Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

FORM 10-K

xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 20112012

¨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

(State or other jurisdiction of

incorporation or organization)

 

45-2609100

(I.R.S. Employer

Identification No.)

290 Woodcliff Drive

Fairport, New York

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

(585) 325-6880

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

 

Name of each exchange in which registered

Class A common stock, $0.01 par value per share The New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:
None

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.     Yes   ¨     No   x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.     Yes   ¨     No   x

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 Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes   x     No   ¨     No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   ¨x

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¨x
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

As

The aggregate market value of the registrant's common equity held by non-affiliates of the registrant (assuming for purposes of this computation only that the directors and executive officers may be affiliates) at June 30, 2011 (the2012, which was the last business day of the registrant’s most recently completed second fiscal quarter), no sharesquarter was approximately $192.5 million based on the closing price of $14.23 for one share of common stock, as reported on the registrant were held by non-affiliates. Accordingly, the market value of the shares of our voting and non-voting common equity held by non-affiliates was $0.

New York Stock Exchange on that date.

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 March 22, 2012

11, 2013

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

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement for its 20122013 Annual Meeting of Stockholders to be held June 20, 201219, 2013 are incorporated by reference into Part III of this Form 10-K.





Table of Contents

TABLE OF CONTENTS

   
 Page
 

Part I

Item 1.

Item 1.

1A.

Item 1B.
Item 2.1
Item 3.
Item 4.
 

Item 1A.

11 

Item 1B.

Unresolved Staff Comments

28

Item 2.

Properties

28

Item 3.

Legal Proceedings

28

Item 4.

Mine Safety Disclosures

28

Part II

Item 5.

29

Item 6.

32

Item 7.

36

Item 7A.

59

Item 8.

61

Item 9.

Item 9A.61
Item 9B.
 

Item 9A.

61 

Item 9B.

Other Information

61

Part III

Item 10.

62

Item 11.

62

Item 12.

62

Item 13.

62

Item 14.

 62 

 

Item 15.

63

In this Annual Report on Form 10-K, “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.



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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

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 this report which include, without limitation: changes in securities or financial markets or general economic conditions; a decline in the performance of the Company’s 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.


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PART I

Item 1.Business.

Item 1.         Business.
Overview

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 ("IPO") 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 asin advance of 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” which collectively consisted of (i) MNA Advisors, Inc. (f/k/a Manning & Napier Advisors, Inc.), or MNA, (ii) M&N Advisory Advantage Corporation (f/k/a Manning & Napier Advisory Advantage Corporation), or AAC, (iii) M&N Alternative Opportunities, Inc. (f/k/a Manning & Napier Alternative Opportunities, Inc.), or MNAO, (iv) Manning & Napier Capital Company, LLC, or MNCC, (v) Manning & Napier Investor Services, Inc., or MNBD, (vi) Manning & Napier Information Services, LLC, or MNIS, (vii) EXA Advisors, Inc. (f/k/a Exeter Advisors, Inc.), or EAI, and (viii) Perspective Partners LLC, or PPI, each as in effect prior to our initial public offering.. The diagram below depicts our organization structure after the reorganization transactions and the consummation of our initial public offering. See Note 3 of our financial statements for a more detailed descriptionas of the reorganization transactions.

date of this annual report.
 
_________________________
(1)Manning & Napier, Associates,Inc. is the managing member of Manning & Napier Group. The operating subsidiaries of Manning & Napier Group are Manning & Napier Advisors, LLC is majority owned by William("MNA"), Manning directly& Napier Advisory Advantage Company, LLC ("AAC"), Exeter Advisors I, LLC ("EAI"), Manning & Napier Alternative Opportunities, LLC ("MNAO"), Perspective Partners, LLC ("PPI"), Manning & Napier Information Services, LLC ("MNIS"), Manning & Napier Benefits, LLC ("MNB"), Manning & Napier Investor Services, Inc. ("MNBD") and indirectly through Manning Ventures, Inc., with a minority interest held by B. Reuben Auspitz.Exeter Trust Company.
(2)Prior to ourthe initial public offering, Manning & Napier Group granted Class B units to each of Patrick Cunningham and James Mikolaichik. As of December 31, 2011, the Class BThese units of Manning & Napier Group granted to Patrick Cunningham and James Mikolaichik collectively represent less thanapproximately 0.1% of the outstanding voting and economic rights of Manning & Napier Group.
(3)Manning & Napier, Inc. is the sole managing member of Manning & Napier Group, LLC.
(4)Represents 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. As a result of the reorganization transactions, Manning & Napier Investor Services, Inc., which until such time was a sub-chapter “S” corporation for tax purposes, became a sub-chapter “C” corporation for tax purposes and is accordingly subject to corporate-level taxation on its earnings.


As illustrated in the chart below, since 1999, we have achieved strong growth in discretionary assets under management, or AUM. From December 31, 1999 through December 31, 2011,2012, our AUM has increased from $6.9 billion to $40.2$45.2 billion, representing a compound annual growth rate of 15.8%15.6% during a period that included two significant bear markets. Our growth in AUM resulted in an increase in our revenues from $50.2 million for the year ended December 31, 1999 to $330.0$339.1 million for

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the year ended December 31, 2011. Our revenues for the year ended December 31, 2011 were $330.0 million, an increase from $255.5 million for the year ending December 31, 2010.2012. We believe this growth is the result of our consultative, total-solutions approach to working with clients and our investment process that has yielded strong long-term investment results.


__________________________
Note: Reflects our AUM over the periods indicated. Data as of December 31 of each respective year.

Since our inception, we have taken the view that an active, team-based approach to portfolio management is the best way to manage risk for clients as market conditions change. Across our variety of equity, fixed income and blended asset portfolios, the goal of our investment process is to provide competitive absolute returns over full market cycles. We employ a disciplined process that seeks to avoid areas of speculation by focusing on investments with strong fundamentals at reasonable prices or stable fundamentals at attractive prices. To ensure a focus on absolute returns, we employ a compensation structure for our research team that rewards positive and above benchmark results and penalizes negative and below benchmark results. This active, absolute-returns based approach requires flexibility to invest in what we view as under-valued market segments, underwhere opportunities are and avoid speculation, regardless of the principle that today’s market prices drive future potential investment returns. Our active, unconstrained approach provides us withallocations within a dedicated mechanism to maintain pricing discipline in our investment decisions.

comparative benchmark.

Initially, this approach helped us build a strong client base of high net worth individuals, small business owners and middle market institutions, and we maintain these relationships in many targeted geographic regions. This foundation allowed us to expand our business to serve the needs of larger institutions, investment consultants and other intermediaries, which has been a strong driver of recent growth.

Wethe growth reflected in the chart above.

In addition to a strong, team-based research engine, we have focused on developing an internal organization of specialists to provide additional consultative services beyond investment management, which we believe helps us build close relationships with our clients through multiple service touch points and a solutions-oriented approach. We have designed solutions that are specific to our clients’ needs, including: 401(k) menuplan design investment option and manager selection;participant education; family wealth management and trust services; and group health and ancillary benefits advisory services. Taken together

with strong long-term investment performance across portfolios, our consultative, total-solutions approach has allowed us to achieve a lowhigh average annual separate account cancellationretention rate. For the five and ten-year periodsperiod ending December 31, 2011,2012, our average annual separate account cancellationretention rate was 3.9%approximately 95%. In addition, we have experienced net positive cash flows in both our separate accounts

Our commitment to team-based research, an absolute return focus and our mutual funds for each of the last five years.

Our investment processes and pricing disciplinesa flexible process that is benchmark-agnostic have been central to our success, and we believe are distinctive within the industry. Our research process is analyst- and team-driven. Our investment process follows a set of disciplines that emphasize fit with our time-tested security selection strategies, absolute pricing discipline, active asset allocation management and incentive compensation that emphasizes absolute dollar returns over returns relative to benchmarks. Our mutual funds have earned a number of industry accolades over time, including a finalist ranking for Morningstar’s international manager of the decade, multiple Lipper awards and two S&P Capital Silver Awardsa Gold Morningstar Analyst rating for the twelve months ended August 31, 2011.several of our equity, life style and target date mutual funds. As of December 31, 2011, 11 of the 21 funds eligible for Morningstar ratings, representing2012 approximately 78%71% of our total mutual fund AUM arethat is rated by Morningstar, were in funds that were rated at least four stars by Morningstar.stars. From January 1, 2000 through December 31, 2011,2012, a period of time that included two significant bear markets, many of our mutual funds and similarly managed separate account portfolios experienced strong cumulative returns well in excess of the returns earned by broad equity market indexes.


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__________________________
Note: Represents cumulative returns, net of fees, for the mutual funds set forth above from January 1, 2000 to December 31, 2011.2012. Percentages in parentheses represent allowable equity range for each mutual fund.

We have separate account portfolios that are managed under similar investment objectives as the mutual funds illustrated above. The above listed blended asset and equity mutual funds and their similarly managed separate account portfolios represent approximately 71% of our total AUM.

We offer our investment management capabilities primarily through direct sales to high net worth individuals and institutions, as well as through third-party intermediaries, including national brokerage firm advisors, independent financial advisors,platforms and institutional investment consultants. Our AUM as of December 31, 20112012 by investment vehicle and portfoliosportfolio were as follows:



As of December 31, 2011,2012, we had 471502 employees, including William Manning, our Chairman and controlling stockholder, and other employee-owners, most of whom are based in Fairport, New York. Collectively, these employee-owners directly and indirectly own approximately 86.2% of our operating subsidiary, Manning & Napier Group, through which we conduct all of our business. Our culture of employee ownership strongly aligns our interests with those of our clients by delivering strong long-term investment performance and solutions.

Our Strategy

Our approach for continued success is focused on the strategies described below.

Maintain a Strong, Team-Based Research Engine
With a research department of 85 people, we are committed to a team-based approach to portfolio management to ensure that success can be repeated over time. All of our investment products are managed by a team of individuals, so that stability of process takes precedence over any individual personality. Our Senior Research Group of 12 Managing Directors within our research department, has oversight for all team-based decisions. This group averages 18 years tenure with our firm. We take a home-grown approach to maintaining this strong research engine. Analysts begin their employment with us as Research Assistants or Associates, and progress to the Analyst level only after learning our process and disciplines in a role that supports the portfolio management teams. This ensures consistency with our time-tested philosophies and also provides a strong supply of future analysts to address growth and turnover. This home-grown, team-based approach to portfolio management has been key to our success over time, and we will continue to invest in the growth and development of the research department as growth in AUM and/or product development warrants.
Expand Distribution
We continue to focus on the depth of our Direct Channel

multi-channel distribution structure. We believe our high-touch, direct distribution has allowed us to build strong relationships with our clients over time. Historically, our Direct Channel has been concentrated around New York, Pennsylvania and Ohio. WhileIn 2012, we have sales representatives as far west as Chicago and as far south as Florida, we are expandingadded six new U.S.-based hires to our Direct Channel, presence geographically,


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filling in new regions along the east coast and expanding fartherfurther west. OurWe continue to integrate those new hires into the organization. In 2013, we plan to continue this expansion with a focus on the west coast. In addition, we added two Service Representatives to our Direct Channel will remain focused on the tenets that have resulted in our past success, which includes identifying geographic regions within which our representatives form key relationshipsto enhance service levels with centers of influence, business owners and other referral networks to build a client base of high net worth individuals while providing more time for Sales Representatives to proactively engage with current and middle market institutions. Our model requires our sales representatives to maintain responsibility for servicing new business they bring to our firm and compensates representatives for both new business generation and strong service records, which has been a contributing factor to our strong client retention over time.

Broaden our Intermediary Channel

We arefuture clients. Regarding third party distribution, we remain focused on the attractive 401(k) marketplace, which we believe is a growing segment of the retirement market with consistent cash inflows and historically low cancellation rates. In addition to building relationships directly with plan sponsors, our wholesale staff seeks what we refer to as Ultimate Defined Contribution Advisors, which are advisors that work primarily with defined contribution plans. According to Brightwork Partners, LLC, 59% of all 401(k) plans between $10 million and $299 million work with a third-party advisor, which makes this an important area of focus for our wholesale staff. We expect significant future growth opportunities within our Intermediary Channel as we begin to target national brokerage firm advisors,identifying retirement plan advisors as well as platform and other intermediaries that work with small- to- mid-sized 401(k) plans.

Focus on the Convergence of Health and Wealth Benefits

We have extensive experience working with employerssub-advisory opportunities. During 2012, we added two key accounts positions, which we expect to design retirement plan menus and provide high quality life cycle portfolios to improve participant retirement outcomes. Our strongstrengthen our relationships with employers have led us to better understandtargeted brokers and retirement platforms. At the full scopeend of benefit plan issues that employers are facing in the current environment. Specifically,2012, we seealso added a convergence of health and wealth in terms of both providing benefit plans to employees, and employers’ need for help in taking a holistic approach to benefit planning to both lower the costs of providing healthcare benefits and to help educate employees about the benefits of saving for retirement. We are focused on providing consultative services to employers to address these key concerns through unique plan design alternatives and technology-based tools to help employers and advisors effectively reach large numbers of employees with tailored retirement and health plan guidance. Wededicated platform sales position which we expect to drive new sub-advisory and platform relationships. Beyond deepening these current channels, we continue to developlook at ways to expand our global distribution, including leveraging our current relationships in Europe and potentially acquire products and services to help employers best address these key issues regarding retirement and health benefit plans.

Develop New Products in Response to Market Opportunities

expanding into new markets.

Innovative Product Development
Our on-going development of products and consultative services in response to current and prospective client needs historically has been a source of significant growth. We remain committed to understandingToday's market environment presents new challenges for investors. Heightened stock market volatility, the key areaspopularity of concern for various client typesexchange traded funds ("ETF") and developinghistorically low yields on fixed income securities have created an investing landscape that requires new solutions to meeting objectives. We understand that we must stay relevant and competitive by ensuring that we are consistently providing innovative solutions to the marketplace that address today's challenges. Our launch of ETF-based target date collective investment trust funds last year, along with our Strategic Income mutual funds, are examples of newer products that can meet the needs of investors in today's challenging environment. In addition to these needs. For example,new products, we continue to incubate new strategies in the alternatives space along with reviewing potential acquisition targets. We also recently launched a global inflation-focusedfixed income mutual fund and global equity portfolio to respond to investor concerns of inflation in light of rising commodity pricescollective investment trust fund and generally easy monetary policies in many developed markets. Furthermore, in response to

demandhave incubated a track record for and market opportunities withina non-U.S. equity markets,fixed income strategy. Today, we have launched portfolios that focus exclusively on emerging market equitiesmore than 180 people dedicated to sales, service and separately, developed market equities. To address continued growth in life cycle investment portfolios, we plan to introduce a family of active asset allocation, ETF-based, target date funds that combine lower management costs with an active management approach to meet key needs of 401(k) plan sponsors. Likewise, to address the large number of baby boomers that will begin to retire and draw on their retirement portfolios, we plan to launch a series of income-oriented strategies. Continued product and service development will likely require building additional resources and areas of expertise, and we are continuingwill continue to add resources where solving key problems can strengthen our relationships with clients.

Products

Enhanced Consultative Services
Offering consultative services alongside our team-based, process-driven investment management has been a source of both new business and Services

We manageclient retention over our history. Currently, we offer a variety of equity, fixed incomeconsultative services to individual and blended asset portfolios, using primarily traditional asset classes such as stocksinstitutional clients, including estate and bonds. The majoritytax planning, asset/liability modeling for defined benefit pension plans, and retirement and health plan design analysis for employers. We plan to add new consultative services to address the needs of endowment and foundation clients and to address current health care reform legislation.

Many of these services are offered through our portfolios are actively managed and based on fundamental, company-specific research, though we do manage a small number of quantitatively driven or active, top-down products. Our goal is to help our clients meet their investment objectives by providing competitive positive returns over full stock market cycles, including both bull and bear market environments. Four key elements of our investment process keep us focused on that goal:

Variety of Security Selection Strategies. Our approach to security selection is active, and we perform fundamental analysis on a company-by-company basis to determine appropriate investments for our clients’ portfolios. We employ three distinct security selection strategies within our active, fundamental-based portfolios—one each for growth, cyclical and mature companies. Every stock in these portfolios must be approved by our Senior Research Group as a fit to one of these strategies. Having three distinct selection strategies that have been refined over four decades allows us to invest in a disciplined manner across a variety of market and economic environments.

Absolute Pricing Discipline.The primary focus of our investment process is an absolute, rather than relative, pricing discipline. With respect to stocks, a key aspect of our investment process is to identify what we view to be the “fair market value” before we purchase a stock for our clients’ portfolios. The fair market value is determined through a variety of valuation techniques relevant to the nature of the investment and ultimately represents a price at which we believe we could sell the stock in question to a rational investor who could then earn a reasonable return going forward. Our emphasis on price also means we are likely to be buying more aggressively into market declines, and selling out of such investments in market rallies. We believe this focus on price has provided strong capital preservation in many valuation-based bear markets during our history, and reduces the risk of permanent, downside price fluctuation from our buy price.

Active Asset Allocation Management Approach. A portfolio’s overall exposure to market sectors, countries, and broad asset classes is driven by our bottom-up security selection. The flexibility to invest across sectors, countries and asset classes based on individual company opportunities allows us to focus on companies we view as having greater upside potential than downside risk, and allows us to have a broad enough opportunity set to freely navigate away from areas of excess or speculation without limiting the number of investment opportunities. While this approach may often result in our portfolios having meaningfully different allocations and exposures when compared to market benchmarks, we believe this type of differentiation is necessary to manage risk in many environments.

Analyst Compensation Structure. Each security in our clients’ fundamental-based equity and blended asset portfolios is recommended by one of our research analysts and reviewed and approved by our Senior Research Group before being purchased for clients. Each analyst recommending a stock subjects a portion of his or her total compensation to the returns generated by that recommendation. We have aligned the incentives of our analysts with the goals of our clients by structuring our analyst compensation system such that returns that are both negative and below benchmarks produce a negative bonus the analyst has to offset before earning a positive bonus. The analysts earn their largest bonus, which could be multiples of their salary and the largest part of their total compensation, when their stock recommendations earn returns that are both positive and above benchmarks for our clients.

This compensation system has kept our analysts focused on absolute return potential of their stock recommendations, which has ultimately enhanced our long-term track record, particularly in valuation-driven bear markets such as those in 1987 and 2000 to 2002.

Our fundamental-based portfolios are all managed by our Senior ResearchClient Analytics Group, which consists of twelve of our senior analysts with an average tenure of approximately 17 years with our firm. Each analyst is the Managing Director of one of our sector or overview groups. In total, we have 83 full-time employees in our research department, including 30 equity analysts/economists and four fixed income analysts/economists.

Our fundamental investment process is based on disciplined strategies that have been applied consistently throughout the firm’s history. We examine fundamental risk and reward characteristics of each investment, not based on broad, backward-looking assumptions, but instead based on prevailing valuations and conditions. We then weigh a given investment against the risk/reward characteristics of alternatives and within the context of a client’s investment objectives. Allocations to asset classes or market sectors are a function of both top-down and bottom-up analysis. The top-down, or macro, view considers prevailing economic and market conditions as well as historical relationships. The bottom-up view builds positions security-by-security, according to individual strategy fits and valuations. In this way, allocation changes become a function of fundamentals rathermore than timing. This total return management style recognizes an active asset allocation approach as a key tool for managing risk.

In our blended asset portfolios, the allocation of assets between stocks and bonds is driven primarily by company-specific analysis of equity opportunities. When our analysts are able to find a greater number of equity opportunities that meet the standards for our pricing disciplines, equity exposure increases in our blended asset class accounts. Likewise, equity exposure in these portfolios decreases when our analysts find fewer individual equity opportunities, which is typically the case when markets become expensive.

Key Portfolio

  AUM as of
December 31,
2011
(in thousands)
   Inception Date   Cumulative
Portfolio
Return Since
Inception
  Benchmark
Return  Since
Inception of
Portfolio (1)
  Cumulative
Excess  Return
Since Inception
 

Long-Term Growth 30%-80% Equity Exposure

  $7,410,017     1/1/1973     3,695.2  3,033.2% (2)   662.0

Growth with Reduced Volatility 20%-60% Equity Exposure

  $3,137,306     1/1/1973     2,939.9  2,743.3% (3)   196.6

Aggregate Fixed Income

  $476,675     1/1/1984     834.4  816.8% (4)   17.6

Equity-Oriented

  $1,319,304     1/1/1993     480.1  304.0% (5)   176.1

Core Equity (Unrestricted) 90%-100% Equity Exposure

  $1,726,001     1/1/1995     457.0  247.2% (6)   209.8

Core Non U.S. Equity

  $12,109,452     10/1/1996     217.3  94.3% (7)   123.0

Core U.S. Equity

  $4,927,469     7/1/2000     71.7  14.7% (8)   57.0

(1)These benchmarks are based on the average equity exposure of the portfolio as well as the market for the underlying securities.
(2)Represents 55% from the S&P 500 Index and 45% from the Barclays Capital U.S. Government/Credit Bond Index, or BCGC Index.
(3)Represents 40% from the S&P 500 Index and 60% from the BCGC Index.
(4)Represents the Barclays Capital U.S. Aggregate Bond Index, or BCA Index.
(5)Represents 65% from the Russell 3000 Index, 20% from the Morgan Stanley Capital International All Country World Index (excluding the United States), or the ACWIxUS Index, and 15% from the BCA Index.
(6)Represents 80% from the Russell 3000 Index and 20% from the ACWIxUS Index.
(7)Represents the ACWIxUS Index.
(8)Represents the Russell 3000 Index.

Ancillary Consultative Services

To maintain a focus on problem solving and to diversify our product set beyond investment products, our field representatives utilize the services of our Client Analytics Group. The Client Analytics Group consists of 20 internal consultants whose primary responsibilities include working with prospective and current clients to solve investment and planning-related problems. The group includes several chartered financial analysts, certified financial planners, an accredited investment fiduciary and professionals with law and masters degrees. Services provided by the group include objective-setting analyses such as wealth modeling, cash flow analysis and asset/liability reporting, estate and tax planning, risk analysis based on overall investment objectives, and manager search and selection for 401(k) plans or individual and institutional clients seeking manager diversification.

We have also developed several technology-driven products and services aimed at the middle-market employer marketplace to assist both employers and employees with their health and wealth planning. Specifically, we have developed technology that assists employers in offering and administering health benefit plans, including a web-based platform to educate employees about high deductible health benefit plans. We have also developed technology that will help employers provide financial guidance to employees in a one-on-one setting to assist in both health and wealth planning.

We expect to continue to develop and potentially acquire products and services to help employers best address key issues regarding retirement and health benefit plans.

Products and Services
We manage a variety of equity, fixed income and blended asset strategies, using primarily traditional asset classes such as stocks and bonds. These strategies may include a mix of the different vehicles we offer, including separate accounts, mutual funds, and collective investment trusts. Our goal is to help our clients meet their investment objectives by providing competitive positive returns over full stock market cycles, including both bull and bear market environments. Three key elements of our investment process keep us focused on that goal:
Team-Based Research. Our analysts and economists work together to understand market opportunities from both a broad, macro level and a more detailed industry and company level. This combination of both "top-down" and "bottom-up" research allows us to identify trends, themes and company specific investment opportunities across the globe, and has been a key factor in our success. The use of a team rather than an individual to manage strategies means we emphasize repeatable processes over personalities.
A Focus on Absolute Returns. Whether investing in a country, industry or individual company, we hold a strong belief that price matters. We are focused on helping our clients avoid permanent loss of capital over their time horizon, which is different than day-to-day volatility, which could in fact present opportunities. To that end, we have aligned the incentives of our analysts with the goals of our clients by structuring our analyst compensation system such that

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returns that are both negative and below benchmarks produce a negative bonus the analyst has to offset before earning a positive bonus. The analysts earn their largest bonus, which could be multiples of their salary and the largest part of their total compensation, when they earn returns that are both positive and above benchmarks for our clients. We believe this focus on price has provided strong capital preservation in many valuation-based bear markets during our history, and reduces the risk of permanent, downside price fluctuation from our buy price.
Flexibility to be Benchmark Agnostic. The flexibility to invest across sectors, countries and asset classes based on individual company opportunities allows us to focus on companies we view as having greater upside potential than downside risk, and allows us to have a broad enough opportunity set to freely navigate away from areas of excess or speculation without limiting the number of investment opportunities. While this approach may often result in our strategies having meaningfully different allocations and exposures when compared to market benchmarks we believe this type of differentiation is necessary to manage risk in many environments.
All strategies are managed under the oversight of our Senior Research Group. In total, we have 85 full-time employees in our research department, including 31 equity analysts/economists and four fixed income analysts/economists.
The table below summarizes the cumulative excess returns against benchmark for our key investment strategies as of December 31, 2012. These strategies are used across separate account, mutual fund, and collective investment trust vehicles, and represent approximately 84% of our total AUM as of December 31, 2012.
Key Strategies
AUM as of
December 31,
2012
(in thousands)
 Inception Date 
Cumulative
Portfolio
Return Since
Inception
 
Benchmark
Return  Since
Inception of
Portfolio (1)
 
Cumulative
Excess  Return
Since Inception
Long-Term Growth 30%-80% Equity Exposure$9,229,688
 1/1/1973 4,186.3% 3,378.7%(2) 807.7%
Growth with Reduced Volatility 20%-60% Equity Exposure$4,068,126
 1/1/1973 3,275.7% 3,008.9%(3) 266.8%
Aggregate Fixed Income$462,003
 1/1/1984 883.8% 855.5%(4) 28.3%
Equity-Oriented$3,723,529
 1/1/1993 574.0% 363.6%(5) 210.4%
Core Equity (Unrestricted) 90%-100% Equity Exposure$1,695,524
 1/1/1995 550.1% 304.7%(6) 245.4%
Core Non-U.S. Equity$15,270,522
 10/1/1996 277.7% 127.0%(7) 150.7%
Core U.S. Equity$3,666,326
 7/1/2000 95.1% 33.5%(8) 61.7%
__________________________
(1)These benchmarks are based on the average equity exposure of the portfolio as well as the market for the underlying securities.
(2)Represents 55% from the S&P 500 Index and 45% from the Barclays U.S. Government/Credit Bond Index, or BGCB Index.
(3)Represents 40% from the S&P 500 Index and 60% from the BGCB Index.
(4)Represents the Barclays U.S. Aggregate Bond Index, or BAB Index.
(5)
Represents 65% from the Russell 3000® Index, 20% from the MSCI ACWI ex USA Index, or the ACWIxUS Index, and 15% from the BAB Index.
(6)
Represents 80% from the Russell 3000® Index and 20% from the ACWIxUS Index.
(7)Represents the ACWIxUS Index.
(8)
Represents the Russell 3000® Index.
Sales and Distribution

We distribute our products and services through direct sales to prospective high net worth individuals, and middle market institutions and larger institutional clients as well as throughthat are working with consultants. In addition, we have dedicated efforts to sell tothrough financial intermediaries and investment consultants.platforms. In identifying prospective new business, we are focused on individuals and institutions that have long-term objectives and needs, and that are looking for a partner in addressing these needs.those objectives. We believe our problem-solving approach fosters strong relationships, and our focus on communicating our investment process helps to manage long-term expectations and minimize turnover.

We currently have 4450 sales and distribution professionals, with an average of nearlyover 18 years of industry experience. Our sales staff includes 23 direct sales representatives, 14 internal and external wholesale professionals that report to our Managing Director of Intermediary Distribution, and five consultant relations specialists, each of whom report to our Managing Director of Sales, who has been with MNA since 1993.1993, oversees a staff of 28 direct sales representatives and two regional service representatives. Our Managing Director of Intermediary Distribution, who has been with MNA since 2009, reports to our Managing Director of Sales and oversees 12 internal and external wholesale professionals, two key account

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representatives and one platform sales representative. Our Managing Director of Portfolio Strategies Group, who has been with the firm since 1989, reports to our Managing Director of Sales and oversees six consultant relationship specialists. Sales representatives have different areas of focus in terms of client type, product and vehicle, but are highly knowledgeable about the markets, our investment process and our product and service offerings, so as to lessen the need for our research department personnel to assist in bringing new relationships on board. Our sales representatives are responsible for generating new business as well as maintaining existing business. Referrals are a strong source of new business in both our direct and intermediary marketing efforts. To assist in the service responsibilities of the field representatives, we have 50 internal service professionals that are responsible for responding to client requests and questions.

Our separate accounts are primarily distributed by direct sales representatives that market to individuals and institutions in defined territories within the U.S.North America. These individuals form separate account relationships with high net worth individuals that own businesses, sit on boards of endowments or foundations, or are generally well-connected in their communities, and leverage those relationships to obtain middle market, institutional separate account business. Our high net worth and middle market separate account clients also often utilizeuse the consultative services of our Client Analytics Group, which generally includes a variety of planning services. Certain of our direct sales representatives focus more on large institutional mandates across the U.S. We obtain a smaller portion of our separate account business through intermediaries, including national brokerage firm advisorsrepresentatives and independent financial advisors working with high net worth individuals, and unaffiliated registered investment advisor platforms that select our strategies for inclusion in their investment programs.

Our mutual funds and collective investment trusts are primarily distributed through intermediaries, via the approval of our fund strategies on various broker, advisor, retailplatforms and recordkeeping platforms.investment consultants, as well as direct to institutional clients. Our wholesalersinternal and external wholesale professionals are focused on distributing through retirement plan advisors that work with 401(k) plans, as well as through brokers and advisors that work with retail clients. We have five investment professionalssix consultant relations specialists dedicated to building

relationships with investment consultants and other unaffiliated registered investment advisors and their research teams.one platform sales representative focused on identifying new platform or sub-advisory opportunities. The primary responsibilities of these individuals are to educate consultants, platform providers and advisors on our investment products and process and to ensure our products are among those considered for placement within mutual fund advisory programs, on platforms’ approved lists and in active searches conducted by consultants. Our direct sales representatives also contribute to mutual fund and collective investment trust distribution through sales and servicing of fund vehicles to 401(k) plan sponsors and middle market and large market institutions.

Competition

Historically, we have competed to attract assets to our management principally on the basis of:

a broad portfolio and service offering that provides solutions for our clients;

the disciplined and repeatable nature of our team-based investment process;

the quality of the service we provide to our clients and the duration of our relationships with them;

the tenure and continuity of our management and team-based investment professionals; and

our track record of long-term investment excellence.

Our ability to continue to compete effectively will also depend upon our ability to retain our current investment professionals and employees and to attract highly qualified new investment professionals and employees. We compete in all aspects of our business with a large number of investment management firms, commercial banks, broker-dealers, insurance companies and other financial institutions.

Regulation

Our business is subject to extensive regulation in the United States at the federal level and, to a lesser extent, the state level, as well as by self-regulatory organizations, and regulations outside the United States. Under certain of these laws and regulations, agencies that regulate investment advisers have broad administrative powers, including the power to limit, restrict or prohibit an investment adviser from carrying on its business in the event that it fails to comply with such laws and regulations. Possible sanctions that may be imposed include the suspension of individual employees, limitations on engaging in certain lines of business for specified periods of time, revocation of investment adviser and other registrations, censures and fines.

SEC Regulation

MNA, AAC and EAI are registered with the U.S. Securities and Exchange Commission, or SEC, as investment advisers under the U.S. Investment Advisers Act of 1940, as amended, or ("the Advisers Act.Act"). Additionally, the Manning & Napier Fund, Inc., or the Fund, and several of the third-party investment companies we sub-advise are registered under the U.S. Investment Company Act of 1940, or the1940 Act.("the 1940 Act"). The Advisers Act and the 1940 Act, together with the SEC’s regulations and interpretations thereunder, impose substantive and material restrictions and requirements on the operations of advisers and

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mutual funds. The SEC is authorized to institute proceedings and impose sanctions for violations of the Advisers Act and the 1940 Act, ranging from fines and censures to termination of an adviser’s registration.

As an investment adviser, we have a fiduciary duty to our clients. The SEC has interpreted these duties to impose standards, requirements and limitations on, among other things:

trading for proprietary, personal and client accounts;

allocations of investment opportunities among clients;

use of soft dollars;

execution of transactions; and

recommendations to clients.

We manage accounts for all of our clients on a discretionary basis, with authority to buy and sell securities for each portfolio, select broker-dealers to execute trades and negotiate brokerage commission rates. In connection with these transactions, we receive soft dollar credits from broker-dealers that have the effect of reducing certain of our expenses. All of our soft dollar arrangements are intended to be within the safe harbor provided by Section 28(e) of the U.S. Securities Exchange Act of 1934, as amended, or ("the Exchange Act.Act".) If our ability to use soft dollars were reduced or eliminated as a result of the implementation of statutory amendments or new regulations, our operating expenses would increase.

As a registered adviser, we are subject to many additional requirements that cover, among other things:

disclosure of information about our business to clients;

maintenance of formal policies and procedures;

maintenance of extensive books and records;

restrictions on the types of fees we may charge;

custody of client assets;

client privacy;

advertising; and

solicitation of clients.

The SEC has authority to inspect any investment adviser and typically inspects a registered adviser periodically to determine whether the adviser is conducting its activities (i) in accordance with applicable laws, (ii) consistent with disclosures made to clients and (iii) with adequate policies, procedures and systems to ensure compliance.

For the year ended December 31, 2011, 42%2012, 41% of our revenues were derived from our advisory services to investment companies registered under the 1940 Act, including 42%41% derived from our advisory services to the Fund. The 1940 Act imposes significant requirements and limitations on a registered fund, including with respect to its capital structure, investments and transactions. While we exercise broad discretion over the day-to-day management of the business and affairs of the Fund and the investment portfolios of the Fund and the funds we sub-advise, our own operations are subject to oversight and management by each fund’s board of directors. Under the 1940 Act, a majority of the directors must not be “interested persons” with respect to us (sometimes referred to as the “independent director” requirement). The responsibilities of the board include, among other things, approving our investment management agreement with the fund; approving other service providers; determining the method of valuing assets; and monitoring transactions involving affiliates. Our investment management agreements with these funds may be terminated by the funds on not more than 60 days’ notice, and are subject to annual renewal by the fund’s board after the initial term of one to two years.

The 1940 Act also imposes on the investment adviser to a mutual fund a fiduciary duty with respect to the receipt of the adviser’s investment management fees. That fiduciary duty may be enforced by the SEC, administrative action or litigation by investors in the fund pursuant to a private right of action.

Under the Advisers Act, our investment management agreements may not be assigned without the client’s consent. Under the 1940 Act, investment management agreements with registered funds (such as the mutual funds we manage) terminate automatically upon assignment. The term “assignment” is broadly defined and includes direct assignments as well as assignments that may be deemed to occur upon the transfer, directly or indirectly, of a controlling interest in us.

MNBD, our SEC-registered broker-dealer subsidiary, is subject to the SEC’s Uniform Net Capital Rule, which requires that at least a minimum part of a registered broker-dealer’s assets be kept in relatively liquid

form. As of December 31, 2011,2012, MNBD was in compliance with its net capital requirements. As a result


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ERISA-Related Regulation

We are a fiduciary under the Employee Retirement Income Security Act of 1974, as amended, or ERISA, with respect to assets that we manage for benefit plan clients subject to ERISA. ERISA, regulations promulgated thereunder and applicable provisions of the Internal Revenue Code of 1986, as amended, impose certain duties on persons who are fiduciaries under ERISA, prohibit certain transactions involving ERISA plan clients and provide monetary penalties for violations of these prohibitions.

The fiduciary duties under ERISA may be enforced by the U.S. Department of Labor by administrative action or litigation and by our benefit plan clients pursuant to a private right of action. In addition, the IRS may assess excise taxes against us if we engage in prohibited transactions on behalf of or with our benefit plan clients.

New Hampshire Banking Department

Exeter Trust Company is a state-chartered non-depository trust company subject to the laws of the State of New Hampshire and the regulations promulgated thereunder by the New Hampshire Bank Commissioner.

Insurance-Related Regulation

Manning & Napier Benefits, LLC is a registered insurance broker in multiple states including the District of Columbia and, as such, is subject to various state insurance and health-related rules and regulations.

Non-U.S. Regulation

In addition to the extensive regulation our investment management industry is subject to in the United States, we are also subject to regulation internationally by various Canadian regulatory authorities in the Canadian provinces where we operate pursuant to exemptions from registration. We are authorized to act as a non-resident sub-advisory investment manager to collective investment vehicles in Ireland. Our business is also subject to the rules and regulations of the more than 3330 countries in which we currently buy and sell current portfolio investments.

Employees
Employees

As of December 31, 2011,2012, we had 471502 employees, most of whom are based in Fairport, New York. None of our employees are subject to a collective bargaining agreement. We believe that relations with our employees are good. We strive to attract and retain the best talent in the industry.

Available Information

All annual, quarterly and current reports, and amendments to those reports, proxy statements and other filings we file or furnish with the SEC are available free of charge from the SEC’s website athttp://www.sec.gov/ or from the Public Reference Room at 100 F Street N.E., Washington, D.C. 20549; 1-800-SEC-0330. Such documents are available as soon as reasonably practicable after electronic filing of the material with the SEC.

We also make the documents listed above available without charge through the Investor Relations section of our website athttp://ir.manning-napier.com/.

Item 1A.     Risk Factors.
Item 1A.Risk Factors.

Risks Related to our Business

Our revenues are dependent on the market value and composition of our AUM, all of which are subject to fluctuation due to factors outside of our control.

We derive the majority of our revenue from investment management fees, typically calculated as a percentage of the market value of our AUM. As a result, our revenues are dependent on the value and composition of our AUM, all of which are subject to fluctuation due to many factors, including:

Declines in prices of securities in our portfolios.The prices of the securities held in the portfolios we manage may decline due to any number of factors beyond our control, including, among others, declining stock or commodities markets, changes in interest rates, a general economic downturn, Europe’s sovereign debt crisis, political uncertainty or acts of terrorism. The U.S. and global financial markets continue to be subject to an unusual amount of uncertainty and instability. Such factors could cause an unusual degree of volatility and price declines for securities in the portfolios we manage.

Redemptions and other withdrawals.Our investors generally may withdraw their funds at any time, on very short notice and without any significant penalty. A substantial portion of our revenue is derived from investment advisory agreements that are terminable by clients upon short notice or no notice and investors in the mutual funds we advise can redeem their investments in those funds at any time without prior notice. Our growth in AUM in recent years has included new clients and portfolios that may not have the same client retention characteristics as we have experienced in the past. In addition, in a declining stock market, the pace of redemptions could accelerate.

Investment performance. If our portfolios perform poorly, even over the short-term, as compared with our competitors or applicable third-party benchmarks, or the rankings of mutual funds we manage decline, we may lose existing AUM and have difficulty attracting new assets.

Declines in prices of securities in our portfolios. The prices of the securities held in the portfolios we manage may decline due to any number of factors beyond our control, including, among others, declining stock or commodities markets, changes in interest rates, a general economic downturn, Europe’s sovereign debt crisis, political uncertainty or acts of terrorism. The U.S. and global financial markets continue to be subject to an unusual amount of uncertainty and instability. Such factors could cause an unusual degree of volatility and price declines for securities in the portfolios we manage.
Redemptions and other withdrawals. Our clients generally may withdraw their funds at any time, on very short notice and without any significant penalty. A substantial portion of our revenue is derived from investment advisory agreements that are terminable by clients upon short notice or no notice and investors in the mutual funds we advise can redeem their investments in those funds at any time without prior notice. Our growth in AUM in recent years has

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included new clients and portfolios that may not have the same client retention characteristics as we have experienced in the past. In addition, in a declining stock market, the pace of redemptions could accelerate.
Investment performance. If our portfolios perform poorly, even over the short-term, as compared with our competitors or applicable third-party benchmarks, or the rankings of mutual funds we manage decline, we may lose existing AUM and have difficulty attracting new assets.
If any of these factors cause a decline in our AUM, it would result in lower investment management revenues.If our revenues decline without a commensurate reduction in our expenses, our net income will be reduced and our business will be adversely affected.

The loss of key investment professionals or members of our senior management team could have an adverse effect on our business.

We depend on the skills and expertise of qualified investment professionals and our success depends on our ability to retain key employees, including members of our senior management team. Our investment professionals possess substantial experience in investing and have been primarily responsible for the historically strong investment performance we have achieved.We particularly depend on our executive officers as well as our Senior Research Group, which is a team of twelve senior analysts who manage our portfolios. The loss of any of these key individuals could limit our ability to successfully execute our business strategy and could have an adverse effect on our business.

Any of our investment or management professionals may resign at any time, subject to various covenants not to compete with us. In addition, employee-owners are subject to additional covenants not to compete. We do not carry any key man insurance on any employees at this time.

Competition for qualified investment, management, marketing and client service professionals is intense and we may fail to successfully attract and retain qualified personnel in the future.Our ability to attract and retain these personnel will depend heavily on the amount and structure of compensation and opportunities for equity ownership we offer.In connection with our transition to a public company, we We intend to implement a compensation structure that uses a combination of cash and equity-based incentives as appropriate. We intend for overall compensation levels to remain commensurate with amounts paid to our named executive officers and

other key employees in the past. However, our compensation may not be effective to recruit and retain the personnel we need, especially if our equity-based compensation does not return significant value to employees. Any cost-reduction initiative or adjustments or reductions to compensation could negatively impact our ability to retain key personnel.In addition, changes to our management structure, corporate culture and corporate governance arrangements, including the changes associated with, and resulting from, our reorganization and our initial public offering, could negatively impact our ability to retain key personnel.

We derive substantially all of our revenues from contracts and relationships that may be terminated upon short or no notice.

We derive substantially all of our revenues from investment advisory and sub-advisor agreements, all of which are terminable by clients upon short notice or no notice and without any significant penalty. Our investment management agreements with mutual funds, as required by law, are generally terminable by the funds’ board of directors or a vote of the majority of the funds’ outstanding voting securities on not more than 60 days’ written notice. After an initial term, each fund’s investment management agreement must be approved and renewed annually by such fund’s board, including by its independent members. In addition, all of our separate account clients and some of the pooled investment vehicles, including mutual funds, that we sub-advise have the ability to re-allocate all or any portion of the assets that we manage away from us at any time with little or no notice. These investment management agreements and mutual fund and collective investment trust client relationships may be terminated or not renewed for any number of reasons. The decrease in revenues that could result from the termination of a material client relationship or group of client relationships could have an adverse effect on our business.

We may be required to reduce the fees we charge, or our fees may decline due to changes in our AUM composition, which could have an adverse effect on our profit margins and results of operations.

Our current fee structure may be subject to downward pressure due to a variety of factors, including a trend in recent years toward lower fees in the investment management industry. We may be required to reduce fees with respect to both the separate accounts we manage and the mutual funds and collective trust funds we advise. In addition, we may charge lower fees to attract future new business as compared to our existing business, which may result in us having to reduce our fees with respect to our existing business accordingly. The investment management agreements pursuant to which we advise mutual funds are terminable on short notice and, after an initial term, are subject to an annual process of review and renewal by the funds’ boards. As part of that annual review process, the fund board considers, among other things, the level of compensation that the fund has been paying us for our services, and that process may result in the renegotiation of our fee structure or increase our obligations, thus increasing the cost of our performance. Further, in recent periods our average fee rate has been declining due to higher average separately managed account sizes triggered by market appreciation and new separately managed account clients. Any fee reductions on existing or future new business could have an adverse effect on our profit margins and results of operations.


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Several of our portfolios involve investing principally in the securities of non-U.S. companies, which involve foreign currency exchange risk, and tax, political, social and economic uncertainties and risks.

As of December 31, 2011,2012, approximately 37%43% of our AUM across all of our portfolios was invested in securities of non-U.S. companies.Fluctuations in foreign currency exchange rates could negatively affect the returns of our clients who are invested in these strategies.In addition, an increase in the value of the U.S. dollar relative to non-U.S. currencies is likely to result in a decrease in the U.S. dollar value of our AUM, which, in turn, could result in lower revenue since we report our financial results in U.S. dollars.

Investments in non-U.S. issuers may also be affected by tax positions taken in countries or regions in which we are invested as well as political, social and economic uncertainty, particularly as a result of the recent decline in global economic conditions. Declining tax revenues may cause governments to assert their ability to tax the local gains and/or income of foreign investors (including our clients), which could adversely affect clients’ interests in investing outside their home markets. Many financial markets are not as developed, or as efficient, as

the U.S. financial markets and, as a result, those markets may have limited liquidity and higher price volatility and may lack established regulations.Liquidity may also be adversely affected by political or economic events, government policies, social or civil unrest within a particular country, and our ability to dispose of an investment may also be adversely affected if we increase the size of our investments in smaller non-U.S. issuers. Non-U.S. legal and regulatory environments, including financial accounting standards and practices, may also be different, and there may be less publicly available information about such companies. These risks could adversely affect the performance of our strategies that are invested in securities of non-U.S. issuers and may be particularly acute in the emerging or less developed markets in which we invest.

We derive a substantial portion of our revenues from our Core Non-U.S. Equity portfolios.

As of December 31, 2011,2012, approximately 30%34% of our AUM were invested in our Core Non-U.S. Equity portfolios. The World Opportunities Series alone represented approximately 15% of our total AUM as of December 31, 2011.2012. As a result, a substantial portion of our operating results depends upon the performance of our Core Non-U.S. Equity portfolios, and our ability to retain client assets in such portfolios. If a significant portion of the investors in our Core Non-U.S. Equity portfolios decide to withdraw their investments or terminate their investment management agreements for any reason, including poor investment performance or adverse market conditions, our revenues from these portfolios would decline, which could have an adverse effect on our earnings and financial condition.

The investment performance and/or the growth of our AUM may be constrained if appropriate investment opportunities are not available or if we close certain of our portfolios.

Our ability to deliver strong investment performance depends in large part on our ability to identify appropriate investment opportunities in which to invest client assets. If we are unable to identify sufficient appropriate investment opportunities for existing and new client assets on a timely basis, our investment performance could be adversely affected. The risk that sufficient appropriate investment opportunities may be unavailable is influenced by a number of factors, including general market conditions, and is likely to increase as and if our AUM increases, particularly if these increases occur very rapidly.

If we determine that sufficient investment opportunities are not available for some or all of our portfolios, or we believe that in order to remain competitive or continue to produce attractive returns from some or all of our portfolios we should limit the growth of those strategies, as we have done in the past, we may choose to limit the growth of the portfolio by limiting the rate at which we accept additional client assets for management under the portfolio, closing the portfolio to all or substantially all new investors or otherwise taking action to limit the flow of assets into the portfolio. If we misjudge the point at which it would be optimal to limit access to or close a portfolio, the investment performance of the portfolio could be negatively impacted. In addition, if we close access to a portfolio, we may offer a new portfolio to our clients, but we cannot guarantee that such new portfolio will attract clients or perform in a manner consistent with the closed portfolio. Limiting access to or closing a portfolio, while designed to enable us to remain competitive or continue to produce attractive returns, may be seen by some investors in our Class A common stock solely as a loss of revenue growth opportunities in the short-term, which could lead to a decrease in the value of our Class A common stock and a loss on your investment.

The significant growth we have experienced historically has been and may continue to be difficult to sustain, and we may have difficulty managing our growth effectively.

The rapid growth in our AUM represents a significant rate of growth that has been and may continue to be difficult to sustain. In particular, as the absolute amount of our AUM increases, it will be more difficult to maintain levels of growth similar to those we have experienced in the past. The future growth of our business will depend on, among other things:

our ability to retain key investment professionals;

our ability to attract investment professionals as necessary;


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our ability to devote sufficient resources to maintaining existing portfolios and to selectively develop new portfolios;

our success in achieving superiordesired investment performance from our portfolios;

our ability to maintain and extend our distribution capabilities;

our ability to deal with changing market conditions;

our ability to maintain adequate financial and business controls; and

our ability to comply with new legal and regulatory requirements arising in response to both the increased sophistication of the investment management industry and the significant market and economic events of the last few years.

Unless our growth results in an increase in our revenues that is proportionate to the increase in our costs associated with this growth, our future profitability will be adversely affected. In addition, failure to successfully diversify into new asset classes may adversely affect our growth strategy and our future profitability.

Our portfolios may not obtain attractive returns under certain market conditions or at all.

The goal of our investment process is to provide competitive absolute returns over full market cycles. Accordingly, our portfolios may not perform well as compared to benchmarks or other investment managers’ strategies during certain periods of time or under certain market conditions, including periods of market uncertainty and volatility similar to what we have experienced in recent months.conditions. Short-term underperformance may negatively affect our ability to retain clients and attract new clients. We are likely to be most out of favor when the markets are running on positive or negative price momentum and market prices become disconnected from underlying investment fundamentals, as was the case during the late 1990s as the technology market and mega cap stocks fueled the broad market upward. During and shortly following such periods of relative under performance, we are likely to see our highest levels of client turnover, even if our absolute returns are positive. Loss of client assets and the failure to attract new clients could adversely affect our revenues and growth.

The historical returns of our existing portfolios may not be indicative of their future results or of the portfolios we may develop in the future.

The historical returns of our portfolios and the ratings and rankings we or the mutual funds that we advise have received in the past should not be considered indicative of the future results of these portfolios or of any other portfolios that we may develop in the future. The investment performance we achieve for our clients varies over time and the variance can be wide. The ratings and rankings we or the mutual funds we advise have received are typically revised monthly. The historical performance and ratings and rankings included in this report are as of December 31, 20112012 and for periods then ended except where otherwise stated. The performance we have achieved and the ratings and rankings received at subsequent dates and for subsequent periods may be higher or lower and the difference could be material. Our portfolios’ returns have benefited during some periods from investment opportunities and positive economic and market conditions. In other periods, such as in 2008 and the third quarter of 2011, general economic and market conditions have negatively affected our portfolios’ returns. These negative conditions may occur again, and in the future we may not be able to identify and invest in profitable investment opportunities within our current or future portfolios.

We depend on third-party distribution sources to market our portfolios and access our client base.

Our ability to attract additional assets to manage is in part dependent on our access to third-party intermediaries. We gain access to mutual fund investors and some retail and institutional clients through third parties, including mutual fund platforms and financial intermediaries. As of December 31, 2011,2012, the largest relationship we have with a third party represents 5.1%3.0% of our total AUM and the mutual fund platform representing the largest portion of our fund assets represents an additional 4.4%2.9% of our total AUM. We

compensate most of the intermediaries through which we gain access to investors in our mutual funds by paying fees, most of which are based on a percentage of assets invested in our mutual funds through that intermediary and with respect to which that intermediary provides services. These distribution sources and client bases may not continue to be accessible to us on terms we consider commercially reasonable, or at all. Limiting or the total absence of such access could have an adverse effect on our results of operations. Many of these consultants review and evaluate our products and our firm from time to time. Poor reviews or evaluations of a particular product, portfolio or us as an investment management firm may result in client withdrawals or may impair our ability to attract new assets through these intermediaries. In addition, the recent economic downturn andindustry trends toward consolidation in the broker-dealer industry may lead to reduced distribution access and increases in fees we are required to pay to intermediaries. If such increased fees should be required, refusal to pay them could restrict our access to those client bases while paying them could adversely affect our profitability.

Our efforts to establish new portfolios or new products or services may be unsuccessful and could negatively impact our results of operations and our reputation.


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As part of our growth strategy, we may seek to take advantage of opportunities to develop new portfolios consistent with our philosophy of managing portfolios to meet our clients’ objectives and using a teamteam-based investment approach. The costs associated with establishing a new portfolio initially likely will exceed the revenues that the portfolio generates. If any such new portfolio performs poorly or fails to attract sufficient assets to manage, our results of operations could be negatively impacted. Further, a new portfolio’s poor performance may negatively impact our reputation and the reputation of our other portfolios within the investment community. In addition, we have developed and may seek from time to time to develop new products and services to take advantage of opportunities involving technology, insurance, participant and plan sponsor education and other products beyond investment management. The development of these products and services could involve investment of financial and management resources and may not be successful in developing client relationships, which could have an adverse effect on our business. The cost to develop these products initially will likely exceed the revenue they generate. If establishing new portfolios or offering new products or services requires hiring new personnel, to the extent we are unable to recruit and retain sufficient personnel, we may not be successful in further diversifying our portfolios, client assets and business, which could have an adverse effect on our business and future prospects.

Our failure to comply with investment guidelines set by our clients including the boards of mutual funds, and limitations imposed by applicable law, could result in damage awards against us and a loss of our AUM, either of which could adversely affect our reputation, results of operations or financial condition.

When clients retain us to manage assets on their behalf, they generally specify certain guidelines regarding investment allocation that we are required to follow in managing their portfolios. In addition, the boards of mutual funds we manage generally establish similar guidelines regarding the investment of assets in those funds. We are also required to invest the mutual funds’ assets in accordance with limitations under the 1940 Act, and applicable provisions of the Internal Revenue Code of 1986, as amended. Other clients, such as plans subject to ERISA, or non-U.S. funds, require us to invest their assets in accordance with applicable law. Our failure to comply with any of these guidelines and other limitations could result in losses to clients or investors in our products which, depending on the circumstances, could result in our obligation to make clients whole for such losses. If we believed that the circumstances did not justify a reimbursement, or clients believed the reimbursement we offered was insufficient, clients could seek to recover damages from us, withdraw assets from our products or terminate their investment management agreement with us. Any of these events could harm our reputation and adversely affect our business.

A change of control of our company could result in termination of our investment advisory agreements.

Under the 1940 Act, each of the investment advisory agreements for SEC registered mutual funds that our affiliate, MNA, advises automatically terminates in the event of its assignment, as defined under the 1940 Act. If such an assignment were to occur, MNA could continue to act as adviser to any such fund only if that fund’s

board of directors and stockholders approved a new investment advisory agreement, except in the case of certain of the funds that we sub-advise for which only board approval would be necessary. In addition, under the Advisers Act each of the investment advisory agreements for the separate accounts we manage may not be assigned without the consent of the client. An assignment may occur under the 1940 Act and the Advisers Act if, among other things, MNA undergoes a change of control. In certain other cases, the investment advisory agreements for the separate accounts we manage require the consent of the client for any assignment. If such an assignment occurs, we cannot be certain that MNA will be able to obtain the necessary approvals from the boards and stockholders of the mutual funds that it advises or the necessary consents from separate account clients.

Operational risks may disrupt our business, result in losses or limit our growth.

We are heavily dependent on the capacity and reliability of the communications, information and technology systems supporting our operations, whether developed, owned and operated by us or by third parties. Operational risks such as trading or operational errors or interruption of our financial, accounting, trading, compliance and other data processing systems, whether caused by fire, natural disaster or pandemic, power or telecommunications failure, act of terrorism or war or otherwise, could result in a disruption of our business, liability to clients, regulatory intervention or reputational damage, and thus adversely affect our business. Some types of operational risks, including, for example, trading errors, may be increased in periods of increased volatility, which can magnify the cost of an error. Although we have back-up systems in place, our back-up procedures and capabilities in the event of a failure or interruption may not be adequate, and the fact that we operate our business out of multiple physical locations may make such failures and interruptions difficult to address on a timely and adequate basis. As and if our client base, number of portfolios and/or physical locations increase, developing and maintaining our operational systems and infrastructure may become increasingly challenging, which could constrain our ability to expand our business. Any upgrades or expansions to our operations or technology to accommodate increased volumes of transactions or otherwise may require significant expenditures and may increase the probability that we will suffer system degradations and failures. In addition, if we are unsuccessful in executing any such upgrades or expansions, we may instead have to hire additional employees, which could increase operational risk due to human error. We also depend on our headquarters in Fairport, New York, where a majority of our employees, administration and technology resources are located, for the continued operation of our business. Any significant disruption to our headquarters could have an adverse effect on our business.


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We depend on third-party service providers for services that are important to our business, and an interruption or cessation of such services by any such service providers could have an adverse effect on our business.

We depend on a number of service providers, including custodial and clearing firms, and vendors of communications and networking products and services. We cannot assure you that any of these providers will be able to continue to provide these services in an efficient manner or that they will be able to adequately expand their services to meet our needs. An interruption or malfunction in or the cessation of an important service by any third-party and our inability to make alternative arrangements in a timely manner, or at all, could have an adverse impact on our business, financial condition and operating results.

Employee misconduct could expose us to significant legal liability and reputational harm.

We operate in an industry in which integrity and the confidence of our clients are of critical importance. Accordingly, if any of our employees engage in illegal or suspicious activities or other misconduct, we could be subject to regulatory sanctions and suffer serious harm to our reputation, financial condition, client relationships and ability to attract new clients. For example, our business often requires that we deal with confidential information. If our employees were to improperly use or disclose this information, even if inadvertently, we could suffer serious harm to our reputation, financial condition and current and future business relationships. It is not always possible to deter employee misconduct, and the precautions we take to detect and prevent this activity may not always be effective. In addition, the SEC recently has increased its scrutiny of the use of non-public

information obtained from corporate insiders by professional investors. Misconduct by our employees, or even unsubstantiated allegations of misconduct, could result in an adverse effect on our reputation and our business.

Improper disclosure of personal data could result in liability and harm our reputation.

We and our service providers store and process personal client information. It is possible that the security controls, training and other processes over personal data may not prevent the improper disclosure of client information. Such disclosure could harm our reputation as well and subject us to liability, resulting in increased costs or loss of revenue.

Failure to properly address conflicts of interest could harm our reputation, business and results of operations.

As we expand the scope of our business and our client base, we must continue to monitor and address any conflicts between our interests and those of our clients. The SEC and other regulators have increased their scrutiny of potential conflicts of interest, and we have implemented procedures and controls that we believe are reasonably designed to address these issues. However, appropriately dealing with conflicts of interest is complex and if we fail, or appear to fail, to deal appropriately with conflicts of interest, we could face reputational damage, litigation or regulatory proceedings or penalties, any of which could adversely affect our reputation, business and results of operations.

If our techniques for managing risk are ineffective, we may be exposed to material unanticipated losses.

In order to manage the significant risks inherent in our business, we must maintain effective policies, procedures and systems that enable us to identify, monitor and control our exposure to operational, legal and reputational risks. Our risk management methods may prove to be ineffective due to their design or implementation, or as a result of the lack of adequate, accurate or timely information or otherwise. If our risk management efforts are ineffective, we could suffer losses that could have an adverse effect on our financial condition or operating results. Additionally, we could be subject to litigation, particularly from our clients, and sanctions or fines from regulators. Our techniques for managing risks in client portfolios may not fully mitigate the risk exposure in all economic or market environments, or against all types of risk, including risks that we might fail to identify or anticipate.

The cost of insuring our business is substantial and may increase.

Our insurance costs are substantial and can fluctuate significantly from year to year. In addition, certain insurance coverage may not be available or may only be available at prohibitive costs. As we renew our insurance policies, we may be subject to additional costs resulting from rising premiums, the assumption of higher deductibles or co-insurance liability and, to the extent certain of our mutual funds purchase separate director and officer or errors and omissions liability coverage, an increased risk of insurance companies disputing responsibility for joint claims. Higher insurance costs and incurred deductibles, as with any expense, would reduce our net income.

We may elect to pursue growth in the United States and abroad through acquisitions or joint ventures, which would expose us to risks inherent in assimilating new operations, expanding into new jurisdictions, and making non-controlling minority investments in other entities.

In order to maintain and enhance our competitive position, we may review and pursue acquisition and joint venture opportunities. We cannot assure we will identify and consummate any such transactions on acceptable terms or have sufficient resources to accomplish such a strategy. In addition, any strategic transaction can involve a number of risks, including:

additional demands on our staff;


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unanticipated problems regarding integration of investor account and investment security recordkeeping, operating facilities and technologies, and new employees;

adverse effects in the event acquired intangible assets or goodwill become impaired;

the existence of liabilities or contingencies not disclosed to or otherwise known by us prior to closing such a transaction; and

dilution to our public stockholders if we issue shares of our Class A common stock, or units of Manning & Napier Group with exchange rights, in connection with future acquisitions.

Risks Related to our Industry

We are subject to extensive regulation.

We are subject to extensive regulation for our investment management business and operations, including regulation by the SEC under the 1940 Act and the Advisers Act, by the U.S. Department of Labor under ERISA, and by the Financial Industry Regulatory Authority, Inc., or FINRA. The U.S. mutual funds we advise are registered with and regulated by the SEC as investment companies under the 1940 Act. The Advisers Act imposes numerous obligations on investment advisers including record keeping, advertising and operating requirements, disclosure obligations and prohibitions on fraudulent activities. The 1940 Act imposes similar obligations, as well as additional detailed operational requirements, on registered investment companies, which must be adhered to by their investment advisers. The U.S. mutual funds that we advise and our broker-dealer subsidiary are each subject to the USA PATRIOT Act of 2001, which requires them to know certain information about their clients and to monitor their transactions for suspicious financial activities, including money laundering. The U.S. Office of Foreign Assets Control, or OFAC, has issued regulations requiring that we refrain from doing business, or allow our clients to do business through us, in certain countries or with certain organizations or individuals on a list maintained by the U.S. government. In addition, Manning & Napier Benefits, LLC is a registered insurance broker with the New York State Insurance Department and, as such, is subject to various insurance and health-related rules and regulations.

Our failure to comply with applicable laws or regulations could result in fines, censure, suspensions of personnel or other sanctions, including revocation of our registration as an investment adviser. Even if a sanction imposed against us or our personnel is small in monetary amount, the adverse publicity arising from the imposition of sanctions against us by regulators could harm our reputation, result in withdrawal by our clients from our products and impede our ability to retain clients and develop new client relationships, which may reduce our revenues.

We face the risk of significant intervention by regulatory authorities, including extended investigation and surveillance activity, adoption of costly or restrictive new regulations and judicial or administrative proceedings that may result in substantial penalties. Among other things, we could be fined or be prohibited from engaging in some of our business activities. The requirements imposed by our regulators are designed to ensure the integrity of the financial markets and to protect customers and other third parties who deal with us, and are not designed to protect our stockholders. Accordingly, these regulations often serve to limit our activities, including through net capital, customer protection and market conduct requirements.

The regulatory environment in which we operate is subject to continual change, and regulatory developments designed to increase oversight could adversely affect our business.

The legislative and regulatory environment in which we operate has undergone significant changes in the recent past. We believe that significant regulatory changes in our industry are likely to continue on a scale that exceeds the historical pace of regulatory change, which is likely to subject industry participants to additional, more costly and generally more punitive regulation. For example, on July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act, or Dodd-Frank, was enacted. Dodd-Frank introduces considerable changes to financial industry regulation, which could impact our business in significant ways. These new laws and regulations can be expected to place greater compliance and administrative burdens on us, which likely will increase our expenses without increasing our revenues. However, many of Dodd-Frank’s provisions require the adoption of regulations by various federal agencies and departments and it is difficult to predict all of the effects Dodd-Frank may have on us until final rules have been adopted.

New laws or regulations, or changes in the enforcement of existing laws or regulations, applicable to us and our clients could adversely affect our business. Our ability to function in this environment will depend on our ability to constantly monitor and promptly react to legislative and regulatory changes. There have been a number of highly publicized regulatory inquiries that have focused on the investment management industry. These inquiries already have resulted in increased scrutiny of the industry and new rules and regulations for mutual funds and investment managers. This regulatory scrutiny may limit our ability to engage in certain activities that might be beneficial to our shareholders. Further, adverse results of regulatory investigations of mutual fund, investment advisory and financial services firms could tarnish the reputation of the financial services industry generally and mutual funds and investment advisers more specifically, causing investors to avoid further fund

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investments or redeem their account balances. Redemptions would decrease our AUM, which would reduce our advisory revenues and net income.

In addition, recently there has been intense public and regulatory interest in 401(k) plan fees and expenses. Lawsuits have been brought against plan sponsors and service providers charging that they breached their fiduciary duties related to such fees and expenses, and the U.S. Department of Labor has imposed substantial additional fee disclosure requirements. These developments may adversely affect our business.

Further, as a result of the recent economic downturn, acts of serious fraud in the investment management industry and perceived lapses in regulatory oversight, U.S. and non-U.S. governmental and regulatory authorities may increase regulatory oversight of our business. We may be adversely affected as a result of new or revised legislation or regulations imposed by the SEC, other U.S. governmental regulatory authorities or self-regulatory organizations that supervise the financial markets. We also may be adversely affected by changes in the interpretation or enforcement of existing laws and rules by these governmental authorities and self-regulatory organizations, as well as by U.S. courts. It is impossible to determine the extent of the impact of any new laws, regulations or initiatives that may be proposed, or whether any of the proposals will become law. Compliance with any new laws or regulations could make compliance more difficult and expensive and affect the manner in which we conduct business.

The investment management industry is intensely competitive.

The investment management industry is intensely competitive, with competition based on a variety of factors, including investment performance, investment management fee rates, continuity of investment professionals and client relationships, the quality of services provided to clients, corporate positioning and business reputation, continuity of selling arrangements with intermediaries and differentiated products. A number of factors, including the following, serve to increase our competitive risks:

a number of our competitors have greater financial, technical, marketing and other resources, more comprehensive name recognition and more personnel than we do;

potential competitors have a relatively low cost of entering the investment management industry;

the recent trend toward consolidation in the investment management industry, and the securities business in general, has served to increase the size and strength of a number of our competitors;

some investors may prefer to invest with an investment manager that is not publicly traded based on the perception that a publicly traded asset manager may focus on the manager’s own growth to the detriment of investment performance for clients;

some competitors may invest according to different investment styles or in alternative asset classes that the markets may perceive as more attractive than the portfolios we offer;

some competitors may have more attractive investment returns due to current market conditions;

some competitors may operate in a different regulatory environment than we do, which may give them certain competitive advantages in the investment products and portfolio structures that they offer;

other industry participants, hedge funds and alternative asset managers may seek to recruit our investment professionals; and

some competitors charge lower fees for their investment services than we do.

If we are unable to compete effectively, our revenues could be reduced and our business could be adversely affected.

The investment management industry faces substantial litigation risks, which could adversely affect our business, financial condition or results of operations or cause significant reputational harm to us.

We depend to a large extent on our network of relationships and on our reputation to attract and retain client assets. If a client is not satisfied with our services, its dissatisfaction may be more damaging to our business than client dissatisfaction would be to other types of businesses. We make investment decisions on behalf of our clients that could result in substantial losses to them. If our clients suffer significant losses, or are otherwise dissatisfied with our services, we could be subject to the risk of legal liabilities or actions alleging negligent misconduct, breach of fiduciary duty, breach of contract, unjust enrichment and/or fraud. These risks are often difficult to assess or quantify and their existence and magnitude often remain unknown for substantial periods of time, even after an action has been commenced. We may incur significant legal expenses in defending against litigation whether or not we engaged in conduct as a result of which we might be subject to legal liability. Substantial legal liability or significant regulatory action against us could adversely affect our business, financial condition or results of operations or cause significant reputational harm to us.


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Catastrophic and unpredictable events could have an adverse effect on our business.

A terrorist attack, war, power failure, cyber-attack, natural disaster or other catastrophic or unpredictable event could adversely affect our future revenues, expenses and earnings by:

decreasing investment valuations in, and returns on, the assets that we manage;

causing disruptions in national or global economies that decrease investor confidence and make investment products generally less attractive;

interrupting our normal business operations;

sustaining employee casualties, including loss of our key members of our senior management team or our investment team;

requiring substantial expenditures and expenses to repair, replace and restore normal business operations; and

reducing investor confidence.

We have a disaster recovery plan to address certain contingencies, but we cannot be assured that this plan will be sufficient in responding or ameliorating the effects of all disaster scenarios. If our employees or vendors we rely upon for support in a catastrophic event are unable to respond adequately or in a timely manner, we may lose clients resulting in a decrease in AUM which may have an adverse effect on revenues and net income.

Risks Related to Our Structure

Control of a majority of the combined voting power of our capital stock by William Manning, and ownership of approximately 86.2% of Manning & Napier Group’s ownership interests by our employee owners, including William Manning, may give rise to conflicts of interest; failure to properly address these or other conflicts of interests could harm our reputation, business and results of operations.

William Manning holds a majority of the combined voting power of our capital stock through his ownership of 100% of our outstanding Class B common stock. Accordingly, William Manning, acting alone, has the ability to approve or disapprove substantially all transactions and other matters submitted to a vote of shareholders,

including those relating to the tax receivable agreement, the exchange agreement and other material corporate transactions, such as a merger, consolidation, dissolution or sale of all or substantially all of our assets, the issuance or redemption of certain additional equity interests, and the election of directors. These voting and class approval rights could enable William Manning to consummate transactions that may not be in the best interests of holders of our Class A common stock or, conversely, prevent the consummation of transactions that may be in the best interests of holders of our Class A common stock. In addition, although he has voting control of Manning & Napier, all of William Manning’s economic interests in us is in the form of his indirect interests in Manning & Napier Group, the payments he may receive from Manning & Napier under the tax receivable agreement we entered into with him at the time of the reorganization transactions and the proceeds he may receive as a result of Manning & Napier Group Holdings, LLC ("M&N Group HoldingsHoldings") and MNCCManning & Napier Capital Company, LLC ("MNCC") exchanging the interests attributable to him in Manning & Napier Group for cash or, at our election, shares of our Class A common stock and, in the case of exchanges for shares of our Class A common stock, from selling such Class A common stock. As a result, William Manning’s economic interests may conflict with the interests of Manning & Napier and its public stockholders.

Our employee owners, including William Manning, directly and through their ownership of M&N Group Holdings and MNCC, indirectly hold approximately 86.2% of the ownership interests in Manning & Napier Group which, as discussed elsewhere, is our sole source of revenue. M&N Group Holdings and MNCC are entities controlled by William Manning, who, through his ownership of M&N Group Holdings and MNCC indirectly owns a total of 67.6%67.5% of the ownership interests in Manning & Napier Group. All of the other owners of interests in M&N Group Holdings and MNCC are current employees of ours, including our executive officers. Further, such employees have the right to cause M&N Group Holdings and MNCC to exchange their indirect interests in Manning & Napier Group for cash or shares of our Class A common stock. If they exercise this right in sufficient amounts, receive shares of our Class A common stock and do not resell such shares, it is possible that after the cancellation of our Class B common stock, these employees may control us. The interests of these employee owners may conflict with our interests and the interests of the holders of our Class A common stock. Decisions of our employee owners with respect to Manning & Napier Group, including those relating to the tax receivable agreement, the exchange agreement and the structuring of future transactions, may take into consideration these employee owners’ tax or other considerations even where no similar benefit would accrue to us or the holders of our Class A common stock.

In addition, as we expand the scope of our business and our client base, we may have conflicts between our interests, those of the holders of our Class A common stock and those of our clients and fund investors. The SEC and other regulators have increased their scrutiny of potential conflicts of interest, and we have implemented procedures and controls that we believe are reasonably designed to address these issues. However, appropriately dealing with conflicts of interest is complex and if we fail, or appear to fail, to deal appropriately with conflicts of interest, we could face reputational damage, litigation or regulatory proceedings or penalties, any of which may adversely affect our results of operations.


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We will continue to recognize substantial non-cash compensation expense through 2014

Certain Manning & Napier Companies adopted new vesting terms related to the current ownership interests of our employees, including our named executive officers, other than William Manning. As a result, we have recognized and will be requiredcontinue to recognize substantial non-cash compensation expense in each year through2013 and 2014. In addition each of Patrick Cunningham and James Mikolaichik were granted Class B units of Manning & Napier Group. As a result, we will recognize non-cash compensation charges through 2012 and 2014, respectively. Further, additional ownership interests in M&N Group Holdings were granted to William Manning in connection with the reorganization transactions pursuant to the amended and restated limited liability company agreement of M&N Group Holdings, as part of the overall agreement among William Manning and the other owners of the Manning & Napier Companies to consummate the reorganization and are fully vested. These expenses have significantly reduced our reported GAAP net income for 2011 and 2012 and will significantly reduce our reported GAAP net income over the remaining vesting periods.

Because we are a “controlled company” within the meaning of the New York Stock Exchange listing rules, our board of directors is not required to consist of a majority of independent directors, and our stockholders may not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the New York Stock Exchange. William Manning has a controlling influence over our board, and the interests of William Manning may conflict with the interests of our other stockholders.

Because William Manning holds a majority of the combined voting power of our capital stock through his ownership of 100% of our outstanding Class B common stock, we are considered a “controlled company” for the purposes of the New York Stock Exchange ("the NYSE") listing requirements. As such, we are permitted to, and may, opt out of the corporate governance requirements that our board of directors, our compensation committee and our nominating and corporate governance committee meet the standard of independence established by the NYSE. As a result, our board of directors and compensation committee may have more directors who do not meet the independence standards than they would if those standards were to apply. In particular, so long as we are a “controlled company,” we are exempt from the NYSE rule that requires that a board be comprised of a majority of “independent directors.” Further,Although we have a majority independent board at December 31, 2012, William Manning has a controlling influence over our board, as William Manningand has sufficient voting power to elect the entire board, and our certificate of incorporation permits stockholders to remove directors at any time with or without cause. In addition, although we have established a nominating and corporate governance committee, we may opt out of the NYSE’s requirement that such committee contain independent directors. Our stockholders may not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the NYSE, and circumstances may occur in which the interests of William Manning could conflict with the interests of our other stockholders.

Our ability to pay regular dividends to our stockholders is subject to the discretion of our board of directors and may be limited by our structure and applicable provisions of Delaware law.

We intend to declare cash dividends on our Class A common stock, however, our board of directors may, in its sole discretion, change the amount or frequency of dividends or discontinue the payment of dividends entirely. In addition, because of our structure, we will be dependent upon the ability of our subsidiaries to generate earnings and cash flows and distribute them to us so that we may pay dividends to our stockholders. We expect to cause Manning & Napier Group to make distributions to its members, including us, in an amount sufficient for us to pay dividends. However, its ability to make such distributions will be subject to its and its subsidiaries’ operating results, cash requirements and financial condition, the applicable laws of the State of Delaware, which may limit the amount of funds available for distribution, and its compliance with covenants and financial ratios related to any indebtedness it has or may incur in the future. As a consequence of these various limitations and restrictions, we may not be able to make, or may have to reduce or eliminate, the payment of dividends on our Class A common stock. Any change in the level of our dividends or the suspension of the payment thereof could adversely affect the market price of our Class A common stock.

We depend on distributions from Manning & Napier Group to pay taxes and expenses, including payments under the tax receivable agreement, but Manning & Napier Group’s ability to make such distributions will be subject to various limitations and restrictions.

