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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

Form 10-Q

(Mark One)

For the quarterly period ended March 31, 2004

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)

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 whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes x     No ¨.

As of May 3, 2004, the number of outstanding shares of the Registrant’s common stock, $.01 par value, was 48,420,586 shares.

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U.S.I. HOLDINGS CORPORATION

INDEX

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FORWARD LOOKING STATEMENTS

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 us 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 our 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 speaks only as of the date set forth on the signature page hereto. We undertake no 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.

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Item 1. Financial Statements

U.S.I. HOLDINGS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

See notes to condensed consolidated financial statements

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U.S.I. HOLDINGS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

See notes to condensed consolidated financial statements.

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U.S.I. HOLDINGS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

See notes to condensed consolidated financial statements.

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U.S.I. HOLDINGS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. Nature of Operations and Summary of Significant Accounting Policies

Nature of Operations

U.S.I. Holdings Corporation, a Delaware corporation, and subsidiaries (collectively, the Company), is a distributor of insurance and financial products and services to small and mid-sized businesses.

Basis of Presentation and Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X, and include all normal recurring adjustments, which the Company considers necessary for a fair presentation of the financial statements of such periods. Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been omitted pursuant to such rules and regulations. The unaudited condensed consolidated financial statements include the accounts of U.S.I. Holdings Corporation and its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. Operating results for the three-month period ended March 31, 2004, are not necessarily indicative of the results that may be expected for the year ending December 31, 2004.

Refer to the audited consolidated financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003 for additional details of the Company’s financial position, as well as, a description of the Company’s significant accounting policies which have been continued without material change. The details included in the notes have not changed except as a result of normal transactions in the interim period and the events mentioned in the notes below.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Reclassifications

Certain prior period amounts have been reclassified to conform to the current period’s presentation.

Stock-Based Compensation

SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure”, an amendment of SFAS No. 123 “Accounting for Stock-Based Compensation” (collectively SFAS No. 148), establishes accounting and disclosure requirements using the fair value based method of accounting for employee stock-based compensation. SFAS No. 148 encourages, but does not require, companies to record compensation cost for stock-based compensation plans at fair value.

The Company accounts for stock-based compensation using the intrinsic value method prescribed by APB No. 25. Under the intrinsic value method, compensation cost is recognized only to the extent the fair market value of the stock at grant date is in excess of the amount that the employee must pay to acquire the stock.

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U.S.I. HOLDINGS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(UNAUDITED)

The following table illustrates the effect on the Company’s operating results and earnings per share as if the Company had applied the fair value recognition provisions of SFAS No. 148 to stock-based compensation. Assumptions in the valuation model are consistent with those used for 2003 (please read Note 9 “Stock Option Plan” to our consolidated financial statement included in our Annual Report on Form 10-K for the year ended December 31, 2003).

Segment Reporting

Effective January 1, 2004, the Company moved its core benefits operation and part of its executive and professional benefits operation from its Specialized Benefits segment into its Insurance Brokerage segment in an effort to gain operating efficiency and further promote cross-sales of their products with other brokerage products. Accordingly, the Company’s 2004 Insurance Brokerage segment data includes the combined results of operations and prior year segment results have been restated to reflect the change in organizational structure (See Note 6 - Segment Reporting).

2. Goodwill and Other Intangible Assets

The changes in the carrying amount of goodwill by reportable segments are as follows:

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U.S.I. HOLDINGS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(UNAUDITED)

In the first quarter of 2004, USI transferred $17,332,000 in goodwill from its Specialized Benefits Services segment to its Insurance Brokerage segment (see above and Note 6 “Segment Reporting”). Goodwill adjustments arise from reclassifications with other intangible assets upon completion of acquisition valuations, divestitures and additional or contingent purchase price payments.

The Company’s amortizable intangible assets by asset class are as follows:

Amortization expense for amortizable intangible assets was $5,434,000 and $5,164,000 for the three months ended March 31, 2004 and 2003, respectively. Amortization expense for amortizable intangible assets for the years ending December 31, 2004, 2005, 2006, 2007 and 2008 is estimated to be $20,460,000, $17,521,000, $14,232,000, $11,248,000 and $8,545,000, respectively.

