Back to GetFilings.com

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

Form 10-Q

(Mark One)

For the quarterly period ended March 31, 2005

OR

For the transition period from              to             .

Commission file number 000-50041

USI 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 6, 2005, the number of outstanding shares of the Registrant’s common stock, $.01 par value, was 56,884,819 shares.

Table of Contents

U.S.I. HOLDINGS CORPORATION

INDEX

2

Table of Contents

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 (the “SEC”), press releases, or otherwise (use of “we,” “us” and “USI” and variations thereof refers to U.S.I. Holdings Corporation and consolidated subsidiaries). 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 management’s belief regarding future events, many of which, by their nature, are inherently uncertain and outside of our control. It is possible that our 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 us, including factors that potentially could materially affect our financial results, are contained in our filings with the SEC. Some factors include: our ability to meet our objective of growing cash earnings per share at least 15% per year; our ability to meet our objective of growing revenues organically and expand our 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 us to regulation in jurisdictions where we operate; determinations of effectiveness of internal control over financial reporting and disclosure controls and procedures; our ability to attract and retain key sales and management professionals; our level of indebtedness and debt service requirements; downward commercial property and casualty premium pressures; the competitive environment; future expenses for integration and margin improvement efforts; and general economic conditions around the country. Our ability to grow has been largely attributable to 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 us. 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.

3

Table of Contents

Item 1. Financial Statements

U.S.I. HOLDINGS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in Thousands Except Per Share Data)

See notes to condensed consolidated financial statements.

4

Table of Contents

U.S.I. HOLDINGS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in Thousands Except Per Share Data)

(UNAUDITED)

See notes to condensed consolidated financial statements.

5

Table of Contents

U.S.I. HOLDINGS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in Thousands)

(UNAUDITED)

See notes to condensed consolidated financial statements.

6

Table of Contents

U.S.I. HOLDINGS CORPORATION AND 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 primarily to small and mid-sized businesses. The Company has two operating segments—Insurance Brokerage and Specialized Benefits Services—and a third administrative segment—Corporate. The Insurance Brokerage segment focuses primarily on general and specialty property and casualty (P&C) insurance, individual and group health, life and disability insurance and core benefits (retirement services). The Specialized Benefits Services segment focuses primarily on enrollment and communication services related to employee benefits and workplace marketing of individual voluntary benefits insurance products. The Corporate segment provides corporate management, acquisition processes, sales management, human resources, legal, capital planning, financial and reporting support.

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, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005.

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, 2004 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 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.

New Accounting Pronouncement

In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (Revised), “Share Based Payment,” (SFAS No. 123 R). SFAS No. 123 R requires companies to recognize in compensation expense the cost of employee services received in exchange for awards of equity based on the grant date fair value of those awards. SFAS No. 123 R supersedes SFAS No. 123, which allowed companies to choose between expensing such equity awards and disclosing only the pro forma effects of having done so. In April of 2005, the Securities and Exchange Commission delayed the required adoption date of SFAS No. 123 R, which is now effective for public companies at the beginning of the next fiscal year instead of the first interim or annual period beginning after June 15, 2005. The Company will adopt SFAS No. 123 R effective January 1, 2006. The Company is currently evaluating the methodology for implementation of SFAS No. 123 R; however, had the Company adopted SFAS No. 123 R in prior periods, the impact of that standard would have approximated the impact of SFAS No. 123, as described in the pro forma net earnings and earnings per share, disclosed below under “Stock Based Compensation” for each of the three months ended March 31, 2005 and 2004, respectively.

7

Table of Contents

U.S.I. HOLDINGS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(Dollars in Thousands, Except Per Share Data)

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 for 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 2004 (please read Note 1 “Nature of Operations and Summary of Significant Accounting Policies” and 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, 2004).

Discontinued Operations

Certain amounts have been reclassified and presented in all periods as discontinued operations to reflect the decision announced in the fourth quarter of 2004 to sell three operations that either exhibited significant earnings volatility or that do not fit with the Company’s core business strategy (see Note 5 – “Discontinued Operations”).

8

Table of Contents

U.S.I. HOLDINGS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(Dollars in Thousands, Except Per Share Data)

2. Goodwill and Other Intangible Assets

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

Changes in goodwill arise primarily from acquisitions and contingent purchase price payments on previous acquisitions. The Company records contingent purchase price payments as adjustments to goodwill when determined. Goodwill adjustments may also arise from reclassifications with other intangible assets upon completion of acquisition asset valuations, divestitures and impairments.

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

Amortization expense for amortizable intangible assets was $6,827 and $5,295 for the three months ended March 31, 2005 and 2004, respectively. Amortization expense for amortizable intangible assets for the years ending December 31, 2005, 2006, 2007, 2008 and 2009 is estimated to be $28,244, $25,853, $22,798, $19,976 and $16,227, respectively.

At March 31, 2005, other intangible assets are comprised of deferred financing costs related to the Company’s credit facility (see Note 4 – “Long-Term Debt”). The Company charged $278 and $207 to interest expense for the amortization of these costs in the three months ended March 31, 2005 and 2004, respectively.

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, 2005. The Company will complete its annual goodwill impairment test in the fourth quarter of 2005.

3. Acquisitions

During the three-month period ended March 31, 2005, the Company acquired the stock or substantially all of the assets of the following companies in exchange for its common stock, notes issued/assumed and cash. These acquisitions have been accounted for using the purchase accounting method for recording business combinations:

9

Table of Contents

U.S.I. HOLDINGS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(Dollars in Thousands, Except Per Share Data)

Shares of the Company’s common stock issued in connection with these acquisitions were valued at the twenty-day average of the closing price of the shares three days prior to the effective date of the acquisition.

In connection with certain acquisitions, there are contingent purchase price payments, which are primarily based upon future earnings of the acquired entities. The contingent payments are not included in the purchase price that is recorded for these acquisitions at their respective acquisition dates because they are not fixed and determinable. Future payments made under these arrangements, if any, generally will be recorded as adjustments to goodwill when the amounts are determined. Additionally, the Company may acquire books of business from time to time, paying a percentage of retained revenues over a number of years. These contingent payments are typically in cash and are recorded to expiration rights when determinable. The aggregate amount of unrecorded contingent purchase price obligations for earn-outs and books of business as of March 31, 2005 is estimated to be between $7,390 and $17,722. These payments are expected to be made from 2005 through 2009. In the three months ended March 31, 2005, the Company made contingent purchase price payments or otherwise recorded obligations under contingent purchase price obligations of $337.

The following is a summary of the estimated fair values of the net assets acquired at the date of each acquisition based on preliminary purchase price allocations:

Included in liabilities in the table above are $1,688 of acquisition-related expenses. Additionally, in 2005, the Company recorded goodwill and deferred tax liabilities in the Corporate segment of $672 and $153 related to these acquisitions and to other acquisition-related intangible adjustments, respectively.

These acquisitions allow the Company to enlarge its footprint in existing geographic locations and further extend its presence in the employee benefits and retail P&C insurance brokerage services industries. The excess of the purchase price over the estimated fair value of the tangible net assets acquired at the acquisition date was allocated to expiration rights and covenants not to compete, with the remaining balance to goodwill, in the amounts of $59,695, $3,634 and $85,650, respectively. Purchase price allocations are preliminarily established at the time of the acquisition and are subsequently reviewed within the first year of operations upon completion of an acquired asset valuation. The Company is currently in the process of performing asset valuations on its 2005 acquisitions and on some 2004 acquisitions. Accordingly, amounts preliminarily allocated to goodwill and other intangible assets may be adjusted throughout 2005 upon completion of the valuations. Such amounts may be material and would primarily represent reclassifications between goodwill and other intangible assets.

10

Table of Contents

U.S.I. HOLDINGS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(Dollars in Thousands, Except Per Share Data)

The Company’s consolidated financial statements for the three months ended March 31, 2005 include the results of operations of these companies from the date of their respective acquisitions. The following is a summary of the unaudited pro forma historical results, as if these purchased entities had been acquired at January 1, 2004:

The unaudited pro forma results above have been prepared for comparative purposes only and do not purport to be indicative of the results of operations which actually would have resulted had the acquisitions occurred at January 1, 2004, nor are they necessarily indicative of future operating results.

Expiration rights and covenants not to compete are amortized on a straight-line basis over a weighted average useful life of 10 years and 7 years, respectively. Goodwill is not amortized, but is subject to periodic reviews for impairment. The Company reviews intangible assets for impairment periodically (at least annually) and whenever events or changes in business circumstances indicate that the carrying value of the assets may not be recoverable. In reviewing intangible assets, if the fair value were less than the carrying amount of the respective (or underlying) asset, an indicator of impairment would exist and further analysis would be required to determine whether or not a loss would need to be charged against current period earnings. Based on the results of the most recent impairment review, the Company did not note any indicators that would cause a write-off of goodwill. Of the $85,560 of goodwill, $59,695 of expiration rights and $3,634 of covenants not to compete related to the 2005 acquisitions, $24,376, $18,980 and $772, respectively, are expected to be deductible for income tax purposes.

11

Table of Contents

U.S.I. HOLDINGS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(Dollars in Thousands, Except Per Share Data)

4. Long-Term Debt

Long-term debt consists of the following as of March 31, 2005 and December 31, 2004:

Substantially all of the assets of the Company are pledged as collateral against 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 maturing in August 2007, and, initially, 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. The proceeds from borrowings under the credit facility were drawn to: (i) repay all amounts under the previously existing credit facility; (ii) repay a portion of certain notes issued for acquisitions; (iii) pay fees and expenses in connection with the credit facility including a prepayment penalty in connection with the prepayment of the previously existing credit facility; and (iv) for general corporate purposes. The Company incurred approximately $3,766 in fees and expenses related to the credit facility, which have been capitalized and are being recorded to interest expense over the term of the credit facility.

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. Borrowings under the term loan bear interest, at our option, at a base rate plus 2.0% per annum or the Eurodollar rate plus 3.0% per annum. The base rate and the Eurodollar rate are effectively the Prime Rate and the London Interbank Offering Rate, respectively. 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 March 31, 2005, availability under the revolving credit facility was $28,200, having been reduced $1,800 for outstanding letters of credit.

On March 26, 2004, the Company executed a first amendment to its credit facility, providing for a 0.5% reduction to the applicable term loan interest rate effective April 1, 2004. 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 5.25% at March 31, 2005.

On January 11, 2005, the Company received approval from its lending institutions for a second amendment to its credit facility, which allowed for a $90,000 increase to its existing term loan and a waiver and amendment of certain covenants. The incremental $90,000 term loan was issued under the same terms and conditions as the Company’s existing term loan and will mature contemporaneously in August, 2008. The proceeds were used to fund a portion of the SGP acquisition and for general corporate purposes. The second amendment provided for an amendment of the limitation on aggregate cash consideration and a waiver of the limitations on total consideration and permitted seller debt to allow for the acquisition of SGP. Further, the Company’s leverage ratio was amended to allow for the term loan increase, the SGP acquisition and certain one-time cash charges related to its margin improvement plan and acquisition integration costs.

12

Table of Contents

U.S.I. HOLDINGS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(Dollars in Thousands, Except Per Share Data)

The credit facility contains various limitations, including limitations on the payment of dividends, buy-back of the Company’s common stock 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. At March 31, 2005, the Company was in compliance with all such covenants.

5. Discontinued Operations

In December 2004, the Company’s Board of Directors approved plans to sell, or otherwise dispose of, three operations in the Company’s Insurance Brokerage and Specialized Benefits Services segments that exhibited significant earnings volatility or that did not fit with the Company’s core business strategy. As a result of this action, the Company classified these entities as discontinued operations.

On January 2, 2005, the Company entered into an agreement that sold substantially all of the assets of its Ocala, Florida operation for cash of $2,065. On February 28, 2005, the Company entered into an agreement that sold substantially all of the assets of its Strategic Asset Management Group for cash of $2 and a promissory note of $424. The note bears interest at 5.25% and is due on March 1, 2009. The Company recorded a pre-tax gain on the sales of these operations of $1,295 in discontinued operations in the first quarter of 2005.

In the first quarter of 2005, in connection with the SGP acquisition, the Company classified as discontinued operations two newly acquired operations that were determined not to fit with the Company’s core business strategy. One of these operations was sold effective April 1, 2005 (see Note 11 – “Subsequent Events”).

The Company expects to sell the remaining two operations by the end of the third quarter of 2005.

The assets and liabilities of discontinued operations at March 31, 2005 and December 31, 2004 are as follows:

13

Table of Contents

U.S.I. HOLDINGS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(Dollars in Thousands, Except Per Share Data)

The results of discontinued operations for the three months ended March 31, 2005 and 2004 are as follows:

6. Common Stock

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.

On December 20, 2004, the Company announced that its Board of Directors authorized an expanded stock repurchase program that permits it to purchase shares of its common stock up to certain limits set forth within its credit facility. The Company had the capacity under the credit facility to purchase up to $11,125 in 2004, but did not purchase any shares in 2004. The Company has the capacity under its credit facility to purchase up to $9,723 of its common stock during 2005.

During the three month period ended March 31, 2005, the Company purchased 27,799 shares of its common stock on the open market at a total cost of $321.

14

Table of Contents

U.S.I. HOLDINGS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(Dollars in Thousands, Except Per Share Data)

7. 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 enrollment and communication services related to employee benefits and workplace marketing of individual voluntary insurance products. The Corporate segment is responsible for managing the following: acquisition processes, sales management, human resources, legal, capital, financial and reporting. Corporate revenues are comprised of interest income.

The following tables show the income (loss) from continuing operations before income taxes for the three months ended March 31, 2005 and 2004: