UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-K




(Mark
One)




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




For the
fiscal year ended December 31, 2009




 ̈
            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 000-51682




HIGHBURY FINANCIAL
INC.


(Exact
Name of Registrant as Specified in Its Charter)




Delaware
            
            20-3187008(State
      or other jurisdiction of
            
            (I.R.S.
      Employerincorporation
      or organization)
            
            Identification
      No.)999
      Eighteenth Street, Ste. 3000, Denver, CO
            
            80202(Address
      of Principal Executive Offices)
            
            (Zip
      Code)


Issuer’s
telephone number (303) 357-4802




Securities
registered under Section 12(b) of the Exchange Act:


None




Securities
registered under Section 12(g) of the Exchange Act:


Title of
Each Class:


Common
Stock, $.0001 par value per share




Series A
Junior Participating Preferred Stock




Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.




 ̈           Yes           x           No




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.




 ̈           Yes           x           No




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 periods as the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.




x           Yes            ̈           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 (§232.405) during
the preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files).




 ̈           Yes            ̈           No




Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405) is not contained herein, and will not be contained, to
the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.  o




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
definitions of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (check one)




Large
      accelerated filer  ̈
              Accelerated
      filer  ̈
              Non-accelerated
      filer  ̈
                (Do
      not check if a smaller reporting company)
              Smaller
      reporting company x


Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).




 ̈           Yes           x           No




As of
June 30, 2009, the aggregate market value of the common stock, $0.0001 par value
per share, held by non-affiliates of the Registrant was approximately
$11,263,770, computed by reference to the closing sales price of such common
stock on June 30, 2009, as reported on the OTC Bulletin Board. In determining
the market value of the voting stock held by any non-affiliates, shares of
common stock of the Registrant beneficially owned by directors, officers and
holders of more than 10% of the outstanding shares of common stock of the
Registrant have been excluded. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.




As of
March 22, 2010, there were 18,526,171 shares of common stock
outstanding.




DOCUMENTS
INCORPORATED BY REFERENCE: None





TABLE OF
CONTENTS





PagePART
      I
                  
                  3ITEM
      1. BUSINESS
                  
                  3ITEM
      1A. RISK FACTORS
                  
                  11ITEM
      2. PROPERTIES
                  
                  21ITEM
      3. LEGAL PROCEEDINGS
                  
                  21ITEM
      4. RESERVED
                  
                  21PART
      II
                  
                  21ITEM
      5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
      ISSUER PURCHASES OF EQUITY SECURITIES
                  
                  21ITEM
      7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
      OF OPERATIONS
                  
                  23ITEM
      7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
    RISK
                  
                  42ITEM
      8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
                  
                  42ITEM
      9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
      FINANCIAL DISCLOSURE
                  
                  42ITEM
      9A(T). CONTROLS AND PROCEDURES
                  
                  42ITEM
      9B. OTHER INFORMATION
                  
                  43PART
      III
                  
                  44ITEM
      10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
                  
                  44ITEM
      11. EXECUTIVE COMPENSATION
                  
                  49ITEM
      12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
      RELATED STOCKHOLDER MATTERS
                  
                  52ITEM
      13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE
                  
                  57ITEM
      14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
                  
                  63PART
      IV
                  
                  64ITEM
      15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
                  
                  64SIGNATURES
                  
                  68


i


CAUTIONARY
STATEMENT REGARDING FORWARD LOOKING STATEMENTS




This
Annual Report on Form 10-K includes forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995, as amended,
Section 27A of the Securities Act of 1933, as amended, or the “Securities Act,”
and Section 21E of the Securities Exchange Act of 1934, as amended, or the
“Exchange Act.” These forward-looking statements can be identified by the use of
forward-looking terminology, including the words “believes,” “contemplates,”
“continues,” “estimates,” “anticipates,” “expects,” “intends,” “may,” “will” or
“should,” or, in each case, their negative or other variations or comparable
terminology. You should read statements that contain these words carefully
because they:




·
            discuss
      future expectations;




·
            contain
      projections of future results of operations or financial condition;
      or




·
            state
      other “forward-looking”
information.




We
believe it is important to communicate to our stockholders our reasonable
expectations, beliefs and assumptions which are based on information that is
currently available to us. However, there may be events in the future that we
are not able to predict accurately or over which we have no control. The risk
factors and cautionary language discussed in this Annual Report provide examples
of risks, uncertainties and events that may cause actual results to differ
materially from the expectations described by us in such forward-looking
statements, including among other things:




·
            the
      successful combination of Highbury and Aston with the business of
      Affiliated Managers Group Inc., or
“AMG”;




·
            the
      ability to retain key personnel and the ability to achieve stockholder and
      regulatory approvals and to successfully close the proposed merger with
      AMG;




·
            the
      possibility of disruptions from the proposed merger with AMG making it
      more difficult to maintain business and operational
      relationships;




·
            the
      possibility that the proposed merger with AMG does not close, including
      but not limited to, due to the failure to satisfy the closing
      conditions;




·
            legal
      or regulatory proceedings, including but not limited to litigation arising
      out of the proposed merger with AMG, or other matters that affect the
      timing or ability to complete the proposed merger with AMG as
      contemplated;




·
            the
      impact of legislative and regulatory actions and reforms and regulatory,
      supervisory or enforcement actions of government
  agencies;




·
            changes
      in political, economic or industry conditions, the interest rate
      environment or financial and capital markets, which could result in
      changes in demand for products or services or in the value of assets under
      management;




·
            terrorist
      activities and international hostilities, which may adversely affect the
      general economy, financial and capital markets, specific industries, and
      us;




·
            changing
      conditions in global financial markets generally and in the equity markets
      particularly, and decline or lack of sustained growth in these
      markets;




·
            our
      business strategy and plans;





·
            the
      introduction, withdrawal, success and timing of business initiatives and
      strategies;




·
            the
      unfavorable resolution of legal proceedings and/or harm to our
      reputation;




·
            fluctuations
      in customer demand;




·
            the
      impact of fund performance on
redemptions;




·
            changes
      in investors' preference of investing
styles;




·
            changes
      in or loss of sub-advisers;




·
            the
      impact of increased competition;




·
            the
      relative and absolute investment performance of our investment
      products;




·
            investment
      advisory agreements subject to termination or
  non-renewal;




·
            a
      substantial reduction in fees received from third
  parties;




·
            the
      ability to retain major clients;




·
            the
      ability to attract and retain highly talented
    professionals;




·
            significant
      limitations or failure of software
applications;




·
            expenses
      subject to significant
fluctuations;




·
            the
      impact, extent and timing of technological changes and the adequacy of
      intellectual property protection;




·
            the
      extent and timing of any share
repurchases;




·
            the
      impact of changes to tax legislation and, generally, our tax position;
      and




·
            expenses
      associated with the Special Committee of Highbury’s board of directors and
      proxy solicitation process in connection with the special meeting of the
      stockholders of Highbury to approve the proposed
  merger.




By
their nature, forward-looking statements involve risks and uncertainties because
they relate to events and depend on circumstances that may or may not occur in
the future. We caution you that forward-looking statements are not guarantees of
future performance and that our actual results of operations, financial
condition and liquidity, and developments in the industry in which we operate
may differ materially from those made in or suggested by the forward-looking
statements contained in this Annual Report. In addition, even if our results of
operations, financial condition and liquidity, and developments in the industry
in which we operate, are consistent with the forward-looking statements
contained in this Annual Report, those results or developments may not be
indicative of results or developments in subsequent periods. You are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of the date of such statements.




All
forward-looking statements included herein are expressly qualified in their
entirety by the cautionary statements contained or referred to in this Annual
Report. Except to the extent required by applicable laws and regulations,
Highbury undertakes no obligation to update these forward-looking statements to
reflect events or circumstances after the date of this Annual Report or to
reflect the occurrence of unanticipated events.


2


Unless
otherwise provided in this Annual Report, references to the “Company,” the
“Registrant,” the “Issuer,” “we,” “us,” and “our” refer to Highbury Financial
Inc. and its subsidiary. References to “Highbury” refer solely to Highbury
Financial Inc. and references to “Aston” refer solely to Aston Asset Management
LLC, a subsidiary of Highbury and the former U.S. mutual fund business of ABN
AMRO. For the period prior to the acquisition, we refer to the former U.S.
mutual fund business of ABN AMRO as the “acquired business.”




PART
I




ITEM
      1.
            BUSINESS




General




Highbury
is a Delaware corporation formed on July 13, 2005 as an investment management
holding company to provide permanent capital solutions to mid-sized investment
management firms. Traditionally, Highbury pursued acquisition opportunities and
sought to establish accretive partnerships with high quality investment
management firms. In July 2009, Highbury’s board of directors suspended its
pursuit of acquisition opportunities other than add-on acquisitions for Aston
and began evaluating strategic alternatives.  On December 12, 2009,
Highbury entered into an Agreement and Plan of Merger or the “Merger Agreement”
by and among AMG, a Delaware corporation publicly traded on the New York Stock
Exchange, Manor LLC, a newly formed Delaware limited liability company and a
wholly-owned subsidiary of AMG, or “Merger Sub”, and Highbury, pursuant to which
Highbury will merge with and into Merger Sub.  We refer to this
transaction in this Annual Report as the “Merger.”  At the effective
time of the Merger, all outstanding shares of Highbury common stock (other than
shares owned or held directly by Highbury and dissenting shares) will be
converted into the right to receive an aggregate of 1,748,879 shares of AMG
common stock, subject to reduction in certain circumstances. Based on 23,026,171
shares of Highbury common stock outstanding as of the record date for the
special meeting to approve the Merger, which includes 4,500,000 shares of common
stock to be issued in exchange for shares of Series B convertible preferred
stock, par value $0.0001 per share, of Highbury, or “Series B preferred stock,”
and assuming no reduction in the aggregate merger consideration, each share of
Highbury common stock would receive 0.075952 shares of AMG common stock in
the Merger.  Following the Merger, the separate corporate existence of
Highbury will cease and Merger Sub will continue as the surviving limited
liability company under the name “Manor LLC” and be a wholly-owned subsidiary of
AMG.  AMG has filed with the SEC a registration statement on Form S-4
to register with the SEC the AMG common stock to be issued to Highbury
stockholders in connection with the Merger, which was declared effective by the
SEC on February 2, 2010. The proxy statement/prospectus that is a part of that
registration statement constitutes a prospectus of AMG, in addition to being a
proxy statement of Highbury for the special meeting to approve the Merger, which
is scheduled for March 29, 2010.




Aston
Business Strategy




Aston, a
100%-owned subsidiary of Highbury, is a platform for internal growth and add-on
acquisitions. Aston was formed by Highbury for the purpose of acquiring the U.S.
mutual fund business of ABN AMRO. Aston is a registered investment adviser and
the investment manager for a family of 25 no-load mutual funds, as of December
31, 2009, and a limited number of separately managed accounts. Aston's mutual
fund platform is built upon providing investment advisory, sales, marketing,
compliance, finance, operations and administration resources to mutual funds
using sub-advisers that produce institutional quality investment products.
Pursuant to the asset purchase agreement dated as of April 20, 2006, referred to
in this Annual Report on Form 10-K as the “asset purchase agreement,” among
Highbury, Aston and ABN AMRO, ABN AMRO Investment Fund Services, Inc., ABN AMRO
Asset Management, Inc., Montag & Caldwell, Inc., Tamro Capital Partners LLC,
Veredus Asset Management LLC, and River Road Asset Management, LLC, collectively
referred to herein as the “Aston Sellers,” on November 30, 2006, Highbury
acquired substantially all of the Aston Sellers’ business of providing
investment advisory, administration, distribution and related services to the
U.S. mutual funds specified in the asset purchase agreement.


3


Until
August 10, 2009 and pursuant to the limited liability company agreement of Aston
which Highbury entered into with Aston and members of the Aston management team,
or the “Management Members,” approximately 72% of the revenues of Aston, or the
“Operating Allocation,” was used to pay operating expenses of Aston, including
salaries and bonuses of all employees of Aston (including the Aston Management
Members). The remaining 28% of the revenues of Aston, or the “Owners’
Allocation,” was allocated among Highbury and the Management
Members.  Prior to August 10, 2009, Highbury owned 65% of the
membership interests of Aston and the Management Members owned 35% of the
membership interests of Aston.




On August
10, 2009, Highbury entered into an exchange agreement, referred to in this
Annual Report on Form 10-K as the “First Exchange Agreement,” with the holders
of Aston’s Series B limited liability company interests, or the “Series B
Investors,” and the Management Members who owned interests in certain of the
Series B Investors. Pursuant to the terms of the First Exchange Agreement, the
Series B Investors exchanged their units for shares of Series B preferred stock.
The result was that as of August 10, 2009 Aston became 100% owned by Highbury.
On August 10, 2009, Highbury and the Series B Investors also entered into an
investor rights agreement which granted the Series B Investors certain
registration rights and placed certain restrictions on the transfer of Highbury
Series B preferred stock.  Please refer to Item 13 “Certain
Relationships and Related Transactions, and Director Independence—Exchange
Agreements” for a description of the First Exchange Agreement.




In
connection with the First Exchange Agreement, Highbury entered into a management
agreement, or the “Management Agreement,” with the Management Members and Aston
which delegates certain powers to a management committee composed initially of
the Management Members to operate the business of Aston. Pursuant to the
Management Agreement, the Operating Allocation of Aston remained unchanged and
may be allocated by Aston’s management committee to pay the operating expenses
of Aston, including salaries and bonuses. In addition, the remaining 28% of
Aston’s total revenues net of sub-administrative fees is paid to Highbury as the
sole owner of the business. Highbury’s contractual share of revenues has
priority over any payment of the Operating Allocation. Any reduction in revenues
to be paid to Highbury as a result of operating expenses exceeding the Operating
Allocation is required to be paid to Highbury out of future Operating Allocation
before any compensation may be paid to management.




On
September 14, 2009, Highbury entered into (i) a second exchange agreement, or
the “Second Exchange Agreement,” with the Series B Investors pursuant to which
the Series B Investors agreed to exchange up to 36% of their shares of Highbury
Series B preferred stock to Highbury for up to 1,620,000 shares of common stock
of Highbury and (ii) an amended and restated investors rights agreement, or the
“Amended and Restated Investor Rights Agreement.”  Please refer to
Item 13 “Certain Relationships and Related Transactions, and Director
Independence—Exchange Agreements” for a description of the Second Exchange
Agreement.




In
connection with the signing of the Merger Agreement, Highbury and each of the
Series B Investors entered into a new exchange agreement, dated as of December
12, 2009, pursuant to which the Series B Investors will exchange all of their
shares of Series B preferred stock for newly issued shares of Highbury common
stock immediately prior to the effective time of the Merger.




In
connection with the signing of the Merger Agreement, Highbury, Aston and the
Series B Investors also entered into a termination agreement, dated as of
December 12, 2009, pursuant to which the First Exchange Agreement, the Second
Exchange Agreement, the Amended and Restated Investor Rights Agreement and the
Management Agreement will each terminate effective immediately prior to the
effective time of the Merger.




In
addition, in connection with the signing of the Merger Agreement, Highbury,
AMG, Merger Sub and certain members of the Aston management team, including
Stuart D. Bilton and Kenneth C. Anderson, who are both members of the board of
directors of Highbury, entered into an Amended and Restated Limited Partnership
Agreement, or the “LP Agreement,” to be effective immediately prior to the
effective time of the Merger.  Pursuant to the terms of the LP
Agreement, immediately prior to the effective time of the Merger, Aston will be
converted into a limited partnership under the Delaware Revised Uniform Limited
Partnership Act and the Delaware Limited Liability Company Act and will operate
under the LP Agreement with Merger Sub as the general partner and the Aston
management employees as limited partners. Under the LP Agreement, 67% of Aston's
revenues will be allocated for use by Aston management to pay the operating
expenses of Aston, including salaries and bonuses. The remaining 33% of the
revenues of Aston will be allocated to the owners of Aston. Of the 33% of the
revenues allocated to the owners of Aston, 28% of Aston revenues is first
allocated to AMG through Merger Sub and, second, to the extent available, the
remaining 5% of Aston revenues is allocated among the management limited
partners as a group, including 1.7% of Aston revenue to Mr. Bilton and 1.3% of
Aston revenue to Mr. Anderson.


4


As of
December 31, 2009, Aston managed approximately $6.7 billion in total assets,
including mutual fund and separate account assets under management. Aston
provides investment advisory services to the Aston funds. As of December 31,
2009, the Aston funds were comprised of 25 no-load mutual funds, including 24
equity funds and one fixed income fund, with approximately $6.5 billion in
mutual fund assets under management. The Aston funds account for approximately
97% of Aston's assets under management.  The open-architecture
platform utilized 16 different entities to manage the funds, as of December 31,
2009.  Aston also advises approximately $192 million of assets under
management in separate accounts as of December 31, 2009. In managing historical
growth and planning for future growth, Aston is guided by the below business
strategies.




Maintain
and Improve Investment Performance




Aston has
a long-term record of achieving competitive, risk-adjusted returns on the mutual
funds managed by its sub-advisers based on ratings from Morningstar RatingsTM. As of
December 31, 2009, 12 of the mutual funds carried at least a three-star rating
from Morningstar RatingsTM,
including seven four-star funds and one five-star fund. These ratings are based
on past performance, which may not be predictive of future results. Aston’s key
strategy is to maintain and improve its investment performance by actively
monitoring its sub-advisers to ensure consistent application of the specifically
mandated investment philosophy and process while the sub-advisers actively
manage Aston’s portfolios to achieve distinct balances of risk and reward. In
terms of improving performance, Aston seeks to partner with additional
investment managers with proven track records as well as provide additional
support to its current sub-advisers in order to improve the sub-advisers’
ability to generate competitive returns while maintaining acceptable levels of
risk for clients.




Morningstar
RatingsTMare a standard performance measure used in the mutual fund industry to
evaluate the relative performance of similar mutual funds. Aston believes that
many investors rely heavily on Morningstar RatingsTMto
select mutual funds in which to invest. As a result, Aston regularly uses
Morningstar RatingsTMto
evaluate the relative performance of its mutual funds. For each fund with at
least a three-year history, Morningstar calculates a Morningstar RatingTMbased
on a Morningstar risk-adjusted return measure that accounts for variation in a
fund’s monthly performance (including the effects of sales charges, loads and
redemption fees), placing more emphasis on downward variations and rewarding
consistent performance. The top 10% of funds in each category receive five
stars, the next 22.5% receive four stars, the next 35% receive three stars, the
next 22.5% receive two stars and the bottom 10% receive one star. (Each share
class is counted as a fraction of one fund within this scale and rated
separately, which may cause slight variations in the distribution percentages.)
The overall Morningstar RatingTMfor a
fund is derived from a weighted average of the performance figures associated
with its 3-, 5- and 10-year (if applicable) Morningstar RatingTMmetrics.




Selectively
Expand Aston's Investment Strategies




Since the
introduction of its first equity funds in 1993, Aston has expanded its product
offerings to include multiple strategies within the equity and fixed income
asset classes. Historically, Aston has entered into sub-advisory agreements with
qualified sub-advisers to create new products in response to demand in the
market. Aston intends to continue to expand selectively its investment
strategies where it believes the application of its core competencies and
process can produce attractive risk-adjusted returns. Aston believes that by
doing so it can enhance its ability to increase assets under management as well
as augment and further diversify its sources of revenue.


5


Selectively
Expand Aston's Products and Distribution Relationships




Aston
strives to develop investment products and distribution channels that best
deliver its strategies to clients of the Aston funds. It seeks continued
opportunities to expand its investment products and relationships for the
delivery of these products. The combination of capacity and established
investment performance track records creates potential to drive future growth.
For example, Aston's client relationship management team continuously identifies
sources of demand for the funds working closely with a broad network of
consultants and financial planners and providing information regarding Aston's
investment strategies and performance. Aston also continuously expands existing
relationships and initiates new relationships within a variety of channels for
mutual funds, including 401(k) platforms, fund supermarkets, broker dealers and
financial planners. These third party distribution resources support a variety
of defined contribution plans and independent financial advisers with demand for
the quality institutional investment styles of Aston.




Aston's
sales force includes 17 sales and client service professionals as of December
31, 2009, which provide Aston with national distribution for new and existing
products. Aston's status as an independent, open-architecture platform enables
it to incubate new products with a variety of investment management firms,
regardless of their affiliations. Open-architecture refers to an investment
platform that can distribute investment products that are advised or sub-advised
by other firms. Aston’s flexibility allows it to establish additional mutual
funds and new product lines with a broad range of existing and new
sub-advisers.




Aston is
currently evaluating additional business lines that may offer opportunities for
growth. Between November 30, 2006 and December 31, 2009, Aston created 15 new
funds. These funds are included in the table set forth below in the section
entitled “Fees and Revenues.” Over the same period, Aston closed or merged nine
mutual funds as a result of poor investment performance, portfolio manager
turnover or other reasons. Aston intends to manage its family of mutual funds in
response to client demands and may open new funds or close existing funds over
time, as appropriate. Aston intends to develop a full suite of open-end
investment products in order to offer clients a diversified portfolio of
investment options.




Mutual
Fund Assets Under Management




The
following chart displays the amount, since inception, of Aston’s mutual fund
assets under management (in billions) as of December 31 for each calendar year.
The chart does not include Aston’s separate account assets under
management.







6


Fees
and Revenues




Aston
generates revenue by charging mutual funds an advisory fee and an administrative
fee based on a percentage of invested assets. A portion of the fees are paid to
the sub-advisers, to a third-party sub-administrator and to third-party
distribution partners. Each fund typically bears all expenses associated with
its operation and the issuance and redemption of its securities. In particular,
each fund pays investment advisory fees (to Aston), shareholder servicing fees
and expenses, fund accounting fees and expenses, transfer agent fees, custodian
fees and expenses, legal and auditing fees, expenses of preparing, printing and
mailing prospectuses and shareholder reports, registration fees and expenses,
proxy and annual meeting expenses and independent trustee fees and expenses.
Aston has agreed with newly organized funds that their expenses will not exceed
a specified percentage of their net assets during an initial operating period.
Aston absorbs all advisory fees and other mutual fund expenses in excess of
these self-imposed limits in the form of expense reimbursements or fee waivers
and collects as revenue the advisory fee less reimbursements and waivers. As of
December 31, 2009, Aston was reimbursing 18 mutual funds whose expenses
exceed the applicable expense cap. The Aston/Montag & Caldwell Growth Fund,
the Aston/Optimum Mid Cap Fund and the Aston/TAMRO Small Cap Fund accounted for
approximately 38%, 17% and 15%, respectively, of the revenues of Aston in the
month of December 2009. The following table sets forth the inception date,
assets under management, Morningstar category, overall Morningstar RatingTM and the
expense reimbursement status for each mutual fund managed as of December 31,
2009. These ratings are based on past performance, which may not be predictive
of future results.




Fund
                
                Inception
                
                Assets Under
                    Management
                    (in millions)
                
                Morningstar
                    Category
                
                Morningstar
                    RatingTM
                
                Currently in
                    Reimbursement?Equity
      Funds:Aston/Montag
      & Caldwell Growth
                
                1994
                
                $
                2,721
                
                Large
      Growth
                
                
                *****
                
                NoAston/Optimum
      Mid Cap
                
                1994
                
                
                1,219
                
                Mid-Cap
      Blend
                
                
                ****
                
                NoAston/TAMRO
      Small Cap
                
                2000
                
                
                846
                
                Small
      Blend
                
                
                ****
                
                NoAston/River
      Road Small Cap Value
                
                2005
                
                
                510
                
                Small
      Value
                
                
                ***
                
                NoAston
      Value
                
                1993
                
                
                240
                
                Large
      Value
                
                
                ****
                
                YesAston/River
      Road Small-Mid Cap
                
                2007
                
                
                225
                
                Small
      Value
                
                
                –
                
                NoAston/River
      Road Dividend All Cap
                
                2005
                
                
                184
                
                Mid-Cap
      Value
                
                
                ****
                
                NoAston/Veredus
      Select Growth
                
                2001
                
                
                96
                
                Large
      Growth
                
                
                ***
                
                YesAston
      Growth
                
                1993
                
                
                80
                
                Large
      Growth
                
                
                ***
                
                YesAston/Veredus
      Aggressive Growth
                
                1998
                
                
                55
                
                Small
      Growth
                
                
                **
                
                YesAston
      Dynamic Allocation
                
                2008
                
                
                50
                
                Conservative
      Allocation
                
                
                –
                
                YesAston/Barings
      International
                
                2007
                
                
                38
                
                Foreign
      Large Blend
                
                
                –
                
                YesAston/M.D.
      Sass Enhanced Equity
                
                2008
                
                
                31
                
                Large
      Blend
                
                
                –
                
                YesAston/Fortis
      Real Estate
                
                1997
                
                
                29
                
                Real
      Estate
                
                
                **
                
                YesAston/New
      Century Absolute Return ETF
                
                2008
                
                
                18
                
                Moderate
      Allocation
                
                
                –
                
                YesAston
      Balanced
                
                1995
                
                
                17
                
                Moderate
      Allocation
                
                
                ***
                
                NoAston/Montag
      & Caldwell Balanced
                
                1994
                
                
                16
                
                Moderate
      Allocation
                
                
                ****
                
                YesAston/TAMRO
      Diversified Equity
                
                2000
                
                
                11
                
                Large
      Growth
                
                
                ****
                
                YesAston/Lake
      Partners LASSO Alternatives
                
                2009
                
                
                6
                
                Long-Short
                
                
                –
                
                YesAston/Optimum
      Large Cap Opportunity
                
                2006
                
                
                5
                
                Large
      Growth
                
                
                **
                
                Yes


7




Fund
                    
                    Inception
                    
                    Assets Under
                        Management
                        (in millions)
                    
                    Morningstar
                        Category
                    
                    Morningstar
                        RatingTM
                    
                    Currently in
                        Reimbursement?Aston/Montag
      & Caldwell Mid Cap Growth
                    
                    2007
                    
                    
                    3
                    
                    Mid-Cap
      Growth
                    
                    
                    –
                    
                    YesAston/Neptune
      International
                    
                    2007
                    
                    
                    2
                    
                    Foreign
      Large Growth
                    
                    
                    –
                    
                    YesAston/Fasciano
      Small Cap
                    
                    2009
                    
                    
                    1
                    
                    Small
      Cap Blend
                    
                    
                    –
                    
                    YesAston/Cardinal
      Mid Cap Value
                    
                    2007
                    
                    
                    1
                    
                    Mid-Cap
      Blend
                    
                    
                    –
                    
                    YesTotal
      Equity Funds
                    
                    
                    
                    
                    6,404Fixed
      Income Funds:Aston/TCH
      Fixed
                      Income
                    
                    1993
                    
                    
                    64
                    
                    Intermediate-Term
      Bond
                    
                    
                    ****
                    
                    YesTotal
      Fixed Income Funds
                    
                    
                    
                    
                    64Total
      Funds
                    
                    
                    
                    $
                    6,468




Distribution




Each of
the Aston funds has a distinct investment objective that has been developed to
provide a broad, comprehensive selection of investment opportunities. This
strategy gives Aston access to many possible customers and distribution
channels. Aston distributes the Aston funds to individuals and institutions.
While institutions may invest directly through Aston, individuals generally
purchase shares through retail financial intermediaries. All Aston funds are
sold exclusively on a no-load basis, i.e., without a sales commission. No-load
mutual funds offer investors a low-cost and relatively easy method of investing
in a variety of stock and bond portfolios. Aston's "N" class of fund shares is
sold through financial intermediaries. Those "N" class shares incur an
additional annual expense equal to 0.25% of the fund's assets under management
which is payable to the financial intermediaries for distribution and
recordkeeping. The institutional "I" class of fund shares, however, bears no
such fee.




Aston
pays all of the advertising and promotion expenses for the Aston funds and
receives reimbursement from the Aston funds pursuant to a 12b-1 plan. This
reimbursement mitigates, but does not completely offset, the advertising and
promotional expenses. These expenses include advertising and direct mail
communications to potential fund stockholders as well as a substantial staff and
communications capability to respond to investor inquiries. Marketing efforts
have traditionally been focused on fee-based intermediaries, including due
diligence teams, brokers, advisers, financial planners and consultants. However,
the independent registered advisory channel as well as the 401(k) channel are
also a specific focus. Aston has a significant focus on marketing efforts
directed toward participant-directed defined contribution plans such as 401(k)
plans that invest in mutual funds. Advertising and promotion expenditures vary
over time based on investor interest, market conditions, new investment
offerings and the development and expansion of new marketing
initiatives.




Technology
and Intellectual Property




The
day-to-day mutual fund technology requirements of Aston are outsourced to PNC
Global Investment Servicing Inc., including fund accounting, sub-administration,
custody and transfer agency functions. Sub-administration is the provision of
services related to the administration of a mutual fund on an out-sourced basis.
Aston also utilizes a web based CRM system, which maintains contact information
of both clients and prospects and is hosted by interlink ONE, Inc. Aston's
website is hosted by Sysys Corporation.


8


Competition




We face
substantial competition in every aspect of our business. Competitive factors
affecting Aston’s business include brand recognition, business reputation,
investment performance, quality of service and the continuity of client
relationships. Fee competition also affects the business, as does compensation,
administration, commissions and other expenses paid to
intermediaries.




Performance
and price are the principal methods of competition for Aston. Prospective
clients and mutual fund stockholders will typically base their investment
decisions on a fund’s ability to generate returns that exceed a market or
benchmark index, i.e. its performance, and on its fees, i.e. its price.
Individual mutual fund investors may also base their investment decisions on the
ability to access the mutual funds Aston manages through a particular
distribution channel. Institutional clients are often advised by consultants who
may include other factors in their decisions for these clients.




We
compete with a large number of global and U.S. investment advisers, commercial
banks, brokerage firms and broker-dealers, insurance companies and other
financial institutions. We are considered a small to mid-sized investment
advisory firm. Many competing firms are parts of larger financial services
companies and attract business through numerous means including retail bank
offices, investment banking and underwriting contacts, insurance agencies and
broker-dealers. U.S. banks and insurance companies have entered into
affiliations with securities firms which has accelerated consolidation within
the investment advisory and financial services businesses. It has also increased
the variety of competition for traditional investment advisory firms with
businesses limited to investing assets on behalf of institutional and individual
clients. Foreign banks and investment firms have also entered the U.S.
investment advisory business, either directly or through partnerships or
acquisitions. A number of factors serve to increase our competitive risks,
including:




·
            some
      of our competitors have greater capital and other resources, and offer
      more comprehensive product and service lines than
  Aston;




·
            consolidation
      within the investment management industry, and the securities industry in
      general, has served to increase the size and strength of a number of our
      competitors;




·
            there
      are relatively few barriers to entry by new investment management firms,
      and the successful efforts of new entrants, including major banks,
      insurance companies and other financial institutions, have resulted in
      increased competition; and




·
            other
      industry participants will from time to time seek to recruit Aston’s
      employees away from Aston.




These
factors and others could place Highbury and/or Aston at a competitive
disadvantage. This could reduce Aston’s revenues and earnings and, as a result,
materially adversely affect our business. If the Aston funds have poor
investment performance relative to their peers, they could lose existing clients
and may be unable to attract new clients. Aston cannot be sure its strategies
and efforts to maintain its existing assets and attract new business will be
successful.




In order
to grow the business, we must be able to compete effectively for assets under
management. Specifically, Aston competes principally on the basis
of:




·
            investment
      performance;




·
            quality
      of service provided to clients;




·
            brand
      recognition and business
reputation;


9


·
            continuity
      of client relationships and of assets under
  management;




·
            continuity
      of its selling arrangements with
intermediaries;




·
            continuity
      of advisory or sub-advisory agreements with excellent
      managers;




·
            the
      range of products offered;




·
            level
      of fees and commissions charged for services;
  and




·
            level
      of expenses paid to financial intermediaries related to administration
      and/or distribution.




Historically,
Aston has succeeded in growing aggregate assets under management by focusing on
investment performance and client service and by developing new products and new
distribution capabilities. In 2009, Aston generated overall net asset inflows
(excluding market value and other changes) as a result of strong relative
investment performance in existing mutual funds and the creation of several new
mutual funds.




Employees




As of
December 31, 2009, Aston had 37 full-time employees, including six in senior
management and administration, six in marketing and communications, 17 in sales
and sales management and eight in operations and compliance.




Highbury
employs three executive officers, two of whom are also members of its board of
directors. These individuals are not obligated to devote any specific number of
hours to Highbury’s matters and intend to devote only as much time as they deem
necessary to its affairs.




Regulation




Virtually
all aspects of the business of Highbury and Aston are subject to extensive
regulation in the U.S. at both the federal and state level. These laws and
regulations are primarily intended to protect investment advisory clients and
shareholders of registered investment companies. Under these laws and
regulations, agencies that regulate investment advisers have broad
administrative powers, including the power to limit, restrict or prohibit an
investment adviser from carrying on its business in the event that it fails to
comply with such laws and regulations. Possible sanctions that may be imposed
include the suspension of individual employees, limitations on engaging in
certain lines of business for specified periods of time, revocation of
investment adviser and other registrations, censures and fines.




Aston is
registered as an investment adviser with the SEC. As a registered investment
adviser, it is subject to the requirements of the Investment Advisers Act of
1940, as amended, or the “Advisers Act,” and the SEC's regulations thereunder,
as well as to examination by the SEC’s staff. The Advisers Act imposes
substantive regulation on virtually all aspects of Aston’s advisory business and
its relationship with its clients. Applicable requirements relate to, among
other things, fiduciary duties to clients, engaging in transactions with
clients, maintaining an effective compliance program, performance fees,
solicitation arrangements, conflicts of interest, advertising, and
recordkeeping, reporting and disclosure requirements. The Aston funds are
registered with the SEC under the Investment Company Act of 1940, as amended, or
the “Investment Company Act.” The Investment Company Act imposes additional
obligations, including detailed operational requirements on both the funds and
their advisers. Moreover, an investment adviser’s contract with a registered
fund may be terminated by the fund on not more than 60 days’ notice, and is
subject to annual renewal by the fund’s board of trustees after an initial term
of up to two years. The SEC is authorized to institute proceedings and impose
sanctions for violations of the Advisers Act and the Investment Company Act,
ranging from fines and censures to termination of an investment adviser’s
registration. The failure of Aston or registered funds advised by Aston to
comply with the requirements of the SEC could have a material adverse effect on
us. Under the rules and regulations of the SEC promulgated pursuant to the
federal securities laws, Aston is subject to periodic examination by the
SEC.




10


The SEC
has adopted rules requiring every registered fund to adopt and implement written
policies and procedures designed to detect and prevent violations of federal
securities law, to review these policies annually for adequacy and
effectiveness, and to designate a chief compliance officer reporting directly to
the fund’s board of directors or trustees. Registered investment advisers must
also adopt a written compliance program to ensure compliance with the Advisers
Act and appoint a chief compliance officer. Some of the SEC’s compliance rules,
as well as other disclosure requirements that have been adopted over the past
few years, are intended to deal with abuses in areas of late trading and market
timing of mutual funds. These rules require additional and more explicit
disclosure of market timing policies and procedures, as well as that funds have
formal procedures in place to comply with their representations regarding market
timing policies.




We are
subject to the Employee Retirement Income Security Act of 1974, as amended, or
ERISA, and to regulations promulgated thereunder, insofar as Aston is a
“fiduciary” under ERISA with respect to benefit plan clients. ERISA and
applicable provisions of the Internal Revenue Code, impose certain duties on
persons who are fiduciaries under ERISA, prohibit certain transactions involving
ERISA plan clients and provide monetary penalties for violations of these
prohibitions. Failure to comply with these requirements could have a material
adverse effect on our business.




Available
Information




Highbury
makes available, free of charge on its website, its Annual Report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to
those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Exchange Act as soon as reasonably practicable after Highbury electronically
files such material with, or furnishes it to, the SEC. Reports may be viewed and
obtained on our website, www.highburyfinancial.com.




The
public may read and copy any materials we file with the SEC at the SEC’s Public
Reference Room at 100 F Street, NE., Washington, DC 20549. Information on the
operation of the Public Reference Room may be obtained by calling the SEC at
1-800-SEC-0330. The SEC also maintains an Internet site that contains reports,
proxies and information statements, and other information regarding issuers that
file electronically with the SEC at www.sec.gov.




ITEM
      1A.
            RISK
      FACTORS




In
addition to the other information included in this Annual Report on Form 10-K,
including the matters addressed in the section entitled “Cautionary Statement
Regarding Forward-Looking Statements” you should carefully consider the
following risks before deciding whether to invest in Highbury’s common
stock.  If any of the following risks occur, our business, financial
condition and results of operations may be materially adversely
affected.




Risk
Factors Relating to the Merger




Highbury
and its stockholders are exposed to several risks related to the proposed Merger
between Highbury and AMG.




There are
a number of risks related to the proposed Merger between Highbury and
AMG.  Such risks include the following:




·
            Fluctuations in the market price
      or changes in the number of outstanding shares of AMG or Highbury common
      stock may affect the value that Highbury stockholders will receive upon
      completion of the Merger.  Such market value could vary
      significantly from the market value of shares of AMG common stock on the
      date of this Annual Report on Form 10-K or on the date of Highbury’s
      special meeting to approve the
Merger.


11


·
            The number of shares of AMG
      common stock that Highbury stockholders will be entitled to receive will
      not be adjusted in the event of any increase or decrease in the share
      price of either AMG common stock or Highbury common
      stock.


·
            The
      Merger Agreement limits Highbury’s ability to pursue alternatives to the
      Merger.


·
            Failure to complete the Merger
      could negatively impact the stock price and the future business and
      financial results of
Highbury.


·
            If the Merger is not consummated,
      Highbury will be unable to recover the time and resources expended in
      pursuit of the Merger, including the cost of any termination fee payable
      to AMG.


·
            The Merger may not be consummated
      if either Highbury or AMG do not fulfill their closing conditions,
      including Highbury’s obligation to obtain stockholder approval of the
      Merger.


·
            The announcement and pendency of
      the Merger could have an adverse effect on Highbury’s stock price,
      business, financial condition, results of operations or business
      prospects.


·
            Certain directors and executive
      officers of Highbury have interests in the Merger that may be different
      from, or in addition to, the interests of Highbury
      stockholders.


·
            The market price of AMG common
      stock after the Merger may be affected by factors different from those
      currently affecting the shares of common stock of
      Highbury.


·
            Uncertainties
      associated with the Merger or with AMG as a new owner may cause Aston’s
      clients to delay or defer decisions concerning their use of Aston’s
      services or may cause Aston’s clients to withdraw assets currently under
      management by Aston.


·
            Uncertainties
      associated with the Merger may cause Aston to lose key
      employees.





These
risks could result in the Merger not being consummated or failing to achieve its
desired objectives.





If
an insufficient number of votes is obtained at the special meeting to approve
the Merger and the adjournment proposal is not approved, Highbury’s board of
directors will not have the ability to adjourn the special meeting of Highbury
stockholders to a later date in order to solicit further votes, and, therefore,
the Merger will not be approved.




Our board
of directors is seeking approval to adjourn the special meeting of Highbury
stockholders to a later date or dates if, at the special meeting of Highbury
stockholders, based upon the tabulated votes, there are insufficient votes to
approve the Merger.  If the adjournment proposal is not approved,
Highbury’s board of directors will not have the ability to adjourn the special
meeting of Highbury stockholders to a later date and, therefore, will not have
more time to solicit additional votes to approve the Merger.




Risks
Related to the Financial Services Industry and Aston




The
investment advisory fees Aston receives may decrease in a market or general
economic downturn, which would decrease its revenues and net
income.




Because
Aston is engaged in the investment advisory business, its net income and
revenues are likely to be subject to wide fluctuations, reflecting the effect of
many factors on its assets under management, including: general economic
conditions; securities market conditions; the level and volatility of interest
rates and equity prices; competitive conditions; liquidity of global markets;
international and regional political conditions; regulatory and legislative
developments; monetary and fiscal policy; investor sentiment and client
retention; availability and cost of capital; technological changes and events;
outcome of legal proceedings; changes in currency values; inflation; credit
ratings; and the size, volume and timing of transactions. These and other
factors subject Aston to an increased risk of asset volatility.


12


Substantially
all of Highbury’s revenues are determined by the amount of assets under Aston’s
management. Under Aston’s investment advisory contracts with the Aston funds,
the investment advisory fee is typically based on the market value of assets
under management. In addition, Aston receives asset-based distribution or
service fees with respect to the Aston funds pursuant to distribution plans
adopted under provisions of Rule 12b-1 of the Investment Company
Act.  Accordingly, a continued decline in the prices of securities,
due to a market or general economic downturn or otherwise, may cause Highbury’s
revenue and income to decline by:




·
            causing
      the value of the assets under Aston's management to decrease, which would
      result in lower investment advisory fees and Rule 12b-1 fees;
      or




·
            causing
      some of Aston's clients to withdraw funds from its investment management
      business (a) to satisfy their cash requirements resulting from, among
      other factors, a decline in the value of other assets they hold or
      unemployment or (b) in favor of investments or investment styles they
      perceive as offering greater opportunity and/or lower risk, which in each
      case would result in lower investment advisory
  fees.




A decline
in Aston’s assets under management, including due to any of the reasons stated
above, may have a material adverse effect on its results of operations and
financial condition and on Highbury’s revenues.  Additionally, under
the Merger Agreement, a decline in the advisory fees on Aston’s assets under
management may impact the ability to consummate the Merger.  Under the
Merger Agreement if the “revenue run rate” (which generally means annualized
advisory fees on assets under management, excluding separate account referral
fees, interest income, certain money market administration fees and certain
excluded accounts) of Aston as of the end of the calendar month prior to the
closing of the Merger attributable to clients who consent to continuing their
advisory agreements following the Merger is less than 90% of the revenue run
rate as of November 30, 2009 (without giving effect to market movement
between those two dates), then the aggregate merger consideration payable to
Highbury stockholders will be reduced by 1% for each 1% by which the revenue run
rate as of such date is less than 90% of the revenue run rate as of
November 30, 2009.  If the revenue run rate is lower than 80% of
the November 30, 2009 revenue run rate (without giving effect to market
movement between those two dates), then neither party is required to close the
Merger.  Furthermore, if the revenue run rate is lower than 82.5% of
the November 30, 2009 revenue run rate (after giving effect to market
movement between those two dates), then neither party is required to close the
Merger.




