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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

Form 10-Q

(Mark One)

For the quarterly period ended September 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 November 1, 2004, the number of outstanding shares of the Registrant’s common stock, $.01 par value, was 48,961,058 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 and 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 consummation and integration; errors and omissions claims; resolution of regulatory issues and other legal claims, including those related to compensation arrangements with insurance companies, the actual cost of resolution of contingent liabilities and passage of new legislation subjecting the Company to regulation in jurisdictions where it operates; 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 SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(Dollars in thousands, except per share data)

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 nine month periods ended September 30, 2004, are not necessarily indicative of the results that may be expected for the year ending December 31, 2004.

As part of the Company’s review of internal controls in compliance with Sarbanes-Oxley Section 404, it determined the need to enhance field office and corporate controls over its receivables (and related producer compensation expense) recorded for revenue on policies billed directly by insurance companies, or “direct bill” receivables. As a result of the changes in internal control, management identified immaterial errors in its direct bill receivable and related producer compensation accrual that affected purchase accounting in prior periods, predominantly affecting goodwill, accounts receivable and accrued liabilities. Accordingly, certain balance sheet adjustments were made in the third quarter of 2004 between goodwill, accounts receivable and accrued liabilities. Management believes that these adjustments were not material to the condensed consolidated balance sheet at September 30, 2004. Additionally, management identified immaterial errors in direct bill revenue and the related producer compensation expense, some of which related to prior periods. Accordingly, certain adjustments were made in the third quarter of 2004 to commissions and fee revenue and compensation expense. Management believes that these adjustments were not material to the Company’s condensed consolidated results of operations for the three or nine months ended September 30, 2004, or to any prior period.

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 except as otherwise disclosed herein. The details included in the notes have not significantly 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.

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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 equaled 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.

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 over four years. The fair value of the shares on the grant date was $2,209. 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. The Company recognized compensation expense related to the grant of $139 and $278 in the three and nine month periods ended September 30, 2004, respectively.

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”).

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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, the Company transferred $17,332 in goodwill from its Specialized Benefits Services segment to its Insurance Brokerage segment (see above and Note 6 “Segment Reporting”). Goodwill adjustments arise primarily from reclassifications with other intangible assets upon completion of acquisition valuations, divestitures and recording of additional or contingent purchase consideration.

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

Amortization expense for amortizable intangible assets was $6,687 and $5,461 for the three months ended September 30, 2004 and 2003, respectively, and $18,208 and $16,131 for the nine months ended September 30, 2004 and 2003, respectively. Amortization expense for existing amortizable intangible assets for the years ending December 31, 2004, 2005, 2006, 2007 and 2008 is estimated to be $24,386, $22,730, $19,613, $16,165 and $13,260, 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.

In accordance with GAAP, the Company routinely assesses impairment and recoverability indicators, such as lower than expected financial performance, on its goodwill and other long-lived assets. As a result of these routine assessments, management concluded that no such assets were impaired during the three and nine month periods ended September 30, 2004. The Company will complete its annual goodwill impairment test in the fourth quarter of 2004.

3. Acquisitions

On July 1, 2004, the Company acquired Future Planning Associates, Inc., an insurance brokerage operation. The aggregate preliminary purchase price of approximately $30,638 consisting of cash of $18,508, shares of the Company’s common stock of $3,064 and notes issued and net assumed liabilities of $9,066 was allocated primarily to goodwill and other intangible assets. This acquisition is included in the Specialized Benefits Services segment.

On May 1, 2004, the Company acquired Dodge, Warren & Peters Insurance Services, Inc., an insurance brokerage operation. The aggregate preliminary purchase price of approximately $38,600 consisting of cash of $16,555, shares of the Company’s common stock.

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and restricted stock units valued at $15,307 and assumed liabilities of $6,738 was allocated primarily to goodwill and other intangible assets. This acquisition is included in the Insurance Brokerage segment.

On April 1, 2004, the Company acquired Bertholon-Rowland Corporation, an insurance brokerage operation. The aggregate preliminary purchase price of approximately $44,562 consisting of cash of $31,000, shares of the Company’s common stock valued at $9,337 and assumed liabilities of $4,225 was allocated primarily to goodwill and other intangible assets. This acquisition is included in the Insurance Brokerage segment.

During the nine month period ended September 30, 2004, the Company acquired one book of business. The aggregate purchase price of approximately $1,913 consisting of cash of $1,435 and shares of the Company’s common stock valued at $478 was allocated primarily to expiration rights. This acquisition is included in the Insurance Brokerage segment.

The preliminary purchase price allocations have not yet been finalized pending final valuations of acquired assets and liabilities; however, the Company does not expect the valuations will materially modify the preliminary purchase price allocations. 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.

The net assets and results of operations for each acquired company are included in the Company’s condensed 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 nine months of 2003, the Company acquired two insurance brokerage operations. The aggregate purchase price of $20,032 included cash of $3,560, notes payable to sellers of $4,680 and shares of the Company’s common stock and restricted stock units valued at $11,792. The purchase price was allocated primarily to expiration rights, covenants not-to-compete and goodwill. The Company’s condensed consolidated financial statements for the three and nine-month periods ended September 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.

The acquisitions were all accounted for using the purchase method, and their related net assets and results of operations are included in the Company’s condensed consolidated financial statements from their respective acquisition dates forward. The Company’s acquisitions frequently have provisions for a reduction in consideration if the acquired company does not meet future financial results. Additionally, the acquisitions frequently have provisions for contingent additional consideration if the acquired company achieves future financial targets. Additional or reduced consideration related to acquisition contingency provisions is recorded as an adjustment to goodwill when the contingency is resolved. In the first nine months of 2004 and 2003, an aggregate of $1,498 and $1,339, respectively, was recorded as additional consideration for acquisitions completed in prior years. As of September 30, 2004, the estimated unrecorded future contingent payments related to acquisitions total $8,996.

On September 8, 2004, the Company announced that it had reached an agreement in principle to acquire Dallas, TX headquartered Summit Global Partners (“SGP”). Established in 1996, SGP is, according to published sources, the 14^th largest privately held insurance brokerage firm in the United States. SGP specializes in risk management and employee benefits for middle market companies throughout the country. SGP is expected to contribute approximately $68 million in annualized revenues to the Company. The consummation of the transaction, which is expected to occur in the fourth quarter of 2004, is subject to final negotiation of a definitive purchase agreement and customary closing conditions.

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4. Long-Term Debt

In August 2003, the Company entered into a $155,000 senior secured credit facility with several lending institutions. The credit facility is structured as follows: a $30,000 revolving credit facility expiring in August 2007, and a $125,000 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. In the third quarter of 2003, as a result of repaying the previously existing credit facility, the Company recorded an expense of $4,049 as early extinguishment of debt consisting of a prepayment penalty and the write-off of remaining deferred financing costs.

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 4.18% at September 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 Investors 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 September 30, 2004, availability under the revolving credit facility was $8,176, having been reduced $20,000 for borrowings to fund the Future Planning Associates, Inc. acquisition and $1,824 for outstanding letters of credit. See Note 3 – “Acquisitions”.

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.

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 September 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. The estimated fair value of the put rights is recorded in liabilities at September 30, 2004 and December 31, 2003.

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 three and nine month periods ended September 30, 2004, the Company purchased 68,400 and 227,300 shares of its common stock on the open market, respectively. The cost of these shares was $892 and $3,297 during the three and nine month period, respectively.

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In the third quarter of 2004, the Company’s largest shareholder, Capital Z Partners, exercised warrants to purchase 1,810,000 shares of the Company’s stock at a strike price of $15.00 per share. The average of the high and low stock price over the ten trading days prior to exercise, or $15.66 per share, was used to calculate a net share issuance of 76,283 shares. The remaining warrants to purchase 689,997 shares of the Company’s stock at $15.00 per share held by parties other than Capital Z Partners expired unexercised in the third quarter of 2004.

