Document
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 September 30, 2016
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 November 2, 2016
Class A common stock, $0.01 par value per share
  
15,002,880
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)
 
 
 
September 30, 2016
 
December 31, 2015
 
 
(unaudited)
 
 
Assets
 
 
 
 
Cash and cash equivalents
 
$
123,708

 
$
117,591

Accounts receivable
 
17,240

 
15,807

Accounts receivable—affiliated mutual funds
 
6,630

 
8,473

Due from broker
 

 
3,962

Due from broker - consolidated funds
 

 
3,510

Investment securities
 
17,568

 
21,460

Investment securities - consolidated funds
 
1,036

 
1,107

Prepaid expenses and other assets
 
3,572

 
4,638

Total current assets
 
169,754

 
176,548

Property and equipment, net
 
6,065

 
6,299

Net deferred tax assets, non-current
 
44,437

 
46,649

Goodwill
 
4,843

 
871

Other long-term assets
 
9,467

 
429

Total assets
 
$
234,566

 
$
230,796

 
 
 
 
 
Liabilities
 
 
 
 
Accounts payable
 
$
2,523

 
$
1,141

Accrued expenses and other liabilities
 
35,540

 
42,480

Deferred revenue
 
10,871

 
10,938

Total current liabilities
 
48,934

 
54,559

Other long-term liabilities
 
6,588

 
2,796

Amounts payable under tax receivable agreement, non-current
 
36,255

 
38,661

Total liabilities
 
91,777

 
96,016

Commitments and contingencies (Note 10)
 


 


Shareholders’ equity
 
 
 
 
Class A common stock, $0.01 par value; 300,000,000 shares authorized; 15,032,880 and 14,755,130 issued and outstanding at September 30, 2016 and December 31, 2015, respectively
 
150

 
148

Class B common stock, $0.01 par value; 2,000 shares authorized, 1,000 shares issued and outstanding at September 30, 2016 and December 31, 2015
 

 

Additional paid-in capital
 
203,885

 
205,760

Retained deficit
 
(37,027
)
 
(37,149
)
Accumulated other comprehensive income
 
4

 
(3
)
Total shareholders’ equity
 
167,012

 
168,756

Noncontrolling interests
 
(24,223
)
 
(33,976
)
Total shareholders’ equity and noncontrolling interests
 
142,789

 
134,780

Total liabilities, shareholders’ equity and noncontrolling interests
 
$
234,566

 
$
230,796

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 September 30,
 
Nine months ended September 30,
 
 
2016
 
2015
 
2016
 
2015
Revenues
 
 
 
 
 
 
 
 
Investment management services revenue
 
$
63,305

 
$
75,435

 
$
189,852

 
$
248,045

Expenses
 
 
 
 
 
 
 
 
Compensation and related costs
 
24,627

 
24,500

 
70,973

 
79,627

Distribution, servicing and custody expenses
 
8,798

 
11,127

 
26,590

 
39,010

Other operating costs
 
8,188

 
9,075

 
24,854

 
27,053

Total operating expenses
 
41,613

 
44,702

 
122,417

 
145,690

Operating income
 
21,692

 
30,733

 
67,435

 
102,355

Non-operating income (loss)
 
 
 
 
 
 
 
 
Interest expense
 
(127
)
 
(131
)
 
(339
)
 
(215
)
Interest and dividend income
 
141

 
138

 
457

 
459

Change in liability under tax receivable agreement
 
(76
)
 
(2,793
)
 
(94
)
 
(2,810
)
Net gains (losses) on investments
 
(80
)
 
(3,221
)
 
1,192

 
(4,184
)
Total non-operating income (loss)
 
(142
)
 
(6,007
)
 
1,216

 
(6,750
)
Income before provision for income taxes
 
21,550

 
24,726

 
68,651

 
95,605

Provision (benefit) for income taxes
 
1,565

 
(1,600
)
 
4,784

 
2,960

Net income attributable to controlling and noncontrolling interests
 
19,985

 
26,326

 
63,867

 
92,645

Less: net income attributable to noncontrolling interests
 
17,727

 
22,784

 
56,586

 
82,291

Net income attributable to Manning & Napier, Inc.
 
$
2,258

 
$
3,542

 
$
7,281

 
$
10,354

 
 
 
 
 
 
 
 
 
Net income per share available to Class A common stock
 
 
 
 
 
 
 
 
Basic
 
$
0.15

 
$
0.24

 
$
0.49

 
$
0.72

Diluted
 
$
0.15

 
$
0.21

 
$
0.48

 
$
0.71

Weighted average shares of Class A common stock outstanding
 
 
 
 
 
 
 
 
Basic
 
14,042,880

 
13,745,130

 
13,916,721

 
13,732,980

Diluted
 
14,175,321

 
81,889,208

 
14,173,283

 
13,951,651

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

 
$
0.16

 
$
0.48

 
$
0.48

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 September 30,
 
Nine months ended September 30,
 
 
2016
 
2015
 
2016
 
2015
Net income attributable to controlling and noncontrolling interests
 
$
19,985

 
$
26,326

 
$
63,867

 
$
92,645

Net unrealized holding gain (loss) on investment securities, net of tax
 
1

 

 
7

 
(2
)
Comprehensive income
 
$
19,986

 
$
26,326

 
$
63,874

 
$
92,643

Less: Comprehensive income attributable to noncontrolling interests
 
17,728

 
22,784

 
56,593

 
82,289

Comprehensive income attributable to Manning & Napier, Inc.
 
$
2,258

 
$
3,542

 
$
7,281

 
$
10,354

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, 2014
 
13,713,540

 
$
137

 
1,000

 
$

 
$
209,284

 
$
(41,087
)
 
$

 
$
(19,623
)
 
$
148,711

Net income
 

 

 

 

 

 
10,354

 

 
82,291

 
92,645

Distributions to noncontrolling interests
 

 

 

 

 

 

 

 
(79,029
)
 
(79,029
)
Net changes in unrealized investment securities gains or losses
 

 

 

 

 

 

 
(2
)
 

 
(2
)
Common stock issued under equity compensation plan
 
1,061,590

 
11

 

 

 
(11
)
 

 

 

 

Equity-based compensation
 

 

 

 

 
600

 

 

 
3,155

 
3,755

Dividends declared on Class A common stock - $0.48 per share
 

 

 

 

 

 
(6,916
)
 

 

 
(6,916
)
Purchase of Class A units of Manning & Napier Group, LLC held by noncontrolling interests
 

 

 

 

 
(4,394
)
 

 

 
(33,326
)
 
(37,720
)
Balance—September 30, 2015
 
14,775,130

 
$
148

 
1,000

 
$

 
$
205,479

 
$
(37,649
)
 
$
(2
)
 
$
(46,532
)
 
$
121,444

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance—December 31, 2015
 
14,755,130

 
$
148

 
1,000

 
$

 
$
205,760

 
$
(37,149
)
 
$
(3
)
 
$
(33,976
)
 
$
134,780

Net income
 

 

 

 

 

 
7,281

 

 
56,586

 
63,867

Distributions to noncontrolling interests
 

 

 

 

 

 

 

 
(34,153
)
 
(34,153
)
Net changes in unrealized investment securities gains or losses
 

 

 

 

 

 

 
7

 

 
7

Common stock issued under equity compensation plan, net of forfeitures
 
277,750

 
2

 

 

 
(2
)
 

 

 

 

Shares withheld to satisfy tax withholding requirements related to restricted stock units granted
 

 

 

 

 
(162
)
 

 

 
(791
)
 
(953
)
Equity-based compensation
 

 

 

 

 
433

 

 

 
2,102

 
2,535

Dividends declared on Class A common stock - $0.48 per share
 

 

 

 

 

 
(7,159
)
 

 

 
(7,159
)
Purchase of Class A units of Manning & Napier Group, LLC held by noncontrolling interests (Note 4)
 

 

 

 

 
(2,144
)
 

 

 
(13,991
)
 
(16,135
)
Balance—September 30, 2016
 
15,032,880

 
$
150

 
1,000

 
$

 
$
203,885

 
$
(37,027
)
 
$
4

 
$
(24,223
)
 
$
142,789

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


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Table of Contents

Manning & Napier, Inc.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
 
 
 
Nine months ended September 30,
 
 
2016
 
2015
Cash flows from operating activities:
 
 
 
 
Net income
 
$
63,867

 
$
92,645

Adjustment to reconcile net income to net cash provided by operating activities:
 
 
 
 
Equity-based compensation
 
2,535

 
3,755

Depreciation and amortization
 
1,952

 
1,968

Change in amounts payable under tax receivable agreement
 
94

 
2,810

Change in contingent consideration liability
 
(500
)
 

Net (gains) losses on investment securities
 
(1,192
)
 
4,184

Deferred income taxes
 
2,212

 
(1,087
)
Amortization of debt issuance costs
 
117

 
65

(Increase) decrease in operating assets and increase (decrease) in operating liabilities:
 
 
 
 
Accounts receivable
 
2,011

 
6,086

Accounts receivable—affiliated mutual funds
 
1,862

 
6,571

Due from broker - consolidated funds
 
3,795

 
(5,000
)
Investment securities - consolidated funds
 

 
(1,150
)
Prepaid expenses and other assets
 
1,238

 
3,230

Accounts payable
 
(349
)
 
(2,036
)
Accrued expenses and other liabilities
 
(12,196
)
 
(18,188
)
Deferred revenue
 
(68
)
 
(35
)
Other long-term liabilities
 
(8
)
 
(217
)
Net cash provided by operating activities
 
65,370

 
93,601

Cash flows from investing activities:
 
 
 
 
Purchase of property and equipment
 
(240
)
 
(555
)
Sale of investments
 
9,033

 
8,207

Purchase of investments
 
(4,229
)
 
(6,610
)
Due from broker
 
4,022

 

Acquisitions, net of cash received
 
(9,321
)
 

Net cash (used in) provided by investing activities
 
(735
)
 
1,042

Cash flows from financing activities:
 
 
 
 
Distributions to noncontrolling interests
 
(34,153
)
 
(79,029
)
Dividends paid on Class A common stock
 
(7,123
)
 
(7,851
)
Payment of shares withheld to satisfy withholding requirements
 
(953
)
 
(64
)
Payment of capital lease obligations
 
(154
)
 
(166
)
Purchase of Class A units of Manning & Napier Group, LLC
 
(16,135
)
 
(37,720
)
Payment of debt issuance costs
 

 
(622
)
Net cash used in financing activities
 
(58,518
)
 
(125,452
)
Net increase (decrease) in cash and cash equivalents
 
6,117

 
(30,809
)
Cash and cash equivalents:
 
 
 
 
Beginning of period
 
117,591

 
124,992

End of period
 
$
123,708

 
$
94,183

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 September 30, 2016.
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=11216182&doc=12  
(1)
The consolidated 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., Exeter Trust Company and Rainier Investment Management, LLC.
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, 2015.
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, 2015. 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.
The Company changed its presentation of goodwill within its consolidated statements of financial condition from a component of total "Other long-term assets" to "Goodwill". Amounts for the comparative prior fiscal year period have been reclassified to conform to the current year presentation. This reclassification had no impact on previously reported total assets or financial position and does not represent a restatement of any previously published financial results. Other long-term assets at December 31, 2015, previously reported as $1.3 million, is $0.4 million as reclassified. Goodwill at December 31, 2015 is $0.9 million as reclassified.
Revision of Previously Reported Consolidated Statements of Operations
In the quarter ended September 30, 2016, the Company revised its treatment of payments made to certain advisory clients, in accordance with Accounting Standard Codification ("ASC") 605-50, Revenue Recognition - Customer Payments and Incentives to properly present these payments as a reduction to revenue. The Company assessed the materiality of this item on its fiscal year ended December 31, 2015, and all prior and subsequent periods, and concluded that the reclassification was not material to any such periods. The statements of operations for the three and nine months ended September 30, 2015 included herein have been revised to reflect the proper presentation of investment management services revenue and distribution, servicing and custody expenses. The reclassification has no impact on operating income or net income. The impact is illustrated below:
 
Three months ended September 30, 2015
 
Nine months ended September 30, 2015
 
(in thousands)
Investment management services revenue, as previously reported

$
77,928

 
$
255,327

Revision
(2,493
)
 
(7,282
)
Investment management services revenue, as revised
$
75,435

 
$
248,045

 
 
 
 
Distribution, servicing and custody expenses, as previously reported

$
13,620

 
$
46,292

Revision
(2,493
)
 
(7,282
)
Distribution, servicing and custody expenses, as revised
$
11,127

 
$
39,010

Principles of Consolidation
The Company consolidates all majority-owned subsidiaries. In addition, as of September 30, 2016, Manning & Napier holds an economic interest of approximately 17.4% 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 Update ("ASU") 2015-02, Consolidation (Topic 810) – Amendments to the Consolidation Analysis, 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”).
The Company provides seed capital to its investment teams to develop new products and services for its clients. The original seed investment may represent 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.

7

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

The Company serves as the investment adviser for Manning & Napier Fund, Inc. series of mutual funds (the “Fund”), Exeter Trust Company Collective Investment Trusts (“CIT”), Rainier Investment Management Mutual Funds and Rainier Multiple Investment Trust. The Fund, CIT, Rainier Investment Management Mutual Funds and Rainier Multiple Investment Trust 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”). 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 consolidates each of these entities where it has a controlling financial interest or a majority voting interest.
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.
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 September 30, 2016, trading securities consist solely of investments held by the Company to provide initial cash seeding for product development purposes.
Goodwill and Intangible Assets
Goodwill represents the excess cost over the fair value of the identifiable net assets of acquired companies. Identifiable intangible assets generally represent the cost of client relationships and investment management agreements acquired as well as trademarks. Goodwill and indefinite-lived assets are tested for impairment annually or more frequently if events or circumstances indicate that the carrying value may not be recoverable. Intangible assets subject to amortization are tested for impairment whenever events or circumstances indicate that the carrying value may not be recoverable. Goodwill and intangible assets require significant management estimate and judgment, including the valuation and expected life determination in connection with the initial purchase price allocation and the ongoing evaluation for impairment.
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.
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.




8

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

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 $1.3 million as of September 30, 2016 and $1.2 million as of December 31, 2015.
Fees earned for advisory related services provided to the Fund and CIT investment vehicles were approximately $24.8 million and $78.6 million for the three and nine months ended September 30, 2016, respectively and $35.1 million and $121.5 million for the three and nine months ended September 30, 2015, respectively. These amounts represent greater than 10% of the Company's revenue in each respective period.
Property and Equipment
Property and equipment is presented net of accumulated depreciation of approximately $11.6 million and $8.7 million as of September 30, 2016 and December 31, 2015, respectively.
Recent Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, 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 January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which requires all equity investments to be measured at fair value with changes in the fair value recognized through net income. ASU 2016-01 will be effective on January 1, 2018 and will result in a cumulative-effect adjustment to the balance sheet upon adoption. The Company is currently evaluating the impact that ASU 2016-01 will have on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which is intended to increase transparency and comparability among organizations by recognizing all lease transactions (with terms in excess of 12 months) on the balance sheet as a lease liability and a right-of-use asset (as defined). The new guidance will be effective for fiscal years beginning after December 15, 2018, with earlier application permitted. Upon adoption, the lessee will apply the new standard retrospectively to all periods presented or retrospectively using a cumulative effect adjustment in the year of adoption. The Company is currently evaluating the impact that ASU 2016-02 will have on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, Stock Compensation (Topic 718), which is intended to simplify several aspects of the accounting for share-based payment award transactions. The guidance will be effective for the fiscal year beginning after December 15, 2016, including interim periods within that year. Early application is permitted. The Company is currently evaluating the impact that ASU 2016-09 will have on its consolidated financial statements.
Note 3—Acquisitions
On April 30, 2016, the Company acquired a majority ownership interest in Rainier Investment Management, LLC ("Rainier”), an active investment management firm. Rainier specializes in capitalization-based U.S. and non-U.S. equity strategies and is headquartered in Seattle, Washington. Under the terms of the transaction, the Company acquired a 75% ownership interest in Rainier, with the remaining 25% ownership maintained by key professionals at Rainier. The transaction serves to further diversify the Company's product offerings, enhance its positioning as a provider to defined contribution plans, and broaden its geographic coverage of the western United States.
Consideration transferred included an upfront cash payment on the transaction closing date of $13.0 million. Additional cash payments of up to $32.5 million over a four year period are contingent upon Rainier’s achievement of certain annual financial targets. The fair value of the liability for this contingent consideration recognized on the acquisition date was $3.5 million. As of September 30, 2016 the fair value of the contingent liability was $3.0 million, of which $0.4 million is included in accrued expenses and other current liabilities with the remainder in other long-term liabilities within the consolidated statements of financial condition.
The transaction was accounted for by the Company using the acquisition method under ASC 805, Business Combinations. The following table summarizes the preliminary allocation of the April 30, 2016 purchase price to the assets acquired and liabilities assumed (in thousands):

9

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

Assets acquired
 
Current assets
$
6,998

Property and equipment, net
783

Intangible assets
 
Client relationships
9,320

Trademarks
270

Goodwill
3,962

Total assets acquired
21,333

Liabilities assumed
 
Accounts payable and accrued expenses
3,703

Other liabilities
1,204

Total liabilities assumed
4,907

Purchase price
$
16,426

The amounts allocated to the Rainier assets acquired and liabilities assumed are preliminary pending completion of the final purchase price allocation, primarily in the area of accounting for income taxes. The goodwill of $4.0 million represents the excess of the purchase price over the fair value of identifiable tangible and intangible assets acquired and, in management's opinion, is largely attributable to the value expected from the synergies created through the integration of Rainier's operations, the reputation and expertise of Rainier in the asset management industry, and the existing workforce of Rainier. The goodwill recognized as a result of the acquisition is expected to be deductible for tax purposes.
The intangible assets for client relationships include those for separately managed accounts, mutual funds, and collective investment trusts. The client relationships for separately managed accounts were valued at $1.5 million and are being amortized over an estimated useful life of 6 years. Those for mutual funds and collective investment trusts, valued at approximately $7.8 million, are indefinite-lived, and as such, are not being amortized.
The acquisition date fair value of the contingent consideration was measured using a Monte Carlo simulation with various unobservable market data inputs, which are Level 3 measurements. Significant unobservable inputs included projected revenue growth, projected EBITDA margins and discount rates over the four year earn-out period. For purposes of the simulation, EBITDA generally means net income before interest expense, income taxes, depreciation and amortization expense. A summary of various assumption values follows:
Projected revenue growth
up to 7.0%
Projected EBITDA margins
12.4% to 29.3%
Market price of risk
7.8%
Earn-out payment discount rate
3.0% to 3.6%
Significant increases (decreases) in projected AUM or revenue could result in a significantly higher (lower) contingent consideration liability fair value.
The 25% ownership maintained by key professionals at Rainier is subject to service-based vesting over the five-year period following the acquisition. The Company has the option to repurchase any vested ownership interests upon termination of employment, at a price based on the post-acquisition financial results of Rainier for the most recent four-quarter period preceding the employee's termination date. This repurchase price is recognized as a liability within the consolidated statements of financial condition. The carrying value of this liability was $0 on the acquisition date, and $0.1 million as of September 30, 2016.
Note 4—Noncontrolling Interests
Manning & Napier holds an economic interest of approximately 17.4% 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 82.6% 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 attributable to the economic interest in Manning & Napier Group held by the noncontrolling interests.

10

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

The following provides a reconciliation from “Income before provision for income taxes” to “Net income attributable to Manning & Napier, Inc.”:
 
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
(in thousands)
Income before provision for income taxes
 
$
21,550

 
$
24,726

 
$
68,651

 
$
95,605

Less: loss before provision for income taxes of Manning & Napier, Inc. (a)
 
(95
)
 
(2,799
)
 
(114
)
 
(2,822
)
Income before provision for income taxes, as adjusted
 
21,645

 
27,525

 
68,765

 
98,427

Controlling interest percentage (b)
 
17.4
%
 
16.7
%
 
17.1
%
 
16.0
%
Net income attributable to controlling interest
 
3,765

 
4,647

 
11,753

 
15,714

Plus: loss before provision for income taxes of Manning & Napier, Inc. (a)
 
(95
)
 
(2,799
)
 
(114
)
 
(2,822
)
Income before income taxes attributable to Manning & Napier, Inc.
 
3,670

 
1,848

 
11,639

 
12,892

Less: provision (benefit) for income taxes of Manning & Napier, Inc. (c)
 
1,412

 
(1,694
)
 
4,358

 
2,538

Net income attributable to Manning & Napier, Inc.
 
$
2,258

 
$
3,542

 
$
7,281

 
$
10,354

________________________
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 was $1.6 million and $4.8 million for the three and nine months ended September 30, 2016, respectively and a benefit of $1.6 million and provision of $3.0 million for the three and nine months ended September 30, 2015, respectively.

A total of 65,784,571 units of Manning & Napier Group are held by the noncontrolling interests as of September 30, 2016. Pursuant to the terms of the exchange agreement entered into at the time of the Company's initial public offering, such units may be exchangeable for shares of the Company's Class A common stock. For any units exchanged, the Company will (i) pay an amount of cash equal to the number of units exchanged multiplied by the value of one share of the Company's Class A common stock less a market discount and expected expenses, or, at the Company's election, (ii) issue shares of the Company's Class A common stock on a one-for-one basis, subject to customary adjustments. As the Company receives units of Manning & Napier Group that are exchanged, the Company's ownership of Manning & Napier Group will increase.
On April 27, 2016, M&N Group Holdings and MNCC exchanged a total of 2,111,913 Class A units of Manning & Napier Group for approximately $16.1 million in cash. Subsequent to the exchange, the Class A units were retired. In addition, during the nine months ended September 30, 2016, equity awards issued under the 2011 Equity Compensation Plan (the "Equity Plan") vested (Note 12) 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 Combination". As a result of the aforementioned transactions, the Company's economic ownership in Manning & Napier Group increased to 17.4%.
At September 30, 2016 and December 31, 2015, the Company had recorded a liability of $38.7 million and $41.9 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 other holders of Class A Units of Manning & Napier Group. Of these amounts, $2.4 million and $3.3 million were included in accrued expenses and other liabilities at September 30, 2016 and December 31, 2015, respectively. The Company made payments of approximately $3.4 million and $2.1 million pursuant to the TRA during the nine months ended September 30, 2016 and 2015, respectively.

11

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

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.
Note 5—Investment Securities
The following represents the Company’s investment securities holdings as of September 30, 2016 and December 31, 2015:
 
 
September 30, 2016
 
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
 
(in thousands)
Available-for-sale securities
 
 
 
 
 
 
 
 
U.S. Treasury notes (0.35%, 10/31/2016)
 
$
2,105

 
$

 
$

 
$
2,105

 
 
 
 
 
 
 
 
 
Trading securities
 
 
 
 
 
 
 
 
Equity securities
 
 
 
 
 
 
 
7,422

Fixed income securities
 
 
 
 
 
 
 
7,754

Mutual funds
 
 
 
 
 
 
 
287

Mutual funds - consolidated funds
 
 
 
 
 
 
 
1,036

 
 
 
 
 
 
 
 
16,499

Total investment securities
 
 
 
 
 
 
 
$
18,604

 
 
December 31, 2015
 
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
 
(in thousands)
Available-for-sale securities
 
 
 
 
 
 
 
 
U.S. Treasury notes (0.35%, 10/31/2016)
 
$
2,105

 
$

 
$
(6
)
 
$
2,099

 
 
 
 
 
 
 
 
 
Trading securities
 
 
 
 
 
 
 
 
Equity securities
 
 
 
 
 
 
 
8,967

Fixed income securities
 
7,624

Mutual funds
 
 
 
 
 
 
 
116

Mutual funds - consolidated funds
 
 
 
 
 
 
 
1,107

Hedge funds
 
 
 
 
 
 
 
2,654

 
 
 
 
 
 
 
 
20,468

Total investment securities
 
 
 
 
 
 
 
$
22,567

Investment securities are classified as either trading or available-for-sale and are carried at fair value. Fair value is determined based on quoted market prices in active markets for identical or similar instruments.
Investment securities classified as trading consist of equity securities, fixed income securities and investments in mutual funds for which the Company provides advisory services. At September 30, 2016 and December 31, 2015, trading securities consist solely of investments held by the Company to provide initial cash seeding for product development purposes. The Company recognized approximately $1.6 million of net unrealized gains and $2.4 million of net unrealized losses related to investments classified as trading during the nine months ended September 30, 2016 and 2015, respectively.
Investment securities classified as available-for-sale consist of U.S. Treasury notes for compliance with certain regulatory requirements. As of September 30, 2016 and December 31, 2015, $0.6 million of these securities was 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 nine months ended September 30, 2016 and 2015.


12

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

Note 6—Derivative Instruments
The Company may enter 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.
As of September 30, 2016, the Company had no open futures contracts. The following table presents the notional value and fair value as of December 31, 2015 for derivative instruments not designated as hedging instruments:
 
 
December 31, 2015
 
 
 
 
Fair Value
 
 
Notional Value
 
Asset Derivative
 
Liability Derivative
 
 
(in thousands)
Interest rate futures
 
$
124,470

 
$
169

 
$
(112
)
Index futures
 
3,715

 
57

 
(47
)
Commodity futures
 
2,440

 
27

 
(30
)
Currency futures
 
6,921

 
35

 
(43
)
Total derivatives
 
$
137,546

 
$
288

 
$
(232
)
As of December 31, 2015, the derivative assets and liabilities were included in due from broker in the consolidated statements of financial condition. Derivative activity concluded on February 4, 2016 with a year to date average volume of derivative activity (measured in terms of notional value) of approximately $127.8 million. The average notional volume of derivative activity for the nine months ended September 30, 2015 was approximately $238.5 million. The following table presents the gains (losses) recognized in net gains (losses) on investments in the consolidated statements of operations for the nine months ended September 30, 2016 and 2015:    
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
(in thousands)
Interest rate futures
 
$

 
$
(877
)
 
$
494

 
$
(1,420
)
Index futures
 

 
(137
)
 
(37
)
 
(47
)
Commodity futures
 

 
(33
)
 
(13
)
 
(10
)
Currency futures
 

 
(117
)
 
(102
)
 
(58
)
Gains (losses) recognized, net
 
$

 
$
(1,164
)
 
$
342

 
$
(1,535
)
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 September 30, 2016 and December 31, 2015:
 
 
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)
September 30, 2016
 
$

 
$

 
$

 
$

 
$

 
$

December 31, 2015
 
$
(232
)
 
$
288

 
$
56

 
$

 
$

 
$
56


13

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

Note 7—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).
The following provides the hierarchy of inputs used to derive the fair value of the Company’s financial instruments measured at fair value on a recurring basis as of September 30, 2016 and December 31, 2015: 
 
 
September 30, 2016
 
 
Level 1
 
Level 2
 
Level 3
 
Totals
 
 
(in thousands)
Equity securities
 
$
7,422

 
$

 
$

 
$
7,422

Fixed income securities
 
1,147

 
6,607

 

 
7,754

Mutual funds
 
287

 

 

 
287

Mutual funds - consolidated funds
 
1,036

 

 

 
1,036

U.S. Treasury notes
 

 
2,105

 

 
2,105

Total assets at fair value
 
$
9,892

 
$
8,712

 
$

 
$
18,604

 
 
 
 
 
 
 
 
 
Contingent consideration liability
 
$

 
$

 
$
3,000

 
$
3,000

Total liabilities at fair value
 
$

 
$

 
$
3,000

 
$
3,000

 
 
December 31, 2015
 
 
Level 1
 
Level 2
 
Level 3
 
Totals
 
 
(in thousands)
Equity securities
 
$
8,967

 
$

 
$

 
$
8,967

Fixed income securities
 
1,008

 
6,616

 

 
7,624

Mutual funds
 
116

 

 

 
116

Mutual funds - consolidated funds
 
1,107

 

 

 
1,107

Hedge funds
 

 
2,654

 

 
2,654

U.S. Treasury notes
 

 
2,099

 

 
2,099

Derivatives
 
288

 

 

 
288

Total assets at fair value
 
$
11,486

 
$
11,369

 
$

 
$
22,855

 
 
 
 
 
 
 
 
 
Derivatives
 
$
232

 
$

 
$

 
$
232

Total liabilities at fair value
 
$
232

 
$

 
$

 
$
232


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.
Contingent consideration was a component of the purchase price of Rainier. The contingent consideration is payable over a four year period upon Rainier’s achievement of certain financial targets. The fair value of the contingent consideration is

14

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

calculated on a quarterly basis by forecasting Rainier’s adjusted earnings before interest, taxes and amortization ("EBITA") as defined by the purchase agreement over the contingency period with changes in the fair value included in other operating costs in the consolidated statements of operations. Significant unobservable inputs used in the valuation include adjusted EBITA growth of up to 63% and an earn-out payment discount rate of 3.1% over the contingency period.
The changes in financial assets and (liabilities) measured at fair value using significant unobservable inputs (Level 3) for the nine months ended September 30, 2016 are presented in the table below:
 
 
December 31, 2015
 
Purchases
 
Sales
 
Redemptions/ Settlements/ Other
 
Transfers
 
Realized and unrealized gains/(losses), net
 
September 30, 2016
 
 
(in thousands)
Contingent consideration liability
 
$

 
$
(3,500
)
 
n/a
 
$
500

 
n/a
 
$

 
$
(3,000
)

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 Levels during the nine months ended September 30, 2016.
Note 8—Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities as of September 30, 2016 and December 31, 2015 consisted of the following:
 
 
September 30, 2016
 
December 31, 2015
 
 
(in thousands)
Accrued bonus and sales commissions
 
$
16,513

 
$
22,584

Accrued payroll and benefits
 
3,481

 
2,844

Accrued sub-transfer agent fees
 
5,891

 
6,148

Dividends payable
 
2,405

 
2,361

Amounts payable under tax receivable agreement
 
2,447

 
3,278

Other accruals and liabilities
 
4,803

 
5,265

 
 
$
35,540

 
$
42,480

Note 9—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 Lenders. 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 September 30, 2016, 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.
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% to 2.50% 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

15

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

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 September 30, 2016, 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 10—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.
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 September 30, 2016 and December 31, 2015, the Company has not accrued for any such claims, legal proceedings, or other contingencies.
Note 11—Earnings per Common Share
Basic earnings per share (“basic EPS”) is computed using the two-class method to determine net income available to Class A common stock. 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 restricted Class A common shares granted under the 2011 Equity Compensation Plan (the "Equity Plan") have non-forfeitable dividend rights during their vesting period and are therefore considered participating securities under the two-class method. Under the two-class method, the Company's net income available to Class A common stock is reduced by the amount allocated to the unvested restricted Class A common stock. Basic EPS is calculated by dividing net income available to Class A common stock by the weighted average number of common shares outstanding during the period.
Diluted earnings per share (“diluted EPS”) is computed under the more dilutive of either the treasury method or the two-class method. For the diluted calculation, the weighted average number of common shares outstanding during the period is increased by the assumed conversion into Class A common stock of the unvested equity awards and the exchangeable units of Manning & Napier Group, to the extent that such conversion would dilute earnings per share.

16

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

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 nine months ended September 30, 2016 and 2015 under the two-class method:
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
(in thousands, except share data)
Net income attributable to controlling and noncontrolling interests
 
$
19,985

 
$
26,326

 
$
63,867

 
$
92,645

Less: net income attributable to noncontrolling interests
 
17,727

 
22,784

 
56,586

 
82,291

Net income attributable to Manning & Napier, Inc.
 
$
2,258

 
$
3,542

 
$
7,281

 
$
10,354

Less: allocation to participating securities
 
158

 
247

 
480

 
482

Net income available to Class A common stock
 
$
2,100

 
$
3,295

 
$
6,801

 
$
9,872

 
 
 
 
 
 
 
 
 
Weighted average shares of Class A common stock outstanding - basic
 
14,042,880

 
13,745,130

 
13,916,721

 
13,732,980

Dilutive effect from unvested equity awards
 
132,441

 
68,144,078

 
256,562

 
218,671

Weighted average shares of Class A common stock outstanding - diluted
 
14,175,321

 
81,889,208

 
14,173,283

 
13,951,651

Net income available to Class A common stock per share - basic
 
$
0.15

 
$
0.24

 
$
0.49

 
$
0.72

Net income available to Class A common stock per share - diluted
 
$
0.15

 
$
0.21

 
$
0.48

 
$
0.71

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.
For the three and nine months ended September 30, 2016, 990,000 unvested equity awards were excluded from the calculation of diluted earnings per common share because the effect would have been anti-dilutive.
For the three and nine months ended September 30, 2015, 1,030,000 and 1,285,357, respectively, unvested equity awards were excluded from the calculation of diluted earnings per common share because the effect would have been anti-dilutive. For the three and nine months ended September 30, 2015, 181,378 unvested equity awards were also excluded from the calculation of diluted earnings per common share because the performance conditions associated with the vesting of such awards had not yet been satisfied.
At September 30, 2016 and 2015 there were 65,784,571 and 67,896,484 Class A Units of Manning & Napier Group outstanding, respectively, which, subject to certain restrictions, may be exchangeable for up to an equivalent number of the Company's Class A common stock. These units were not included in the calculation of diluted earnings per common share for the three and nine months ended September 30, 2016 or for the nine months ended September 30, 2015, because the effect would have been anti-dilutive.
Note 12—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 nine months ended September 30, 2016, 72,410 equity awards were granted under the Equity Plan. These awards consisted of Class A common stock that vested immediately.

17

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

The following table summarizes the equity award activity for the nine months ended September 30, 2016 under the Company's Equity Plan:
 
 
Restricted
Stock Awards
 
Weighted Average Grant Date Fair Value
Stock awards outstanding at January 1, 2016
 
2,031,629

 
$
12.92

Granted
 
72,410

 
$
8.38

Vested
 
(409,479
)
 
$
14.32

Forfeited
 
(409,800
)
 
$
10.85

Stock awards outstanding at September 30, 2016
 
1,284,760

 
$
12.88

The weighted average grant date fair value of Equity Plan awards granted during the nine months ended September 30, 2016 and 2015 was $8.38 and $11.89, 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, when 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 nine months ended September 30, 2016, the Company recorded approximately $0.4 million and $2.5 million, respectively, of compensation expense related to awards under the Equity Plan. For the three and nine months ended September 30, 2015, the Company recorded approximately $1.2 million and $3.8 million, respectively of compensation expense related to awards under the Equity Plan. As of September 30, 2016, there was unrecognized compensation expense related to Equity Plan awards of approximately $10.3 million, which the Company expects to recognize over a weighted average period of approximately 4.1 years.
Note 13—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: 
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
(in thousands)
Earnings from continuing operations before income taxes
 
$
21,550

 
$
24,726

 
$
68,651

 
$
95,605

Effective tax rate
 
7.3
%
 
(6.5
)%
 
7.0
%
 
3.1
%
Provision (benefit) for income taxes
 
1,565

 
(1,600
)
 
4,784

 
2,960

Provision for income taxes @ 35%
 
7,543

 
8,654

 
24,028

 
33,462

Difference between tax at effective vs. statutory rate
 
$
(5,978
)
 
$
(10,254
)
 
$
(19,244
)
 
$
(30,502
)
For the three and nine months ended months ended September 30, 2016 and 2015, 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 three and nine months ended September 30, 2015, the Company received an additional benefit of approximately $3.2 million resulting from the release of uncertain tax positions that increased the expected future tax benefits under the TRA.
Note 14—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

18

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

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 nine months ended September 30, 2016.
Affiliated fund transactions
The Company has agreements to serve as the investment manager of Manning & Napier Fund, Inc. and Rainier Investment Management Mutual Funds, with which certain of its officers are affiliated. Under the terms of these agreements, the Company receives a fee based on an annual percentage of the average daily net assets of each series within the affiliated funds. The Company has contractually agreed to limit its fees and reimburse expenses to limit operating expenses incurred by certain of the affiliated fund series. The investment management and operating expense agreements are generally reviewed and continued annually by the affiliated funds' boards of directors.
Note 15—Subsequent Events
Distributions and dividends
On October 25, 2016, 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 $30.0 million, of which approximately $24.9 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 February 1, 2017 to shareholders of record as of January 13, 2017.





19

Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This report contains forward-looking statements within the meaning of section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which reflect our views with respect to, among other things, our operations and financial performance. Words like "believes," "expects," "may," "estimates," "will," "should," "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; any loss of an executive officer or key personnel; changes in our business related to strategic acquisitions and other transactions; 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. and Exeter Trust Company. In addition, on April 30, 2016, we acquired a majority interest in Rainier Investment Management, LLC ("Rainier"), an active investment management firm. With the acquisition of Rainier we expand our product offering to include capitalization-based U.S. and non-U.S. equity strategies. We also broaden our investment vehicles to include mutual funds and collective investment trusts offered by Rainier Investment Management Mutual Funds and Rainier Multiple Investment Trust. Based in Seattle, Washington, Rainier broadens our geographic presence in the Northwestern United States.
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 distributed through financial intermediaries, including brokers, financial advisors, retirement plan advisors and platform relationships. We also distribute our mutual fund and collective investment trusts through our direct sales representatives, in particular within the defined contribution and institutional marketplace. Our mutual fund and collective investment trust products are an important driver of our blended asset class portfolios, in particular with 401(k) plan sponsors, advisors and recordkeepers that select our funds as default options for participants. In addition, financial intermediaries, mutual fund advisory programs and retail platforms are a driver of equity strategies within our mutual fund offerings.

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Table of Contents

Our assets under management ("AUM") was $34.8 billion as of September 30, 2016. The composition of our AUM by vehicle and portfolio is illustrated in the table below:
 
 
September 30, 2016
AUM - by investment vehicle and portfolio
 
Blended
Asset
 
Equity
 
Fixed Income
 
Total
 
 
(in millions)
Separately managed accounts
 
$
11,828.1

 
$
7,507.3

 
$
1,201.6

 
$
20,537.0

Mutual funds and collective investment trusts
 
9,720.8

 
4,417.5

 
143.2

 
14,281.5

Total
 
$
21,548.9

 
$
11,924.8

 
$
1,344.8

 
$
34,818.5

The composition of our separately managed accounts as of September 30, 2016, by channel and portfolio, is set forth in the table below:
 
 
September 30, 2016
 
 
Blended
Asset
 
Equity
 
Fixed Income
 
Total
 
 
(dollars in millions)
Separate account AUM
 
 
 
 
 
 
 
 
Direct Channel
 
$
8,658.0

 
$
5,943.8

 
$
1,071.4

 
$
15,673.2

Intermediary Channel
 
3,165.7

 
687.5

 
130.2

 
3,983.4

Platform/Sub-advisor Channel
 
4.4

 
876.0

 

 
880.4

Total
 
$
11,828.1

 
$
7,507.3

 
$
1,201.6

 
$
20,537.0

Percentage of separate account AUM
 
 
 
 
 
 
 
 
Direct Channel
 
42
%
 
29
%
 
5
%
 
76
%
Intermediary Channel
 
16
%
 
3
%
 
1
%
 
20
%
Platform/Sub-advisor Channel
 
0
%
 
4
%
 
0
%
 
4
%
Total
 
58
%
 
36
%
 
6
%
 
100
%
Percentage of portfolio by channel
 
 
 
 
 
 
 
 
Direct Channel
 
73
%
 
79
%
 
89
%
 
76
%
Intermediary Channel
 
27
%
 
9
%
 
11
%
 
20
%
Platform/Sub-advisor Channel
 
0
%
 
12
%
 
0
%
 
4
%
Total
 
100
%
 
100
%
 
100
%
 
100
%
Percentage of channel by portfolio
 
 
 
 
 
 
 
 
Direct Channel
 
55
%
 
38
%
 
7
%
 
100
%
Intermediary Channel
 
80
%
 
17
%
 
3
%
 
100
%
Platform/Sub-advisor Channel
 
0
%
 
100
%
 
0
%
 
100
%
Our separate accounts contributed 34% of our total gross client inflows for the nine months ended September 30, 2016 and represented 59% of our total AUM as of September 30, 2016.
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 nine months ended September 30, 2016 and represented 76% of our total separate account AUM as of September 30, 2016. 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 nine months ended September 30, 2016, blended asset portfolios represented 71% of the separate account gross client inflows from the Direct Channel, while equity and fixed income portfolios represented 12% and 17% respectively. As of September 30, 2016, blended asset and equity portfolios represented 55% and 38%, respectively, of total Direct Channel separate account AUM, while our fixed income portfolios were 7%. 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. Our relationships with larger institutions may also be a driver of growth in separately managed account equity strategies, though many of these larger institutions may seek exposure to

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Table of Contents

non-U.S. equity strategies through commingled vehicles rather than separately managed accounts to limit related custody expenses.
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 nine months ended September 30, 2016, 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 24% of our total separate account AUM as of September 30, 2016.
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 nine months ended September 30, 2016, blended asset and equity portfolios represented 69% and 24%, respectively, of the separate account gross client inflows from the Intermediary Channel, while fixed income portfolios represented 7%. As of September 30, 2016, 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 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 nine months ended September 30, 2016, 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 was approximately 86% during the nine months ended September 30, 2016, representing the strong relationship focus that is inherent in our direct sales model, which is the primary driver of our separate account business.
The composition of our mutual fund and collective investment trust AUM as of September 30, 2016, by portfolio, is set forth in the table below:
 
 
September 30, 2016
 
 
Blended
Asset
 
Equity
 
Fixed Income
 
Total
 
 
(in millions)
Mutual fund and collective investment trust AUM
 
$
9,720.8

 
$
4,417.5

 
$
143.2

 
$
14,281.5

Our mutual funds and collective investment trusts contributed 66% of our total gross client inflows for the nine months ended September 30, 2016 and represented 41% of our total AUM as of September 30, 2016. As of September 30, 2016, our mutual fund and collective investment trust AUM consisted of 68% from blended asset portfolios and 31% from equity portfolios. During the nine months ended September 30, 2016, 78% and 20% of the gross client inflows were attributable to blended assets and equity portfolios, respectively.
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 focused on our blended asset life cycle fund vehicles given our emphasis on advisors who 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, we are focused on equity and fixed income portfolios within the Intermediary Channel for intermediaries 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 manager research teams at platforms. We are focused on equity and fixed income portfolio assets in this channel through the selection of our funds within advisory programs, or through placement on platforms’ approved lists of funds. To facilitate our relationships with intermediaries, we currently have approximately 290 dealer relationships. These relationships are important to our retail business as well as our 401(k) life cycle and institutional business.
Our Direct Sales Representatives distribute our equity 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 focus on distributing blended asset and equity portfolio funds in the future.


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Table of Contents

Results of Operations
Below is a discussion of our consolidated results of operations for the three and nine months ended September 30, 2016 and 2015.
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 AUM, net flows from non-sales related activities including 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.

23

Table of Contents

Assets Under Management and Investment Performance
The following tables reflect the indicated components of our AUM for our investment vehicles for the three and nine months ended September 30, 2016 and 2015.
 
 
Separately
managed
accounts
 
Mutual funds
and collective
investment
trusts
 
Total
 
Separately
managed
accounts
 
Mutual funds
and collective
investment
trusts
 
Total
 
 
 
 
(in millions)
 
 
 
 
 
 
 
 
As of June 30, 2016
 
$
20,585.0

 
$
15,131.2

 
$
35,716.2

 
58
%
 
42
%
 
100
%
Gross client inflows
 
374.6

 
752.2

 
1,126.8

 
 
 
 
 
 
Gross client outflows
 
(1,226.0
)
 
(2,163.2
)
 
(3,389.2
)
 
 
 
 
 
 
Market appreciation/(depreciation) & other
 
803.4

 
561.3

 
1,364.7

 
 
 
 
 
 
As of September 30, 2016
 
$
20,537.0

 
$
14,281.5

 
$
34,818.5

 
59
%
 
41
%
 
100
%
Average AUM for period
 
$
20,678.1

 
$
14,767.5

 
$
35,445.6

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of June 30, 2015
 
$
24,205.2

 
$
18,900.9

 
$
43,106.1

 
56
%
 
44
%
 
100
%
Gross client inflows
 
783.4

 
1,030.7

 
1,814.1

 
 
 
 
 
 
Gross client outflows
 
(1,737.0
)
 
(2,696.3
)
 
(4,433.3