NATIONAL FINANCIAL PARTNERS CORP - 10-Q Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004

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

FOR THE TRANSITION PERIOD FROM TO

001-31781

(Commission File Number)

NATIONAL FINANCIAL PARTNERS CORP.

(Exact name of registrant as specified in its charter)

Delaware

13-4029115

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)


787 Seventh Avenue, 49th Floor, New York, New York		10019
(Address of principal executive offices)		(Zip Code)

(212) 301-4000

(Registrant’s telephone number, including area code)

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 is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

The number of outstanding shares of the registrant’s Common Stock, $0.10 par value, as of October 31, 2004 was 34,106,906.

National Financial Partners Corp. and Subsidiaries

Form 10-Q

INDEX


Part I	Financial Information:

	Item 1.	Financial Statements (Unaudited):

		Consolidated Statements of Financial Condition September 30, 2004 and December 31, 2003	1

		Consolidated Statements of Income Three Months and Nine Months Ended September 30, 2004 and 2003	2

		Consolidated Statements of Cash Flows Nine Months Ended September 30, 2004 and 2003	3

		Notes to Consolidated Financial Statements	4

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24

	Item 4.	Controls and Procedures	25

Part II	Other Information:

	Item 1.	Legal Proceedings	26

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26

	Item 5.	Other Information	27

	Item 6.	Exhibits and Reports on Form 8-K	27

Signatures			28

Forward-Looking Statements

National Financial Partners Corp. and its subsidiaries and their representatives may from time to time make verbal or written statements, including certain statements in this quarterly report, which are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, without limitation, any statement that may project, indicate or imply future results, events, performance or achievements, and may include discussions concerning revenue, expenses, earnings, cash flow, dividends, capital structure, credit facilities, market and industry conditions, premium and commission rates, interest rates, contingencies, the direction or outcome of regulatory investigations, income taxes and NFP’s operations. In some cases, you can identify forward-looking statements by the words “may,” “will,” “should,” “anticipate,” “expect,” “intend,” “plan,” “believe,” “estimate,” “predict,” “project,” “target,” “continue,” “potential” and similar expressions of a future or forward-looking nature.

Forward-looking statements are based on beliefs and assumptions made by management using currently available information, such as market and industry materials, experts’ reports and opinions, and trends. These statements are only predictions and are not guarantees of future performance. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated by a forward-looking statement. These factors include, without limitation:

•	NFP’s success in acquiring high quality independent financial services distribution firms;

•	competition in the business of providing financial services to the high net worth and entrepreneurial corporate markets;

•	NFP’s ability, through its operating structure, to respond quickly to operational or financial situations and to grow its business;

•	NFP’s ability to effectively manage its business through the principals of its firms;

•	the impact of legislation or regulations in jurisdictions in which NFP’s subsidiaries operate, including the possible adoption of comprehensive and exclusive federal regulation over all interstate insurers;

•	changes in tax laws, including the elimination or modification of the federal estate tax and any change in the tax treatment of life insurance products;

•	changes in premiums and commission rates;

•	adverse results or other consequences from litigation, arbitration or regulatory investigations, including those related to compensation agreements with insurance companies;

•	changes in interest rates or general economic conditions;

•	the occurrence of adverse economic conditions or an adverse regulatory climate in New York, Florida or California;

•	the loss of services of key members of senior management;

•	the availability or adequacy of errors and omissions insurance; and

•	NFP’s ability to facilitate smooth succession planning at its firms.

Additional factors are set forth in NFP’s filings with the Securities and Exchange Commission, including its registration statement on Form S-1.

Forward-looking statements speak only as of the date on which they are made. NFP expressly disclaims any obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

Part I – Financial Information

Item 1. Financial Statements (Unaudited)

NATIONAL FINANCIAL PARTNERS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(in thousands, except per share data)


	(Unaudited) September 30, 2004			December 31, 2003
ASSETS
Current assets:
Cash and cash equivalents	$	63,553		$	71,244
Cash, cash equivalents and securities purchased under resale agreements in premium trust accounts		54,412			41,317
Commissions, fees, and premiums receivable, net		25,702			37,872
Due from principals and/or certain entities they own		13,192			6,803
Notes receivable, net		7,051			5,462
Deferred tax assets		4,332			4,794
Other current assets		8,059			9,378

Total current assets		176,301			176,870

Property and equipment, net		16,418			14,074
Deferred tax assets		22,021			21,802
Intangibles, net		274,206			232,665
Goodwill, net		262,650			218,002
Notes receivable, net		5,627			7,723
Other non-current assets		461			419

Total assets	$	757,684		$	671,555

LIABILITIES
Current liabilities:
Premiums payable to insurance carriers	$	52,434		$	39,597
Income taxes payable		4,463			6,020
Deferred tax liabilities		6,067			5,019
Due to principals and/or certain entities they own		26,734			25,388
Accounts payable		6,190			9,032
Dividends payable		3,392			3,135
Accrued liabilities		31,073			27,849

Total current liabilities		130,353			116,040

Deferred tax liabilities		87,421			81,278
Other non-current liabilities		8,502			8,965

Total liabilities		226,276			206,283

STOCKHOLDERS’ EQUITY
Preferred stock, $0.01 par value: Authorized 200,000 shares; none issued		—			—
Common stock, $0.10 par value: Authorized 60,000 shares; 35,100 and 33,384 issued and 34,010 and 32,122 outstanding, respectively		3,510			3,313
Additional paid-in capital		526,632			476,633
Common stock subscribed		68			2,020
Stock subscription receivable		(68	)		(2,020	)
Retained earnings		22,119			4,159
Treasury stock, 1,084 and 1,023 shares, respectively, at cost		(20,853	)		(18,833	)

Total stockholders’ equity		531,408			465,272

Total liabilities and stockholders’ equity	$	757,684		$	671,555

See accompanying notes to consolidated financial statements.

NATIONAL FINANCIAL PARTNERS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited - in thousands, except per share data)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2004			2003 (Restated)			2004			2003 (Restated)
Revenue:
Commissions and fees	$	153,304		$	116,349		$	435,923		$	324,428

Cost of services:
Commissions and fees		39,780			27,833			119,058			80,138
Operating expenses		46,847			36,863			134,452			108,108
Management fees		32,263			22,940			86,406			61,927

Total cost of services		118,890			87,636			339,916			250,173

Gross margin		34,414			28,713			96,007			74,255

Corporate and other expenses:
General and administrative (excludes option compensation)		7,864			6,107			23,481			18,376
Option compensation		203			177			786			45
Amortization and depreciation		6,450			5,292			19,183			15,261
Impairment of goodwill and intangible assets		1,461			—			3,170			9,932
Loss (gain) on sale of subsidiaries		—			1,038			(145	)		1,038

Total corporate and other expenses		15,978			12,614			46,475			44,652

Income from operations		18,436			16,099			49,532			29,603

Interest and other income		429			346			1,635			1,177
Interest and other expense		(630	)		(998	)		(1636	)		(3,023	)

Net interest and other		(201	)		(652	)		(1	)		(1,846	)

Income before income taxes		18,235			15,447			49,531			27,757
Income tax expense		7,096			8,078			21,373			13,987

Net income	$	11,139		$	7,369		$	28,158		$	13,770

Earnings per share:
Basic	$	0.33		$	0.26		$	0.84		$	0.49

Diluted	$	0.30		$	0.24		$	0.78		$	0.45

Weighted average shares outstanding:
Basic		33,909			28,571			33,509			27,937

Diluted		36,668			31,004			36,271			30,556

See accompanying notes to consolidated financial statements.

NATIONAL FINANCIAL PARTNERS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited - in thousands)


	Nine Months Ended September 30,
	2004			2003
Cash flow from operating activities:
Net income	$	28,158		$	13,770

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Deferred taxes		(4,720	)		(1,964	)
Option compensation		786			45
Amortization of intangibles		14,478			12,201
Impairment of goodwill and intangible assets		3,170			9,932
Depreciation		4,705			3,060
(Gain) loss on disposal of subsidiary		(145	)		1,038
Other, net		—			539
(Increase) decrease in operating assets:
Cash, cash equivalents and securities purchased under resale agreements in premium trust accounts		(13,095	)		(12,695	)
Commissions, fees and premiums receivable, net		12,170			3,381
Due from principals and/or certain entities they own		(6,606	)		(8,097	)
Notes receivable, net – current		(1,589	)		(2,471	)
Other current assets		1,319			(5,077	)
Notes receivable, net – non current		1,587			1,836
Other non-current assets		(94	)		31
Increase (decrease) in operating liabilities:
Premiums payable to insurance carriers		12,837			11,428
Income tax payable		1,012			2,702
Due to principals and/or certain entities they own		1,346			(234	)
Accounts payable		(2,994	)		(5,745	)
Accrued liabilities		1,369			4,633
Other non-current liabilities		2,173			2,619

Total adjustments		27,709			17,162

Net cash provided by operating activities		55,867			30,932

Cash flow from investing activities:
Purchases of property and equipment, net		(7,049	)		(4,353	)
Payments for acquired firms, net of cash		(54,446	)		(51,981	)

Net cash used in investing activities		(61,495	)		(56,334	)

Cash flow from financing activities:
Repayment of bank loan		(63,000	)		(159,540	)
Proceeds from bank loan		63,000			120,090
Proceeds from initial public offering, net of offering cost		—			89,629
Proceeds from issuance of common stock		1,953			188
Capital contributions		—			361
Proceeds from exercise of stock options, including tax benefit		5,925			494
Purchase of treasury stock		—			(3	)
Dividends paid		(9,941	)		—

Net cash (used in) provided by financing activities		(2,063	)		51,219

Net (decrease) increase in cash and cash equivalents		(7,691	)		25,817

Cash and cash equivalents, beginning of the period		71,244			31,814

Cash and cash equivalents, end of the period	$	63,553		$	57,631

Supplemental disclosures of cash flow information:

Cash paid for income taxes	$	26,670		$	8,182

Cash paid for interest	$	264		$	2,182

Non-cash transactions: See Note 8

See accompanying notes to consolidated financial statements.

National Financial Partners Corp. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2004 and December 31, 2003

Note 1 - Nature of Operations

National Financial Partners Corp. (“NFP”), a Delaware corporation, was formed on August 27, 1998, and commenced operations on January 1, 1999. The principal business of NFP and its Subsidiaries (the “Company”) is the acquisition and management of operating companies which form a national distribution network that offers financial services including life insurance and wealth transfer, corporate and executive benefits and financial planning and investment advisory services to the high net worth and entrepreneurial corporate markets. As of September 30, 2004, the Company owned 142 firms located in 40 states and Puerto Rico.

In December 2002, NFP’s Board of Directors authorized a one-for-ten reverse stock split for its shares of common stock. On May 19, 2003, the Company’s stockholders approved the reverse stock split, which took effect on September 12, 2003. On September 23, 2003, the Company completed an initial public offering of 10,427,025 shares of common stock, including 4,279,146 primary shares, for which it received proceeds, after fees and expenses, of approximately $86.4 million. All references to shares of common stock, options and per share amounts in the accompanying consolidated financial statements for periods prior to the initial public offering have been restated to reflect the reverse stock split on a retroactive basis, exclusive of fractional shares.

Restatement of Consolidated Financial Statements

The Company plans to restate its previously issued consolidated financial statements contained in the Company’s third quarter 2003 Form 10-Q, 2003 Form 10-K and first and second quarter 2004 Form 10-Q’s to reflect a restatement of commissions and fees revenue and commissions and fees expense for prior periods to reflect a change in the reporting of certain transactions by one subsidiary of the Company from a gross to a net basis.

During the third quarter of 2004, the Company determined that a subsidiary had incorrectly applied the provisions of Emerging Issues Task Force (“EITF”) Issue No. 99-19, “Reporting Revenue Gross as a Principal Versus Net as an Agent,” effective beginning in 2000 to transactions in which it collected and remitted premiums on behalf of certain insurance carriers and their clients without acting as a principal or assuming the primary obligation in the relationship. The result was an overstatement of both commissions and fees revenue and commissions and fees expense by equal amounts. The restatement does not affect previously reported gross margin, income from operations, net income or net income per share. In addition, there is no effect on the consolidated statements of financial condition, stockholders’ equity or cash flows for the previously issued financial statements. A summary of the effects of the restatement to reclassify these amounts is as follows:


	Three Months Ended June 30, 2004				Six Months Ended June 30, 2004
(in thousands)	As Previously Reported		As Restated		As Previously Reported		As Restated
Revenue:
Commissions and fees	$	156,341	$	151,687	$	291,566	$	282,619

Cost of services:
Commissions and fees	$	47,176	$	42,522	$	88,225	$	79,278

Total cost of services	$	121,493	$	116,839	$	229,973	$	221,026


					Three Months Ended March 31, 2004
(in thousands)					As Previously Reported		As Restated
Revenue:
Commissions and fees					$	135,225	$	130,932

Cost of services:
Commissions and fees					$	41,049	$	36,756

Total cost of services					$	108,480	$	104,187

					Year Ended December 31, 2003
(in thousands)					As Previously Reported		As Restated
Revenue:
Commissions and fees					$	479,577	$	464,426

Cost of services:
Commissions and fees					$	126,776	$	111,625

Total cost of services					$	371,428	$	356,277

	Three Months Ended September 30, 2003				Nine Months Ended September 30, 2003
(in thousands)	As Previously Reported		As Restated		As Previously Reported		As Restated
Revenue:
Commissions and fees	$	119,899	$	116,349	$	336,164	$	324,428

Cost of services:
Commissions and fees	$	31,383	$	27,832	$	91,874	$	80,138

Total cost of services	$	91,186	$	87,636	$	261,909	$	250,173

	Three Months Ended June 30, 2003				Six Months Ended June 30, 2003
(in thousands)	As Previously Reported		As Restated		As Previously Reported		As Restated
Revenue:
Commissions and fees	$	119,273	$	114,522	$	216,265	$	208,079

Cost of services:
Commissions and fees	$	31,845	$	27,094	$	60,491	$	52,305

Total cost of services	$	92,534	$	87,783	$	170,723	$	162,537

					Three Months Ended March 31, 2003
(in thousands)					As Previously Reported		As Restated
Revenue:
Commissions and fees					$	96,992	$	93,557

Cost of services:
Commissions and fees					$	28,646	$	25,211

Total cost of services					$	78,189	$	74,754


					Year Ended December 31, 2002
(in thousands)					As Previously Reported		As Restated
Revenue:
Commissions and fees					$	361,071	$	348,172

Cost of services:
Commissions and fees					$	104,747	$	91,848

Total cost of services					$	285,635	$	272,736

	Three Months Ended September 30, 2002				Nine Months Ended September 30, 2002
(in thousands)	As Previously Reported		As Restated		As Previously Reported		As Restated
Revenue:
Commissions and fees	$	86,791	$	84,352	$	251,486	$	242,560

Cost of services:
Commissions and fees	$	24,060	$	21,621	$	73,454	$	64,528

Total cost of services	$	66,800	$	64,361	$	197,282	$	188,356

					Year Ended December 31, 2001
(in thousands)					As Previously Reported		As Restated
Revenue:
Commissions and fees					$	278,064	$	268,164

Cost of services:
Commissions and fees					$	77,439	$	67,539

Total cost of services					$	216,662	$	206,762

					Year Ended December 31, 2000
(in thousands)					As Previously Reported		As Restated
Revenue:
Commissions and fees					$	207,945	$	198,986

Cost of services:
Commissions and fees					$	62,796	$	53,837

Total cost of services					$	163,612	$	154,653

Note 2 - Summary of Significant Accounting Policies

Basis of Presentation

The unaudited interim consolidated financial statements of the Company included herein have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and with Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the unaudited interim consolidated financial statements reflect all adjustments, which are of a normal recurring nature, necessary for a fair presentation of financial position, results of operations and cash flows of the Company for the interim periods presented and are not necessarily indicative of a full year’s results.

All material intercompany balances and transactions have been eliminated. [These financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes for the year ended December 31, 2003, included in NFP’s Annual Report on Form 10-K filed March 12, 2004].

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of the assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results may differ from those estimates.

Stock-Based Compensation

The Company currently sponsors five stock-based incentive compensation plans. Effective January 1, 2003, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” in accordance with the transition and disclosure provisions of SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” and adopted the prospective method for transition.

Prior to January 1, 2003, the Company elected to use the intrinsic value method prescribed in Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Accordingly, no compensation expense was recorded where the exercise price equaled or exceeded the market price of the underlying stock on the date of grant. Awards granted under the Company’s plans vest over periods of up to five years. Therefore, the cost related to stock-based employee compensation included in the determination of net income as of September 30, 2004 and 2003 was less than that which would have been recognized if the fair value based method had been applied to all awards since the original effective date of SFAS No. 123.

The following table illustrates the effect on net income and earnings per share if the fair value based method had been applied to all outstanding and unvested awards in each period:


	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands, except per share amounts)	2004			2003			2004			2003
Net income, as reported	$	11,139		$	7,369		$	28,158		$	13,770
Add stock-based employee compensation expense included in reported net income, net of tax		18			33			54			92
Deduct total stock-based employee compensation expense determined under fair-value-based method for all awards, net of tax		(244	)		(512	)		(732	)		(1,511	)

Pro forma net income	$	10,913		$	6,890		$	27,480		$	12,351

Earnings per share:
Basic – as reported	$	0.33		$	0.26		$	0.84		$	0.49

Basic – pro forma	$	0.32		$	0.24		$	0.82		$	0.44

Diluted – as reported	$	0.30		$	0.24		$	0.78		$	0.45

Diluted – pro forma	$	0.30		$	0.22		$	0.76		$	0.40

Reclassification

Certain reclassifications have been made to the consolidated financial statements for the periods ended September 30, 2003 to conform to the current year presentation.

Note 3 - Earnings Per Share

The computations of basic and diluted earnings per share are as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands, except per share amounts)	2004		2003		2004		2003
Basic:
Net income	$	11,139	$	7,369	$	28,158	$	13,770

Average shares outstanding		33,872		28,540		33,497		27,926
Contingent consideration		37		31		12		11

Total		33,909		28,571		33,509		27,937

Basic earnings per share	$	0.33	$	0.26	$	0.84	$	0.49

Diluted:
Net income	$	11,139	$	7,369	$	28,158	$	13,770

Average shares outstanding		33,872		28,540		33,497		27,926

Stock held in escrow and stock subscriptions		6		307		6		307
Contingent consideration		37		64		37		64
Stock options		2,753		2,093		2,731		2,259

Total		36,668		31,004		36,271		30,556

Diluted earnings per share	$	0.30	$	0.24	$	0.78	$	0.45

Note 4 - Acquisitions

During the nine months ended September 30, 2004, the Company acquired the net assets of sixteen firms which offer one or more of the following services: life insurance and wealth transfer, corporate and executive benefits and financial planning and investment advisory services to the high net worth and entrepreneurial corporate markets. These acquisitions allow the Company to expand into desirable geographic locations, further extend its presence in the insurance and financial services industry and increase the volume of services currently provided. The Company acquired all of the net assets of these firms in exchange for its common stock and/or cash using the purchase accounting method for recording business combinations. The following table details the amount of consideration paid and the allocation of purchase price, in aggregate (in thousands):


Consideration:
Cash	$	57,384
Common stock		33,258
Other^(a)		396

Total	$	91,038

Allocation of purchase price:
Net tangible assets	$	8,990
Cost assigned to intangibles:
Book of business		20,124
Management contract		36,966
Trade name		642
Goodwill		24,316

Total	$	91,038

(a)	Represents capitalized costs of acquisitions.

In connection with these acquisitions, the Company has contingent obligations based upon the future earnings growth of the acquired entities. Future payments made under these arrangements will be recorded as upward adjustments to goodwill when the contingencies are settled. As of September 30, 2004, the maximum amount of contingent obligations for the sixteen acquired firms was $91.0 million. The maximum amount of contingent obligations for all eligible firms was $263.5 million.

The following table summarizes the required disclosures of the pro forma combined entity, as if these acquisitions occurred at January 1, 2004 and 2003, respectively (in thousands, except per share amounts):


	Nine Months Ended September 30,
	2004		2003 (Restated)
Revenue	$	447,180	$	372,646
Income before taxes	$	53,098	$	43,434
Net income	$	30,186	$	21,547
Earnings per share – basic	$	0.90	$	0.74
Earnings per share – diluted	$	0.83	$	0.68

The pro forma results above have been prepared for comparative purposes only and do not purport to be indicative of the results of operations which actually would have resulted had the acquisitions occurred at January 1, 2004 and 2003, respectively, nor is it necessarily indicative of future operating results.

Note 5 - Goodwill and Other Intangible Assets

Goodwill:

The changes in the carrying amount of goodwill for the nine months ended September 30, 2004 are as follows (in thousands):


Balance as of December 31, 2003	$	218,002
Goodwill acquired during 2004, including goodwill acquired related to the deferred tax liability of $11,714		36,030
Contingent payments, restructurings, dispositions and other		10,576
Impairment of goodwill		(1,958	)

Balance as of September 30, 2004	$	262,650

Acquired intangible assets:

The gross carrying amount and accumulated amortization for each of the Company’s acquired intangible assets are as follows (in thousands):


	September 30, 2004					December 31, 2003
	Gross carrying amount		Accumulated amortization			Gross carrying amount		Accumulated amortization
Amortizing identified intangible assets:
Book of business	$	116,742	$	(35,402	)	$	96,811	$	(27,258	)
Management contract		223,096		(33,833	)		187,612		(27,499	)

Total	$	339,838	$	(69,235	)	$	284,423	$	(54,757	)

Non-amortizing intangible assets:
Goodwill	$	277,855	$	(15,205	)	$	233,207	$	(15,205	)
Trade name		3,799		(196	)		3,195		(196	)

Total	$	281,654	$	(15,401	)	$	236,402	$	(15,401	)

Aggregate amortization expense for intangible assets subject to amortization for the nine months ended September 30, 2004 was $14.5 million. Intangibles related to book of business and management contract are being amortized over a 10-year period and a 25-year period, respectively. Estimated amortization expense for each of the next five years is $19.3 million per year, based on the Company’s acquisitions as of September 30, 2004. Estimated amortization expense for each of the next five years will change primarily as the Company continues to acquire firms. The accumulated amortization of non-amortizing intangible assets represents amortization recorded prior to the adoption of SFAS No. 142, “Goodwill and Other Intangible Assets”.

Impairment of goodwill and intangible assets:

The Company evaluates its amortizing (long-lived assets) and non-amortizing intangible assets for impairment in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” and SFAS No. 142.

In connection with its evaluation, management proactively seeks to identify indicators of impairment. Indicators of impairment include, but are not limited to, sustained operating losses, a trend of poor operating performance and significant customer or revenue loss. If one or more indicators of impairment exist among any of the Company’s firms, the Company performs an evaluation to identify potential impairments. If an impairment is identified the Company measures and records the amount of impairment loss.

Impairments were identified among five firms in the nine months ended September 30, 2004 and 2003. The Company compared the carrying value of each firm’s long-lived assets (book of business and management contract) to an estimate of their respective fair value. The fair value is based upon the amount at which the long-lived assets could be bought or sold in a current transaction between the Company and its principals, and or the present value of the assets’ future cash flow. Based upon this analysis, the following impairments of amortizing intangible assets were recorded (in thousands):


	Impairment loss as of
	September 30, 2004		September 30, 2003
Amortizing identified intangible assets:
Book of business	$	191	$	—
Management contract		983		4,158

Total	$	1,174	$	4,158

For each firm’s non-amortizing intangible assets, the Company compared the carrying value of each firm to an estimate of its fair value. The fair value is based upon the amount at which the firm could be bought or sold in a current transaction between the Company and a willing party, and or the present value of the assets future cash flows. Based upon this analysis, the following impairments of non-amortizing intangible assets were recorded (in thousands):


	Impairment loss as of
	September 30, 2004		September 30, 2003
Non-amortizing intangible assets:
Trade name	$	38	$	107
Goodwill		1,958		5,667

Total	$	1,996	$	5,774

The total impairment loss recognized in the consolidated statements of income for the nine months ended September 30, 2004 and 2003 was $3.2 million and $9.9 million, respectively.

Both the process to look for indicators of impairment and the method to compute the amount of impairment incorporate quantitative data and qualitative criteria including new information that can dramatically change the decision about the valuation of an intangible asset in a very short period of time. The timing and amount of realized losses reported in earnings could vary if management’s conclusions were different.

Note 6 – Borrowings

revolving credit facility and is due on September 14, 2005, unless the Company elects to convert the credit facility to a term loan, in which case it will amortize over one year, with a principal payment due on March 14, 2006 and a final maturity on September 14, 2006. As of September 30, 2004, the Company did not have any balance outstanding under the credit facility. The Company’s obligations under its credit facility are collateralized by all of its assets. The credit facility contains various customary restrictive covenants. As of September 30, 2004, management believes the Company was in compliance with all covenants under the facility.

Note 7 – Stockholders’ Equity

The changes in stockholders’ equity during the nine months ended September 30, 2004 is summarized as follows (in thousands):


	Common Stock Par Value		Additional Paid-in Capital		Retained Earnings			Treasury Stock			Total
Balance at December 31, 2003	$	3,313	$	476,633	$	4,159		$	(18,833	)	$	465,272
Common stock issued:
Acquisitions		111		33,147		—			—			33,258
Contingent consideration		27		7,604		—			—			7,631
Other		20		2,252		—			—			2,272
Common stock repurchased		—		—		—			(2,020	)		(2,020	)
Stock options exercised, including tax benefit		39		5,886		—			—			5,925
Cash dividends declared		—		—		(10,198	)		—			(10,198	)
Other		—		1,110		—			—			1,110
Net income		—		—		28,158			—			28,158

Balance at September 30, 2004	$	3,510	$	526,632	$	22,119		$	(20,853	)	$	531,408

Note 8 – Non-Cash Transactions

The following non-cash transactions occurred during the periods indicated (in thousands):


	Nine Months Ended September 30,
	2004		2003
Stock issued as consideration for acquisitions	$	33,258	$	23,515
Stock issued for contingent consideration and other	$	7,631	$	1,288
Treasury stock, note receivable and satisfaction of an accrued liability in exchange for partial release of an acquired firm	$	947	$	1,200
Stock repurchased in connection with divestitures of acquired firms	$	—	$	615
Stock received in exchange for satisfaction of a note receivable and/or due from principal/and or certain entities they own	$	1,073	$	865
Net tax benefit from stock options exercised	$	5,925	$	—

Note 9 – Subsequent Events

Effective October 1, 2004, the Company acquired two firms which primarily offer wealth transfer, corporate and executive benefits and financial planning to the high net worth and entrepreneurial corporate markets. The Company acquired all of the net assets of these firms for aggregate consideration of approximately $3.4 million in cash and the issuance of approximately 38,800 shares of common stock.

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

The following discussion should be read in conjunction with NFP’s consolidated financial statements and the related notes included elsewhere in this report. In addition to historical information, this discussion includes forward-looking information that involves risks and assumptions, which could cause actual results to differ materially from management’s expectations. See “Forward-Looking Statements” included elsewhere in this report.

On November 3, 2004, the Board of Directors of the Company determined to restate the previously filed consolidated financial statements contained in the Company’s third quarter 2003 Form 10-Q, 2003 Form 10-K and first and second quarter 2004 Form 10-Qs to reflect the change. The Board of Directors concurred with management’s assessment that, in accordance with Emerging Issues Task Force Issue No. 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent,” certain revenue received by the subsidiary in connection with its billing, collection and remittance services for premiums due to insurance carriers should have been reported on a net basis and not on a gross basis.

The restatement will lower revenue and expenses by equal amounts and does not affect previously reported gross margin dollars, net income or net income per diluted share. In addition, there will be no effect on the consolidated statements of financial condition, consolidated statements of changes in stockholders’ equity or consolidated statements of cash flows. All financial information included in Management’s Discussion and Analysis of Financial Condition and Results of Operations has been restated to reflect the restated results.

Executive Overview

NFP is a leading independent distributor of financial services products primarily to high net worth individuals and growing entrepreneurial companies. Founded in 1998, and commencing operations on January 1, 1999, NFP has grown internally and through acquisitions and, as of September 30, 2004, operates a national distribution network with over 1,500 producers in 40 states and Puerto Rico operating through 142 owned firms and over 190 affiliated third-party distributors. Net income grew from $13.8 million during the nine months ended September 30, 2003 to $28.2 million during the nine months ended September 30, 2004. As a result of new acquisitions and the growth of previously acquired firms, revenue grew from $324.4 million during the nine months ended September 30, 2003, as restated, to $435.9 million during the nine months ended September 30, 2004. Firms are considered to be “new acquisitions” during the first twelve months following acquisition by NFP.

NFP’s firms earn revenue that consists primarily of commissions and fees earned from the sale of financial products and services to their clients and incur commission and fee expense and operating expense in the course of earning this revenue. NFP pays management fees to non-employee principals of its firms based on the financial performance of each respective firm. Management refers to revenue earned by NFP’s firms minus the expenses of its firms, including management fees, as gross margin. Management uses gross margin as a measure of the performance of the acquired firms. Through acquisitions and internal growth, gross margin grew from $74.3 million, or 22.9% of revenue, during the nine months ended September 30, 2003, as restated, to $96.0 million, or 22.0% of revenue, during the nine months ended September 30, 2004.

Gross margin is offset by expenses that NFP incurs at the corporate level, including corporate and other expenses. Corporate and other expenses increased from $44.7 million during the nine months ended September 30, 2003 to $46.5 million during the nine months ended September 30, 2004, primarily due an increase in corporate general and administrative expenses, partially offset by a decrease in impairment of goodwill and net intangible assets. General and administrative expenses grew from $18.4 million during the nine months ended September 30, 2003 to $23.5 million during the nine months ended September 30, 2004 primarily due to certain costs related to operating as a public company. General and administrative expenses as a percent of revenue declined from 5.7% during the nine months ended September 30, 2003, as restated, to 5.4% during the nine months ended September 30, 2004.

Acquisitions

Under its acquisition structure, NFP acquires 100% of the equity of independent financial services products distribution businesses on terms that are relatively standard across all its acquisitions. To determine the acquisition price, NFP’s management first estimates the annual operating cash flow of the business to be acquired based on

current levels of revenue and expense. For this purpose, management defines operating cash flow as cash revenue of the business less cash and non-cash expenses, other than amortization, depreciation and compensation to the business’s owners or individuals who subsequently become principals. Management refers to this estimated annual operating cash flow as “target earnings.” The acquisition price is a multiple (approximately five times) of a portion of the target earnings, which management refers to as “base earnings.” Base earnings averaged 47% of target earnings for all firms owned as of September 30, 2004. In determining base earnings, management’s general rule is not to exceed an amount equal to the recurring revenue of the business. By recurring revenue, management means revenue from sales previously made (such as renewal commissions on insurance products, commissions and administrative fees for ongoing benefit plans and mutual fund trail commissions) and fees for assets under management.

NFP enters into a management agreement with principals and/or certain entities they own. Under the management agreement, the principals and/or such entities are entitled to management fees consisting of:

•

all future earnings of the acquired business in excess of the base earnings up to target earnings; and,

•

a percentage of any earnings in excess of target earnings based on the ratio of base earnings to target earnings.

NFP retains a cumulative preferred position in the base earnings. To the extent earnings of a firm in any year are less than base earnings, in the following year NFP is entitled to receive base earnings together with the prior years’ shortfall before any management fees are paid.

Additional purchase consideration is often paid to the former owners based on satisfying specified internal growth thresholds over the three-year period following the acquisition.

Substantially all of NFP’s acquisitions have been paid for with a combination of cash and its common stock, valued at its then fair market value. At this time, NFP typically requires its principals to take at least 30% of the total acquisition price in its common stock; however, through September 30, 2004, principals have taken on average approximately 45% of the total acquisition price in NFP’s common stock. The following table shows acquisition activity in the following period (in thousands, except number of acquisitions closed):


	Nine Months Ended September 30, 2004
Number of acquisitions closed		16
Consideration:
Cash	$	57,384
Common stock		33,258
Other^(a)		396

Total	$	91,038

(a)	Represents capitalized costs of the acquisitions.

Revenue

NFP’s firms generate revenue primarily from the following sources:

Life insurance commissions and estate planning fees. Insurance and annuity commissions paid by insurance companies are based on a percentage of the premium that the insurance company charges to the policyholder. First-year commissions are calculated as a percentage of the first twelve months’ premium on the policy and earned in the year that the policy is originated. In many cases, NFP’s firms receive renewal commissions for a period following the first year, if the policy remains in force. Its firms also earn fees for developing estate plans.

Corporate and executive benefits commissions and fees. NFP’s firms earn commissions on the sale of

insurance policies written for benefit programs. The commissions are paid each year as long as the client continues to use the product and maintain its broker of record relationship with the firm. Its firms also earn fees for the development and implementation of corporate and executive benefit programs as well as fees for the duration that these programs are administered. Asset-based fees are also earned for administrative services or consulting related to certain benefits plans.

Financial planning and investment advisory fees and securities commissions. NFP’s firms earn commissions related to the sale of securities and certain investment-related insurance products as well as fees for offering financial advice and related services. These fees are based on a percentage of assets under management and are generally paid quarterly. In a few cases, incentive fees are earned based on the performance of the assets under management. Some of NFP’s firms charge flat fees for the development of a financial plan or a flat fee annually for advising clients on asset allocation.

NFP’s firms also earn additional compensation in the form of incentive revenue, including override payments, from manufacturers of financial services products, based on the volume, persistency and profitability of business generated by the firms from these three sources. These forms of payments are earned both with respect to sales by its owned firms and sales by its network of over 190 affiliated third-party distributors.

NFPSI, NFP’s registered broker-dealer and investment adviser, also earns commissions and fees on the transactions effected through it. Most principals of NFP’s firms, as well as many of NFP’s affiliated third-party distributors, conduct securities or investment advisory business through NFPSI.

Incidental to the corporate and executive benefits services provided to their customers, some of NFP’s firms offer property and casualty insurance brokerage and advisory services. Commissions and fees are earned in connection with these services.

Although NFP’s operating history is limited, management believes that its firms earn approximately 65% to 70% of their revenue in the first three quarters of the year and approximately 30% to 35% of their revenue in the fourth quarter.

Expenses

The following table sets forth certain expenses as a percentage of revenue for the periods indicated:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2004		2003 (Restated)		2004		2003 (Restated)
Total revenue	100.0	%	100.0	%	100.0	%	100.0	%
Cost of services:
Commissions and fees	26.0		23.9		27.4		24.7
Operating expenses	30.5		31.7		30.8		33.3
Management fees	21.1		19.7		19.8		19.1

Total cost of services	77.6		75.3		78.0		77.1

Gross margin	22.4		24.7		22.0		22.9

Corporate and other expenses:
General and administrative (excludes option compensation)	5.1		5.2		5.4		5.7
Option compensation	0.1		0.2		0.2		—
Amortization	3.3		3.6		3.3		3.8
Depreciation	0.9		0.9		1.1		1.0
Impairment of goodwill and intangible assets	1.0		0.0		0.7		3.0
(Gain) on sale of subsidiary	0.0		0.9		0.0		0.3

Total corporate and other expenses	10.4	%	10.8	%	10.7	%	13.8	%

Cost of services

Commissions and fees. Commissions and fees are typically paid to non-principal producers, who are producers that are employed by or affiliated with NFP’s firms but are not principals. When business is generated solely by a principal, no commission expense is incurred because principals are only paid from a share of the cash flow of the acquired firm through management fees. However, when income is generated by a non-principal producer, the producer is generally paid a portion of the commission income, which is reflected as commission expense of the acquired firm. The use of non-principal producers affords principals the opportunity to expand the reach of the business of a firm beyond clients or customers with whom they have direct contact. In addition, NFPSI pays commissions to NFP’s affiliated third-party distributors who transact business through NFPSI.

Operating expenses. NFP’s firms incur operating expenses related to maintaining individual offices, including compensating non-producing staff. Firm operating expenses also include the expenses of NFPSI and of NFPISI, another subsidiary that serves NFP’s acquired firms and through which its acquired firms and its affiliated third-party distributors access insurance and financial services products and manufacturers.

Management fees. Management fees are paid to the principals of NFP’s firms and/or certain entities they own based on the financial performance of the firms they manage. Once NFP receives cumulative preferred earnings (base earnings) from a firm, the principals and/or an entity the principals own receive management fees equal to earnings above base earnings up to target earnings. An additional management fee is paid in respect of earnings in excess of target earnings based on the ratio of base earnings to target earnings. For example, if base earnings equal 40% of target earnings, NFP receives 40% of earnings in excess of target earnings and the principal and/or the entity receives 60%. Management fees also include an accrual for certain performance-based incentive amounts payable under NFP’s ongoing incentive program.

The ratio of management fees to gross margin before management fees is dependent on the percentage of total earnings of the firms capitalized by NFP, the performance of its firms relative to base earnings and target earnings and the earnings of NFPISI and NFPSI, from which no management fees are paid. Because of its cumulative preferred position, if a firm produces earnings below target earnings in a given year, NFP’s share of the firm’s total earnings would be higher for that year. If a firm produces earnings at or above target earnings, NFP’s share of the firm’s total earnings would be equal to the percentage of the earnings capitalized by NFP in the initial transaction, less any additional management fees earned under ongoing incentive plans.

The following table summarizes the results of operations of NFP’s firms for the periods presented and shows management fees as a percentage of gross margin before management fees (in thousands):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2004			2003 (Restated)			2004			2003 (Restated)
Revenue:

Commissions and fees	$	153,304		$	116,349		$	435,923		$	324,428

Cost of services:
Commissions and fees		39,780			27,833			119,058			80,138
Operating expenses		46,847			36,863			134,452			108,108

Gross margin before management fees		66,677			51,653			182,413			136,182
Management fees		32,263			22,940			86,406			61,927

Gross margin	$	34,414		$	28,713		$	96,007		$	74,255
Management fees, as a percentage of gross margin before management fees		48.4	%		44.4	%		47.4	%		45.5	%

Corporate and other expenses

General and administrative. At the corporate level, NFP incurs general and administrative expense related to the acquisition and management of its firms. General and administrative expense includes compensation, occupancy, professional fees, travel and entertainment, technology, telecommunication, advertising and marketing costs. Option compensation expense is disclosed separately.

Option compensation. Option compensation expense consists of expenses related to stock option grants under an incentive program offered to the principals and certain employees of NFP’s earlier acquisitions. This program, offered to the sellers of 40 acquired firms, allowed principals and certain employees to earn options with a strike price equal to the price of NFP’s common stock at the time the options were earned. This incentive program expired at the end of 2003.

In addition to the option incentive program, NFP has incurred option compensation expense for stock options granted to employees and directors. Stock options granted to employees through December 31, 2002 were accounted for under the intrinsic-value-based method of accounting in accordance with APB Opinion No. 25. On January 1, 2003, NFP adopted the fair value recognition provisions of SFAS No. 123 in accordance with SFAS No. 148 and adopted the “prospective” method of transition. Under this method, the cost of stock options granted to employees after January 1, 2003 are included in the determination of net income.

Amortization. NFP incurs amortization expense related to the amortization of intangible assets.

Impairment of goodwill and intangible assets. The firms acquired by NFP may not continue to positively perform after the acquisition for various reasons, including legislative or regulatory changes that affect the products in which a firm specializes, the loss of key clients after the acquisition closed, general economic factors that impact a firm in a direct way and the cultural incompatibility of an acquired firm’s management team with NFP. In such situations, NFP may take impairment charges in accordance with SFAS No. 142 and SFAS No. 144 and reduce the carrying cost of acquired identifiable intangible assets (including book of business, management contract and trade name) and goodwill to their respective fair values. Management reviews and evaluates the financial and operating results of acquired firms on a firm-by-firm basis throughout the year to assess the recoverability of goodwill and other intangible assets associated with these firms. The fair value is based upon the amount at which the acquired firm could be bought or sold in a current transaction between NFP and the principals. The intangible assets associated with a particular firm may be impaired when the firm has experienced a significant deterioration in its business indicated by an inability to produce at the level of base earnings for a period of four consecutive quarters and when the firm does not appear likely to improve its operating results or cash flows in the foreseeable future. Management believes that this is an appropriate time period to evaluate firm performance given the seasonal nature of many firms’ activities. In assessing the recoverability of goodwill and other intangible assets, historical trends are used and projections regarding the estimated future cash flows and other factors are made to determine the fair value of the respective assets.

Depreciation. NFP incurs depreciation expense related to capital assets, such as investments in technology, office furniture and equipment, as well as amortization for its leasehold improvements.

(Gain) on sale of subsidiaries. From time to time, NFP has disposed of acquired firms. In these dispositions, NFP may realize a gain or loss on the sale of the subsidiary.

Results of Operations

NFP’s management monitors acquired firm revenue, commission and fee expense and operating expense from new acquisitions as compared with existing firms. For this purpose, a firm is considered to be a new acquisition for the twelve months following the acquisition. After the first twelve months, a firm is considered to be an existing firm. Within any reported period, a firm may be considered to be a new acquisition for part of the period and an existing firm for the remainder of the period. Additionally, NFPSI and NFPISI are considered to be existing firms. Sub-acquisitions that do not separately report their results are considered to be part of the firm making the acquisition, and the results of firms disposed of are included in the calculations. The results of operations discussions set forth below include analysis of the relevant line items on this basis.

Three months ended September 30, 2004 compared with the three months ended September 30, 2003

The following table provides a comparison of NFP’s revenue and expenses for the periods presented:


	Three Months Ended September 30,
	2004			2003 (Restated)			$ Change			% Change
	(in millions)
Consolidated Statements of Income Data:
Revenue:
Commissions and fees	$	153.3		$	116.3		$	37.0		31.8	%

Cost of services:
Commissions and fees		39.8			27.8			12.0		43.2
Operating expenses		46.8			36.9			9.9		26.8
Management fees		32.3			22.9			9.4		41.0

Total cost of services		118.9			87.6			31.3		35.7

Gross margin		34.4			28.7			5.7		19.9

Corporate and other expenses:
General and administrative (excludes option compensation)		7.9			6.1			1.8		29.5
Option compensation		0.2			0.2			0.0		NM
Amortization		5.0			4.2			0.8		19.0
Depreciation		1.4			1.1			0.3		27.3
Impairment of goodwill and intangible assets		1.5			—			1.5		NM
(Gain) on sale of subsidiary		—			1.0			(1.0	)	NM

Total corporate and other expenses		16.0			12.6			3.4		27.0

Income from operations		18.4			16.1			2.3		14.3

Interest and other income		0.4			0.3			0.1		33.3
Interest and other expense		(0.6	)		(1.0	)		0.4		(40.0	)

Net interest and other		(0.2	)		(0.7	)		0.5		(71.4	)

Income before income taxes		18.2			15.4			2.8		18.2
Income tax expense		7.1			8.0			(0.9	)	(11.3	)

Net income	$	11.1		$	7.4		$	3.7		50.0	%

NM	indicates amount is not meaningful.

Summary

Net income. Net income increased $3.7 million, or 50.0%, to $11.1 million in the three months ended September 30, 2004 compared with $7.4 million in the same period last year. The increase was primarily a result of the growth of existing firms, the acquisition of new firms and a decrease in the estimated effective tax rate to 43% for 2004 from 50% in 2003.

Revenue

Commissions and fees. Commissions and fees increased $37.0 million, or 31.8%, to $153.3 million in the three months ended September 30, 2004 compared with $116.3 million in the same period last year, as restated. The increase was due to an increased volume of business from NFP’s existing firms as well as business generated by new acquisitions. Approximately $19.8 million of the increase was due to business generated by new acquisitions, and approximately $17.2 million was a direct result of increased volume of business from NFP’s existing firms, including NFPSI and NFPISI.

Cost of services

Commissions and fees. Commissions and fees expense increased $12.0 million, or 43.2%, to $39.8 million in the three months ended September 30, 2004 compared with $27.8 million in the same period last year, as restated. The increase was principally due to an increased volume of business from NFP’s existing firms and business generated by new acquisitions. Approximately $7.3 million of the increase was due to business generated by new acquisitions, and approximately $4.7 million was due to increased volume of business from NFP’s existing firms. As a percentage of revenue, commissions and fees expense increased to 26.0% in the three months ended September

30, 2004 from 23.9% in the same period last year, as restated. The growth at the acquired firm level was driven primarily by the acquisitions of two firms in 2004, both of which are wholesale operations that pay out a relatively high percentage of revenue in the form of commissions to producers and an increased use of outside producers to grow revenue among some of the Company’s firms.

Operating expenses. Operating expenses increased $9.9 million, or 26.8%, to $46.8 million in the three months ended September 30, 2004 compared with $36.9 million in the same period last year. The increase was due to the operating expenses from new acquisitions and greater operating expenses at NFP’s existing firms associated with an increase in the volume of business generated. Approximately $3.6 million of the increase was due to operating expenses of new acquisitions, and approximately $6.3 million was a result of increased operating expenses at NFP’s existing firms. As a percentage of revenue, operating expenses declined to 30.5% in the three months ended September 30, 2004 from 31.7% in the same period in 2003, as restated. The Company believes that revenue growth and the reduction in firm operating expenses as a percentage of revenue post-acquisition is an indication of the efficiency of the Company’s operating structure.

Management fees. Management fees increased $9.4 million, or 41.0%, to $32.3 million in the three months ended September 30, 2004 compared with $22.9 million in the same period last year. The increase resulted from higher earnings at NFP’s owned firms generated primarily through new acquisitions and internal growth of existing firms. Management fees represented 48.4% of gross margin before management fees in the three months ended September 30, 2004 compared with 44.4% in the same period last year. Since management fees are accrued based on the year-to-date performance of each firm relative to base and target earnings, an improvement in firm performance particularly early in the year will lead to higher rates of management fees as a percentage of gross margin before management fees. In the third quarter of 2004, management fees as a percentage of revenue reflected the strong overall performance of firms as well as an $2.6 million accrual for anticipated payments related to ongoing incentive programs compared with an incentive accrual of $0.2 million for the third quarter of 2003. These programs reward principals of acquired firms for achieving certain rates of earnings growth measured in successive three year periods, after their initial three-year incentive and contingent consideration periods expire. Management fees as a percentage of revenue increased to 21.1% in the three months ended September 30, 2004 from 19.7% in the same period last year, as restated.

Gross margin. Gross margin increased $5.7 million, or 19.9%, to $34.4 million in the three months ended September 30, 2004 compared with $28.7 million in the same period last year. Gross margin as a percentage of revenue decreased to 22.4% in the three months ended September 30, 2004 from 24.7% in the same period last year, as restated. This decrease resulted from a higher rate of commissions and fees expense and management fees as a percentage of revenue, partially offset by a lower rate of firm operating expenses.

Corporate and other expenses

General and administrative. General and administrative expenses increased $1.8 million, or 29.5%, to $7.9 million in the three months ended September 30, 2004 compared with $6.1 million in the same period last year. The increase in general and administrative expenses was largely attributable to the additional costs associated with operating as a public company subsequent to NFP’s initial public offering which occurred in September 2003. These costs include additional personnel, increased directors and officers liability insurance premiums, fees for independent members of the board of directors, shareholder services and investor relations. In addition, the Company incurred non-recurring costs associated with corporate governance initiatives, including those implemented to meet the requirements set forth under the Sarbanes-Oxley legislation. As a percentage of revenue, general and administrative expense declined to 5.1% in the three months ended September 30, 2004 and 5.2% in the same period last year, as restated.

Option compensation. Option compensation expense was $0.2 million in the three months ended September 30, 2004 and in the same period last year.

Amortization. Amortization increased $0.8 million, or 19.0%, to $5.0 million in the three months ended September 30, 2004 compared with $4.2 million in the same period last year. Amortization expense increased primarily as a result of a 15.2% increase in net intangible assets resulting primarily from new acquisitions. As a percentage of revenue, amortization was 3.3% in the three months ended September 30, 2004 compared with 3.6% in the same period last year, as restated.

Depreciation. Depreciation expense increased $0.3 million, or 27.3%, to $1.4 million in the three months ended September 30, 2004 compared with $1.1 million in the same period last year. The increase in depreciation resulted from an increase in the number of owned firms and capital expenditures at the Company’s existing firms. As a percentage of revenue, depreciation expense was 0.9% in the three months ended September 30, 2004 and in the same period last year, as restated.

Impairment of goodwill and intangible assets. Impairment of goodwill and intangible assets was $1.5 million the three months ended September 30, 2004 compared with none in the same period last year. The impairment in the third quarter 2004 was related to one of the Company’s firms. In connection with these charges, the Company reduced the carrying value of the identifiable intangible assets and goodwill associated with this firm to their fair value. As a percentage of revenue, impairment of goodwill and intangible assets was 1.0% in the three months ended September 30, 2004.

Interest and other income. Interest and other income increased $0.1 million to $0.4 million in the three months ended September 30, 2004 compared with $0.3 million in the same period last year.

Interest and other expense. Interest and other expense decreased $0.4 million, or 40.0%, to $0.6 million in the three months ended September 30, 2004 compared with $1.0 million in the same period last year. The decrease was due to lower average borrowings under the Company’s bank line of credit. Since the Company’s initial public offering in September 2003, average borrowings under the line of credit have declined substantially. The weighted average outstanding balance in the third quarter of 2004 was $3.9 million, compared with $45.0 million in the prior year period. As of September 30, 2004, the Company did not have any borrowings outstanding. The decrease in interest expense was offset by a $0.3 million write off of the Company’s unamortized value of leasehold improvements and furniture and fixtures in connection with the relocation of its corporate office.

Income tax expense

Income tax expense. Income tax expense decreased $0.9 million to $7.1 million in the three months ended September 30, 2004 from $8.0 million in the same period last year. The decrease was a direct result of a lower estimated effective tax rate, offset by an increase in pretax income. The effective tax rate differs from the provision calculated at the federal statutory rate primarily because of certain expenses that are not deductible for tax purposes, as well as the effects of state and local taxes. The estimated effective tax rate for the full year 2004 is 43%, which is below the effective tax rate in 2003 of 50%. The decline in the expected tax rate in 2004 resulted from benefits obtained through state tax planning initiatives commenced during the year.

Nine months ended September 30, 2004 compared with the Nine months ended September 30, 2003

The following table provides a comparison of NFP’s revenue and expenses for the periods presented:


	Nine Months Ended September 30,
	2004			2003 (Restated)			$ Change			% Change
	(in millions)
Consolidated Statements of Income Data:
Revenue:
Commissions and fees	$	435.9		$	324.4		$	111.5		34.4	%

Cost of services:
Commissions and fees		119.1			80.1			39.0		48.7
Operating expenses		134.4			108.1			26.3		24.3
Management fees		86.4			61.9			24.5		39.6

Total cost of services		339.9			250.1			89.8		35.9

Gross margin		96.0			74.3			21.7		29.2

Corporate and other expenses:
General and administrative (excludes option compensation)		23.5			18.4			5.1		27.7
Option compensation		0.8			0.1			0.7		NM
Amortization		14.5			12.2			2.3		18.9
Depreciation		4.7			3.1			1.6		51.6
Impairment of goodwill and intangible assets		3.2			9.9			(6.7	)	(67.7	)
(Gain) on sale of subsidiary		(0.2	)		1.0			(1.2	)	NM

Total corporate and other expenses		46.5			44.7			1.8		4.0

Income from operations		49.5			29.6			19.9		67.2

Interest and other income		1.6			1.2			0.4		33.3
Interest and other expense		(1.6	)		(3.0	)		1.4		(46.7	)

Net interest and other		0.0			(1.8	)		1.8		NM

Income before income taxes		49.5			27.8			21.7		78.1
Income tax expense		21.3			14.0			7.3		52.1

Net income	$	28.2		$	13.8		$	14.4		104.3	%

NM	indicates amount is not meaningful.

Summary

Net income. Net income increased $14.4 million, or 104.3%, to $28.2 million in the nine months ended September 30, 2004 compared with $13.8 million in the same period last year. The increase was largely due to an increase in gross margin as a result of acquisitions, the internal growth of NFP’s firms, a decrease in impairment of goodwill and intangible assets and a lower estimated effective tax rate. This was partially offset by an increase in general and administrative expenses, option compensation expense, and amortization and depreciation. Net income in the nine months ended September 30, 2003 quarter was reduced by a $9.9 million impairment loss and a $1.8 million acquisition-related production bonus.

Revenue

Commissions and fees. Commissions and fees increased $111.5 million, or 34.4%, to $435.9 million in the nine months ended September 30, 2004 compared with $324.4 million in the same period last year, as restated. The increase was due to an increased volume of business from NFP’s existing firms as well as business generated from new acquisitions. Approximately $57.0 million of the increase was due to business generated by new acquisitions and approximately $54.5 million was a direct result of increased volume of business from NFP’s existing firms, including NFPSI and NFPISI.

Cost of services

Commissions and fees. Commissions and fees expense increased $39.0 million, or 48.7%, to $119.1 million in the nine months ended September 30, 2004 compared with $80.1 million in the same period last year, as restated. The increase was principally due to increased volume of business from NFP’s existing firms and business

generated by new acquisitions. Approximately $20.6 million of the increase was due to business generated by new acquisitions, and approximately $18.4 million was due to increased volume of business from NFP’s existing firms. As a percentage of revenue, commissions and fees expense increased to 27.4% in the nine months ended September 30, 2004 from 24.7% in the same period last year, as restated. The increase as a percentage of revenue was primarily attributable to the impact of two acquisitions completed early in 2004, both of which are wholesale operations that pay out a relatively high percentage of revenue in the form of commissions to producers.

Operating expenses. Operating expenses increased $26.3 million, or 24.3%, to $134.4 million in the nine months ended September 30, 2004 compared with $108.1 million in the same period last year. The increase was due to the operating expenses from new acquisitions and greater operating expenses at NFP’s existing firms associated with an increase in the volume of business generated. Approximately $10.9 million of the increase was due to operating expenses of new acquisitions and approximately $15.4 million was a result of increased operating expenses at NFP’s existing firms. As a percentage of revenue, operating expenses declined to 30.8% in the nine months ended September 30, 2004 from 33.3% in the same period in 2003, as restated. Operating expenses increased at a slower rate than revenue as firms realized the benefits of economies of scale.

Management fees. Management fees increased $24.5 million, or 39.6%, to $86.4 million in the nine months ended September 30, 2004 compared with $61.9 million in the same period last year. The increase principally resulted from higher earnings at NFP’s owned firms generated primarily through new acquisitions and internal growth of existing firms. Management fees represented 47.4% of gross margin before management fees in the nine months ended September 30, 2004 compared with 45.5% in the same period last year. In the nine months ended September 30, 2004, management fees included a $4.1 million accrual for anticipated payments related to ongoing incentive programs compared with an incentive accrual of $0.2 million for the same period last year. These programs reward principals of acquired firms for achieving certain rates of earnings growth measured in successive three year periods, after their initial three-year incentive and contingent consideration periods expire. Management fees as a percentage of revenue increased to 19.8% in the nine months ended September 30, 2004 from 19.1% in the same period last year, as restated.

Gross margin. Gross margin increased $21.7 million, or 29.2%, to $96.0 million in the nine months ended September 30, 2004 compared with $74.3 million in the same period last year. Gross margin as a percentage of revenue was 22.0% for the nine months ended September 30, 2004, and 22.9% for the nine months ended September 30, 2003, as restated. Increases in commissions and fees and management fees as a percentage of revenue were offset by a reduction in firm operating expenses as a percentage of revenue.

Corporate and other expenses

General and administrative. General and administrative expenses increased $5.1 million, or 27.7%, to $23.5 million in the nine months ended September 30, 2004 compared with $18.4 million in the same period last year. This increase was largely the result of certain costs associated with operating as a public company. These costs include additional personnel, increased directors and officers liability insurance premiums, fees for independent members of the board of directors, shareholder services and investor relations. In addition, the Company incurred non-recurring costs associated with corporate governance initiatives, including those implemented to meet the requirements set forth under the Sarbanes-Oxley legislation. Included in the nine months ended September 30, 2003 was a $1.8 million production bonus related to the achievement of specific milestones over a thirty-nine month period by an insurance marketing platform acquired in 2000. There is no further contingent obligation related to the performance of this unit. As a percentage of revenue, general and administrative expense declined to 5.4% in the nine months ended September 30, 2004 compared with 5.7% in the same period last year, as restated.

Option compensation. Option compensation expense was $0.8 million in the nine months ended September 30, 2004 compared with $0.1 million in the same period last year. In prior years, the Company accrued option compensation expense related to two option incentive programs for principals of some of the Company’s earliest acquisitions, which expired during 2003. The Company reduced accruals for options which were not issued by $2.1 million during the nine months ended September 30, 2003. The reduction of these accruals offset option expense of $1.8 million recorded in connection with the option incentive programs and $0.4 million of option compensation expense for the stock-based employee compensation plans for the nine months ended September 30, 2003.

Amortization. Amortization increased $2.3 million, or 18.9%, to $14.5 million in the nine months ended September 30, 2004 compared with $12.2 million in the same period last year. Amortization expense increased primarily as a result of a 15.2% increase in net intangible assets resulting primarily from new acquisitions. As a percentage of revenue, amortization was 3.3% in the nine months ended September 30, 2004 compared with 3.8% in the same period last year, as restated.

Impairment of goodwill and intangible assets. Impairment of goodwill and intangible assets decreased $6.7 million, or 67.7%, to $3.2 million in the nine months ended September 30, 2004 compared with $9.9 million in the same period last year. The impairment in the 2003 period was related to five of the Company’s firms. The impairment in the current period related to five firms. In connection with these charges, the Company reduced the carrying value of the identifiable intangible assets and goodwill associated with these firms to their fair value. As a percentage of revenue, impairment of goodwill and intangible assets was 0.7% in the nine months ended September 30, 2004 compared with 3.0% in the same period last year, as restated.

Depreciation. Depreciation expense increased $1.6 million, or 51.6%, to $4.7 million in the nine months ended September 30, 2004 compared with $3.1 million in the same period last year. The increase in depreciation resulted from an increase in the number of owned firms and a higher level of capital expenditures as some firms moved into newer or larger facilities, purchased office furniture and made investments in new technology. In addition, approximately $0.7 million of the increase resulted from the March 2004 completion of a comprehensive review of depreciable assets held at the Company’s owned firms. As a percentage of revenue, depreciation expense was 1.1% in the nine months ended September 30, 2004 compared with 1.0% in the same period last year, as restated.

Interest and other income. Interest and other income increased $0.4 million, or 33.3%, to $1.6 million in the three months ended September 30, 2004 compared with $1.2 million in the same period last year.

Interest and other expense. Interest and other expense decreased $1.4 million, or 46.7%, to $1.6 million in the nine months ended September 30, 2004 compared with $3.0 million in the same period last year. The change between periods was driven by a reduction in interest expense associated with the significant reduction in average borrowings under the Company’s bank line of credit offset by a $0.3 million write off of the Company’s unamortized value of leasehold improvements and furniture and fixtures in connection with the relocation of its corporate office.

Income tax expense

Income tax expense. Income tax expense increased $7.3 million to $21.3 million in the nine months ended September 30, 2004 from $14.0 million in the same period last year. The increase was a direct result of the increase in pretax income for the nine months ended September 30, 2004 to $49.5 million compared with $27.8 million for the same period last year, partially offset by a decrease in the Company’s estimated annual effective tax rate to 43% in the nine months ended September 30, 2004, from 50% in the prior year period. The effective tax rate differs from the provision calculated at the federal statutory rate primarily because of certain expenses that are not deductible for tax purposes, as well as the effects of state and local taxes. The estimated effective tax rate for the full year 2004 is 43%, which is below the effective tax rate in 2003 of 50%. The decline in the expected tax rate in 2004 resulted from benefits obtained through state tax planning initiatives commenced during the year.

Liquidity and Capital Resources

The Company generates cash flows through the earnings of its acquired firms including NFPISI and NFPSI. Additional liquidity is available through the Company’s $90 million bank credit facility. At September 30, 2004, the Company had cash and cash equivalents of $63.5 million, a decrease of $7.7 million from the balance as of December 31, 2003 of $71.2 million. The decrease in cash and cash equivalents during the nine months ended September 30, 2004 was principally due to net cash paid for acquisitions, partially offset with cash provided by operating activities.

Summary cash flow data is provided as follows (in thousands):


	Nine Months Ended September 30,
	2004			2003
Cash flows provided by (used in):
Operating activities	$	55,867		$	30,932
Investing activities		(61,495	)		(56,334	)
Financing activities		(2,063	)		51,219

(Decrease) increase		(7,691	)		25,817
Cash and cash equivalents – beginning of period		71,244			31,814

Cash and cash equivalents – end of period	$	63,553		$	57,631

During the nine months ended September 30, 2004, cash provided by operating activities was $55.9 million, primarily generated from net income plus non-cash charges and a decrease in commissions, fees and premiums receivable, net, which was partially offset by an increase in due from principals and/or certain entities they own, and a decrease in accounts payable. During the nine months ended September 30, 2003, cash provided by operating activities was $30.9 million primarily generated by net income plus non-cash charges and an increase in accrued liabilities, which was partially offset by an increase in due from principals and/or certain entities they own, other assets, and a decrease in accounts payable.

During the nine months ended September 30, 2004 and 2003 cash used in investing activities was $61.5 million and $56.3 million, respectively, in both cases for the acquisition of firms, property and equipment, and contingent consideration. In each period, payments for acquired firms represented the largest use of cash in investing activities.

During the nine months ended September 30, 2004 cash used in financing activities was $2.1 million which primarily resulted from the payment of $9.9 million for cash dividends offset by cash proceeds, net of tax benefit of $5.9 million received from the exercise of stock options. During the nine months ended September 30, 2004, the Company borrowed and repaid $63.0 million under its bank line of credit principally resulting from the timing of acquisitions and cash flow from operations. During the nine months ended September 30, 2003, cash provided by financing activities was $51.2 million, which was primarily the result from cash provided by the Company’s initial public offering of $89.6 million, offset by net repayments to our bank line of credit of $39.4 million. In September 2003, the Company raised, net of offering costs, $89.6 million from the sale of 4.3 million shares of the Company’s common stock. The Company uses this credit facility primarily to fund acquisitions.

Some of the Company’s firms maintain premium trust accounts which represent payments collected from insureds on behalf of carriers. Funds held in these accounts are invested in cash, cash equivalents and securities purchased under resale agreements (overnight). As of September 30, 2004, NFP had cash, cash equivalents and securities purchased under resale agreements in premium trust accounts of $54.4 million, an increase of $13.1 million from the balance as of December 31, 2003 of $41.3 million. Increases or decreases in these accounts relate to the volume and timing of payments from insureds and the timing of the Company’s remittances to carriers. These increases or decreases are largely offset by changes in the premiums payable to insurance carriers’ liability accounts.

Management believes that the Company’s existing cash, cash equivalents, funds generated from its operating activities and funds available under its credit facility will provide sufficient sources of liquidity to satisfy its financial needs for the next twelve months. However, if circumstances change, NFP may need to raise debt or additional capital in the future.

Borrowings

The Company has a $90 million credit facility with a group of banks. Borrowings under the credit facility bear interest, at management’s discretion, at (1) the greatest of (a) the prime rate, (b) the three-month certificate of deposit rate plus 1% or (c) the federal funds effective rate plus ½ of 1%; or (2) the Eurodollar rate for one, two, three or six-month periods plus 2%. The rates under (1) above float with changes in the indicated rates and under (2) are fixed for the indicated Eurodollar rate period. Interest is computed on the daily outstanding balance. The weighted average interest rate under the credit facility at September 30, 2004 was 5.1%. The credit facility is structured as a revolving credit facility and is due on September 14, 2005, unless the Company elects to convert the credit facility to a term loan, in which case it will amortize over one year, with a principal payment due on March 14, 2006 and a final maturity on September 14, 2006. As of September 30, 2004, the Company did not have any amounts outstanding under the credit facility. The Company’s obligations under its credit facility are collateralized by all of its assets.

The credit facility contains various customary restrictive covenants prohibiting the Company and its subsidiaries, subject to various exceptions, among other things, from (i) incurring additional indebtedness or guarantees, (ii) creating liens or other encumbrances on its property or granting negative pledges, (iii) entering into a merger or similar transaction, (iv) selling or transferring any of its property except in the ordinary course of business, (v) making dividend and other restricted payments and (vi) making investments. In addition to the foregoing, the credit facility contains financial covenants requiring the Company to maintain a minimum interest coverage ratio and a minimum amount of Adjusted EBITDA (as defined in the credit agreement) and a maximum consolidated leverage ratio. As of September 30, 2004, the Company was in compliance with all covenants under the credit facility.

Contractual Obligations

There have been no material changes outside the ordinary course of the Company’s business to the Company’s total contractual cash obligations which are set forth in the table included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

Dividends

The Company paid a quarterly cash dividend of $0.10 per share of its common stock on each of January 7, 2004, April 7, 2004, and July 7, 2004 to its stockholders as approved by the Company’s board of directors. On August 18, 2004, the Company declared a quarterly cash dividend of $0.10 per share of its common stock, which was paid on October 7, 2004 to stockholders of record on September 17, 2004. This amount was reflected as a dividend payable at September 30, 2004. The declaration and payment of future dividends to holders of the Company’s common stock will be at the discretion of its board of directors and will depend upon many factors, including it financial condition, earnings, legal requirements and other factors as its board of directors deems relevant. Based on the most recent quarterly dividend declared of $0.10 per share of common stock, the total annual cash requirement for dividend payments would be approximately $13.3 million.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

The Company has market risk on buy and sell transactions effected by its firms’ customers. The Company is contingently liable to its clearing brokers for margin requirements under customer margin securities transactions, the failure of delivery of securities sold or payment for securities purchased by a customer. If customers do not fulfill their obligations, a gain or loss could be suffered equal to the difference between a customer’s commitment and the market value of the underlying securities. The risk of default depends on the creditworthiness of the customers. The Company assesses the risk of default of each customer accepted to minimize its credit risk.

The Company is further exposed to credit risk for commissions receivable from clearing brokers and insurance companies. This credit risk is generally limited to the amount of commissions receivable.

The Company has market risk on the fees its firms earn that are based on the market value of assets under management or the value of assets held in certain mutual fund accounts and variable insurance policies for which ongoing fees or commissions are paid. Certain of its firms’ performance based fees are impacted by fluctuations in the market performance of the assets managed according to such arrangements.

The Company has a credit facility and cash, cash equivalents and securities purchased under resale agreements in premium trust accounts which are subject to short-term interest rate risk. Based on the weighted average borrowings under its credit facility during the nine months ended September 30, 2004 and 2003, a 1% change in short-term interest rates would have affected the Company’s income before income taxes by approximately $0.1 million and $0.6 million, respectively. Based on the weighted average amount of cash, cash equivalents and securities purchased under resale agreements in premium trust accounts during the nine months ended September 30, 2004 and 2003, a 1% change in short-term interest rates would have affected the Company’s income before income taxes by approximately $0.5 million and $0.3 million, respectively.

The Company does not enter into derivatives or other similar financial instruments for trading or speculative purposes.

Item 4. Controls and Procedures

As of the end of the period covered by this report, NFP’s management carried out an evaluation, under the supervision and with the participation of the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934). Based on this evaluation, the CEO and CFO have concluded that, as of the end of period covered by this report, the Company’s disclosure controls and procedures were effective.

During its third quarter review, the Company determined that a subsidiary had incorrectly applied the provisions of EITF No. 99-19, “Reporting Revenue Gross as a Principal Versus Net as an Agent,” at the time of its implementation in 2000. The misapplication of the accounting guidance of EITF 99-19 led to an overstatement of both commissions and fees revenue and commissions and fees expense in equal amounts. There was no effect to gross margin, net income or net income per share and the change did not impact the statements of financial condition, stockholders’ equity or cash flows. The consolidated financial statements for all prior periods have either been restated or will be restated when the Company files amended Form 10-Q’s for the quarterly periods ending September 30, 2003, March 31, 2004 and June 30, 2004 and Form 10-K for the year ended December 31, 2003.

The Company’s CEO and the CFO have concluded that the misapplication was the result of a significant deficiency that existed in the control process regarding the selection and application of GAAP and the review process of the implementation of accounting guidance to new transactions. The Company concluded it was not a material weakness because, among other things, the error resulting in the misapplication occurred in one acquired firm five years earlier, was correctly applied to subsequently acquired firms, was identified through an analysis performed by management and did not result in a restatement of net income or net income per share, its consolidated statements of financial condition, stockholders’ equity or cash flows.

Since that time, management has taken a series of steps in its ongoing process to improve control processes including those regarding the selection and application of GAAP and the review process of the implementation of accounting guidance to new transactions. Specifically, the Company has added personnel with financial reporting technical expertise and public company reporting experience, established a Disclosure Committee consisting of senior executives and sub-committees consisting of key operating personnel and have, and are continuing the process of designing and implementing new systems and procedures involving the Company’s general ledger and firm reporting capabilities, which are expected to enhance internal control processes.

There have been no changes in the Company’s internal controls over financial reporting (as such term is defined in Rules 13a-15(f) or 15d-15(f) under the Securities Exchange Act of 1934) during the last fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II – Other Information

Item 1. Legal Proceedings

The Company is involved in a variety of claims, lawsuits and other disputes as well as investigations by various regulatory authorities arising in the ordinary course of business. Management believes the resolution of these matters and the incurrence of their related costs and expenses should not have a material adverse effect on the Company’s consolidated results of operations or financial condition.

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

(c) Recent Sales of Unregistered Securities

Since January 1, 2004, the Company has issued the following securities:

The Company has issued 1,112,796 shares of common stock with a value of approximately $33.3 million to principals in connection with the acquisition of firms. The Company has also issued 272,609 shares of common stock with a value of approximately $7.6 million to principals related to the payment of contingent consideration.

All of the transactions described above were transactions that were exempt from registration under the Securities Act by virtue of the exemption provided under Section 4(2) for transactions not involving a public offering. Specifically, each of these transactions involved the offer of the Company’s securities to a limited number of offerees (and, in many of the cases, to a single offeree), all of whom were sophisticated investors (based, in substantially all cases, upon reasonable assurances provided by the investors that they were accredited investors within the meaning of Rule 501 promulgated under the Securities Act) and all of whom acknowledged that they were afforded the opportunity to access such information regarding the business, management and financial affairs of the Company as they required to make an investment decision. In addition, in each case the Company obtained reasonable assurances from the investors that they were acquiring the securities for investment purposes and not with a view to distribution. Further, all statements that were delivered to the investors evidencing their book-ownership of the securities contained legends referencing the fact that the securities had not been registered under the Securities Act and were subject to restrictions on transfer, all of which was expressly acknowledged by the investors. Finally, in each case the offer was not made by means of any form of general solicitation.

(e) Issuer Purchases of Equity Securities


Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans	Maximum Number of Shares that May Yet Be Purchased under the Plans
	(in thousands)
January 1, 2004 – January 31, 2004	—			—	—	—
February 1, 2004 – February 29, 2004	—			—	—	—
March 1, 2004 – March 31, 2004	30,893	^(a)	$	28.66	—	—
April 1, 2004 – April 30, 2004	—			—	—	—
May 1, 2004 – May 31, 2004	—			—	—	—
June 1, 2004 – June 30, 2004	29,788	^(b)		31.79	—	—
July 1, 2004 – July 31, 2004	—			—	—	—
August 1, 2004 – August 31, 2004	—			—	—	—
September 1, 2004 – September 30, 2004	—			—	—	—

Total	60,681		$	30.20	—	—

(a)	30,893 shares were reacquired to satisfy outstanding promissory notes and receivables. No gain or loss was recorded on these transactions.

(b)	29,788 shares were reacquired related to the disposition of a firm. A gain of approximately $0.1 million was recorded in the consolidated statement of income.

Item 5. Other Information

As previously disclosed, the Company has received three subpoenas from the Office of the Attorney General of the State of New York seeking information regarding contingent compensation arrangements with insurance companies and information regarding any requests made of insurance companies to provide fictitious or inflated quotes to clients or any intentional misrepresentation of quotes to clients. The scope of the Attorney General’s inquiry of the Company’s operations has thus far been limited to the Company’s New York-licensed property and casualty insurance brokers, but the ultimate scope and outcome of the inquiry cannot be determined at this time. The Company has not received any additional subpoenas related to these matters and continues to cooperate fully with the Attorney General’s Office.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

EXHIBIT INDEX


Exhibit No.		Description
31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(b) Reports on Form 8-K

The Company furnished or filed the following reports on Form 8-K during the three months ended September 30, 2004:

•

The Company furnished a report on Form 8-K on August 3, 2004, announcing the issuance of its earnings release for the second quarter and six months ended June 30, 2004 and its Quarterly Financial Supplement for the period ended June 30, 2004.

•

The Company filed a report on Form 8-K on September 13, 2004, announcing that the Company entered into a new office lease agreement and assigned to a third party its rights and obligations of the current lease.

SIGNATURES

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

National Financial Partners Corp.


Signature	Title	Date
/s/ JESSICA M. BIBLIOWICZ Jessica M. Bibliowicz	Chairman, President, Chief Executive Officer and Director	November 12, 2004

/s/ MARK C. BIDERMAN Mark C. Biderman	Executive Vice President and Chief Financial Officer	November 12, 2004

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