##### Table of Contents

---

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549



---



Form 10-K



(Mark One)

|x |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ------------------------------------------------------------------------------------

For the fiscal year ended December 31, 2002

Or

| ̈ |  | TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ----------------------------------------------------------------------------------------

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)



|Delaware                        |  | 13-3771733         
|------------------------------- |  | -------------------
|(State or other jurisdiction of |  | (IRS Employer      
|incorporation or organization)  |  | Identification No.)



50
California Street, 24thFloor

San Francisco, California 94111

(Address of principal executive
offices, including zip code)



(415)
983-0100

(Registrants telephone number, including area code)



Securities Registered Pursuant to Section 12(b) of the Act:

None



Securities Registered Pursuant to Section 12(g) of the Act:



|Title of Each Class                     |  | Name of Each Exchange on Which Registered
|--------------------------------------- |  | -----------------------------------------
|Common Stock, par value $0.01 per share |  | NASDAQ National Market                   





---

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



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



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



The aggregate market value of the Registrants voting common stock held by non-affiliates of the Registrant, computed by reference to the closing price of such stock on March 27, 2003, was approximately $356,796,330.



As of March 27, 2003, the number of outstanding
shares of the Registrants common stock, $.01 par value, was 44,584,194 shares.



Portions of the Registrants definitive Proxy Statement to be filed for its 2003 annual meeting of stockholders are incorporated by reference into Part III of this Form 10-K.



---



---

##### Table of Contents



U.S.I.
HOLDINGS CORPORATION



INDEX



|Part I.                    |  | Page No.                                                                              
|-------------------------- |  | --------------------------------------------------------------------------------------
|Forward Looking Statements |  | 3                                                                                     
|Item 1.                    |  | Business                                                                              
|Item 2                     |  | Properties                                                                            
|Item 3.                    |  | Legal Proceedings                                                                     
|Item 4.                    |  | Submission of Matters to a Vote of Security Holders                                   
|                          
|Part II.                   |  |                                                                                       
|Item 5.                    |  | Market for Registrants Common Equity and Related Stockholder Matters.                
|Item 6.                    |  | Selected Financial Data.                                                              
|Item 7.                    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations.
|Item 7A.                   |  | Quantitative and Qualitative Disclosure about Market Risk.                            
|Item 8.                    |  | Financial Statements and Supplementary Data.                                          
|Item 9.                    |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 
|                          
|Part III.                  |  |                                                                                       
|Item 10.                   |  | Directors and Executive Officers of the Registrant.                                   
|Item 11.                   |  | Executive Compensation.                                                               
|Item 12.                   |  | Security Ownership of Certain Beneficial Owners and Management.                       
|Item 13.                   |  | Certain Relationships and Related Transactions.                                       
|Item 14.                   |  | Controls and Procedures.                                                              
|                          
|Part IV.                   |  |                                                                                       
|Item 15.                   |  | Exhibits, Financial Statement Schedules, and Reports on Form 8-K.                     
|                          
|Signatures                 |  | 69                                                                                    
|Certifications             |  | 70                                                                                    



---

##### Table of Contents



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 made by us or on our behalf are
subject to risks and uncertainties, including but not limited to the following: general economic conditions around the country; downward commercial property and casualty premium pressures; the competitive environment; the integration of our
operations with those businesses or assets we have acquired or may acquire in the future and the failure to realize the expected benefits of such integration; future regulatory actions and conditions in the states in which we conduct business; our
level of indebtedness and debt service requirements; and our ability to attract and retain key sales and management professionals. Our 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 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 speak 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



PART I



Item 1.    Business



We are a distributor of insurance and financial products and services to small and mid-sized businesses. Founded in 1994, we have grown organically and through acquisitions to become the eighth largest insurance broker in
the United States and a provider of employee health and welfare products and related consulting and administration services. We currently have approximately 60,000 small and mid-sized business clients. Our sales and marketing efforts are focused
primarily on serving middle-market businesses. We have two operating segments: Insurance Brokerage and Specialized Benefits Services segment. The products and services we distribute and offer through our two operating segments can be categorized as:



Insurance Brokerage Segment



| |  |  | General and specialty property and casualty insurance, which we refer to as P&C insurance
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | Individual and group health, life and disability insurance, which we refer to as group employee benefits insurance
| | - |  | ------------------------------------------------------------------------------------------------------------------



Specialized Benefits Services Segment



| |  |  | Core benefits (health and welfare)
| | - |  | ----------------------------------



| |  |  | Benefits enrollment and communication
| | - |  | -------------------------------------



| |  |  | Executive and professional benefits
| | - |  | -----------------------------------



Approximately 84% of our revenues for the year ended December 31, 2002 was derived from our Insurance Brokerage segment. Within this
segment, approximately 66% relates to P&C insurance and 34% to group employee benefits insurance. The remaining approximate 16% of our revenues was derived from our Specialized Benefits Services segment. Within this segment, approximately 52%
relates to core benefits, 30% to benefits enrollment and communication and 18% to executive and professional benefits.



Our sales and marketing efforts are primarily focused on distributing insurance and financial products and services to middle-market
businesses. We have approximately 350 sales professionals and product specialists based in 61 offices in 20 states.



Our History



Since our inception in 1994, we have built a national distribution system through the acquisition, consolidation and integration of over
90 insurance brokers and related businesses. Substantially all of these acquisitions were completed before December 31, 1999. Our early acquisition growth strategy was financed primarily by equity investments by private investment firms and large
insurance and financial services companies, or their respective affiliates, some of which entered into strategic marketing agreements with us and designated representatives to serve on our board of directors.



In the past two years, we have shifted our focus mostly toward
integrating these operations. We have committed significant resources to establishing operating and financial reporting standards and conforming the technology platforms utilized by our various business units.



In 1998 and 1999, we raised equity capital from Zurich
Financial Services Group and Capital Z Financial Services Fund II, L.P., and its affiliates (Capital Z), along with other investors, the proceeds of which were used towards managing our capital structure and funding the growth of our business.



4



---

##### Table of Contents



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



Capital Z is our largest investor. Capital Z is a leading private equity investment firm focused on the financial services sector, with significant experience in the insurance area. Capital Z, together with Capital Zs
representatives on our board, own 23.9% of our common stock at December 31, 2002. Two members of our board of directors are Capital Z partners.



Operations



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



Sales



Our sales strategy is to be a single distribution point to middle-market businesses, serving their insurance and financial products and
services needs. Of our approximately 350 sales professionals, 316 are in the Insurance Brokerage segment and 34 are in the Specialized Benefits Services segment. We evaluate our sales professionals by measuring the revenues they generate from new
business and cross-selling and the revenues they are able to retain from existing clients. We utilize sales force automation, or SFA, software to manage and track the progression and status of sales prospects.



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



Products and Services



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



5



---

##### Table of Contents



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



Insurance Brokerage Segment



|Property and Casualty Insurance       |  | Group Employee Benefits Insurance
|------------------------------------- |  | ---------------------------------
|   General Commercial Liability      |  |    Health                       
|   Workers Compensation             |  |    Life                         
|   Fidelity and Surety Bonds         |  |    Disability                   
|   Professional Liability            |  |    Dental                       
|   Personal Lines (Auto, Home, etc.) |  |                                  
|   Affinity Marketing                |  |                                  



Specialized Benefits Services Segment



|Core Benefits                                                                                                                                                                                                                                      |  | Benefits Enrollment and Communication                                                                                                     |  | Executive and Professional Benefits                                                                                                                                         
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   Health and Welfare Consulting, Administration    Defined Contribution Consulting, Record Keeping    Defined Benefit/Actuarial Consulting, Administration    Related Legal/Compliance Consulting, Research    Employee Benefits Outsourcing |  |    Core Benefit Enrollment    Supplemental Individual Life and Disability Insurance    Supplemental Critical Care and Cancer Insurance |  |    Bank Owned Life Insurance (BOLI)    Company Owned Life Insurance (COLI)    Executive Disability Income Insurance    Estate Planning    Individual Financial Planning



Property and Casualty Insurance.    We place P&C insurance, including general commercial liability, workers compensation, fidelity and surety bonds, professional liability and personal lines.
Revenues generated from the sales of these products and services accounted for approximately 55% of our revenues for the year ended December 31, 2002.



Group Employee Benefits Insurance.    We place individual and group health, life, disability and dental
insurance, as well as individual long-term care insurance. These policies are underwritten by life and health insurance carriers and health maintenance organizations, or HMOs. Revenues generated from the sales of these products and services
accounted for approximately 29% of our revenues for the year ended December 31, 2002.



Core Benefits.    Core Benefits covers a broad spectrum of benefit and retirement plan related consulting and administration services. Employee benefits services include plan
design and related outsourcing services and related legal and compliance consulting. Retirement plan services include plan design, communication and administration (both defined contribution and defined benefit). Revenues generated from the sales of
these products and services accounted for approximately 8% of our revenues for the year ended December 31, 2002.



Benefits Enrollment and Communication.    We administer the annual employee benefits open enrollment function
for our business clients. In conjunction with the administrative services we provide, our enrollment counselors sell voluntary supplementary insurance products such as additional life or disability insurance to our clients employees. Revenues
generated from the sales of these products and services accounted for approximately 5% of our revenues for the year ended December 31, 2002.



6



---

##### Table of Contents



Executive
and Professional Benefits.    Our Executive and Professional Benefits division provides consulting, administration and funding strategies for executive benefits programs. Our primary line of business is in the design and
implementation of supplemental executive retirement plans and other non-qualified executive benefits programs. We are also a distributor of bank-owned life insurance programs. Lastly, we provide other executive benefits services to individuals or
corporate clients such as executive disability benefits planning, estate planning, individual financial planning and executive benefits communications. Revenues generated from the sales of these products and services accounted for approximately 3%
of our revenues for the year ended December 31, 2002.



Insurance Carriers



We
maintain relationships with over 200 insurance carriers in the United States and no single insurance carriers products represented a material portion of our total commissions and fees in 2002.



Customers



We currently have approximately 60,000 small and mid-sized business clients. Revenues generated by our ten
largest clients accounted for 4.9% of our commissions and fees in 2002, while no single client in this group represented more than 1.0% of our commissions and fees in 2002.



Competition



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



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



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



Regulation



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



Governmental regulation may eliminate the federal tax law advantages or otherwise limit the sale of split dollar life insurance policies.
We design and implement supplemental executive retirement plans that use split dollar life insurance as a funding source. In recent years, the Internal Revenue Service, or IRS, has proposed



7



---

##### Table of Contents

regulations relating to the tax treatment of split dollar life insurance arrangements. The IRS recently proposed regulations that treat
premiums paid by the employer in connection with some split dollar life insurance arrangements as loans to the employee for tax purposes and taxes them as loans under the Internal Revenue Code. In addition, the recently enacted Sarbanes-Oxley Act
may affect these arrangements. Specifically, the Sarbanes-Oxley Act includes a provision that prohibits loans from public companies to their directors and/or executives. Because a split dollar life insurance arrangement between a public company and
its directors and/or executives could be viewed as a personal loan, we may face a reduction in sales of split dollar life insurance policies to some of our clients. Moreover, members of Congress have proposed, from time to time, other laws reducing
the tax incentive or otherwise impacting these arrangements. The Executive and Professional Benefits division of our Specialized Benefits Services segment designs and implements supplemental executive retirement plans that use split dollar life
insurance as a funding source. Our Executive and Professional Benefits division is one of our highest margin operations and, in 2002, represented approximately $10 million, or 3%, of our revenues.



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



Employees



At December 31, 2002, we had approximately 2,000 employees, of which approximately 350 are sales
professionals. We are not involved in any material disputes with employees and believe that relations with our employees are good.



The ten top revenue producing sales professionals during 2002 represented 9.7% of our commissions and fees for the year. No single
salesperson was responsible for more than 2.2% of our commissions and fees in 2002.



Risks Related to Our Business



We face a number of risks in our business. If any of the following risks develop into actual events, our business, financial condition or results could be negatively affected, the market price or your shares could decline and you may
lose all or part of your investment.



| |  |  | We have a history of net losses and may incur losses in the future, which could negatively impact the value of our common stock.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------



| |  |  | We have substantial indebtedness and debt service requirements and are subject to restrictive covenants in our existing credit facility, which may limit our
ability to finance our operations and implement our business strategy.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our continued growth is partly based on our ability to acquire and successfully integrate the acquired businesses into our decentralized operations, and our
failure to do so may negatively affect our financial results.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Recently enacted and pending legislation may reduce or eliminate our ability to sell some life insurance products that we sell to our executive and professional
benefits divisions clients, and could negatively affect our financial results.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Goodwill and other intangible assets represent a substantial portion of our assets and if we are required to write down this asset, our financial condition and
results would be negatively affected.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We are dependent on key sales and management professionals who could end their employment with us, which could negatively affect our financial results.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



8



---

##### Table of Contents



| |  |  | Our decentralized operating strategy and structure make it difficult to respond quickly to operational or financial problems, which could negatively affect our
financial results.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We act as brokers for state insurance funds such as those in California which could choose to reduce brokerage commissions and/or contingent commissions we
receive, which could negatively affect our financial results.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Website



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



Item 2.    Properties.



We lease our principal corporate office in San Francisco, California, and our operating unit offices in various states. Information regarding our lease commitments is set forth in Note 9 Lease Commitments
in the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report. The disclosure set forth in Note 9 Lease Commitments is incorporated herein by reference.



Item 3.    Legal Proceedings.



Information regarding legal proceedings is set forth in Note 14 Contingencies in the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report. The disclosure
set forth in Note 14 Contingencies is incorporated herein by reference.



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



Pursuant to a Written Consent in Lieu of a Meeting of Stockholders dated October 9, 2002, holders of the requisite majority of our then
outstanding shares of series H and I preferred stock voting together as a single class and a majority of our total outstanding voting securities approved resolutions to amend the certificate of designations for series H and I preferred stock
eliminating the per share and aggregate proceeds dollar amount from the definition of Public Offering therein. On October 11, 2002, the holders of the requisite majority of our then outstanding shares of series G preferred stock and a
majority of our total outstanding voting securities approved a substantively identical resolution to remove the per share and aggregate proceeds dollar amount from the definition of Public Offering in the series G preferred stock
certificate of designations. On October 16, 2002, the holders of the requisite majority of our then outstanding shares of series F preferred stock and a majority of our total outstanding voting securities approved a substantively identical
resolution as described above, to remove the per share and aggregate proceeds dollar amount from the definition of Public Offering in the series F preferred stock certificate of designations.



9



---

##### Table of Contents

PART II



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



Market Information and Holders



Our common stock is quoted on the Nasdaq Stock Market under the symbol USIH. The following table sets forth the intra-day high
and low sales prices for our common stock on the Nasdaq Stock Market for the periods indicated since our initial public offering on October 22, 2002:



|Fiscal 2002                           |  | High |         | Low
|------------------------------------- |  | ---- | ------- | ---
|Fourth Quarter                        |  |      |         |    
|October 22, 2002 to December 31, 2002 |  | $    | 11.7500 |    



As of
March 27, 2003, there were 44,584,194 shares of our common stock outstanding, held by approximately 242 stockholders of record. The closing sale price of our common stock on March 27, 2003 was $10.25 per share.



Under our existing credit facility we are currently prohibited
from paying dividends on or repurchasing shares of our capital stock, with the limited exception of repurchasing shares held by terminated employees.



Recent Sales of Unregistered Securities



In January 2002, the Company sold 357,143 shares at $7.00 per share (pre-split) of its Series Y preferred stock for gross proceeds of
$2,500,000. Our issuance of these securities was not registered under the Securities Act of 1933, as amended (the Securities Act), because such private placement was exempt under Section 4(2) of the Securities Act.



In June 2002, the Company issued 353,572 shares at $7.00 per
share (pre-split) of Series Y preferred stock in exchange for a release of liability of $2,475,000. The private placement of these securities was exempt from registration under the Securities Act pursuant to Section 4(2).



In October 2002, concurrent with our initial public offering,
we issued 34,772,835 shares of our common stock to the holders of our series A, B, C, D, E, F, G, H, I, J, K, L, M, N, O, P, Q, R, T, U, V, W, X and Y preferred stock upon the automatic conversion of such series. Our issuance of these securities was
not registered under the Securities Act, because such exchange was exempt pursuant to Section 3(a)(9) thereof.



On November 27, 2002, we issued approximately 2,818,420 options to purchase our common stock and 9,138 shares of common stock in exchange
for our outstanding share appreciation rights. Such issuance was exempt from registration under the Securities Act pursuant to Section 3(a)(9) thereof.



10



---

##### Table of Contents

Item 6.    Selected Financial Data.



You should read the selected consolidated financial data set forth below in conjunction with Managements Discussion and Analysis of Financial Condition and Results of Operations and
our financial statements and the related notes included elsewhere in this filing. We derived the financial information for each of the years ended and as of December 31, 2002, 2001, 2000, 1999 and 1998 from our audited financial statements and the
related notes included elsewhere in this filing. Between 1994 and 1999, we pursued an acquisition strategy with a goal of building a national organization capable of distributing a broad range of insurance and financial products and services. The
majority of our over 90 acquisitions were completed prior to December 31, 1999. As a result of our acquisitions, the results in the years 1998 through 2000 are not directly comparable. There is no single acquisition that materially affects the
comparability of the financial information presented.



|                                                                         |  | Year ended December 31,                   |        
|------------------------------------------------------------------------ |  | ----------------------------------------- | -------
|                                                                         |  | 2002                                      |        
|                                                                         |  | (in thousands, except for per share data) |        
|Income Statement Data:                                                   |  |                                           |        
|Revenues                                                                 |  |                                           |        
|Commissions and Fees                                                     |  | $                                         | 325,548
|Investment Income                                                        |  |                                           | 2,648  
|                                                                         |  |                                           |        
|Total Revenues                                                           |  |                                           | 328,196
|Expenses                                                                 |  |                                           |        
|Compensation and Employee Benefits                                       |  |                                           | 200,982
|Change in Value of Stock Appreciation Rights(a)                          |  |                                           | (2,995 
|Value of Stock Options Exchanged for Stock Appreciation Rights           |  |                                           | 1,269  
|Grant of Restricted Stock Units                                          |  |                                           | 1,042  
|Other Operating Expenses                                                 |  |                                           | 68,779 
|Amortization of Intangible Assets                                        |  |                                           | 21,326 
|Depreciation                                                             |  |                                           | 11,053 
|Interest                                                                 |  |                                           | 17,782 
|Change in Value of Redeemable Common Stock Warrants(a)                   |  |                                           | (4,070 
|Expense on Early Retirement of Debt                                      |  |                                           | 2,610  
|                                                                         |  |                                           |        
|Total Expenses                                                           |  |                                           | 317,778
|                                                                         |  |                                           |        
|Income (Loss) From Continuing Operations Before Income Tax Benefit       |  |                                           | 10,418 
|Income Tax Benefit                                                       |  |                                           | (518   
|                                                                         |  |                                           |        
|Net Income (Loss) From Continuing Operations                             |  |                                           | 10,936 
|Loss From Discontinued Operations, Net of Income Taxes(b)                |  |                                           | (13,751
|Loss on Early Extinguishment of Debt, Net of Income Tax
Benefit(c)       |  |                                           |       
|                                                                         |  |                                           |        
|Net Loss                                                                 |  | $                                         | (2,815 
|                                                                         |  |                                           |        
|Reconciliation of Net Loss to Net Loss Available to Common
Stockholders: |  |                                           |        
|Net Loss                                                                 |  | $                                         | (2,815 
|Change in Aggregate Liquidation Preference of Preferred Stock            |  |                                           | (18,708
|Change in Redemption
Value of Series N Put Rights                        |  |                                           | 138    
|                                                                         |  |                                           |        
|Net Loss Available to Common Stockholders                                |  | $                                         | (21,385
|                                                                         |  |                                           |        



(Table continued on following page)



11



---

##### Table of Contents



(Continued from previous
page)



|                                                                |  | Year ended December 31,                   |      
|--------------------------------------------------------------- |  | ----------------------------------------- | -----
|                                                                |  | 2002                                      |      
|                                                                |  | (in thousands, except for per share data) |      
|Per Share DataBasic and Diluted: (d)                           |  |                                           |      
|Net Loss From Continuing Operations                             |  | $                                         | (0.87
|Loss From Discontinued Operations, Net of Income Taxes          |  |                                           | (1.56
|Loss on Early Extinguishment of Debt, Net of Income Tax Benefit |  |                                           |     
|                                                                |  |                                           |      
|Net Loss Per Common Share                                       |  | $                                         | (2.43
|                                                                |  |                                           |      



|                                       |  | As of December 31,
|-------------------------------------- |  | ------------------
|                                       |  | 2002              
|                                       |  | (in thousands)    
|Balance Sheet Data:                    |  |                   
|Goodwill, Net                          |  | $                 
|Other Intangible Assets, Net           |  |                   
|Total Assets of Continuing Operations  |  |                   
|Total Debt of Continuing Operations(d) |  |                   
|Redeemable Common Stock(e)             |  |                   
|Redeemable Preferred Stock(e)          |  |                   
|Redeemable Common Stock Warrants(e)    |  |                   
|Total Stockholders Equity(d)          |  |                   

---

|(a) |  | Certain prior years amounts have been reclassified to conform to the current years presentation.
|--- |  | -------------------------------------------------------------------------------------------------

|(b) |  | We sold USIA, formally our third-party administration business, in April 2002. In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, we reflect USIA in our financial statements as a Discontinued Operation. In the fourth quarter of 2001, following the provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets
to Be Disposed Of, we reduced the carrying value of USIAs intangible assets to their estimated fair value. This resulted in an impairment charge of $46.9 million against USIA-related goodwill and expiration rights. For the years ended
December 31, 2002, 2001, 2000, 1999 and 1998, the loss from discontinued operations is reported net of income tax expense (benefit) of zero, $(4.5) million, $0.3 million, $0.9 million, and $(4.6) million, respectively. Please
read Managements Discussion and Analysis of Financial Condition and Results of OperationsDiscontinued Operations.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(c) |  | In March 1999, we recorded a charge of $1.5 million, net of a related tax benefit of $1.0 million, as an extraordinary loss to reflect a prepayment penalty on senior
subordinated debt and the write-off of debt issuance costs.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(d) |  | On October 25, 2002, we completed our initial public offering of 9.0 million common shares at a price of $10 per share. Upon the consummation of the initial public
offering, all outstanding shares of Preferred Stock were split adjusted (two-for-five reverse stock split) and converted into approximately 23.1 million shares of our Common Stock. The accretion dividends, with respect to the Preferred Stock, were
converted to approximately 9.1 million shares of our Common Stock at the initial public offering price of $10 per share. At December 31, 2002, we had approximately 42.4 million shares of Common Stock outstanding. At December 31, 2001,
2000, 1999 and 1998, we had approximately 0.8 million shares of Common Stock outstanding. The initial public offering proceeds, net of the underwriting discount and expenses, of approximately $78.4 million was used to repay indebtedness
under our credit facility.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(e) |  | At December 31, 2002, we had approximately 2.2 million shares of Redeemable Common Stock outstanding. For a description of put rights relating to our
Common Stock and Preferred Stock and our Common Stock Warrants please read Note 7Redeemable Securities in our consolidated financial statements and accompanying footnotes included in Part 2Item 8.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



12



---

##### Table of Contents

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





The following discussion and analysis should be read in
conjunction with our consolidated financial statements and accompanying notes included in Part II-Item 8. Certain information contained in Managements Discussion and Analysis of Financial Condition and Results of Operations are
forward-looking statements that involve risks and uncertainties. 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.



General



We generate revenues primarily from:



| |  |  | commissions paid by insurance companies;
| | - |  | ----------------------------------------



| |  |  | fees paid directly by clients for related Specialized Benefits Services; and
| | - |  | ----------------------------------------------------------------------------



| |  |  | interest earned on premiums held prior to remittance to insurance companies.
| | - |  | ----------------------------------------------------------------------------



Commissions we earn on the placement of insurance products other than individual life and individual
disability, i.e., 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 but can be influenced by a number of other factors including
the type of insurance and amount of the premium. We recognize commission revenues on the later of the effective date of the policy or the billing date. Installment premiums and related commissions are recorded periodically as billed. Commissions
earned from the placement of individual life and individual disability insurance are calculated as a percentage of corresponding premiums and the duration or term of the underlying policies. The majority of commissions from individual life and
individual disability insurance sales are earned and recognized during the first year the insurance is placed, with the balance earned and recognized over the following two to ten years. We also often receive contingent commissions from insurance
carriers, which are designed to provide us incremental incentive compensation for achieving specified premium volume goals set by carriers and/or the loss experience of the insurance we place with them. Contingent commissions are recorded when we
receive data from the insurance companies that allow us to reasonably estimate the amount. Non-commission revenues related to Specialized Benefits Services are generally calculated as a percentage of assets under administration or on an hourly
basis.



We have two operating segments: Insurance
Brokerage and Specialized Benefits Services. Approximately 84% of our revenues, for the year ended December 31, 2002, was derived from our Insurance Brokerage segment. Within this segment, approximately 66% relates to P&C insurance and 34% to
group employee benefits insurance. The remaining approximate 16% of our revenues was derived from our Specialized Benefits Services segment. Within this segment, approximately 52% relates to core benefits, 30% to benefits enrollment and
communication and 18% to executive and professional benefits.



The majority of our operating expenses relates to Compensation and Employee Benefits, which equated to approximately 61% of revenues in 2002. We refer to the balance of our operating expenses as Other Operating Expenses,
which includes selling-related expenses, rent, communication expenses and other items. Other Operating Expenses were approximately 21% of total revenues in 2002.



Primary Financial Measures



The financial measures that we use to evaluate our performance on a consolidated basis are:



| |  |  | Total Revenues;
| | - |  | ---------------



| |  |  | EBITDA, which we define as Total Revenues less Compensation and Employee Benefits and Other Operating Expenses;
| | - |  | ---------------------------------------------------------------------------------------------------------------



| |  |  | EBITDA Margin, which we define as EBITDA as a percentage of Total Revenues; and
| | - |  | -------------------------------------------------------------------------------



| |  |  | Net Income (Loss) plus Amortization of Intangible Assets.
| | - |  | ---------------------------------------------------------



13



---

##### Table of Contents



We present
EBITDA because we believe that it is a relevant and useful indicator of our operating profitability and our ability to incur and service debt. We believe EBITDA is relevant owing to our leveraged approach to our capital structure and resulting
significant amount of interest expenses, and our accounting for all acquisitions using the purchase method of accounting 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 Net Income (Loss) plus Amortization of Intangible Assets because we believe that it is a relevant and useful indicator in understanding our ability to
generate earnings. We believe Net Income (Loss) plus Amortization of Intangible Assets is relevant owing to the significant amount of our amortization of intangible assets resulting from accounting for all acquisitions using the purchase method of
accounting.



You should not consider these
financial measures as alternatives to other financial measures determined in accordance with accounting principles generally accepted in the United States, which we refer to as GAAP. You should not consider EBITDA as an alternative to cash flows
from operating activities, investing activities or financing activities 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
filing is not likely to be comparable to those of other companies. Additionally, under our existing credit facility we are currently prohibited from paying dividends on or repurchasing shares of our capital stock, with the limited exception of
repurchasing shares held by terminated employees.



Industry
Conditions



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 caused insurers to increase premium rates starting in mid- to late 2000. Additionally, the insurance industry was affected by the events of September 11, 2001, which resulted in the largest insurance loss in
Americas history and accelerated increases in premium rates for particular lines of commercial P&C insurance. The current hard market, which is an insurance market characterized by a period of rising premium rates, is, in
general, positively affecting commissions earned by insurance brokers. Approximately 48% of our revenues in 2002 relates to commercial P&C insurance, which is the line of business most impacted by the hard market. However, the
longevity of this cycle cannot be accurately predicted. In response to rising premiums, some of our customers have increased their deductibles and/or reduced their insurance coverage in order to reduce the impact of the premium increases. These
factors have negatively impacted our revenues.



Premium rates in the health insurance industry, however, have generally realized a consistent upward trend due to increasing health care delivery costs. 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. In addition, some of our customers have reduced benefits for their employees resulting in a reduction of costs and related
insurance premium. This factor has negatively impacted our revenues.



Acquisitions



Between
1994 and 1999, we pursued an acquisition strategy with a vision of building a national organization capable of distributing a broad range of insurance and financial products and services. The majority of our over 90 acquisitions were completed prior
to December 31, 1999.



In most acquisitions, we
issued a combination of cash, seller notes and preferred stock. Effective with our initial public offering, we discontinued the practice of offering preferred stock as consideration in acquisitions and started the practice of offering common stock.
We also structured our acquisition agreements to include contingent purchase price payments, commonly referred to as earn-outs, which we treated as adjustments to



14



---

##### Table of Contents

purchase price and paid in a combination of cash, seller notes and preferred stock and capitalized upon determination. In some cases,
acquisitions included annual cash bonuses, which we refer to as Growth Based Bonuses, that were payable upon achieving agreed upon performance targets, and are expensed as incurred and are classified in Compensation and Employee
Benefits. Effective January 2000, we discontinued the practice of offering Growth Based Bonuses. We incurred $1.6 million, $2.3 million and $3.8 million of Growth Based Bonus Expense in 2002, 2001 and 2000, respectively. We expect that all of our
Growth Based Bonus obligations related to completed acquisitions will expire by December 31, 2004. The Growth Based Bonus expense for the years ending December 31, 2003 and 2004 is estimated to be $0.3 million and $0.1 million, respectively.



Discontinued Operations



In the latter part of 2001, we completed a strategic and
financial review of our company and concluded that USIA was no longer core to our mission, vision or strategy. Consequently, in January 2002, we announced our intention to sell USIA and subsequently sold the business in April 2002. The cash proceeds
from the disposition of USIA were used to repay a portion of our bank borrowings, seller notes associated with the business and related transaction expenses. USIA is reflected in our financial statements as a Discontinued Operation in accordance
with Statement of Financial Accounting Standards, or SFAS, No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Accordingly, the assets, liabilities and results of operations for USIA have been disaggregated in our
financial statements. USIA accounted for $74.8 million of total revenues for the year ended December 31, 2001 and had approximately 1,100 employees. Discontinued operations had net losses of $13.8 million, $61.8 million, and $8.3 million for the
years ended December 31, 2002, 2001 and 2000, respectively. In the fourth quarter of 2001, following the provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of, we recorded
an impairment charge of $46.9 million against USIAs goodwill and expiration rights. The net loss for the year ended December 31, 2002 includes a $7.2 million pre-tax loss on the sale of USIA in April 2002. For further detail on the losses
incurred at USIA in 2001 please read Note 16, Discontinued Operations, in our annual financial statements, under USIA Litigation MattersFiremans Fund Litigation and Mutual of Omaha Litigation.



Litigation Costs Related to Discontinued Operations



We incurred $1.0 million, $2.5 million and
$1.2 million in legal fees and other expenses associated with the defense of claims against us, the pursuit of claims made by us and payment of claims by us relating to USIA for the years ended December 31, 2002, 2001 and 2000, respectively. These
expenses were incurred in connection with litigation matters related to USIA, but are reflected in the results of our corporate segment under Other Operating Expenses, consistent with our accounting practices.



Quarterly Fluctuations



Historically, our revenues and EBITDA for the fourth quarter
of the year have been higher relative to the preceding three quarters because a significant portion of commissions and fees earned from our Specialized Benefits Services segment is typically recorded at that time. In addition, we are subject to
quarterly earnings fluctuations attributable to the timing of sales of Specialized Benefits Services products.



15



---

##### Table of Contents



Results of Operations



|                                                                   |  | Year ended December 31, |        
|------------------------------------------------------------------ |  | ----------------------- | -------
|                                                                   |  | 2002                    |        
|                                                                   |  | (in thousands)          |        
|Revenues                                                           |  | $                       | 328,196
|Compensation and Employee Benefits                                 |  |                         | 200,982
|Other Operating Expenses                                           |  |                         | 68,779 
|                                                                   |  |                         |        
|EBITDA(a)                                                          |  |                         | 58,435 
|Change in Value of Stock Appreciation Rights                       |  |                         | (2,995 
|Value of Stock Options Exchanged for Stock Appreciation Rights     |  |                         | 1,269  
|Grant of Restricted Stock Units                                    |  |                         | 1,042  
|Amortization of Intangible Assets                                  |  |                         | 21,326 
|Depreciation                                                       |  |                         | 11,053 
|Interest                                                           |  |                         | 17,782 
|Change in Value of Redeemable Common Stock Warrants                |  |                         | (4,070 
|Expense on Early Retirement of Debt                                |  |                         | 2,610  
|                                                                   |  |                         |        
|Income (Loss) From Continuing Operations Before Income Tax Benefit |  |                         | 10,418 
|Income Tax Benefit                                                 |  |                         | (518   
|                                                                   |  |                         |        
|Net Income (Loss) From Continuing Operations                       |  |                         | 10,936 
|Loss From Discontinued Operations, Net of Income Taxes             |  |                         | (13,751
|                                                                   |  |                         |        
|Net Loss                                                           |  |                         | (2,815 
|Addback:                                                           |  |                         |        
|Amortization of Intangible Assets                                  |  |                         | 21,326 
|                                                                   |  |                         |        
|Net Income (Loss) plus Amortization of Intangible Assets           |  | $                       | 18,511 
|                                                                   |  |                         |        

---

|(a) |  | Net cash from continuing operating activities was $36.6 million, $21.9 million and $29.9 million for the years ended December 31, 2002, 2001 and 2000, respectively.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



Please read the
information under the caption Integration Efforts and Other Charges below for more details.



Revenues.    Revenues increased $16.6 million, or 5.3%, to $328.2 million in 2002 from $311.6 million in 2001.
In 2002, we experienced positive net new business and increased premium rates on renewals. In addition, we generated increased revenues from the sales production of recently hired sales professionals. Offsetting the increase in revenues from new
business production, increasing premium rates and additional sales production from recently hired sales professionals in 2002, was a $7.7 million reduction in revenues from eliminating low margin business, which contributed $1.1 million in 2002
versus $8.8 million in 2001. Revenues before this item increased approximately 8% in 2002.



Compensation and Employee Benefits.    Compensation and Employee Benefits increased $0.8 million, or 0.4%, to $201.0 million in 2002 from $200.2 million in 2001. In 2002, we
had integration efforts and other charges of $8.1 million compared to $11.2 million in 2001. Excluding the effect of these charges, Compensation and Employee Benefits increased $3.8 million or 2.0% in 2002. As a percentage of revenues, Compensation
and Employee Benefits was 61.2% in 2002 compared to 64.3% in 2001, primarily due to the charges. Excluding the effect of these charges, Compensation and Employee Benefits as a percentage of revenues was 58.8% in 2002 compared to 60.7% in 2001. The
decrease, as a percentage of revenues, in 2002 is primarily due to the positive affects of our integration efforts and improvements in performance in our operations. In an effort to reduce compensation expense, we terminated 32 employees and
renegotiated compensation arrangements for four sales professionals during the first quarter of 2002.



16



---

##### Table of Contents



Other
Operating Expenses.    Other Operating Expenses decreased $7.6 million, or 9.9%, to $68.8 million in 2002 from $76.4 million in 2001. In 2002, we had integration efforts and other charges of $1.6 million compared to $11.3
million in 2001. Excluding the effect of these charges, Other Operating Expenses increased $2.1 million or 3.3% in 2002. As a percentage of revenues, Other Operating Expenses were 21.0% in 2002 compared to 24.5% in 2001, primarily due to the
charges. Excluding the effect of these charges, Other Operating Expenses as a percentage of revenues were 20.5% in 2002 compared to 20.9% in 2001.



Net Income (Loss) From Continuing Operations.    Net Income (Loss) From Continuing Operations increased $45.6
million to $10.9 million in 2002 from a loss of $34.7 million in 2001, due to (i) a reduction in Other Operating Expenses principally due to the integration efforts in the fourth quarter of 2001, (ii) improvement in performance of operations, (iii)
the gain from the reduction in the book value of the redeemable common stock warrants and the stock appreciation rights, (iv) a decrease in interest expense as a result of lower interest rates and a reduction in debt, and (v) a decrease in
amortization of intangible assets principally due to our adoption of SFAS No. 142. Please read Note 1, Nature of Operations and Summary of Significant Accounting Policies in our annual financial statements under Intangible
Assets. The effective tax rate from continuing operations in 2002 was (5.0)% compared to (11.8)% in 2001. The decrease in the effective tax rate and corresponding reduced benefit in 2002 resulted from the increase in the tax valuation
allowance established in 2001, offset by the impact of state income taxes.



Year Ended December 31, 2001 Compared with Year Ended December 31, 2000



Revenues.    Revenues increased $20.8 million, or 7.2%, to $311.6 million in 2001 from $290.7 million in 2000. The increase was primarily due to a combination of new business
production and increasing premium rates. Excluding the effect of businesses acquired by adjusting 2000 revenues by $4.4 million and excluding $8.0 million of non-recurring revenues in 2000, revenues increased approximately 9% in 2001. In 2000, we
received non-recurring revenues of $8.0 million paid to our Specialized Benefits Services segment. $5.0 million of the non-recurring revenues relate to a one-time management-consulting fee related to a technology project. As we are not in the
business of information technology management consulting and we do not expect that this sort of consulting services agreement will occur again, we consider these revenues to be non-recurring. The other $3.0 million of the non-recurring revenues were
paid by an insurance carrier primarily for acquisition-related and other services provided to consummate our acquisition of one of the insurance carriers independent distributors. We do not expect to receive a fee for the performance of these
types of services in the future. Accordingly, we consider this payment non-recurring.



Compensation and Employee Benefits.    Compensation and Employee Benefits increased $28.1 million, or 16.3%, to $200.2 million in 2001 from $172.1 million in 2000. In 2001,
we had integration efforts and other charges of $11.2 million compared to $2.9 million in 2000. Excluding the effect of these charges, Compensation and Employee Benefits increased $19.8 million or 11.7% in 2001, primarily as a result of the increase
in revenues. As a percentage of revenues, Compensation and Employee Benefits were 64.3% in 2001 as compared to 59.2% in 2000, primarily due to the charges. Excluding the effect of these charges and non-recurring revenues in 2000, Compensation and
Employee Benefits as a percentage of revenues were 60.7% in 2001 as compared to 59.8% in 2000. In an effort to reduce compensation expense, we terminated 96 employees and renegotiated compensation arrangements for 29 sales professionals during the
fourth quarter of 2001.



Other Operating
Expenses.    Other Operating Expenses increased $14.0 million, or 22.4%, to $76.4 million in 2001 from $62.4 million in 2000. In 2001, we had integration efforts and other charges of $11.3 million compared to $0.8 million in
2000. Excluding the effect of these charges, Other Operating Expenses increased $3.4 million or 5.6% in 2001. As a percentage of revenues, Other Operating Expenses were 24.5% in 2001 as compared to 21.5% in 2000, primarily due to the charges.
Excluding the effect of these charges and non-recurring revenues in 2000, Other Operating Expenses as a percentage of revenues were 20.9% in 2001 as compared to 21.8% in 2000.



17



---

##### Table of Contents



Net Loss
From Continuing Operations.    Net Loss From Continuing Operations increased $24.8 million to $34.7 million in 2001 from $9.9 million in 2000, primarily due to the items described under the heading Integration Efforts
and Other Charges, below. This was partially offset by an increase in the Income Tax Benefit of $2.0 million. The Income Tax Benefit recorded in 2001 was reduced by the accrual of an $8.0 million tax valuation allowance against our net
deferred tax assets recorded in 2001. In accordance with GAAP, a deferred tax asset valuation allowance must be established to the extent it is more likely than not that an entity will not fully realize the deferred tax asset in the near future. The
effective tax rate from continuing operations in 2001 was (11.8)% compared to (21.3)% in 2000. The decrease in the effective tax rate and corresponding reduced benefit in 2001 resulted from the establishment of the valuation allowance in 2001 offset
by a reduction in permanent differences relating to non-deductible goodwill and state income taxes.



Our Segments



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



The Insurance Brokerage segment offers:



| |  |  | General and specialty property and casualty insurance, which we refer to as P&C insurance; and
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | Individual and group health, life and disability insurance, which we refer to as Group Employee Benefits insurance.
| | - |  | -------------------------------------------------------------------------------------------------------------------



The Specialized Benefits Services segment offers:



| |  |  | Core benefits (health and welfare);
| | - |  | -----------------------------------



| |  |  | Benefits enrollment and communication; and
| | - |  | ------------------------------------------



| |  |  | Executive and professional benefits.
| | - |  | ------------------------------------



We evaluate segment performance based on revenues, EBITDA and EBITDA margin. 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



|                                                      |  | Year ended December 31,                |        
|----------------------------------------------------- |  | -------------------------------------- | -------
|                                                      |  | 2002                                   |        
|                                                      |  | (in thousands, except for percentages) |        
|Revenue:                                              |  |                                        |        
|Property & Casualty                                   |  | $                                      | 180,825
|Group Employee Benefits                               |  |                                        | 93,442 
|                                                      |  |                                        |        
|Total Revenues                                        |  |                                        | 274,267
|Compensation and Employee Benefits                    |  |                                        | 160,512
|Other Operating Expenses                              |  |                                        | 45,395 
|                                                      |  |                                        |        
|EBITDA                                                |  | $                                      | 68,360 
|                                                      |  |                                        |        
|EBITDA Margin                                         |  |                                        | 24.9   
|Income From Continuing Operations Before Income Taxes |  | $                                      | 41,878 





Comparisons for Years Ended December 31, 2002, 2001 and 2000



The Insurance Brokerage segment results reflect the following integration efforts and other charges: $4.6
million, $16.3 million and $2.0 million in years 2002, 2001 and 2000, respectively.



18



---

##### Table of Contents



Revenues in
the Insurance Brokerage segment increased 6.3% and 7.4% in 2002 and 2001, respectively, due to net new business production, increasing premium rates and additional sales production from recently hired sales professionals. Offsetting the increase in
revenues in 2002 was a $7.7 million reduction in revenues from eliminating low margin business, which contributed $1.1 million of revenues in 2002 versus $8.8 million in 2001. Insurance Brokerage revenues before this item increased approximately 10%
in 2002. Property & Casualty revenues represented 55.1%, 53.7% and 51.8% of our total consolidated revenues in 2002, 2001 and 2000, respectively, and Group Employee Benefits revenues represented 28.5%, 29.2% and 30.8% of our total consolidated
revenues in 2002, 2001 and 2000, respectively.



EBITDA in the Insurance Brokerage segment increased $24.4 million or 55.5% to $68.4 million in 2002 from $44.0 million in 2001, and decreased $8.3 million or 15.8% to $44.0 million in 2001 from $52.2 million in 2000. EBITDA Margin in
the Insurance Brokerage segment was 24.9%, 17.0% and 21.7% in 2002, 2001 and 2000, respectively. Excluding the effect of the integration efforts and other charges, EBITDA and EBITDA Margin in the Insurance Brokerage segment were $73.0 million and
26.6%, $60.2 million and 23.3% and $54.2 million and 22.6% in 2002, 2001 and 2000, respectively. The increase in EBITDA and EBITDA Margin in 2002 is due to (i) a decrease in Compensation and Employee Benefits and Other Operating Expenses, as a
percent of revenues, due to the positive affects of our integration efforts and (ii) improvement in performance in our operations.



Income From Continuing Operations Before Income Taxes in the Insurance Brokerage segment was $41.9 million, $7.2 million and $16.8 million
for the years ended December 31, 2002, 2001 and 2000, respectively. The increase in 2002 is due to (i) the items discussed above, and (ii) a decrease in amortization of intangible assets, principally due to our adoption of SFAS No. 142. Please read
Note 1, Nature of Operations and Summary of Significant Accounting Policies in our annual financial statements under Intangible Assets. The reduction in 2001 is due to the negative impact of the integration effort and other
charges in 2001 compared to 2000.



Specialized Benefits
Services



|                                                      |  | Year ended December 31,                |       
|----------------------------------------------------- |  | -------------------------------------- | ------
|                                                      |  | 2002                                   |       
|                                                      |  | (in thousands, except for percentages) |       
|Revenues                                              |  | $                                      | 53,310
|Compensation and Employee Benefits                    |  |                                        | 29,824
|Other Operating Expenses                              |  |                                        | 13,759
|                                                      |  |                                        |       
|EBITDA                                                |  | $                                      | 9,727 
|                                                      |  |                                        |       
|EBITDA Margin                                         |  |                                        | 18.2  
|Income From Continuing Operations Before Income Taxes |  | $                                      | 2,727 



Comparisons for Years
Ended December 31, 2002, 2001 and 2000



The
Specialized Benefits Services segment results reflect the following integration efforts and other charges: $1.1 million, $1.7 million and $0.7 million in years 2002, 2001 and 2000, respectively.



Specialized Benefits Services revenues increased $0.3 million,
or 0.5%, to $53.3 million in 2002 and $3.4 million, or 6.8%, to $53.0 million in 2001. Excluding the effect of businesses acquired by adjusting 2000 revenues by $4.4 million and excluding $8.0 million of non-recurring revenues in 2000 as previously
discussed, revenues increased approximately 1% and 15% in 2002 and 2001, respectively, in the Specialized Benefits Services segment. The flat revenue growth in 2002 is due to a reduction in core benefit product sales and executive and professional
benefit product sales resulting from difficult market conditions, offset by increases in enrollment and communication product sales. Specialized Benefits Services revenues represented 16.2%, 17.0% and 17.1% of our total consolidated revenues in
2002, 2001 and 2000, respectively.



19



---

##### Table of Contents



EBITDA in the
Specialized Benefits Services segment decreased $3.2 million, or 24.6%, to $9.7 million in 2002 from $12.9 million in 2001 and decreased $5.9 million, or 31.3%, to $12.9 million in 2001 from $18.8 million in 2000. EBITDA Margin in the Specialized
Benefits Services segment was 18.2%, 24.3% and 37.8% in 2002, 2001 and 2000, respectively. Excluding the effect of the integration efforts and other charges and non-recurring revenues in 2000, EBITDA and EBITDA Margin in the Specialized Benefits
Services segment were $10.8 million and 20.3%, $14.6 million and 27.4% and $11.5 million and 27.7% in 2002, 2001 and 2000, respectively. EBITDA and EBITDA Margin in the Specialized Benefits Services segment in 2002 were negatively impacted by (i)
decrease in new business and an increase in lost business in our Core Benefits division, (ii) decrease in new business in our Executive and Professional Benefit division, and (iii) expenses incurred to expand and support our sales distribution
capacity and infrastructure.



Income From
Continuing Operations Before Income Taxes in the Specialized Benefit Services Segment was $2.7 million, $5.0 million and $12.3 million for the years ended December 31, 2002, 2001 and 2000, respectively. The decrease in 2002 is due to the items
discussed above, partially offset by a decrease in amortization of intangible assets principally due to our adoption of SFAS No. 142. Please read Note 1, Nature of Operations and Summary of Significant Accounting Policies in our annual
financial statements under Intangible Assets.



Corporate



|                                                    |  | Year ended December 31,                |        
|--------------------------------------------------- |  | -------------------------------------- | -------
|                                                    |  | 2002                                   |        
|                                                    |  | (in thousands, except for percentages) |        
|Revenues                                            |  | $                                      | 619    
|Compensation and Employee Benefits                  |  |                                        | 10,646 
|Other Operating Expenses                            |  |                                        | 9,625  
|                                                    |  |                                        |        
|EBITDA                                              |  | $                                      | (19,652
|                                                    |  |                                        |        
|Percentage of Revenues                              |  |                                        | (6.0   
|Loss From Continuing Operations Before Income Taxes |  | $                                      | (34,187



Comparisons for Years
Ended December 31, 2002, 2001 and 2000



The
Corporate segment results reflect the following integration efforts and other charges: $3.9 million, $4.6 million and $0.9 million in years 2002, 2001 and 2000, respectively.



Revenues at the Corporate segment represent interest income. Net Corporate expenses were $19.7 million, $21.9
million and $14.8 million in 2002, 2001 and 2000, respectively. As a percentage of total consolidated revenues, net Corporate expenses were 6.0%, 7.0% and 5.1% in 2002, 2001 and 2000, respectively. Included in net Corporate expenses is $1.0 million,
$2.5 million and $1.2 million in 2002, 2001 and 2000, respectively, in legal fees and other expenses associated with the defense of claims against us, the pursuit of claims made by us and payment of claims by us relating to USIA, a discontinued
operation. Excluding the effect of the integration efforts and other charges and the legal fees discussed above, net Corporate expenses were $14.7 million, $14.8 million and $12.7 million in 2002, 2001 and 2000, respectively, and as a percentage of
total consolidated revenues, net Corporate expenses were 4.5%, 4.7% and 4.5% in 2002, 2001 and 2000, respectively. Included in the Corporate segment in 2002 was a $0.8 million charge related to the Missigman liability. Please read Note 14,
Contingencies in our annual financial statements under Gary J. Missigman Litigation.



Net Loss From Continuing Operations in the Corporate segment was $34.2 million, $51.5 million and $41.6 million in 2002, 2001 and 2000,
respectively. The decrease in 2002 is primarily due to (i) a $6.3 million decrease in interest expense as a result of lower interest rates and a reduction in debt, (ii) a $4.1 million gain from the reduction in the book value of redeemable common
stock warrants, and (iii) a $3.0 million gain from the



20



---

##### Table of Contents

reduction in the book value of the stock appreciation rights. The increase in 2001 is primarily a result of the integration efforts and other
charges in 2001 compared to 2000.



Integration Efforts and
Other Charges



|                                   |  | Year ended December 31,
|---------------------------------- |  | -----------------------
|                                   |  | 2002                   
|                                   |  | (in thousands)         
|Integration Efforts                |  |                        
|Compensation and Employee Benefits |  | $                      
|Other Operating Expenses           |  |                        
|                                   |  |                        
|Total Integration Efforts          |  |                        
|Other Charges                      |  |                        
|Compensation and Employee Benefits |  |                        
|Other Operating Expenses           |  |                        
|                                   |  |                        
|Total Other Charges                |  |                        
|                                   |  |                        
|Total Charges to EBITDA            |  | $                      
|                                   |  |                        



Integration Efforts



Upon completion of the majority of our
acquisitions, we undertook initiatives to determine the following: (i) positions within the organization that could be eliminated without resulting in loss of revenues or detriment to service; (ii) sales professionals contracts that should be
renegotiated because they were in excess of our standard compensation practices; and (iii) accretive benefits that could be derived from the early termination of lease commitments. Upon completion of the analysis we reduced the number of our
employees by 32, 96 and 11, during the first quarter of 2002 and for 2001 and 2000, respectively, and such persons were given various levels of severance depending on their length of service with us. This process resulted in severance charges of
$3.6 million, $4.7 million and $2.9 million in the first quarter of 2002 and in 2001 and 2000, respectively. In addition, in the first quarter of 2002 and in 2001, we renegotiated the compensation arrangements of four and 29 sales professionals,
respectively, whose compensation arrangements were in excess of our standard compensation practices. The renegotiation of these contracts resulted in an expense of $1.8 million in the first quarter of 2002 and $3.0 million in 2001. Finally, in the
first quarter of 2002, and in 2001 and 2000, we terminated lease arrangements at one, eight and four locations, respectively. The early termination of lease commitments resulted in charges of $0.1 million, $1.9 million and $0.5 million in the first
quarter of 2002, in 2001 and 2000, respectively. Additionally, in 2000, $0.3 million in claims expense was recorded.



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



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



21



---

##### Table of Contents

the sold brokerage operation, we determined that the note was impaired by $1.4 million. The note receivable, originally issued for $1.5
million, was written down by $1.0 million in the second quarter of 2001, written down by $0.3 million in the fourth quarter of 2001 and written down by $0.1 million in the first quarter of 2002.



Other Charges



In January 2002, Bernard H. Mizel retired as our chairman and
chief executive officer. David L. Eslick, who has been president and chief operating officer since July 1998, succeeded Mr. Mizel. In the first quarter of 2002, we recorded a charge of $2.8 million related to the retirement.



In the first quarter of 2002, we accrued $0.3 million related
to the Royal Indemnity Company Claim. Please read Note 14 Contingencies, in our annual financial statements under Royal Indemnity Company Claim.



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



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



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



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



22



---

##### Table of Contents



Stock Appreciation Rights



In 1995, we adopted a Long-Term Incentive
Plan to provide a means to attract, retain and motivate employees. As part of the Long-Term Incentive Plan we issued stock appreciation rights, which we refer to as SARs. SARs generally vest over a five-year period, although accelerated vesting is
possible under specified circumstances. Upon exercise of a SAR, the holder generally is entitled to receive, in cash, the excess of the fair market value per share of our common stock on the date of exercise over the grant price of the SAR. The
valuation of SARs is based on the estimated fair value of a share of our common stock. In accordance with GAAP, compensation expense, or a reduction of compensation expense, for SARs is recorded over the vesting period based on the change in fair
value from grant date to each balance sheet date. Please read Note 6, Stockholders EquityLong-Term Incentive and Share Award Plan, in our annual financial statements. We recorded a net reduction in SAR-related compensation
expense of $3.0 million in 2002, resulting from a reduction in the fair market value of our common stock. We recorded SAR-related compensation expense of $3.1 million and $0.3 million in 2001 and 2000, respectively.



Upon the consummation of our initial public offering in
October 2002, the Long-Term Incentive Plan was terminated and replaced with the 2002 Equity Incentive Plan. Also, after the consummation of our initial public offering, we made an offer to exchange all outstanding SARs for stock options or stock
under our 2002 Equity Incentive Plan. On November 27, 2002, the SARs exchange was completed, the SARs tendered in the exchange were canceled, and the related compensation expense for 2002 was finalized. As of December 31, 2002, there were no SARs
outstanding.



2002 Equity Incentive Plan



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



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



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



Redeemable Common Stock Warrants



In March 1996, we issued warrants to purchase 0.7 million
shares of common stock issued at an exercise price of $11.125 per share. Holders of the Redeemable Common Stock Warrants, issued in conjunction with a



23



---

##### Table of Contents

1996 senior subordinated debt offering that was repaid in 1999, agreed to terminate the put rights associated with the Redeemable Common
Stock Warrants concurrent with the consummation of the initial public offering. The aggregate value of the warrants was $4.3 million and was reported as Redeemable Common Stock warrants on our balance sheet prior to the consummation of our initial
public offering. The change in value of the warrants, which is recorded as change in value of redeemable common stock warrants in our statements of operations, was $(4.1) million and $1.4 million for 2002 and 2001, respectively.



Early Retirement of Debt



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



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



Liquidity and Capital Resources



Our debt consists of the following:



|                                                                             |  | December 31,   |        
|---------------------------------------------------------------------------- |  | -------------- | -------
|                                                                             |  | 2002           |        
|                                                                             |  | (in thousands) |        
|Existing Credit Facility:                                                    |  |                |        
|Term loan                                                                    |  | $              | 29,521 
|Revolving credit facility                                                    |  |                | 56,075 
|Other Debt:                                                                  |  |                |        
|Notes issued in connection with acquisitions, due various dates through
2007 |  |                | 35,880 
|CNA Pro Finite Risk Policy                                                   |  |                | 3,028  
|Zurich term loan                                                             |  |                | 3,000  
|Other long-term debt, including capital leases                               |  |                | 9,331  
|                                                                             |  |                |        
|Total debt                                                                   |  |                | 136,835
|Current portion of long-term debt                                            |  |                | (32,871
|                                                                             |  |                |        
|Long-term debt                                                               |  | $              | 103,964
|                                                                             |  |                |        



Our
existing credit facility is comprised of (i) a $75.0 million revolving credit facility, expiring on September 17, 2004, and (ii) a $125.0 million term loan payable in quarterly installments, which commenced on December 31, 1999. The last quarterly
installment is due on September 17, 2004, the maturity date of the term loan. The revolving credit facility is available on a revolving basis for loans denominated in U.S. dollars and for letters of credit.



From the inception of our existing credit facility on
September 17, 1999 through December 31, 2002, we amended the facility five times to adjust financial covenants. Without these amendments, we would have been in default under the facility. Failure to comply with financial covenants in our existing
credit facility could cause all or a portion of our debt to become immediately due and payable. As of December 31, 2002 we were in compliance with the facility as amended.



24



---

##### Table of Contents



As of December
31, 2002, the significant financial covenants of our existing credit facility were as follows:



|Description of Covenant                                       |  | Actual |       | Covenant
|------------------------------------------------------------- |  | ------ | ----- | --------
|Consolidated Total Debt to Adjusted Pro Forma EBITDA Ratio(a) |  |        | 1.97  |         
|Interest Expense Coverage Ratio(a)                            |  |        | 4.42  |         
|Stockholders Equity(a) (in millions)                         |  | $      | 204.1 |         

---



|(a) |  | As defined in our existing credit facility.
|--- |  | -------------------------------------------



On January 31, 2003, we amended the facility for the sixth time to adjust the financial covenants in 2003. Without this amendment, we may
have defaulted under the facility in the first quarter of 2003.



With the consummation of the initial public offering and the net proceeds used to reduce bank borrowings, we are currently evaluating our debt structure in light of our available sources of funding. Upon completing this evaluation,
we expect to be in a position to make a judgment as to what the debt component of our capital structure should be to best support our business and acquisition strategy. This may or may not result in a decision to replace our existing credit facility
with either a new credit facility, publicly or privately offered notes, some other form of debt financing, or some combination of the foregoing or request an amendment to our existing credit facility. In the event that we replace our existing credit
facility, we will be required to pay a fee equal to 1.00% of the revolving credit commitment and the outstanding borrowings under the term loan as determined 30 days prior to repayment. In the event our existing credit facility is not replaced by
March 31, 2004, and depending on our results of operations, we may be required to request from our current lenders a waiver or modification of the shareholders equity covenant, and possibly other covenants, in the existing credit facility.
Failure to comply with financial covenants in our existing credit facility could cause all or a portion of our debt to become immediately due and payable.



In the event the revolving credit commitment and the outstanding borrowings under the term loan have not been repaid and all related
commitments terminated as of October 1, 2003, we will be required to pay a fee in an amount equal to 1.00% of the sum of the total of the revolving credit commitment and the outstanding borrowings under the term loan as of October 1, 2003. The fee
is due and payable on October 1, 2003. However, if we, by July 31, 2003, retain the lenders to structure and arrange a new senior credit facility, then the amount of any refinancing fee that is subsequently paid to the lenders shall be credited
towards any fees otherwise payable in connection with a new senior credit facility.



On October 31, 2002, Standard & Poors removed us from CreditWatch and affirmed its single-B-plus rating on our company with a positive outlook, after we successfully completed our
initial public offering.



In addition to our debt
service requirements, we will require liquidity for capital expenditures and working capital needs. Capital Expenditures for the years ended December 31, 2002, 2001 and 2000 were $7.0 million, $8.5 million and $10.3 million, respectively. For the
years ended December 31, 2002, 2001 and 2000, $4.6 million, $5.6 million and $5.7 million, respectively, of our total Capital Expenditures related to management information systems. We have funded our capital expenditures with cash generated
internally from operations and from external financing and expect to continue to do so in the future. Our total Capital Expenditures are expected to be approximately $10.9 million in 2003.



We believe that cash and cash equivalents on hand of $21.4 million and our availability under our revolving
credit facility of $17.5 million as of December 31, 2002, together with cash flow generated from operations, should be sufficient to fund our estimated $32.9 million in debt principal repayment, working capital needs and budgeted $10.9 million in
capital expenditures through December 31, 2003. Our liquidity thereafter will depend on our financial results and future available sources of additional equity or debt funding and our results of operations. The revolving credit facility provides us
with availability of up to $75.0 million, all of which is



25



---

##### Table of Contents

available for general corporate purposes, including acquisitions. As of December 31, 2002 borrowings outstanding under the revolving credit
facility were $56.1 million. Additionally, we had $1.4 million outstanding under letters of credit. Our future operating performance and ability to service our debt will be subject to economic conditions and to financial, business and other factors,
many of which are beyond our control.



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



Cash and cash equivalents from continuing operations (decreased) increased by $(9.5) million, $29.2 million and $8.7 million for the years ended December 31, 2002, 2001 and 2000, respectively. Net cash provided by operating
activities totaled $36.6 million, $21.9 million and $29.9 million for the years ended December 31, 2002, 2001 and 2000, respectively, and is principally dependent upon the timing of collection of premiums receivable and payments of premiums payable.



Net cash provided by (used in) continuing
investing activities totaled $5.6 million, $(14.9) million and $(12.1) million for the years ended December 31, 2002, 2001 and 2000, respectively, which principally reflects acquisition activities and Capital Expenditures. Included in the net cash
provided by continuing investing activities for the year ended December 31, 2002 is $18.2 million in proceeds from the sale of USIA. Please read Discontinued Operations. Cash expenditures for acquisitions amounted to $5.7 million, $6.9
million and $2.4 million for the years ended December 31, 2002, 2001 and 2000, respectively. We made no acquisitions in 2002 or 2001. The $5.7 million for the year ended December 31, 2002, reflects the payment of additional purchase price and
retention based acquisition payments. The $6.9 million for the year ended December 31, 2001, reflects the payment of additional purchase price on retention based acquisitions, as well as the payment of the cash portion of an acquisition effective in
2000 but paid in the first quarter of 2001. Cash expenditures for Capital Expenditures amounted to $7.0 million, $8.5 million and $10.3 million for the years ended December 31, 2002, 2001 and 2000, respectively. Investments in Discontinued
Operations amounted to $8.9 million, $14.8 million and $11.1 million for the years ended December 31, 2002, 2001 and 2000, respectively.



Net cash (used in) provided by financing activities totaled $(42.7) million, $36.9 million and $2.0 million for the years ended December
31, 2002, 2001 and 2000, respectively, as we made debt payments and continued to issue both debt and equity. In the first quarter of 2002, we received $2.5 million from the issuance of our preferred stock to Sovereign Bancorp. In the second quarter
of 2002, we used $16.3 million of the proceeds from the sale of USIA to reduce our term loan. In the fourth quarter of 2002, we received $90.0 million from the issuance of common stock in our initial public offering. Of the $90.0 million in gross
proceeds from our initial public offering, we used $78.4 million to reduce our term loan and revolving credit facility and we used $11.6 million to pay issuance costs related to our initial public offering. In the fourth quarter of 2001, we received
$30.0 million from the issuance of our preferred stock. Of the $30.0 million issued, $15.0 million was issued to UnumProvident Corporation and $15.0 million was issued to Ceridian Corporation. Please read Note 5, Long-Term Debt, and Note
6, Stockholders Equity, to our annual financial statements.



Net loss from continuing operations per share (basic and diluted) was $(0.87), $(74.16) and $(41.56) for the years ended December 31, 2002, 2001 and 2000, respectively. Our per share data was
significantly impacted by the 43.8 million increase in our common shares outstanding, which was a result of (i) 34.8 million shares of our common stock issued to the holders of our preferred stock concurrent with our initial public offering and
(ii) 9.0 million shares of our common stock issued as part of the initial public offering. As of December 31, 2002, we had 44.6 million shares of our common stock outstanding; that is, 42.4 million shares are included in



26



---

##### Table of Contents

stockholders equity and 2.2 million shares are included in redeemable securities. As of December 31, 2001 and 2000, we had 0.8 million
shares of our common stock outstanding.



Net Operating Loss
Carryforwards



Our net losses have resulted
in net operating loss carryforwards for federal and state income tax purposes. At December 31, 2002, we had $48.1 million of net operating loss carryforwards for federal tax purposes that will expire during the period 2011 through 2022. Our ability
to use these net operating loss carryforwards to offset future taxable income, if any, may be subject to limitations under Section 382 of the Internal Revenue Code of 1986, as amended and similar state provisions. The provisions of Section 382 are
triggered by specific ownership changes of our stock. We do not believe Section 382 will limit us in utilizing our net operating loss carryforwards in 2003. However, if limited, the unused portion may then be carried forward to future years. In any
event, we have established a 100% valuation allowance against the carrying value of the net operating loss to reduce its carrying value to zero as it is more likely than not that it will not be realized in the near future.



Commitments



The table below summarizes our indebtedness and lease
commitments as of December 31, 2002:



|Payments due by period      |  | Total          |         | Less than 1 year |   | 2-3 years |  | 4-5 years |         | After 5 years
|--------------------------- |  | -------------- | ------- | ---------------- | - | --------- |  | --------- | ------- | -------------
|                            |  | (in thousands)
|Credit facility             |  | $              | 85,596  |                  | $ | 9,840     |  | $         | 75,756  |              
|Other debt                  |  |                | 51,239  |                  |   | 23,031    |  |           | 24,477  |              
|Operating lease commitments |  |                | 57,438  |                  |   | 13,881    |  |           | 22,815  |              
|                            |  |                |         |                  |   |           |  |           |         |              
|Total                       |  | $              | 194,273 |                  | $ | 46,752    |  | $         | 123,048 |              
|                            |  |                |         |                  |   |           |  |           |         |              



We have
structured our acquisition agreements to include contingent purchase price payments to be treated as adjustments to purchase price and capitalized when determined. At December 31, 2002, we estimate the future significant contingent purchase price
payments to be $6.6 million, which would be payable in a combination of cash, common stock and debt. Because of the contingent nature of this liability, under GAAP this amount has not been recorded as a liability in our financial statements. This
amount primarily relates to one acquisition and will be reflected on our financial statements as a liability and additional purchase price within 90 days of the measurement date. The 90-day period from the measurement date allows us to calculate the
contingent purchase price. Approximately $6.6 million of the future contingent purchase price payments have measurement dates of December 31, 2003. Please read Acquisitions above and Note 3, Acquisitions and
Divestitures, to our annual financial statements.



Some of our common stockholders have various put rights that are exercisable upon specific events. Please read Note 7, Redeemable Securities in our annual financial statements.



Critical Accounting Policies



Our discussion and analysis of our financial condition and
results of operations are based upon our financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses. 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, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.



We believe that the following critical accounting policies
affect our more significant judgments and estimates used in the preparation of our financial statements.



27



---

##### Table of Contents



Revenue Recognition



We follow very specific and detailed
guidelines in measuring revenue; however, judgments we make affect the application of our revenue policy. Premiums and commissions receivable from clients, premiums payable to insurance companies and the related commissions income are recorded on
the later of the effective date of the policy or the billing date. Installment premiums and related commissions are recorded periodically as billed. Commissions earned from the placement of individual life and individual disability insurance are
calculated as a percentage of corresponding premiums and the duration or term of the underlying policies. The majority of commissions from individual life and individual disability insurance sales are earned and recognized during the first year the
insurance is placed, with the balance earned and recognized over the following two to ten years. Commissions on premiums billed and collected directly by insurance companies and contingent commissions are recorded when we receive data from the
insurance companies that allows us to reasonably estimate these amounts. We are able to reasonably estimate these amounts when we receive the cash, notification of the amount due from the insurance companies or the insurance policy detail from the
insurance companies. Contingent commissions are received from insurance companies as additional incentive for achieving specified premium volume goals and/or the loss experience of the insurance placed by us. We record commission adjustments,
including policy cancellations and override commissions, when the adjustments become reasonably estimable. Fees for consulting and administrative services are recognized over the period when the respective services are rendered. Revenue results are
difficult to predict, and any shortfall in projected revenue or delay in recognizing revenue could cause our operating results to vary significantly from quarter to quarter.



Premiums and commissions receivable in the consolidated balance sheets are net of allowances for bad debts.
The allowance for bad debts, or allowance, is established through a charge to Other Operating Expenses. The allowance is based on estimates and assumptions using historical data to project future experience. After all collection efforts have been
exhausted, we reduce the allowance for write-offs of accounts receivable that have been deemed uncollectible. We periodically review the adequacy of this allowance and make adjustments as necessary. The use of different estimates or assumptions
could produce different results.



Business Acquisitions and
Purchase Price Allocations



We have
completed over 90 acquisitions. All of these acquisitions have been accounted for using the purchase method, and their related net assets and results of operations were included in our financial statements on their respective acquisition dates. A
majority of the acquisitions have provisions for a reduction in consideration if the acquired company does not meet targeted financial results. Additionally, a majority of the acquisitions have provisions for contingent additional consideration if
the acquired company achieves financial targets. Additional consideration or a reduction in consideration resulting from acquisition contingency provisions is reflected as an adjustment to intangible assets when the contingency is determined.



In connection with these acquisitions, we
recorded intangible assets, which represent expiration rights, non-compete agreements and the excess of costs over the fair value of identifiable net assets acquired (goodwill). Expiration rights are records and files obtained from acquired
businesses that contain information on insurance policies and clients and other information that is essential to policy renewals. Expiration rights are being amortized on a straight-line basis over their estimated lives, which in most cases is 10
years. The costs of non-compete agreements are amortized on a straight-line method over the terms of the agreements, which in most cases is seven years. Goodwill was amortized on a straight-line basis over 25 years. We stopped amortizing goodwill on
January 1, 2002, when we adopted SFAS No. 142. Please read Note 1, Nature of Operations and Summary of Significant Accounting Policies in our annual financial statements under Intangible Assets.



Intangible Assets Impairment



We assess the recoverability of our goodwill and other
intangibles based on assumptions regarding estimates of future cash flows and fair value based on current and projected revenues, EBITDA, business prospects, market trends and other economic factors.



28



---

##### Table of Contents



On January 1,
2002, we adopted SFAS No. 142, which addresses the financial accounting and reporting standards for the acquisition of intangible assets outside of a business combination and for goodwill and other intangible assets subsequent to their acquisition.
This accounting standard requires that goodwill be separately disclosed from other intangible assets in the statement of financial position, and no longer be amortized but tested for impairment on a periodic basis. Intangible assets deemed to have
indefinite lives are no longer amortized but are subject to impairment tests at least annually. Other intangible assets will continue to be amortized over their useful lives. In May 2002, we completed the transitional impairment test, which
indicated that there was no goodwill impairment as of January 1, 2002. In the fourth quarter of 2002, we completed the annual impairment test, which indicated that there was no goodwill impairment as of October 1, 2002. We have no intangible assets
with indefinite lives.



In the fourth quarter of
2001, we believed that the intangible assets of USIA were impaired after considering USIAs actual and projected EBITDA margins. Following the provisions of SFAS No. 121, we considered the sum of the undiscounted cash flows to be derived from
USIA over the remaining amortization period and reduced the carrying value of USIAs intangible assets to the estimated fair value. This resulted in an impairment charge of $46.9 million against goodwill and expiration rights in the fourth
quarter of 2001.



Future events could cause us to
conclude that impairment indicators exist and that our remaining goodwill and other intangibles are impaired. Any resulting impairment loss could have a material adverse effect on our reported financial position and results of operations for any
particular quarterly or annual period.



Income Taxes



We account for income taxes in accordance
with SFAS No. 109, Accounting for Income Taxes, which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and
liabilities. SFAS No. 109 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized after considering all relevant evidence.



We evaluate the recoverability of our net
deferred tax assets on a quarterly basis and adjust, as necessary, the valuation allowance if it is determined that the deferred tax asset is more likely than not to be realized. In assessing the valuation allowance, we consider all available
evidence, which includes our historical losses and projected future taxable income. In 2002 and 2001, we recorded a valuation allowance of $17.5 million and $8.0 million, respectively, to eliminate our net deferred tax assets generated from
continuing operations as it was determined that it is more likely than not that we would not be able to realize any of our net deferred tax assets. In the event we were to determine that we would be able to realize our net deferred tax assets in the
future, an adjustment to our net deferred tax assets would increase income in the period such determination was made.



Debt Covenants



Our existing credit facility requires us to maintain financial covenants. Future operating results and continued compliance with our debt
covenants cannot be assured and our lenders actions are not controllable by us. If our projections of future operating results are not achieved, which may result in a violation of our financial covenants, and 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.



In addition, under the provisions of our existing credit facility, we are generally prohibited from
repurchasing shares of our capital stock, subject to specified permitted monetary thresholds. As a result, if the put rights, described in Note 7 Redeemable Securities in our annual financial statements, are exercised, we may be required
to repurchase the related shares in excess of the monetary thresholds provided for under our existing credit facility. If the lenders under our existing credit facility do not waive the applicable limitations, we may be in default under our
obligations to repurchase the shares put to us, or, if we effected the repurchase, we may be in default under our existing credit facility.



29



---

##### Table of Contents



Litigation Matters



We are subject to various claims, lawsuits
and proceedings that arise in the normal course of business. We do not believe we are a party to any claims, lawsuits or legal proceedings that will have a material adverse effect on our reported financial position and results of operations. As
further discussed in Note 14 Contingencies, in our annual financial statements, we have accrued a liability for our best estimate of the probable cost of the resolution of these claims. This estimate has been developed in consultation
with internal and external counsel that is handling our defense in these matters and is based upon a combination of litigation and settlement strategies. To the extent additional information arises or our strategies change, it is possible that our
best 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.



New Accounting Pronouncements



In June 2001, the Financial Accounting Standards Board, or
FASB, issued SFAS No. 141, Business Combinations, which eliminates the pooling-of-interests method of accounting for all business combinations initiated after June 30, 2001, and addresses the initial recognition and measurement of
goodwill and other intangible assets acquired in a business combination. We did not initiate any business combinations after June 30, 2001, so SFAS No. 141 had no impact on our annual financial statements.



In August 2001, the FASB issued SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121 and accounting and reporting provisions of Accounting
Principles Board, or APB, Opinion No. 30, Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for a disposal of
a segment of a business. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. We adopted SFAS No. 144 beginning January 1, 2002. As a result of our decision to discontinue USIAs operations in January 2002, the prior
years financial statements have been restated to separately reflect continuing and discontinued operations. Please read Note 16 Discontinued Operations in our annual financial statements.



In April 2002, FASB issued SFAS No. 145, Rescission of
FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS No. 145 rescinds SFAS No. 4, Reporting Gains and Losses from Extinguishment of Debt, which required all gains and losses from
extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. As a result, the criteria in APB No. 30 will now be used to classify those gains and losses. Any gain or loss on
extinguishment of debt that was classified as an extraordinary item in prior periods presented that does not meet the criteria in APB No. 30 for classification as an extraordinary item shall be reclassified. We will adopt SFAS No. 145 beginning
January 1, 2003. We do not expect that the adoption of this statement will have a significant impact on our financial position or results of operations.



In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146
nullifies Emerging Issues Task Force, or EITF, Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS No. 146
requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF 94-3, a liability for an exit cost as defined in EITF 94-3 was recognized at the date of an entitys
commitment to an exit plan. SFAS No. 146 also establishes that fair value is the objective for initial measurement of the liability. SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002. We do not expect that
the adoption of this statement will have a significant impact on our financial position or results of operations.



On December 31, 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based CompensationTransition and Disclosure,
which amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition to SFAS No. 123s fair value method of accounting for stock-based



30



---

##### Table of Contents

employee compensation. SFAS No. 148 also amends the disclosure provisions of SFAS No. 123 and APB Opinion No. 28, Interim Financial
Reporting, to require disclosure in the summary of significant accounting policies of the effects on an entitys accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual
and interim financial statements. While the Statement does not amend SFAS No. 123 to require companies to account for employee stock options using the fair value method, the disclosure provisions of SFAS No. 148 are applicable to all companies with
stock-based employee compensation, regardless of whether they account for that compensation using the fair value method of SFAS No. 123 or the intrinsic value method of APB No. 25. We adopted the disclosure provisions of SFAS No. 148 at December 31,
2002.



Item 7A.    Quantitative And Qualitative Disclosures About Market Risk



Market risk is the potential loss arising from adverse changes in market rates and prices, such as interest, foreign currency exchange
rates, and equity prices. We are exposed to interest rate risk in connection with our credit facility. We had approximately $85.6 million of floating rate bank debt outstanding at December 31, 2002. Each 100 basis point increase in the interest
rates charged on the balance of our outstanding floating rate debt will result in a $0.9 million decrease annually in our net earnings. We currently do not engage in any derivatives or hedging transactions.



31



---

##### Table of Contents

Item 8.   Financial Statements and Supplemental Data.



INDEX TO FINANCIAL STATEMENTS



U.S.I. HOLDINGS CORPORATION AND SUBSIDIARIES



|Report of Ernst & Young LLP, Independent Auditors                                                                              |  | 33
|------------------------------------------------------------------------------------------------------------------------------ |  | --
|Consolidated Financial Statements at December 31, 2002 and 2001 and for the three
years in the period ended December 31, 2002: |  |   
|Consolidated Balance Sheets                                                                                                    |  | 34
|Consolidated Statements of Operations                                                                                          |  | 35
|Consolidated Statements of Stockholders Equity                                                                                |  | 36
|Consolidated Statements of Cash Flows                                                                                          |  | 37
|Notes to Consolidated Financial Statements                                                                                     |  | 38



32



---

##### Table of Contents

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS



Board of Directors and Stockholders

U.S.I. Holdings Corporation and Subsidiaries



We have audited the accompanying consolidated balance sheets of U.S.I. Holdings Corporation and subsidiaries
at December 31, 2002 and 2001, and the related consolidated statements of operations, stockholders equity, and cash flows for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility of
the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.



We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for
our opinion.



In our opinion, the financial
statements referred to above present fairly, in all material respects, the consolidated financial position of U.S.I. Holdings Corporation and subsidiaries at December 31, 2002 and 2001, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States.



As further described in Note 1 to the consolidated financial statements, during the year ended December 31, 2002, the Company changed its
method of accounting for goodwill and intangible assets.



/s/    ERNST & YOUNG LLP



Los Angeles, California

February 12, 2003, except for Note 20, as to

which the date
is March 1, 2003



33



---

##### Table of Contents

U.S.I. HOLDINGS CORPORATION AND SUBSIDIARIES



CONSOLIDATED BALANCE SHEETS



|                                                                                                                                |  | December 31,                                  |         
|------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------- | --------
|                                                                                                                                |  | 2002                                          |         
|                                                                                                                                |  | (Amounts in Thousands, Except Per Share Data) |         
|ASSETS                                                                                                                          |  |                                               |         
|Current assets:                                                                                                                 |  |                                               |         
|Cash and cash equivalents                                                                                                       |  | $                                             | 21,374  
|Fiduciary fundsrestricted                                                                                                      |  |                                               | 77,931  
|Premiums and commissions receivable, net of allowance for bad debts of $1,730 and $2,074, respectively                          |  |                                               | 161,450 
|Receivable from sale of discontinued operations (Note 16)                                                                       |  |                                               | 1,713   
|Other                                                                                                                           |  |                                               | 12,304  
|Current assets held for discontinued operations (Note 16)                                                                       |  |                                               | 1,063   
|                                                                                                                                |  |                                               |         
|Total current assets                                                                                                            |  |                                               | 275,835 
|Goodwill (net of accumulated amortization of $40,195 for 2002 and 2001, respectively)
(Note 2)                                  |  |                                               | 188,110 
|Other intangible assets (Note 2):                                                                                               |  |                                               |         
|Expiration rights                                                                                                               |  |                                               | 178,911 
|Covenants not-to-compete                                                                                                        |  |                                               | 38,671  
|Other                                                                                                                           |  |                                               | 3,701   
|                                                                                                                                |  |                                               |         
|                                                                                                                                |  |                                               | 221,283 
|Accumulated amortization                                                                                                        |  |                                               | (129,263
|                                                                                                                                |  |                                               |         
|                                                                                                                                |  |                                               | 92,020  
|Property and equipment, net (Note 4)                                                                                            |  |                                               | 20,961  
|Other assets                                                                                                                    |  |                                               | 2,551   
|Assets held for discontinued operations (Note 16)                                                                               |  |                                               | 29      
|                                                                                                                                |  |                                               |         
|TOTAL ASSETS                                                                                                                    |  | $                                             | 579,506 
|                                                                                                                                |  |                                               |         
|LIABILITIES, REDEEMABLE SECURITIES AND STOCKHOLDERS EQUITY                                                                     |  |                                               |         
|Current liabilities:                                                                                                            |  |                                               |         
|Premiums payable to insurance companies                                                                                         |  | $                                             | 179,032 
|Accrued expenses                                                                                                                |  |                                               | 49,293  
|Current portion of long-term debt (Note 5)                                                                                      |  |                                               | 32,871  
|Other                                                                                                                           |  |                                               | 5,937   
|Current liabilities held for discontinued operations (Note 16)                                                                  |  |                                               | 1,472   
|                                                                                                                                |  |                                               |         
|Total current liabilities                                                                                                       |  |                                               | 268,605 
|Long-term debt (Note 5)                                                                                                         |  |                                               | 103,964 
|Other liabilities                                                                                                               |  |                                               | 2,836   
|Liabilities held for discontinued operations (Note 16)                                                                          |  |                                               |        
|                                                                                                                                |  |                                               |         
|TOTAL LIABILITIES                                                                                                               |  |                                               | 375,405 
|                                                                                                                                |  |                                               |         
|Commitments and contingencies (Notes 9 and 14)                                                                                  |  |                                               |         
|                                                                                                                               
|Redeemable securities (Note 7):                                                                                                 |  |                                               |         
|Redeemable common stockpar value $.01, 2,208 shares issued and
outstanding                                                     |  |                                               | 21,302  
|Redeemable preferred stockpar value $.01aggregate liquidation preference $0
and $36,955, respectively                         |  |                                               |        
|Redeemable common stock warrants                                                                                                |  |                                               |        
|                                                                                                                                |  |                                               |         
|TOTAL REDEEMABLE SECURITIES                                                                                                     |  |                                               | 21,302  
|                                                                                                                                |  |                                               |         
|Stockholders equity (Note 6):                                                                                                  |  |                                               |         
|Preferred stockSeries A through Ypar $.01aggregate liquidation
preference $0 and $435,299, respectively                      |  |                                               |        
|Common stockvotingpar $.01, 300,000 and 135,000 shares authorized; 42,440
and 754 shares issued and outstanding, respectively |  |                                               | 424     
|Common stocknonvotingpar $.01, 10,000 shares authorized; no shares issued
and outstanding                                     |  |                                               |        
|Additional paid-in capital                                                                                                      |  |                                               | 480,082 
|Retained deficit                                                                                                                |  |                                               | (297,707
|                                                                                                                                |  |                                               |         
|TOTAL STOCKHOLDERS EQUITY                                                                                                      |  |                                               | 182,799 
|                                                                                                                                |  |                                               |         
|TOTAL LIABILITIES, REDEEMABLE SECURITIES AND STOCKHOLDERS
EQUITY                                                               |  | $                                             | 579,506 
|                                                                                                                                |  |                                               |         

See notes to consolidated financial statements.



34



---

##### Table of Contents

U.S.I. HOLDINGS CORPORATION AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF OPERATIONS



|                                                                         |  | Year Ended December 31,                       |        
|------------------------------------------------------------------------ |  | --------------------------------------------- | -------
|                                                                         |  | 2002                                          |        
|                                                                         |  | (Dollars in Thousands, Except Per Share Data) |        
|REVENUES:                                                                |  |                                               |        
|Commissions and fees                                                     |  | $                                             | 325,548
|Investment income                                                        |  |                                               | 2,648  
|                                                                         |  |                                               |        
|TOTAL REVENUES                                                           |  |                                               | 328,196
|EXPENSES:                                                                |  |                                               |        
|Compensation and employee benefits                                       |  |                                               | 200,982
|Change in value of stock appreciation rights (Note 6)                    |  |                                               | (2,995 
|Value of stock options exchanged for stock appreciation rights
(Note 18) |  |                                               | 1,269  
|Grant of restricted stock units (Note 6)                                 |  |                                               | 1,042  
|Other operating expenses                                                 |  |                                               | 68,779 
|Amortization of intangible assets (Note 2)                               |  |                                               | 21,326 
|Depreciation (Note 4)                                                    |  |                                               | 11,053 
|Interest                                                                 |  |                                               | 17,782 
|Change in value of redeemable common stock warrants (Note 7)             |  |                                               | (4,070 
|Expense on early retirement of debt (Note 5)                             |  |                                               | 2,610  
|                                                                         |  |                                               |        
|TOTAL EXPENSES                                                           |  |                                               | 317,778
|                                                                         |  |                                               |        
|Income (loss) from continuing operations before income tax benefit       |  |                                               | 10,418 
|                                                                        
|Income tax benefit (Note 8)                                              |  |                                               | (518   
|                                                                         |  |                                               |        
|NET INCOME (LOSS) FROM CONTINUING OPERATIONS                             |  |                                               | 10,936 
|                                                                        
|Loss from discontinued operations, net of income taxes (Note 16)         |  |                                               | (13,751
|                                                                         |  |                                               |        
|NET LOSS                                                                 |  | $                                             | (2,815 
|                                                                         |  |                                               |        
|RECONCILIATION OF NET LOSS TO NET LOSS AVAILABLE TO COMMON
STOCKHOLDERS: |  |                                               |        
|Net loss                                                                 |  | $                                             | (2,815 
|Change in aggregate liquidation preference of preferred stock            |  |                                               | (18,708
|Change in redemption value of series N put rights                        |  |                                               | 138    
|                                                                         |  |                                               |        
|NET LOSS AVAILABLE TO COMMON STOCKHOLDERS                                |  | $                                             | (21,385
|                                                                         |  |                                               |        
|PER SHARE DATABASIC AND DILUTED (NOTE 17):                              |  |                                               |        
|Net loss from continuing operations                                      |  | $                                             | (0.87  
|Loss from discontinued operations, net of income taxes                   |  |                                               | (1.56  
|                                                                         |  |                                               |        
|NET LOSS PER COMMON SHARE                                                |  | $                                             | (2.43  
|                                                                         |  |                                               |        







See notes to consolidated financial statements.





35



---

##### Table of Contents

U.S.I. HOLDINGS CORPORATION AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY



|                                                               |  | PREFERRED STOCK SERIES A-Y |   |  | COMMON STOCK |      | ADDITIONAL PAID-IN CAPITAL |        |        | RETAINED DEFICIT |     |   | TOTAL STOCKHOLDERS EQUITY | 
|-------------------------------------------------------------- |  | -------------------------- | - |  | ------------ | ---- | -------------------------- | ------ | ------ | ---------------- | --- | - | -------------------------- | 
|                                                               |  | SHARES                     |   |  | PAR          |      |                            | SHARES |        |                  | PAR |   |                            | 
|                                                               |  | (Amounts in Thousands)     |  
|BALANCE AT DECEMBER 31, 1999                                   |  | 52,011                     |   |  | $            | 521  |                            |        | 754    |                  |     | $ | 8                          | 
|Series A Preferred Stock Repurchased                           |  |                           |   |  |              |     |                            |        |       |                  |     |   |                           | 
|Series K Preferred Stock Repurchased                           |  |                           |   |  |              |     |                            |        |       |                  |     |   |                           | 
|Series W Preferred Stock                                       |  |                           |   |  |              |     |                            |        |       |                  |     |   |                           | 
|Expired Preferred Stock Put Rights                             |  | 396                        |   |  |              | 4    |                            |        |       |                  |     |   |                           | 
|Net Loss                                                       |  |                           |   |  |              |     |                            |        |       |                  |     |   |                           | 
|                                                               |  |                            |   |  |              |      |                            |        |        |                  |     |   |                            | 
|BALANCE AT DECEMBER 31, 2000                                   |  | 52,407                     |   |  |              | 525  |                            |        | 754    |                  |     |   | 8                          | 
|Series F Preferred Stock Repurchased                           |  | (40                        | ) |  |              |     |                            |        |       |                  |     |   |                           | 
|Series M Preferred Stock                                       |  |                           |   |  |              |     |                            |        |       |                  |     |   |                           | 
|Series Q Preferred Stock Repurchased                           |  | (70                        | ) |  |              | (1   | )                          |        |       |                  |     |   |                           | 
|Series Y Preferred Stock                                       |  | 4,286                      |   |  |              | 43   |                            |        |       |                  |     |   |                           | 
|Expired Preferred Stock Put Rights                             |  | 205                        |   |  |              | 2    |                            |        |       |                  |     |   |                           | 
|Change in Value of Redeemable Series N Put Rights              |  |                           |   |  |              |     |                            |        |       |                  |     |   |                           | 
|Net Loss                                                       |  |                           |   |  |              |     |                            |        |       |                  |     |   |                           | 
|                                                               |  |                            |   |  |              |      |                            |        |        |                  |     |   |                            | 
|BALANCE AT DECEMBER 31, 2001                                   |  | 56,788                     |   |  |              | 569  |                            |        | 754    |                  |     |   | 8                          | 
|Series Y Preferred Stock                                       |  | 711                        |   |  |              | 8    |                            |        |       |                  |     |   |                           | 
|Expired Preferred Stock Put Rights                             |  | 209                        |   |  |              | 2    |                            |        |       |                  |     |   |                           | 
|Change in Value of Redeemable Series N Put Rights              |  |                           |   |  |              |     |                            |        |       |                  |     |   |                           | 
|Issuance of Common Stock in Initial Public Offering            |  |                           |   |  |              |     |                            |        | 9,000  |                  |     |   | 90                         | 
|Preferred Stock Conversion to Common Stock                     |  | (57,708                    | ) |  |              | (579 | )                          |        | 23,083 |                  |     |   | 230                        | 
|Issuance of Common Stock for Preferred Stock Accretion         |  |                           |   |  |              |     |                            |        | 9,112  |                  |     |   | 91                         | 
|Grant of Restricted Stock Units                                |  |                           |   |  |              |     |                            |        | 104    |                  |     |   | 1                          | 
|Termination of Common Stock Put Rights                         |  |                           |   |  |              |     |                            |        |       |                  |     |   |                           | 
|Termination of Series N Preferred Stock Put Rights             |  |                           |   |  |              |     |                            |        | 369    |                  |     |   | 4                          | 
|Common Stock Repurchased During the Year                       |  |                           |   |  |              |     |                            |        | (16    | )                |     |   |                           | 
|Issuance of Equity for Employee Stock Purchase Plan            |  |                           |   |  |              |     |                            |        | 25     |                  |     |   |                           | 
|Issuance of Equity for Stock Appreciation Rights               |  |                           |   |  |              |     |                            |        | 9      |                  |     |   |                           | 
|Value of Stock Options Exchanged for Stock Appreciation Rights |  |                           |   |  |              |     |                            |        |       |                  |     |   |                           | 
|Net Loss                                                       |  |                           |   |  |              |     |                            |        |       |                  |     |   |                           | 
|                                                               |  |                            |   |  |              |      |                            |        |        |                  |     |   |                            | 
|BALANCE AT DECEMBER 31, 2002                                   |  |                           |   |  | $            |     |                            |        | 42,440 |                  |     | $ | 424                        | 
|                                                               |  |                            |   |  |              |      |                            |        |        |                  |     |   |                            | 





See notes to consolidated financial statements.



36



---

##### Table of Contents

U.S.I. HOLDINGS CORPORATION AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                                                                    |  | Year Ended December 31, |         
|------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | --------
|                                                                                                                    |  | 2002                    |         
|                                                                                                                    |  | (Dollars In Thousands)  |         
|OPERATING ACTIVITIES                                                                                                |  |                         |         
|Net income (loss) from continuing operations                                                                        |  | $                       | 10,936  
|Adjustments to reconcile net income (loss) from continuing operations to net cash
provided by operating activities: |  |                         |         
|Amortization of intangible assets                                                                                   |  |                         | 21,326  
|Depreciation                                                                                                        |  |                         | 11,053  
|Change in value of redeemable common stock warrants                                                                 |  |                         | (4,070  
|Value of stock options exchanged for stock appreciation rights                                                      |  |                         | 1,269   
|Deferred income taxes                                                                                               |  |                         | (2,465  
|Other non-cash charges                                                                                              |  |                         | 2,281   
|Changes in operating assets and liabilities (net of purchased
companies):                                           |  |                         |         
|Fiduciary fundsrestricted                                                                                          |  |                         | (935    
|Premiums and commissions receivable                                                                                 |  |                         | (6,128  
|Receivable from sale of discontinued operations                                                                     |  |                         | (1,713  
|Other assets                                                                                                        |  |                         | (6,637  
|Premiums payable to insurance companies                                                                             |  |                         | 4,550   
|Accrued expenses and other liabilities                                                                              |  |                         | 7,084   
|                                                                                                                    |  |                         |         
|NET CASH PROVIDED BY OPERATING ACTIVITIES                                                                           |  |                         | 36,551  
|                                                                                                                   
|INVESTING ACTIVITIES                                                                                                |  |                         |         
|Purchases of property and equipment                                                                                 |  |                         | (6,975  
|Proceeds from sale of assets                                                                                        |  |                         | 18,333  
|Cash paid for businesses acquired and related costs                                                                 |  |                         | (5,740  
|Cash obtained from businesses acquired, primarily fiduciary funds                                                   |  |                         |        
|Other                                                                                                               |  |                         |        
|                                                                                                                    |  |                         |         
|Net cash provided by (used in) continuing operations                                                                |  |                         | 5,618   
|Net effect of discontinued operations                                                                               |  |                         | (8,916  
|                                                                                                                    |  |                         |         
|NET CASH USED IN INVESTING ACTIVITIES                                                                               |  |                         | (3,298  
|                                                                                                                   
|FINANCING ACTIVITIES                                                                                                |  |                         |         
|Proceeds from issuance of long-term debt, net of issuance costs                                                     |  |                         | 4,643   
|Payments on long-term debt                                                                                          |  |                         | (128,282
|Gross proceeds from issuance of common and preferred stock                                                          |  |                         | 92,742  
|Payments of issuance costs related to common and preferred stock                                                    |  |                         | (11,564 
|Payments for repurchases of common and preferred stock                                                              |  |                         | (250    
|                                                                                                                    |  |                         |         
|NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES                                                                 |  |                         | (42,711 
|                                                                                                                    |  |                         |         
|(Decrease) increase in cash and cash equivalents                                                                    |  |                         | (9,458  
|Cash and cash equivalents at beginning of year                                                                      |  |                         | 30,832  
|                                                                                                                    |  |                         |         
|CASH AND CASH EQUIVALENTS AT END OF YEAR                                                                            |  | $                       | 21,374  
|                                                                                                                    |  |                         |         
|Supplemental disclosures of cash flow information:                                                                  |  |                         |         
|Cash paid for interest                                                                                              |  | $                       | 17,135  
|Cash paid for taxes                                                                                                 |  | $                       | 2,360   
|Supplemental schedule of noncash investing and financing activities:                                                |  |                         |         
|Redeemable preferred stock issued for acquisitions, primarily
intangibles                                           |  | $                       | 711     
|Long-term debt issued for acquisitions, primarily intangibles                                                       |  | $                       | 7,907   
|Preferred stock issued for reduction in accrued liabilities                                                         |  | $                       | 2,475   



See notes
to consolidated financial statements.



37



---

##### Table of Contents

U.S.I. HOLDINGS CORPORATION AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEAR ENDED DECEMBER 31, 2002



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. Founded in 1994, the Company has grown organically and through acquisitions. The
Companys sales and marketing efforts are focused primarily on serving middle-market businesses.



Basis of Presentation and Principles of Consolidation



The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the
United States (GAAP). The consolidated financial statements include the accounts of U.S.I. Holdings Corporation and its wholly-owned subsidiaries. The accompanying financial statements reflect the Companys decision to discontinue the
operations of its third-party administration business (USIA) in January 2002 as further discussed in Note 16Discontinued Operations. All significant intercompany transactions and balances have been eliminated in consolidation.



Revenue Recognition



The Company records 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. The Company records installment premiums and related commissions periodically as billed.
Commissions earned from the placement of individual life and individual disability insurance are calculated as a percentage of corresponding premiums and the duration or term of the underlying policies. The majority of commissions from individual
life and individual disability insurance sales are earned and recognized during the first year the insurance is placed, with the balance earned and recognized over the following two to ten years.



The Company records commissions on premiums billed and
collected directly by insurance companies and contingent commissions when the Company receives data from the insurance companies that allows the Company to reasonably estimate these amounts. The Company is able to reasonably estimate these amounts
when it receives the cash, the notification of the amount due from the insurance companies or the insurance policy detail from the insurance companies. The Company receives contingent commissions from insurance companies as additional incentive for
achieving specified premium volume goals and/or the loss experience of the insurance placed by the Company. The Company records commission adjustments, including policy cancellations and override commissions, when the adjustments become reasonably
estimable.



The Company recognizes fees for
consulting and administrative services over the period when the respective services are rendered. The Company recognizes investment income as earned.



The Company establishes an allowance for bad debts (allowance) on its premiums and commissions receivable through a charge to other
operating expenses. This allowance is determined based on estimates and assumptions using historical data to project future experience. After all collection efforts have been exhausted, the Company reduces the allowance for write-offs of accounts
receivable that have been deemed uncollectible. The Company periodically reviews the adequacy of the allowance and makes adjustments as necessary. Future additions to the allowance may be necessary based on changes in the general economic conditions
and the clients financial conditions.



38



---

##### Table of Contents

U.S.I. HOLDINGS CORPORATION AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Cash and Cash Equivalents



Cash and cash equivalents includes highly liquid investments, such as money market accounts and certificates
of deposit, with original maturities of three months or less. The carrying amounts reported on the consolidated balance sheets approximate fair value.



Fiduciary Funds-Restricted



As an insurance broker, the Company directly collects premiums from its clients and, after deducting its commissions and/or fees, remits
these premiums to insurance companies. Unremitted insurance premiums are held in a fiduciary capacity until disbursed by the Company. The Company earns interest on these unremitted funds, which is reported as investment income in the accompanying
consolidated statements of operations.



The use
of premiums collected from clients but not yet remitted to insurance companies is restricted by laws in certain states in which the Companys subsidiaries operate. These unremitted amounts are reported as fiduciary fundsrestricted cash,
with the related liability reported as premiums payable to insurance companies in the accompanying consolidated balance sheets.



Property and Equipment



Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation is recorded using the
straight-line method over the estimated useful lives of the related assets, which range from three to seven years. Assets recorded under capital leases are amortized using the straight-line method over the term of the related lease.



Intangible Assets



Intangible assets represent expiration rights, non-compete
agreements and the excess of costs over the fair value of identifiable net assets acquired (goodwill). Expiration rights are records and files obtained from acquired businesses that contain information on insurance policies, clients, and other
information that is essential to policy renewals (expiration rights). The Company utilizes a methodology based on an estimate of discounted future cash flows derived from existing client lists and attrition rates to estimate the fair value of the
expiration rights at the date of the acquisition. The methodology was derived from independent appraisals obtained in connection with the Companys initial acquisitions. Expiration rights are amortized on a straight-line basis over their
estimated lives of five to ten years (with ten years used in most cases), based on historical attrition that has generally been consistent year over year. The costs of non-compete agreements are amortized on a straight-line method over the terms of
the agreements, which range from four to seven years.



Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 142 Goodwill and Other Intangible Assets (SFAS No. 142), which addresses the financial accounting and reporting
standards for the acquisition of intangible assets outside of a business combination and for goodwill and other intangible assets subsequent to their acquisition. This accounting standard requires that goodwill be separately disclosed from other
intangible assets in the statement of financial position, and no longer be amortized but tested for impairment on a periodic basis. Prior to January 1, 2002, goodwill was amortized on a straight-line basis over 25 years. The Company tests goodwill
for impairment using the two-step process prescribed in SFAS No. 142. The first step is a screen for potential impairment, while the second step measures the amount of the impairment, if any. In the fourth quarter of 2002, the Company completed its
impairment test, which indicated that there was no goodwill impairment at October 1, 2002. The Company has no intangible assets with indefinite lives (see Note 2Goodwill and Other Intangible Assets).



39



---

##### Table of Contents

U.S.I. HOLDINGS CORPORATION AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





For the
year ended December 31, 2001, the Company recorded an impairment charge under SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of (SFAS No. 121), which is reflected in the net loss
from discontinued operations, of $46,900,000 against goodwill and expiration rights related to USIA (see Note 16Discontinued Operations). Under SFAS No. 121, the intangible assets were reviewed using the undiscounted cash flows of the entity
acquired over the remaining amortization period. If such a review indicates that the intangibles will not be recoverable, the Companys carrying value of the intangibles will be reduced to fair value. The 2001 impairment charge was due to
deteriorating operating results with low margin and high capital expenditures, which were expected to continue in the indefinite future.



Accounting for Stock-Based Compensation



At December 31, 2002, the Company has an incentive and nonqualifed stock option plan, which is described more fully in Note 18Stock
Option Plan. The Company accounts for its employee stock options using the intrinsic value method prescribed in Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations
(APB No. 25). Under APB No. 25, no stock-based employee compensation cost is reflected in the statement of operations, as all options granted had an exercise price equal to the market value of the underlying common stock on the date of
grant.



SFAS No. 123, Accounting for
Stock-Based Compensation (SFAS No. 123), established accounting and disclosure requirements using the fair value based method of accounting for employee stock options. 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. 123 to stock-based employee compensation.



|                                                                                                                                            |  | Year Ended December 31                        |       
|------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------- | ------
|                                                                                                                                            |  | 2002                                          |       
|                                                                                                                                            |  | (Dollars in Thousands, Except Per Share Data) |       
|Net loss, as reported                                                                                                                       |  | $                                             | (2,815
|Add: Stock-based employee compensation expense included in reported net loss, net of
related tax effects                                    |  |                                               | (404  
|Deduct: Total stock-based employee compensation expense determined under fair value
based method for all awards, net of related tax effects |  |                                               | (3,133
|                                                                                                                                            |  |                                               |       
|Pro forma net loss                                                                                                                          |  | $                                             | (6,352
|                                                                                                                                            |  |                                               |       
|Earnings per sharebasic and diluted:                                                                                                       |  |                                               |       
|As reported                                                                                                                                 |  | $                                             | (2.43 
|                                                                                                                                            |  |                                               |       
|Pro forma                                                                                                                                   |  | $                                             | (2.83 
|                                                                                                                                            |  |                                               |       



Income Taxes



The Company files a consolidated federal
income tax return. Deferred tax assets and liabilities are determined based on the differences between financial statement and tax bases of assets and liabilities using enacted rates in effect for the year the differences are expected to reverse. In
2002 and 2001, deferred tax assets were reduced through the establishment of a valuation allowance, as it is more likely than not that the deferred tax assets will not be realized in the near future.



40



---

##### Table of Contents

U.S.I. HOLDINGS CORPORATION AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





Fair Value of Financial
Instruments



Cash and cash equivalents,
premiums and commissions receivable, receivable from the sale of discontinued operations, premiums payable to insurance companies, other current liabilities, current portion of long-term debt and long-term debt are considered financial instruments.
The Company believes that due to the short duration of certain financial instruments, specifically cash and cash equivalents, premiums and commissions receivable, receivable from the sale of discontinued operations, premiums payable to insurance
companies, other current liabilities and current portion of long-term debt, the carrying amounts approximate fair value. For long-term debt, the Company uses the present value of future cash flows, discounted at the Companys current
incremental rate of borrowing on similar debt, to ascertain a fair value. At December 31, 2002 and 2001, the fair value of the Companys long-term debt approximates the carrying value of such debt.



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 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 years amounts have been reclassified to conform to the current years presentation.



New Accounting Pronouncements



In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141, Business Combinations, which eliminates the
pooling-of-interests method of accounting for all business combinations initiated after June 30, 2001, and addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. The Company did
not initiate any business combinations during the period July 1, 2001 through December 31, 2002, so SFAS No. 141 had no impact on the accompanying financial statements.



In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, and accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of
OperationsReporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, (APB No. 30) for a disposal of a segment of a business. SFAS No. 144 is effective for
fiscal years beginning after December 15, 2001. The Company adopted SFAS No. 144 beginning January 1, 2002. As a result of the Companys decision to discontinue USIAs operations in January 2002, the accompanying prior years
financial statements have been restated to separately reflect continuing and discontinued operations (see Note 16Discontinued Operations).



In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13,
and Technical Corrections, (SFAS No. 145). SFAS No. 145 rescinds SFAS No. 4, Reporting Gains and Losses from Extinguishment of Debt, which required all gains and losses from extinguishment of debt to be aggregated and, if material,
classified as an extraordinary item, net of related income tax effect. As a result, the criteria in APB No. 30 will now be used to classify those gains and losses. Any gain or loss on extinguishment of debt that was classified as an extraordinary
item in prior periods presented that



41



---

##### Table of Contents

U.S.I. HOLDINGS CORPORATION AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



does not meet the criteria in APB No. 30 for classification as an extraordinary item shall be reclassified. The Company will adopt SFAS No.
145 beginning January 1, 2003. The Company does not expect that the adoption of this statement will have a significant impact on its financial position or results of operations.



In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal
Activities, (SFAS No. 146). SFAS No. 146 nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in
a Restructuring), (EITF 94-3). SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF 94-3, a liability for an exit cost as defined in EITF 94-3
was recognized at the date of an entitys commitment to an exit plan. SFAS No. 146 also establishes that fair value is the objective for initial measurement of the liability. SFAS No. 146 is effective for exit or disposal activities initiated
after December 31, 2002. The Company does not expect that the adoption of this statement will have a significant impact on its financial position or results of operations.



On December 31, 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
CompensationTransition and Disclosure (SFAS No. 148), which amends SFAS No. 123, to provide alternative methods of transition to SFAS No. 123s fair value method of accounting for stock-based employee compensation. SFAS No. 148 also
amends the disclosure provisions of SFAS No. 123 and APB Opinion No. 28, Interim Financial Reporting, to require disclosure in the summary of significant accounting policies of the effects of an entitys accounting policy with
respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. While the Statement does not amend SFAS No. 123 to require companies to account for employee stock options using
the fair value method, the disclosure provisions of SFAS No. 148 are applicable to all companies with stock-based employee compensation, regardless of whether they account for that compensation using the fair value method of SFAS No. 123 or the
intrinsic value method of APB No. 25. The Company adopted the disclosure provisions of SFAS No. 148 at December 31, 2002.



2.    Goodwill and Other Intangible Assets



A reconciliation of reported net income (loss) from continuing operations to adjusted net income (loss) from
continuing operations had SFAS No. 142 been applied beginning January 1, 2000 is as follows for the years ended December 31:



|                                                      |  | 2002                                          |        |                                   | 2001 |       |        | 2000 |  
|----------------------------------------------------- |  | --------------------------------------------- | ------ | --------------------------------- | ---- | ----- | ------ | ---- | -
|                                                      |  | Amount                                        |        | Per Share Data Basic and Diluted |      |       | Amount |      |  
|                                                      |  | (Dollars in Thousands, Except Per Share Data) |       
|Reported net income (loss) from continuing operations |  | $                                             | 10,936 |                                   | $    | (0.87 | )      |      | $
|Add back (net of tax):                                |  |                                               |        |                                   |      |       |        |      |  
|Amortization of goodwill                              |  |                                               |       |                                   |      |      |        |      |  
|                                                      |  |                                               |        |                                   |      |       |        |      |  
|Adjusted net income (loss) from continuing operations |  | $                                             | 10,936 |                                   | $    | (0.87 | )      |      | $
|                                                      |  |                                               |        |                                   |      |       |        |      |  



42



---

##### Table of Contents

U.S.I. HOLDINGS CORPORATION AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





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



|                                  |  | Insurance Brokerage    |         |   | Specialized Benefits Services |   |        | Corporate |  |   | Total  |  
|--------------------------------- |  | ---------------------- | ------- | - | ----------------------------- | - | ------ | --------- |  | - | ------ | -
|                                  |  | (Dollars in Thousands) |        
|December 31, 2000                 |  | $                      | 119,151 |   |                               | $ | 28,602 |           |  | $ | 40,593 |  
|Goodwill acquisitions/adjustments |  |                        | 2,808   |   |                               |   | (959   | )         |  |   | (4,271 | )
|Amortization expense              |  |                        | (5,887  | ) |                               |   | (1,360 | )         |  |   | (1,884 | )
|                                  |  |                        |         |   |                               |   |        |           |  |   |        |  
|December 31, 2001                 |  |                        | 116,072 |   |                               |   | 26,283 |           |  |   | 34,438 |  
|Goodwill acquisitions/adjustments |  |                        | 3,931   |   |                               |   | 4,922  |           |  |   | 2,464  |  
|Amortization expense              |  |                        |        |   |                               |   |       |           |  |   |       |  
|                                  |  |                        |         |   |                               |   |        |           |  |   |        |  
|December 31, 2002                 |  | $                      | 120,003 |   |                               | $ | 31,205 |           |  | $ | 36,902 |  
|                                  |  |                        |         |   |                               |   |        |           |  |   |        |  



The
adjustments to goodwill relate to contingent purchase price payments on previous acquisitions. The Company treats contingent purchase price adjustments to the original purchase price and capitalizes them when resolved.



The Companys amortizable intangible assets by asset
class are as follows at December 31:



|                         |  | Gross Carrying Value   |         | Accumulated Amortization |   |          | Weighted Average Amortization Period
|------------------------ |  | ---------------------- | ------- | ------------------------ | - | -------- | ------------------------------------
|                         |  | (Dollars in Thousands) |         |                          |  
|2002                     |  |                        |         |                          |   |          |                                     
|Expirations rights       |  | $                      | 178,911 |                          | $ | (94,615  | )                                   
|Covenants not-to-compete |  |                        | 38,671  |                          |   | (33,951  | )                                   
|Other                    |  |                        | 3,701   |                          |   | (697     | )                                   
|                         |  |                        |         |                          |   |          |                                     
|Total                    |  | $                      | 221,283 |                          | $ | (129,263 | )                                   
|                         |  |                        |         |                          |   |          |                                     
|2001                     |  |                        |         |                          |   |          |                                     
|Expirations rights       |  | $                      | 167,234 |                          | $ | (77,144  | )                                   
|Covenants not-to-compete |  |                        | 38,431  |                          |   | (30,550  | )                                   
|Other                    |  |                        | 8,117   |                          |   | (692     | )                                   
|                         |  |                        |         |                          |   |          |                                     
|Total                    |  | $                      | 213,782 |                          | $ | (108,386 | )                                   
|                         |  |                        |         |                          |   |          |                                     



The
amortization expense for the years ended December 31, 2002, 2001 and 2000 was $21,326,000, $32,908,000 and $32,678,000, respectively. The amortization expense for amortizable intangible assets for the years ending December 31, 2003, 2004, 2005, 2006
and 2007 is estimated to be $20,146,000, $17,691,000, $14,653,000, $11,568,000 and $8,829,000, respectively.



The Company has no intangible assets with indefinite lives.



For the year ended December 31, 2001, the Company recorded a $46,900,000 impairment charge against goodwill
and expiration rights related to its discontinued operations (see Note 16Discontinued Operations).



43



---

##### Table of Contents

U.S.I. HOLDINGS CORPORATION AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





3.    Acquisitions and Divestitures



During 2002 and 2001, the Company made no acquisitions. In July 2001, the Company sold certain insurance accounts and other assets of one insurance brokerage operation resulting in a pre-tax gain of
$2,000. Revenues, expenses and assets of this operation were not material to the consolidated financial statements.



During 2000, the Company acquired the assets of one insurance brokerage operation and all of the outstanding common stock of one
specialized benefits services business within the United States. The aggregate purchase price of $14,613,000 included cash of $3,815,000, notes payable to sellers of $7,991,000, 389,000 shares of the Companys Preferred Stock valued at
$2,410,000 and associated costs capitalized of $397,000. The excess of the purchase price over the tangible net assets assumed of $2,102,000 was $12,511,000, $5,827,000 of which related primarily to expiration rights, and $6,684,000 of which was
recorded as goodwill.



The acquisitions were all
accounted for using the purchase method, and their related net assets and results of operations were included in the Companys consolidated financial statements on their respective acquisition dates. The acquisitions generally have provisions
for a reduction in consideration if the acquired company does not meet future financial results. Additionally, the acquisitions generally have provisions for contingent additional consideration if the acquired company achieves future financial
targets. Additional or a reduction in consideration resulting from acquisition contingency provisions is recorded as an adjustment to intangible assets when the contingency is determinable.



In some cases, acquisitions included annual cash bonuses
(Growth Based Bonuses), which are expensed as incurred. Effective January 2000, the Company discontinued the practice of offering Growth Based Bonuses. The Company expects that all of its Growth Based Bonus obligations related to completed
acquisitions will expire by December 31, 2004. The Growth Based Bonus expense for the years ending December 31, 2003 and 2004 is estimated to be $307,000 and $124,000, respectively.



In 2002, an aggregate of $10,583,000 in additional consideration was recorded for three acquisitions. There
were no significant adjustments in 2001 and 2000 to the original purchase price of acquisitions.



As of December 31, 2002, the estimated unrecorded future significant contingency payments related to acquisitions totaled $6,610,000.



The basic structure for an acquisition by the Company generally includes employment agreements with the
employee shareholders of the acquired company. Compensation under these agreements is generally in the form of a guaranteed salary plus an incentive-based bonus. Such amounts are expensed as incurred.



4.    Property and Equipment



Property and equipment consists of the following:



|                              |  | December 31,           |        
|----------------------------- |  | ---------------------- | -------
|                              |  | 2002                   |        
|                              |  | (Dollars in Thousands) |        
|Furniture and equipment       |  | $                      | 54,596 
|Leasehold improvements        |  |                        | 7,345  
|                              |  |                        |        
|                              |  |                        | 61,941 
|Less accumulated depreciation |  |                        | (40,980
|                              |  |                        |        
|Property and equipment, net   |  | $                      | 20,961 
|                              |  |                        |        



44



---

##### Table of Contents

U.S.I. HOLDINGS CORPORATION AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





5.    Long-Term Debt



Long-term debt consists of the following:



|                                                                                                              |  | December 31,           |        
|------------------------------------------------------------------------------------------------------------- |  | ---------------------- | -------
|                                                                                                              |  | 2002                   |        
|                                                                                                              |  | (Dollars in Thousands) |        
|Existing Credit Facility:                                                                                     |  |                        |        
|Term loan                                                                                                     |  | $                      | 29,521 
|Revolving credit facility                                                                                     |  |                        | 56,075 
|Other Debt:                                                                                                   |  |                        |        
|Notes issued in connection with acquisitions, due various dates through 2007 at interest
rates from 7% to 10% |  |                        | 35,880 
|CNA Pro Finite Risk Policy                                                                                    |  |                        | 3,028  
|Zurich term loan                                                                                              |  |                        | 3,000  
|Other long-term debt, including capital leases                                                                |  |                        | 9,331  
|                                                                                                              |  |                        |        
|Total debt                                                                                                    |  |                        | 136,835
|Current portion of long-term debt                                                                             |  |                        | (32,871
|                                                                                                              |  |                        |        
|Long-term debt                                                                                                |  | $                      | 103,964
|                                                                                                              |  |                        |        



Substantially all of the assets of the Company are pledged as collateral against long-term debt.



On October 25, 2002, the Company completed its initial public offering (IPO) of 9,000,000 shares at a price of $10 per share. The cash
proceeds of the offering after the underwriting discount were $83,700,000. After deducting offering expenses of $5,264,000, $78,436,000 was used to pay down the Companys indebtedness under the existing credit facility. In connection with the
debt repayment, the Company wrote off $1,950,000 in deferred financing costs, which was recorded in the fourth quarter of 2002.



In April 2002, the Company completed the sale of USIA for $19,900,000. The Company received cash proceeds of $18,200,000 with the
remaining consideration of $1,700,000 in the form of an account receivable. Of the $18,200,000 in cash proceeds, $16,300,000 was used to reduce the Companys term loan and $1,900,000 was used to pay selling costs. In connection with the debt
repayment, the Company wrote off $660,000 in deferred financing costs, which was recorded in the second quarter of 2002.



In May 2001, the Company entered into a term loan with Zurich Services Corporation (Zurich) in the amount of $3,000,000. The principal
amount has a maturity date of September 20, 2004, and bears an interest rate based on the prime rate plus .50% (4.75% at December 31, 2002).



On March 2, 1999, the Company replaced a $100,000,000 revolving credit facility (the Previously Existing Credit Facility) with a
$200,000,000 credit facility (Credit Facility). The Credit Facility was structured as follows: a $75,000,000 revolving credit facility expiring on December 31, 2004, a $35,000,000 term loan expiring on December 31, 2005, and a $90,000,000 bridge
loan expiring on June 30, 2000. The proceeds from borrowings under the Credit Facility were drawn to (i) repay all or a portion of certain notes issued for acquisitions, (ii) refinance amounts outstanding under the Previously Existing Credit
Facility, (iii) repay senior subordinated notes, (iv) pay accrued interest on the repaid or refinanced notes issued for acquisitions, Previously Existing Credit Facility and the senior subordinated notes and (v) pay fees and expenses in connection
with the Credit Facility, including a prepayment penalty in connection with the prepayment of the senior subordinated notes.



45



---

##### Table of Contents

U.S.I. HOLDINGS CORPORATION AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





On
September 17, 1999, the Company amended and restated the Credit Facility with a $200,000,000 credit facility (Existing Credit Facility). The Existing Credit Facility is structured as follows: a $75,000,000 revolving credit facility expiring on
September 17, 2004, and a $125,000,000 term loan payable in quarterly installments commencing on December 31, 1999. The last quarterly installment is due on September 17, 2004, the maturity date of the term loan. However, there is a 1.00% fee
payable if the Existing Credit Facility is not repaid by October 1, 2003. Proceeds from borrowings under the Existing Credit Facility were drawn to (i) refinance amounts outstanding under the Credit Facility, (ii) repay all or a portion of certain
notes issued for acquisitions, (iii) pay accrued interest on the repaid or refinanced notes issued for acquisitions and Credit Facility and (iv) pay fees and expenses in connection with the Existing Credit Facility.



The revolving credit facility is available on a revolving
basis for loans denominated in U.S. dollars and for letters of credit. As of December 31, 2002, there was $56,075,000 outstanding under this facility. Additionally, the Company had $1,425,000 outstanding under letters of credit. Borrowings under the
revolving credit facility and term loan bear interest rates based on LIBOR plus a maximum of 4.5%. Additionally, there is a quarterly commitment fee on the unused portion of the revolving credit facility of 0.75%. The revolving credit facility may
be used for acquisition financing and general corporate purposes. The Existing Credit Facility contains provisions that prohibit the payment of dividends or other distributions to stockholders. The Existing Credit Facility also contains financial
covenants that must be met with respect to interest and fixed charges coverage and limitations on consolidated debt and capital expenditures, and further limit the incurrence of certain secured indebtedness. The Company is currently in compliance
with all debt covenants, as amended, governing its indebtedness.



The Company is required to pay a fee upon termination of the credit facility equal to 1.00% of the revolving credit commitment and the outstanding borrowings under the term loan determined 30 days prior to termination.



In January 2003, the Company amended the credit facility to
adjust the covenants for 2003. In connection with this amendment, in the event the revolving credit commitment and the outstanding borrowings under the term loan have not been repaid and all related commitments terminated as of October 1, 2003, the
Company will be required to pay a fee in an amount equal to 1.00% of the sum of the total of the revolving credit commitment and the outstanding borrowings under the term loan as of October 1, 2003. The fee is due and payable on October 1, 2003. The
Company accrued the additional fee of $1,012,000 in the first quarter of 2003. However, if the Company, by July 31, 2003, retain the lenders to structure and arrange a new senior credit facility, then the amount of any refinancing fee that is
subsequently paid to the lenders shall be credited towards any fees otherwise payable in connection with a new senior credit facility.



In April 1999, the Company entered into a finite risk and excess liability policy with CNA Pro, an affiliate of CNA Financial Corporation,
with a coverage effective date of January 1, 1999. The policy expires on December 31, 2003, with premiums being paid quarterly. The coverage is in excess of the Companys primary professional liability insurance and is bifurcated as follows:
$17,200,000 in the aggregate in respect of the Nassau County litigation (see Note 16Discontinued Operations) and up to $20,000,000 aggregate professional liability coverage for all other claims besides the Nassau County litigation. In June
1999, the Company utilized the $17,200,000 of coverage to pay the Nassau County litigation settlement and related expenses. The $17,200,000 has been recorded as debt bearing interest at 13.44% on the consolidated balance sheets and is amortized
quarterly as a portion of premiums paid. The final quarterly installment is due July 1, 2003.



46



---

##### Table of Contents

U.S.I. HOLDINGS CORPORATION AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





At
December 31, 2002, future maturities of long-term debt were as follows (dollars in thousands):



|Year                            |  | Amount
|------------------------------- |  | ------
|2003                            |  | $     
|2004                            |  |       
|2005                            |  |       
|2006                            |  |       
|2007                            |  |       
|Thereafter                      |  |       
|                                |  |       
|Total future maturities of debt |  | $     
|                                |  |       



6.    Stockholders Equity



As of December 31, 2002, the Companys authorized capital stock under the Companys certificate of incorporation was 397,000,000 shares, of which 300,000,000 shares were common stock, par
value $.01 per share, 10,000,000 shares were non-voting common stock, par value $.01 per share, and 87,000,000 shares were voting preferred stock, par value $.01 per share.



In April 2002, the Companys Board of Directors and stockholders approved to increase the number of
authorized common shares from 135,000,000 to 300,000,000. The Board of Directors and stockholders also authorized a two-for-five reverse stock split for its common shares issued and outstanding or held in treasury immediately prior to October 16,
2002 (reverse stock split). The par value of the common stock was maintained at the pre-split amount of $0.01 per share. All references to common shares, common stock warrants, stock options, stock appreciation rights (SARs) and per share amounts in
the accompanying consolidated financial statements have been restated to reflect the reverse stock split on a retroactive basis, exclusive of fractional shares.



Common Stock



At December 31, 2002, the Company had approximately 42,440,000 shares of Common Stock and no shares of non-voting Common Stock
outstanding.



On October 25, 2002, the Company
completed its IPO of 9,000,000 common shares at a price of $10 per share. The $78,436,000 in net cash proceeds from the offering, after deducting the underwriting discount and offering expenses, was used to pay down the Company indebtedness under
the credit facility (see Note 5Long-Term Debt).



Upon consummation of the Companys IPO, all outstanding shares of Preferred Stock were split adjusted (two-for-five reverse stock split) and converted into approximately 23,083,000 shares of the Companys Common Stock. The
accretion dividends, with respect to the Preferred Stock, were converted to approximately 9,112,000 shares of the Companys Common Stock at the IPO price of $10 per share.



2002 Equity Incentive Plan



The Companys Board of Directors and a requisite majority of the stockholders approved a new 2002 Equity Incentive Plan that became
effective and replaced the Long-Term Incentive Plan with the consummation of the IPO. The 2002 Equity Incentive Plan reserves approximately 10,270,000 shares of the Companys Common Stock for issuance to directors, executive officers,
employees and non-employee contributors.



47



---

##### Table of Contents

U.S.I. HOLDINGS CORPORATION AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





Awards may
consist of options, SARs, restricted shares, dividend equivalents or other share-based awards and are granted to eligible participants under the plan (see Note 18Stock Option Plan). Upon the consummation of the IPO, approximately 104,000
restricted stock units, which were fully vested, were granted to nine executive officers with a value of $1,042,000 that was recorded as an expense in the fourth quarter of 2002.



Employee Stock Purchase Plan



The Company adopted the Employee Stock Purchase Plan (ESPP) effective on the consummation of the IPO. The
ESPP is intended to promote broad-based employee ownership with the Company. The ESPP will provide for the purchase of up to 1,600,000 shares of the Companys Common Stock by its employees. The Company will deliver repurchased and/or newly
issued shares under this plan. Eligible employees will be entitled to purchase the Companys Common Stock at a 15% discount, contributing a maximum of 20% of their gross compensation. There were 25,000 shares issued under the plan in 2002. All
shares purchased under this plan must be retained for a period of one year.



Preferred Stock



At
December 31, 2002, the Company had no shares of Preferred Stock outstanding. As noted above, upon the consummation of the Companys IPO, all outstanding shares of Preferred Stock were converted into the Companys Common Stock, and the
related accretion dividends were converted to the Companys common stock at the IPO price of $10 per share.



The following table summarizes certain information about the Companys Preferred Stock at December 31, 2002, 2001 and 2000:



|                  |  | Par                                           |      | Shares Authorized |        | Shares Issued and Outstanding |        | Aggregate Liquidation Preference
|----------------- |  | --------------------------------------------- | ---- | ----------------- | ------ | ----------------------------- | ------ | --------------------------------
|                  |  | (Amounts in Thousands, Except per Share Data)
|December 31, 2002 |  | $                                             | 0.01 |                   | 87,000 |                               |       |                                 
|December 31, 2001 |  |                                               | 0.01 |                   | 77,117 |                               | 56,788 |                                 
|December 31, 2000 |  |                                               | 0.01 |                   | 70,396 |                               | 52,407 |                                 



The
Preferred Stockholders of Series A through Y were generally entitled to the number of votes equal to the number of shares of Common Stock into which such shares of Preferred Stock could be converted and have voting rights and powers equal to the
voting rights and powers of the Common Stockholders. The Companys Preferred Stock had a liquidation preference that was at least equal to the original issuance price. Each of Series A through Q carried a liquidation preference equal to the
original issuance price plus 10% per year. Series R, T, W and Y carried a liquidation preference equal to the original issuance price plus 5% per year. Series U, V and X carried a liquidation preference equal to the original issuance price.



The Preferred Stock was convertible into Common
Stock at either the option of the Company upon the occurrence of certain events, or at the option of the stockholder at any time. The per share conversion rate is equal to one plus an amount equal to the excess of the liquidation preference over the
original issuance price divided by the fair market value of one share of Common Stock on the conversion date. The per share conversion rate was also adjusted for stock splits or dividends.



While shares of Preferred Stock are outstanding, dividends may only be declared by unanimous consent of the
Board of Directors, and the holders of Preferred Stock are entitled to share proportionately in any dividend declared on the Common Stock.



48



---

##### Table of Contents

U.S.I. HOLDINGS CORPORATION AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





In
September 1999, Series W stockholders were issued warrants convertible into shares of Series W Preferred Stock. As of December 31, 2002, 6,250,002 warrants were outstanding and exercisable into an aggregate of 2,499,997 shares of common stock at an
exercise price of $15.00 per share. The warrants expire on September 17, 2004.



Long-Term Incentive and Share Award Plan



As noted above, upon consummation of the IPO, the 2002 Equity Incentive Plan replaced the Long-Term Incentive and Share Award Plan. SARs held by former employees were settled in cash. SARs held by current employees and consultants
were either 1) exchanged for stock options or Common Stock or 2) paid out in a combination of cash and Common Stock. On November 27, 2002, the SARs exchange was completed, the SARs tendered in the exchange were canceled and the related compensation
expense for 2002 was finalized. As of December 31, 2002, there were no SARs outstanding. The information below is provided for historical purposes.



In 1995, the Company adopted the Long-Term Incentive and Share Award Plan (the Incentive Plan). The intention of the Incentive Plan was to
provide a means to attract, retain and motivate employees and directors of the Company, upon whose judgment, initiative and efforts, the continued success, growth and development of the Company was dependent. The Incentive Plan provided that the
Company may, at its discretion, grant an award, including options, SARs, restricted shares, and other share-based awards, to any eligible employee. The only type of award issued under this plan was SARs. These SARs generally vested at a rate of 20%
per year over a five-year period, provided that the SAR holder remained associated with the Company. The SARs were not exercisable until the occurrence of an event that triggered the rights of holders to exercise their SARs. The valuation of SARs
was based upon the estimated fair value of a share of Common Stock.



The following table summarizes certain information about the Companys Incentive Plan:



|                          |  | SARs Outstanding                              |   |  | Reference Prices Per Share
|------------------------- |  | --------------------------------------------- | - |  | --------------------------
|                          |  | (Amounts in Thousands, Except Per Share Data)
|December 31, 1999:        |  | 2,289                                         |   |  |                           
|SARs granted              |  | 711                                           |   |  | $                         
|SARs redeemed             |  | (26                                           | ) |  | $                         
|SARs canceled             |  | (224                                          | ) |  | $                         
|                          |  |                                               |   |  |                           
|December 31, 2000:        |  | 2,750                                         |   |  |                           
|SARs granted              |  | 523                                           |   |  | $                         
|SARs redeemed             |  | (7                                            | ) |  | $                         
|SARs canceled             |  | (73                                           | ) |  | $                         
|                          |  |                                               |   |  |                           
|December 31, 2001:        |  | 3,193                                         |   |  |                           
|SARs granted              |  | 310                                           |   |  | $                         
|SARs redeemed             |  | (459                                          | ) |  | $                         
|SARs canceled             |  | (224                                          | ) |  | $                         
|SARs converted to options |  | (2,820                                        | ) |  | $                         
|                          |  |                                               |   |  |                           
|December 31, 2002         |  |                                              |   |  |                           
|                          |  |                                               |   |  |                           



Compensation expense, or a reduction of compensation expense, for SARs was recorded based on the change in fair value of the Companys Common Stock from grant date to each balance sheet date. Reference



49



---

##### Table of Contents

U.S.I. HOLDINGS CORPORATION AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



prices are equal to the estimated fair value of the Companys Common Stock at the grant date. Compensation expense, or a reduction of
compensation expense, in 2002, 2001 and 2000 related to the SARs was $(2,995,000), $3,092,000 and $250,000, respectively. At December 31, 2002, 2001 and 2000, there were zero, 1,393,200 and 964,800 vested SARs outstanding, respectively.



7.    Redeemable Securities



Redeemable Common Stock



Upon consummation of the IPO, all Redeemable Preferred Stock,
for which the holders still had put rights, was converted to Redeemable Common Stock (see description of put rights under Redeemable Preferred Stock below). These same put rights carried over to the Redeemable Common Stock.



The original issuance cost of $21,302,000 at December 31,
2002, is reported as Redeemable Common Stock in the accompanying 2002 balance sheet. Since the Company is obligated to repurchase shares from its employees only in an amount equal to their original issuance cost, changes in the fair value of such
shares are not required to be recognized in the Companys statements of operations or stockholders equity.



Redeemable Common Stock Warrants



Warrants to purchase 739,999 shares of the Companys voting Common Stock, issued in conjunction with a 1996 senior subordinated debt
offering that was repaid in 1999 were outstanding and exercisable at December 31, 2002. In 2002, the holders of the warrants agreed to terminate the put rights associated with the Common Stock Warrants concurrent with the consummation of the IPO.
The Company had the right, which it did not exercise, to repurchase all, but not less than all, the warrants issued in 1996 and shares issuable upon the exercise of these warrants until January 2003. The warrants have a strike price of $11.125 per
share and expired on January 30, 2003. Since prior to the termination of the put rights, the holders had the right to put the warrants or warrant shares back to the Company, the change in the value of the warrants is reported in the accompanying
statements of operations. The value of the warrants is $230,000 and $4,300,000 at December 31, 2002 and 2001, respectively. Since the put rights were terminated, the values of the warrants were transferred from Redeemable Common Stock to Common
Stock in the fourth quarter of 2002. At December 31, 2001, the value of the warrants is reported as Redeemable Common Stock Warrants. The change in the value of the warrants was $(4,070,000), $1,406,000 and zero for the years ended December 31,
2002, 2001 and 2000, respectively.



Redeemable Preferred Stock



Upon consummation of the IPO, all
Redeemable Preferred Stock was either converted to Common Stock or Redeemable Common Stock.





The following schedule summarizes certain information about the Companys Redeemable Preferred Stock at
December 31, 2001 and 2000:



|                  |  | Par                                           |      | Shares Authorized, Issued and Outstanding |       | Aggregate Liquidation Preference
|----------------- |  | --------------------------------------------- | ---- | ----------------------------------------- | ----- | --------------------------------
|                  |  | (Amounts in Thousands, Except Per Share Data)
|December 31, 2001 |  | $                                             | 0.01 |                                           | 4,764 |                                 
|December 31, 2000 |  |                                               | 0.01 |                                           | 4,985 |                                 



50



---

##### Table of Contents

U.S.I. HOLDINGS CORPORATION AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





Substantially all of the Companys employees who held Preferred Stock from prior acquisitions could put to the Company the number of shares owned by them that had a fair value equal to the employees original investment in
those shares upon the (a) termination of employment by the Company without cause, (b) employees resignation for good reason or (c) disability or death of the employee. The original issuance cost of $18,663,000 at December 31, 2001, is reported
as Redeemable Preferred Stock in the accompanying balance sheets. As the Company is obligated to repurchase Preferred Stock from its employees only in an amount equal to the original issuance cost of their Preferred Stock, changes in the fair value
of such series are not required to be recognized in the Companys statements of operations or stockholders equity.



On December 1, 1999, the Company agreed to extend the put option held by a former employee. The former employee may require the Company to
repurchase $3,000,000, the original issuance cost (see above), of Preferred Stock shares owned by him during a 60-day period beginning November 30, 2004. The $3,000,000 is reported as Redeemable Common Stock and Redeemable Preferred Stock in the
accompanying balance sheets at December 31, 2002 and 2001, respectively.



In 1997, in connection with a former joint venture with JP Morgan Chase, the Company sold 923,000 shares of Series N Preferred Stock to CBC Holding Ltd. (CBC), an affiliate of JP Morgan Chase, for $6,000,000. In connection
with this transaction, JP Morgan Chase received the right to designate a nominee of the Companys Board of Directors. In October 1998, the Company sold 3,300,000 shares of Series T Preferred Stock to CBD Holdings Ltd. (CBD), another affiliate
of JP Morgan Chase, for $25,000,000, and CBC transferred its holdings of Series N Preferred Stock to CBD. In connection with this transaction, JP Morgan Chase received the right to designate a member of the executive committee of the Companys
Board of Directors.



In connection with the
Series N Preferred Stock purchase by CBC (which was subsequently transferred to CBD, along with all the related put rights), the Company granted CBC the right to put the Preferred Stock back to the Company if any of the following occurs:



| |  |  | Any bank or its affiliate acquires a 25% or greater equity interest in the Company;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | Any other entity, other than Zurich Centre Investments Limited and its affiliates (Zurich), a current stockholder of the Company, acquires a 40% or greater equity
interest in the Company; or
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Zurich acquires a 51% or greater equity interest in the Company.
| | - |  | ----------------------------------------------------------------



Upon consummation of the IPO, the puts rights were terminated and the Redeemable Preferred Stock was
converted to shares of Common Stock. The put price was the greatest of (a) the original purchase price paid by CBC for the series N Preferred Stock, (b) 95% of the fair market value as determined by the Companys board of directors or an
independent appraiser of the series N Preferred Stock on the date CBD delivers a put exercise to the Company, and (c) 95% of the per share purchase price paid by the entity or group whose action triggers the right to exercise the put. The put price
was $6,138,000 at December 31, 2001, and is reported as Redeemable Preferred Stock in the accompanying 2001 balance sheet. The change in the put price is recorded as an adjustment to retained deficit and is reflected as an adjustment to the net loss
in the computation of basic and diluted earnings per share (EPS). The change in the put price recorded as an adjustment to the Companys retained deficit was $(138,000), $138,000 and zero for the years ended December 31, 2002, 2001 and 2000,
respectively.



The series T Preferred Stock does
not have a put option or warrants.



51



---

##### Table of Contents

U.S.I. HOLDINGS CORPORATION AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





8.
    Income Taxes



For
the years ended December 31, the provision (benefit) for income taxes related to continuing operations consists of the following:



|                              |  | 2002                   |         |   | 2001 |   |         | 2000 | 
|----------------------------- |  | ---------------------- | ------- | - | ---- | - | ------- | ---- | 
|                              |  | (Dollars in Thousands) |        
|Current provision:            |  |                        |         |   |      |   |         |      | 
|Federal                       |  | $                      | 183     |   |      | $ | (1,113  | )    | 
|State                         |  |                        | 1,764   |   |      |   | 1,659   |      | 
|                              |  |                        |         |   |      |   |         |      | 
|Total current provision       |  |                        | 1,947   |   |      |   | 546     |      | 
|Deferred benefit:             |  |                        |         |   |      |   |         |      | 
|Federal                       |  |                        | (10,175 | ) |      |   | (11,222 | )    | 
|State                         |  |                        | (1,796  | ) |      |   | (1,980  | )    | 
|                              |  |                        |         |   |      |   |         |      | 
|Total deferred benefit        |  |                        | (11,971 | ) |      |   | (13,202 | )    | 
|Change in valuation allowance |  |                        | 9,506   |   |      |   | 8,011   |      | 
|                              |  |                        |         |   |      |   |         |      | 
|Total income tax benefit      |  | $                      | (518    | ) |      | $ | (4,645  | )    | 
|                              |  |                        |         |   |      |   |         |      | 



Income
taxes recorded by the Company related to continuing operations differ from the amounts computed by applying the statutory U.S. federal tax rate to the income (loss) before income taxes. Significant reconciling items are as follows:



|                                                                   |  | 2002                   |        |   | 2001 |       |    | 2000 |  
|------------------------------------------------------------------ |  | ---------------------- | ------ | - | ---- | ----- | -- | ---- | -
|                                                                   |  | (Dollars in Thousands) |       
|Expected provision (benefit)                                       |  | $                      | 3,542  |   |      | 34.0  | %  |      | $
|Recognized net operating loss, future deductions and credits       |  |                        | (4,624 | ) |      | (44.4 | )  |      |  
|Purchase price adjustment                                          |  |                        | (2,465 | ) |      | (23.7 | )  |      |  
|Nondeductible goodwill                                             |  |                        |       |   |      |      |    |      |  
|Increase in NOL                                                    |  |                        | (7,419 | ) |      | (71.2 | )  |      |  
|Change in valuation allowance                                      |  |                        | 9,506  |   |      | 91.2  |    |      |  
|Tax effect of elimination of intercompany revenues and expenses    |  |                        |       |   |      |      |    |      |  
|State income and capital based taxes, net of federal tax (benefit) |  |                        | 1,764  |   |      | 16.9  |    |      |  
|Nondeductible meals and entertainment                              |  |                        | 623    |   |      | 6.0   |    |      |  
|Interest expense on common stock warrants                          |  |                        | (1,628 | ) |      | (15.6 | )  |      |  
|State net operating loss                                           |  |                        |       |   |      |      |    |      |  
|Recovery of income taxes                                           |  |                        |       |   |      |      |    |      |  
|Other                                                              |  |                        | 183    |   |      | 1.8   |    |      |  
|                                                                   |  |                        |        |   |      |       |    |      |  
|Total income tax benefit                                           |  | $                      | (518   | ) |      | (5.0  | )% |      | $
|                                                                   |  |                        |        |   |      |       |    |      |  



52



---

##### Table of Contents

U.S.I. HOLDINGS CORPORATION AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





Deferred
income taxes reflect the impact of temporary differences between the values recorded for financial reporting purposes and values utilized for measurement in accordance with current tax laws. The tax effects of the significant temporary differences
giving rise to the Companys deferred tax assets (liabilities) from continuing operations at December 31 are as follows:



|                                              |  | 2002                   |         |   | 2001 |  
|--------------------------------------------- |  | ---------------------- | ------- | - | ---- | -
|                                              |  | (Dollars in Thousands) |        
|Current deferred tax assets:                  |  |                        |         |   |      |  
|Bad debt reserves                             |  | $                      | 929     |   |      | $
|Accrued compensation                          |  |                        | 820     |   |      |  
|Accrued severance                             |  |                        | 1,261   |   |      |  
|Accrued errors and omissions                  |  |                        | 1,042   |   |      |  
|Other                                         |  |                        | 702     |   |      |  
|                                              |  |                        |         |   |      |  
|Current deferred tax assets                   |  |                        | 4,754   |   |      |  
|Valuation allowance                           |  |                        | (4,754  | ) |      |  
|                                              |  |                        |         |   |      |  
|Net current deferred tax assets               |  | $                      |        |   |      | $
|                                              |  |                        |         |   |      |  
|Noncurrent deferred tax assets (liabilities): |  |                        |         |   |      |  
|Intangible assets                             |  | $                      | (10,348 | ) |      | $
|Retention agreements                          |  |                        | 2,281   |   |      |  
|Net operating loss carryforward               |  |                        | 16,797  |   |      |  
|Deferred rent                                 |  |                        | 991     |   |      |  
|Accrued compensation                          |  |                        | 1,034   |   |      |  
|Other                                         |  |                        | 2,008   |   |      |  
|                                              |  |                        |         |   |      |  
|Noncurrent deferred tax assets                |  |                        | 12,763  |   |      |  
|Valuation allowance                           |  |                        | (12,763 | ) |      |  
|                                              |  |                        |         |   |      |  
|Net noncurrent deferred tax assets            |  | $                      |        |   |      | $
|                                              |  |                        |         |   |      |  



At
December 31, 2002, the Company had a net operating loss carryforward of approximately $48,141,000 for federal tax purposes that will expire during the period 2011 through 2022. In addition, as a result of certain acquisitions, the Company had a
preacquisition net operating loss carryforward of approximately $1,262,000. To the extent not utilized, the preacquisition net operating loss has expiration dates from 2011 through 2013.



53



---

##### Table of Contents

U.S.I. HOLDINGS CORPORATION AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





9.
    Lease Commitments



The Company leases various facilities and equipment under noncancelable operating leases. These leases generally contain renewal and/or purchase options and escalation clauses. Minimum aggregate rental commitments at December 31,
2002, under noncancelable operating leases having an initial term of more than one year, are as follows (dollars in thousands):



|Year                                |  | Amount
|----------------------------------- |  | ------
|2003                                |  | $     
|2004                                |  |       
|2005                                |  |       
|2006                                |  |       
|2007                                |  |       
|Thereafter                          |  |       
|                                    |  |       
|Total future minimum lease payments |  | $     
|                                    |  |       



Total
rental expense in 2002, 2001 and 2000 was $14,418,000, $15,984,000 and $14,088,000, respectively.



10.     Employee Benefits



The Company established a 401(k) Plan (the Plan) covering substantially all employees with at least six months of service. Under the Plan,
the first 4% of a participants contribution will be eligible for a discretionary employer match of $0.75 for each dollar contributed. The maximum employer match is 3% of a participants annual compensation.



Following an acquisition, the Company may maintain the
existing savings plans of acquired entities for a short period of time. During 2002, 2001 and 2000, a number of such plans were maintained by the Company prior to being merged into the Plan.



Company contributions to all 401(k) plans for 2002, 2001 and
2000 were $3,527,000, $3,374,000 and $3,353,000, respectively.



11.     Related Party Transactions



Seven insurance carriers are stockholders of the Company. For the years ended December 31, 2002, 2001 and 2000, commissions earned on policies placed through these insurance carriers were approximately
$43,644,000, $34,958,000 and $31,300,000, respectively.



The Company paid $2,240,000, $1,144,000 and $101,000 to JP Morgan Securities Inc., an affiliate of J.P. Morgan Chase & Co., in fees relating to financing and other professional services for the years ended December 31, 2002, 2001
and 2000, respectively. JP Morgan Chase Bank is the syndicating agent and a significant participant on the existing credit facility which includes the $75,000,000 revolving credit facility and the $29,521,000 term loan (see Note 5Long-Term
Debt). CBD and CB Capital Investors, L.P. are affiliates of J.P. Morgan Chase & Co. and JP Morgan Chase Bank, and are stockholders of the Company.



On December 21, 2001, the Company entered into a service agreement with Ceridian Corporation (Ceridian) whereby Ceridian will provide
certain administrative services to the Company and its customers. The service agreement with Ceridian includes a provision whereby Ceridian can recover up to $1,182,000 in expected



54



---

##### Table of Contents

U.S.I. HOLDINGS CORPORATION AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



conversion costs if their revenue from administrative services provided to the Companys customers fails to meet specific semi-annual
requirements. The Company determined that it was probable that the revenue targets would not be met and, accordingly, reserved for $1,182,000 in the fourth quarter of 2002. In March of 2002, the original service agreement was amended due to our
announcement to sell USIA (see Note 16Discontinued Operations). The amendment eliminated USIA as a party to the service agreement, which resulted in the accrual of an additional $990,000. Ceridian is a stockholder of the Company.



In May 2001, the Company entered into a term loan agreement
with its affiliate Zurich Services Corporation (see Note 5Long-Term Debt). Zurich is a stockholder of the Company.



In May 1999, the Company purchased an excess professional liability policy from CNA Pro, an affiliate of CNA Financial Corporation (see
Note 5Long-Term Debt). Continental Casualty Company, an affiliate of CNA Financial Corporation, is a stockholder of the Company.



Additionally, a majority of the Companys acquisition-related debt is payable to current employees of the Company.



The Company was in dispute with Royal & Sun Alliance
Insurance Group plc, an affiliate of one of the Companys stockholders (see Note 14Contingencies).



12.     Business Concentrations



For the year ended December 31, 2002, a substantial portion of the Companys commissions and fees were received from clients in the
states of New York and California. Accordingly, the occurrence of adverse economic conditions or an adverse regulatory climate in New York or California could have a material adverse effect on the Company. However, the Company believes, based on its
diversified customer base and product lines within the states it operates in, that there is minimal risk of a material adverse occurrence due to the concentration of operations in New York and California.



13.    Segment Reporting



In connection with the decision to discontinue the operations
of USIA, the Company renamed its administration and other services segment the specialized benefits services segment. The Company has three reportable segments: insurance brokerage, specialized benefits services and corporate. The insurance
brokerage segment offers general and specialty property and casualty insurance, medical plan insurance and group life insurance. The specialized benefits services segment offers health and welfare products, benefits enrollment and communication and
other related consulting services. The corporate segment is responsible for managing the following: acquisition processes, marketing, human resources, legal, capital, financial and reporting.



The Companys reportable segments are strategic business
units that offer different products and services. They are managed separately because each business has different clients and requires different marketing strategies. Most of the businesses were acquired as a unit, and the management at the time of
the acquisition was retained. The Company evaluates performance based on the following measurements: (1) revenues and (2) earnings before interest, taxes, depreciation and amortization.



55



---

##### Table of Contents

U.S.I. HOLDINGS CORPORATION AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





The
following table shows the income (loss) from continuing operations before income taxes for the years ended December 31, 2002, 2001 and 2000.



|                                                               |  | Insurance Brokerage    |         | Specialized Benefits Services |   | Corporate |  |   | Total   |  
|-------------------------------------------------------------- |  | ---------------------- | ------- | ----------------------------- | - | --------- |  | - | ------- | -
|                                                               |  | (Dollars In Thousands) |        
|2002                                                           |  |                        |         |                               |   |           |  |   |         |  
|Revenues                                                       |  | $                      | 274,267 |                               | $ | 53,310    |  | $ | 619     |  
|Expenses                                                       |  |                        | 205,907 |                               |   | 43,583    |  |   | 20,271  |  
|Change in value of stock appreciation rights                   |  |                        |        |                               |   |          |  |   | (2,995  | )
|Value of stock options exchanged for stock appreciation rights |  |                        |        |                               |   |          |  |   | 1,269   |  
|Grant of restricted stock units                                |  |                        |        |                               |   |          |  |   | 1,042   |  
|Depreciation and amortization                                  |  |                        | 23,766  |                               |   | 5,674     |  |   | 2,939   |  
|Interest                                                       |  |                        | 2,716   |                               |   | 1,326     |  |   | 13,740  |  
|Change in value of redeemable common stock warrants            |  |                        |        |                               |   |          |  |   | (4,070  | )
|Expense on early retirement of debt                            |  |                        |        |                               |   |          |  |   | 2,610   |  
|                                                               |  |                        |         |                               |   |           |  |   |         |  
|Income (loss) from continuing operations before income taxes   |  | $                      | 41,878  |                               | $ | 2,727     |  | $ | (34,187 | )
|                                                               |  |                        |         |                               |   |           |  |   |         |  
|2001                                                           |  |                        |         |                               |   |           |  |   |         |  
|Revenues                                                       |  | $                      | 258,094 |                               | $ | 53,042    |  | $ | 443     |  
|Expenses                                                       |  |                        | 214,129 |                               |   | 40,143    |  |   | 22,314  |  
|Change in value of stock appreciation rights                   |  |                        |        |                               |   |          |  |   | 3,092   |  
|Depreciation and amortization                                  |  |                        | 34,079  |                               |   | 6,536     |  |   | 5,111   |  
|Interest                                                       |  |                        | 2,736   |                               |   | 1,366     |  |   | 19,989  |  
|Change in value of redeemable common stock warrants            |  |                        |        |                               |   |          |  |   | 1,406   |  
|                                                               |  |                        |         |                               |   |           |  |   |         |  
|Income (loss) from continuing operations before income taxes   |  | $                      | 7,150   |                               | $ | 4,997     |  | $ | (51,469 | )
|                                                               |  |                        |         |                               |   |           |  |   |         |  
|2000                                                           |  |                        |         |                               |   |           |  |   |         |  
|Revenues                                                       |  | $                      | 240,265 |                               | $ | 49,645    |  | $ | 824     |  
|Expenses                                                       |  |                        | 188,037 |                               |   | 30,862    |  |   | 15,638  |  
|Change in value of stock appreciation rights                   |  |                        |        |                               |   |          |  |   | 250     |  
|Depreciation and amortization                                  |  |                        | 32,025  |                               |   | 5,496     |  |   | 5,378   |  
|Interest                                                       |  |                        | 3,426   |                               |   | 945       |  |   | 21,202  |  
|                                                               |  |                        |         |                               |   |           |  |   |         |  
|Income (loss) from continuing operations before income taxes   |  | $                      | 16,777  |                               | $ | 12,342    |  | $ | (41,644 | )
|                                                               |  |                        |         |                               |   |           |  |   |         |  



56



---

##### Table of Contents

U.S.I. HOLDINGS CORPORATION AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





The total
assets by segment at December 31 are as follows:



|                                                  |  | 2002                   |         | 2001
|------------------------------------------------- |  | ---------------------- | ------- | ----
|                                                  |  | (Dollars In Thousands)
|Segment Assets:                                   |  |                        |         |     
|Insurance Brokerage                               |  | $                      | 461,903 |     
|Specialized Benefits Services                     |  |                        | 82,702  |     
|Corporate                                         |  |                        | 33,809  |     
|                                                  |  |                        |         |     
|Total assets for use in continuing operations     |  |                        | 578,414 |     
|Reconciling items:                                |  |                        |         |     
|Assets held for discontinued operations (Note 16) |  |                        | 1,092   |     
|                                                  |  |                        |         |     
|Total Assets                                      |  | $                      | 579,506 |     
|                                                  |  |                        |         |     



14.    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 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.



Brian D. Whitney Litigation.    The
Company and its retired Chairman and Chief Executive Officer, Bernard H. Mizel, and the Companys current Chairman and Chief Executive Officer, David L. Eslick, were involved in a dispute with Brian D. Whitney, the former President and Chief
Executive Officer of one of the Companys subsidiaries. On January 18, 2000, the Company terminated the employment agreement of Mr. Whitney. On May 26, 2000, Mr. Whitney commenced arbitration before the American Arbitration Association against
the Company asserting certain claims arising out of the termination of his employment. With the arbitration, Mr. Whitney sought damages in excess of $20,000,000. The arbitration hearings commenced in July 2001 and concluded on January 3, 2002. On
January 30, 2002, the panel issued an award of $528,000 to Mr. Whitney. Also, on May 26, 2000, Mr. Whitney commenced an action in the United States District Court for the District of Connecticut against Mr. Mizel and Mr. Eslick. Mr. Whitney asserted
a claim of tortious interference with his employment contract, arising from the same facts at issue in his arbitration and seeking the same damages. The Company accrued a $700,000 liability in 2001 as a result of the arbitration and litigation.



All claims in this litigation were settled
pursuant to a settlement agreement dated as of February 27, 2002 and effective as of March 21, 2002. Pursuant to the settlement agreement, the parties have executed and filed with the court a stipulation of dismissal with prejudice, and the Company
paid Mr. Whitney $250,000. The Companys insurer paid the Company $200,000 toward the settlement of this action.



Near North Insurance Litigation.    Plaintiffs, affiliated companies which are competitors of the Company in
the insurance brokerage and risk management business, filed this action against the Company and three of its officers and employees who previously worked for plaintiffs. Plaintiffs sought compensatory damages of at least $18,000,000, plus punitive
damages and injunctive relief. The Company and its officers and employees asserted various defenses to this action; the Company and its officers have also filed an action against plaintiffs. The Company tendered this action to its comprehensive
liability, errors and omissions, and directors and officers insurers.



57



---

##### Table of Contents

U.S.I. HOLDINGS CORPORATION AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





On April
15, 2002, the Company and all named parties in the litigation entered into a settlement agreement pursuant to which mutual releases were granted and a stipulation for dismissal with prejudice was filed with the court. Pursuant to such settlement
agreement, plaintiffs received a payment in the amount of $1,875,000, of which the Company contributed $225,000. In October 2000, the Company entered into an agreement to purchase a book of business in the entertainment industry. The agreement to
purchase the business indicates that the purchase price will include the amount of any settlement paid and incurred as a result of the acquisition. Therefore, the $225,000 was reflected as an adjustment to the purchase price. Pursuant to a separate
settlement agreement entered into between the Company and its insurers, the Companys insurers paid an amount of $1,650,000 toward the settlement in exchange for mutual releases.



Royal Indemnity Company Claim.    In March 2000, the Company and Royal Indemnity
Company, an affiliate of Royal & Sun Alliance Insurance Group plc (Royal), entered into a multi-year strategic Alliance Agreement (Agreement). In May 2001, Royal gave notice of its intent to terminate the Agreement and thereby avoided
responsibility to fund additional annual incentive payments. In September 2001, Royal advised the Company in writing of its contention that the Company owed Royal $7,295,000 under the Agreement. At December 31, 2001, the Company had a $4,700,000
liability for the Royal claim. Royal also contended that the Company was obligated to contribute $1,500,000 toward an errors and omissions claim not directly related to the Agreement, but that arose from a coverage dispute with a mutual client. In
April 2002, Royal and the Company agreed on terms to settle all matters related to the errors and omissions claim and the Agreement. Pursuant to the terms of the June 7, 2002 Settlement Agreement and Mutual Release, Royal will receive a $2,725,000
cash payment from the Company, with $250,000 of such payment being paid by the Companys insurer. The $2,725,000 cash payment will be paid in installments whereby $250,000 from the Companys insurer was paid upon the execution of the
settlement agreement, $1,238,000 was paid by the Company in January 2003, and the remaining $1,237,000 will be paid by the Company in April 2003. In addition, solely in exchange for a release of liability on all claims, the Company issued to Royal
353,572 shares of preferred stock (which was converted into common stock upon the consummation of the Companys initial public offering) at $7 per share (pre-split). The parties agreed to mutually exchange releases of liability.



Gary J. Missigman
Litigation.    USI Northeast, Inc. (USI Northeast), a subsidiary of the Company, was a defendant in an action pending in the United States District Court for the Southern District of New York, Gary J. Missigman v. USI
Northeast and The Zurich American Insurance Company, No. 99 CIV, 4763. Mr. Missigman alleged in his complaint that USI Northeast wrongfully terminated his employment on or about March 5, 1999, and he asserted various causes of action stemming
from that allegation, including breach of contract, breach of implied contract, unjust enrichment, fraud and joint venture to commit fraud. USI Northeast maintained that Mr. Missigmans termination was justified and filed an answer, in which it
denied all of the complaints allegations, asserts numerous affirmative defenses and asserts counterclaims for breach of contract and implied contract. On February 7, 2001, the court granted USI Northeasts motion for summary judgment as
to Mr. Missigmans contract, implied contract, fraud and joint venture to commit fraud claims and denied USI Northeasts motion for summary judgment as to Mr. Missigmans only remaining claim, a claim for unjust enrichment. The court
denied Mr. Missigmans motion for summary judgment as to USI Northeasts counterclaims. In his complaint, Mr. Missigman alleged that his damages under the remaining unjust enrichment claim are believed to exceed $3,000,000. In
April 2001, Mr. Missigman served a report of an expert witness opining that the damages under the unjust enrichment claim are between $25,500,000 and $43,500,000. USI Northeast denied having any liability under the unjust enrichment claim, but in
the even such liability were found, the expert witness retained by USI Northeast has calculated damages would have been $93,600. On October 9, 2002, the parties entered into a settlement agreement. The settlement agreement provided for, among other
things, the payment of $750,000 by USI Northeast to the Missigman bankruptcy estate, an exchange of releases and dismissal of the action with prejudice. The Company accrued $300,000 in the first quarter of 2002 towards this liability and an
additional



58



---

##### Table of Contents

U.S.I. HOLDINGS CORPORATION AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



$450,000 in the third quarter of 2002 as a result of this settlement agreement. The $750,000 settlement payment was paid in January 2003.



15.    Efficiency Initiative Accrual



In efforts to integrate its business
acquisitions, the Company continues to focus on operating expense reductions. As a result, for the years ended December 31, 2002, 2001 and 2000, the Company recorded charges of $5,511,000, $9,642,000 and $3,429,000, respectively, related to future
compensation costs for terminated employees, future producer compensation restructuring and future lease costs for terminated office leases.



In 2002, 2001 and 2000, the Company expected to and eliminated 32, 96 and 11 positions, respectively, across all of its operating offices.
In addition, the Company renegotiated the compensation arrangements of four and 29 sales professionals in 2002 and 2001, respectively, in connection with these expense reductions.



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



|                              |  | Employee Termination Benefits |        |   | Producer Compensation Restructuring |   |        | Terminated Office Lease |  |   | Total  |  
|----------------------------- |  | ----------------------------- | ------ | - | ----------------------------------- | - | ------ | ----------------------- |  | - | ------ | -
|                              |  | (Dollars In Thousands)        |       
|December 31, 1999             |  | $                             | 547    |   |                                     | $ |       |                         |  | $ | 57     |  
|Efficiency initiative charges |  |                               | 2,918  |   |                                     |   |       |                         |  |   | 511    |  
|Used in year                  |  |                               | (486   | ) |                                     |   |       |                         |  |   | (40    | )
|                              |  |                               |        |   |                                     |   |        |                         |  |   |        |  
|December 31, 2000             |  |                               | 2,979  |   |                                     |   |       |                         |  |   | 528    |  
|Efficiency initiative charges |  |                               | 4,738  |   |                                     |   | 2,951  |                         |  |   | 1,953  |  
|Used in year                  |  |                               | (3,293 | ) |                                     |   | (88    | )                       |  |   | (632   | )
|                              |  |                               |        |   |                                     |   |        |                         |  |   |        |  
|December 31, 2001             |  |                               | 4,424  |   |                                     |   | 2,863  |                         |  |   | 1,849  |  
|Efficiency initiative charges |  |                               | 3,563  |   |                                     |   | 1,832  |                         |  |   | 116    |  
|Used in year                  |  |                               | (5,725 | ) |                                     |   | (2,802 | )                       |  |   | (1,180 | )
|                              |  |                               |        |   |                                     |   |        |                         |  |   |        |  
|December 31, 2002             |  | $                             | 2,262  |   |                                     | $ | 1,893  |                         |  | $ | 785    |  
|                              |  |                               |        |   |                                     |   |        |                         |  |   |        |  



The
employee termination benefits and the future producer compensation restructuring costs reflected above are included in compensation and employee benefits in the accompanying statements of operations. The terminated office lease costs are included in
other operating expenses in the accompanying statements of operations.



Retirement



In January
2002, the Company announced that Bernard H. Mizel, Chairman and Chief Executive Officer since the Company was founded in 1994, would retire as Chairman and Chief Executive Officer. David L. Eslick, who had been President and Chief Operating Officer
since July 1998, succeeded Mr. Mizel. In the first quarter of 2002, the Company took a compensation charge of $2,800,000 related to the retirement. This compensation charge consisted of $1,935,000 for severance, $295,000 for bonus and $570,000 for
benefits.



59



---

##### Table of Contents

U.S.I. HOLDINGS CORPORATION AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





16.    Discontinued Operations



The Company determined that USIA was no longer core to the Companys mission, vision, or strategy and in January 2002, the Company announced its intention to sell USIA. USIA was part of the
Companys administration and other services reportable segment and offers third-party administration of employee benefit plans to its clients. In April 2002, the Company completed the sale of USIA for $19,900,000. The Company received and
recorded cash proceeds of $18,200,000 with the remaining consideration of $1,700,000 in the form of an account receivable. The receivable is due to the Company no later than May 16, 2003. In connection with the sale, the Company recorded a pre-tax
loss of $7,219,000. The Company also received a $13,000,000 note receivable that bears interest at 8% due in June 2003 that is subject to certain post-closing revenue and other adjustments included in the purchase agreement. These potential
adjustments cannot be reasonably determined as of December 31, 2002; therefore, the accompanying financial statements do not reflect the note receivable. These adjustments are expected to be resolved in June 2003. Of the $18,200,000 in cash
proceeds, $16,300,000 was used to reduce the Companys term loan and $1,900,000 was used to pay selling costs.



The assets and liabilities of discontinued operations at December 31 are as follows:



|                                        |  | 2002                   |       | 2001
|--------------------------------------- |  | ---------------------- | ----- | ----
|                                        |  | (Dollars In Thousands)
|Assets                                  |  |                        |       |     
|Cash and cash equivalents               |  | $                      | 833   |     
|Premiums and commissions receivable     |  |                        | 20    |     
|Other receivables                       |  |                        | 210   |     
|Other                                   |  |                        |      |     
|                                        |  |                        |       |     
|Total current assets                    |  |                        | 1,063 |     
|                                        |  |                        |       |     
|Intangible assets, net                  |  |                        |      |     
|Property and equipment, net             |  |                        | 15    |     
|Other                                   |  |                        | 14    |     
|                                        |  |                        |       |     
|Total other assets                      |  |                        | 29    |     
|                                        |  |                        |       |     
|Total Assets                            |  | $                      | 1,092 |     
|                                        |  |                        |       |     
|Liabilities                             |  |                        |       |     
|Premiums payable to insurance companies |  | $                      |      |     
|Accrued expenses                        |  |                        | 990   |     
|Current portion of long-term debt       |  |                        |      |     
|Other                                   |  |                        | 482   |     
|                                        |  |                        |       |     
|Total current liabilities               |  |                        | 1,472 |     
|                                        |  |                        |       |     
|Long-term debt                          |  |                        |      |     
|Other liabilities                       |  |                        |      |     
|                                        |  |                        |       |     
|Total other liabilities                 |  |                        |      |     
|                                        |  |                        |       |     
|Total Liabilities                       |  | $                      | 1,472 |     
|                                        |  |                        |       |     



60



---

##### Table of Contents

U.S.I. HOLDINGS CORPORATION AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





The
results of operations of discontinued operations for the years ended December 31 are as follows:



|                                      |  | 2002                   |         |   | 2001 |   |         | 2000 | 
|------------------------------------- |  | ---------------------- | ------- | - | ---- | - | ------- | ---- | 
|                                      |  | (Dollars In Thousands) |        
|Revenues                              |  | $                      | 19,496  |   |      | $ | 74,751  |      | 
|Expenses                              |  |                        |         |   |      |   |         |      | 
|Compensation and employee benefits    |  |                        | 15,159  |   |      |   | 52,314  |      | 
|Other operating expenses              |  |                        | 8,520   |   |      |   | 31,216  |      | 
|Amortization of intangible assets     |  |                        | 792     |   |      |   | 5,775   |      | 
|Depreciation                          |  |                        | 1,257   |   |      |   | 3,886   |      | 
|Interest                              |  |                        | 300     |   |      |   | 947     |      | 
|Impairment of long-lived assets       |  |                        |        |   |      |   | 46,900  |      | 
|Loss on sale of USIA                  |  |                        | 7,219   |   |      |   |        |      | 
|                                      |  |                        |         |   |      |   |         |      | 
|Total Expenses                        |  |                        | 33,247  |   |      |   | 141,038 |      | 
|                                      |  |                        |         |   |      |   |         |      | 
|Loss from discontinued operations     |  |                        | (13,751 | ) |      |   | (66,287 | )    | 
|Income tax (benefit) expense          |  |                        |        |   |      |   | (4,481  | )    | 
|                                      |  |                        |         |   |      |   |         |      | 
|Net loss from discontinued operations |  | $                      | (13,751 | ) |      | $ | (61,806 | )    | 
|                                      |  |                        |         |   |      |   |         |      | 



In the
fourth quarter of 2001, the Company determined that the intangible assets of USIA were impaired after considering USIAs actual and projected operating results. Following the provisions of SFAS No. 121, the Company considered USIAs
undiscounted cash flows over the remaining amortization period and reduced the carrying value of USIAs intangible assets to the estimated fair value. At December 31, 2001, the Company determined that the fair value of the long-lived assets of
USIA approximated $22,500,000 based on historical multiples of EBITDA that were paid for similar businesses. The carrying amount of the long-lived assets approximated $69,400,000 prior to the impairment charge at December 31, 2001. Following the
provisions of SFAS No. 121, the Company wrote-off all existing goodwill of $37,500,000. Additionally, the Company reduced related expiration rights by $9,400,000. Together, these two write-offs resulted in the impairment charge of $46,900,000.



USIA Litigation Matters



Nassau County Litigation.     In
January 1999, USIA was named as defendant in a lawsuit filed by County of Nassau, New York (Nassau County). USIA was the third-party administrator of health benefits for the employees of Nassau County. At December 31, 1998, USIA had established a
$16,000,000 reserve for this matter. USIA also established a $1,500,000 reserve at December 31, 1998, to cover the related wind down costs of the contract. The Nassau County litigation was settled pursuant to a settlement agreement in March 1999.
Under the settlement agreement, USIA paid Nassau County $16,000,000 on June 1, 1999, plus approximately $350,000 thereafter in actual expenses incurred by Nassau County in connection with the Nassau County litigation and for payment of premiums for
a new insurance policy issued to Nassau County. USIA also assisted Nassau County in transferring its self-insured benefit plan to a fully insured plan, and USIAs contract with Nassau County terminated on March 31, 1999. At the time of the
establishment of the $16,000,000 reserve, USIA recorded a receivable of $10,000,000 from Firemans Fund Insurance Company (Firemans Fund) under its insurance policy at December 31, 1998 (see Firemans Fund Litigation below).



Since early 1999, offices of the United States
Attorney for the Eastern District of New York and the District Attorney of Nassau County have been conducting a joint investigation into possible wrongdoing in the procurement and administration of contracts for third-party health care
administrative services for employees of



61



---

##### Table of Contents

U.S.I. HOLDINGS CORPORATION AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Nassau County. None of the Company, USIA or any of their current management or employees has been informed that such person is a target of
the investigation. The Company and USIA have, from the outset, cooperated fully with this investigation. In October 2001, the United States Attorney brought an indictment against several individuals connected with the Nassau County controversy,
including the former CEO of USIA. Based on the facts and the cooperation of the Company and USIA in the governments investigation, the United States Attorney issued a press release in October 2001 that included, among other matters, a
statement that neither the Company nor USIA was responsible for any wrongdoing alleged in the indictment. In March 2002, a second superseding indictment was made public. This indictment added the former CFO of USIA as a defendant, charging him with
aiding the coordination and cover-up of the payment of secret commissions in violation of the contract with Nassau County and altering USIAs records. The former CFO of USIA was added to a number of charges, including the charge of conspiracy
to defraud Nassau County. The second superseding indictment also added income tax evasion charges against several people, including the former CEO of USIA, and accused him of causing the Company to file a false tax return. The trial started in
January 2003 and is expected to be completed in April 2003. The Company continues to cooperate fully with the United States Attorneys office.



Firemans Fund Litigation.     During 1998 and 1999, USIA was insured under an errors and omissions policy
issued by Firemans Fund. With respect to the Nassau County litigation, USIA asserted a claim for indemnification under the policy in the amount of $10,000,000 (the policy limit) plus the cost of defense. On March 8, 1999, Firemans Fund
filed a complaint for declaratory judgment against USIA. The complaint sought a declaration that Firemans Fund was not obligated to indemnify USIA with respect to the Nassau County litigation. On March 19, 1999, USIA commenced an action
against Firemans Fund that sought a declaration that USIA was entitled to indemnification under the Firemans Fund policy in the amount of $10,000,000 plus reimbursement of legal expenses. In November 2001, USIA settled this litigation
with Firemans Fund with the exchange of mutual releases of liability and a payment by Firemans Fund to USIA in the amount of $2,067,000. As a result of the settlement, the Company reduced its receivable for the claim by $7,933,000. This
write down is reflected in the results from discontinued operations included in the accompanying statement of operations for the year ended December 31, 2001.



Mutual of Omaha Litigation.     USIA, as the third-party administrator of health benefits for the employees of
Nassau County, placed stop-loss insurance with the Mutual of Omaha Insurance Company (Mutual). In 1999, Mutual brought an action against USIA asserting breach of contract, breach of warranty, fraud and negligent misrepresentation on the part of USIA
arising out of contracts between Mutual and USIA. All claims in this litigation were settled pursuant to a settlement agreement dated as of November 30, 2001 and dismissed with prejudice pursuant to a stipulation of dismissal with prejudice filed
with the court on December 17, 2001. Pursuant to the settlement agreement, USIAs insurer, Firemans Fund, paid Mutual $2,216,667. No payment by USIA was required. However, as a result of the settlement, USIA wrote off in 2001 a $1,000,000
commission receivable from Mutual recorded over a four-year period from 1995 through 1999. This write off is reflected in the results from discontinued operations included in the accompanying statement of operations for the year ended December 31,
2001.



62



---

##### Table of Contents

U.S.I. HOLDINGS CORPORATION AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





17.
    Earnings Per Share



The following table sets forth the computation of basic and diluted EPS giving effect to the reverse stock split (see Note 6):



|                                                                                         |  | 2002                                          |         |   | 2001 |   |          | 2000 | 
|---------------------------------------------------------------------------------------- |  | --------------------------------------------- | ------- | - | ---- | - | -------- | ---- | 
|                                                                                         |  | (Amounts in Thousands, Except Per Share Data) |        
|Numerator:                                                                               |  |                                               |         |   |      |   |          |      | 
|Net income (loss) from continuing operations                                             |  | $                                             | 10,936  |   |      | $ | (34,677  | )    | 
|Loss from discontinued operations, net of tax                                            |  |                                               | (13,751 | ) |      |   | (61,806  | )    | 
|                                                                                         |  |                                               |         |   |      |   |          |      | 
|Net Loss                                                                                 |  |                                               | (2,815  | ) |      |   | (96,483  | )    | 
|Change in aggregate liquidation preference of preferred stock                            |  |                                               | (18,708 | ) |      |   | (21,099  | )    | 
|Change in redemption value of Series N put rights                                        |  |                                               | 138     |   |      |   | (138     | )    | 
|                                                                                         |  |                                               |         |   |      |   |          |      | 
|                                                                                         |  |                                               | (18,570 | ) |      |   | (21,237  | )    | 
|                                                                                         |  |                                               |         |   |      |   |          |      | 
|Numerator for basic and diluted earnings per shareloss available to common
stockholders |  | $                                             | (21,385 | ) |      | $ | (117,720 | )    | 
|                                                                                         |  |                                               |         |   |      |   |          |      | 
|Denominator:                                                                             |  |                                               |         |   |      |   |          |      | 
|Denominator for basic and diluted earnings per shareweighted average
shares             |  |                                               | 8,805   |   |      |   | 754      |      | 
|                                                                                         |  |                                               |         |   |      |   |          |      | 
|Earnings per sharebasic and diluted:                                                    |  |                                               |         |   |      |   |          |      | 
|Net loss from continuing operations                                                      |  | $                                             | (0.87   | ) |      | $ | (74.16   | )    | 
|Loss from discontinued operations, net of income tax                                     |  |                                               | (1.56   | ) |      |   | (81.97   | )    | 
|                                                                                         |  |                                               |         |   |      |   |          |      | 
|Net Loss                                                                                 |  | $                                             | (2.43   | ) |      | $ | (156.13  | )    | 
|                                                                                         |  |                                               |         |   |      |   |          |      | 



Pro-forma net loss per share (basic and diluted) for the years ended December 31, 2002 and 2001 assuming the conversion of all Preferred Stock into Common Stock had taken place at the beginning of each year would have been $(0.09)
and $(3.42), respectively.



For additional
disclosures regarding the aggregate liquidation preference of Preferred Stock and the Series N put options (see Note 6 and Note 7).



For the years ended December 31, 2002, 2001, 2000, dilutive shares of 17,000, 30,698,000 and 29,868,000, respectively, were not included
in diluted weighted average shares outstanding because the effects would have been antidilutive.



18.     Stock Option Plan



The Company has granted nonqualified stock options to officers, employees and non-employee directors of the Company and its subsidiaries.
The options are primarily granted at the fair value of the underlying shares at the date of grant. Options granted generally become fully exercisable at the end of four years of continued employment. Options expire ten years from the date of grant,
or earlier in the event of termination of employment.



The Company has elected to follow APB No. 25 and, accordingly, recognizes no compensation expense for the stock options that are granted to employees at the fair value of the underlying shares at the date of grant.



63



---

##### Table of Contents

U.S.I. HOLDINGS CORPORATION AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



SFAS No. 123 requires disclosure of pro forma information regarding net earnings and net earnings per share, using pricing models to estimate
the fair value of stock options grants. Had compensation expense for the Companys stock option plans been determined based on the estimated fair value at the date of grant consistent with the methodology prescribed under SFAS No. 123,
approximate net earnings and net earnings per share would have been as follows:



|                                      |  | December 31, 2002                              |       
|------------------------------------- |  | ---------------------------------------------- | ------
|                                      |  | As Reported                                    |       
|                                      |  | ( Dollars in Thousands, Except Per Share Data) |       
|Net income from continuing operations |  | $                                              | 10,936
|Net loss                              |  |                                                | (2,815
|Basic and diluted earnings per share: |  |                                                |       
|Net loss from continuing operations   |  |                                                | (.87  
|Net loss                              |  |                                                | (2.43 



Pro
forma information regarding net loss and net loss per share is required by SFAS No. 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that statement. The fair value for these
options was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions for 2002: risk-free interest rate of 4.0%; dividend yields of 0.0%; volatility factor of the expected market
price of the Companys common stock of .26; and a weighted-average expected life of the option of 6 years.



The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Companys employee stock options have characteristics
significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in managements opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee and director stock options.



The pro forma disclosures above only include the effect of options granted subsequent to October 25, 2002, the Companys IPO date. Accordingly, the effects of applying the SFAS No. 123 pro forma
disclosures to future periods may not be indicative of future effects.



The following is a summary of all of the Companys stock option activity and related information:



|                           |  | December 31, 2002                                 
|-------------------------- |  | --------------------------------------------------
|                           |  | Shares Under Option                               
|                           |  | (Amounts in Thousands,
Except Exercise Price Data)
|December 31, 2001:         |  |                                                  
|Granted                    |  | 5,863                                             
|Exercised                  |  |                                                  
|Canceled                   |  | (2                                                
|                           |  |                                                   
|December 31, 2002          |  | 5,861                                             
|                           |  |                                                   
|Exercisable at end of year |  | 1,748                                             
|                           |  |                                                   



64



---

##### Table of Contents

U.S.I. HOLDINGS CORPORATION AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





The
weighted-average fair value of options granted during the year was $3.43 and the weighted-average contract life was 10 years.



On November 27, 2002, the Company exchanged all SARs for 2,820,000 stock options under the 2002 Equity Incentive Plan. In connection with
this exchange, the Company recorded $1,269,000 of compensation expense in the fourth quarter of 2002 and is reported as the value of stock options exchanged for stock appreciation rights in the accompanying 2002 statements of operations. The stock
options that were exchanged for the SARs maintained the original vesting schedule of the SARs. At December 31, 2002, the 1,748,000 options exercisable were a result of this arrangement.



19.    Selected Quarterly Financial Data (Unaudited)



|                                             |  | Three-Month Period Ended                          |        
|-------------------------------------------- |  | ------------------------------------------------- | -------
|                                             |  | March 31                                          |        
|                                             |  | (Dollars in Thousands, Except for Per Share Data) |        
|2002                                         |  |                                                   |        
|Revenues:                                    |  |                                                   |        
|Commissions and fees                         |  | $                                                 | 76,539 
|Investment income                            |  |                                                   | 740    
|                                             |  |                                                   |        
|Total revenues                               |  | $                                                 | 77,279 
|                                             |  |                                                   |        
|Net income (loss) from continuing operations |  | $                                                 | (13,854
|                                             |  |                                                   |        
|Per share databasic:                        |  |                                                   |        
|Net income (loss) from continuing operations |  | $                                                 | (26.00 
|                                             |  |                                                   |        
|Per share datadiluted:                      |  |                                                   |        
|Net income (loss) from continuing operations |  | $                                                 | (26.00 
|                                             |  |                                                   |        
|2001                                         |  |                                                   |        
|Revenues:                                    |  |                                                   |        
|Commissions and fees                         |  | $                                                 | 74,112 
|Investment income                            |  |                                                   | 944    
|                                             |  |                                                   |        
|Total revenues                               |  |                                                   | 75,056 
|                                             |  |                                                   |        
|Net loss from continuing operations          |  | $                                                 | (6,261 
|                                             |  |                                                   |        
|Per share databasic and diluted:            |  |                                                   |        
|Net loss from continuing operations          |  | $                                                 | (15.36 
|                                             |  |                                                   |        



The net
loss in the quarter ended March 31, 2002 was predominantly the result of the 2002 efficiency initiative charge of $5,511,000 (see Note 15).



The increase in the net loss for the quarter ended December 31, 2001 was predominantly the result of the 2001 efficiency initiative charge
of $9,642,000 (see Note 15) and a $3,092,000 compensation charge resulting from Companys Incentive Plan (see Note 6).



65



---

##### Table of Contents

U.S.I. HOLDINGS CORPORATION AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





20.    Subsequent Event



On March 1, 2003, the Company acquired one insurance brokerage operation in exchange for cash, seller note payable, the assumption of certain liabilities and Common Stock. The aggregate preliminary purchase price of
approximately $7,200,000 will be allocated primarily to goodwill and other intangible assets.



66



---

##### Table of Contents

Item 9.   Changes in and Disagreements with Accountants and Financial Disclosure.



None.



PART III



Item 10.   Directors and Executive Officers of the Registrant.



Information required by this Item will be contained in the Companys definitive Proxy Statement for its 2003 Annual Meeting of
Stockholders, to be filed on or before April 30, 2003, and such information is incorporated herein by reference.



Item 11.   Executive Compensation.



Information required by this Item will be contained in the Companys definitive Proxy Statement for its 2003 Annual Meeting of Stockholders, to be filed on or before April 30, 2003, and such information is incorporated
herein by reference.



Item 12.   Security Ownership of Certain Beneficial Owners and Management.



Information required by this Item will be contained in the Companys definitive Proxy Statement for its 2003 Annual Meeting of
Stockholders, to be filed on or before April 30, 2003, and such information is incorporated herein by reference.



Item 13.   Certain Relationships and Related Transactions.



Information required by this Item will be contained in the Companys definitive Proxy Statement for its 2003 Annual Meeting of Stockholders, to be filed on or before April 30, 2003, and
such information is incorporated herein by reference.



Item 14.   Controls and Procedures



Within the 90-day period prior to the date of this report, an evaluation was carried out, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer,
of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934. Based upon that evaluation, the chief executive officer and chief financial officer concluded
that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within
the time periods specified in Securities and Exchange Commission rules and forms.



There have been no significant changes in our internal controls or in other factors that could significantly affect internal controls, including any corrective actions with regard to significant
deficiencies and material weaknesses.





67



---

##### Table of Contents

PART IV



Item 15.   Exhibits, Financial Statement Schedules and Reports on Form 8-K



(a)     Listing of Documents.



(1)     Financial Statements.



The Companys Consolidated Financial Statements included
in Item 8 hereof, as required at December 31, 2002. Please see the Index to Consolidated Financial Statements at Item 8 of this report.



(2)     Financial Statement Schedules.



(3)     Exhibits:



See Exhibit Table at the
end of this Report.



(b)
    Reports on Form 8-K:



We filed the following Current Reports on Form 8-K during the last quarter of the year ended December 31, 2002:



| | 1. |  | Current Report on Form 8-K regarding our financial results for the quarter ended September 30, 2002, filed on November 15, 2002.
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------



| | 2. |  | Current Report on Form 8-K regarding the election of Messrs. Robert F. Wright and Thomas A. Hayes to our Board of Directors and as Chairman of the Audit Committee
and Chairman of the Compensation Committee, respectively, filed on November 18, 2003.
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



68



---

##### Table of Contents

SIGNATURES



Pursuant to the requirements of Section 13 or 15(d) the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



|      |  |                |  | U.S.I. HOLDINGS CORPORATION
|----- |  | -------------- |  | ---------------------------
|     
|DATE: |  | March 28, 2003 |  |                            
|      |  |                |  |                            



Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.



|Signature                                          |  | Title                                                                                      |  | Date          
|-------------------------------------------------- |  | ------------------------------------------------------------------------------------------ |  | --------------
|                                                  
|/s/    DAVID L.
ESLICKDavid L. Eslick              |  | Chairman, President and Chief Executive Officer (Principal Executive Officer) and Director |  | March 28, 2003
|                                                  
|/s/    ROBERT S.
SCHNEIDERRobert S. Schneider      |  | Executive Vice President and Chief Financial Officer (Principal Financial Officer)         |  | March 28, 2003
|                                                  
|/s/    JASON S.
MITCHELLJason S. Mitchell          |  | Controller (Principal Accounting Officer)                                                  |  | March 28, 2003
|                                                  
|/s/    RICHARD A.
HAVERLAND*Richard A. Haverland   |  | Director                                                                                   |  | March 28, 2003
|                                                  
|/s/    THOMAS A.
HAYES*Thomas A. Hayes             |  | Director                                                                                   |  | March 28, 2003
|                                                  
|/s/    PHILIP E. LARSON,
III*Philip E. Larson,
III |  | Director                                                                                   |  | March 28, 2003
|                                                  
|/s/    ROBERT
SPASS*Robert Spass                   |  | Director                                                                                   |  | March 28, 2003
|                                                  
|/s/    ROBERT F.
WRIGHT*Robert F. Wright           |  | Director                                                                                   |  | March 28, 2003
|                                                  
|*/s/    DAVID L.
ESLICKAttorney-in-fact            |  |                                                                                            |  | March 28, 2003



69



---

##### Table of Contents

CERTIFICATION OF DAVID L. ESLICK PURSUANT TO

RULE 13a-14 UNDER THE

SECURITIES EXCHANGE ACT OF 1934

FORM 10-K FOR THE YEAR ENDED

DECEMBER 31, 2002 OF

U.S.I. HOLDINGS CORPORATION



I, David L. Eslick, certify that:



|1. |  | I have reviewed this annual report on Form 10-K of U.S.I. Holdings Corporation;
|-- |  | -------------------------------------------------------------------------------



|2. |  | Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3. |  | Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and have:
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this annual report is being prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report
(the Evaluation Date); and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c) |  | presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



|5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee
of registrants board of directors (or persons performing the equivalent function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize
and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



|6. |  | The registrants other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|      |  |                |  | 
|----- |  | -------------- |  | 
|     
|Date: |  | March 28, 2003 |  | 
|      |  |                |  | 





70



---

##### Table of Contents

CERTIFICATION OF ROBERT S. SCHNEIDER PURSUANT TO

RULE 13a-14 UNDER THE

SECURITIES EXCHANGE ACT OF 1934

FORM 10-K FOR THE YEAR ENDED

DECEMBER 31, 2002 OF

U.S.I. HOLDINGS CORPORATION



I, Robert S.
Schneider, certify that:



|1. |  | I have reviewed this annual report on Form 10-K of U.S.I. Holdings Corporation;
|-- |  | -------------------------------------------------------------------------------



|2. |  | Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3. |  | Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and have:
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this annual report is being prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report
(the Evaluation Date); and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c) |  | presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



|5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee
of registrants board of directors (or persons performing the equivalent function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize
and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



|6. |  | The registrants other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|      |  |                |  | 
|----- |  | -------------- |  | 
|     
|Date: |  | March 28, 2003 |  | 
|      |  |                |  | 



71



---

##### Table of Contents

U.S.I. HOLDINGS CORPORATION

Exhibit Index



|Exhibit No. |     |  | Description                                                                                                                                                                                            
|----------- | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|           
|3.1*        |     |  | Amended and Restated Certificate of Incorporation of U.S.I. Holdings Corporation
dated May 31, 1994.                                                                                                   
|           
|3.2*        |     |  | Amendment to Certificate of Incorporation of U.S.I. Holdings Corporation dated
December 18, 1995.                                                                                                      
|           
|3.3*        |     |  | Amendment to Certificate of Incorporation of U.S.I. Holdings Corporation dated July
30, 1997.                                                                                                          
|           
|3.4*        |     |  | Amendment to Certificate of Incorporation of U.S.I. Holdings Corporation dated March
12, 1998.                                                                                                         
|           
|3.5*        |     |  | Amendment to the Amended and Restated Certificate of Incorporation of U.S.I. Holdings
Corporation dated July 9, 1998.                                                                                  
|           
|3.6*        |     |  | Certificate of Correction Filed to Correct a Certain Error in the Certificate of
Amendment to the Amended and Restated Certificate of Incorporation of U.S.I. Holdings Corporation dated July 12, 1999.
|           
|3.7*        |     |  | Certificate of Amendment to the Amended and Restated Certificate of Incorporation of
U.S.I. Holdings Corporation dated September 17, 1999.                                                             
|           
|3.8*        |     |  | Amended and Restated By-laws of U.S.I. Holdings Corporation.                                                                                                                                           
|           
|3.9*        |     |  | Amendment to Amended and Restated By-laws adopted December 27,
2001.                                                                                                                                   
|           
|3.10*       |     |  | Certificate of Retirement of U.S.I. Holdings Corporation dated August 26,
1998.                                                                                                                        
|           
|3.11**      |     |  | Amendment to Amended and Restated By-Laws dated October 25,
2002.                                                                                                                                      
|           
|3.12**      |     |  | Certificate of Amendment to Amended and Restated Certificate of Incorporation of
U.S.I. Holdings Corporation dated October 16, 2002.                                                                   
|           
|3.13        |     |  | Certificate of Elimination for Series B, C, D, E, F, G, H, I, J, K, L, M, N, O, P, Q,
R, T, U, V, W, X and Y Preferred Stock.                                                                          
|           
|4.1*        | (a) |  | Form of Common Stock Certificate of U.S.I. Holdings Corporation.                                                                                                                                       
|           
|4.2*        |     |  | Warrant Agreement of U.S.I. Holdings Corporation dated as of March 12,
1996.                                                                                                                           
|           
|4.3*        |     |  | Warrantholders Agreement of U.S.I. Holdings Corporation dated as of March 12,
1996.                                                                                                                   
|           
|4.4*        |     |  | Amendment to U.S.I. Holdings Corporation Warrant Agreement and Warrantholders
Agreement effective as of September 17, 1999.                                                                           
|           
|4.5*        |     |  | Amendment to U.S.I. Holdings Corporation Warrant Agreement and Warrantholders
Agreement dated as of April 26, 2002.                                                                                   
|           
|4.6*        |     |  | Series W Warrant Agreement among U.S.I. Holdings Corporation and the parties
signatory thereto dated as of September 17, 1999.                                                                         
|           
|4.7*        |     |  | Shareholders and Warrantholders Agreement among U.S.I. Holdings
Corporation and the parties signatory thereto dated as of September 17, 1999.                                                        
|           
|4.8*        |     |  | Amendment to Shareholders and Warrantholders Agreement among U.S.I.
Holdings Corporation and the parties signatory thereto dated as of December 27, 2001.                                            
|           
|4.9*        | (c) |  | Amendment to Warrantholders Agreement of U.S.I. Holdings
Corporation.                                                                                                                                 
|           
|4.10*       | (c) |  | Amendment to Warrantholders Agreement of U.S.I. Holdings
Corporation.                                                                                                                                 
|           
|4.11*       | (c) |  | Amendment to Series W Warrant Agreement among U.S.I. Holdings Corporation and the
parties signatory thereto.                                                                                           
|           
|4.12*       | (c) |  | Amendment to Shareholders and Warrantholders Agreement among U.S.I.
Holdings Corporation and the parties signatory thereto.                                                                          



1



---

##### Table of Contents

|Exhibit No. |   |  | Description                                                                                                                                                                                                              
|----------- | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|           
|10.1*       |   |  | Credit Agreement among U.S.I. Holdings Corporation and Credit Lyonnais Cayman Island
Branch, the Chase Manhattan Bank and Chase Securities Inc. dated as of September 17, 1999.                                          
|           
|10.2*       |   |  | First Amendment to Credit Agreement between U.S.I. Holdings Corporation and Credit
Lyonnais Cayman Island Branch, the Chase Manhattan Bank and Chase Securities Inc. dated as of March 27, 2000.                         
|           
|10.3*       |   |  | Second Amendment to Credit Agreement between U.S.I. Holdings Corporation and Credit
Lyonnais Cayman Island Branch, the Chase Manhattan Bank and Chase Securities Inc., as amended, dated as of December 29, 2000.        
|           
|10.4*       |   |  | Third Amendment and Consent to Credit Agreement between U.S.I. Holdings Corporation
and Credit Lyonnais Cayman Island Branch, the Chase Manhattan Bank and Chase Securities Inc., as amended, dated as of April 17, 2001.
|           
|10.5*       |   |  | Fourth Amendment to Credit Agreement between U.S.I. Holdings Corporation and Credit
Lyonnais Cayman Island Branch, the Chase Manhattan Bank and Chase Securities Inc., as amended, dated as of June 29, 2001.            
|           
|10.6*       |   |  | Fifth Amendment to Credit Agreement between U.S.I. Holdings Corporation and Credit
Lyonnais Cayman Island Branch, the Chase Manhattan Bank and Chase Securities Inc., as amended, dated as of December 31, 2001.         
|           
|10.7*       |   |  | Sixth Amendment to Credit Agreement between U.S.I. Holdings Corporation and Credit
Lyonnais Cayman Island Branch, the Chase Manhattan Bank and Chase Securities Inc. dated as of April 16, 2002.                         
|           
|10.8*       |   |  | Term Loan Agreement between USI Insurance Services Corp. and Zurich Services
Corporation dated as of May 16, 2001.                                                                                                       
|           
|10.9*       |   |  | Subscription Agreement for Series Y Convertible Preferred Stock between U.S.I.
Holdings Corporation and Sovereign Bancorp, Inc. dated as of January 16, 2002.                                                            
|           
|10.10       | * |  | Letter Agreement between U.S.I. Holdings Corporation and Credit Lyonnais Securities
(USA) Inc. dated as of December 21, 2001.                                                                                            
|           
|10.11       | * |  | Fee Letter between U.S.I. Holdings Corporation and Credit Lyonnais Securities (USA)
Inc. dated as of December 21, 2001.                                                                                                  
|           
|10.12       | * |  | Joint Venture Agreement between Maryland Casualty Company and USI of Illinois, Inc.
dated as of April 16, 1998.                                                                                                          
|           
|10.13       | * |  | Marketing and Servicing Agreement among U.S.I. Holdings Corporation, USI Insurance
Services Corporation and Chase Insurance Agency, Inc. dated as of August 2, 1999.                                                     
|           
|10.14       | * |  | Marketing Contract between USI Insurance Services Corp. and Unum Life Insurance
Company of America dated as of January 1, 2000.                                                                                          
|           
|10.15       | * |  | USI Marketing Support Agreement for Voluntary Benefits between USI Insurance Services
Corp. and UnumProvident Corporation dated as of May 16, 2000.                                                                      
|           
|10.16       | * |  | Environmental Placement Service Agreement between Chubb Financial Solutions Division
of Federal Insurance Company and USI Insurance Services of Texas dated as of September 17, 2001.                                    
|           
|10.17       | * |  | USI Marketing Support Agreement between USI Insurance Services Corp. and
UnumProvident Corporation dated as of November 13, 2001.                                                                                        
|           
|10.18       | * |  | Marketing and Servicing Agreement between USI Insurance Services Corp. and Sovereign
Bank dated as of January 16, 2002.                                                                                                  
|           
|10.19       | * |  | Referral Agreement between USI Insurance Services Corp. and Ceridian Corporation
dated as of October 24, 2001.                                                                                                           



2



---

##### Table of Contents

|Exhibit No. |         |  | Description                                                                                                                                                                                                                                      
|----------- | ------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|           
|10.20       | *       |  | Amendment Number One to Referral Agreement between USI Insurance Services Corp. and
Ceridian Corporation dated as of March 21, 2002.                                                                                                             
|           
|10.21       | *       |  | Services Agreement between USI Insurance Services Corp. and Ceridian Corporation
dated as of December 21, 2001.                                                                                                                                  
|           
|10.22       | *       |  | Amendment Number One to Services Agreement between USI Insurance Services Corp. and
Ceridian Corporation dated as of March 21, 2002.                                                                                                             
|           
|10.23       | *       |  | Stock Purchase Agreement between U.S.I. Holdings Corporation, USI Insurance Services
Corp., USI Care Management, Inc., Texas Professional Administrators, Inc., USI Prescription Benefits Management Co. and CBCA Inc. dated as of April 1, 2002.
|           
|10.24       | *       |  | Non-Negotiable Subordinated Promissory Note by CBCA Inc. payable to USI Insurance
Services Corp. dated as of April 16, 2002.                                                                                                                     
|           
|10.25       | *       |  | Restated and Amended Employment Agreement between USI Insurance Services Corp. and
David L. Eslick dated as of January 22, 2002.                                                                                                                 
|           
|10.26       | *       |  | Restated and Amended Employment Agreement between USI Insurance Services Corp. and
Edward J. Bowler dated as of January 22, 2002.                                                                                                                
|           
|10.27       | *       |  | Restated and Amended Employment Agreement between USI Insurance Services Corp. and
Ernest J. Newborn, II dated as of January 22, 2002.                                                                                                           
|           
|10.28       | *       |  | Separation Agreement between USI Insurance Services Corp. and Bernard H. Mizel dated
as of January 23, 2002.                                                                                                                                     
|           
|10.29       | *       |  | Termination Agreement between USI Insurance Services Corp. and Loren Claypool dated
as of February 1, 2002.                                                                                                                                      
|           
|10.30       | *(a)    |  | 2000 Management Incentive Program of USI Insurance Services
Corp.                                                                                                                                                                                
|           
|10.31       | *(a)    |  | U.S.I. Holdings Corporation 1995 Long Term Incentive and Share Award
Plan.                                                                                                                                                                       
|           
|10.32       | *(c)    |  | U.S.I. Holdings Corporation 2002 Equity Incentive Plan.                                                                                                                                                                                          
|           
|10.33       | *       |  | Current Share Appreciation Right Award Agreement.                                                                                                                                                                                                
|           
|10.34       | (a)*    |  | Former Share Appreciation Right Award Agreement with Public Offering Exercise
Event.                                                                                                                                                             
|           
|10.34       | (b)*(e) |  | Former Share Appreciation Right Award Agreement without Public Offering Exercise
Event.                                                                                                                                                          
|           
|10.35       | *       |  | Agreement among CBC Holding (Delaware) Inc., Chase Insurance Agency, Inc., U.S.I.
Holdings Corporation and USI Insurance Services Corp. dated as of November 30, 1997.                                                                           
|           
|10.36       | *       |  | Amendment to Agreement among CBC Holding (Delaware) Inc., Chase Insurance Agency,
Inc., U.S.I. Holdings Corporation and USI Insurance Services Corp. dated as of April 26, 2002.                                                                 
|           
|10.37       | *       |  | Form of Stock Subscription Agreement used in acquisition
transactions.                                                                                                                                                                           
|           
|10.38       | *(e)    |  | U.S.I. Holdings Corporation Employee Stock Purchase Plan.                                                                                                                                                                                        
|           
|10.39       | *(b)    |  | Settlement Agreement and Mutual Release between U.S.I. Holdings Corporation and Royal
Indemnity Company dated as of June 7, 2002.                                                                                                                
|           
|10.40       | *(d)    |  | Third Amendment to Refinancing Fee Letter between U.S.I. Holdings Corporation and
Credit Lyonnais Cayman Island Branch, the Chase Manhattan Bank and Chase Securities Inc., dated as of December 29, 2000.                                       
|           
|10.41       | *(d)    |  | Fee Letter between U.S.I. Holdings Corporation, Credit Lyonnais Cayman Island Branch
and J.P. Morgan Chase Bank dated as of March 29, 2002.                                                                                                      
|           
|10.42       | *       |  | Amendment Number One to Stock Purchase Agreement between USI Insurance Services
Corp., USI Care Management, Inc., Texas Professional Administrators, Inc., USI Prescription Benefits Management Co. and CBCA Inc., dated as of September 3, 2002.



3



---

##### Table of Contents

|Exhibit No. |      |  | Description                                                                                                                                                                                                                                                     
|----------- | ---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|           
|10.43       | *(e) |  | Seventh Amendment to Credit Agreement between U.S.I. Holdings Corporation and Credit
Lyonnais Cayman Island Branch, the Chase Manhattan Bank and Chase Securities Inc., as amended, dated as of December 31, 2001.                                              
|           
|10.44       | *(f) |  | Settlement Agreement between Gary J. Missigman and USI Northeast and U.S.I. Holdings
Corporation solely as guarantor dated as of October 9, 2002.                                                                                                               
|           
|10.45       |      |  | Employment Agreement between USI Insurance Services Corp. and Robert S. Schneider
dated as of November 1, 2002.                                                                                                                                                 
|           
|10.46       |      |  | Marketing and Distribution Agreement between U.S.I. Holdings Corporation and
Minnesota Life Insurance Company dated as of November 7, 2002.                                                                                                                     
|           
|10.47       |      |  | Employment Agreement between USI Insurance Services Corp. and Thomas E. ONeil
dated as of December 1, 2002.                                                                                                                                                    
|           
|10.48       |      |  | Employment Agreement between USI Insurance Services Corp. and Jeffrey L. Jones dated
as of December 1, 2002.                                                                                                                                                    
|           
|10.49       |      |  | Eighth Amendment and Consent to the Credit Agreement between U.S.I. Holdings
Corporation, Credit Lyonnais Cayman Island Branch as Administrative Agent, J.P. Morgan Chase Bank as Syndication Agent and the Lenders named therein, dated as of January 31, 2003.
|           
|10.50       |      |  | Fee Letter between U.S.I. Holdings Corporation and J.P. Morgan Chase Bank dated as of
January 31, 2003.                                                                                                                                                         
|           
|10.51       |      |  | Fee Letter between U.S.I. Holdings Corporation and Credit Lyonnais Cayman Island
Branch dated as of January 31, 2003.                                                                                                                                           
|           
|21.1        |      |  | Subsidiaries of U.S.I. Holdings Corporation.                                                                                                                                                                                                                    
|           
|23.1        |      |  | Consent of Ernst & Young LLP, Independent Auditors.                                                                                                                                                                                                             
|           
|24.1        |      |  | Powers of Attorney pursuant to which this Form 10-K has been signed on behalf of
certain Directors of the Registrant.                                                                                                                                           
|           
|99.1        |      |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002                                                                                                                                          
|           
|99.2        |      |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002                                                                                                                                          

---

|* |  | Incorporated by reference to the Exhibits filed with U.S.I. Holdings Corporations Registration Statement on Form S-1, filed on April 30, 2002 (File No.
333-87258).
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

|*(a) |  | Incorporated by reference to the Exhibits filed with Amendment No. 1 to U.S.I. Holdings Corporations Registration Statement on Form S-1, filed on May 28, 2002
(File No. 333-87258).
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|*(b) |  | Incorporated by reference to the Exhibits filed with Amendment No. 2 to U.S.I. Holdings Corporations Registration Statement on Form S-1, filed on July 3, 2002
(File No. 333-87258).
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|*(c) |  | Incorporated by reference to the Exhibits filed with Amendment No. 3 to U.S.I. Holdings Corporations Registration Statement on Form S-1, filed on August 6,
2002 (File No. 333-87258).
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|*(d) |  | Incorporated by reference to the Exhibits filed with Amendment No. 4 to U.S.I. Holdings Corporations Registration Statement on Form S-1, filed on August 30,
2002 (File No. 333-87258).
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|*(e) |  | Incorporated by reference to the Exhibits filed with Amendment No. 5 to U.S.I. Holdings Corporations Registration Statement on Form S-1, filed on October 1,
2002 (File No. 333-87258).
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|*(f) |  | Incorporated by reference to the Exhibits filed with Amendment No. 6 to U.S.I. Holdings Corporations Registration Statement on Form S-1, filed on October 17,
2002 (File No. 333-87258).
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|** |  | Incorporated by reference to the Exhibits filed with U.S.I. Holdings Corporations Quarterly Report on Form 10-Q for the period ended September 30, 2002
(Commission file number 000-50041).
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



4