SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the Quarterly Period Ended JuneSeptember 30, 2011

Or

For the transition period from                to                 

Commission file number 001-33761

PZENA INVESTMENT MANAGEMENT, INC.

120 West 45th Street

New York, New York 10036

Not Applicable

PZENA INVESTMENT MANAGEMENT, INC.

FORM 10-Q

(in thousands, except share and per-share amounts)

Pzena Investment Management, Inc. (the “Company”) functions as the holding company through which the business of its operating company, Pzena Investment Management, LLC (the “operating company”), is conducted.  Concurrently with the consummation of the Company’s initial public offering on October 30, 2007, the operating agreement of the operating company was amended and restated such that, among other things, the Company became the sole managing member of the operating company.  As a result of these transactions: (i) the Company has consolidated the financial results of the operating company with its own, and reflected the membership interest in it that it does not own as a non-controlling interest in its consolidated financial statements; and (ii) the Company recognizes income generated from its economic interest in the operating company’s net income.

Pzena Investment Management, LLC is an investment adviser which is registered under the Investment Advisers Act of 1940 and is headquartered in New York, New York.  As of JuneSeptember 30, 2011, the operating company managed assets in a variety of value-oriented investment strategies across a wide range of market capitalizations in both U.S. and non-U.S. capital markets.

The Company, through its investment in its operating company, has consolidated the results of operations and financial condition of the following entities as of JuneSeptember 30, 2011:

Note 2—Significant Accounting Policies

Basis of Presentation:

VIEs that are not consolidated continue to receive investment management services from the Company, and are vehicles through which the Company offers its Global Value and/or EAFE Value strategies.  The total net assets of these VIEs was approximately $270.5$206.0 million and $515.6 million at JuneSeptember 30, 2011 and December 31, 2010, respectively.  Neither the Company nor the operating company were exposed to losses as a result of its involvement with these entities because they had no direct investment in them.

The Company records in its own equity its pro-rata share of transactions that impact the operating company’s net equity, including equity and option issuances and adjustments to accumulated other comprehensive income.  The operating company’s pro-rata share of such transactions are recorded as adjustments to additional paid-in capital or non-controlling interests, as applicable, on the consolidated statements of financial position.

Management’s Use of Estimates:

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses for the period.  Actual results could differ from those estimates.

Fair Values of Financial Instruments:

The carrying amounts of all financial instruments in the consolidated statements of financial condition are presented at their fair value.

Revenue Recognition:

Earnings per Share:

Basic earnings per share is computed by dividing the Company’s net income or loss attributable to its common stockholders by the weighted average number of shares outstanding during the reporting period.  Diluted earnings per share adjusts this calculation to reflect the impact of all outstanding operating company membership units, as well as operating company phantom units and outstanding operating company unit options and options to purchase Class A Common Stock, to the extent they would have a dilutive effect on net income per share for the reporting period.  Net income or loss for diluted earnings per share generally assumes all operating company membership units are converted into Company stock at the beginning of the reporting period and the resulting change to Company net income associated with its increased interest in the operating company is taxed at the Company’s effective tax rate, exclusive of adjustments associated with both the valuation allowance and the liability to selling and converting shareholders.  When this conversion results in an increase in earnings per share or a decrease in loss per share, diluted net income and diluted earnings per share are assumed to be equal to basic net income and basic earnings per share for the reporting period.

For the three and sixnine months ended JuneSeptember 30, 2011 and 2010, the Company’s diluted net income was determined as follows:

For the three and sixnine months ended JuneSeptember 30, 2011 and 2010, the following operating company units, and options to purchase operating company unit,units and shares of Class A common stock and options to purchase Class A common stock, and phantom operating company units were excluded from the calculation of diluted net income per share, as their inclusion would have had an antidilutive effect for the respective periods:

For the three and sixnine months ended JuneSeptember 30, 2011 and 2010, the Company’s basic and diluted earnings per share were determined as follows:

Cash and Cash Equivalents:

At JuneSeptember 30, 2011, cash and cash equivalents was $25.2$36.9 million.  The Company considers all money market funds and highly-liquid debt instruments with an original maturity of three months or less at the time of purchase to be cash equivalents.  The Company maintains its cash in bank deposit and other accounts whose balances, at times, exceed federally insured limits.

Interest on cash and cash equivalents is recorded as interest income on an accrual basis in the consolidated statements of operations.

Restricted Cash:

The Company maintains a compensating balance of $1.4 million at JuneSeptember 30, 2011 as collateral for a letter of credit issued by a third party in lieu of a cash security deposit, as required by the Company’s lease for its New York office space.  Such amount is recorded in restricted cash in the consolidated statements of financial condition.

Due to/from Broker:

Due to/from broker consists primarily of cash balances and amounts receivable/payable for unsettled securities transactions held/initiated at the clearing brokers of the Company’s consolidated investment partnerships.

Investments, at Fair Value:

Investments, at Fair Value represents the securities held by the Company and its consolidated investment partnerships, as well as investments in mutual funds.  All such investments are recorded at fair value, with net realized and unrealized gains and losses reported in earnings in the consolidated statements of operations.

The Company’s fair value measurements relate to its consolidated investments in equity securities, which are primarily exchange-traded securities with quoted prices in active markets, and its investments in mutual funds.  The fair value measurements of the equity securities and mutual funds have been classified as Level 1.

The following table presents these instruments’ fair value at JuneSeptember 30, 2011:

The following table presents these instruments’ fair value at December 31, 2010:

Securities Valuation:

The net realized gain or loss on sales of securities and mutual funds is determined on a specific identification basis and is included in net realized and unrealized gain/(loss) from investments in the consolidated statements of operations.

Concentrations of Credit Risk:

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, amounts due from brokers, and advisory fees receivable.  The Company maintains its cash and temporary cash investments in bank deposits and other accounts whose balances, at times, exceed federally insured limits.

The concentration of credit risk with respect to advisory fees receivable is generally limited due to the short payment terms extended to clients by the Company.  On a periodic basis, the Company evaluates its advisory fees receivable and establishes an allowance for doubtful accounts, if necessary, based on a history of past write-offs and collections and current credit conditions.  For the three months ended JuneSeptember 30, 2011 and 2010, approximately 8.1%7.1% and 10.5%10.4%, respectively, of the Company’s advisory fees were generated from an advisory agreement with one client.  For the sixnine months ended JuneSeptember 30, 2011 and 2010, approximately 8.3%7.9% and 10.0%10.1%, respectively, of the Company’s advisory fees were generated from an advisory agreement with one client.  At JuneSeptember 30, 2011 and December 31, 2010, no allowance for doubtful accounts has been deemed necessary.

Property and Equipment:

Property and equipment is carried at cost, less accumulated depreciation and amortization.  Depreciation is provided on a straight-line basis over the estimated useful lives of the respective assets, which range from three to seven years.  Leasehold improvements are amortized on a straight-line basis over the shorter of the useful life of the improvements or the remaining lease term.

Business Segments:

The Company views its operations as comprising one operating segment.

Income Taxes:

The Company is a “C” corporation under the Internal Revenue Code, and thus liable for federal, state, and local taxes on the income derived from its economic interest in its operating company.  The operating company is a limited liability company that has elected to be treated as a partnership for tax purposes.  It has not made a provision for federal or state income taxes because it is the individual responsibility of each of the operating company’s members (including the Company) to separately report their proportionate share of the operating company’s taxable income or loss.  Similarly, the income of the Company’s consolidated investment partnerships is not subject to income taxes, since it is allocated to each partnership’s individual partners.  The operating company has made a provision for New York City Unincorporated Business Tax (“UBT”).

