one large case. The flat revenue growth in 2002 is due to a reduction in core benefit product sales and executive and professional benefit product sales resulting from difficult market conditions, offset by increases in enrollment and communication product sales. Specialized Benefits Services revenues represented 14.8%, 16.2% and 17.0% of our total consolidated revenues in 2003, 2002 and 2001, respectively.

The Specialized Benefits Services segment results reflect the following integration efforts and other charges: zero, $1.1 million and $1.7 million in years 2003, 2002 and 2001, respectively.

EBITDA in the Specialized Benefits Services segment increased $0.6 million, or 5.7%, to $10.3 million in 2003 from $9.7 million in 2002 and decreased $3.2 million, or 24.6%, to $9.7 million in 2002 from $12.9 million in 2001. EBITDA Margin in the Specialized Benefits Services segment was 19.6%, 18.2% and 24.3% in 2003, 2002 and 2001, respectively. EBITDA and EBITDA Margin in the Specialized Benefits Services segment in 2003 increased primarily due to the integration efforts and other charges in 2002. EBITDA and EBITDA Margin in the Specialized Benefits Services segment in 2002 were negatively impacted by (i) a decrease in new business and an increase in lost business in our core benefits product sales and (ii) a decrease in new business in our executive and professional benefit product sales.

Income From Continuing Operations Before Income Taxes in the Specialized Benefit Services segment was $4.3 million, $2.7 million and $5.0 million for the years ended December 31, 2003, 2002 and 2001, respectively. The increase in 2003 was primarily due to the integration efforts and other charges in 2002. The decrease in 2002, compared to 2001, is due to the reasons noted above, partially offset by a decrease in amortization of intangible assets principally due to our adoption of SFAS No. 142. Please read Note 1, “Nature of Operations and Summary of Significant Accounting Policies” in our consolidated financial statements under “Goodwill and Other Intangible Assets.”

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Corporate

Comparisons for Years Ended December 31, 2003, 2002 and 2001

The Corporate segment results reflect the following integration efforts and other charges: $0.4 million, $3.9 million and $4.6 million in 2003, 2002 and 2001, respectively.

Revenues at the Corporate segment represent interest income. Net Corporate expenses were $19.1 million, $14.9 million and $26.4 million in 2003, 2002 and 2001, respectively. As a percentage of total consolidated revenues, net Corporate expenses were 5.4%, 4.5% and 8.5% in 2003, 2002 and 2001, respectively. In 2003 we recorded $2.9 million in expense related to the corporate office move and to consulting fees related to Sarbanes-Oxley Section 404 compliance preparation. Also, included in net Corporate expenses is zero, $1.0 million and $2.5 million in 2003, 2002 and 2001, respectively, in legal fees and other expenses associated with the defense of claims against us, the pursuit of claims made by us and payment of claims by us relating to USIA, a discontinued operation. The increase in net Corporate expenses in 2003, compared to 2002, was primarily due to (i) the $7.1 million gain in 2002 from the change in value of redeemable common stock warrants and stock appreciation rights related to our pre-IPO capital structure, (ii) the move and Sarbanes-Oxley-related expenses in 2003, noted above and (iii) the increase in costs generally associated with being a public company, offset primarily by (iv) the integration efforts and other charges in 2002, (v) the expense on the value of stock options exchanged for stock appreciation rights in 2002 and (vi) the expense on the grant of restricted stock in 2002.

Loss From Continuing Operations Before Income Taxes in the Corporate segment was $33.0 million, $34.2 million and $51.5 million in 2003, 2002 and 2001, respectively. The decrease in 2003 is primarily attributable to a $6.0 million decrease in interest expense in 2003, the result of lower borrowings and more favorable interest rates, combined with the reasons noted above. The decrease in 2002, compared to 2001, is primarily due to (i) a $6.3 million decrease in interest expense as a result of lower interest rates and a reduction in debt, (ii) a $4.1 million gain from the reduction in the book value of redeemable common stock warrants, and (iii) a $3.0 million gain from the reduction in the book value of the stock appreciation rights.

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Integration Efforts and Other Charges

In 2003, we recorded a charge of $0.4 million for severance costs related to the move of the corporate offices from San Francisco to New York.

Upon completion of the majority of our acquisitions, we undertook initiatives to determine the following: (i) positions within the organization that could be eliminated without resulting in loss of revenues or detriment to service; (ii) sales professionals contracts that should be renegotiated because they were in excess of our standard compensation practices; and (iii) accretive benefits that could be derived from the early termination of lease commitments. Upon completion of the analysis we reduced the number of our employees by 32 and 96 during the first quarter of 2002 and for 2001, respectively, and such persons were given various levels of severance depending on their length of service with us. This process resulted in severance charges of $3.6 million and $4.7 million in the first quarter of 2002 and in 2001, respectively. In addition, in the first quarter of 2002 and in 2001, we renegotiated the compensation arrangements of four and 29 sales professionals, respectively, whose compensation arrangements were in excess of our standard compensation practices. The renegotiation of these contracts resulted in an expense of $1.8 million in the first quarter of 2002 and $3.0 million in 2001. Finally, in the first quarter of 2002 and in 2001, we terminated lease arrangements at one and eight locations, respectively. The early termination of lease commitments resulted in charges of $0.1 million and $1.9 million in the first quarter of 2002 and in 2001, respectively.

In the fourth quarter of 2001, we reorganized an administrative affinity group marketing operation, included as part of the insurance brokerage segment, after it lost its principal revenue source, commissions and fees generated from the sale of retiree military supplemental medical insurance. This source of revenue was negatively impacted by federal legislation that changed the retiree military medical insurance program. This operation was reorganized into three distinct units. Two of the three units were transferred to then existing operations. Operations at the third unit were terminated. This decision resulted in a write-off of receivables of $2.4 million and a write-off of other assets of $0.8 million for a total charge of $3.2 million in the fourth quarter of 2001.

In 1999, we sold a brokerage operation that generated revenues from commissions and fees on the sale of life insurance products primarily through third-party agents, which we call wholesale distribution. The wholesale distribution strategy of this operation did not fit with our focus on retail distribution; as a result, we sold the operation to the former owners of that operation and recorded a loss of $3.2 million on the sale of the business. Included in the consideration received for the operation was a note receivable based on a future revenue sharing arrangement. Upon review of the current and future revenue streams generated and to be generated from the sold brokerage operation, we determined that the note was impaired by $1.4 million. The note receivable, originally issued for $1.5 million, was written down by $1.0 million in the second quarter of 2001, written down by $0.3 million in the fourth quarter of 2001 and written down by $0.1 million in the first quarter of 2002.

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Other Charges

In January 2002, Bernard H. Mizel retired as our chairman and chief executive officer and we recorded a charge of $2.8 million related to the retirement.

In 2000, in an effort to provide a simplified and common medical and dental insurance program to our employees, we decided to consolidate our insurance program into one self-insured medical and dental plan. Prior to this plan, many of our acquired businesses had purchased their medical insurance on an individual basis. These medical contracts were placed with a number of different regional and/or national insurance companies principally on a fully insured basis. These insurance brokerage businesses had an employment size that placed them into the insurance carriers’ “community rated” programs. Community rated programs are for businesses that do not have a sufficient employee size, generally less than 100 employees, for the insurance carriers to evaluate their claim history and, therefore, the insurance carriers rate history on an individual basis. In accordance with GAAP, we were required to establish a liability for incurred but not yet reported claims. Since the prior insurance carriers categorized these acquired businesses as community rated, they could not provide us with historical claims information. Therefore, we could not reasonably estimate this liability at the end of 2000. Our historical experience indicated that our average monthly claims were approximately $1.0 million and the lag in reporting claims was approximately three and one-half months. In the first quarter of 2001, we recorded a $3.5 million charge to establish this self-insurance plan liability. We have purchased a specific and aggregate insurance policy to minimize our future exposure. In the fourth quarter of 2002, we changed from the self-insured plan to a fully insured medical and dental plan. The impact of this change did not have a material impact on our financial position or results of operations.

