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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended September 30, 2012

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to            

Commission file number: 001-35355

 

 

MANNING & NAPIER, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   45-2609100

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

290 Woodcliff Drive

Fairport, New York

  14450
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code:

(585) 325-6880

 

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

 

Class

   Outstanding at November 8, 2012

Class A common stock, $0.01 par value per share

   13,583,873

Class B common stock, $0.01 par value per share

   1,000

 

 

 


Table of Contents

TABLE OF CONTENTS

 

         Page  

Part I

  Financial Information   

Item 1.

  Financial Statements (unaudited)   
 

Combined Consolidated Statements of Financial Condition as of September 30, 2012 and December 31, 2011

     1   
 

Combined Consolidated Statements of Operations for the three and nine months ended September 30, 2012 and 2011

     2   
 

Combined Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2012 and 2011

     3   
 

Combined Consolidated Statement of Shareholders’ Equity for the nine months ended September 30, 2012

     4   
 

Combined Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and 2011

     5   
 

Notes to Combined Consolidated Financial Statements

     6   

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     14   

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      30   

Item 4.

  Controls and Procedures      30   

Part II

  Other Information   

Item 1.

  Legal Proceedings      31   

Item 1A.

  Risk Factors      31   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      31   

Item 6.

  Exhibits      32   
 

In this Quarterly Report on Form 10-Q, “we”, “our”, “us”, the “Company”, “Manning & Napier” and the “Registrant” refers to Manning & Napier, Inc. and, unless the context otherwise requires, its consolidated direct and indirect subsidiaries and predecessors.

  

 

i


Table of Contents

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

Manning & Napier, Inc.

Combined Consolidated Statements of Financial Condition

As of September 30, 2012 and December 31, 2011

 

(in thousands, except share data)    September 30,
2012
    December 31,
2011
 
     (unaudited)        

Assets

    

Cash and cash equivalents

   $ 96,957      $ 81,208   

Accounts receivable

     21,359        18,409   

Accounts receivable—Manning & Napier Fund, Inc.

     13,209        12,850   

Investment securities, at fair value

     12,630        4,642   

Prepaid expenses and other assets

     5,423        4,126   
  

 

 

   

 

 

 

Total current assets

     149,578        121,235   

Property and equipment, net

     4,539        3,812   

Net deferred tax assets, non-current

     49,154        53,786   
  

 

 

   

 

 

 

Total non-current assets

     53,693        57,598   

Total assets

   $ 203,271      $ 178,833   
  

 

 

   

 

 

 

Liabilities

    

Accounts payable

   $ 1,912      $ 1,139   

Accrued expenses and other liabilities

     32,012        30,099   

Deferred revenue

     11,136        9,902   
  

 

 

   

 

 

 

Total current liabilities

     45,060        41,140   

Amounts payable under tax receivable agreement

     43,989        45,885   
  

 

 

   

 

 

 

Total non-current liabilities

     43,989        45,885   

Total liabilities

   $ 89,049      $ 87,025   

Commitments and contingencies (Note 7)

    

Shareholders’ equity

    

Class A common stock, $0.01 par value 300,000,000 shares authorized, 13,583,873 issued and outstanding at September 30, 2012 and December 31, 2011

   $ 136      $ 136   

Class B common stock, $0.01 par value; 2,000 shares authorized, 1,000 shares issued and outstanding at September 30, 2012 and December 31, 2011

     0        0   

Additional paid-in capital

     194,354        188,133   

Retained deficit

     (30,966     (27,167

Accumulated other comprehensive income

     1        2   
  

 

 

   

 

 

 

Total shareholders’ equity attributable to Manning & Napier Group

     163,525        161,104   

Noncontrolling deficit

     (49,303     (69,296
  

 

 

   

 

 

 

Total shareholders’ equity and noncontrolling deficit

     114,222        91,808   
  

 

 

   

 

 

 

Total liabilities, shareholders’ equity and noncontrolling deficit

   $ 203,271      $ 178,833   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these combined consolidated financial statements.

 

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Manning & Napier, Inc.

Combined Consolidated Statements of Operations

Three and Nine Months Ended September 30, 2012 and 2011

(Unaudited)

 

     Three months ended September 30,     Nine months ended September 30,  
(in thousands, except share data)    2012     2011     2012     2011  

Revenues

        

Investment management service revenue

   $ 85,382      $ 85,789      $ 251,925      $ 249,634   

Expenses

        

Compensation and related costs

     40,922        20,890        115,224        70,845   

Sub-transfer agent and shareholder service costs

     12,830        12,496        37,975        36,859   

Other operating costs

     9,941        9,300        27,789        25,225   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     63,693        42,686        180,988        132,929   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     21,689        43,103        70,937        116,705   

Non-operating income (loss)

        

Interest expense on shares subject to mandatory redemption

     —          (13,339     —          (42,722

Interest expense

     (13     (9     (26     (28

Interest and dividend income

     36        16        105        44   

Net capital gains on investments

     572        185        337        29   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-operating income (loss)

     595        (13,147     416        (42,677
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before provision for income taxes

     22,284        29,956        71,353        74,028   

Provision for income taxes

     1,220        253        6,409        792   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to controlling and noncontrolling interests

     21,064        29,703        64,944        73,236   

Less: net income attributable to noncontrolling interests

     19,410        29,703        62,223        73,236   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Manning & Napier, Inc.

   $ 1,654      $ —        $ 2,721      $ —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per share available to Class A common stock

        

Basic

   $ 0.12        $ 0.20     
  

 

 

     

 

 

   

Diluted

   $ 0.12        $ 0.20     
  

 

 

     

 

 

   

Weighted average shares of Class A common stock outstanding

        

Basic

     13,583,873          13,583,873     
  

 

 

     

 

 

   

Diluted

     13,583,873          13,583,873     
  

 

 

     

 

 

   

Cash dividends declared per share of Class A common stock

   $ 0.16        $ 0.48     
  

 

 

     

 

 

   

The accompanying notes are an integral part of these combined consolidated financial statements.

 

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Manning & Napier, Inc.

Combined Consolidated Statements of Comprehensive Income

Three and Nine Months Ended September 30, 2012 and 2011

(Unaudited)

 

     Three months ended September 30,     Nine months ended September 30,  
(in thousands)    2012      2011     2012     2011  

Net income

   $ 21,064       $ 29,703      $ 64,944      $ 73,236   

Net unrealized holding loss on investment securities, net of tax

     —           (1,060     (1     (464

Reclassification adjustment for realized losses on marketable securities included in net income

     —           185        —          29   
  

 

 

    

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 21,064       $ 28,828      $ 64,943      $ 72,801   
  

 

 

    

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these combined consolidated financial statements.

 

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Manning & Napier, Inc.

Combined Consolidated Statement of Shareholders’ Equity

Nine Months Ended September 30, 2012

(Unaudited)

 

 

    Common Stock – class A     Common Stock – class B     Additional
Paid in
    Retained
(Deficit)
    Accumulated
Other
Comprehensive
   

Non
Controlling

Interest

       
(in thousands, except share data)   Shares     Amount     Shares     Amount     Capital     Earnings     Income (Loss)     (Deficit)     Total  

Balance—December 31, 2011

    13,583,873      $ 136        1,000      $ 0      $ 188,133      $ (27,167   $ 2      $ (69,296   $ 91,808   

Net income

              2,721          62,223        64,944   

Distributions

                  (81,045     (81,045

Net changes in unrealized investment securities gains or losses

                (1       (1

Equity-based compensation

            6,221            38,815        45,036   

Dividends declared on Class A common stock

              (6,520         (6,520
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance—September 30, 2012

    13,583,873      $ 136        1,000      $ 0      $ 194,354      $ (30,966   $ 1      $ (49,303   $ 114,222   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these combined consolidated financial statements.

 

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Manning & Napier, Inc.

Combined Consolidated Statements of Cash Flows

Nine Months Ended September 30, 2012 and 2011

(Unaudited)

 

     Nine months ended September 30,  
(in thousands)    2012     2011  

Cash flows from operating activities:

    

Net income

   $ 64,944      $ 73,236   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Interest expense related to change in mandatory redemption liability

     —          42,722   

Equity-based compensation

     45,036        929   

Depreciation

     1,276        827   

Change in amounts payable under tax receivable agreement

     24        —     

Net gain on investment securities

     (337     (29

Deferred income taxes

     2,281        —     

(Increase) decrease in operating assets and increase (decrease) in operating liabilities:

    

Accounts receivable

     (2,950     (68

Accounts receivable—Manning & Napier Fund, Inc.

     (359     (713

Prepaid expenses and other assets

     882        (1,768

Accounts payable

     773        123   

Accrued expenses and other liabilities

     (1,336     (5,816

Deferred revenue

     1,234        1,408   
  

 

 

   

 

 

 

Net cash provided by operating activities

     111,468        110,851   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchases of property and equipment

     (2,002     (638

Sale of investments

     3,782        1,258   

Purchase of investments

     (11,435     (1,124
  

 

 

   

 

 

 

Net cash used in investing activities

     (9,655     (504
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Distributions

     (81,045     (118,200

Dividends paid

     (4,347     —     

Payment of stock purchase note payable

     —          (95

Payment of capital lease obligations

     (74     (59

Proceeds on issuance of stock

     —          35   

Capital contributions

     —          3,863   

Payments of costs directly associated with issuance of Class A common stock

     (598     —     
  

 

 

   

 

 

 

Net cash used in financing activities

     (86,064     (114,456
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     15,749        (4,109

Cash and cash equivalents:

    

Beginning of period

     81,208        27,543   
  

 

 

   

 

 

 

End of period

   $ 96,957      $ 23,434   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these combined consolidated financial statements.

 

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NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except per unit or per share amounts)

Note 1—Organization and Nature of the Business

Manning & Napier, Inc. provides a broad range of investment solutions through separately managed accounts, mutual funds, and collective investment trust funds, as well as a variety of consultative services that complement our investment process. Founded in 1970, we offer equity and fixed income portfolios as well as a range of blended asset portfolios, such as life cycle funds, that use a mix of stocks and bonds. Headquartered in Fairport, New York, we serve a diversified client base of high net worth individuals and institutions, including 401(k) plans, pension plans, Taft-Hartley plans, endowments and foundations.

The Company was incorporated on June 22, 2011 for the purpose of facilitating an initial public offering of 13,583,873 shares of its Class A common stock and to become the sole managing member of Manning & Napier Group, LLC and its subsidiaries (“Manning & Napier Group”), a holding company for the investment management businesses conducted by its operating subsidiaries. Prior to the series of transactions to reorganize our capital structure prior to our initial public offering, which we refer to as the reorganization transactions, and the consummation of our initial public offering, we were a group of privately-held, affiliated companies, which we refer to as the “Manning & Napier Companies”.

 

LOGO

 

(1) Manning & Napier, Inc. is the sole managing member of Manning & Napier Group. The operating subsidiaries of Manning & Napier Group include Manning & Napier Advisors, LLC, Manning & Napier Advisory Advantage Company, LLC, Exeter Advisors I, LLC, Manning & Napier Alternative Opportunities, LLC, Perspective Partners LLC, Manning & Napier Information Services, LLC, Manning & Napier Investor Services, Inc. and Exeter Trust Company.

Note 2—Summary of Significant Accounting Policies

Critical Accounting Policies

There have been no significant changes in new accounting pronouncements or in our critical accounting policies and estimates from those that were disclosed in our Annual Report on Form 10-K for the year ended December 31, 2011.

The Company believes that the disclosures herein are adequate so that the information presented is not misleading; however, it is suggested that these financial statements be read in conjunction with the financial statements and the notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2011. The financial data for the interim periods may not necessarily be indicative of results to be expected for the year.

 

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Basis of Presentation

The accompanying unaudited combined consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and related rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for interim financial reporting and include all adjustments, consisting only of normal recurring adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim period.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates or assumptions that affect the reported amounts and disclosures in the combined consolidated financial statements. Actual results could differ from these estimates or assumptions.

For the three months ended September 30, 2012, the Company recorded a correction of an immaterial error relating to the year 2011, and the first and second quarter of 2012 that increased net income by $0.2 million in the aggregate. The error relates to the number of Class A units of Manning & Napier Group that were subject to service vesting as opposed to performance vesting under the terms of the 2011 reorganization transactions. The error resulted in an understatement of $0.7 million, $1.4 million and an overstatement of $1.9 million non-cash component of compensation and related benefits for the periods ended December 31, 2011, March 31, 2012 and June 30, 2012, respectively. Approximately 1.5 million of such units were reclassified from performance-based to service-based awards. After evaluating the quantitative and qualitative aspects of the adjustment, the Company concluded that its prior period financial statements were not materially misstated.

Principles of Consolidation

Manning & Napier is the sole managing member of Manning & Napier Group. Following the Company’s 2011 reorganization transactions and initial public offering, Manning & Napier holds approximately 13.8% economic interest in Manning & Napier Group, but as managing member controls the management of Manning & Napier Group. As a result, the Company consolidates the financial results of Manning & Napier Group and records a noncontrolling interest on its statement of financial condition with respect to the remaining economic interest in Manning & Napier Group held by Manning & Napier Group Holdings, LLC (“M&N Group Holdings”), Manning & Napier Capital Company, LLC (“MNCC”) and the other members of Manning & Napier Group.

For periods prior to the reorganization, the financial statements include the combined accounts of the Manning & Napier Companies.

All material intercompany transactions have been eliminated in consolidation.

Operating Segments

The Company operates in one segment, the investment management industry. The Company primarily provides investment management services to separately managed accounts, mutual funds and collective investment trust funds. Management assesses the financial performance of these vehicles on a combined basis.

Advisory Agreements

The Company derives significant revenue from its role as advisor to the Manning & Napier Fund, Inc. series of mutual funds (“Fund”) and the Exeter Trust Company (“Exeter” or “ETC”) Collective Investment Trust (“CIT”) investment vehicles.

Investments in the Fund amounted to approximately $0.2 million and $0.7 million at September 30, 2012 and December 31, 2011, respectively.

For the three and nine months ended September 30, 2012, fees earned for advisory related services provided to the Fund and CIT investment vehicles totaled approximately $43.6 million and $128.6 million, respectively. For the three and nine months ended September 30, 2011, fees earned for advisory related services provided to the Fund and CIT investment vehicles were approximately $43.4 and $126.1 million, respectively. These amounts represent greater than 10% of revenue in each period.

Recent Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. This standard eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. In December 2011, the FASB issued an amendment to this standard which defers the requirement to present components of reclassifications of other comprehensive income on the face of the income statement. These amendments are effective for annual periods beginning after December 15, 2011. The adoption of these amendments on January 1, 2012 did not have a material impact on the Company’s combined consolidated financial statements and related disclosures.

In May 2011, FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards. The amendments in this update change the wording used to describe the requirements in U.S. GAAP for measuring fair value and for disclosing information

 

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about fair value measurements. These amendments are effective for annual periods beginning after December 15, 2011. The adoption of these amendments on January 1, 2012 did not have a material impact on the Company’s combined consolidated financial statements and related disclosures.

Note 3—Noncontrolling Interests

Manning & Napier is the sole managing member of Manning & Napier Group. Manning & Napier holds an approximately 13.8% economic interest in Manning & Napier Group, but as managing member controls the management of Manning & Napier Group. As a result, the Company consolidates the financial results of Manning & Napier Group and records a noncontrolling interest on its statement of financial condition with respect to the remaining approximately 86.2% economic interest in Manning & Napier Group held by M&N Group Holdings, MNCC and the other members of Manning & Napier Group. Net income attributable to noncontrolling interest on the statements of operations represents the portion of earnings or loss attributable to the economic interest in Manning & Napier Group held by the noncontrolling members. Subsequent to its initial public offering, the Company has consolidated the results of Manning & Napier Group; therefore, all income for the period prior to the initial public offering is entirely attributable to noncontrolling interest. A reconciliation from “Income before provision for income taxes” to “Net income attributable to Manning & Napier, Inc.” is detailed as follows:

 

      Three Months Ended
September 30,
2012
    Nine Months Ended
September 30,
2012
 
     (in thousands)  

Income before provision for income taxes

   $ 22,284      $ 71,353   

Less: loss before provision for income taxes of Manning & Napier, Inc. (a)

     (310     (1,073
  

 

 

   

 

 

 

Income before provision for income taxes, as adjusted

     22,594        72,426   

Controlling interest percentage (b)

     13.8     13.8
  

 

 

   

 

 

 

Net income attributable to controlling interest

     3,121        10,005   

Plus: loss before provision for income taxes of Manning & Napier, Inc. (a)

     (310     (1,074
  

 

 

   

 

 

 

Income before income taxes attributable to Manning & Napier

     2,811        8,931   

Less: provision for income taxes of Manning & Napier, Inc. (c)

     1,157        6,210   
  

 

 

   

 

 

 

Net income attributable to Manning & Napier, Inc.

   $ 1,654      $ 2,721   
  

 

 

   

 

 

 

 

 

a) Manning & Napier, Inc. incurs certain expenses that are only attributable to Manning & Napier, Inc. and are therefore excluded from the net income attributable to noncontrolling interests.
b) Income before provision for income taxes is allocated to the controlling interest based on the percentage of units of Manning & Napier Group held by Manning & Napier, Inc.
c) The consolidated provision for income taxes is equal to the sum of (i) the provision for income taxes for entities other than Manning & Napier, Inc. and (ii) the provision for income taxes of Manning & Napier, Inc. which includes all U.S. federal and state income taxes. The consolidated provision for income taxes totaled approximately $1.2 million and $6.4 million for the three and nine months ended September 30, 2012.

During the three and nine months ended September 30, 2012, the Company made approximately $27.0 million and $81.0 million in distributions to noncontrolling members, respectively. None of these distributions were payments pursuant to the tax receivable agreement (“TRA”).

At September 30, 2012 and December 31, 2011, the Company had recorded a liability of $45.9 million and $46.2 million, respectively, representing the payments due to the selling unit holders under the TRA. During the nine months ended September 30, 2012, the Company made payments of approximately $0.3 million pursuant to the TRA. During the next twelve months, the Company expects to pay approximately $1.9 million of the total amount recorded at September 30, 2012. The basis for determining the current portion of the payments under the TRA is the expected amount of payments to be made within the next 12 months. The long-term portion of the payments under the tax receivable agreement is the remainder. The Company recorded an adjustment of less than $0.1 million to the liability during the nine months ended September 30, 2012 to account for changes in enacted tax rates in various states.

 

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Obligations pursuant to the TRA are obligations of Manning & Napier. They do not impact the noncontrolling interest. These obligations are not income tax obligations. Furthermore, the TRA has no impact on the allocation of the provision for income taxes to the Company’s net income.

Note 4—Investment Securities

The following table represents the Company’s investment securities holdings at September 30, 2012 and December 31, 2011:

 

At September 30, 2012    Cost      Unrealized
Gains
     Unrealized
Losses
     Fair
Value
 
     (in thousands)  

Available-for-sale securities

           

U.S. Treasury Note (0.375%, 9/30/2012)

   $ 504       $ 2       $ —         $ 506   

U.S. Treasury Note (1.75%, 1/31/2014)

     102         —           —           102   
  

 

 

    

 

 

    

 

 

    

 

 

 
     606         2         —           608   
  

 

 

    

 

 

    

 

 

    

 

 

 

Trading Securities

           

Equity securities

  

     5,689   

Fixed income securities

  

     5,014   

Short-term securities

  

     1,111   

Managed mutual funds

  

     208   
           

 

 

 
              12,022   
           

 

 

 

Total investment securities

            $ 12,630   
           

 

 

 

 

At December 31, 2011    Cost      Unrealized
Gains
     Unrealized
Losses
     Fair
Value
 
     (in thousands)  

Available-for-sale securities

           

U.S. Treasury Note (0.375%, 9/30/2012)

   $ 504       $ 2       $ —         $ 506   

U.S. Treasury Note (1.75%, 1/31/2014)

     102         2         —           104   
  

 

 

    

 

 

    

 

 

    

 

 

 
     606         4         —           610   
  

 

 

    

 

 

    

 

 

    

 

 

 

Trading Securities

           

Equity securities

  

     2,656   

Short-term securities

  

     636   

Managed mutual funds

  

     740   
           

 

 

 
              4,032   
           

 

 

 

Total investment securities

            $ 4,642   
           

 

 

 

Investment securities are classified as either trading or available-for-sale and are carried at fair value. Fair value is determined based on quoted market prices in active markets for identical or similar instruments.

Investment securities classified as trading consist of equity securities, fixed income securities, short-term securities, and investments in mutual funds for which the Company provides advisory services. At September 30, 2012 and December 31, 2011, trading securities consist solely of investments held by the Company for the purpose of providing initial cash seeding for product development purposes. The Company recognized approximately $0.2 million and less than $0.1 million of net unrealized gains related to investments classified as trading for the three and nine month periods ended September 30, 2012, respectively. For the three and nine month periods ended September 30, 2011 there were no net unrealized gains or losses related to investments classified as trading.

Investment securities classified as available-for-sale consist of U.S. Treasury Notes, which are held by ETC in order to comply with New Hampshire state regulations. As of September 30, 2012 and December 31, 2011, $0.6 million of investment securities is considered restricted. The Company periodically reviews each individual security position that has an unrealized loss, or impairment, to determine if that impairment is other-than-temporary. No other-than-temporary impairment charges have been recognized by the Company during the three and nine month periods ended September 30, 2012 and 2011.

Note 5—Fair Value Measurements

In accordance with current accounting standards, fair value is defined as the price that the Company would receive upon selling an investment in an orderly transaction to an independent buyer in the principal or most advantageous market of the investment. A fair value hierarchy is provided that gives the highest priority to unadjusted quoted prices in active markets for identical assets and liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).

The following three-tier fair value hierarchy prioritizes the inputs used in measuring fair value:

Level 1—observable inputs such as quoted prices in active markets for identical securities;

 

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Level 2—other significant observable inputs (including but not limited to quoted prices for similar securities, interest rates, prepayment rates, credit risk, etc.); and

Level 3—significant unobservable inputs (including the Company’s own assumptions in determining the fair value of investments).

The following provides the hierarchy of inputs used to derive the fair value of the Company’s assets as of September 30, 2012 and December 31, 2011:

 

     Level 1      Level 2      Level 3      Totals  
     (in thousands)  

At September 30, 2012

           

Equity securities

   $ 5,689       $ —         $ —         $ 5,689   

Fixed income securities

     —           5,014        —           5,014   

Short-term securities

     1,111         —           —           1,111   

Managed mutual funds

     208         —           —           208   

U.S. Treasury Notes

     —           608         —           608   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 7,008       $ 5,622       $ —         $ 12,630   
  

 

 

    

 

 

    

 

 

    

 

 

 

At December 31, 2011

           

Equity securities

   $ 2,656       $ —         $ —         $ 2,656   

Short-term securities

     636         —           —           636   

Managed mutual funds

     740         —           —           740   

U.S. Treasury Notes

     —           610         —           610   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 4,032       $ 610       $ —         $ 4,642   
  

 

 

    

 

 

    

 

 

    

 

 

 

There were no Level 3 securities held by the Company at September 30, 2012 or December 31, 2011.

The Company’s policy is to recognize transfers in and transfers out of the valuation levels as of the beginning of the reporting period. There were no transfers between Level 1 and Level 2 securities during the nine months ended September 30, 2012.

Note 6—Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities as of September 30, 2012 and December 31, 2011 consisted of the following:

 

     September 30,
2012
     December 31,
2011
 
     (in thousands)  

Accrued sales commissions

   $ 6,483       $ 5,715   

Accrued bonuses

     8,071         9,991   

Accrued sub-transfer agent fees

     7,276         6,492   

Accrued professional service fees

     1,140         3,055   

Dividends payable

     2,173         —     

Amounts payable under tax receivable agreement

     1,928         321   

Other accruals and liabilities

     4,941         4,525   
  

 

 

    

 

 

 
   $ 32,012       $ 30,099   
  

 

 

    

 

 

 

Note 7—Commitments and Contingencies

The Company may enter into agreements that contain certain representations and warranties and which provide general indemnifications. The Company may also serve as a guarantor of such obligations. The Company’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Company that have not yet occurred. The Company expects any risk of liability associated with such guarantees to be remote.

As an investment adviser to a variety of investment products, the Company is subject to routine reviews and inspections by the SEC and the Financial Industry Regulatory Authority, Inc. (“FINRA”). From time to time the Company may also be subject to claims, be involved in various legal proceedings arising in the ordinary course of its business and other contingencies. The Company does not believe that the outcome of any of these reviews, inspections or other legal proceedings will have a material impact on its combined consolidated financial statements; however, litigation is subject to many uncertainties, and the outcome of individual litigated matters is difficult to predict. The Company will establish accruals for matters that are probable, can be reasonably estimated, and may take

 

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into account any related insurance recoveries to the extent of such recoveries. Currently, there are no legal proceedings pending or to the Company’s knowledge threatened against it. As of September 30, 2012 and December 31, 2011, the Company has not accrued for any such claims, legal proceedings, or other contingencies.

Note 8—Earnings per Common Share

Basic earnings per share (“basic EPS”) is computed by dividing net income by the weighted average number of shares outstanding for the reporting period. Diluted earnings per share (“diluted EPS”) gives effect during the reporting period to all dilutive potential shares outstanding resulting from employee share-based awards. The following table sets forth the calculation of basic and diluted earnings per share for the three and nine months ended September 30, 2012:

     Three months ended
September 30, 2012
     Nine months ended
September 30, 2012
 
     (in thousands, except share data)  

Net income attributable to controlling and noncontrolling interests

   $ 21,064       $ 64,944   

Less: net income attributable to noncontrolling interests

     19,410         62,223   
  

 

 

    

 

 

 

Net income attributable to Manning & Napier, Inc.

   $ 1,654       $ 2,721   
  

 

 

    

 

 

 

Net income available to Class A common stock per basic and diluted share

   $ 0.12       $ 0.20   
  

 

 

    

 

 

 

Weighted average shares of Class A common stock outstanding

     13,583,873         13,583,873   
  

 

 

    

 

 

 

The Company’s Class B common stock represent voting interests and do not participate in the earnings of the Company. Accordingly, there is no basic or diluted EPS related to the Company’s Class B common stock.

At September 30, 2012 there were 76,400,000 Class A Units of Manning & Napier Group which, subject to certain restrictions, will be exchangeable for up to 76,400,000 shares of the Company’s Class A common stock. The restrictions set forth in the exchange agreement were in place at the end of the current reporting period. As such, these units were not included in the calculation of diluted earnings per common share for the three and nine months ended September 30, 2012.

Note 9—Equity Based Compensation

2011 Equity Compensation Plan

As of September 30, 2012, no interests had been awarded under the 2011 Equity Compensation Plan (the “2011 Plan”). A total of 13,142,813 equity interests are available under the 2011 Plan.

Reorganization-Related Equity Based Compensation

During 2012, the Company commenced recognition of compensation expense for the approximately 3.8 million performance-based awards eligible to vest on December 31, 2012 under the vesting terms of ownership interests in connection with the 2011 reorganization transactions. Vesting of these performance-based awards is contingent upon the satisfaction of annual performance criteria specific to each award recipient. The determination of whether an award recipient has met such performance criteria will be made by a vesting committee at the end of the annual service period. In accordance with Accounting Standards Codification Topic 718, Stock Compensation, the grant date for these performance-based awards will occur at the end of the service period. Until the grant date, compensation expense will be re-measured at the end of each reporting period, to the extent that service has been rendered in proportion to the total requisite service period. No expense is being recognized for the performance-based awards eligible to vest on December 31, 2013 and 2014 in connection with the 2011 reorganization transactions, as the performance conditions have not yet been defined.

The following table summarizes stock unit activity for the nine months ended September 30, 2012 specific to the 2011 reorganization transactions:

 

     Performance-Based
Stock Units
     Weighted
Average
Fair
Value
 

Stock unit awards outstanding at January 1, 2012

     40,480       $ 12.00   

Granted

     —         $ —     

Vested

     —         $ —     

Forfeited

     —         $ —     
  

 

 

    

Stock unit awards outstanding at September 30, 2012

     40,480       $ 12.00   
  

 

 

    

 

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     Service-Based
Stock Units
    Weighted
Average
Grant
Date Fair
Value
 

Stock unit awards outstanding at January 1, 2012

     2,899,917      $ 12.00   

Allocation of units from performance to service-based (Note 2)

     1,548,427      $ 12.00   

Granted

     63,423      $ 13.45   

Vested

     (63,423   $ 13.45   

Forfeited

     (28,791   $ 12.00   
  

 

 

   

Stock unit awards outstanding at September 30, 2012

     4,419,553      $ 12.00   
  

 

 

   

For service-based awards granted during the nine months ended September 30, 2012, the weighted average fair value of the awards granted was $13.45, as determined by the closing sale price of Manning & Napier, Inc.’s Class A common stock as reported on the New York Stock Exchange on the date of grant. For performance-based awards with a service inception date during the nine months ended September 30, 2012, the weighted average value of the awards at the end of the reporting period was $12.19, as determined by the closing sale price of Manning & Napier, Inc.’s Class A common stock as reported on September 28, 2012.

For the three and nine months ended September 30, 2012, the Company recorded approximately $17.3 million and $45.0 million, respectively, of compensation expense related to the vesting terms of ownership interests in connection with the 2011 reorganization transactions. For the three and nine months ended September 30, 2012, approximately $7.9 million and $14.3 million, respectively, is attributable to the service-based awards. For the same periods, the remaining expense of approximately $9.4 million and $30.7 million, respectively, is attributable to performance based awards. For the three and nine months ending September 30, 2012, $9.3 million and $30.5 million, respectively, of the expense attributable to performance-based awards is related to awards eligible to vest on December 31, 2012 under the vesting terms of ownership interests in connection with the 2011 reorganization transactions. As discussed above, this expense is based upon the closing sale price of Manning & Napier Inc.’s Class A common stock as reported on the New York Stock Exchange on September 28, 2012. For the three and nine months ended September 30, 2011, the Company recognized approximately $0.3 million and $0.9 million, respectively, of compensation expense related to shares granted.

As of September 30, 2012, there was unrecognized compensation expense related to unvested service-based awards of approximately $38.2 million. The Company expects to recognize this expense over a weighted average period of 1.6 years.

As of September 30, 2012, there was unrecognized compensation expense related to unvested performance-based awards of approximately $107.1 million, which the Company expects to recognize over a weighted average period of 1.5 years. Included in this total is an estimate of $106.9 million of unrecognized compensation expense related to the approximately 11.3 million unvested performance-based awards under the vesting terms of ownership interests in connection with the 2011 reorganization transactions. This estimate is based upon the closing sale price of Manning & Napier, Inc.’s Class A common stock as reported on September 28, 2012, and includes performance awards eligible to vest through 2014. The Company expects to recognize this expense over a weighted average period of 1.5 years.

Stock unit awards forfeited during the nine-month period ended September 30, 2012 were redistributed amongst the legacy owners, including William Manning. Of the stock units forfeited, 63,423 were granted to William Manning which vested immediately. The remaining units were awarded to the legacy owners and are subject to performance criteria. This award does not result in dilution to the number of outstanding shares of our Class A common stock. The aggregate intrinsic value of stock units that vested during the nine months ended September 30, 2012 was approximately $0.9 million.

Note 10—Income Taxes

The Company is comprised of entities that have elected to be treated as either an “S-Corporation”, a limited liability company (LLC), or a “C-Corporation”. As such, the entities functioning as S-Corporations or LLC’s are not liable for or able to benefit from federal and most state income taxes on their earnings, and earnings will be included in the personal income tax returns of each entity’s shareholders or unit holders. The entities functioning as C-Corporations are liable for or able to benefit from federal and state taxes on their earnings.

 

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The Company’s income tax provision and effective tax rate were as follows:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2012     2011     2012     2011  
     (dollars in thousands)  

Earnings from continuing operations before income taxes

   $ 22,284      $ 29,956      $ 71,353      $ 74,028   

Effective Tax Rate

     5.5     0.8     9.0     1.1
  

 

 

   

 

 

   

 

 

   

 

 

 

Provision for income taxes

     1,220        253        6,409        792   

Provision for income taxes @ 35%

     7,799        10,485        24,974        25,910   
  

 

 

   

 

 

   

 

 

   

 

 

 

Difference between tax at effective vs. statutory rate

   $ (6,579   $ (10,232   $ (18,565   $ (25,118
  

 

 

   

 

 

   

 

 

   

 

 

 

For the three and nine months ended September 30, 2012 and 2011, the difference between the Company’s recorded provision and the provision that would result from applying the U.S. statutory rate of 35% is primarily attributable to the benefit resulting from the fact that a significant portion of the Company’s operations include a series of flow-through entities which are generally not subject to federal and most state income taxes. Accordingly, a portion of the Company’s earnings are not subject to corporate level taxes.

Note 11—Related Party Transactions

Transactions with noncontrolling members

During the nine months ended September 30, 2012, the Company loaned approximately $1.0 million to certain noncontrolling members in order for the entities to make required tax payments. The amount was repaid in full as of March 31, 2012.

From time to time, the Company may be asked to provide certain services, including accounting, legal and other administrative functions for the noncontrolling members of Manning & Napier Group. While immaterial, the Company has not received any reimbursement for such services.

Note 12—Subsequent Events

Distributions and dividends

On November 6, 2012, the Board of Directors approved a distribution from Manning & Napier Group to Manning & Napier and the noncontrolling members of Manning & Napier Group. The amount of the distribution to the members of Manning & Napier Group is approximately $31.3 million. Concurrently, the Board of Directors declared a $0.16 per share dividend to the holders of Class A common stock. The dividend is payable on February 1, 2013 to shareholders of record as of January 15, 2013.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

This report contains forward-looking statements within the meaning of section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which reflect our views with respect to, among other things, our operations and financial performance. Words like “believes,” “expects,” “may,” “estimates,” “will,” “should,” “intends,” “plans,” or “anticipates” or the negative thereof or other variations thereon or comparable terminology, are used to identify forward-looking statements, although not all forward-looking statements contain these words. Although we believe that we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know about our business and operations, there can be no assurance that our actual results will not differ materially from what we expect or believe. Some of the factors that could cause our actual results to differ materially from our expectations or beliefs are disclosed in the “Risk Factors” section of our Annual Report on Form 10-K which include, without limitation: changes in securities or financial markets or general economic conditions; a decline in the performance of our products; client sales and redemption activity; and changes of government policy or regulations. All forward-looking statements speak only as of the date on which they are made and we undertake no duty to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Overview

Business

We are an independent investment management firm that provides a broad range of investment solutions through separately managed accounts, mutual funds and collective investment trust funds. Founded in 1970, we offer equity and fixed income portfolios as well as a range of blended asset portfolios, such as life cycle portfolios, that use a mix of stocks and bonds. We serve a diversified client base of high net worth individuals and institutions, including 401(k) plans, pension plans, Taft-Hartley plans, and endowments and foundations. Our operations are based principally in the United States, with our headquarters located in Fairport, New York.

Our Products

We derive substantially all of our revenues from investment management fees earned from providing advisory services to separately managed accounts and mutual funds and collective investment trusts—including those offered by the Manning & Napier Fund, Inc., or the Fund, and Exeter Trust Company.

 

   

Our separate accounts are primarily distributed through our Direct Channel, where our representatives form relationships with high net worth individuals, middle market institutions or large institutions that are working with a consultant. To a lesser extent, we also obtain a portion of our separate account distribution via third parties, either through our Intermediary Channel where national brokerage firm representatives or independent financial advisors select our separate account strategies for their clients, or through our Platform/Sub-Advisory Channel, where unaffiliated registered investment advisors approve our strategies for their product platforms. Our separate account products are a primary driver of our blended asset portfolios for high net worth and middle market institutional clients and financial intermediaries. In contrast, larger institutions and unaffiliated registered investment advisor platforms are a driver of our separate account equity portfolios.

 

   

Our mutual funds and collective investment trusts are primarily distributed through financial intermediaries, including brokers, financial advisors, retirement plan advisors and platform relationships. We also obtain a portion of our mutual fund and collective investment trust distribution through our direct sales representatives, in particular within the defined contribution and institutional marketplace. Our mutual fund and collective investment trust products are important drivers of our blended asset class portfolios, in particular with 401(k) plan sponsors, advisors and recordkeepers that select our funds as default options for participants. In addition, financial intermediaries, mutual fund advisory programs and retail platforms are a driver of equity strategies within our mutual fund and collective investment trust fund offerings.

 

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Our assets under management (“AUM”) was $44.3 billion as of September 30, 2012, as illustrated in the table below.

 

     As of September 30, 2012  
     Blended
Asset
     Equity      Fixed Income      Total  
     (in millions)  

Assets under management – By investment vehicle and portfolio

           

Separately managed accounts

   $ 11,563.9       $ 11,576.8       $ 1,182.6       $ 24,323.3   

Mutual funds and collective investment trusts

     8,933.9         10,976.1         34.7         19,944.7   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 20,497.8       $ 22,552.9       $ 1,217.3       $ 44,268.0   
  

 

 

    

 

 

    

 

 

    

 

 

 

The composition of our separately managed accounts as of September 30, 2012, by channel and portfolio, is set forth in the table below.

 

     As of September 30, 2012  
     Blended
Asset
    Equity     Fixed Income     Total  
     (dollars in millions)  

Separate account AUM

        

Direct Channel

   $ 8,205.9      $ 8,542.8      $ 945.5      $ 17,694.2   

Intermediary Channel

     3,358.0        871.1        237.1        4,466.2   

Platform/Sub-advisor Channel

     —          2,162.9        —          2,162.9   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 11,563.9      $ 11,576.8      $ 1,182.6      $ 24,323.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Percentage of separate account AUM

        

Direct Channel

     34     35     4     73

Intermediary Channel

     14     3     1     18

Platform/Sub-advisor Channel

     —          9     —          9
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     48     47     5     100
  

 

 

   

 

 

   

 

 

   

 

 

 

Percentage of portfolio by channel

        

Direct Channel

     71     74     80     73

Intermediary Channel

     29     7     20     18

Platform/Sub-advisor Channel

     —          19     —          9
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     100     100     100     100
  

 

 

   

 

 

   

 

 

   

 

 

 

Percentage of channel by portfolio

        

Direct Channel

     46     49     5     100

Intermediary Channel

     75     20     5     100

Platform/Sub-advisor Channel

     —          100     —          100

Our separate accounts contributed 34% of our total gross client inflows for the nine months ended September 30, 2012 and represented 55% of our total AUM as of September 30, 2012.

Our separate account business has historically been driven primarily by our Direct Channel, where sales representatives form a relationship with high net worth investors, middle market institutions, and large institutional clients working in conjunction with a consultant. The Direct Channel contributed 74% of the total gross client inflows for our separate account business for the nine months ended September 30, 2012 and represented 73% of our total separate account AUM as of September 30, 2012. We anticipate the Direct Channel to continue to be the largest driver of new separate account business going forward, given the Channel’s high net worth and middle market institutional client-type focus.

During the nine months ended September 30, 2012, equity and blended asset portfolios represented 65% and 28% of the separate account gross client inflows from the Direct Channel, respectively, while fixed income portfolios accounted for 7%. As of September 30, 2012, equity and blended asset portfolios represented 49% and 46% of total Direct Channel separate account AUM, while our fixed income portfolios were 5%. We expect our focus on individuals and middle market institutions to continue to drive interest in our blended asset class portfolios, where we provide a comprehensive portfolio of stocks and bonds managed to a client’s specific investment objectives. However, relationships with larger institutions have resulted in strong growth in equity portfolios as a percentage of total AUM, which will likely continue given the breadth of our offerings, including domestic, international and global equity portfolios.

 

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To a lesser extent, we also obtain separate account business from third parties, including financial advisors or unaffiliated registered investment advisor programs or platforms. During the nine months ended September 30, 2012, 18% of the total gross client inflows for separate accounts came from financial advisor representatives (Intermediary Channel), and an additional 8% came from unaffiliated registered investment advisor platforms (Platform/Sub-advisor Channel). The Intermediary and Platform/Sub-advisor Channels represented 27% of our total separate account AUM as of September 30, 2012.

New separate account business through the Intermediary Channel were into both our blended asset and equity portfolios, driven by advisors’ needs to identify either a one-stop solution (blended asset portfolio) or to fill a mandate within a multi-strategy portfolio. During the nine months ended September 30, 2012, blended asset and equity portfolios represented 55% and 42% of the separate account gross client inflows from the Intermediary Channel, respectively, while fixed income portfolios represented 3%. As of September 30, 2012, 75% of our separate account AUM derived from financial advisors was allocated to blended asset portfolios, with 20% allocated to equity and 5% allocated to fixed income. We expect that equity and fixed income portfolios may see additional interest from financial advisors over time as more and more advisors structure a multi-strategy portfolio.

In contrast, gross client inflows through the Platform/Sub-advisor Channel are primarily directed to our equity strategies, where we are filling a specific mandate within the investment program or platform product. During the nine months ended September 30, 2012, 100% of our separate account gross client inflows from the Platform/Sub-advisory Channel were from equity portfolios, and we expect this will continue going forward. As of September 30, 2012, equity portfolios represented 100% of total Platform/Sub-Advisory Channel separate account AUM.

Our annualized separate account retention rate across all channels was approximately 95% during the nine months ended September 30, 2012, representing the strong relationship focus that is inherent in our direct sales model, which is the primary driver of our separate account business.

The composition of our mutual funds and collective investment trusts as of September 30, 2012, by portfolio, is set forth in the table below.

 

     As of September 30, 2012  
     Blended
Asset
     Equity      Fixed Income      Total  
     (in millions)  

Mutual funds and collective investment trusts AUM

   $ 8,933.9       $ 10,976.1       $ 34.7       $ 19,944.7   

Our mutual fund and collective investment trusts contributed 66% to our total gross client inflows for the nine months ended September 30, 2012 and represented 45% of our total AUM as of September 30, 2012. As of September 30, 2012, our mutual fund and collective investment trust AUM consisted of 45% from blended asset portfolios and 55% from equity portfolios, compared to 40% and 60% for blended asset and equity portfolios as of September 30, 2011. During the nine months ended September 30, 2012, 47% of the gross client inflows were attributable to blended assets, while 52% came in equity portfolios and the remaining 1% came in fixed income portfolios. For the nine months ended September 30, 2012, market appreciation for our mutual fund and collective investment trust AUM was 11.6%, including appreciation of 11.3% in our blended assets and 11.8% in our equity portfolios.

Mutual fund and collective investment trust business is driven by financial intermediaries and to a lesser extent, our direct sales representatives. Intermediary distribution of our mutual funds and collective investment trust vehicles is achieved via financial advisors, brokers, retirement plan advisors and approval of our funds on platforms and within mutual fund advisory programs. Through our Intermediary Channel, we are increasingly focused on our blended asset life cycle fund vehicles given our emphasis on advisors that work with retirement plans. In addition, we anticipate greater use of our blended asset portfolios by advisors seeking a multi-asset class solution for their retail clients. In addition, our allocation to equity portfolios within the Intermediary Channel may also increase due to interest from national brokerage firm advisors who wish to utilize our mutual funds as a sleeve within a larger portfolio.

Through our Platform/Sub-advisor Channel, we have relationships with consultants and advisors at platforms. We derive equity portfolio assets in this channel through the selection of our funds within advisory programs where our mutual funds are used within a multi-strategy portfolio, or through placement on platforms’ approved lists of funds. To facilitate our relationships with intermediaries, we currently have more than 275 dealer relationships. The continued increase in financial intermediaries offering our mutual funds and collective investment trusts to clients will afford us the opportunity for continued growth across distribution channels. These relationships are an important component in expanding our retail business as well as our 401(k) life cycle and institutional business.

Our Direct Sales Representatives distribute our equity portfolios, in particular our non-US portfolios, to large institutional clients for which we have direct relationships with the client and often, the client’s consultant. Through the Direct Channel, we also form relationships with middle market and large market defined contribution plan sponsors seeking to use our life cycle mutual funds and collective investment trusts as default options on their investment menu. We expect this channel to be focused on distributing blended asset and equity fund vehicles, particularly as the breadth of our mutual fund and collective investment trust offerings expands.

 

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Results of Operations

Below is a discussion of our consolidated results of operations for the three and nine months ended September 30, 2012 and 2011.

Key Components of Results of Operations

Overview. Changes to our operating results over time are largely driven by net new client asset flows and changes to the market value of our AUM.

An important factor influencing inflows and outflows of our AUM is the investment performance of our various investment approaches. Our variety of stock selection strategies, absolute pricing discipline and active asset allocation management approach generally results in specific absolute and relative return characteristics in different market environments. For example, during a fundamental-driven bull market when prices are rising alongside improving fundamentals, we are likely to experience positive absolute returns and competitive relative returns. However, in a more momentum-driven bull market, when prices become disconnected from underlying fundamentals, we are likely to experience positive absolute returns but lagging relative returns. Similarly, during a valuation-driven bear market, when markets experience a period of price correction following a momentum-driven bull market, we are likely to experience negative absolute returns but strong relative returns. However, in a momentum-driven bear market, which is typically characterized by broad price declines in a highly correlated market, we are likely to experience negative absolute returns and lagging relative returns. Essentially, our approach is likely to do well when markets are driven by fundamentals, but lag when markets are driven primarily by momentum.

Other components of our operating results include:

 

   

asset-based fee rates and changes in those rates;

 

   

the composition of our AUM among various portfolios, vehicles and client types; and

 

   

the rate of increase in our variable and fixed costs, which is affected by the rate of revenue increases, compensation and year-to-year changes in incentive bonuses, changes to base compensation, vendor-related costs and investment spending on new products, consultative staffing and proprietary and third-party technology development.

Assets Under Management. The following tables reflect the indicated components of our AUM for our investment vehicles for the three and nine months ended September 30, 2012 and 2011.

 

AUM – by investment vehicle

(for the three months ended September 30, 2012 and 2011)

   Separately
managed
accounts
    Mutual funds
and collective
investment
trusts
    Total     Separately
managed
accounts
    Mutual funds
and collective
investment
trusts
    Total  
           (in millions)                          

As of June 30, 2012

   $ 23,550.5      $ 18,821.0      $ 42,371.5        56     44     100

Gross client inflows

     507.0        1,306.5        1,813.5         

Gross client outflows

     (1,084.1     (1,343.4     (2,427.5      

Market appreciation

     1,349.9        1,160.6        2,510.5         
  

 

 

   

 

 

   

 

 

       

As of September 30, 2012

   $ 24,323.3      $ 19,944.7      $ 44,268.0        55     45     100
  

 

 

   

 

 

   

 

 

       

Average AUM for period

   $ 23,862.7      $ 19,387.2      $ 43,249.9         

As of June 30, 2011

   $ 24,910.8      $ 19,712.3      $ 44,623.1        56     44     100

Gross client inflows

     1,454.3        2,626.9        4,081.2         

Gross client outflows

     (1,139.0     (1,494.9     (2,633.9      

Market depreciation

     (3,674.4     (3,627.2     (7,301.6      
  

 

 

   

 

 

   

 

 

       

As of September 30, 2011

   $ 21,551.7      $ 17,217.1      $ 38,768.8        56     44     100
  

 

 

   

 

 

   

 

 

       

Average AUM for period

   $ 23,800.0      $ 18,913.5      $ 42,713.5         

 

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Table of Contents

AUM – by investment vehicle

(for the nine months ended September 30, 2012 and 2011)

   Separately
managed
accounts
    Mutual funds
and collective
investment
trusts
    Total     Separately
managed
accounts
    Mutual funds
and collective
investment
trusts
    Total  
           (in millions)                          

As of December 31, 2011

   $ 22,658.1      $ 17,542.0      $ 40,200.1        56     44     100

Gross client inflows

     2,365.4        4,603.1        6,968.5         

Gross client outflows

     (3,217.2     (4,238.0     (7,455.2      

Market appreciation

     2,517.0        2,037.6        4,554.6         
  

 

 

   

 

 

   

 

 

       

As of September 30, 2012

   $ 24,323.3      $ 19,944.7      $ 44,268.0        55     45     100
  

 

 

   

 

 

   

 

 

       

Average AUM for period

   $ 23,884.2      $ 19,106.0      $ 42,990.2         

As of December 31, 2010

   $ 22,935.1      $ 15,906.6      $ 38,841.7        59     41     100

Gross client inflows

     3,678.4        7,426.1        11,104.5         

Gross client outflows

     (2,598.6     (3,294.9     (5,893.5      

Market depreciation

     (2,463.2     (2,820.7     (5,283.9      
  

 

 

   

 

 

   

 

 

       

As of September 30, 2011

   $ 21,551.7      $ 17,217.1      $ 38,768.8        56     44     100
  

 

 

   

 

 

   

 

 

       

Average AUM for period

   $ 24,111.0      $ 18,326.1      $ 42,437.1         

Assets Under Management. The following tables reflect the indicated components of our AUM for our portfolios for the three and nine months ended September 30, 2012 and 2011.

 

 

AUM – by portfolio

(for the three months ended September 30, 2012 and 2011)

   Blended
Asset
    Equity     Fixed
Income
    Total     Blended
Asset
    Equity     Fixed
Income
    Total  
           (in millions)                                

As of June 30, 2012

   $ 19,450.7      $ 21,695.9      $ 1,224.9      $ 42,371.5        46     51     3     100

Gross client inflows

     857.7        922.5        33.3        1,813.5           

Gross client outflows

     (816.5     (1,551.2     (59.8     (2,427.5        

Market appreciation

     1,005.9        1,485.7        18.9        2,510.5           
  

 

 

   

 

 

   

 

 

   

 

 

         

As of September 30, 2012

   $ 20,497.8      $ 22,552.9      $ 1,217.3      $ 44,268.0        46     51     3     100
  

 

 

   

 

 

   

 

 

   

 

 

         

Average AUM for period

   $ 19,943.0      $ 22,086.7      $ 1,220.2      $ 43,249.9           

As of June 30, 2011

   $ 18,791.3      $ 24,573.6      $ 1,258.2      $ 44,623.1        42     55     3     100

Gross client inflows

     1,222.1        2,832.2        26.9        4,081.2           

Gross client outflows

     (926.6     (1,677.2     (30.1     (2,633.9        

Market depreciation

     (1,903.7     (5,372.2     (25.7     (7,301.6        
  

 

 

   

 

 

   

 

 

   

 

 

         

As of September 30, 2011

   $ 17,183.1      $ 20,356.4      $ 1,229.3      $ 38,768.8        44     53     3     100
  

 

 

   

 

 

   

 

 

   

 

 

         

Average AUM for period

   $ 18,188.4      $ 23,294.5      $ 1,230.6      $ 42,713.5           

 

 

AUM – by portfolio

(for the nine months ended September 30, 2012 and 2011)

   Blended
Asset
    Equity     Fixed
Income
    Total     Blended
Asset
    Equity     Fixed
Income
    Total  
           (in millions)                                

As of December 31, 2011

   $ 18,122.5      $ 20,812.0      $ 1,265.6      $ 40,200.1        45     52     3     100

Gross client inflows

     2,904.6        3,901.8        162.1        6,968.5           

Gross client outflows

     (2,530.7     (4,672.2     (252.3     (7,455.2        

Market appreciation

     2,001.4        2,511.3        41.9        4,554.6           
  

 

 

   

 

 

   

 

 

   

 

 

         

As of September 30, 2012

   $ 20,497.8      $ 22,552.9      $ 1,217.3      $ 44,268.0        46     51     3     100
  

 

 

   

 

 

   

 

 

   

 

 

         

Average AUM for period

   $ 19,467.4      $ 22,283.4      $ 1,239.4      $ 42,990.2           

As of December 31, 2010

   $ 17,280.5      $ 20,256.9      $ 1,304.3      $ 38,841.7        45     52     3     100

Gross client inflows

     3,423.6        7,580.5        100.4        11,104.5           

Gross client outflows

     (2,400.1     (3,310.1     (183.3     (5,893.5        

Market (depreciation) appreciation

     (1,120.9     (4,170.9     7.9        (5,283.9        
  

 

 

   

 

 

   

 

 

   

 

 

         

As of September 30, 2011

   $ 17,183.1      $ 20,356.4      $ 1,229.3      $ 38,768.8        44     53     3     100
  

 

 

   

 

 

   

 

 

   

 

 

         

Average AUM for period

   $ 18,261.0      $ 22,915.5      $ 1,260.6      $ 42,437.1           

 

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Revenue. Our revenues primarily consist of investment management fees earned from managing our clients’ AUM. We earn our investment management fees as a percentage of our clients’ AUM either as of a specified date or on a daily basis. Our investment management fees fluctuate based on the average fee rate for our investment management products, which are affected by the composition of our AUM among various portfolios and investment vehicles. We currently do not have revenues from performance fee based products.

Manning & Napier Advisors, LLC (“MNA”), our subsidiary, serves as the investment advisor to the Fund and Exeter Trust Company. The Fund is currently a family of 36 open-end mutual funds that offer no-load share classes designed to meet the needs of a range of institutional and other investors. Exeter Trust Company is an affiliated New Hampshire-chartered trust company that sponsors a family of collective investment trusts for qualified retirement plans, including 401(k) plans. These mutual funds and collective investment trusts comprised $19.9 billion, or 45%, of our AUM as of September 30, 2012, and investment management fees from these mutual funds and collective investment trusts were $43.6 million, or 51%, of our revenues for the three months ended September 30, 2012, and were $128.6 million, or 51%, of our revenues for the nine months ended September 30, 2012.

MNA also serves as the investment advisor to all of our separately managed accounts, managing $24.3 billion, or 55%, of our AUM as of September 30, 2012, including assets managed as a sub-advisor to pooled investment vehicles and assets in client accounts invested in the Fund. Investment management fees from separately managed accounts were $37.8 million, or 44%, of our revenues for the three months ended September 30, 2012, and were $111.0 million, or 44%, of our revenues for the nine months ended September 30, 2012.

Operating Expenses. Our largest operating expenses are employee compensation and sub-transfer agent/shareholder service fees, discussed further below, with a significant portion of these expenses varying in a direct relationship to our AUM and revenues. We review our operating expenses in relation to the investment market environment and changes in our revenues. However, we are generally willing to make expenditures as necessary even in the face of declining rates of growth in revenues in order to support our investment products, our client service levels, strategic initiatives and our long-term value.

 

   

Compensation and related costs. Employee compensation and related costs represent our largest expense, including employee salaries and benefits, incentive compensation to investment and sales professionals and reorganization-related share-based compensation. These costs are affected by changes in the employee headcount, mix of existing job descriptions, competitive factors, the addition of new skill sets and/or changes in our stock price reflected in share-based compensation.

 

   

Sub-transfer agent/shareholder service fees. Sub-transfer agent/shareholder service fees represent amounts paid to various platforms that distribute our mutual fund and collective investment trust products. These expenses increase as the AUM in our mutual fund and collective investment trust products increase.

 

   

Other operating expenses. Other operating expenses include costs for custodial services, professional fees, including accounting and legal fees, occupancy and facility costs, as well as other costs related to travel and entertainment expenses, insurance, market data service expenses and all other miscellaneous costs associated with managing the day-to-day operations of our business.

Non-Operating Income (Loss). Non-operating income (loss) includes interest expense, interest and dividend income, and gains (losses) related to investment securities sales and changes in values of those designated as trading. Prior to the consummation of our initial public offering, interest expense included charges related to the agreement with William Manning, our Chairman and controlling stockholder. Prior to being publicly traded, we had a mandatory redemption obligation upon the death of William Manning to pay his estate his pro rata share of net revenue for the four quarters immediately preceding his death. Our liability related to this mandatory redemption obligation was calculated each fiscal quarter, and the change in the liability was reflected as non-cash interest expense. Upon the consummation of our initial public offering, such mandatory redemption obligation terminated and we no longer reflect non-cash interest expense or the liability related to such agreement.

Provision for Income Taxes. Historically, we have not had a significant provision for income taxes due to the fact that the combined entity is generally made up of S-Corporations and limited liability companies. However, following our initial public offering, we reported an increase in the provision for income taxes due to the requirement to include provisions for federal and state income taxes as a result of Manning & Napier’s C-Corporation status.

 

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Critical Accounting Policies and Estimates

There have been no significant changes in our critical accounting policies and estimates from those that were disclosed in our Annual Report on Form 10-K for the year ended December 31, 2011.

This management’s discussion and analysis should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 together with the combined consolidated financial statements and related notes and the other financial information that appear elsewhere in this report.

Revenue Recognition

Because the majority of our revenues are earned based on AUM that has been determined using fair value methods and since market appreciation/depreciation has a significant impact on our revenue, we have presented our AUM using the GAAP framework for measuring fair value. That framework provides a three-level fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs based on company assumptions (Level 3). A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the instrument’s fair value measurement. The three levels within the fair value hierarchy are described as follows:

Level 1—includes observable inputs such as quoted prices in active markets for identical securities.

Level 2—includes inputs other than quoted prices that are observable for the asset or liability, including quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability.

Level 3—includes one or more significant unobservable inputs.

The table below summarizes the approximate amount of AUM for the periods indicated for which fair value is measured based on Level 1, Level 2 and Level 3.

 

     Level 1      Level 2      Level 3      Total  
     (in millions)  

December 31, 2011 AUM

   $ 21,732       $ 18,462       $ 6       $ 40,200   

September 30, 2012 AUM

   $ 26,480       $ 17,766       $ 22       $ 44,268   

As substantially all our AUM is valued by independent pricing services based upon observable market prices or inputs, we believe market risk is the most significant risk underlying valuation of our AUM, as discussed under “Item 3. Quantitative and Qualitative Disclosures About Market Risk” and “Part II. Item 1A. Risk Factors.”

Recent Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. This standard eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. In December 2011, the FASB issued an amendment to this standard which defers the requirement to present components of reclassifications of other comprehensive income on the face of the income statement. These amendments are effective for annual periods beginning after December 15, 2011. The adoption of these amendments on January 1, 2012, did not have a material impact on our combined consolidated financial statements and related disclosures.

In May 2011, FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards. The amendments in this update change the wording used to describe the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. These amendments are effective for annual periods beginning after December 15, 2011. The adoption of these amendments on January 1, 2012, did not have a material impact on our combined consolidated financial statements and related disclosures.

 

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Table of Contents

Three Months Ended September 30, 2012 Compared to Three Months Ended September 30, 2011

Assets Under Management

The following table reflects changes in our AUM for the three months ended September 30, 2012 and 2011:

 

     Three Months Ended September 30,     Period-to-Period  
     2012     2011     $     %  
     (in millions)  

Separately managed accounts

        

Beginning assets under management

   $ 23,550.5      $ 24,910.8      $ (1,360.3     (5 %) 

Gross client inflows

     507.0        1,454.3        (947.3     (65 %) 

Gross client outflows

     (1,084.1     (1,139.0     54.9        (5 %) 

Market appreciation/(depreciation)

     1,349.9        (3,674.4     5,024.3        (137 %) 
  

 

 

   

 

 

   

 

 

   

Ending assets under management

   $ 24,323.3      $ 21,551.7      $ 2,771.6        13
  

 

 

   

 

 

   

 

 

   

Mutual funds and collective investment trusts

        

Beginning assets under management

   $ 18,821.0      $ 19,712.3      $ (891.3     (5 %) 

Gross client inflows

     1,306.5        2,626.9        (1,320.4     (50 %) 

Gross client outflows

     (1,343.4     (1,494.9     151.5        (10 %) 

Market appreciation/(depreciation)

     1,160.6        (3,627.2     4,787.8        (132 %) 
  

 

 

   

 

 

   

 

 

   

Ending assets under management

   $ 19,944.7      $ 17,217.1      $ 2,727.6        16
  

 

 

   

 

 

   

 

 

   

Total assets under management

        

Beginning assets under management

   $ 42,371.5      $ 44,623.1      $ (2,251.6     (5 %) 

Gross client inflows

     1,813.5        4,081.2        (2,267.7     (56 %) 

Gross client outflows

     (2,427.5     (2,633.9     206.4        (8 %) 

Market appreciation/(depreciation)

     2,510.5        (7,301.6     9,812.1        (134 %) 
  

 

 

   

 

 

   

 

 

   

Ending assets under management

   $ 44,268.0      $ 38,768.8      $ 5,499.2        14
  

 

 

   

 

 

   

 

 

   

Our total AUM increased by $5.5 billion, or 14%, to $44.3 billion as of September 30, 2012 from $38.8 billion as of September 30, 2011. Compared to the three months ended September 30, 2011, gross client inflows decreased by $2.3 billion for the three months ended September 30, 2012, while gross client outflows decreased by $0.2 billion for the same period. Additionally, we experienced market depreciation of $7.3 billion for the three months ended September 30, 2011 compared to market appreciation of $2.5 billion for the three months ended September 30, 2012.

For the three months ended September 30, 2012, our total AUM increased by $1.9 billion from $42.4 billion at June 30, 2012 to $44.3 billion. Of the $1.9 billion increase, $2.5 billion came from investment gains during the period, which was partially offset by net client outflows of $0.6 billion. Net client outflows were comprised of $0.6 billion from our separate accounts, primarily caused by withdrawals from existing client accounts, and relatively flat mutual funds and collective investment trusts net client flows.

Market appreciation during the three months ended September 30, 2012 constituted a 5.9% rate of increase in our total AUM. The investment gain was 5.7% in separately managed accounts and 6.2% in mutual funds and collective investment trusts.

The rates of change in AUM during the three months ended September 30, 2012 were most significant in our blended asset and equity portfolios, with increases of 5% and 4%, respectively, while our fixed income portfolio decreased by 1%. The rates of change in AUM were also most significant in our blended asset and equity portfolios from September 30, 2011 to September 30, 2012, as these portfolios experienced increases of 19% and 11%, respectively, over this period, while our fixed income portfolio decreased by 1%.

As of September 30, 2012, the composition of our AUM was 45% in mutual funds and collective investment trusts and 55% in separate accounts, compared to 44% in mutual funds and collective investment trusts and 56% in separate accounts at June 30, 2012 and September 30, 2011. The composition of our AUM across portfolios at September 30, 2012 and June 30, 2012 was 46% in blended assets, 51% in equity, and 3% in fixed income, compared to 44% in blended assets, 53% in equity, and 3% in fixed income at September 30, 2011.

 

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The following table sets forth our results of operations for the three months ended September 30, 2012 and 2011:

 

     Three Months Ended September 30,     Period-to-Period  
     2012      2011     $     %  
     (in thousands, except share data)        

Statements of operations data:

         

Revenues

         

Investment management services revenue

   $ 85,382       $ 85,789      $ (407     (0 %) 

Expenses

         

Compensation and related costs

     40,922         20,890        20,032        96

Sub-transfer agent and shareholder service costs

     12,830         12,496        334        3

Other operating costs

     9,941         9,300        641        7
  

 

 

    

 

 

   

 

 

   

Total operating expenses

     63,693         42,686        21,007        49
  

 

 

    

 

 

   

 

 

   

Operating income

     21,689         43,103        (21,414     (50 %) 
  

 

 

    

 

 

   

 

 

   

Non-operating income (loss)

         

Interest expense on shares subject to mandatory redemption

     —           (13,339     13,339        (100 %) 

Other non-operating income

     595         192        403        210
  

 

 

    

 

 

   

 

 

   

Total non-operating income (loss)

     595         (13,147     13,742        105
  

 

 

    

 

 

   

 

 

   

Income before provision for income taxes

     22,284         29,956        (7,672     (26 %) 

Provision for income taxes

     1,220         253        967        382
  

 

 

    

 

 

   

 

 

   

Net income attributable to controlling and noncontrolling interests

     21,064         29,703        (8,639     (29 %) 

Less: net income attributable to noncontrolling interests

     19,410         29,703        (10,293     (35 %) 
  

 

 

    

 

 

     

Net income attributable to Manning & Napier, Inc.

   $ 1,654       $ —         
  

 

 

    

 

 

     

Per Share Data

         

Net income available to Class A common stock per basic and diluted share

   $ 0.12          
  

 

 

        

Weighted average basic and diluted shares of Class A common stock outstanding

     13,583,873          
  

 

 

        

Cash dividends declared per share of Class A common stock

   $ 0.16          
  

 

 

        

Revenues

Our investment management services revenue decreased by $0.4 million, or less than 1%, to $85.4 million for the three months ended September 30, 2012 from $85.8 million for the three months ended September 30, 2011. This change in revenue is generally consistent with the $0.5 billion, or 1%, increase in our average AUM to $43.2 billion for the three months ended September 30, 2012 from $42.7 billion for the three months ended September 30, 2011.

Our average separately managed account fee decreased to 63 basis points for the three months ended September 30, 2012 from 65 basis points for the three months ended September 30, 2011. For the three months ended September 30, 2012 and 2011, separately managed account standard fees ranged from 15 basis points to 125 basis points, which was consistent with prior periods. The concentration of investments in our separately managed account assets was 48% blended assets, 47% equity and 5% fixed income at both September 30, 2012 and September 30, 2011.

Our average fee on mutual fund and collective investment trust products decreased to 89 basis points for the three months ended September 30, 2012 from 92 basis points for the three months ended September 30, 2011. This decrease was primarily due to a shift in the mix of our AUM from higher fee mutual funds and collective investment trusts to those with lower fees. For the three months ended September 30, 2012, mutual fund and collective investment trust management fees ranged from 34 basis points to 100 basis points, and ranged from 45 basis points to 100 basis points for the three months ended September 30, 2011.

Operating Expenses

Our operating expenses increased by $21.0 million, or 49%, to $63.7 million for the three months ended September 30, 2012 from $42.7 million for the three months ended September 30, 2011.

Compensation and related costs increased by $20.0 million, or 96%, to $40.9 million for the three months ended September 30, 2012 from $20.9 million for the three months ended September 30, 2011. This increase was primarily attributable to a non-cash

 

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reorganization-related share-based compensation charge of $17.3 million. When considered as a percentage of revenue, compensation and related costs excluding non-cash reorganization-related share-based compensation charges increased to 28% for the three months ended September 30, 2012 from 24% for the three months ended September 30, 2011. This increase in compensation as a percentage of revenue resulted from an increase in incentive compensation costs resulting from the strong absolute and relative investment performance during the three months ended September 30, 2012, coupled with a 13% increase in headcount compared to September 30, 2011.

Sub-transfer agent and shareholder service costs increased by $0.3 million, or 3%, to $12.8 million for the three months ended September 30, 2012 from $12.5 million for the three months ended September 30, 2011. The increase was generally attributable to a 3% increase in mutual funds and collective investment trusts average AUM for the three months ended September 30, 2012 compared to September 30, 2011. As a percentage of mutual fund and collective investment trust revenue, sub-transfer agent and shareholder service fees remained generally consistent at 29% for the three months ended September 30, 2012 and September 30, 2011.

Other operating costs increased by $0.6 million, or 7%, to $9.9 million for the three months ended September 30, 2012 from $9.3 million for the three months ended September 30, 2011. The increase was primarily attributable to increases in fee waivers and 12b-1 fees associated with our mutual fund offerings.

Non-Operating Income (Loss)

Non-operating income increased by $13.7 million, or 105%, to income of $0.6 million for the three months ended September 30, 2012 from a loss of $13.1 million for the three months ended September 30, 2011. The increase was primarily due to the elimination of the non-cash interest expense on the shares subject to mandatory redemption. Non-cash interest expense on shares subject to mandatory redemption was eliminated due to the termination of the mandatory redemption obligation upon the consummation of our initial public offering.

Provision for Income Taxes

The Company’s tax provision increased by $1.0 million, or 382%, to $1.2 million for the three months ended September 30, 2012 from $0.3 million for the three months ended September 30, 2011. The increase is primarily driven by our reorganization and, following our initial public offering, an increase in the provision for income taxes as a result of our C-corporation status. For the three months ended September 30, 2011, the Company operated primarily as a series of flow-through entities which are generally not subject to U.S federal or most state and local income tax.

 

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Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30, 2011

Assets Under Management

The following table reflects changes in our AUM for the nine months ended September 30, 2012 and 2011:

 

     Nine Months Ended September 30,     Period-to-Period  
     2012     2011     $     %  
     (in millions)  

Separately managed accounts

        

Beginning assets under management

   $ 22,658.1      $ 22,935.1      $ (277.0     (1 %) 

Gross client inflows

     2,365.4        3,678.4        (1,313.0     (36 %) 

Gross client outflows

     (3,217.2     (2,598.6     (618.6     24

Market appreciation/(depreciation)

     2,517.0        (2,463.2     4,980.2        (202 %) 
  

 

 

   

 

 

   

 

 

   

Ending assets under management

   $ 24,323.3      $ 21,551.7      $ 2,771.6        13
  

 

 

   

 

 

   

 

 

   

Mutual funds and collective investment trusts

        

Beginning assets under management

   $ 17,542.0      $ 15,906.6      $ 1,635.4        10

Gross client inflows

     4,603.1        7,426.1        (2,823.0     (38 %) 

Gross client outflows

     (4,238.0     (3,294.9     (943.1     29

Market appreciation/(depreciation)

     2,037.6        (2,820.7     4,858.3        (172 %) 
  

 

 

   

 

 

   

 

 

   

Ending assets under management

   $ 19,944.7      $ 17,217.1      $ 2,727.6        16
  

 

 

   

 

 

   

 

 

   

Total assets under management

        

Beginning assets under management

   $ 40,200.1      $ 38,841.7      $ 1,358.4        3

Gross client inflows

     6,968.5        11,104.5        (4,136.0     (37 %) 

Gross client outflows

     (7,455.2     (5,893.5     (1,561.7     26

Market appreciation/(depreciation)

     4,554.6        (5,283.9     9,838.5        (186 %) 
  

 

 

   

 

 

   

 

 

   

Ending assets under management

   $ 44,268.0      $ 38,768.8      $ 5,499.2        14
  

 

 

   

 

 

   

 

 

   

Our total AUM increased by $5.5 billion, or 14%, to $44.3 billion as of September 30, 2012 from $38.8 billion as of September 30, 2011. Compared to the nine months ended September 30, 2011, gross client inflows decreased by $4.1 billion for the nine months ended September 30, 2012, while gross client outflows increased by $1.6 billion for the same periods. Additionally, we experienced market depreciation of $5.3 billion for the nine months ended September 30, 2011 compared to market appreciation of $4.6 billion for the nine months ended September 30, 2012.

For the nine months ended September 30, 2012, our total AUM increased by $4.1 billion from $40.2 billion at December 31, 2011 to $44.3 billion at September 30, 2012. Of the $4.1 billion increase, $4.6 billion came from investment gains during the period, which was partially offset by net client outflows of $0.5 billion. Our net client outflows were comprised of separate accounts net client outflows of $0.9 billion, primarily caused by withdrawals from existing client accounts, offset by $0.4 billion of net client inflows to our mutual funds and collective investment trusts. The annualized separate account retention rate was approximately 95% during the nine months ended September 30, 2012.

Market appreciation during the nine months ended September 30, 2012 constituted an 11.3% rate of increase in our total AUM. The investment gain was 11.1% in separately managed accounts and 11.6% in mutual funds and collective investment trusts.

The rates of change in AUM during the nine months ended September 30, 2012 were most significant in our blended asset and equity portfolios, with increases of 13% and 8%, respectively, while our fixed income portfolio decreased by 4%. The rates of change in AUM were also most significant in our blended asset and equity portfolios from September 30, 2011 to September 30, 2012, as these portfolios experienced increases of 19% and 11%, respectively, over this period, while our fixed income portfolio decreased by 1%.

As of September 30, 2012, the composition of our AUM was 45% in mutual funds and collective investment trusts and 55% in separate accounts, compared to 44% in mutual funds and collective investment trusts and 56% in separate accounts at December 31, 2011 and September 30, 2011. The composition of our AUM across portfolios at September 30, 2012 was 46% in blended assets, 51% in equity, and 3% in fixed income, compared to 45% in blended assets, 52% in equity, and 3% in fixed income at December 31, 2011, and 44% in blended assets, 53% in equity, and 3% in fixed income at September 30, 2011.

 

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The following table sets forth our results of operations for the nine months ended September 30, 2012 and 2011:

 

     Nine Months Ended September 30,     Period-to-Period  
     2012      2011     $     %  
     (in thousands, except share data)        

Statements of operations data:

         

Revenues

         

Investment management services revenue

   $ 251,925       $ 249,634      $ 2,291        1

Expenses

         

Compensation and related costs

     115,224         70,845        44,379        63

Sub-transfer agent and shareholder service costs

     37,975         36,859        1,116        3

Other operating costs

     27,789         25,225        2,564        10
  

 

 

    

 

 

   

 

 

   

Total operating expenses

     180,988         132,929        48,059        36
  

 

 

    

 

 

   

 

 

   

Operating income

     70,937         116,705        (45,768     (39 %) 
  

 

 

    

 

 

   

 

 

   

Non-operating income (loss)

         

Interest expense on shares subject to mandatory redemption

     —           (42,722     42,722        (100 %) 

Other non-operating income

     416         45        371        824
  

 

 

    

 

 

   

 

 

   

Total non-operating income (loss)

     416         (42,677     43,093        101
  

 

 

    

 

 

   

 

 

   

Income before provision for income taxes

     71,353         74,028        (2,675     (4 %) 

Provision for income taxes

     6,409         792        5,617        709
  

 

 

    

 

 

   

 

 

   

Net income attributable to controlling and noncontrolling interests

     64,944         73,236        (8,292     (11 %) 

Less: net income attributable to noncontrolling interests

     62,223         73,236        (11,013     (15 %) 
  

 

 

    

 

 

     

Net income attributable to Manning & Napier, Inc.

   $ 2,721       $ —         
  

 

 

    

 

 

     

Per Share Data

         

Net income available to Class A common stock per basic and diluted share

   $ 0.20          
  

 

 

        

Weighted average basic and diluted shares of Class A common stock outstanding

     13,583,873          
  

 

 

        

Cash dividends declared per share of Class A common stock

   $ 0.48          
  

 

 

        

Revenues

Our investment management services revenue increased by $2.3 million, or 1%, to $251.9 million for the nine months ended September 30, 2012 from $249.6 million for the nine months ended September 30, 2011. This increase was driven primarily by a $0.6 billion, or 1%, increase in our average AUM to $43.0 billion for the nine months ended September 30, 2012 from $42.4 billion for the nine months ended September 30, 2011.

Our average separately managed account fee was 62 basis points for the nine months ended September 30, 2012 and September 30, 2011. For the nine months ended September 30, 2012 and 2011, separately managed account management fees ranged from 15 basis points to 125 basis points, which was consistent with prior periods. The concentration of investments in our separately managed account assets was 48% blended assets, 47% equity and 5% fixed income at both September 30, 2012 and September 30, 2011.

Our average fee on mutual fund and collective investment trust products decreased to 90 basis points for the nine months ended September 30, 2012 from 92 basis points for the nine months ended September 30, 2011. This decrease was primarily due to a shift in the mix of our AUM from higher fee mutual funds and collective investment trusts to those with lower fees. For the nine months ended September 30, 2012, mutual fund and collective investment trust management fees ranged from 34 basis points to 100 basis points, and ranged from 45 basis points to 100 basis points for the nine months ended September 30, 2011.

Operating Expenses

Our operating expenses increased by $48.1 million, or 36%, to $181.0 million for the nine months ended September 30, 2012 from $132.9 million for the nine months ended September 30, 2011.

Compensation and related costs increased by $44.4 million, or 63%, to $115.2 million for the nine months ended September 30, 2012 from $70.8 million for the nine months ended September 30, 2011. This increase was primarily attributable to a non-cash

 

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reorganization-related share-based compensation charge of $45.0 million. When considered as a percentage of revenue, compensation and related costs excluding non-cash reorganization-related share-based compensation charges remained consistent at 28% for the nine months ended September 30, 2012 and 2011. The increase in compensation attributed to a 13% increase in headcount was offset by lower incentive compensation during the nine months ended September 30, 2012 than for the nine months ended September 30, 2011. Incentive compensation grew at a slower pace due to a decrease in analyst bonuses caused by the impact of market depreciation during the second half of 2011, and the second quarter of 2012.

Sub-transfer agent and shareholder service costs increased by $1.1 million, or 3%, to $38.0 million for the nine months ended September 30, 2012 from $36.9 million for the nine months ended September 30, 2011. The increase was generally attributable to a 4% increase in mutual funds and collective investment trusts average AUM for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011. As a percentage of mutual fund and collective investment trust revenue, sub-transfer agent and shareholder service fees remained generally consistent at 30% for the nine months ended September 30, 2012, compared to 29% for the nine months ended September 30, 2011.

Other operating costs increased by $2.6 million, or 10%, to $27.8 million for the nine months ended September 30, 2011 from $25.2 million for the nine months ended September 30, 2011. The increase was primarily attributable to increases in fee waivers and 12b-1 fees associated with our mutual fund offerings.

Non-Operating Income (Loss)

Non-operating income increased by $43.1 million, or 101%, to income of $0.4 million for the nine months ended September 30, 2012 from a loss of $42.7 million for the nine months ended September 30, 2011. The increase was primarily attributable to the elimination of the non-cash interest expense on the shares subject to mandatory redemption. Non-cash interest expense on shares subject to mandatory redemption was eliminated because the mandatory redemption obligation terminated upon the consummation of our initial public offering in 2011.

Provision for Income Taxes

The Company’s tax provision increased by $5.6 million, or 709%, to $6.4 million for the nine months ended September 30, 2012 from $0.8 million for the nine months ended September 30, 2011. The increase is primarily driven by our reorganization and, following our initial public offering, an increase in the provision for income taxes as a result of our C-corporation status. For the nine months ended September 30, 2011, the Company operated primarily as a series of flow-through entities which are generally not subject to U.S federal or most state and local income tax.

Supplemental Non-GAAP Financial Information

To provide investors with greater insight, promote transparency and allow for a more comprehensive understanding of the information used by management in its financial and operational decision-making, we supplement our combined consolidated statements of operations presented on a GAAP basis with non-GAAP financial measures of earnings.

Management uses economic income, economic net income, and economic net income per adjusted share as financial measures to evaluate the profitability and efficiency of its business model. Economic income and economic net income are not presented in accordance with GAAP. Economic income excludes from income before provision for income taxes:

 

   

the non-cash interest expense associated with the liability for shares subject to mandatory redemption. Upon consummation of the initial public offering, such mandatory redemption obligation terminated and the Company no longer reflects in its financial statements non-cash interest expense or the liability related to such obligation; and

 

   

the reorganization-related share-based compensation, which results in non-cash compensation expense reported over the vesting period. In addition, upon the consummation of our initial public offering, the vesting terms related to the ownership of our employees were modified, including our named executive officers, other than William Manning. Such individuals were entitled to 15% of their ownership interests upon the consummation of our initial public offering, and 15% of their ownership interests over the subsequent three years. The remaining ownership interests are subject to performance-based vesting over such three-year period. Such new vesting terms will not result in dilution to the number of outstanding shares of the Company’s Class A common stock. As a result of such vesting requirements, the Company will recognize non-cash compensation charges through 2014. Economic net income is a non-GAAP measure of after-tax operating performance and equals the Company’s economic income less adjusted income taxes. Adjusted income taxes are estimated assuming the exchange of all outstanding units of Manning & Napier Group into Class A common stock on a one-to-one basis. Therefore, all income of Manning & Napier Group allocated to the units of Manning & Napier Group is treated as if it were allocated to the Company and represents an estimate of income tax expense at an effective rate of 38.25% on economic income for each respective period, reflecting assumed federal, state and local income taxes. Economic net income per adjusted share is equal to economic net income divided by the total number of adjusted Class A common shares outstanding. The number of adjusted Class A common shares outstanding for all periods presented is determined by assuming that all exchangeable units of Manning & Napier Group are converted into our outstanding Class A common stock as of the respective reporting date, on a one-to-one basis. The Company’s management uses economic net income, among other financial data, to determine the earnings available to distribute as dividends to holders of its Class A common stock and to the holders of the units of Manning & Napier Group.

 

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Table of Contents

Non-GAAP measures are not a substitute for financial measures prepared in accordance with GAAP. Additionally, the Company’s non-GAAP measures may differ from similar measures by other companies, even if similar terms are used to identify such measures.

The following table sets forth our other financial and operating data for the three and nine months ended September 30, 2012 and 2011:

 

     Three Months Ended
September 30,
     Period-to-
Period
    Nine Months Ended
September 30,
     Period-to-Period  
(in thousands, except share data)    2012      2011      $     %     2012      2011      $     %  

Other Non-GAAP financial and operating data

                    

Economic income

   $ 39,574       $ 43,295       $ (3,721     (9 %)    $ 116,389       $ 116,750       $ (361     (0 %) 
  

 

 

    

 

 

    

 

 

     

 

 

    

 

 

    

 

 

   

Economic net income

   $ 24,437       $ 26,735       $ (2,298     (9 %)    $ 71,870       $ 72,093       $ (223     (0 %) 
  

 

 

    

 

 

    

 

 

     

 

 

    

 

 

    

 

 

   

Economic net income per adjusted share

   $ 0.27              $ 0.80           
  

 

 

           

 

 

         

The following table sets forth, for the periods indicated, a reconciliation of non-GAAP financial measures to GAAP measures:

 

     Three Months Ended      Nine Months Ended  
     September 30,
2012
    September 30,
2011
     September 30,
2012
    September 30,
2011
 
     (in thousands, except share data)  

Reconciliation of non-GAAP financial measures:

         

Net income attributable to Manning & Napier, Inc.

   $ 1,654      $ —         $ 2,721      $ —     

Plus: net income attributable to noncontrolling interests

     19,410        29,703         62,223        73,236   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income attributable to controlling and noncontrolling interests

     21,064        29,703         64,944        73,236   

Provision for income taxes

     1,220        253         6,409        792   
  

 

 

   

 

 

    

 

 

   

 

 

 

Income before provision for income taxes

     22,284        29,956         71,353        74,028   

Interest expense on shares subject to mandatory redemption

     —          13,339         —          42,722   

Reorganization-related share-based compensation

     17,290        —           45,036        —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Economic income

     39,574        43,295         116,389        116,750   

Adjusted income taxes

     15,137        16,560         44,519        44,657   
  

 

 

   

 

 

    

 

 

   

 

 

 

Economic net income

   $ 24,437      $ 26,735       $ 71,870      $ 72,093   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income available to Class A common stock per basic and diluted share

   $ 0.12         $ 0.20     

Plus: net income attributable to noncontrolling interests per basic and diluted share

     1.43           4.58     
  

 

 

      

 

 

   

Net income attributable to controlling and noncontrolling interests per basic and diluted share

     1.55           4.78     

Provision for income taxes per basic and diluted share

     0.09           0.47     
  

 

 

      

 

 

   

Income before provision for income taxes per basic and diluted share

     1.64           5.25     

Interest expense on shares subject to mandatory redemption per basic share

     —             —       

Reorganization-related share-based compensation per basic and diluted share

     1.27           3.32     
  

 

 

      

 

 

   

Economic income per basic and diluted share

     2.91           8.57     

Adjusted income taxes per basic and diluted share

     1.11           3.28     
  

 

 

      

 

 

   

Economic net income per basic and diluted share

     1.80           5.29     

Less: Impact of Manning & Napier Group, LLC units converted to publicly traded shares

     (1.53        (4.49  
  

 

 

      

 

 

   

Economic net income per adjusted share

   $ 0.27         $ 0.80     
  

 

 

      

 

 

   

Total basic and diluted shares of Class A common stock outstanding

     13,583,873           13,583,873     

Total exchangeable units of Manning & Napier Group, LLC

     76,400,000           76,400,000     
  

 

 

      

 

 

   

Total adjusted Class A common stock outstanding

     89,983,873           89,983,873     
  

 

 

      

 

 

   

 

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Liquidity and Capital Resources

Historically, our cash and liquidity needs have been met primarily through cash generated by our operations. Our current financial condition is highly liquid, with a significant amount of our assets comprised of cash and cash equivalents and accounts receivable. The following table sets forth certain key financial data relating to our liquidity and capital resources as of September 30, 2012 and December 31, 2011.

 

     September 30,      December 31,  
     2012      2011  
     (unaudited)         
     (in thousands)  

Cash and cash equivalents

   $ 96,957       $ 81,208   

Accounts receivable

   $ 34,568       $ 31,259   

Amounts payable under tax receivable agreement (1)

   $ 45,917       $ 46,205   

 

(1) 

In light of numerous factors affecting our obligation to make such payments, the timing and amounts of any such actual payments are based on our best estimate as of September 30, 2012 and December 31, 2011, including our ability to realize the expected tax benefits. Actual payments may significantly differ from estimated payments.

In determining the sufficiency of liquidity and capital resources to fund our business, we regularly monitor our liquidity position, including among other things, cash, working capital, long-term liabilities, lease commitments and operating company distributions. We believe cash generated from operations will be sufficient over the foreseeable future, or twelve months, to meet our working capital requirements. Further, we expect that cash on hand and cash generated by operations will be sufficient to meet our liquidity needs.

Cash Flows

The following table sets forth our cash flows for the nine months ended September 30, 2012 and 2011. Operating activities consist primarily of net income subject to adjustments for changes in operating assets and liabilities, equity-based compensation expense, and change in shares liability subject to mandatory redemption, deferred income tax expense and depreciation. Investing activities consist primarily of the purchase and sale of investments, as well as the purchases of property and equipment. Financing activities consist primarily of distributions, dividends paid and contributions.

 

     Nine Months Ended
September 30,
 
     2012     2011  
    

(unaudited)

(in thousands)

 

Net cash provided by operating activities

   $ 111,468      $ 110,851   

Net cash used in investing activities

     (9,655     (504

Net cash used in financing activities

     (86,064     (114,456
  

 

 

   

 

 

 

Net change in cash and cash equivalents

   $ 15,749      $ (4,109
  

 

 

   

 

 

 

Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30, 2011

Operating Activities

Operating activities provided $111.5 million and $110.9 million of net cash for the nine months ended September 30, 2012 and 2011, respectively. This overall $0.6 million increase in net cash provided by operating activities was driven primarily by an increase in operating assets and liabilities, primarily accrued expenses and other current liabilities, of approximately $5.1 million, partially offset by a decrease in net income after adjustment for non-cash items of approximately $4.5 million.

 

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Investing Activities

Investing activities used $9.7 million and $0.5 million of net cash for the nine months ended September 30, 2012 and 2011, respectively. The increase in net cash used in investing activities was primarily due to an increase in purchases of investments of $10.3 million, driven largely by the seeding of new products, and in property and equipment purchases of $1.4 million, partially offset by increases in sales of investments of $2.5 million for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011.

Financing Activities

Financing activities used $86.1 million and $114.5 million of net cash for the nine months ended September 30, 2012 and 2011, respectively. The decrease in net cash used in financing activities was primarily the result of a decrease in distributions of $37.2 million for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011, partially offset by an increase in dividends paid on our class A common stock during the nine months ended September 30, 2012.

Dividends

On March 20, 2012, the Board of Directors declared a $0.16 per share dividend to the holders of Class A common stock. The dividend was paid on May 1, 2012 to shareholders of record as of April 13, 2012.

On May 11, 2012, the Board of Directors declared a $0.16 per share dividend to the holders of Class A common stock. The dividend was paid on August 1, 2012 to shareholders of record as of July 16, 2012.

On August 8, 2012, the Board of Directors declared a $0.16 per share dividend to the holders of Class A common stock. The dividend is payable on November 1, 2012 to shareholders of record as of October 15, 2012.

We currently intend to pay quarterly cash dividends of our Class A common stock. We intend to fund such dividends from our portion of distributions made by Manning & Napier Group, from its available cash generated from operations. William Manning, as the holder of our Class B common stock, will not be entitled to any cash dividends in his capacity as a Class B stockholder, but will, in his capacity as an indirect holder of Class A units of Manning & Napier Group, generally participate on a pro rata basis in distributions by Manning & Napier Group.

The declaration and payment of all future dividends, if any, will be at the sole discretion of our board of directors. In determining the amount of any future dividends, our board of directors will take into account:

 

   

the financial results of Manning & Napier Group;

 

   

our available cash, as well as anticipated cash requirements, including any debt servicing;

 

   

our capital requirements and the capital requirements of our subsidiaries, including Manning & Napier Group;

 

   

contractual, legal, tax and regulatory restrictions on, and implications of, the payment of dividends by us to our stockholders or by Manning & Napier Group to us, including the obligation of Manning & Napier Group to make tax distributions to its unitholders, including us;

 

   

general economic and business conditions; and

 

   

any other factors that our board of directors may deem relevant.

We have no material assets other than our ownership of Class A units of Manning & Napier Group and, accordingly, will depend on distributions from Manning & Napier Group to fund any dividends we may pay. As managing member of Manning & Napier Group, we will determine the timing and amount of any distributions to be paid to its members. We intend to cause Manning & Napier Group to distribute cash to its members, including us, in an amount sufficient to cover dividends, if any, declared by us. If we do cause Manning & Napier Group to make such distributions, M&N Group Holdings, MNCC and any other holders of units of Manning & Napier Group will be entitled to receive equivalent distributions on a pari passu basis.

Contractual Obligations

There have been no material changes in our contractual obligations as set forth in our Annual Report on Form 10-K for the year ended December 31, 2011.

Off Balance Sheet Arrangements

We did not have any off-balance sheet arrangements as of September 30, 2012.

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Market Risk

Our exposure to market risk is directly related to the role of our operating company as an investment adviser for the mutual funds and separate accounts it manages. Substantially all of our revenues are derived from investment management agreements with these funds and accounts. Under these agreements, the investment management fees we receive are based on the value of our AUM and our fee rates. Accordingly, our revenues and net income may decline as a result of our AUM decreasing due to depreciation of our investment portfolios. In addition, such a decline could cause our clients to withdraw their funds in favor of investments offering higher returns or lower risk, which would cause our revenues to decline further.

The value of our AUM was $44.3 billion as of September 30, 2012. Assuming a 10% increase or decrease in the value of our AUM and the change being proportionally distributed over all our products, the value would increase or decrease by approximately $4.4 billion, which would cause an annualized increase or decrease in revenues of approximately $34.6 million at our current weighted average fee rate of 0.78%.

We have not adopted a corporate-level risk management policy regarding client assets, nor have we attempted to hedge at the corporate level the market risks that would affect the value of our overall AUM and related revenues. Some of these risks (e.g., sector risks and currency risks) are inherent in certain strategies, and clients may invest in particular strategies to gain exposure to these risks.

We also are subject to market risk from a decline in the prices of investment securities that we own. These securities consist primarily of short-term investments, equity securities and investment in mutual funds, including the Fund for which MNA provides advisory services. The value of these investment securities was $12.6 million as of September 30, 2012. Management regularly monitors the value of these investments; however, given their nature and relative size, we have not adopted a specific risk management policy to manage the associated market risk. Assuming a 10% increase or decrease in the values of these investment securities, the fair value would increase or decrease by approximately $1.3 million at September 30, 2012. Due to the nature of our business, we believe that we do not face any material risk from inflation.

Exchange Rate Risk

A substantial portion of the accounts that we advise, or sub-advise, hold investments that are denominated in currencies other than the U.S. dollar. Movements in the rate of exchange between the U.S. dollar and the underlying foreign currency affect the values of assets held in accounts we manage, thereby affecting the amount of revenues we earn. The value of the assets we manage was $44.3 billion as of September 30, 2012. As of September 30, 2012, approximately 30% of our AUM across our investment strategies was invested in securities denominated in currencies other than the U.S. dollar. To the extent our AUM are denominated in currencies other than the U.S. dollar, the value of those AUM would decrease, with an increase in the value of the U.S. dollar, or increase, with a decrease in the value of the U.S. dollar.

We monitor our exposure to exchange rate risk and make decisions on how to manage such risk accordingly; however, we have not adopted a corporate-level risk management policy to manage exchange rate risk. Assuming that 30% of our AUM is invested in securities denominated in currencies other than the U.S. dollar and excluding the impact of any hedging arrangements, a 10% increase or decrease in the value of the U.S. dollar would decrease or increase the fair value of our AUM by approximately $1.3 billion, which would cause an annualized increase or decrease in revenues of approximately $10.4 million at our current weighted average fee rate of 0.78%.

Interest Rate Risk

We typically invest our excess cash balances in money market mutual funds that invest primarily in U.S. Treasury or agency-backed money market instruments. These funds attempt to maintain a stable net asset value but interest rate changes may affect the fair value of such investments and, if significant, could result in a loss of investment principal. Interest rate changes affect the income we earn from our excess cash balances.

Item 4. Controls and Procedures.

We maintain disclosure controls and procedures, as defined in Rule 13a-15(e) of the Exchange Act, that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow for timely decisions regarding required disclosure. As of September 30, 2012, we carried out an evaluation, under the supervision and with the participation of management, including our chief executive officer and our chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective and were operating at the reasonable assurance level.

 

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In addition, there were no changes in our internal control over financial reporting during the quarter ended September 30, 2012 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

None

Item 1A. Risk Factors.

There have been no material changes in our risk factors since those published in our Annual Report on Form 10-K for the year ended December 31, 2011.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None

 

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Item 6. Exhibits

 

Exhibit No.

  

Description

31.1    Certification of the Company’s Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2    Certification of the Company’s Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1    Certification of the Company’s Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2    Certification of the Company’s Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101    Materials from the Manning & Napier, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 2012, formatted in Extensible Business Reporting Language (XBRL): (i) Combined Consolidated Statements of Financial Condition, (ii) Combined Consolidated Statements of Operations, (iii) Combined Consolidated Statements of Comprehensive Income, (iv) Combined Consolidated Statement of Shareholders’ Equity, (v) Combined Consolidated Statements of Cash Flows, and (vi) related Notes to the Unaudited Combined Consolidated Financial Statements.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

      MANNING & NAPIER, INC.

Dated:  November 13, 2012

       

By:

 

/s/    PATRICK CUNNINGHAM

          Patrick Cunningham
          Chief Executive Officer
          (principal executive officer)
         

/s/    JAMES MIKOLAICHIK

          James Mikolaichik
          Chief Financial Officer
          (principal financial and accounting officer)

 

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