The
financial services industry is highly regulated and Highbury may experience
reduced revenues and profitability if its or Aston’s services are not regarded
as compliant with the regulatory regime.




The
financial services industry is subject to extensive regulation. Many regulators,
including U.S. government agencies and self-regulatory organizations, as well as
state securities commissions and attorneys general, are empowered to conduct
administrative proceedings and investigations that can result in, among other
things, censure, fine, the issuance of cease-and-desist orders, prohibitions
against engaging in some lines of business or the suspension or expulsion of an
investment adviser. The requirements imposed by regulators are designed to
ensure the integrity of the financial markets and not to protect Highbury
stockholders.




Governmental
and self-regulatory organizations, including the SEC, the Financial Industry
Regulatory Authority, or FINRA, and national securities exchanges, impose and
enforce regulations on financial services companies. The types of regulations to
which investment advisers and managers are subject are extensive and include,
among other things: recordkeeping, fee arrangements, client disclosure, custody
of customer assets, and the conduct of officers and employees.




The
regulatory environment in which we operate is also subject to modifications and
further regulations. Numerous bills have been introduced in Congress that, if
enacted, could change the regulatory framework for the financial services
industry in significant ways. New laws or regulations or changes in the
enforcement of existing laws or regulations applicable to us, including any
changes stemming from the ongoing global credit crisis, may adversely affect our
business, and our ability to function in this environment depends on our ability
to constantly monitor and react to these changes.


13


We
may face legal liability that may result in reduced revenues and
profitability.




In recent
years, the volume of claims and amount of damages claimed in litigation and
regulatory proceedings against financial services firms has been increasing.
Aston’s investment advisory contracts include provisions designed to limit
Aston’s exposure to legal claims relating to services, but these provisions may
not protect Aston or may not be adhered to in all cases. The risk of significant
legal liability is often difficult to assess or quantify and its existence and
magnitude often remain unknown for substantial periods of time. As a result,
Highbury or Aston may incur significant legal expenses in defending against
litigation. Substantial legal liability or significant regulatory action against
Highbury or Aston could materially adversely affect our business, financial
condition or results of operations or cause significant harm to our reputation,
which could seriously harm our business.




There
have been a number of highly publicized cases involving fraud or other
misconduct by employees in the financial services industry in recent years, and
we run the risk that employee misconduct could occur. It is not always possible
to deter or prevent employee misconduct and the precautions we take to prevent
and detect this activity may not be effective in all cases.




We
face strong competition from financial services firms, many of whom have the
ability to offer clients a wider range of products and services than we offer,
which could lead to pricing pressures that could have a material adverse affect
on our revenue and profitability.




We
compete with other firms—both domestic and foreign—in a number of areas,
including investment performance, the quality of its employees, transaction
execution, products and services, innovation, reputation and price. We also face
significant competition as a result of a recent trend toward consolidation in
the investment management industry. In the past several years, there has been
substantial consolidation and convergence among companies in this industry. In
particular, a number of large commercial banks, insurance companies and other
broad-based financial services firms have established or acquired broker-dealers
or have merged with other financial institutions. Many of these firms have the
ability to offer a wide range of products such as loans, deposit-taking,
insurance, brokerage, investment management and investment banking services,
which may enhance their competitive positions. They also have the ability to
support investment management activity with commercial banking, investment
banking, insurance and other financial services revenue in an effort to gain
market share, which could result in pricing pressure on our business. We
believe, in light of increasing industry consolidation, that competition will
continue to increase from providers of financial services products. We may fail
to attract new business and may lose clients if, among other reasons, it is not
able to compete effectively.




Aston’s
investment advisory contracts are subject to termination by clients on short
notice. Termination of a significant number of investment advisory contracts
will have a material impact on our results of operations.




Aston
derives almost all of its revenue from investment advisory contracts with the
Aston funds. These contracts are terminable by the fund trustees without penalty
upon relatively short notice (generally not longer than 60 days). Aston cannot
be certain that it will be able to retain the Aston funds as clients. Because
all of the Aston funds have the same trustees, it is possible that all of the
contracts with them could be terminated simultaneously. If the trustees of the
Aston funds terminate Aston's investment advisory contracts we would lose
substantially all of our revenues.




If
Aston is forced to compete on the basis of price, it may not be able to maintain
its current fee structure.




The
investment management business is highly competitive and has relatively low
barriers to entry. If Aston is forced to compete on the basis of price, it may
not be able to maintain its current fee structure. Although Aston’s investment
management fees vary from product to product, historically the acquired business
competed more on the performance of its products than the level of its
investment management fees relative to those of its competitors. In recent
years, however, there has been a trend toward lower fees in the investment
management industry. In order to maintain its fee structure in a competitive
environment, Aston must be able to continue to provide clients with investment
returns and services that make investors willing to pay its fees. In addition,
the board of trustees of the Aston funds must make certain findings as to the
reasonableness of these fees. We cannot be certain that Aston will succeed in
providing investment returns and service that will allow it to maintain its
current fee structure. Fee reductions on existing or future new business could
have an adverse effect on our profit margins and results of
operations.


14


Termination
of Aston’s sub-advisory contracts could have a material adverse impact on the
Aston funds’ performance, and consequently, on our revenues and operating
results.




As of
December 31, 2009, Aston managed 25 mutual funds, comprised of 24 equity funds
and one fixed income fund, with approximately $6.5 billion of total mutual fund
assets under management. As of December 31, 2009, Aston utilized 16 different
entities to manage the funds, of which five were current or former affiliates of
ABN AMRO and 11 were independent. The sub-advisory contracts with ABN AMRO’s
current and former affiliates, which are not terminable by the sub-advisers
until November 30, 2011 pursuant to the asset purchase agreement, include
limited non-compete provisions and certain capacity guarantees in appropriate
products to benefit the acquired business. While these arrangements are intended
to ensure that the investment philosophy and process guiding the mutual funds in
the future are consistent with their historical investment philosophy and
process, there can be no assurances that these arrangements will remain in
place. The sub-advisory agreements with the 11 independent sub-advisors are
terminable by the sub-advisors at any time upon 60 days’ written notice. If one
or more of these sub-advisory contracts is terminated, it could have a material
adverse impact on the Aston funds’ performance and on our revenues and operating
results.




Aston
depends on third-party distribution channels to market its investment products
and access its client base. A substantial reduction in fees from assets under
management generated by third-party intermediaries could have a material adverse
effect on its business.




The
potential investor base for mutual funds and managed accounts is limited, and
Aston’s ability to distribute mutual funds and access clients for managed
accounts is dependent on access to the distribution systems and client bases of
national and regional securities firms, banks, insurance companies, defined
contribution plan administrators and other intermediaries, which generally offer
competing internally and externally managed investment products. For open-end
funds, such intermediaries are paid for their services to fund stockholders, in
part, through Rule 12b-1 fees. Rule 12b-1 fees are amounts designated by fund
boards for promotions, sales, and certain other activities connected with the
distribution of the fund's shares. Access to such distribution systems and
client bases is substantially dependent upon Aston's ability to receive Rule
12b-1 fees from Aston’s funds. If regulatory initiatives prohibit or limit the
imposition of Rule 12b-1 or similar fees, Aston's access to these distribution
systems and client bases may be foreclosed in the future. To a lesser extent,
the managed account business depends on referrals from financial planners and
other professional advisers, as well as from existing clients. We cannot ensure
that these channels and client bases will continue to be accessible to Aston.
The inability to have such access could have a material adverse effect on our
earnings.




A
significant portion of Aston's assets under management in recent years has been
accessed through intermediaries. As of December 31, 2009, substantially all of
the assets under management of Aston were attributable to accounts that it
accessed through third-party intermediaries. These intermediaries generally may
terminate their relationships on short notice. Loss of any of the distribution
channels afforded by these intermediaries, and the inability to access clients
through new distribution channels, could decrease assets under management and
adversely affect Aston’s results of operations and growth. If any of these
intermediaries were to cause their customers to withdraw all or a significant
portion of these assets, our revenue could decrease materially.


15


A
change of control of Highbury would automatically terminate Aston’s investment
management agreements and replacement agreements require approvals of clients,
their boards and, in some cases, their stockholders.




Under the
Investment Company Act, an investment management agreement with a fund must
provide for its automatic termination in the event of its assignment. Under the
Advisers Act, a client’s investment management agreement may not be “assigned”
by the investment adviser without the client’s consent. An investment management
agreement is considered under both acts to be assigned to another party when a
controlling block of the adviser’s securities is transferred. We cannot be
certain that clients, their boards and their stockholders will approve new
agreements, or grant consent, in connection with the Merger.  However,
in connection with the Merger, the sub-advisors to certain Aston funds,
Aston/Montag & Caldwell Growth Fund, the Aston/Optimum Mid Cap Fund,
Aston/River Road Small Cap Value Fund and the Aston/TAMRO Small Cap Fund, have
confirmed their willingness to renew their investment advisory contracts
effective at the close of the Merger. The sub-advisors for these funds agreed to
renew their sub-advisory agreements on substantially the same terms, but
individual funds have not entered (and cannot enter) into any such arrangement.
We cannot be certain that we will be able to retain all of the Aston funds as
clients after the Merger.




Investors
in open-end funds can redeem their investments in these funds at any time
without prior notice, which could adversely affect our earnings.




Open-end
fund investors may redeem their investments in those funds at any time without
prior notice. Investors may reduce the aggregate amount of assets under
management for any number of reasons, including, particularly in the current
economic environment, to meet cash requirements, investment performance, changes
in prevailing interest rates and financial market performance. Poor performance
relative to other asset management firms tends to result in decreased purchases
of mutual fund shares and increased redemptions of mutual fund shares. The pace
of mutual fund redemptions may accelerate in a declining stock market. The
redemption of investments in mutual funds managed by Aston would adversely
affect our revenues, which are substantially dependent upon the assets under
management in Aston’s funds. If Aston experiences net redemptions of investments
in the Aston funds, it would cause our revenues to decline, which could have a
material adverse effect on our earnings.




Changes
in investors' preference of investing styles could lead to a decline in our
revenues and earnings.




A decline
in the investment performance of one or more of the Aston funds, due to market
conditions or otherwise, may cause investors to redeem their shares in the
funds. While the revenues of Aston are derived from numerous investment styles,
the large capitalization growth style of investing accounts for approximately
45% of assets under management as of December 31, 2009. Large capitalization
growth style implies a restriction imposed on the portfolio manager to select
for investment by the fund predominantly equity securities of companies that
have an average market capitalization of more than $10 billion and companies
whose earnings are expected to grow at a rate that is above average for their
industries or the overall market. If investor preferences were to turn away from
the large capitalization growth style, investors may redeem their shares in
these funds.




If a
change in investors' preference of investment styles were to cause our revenues
to decline, it could have a material adverse effect on our
earnings.




Loss
of key employees could lead to the loss of clients, a decline in revenue and
disruptions to our business.




Aston’s
ability to attract and retain personnel is important to its ability to add new
clients and maintain existing clients. The market for senior executives,
qualified wholesalers, compliance professionals, marketing professionals, key
managers at the sub-advisers and other professionals is competitive. Except as
described below, Highbury does not have employment agreements with any of their
executive officers and none of its executive officers is currently subject to a
contractual restriction limiting his ability to compete or to solicit clients or
employees.  Also, Highbury believes its executive officers are
compensated at below market rates in comparison to similarly situated executive
officers in the industry. Such compensation may or may not be sufficient to
retain these executive officers. As a result of these factors, Highbury may have
a greater risk of losing one or more of its executive officers than other firms
whose executive officers are subject to employment or restrictive covenant
agreements or who pay their executive officers at market rates. We may not be
successful in recruiting and retaining the required personnel to maintain or
grow our business. Loss of a significant number of key personnel may lead to the
loss of clients, a decline in revenue and disruptions to our
business.




In
connection with the Merger, Stuart D. Bilton and Kenneth C. Anderson, both
Highbury directors and Aston executives, entered into employment agreements with
Highbury, Aston and Merger Sub, which become effective upon closing of the
Merger. The effectiveness of these employment agreements is a condition to
closing the Merger. Highbury, however, cannot be sure that other Aston
executives will remain in place until or after the consummation of the
Merger.


16


Any
significant limitation or failure of Aston’s software applications and other
technology systems that are critical to its operations could constrain its
operations.




Aston is
highly dependent upon the use of various proprietary and third-party software
applications and other technology systems to operate the business. Aston uses
its technology to, among other things, provide reports and other customer
services to its clients. Any inaccuracies, delays or systems failures in these
and other processes could subject Aston to client dissatisfaction and losses.
Although Aston takes protective measures, its technology systems may be
vulnerable to unauthorized access, computer viruses or other events that have a
security impact, such as an authorized employee or vendor inadvertently causing
Aston to release confidential information, which could materially damage Aston's
operations or cause the disclosure or modification of sensitive or confidential
information. Moreover, loss of confidential customer identification information
could cause harm to our reputation.




Aston
relies heavily on software and technology that are licensed from, and supported,
upgraded and maintained by, third-party vendors. The day-to-day mutual fund
technology requirements of Aston are outsourced to PNC Global Investment
Servicing Inc., including fund accounting, sub-administration and transfer
agency functions. Although Aston has adopted business continuity procedures, a
suspension or termination of the technology and services provided by PNC Global
Investment Servicing Inc. or certain other licenses or the related support,
upgrades and maintenance could cause temporary system delays or interruption.
Potential system failures or breaches and the cost necessary to correct them
could result in material financial loss, regulatory action, breach of client
contracts, reputational harm or legal claims and liability, which in turn could
negatively impact our revenues and income.




The
loss of any significant client, or adverse developments with respect to the
financial condition of any significant client could reduce our
revenue.




The Aston
funds account for approximately 97% of our assets under management as of
December 31, 2009. Because all of these funds have the same trustees, it is
possible that the contracts with them could be terminated simultaneously. Of
these 25 funds, the Aston/Montag & Caldwell Growth Fund, the Aston/Optimum
Mid Cap Fund and the Aston/TAMRO Small Cap Fund accounted for approximately 38%,
17% and 15%, respectively, of the revenues of Aston in the month of December
2009. These various client concentrations leave us vulnerable to any adverse
change in the financial condition of any of these major clients. The loss of any
of these relationships may have a material adverse impact on
revenues.




Difficult
market conditions may adversely affect our ability to execute our business
model, which could materially reduce revenue and cash flow and adversely affect
our business, results of operations or financial condition.




Our
business is materially affected by conditions in the U.S. and global financial
markets. Economic conditions are outside our control, such as interest rates,
availability of credit, inflation rates, economic uncertainty, changes in laws
(including laws relating to taxation), commodity prices, and political
circumstances (including wars, terrorist acts or security operations). These
factors may affect the level and volatility of securities prices and the
liquidity and value of investments, and we may not be able to or may choose not
to manage our exposure to these market conditions. A general market downturn, or
a specific market dislocation, may result in lower net inflows or net outflows
and lower returns for Aston, which would adversely affect our revenues. The
recent global financial crisis has caused a significant decline in the value and
liquidity of many securities.


17


Risks
Related to the Structure of Highbury’s Business




The
agreed-upon expense allocation under Highbury’s revenue sharing arrangement with
Aston may not be large enough to pay for all of Aston’s operating
expenses.




Pursuant
to the Management Agreement of Aston currently in effect, Highbury receives a
specified percentage of Aston’s gross revenue, and a percentage of revenue is
retained to pay Aston’s operating expenses. The Management Agreement may not
properly anticipate or reflect possible changes in Aston’s revenue and expense
base, and the agreed-upon expense allocation may not be large enough to pay for
all of Aston’s operating expenses. Highbury may elect to defer the receipt of
its share of Aston’s revenue to permit Aston to fund such operating expenses, or
Highbury may restructure its relationship with Aston with the aim of maximizing
the long-term benefits to Highbury. Highbury cannot be certain, however, that
any such deferral or restructured relationship would be of any greater benefit.
Such a deferral or restructured relationship might have an adverse effect on
Highbury’s near-term or long-term profitability and financial
condition.




The
failure to receive regular distributions from Aston will adversely affect
Highbury. In addition, Highbury’s holding company structure results in
substantial structural subordination that may affect its ability to make
payments on its obligations.




Because
Highbury is a holding company, it receives substantially all of its cash flow
from distributions made by Aston. Aston’s payment of distributions to Highbury
may be subject to claims by Aston’s creditors and to limitations applicable to
Aston under federal and state laws, including securities and bankruptcy laws.
Additionally, Aston may default on some or all of the distributions that are
payable to Highbury. As a result, Highbury cannot guarantee it will always
receive these distributions from Aston. The failure to receive the distributions
to which Highbury is entitled would adversely affect Highbury, and may affect
its ability to make payments on its obligations.




Highbury’s
right to receive any assets of Aston upon its liquidation or reorganization, and
thus the right of Highbury stockholders to participate in those assets,
typically would be subordinated to the claims of Aston’s creditors. In addition,
even if Highbury were a creditor of Aston, Highbury’s rights as a creditor would
be subordinated to any security interest and indebtedness of Aston that is
senior to Highbury.




Aston’s
autonomy limits Highbury’s ability to alter Aston’s day-to-day activities, and
Highbury may be held responsible for liabilities Aston incurs.




Highbury
generally is not directly involved in managing Aston’s day-to-day activities,
including satisfaction of the contractual terms of the advisory, sub-advisory
and other contracts, product development, client relationships, compensation
programs and compliance activities. Highbury’s financial condition and results
of operations may be adversely affected by problems stemming from the day-to-day
operations of Aston.




In
addition, Highbury may be held liable in some circumstances as a control person
for the acts of Aston or its employees. For example, if Highbury exercises or
refuses to exercise its approval right as the manager member to settle potential
litigation and does not use due care in exercising this authority or Aston
issues securities in violation of laws, Highbury may be exposed to liability
related to Aston’s actions. Highbury may have to defend claims that exceed the
limits of available insurance coverage. Furthermore, insurers may not remain
solvent, meet their obligations to provide coverage, or coverage may not
continue to be available with sufficient limits and at a reasonable cost. A
judgment against Highbury or Aston in excess of available insurance coverage
could have a material adverse effect on Highbury.


18


Risks
Related to Ownership of Highbury Common Stock




Highbury
securities are quoted on the OTC Bulletin Board, which limits the liquidity and
price of its securities more than if its securities were quoted or listed on a
national securities exchange.




Highbury
securities are traded in the over-the-counter market. They are quoted on the OTC
Bulletin Board, an inter-dealer automated quotation system for equity securities
sponsored and operated by FINRA. Quotation of Highbury's securities on the OTC
Bulletin Board limits the liquidity and price of its securities more than if its
securities were quoted or listed on a national securities exchange. Lack of
liquidity limits the price at which you are able to sell Highbury's securities
or your ability to sell its securities at all.




The
market price for Highbury common stock could be volatile and could decline,
resulting in a substantial or complete loss of your investment.




The stock
markets on which Highbury common stock trades have experienced significant price
and volume fluctuations. As a result, the market price of Highbury common stock
could be similarly volatile and investors in Highbury common stock may
experience a decrease in the value of their shares, including decreases
unrelated to our operating performance. The price of Highbury common stock could
be subject to wide fluctuations in response to a number of factors,
including:




·
            our
      operating performance and the performance of other similar
      companies;




·
            actual
      or anticipated differences in our operating
  results;




·
            changes
      in our revenues or earnings estimates or recommendations by securities
      analysts;




·
            publication
      of research reports about us or our industry by securities
      analysts;




·
            additions
      and departures of key personnel;




·
            speculation
      in the press or investment
community;




·
            fluctuations
      in the price of AMG’s common stock;




·
            the
      market’s perception of the timing and likelihood of the consummation of
      the Merger;




·
            actions
      by institutional or other
stockholders;




·
            changes
      in accounting principles;




·
            terrorist
      acts; and




·
            general
      market conditions, including factors unrelated to our
      performance.




Anti-takeover
defense provisions in Highbury’s charter and by-laws, and Highbury’s rights
agreement, may deter potential acquirers and depress the price of Highbury
common stock.




Because
Highbury is a Delaware corporation, the anti-takeover provisions of the Delaware
General Corporation Law, or the “DGCL,” could make it more difficult for a third
party to acquire control of Highbury, even if the change in control would be
beneficial to stockholders. Highbury is subject to the provisions of Section 203
of the DGCL which prohibits it from engaging in certain business combinations,
unless the business combination is approved in a prescribed manner. In addition,
Highbury’s charter and by-laws contain certain provisions that may make a
third-party acquisition difficult, including (i) its board of directors is
classified, (ii) its board of directors may issue preferred stock with such
voting power, designations, preferences or other rights and such qualifications,
limitations and restrictions as it may choose and as may be permitted by the
DGCL, (iii) advance notice provisions for the nomination of directors and the
proposal of other matters to be considered at the annual meeting of
stockholders, (iv) its stockholders may not call a special meeting of
stockholders, and (v) vacancies in its board of directors may be filled only by
its board of directors.


19


On August
10, 2009, Highbury’s board of directors declared a dividend of one preferred
share purchase right, for each outstanding share of Highbury common stock. In
connection with the issuance of the preferred share purchase right, Highbury
entered into a rights agreement which describes and sets forth the terms of the
preferred share purchase right.




Section
203 of the DGCL, the provisions of Highbury’s charter and by-laws and the
outstanding preferred share purchase right may deter potential acquirers or
investors, discourage certain types of transactions in which Highbury
stockholders might otherwise receive a premium for their shares over then
current market prices, and limit the ability of Highbury’s stockholders to
approve transactions that they think may be in their best
interests.




Highbury
executive officers and directors and their respective affiliates own a large
percentage of Highbury common stock and could limit stockholders’ influence on
corporate decisions and the Merger.




As of
March 22, 2010, Highbury’s executive officers and directors and their respective
affiliates own, in the aggregate, shares of common stock representing
approximately 18.3% of the voting power of outstanding common stock. In
addition, the holders of Series B preferred stock, which are all affiliates of
and controlled by employees of Aston, including Stuart D. Bilton and Kenneth C.
Anderson who are two of Highbury’s directors, are entitled to (i) elect 25% of
Highbury’s board of directors voting separately as a class and (ii) vote on
certain matters, including a merger or consolidation of Highbury with or into
another entity as a result of which all of Highbury common stock is converted
into or exchanged for the right to receive cash, securities or other property or
is cancelled, a sale of all or substantially all of Highbury’s assets,
Highbury’s dissolution or an amendment to the charter, as a single class with
the holders of shares of Highbury common stock. As of March 22, 2010, with
respect to matters that the holders of the Series B preferred stock have the
right to vote on, Highbury’s executive officers and directors and their
respective affiliates own, in the aggregate, shares of stock representing
approximately 25.6% of the voting power of Highbury’s outstanding stock entitled
to vote on such matters. In connection with the Merger, these directors and
officers will receive their pro rata portion of the merger consideration with
respect to their shares of Highbury common stock (including common stock issued
upon exchange for shares of Highbury Series B preferred stock) and will receive
a pro rata portion of the special dividend anticipated to be declared by the
Highbury board of directors and payable on the closing date of the
Merger.




Should
some of these stockholders act together, they would be able to exert influence
on all matters requiring approval by Highbury’s stockholders, including mergers,
sales of assets, and other significant corporate transactions. The interests of
these stockholders may not always coincide with Highbury’s corporate interests
or the interests of other stockholders, and they may act in a manner with which
you may not agree or that may not be in the best interests of Highbury’s other
stockholders. In connection with entering into the Merger Agreement,
stockholders representing approximately 25.6% (as of March 22, 2010) of the
voting power of the shares entitled to vote on the Merger agreed, subject to the
terms of the voting agreements entered into with AMG, to vote all shares of
Highbury common stock and Series B preferred stock beneficially owned by them in
favor of the Merger. In addition, Peerless Systems Corporation or “Peerless,”
together with certain of its affiliates, held, as of March 22, 2010,
approximately 14.0% of the voting power of the shares entitled to vote on the
Merger and has agreed to vote all of its shares in accordance with the
recommendation of our board of directors on the Merger.


20


ITEM
      2.
            PROPERTIES




We do not
own any real estate or other physical properties. The facilities of Highbury are
maintained at 999 18th Street,
Suite 3000, Denver, Colorado 80202. On October 31, 2007, we entered into an
office services agreement with Berkshire Capital Securities LLC, or Berkshire
Capital, which provides for a monthly fixed fee of $10,000 for office and
secretarial services including use and access to our office in Denver, Colorado
and those other office facilities of Berkshire Capital as we may reasonably
require as well as information technology equipment and access to numerous
subscription-based periodicals and databases. In addition, certain employees of
Berkshire Capital provide us with financial reporting, administrative and
information technology support on a daily basis. R. Bruce Cameron, our Chairman
of the board, Richard S. Foote, our President, Chief Executive Officer and
Director, and R. Bradley Forth, our Executive Vice President, Chief Financial
Officer and Secretary are employees and equity owners of Berkshire Capital.
Berkshire Capital has the right, pursuant to the agreement, to relocate us, upon
ten days written notice, to other offices. The term of the agreement is
indefinite and the agreement is terminable by either party upon six months’
prior notice. In connection with the signing of the Merger Agreement, Highbury
and Berkshire Capital entered into a termination agreement, dated as of December
12, 2009, pursuant to which the office services agreement will terminate at the
effective time of the Merger.




The
facilities of Aston are maintained at 120 North LaSalle Street, Suite 2500,
Chicago, Illinois 60602. The lease expense for the Chicago office was $184,926
for fiscal year 2009. The term of the lease expires in January 2017. Aston also
leases office space for two satellite offices in New Jersey and California under
various leasing arrangements. The lease for the office in New Jersey has an
evergreen term. The lease for the office in California is on a month-to-month
basis.




We
believe our office facilities are suitable and adequate for our business as it
is presently conducted. Given the nature of our business and the fact that we do
not own real property, we do not anticipate that compliance with federal, state
and local provisions regarding the discharge of materials into the environment,
or otherwise relating to the protection of the environment, will have a material
effect upon our capital expenditures, earnings or competitive
position.




ITEM
      3.
            LEGAL
      PROCEEDINGS




Neither
Highbury nor Aston is currently subject to any material legal proceedings, nor,
to our knowledge, is any material legal proceeding threatened against either of
them or our management team in their capacity as such. From time to time, we may
be a party to certain legal proceedings incidental to the normal course of our
business. While the outcome of these legal proceedings cannot be predicted with
certainty, we do not expect that these proceedings will have a material effect
upon our financial condition or results of operations.




ITEM
      4.
            RESERVED




PART
II




ITEM
      5.
            MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES




Market
Price and Dividend Data for Highbury Securities




Highbury’s
common stock is traded on the OTC Bulletin Board under the symbol HBRF.
Highbury’s units and warrants were traded on the OTC Bulletin Board under the
symbols "HBRFU" and "HBRFW," respectively. On January 25, 2010, the warrants
expired by their terms and on January 26, 2010, Highbury deregistered the
warrants and the units by filing a Form 15 with the SEC. Prior to expiration of
the warrants, each of Highbury’s units consisted of one share of Highbury common
stock and two warrants, each to purchase one share of common stock. The units
now represent one share of common stock. The following table sets forth the
range of high and low prices for the units, common stock and warrants for the
periods indicated.




Units
              
              
              Common Stock
              
              
              WarrantsHigh
              
              
              Low
              
              
              High
              
              
              Low
              
              
              High
              
              
              LowFiscal
      Year 2008Quarter
      endedMarch
      31, 2008
              
              $
              6.00
              
              
              $
              2.85
              
              
              $
              4.85
              
              
              $
              2.70
              
              
              $
              0.72
              
              
              $
              0.15June
      30, 2008
              
              $
              3.49
              
              
              $
              2.50
              
              
              $
              3.05
              
              
              $
              2.30
              
              
              $
              0.20
              
              
              $
              0.07September
      30, 2008
              
              $
              3.50
              
              
              $
              2.60
              
              
              $
              4.00
              
              
              $
              2.57
              
              
              $
              0.25
              
              
              $
              0.08December
      31, 2008
              
              $
              3.25
              
              
              $
              1.50
              
              
              $
              3.90
              
              
              $
              1.60
              
              
              $
              0.13
              
              
              $
              0.002Fiscal
      Year 2009Quarter
      endedMarch
      31, 2009
              
              $
              1.80
              
              
              $
              1.50
              
              
              $
              2.40
              
              
              $
              1.60
              
              
              $
              0.02
              
              
              $
              0.001June
      30, 2009
              
              $
              2.90
              
              
              $
              1.80
              
              
              $
              4.25
              
              
              $
              2.35
              
              
              $
              0.25
              
              
              $
              0.0012September
      30, 2009
              
              $
              9.00
              
              
              $
              2.90
              
              
              $
              5.75
              
              
              $
              4.00
              
              
              $
              0.35
              
              
              $
              0.10December
      31, 2009
              
              $
              8.00
              
              
              $
              2.50
              
              
              $
              5.75
              
              
              $
              3.70
              
              
              $
              0.60
              
              
              $
              0.0222




21




The
closing price for each share of Highbury common stock on March 22, 2010 was
$6.80.




Holders
of Common Equity




On March
22, 2010, there was one holder of record of Highbury’s units and were nine
holders of record of Highbury’s common stock, which do not include beneficial
owners of Highbury’s securities.




Dividends




On April
15, 2009, Highbury paid a dividend of $455,155 ($0.05 per share) to stockholders
of record on April 1, 2009 and, on July 15, 2009, Highbury paid a dividend of
$454,252 ($0.05 per share) to stockholders of record on July 1,
2009.




On
October 7, 2009, Highbury paid (i) a special dividend of $29,308,866 ($1.50 per
share) and (ii) a dividend of $976,962 ($0.05 per share), in each case to
stockholders of record on October 6, 2009.




On
January 15, 2010, Highbury paid a dividend of $1,000,623 ($0.05 per share) to
stockholders of record on January 4, 2010.




Holders
of Highbury’s Series B preferred stock participate in dividends declared on
Highbury common stock on an as converted basis.  If the Merger is not
completed, the payment of dividends in the future will be contingent upon
Highbury’s revenues and earnings, if any, capital requirements, business
strategy and general financial condition. Such capital requirements include seed
capital investments in new investment funds and working capital reserves to
ensure clients of Aston of Highbury’s ability to support the stability of Aston
during periods of increased market volatility. Pursuant to the terms of the
Merger Agreement Highbury is permitted to make certain distributions to its
stockholders prior to closing, including distributions in accordance with the
Management Agreement, quarterly dividends up to $0.05 per share consistent with
past practice, and to holders of Series B preferred stock at the applicable
dividend rate set forth in the Certificate of Designation.




As
Highbury is a holding company, its ability to pay dividends, service its debt
and meet its other obligations depends primarily on the ability of Aston to make
distributions to Highbury. Pursuant to the Management Agreement of Aston, 28% of
the total revenue of Aston is allocated to Highbury and 72% of the total revenue
will be retained for use in paying operating expenses of Aston. In addition,
Aston’s payment of distributions to Highbury may be subject to claims by Aston’s
creditors and to limitations applicable to Aston under federal and state laws,
including securities and bankruptcy laws. See “Risk Factors—Risks Related to the
Structure of Highbury’s Business” for risks associated with the Aston revenue
allocation. The future payment of any dividends will be within the discretion of
our board of directors.




In
addition, immediately prior to the closing of the Merger, subject to applicable
law and the terms of the Merger Agreement, our board of directors intends to
declare a special dividend, payable on the closing date of the Merger, to all
holders of record of shares of Highbury common stock immediately prior to the
effective time of the Merger in an aggregate amount equal to Highbury’s working
capital (including all Highbury liabilities, subject to certain exceptions, and
Merger related transaction expenses then outstanding) as of the end of the
calendar month prior to the closing of the Merger minus $5.0 million. Each
holder of Highbury common stock issued in exchange for shares of Highbury Series
B preferred stock will receive its pro rata portion of the special
dividend.


22


Recent
Sales of Unregistered Securities




Except as
previously disclosed in our quarterly report on Form 10-Q for the quarter ended
September 30, 2009, Highbury did not engage in any unregistered sales of
securities during the year ended December 31, 2009.




Issuer
Purchases of Equity Securities




On
January 15, 2009, our board of directors approved a securities repurchase
program authorizing the use of up to $1,000,000 to acquire common shares,
warrants or a combination thereof in the open market or in any private
transaction, from time to time and in accordance with applicable laws, rules and
regulations. The securities repurchase program expired on December 31,
2009.




During
the quarter ended December 31, 2009, we repurchased 554,893 of our outstanding
warrants. The following table sets forth information with respect to repurchases
of our common stock during the quarter ended December 31, 2009:




Period
              
              Total
                  Number of
                  Securities
                  Purchased
              
              
              Average
                  Price Paid
                  per Share
                  or Warrant
              
              
              Total
                  Number of
                  Shares or
                  Warrants
                  Purchased
                  as Part of
                  Publicly
                  Announced
                  Plans or
                  Programs
              
              
              Maximum
                  Dollar Value of
                  Securities that
                  May Yet Be
                  Purchased
                  Under the Plans
                  or ProgramsOctober
      1, 2009 to October 31, 2009Shares
              
              
              —
              
              
              $
              —
              
              
              
              —Warrants(1)
              
              
              554,893
              
              
              $
              0.27
              
              
              
              554,893
              
              
              $
              662,136November
      1, 2009 to November 30, 2009
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              662,136Shares
              
              
              —
              
              
              $
              —
              
              
              
              —Warrants
              
              
              —
              
              
              $
              —
              
              
              
              —December
      1, 2009 to December 31, 2009
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              662,136
              (2)Shares
              
              
              —
              
              
              $
              —
              
              
              
              —Warrants
              
              
              —
              
              
              $
              —
              
              
              
              —


(1)
            These
      repurchases were made in three privately negotiated transactions under our
      2009 securities repurchase program.




(2)
            This
      program was announced on January 21, 2009 and authorized up to $1,000,000
      to be used for repurchases of Highbury’s outstanding
      securities.  The 2009 securities repurchase program expired on
      December 31, 2009.  As such, after December 31, 2009, the
      maximum dollar value of securities that may be purchased under the 2009
      securities repurchase program is
$0.




ITEM
      7.
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS




You
should read this discussion and analysis of our financial condition and results
of operations in conjunction with our audited consolidated financial statements
and the related notes appearing elsewhere in this Annual Report on Form 10-K.
The information in this section contains forward-looking statements (see
“Cautionary Statement Regarding Forward-Looking Statements”). Our actual results
may differ significantly from the results suggested by these forward-looking
statements and our historical results. Some factors that may cause our results
to differ are described in “Risk Factors” under Item 1A of this Annual Report on
Form 10-K. We wish to caution you not to place undue reliance on these
forward-looking statements, which speak only as of the date
made.


23


Overview




Highbury
is an investment management holding company formed to provide permanent capital
solutions to mid-sized investment management firms. Aston is an investment
management firm that is the investment adviser to the Aston funds, a Delaware
business trust, and a variety of separately managed accounts. Historically, we
have pursued acquisition opportunities and sought to establish accretive
partnerships with high-quality investment management firms. In July 2009, our
board of directors suspended its pursuit of acquisition opportunities (other
than add-on acquisitions for Aston) and formed a Special Committee comprised of
independent directors for the purpose of evaluating strategic
alternatives.  On December 12, 2009, Highbury entered into the Merger
Agreement with AMG and Merger Sub.  At the effective time of the
Merger, all outstanding shares of Highbury common stock (other than shares owned
or held directly by Highbury and dissenting shares) will be converted into the
right to receive an aggregate of 1,748,879 shares of AMG common stock, subject
to reduction in certain circumstances. Based on 23,026,171 shares of Highbury
common stock outstanding as of the record date for the special meeting to
approve the Merger, which includes 4,500,000 shares of common stock to be issued
in exchange for the Series B preferred stock, and assuming no reduction in
the aggregate merger consideration, each share of Highbury common stock would
receive 0.075952 shares of AMG common stock in the
Merger.  Highbury will hold a special meeting of its stockholders on
March 29, 2010 to vote on the Merger.




As of
December 31, 2009, Aston had approximately $6.7 billion of total assets under
management compared to approximately $3.5 billion as of December 31, 2008. As of
December 31, 2009, Aston managed 25 no-load mutual funds, comprised of 24 equity
funds and one fixed income fund, with approximately $6.5 billion of mutual fund
assets under management. Aston had $3.4 billion of mutual fund assets under
management as of December 31, 2008. As of December 31, 2009, 12 of the mutual
funds carried an overall Morningstar RatingTMof
three stars or better, including seven four-star funds and one five star fund.
Of the 25 funds, ten are relatively new and are not currently rated by
Morningstar. The 24 equity funds are classified across each of the nine
Morningstar RatingTM style
boxes, giving Aston wide coverage of the public equity investment spectrum and
multiple sources of revenue. As of December 31, 2009, Aston also managed
approximately $192 million of separate account assets compared to approximately
$115 million as of December 31, 2008.




Aston
intends to expand its assets under management with a combination of internal
growth, new product development and accretive acquisitions. Aston believes the
development of new products will provide growth in the future.




Business Combination.
Highbury was formed on July 13, 2005, and closed its initial public offering on
January 31, 2006. On April 20, 2006, Highbury and Aston entered into the asset
purchase agreement with the Aston Sellers. Pursuant to the asset purchase
agreement, on November 30, 2006, we acquired substantially all of the Aston
Sellers’ business of providing investment advisory, administration, distribution
and related services to the target funds specified in the asset purchase
agreement.




Pursuant
to the asset purchase agreement, Highbury and Aston paid $38.6 million in cash
to ABN AMRO. The asset purchase agreement provided for a contingent payment to
be made on November 30, 2008, as follows: in the event the annualized
investment advisory fee revenue generated under investment advisory contracts
between Aston and the Aston Sellers’ applicable to the target funds for the six
months ending on November 30, 2008, or the target revenue, (x) exceeded
$41.8 million, Highbury would pay to ABN AMRO the difference between the target
revenue and $41.8 million, up to a total aggregate payment of $3.8 million, or
(y) was less than $34.2 million, ABN AMRO would pay to us the difference between
the $34.2 million and the target revenue, up to a total aggregate payment of
$3.8 million. The target revenue for the six month period ending
November 30, 2008 was $30,459,205. Therefore, in December 2008, Fortis
Investment Management USA, Inc., or Fortis, the successor entity to ABN AMRO,
paid us $3,740,796.


24


The
business that now operates as Aston was founded in 1993 within Alleghany Asset
Management by employees of Aston to manage open-end investment funds for retail
and institutional clients in the United States. Originally, Aston employed
investment advisers affiliated with its parent to manage the assets of the
funds, while it centralized the distribution, marketing, reporting and other
operations of the fund family. As the business developed, the acquired business
created new mutual funds managed by experienced independent investment advisers.
In connection with the consummation of the acquisition, Aston entered into
agreements with each of the Aston Sellers that managed the target funds prior to
the acquisition, pursuant to which each such seller now acts as a sub-adviser to
the applicable target fund, each of which is now rebranded as an Aston fund.
Pursuant to the asset purchase agreement, the Aston Sellers have agreed not to
terminate these agreements prior to November 30, 2011.  In general,
sub-advisers unaffiliated with the Aston Sellers may terminate their
sub-advisory contracts upon 60 days’ written notice. As of December 31,
2009, Aston employed 16 different sub-advisors of which five were current
or former affiliates of the Aston Sellers and 11 were independent. Aston’s
relationship with the sub-advisers currently or formerly affiliated with the
Aston Sellers is supported by limited non-compete provisions and certain
capacity guarantees in certain products to benefit Aston. This arrangement is
intended to ensure that the investment philosophies and processes guiding the
mutual funds in the future are consistent with their historical investment
philosophies and processes. The sub-advisors for these funds agreed to renew
their sub-advisory agreements on substantially the same terms, but individual
funds have not entered (and cannot enter) into any such
arrangement.




Between
November 30, 2006 and December 31, 2009, Aston opened 15 new equity mutual
funds. These funds are set forth in the table below.




Fund
            
            Morningstar CategoryAston/River
      Road Small-Mid Cap
            
            Small
      ValueAston/Optimum
      Large Cap Opportunity
            
            Large
      GrowthAston/ABN
      AMRO Global Real Estate
            
            Specialty-Real
      EstateAston/Resolution
      Global Equity
            
            World
      StockAston/Neptune
      International
            
            Foreign
      Large GrowthAston/Barings
      International
            
            Foreign
      Large BlendAston/Montag
      & Caldwell Mid Cap Growth
            
            Mid-Cap
      GrowthAston/SGA
      International Small-Mid Cap
            
            Foreign
      Small/Mid GrowthAston/Cardinal
      Mid Cap Value
            
            Mid-Cap
      BlendAston/ClariVest
      Mid Cap Growth
            
            Mid-Cap
      GrowthAston/Dynamic
      Allocation
            
            Conservative
      AllocationAston/M.D.
      Sass Enhanced Equity Income
            
            Large
      BlendAston/New
      Century Absolute Return ETF
            
            Moderate
      AllocationAston/Lake
      Partners LASSO Alternatives
            
            Long-ShortAston/Fasciano
      Small Cap
            
            Small
      Cap Blend


Between
November 30, 2006 and December 31, 2009, Aston closed or merged nine mutual
funds as a result of poor investment performance, portfolio manager turnover or
other reasons. Aston intends to manage its family of mutual funds in response to
client demands, and may open new funds or close existing funds over time, as
appropriate.