In 2001, several insurance carriers notified us that differences existed between insurance coverages placed and the corresponding premiums remitted. After a comprehensive review, we determined that in prior periods coverage had been placed with the carriers without the establishment of the corresponding receivable from the client and payable to the carriers on the general ledger. Thus, after obtaining the necessary information from the carriers in 2001, we were able to reasonably estimate and record the corresponding payables and receivables, net of commission revenues. As the receivables related to the years 1997 through 2001 and collection would entail pursuing numerous former clients, we determined in the fourth quarter of 2001 that the collection of these receivables was remote. In accordance with GAAP, since the collection of the receivables was highly uncertain and the amount of the loss was known, we wrote off the $2.8 million receivables in the fourth quarter of 2001. We have since strengthened our internal controls and systems to minimize the risk of similar discrepancies occurring in subsequent periods.

In December 2001, we entered into a services agreement with Ceridian Corporation. The agreement stipulated that Ceridian Corporation will provide administrative services to our customers and us. We estimated that the conversion cost associated with this service agreement would be $1.2 million and we accrued this amount in the fourth quarter of 2001. In March 2002, the original service agreement was amended due to our announcement to sell USIA. Please read “—Discontinued Operations” below. The amendment eliminated USIA as a party to the service agreement, which resulted in the accrual of an additional $1.0 million in the first quarter of 2002.

In 2000, we entered into a strategic marketing agreement with a technology company. The agreement was terminated by mutual consent in the fourth quarter of 2001, resulting in an accrual of $0.8 million.

Stock Appreciation Rights

In 1995, we adopted a Long-Term Incentive Plan to provide a means to attract, retain and motivate employees. As part of the Long-Term Incentive Plan we issued stock appreciation rights, which we refer to as SARs. SARs generally vest over a five-year period, although accelerated vesting is possible under specified circumstances. Upon exercise of a SAR, the holder generally is entitled to receive, in cash, the excess of the fair market value per share of our common stock on the date of exercise over the grant price of the SAR. The

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valuation of SARs is based on the estimated fair value of a share of our common stock. In accordance with GAAP, compensation expense, or a reduction of compensation expense, for SARs is recorded over the vesting period based on the change in fair value from grant date to each balance sheet date. Please read Note 8, “Employee Benefit Plans” to our annual financial statements. We recorded a net reduction in SAR-related compensation expense of $3.0 million in 2002, resulting from a reduction in the fair market value of our common stock. We recorded SAR-related compensation expense of $3.1 million in 2001.

Upon the consummation of our initial public offering in October 2002, the Long-Term Incentive Plan was terminated and replaced with the 2002 Equity Incentive Plan.

After the consummation of our initial public offering, we exchanged all our outstanding SARs for stock options or stock under our 2002 Equity Incentive Plan. On November 27, 2002, all SAR holders agreed to exchange their SARs for stock options and the number of options that each individual employee was entitled to receive and the option exercise price, was known. The historical accounting treatment of SARs was finalized and all SARs tendered in the exchange were cancelled. In accordance with GAAP, the SAR program existing prior to our initial public offering was accounted for as a fixed plan, and compensation expense was measured by the difference between the quoted market price and the price, if any, to be paid by the employee. The corresponding accrual for SAR-related compensation expense was reversed and offset compensation expense that was recognized upon the conversion to a stock option. Our stock price did not increase significantly prior to the consummation of the exchange of SARs for options, therefore the financial statement impact of the transaction in which the SARs were ultimately exchanged for stock options was a $1.3 million expense which was recorded in the fourth quarter of 2002. Upon the consummation of the exchange of all SARs for options or stock, no further expense was recognized under our 2002 Equity Incentive Plan in connection with the exchange.

2002 Equity Incentive Plan

Our Company’s board of directors adopted and a requisite majority of our stockholders approved a new 2002 Equity Incentive Plan that became effective and replaced the Long-Term Incentive Plan, upon the consummation of our initial public offering. The 2002 Equity Incentive Plan reserves up to 10.3 million shares of our common stock for issuance to directors, executive officers, employees and non-employee contributors. Awards may consist of options, SARs, restricted shares, dividend equivalents or other share-based awards and are granted to eligible participants under the plan.

Upon the consummation of our initial public offering, approximately 0.1 million shares of restricted stock, which were fully vested, were granted to nine executive officers. A $1.0 million expense was recorded for the value of the grant of restricted stock during the fourth quarter of 2002.

Redeemable Common Stock Warrants

In March 1996, we issued warrants to purchase 0.7 million shares of common stock issued at an exercise price of $11.125 per share. Holders of the Redeemable Common Stock Warrants, issued in conjunction with a 1996 senior subordinated debt offering that was repaid in 1999, agreed to terminate the put rights associated with the Redeemable Common Stock Warrants concurrent with the consummation of our initial public offering. The aggregate value of the warrants was $4.3 million and was reported as Redeemable Common Stock warrants on our balance sheet prior to the consummation of our initial public offering. The change in value of the warrants, which was recorded as change in value of redeemable common stock warrants in our statements of operations, was $(4.1) million and $1.4 million for 2002 and 2001, respectively.

Early Retirement of Debt

In August 2003, we completed a $155.0 million senior secured credit facility, further described below under “Long-Term Debt.” The proceeds from borrowings under the credit facility were drawn, in part, to repay all

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amounts under our previously existing credit facility. As a result of repaying the previously existing credit facility, we recorded an expense of $4.0 million as early retirement of debt to reflect the prepayment penalty and the write-off of remaining deferred financing costs in the third quarter of 2003.

On October 25, 2002, we completed our initial public offering of 9.0 million shares at a price of $10 per share. The cash proceeds of the offering after the underwriting discount were $83.7 million. After deducting offering expenses of $5.3 million, $78.4 million was used to pay down our indebtedness under the credit facility. In connection with the debt repayment, we wrote-off $1.9 million in deferred financing costs in the fourth quarter of 2002.

In April 2002, we completed the sale of USIA for $19.9 million. We received cash proceeds of $18.2 million with the remaining consideration of $1.7 million in the form of an account receivable. Of the $18.2 million in cash proceeds, $16.3 million was used to reduce our term loan and $1.9 million was used to pay selling costs. In connection with the debt repayment, we wrote-off $0.7 million in deferred financing costs in the second quarter of 2002.

Liquidity and Capital Resources

Liquidity describes the ability of a company to generate sufficient cash flows to meet the cash requirements of its business operations, including working capital needs, capital expenditures, debt service, acquisitions and other commitments and contractual obligations. Prior to our initial public offering, we relied on our ability to generate cash flows from our financing activities, such as the issuance of debt and equity, to supplement our cash flows from operations which were insufficient to fund our business operations. Following our initial public offering, we substantially reduced our long-term debt, but still lacked sufficient cash flows from operations to fund our foreseeable debt payments. So, in 2003, we entered into a new credit facility, as further described below, and now consider our liquidity in terms of cash flows from operations and their sufficiency to fund our operating and investing activities.

When considering our liquidity, it is important to note that we hold cash in a fiduciary capacity as a result of premiums received from clients that have not yet been paid to insurance carriers. The fiduciary cash is recorded as an asset on our balance sheet with a corresponding liability, net of commissions, to insurance carriers. We earn interest on these funds during the time between receipt of the cash and payment to insurance carriers. In some states, fiduciary cash must be kept in separate bank accounts subject to specific guidelines, which generally emphasize capital preservation and liquidity, and is not generally available to service debt or for other corporate purposes. Insurance brokerage transactions typically generate large cash flows, and the timing of such cash flows can significantly affect the net cash balances held at month end. Additionally, the seasonality of some of our businesses, particularly in the Specialized Benefits segment, can create period-to-period fluctuations in our cash flows.

We believe that cash and cash equivalents on hand of $46.1 million and our availability under our revolving credit facility of $28.3 million as of December 31, 2003, together with cash flows generated from operations, should be sufficient to fund our estimated $18.7 million in debt principal repayments, working capital needs, acquisitions and budgeted $9.9 million in capital expenditures through December 31, 2004. Our liquidity thereafter will depend on our financial results and results of operations and future available sources of additional equity or debt financing. Our revolving credit facility provides us with availability of up to $30.0 million, all of which is available for general corporate purposes, including acquisitions. As of December 31, 2003 availability under the revolving credit facility was reduced by $1.7 million for outstanding letters of credit. Our future operating performance and ability to service our debt will be subject to economic conditions and to financial, business and other factors, many of which are beyond our control—please review our “Risks Related to Our Business” in Item 1 of this report.

Cash and cash equivalents at year-end increased (decreased) $24.8 million, $(9.5) million and $29.2 million for the years ended December 31, 2003, 2002 and 2001, respectively. Net cash provided by operating activities

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totaled $35.9 million, $36.6 million and $21.9 million for the years ended December 31, 2003, 2002 and 2001, respectively, and is principally dependent upon our results of operations and the timing of collection of premiums receivable and payments of premiums payable. Cash provided by operating activities was negatively impacted in 2003 by the pay-down of approximately $13.8 million in liabilities existing at December 31, 2002 in our Corporate segment related to pre-initial public offering obligations. These obligations did not exist at December 31, 2003, so we do not expect to see a similar drain on cash flows from operations in 2004.

Net cash (used in) provided by continuing investing activities totaled $(21.2) million, $5.6 million and $(14.9) million for the years ended December 31, 2003, 2002 and 2001, respectively, which principally reflects acquisition activities and capital expenditures. Included in the net cash provided by continuing investing activities for the year ended December 31, 2002 is $18.2 million in proceeds from the sale of USIA. Please read “Discontinued Operations” below. Cash expenditures for acquisitions amounted to $18.2 million, $5.7 million and $6.9 million for the years ended December 31, 2003, 2002 and 2001, respectively. We made no acquisitions in 2002 or 2001. The $5.7 million for the year ended December 31, 2002, reflects the payment of additional purchase price and retention-based acquisition payments. The $6.9 million for the year ended December 31, 2001, reflects the payment of additional purchase price on retention-based acquisitions, as well as the payment of the cash portion of an acquisition effective in 2000 but paid in the first quarter of 2001. Cash expenditures for property and equipment amounted to $8.1 million, $7.0 million and $8.5 million for the years ended December 31, 2003, 2002 and 2001, respectively. The net effect of investments in discontinued operations amounted to $0.2 million, $(8.9) million and $(14.8) million for the years ended December 31, 2003, 2002 and 2001, respectively.

Net cash provided by (used in) financing activities totaled $9.9 million, $(42.7) million and $36.9 million for the years ended December 31, 2003, 2002 and 2001, respectively, as we made debt payments and continued to issue both debt and equity. In the third quarter of 2003, we refinanced our credit facility resulting in gross proceeds from the issuance of debt of $125.0 million and costs paid of $3.8 million. With the proceeds, we paid down our previously existing revolver and term loan of $70.9 million and $27.3 million, respectively and other acquisition-related debt of $5.0 million. In the first quarter of 2002, we received $2.5 million from the issuance of our preferred stock to Sovereign Bancorp. In the second quarter of 2002, we used $16.3 million of the proceeds from the sale of USIA to reduce our term loan. In the fourth quarter of 2002, we completed our initial public offering of 9.0 million shares at a price of $10 per share. The cash proceeds of the offering after the underwriting discount were $83.7 million. After deducting offering expenses of $5.3 million, $78.4 million was used to pay down our indebtedness under our previous credit facility. In the fourth quarter of 2001, we received $30.0 million from the issuance of our preferred stock. Of the $30.0 million issued, $15.0 million was issued to UnumProvident Corporation and $15.0 million was issued to Ceridian Corporation. Please read Note 12, “Related Party Transactions” to our annual financial statements.

Income (loss) per share from continuing operations on a basic and diluted basis was $0.78 and $0.77, respectively, for the year ended December 31, 2003 and $(0.87) and $(74.16) for the years ended December 31, 2002 and 2001 on a basic and diluted basis, respectively. Our per share data was significantly impacted by the 43.8 million increase in our common shares outstanding, which was a result of (i) 34.8 million shares of our common stock issued to the holders of our preferred stock concurrent with our initial public offering and (ii) 9.0 million shares of our common stock issued as part of the initial public offering. Shares of our common stock outstanding as of December 31, 2003, 2002 and 2001, were 46.7 million, 42.4 million and 0.8 million, respectively.

Taxes

Our net losses have resulted in net operating loss carry-forwards for federal and state income tax purposes. At December 31, 2003, we had $22.6 million of net operating loss carry-forwards for federal tax purposes that will expire during the period 2011 through 2022. Our ability to use these net operating loss carry-forwards to offset future taxable income, if any, may be subject to limitations under Section 382 of the Internal Revenue

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Code of 1986, as amended and similar state provisions. The provisions of Section 382 are triggered by specific ownership changes of our stock. We do not believe Section 382 will limit us in utilizing our net operating loss carry-forwards in 2004. However, if limited, the unused portion may then be carried forward to future years. We expect to utilize our remaining net operating loss carry-forwards in the first half of 2004 and then to become a full taxpayer for both federal and state income taxes. In 2003 and 2002 we paid $3.4 million and $2.4 million, respectively, primarily for state income taxes. In 2004, this amount is likely to be substantially higher depending on our results of operations and the composition of our taxable income by state.

Registration Statement

On February 12, 2004, we filed a $300.0 million universal shelf registration statement on Form S-3 with the Securities and Exchange Commission pursuant to which we may offer up to $150.0 million of securities in the future and selling shareholders may offer up to $150.0 million of common stock in the future. Securities offered by us may be common stock, preferred stock, debt securities, warrants to purchase common stock, preferred stock or debt securities, stock purchase contracts, stock purchase units or any combination of such securities. Upon effectiveness of the registration, one or more of these securities may be offered in amounts, prices, and on terms to be announced when and if the securities are offered. The timing, structure and nature of any funds raised under this shelf registration statement, as well as the use of such funds, are at the discretion of our management and board of directors.

Long-Term Debt

Our debt consists of the following:

In August 2003, we completed a $155.0 million senior secured credit facility with several lending institutions. The credit facility is structured as follows: a $30.0 million revolving credit facility maturing on August 11, 2007, and a $125.0 million term loan payable in quarterly installments which commenced on October 31, 2003. The last quarterly installment is due on August 11, 2008, the maturity date of the term loan. The proceeds from borrowings under the credit facility were drawn to (i) repay all amounts under the previously existing credit facility, (ii) repay a portion of certain notes issued for acquisitions, (iii) pay fees and expenses in connection with the credit facility including a prepayment penalty in connection with the prepayment of the previously existing credit facility and (iv) for general corporate purposes. As a result of repaying the previously existing credit facility, we recorded an expense of $4.0 million as early retirement of debt to reflect the prepayment penalty and the write-off of remaining deferred financing costs in the third quarter of 2003.

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The revolving credit facility is available for loans denominated in U.S. dollars and for letters of credit. Borrowings under the revolving credit facility bear interest, at our option, at either a base rate plus an applicable margin ranging from 1.5% to 2.5% per annum or the Eurodollar rate plus an applicable margin ranging from 2.5% to 3.5% per annum, depending on our credit ratings as determined by Standard & Poor’s and Moody’s credit rating services at the time of borrowing. Borrowings under the term loan bear interest, at our option, at a base rate plus 2.0% per annum or the Eurodollar rate plus 3.0% per annum. The base rate and the Eurodollar rate are effectively the prime rate and the London Interbank Offering Rate, respectively. Additionally, there is a commitment fee on the unused portion of the revolving credit facility of 0.50% per annum. The revolving credit facility may be used for acquisition financing and general corporate purposes.

The credit facility contains various limitations, including limitations on our ability to pay dividends and make other distributions to stockholders, borrowings and acquisitions. The credit facility also contains various financial covenants that must be met, including those with respect to fixed charges coverage and limitations on consolidated debt, net worth and capital expenditures. Failure to comply with the covenants may result in an acceleration of the borrowings outstanding under the facility. All of the stock of our subsidiaries and certain other identified assets are pledged as collateral to secure the credit facility. Additionally, each subsidiary guarantees our obligations under the credit facility. As of December 31, 2003 we had $1.7 million outstanding under letters of credit, which reduced the availability of our revolving credit facility to $28.3 million as of that date.

As a result of the new credit facility, we have improved our working capital position and improved our near term available cash flows. Working capital increased by $63.3 million to $70.6 million at December 31, 2003, compared to $7.3 million at December 31, 2002, principally due to the net cash proceeds received from the new credit facility and the reduction in current portion of long-term debt. The scheduled repayment of bank debt over the next twelve months was reduced by $19.5 million to $1.3 million at December 31, 2003, compared to $20.8 million at June 30, 2003.

On July 24, 2003, Standard & Poor’s raised the counterparty credit and bank loan rating on us to ‘BB-’ from ‘B+.’ On August 12, 2003 Moody’s Investors Service assigned a B1 rating to our new credit facility with a stable outlook.

As of December 31, 2003, we were in compliance with the covenants in our new credit facility. The significant financial covenants of our new credit facility were as follows: