MN 10-Q Q1 2013
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________________________________
FORM 10-Q 
_____________________________________________________________
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2013
OR 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to            
Commission file number: 001-35355
 _____________________________________________________________
MANNING & NAPIER, INC.
(Exact name of registrant as specified in its charter)
_____________________________________________________________
Delaware
 
45-2609100
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
290 Woodcliff Drive
Fairport, New York
 
14450
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code:
(585) 325-6880
_____________________________________________________________ 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer
 
¨
  
Accelerated filer
 
x
 
 
 
 
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. 
Class
  
Outstanding at May 7, 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
 




TABLE OF CONTENTS
 
 
 
Page
Part I
 
Item 1.
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
Part II
 
Item 1.
Item 1A.
Item 2.
Item 6.
 
 
 
 
In this Quarterly Report on Form 10-Q, “we”, “our”, “us”, the “Company”, “Manning & Napier” and the “Registrant” refers to Manning & Napier, Inc. and, unless the context otherwise requires, its consolidated direct and indirect subsidiaries and predecessors.
 
 


i

Table of Contents

PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
Manning & Napier, Inc.
Consolidated Statements of Financial Condition
(In thousands, except share data)
 

 
March 31,
2013
 
December 31,
2012
 
 
(unaudited)
 
 
Assets
 
 
 
 
Cash and cash equivalents
 
$
131,686

 
$
108,324

Accounts receivable
 
23,818

 
22,962

Accounts receivable—Manning & Napier Fund, Inc.
 
14,576

 
13,767

Investment securities, at fair value
 
10,558

 
13,082

Prepaid expenses and other assets
 
6,452

 
7,014

Total current assets
 
187,090

 
165,149

Property and equipment, net
 
4,420

 
4,460

Net deferred tax assets, non-current
 
48,571

 
48,571

Total non-current assets
 
52,991

 
53,031

Total assets
 
$
240,081

 
$
218,180

Liabilities
 
 
 
 
Accounts payable
 
$
1,325

 
$
1,231

Accrued expenses and other liabilities
 
57,417

 
38,872

Deferred revenue
 
12,054

 
10,342

Total current liabilities
 
70,796

 
50,445

Amounts payable under tax receivable agreement, non-current
 
43,989

 
43,989

Total non-current liabilities
 
43,989

 
43,989

Total liabilities
 
$
114,785

 
$
94,434

Commitments and contingencies (Note 8)
 


 


Shareholders’ equity
 
 
 
 
Class A common stock, $0.01 par value; 300,000,000 shares authorized, 13,583,873 issued and outstanding at March 31, 2013 and December 31, 2012
 
$
136

 
$
136

Class B common stock, $0.01 par value; 2,000 shares authorized, 1,000 shares issued and outstanding at March 31, 2013 and December 31, 2012
 

 

Additional paid-in capital
 
201,137

 
198,117

Retained deficit
 
(35,221
)
 
(33,392
)
Accumulated other comprehensive income
 

 

Total shareholders’ equity
 
166,052

 
164,861

Noncontrolling interest
 
(40,756
)
 
(41,115
)
Total shareholders’ equity and noncontrolling interest
 
125,296

 
123,746

Total liabilities, shareholders’ equity and noncontrolling interest
 
$
240,081

 
$
218,180

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


1

Table of Contents

Manning & Napier, Inc.
Consolidated Statements of Operations
(In thousands, except share data)
(Unaudited)
 
 
 
Three months ended March 31,
 
 
2013
 
2012
Revenues
 
 
 
 
Investment management services revenue
 
$
90,256

 
$
85,014

Expenses
 
 
 
 
Compensation and related costs
 
48,483

 
27,732

Distribution, servicing and custody expenses
 
15,915

 
14,230

Other operating costs
 
7,779

 
7,033

Total operating expenses
 
72,177

 
48,995

Operating income
 
18,079

 
36,019

Non-operating income (loss)
 
 
 
 
Interest expense
 
(3
)
 
(4
)
Interest and dividend income
 
63

 
19

Net capital gains on investments
 
250

 
380

Total non-operating income
 
310

 
395

Income before provision for income taxes
 
18,389

 
36,414

Provision for income taxes
 
1,997

 
1,990

Net income attributable to controlling and noncontrolling interests
 
16,392

 
34,424

Less: net income attributable to noncontrolling interests
 
16,048

 
31,521

Net income attributable to Manning & Napier, Inc.
 
$
344

 
$
2,903

 
 
 
 
 
Net income per share available to Class A common stock
 
 
 
 
Basic
 
$
0.03

 
$
0.21

Diluted
 
$
0.03

 
$
0.21

Weighted average shares of Class A common stock outstanding
 
 
 
 
Basic
 
13,583,873

 
13,583,873

Diluted
 
13,583,873

 
13,583,873

Cash dividends declared per share of Class A common stock
 
$
0.16

 
$
0.16

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


2

Table of Contents

Manning & Napier, Inc.
Consolidated Statements of Comprehensive Income
(In thousands)
(Unaudited)
 
 
 
Three months ended March 31,
 
 
2013
 
2012
Net income attributable to controlling and noncontrolling interests
 
$
16,392

 
$
34,424

Net unrealized holding gain on investment securities, net of tax
 

 
10

Comprehensive income
 
$
16,392

 
$
34,434

Less: Comprehensive income attributable to noncontrolling interest
 
16,048

 
31,531

Comprehensive income attributable to Manning & Napier, Inc.
 
$
344

 
$
2,903

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


3

Table of Contents

Manning & Napier, Inc.
Consolidated Statement of Shareholders’ Equity
(In thousands, except share data)
(Unaudited) 
 
 
 
Common Stock –  class A
 
Common Stock – class B
 
Additional
Paid in Capital
 
Retained
Deficit
 
Accumulated
Other
Comprehensive Income (Loss)
 
Non
Controlling
Interest
 
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
Total
Balance—December 31, 2012
 
13,583,873

 
$
136

 
1,000

 
$

 
$
198,117

 
$
(33,392
)
 
$

 
$
(41,115
)
 
$
123,746

Net income
 

 

 

 

 

 
344

 

 
16,048

 
16,392

Distributions
 

 

 

 

 

 

 

 
(26,996
)
 
(26,996
)
Equity-based compensation
 

 

 

 

 
3,020

 

 

 
18,720

 
21,740

Dividends declared on Class A common stock
 

 

 

 

 

 
(2,173
)
 

 

 
(2,173
)
Purchase of Class A units of Manning & Napier Group, LLC held by noncontrolling interests (Note 3)
 

 

 

 

 

 

 

 
(7,413
)
 
(7,413
)
Balance—March 31, 2013
 
13,583,873

 
$
136

 
1,000

 
$

 
$
201,137

 
$
(35,221
)
 
$

 
$
(40,756
)
 
$
125,296

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


4

Table of Contents

Manning & Napier, Inc.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
 
 
 
Three months ended March 31,

 
2013
 
2012
Cash flows from operating activities:
 
 
 
 
Net income
 
$
16,392

 
$
34,424

Adjustment to reconcile net income to net cash provided by operating activities:
 
 
 
 
Equity-based compensation
 
21,740

 
3,709

Depreciation
 
486

 
397

Change in amounts payable under tax receivable agreement
 

 
39

Net gain on investment securities
 
(250
)
 
(380
)
Deferred income taxes
 
393

 
532

(Increase) decrease in operating assets and increase (decrease) in operating liabilities:
 
 
 
 
Accounts receivable
 
(856
)
 
(3,189
)
Accounts receivable—Manning & Napier Fund, Inc.
 
(809
)
 
(1,257
)
Prepaid expenses and other assets
 
169

 
(30
)
Accounts payable
 
94

 
1,327

Accrued expenses and other liabilities
 
(8,489
)
 
(4,630
)
Deferred revenue
 
1,712

 
1,001

Net cash provided by operating activities
 
30,582

 
31,943

Cash flows from investing activities:
 
 
 
 
Purchase of property and equipment
 
(373
)
 
(1,160
)
Sale of investments
 
4,852

 
653

Purchase of investments
 
(2,077
)
 
(3,541
)
Net cash provided by (used in) investing activities
 
2,402

 
(4,048
)
Cash flows from financing activities:
 
 
 
 
Distributions
 

 
(27,071
)
Dividends paid
 
(2,173
)
 

Payment of capital lease obligations
 
(36
)
 
(24
)
Payment of costs directly associated with issuance of Class A common stock
 

 
(598
)
Purchase of Class A units of Manning & Napier Group, LLC
 
(7,413
)
 

Net cash used in financing activities
 
(9,622
)
 
(27,693
)
Net increase in cash and cash equivalents
 
23,362

 
202

Cash and cash equivalents:
 
 
 
 
Beginning of period
 
108,324

 
81,208

End of period
 
$
131,686

 
$
81,410

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

5

Table of Contents

Manning & Napier, Inc.
Notes to Consolidated Financial Statements

Note 1—Organization and Nature of the Business
Manning & Napier, Inc. ("Manning & Napier, the "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 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 the capital structure in advance of the IPO, the Company was a group of privately-held, affiliated companies, which we refer to as the “Manning & Napier Companies”. The diagram below depicts the Company's organization structure as of March 31, 2013.

 
 
(1)
Manning & Napier, Inc. is the managing member of Manning & Napier Group. The operating subsidiaries of Manning & Napier Group include Manning & Napier Advisors, LLC ("MNA"), 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 Benefits, LLC, Manning & Napier Investor Services, Inc. and Exeter Trust Company.
(2)
Prior to the IPO, 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.


6

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

Note 2—Summary of Significant Accounting Policies
Critical Accounting Policies
There have been no significant changes in new accounting pronouncements or in our critical accounting policies and estimates from those that were disclosed in our Annual Report on Form 10-K for the year ended December 31, 2012.
The Company believes that the disclosures herein are adequate so that the information presented is not misleading; however, it is suggested that these financial statements be read in conjunction with the financial statements and the notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2012. The financial data for the interim periods may not necessarily be indicative of results to be expected for the year.
Basis of Presentation
The accompanying unaudited consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and related rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for interim financial reporting and include all adjustments, consisting only of normal recurring adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim period.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates or assumptions that affect the reported amounts and disclosures in the consolidated financial statements. Actual results could differ from these estimates or assumptions.
In the quarter ended March 31, 2013, the Company changed the presentation of certain items within its consolidated statements of operations. The Company incurs 12b-1 distribution and servicing fees ("12b-1 fees") that are due to third party distributors of the Manning & Napier Fund, Inc. series of mutual funds (the "Fund") based on the assets under management of designated share classes of the Fund. The Company incurs sub-custodian fees due to a third party that provides custodial services for those assets where Exeter Trust Company is the named custodian. The Company changed its presentation of 12b-1 fees and sub-custodian fees from "Other operating costs" to "Sub-transfer agent and shareholder service costs" to more appropriately reflect the nature of these costs as distribution and asset-based. The line was renamed "Distribution, servicing and custody expenses" to reflect the broader nature of the underlying expenses.
Amounts for the comparative prior fiscal year periods have been reclassified to conform to the current year presentation. This reclassification had no impact on previously reported total operating expenses, net income or financial position and do not represent a restatement of any previously published financial results. The impact is illustrated below:
 
 
Three months ended March 31, 2012
 
 
(in thousands)
Sub-transfer agent and shareholder service costs, as previously reported
 
$
12,674

Reclassification
 
1,556

Distribution, servicing and custody expenses, as reclassified
 
$
14,230

 
 
 
Other operating costs, as previously reported
 
$
8,589

Reclassification
 
(1,556
)
Other operating costs, as reclassified
 
$
7,033


Principles of Consolidation
Manning & Napier holds approximately 13.9% economic interest in Manning & Napier Group, but as managing member controls all of the business 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 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”), Manning & Napier Capital Company, LLC (“MNCC”) and the other members of Manning & Napier Group.
All material intercompany transactions have have been eliminated in consolidation.

7

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

Operating Segments
The Company operates in one segment, the investment management industry. The Company primarily provides investment management services to separately managed accounts, mutual funds and collective investment trust funds. Management assesses the financial performance of these vehicles on a combined basis.
Advisory Agreements
The Company derives significant revenue from its role as advisor to the Fund and the Exeter Trust Company Collective Investment Trust (“CIT”) investment vehicles.
Investments in the Fund amounted to approximately $0.2 million as of March 31, 2013 and December 31, 2012.
Fees earned for advisory related services provided to the Fund and CIT investment vehicles were approximately $46.6 million and $43.0 million for the three months ended March 31, 2013 and 2012, respectively, which represent greater than 10% of revenue in each period.
Recent Accounting Pronouncements
In February 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU")2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This new guidance requires entities to present (either on the face of the income statement or in the notes) the effects on the line items of the income statement for amounts reclassified out of Accumulated Other Comprehensive Income. The adoption of this amendment on January 1, 2013 did not have a material impact on the consolidated financial statements and related disclosures.
Note 3—Noncontrolling Interests
Manning & Napier holds an approximately 13.9% economic interest in Manning & Napier Group, but as managing member controls all of the business 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 consolidated statement of financial condition with respect to the remaining approximately 86.1% economic interest in Manning & Napier Group held by M&N Group Holdings, MNCC and the other members of Manning & Napier Group. Net income attributable to noncontrolling interest on the statements of operations represents the portion of earnings or loss attributable to the economic interest in Manning & Napier Group held by the noncontrolling members. A reconciliation from “Income before provision for income taxes” to “Net income attributable to Manning & Napier, Inc.” is detailed as follows:
 
 
 
Three months ended March 31,
 
 
2013
 
2012
 
 
(in thousands)
Income before provision for income taxes
 
$
18,389

 
$
36,414

Less: loss before provision for income taxes of Manning & Napier, Inc. (a)
 
(308
)
 
(367
)
Income before provision for income taxes, as adjusted
 
18,697

 
36,781

Controlling interest percentage (b)
 
13.9
%
 
13.8
%
Net income attributable to controlling interest
 
2,597

 
5,081

Plus: loss before provision for income taxes of Manning & Napier, Inc. (a)
 
(308
)
 
(367
)
Income before income taxes attributable to Manning & Napier, Inc.
 
2,289

 
4,714

Less: provision for income taxes of Manning & Napier, Inc. (c)
 
1,945

 
1,811

Net income attributable to Manning & Napier, Inc.
 
$
344

 
$
2,903

________________________
a)
Manning & Napier, Inc. incurs certain expenses that are only attributable to it and are therefore excluded from the net income attributable to noncontrolling interests.
b)
Income before provision for income taxes is allocated to the controlling interest based on the percentage of units of Manning & Napier Group held by Manning & Napier, Inc.
c)
The consolidated provision for income taxes is equal to the sum of (i) the provision for income taxes for entities other than Manning & Napier, Inc. and (ii) the provision for income taxes of Manning & Napier, Inc. which includes all U.S. federal and state income taxes. The consolidated provision for income taxes totaled approximately $2.0 million and $2.0 million for the three months ended March 31, 2013 and 2012, respectively.

8

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

On March 29, 2013, M&N Group Holdings exchanged 498,497 Class A units of Manning & Napier Group for approximately $7.4 million in cash. Subsequent to the exchange, the Class A units were retired. As a result, M&N Group Holdings, MNCC and the other direct holders may exchange 75,901,503 units of Manning & Napier Group for shares of the Company's Class A common stock pursuant to the terms of the exchange agreement entered into at the time of the IPO. As a result of the purchase and subsequent retirement of Class A units of Manning & Napier Group, the Company's economic ownership interest in Manning & Napier Group increased to 13.9%.
During the three months ended March 31, 2013 and 2012, the Company declared approximately$27.0 million and $27.1 million in distributions to noncontrolling members, respectively. None of these distributions were payments pursuant to the tax receivable agreement (“TRA”).
At March 31, 2013 and December 31, 2012, the Company had recorded a liability of $45.9 million, representing the payments due to the selling unit holders under the TRA. The Company made no payments pursuant to the TRA during either of the three months ended March 31, 2013 and 2012. During the next twelve months, the Company expects to pay approximately $1.9 million of the total amount recorded at March 31, 2013. 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 TRA is the remainder. The Company recorded an adjustment of less than $0.1 million to the liability during the three months ended March 31, 2012 to account for changes in enacted tax rates in various states.
Obligations pursuant to the TRA are obligations of Manning & Napier. They do not impact the noncontrolling interest. These obligations are not income tax obligations. Furthermore, the TRA has no impact on the allocation of the provision for income taxes to the Company’s net income.
Note 4—Investment Securities
The following table represents the Company’s investment securities holdings as of March 31, 2013 and December 31, 2012:
March 31, 2013
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
 
(in thousands)
Available-for-sale securities
 
 
 
 
 
 
 
 
U.S. Treasury note (0.25%, 8/31/2014)
 
$
505

 
$
1

 
$

 
$
506

U.S. Treasury note (1.75%, 1/31/2014)
 
102

 

 

 
102

 
 
607

 
1

 

 
608

Trading Securities
 
 
 
 
 
 
 
 
Equity securities
 
 
 
 
 
 
 
5,458

Fixed income securities
 
 
 
 
 
 
 
4,271

Managed mutual funds
 
 
 
 
 
 
 
221

 
 
 
 
 
 
 
 
9,950

Total investment securities
 
 
 
 
 
 
 
$
10,558

 
December 31, 2012
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
 
(in thousands)
Available-for-sale securities
 
 
 
 
 
 
 
 
U.S. Treasury note (0.25%, 8/31/2014)
 
$
505

 
$
1

 
$

 
$
506

U.S. 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


9

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


Investment securities are classified as either trading or available-for-sale and are carried at fair value. Fair value is determined based on quoted market prices in active markets for identical or similar instruments.
Investment securities classified as trading consist of equity securities, fixed income securities and investments in mutual funds for which the Company provides advisory services. At March 31, 2013 and December 31, 2012, trading securities consist solely of investments held by the Company for the purpose of providing initial cash seeding for product development purposes. The Company recognized approximately $0.4 million of net unrealized gains related to investments classified as trading during each of the three month periods ended March 31, 2013 and 2012.
Investment securities classified as available-for-sale consist of U.S. Treasury notes, which are held by Exeter Trust Company for compliance with certain state regulations. As of March 31, 2013 and December 31, 2012, $0.6 million of investment securities is considered restricted. The Company periodically reviews each individual security position that has an unrealized loss, or impairment, to determine if that impairment is other-than-temporary. No other-than-temporary impairment charges have been recognized by the Company during the three month periods ended March 31, 2013 and 2012.
Note 5—Fair Value Measurements
In accordance with current accounting standards, fair value is defined as the price that the Company would receive upon selling an investment in an orderly transaction to an independent buyer in the principal or most advantageous market of the investment. A fair value hierarchy is provided that gives the highest priority to unadjusted quoted prices in active markets for identical assets and liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).
The following three-tier fair value hierarchy prioritizes the inputs used in measuring fair value:
Level 1—observable inputs such as quoted prices in active markets for identical securities;
Level 2—other significant observable inputs (including but not limited to quoted prices for similar securities, interest rates, prepayment rates, credit risk, etc.); and
Level 3—significant unobservable inputs (including the Company’s own assumptions in determining the fair value of investments).
The following provides the hierarchy of inputs used to derive the fair value of the Company’s assets as of March 31, 2013 and December 31, 2012: 
March 31, 2013
 
Level 1
 
Level 2
 
Level 3
 
Totals
 
 
(in thousands)
Equity securities
 
$
5,458

 
$

 
$

 
$
5,458

Fixed income securities
 

 
4,271

 

 
4,271

Managed mutual funds
 
221

 

 

 
221

U.S. Treasury notes
 

 
608

 

 
608

 
 
$
5,679

 
$
4,879

 
$

 
$
10,558

December 31, 2012
 
Level 1
 
Level 2
 
Level 3
 
Totals
 
 
(in thousands)
Equity securities
 
$
7,293

 
$

 
$

 
$
7,293

Fixed income securities
 

 
4,970

 

 
4,970

Managed mutual funds
 
211

 

 

 
211

U.S. Treasury notes
 

 
608

 

 
608

 
 
$
7,504

 
$
5,578

 
$

 
$
13,082


Valuations of investments in fixed income securities and U.S. Treasury notes can generally be obtained through reference to quoted prices in less active markets for the same or similar securities or through model-based techniques in which all significant inputs are observable and, therefore, such valuations have been classified as Level 2.
There were no Level 3 securities held by the Company at March 31, 2013 or December 31, 2012.

10

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

The Company’s policy is to recognize transfers in and transfers out of the valuation levels as of the beginning of the reporting period. There were no transfers between Level 1 and Level 2 securities during the three months ended March 31, 2013.
Note 6—Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities as of March 31, 2013 and December 31, 2012 consisted of the following:
 
 
March 31, 2013
 
December 31, 2012
 
 
(in thousands)
Accrued bonus and sales commissions
 
$
13,703

 
$
20,070

Accrued payroll and benefits
 
1,265

 
2,960

Accrued sub-transfer agent fees
 
7,688

 
7,455

Dividends payable
 
2,173

 
2,173

Accrued distributions
 
26,996

 

Amounts payable under tax receivable agreement
 
1,928

 
1,928

Other accruals and liabilities
 
3,664

 
4,286

 
 
$
57,417

 
$
38,872

Note 7—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.

Note 8—Commitments and Contingencies
Regulation
The Company may enter into agreements that contain certain representations and warranties and which provide general indemnifications. The Company may also serve as a guarantor of such obligations. The Company’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Company that have not yet occurred. The Company expects any risk of liability associated with such guarantees to be remote.
As an investment adviser to a variety of investment products, the Company is subject to routine reviews and inspections by the SEC and the Financial Industry Regulatory Authority, Inc. (“FINRA”). From time to time the Company may also be subject to claims, be involved in various legal proceedings arising in the ordinary course of its business and other contingencies. The Company does not believe that the outcome of any of these reviews, inspections or other legal proceedings will have a material impact on its 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 March 31, 2013 and December 31, 2012, the Company has not accrued for any such claims, legal proceedings, or other contingencies.


11

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

Note 9—Earnings per Common Share
Basic earnings per share (“basic EPS”) is computed by dividing net income by the weighted average number of shares outstanding for the reporting period. Diluted earnings per share (“diluted EPS”) gives effect during the reporting period to all dilutive potential shares outstanding resulting from employee share-based awards. The following table sets forth the calculation of basic and diluted earnings per share for the three months ended March 31, 2013 and 2012:
 
 
Three months ended March 31,
 
 
2013
 
2012
 
 
(in thousands, except share data)
Net income attributable to controlling and noncontrolling interests
 
$
16,392

 
$
34,424

Less: net income attributable to noncontrolling interests
 
16,048

 
31,521

Net income attributable to Manning & Napier, Inc.
 
$
344

 
$
2,903

Net income available to Class A common stock per basic and diluted share
 
$
0.03

 
$
0.21

Weighted average basic and diluted shares of Class A common stock outstanding
 
13,583,873

 
13,583,873

At March 31, 2013 there were 75,901,503 Class A Units of Manning & Napier Group which, subject to certain restrictions, may be exchangeable for up to 75,901,503 shares of the Company’s Class A common stock. The restrictions set forth in the exchange agreement were in place at the end of the current reporting period. As such, these units were not included in the calculation of diluted earnings per common share for the three months ended March 31, 2013.
The Company’s Class B common stock represent voting interests and do not participate in the earnings of the Company. Accordingly, there is no basic or diluted EPS related to the Company’s Class B common stock.

Note 10—Equity Based Compensation
2011 Equity Compensation Plan
As of March 31, 2013, no interests had been awarded under the 2011 Equity Compensation Plan (the “2011 Plan”). A total of 13,142,813 equity interests are available under the 2011 Plan.
Reorganization-Related Equity Based Compensation
During the three months ended March 31, 2013, the Company commenced recognition of compensation expense for the approximately 3.8 million performance-based awards eligible to vest on December 31, 2013 under the vesting terms of ownership interests in connection with the 2011 reorganization transactions. Vesting of these performance-based awards is contingent upon the satisfaction of annual performance criteria specific to each award recipient. The determination of whether an award recipient has met such performance criteria will be made by a vesting committee at the end of the annual service period. In accordance with Accounting Standards Codification Topic 718, Stock Compensation, the grant date for these performance-based awards will occur at the end of the service period. Until the grant date, compensation expense will be re-measured at the end of each reporting period, to the extent that service has been rendered in proportion to the total requisite service period. No expense is being recognized for the performance-based awards eligible to vest on December 31, 2014 in connection with the 2011 reorganization transactions, as the performance conditions have not yet been defined.
The following table summarizes performance-based stock unit activity for the three months ended March 31, 2013 specific to the 2011 reorganization transactions:
 
 
Performance-Based
Stock Units
 
Weighted Average Fair Value
Stock unit awards outstanding at January 1, 2013
 
28,914

 
$
12.00

Granted
 

 

Vested
 

 

Forfeited
 

 

Stock unit awards outstanding at March 31, 2013
 
28,914

 
$
12.00


12

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


The following table summarizes service-based stock unit activity for the three months ended March 31, 2013 specific to the 2011 reorganization transactions:
 
 
Service-Based
Stock Units
 
Weighted Average Grant Date Fair Value
Stock unit awards outstanding at January 1, 2013
 
2,924,962

 
$
12.00

Granted
 
102,390

 
$
16.54

Vested
 
(102,390
)
 
$
16.54

Forfeited
 
(8,849
)
 
$
12.00

Stock unit awards outstanding at March 31, 2013
 
2,916,113

 
$
12.00

For service-based awards granted during the three months ended March 31, 2013, the weighted average fair value of the awards granted was $16.54, as determined by the closing sale price of Manning & Napier, Inc.’s Class A common stock as reported on the New York Stock Exchange on the date of grant. For performance-based awards with a service inception date during the three months ended March 31, 2013, the weighted average value of the awards at the end of the reporting period was $16.54, as determined by the closing sale price of Manning & Napier, Inc.’s Class A common stock as reported on March 28, 2013.
For the three months ended March 31, 2013, the Company recorded approximately $21.7 million of compensation expense related to the vesting terms of ownership interests in connection with the 2011 reorganization transactions. For the three months ended March 31, 2013, approximately $6.2 million is attributable to the service-based awards. For the same period, the remaining expense of approximately $15.6 million is attributable to performance-based awards. For the three months ended March 31, 2013, $15.5 million of the expense attributable to performance-based awards is related to awards eligible to vest on December 31, 2013 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 March 28, 2013.
For the three months ended March 31, 2012, the Company recognized a total of approximately $3.7 million of compensation expense related to the vesting terms of ownership interests in connection with the 2011 reorganization transactions, $0.1 million of which was related to performance-based awards, and $3.6 million to the service-based awards.
As of March 31, 2013, there was unrecognized compensation expense related to unvested service-based awards of approximately $29.1 million. The Company expects to recognize this expense over a weighted average period of 1.2 years .
As of March 31, 2013, there was unrecognized compensation expense related to unvested performance-based awards of approximately $110.2 million, which the Company expects to recognize over a weighted average period of 1.3 years. Included in this total is an estimate of $108.8 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 March 28, 2013, and includes performance awards eligible to vest through 2014.
Stock unit awards forfeited during the three months ended March 31, 2013 and during the fourth quarter of 2012 were redistributed amongst the legacy owners, including William Manning, during the three months ended March 31, 2013. Of the stock units forfeited, 102,390 were granted to William Manning which vested immediately. The remaining units were awarded to the legacy owners and are subject to performance criteria. This award does not result in dilution to the number of outstanding shares of our Class A common stock. The aggregate intrinsic value of stock units that vested during the three months ended March 31, 2013 was approximately $1.7 million.
Note 11—Income Taxes
The Company is comprised of entities that have elected to be treated as either a limited liability company ("LLC") or a “C" corporation. As such, the entities functioning as LLC’s are not liable for or able to benefit from U.S. federal and most state income taxes on their earnings, and earnings will be included in the personal income tax returns of each entity’s unit holders. The entities functioning as "C" corporations are liable for or able to benefit from U.S. federal and state and local income taxes on their earnings and losses, respectively.

13

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


The Company’s income tax provision and effective tax rate were as follows: 
 
 
Three months ended March 31,
 
 
2013
 
2012
 
 
(in thousands)
Earnings from continuing operations before income taxes
 
$
18,389

 
$
36,414

Effective Tax Rate
 
10.9
%
 
5.5
%
Provision for income taxes
 
1,997

 
1,990

Provision for income taxes @ 35%
 
6,436

 
12,745

Difference between tax at effective vs. statutory rate
 
$
(4,439
)
 
$
(10,755
)
For the three months ended March 31, 2013 and 2012, the difference between the Company’s recorded provision and the provision that would result from applying the U.S. statutory rate of 35% is primarily attributable to the benefit resulting from the fact that a significant portion of the Company’s operations include a series of flow-through entities which are generally not subject to federal and most state income taxes. Accordingly, a portion of the Company’s earnings are not subject to corporate level taxes.
Note 12—Related Party Transactions
Transactions with noncontrolling members
From time to time, the Company may be asked to provide certain services, including accounting, legal and other administrative functions for the noncontrolling members of Manning & Napier Group. While immaterial, the Company has not received any reimbursement for such services.
Note 13—Subsequent Events
Distributions and dividends
On April 10, 2013, the Company distributed approximately $27.0 million to noncontrolling members. The distribution was included in accrued expenses and other liabilities as of March 31, 2013.
On May 6, 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. Concurrently, the Board of Directors declared a $0.16 per share dividend to the holders of Class A common stock. The dividend is payable on August 1, 2013 to shareholders of record as of July 15, 2013.
2011 Equity Compensation Plan
On April 30, 2013, the Company authorized the issuance of 480,070 awards under the 2011 Plan. 40,480 of these awards relate to the conversion into Class A common stock of previously issued and outstanding profit participation units in Manning & Napier Group that were granted prior to the initial public offering. The remaining 439,590 awards represent newly issued awards, consisting of 9,893 shares of Class A common stock granted to our independent directors and Chief Executive Officer, and 429,697 of restricted stock units granted to management and employees of the Company. The Class A common stock awards will vest immediately and the restricted stock units will generally vest on the third anniversary of the grant date.



14

Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This report contains forward-looking statements within the meaning of section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which reflect our views with respect to, among other things, our operations and financial performance. Words like “believes,” “expects,” “may,” “estimates,” “will,” “should,” “intends,” “plans,” or “anticipates” or the negative thereof or other variations thereon or comparable terminology, are used to identify forward-looking statements, although not all forward-looking statements contain these words. Although we believe that we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know about our business and operations, there can be no assurance that our actual results will not differ materially from what we expect or believe. Some of the factors that could cause our actual results to differ materially from our expectations or beliefs are disclosed in the “Risk Factors” section of our Annual Report on Form 10-K which include, without limitation: changes in securities or financial markets or general economic conditions; a decline in the performance of our products; client sales and redemption activity; and changes of government policy or regulations. All forward-looking statements speak only as of the date on which they are made and we undertake no duty to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Overview
Business
We are an independent investment management firm that provides a broad range of investment solutions through separately managed accounts, mutual funds and collective investment trust funds. Founded in 1970, we offer equity and fixed income portfolios as well as a range of blended asset portfolios, such as life cycle portfolios, that use a mix of stocks and bonds. We serve a diversified client base of high net worth individuals and institutions, including 401(k) plans, pension plans, Taft-Hartley plans, and endowments and foundations. Our operations are based principally in the United States, with our headquarters located in Fairport, New York.
Our Products
We derive substantially all of our revenues from investment management fees earned from providing advisory services to separately managed accounts and mutual funds and collective investment trusts—including those offered by the Manning & Napier Fund, Inc. (the "Fund") and Exeter Trust Company.
Our separate accounts are primarily distributed through our Direct Channel, where our representatives form relationships with high net worth individuals, middle market institutions or large institutions that are working with a consultant. To a lesser extent, we also obtain a portion of our separate account distribution via third parties, either through our Intermediary Channel where national brokerage firm representatives or independent financial advisors select our separate account strategies for their clients, or through our Platform/Sub-Advisory Channel, where unaffiliated registered investment advisors approve our strategies for their product platforms. Our separate account products are a primary driver of our blended asset portfolios for high net worth and middle market institutional clients and financial intermediaries. In contrast, larger institutions and unaffiliated registered investment advisor platforms are a driver of our separate account equity portfolios.
Our mutual funds and collective investment trusts are primarily distributed through financial intermediaries, including brokers, financial advisors, retirement plan advisors and platform relationships. We also obtain a portion of our mutual fund and collective investment trust distribution through our direct sales representatives, in particular within the defined contribution and institutional marketplace. Our mutual fund and collective investment trust products are important drivers of our blended asset class portfolios, in particular with 401(k) plan sponsors, advisors and recordkeepers that select our funds as default options for participants. In addition, financial intermediaries, mutual fund advisory programs and retail platforms are a driver of equity strategies within our mutual fund offerings.
Our assets under management (“AUM”) was $48.1 billion as of March 31, 2013, as illustrated in the table below.
 
 
 
March 31, 2013
AUM – by investment vehicle and portfolio:
 
Blended
Asset
 
Equity
 
Fixed Income
 
Total
 
 
(in millions)
Separately managed accounts
 
$
12,114.0

 
$
12,916.5

 
$
1,200.7

 
$
26,231.2

Mutual funds and collective investment trusts
 
9,794.6

 
12,017.1

 
37.5

 
21,849.2

Total
 
$
21,908.6

 
$
24,933.6

 
$
1,238.2

 
$
48,080.4


15

Table of Contents

The composition of our separately managed accounts as of March 31, 2013, by channel and portfolio, is set forth in the table below. 
 
 
March 31, 2013
Separate account AUM - by channel and portfolio:
 
Blended
Asset
 
Equity
 
Fixed Income
 
Total
 
 
(dollars in millions)
Separate account AUM
 
 
 
 
 
 
 
 
Direct Channel
 
$
8,612.4

 
$
9,919.7

 
$
972.9

 
$
19,505.0

Intermediary Channel
 
3,501.6

 
932.7

 
227.8

 
4,662.1

Platform/Sub-advisor Channel
 

 
2,064.1

 

 
2,064.1

Total
 
$
12,114.0

 
$
12,916.5

 
$
1,200.7

 
$
26,231.2

Percentage of separate account AUM
 
 
 
 
 
 
 
 
Direct Channel
 
32
%
 
38
%
 
4
%
 
74
%
Intermediary Channel
 
13
%
 
4
%
 
1
%
 
18
%
Platform/Sub-advisor Channel
 

 
8
%
 

 
8
%
Total
 
45
%
 
50
%
 
5
%
 
100
%
Percentage of portfolio by channel
 
 
 
 
 
 
 
 
Direct Channel
 
71
%
 
77
%
 
81
%
 
74
%
Intermediary Channel
 
29
%
 
7
%
 
19
%
 
18
%
Platform/Sub-advisor Channel
 

 
16
%
 

 
8
%
Total
 
100
%
 
100
%
 
100
%
 
100
%
Percentage of channel by portfolio
 
 
 
 
 
 
 
 
Direct Channel
 
44
%
 
51
%
 
5
%
 
100
%
Intermediary Channel
 
75
%
 
20
%
 
5
%
 
100
%
Platform/Sub-advisor Channel
 

 
100
%
 

 
100
%
Our separate accounts contributed 36% of our total gross client inflows for the three months ended March 31, 2013 and represented 55% of our total AUM as of March 31, 2013.
Our separate account business has historically been driven primarily by our Direct Channel, where sales representatives form a relationship with high net worth investors, middle market institutions, and large institutional clients working in conjunction with a consultant. The Direct Channel contributed 74% of the total gross client inflows for our separate account business for the three months ended March 31, 2013 and represented 74% of our total separate account AUM as of March 31, 2013. We anticipate the Direct Channel to continue to be the largest driver of new separate account business going forward, given the Channel’s high net worth and middle market institutional client-type focus.
During the three months ended March 31, 2013, equity and blended asset portfolios represented 51% and 44% of the separate account gross client inflows from the Direct Channel, respectively, while fixed income portfolios accounted for 5%. As of March 31, 2013, equity and blended asset portfolios represented 51% and 44%, respectively, of total Direct Channel separate account AUM, while our fixed income portfolios were 5%. We expect our focus on individuals and middle market institutions to continue to drive interest in our blended asset class portfolios, where we provide a comprehensive portfolio of stocks and bonds managed to a client’s specific investment objectives. However, relationships with larger institutions have resulted in strong growth in equity portfolios as a percentage of total AUM, which will likely continue given the breadth of our offerings, including domestic, international and global equity portfolios.
To a lesser extent, we also obtain separate account business from third parties, including financial advisors or unaffiliated registered investment advisor programs or platforms. During the three months ended March 31, 2013, 17% of the total gross client inflows for separate accounts came from financial advisor representatives (Intermediary Channel), and an additional 9% came from unaffiliated registered investment advisor platforms (Platform/Sub-advisor Channel). The Intermediary and Platform/Sub-advisor Channels represented 26% of our total separate account AUM as of March 31, 2013.
New separate account business through the Intermediary Channel flowed into both our blended asset and equity portfolios, driven by advisors’ needs to identify either a one-stop solution (blended asset portfolio) or to fill a mandate within a multi-strategy portfolio. During the three months ended March 31, 2013, blended asset and equity portfolios represented 77% and 22%, respectively, of the separate account gross client inflows from the Intermediary Channel, while fixed income

16

Table of Contents

portfolios represented 1%. As of March 31, 2013, 75% of our separate account AUM derived from financial advisors was allocated to blended asset portfolios, with 20% allocated to equity and 5% allocated to fixed income. We expect that equity and fixed income portfolios may see additional interest from financial advisors over time as more and more advisors structure a multi-strategy portfolio.
In contrast, gross client inflows through the Platform/Sub-advisor Channel are primarily directed to our equity strategies, where we are filling a specific mandate within the investment program or platform product. During the three months ended March 31, 2013, 100% of our separate account gross client inflows from the Platform/Sub-advisory Channel were into equity portfolios, and we expect this will continue going forward. As of March 31, 2013, equity portfolios represented 100% of total Platform/Sub-Advisory Channel separate account AUM.
Our annualized separate account retention rate across all channels was approximately 97% during the three months ended March 31, 2013, representing the strong relationship focus that is inherent in our direct sales model, which is the primary driver of our separate account business.
During the three months ended March 31, 2013, market appreciation for our separate account AUM was 7.0%, including 6.2% in our blended assets and 8.4% in equity portfolios.
The composition of our mutual fund and collective investment trust AUM as of March 31, 2013, by portfolio, is set forth in the table below. 
 
 
March 31, 2013
Mutual fund and collective investment trust AUM - by portfolio:
 
Blended
Asset
 
Equity
 
Fixed Income
 
Total
 
 
(in millions)
Mutual fund and collective investment trust AUM
 
$
9,794.6

 
$
12,017.1

 
$
37.5

 
$
21,849.2

Our mutual funds and collective investment trusts contributed 64% of our total gross client inflows for the three months ended March 31, 2013 and represented 45% of our total AUM as of March 31, 2013. As of March 31, 2013, our mutual fund and collective investment trust AUM consisted of 45% from blended asset portfolios and 55% from equity portfolios. During the three months ended March 31, 2013, 49% and 51% of the gross client inflows were attributable to blended assets and equity portfolios, respectively. For the three months ended March 31, 2013, market appreciation for our mutual fund and collective investment trust AUM was 5.7%, including 5.9% in our blended assets and 5.6% in our equity portfolios.
Our 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 within mutual fund 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. We anticipate greater use of our blended asset portfolios by advisors seeking a multi-asset class solution for their retail clients. In addition, our allocation to equity portfolios within the Intermediary Channel may also increase due to interest from national brokerage firm representatives who wish to use our mutual funds as a sleeve within a larger portfolio.
Through our Platform/Sub-advisor Channel, we have relationships with consultants and advisors at platforms. We derive equity portfolio assets in this channel through the selection of our funds within advisory programs where our mutual funds are used within a multi-strategy portfolio, or through placement on platforms’ approved lists of funds. To facilitate our relationships with intermediaries, we currently have more than 280 dealer relationships. 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-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, 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 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 consolidated results of operations for the three months ended March 31, 2013 and 2012.


17

Table of Contents

Key Components of Results of Operations
Overview. Changes to our operating results over time are largely driven by net client asset flows and changes to the market value of our AUM.
An important factor influencing inflows and outflows of our AUM is the investment performance of our various investment approaches. Our variety of stock selection strategies, absolute pricing discipline and active asset allocation management approach generally results in specific absolute and relative return characteristics in different market environments. For example, during a fundamental-driven bull market when prices are rising alongside improving fundamentals, we are likely to experience positive absolute returns and competitive relative returns. However, in a more momentum-driven bull market, when prices become disconnected from underlying fundamentals, we are likely to experience positive absolute returns but lagging relative returns. Similarly, during a valuation-driven bear market, when markets experience a period of price correction following a momentum-driven bull market, we are likely to experience negative absolute returns but strong relative returns. However, in a momentum-driven bear market, which is typically characterized by broad price declines in a highly correlated market, we are likely to experience negative absolute returns and lagging relative returns. Essentially, our approach is likely to do well when markets are driven by fundamentals, but lag when markets are driven primarily by momentum.
Other components of our operating results include:
asset-based fee rates and changes in those rates;
the composition of our AUM among various portfolios, vehicles and client types; and
the rate of increase in our variable and fixed costs, which is affected by the rate of revenue increases, compensation and year-to-year changes in incentive bonuses, changes to base compensation, vendor-related costs and investment spending on new products, consultative staffing and proprietary and third-party technology development.
Assets Under Management. The following tables reflect the indicated components of our AUM for our investment vehicles for the three months ended March 31, 2013 and 2012. 
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, 2012
 
$
24,683.6

 
$
20,525.3

 
$
45,208.9

 
55
%
 
45
%
 
100
%
Gross client inflows
 
980.1

 
1,747.7

 
2,727.8

 
 
 
 
 
 
Gross client outflows
 
(1,154.9
)
 
(1,592.7
)
 
(2,747.6
)
 
 
 
 
 
 
Market appreciation
 
1,722.4

 
1,168.9

 
2,891.3

 
 
 
 
 
 
As of March 31, 2013
 
$
26,231.2

 
$
21,849.2

 
$
48,080.4

 
55
%
 
45
%
 
100
%
Average AUM for period
 
$
25,770.8

 
$
21,417.4

 
$
47,188.2

 
 
 
 
 
 
As of December 31, 2011
 
$
22,658.1

 
$
17,542.0

 
$
40,200.1

 
56
%
 
44
%
 
100
%
Gross client inflows
 
879.2

 
1,853.1

 
2,732.3

 
 
 
 
 
 
Gross client outflows
 
(939.3
)
 
(1,472.2
)
 
(2,411.5
)
 
 
 
 
 
 
Market appreciation
 
2,229.7

 
1,981.4

 
4,211.1

 
 
 
 
 
 
As of March 31, 2012
 
$
24,827.7

 
$
19,904.3

 
$
44,732.0

 
56
%
 
44
%
 
100
%
Average AUM for period
 
$
23,972.9

 
$
19,103.7

 
$
43,076.6

 
 
 
 
 
 

18

Table of Contents

Assets Under Management. The following tables reflect the indicated components of our AUM for our portfolios for the three months ended March 31, 2013 and 2012.
AUM – by portfolio:
 
Blended
Asset
 
Equity
 
Fixed
Income
 
Total
 
Blended
Asset
 
Equity
 
Fixed
Income
 
Total
 
 
 
 
(in millions)
 
 
 
 
 
 
 
 
 
 
As of December 31, 2012
 
$
20,470.7

 
$
23,472.5

 
$
1,265.7

 
$
45,208.9

 
45
%
 
52
%
 
3
%
 
100
%
Gross client inflows
 
1,299.9

 
1,385.9

 
42.0

 
2,727.8

 
 
 
 
 
 
 
 
Gross client outflows
 
(1,097.4
)
 
(1,580.6
)
 
(69.6
)
 
(2,747.6
)
 
 
 
 
 
 
 
 
Market appreciation
 
1,235.4

 
1,655.8

 
0.1

 
2,891.3

 
 
 
 
 
 
 
 
As of March 31, 2013
 
$
21,908.6

 
$
24,933.6

 
$
1,238.2

 
$
48,080.4

 
45
%
 
52
%
 
3
%
 
100
%
Average AUM for period
 
$
21,371.6

 
$
24,579.8

 
$
1,236.8

 
$
47,188.2

 
 
 
 
 
 
 
 
As of December 31, 2011
 
$
18,122.5

 
$
20,812.0

 
$
1,265.6

 
$
40,200.1

 
45
%
 
52
%
 
3
%
 
100
%
Gross client inflows
 
1,031.3

 
1,613.6

 
87.4

 
2,732.3

 
 
 
 
 
 
 
 
Gross client outflows
 
(820.2
)
 
(1,494.5
)
 
(96.8
)
 
(2,411.5
)
 
 
 
 
 
 
 
 
Market appreciation/(depreciation)
 
1,324.5

 
2,887.9

 
(1.3
)
 
4,211.1

 
 
 
 
 
 
 
 
As of March 31, 2012
 
$
19,658.1

 
$
23,819.0

 
$
1,254.9

 
$
44,732.0

 
44
%
 
53
%
 
3
%
 
100
%
Average AUM for period
 
$
19,134.9

 
$
22,683.2

 
$
1,258.5

 
$
43,076.6

 
 
 
 
 
 
 
 
 Revenue. Our revenues primarily consist of investment management fees earned from managing our clients’ AUM. We earn our investment management fees as a percentage of our clients’ AUM either as of a specified date or on a daily basis. Our investment management fees fluctuate based on the average fee rate for our investment management products, which are affected by the composition of our AUM among various portfolios and investment vehicles. We currently do not have revenues from performance fee based products.
Manning & Napier Advisors, LLC ("MNA"), our subsidiary, serves as the investment advisor to the Fund and Exeter Trust Company. The Fund is a family of 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 $21.8 billion, or 45%, of our AUM as of March 31, 2013, and investment management fees from these mutual funds and collective investment trusts were $46.6 million for the three months ended March 31, 2013. MNA also serves as the investment advisor to all of our separately managed accounts, managing $26.2 billion, or 55%, of our AUM as of March 31, 2013, including assets managed as a sub-advisor to pooled investment vehicles and assets in client accounts invested in the Fund.
Operating Expenses. Our largest operating expenses are employee compensation and distribution, servicing and custody expenses, 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.
Distribution, servicing and custody expenses. Distribution, servicing and custody expense represent amounts paid to various platforms that distribute our mutual fund and collective investment trust products as well as costs for custodial services and 12b-1 distribution and servicing fees. These expenses increase as the AUM in our mutual fund and collective investment trust products increase.
Other operating expenses. Other operating expenses include 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.

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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.
Provision for Income Taxes. The Company is comprised of entities that have elected to be treated as either a limited liability company ("LLC"), or a "C" corporation. As such, the entities functioning as 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) will be included in the personal income tax returns of each entity's unit holders. The entities functioning as "C" corporations are liable for or able to benefit from U.S. federal and state and local income taxes on their earnings and losses, respectively.
Critical Accounting Policies and Estimates
There have been no significant changes in our critical accounting policies and estimates from those that were disclosed in our Annual Report on Form 10-K for the year ended December 31, 2012.
This management’s discussion and analysis should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 together with the consolidated financial statements and related notes and the other financial information that appear elsewhere in this report.
Revenue Recognition
Because the majority of our revenues are earned based on AUM that has been determined using fair value methods and since market appreciation/depreciation has a significant impact on our revenue, we have presented our AUM using the GAAP framework for measuring fair value. That framework provides a three-level fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs based on company assumptions (Level 3). A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the instrument’s fair value measurement. The three levels within the fair value hierarchy are described as follows:
Level 1—includes observable inputs such as quoted prices in active markets for identical securities.
Level 2—includes inputs other than quoted prices that are observable for the asset or liability, including quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability.
Level 3—includes one or more significant unobservable inputs.
The table below summarizes the approximate amount of AUM for the periods indicated for which fair value is measured based on Level 1, Level 2 and Level 3. 
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
(in millions)
December 31, 2012
 
$
26,826

 
$
18,371

 
$
12

 
$
45,209

March 31, 2013
 
$
29,302

 
$
18,767

 
$
11

 
$
48,080

As substantially all our AUM is valued by independent pricing services based upon observable market prices or inputs, we believe market risk is the most significant risk underlying valuation of our AUM, as discussed under “Item 3. Quantitative and Qualitative Disclosures About Market Risk” and “Part II. Item 1A. Risk Factors.”
Recent Accounting Pronouncements
In February 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU")2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This new guidance requires entities to present (either on the face of the income statement or in the notes) the effects on the line items of the income statement for amounts reclassified out of Accumulated Other Comprehensive Income. The adoption of this amendment on January 1, 2013 did not have a material impact on the consolidated financial statements and related disclosures.


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Three Months Ended March 31, 2013 Compared to Three Months Ended March 31, 2012
Assets Under Management
The following table reflects changes in our AUM for the three months ended March 31, 2013 and 2012: 
 
 
Three months ended March 31,
 
Period-to-Period
 
 
2013
 
2012
 
$
 
%
 
 
(in millions)
Separately managed accounts
 
 
 
 
 
 
 
 
Beginning assets under management
 
$
24,683.6

 
$
22,658.1

 
$
2,025.5

 
9
 %
Gross client inflows
 
980.1

 
879.2

 
100.9

 
11
 %
Gross client outflows
 
(1,154.9
)
 
(939.3
)
 
(215.6
)
 
23
 %
Market appreciation
 
1,722.4

 
2,229.7

 
(507.3
)
 
(23
)%
Ending assets under management
 
$
26,231.2

 
$
24,827.7

 
$
1,403.5

 
6
 %
Mutual funds and collective investment trusts
 
 
 
 
 
 
 
 
Beginning assets under management
 
$
20,525.3

 
$
17,542.0

 
$
2,983.3

 
17
 %
Gross client inflows
 
1,747.7

 
1,853.1

 
(105.4
)
 
(6
)%
Gross client outflows
 
(1,592.7
)
 
(1,472.2
)
 
(120.5
)
 
8
 %
Market appreciation
 
1,168.9

 
1,981.4

 
(812.5
)
 
(41
)%
Ending assets under management
 
$
21,849.2

 
$
19,904.3

 
$
1,944.9

 
10
 %
Total assets under management
 
 
 
 
 
 
 
 
Beginning assets under management
 
$
45,208.9

 
$
40,200.1

 
$
5,008.8

 
12
 %
Gross client inflows
 
2,727.8

 
2,732.3

 
(4.5
)
 
 %
Gross client outflows
 
(2,747.6
)
 
(2,411.5
)
 
(336.1
)
 
14
 %
Market appreciation
 
2,891.3

 
4,211.1

 
(1,319.8
)
 
(31
)%
Ending assets under management
 
$
48,080.4

 
$
44,732.0

 
$
3,348.4

 
7
 %
Our total AUM increased by $3.3 billion, or 7%, to $48.1 billion as of March 31, 2013 from $44.7 billion as of March 31, 2012. For the three months ended March 31, 2013, gross client inflows remained generally consistent as compared to the three months ended March 31, 2012, while gross client outflows increased by $0.3 billion for the same period. Additionally, we experienced market appreciation of $2.9 billion for the three months ended March 31, 2013 compared to market appreciation of $4.2 billion for the three months ended March 31, 2012.
The total AUM increase of $2.9 billion, or 6%, from $45.2 billion at December 31, 2012 to $48.1 billion at March 31, 2013 was primarily attributable to market appreciation as our net client flows were generally flat. Our net client flows were comprised of separate accounts net client outflows of $0.2 billion, primarily caused by withdrawals from existing client accounts, offset by $0.2 billion of net client inflows to our mutual funds and collective investment trusts. The annualized separate account retention rate was 97% for the three months ended March 31, 2013.
Market appreciation during the three months ended March 31, 2013 constituted a 6.4% rate of increase in our total AUM. The investment gain was 7.0% in separately managed accounts and 5.7% in mutual funds and collective investment trusts.
The rates of change in AUM during the three months ended March 31, 2013 were most significant in our blended asset and equity portfolios, with increases of 7% and 6%, respectively, while our fixed income portfolio decreased by 2%. The rates of change in AUM were also most significant in our blended asset and equity portfolios from March 31, 2012 to March 31, 2013, as these portfolios experienced increases of 11% and 5%, respectively, over this period, while our fixed income portfolio decreased by 1%.
As of March 31, 2013, the composition of our AUM was 45% in mutual funds and collective investment trusts and 55% in separate accounts, compared to 44% in mutual funds and collective investment trusts and 56% in separate accounts at March 31, 2012. The composition of our AUM across portfolios at March 31, 2013 was 45% in blended assets, 52% in equity, and 3% in fixed income, compared to 44% in blended assets, 53% in equity, and 3% in fixed income at March 31, 2012.

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The following table sets forth our results of operations for the three months ended March 31, 2013 and 2012: 
 
 
Three months ended March 31,
 
Period-to-Period
Statements of operations data:
 
2013
 
2012
 
$
 
%
 
 
(in thousands, except share data)
 
 
 
 
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
 
Investment management services revenue
 
$
90,256

 
$
85,014

 
$
5,242

 
6
 %
Expenses
 
 
 
 
 
 
 
 
Compensation and related costs
 
48,483

 
27,732

 
20,751

 
75
 %
Distribution, servicing and custody expenses
 
15,915

 
14,230

 
1,685

 
12
 %
Other operating costs
 
7,779

 
7,033

 
746

 
11
 %
Total operating expenses
 
72,177

 
48,995

 
23,182

 
47
 %
Operating income
 
18,079

 
36,019

 
(17,940
)
 
(50
)%
Non-operating income (loss)
 
 
 
 
 
 
 
 
Non-operating income, net
 
310

 
395

 
(85
)
 
(22
)%
Income before provision for income taxes
 
18,389

 
36,414

 
(18,025
)
 
(50
)%
Provision for income taxes
 
1,997

 
1,990

 
7

 
 %
Net income attributable to controlling and noncontrolling interests
 
16,392

 
34,424

 
(18,032
)
 
(52
)%
Less: net income attributable to noncontrolling interests
 
16,048

 
31,521

 
(15,473
)
 
(49
)%
Net income attributable to Manning & Napier, Inc.
 
$
344

 
$
2,903

 
$
(2,559
)
 
(88
)%
Per Share Data
 
 
 
 
 
 
 
 
Net income available to Class A common stock per basic and diluted share
 
$
0.03

 
$
0.21

 
 
 
 
Weighted average basic and diluted shares of Class A common stock outstanding
 
13,583,873

 
13,583,873

 
 
 
 
Cash dividends declared per share of Class A common stock
 
$
0.16

 
$
0.16

 
 
 
 
 
 
 
 
 
 
 
 
 
Other financial and operating data
 
 
 
 
 
 
 
 
Economic income (1)
 
$
40,129

 
$
40,123

 
$
6

 
 %
Economic net income (1)
 
$
24,780

 
$
24,776

 
$
4

 
 %
Economic net income per adjusted share (1)
 
$
0.28

 
$
0.28

 

 


________________________
(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 $5.2 million, or 6%, to $90.3 million for the three months ended March 31, 2013 from $85.0 million for the three months ended March 31, 2012. This change in revenue is generally consistent with the $4.1 billion, or 10%, increase in our average AUM to $47.2 billion for the three months ended March 31, 2013 from $43.1 billion for the three months ended March 31, 2012.
Our average separately managed account fee decreased to 62 basis points for the three months ended March 31, 2013 from 63 basis points for the three months ended March 31, 2012. For the three months ended March 31, 2013 and 2012, separately managed account standard fees ranged from 15 basis points to 125 basis points.
Our average fee on mutual fund and collective investment trust products decreased to 88 basis points for the three months ended March 31, 2013 from 90 basis points for the three months ended March 31, 2012. This decrease was primarily due to a shift in the mix of our AUM from higher fee mutual funds and collective investment trusts to those with lower fees. For the

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three months ended March 31, 2013, mutual fund and collective investment trust management fees ranged from 34 basis points to 100 basis points, and ranged from 45 basis points to 100 basis points for the three months ended March 31, 2012.
Operating Expenses
Our operating expenses increased by $23.2 million, or 47%, to $72.2 million for the three months ended March 31, 2013 from $49.0 million for the three months ended March 31, 2012.
Compensation and related costs increased by $20.8 million, or 75%, to $48.5 million for the three months ended March 31, 2013 from $27.7 million for the three months ended March 31, 2012. This increase was primarily attributable to an increase in non-cash reorganization-related share-based compensation charge of $18.0 million. This increase is due to the Company not recording non-cash reorganization-related share-based compensation charges during the three months ended March 31, 2012 for the performance-based awards eligible to vest under the vesting terms of ownership interests in connection with the 2011 reorganization transactions as the performance conditions had not yet been defined as of March 31, 2012. When considered as a percentage of revenue, compensation and related costs excluding non-cash reorganization-related share-based compensation charges, increased to 30% for the three months ended March 31, 2013 from 28% for the three months ended March 31, 2012. This increase in compensation as a percentage of revenue resulted from an increase in incentive compensation costs resulting from the strong absolute and relative investment performance during the three months ended March 31, 2013, coupled with an investment in personnel related to distribution and infrastructure when compared to March 31, 2012.
Distribution, servicing and custody expenses increased by $1.7 million, or 12%, to $15.9 million for the three months ended March 31, 2013 from $14.2 million for the three months ended March 31, 2012. The increase was generally attributable to a 12% increase in mutual funds and collective investment trusts average AUM for the three months ended March 31, 2013 compared to March 31, 2012. As a percentage of mutual fund and collective investment trust revenue, distribution, servicing and custody expense remained generally consistent at 34% for the three months ended March 31, 2013 compared to 33% for the three months ended March 31, 2012.
Other operating costs increased by $0.7 million, or 11%, to $7.8 million for the three months ended March 31, 2013 from $7.0 million for the three months ended March 31, 2012. The increase was primarily attributable to increases in fee waivers associated with our mutual fund offerings.
Non-Operating Income (Loss)
Non-operating income decreased by $0.1 million, or 22%, to income of $0.3 million for the three months ended March 31, 2013 from income of $0.4 million for the three months ended March 31, 2012. The decrease was primarily due to lower changes in values of those investment securities designated as trading securities for the three months ended March 31, 2013 compared to 2012.
Provision for Income Taxes
The Company’s tax provision was $2.0 million for both the three months ended March 31, 2013 and 2012.

Supplemental Non-GAAP Financial Information
To provide investors with greater insight, promote transparency and allow for a more comprehensive understanding of the information used by management in its financial and operational decision-making, we supplement our 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 reorganization-related share-based compensation, which results in non-cash compensation expense reported over the vesting period. In addition, upon the consummation of our initial public offering, the vesting terms related to the ownership of our employees were modified, including our named executive officers, other than William Manning. Such individuals were entitled to 15% of their pre-IPO ownership interests upon the consummation of our 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

23

Table of Contents

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 the weighted average exchangeable units of Manning & Napier Group are converted into our outstanding Class A common stock as of the respective reporting date, on a one-to-one basis. The Company’s management uses economic net income, among other financial data, to determine the earnings available to distribute as dividends to holders of its Class A common stock and to the holders of the units of Manning & Napier Group.
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 three months ended March 31, 2013 and 2012: 
 
 
Three months ended March 31,
 
Period-to-Period
Other financial and operating data:
 
2013
 
2012
 
$
 
%
 
 
(in thousands, except share data)
 
 
Economic income
 
$
40,129

 
$
40,123

 
$
6

 
%
Economic net income
 
$
24,780

 
$
24,776

 
$
4

 
%
Economic net income per adjusted share
 
$
0.28

 
$
0.28

 
$

 
%

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Table of Contents

The following table sets forth, for the periods indicated, a reconciliation of non-GAAP financial measures to GAAP measures:
 
 
Three Months Ended
Reconciliation of non-GAAP financial measures:
 
March 31, 2013
 
March 31, 2012
 
 
(in thousands, except share data)
 
 
 
 
 
Net income attributable to Manning & Napier, Inc.
 
$
344

 
$
2,903

Plus: net income attributable to noncontrolling interests
 
16,048

 
31,521

Net income attributable to controlling and noncontrolling interests
 
16,392

 
34,424

Provision for income taxes
 
1,997

 
1,990

Income before provision for income taxes
 
18,389

 
36,414

Reorganization-related share-based compensation
 
21,740

 
3,709

Economic income
 
40,129

 
40,123

Adjusted income taxes
 
15,349

 
15,347

Economic net income
 
$
24,780

 
$
24,776

 
 
 
 
 
Net income available to Class A common stock per basic share
 
$
0.03

 
$
0.21

Plus: net income attributable to noncontrolling interests per basic share
 
1.17

 
2.32

Net income attributable to controlling and noncontrolling interests per basic share
 
1.20

 
2.53

Provision for income taxes per basic share
 
0.15

 
0.15

Income before provision for income taxes per basic share
 
1.35

 
2.68

Reorganization-related share-based compensation per basic share
 
1.60

 
0.27

Economic income per basic share
 
2.95

 
2.95

Adjusted income taxes per basic share
 
1.13

 
1.13

Economic net income per basic share
 
1.82

 
1.82

Less: Impact of Manning & Napier Group, LLC units converted to publicly traded shares
 
(1.54
)
 
(1.54
)
Economic net income per adjusted share
 
$
0.28

 
$
0.28

Weighted average shares of Class A common stock outstanding
 
13,583,873

 
13,583,873

Weighted average exchangeable units of Manning & Napier Group, LLC outstanding
 
76,383,383

 
76,400,000

Weighted average adjusted Class A common stock outstanding
 
89,967,256

 
89,983,873

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. The following table sets forth certain key financial data relating to our liquidity and capital resources as of March 31, 2013 and December 31, 2012. 
 
 
March 31, 2013
 
December 31, 2012
 
 
(unaudited)
 
 
 
 
(in thousands)
Cash and cash equivalents
 
$
131,686

 
$
108,324

Accounts receivable
 
$
38,394

 
$
36,729

Amounts payable under tax receivable agreement (1)
 
$
45,917

 
$
45,917

________________________

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(1)
In light of numerous factors affecting our obligation to make such payments, the timing and amounts of any such actual payments are based on our best estimate as of March 31, 2013 and December 31, 2012, including our ability to realize the expected tax benefits. Actual payments may significantly differ from estimated payments.
In determining the sufficiency of liquidity and capital resources to fund our business, we regularly monitor our liquidity position, including among other things, cash, working capital, long-term liabilities, lease commitments and operating company distributions. We believe cash generated from operations will be sufficient over the foreseeable future, or twelve months, to meet our working capital requirements. Further, we expect that cash on hand and cash generated by operations will be sufficient to meet our liquidity needs.
Cash Flows
The following table sets forth our cash flows for the three months ended March 31, 2013 and 2012. Operating activities consist primarily of net income subject to adjustments for changes in operating assets and liabilities, equity-based compensation expense, deferred income tax expense and depreciation. Investing activities consist pri