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, 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, 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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Income (loss) from continuing operations before income tax expense by reporting segment for the three and nine months ended September 30, 2004 and 2003 were as follows:

Total assets by reporting segment at September 30, 2004 and December 31, 2003 were as follows:

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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. However, to the extent additional information arises or our strategies change, it is possible that the outcome of these claims, lawsuits or proceedings could have a material adverse effect on our financial position and results of operations for any particular quarterly or annual period.

Opticare Health Systems Litigation. The Company has been named as one of more than 30 insurance company and insurance brokerage defendants in an amended complaint filed in the United States District Court Southern District of New York in a putative class action lawsuit captioned Opticare Health Systems, Inc. v. Marsh & McLennan Companies, Inc., et al (Civil Action No. CV 06954 (DC). The amended complaint alleges breaches of fiduciary duties to insureds by virtue of the payment of contingent commissions by insurers to insurance brokers who sell their insurance and what the amended complaint alleges constituted “bid rigging” in the setting of insurance premium levels. It is alleged that such practice gave rise to the violation of numerous Federal and state laws including the Federal Racketeer Influenced and Corrupt Organizations (RICO) and restraint of trade statutes, state restraint of trade, unfair and deceptive practices statutes, breach of fiduciary duty and unjust enrichment. The amended complaint seeks class certification for the named plaintiff, treble damages for the alleged injury suffered by the putative plaintiff class and other damages. The Company intends to defend vigorously the allegations made against us.

Insurance Industry Investigations. The Company has received a subpoena from the Offices of both Attorneys General of the States of New York and Connecticut requesting documents and seeking information as part of an industry-wide investigation relating to pricing and placement of insurance. The Company has also been advised by a representative of the Florida Attorney General’s Office that the Company will receive a request for information in connection with a similar investigation in the State of Florida. The Company plans to cooperate fully with these requests. While these investigations are in their preliminary stages and the ultimate outcome can not be predicted, the investigations center upon, among other items, allegations of bid-rigging, tying arrangements and other fraudulent or unlawful business practices. A further discussion of industry developments can be found in Item 2 of this Report, “Management’s Discussion and Analysis of Financial Condition and 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. On October 1, 2004, the Illinois court again dismissed all of the claims asserted against the Company and its officers and employees. A hearing was held before the Illinois court on October 15, 2004 at which the judge ruled that the plaintiffs could not seek to replead certain claims against the Company. However, as to certain remaining claims, the judge granted leave to file a fourth amended pleading against the Company and its officers and employees.

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

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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 RICO statute, among other things. In June 2004, a jury convicted Near North and Michael Segal on all counts. Sentencing in this matter was originally set for August 2004, but has been continued due to motions filed by Near North and Michael Segal. Under the criminal RICO statute, the sentencing may include forfeiture of a majority stake in the ownership of Near North. The federal court has appointed a trustee over the operations of Near North pending further order of the court. The Company believes that the trustee, if authorized, may determine that it is appropriate to no longer pursue any of the claims by Near North against the Company or its officers and employees.

Minnesota Life Insurance Company (“MLI”), Pursuant to a Marketing and Distribution Agreement dated November 7, 2002 (the “Agreement”) between the Company and MLI, the parties agreed to perform specific services in connection with the Company’s creation of a nationwide wealth management distribution system. Among other things, the Company is required to hire and train sales professionals, build-out the back-office of its broker dealer subsidiary to support wealth management and life insurance sales and service, and create a website. MLI, for its part, is to provide the Company with access to competitive products, product education and development fees to fund the creation of the wealth management distribution system. MLI has advised the Company that it believes that the Company has not met a deadline established by the Agreement for the delivery of some of the services specified in the Agreement. MLI and the Company have engaged in preliminary discussions concerning revising the key terms and deliverables of the Agreement. While the Company expects that the parties will reach a final agreement concerning the revised key terms and deliverables, there can be no assurance that the parties will reach a definitive agreement. If the Company and MLI are unable to reach such an agreement, the Company could be required to pay liquidated damages called for in the Agreement of up to $2.8 million.

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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 nine months ended September 30, 2004 and the year ended December 31, 2003, the Company recorded charges of $229 and $396, 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.

9. Earnings Per Share

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