The Company and its consolidated subsidiaries account for all federal, state, and local taxation pursuant to the asset and liability method, which requires deferred income tax assets and liabilities to be recorded for temporary differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future, based on enacted tax laws and rates applicable to the periods in which the temporary differences are expected to affect taxable income.  Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount more likely than not to be realized.  At JuneSeptember 30, 2011, the Company had a $58.7$60.3 million valuation allowance against the deferred tax assetassets recorded as part of the Company’s initial public offering and the subsequent exchanges of Class B units for shares of its Class A common stock.  At December 31, 2010, the Company had a $59.4 million valuation allowance against thisthese deferred tax asset.assets.  The income tax expense, or benefit, is the tax payable or refundable for the period, plus or minus the change during the period in deferred tax assets and liabilities.  The Company records its deferred tax liabilities as a component of other liabilities in the consolidated statements of financial condition.

Foreign Currency:

Investment securities and other assets and liabilities denominated in foreign currencies are remeasured into U.S. dollar amounts at the date of valuation.  Purchases and sales of investment securities, and income and expense items denominated in foreign currencies, are remeasured into U.S. dollar amounts on the respective dates of such transactions.

The Company does not isolate the portion of the results of its operations resulting from the impact of changes in foreign exchange rates on its investments, from the fluctuations arising from changes in market prices of securities held.  Such fluctuations are included in net realized and unrealized gain/(loss) on investments in the consolidated statements of operations.

Reported net realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions, and the difference between the amounts of dividends, interest, and foreign withholding taxes recorded on the Company’s books and the U.S. dollar equivalent of the amounts actually received or paid.  Net realized foreign exchange gains and losses arise from changes in the fair values of assets and liabilities resulting from changes in exchange rates.

Note 3—Property and Equipment

Property and equipment, net, is comprised of the following:

Depreciation is included in general and administrative expense and totaled $0.1 million for each of the three months ended JuneSeptember 30, 2011 and 2010.  Such expenses totaled $0.2$0.3 million for each of the sixnine months ended JuneSeptember 30, 2011 and 2010.

Note 4—Related Party Transactions

For the three months ended JuneSeptember 30, 2011 and 2010, the Company earned $0.7$0.5 million and $1.0$1.1 million, respectively, in investment advisory fees from unconsolidated VIEs which receive investment management services from the Company.  For the sixnine months ended JuneSeptember 30, 2011 and 2010, the Company earned $1.7$2.1 million and $2.1$3.2 million, respectively, in such fees.  The Company is not the primary beneficiary of these VIEs.

At both JuneSeptember 30, 2011 and December 31, 2010, the Company had less than $0.1 million remaining of an advanceadvances to an international investment company for organization and start-up costs, which isare included in receivable from related parties on the consolidated statements of financial condition.  The Company is the sponsor and investment manager of this entity.  This entity is included in the previously mentioned unconsolidated VIEs, of which the Company is not considered the primary beneficiary.

At JuneSeptember 30, 2011 and December 31, 2010, receivables from related parties included less than $0.1 million of loans to employees.  The Company has, in the past, issued loans that were in the form of forgivable promissory notes, which were amortized through compensation expense pursuant to their terms.  For the sixnine months ended JuneSeptember 30, 2010, less than $0.1 million of such amortization was recognized through compensation and benefits expense.   No such amortization was recognized for the three months ended JuneSeptember 30, 2010.  The Company did not have any forgivable promissory notes at JuneSeptember 30, 2011 or December 31, 2010.

On October 28, 2008, the operating company issued an aggregate of $16.0 million principal amount of Senior Subordinated Notessenior subordinated notes to entities established by Richard S. Pzena, the Company’s Chief Executive Officer, for the benefit of certain of his family members, an entity controlled by a Company Director, and a former employee.  The Notes were repaid in full during the year ended December 31, 2010.