In
addition, Aston may be able to develop new distribution channels
including:




·
            arrangements
      with banks and insurance companies which, like ABN AMRO, elect to divest
      their mutual fund operations but enter into agreements with Aston to
      service their customers; and




·
            wholesalers
      focused on the traditional retail broker
  channel.




Revenue Sharing Arrangement with
Aston Prior to August 10, 2009.  Highbury formed Aston on April
19, 2006 and became the sole member of Aston. In connection with Highbury and
Aston entering into the asset purchase agreement, the limited liability company
agreement of Aston was amended and eight employees of Aston (the Management
Members) and ABN AMRO were admitted as members of Aston. From November 30, 2006
through August 10, 2009, Highbury owned 65% of the membership interests of
Aston, and the Management Members of Aston owned 35% of the membership interests
of Aston.


25


Pursuant
to the limited liability company agreement in place during the period from
November 30, 2006 through August 10, 2009, approximately 72% of the revenues of
Aston, the Operating Allocation, was used to pay operating expenses of Aston,
including salaries and bonuses of all employees of Aston. The remaining 28% of
the total revenues of Aston net of sub-administrative fees, the Owner’s
Allocation, was allocated to the owners of Aston. This allocation was allocated
among the members of Aston according to their relative ownership interests.
Between November 30, 2006 and August 10, 2009, 18.2% of total revenues net of
sub-administrative fees was allocated to Highbury and 9.8% of total revenues net
of sub-administrative fees was allocated to the Management Members.




Highbury’s
contractual share of revenues had priority over the distributions to the
Management Members in the event Aston’s actual operating expenses exceeded the
Operating Allocation.  As a result, excess expenses first reduced the
portion of the Owners’ Allocation allocated to the Management Members until the
Management Members’ allocation was eliminated, then Highbury’s allocation was
reduced. Any reduction in the distribution of revenues to be paid to Highbury
was required to be paid to Highbury out of any future excess Operating
Allocation and the portion of future Owners’ Allocation allocated to the
Management Members, with interest. Aston’s operating expenses in the period from
January 1, 2009 through August 10, 2009 exceeded the Operating Allocation by
$57,614. These excess expenses were funded by a reduction in the Management
Members' share of the Owners’ Allocation.




Accretive Acquisition of
Noncontrolling Interest in Aston.  On August 10, 2009, Highbury
entered into the First Exchange Agreement with the Series B Investors and the
Management Members each of whom owned interests in certain of the Series B
Investors. Pursuant to the terms of the First Exchange Agreement, the Series B
Investors sold all of their Series B limited liability company interests to
Highbury in exchange for shares of Series B preferred stock of Highbury with a
liquidation value of $22,500,000. As a result of the First Exchange Agreement,
Aston became a wholly owned subsidiary of Highbury.




In
connection with the First Exchange Agreement, Highbury entered into the
Management Agreement with the Management Members and Aston which delegates
certain powers to a management committee composed initially of the Management
Members to operate the business of Aston. Pursuant to the Management Agreement,
28% of Aston's total revenues net of sub-administrative fees is paid to Highbury
as the sole owner of the business. The remaining portion of Aston's total
revenues, the Operating Allocation, may be allocated by Aston's management
committee to pay the operating expenses of Aston, including salaries and
bonuses. Highbury’s contractual share of revenues has priority over any payment
of the Operating Allocation. Any reduction in revenues to be paid to Highbury as
a result of operating expenses exceeding the Operating Allocation is required to
be paid to Highbury out of future Operating Allocation before any compensation
may be paid to the Management Members.




On
September 14, 2009, Highbury entered into the Second Exchange Agreement with the
Series B Investors pursuant to which the Series B Investors agreed to exchange
up to 36% of their shares of Highbury Series B preferred stock to Highbury for
up to 1,620,000 shares of common stock of Highbury.




In
connection with the signing of the Merger Agreement, Highbury and each of the
Series B Investors entered into a new exchange agreement, dated as of December
12, 2009, pursuant to which the Series B Investors will exchange all of their
shares of Series B preferred stock for newly issued shares of Highbury common
stock immediately prior to the effective time of the Merger.


26


Business Overview. Aston
generates revenue by charging mutual funds an advisory fee and an administrative
fee based on a percentage of invested assets. A portion of the fees are paid to
the sub-advisers, to a third-party sub-administrator and to third-party
distribution partners. Each fund typically bears all expenses associated with
its operation and the issuance and redemption of its securities. In particular,
each fund pays investment advisory fees (to Aston), shareholder servicing fees
and expenses, fund accounting fees and expenses, transfer agent fees, custodian
fees and expenses, legal and auditing fees, expenses of preparing, printing and
mailing prospectuses and shareholder reports, registration fees and expenses,
proxy and annual meeting expenses and independent trustee fees and expenses.
Aston has guaranteed many of the funds that their expenses will not exceed a
specified percentage of their net assets. Aston absorbs all advisory fees and
other mutual fund expenses in excess of these self-imposed limits in the form of
expense reimbursements or fee waivers and collects as revenue the advisory fee
less reimbursements and waivers. As of December 31, 2009, Aston was reimbursing
18 mutual funds whose expenses exceed the applicable expense cap.




Aston’s
relationships with a limited number of clients account for a significant
majority of our revenue. Aston’s client, the Aston Funds, which accounts for
approximately 97% of our assets under management as of December 31, 2009,
is comprised of 25 mutual funds that are currently managed by Aston. Because all
these funds have the same trustees, it is possible that the contracts with them
could be terminated simultaneously. Of these 25 funds, the Aston/Montag &
Caldwell Growth Fund, the Aston/Optimum Mid Cap Fund and the Aston/TAMRO Small
Cap Fund accounted for approximately 35%, 17% and 15%, respectively, of the
revenues of Aston in December 2009. These various client concentrations leave us
vulnerable to any adverse change in the financial condition of any of our major
clients. The loss of any of these relationships may have a material adverse
impact on our revenues.




Our level
of profitability will depend on a variety of factors, including:




·
            those
      affecting the global financial markets generally and the equity markets
      particularly, which could potentially result in considerable increases or
      decreases in our assets under
management;




·
            our
      revenue, which is dependent on our ability to maintain or increase assets
      under management by maintaining existing investment advisory relationships
      and fee structures, retaining our current clients, marketing our services
      successfully to new clients and obtaining favorable investment
      results;




·
            our
      ability to maintain certain levels of operating profit
      margins;




·
            the
      availability and cost of the capital with which we finance our existing
      and new acquisitions;




·
            our
      success in making new acquisitions and the terms upon which such
      transactions are completed (in the event the Merger is not
      consummated);




·
            the
      level of intangible assets and the associated amortization expense
      resulting from our acquisitions;




·
            the
      level of expenses incurred for holding company operations;
    and




·
            the
      level of taxation to which we are
subject.




In July
2009, three of our significant stockholders sent letters to our board of
directors requesting, among other things, changes to our management and the
composition of our board of directors. In response to the initiatives of these
stockholders, in July 2009, our board of directors formed a Special Committee
consisting of Hoyt Ammidon Jr., who chairs the Special Committee, Theodore M.
Leary Jr. and Aidan J. Riordan, each of whom is an independent director, to
explore and evaluate strategic alternatives aimed at enhancing value for all of
our stockholders. The Special Committee hired the investment banking firm of
Sandler O'Neill & Partners and the law firm of Debevoise & Plimpton LLP
to provide financial advisory and legal services, respectively, to the Special
Committee. We have incurred significant fees and expenses associated with the
Special Committee and the process of exploring strategic alternatives. These
fees include an annual fee of $40,000 to be paid to the chairman of the Special
Committee, an annual fee of $20,000 to be paid to other members of the Special
Committee, a fee of $1,000 to be paid to each member of the Special Committee
for each meeting of the Special Committee attended, whether in person or by
telephonic conference, and financial advisory fees and legal fees paid to the
advisers to the Special Committee all of which continue to be incurred in
connection with the Merger.


27


In
addition, one of our significant stockholders, Peerless Systems Corporation,
filed a definitive proxy statement with the SEC on November 25, 2009 in
connection with our 2009 annual meeting of stockholders, in which Peerless
solicited proxies to elect Timothy E. Brog to our board of directors and to
adopt two non-binding stockholder proposals. As a result, we incurred fees and
expenses in connection with our 2009 annual meeting of stockholders in excess of
the fees and expenses typically associated with an uncontested proxy
solicitation.




On
December 18, 2009, we entered into an agreement with Peerless and Mr. Brog
pursuant to which Peerless ended (i) its proxy contest to elect Mr. Brog to our
board of directors at our 2009 annual meeting stockholders and (ii) its support
of two non-binding stockholder resolutions. Pursuant to the agreement, Peerless
and Mr. Brog (i) ceased all of their solicitation efforts with respect to our
2009 annual meeting of stockholders, (ii) agreed not to vote any proxies
obtained by them at our 2009 annual meeting of Highbury stockholders, (iii)
agreed to vote all of Peerless’ shares of Highbury common stock in favor of the
election of Hoyt Ammidon Jr. and John Weil as directors of Highbury for a term
expiring at the 2012 annual meeting of Highbury stockholders, (iv) agreed to
vote all of Peerless’ shares in accordance with the recommendations of the our
board of directors with respect to the Merger, (v) waived Peerless’ appraisal
and dissenters’ rights with respect to the Merger and (vi) agreed not to take
any action in opposition to the recommendations or proposals of our board of
directors or to effect a change of control of us.




The
agreement further provides that if the Merger is not completed on or before July
16, 2010, or the Merger Agreement is terminated, then our board of directors
will take all necessary action to appoint Mr. Brog to serve on our board of
directors for a term expiring at the 2012 annual meeting of stockholders. We
also agreed to reimburse Peerless for $200,000 of its expenses incurred in the
proxy contest with respect to the 2009 annual meeting of stockholders. The
parties also agreed to customary mutual releases, covenants not to sue and
non-disparagement provisions. The agreement terminates upon the earliest of (i)
the mutual agreement of the parties, (ii) consummation of the Merger, (iii)
August 13, 2010 or (iv) the termination of the Merger Agreement. The mutual
releases and covenants not to sue survive any such termination.




For the
fiscal year ended December 31, 2009, Highbury incurred significant expenses
related to the Special Committee and the contested proxy solicitation in
connection with our 2009 annual meeting of stockholders. Such expenses have and
may continue to be incurred in amounts which cannot presently be estimated, but
which may continue to be substantial. These additional expenses have had a
negative impact on our results of operations during the fiscal year ended
December 31, 2009 and may have a negative impact on our results in future
periods.




Investments




Between
the date of the Aston acquisition and December 31, 2009, Highbury used $6.9
million of working capital to seed nine new Aston mutual funds or mutual fund
share classes. At December 31, 2009, Highbury had one outstanding seed
capital investment of $1,000,000 in the Aston/Fasciano Small Cap
Fund.




Highbury
invests its working capital according to an investment policy statement approved
by its board of directors.  The investment policy statement sets forth
Highbury’s risk tolerance, return objectives, time horizon, liquidity
requirements, liabilities, tax considerations and legal, regulatory and other
unique circumstances.  Highbury’s risk tolerance is low due, among
other factors, to its substantial exposure to the U.S. domestic equity market as
a result of its investment management business and to the potential need to fund
acquisitions upon short notice.  Highbury’s investments seek to hedge
risks to the value of its working capital and the value of its investment
management business as adjusted for changes in purchasing power over
time.  Changes in purchasing power can occur due to changes in
monetary aggregates, nominal price levels, currency values, and supply and
demand fundamentals.  All investments must be made without borrowed
money.  In the present economic environment Highbury is unwilling to
bear credit risk.  Highbury’s return objective is to earn a return
adequate to preserve the purchasing power of its working capital and to earn
returns negatively correlated to changes in the value of its investment
management business.  Because Highbury’s working capital may need to
be deployed upon short notice, investments with price volatility, including seed
capital investments, may not exceed 50% of Highbury’s working capital without
approval of the board of directors.  With respect to liquidity, all
investments must be able to be liquidated in an orderly manner with little or no
price impact with settlement three days following the trade
date.


28


Key
Operating Measures




We use
the following key measures to evaluate and assess our business:




·
            Assets Under
      Management. Aston generates revenues by charging each fund
      investment advisory and administrative fees (collected monthly), each of
      which are equal to a percentage of the daily weighted average assets under
      management of the fund. Assets under management change on a daily basis as
      a result of client investments and withdrawals and changes in the market
      value of securities held in the mutual funds. We carefully review net
      asset flows into the mutual funds, trends in the equity markets and the
      investment performance of the mutual funds, both absolutely and relative
      to their peers, to monitor their effects on the overall level of assets
      under management.




·
            Total Revenue. Total
      revenue for Aston is equal to the sum of the advisory fees, administrative
      fees and money market service fees earned by the business in a given
      period. We operate Aston under a revenue sharing structure through which
      Highbury receives a fixed percentage of the total revenue, net of
      sub-administrative fees, earned by Aston. Between November 30, 2006
      and August 10, 2009, Highbury received 18.2% of Aston’s total
      revenue, net of sub-administrative fees.  Since August 10,
      2009, Highbury has received 28.0% of Aston’s total revenue, net of
      sub-administrative fees. In addition, Highbury earns interest income on
      its cash balances which we recognize as other income on the consolidated
      financial statements.




·
            Weighted Average Fee
      Basis. The weighted average fee basis is equal to the total revenue
      earned in a specific period divided by the weighted average assets under
      management for that period. Because each fund has a different fee
      schedule, the weighted average fee basis provides us with a single
      indicator of the business’ ability to generate fees on its total assets
      under management across all
products.




·
            Total Operating
      Expenses. The total operating expenses include the operating
      expenses of Aston as well as Highbury. At the Aston level, we monitor
      total operating expenses relative to Aston’s total revenue to ensure there
      is sufficient operating margin to cover expenses. We expect Aston’s total
      operating expenses (including distribution and sub-advisory costs and
      sub-administrative fees and excluding certain non-cash, non-recurring
      items) to equal approximately 72% of the total revenue of
      Aston.




In the
period from January 1, 2009 through August 9, 2009, Aston's operating expenses
exceeded the Operating Allocation by $57,614. These excess expenses were funded
by a reduction in the Management Members’ share of the Owners’ Allocation. In
the period from August 10, 2009 through December 31, 2009, Aston's operating
expenses, including compensation, equaled approximately 72% of the total revenue
of Aston. At the Highbury level, Highbury incurred operating expenses in
connection with its pursuit of accretive acquisitions, although as of July 2009
its board of directors determined to cease pursuing acquisitions unrelated to
Aston while Highbury explored strategic alternatives. Highbury also incurred
legal and accounting expenses in connection with its SEC filing requirements,
the proxy contest related to its 2009 annual meeting, the exploration of
strategic alternatives and expenses of directors’ and officers’
insurance.


29


Description
of Certain Line Items




Following
is a description of the components of certain line items from our consolidated
financial statements:




·
            Revenue. Aston
      generates advisory fees based on a fixed percentage of the daily weighted
      average assets under management for each fund and receives these fees on a
      monthly basis. For many funds, Aston provides an expense cap which
      guarantees to investors that the total expenses of a fund will not exceed
      a fixed percentage of the total assets under management. For small funds,
      the fixed expenses for fund accounting, client reporting, printing and
      other expenses, when combined with the investment advisory fees and
      administrative fees, cause a fund’s total expenses to exceed the expense
      cap. In such cases, Aston reimburses the funds for the excess fixed
      expenses or waives a portion of the investment advisory fee, so as to keep
      the total expenses of the fund at or below the expense cap. Aston’s
      advisory fees include investment advisory fees from all of the funds, net
      of all fee waivers and expense reimbursements. Aston also generates
      advisory fees based on a fixed percentage of either monthly or quarterly
      assets under management for a variety of separately managed accounts.
      Additionally, Aston generates administration fees for providing
      administration services. Such services include marketing and customer
      relations, bookkeeping and internal accounting functions, and legal,
      regulatory and board of trustees
support.




·
            Distribution and Sub-advisory
      Costs. Aston has contracted on a non-exclusive basis with
      approximately 400 different institutions to sell its mutual funds, in
      exchange for a distribution fee, to retail and institutional investors.
      These distribution fees are generally equal to a fixed percentage of the
      assets invested by the retail or institutional investor. In addition,
      Aston employs third-party investment managers, or sub-advisers, to perform
      the security research and investment selection processes for each of its
      mutual funds. Under this arrangement, Aston pays the third-party
      investment manager a sub-advisory fee, generally equal to 50% of the
      advisory fees for the mutual fund, net of fee waivers, expense
      reimbursements, and applicable distribution fees paid under the
      distribution agreements discussed above. Total distribution and
      sub-advisory fees represent the largest component of expenses for Aston.
      Since these fees are generally based on total assets under management,
      they increase or decrease proportionately with total assets under
      management.




·
            Compensation and Related
      Expenses. As of December 31, 2009, Aston employed 37 full-time
      employees. The compensation and related expenses of Aston include the base
      salaries, incentive compensation, health insurance, retirement benefits
      and other costs related to the employees. These expenses increase and
      decrease with the addition or termination of employees. Highbury currently
      employs three executive officers.  For the year ended December
      31, 2009, the compensation and related expenses of Highbury include base
      salaries to the executive officers and related payroll
      taxes.  Highbury did not pay compensation of any kind in the
      first nine months of 2008.




·
            Other Operating
      Expenses. The most significant components of other operating
      expenses include sub-administration fees, professional fees, insurance,
      occupancy, marketing and advertising, voice and data communication and
      travel and entertainment expenses.




·
            Impairment of
      Intangibles. We determined the identifiable intangible related to
      Aston’s advisory contract with the Aston Funds had not been impaired as of
      December 31, 2009. In the fourth quarter of 2008, we recorded
      impairment charges to the identifiable intangible related to Aston’s
      advisory contract with the Aston Funds of $2,288,000 as a result of
      negative market performance and net asset outflows from the Aston Funds in
      2008. Highbury also determined in both 2008 and 2009 that the identifiable
      intangible continued to meet the criteria for indefinite
    life.


30


Critical
Accounting Policies




The
Company’s discussion and analysis of its financial condition and results of
operations for the purposes of this document are based upon its consolidated
financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America, or “GAAP.” The
preparation of these financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues, expenses and related disclosures. Actual results could differ from
those estimates.




The
Company’s significant accounting policies are presented in Note 1 to its audited
consolidated financial statements included elsewhere herein, and the following
summaries should be read in conjunction with the consolidated financial
statements and the related notes. While all accounting policies affect the
consolidated financial statements, certain policies may be viewed as critical.
Critical accounting policies are those that are both most important to the
portrayal of the consolidated financial statements and results of operations and
that require management’s most subjective or complex judgments and estimates. We
believe the policies that fall within this category are the policies related to
principles of consolidation, investments, goodwill and intangible assets,
revenue recognition and income taxes.




Principles of Consolidation.
The consolidated financial statements include the accounts of Highbury and
Aston, in which Highbury has a controlling financial interest. Generally, an
entity is considered to have a controlling financial interest when it owns a
majority of the voting interest in another entity. Highbury is the manager
member of Aston and owned 65% of Aston through August 10, 2009 and has owned
100% since August 10, 2009. Highbury has had a contractual arrangement with
Aston (prior to August 10, 2009) and the Management Members (since August 10,
2009) whereby a percentage of revenue is allocated to fund Aston’s operating
expenses. The balance of the revenue is allocable to Highbury and, prior to
August 10, 2009, the other members of Aston, with a priority to Highbury. The
portion of the income of Aston allocated to owners other than Highbury is
included in noncontrolling interest in the Consolidated Statements of Income.
Noncontrolling interest on the Consolidated Balance Sheets includes the capital
owned by the Management Members of Aston as of December 31, 2008. All material
intercompany balances and transactions have been eliminated in
consolidation.




Investments.  The
Company carries its investments at fair value based on quoted market prices in
accordance with the FASB Accounting Standards Codification, or the “ASC,” on
“Fair Value Measurements and Disclosures.” The Company reflects interest paid
and accrued on money market mutual funds and U.S. Treasury bills in interest
income and changes in fair value of investments in investment income
(loss).




Goodwill and Intangible
Assets. The purchase price and the capitalized transaction costs incurred
in connection with the acquisition of the acquired business are allocated based
on the fair value of the assets acquired, which is primarily the acquired mutual
fund advisory contract. In determining the allocation of the purchase price to
the acquired mutual fund advisory contract, we have analyzed the present value
of the acquired business’ existing mutual fund advisory contracts based on a
number of factors including: the acquired business’ historical and potential
future operating performance; the historical and potential future rates of new
business from new and existing clients and attrition among existing clients; the
stability and longevity of existing advisory and sub-advisory relationships; the
acquired business’ recent, as well as long-term, investment performance; the
characteristics of the acquired business’ products and investment styles; the
stability and depth of the management team; and the acquired business’ history
and perceived franchise or brand value.




We have
determined that the acquired mutual fund advisory contract meets the indefinite
life criteria outlined in ASC 350-30-35, because we expect both the contract and
the cash flows generated by the contract to continue indefinitely due to the
likelihood of continued renewal at little or no cost. Accordingly, we do not
amortize this intangible asset, but instead review this asset at least annually
for impairment. If the carrying amount of this intangible asset exceeds the fair
value, an impairment loss is recorded in an amount equal to that excess.
Additionally, each reporting period we assess whether events or circumstances
have occurred which indicate that the indefinite life criteria are no longer
met. If the indefinite life criteria are no longer met, we will amortize the
intangible asset over its remaining useful life.


31


We
determined the identifiable intangible related to Aston’s advisory contract with
the Aston Funds had not been impaired as of December 31, 2009.  In the
fourth quarter of 2008, we recorded an impairment charge to the identifiable
intangible related to Aston’s advisory contract with the Aston Funds of
$2,288,000 as a result of negative market performance and net asset outflows
from the Aston Funds in 2008. Highbury also determined in both 2008 and 2009
that the identifiable intangible continued to meet the criteria for indefinite
life.




The
excess of purchase price for the acquisition of the acquired business over the
fair value of net assets acquired, including the acquired mutual fund advisory
contract, is reported as goodwill. Goodwill is not amortized, but is instead
reviewed for impairment. Highbury assesses goodwill for impairment at least
annually, or more frequently whenever events or circumstances occur indicating
that the recorded goodwill may be impaired. If the carrying amount of goodwill
exceeds the fair value, an impairment loss would be recorded in an amount equal
to that excess. We determined that the goodwill has not been impaired as of
December 31, 2009.




In
allocating the purchase price of the acquisition and testing our assets for
impairment, we make estimates and assumptions to determine the value of our
acquired client relationships. In these valuations, we make assumptions of the
growth rates and useful lives of existing and prospective client accounts.
Additionally, we make assumptions of, among other factors, projected future
earnings and cash flow, valuation multiples, tax benefits and discount rates.
The impacts of many of these assumptions are material to our financial condition
and operating performance and, at times, are subjective. If we used different
assumptions, the carrying values of our intangible assets and goodwill and the
related amortization could be stated differently and our impairment conclusions
could be modified. In December 2008, Highbury received a payment from Fortis
Investment Management USA, Inc. in the amount of $3,740,796 in satisfaction of a
contingency related to the acquisition in 2006 and recorded this receipt as a
decrease in goodwill. As a result, goodwill was reflected on the December 31,
2008 and 2009 consolidated balance sheets at its adjusted cost of
$3,305,616.




Revenue Recognition. Highbury
derives its operating revenues from Aston, of which it owned 65% through
August 10, 2009 and has owned 100% since August 10, 2009. Highbury
also earns interest income on its cash balances. Aston earns investment advisory
and administrative fees for services provided to the Aston Funds and a limited
number of separately managed accounts. These fees are primarily based on
predetermined percentages of the market value of the assets under management and
are billed in arrears of the period in which they are earned. These fees are
recognized over the period in which services are performed unless facts and
circumstances would indicate that collectability of the fees is not reasonably
assured. Fee waivers and expense reimbursements to certain of the Aston Funds in
accordance with agreements are reported as an offset to investment advisory
fees. Management has determined that no allowance for doubtful accounts is
necessary due to all fees being collected within one month from the date of
invoice.




Income Taxes. Deferred tax
assets and liabilities are primarily the result of timing differences between
the carrying value of assets and liabilities and the deductibility of operating
expenses for financial reporting and income tax purposes. Deferred tax assets
arise from financial statement impairment and tax amortization of our acquired
intangible assets as well as certain expenses deferred for tax purposes and the
unrealized gains and losses on mutual fund investments. Aston amortizes acquired
intangible assets over a 15-year period for tax purposes only, reducing their
tax basis and generating deferred taxes each reporting period. Aston amortized
$2,404,448 and $2,736,491 related to goodwill and intangible assets in 2008 and
2009, respectively, for income tax purposes. As a result of the acquisition of
the 35% interest in Aston in 2009, Highbury expects to amortize approximately
$3.6 million annually for income tax purposes going
forward.  Additionally, at November 30, 2006, when Highbury ceased to
be a corporation in the development stage, Highbury had total deferred expenses
of $440,342 that will be amortized for tax purposes over a 15-year period. These
expenses were expensed for financial statement purposes during Highbury’s
development stage, but were not deductible for tax purposes. Highbury amortized
$29,326 and $29,720 of this deferred expense in 2008 and 2009, respectively.
Deferred tax assets and liabilities also result from unrealized investment gains
and losses. Such unrealized gains and losses are reflected in our consolidated
statements of income, but we do not incur an income tax liability or receive a
benefit until such gains or losses, respectively, are realized.


32


As
required by ASC 740 (formerly FASB interpretation No. 48, Accounting for
Uncertainty in Income Taxes—An Interpretation of FASB Statement No. 109), the
Company recognizes the financial statement benefit of an uncertain tax position
only after considering the probability that a tax authority would sustain the
position in an examination. For tax positions meeting a “more-likely-than-not”
threshold, the amount recognized in the financial statements is the benefit
expected to be realized upon settlement with the tax authority. For tax
positions not meeting the threshold, no financial statement benefit is
recognized.  Since the adoption of FIN 48 at January 1, 2007, the
Company has had no uncertain tax positions.
  Recently
Issued Pronouncements
  In June
2009, the FASB issued guidance (formerlySFAS No. 168, The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB
Statement No. 162) now referred to as ASC 105-10, Generally Accepted Accounting
Principles. The FASB Accounting Standards Codification, or the “Codification,”
will become the source of authoritative GAAP, recognized by the FASB to be
applied by nongovernmental entities. Rules and interpretive releases of the SEC,
under authority of federal securities laws are also sources of authoritative
GAAP for SEC registrants. On the effective date of this statement, the
Codification will supersede all then-existing non-SEC accounting and reporting
standards. All other non-grandfathered non-SEC accounting literature not
included in the Codification will become non-authoritative. This statement is
effective for financial statements issued for interim and annual periods ending
after September 30, 2009.  The adoption of this guidance did not have
a material effect on the Company’s consolidated financial
statements.
  In
December 2007, the FASB issued guidance (formerly SFAS No. 160, Noncontrolling
Interests in Consolidated Financial Statements – an amendment of ARB No. 51) now
referred to as “ASC 810.” ASC 810 addresses the accounting and reporting
standards for ownership interests in subsidiaries held by parties other than the
parent, the amount of consolidated net income attributable to the parent and to
the noncontrolling interest, changes in a parent’s ownership interest, and the
valuation of retained noncontrolling equity investments when a subsidiary is
deconsolidated. ASC 810 also establishes disclosure requirements that clearly
identify and distinguish between the interests of the parent and the interests
of the noncontrolling owners. ASC 810 is effective for fiscal years beginning
after December 15, 2008. The Company adopted the provisions of ASC 810 in the
first quarter of 2009. As a result of the adoption, the Company has reported
noncontrolling interests as a component of equity in the unaudited Consolidated
Balance Sheets and the net income or loss attributable to noncontrolling
interests has been separately identified in the unaudited Consolidated
Statements of Income. The prior periods presented have also been retrospectively
restated to conform to the current classification required by ASC 810. The
adoption of ASC 810 required the Company not to record any increase to the
carrying value of the assets and liabilities of Aston in connection with the
purchase of the 35% interest in Aston from the noncontrolling interest
holders.
  In April
2008, the FASB issued revised guidance (formerly FASB Staff Position No. FAS
142-3, Determination of the Useful Life of Intangible Assets) now referred to as
“ASC 350” which amends the list of factors an entity should consider in
developing renewal or extension assumptions used in determining the useful life
of recognized intangible assets .The new guidance applies to (1) intangible
assets that are acquired individually or with a group of other assets and (2)
intangible assets acquired in both business combinations and asset acquisitions.
Under ASC 350, entities estimating the useful life of a recognized intangible
asset must consider their historical experience in renewing or extending similar
arrangements or, in the absence of historical experience, must consider
assumptions that market participants would use about renewal or extension. For
Highbury, this pronouncement required certain additional disclosures beginning
January 1, 2009 and application to useful life estimates prospectively for
intangible assets acquired after December 31, 2008. The adoption of ASC 350 did
not have a material impact on the Company's consolidated financial
statements.
  In June
2009 and February 2010, the FASB issued guidance (formerly SFAS No. 165) later
codified in ASC 855-10, Subsequent Events. ASC 855-10 establishes general
standards of for the evaluation, recognition and disclosure of events and
transactions that occur after the balance sheet date. Although there is new
terminology, the standard is based on the same principles as those that
currently exist in the auditing standards. The standard, which includes a new
required disclosure of the date through which an entity has evaluated subsequent
events, is effective for interim or annual periods ending after June 15,
2009.  The adoption of ASC 855-10 did not have a material effect on
the Company’s consolidated financial statements.
  33
  In June
2009, the FASB issued revised guidance for the accounting of variable interest
entities (codified in December 2009 as ASU No. 2009-17), which replaces the
quantitative-based risks and rewards approach with a qualitative approach that
focuses on identifying which enterprise has the power to direct the activities
of a variable interest entity that most significantly impact the entity’s
economic performance. The accounting guidance also requires an ongoing
reassessment of whether an entity is the primary beneficiary and requires
additional disclosures about an enterprise’s involvement in variable interest
entities. This accounting guidance is effective as of the beginning of each
reporting entity’s first annual reporting period that begins after November 15,
2009, and for interim periods within that first annual reporting period, and for
interim and annual reporting periods thereafter. Earlier application is
prohibited. The adoption of this pronouncement is not expected to have a
material impact on our financial position or results of operations.
  In
January 2010, the FASB issued new guidance for fair value measurements and
disclosures.  The new guidance, which is now part of ASC 820, Fair
Value Measurements and Disclosures, clarifies existing disclosure requirements
regarding the level of disaggregation and inputs and valuation techniques and
provides new disclosure requirements regarding disclosures about, among other
things, transfers in and out of levels 1 and 2 of the fair value hierarchy and
details of the activity in level 3 of the fair value hierarchy.  The
new guidance is effective for fiscal years beginning after December 15, 2009 for
the levels 1 and 2 disclosures and for fiscal years beginning after December 15,
2010 for level 3 disclosures. The disclosure requirements will be applied
prospectively to the Company’s fair value disclosure subsequent to the effective
date.
  Management
does not believe that any other recently issued, but not yet effective,
accounting standards if adopted in their current form would have a material
effect on the accompanying consolidated financial statements.
  Results
of Operations
  Year
ended December 31, 2009 for the Company compared to year ended
December 31, 2008 for the Company.
  For the
year ended December 31, 2009, the Company earned net income attributable to
Highbury of $1,419,315 on total revenue of $40,082,210, as compared to net
income attributable to Highbury of $486,007 on total revenue of $35,712,112 for
the year ended December 31, 2008.
  The
following tables summarize the components of revenue, weighted average assets
under management and the weighted average fee basis for the years ended December
31, 2008 and 2009.
  For
      the year ended
                      December
      31, 2008Total
      Fees
                  
                  
                  Weighted
                      Average
      Assets
                      Under
                      Management
                      ($millions)
                  
                  
                  Weighted
                      Average
      Fee
                      Basis
                      (Annualized)Net
      advisory fees
                  
                  $
                  31,200,270
                  
                  
                  $
                  4,459
                  (1)
                  
                  
                  0.70
                  %Net
      administrative fees(2)
                  
                  
                  1,931,170
                  
                  
                  
                  7,244
                  (3)
                  
                  
                  0.03
                  %Money
      market service fees
                  
                  
                  558,027
                  
                  
                  
                  2,937
                  
                  
                  
                  0.02
                  %(4)$
                  33,689,467
                  
                  
                  
                  4,459
                  (5)
                  
                  
                  0.76
                  %(5)
  34
  For
      the year ended
                      December
      31, 2009Total
      Fees
                  
                  
                  Weighted
                      Average
      Assets
                      Under
                      Management
                      ($millions)
                  
                  
                  Weighted
                      Average
      Fee
                      Basis
                      (Annualized)Net
      advisory fees
                  
                  $
                  36,407,482
                  
                  
                  $
                  5,057
                  (1)
                  
                  
                  0.72
                  %Net
      administrative fees(2)
                  
                  
                  1,544,090
                  
                  
                  
                  5,807
                  (3)
                  
                  
                  0.03
                  %Money
      market service fees
                  
                  
                  514,516
                  
                  
                  
                  886
                  
                  
                  
                  0.06
                  %(4)$
                  38,466,088
                  
                  
                  
                  5,057
                  (5)
                  
                  
                  0.76
                  %(5)
  (1)
              Includes
      long-term mutual fund and separate account assets under
      management.
  (2)
              Administrative
      fees are presented net of sub-administration fees paid to a third party to
      be consistent with the methodology used in calculating the revenue sharing
      arrangement with Aston. Gross administration fees were $3,160,212 and
      $3,953,815 for the years ended December 31, 2009 and 2008,
      respectively.
  (3)
              Aston
      provides administrative services to the Aston Funds, and prior to July
      2009, provided administrative services to five money market mutual funds
      managed by Fortis.
  (4)
              Pursuant
      to the Administrative, Compliance and Marketing Services Agreement dated
      September 1, 2006 between Fortis and Aston, Aston received a money market
      service fee from Fortis equal to $550,000 per annum plus 0.0001% of the
      weighted average assets under management in five money market mutual funds
      in excess of $3 billion. The fee was accrued and paid
      monthly.  This agreement was terminated effective December 8,
      2009.
  (5)
              For
      an estimate of the overall weighted average fee basis, we use the total
      fees from all sources and the weighted average assets under management for
      which we provide investment advisory services (Note 1
    above).
  As of
December 31, 2009, the Company had approximately $6.7 billion of total assets
under management, compared to approximately $3.5 billion as of December 31,
2008. As of December 31, 2009, mutual fund assets under management were
approximately $6.5 billion, compared to approximately $3.4 billion as of
December 31, 2008, an increase of approximately 90%. This aggregate increase in
mutual fund assets under management of $3.1 billion resulted from a combination
of (i) positive market appreciation and other adjustments, including
distributions of income and gain, reinvestments of distributions, and other
items, of approximately $1.6 billion and (ii) net asset inflows, which represent
aggregate contributions from new and existing clients less withdrawals, of
approximately $1.5 billion. During the year ended December 31, 2008, the Company
generated net asset inflows of approximately $0.2 billion which were outweighed
by negative market appreciation and other adjustments, including distributions
of income and gains, reinvestments of distributions, and other items, of
approximately $1.8 billion. The Company believes that the favorable relative
investment performance of many of the Aston Funds led to our significant net
asset inflows in 2009.  During the year ended December 31, 2009,
separate account assets under management increased from $115 million to $192
million.
  The
Company generated total operating revenue during the year ended December 31,
2009 of $40,082,210, as compared to $35,712,112 during the year ended December
31, 2008. This 12% increase in revenue was largely attributable to the 13%
increase in the weighted average assets under management in 2009 relative to
2008. Net advisory fees increased to $36,407,482 in 2009 from $31,200,270 in
2008, primarily as a result of the increase in the weighted average assets under
management in 2009 relative to 2008. Gross administration fees decreased from
$3,953,815 in 2008 to $3,160,212 in 2009. Net administration fees declined from
$1,931,170 in 2008 to $1,544,090 in 2009. The declines in the gross and net
administration fees resulted from Fortis’ decision to terminate the
Administrative, Compliance and Marketing Services Agreement with Aston in June
2008 which resulted in a decline in the weighted average assets under
administration.  Aston also earned money market service fees of
$514,516 in the year ended December 31, 2009, down from $558,027 in the year
ended December 31, 2008. The Company’s overall weighted average fee basis
remained flat at 0.76% in 2009 as compared to 2008.
  35
  Distribution
and sub-advisory costs increased from $16,514,898 for the year ended December
31, 2008 to $19,133,595 in 2009. This 16% increase is attributable to the
increase in weighted average assets under management from 2008 to 2009, as these
expenses are directly related to the value of assets under
management.
  Compensation
and related expenses were $9,427,097 for the year ended December 31, 2009.
Compensation and related expenses were $6,037,770 for the year ended December
31, 2008. The Aston management team participates directly in the profitability
of the business through their retention of any excess operating allocation which
is paid as compensation. Because of the lower level of assets under management
in 2008, as compared to 2009, there was a lower level of excess operating
allocation available to pay as compensation to the Aston management team. In
addition, because Aston generated net inflows of approximately $1.5 billion in
2009, as compared to approximately $0.2 billion in 2008, the sales commissions
paid to Aston’s sales and marketing professionals increased significantly in
2009 relative to 2008.  Finally, compensation and related expenses
includes $2,708,834 and $325,487 paid to Highbury’s executive officers in 2009
and 2008, respectively.  More information on the compensation and
related expenses of Highbury’s executive officers is included in Item 11
“Executive Compensation.”
  Highbury
determined the identifiable intangible related to Aston’s advisory contract with
the Aston Funds had not been impaired as of December 31, 2009. In the
fourth quarter of 2008, the Company recorded impairment charges to the
identifiable intangible related to Aston’s advisory contract with the Aston
Funds of $2,288,000 as a result of negative market performance and net asset
outflows from the Aston Funds in 2008.
  The
Company incurred $185,232 of depreciation and amortization expense relating to
Aston’s fixed assets in 2009, compared to $186,450 in 2008.
  Other
operating expenses increased from $5,970,130 for the year ended December 31,
2008 to $8,602,118 for the year ended December 31, 2009. These expenses include
the operating expenses of Aston and Highbury for the periods and consist
primarily of legal, accounting, insurance, occupancy and administrative fees.
Aston’s direct operating expenses for 2009 were $3,350,563, as compared to
$3,926,862 in 2008. Highbury’s operating expenses include $40,000 and $242,000
paid to Highbury’s independent directors in 2008 and 2009,
respectively.  During the fiscal year ended December 31, 2009,
Highbury incurred significant professional fee expenses related to the Special
Committee and the contested proxy solicitation in connection with our 2009
annual meeting of stockholders. Such expenses have and may continue to be
incurred in amounts which cannot presently be estimated, but which may continue
to be substantial. These additional expenses have had a negative impact on our
results of operations in 2009 and may have a negative impact on our results in
future periods.  Highbury also incurred significant expenses related
to the negotiation and documentation of the Merger with AMG, as well as in
subsequent efforts to prepare and distribute the proxy statements for Highbury’s
and the Aston Funds’ special meetings of stockholders to vote on the
Merger.
  Highbury’s
operating expenses, excluding impairment charges, for the years ended December
31, 2008 and 2009 were as follows:
  Year
      Ended December 31,2008
                  
                  
                  2009Professional
      fees
                  
                  $
                  1,495,625
                  
                  
                  $
                  4,687,971Compensation
      and related expenses
                  
                  
                  325,487
                  
                  
                  
                  2,708,834Insurance
                  
                  
                  196,580
                  
                  
                  
                  156,544Administrative
      fees
                  
                  
                  120,000
                  
                  
                  
                  120,000Travel
      and entertainment
                  
                  
                  122,403
                  
                  
                  
                  159,752Other
      expenses
                  
                  
                  108,660
                  
                  
                  
                  127,288$
                  2,368,755
                  
                  
                  $
                  7,960,389
  36
 
 Non-operating
income (loss) consists primarily of earnings on cash and cash equivalent
balances, short-term investments in U.S. Treasury bills and money market mutual
funds and marketable securities. For the year ended December 31, 2009, Highbury
earned interest income on its cash and cash equivalent balances of $25,818. The
Company also had net realized gains of $969,433 related to investments in
marketable securities. For the year ended December 31, 2008, Highbury earned
interest income on its cash and cash equivalent balances of
$155,172.  The Company also had realized losses and net unrealized
losses of $663,175 related to investments in marketable securities.
  Highbury’s
realized and unrealized gains and losses on its marketable securities for the
years ended December 31, 2008 and 2009 were as follows:
  Year
      Ended December 31,2008
                      
                      
                      2009Aston
      mutual fundsRealized
      losses
                      
                      $
                      (146,492
                      )
                      
                      $
                      (46,077
                      )Unrealized
      losses
                      
                      
                      (657,748
                      )
                      
                      
                      —Other
      marketable securitiesRealized
      gains
                      
                      
                      —
                      
                      
                      
                      1,015,510Unrealized
      gains
                      
                      
                      141,065
                      
                      
                      
                      —$
                      (663,175
                      )
                      
                      $
                      969,433
  For the
year ended December 31, 2009, the Company recorded income before provision for
income taxes of $3,729,419. The provision for income taxes and income
attributable to the noncontrolling interest for the year were $410,879 and
$1,899,225, respectively. For the year ended December 31, 2008, the Company
recorded income before provisions for income taxes of $4,206,861. The provision
for income taxes and income attributable to the noncontrolling interest for the
year were $410,925 and $3,309,929, respectively.
  The
following table outlines Highbury’s income tax expenses for the years ended
December 31, 2008 and 2009.
  Year
      Ended December 31,2008
                  
                  
                  2009Current
                  
                  $
                  556,336
                  
                  
                  $
                  (500,236
                  )Deferred -
      intangible related
                  
                  
                  (37,023
                  )
                  
                  
                  791,127Deferred
      - other
                  
                  
                  (108,388
                  )
                  
                  
                  119,988Totals
                  
                  $
                  410,925
                  
                  
                  $
                  410,879
  For
further discussion of the Company’s income taxes, please refer to Note 10 of the
audited consolidated financial statements included elsewhere
herein.
  Highbury
earned net income attributable to Highbury of $1,419,315 in 2009 as compared to
$486,007 in 2008.
  Supplemental
Non-GAAP Performance Measure
  As
supplemental information, we provide a non-GAAP performance measure that we
refer to as “Cash Net Income.” This measure is provided in addition to, but not
as a substitute for, GAAP Net Income. Cash Net Income means the sum of (a) net
income determined in accordance with GAAP, plus (b) amortization of intangible
assets, plus (c) deferred taxes related to intangible assets, plus (d) affiliate
depreciation, plus (e) other non-cash expenses. We consider Cash Net Income an
important measure of our financial performance, as we believe it best represents
operating performance before non-cash expenses relating to the acquisition of
our interest in Aston. Cash Net Income is not a measure of financial performance
under GAAP and, as calculated by us, may not be consistent with computations of
Cash Net Income by other companies. Cash Net Income is used by our management
and board of directors as a principal performance benchmark.
  37
  Since our
acquired assets do not generally depreciate or require replacement by us, and
since they generate deferred tax expenses that are unlikely to reverse, we add
back these non-cash expenses to Net Income to measure operating performance. We
will add back amortization attributable to acquired client relationships because
this expense does not correspond to the changes in value of these assets, which
do not diminish predictably over time. The portion of deferred taxes generally
attributable to intangible assets (including goodwill) that we do not amortize
but which generates tax deductions is added back, because these accruals would
be used only in the event of a future sale of Aston or an impairment charge. We
will add back the portion of consolidated depreciation expense incurred by Aston
because under Aston’s operating agreement we are not required to replenish these
depreciating assets. We also add back expenses that we incur for financial
reporting purposes for which there is no corresponding cash expense because such
expenses cause our Net Income to be understated relative to our ability to
generate cash flow to service debt, if any, finance accretive acquisitions, and
repurchase securities, if appropriate.
  Year
      Ended December 312008
                  
                  
                  2009Net
      Income attributable to Highbury Financial Inc.
                  
                  $
                  486,007
                  
                  
                  $
                  1,419,315Impairment
      of intangible
                  
                  
                  2,288,000
                  
                  
                  
                  —Intangible-related
      deferred taxes
                  
                  
                  (37,023
                  )
                  
                  
                  791,127Affiliate
      depreciation
                  
                  
                  186,450
                  
                  
                  
                  185,232Other
      non-cash expenses
                  
                  
                  —
                  
                  
                  
                  —Cash
      Net Income
                  
                  
                  2,923,434
                  
                  
                  
                  2,395,674Preferred
      stock dividends
                  
                  
                  —
                  
                  
                  
                  (352,174
                  )Cash
      Net Income attributable to common stockholders
                  
                  $
                  2,923,434
                  
                  
                  $
                  2,043,500
 
 Impact
of Inflation
  Our
revenue is directly linked to the total assets under management within the 25
mutual funds and the separate accounts managed by Aston. Our total assets under
management increase or decrease on a daily basis as a result of fluctuations in
the financial markets and net asset flows from investors. While long-term
returns in the financial markets have historically exceeded the rate of
inflation, this may not be the case going forward. Our operating expenses are
likely to be directly affected by inflation. Furthermore, while we earn interest
income on our cash balances, the current interest rates available to us are less
than the rate of inflation.  As a result, the impact of inflation
erodes our purchasing power. Consistent with our investment policy statement
discussed above, we have invested a portion of our working capital in a manner
intended to protect the real purchasing power of our working capital in an
inflationary environment.  However we cannot be sure this strategy
will be successful.
  Liquidity
and Capital Resources
  Prior to
the acquisition of the acquired business, Highbury funded its business
activities almost exclusively through cash flows from financing, including the
debt and equity provided by the initial shareholders and the funds raised in our
initial public offering.  Since the acquisition, Highbury has funded
its business activities with a combination of operating income and the interest
income earned on its cash and cash equivalent balances. Aston funds its business
activities with operating cash flow. Highbury may occasionally provide capital
to Aston to help finance the development of new products or execute accretive
acquisitions. Because Aston, like most investment management businesses, does
not require a high level of capital expenditures, such as for purchases of
inventory, property, plant or equipment, liquidity is less of a concern than for
a company that sells physical assets.
  38
  As of
December 31, 2008 and 2009, Highbury had no borrowings outstanding. In the
future, however, if the Merger is not completed, we will closely review our
ratio of debt to Adjusted EBITDA (as defined below), or  our “leverage
ratio,” as an important gauge of our ability to service debt, make new
investments and access capital. The leverage covenant of our credit facility
provides for a maximum total leverage ratio (including debt from all sources) of
5.0 times Adjusted EBITDA, although borrowings under the credit facility are
limited to 2.0 times Adjusted EBITDA. We believe this level is prudent for its
business, although substantially higher levels of senior and subordinated debt
in relation to Adjusted EBITDA may also be prudent to fund future acquisitions.
“Adjusted EBITDA” under our credit facility means the sum of (a) net income
determined in accordance with GAAP, plus (b) amortization of intangible assets,
plus (c) interest expense, plus (d) depreciation, plus (e) other non-cash
expenses, plus (f) income tax expense. For further information about our credit
facility, please refer to the section entitled “Credit Facility.”
  If the
Merger is not completed, current market conditions may make it more difficult
for us to complete an acquisition through the use of debt financing because of
the reduced availability of debt at appropriate terms. A decrease in our assets
under management caused by negative market conditions could have an adverse
effect on the distributions we receive from Aston and potential future
affiliates and limit our ability to repay our borrowings, including any debt
issued to finance an acquisition. In addition, our ability to make accretive
acquisitions through the issuance of additional equity is dependent upon the
relationship between the market value of our outstanding common stock and the
pricing of any transaction. If the price of our common stock remains at or near
its current level, it may be more difficult for us to issue additional equity to
finance an acquisition. The inability to complete accretive acquisitions may
negatively impact our growth, results of operations or financial
condition.
  As of
December 31, 2009, the Company had $13,290,552 of cash and cash equivalents,
$1,000,000 of investments and $4,391,161 of accounts receivable as compared to
$10,244,469 of cash and cash equivalents, $4,186,552 of investments and
$2,448,572 of accounts receivable as of December 31, 2008. Pursuant to the asset
purchase agreement, as discussed in Item 1 “Business—Aston Business Strategy,” we
received a contingent payment in December 2008.  The contingent
payment was based on the target revenue, as discussed in Item 7 “Management’s
Discussion and Analysis of Financial Condition and Results of Operations —
Overview.”  The target revenue for the six month period ended
November 30, 2008 was $30,459,205. Therefore, in December 2008, Fortis paid
us $3,740,796. The accounts receivable are primarily related to the investment
advisory fees, administrative fees and money market service fees earned by Aston
in December. Aston receives payment of its revenues generally within the first
week of the month following the month in which they are earned. At December 31,
2009, the Company had accounts payable and accrued expenses of $4,853,644,
primarily attributable to the revenue sharing payments owed to Aston’s
distribution partners and the investment sub-advisers, accrued compensation
payable to Aston’s Management Members and employees and accrued legal expenses
associated with negotiation and documentation of the Merger with AMG, as
compared to accounts payable and accrued expenses of $3,407,601 at December 31,
2008. The payments to Aston’s distribution partners and the investment
sub-advisers are generally paid shortly after the receipt of the revenue
discussed above. Because Aston is able to finance its day-to-day operations with
operating cash flow, it does not need to retain a significant amount of cash on
its balance sheet. We expect Aston will continue to distribute all of its excess
cash and cash equivalents on a quarterlybasis to its owners, so
we do not expect large cash and cash equivalents balances to accrue within
Aston.  If the Merger is not completed, Highbury expects to use its
cash and cash equivalents to fund acquisitions related to Aston, pay dividends,
service debt, if any, or repurchase its securities, if appropriate.
  On April
15, 2009, Highbury paid a dividend of $455,155 ($0.05 per share) to stockholders
of record on April 1, 2009 and, on July 15, 2009, Highbury paid a dividend of
$454,252 ($0.05 per share) to stockholders of record on July 1,
2009.
  On
October 7, 2009, Highbury paid (i) a special dividend of $29,308,866 ($1.50 per
share) and (ii) a dividend of $976,962 ($0.05 per share), in each case to
stockholders of record on October 6, 2009.
  On
January 15, 2010, Highbury paid a dividend of $1,000,623 ($0.05 per share) to
stockholders of record on January 4, 2010.
  In
addition, immediately prior to the closing of the Merger, subject to applicable
law and the terms of the Merger Agreement, our board of directors intends to
declare a special cash dividend, payable on the closing date of the Merger, to
all holders of record of shares of Highbury common stock immediately prior to
the effective time of the Merger in an aggregate amount equal to Highbury’s
working capital (including all Highbury liabilities, subject to certain
exceptions, and merger related transaction expenses then outstanding) as of
the end of the calendar month prior to the closing of the Merger minus
$5.0 million.
  39
  Holders
of Highbury’s Series B preferred stock participate in dividends declared on
Highbury common stock on an as converted basis. If the Merger is not completed,
the payment of dividends in the future will be contingent upon our revenues and
earnings, if any, capital requirements, business strategy and general financial
condition. Such capital requirements include seed capital investments in new
investment funds and working capital reserves to ensure clients of Aston and
potential future affiliates of our ability to support the stability of such
affiliates during periods of increased market volatility, capital to finance the
completion of identified potential acquisitions and capital to enable us to
pursue other potential acquisitions by ensuring financial credibility with
acquisition targets and sources of capital such as senior lenders and equity
co-investors.
  Management
believes our existing liquid assets, together with the expected continuing cash
flow from operations, our borrowing capacity under the current credit facility
and our ability to issue debt or equity securities will be sufficient to meet
our present and reasonably foreseeable operating cash needs and future
commitments over the next 12 months.
  Cash Flow from Operating
Activities. Cash flow from operations represents net income plus non-cash
charges or credits for deferred income taxes, depreciation and amortization and
impairment charges as well as the changes in our consolidated working capital.
In 2009, Highbury had $3,269,466 of net cash flow from its operating activities
as compared to $6,619,896 of net cash flow from its operating activities in
2008. We recorded a non-cash impairment charge to the identifiable intangible
related to Aston’s advisory contract with the Aston Funds of $2,288,000 in the
fourth quarter of 2008, as a result of negative market performance and net asset
outflows from the Aston Funds. There was no corresponding impairment charge in
2009.  In 2009, accounts payable increased by $2,106,930 as compared
to a 2008 decrease of $837,001. This is primarily a result of an increase in the
compensation payable to the Aston management team, an increase in the
distribution and sub-advisory costs owed relative to the prior year due to the
higher levels of assets under management in December 2009 as compared to
December 2008 and the accrued expenses incurred in connection with the Merger
with AMG.
  Cash Flow from Investing
Activities. Net cash flow from investing activities will result primarily
from investments in new affiliates, U.S Treasury securities and marketable
securities. In 2009, Highbury invested a total of $6,747,508 in U.S. Treasury
securities and marketable securities as compared to a total of $5,319,735 in
2008. In 2009, Highbury’s investments in U.S. Treasury securities subsequently
matured, and the Company liquidated its portfolio of marketable securities
resulting in total proceeds of $10,903,492 to Highbury.  In 2008, the
investments in U.S. Treasury securities subsequently matured, and a portion of
the investments in marketable securities were sold generating proceeds to
Highbury of $5,105,515.  In December 2008, we received a payment of
$3,740,796 in satisfaction of a contingency related our 2006
acquisition.
  Cash Flow from Financing
Activities. Net cash flow from financing activities will result primarily
from the issuance of equity or debt and the repayment of any obligations which
may arise thereunder, the repurchase of our outstanding securities, the payment
of distributions to Aston’s noncontrolling interest holders or the payment of
dividends.  In 2009, the Company distributed $3,400,112 to Aston’s
noncontrolling interest holders and paid dividends of $31,195,235.  The
Company received proceeds of $32,026,395 upon the exercise of outstanding
warrants, repurchased 3,776,593 warrants for $1,704,740 and repurchased 33,705
shares of common stock for $83,725.  In 2008, we used $1,751,467 and
$1,823,083 to repurchase outstanding common stock and warrants, respectively. We
also paid distributions of $3,614,543 to Aston’s noncontrolling interest holders
related to their noncontrolling interest in Aston.
  Credit
Facility
  On
October 1, 2009, we entered into a third amendment to our credit agreement with
City National Bank. The credit agreement, as amended, expires on
September 30, 2010 and provides for a revolving line of credit of up to
$12.0 million. The credit agreement provides for a maximum total leverage ratio
(including debt from all sources) of 5.0 times Adjusted EBITDA, although
borrowings under the credit agreement are limited to 2.0 times Adjusted EBITDA,
and incorporates a minimum fixed charge coverage ratio of 1.25x and a minimum
net worth of $20 million. The credit facility may be used for working capital,
general corporate purposes and repurchases of our outstanding securities, if
appropriate.
  40
  Borrowings
under our credit facility will bear interest, at our option, at (i) for a LIBOR
loan, the greater of (w) 3.50% and (x) the LIBOR interest rate plus 2.75% per
year or (ii) for a prime rate loan, the greater of (y) 3.50% and (z) the
fluctuating prime rate plus 0.50% per year. In addition, we will be required to
pay annually a fee of one quarter of one percent (0.25%) on the average daily
balance of the unused portion of the credit facility. We are required to make
interest payments monthly for any prime rate borrowings. For any LIBOR
borrowings, interest payments are required to be made at the end of any LIBOR
contract or quarterly, whichever is sooner. Any outstanding principal is due at
maturity on September 30, 2010. For so long as certain events of default
continue, upon notice by City National Bank, the interest rate on any
outstanding loans will increase by three percent (3%).  Under the
credit facility, the consummation of the Merger would accelerate the required
repayment of any outstanding borrowings. As of December 31, 2009, Highbury had
no borrowings outstanding.
  Our
credit facility is secured by all of our assets. Our credit facility contains
customary negative covenants which, among other things, limit indebtedness,
asset sales, loans, investments, liens, mergers and acquisitions, sale and
leaseback transactions and purchases of equity, other than repurchases of our
outstanding securities. Our credit facility also contains affirmative covenants
as to, among other things, financial statements, taxes, corporate existence and
legal compliance. As of December 31, 2009, we were in compliance with all of the
covenant requirements under this credit facility.
  Supplemental
Non-GAAP Liquidity Measure
  As
supplemental information, we provide information regarding Adjusted EBITDA, a
non-GAAP liquidity measure. This measure is provided in addition to, but not as
a substitute for, cash flow from operations. As a measure of liquidity, we
believe that Adjusted EBITDA is useful as an indicator of our ability to service
debt, make new investments and meet working capital requirements. Highbury
provides this non-GAAP measure because its management uses this information when
analyzing our financial position. We further believe that many investors use
this information when analyzing the financial position of companies in the
investment management industry.
  The
following table provides a reconciliation of net income to Adjusted EBITDA for
fiscal years 2008 and 2009:
  Year
      Ended December 312008
                    
                    
                    2009Net
      Income
                    
                    $
                    486,007
                    
                    
                    $
                    1,419,315Provision
      for income taxes
                    
                    
                    410,925
                    
                    
                    
                    410,879Interest
      expense
                    
                    
                    —
                    
                    
                    
                    —Impairment
      of intangible
                    
                    
                    2,288,000
                    
                    
                    
                    —Depreciation
      and amortization
                    
                    
                    186,450
                    
                    
                    
                    185,232Other
      non-cash expenses
                    
                    
                    —
                    
                    
                    
                    —Adjusted
      EBITDA
                    
                    $
                    3,371,382
                    
                    
                    $
                    2,015,426
 
 Quantitative
and Qualitative Disclosures About Market Risk
  The
investment management business is, by its nature, subject to numerous and
substantial risks, including volatile trading markets and fluctuations in the
volume of market activity. Our revenue, which is based on a percentage of our
assets under management, is largely dependent on the total value and composition
of our assets under management. Additionally, consistent with the terms of
Highbury’s investment policy statement, we invest a portion of our working
capital, from time to time, in marketable securities.  Consequently,
our net income, revenues and working capital investments are likely to be
subject to wide fluctuations, reflecting the effect of many factors, including:
general economic conditions; securities market conditions; the level and
volatility of interest rates and equity prices; competitive conditions;
liquidity of global markets; international and regional political conditions;
regulatory and legislative developments; monetary and fiscal policy; investor
sentiment; availability and cost of capital; technological changes and events;
outcome of legal proceedings; changes in currency values; inflation; credit
ratings; changes in global monetary aggregates; changes in supply and demand
fundamentals for equity and debt securities as well as real commodities; and the
size, volume and timing of transactions. These and other factors could affect
the stability and liquidity of securities and future markets, and the ability of
Highbury, Aston and other financial services firms and counterparties to satisfy
their obligations.
  41
  Highbury
is also exposed to market risk as it relates to changes in interest rates
applicable to borrowings under Highbury’s line of credit and investment of
Highbury’s cash balances. Because Highbury had no outstanding debt under its
line of credit as of December 31, 2009, it does not view this interest rate risk
as a material risk.
  Certain
of Highbury’s outstanding cash balances are invested in 100% U.S. Treasury money
market mutual funds. We do not have significant exposure to changing interest
rates on invested cash at December 31, 2009. As a result, the interest rate
market risk implicit in these investments at December 31, 2009, if any, is
low.
  Off-Balance
Sheet Arrangements
  Warrants
issued in conjunction with our initial public offering are equity linked
derivatives and accordingly represent off-balance sheet arrangements. The
warrants meet the scope exception in paragraphs 74 and 75 of ASC 815-10-15 and
are accordingly not accounted for as derivatives for purposes of ASC 815-10-15,
but instead are accounted for as equity. Our warrants issued in connection with
our initial public offering expired on January 25, 2010 and, therefore, are
no longer outstanding. See Note 8 to the consolidated financial statements for a
discussion of the warrants.
  ITEM
      7A.
              QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
  For
quantitative and qualitative disclosures about how we are affected by market
risk, see Item 7 “Management’s Discussion and Analysis of Financial Condition
and Results of Operations—Quantitative and Qualitative Disclosures About Market
Risk,” which is incorporated herein by reference.
  ITEM
      8.
              FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA
  This
information appears following Item 15 of this Report and is incorporated herein
by reference.
  ITEM
      9.
              CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE
  None.
  ITEM
      9A(T).
              CONTROLS
      AND PROCEDURES
  Disclosure
Controls and Procedures
  We
carried out an evaluation, under the supervision and with the participation of
our management, including our principal executive officer and our principal
financial officer, of the effectiveness of our disclosure controls and
procedures (as defined in Rule 13a-15(e) or 15d-15(e)) as of December 31, 2009.
Based on that evaluation, our chief executive officer and our principal
financial officer concluded that our disclosure controls and procedures are
effective as of the end of the period covered by this report.
  Internal
Control Over Financial Reporting
  The
management of Highbury and its subsidiaries is responsible for establishing and
maintaining adequate internal control over financial reporting as defined in
Rule 13(a)-15(f) under the Exchange Act. The Company’s internal control over
financial reporting is a process designed under the supervision of the Company’s
principal executive officer and principal financial officer, and effected by the
Company’s board of directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of the Company’s financial statements for external purposes in
accordance with GAAP.
  42
  Our
internal control over financial reporting includes policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the
Company; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with GAAP,
and that receipts and expenditures of the Company are being made only in
accordance with authorizations of management and directors of the Company; and
(3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the Company’s assets that could
have a material effect on the financial statements.
  As of
December 31, 2009, management, including the Company’s principal executive
officer and principal financial officer, assessed the effectiveness of the
Company’s internal control over financial reporting based on the criteria
established in Internal Control - Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission. Based on this
assessment, management has determined that the Company’s internal control over
financial reporting as of December 31, 2009 is effective. Because of the
inherent limitations of internal control over financial reporting, including the
possibility of collusion or improper management override of controls, material
misstatements due to error or fraud may not be prevented or detected on a timely
basis. Also, projections of any evaluation of the effectiveness of the internal
control over financial reporting to future periods are subject to the risk that
the controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
  This
annual report does not include a report of the Company’s independent registered
public accounting firm regarding internal control over financial
reporting.  Our internal controls were not subject to audit by the
Company’s independent registered public accounting firm pursuant to temporary
rules of the SEC.
  During
the fiscal quarter ended December 31, 2009, there has been no change in our
internal control over financial reporting that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
  ITEM
      9B.
              OTHER
      INFORMATION
  Highbury
held its annual meeting of stockholders on December 29, 2009. At that
meeting, the stockholders:
  (i)
              elected Hoyt Ammidon Jr. as
      director to serve for a term of three years or until his successor is duly
      elected and qualified, for which voting at the meeting was as follows:
      11,437,846 votes cast for; 197,450 votes withheld;
    and
 
 (ii)
              elected John D. Weil as director
      to serve for a term of three years or until his successor is duly elected
      and qualified, for which voting at the meeting was as follows: 11,600,096
      votes cast for; 35,200 votes
withheld.
 
 The
following directors’ term of office continued after the meeting: Kenneth C.
Anderson, Stuart D. Bilton, R. Bruce Cameron, Richard S. Foote, Theodore M.
Leary Jr., and Aidan Riordan.
  On
November 25, 2009, one of our significant stockholders, Peerless, filed a
definitive proxy statement with the SEC in connection with our 2009 annual
meeting of stockholders, in which Peerless solicited proxies to elect Timothy E.
Brog to our board of directors and to adopt two non-binding stockholder
proposals.
  43
  On
December 18, 2009, we entered into an agreement with Peerless and Mr. Brog
pursuant to which Peerless ended (i) its proxy contest to elect Mr. Brog to our
board of directors at our 2009 annual meeting stockholders and (ii) its support
of two non-binding stockholder resolutions. Pursuant to the agreement, Peerless
and Mr. Brog (i) ceased all of their solicitation efforts with respect to our
2009 annual meeting of stockholders, (ii) agreed not to vote any proxies
obtained by them at our 2009 annual meeting of Highbury stockholders, (iii)
agreed to vote all of Peerless’ shares of Highbury common stock in favor of the
election of Hoyt Ammidon Jr. and John Weil as directors of Highbury for a term
expiring at the 2012 annual meeting of Highbury stockholders, (iv) agreed to
vote all of Peerless’ shares in accordance with the recommendations of the our
board of directors with respect to the Merger, (v) waived Peerless’ appraisal
and dissenters’ rights with respect to the Merger and (vi) agreed not to take
any action in opposition to the recommendations or proposals of our board of
directors or to effect a change of control of us.
  Pursuant
to this agreement, Peerless and Mr. Brog did not attend the 2009 annual meeting.
Therefore, in accordance with Highbury’s by-laws, the non-binding stockholder
proposal recommending that our board of directors amend our charter and by-laws
to eliminate our classified board of directors and the non-binding stockholder
proposal recommending that our board of directors redeem all rights under our
Rights Agreement and that our board of directors obtain stockholder approval
prior to entering into any future rights agreement were not properly presented,
this proposed business was not transacted, and the proxies for these stockholder
proposals were not voted at the 2009 annual meeting.
  The
agreement further provides that if the Merger is not completed on or before July
16, 2010, or the Merger Agreement is terminated, then our board of directors
will take all necessary action to appoint Mr. Brog to serve on our board of
directors for a term expiring at the 2012 annual meeting of stockholders. We
also agreed to reimburse Peerless for $200,000 of its expenses incurred in the
proxy contest with respect to the 2009 annual meeting of stockholders. The
parties also agreed to customary mutual releases, covenants not to sue and
non-disparagement provisions. The agreement terminates upon the earliest of (i)
the mutual agreement of the parties, (ii) consummation of the Merger, (iii)
August 13, 2010 or (iv) the termination of the Merger Agreement. The mutual
releases and covenants not to sue survive any such termination.
  As a
result of this proxy contest and settlement, for the fiscal year ended December
31, 2009, Highbury incurred significant expenses related to the Special
Committee and the contested proxy solicitation in connection with our 2009
annual meeting in excess of the fees and expenses typically associated with an
uncontested proxy solicitation. Such expenses have and may continue to be
incurred in amounts which cannot presently be estimated, but which may continue
to be substantial. These additional expenses have had a negative impact on our
results of operations during the fiscal year ended December 31, 2009 and may
have a negative impact on our results in future periods.
  PART
III
  ITEM
      10.
              DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
  Directors
and Executive Officers
  Highbury’s
current directors and executive officers are as follows:
  Name
              
              Age
              
              PositionR.
      Bruce Cameron
              
              53
              
              Chairman
      of the Board of DirectorsRichard
      S. Foote
              
              46
              
              President,
      Chief Executive Officer and DirectorR.
      Bradley Forth
              
              30
              
              Executive
      Vice President, Chief Financial Officer and SecretaryHoyt
      Ammidon Jr.
              
              72
              
              DirectorKenneth
      C. Anderson
              
              45
              
              DirectorStuart
      D. Bilton
              
              62
              
              DirectorTheodore
      M. Leary Jr.
              
              65
              
              DirectorAidan
      J. Riordan
              
              38
              
              DirectorJohn
      D. Weil
              
              69
              
              Director
  44
  Director
Qualifications
 The
following information pertains to the directors, their ages, principal
occupations and other public company directorships for at least the last
five-years and information regarding their specific experience, qualifications,
attributes or skills that led to the conclusion that each such person should
serve as a director of the Company in light of the Company’s business and
structure.  In addition to this information, the board of directors
also believes that each director has a reputation for integrity, honesty and
adherence to high ethical standards.  Each director has demonstrated
business acumen and an ability to exercise sound judgment, as well as a
commitment of service to Highbury and to our board of directors.
  R. Bruce Cameron,
CFA has been our Chairman of the board since our inception. Mr. Cameron
has been the president and chief executive officer of Berkshire Capital since
its formation in May 2004. Mr. Cameron co-founded Berkshire Capital Corporation,
the predecessor firm to Berkshire Capital, in 1983 as the first independent
investment bank covering the financial services industry, with a focus on
investment management and capital markets firms. Mr. Cameron and his partners
have advised on approximately 239 mergers and acquisitions of financial services
companies, including high net worth managers, institutional investment managers,
mutual fund managers, real estate managers, brokerage firms, investment banks
and capital markets firms with aggregate client assets under management of more
than $525 billion and aggregate transaction value in excess of $10.8 billion.
Mr. Cameron is the managing member of Broad Hollow LLC, an entity formed for the
purpose of facilitating the investments in us made by our founding stockholders,
which owns 1,001,250 shares of our common stock. Prior to forming Berkshire
Capital Corporation, Mr. Cameron was an associate director of Paine Webber Group
Inc.’s Strategic Planning Group from 1981 through 1983. Mr. Cameron began his
career at Prudential Insurance Company from 1978 through 1980, working first in
the Comptroller’s Department and then in the Planning & Coordination Group.
Mr. Cameron was graduated from Trinity College, where he received a B.A. in
Economics, and from Harvard Business School, where he received an M.B.A. Mr.
Cameron also attended the London School of Economics. Mr. Cameron is a CFA
charterholder and the treasurer of the New York Society of Security Analysts.
Mr. Cameron is a director of White Oak Capital Corporation, a middle-market
lending organization that is in formation. Mr. Cameron is a Fellow of the Life
Management Institute. He is also a past trustee of the Securities Industry
Institute.  Mr. Cameron brings significant strategic insight and
business experience to the board of directors from his long career in investment
banking with a focus on the investment management industry.
  Richard S. Foote,
CFA has been our President and Chief Executive Officer and a member of
our board of directors since our inception. Mr. Foote has been a managing
director of Berkshire Capital since its formation in May 2004 and a managing
director, principal and vice president of Berkshire Capital Corporation since
1994. Since 1994, Mr. Foote has advised on 30 completed mergers and acquisitions
of financial services companies, including high net worth managers,
institutional investment managers, mutual fund managers, real estate managers,
brokerage firms, investment banks and capital markets firms with aggregate
client assets under management of approximately $131 billion and aggregate
transaction value of approximately $2.2 billion. Mr. Foote is a director of
Berkshire Capital and serves on its compensation committee, commitment committee
and technology committee. From 1991 through 1994, Mr. Foote was a co-founder and
partner of Knightsbridge Capital Partners, a partnership engaged in investment
banking and merchant banking activities. From 1985 to 1991, Mr. Foote was a vice
president, an associate, and an analyst in the investment banking division of
PaineWebber Incorporated, primarily working on mergers, acquisitions and the
issuance of equity and debt securities. Mr. Foote was graduated from Harvard
College, cum laude, in 1985 with an A.B. in Economics. Mr. Foote is a CFA
charterholder and a member of the CFA Institute, the New York Society of
Security Analysts, the Pension Real Estate Association and the National Council
of Real Estate Investment Fiduciaries.  Mr. Foote brings significant
strategic insight and business experience to the board of directors from his
long career in investment banking with a focus on the financial services
industry as well as considerable skills in business strategy and operations to
the board of directors.
  45
  R. Bradley Forth,
CFA has been our Executive Vice President, Chief Financial Officer and
Secretary since our inception. Mr. Forth has been a vice president and an
associate at Berkshire Capital since its formation in May 2004 and, before that,
an associate and an analyst at Berkshire Capital Corporation since 2001. Mr.
Forth has advised on 19 mergers and acquisitions of financial services companies
with aggregate transaction value of approximately $1.3 billion. He was graduated
from Duke University in 2001 with a B.S. in Economics and a B.A. in Chemistry.
Mr. Forth is a CFA charterholder and a member of the CFA Institute and the New
York Society of Security Analysts.
  Hoyt Ammidon
Jr. has been a member of our board of directors since December 2008 and
lead independent director since April 2009. Mr. Ammidon has been an Advisory
Director for Berkshire Capital since 2004. Prior to this role, he served as a
Managing Director at Berkshire Capital and its predecessor from 1994 to 2004.
Mr. Ammidon was previously at Cazenove Incorporated, where he was President of
its U.S. brokerage and investment banking subsidiary from 1988 to 1993. He was
also formerly the Managing Director of Chase Investment Bank’s Merger and
Acquisition Division from 1985 to 1987, and Senior Vice President in E.F. Hutton
Company’s Corporate Finance Department from 1977 to 1985. Mr. Ammidon began his
career in corporate finance at Morgan Stanley & Co. from 1963 to 1976 and
worked in Paris for three years for Morgan & Cie. International from 1972 to
1975. He is a former director of Tetra Technologies, Inc., Balchem Corporation
and W. H. Smith Group (USA). He has also served as a member of the Securities
Industry Association’s International Committee. Mr. Ammidon earned a BA in
history from Yale University in 1959 and then served as a captain and aviator in
the United States Marine Corps from 1959 to 1963. Mr. Ammidon has more than
thirty years of experience in the investment management industry as well as
significant experience serving on the boards of directors of other public
companies, which has given him extensive operational, industry and strategic
knowledge in Highbury’s key business areas.
  Kenneth C.
Anderson, CPA has been a member of our board of directors since August
2009. Mr. Anderson has served as President of Aston since December 2006. Mr.
Anderson was associated with AAAM and its predecessors and/or affiliates since
1993. From 2001 until 2006, Mr. Anderson was the President and CEO of the fund
business and Executive Vice President and Director of Mutual Funds for AAAM. In
addition, he was the Chairman of the Product Management Committee for AAAM. Mr.
Anderson served on the boards of Veredus Asset Management, TAMRO Capital
Partners, and ABN AMRO Investment Trust Company, subsidiaries of AAAM. He is a
member of the Investment Company Institute’s Sales Force Committees and a past
Chairman of the Board of Governors for the Mutual Fund Education Alliance from
2004 to 2005. From 1987 until 1993, Mr. Anderson specialized in the Financial
Services Practice at KPMG LLP. He received a B.B.A. in Accounting from Loyola
University of Chicago. Mr. Anderson’s experience as the President of Aston and
his years of experience at KPMG LLP allows him to lend considerable financial,
accounting and business skills to the board of directors.
  Stuart D. Bilton,
CFA has been a member of our board of directors since August 2009. Mr.
Bilton was selected to serve as a director by the holders of our Series B
preferred stock in accordance with the Certificate of Designation of the Series
B preferred stock. Mr. Bilton has served as Chairman and Chief Executive Officer
of Aston since November 2006. Mr. Bilton was associated with ABN AMRO Asset
Management, or AAAM, and its predecessors and/or affiliates since 1972. He
served as President and Chief Executive Officer of ABN AMRO Asset Management
Holdings, Inc. from 2001 to 2003 and as its Vice Chairman from 2004 to 2006.
Prior to its acquisition by ABN AMRO, Mr. Bilton was President and Chief
Executive Officer of Alleghany Asset Management, the parent company of
Blairlogie Capital Management, Chicago Capital Management, Chicago Deferred
Exchange Corporation, The Chicago Trust Company, Montag & Caldwell, TAMRO
Capital Partners and Veredus Asset Management. He is the Chairman of the Aston
Funds and is a Director of Baldwin & Lyons, Inc. He earned a B.Sc.(Econ)
degree from the London School of Economics in 1967 and an M.S. degree from the
University of Wisconsin in 1970. As Chairman and Chief Executive Officer of
Aston and its predecessors, Mr. Bilton brings management experience, necessary
insight into Highbury’s operations and a historical perspective to the board of
directors.
  46
  Theodore M. Leary
Jr. has been a member of our board of directors since April 2009. Mr.
Leary is the President of Crosswater Realty Advisors LLC, a real estate advisory
firm he founded in 2005. Prior to founding Crosswater, he served for 22 years in
a variety of roles as a Principal of Lowe Enterprises, a diversified real estate
company. He was the President of Lowe Enterprises Investment Management, LLC, or
LEIM, the institutional advisory arm of Lowe Enterprises, from 1990 to 2004 and
the Chairman from 2004 to 2005. Mr. Leary worked for the Victor Palmieri Company
from 1975 to 1982. Before entering the real estate business, Mr. Leary worked in
the United States Senate as the chief of staff to U.S. Senator Abraham Ribicoff.
Mr. Leary is a graduate of Harvard College and George Washington University Law
School. Mr. Leary has considerable experience in the real estate investment
management industry and he brings considerable industry and strategic knowledge
to the board of directors.
  Aidan J.
Riordan has been a member of our board of directors since May 2007. Since
2003, Mr. Riordan has been a Partner at Calvert Street Capital Partners, Inc.,
or CSCP, a Baltimore-based private equity investment firm focused on
middle-market manufacturing and service companies. Previously, he was an
Associate with Castle Harlan, Inc., a New York-based middle-market private
equity partnership from 2000 to 2003. Mr. Riordan also served as an Associate
for Berkshire Capital Corporation from 1994 to 1998. He holds a Bachelor of Arts
degree in Economics from the University of Pennsylvania and a Masters in
Business Administration degree in Finance from Columbia Business School. Mr.
Riordan currently serves on the boards of directors for two CSCP portfolio
companies: Universal Millennium, a printing and graphics services company, and
ADAPCO, a distributor of specialty chemicals and equipment. With considerable
experience in private equity and investment banking, Mr. Riordan brings to the
board of directors in-depth experience in strategic planning and
finance.
 
 John D.
Weil has been a member of our board of directors since August 2009. Mr.
Weil currently serves as President of Clayton Management Company, an investment
firm, and has served in this capacity since 1978. Mr. Weil has also served as a
trustee of Washington University in St. Louis since 2004 and has served as
President of the governing board of the St. Louis Art Museum since 2008. Mr.
Weil has served as a member of the Board of Directors of PICO Holdings, Inc.
since 1996 and as Lead Director from May 2007 until he was elected Chairman in
February 2008. Mr. Weil has also served as a member of the board of directors of
Allied Health Products, Inc. and Baldwin & Lyons, Inc. since 1997. Mr. Weil
brings significant business experience to the board of directors from his long
career in the investment management business and his extensive experience on the
boards of directors of other public companies.
  In
December 2002 an action initiated by the SEC against Mr. Weil was settled
simultaneously with its filing pursuant to a consent agreement entered into by
Mr. Weil. The SEC alleged violations of the anti-fraud provisions of the federal
securities laws arising in connection with transactions in the securities of
Kaye Group, Inc. ("Kaye Group") involving material non-public information. Mr.
Weil was not an officer or director of Kaye Group. The transactions cited by the
SEC in its complaint involved less than one percent of the securities of Kaye
Group beneficially owned by Mr. Weil and less than one-tenth of one percent of
the Kaye Group's outstanding shares. Mr. Weil consented to the entry of a final
judgment of permanent injunction and other relief, including disgorgement of
alleged profits in the amount of $47,000 and civil penalties of a like amount,
but did not admit to nor deny any of the allegations in the SEC's
complaint.
  Number
and Terms of Directors
  Our board
of directors has eight directors. Seven of the directors are divided into three
classes with only one class of directors being elected in each year and each
class serving a three-year term. The term of office of the first class of
directors, consisting of Messrs. Ammidon and Weil, will expire on the date of
our annual meeting in 2012. The term of office of the second class of directors,
consisting of Messrs. Cameron and Riordan, will expire on the date of our annual
meeting in 2010. The term of office of the third class of directors, consisting
of Messrs. Foote, Leary and Anderson, will expire on the date of our annual
meeting in 2011.
  Messrs.
Bilton and Anderson were selected to serve as directors by the holders of our
Series B preferred stock in accordance with the Certificate of Designation of
the Series B preferred stock, which provides that the holders of our Series B
preferred stock have the right to elect a number of directors equal to 25% of
the total number of the our directors. On September 14, 2009, Mr. Anderson
stepped down as a director selected by the holders of our Series B preferred
stock. He was thereafter elected by our board of directors to serve as a
director in the class of directors whose term will expire on the date of our
2011 annual meeting. Except for the right of holders of our Series B preferred
stock to elect a number of directors equal to 25% of the total number of our
directors, and the designation of Mr. Bilton to serve as one of their directors,
no arrangement or understanding exists between any of our officers or directors
and any other person or persons pursuant to which the officer or director was or
is to be selected as an officer or director. There are no family relationships
among any of our officers and directors. Mr. Bilton remains a director
designated by the Series B preferred stock.
  47
  On
December 18, 2009, we entered into an agreement with Peerless and Timothy E.
Brog pursuant to which Peerless ended (i) its proxy contest to elect Mr. Brog to
our board of directors at our 2009 annual meeting stockholders and (ii) its
support of two non-binding stockholder resolutions. The agreement provides that
if the Merger is not completed on or before July 16, 2010 or the Merger
Agreement is terminated, then our board of directors will take all necessary
action to appoint Mr. Brog to serve on our board of directors for a term
expiring at the 2012 annual meeting of stockholders.
  Section
16(a) Beneficial Ownership Reporting Compliance
  Section
16(a) of the Exchange Act requires Highbury’s officers and directors, and
persons who own more than ten percent of Highbury’s common stock, to file
reports of ownership and changes in ownership on Forms 3, 4 and 5 with the SEC.
Such persons are required by the SEC regulations to furnish us with copies of
all Forms 3, 4 and 5 that they file. Based on our review of the Forms 3, 4 and 5
filed by such persons, we believe that all Section 16(a) filing requirements
applicable to Highbury’s officers, directors and greater than ten percent
beneficial owners were complied with during the fiscal year ended December 31,
2009, with the following exceptions. Second Curve Capital LLC, a greater than
10% beneficial owner of Highbury’s common stock, filed (i) a late Form 3 with
the SEC on March 12, 2009 which reported two transactions, (ii) a late Form 4
with the SEC on March 12, 2009 which reported five transactions and (iii) a late
Form 4 with the SEC on October 9, 2009 which reported two transactions. Talon
Asset Management, LLC, a greater than 10% beneficial owner of Highbury’s common
stock, filed (i) a late Form 3 with the SEC on June 23, 2009 which reported two
transactions and (ii) a late Form 4 with the SEC on October 6, 2009 which
reported two transactions. Stuart D. Bilton, a director of Highbury and an
officer of Aston, filed a late Form 4 with the SEC on August 19, 2009 which
reported one transaction. Kenneth C. Anderson, a director of Highbury and
officer of Aston, filed a late Form 4 with the SEC on August 18, 2009 which
reported one transaction. Gerald Dillenburg, an officer of Aston, filed a late
Form 4 with the SEC on August 20, 2009 which reported one
transaction.
  Code
of Business Conduct and Ethics
  Our board
of directors has adopted a Code of Business Conduct and Ethics for our officers
and directors. The text of this Code of Business Conduct and Ethics may be found
on our website at www.highburyfinancial.com. Amendments to and waivers from the
Code of Business Conduct and Ethics that require disclosure under applicable SEC
rules will be posted on our website.
  Committees
of the Board of Directors
  Special Committee. In July
2009, our board of directors formed a Special Committee to explore and evaluate
strategic alternatives aimed at enhancing stockholder value. The Special
Committee consists of Hoyt Ammidon Jr., who chairs the Special Committee,
Theodore M. Leary Jr. and Aidan J. Riordan. The Special Committee has hired the
investment banking firm of Sandler O’Neill & Partners, L.P. and the law firm
of Debevoise & Plimpton LLP to provide financial advisory and legal
services, respectively, to the Special Committee.
  Audit Committee. Prior to
April 2009, our board of directors carried out the functions customarily
undertaken by an audit committee. In April 2009, our board of directors formed
an Audit Committee. The members of the Audit Committee are Hoyt Ammidon Jr. and
Theodore M. Leary, Jr. The Audit Committee operates under a written charter
adopted by our board of directors, which can be viewed on our website at
www.highburyfinancial.com. Our board of directors has determined that each of R.
Bruce Cameron, Richard S. Foote and Hoyt Ammidon Jr. qualify as an “audit
committee financial expert” as that term is defined under Item 407(d)(5)(ii) of
Regulation S-K of the Exchange Act. However, since Messrs. Cameron and Foote are
officers of Highbury, neither is “independent” as that term is defined under The
Nasdaq Stock Market listing requirements.
  48
  Compensation Committee. Prior
to February 2009, our board of directors carried out the functions customarily
undertaken by a compensation committee. In February, 2009, our board of
directors formed a Compensation Committee. The members of the Compensation
Committee are Aidan J. Riordan and Hoyt Ammidon Jr. The Compensation Committee
operates under a written charter adopted by our board of directors, which can be
viewed on our website at www.highburyfinancial.com.
  Nominating and Corporate Governance
Committee. Prior to April 2009, our board of directors carried out the
functions customarily undertaken by a nominating and corporate governance
committee. In April 2009, our board of directors formed a Nominating and
Corporate Governance Committee. The members of the Nominating and Corporate
Governance Committee are Aidan J. Riordan and Theodore M. Leary, Jr. The
Nominating and Corporate Governance Committee operates under a written charter
adopted by our board of directors, which can be viewed on our website at
www.highburyfinancial.com.
  ITEM
      11.
              EXECUTIVE
      COMPENSATION
  As a
“Smaller Reporting Company,” the Company has elected to follow scaled disclosure
requirements for smaller reporting companies with respect to the disclosure
required by Item 402 of Regulation S-K. Under the scaled disclosure obligations,
the Company is not required to provide a Compensation Discussion and Analysis,
Compensation Committee Report and certain other tabular and narrative
disclosures relating to executive compensation.
  SUMMARY
COMPENSATION TABLE
  The
following table sets forth information concerning the compensation of the Chief
Executive Officer and the two most highly compensated executive officers, other
than the Chief Executive Officer, of Highbury for fiscal years 2008 and
2009.
  Name
      and Principal Position
                  
                  Year
                  
                  Salary
      ($)
                  
                  
                  Bonus
      ($)
                  
                  
                  All
      Other
                      Compensation
                  
                  
                  Total
      ($)Richard
      S. Foote
                  
                  2009
                  
                  $
                  300,000
                  
                  
                  $
                  284,000
                  (1)
                  
                  $
                  884,000
                  (2)
                  
                  $
                  1,468,000President,
      Chief Executive Officer and Director
                  
                  2008
                  
                  $
                  —
                  
                  
                  $
                  150,000
                  
                  
                  $
                  —
                  
                  
                  $
                  150,000R.
      Bradley Forth
                  
                  2009
                  
                  $
                  150,000
                  
                  
                  $
                  167,000
                  (3)
                  
                  $
                  584,000
                  (4)
                  
                  $
                  901,000Executive
      Vice President, Chief Financial Officer and Secretary
                  
                  2008
                  
                  $
                  —
                  
                  
                  $
                  75,000
                  
                  
                  $
                  —
                  
                  
                  $
                  75,000Stuart
      D. Bilton(5)
                  
                  2009
                  
                  $
                  257,500
                  
                  
                  $
                  439,359
                  
                  
                  $
                  —
                  
                  
                  $
                  696,859Chairman
      and Chief Executive Officer of Aston, Director
                  
                  2008
                  
                  $
                  257,500
                  
                  
                  $
                  410,550
                  
                  
                  $
                  —
                  
                  
                  $
                  668,050
 
 (1)
              On
      November 25, 2009, Highbury’s Compensation Committee approved an incentive
      bonus of $284,000 for Mr. Foote for 2009. The incentive bonus was paid in
      December 2009.
  (2)
              In
      connection with the Company’s exploration of strategic alternatives, the
      Special Committee and Compensation Committee approved a retention bonus of
      $300,000 for Mr. Foote. The retention bonus was paid in December 2009. In
      connection with the Merger Agreement, Highbury entered into a severance
      agreement, dated as of December 12, 2009, with Mr. Foote. Pursuant to the
      severance agreement, if the employment of Mr. Foote is terminated (i) by
      Highbury without cause, (ii) due to the death or (iii) voluntarily for
      good reason, then Highbury shall pay to Mr. Foote the following: (a) his
      earned salary, (b) his accrued obligations and (c) a separation payment
      equal to $584,000 (an amount equal to the sum of his base salary currently
      in effect and the amount payable to him as an annual incentive bonus for
      services rendered by him in 2009). This separation payment was recognized
      as an expense by the Company and as income by Mr. Foote in 2009, but is
      currently being held in a trust account. If the Merger closes, it is
      anticipated that Mr. Foote will receive his separation payment.The
      separation payment will revert to the Company if the Merger is not
      consummated or if Mr. Foote (i) is terminated for cause (as defined in the
      severance agreement) or (ii) voluntarily terminates his employment with
      Highbury, other than a voluntary termination for good reason. The
      retention bonus and the separation payment are included in the column
      entitled “All Other Compensation”
above.
  49
  (3)
              On
      November 25, 2009, Highbury’s Compensation Committee approved an incentive
      bonus of $142,000 for Mr. Forth for 2009. In December 2009, Highbury’s
      Compensation Committee approved a one-time bonus of $25,000 for Mr. Forth
      in consideration, in part, for the exceptional effort and time commitment
      required of him in the negotiation of the merger agreement. The incentive
      bonus and the one-time bonus were paid in December
  2009.
  (4)
                In
      connection with the Company’s exploration of strategic alternatives, the
      Special Committee and Compensation Committee also approved a retention
      bonus of $292,000 for Mr. Forth.  The retention bonus was paid
      in December 2009.  In connection with the Merger Agreement,
      Highbury entered into a severance agreement, dated as of December 12,
      2009, with Mr. Forth. Pursuant to the severance agreement, if the
      employment of Mr. Forth is terminated (i) by Highbury without cause, (ii)
      due to the death or (iii) voluntarily for good reason, then Highbury shall
      pay to Mr. Forth the following: (a) his earned salary, (b) his accrued
      obligations and (c) a separation payment equal to $292,000 (an amount
      equal to the sum of his base salary currently in effect and the amount
      payable to him as an annual incentive bonus for services rendered by him
      in 2009). This separation payment was recognized as an expense by the
      Company and as income by Mr. Forth in 2009, but is currently being held in
      a trust account.  If the Merger closes, it is anticipated that
      Mr. Forth will receive his separation payment.  The separation
      payment will revert to the Company if the Merger is not consummated or if
      Mr. Forth (i) is terminated for cause (as defined in the severance
      agreement) or (ii) voluntarily terminates his employment with Highbury,
      other than a voluntary termination for good reason.  The
      retention bonus and the separation payment are included in the column
      entitled “All Other Compensation”
above.
  (5)
                The
      salary and bonus of Mr. Bilton is paid out of Aston’s Operating Allocation
      pursuant to the Management Agreement. A description of the Management
      Agreement is included in Item 13 “Certain Relationships and Related
      Transactions—Management Agreement.”
  2009
DIRECTOR COMPENSATION
  The
following table sets forth information concerning the compensation of the
independent directors of Highbury for fiscal year 2009. The remaining directors
did not receive any compensation for fiscal year 2009 for their service on the
board of directors.
  Name
                
                Fees Earned
                    or Paid in
                    Cash ($)
                
                
                Stock
                    Awards ($)
                
                
                Option
                    Awards ($)
                
                
                All Other
                    Compensation ($)
                
                
                Total ($)Hoyt
      Ammidon Jr.
                
                $
                84,000
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                $
                84,000Theodore
      M. Leary Jr.
                
                $
                64,000
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                $
                64,000Aidan
      J. Riordan
                
                $
                74,000
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                $
                74,000John
      D. Weil
                
                $
                20,000
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                $
                20,000
  Highbury’s
board of directors has approved annual cash fees for each of the Company’s
independent directors of $40,000 for 2010. Highbury’s board of directors has
also approved additional fees for the independent directors serving on the
Special Committee of the Company’s board of directors including an annual fee of
$40,000 to be paid to the chairman (Mr. Ammidon), an annual fee of $20,000 to be
paid to other members (Messrs. Leary and Riordan) and a fee of $1,000 to be paid
to each member for each meeting of the Special Committee attended, whether in
person or by telephonic conference.
  50
  POTENTIAL
PAYMENTS UPON TERMINATION AND CHANGE IN CONTROL
  In
connection with entering into the Merger Agreement, Richard S. Foote, Highbury's
President and Chief Executive Officer and a director, and R. Bradley Forth,
Highbury's Executive Vice President, Chief Financial Officer and Secretary,
entered into severance agreements with Highbury.  The severance
agreements terminate on December 31, 2010.
  These
severance agreements provide that if either of Messrs. Foote or Forth
(i) is terminated for cause (as defined in the severance agreements) or
(ii) voluntarily terminates his employment with Highbury, other than a
voluntary termination for good reason (as defined in the severance agreements),
then Highbury will pay to him his base salary earned but unpaid through the date
of termination, or his “Earned Salary," and any vested amounts of benefits owing
to him under Highbury's applicable employee benefit plans and programs,
including any compensation previously deferred by him (together with any accrued
earnings thereon) and not yet paid, or his "Accrued Obligations.”
  If the
employment of either of Messrs. Foote or Forth is terminated (i) by
Highbury without cause, (ii) due to death, or (iii) voluntarily for
good reason, then Highbury will pay to Mr. Foote or Mr. Forth, as the case may
be, the following: (a) his Earned Salary, (b) his Accrued Obligations
and (c) a separation payment equal to $584,000, in the case of
Mr. Foote, and $292,000 in the case of Mr. Forth (each amount equal to
the sum of his respective base salary currently in effect and the amount payable
to him as an annual incentive payment for services rendered by him in
2009).  As described in the severance agreements, the definition of
“termination for good reason” requires both a change in control of Highbury and
the occurrence of certain enumerated events.  A change of control of
Highbury (as defined in the severance agreements) includes the transactions
contemplated by the Merger Agreement.  As the Merger Agreement calls
for the resignation of all of Highbury’s officers, as a condition to the
closing, “good reason” also includes each executive’s voluntary resignation
after the conditions to closing of the Merger have been satisfied, to be
effective upon the closing of the Merger.  Accordingly, if the Merger
closes, it is anticipated that they will receive the separation
payments.
  Payment
of the separation payment is contingent upon Mr. Foote or Mr. Forth, as the case
may be, executing a general release agreement in favor of Highbury within 60
days of his termination.  The separation payment shall be payable in
all cases, other than death, as soon as practicable (but no later than 10 days)
following the expiration of the seven-day revocation period stated in the
general release agreement, and in the case of death, within 30 days after
death.  In addition, Mr. Forth will be subject to a six-month
post-termination non-competition commitment in favor of Highbury.
  Compensation
Committee Interlocks and Insider Participation
  In
February 2009, Highbury’s board of directors formed a Compensation Committee
consisting of Messrs. Ammidon and Riordan. Prior to February 2009, Highbury’s
entire board of directors carried out the functions customarily undertaken by
the Compensation Committee. Two members of Highbury’s board of directors,
Messrs. Cameron and Foote, were executive officers of Highbury during the fiscal
year ended December 31, 2009. In addition, Messrs. Cameron and Foote are
executive officers of, and serve on the compensation committee of Berkshire
Capital. For a description of certain transactions between us and Messrs.
Cameron and Foote, see Item 13 “Certain Relationships and Related Transactions,
and Director Independence—Share Issuances to Initial
Stockholders.”  For a description of certain transactions between us
and Berkshire Capital, which will benefit Messrs. Cameron and Foote to the
extent of their interest in Berkshire Capital, see Item 13 “Certain
Relationships and Related Transactions, and Director Independence—Office
Services Agreement” and “—Financial Adviser Engagement.” During the fiscal year
ended December 31, 2009, Messrs. Cameron, Foote and Forth participated in the
deliberations of Highbury’s board of directors concerning executive officer
compensation but did not vote on the executive officer compensation
proposal.
  51
  ITEM
      12.
              SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS
  The
following table sets forth information as of March 22, 2010 in respect of the
beneficial ownership of Highbury’s common stock and Series B preferred stock by
each director, by each named executive officer and by all directors and
executive officers of Highbury as a group, and each person known by Highbury, as
a result of such person’s public filings with the SEC and the information
contained therein, to be the beneficial owner of more than 5% of Highbury’s
outstanding shares of common stock or Series B preferred stock. The percentages
of common stock beneficially owned are based on 18,526,171 shares of common
stock outstanding as of March 22, 2010, adjusted for each holders’ shares of
common stock issuable upon conversion of shares of Series B preferred stock, if
any. The percentages of Series B preferred stock beneficially owned are based on
1,000 shares of Series B preferred stock outstanding as of March 22,
2010.
  Unless
otherwise indicated, Highbury believes that all persons named in the table have
sole voting and investment power with respect to all shares of common stock and
Series B preferred stock beneficially owned by them.
  Name and Address of Beneficial
                  Owner(1)
                
                Amount and
                    Nature of
                    Beneficial
                    Ownership of
                    Common
                    Stock
                
                
                Approximate
                    Percentage of
                    Outstanding
                    Common
                    Stock
                
                
                Amount and
                    Nature of
                    Beneficial
                    Ownership of
                    Series B
                    Convertible
                    Preferred
                    Stock
                
                
                Approximate
                    Percentage of
                    Outstanding
                    Series B
                    Convertible
                    Preferred
                    StockAffiliated
      Managers Group, Inc.(2)
                
                
                5,607,813
                
                
                
                27.0
                %
                
                
                657.16
                
                
                
                65.7
                %Stuart
      D. Bilton(3)
                
                
                1,671,480
                
                
                
                8.3
                %
                
                
                371.44
                
                
                
                37.1
                %John
      D. Weil(4)
                
                
                1,376,500
                
                
                
                7.4
                %
                
                
                —
                
                
                
                —Kenneth
      C. Anderson(5)
                
                
                1,285,740
                
                
                
                6.5
                %
                
                
                285.72
                
                
                
                28.6
                %R.
      Bruce Cameron(6)
                
                
                1,223,751
                
                
                
                6.6
                %
                
                
                —
                
                
                
                —Broad
      Hollow LLC(7)
                
                
                1,001,250
                
                
                
                5.4
                %
                
                
                —
                
                
                
                —Richard
      S. Foote(8)
                
                
                667,500
                
                
                
                3.6
                %
                
                
                —
                
                
                
                —Gerald
      Dillenburg(9)
                
                
                642,870
                
                
                
                3.4
                %
                
                
                142.86
                
                
                
                14.3
                %R.
      Bradley Forth
                
                
                111,249
                
                
                
                *
                
                
                
                —
                
                
                
                —Aidan
      J. Riordan
                
                
                3,450
                
                
                
                *
                
                
                
                —
                
                
                
                —Hoyt
      Ammidon Jr.
                
                
                2,000
                
                
                
                *
                
                
                
                —
                
                
                
                —Theodore
      M. Leary, Jr.(10)
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Peerless
      Systems Corporation(11)
                
                
                3,070,355
                
                
                
                16.6
                %
                
                
                —
                
                
                
                —Pine
      River Capital Management L.P.(12)
                
                
                1,538,159
                
                
                
                8.3
                %
                
                
                —
                
                
                
                —Woodbourne
      Partners, L.P.(13)
                
                
                1,368,000
                
                
                
                7.4
                %
                
                
                —
                
                
                
                —Talon
      Asset Management, LLC(14)
                
                
                1,287,837
                
                
                
                7.0
                %
                
                
                —
                
                
                
                —Fairview
      Capital(15)
                
                
                1,189,635
                
                
                
                6.4
                %
                
                
                —
                
                
                
                —Second
      Curve Capital, LLC(16)
                
                
                1,002,000
                
                
                
                5.4
                %
                
                
                —
                
                
                
                —Christine
      R. Dragon(17)
                
                
                257,130
                
                
                
                1.4
                %
                
                
                57.14
                
                
                
                5.7
                %All
      executive officers and directors as a group
                
                
                6,341,670
                
                
                
                29.5
                %
                
                
                657.16
                
                
                
                65.7
                %
 
 
 *
              Less
      than 1% of the outstanding shares.
  (1)
              Unless
      otherwise noted, the business address of each stockholder listed in this
      table is c/o Highbury Financial Inc., 999 18th Street, Suite 3000, Denver,
      Colorado 80202.
  (2)
              As
      reported in the Schedule 13D filed with the SEC on December 22, 2009 by
      AMG, AMG has shared voting power over shares beneficially owned by SDB
      Aston, Inc., an entity affiliated with Stuart D. Bilton, KCA Aston, Inc.,
      an entity affiliated with Kenneth C. Anderson, R. Bruce Cameron, Richard
      S. Foote, Aidan J. Riordan, Hoyt Ammidon Jr., R. Bradley Forth, Broad
      Hollow LLC and Woodbourne Partners, L.P. with respect to the specific
      matters identified in those certain voting agreements, dated December 12,
      2009, by and between AMG and each of the foregoing. Pursuant to the voting
      agreements, AMG is, or may be deemed to be, the beneficial owner of
      5,607,813 shares of Highbury common stock and 657.16 shares of Series B
      preferred stock as of December 12, 2009. AMG’s principal executive office
      is located at 600 Hale Street, Prides Crossing, Massachusetts
      01965.
  52
  (3)
              Mr.
      Bilton beneficially owns, and SDB Aston, Inc. is the record owner of,
      371.44 shares of Series B preferred stock, which represents approximately
      37.1% of the outstanding shares of Series B preferred stock. Mr. Bilton
      and SDB Aston, Inc. may be deemed to beneficially own in the aggregate
      1,671,480 shares of common stock issuable upon conversion of the 371.44
      shares of Series B preferred stock. SDB Aston, Inc., and Mr. Bilton by
      virtue of being the sole stockholder of SDB Aston, Inc., may be deemed to
      have shared voting and dispositive power with respect to 371.44 shares of
      Series B preferred stock convertible into 1,671,480 shares of common
      stock. The business address of SDB Aston, Inc. and Mr. Bilton is c/o Aston
      Asset Management LLC, 120 North La Salle Street, Suite 2500, Chicago,
      Illinois 60602.
  (4)
              As
      reported in the Schedule 13D filed with the SEC on December 15, 2009 by
      Woodbourne Partners L.P., Clayton Management Company and John D. Weil. Mr.
      Weil is the President of Clayton Management Company, which is the general
      partner of Woodbourne Partners, L.P. 1,368,000 shares of common stock are
      held of record by Woodbourne Partners, L.P. Woodbourne and Clayton
      Management Company share voting power with Mr. Weil, who has sole
      dispositive power over such shares. In addition, shares reported as
      beneficially owned by Mr. Weil also include 8,500 shares of common stock
      owned by Mr. Weil's spouse, Anabeth Weil, in an IRA account, over which
      Mr. Weil may be deemed to have indirect sole voting and dispositive power.
      The business address of Mr. Weil is 200 North Broadway, Suite 825, St.
      Louis, Missouri 63102.
  (5)
              Mr.
      Anderson beneficially owns, and KCA Aston, Inc. is the record owner of,
      285.72 shares of Series B preferred stock, which represents approximately
      28.6% of the outstanding shares of Series B preferred stock. Mr. Anderson
      and KCA Aston, Inc. may be deemed to beneficially own in the aggregate
      1,285,740 shares of common stock issuable upon conversion of the 285.72
      shares of Series B preferred stock. KCA Aston, Inc., and Mr. Anderson by
      virtue of being the sole stockholder of KCA Aston, Inc., may be deemed to
      have shared voting and dispositive power with respect to 285.72 shares of
      Series B preferred stock convertible into 1,285,740 shares of common
      stock. The business address of KCA Aston, Inc. and Mr. Anderson is c/o
      Aston Asset Management LLC, 120 North La Salle Street, Suite 2500,
      Chicago, Illinois 60602.
  (6)
              Includes
      1,001,250 shares owned of record by Broad Hollow LLC that are attributed
      to Mr. Cameron, according to Section 13(d) of the Exchange Act, due to his
      position as the managing member of Broad Hollow LLC. The business address
      of Mr. Cameron is c/o Berkshire Capital Securities LLC, 535 Madison
      Avenue, 19th Floor, New York, New York
10022.
  (7)
              The
      business address of Broad Hollow LLC is c/o Berkshire Capital Securities
      LLC, 535 Madison Avenue, 19th Floor, New York, New York
    10022.
  (8)
              The
      business address of Mr. Foote is c/o Berkshire Capital Securities LLC, 535
      Madison Avenue, 19th Floor, New York, New York
  10022.
  (9)
              Mr.
      Dillenburg beneficially owns, and GFD Aston, Inc. is the record owner of,
      142.86 shares of Series B preferred stock, which represents approximately
      14.3% of the outstanding shares of Series B preferred stock. Mr.
      Dillenburg and GFD Aston, Inc. may be deemed to beneficially own in the
      aggregate 642,870 shares of common stock issuable upon conversion of the
      142.86 shares of Series B preferred stock. GFD Aston Inc., and Mr.
      Dillenburg by virtue of being the sole stockholder of GFD Aston, Inc., may
      be deemed to have shared voting and dispositive power with respect to
      142.86 shares of Series B preferred stock convertible into 642,870 shares
      of common stock. The business address of GFD Aston, Inc. and Mr.
      Dillenburg is c/o Aston Asset Management LLC, 120 North La Salle Street,
      Suite 2500, Chicago, Illinois
60602.
  (10)
              The
      business address of Mr. Leary is 308 N. Sycamore Avenue, Apt. 406, Los
      Angeles, California 90036.
  53
  (11)
              As
      reported in the Schedule 13D/A filed with the SEC on October 9, 2009 by
      Peerless.  Peerless has sole voting and dispositive power over
      all of the shares of common stock. All securities are owned directly by
      Peerless, a company of which Timothy E. Brog is a director. Mr. Brog was
      nominated by Peerless for election as a director of Highbury. Mr. Brog may
      be deemed to beneficially own the Highbury securities directly owned by
      Peerless. Mr. Brog disclaims ownership of all such securities. Peerless
      and Mr. Brog, have entered into an agreement, dated December 18, 2009,
      with Highbury pursuant to which Peerless Systems Corporation has withdrawn
      (i) its nomination of Mr. Brog to Highbury’s board of directors and (ii)
      its intent to propose two non-binding stockholder proposals. Under the
      agreement, if the Merger is not completed on or before July 16, 2010, or
      the Merger Agreement is terminated, then Highbury’s board of directors
      will take all necessary action to appoint Mr. Brog to serve on Highbury’s
      board of directors for a term expiring at the 2012 annual meeting of
      stockholders. The business address of Peerless is 2381 Rosecrans Avenue,
      El Segundo, California 90245.
  (12)
              As
      reported in the Schedule 13G/A filed with the SEC on January 15, 2010 by
      Brian Taylor, Pine River Capital Management L.P., and Nisswa Acquisition
      Master Fund Ltd. Brian Taylor and Pine River Capital Management L.P. have
      shared voting power and shared dispositive power over 1,538,159 shares of
      common stock; and Nisswa Master Fund Ltd. has shared voting power and
      shared dispositive power over 1,475,659 shares of common stock. The
      business address of each of these persons is c/o Pine River Capital
      Management L.P., 601 Carlson Parkway, Suite 330, Minnetonka, Minnesota
      55305.
  (13)
              As
      reported in the Schedule 13D filed with the SEC on December 15, 2009 by
      Woodbourne Partners L.P., Clayton Management Company and John D. Weil.
      1,368,000 shares of common stock are held of record by Woodbourne
      Partners, L.P. The controlling person of Woodbourne Partners, L.P. is
      Clayton Management Company, its General Partner, and Mr. Weil is the
      President and controlling person of Clayton Management Company. Woodbourne
      and Clayton Management Company share voting power with Mr. Weil, who has
      sole dispositive power over such shares. The business address of
      Woodbourne Partners, L.P. is 200 North Broadway, Suite 825, St. Louis,
      Missouri 63102.
  (14)
              As
      reported in the Schedule 13G/A filed with the SEC on January 26, 2010 by
      Talon Opportunity Partners, L.P., Talon Opportunity Managers, LLC and
      Talon Asset Management, LLC. Talon Opportunity Managers, LLC is the
      general partner of Talon Opportunity Partners, L.P. Talon Asset
      Management, LLC is the manager of Talon Opportunity Managers, LLC. As a
      consequence, Talon Asset Management, LLC and Talon Opportunity Managers,
      LLC may be deemed to share beneficial ownership of all of the shares of
      common stock owned by Talon Opportunity Partners, L.P. Talon Asset
      Management, LLC has shared voting and dispositive power over 1,287,837
      shares of common stock. Talon Opportunity Managers, LLC and Talon
      Opportunity Partners, L.P. each has shared voting and dispositive power
      over 1,273,837 shares of common stock. The business address of each of the
      reporting persons is One North Franklin Street, Suite 900, Chicago,
      Illinois 60606.
  (15)
              As
      reported in the Schedule 13G/A filed with the SEC on February 5, 2010 by
      Fairview Capital, Fairview Capital Investment Management, LLC, Andrew F.
      Mathieson, Scott W. Clark and Darlington Partners, L.P. Fairview Capital
      Investment Management, LLC is an investment adviser. It is the general
      partner and investment adviser of Darlington Partners, L.P. Fairview
      Capital is the manager of Fairview Capital Investment Management, LLC. Mr.
      Mathieson is the controlling stockholder and President of Fairview
      Capital. Mr. Clark is a member and portfolio manager of Fairview Capital
      Investment Management, LLC. The reporting persons have shared voting and
      dispositive power over 1,189,635 shares and Mr. Clark has sole voting and
      dispositive power over an additional 6,500 shares. The business address of
      each of the reporting persons is 300 Drakes Landing Road, Suite 250,
      Greenbrae, California 94904.
  (16)
              As
      reported in a Schedule 13G/A filed with the SEC on February 17, 2009 by
      Second Curve Capital, LLC, Thomas K. Brown and Second Curve Opportunity
      Fund, LP. Second Curve Capital, LLC and Thomas Brown have shared voting
      and dispositive power with respect to 1,002,000 shares. Second Curve
      Opportunity Fund, LP has shared voting and dispositive power with respect
      to 497,820 of the 1,002,000 shares. The business address of each of these
      persons is 237 Park Avenue, 9th Floor, New York, New York
      10017.
  (17)
              Ms.
      Dragon beneficially owns, and CRD Aston, Inc. is the record owner of,
      57.14 shares of Series B preferred stock, which represents approximately
      5.7% of the outstanding shares of Series B preferred stock. Ms. Dragon and
      CRD Aston, Inc. may be deemed to beneficially own in the aggregate 257,130
      shares of common stock issuable upon conversion of the 57.14 shares of
      Series B preferred stock. CRD Aston, Inc., and Ms. Dragon by virtue of
      being the sole stockholder of CRD Aston, Inc., may be deemed to have
      shared voting and dispositive power with respect to 57.14 shares of Series
      B preferred stock. The business address of CRD Aston, Inc. and Ms. Dragon
      is c/o Aston Asset Management LLC, 120 North La Salle Street, Suite 2500,
      Chicago, Illinois 60602.
  54
  Equity
Compensation Plan Information
  Plan Category
                
                Number of Securities to
                    be Issued Upon Exercise
                    of Outstanding Options,
                    Warrants and Rights
                
                
                Weighted-average
                    Exercise Price of
                    Outstanding Options,
                    Warrants and Rights
                
                
                Number of Securities
                    Remaining Available for
                    Future Issuance Under
                    Equity Compensation
                    Plans (excluding
                    Securities reflected in
                    column(a))Equity
      Compensation Plans Approved by Security Holders
                
                
                —
                
                
                
                —
                
                
                
                —Equity
      Compensation Plans not Approved by Security Holders
                
                
                —
                
                
                
                —
                
                
                
                (1
                )Total
                
                
                —
                
                
                
                —
                
                
                
                —
  (1)
              For
      a description of the maximum number of securities remaining available for
      issuance under the Equity Incentive Plan see the sections entitled “Maximum Number of Shares
      Available for Awards Other Than Qualified Performance-Based Awards”and “Maximum
      Number of Shares Available for Qualified Performance-Based Awards”
      in the summary below, which such sections are incorporated by reference
      herein.
  In 2008,
Highbury’s board of directors adopted the Highbury Financial Inc. 2008 Equity
Incentive Plan, or the “Equity Incentive Plan.” The Equity Incentive Plan is
intended to retain and reward highly qualified employees, executive officers,
consultants and directors of Highbury and its affiliates, and to encourage their
ownership of common stock. The plan was included in the Company’s 2008 proxy
statement but was not approved by Highbury’s stockholders. However, the Equity
Incentive Plan remains in effect, securities are authorized for issuance under
the Equity Incentive Plan, and the board of directors may make awards under this
plan. Below is a summary of the principal provisions of the Equity Incentive
Plan. The summary does not purport to be exhaustive and is qualified by the full
text of the plan.  Highbury has never made any awards under this
plan.
  Administration. The Equity
Incentive Plan is administered by the Compensation Committee of the board of
directors. Subject to the provisions of the Equity Incentive Plan, the
Compensation Committee has discretion to determine the employees, executive
officers, consultants or directors who will receive awards and the form of the
awards. Further, the Compensation Committee has complete authority to interpret
the Equity Incentive Plan, to prescribe, amend and rescind rules and regulations
relating to it, to determine the terms and provisions of the respective award
agreements (which need not be identical) and to make all other determinations
necessary or advisable for the administration of the Equity Incentive Plan.
Awards may be granted to any employee or executive officer of or consultant to
Highbury or any of its affiliates and to non-employee members of the board of
directors or of any board of directors (or similar governing authority) of any
affiliate. Awards may be granted under the Equity Incentive Plan prior to
October 21, 2018.  There are up to 14,017,334 shares of the Company’s
common stock authorized for issuance under this plan based upon the achievement
of certain long term financial, business and other performance
criteria.
  55
  Maximum Number of Shares Available
for Awards Other Than Qualified Performance-Based Awards.  The
maximum number of shares of common stock available for awards under the Equity
Incentive Plan, other than those awards intended to qualify as Qualified
Performance-Based Awards (as defined below), is 10% multiplied by the sum of (x)
and (y), where (x) is that number of shares of common stock issued and
outstanding as of September 30, 2008, and (y) is the lesser of (i) the number of
warrants to purchase common stock that were issued and outstanding as of
September 30, 2008, and (ii) the number of warrants to purchase common stock
that were issued and outstanding as of September 30, 2008 and that have been
exercised as of the last day of the last possible performance period under the
Equity Incentive Plan (which cannot expire later than twenty years after the
date of adoption of the Equity Incentive Plan) ((x) plus (y) together, the
“Initial Shares”).
  Maximum Number of Shares Available
for Qualified Performance-Based Awards.  The maximum number of
shares of common stock (or their cash equivalent) available for awards intended
to qualify as “performance-based compensation” under Section 162(m) of the Code,
or “Qualified Performance-Based Awards,” is the number of “Base Shares”
calculated as of the last day of the last performance period to expire under the
Plan (which cannot expire later than October 21, 2028). This maximum is also
reduced by the Initial Shares and by any shares that are subject to, or have
been issued pursuant to, awards under the Equity Incentive Plan other than
Qualified Performance-Based Awards. The “Base Shares” are the Initial Shares,
increased annually, on a compounded basis, by the least of (i) 4.855%, the 2008
burn rate cap for non-Russell 3000 diversified financial companies, the industry
group with which Highbury has the most in common, as published by RiskMetrics
Group and adjusted for full value awards, (ii) the future burn rate cap
applicable to Highbury published by RiskMetrics Group, and (iii) any lower rate
recommended by the President and Chief Executive Officer of Highbury and
approved by the Compensation Committee, referred to as the “Burn Rate Cap.” The
number of shares of common stock available for Qualified Performance-Based
Awards shall also be subject to reduction if the “CAGR” for all performance
periods under the Equity Incentive Plan is less than 30%. “CAGR” means the
compound annual growth rate in “Cash Net Income Per Share” over a performance
period, expressed as a percentage. “Cash Net Income Per Share” means, with
respect to any year, the quotient obtained by dividing (i) net income before
amortization, intangible-related deferred taxes, affiliate depreciation and
other non-cash expenses (including, without limitation, any charges related to
the Equity Incentive Plan or any other equity-based or cash-based incentive
compensation plan of Highbury), as determined by the Compensation Committee
based on the audited financial statements of Highbury for such year, by (ii) the
daily weighted average number of shares of common stock outstanding during such
year, determined on a diluted basis using the treasury stock method to determine
the number of common stock share equivalents issuable pursuant to any dilutive
securities, excluding any shares of common stock issued or issuable pursuant to
awards under the Equity Incentive Plan or under any other equity-based
compensation plan of Highbury.
  Qualified Performance-Based Awards
Subject to Stockholder Approval.  Awards will not qualify as
Qualified Performance-Based Awards unless the material terms of the underlying
performance goals are disclosed to and approved by Highbury’s stockholders prior
to settlement of the Awards.  The material terms of the Equity
Incentive Plan, including a description of the business criteria upon which
performance goals for Qualified Performance-Based Awards may be based, were
disclosed in a proxy statement delivered to Highbury’s stockholders in
connection with the 2008 annual meeting of Highbury stockholders.  At
such meeting the Highbury stockholders did not approve the Equity Incentive
Plan.
  Additional
Limitations.  The maximum Qualified Performance-Based Award
payment to any participant for a performance period is 50% of the maximum number
of shares of common stock (or their cash equivalent at the date of settlement)
that may be issued under the Equity Incentive Plan for Qualified
Performance-Based Awards. Further, in no event shall the number of shares of
common stock covered by awards granted to any one individual in any calendar
year exceed 50% of the aggregate number of shares of common stock subject to the
Equity Incentive Plan.
  Types of
Awards.  Awards under the Equity Incentive Plan may include
incentive stock options, nonstatutory stock options, stock appreciation rights,
restricted stock, restricted stock units, performance units, qualified
performance-based awards, including performance stock units, and stock grants.
Since the stockholders’ approval of the Equity Incentive Plan was not obtained
prior to October 21, 2009, only nonqualified stock options may be granted under
the plan.
  56
  Effect of Termination of Employment
or Other Association.  Unless the Compensation Committee
determines otherwise in connection with any particular award, in the event that
a participant’s employment or other association with Highbury or an affiliate
ends for any reason, any outstanding stock options and stock appreciation rights
will generally terminate 90 days following the recipient’s termination of
employment or other association with Highbury, and any other outstanding award
will be forfeited or otherwise subject to return to or repurchase by Highbury on
the terms specified in the applicable award agreement. However, in the case of
performance stock units, if a participant’s employment or other association with
Highbury or an affiliate terminates prior to the end of a performance period due
to (i) termination for any reason within 24 months following a change of control
of Highbury, (ii) total and permanent disability, (iii) death, (iv) involuntary
termination without cause, or (v) voluntary termination for good reason, the
participant (or, in the event of death, the participant’s estate), will be
entitled to receive only a prorated proportion of his performance stock units
based on the number of days in the performance period remaining after the date
of termination, subject to achievement of the performance goals. Except in
certain circumstances approved by the Compensation Committee, no award under the
Equity Incentive Plan may be transferred by the recipient, and during the life
of the recipient all rights under an award may be exercised only by the
recipient or his or her legal representative.
  ITEM
      13.
              CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE
  Agreements
Related to Share Issuances to Related Parties
  Our
initial stockholders are entitled to registration rights with respect to the
shares of common stock and units of the Company owned by them. The holders of
the majority of the shares purchased prior to the initial public offering, or
the founding shares, and the holders of the majority of the units purchased in
the private placement completed contemporaneously with our initial public
offering are each entitled to make up to two demands that we register these
securities and any other securities of ours owned by them. In addition, our
initial stockholders have certain “piggy-back” registration rights with respect
to such securities on registration statements filed by us. We will bear the
expenses incurred in connection with the filing of any of the foregoing
registration statements. These securities are also eligible for resale pursuant
to Rule 144 under the Securities Act.
  The
holders of Series B preferred stock have registration rights with respect to the
shares of common stock issuable upon conversion of the Series B preferred
stock.  The holders of a majority of the shares issuable upon conversion of
the Series B preferred stock are entitled to make up to three demands that we
register the resale of the shares of common stock issuable upon the conversion
of shares of Series B preferred stock, but only after the shares of Series B
preferred stock have been converted into common stock.  In addition,
the holders of our Series B preferred stock have certain “piggy-back”
registration rights with respect to the shares of common stock issuable upon
conversion of our Series B preferred stock.  Highbury will bear the
expenses incurred in connection with the filing of any of the foregoing
registration statements.
  Office
Services Agreement
  On
October 31, 2007, we entered into an office services agreement with Berkshire
Capital which provides for a monthly fixed fee of $10,000 for office and
secretarial services including use and access to our office in Denver, Colorado
and those other office facilities of Berkshire Capital as we may reasonably
require as well as information technology equipment and access to numerous
subscription-based periodicals and databases. In addition, certain employees of
Berkshire Capital provide us with financial reporting, administrative and
information technology support on a daily basis. R. Bruce Cameron, our Chairman
of the board of directors, Richard S. Foote, our President, Chief Executive
Officer and Director, and R. Bradley Forth, our Executive Vice President, Chief
Financial Officer and Secretary are employees and equity owners of Berkshire
Capital. As a result of these affiliations, these individuals will benefit from
the transaction to the extent of their interest in Berkshire
Capital.  This arrangement, however, is solely for our benefit and is
not intended to provide any of our executive officers compensation in lieu of a
salary. We believe, based on rents and fees for similar services, that the fee
charged by Berkshire Capital is more favorable than we could have obtained from
an unaffiliated third party. The term of the agreement is indefinite and the
agreement is terminable by either party upon six months’ prior notice. In
connection with the signing of the Merger Agreement, Highbury and Berkshire
Capital entered into a termination agreement, dated as of December 12, 2009,
pursuant to which the office services agreement will terminate at the time of
the closing of the Merger. This agreement was ratified in accordance with our
Related Person Policy described below.
  57
  Financial
Advisor Engagement
  We have
engaged Berkshire Capital to act as our non-exclusive financial adviser in
connection with possible acquisitions and a review of strategic alternatives. In
such capacity, Berkshire Capital will assist us in (i) structuring, negotiating
and completing acquisitions of targets identified by us and acknowledged by both
us and Berkshire Capital as being subject to Berkshire Capital’s engagement, and
(ii) identifying prospective purchasers if we decide to pursue a sale
transaction, and structuring, negotiating and assisting us in the completion of
such transaction. If we enter into an agreement to acquire a target company
during the term of Berkshire Capital’s engagement or within two years
thereafter, and such acquisition is completed, then we will pay Berkshire
Capital a success fee at closing equal to the greater of (a) the sum of 3.0% of
the first $15 million of the aggregate consideration in such transaction and
1.0% of the aggregate consideration in such transaction in excess of $15
million, and (b) $600,000. Upon the execution of a definitive agreement with
respect to an acquisition, we will pay Berkshire Capital $200,000, which will be
credited against the success fee.  Upon the consummation of the
Merger, we will pay Berkshire Capital a success fee at closing equal to the
greater of (x) 1.0% of the aggregate consideration in the Merger and (y)
$1,000,000. Upon the execution of the Merger Agreement, we paid Berkshire
Capital $150,000, which will be credited against the success fee. We will also
reimburse Berkshire Capital for its reasonable expenses in performing its
services under the engagement letter and will indemnify Berkshire Capital for
liabilities it incurs in performing such services, unless such liabilities are
attributable to Berkshire Capital’s gross negligence or willful
misconduct.  R. Bruce Cameron, our Chairman of the board of directors,
Richard S. Foote, our President, Chief Executive Officer and Director, and R.
Bradley Forth, our Executive Vice President, Chief Financial Officer and
Secretary are employees and equity owners of Berkshire Capital. As a result of
these affiliations, these individuals will benefit from the transaction to the
extent of their interest in Berkshire Capital. Berkshire Capital has agreed to
take such measures as necessary to ensure that Messrs. Cameron, Foote and Forth
do not receive compensation from Berkshire Capital directly from the fee paid to
Berkshire Capital in connection with the Merger. We believe, based on
discussions with other investment banks, that the terms of our engagement of
Berkshire Capital are at least as favorable as we could have obtained from an
unaffiliated third party. Our engagement of Berkshire Capital was approved in
accordance with our Related Person Policy described below.
  In
connection with the signing of the Merger Agreement, Highbury and Berkshire
Capital entered into a Termination Agreement, dated December 12, 2009, pursuant
to which Berkshire Capital’s engagement as financial advisor of Highbury will
terminate at the time of the closing of the Merger.
  The
Special Committee of Highbury's board of directors engaged Sandler
O’Neill & Partners, L.P., or “Sandler O’Neill,” to render an
opinion to the Special Committee on the fairness from a financial point of view
of the merger consideration to be received by the holders of shares of Highbury
common stock in the Merger. Sandler O’Neill is an investment banking firm that
regularly is engaged in the valuation of financial institutions and their
securities in connection with mergers and acquisitions and other corporate
transactions. The Special Committee decided to use the services of Sandler
O’Neill because it is a recognized investment banking firm that has significant
expertise in merger and acquisition transactions in the investment management
industry. Pursuant to the engagement letter, Highbury paid Sandler O’Neill a fee
of $300,000 for the fairness opinion delivered to the Special Committee in
connection with the Merger and reimbursed Sandler O’Neill for its reasonable
out-of-pocket expenses. Highbury also agreed to indemnify Sandler O’Neill in the
event Sandler O’Neill were to incur certain losses as a result of its engagement
by the Special Committee. In addition, Sandler O’Neill received an advisory fee
of $150,000 upon execution of its engagement letter and a fee of $150,000 for
providing a fairness opinion in connection with the Series B
Exchange.
  58
  Exchange
Agreements
  On August
10, 2009, Highbury entered into the First Exchange Agreement with the Series B
Investors and the Management Members. Pursuant to the First Exchange Agreement,
the Series B Investors sold all of their Series B limited liability company
interests to Highbury in exchange for shares of Series B preferred stock of
Highbury. The Series B Investors include affiliates of Stuart D. Bilton, one of
our directors and the Chairman and CEO of Aston, and Kenneth C. Anderson, one of
our directors and the President of Aston, and each of Messrs. Bilton and
Anderson is a Management Member. As a result of the transaction, Aston became a
wholly-owned subsidiary of Highbury.
  Pursuant
to the terms of the First Exchange Agreement, each holder of Series B limited
liability company interests received, in exchange for each Series B limited
liability company interest, 2.8571 shares of Series B preferred stock which
resulted in an aggregate issuance of 1,000 shares of Series B preferred stock
with a face value of $22.5 million. An affiliate of Mr. Bilton received 371.44
shares of Series B preferred stock, and an affiliate of Mr. Anderson received
285.72 shares of Series B preferred stock. The rights of the holders of Series B
preferred stock are set forth in the Certificate of Designation of the Series B
preferred stock which was filed as an exhibit to our Current Report on Form 8-K
filed with the SEC on August 11, 2009.
  In
connection with the closing of the First Exchange Agreement, Aston distributed
$790,000 to the Management Members, as holders of Series B limited liability
company interests, as a return of capital.
  On
September 14, 2009, Highbury entered into the Second Exchange Agreement with the
Series B Investors, including affiliates of Stuart D. Bilton, one of our
directors and the Chairman and CEO of Aston, and Kenneth C. Anderson, one of our
directors and the President of Aston. Pursuant to the Second Exchange Agreement,
the Series B Investors agreed to exchange up to 36% of their shares of Series B
preferred stock to Highbury for up to 1,620,000 shares of common
stock.
  Pursuant
to the Second Exchange Agreement, each time a person becomes a beneficial owner
of 25% or more of the outstanding voting securities of Highbury, or a 25%
Stockholder, Highbury simultaneously will issue to each Series B Investor its
pro rata share of the “Exchange Shares.” “Exchange Shares” means the number of
shares of common stock that Highbury must issue such that after such issuance
the number of voting securities held by the 25% Stockholder that triggered the
exchange will be equal to one share less than 25% of the outstanding voting
securities. In exchange for the Exchange Shares, each Series B Investor will
assign to Highbury such number of shares or fractional shares of Series B
preferred stock (which shall not exceed 360 shares of Series B preferred stock
in the aggregate) equal to the quotient of (x) the number of Exchange Shares
issued to such B Investor and (y) 4,500, subject to standard anti-dilution
provisions. The number of shares of common stock to be received in exchange for
each share of Series B preferred stock is the same as the number of shares of
common stock into which the Series B preferred stock is presently
convertible.
  The
maximum number of shares of common stock that Highbury may be required to issue
in exchange for Series B preferred stock pursuant to the Second Exchange
Agreement is 1,620,000. The maximum number of shares that may be issued to each
of Messrs. Bilton and Anderson is 601,714 and 462,857, respectively. An exchange
may not occur after the earlier to occur of (i) the first anniversary of the
date of the Second Exchange Agreement and (ii) a transaction that would
constitute a Change of Control (as defined in the Certificate of Designation of
the Series B preferred stock) of Highbury. If an exchange does not occur on or
before the first anniversary of the date of the Second Exchange Agreement, the
Second Exchange Agreement will terminate. As of March 22, 2010, no exchange has
been consummated under the Second Exchange Agreement.
  In
connection with the signing of the Merger Agreement, Highbury, Aston, the Series
B Investors and the Management Members entered into a Termination Agreement,
dated as of December 12, 2009, pursuant to which the First Exchange Agreement,
the Second Exchange Agreement, the Amended and Restated Investor Rights
Agreement and the Management Agreement will each terminate effective immediately
prior to the time of the closing of the Merger.
  In
connection with the signing of the Merger Agreement, Highbury and each of the
Series B Investors have entered into an Exchange Agreement, dated as of December
12, 2009, pursuant to which the Series B Investors will exchange all of their
shares of Series B preferred stock for newly issues shares of Highbury common
stock immediately prior to the effective time of the Merger.
  59
  Amended
and Restated Investor Rights Agreement
  As part
of the First Exchange Agreement, Highbury entered into an Investor Rights
Agreement with the Series B Investors and the Management Members. In connection
with the Second Exchange Agreement, Highbury entered into an Amended and
Restated Investor Rights Agreement, dated September 14, 2009, with the Series B
Investors and Management Stockholders.
  The
Amended and Restated Investor Rights Agreement provides each of the Series B
Investors with certain registration rights for shares of common stock issued
upon conversion of the Series B preferred stock and the Exchange Shares,
including three demand registration rights and unlimited piggy-back registration
rights.
  The
Amended and Restated Investor Rights Agreement also places certain restrictions
on the transfer of shares of Series B preferred stock and Exchange Shares. The
Amended and Restated Investor Rights Agreement includes certain restrictions on
voting by the Series B Investors, including the affiliates of Messrs. Bilton and
Anderson, which limit the aggregate vote of Exchange Shares and Series B
preferred stock to not represent more than 25% of the votes that may be cast on
any matter.
  Management
Agreement
  In
connection with the First Exchange Agreement, Highbury entered into the
Management Agreement with each of the Management Members, including Messrs.
Bilton and Anderson, and Aston which delegates certain powers to a management
committee composed initially of Management Members, to operate the business of
Aston. Pursuant to the Management Agreement, approximately 72% of the revenues
of Aston, the Operating Allocation, shall be allocated by the management
committee for use by management of Aston to pay the operating expenses of Aston,
including salaries and bonuses. The remaining 28% of revenues of Aston, the
Owner’s Allocation, is paid to Highbury as the owner of the business. Highbury’s
contractual share of revenues has priority over any payment of the Operating
Allocation. Any reduction in revenues to be paid to Highbury as a result of
expenses exceeding the Operating Allocation is required to be paid to Highbury
out of future Operating Allocation before any compensation may be paid to the
Management Members. In the event that operating expenses are less than the limit
imposed by the Operating Allocation, the balance may be paid as bonuses to the
Management Members, including Messrs. Bilton and Anderson.
  Amended
and Restated Limited Partnership Agreement of Aston Asset Management,
LP
  In
connection with the entering into of the Merger Agreement, Highbury, AMG, Merger
Sub and certain employee members of the Aston management team entered into the
LP Agreement to be effective immediately prior to the closing of the
Merger.  Pursuant to the terms of the LP Agreement, immediately prior
to the closing of the Merger, Aston will be converted into a limited partnership
under Delaware law and shall operate under the LP Agreement following such
conversion.  Merger Sub will be the general partner of the partnership
following such conversion, and the Aston management employees will be limited
partners of the partnership.  Pursuant to the LP Agreement, 67% of the
revenues of Aston is allocated for use by management of Aston to pay the
operating expenses of Aston, including salaries and bonuses.  The
remaining 33% of the revenues of Aston is allocated to the owners of
Aston.  The portion of the revenues allocated to the owners of Aston
is allocated among the partners of Aston according to their relative ownership
interests.  Of the 33% of the revenues of Aston allocated to its
owners, 1.7% of Aston revenue is allocated to Stuart Bilton and 1.3% of Aston
revenue is allocated to Kenneth Anderson.  Pursuant to the LP
Agreement, 28% of Aston revenues (or 85% of the revenues of Aston allocated to
its owners) is allocated to Merger Sub and the remaining 5% of Aston revenues
(or 15% of the revenues of Aston allocated to its owners) is allocated among the
management limited partners as a group, including the interests of Messrs.
Bilton and Anderson described above.  Messrs. Bilton and Anderson are
currently executive officers of Aston and directors of
Highbury.  Pursuant to the terms of the current Management Agreement
between the Management Members and Highbury, approximately 72% of the revenues
of Aston is allocated to Operating Allocation.  Under the terms of the
LP Agreement, the 5% difference in revenues that is no longer allocated to pay
the operating expenses of Aston, including salaries and bonuses, as is currently
provided for under the existing Management Agreement, is provided to the
management limited partners through their portion of the allocation of the
revenues of Aston allocated to its owners.
  60
  Merger
Sub’s contractual share of revenues has priority over the distributions to the
Management Members in the event Aston’s actual operating expenses exceed the
allocation provided to pay the operating expenses.  As a result,
excess expenses first reduce the portion of the revenues of Aston allocated to
its owners allocated to the management limited partners until the management
limited partners’ allocation is eliminated, after which Merger Sub’s allocation
is reduced.
  The
limited partnership interests owned by the management limited partners are
subject to certain put and call rights upon the happening of certain events and
are generally restricted from being transferred by the management limited
partners.
  Employment
Agreements
  As a
condition to AMG entering into the Merger Agreement each of Stuart Bilton and
Kenneth Anderson and certain other key employees of Aston or the “Key
Employees,” entered into employment agreements, dated as of December 12, 2009,
with Highbury, Aston and Merger Sub.  The employment agreements will
become effective upon the closing of the Merger and will terminate upon
termination of the Merger Agreement if the closing of the Merger does not
occur.  The term of each employment agreement is 15 years except for
the employment agreement with Mr. Bilton which has a term of four
years.  The Key Employees’ compensation (including salary and bonus)
will be determined by a management committee of Aston or its delegates in
accordance with the LP Agreement.  The Key Employees will hold those
positions and perform such duties as assigned to them in accordance with the LP
Agreement.  The Key Employees may only be terminated (i) for cause by
Merger Sub, as the general partner of Aston, or by the management committee upon
consent of Merger Sub, (ii) other than for cause, by the management committee
with the prior consent of Merger Sub, (iii) upon permanent incapacity or (iv)
upon death.  Each employment agreement includes restrictions on
competition and solicitation of clients and employees for a term expiring one
year after termination of the employment agreement, except for the employment
agreements with Messrs. Bilton and Anderson which include restrictions on
competition and solicitation for a term expiring two years after termination of
the employment agreement.
  Partner
Non-Competition Agreements
  As an
additional condition to AMG entering into the Merger Agreement, each of Stuart
Bilton and Kenneth Anderson entered into partner non-competition agreements,
dated as of December 12, 2009, with Highbury, Aston and Merger
Sub.  The partner non-competition agreements will become effective
upon the closing of the Merger and will terminate upon the termination of the
Merger Agreement if the closing of the Merger does not occur.  For a
period of six years (or, in certain cases with respect to Mr. Anderson, two
years) after the closing of the Merger, Messrs. Bilton and Anderson agree they
will not compete with Aston or solicit clients or employees of Aston or Merger
Sub.
  Severance
Agreements
  Please
refer to Item 11 “Executive Compensation — Potential Payments Upon Termination
and Change in Control” for a description of the severance
agreements.
  Agreement
with Peerless Systems Corporation
  On
December 18, 2009, we entered into an agreement with Peerless and Timothy E.
Brog pursuant to which Peerless ended (i) its proxy contest to elect Mr. Brog to
our board of directors at our 2009 annual meeting stockholders and (ii) its
support of two non-binding stockholder resolutions. Pursuant to the agreement,
Peerless and Mr. Brog (i) ceased all of their solicitation efforts with respect
to our 2009 annual meeting of stockholders, (ii) agreed not to vote any proxies
obtained by them at our 2009 annual meeting of Highbury stockholders, (iii)
agreed to vote all of Peerless’ shares of Highbury common stock in favor of the
election of Hoyt Ammidon Jr. and John Weil as directors of Highbury for a term
expiring at the 2012 annual meeting of Highbury stockholders, (iv) agreed to
vote all of Peerless’ shares in accordance with the recommendations of the our
board of directors with respect to the Merger, (v) waived Peerless’ appraisal
and dissenters’ rights with respect to the Merger and (vi) agreed not to take
any action in opposition to the recommendations or proposals of our board of
directors or to effect a change of control of us.
  61
  The
agreement further provides that if the Merger is not completed on or before July
16, 2010, or the Merger Agreement is terminated, then our board of directors
will take all necessary action to appoint Mr. Brog to serve on our board of
directors for a term expiring at the 2012 annual meeting of stockholders. We
also agreed to reimburse Peerless for $200,000 of its expenses incurred in the
proxy contest with respect to the 2009 annual meeting of stockholders. The
parties also agreed to customary mutual releases, covenants not to sue and
non-disparagement provisions. The agreement terminates upon the earliest of (i)
the mutual agreement of the parties, (ii) consummation of the Merger, (iii)
August 13, 2010 or (iv) the termination of the Merger Agreement. The mutual
releases and covenants not to sue survive any such termination.
  Conflicts
of Interest
  Our
public stockholders should be aware of the following potential conflicts of
interest. Our officers and directors are not required to commit their full time
to our affairs and, accordingly, they may have conflicts of interest in
allocating management time among various business activities. Furthermore,
Messrs. Cameron, Foote and Forth, our executive officers, are affiliated with
Berkshire Capital. Berkshire Capital’s clients may compete with us for
acquisitions in the financial services industry, and Berkshire Capital may have
a duty to present certain acquisition opportunities to its clients before it
presents them to us.
  Policies
and Procedures for Review, Approval or Ratification of Transactions with Related
Persons
  Our board
of directors has adopted certain written policies and procedures for the review,
approval and ratification of related person transactions, which we refer to as
our “Related Person Policy.”  Among other things, our Related Person
Policy provides that any transaction, arrangement or relationship (or any series
of similar transactions, arrangements or relationships) in which we (including
any of our subsidiaries) were, are or will be a participant and the amount
involved exceeds $120,000, and in which any related person had, has or will have
a direct or indirect material interest, must be reported to our board of
directors prior to the consummation or amendment of the transaction. A related
person, as defined in our Related Person Policy, means any person who is, or at
any time since the beginning of our last fiscal year was, a director or
executive officer of the Company or a nominee to become a director of the
Company; any person who is known to be the beneficial owner of more than 5% of
any class of our voting securities; any immediate family member of any of the
foregoing persons, which means any child, stepchild, parent, stepparent, spouse,
sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law,
brother-in-law, or sister-in-law of the director, executive officer, nominee or
more than 5% beneficial owner, and any person (other than a tenant or employee)
sharing the household of such director, executive officer, nominee or more than
5% beneficial owner; and any firm, corporation or other entity in which any of
the foregoing persons is employed or is a general partner or principal or in a
similar position or in which such person has a 5% or greater beneficial
ownership interest. Our board of directors reviews these related person
transactions and considers all of the relevant facts and circumstances available
to the board of directors, including (if applicable) but not limited to: the
benefits to us; the availability of other sources of comparable products or
services; the terms of the transaction; and the terms available to unrelated
third parties or to employees generally. The board of directors may approve only
those related person transactions that are in, or are not inconsistent with, the
best interests of us and of our stockholders, as the board of directors
determines in good faith. At the beginning of each fiscal year, the board of
directors will review any previously approved or ratified related person
transactions that remain ongoing and have a remaining term of more than six
months. The board of directors will consider all of the relevant facts and
circumstances and will determine if it is in the best interests of us and our
stockholders to continue, modify or terminate these related person
transactions.
  The
transactions described in this Item under the caption “—Agreements Related to
Share Issuances to Related Parties” were not approved or ratified in accordance
with our Related Person Policy, which was not in effect at the time such
transactions were consummated. Because all of our directors at that time had an
interest in such transactions, it was not possible to have them approved or
ratified by disinterested directors.
   62
  Independence
of Directors
  Highbury
currently does not have, and is not required to have, a majority of independent
directors. Should Highbury decide to list on a securities exchange, we will be
required to adhere to the independence requirements of that exchange. We believe
that only four of our current eight directors, Messrs. Ammidon, Leary,
Riordan and Weil, would meet the independence requirements applicable to
companies listed on The Nasdaq Stock Market, including those applicable to
audit, compensation and nominating committee members. While our board of
directors considered the relationship of Mr. Ammidon with Berkshire Capital in
its determination of the independence of Mr. Ammidon, our board of directors
believes that Mr. Ammidon satisfies the independence requirements of both The
Nasdaq Stock Market and Rule 10A-3 of the Exchange Act because, among other
reasons, Mr. Ammidon was never employed by us or Aston and has not been an
employee of Berkshire Capital since 2003. Our other four directors, Messrs.
Cameron, Foote, Bilton and Anderson would not meet the director independence
requirements of The Nasdaq Stock Market.
  ITEM
      14.
              PRINCIPAL
      ACCOUNTANT FEES AND SERVICES
  The firm
of J.H. Cohn LLP, or “Cohn,” which we retained on January 24, 2008, currently
acts as our principal accountant. Cohn performed the audits of our consolidated
financial statements for the 2009 and 2008 fiscal years.
  The
following is a summary of fees billed by Cohn for services
rendered.
  Audit
Fees
  During
the fiscal year ended December 31, 2009, we incurred $258,255 in fees from Cohn
for services provided in connection with our Quarterly Reports on Form 10-Q for
the first three quarters of the 2009 fiscal year, our proxy filing for the
annual shareholder meeting and our Annual Report on Form 10-K for the fiscal
year ended December 31, 2009.
  During
the fiscal year ended December 31, 2008, we incurred $242,416 in fees for
services provided by Cohn in connection with our Quarterly Reports on Form 10-Q
for the first three quarters of the 2008 fiscal year, our proxy filing for the
annual stockholder meeting and our Annual Report on Form 10-K for the fiscal
year ended December 31, 2008.
  Pre-Approval
of Fees
  Prior to
formation of our Audit Committee in April 2009 our full board of directors was,
and since its formation the Audit Committee has been, responsible for
appointing, setting compensation, and overseeing the work of the independent
auditor. In recognition of this responsibility, our board of directors has
established a policy to pre-approve all audit and permissible non-audit services
provided by the independent auditor.  In fiscal years 2009 and 2008,
we were not billed any fees by Cohn for services that fall under the categories
“Audit Related Fees,” “Tax Fees” and “All Other Fees” as such categories are
defined in the rules promulgated by the SEC.
  63
  PART
IV
  ITEM
      15.
              EXHIBITS
      AND FINANCIAL STATEMENT SCHEDULES
  1.
              Financial
      Statements:
  Index to
Financial Statements
  Highbury
      Financial Inc.Report
      of Independent Registered Public Accounting Firm
                
                F-1Consolidated
      Balance Sheets at December 31, 2009 and December 31, 2008
                
                F-2Consolidated
      Statements of Income for the years ended December 31, 2009 and
      2008
                
                F-3Consolidated
      Statements of Changes in Stockholders’ Equity for the years ended December
      31, 2009 and 2008
                
                F-4Consolidated
      Statements of Cash Flows for the years ended December 31, 2009 and
      2008
                
                F-5Notes
      to Consolidated Financial Statements
                
                F-6
  2.
              Financial
      Statement Schedule(s):
  No
financial statement schedules are filed herewith because (i) such schedules are
not required or (ii) the information required has been presented in the
aforementioned financial statements.
  3.
              Exhibits:
  The
following Exhibits are filed as part of this report:
  Exhibit
      No.
              
              Description2.1
      (5)
              
              Agreement
      and Plan of Merger, dated December 12, 2009, between the Registrant,
      Affiliated Managers Group, Inc. and Manor LLC.3.1(1)
              
              Restated
      certificate of incorporation.3.2(2)
              
              Certificate
      of Designation of Series B Convertible Preferred Stock.3.3(2)
              
              Certificate
      of Designation of Series A Junior Participating Preferred
      Stock.3.2(3)
              
              Amended
      and Restated By-laws.4.1(4)
              
              Specimen
      Unit Certificate.4.2(4)
              
              Specimen
      Common Stock Certificate.4.3(4)
              
              Specimen
      Warrant Certificate.4.4(4)
              
              Warrant
      Agreement between Continental Stock Transfer & Trust Company and the
      Company.4.5(4)
              
              Unit
      Purchase Option.4.6(2)
              
              Rights
      Agreement, dated August 10, 2009, between the Registrant and Continental
      Stock Transfer & Trust Company.4.7(5)
              
              Amendment
      No. 1 to Rights Agreement, dated December 12, 2009, between the Registrant
      and Continental Stock Transfer & Trust Company.10.1(4)
              
              Subscription
      Agreement between the Registrant and R. Bruce Cameron.10.2(4)
              
              Subscription
      Agreement between the Registrant and Richard S. Foote.10.3(4)
              
              Subscription
      Agreement between the Registrant and R. Bradley
  Forth.
  64
  Exhibit No.
                
                Description10.4(4)
                
                Subscription
      Agreement between the Registrant and The Hillary Appel
    Trust.10.5(4)
                
                Subscription
      Agreement between the Registrant and The Catey Lauren Appel
      Trust.10.6(4)
                
                Subscription
      Agreement between the Registrant and Broad Hollow LLC.10.7(4)
                
                Form
      of Letter Agreement between the Registrant and each of R. Bruce Cameron,
      Richard S. Foote, R. Bradley Forth, The Hillary Appel Trust, The Catey
      Lauren Appel Trust, Broad Hollow LLC (the initial stockholders) and
      Russell L. Appel.10.8
                
                [Intentionally
      omitted].10.9(4)
                
                Form
      of Stock Escrow Agreement between the Registrant and Continental Stock
      Transfer and Trust Company.10.10(4)
                
                Registration
      Rights Agreement between the Registrant and the initial
      stockholders.10.11(4)
                
                Form
      of Placement Unit Purchase Agreement among the Registrant, ThinkEquity
      Partners LLC, and the initial stockholders.10.12(6)
                
                Asset
      Purchase Agreement, dated as of April 20, 2006, by and among the
      Registrant, ABN AMRO Asset Management Holdings, Inc., ABN AMRO Investment
      Fund Services, Inc., ABN AMRO Asset Management, Inc., Montag &
      Caldwell, Inc., Tamro Capital Partners LLC, Veredus Asset Management LLC,
      River Road Asset Management LLC and Aston Asset Management
      LLC.10.13(6)
                
                Side
      Letter Agreement, dated as of April 20, 2006, by and among Registrant,
      Aston Asset Management LLC and Veredus Asset Management
    LLC.10.14(6)
                
                Side
      Letter Agreement, dated as of April 20, 2006, by and among Registrant,
      Aston Asset Management LLC and River Road Asset Management
      LLC.10.15(1)
                
                Side
      Letter Agreement, dated as of November 30, 2006, by and among Registrant,
      Aston Asset Management LLC and Montag & Caldwell,
  Inc.10.16(6)
                
                Side
      Letter Agreement, dated as of April 20, 2006, by and among Registrant,
      Aston Asset Management LLC and ABN AMRO Asset Management Holdings,
      Inc.10.17(6)
                
                Amended
      and Restated Limited Liability Company Agreement of Aston Asset Management
      LLC, dated as of April 20, 2006.10.18(7)
                
                Credit
      Agreement, dated as of November 9, 2006, between City National Bank and
      Registrant.10.19
                
                [Intentionally
      omitted].10.20(1)
                
                Promissory
      Note issued by Aston in favor of Registrant, dated November 30,
      2006.10.21(4)
                
                Administrative,
      Compliance and Marketing Services Agreement, dated as of September 1,
      2006, between ABN AMRO Asset Management, Inc., and Aston Asset Management
      LLC.10.22(4)
                
                Form
      of Investment Advisory Agreement, between the Aston Funds and Aston Asset
      Management LLC.10.23(8)
                
                Letter
      Agreement, dated February 2, 2007, by and between Registrant and Berkshire
      Capital Securities LLC.10.24(9)
                
                First
      Amendment to Credit Agreement, dated as of October 31, 2007, between City
      National Bank and Registrant.10.25(9)
                
                Office
      Service Agreement, between Registrant and Berkshire Capital, dated October
      31, 2007.10.26(8)
                
                Amendment
      to Unit Purchase Option, dated December 15, 2006, by and between
      Registrant and ThinkEquity Partners LLC.10.27(8)
                
                Amendment
      to Unit Purchase Option, dated December 15, 2006, by and between
      Registrant and EarlyBirdCapital,
Inc.
  65
  Exhibit
      No.
                
                Description10.28(8)
                
                Amended
      and Restated Warrant Clarification Agreement, dated December 15, 2006, by
      and between Registrant and Continental Stock Transfer and Trust
      Company.10.29(10)
                
                Second
      Amendment to Credit Agreement, dated as of October 1, 2008, between
      City National Bank and Registrant.10.30(11)
                
                Warrant
      Repurchase Agreement, dated as of January 8, 2008, between Context Capital
      Management LLC and Registrant.10.31(12)
                
                Share
      Repurchase Agreement, dated as of January 28, 2008, Potomac Capital
      Management LLC, as Investment Manager to certain shareholders of
      Registrant, and Registrant.10.32(13)
                
                Highbury
      Financial Inc. 2008 Equity Incentive Plan.10.33(13)
                
                Highbury
      Financial Inc. 2008 Executive Long Term Incentive Plan.10.34(2)
                
                Exchange
      Agreement, dated August 10, 2009, between the Registrant and the Investors
      and Management Stockholders named therein.10.35(2)
                
                Management
      Agreement, dated August 10, 2009, between the Registrant, Aston Asset
      Management LLC and the management stockholders named
    therein.10.36(2)
                
                Investor
      Rights Agreement, dated August 10, 2009 between the Registrant and the
      Investors and Management Stockholders named therein.10.37(2)
                
                Third
      Amended and Restated Limited Liability Company Agreement of Aston Asset
      Management LLC.10.38(14)
                
                Exchange
      Agreement, dated September 14, 2009, between the Registrant and the
      investors named therein.10.39(14)
                
                Amended
      and Restated Investor Rights Agreement, dated September 14, 2009, between
      the Registrant and the investors and management stockholders named
      therein.10.40(15)
                
                Agreement,
      dated December 18, 2009, between the Registrant, Peerless Systems
      Corporation and Timothy E. Brog.10.41
                
                [Intentionally
      omitted.]10.42(5)
                
                Severance
      Agreement, dated December 12, 2009, between the Registrant and Richard S.
      Foote.10.43(5)
                
                Severance
      Agreement, dated December 12, 2009, between the Registrant and R. Bradley
      Forth.10.44(5)
                
                Termination
      Agreement, dated December 12, 2009, between the Registrant and Berkshire
      Capital Securities LLC.10.45(5)
                
                Termination
      Agreement, dated December 12, 2009, between the Registrant, Aston Asset
      Management LLC and the investors and management stockholders named
      therein.10.46(16)
                
                Form
      of Highbury Financial Inc. Indemnification Agreement.10.47(17)
                
                Third
      Amendment to Credit Agreement, dated October 1, 2009, between the
      Registrant and City National Bank.10.48*
                
                Amended
      and Restated Limited Partnership Agreement of Aston Asset Management, LP,
      dated December 12, 2009, between Aston Asset Management LLC, Manor
      LLC, and certain members of the Aston Asset Management LLC named
      therein.10.49*
                
                Employment
      Agreement, dated December 12, 2009, between Stuart Bilton, the Registrant,
      Aston Asset Management LLC, and Manor LLC.10.50*
                
                Employment
      Agreement, dated December 12, 2009, between Kenneth Anderson, the
      Registrant, Aston Asset Management LLC, and Manor
  LLC.
  66
  Exhibit
      No.
                
                Description10.51*
                
                Partner
      Non-Competition Agreements, dated as of December 12, 2009, between Stuart
      Bilton, the Registrant, Aston Asset Management LLC, and Manor
      LLC.10.52*
                
                Partner
      Non-Competition Agreements, dated as of December 12, 2009, between Kenneth
      Anderson, the Registrant, Aston Asset Management LLC, and Manor
      LLC.10.53*
                
                Exchange
      Agreement, dated December 12, 2009, between the Registrant and the
      investors and management stockholders named therein.21.1
                
                Subsidiaries
      of Registrant.31.1
                
                Certification
      by Principal Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.*31.2
                
                Certification
      by Principal Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.*32.1
                
                Certification
      of Principal Executive and Financial Officers 18 U.S.C.
    1350.*
 
 *
      Filed herewith.
  (1)
              Incorporated
      by reference from our Current Report on Form 8-K filed with the SEC on
      December 6, 2006.
  (2)
              Incorporated
      by reference from our Current Report on Form 8-K filed with the SEC on
      August 11, 2009.
  (3)
              Incorporated
      by reference from our Current Reports on Form 8-K filed with the SEC on
      June 26, 2009 and August 11, 2009.
  (4)
              Incorporated
      by reference from our Registration Statement on Form S-1 (SEC File No.
      333-127272).
  (5)
              Incorporated
      by reference from our Current Report on Form 8-K filed with the SEC on
      December 14, 2009.
  (6)
              Incorporated
      by reference from our Current Report on Form 8-K filed with the SEC on
      April 21, 2006.
  (7)
              Incorporated
      by reference from our Quarterly Report on Form 10-QSB filed with the SEC
      on November 14, 2006.
  (8)
              Incorporated
      by reference from our Annual Report on Form 10-K filed with the SEC on
      March 23, 2007.
  (9)
              Incorporated
      by reference from our Current Report on Form 8-K filed with the SEC on
      November 5, 2007.
  (10)
              Incorporated
      by reference from our Current Report on Form 8-K filed with the SEC on
      October 6, 2008.
  (11)
              Incorporated
      by reference from our Current Report on Form 8-K filed with the SEC on
      January 11, 2008.
  (12)
              Incorporated
      by reference from our Current Report on Form 8-K filed with the SEC on
      February 1, 2008.
  (13)
              Incorporated
      by reference from Amendment No. 1 to Schedule 14-A filed with the SEC on
      October 27, 2008.
  (14)
              Incorporated
      by reference from our Current Report on Form 8-K filed with the SEC on
      September 14, 2009.
  (15)
              Incorporated
      by reference from our Current Report on Form 8-K filed with the SEC on
      December 21, 2009.
  (16)
              Incorporated
      by reference from our Quarterly Report on Form 10-Q filed with the SEC on
      April 29, 2009.
  (17)
              Incorporated
      by reference from our Current Report on Form 8-K filed with the SEC on
      October 8, 2009.
  67
  SIGNATURES
  Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this Report to be signed on its behalf by
the undersigned, thereunto duly authorized.
  HIGHBURY
      FINANCIAL INC.By:
                /s/ Richard S. FooteRichard
      S. FootePresident
      and Chief Executive Officer
 Date:  March
26, 2010
  Pursuant
to the requirement of the Securities Exchange Act of 1934, this Report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
  SIGNATURE
                
                TITLE
                
                DATE/s/ R. Bruce Cameron
                
                Chairman of the Board
                
                March 26, 2010R. Bruce Cameron/s/ Richard S. Foote
                
                President and Chief Executive
                  Officer and Director (principal
                  executive officer)
                
                March 26, 2010Richard S. Foote/s/ R. Bradley Forth
                
                Executive Vice President, Chief
                  Financial Officer and Secretary
                  (principal financial and
                  accounting officer)
                
                March 26, 2010R. Bradley Forth/s/ Hoyt Ammidon Jr.
                
                Director
                
                March 26, 2010Hoyt Ammidon Jr./s/ Kenneth C. Anderson
                
                Director
                
                March 26, 2010Kenneth C. Anderson/s/ Stuart D. Bilton
                
                Director
                
                March 26, 2010Stuart D. Bilton/s/ Theodore M. Leary Jr.
                
                Director
                
                March 26, 2010Theodore M. Leary Jr./s/ Aidan J. Riordan
                
                Director
                
                March 26, 2010Aidan J. Riordan/s/ John D. Weil
                
                Director
                
                March 26, 2010John D. Weil
  68




REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




To the
Board of Directors and Stockholders


Highbury
Financial Inc.




We have
audited the accompanying consolidated balance sheets of Highbury Financial Inc.
and Subsidiary as of December 31, 2009 and 2008 and the related consolidated
statements of income, changes in stockholders’ equity and cash flows for the
years then ended. These consolidated financial statements are the responsibility
of the Company’s management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.




We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.




In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Highbury
Financial Inc. and Subsidiary as of December 31, 2009 and 2008, and their
results of operations and cash flows for the years then ended, in conformity
with accounting principles generally accepted in the United States of
America.




As
discussed in Note 1 to the consolidated financial statements, the Company
changed the manner in which it accounts for noncontrolling interests in
2009.




/s/ J. H.
Cohn LLP




New York,
New York


March 26,
2010




F-1




HIGHBURY
      FINANCIAL INC. AND SUBSIDIARYConsolidated
      Balance Sheets




December 31,2008
                                    
                                    
                                    2009ASSETSCurrent
      assetsCash
      and cash equivalents
                                    
                                    $
                                    10,244,469
                                    
                                    
                                    $
                                    13,290,552Investments
                                    
                                    
                                    4,186,552
                                    
                                    
                                    
                                    1,000,000Accounts
      receivable
                                    
                                    
                                    2,448,572
                                    
                                    
                                    
                                    4,391,161Prepaid
      expenses
                                    
                                    
                                    239,434
                                    
                                    
                                    
                                    306,740Prepaid
      and refundable taxes
                                    
                                    
                                    278,444
                                    
                                    
                                    
                                    562,136Deferred
      income taxes
                                    
                                    
                                    —
                                    
                                    
                                    
                                    73,038Total
      current assets
                                    
                                    
                                    17,397,471
                                    
                                    
                                    
                                    19,623,627Other
      assetsFixed
      assets, net
                                    
                                    
                                    806,637
                                    
                                    
                                    
                                    643,356Identifiable
      intangibles
                                    
                                    
                                    22,982,000
                                    
                                    
                                    
                                    22,982,000Goodwill
                                    
                                    
                                    3,305,616
                                    
                                    
                                    
                                    3,305,616Deferred
      tax assets
                                    
                                    
                                    1,097,620
                                    
                                    
                                    
                                    113,467Other
      long-term assets
                                    
                                    
                                    157,092
                                    
                                    
                                    
                                    101,400Total
      other assets
                                    
                                    
                                    28,348,965
                                    
                                    
                                    
                                    27,145,839Total
      assets
                                    
                                    $
                                    45,746,436
                                    
                                    
                                    $
                                    46,769,466LIABILITIES
      AND EQUITYCurrent
      liabilitiesAccounts
      payable and accrued expenses
                                    
                                    $
                                    3,407,601
                                    
                                    
                                    $
                                    4,853,644Dividends
      payable
                                    
                                    
                                    —
                                    
                                    
                                    
                                    1,000,623Total
      current liabilities
                                    
                                    
                                    3,407,601
                                    
                                    
                                    
                                    5,854,267Deferred
      rent
                                    
                                    
                                    805,707
                                    
                                    
                                    
                                    760,684Total
      liabilities
                                    
                                    
                                    4,213,308
                                    
                                    
                                    
                                    6,614,951Commitments
      and contingenciesPreferred
      stock, $0.0001 par value, authorized 1,000,000 shares; 0 and 1,000 issued
      and outstanding as of December 31, 2008 and December 31, 2009,
      respectively
                                      ·Series B Convertible Preferred Stock
      (1,000 shares issued; liquidation value of $22,500,000 as of December 31,
      2009)
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —Equity:Highbury
      Financial Inc. stockholders’ equity:Preferred
      stock, $0.0001 par value, authorized 1,000,000 shares; 0 and 1,000 issued
      and outstanding as of December 31, 2008 and December 31, 2009,
      respectively
                                      ·Series A Junior Participating Preferred Stock (0 shares
      issued)
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —Common
      stock, $0.0001 par value, authorized 50,000,000 shares; 9,118,740 and
      15,512,464 shares issued and outstanding as of December 31, 2008 and 2009,
      respectively
                                    
                                    
                                    912
                                    
                                    
                                    
                                    1,551Additional
      paid-in capital
                                    
                                    
                                    51,818,975
                                    
                                    
                                    
                                    49,860,408Accumulated
      deficit
                                    
                                    
                                    (11,126,759
                                    )
                                    
                                    
                                    (9,707,444
                                    )Total
      Highbury Financial Inc. stockholders’ equity
                                    
                                    
                                    40,693,128
                                    
                                    
                                    
                                    40,154,515Noncontrolling
      interest
                                    
                                    
                                    840,000
                                    
                                    
                                    
                                    —Total
      equity
                                    
                                    
                                    41,533,128
                                    
                                    
                                    
                                    40,154,515Total
      liabilities and equity
                                    
                                    $
                                    45,746,436
                                    
                                    
                                    $
                                    46,769,466




See
Notes to Consolidated Financial Statements





F-2


HIGHBURY
      FINANCIAL INC. AND SUBSIDIARYConsolidated
      Statements of Income




Year Ended December 31,2008
                  
                  
                  2009Revenue
                  
                  $
                  35,712,112
                  
                  
                  $
                  40,082,210Operating
      expensesDistribution
      and sub-advisory costs
                  
                  
                  16,514,898
                  
                  
                  
                  19,133,595Compensation
      and related expenses
                  
                  
                  6,037,770
                  
                  
                  
                  9,427,097Depreciation
      and amortization
                  
                  
                  186,450
                  
                  
                  
                  185,232Impairment
      of intangibles
                  
                  
                  2,288,000
                  
                  
                  
                  —Other
      operating expenses
                  
                  
                  5,970,130
                  
                  
                  
                  8,602,118Total
      operating expenses
                  
                  
                  30,997,248
                  
                  
                  
                  37,348,042Operating
      income
                  
                  
                  4,714,864
                  
                  
                  
                  2,734,168Other
      income (loss)Interest
      income
                  
                  
                  155,172
                  
                  
                  
                  25,818Investment
      income (loss)
                  
                  
                  (663,175
                  )
                  
                  
                  969,433Total
      other income (loss)
                  
                  
                  (508,003
                  )
                  
                  
                  995,251Income
      before provision for income taxes
                  
                  
                  4,206,861
                  
                  
                  
                  3,729,419Provision
      for income taxes
                  
                  
                  410,925
                  
                  
                  
                  410,879Net
      income
                  
                  
                  3,795,936
                  
                  
                  
                  3,318,540Less:
      Net income attributable to the noncontrolling interest
                  
                  
                  3,309,929
                  
                  
                  
                  1,899,225Net
      income attributable to Highbury Financial Inc.
                  
                  
                  486,007
                  
                  
                  
                  1,419,315Less:
      Preferred stock dividends
                  
                  
                  —
                  
                  
                  
                  352,174Net
      income attributable to common stockholders
                  
                  $
                  486,007
                  
                  
                  $
                  1,067,141Weighted
      average common shares outstanding, basic
                  
                  
                  9,158,692
                  
                  
                  
                  10,669,600Net
      income per common share, basic
                  
                  $
                  0.05
                  
                  
                  $
                  0.10Weighted
      average common shares outstanding, diluted
                  
                  
                  9,158,692
                  
                  
                  
                  12,524,055Net
      income per common share, diluted
                  
                  $
                  0.05
                  
                  
                  $
                  0.09




See
Notes to Consolidated Financial Statements




F-3




HIGHBURY
      FINANCIAL INC. AND SUBSIDIARYConsolidated
      Statements of Changes in Stockholders’ Equity





Highbury
      Financial Inc. Stockholders’
      EquityAdditionalCommon
      Stock
                    
                    
                    Paid-In
                    
                    
                    Accumulated
                    
                    
                    NoncontrollingShares
                    
                    
                    Amount
                    
                    
                    Capital
                    
                    
                    Deficit
                    
                    
                    Interest
                    
                    
                    TotalBalance
      at December 31, 2007
                    
                    
                    9,527,000
                    
                    
                    $
                    953
                    
                    
                    $
                    55,393,484
                    
                    
                    $
                    (11,612,766
                    )
                    
                    $
                    840,000
                    
                    
                    $
                    44,621,671Repurchase
      of Common Stock
                    
                    
                    (408,260
                    )
                    
                    
                    (41
                    )
                    
                    
                    (1,751,426
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (1,751,467
                    )Repurchase
      of warrants
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (1,823,083
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (1,823,083
                    )Net
      income
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    486,007
                    
                    
                    
                    3,309,929
                    
                    
                    
                    3,795,936Income
      distributable to noncontrolling interest
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (3,309,929
                    )
                    
                    
                    (3,309,929
                    )Balance
      at December 31, 2008
                    
                    
                    9,118,740
                    
                    
                    
                    912
                    
                    
                    
                    51,818,975
                    
                    
                    
                    (11,126,759
                    )
                    
                    
                    840,000
                    
                    
                    
                    41,533,128Repurchase
      of Common Stock
                    
                    
                    (33,705
                    )
                    
                    
                    (3
                    )
                    
                    
                    (83,722
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (83,725
                    )Repurchase
      of warrants
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (1,704,740
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (1,704,740
                    )Issuance
      of Common Stock upon exchange of warrants
                    
                    
                    22,150
                    
                    
                    
                    2
                    
                    
                    
                    (2
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Issuance
      of Common Stock upon exercise of warrants
                    
                    
                    6,405,279
                    
                    
                    
                    640
                    
                    
                    
                    32,025,755
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    32,026,395Distribution
      to noncontrolling interest holders
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (840,000
                    )
                    
                    
                    (840,000
                    )Dividends
      paid
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (31,195,235
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (31,195,235
                    )Dividends
      declared
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (1,000,623
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (1,000,623
                    )Net
      income
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,419,315
                    
                    
                    
                    1,899,225
                    
                    
                    
                    3,318,540Income
      distributable to noncontrolling interest
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (1,899,225
                    )
                    
                    
                    (1,899,225
                    )Balance
      at December 31, 2009
                    
                    
                    15,512,464
                    
                    
                    $
                    1,551
                    
                    
                    $
                    49,860,408
                    
                    
                    $
                    (9,707,444
                    )
                    
                    $
                    -
                    
                    
                    $
                    40,154,515





See
Notes to Consolidated Financial Statements


F-4




HIGHBURY
      FINANCIAL INC. AND SUBSIDIARYConsolidated
      Statements of Cash Flows




Year Ended December 31,2008
                                            
                                            
                                            2009CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      income attributable to Highbury Financial Inc.
                                            
                                            $
                                            486,007
                                            
                                            
                                            $
                                            1,419,315Adjustments
      to reconcile net income attributable to Highbury Financial
      Inc.to
      net cash provided by operating activities:Depreciation
      and amortization
                                            
                                            
                                            186,450
                                            
                                            
                                            
                                            185,232Deferred
      income taxes
                                            
                                            
                                            (145,411
                                            )
                                            
                                            
                                            911,115Investment
      (gain) loss
                                            
                                            
                                            663,175
                                            
                                            
                                            
                                            (969,433
                                            )Net
      income attributable to noncontrolling interest
                                            
                                            
                                            3,309,929
                                            
                                            
                                            
                                            1,899,225Deferred
      rent
                                            
                                            
                                            (39,273
                                            )
                                            
                                            
                                            (45,023
                                            )Impairment
      charge
                                            
                                            
                                            2,288,000
                                            
                                            
                                            
                                            —Changes
      in operating assets and liabilities:(Increase)
      decrease in:Accounts
      receivable
                                            
                                            
                                            1,053,570
                                            
                                            
                                            
                                            (1,942,589
                                            )Prepaid
      expenses
                                            
                                            
                                            30,652
                                            
                                            
                                            
                                            (67,306
                                            )Prepaid
      and refundable taxes
                                            
                                            
                                            (278,444
                                            )
                                            
                                            
                                            (283,692
                                            )Other
      long-term assets
                                            
                                            
                                            —
                                            
                                            
                                            
                                            55,692Increase
      (decrease) in:Accounts
      payable and accrued expenses
                                            
                                            
                                            (837,001
                                            )
                                            
                                            
                                            2,106,930Income
      taxes payable
                                            
                                            
                                            (97,758
                                            )
                                            
                                            
                                            —Net
      cash provided by operating activities
                                            
                                            
                                            6,619,896
                                            
                                            
                                            
                                            3,269,466CASH
      FLOWS FROM INVESTING ACTIVITIESPurchases
      of investments
                                            
                                            
                                            (5,319,735
                                            )
                                            
                                            
                                            (6,747,508
                                            )Proceeds
      from sales of investments
                                            
                                            
                                            5,105,515
                                            
                                            
                                            
                                            10,903,492Proceeds
      from contingent payment
                                            
                                            
                                            3,740,796
                                            
                                            
                                            
                                            —Decrease
      in other long-term assets
                                            
                                            
                                            12,372
                                            
                                            
                                            
                                            —Purchase
      of fixed assets
                                            
                                            
                                            (1,827
                                            )
                                            
                                            
                                            (21,950
                                            )Net
      cash provided by investing activities
                                            
                                            
                                            3,537,121
                                            
                                            
                                            
                                            4,134,034CASH
      FLOWS FROM FINANCING ACTIVITIES:Dividends
      paid
                                            
                                            
                                            —
                                            
                                            
                                            
                                            (31,195,235
                                            )Issuance
      of Common Stock
                                            
                                            
                                            —
                                            
                                            
                                            
                                            32,026,395Repurchase
      of Common Stock
                                            
                                            
                                            (1,751,467
                                            )
                                            
                                            
                                            (83,725
                                            )Repurchase
      of warrants
                                            
                                            
                                            (1,823,083
                                            )
                                            
                                            
                                            (1,704,740
                                            )Distributions
      paid to noncontrolling interest holders
                                            
                                            
                                            (3,614,543
                                            )
                                            
                                            
                                            (3,400,112
                                            )Net
      cash used in financing activities
                                            
                                            
                                            (7,189,093
                                            )
                                            
                                            
                                            (4,357,417
                                            )Net
      increase in cash and cash equivalents
                                            
                                            
                                            2,967,924
                                            
                                            
                                            
                                            3,046,083Cash
      and cash equivalents – beginning of year
                                            
                                            
                                            7,276,545
                                            
                                            
                                            
                                            10,244,469Cash
      and cash equivalents – end of year
                                            
                                            $
                                            10,244,469
                                            
                                            
                                            $
                                            13,290,552Supplemental schedule of
      non-cash investing and financing activities:Issuance
      of Series B Convertible Preferred Stock (liquidation value of
      $22,500,000)
                                            
                                            $
                                            —
                                            
                                            
                                            $
                                            —Issuance
      of 22,150 shares of common stock upon exchange of 443,000
      warrants
                                            
                                            $
                                            —
                                            
                                            
                                            $
                                            —Dividend
      declared but not yet paid
                                            
                                            $
                                            —
                                            
                                            
                                            $
                                            1,000,623Supplemental
      disclosure of cash flow information:Cash
      paid for income taxes
                                            
                                            $
                                            932,538
                                            
                                            
                                            $
                                            33,648





See
Notes to Consolidated Financial Statements


F-5


HIGHBURY
      FINANCIAL INC. AND SUBSIDIARYNotes
      to Consolidated Financial Statements


1.
            Business
      and Summary of Significant Accounting
Policies





Organization
and Nature of Operations





Highbury
Financial Inc. (“Highbury”, “we” or the “Company”) is an investment management
holding company formed to provide permanent capital solutions to mid-sized
investment management firms. Historically, Highbury pursued acquisition
opportunities and sought to establish accretive partnerships with high quality
investment management firms. In July 2009, Highbury’s board of directors
suspended its pursuit of acquisition opportunities other than add-on
acquisitions for Highbury’s subsidiary, Aston Asset Management LLC (“Aston”),
and began evaluating strategic alternatives.  On December 12, 2009,
Highbury entered into an Agreement and Plan of Merger (the “Merger Agreement”)
by and among Affiliated Managers Group, Inc. (“AMG”), a Delaware corporation
publicly traded on the New York Stock Exchange, Manor LLC, a newly formed
Delaware limited liability company and a wholly-owned subsidiary of AMG (“Merger
Sub”), and Highbury, pursuant to which Highbury will merge with and into Merger
Sub.  We refer to this transaction as the “Merger”
herein.  Following the Merger, the separate corporate existence of
Highbury will cease and Merger Sub will continue as the surviving limited
liability company under the name “Manor LLC” and be a wholly-owned subsidiary of
AMG.





The
consolidated financial statements include the accounts of Highbury and Aston,
its majority-owned subsidiary through August 10, 2009 and a wholly-owned
subsidiary thereafter. We were incorporated in Delaware on July 13, 2005. On
November 30, 2006, Highbury and Aston completed the acquisition of the U.S.
mutual fund business of ABN AMRO Asset Management Holdings, Inc. (“AAAMHI”) from
AAAMHI and certain of its affiliates. See Note 2 for additional information.
Subsequent to the completion of the acquisition, AAAMHI was acquired by Fortis
Investment Management USA, Inc. (“Fortis”).





Aston’s
total assets under management were $6.7 billion and $3.5 billion as of December
31, 2009 and 2008, respectively. Aston provides investment advisory services to
the Aston Funds, a Delaware business trust which includes a family of 25 and 26
no-load, open-end mutual funds with approximately $6.5 billion and $3.4 billion
in client assets as of December 31, 2009 and 2008, respectively. Aston provides
advisory, sales, marketing, compliance and operating resources to mutual funds
using sub-advisers that produce institutional quality investment products. Aston
also has a separate account management platform with approximately $192 million
and $115 million of assets under management as of December 31, 2009 and 2008,
respectively.





The
consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States (“U.S. GAAP”).





Principles
of Consolidation





The
consolidated financial statements include the accounts of Highbury and Aston, in
which the Company has a controlling financial interest. Generally, an entity is
considered to have a controlling financial interest when it owns a majority of
the voting interest in another entity. Highbury is the manager member of Aston
and owned 65% of Aston through August 10, 2009 and has owned 100% since August
10, 2009. Highbury has a contractual arrangement with Aston (prior to August 10,
2009) and the Management Members (since August 10, 2009) whereby a percentage of
revenue is allocable to fund Aston’s operating expenses, including
compensation.  The remaining portion of revenue is allocable to the
Company and, prior to August 10, 2009, the other members, with a priority to
Highbury. The portion of the income of Aston allocated to owners other than
Highbury (eight individuals collectively referred to herein as the “Management
Members”) is included in noncontrolling interest in the consolidated statements
of income. Noncontrolling interest in the consolidated balance sheets includes
capital and undistributed income owned by the Management Members of Aston. All
material intercompany balances and transactions have been eliminated in
consolidation.




F-6





HIGHBURY
      FINANCIAL INC. AND SUBSIDIARYNotes
      to Consolidated Financial Statements





Use
of Estimates





The
consolidated financial statements are prepared in accordance with U.S. GAAP,
which requires management to make assumptions and estimates that affect the
amounts reported in the financial statements and accompanying notes, including
identifiable intangible assets and goodwill, liabilities for losses and
contingencies and income taxes. Management believes that the estimates used are
reasonable, although actual amounts could differ from the estimates and the
differences could have a material impact on the consolidated financial
statements.





Cash and Cash Equivalents





The
Company considers all highly liquid investments, including money market mutual
funds and U.S. Treasury securities with original maturities of three months or
less, to be cash equivalents. Certain cash accounts are maintained at large
financial institutions and, at times, may exceed federally insured
limits.





Investments





The
Company carries its investments at fair value based on quoted market prices, a
Level 1 input, which is defined by Accounting Standards Codification (“ASC”)
“Fair Value Measurements and Disclosures” as quoted prices (unadjusted) in
active markets that are accessible at the measurement date for identical assets
or liabilities. The fair value hierarchy gives the highest priority to Level 1
inputs. The Company reflects interest paid and accrued on money market mutual
funds and U.S. Treasury bills in interest income and changes in fair value of
marketable securities, including certain mutual funds managed by Aston, in
investment income (loss).





Investments
consist of the following:





As of December 31,2008
                        
                        
                        2009Aston
      mutual funds
                        
                        $
                        725,752
                        
                        
                        $
                        1,000,000Other
      marketable securities
                        
                        
                        3,460,800
                        
                        
                        
                        —$
                        4,186,552
                        
                        
                        $
                        1,000,000





Unrealized
gains and losses reflecting the changes in fair value of investments, as well as
realized gains and losses resulting from the sale of investments, are included
in investment income (loss) and are as follows:




Year Ended December 31,2008
                        
                        
                        2009Aston
      mutual fundsRealized
      losses
                        
                        $
                        (146,492
                        )
                        
                        $
                        (46,077)Unrealized
      losses
                        
                        
                        (657,748
                        )
                        
                        
                        —Other
      marketable securitiesRealized
      gains
                        
                        
                        —
                        
                        
                        
                        1,015,510Unrealized
      gains
                        
                        
                        141,065
                        
                        
                        
                        —$
                        (663,175
                        )
                        
                        $
                        969,433


F-7





HIGHBURY
      FINANCIAL INC. AND SUBSIDIARYNotes
      to Consolidated Financial Statements





Restricted
Cash





Under the
terms of the letter of credit provided to the lessor in connection with Aston’s
lease agreement, the Company is required to maintain $150,000 and $100,000 on
deposit with the bank, which is included in other long-term assets, as of
December 31, 2008 and 2009, respectively.





Fixed
Assets





Fixed
assets are recorded at cost and depreciated using the straight-line method over
their estimated useful lives. The estimated useful lives of office equipment and
furniture and fixtures generally range from three to eleven years. Computer
software developed or obtained for internal use is amortized using the
straight-line method over the estimated useful life of the software, generally
three years or less. The costs of improvements that extend the life of a fixed
asset are capitalized, while the cost of repairs and maintenance are expensed as
incurred. Leasehold improvements are amortized over the shorter of their
expected useful lives or the remaining term of the lease for which they are
incurred. Under the terms of Highbury’s credit facility (Note
6), these fixed assets are pledged as collateral for borrowings under the credit
facility.




Acquired
Client Relationships, Goodwill and Impairment Charges





The
purchase price and the capitalized transaction costs incurred in connection with
the acquisition of the U.S. mutual fund business of AAAMHI were allocated based
on the fair value of the assets acquired, which was primarily the acquired
mutual fund advisory contract. In determining the allocation of the purchase
price to the acquired mutual fund advisory contract, Highbury has analyzed the
present value of the acquired business’ mutual fund advisory contract based on a
number of factors including: the acquired business’ historical and potential
future operating performance; the historical and potential future rates of new
business from new and existing clients and attrition among existing clients; the
stability and longevity of existing advisory and sub-advisory relationships; the
acquired business’ recent, as well as long-term, investment performance; the
characteristics of the acquired business’ products and investment styles; the
stability and depth of the management team; and the acquired business’ history
and perceived franchise or brand value.





The
Company has determined that the acquired mutual fund advisory contract meets the
indefinite life criteria outlined in ASC Topic 350, “Goodwill and Other Intangible
Assets”, because the Company expects both the contract and the cash flows
generated by the contract to continue indefinitely due to the likelihood of
continued renewal at little or no cost. However, the mutual funds’ trustees or
directors may terminate the mutual fund advisory contract at any time upon
written notice for any reason. The Company does not amortize this intangible
asset, but instead assesses, each reporting period, whether events or
circumstances have occurred which indicate that the indefinite life criteria are
no longer met. If the Company determines the indefinite life criteria are no
longer met, the Company will amortize the asset over its remaining useful life.
The Company reviews this asset for impairment at least annually, or more
frequently whenever events or circumstances occur indicating that the recorded
intangible asset may be impaired. If Highbury concludes that the carrying value
of the asset exceeds its fair value, an impairment loss is recorded in an amount
equal to any such excess.





The
excess of purchase price for the acquisition over the fair value of net assets
acquired, including the acquired mutual fund advisory contract, is reported as
goodwill. Goodwill is not amortized, but is instead reviewed for impairment. The
Company assesses goodwill for impairment at least annually in connection with
the preparation of year-end financial statements, or more frequently whenever
events or circumstances occur indicating that the recorded goodwill may be
impaired. If the carrying amount of goodwill exceeds the fair value, an
impairment loss would be recorded in an amount equal to that
excess.


F-8





HIGHBURY
      FINANCIAL INC. AND SUBSIDIARYNotes
      to Consolidated Financial Statements





The
Company determined the identifiable intangible related to Aston’s advisory
contract with the Aston Funds had not been impaired as of December 31, 2009. In
the fourth quarter of 2008, the Company recorded impairment charges to the
identifiable intangible related to Aston’s advisory contract with the Aston
Funds of $2,288,000 as a result of negative market performance and net asset
outflows from the Aston Funds.





Income
Taxes





Income
taxes are accounted for under the asset and liability method in accordance with
ASC 740 “Accounting for Income Taxes.”  Deferred income taxes reflect
the expected future tax consequences of temporary differences between the bases
of assets and liabilities for financial reporting and income tax purposes. A
valuation allowance may be established when necessary to reduce deferred tax
assets to the amount expected to be realized.




The Company recognizes the financial statement benefit of an
uncertain tax position only after considering the probability that a tax
authority would sustain the position in an examination. For tax positions
meeting a "more-likely-than-not" threshold, the amount recognized in the
financial statements is the benefit expected to be realized upon settlement with
the tax authority. For tax positions not meeting the threshold, no financial
statement benefit is recognized.  The Company had no uncertain tax
positions as of December 31, 2009 and does not expect this to change
significantly over the next twelve months.   The Company recognizes
interest and penalties, if any, related to uncertain tax positions in income tax
expense.  The Company files income tax returns in the U.S. federal and
Illinois jurisdictions and various other states.  The Internal Revenue
Service (“IRS”) completed its examination of 2007 that resulted in no
change.  U.S. state jurisdictions in which the Company files have
statutes of limitations of three to four years.





Noncontrolling
Interest





Highbury
is the manager member of Aston and owned 65% of Aston through August 10, 2009
when it purchased the remaining 35% through issuance of 1,000 shares of Series B
convertible preferred stock, par value $0.0001, of Highbury (“Series B Preferred
Stock”) with a face value of $22.5 million. Highbury has a contractual
arrangement with Aston (prior to August 10, 2009) and the Management Members
(since August 10, 2009) whereby a percentage of revenue is allocable to fund
Aston’s operating expenses, including compensation, the operating allocation,
while the remaining portion of revenue, the owners’ allocation, is allocable to
the Company and, prior to August 10, 2009, the other members, with a priority to
Highbury. The portion of the income or loss of Aston allocated to owners other
than Highbury is included in noncontrolling interest in the Consolidated
Statements of Income. Noncontrolling interest in the Consolidated Balance Sheets
includes capital and undistributed income owned by the Management
Members.





Revenue
Recognition





The
Company, through Aston, earns investment advisory and administrative fees for
services provided to the Aston Funds, five money market funds advised by Fortis
and a limited number of separately managed accounts. These fees are primarily
based on predetermined percentages of the market value of the assets under
management and are billed in arrears of the period in which they are earned.
These fees are recognized over the period in which services are performed unless
facts and circumstances would indicate that collectability of the fees is not
reasonably assured. Expense reimbursements to certain of the Aston Funds in
accordance with the advisory agreements are reported as an offset to investment
advisory fees and accounts receivable. Substantially all of Aston’s revenues are
derived from the Aston Funds for which Aston is the investment advisor.
Management has determined that no allowance for doubtful accounts is necessary
due to all fees being collected within one month from the date of
invoice.


F-9





HIGHBURY
      FINANCIAL INC. AND SUBSIDIARYNotes
      to Consolidated Financial Statements





Takeover
Defense Costs





The
Company expenses all costs related to its defense against takeover attempts (see
Note 14 Significant Events).





Deferred
Rent





The
Company recognizes rent on a straight line basis over the life of the lease and
records the difference between the amount expensed and the rent paid as deferred
rent.





Fair
Value of Financial Instruments





The
carrying amounts of cash and equivalents, accounts receivable and accounts
payable approximates fair value because of the short-term nature of these
instruments.





Share-Based
Compensation





Accounting
for share-based payment requires compensation costs related to share-based
payment transactions to be recognized in the financial statements. We adopted
the related standard using the modified prospective application transition
method. Under this method, compensation cost includes options prior to but not
vested as of December 31, 2005 and all options granted since the adoption
of this standard.




Segment Information





Management
has determined that the Company operates in one business segment, namely as an
investment adviser managing mutual funds and separate accounts.





Advertising





Advertising
costs are expensed as incurred and amounted to $806,349 and $969,876 for the
years ended December 31, 2009 and 2008, respectively.





Recent
Accounting Pronouncements





In June
2009, the FASB issuedguidance (formerlySFAS No. 168,The FASB
Accounting Standards Codification and the Hierarchy of Generally Accepted
Accounting Principles – a replacement of FASB Statement No. 162)now referred to as ASC
105-10,Generally
Accepted Accounting Principles. The FASB Accounting
Standards Codification (“Codification”) will become the source of authoritative
U.S.GAAPrecognized bytheFASB to be applied by
nongovernmental entities. Rules and interpretive releases of the Securities and
Exchange Commission (“SEC”) under authority of federal securities laws are also
sources of authoritativeU.S.GAAP for SEC registrants. On
the effective date of this statement, the Codification will supersede all
then-existing non-SEC accounting and reporting standards. All other
non-grandfathered non-SEC accounting literature not included in the Codification
will become non-authoritative. This statement is effective for financial
statements issued for interim and annual periods ending after September15, 2009.  The adoption of
thisguidancedid not have a material
effect on the Company’sconsolidatedfinancial
statements.


F-10





HIGHBURY
      FINANCIAL INC. AND SUBSIDIARYNotes
      to Consolidated Financial Statements





In
December 2007, the FASB issued guidance (formerly SFAS No.141R, Business Combinations) now
referred to as ASC 805.
ASC 805 establishes principles and requirements for how the acquirer of a
business recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree. The statement also provides guidance for recognizing and measuring the
goodwill acquired in the business combination and determines what information to
disclose to enable users of the financial statements to evaluate and financial
effects of the business combination.  The guidance became effective for the
fiscal year beginning after December 15, 2008. The adoption of this guidance did
not have a material effect on the Company's consolidated financial
statements.





In
December 2007, the FASB issued guidance (formerly SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements – an amendment of ARB No. 51) now
referred to as ASC 810. ASC 810 addresses the accounting and reporting standards
for ownership interests in subsidiaries held by parties other than the parent,
the amount of consolidated net income attributable to the parent and to the
noncontrolling interest, changes in a parent’s ownership interest, and the
valuation of retained noncontrolling equity investments when a subsidiary is
deconsolidated. ASC 810 also establishes disclosure requirements that clearly
identify and distinguish between the interests of the parent and the interests
of the noncontrolling owners. ASC 810 is effective for fiscal years beginning
after December 15, 2008. The Company adopted the provisions of ASC 810 in the
first quarter of 2009. As a result of the adoption, the Company has reported
noncontrolling interests as a component of equity in the Consolidated Balance
Sheets and the net income or loss attributable to noncontrolling interests has
been separately identified in the Consolidated Statements of Income. The prior
periods presented have also been retrospectively restated to conform to the
current classification required by ASC 810. The adoption of ASC 810 required the
Company to not recognize any increase to the carrying value of the assets and
liabilities of Aston in connection with the purchase of the 35% interest in
Aston from the noncontrolling interest holders.





In April
2008, the FASB issued revised guidance (formerly FASB Staff Position No. FAS
142-3, Determination of the
Useful Life of Intangible Assets) now referred to as ASC 350 which amends
the list of factors an entity should consider in developing renewal or extension
assumptions used in determining the useful life of recognized intangible
assets.  The new guidance applies to (1) intangible assets that are
acquired individually or with a group of other assets and (2) intangible assets
acquired in both business combinations and asset acquisitions. Under ASC 350,
entities estimating the useful life of a recognized intangible asset must
consider their historical experience in renewing or extending similar
arrangements or, in the absence of historical experience, must consider
assumptions that market participants would use about renewal or extension. For
Highbury, this pronouncement required certain additional disclosures beginning
January 1, 2009 and application to useful life estimates prospectively for
intangible assets acquired after December 31, 2008. The adoption of ASC 350 did
not have a material impact on the Company's consolidated financial
statements.





In June
2009 and February 2010, the FASB issued guidance (formerly SFAS No. 165)later codified in ASC
855-10, Subsequent
Events. ASC 855-10 establishes general standards of for the evaluation,
recognition and disclosure of events and transactions that occur after the
balance sheet date. Although there is new terminology, the standard is based on
the same principles as those that currently exist in the auditing standards. The
standard, which includes a new required disclosure of the date through which an
entity has evaluated subsequent events, is effective for interim or annual
periods ending after June 15, 2009. The adoption of ASC 855-10 did not have a
material effect on the Company’s consolidatedfinancial
statements.


F-11





HIGHBURY
      FINANCIAL INC. AND SUBSIDIARYNotes
      to Consolidated Financial Statements





In June
2009, the FASB issued revised guidance for the accounting of variable interest
entities (codified in December 2009 as ASU No. 2009-17), which replaces the
quantitative-based risks and rewards approach with a qualitative approach that
focuses on identifying which enterprise has the power to direct the activities
of a variable interest entity that most significantly impact the entity’s
economic performance. The accounting guidance also requires an ongoing
reassessment of whether an entity is the primary beneficiary and requires
additional disclosures about an enterprise’s involvement in variable interest
entities. This accounting guidance is effective as of the beginning of each
reporting entity’s first annual reporting period that begins after November 15,
2009, and for interim periods within that first annual reporting period, and for
interim and annual reporting periods thereafter. Earlier application is
prohibited. The adoption of this pronouncement is not expected to have a
material impact on our financial position or results of operations.





In
January 2010, the FASB issued new guidance for fair value measurements and
disclosures.  The new guidance, which is now part of ASC 820, Fair
Value Measurements and Disclosures, clarifies existing disclosure requirements
regarding the level of disaggregation and inputs and valuation techniques and
provides new disclosure requirements regarding disclosures about, among other
things, transfers in and out of levels 1 and 2 of the fair value hierarchy and
details of the activity in level 3 of the fair value hierarchy.  The
new guidance is effective for fiscal years beginning after December 15, 2009 for
the levels 1 and 2 disclosures and for fiscal years beginning after December 15,
2010 for level 3 disclosures. The disclosure requirements will be applied
prospectively to the Company’s fair value disclosure subsequent to the effective
date.





Management
does not believe that any other recently issued, but not yet effective,
accounting standards if currently adopted would have a material effect on the
accompanying consolidated financial statements.





2.
            Acquisition





Summary
of the Acquisition





On April
20, 2006, Highbury and Aston (the “Highbury Entities”), entered into an Asset
Purchase Agreement (“Asset Purchase Agreement”) with AAAMHI, ABN AMRO Investment
Fund Services, Inc. (“AAIFS”), ABN AMRO Asset Management, Inc., (“AAAMI”),
Montag & Caldwell, Inc., (“Montag”), Tamro Capital Partners LLC, (“TAMRO”),
Veredus Asset Management LLC, (“Veredus”), and River Road Asset Management, LLC,
(“River Road” and together with AAAMHI, AAIFS, AAAMI, Montag, TAMRO and Veredus
individually referred to as a “Seller” and collectively as “Sellers”) to acquire
substantially all of the Sellers’ business of providing investment advisory,
administration, distribution and related services to the U.S. mutual funds (the
“Target Funds”) specified in the Asset Purchase Agreement.





Upon the
consummation of the acquisition on November 30, 2006, the Highbury Entities
acquired 100% of the assets necessary to operate the acquired business and such
assets were transferred to Aston. Through August 10, 2009, Highbury owned a 65%
interest in Aston, and eight employees of Aston owned the balance of the
membership interests. The Highbury Entities did not acquire any research and
development assets in the acquisition.





Following
the consummation of the acquisition, substantially all of the management and
staff of the acquired business were hired by Aston. A senior officer of AAAMHI
and three other individuals also joined Aston in connection with the
acquisition. In connection with the consummation of the acquisition, Aston
entered into agreements with each of the Sellers that previously managed the
Target Funds pursuant to which each such Seller now acts as a sub-advisor to the
applicable Target Fund. In connection with the consummation of the acquisition,
Aston re-branded the Target Funds as the Aston Funds. Pursuant to the Asset
Purchase Agreement, the Sellers have agreed not to terminate these agreements
prior to November 30, 2011.


F-12





HIGHBURY
      FINANCIAL INC. AND SUBSIDIARYNotes
      to Consolidated Financial Statements





Limited
Liability Company Agreement





Highbury
formed Aston on April 19, 2006 and became the sole member of Aston. In
connection with Highbury and Aston entering into the asset purchase agreement,
the limited liability company agreement of Aston was amended and eight employees
of Aston (the “Management Members”) and ABN AMRO were admitted as members of
Aston. From November 30, 2006 through August 10, 2009, Highbury owned 65% of the
membership interests of Aston, and the Management Members of Aston owned 35% of
the membership interests of Aston.





Prior to
August 10, 2009, pursuant to the limited liability company agreement of Aston in
place during the period from November 30, 2006 through August 10, 2009,
approximately 72% of the revenue (the “Operating Allocation”) of Aston was used
to pay operating expenses of Aston, including salaries and bonuses of all
employees of Aston. The remaining 28% of the revenues net of sub-administrative
fees (the “Owners’ Allocation”) of Aston were allocated to the owners of Aston.
The Owners’ Allocation was allocated among the members of Aston according to
their relative ownership interests. Between November 30, 2006 and August 10,
2009, 18.2% of total revenue net of sub-administrative fees was allocated to
Highbury, and 9.8% of total revenue net of sub-administrative fees was allocated
to the Management Members.





Highbury’s
contractual share of revenues had priority over the distributions to the
Management Members in the event Aston’s actual operating expenses exceeded the
Operating Allocation. As a result, excess expenses first reduced the portion of
the Owners’ Allocation allocated to the Management Members until the Management
Members’ allocation was eliminated, then Highbury’s allocation was reduced. Any
reduction in the distribution of revenues to be paid to Highbury was required to
be paid to Highbury out of any future excess Operating Allocation and the
portion of future Owners’ Allocation allocated to the Management Members, with
interest. Aston’s operating expenses in the period from January 1, 2009 through
August 10, 2009 exceeded the Operating Allocation by $57,614. These excess
expenses were funded by a reduction in the Management Members' share of the
Owners’ Allocation.





Accretive
Acquisition of Noncontrolling Interest in Aston.





On August
10, 2009, Highbury entered into an exchange agreement (the “First Exchange
Agreement”) with the holders of Aston’s Series B limited liability company
interests (the “Series B Investors”) and the Management Members who owned
interests in certain of the Series B Investors. Pursuant to the terms of the
First Exchange Agreement, the Series B Investors exchanged their units for
shares of Series B Preferred Stock. The result was that as of August 10, 2009
Aston became 100% owned by Highbury. On August 10, 2009, Highbury and the Series
B Investors also entered into an investor rights agreement which granted the
Series B Investors certain registration rights and placed certain restrictions
on the transfer of Highbury Series B Preferred Stock.





In
connection with the First Exchange Agreement, Highbury entered into a management
agreement (the “Management Agreement”) with the Management Members and Aston
which delegates certain powers to a management committee composed initially of
the Management Members to operate the business of Aston. Pursuant to the
Management Agreement, the Operating Allocation of Aston is 72% of Aston's total
revenues net of sub-administrative fees and may be allocated by Aston’s
management committee to pay the operating expenses of Aston, including salaries
and bonuses. In addition, the remaining 28% of Aston’s total revenues net of
sub-administrative fees is paid to Highbury as the sole owner of the business.
Highbury’s contractual share of revenues has priority over any payment of the
Operating Allocation. Any reduction in revenues to be paid to Highbury as a
result of operating expenses exceeding the Operating Allocation is required to
be paid to Highbury out of future Operating Allocation before any compensation
may be paid to management.




F-13





HIGHBURY
      FINANCIAL INC. AND SUBSIDIARYNotes
      to Consolidated Financial Statements





On
September 14, 2009 Highbury entered into (i) a second exchange agreement (the
“Second Exchange Agreement”) with the Series B Investors pursuant to which the
Series B Investors agreed to exchange up to 36% of their shares of Highbury
Series B Preferred Stock to Highbury for up to 1,620,000 shares of common stock,
$0.0001 par value, of Highbury (“Common Stock”) and (ii) an amended and restated
investors rights agreement (the “Amended and Restated Investor Rights
Agreement”).





In
connection with the signing of the Merger Agreement, Highbury and each of the
Series B Investors entered into a new exchange agreement, dated as of December
12, 2009, pursuant to which the Series B Investors will exchange all of their
shares of Series B Preferred Stock for newly issued shares of Highbury Common
Stock immediately prior to the effective time of the Merger.





In
connection with the signing of the Merger Agreement, Highbury, Aston and the
Series B Investors also entered into a termination agreement, dated as of
December 12, 2009, pursuant to which the First Exchange Agreement, the Second
Exchange Agreement, the Amended and Restated Investor Rights Agreement and the
Management Agreement will each terminate effective immediately prior to the
effective time of the Merger.





In
addition, in connection with the signing of the Merger Agreement, Aston, Merger
Sub and certain members of the Aston management team, including Stuart D. Bilton
and Kenneth C. Anderson, who are both members of the board of directors of
Highbury, entered into a limited partnership agreement, or the LP Agreement, to
be effective immediately prior to the effective time of the Merger. Pursuant to
the terms of the LP Agreement, immediately prior to the effective time of the
Merger, Aston will be converted into a limited partnership under the Delaware
Revised Uniform Limited Partnership Act and the Delaware Limited Liability
Company Act and will operate under the LP Agreement with Merger Sub as the
general partner and the Aston management employees as limited partners. Under
the LP Agreement, 67% of Aston's revenues will be allocated for use by Aston
management to pay the operating expenses of Aston, including salaries and
bonuses. The remaining 33% of the revenues of Aston will be allocated to the
owners of Aston. Of the 33% of the revenues of Aston allocated to its owners,
28% of Aston revenues is first allocated to AMG through Merger Sub and, second,
to the extent available, the remaining 5% of Aston revenues is allocated among
the management limited partners as a group, including 1.7% of Aston revenue to
Mr. Bilton and 1.3% of Aston revenue to Mr. Anderson.





Purchase
Price Allocation





The
Highbury Entities purchased the acquired business from the Sellers for a cash
payment of $38,600,000 at the closing. Highbury did not issue any equity
interests to the Sellers in connection with the transaction. The purchase price
and the other costs of the acquisition of the acquired business are allocated
based on the fair value of net assets acquired. In addition to the purchase
price, Highbury incurred $1,859,312 of costs directly attributable to the
transaction. As such, the total cost of the acquisition was as
follows:





Costs of the
      acquisition:Original
      purchase price
                    
                    $
                    38,600,000Transaction
      costs
                    
                    
                    1,859,312Total
      costs
                    
                    $
                    40,459,312


F-14





HIGHBURY
      FINANCIAL INC. AND SUBSIDIARYNotes
      to Consolidated Financial Statements








Allocation of assets received in the
      acquisition:
                      
                      Original
                        Allocation
                      
                      
                      Revised
                        AllocationIdentifiable
      intangibles (mutual fund advisory contract)
                      
                      $
                      26,753,000
                      
                      
                      $
                      29,380,000Goodwill
                      
                      
                      9,673,412
                      
                      
                      
                      7,046,412Working
      capital (cash)
                      
                      
                      3,500,000
                      
                      
                      
                      3,500,000Receivable
      from Sellers
                      
                      
                      301,989
                      
                      
                      
                      301,989Fixed
      assets
                      
                      
                      230,911
                      
                      
                      
                      230,911Total
      costs
                      
                      $
                      40,459,312
                      
                      
                      $
                      40,459,312





The
purchase price (i) excluded up to $3.8 million that would have been be payable
if the annualized investment advisory fee revenue generated under investment
advisory contracts for the six months ending November 30, 2008 exceeded $41.8
million and (ii) included up to $3.8 million that was refundable if the
annualized investment advisory fee revenue generated under investment advisory
contracts for the six months ending November 30, 2008 was less than $34.2
million. In December 2008, Highbury received a payment from Fortis in the amount
of $3,740,796 in satisfaction of a contingency related to the acquisition in
2006 and recorded this receipt as a decrease in the allocation to
goodwill.  As a result, goodwill is reflected on the December 31, 2008
and 2009 consolidated balance sheets at its adjusted cost of
$3,305,616.





Acquired
Assets





The
assets acquired in the acquisition were accounted for under the purchase method
of accounting and recorded at their fair values at the date of acquisition. The
excess of the purchase price over the estimated fair values of the net assets
acquired was recorded as identifiable intangibles and goodwill. The results of
operations of the acquired business have been included in the consolidated
financial statements beginning as of December 1, 2006.





The
Company has determined that the acquired mutual fund advisory contract meets the
indefinite life criteria outlined in ASC 350 because the Company expects both
the contract and the cash flows generated by the contract to continue
indefinitely due to the likelihood of continued renewal at little or no cost.
Accordingly, the Company does not amortize this intangible asset, but instead
assesses, each reporting period, whether events or circumstances have occurred
which indicate that the indefinite life criteria are no longer met. If the
Company determines the indefinite life criteria are no longer met, the Company
will amortize the asset over its remaining useful life. The Company reviews this
asset for impairment at least annually, or more frequently whenever events or
circumstances occur indicating that the recorded intangible asset may be
impaired. If Highbury concludes that the carrying value of the asset exceeds its
fair value, an impairment loss will be recorded in an amount equal to any such
excess.




The excess of purchase price for the acquisition over the fair
value of net assets acquired, including the acquired mutual fund advisory
contract, is reported as goodwill. Goodwill is not amortized, but is instead
reviewed for impairment. The Company assesses goodwill for impairment at least
annually, or more frequently whenever events or circumstances occur indicating
that the recorded goodwill may be impaired. If the carrying amount of goodwill
exceeds the fair value, an impairment loss would be recorded in an amount equal
to that excess.





The
balance of the fixed assets acquired are depreciated on a straight-line basis
over their useful lives.


F-15





HIGHBURY
      FINANCIAL INC. AND SUBSIDIARYNotes
      to Consolidated Financial Statements





3.
            Fixed
      Assets and Lease Commitments





Fixed
assets consisted of the following:





At
      December 31,2008
                          
                          
                          2009Leasehold
      improvements
                          
                          $
                          601,666
                          
                          
                          $
                          609,137Furniture
      and fixtures
                          
                          
                          373,164
                          
                          
                          
                          376,964Computer
      equipment
                          
                          
                          142,426
                          
                          
                          
                          153,105Office
      equipment
                          
                          
                          97,945
                          
                          
                          
                          97,9451,215,201
                          
                          
                          
                          1,237,151Accumulated
      depreciation and amortization
                          
                          
                          (408,564
                          )
                          
                          
                          (593,795
                          )Net
      fixed assets
                          
                          $
                          806,637
                          
                          
                          $
                          643,356




Depreciation
and amortization expense was $185,232 and $186,450 in 2009 and 2008,
respectively. Rent expense in 2009 and 2008, which totaled $413,854 and
$404,192, respectively, was solely related to Aston’s operations. Aston
currently leases office space for its primary office in Chicago and for two
satellite offices in New Jersey and California under various leasing
arrangements. The lease for the office in New Jersey has an evergreen term. The
lease for the office in California is on a month-to-month basis. At December 31,
2009, the Company’s aggregate future minimum payments for the Chicago lease,
which carries an eight year term ending January 2017, are payable as
follows:




Required
                            Minimum
                            Payments
                          
                          
                          Annual
                            Lease
                            ExpenseYear
      ending December 31,2010
                          
                          $
                          227,988
                          
                          
                          $
                          219,1742011
                          
                          
                          234,518
                          
                          
                          
                          219,1742012
                          
                          
                          241,047
                          
                          
                          
                          219,1742013
                          
                          
                          247,577
                          
                          
                          
                          219,1742014
                          
                          
                          254,106
                          
                          
                          
                          219,174Thereafter
                          
                          
                          545,019
                          
                          
                          
                          450,955Totals
                          
                          $
                          1,750,255
                          
                          
                          $
                          1,546,825




In addition to the base rent, Aston is required to pay its pro
rata share of the real estate taxes and operating expenses of its building. The
figures in the table above reflect the base annual rent payments and the base
annual rent expense on a straight-line basis. Under the terms of Aston’s
lease, Aston was entitled to an abatement of the base rent and real estate taxes
and operating expenses for a period of 11 months at the beginning of the lease
term. This abatement period ended in December 2007. Management has
estimated that the abatement relating to real estate taxes and operating
expenses was approximately $190,000. In addition, the lessor contributed
$522,360 to the construction costs in connection with the build-out of the
office space. This construction allowance and the aforementioned abatement of
the real estate taxes and operating expenses has been recorded as deferred rent
and amortized as a reduction to rent expense over the term of the lease. The
amortization of these deferred rent amounts are not included in the annual rent
expense schedule above. Also, Aston has an option to extend the lease under the
same terms and conditions for a single additional five year
period.




F-16





HIGHBURY
      FINANCIAL INC. AND SUBSIDIARYNotes
      to Consolidated Financial Statements





4.
            Benefit
      Plans





In 2006,
Aston established a qualified defined contribution retirement plan covering
substantially all of its full-time employees. Under the plan, Aston is able to
make discretionary contributions for the benefit of qualified plan participants
up to IRS limits. The expense related to Aston’s plan for the years ended
December 31, 2008 and 2009 was $87,520 and $0, respectively.





The
Company has adopted the 2008 Equity Incentive Plan effective October 21, 2008
and expiring on October 21, 2018 unless amended or terminated earlier by the
board of directors. This plan is intended to encourage ownership of stock by
employees, consultants and directors of the Company and to provide incentives
for them to promote the success of the Company’s business through the grant of
awards of or pertaining to shares of the Company’s Common Stock.





The
Company has adopted the 2008 Executive Long Term Incentive Plan effective
October 21, 2008 expiring on December 31, 2029 unless amended or terminated
earlier by the board of directors.  The purpose of this plan is to
provide certain executives of the Company with incentive compensation based upon
the achievement of financial, business and other performance
criteria.





These
non-qualified plans have been approved by the board of directors.  No
awards have been granted under either of these plans.





5.
            Accounts
      Payable and Accrued Expenses





Accounts
payable and accrued expenses consisted of the following:




At
      December 31,2008
                        
                        
                        2009Payable
      to sub-advisors
                        
                        $
                        802,583
                        
                        
                        $
                        1,739,714Accrued
      professional fees
                        
                        
                        552,647
                        
                        
                        
                        1,198,339Accrued
      compensation payable
                        
                        
                        436,239
                        
                        
                        
                        618,022Payable
      to brokers
                        
                        
                        321,261
                        
                        
                        
                        596,434Payable
      to noncontrolling interest
                        
                        
                        660,887
                        
                        
                        
                        -Other
      payables
                        
                        
                        633,984
                        
                        
                        
                        701,135Totals
                        
                        $
                        3,407,601
                        
                        
                        $
                        4,853,644





6.
            Credit
      Facility





Highbury
has available a credit agreement with City National Bank expiring on September
30, 2010. The credit facility provides for a revolving line of credit of up to
$12,000,000 which may be used for working capital, general corporate purposes
and repurchases of the Company’s outstanding securities, if
appropriate.


F-17





HIGHBURY
      FINANCIAL INC. AND SUBSIDIARYNotes
      to Consolidated Financial Statements





The
Company’s borrowing under the credit facility bears interest, at Highbury’s
option, at (i) for a LIBOR loan, the greater of (w) 3.50% and (x) the LIBOR
interest rate plus 2.75% per year or (ii) for a prime rate loan, the greater of
(y) 3.50% and (z) the fluctuating prime rate plus 0.50% per year.  In
addition, Highbury will pay annually a fee of 0.25% on the average daily balance
of the unused portion of the credit facility. The Company will have to make
interest payments monthly for any prime rate borrowings. For any LIBOR
borrowings, interest payments will be made at the end of any LIBOR contract or
quarterly, whichever is sooner.





The
credit facility is secured by all of the Company’s assets and contains customary
and appropriate affirmative and negative covenants for financings of its type
(subject to customary exceptions). The financial covenants include a maximum
total leverage ratio (including debt from all sources) of 5.0x Adjusted EBITDA,
although borrowings under the credit agreement are limited to 2.0x Adjusted
EBITDA, and incorporate a minimum fixed charge coverage ratio of 1.25x and a
minimum net worth of $20 million. Other covenants will, among other things,
limit our ability to incur liens or other encumbrances, make certain
investments, dispose of assets, enter into mergers or acquisitions and incur
indebtedness.





There
were no borrowings outstanding under this facility at any point in 2009 or 2008,
including at December 31, 2009 or 2008. Highbury has maintained compliance with
the applicable covenants of this facility.





7.
            Commitments
      and Contingencies





a.  
The Company presently occupies office space provided by Berkshire Capital
Securities LLC (“Berkshire Capital), an affiliate of our executive officers.
Such affiliate has agreed that it will make such office space, as well as
certain office and secretarial services, information technology equipment and
access to numerous subscription-based periodicals and databases, available to
the Company as may be required by the Company from time to time. The Company has
agreed to pay such affiliate $10,000 per month for such services. The
consolidated statements of income for the years ended December 31, 2009 and 2008
include $120,000 for each year related to this agreement. The agreement is
terminable by either party upon six months’ prior notice.  In
connection with the signing of the Merger Agreement, Highbury and Berkshire
Capital entered into a termination agreement, dated as of December 12, 2009,
pursuant to which the office services agreement will terminate at the effective
time of the Merger.




b.  
The Company’s stockholders prior to its initial public offering (the “Initial
Stockholders”) are entitled to registration rights with respect to the shares of
Common Stock of the Company owned by them. The holders of the majority of the
shares purchased prior to the initial public offering, or the founding shares,
and the holders of the majority of the shares of Common Stock underlying the
units purchased in a private placement completed simultaneously with our initial
public offering are each entitled to make up to two demands that the Company
register these securities and any other securities of the Company owned by them.
In addition, the Initial Stockholders have certain “piggy-back” registration
rights with respect to such securities on registration statements filed by the
Company. The Company will bear the expenses incurred in connection with the
filing of any of the foregoing registration statements. These securities are
also eligible for resale pursuant to Rule 144 under the Securities Act of 1933,
as amended.





c.  
The holders of the Company’s Series B Preferred Stock, have registration rights
with respect to the shares of Common Stock issuable upon conversion of the
Series B Preferred Stock.  The holders of a majority of the shares
issuable upon conversion of the Series B Preferred Stock are entitled to make up
to three demands that we register the resale of the shares of Common Stock
issuable upon the conversion of shares of Series B Preferred Stock but only
after the shares of Series B Preferred Stock have been converted into Common
Stock.  Each outstanding share of Series B Preferred Stock is into
4,500 shares of our Common Stock, or 4,500,000 shares of Common Stock in the
aggregate for the 1,000 shares of outstanding Series B Preferred Stock, subject
to customary anti-dilution adjustments.  In addition, the holders of
our Series B Preferred Stock have certain “piggy-back” registration rights with
respect to the shares of Common Stock issuable upon conversion of our Series B
Preferred Stock.  The Company will bear the expenses incurred in
connection with the filing of any of the foregoing registration
statements.


F-18





HIGHBURY
      FINANCIAL INC. AND SUBSIDIARYNotes
      to Consolidated Financial Statements





d.   Highbury and Aston are subject to claims, legal
proceedings and other contingencies in the ordinary course of their business
activities. Each of these matters is subject to various uncertainties, and it is
possible that some of these matters may be resolved in a manner unfavorable to
the Company or Aston. Highbury and Aston establish accruals for matters for
which the outcome is probable and can be reasonably estimated. Management is not
aware of any claims, legal proceedings and other contingencies that could result
in a loss to Highbury or Aston. As such, no contingencies have been
accrued.




8.
            Highbury
      Financial Inc. Stockholders’ Equity





Preferred
Stock





The
Company is authorized to issue up to 1,000,000 shares of preferred stock, par
value $0.0001 per share, with such designations, voting and other rights and
preferences as may be determined from time to time by the board of directors. On
August 10, 2009 the Company issued 1,000 shares of the Series B Preferred Stock,
par value $0.0001, with a face value of $22.5 million.  This Series B
Preferred Stock carries a 4% dividend and participates in any dividends paid to
holders of the Company’s Common Stock on an as-converted basis.  Each
share of Series B Preferred Stock is initially convertible into 4,500 shares of
common, reflecting an initial conversion price of $5.00 per share.





The
purpose of the following schedule is to disclose the effects of changes in
Highbury’s ownership interest in Aston on the Company’s equity.





Year ended December 31,2008
                    
                    
                    2009Net
      income attributable to Highbury Financial Inc.
                    
                    $
                    486,007
                    
                    
                    $
                    1,419,315Increase
      (decrease) in Highbury Financial Inc’s paid-in capital for purchase of 35%
      interest in Aston
                    
                    
                    —
                    
                    
                    
                    —Change
      from net income attributable to Highbury Financial Inc. and transfers (to)
      from noncontrolling interest
                    
                    $
                    486,007
                    
                    
                    $
                    1,419,315





Common
Stock





The
Company is authorized to issue up to 50,000,000 shares of Common Stock. As of
December 31, 2009 and 2008, 15,512,464 and 9,118,740 shares of Common Stock were
issued and outstanding, respectively. The Company repurchased 408,260 shares for
$1,751,467 in 2008 and 33,705 shares for $83,725 in 2009.





Exercise
of Warrants





In 2009,
holders of the Company’s warrants exercised 6,405,279 warrants generating
proceeds to the Company of $32,026,395.


F-19





HIGHBURY
      FINANCIAL INC. AND SUBSIDIARYNotes
      to Consolidated Financial Statements





Common
Stock Commitments





At
December 31, 2009 and 2008, 3,358,836 and 13,983,708 shares of Common Stock were
reserved for issuance upon exercise of redeemable warrants, respectively. In
January 2010, an additional 3,013,707 warrants were exercised at a price of
$5.00.  The remaining 345,129 warrants expired unexercised on January
25, 2010.   In 2009, Highbury repurchased 3,776,593 warrants for
$1,704,740 and executed an exchange of 443,000 warrants for 22,150 shares of
Common Stock.  In 2008, the Company repurchased 1,836,292 warrants for
$1,823,083.





The
Company has adopted the 2008 Equity Incentive Plan effective October 21, 2008
and expiring on October 21, 2018 unless amended or terminated earlier by the
board of directors.  There are up to 14,017,334 shares of the
Company’s Common Stock authorized for issuance under this plan based upon the
achievement of certain long term financial, business and other performance
criteria.  No awards have been granted under this plan.





Common
Stock Dividends





On March
18, 2009, the board of directors authorized a dividend on the outstanding Common
Stock of the Company to be paid in cash.  On April 15, 2009, the Company
paid a dividend of $455,155 ($0.05 per share) to stockholders of record as
of April 1, 2009.





On June
15, 2009, the board of directors authorized a dividend on the outstanding Common
Stock of the Company to be paid in cash.  On July 15, 2009, the Company
paid a dividend of $454,252 ($0.05 per share) to stockholders of record as of
July 1, 2009.





On
September 16, 2009, the board of directors authorized a dividend on the
outstanding Common Stock of the Company to be paid in cash.  The Series B
Preferred Stock is convertible into 4,500,000 shares of Common Stock and
eligible to participate in any dividends paid to holders of Common Stock on an
as-converted basis.  On October 7, 2009, the Company paid a dividend of
$30,285,828 ($1.55 per share), based on the 15,039,244 shares of Common Stock
and 4,500,000 shares of Common Stock underlying the Series B Preferred Stock
then outstanding, to stockholders of record as of October 6, 2009.





On
December 21, 2009, the board of directors authorized a dividend on the
outstanding Common Stock of the Company to be paid in cash.  The Series B
Preferred Stock is convertible into 4,500,000 shares of Common Stock and
eligible to participate in any dividends paid to holders of Common Stock on an
as-converted basis.  On January 15, 2010, the Company paid a dividend
of $1,000,623 ($0.05 per share), based on the 15,512,464 shares of Common Stock
and 4,500,000 shares of Common Stock underlying the Series B Preferred Stock
then outstanding, to stockholders of record as of January 4,
2010.  This dividend was accrued on the Company’s balance sheet as of
December 31, 2009.




9.
            Economic
      Dependency





Relationships
with a limited number of clients account for a significant majority of
Highbury’s revenue. Aston’s client, the Aston Funds, a Delaware business trust,
which accounts for approximately 97% of our assets under management, is
comprised of 25 mutual funds that are currently managed by Aston. Because all
these funds have the same trustees, it is possible that the contracts with them
could be terminated simultaneously. Of these 25 funds, the Aston/Montag &
Caldwell Growth Fund, the Aston/Optimum Mid Cap Fund and the Aston/TAMRO Small
Cap Fund contributed approximately 38%, 17% and 15% of the revenues of Aston,
respectively, in the month of December 2008. In the month of December 2008, the
Aston/Montag & Caldwell Growth Fund, the Aston/Optimum Mid Cap Fund and the
Aston/TAMRO Small Cap Fund contributed approximately 35%, 16% and 11% of the
revenues of Aston, respectively.   These various client
concentrations leave Highbury vulnerable to any adverse change in the financial
condition of any of its major clients. The loss of any of these relationships
may have a material adverse impact on the Company’s revenue.




F-20





HIGHBURY
      FINANCIAL INC. AND SUBSIDIARYNotes
      to Consolidated Financial Statements





10.
            Income
      Taxes





The
provisions (benefit) for income taxes consist of the following:





Year ended December 31,2008
                        
                        
                        2009Current:Federal
                        
                        $
                        408,058
                        
                        
                        $
                        (438,924)State
                        
                        
                        148,278
                        
                        
                        
                        (61,312)Deferred:Federal
                        
                        
                        (107,459
                        )
                        
                        
                        834,862State
                        
                        
                        (37,952
                        )
                        
                        
                        76,253Totals
                        
                        $
                        410,925
                        
                        
                        $
                        410,879





The total
provision for income taxes differs from that amount which would be computed by
applying the U.S. Federal income tax rate to income before provision for income
taxes as follows:





Year Ended December 31,2008
                                
                                
                                2009Statutory
      federal income tax rate
                                
                                
                                34
                                %
                                
                                
                                34
                                %State
      tax net of federal benefit
                                
                                
                                6
                                
                                
                                
                                5Permanent
      differences
                                
                                
                                3
                                
                                
                                
                                (4
                                )Other
                                
                                
                                3
                                
                                
                                
                                (13
                                )Effective
      income tax rate
                                
                                
                                46
                                %
                                
                                
                                22
                                %




The
permanent differences consist primarily of the tax benefit of amortization
resulting from the purchase of the non-controlling interest in Aston ($22.5
million amortized over 15 years).  The other items consist primarily
of the deferred tax benefit recognized upon the acquisition of the tax
attributes of the noncontrolling interest purchased.





The
sources of the net deferred tax assets are as follows:




At December 31,2008
                        
                        
                        2009Expenses
      and net unrealized investment losses deferred for income tax
      purposes
                        
                        $
                        492,258
                        
                        
                        $
                        438,674Net
      operating loss carryover
                        
                        
                        —
                        
                        
                        
                        53,397(Amortization)
      impairment of intangibles
                        
                        
                        605,362
                        
                        
                        
                        (305,566)Net
      deferred tax assets
                        
                        $
                        1,097,620
                        
                        
                        $
                        186,505




F-21





HIGHBURY
      FINANCIAL INC. AND SUBSIDIARYNotes
      to Consolidated Financial Statements





11.
            Earnings
      Per Share





The
calculation of basic earnings per share is computed by dividing income available
to common stockholders by the weighted average number of shares of the Company’s
common stock outstanding during the period. Diluted earnings per share gives
effect to all dilutive potential common shares outstanding during the period.
The following is a reconciliation of the numerator and denominator used in the
calculation of earnings per share available to common stockholders:




Year Ended December 31,2008
                                      
                                      
                                      2009Earnings
      Per Share – BasicNumerator:Net
      income attributable to common stockholders
                                      
                                      $
                                      486,007
                                      
                                      
                                      $
                                      1,067,141Denominator:Average
      common shares outstanding – basic
                                      
                                      
                                      9,158,692
                                      
                                      
                                      
                                      10,669,600Earnings
      Per Share – DilutedNumerator:Net
      income attributable to Highbury Financial Inc.
                                      
                                      $
                                      486,007
                                      
                                      
                                      $
                                      1,419,315Denominator:Average
      shares outstanding - basic
                                      
                                      
                                      9,158,692
                                      
                                      
                                      
                                      10,669,600Effect
      of dilutive instruments:Series
      B Preferred Stock
                                      
                                      
                                      -
                                      
                                      
                                      
                                      1,803,571Warrants
                                      
                                      
                                      -
                                      
                                      
                                      
                                      50,884Average
      shares outstanding - diluted
                                      
                                      
                                      9,158,692
                                      
                                      
                                      
                                      12,524,055





As of
December 31, 2009 and 2008, the Company’s dilutive instruments outstanding
include 4,500,000 and 0 Series B Preferred shares and 3,358,836 and 13,983,708
warrants, respectively.





There are
no effects of dilutive instruments included in the 2008 calculation because the
Company’s weighted average share price during the period was less than the
warrants’ exercise price. The dilutive effect of the warrants is calculated
using the treasury stock method and the average share price during the
period.





12.
            Related
      Person Transactions





Highbury’s
board of directors has adopted certain policies and procedures for the review,
approval and ratification of related person transactions (the “Related Person
Policy”). Among other things, the Related Person Policy provides that any
transaction, arrangement or relationship (or any series of similar transactions,
arrangements or relationships) in which Highbury (including any of its
subsidiaries) was, is or will be a participant and the amount involved exceeds
$120,000, and in which any related person had, has or will have a direct or
indirect material interest, must be reported to the Company’s board of directors
prior to the consummation or amendment of the transaction. A related person, as
defined in the Related Person Policy, means any person who is, or at any time
since the beginning of the Company’s last fiscal year was, a director or
executive officer of the Company or a nominee to become a director of the
Company; any person who is known to be the beneficial owner of more than 5% of
any class of Highbury’s voting securities; any immediate family member of any of
the foregoing persons, which means any child, stepchild, parent, stepparent,
spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law,
brother-in-law, or sister in-law of the director, executive officer, nominee or
more than 5% beneficial owner, and any person (other than a tenant or employee)
sharing the household of such director, executive officer, nominee or more than
5% beneficial owner; and any firm, corporation or other entity in which any of
the foregoing persons is employed or is a general partner or principal or in a
similar position or in which such person has a 5% or greater beneficial
ownership interest. The Company’s board of directors reviews these related
person transactions and considers all of the relevant facts and circumstances
available to the board of directors, including (if applicable) but not limited
to: the benefits to Highbury; the availability of other sources of comparable
products or services; the terms of the transaction; and the terms available to
unrelated third parties or to employees generally. The board of directors may
approve only those related person transactions that are in, or are not
inconsistent with, the best interests of the Company and its stockholders, as
the board of directors determines in good faith. At the beginning of each fiscal
year, the board of directors will review all previously approved or ratified
related person transactions that remain ongoing and have a remaining term of
more than six months. The board of directors will consider all of the relevant
facts and circumstances and will determine if it is in the best interests of
Highbury and its stockholders to continue, modify or terminate these related
person transactions.


F-22





HIGHBURY
      FINANCIAL INC. AND SUBSIDIARYNotes
      to Consolidated Financial Statements





a.   Aston is the investment advisor to the Aston
Funds, a Delaware business trust. Aston’s Chief Executive Officer, is the
Chairman of the Board of Trustees of the Aston Funds. Aston’s President, is the
President and Chief Executive Officer of the Aston Funds. Aston’s Chief
Financial Officer and Chief Compliance Officer, is the Senior Vice President,
Secretary, Treasurer, Chief Financial Officer, Chief Operating Officer and Chief
Compliance Officer of the Aston Funds. As a result of these relationships, the
Aston Funds may be considered related parties as such are defined in ASC Topic
850, Related Party Disclosures. In 2009 and 2008, Aston earned advisory fees of
$35,673,550 and $30,222,986 and administrative fees of $3,160,212 and $3,953,815
from the Aston Funds, respectively. These fees, in total, accounted for
approximately 97% and 96% of Aston’s total revenue in 2009 and 2008,
respectively. As of December 31, 2009 and 2008, the Company’s balance sheet
includes accounts receivable of $4,091,513 and $2,039,687, respectively,
associated with these fees, as Aston is generally paid in the first week of the
month following the month in which fees were earned.





b.   Highbury
has engaged Berkshire Capital to act as its non-exclusive financial adviser in
connection with possible acquisitions and a review of strategic alternatives. In
such capacity, Berkshire Capital assists us in (i) structuring, negotiating and
completing acquisitions of targets identified by us and acknowledged by both us
and Berkshire Capital as being subject to Berkshire Capital’s engagement, and
(ii) identifying prospective purchasers if we decide to pursue a sale
transaction (including our proposed Merger), and structuring, negotiating and
assisting us in the completion of such transaction. If we enter into an
agreement to acquire a target company during the term of Berkshire Capital’s
engagement or within two years thereafter, and such acquisition is completed,
then we will pay Berkshire Capital a success fee at closing equal to the greater
of (a) the sum of 3.0% of the first $15 million of the aggregate consideration
in such transaction and 1.0% of the aggregate consideration in such transaction
in excess of $15 million, and (b) $600,000. Upon the execution of a definitive
agreement with respect to an acquisition, we will pay Berkshire Capital $200,000
which will be credited against the success fee.  Upon the consummation
of the Merger, we will pay Berkshire Capital a success fee at closing equal to
the greater of (x) 1.0% of the aggregate consideration in the Merger and (y)
$1,000,000. Upon the execution of the Merger Agreement, we paid Berkshire
Capital $150,000 which will be credited against the success fee. We will also
reimburse Berkshire Capital for its reasonable expenses in performing its
services under the engagement letter and will indemnify Berkshire Capital for
liabilities it incurs in performing such services, unless such liabilities are
attributable to Berkshire Capital’s gross negligence or willful misconduct. R.
Bruce Cameron, our Chairman of the board of directors, Richard S. Foote, our
President, Chief Executive Officer and Director, and R. Bradley Forth, our
Executive Vice President, Chief Financial Officer and Secretary are employees
and equity owners of Berkshire Capital. As a result of these affiliations, these
individuals will benefit from the transaction to the extent of their interest in
Berkshire Capital. Berkshire Capital has agreed to take such measures as
necessary to ensure that Messrs. Cameron, Foote and Forth do not receive
compensation from Berkshire Capital directly from the fee paid to Berkshire
Capital in connection with the Merger. We believe, based on discussions with
other investment banks, that the terms of our engagement of Berkshire Capital
are at least as favorable as we could have obtained from an unaffiliated third
party. Our engagement of Berkshire Capital was approved in accordance with our
Related Person Policy.  In connection with the signing of the Merger
Agreement, Highbury and Berkshire Capital entered into a Termination Agreement,
dated December 12, 2009, pursuant to which Berkshire Capital’s engagement as
financial advisor of Highbury will terminate at the time of the closing of the
Merger.




F-23





HIGHBURY
      FINANCIAL INC. AND SUBSIDIARYNotes
      to Consolidated Financial Statements





c.   The
Company presently occupies office space provided by Berkshire Capital. Berkshire
Capital has agreed that it will make such office space, as well as certain
office and secretarial services, information technology equipment and access to
numerous subscription-based periodicals and databases available to the Company,
as may be required by the Company from time to time. The Company has agreed to
pay Berkshire Capital $10,000 per month for such facilities and services. The
consolidated statements of income for the years ended December 31, 2009 and 2008
include $120,000 related to this agreement. The agreement is terminable by
either party upon six months’ prior notice. This agreement was ratified in
accordance with our Related Person Policy.  In connection with the
signing of the Merger Agreement, Highbury and Berkshire Capital entered into a
termination agreement, dated as of December 12, 2009, pursuant to which the
office services agreement will terminate at the time of the closing of the
Merger.





13.  Aston
Operating Allocation





During
the three months ended March 31, 2009, Aston’s operating expenses exceeded the
Operating Allocation by $604,432.  These excess expenses were funded
by a reduction in the management stockholders’ share of the Owners’
Allocation.  During the period from April 1, 2009 through August 10,
2009, Aston’s operating expenses were $546,818 less than the Operating
Allocation.  This excess Operating Allocation for the period from
April 1, 2009 through August 10, 2009 was allocated to the management
stockholders’ share of the Owners’ Allocation to partially offset the shortfall
from the first quarter of 2009 and is reflected as an increase in net income
attributable to noncontrolling interest.  Aston’s operating expenses
in the period from January 1, 2009 through August 10, 2009 exceeded the
Operating Allocation by $57,614.  These excess expenses were funded by
a reduction in the management stockholders’ share of the Owners’ Allocation and
were reflected as a reduction in net income attributable to noncontrolling
interest.  In no other prior period did Aston’s operating expenses
exceed the Operating Allocation.





14.  Significant
Events





a.  In
July 2009, three of our significant stockholders sent letters to our board of
directors requesting, among other things, changes to our management and the
composition of our board of directors. In response to the initiatives of these
stockholders, in July 2009, our board of directors formed a special committee
consisting of Hoyt Ammidon Jr., who chairs the special committee, Theodore M.
Leary Jr. and Aidan J. Riordan, each of whom is an independent director, to
explore and evaluate strategic alternatives aimed at enhancing value for all of
our stockholders. The special committee hired the investment banking firm of
Sandler O'Neill & Partners and the law firm of Debevoise & Plimpton LLP
to provide financial advisory and legal services, respectively, to the special
committee. We have incurred significant fees and expenses associated with the
special committee and the process of exploring strategic alternatives. These
fees include an annual fee of $40,000 to be paid to the chairman of the special
committee, an annual fee of $20,000 to be paid to other members of the special
committee, a fee of $1,000 to be paid to each member of the special committee
for each meeting of the special committee attended, whether in person or by
telephonic conference, and financial advisory fees and legal fees paid to the
advisers to the special committee all of which continue to be incurred in
connection with the Merger.


F-24





HIGHBURY
      FINANCIAL INC. AND SUBSIDIARYNotes
      to Consolidated Financial Statements





In
addition, one of our significant stockholders, Peerless Systems Corporation
(“Peerless”), filed a definitive proxy statement with the SEC on November 25,
2009 in connection with our 2009 annual meeting of stockholders, in which
Peerless solicited proxies to elect Timothy E. Brog to our board of directors
and to adopt two non-binding stockholder proposals. As a result, we incurred
fees and expenses in connection with our 2009 annual meeting of stockholders in
excess of the fees and expenses typically associated with an uncontested proxy
solicitation.





On
December 18, 2009, we entered into an agreement with Peerless and Mr. Brog
pursuant to which Peerless ended (i) its proxy contest to elect Mr. Brog to our
board of directors at our 2009 annual meeting stockholders and (ii) its support
of two non-binding stockholder resolutions. Pursuant to the agreement, Peerless
and Mr. Brog (i) ceased all of their solicitation efforts with respect to our
2009 annual meeting of stockholders, (ii) agreed not to vote any proxies
obtained by them at our 2009 annual meeting of Highbury stockholders, (iii)
agreed to vote all of Peerless’ shares of Highbury Common Stock in favor of the
election of Hoyt Ammidon Jr. and John Weil as directors of Highbury for a term
expiring at the 2012 annual meeting of Highbury stockholders, (iv) agreed to
vote all of Peerless’ shares in accordance with the recommendations of the our
board of directors with respect to the Merger, (v) waived Peerless’ appraisal
and dissenters’ rights with respect to the Merger and (vi) agreed not to take
any action in opposition to the recommendations or proposals of our board of
directors or to effect a change of control of us.





The
agreement further provides that if the Merger is not completed on or before July
16, 2010, or the Merger Agreement is terminated, then our board of directors
will take all necessary action to appoint Mr. Brog to serve on our board of
directors for a term expiring at the 2012 annual meeting of stockholders. We
also agreed to reimburse Peerless for $200,000 of its expenses incurred in the
proxy contest with respect to the 2009 annual meeting of stockholders. The
parties also agreed to customary mutual releases, covenants not to sue and
non-disparagement provisions. The agreement terminates upon the earliest of (i)
the mutual agreement of the parties, (ii) consummation of the Merger, (iii)
August 13, 2010 or (iv) the termination of the Merger Agreement. The mutual
releases and covenants not to sue survive any such termination.





For the
fiscal year ended December 31, 2009, Highbury incurred significant expenses
related to the special committee and the contested proxy solicitation in
connection with our 2009 annual meeting of stockholders. Such expenses have and
may continue to be incurred in amounts which cannot presently be estimated, but
which may continue to be substantial. These additional expenses have had a
negative impact on our results of operations during the fiscal year ended
December 31, 2009 and may have a negative impact on our results in future
periods.




b.  On
August 10, 2009, the Company entered into an Exchange Agreement with the holders
of the noncontrolling interest in Aston. Each holder of the noncontrolling
interest exchanged all of its Series B limited liability company interests in
Aston for newly authorized Series B Preferred Stock of the Company, resulting in
an aggregate issuance of 1,000 shares of Series B Preferred Stock with a face
value of $22.5 million.  This Series B Preferred Stock carries a 4%
dividend and participates in any dividends paid to holders of the Company’s
Common Stock on an as-converted basis.  Each share of Series B
Preferred Stock is initially convertible into 4,500 shares of Common Stock,
reflecting an initial conversion price of $5.00 per share.




F-25





HIGHBURY
      FINANCIAL INC. AND SUBSIDIARYNotes
      to Consolidated Financial Statements





The
Company has the right to redeem the Series B Preferred Stock, in whole but not
in part, in the event that the last sale price for the Common Stock of the
Company exceeds $8.50 per share for any 20 trading days in a 30-trading day
period at a redemption price equal to the face value plus any accrued but unpaid
dividends.  The Company may also redeem shares of Series B Preferred
Stock from a holder for a period of 120 days following the termination of such
holder’s employment with Aston at a redemption price ranging from $1.00 to fair
value, as defined, depending on the time and reason for such termination of
employment.  The Company also has the option to cause each holder of
Series B Preferred Stock to convert his shares into Common Stock immediately
prior to a merger by the Company with or into another entity or a sale of all or
substantially all of the assets of the Company and cause such holders to
participate in the sale event on the same terms and conditions as holders of
Common Stock.




The
holders of Series B Preferred Stock may elect to convert the Series B Preferred
Stock into Common Stock under certain circumstances.  Holders of
Series B Preferred Stock may also require the Company to redeem their shares of
Series B Preferred Stock upon a change of control of the Company at a redemption
price per share equal to the greater of the face value of such preferred stock
(plus accrued and unpaid dividends) or fair value, as
defined.  Because the holders of Series B Preferred Stock may require
the Company to redeem their shares upon the occurrence of certain changes of
control (as defined in the certificate of designation for the Series B Preferred
Stock) outside the control of the Company, the Series B Preferred Stock has a
temporary equity classification on our balance sheet.




c.  On
August 10, 2009, the Company’s board of directors declared a dividend of
one preferred share purchase right (a "Right") for each outstanding share of
Common Stock.  The dividend was paid on August 25, 2009 to the
stockholders of record on August 11, 2009 (the "Record Date").  Each
Right entitles the registered holder to purchase from the Company one
one-thousandth of a share of Series A Junior Participating Preferred Stock, par
value $0.0001 per share, of the Company (the "Series A Preferred Stock") at a
price of $20.00 (the "Purchase Price"), subject to adjustment. The Rights will
have no financial impact on the Company unless they are exercised, exchanged or
redeemed.




Until the
earlier to occur of (i) 10 business days following a public announcement that a
person or group of affiliated or associated persons (with certain exceptions, an
"Acquiring Person") has acquired beneficial ownership of 15% or more of the
outstanding shares of Common Stock or (ii) 10 business days (or such later date
as may be determined by action of the board of directors prior to such time as
any person or group of affiliated persons becomes an Acquiring Person) following
the commencement of, or announcement of an intention to make, a tender offer or
exchange offer the consummation of which would result in the beneficial
ownership by a person or group of 15% or more of the outstanding shares of
Common Stock (the earlier of such dates being called the "Distribution Date"),
the Rights will be evidenced, with respect to any of the Common Stock
certificates outstanding as of the Record Date, by such Common Stock
certificate.




With
respect to any person or entity who beneficially owns (for purposes of the
Rights Agreement) 15% or more of the outstanding shares of Common Stock as of
the date of the Rights Agreement or first public announcement of the adoption of
the Rights Agreement, such person’s or entity’s share ownership will not cause
the Rights to be exercisable unless such person or entity becomes the beneficial
owner of additional shares of Common Stock subject to certain exceptions and
provided that following such person or entity becoming the beneficial owner of
additional shares of Common Stock, such person or entity will beneficially own
at least 15% of the outstanding Common Stock.




The
Rights are not exercisable until the Distribution Date.  The Rights
will expire on the earlier of (i) December 31, 2010 if the Rights Agreement is
not approved by the stockholders of the Company at the 2010 annual meeting of
stockholders, or (ii) August 10, 2019 (the “Final Expiration Date”), unless the
Final Expiration Date is advanced or extended or unless the Rights are earlier
redeemed or exchanged by the Company, in each case as described
below.




F-26





HIGHBURY
      FINANCIAL INC. AND SUBSIDIARYNotes
      to Consolidated Financial Statements





The
Purchase Price payable, and the number of shares of Series A Preferred Stock or
other securities or property issuable, upon exercise of the Rights is subject to
adjustment from time to time to prevent dilution (i) in the event of a stock
dividend on, or a subdivision, combination or reclassification of, the Series A
Preferred Stock, (ii) upon the grant to holders of the Series A Preferred Stock
of certain rights or warrants to subscribe for or purchase Series A Preferred
Stock at a price, or securities convertible into Series A Preferred Stock with a
conversion price, less than the then-current market price of the Series A
Preferred Stock or (iii) upon the distribution to holders of the Series A
Preferred Stock of evidences of indebtedness or assets (excluding regular
periodic cash dividends or dividends payable in Series A Preferred Stock) or of
subscription rights or warrants (other than those referred to
above).




The
number of outstanding Rights is subject to adjustment in the event of a stock
dividend on the Common Stock payable in shares of Common Stock or subdivisions,
consolidations or combinations of the Common Stock occurring, in any such case,
prior to the Distribution Date.




Shares of
Series A Preferred Stock purchasable upon exercise of the Rights will not be
redeemable.  Each share of Series A Preferred Stock will be entitled,
when, as and if declared, to a minimum preferential quarterly dividend payment
of the greater of (a) $10.00 per share, and (b) an amount equal to 1,000 times
the dividend declared per share of Common Stock.  In the event of
liquidation, dissolution or winding up of the Company, the holders of the Series
A Preferred Stock will be entitled to a minimum preferential payment of the
greater of (a) $10.00 per share (plus any accrued but unpaid dividends), and (b)
an amount equal to 1,000 times the payment made per share of Common
Stock.  Each share of Series A Preferred Stock will have 1,000 votes,
voting together with the Common Stock.  Finally, in the event of any
merger, consolidation or other transaction in which outstanding shares of Common
Stock are converted or exchanged, each share of Series A Preferred Stock will be
entitled to receive 1,000 times the amount received per share of Common
Stock.  These rights are protected by customary antidilution
provisions.




Because
of the nature of the Series A Preferred Stock's dividend, liquidation and voting
rights, the value of the one one-thousandth interest in a share of Series A
Preferred Stock purchasable upon exercise of each Right should approximate the
value of one share of Common Stock.




In the
event that any person or group of affiliated or associated persons becomes an
Acquiring Person, each holder of a Right, other than Rights beneficially owned
by the Acquiring Person (which will thereupon become void), will thereafter have
the right to receive upon exercise of a Right that number of shares of Common
Stock having a market value of two times the exercise price of the
Right.




In the
event that, after a person or group has become an Acquiring Person, the Company
is acquired in a merger or other business combination transaction or 50% or more
of its consolidated assets or earning power are sold, proper provisions will be
made so that each holder of a Right (other than Rights beneficially owned by an
Acquiring Person which will have become void) will thereafter have the right to
receive upon the exercise of a Right that number of shares of Common Stock of
the person with whom the Company has engaged in the foregoing transaction (or
its parent) that at the time of such transaction have a market value of two
times the exercise price of the Right.




At any
time after any person or group becomes an Acquiring Person and prior to the
earlier of one of the events described in the previous paragraph or the
acquisition by such Acquiring Person of 50% or more of the outstanding shares of
Common Stock, the board of directors may exchange the Rights (other than Rights
owned by such Acquiring Person which will have become void), in whole or in
part, for shares of Common Stock or Series A Preferred Stock (or a series of the
Company's preferred stock having equivalent rights, preferences and privileges),
at an exchange ratio of one share of Common Stock, or a fractional share of
Series A Preferred Stock (or other preferred stock) equivalent in value thereto,
per Right.




F-27





HIGHBURY
      FINANCIAL INC. AND SUBSIDIARYNotes
      to Consolidated Financial Statements





At any
time prior to the time an Acquiring Person becomes such, the board of directors
may redeem the Rights in whole, but not in part, at a price of $0.01 per Right
(the "Redemption Price") payable, at the option of the Company, in cash, shares
of Common Stock or such other form of consideration as the board of directors
shall determine.





d.  On December 12, 2009, the Company entered into the
Merger Agreement by and among AMG, Merger Sub and Highbury, pursuant to which
Highbury will merge with and into Merger Sub.  Pursuant to the Merger
Agreement, the holders of Highbury common stock will receive 1,748,879 shares of
AMG common stock in the aggregate as consideration in the Merger, subject to
potential reduction as described below. At the effective time of the Merger,
each share of Highbury common stock issued and outstanding immediately prior to
the effective time of the Merger (other than shares owned or held directly by
Highbury and dissenting shares) will be cancelled and automatically converted
into the right to receive such fraction of a share of AMG common stock as is
equal to the aggregate Merger consideration divided by the number of shares of
Highbury common stock issued and outstanding immediately prior to the effective
time of the Merger, which includes the shares of common stock to be issued in
exchange for Highbury Series B Preferred Stock pursuant to the terms of an
exchange agreement entered into by Highbury with each holder of Series B
Preferred Stock. Assuming no reduction in aggregate Merger consideration, as
discussed below, each share of Highbury common stock would receive 0.075952
shares of AMG common stock.





If the
“revenue run rate” (which generally means annualized advisory fees on assets
under management, excluding separate account referral fees, interest income,
certain money market administration fees and certain excluded accounts) of Aston
as of the end of the calendar month prior to the closing of the Merger
attributable to clients who consent to continuing their advisory agreements
following the Merger is less than 90% of the revenue run rate as of November 30,
2009 (without giving effect to market movement between those two dates), then
the aggregate Merger consideration payable to Highbury stockholders will be
reduced by 1% for each 1% by which the revenue run rate as of such date is less
than 90% of the revenue run rate as of November 30, 2009. If the revenue run
rate is lower than 80% of the November 30, 2009 revenue run rate (without giving
effect to market movement between those two dates), then neither party is
required to close the Merger. In addition, if the revenue run rate as of the end
of the month prior to the closing of the Merger is not at least equal to 82.5%
of the revenue run rate as of November 30, 2009 (giving effect to market
movements between those two dates), then neither party is required to close the
Merger. The revenue run rate as of November 30, 2009 was $44.2
million.





For
example, if the loss of clients resulted in a revenue run rate as of the end of
the calendar month prior to the closing of the Merger of 85% of the November 30,
2009 revenue run rate (without giving effect to market movement between those
two dates), then the aggregate Merger consideration payable to Highbury
stockholders will be 1,661,435 shares of AMG common stock, or 0.072154 shares of
AMG common stock for each outstanding share of Highbury Common
Stock.





In
addition, immediately prior to the closing of the Merger, subject to applicable
law and the terms of the Merger Agreement, Highbury's board of directors intends
to declare a special dividend, payable on the closing date of the Merger, to all
holders of record of shares of Highbury Common Stock immediately prior to the
effective time of the Merger in an aggregate amount equal to Highbury's working
capital (including all Highbury liabilities, subject to certain exceptions, and
Merger related transaction expenses then outstanding) as of the end of the
calendar month prior to the closing of the Merger minus $5.0
million.


F-28





HIGHBURY
      FINANCIAL INC. AND SUBSIDIARYNotes
      to Consolidated Financial Statements





The board
of directors of Highbury intends to declare and pay the special dividend to the
maximum extent permissible under the Merger Agreement.  Pursuant to
the terms of the Merger Agreement, Highbury is also permitted to make certain
distributions to its stockholders prior to closing, quarterly dividends up to
$0.05 per share consistent with past practice, and to holders of Series B
Preferred Stock at the applicable dividend rate set forth in the certificate of
designation.





The
obligations of each of Highbury and AMG to complete the Merger are subject to
the satisfaction or waiver by the other party at or prior to the closing date of
various conditions, including: (a) the approval of the Merger by the
stockholders of Highbury; (b) the receipt of all required regulatory approvals;
(c) the registration statement being declared effective by the SEC and the
approval of the shares registered hereby for listing on the NYSE; (d)
confirmation that all of the outstanding Highbury warrants have expired or have
been exercised in full, in accordance with their terms; (e) the revenue run rate
of Aston as of the end of the month prior to the closing of the Merger being at
least equal to 82.5% of the revenue run rate as of November 30, 2009 (giving
effect to market movements between those two dates); and (f) the revenue run
rate of Aston as of the end of the month prior to the closing of the Merger
attributable to clients who consent to continuing their agreements with Aston
following the Merger being at least equal to 80% of the revenue run rate as of
November 30, 2009 (without giving effect to market movements between those two
dates).





In
addition, the parties' obligations to complete the Merger are subject to the
satisfaction or waiver by the other party at or prior to the closing date of the
following conditions: (a) the accuracy of the parties' respective
representations and warranties contained in the Merger Agreement; (b) the
performance by each of Highbury and AMG in all material respects of their
respective obligations under the Merger Agreement; (c) the receipt, by each
registered investment company advised by Aston of board and stockholder approval
of a new advisory contract with Aston and the election of not less than nine AMG
nominees to the board of trustees of each such registered investment company;
(d) the receipt by each registered investment company advised by Aston of board
approval of certain sub-advisory agreements with Aston and the continued
effectiveness of certain specified sub-advisory agreements and related
agreements with Aston; (e) the continued effectiveness of certain ancillary
agreements described in the notes to these consolidated financial
statements and the continued employment by Aston of certain individuals;
and (f) the absence of a material adverse effect on either Highbury or
AMG.





The
Merger Agreement may be terminated at any time prior to the effective time of
the Merger by mutual written consent of AMG and Highbury. The Merger Agreement
may also be terminated by either AMG or Highbury upon the occurrence of certain
events.  In the event the Merger Agreement is terminated under certain
circumstances, Highbury has agreed to pay AMG $3.6 million (less any previously
paid expenses) as a termination fee.





e.  In
connection with entering into the Merger Agreement, Richard S. Foote, Highbury's
President and Chief Executive Officer and a director, and R. Bradley Forth,
Highbury's Executive Vice President, Chief Financial Officer and Secretary,
entered into severance agreements with Highbury.  The severance
agreements terminate on December 31, 2010.





These
severance agreements provide that if either of Messrs. Foote or Forth (i) is
terminated for cause (as defined in the severance agreements) or  (ii)
voluntarily terminates his employment with Highbury, other than a voluntary
termination for good reason (as defined in the severance agreements), then
Highbury will pay to him his base salary earned but unpaid through the date of
termination (his “Earned Salary") and any vested amounts of benefits owing to
him under Highbury's applicable employee benefit plans and programs, including
any compensation previously deferred by him (together with any accrued earnings
thereon) and not yet paid (his "Accrued Obligations”).


F-29





HIGHBURY
      FINANCIAL INC. AND SUBSIDIARYNotes
      to Consolidated Financial Statements





If the
employment of either of Messrs. Foote or Forth is terminated (i) by Highbury
without cause, (ii) due to death, or (iii) voluntarily for good reason, then
Highbury will pay to Mr. Foote or Mr. Forth, as the case may be, the following:
(a) his Earned Salary, (b) his Accrued Obligations and (c) a separation payment
equal to $584,000, in the case of Mr. Foote, and $292,000 in the case of Mr.
Forth (each amount equal to the sum of his respective base salary currently in
effect and the amount payable to him as an annual incentive payment for services
rendered by him in 2009). During the period following satisfaction of the
closing conditions to the Merger, Messrs. Foote and Forth may resign for "good
reason."  Accordingly, if the Merger closes, it is anticipated that
they will receive the separation payments.





Payment
of the separation payment is contingent upon Mr. Foote or Mr. Forth, as the case
may be, executing a general release agreement in favor of Highbury within 60
days of his termination.  The separation payment shall be payable in
all cases, other than death, as soon as practicable (but no later than 10 days)
following the expiration of the seven-day revocation period stated in the
general release agreement, and in the case of death, within 30 days after
death.  In addition, Mr. Forth will be subject to a six-month
post-termination non-competition commitment in favor of Highbury.





e.
Professional fees incurred by Highbury for the years ended December
31, 2008 and 2009, which are included in other operating expenses on the
Consolidated Statements of Income, were $1,495,625 and $4,687,971,
respectively.  These totals exclude professional fees incurred by
Aston within its Operating Allocation.





15.  Subsequent
Events





Subsequent
events have been evaluated through the date the financial statements were
issued.


F-30