USIH Usi Hldgs Corp (MM)

USI Holdings Corporation ("USI" or the "Company"), (NASDAQ:USIH): USI today reported financial results for the second quarter ended June 30, 2006. A printer friendly version of this release is available on our website at http://www.usi.biz. Highlights: For the quarter ended June 30, 2006 as compared to the same quarter in 2005: -- Consolidated revenues increased 9.2% to $133.9 million, including organic growth of 2.8% -- Consolidated net commissions and fees (excluding contingent commissions) increased 8.4%, including organic growth of 1.7% -- Income from continuing operations, before income tax expense increased by 34.3% to $12.6 million from $9.4 million -- Net income per share on a diluted basis increased to $0.13 from $0.03 -- Operating margin increased to 18.5% from 16.8% -- Excluding the impact of stock option expense in 2006 and other identified adjustments in 2005, operating margin increased to 19.2% from 18.2% -- Acquired one insurance agency and four books of business, expected to add $11.2 million of annualized revenues -- Company has challenged and will, if necessary, appeal judgments entered against its subsidiary and one of its employees in a copyright infringement case in the amount of $16.6 million and $2.2 million, respectively -0- *T (Dollars in Thousands, Except Per Share Three Months Ended Data) June 30, ----------------------------- 2006 2005 % Change -------- -------- --------- GAAP Financial Measures: Revenues: Net commissions and fees ("NCF") $127,732 $117,818 8.4% Contingents and overrides 3,354 2,926 14.6% Interest income 1,345 878 53.2% Other income 1,451 933 55.5% -------- Total revenues 133,882 122,555 9.2% -------- Expenses: Operating expenses 109,116 102,244 6.7% Amortization of intangible assets 7,825 7,254 7.9% Interest 4,330 3,669 18.0% Early extinguishment of debt -- -- N/M -------- -------- Total expenses 121,271 113,167 7.2% -------- -------- Operating Results: Income from continuing operations before income tax expense $ 12,611 $ 9,388 34.3% Per Share Data-Diluted: Income from continuing operations $ 0.13 $ 0.09 44.4% Net income $ 0.13 $ 0.03 333.3% Non-GAAP Financial Measures (1): Operating income 24,766 20,621 20.1% Operating margin 18.5% 16.8% 10.1% Operating margin, excluding identified adjustments 19.2% 18.2% 5.5% Income from continuing operations plus amortization, excluding identified adjustments on a diluted per share basis $ 0.27 $ 0.25 8.0% NCF organic growth 1.7% Total revenue organic growth 2.8% Six Months Ended June 30, ----------------------------- 2006 2005 % Change -------- -------- --------- GAAP Financial Measures: Revenues: Net commissions and fees ("NCF") $242,688 $220,322 10.2% Contingents and overrides 22,107 20,928 5.6% Interest income 2,705 1,542 75.4% Other income 3,010 1,775 69.6% -------- -------- Total revenues 270,510 244,567 10.6% -------- -------- Expenses: Operating expenses 217,708 210,903 3.2% Amortization of intangible assets 15,728 14,008 12.3% Interest 8,818 6,769 30.3% Early extinguishment of debt 2,093 -- N/M -------- -------- Total expenses 244,347 231,680 5.5% -------- -------- Operating Results: Income from continuing operations before income tax expense $ 26,163 $ 12,887 103.0% Per Share Data-Diluted: Income from continuing operations $ 0.26 $ 0.13 100.0% Net income $ 0.26 $ 0.05 420.0% Non-GAAP Financial Measures (1): Operating income 52,820 46,126 14.5% Operating margin 19.5% 18.9% 3.2% Operating margin, excluding identified adjustments 20.2% 19.5% 3.6% Income from continuing operations plus amortization, excluding identified adjustments on a diluted per share basis $ 0.57 $ 0.53 7.5% NCF organic growth 1.5% Total revenue organic growth 2.3% (1) Refer to Non-GAAP financial measures-Purpose and Use and related reconciliations included in this release. *T The revenue increase for the quarter includes the net impact of $5.7 million from acquisitions and divestitures completed in the last twelve months. On an organic basis, after identified adjustments, NCF (excluding contingent commissions) increased $2.0 million, or 1.7% for the quarter compared to the same period last year. The revenue increase for the first six months includes the net impact of $18.1 million from acquisitions and divestitures completed in the last twelve months. On an organic basis, after identified adjustments, NCF (excluding contingent commissions) increased $3.3 million, or 1.5% for the six months compared to the same period last year. In 2005, the Company concluded its previously announced margin improvement plan. For the three and six months ended June 30, 2005, the Company recorded zero and $4.0 million in expenses, before income taxes, for employee severance and related benefits, facilities closures, contract terminations and the amendment of sales professionals' compensation agreements. Also, for the three and six months ended June 30, 2005, the Company recorded $0.3 million and $8.4 million in expenses, respectively, before income taxes primarily associated with the SGP acquisition. There were no such similar expenses in the three and six months ended June 30, 2006. The operating margin (operating income as a percentage of total revenues) for the quarter was 18.5% on $24.8 million of operating income, compared to 16.8% on $20.6 million of operating income for the same period in 2005. The operating margin increase for the quarter was due principally to a $2.1 million adjustment in the second quarter of 2005 due to a change in accounting estimate. Other factors leading to the improvement in 2006 are the increase in operating margin in our insurance brokerage segment and lower corporate operating expenses, somewhat offset by the impact of $0.9 million in stock option expense and by the decrease in our specialized benefits segment. The increase in the insurance brokerage segment is attributable to the positive impacts of the 2005 margin improvement efforts, somewhat offset by higher legal costs in 2006, and to acquisitions, as well as organic growth