S-1/A 1 ds1a.htm AMENDMENT #6 TO FORM S-1 Amendment #6 to Form S-1
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As filed with the Securities and Exchange Commission on October 17, 2002.
Registration No. 333-87258          
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
AMENDMENT NO. 6
TO 
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
 
 
U.S.I. Holdings Corporation
(Exact name of registrant as specified in its charter)
Delaware
  
6411
  
13-3771733
(State or other jurisdiction of
incorporation or organization)
  
(Primary Standard Industrial
Classification Code Number)
  
(I.R.S. Employer
Identification Number)
50 California Street, 24th Floor
San Francisco, California 94111-4796
(415) 983-0100
(Address, including zip code, and telephone number, including
area code, of registrant’s principal executive offices)
 
 
David L. Eslick
Chairman, President and
Chief Executive Officer
U.S.I. Holdings Corporation
50 California Street, 24th Floor
San Francisco, California 94111-4796
(415) 983-0100
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
 
 
Copies to:
Jonathan I. Mark, Esq.
Cahill Gordon & Reindel
80 Pine Street
New York, New York 10005-1702
(212) 701-3000
  
Ernest J. Newborn, II, Esq.
Senior Vice President, General Counsel
and Secretary
U.S.I. Holdings Corporation
50 California Street, 24th Floor
San Francisco, California 94111-4796
(415) 983-0100
   
Phyllis G. Korff, Esq.
Skadden, Arps, Slate, Meagher
& Flom LLP
4 Times Square
New York, New York 10036-6522 (212) 735-3000
 
 
Approximate date of commencement of proposed sale to the public:    As soon as practicable after this registration statement becomes effective.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, check the following box.    ¨
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨
If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box.    ¨
 
 
The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until this registration statement shall become effective on such date as the Commission, acting pursuant to Section 8(a), may determine.
 

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The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

Subject to Completion
 
Preliminary Prospectus dated October 17, 2002
 
PROSPECTUS
 
9,000,000 Shares
 
LOGO
U.S.I. Holdings Corporation
 
Common Stock
 
 
This is our initial public offering. We are selling all of the shares.
 
We expect the public offering price of the shares to be between $10.00 and $11.00 per share. Currently, no public market exists for our shares. Our common stock has been approved for listing on the New York Stock Exchange under the symbol “USH,” subject to official notice of issuance.
 
Investing in our common stock involves risks that are described in the “Risk Factors” section beginning on page 8 of this prospectus.
 
 
      
Per Share
     
Total
Public offering price
     
$
     
$
Underwriting discount
     
$
     
$
Proceeds, before expenses, to U.S.I. Holdings Corporation
     
$
     
$
 
The underwriters may also purchase up to an additional 1,350,000 shares from us at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus to cover overallotments.
 
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
 
The shares will be ready for delivery on or about            , 2002.
 
 
Merrill Lynch & Co.
   
JPMorgan
 
Credit Suisse First Boston
 
Credit Lyonnais Securities (USA) Inc.
   
Fox-Pitt, Kelton
 
 
The date of this prospectus is             , 2002.

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USI’s National Distribution System
LOGO
 

Table of Contents
 
TABLE OF CONTENTS
 
 
 
You should rely only on the information contained in this prospectus. We have not, and the underwriters have not, authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted.
 
You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus. Our business, financial condition, results of operations and prospects may have changed since that date.
 
Some of the market data in this prospectus are based on independent industry sources. Although we believe that these independent sources are reliable, the accuracy and completeness of this information is not guaranteed and has not been independently verified.

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PROSPECTUS SUMMARY
 
This summary highlights key aspects of our business that are described more fully elsewhere in this prospectus. You should read this entire prospectus carefully, including “Risk Factors” and our financial statements and the related notes included elsewhere in this prospectus.
 
About U.S.I. Holdings Corporation
 
We are a leading 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 leading 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. The products and services we distribute and offer can be categorized as:
 
Insurance Brokerage
 
 
Ÿ
General and specialty property and casualty insurance, which we refer to as P&C insurance
 
 
Ÿ
Individual and group health, life and disability insurance, which we refer to as group employee benefits insurance
 
Specialized Benefits Services
 
 
Ÿ
Core benefits (health and welfare)
 
 
Ÿ
Benefits enrollment and communication
 
 
Ÿ
Executive and professional benefits
 
Approximately 83% of our revenues for the year ended December 31, 2001 was derived from our Insurance Brokerage segment. Within this segment, approximately 65% relates to P&C insurance and 35% to group employee benefits insurance. The remaining approximate 17% of our revenues was derived from our Specialized Benefits Services segment. Within this segment, approximately 57% relates to core benefits, 24% to benefits enrollment and communication and 19% 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. According to the U.S. Census Bureau, in 1999 there were approximately 1.1 million businesses employing between 20 and 999 employees. We believe that this target market remains underpenetrated and includes companies that provide us with significant opportunities for future growth. Small to mid-sized businesses have traditionally purchased insurance and financial products and services from a highly fragmented group of providers, including insurance brokers, direct writers, benefits consultants, commercial banks and securities brokers. We believe that few of these companies are capable of providing the full array of products and services sought by their clients.
 
As a result, a key element of our sales strategy is to provide superior customer service and convenience to our clients by serving as a single distribution point for their multiple insurance and financial products and services needs. Our sales approach includes performing a full needs and priorities assessment, which we believe allows our sales professionals to better understand the needs of our clients and identify opportunities where multiple products and services may be cross-sold, i.e., where additional products and services may be sold to existing clients. A team of sales

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professionals and product specialists with the requisite expertise is organized to respond to and fulfill our clients’ needs. We have approximately 360 sales professionals and product specialists based in 58 offices in 20 states. After the initial sale, we focus on maximizing client retention by continuously monitoring the changing needs of our clients and providing them with additional products and services. We use sales management software which monitors current and prospective sales information by individual sales professional, by region and in the aggregate.
 
To expand our middle-market customer base and the scope of products and services we distribute and offer, we have formed marketing relationships with a number of leading insurance and financial services companies. Currently, we have agreements with Ceridian Corporation, The Chubb Corporation, Sovereign Bancorp, Inc., UnumProvident Corporation and Zurich Financial Services Group. These companies have further supported our strategy by making equity investments in us.
 
Our national scope, breadth of core and specialized products and services and relationships with insurance and financial services providers enable us to offer our clients products and services typically provided by national and global insurance brokers. However, our local presence enables us to provide our clients with the high degree of customer service that they would typically only receive from regional and local brokers. We differentiate ourselves from our competitors by delivering full-service capabilities with high-quality customer service.
 
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. 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. A key component of our integration effort also included standardizing and institutionalizing our sales strategy and introducing technology to monitor, report and forecast performance.
 
Our largest investors include leading private equity investment firms and financial institutions which provided the equity capital we used to manage our capital structure and fund the growth of our business. In connection with their investments, several of our investors designated representatives to serve on our board of directors. Capital Z Financial Services Fund II, L.P. and its affiliates, or Capital Z, our largest stockholder, will own 19.4% of our common stock after this offering. Capital Z is a leading private equity investment firm focused on the financial services sector, with significant experience in the insurance area. Upon the consummation of this offering, approximately 29.0% of our diluted voting equity will be held by the following unaffiliated financial institutions or their respective affiliates: Zurich, J.P. Morgan Chase & Co., UnumProvident, Chubb, The Travelers Insurance Group, Ceridian and Sovereign Bancorp. Of these stockholders, Capital Z and Zurich presently have representatives on our board of directors.
 
Competitive Strengths
 
We believe that the following competitive strengths will be material in enhancing our growth, profitability and standing in the industry:
 
 
Ÿ
we are a leading distributor of insurance and financial products and services to small and mid-sized businesses;
 
 
Ÿ
we serve as a single distribution point to our clients for over 20 insurance and financial products and services;

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Ÿ
our diversified revenue mix provides for consistent growth through insurance cycles;
 
 
Ÿ
we have strategic relationships with leading financial services companies;
 
 
Ÿ
we use customized sales management software to help manage our sales professionals and our sales prospects; and
 
 
Ÿ
we have an experienced and motivated management team.
 
Business Strategy
 
Our objective is to build stockholder value, and, to achieve this, we will focus on capitalizing on our competitive strengths and implementing the business strategies outlined below:
 
 
Ÿ
Increase Operating Efficiencies.    We expect to realize continued improvement in our margins by consolidating the back-office operations of our insurance brokerage businesses on a regional basis, completing fold-in and strategic acquisitions and increasing the productivity of our sales professionals.
 
 
Ÿ
Increase Cross-Selling Penetration.    We continue to train and provide financial incentives to our sales professionals to increase the percentage of our gross new business from cross-selling.
 
 
Ÿ
Pursue Fold-in and Strategic Acquisitions.    We intend to continue making selective acquisitions of businesses currently operating in our geographic footprint and consolidating their operations into our existing infrastructure.
 
Risks Related to Our Competitive Strengths and Business Strategy
 
You should also consider risks we face in our business that could mitigate our competitive strengths and limit our ability to implement our business strategy, including that:
 
 
Ÿ
we have substantial indebtedness, current and future debt service requirements and are subject to restrictive covenants in our existing credit facility;
 
 
Ÿ
we must successfully integrate multiple types of acquired businesses into our decentralized operations;
 
 
Ÿ
recently enacted and pending legislation may reduce or eliminate the attractiveness of some life insurance products that we sell to our executive and professional benefits division’s clients;
 
 
Ÿ
we are dependent on key sales and management professionals who could end their employment with us; and
 
 
Ÿ
our recently formed strategic relationships with Ceridian and Sovereign Bancorp have limited operating histories.
 
Our Executive Offices
 
Our principal executive offices are located at 50 California Street, 24th Floor, San Francisco, California 94111-4796. Our telephone number is (415) 983-0100. Our Internet address is www.usi.biz. Information on our website does not constitute part of this prospectus.

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The Offering
 
Common stock offered by us
   
  9,000,000 shares
 
Shares outstanding after the offering
   
44,113,696 shares
 
Use of proceeds

   
 
We estimate that our net proceeds from this offering will be approximately $82.6 million. We intend to use these net proceeds to repay indebtedness.
 
Risk factors

   
 
Please read “Risk Factors” and other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in shares of our common stock.
 
Proposed New York Stock Exchange symbol
   
 
“USH”
 
The information contained in this prospectus gives effect to a reverse stock split effected on October 16, 2002 in which two shares of common stock were issued for every five shares outstanding. All references to common shares, common share warrants, stock appreciation rights, or SARs, and per share amounts with respect to common stock in this prospectus have been restated to reflect the reverse stock split.
 
The number of shares outstanding upon the consummation of this offering excludes 3,239,996 shares that are issuable upon the exercise of outstanding warrants, 10,165,364 shares reserved and available for issuance under our 2002 Equity Incentive Plan (which includes up to approximately 2,685,360 shares issuable upon the exercise of stock options to be issued upon the consummation of this offering), and 1,600,000 shares reserved for issuance under our Employee Stock Purchase Plan. Please read “Capitalization” for a description of the shares of common stock that will be outstanding immediately following the consummation of this offering.
 
Unless otherwise indicated, the information contained in this prospectus assumes that the underwriters will not exercise their overallotment option.

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Summary Consolidated Financial Data
 
You should read the summary 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 prospectus. We derived the financial information for each of the years ended and as of December 31, 1999, 2000 and 2001 from our audited financial statements and the related notes included elsewhere in this prospectus. We derived the financial information for the six months ended June 30, 2001 and 2002 and as of June 30, 2002 from our unaudited financial statements and the related notes included elsewhere in this prospectus.
 
    
Year ended December 31,
     
Six Months
ended June 30,
  
    
1999
     
2000
     
2001
     
2001
     
2002
  
    
(in thousands, except per share data)
  
Income Statement Data:
                                   
Revenues
                                   
Commissions and Fees
   
$
250,757
 
   
$
286,662
 
   
$
308,349
 
   
$
150,029
 
   
$
156,090
 
Investment Income
   
 
3,847
 
   
 
4,072
 
   
 
3,230
 
   
 
1,744
 
   
 
1,404
 
    
  
  
  
  
Total Revenues
   
 
254,604
 
   
 
290,734
 
   
 
311,579
 
   
 
151,773
 
   
 
157,494
 
Expenses
                                             
Compensation and Employee Benefits
   
 
157,925
 
   
 
172,380
 
   
 
203,307
 
   
 
95,227
 
   
 
105,107
 
Other Operating Expenses
   
 
64,887
 
   
 
62,407
 
   
 
76,371
 
   
 
34,623
 
   
 
35,187
 
Amortization of Intangible Assets
   
 
30,386
 
   
 
32,678
 
   
 
32,908
 
   
 
16,338
 
   
 
10,504
 
Depreciation
   
 
8,508
 
   
 
10,221
 
   
 
12,818
 
   
 
6,031
 
   
 
6,516
 
Interest
   
 
25,970
 
   
 
25,573
 
   
 
25,497
 
   
 
12,999
 
   
 
9,811
 
Early Extinguishment of Debt
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
660
 
    
  
  
  
  
Total Expenses
   
 
287,676
 
   
 
303,259
 
   
 
350,901
 
   
 
165,218
 
   
 
167,785
 
    
  
  
  
  
Loss From Continuing Operations Before Income Taxes
   
 
(33,072
)
   
 
(12,525
)
   
 
(39,322
)
   
 
(13,445
)
   
 
(10,291
)
Income Tax (Benefit) Expense
   
 
(9,402
)
   
 
(2,668
)
   
 
(4,645
)
   
 
(2,685
)
   
 
1,280
 
    
  
  
  
  
Net Loss From Continuing Operations
   
 
(23,670
)
   
 
(9,857
)
   
 
(34,677
)
   
 
(10,760
)
   
 
(11,571
)
Loss From Discontinued Operations, Net of
Income Tax(a)
   
 
(4,963
)
   
 
(8,349
)
   
 
(61,806
)
   
 
(2,516
)
   
 
(13,154
)
Loss on Early Extinguishment of Debt, Net of Income Tax Benefit(b)
   
 
(1,511
)
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
    
  
  
  
  
Net Loss
   
$
(30,144
)
   
$
(18,206
)
   
$
(96,483
)
   
$
(13,276
)
   
$
(24,725
)
    
  
  
  
  
Reconciliation of Net Loss to Net Loss Available to Common Stockholders:
                                             
Net Loss
   
$
(30,144
)
   
$
(18,206
)
   
$
(96,483
)
   
$
(13,276
)
   
$
(24,725
)
Change in Aggregate Liquidation Preference of Preferred Stock
   
 
(16,920
)
   
 
(21,475
)
   
 
(21,099
)
   
 
(10,622
)
   
 
(11,435
)
Change in Redemption Value of Series N Preferred Stock
   
 
576
 
   
 
—  
 
   
 
(138
)
   
 
—  
 
   
 
—  
 
    
  
  
  
  
Net Loss Available to Common Stockholders
   
$
(46,488
)
   
$
(39,681
)
   
$
(117,720
)
   
$
(23,898
)
   
$
(36,160
)
    
  
  
  
  
Per Share Data—Basic and Diluted:
                                   
Net Loss From Continuing Operations
   
$
(53.08
)
   
$
(41.56
)
   
$
(74.16
)
   
$
(28.36
)
   
$
(30.51
)
Loss From Discontinued Operations, Net of Income Taxes
   
 
(6.58
)
   
 
(11.07
)
   
 
(81.97
)
   
 
(3.34
)  
   
 
(17.44
)
Loss on Early Extinguishment of Debt, Net of Income Tax Benefit
   
 
(2.00
)
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
    
  
  
  
  
Net Loss Per Common Share
   
$
(61.66
)
   
$
(52.63
)
   
$
(156.13
)
   
$
(31.70
)
   
$
(47.95
)
    
  
  
  
  

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As of December 31,
   
As of June 30, 2002
   
As adjusted as of
June 30, 2002(c)
    
1999
   
2000
   
2001
      
    
(in thousands)
Balance Sheet Data:
                                 
Goodwill, Net 
   
$
188,105
   
$
188,346
   
$
176,793
   
$183,950
   
$
183,950
Other Intangible Assets, Net
   
 
139,059
   
 
123,190
   
 
105,396
   
102,640
   
 
100,407
Total Assets of Continuing Operations
   
 
538,258
   
 
553,106
   
 
584,702
   
566,042
   
 
563,809
Total Debt of Continuing Operations 
   
 
218,390
   
 
230,429
   
 
250,036
   
229,172
   
 
146,583
Redeemable Preferred Stock(d)
   
 
28,418
   
 
28,590
   
 
27,801
   
27,432
   
 
—  
Redeemable Common Stock and Warrants(d)
   
 
2,894
   
 
2,894
   
 
4,300
   
4,300
   
 
21,301
Total Stockholders’ Equity
   
 
176,205
   
 
159,862
   
 
92,370
   
73,700
   
 
164,486
(a)
We sold USIA, formerly 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, 1999, 2000 and 2001 and for the six months ended June 30, 2001 and 2002, the loss from discontinued operations is reported net of income tax expense (benefit) of $0.9 million, $0.3 million, $(4.5) million, $(1.0) million and zero, respectively. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Discontinued Operations.”
(b)
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.
(c)
We have adjusted the balance sheet data to give effect to the sale of the shares of our common stock in this offering, the anticipated use of the estimated net proceeds to repay indebtedness, elimination of all common stock warrant put rights and some preferred stock put rights, the conversion of all series of our preferred stock and accretion dividends, the pro-rata write-off of deferred financing costs related to our existing credit facility and restricted stock units to be granted under our 2002 Equity Incentive Plan all of which will occur upon the consummation of this offering. The adjustments do not give effect to the potential exercise of 6,250,002 series W preferred stock warrants which are exercisable into 2,499,997 shares of common stock or the potential exercise of warrants to purchase 739,999 shares of common stock and the potential exercise of stock options granted separately or in exchange for SARs and stock issued in exchange for SARs under our 2002 Equity Incentive Plan.
(d)
For a description of put rights relating to our preferred stock and our common stock warrants please read “Description of Put Rights.”

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FORWARD-LOOKING STATEMENTS
 
This prospectus includes forward-looking statements that are subject to a number of risks and uncertainties, many of which are beyond our control, which may include statements about:
 
 
Ÿ
our business strategy;
 
 
Ÿ
our financial strategy;
 
 
Ÿ
our future financial results;
 
 
Ÿ
the integration of our operations with businesses or assets that we have acquired or may acquire in the future;
 
 
Ÿ
competition from others in the insurance agency and brokerage business;
 
 
Ÿ
future regulatory actions and conditions in the states in which we conduct our business; and
 
 
Ÿ
our plans, objectives, expectations and intentions contained in this prospectus that are not historical.
 
All statements other than statements of historical fact included in this prospectus, including statements regarding our strategy, financial position, estimated revenues and losses, projected costs, prospects and plans and objectives of management, including the benefits expected to be derived from the implementation of our business strategy, are forward-looking statements. When used in this prospectus, the words “will,” “could,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “project” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. All forward-looking statements speak only as of the date of this prospectus. You should not place undue reliance on these forward-looking statements. Although we believe that our plans, intentions and expectations reflected in or suggested by these forward-looking statements are reasonable, we cannot assure you that these plans, intentions or expectations will be achieved. We disclose important factors that could cause our actual results to differ materially from our expectations under “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this prospectus. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf.

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RISK FACTORS
 
You should carefully consider each of the risks described below, together with all of the other information contained in this prospectus, before deciding to invest in shares of our common stock. If any of the following risks develop into actual events, our business, financial condition or results could be negatively affected, the market price of your shares could decline and you may lose all or part of your investment.
 
Risks Relating to Our Company
 
We have a history of net losses, expect to incur losses in the future and may never achieve profitability, which could negatively impact the value of our common stock.
 
Since our inception, we have experienced net losses. These losses principally resulted from losses related to discontinued operations, the amortization expense on intangibles assets and interest expense. The following table summarizes these losses:
    
Year ended
December 31,
     
Six months ended June 30, 2002
    
1999
   
2000
   
2001
     
    
(in millions)
Losses related to discontinued operations, net of income tax benefit
   
$  5.0  
   
$  8.3  
   
$61.8  
     
$13.2  
Amortization expense on intangible assets
   
30.4
   
32.7
   
32.9
     
10.5
Interest expense
   
26.0
   
25.6
   
25.5
     
  9.8
Net losses
   
30.1
   
18.2
   
96.5
     
24.7
 
We expect to incur a net loss in 2002, may incur net losses in the future and may never achieve profitability. We also face the risk of future charges that could be material.
 
Beyond the charges that are expected to be incurred in connection with and upon the consummation of this offering, potential charges are:
 
 
Ÿ
an estimated $1.0 million prepayment fee and a charge of $3.8 million for the remaining write-off of deferred financing fees in connection with prepayment of indebtedness under our existing credit facility, after giving effect to the pro-rata write-off, upon entering into a new credit facility or issuing debt instruments following this offering;
 
 
Ÿ
an additional estimated fee of $1.0 million in the event that our leverage covenant in our credit facility is not met on December 31, 2002;
 
 
Ÿ
a goodwill and other intangible asset write-down resulting from impairment;
 
 
Ÿ
continued SARs expense until all SARs are either cashed-out or exchanged for options or stock; and
 
 
Ÿ
government regulation affecting our Specialized Benefits Services segment that may result in restructuring charges (e.g., severance, lease termination and leasehold write-offs).
 
If we are unable to achieve profitability, the value of our common stock could be negatively impacted.

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We have substantial indebtedness and debt service requirements, which limit our ability to finance our operations and implement our business strategy.
 
We intend to use the net proceeds of this offering to repay indebtedness under our existing credit facility, but we will continue to have a substantial amount of debt. We estimate that, immediately following this offering, we will have total consolidated debt of $146.6 million (not including $20.6 million in unused commitments under our existing credit facility) and total stockholders’ equity of $164.5 million. We expect that we will have to borrow additional money to finance capital expenditures and acquisitions and to refinance our other debt. If we add new debt to our current debt level, the risks noted below could intensify.
 
As of June 30, 2002, our consolidated debt totaled $229.2 million and our future maturities of debt and related interest were as follows:
 
    
Principal
   
Interest(a)
   
Total
Year
  
(in thousands)
2002 (July 1 through December 31)
   
$
21,575
   
$
9,827
   
$
31,402
2003
   
 
51,745
   
 
16,355
   
 
68,100
2004
   
 
147,204
   
 
7,403
   
 
154,607
2005
   
 
6,178
   
 
500
   
 
6,678
2006
   
 
1,784
   
 
142
   
 
1,926
Thereafter
   
 
686
   
 
31
   
 
717
    
  
  
Total
   
$
229,172
   
$
34,258
   
$
263,430
    
  
  
 
Using the estimated $82.6 million, net of fees and expenses, of proceeds to us from this offering on September 30, 2002 to repay indebtedness under our existing credit facility, we estimate the future maturities of our consolidated debt and related interest to be as follows:
 
    
Principal
   
Interest(a)
   
Total
Year
  
(in thousands)
2002 (July 1 through December 31)
   
$
17,974
   
$
8,050
   
$
26,024
2003
   
 
32,298
   
 
10,121
   
 
42,419
2004
   
 
87,663
   
 
4,723
   
 
92,386
2005
   
 
6,178
   
 
500
   
 
6,678
2006
   
 
1,784
   
 
142
   
 
1,926
Thereafter
   
 
686
   
 
31
   
 
717
    
  
  
Total
   
$
146,583
   
$
23,567
   
$
170,150
    
  
  
(a)
Assumes an interest rate of 9% which was an approximate average interest on our debt over the last several years; the interest rates on most of our indebtedness are variable and it is not possible to accurately predict future interest rates.
 
We believe that cash and cash equivalents on hand of $16.6 million as of June 30, 2002, together with cash flow generated from operations, should be sufficient to fund our estimated $18.0 million in debt principal repayments, $7.7 million in capital expenditures and working capital needs through December 31, 2002. Our liquidity thereafter will depend on our financial results and future available sources of additional equity or debt funding, which include public debt offerings, private placements of debt under Rule 144A of the Securities Act, syndicated loans, bank debt and additional public equity offerings. If we are unable to access these forms of capital on terms attractive to us or at all, we will consider raising funds from private equity sources or explore other strategic alternatives.

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Our high level of debt could have important consequences for you, including the following:
 
 
Ÿ
we may have difficulty borrowing money in the future to finance working capital, capital expenditures and acquisitions, to implement our business strategy and to refinance our other debt;
 
 
Ÿ
we will need to use cash generated by our subsidiaries to pay principal and interest on our existing credit facility and our other debt shown in the tables above, which will reduce the amount of money available to us to finance our operations and other business activities;
 
 
Ÿ
as of June 30, 2002, the $165.0 million outstanding under our existing credit facility had a weighted average variable interest rate of 6.4%, which exposes us to the risk of increased interest rates; and
 
 
Ÿ
all debt under our existing credit facility is secured by substantially all of our assets, including all of our equity interests in our subsidiaries, and therefore, if we default under the facility, some of our assets may be sold by our creditors.
 
Our high level of indebtedness may put us at a competitive disadvantage relative to insurance brokers and other distributors of financial products and services.
 
As of June 30, 2002, our total indebtedness of $229.2 million and our total indebtedness measured as a percentage of our total capitalization of 68.5% were higher than those of brokers that we consider to be generally comparable to us, including Arthur J. Gallagher, Brown & Brown and Hilb, Rogal and Hamilton. As a result, we are likely to be less able to compete effectively with our peers when acquiring other brokerage operations that are seeking cash purchase consideration versus stock purchase consideration. Additionally, with a lower level of indebtedness, our peers are likely to have greater flexibility to direct cash flow from operations toward capital expenditures, hiring additional sales professionals and other forms of reinvestment in their businesses than we have currently.
 
Restrictive covenants in our existing credit facility make it difficult to implement our business plan, and refinance our other debt.
 
Our existing credit facility contains, and our future debt instruments may contain, restrictive covenants. These restrictions limit:
 
 
Ÿ
our ability to incur additional debt;
 
 
Ÿ
the amount of capital expenditures we may make; and
 
 
Ÿ
our ability to make acquisitions.
 
If we are unable to obtain waivers of these restrictions, it will be difficult to implement our business strategy and to refinance our other debt.
 
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.
 
Under our existing credit facility, we must comply with financial covenants, which limit our flexibility in responding to changing business and economic conditions.

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As of June 30, 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)
   
 
3.76
   
 
4.125 maximum
Interest Expense Coverage Ratio
   
 
3.37
   
 
  2.25 minimum
Stockholders’ Equity(b) (in millions)
   
$
105.4
   
$
101.0 minimum 
(a)
Adjusted Pro Forma EBITDA as defined in the existing credit facility means the EBITDA for such period adjusted for the EBITDA of any business acquired during such period, adjusted to reflect changes in continuing revenues and expenses in connection with the acquisition and excluding from the calculation the revenues, other income items and expenses and other charges attributable to each subsidiary of ours that ceased to be wholly owned by us during such period, in each case as though such acquisition or sale had been consummated on the first day of such period.
 
EBITDA as defined in the existing credit facility means the consolidated net income for the period plus the aggregate amount of (1) charges for consolidated interest and financing fees and costs and other interest charges accrued in or for the period, (2) charges for consolidated income taxes accrued in or for the period by us, (3) charges for consolidated amortization and depreciation, (4) compensation expense accrued in respect of SARs, minus cash payments made in the period to honor, redeem or discharge SARs, and (5) other adjustments.
 
(b)
Stockholders’ Equity as defined in the existing credit facility means the total of our stockholders’ equity and the total of our redeemable securities.
 
In addition, under the provisions of our existing credit facility, we are generally prohibited from repurchasing shares of our capital stock, with the limited exception of repurchasing shares held by terminated employees in an amount up to $3.0 million per year. As a result, if the rights described below under “—Our liquidity could be reduced if a substantial number of our employee stockholders or two former employee stockholders require us to repurchase their stock” and “Description of Put Rights” 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 and we fail to repurchase the shares, we may be in default under our obligations to repurchase the shares put to us and could be sued for breach of the contract governing the put. However, if we repurchase the shares, we would be in default under our existing credit facility, which could result in the acceleration of our indebtedness under that facility and our other debt.
 
Amounts due under our existing credit facility and under future debt instruments could become immediately due and payable as a result of our failure to comply with the restrictive covenants they contain, which, in turn, could cause all or a portion of our other debt to become immediately due and payable. Our ability to comply with these provisions in existing or future debt instruments may be affected by events beyond our control.
 
Since 1999, we have had to amend the financial covenants in our existing credit facility five times to avoid being in default under this facility. We may be required to seek similar amendments to this facility or any replacement facility in the future and, if we need to make such amendments, we may not be able to obtain them on terms acceptable to us or at all.
 
Our continued growth is partly based on our ability to acquire and integrate operations successfully, and our failure to do so may negatively affect our financial results.
 
Competition to acquire traditional insurance brokerage agencies is intense. As part of our business strategy, we may seek to acquire such agencies and may experience heightened price competition from our peers.

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We also seek to acquire agencies in the core benefits, benefits enrollment and communication, and executive and professional benefits areas. Due in part to the decentralized nature of our operations, as well as the variety of types of businesses we seek to acquire, we may have difficulty integrating the operations, systems and management of our acquired companies and may lose key employees of acquired companies. Also, we may be required to obtain additional financing to pursue our acquisition strategy; however, our ability to do so is limited by the terms of our existing credit facility, which contains covenants that, among other things, require lender approval of most acquisitions that we propose to make as well as restrictions on our ability to incur additional debt. We may also be similarly limited by our future debt instruments.
 
Government regulation relating to the supplemental executive benefits plans we design and implement could negatively affect our financial results.
 
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. Split dollar life insurance policies are arrangements in which premiums, ownership rights, and death benefits are generally split between an employer and an employee. The employer pays either the entire premium or the portion of each year’s premium that at least equals the increase in cash value of the policy. Split dollar life insurance has traditionally been used because of its federal tax law advantages. However, in recent years, the Internal Revenue Service has proposed regulations relating to the tax treatment of some types of these life insurance arrangements. The Internal Revenue Service recently proposed regulations that treat premiums paid by an employer in connection with split dollar life insurance arrangements as loans for tax purposes under the Internal Revenue Code. In addition, the recently enacted Sarbanes-Oxley Act of 2002 may affect these arrangements. Specifically, the Sarbanes-Oxley Act includes a provision that prohibits most loans from a public company to its 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. As a result, these plans as presently structured are likely to become less attractive to some of our customers. This could result in lower revenues to us in which case, we may have to restructure our Executive and Professional Benefits division. This could result in severance, lease termination, leasehold write-offs, impairment charges to intangible assets and other similar charges, as well as a reduction in future revenues. Our Executive and Professional Benefits division is one of our highest margin operations and, in 2001, represented approximately $10 million, or 3%, of our revenues and contributed $1.2 million pre-tax income toward our loss from continuing operations before income taxes of $39.3 million. We expect that in 2002 the Executive and Professional Benefits division will contribute approximately the same amount toward our consolidated financial results.
 
If we are required to write down goodwill and other intangible assets, our financial condition and results would be negatively affected.
 
When we acquire a business, a substantial portion of the purchase price of the acquisition is allocated to goodwill and other identifiable intangible assets. The amount of the purchase price which is allocated to goodwill and other intangible assets is determined by the excess of the purchase price over the net identifiable assets acquired. At June 30, 2002, goodwill represented $184.0 million, or 249.6% of our total stockholders’ equity, net of accumulated amortization of $40.2 million. At June 30, 2002, other intangible assets, including expiration rights, covenants not-to-compete and other assets, represented $102.6 million, or 139.3% of our total stockholders’ equity, net of accumulated amortization of $118.8 million.
 
On January 1, 2002, we adopted SFAS No. 142, “Goodwill and Other Intangible Assets,” 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 no longer be amortized but tested for impairment at least annually. Intangible assets deemed to have indefinite lives are no longer amortized but are subject to impairment tests at

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least annually. Other intangible assets will continue to be amortized over their useful lives. SFAS No. 142 also requires the completion of a transitional impairment test within six months of adoption. In May 2002, we completed the transitional impairment test, which indicated that there was no goodwill impairment as of January 1, 2002. We have no intangible assets with indefinite lives.
 
Under current accounting standards, if we determine goodwill or intangible assets are impaired, we will be required to write down the value of such assets. Because goodwill and intangible assets comprise such a large percentage of our stockholders’ equity, any such writedown would have a significant negative effect on our stockholders’ equity and financial results.
 
Our liquidity could be reduced if a substantial number of our employee stockholders or two former employee stockholders require us to repurchase their stock.
 
Substantially all of our employees who hold our preferred stock from prior acquisitions may put to us that number of shares owned by them having a fair market value equal to the employee’s original investment in those shares upon termination of employment by us without cause, the employee’s resignation for good reason or the death or disability of the employee. As of June 30, 2002, the value of the largest individual employee stockholder’s put was $1.8 million and the aggregate value of all employee stockholders’ puts was $17.3 million.
 
In addition, our retired chairman of the board and one of our other former employees have rights to require us to repurchase some of the preferred stock owned by them at fair market value at the time of such repurchase, up to the amount of their original investment. Our retired chairman may require us to repurchase $1.0 million of the preferred stock owned by him during the period between December 31, 2002 and January 30, 2003. The other former employee may require us to repurchase $3.0 million of the preferred stock owned by him during a 60-day period beginning November 30, 2004.
 
Our requirement to repurchase significant amounts of our stock is conditioned on our ability to fund the repurchase from operations or obtain other financing. If we are required to make such repurchase and have or obtain adequate cash to make the repurchase, the cash utilized to make the repurchase would be unavailable for other corporate purposes. Such circumstances would reduce our liquidity.
 
If we are unable to fund or finance a purchase at the time the preferred stock is put to us by a stockholder, then we will be permitted to delay the purchase for a period of up to 120 days. If we are not able to fund or finance the purchase within the 120-day period, then the stockholder may withdraw the put and will again have the right to put the preferred stock to us. If the stockholder later exercises his or her put right, we would be subject to the same liquidity risks described above.
 
Under the provisions of our existing credit facility, we are generally prohibited from repurchasing shares of our capital stock, with the limited exception of repurchasing shares held by terminated employees in an amount up to $3.0 million per year. As a result, if the put rights 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 and could be sued for breach of the contract governing the put. However, if we effected the repurchase, we may be in default under our existing credit facility, which could result in the acceleration of our indebtedness under that facility and our other debt.
 
Please read “Description of Put Rights” for additional information about these put rights.
 
SARs remaining after the consummation of this offering could negatively affect our financial results.
 
Until recently, we issued stock appreciation rights, or SARs, as compensation to our employees and consultants. As of June 30, 2002, there were 2,912,674 SARs held by employees and consultants and 472,656

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SARs held by former employees. Within 60 days following the consummation of this offering, we will exercise our right to cash out all of the SARs deemed exercised because they are held by former employees who have no continuing relationship with us. We estimate and currently reflect this liability to be approximately $0.8 million, which we expect to fund through cash flows from operations or additional borrowings under our existing credit facility. Soon after the completion of this offering, we intend to make an offer to exchange outstanding SARs that are held by current employees and consultants for stock options or stock under the 2002 Equity Incentive Plan. The historical accounting treatment of SARs (which is described in Note 6 “Stockholders’ Equity,” to our annual financial statements included elsewhere in this prospectus) will continue until the exchange is finalized and the SARs tendered in the exchange are canceled; that is, the difference between the reference price of the SARs (the estimated fair value of our common stock on the date the SARs were granted) and the market value of our common stock would continue to be recorded on our income statement as an expense and would, therefore, continue to affect our financial results. If fewer than all of the SARs are exchanged, the difference between the reference price of the outstanding SARs and the market value of our common stock would continue to be recorded on our income statement as an expense and would, therefore, continue to affect our financial results.
 
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 operate through decentralized units that report their results to corporate headquarters monthly. If there is a delay in informing corporate headquarters of a negative business development such as the possible loss of an important client or insurance carrier relationship or a threatened professional liability claim, corporate headquarters may not be able to take action to remedy the situation on a timely basis. This in turn could have a negative effect on our financial results. In addition, if one of our operating units were to report inaccurate financial information, we might not learn of the inaccuracies on a timely basis and be able to take corrective measures promptly.
 
During the past two years, we have taken steps to minimize the impact of untimely reporting of negative business developments within our operations. For example, we reduced the number of units reporting into corporate headquarters, thereby concentrating oversight among fewer regional executive officers and reducing the number of regions requiring monitoring by corporate headquarters. Furthermore, we have instituted new operating policies and procedures to improve corporate headquarters’ monitoring of our nationwide operations. Specifically, our chief executive officer and chief financial officer conduct monthly calls with regional executive officers to discuss results and material operational concerns. However, if these measures are unsuccessful in reducing the occurrence or minimizing the impact of untimely and/or inaccurate reporting, our financial results could be negatively affected.
 
The geographic concentration of our businesses could leave us vulnerable to an economic downturn or regulatory changes in those areas, resulting in a decrease in our revenues.
 
For the years ended December 31, 1999, 2000 and 2001 and for the six months ended June 30, 2002, our California- and New York-based businesses constituted approximately 27%, 26%, 28% and 30%, respectively, of our consolidated revenues. Because our business is concentrated in these two states, the occurrence of adverse economic conditions or an adverse regulatory climate in either California or New York could negatively affect our financial results more than would be the case if our business was more geographically diversified. Currently, we are not experiencing adverse economic conditions or an adverse regulatory climate in either of these two states.
 
The cyclical nature of P&C premium rates may make our financial results volatile and unpredictable.
 
Commissions from the brokering of insurance products represent a majority of our revenues. Commissions are typically determined as a percentage of premium rates. We have no control over the insurance premium rates on which these commissions are calculated. For example, from 1987 through 1999, the P&C

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insurance industry experienced 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 P&C insurance. However, the longevity of this cycle cannot be accurately predicted. Accordingly, the cyclical nature of premium rates may make our financial results volatile and unpredictable.
 
Contingent commissions are more profitable, but less predictable, than our other revenues, which makes it difficult to forecast revenues; and decreases in these commissions may negatively impact our financial results.
 
Many insurance companies pay us contingent commissions for achieving specified premium volume goals set by them and/or the loss experience of the insurance we place with them. We generally receive these commissions in the first and second quarters of each year. However, we have no control over the ability of insurance companies to estimate loss reserves, which affects the amount of contingent commissions that we will receive. In addition, because no significant incremental operating costs are incurred when contingent commissions are realized, a significant decrease in these commissions can cause a disproportionate increase in loss from continuing operations before income taxes. We derived approximately 3%, 4% and 4% of our consolidated revenues from contingent commissions for each of the years ended December 31, 1999, 2000 and 2001, respectively. Contingent commissions for each six month period ended June 30, 2001 and 2002 approximated 6% of our consolidated revenues, or $9.4 million.
 
Any decrease in the contingent commissions we receive would reduce our revenues and, to a greater degree, increase our loss from continuing operations net of incoming taxes, on a percentage basis. For example, a $3.1 million reduction in contingent commissions would have reduced 2001 revenues by approximately 1% but would have increased loss from continuing operations before income taxes by approximately 8% in the same period. A significant decrease in contingent commissions would consequently have a negative impact on our financial results and limit our ability to incur and service debt and comply with financial covenants in our existing credit facility.
 
Competition in our industry is intense and, if we are unable to compete effectively, we may lose clients and our financial results may be negatively affected.
 
We face competition in both our Insurance Brokerage and Specialized Benefits Services segments. We compete for clients on the basis of reputation, client service, program and product offerings, and the ability to tailor our products and services to the specific needs of a client.
 
We currently have approximately 60,000 small and mid-sized business clients. Revenues generated by our ten largest clients accounted for 5.5% of our commissions and fees in 2001, while no single client in this group represented more than 1.0% of our commissions and fees in 2001. Our client base fluctuates over time as a result of competition in our industry as well as other factors. If we lose one or more of our larger clients and are not able to replace them or otherwise mitigate our loss sufficiently, our financial results could be negatively affected.
 
In our Insurance Brokerage segment, competition is intense in all our business lines and in every insurance market. We believe that most of our competition is from numerous local and regional brokerage firms that focus primarily on middle-market businesses and, to a lesser extent, from larger domestic brokerage firms. We believe our most significant competitors will be brokers that pursue an acquisition or consolidation strategy similar to ours, which include Arthur J. Gallagher, Brown & Brown and Hilb, Rogal and Hamilton. In addition, insurance companies compete with us by directly soliciting clients without the assistance of an independent broker or agent. Weak economic growth, as experienced in the past few years, as well as rising P&C insurance

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rates, exacerbate these various competitive pressures as some of our customers have chosen to cut back or eliminate various types of coverage. These conditions have not negatively affected our revenues to date, but they may in the future. Additionally, as P&C insurance rates continue to rise, some of our customers may seek alternatives to traditional coverage options and other mechanisms for funding their risks. Additional competitive pressures arise from the entry of new market participants, such as banks, securities firms, accounting firms and other institutions that offer insurance-related products and services.
 
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 and from larger competitors that pursue an acquisition or consolidation strategy similar to ours.
 
The loss of key personnel could negatively affect our financial results and impair our ability to implement our business strategy.
 
Our success substantially depends on our ability to attract and retain senior management and the individual sales professionals and teams that service our clients and maintain client relationships. The ten highest revenue producing sales professionals during 2001 represented 9.7% of our commissions and fees for the year. In addition, each of our regional and product line reporting unit chief executive officers are responsible for significant segments of our business.
 
If key sales professionals and senior managers were to end their employment with us, it could disrupt our client relationships and have a corresponding negative effect on our financial results, marketing and other objectives and impair our ability to implement our strategy. Our senior managers and substantially all of our sales professionals are subject to employment agreements containing confidentiality and non-solicitation provisions. We have no reason to believe any of these senior managers and key sales professionals will leave us in the foreseeable future. However, if any of them were to leave and litigate to be released from these agreements, some courts may not enforce these agreements.
 
Our business, financial condition and/or results may be negatively affected by errors and omissions claims.
 
We have extensive operations and are subject to claims and litigation in the ordinary course of business resulting from alleged errors and omissions in placing insurance and handling claims. The placement of insurance and the handling of claims involve substantial amounts of money. Since errors and omissions claims against us may allege our potential liability for all or part of the amounts in question, claimants may seek large damage awards and these claims can involve significant defense costs. Errors and omissions could include, for example, our employees or sub-agents failing, whether negligently or intentionally, to place coverage or file claims on behalf of clients, to provide insurance carriers with complete and accurate information relating to the risks being insured or to appropriately apply funds that we hold for our clients on a fiduciary basis. It is not always possible to prevent or detect errors and omissions, and the precautions we take may not be effective in all cases.
 
We have primary errors and omissions insurance coverage providing limits of $5.0 million per claim and $10.0 million annual aggregate coverage. We also carry $25.0 million per claim excess coverage and $60.0 million aggregate excess coverage. Our deductible on these policies is $500,000 per claim. The coverage limits and the amount of related deductibles are established annually based upon our assessment of our errors and omissions exposure, loss experience and the availability and pricing within the marketplace. During our recent renewal, our premiums and deductibles associated with the purchase of errors and omission coverages were higher than in prior years because of adverse market conditions for buyers of these coverages. Recently, prices have increased and coverage terms have become far more restrictive because of reduced insurer capacity in the

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marketplace. While we endeavor to purchase coverage that is appropriate to our assessment of our risk, we are unable to predict with certainty the frequency, nature or magnitude of claims for direct or consequential damages.
 
Our business, financial condition and/or results may be negatively affected if in the future our insurance proves to be inadequate or unavailable. In addition, errors and omissions claims may harm our reputation or divert management resources away from operating our business.
 
Failure to comply with regulations applicable to us could restrict our ability to conduct our business.
 
We conduct business in a number of states and are subject to comprehensive regulation and supervision by government agencies in many of the states in which we do business. State laws grant supervisory agencies broad administrative powers. Our ability to conduct our business in the states in which we currently operate depends on our compliance with the rules and regulations established by the regulatory authorities in each of these states.
 
State insurance regulators and the National Association of Insurance Commissioners continually re-examine existing laws and regulations, some of which affect us, including those relating to the licensing of insurance brokers and agents, premium rates, regulating unfair trade and claims practices, and the regulation of the handling and investment of insurance carrier funds held in a fiduciary capacity. These examinations may result in the enactment of insurance-related laws and regulations, or the issuance of interpretations of existing laws and regulations, that adversely affect our business. More restrictive laws, rules or regulations may be adopted in the future that could make compliance more difficult and/or expensive. Specifically, recently adopted federal financial services modernization legislation addressing privacy issues, among other matters, is expected to lead to additional federal regulation of the insurance industry in the coming years, which could result in increased expenses or restrictions on our operations.
 
In response to perceived excessive cost or inadequacy of available insurance, states have also from time to time created state insurance funds and assigned risk pools, which compete directly, on a subsidized basis, with private insurance providers. We act as agents and brokers for state insurance funds such as those in California, New York and other states in which we operate. These state funds could choose to reduce the sales or brokerage commissions we receive. In addition, these states could enact legislation to reform existing P&C and individual and group health care insurance regulations. If these reductions in commissions or changes in legislation occurred in a state in which we have substantial operations, such as California or New York, they could substantially affect the profitability of our operations in that state or cause us to change our marketing focus.
 
Proposed tort reform legislation could decrease demand for liability insurance, thereby reducing our commission and fee revenues.
 
Legislation concerning tort reform has been considered, from time to time, in the United States Congress and in several states. Among the provisions considered for inclusion in proposed legislation have been limitations on damage awards, including punitive damages, and various restrictions applicable to class action lawsuits. Enactment of these or similar provisions by Congress or by states in which we sell insurance could result in a reduction in the demand for liability insurance policies or a decrease in limits on policies we sell, thereby reducing our commission and fee revenues.
 
Risks Related to our Common Stock
 
Investors in this offering will suffer immediate and substantial dilution.
 
The initial public offering price of our common stock will be substantially higher than the net tangible book value per share of our common stock. Purchasers of our common stock in this offering will experience immediate and substantial dilution in the net tangible book value of $13.40 per share of the common stock,

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assuming an initial public offering price of $10.50 per share. Our issuance of options and the exercise of our existing warrants will cause investors to experience further dilution if the market price of our common stock exceeds the exercise price of these securities.
 
The market price of our common stock could be negatively affected by sales of substantial amounts of our common stock in the public markets.
 
Sales by us or our stockholders of a substantial number of shares of our common stock in the public markets following this offering, or the perception that these sales might occur, could cause the market price of our common stock to decline or could impair our ability to obtain capital through an offering of equity securities. Upon the consummation of this offering, there will be 44,113,696 shares of our common stock outstanding. There will be 45,463,696 shares outstanding if the underwriters exercise their overallotment option in full. Of these shares, the shares of our common stock sold in this offering will be freely transferable, except for any shares sold to our “affiliates,” as that term is defined in Rule 144 under the Securities Act. The remaining shares will be “restricted securities” subject to the volume limitations and the other conditions of Rule 144.
 
We, our directors, officers and all existing stockholders have agreed, with limited exceptions, for a period of 180 days after the date of this prospectus, that we and they will not, without the prior written consent of the representatives on behalf of the underwriters, directly or indirectly, offer to sell, sell or otherwise dispose of any shares of our common stock. Upon the consummation of this offering, all existing stockholders and their transferees will have the right to require us to register their shares of our common stock under the Securities Act for sale into the public markets, subject to the 180-day lock-up agreements. Upon the effectiveness of that registration statement, all shares covered by the registration statement will be freely transferable. In addition, following the consummation of this offering, we intend to file a registration statement on Form S-8 under the Securities Act to register an aggregate of 11,869,515 shares of our common stock reserved for issuance under our 2002 Equity Incentive Plan and our Employee Stock Purchase Plan. Subject to the exercise of issued and outstanding options, shares registered under the registration statement on Form S-8 will be available for sale into the public markets after the expiration of 180-day lock-up agreements.
 
Possible volatility in our stock price could negatively affect us and our stockholders.
 
The trading price of our common stock may be volatile in response to a number of factors, many of which are beyond our control, including actual or anticipated variations in quarterly financial results, changes in financial estimates by securities analysts and announcements by our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments. In addition, our financial results may be below the expectations of securities analysts and investors. If this were to occur, the market price of our common stock could decrease, perhaps significantly.
 
In addition, the U.S. securities markets have experienced significant price and volume fluctuations. These fluctuations often have been unrelated to the operating performance of companies in these markets. Broad market and industry factors may negatively affect the price of our common stock, regardless of our operating performance. In the past, following periods of volatility in the market price of an individual company’s securities, securities class action litigation often has been instituted against that company. The institution of similar litigation against us could result in substantial costs and a diversion of our management’s attention and resources, which could negatively affect our financial results.
 
Our common stock may not trade actively, which may cause our common stock to trade at a discount and make it difficult for you to sell your stock.
 
This is our initial public offering, which means that our common stock currently does not trade in any market. Upon the consummation of this offering our common stock may not trade actively. In addition, since only 20.4% of our common stock will be sold to the public in this offering, the market for our stock may be

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illiquid. An illiquid market for our common stock may result in price volatility and poor execution of buy and sell orders for investors. Our initial public offering price may bear no relationship to the price at which the common stock will trade after this offering.
 
Our principal stockholders’ interests in our business may be different than yours and therefore may make decisions that are adverse to your interests.
 
After this offering, Capital Z will beneficially own 19.4% of our outstanding voting common stock. Capital Z’s ownership, combined with the ownership of entities controlled by Zurich, JPMorgan Chase, CNA, UnumProvident and Ceridian, which are all unaffiliated with each other, will comprise together 52.4% of our outstanding voting common stock. As a result, Capital Z, both independently and voting together with these stockholders, will have the ability to significantly influence matters requiring stockholder approval, including, without limitation, the election of directors and mergers, consolidations and sales of all or substantially all of our assets. They also may have interests that differ from yours and may vote in a way with which you disagree and which may be adverse to your interests. In addition, this concentration of ownership may have the effect of preventing, discouraging or deferring a change of control, which could depress the market price of our common stock.
 
Provisions of Delaware law could delay or prevent a change in control of our company, which could adversely impact the value of our common stock.
 
Delaware law imposes some restrictions on mergers and other business combinations between us and any holder of 15% or more of our outstanding common stock. This provision in Delaware law could delay or prevent a change in control of our company, which could adversely affect the price of our common stock.
 
We have no plans to pay and are currently precluded from paying dividends on our common stock.
 
We have never declared or paid cash dividends on our common stock and do not anticipate paying any cash dividends on our common stock in the foreseeable future. We currently intend to retain future earnings, if any, to finance our business. In addition, 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 in an amount up to $3.0 million per year. It is likely that future debt we incur will similarly restrict dividend payments and/or share repurchases.

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USE OF PROCEEDS
 
We estimate that we will receive net proceeds of approximately $82.6 million from the sale of shares of our common stock in this offering, based upon an assumed initial public offering price of $10.50 per share, the midpoint of the offering range, and after deducting underwriting discounts and commissions and estimated offering expenses. If the underwriters’ overallotment option is exercised in full, we estimate that our net proceeds will be approximately $95.7 million.
 
We intend to use the net proceeds from this offering to repay indebtedness under our existing credit facility. The indebtedness under our existing credit facility bears interest at a weighted average rate equal to 6.4% as of June 30, 2002, and has a final maturity of September 17, 2004. We used the indebtedness under our existing credit facility primarily to refinance previously incurred indebtedness.
 
If the underwriters exercise their overallotment option, any additional proceeds we receive will be used to repay additional indebtedness under our existing credit facility.
 
DIVIDEND POLICY
 
We have never declared or paid cash dividends on our common stock and do not anticipate paying any cash dividends on our common stock in the foreseeable future. We currently intend to retain future earnings, if any, to finance our business. We cannot assure you that we will pay dividends in the future. Our future dividend policy is within the discretion of our board of directors and will depend upon various factors, including our business and financial condition, results of operations, capital requirements and investment opportunities. In addition, 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. It is likely that future debt we incur will similarly restrict dividend payments and/or share repurchases.

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CAPITALIZATION
 
The following table sets forth our capitalization as of June 30, 2002:
 
 
Ÿ
on an actual basis; and
 
 
Ÿ
on an as adjusted basis to give effect to the sale of the shares of our common stock in this offering, the anticipated use of the estimated net proceeds to repay indebtedness, elimination of all common stock warrant put rights and some preferred stock put rights upon the conversion of all series of our preferred stock and accretion dividends, the pro rata write-off of deferred financing costs relating to our existing credit facility and the grant of restricted stock units to be made under our 2002 Equity Incentive Plan, all of which will occur upon the consummation of this offering.
 
You should read this table 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 prospectus.
 
    
As of June 30, 2002
  
    
Actual
       
As Adjusted(a)
  
    
(in thousands, except
per share data)
  
Debt:
                    
Credit facility:
                    
Term loan
   
$
91,570
 
     
$
29,628
 
Revolving credit facility
   
 
73,475
 
     
 
52,828
 
Seller notes
   
 
43,963
 
     
 
43,963
 
Other debt
   
 
20,164
 
     
 
20,164
 
    
    
Total debt
   
 
229,172
 
     
 
146,583
 
    
    
Redeemable preferred stock: par value $.01 per share; aggregate liquidation preference $36,989 actual; no aggregate liquidation preference as adjusted(b)
   
 
27,432
 
     
 
—  
 
    
    
Redeemable common stock and warrants: par value $.01 per share; 2,157 shares issued and outstanding as adjusted(b)
   
 
4,300
 
     
 
21,301
 
    
    
Stockholders’ equity:
                    
Preferred stock: par value $.01 per share; 87,000 shares authorized; aggregate liquidation preference $452,386 actual; no aggregate liquidation preference as adjusted
   
 
579
 
     
 
—  
 
Common stock:
                    
Voting: par value $.01 per share; 300,000 shares authorized; 754 shares issued and outstanding actual; 41,303 shares issued and outstanding as adjusted
   
 
8
 
     
 
413
 
Non-voting: par value $.01 per share; 10,000 shares authorized; no shares issued and outstanding actual or as adjusted
   
 
—  
 
     
 
—  
 
Additional paid-in capital
   
 
294,610
 
     
 
479,775
 
Retained deficit
   
 
(221,497
)
     
 
(315,702
)
    
    
Total stockholders’ equity
   
 
73,700
 
     
 
164,486
 
    
    
Total capitalization
   
$
334,604
 
     
$
332,370
 
    
    
 
(a)
Does not give effect to the potential exercise of 6,250,002 series W preferred stock warrants which are exercisable into 2,499,997 shares of common stock or the potential exercise of warrants to purchase 739,999 shares of common stock, and the potential exercise of stock options granted separately or in exchange for SARs and stock issued in exchange for SARs under our 2002 Equity Incentive Plan.
(b)
Please read “Description of Put Rights.”

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DILUTION
 
As of June 30, 2002, our net tangible book value was $(212.9) million, or $(282.54) per share of common equity. As of the same date, our net tangible book value after giving effect to
 
 
Ÿ
the conversion of all outstanding preferred stock and accretion dividends, including $6.1 million of redeemable preferred stock that will convert into common stock,
 
 
Ÿ
the pro-rata write-off of deferred financing fees on our balance sheet in conjunction with repayment of our bank borrowings,
 
 
Ÿ
the issuance of 104,151 shares of restricted stock units valued at $1.1 million to be granted under our 2002 Equity Incentive Plan to senior management, and
 
 
Ÿ
the reclassification of redeemable common stock warrants to equity,
 
all of which will occur upon consummation of this offering, would have been $(202.5) million, or $(6.27) per share of common equity. Net tangible book value per share as adjusted is equal to our total tangible assets minus total liabilities and redeemable common stock remaining following this offering divided by the number of shares of common equity outstanding. After giving effect to the sale of new shares of common stock in the offering and giving effect to the application of net proceeds, our pro forma tangible book value as adjusted as of June 30, 2002, would have been $(119.9) million, or $(2.90) per share of common equity. This represents an immediate increase in net tangible book value as adjusted of $3.36 per share to existing stockholders and an immediate dilution in net tangible book value of $(13.40) per share to new investors purchasing shares of our common stock in this offering. Dilution is determined by subtracting pro forma net tangible book value per share after this offering from the amount of cash paid by a new investor for a share of our common stock. The following table illustrates the foregoing information as of June 30, 2002 with respect to dilution to new investors:
 
Assumed initial public offering price per share
            
$
10.50
 
Net tangible book value per share as of June 30, 2002
   
$
(282.54
)
         
Increase in net tangible book value per share attributable to conversion of preferred stock to common stock
   
 
276.19
 
         
Increase in net tangible book value per share attributable to other adjustments
   
 
0.08
 
         
    
        
Net tangible book value per share, as adjusted
   
 
(6.27
)
         
Increase in net tangible book value per share attributable to new investors
   
 
3.36
 
         
Net tangible book value per share upon the consummation of this offering and after other adjustments
            
 
(2.90
)
             
Dilution per share to new investors
            
$
13.40
 
             
 
The following table summarizes, as of June 30, 2002, the differences between the total number of shares of our common stock purchased from us, the total consideration paid and the average price per share paid by existing stockholders and new investors purchasing shares of our common stock in this offering:
 
    
Shares Purchased
     
Total Consideration
       
Average Price
Per Share
    
Number
   
Percent
     
Amount
   
Percent
       
Existing stockholders
   
34,355,611
   
79.2
%
   
$
398,410,355
   
80.8
%
     
$
11.60
New investors
   
9,000,000
   
20.8
 
   
 
94,500,000
   
19.2
 
     
 
10.50
    
  
  
  
        
Total
   
43,355,611
   
100.0
%
   
$
492,910,355
   
100.0
%
         
    
  
  
  
        
 
If the underwriters exercise their overallotment option in full, the number of shares held by new investors will be increased to 10,350,000, or approximately 23% of the total number of outstanding shares of our common stock.

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SELECTED CONSOLIDATED 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 prospectus. We derived the financial information for each of the years ended and as of December 31, 1997, 1998, 1999, 2000 and 2001 from our audited financial statements and the related notes included elsewhere in this prospectus. We derived the financial information for the six months ended June 30, 2001 and 2002 and as of June 30, 2002 from our unaudited financial statements and the related notes included elsewhere in this prospectus. 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 1997 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,
     
Six Months ended June 30,
  
   
1997
    
1998
     
1999
     
2000
     
2001
     
2001
     
2002
  
   
(in thousands, except per share data)
  
Income Statement Data:
                        
Revenues
                                                             
Commissions and Fees
  
$
146,790
 
  
$
204,828
 
   
$
250,757
 
   
$
286,662
 
   
$
308,349
 
   
$
150,029
 
   
$
156,090
 
Investment Income
  
 
2,269
 
  
 
3,423
 
   
 
3,847
 
   
 
4,072
 
   
 
3,230
 
   
 
1,744
 
   
 
1,404
 
   
 
  
  
  
  
  
Total Revenues
  
 
149,059
 
  
 
208,251
 
   
 
254,604
 
   
 
290,734
 
   
 
311,579
 
   
 
151,773
 
   
 
157,494
 
Expenses
                                                             
Compensation and Employee Benefits
  
 
93,496
 
  
 
132,401
 
   
 
157,925
 
   
 
172,380
 
   
 
203,307
 
   
 
95,227
 
   
 
105,107
 
Other Operating Expenses
  
 
35,081
 
  
 
48,104
 
   
 
64,887
 
   
 
62,407
 
   
 
76,371
 
   
 
34,623
 
   
 
35,187
 
Amortization of Intangible Assets
  
 
17,959
 
  
 
24,256
 
   
 
30,386
 
   
 
32,678
 
   
 
32,908
 
   
 
16,338
 
   
 
10,504
 
Depreciation
  
 
3,186
 
  
 
5,596
 
   
 
8,508
 
   
 
10,221
 
   
 
12,818
 
   
 
6,031
 
   
 
6,516
 
Interest
  
 
12,077
 
  
 
18,888
 
   
 
25,970
 
   
 
25,573
 
   
 
25,497
 
   
 
12,999
 
   
 
9,811
 
Early Extinguishment of Debt
  
 
—  
 
  
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
660
 
   
 
  
  
  
  
  
Total Expenses
  
 
161,799
 
  
 
229,245
 
   
 
287,676
 
   
 
303,259
 
   
 
350,901
 
   
 
165,218
 
   
 
167,785
 
   
 
  
  
  
  
  
Loss From Continuing Operations Before Income Taxes
  
 
(12,740
)
  
 
(20,994
)
   
 
(33,072
)
   
 
(12,525
)
   
 
(39,322
)
   
 
(13,445
)
   
 
(10,291
)
Income Tax (Benefit) Expense
  
 
(2,071
)
  
 
(4,777
)
   
 
(9,402
)
   
 
(2,668
)
   
 
(4,645
)
   
 
(2,685
)
   
 
1,280
 
   
 
  
  
  
  
  
Net Loss From Continuing Operations
  
 
(10,669
)
  
 
(16,217
)
   
 
(23,670
)
   
 
(9,857
)
   
 
(34,677
)
   
 
(10,760
)
   
 
(11,571
)
Loss From Discontinued Operations, Net of Income Taxes(a)
  
 
(2,869
)
  
 
(6,942
)
   
 
(4,963
)
   
 
(8,349
)
   
 
(61,806
)
   
 
(2,516
)
   
 
(13,154
)
Loss on Early Extinguishment of Debt, Net of Income Tax Benefit(b)
  
 
—  
 
  
 
—  
 
   
 
(1,511
)
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
  
  
  
  
  
Net Loss
  
$
(13,538
)
  
$
(23,159
)
   
$
(30,144
)
   
$
(18,206
)
   
$
(96,483
)
   
$
(13,276
)
   
$
(24,725
)
   
 
  
  
  
  
  
Reconciliation of Net Loss to Net Loss
Available to Common Stockholders:
                                                             
Net Loss
  
$
(13,538
)
  
$
(23,159
)
   
$
(30,144
)
   
$
(18,206
)
   
$
(96,483
)
   
$
(13,276
)
   
$
(24,725
)
Change in Aggregate Liquidation Preference of Preferred Stock
  
 
(9,357
)
  
 
1,921
 
   
 
(16,920
)
   
 
(21,475
)
   
 
(21,099
)
   
 
(10,622
)
   
 
(11,435
)
Change in Redemption Value of Series N Preferred Stock
  
 
—  
 
  
 
(576
)
   
 
576
 
   
 
—  
 
   
 
(138
)
   
 
—  
 
   
 
—  
 
   
 
  
  
  
  
  
Net Loss Available to Common Stockholders
  
$
(22,895
)
  
$
(21,814
)
   
$
(46,488
)
   
$
(39,681
)
   
$
(117,720
)
   
$
(23,898
)
   
$
(36,160
)
   
 
  
  
  
  
  
 
(Table continued on following page)

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Table of Contents
(Continued from previous page)
 
    
Year ended December 31,
     
Six Months ended June 30,
  
    
1997
     
1998
     
1999
     
2000
     
2001
     
2001
     
2002
  
    
(in thousands, except per share data)
  
Per Share Data—Basic and Diluted:
                                                 
Net Loss From Continuing Operations
   
$
   (22.17
)
   
$
   (19.72
)
   
$
   (53.08
)
   
$
   (41.56
)
   
$
(74.16
)
   
$
   (28.36
)
   
$
   (30.51
)
Loss From Discontinued Operations, Net of Income Taxes
  
 
(3.18
)
   
 
(9.21
)
   
 
(6.58
)
   
 
(11.07
)
   
 
(81.97
)
   
 
(3.34
)
   
 
(17.44
)
Loss on Early Extinguishment of Debt, Net of Income Tax Benefit
   
 
—  
 
   
 
—  
 
   
 
(2.00
)
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
    
  
  
  
  
  
  
Net Loss Per Common Share
   
$
(25.35
)
   
$
(28.93
)
   
$
(61.66
)
   
$
(52.63
)
   
$
  (156.13
)
   
$
(31.70
)
   
$
(47.95
)
    
  
  
  
  
  
  
 
    
As of December 31,
   
As of
June 30,
2002
    
1997
   
1998
   
1999
   
2000
   
2001
   
    
(in thousands)
     
Balance Sheet Data:
                                        
Goodwill, Net
   
$
116,482
   
$
173,582
   
$
188,105
   
$
188,346
   
$
176,793
   
$183,950
Other Intangible Assets, Net
   
 
96,676
   
 
135,523
   
 
139,059
   
 
123,190
   
 
105,396
   
102,640
Total Assets of Continuing Operations
   
 
357,310
   
 
528,754
   
 
538,258
   
 
553,106
   
 
584,702
   
566,042
Total Debt of Continuing Operations
   
 
154,608
   
 
248,503
   
 
218,390
   
 
230,429
   
 
250,036
   
229,172
Redeemable Preferred Stock(c)
   
 
20,387
   
 
27,228
   
 
28,418
   
 
28,590
   
 
27,801
   
27,432
Redeemable Common Stock and Warrants(c)
   
 
3,421
   
 
5,179
   
 
2,894
   
 
2,894
   
 
4,300
   
4,300
Total Stockholders’ Equity
   
 
66,908
   
 
85,533
   
 
176,205
   
 
159,862
   
 
92,370
   
73,700
(a)
We sold USIA 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, 1997, 1998, 1999, 2000 and 2001 and for the six months ended June 30, 2001 and 2002, the loss from discontinued operations is reported net of income tax expense (benefit) of $(2.8) million, $(4.6) million, $0.9 million, $0.3 million, $(4.5) million, $(1.0) million and zero, respectively. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Discontinued Operations.”
(b)
For a description of the $1.5 million charge, see footnote (b) under “Summary Consolidated Financial Data.”
(c)
For a description of put rights relating to our preferred stock and our common stock warrants please read “Description of Put Rights.”

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Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion generally relates to our consolidated results of operations and financial condition, and should be read in conjunction with our financial statements and the related notes included elsewhere in this prospectus.
 
General
 
We generate revenues primarily from:
 
 
Ÿ
commissions paid by insurance companies;
 
 
Ÿ
fees paid directly by clients for related Specialized Benefits Services; and
 
 
Ÿ
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 83% of our revenues for the year ended December 31, 2001 was derived from our Insurance Brokerage segment. Within this segment, approximately 65% relates to P&C insurance and 35% to group employee benefits insurance. The remaining approximate 17% of our revenues was derived from our Specialized Benefits Services segment. Within this segment, approximately 57% relates to core benefits, 24% to benefits enrollment and communication and 19% to executive and professional benefits.
 
The majority of our operating expenses relates to Compensation and Employee Benefits, which equated to approximately 65% of revenues in 2001, or 61% giving effect to the Adjustments, which are described below. 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 25% of total revenues in 2001, or 21% giving effect to the Adjustments.
 
Historically, our revenues and EBITDA, which we define as Total Revenues less Compensation and Employee Benefits and Other Operating Expenses, 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 given the timing of sales of Specialized Benefits Services products.

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Table of Contents
 
Primary Financial Measures
 
The financial measures that we use to evaluate our performance on a consolidated basis are:
 
 
Ÿ
Total Revenues;
 
 
Ÿ
EBITDA, which we define as Total Revenues less Compensation and Employee Benefits and Other Operating Expenses;
 
 
Ÿ
EBITDA Margin, which we define as EBITDA as a percentage of Total Revenues;
 
 
Ÿ
Adjusted EBITDA, which we define as EBITDA, giving effect to Non-Recurring Revenues, Integration Efforts, Long-Term Incentive Plan and Other Adjustments, which we refer to collectively as the Adjustments. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Adjustments” for more information on these items and an explanation of why they are treated as adjustments;
 
 
Ÿ
Adjusted EBITDA Margin, which we define as EBITDA Margin after giving effect to the Adjustments;
 
 
Ÿ
Net Income (Loss) from Continuing Operations plus Amortization of Intangible Assets; and
 
 
Ÿ
Adjusted Net Income (Loss) plus Amortization of Intangible Assets, which we define as Net Income (Loss) from Continuing Operations plus Amortization of Intangible Assets after giving effect to the Adjustments and Early Extinguishment of Debt, both net of related tax benefit and Valuation Allowance on Deferred Tax Assets.
 
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 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) from Continuing Operations plus Amortization of Intangible Assets because we believe that it is a relevant and useful indicator in understanding our ability to generate earnings. We present Adjusted EBITDA, Adjusted EBITDA Margin and Adjusted Net Income (Loss) plus Amortization of Intangible Assets because they present their respective unadjusted measures on a basis reflecting our present expense structure and ongoing operations.
 
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 or Adjusted 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 prospectus is not likely to be comparable to those of other companies. Also, you should not conclude from the presentation of Adjusted EBITDA, Adjusted EBITDA Margin and Adjusted Net Income (Loss) plus Amortization of Intangible Assets that the items that result in the Adjustments or similar items will not occur in the future. 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 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 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

26

Table of Contents
accelerated increases in premium rates for particular lines of 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. However, the longevity of this cycle cannot be accurately predicted. Premium rates in the health insurance industry, however, have generally realized a consistent upward trend due to increasing health care delivery costs. Our financial results are benefiting from the current hard market, and we believe that future effects on our financial results due to changes in the P&C cycle will be mitigated because a significant portion of our revenues is derived from the placement of non-P&C business.
 
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. Including these acquisitions, our revenues increased from $10.1 million in 1994 to $254.6 million in 1999.
 
In most acquisitions, we issued a combination of cash, seller notes and preferred 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 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,” which 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 $5.7 million, $3.8 million and $2.3 million of Growth Based Bonus Expense in 1999, 2000, and 2001, respectively. We incurred $0.6 million and $1.4 million of Growth Based Bonus Expense for the six month periods ended June 30, 2001 and 2002, 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, 2002, 2003 and 2004 is estimated to be $1.8 million (inclusive of the $1.4 million incurred in the first six months of 2002), $0.3 million and $0.1 million, respectively.
 
Integration Efforts and Other Adjustments
 
Prior to 1999, we completed limited integration of acquired businesses. However, beginning in late 1999 and through early 2002, we became primarily focused on consolidation and integration efforts and consequently reduced our acquisition activity. This process involved committing significant resources to improving operating and financial reporting standards, standardizing technology platforms, reducing staff headcount and restructuring or terminating select employment agreements. In doing so, we incurred a number of expenses associated with lease terminations, severance, litigation and other items.
 
Activities related to our integration efforts and other aspects of our business operations resulted in net charges totaling $8.1 million, $(4.1) million, $25.6 million, $4.5 million and $10.3 million for the years ended December 31, 1999, 2000 and 2001 and for the six months ended June 30, 2001 and 2002, respectively. These items are further quantified and presented in tabular form below as Adjustments and relate specifically to Non-Recurring Revenues, Integration Efforts resulting from our acquisitions, Long-Term Incentive Plan expense and Other Adjustments. We evaluate our financial results after giving effect to these Adjustments because we believe that doing so allows us to evaluate our business and financial results based on our on-going operating structure. These Adjustments are described more fully under the caption “—Adjustments.”

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Year ended December 31,
   
Six Months ended
June 30,
    
1999
     
2000
     
2001
   
2001
   
2002
    
(in thousands)
EBITDA
   
$
31,792
 
   
$
55,947
 
   
$
31,901
   
$
21,923
   
$
17,200
    
  
  
  
  
Non-Recurring Revenues
   
 
—  
 
   
 
(8,000
)
   
 
—  
   
 
—  
   
 
—  
Integration Efforts
   
 
6,585
 
   
 
3,676
 
   
 
14,133
   
 
975
   
 
5,512
Long-Term Incentive Plan
   
 
(777
)
   
 
250
 
   
 
3,092
   
 
—  
   
 
631
Other Adjustments
   
 
2,321
 
   
 
—  
 
   
 
8,348
   
 
3,525
   
 
4,156
    
  
  
  
  
Total Adjustments to EBITDA
   
 
8,129
 
   
 
(4,074
)
   
 
25,573
   
 
4,500
   
 
10,299
    
  
  
  
  
Adjusted EBITDA
   
$
39,921
 
   
$
51,873
 
   
$
57,474
   
$
26,423
   
$
27,499
    
  
  
  
  
 
EBITDA was $31.8 million, $55.9 million and $31.9 million for the years ended December 31, 1999, 2000 and 2001, respectively. Adjusted EBITDA, which we define as EBITDA after giving effect to the Adjustments noted above, was $39.9 million, $51.9 million and $57.5 million for the same periods, respectively. For the six months ended June 30, 2001 and 2002, EBITDA was $21.9 million and $17.2 million, respectively, and Adjusted EBITDA was $26.4 million and $27.5 million, respectively. We incurred $10.0 million of the $10.3 million of Adjustments for the six months ended June 30, 2002 in the first quarter.
 
    
Year ended December 31,
     
Six Months ended June 30,
  
    
1999
   
2000
     
2001
     
2001
   
2002
  
    
(in thousands)
  
Net Income (Loss) from Continuing Operations plus Amortization of Intangible Assets
   
$
6,716
   
$
22,821
 
   
$
(1,769
)
   
$
5,578
   
$
(1,067
)
    
  
  
  
  
Adjustments to EBITDA, net of taxes
   
 
4,877
   
 
(2,444
)
   
 
15,344
 
   
 
2,700
   
 
6,179
 
Early Extinguishment of Debt, net of taxes
   
 
—  
   
 
—  
 
   
 
—  
 
   
 
—  
   
 
396
 
Valuation Allowance on Deferred Tax Assets
   
 
—  
   
 
—  
 
   
 
8,011
 
   
 
—  
   
 
4,504
 
    
  
  
  
  
    
 
4,877
   
 
(2,444
)
   
 
23,355
 
   
 
2,700
   
 
11,079
 
    
  
  
  
  
Adjusted Net Income (Loss) plus Amortization of Intangible Assets
   
$
11,593
   
$
20,377
 
   
$
21,586
 
   
$
8,278
   
$
10,012
 
    
  
  
  
  
 
Net Income (Loss) from Continuing Operations plus Amortization of Intangible Assets was $6.7 million, $22.8 million and $(1.8) million for the years ended December 31, 1999, 2000 and 2001, respectively. Adjusted Net Income (Loss) plus Amortization of Intangible Assets was $11.6 million, $20.4 million and $21.6 million for the same periods, respectively. For the six months ended June 30, 2001 and 2002 Net Income (Loss) from Continuing Operations plus Amortization of Intangible Assets was $5.6 million and $(1.1) million, respectively, and Adjusted Net Income (Loss) plus Amortization of Intangible Assets was $8.3 million and $10.0 million for the same periods, 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 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

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financial statements. USIA accounted for $74.8 million of total revenues for the year ended December 31, 2001 and had approximately 1,100 employees. USIA had net losses of $5.0 million, $8.3 million, $61.8 million, $2.5 million and $13.2 million for the years ended December 31, 1999, 2000 and 2001 and for the six months ended June 30, 2001 and 2002, 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 six months ended June 30, 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 please read Note 16, “Discontinued Operations,” in our annual financial statements, and read Note 5, “Contingencies,” in our six month financial statements included elsewhere in this prospectus under “USIA Litigation Matters—Fireman’s Fund Litigation” and “—Mutual of Omaha Litigation.”
 
Litigation Costs Related to Discontinued Operations
 
We incurred $1.5 million, $1.2 million, $2.5 million, $0.5 million and $1.0 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, 1999, 2000 and 2001 and for the six months ended June 30, 2001 and 2002, 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. We do not consider these expenses reflective of our current and ongoing expense structure.

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Results of Operations
 
The following table summarizes our results of operations as reported in accordance with GAAP and as adjusted for the items discussed under the caption “—Adjustments” below. Our discussion of results of operations also includes a discussion of our results giving effect to the Adjustments.
 
Adjusted Results are not a substitute 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.