Note 5—Commitments and Contingencies

The Company leases office space under a non-cancelable operating lease agreement which expires on October 31, 2015.  The Company reflects minimum lease expense for its headquarters on a straight-line basis over the lease term.  Lease expenses totaled $0.5 million and $0.4 million for each of the three months ended JuneSeptember 30, 2011 and 2010, respectively, and are included in general and administrative expense.  Such expenses totaled $1.1$1.5 million for each of the sixnine months ended JuneSeptember 30, 2011 and 2010.2010, respectively.  Lease expenses are presented net of sublease income.

Note 6—Compensation and Benefits

Compensation and benefits expense to employees and members is comprised of the following:

For the three and sixnine months ended JuneSeptember 30, 2011 and 2010, the Company awarded no options to acquire Class B units under the Pzena Investment Management, LLC 2006 Equity Incentive Plan (the “2006 Equity Incentive Plan”) and no options to acquire Class A common stock under the Pzena Investment Management, Inc. 2007 Equity Incentive Plan (the “2007 Equity Incentive Plan”).

For the three months ended JuneSeptember 30, 2011 and 2010, the Company recognized approximately $0.7 million and $0.5 million, respectively, in compensation and benefits expense associated with the amortization of all operating company Class B units and options to acquire operating company Class B units under the 2006 Equity Incentive Plan, and options to acquire Class A common stock issued under the 2007 Equity Incentive Plan.  For the sixnine months ended JuneSeptember 30, 2011 and 2010, the Company recognized approximately $1.4$2.0 million and $1.0$1.6 million in such compensation and benefits expense.

For the sixnine months ended JuneSeptember 30, 2011 and 2010, the operating company granted 6,000 and 7,000, respectively, restricted operating company Class B units and the related shares of Class B common stock to certain members pursuant to the 2006 Equity Incentive Plan.  No such units were granted for the three months ended JuneSeptember 30, 2011 and 2010.  These unit grants each vest ratably over a four-year period commencing January 1, 2011 and 2010, respectively.  The amortization of allthese unit-based awards was not materialless than $0.1 million for eithereach of the three and six months ended JuneSeptember 30, 2011 and 2010, and $0.1 million for each of the nine months ended September 30, 2011 and 2010.

Pursuant to the Pzena Investment Management, LLC Amended and Restated Bonus Plan (the “Bonus Plan”), which became effective January 1, 2007, was amended and restated as of October 30, 2007, and was further amended as of October 31, 2008, eligible employees whose cash compensation is in excess of certain thresholds have a portion of that excess mandatorily deferred.  Amounts deferred may be credited to an investment account, take the form of phantom Class B units, or be invested in money market funds at the employee’s discretion, and vest ratably over four years.  At Juneboth September 30, 2011 and December 31, 2010, the liability associated with deferred compensation investment accounts was approximately $0.7 million and $0.9 million, respectively, which is recorded in the deferred compensation liability on the consolidated statement of financial condition.  For the three months ended JuneSeptember 30, 2011 and 2010, the Company recognized approximately $0.5$0.3 million and $0.3$0.4 million, respectively, in compensation and benefits expense associated with the amortization of all deferred compensation awards.awards associated with the Bonus Plan.  For the sixnine months ended JuneSeptember 30, 2011 and 2010, the Company recognized approximately $1.0$1.3 million and $0.6$0.9 million in such expense.

Note 7—Income Taxes

The operating company is a limited liability company that has elected to be treated as a partnership for tax purposes.  Neither it nor the Company’s other consolidated subsidiaries has made a provision for federal or state income taxes because it is the individual responsibility of each of these entities’ members (including the Company) to separately report their proportionate share of the respective entity’s taxable income or loss.  The operating company has made a provision for New York City UBT.  The Company, as a “C” corporation under the Internal Revenue Code, is liable for federal, state and local taxes on the income derived from its economic interest in its operating company, which is net of UBT.  Correspondingly, in its consolidated financial statements, the Company reports both the operating company’s provision for UBT, as well as its provision for federal, state and local corporate taxes.

The components of the income tax expense/(benefit) are as follows: