MN 10-Q _Q2 2015
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________________________________
FORM 10-Q 
_____________________________________________________________
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2015
OR 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to            

Commission file number: 001-35355
 _____________________________________________________________
MANNING & NAPIER, INC.
(Exact name of registrant as specified in its charter)
_____________________________________________________________
Delaware
 
45-2609100
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
290 Woodcliff Drive
Fairport, New York
 
14450
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code:
(585) 325-6880
_____________________________________________________________ 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer
 
¨
  
Accelerated filer
 
x
 
 
 
 
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. 
Class
  
Outstanding at August 4, 2015
Class A common stock, $0.01 par value per share
  
14,775,130
Class B common stock, $0.01 par value per share
  
1,000
 




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


i

Table of Contents

PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
Manning & Napier, Inc.
Consolidated Statements of Financial Condition
(In thousands, except share data)
 
 
 
June 30, 2015
 
December 31, 2014
 
 
(unaudited)
 
 
Assets
 
 
 
 
Cash and cash equivalents
 
$
94,600

 
$
124,992

Accounts receivable
 
19,942

 
23,704

Accounts receivable—Manning & Napier Fund, Inc.
 
11,998

 
15,579

Due from broker
 
4,678

 
5,391

Due from broker - consolidated funds
 
4,388

 

Investment securities
 
24,598

 
26,915

Investment securities - consolidated funds
 
975

 

Prepaid expenses and other assets
 
7,933

 
9,321

Total current assets
 
169,112

 
205,902

Property and equipment, net
 
6,994

 
7,456

Net deferred tax assets, non-current
 
41,267

 
42,581

Other long-term assets
 
1,417

 
1,534

Total assets
 
$
218,790

 
$
257,473

 
 
 
 
 
Liabilities
 
 
 
 
Accounts payable
 
$
1,159

 
$
2,906

Accrued expenses and other liabilities
 
40,665

 
50,779

Deferred revenue
 
12,361

 
12,812

Total current liabilities
 
54,185

 
66,497

Other long-term liabilities
 
3,088

 
3,116

Amounts payable under tax receivable agreement, non-current
 
39,166

 
39,149

Total liabilities
 
96,439

 
108,762

Commitments and contingencies (Note 9)
 


 


Shareholders’ equity
 
 
 
 
Class A common stock, $0.01 par value; 300,000,000 shares authorized; 14,785,130 and 13,713,540 issued and outstanding at June 30, 2015 and December 31, 2014, respectively
 
148

 
137

Class B common stock, $0.01 par value; 2,000 shares authorized, 1,000 shares issued and outstanding at June 30, 2015 and December 31, 2014
 

 

Additional paid-in capital
 
205,271

 
209,284

Retained deficit
 
(38,834
)
 
(41,087
)
Accumulated other comprehensive income
 
(1
)
 

Total shareholders’ equity
 
166,584

 
168,334

Noncontrolling interests
 
(44,233
)
 
(19,623
)
Total shareholders’ equity and noncontrolling interests
 
122,351

 
148,711

Total liabilities, shareholders’ equity and noncontrolling interests
 
$
218,790

 
$
257,473

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


1

Table of Contents

Manning & Napier, Inc.
Consolidated Statements of Operations
(In thousands, except share data)
(Unaudited)
 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2015
 
2014
 
2015
 
2014
Revenues
 
 
 
 
 
 
 
 
Investment management services revenue
 
$
86,973

 
$
103,864

 
$
177,399

 
$
202,334

Expenses
 
 
 
 
 
 
 
 
Compensation and related costs
 
28,309

 
56,148

 
55,127

 
107,958

Distribution, servicing and custody expenses
 
15,840

 
19,964

 
32,672

 
38,404

Other operating costs
 
9,036

 
8,565

 
17,978

 
16,502

Total operating expenses
 
53,185

 
84,677

 
105,777

 
162,864

Operating income
 
33,788

 
19,187

 
71,622

 
39,470

Non-operating income (loss)
 
 
 
 
 
 
 
 
Interest expense
 
(81
)
 
(4
)
 
(84
)
 
(7
)
Interest and dividend income
 
158

 
195

 
321

 
409

Change in liability under tax receivable agreement
 

 

 
(17
)
 
2,110

Net gains (losses) on investments
 
(1,576
)
 
717

 
(963
)
 
833

Total non-operating income (loss)
 
(1,499
)
 
908

 
(743
)
 
3,345

Income before provision for income taxes
 
32,289

 
20,095

 
70,879

 
42,815

Provision for income taxes
 
2,081

 
2,360

 
4,560

 
7,436

Net income attributable to controlling and noncontrolling interests
 
30,208

 
17,735

 
66,319

 
35,379

Less: net income attributable to noncontrolling interests
 
26,705

 
17,036

 
59,507

 
34,599

Net income attributable to Manning & Napier, Inc.
 
$
3,503

 
$
699

 
$
6,812

 
$
780

 
 
 
 
 
 
 
 
 
Net income per share available to Class A common stock
 
 
 
 
 
 
 
 
Basic
 
$
0.24

 
$
0.05

 
$
0.48

 
$
0.06

Diluted
 
$
0.23

 
$
0.05

 
$
0.47

 
$
0.06

Weighted average shares of Class A common stock outstanding
 
 
 
 
 
 
 
 
Basic
 
13,739,923

 
13,667,861

 
13,726,804

 
13,651,223

Diluted
 
14,002,133

 
13,820,309

 
13,965,655

 
13,788,381

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

 
$
0.16

 
$
0.32

 
$
0.32

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


2

Table of Contents

Manning & Napier, Inc.
Consolidated Statements of Comprehensive Income
(In thousands)
(Unaudited)
 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2015
 
2014
 
2015
 
2014
Net income attributable to controlling and noncontrolling interests
 
$
30,208

 
$
17,735

 
$
66,319

 
$
35,379

Net unrealized holding loss on investment securities, net of tax
 

 

 
(1
)
 

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

 

 

 
1

Comprehensive income
 
$
30,208

 
$
17,735

 
$
66,318

 
$
35,380

Less: Comprehensive income attributable to noncontrolling interests
 
26,705

 
17,036

 
$
59,506

 
$
34,600

Comprehensive income attributable to Manning & Napier, Inc.
 
$
3,503

 
$
699

 
$
6,812

 
$
780

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


3

Table of Contents

Manning & Napier, Inc.
Consolidated Statements of Shareholders’ Equity
(In thousands, except share data)
(Unaudited) 
 
 
 
Common Stock –  class A
 
Common Stock – class B
 
Additional
Paid in Capital
 
Retained
Deficit
 
Accumulated
Other
Comprehensive Income (Loss)
 
Non
Controlling
Interests
 
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
Total
Balance—December 31, 2013
 
13,634,246

 
$
136

 
1,000

 
$

 
$
208,988

 
$
(40,544
)
 
$
(1
)
 
$
(22,790
)
 
$
145,789

Net income
 

 

 

 

 

 
780

 

 
34,599

 
35,379

Distributions to noncontrolling interests
 

 

 

 

 

 

 

 
(53,809
)
 
(53,809
)
Net changes in unrealized investment securities gains or losses
 

 

 

 

 

 

 
1

 

 
1

Common stock issued under equity compensation plan
 
69,923

 
1

 

 

 

 

 

 

 
1

Equity-based compensation
 

 

 

 

 
6,577

 

 

 
39,846

 
46,423

Dividends declared on Class A common stock - $0.32 per share
 

 

 

 

 

 
(4,377
)
 

 

 
(4,377
)
Purchase of Class A units of Manning & Napier Group, LLC held by noncontrolling interests
 

 

 

 

 
(5,653
)
 

 

 
(26,530
)
 
(32,183
)
Balance—June 30, 2014
 
13,704,169

 
$
137

 
1,000

 
$

 
$
209,912

 
$
(44,141
)
 
$

 
$
(28,684
)
 
$
137,224

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance—December 31, 2014
 
13,713,540

 
$
137

 
1,000

 
$

 
$
209,284

 
$
(41,087
)
 
$

 
$
(19,623
)
 
$
148,711

Net income
 

 

 

 

 

 
6,812

 

 
59,507

 
66,319

Distributions to noncontrolling interests
 

 

 

 

 

 

 

 
(52,908
)
 
(52,908
)
Net changes in unrealized investment securities gains or losses
 

 

 

 

 

 

 
(1
)
 

 
(1
)
Common stock issued under equity compensation plan
 
1,071,590

 
11

 

 

 
(11
)
 

 

 

 

Equity-based compensation
 

 

 

 

 
392

 

 

 
2,117

 
2,509

Dividends declared on Class A common stock - $0.32 per share
 

 

 

 

 

 
(4,559
)
 

 

 
(4,559
)
Purchase of Class A units of Manning & Napier Group, LLC held by noncontrolling interests (Note 3)
 

 

 

 

 
(4,394
)
 

 

 
(33,326
)
 
(37,720
)
Balance—June 30, 2015
 
14,785,130

 
$
148

 
1,000

 
$

 
$
205,271

 
$
(38,834
)
 
$
(1
)
 
$
(44,233
)
 
$
122,351

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


4

Table of Contents

Manning & Napier, Inc.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
 
 
 
Six months ended June 30,
 
 
2015
 
2014
Cash flows from operating activities:
 
 
 
 
Net income
 
$
66,319

 
$
35,379

Adjustment to reconcile net income to net cash provided by operating activities:
 
 
 
 
Equity-based compensation
 
2,509

 
46,423

Depreciation and amortization
 
1,255

 
1,007

Change in amounts payable under tax receivable agreement
 
17

 
(2,110
)
Net losses (gains) on investment securities
 
963

 
(833
)
Deferred income taxes
 
1,300

 
3,975

Amortization of debt issuance costs
 
26

 

(Increase) decrease in operating assets and increase (decrease) in operating liabilities:
 
 
 
 
Accounts receivable
 
3,762

 
(2,880
)
Accounts receivable—Manning & Napier Fund, Inc.
 
3,581

 
(336
)
Due from broker - consolidated funds
 
(5,000
)
 

Investment securities - consolidated funds
 
(1,000
)
 

Prepaid expenses and other assets
 
2,037

 
(257
)
Accounts payable
 
(1,747
)
 
(312
)
Accrued expenses and other liabilities
 
(8,186
)
 
2,925

Deferred revenue
 
(451
)
 
906

Other long-term liabilities
 
(122
)
 
942

Net cash provided by operating activities
 
65,263

 
84,829

Cash flows from investing activities:
 
 
 
 
Purchase of property and equipment
 
(450
)
 
(1,477
)
Sale of investments
 
6,645

 
5,036

Purchase of investments
 
(4,967
)
 
(7,792
)
Acquisitions, net of cash received
 

 
(2,068
)
Proceeds from maturity of investments
 

 
100

Net cash provided by (used in) investing activities
 
1,228

 
(6,201
)
Cash flows from financing activities:
 
 
 
 
Distributions to noncontrolling interests
 
(52,908
)
 
(53,809
)
Dividends paid on Class A common stock
 
(5,485
)
 
(5,456
)
Payment of shares withheld to satisfy withholding requirements
 
(64
)
 

Payment of capital lease obligations
 
(94
)
 
(138
)
Purchase of Class A units of Manning & Napier Group, LLC
 
(37,720
)
 
(32,401
)
Payment of debt issuance costs
 
(612
)
 

Net cash used in financing activities
 
(96,883
)
 
(91,804
)
Net decrease in cash and cash equivalents
 
(30,392
)
 
(13,176
)
Cash and cash equivalents:
 
 
 
 
Beginning of period
 
124,992

 
125,250

End of period
 
$
94,600

 
$
112,074

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

5

Table of Contents

Manning & Napier, Inc.
Notes to Consolidated Financial Statements

Note 1—Organization and Nature of the Business
Manning & Napier, Inc. ("Manning & Napier", or the "Company") provides a broad range of investment solutions through separately managed accounts, mutual funds, and collective investment trusts, as well as a variety of consultative services that complement its investment process. Founded in 1970, the Company offers equity, fixed income and alternative strategies, as well as a range of blended asset portfolios, such as life cycle funds. Headquartered in Fairport, New York, the Company serves a diversified client base of high net worth individuals and institutions, including 401(k) plans, pension plans, Taft-Hartley plans, endowments and foundations.
The Company is the sole managing member of Manning & Napier Group, LLC and its subsidiaries ("Manning & Napier Group"), a holding company for the investment management businesses conducted by its operating subsidiaries. The diagram below depicts the Company's organization structure as of June 30, 2015.
  
(1)
The operating subsidiaries of Manning & Napier Group include Manning & Napier Advisors, LLC ("MNA"), Manning & Napier Alternative Opportunities, LLC, Perspective Partners LLC, Manning & Napier Information Services, LLC, Manning & Napier Benefits, LLC, Manning & Napier Investor Services, Inc. and Exeter Trust Company.
Note 2—Summary of Significant Accounting Policies
Critical Accounting Policies
There have been no significant changes in our critical accounting policies and estimates from those that were disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014.
The Company believes that the disclosures herein are adequate so that the information presented is not misleading; however, these financial statements should be read in conjunction with the financial statements and the notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2014. The financial data for the interim periods may not necessarily be indicative of results for future interim periods or for the full year.

6

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

Basis of Presentation
The accompanying unaudited consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and related rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for interim financial reporting and include all adjustments, consisting only of normal recurring adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim period.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates or assumptions that affect the reported amounts and disclosures in the consolidated financial statements. Actual results could differ from these estimates or assumptions.
Principles of Consolidation
As of June 30, 2015, Manning & Napier holds an approximately 16.7% economic interest in Manning & Napier Group but, as managing member, controls all of the business and affairs of Manning & Napier Group. As a result, the Company consolidates the financial results of Manning & Napier Group and records a noncontrolling interest on its consolidated statements of financial condition with respect to the remaining economic interest in Manning & Napier Group held by Manning & Napier Group Holdings, LLC (“M&N Group Holdings”) and Manning & Napier Capital Company, LLC (“MNCC”).
All material intercompany transactions have been eliminated in consolidation.
In accordance with Accounting Standards Codification ("ASU") 2009-17, Consolidation (Topic 810) – Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities, the determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design, a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance, and whether a company is obligated to absorb losses or receive benefits that could potentially be significant to the entity. The standard also requires ongoing assessments of whether a company is the primary beneficiary of a variable interest entity (“VIE”). In January 2010, the FASB deferred portions of ASU 2009-17 that relate to certain investment companies. The Company determined that certain entities for which it is the investment manager and/or general partner, qualify for the scope deferral and will continue to be assessed for consolidation under prior accounting guidance for consolidation of VIEs.
The Company provides seed capital to its investment teams to develop new products and services for its clients. The original seed investment typically represents all or a majority of the equity investment in the new product. Pursuant to U.S. GAAP, the Company evaluates its seed investments on a regular basis and consolidates such investments for which it holds a controlling financial interest.
The Company serves as the investment adviser for Manning & Napier Fund, Inc. series of mutual funds (the “Fund”) and the Exeter Trust Company Collective Investment Trusts (“CIT”). The Fund and CIT are legal entities, the business and affairs of which are managed by their respective boards of directors. As a result, each of these entities is a voting interest entity (“VOE”). While the Company holds, in limited cases, direct investments in a fund (which are made on the same terms as are available to other investors and do not represent a majority voting interest in any fund), the Company does not have a controlling financial interest or a majority voting interest and, as such, does not consolidate these entities.
The Company is the General Partner of the MN Xenon Managed Futures Fund LP ("LP Fund"). The Company has determined that the LP Fund is not a VIE as (a) the entity has enough equity to finance its activities without additional financial support and (b) the limited partners, as a group, have the ability to remove the general partner ("kick-out rights") with a majority vote of partnership percentage. Under the voting interest model, the Company does not consolidate VOEs in which the presumption of control by the general partner is overcome by kick-out rights.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Cash and cash equivalents are primarily held in operating accounts at major financial institutions and also in money market securities. Cash equivalents are stated at cost, which approximates market value due to the short-term maturity of these investments. The fair value of cash equivalents have been classified as Level 1 in accordance with the fair value hierarchy.
Due from broker
The Company and its consolidated funds conducts business with brokers for certain of its investment activities. The due from broker balances on the consolidated statements of financial condition represents cash held by brokers as collateral for managed futures.

7

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


Investment Securities
Investment securities are classified as either trading or available-for-sale and are carried at fair value. Fair value is determined based on quoted market prices in active markets for identical or similar instruments.
Investment securities classified as trading consist of equity securities, fixed income securities, and investments in mutual funds and hedge funds for which the Company provides advisory services. Realized and unrealized gains and losses on trading securities are recorded in net gains (losses) on investments in the consolidated statements of operations. At June 30, 2015, trading securities consist solely of investments held by the Company to provide initial cash seeding for product development purposes.
Operating Segments
The Company operates in one segment, the investment management industry. The Company primarily provides investment management services to separately managed accounts, mutual funds and collective investment trust funds. Management assesses the financial performance of these vehicles on a combined basis.
Revenue
The majority of the Company’s revenues are based on fees charged to manage customers’ portfolios. Investment management fees are generally computed as a percentage of assets under management ("AUM") and recognized as earned. Fees for providing investment advisory services are computed and billed in accordance with the provisions of the applicable investment management agreements. For the Company’s separately managed accounts, clients either pay investment management fees in advance, typically for a semi-annual or quarterly period, or in arrears, typically for a monthly or quarterly period. When investment management fees are paid in advance, the Company defers the revenue and recognizes it over the applicable period. When investment management fees are paid in arrears, the Company estimates revenues based on AUM market values as of the most recent month end date, and adjusts to actual when billed. For mutual funds and collective investment trust vehicles, the Company’s fees are calculated and earned daily based on AUM.
Certain investment advisory contracts provide for a performance-based fee, in addition to a base investment management fee, which is calculated as a percentage of cumulative profits over and above the aggregate of previous period cumulative profits. Performance-based fees are recorded as a component of revenue at the end of each contract’s measurement period, when all contingencies are resolved, typically on a quarterly basis. For the three and six months ended June 30, 2015, the Company recognized less than $0.1 million and approximately $0.1 million, respectively, in performance fee income.
The Company has agreements with third parties who provide distribution and administrative services for its mutual funds, collective investment trusts and certain separately managed accounts. Third party agreements are evaluated against Financial Accounting Standards Board ("FASB") ASC 605-45 Revenue Recognition - Principal Agent Considerations to determine whether revenue should be reported gross or net of payments to third-party service providers. In management's judgment there are various indicators that support gross revenue reporting, the most notable being the Company acts as primary obligor and therefore principal service provider. Based on this evaluation, investment management service revenue is recorded gross of distribution and administrative fees paid to third parties.
Advisory Agreements
The Company derives significant revenue from its role as advisor to the Fund and the CIT.
The Company's investments in the Fund amounted to approximately $1.1 million as of June 30, 2015 and $0.2 million as of December 31, 2014.
Fees earned for advisory related services provided to the Fund and CIT investment vehicles were approximately $42.2 million and $87.4 million for the three and six months ended June 30, 2015, respectively, and $55.9 million and $108.0 million for the three and six months ended June 30, 2014, respectively. These amounts represent greater than 10% of the Company's revenue in each respective period.

8

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


Recent Accounting Pronouncements
In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. The ASU modifies existing consolidation guidance for determining whether certain legal entities should be consolidated. The new guidance will be effective on January 1, 2016, and requires either a retrospective or a modified retrospective approach to adoption. Early adoption is permitted. The Company is currently evaluating the potential impact on its consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes existing accounting standards for revenue recognition and creates a single framework. The new guidance will be effective on January 1, 2018 and requires either a retrospective or a modified retrospective approach to adoption. Early application is permitted. The Company is currently evaluating its transition method and the potential impact on its consolidated financial statements.
In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs (Topic 835). The ASU requires that debt issuance costs related to a recognized liability be presented in the balance sheet as a direct deduction from that debt liability. The new guidance will be effective on January 1, 2016. Early adoption is permitted. The Company is currently evaluating its transition method and the potential impact on its consolidated financial statements.
Note 3—Noncontrolling Interests
Manning & Napier holds an approximately 16.7% economic interest in Manning & Napier Group, but as managing member controls all of the business and affairs of Manning & Napier Group. As a result, the Company consolidates the financial results of Manning & Napier Group and records a noncontrolling interest on its consolidated statement of financial condition with respect to the remaining approximately 83.3% aggregate economic interest in Manning & Napier Group held by M&N Group Holdings and MNCC. Net income attributable to noncontrolling interests on the statements of operations represents the portion of earnings or loss attributable to the economic interest in Manning & Napier Group held by the noncontrolling interests.
The following provides a reconciliation from “Income before provision for income taxes” to “Net income attributable to Manning & Napier, Inc.”:
 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2015
 
2014
 
2015
 
2014
 
 
(in thousands)
Income before provision for income taxes
 
$
32,289

 
$
20,095

 
$
70,879

 
$
42,815

Less: (loss) gain before provision for income taxes of Manning & Napier, Inc. (a)
 
(6
)
 
(4
)
 
(24
)
 
2,101

Income before provision for income taxes, as adjusted
 
32,295

 
20,099

 
70,903

 
40,714

Controlling interest percentage (b)
 
16.7
%
 
14.4
%
 
15.6
%
 
14.2
%
Net income attributable to controlling interest
 
5,454

 
2,892

 
11,068

 
5,769

Plus: (loss) gain before provision for income taxes of Manning & Napier, Inc. (a)
 
(6
)
 
(4
)
 
(24
)
 
2,101

Income before income taxes attributable to Manning & Napier, Inc.
 
5,448

 
2,888

 
11,044

 
7,870

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

 
2,189

 
4,232

 
7,090

Net income attributable to Manning & Napier, Inc.
 
$
3,503

 
$
699

 
$
6,812

 
$
780

________________________
a)
Manning & Napier, Inc. incurs certain gains or expenses that are only attributable to it and are therefore excluded from the net income attributable to noncontrolling interests.
b)
Income before provision for income taxes is allocated to the controlling interest based on the percentage of units of Manning & Napier Group held by Manning & Napier, Inc. The amount represents the Company's weighted ownership of Manning & Napier Group for the respective periods.
c)
The consolidated provision for income taxes is equal to the sum of (i) the provision for income taxes for entities other than Manning & Napier, Inc. and (ii) the provision for income taxes of Manning & Napier, Inc. which includes all U.S. federal and state income taxes. The consolidated provision for income taxes totaled approximately $2.1 million

9

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

and $4.6 million for the three and six months ended June 30, 2015, respectively, and approximately $2.4 million and $7.4 million for the three and six months ended June 30, 2014, respectively.

On March 31, 2015, M&N Group Holdings and MNCC exchanged a total of 3,161,502 Class A units of Manning & Napier Group for approximately $36.3 million in cash. Subsequent to the exchange, the Class A units were retired. On March 31, 2015, the Company also purchased and retired 2,516,352 unvested Class A units of Manning & Napier Group held by M&N Group Holdings and MNCC at a predetermined cost basis for approximately $1.4 million in cash. These units were subject to performance-based vesting criteria in connection with the 2011 reorganization transactions and did not vest. In addition, on April 16, 2015, the Company granted approximately 1.1 million of Class A common stock awards under the 2011 Equity Compensation Plan (the "Equity Plan") (Note 11) for which Manning & Napier, Inc. acquired an equivalent number of Class A units of Manning & Napier Group. These acquisitions of additional operating membership interests were treated as reorganizations of entities under common control as required by ASC 805 "Business Combinations".
As a result of the aforementioned transactions, the Company's economic ownership interest in Manning & Napier Group increased to 16.7%. As of June 30, 2015, M&N Group Holdings and MNCC may exchange an aggregate of 67,896,484 units of Manning & Napier Group for shares of the Company's Class A common stock pursuant to the terms of the exchange agreement entered into at the time of the Company's 2011 IPO.
At June 30, 2015 and December 31, 2014, the Company had recorded a liability of $41.3 million and $41.2 million, respectively, representing the estimated payments due to the selling unit holders under the tax receivable agreement ("TRA") entered into between Manning & Napier and the holders of Manning & Group. Of these amounts, $2.1 million were included in accrued expenses and other liabilities at June 30, 2015 and December 31, 2014, respectively. The Company made no payments pursuant to the TRA during the six months ended June 30, 2015 and 2014.
Obligations pursuant to the TRA are obligations of Manning & Napier. They do not impact the noncontrolling interests. These obligations are not income tax obligations. Furthermore, the TRA has no impact on the allocation of the provision for income taxes to the Company’s net income.
During the six months ended June 30, 2015 and 2014, the Company distributed approximately $52.9 million and $53.8 million, respectively, to noncontrolling interests. None of these distributions are payments pursuant to the TRA.
Note 4—Investment Securities
The following represents the Company’s investment securities holdings as of June 30, 2015 and December 31, 2014:
 
 
June 30, 2015
 
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
 
(in thousands)
Available-for-sale securities
 
 
 
 
 
 
 
 
U.S. Treasury notes (0.25%, 10/31/2015)
 
$
2,107

 
$

 
$
(1
)
 
$
2,106

Trading securities
 
 
 
 
 
 
 
 
Equity securities
 
 
 
 
 
 
 
10,390

Fixed income securities
 
 
 
 
 
 
 
8,670

Mutual funds
 
 
 
 
 
 
 
121

Mutual funds - consolidated funds
 
 
 
 
 
 
 
975

Hedge funds
 
 
 
 
 
 
 
3,311

 
 
 
 
 
 
 
 
23,467

Total investment securities
 
 
 
 
 
 
 
$
25,573


10

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

 
 
December 31, 2014
 
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
 
(in thousands)
Available-for-sale securities
 
 
 
 
 
 
 
 
U.S. Treasury notes (0.25%, 10/31/2015)
 
$
2,107

 
$

 
$

 
$
2,107

Trading securities
 
 
 
 
 
 
 
 
Equity securities
 
 
 
 
 
 
 
12,048

Fixed income securities
 
9,366

Mutual funds
 
 
 
 
 
 
 
168

Hedge funds
 
 
 
 
 
 
 
3,226

 
 
 
 
 
 
 
 
24,808

Total investment securities
 
 
 
 
 
 
 
$
26,915

Investment securities are classified as either trading or available-for-sale and are carried at fair value. Fair value is determined based on quoted market prices in active markets for identical or similar instruments.
Investment securities classified as trading consist of equity securities, fixed income securities and investments in mutual funds and hedge funds for which the Company provides advisory services. At June 30, 2015 and December 31, 2014, trading securities consist solely of investments held by the Company to provide initial cash seeding for product development purposes. The Company recognized approximately $0.4 million of net unrealized losses and $0.3 million of net unrealized gains related to investments classified as trading during the six months ended June 30, 2015 and 2014, respectively.
Investment securities classified as available-for-sale consist of U.S. Treasury notes for compliance with certain regulatory requirements. As of June 30, 2015 and December 31, 2014, $0.6 million of these securities is considered restricted. The Company periodically reviews each individual security position that has an unrealized loss, or impairment, to determine if that impairment is other-than-temporary. No other-than-temporary impairment charges have been recognized by the Company during the six months ended June 30, 2015 and 2014.
Note 5—Derivative Instruments
The Company enters into futures contracts for product development purposes. Futures are commitments either to purchase or sell a designated financial instrument, currency, commodity or an index at a specified future date for a specified price and may be settled in cash or another financial asset. Upon entering into a futures contract, the Company is required to pledge to the broker an amount of cash, which is reported in due from broker within the consolidated statements of financial condition. Futures contracts have little credit risk because the counterparties are futures exchanges. The Company does not hold any derivatives in a formal hedge relationship under ASC 815-10, Derivatives and Hedging.
The following tables present the notional value and fair value as of June 30, 2015 and December 31, 2014 for derivative instruments not designated as hedging instruments:

 
 
June 30, 2015
 
 
 
 
Fair Value
 
 
Notional Value
 
Asset Derivative
 
Liability Derivative
 
 
(in thousands)
Interest rate futures
 
$
220,377

 
$
248

 
$
(202
)
Index futures
 
2,015

 
4

 
(18
)
Commodity futures
 
3,765

 
78

 
(63
)
Currency futures
 
10,996

 
71

 
(12
)
Total derivatives
 
$
237,153

 
$
401

 
$
(295
)

11

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

 
 
December 31, 2014
 
 
 
 
Fair Value
 
 
Notional Value
 
Asset Derivative
 
Liability Derivative
 
 
(in thousands)
Interest rate futures
 
$
106,932

 
$
162

 
$
(60
)
Index futures
 
2,032

 
51

 
(16
)
Commodity futures
 
3,506

 
41

 
(76
)
Currency futures
 
10,017

 
162

 
(17
)
Total derivatives
 
$
122,487

 
$
416

 
$
(169
)
As of June 30, 2015 and December 31, 2014, the derivative assets and liabilities are measured at fair value and are included in due from broker in the consolidated statements of financial condition, with changes in the fair value reported in net gains (losses) on investments in the consolidated statements of operations. For the six months ended June 30, 2015, the average volume of derivative activity (measured in terms of notional value) was approximately $233.1 million. The following table presents the gains (losses) recognized in net gains (losses) on investments in the consolidated statements of operations for the three and six months ended June 30, 2015 and 2014:    
 
Three months ended June 30,
 
Six months ended June 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Interest rate futures
$
(661
)
 
$
(191
)
 
$
(543
)
 
$
(556
)
Index futures
19

 
69

 
90

 
69

Commodity futures
3

 
(60
)
 
23

 
(60
)
Currency futures
(236
)
 
35

 
59

 
35

Balance as of end of period
$
(875
)
 
$
(147
)
 
$
(371
)
 
$
(512
)
The Company discloses information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position in accordance with ASU 2011-11, Disclosures about Offsetting Assets and Liabilities. The derivatives instruments are subject to a master netting agreement allowing for the netting of assets and liabilities on the consolidated statements of financial position.

The following table presents the offsetting of managed futures as of June 30, 2015 and December 31, 2014:
 
 
Gross Amounts of Recognized Liabilities
 
Gross Amounts Offset in the Statement of Financial Position
 
Net Amounts of Assets (Liabilities) Presented in the Statement of Financial Position
 
Financial Instruments
 
Cash Collateral Received (Pledged)
 
Net Amount
 
 
(in thousands)
June 30, 2015
 
$
(295
)
 
$
401

 
$
106

 
$

 
$

 
$
106

December 31, 2014
 
$
(169
)
 
$
416

 
$
247

 
$

 
$

 
$
247

Note 6—Fair Value Measurements
Fair value is defined as the price that the Company would receive upon selling an investment in an orderly transaction to an independent buyer in the principal or most advantageous market of the investment. A fair value hierarchy is provided that gives the highest priority to unadjusted quoted prices in active markets for identical assets and liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).
The following three-tier fair value hierarchy prioritizes the inputs used in measuring fair value:
Level 1—observable inputs such as quoted prices in active markets for identical securities;
Level 2—other significant observable inputs (including but not limited to quoted prices for similar securities, interest rates, prepayment rates, credit risk, etc.); and
Level 3—significant unobservable inputs (including the Company’s own assumptions in determining the fair value of investments).

12

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

The following provides the hierarchy of inputs used to derive the fair value of the Company’s financial instruments as of June 30, 2015 and December 31, 2014: 
 
 
June 30, 2015
 
 
Level 1
 
Level 2
 
Level 3
 
Totals
 
 
(in thousands)
Equity securities
 
$
10,390

 
$

 
$

 
$
10,390

Fixed income securities
 
1,093

 
7,577

 

 
8,670

Mutual funds
 
121

 

 

 
121

Mutual funds - consolidated funds
 
975

 

 

 
975

Hedge funds
 

 
3,311

 

 
3,311

U.S. Treasury notes
 

 
2,106

 

 
2,106

Derivatives
 
401

 

 

 
401

Total assets at fair value
 
$
12,980

 
$
12,994

 
$

 
$
25,974

 
 
 
 
 
 
 
 
 
Derivatives
 
$
295

 
$

 
$

 
$
295

Total liabilities at fair value
 
$
295

 
$

 
$

 
$
295

 
 
December 31, 2014
 
 
Level 1
 
Level 2
 
Level 3
 
Totals
 
 
(in thousands)
Equity securities
 
$
12,048

 
$

 
$

 
$
12,048

Fixed income securities
 
1,154

 
8,212

 

 
9,366

Mutual funds
 
168

 

 

 
168

Hedge funds
 

 
3,226

 

 
3,226

U.S. Treasury notes
 

 
2,107

 

 
2,107

Derivatives
 
416

 

 

 
416

Total assets at fair value
 
$
13,786

 
$
13,545

 
$

 
$
27,331

 
 
 
 
 
 
 
 
 
Securities sold, not yet purchased
 
$
964

 
$

 
$

 
$
964

Derivatives
 
169

 

 

 
169

Total liabilities at fair value
 
$
1,133

 
$

 
$

 
$
1,133


Valuations of investments in fixed income securities and U.S. Treasury notes can generally be obtained through independent pricing services. For most bond types, the pricing service utilizes matrix pricing, which considers one or more of the following factors: yield or price of bonds of comparable quality, coupon, maturity, current cash flows, type and current day trade information, as well as dealer supplied prices. These valuations are categorized as Level 2 in the hierarchy.
The Company relies on the net asset value of certain hedge fund investments as their fair value. The net asset values have been derived from the fair values of underlying futures contracts as of the respective reporting dates. Redemptions may occur monthly at the net asset value and are therefore categorized as Level 2 in the hierarchy.
There were no Level 3 securities held by the Company at June 30, 2015 or December 31, 2014.
The Company’s policy is to recognize transfers in and transfers out of the valuation levels as of the beginning of the reporting period. There were no transfers between Level 1 and Level 2 securities during the six months ended June 30, 2015.

13

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

Note 7—Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities as of June 30, 2015 and December 31, 2014 consisted of the following:
 
 
June 30, 2015
 
December 31, 2014
 
 
(in thousands)
Accrued bonus and sales commissions
 
$
22,388

 
$
28,801

Accrued payroll and benefits
 
2,879

 
3,424

Accrued sub-transfer agent fees
 
6,608

 
8,108

Dividends payable
 
2,364

 
3,291

Amounts payable under tax receivable agreement
 
2,100

 
2,100

Securities sold, not yet purchased
 

 
964

Other accruals and liabilities
 
4,326

 
4,091

 
 
$
40,665

 
$
50,779

Note 8—Borrowings
Revolving Credit Facility
On April 23, 2015, Manning & Napier, Inc., Manning & Napier Group and MNA (collectively, the "Borrowers") entered into an unsecured revolving credit agreement (the "Credit Agreement") with Wells Fargo Bank, National Association, as administrative agent, lender, swingline lender and issuing bank, Manufacturers and Traders Trust Company, as syndication agent and lender, and First Niagara Bank, The Bank of New York Mellon, and The Huntington National Bank, as lenders (collectively, the "Lenders") that has a four-year term (until April 23, 2019) and provides borrowing capacity of up to $100.0 million, with a feature providing for an increase in the line to $150.0 million on approval by the lending group. The Credit Agreement also provides for a $5.0 million sub-limit for the issuance of standby letters of credit and a $5.0 million swingline facility. At June 30, 2015, there were no amounts outstanding under the Credit Agreement and the Company had the capacity to draw on the entire $100.0 million under the Credit Agreement. The Company incurred approximately $0.6 million of issuance costs to enter this facility. These costs are being amortized to interest expense over the contractual term of the Credit Agreement
Amounts outstanding under the Credit Agreement bear interest at an annual rate equal to, at the Company's option, either LIBOR (adjusted for reserves and not below 0.0%) for interest periods of one, two, three or six months or a base rate (as defined in the Credit Agreement), plus, in each case, an applicable margin. The applicable margins range from 1.50% to2.50% in the case of LIBOR-based loans, and 0.50% to 1.50% in the case of base rate loans. Under the terms of the Credit Agreement, the Company is also required to pay certain fees, including among other things a one-time initial commitment fee, and a quarterly fee based on the average unused amount of the facility ranging from 0.25% to 0.45%.
The Credit Agreement contains customary covenants, including covenants that restrict (subject in certain instances to minimum thresholds or exceptions) the ability of the Company and certain of its subsidiaries to incur additional indebtedness, create liens, merge, dispose of assets, and make distributions, dividends, investments or capital expenditures, among other things. In addition, the Credit Agreement contains certain financial covenants, including: (i) a minimum interest coverage ratio (generally, adjusted EBITDA to interest expense as defined in and for the period specified in the Credit Agreement) of at least 4.00:1.00 and (ii) a leverage ratio (generally, total debt as of any date to adjusted EBITDA as defined in and for the period specified in the Credit Agreement) of no greater than 2.75:1.00. For purposes of the Credit Agreement, adjusted EBITDA generally means, for any period, net income of the Company before interest expense, income taxes, depreciation and amortization expense, non-cash stock-based compensation expense, and certain non-cash nonrecurring gains and losses as described in and specified under the Credit Agreement. At June 30, 2015, the Company was in compliance with all financial covenants under the Credit Agreement.
The Credit Agreement also contains customary provisions regarding events of default which could result in an acceleration of amounts due under the facility. Such events of default include the Company's failure to pay principal or interest when due, the Company's failure to satisfy or comply with covenants and a change of control.
Note 9—Commitments and Contingencies
The Company may from time to time enter into agreements that contain certain representations and warranties and which provide general indemnifications. The Company may also serve as a guarantor of such obligations of one or more of the Manning & Napier Group entities. The Company’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Company that have not yet occurred. The Company expects any risk of liability associated with such guarantees to be remote.

14

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

Regulation
As an investment adviser to a variety of investment products, the Company and its affiliated broker-dealer are subject to routine reviews and inspections by the SEC, Financial Industry Regulatory Authority, Inc., National Futures Association and U.S. Commodity Futures Trading Commission. From time to time, the Company may also be subject to claims, be involved in various legal proceedings arising in the ordinary course of its business and be subject to other contingencies. The Company does not believe that the outcome of any of these reviews, inspections or other legal proceedings will have a material impact on its consolidated financial statements; however, litigation is subject to many uncertainties, and the outcome of individual litigated matters is difficult to predict. The Company will establish accruals for matters that are probable, can be reasonably estimated, and may take into account any related insurance recoveries to the extent of such recoveries. As of June 30, 2015 and December 31, 2014, the Company has not accrued for any such claims, legal proceedings, or other contingencies.
Note 10—Earnings per Common Share
Basic earnings per share (“basic EPS”) is computed by dividing net income attributable to common stockholders by the weighted average number of shares outstanding during the reporting period. The Company's unvested restricted Class A common shares granted under the 2011 Equity Compensation Plan (the "Equity Plan") have non-forfeitable dividend rights and are therefore considered participating securities under GAAP. As such, these shares are included in the computation of basic earnings per share using the two-class method.
Under the two-class method, basic earnings per share is calculated by dividing net income for basic earnings per share by the weighted average number of common shares outstanding during the period. The two-class method includes an earnings allocation formula that determines earnings per share for each participating security according to dividends declared and undistributed earnings for the period. The Company's net income for basic earnings per share is reduced by the amount allocated to participating unvested restricted Class A common stock which participate for purposes of calculating earnings per share. Diluted earnings per share (“diluted EPS”) gives effect during the reporting period to other potentially dilutive shares outstanding. 
The following is a reconciliation of the income and share data used in the basic and diluted earnings per share computations for the three and six months ended June 30, 2015 and 2014 under the two-class method:
 
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2015
 
2014
 
2015
 
2014
 
 
(in thousands, except share data)
Net income attributable to controlling and noncontrolling interests
 
$
30,208

 
$
17,735

 
$
66,319

 
$
35,379

Less: net income attributable to noncontrolling interests
 
26,705

 
17,036

 
59,507

 
34,599

Net income attributable to Manning & Napier, Inc.
 
$
3,503

 
$
699

 
$
6,812

 
$
780

Less: allocation to participating securities
 
234

 

 
236

 

Net income available to Class A common stock
 
$
3,269

 
$
699

 
$
6,576

 
$
780

 
 
 
 
 
 
 
 
 
Weighted average shares of Class A common stock outstanding - basic
 
13,739,923

 
13,667,861

 
13,726,804

 
13,651,223

Dilutive effect from unvested equity awards
 
262,210

 
152,448

 
238,851

 
137,158

Weighted average shares of Class A common stock outstanding - diluted
 
14,002,133

 
13,820,309

 
13,965,655

 
13,788,381

Net income available to Class A common stock per share - basic
 
$
0.24

 
$
0.05

 
$
0.48

 
$
0.06

Net income available to Class A common stock per share - diluted
 
$
0.23

 
$
0.05

 
$
0.47

 
$
0.06

For the three and six months ended June 30, 2015 and 2014, 163,632 and 181,378 restricted stock units were excluded from the calculation of diluted earnings per common share because the performance conditions had not yet been satisfied.
For the three and six months ended June 30, 2015, 1,040,000 unvested restricted Class A common shares were excluded from the calculation of diluted earnings per common share because the effect would have been anti-dilutive.
At June 30, 2015 and June 30, 2014 there were 67,896,484 and 73,574,338, respectively, Class A Units of Manning & Napier Group outstanding which, subject to certain restrictions, may be exchangeable for up to 67,896,484 and 73,574,338, respectively, shares of the Company’s Class A common stock. The restrictions set forth in the exchange agreement were in

15

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

place at the end of each respective reporting period. These units were not included in the calculation of diluted earnings per common share for the three and six months ended June 30, 2015 and 2014, respectively, because the effect would have been anti-dilutive.
The Company’s Class B common stock represent voting interests and do not participate in the earnings of the Company. Accordingly, there is no basic or diluted EPS related to the Company’s Class B common stock.
Note 11—Equity Based Compensation
The Equity Plan was adopted by the Company's board of directors and approved by the Company's stockholders prior to the consummation of the IPO. A total of 13,142,813 equity interests are authorized for issuance. The equity interests may be issued in the form of the Company's Class A common stock, restricted stock units, units of Manning & Napier Group, or certain classes of membership interests in the Company which may convert into units of Manning & Napier Group.
During the six months ended June 30, 2015, 1,436,947 equity awards were granted under the Equity Plan. The awards consist of 31,590 shares of Class A common stock, 1,150,000 restricted stock awards and 255,357 restricted stock units. The Class A common stock awards vested immediately, and the restricted share-based awards are subject to service-based vesting over a period ranging from 2 to 6 years.
The following table summarizes the equity award activity for the six months ended June 30, 2015 under the Company's Equity Plan:
 
 
Restricted
Stock Awards
 
Weighted Average Grant Date Fair Value
Stock awards outstanding at January 1, 2015
 
855,009

 
$
15.32

Granted
 
1,436,947

 
$
11.89

Vested
 
(31,590
)
 
$
12.20

Forfeited
 
(142,303
)
 
$
12.93

Stock awards outstanding at June 30, 2015
 
2,118,063

 
$
13.20

The weighted average grant date fair value of Equity Plan awards granted during the six months ended June 30, 2015 and 2014 was $11.89 and $15.29, respectively, based on the closing sale price of Manning & Napier Inc.'s Class A common stock as reported on the New York Stock Exchange on the date of grant, and, where applicable, reduced by the present value of the dividends expected to be paid on the underlying shares during the requisite service period. Restricted stock unit awards are not entitled to dividends declared on the underlying shares of Class A common stock until the awards vest.
For the three and six months ended June 30, 2015 , the Company recorded approximately $1.9 million and $2.5 million, respectively, of compensation expense related to awards under the Equity Plan. For the three and six months ended June 30, 2014, the Company recorded approximately $0.5 million and $1.3 million, respectively, of compensation expense related to awards under the Equity Plan.
For the three and six months ended June 30, 2014, the Company recognized approximately $23.2 million and $45.1 million, respectively, of compensation expense related to the vesting terms of ownership interests in connection with the 2011 reorganization transactions.
As of June 30, 2015, there was unrecognized compensation expense related to Equity Plan awards of approximately $18.9 million, which the Company expects to recognize over a weighted average period of approximately 4.4 years.
Note 12—Income Taxes
The Company is comprised of entities that have elected to be treated as either a limited liability company ("LLC") or a “C-Corporation". As such, the entities functioning as LLC’s are not liable for or able to benefit from U.S. federal and most state income taxes on their earnings, and earnings (losses) will be included in the personal income tax returns of each entity’s unit holders. The entities functioning as C-Corporations are liable for or able to benefit from U.S. federal and state and local income taxes on their earnings and losses, respectively.
The Company’s income tax provision and effective tax rate were as follows: 

16

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

 
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2015
 
2014
 
2015
 
2014
 
 
(in thousands)
Earnings from continuing operations before income taxes
 
$
32,289

 
$
20,095

 
$
70,879

 
$
42,815

Effective tax rate
 
6.4
%
 
11.7
%
 
6.4
%
 
17.4
%
Provision for income taxes
 
2,081

 
2,360

 
4,560

 
7,436

Provision for income taxes @ 35%
 
11,301

 
7,033

 
24,808

 
14,985

Difference between tax at effective vs. statutory rate
 
$
(9,220
)
 
$
(4,673
)
 
$
(20,248
)
 
$
(7,549
)
For the three and six months ended June 30, 2015 and 2014, the difference between the Company’s recorded provision and the provision that would result from applying the U.S. statutory rate of 35% is primarily attributable to the benefit resulting from the fact that a significant portion of the Company’s operations include a series of flow-through entities which are generally not subject to federal and most state income taxes. Accordingly, a portion of the Company’s earnings are not subject to corporate level taxes. For the six months ended June 30, 2014, the benefit is partially offset by a $2.2 million impact from enacted changes in tax laws that lowered the Company's expectation of the future tax benefits under the tax receivable agreement.
Note 13—Related Party Transactions
Transactions with noncontrolling members
From time to time, the Company may be asked to provide certain services, including accounting, legal and other administrative functions for the noncontrolling members of Manning & Napier Group. While immaterial, the Company has not received any reimbursement for such services.
The Company manages the personal funds of certain of the Company's executive officers, including William Manning. Pursuant to the respective investment management agreements, in some instances the Company waives or reduces its regular advisory fees for these accounts and personal funds utilized to incubate products. The aggregate value of the fees earned was approximately $0.1 million and fees waived was less than $0.1 million for the six months ended June 30, 2015.
Affiliate transactions - Manning & Napier Fund, Inc.
The Company has agreements to serve as the investment manager of Manning & Napier Fund, Inc., with which certain of its officers are affiliated. Under the terms of these agreements, which are generally reviewed and continued by the board of directors of Manning & Napier Fund, Inc. annually, the Company receives a fee based on an annual percentage of the average daily net assets of each series within the Manning & Napier Fund, Inc. The Company has contractually agreed to limit its fees and reimburse expenses to limit operating expenses incurred by certain of Manning & Napier Fund, Inc. series.
Note 14—Subsequent Events
Distributions and dividends
On August 6, 2015, the Board of Directors approved a distribution from Manning & Napier Group to Manning & Napier and the noncontrolling interests of Manning & Napier Group. The amount of the distribution to the members of Manning & Napier Group is approximately $31.3 million, of which approximately $26.1 million is expected to be payable to the noncontrolling interests. Concurrently, the Board of Directors declared a $0.16 per share dividend to the holders of Class A common stock. The dividend is payable on or about November 2, 2015 to shareholders of record as of October 15, 2015.



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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This report contains forward-looking statements within the meaning of section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which reflect our views with respect to, among other things, our operations and financial performance. Words like "believes," "expects," "may," "estimates," "will," "should," "could," "intends," "likely," "plans," or "anticipates" or the negative thereof or other variations thereon or comparable terminology, are used to identify forward-looking statements, although not all forward-looking statements contain these words. Although we believe that we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know about our business and operations, there can be no assurance that our actual results will not differ materially from what we expect or believe. Some of the factors that could cause our actual results to differ materially from our expectations or beliefs are disclosed in the “Risk Factors” section, as well as other sections, of our Annual Report on Form 10-K which include, without limitation: changes in securities or financial markets or general economic conditions; a decline in the performance of our products; client sales and redemption activity; and changes of government policy or regulations. All forward-looking statements speak only as of the date on which they are made and we undertake no duty to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Overview
Business
We are an independent investment management firm that provides a broad range of investment solutions, as well as a variety of consultative services that complement our investment process. Founded in 1970, we offer equity, fixed income, and alternative strategies, as well as a range of blended asset portfolios, such as life cycle funds. We serve a diversified client base of high net worth individuals and institutions, including 401(k) plans, pension plans, Taft-Hartley plans, endowments and foundations. Our operations are based principally in the United States, with our headquarters located in Fairport, New York.
Our Products
We derive substantially all of our revenues from investment management fees earned from providing advisory services to separately managed accounts and mutual funds and collective investment trusts—including those offered by the Manning & Napier Fund, Inc. (the "Fund") and Exeter Trust Company.
Our separate accounts are primarily distributed through our Direct Channel, where our representatives form relationships with high net worth individuals, middle market institutions or large institutions that are working with a consultant. To a lesser extent, we also obtain a portion of our separate account distribution via third parties, either through our Intermediary Channel, where national brokerage firm representatives or independent financial advisors select our separate account strategies for their clients, or through our Platform/Sub-Advisory Channel, where unaffiliated registered investment advisors approve our strategies for their product platforms. Our separate account products are a primary driver of our blended asset portfolios for high net worth and middle market institutional clients and financial intermediaries. In contrast, larger institutions and unaffiliated registered investment advisor platforms are a driver of our separate account equity portfolios.
Our mutual funds and collective investment trusts are primarily distributed through financial intermediaries, including brokers, financial advisors, retirement plan advisors and platform relationships. We also obtain a portion of our mutual fund and collective investment trust distribution through our direct sales representatives, in particular within the defined contribution and institutional marketplace. Our mutual fund and collective investment trust products are an important driver of our blended asset class portfolios, in particular with 401(k) plan sponsors, advisors and recordkeepers that select our funds as default options for participants. In addition, financial intermediaries, mutual fund advisory programs and retail platforms are a driver of mutual fund equity portfolios.
Our assets under management (“AUM”) was $43.1 billion as of June 30, 2015. The composition of our AUM by vehicle and portfolio is illustrated in the table below.
 
 
June 30, 2015
AUM - by investment vehicle and portfolio
 
Blended
Asset
 
Equity
 
Fixed Income
 
Total
 
 
(in millions)
Separately managed accounts
 
$
13,272.7

 
$
9,822.2

 
$
1,110.3

 
$
24,205.2

Mutual funds and collective investment trusts
 
11,627.6

 
7,225.5

 
47.8

 
18,900.9

Total
 
$
24,900.3

 
$
17,047.7

 
$
1,158.1

 
$
43,106.1


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The composition of our separately managed accounts as of June 30, 2015, by channel and portfolio, is set forth in the table below. 
 
 
June 30, 2015
 
 
Blended
Asset
 
Equity
 
Fixed Income
 
Total
 
 
(dollars in millions)
Separate account AUM
 
 
 
 
 
 
 
 
Direct Channel
 
$
9,546.0

 
$
7,304.2

 
$
960.3

 
$
17,810.5

Intermediary Channel
 
3,723.3

 
813.3

 
150.0

 
4,686.6

Platform/Sub-advisor Channel
 
3.4

 
1,704.7

 

 
1,708.1

Total
 
$
13,272.7

 
$
9,822.2

 
$
1,110.3

 
$
24,205.2

Percentage of separate account AUM
 
 
 
 
 
 
 
 
Direct Channel
 
40
%
 
30
%
 
4
%
 
74
%
Intermediary Channel
 
15
%
 
3
%
 
1
%
 
19
%
Platform/Sub-advisor Channel
 
%
 
7
%
 
%
 
7
%
Total
 
55
%
 
40
%
 
5
%
 
100
%
Percentage of portfolio by channel
 
 
 
 
 
 
 
 
Direct Channel
 
72
%
 
75
%
 
86
%
 
74
%
Intermediary Channel
 
28
%
 
8
%
 
14
%
 
19
%
Platform/Sub-advisor Channel
 
%
 
17
%
 
%
 
7
%
Total
 
100
%
 
100
%
 
100
%
 
100
%
Percentage of channel by portfolio
 
 
 
 
 
 
 
 
Direct Channel
 
54
%
 
41
%
 
5
%
 
100
%
Intermediary Channel
 
80
%
 
17
%
 
3
%
 
100
%
Platform/Sub-advisor Channel
 
%
 
100
%
 
%
 
100
%
Our separate accounts contributed 36% of our total gross client inflows for the six months ended June 30, 2015 and represented 56% of our total AUM as of June 30, 2015.
Our separate account business has historically been driven primarily by our Direct Channel, where sales representatives form a relationship with high net worth investors, middle market institutions, and large institutional clients working in conjunction with a consultant. The Direct Channel contributed 64% of the total gross client inflows for our separate account business for the six months ended June 30, 2015 and represented 74% of our total separate account AUM as of June 30, 2015. We anticipate the Direct Channel to continue to be the largest driver of new separate account business going forward, given the Direct Channel’s high net worth and middle market institutional client-type focus.
During the six months ended June 30, 2015, blended asset and equity portfolios represented 70% and 21%, respectively, of the separate account gross client inflows from the Direct Channel, while fixed income portfolios accounted for 9%. As of June 30, 2015, blended asset and equity portfolios represented 54% and 41%, respectively, of total Direct Channel separate account AUM, while our fixed income portfolios were 5%. We expect our focus on individuals and middle market institutions to continue to drive interest in our blended asset class portfolios, where we provide a comprehensive portfolio of stocks and bonds managed to a client’s specific investment objectives. Historically, relationships with larger institutions have been a driver of growth in separately managed account equity strategies. Going forward, we expect many of these larger institutions may seek exposure to non-U.S. equity strategies through commingled vehicles to limit related custody expenses rather than separately managed accounts, and our U.S.-based equity strategies may continue to be attractive to large institutions in a separate account format.
To a lesser extent, we also obtain separate account business from third parties, including financial advisors or unaffiliated registered investment advisor programs or platforms. During the six months ended June 30, 2015, 15% of the total gross client inflows for separate accounts came from financial advisor representatives (Intermediary Channel), and an additional 21% came from registered investment advisor platforms (Platform/Sub-advisor Channel). The Intermediary and Platform/Sub-advisor Channels represented 26% of our total separate account AUM as of June 30, 2015.
New separate account business through the Intermediary Channel flowed into both our blended asset and equity portfolios, driven by advisors’ needs to identify either a one-stop solution (blended asset portfolio) or to fill a mandate within a multi-strategy portfolio. During the six months ended June 30, 2015, blended asset and equity portfolios represented 84% and

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15%, respectively, of the separate account gross client inflows from the Intermediary Channel, while fixed income portfolios represented 1%. As of June 30, 2015, 80% of our separate account AUM derived from financial advisors was allocated to blended asset portfolios, with 17% allocated to equity and 3% allocated to fixed income. We expect that equity and fixed income portfolios may see additional interest from financial advisors over time as more and more advisors structure a multi-strategy portfolio for their clients.
In contrast, gross client inflows through the Platform/Sub-advisor Channel are primarily directed to our equity strategies, where we are filling a specific mandate within the investment program or platform product. During the six months ended June 30, 2015, 100% of our separate account gross client inflows from the Platform/Sub-advisory Channel were into equity portfolios.
Our annualized separate account retention rate across all channels is approximately 92% during the six months ended June 30, 2015, representing the strong relationship focus that is inherent in our direct sales model, which is the primary driver of our separate account business.
During the six months ended June 30, 2015, market appreciation for our separate account AUM was 1.5%, including 0.8% in our blended assets, 2.4% in equity portfolios and 0.4% in our fixed income portfolios.
The composition of our mutual fund and collective investment trust AUM as of June 30, 2015, by portfolio, is set forth in the table below. 
 
 
June 30, 2015
 
 
Blended
Asset
 
Equity
 
Fixed Income
 
Total
 
 
(in millions)
Mutual fund and collective investment trust AUM
 
$
11,627.6

 
$
7,225.5

 
$
47.8

 
$
18,900.9

Our mutual funds and collective investment trusts contributed 64% of our total gross client inflows for the six months ended June 30, 2015 and represented 44% of our total AUM as of June 30, 2015. As of June 30, 2015, our mutual fund and collective investment trust AUM consisted of 62% from blended asset portfolios and 38% from equity portfolios. During the six months ended June 30, 2015, 71% and 28% of the gross client inflows were attributable to blended assets and equity portfolios, respectively. For the six months ended June 30, 2015, market appreciation for our mutual fund and collective investment trust AUM was 1.6%, including 0.4% in our blended assets and 3.0% in our equity portfolios, offset by market depreciation of 11.0% in our fixed income portfolios.
Our mutual fund and collective investment trust business is driven by financial intermediaries and to a lesser extent, our direct sales representatives. Intermediary distribution of our mutual fund and collective investment trust vehicles is achieved via financial advisors, brokers and retirement plan advisors. Through our Intermediary Channel, we are increasingly focused on our blended asset life cycle fund vehicles given our emphasis on advisors that work with retirement plans. Our blended asset portfolios are also used by advisors seeking a multi-asset class solution for their retail clients. In addition, our allocation to equity portfolios within the Intermediary Channel is anticipated to increase due to national brokerage firm representatives who wish to use our mutual funds as a component of a larger portfolio.
Through our Platform/Sub-advisor Channel, we have relationships with consultants and advisors at platforms. We derive equity portfolio assets in this channel through the selection of our funds within advisory programs where our mutual funds are used within a multi-strategy portfolio, or through placement on platforms’ approved lists of funds. To facilitate our relationships with intermediaries, we currently have more than 290 dealer relationships. These relationships are important to the expansion of our retail business as well as our 401(k) life cycle and institutional business.
Our Direct Sales Representatives distribute our equity portfolios, in particular our non-U.S. portfolios, to large institutional clients with which we have direct relationships, and often the client’s consultant. Through the Direct Channel, we also form relationships with middle market and large market defined contribution plan sponsors seeking to use our life cycle mutual funds and collective investment trusts as default options on their investment menu. We expect this channel to be focused on distributing blended asset and equity portfolio funds, particularly as the breadth of our mutual fund and collective investment trust offerings expands.
Results of Operations
Below is a discussion of our consolidated results of operations for the three and six months ended June 30, 2015 and 2014.


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Key Components of Results of Operations
Overview
Changes to our operating results over time are largely driven by net client asset flows and changes to the market value of our AUM. The line item "market appreciation/(depreciation) and other" within our AUM tables throughout "Management's Discussion and Analysis of Financial Condition and Results of Operations" includes investment gains/(losses) on assets under management and net flows from non-sales related activities including asset acquisitions and net reinvested dividends.
An important factor influencing inflows and outflows of our AUM is the investment performance of our various investment approaches. Our variety of stock selection strategies, absolute pricing discipline and active asset allocation management approach generally results in specific absolute and relative return characteristics in different market environments. For example, during a fundamental-driven bull market when prices are rising alongside improving fundamentals, we are likely to experience positive absolute returns and competitive relative returns. However, in a more momentum-driven bull market, when prices become disconnected from underlying fundamentals, or narrow market environment where a small handful of stocks outperform the average stock, we are likely to experience positive absolute returns but lagging relative returns. Similarly, during a valuation-driven bear market, when markets experience a period of price correction following a momentum-driven bull market, we are likely to experience negative absolute returns but strong relative returns. However, in a momentum-driven bear market, which is typically characterized by broad price declines in a highly correlated market, we are likely to experience negative absolute returns and potentially lagging relative returns. Essentially, our approach is likely to do well when markets are driven by fundamentals, but lag when markets are driven primarily by momentum.
Other components impacting our operating results include:
asset-based fee rates and changes in those rates;
the composition of our AUM among various portfolios, vehicles and client types;
changes in our variable costs, including incentive compensation and distribution, servicing and custody expenses, which are affected by our investment performance, level of our AUM and revenue; and
fixed costs, including changes to base compensation, vendor-related costs and investment spending on new products.

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Assets Under Management and Investment Performance
The following tables reflect the indicated components of our AUM for our investment vehicles for the three and six months ended June 30, 2015 and 2014.
 
 
Separately
managed
accounts
 
Mutual funds
and collective
investment
trusts
 
Total
 
Separately
managed
accounts
 
Mutual funds
and collective
investment
trusts
 
Total
 
 
 
 
(in millions)
 
 
 
 
 
 
 
 
As of March 31, 2015
 
$
25,151.6

 
$
20,469.4

 
$
45,621.0

 
55
%
 
45
%
 
100
%
Gross client inflows
 
560.3

 
993.7

 
1,554.0

 
 
 
 
 
 
Gross client outflows
 
(1,687.9
)
 
(2,688.3
)
 
(4,376.2
)
 
 
 
 
 
 
Market appreciation/(depreciation) & other
 
181.2

 
126.1

 
307.3

 
 
 
 
 
 
As of June 30, 2015
 
$
24,205.2

 
$
18,900.9

 
$
43,106.1

 
56
%
 
44
%
 
100
%
Average AUM for period
 
$
24,965.0

 
$
20,300.7

 
$
45,265.7

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of March 31, 2014
 
$
27,217.5

 
$
24,973.9

 
$
52,191.4

 
52
%
 
48
%
 
100
%
Gross client inflows
 
935.0

 
1,605.7

 
2,540.7

 
 
 
 
 
 
Gross client outflows
 
(1,761.7
)
 
(1,134.5
)
 
(2,896.2
)
 
 
 
 
 
 
Market appreciation/(depreciation) & other
 
1,230.8

 
1,011.9

 
2,242.7

 
 
 
 
 
 
As of June 30, 2014
 
$
27,621.6

 
$
26,457.0

 
$
54,078.6

 
51
%
 
49
%
 
100
%
Average AUM for period
 
$
27,413.4

 
$
25,709.2

 
$
53,122.6

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Separately
managed
accounts
 
Mutual funds
and collective
investment
trusts
 
Total
 
Separately
managed
accounts
 
Mutual funds
and collective
investment
trusts
 
Total
 
 
 

 
(in millions)
 
 

 
 
 
 
 
 
As of December 31, 2014
 
$
25,408.7

 
$
22,392.9

 
$
47,801.6

 
53
%
 
47
%
 
100
%
Gross client inflows
 
1,251.7

 
2,269.6

 
3,521.3

 
 
 
 
 
 
Gross client outflows
 
(2,828.3
)
 
(6,123.0
)
 
(8,951.3
)
 
 
 
 
 
 
Market appreciation/(depreciation) & other
 
373.1

 
361.4

 
734.5

 
 
 
 
 
 
As of June 30, 2015
 
$
24,205.2

 
$
18,900.9

 
$
43,106.1