We have no material assets other than our ownership of Class A units of Manning & Napier Group and have no independent means of generating revenue. Manning & Napier Group is treated as a partnership for U.S. federal income tax purposes and, as such, is not subject to U.S. federal income tax. Instead, taxable income is allocated to holders of its units, including us. Accordingly, we incur income taxes on our allocable share of any net taxable income of Manning & Napier Group. Under the terms of its amended and restated limited liability company operating agreement, Manning & Napier Group is obligated to make tax distributions to holders of its units, including us. In addition to tax expenses, we also incur expenses related to our operations, including expenses under the tax receivable agreement, which we expect to be significant. We intend, as its managing member, to cause Manning & Napier Group to make distributions in an amount sufficient to allow us to pay our

taxes and operating expenses, including any payments due under the tax receivable agreement. However, Manning & Napier Group’s ability to make such distributions is subject to various limitations and restrictions including, but not limited to, restrictions on distributions that would violate any contract or agreement to which Manning & Napier Group is then a party or


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any applicable law or that would have the effect of rendering Manning & Napier Group insolvent. If we do not have sufficient funds to pay tax or other liabilities to fund our operations, we may have to borrow funds, which could adversely affect our liquidity and financial condition and subject us to various restrictions imposed by any such lenders. To the extent that we are unable to make payments under the tax receivable agreement for any reason, such payments will be deferred and will accrue interest until paid.

We are required to pay holders of units of Manning & Napier Group for certain tax benefits we may claim as a result of the tax basis step up we realize in connection with the future purchases or exchanges of those units for shares of our Class A common stock, and the amounts we may pay could be significant.

Our employee owners indirectly hold a substantial majority of the ownership interests in Manning & Napier Group. Any future purchases or exchanges of their units of Manning & Napier Group for cash or, at our election, shares of our Class A common stock are expected to produce favorable tax attributes for us. When we acquire such units from employee owners, both the existing basis and the anticipated basis adjustments are likely to increase, for tax purposes, depreciation and amortization deductions allocable to us from Manning & Napier Group and therefore reduce the amount of income tax we would otherwise be required to pay in the future. This increase in tax basis may also decrease gain, or increase loss, on future dispositions of certain capital assets to the extent the increased tax basis is allocated to those capital assets.

We entered into a tax receivable agreement with M&N Group Holdings, MNCC and the other holders of Class A units of Manning & Napier Group, pursuant to which we are required to pay to such holder of such Class A units 85% of the applicable cash savings, if any, in U.S. federal, state, local and foreign income tax that we actually realize, or are deemed to realize in certain circumstances, as a result of any step-up in tax basis in Manning & Napier Group’s assets resulting from (i) our purchase of such Class A units from M&N Group Holdings with a portion of the net proceeds of ourthe initial public offering, (ii) our purchases or exchanges of such Class A units from M&N Group Holdings and MNCC, respectively, for cash or, at our election, shares of our Class A common stock and (iii) payments under the tax receivable agreement, including any tax benefits related to imputed interest deemed to be paid by us as a result of such agreement.

We expect that the payments we will be required to make under the tax receivable agreement will be substantial. Assuming no material changes in the relevant tax law, that the purchase or exchange of Class A units would result in depreciable or amortizable basis and that we earn sufficient taxable income to realize all tax benefits that are subject to the tax receivable agreement, we expect that the reduction in tax payments for us associated with the purchase or exchange of all of the Class A units held by M&N Group Holdings and MNCC would aggregateaggregated approximately $54.4$51.4 million as of December 31, 2012 over a 15-year period. Under such scenario, we would be required to pay the holders of such Class A units 85% of such amount, or approximately $46.2$45.9 million over the same 15-year period. The actual amounts may materially differ from these estimated amounts, as potential future reductions in tax payments for us and tax receivable agreement payments by us will be calculated using the market value of our Class A common stock and the prevailing tax rates at the time of purchase or exchange and will be dependent on us generating sufficient future taxable income to realize the benefit. In general, increases in the market value of our shares or in prevailing tax rates will increase the amounts we pay under the tax receivable agreement.

The actual increase in tax basis, as well as the amount and timing of any payments under the tax receivable agreement, will vary depending upon a number of factors, including:

the timing of exchanges by the holders of units of Manning & Napier Group, the number of units purchased or exchanged, or the price of our Class A common stock, as the case may be, at the time of the purchase or exchange;

the amount and timing of the taxable income we generate in the future and the tax rate then applicable; and

the portion of our payments under the tax receivable agreement constituting imputed interest and whether the purchases or exchanges result in depreciable or amortizable basis.

There is a possibility that not all of the 85% of the applicable cash savings will be paid to the selling or exchanging holder of Class A units at the time described above. If we determine that all or a portion of such applicable tax savings is in doubt, we will pay to the holders of such Class A units the amount attributable to the portion of the applicable tax savings that we determine is not in doubt and pay the remainder at such time as we determine the actual tax savings or that the amount is no longer in doubt.

Payments under the tax receivable agreement, if any, will be made pro rata among all tax receivable agreement holders entitled to payments on an annual basis to the extent we have sufficient taxable income to utilize the increased depreciation and amortization charges.expense. The availability of sufficient taxable income to utilize the increased depreciation and amortization expense will not be determined until such time as the financial results for the year in question are known and tax estimates prepared.


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In certain cases, payments under the tax receivable agreement to holders of Manning & Napier Group units may be accelerated and/or significantly exceed the actual benefits we realize in respect of the tax attributes subject to the tax receivable agreement.

The tax receivable agreement provides that upon certain mergers, asset sales, other forms of business combinations or other changes of control, or if, at any time, we elect an early termination of the tax receivable agreement, our, or our successor’s, obligations under the tax receivable agreement with respect to all Class A units of Manning & Napier Group, whether or not such units have been purchased or exchanged before or after such transaction, would be based on certain assumptions, including that we would have sufficient taxable income to fully utilize the deductions arising from the increased tax deductions and tax basis and other benefits related to entering into the tax receivable agreement. As a result, (i) we could be required to make payments under the tax receivable agreement that are greater than or less than the specified percentage of the actual benefits we realize in respect of the tax attributes subject to the tax receivable agreement and (ii) if we elect to terminate the tax receivable agreement early, we would be required to make an immediate payment equal to the present value of the anticipated future tax benefits, which payment may be made significantly in advance of the actual realization of such future benefits. In these situations, our obligations under the tax receivable agreement could have a substantial negative impact on our liquidity and could have the effect of delaying, deferring or preventing certain mergers, asset sales, other forms of business combinations or other changes of control. There can be no assurance that we will be able to finance our obligations under the tax receivable agreement. If we were to elect to terminate the tax receivable agreement immediately as of December 31, 2011,2012, we estimate that we would be required to pay $42.8$43.0 million in the aggregate under the tax receivable agreement.

If we were deemed an investment company under the 1940 Act as a result of our ownership of Manning & Napier Group, applicable restrictions could make it impractical for us to continue our business as contemplated and could have an adverse effect on our business.

We do not believe that we are an “investment company” under the 1940 Act. Because we, as the sole managing member of Manning & Napier Group, control the management of and operate Manning & Napier Group, we believe that our interest in Manning & Napier Group is not an “investment security” as such term is used in the 1940 Act. If we were to cease participation in the management of Manning & Napier Group or not be deemed to control Manning & Napier Group, our interest in Manning & Napier Group could be deemed an “investment security” for purposes of the 1940 Act. A person may be an “investment company” if it owns investment securities having a value exceeding 40% of the value of its total assets (exclusive of U.S. government securities and cash items). Our sole asset is our equity investment in Manning & Napier Group. A determination that such investment is an investment security could cause us to be deemed an investment company under the

1940 Act and to become subject to the registration and other requirements of the 1940 Act. In addition, we do not believe that we are an investment company under Section 3(b)(1) of the 1940 Act because we are not primarily engaged in a business that causes us to fall within the definition of “investment company.” The 1940 Act and the rules thereunder contain detailed prescriptions for the organization and operations of investment companies. Among other things, the 1940 Act and the rules thereunder limit or prohibit transactions with affiliates, impose limitations on the issuance of debt and equity securities, prohibit the issuance of stock options, and impose certain governance requirements. We and Manning & Napier Group intend to conduct our operations so that we will not be deemed an investment company. However, if we nevertheless were to be deemed an investment company, restrictions imposed by the 1940 Act, including limitations on our capital structure and our ability to transact with affiliates, could make it impractical for us to continue our business as contemplated and could have an adverse effect on our business, financial condition and results of operations.

Risks Related to Our Class A Common Stock

The market price and trading volume of our Class A common stock may be volatile, and your investment in our Class A common stock could suffer a decline in value.

The stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations have often been unrelated or disproportionate to the operating performance of those companies. These broad market and industry fluctuations, as well as general economic, political and market conditions such as recessions, interest rate changes or international currency fluctuations, may negatively affect the market price of our Class A common stock. The market price of our Class A common stock may fluctuate or decline significantly in the future. As such, you may not realize any return on your investment in us and may lose some or all of your investment.

Some of the factors that could negatively affect the price of our Class A common stock, or result in fluctuations in the price or trading volume of our Class A common stock, include:

actual or anticipated variations in our quarterly operating results;

failure to meet the market’s earnings expectations;


19




publication of research reports about us or the investment management industry, or the failure of securities analysts to cover our Class A common stock;

a limited float and low average daily trading volume, which may result in illiquidity as investors try to buy and sell and thereby exacerbating positive or negative pressure on our stock;

departures of any members of our senior management team or additions or departures of other key personnel;

adverse market reaction to any indebtedness we may incur or securities we may issue in the future;

changes in market valuations of similar companies;

actual or anticipated poor performance in one or more of the portfolios we offer;

changes or proposed changes in laws or regulations, or differing interpretations thereof, affecting our business, or enforcement of these laws and regulations, or announcements relating to these matters;

adverse publicity about the investment management industry generally, or particular scandals, specifically;

litigation and governmental investigations;

consummation by us or our competitors of significant acquisitions, strategic partnerships or divestitures;

actions by stockholders;

exchange of units of Manning & Napier Group for shares of our Class A common stock or the expectation that such conversions or exchanges may occur; and

general market and economic conditions.

William Manning and our other employee-owners directly and indirectly own interests in M&N Group Holdings and directly own interests in MNCC, and they will have the right to exchange and cause M&N Group Holdings and MNCC to exchange, as applicable, such interests for cash or an aggregate of 76,400,000 shares of our Class A common stock pursuant to the terms of an exchange agreement; future sales of such shares in the public market, or the perception that such sales may occur, could lower our stock price.

The market price of our Class A common stock could decline as a result of sales of a large number of shares of our Class A common stock available for sale, or the perception that such sales could occur. These sales, or the possibility that these sales may occur, also may make it more difficult for us to raise additional capital by selling equity securities in the future, at a time and price that we deem appropriate.

We have 13,583,873 shares of Class A common stock outstanding. We have entered into an exchange agreement with M&N Group Holdings, MNCC, and the other direct holders of the units of Manning & Napier Group that are not owned by us, and subject to certain restrictions set forth therein and as described elsewhere in this report, certain of our employee-owners and M&N Group Holdings and MNCC, on behalf of William Manning and our other employee-members that are direct or indirect members of M&N Group Holdings and MNCC, are entitled to exchange such units for an aggregate of up to 76,400,000 shares of our Class A common stock, subject to customary adjustments. In addition, the holders of any units of Manning & Napier Group will also become parties to the exchange agreement and, pursuant to the terms of the exchange agreement, we may also purchase or exchange such units for shares of our Class A common stock. We are party to a registration rights agreement pursuant to which the shares of Class A common stock issued upon such exchanges are eligible for resale, subject to certain limitations set forth therein.

We cannot predict the size of future issuances of our Class A common stock or the effect, if any, that future issuances and sales of shares of our Class A common stock may have on the market price of our Class A common stock. Sales or distributions of substantial amounts of our Class A common stock, including shares issued in connection with an acquisition, or the perception that such sales or distributions could occur, may cause the market price of our Class A common stock to decline.

The disparity in the voting rights among the classes of our capital stock may have a potential adverse effect on the price of our Class A common stock.

Each share of our Class A common stock entitles its holder to one vote on all matters to be voted on by stockholders generally, while the holder of our Class B common stock controls a majority of the vote on all matters submitted to a vote of all stockholders. The difference in voting rights could adversely affect the value of our Class A common stock if, for example, investors view, or any potential future purchaser of our company views, the superior voting rights of the Class B common stock to have value or to delay or deter a change of control.


20




You may experience dilution in the future as a result of the issuance of Class A units of Manning & Napier Group in connection with future acquisitions.

We may issue shares of our Class A common stock or units of Manning & Napier Group in connection with future acquisitions or grants under the 2011 Plan. If we grant exchange rights with respect to the issuance of the units of Manning & Napier Group that allow its holder to exchange such units for shares of our Class A common stock, stockholders will incur dilution in the percentage of the issued and outstanding shares of Class A common stock that are owned at such time.

Fulfilling our public company financial reporting and other regulatory obligationsobligation has been and will be expensive and time consuming, may strain our resources and if we fail to comply with such obligations,obligation, our business, operating results and stock price could be adversely affected.

As a public company, we are subject to the reporting requirements of the Exchange Act, and will be required to implementhave implemented specific corporate governance practices and adhere to a variety of reporting requirements under the Sarbanes-Oxley Act of 2002 or Sarbanes-Oxley, and the related rules and regulations of the SEC, as well as the rules of the New York Stock Exchange.

In accordanceExchange (the ''NYSE'').

Commencing with Section 404 of Sarbanes-Oxley,this annual report on Form 10-K, our management will beis required to conduct an annual assessment of the effectiveness of our internal controlcontrols over financial reporting and include a report on theseour internal controls in theour annual reports on Form 10-K we will file withpursuant to Section 404 of the SEC.Sarbanes-Oxley Act of 2002. In addition, we will beare required to have our independent registered public accounting firm provide an opinion regarding the effectiveness of our internal controls. We expect that in the future we will become an accelerated or large accelerated filer,attest to and accordingly our annual reports, beginning with our annual report for the fiscal year ending December 31, 2012, must also contain a statement that our independent registered public accounting firm has issued an attestation report on the effectiveness of our internal controlcontrols over financial reporting.

In order to achieve timely compliance with Section 404 of Sarbanes-Oxley, we have begun a process to evaluate our internal control over financial reporting.

Our efforts to comply with Section 404 have resulted in, and are likely to continue to result in, significant costs, the commitment of time and operational resources and the diversion of management’smanagement's attention. If our management identifies one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal control over financial reporting is effective. If we are unable to assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion on the effectiveness of our internal control over financial reporting, market perception of our financial condition and the trading price of our stock may be adversely affected and customer perception of our business may suffer.

Further, the Exchange Act requires us to file annual, quarterly and current reports with respect to our business and financial condition. Compliance with these requirements places significant additional demands on our legal, accounting and finance staff and on our accounting, financial and information systems and increases our legal and accounting compliance costs as well as our compensation expense as we willmay be required to hire additional accounting, tax, finance andor legal staff with the requisite technical knowledge.

As a public company, we have enhanced our investor relations, legal and corporate communications functions. These additional efforts may strain our resources and divert management’smanagement's attention from other business concerns, which could have an adverse effect on our business, financial condition and results of operations.

Our corporate documents and Delaware law contain provisions that could discourage, delay or prevent a change in control of the Company.

Our amended and restated certificate of incorporation and amended and restated bylaws contain provisions that may make the acquisition of our company more difficult. These provisions:

authorize the issuance of undesignated preferred stock, the terms of which may be established and the shares of which may be issued without stockholder approval, and which may include super voting, special approval, dividend, or other rights or preferences superior to the rights of the holders of our Class A common stock;

prohibit stockholder action by written consent and instead require all stockholder actions to be taken at a meeting of our stockholders;

provide that the board of directors is expressly authorized to make, alter, or repeal our amended and restated bylaws;

establish advance notice requirements for nominations for elections to our board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings; and

establish a dual class structure of our voting stock, granting the holder of our Class B common stock majority voting rights.

These anti-takeover provisions and other provisions under Delaware law could discourage, delay or prevent a transaction involving a change in control of our company, even if doing so would benefit the holders of our Class A common stock.


21




Any issuance of preferred stock could make it difficult for another company to acquire us or could otherwise adversely affect holders of our Class A common stock, which could depress the price of our Class A common stock.

Our board of directors has the authority to issue preferred stock and to determine the preferences, limitations and relative rights of shares of preferred stock and to fix the number of shares constituting any series and the designation of such series, without any further vote or action by our stockholders. Our preferred stock could be issued with voting, liquidation, dividend and other rights superior to the rights of our Class A common stock. The potential issuance of preferred stock may delay or prevent a change in control of us, discouraging bids for our Class A common stock at a premium over the market price, and adversely affect the market price and the voting and other rights of the holders of our Class A common stock.

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.

The trading market for our Class A common stock depends in part on the research and reports that securities or industry analysts publish about us or our business. If one or more of the analysts who covers us downgrades our stock or publishes inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price and trading volume to decline.

Item 1B.     Unresolved Staff Comments.
None.
Item 1B.
Unresolved Staff Comments.

The Company has no unresolved SEC comments.

Item 2.Properties.

Item 2.         Properties.
Our corporate headquarters is located in Fairport, New York, and we have regional offices in St. Petersburg, Florida and Dublin, Ohio. We also lease office space in Northfield, Illinois, Wexford, Pennsylvania, Richmond, Virginia and Portsmouth, New Hampshire. MNIS leases office space in Amherst, New York and Tampa, Florida. Manning & Napier Benefits LLC, a subsidiary of MNIS, leases office space in Ellicottville, New York.various other locations throughout the United States. We do not own any facilities. The table below lists our current leased facilities.

Location

 Lease Expiration Approximate Square Footage

Fairport, New York

 June 30, 2015December 31, 2022 138,567126,254

St. Petersburg, Florida

 October 31, 2016 10,438

Dublin, Ohio

 September 30, 2015 8,309

Northfield, Illinois

Amherst, New York
 June 30, 201222, 2013 4,123765
Northfield, Illinois May 31, 2017883

Portsmouth, New Hampshire

March 31, 2013600
Pepper Pike, OhioAugust 31, 2013458
Wexford, Pennsylvania

 October 31, 20122013 170

Richmond, Virginia

November 30, 2012150

Portsmouth, New Hampshire

March 31, 2012600

Amherst, New York

Dallas, Texas
 July 31, 2013 1624,123

Tampa, Florida

October 31, 20123,431

Ellicottville, New York

March 31, 2012564

We believe our properties are in good operating condition and adequately serve our current business operations. We also anticipate suitable additional or alternative space will be available at commercially reasonable terms for future expansion to the extent necessary.

Item 3.Legal Proceedings.

Item 3.         Legal Proceedings.
As an investment adviser to a variety of investment products, we are subject to routine reviews and inspections by the SEC and FINRA. From time to time we may also be involved in various legal proceedings arising in the ordinary course of our business. We do not believe that the outcome of any of these reviews, inspections or other legal proceedings will have a material impact on our combined consolidated financial statements; however, litigation is subject to many uncertainties, and the outcome of individual litigated matters is not predictable with assurance. Currently, there are no legal proceedings pending or to our knowledge threatened against us.

Item 4.Mine Safety Disclosures.

Item 4.         Mine Safety Disclosures.
Not applicable.


22




PART II

Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases and Equity Securities.

Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases and Equity Securities.

Market for the Registrant’s Common Equity

Our Class A common stock is listed and trading on the New York Stock Exchange under the symbol “MN” since November 18, 2011. Prior to November 18, 2011, there was no established public trading market for our Class A common stock. Our Class B common stock is not listed on the New York Stock Exchange and there is no established trading market for such shares.

The following table presents information on the high and low sales prices per share as reported on the New York Stock Exchange for our Class A common stock for the periods indicated and dividends declared during such periods:

   High   Low   Dividends Declared Per Share

Fourth quarter (commencing November 18, 2011)

  $13.24    $11.76    $ —  

 2012 2011
 High Low Dividends Declared Per Share High Low Dividends Declared Per Share
First quarter$15.00
 $12.48
 $0.16
 N/A
 N/A
 N/A
Second quarter$15.00
 $12.96
 $0.16
 N/A
 N/A
 N/A
Third quarter$14.40
 $11.80
 $0.16
 N/A
 N/A
 N/A
Fourth quarter (1) 
$13.25
 $11.95
 $0.16
 $13.24
 $11.76
 $
__________________________
(1) The period reported for the fourth quarter of 2011 is from November 18, 2011 through December 31, 2011.    
Holders
Holders

As of March 22, 201211, 2013 there were 3 holders of record of our Class A common stock and one holder of record of our Class B common stock. A substantially greater number of holders of our Class A common stock are held in “street name” and held of record by banks, brokers, and other financial institutions.

Use of Proceeds

On November 18, 2011, we completed an initial public offering of 12,500,000 shares of our Class A common stock at a price of $12.00 per share, less the underwriting discount. On December 16, 2011, the underwriters exercised their overallotment option and purchased an additional 1,083,873 shares at $12.00 per share, less the underwriting discount. The shares of Class A common stock sold in the IPO were registered under the Securities Act on a registration statement on Form S-1 (File No. 333-175309) that was declared effective by the SEC on November 17, 2011. Merrill Lynch, Pierce, Fenner & Smith Incorporated served as global coordinator of the IPO. J.P. Morgan, Wells Fargo, Stifel, Nicolaus & Co, Keffe, Bruyette & Woods, Inc., Sandler O’Neill & Partners and Needham & Co served as bookrunners. The following table summarizes the net proceeds from the initial public offering.

   Per Share   Total
(in  thousands)
 

Gross Proceeds

  $12.00    $163,007  

Underwriting discount

   .63     8,558  
  

 

 

   

 

 

 

Net Proceeds, before expenses, to the Company

  $11.37    $154,449  
  

 

 

   

 

 

 

Dividends
We used approximately $41.2 million of the net proceeds from the initial public offering to purchase Class A units of Manning & Napier Group from Manning & Napier Group, which in turn expects to use such net proceeds for general corporate purposespay and strategic growth opportunities, including potential acquisitions and product seeding, approximately $105.7 million of the net proceeds from the initial public offering to purchase Class A units of Manning & Napier Group held by M&N Group Holdings, which in turn distributed such proceeds to its members, and approximately $2.7 million, for expenses relating to the initial public offering, not including the underwriting discount.

Dividends

We currently intend to paycontinue paying 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. Distributions to members upon a liquidation of Manning & Napier Group or a capital transaction, such as a sale of all or substantially all of its assets or any financing or refinancing of all or substantially all of its assets or debt, generally will be made to its members pro rata in proportion to their capital account balances, subject to the claims of creditors.

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

23




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.

Our dividend policy has certain risks and limitations, particularly with respect to liquidity. Although we expect to pay dividends according to our dividend policy, we may not pay dividends according to our policy, or at all, if, among other things, Manning & Napier Group is unable to make distributions to us as a result of its operating results, cash requirements and financial condition, its making certain mandatory distributions to its members relating to their income tax liability, the applicable laws of the State of Delaware, which may limit the amount of funds available for distribution, and its compliance with covenants and financial ratios related to any indebtedness it may incur in the future. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

We are taxable as a corporation for U.S. federal income tax purposes and therefore holders of our Class A common stock will not be taxed directly on our earnings. Distributions of cash or other property that we pay to our stockholders will constitute dividends for U.S. federal income tax purposes to the extent paid from our current or accumulated earnings and profits, as determined under U.S. federal income tax rules. If the amount of a distribution by us to our stockholders exceeds our current and accumulated earnings and profits, such excess will be treated first as a tax-free return of capital to the extent of a holder’s adjusted tax basis in the Class A common stock and thereafter as capital gain.

Recent Sales of Unregistered Securities

On November 17, 2011, we issued to William Manning, our Chairman

There were no sales of unregistered securities during the Board, 1,000 shares of our Class B common stock, as part of the reorganization transactions and our initial public offering. Such shares were issued pursuant to the exemption from registration contained in Section 4(2) of the Securities Act, as an offering and sale of securities by an issuer not involving a public offering.

period ended December 31, 2012.

Equity Compensation Plan Information

Plan Category

  Number of
Securities to be
issued upon
exercise of
outstanding
options,
warrants and
rights
  Weighted-
average exercise
price of
outstanding
options, warrants
and rights
  Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))
 
   (a)  (b)  (c) 

Equity compensation plans approved by security holders

   —      —      13,142,813(1) 

Equity compensation plans not approved by security holders

   62,822,825(2)  $0.00(3)   13,577,175(4) 
  

 

 

  

 

 

  

 

 

 

Total

   62,822,825   $0.00    26,719,988  
  

 

 

  

 

 

  

 

 

 

Plan CategoryNumber of securities to be issued upon exercise of outstanding options, warrants and rights Weighted- average exercise price of outstanding options, warrants and rights Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) 
 (a) (b) (c) 
Equity compensation plans approved by security holders
 
 13,142,813
(1) 
Equity compensation plans not approved by security holders76,400,000
(2) 
$
(3) 

 
Total76,400,000
 $
 13,142,813
 
__________________________
(1)The 2011 Equity Compensation Plan was adopted by our board of directors and approved by the Company’s stockholders prior to the consummation of ourthe initial public offering. A total of 13,142,813 equity interests are available for issuance under the 2011 Equity Compensation Plan.
(2)Represents units of Manning & Napier Group which willmay be exchangeable for shares of our Class A common stock. Pursuant to the adoption ofinitial public offering, certain Manning & Napier Companies adopted new vesting terms related to the pre-IPO ownership interests of certainour employees, some of these units are subject to service-based vesting.other than William Manning. Such individuals were entitled to 15% of their pre-Reorganization ownershippre-IPO interests upon the consummation of ourthe initial public offering, and an additional 5% of such pre-IPO ownership interests will vest annually through 2014, provided such individuals are employees of the Company as of such date. Such individuals remaining ownership interests vest annually through 2014, subject to performance-based vesting.
(3)Reflects an exercise price of $0 with respect to each unit outstanding as of December 31, 2011.2012.
(4)Represents units of Manning & Napier Group which will be exchangeable for shares of our Class A common stock. Pursuant to the adoption of new vesting terms related to the pre-IPO ownership interests of certain employees, these units are subject to performance-based vesting. As of December 31, 2011, performance conditions were not yet defined for these performance-based awards and therefore the grant date had not been established as of December 31, 2011. As such, these awards are not considered granted as of December 31, 2011.


Performance Graph

The following graph compares the cumulative total stockholder return on our common stock from November 18, 2011 (the date our Class A common stock first began trading on the New York Stock Exchange) through December 31, 2011,2012, with the cumulative total return of the Standard & Poor’s 500 Stock Index and the SNL Asset Manager Index. The SNL Manager Index is a composite of 3334 publicly traded asset management companies prepared by SNL Financial, Charlottesville, Virginia. The graph assumes the investment of $100 in our Class A common stock and in each of the two indicesindexes on November 18, 2011 and the reinvestment of all dividends, if any. The initial public offering price of our Class A common stock was $12.00 per share.

Company/Index  11/18/2011   11/30/2011   12/30/2011 

Manning & Napier, Inc.

   100.00     105.83     104.08  

S&P 500 Index

   100.00     102.58     103.45  

SNL Asset Manager Index

   100.00     104.38     103.65  


24




Company/Index 11/18/2011 12/30/2011 3/31/2012 6/30/2012 9/30/2012 12/31/2012
Manning & Napier, Inc. $100.00
 $104.08
 $122.50
 $119.94
 $103.92
 $108.80
S&P 500® Index
 $100.00
 $103.72
 $116.78
 $113.57
 $120.78
 $120.32
SNL Asset Manager Index $100.00
 $104.42
 $125.74
 $115.14
 $123.91
 $133.97
In accordance with the rules of the SEC, this section entitled “Performance Graph” shall not be incorporated by reference into any future filings by us under the Securities Act or Exchange Act, and shall not be deemed to be soliciting material or to be filed under the Securities Act or the Exchange Act.

Item 6.         Selected Financial Data.
Item 6.
Selected Financial Data.

The following tables set forth selected historical combined consolidated statements of operations data for the years ended December 31, 2012, 2011 and 2010, and the combined consolidated statements of financial and othercondition data of the Manning & Napier Companies as of the datesDecember 31, 2012 and for the periods indicated. 2011 included elsewhere in this report.

The selected combined consolidated statements of operations data for the years ended December 31, 2011, 2010 and 2009 and December 31, 2008 and the selected combined consolidated statements of financial condition data as of December 31, 20112010 and 2010 have been derived from the Manning & Napier Companies’ audited combined consolidated financial statements included elsewhere in this report.

The selected combined consolidated statements of operations data for the year ended December 31, 2008 has2009 have been derived from the Manning & Napier Companies’ audited combined consolidated financial statements not included in this report. The selected combined consolidated statements of operations data for the year ended December 31, 2007 and the combined consolidated statementsstatement of financial condition data as of December 31, 2008 and 2007 havehas been derived from the Manning & Napier Companies’ unaudited combined consolidated financial statements not included in this report.

You should read the following selected historical combined consolidated financial data together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical combined consolidated financial statements and related notes included elsewhere in this report.

   

Year Ended December 31,

 
   2011  2010  2009  2008  2007 
   (in millions, except share and per share data) 
               (unaudited) 

Statements of operations data:

      

Revenues

      

Investment management services revenue

  $330.0   $255.5   $162.7   $145.6   $133.3  

Expenses

      

Compensation and related costs

   306.0    78.4    55.6    46.3    46.8  

Sub-transfer agent and shareholder service costs

   49.1    36.8    19.9    13.1    9.9  

Other operating costs

   33.7    25.3    22.3    20.7    17.3  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total operating expenses

   388.8    140.5    97.8    80.1    74.0  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Operating (loss) income

   (58.8  115.0    64.9    65.5    59.3  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Non-operating loss

      

Interest expense on shares subject to mandatory redemption

   (45.8  (61.2  (10.0  (6.7  (25.0

Other non-operating gain (loss)

   0.2    —      (0.1  0.6    1.2  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total non-operating loss

   (45.6  (61.2  (10.1  (6.1  (23.8
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

(Loss) income before provision for income taxes

   (104.4  53.8    54.8    59.4    35.5  

Provision for income taxes

   2.0    0.7    0.4    0.4    0.6  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net (loss) income attributable to controlling and noncontrolling interests

  $(106.4 $53.1   $54.4   $59.0   $34.9  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Less: net (loss) income attributable to noncontrolling interests

   (79.2  53.1    54.4    59.0    34.9  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net loss attributable to Manning & Napier, Inc.

  $(27.2  —      —      —      —    
  

 

 

     

Net (loss) available to Class A common stock per basic and diluted share(1)

  $(2.11    
  

 

 

     

Weighted average basic and diluted shares of Class A common stock outstanding(2)

   12,894,136      
  

 

 

     


25




 Year Ended December 31,
 2012 2011 2010 2009 2008
 (in millions, except share data)
         
Statements of operations data:         
Revenues         
Investment management services revenue$339.1
 $330.0
 $255.5
 $162.7
 $145.6
Expenses         
Compensation and related costs165.7
 306.0
 78.4
 55.6
 46.3
Sub-transfer agent and shareholder service costs51.2
 49.1
 36.8
 19.9
 13.1
Other operating costs38.0
 33.7
 25.3
 22.3
 20.7
Total operating expenses254.9
 388.8
 140.5
 97.8
 80.1
Operating income (loss)84.2
 (58.8) 115.0
 64.9
 65.5
Non-operating income (loss)         
Interest expense on shares subject to mandatory redemption
 (45.8) (61.2) (10.0) (6.7)
Other non-operating income (loss)0.5
 0.2
 
 (0.1) 0.6
Total non-operating income (loss)0.5
 (45.6) (61.2) (10.1) (6.1)
Income (loss) before provision for income taxes84.7
 (104.4) 53.8
 54.8
 59.4
Provision for income taxes8.2
 2.0
 0.7
 0.4
 0.4
Net income (loss) attributable to controlling and noncontrolling interests76.5
 (106.4) 53.1
 54.4
 59.0
Less: net income (loss) attributable to noncontrolling interests74.0
 (79.2) 53.1
 54.4
 59.0
Net income (loss) attributable to Manning & Napier, Inc.$2.5
 $(27.2) 
 
 
Net income (loss) available to Class A common stock per basic and diluted share (1)
$0.18
 $(2.11)      
Weighted average basic and diluted shares of Class A common stock outstanding (2)
13,583,873
 12,894,136
      
Cash dividends declared per share of Class A common stock$0.64
 $
      
__________________________
(1)We consummated ourthe initial public offering on November 18, 2011. Since that date, we have consolidated the results of Manning & Napier Group, LLC due to our role as its managing member. Therefore, all income for the period prior to November 18, 2011 is entirely attributable to the noncontrolling interest which existed prior to the initial public offering. As a result, in the computation of GAAP earnings per share, only the net income attributable to our controlling interest from the period subsequent to the initial public offering is considered.

(2)The computation of weighted average basic and diluted shares of Class A common stock outstanding considers the outstanding shares from the date of the initial public offering, November 18, 2011 through December 31, 2011.

   

As of December 31,

 
   2011   2010   2009   2008   2007 
               (unaudited)   (unaudited) 
   (in millions) 

Statements of financial condition data:

          

Total assets

  $178.8    $68.3    $53.4    $41.1    $49.3  

Shares liability subject to mandatory redemption (1)

   —       170.3     109.1     99.1     92.4  

Total liabilities

   87.0     212.1     136.7     120.8     120.3  

 As of December 31,
 2012 2011 2010 2009 2008 (unaudited)
 (in millions)
Statements of financial condition data:         
Cash and cash equivalents$108.3
 $81.2
 $27.5
 $24.8
 $23.3
Total assets$218.2
 $178.8
 $68.3
 $53.4
 $41.1
Shares liability subject to mandatory redemption (1)
$
 $
 $170.3
 $109.1
 $99.1
Total liabilities$94.4
 $87.0
 $212.1
 $136.7
 $120.8
__________________________
(1)Prior to ourthe initial public offering, 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. As part of the overall agreement among William Manning and the other owners of the Manning & Napier Companies prior to consummating our initial public offering, such mandatory redemption obligation terminated upon the consummation of the initial public offering and we no longer reflect in our financial statements non-cash interest expense or the liability related to such obligation.

   

Year Ended December 31,

 
   2011   2010   2009   2008   2007 
   (in millions) 

Selected unaudited financial and operating data:

  

        

Assets under management (1)

  $40,200.1    $38,841.7    $28,271.3    $16,231.4    $18,795.7  

Economic income (2)

   156.7     115.1     64.8     66.1     60.5  

Economic net income (2)

   96.8     71.0     40.0     40.8     37.3  

Economic net income per adjusted share (2)

  $1.08          


26




overall agreement among William Manning and the other owners of the Manning & Napier Companies prior to consummating the initial public offering, such mandatory redemption obligation terminated upon the consummation of the initial public offering and we no longer reflect in our financial statements the liability related to such obligation.
 Year Ended December 31,
 2012 2011 2010 2009 2008
 (in millions, except share data)
Selected unaudited financial and operating data:         
Assets under management (1)
$45,208.9
 $40,200.1
 $38,841.7
 $28,271.3
 $16,231.4
Economic income (2)
$156.9
 $156.7
 $115.1
 $64.8
 $66.1
Economic net income (2)
$96.9
 $96.8
 $71.0
 $40.0
 $40.8
Economic net income per adjusted share (2)
$1.08
 $1.08
 
 
 
__________________________
(1)Reflects the amount of money we managed for our clients as of the last day of the period.
(2)Economic income, economic net income and economic net income per adjusted share are not financial measures prepared in accordance with GAAP. Our management uses the non-GAAP financial measures of economic income, economic net income and economic net income per adjusted share to evaluate the profitability and efficiency of our business model. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Supplemental Non-GAAP Financial Information” for our reasons for including these non-GAAP measures in this report. Our non-GAAP financial measures may differ from similar measures used by other companies, even if similar terms are used to identify such measures. The following table sets forth, for the periods indicated, a reconciliation of non-GAAP financial measures to GAAP measures:

  

Year Ended December 31,

 
  2011  2010  2009  2008  2007 
              (unaudited) 
  (dollars in thousands) 

Reconciliation of non-GAAP financial measures:

     

Net (loss) income attributable to Manning & Napier, Inc.

 $(27,167 $—     $—     $—     $—    

Plus: net (loss) income attributable to the noncontrollling interests

  (79,249  53,098    54,425    58,992    34,900  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net (loss) income attributable to the controlling and the noncontrolling interests

  (106,416  53,098    54,425    58,992    34,900  

Provision for income taxes

  1,982    712    360    374    555  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

(Loss) income before provision for income taxes

  (104,434  53,810    54,785    59,366    35,455  

Interest expense on shares subject to mandatory redemption

  45,833    61,243    9,991    6,707    25,001  

Reorganization-related share-based compensation

  215,324    —      —      —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Economic income

  156,723    115,053    64,776    66,073    60,456  

Adjusted income taxes

  59,947    44,008    24,777    25,273    23,124  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Economic net income

 $96,776   $71,045   $39,999   $40,800   $37,332  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

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

  (2.11    

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

  (6.14    
 

 

 

     

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

  (8.25    

Provision for income taxes per basic and diluted share

  0.15      
 

 

 

     

Loss (income) before provision for income taxes per basic and diluted share

  (8.10    

Interest expense on shares subject to mandatory redemption per basic and diluted share

  3.55      

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

  16.70      
 

 

 

     

Economic income per basic and diluted share

  12.15      

Adjusted income taxes per basic and diluted share

  4.65      
 

 

 

     

Economic net income per basic and diluted share

  7.50      

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

  (6.42    
 

 

 

     

Economic net income per adjusted share

 $1.08      
 

 

 

     

Total basic and diluted shares of Class A common stock outstanding

  13,583,873      

Total units of Manning & Napier Group, LLC

  76,400,000      
 

 

 

     

Total adjusted Class A common stock outstanding

  89,983,873      
 

 

 

     


27




 Year Ended December 31,
 2012 2011 2010 2009 2008
 (in thousands, except share data)
Reconciliation of non-GAAP financial measures:         
Net income (loss) attributable to Manning & Napier, Inc.
$2,469
 $(27,167) $
 $
 $
Plus: net income (loss) attributable to the noncontrollling interests73,950
 (79,249) 53,098
 54,425
 58,992
Net income (loss) attributable to the controlling and the noncontrolling interests76,419
 (106,416) 53,098
 54,425
 58,992
Provision for income taxes8,160
 1,982
 712
 360
 374
Income (loss) before provision for income taxes84,579
 (104,434) 53,810
 54,785
 59,366
Interest expense on shares subject to mandatory redemption
 45,833
 61,243
 9,991
 6,707
Reorganization-related share-based compensation72,274
 215,324
 
 
 
Economic income156,853
 156,723
 115,053
 64,776
 66,073
Adjusted income taxes59,996
 59,947
 44,008
 24,777
 25,273
Economic net income$96,857
 $96,776
 $71,045
 $39,999
 $40,800
Net income (loss) available to Class A common stock per basic share$0.18
 $(2.11)      
Plus: net income (loss) attributable to noncontrolling interests per basic share5.45
 (6.14)      
Net income (loss) attributable to controlling and noncontrolling interests per basic share5.63
 (8.25)      
Provision for income taxes per basic share0.60
 0.15
      
Income (loss) before provision for income taxes per basic share6.23
 (8.10)      
Interest expense on shares subject to mandatory redemption per basic share
 3.55
      
Reorganization-related share-based compensation per basic share5.32
 16.70
      
Economic income per basic share11.55
 12.15
      
Adjusted income taxes per basic share4.42
 4.65
      
Economic net income per basic share7.13
 7.50
      
Less: Impact of Manning & Napier Group, LLC units converted to publicly traded shares(6.05) (6.42)      
Economic net income per adjusted share$1.08
 $1.08
      
Total basic shares of Class A common stock outstanding13,583,873
 13,583,873
      
Total exchangeable units of Manning & Napier Group, LLC76,400,000
 76,400,000
      
Total adjusted Class A common stock outstanding89,983,873
 89,983,873
      
Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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


28




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 an important driver 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.

Our AUMassets under management ("AUM") was $40.2$45.2 billion as of December 31, 2011,2012, as illustrated in the table below.

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

Assets under management – By investment vehicle and portfolio

        

As of December 31, 2011

        

Separately managed accounts

  $10,602.4    $10,809.0    $1,246.7    $22,658.1  

Mutual funds and collective investment trusts

   7,520.1     10,003.0     18.9     17,542.0  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $18,122.5    $20,812.0    $1,265.6    $40,200.1  
  

 

 

   

 

 

   

 

 

   

 

 

 

 As of December 31, 2012
AUM - by investment vehicle and portfolio:
Blended
Asset
 Equity 
Fixed
Income
 Total
 (in millions)
Separately managed accounts$11,407.8
 $12,065.8
 $1,210.0
 $24,683.6
Mutual funds and collective investment trusts9,062.9
 11,406.7
 55.7
 20,525.3
Total$20,470.7
 $23,472.5
 $1,265.7
 $45,208.9

29




The composition of our separately managed accounts as of December 31, 2011,2012, by channel and portfolio, is set forth in the table below.

   As of December 31, 2011 
   Blended
Asset
  Equity  Fixed Income  Total 
   (dollar amounts in millions) 

Separate account AUM

     

Direct Channel

  $7,485.6   $7,268.8   $1,042.1   $15,796.5  

Intermediary Channel

   3,116.8    792.1    204.6    4,113.5  

Platform/Sub-advisor Channel

   —      2,748.1    —      2,748.1  
  

 

 

  

 

 

  

 

 

  

 

 

 

Total

  $10,602.4   $10,809.0   $1,246.7   $22,658.1  
  

 

 

  

 

 

  

 

 

  

 

 

 

Percentage of separate account AUM

     

Direct Channel

   33  32  5  70

Intermediary Channel

   14  3  1  18

Platform/Sub-advisor Channel

   0  12  0  12
  

 

 

  

 

 

  

 

 

  

 

 

 

Total

   47  47  6  100
  

 

 

  

 

 

  

 

 

  

 

 

 

Percentage of portfolio by channel

     

Direct Channel

   71  67  84  70

Intermediary Channel

   29  7  16  18

Platform/Sub-advisor Channel

   —      26  —      12
  

 

 

  

 

 

  

 

 

  

 

 

 

Total

   100  100  100  100
  

 

 

  

 

 

  

 

 

  

 

 

 

Percentage of channel by portfolio

     

Direct Channel

   47  46  7  100

Intermediary Channel

   76  19  5  100

Platform/Sub-advisor Channel

   —      100  —      100

below:

 As of December 31, 2012
Separate Account AUM - by Channel and Portfolio:
Blended
Asset
 Equity 
Fixed 
Income
 Total
 (in millions)
Separate account AUM       
Direct Channel$8,128.1
 $9,182.8
 $966.0
 $18,276.9
Intermediary Channel3,279.7
 892.6
 244.0
 4,416.3
Platform/Sub-advisor Channel
 1,990.4
 
 1,990.4
Total$11,407.8
 $12,065.8
 $1,210.0
 $24,683.6
Percentage of separate account AUM       
Direct Channel33% 37% 4% 74%
Intermediary Channel13% 4% 1% 18%
Platform/Sub-advisor Channel% 8% % 8%
Total46% 49% 5% 100%
Percentage of portfolio by channel       
Direct Channel71% 77% 80% 74%
Intermediary Channel29% 7% 20% 18%
Platform/Sub-advisor Channel% 16% % 8%
Total100% 100% 100% 100%
Percentage of channel by portfolio       
Direct Channel44% 51% 5% 100%
Intermediary Channel74% 20% 6% 100%
Platform/Sub-advisor Channel% 100% % 100%
Our separate accounts contributed 32%35% of our total gross client inflows for the year ended December 31, 20112012 and represented 56%55% of our total AUM as of December 31, 2011.

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 53%75% of the total gross client inflows for our separate account business for the year ended December 31, 20112012 and represented 70%74% of our total separate account AUM as of December 31, 2011.2012. 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 2011,2012, equity and blended asset portfolios represented 63%65% and 32%29% of the separate account gross client inflows from the Direct Channel, respectively, while fixed income portfolios accounted for 5%6%. As of December 31, 2011,2012, equity and blended asset portfolios represented 46%51% and 47%44% of total Direct Channel separate account AUM, while our fixed income portfolios were 7%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.

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 2011, 35%2012, 15% of the total gross client inflows for separate accounts came from financial advisor representatives (Intermediary Channel), and an additional 10% came from unaffiliated registered investment advisor platforms (Platform/Sub-advisor Channel), and an additional 12% came from financial advisor representatives (Intermediary Channel). The Intermediary and Platform/Sub-advisor and Intermediary Channels represented 30%26% of our total separate account AUM as of December 31, 2011.

2012.

New separate account business through the Platform/Sub-advisor Channel is primarily directed to our equity strategies, where we are filling a specific mandate within the investment program or platform product. During 2011, 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 December 31, 2011, equity portfolios represented 100% of total Platform/Sub-Advisory Channel separate account AUM.

In contrast, gross client inflows through the Intermediary Channel were fromflowed into both our blended asset portfolios and our 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 2011,2012, blended asset and equity portfolios represented 63%58% and 34%38%, respectively, of the separate account gross client inflows from the Intermediary Channel, respectively, while fixed income portfolios represented 3%4%. As of


30




December 31, 2011, 76%2012, 74% of our separate account AUM derived from financial advisors was allocated to blended asset portfolios, with 19%20% allocated to equity and 5%6% 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.

Despite

In contrast, gross client inflows through the Platform/Sub-advisor Channel are primarily directed to our equity strategies, where we are filling a difficult market environment,specific mandate within the investment program or platform product. During 2012, 100% of our separate account cancellationgross client inflows from the Platform/Sub-advisory Channel were into equity portfolios, and we expect this will continue going forward. As of December 31, 2012, equity portfolios represented 100% of total Platform/Sub-Advisory Channel separate account AUM.
Our annualized separate account retention rate across all channels was 4.3%approximately 95% during the calendar year 2011,2012, representing the strong relationship focus that is inherent in our direct sales model, which is the primary driver of our separate account business.

For the year ended December 31, 2012, market appreciation for our separate account AUM was 13.7%, including 12.1% in our blended assets and 16.3% in equity portfolios.
The composition of our mutual fundsfund and collective investment truststrust AUM as of December 31, 2011,2012, by portfolio, is set forth in the table below.

   As of December 31, 2011 
   Blended
Asset
   Equity  Fixed Income   Total 
   (dollar amounts in millions) 

Mutual funds and collective investment
trusts AUM

  $7,520.1    $10,003.0   

$

        18.9

  

  $17,542.0  

below:

 As of December 31, 2012
Mutual fund and collective investment
trust AUM - by portfolio:
Blended
Asset
 Equity 
Fixed 
Income
 Total
 (in millions)
Mutual fund and collective investment trust AUM$9,062.9
 $11,406.7
 $55.7
 $20,525.3
Our mutual fundfunds and collective investment trusts contributed 68%65% of our total gross client inflows for the year ended December 31, 20112012 and represented 44%45% of our total AUM as of December 31, 2011.2012. As of December 31, 2011,2012, our mutual fundfunds and collective investment trusttrusts AUM consisted of 43%44% from blended asset portfolios and 57%56% from equity portfolios, compared to 42%43% and 58%57% for blended asset and equity portfolios as of December 31, 2010.2011. During the year ended December 31, 2011, 34%2012, 46% and 53% of the gross client inflows were attributable to blended assetsasset and equity portfolios, respectively, and the remaining 66%1% came in equityinto fixed income portfolios. For the year ended December 31, 2011,2012, market depreciationappreciation for our mutual fundfunds and collective investment trust AUM was 13.3%15.2%, including 2.4%12.8% in our blended assets and 21.3%16.9% in 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 fund 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.platforms. 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. Specifically, weWe anticipate greater use of our life cycle mutual funds and collective investment trusts by advisors that utilize 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 channelChannel may also increase due to interest from national brokerage firm advisors.

representatives who wish to use our mutual funds as a sleeve within a larger portfolio.

Through our Platform/Sub-advisor channel,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 such aswhere our mutual fund wrap programs,funds are used within a multi-strategy portfolio, or through placement on platforms’platforms' approved lists of funds. To facilitate our relationships with intermediaries, we currently have more than 270280 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 in our Intermediary Channel, as well as our Platform/Sub-Advisory channel.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-USnon-U.S. portfolios, to large institutional clients for which we have direct relationships with the client and often, the client’s consultant. Through the Direct channel,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,portfolio funds, particularly as the breadth of our mutual fund and collective investment trust offerings expands.

Results of Operations

Below is a discussion of our combined consolidated results of operations for the years ended December 31, 2012, 2011 2010, and 2009.

2010.


31




Key Components of Results of Operations
Overview.

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 two tables reflect the indicated components of our AUM for our investment vehicles for the years ended December 31, 2012, 2011, and2010.
AUM—by investment vehicle:
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, 2009$17,234.2
 $11,037.1
 $28,271.3
 61% 39% 100%
Gross client inflows5,237.7
 7,310.7
 12,548.4
      
Gross client outflows(2,213.5) (3,870.4) (6,083.9)      
Market appreciation2,676.7
 1,429.2
 4,105.9
      
As of December 31, 2010$22,935.1
 $15,906.6
 $38,841.7
 59% 41% 100%
Gross client inflows4,456.3
 9,328.4
 13,784.7
      
Gross client outflows(3,496.2) (5,578.3) (9,074.5)      
Market depreciation(1,237.1) (2,114.7) (3,351.8)      
As of December 31, 2011$22,658.1
 $17,542.0
 $40,200.1
 56% 44% 100%
Gross client inflows3,327.8
 6,172.0
 9,499.8
      
Gross client outflows(4,399.2) (5,858.3) (10,257.5)      
Market appreciation3,096.9
 2,669.6
 5,766.5
      
As of December 31, 2012$24,683.6
 $20,525.3
 $45,208.9
 55% 45% 100%
Average AUM:Separately managed accounts 
Mutual funds and collective
investment trusts
 Total
 (in millions)
      
For the year ended December 31, 2010$19,268.2 $13,070.5 $32,338.7
For the year ended December 31, 2011$23,850.1 $18,331.5 $42,181.6
For the year ended December 31, 2012$24,016.3 $19,565.6 $43,581.9

32




Assets Under Management. The following tables reflect the indicated components of our AUM for our portfolios for the periods indicated.years ended

The first table presents AUM for our separately managed accountsDecember 31, 2012, 2011, and our mutual funds and collective investment trusts for the periods indicated. This table reflects the shift in the periods indicated from AUM comprised primarily of our separately managed accounts to a more balanced AUM comprised of both our separately managed accounts and our mutual funds and collective investment trusts. The table reflects that the shift in the periods indicated has occurred due to the strong growth of our mutual funds and collective investment trusts.

The second table presents AUM for our blended asset, equity and fixed income portfolios. This table reflects the shift in the periods indicated from AUM comprised primarily of blended portfolios to a more balanced AUM comprised primarily of blended and equity portfolios. The table reflects that the shift in the periods indicated has occurred due to the growth of the mutual funds and collective investment trusts within our equity portfolio.

For each of the applicable periods, we computed average AUM by averaging 13 data points including beginning of the year AUM and AUM for the end of each of the 12 months during such period.

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

Assets under management—By investment vehicle

      

As of December 31, 2008

  11,718.8    4,512.6    16,231.4    72.2  27.8  100.0

Separately managed accounts gross client inflows

  4,093.7    —      4,093.7     

Separately managed accounts gross client outflows

  (1,935.1  —      (1,935.1   

Mutual funds and collective investment trusts net client flows

  —      4,540.3    4,540.3     

Market appreciation

  3,356.8    1,984.2    5,341.0     
 

 

 

  

 

 

  

 

 

    

As of December 31, 2009

  17,234.2    11,037.1    28,271.3    61.0  39.0  100.0

Gross client inflows

  5,237.7    7,310.7    12,548.4     

Gross client outflows

  (2,213.5  (3,870.4  (6,083.9   

Market appreciation

  2,676.7    1,429.2    4,105.9     
 

 

 

  

 

 

  

 

 

    

As of December 31, 2010

  22,935.1    15,906.6    38,841.7    59.0  41.0  100.0

Gross client inflows

  4,456.3    9,328.4    13,784.7     

Gross client outflows

  (3,496.2  (5,578.3  (9,074.5   

Market depreciation

  (1,237.1  (2,114.7  (3,351.8   
 

 

 

  

 

 

  

 

 

    

As of December 31, 2011

  22,658.1    17,542.0    40,200.1    56.4  43.6  100.0

  Separately managed
accounts
  Mutual funds and collective
investment trusts
  Total 

Annual growth rates

   

December 31, 2009 vs. December 31, 2008

  47.1  144.6  74.2

December 31, 2010 vs. December 31, 2009

  33.1  44.1  37.4

December 31, 2011 vs. December 31, 2010

  (1.2%)   10.3  3.5

Compound annual growth rate—December 31, 2008 through December 31, 2011

  24.6  57.2  35.3

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

Average assets under management

   

For the year ended December 31, 2009

  13,614.5    6,970.2    20,584.7  

For the year ended December 31, 2010

  19,268.2    13,070.5    32,338.7  

For the year ended December 31, 2011

  23,850.1    18,331.5    42,181.6  

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

Assets under management—By portfolio

         

As of December 31, 2008

   10,142.9    4,812.6    1,275.9    16,231.4    62.5  29.6  7.9  100.0
  

 

 

  

 

 

  

 

 

  

 

 

     

Separately managed accounts gross client inflows

   1,003.2    2,801.2    289.3    4,093.7      

Separately managed accounts gross client outflows

   (955.8  (618.0  (361.3  (1,935.1    

Mutual funds and collective investment trusts net client flows

   1,267.0    3,273.3    —      4,540.3      

Market appreciation

   2,492.1    2,745.5    103.4    5,341.0      
  

 

 

  

 

 

  

 

 

  

 

 

     

As of December 31, 2009

   13,949.4    13,014.6    1,307.3    28,271.3    49.4  46.0  4.6  100.0
  

 

 

  

 

 

  

 

 

  

 

 

     

Gross client inflows

   4,131.2    8,270.5    146.7    12,548.4      

Gross client outflows

   (2,517.5  (3,370.2  (196.2  (6,083.9    

Market appreciation

   1,717.4    2,342.0    46.5    4,105.9      
  

 

 

  

 

 

  

 

 

  

 

 

     

As of December 31, 2010

   17,280.5    20,256.9    1,304.3    38,841.7    44.5  52.1  3.4  100.0
  

 

 

  

 

 

  

 

 

  

 

 

     

Gross client inflows

   4,263.4    9,361.6    159.7    13,784.7      

Gross client outflows

   (3,231.0  (5,608.0  (235.5  (9,074.5    

Market appreciation/(depreciation)

   (190.4  (3,198.5  37.1    (3,351.8    
  

 

 

  

 

 

  

 

 

  

 

 

     

As of December 31, 2011

   18,122.5    20,812.0    1,265.6    40,200.1    45.1  51.8  3.1  100.0
  

 

 

  

 

 

  

 

 

  

 

 

     

   Blended
Asset
  Equity  Fixed Income  Total 

Annual growth rates

     

December 31, 2009 vs. December 31, 2008

   37.5  170.4  2.5  74.2

December 31, 2010 vs. December 31, 2009

   23.9  55.6  (0.2%)   37.4

December 31, 2011 vs. December 31, 2010

   4.9  2.7  (3.0%)   3.5

Compound annual growth rate—December 31, 2008 through December 31, 2011

   21.3  62.9  (0.3%)   35.3

   Blended
Asset
   Equity   Fixed Income   Total 
   (in millions) 

Average assets under management

        

For the year ended December 31, 2009

   11,358.4     7,969.9     1,256.4     20,584.7  

For the year ended December 31, 2010

   15,193.7     15,805.3     1,339.7     32,338.7  

For the year ended December 31, 2011

   18,276.2     22,649.9     1,255.5     42,181.6  

2010:

AUM—by portfolio:
Blended
Asset
 Equity 
Fixed
Income
 Total 
Blended
Asset
 Equity 
Fixed
Income
 Total
  (in millions)        
As of December 31, 2009$13,949.4
 $13,014.6
 $1,307.3
 $28,271.3
 49% 46% 5% 100%
Gross client inflows4,131.2
 8,270.5
 146.7
 12,548.4
        
Gross client outflows(2,517.5) (3,370.2) (196.2) (6,083.9)        
Market appreciation1,717.4
 2,342.0
 46.5
 4,105.9
        
As of December 31, 2010$17,280.5
 $20,256.9
 $1,304.3
 $38,841.7
 45% 52% 3% 100%
Gross client inflows4,263.4
 9,361.6
 159.7
 13,784.7
        
Gross client outflows(3,231.0) (5,608.0) (235.5) (9,074.5)        
Market appreciation/(depreciation)(190.4) (3,198.5) 37.1
 (3,351.8)        
As of December 31, 2011$18,122.5
 $20,812.0
 $1,265.6
 $40,200.1
 45% 52% 3% 100%
Gross client inflows3,847.7
 5,431.2
 220.9
 9,499.8
        
Gross client outflows(3,750.0) (6,222.7) (284.8) (10,257.5)        
Market appreciation2,250.5
 3,452.0
 64.0
 5,766.5
        
As of December 31, 2012$20,470.7
 $23,472.5
 $1,265.7
 $45,208.9
 45% 52% 3% 100%
Average AUM:
Blended
Asset
 Equity 
Fixed 
Income
 Total
 (in millions)
        
For the year ended December 31, 2010$15,193.7
 $15,805.3
 $1,339.7
 $32,338.7
For the year ended December 31, 2011$18,276.2
 $22,649.9
 $1,255.5
 $42,181.6
For the year ended December 31, 2012$19,671.4
 $22,668.0
 $1,242.5
 $43,581.9
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.

MNA,

Manning & Napier Advisors, LLC ("MNA"), our affiliate,subsidiary, serves as the investment advisor to the Fund and Exeter Trust Company. The Fund is currently a family of 29 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 $17.5$20.5 billion, or 44%45%, of our AUM as of December 31, 2011,2012, and investment management fees from these mutual funds and collective investment trusts were $167.8$173.4 million or 51%, of our revenues for the year ended December 31, 2011.

2012. MNA also serves as the investment advisor to all of our separately managed accounts, managing $22.7$24.7 billion, or 56%55%, of our AUM as of December 31, 2011,2012, 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 represented $147.4 million, or 45%, of our revenues for the year ended December 31, 2011.

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.

33




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, asset-based distribution fees including 12b-1 distribution and servicing fees and fund fee waiver and/or expense reimbursement, 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.
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 stock-based compensation. These costs are affected by changes in the employee headcount and mix of existing job descriptions, competitive factors and new product and service initiatives requiring the addition of new skill sets and/or expanded or upgraded staffing.

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 investment securities designated as trading. Within interest expense, we have recognized expenses related to the agreement with William Manning, our Chairman and controlling stockholder. Prior to the Company 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 ourthe 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, weThe 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 had a significant provisionliable for or able to benefit from U.S. federal or most state and local income taxes due to the fact that the combined entity is generally made up of S-corporations and limited liability companies. However, following the public offering, we reported an increaseon their earnings; as such earnings (losses) will be included in the provisionpersonal 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 U.S. federal or state and local income taxes due toon their earnings and losses, respectively.
Noncontrolling Interests. Manning & Napier, Inc. holds approximately 13.8% economic interest in Manning & Napier Group, but as managing member controls all of the requirement to include provisions for federalbusiness and state income taxes as a resultaffairs of Manning & Napier’s C-corporation status.Napier Group. As a result, the Company consolidates the financial results of Manning & Napier Group and records a noncontrolling interest in our combined consolidated financial statements. Net income (loss) attributable to noncontrolling interest on the combined consolidated statements of operations represents the portion of earnings or loss attributable to the economic interest in Manning & Napier Group held by the noncontrolling members.

Critical Accounting Policies and Estimates

The combined consolidated financial statements are prepared in accordance with GAAP and related rules and regulations of the SEC. The preparation of combined consolidated financial statements in conformity with GAAP requires management to make estimates or assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. Accordingly, actual results could differ from these estimates or assumptions and may have a material effect on the combined consolidated financial statements.

Accounting policies are an integral part of our financial statements. A thorough understanding of these accounting policies is essential when reviewing our reported results of operations and our financial condition. Our management has identified the following significant accounting policies that are critical to understanding our business and prospects for future performance, as these policies affect the reported amounts of revenue and other significant areas that involve management’s judgment and estimates:

Shares subject to redemption;

Revenue recognition;

Equity-based compensation;

Income tax provision; and

Payments pursuant to the Tax Receivable Agreement

These policies and our procedures related to these policies are described in detail below. In addition, please refer to the notes to our combined consolidated financial statements included elsewhere in this report for further discussion of our accounting policies.

Shares Subject to Redemption

The Company entered into an agreement with William Manning, pursuant to which we had a mandatory redemption obligation upon his death to pay his pro rata share of net revenue for the four quarters immediately preceding Mr. Manning’s death. In accordance with the requirements of accounting for certain financial instruments with characteristics of both liabilities and equity, we recognized a liability for these shares subject to mandatory redemption in our financial statements.

For one of our entities, MNBD, our redemption obligation upon his death to pay his pro rata share of net revenue had an element of conditionality. In accordance with the requirements of accounting for contracts in our own equity, we had recognized the shares subject to conditional redemption related to MNBD as temporary equity.

Upon consummation of our initial public offering, the shares subject to redemption terminated, and as a result the instruments were reclassified to permanent equity. The liability and temporary equity for all periods prior to the termination had been measured at the redemption amount.

Revenue Recognition

The majority of our revenues are based on fees charged to manage customers’ portfolios. Investment management fees are generally computed as a percentage of AUM and recognized as earned. Fees for providing investment advisory services are computed and billed in accordance with the provisions of the applicable investment management agreements. For our separately managed accounts, clients either pay investment management fees in advance, typically for a semi-annual or quarterly period, or in arrears, typically for a monthly or quarterly period. When investment management fees are paid in advance, we defer the revenue and recognize it over the applicable period. When investment management fees are paid in

34




arrears, we estimate

revenues based on AUM market values as of the most recent month end date, and adjust to actual when billed. Revenue is also earned for providing custodial services, sub-advisor services to mutual funds and collective investment trusts and other services. For mutual funds and collective investment trust vehicles, our fees are calculated and earned daily based on AUM.

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 (unadjusted) in active markets for identical assets or liabilities that the Plan has the ability to access at the measurement date.

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, 2010 AUM

  $20,496    $18,346    $  —      $38,842  

December 31, 2011 AUM

   21,732     18,462     6     40,200  

3:

 Level 1 Level 2 Level 3 Total
 (in millions)
December 31, 2011 AUM$21,732
 $18,462
 $6
 $40,200
December 31, 2012 AUM$26,826
 $18,371
 $12
 $45,209
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 the heading “Item 1A. Risk Factors” and “Item 7A. Quantitative and Qualitative Disclosure About Market Risk.”

All other revenue earned by us is recognized on a GAAP accounting basis as earned per the terms of the specific contract.

Equity-Based Compensation

The Company measures the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The cost is recognized over the period during which an employee is required to provide service in exchange for the award for the portion of the shares that are expected to vest. Therefore, we apply estimated forfeiture rates. If the actual number of forfeitures differs from those estimated by management, additional adjustments to compensation expense may be required in future periods.

Income Tax Provision

Management judgment is required in developing our provision for income taxes, including the determination of deferred tax assets and liabilities and any valuation allowance that might be required against deferred tax assets. As of December 31, 2011,2012, we have not recorded a valuation allowance on deferred tax assets,

which were primarily attributable to an increase in the tax basis of the tangible and intangible assets of Manning & Napier Group’s election under Section 754 of the Internal Revenue Code. In the event that sufficient taxable income of the same character does not result in future years, among other things, a valuation allowance for certain of our deferred tax assets may be required. Because the determination of our annual income tax provision is subject to judgments and estimates, it is likely that the actual results will vary from those recorded in our financial statements. Hence, we recognize additions to and reductions in income tax expense during a reporting period that pertains to prior period provisions as our estimated liabilities are revised and our actual tax returns and tax audits are completed.

The Company recognizes tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized.

Payments pursuant to the Tax Receivable Agreement

As a result of the Company’s purchase of Class A units of Manning & Napier Group from M&N Group Holdings and Manning & Napier Group’s election under Section 754 of the Internal Revenue Code, the Company expects to benefit from

35




depreciation and amortization deductions from an increase in tax basis of tangible and intangible assets of Manning & Napier Group. Those deductions allocated to the Company will be taken into account in reporting the Company’s taxable income.

Upon consummation of the initial public offering during the period ended December 31, 2011, the company entered into a tax receivable agreement (“TRA”) with M&N Group Holdings, MNCC and the other holders of Class A units of Manning & Napier Group, under which we are required to pay to the holders of such Class A units 85% of the applicable cash savings, if any, in U.S. federal, state, local and foreign income tax that we actually realize, or are deemed to realize in certain circumstances as a result of any step-up in tax basis in Manning & Napier Group’s assets resulting from (i) the Company’s purchase of such Class A units from M&N Group Holdings with a portion of the net proceeds of the initial public offering, (ii) the Company’s purchases or exchanges of such Class A units from M&N Group Holdings and MNCC, respectively, for cash or shares of our Class A common stock and (iii) payments under the tax receivable agreement, including any tax benefits related to imputed interest deemed to be paid by us as a result of such agreement.

As of December 31, 2011,2012, the Company recorded a liability of $46.2$45.9 million, representing the payments due to the selling unitholders. The amount and timing of any payments vary based on a number of factors, including no material change in the relevant tax law, the Company continues to earn sufficient taxable income to realize all tax benefits, and assuming no additional uncertain tax positions that are subject to the tax receivable agreement; depending upon the outcome of these factors, we may be obligated to make substantial payments pursuant to the TRA. The actual payment amounts may differ from these estimated amounts, as the liability will reflect changes in prevailing tax rates as well as the actual benefit it realized on the tax return.

Within the next 12 month period, the Company expects to pay approximately $0.3$1.9 million of the total amount. 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 is the remainder. To determine the current amount of the payments due, the Company estimated the amount of taxable income that Manning & Napier has generated since consummation ofduring 2012 and the initial public offering. Next, the Company estimated the amount of the specified TRA deductions for the respective period. This was used as a basis for determining the amount of tax deduction that generates a TRA obligation which was used to calculate the estimated payments due under the TRA that the Company expects to pay in the next 12 months. These calculations are performed in accordance with the terms of the TRA.

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. TheseThe adoption of these amendments are effective for annual periods beginning after December 15, 2011. We doon January 1, 2012 did not expect the amendments to 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. TheseThe adoption of these amendments are effective for annual periods beginning after December 15, 2011. We doon January 1, 2012 did not expect the amendments to have a material impact on our combined consolidated financial statements and related disclosures.


36




In February 2010,Year Ended December 31, 2012 Compared to Year Ended December 31, 2011
Assets Under Management
The following table reflects changes in our AUM for the FASB issued ASU 2010-10,Consolidation (Topic 810)years ended December 31, 2012 and 2011: Amendments
 Year Ended December 31, 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 inflows3,327.8
 4,456.3
 (1,128.5) (25)%
Gross client outflows(4,399.2) (3,496.2) (903.0) 26 %
Market appreciation (depreciation)3,096.9
 (1,237.1) 4,334.0
 350 %
Ending assets under management$24,683.6
 $22,658.1
 $2,025.5
 9 %
Mutual funds and collective investment trusts       
Beginning assets under management$17,542.0
 $15,906.6
 $1,635.4
 10 %
Gross client inflows6,172.0
 9,328.4
 (3,156.4) (34)%
Gross client outflows(5,858.3) (5,578.3) (280.0) 5 %
Market appreciation (depreciation)2,669.6
 (2,114.7) 4,784.3
 226 %
Ending assets under management$20,525.3
 $17,542.0
 $2,983.3
 17 %
Total assets under management       
Beginning assets under management$40,200.1
 $38,841.7
 $1,358.4
 3 %
Gross client inflows9,499.8
 13,784.7
 (4,284.9) (31)%
Gross client outflows(10,257.5) (9,074.5) (1,183.0) 13 %
Market appreciation (depreciation)5,766.5
 (3,351.8) 9,118.3
 272 %
Ending assets under management$45,208.9
 $40,200.1
 $5,008.8
 12 %
Our total AUM increased by $5.0 billion, or 12%, to $45.2 billion as of December 31, 2012 from $40.2 billion as of December 31, 2011. Compared to the twelve months ended December 31, 2011, gross client inflows decreased by $4.3 billion for Certain Investment Fundsthe twelve months ended December 31, 2012, while gross client outflows increased by $1.2 billion over the same period. Additionally, we experienced market appreciation of $5.8 billion for the twelve months ended December 31, 2012, compared to market depreciation of $3.4 billion for the twelve months ended December 31, 2011.
Of the $5.0 billion increase in our total AUM from December 31, 2011 to December 31, 2012, $5.8 billion came from investment gains during the period, which was partially offset by net client outflows of $0.8 billion. Our net client outflows were comprised of separate accounts net client outflows of $1.1 billion, primarily caused by withdrawals from existing client accounts, offset by $0.3 billion of net client inflows to our mutual funds and collective investment trusts. The annualized separate account retention rate was approximately 95% for the twelve months ended December 31, 2012.
Market appreciation during the year ended December 31, 2012 constituted a 14.3% rate of increase in our total AUM. The investment gain was 13.7% in separately managed accounts and 15.2% in mutual funds and collective investment trusts.
The rates of change in AUM during the year ended December 31, 2012 were most significant in our blended asset and equity portfolios, with both portfolios increasing 13% each, while our fixed income portfolio remained generally flat.
As of December 31, 2012, the composition of our AUM was 45% in mutual funds and collective investment trusts and 55% in separate accounts as compared to 44% in mutual funds and collective investment trusts and 56% in separate accounts as of December 31, 2011.
The following table sets forth our results of operations for the years ended December 31, 2012 and 2011:

37




 Year Ended December 31, Period-to-Period
Statements of operations data:2012 2011 $ %
 (in thousands, except share data)  
Revenues       
Investment management services revenue$339,055
 $329,992
 $9,063
 3 %
Expenses       
Compensation and related costs165,698
 305,957
 (140,259) (46)%
Sub-transfer agent and shareholder service costs51,206
 49,115
 2,091
 4 %
Other operating costs38,031
 33,704
 4,327
 13 %
Total operating expenses254,935
 388,776
 (133,841) (34)%
Operating income (loss)84,120
 (58,784) 142,904
 243 %
Non-operating income (loss)       
Interest expense on shares subject to mandatory redemption
 (45,833) 45,833
 (100)%
Other non-operating gain459
 183
 276
 151 %
Total non-operating income (loss)459
 (45,650) 46,109
 101 %
Income (loss) before provision for income taxes84,579
 (104,434) 189,013
 181 %
Provision for income taxes8,160
 1,982
 6,178
 312 %
Net income (loss) attributable to controlling and noncontrolling interests76,419
 (106,416) 182,835
 172 %
Less: net income (loss) attributable to noncontrolling interests73,950
 (79,249) 153,199
 193 %
Net income (loss) attributable to Manning & Napier, Inc.$2,469
 $(27,167) $29,636
 109 %
Per Share Data       
Net income (loss) available to Class A common stock per basic and diluted share$0.18
 $(2.11)    
Weighted average basic and diluted shares of Class A common stock outstanding.13,583,873
 12,894,136
    
        
Other financial and operating data       
Economic income (1)
$156,853
 $156,723
 $130
  %
Economic net income (1)
$96,857
 $96,776
 $81
  %
Economic net income per adjusted share (1)
$1.08
 $1.08
 $
  %
________________________
(1)See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Supplemental Non-GAAP Financial Information” for Manning & Napier’s reasons for including these non-GAAP measures in this report in addition to a reconciliation of non-GAAP financial measures to GAAP measures for the periods indicated.
Revenues
Our investment management services revenue increased by $9.1 million, or 3%, to $339.1 million for the year ended December 31, 2012 from $330.0 million for the year ended December 31, 2011. This increase was driven primarily by a $1.4 billion or 3%, increase in our average AUM to $43.6 billion for the year ended December 31, 2012 from $42.2 billion for the year ended December 31, 2011.
Our average separately managed account fee remained consistent at 62 basis points for each of the years ending December 31, 2012 and December 31, 2011. For the years ended December 31, 2012 and 2011, separately managed account standard fees ranged from 15 basis points to 125 basis points. As of December 31, 2012, the concentration of investments in our separately managed account assets was 46% blended assets, 49% equity and 5% fixed income, compared to 47% blended assets, 47% equity and 6% fixed income as of December 31, 2011.
Our average fee on mutual fund and collective investment trust products decreased to 89 basis points for the year ended December 31, 2012 from 92 basis points for the year ended December 31, 2011. This decrease was primarily due to a shift in the mix of our AUM from higher fee mutual fund and collective investments trusts to those with lower fees. The management

38




fees earned on our mutual funds and collective investment trusts ranged from 34 basis points to 100 basis points for the years ending December 31, 2012 and 2011.
Operating Expenses
Our operating expenses decreased by $133.8 million, or 34%, to $254.9 million for the year ended December 31, 2012 from $388.8 million for the year ended December 31, 2011.
Compensation and related costs decreased by $140.3 million, or 46%, to $165.7 million for the year ended December 31, 2012 from $306.0 million for the year ended December 31, 2011. This decrease was primarily attributable to a decrease in non-cash reorganization-related share-based compensation charge of $143.1 million, resulting from a $213.0 million one-time non-cash compensation charge related to the Class B Units of M&N Group Holdings granted to William Manning in the year ended December 31, 2011 offset by current year non-cash compensation charges of $72.3 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 year ended December 31, 2012 from 27% for the year ended December 31, 2011. The amendmentsincrease in compensation and related costs is primarily attributed to an investment in personnel related to distribution and infrastructure during the twelve months ended December 31, 2012.
Sub-transfer agent and shareholder service costs increased by $2.1 million, or 4%, to $51.2 million for the year ended December 31, 2012 from $49.1 million for the year ended December 31, 2011. The increase was generally attributable to a 7% increase in mutual funds and collective investment trusts average AUM for the year ended December 31, 2012 compared to December 31, 2011. As a percentage of mutual fund and collective investment trust revenue, sub-transfer agent and shareholder service fees increased slightly to 30% for the year ended December 31, 2012 from 29% for the year ended December 31, 2011.
Other operating costs increased by $4.3 million, or 13%, to $38.0 million for the year ended December 31, 2012 from $33.7 million for the year ended December 31, 2011. The increase was primarily attributable to higher asset-based costs including 12b-1 distribution and servicing fees and fund fee waiver and/or expense reimbursements resulting from an increase in mutual fund AUM.
Non-Operating Income (Loss)
Non-operating income increased by $46.1 million, or 101%, to $0.5 million for the year ended December 31, 2012 from a loss of $45.7 million for the year ended December 31, 2011. The increase was due to the consolidation requirementsdecrease in non-cash interest expense on shares subject to mandatory redemption. Non-cash interest expense on shares subject to mandatory redemption decreased due to the termination of Topic 810the mandatory redemption obligation upon the consummation of the initial public offering and we no longer reflect non-cash interest expense or the related liability as of December 31, 2012.
Provision for Income Taxes
The Company’s tax provision increased by $6.2 million, or 312%, to $8.2 million for the year ended December 31, 2012 from $2.0 million for the year ended December 31, 2011. The increase is primarily driven by our reorganization and, following the initial public offering, an increase in the provision for income taxes as a result of a full year of our C-Corporation status. For a majority of the year ended December 31, 2011, the Company operated primarily as a series of flow-through entities which are deferred for a reporting entity’s interest in an entity (1) that has all the attributesgenerally not subject to U.S. federal or most state and local income tax.

39



Table of an investment company or (2) for which it is industry practice to apply measurement principles for financial reporting purposes that are consistent with those followed by investment companies. ASU 2010-10 became effective for us on January 1, 2010 and there was no impact on our combined consolidated financial statements and related disclosures.

In January 2010, the FASB issued ASU 2010-06,Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements, which requires entities to make new disclosures about recurring or nonrecurring fair-value measurements and provides clarification of existing disclosure requirements. This amendment requires separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements. This amendment is effective for fiscal years beginning after December 15, 2010. The adoption did not have a material impact on the our combined consolidated financial statements and related disclosures.

Contents


Year Ended December 31, 2011 Compared to Year Ended December 31, 2010

Assets Under Management

The following table reflects changes in our AUM for the years ended December 31, 2011 and 2010:

   Year Ended December 31,  Period-to-Period 
   2011  2010  $  % 
   (dollars in millions) 

Separately managed accounts

     

Beginning assets under management

  $22,935.1   $17,234.2   $5,700.9    33

Gross client inflows

   4,456.3    5,237.7    (781.4  (15%) 

Gross client outflows

   (3,496.2  (2,213.5  (1,282.7  58

Market appreciation (depreciation)

   (1,237.1  2,676.7    (3,913.8  (146%) 
  

 

 

  

 

 

  

 

 

  

Ending assets under management

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

 

 

  

 

 

  

 

 

  

Mutual funds and collective investment trusts

     

Beginning assets under management

  $15,906.6   $11,037.1    4,869.5    44

Gross client inflows

   9,328.4    7,310.7    2,017.7    28

Gross client outflows

   (5,578.3  (3,870.4  (1,707.9  44

Market appreciation (depreciation)

   (2,114.7  1,429.2    (3,543.9  (248%) 
  

 

 

  

 

 

  

 

 

  

Ending assets under management

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

 

 

  

 

 

  

 

 

  

Total assets under management

     

Beginning assets under management

  $38,841.7   $28,271.3    10,570.4    37

Gross client inflows

   13,784.7    12,548.4    1,236.3    10

Gross client outflows

   (9,074.5  (6,083.9  (2,990.6  49

Market appreciation (depreciation)

   (3,351.8  4,105.9    (7,457.7  (182%) 
  

 

 

  

 

 

  

 

 

  

Ending assets under management

  $40,200.1   $38,841.7   $1,358.4    4
  

 

 

  

 

 

  

 

 

  

 Year Ended December 31, Period-to-Period
 2011 2010 $ %
Separately managed accounts(in millions)  
Beginning assets under management$22,935.1
 $17,234.2
 $5,700.9
 33 %
Gross client inflows4,456.3
 5,237.7
 (781.4) (15)%
Gross client outflows(3,496.2) (2,213.5) (1,282.7) 58 %
Market appreciation (depreciation)(1,237.1) 2,676.7
 (3,913.8) (146)%
Ending assets under management$22,658.1
 $22,935.1
 $(277.0) (1)%
Mutual funds and collective investment trusts       
Beginning assets under management$15,906.6
 $11,037.1
 $4,869.5
 44 %
Gross client inflows9,328.4
 7,310.7
 2,017.7
 28 %
Gross client outflows(5,578.3) (3,870.4) (1,707.9) 44 %
Market appreciation (depreciation)(2,114.7) 1,429.2
 (3,543.9) (248)%
Ending assets under management$17,542.0
 $15,906.6
 $1,635.4
 10 %
Total assets under management       
Beginning assets under management$38,841.7
 $28,271.3
 $10,570.4
 37 %
Gross client inflows13,784.7
 12,548.4
 1,236.3
 10 %
Gross client outflows(9,074.5) (6,083.9) (2,990.6) 49 %
Market appreciation (depreciation)(3,351.8) 4,105.9
 (7,457.7) (182)%
Ending assets under management$40,200.1
 $38,841.7
 $1,358.4
 4 %
Our total AUM increased by $1.4 billion, or 4%, to $40.2 billion as of December 31, 2011 from $38.8 billion as of December 31, 2010. As of December 31, 2011, the composition of our AUM was 44% in mutual funds and collective investment trusts and 56% in separate accounts as compared to 41% in mutual funds and collective investment trusts and 59% in separate accounts as of December 31, 2010. Mutual funds and collective investment trusts AUM increased by 10% as of December 31, 2011 compared to December 31, 2010, while separate account AUM decreased by 1% over the same period. The $1.4 billion increase in total AUM was driven by net client inflows of $4.7 billion, partially offset by market depreciation of $3.4 billion. Of the $4.7 billion net client inflows, $3.8 billion, or 80%, was derived from mutual fund and collective investment trusts and $1.0 billion, or 20%, was derived from separately managed accounts.

Our market depreciation during the year ended December 31, 2011 constituted an 8.6% rate of decrease in our total AUM. The investment loss was 5.4% in separately managed accounts and 13.3% in mutual funds and collective investment trusts, reflecting primarily a difference in the mix of portfolios in the two investment vehicles.

The rates of change in AUM during the year ended December 31, 2011 were generally modest across all of our portfolios. While our blended asset and equity portfolios experienced growth of 5% and 3%, respectively, our fixed income portfolio decreased by 3%.


40



Table of Contents

The following table sets forth our results of operations for the years ended December 31, 2011 and 2010:

   Year Ended December 31,  Period-to-Period 
   2011  2010  $  % 
   (dollars in thousands, except share and per share data) 

Statements of operations data:

     

Revenues

     

Investment management services revenue

  $329,992   $255,472   $74,520    29

Expenses

     

Compensation and related costs

   305,957    78,416    227,541    290

Sub-transfer agent and shareholder service costs

   49,115    36,830    12,285    33

Other operating costs

   33,704    25,284    8,420    33
  

 

 

  

 

 

  

 

 

  

Total operating expenses

   388,776    140,530    248,246    177
  

 

 

  

 

 

  

 

 

  

Operating (loss) income

   (58,784  114,942    (173,726  (151%) 
  

 

 

  

 

 

  

 

 

  

Non-operating loss

     

Interest expense on shares subject to mandatory redemption

   (45,833  (61,243  15,410    (25%) 

Other non-operating gain

   183    111    72    65
  

 

 

  

 

 

  

 

 

  

Total non-operating loss

   (45,650  (61,132  15,482    (25%) 
  

 

 

  

 

 

  

 

 

  

(Loss) income before provision for income taxes

   (104,434  53,810    (158,244  (294%) 

Provision for income taxes

   1,982    712    1,270    178
  

 

 

  

 

 

  

 

 

  

Net (loss) income attributable to controlling and noncontrolling interests

   (106,416  53,098    (159,514  (300%) 

Less: net (loss) income attributable to noncontrolling interests

   (79,249  53,098    (132,347  (249%) 
  

 

 

  

 

 

  

 

 

  

Net loss attributable to Manning & Napier, Inc.

  $(27,167   
  

 

 

    

Per Share Data

     

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

  $(2.11   
  

 

 

    

Weighted average basic and dilute shares of Class A common stock outstanding.

   12,894,136     
  

 

 

    

 Year Ended December 31, Period-to-Period
Statements of operations data:2011 2010 $ %
 (in thousands, except share data)  
Revenues       
Investment management services revenue$329,992
 $255,472
 $74,520
 29 %
Expenses       
Compensation and related costs305,957
 78,416
 227,541
 290 %
Sub-transfer agent and shareholder service costs49,115
 36,830
 12,285
 33 %
Other operating costs33,704
 25,284
 8,420
 33 %
Total operating expenses388,776
 140,530
 248,246
 177 %
Operating (loss) income(58,784) 114,942
 (173,726) (151)%
Non-operating loss       
Interest expense on shares subject to mandatory redemption(45,833) (61,243) 15,410
 (25)%
Other non-operating gain183
 111
 72
 65 %
Total non-operating loss(45,650) (61,132) 15,482
 (25)%
(Loss) income before provision for income taxes(104,434) 53,810
 (158,244) (294)%
Provision for income taxes1,982
 712
 1,270
 178 %
Net (loss) income attributable to controlling and noncontrolling interests(106,416) 53,098
 (159,514) (300)%
Less: net (loss) income attributable to noncontrolling interests(79,249) 53,098
 (132,347) (249)%
Net loss attributable to Manning & Napier, Inc.$(27,167) $
 (27,167) (100)%
Per Share Data       
Net loss available to Class A common stock per basic and diluted share$(2.11)      
Weighted average basic and dilute shares of Class A common stock outstanding.12,894,136
      
        
Other financial and operating data       
Economic income (1)
$156,723
 $115,053
 $41,670
 36 %
Economic net income (1)
$96,776
 $71,045
 $25,731
 36 %
Economic net income per adjusted share (1)
$1.08
 N/A
    
________________________
(1)See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Supplemental Non-GAAP Financial Information” for Manning & Napier’s reasons for including these non-GAAP measures in this report in addition to a reconciliation of non-GAAP financial measures to GAAP measures for the periods indicated.
Revenues

Our investment management services revenue increased by $74.5 million, or 29%, to $330.0 million for the year ended December 31, 2011 from $255.5 million for the year ended December 31, 2010. This increase was driven primarily by a $9.8 billion, or 30%, increase in our average AUM to $42.2 billion for the year ended December 31, 2011 from $32.3 billion for the year ended December 31, 2010.

Our average separately managed account fee decreased slightly to 62 basis points for the year ended December 31, 2011 from 63 basis points for the year ended December 31, 2010. This is a result of higher average account sizes in our separately managed accounts. For the year ended December 31, 2011 and 2010, separately managed account standard fees ranged from 15 basis points to 125 basis points, which was consistent with prior periods. As of December 31, 2011, the concentration of investments in our separately managed account assets

was 47% blended assets, 47% equity and 6% fixed income, compared to 46% blended assets, 48% equity and 6% fixed income as of December 31, 2010.


41



Table of Contents

Our average fee on mutual fund and collective investment trust products decreased slightly to 92 basis points for the year ended December 31, 2011 from 93 basis points for the year ended December 31, 2010. The management fees earned on our mutual funds and collective investment trusts ranged from 45 basis points to 100 basis points for both the year ended December 31, 2011 and 2010, consistent with prior periods.

Operating Expenses

Our operating expenses increased by $248.2 million, or 177%, to $388.8 million for the year ended December 31, 2011 from $140.5 million for the year ended December 31, 2010.

Compensation and related costs increased by $227.5 million, or 290%, to $306.0 million for the year ended December 31, 2011 from $78.4 million for the year ended December 31, 2010. This increase was primarily attributable to a non-cash reorganization-related share-based compensation charge of $215.3 million, of which $213.0 million was a one-time non-cash compensation charge related to the Class B Units of M&N Group Holdings granted to William Manning. Further, we experienced a 17% increase in headcount to 471 employees as of December 31, 2011 from 404 as of December 31, 2010. When considered as a percentage of revenue, compensation and related costs excluding non-cash reorganization-related share-based compensation charges decreased to 27% for the year ended December 31, 2011 from 31% for the year ended December 31, 2010. This decrease in compensation as a percentage of revenue resulted from incentive compensation growing at a slower rate in 2011 compared to 2010 because of a reduction in net client inflows and market depreciation during the second half of 2011.

Sub-transfer agent and shareholder service costs increased by $12.3 million, or 33%, to $49.1 million for the year ended December 31, 2011 from $36.8 million for the year ended December 31, 2010. The increase was generally attributable to a 40% increase in mutual funds and collective investment trusts average AUM for the year ended December 31, 2011 compared to December 31, 2010. As a percentage of mutual fund and collective investment trust revenue, sub-transfer agent and shareholder service fees decreased slightly to 29% for the year ended December 31, 2011 from 30% for the year ended December 31, 2010.

Other operating costs increased by $8.4 million, or 33%, to $33.7 million for the year ended December 31, 2011 from $25.3 million for the year ended December 31, 2010. The increase was primarily attributable to professional services fees associated with ourthe initial public offering consummated during the year ended December 31, 2011, as well as higher 12b-1 distribution and servicing fees resulting from an increase in mutual fund AUM.

Non-Operating Income (Loss)

Loss

Non-operating loss decreased by $15.5 million, or 25%, to $45.7 million for the year ended December 31, 2011 from $61.1 million for the year ended December 31, 2010. The decrease was due to the decrease in non-cash interest expense on shares subject to mandatory redemption. Non-cash interest expense on shares subject to mandatory redemption decreased because the mandatory redemption obligation terminated upon the consummation of ourthe initial public offering and we no longer reflect non-cash interest expense or the related liability as of December 31, 2011.

Provision for Income Taxes

The Company’s tax provision increased by $1.3 million, or 178%, to $2.0 million for the year ended December 31, 2011 from $0.7 million for the year ended December 31, 2010. The increase is primarily driven by the Company’s reorganization and the C-Corporation taxes resulting from the incorporation of the Company during 2011. For the year ended December 31, 2010, 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.

Year Ended December 31, 2010 Compared to Year Ended December 31, 2009

Assets Under Management

The following table reflects changes in our AUM for the years ended December 31, 2010 and 2009:

   Year Ended December 31,  Period-to-Period 
   2010  2009  $  % 
   (dollars in millions) 

Separately managed accounts

     

Beginning assets under management

  $17,234.2   $11,718.8   $5,515.4    47

Gross client inflows

   5,237.7    4,093.7    1,144.0    28

Gross client outflows

   (2,213.5  (1,935.1  (278.4  14

Market appreciation

   2,676.7    3,356.8    (680.1  (20%) 
  

 

 

  

 

 

  

 

 

  

Ending assets under management

  $22,935.1   $17,234.2   $5,700.9    33
  

 

 

  

 

 

  

 

 

  

Mutual funds and collective investment trusts

     

Beginning assets under management

  $11,037.1   $4,512.6   $6,524.5    145

Net client flows

   3,440.3    4,540.3    (1,100.0  (24%) 

Market appreciation

   1,429.2    1,984.2    (555.0  (28%) 
  

 

 

  

 

 

  

 

 

  

Ending assets under management

  $15,906.6   $11,037.1   $4,869.5    44
  

 

 

  

 

 

  

 

 

  

Total assets under management

     

Beginning assets under management

  $28,271.3   $16,231.4   $12,039.9    74

Gross separately managed accounts client inflows

   5,237.7    4,093.7    1,144.0    28

Gross separately managed accounts client outflows

   (2,213.5  (1,935.1  (278.4  14

Net mutual funds and collective investment trusts client flows

   3,440.3    4,540.3    (1,100.0  (24%) 

Market appreciation

   4,105.9    5,341.0    (1,235.1  (23%) 
  

 

 

  

 

 

  

 

 

  

Ending assets under management

  $38,841.7   $28,271.3   $10,570.4    37
  

 

 

  

 

 

  

 

 

  

Our total AUM increased by $10.6 billion, or 37%, to $38.8 billion as of December 31, 2010 from $28.3 billion as of December 31, 2009. As of December 31, 2010, the composition of our AUM was 41% in mutual funds and collective investment trusts and 59% in separate accounts as compared to 39% in mutual funds and collective investment trusts and 61% in separate accounts as of December 31, 2009. Of the total $10.6 billion increase in AUM, 61% was driven by net new client flows of $6.5 billion, primarily due to inflows from new and existing financial intermediary relationships. Of the $6.5 billion net new client flows, $3.4 billion, or 54%, was derived from mutual funds and collective investment trusts and 46% from separately managed accounts; 39% of the increase in our total AUM in 2010 came from investment gains.

Our market appreciation during the year ended December 31, 2010 constituted a 14.5% rate of increase in our total AUM compared to the year ended December 31, 2009. The investment gain was 15.5% in separately managed accounts and 12.9% in mutual funds and collective investment trusts, reflecting primarily a difference in the mix of portfolios in the two investment vehicles.

The rates of increase in AUM during the year ended December 31, 2010 were most rapid, in excess of 50%, for our equity portfolios. The blended asset portfolios also experienced strong growth of 24%. Equity portfolios contributed 68% of our total increase in AUM as of December 31, 2010 compared to December 31, 2009, while blended asset portfolios contributed 32% of our total increase in AUM as of December 31, 2010 compared to December 31, 2009.

The following table sets forth our results of operations for the years ended December 31, 2010 and 2009:

   

Year Ended December 31,

  Period-to-Period 
   2010  2009  Amount  % 
   (dollars in thousands) 

Statements of operations data:

     

Revenues

     

Investment management services revenue

  $255,472   $162,660   $92,812    57

Expenses

     

Compensation and related costs

   78,416    55,643    22,773    41

Sub-transfer agent and shareholder service costs

   36,830    19,853    16,977    86

Other operating costs

   25,284    22,252    3,032    14
  

 

 

  

 

 

  

 

 

  

Total operating expenses

   140,530    97,748    42,782    44
  

 

 

  

 

 

  

 

 

  

Operating income

   114,942    64,912    50,030    77
  

 

 

  

 

 

  

 

 

  

Non-operating loss

     

Interest expense on shares subject to mandatory redemption (1)

   (61,243  (9,991  (51,252  513

Other non-operating gain (loss)

   111    (136  247    (182%) 
  

 

 

  

 

 

  

 

 

  

Total non-operating loss

   (61,132  (10,127  (51,005  504
  

 

 

  

 

 

  

 

 

  

Income before provision for income taxes

   53,810    54,785    (975  (2%) 

Provision for income taxes

   712    360    352    98
  

 

 

  

 

 

  

 

 

  

Net income attributable to controlling and noncontrolling interests

   53,098   $54,425   $(1,327  (2%) 

Less: net income attributable to noncontrolling interests

   53,098   $54,425   $(1,327  (2%) 
  

 

 

  

 

 

  

 

 

  

Net income attributable to Manning & Napier,
Inc
.

  $—     $—     $—      —    
  

 

 

  

 

 

  

 

 

  

Revenues

Our investment management services revenue increased by $92.8 million, or 57%, to $255.5 million as of December 31, 2010 from $162.7 million as of December 31, 2009. This increase was attributable to an $11.7 billion, or 57%, increase in our average AUM to $32.3 billion for the year ended December 31, 2010 from $20.6 billion for the year ended December 31, 2009.

Our average separately managed account fee decreased to 63 basis points for the year ended December 31, 2010 from 65 basis points for the year ended December 31, 2009. This is a result of lower fee tiers in our separately managed accounts resulting from higher average separately managed account sizes triggered by market appreciation and new separately managed account clients. For the years ended December 31, 2010 and 2009, separately managed account standard fees ranged from 15 basis points to 125 basis points, which was consistent with prior periods. For the year ended December 31, 2010, the concentration of investments in our assets was 46% blended assets, 48% equity and 6% fixed income, compared to 55% blended assets, 38% equity and 7% fixed income for the year ended December 31, 2009.

Our average fee on mutual fund and collective investment trust products remained consistent at approximately 93 basis points for the years ended December 31, 2010 and 2009. The management fees earned on our mutual funds and collective investment trusts ranged from 45 basis points to 100 basis points for both the years ended December 31, 2010 and 2009, consistent with prior periods.

Operating Expenses

Total operating expenses increased by $42.8 million, or 44%, to $140.5 million for the year ended December 31, 2010 from $97.7 million for the year ended December 31, 2009. This increase was driven primarily by increases in compensation and sub-transfer agent and shareholder service fees.

Compensation and related costs increased by $22.8 million, or 41%, to $78.4 million for the year ended December 31, 2010 from $55.6 million for the year ended December 31, 2009. The 41% increase was driven in large part by higher incentive compensation due to analyst bonuses and sales representative commissions, as well as from increases in overall firm-wide headcount of 7.2%, to 404 as of December 31, 2010 from 377 as of December 31, 2009. As a percentage of revenue, however, compensation and related costs decreased to 31% for the year ended December 31, 2010 from 34% for the year ended December 31, 2009 because we continued to increase headcount during 2009 despite the fact that the pace of revenue growth slowed as a result of the economic downturn at the end of 2008.

Sub-transfer agent and shareholder service fees increased by $16.9 million, or 86%, to $36.8 million for the year ended December 31, 2010 from $19.9 million for the year ended December 31, 2009. The increase was generally attributable to an 88% increase in mutual funds and collective investment trusts average AUM for the year ended December 31, 2010 compared to December 31, 2009. As a percentage of mutual fund and collective investment trust revenue, sub-transfer agent and shareholder service fees remained stable at 30% for the years ended December 31, 2010 and 2009.

Non-Operating Income (Loss)

Non-operating loss increased by $51.0 million, or 504%, to $61.1 million for the year ended December 31, 2010 from $10.1 million for the year ended December 31, 2009. The increase was primarily due to the increase in non-cash interest expense on the shares subject to mandatory redemption. Non-cash interest expense on shares subject to mandatory redemption increased because the period-to-period change in the liability from December 31, 2009 to December 31, 2010 was greater than the period-to-period change in the liability from December 31, 2008 to December 31, 2009. This liability is calculated based on the last four quarters of net revenue pursuant to the terms of an agreement with William Manning described elsewhere in this report, and we have recognized non-cash interest expense related to the period-to-period change in the amount of the liability for shares subject to mandatory redemption.

Provision for Income Taxes

Provision for income taxes increased by $0.3 million, or 98%, to $0.7 million for the year ended December 31, 2010 from $0.4 million for the year ended December 31, 2009. The increase was primarily due to a 77% increase in operating income for the year ended December 31, 2010 compared to the year ended December 31, 2009.

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, the Company supplements its 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 combined consolidated financial statements non-cash interest expense or the liability related to such obligation; and

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 ourthe initial public offering, the vesting terms related to the ownership of our employees were modified, including our named executive officers, other than William Manning.


42



Table of Contents

Such individuals were entitled to 15% of their pre-IPO ownership interests upon the consummation of ourthe initial public offering, and 15% of their pre-IPO 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 outstandingexchangeable units of Manning & Napier Group are converted into our outstanding Class A common stock as of December 31, 2011,2012, 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.

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 used 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 years ended December 31, 20112012 and 2010:

   Year Ended December 31,   Period-to-Period 
   2011   2010   $   % 
   (dollars in thousands, except share and per share data) 

Other financial and operating data

        

Economic income (1).

  $156,723    $115,053    $41,670     36
  

 

 

   

 

 

   

 

 

   

Economic net income (1).

  $96,776    $71,045    $25,731     36
  

 

 

   

 

 

   

 

 

   

Economic net income per adjusted share (1)

  $1.08        
  

 

 

       

(1)See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Supplemental Non-GAAP Financial Information” for Manning & Napier’s reasons for including these non-GAAP measures in this report. The following table sets forth, for the periods indicated, a reconciliation of non-GAAP financial measures to GAAP measures:

  Year Ended December 31,   Period-to-Period 
  2011  2010   $  % 
(dollars in thousands, except share and per share data) 

Reconciliation of non-GAAP financial measures:

     

Net loss attributable to Manning & Napier, Inc.

 $(27,167 $—      $(27,167  —    

Plus: net (loss) income attributable to noncontrolling interests

  (79,249  53,098     (132,347  (249)% 
 

 

 

  

 

 

   

 

 

  

Net (loss) income attributable to controlling and noncontrolling interests

  (106,416  53,098     (159,514  (300)% 

Provision for income taxes

  1,982    712     1,270    178
 

 

 

  

 

 

   

 

 

  

(Loss) income before provision for income taxes

  (104,434  53,810     (158,244  (294)% 

Interest expense on shares subject to mandatory redemption

  45,833    61,243     (15,410  (25)% 

Reorganization-related share-based compensation

  215,324    —       215,324    —    
 

 

 

  

 

 

   

 

 

  

Economic income

  156,723    115,053     41,670    36

Adjusted income taxes

  59,947    44,008     15,939    36
 

 

 

  

 

 

   

 

 

  

Economic net income

 $96,776   $71,045    $25,731    36
 

 

 

  

 

 

   

 

 

  

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

  (2.11    

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

  (6.14    
 

 

 

     

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

  (8.25    

Provision for income taxes per basic and diluted share

  0.15      
 

 

 

     

Loss (income) before provision for income taxes per basic and diluted share

  (8.10    

Interest expense on shares subject to mandatory redemption per basic and diluted share

  3.55      

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

  16.70      
 

 

 

     

Economic income per basic and diluted share

  12.15      

Adjusted income taxes per basic and diluted share

  4.65      
 

 

 

     

Economic net income per basic and diluted share

  7.50      

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

  (6.42    
 

 

 

     

Economic net income per adjusted share

 $1.08      
 

 

 

     

Total basic and diluted shares of Class A common stock outstanding

  13,583,873      

Total units of Manning & Napier Group, LLC

  76,400,000      
 

 

 

     

Total adjusted Class A common stock outstanding

  89,983,873      
 

 

 

     

2011:

 Year Ended December 31, Period-to-Period
Other financial and operating data:2012 2011 $ %
 (in thousands, except share data)
Economic income$156,853
 $156,723
 $130
 %
Economic net income$96,857
 $96,776
 $81
 %
Economic net income per adjusted share$1.08
 $1.08
 $
 %


43



Table of Contents

The following table sets forth, for the periods indicated, a reconciliation of non-GAAP financial measures to GAAP measures:
 Year Ended December 31, Period-to-Period
Reconciliation of non-GAAP financial measures:2012 2011 $ %
 (in thousands, except share data)  
Net income (loss) attributable to Manning & Napier, Inc.$2,469
 $(27,167) $29,636
 109 %
Plus: net income (loss) attributable to noncontrolling interests73,950
 (79,249) 153,199
 193 %
Net income (loss) attributable to controlling and noncontrolling interests76,419
 (106,416) 182,835
 172 %
Provision for income taxes8,160
 1,982
 6,178
 312 %
Income (loss) before provision for income taxes84,579
 (104,434) 189,013
 181 %
Interest expense on shares subject to mandatory redemption
 45,833
 (45,833) (100)%
Reorganization-related share-based compensation72,274
 215,324
 (143,050) (66)%
Economic income156,853
 156,723
 130
  %
Adjusted income taxes59,996
 59,947
 49
  %
Economic net income$96,857
 $96,776
 $81
  %
Net income (loss) available to Class A common stock per basic share$0.18
 $(2.11)    
Plus: net income (loss) attributable to noncontrolling interests per basic share5.45
 (6.14)    
Net income (loss) attributable to controlling and noncontrolling interests per basic share5.63
 (8.25)    
Provision for income taxes per basic share0.60
 0.15
    
Income (loss) before provision for income taxes per basic share6.23
 (8.10)    
Interest expense on shares subject to mandatory redemption per basic share
 3.55
    
Reorganization-related share-based compensation per basic share5.32
 16.70
    
Economic income per basic share11.55
 12.15
    
Adjusted income taxes per basic share4.42
 4.65
    
Economic net income per basic share7.13
 7.50
    
Less: Impact of Manning & Napier Group, LLC units converted to publicly traded shares(6.05) (6.42)    
Economic net income per adjusted share$1.08
 $1.08
    
Total basic shares of Class A common stock outstanding13,583,873
 13,583,873
    
Total units of Manning & Napier Group, LLC76,400,000
 76,400,000
    
Total adjusted Class A common stock outstanding89,983,873
 89,983,873
    
The following table sets forth our results of our other financial and operating data for the years ended December 31, 20102011 and 2009:

   

Year Ended December 31,

   Period-to-Period 
   2010   2009   Amount   % 
   (dollars in thousands) 

Other financial and operating data

        

Economic income (1)

  $115,053    $64,776    $50,277     78
  

 

 

   

 

 

   

 

 

   

Economic net income (1)

  $71,045    $39,999    $31,046     78
  

 

 

   

 

 

   

 

 

   

(1)See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Supplemental Non-GAAP Financial Information” for Manning & Napier’s reasons for including these non-GAAP measures in this report. 2010:
 Year Ended December 31, Period-to-Period
Other financial and operating data:2011 2010 $ %
 (in thousands, except share data)  
Economic income$156,723
 $115,053
 $41,670
 36%
Economic net income$96,776
 $71,045
 $25,731
 36%
Economic net income per adjusted share$1.08
 N/A
    


44




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

   

Year Ended December 31,

   Period-to-Period 
       2010           2009           Amount          %     
   (dollars in thousands) 

Reconciliation of non-GAAP financial measures:

       

Net (loss) income attributable to Manning & Napier, Inc.

   —       —       —     

Plus: net income attributable to noncontrolling interests

   53,098     54,425     (1,327  (2)% 
  

 

 

   

 

 

   

 

 

  

 

 

 

Net income attributable to controlling and noncontrolling interests

   53,098     54,425     (1,327  (2)% 

Provision for income taxes

   712     360     352    98
  

 

 

   

 

 

   

 

 

  

Income before provision for income taxes

   53,810     54,785     (975  (2)% 

Interest expense on shares subject to mandatory redemption

   61,243     9,991     51,252    513

Reorganization-related share-based compensation

   —       —       —     
  

 

 

   

 

 

   

 

 

  

Economic income

   115,053     64,776     50,277    78

Adjusted income taxes

   44,008     24,777     19,231    78
  

 

 

   

 

 

   

 

 

  

Economic net income

  $71,045    $39,999    $31,046    78
  

 

 

   

 

 

   

 

 

  

Quarterly Results

The following tables set forth selected unaudited combined consolidated quarterly results of operations data and selected consolidated operating data for the eight quarters ended December 31, 2011. This unaudited information has been prepared on substantially the same basis as our audited combined consolidated financial statements and includes all adjustments consisting only of normal recurring adjustments, necessary to a fair statement of the consolidated results of operations and selected combined consolidated operating data for the periods presented therein. The unaudited combined consolidated quarterly data should be read together with the combined consolidatedindicated, a reconciliation of non-GAAP financial statements and related notes included elsewhere in this report. The results for any quarter are not necessarily indicative of results for any future period and you should not rely on them as such. Changesmeasures to our operating results from one period to another are primarily caused by changes in the value of our AUM, which increase or decrease with the net inflows or outflows of cash into our various investment strategies and with the investment performance of these strategies.

  Three Months Ended 
  December 31,
2011
  September 30,
2011
  June 30,
2011
  March 31,
2011
  December 31,
2010
  September 30,
2010
  June 30,
2010
  March 31,
2010
 
  

(unaudited)

(dollars in thousands)

 

Statements of operations data:

        

Investment management services revenue

 $80,358   $85,789   $85,805   $78,040   $73,463   $63,249   $61,550   $57,210  

Expenses

        

Compensation and related costs

  235,113    20,890    27,061    22,894    23,298    19,740    18,603    16,775  

Sub-transfer agent and shareholder service costs

  12,255    12,496    12,668    11,695    10,537    9,212    8,583    8,498  

Other operating costs

  8,479    9,300    9,700    6,225    7,078    6,205    6,212    5,789  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total operating expenses

  255,847    42,686    49,429    40,814    40,913    35,157    33,398    31,062  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Operating (loss) income

  (175,489  43,103    36,376    37,226    32,550    28,092    28,152    26,148  

Non-operating loss

        

Interest expense on shares subject to mandatory redemption

  (3,111  (13,339  (16,095  (13,288  (13,590  (13,534  (17,900  (16,219

Other non-operating gains (losses)

  138    192    (155  8    89    15    (3  10  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total non-operating loss

  (2,973  (13,147  (16,250  (13,280  (13,501  (13,519  (17,903  (16,209

(Loss) income before provision for income taxes

  (178,462  29,956    20,126    23,946    19,049    14,573    10,249    9,939  

Provision for income taxes

  1,191    253    253    286    64    229    208    211  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net (loss) income attributable to controlling and noncontrolling interests

 $(179,653 $29,703   $19,873   $23,660   $18,985   $14,344   $10,041   $9,728  

Less: net (loss) income attributable to noncontrolling interest

 $(152,486 $29,703   $19,873   $23,660   $18,985   $14,344   $10,041   $9,728  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net loss attributable to Manning & Napier, Inc.

 $(27,167 $—     $—     $—     $—     $—     $—     $—    
 

 

 

        

Other financial and operating data

        

Economic income (1)

 $39,973   $43,295   $36,221   $37,234   $32,639   $28,107   $28,149   $26,158  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Economic net income (1)

 $24,684   $26,735   $22,366   $22,992   $20,155   $17,356   $17,382   $16,153  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

(1)Economic income and economic net income are not financial measures prepared in accordance with GAAP. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Supplemental Non-GAAP Financial Information” for Manning & Napier’s reasons for included these non-GAAP measures in this report. The following table sets forth, for the periods indicated, a reconciliation of non-GAAP financial measures to GAAP measures:

  Three Months Ended 
  December 31,
2011
  September 30,
2011
  June 30,
2011
  March 31,
2011
  December 31,
2010
  September 30,
2010
  June 30,
2010
  March 31,
2010
 
  

(unaudited)

(dollars in thousands)

 

Reconciliation of non-GAAP financial measures:

        

Net (loss) income attributable to Manning & Napier, Inc.

 $(27,167 $—     $—     $—     $—     $—     $—     $—    

Plus: net (loss) income attributable to noncontrolling interests

  (152,486  29,703    19,873    23,660    18,985    14,344    10,041    9,728  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net (loss) income attributable to controlling and noncontrolling interests

  (179,653  29,703    19,873    23,660    18,985    14,344    10,041    9,728  

Provision for income taxes

  1,191    253    253    286    64    229    208    211  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

(Loss) income before provision for income taxes

  (178,462  29,956    20,126    23,946    19,049    14,573    10,249    9,939  

Interest expense on shares subject to mandatory redemption

  3,111    13,339    16,095    13,288    13,590    13,534    17,900    16,219  

Reorganization-related share-based compensation

  215,324    —      —      —      —      —      —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Economic income

  39,973    43,295    36,221    37,234    32,639    28,107    28,149    26,158  

Adjusted income taxes

  15,289    16,560    13,855    14,242    12,484    10,751    10,767    10,005  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Economic net income

 $24,684   $26,735   $22,366   $22,992   $20,155   $17,356   $17,382   $16,153  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total Operating Revenue

  80,358    85,789    85,805    78,040    73,463    63,249    61,550    57,210  

Net (loss) income attributable to controlling and noncontrolling interests margin percentage

  (223.6%)   34.6  23.2  30.3  25.8  22.7  16.3  17.0

Economic income margin percentage

  49.7  50.5  42.2  47.7  44.4  44.4  45.7  45.7

Economic net income margin percentage

  30.7  31.2  26.1  29.5  27.4  27.4  28.2  28.2

GAAP measures:

 Year Ended December 31, Period-to-Period
Reconciliation of non-GAAP financial measures:2011 2010 $ %    
 (in thousands, except share data)  
Net loss attributable to Manning & Napier, Inc.$(27,167) $
 $(27,167) 100 %
Plus: net (loss) income attributable to noncontrolling interests(79,249) 53,098
 (132,347) (249)%
Net (loss) income attributable to controlling and noncontrolling interests(106,416) 53,098
 (159,514) (300)%
Provision for income taxes1,982
 712
 1,270
 178 %
Loss (income) before provision for income taxes(104,434) 53,810
 (158,244) (294)%
Interest expense on shares subject to mandatory redemption45,833
 61,243
 (15,410) (25)%
Reorganization-related share-based compensation215,324
 
 215,324
 100 %
Economic income156,723
 115,053
 41,670
 36 %
Adjusted income taxes59,947
 44,008
 15,939
 36 %
Economic net income$96,776
 $71,045
 $25,731
 36 %
Net loss available to Class A common stock per basic share$(2.11)      
Plus: net loss attributable to noncontrolling interests per basic share(6.14)      
Net loss attributable to controlling and noncontrolling interests per basic share(8.25)      
Provision for income taxes per basic share0.15
      
Loss before provision for income taxes per basic share(8.10)      
Interest expense on shares subject to mandatory redemption per basic share3.55
      
Reorganization-related share-based compensation per basic share16.70
      
Economic income per basic share12.15
      
Adjusted income taxes per basic share4.65
      
Economic net income per basic share7.50
      
Less: Impact of Manning & Napier Group, LLC units converted to publicly traded shares(6.42)      
Economic net income per adjusted share$1.08
      
Total basic shares of Class A common stock outstanding13,583,873
      
Total units of Manning & Napier Group, LLC76,400,000
      
Total adjusted Class A common stock outstanding89,983,873
      
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.

45




The following table sets forth certain key financial data relating to our liquidity and capital resources as of December 31, 2012, 2011 2010 and 2009:

  Year Ended December 31, 
  2011  2010  2009 
  (dollars in thousands) 

Cash and cash equivalents

 $81,208   $27,543   $24,802  

Accounts receivable

 $31,259   $30,799   $21,374  

Amounts payable under tax receivable agreement (1)

 $46,205   $—     $—    

2010:
 Year Ended December 31,
 2012 2011 2010
 (in thousands)
Cash and cash equivalents$108,324
 $81,208
 $27,543
Accounts receivable$36,729
 $31,259
 $30,799
Amounts payable under tax receivable agreement (1)
$45,917
 $46,206
 $
__________________________
(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 the Company’s best estimate as of December 31, 2011,2012, including the Company’s ability to realize the expected tax benefits. Actual payments may significantly differ from estimated payments. See “Critical Accounting Policies – Payments under the Tax Receivable Agreement” for more information.

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 years ended December 31, 2012, 2011 2010 and 2009.2010. Operating activities consist primarily of net income subject to adjustments for changes in operating assets and liabilities, changeequity-based compensation expense, deferred income taxes, depreciation and changes in shares liability subject to mandatory redemption depreciation, and equity-based compensation expense.prior to the initial public offering. Investing activities consist primarily of the purchase and salessale of investments, as well as purchases of property and equipment, as well as the purchase and sale of investments.equipment. Financing activities consist primarily of distributions, dividends paid on our Class A common stock, contributions and net proceeds from ourthe initial public offering.

   Years Ended December 31, 
   2011  2010  2009 
   (in thousands) 

Net cash provided by operating activities

  $153,862   $119,972   $62,779  

Net cash used in investing activities

   (2,028  (2,489  (975

Net cash used in financing activities

   (98,169  (114,742  (60,311
  

 

 

  

 

 

  

 

 

 

Net change in cash flows

  $53,665   $2,741   $1,493  
  

 

 

  

 

 

  

 

 

 

 Years Ended December 31,
 2012 2011 2010
 (in thousands)
Net cash provided by operating activities$152,854
 $153,862
 $119,972
Net cash used in investing activities(10,378) (2,028) (2,489)
Net cash used in financing activities(115,360) (98,169) (114,742)
Net change in cash flows$27,116
 $53,665
 $2,741
Year Ended December 31, 2012 Compared to Year Ended December 31, 2011
Operating Activities
Operating activities provided $152.9 million and $153.9 million of net cash for the years ended December 31, 2012 and 2011, respectively. This decrease in net cash provided by operating activities was driven primarily by a decrease in net income after adjustment for non-cash items of approximately $3.9 million, which was offset by a $2.8 million increase in working capital.
Investing Activities
Investing activities used $10.4 million and $2.0 million of net cash for the years ended December 31, 2012 and 2011, respectively. The increase in net cash used in investing activities was primarily due to a $10.6 million increase in purchases of investments for the year ended December 31, 2012 as compared to the year ended December 31, 2011, driven largely by the seeding of new products. This increase in purchases of investments was partially offset by an increase of $2.3 million in sales of investments for the year ended December 31, 2012 as compared to the year ended December 31, 2011.
Financing Activities
Financing activities used $115.4 million and $98.2 million of net cash for the years ended December 31, 2012 and 2011, respectively. The net cash used in 2012 was due to the $114.6 million in distributions and dividends paid to our shareholders during the year. The increase in net cash used in financing activities for 2012 as compared to 2011 was primarily the result of 2011 cash inflows of $46.6 million from our 2011 initial public offering and $4.0 million from capital contributions prior to our

46




2011 reorganization. In addition, during 2012 Manning & Napier paid $6.5 million in dividends on Class A common stock. This overall increase in cash used for financing activities during 2012 was partially offset by a decrease in distributions of $40.6 million for the year ended December 31, 2012 compared to the year ended December 31, 2011.
Year Ended December 31, 2011 Compared to Year Ended December 31, 2010

Operating Activities

Operating activities provided $153.9 million and $120.0 million of net cash for the years ended December 31, 2011 and 2010, respectively. This increase in net cash provided by operating activities was driven primarily by an increase in net (loss) income after adjustment for non-cash items of approximately $40.2 million, which was offset by a $6.3 million decrease in working capital.

The increase in net income after adjustment for non-cash items was mainly attributable to higher investment management fee revenues resulting from an increase in our average AUM to $42.2 billion for the year ended December 31, 2011 compared to $32.3 billion for the year ended December 31, 2010.

Investing Activities

Investing activities used $2.0 million and $2.5 million of net cash for the years ended December 31, 2011 and 2010, respectively. The decrease in net cash used in investing activities was primarily due to the increase in sales of investments of $1.9 million, partially offset by increases in property and equipment purchases of $0.6 million and purchases of investments of $0.3 million for the year ended December 31, 2011 compared to the year ended December 31, 2010.

Financing Activities

Financing activities used $98.2 million and $114.7 million of net cash for the years ended December 31, 2011 and 2010, respectively. The decrease in net cash used in financing activities was primarily the result of $46.6 million of cash inflows resulting from ourthe initial public offering, which represents net proceeds from the issuance of Class A common stock of $154.4 million less payments of costs directly associated with the issuance of Class A common stock of $2.1 million and the purchase of Class A Units of Manning & Napier Group of $105.7 million. This was partially offset by an increase in distributions of $29.0 million for the year ended December 31, 2011 compared to the year ended December 31, 2010.

Year Ended December 31, 2010 Compared to Year Ended December 31, 2009

Operating Activities

Operating activities provided $120.0 million and $62.8 million of net cash for the years ended December 31, 2010 and 2009, respectively. This increase in net cash flows from operating activities was driven primarily by an

increase in the non-cash interest expense associated with the mandatory redemption liability of $51.3 million for the year ended December 31, 2010 compared to the year ended December 31, 2009, offset by a decrease in net income of $1.3 million for the year ended December 31, 2010 compared to the year ended December 31, 2009. In addition, an increase in accrued expenses and other liabilities of $7.4 million further contributed to the increase in net cash flows from operating activities for the year ended December 31, 2010 compared to the year ended December 31, 2009. Our average AUM increased to $32.3 billion for year ended December 31, 2010 from $20.6 billion for the year ended December 31, 2009, which had a corresponding positive impact on our investment management fee revenue.

Investing Activities

Investing activities used $2.5 million and $1.0 million of net cash for the years ended December 31, 2010 and 2009, respectively. This increase in net cash used in investing activities was primarily due to the increase in the purchase of investment securities of $1.4 million for the year ended December 31, 2010 compared to the year ended December 31, 2009, offset by an increase in proceeds from the maturity of investments of $0.5 million for the year ended December 31, 2010 compared to the year ended December 31, 2009.

Financing Activities

Financing activities used $114.7 million and $60.3 million of net cash for the years ended December 31, 2010 and 2009, respectively. This increase in net cash used in financing activities was primarily the result of an increase in distributions of $55.6 million for the year ended December 31, 2010 compared to the year ended December 31, 2009.

Certain Contractual Obligations

The following table sets forth our contractual obligations as of December 31, 2011:

   Payment Due By Period 

Contractual Obligations

  Less than
1 year
   1-3 years   4-5 years   More than
5 years
   Total 
   (in thousands) 

Operating lease obligations

  $3,383    $6,395    $1,944    $—      $11,722  

Capital lease obligations

   125     107     6     —       238  

Amounts payable under tax receivable agreement (1)

   321     3,880     4,401     37,603     46,205  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $3,829    $10,382    $6,351    $37,603    $58,165  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

2012
:
 Payment Due By Period
Contractual obligations:
Less than
1 year
 1-3 years 4-5 years 
More than
5 years
 Total
 (in thousands)
Operating lease obligations$3,233
 $6,521
 $6,061
 $14,549
 $30,364
Capital lease obligations146
 102
 
 
 248
Amounts payable under tax receivable agreement (1)
1,928
 4,001
 4,774
 35,214
 45,917
Total$5,307
 $10,624
 $10,835
 $49,763
 $76,529
__________________________
(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 the Company’s best estimate as of December 31, 2011,2012, including the Company’s ability to realize the expected tax benefits. Actual payments may significantly differ from estimated payments. See “Critical Accounting Policies – Payments under the Tax Receivable Agreement” for more information.

Off Balance Sheet Arrangements

We did not have any off-balance sheet arrangements as of December 31, 2011.

2012.
Item 7A.Quantitative and Qualitative Disclosures About Market Risk.

Item 7A.     Quantitative and Qualitative Disclosures About Market Risk.
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


47



Table of Contents

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 $40.2$45.2 billion as of December 31, 2011.2012. 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 $4.0approximately $4.5 billion, which would cause an annualized increase or decrease in revenues of approximately $31.5$35.2 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, fixed income securities, and investment in mutual funds, including the Fund for which MNA provides advisory services. The value of these investment securities was $4.6$13.1 million as of December 31, 20112012 of which $4.0$12.5 million is classified as trading, and $0.6$0.6 million is classified as available-for-sale. 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 $0.5 million at December 31, 2011.$1.3 million. 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 $40.2$45.2 billion as of December 31, 2011.2012. As of December 31, 2011,2012, approximately 27%32% 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 27%32% 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 $1.1$1.4 billion, which would cause an annualized increase or decrease in revenues of approximately $8.6$11.3 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 8.         Financial Statements and Supplementary Data.

Our combined consolidated financial statements listed in Item 15 are filed as part of this report on pages F-2 through F-31F-27 and are incorporated by reference in this Item 8.

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

None

None.

Item 9A.     Controls and Procedures.

We maintain

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2012 pursuant to Rule 13a-15 under the Exchange Act. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2012, our disclosure controls and procedures (as defined in Rule 13a-15(e) ofunder the Exchange Act, that are designedAct) were effective to ensure that information we are required to be discloseddisclose in our reports filedthat we file or submittedsubmit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’sSEC rules and forms, and that such information is accumulated

48



Table of Contents

and communicated to our management, including chief executive officerour Chief Executive Officer and chief financial officer,Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. As of December 31, 2011, we carried out an evaluation,disclosures.
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over our financial reporting, as defined in Rule 13a-15(f) under the supervision and withExchange Act. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the participation of management, including the chief executive officer and our chief financial officer, of the effectiveness of the design and operationreliability of our disclosure controlsfinancial reporting and procedures were effective and were operating at the reasonable assurance level.

This annual report does not include a reportpreparation of management’s assessment regardingfinancial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or an attestation reportdetect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, has assessed the effectiveness of our internal control over financial reporting as of December 31, 2012. In making this assessment, management used the criteria set forth in the Committee of Sponsoring Organizations of the company’sTreadway Commission (COSO) in Internal Control - Integrated Framework.
Based on the assessment using those criteria, management concluded that, as of December 31, 2012, our internal control over financial reporting was effective.
Our independent registered public accounting firm, due to a transition period established by ruleswhich has audited the financial statements included in this Annual Report, has also issued an audit report on the effectiveness of the Securities and Exchange Commission for newly public companies.

In addition, thereour internal control over financial reporting as of December 31, 2012. This report appears on page F-2 of this Annual Report.

Changes in Internal Control Over Financial Reporting
There were no changes in the Company’sour internal control over financial reporting during the quarter ended December 31, 20112012 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Item 9B.     Other Information.

None

None.

49




PART III

Item 10.     Directors, Executive Officers and Corporate Governance

Information required by this item will be in our definitive Proxy Statement for our 20122013 Annual Meeting of Stockholders to be held on June 20, 2012,19, 2013, which will be filed within 120 days of the end of our fiscal year ended December 31, 20112012 (“20122013 Proxy Statement”) and is incorporated herein by reference.

Item 11.     Executive Compensation

Information required by this item will be in the 20122013 Proxy Statement and is incorporated herein by reference.

Item 12.     Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Information required by this item will be in the 20122013 Proxy Statement and is incorporated herein by reference.

Item 13.     Certain Relationships and Related Transactions, and Director Independence

Information required by this item will be in the 20122013 Proxy Statement and is incorporated herein by reference.

Item 14.     Principal Accounting Fees and Services

Information required by this item will be in the 20122013 Proxy Statement and is incorporated herein by reference.


50




PART IV

Item 15.     Exhibits, Financial Statement Schedules.

(a)
(a)The following documents are filed as part of this Annual Report on Form 10-K:

(1)Financial Statements

(i)Combined Consolidated Statements of Financial Condition as of December 31, 20112012 and 20102011

(ii)Combined Consolidated Statements of Operations for the years ended December 31, 2012, 2011 2010 and 20092010

(iii)Combined Consolidated Statements of Comprehensive Income for the years ended December 31, 2012, 2011 and 2010
(iv)Combined Consolidated Statements of Shareholders’ Equity (Deficit) and Partners’ Capital for the years ended December 31, 2012, 2011 2010 and 20092010

(iv)
(v)Combined Consolidated Statements of Cash Flows for the years ended December 31, 2012, 2011 2010 and 20092010

(v)
(vi)Notes to Combined Consolidated Financial Statements


(2)Financial Statement Schedules

There are no Financial Statement Schedules filed as part of this Annual Report on 10-K, as the required information is included in our combined consolidated financial statements and in the notes thereto.

(b)
(b)Exhibit Index:

Exhibit No.

 

Description

Exhibit No.Description
3.1  Amended and Restated Certificate of Incorporation of Manning & Napier, Inc.(4)
3.2  Amended and Restated Bylaws of Manning & Napier, Inc.(4)
4.1  Form of specimen certificate representing Manning & Napier, Inc.’s Class A common stock(1)
10.1  Amended and Restated Limited Liability Company Agreement of Manning & Napier Group, LLC
LLC(4)
10.2  Amended and Restated Limited Liability Company Agreement of M&N Group Holdings, LLC
LLC(4)
10.3  Exchange Agreement, dated as of November 23, 2011, by and among Manning & Napier, Inc. and the other parties thereto.
(4)
10.4  Tax Receivable Agreement, dated as of November 23, 2011, by and among Manning & Napier, Inc. and the other parties thereto.
(4)
10.5  Registration Rights Agreement, dated as of November 23, 2011, by and among Manning & Napier, Inc. and the other parties thereto.
(4)
10.6*  Manning & Napier, Inc. 2011 Equity Compensation Plan
Plan(4)
10.7*  Form of Award Agreement under the Manning & Napier, Inc. 2011 Equity Compensation Plan(2)
10.8*  Form of Stock Option Agreement under the Manning & Napier, Inc. 2011 Equity Compensation Plan(2)
10.9  Amended and Restated Shareholders Agreement of MNA Advisors, Inc.
(4)
10.10  Amended and Restated Shareholders Agreement of M&N Advisory Advantage Corporation
Corporation(4)
10.11  Amended and Restated Shareholders Agreement of M&N Alternative Opportunities, Inc.(4)


51



Table of Contents

Exhibit No.

 

Description

Exhibit No.Description
10.12  Amended and Restated Operating Agreement of Manning & Napier Capital Company, L.L.C.
(4)
10.13*  Form of Indemnification Agreement(2)
10.14*  Employment Agreement, dated September 8, 1992, of Patrick Cunningham(2)
10.15*  Employment Agreement, dated August 1, 1993, of Jeff Coons(2)
10.16*  Employment Agreement, dated June 28, 1993, of Charles Stamey(2)
10.17*  Employment Agreement, effective September 12, 2011, by and between Manning & Napier Advisors, Inc. and James Mikolaichik(2)
10.18  Purchase Agreement, by and between Manning & Napier, Inc. and Manning & Napier Group, LLC
LLC(4)
10.19  Purchase Agreement, by and between Manning & Napier, Inc. and M&N Group Holdings, LLC
LLC(4)
10.20*  Letter, dated October 31, 2011, by and between Manning & Napier Group, LLC and James Mikolaichik
Mikolaichik(4)
10.21*  Letter, dated October 27, 2011, by and between Manning & Napier Group, LLC and Patrick CunninghamCunningham(4)
10.22Form of Daily Adjusting LIBOR Revolving Line Note executed on February 13, 2013(5)
10.23First Amendment to Amended and Restated Limited Liability Company Agreement of M&N Group Holdings, LLC
10.24First Amendment to Amended and Restated Shareholder Agreement of MNA Advisors, Inc.
21.1  Subsidiaries of Manning & Napier, Inc.(3)
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
101Materials from the Manning & Napier, Inc. Annual Report on Form 10-K for the year ended December 31, 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 Statements of Shareholders' Equity, (v) Combined Consolidated Statements of Cash Flows, and (iv) related Notes to Combined Consolidated Financial Statements.

 __________________________
* Management contract or compensatory plan or arrangement
*Management contract or compensatory plan or arrangement

(1)Incorporated by reference to Amendment No. 4 of the Registration Statement on Form S-1 (File No. 333-175309) of Manning & Napier, Inc., which was filed with the Securities and Exchange Commission on November 7, 2011.

(2)Incorporated by reference to Amendment No. 2 of the Registration Statement on Form S-1 (File No. 333-175309) of Manning & Napier, Inc., which was filed with the Securities and Exchange Commission on September 23, 2011.

(3)Incorporated by reference to Amendment No. 3 of the Registration Statement on Form S-1 (File No. 333-175309) of Manning & Napier, Inc., which was filed with the Securities and Exchange Commission on October 31, 2011.

(4)Incorporated by reference to the Annual Report on Form 10-K of Manning & Napier, Inc. for the fiscal year ended December 31, 2011.
(5)Incorporated by reference to Exhibit 10.1 of the Form 8-K of Manning & Napier, Inc., which was filed with the Securities and Exchange Commission on February 13, 2013.

52




SIGNATURES
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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, in the City of Fairport, State of New York, on March 27, 2012.

15, 2013
MANNING & NAPIER, INC.

By:

 

By:/s/ Patrick Cunningham

 Name:Patrick Cunningham
 Title:

Chief Executive Officer

(principal executive officer)

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

Signature  Capacity Date

/s/ Patrick Cunningham

Patrick Cunningham

  

Chief Executive Officer and Director

(principal executive officer)

 March 27, 201215, 2013
Patrick Cunningham(principal executive officer)

/s/ James Mikolaichik

James Mikolaichik

  

Chief Financial Officer

March 15, 2013
James Mikolaichik(principal financial and accounting officer)

 

March 27, 2012

/s/ William Manning

William Manning

  

Chairman of the Board of Directors

 

March 27, 2012

15, 2013
Williams Manning

/s/ B. Reuben Auspitz

B. Reuben Auspitz

  

Vice-Chairman of the Board of Directors

 

March 27, 2012

15, 2013
B. Reuben Auspitz

/s/ Richard Hurwitz

Richard Hurwitz

  

Director

 

March 27, 2012

15, 2013
Richard Hurwitz

/s/ Edward J. Pettinella

Director
March 15, 2013
Edward J. Pettinella

 

Director

 

March 27, 2012

/s/ Michael Serventi

Michael Serventi

 

Director

 

/s/ Robert M. Zak
Director
March 27, 2012

15, 2013
Robert M. Zak
/s/ Barbara Goodstein
Director
March 15, 2013
Barbara Goodstein


53




INDEX TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS

Manning & Napier, Inc.

 

F-5

F-6

F-7



F-1




Report of Independent Registered Public Accounting Firm


To the Board of Directors and Shareholders of
Manning & Napier, Inc.:


In our opinion, the accompanying combined consolidated statements of financial condition and the related combined consolidated statements of operations, combined consolidated statements of shareholders’comprehensive income, of shareholders' equity, (deficit) and partners’ capital, and combined consolidated statements of cash flows present fairly, in all material respects, the financial position of Manning & Napier, Inc. and its subsidiaries at December 31, 20112012 and 2010,December 31, 2011, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2011 2012in conformity with accounting principles generally accepted in the United States of America. TheseAlso in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements, are the responsibilityfor maintaining effective internal control over financial reporting and for its assessment of the Company’s management.effectiveness of internal control over financial reporting, included in Management's Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express an opinionopinions on these financial statements and on the Company's internal control over financial reporting based on our audits.audits (which was an integrated audit in 2012). We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the auditaudits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includesmisstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includesstatements, assessing the accounting principles used and significant estimates made by management, as well asand evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinion.

opinions.


A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/PricewaterhouseCoopers LLP

Rochester, NY

New York

March 27, 2012

15, 2013



F-2




Manning & Napier, Inc.

Combined Consolidated Statements of Financial Condition

As of December 31, 2011 and 2010

(in thousands, except share and per share data)  December 31,
2011
  December 31,
2010
 

Assets

   

Cash and cash equivalents

  $81,208    $27,543  

Accounts receivable

   18,409    18,851  

Accounts receivable—Manning & Napier Funds, Inc.

   12,850    11,948  

Investment securities, at fair value

   4,642    4,381  

Prepaid expenses and other assets

   4,126    2,508  
  

 

 

  

 

 

 

Total current assets

   121,235    65,231  

Property and equipment, net

   3,812    3,111  

Net deferred tax assets, non-current

   53,786    —    
  

 

 

  

 

 

 

Total non-current assets

   57,598    3,111  

Total assets

  $178,833   $68,342  
  

 

 

  

 

 

 

Liabilities

   

Accounts payable

  $1,139   $1,153  

Accrued expenses and other liabilities

   30,099    30,464  

Deferred revenue

   9,902    9,974  

Stock purchase note payable

   —      201  
  

 

 

  

 

 

 

Total current liabilities

   41,140    41,792  

Shares liability subject to mandatory redemption

   —      170,319  

Amounts payable under tax receivable agreement

   45,885    —    
  

 

 

  

 

 

 

Total non-current liabilities

   45,885    170,319  

Total liabilities

   87,025    212,111  

Commitments and contingencies (Note 10)

   

Shareholders’ equity (deficit) and partners’ capital

   

Class A common stock, $0.01 par value; 300,000,000 shares authorized, 13,583,783 issued and outstanding at December 31, 2011

  $136   $—    

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

   0    —    

Common stock, $.01 par value; 10,000,000 shares authorized, 2,533,110 shares issued and outstanding and 5,224,050 shares issued and outstanding subject to redemption as of December 31, 2010

   —      101  

Additional paid-in capital

   188,133    1,628  

Retained deficit

   (27,167  (147,035

Accumulated other comprehensive income

   2    193  

Partners’ capital

   —      1,307  
  

 

 

  

 

 

 

Total shareholders’ equity (deficit) and partners’ capital attributable to Manning & Napier Group

   161,104    (143,806

Noncontrolling (deficit) interest

   (69,296  37  
  

 

 

  

 

 

 

Total shareholders’ equity (deficit), partners’ capital and noncontrolling (deficit) interest

   91,808    (143,769
  

 

 

  

 

 

 

Total liabilities, shareholders’ equity (deficit), partners’ capital and noncontrolling (deficit) interest

  $178,833   $68,342  
  

 

 

  

 

 

 

(In thousands, except share data)

December 31, 2012 December 31, 2011
Assets   
Cash and cash equivalents$108,324
 $81,208
Accounts receivable22,962
 18,409
Accounts receivable—Manning & Napier Fund, Inc.13,767
 12,850
Investment securities, at fair value13,082
 4,642
Prepaid expenses and other assets7,014
 4,126
Total current assets165,149
 121,235
Property and equipment, net4,460
 3,812
Net deferred tax assets, non-current48,571
 53,786
Total non-current assets53,031
 57,598
Total assets$218,180
 $178,833
Liabilities   
Accounts payable$1,231
 $1,139
Accrued expenses and other liabilities38,872
 30,099
Deferred revenue10,342
 9,902
Total current liabilities50,445
 41,140
Amounts payable under tax receivable agreement, non-current43,989
 45,885
Total non-current liabilities43,989
 45,885
Total liabilities94,434
 87,025
Commitments and contingencies (Note 9)

 

Shareholders’ equity   
Class A common stock, $0.01 par value; 300,000,000 shares authorized, 13,583,873 issued and outstanding at December 31, 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 December 31, 2012 and December 31, 2011
 
Additional paid-in capital198,117
 188,133
Retained deficit(33,392) (27,167)
Accumulated other comprehensive income
 2
Total shareholders’ equity164,861
 161,104
Noncontrolling interest(41,115) (69,296)
Total shareholders’ equity and noncontrolling interest123,746
 91,808
Total liabilities, shareholders’ equity and noncontrolling interest$218,180
 $178,833
The accompanying notes are an integral part of these combined consolidated financial statements.



F-3


Manning & Napier, Inc.

Combined Consolidated Statements of Operations

Years Ended December 31, 2011, 2010 and 2009

(in thousands, except per share data)  2011  2010  2009 

Revenues

    

Investment management service revenue

  $329,992   $255,472   $162,660  

Expenses

    

Compensation and related costs

   305,957    78,416    55,643  

Sub-transfer agent and shareholder service costs

   49,115    36,830    19,853  

Other operating costs

   33,704    25,284    22,252  
  

 

 

  

 

 

  

 

 

 

Total operating expenses

   388,776    140,530    97,748  
  

 

 

  

 

 

  

 

 

 

Operating (loss) income

   (58,784  114,942    64,912  

Non-operating loss:

    

Interest expense on shares subject to mandatory redemption

   (45,833  (61,243  (9,991

Interest expense

   (31  (16  (125

Interest and dividend income

   67    126    140  

Net capital gains (losses) on investments

   147    1    (151
  

 

 

  

 

 

  

 

 

 

Total non-operating loss

   (45,650  (61,132  (10,127
  

 

 

  

 

 

  

 

 

 

(Loss) income before provision for income taxes

   (104,434  53,810    54,785  

Provision for income taxes

   1,982    712    360  
  

 

 

  

 

 

  

 

 

 

Net (loss) income attributable to controlling and noncontrolling interests

   (106,416  53,098    54,425  

Less: net (loss) income attributable to noncontrolling interests

   (79,249  53,098    54,425  
  

 

 

  

 

 

  

 

 

 

Net loss attributable to Manning & Napier, Inc.

  $(27,167 $—     $—    
  

 

 

  

 

 

  

 

 

 
   November 18,
2011 through
December 31,
2011
       
   (in thousands)       

Net loss attributable to controlling and noncontrolling interests

  $(197,874  
    

Less: net loss attributable to noncontrolling interests

   (170,707  
  

 

 

   

Net loss attributable to Manning & Napier, Inc.

  $(27,167  
  

 

 

   

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

  $(2.11  
  

 

 

   

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

   12,894,136    
  

 

 

   

(In thousands, except share data)
 Year Ended December 31,

2012 2011 2010
Revenues     
Investment management service revenue$339,055
 $329,992
 $255,472
Expenses     
Compensation and related costs165,698
 305,957
 78,416
Sub-transfer agent and shareholder service costs51,206
 49,115
 36,830
Other operating costs38,031
 33,704
 25,284
Total operating expenses254,935
 388,776
 140,530
Operating income (loss)84,120
 (58,784) 114,942
Non-operating income (loss)     
Interest expense on shares subject to mandatory redemption
 (45,833) (61,243)
Interest expense(38) (31) (16)
Interest and dividend income149
 67
 126
Net gains on investments348
 147
 1
Total non-operating income (loss)459
 (45,650) (61,132)
Income (loss) before provision for income taxes84,579
 (104,434) 53,810
Provision for income taxes8,160
 1,982
 712
Net income (loss) attributable to controlling and noncontrolling interests76,419
 (106,416) 53,098
Less: net income (loss) attributable to noncontrolling interests73,950
 (79,249) 53,098
Net income (loss) attributable to Manning & Napier, Inc.$2,469
 $(27,167) $
      
 
Year Ended
December 31,
2012
 
November 18, 2011 through
December 31, 2011
  
Net income (loss) per share available to Class A common stock  
  
Basic$0.18
 $(2.11)  
Diluted$0.18
 $(2.11)  
Weighted average shares of Class A common stock outstanding     
Basic13,583,873
 12,894,136
  
Diluted13,583,873
 12,894,136
  
Cash dividends declared per share of Class A common stock$0.64
 $
  
The accompanying notes are an integral part of these combined consolidated financial statements.



F-4




Manning & Napier, Inc.

Combined Consolidated Statements of Shareholders’ Equity (Deficit) and Partners’ Capital

Years Ended December 31, 2011, 2010 and 2009

  Common Stock  

Additional

Paid-In

  Treasury Stock  Retained  

Accumulated
Other

Comprehensive

  

Partners’

Capital

  

Non

controlling

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

Balance—January 1, 2009

  2,454,428   $98   $1,622    20,440   $(274 $(81,008 $(891 $773    —     $(79,680

Net income

       58,819     (4,394   54,425  

S-Corporation distributions

       (64,019     (64,019

Net changes in unrealized investment securities gains or losses

        781      781  

Common stock and treasury stock Transactions

  37,260    2    4    (27,850  16        22  

Equity-based compensation

      411    320       731  

Partners’ contributions

         4,649     4,649  

Treasury stock purchase

     16,673    (255      (255
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance—December 31, 2009

  2,491,688   $100   $1,626    9,263   $(102 $(85,888 $(110 $1,028    —     $(83,346

Net income

       57,957     (4,859   53,098  

S-Corporation distributions

       (119,619     (119,619

Net changes in unrealized investment securities gains or losses

        303      303  

Common stock and treasury stock Transactions

  41,422    1    2    (9,263  5    (70   (3   (65

Equity-based compensation

      97    585       682  

Partners’ contributions

         5,141     5,141  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance—December 31, 2010

  2,533,110   $101   $1,628    —      —     $(147,035 $193   $1,307    —     $(143,806

Net income

       75,169     16,289     91,458  

Distributions

       (148,628     (148,628

Net changes in unrealized investment securities gains or losses

        (305    (305

Common stock transactions

  32,212    1    52      1       54  

Equity-based compensation

    929          929  

Partners’ contributions

         4,007     4,007  

Conditional redemption

       (348     (348

Elimination of shares subject to redemption

  5,224,050    52    5,291      211,154     91     216,588  

Reorganization and attribution of historical equity to partners’ capital

  (7,789,372  (154  (7,900    9,687     (1,633   —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance—November 18, 2011

  —      —      —      —      —      —      (112  20,061    —      19,949  

Issuance of Class A shares, net of offering costs (Note 3)

  13,583,783    136    159,763          159,899  

Issuance of Class B shares

  1,000    0    0          0  

Attribution of partners’ capital to noncontrolling interest

         (20,061  20,061    —    

Purchase of Class A units of Manning & Napier Group, LLC held by Manning & Napier Group Holdings, LLC

          (105,663  (105,663

Equity-based compensation

    28,311         187,013    215,324  

Net changes in unrealized investment securities gains or losses

        114      114  

Initial establishment of deferred tax balances

    59          59  

Net loss

       (27,167    (170,707  (197,874
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance—December 31, 2011

  13,584,783   $136   $188,133    —     $—     $(27,167 $2   $—     $(69.296 $91,808  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Comprehensive Income

(In thousands)
  Year Ended December 31,
  2012 2011 2010
Net income (loss) attributable to controlling and noncontrolling interests $76,419
 $(106,416) $53,098
Net unrealized holding gain (loss) on investment securities, net of tax (3) (338) 302
Reclassification adjustment for realized gains on investment securities included in net income (loss) 1
 147
 1
       
Comprehensive income (loss) 76,417
 (106,607) 53,401
Less: Comprehensive income (loss) attributable to noncontrolling interest 73,948
 (79,440) 53,401
Comprehensive income (loss) attributable to Manning & Napier, Inc. $2,469
 $(27,167) $

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

Manning & Napier, Inc.


F-5



Combined Consolidated Statements of Cash Flows

Years Ended December 31, 2011, 2010 and 2009

(in thousands)  2011  2010  2009 

Cash flows from operating activities:

    

Net (loss) income

  $(106,416 $53,098   $54,425  

Adjustment to reconcile net (loss) income to net cash provided by operating activities:

    

Interest expense related to change in mandatory redemption liability

   45,833    61,243    9,991  

Equity-based compensation

   216,253    682    731  

Depreciation

   1,139    1,422    1,099  

Net (gain) loss on investment securities

   (147  (1  151  

Deferred income taxes

   20    —      —    

Accrued interest on debt securities

   —      —      (1

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

    

Accounts receivable

   442    (6,454  (4,786

Accounts receivable—Manning & Napier Fund, Inc.

   (902  (2,971  (5,125

Prepaid expenses and other assets

   (833  (1,070  (70

Accounts payable

   (694  252    (333

Accrued expenses and other liabilities

   (761  13,025    5,642  

Deferred revenue

   (72  746    1,055  
  

 

 

  

 

 

  

 

 

 

Net cash provided by operating activities

   153,862    119,972    62,779  
  

 

 

  

 

 

  

 

 

 

Cash flows from investing activities:

    

Purchase of property and equipment

   (1,720  (1,137  (1,003

Cash payments for options

   —      —      (222

Cash received from option exercises

   —      48    305  

Sale of investments

   1,987    120    576  

Purchase of investments

   (2,295  (2,025  (631

Proceeds from maturity of investments

   —      505    —    
  

 

 

  

 

 

  

 

 

 

Net cash used in investing activities

   (2,028  (2,489  (975
  

 

 

  

 

 

  

 

 

 

Cash flows from financing activities:

    

Distributions

   (148,628  (119,619  (64,019

Payment of stock purchase note payable

   (201  (120  (583

Payment of capital lease obligations

   (81  (146  (124

Issuance of promissory note receivable

   —      —      (8,000

Proceeds from repayment of promissory note receivable

   —      —      8,000  

Proceeds on issuance of stock

   54    2    21  

Repurchase of treasury stock

   —      —      (255

Capital contributions

   4,007    5,141    4,649  

Net proceeds from issuance of Class A common stock in initial public offering

   154,449    —      —    

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

   (2,106  —      —    

Purchase of Class A Units of Manning & Napier Group, LLC

   (105,663  —      —    
  

 

 

  

 

 

  

 

 

 

Net cash used in financing activities

   (98,169  (114,742  (60,311
  

 

 

  

 

 

  

 

 

 

Net increase in cash and cash equivalents

   53,665    2,741    1,493  

Cash and cash equivalents:

    

Beginning of period

   27,543    24,802    23,309  
  

 

 

  

 

 

  

 

 

 

End of period

  $81,208   $27,543   $24,802  
  

 

 

  

 

 

  

 

 

 

Supplemental disclosures:

    

Cash paid during the period for interest

  $4   $16   $115  
  

 

 

  

 

 

  

 

 

 

Cash paid during the period for taxes

  $1,101   $661   $421  
  

 

 

  

 

 

  

 

 

 

Non-cash transactions:

    

Accrued costs directly associated with issuance of Class A common stock

  $598   $—     $—    
  

 

 

  

 

 

  

 

 

 

Capital expenditures in accounts payable and accruals

  $125   $240   $115  
  

 

 

  

 

 

  

 

 

 

Equipment acquired through capital lease obligation

  $120   $123   $135  
  

 

 

  

 

 

  

 

 

 



Manning & Napier, Inc.
Combined Consolidated Statements of Shareholders’ Equity
(In thousands, except share data)
 Common Stock - Pre-Reorganization Common Stock- Class A Common Stock-Class B Additional Paid-In Capital Treasury Stock   Accumulated Other Comprehensive Income (Loss) Partners' Capital (Deficit) Non controlling Interest  

Shares Amount Shares Amount Shares Amount  Shares Amount Retained Deficit    Total
                            
Balance—January 1, 20102,491,688
 $100
 
 $
 
 $
 $1,626
 9,263
 $(102) $(85,888) $(110) $1,028
 $
 $(83,346)
Net income                  57,957
   (4,859)   53,098
S-Corporation distributions                  (119,619)       (119,619)
Net changes in unrealized investment securities gains or losses                    303
     303
Common stock and treasury stock Transactions41,422
 1
         2
 (9,263) 5
 (70)   (3)   (65)
Equity-based compensation                97
 585
       682
Partners’ contributions                      5,141
   5,141
                            
Balance—December 31, 20102,533,110
 $101
 
 $
 
 $
 $1,628
 
 $
 $(147,035) $193
 $1,307
 
 $(143,806)
Net income                  75,169
   16,289
   91,458
Distributions                  (148,628)       (148,628)
Net changes in unrealized investment securities gains or losses                    (305)     (305)
Common stock transactions32,212
 1
         52
     1
       54
Equity-based compensation            929
             929
Partners’ contributions                      4,007
   4,007
Conditional redemption                  (348)       (348)
Elimination of shares subject to redemption5,224,050
 52
         5,291
     211,154
   91
   216,588
Reorganization and attribution of historical equity to partners’ capital(7,789,372) (154)         (7,900)     9,687
   (1,633)   
                            
Balance—November 18, 2011
 
 
 
 
 
 
 
 
 
 (112) 20,061
 
 19,949

F-6




Manning & Napier, Inc.
Combined Consolidated Statements of Shareholders’ Equity
(In thousands, except share data)
 Common Stock - Pre-Reorganization Common Stock- Class A Common Stock-Class B Additional Paid-In Capital Treasury Stock   Accumulated Other Comprehensive Income (Loss) Partners' Capital (Deficit) Non controlling Interest  

Shares Amount Shares Amount Shares Amount  Shares Amount Retained Deficit    Total
                            
Issuance of Class A shares, net of offering costs    13,583,873
 136
     159,763
             159,899
Issuance of Class B shares        1,000
 
 
             
Attribution of partners’ capital to noncontrolling interest                      (20,061) 20,061
 
Purchase of Class A units of Manning & Napier Group, LLC held by Manning & Napier Group Holdings, LLC                        (105,663) (105,663)
Equity-based compensation            28,311
           187,013
 215,324
Net changes in unrealized investment securities gains or losses                    114
     114
Initial establishment of deferred tax balances            59
             59
Net loss                  (27,167)     (170,707) (197,874)
                            
Balance—December 31, 2011
 $
 13,583,873
 $136
 1,000
 $
 $188,133
 
 $
 $(27,167) $2
 $
 $(69,296) $91,808
Net income                  2,469
     73,950
 76,419
Distributions                      
 (108,059) (108,059)
Net changes in unrealized investment securities gains or losses                    (2)     (2)
Equity-based compensation            9,984
         
 62,290
 72,274
Dividends declared on Class A common stock                  (8,694)       (8,694)
                            
Balance—December 31, 2012
 $
 13,583,873
 $136
 1,000
 $
 $198,117
 
 $
 $(33,392) $
 $
 $(41,115) $123,746
                            
The accompanying notes are an integral part of these combined consolidated financial statements.



F-7



NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2011 AND 2010 AND FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009

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

Table of Contents

Manning & Napier, Inc.
Combined Consolidated Statements of Cash Flows
(In thousands)
 Year Ended December 31,

2012 2011 2010
Cash flows from operating activities:     
Net income (loss)$76,419
 $(106,416) $53,098
Adjustment to reconcile net income (loss) to net cash provided by operating activities:     
Interest expense related to change in mandatory redemption liability
 45,833
 61,243
Equity-based compensation72,274
 216,253
 682
Depreciation1,686
 1,139
 1,422
Change in amounts payable under tax receivable agreement24
 
 
Net gain on investment securities(348) (147) (1)
Deferred income taxes2,776
 20
 
(Increase) decrease in operating assets and increase (decrease) in operating liabilities:     
Accounts receivable(4,553) 442
 (6,454)
Accounts receivable—Manning & Napier Fund, Inc.(917) (902) (2,971)
Prepaid expenses and other assets(620) (833) (1,070)
Accounts payable92
 (694) 252
Accrued expenses and other liabilities5,581
 (761) 13,025
Deferred revenue440
 (72) 746
Net cash provided by operating activities152,854
 153,862
 119,972
Cash flows from investing activities:     
Purchase of property and equipment(2,282) (1,720) (1,137)
Cash received from option exercises
 
 48
Sale of investments4,267
 1,987
 120
Purchase of investments(12,868) (2,295) (2,025)
Proceeds from maturity of investments505
 
 505
Net cash used in investing activities(10,378) (2,028) (2,489)
Cash flows from financing activities:     
Distributions(108,059) (148,628) (119,619)
Payment of stock purchase note payable
 (201) (120)
Dividends paid(6,520) 
 
Payment of capital lease obligations(183) (81) (146)
Proceeds on issuance of stock
 54
 2
Capital contributions
 4,007
 5,141
Net proceeds from issuance of Class A common stock in initial public offering
 154,449
 
Payments of costs directly associated with issuance of Class A common stock(598) (2,106) 
Purchase of Class A Units of Manning & Napier Group, LLC
 (105,663) 
Net cash used in financing activities(115,360) (98,169) (114,742)
Net increase in cash and cash equivalents27,116
 53,665
 2,741
Cash and cash equivalents:  
  
Beginning of period81,208
 27,543
 24,802
End of period$108,324
 $81,208
 $27,543
      
      

F-8




Manning & Napier, Inc.
Combined Consolidated Statements of Cash Flows
(In thousands)
Supplemental disclosures:     
Cash paid during the period for interest$25
 $4
 $16
Cash paid during the period for taxes$6,984
 $1,101
 $661
Non-cash investing and financing activities:     
Capital expenditures in accounts payable and accruals$122
 $125
 $240
Equipment acquired through capital lease obligation$52
 $120
 $123
Accrued dividends$2,173
 $
 $
Accrued costs directly associated with issuance of Class A common stock$
 $598
 $

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

F-9




Manning & Napier, Inc.
Notes to Combined Consolidated Financial Statements

Note 1—Organization and Nature of the Business

Manning & Napier, Inc. (“("Manning & Napier”Napier", the “Company” or the “Registrant”"Company") 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 its investment process. Founded in 1970, the Company offers 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, the Company serves a diversified client base of high-net-worthhigh net worth individuals and institutions, including 401(k) plans, pension plans, Taft-Hartley plans, endowments and foundations. For many of these clients, the Company’s relationship goes beyond investment management and includes customized solutions that address key issues and solve client-specific problems.

The Company was incorporated on June 22, 2011 for the purpose of facilitating an initial public offering ("IPO") of 13,583,873 shares of its Class A shares (“IPO” or “the Offering”)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 reorganizationseries of transactions andto reorganize the Offering (Note 3),capital structure in advance of the initial public offering, the Company was a group of privately-held, affiliated companies, which are referred to as the “Manning & Napier Companies” which collectively consisted. The diagram below depicts the Company's organization structure as of (i) MNA Advisors, Inc. (f/k/a December 31, 2012.
 
(1)Manning & Napier, Inc. is the managing member of Manning & Napier Group. The operating subsidiaries of Manning & Napier Group are Manning & Napier Advisors, LLC ("MNA"), Manning & Napier Advisory Advantage Company, LLC ("AAC"), Exeter Advisors I, LLC ("EAI"), Manning & Napier Alternative Opportunities, LLC ("MNAO"), Perspective Partners, LLC ("PPI"), Manning & Napier Information Services, LLC ("MNIS"), Manning & Napier Benefits, LLC ("MNB"), Manning & Napier Investor Services, Inc. ("MNBD") and Exeter Trust Company ("ETC").
(2)
Prior to the initial public offering, Manning & Napier Group granted Class B units to each of Patrick Cunningham and James Mikolaichik. These units represent approximately 0.1% of the outstanding voting and economic rights of Manning & Napier Group.

F-10



Manning & Napier, Advisors, Inc.), or MNA, (ii) M&N Advisory Advantage Corporation (f/k/a Manning & Napier Advisory Advantage Corporation), or AAC, (iii) M&N Alternative Opportunities, Inc. (f/k/a Manning & Napier Alternative Opportunities, Inc.), or MNAO, (iv) Manning & Napier Capital Company, LLC, or MNCC, (v) Manning & Napier Investor Services, Inc., or MNBD, (vi) Manning & Napier Information Services, LLC, or MNIS, (vii) EXA Advisors, Inc. (f/k/a Exeter Advisors, Inc.), or EAI, and (viii) Perspective Partners LLC, or PPI, each as in effect prior
Notes to the Offering.

Manning & Napier has sole voting power in and controls all of the business and affairs of Manning & Napier Group and its subsidiaries. As a result, the Company consolidates the financial results of Manning & Napier Group and records noncontrolling interest for the economic interest in Manning & Napier Group held by Manning & Napier Group Holdings, LLC (“M&N Group Holdings”), MNCC and the other members of Manning & Napier Group. The Company’s economic interest in Manning & Napier Group totaled approximately 13.8% at December 31, 2011. 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. Noncontrolling interest on the statement of financial condition represents the portion of net assets of Manning & Napier Group held by the noncontrolling members.

Combined Consolidated Financial Statements (Continued)


Note 2—Summary of Significant Accounting Policies

Basis of Presentation

The accompanying 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, or SEC. All material intercompany transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of AmericaU.S. GAAP requires management to make estimates and judgments whichor assumptions that affect the reported

amounts of assets, liabilities, related disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amount of revenues and expenses during the reporting period. Estimates are used in accounting for, among other things, allowances for doubtful accounts, valuing investment securities, contingencies and other accruals. Estimates are based on historical experience and on various other assumptions which are believed to be reasonable under the circumstances. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may differ from those estimates. Estimates and assumptions are reviewed periodically, and the effect of revisions is reflecteddisclosures in the combined consolidated financial statementsstatements. Actual results could differ from these estimates or assumptions.

During 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 period they are determined to be necessary.

Principles of Consolidation

On November 18, 2011, the Company completed its initial public offering. Prioraggregate. The error relates to the Offering, the Company completed a reorganizationnumber of entities under common control of William Manning (the “Reorganization”). Manning & Napier is the sole managing memberClass A units of Manning & Napier Group. FollowingGroup that were subject to service vesting as opposed to performance vesting under the Reorganizationterms of the 2011 reorganization transactions. The error resulted in an understatement of $0.7 million and Offering, $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 has heldholds approximately 13.8% economic interest in Manning & Napier Group, but as managing member will controlcontrols all of the managementbusiness and affairs of Manning & Napier Group. As a result, the Company consolidates the financial results of Manning & Napier Group and records a noncontrolling interest on its balance sheetcombined consolidated statements 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, MNCCHoldings”), Manning & Napier Capital Company, LLC (“MNCC”) and the other members of Manning & Napier Group. See Note 3 for additional information regarding the Reorganization and the Offering and their effects on the consolidated financial statements and capital structure of the Company.

For periods prior to the Reorganization,reorganization, the financial statements include the combined accounts of operating entities under common control, which consisted of MNA, AAC, MNCC, ETC, MNAO, MNBD, MNIS and PPI. As further discussedthe Manning & Napier Companies.
All material intercompany transactions have been eliminated in Note 3, all of the entities included in the combined financial statements in periods at the time of the Reorganization are included in the combined consolidated financial statements subsequent to the Reorganization.

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.

Cash and Cash Equivalents

The Company defines cash and cash equivalents as money market funds and otherconsiders all highly liquid investments with original maturities of 90 daysthree months or less.less to be cash equivalents. Cash and cash equivalents are statedprimarily held in operating accounts at cost, which approximates fair value. Cashmajor financial institutions and cash equivalents are subject to credit risk and are primarily maintainedalso in a U.S. Treasury money market fund.

mutual funds, in which the Company is exposed to market and credit risk.

Investment Securities

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 short-termequity securities, equityfixed income securities, and investments in mutual funds for which the Company provides advisory services. Realized and unrealized gains and losses on trading securities are recorded in net capital gains (losses) on investments in the combined consolidated statements of operations. Realized gains and losses on sales of trading securities are computed on a specific identification basis. At December 31, 2012 and 2011, trading securities consist solely of investments held by the Company for the purpose of providing initial cash seeding for product development purposes. Prior to December 31, 2011, the Company classified these investments as available-for-sale. The reclassification of these investments from available-for-sale to trading on December 31, 2011 resulted in the recording of less than $0.1 million of unrealized gains in net capital gains (losses) on investments in the combined consolidated statements of operations.

Investment securities classified as available-for-sale consist of U.S. Treasury Notes. Unrealized gains and losses on available-for-sale securities are excluded from earnings and are reported, net of deferred income tax, as a separate component of accumulated other comprehensive income in stockholders’ equity until realized. The Company periodically reviews each individual security position that has an unrealized loss, or impairment, to determine if that impairment is other-than-temporary. If impairment is determined to be other-than-temporary, the carrying value of the security will be written down to fair value and the loss will be recognized in earnings. Realized gains and losses on sales of available-for-sale securities are computed on a

F-11



Manning & Napier, Inc.
Notes to Combined Consolidated Financial Statements (Continued)

specific identification basis and are recorded in net capital gains (losses) on investments in the combined consolidated statements of operations.

Accounts Receivable

Accounts receivable includes investment management and custodial fees receivable from clients. The Company’s accounts receivable balances do not include any significant allowance for doubtful accounts nor has any significant bad debt expense attributable to accounts receivable been recorded for the years ended December 31, 2012, 2011 2010 or 2009.

2010.

Property and Equipment

Property and equipment are carried at cost less accumulated depreciation. Depreciation is computed on a straight-line basis over the applicable life of the asset class. Depreciation is calculated for computer software, office equipment, and furniture and fixtures using useful lives of 3, 5, and 7 years, respectively. Depreciation is calculated for leasehold improvements using a useful life equivalent to the lease term.term or expected useful life. Upon sale or other disposition of fixed assets, the resulting gain or loss is included in the statementcombined consolidated statements of operations.

Leases

Rent under non-cancelable operating leases with scheduled rent increases is accounted for on a straight-line basis over the lease term, beginning on the date of initial possession or the effective date of the lease agreement. Allowances and other lease incentives provided by the Company’s landlords are amortized on a straight-line basis as a reduction of rent expense. The difference between straight-line rent expense and rent paid and the unamortized deferred lease costs and build-out allowances are recorded as deferred rent liability in the combined consolidated statements of financial condition.

Shares Subject to Redemption

The Company entered into an agreement with William Manning, pursuant to which the Company had a mandatory redemption obligation upon his death to pay his pro rata share of net revenue for the four quarters immediately preceding Mr. Manning’s death. In accordance with the requirements of accounting for certain financial instruments with characteristics of both liabilities and equity, the Company recognized a liability for these shares subject to mandatory redemption in its financial statements.

For one of the Company’s entities, MNBD, the Company’s redemption obligation upon his death to pay his pro rata share of net revenue had an element of conditionality. In accordance with the requirements of accounting for contracts in the Company’s own equity, the Company had recognized the shares subject to conditional redemption related to MNBD as temporary equity.

As further described in Note 9, the shares subject to redemption terminated during the period and as a result, the instruments were reclassified to permanent equity. The liability and temporary equity for all periods prior to the termination had been measured at the redemption amount.

Revenue Recognition

The majority of the Company’s revenues are based on fees charged to manage customers’ portfolios. Investment management fees are generally computed as a percentage of AUMassets under management ("AUM") and recognized as earned. Fees for providing investment advisory services are computed and billed in accordance with the provisions of the

applicable investment management agreements. For the Company’s separately managed accounts, clients either pay investment management fees in advance, typically for a semi-annual or quarterly period, or in arrears, typically for a monthly or quarterly period. When investment management fees are paid in advance, the Company defers the revenue and recognizes it over the applicable period. When investment management fees are paid in arrears, the Company estimates revenues based on AUM market values as of the most recent month end date, and adjusts to actual when billed. Revenue is also earned for providing custodial services, sub-advisor services to mutual funds and collective investment trusts and other services. For mutual funds and collective investment trust vehicles, the Company‘sCompany’s fees are calculated and earned daily based on AUM.

All other revenue earned by us is recognized on a GAAP accounting basis as earned per the terms of the specific contract.

Equity-Based Compensation

The Company measures the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The cost is recognized over the period during which an employee is required to provide service in exchange for the award. The guidance also requires that the Company estimate forfeitures when recognizing equity-based compensation expense and that this estimate of forfeitures be adjusted over the requisite service period based on the extent to which actual forfeitures differ, or are expected to differ, from such estimates. See Note 13 for additional information on equity-based compensation.

Income Taxes

The Company records a tax provision for the anticipated tax consequences of the reported results of operations. The provision for income taxes is computed using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities, and for operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets are expected to be realized or settled. The Company records a valuation allowance, if necessary, to reduce deferred tax assets to the amount that is believed more likely than not to be realized.

The Company recognizes tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.


F-12



Manning & Napier, Inc.
Notes to Combined Consolidated Financial Statements (Continued)

Comprehensive Income (Loss) Income

Comprehensive income is a measure of income which includes net income (loss) income and other comprehensive income (loss) income.. Other comprehensive income (loss) income consists of the change in unrealized (losses) gains and losses on available-for-sale investments. The changes in the balances of components comprising other comprehensive income (loss) income are presented in the following table:

   December, 31 
   (dollars in thousands) 
   2011  2010   2009 

Net (loss) income

  $(106,416 $53,098    $54,425  

Net unrealized holding (loss) gain on investment securities arising during the year

   (338  302     932  

Reclassification adjustment for realized gains (losses) on investment securities included in net income

   147    1     (151
  

 

 

  

 

 

   

 

 

 

Comprehensive (loss) income

  $(106,607 $53,401    $55,206  
  

 

 

  

 

 

   

 

 

 

accompanying combined consolidated statements of comprehensive income for the years ended December 31, 2012, 2011 and 2010.

Loss Contingencies

The Company accrues for estimated costs, including legal costs related to existing lawsuits, claims and proceedings when it is probable that a liability has been incurred and the costs can be reasonably estimated. Potential loss contingencies and related accruals are reviewed at least quarterly and are adjusted to reflect the impact and status of settlements, rulings, advice of counsel and other information pertinent to a particular matter. Significant differences could exist between the actual cost required to investigate, litigate and/or settle a claim or the ultimate outcome of a suit and management’s estimate. These differences could have a material impact on the Company’s combined consolidated financial statements. No loss accruals were recorded as of December 31, 2012, 2011 2010 and 2009.

Loss per Common Share2010

Basic loss 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 period from November 18, 2011 through December 31, 2011:

   November 18,
2011 through
December 31, 2011
 
   (dollars in thousands) 

Net loss attributable to controlling and noncontrolling interests

  $(197,874

Less: net loss attributable to noncontrolling interests

   (170,707
  

 

 

 

Net loss attributable to Manning & Napier, Inc

  $(27,167
  

 

 

 

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

  $(2.11
  

 

 

 

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

   12,894,136  
  

 

 

 

The Company consummated its initial public offering on November 18, 2011 (Note 3). Since that date, the Company has consolidated the results of Manning & Napier Group due to the Company’s role as its managing member. Therefore, all income for the period prior to November 18, 2011 is entirely attributable to noncontrolling interest (Note 4) which existed prior to the initial public offering. As a result, only the net income attributable to the Company’s controlling interest from the period subsequent to the initial public offering is considered.

The Company’s Class B common stock represent voting interests and do not participate in the earnings of the Company. Accordingly, there is no EPS related to the Company’s Class B common stock. Additionally, the computation of weighted average basic and diluted shares of Class A common stock outstanding considers the outstanding shares from the date of the initial public offering, November 18, 2011, through December 31, 2011.

At December 31, 2011 there were outstanding 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, subject to customary adjustments (Note 12). Such units were not included in the calculation of diluted loss per common share because the effect would have been anti-dilutive.

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

In February 2010, the FASB issued ASU 2010-10,Consolidation (Topic 810): Amendments for Certain Investment Funds. The amendments to the consolidation requirements of Topic 810 are deferred for a reporting entity’s interest in an entity (1) that has all the attributes of an investment company or (2) for which it is industry practice to apply measurement principles for financial reporting purposes that are consistent with those followed by investment companies. ASU 2010-10 became effective for the Company on January 1, 2010 and there was no impact on the Company’s combined consolidated financial statements and related disclosures.

In January 2010, the FASB issued ASU 2010-06,Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements, which requires entities to make new disclosures about recurring or nonrecurring fair-value measurements and provides clarification of existing disclosure requirements. This amendment requires separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements. This amendment is effective for fiscal years beginning after December 15, 2010. The adoption2012 did not have a material impact on the Company’sCompany's combined consolidated financial statements and related disclosures.

Note 3—Reorganization and Offering

Reorganization

Prior to the Offering, the Company entered into a series of transactions to reorganize its capital structure, as described and depicted below.

Step One: Each of MNA, AAC and MNAO contributed all of its assets and liabilities to a corresponding newly formed limited liability company subsidiary in exchange for 100% of the equity interests of such new subsidiary.

Step Two: EAI distributed 100% of its new subsidiary’s equity interests to AAC, its parent. Each of MNA, AAC and MNAO then contributed 100% of its new subsidiary’s equity interests and, in the case of AAC, 100% of the equity interests distributed from EAI, to M&N Group Holdings, in exchange for Class A units of M&N Group Holdings representing approximately 99.93% of the outstanding membership interests in M&N Group Holdings. In addition, William Manning was granted Class B units of M&N Group Holdings. The Class B units of M&N Group Holdings vested upon consummation of the Offering.

(1)Represents MNA, AAC and MNAO. EAI is a wholly-owned subsidiary of M&N Advisory Advantage Corporation.
(2)Each S-Corp is majority owned by William Manning, with a minority interest held by 47 of the Company’s employees.
(3)In connection with the reorganization transactions, in addition to the Class B units granted to William Manning, M&N Group Holdings granted Class B units to Richard Goldberg for strategic consulting services Mr. Goldberg has and will perform for the Manning & Napier Companies, representing less than 0.1% of the outstanding membership interests in M&N Group Holdings.
(4)Represents Manning & Napier Advisors, LLC, Manning & Napier Advisory Advantage Company, LLC, Exeter Advisors I, LLC and Manning & Napier Alternative Opportunities, LLC.

Step Three:Immediately following such contributions, (i) M&N Group Holdings contributed 100% of its equity interests in each of Manning & Napier Advisors, LLC, Manning & Napier Advisory Advantage Company, LLC, Exeter Advisors I, LLC and Manning & Napier Alternative Opportunities, LLC to Manning & Napier Group in exchange for Class A units of Manning & Napier Group representing approximately 99.2% of the outstanding membership interests of Manning & Napier Group, (ii) MNCC contributed all of its assets and liabilities, including 100% of its equity interests in Exeter Trust Company, to Manning & Napier Group in exchange for Class A units of Manning & Napier Group representing approximately 0.8% of the outstanding membership interests of Manning & Napier Group, and (iii) Manning & Napier, Inc. contributed cash to Manning & Napier Group in exchange for Class A units of Manning & Napier Group representing less than 0.1% of the outstanding membership interests of Manning & Napier Group.

(1)Represents Manning & Napier Advisors, LLC, Manning & Napier Advisory Advantage Company, LLC, Exeter Advisors I, LLC, Manning & Napier Alternative Opportunities, LLC and Exeter Trust Company (“ETC”).

Following the reorganization transactions and prior to the Offering, (i) the shareholders of MNBD contributed 100% of the outstanding common stock of MNBD to MNCC, and immediately following such contribution, MNCC contributed 100% of its equity interests in MNBD to Manning & Napier Group in exchange for Class A units of Manning & Napier Group and (ii) Manning & Napier Associates contributed 100% of its equity interests in MNIS and PPI to M&N Group Holdings in exchange for Class A units of M&N Group Holdings, and immediately following such contribution M&N Group Holdings contributed 100% of its equity interests in MNIS and PPI to Manning & Napier Group in exchange for Class A units of Manning & Napier Group.

Manning & Napier Group, LLC

As a result of the Reorganization, the Company conducts all of its business activities through its principal operating subsidiary, Manning & Napier Group. Net profits and net losses and distributions of profits of Manning & Napier Group generally will be allocated and made to its members pro rata in accordance with the number of units of Manning & Napier Group they hold.

Manning & Napier, Inc.

The Registrant serves as managing member of Manning & Napier Group. As managing member, the Company operates and controls all of the business and affairs of Manning & Napier Group and its subsidiaries and, as a result of this control, consolidates the financial results of Manning & Napier Group with its own financial results. The capital structure of the Company is made-up of the following:

Class A common stock—Class A common stock represents all of the economic interests in the Registrant and entitles holders to one vote per share on matters submitted to shareholders for approval.

Class B common stock—Prior to the Offering, the Company issued 1,000 shares of its Class B common stock to William Manning. The holder of the Company’s Class B common stock controls a majority of the vote on all matters submitted to shareholders for approval, but William Manning does not have any economic rights in the Company by virtue of his ownership of Class B common stock, whether rights to dividends, distributions or otherwise upon liquidation.

As the Registrant and the Manning & Napier Companies were under the common control of William Manning at the time of the Reorganization, the transfer of control to the Registrant was accounted for as a transaction among entities under common control, which resulted in the following impacts to the consolidated and combined financial statements:

Statement of Financial Condition—The assets, liabilities and equity of the Manning & Napier Companies and of the Registrant have been combined and carried forward at their historical carrying values. An attribution of historical common stock, additional paid-in capital and retained earnings (deficit) was to partners’ equity (deficit).

Statements of Operations—The statements of operation include the historical combined consolidated statements of operations of the Manning & Napier Companies consolidated with the statement of operation of the Registrant.

Statements of Shareholders’ Equity (Deficit) and Partners’ Capital—Prior to the Reorganization and Offering, the Company was a group of affiliated companies comprising S-Corps and Limited Liabilities Companies. As a result of the Reorganization, the partners retained their interests in the Manning & Napier Companies directly through Manning & Napier Group units and this historical equity is reflected as partners’ equity prior to the Offering. As a result of the Offering, these interests are included within noncontrolling interests.

Statements of Cash Flows���The statements of cash flows include the historical combined statements of cash flows of the Manning & Napier Companies combined with the statement of cash flows of the Registrant

Offering

On November 18, 2011, the Company completed the Offering. The following table summarizes the net proceeds from the Offering.

   Per Share   Total 
   (dollars in thousands
except per share amount)
 

Gross Proceeds

  $12.00    $163,007  

Underwriting discount

   .63     8,558  
  

 

 

   

 

 

 

Net Proceeds, before expenses, to Manning & Napier, Inc.

  $11.37    $154,449  
  

 

 

   

 

 

 

The Company used approximately $41.2 million of the net proceeds from the IPO to purchase Class A units of Manning & Napier Group from Manning & Napier Group, which in turn will use such net proceeds for general corporate purposes and strategic growth opportunities, including potential acquisitions and product seeding, approximately $105.7 million of the net proceeds from the IPO to purchase Class A units of Manning & Napier Group held by M&N Group Holdings, which in turn distributed such proceeds to its members, and approximately $2.7 million for expenses relating to the IPO, not including the underwriting discount. Additionally, the purchase of Class A units of Manning & Napier Group held by M&N Group Holdings gave rise to a deferred tax asset and a corresponding liability under a tax receivable agreement entered into by the Company, M&N Group Holdings, MNCC and the other holders of Class A units of Manning & Napier Group. See Note 4 for additional information on the tax receivable agreement. The initial estimate for the deferred tax asset, net of the liability under the tax receivable agreement is recorded within paid-in capital as additional consideration on behalf of the Class A shareholders.

The following table summarizes the net increase to paid-in capital as a result of the Offering, the deferred tax asset and the corresponding liability related to the tax receivable agreement described above, and expenses incurred that were directly attributable to the Offering:

   Increase (Decrease)
To Paid-in Capital
 
   (dollars in thousands) 

Net Proceeds, before expenses, to Manning & Napier

  $154,449  

Net deferred tax asset upon acquiring interests in Manning & Napier Group

   54,359  

Amounts payable under the tax receivable agreement

   (46,205

Expenses directly attributable to the Offering

   (2,704
  

 

 

 

Net Increase to Paid-in Capital, including Common Stock

  $159,899  
  

 

 

 

As a result of the Offering, the Company holds approximately 13.8% interest in Manning & Napier Group. The diagram below depicts the Company’s organizational structure after the Reorganization and the Offering.

(1)Manning & Napier Associates, LLC is majority owned by William Manning, directly and indirectly through Manning Ventures, Inc., with a minority interest held by B. Reuben Auspitz.
(2)Prior to the Offering, Manning & Napier Group granted Class B units to each of Patrick Cunningham and James Mikolaichik. As of December 31, 2011, the Class B units of Manning & Napier Group granted to Patrick Cunningham and James Mikolaichik collectively represent less than 0.1% of the outstanding voting and economic rights of Manning & Napier Group.

(3)Manning & Napier, Inc. is the sole managing member of Manning & Napier Group, LLC.
(4)Represents 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 ETC. As a result of the reorganization transactions, Manning & Napier Investor Services, Inc., which until such time was a sub-chapter “S” corporation for tax purposes, became a sub-chapter “C” corporation for tax purposes and is accordingly subject to corporate-level taxation on its earnings.

Note 4—Noncontrolling Interests

Manning & Napier is the sole managing member of Manning & Napier Group. Following the Reorganization and Offering,

Manning & Napier holds approximately 13.8% economic interest in Manning & Napier Group, but as managing member controls all of the managementbusiness and affairs of Manning & Napier Group. As a result, the Company consolidates the financial results of Manning & Napier Group and records a noncontrolling interest on its balance sheet 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 (loss) attributable to noncontrolling interest on the combined consolidated 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 the Offering,initial public offering, the Company has consolidated the results of Manning & Napier Group; therefore, all income for the period prior to the OfferingIPO is entirely attributable to noncontrolling interest.

F-13



Manning & Napier, Inc.
Notes to Combined Consolidated Financial Statements (Continued)

A reconciliation from “(Loss) income“Income (loss) before provision for income taxes” to “Net lossincome (loss) attributable to Manning & Napier, Inc.” is detailed as follows:

   Year Ended
December 31,
 
   2011 
   (dollars in thousands) 

(Loss) income before provision for income taxes

  $(104,434

Less: income before provision for income taxes prior to the Offering (a)

   92,366  

Less: loss before provision for income taxes of Registrant (b)

   (298
  

 

 

 

(Loss) income before provision for income taxes, as adjusted

   (196,502

Controlling interest percentage (c)

   13.148
  

 

 

 

Net loss attributable to controlling interest

   (25,836

Plus: loss before provision of Registrant (b)

   (298
  

 

 

 

(Loss) income before income taxes, as adjusted, attributable to Manning & Napier

   (26,134

Less: provision for income taxes of Manning & Napier (d)

   (1,033
  

 

 

 

Net (loss) income attributable to Manning & Napier, Inc.

  $(27,167
  

 

 

 

 Year Ended December 31,
 2012 2011
 (in thousands)
Income (loss) before provision for income taxes$84,579
 $(104,434)
Less: income before provision for income taxes prior to the initial public offering (a)
 92,366
Less: loss before provision for income taxes of Manning & Napier, Inc. (b)(1,773) (298)
Income (loss) before provision for income taxes, as adjusted86,352
 (196,502)
Controlling interest percentage (c)13.8% 13.1%
Net income (loss) attributable to controlling interest11,929
 (25,836)
Plus: loss before provision for income taxes of Manning & Napier, Inc. (b)(1,773) (298)
Income (loss) before income taxes attributable to Manning & Napier, Inc.10,156
 (26,134)
Less: provision (benefit) for income taxes of Manning & Napier, Inc. (d)7,687
 (1,033)
Net income (loss) attributable to Manning & Napier, Inc.$2,469
 $(27,167)
__________________________
a)All income for the period prior to the Offeringinitial public offering is entirely attributable to the noncontrolling interest which existed prior to the IPO.
b)Manning & Napier, Inc. incurs certain expenses that are only attributable to the Registrantit and are included withintherefore excluded from the net lossincome (loss) attributable to Manning & Napier.noncontrolling interests.
c)

(Loss) incomeIncome (loss) before provision for income taxes as adjusted, is allocated to the controlling interest based on the percentage of units of Manning & Napier Group held by Manning & Napier, Inc. For the Company. On December 16, 2011 the underwriters in the Offering exercised their overallotment option and purchased an additional 1,083,873

shares at the public offering price, less the underwriting discount. As a result,period, the amount of (loss) incomeloss attributable to Manning & Napier, Inc. from the date of the Offeringinitial public offering through December 31, 2011 represents the Company’s weighted ownership of Manning & Napier Group during that period. This weighted ownership reflects the December 16, 2011 overallotment option purchase of additional shares by the underwriters in the initial public offering.
d)
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 $2.0$8.2 million and $2.0 million for the yearyears ended December 31, 2011.2012 and 2011, respectively.

As of

During the year ended December 31, 2011,2012, the Company has not made anyapproximately $108.1 million in distributions or other payments to noncontrolling members, including anymembers. None of these distributions were payments pursuant to the tax receivable agreement (“TRA”).

agreement.

Pursuant to the exchange agreement (Note 12)11) and following the 2011 consummation of the Offering,initial public offering, Class A units of Manning & Napier Group were acquired from their holders in exchange for cash or shares of the Company’s Class A common stock. In addition, approximately $105.7$105.7 million of the net proceeds of the Offeringinitial public offering were used to purchase Class A units of Manning & Napier Group held by M&N Group Holdings. Manning & Napier Group has elected Section 754 of the Internal Revenue Code, as amended, to be in effect for taxable years in which purchases or exchanges of the Class A units of Manning & Napier Group will occur. Pursuant to the Section 754 election, each future purchase or exchange of such Class A units is expected to result in the purchaser of such units receiving an increase in the tax basis of tangible and intangible assets of Manning & Napier Group. The basis adjustments will increase, for tax purposes, the tax basis in the Manning & Napier Group’s assets attributable to the Class A units acquired. The higher tax basis will increase depreciation and amortization deductions allocable to the Company from Manning & Napier Group and therefore reduce the amount of income tax that the Company would otherwise be required to pay in the future.

Upon the consummation of the Offering,initial public offering, a tax receivable agreement ("TRA") was entered into with M&N Group Holdings, MNCC and the other holders of Class A units of Manning & Napier Group, pursuant to which the Company is required to pay M&N Group Holdings and any other future holders of units of Manning & Napier Group 85% of the applicable cash savings, if any, in U.S. federal, state, local and foreign income tax that the Company actually realizes, or is deemed to realize in certain circumstances, in periods after the Offering as a result of any step-up in tax basis in Manning & Napier Group’s assets resulting from (i) the Company’s purchase of such Class A units from M&N Group Holdings with a portion of the net proceeds of the Offering,initial public offering, (ii) the Company’s purchases or exchanges of such Class A units from M&N Group Holdings and MNCC respectively, for cash or, at the Company’s election, shares of its Class A common stock and (iii) payments under the tax receivable agreement, including any tax benefits related to imputed interest deemed to be paid by the Company as a result of such agreement.


F-14



Manning & Napier, Inc.
Notes to Combined Consolidated Financial Statements (Continued)

There is a possibility that not all of the 85% of the applicable cash savings will be paid to the selling or exchanging holder of Class A units at the time described above. If it is determined that all or a portion of such applicable tax savings is in doubt, payment to the holders of such Class A units will be the amount attributable to the portion of the applicable tax savings that are determined not to be in doubt and the payment of the remainder at such time as it is reasonably determined that the actual tax savings or that the amount is no longer in doubt.

As of

At December 31, 2012 and 2011, the Company had recorded a liability of $46.2$45.9 million and $46.2 million, respectively, representing the payments due to the selling unit holders under the TRA. Within the next 12 month period, the Company expects to pay approximately $0.3$1.9 million of the total amount. 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. Payments are anticipated to be made annually over 15 years, commencing from the date of each event that gives rise to the TRA benefits, beginning with the date of the Offering.2011 initial public offering. The payments are made in accordance with the terms of the TRA. The timing of the payments is subject to certain contingencies including Manning & Napier having sufficient taxable income to utilize all of the tax benefits defined in the TRA.

Payments pursuant to the TRA totaled $0.3 million for the year ended December 31, 2012, while the Company made no payments for the year ended December 31, 2011.

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

ETC was a 98% owned subsidiary of MNCC until June 2011, at which time it became a wholly owned subsidiary of MNCC. As such, a noncontrolling interest of less than $0.1 million was recorded in the period ended December 31, 2010.

.

Note 5—4—Investment Securities

The following table represents the Company’s investment securities holdings at December 31, 2012 and December 31, 2011 and December 31, 2010:

At December 31, 2011               
   Cost   Unrealized
Gains
   Unrealized
Losses
  Fair
Value
 
Available-for-sale securities  (dollars in thousands) 

US treasury note (0.375%, 9/30/2012)

  $504    $2    $—     $506  

US treasury note (1.75%, 1/31/2014)

   102     2     —      104  
  

 

 

   

 

 

   

 

 

  

 

 

 
   606     4     —      610  
  

 

 

   

 

 

   

 

 

  

 

 

 

Trading Securities

       

Short-term securities

  

  636  

Equity securities

  

  2,656  

Managed mutual funds

  

  740  
       

 

 

 
       $4,032  
       

 

 

 

Total investment securities

  

 $4,642  
       

 

 

 
At December 31, 2010               
   Cost   Unrealized
Gains
   Unrealized
Losses
  Fair
Value
 
Available-for-sale securities  (dollars in thousands) 

Short-term securities

  $654    $ —      $—     $654  

Equity securities

   2,317     624     (497  2,444  

Managed mutual funds

   611     65     —      676  

US treasury note (0.375%, 9/30/2012)

   504     —       —      504  

US treasury note (1.75%, 1/31/2014)

   102     1     —      103  
  

 

 

   

 

 

   

 

 

  

 

 

 

Total investment securities

  $4,188    $690    $(497 $4,381  
  

 

 

   

 

 

   

 

 

  

 

 

 

:

As of December 31, 2012Cost 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
Available-for-sale securities(in thousands)
US treasury note (0.25%, 8/31/2014)$505
 $1
 $
 $506
US treasury note (1.75%, 1/31/2014)102
 
 
 102
 607
 1
 
 608
Trading securities       
Equity securities 7,293
Fixed income securities 4,970
Managed mutual funds 211
  12,474
Total investment securities $13,082

As of December 31, 2011Cost 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
Available-for-sale securities(in thousands)
US treasury note (0.375%, 9/30/2012)$504
 $2
 $
 $506
US 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.


F-15



Manning & Napier, Inc.
Notes to Combined Consolidated Financial Statements (Continued)

Investment securities classified as trading consist of short-termequity securities, equityfixed income securities, and investments in mutual funds for which the Company provides advisory services. At December 31, 2012 and 2011, trading securities consist solely of investments held by the Company for the purpose of providing initial cash seeding for product development purposes. Prior to For the year ended December 31, 2011,2012, the Company recognized less than $0.1 million of net unrealized losses related to investments classified these investments as available-for-sale. The reclassificationtrading securities, while less than $0.1 million of these investments from available-for-sale to trading onnet unrealized gains were recognized for the year ended December 31, 2011 resulted in the recording of less than $0.1 million of unrealized gains in net capital gains (losses) on investments in the combined consolidated statements of operations.

2011.

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 requiring ETC to maintain a restricted surplus fund equal to 100% of its common stock.regulations. As of December 31, 20112012 and December 31, 2010, $0.62011, $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 years ended December 31, 2012, 2011 2010,, or 2009.2010. Unrealized losses on available-for-sale securities that had been in a continuous loss position for twelve months or longer were immaterial as of the end of each reporting period.


The table below presents realized gains and losses on the sale of all securities for the twelve monthsyears ended December 31, 2012, 2011 December 31, 2010,, and December 31, 2009:

   December 31, 
   2011  2010  2009 
   (dollars in thousands) 

Gross realized investment gains

  $384   $5   $28  

Gross realized investment losses

   (247  (4  (179
  

 

 

  

 

 

  

 

 

 

Net realized gains (losses)

  $137   $1   $(151
  

 

 

  

 

 

  

 

 

 

2010:

 Year ended December 31,
 2012 2011 2010
 (in thousands)
Gross realized investment gains$718
 $384
 $5
Gross realized investment losses(350) (247) (4)
Net realized gains$368
 $137
 $1
Note 6—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;

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

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


F-16



Manning & Napier, Inc.
Notes to Combined Consolidated Financial Statements (Continued)

The following provides the hierarchy of inputs used to derive the fair value of the Company’s assets as of December 31, 20112012 and 2010:

    Level 1   Level 2   Level 3   Totals 
   (dollars in thousands) 

At December 31, 2011

        

Short-term securities

  $636    $ —      $ —      $636  

Equity securities

   2,656     —       —       2,656  

Managed mutual funds

   740     —       —       740  

US treasury note (0.375%, 9/30/2012)

   —       506     —       506  

US treasury note (1.75%, 1/31/2014)

   —       104     —       104  
  

 

 

   

 

 

   

 

 

   

 

 

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

 

 

   

 

 

   

 

 

   

 

 

 

At December 31, 2010

        

Short-term securities

  $654    $—      $—      $654  

Equity securities

   2,444     —       —       2,444  

Managed mutual funds

   676     —       —       676  

US treasury note (0.375%, 9/30/2012)

   —       504     —       504  

US treasury note (1.75%, 1/31/2014)

   —       103     —       103  
  

 

 

   

 

 

   

 

 

   

 

 

 
  $3,774    $607    $—      $4,381  
  

 

 

   

 

 

   

 

 

   

 

 

 

2011:

 Level 1 Level 2 Level 3 Totals
 (in thousands)
As of December 31, 2012       
Equity securities$7,293
 $
 $
 $7,293
Fixed income securities
 4,970
 
 4,970
Managed mutual funds211
 
 
 211
U.S. Treasury Notes
 608
 
 608
 $7,504
 $5,578
 $
 $13,082
As of December 31, 2011       
Equity securities$2,656
 $
 $
 $2,656
Short-term securities636
 
 
 636
Managed mutual funds740
 
 
 740
U.S. Treasury Notes
 610
 
 610
 $4,032
 $610
 $
 $4,642
There were no Level 3 securities held by the Company as of December 31, 20112012 or 2010.

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 significant transfers between Level 1 and Level 2 during the years ended December 31, 20112012 and 2010.

2011.

Note 7—6—Property and Equipment

Property and equipment as of December 31, 20112012 and 20102011 consisted of the following:

    December 31,  December 31, 
   2011  2010 
   (dollars in thousands) 

Furniture and fixtures

  $1,607   $1,414  

Office equipment

   3,617    3,185  

Computer software

   1,356    2,490  

Leasehold improvements

   1,702    1,116  
  

 

 

  

 

 

 
   8,282    8,205  

Less: Accumulated depreciation

   (4,470  (5,094
  

 

 

  

 

 

 
  $3,812   $3,111  
  

 

 

  

 

 

 

 December 31,
 2012 2011
 (in thousands)
Furniture and fixtures$1,180
 $1,607
Office equipment3,593
 3,617
Computer software1,758
 1,356
Leasehold improvements2,447
 1,702
 8,978
 8,282
Less: Accumulated depreciation(4,518) (4,470)
Property and Equipment, net$4,460
 $3,812
Depreciation expense was $1.1is included in other operating costs and totaled $1.7 million $1.4, $1.1 million and $1.1$1.4 million for the years ended December 31, 2012, 2011 2010 and 2009,2010, respectively.

The Company has evaluated its long-lived assets for impairment under the current accounting standards and has concluded that no impairment loss has occurred as of December 31, 20112012 and 2010.

2011.


F-17



Table of Contents

Note 8—7—Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities as of December 31, 20112012 and 20102011 consisted of the following:

   December 31,
   December 31,
 
   2011   2010 
   (dollars in thousands) 

Accrued sales commissions

  $5,715    $5,518  

Accrued bonuses

   9,991     15,077  

Accrued sub-transfer agent fees

   6,492     5,916  

Accrued professional service fees

   3,055     654  

Other accruals and liabilities

   4,846     3,299  
  

 

 

   

 

 

 
  $30,099    $30,464  
  

 

 

   

 

 

 

 December 31,
 2012 2011
 (in thousands)
Accrued bonuses and sales commissions$20,070
 $15,706
Accrued payroll and benefits2,960
 2,156
Accrued sub-transfer agent fees7,455
 6,492
Accrued professional service fees1,080
 3,055
Dividends payable2,173
 
Amounts payable under tax receivable agreement1,928
 321
Other accruals and liabilities3,206
 2,369
 $38,872
 $30,099
Note 9—8—Shares Subject to Redemption

The

Prior to the 2011 IPO, the Company entered intowas party to an agreement that upon the death of the majority shareholder, the Company haswould have a mandatory obligation to pay the majority shareholder his pro rata share of net revenue for the four quarters immediately preceding the holder’s death. The Company recognized a liability for shares subject to mandatory redemption of approximately $170.3 million as of December 31, 2010, which represents the amount that would have been paid if settlement had occurred on the respective reporting date. As discussed further below, effective upon the consummation of the IPO, the Company hashad no obligation as of December 31, 2011.under this agreement. Changes in the liability associated with this obligation have been recorded as interest expense on shares subject to mandatory redemption in the combined consolidated statements of operationsoperations. The Company recorded no interest expense for the year ended December 31, 2012 and interest expense of $45.8$45.8 million and $61.2$61.2 million for the years ended December 31, 2011 and 2010, respectively.

On June 29, 2011, the Company entered into an Amended and Restated Shareholders Agreement relative to MNBDManning & Napier Investor Services, Inc. that made the obligation to purchase the shares of the majority shareholder contingent. As a result of the conditionality established by this amendment, the obligation to purchase the shares of the majority shareholder no longer meetmet the criteria to be classified as a liability, and $1.5$1.5 million was reclassified to temporary equity in accordance with the requirements of accounting for contracts in an entity’s own equity. The Company did not recognize any gains or losses as a result of the aforementioned reclassification. Subsequent changes to the contingent obligation were recorded to equity.

As part of the overall agreement among the majority shareholder and the legacy owners of the Manning & Napier Companies to consummate the Offering,initial public offering, such mandatory and conditional obligations terminated upon the consummation of the OfferingIPO and the Company no longer reflects interest expense, or the liability and temporary equity related to such obligation. As a result, the carrying amounts of the instruments were reclassified to permanent equity at the date of the Offering. Refer to the combined consolidated statements of shareholders’ equity (deficit) and partners’ capital for the impacts of the reclassification.

At December 31, 2011 and 2010, the shares subject to redemption upon the death of the majority holder consisted of:

   December 31,   December 31, 
   2011   2010 
   (dollars in thousands) 

Common stock, $.01 par value—5,224,500 shares subject to redemption

  $—      $52  

Additional paid-in capital

   —       5,291  

Accumulated deficit attributable to those shares

   —       121,974  

Excess of common stock—additional paid-in capital and accumulated deficit attributable to those shares over redemption amount

   —       43,002  
  

 

 

   

 

 

 

Shares subject to mandatory redemption

  $—      $170,319  
  

 

 

   

 

 

 

initial public offering.

Note 10—9—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 Financial Industry Regulatory Authority, Inc., or 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 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 December 31, 20112012 and 2010,2011, the Company has not accrued for any such claims, legal proceedings, or other contingencies.

Lease Commitments

The Company has several operating leases for office space, and leases its primary office facilities in Fairport, New York under an operating lease expiring June 30, 2015.December 31, 2022. The Company also rents additional office space in Buffalo, New York, St. Petersburg, Florida, and Dublin, Ohio.various other locations throughout the United States. Total rental expense for all leases amounted to $3.1$3.6 million $2.6, $3.1 million and $2.6 $2.6

F-18



Table of Contents

million for the years ended December 31, 2012, 2011 2010 and 2009,2010, respectively. Minimum rent payments relating to the office leases for years subsequent to 2011,2012, are as follows:

   (dollars in
thousands)
 

Year Ending December 31,

  

2012

  $3,383  

2013

   3,226  

2014

   3,169  

2015

   1,732  

2016

   212  

Thereafter

   0  
  

 

 

 
  $11,722  
  

 

 

 

Year Ending December 31, Minimum Payments
  (in thousands)
2013 $3,233
2014 3,268
2015 3,253
2016 3,143
2017 2,918
Thereafter 14,549
  $30,364
Under the agreement for its primary office facilities, the Company is required to pay a minimum of $2.8approximately $2.9 million annually for the use of the facility as defined in the agreement.

facility.

As of December 31, 20112012 and 2010,2011, the Company had approximately $0.2$0.2 million of total capital lease obligations.

As detailed in Note 4,3, the Company is committed to obligations pursuant to the TRA. The timing of payments is subject to certain contingencies including Manning & Napier having sufficient taxable income to utilize all of the tax benefits defined in the TRA.

Note 11—10—Advisory Agreements

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

Investments in the Fund amounted to approximately $0.7$0.2 million and $0.7$0.7 million at December 31, 20112012 and 2010,2011, respectively.

Fees earned for advisory related services provided to the Fund and CIT investment vehicles were approximately $167.8$173.4 million $120.0, $167.8 million and $63.5$120.0 million for the years ended December 31, 2012, 2011 2010 and 2009,2010, respectively, which represents greater than 10% of revenue in each period.

Note 12—11—Shareholders’ Equity and Capital Structure

The authorized capital stock of Manning & Napier consists of 300,000,000 shares of Class A common stock, par value $0.01$0.01 per share and 2,000 shares of Class B common stock, par value $0.01$0.01 per share and are further described below. In addition to the Class A and Class B common stock, the Company has the authority to issue 100,000 shares of preferred stock, par value $0.01$0.01 per share.

Class A Common Stock

The holders of the Company’s Class A common stock are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders.

The holders of the Company’s Class A common stock are entitled to receive dividends, if declared by the Company’s board of directors, out of funds legally available therefore, subject to any statutory or contractual restrictions on the payment of dividends.

The holders of the Company’s Class A common stock do not have preemptive, subscription, redemption or conversion rights.

Class B Common Stock

The holder of the Company’s Class B common stock controls a majority of the vote on all matters submitted to a vote of stockholders. The number of votes for each share of Class B common stock is equal to the quotient derived by dividing the total number of issued and outstanding shares of Class B common stock into a number equal to 101% of the aggregate number of votes entitled to be cast by the holders of the Class A common stock and any other of the Company’s equity securities entitled to vote other than the holders of Class B common stock, as calculated on the record date of such vote.

The holder of the Company’s Class B common stock does not have any right to receive dividends or to receive a distribution upon the dissolution, liquidation or sale of all or substantially all of the Company’s assets.


F-19



Manning & Napier, Inc.
Notes to Combined Consolidated Financial Statements (Continued)

In the event the holder of the Company’s Class B common stock transfers any shares of Class B common stock to any person or entity, such shares will be deemed automatically to convert into the same number of shares of Class A common stock.

Upon the earlier to occur of: (i) the death of William Manning, the holder of the Company’s Class B common stock, (ii) the date that the aggregate direct and indirect ownership of William Manning of Class A units and Class B units of Manning & Napier Group constitutes less than 25% of the total number of Class A units and Class B units of Manning & Napier Group and (iii) the sixth anniversary of the original date of issuance of the Class B common stock, all outstanding shares of the Company’s Class B common stock will be automatically, without any further action on the Company’s part or the holder of the shares of the Company’s Class B common stock, cancelledcanceled and will revert to the status of authorized but unissued shares of Class B common stock.

The holder of the Company’s Class B common stock does not have any preemptive, subscription or conversion rights.

Voting

Generally, all matters to be voted on by stockholders must be approved by a majority of the votes entitled to be cast by all shares of Class A common stock and Class B common stock, voting together as a single class.

Shares Eligible for Future Sale

Upon the Offering,initial public offering, the Company entered into an exchange agreement with M&N Group Holding, MNCC and the other direct holders of all of the units of Manning & Napier Group that are not held by the Company.

Pursuant to the terms of an exchange agreement, subject to certain restrictions, such units willmay be exchangeable for an aggregate of up to 76,400,000 shares of the Company’s Class A common stock, subject to customary adjustments. In addition, the holders of any subsequent units issued of Manning & Napier Group will also become parties to the exchange agreement and such units, pursuant to the terms of the exchange agreement, will also be exchangeable for shares of the Company’s Class A common stock.

Subject to certain restrictions set forth in the exchange agreement:

with respect to the 59,160,487approximately 59.1 million Class A units of Manning & Napier Group held by M&N Group Holdings that are attributable to the interests of William Manning in M&N Group Holdings, commencing on the first anniversary of Offering,the initial public offering, M&N Group Holdings may exchange up to 15% of such units per year on behalf of William Manning; and

with respect to the 16,110,311approximately 16.0 million Class A units of Manning & Napier Group held by M&N Group Holdings that are attributable to the interests of the other holders of M&N Group Holdings,

commencing on the first anniversary of the consummation of the Offering,initial public offering, M&N Group Holdings may exchange up to 5% of such Class A units on behalf of such holders; and

commencing on the second anniversary of the consummation of the Offering,initial public offering, M&N Group Holdings may exchange the remaining Class A units, subject to the vesting requirements and selling restrictions;

with respect to the 749,964approximately 0.7 million Class A units of Manning & Napier Group held by MNCC attributable to the interests of William Manning in MNCC, commencing on the second anniversary of the Offering,initial public offering, MNCC may exchange up to 15% of such units per year on behalf of William Manning; and

with respect to the 338,758approximately 0.4 million Class A units of Manning & Napier Group held by MNCC attributable to the interests of the other members of MNCC, other than William Manning, commencing on the second anniversary of the consummation of the Offering,initial public offering, MNCC may exchange such Class A units, subject to the vesting requirements and selling restrictions, on behalf of such holders.

holders;

with respect to the approximately 0.2 million Class A units of Manning & Napier Group held by the other direct and indirect members, commencing on the second anniversary of the consummation of the initial public offering, these members may exchange such Class A units, subject to the vesting requirements and selling restrictions.
For any units of Manning & Napier Group exchanged, subsequent to the Offering, the Company will (i) pay an amount of cash equal to the number of units exchanged multiplied by the value of one share of the Company’s Class A common stock less a market discount and expected expenses, or, at the Company’s election, (ii) issue shares of the Company’s Class A common stock on a one-for-one basis, subject, in each case, to customary adjustments for stock splits, stock dividends and reclassifications and other similar transactions. As the Company receives units of Manning & Napier Group that are exchanged, the Company’s ownership of Manning & Napier Group will increase. The decision whether to pay cash or issue shares will be made by the independent members of the Company’s board of directors.


F-20




Note 12—Earnings per Common Share
Basic earnings per share (“basic EPS”) is computed by dividing net income (loss) 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 year ended December 31, 2012 and for the period from November 18, 2011 through December 31, 2011:
 Year Ended December 31, 2012 
November 18,
2011 through
December 31, 2011
 (in thousands, except share data)
Net income (loss) attributable to controlling and noncontrolling interests$76,419
 $(197,874)
Less: net income (loss) attributable to noncontrolling interests73,950
 (170,707)
Net income (loss) attributable to Manning & Napier, Inc.$2,469
 $(27,167)
Net income (loss) available to Class A common stock per basic and diluted share$0.18
 $(2.11)
Weighted average basic and diluted shares of Class A common stock outstanding13,583,873
 12,894,136
At December 31, 2012 and 2011, there were outstanding 76,400,000 Class A Units of Manning & Napier Group which, subject to certain restrictions, may 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 periods ended December 31, 2012 and 2011.
The Company’s Class B common stock represent voting interests and do not participate in the earnings of the Company. Accordingly, there is no earnings per share related to the Company’s Class B common stock.
Note 13—Equity Based Compensation

2011 Equity Compensation Plan

The 2011 Equity Compensation Plan (the “2011 Plan”) was adopted by the Company’s board of directors and approved by the Company’s stockholders prior to the consummation of the 2011 IPO. A total of 13,142,813 equity

interests are available for issuance under the 2011 Plan. The equity interests may be issued in the form of the Company’s Class A common stock, units of Manning & Napier Group, or LTIP units. As of December 31, 2011,2012, no such interests had been awarded under the 2011 Plan.

2011 Reorganization-Related Transactions

Prior to the IPO,initial public offering, the Company and certain affiliates had awarded certain employees equity shares in the Company and those affiliates. Equity-based compensation for these shares was determined based on the grant-date fair value less the cash consideration for such shares paid by the employee. Shares granted on January 1, 2011 and 2010 had a weighted average grant-date fair value per share of $117.85$117.85 and $27.01,$27.01, respectively, with the total estimated compensation cost associated with such shares being recognized over the required service term of 3 years.

In connection with the Reorganization (Note 3),2011 reorganization transactions, Class B units of M&N Group Holdings were granted to William Manning as part of the overall agreement among William Manning and the other owners of the Manning & Napier Companies to consummate the Reorganization.reorganization. These Class B units were vested immediately upon the consummation of the IPO (Note 3).IPO. As such, a one-time compensation charge of $213.0$213.0 million was recognized by the Company, based on the value of the Class B units, which represent approximately 23.6% of the outstanding voting and economic rights in M&N Group Holdings following the reorganization transactions and the consummation of the IPO.

these units.

Also upon the consummation of the IPO,initial public offering, the Company adopted new vesting terms related to the pre-IPO ownership interests of certain employees of the Company other than William Manning. Such individuals were entitled to 15% of their pre-Reorganizationpre-reorganization ownership interests upon the consummation of the IPO, andinitial public offering, with an additional 5% of such ownership interests will vestvesting annually through 2014, provided such individuals are employees of the Company as of such date (service-based vesting). The remaining ownership interests will be subject to performance-based vesting annually through 2014, to be determined by a vesting committee, and subject to an initial two-yeartwo-year lockup period as well as other selling restrictions (performance-based vesting). Notwithstanding these vesting requirements, in the event William Manning sells any portion of his interests in the Manning & Napier Companies following the consummation of the Offering, ourinitial public offering, the other pre-IPO employee-owners will have the right to sell a pro rata amount of such individuals’ indirect ownership interest in Manning & Napier Group, and if any individual does not at such time have fully vested ownership interests sufficient to allow such participation, an amount of their ownership interests will vest to the extent necessary to allow them to participate in the pro rata sale. In connection with the Reorganizationreorganization and the related amendment to the limited liability company agreement of Manning & Napier Group, these pre-IPO ownership interests were reclassified as Class A Units of Manning & Napier Group. As such, fully vested ownership interests willmay be exchangeable for shares of the Company’s Class A common stock (Note 12)11).

As of December 31, 2011, performance conditions were not yet defined


F-21



Manning & Napier, Inc.
Notes to Combined Consolidated Financial Statements (Continued)

Reorganization-Related Equity Compensation
During 2012, the Company recorded compensation expense for the performance-based awards and thereforeeligible 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 had notfor these performance-based awards will occur at the end of the service period. Until the grant date, compensation expense was re-measured at the end of each reporting period, to the extent that service has been established as ofrendered in proportion to the total requisite service period. No expense is being recognized for the performance-based awards eligible to vest on December 31, 2011. These awards are2013 and 2014 in connection with the 2011 reorganization transactions, as the performance conditions have not considered granted as of December 31, 2011 and as such, no expense for the approximately 13.5 million performance-based units was recognized during 2011.

yet been defined.

The following table summarizes performance-based stock unit activity for the year ended December 31, 2011:

   Stock Units  Weighted
Average
Grant
Date Fair
Value
 

Legacy S-Corp awards outstanding at January 1, 2011

   55,493   $26.08  

Legacy S-Corp shares granted

   32,212   $117.85  

Legacy S-Corp shares vested

   —      —    

Legacy S-Corp shares forfeited

   —      —    

Effect of reorganization (1)

   (87,705 $59.78  
  

 

 

  

Outstanding at November 18, 2011

   —      —    
  

 

 

  

Granted

   20,765,512   $12.00  

Vested

   (17,825,115 $12.00  

Forfeited

   —     
  

 

 

  

Outstanding at December 31, 2011

   2,940,397   $12.00  
  

 

 

  

(1)Effect of new vesting terms on legacy S-Corp share awards outstanding prior to the IPO

2012 specific to the 2011 reorganization transactions:

 Performance-Based Stock Units Weighted Average Grant Date Fair Value
Stock unit awards outstanding at January 1, 201240,480
 $12.00
Granted4,237,042
 $12.65
Vested(4,248,608) $12.64
Forfeited
 $
Stock unit awards outstanding at December 31, 201228,914
 $12.00

The following table summarizes service-based stock unit activity for the year ended December 31, 2012 specific to the 2011 reorganization transactions:
 Service-Based Stock Units Weighted Average Grant Date Fair Value
Stock unit awards outstanding at January 1, 20122,899,917
 $12.00
Allocation of units from performance to service-based (Note 2)1,548,427
 $12.00
Granted65,643
 $13.45
Vested(1,528,124) $12.00
Forfeited(60,901) $12.00
Stock unit awards outstanding at December 31, 20122,924,962
 $12.00
For service-based and performance-based awards granted during the year endedDecember 31, 2011,2012, the weighted average fair value of the awards granted was $12.00,$13.45 and $12.65, respectively, 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 datesdate of grant.

For the year endedDecember 31, 2012, the Company recorded approximately $72.3 million of compensation expense related to the vesting terms of ownership interests in connection with the 2011 reorganization transactions. For the year endedDecember 31, 2012, approximately $18.4 million is attributable to the service-based awards. For the same period, the remaining expense of approximately $53.8 million is attributable to performance-based awards. For the year endedDecember 31, 2012, $53.1 million of the expense attributable to performance-based awards is related to awards that vested 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 December 31, 2012.
For the year ended December 31, 2011, the Company recorded approximately $0.9$0.9 million of compensation expense related to shares granted prior to the IPO as well as $215.3$215.3 million of compensation expense related to the amended vesting terms of ownership interests described above. Of this amount, $213.0$213.0 million was a one-time compensation charge related to the fully vested Class B Units of M&N Group Holdings granted to William Manning. For the yearsyear ended December 31, 2010, and 2009 the Company recorded compensation expense related to shares granted of approximately $0.7 in each respective year.

$0.7 million.

The aggregate intrinsic value of service-based and performance-based stock units that vested during the year endedDecember 31, 2012 was approximately $19.3 million and $53.7 million, respectively. The aggregate intrinsic value of stock

F-22



Manning & Napier, Inc.
Notes to Combined Consolidated Financial Statements (Continued)

units that vested during the year ended December 31, 2011 was approximately $213.9 million.$213.9 million. The aggregate intrinsic value of legacy S-Corp share awards that vested during each of the yearsyear endedDecember 31, 2010 and 2009 was approximately $0.7 million.

$0.7 million.

As of December 31, 2011,2012, there was unrecognized compensation expense related to unvested service-based awards of approximately $33.9 million.$33.7 million. The Company expects to recognize thethis expense over a weighted average period of 2.01.5 years.

As of December 31, 2012, there was unrecognized compensation expense related to unvested performance-based awards of approximately $96.2 million, which the Company expects to recognize over a weighted average period of 1.5 years. Included in this total is an estimate of $95.0 million of unrecognized compensation expense related to the approximately 7.6 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 December 31, 2012, and includes performance awards eligible to vest through 2014.
Stock unit awards forfeited during the year ended December 31, 2012 were redistributed amongst the legacy owners, including William Manning. Of the stock units forfeited, 65,643 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 Class A common stock. The aggregate intrinsic value of these stock units that vested during the year ended December 31, 2012 was approximately $0.9 million .
Note 14—Income Taxes

The Company is comprised of entities that have elected to be treated as either an “S-Corporation”, a limited liability company (LLC)("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 U.S. federal or most state and local income taxes on their earnings; as such earnings (losses) 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 U.S. federal or state and local income taxes on their earnings and (losses), respectively.

Components of the provision for income taxes consist of the following:

   December 31, 
    2011   2010   2009 
   (dollars in thousands) 

Current

      

Federal

  $1,050    $159    $133  

State and Local

   912     549     227  
  

 

 

   

 

 

   

 

 

 

Current tax expense

   1,962     708     360  

Deferred

      

Federal

   18     3     —    

State and Local

   2     1     —    
  

 

 

   

 

 

   

 

 

 

Deferred tax expense

   20     4     —    
  

 

 

   

 

 

   

 

 

 

Provision for income tax expense

  $1,982    $712    $360  
  

 

 

   

 

 

   

 

 

 

 Year Ended December 31,
  
2012 2011 2010
 (in thousands)
Current     
Federal$4,472
 $1,050
 $159
State and Local912
 912
 549
Current tax expense5,384
 1,962
 708
Deferred     
Federal2,603
 18
 3
State and Local173
 2
 1
Deferred tax expense2,776
 20
 4
Provision for income tax expense$8,160
 $1,982
 $712


F-23



Manning & Napier, Inc.
Notes to Combined Consolidated Financial Statements (Continued)

The differences between income taxes computed using the U.S. federal income tax rate and the provision for income taxes for continuing operations wereare as follows:

   2011  2010  2009 
   (dollars in thousands) 
    

Amount computed using the statutory rate

  $(36,552 $18,834   $19,175  

Increase (reduction) in taxes resulting from:

    

State and local taxes, including settlements and adjustments, net of federal benefit

   852    534    206  

Equity-based compensation

   9,909    —      —    

Other, net

   (28  2    22  

Rate benefit from the flow-through entities

   27,801    (18,658  (19,043
  

 

 

  

 

 

  

 

 

 

Provision for income taxes

  $1,982   $712   $360  
  

 

 

  

 

 

  

 

 

 

 Year Ended December 31,
 2012 2011 2010
 (in thousands)
Amount computed using the statutory rate$29,603
 $(36,552) $18,834
Increase (reduction) in taxes resulting from:     
State and local taxes, including settlements and adjustments, net of federal benefit820
 852
 534
Equity-based compensation3,494
 9,909
 
Other, net74
 (28) 2
(Benefit) provision from the flow-through entities(25,831) 27,801
 (18,658)
Provision for income taxes$8,160
 $1,982
 $712
The effective tax rateprovision for income taxes includes a benefit(benefit) provision attributable to the fact that 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. This favorable(favorable) unfavorable impact is partially offset by the impact of certain permanent items, primarily attributable to certain compensation related expenses that are not deductible for tax purposes.

Deferred Tax Assets and Liabilities

   December 31, 
   2011   2010 
   (dollars in thousands 
    

Deferred Tax Assets

    

Tax receivable agreement

  $53,925    $—    

Bonus and commissions

   490     —    

Consulting and professional

   59     4  

Tax loss carryforwards

   29     —    

Other

   44     9  
  

 

 

   

 

 

 
  $54,547    $13  

Deferred Tax Liabilities

    

Depreciation and amortization

   139     —    
  

 

 

   

 

 

 

Total Deferred Tax Assets and Liabilities, net

  $54,408    $13  
  

 

 

   

 

 

 

 December 31,
 2012 2011
 (in thousands)
Deferred Tax Assets   
Tax receivable agreement$51,357
 $53,925
Bonus and commissions644
 490
Consulting and professional35
 59
Tax loss carryforwards
 29
Other46
 44
 52,082
 54,547
Deferred Tax Liabilities   
Depreciation and amortization142
 139
Prepaid items308
 
 450
 139
Total Deferred Tax Assets and Liabilities, net$51,632
 $54,408
The increasedecrease in net deferred tax assets from as of December 31, 2010 to 2012 since December 31, 2011 was primarily attributable to an increase inamortization of the tangible and intangible assets of Manning & Napier Group. During the year ended December 31, 2011, the Company recorded the tax basis of the tangible and intangible assets of Manning & Napier Group in accordance with the Company’s election to be made under Section 754 of the Internal Revenue Code. Upon consummation of the Offeringinitial public offering the Companies entered into an exchange agreement whereby interests of Manning & Napier Group were exchanged for Class A shares. This transaction resulted in an increase in the tax basis of the tangible and intangible assets of Manning & Napier Group, which triggered a liability under the tax receivable agreement that was entered into between the Company and the Manning & Napier Group selling unit holders. The agreement provides for a payment to the Manning & Napier Group Unit holders of 85% of the cash tax savings (if any), resulting from the increased tax benefits from the exchange and for the Company to retain 15% of such benefits. Accordingly, deferred tax assets, amounts payable under the tax receivable agreement and additional paid-in capital increased by $54.4$54.4 million $46.2, $46.2 million and $8.2$8.2 million, respectively, on the Company’s combined consolidated statementstatements of financial condition as of December 31, 2011. See Note 4 for further discussion.

As of December 31, 2011.

As of December 31, 2012, the Company had no available net operating loss carryforwards for income tax purposes. As of December 31, 2011, the Company had available net operating loss carryforwards for income tax purposes of less than $0.1$0.1 million which will expire in 2031. As of December 31, 2010, the Company had no available net operating loss carryforwards for income tax purposes.

.


F-24



Manning & Napier, Inc.
Notes to Combined Consolidated Financial Statements (Continued)

The Company has assessed the recoverability of the deferred tax assets and believes it is more likely than not that the assets will be realized. The Company has not recorded a valuation allowance as of December 31, 20112012 and 2010.

2011.

Accounting for Uncertainty in Income Taxes

A reconciliation of the beginning and ending amount of the Company’s liability for income taxes associated with unrecognized tax benefits is as follows:

   December 31, 
   2011   2010 
   (dollars in thousands) 
    

Balance as of January 1

  $—      $  —    

Tax positions related to the current year:

    

Additions

   3,144     —    

Tax positions related to prior years

   —       —    
  

 

 

   

 

 

 

Balance as of December 31

  $3,144    $—    
  

 

 

   

 

 

 

 Year Ended December 31,
 2012 2011
 (in thousands)
Beginning Balance$3,144
 $
Additions
 3,144
Ending Balance$3,144
 $3,144
The Company’s policy regarding interest and penalties related to uncertain tax positions is to recognize such items as a component of the provision (benefit) for income taxes. The Company recorded no interest or penalties in the combined consolidated statements of operations for the years ended December 31, 2012, 2011 2010 and 2009.

2010.

The Company does not expect that changes in the liability for unrecognized tax benefits during the next twelve months will have a significant impact on the Company's financial position or results of operations. If the unrecognized tax benefits of $3.1$3.1 million were subsequently recognized, it would favorably affect the effective income tax rate in the period recognized.

The Company files income tax returns with Federal, state and local jurisdictions. The Company’s U.S. Federal and state tax matters for the years 20082009 through 20102011 remain subject to examination by the respective tax authorities.

Note 15—Related Party Transactions

Aircraft
Aircraft

From time to time, the Company reimburses William Manning for business travel in connection with the use of a private plane owned by William Manning. The Company owns no direct or indirect interest in such private plane, and no such entity has provided any financing to William Manning for such plane. In the event William Manning, or other executives, use such plane in connection with the business of the Company, the Company reimburses William Manning based upon the amount of flight time per trip, which is a fraction of the total cost of the ownership and maintenance of such plane. Reimbursements with respect to each particular use of the plane for the years ended December 31, 2012, 2011 2010 and 20092010 have been less than $0.1millionapproximately $0.1 million annually, and in the aggregate have equaled approximately $0.2 million.

$0.3 million.

Services Arrangement

Pursuant to an arrangement between MNIS and IP.com I, LLC ("IP.com"), an entity that is indirectly majority-owned by William Manning, MNIS provides to IP.com, and IP.com reimburses MNIS for central administrative services, including accounting, group health and other benefits, benefits management, payroll, occupancy of shared space and other office expenses. IP.com paid MNIS less than $0.1 million and approximately $0.2$0.2 million $0.3 and $0.3 million and $0.3 million for such services for the years ended December 31, 2012, 2011 and 2010, respectively.
Transactions with noncontrolling members
During 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.
For the year ended December 31, 2011, 2010 and 2009, respectively.

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 subsequent to the Offering.

M&N Group Holdings

The Company used approximately $105.7$105.7 million of the net proceeds from the sale of the Company’s Class A common stock in the Offeringinitial public offering to purchase Class A units of Manning & Napier Group from M&N Group Holdings, which in turn transferred such net proceeds to its members. William Manning, the Company’s current employees, including certain of the Company’s executive officers, and Richard Goldberg, directly and indirectly, collectively own 100% of the outstanding membership interests of M&N Group Holdings. The purchase price for each Class A unit was equal to the price per share of the Company’s Class A common stock in the Offering.initial public offering. M&N Group Holdings transferred such net proceeds to its members.

Promissory Note

MNA was issued a promissory note from William

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 in& Napier Group. While immaterial, the principal amountCompany has not received any reimbursement for such services.

F-25




Note 16—Employee Benefit Plan

The Company offerspreviously offered two benefit plans across the combined consolidated companies. The Manning & Napier Advisors, Inc.LLC 401(k) and Profit Sharing Plan (the “MNA Plan”) covers employees of MNA, AAC and ETC who meet the plan criteria. The Manning & Napier Information Services, Inc.Services/Textwise 401(k) Plan (the “MNIS Plan”"MNIS Plan") coverscovered employees of MNIS and PPI who meetmet the plan criteria.

On April 2, 2012, the employees of MNIS and PPI transferred out of the MNIS Plan and into the MNA Plan and as a result, the Company now offers one benefit plan across the combined consolidated companies.

With respect to the 401(k) portion of the MNA Plan, and the MNIS Plan, participants may voluntarily contribute up to 50% of their regular salary subject to annual limitations determined by the IRS. The Company matches an amount equivalent to 50% of a participant’s contribution, not to exceed 2% of salaries paid.their total compensation. Matching contributions vest to the participants after three years of service. These contributions by the Company amounted to approximately $0.7$0.7 million $0.6, $0.7 million and $0.5$0.6 million for the years ended December 31, 2012, 2011 2010 and 2009,2010, respectively.

With respect to the Profit Sharing portion of the MNA Plan, the Company may make annual profit sharing contributions, subject to certain limitations, which vest immediately to individuals who participate. These contributions by the Company amounted to $1.1$1.3 million $1.0, $1.1 million and $0.9$1.0 million for the years ended December 31, 2012, 2011 and 2010, respectively.
Note 17—Selected Quarterly Financial Data (Unaudited)
The following is a summary of the quarterly results of operations of the Company for the years ended December 31, 2012 and 2011.
 2012
 First Quarter Second Quarter Third Quarter Fourth Quarter
 (in thousands, except share data)
Revenue$85,014
 $81,529
 $85,382
 $87,130
Operating income (1)
$36,019
 $13,229
 $21,689
 $13,183
Net income (loss) attributable to the controlling and noncontrolling interests (1)
$34,424
 $9,456
 $21,064
 $11,475
Net income (loss) attributable to Manning & Napier, Inc.$2,903
 $(1,836) $1,654
 $(252)
Net income (loss) available to Class A common stock - basic and diluted$0.21
 $(0.14) $0.12
 $(0.02)
Weighted average shares of Class A common stock - basic and diluted13,583,873
 13,583,873
 13,583,873
 13,583,873
Cash dividends declared per share of Class A common stock$0.16
 $0.16
 $0.16
 $0.16
        
 2011
 First Quarter Second Quarter Third Quarter Fourth Quarter
 (in thousands, except share data)
Revenue$78,040
 $85,805
 $85,789
 $80,358
Operating income (loss) (1)
$37,226
 $36,376
 $43,103
 $(175,489)
Net income (loss) attributable to the controlling and noncontrolling interests (1)
$23,660
 $19,873
 $29,703
 $(179,653)
Net income (loss) attributable to Manning & Napier, Inc. (2)


 

 

 $(27,167)
Net income (loss) available to Class A common stock - basic and diluted (2)
  

 

 $(2.11)
Weighted average shares of Class A common stock - basic and diluted (2)


 

 

 12,894,136
Cash dividends declared per share of Class A common stock

 

 

 $
(1) Operating income and net income (loss) attributable to the controlling and noncontrolling interests for the fourth quarter of 2011 2010 and 2009, respectively.the first, second, third and fourth quarters of 2012 included $215.3 million, $3.7 million, $24.0 million, $17.3 million and $27.2 million, respectively, of non-cash equity-based compensation charges.

F-26



Manning & Napier, Inc.
Notes to Combined Consolidated Financial Statements (Continued)


(2) The MNIS Plan does not participateCompany consummated its initial public offering on November 18, 2011. Since that date, the Company has consolidated the results of Manning & Napier Group due to the Company's role as its managing member. Therefore, all income for the period prior to November 18, 2011 is entirely attributable to the noncontrolling interest which existed prior to the initial public offering. As a result, in profit sharing.

the computation of GAAP earnings per share, only the net income attributable to the Company's controlling interest from the period subsequent to the initial public offering is considered.

Note 17—18—Subsequent Events
Line of Credit
On February 13, 2013, the Company and Manning & Napier Group executed a Daily Adjusting

LIBOR Revolving Line Note (the "Note") with M&T Bank. The Note has an original principal amount of $10.0 million and bears an interest rate of 1.50 percentage points above the greater of (a) one-month LIBOR, adjusting daily, or (b) one-day (i.e. overnight) LIBOR. The Note is unsecured and is payable on demand. If the Company fails to make payment when due under the Note, the default rate on the outstanding balance shall be 5 percentage points per year above the otherwise applicable rate per year. The Company has not drawn any loans under the Note.

Distribution and Dividend
On March 20, 2012,8, 2013, 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.$31.3 million. Concurrently, the Board of Directors declared a $0.16$0.16 per share dividend to the holders of Class A common stock. The dividend is payable on May 1, 20122013 to shareholders of record as of April 13, 2012.

F-31

15, 2013.
Exchange of Class A units of Manning & Napier Group
The Company is nearing the completion of the 2013 exchange period whereby eligible Class A units of Manning & Napier Group held by M&N Group Holdings may be tendered for exchange. In connection with the exchange, the Company will pay an amount of cash equal to the number of units exchanged multiplied by the value of one share of the Company's Class A common stock less a market discount and expected expenses, or at the Company's election issue shares of Class A common stock on a one-for-one basis.



F-27