in revenues of 2.6%, including organic growth in NCF of 1.2%. Operating margin in the insurance brokerage segment also benefited from an increase in interest and other income (other income consists primarily of premium finance revenues), which were each positively impacted by higher interest rates. The decrease in operating margin in the specialized benefits segment was due to investments in personnel and systems to support our expansion into our middle and emerging market strategy in order to increase our future growth opportunities. The operating margin for the six months ended June 30, 2006 was 19.5% on $52.8 million of operating income, compared to 18.9% on $46.1 million of operating income for the same period in 2005. The operating margin increase for the six months was due principally to the improvement in operating margin in our insurance brokerage segment and the $2.1 million adjustment in the second quarter of 2005 due to a change in accounting estimate. Other factors leading to the improvement in 2006 are lower corporate operating expenses, somewhat offset by the impact of $1.7 million in stock option expense and by the decrease in our specialized benefits segment. The increase in the insurance brokerage segment is attributable to the positive impacts of the 2005 margin improvement efforts, somewhat offset by higher legal costs in 2006, and to acquisitions, as well as organic growth in revenues of 2.6%, including organic growth in NCF of 1.5%. Operating margin in the insurance brokerage segment also benefited from an increase in interest and other income (other income consists primarily of premium finance revenues), which were each positively impacted by higher interest rates. The decrease in operating margin in the specialized benefits segment was due to investments in personnel and systems to support our expansion into our middle and emerging market strategy in order to increase our future growth opportunities. As previously disclosed, on June 27, 2006, a federal district court jury returned an adverse verdict against one of the Company's subsidiaries and one of its employees in a copyright infringement action. On the following day the federal district court entered judgment against the Company's subsidiary and its employee in the amount of approximately $16.6 million and $2.2 million, respectively. Subsequently, the plaintiff has filed a motion for awards of pre-judgment interest (totaling approximately $8 million with respect to the Company's subsidiary and approximately $1.1 million with respect to the employee) and of post-judgment interest. The Company and the employee have filed papers in opposition to plaintiff's motion for award of pre-judgment interest. On July 13, 2006, the subsidiary and the employee renewed their motion made during the trial for judgment as a matter of law and also moved, in the alternative, for a new trial. After consideration of the federal district court post-trial process, including the reasons supporting the motion for judgment as a matter of law or a new trial and potential issues available on appeal, the Company has determined that no increase to its $0.1 million contingency reserves as of June 30, 2006 for this case is warranted under the circumstances. Until future events occur related to the post trial and appellate process, including potential adjudication of those questions, management is unable to reasonably estimate, at this point in time, the amount of any loss within the possible range of zero up to the full judgment, plus pre-judgment and post-judgment interest. Through June 30, 2006, the Company has incurred approximately $0.7 million in expenses related to this case, primarily representing legal costs. David L. Eslick, Chairman, President and CEO, noted, "We are pleased with our sequential improvement in organic growth, strong margin expansion and continued success in our acquisition strategy - the three cornerstones to our business strategy. We continue to invest in the great growth opportunities that we expect out of our worksite marketing operations. We also recently announced the acquisition of the pre-eminent west coast worksite marketing firm, Tandem Benefits. With this acquisition we now have a comprehensive U.S. coverage platform which further supports our position as the largest independent communications, enrollment and worksite marketing organization in the U.S." USI will hold a conference call and audio webcast to review the results at 8:30 AM (ET) on Tuesday, August 8, 2006. To access the audio webcast, please visit USI's website at www.usi.biz on August 8, 2006 and follow the link. To access the conference call, dial toll-free 800-510-9834 or 617-614-3669 for international callers and use passcode 72982585, five minutes before the teleconference. A replay of the conference call will be available on the Investor Relations section of the USI website (www.usi.biz) or by dialing 888-286-8010 and using access code 11247227. This press release contains certain statements relating to future results which are forward-looking statements within the meaning of that term as found in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements are not historical facts, but instead represent USI's belief regarding future events, many of which, by their nature, are inherently uncertain and outside of USI's control. It is possible that USI's actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these forward-looking statements. Further information concerning USI and its business, including factors that potentially could materially affect USI's financial results, are contained in USI's filings with the Securities and Exchange Commission. Some factors include: USI's ability to grow revenues organically and expand its margins; successful consummation and integration of acquisitions; the insurance brokerage business is subject to a great deal of uncertainty due to the investigations into its business practices by various governmental authorities and related private litigation; resolution of regulatory matters and other claims, lawsuits and related proceedings; the passage of new legislation and/or disclosure arrangements with insurance companies affecting our business; determinations of effectiveness of internal controls over financial reporting and disclosure controls and procedures; USI's ability to attract and retain key sales and management professionals; USI's level of indebtedness and debt service requirements; downward commercial property and casualty premium pressures; the competitive environment; future expenses for integration and margin improvement efforts; and general economic conditions around the country. USI's ability to grow has been largely attributable to acquisitions, which may or may not be available on acceptable terms in the future and which, if consummated, may or may not be advantageous to USI. All forward-looking statements included in this press release are made only as of the date of this press release, and USI does not undertake any obligation to publicly update or correct any forward-looking statements to reflect events or circumstances that subsequently occur or of which USI hereafter becomes aware. This press release includes supplemental financial information which contains references to non-GAAP financial measures as defined in Regulation G of SEC rules. Consistent with Regulation G, a reconciliation of this financial information to generally accepted accounting principles in the United States ("GAAP") information follows. USI presents such non-GAAP supplemental financial information because it believes that such information is of interest to the investment community owing to the fact that it provides additional meaningful methods of evaluating certain aspects of USI's operating performance from period to period on a basis that may not be otherwise apparent on a GAAP basis. This supplemental financial information should be viewed in addition to, not in lieu of, USI's consolidated statements of operations for the three and six months ended June 30, 2006 and 2005. About USI Holdings Corporation Founded in 1994, USI is a leading distributor of insurance and financial products and services to businesses throughout the United States. USI is headquartered in Briarcliff Manor, NY, and operates out of 68 offices in 19 states. Additional information about USI, including instructions for the quarterly conference call, may be found at www.usi.biz. -0- *T USI Holdings Corporation and Subsidiaries Consolidated Statements of Operations Three Months Ended Six Months Ended June 30, June 30, 2006 2005 2006 2005 -------- -------- -------- -------- (Amounts in Thousands, Except Per Share Data) Revenues: Net commissions and fees $127,732 $117,818 $242,688 $220,322 Contingents and overrides 3,354 2,926 22,107 20,928 Interest income 1,345 878 2,705 1,542 Other income 1,451 933 3,010 1,775 -------- -------- -------- -------- Total Revenues 133,882 122,555 270,510 244,567 Expenses: Compensation and employee benefits 73,433 70,903 148,924 151,297 Non-cash stock-based compensation: Restricted stock awards 832 551 1,527 869 Stock option expense 888 - 1,711 - Other operating expenses 31,487 28,418 60,571 54,036 Amortization of intangible assets 7,825 7,254 15,728 14,008 Depreciation 2,476 2,372 4,975 4,701 Interest 4,330 3,669 8,818 6,769 Early extinguishment of debt - - 2,093 - -------- -------- -------- -------- Total Expenses 121,271 113,167 244,347 231,680 -------- -------- -------- -------- 12,611 9,388 26,163 12,887 Income from continuing operations before income tax expense Income tax expense 5,346 4,095 11,177 5,609 -------- -------- -------- -------- Income From Continuing Operations 7,265 5,293 14,986 7,278 Loss from discontinued operations, net - (3,682) - (4,692) -------- -------- -------- -------- Net Income $ 7,265 $ 1,611 $ 14,986 $ 2,586 ======== ======== ======== ======== Per Share Data - Basic and Diluted: Basic: Income from continuing operations $ 0.13 $ 0.09 $ 0.26 $ 0.13 Loss from discontinued operations, net - (0.06) - (0.08) -------- -------- -------- -------- Net Income Per Common Share $ 0.13 $ 0.03 $ 0.26 $ 0.05 ======== ======== ======== ======== Diluted: Income from continuing operations $ 0.13 $ 0.09 $ 0.26 $ 0.13 Loss from discontinued operations, net - (0.06) - (0.08) -------- -------- -------- -------- Net Income Per Common Share $ 0.13 $ 0.03 $ 0.26 $ 0.05 ======== ======== ======== ======== Weighted-Average Number of Shares Outstanding: Basic 56,789 56,330 56,796 55,142 Diluted 57,798 56,846 57,787 55,601 USI Holdings Corporation and Subsidiaries Consolidated Balance Sheets June 30, December 31, 2006 2005 ------------ ------------ (Amounts in Thousands, Except Per Share Data) Assets Current assets: Cash and cash equivalents $ 15,191 $ 27,289 Fiduciary funds--restricted 102,350 103,887 Premiums and commissions receivable, net of allowance for bad debts and cancellations of $7,452 and $7,300, respectively 245,457 244,372 Other 22,966 25,048 Deferred tax asset 9,530 14,887 Current assets held for discontinued operations 3,270 4,843 ----------- ----------- Total current assets 398,764 420,326 Goodwill 427,669 405,490 Expiration rights 336,895 312,382 Other intangible assets 51,646 50,800 Accumulated amortization (213,266) (197,539) ----------- ----------- Expiration rights and other intangible assets, net 175,275 165,643 Property and equipment, net 27,623 28,475 Other assets 3,516 3,840 ----------- ----------- Total Assets $ 1,032,847 $ 1,023,774 =========== =========== Liabilities and Stockholders' Equity Current liabilities: Premiums payable to insurance companies $ 255,970 $ 259,286 Accrued expenses 60,113 77,120 Current portion of long-term debt 13,980 11,470 Other 13,195 16,829 ----------- ----------- Total current liabilities 343,258 364,705 Long-term debt 242,938 225,062 Deferred tax liability 14,257 16,237 Other liabilities 6,152 7,789 Other liabilities held for discontinued operations 426 - ----------- ----------- Total Liabilities 607,031 613,793 Stockholders' equity: Common stock--voting--par $.01, 300,000 shares authorized; 58,763 and 58,308 shares issued, respectively 588 583 Additional paid-in capital 666,707 663,436 Accumulated deficit (231,087) (246,073) Less treasury stock at cost, 789 and 620 shares, respectively (10,392) (7,965) ----------- ----------- Total Stockholders' Equity 425,816 409,981 ----------- ----------- Total Liabilities and Stockholders' Equity $ 1,032,847 $ 1,023,774 =========== =========== USI Holdings Corporation and Subsidiaries Non-GAAP Financial Measures - Purpose and Use *T USI defines Operating Income as revenues, less compensation and employee benefits, non-cash stock-based compensation, other operating expenses and depreciation. Compensation and employee benefits and other operating expenses are adjusted to exclude expenses related to USI's margin improvement plan (announced in the fourth quarter of 2004 and concluded in the fourth quarter of 2005 to reduce ongoing operating expenses) and acquisition integration efforts (expenses incurred during the integration of acquired companies), which USI's management does not consider indicative of the Company's run-rate, or normal operating expenses. USI presents Operating Income because management believes that it is a relevant and useful indicator of operating profitability. Management believes that Operating Income is relevant owing to USI's leveraged approach to its capital structure and resulting significant amount of interest expense and to USI's acquisition strategy which creates significant amortization and other expenses not directly associated with the core operations of the Company and which are specifically aimed at eliminating redundant real estate, positions and other costs. Additionally, management believes that investors in its stock use Operating Income to compare USI's ability to generate operating profits with its peers and for valuation purposes. Operating Margin (Operating Income as a percentage of total revenues) is presented because management believes that it is a relevant and useful indicator of operating efficiency. USI uses Operating Income and Operating Margin in budgeting and evaluating operating company performance. These financial measures should not be considered as an alternative to other financial measures determined in accordance with GAAP. USI presents Income from continuing operations plus amortization of intangible assets on an absolute and diluted per share basis because management believes that it is a relevant and useful indicator of its ability to generate working capital. Management believes that income from continuing operations plus amortization of intangible assets is relevant owing to the significant amount of amortization of intangible assets resulting from accounting for all acquisitions using the purchase method of accounting. Additionally, management believes that investors in its stock use income from continuing operations plus amortization of intangible assets to compare USI with its peers and for valuation purposes. This financial measure should not be considered as an alternative to other financial measures determined in accordance with GAAP. USI presents Income from continuing operations plus amortization of intangible assets, operating income and operating margin, excluding the impact of the identified adjustments because management believes that it is useful in understanding operating profitability compared to other periods presented. Additionally, management believes that investors in its stock use income from continuing operations plus amortization of intangible assets, operating income and operating margin, excluding the impact of the identified adjustments on an absolute and diluted per share basis, to compare USI with its peers, for valuation purposes and as an indicator of operating performance. This financial measure should not be considered as an alternative to other financial measures determined in accordance with GAAP. USI presents organic revenue growth (decline) because management believes that it is useful in understanding organic revenue growth/decline compared to prior periods presented. Organic revenue growth (decline) is calculated by excluding the current period's total revenues attributable to acquisitions and the prior period's total revenues from divested businesses during the twelve months following acquisition or divestiture. Additionally, management believes that investors in its stock use organic revenue growth (decline) to compare USI with its peers and to measure growth in revenues attributable to the Company's ability to execute on its sales and client retention strategies. The financial measure should not be considered as an alternative to other financial measures determined in accordance with GAAP. -0- *T USI Holdings Corporation and Subsidiaries Non-GAAP Financial Measures Reconciliation of Operating Income, Operating Margin and Income from Continuing Operations plus Amortization of Intangible Assets For the Three Months For the Six Months Ended Ended June 30, June 30, --------------------- --------------------- 2006 2005 2006 2005 --------- --------- --------- --------- (Dollars in Thousands) Total Revenues $ 133,882 $ 122,555 $ 270,510 $ 244,567 Compensation and employee benefits 73,433 70,894 148,924 139,129 Non-cash stock-based compensation: Restricted stock awards 832 551 1,527 869 Stock option expense 888 - 1,711 - Other operating expenses 31,487 28,117 60,553 53,742 Depreciation 2,476 2,372 4,975 4,701 ---------- ---------- ---------- ---------- Operating Income 24,766 20,621 52,820 46,126 Operating Margin 18.5% 16.8% 19.5% 18.9% Amortization of intangible assets 7,825 7,254 15,728 14,008 Interest 4,330 3,669 8,818 6,769 Early extinguishment of debt - - 2,093 - Margin improvement plan expenses (a) - - - 4,030 Acquisition integration expenses (a) - 310 18 8,432 ---------- ---------- ---------- ---------- Income from continuing operations before income tax expense 12,611 9,388 26,163 12,887 Income tax expense 5,346 4,095 11,177 5,609 --------- --------- --------- --------- Income from continuing operations 7,265 5,293 14,986 7,278 Addback: Amortization of intangible assets 7,825 7,254 15,728 14,008 --------- --------- --------- --------- Income from continuing operations plus amortization of intangible assets $ 15,090 $ 12,547 $ 30,714 $ 21,286 ========= ========= ========= ========= (a) Amounts are included in compensation and employee benefits and other operating expenses in the Consolidated Statements of Operations. USI Holdings Corporation Non-GAAP Financial Measures Reconciliation of Operating Income, Operating Margin and Income from Continuing Operations plus Amortization of Intangible Assets, Excluding Identified Adjustments Identified Adjustments: Effective January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123(R). Accordingly, the Company recorded expenses of $0.9 and $1.7 million related to its stock option and employee stock purchase plans for the three and six months ended June 30, 2006, respectively. Additionally, in the first quarter of 2006, the Company recorded $2.1 million of expense for an early extinguishment of debt related to its new credit facility. There were no such similar expenses in 2005. All adjustments noted above are referred to as "Identified Adjustments." For the Three Months Ended June 30, ----------------------------------- 2006 Excluding 2006 As Identified Identified Reported Adjustments Adjustments --------- ------------ ------------ (Dollars in Thousands) Revenues $133,882 $ - $ 133,882 Compensation and employee benefits 73,433 - 73,433 Non-cash stock-based compensation: Restricted stock awards 832 - 832 Stock option expense 888 (888) - Other operating expenses 31,487 - 31,487 Depreciation 2,476 - 2,476 --------- ----------- ------------- Operating Income 24,766 888 25,654 Operating Margin 18.5% 19.2% Amortization of intangible assets 7,825 - 7,825 Interest 4,330 - 4,330 Early extinguishment of debt - - - Acquisition integration expenses (a) - - - -------- ----------- ----------- Total Expenses 121,271 (888) 120,383 -------- ----------- ----------- Income from continuing operations before income tax expense 12,611 888 13,499 Income tax expense 5,346 376 5,722 -------- ----------- ----------- Income from continuing operations 7,265 512 7,777 Addback: Amortization of intangible assets 7,825 - 7,825 -------- ----------- ----------- Income from continuing operations plus amortization of intangible assets $ 15,090 $ 512 $ 15,602 ======== =========== =========== Per Share Data - Diluted: Income From Continuing Operations $ 0.13 $ 0.01 $ 0.14 Addback: Amortization of intangible assets 0.13 - 0.13 -------- ----------- ----------- Income from continuing operations plus amortization of intangible assets $ 0.26 $ 0.01 $ 0.27 ======== =========== =========== For the Six Months Ended June 30, ------------------------------------ 2006 Excluding 2006 As Identified Identified Reported Adjustments Adjustments --------- ------------- ------------ (Dollars in Thousands) Revenues $270,510 $ - $ 270,510 Compensation and employee benefits 148,924 - 148,924 Non-cash stock-based compensation: Restricted stock awards 1,527 - 1,527 Stock option expense 1,711 (1,711) - Other operating expenses 60,553 - 60,553 Depreciation 4,975 - 4,975 ---------- ------------ ------------ Operating Income 52,820 1,711 54,531 Operating Margin 19.5% 20.2% Amortization of intangible assets 15,728 - 15,728 Interest 8,818 - 8,818 Early extinguishment of debt 2,093 (2,093) - Acquisition integration expenses (a) 18 (18) - -------- ----------- ----------- Total Expenses 244,347 (3,822) 240,525 -------- ----------- ----------- Income from continuing operations before income tax expense 26,163 3,822 29,985 Income tax expense 11,177 1,633 12,810 -------- ----------- ----------- Income from continuing operations 14,986 2,189 17,175 Addback: Amortization of intangible assets 15,728 - 15,728 -------- ----------- ----------- Income from continuing operations plus amortization of intangible assets $ 30,714 $ 2,189 $ 32,903 ======== =========== =========== Per Share Data - Diluted: Income From Continuing Operations 0.26 0.04 0.30 Addback: Amortization of intangible assets 0.27 - 0.27 -------- ----------- ----------- Income from continuing operations plus amortization of intangible assets 0.53 0.04 0.57 ======== =========== =========== (a) Amounts are included in other operating expenses in the Consolidated Statements of Operations. USI Holdings Corporation Non-GAAP Financial Measures Reconciliation of Operating Income, Operating Margin and Income from Continuing Operations plus Amortization of Intangible Assets, Excluding Identified Adjustments Identified Adjustments: In December 2004, USI announced that it had approved a plan to take steps to reduce ongoing operating expenses. As a result of these actions, for the six months ended June 30, 2005, the Company recorded expenses of $4.0 million, comprised of restructuring of sales professionals' employment agreements, employee severance and related benefits and lease termination costs. Additionally, in the three and six months ended June 30, 2005, the Company recorded expenses of $0.3 million and $8.4 million, primarily related to the acquisition of Summit Global Partners. In the second quarter of 2005, the Company recorded an adjustment to revenues and related producer compensation payable of $2.2 million and $0.1 million, respectively, related to a change in accounting estimate. There were no such similar adjustments for the three and six months ended June 30, 2006. All adjustments noted above are referred to as "Identified Adjustments." For the Three Months Ended June 30, ----------------------------------- 2005 Excluding 2005 As Identified Identified Reported Adjustments Adjustments --------- ------------ ------------ (Dollars in Thousands, Except per Share Amounts) Total revenues $122,555 $ 2,169 $ 124,724 Compensation and employee benefits 70,894 108 71,002 Non-cash stock-based compensation, restricted stock awards 551 - 551 Other operating expenses 28,117 - 28,117 Depreciation 2,372 - 2,372 --------- ------------ ------------ Operating Income 20,621 2,061 22,682 -------- ----------- ----------- Operating Margin 16.8% 18.2% Amortization of intangible assets 7,254 - 7,254 Interest 3,669 - 3,669 Margin improvement plan expenses (a) - - - Acquisition Integration expenses (a) 310 (310) - -------- ----------- ----------- Total Expenses 113,167 (202) 112,965 -------- ----------- ----------- Income from continuing operations before income tax expense 9,388 2,371 11,759 Income tax expense 4,095 914 5,009 -------- ----------- ----------- Income from continuing operations 5,293 1,457 6,750 Addback: Amortization of intangible assets 7,254 - 7,254 -------- ----------- ----------- Income from continuing operations plus amortization of intangible assets $ 12,547 $ 1,457 $ 14,004 ======== =========== =========== Per Share Data - Diluted: Income From Continuing Operations $ 0.09 $ 0.03 $ 0.12 Addback: Amortization of intangible assets 0.13 - 0.13 -------- ----------- ----------- Income from continuing operations plus amortization of intangible assets $ 0.22 $ 0.03 $ 0.25 ======== =========== =========== For the Six Months Ended June 30, ------------------------------------ 2005 Excluding 2005 As Identified Identified Reported Adjustments Adjustments ---------- ------------ ------------ (Dollars in Thousands, Except per Share Amounts) Total revenues $ 244,567 $ 2,169 $ 246,736 Compensation and employee benefits 139,129 108 139,237 Non-cash stock-based compensation, restricted stock awards 869 - 869 Other operating expenses 53,742 - 53,742 Depreciation 4,701 - 4,701 ---------- ----------- ------------ Operating Income 46,126 2,061 48,187 --------- ----------- ----------- Operating Margin 18.9% 19.5% Amortization of intangible assets 14,008 - 14,008 Interest 6,769 - 6,769 Margin improvement plan expenses (a) 4,030 (4,030) - Acquisition Integration expenses (a) 8,432 (8,432) - --------- ----------- ----------- Total Expenses 231,680 (12,354) 219,326 --------- ----------- ----------- Income from continuing operations before income tax expense 12,887 14,523 27,410 Income tax expense 5,609 6,068 11,677 --------- ----------- ----------- Income from continuing operations 7,278 8,455 15,733 Addback: Amortization of intangible assets 14,008 - 14,008 --------- ----------- ----------- Income from continuing operations plus amortization of intangible assets $ 21,286 $ 8,455 $ 29,741 ========= =========== =========== Per Share Data - Diluted: Income From Continuing Operations $ 0.13 $ 0.15 $ 0.28 Addback: Amortization of intangible assets 0.25 - 0.25 --------- ----------- ----------- Income from continuing operations plus amortization of intangible assets $ 0.38 $ 0.15 $ 0.53 ========= =========== =========== (a) Amounts are included in compensation and employee benefits and other operating expenses in the Consolidated Statements of Operations. USI Holdings Corporation and Subsidiaries Summary Statements of Operations by Segment (Amounts in Thousands) For the three months ended June 30: Specialized Insurance Benefits 2006 Brokerage Services Corporate Total ---------------------- ----------- ----------- ----------- ----------- Revenues $ 125,787 $ 8,044 $ 51 $ 133,882 ---------- ---------- ---------- ---------- Compensation and employee benefits 66,674 4,174 2,585 73,433 Other operating expenses 23,790 3,797 3,900 31,487 Non-cash stock-based compensation: Restricted stock awards 645 17 170 832 Stock option expense 413 49 426 888 Depreciation 1,939 236 301 2,476 Amortization 7,096 729 - 7,825 Interest expense 170 102 4,058 4,330 ---------- ---------- ---------- ---------- Income (loss) from continuing operations, before income taxes 25,060 (1,060) (11,389) 12,611 ---------- ---------- ---------- ---------- Add back: Amortization 7,096 729 - 7,825 Interest expense 170 102 4,058 4,330 Acquisition integration expense - - - - ---------- ---------- ---------- ---------- Operating income (loss) $ 32,326 $ (229) $ (7,331) $ 24,766 ========== ========== ========== ========== Operating margin 25.7% -2.8% NM 18.5% Revenues $ 125,787 $ 8,044 $ 51 $ 133,882 Adjustments to revenues - - - - ---------- ---------- ---------- ---------- Adjusted revenues $ 125,787 $ 8,044 $ 51 $ 133,882 ---------- ---------- ---------- ---------- Operating income (loss) $ 32,326 $ (229) $ (7,331) $ 24,766 Adjustments to operating income (loss) (1) 413 49 426 888 ---------- ---------- ---------- ---------- Adjusted operating income (loss) $ 32,739 $ (180) $ (6,905) $ 25,654 ---------- ---------- ---------- ---------- Adjusted operating margin 26.0% -2.2% NM 19.2% 2005 ---------------------- Revenues $ 115,590 $ 6,630 $ 335 $ 122,555 ---------- ---------- ---------- ---------- Compensation and employee benefits 64,852 2,980 3,071 70,903 Other operating expenses 20,485 2,753 5,180 28,418 Non-cash stock-based compensation, restricted stock awards 444 11 96 551 Depreciation 1,896 126 350 2,372 Amortization 6,575 679 - 7,254 Interest expense 267 85 3,317 3,669 ---------- ---------- ---------- ---------- Income (loss) from continuing operations, before income taxes 21,071 (4) (11,679) 9,388 ---------- ---------- ---------- ---------- Add back: Amortization 6,575 679 - 7,254 Interest expense 267 85 3,317 3,669 Acquisition integration expense 310 - - 310 ---------- ---------- ---------- ---------- Operating income (loss) $ 28,223 $ 760 $ (8,362) $ 20,621 ========== ========== ========== ========== Operating margin 24.4% 11.5% NM 16.8% Revenues $ 115,590 $ 6,630 $ 335 $ 122,555 Adjustments to revenues 2,169 - - 2,169 ---------- ---------- ---------- ---------- Adjusted revenues $ 117,759 $ 6,630 $ 335 $ 124,724 ---------- ---------- ---------- ---------- Operating income (loss) $ 28,223 $ 760 $ (8,362) $ 20,621 Adjustments to operating income (loss) (1) 2,061 - - 2,061 ---------- ---------- ---------- ---------- Adjusted operating income (loss) $ 30,284 $ 760 $ (8,362) $ 22,682 ---------- ---------- ---------- ---------- Adjusted operating margin 25.7% 11.5% NM 18.2% (1) Effective January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123(R). Accordingly, the Company recorded expenses of $0.9 and $1.7 million related to its stock option and employee stock purchase plans for the three and six months ended June 30, 2006, respectively. Additionally, in the first quarter of 2006, the Company recorded $2.1 million of expense for an early extinguishment of debt related to its new credit facility. In the second quarter of 2005, the Company recorded an adjustment to revenues and related producer compensation payable of $2.2 million and $0.1 million, respectively, related to a change in accounting estimate. All adjustments noted above are referred to as "Identified Adjustments." USI Holdings Corporation and Subsidiaries Summary Statements of Operations by Segment (Amounts in Thousands) For the six months Specialized ended June 30: Insurance Benefits 2006 Brokerage Services Corporate Total --------------------- ------------ ----------- ----------- ----------- Revenues $ 255,422 $ 14,965 $ 123 $ 270,510 ---------- ---------- ---------- ---------- Compensation and employee benefits 135,306 8,484 5,134 148,924 Other operating expenses 45,117 7,662 7,792 60,571 Non-cash stock-based compensation: Restricted stock awards 1,207 28 292 1,527 Stock option expense 803 79 829 1,711 Depreciation 3,862 472 641 4,975 Amortization 14,200 1,528 - 15,728 Interest expense 377 206 8,235 8,818 Early extinguishment of debt - - 2,093 2,093 ---------- ---------- ---------- ---------- Income(loss) from continuing operations, before income taxes 54,550 (3,494) (24,893) 26,163 ---------- ---------- ---------- ---------- Add back: Amortization 14,200 1,528 - 15,728 Interest expense 377 206 8,235 8,818 Early extinguishment of debt - - 2,093 2,093 Acquisition integration expense 18 - - 18 ---------- ---------- ---------- ---------- Operating income (loss) $ 69,145 $ (1,760) $ (14,565) $ 52,820 ---------- ---------- ---------- ---------- Operating margin 27.1% -11.8% NM 19.5% Revenues $ 255,422 $ 14,965 $ 123 $ 270,510 Adjustments to revenues - - - - ---------- ---------- ---------- ---------- Adjusted revenues $ 255,422 $ 14,965 $ 123 $ 270,510 ---------- ---------- ---------- ---------- Operating income (loss) $ 69,145 $ (1,760) $ (14,565) $ 52,820 Adjustments to operating income (loss) (1) 803 79 829 1,711 ---------- ---------- ---------- ---------- Adjusted operating income (loss) $ 69,948 $ (1,681) $ (13,736) $ 54,531 ---------- ---------- ---------- ---------- Adjusted operating margin 27.4% -11.2% NM 20.2% 2005 ---------------------- Revenues $ 230,639 $ 13,334 $ 594 $ 244,567 ---------- ---------- ---------- ---------- Compensation and employee benefits 137,206 6,396 7,695 151,297 Other operating expenses 40,147 5,107 8,782 54,036 Non-cash stock-based compensation, restricted stock awards 689 18 162 869 Depreciation 3,741 247 713 4,701 Amortization 12,645 1,363 - 14,008 Interest expense 555 189 6,025 6,769 ---------- ---------- ---------- ---------- Income(loss) from continuing operations, before income taxes 35,656 14 (22,783) 12,887 ---------- ---------- ---------- ---------- Add back: Amortization 12,645 1,363 - 14,008 Interest expense 555 189 6,025 6,769 Acquisition integration and margin improvement plan expenses 10,828 82 1,552 12,462 ---------- ---------- ---------- ---------- Operating income (loss) $ 59,684 $ 1,648 $ (15,206) $ 46,126 ---------- ---------- ---------- ---------- Operating margin 25.9% 12.4% NM 18.9% Revenues $ 230,639 $ 13,334 $ 594 $ 244,567 Adjustments to revenues 2,169 - - 2,169 ---------- ---------- ---------- ---------- Adjusted revenues $ 232,808 $ 13,334 $ 594 $ 246,736 ---------- ---------- ---------- ---------- Operating income (loss) $ 59,684 $ 1,648 $ (15,206) $ 46,126 Adjustments to operating income (loss) (1) 2,061 - - 2,061 ---------- ---------- ---------- ---------- Adjusted operating income (loss) $ 61,745 $ 1,648 $ (15,206) $ 48,187 ---------- ---------- ---------- ---------- Adjusted operating margin 26.5% 12.4% NM 19.5% (1) Effective January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123(R). Accordingly, the Company recorded expenses of $0.9 and $1.7 million related to its stock option and employee stock purchase plans for the three and six months ended June 30, 2006, respectively. Additionally, in the first quarter of 2006, the Company recorded $2.1 million of expense for an early extinguishment of debt related to its new credit facility. In the second quarter of 2005, the Company recorded an adjustment to revenues and related producer compensation payable of $2.2 million and $0.1 million, respectively, related to a change in accounting estimate. All adjustments noted above are referred to as "Identified Adjustments." USI Holdings Corporation and Subsidiaries Non-GAAP Financial Measures Reconciliation of Organic Revenue Growth/(Decline) For the Three Months Ended June 30 ----------------------------------- Revenues Change ------------------- ---------------- 2006 2005 Amount Percent -------- -------- -------- ------- Consolidated (Dollars in --------------------------------- Thousands) Net Commissions and Fees - Property & Casualty $ 68,278 $ 66,605 $ 1,673 2.5% Net Commissions and Fees - Benefits 59,454 51,213 8,241 16.1% -------- -------- ------- Total Net Commissions and Fees 127,732 117,818 9,914 8.4% -------- -------- ------- Contingents and Overrides 3,354 2,926 428 14.6% Other Income 2,796 1,811 985 54.4% --------- --------- -------- ------- Total Revenues $133,882 $122,555 $11,327 9.2% ======== ======== ======= ======= Insurance Brokerage --------------------------------- Net Commissions and Fees - Property & Casualty $ 68,278 $ 66,605 $ 1,673 2.5% Net Commissions and Fees - Benefits 51,412 44,587 6,825 15.3% -------- -------- ------- Total Net Commissions and Fees 119,690 111,192 8,498 7.6% -------- -------- ------- Contingents and Overrides 3,354 2,926 428 14.6% Other Income 2,743 1,472 1,271 86.3% --------- --------- -------- ------- Total Revenues $125,787 $115,590 $10,197 8.8% ======== ======== ======= ======= Specialized Benefits Services --------------------------------- Net Commissions and Fees - Benefits $ 8,042 $ 6,626 $ 1,416 21.4% Contingents and Overrides - - - - Other Income 2 4 (2) -50.0% --------- --------- -------- ------- Total Revenues $ 8,044 $ 6,630 $ 1,414 21.3% ======== ======== ======= ======= Corporate --------------------------------- Other Income $ 51 $ 335 $ (284) -84.8% --------- --------- -------- ------- Total Revenues $ 51 $ 335 $ (284) -84.8% ======== ======== ======= ======= Adjustment Adjusted for Net Organic Identified Organic Acquired Growth/ Adjustments Growth/ Businesses (Decline) (1) Decline ---------- --------- ----------- -------- Consolidated ---------------------------- Net Commissions and Fees - Property & Casualty $ (625) 1.6% $ (1,901) -1.3% Net Commissions and Fees - Benefits (5,080) 6.2% (268) 5.6% --------- ---------- Total Net Commissions and Fees (5,705) 3.6% (2,169) 1.7% --------- ---------- Contingents and Overrides (42) 13.2% - 13.2% Other Income - 54.4% - 54.4% ---------- --------- ----------- -------- Total Revenues $ (5,747) 4.6% $ (2,169) 2.8% ========= ========= ========== ======== Insurance Brokerage ---------------------------- Net Commissions and Fees - Property & Casualty $ (625) 1.6% $ (1,901) -1.3% Net Commissions and Fees - Benefits (4,345) 5.6% (268) 5.0% --------- ---------- Total Net Commissions and Fees (4,970) 3.2% (2,169) 1.2% --------- ---------- Contingents and Overrides (42) 13.2% - 13.2% Other Income - 86.3% - 86.3% ---------- --------- ----------- -------- Total Revenues $ (5,012) 4.5% $ (2,169) 2.6% ========= ========= ========== ======== Specialized Benefits Services ---------------------------- Net Commissions and Fees - Benefits $ (735) 10.3% $ - 10.3% Contingents and Overrides - - - - Other Income - -50.0% - -50.0% ---------- --------- ----------- -------- Total Revenues $ (735) 10.2% $ - 10.2% ========= ========= ========== ======== Corporate ---------------------------- Other Income $ - -84.8% $ - -84.8% ---------- --------- ----------- -------- Total Revenues $ - -84.8% $ - -84.8% ========= ========= ========== ======== For the Six Months Ended June 30 ------------------------------------ Revenues Change ------------------- ---------------- 2006 2005 Amount Percent -------- -------- -------- ------- Consolidated (Dollars in --------------------------------- Thousands) Net Commissions and Fees - Property & Casualty $133,598 $127,624 $ 5,974 4.7% Net Commissions and Fees - Benefits 109,090 92,698 16,392 17.7% -------- -------- ------- Total Net Commissions and Fees 242,688 220,322 22,366 10.2% -------- -------- ------- Contingents and Overrides 22,107 20,928 1,179 5.6% Other Income 5,715 3,317 2,398 72.3% --------- --------- -------- ------- Total Revenues $270,510 $244,567 $25,943 10.6% ======== ======== ======= ======= Insurance Brokerage --------------------------------- Net Commissions and Fees - Property & Casualty $133,598 $127,624 $ 5,974 4.7% Net Commissions and Fees - Benefits 94,127 79,390 14,737 18.6% -------- -------- ------- Total Net Commissions and Fees 227,725 207,014 20,711 10.0% -------- -------- ------- Contingents and Overrides 22,107 20,909 1,198 5.7% Other Income 5,590 2,716 2,874 105.8% --------- --------- -------- ------- Total Revenues $255,422 $230,639 $24,783 10.7% ======== ======== ======= ======= Specialized Benefits Services --------------------------------- Net Commissions and Fees - Benefits $ 14,963 $ 13,308 $ 1,655 12.4% Contingents and Overrides - 19 (19) - Other Income 2 7 (5) -71.4% --------- --------- -------- ------- Total Revenues $ 14,965 $ 13,334 $ 1,631 12.2% ======== ======== ======= ======= Corporate --------------------------------- Other Income $ 123 $ 594 $ (471) -79.3% --------- --------- -------- ------- Total Revenues $ 123 $ 594 $ (471) -79.3% ======== ======== ======= ======= Adjustment Adjusted for Net Organic Identified Organic Acquired Growth/ Adjustments Growth/ Businesses (Decline) (1) Decline ---------- --------- ----------- -------- Consolidated ---------------------------- Net Commissions and Fees - Property & Casualty $ (5,555) 0.3% $ (1,901) -1.2% Net Commissions and Fees - Benefits (11,377) 5.4% (268) 5.1% --------- ---------- Total Net Commissions and Fees (16,932) 2.5% (2,169) 1.5% --------- ---------- Contingents and Overrides (989) 0.9% - 0.9% Other Income (166) 67.3% - 67.3% ---------- --------- ----------- -------- Total Revenues $ (18,087) 3.2% $ (2,169) 2.3% ========= ========= ========== ======== Insurance Brokerage ---------------------------- Net Commissions and Fees - Property & Casualty $ (5,555) 0.3% $ (1,901) -1.2% Net Commissions and Fees - Benefits (9,873) 6.1% (268) 5.8% --------- ---------- Total Net Commissions and Fees (15,428) 2.6% (2,169) 1.5% --------- ---------- Contingents and Overrides (989) 1.0% - 1.0% Other Income (166) 99.7% - 99.7% ---------- --------- ----------- -------- Total Revenues $ (16,583) 3.6% $ (2,169) 2.6% ========= ========= ========== ======== Specialized Benefits Services ---------------------------- Net Commissions and Fees - Benefits $ (1,504) 1.1% $ - 1.1% Contingents and Overrides - - - - Other Income - -71.4% - -71.4% ---------- --------- ----------- -------- Total Revenues $ (1,504) 1.0% $ - 1.0% ========= ========= ========== ======== Corporate ---------------------------- Other Income $ - -79.3% $ - -79.3% ---------- --------- ----------- -------- Total Revenues $ - -79.3% $ - -79.3% ========= ========= ========== ======== (1) In the second quarter of 2005, the Company recorded an adjustment to revenues and related producer compensation payable of $2.2 million and $0.1 million, respectively, related to a change in accounting estimate. There were no such similar adjustments for the three and six months ended June 30, 2006. All adjustments noted above are referred to as "Identified Adjustments." *T