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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

Form 10-Q

(Mark One)

For the quarterly period ended June 30, 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 August 4, 2004, the number of outstanding shares of the Registrant’s common stock, $.01 par value, was 48,948,521 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 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

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 and six-month periods ended June 30, 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 on stock options 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. To date, no compensation expense has been recorded for stock options since the market price at the date of grant equalled the amount the employee must pay. Additionally, in accordance with APB No. 25, compensation expense related to restricted stock is recorded ratably over the vesting period based on the fair market value on the date of grant.

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U.S.I. HOLDINGS CORPORATION AND SUBSIDIARIES

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

In the second quarter of 2004, the Company granted 152,748 shares of restricted stock to various corporate and operating company management. The shares vest 25% per year for four years. The fair value of the shares on the grant date was $2,209,000. The restricted stock grant was recorded as unearned compensation in stockholders’ equity and is being charged to compensation expense on a straight-line basis over the vesting period. In the second quarter of 2004, the Company recognized additional compensation expense of $139,000 related to the grant.

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 Services 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 reclassified 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:

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 consideration.

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U.S.I. HOLDINGS CORPORATION AND SUBSIDIARIES

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

Amortization expense for amortizable intangible assets was $6,087,000, $5,506,000, $11,521,000 and $10,670,000 for the three months ended June 30, 2004 and 2003 and for the six months ended June 30, 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 $22,836,000, $20,771,000, $17,335,000, $14,365,000 and $11,470,000, 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 and six-month period ended June 30, 2004. The Company will complete its annual goodwill impairment test in the fourth quarter of 2004.

3. Acquisitions

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, shares of the Company’s common stock valued at $9,337,000 and assumed liabilities of $4,225,000 was tentatively 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 $16,555,000, shares of the Company’s common stock and restricted stock units valued at $15,307,000 and assumed liabilities of $6,738,000 was tentatively allocated primarily to goodwill and other intangible assets.

During the six month period ended June 30, 2004, the Company acquired one book of business. The aggregate preliminary purchase price of approximately $1,913,000 consisting of cash of $1,435,000 and shares of the Company’s common stock valued at $478,000 was tentatively allocated primarily to expiration rights.

The preliminary purchase price allocations have not yet been finalized, however, the Company does not expect any material adjustments. Upon finalization of the purchase price allocation it is possible that amounts could be reclassified out of or in to goodwill, a non-amortizable asset, resulting in an adjustment to expense.

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U.S.I. HOLDINGS CORPORATION AND SUBSIDIARIES

The net assets and results of operations for each acquired company are included in the Company’s consolidated financial statements from their respective acquisition dates forward. The following is a summary of the unaudited pro forma historical results, as if these companies had been acquired on January 1:

These unaudited pro forma results are presented for comparative purposes only and are not necessarily indicative of the actual results of operations had these companies been acquired on January 1^st of each year.

In the first six months of 2003, the Company acquired two insurance brokerage operations. The aggregate purchase price of $20,032,000 included cash of $3,560,000, notes payable to sellers of $4,680,000 and shares of the Company’s common stock and restricted stock units valued at $11,792,000. The purchase price was allocated primarily to expiration rights, covenants not-to-compete and goodwill. The Company’s consolidated financial statements for the three and six-month periods ended June 30, 2003 include the results of both operations since the closing date of the acquisition. These acquisitions were 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 3.67% at June 30, 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. There is also 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 June 30, 2004, availability under the revolving credit facility was $24,176,460, having been reduced $4,000,000 for borrowings and $1,823,540 for outstanding letters of credit. See Note 10 – “Subsequent Events”.

The credit facility contains various limitations, including limitations on the payment of dividends and other distributions to stockholders, borrowing, acquisitions and 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. Additionally, 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 and each subsidiary guarantees the Company’s obligations under the credit facility.

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U.S.I. HOLDINGS CORPORATION AND SUBSIDIARIES

On March 26, 2004, in order to proceed with its acquisition strategy, the Company requested and received a waiver that specifically excludes the Bertholon-Rowland and Dodge, Warren & Peters acquisitions from our credit facility limitations on aggregate cash payments, aggregate total consideration and assumed indebtedness. No other covenants were waived or amended.

At June 30, 2004, the Company is in compliance with all such covenants.

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.

On May 10, 2004, the Company 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 its equity compensation plans and previously issued warrants to purchase its common stock. The amount and timing of repurchases will be based upon the number of shares of common stock which may be issued from time to time upon the exercise of stock options and warrants, market conditions and other factors. During the second quarter of 2004 the Company purchased 158,900 shares of its common stock on the open market at an aggregate cost of $2.4 million.

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 Services 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.

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U.S.I. HOLDINGS CORPORATION AND SUBSIDIARIES

The following tables show the income (loss) from continuing operations before income taxes by reporting segment for the three and six months ended June 30, 2004 and 2003:

The following table shows the total assets by reporting segment at June 30, 2004 and December 31, 2003:

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U.S.I. HOLDINGS CORPORATION AND SUBSIDIARIES

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 (“Near North”). 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, tortious 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 was held in July 2004 and the Company anticipates a ruling on the Company’s motion in October 2004.

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

In addition, the United States brought a criminal indictment against one of the plaintiff corporations, Near North, and its owner Michael Segal. The indictment alleged various criminal counts for mail fraud, tax violations and violations of the criminal Racketeer Influenced and Corrupt Organizations Act (“RICO”), among other things. In June 2004, a jury convicted Near North and Michael Segal on all counts. Sentencing in this matter is set for August 2004. Under the criminal RICO statute, the sentencing may include forfeiture of a majority stake in the ownership of Near North.

8. Efficiency Initiative and Other Accruals

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 six months ended June 30, 2004 and the year ended December 31, 2003, the Company recorded charges of $140,000 and $396,000, respectively, for severance costs related to its corporate office move from San Francisco to New York.

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.

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9. Earnings Per Share

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