Other intangible assets primarily consist of deferred financing costs, which are amortized to interest expense.

With the exception of goodwill, the Company has no intangible assets with indefinite lives.

There were no indicators of possible impairment in the Company’s goodwill and intangible assets during the three-month period ended March 31, 2004. The Company will complete its annual goodwill impairment test in the fourth quarter of 2004.

3. Acquisitions

There were no acquisitions completed in the first quarter of 2004; however, in April and May of 2004 the Company consummated the acquisition of two insurance brokerage operations (see Note 10 – “Subsequent Events”).

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U.S.I. HOLDINGS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(UNAUDITED)

In the first quarter of 2003 the Company acquired the assets and certain liabilities of one insurance brokerage operation. The purchase price of $7,200,000 included cash of $2,160,000, notes payable to sellers of $4,680,000 and shares of the Company’s common stock of $360,000. Common shares issued by the Company in connection with this acquisition were valued at an amount approximating the fair market value based on an average daily closing price over a short period of time just prior to the effective date of the acquisition. The following amounts were allocated to covenants-not-to-compete, expiration rights and net tangible assets, respectively: $398,000, $3,029,000, and $22,000; and the balance of $3,751,000 was recognized as goodwill. Expiration rights and covenants-not-to-compete are being amortized over 10 and 7 years, respectively. This acquisition is not considered material to the Company’s financial position or results of operations.

4. Long-Term Debt

In August 2003, the Company entered into a $155,000,000 senior secured credit facility with several lending institutions. The credit facility is structured as follows: a $30,000,000 revolving credit facility expiring in August 2007, and a $125,000,000 term loan, payable in quarterly installments that commenced on October 31, 2003. The last quarterly installment is due in August 2008, the maturity date of the term loan.

On March 26, 2004, the Company executed a first amendment to the credit facility, providing for a 0.5% reduction to the applicable term loan interest rate effective April 1, 2004 and paid an amendment fee to Banc of America Securities LLC and J.P. Morgan Securities Inc., the joint lead arrangers.

As amended, borrowings under the term loan bear interest, at the Company’s option, at either a base rate plus 1.5% per annum or the Eurodollar rate plus 2.5% per annum. The base rate and the Eurodollar rate are effectively the prime rate and the London Interbank Offering Rate for the applicable period, respectively. The interest rate on the term loan was 4.13% at March 31, 2004.

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 the Company’s 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 the Company’s credit ratings as determined by Standard & Poor’s and Moody’s Investor Service credit rating services at the time of borrowing. Additionally, there is a commitment fee on the unused portion of the revolving credit facility of 0.5% per annum. The revolving credit facility may be used for acquisition financing and general corporate purposes. At March 31, 2004, availability under the revolving credit facility was $28,176,460, having been reduced by $1,823,540 for outstanding letters of credit.

The credit facility contains various limitations, including limitations on the payment of dividends and other distributions to stockholders, borrowing 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 the Company’s subsidiaries and certain other identified assets of the Company are pledged as collateral to secure the credit facility. Additionally, each subsidiary guarantees the obligations of the Company under the credit facility.

On March 26, 2004, the Company executed a first waiver to the credit agreement. The credit agreement has various limitations on acquisitions, including, but not limited to, aggregate cash payments for acquisitions each fiscal year, the aggregate amount of total consideration for acquisitions each fiscal year and the amount of indebtedness assumed on a given acquisition. In order to proceed with its acquisition strategy the Company requested and received a waiver that specifically excludes two significant acquisitions from its credit facility limitations on aggregate cash payments, aggregate total consideration and assumed indebtedness (see Note 10 – “Subsequent Events”). No other covenants were waived or amended. In March 2004, the Company paid a waiver fee to the lender group.

At March 31, 2004 the Company is in compliance with all such covenants.

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U.S.I. HOLDINGS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(UNAUDITED)

5. Common Stock

Upon consummation of the Company’s initial public offering in October 2002, all redeemable preferred stock, for which the holders still had put rights, was converted to common stock. After the conversion, the holders of the redeemable preferred stock retained the right to put their common stock to the Company upon the occurrence of certain events as described below.

The individuals who hold the put rights may, in the event of death, disability or involuntary termination, put to the Company the number of shares owned by them having a fair market value equal to their original investment in those shares. The put rights generally continue as long as the original holders own the stock and remain employed by the Company. The put rights are not transferable. Therefore, if these original holders sell any of the stock, the put rights with respect to the shares sold are extinguished.

6. Segment Reporting

The Company has three reportable segments: Insurance Brokerage, Specialized Benefits Services and Corporate. The Company’s reportable segments are separately managed strategic business units that offer different products and services to different target markets.

The Insurance Brokerage segment offers general and specialty property and casualty, employee benefit-related insurance and retirement services such as 401(k) plan administration and defined benefit actuarial services. The Specialized Benefits Services segment offers benefits enrollment and communication, executive benefits and other related consulting services. The Corporate segment is responsible for managing the following: acquisition processes, marketing, human resources, legal, capital, financial and reporting.

Effective January 1, 2004, USI moved its core benefits operation and part of its executive and professional benefits operation from its Specialized Benefits segment into its Insurance Brokerage segment, reorganizing the management and reporting of the two business units. The change was made based on the determination that these business units’ focus is on a target market and an array of products similar to that of the Insurance Brokerage Segment. Prior year amounts have been reclassified to reflect the new business segment structure.

The following tables show the income (loss) from continuing operations before income taxes for the three months ended March 31, 2004 and 2003:

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U.S.I. HOLDINGS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(UNAUDITED)

7. Contingencies

The Company is subject to various claims, lawsuits and proceedings that arise in the normal course of business. These matters principally consist of alleged errors and omissions in connection with the placement of insurance and rendering administrative or consulting services and are generally covered in whole or in part by insurance. On the basis of present information, anticipated insurance coverage and advice received from counsel, it is the opinion of the Company’s management that the disposition or ultimate determination of these claims, lawsuits or proceedings will not have a material adverse effect on the Company’s consolidated financial position or results of operations.

Near North Insurance Litigation. In October 2002, a group of affiliated plaintiffs who are competitors of the Company in the insurance brokerage and risk management business, filed a complaint in the Chancery Court of the Circuit Court of Cook County, Illinois, against the Company and two of its Illinois-based and one of its California-based officers and employees who previously worked for one of the plaintiffs, various other third party individuals, and an insurance brokerage. Plaintiffs’ complaint seeks from all defendants unspecified compensatory damages and punitive damages related to claims for among other things tortuous interference with clients, violation of state trade secrets laws and civil conspiracy. The Company, its officers and employees asserted various defenses to this action, and the Company’s insurance carriers are involved in the defense of the litigation. In March 2003, the Company’s California-based officer was dismissed from the litigation. In November 2003, the Illinois court dismissed all of the claims asserted against the Company and its officers and employees for failing to meet Illinois pleading requirements, and the court gave plaintiffs an additional opportunity to attempt to meet those requirements.

In December 2003, plaintiffs filed a third amended complaint, and in February 2004 the Company filed another motion to dismiss all claims asserted against the Company and its officers and employees based on several grounds including the grounds previously accepted by the court. A hearing on the Company’s motion to dismiss is set for May 2004.

The Company is vigorously defending this action, as it believes the plaintiffs’ allegations against the Company have no merit.

8. Efficiency Initiative and Other Accruals

In an effort to reduce operating expenses, in 2002 and 2001, the Company recorded charges related to future compensation costs for terminated employees, future producer compensation restructuring and future lease costs for terminated office leases. Additionally, for the three months ended March 31, 2004 and the year ended December 31, 2003, the Company recorded charges of $64,000 and $396,000, respectively, for severance costs related to its corporate office move from San Francisco to New York.

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U.S.I. HOLDINGS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(UNAUDITED)

The following table summarizes transactions related to the employee termination benefits, producer compensation restructuring costs and terminated office lease costs:

The employee termination benefits and the future producer compensation restructuring charges reflected above are included in compensation and employee benefits in the accompanying condensed consolidated statements of operations. The terminated office lease charges are included in other operating expenses in the accompanying condensed consolidated statements of operations. Substantially all of the remaining liabilities will be paid by the end of 2004.

9. Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share:

10. Subsequent Events

In April 2004, USI completed a follow-on public offering of 11,229,578 shares of its common stock at a public offering price of $14.72 per common share. Of those shares, 4,025,000 shares were sold by the Company via forward sale agreements and 7,204,578 shares were sold by various selling shareholders. The Company expects to receive net proceeds initially valued at $55.5 million upon settlement of the forward sale agreement, which will be within the twelve months following the closing of the public offering. USI expects to use the net proceeds from its sale of common stock to fund its acquisition activity.

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U.S.I. HOLDINGS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(UNAUDITED)

On April 1, 2004 USI acquired Bertholon-Rowland Corporation, an insurance brokerage operation. The aggregate preliminary purchase price of approximately $44,562,000 consisting of cash of $31,000,000, common stock of $9,337,000 and assumed liabilities of $4,225,000 will be allocated primarily to goodwill and other intangible assets.

On May 1, 2004, USI acquired Dodge, Warren & Peters Insurance Services, Inc., an insurance brokerage operation. The aggregate preliminary purchase price of approximately $38,600,000 consisting of cash of $12,523,000, common stock of $14,307,000 and assumed liabilities of $11,770,000 will be allocated primarily to goodwill and other intangible assets.

On May 10, 2004, USI announced that its Board of Directors authorized a stock repurchase plan. Using only proceeds, and any related tax benefit amounts from the exercise of Stock options and warrants, the Company may at its discretion repurchase shares on the open market or in private transactions in order to help offset dilution from the Company’s equity compensation plans and previously issued warrants to purchase the Company’s common stock. The amount and timing of repurchases will be based upon the number of shares of the Company’s common stock which may be issued from time to time upon the exercise of stock options and warrants, market conditions and other factors.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and accompanying notes included in Part I-Item 1. 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 allows 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.

According to published and industry sources, the Office of the Attorney General of the State of New York is conducting an investigation of certain compensation agreements (generally known as contingent commission or policy service agreements) between insurance brokers and insurance companies and has served subpoenas on a number of insurance brokerage companies. In addition, we are aware from published sources that the California Department of Insurance has also launched a similar investigation into these types of compensation agreements. As of the date of this report, we have not received a subpoena or other inquiry from the Office of the Attorney General of the State of New York or the California Department of Insurance in connection with these investigations. While it is not possible to predict the outcome of these investigations, any resulting impact on the industry’s use of these types of agreements could have a material and adverse impact on our results of operations.

We have two operating segments: Insurance Brokerage and Specialized Benefits Services, and a third administrative segment: Corporate. See discussion under “Results of Operations” below.

Market

Property & Casualty

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 and into 2004, 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

Premium rates in the health insurance industry have generally had 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

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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 cannot 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 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 company 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, leveraging our purchasing power and lowering the cost of our information technology through 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.

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Acquisitions

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

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 common stock 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 targets. All acquisitions require approval of our board of directors and, if greater than $1.5 million in aggregate purchase price, also require notification to our bank lenders. Please read Note 3, “Acquisitions” in our three-month financial statements.

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, 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 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.

There were no acquisitions made in the first quarter of 2004; however, the Company acquired two insurance brokerage operations in the second quarter of 2004 (Please read Note 10, “Subsequent Events” in our three-month financial statements).

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 Specialized Benefits revenues. The timing of certain aspects of our revenue stream, particularly in the Specialized Benefits segment, makes comparisons of any period less than a full year difficult. We have implemented various strategies to reduce the impact of seasonal and uneven revenue streams, 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 generate 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 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 included in our Annual Report on Form 10-K for the year ended December 31, 2003 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

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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 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.

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.

We follow a consistent methodology based on an estimate of discounted future cash flows derived from acquired clients lists and attrition rates to estimate the fair value of the expiration rights and other intangible assets at the date of acquisition. For acquisitions in excess of $5.0 million in purchase price, we obtain an independent appraisal of the fair value of intangible assets acquired. 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.

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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 included in our Annual Report on Form 10-K for the year ended December 31, 2003.

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 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. We have accrued a liability in accordance with GAAP for our best estimate of the probable cost of the resolution of those claims where our liability is probable and can be reasonably estimated. 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.

Results of Operations

A reconciliation of EBITDA to Net income 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.

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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 reflecting our operating performance in a manner 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 internally generated revenue growth.

Revenues. Revenues increased $10.2 million, or 12.4%, to $92.8 million for the three months ended March 31, 2004, from $82.6 million for the three months ended March 31, 2003. Organic revenue growth was 3.9%. Of the $10.2 million in revenue growth, $7.1 million was due to prior year acquisitions, net of disposed businesses. The remaining $3.1 million in revenue growth was comprised of a net increase in P&C contingents and overrides on Health & Welfare business of $2.6 million, with the balance due to the net impact of new business, rate and market conditions and lost business, offset by decreased revenues in the Specialized Benefits segment due to $4.2 million in revenues in the first quarter of 2003 related to two large life insurance transactions.

Compensation and Employee Benefits. Compensation and Employee Benefits increased $6.7 million, or 13.7%, to $55.4 million for the three months ended March 31, 2004, from $48.7 million for the three months ended March 31, 2003. For the three months ended March 31, 2004, the increase was primarily due to the effect of acquisitions in 2003. As a percentage of revenues, Compensation and Employee Benefits was 59.7% for the three months ended March 31, 2004, compared to 59.0% for the three months ended March 31, 2003. The increase, as a percentage of revenues, was due to the impact of the previously mentioned life insurance transactions, somewhat offset by the positive effects of the efficiencies we have gained from fold-in acquisitions and generally leveraging our larger revenue base over our existing operations. For the three months ended March 31, 2003, Compensation and Employee Benefits related to the $4.2 million in life insurance revenues noted above was $1.2 million, or 28.5% of the related revenues, which negatively effects the comparison of the EBITDA Margin for the first quarter of 2004 to the same period in the prior year by 1%.

Other Operating Expenses. Other Operating Expenses increased $1.5 million, or 8.8%, to $19.0 million in the three months ended March 31, 2004, from $17.5 million for three months ended March 31, 2003. For the three months ended March 31, 2004, we incurred $0.9 million in costs related to the implementation of Sarbanes-Oxley Section 404 procedures and the corporate move. As a percentage of revenues, Other Operating Expenses were 20.5% for the three months ended March 31, 2004, compared to 21.2% for the three months ended March 31, 2003, an improvement of 0.7%. The improvement is due to expansion of our revenue base over our existing footprint through fold-in and other accretive acquisitions and to organic growth and the resultant efficiencies of greater revenues covering our fixed costs. Additionally, we continue to see the benefits of targeted expense reduction efforts, particularly in the area of lease expense, offset by the other expenses noted above.

Income From Continuing Operations. Income From Continuing Operations increased $0.1 million to $5.1 million for the three months ended March 31, 2004, from $5.0 million for the three months ended March 31, 2003. Comparison of 2004 to 2003 was negatively affected by the high margin life insurance revenue in 2003 noted above. Additionally, other improvements in operating efficiency were somewhat offset by continued expenses related to the Sarbanes-Oxley Section 404 project and the corporate move. Lastly, the positive impact of greater revenues and improvement in interest expense were offset by the increase in our tax provision. The effective tax rate from continuing operations, for the three months ended March 31, 2004, was 42.4% compared to 10.0% for the three months ended March 31, 2003. Income tax expense for the three months ended March 31, 2004 increased $3.2 million to $3.8 million from $0.6 million for the three months ended March 31, 2003. The increase is due to the fact that we are providing for income taxes at a full tax-paying rate in 2004, whereas in 2003 we were in a net operating loss position and recognizing those benefits.

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:

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Effective January 1, 2004, we integrated our core benefits operation and part of our executive and professional benefits operation with our Northeast brokerage operation in an effort to gain operating efficiency and further promote cross-sales of their products with other brokerage products. Accordingly, we moved a part of our executive and professional benefits and all of our core benefits operations from the Specialized Benefits segment into the Insurance Brokerage segment. Prior period segment information was reclassified to reflect the change in the organizational structure.

We evaluate segment performance based on Revenues, Organic Revenue Growth, EBITDA and EBITDA Margin. Organic Revenue Growth, EBITDA and EBITDA Margin are not substitutes for other financial measures determined in accordance with GAAP. Because not all companies calculate these non-GAAP measures in the same fashion, these measures as presented are not likely to be comparable to other similarly titled measures of other companies.

Insurance Brokerage

Revenues in the Insurance Brokerage segment increased $14.1 million, or 18.5%, to $90.7 million for the three months ended March 31, 2004, from $76.6 million for the three months ended March 31, 2003. Of the $14.1 million increase in revenues, $7.0 million was organic revenue growth, representing an organic growth rate of 9.2%. The remaining $7.1 million was the net impact of businesses acquired and divested in 2003. Included in the organic growth of $7.0 million is an increase in contingent commissions of $2.6 million, the positive effect of rate and market conditions and positive net new business, which we define as new business less the impact of lost business and other prior year revenues that did not recur. Property & Casualty revenues represented 65.5% and 58.5% of our total consolidated revenues in three months ended March 31, 2004 and 2003, respectively, and Group Employee Benefits revenues represented 32.2% and 34.3% of our total consolidated revenues in three months ended March 31, 2004 and 2003, respectively.

EBITDA in the Insurance Brokerage segment increased $5.3 million or 26.3% to $25.3 million for the three months ended March 31, 2004 from $20.0 million for the three months ended March 31, 2003. EBITDA Margin in the Insurance Brokerage segment was 27.8% and 26.1% in three months ended March 31, 2004 and 2003, respectively. The increase in EBITDA and EBITDA Margin for the three months ended March 31, 2004 is due to (i) a decrease in Compensation and Employee Benefits and Other Operating Expenses, as a percent of revenues, due to the increased revenue base over our fixed costs, the positive affects of our integration efforts and accretive acquisitions, (ii) improvement in performance in our operations and (iii) the positive impact of increased P&C contingent commissions.

Income From Continuing Operations Before Income Taxes in the Insurance Brokerage segment was $18.4 million and $12.9 million for the three months ended March 31, 2004 and 2003, respectively. The increase for the three months ended March 31, 2004 is due to the items discussed above.

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Specialized Benefits Services

Specialized Benefits Services revenues decreased $3.9 million, or 66.3%, to $2.0 million for the three months ended March 31, 2004, from $5.9 million for the three months ended March 31, 2003, due to a decrease in net new business. As previously discussed, there were two significant life insurance transactions in the first quarter of 2003 totaling $4.2 million in revenues, which negatively affects the year-over-year comparison. Specialized Benefits Services revenues represented 2.1% and 7.2% of our total consolidated revenues for the three months ended March 31, 2004 and 2003, respectively.

EBITDA in the Specialized Benefits Services segment decreased $2.8 million to $(1.5) million for the three months ended March 31, 2004 from $1.3 million for the three months ended March 31, 2003. EBITDA Margin in the Specialized Benefits Services segment was (74.6)% and 21.8% for the three months ended March 31, 2004 and 2003, respectively. Comparisons of EBITDA and EBITDA Margin in the Specialized Benefits Services segment for the three months ended March 31, 2004 versus the same period in 2003 were negatively impacted by the significant prior year life insurance revenue items discussed above, somewhat offset by reductions in other operating expenses.

Income (Loss) From Continuing Operations Before Income Taxes in the Specialized Benefit Services segment was $(2.1) million and $0.6 million for the three months ended March 31, 2004 and 2003, respectively. The decrease for the three months ended March 31, 2004 is due to the items discussed above.

Corporate

Revenues at the Corporate segment represent interest income.

Net Corporate expenses were $5.4 million and $5.0 million in the three months ended March 31, 2004 and 2003, respectively. As a percentage of total consolidated revenues, net Corporate expenses were 5.8% and 6.0% in the three months ended March 31, 2004 and 2003, respectively. Included in net Corporate expenses in the three months ended March 31, 2004 is a net increase of $1.0 million in expenses related to the implementation of Sarbanes-Oxley Section 404 procedures and the move of the corporate office.

Net Loss From Continuing Operations in the Corporate segment was $7.4 million and $8.0 million for the three months ended March 31, 2004 and 2003, respectively. The improvement in 2004 is primarily due to a decrease in interest expense due to the restructuring of our credit facility at a lower interest rate, offset by the expenses mentioned above.

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Liquidity and Capital Resources

Our debt consists of the following: