UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-Q




(Mark
      One)x
            QUARTERLY REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the quarterly period ended June 30, 2009o
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF 1934For
      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
                incorporation
      or organization)
              
              (I.R.S.
      Employer
                Identification
      No.)999
      Eighteenth Street, Ste. 3000
                Denver,
      Colorado
              
              80202(Address
      of principal executive offices)
              
              (Zip
      Code)




(303)
357-4802


(Registrant's
telephone number, including area code)




Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes xNo o





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).   Yes oNo 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.




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 Exchange Act).   Yes oNo x




As of
August 10, 2009, 9,085,035 shares of common stock, par value $0.0001 per share,
were issued and outstanding.







PagePART
      I. FINANCIAL INFORMATIONItem
      1— Financial Statements
                
                
                3Highbury
      Financial Inc.Condensed
      Consolidated Balance Sheets
                
                
                3Condensed
      Consolidated Statements of Income
                
                
                4Condensed
      Consolidated Statements of Equity
                
                
                5Condensed
      Consolidated Statements of Cash Flows
                
                
                6Notes
      to Unaudited Condensed Consolidated Financial Statements
                
                
                7Item
      2 — Management’s Discussion and Analysis of Financial Condition and
      Results of Operations
                
                
                15Item
      3 — Quantitative and Qualitative Disclosures About Market
      Risk
                
                
                31Item
      4 — Controls and Procedures
                
                
                31PART
      II. OTHER INFORMATIONItem
      1 — Legal Proceedings
                
                
                32Item
      1A — Risk Factors
                
                
                32Item
      2 — Unregistered Sales of Equity Securities and Use of
      Proceeds
                
                
                32Item
      6 — Exhibits
                
                
                33Signatures
                
                
                34




2




ITEM
1 - FINANCIAL STATEMENTS




Highbury
Financial Inc. and Subsidiary





Condensed
Consolidated Balance Sheets




December 31,
                      
                      
                      June 30,2008
                      
                      
                      2009(audited)
                      
                      
                      (unaudited)ASSETSCurrent
      assetsCash
      and cash equivalents
                      
                      $
                      10,244,469
                      
                      
                      $
                      11,703,812Investments
                      
                      
                      4,186,552
                      
                      
                      
                      3,647,200Accounts
      receivable
                      
                      
                      2,448,572
                      
                      
                      
                      3,451,269Prepaid
      expenses
                      
                      
                      239,434
                      
                      
                      
                      127,734Prepaid
      taxes
                      
                      
                      278,444
                      
                      
                      
                      -Total
      current assets
                      
                      
                      17,397,471
                      
                      
                      
                      18,930,015Other
      assetsFixed
      assets, net
                      
                      
                      806,637
                      
                      
                      
                      715,639Identifiable
      intangibles
                      
                      
                      22,982,000
                      
                      
                      
                      22,982,000Goodwill
                      
                      
                      3,305,616
                      
                      
                      
                      3,305,616Deferred
      tax assets
                      
                      
                      1,097,620
                      
                      
                      
                      513,766Other
      long-term assets
                      
                      
                      157,092
                      
                      
                      
                      123,936Total
      other assets
                      
                      
                      28,348,965
                      
                      
                      
                      27,640,957Total
      assets
                      
                      $
                      45,746,436
                      
                      
                      $
                      46,570,972LIABILITIES
      AND EQUITYCurrent
      liabilitiesAccounts
      payable and accrued expenses
                      
                      $
                      3,407,601
                      
                      
                      $
                      4,315,352Income
      taxes payable
                      
                      
                      -
                      
                      
                      
                      12,716Total
      current liabilities
                      
                      
                      3,407,601
                      
                      
                      
                      4,328,068Deferred
      rent
                      
                      
                      805,707
                      
                      
                      
                      783,223Total
      liabilities
                      
                      
                      4,213,308
                      
                      
                      
                      5,111,291Commitments
      and contingenciesEquityHighbury
      Financial Inc. stockholders’ equityPreferred
      stock, $0.0001 par value, authorized 1,000,000 shares; none
      issued
                      
                      
                      -
                      
                      
                      
                      -Common
      stock, $0.0001 par value, authorized 50,000,000 shares; 9,118,740 and
      9,085,035 shares issued and outstanding as of December 31,
      2008 and June 30, 2009, respectively
                      
                      
                      912
                      
                      
                      
                      908Additional
      paid-in capital
                      
                      
                      51,818,975
                      
                      
                      
                      51,589,127Accumulated
      deficit
                      
                      
                      (11,126,759
                      )
                      
                      
                      (10,920,354
                      )Total
      Highbury Financial Inc. stockholders’ equity
                      
                      
                      40,693,128
                      
                      
                      
                      40,669,681Noncontrolling
      interest
                      
                      
                      840,000
                      
                      
                      
                      790,000Total
      equity
                      
                      
                      41,533,128
                      
                      
                      
                      41,459,681Total
      liabilities and equity
                      
                      $
                      45,746,436
                      
                      
                      $
                      46,570,972




See
accompanying Notes to Unaudited Condensed Consolidated Financial
Statements.


3




Highbury
Financial Inc. and Subsidiary





Condensed
Consolidated Statements of Income


(unaudited)





Three Months Ended
                
                
                Six Months EndedJune 30,
                
                
                June 30,2008
                
                
                2009
                
                
                2008
                
                
                2009Revenue
                
                $
                9,680,469
                
                
                $
                9,231,394
                
                
                $
                18,959,516
                
                
                $
                16,260,061Operating
      expensesDistribution
      and sub-advisory costs
                
                
                (4,435,366
                )
                
                
                (4,361,155
                )
                
                
                (8,786,769
                )
                
                
                (7,611,394
                )Compensation
      and related expenses
                
                
                (1,612,420
                )
                
                
                (1,459,246
                )
                
                
                (3,146,604
                )
                
                
                (3,283,990
                )Depreciation
      and amortization
                
                
                (45,997
                )
                
                
                (45,921
                )
                
                
                (95,056
                )
                
                
                (91,842
                )Other
      operating expenses
                
                
                (1,327,558
                )
                
                
                (1,125,307
                )
                
                
                (2,662,026
                )
                
                
                (2,531,854
                )Total
      operating expenses
                
                
                (7,421,341
                )
                
                
                (6,991,629
                )
                
                
                (14,690,455
                )
                
                
                (13,519,080
                )Operating
      income
                
                
                2,259,128
                
                
                
                2,239,765
                
                
                
                4,269,061
                
                
                
                2,740,981Other
      incomeInterest
      income
                
                
                17,280
                
                
                
                6,783
                
                
                
                71,291
                
                
                
                19,248Investment
      income (loss)
                
                
                26,963
                
                
                
                36,000
                
                
                
                (151,861
                )
                
                
                140,323Total
      other income (loss)
                
                
                44,243
                
                
                
                42,783
                
                
                
                (80,570
                )
                
                
                159,571Income
      before provision for income taxes
                
                
                2,303,371
                
                
                
                2,282,548
                
                
                
                4,188,491
                
                
                
                2,900,552Provision
      for income taxes
                
                
                (504,559
                )
                
                
                (457,526
                )
                
                
                (905,393
                )
                
                
                (626,222
                )Net
      income
                
                
                1,798,812
                
                
                
                1,825,022
                
                
                
                3,283,098
                
                
                
                2,274,330Net
      income attributable to noncontrolling interest
                
                
                (897,931
                )
                
                
                (1,112,147
                )
                
                
                (1,757,938
                )
                
                
                (1,158,518
                )Net
      income attributable to Highbury Financial Inc.
                
                $
                900,881
                
                
                $
                712,875
                
                
                $
                1,525,160
                
                
                $
                1,115,812Weighted
      average shares outstanding, basic
                
                
                9,126,628
                
                
                
                9,088,014
                
                
                
                9,192,309
                
                
                
                9,102,603Net
      income per share, basic
                
                $
                0.10
                
                
                $
                0.08
                
                
                $
                0.17
                
                
                $
                0.12Weighted
      average shares outstanding, diluted
                
                
                9,126,628
                
                
                
                9,088,014
                
                
                
                9,192,309
                
                
                
                9,102,603Net
      income per share, diluted
                
                $
                0.10
                
                
                $
                0.08
                
                
                $
                0.17
                
                
                $
                0.12Cash
      dividend per share of common stock – declared
                
                $
                0.00
                
                
                $
                0.05
                
                
                $
                0.00
                
                
                $
                0.10Cash
      dividend per share of common stock – paid
                
                $
                0.00
                
                
                $
                0.05
                
                
                $
                0.00
                
                
                $
                0.05





See
accompanying Notes to Unaudited Condensed Consolidated Financial
Statements.


4




Highbury
Financial Inc. and Subsidiary





Condensed
Consolidated Statements of Equity


(unaudited)





Highbury Financial Inc. StockholdersCommon Stock
                        
                        
                        Additional
                          Paid-In
                        
                        
                        Accumulated
                        
                        
                        NoncontrollingShares
                        
                        
                        Amount
                        
                        
                        Capital
                        
                        
                        Deficit
                        
                        
                        Interest
                        
                        
                        TotalBalance
      at December 31, 2008
                        
                        
                        9,118,740
                        
                        
                        $
                        912
                        
                        
                        $
                        51,818,975
                        
                        
                        $
                        (11,126,759
                        )
                        
                        $
                        840,000
                        
                        
                        $
                        41,533,128Repurchase
      of common stock
                        
                        
                        (33,705
                        )
                        
                        
                        (4
                        )
                        
                        
                        (83,723
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (83,727
                        )Repurchase
      of warrants
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (146,125
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (146,125
                        )Common
      stock dividends declared - $0.10 per share
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (909,407
                        )
                        
                        
                        -
                        
                        
                        
                        (909,407
                        )Net
      income for the period
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        1,115,812
                        
                        
                        
                        1,158,518
                        
                        
                        
                        2,274,330Special
      distribution to noncontrolling interest
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (50,000
                        )
                        
                        
                        (50,000
                        )Income
      distributable to noncontrolling interest
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (1,158,518
                        )
                        
                        
                        (1,158,518
                        )Balance
      at June 30, 2009
                        
                        
                        9,085,035
                        
                        
                        $
                        908
                        
                        
                        $
                        51,589,127
                        
                        
                        $
                        (10,920,354
                        )
                        
                        $
                        790,000
                        
                        
                        $
                        41,459,681




See
accompanying Notes to Unaudited Condensed Consolidated Financial
Statements.


5




Highbury
Financial Inc. and Subsidiary





Condensed
Consolidated Statements of Cash Flows


(unaudited)





Three Months Ended
                                  
                                  
                                  Six Months EndedJune 30,
                                  
                                  
                                  June 30,2008
                                  
                                  
                                  2009
                                  
                                  
                                  2008
                                  
                                  
                                  2009CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      income attributable to Highbury Financial Inc.
                                  
                                  $
                                  900,881
                                  
                                  
                                  $
                                  712,875
                                  
                                  
                                  $
                                  1,525,160
                                  
                                  
                                  $
                                  1,115,812Adjustments
      to reconcile net income tonet
      cash provided by operating activities:Depreciation
      and amortization
                                  
                                  
                                  45,997
                                  
                                  
                                  
                                  45,921
                                  
                                  
                                  
                                  95,056
                                  
                                  
                                  
                                  91,842Deferred
      taxes
                                  
                                  
                                  253,866
                                  
                                  
                                  
                                  227,235
                                  
                                  
                                  
                                  433,543
                                  
                                  
                                  
                                  583,854Investment
      (gain) loss
                                  
                                  
                                  (26,963
                                  )
                                  
                                  
                                  (36,000
                                  )
                                  
                                  
                                  151,861
                                  
                                  
                                  
                                  (140,323
                                  )Net
      income attributable to noncontrolling interest
                                  
                                  
                                  897,931
                                  
                                  
                                  
                                  1,112,147
                                  
                                  
                                  
                                  1,757,938
                                  
                                  
                                  
                                  1,158,518Deferred
      rent
                                  
                                  
                                  (9,768
                                  )
                                  
                                  
                                  (11,756
                                  )
                                  
                                  
                                  (19,238
                                  )
                                  
                                  
                                  (22,484
                                  )Changes
      in operating assets and liabilities(Increase)
      decrease in:Accounts
      receivable
                                  
                                  
                                  (186,534
                                  )
                                  
                                  
                                  (936,880
                                  )
                                  
                                  
                                  52,139
                                  
                                  
                                  
                                  (1,002,697
                                  )Prepaid
      expenses
                                  
                                  
                                  53,945
                                  
                                  
                                  
                                  63,453
                                  
                                  
                                  
                                  146,706
                                  
                                  
                                  
                                  111,700Prepaid
      taxes
                                  
                                  
                                  -
                                  
                                  
                                  
                                  467,667
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  278,444Other
      current assets
                                  
                                  
                                  -
                                  
                                  
                                  
                                  150,000
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Other
      long-term assets
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (23,936
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  33,156Increase
      (decrease) in:Accounts
      payable and accrued expenses
                                  
                                  
                                  269,213
                                  
                                  
                                  
                                  (32,450
                                  )
                                  
                                  
                                  (608,180
                                  )
                                  
                                  
                                  2,239Income
      taxes payable
                                  
                                  
                                  (95,515
                                  )
                                  
                                  
                                  12,716
                                  
                                  
                                  
                                  (4,858
                                  )
                                  
                                  
                                  12,716Net
      cash provided by operating activities
                                  
                                  
                                  2,103,053
                                  
                                  
                                  
                                  1,750,992
                                  
                                  
                                  
                                  3,530,127
                                  
                                  
                                  
                                  2,222,777CASH
      FLOWS FROM INVESTING ACTIVITIESPurchases
      of investments
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (2,000,000
                                  )
                                  
                                  
                                  -Proceeds
      from sales of investments
                                  
                                  
                                  902,844
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  3,966,915
                                  
                                  
                                  
                                  679,675Decrease
      in other long-term assets
                                  
                                  
                                  3,767
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  1,348
                                  
                                  
                                  
                                  -Purchase
      of fixed assets
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (844
                                  )
                                  
                                  
                                  (2,756
                                  )
                                  
                                  
                                  (844
                                  )Net
      cash provided by (used in) investing activities
                                  
                                  
                                  906,611
                                  
                                  
                                  
                                  (844
                                  )
                                  
                                  
                                  1,965,507
                                  
                                  
                                  
                                  678,831CASH
      FLOWS FROM FINANCING ACTIVITIESDividends
      paid
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (455,155
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (455,155
                                  )Distributions
      paid to noncontrolling interest holders
                                  
                                  
                                  (853,731
                                  )
                                  
                                  
                                  (96,371
                                  )
                                  
                                  
                                  (1,808,802
                                  )
                                  
                                  
                                  (757,258
                                  )Repurchase
      of common stock
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (49,453
                                  )
                                  
                                  
                                  (1,735,611
                                  )
                                  
                                  
                                  (83,727
                                  )Repurchase
      of warrants
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (146,125
                                  )
                                  
                                  
                                  (1,823,083
                                  )
                                  
                                  
                                  (146,125
                                  )Net
      cash used in financing activities
                                  
                                  
                                  (853,731
                                  )
                                  
                                  
                                  (747,104
                                  )
                                  
                                  
                                  (5,367,496
                                  )
                                  
                                  
                                  (1,442,265
                                  )Net
      increase in cash and cash equivalents
                                  
                                  
                                  2,155,933
                                  
                                  
                                  
                                  1,003,044
                                  
                                  
                                  
                                  128,138
                                  
                                  
                                  
                                  1,459,343Cash
      and cash equivalents - beginning of period
                                  
                                  
                                  5,248,750
                                  
                                  
                                  
                                  10,700,768
                                  
                                  
                                  
                                  7,276,545
                                  
                                  
                                  
                                  10,244,469Cash
      and cash equivalents - end of period
                                  
                                  $
                                  7,404,683
                                  
                                  
                                  $
                                  11,703,812
                                  
                                  
                                  $
                                  7,404,683
                                  
                                  
                                  $
                                  11,703,812Supplemental
      schedule of non-cash financing and investing activities:Dividend
      declared and not yet paid
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  454,252
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  454,252Supplemental
      disclosure of cash flow information:Cash
      paid for income taxes
                                  
                                  $
                                  346,208
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  476,708
                                  
                                  
                                  $
                                  -




See
accompanying Notes to Unaudited Condensed Consolidated Financial
Statements.


6


Highbury
Financial Inc. and Subsidiary
 
 Notes
to Unaudited Condensed Consolidated Financial Statements


1.  Basis of Presentation and Significant
Accounting Policies





The
accompanying unaudited condensed consolidated financial statements as of June
30, 2009 and for the three months and six months ended June 30, 2009 and 2008 of
Highbury Financial, Inc. and Subsidiary (“Company” or “Highbury”) have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America (“GAAP”) for
complete financial statements. The December 31, 2008 condensed consolidated
balance sheet data was derived from audited financial statements, but does not
include all of the disclosures required by accounting principles generally
accepted in the United States of America. In the opinion of management, all
adjustments, consisting of normal, recurring adjustments, considered necessary
for a fair statement of the results have been included. All material
intercompany balances and transactions have been eliminated. Operating
results for interim periods are not necessarily indicative of the results that
may be expected for the full year. The Company’s Annual Report on Form 10-K for
the fiscal year ended December 31, 2008, as filed with the Securities and
Exchange Commission on March 4, 2009, includes additional information about
Highbury, its operations and its financial position and should be read in
conjunction with this Quarterly Report on Form 10-Q.









Investments





The
Company carries its investments at fair value based on quoted market prices, a
Level 1 input, which is defined by Statement of Financial Accounting Standards
(“SFAS”) No. 157 “Fair Value Measurements” (“SFAS 157”) 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 reflected 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 its sole subsidiary, Aston Asset Management LLC (“Aston”), in investment
income (loss).





Investments
consist of the following:




December 31,
                                                        
                                                        June
      30,2008
                                                        
                                                        2009Aston
      mutual funds
                                                        $
                                                        
                                                        725,752
                                                        
                                                        $
                                                        
                                                        -Other
      marketable securities
                                                        
                                                        
                                                        3,460,800
                                                        
                                                        
                                                        
                                                        3,647,200$
                                                        
                                                        4,186,552
                                                        
                                                        $
                                                        
                                                        3,647,200




Changes
in fair value of investments are included in investment income (loss) and are as
follows:




Three Months Ended
                                      June 30,
                                    
                                    
                                    Six Months Ended
                                      June 30,2008
                                    
                                    
                                    2009
                                    
                                    
                                    2008
                                    
                                    
                                    2009Aston
      mutual fundsRealized
      gains (losses)
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    (46,077
                                    )Unrealized
      gains (losses)
                                    
                                    
                                    24,120
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (154,704
                                    )
                                    
                                    
                                    -Other
      marketable securitiesRealized
      gains (losses)
                                    
                                    
                                    2,843
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    2,843
                                    
                                    
                                    
                                    -Unrealized
      gains (losses)
                                    
                                    
                                    -
                                    
                                    
                                    
                                    36,000
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    186,400$
                                    26,963
                                    
                                    
                                    $
                                    36,000
                                    
                                    
                                    $
                                    (151,861
                                    )
                                    
                                    $
                                    140,323




7


Highbury
Financial Inc. and Subsidiary
 
 Notes
to Unaudited Condensed Consolidated Financial Statements


Recent
Accounting Pronouncements





In April
2009, the Financial Accounting Standards Board (“FASB”) issued FSP No. 141R-1,
“Accounting for Assets Acquired and Liabilities Assumed in a Business
Combination That Arise from Contingencies” (“FSP 141R-1”). FSP 141R-1 amends the
provisions in SFAS 141R for the initial recognition and measurement, subsequent
measurement and accounting, and disclosures for assets and liabilities arising
from contingencies in business combinations. FSP 141R-1 eliminates the
distinction between contractual and non-contractual contingencies, including the
initial recognition and measurement criteria in SFAS 141R and instead carries
forward most of the provisions in SFAS 141 for acquired contingencies. FSP
141R-1 is effective for contingent assets and contingent liabilities acquired in
business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December
15, 2008. We expect FSP 141R-1 will have an impact on our consolidated financial
statements, but the nature and magnitude of the specific effects will depend
upon the nature, term and size of the acquired contingencies.





In May
2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”). SFAS 165
sets forth: (1) the period after the balance sheet date during which management
of a reporting entity should evaluate events or transactions that may occur for
potential recognition or disclosure in financial statements, (2) the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements and (3) the
disclosures that an entity should make about events or transactions that
occurred after the balance sheet date.





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





Recently
Adopted Accounting Pronouncements





In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements — an amendment of Accounting Research Bulletin
No. 51” (“SFAS 160”). SFAS 160 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. SFAS 160 also establishes disclosure requirements that clearly
identify and distinguish between the interests of the parent and the interests
of the noncontrolling owners. SFAS 160 is effective for fiscal years beginning
after December 15, 2008. The Company adopted the provisions of SFAS 160 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 Condensed Consolidated Balance Sheets and the net income or loss
attributable to noncontrolling interests has been separately identified in the
unaudited Condensed Consolidated Statements of Income. The prior periods
presented have also been retrospectively restated to conform to the current
classification required by SFAS 160. Other than the change in presentation of
noncontrolling interests, the adoption of SFAS 160 had no impact on the
condensed consolidated financial statements.





2.  Accounts Payable and Accrued
Expenses





Accounts
payable and accrued expenses consisted of the following:





December 31,
                    
                    
                    June 30,2008
                    
                    
                    2009Payable to
      sub-advisors
                    
                    $
                    802,583
                    
                    
                    $
                    1,291,051Payable
      to brokers
                    
                    
                    321,261
                    
                    
                    
                    352,436Payable
      to noncontrolling interest
                    
                    
                    660,887
                    
                    
                    
                    1,099,258Accrued
      compensation payable
                    
                    
                    436,239
                    
                    
                    
                    437,161Accrued
      professional fees
                    
                    
                    552,647
                    
                    
                    
                    182,504Dividend
      payable
                    
                    
                    -
                    
                    
                    
                    454,252Other
      payables
                    
                    
                    633,984
                    
                    
                    
                    498,690$
                    3,407,601
                    
                    
                    $
                    4,315,352


8




Highbury
Financial Inc. and Subsidiary





Notes
to Unaudited Condensed Consolidated Financial Statements





3.  Commitments and
Contingencies





a.  The
Company presently occupies office space provided by Berkshire Capital Securities
LLC (“Berkshire Capital”), an affiliate of our executive officers. Berkshire
Capital has agreed that it will make such office space, as well as certain
office and secretarial services, financial reporting and administrative support,
information technology equipment and support and access to numerous
subscription-based periodicals and databases, available to the Company as may be
required by the Company from time to time in exchange for a monthly payment of
$10,000. The condensed consolidated statements of income for the three months
and six months ended June 30, 2008 and 2009 each include $30,000 and $60,000,
respectively, related to this agreement. The agreement is terminable by either
party upon six months’ prior notice.





b.
 The Company’s stockholders prior to its initial public offering (the
“Initial Stockholders”) have registration rights with respect to the shares of
common stock, warrants and units of the Company owned by them. The holders of
the majority of the shares purchased prior to the initial public offering and
the holders of the majority of 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. 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 Highbury 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
or other contingencies that could result in a loss to Highbury or Aston. As
such, no contingencies have been accrued.





4.  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 as of June
30, 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, Aston/TAMRO Small Cap Fund, the
Aston/Optimum Mid Cap Fund and the Aston/River Road Small Cap Value Fund
contributed approximately 38%, 15%, 14% and 10% of the revenues of Aston,
respectively, in June 2009.  In June 2008, the Aston/Montag &
Caldwell Growth Fund and the Aston/Optimum Mid Cap Fund contributed
approximately 34% and 20% of the revenues of Aston,
respectively.  These 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, profitability and cash flow.




5.  Income Taxes





The
provisions for income taxes for the three and six month periods ended June
30, 2008 and 2009 consist of the following:


9




Highbury
Financial Inc. and Subsidiary
 
 Notes
to Unaudited Condensed Consolidated Financial Statements





Three Months Ended
                                                                                                                      
                                                                                                                      Six Months EndedJune 30,
                                                                                                                      
                                                                                                                      June 30,2008
                                                                                                                      
                                                                                                                      2009
                                                                                                                      
                                                                                                                      2008
                                                                                                                      
                                                                                                                      2009CurrentFederal
                                                                                                                      $
                                                                                                                      179,040
                                                                                                                      
                                                                                                                      $
                                                                                                                      187,408
                                                                                                                      
                                                                                                                      $
                                                                                                                      358,031
                                                                                                                      
                                                                                                                      $
                                                                                                                      57,078State
                                                                                                                      
                                                                                                                      72,197
                                                                                                                      
                                                                                                                      
                                                                                                                      42,883
                                                                                                                      
                                                                                                                      
                                                                                                                      114,363
                                                                                                                      
                                                                                                                      
                                                                                                                      (14,710
                                                                                                                      )DeferredFederal
                                                                                                                      
                                                                                                                      224,167
                                                                                                                      
                                                                                                                      
                                                                                                                      196,690
                                                                                                                      
                                                                                                                      
                                                                                                                      383,165
                                                                                                                      
                                                                                                                      
                                                                                                                      505,372State
                                                                                                                      
                                                                                                                      29,155
                                                                                                                      
                                                                                                                      
                                                                                                                      30,545
                                                                                                                      
                                                                                                                      
                                                                                                                      49,834
                                                                                                                      
                                                                                                                      
                                                                                                                      78,482$
                                                                                                                      504,559
                                                                                                                      
                                                                                                                      $
                                                                                                                      457,526
                                                                                                                      
                                                                                                                      $
                                                                                                                      905,393
                                                                                                                      
                                                                                                                      $
                                                                                                                      626,222





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





December 31,
                          
                          
                          June
      30,2008
                          
                          
                          2009Expenses
      and net unrealized investment lossesdeferred
      for income tax purposes
                          
                          $
                          492,258
                          
                          
                          $
                          398,904(Tax
      amortization of) / GAAP impairment of intangibles
                          
                          
                          605,362
                          
                          
                          
                          114,862Net
      deferred tax assets
                          
                          $
                          1,097,620
                          
                          
                          $
                          513,766




6.  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:




Three Months Ended
                                  
                                  
                                  Six Months EndedJune 30,
                                  
                                  
                                  June 30,2008
                                  
                                  
                                  2009
                                  
                                  
                                  2008
                                  
                                  
                                  2009Numerator:Net
      income attributable to Highbury Financial Inc.
                                  
                                  $
                                  900,881
                                  
                                  
                                  $
                                  712,875
                                  
                                  
                                  $
                                  1,525,160
                                  
                                  
                                  $
                                  1,115,812Denominator:Average
      shares outstanding - basic
                                  
                                  
                                  9,126,628
                                  
                                  
                                  
                                  9,088,014
                                  
                                  
                                  
                                  9,192,309
                                  
                                  
                                  
                                  9,102,603Effect
      of dilutive instruments:Warrants
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Average
      shares outstanding - diluted
                                  
                                  
                                  9,126,628
                                  
                                  
                                  
                                  9,088,014
                                  
                                  
                                  
                                  9,192,309
                                  
                                  
                                  
                                  9,102,603




The
dilutive effect of the warrants is calculated using the treasury stock method
and the average share price during the period.  There are no effects
of dilutive instruments included in the calculations because the Company’s
weighted average share price during the periods was less than the warrants’
exercise price.  As of June 30, 2008 and 2009, the Company had
13,983,708 and 13,566,208 warrants outstanding, respectively.


10




Highbury
Financial Inc. and Subsidiary





Notes
to Unaudited Condensed Consolidated Financial Statements





7.  Related Person
Transactions





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 SFAS No. 57, “Related Party Disclosures” (“SFAS 57”). In the
three and six months ended June 30, 2009, Aston earned advisory fees of
$8,133,803 and $14,103,419, respectively, and administrative fees of $797,577
and $1,556,873, respectively, from the Aston Funds. These fees, in total,
accounted for approximately 97% and 96% of Aston’s total revenue during the
periods, respectively. In the three and six months ended June 30, 2008, Aston
earned advisory fees of $8,238,947 and $16,098,563, respectively, and
administrative fees of $1,050,627 and $2,097,345, respectively, from the Aston
Funds. These fees, in total, accounted for approximately 96% of Aston’s total
revenue during both periods. As of December 31, 2008 and June 30, 2009, the
Company’s balance sheets include accounts receivable of $2,039,687 and
$3,086,332, respectively, associated with these fees, as Aston is generally paid
in the first week of the month following the month in which fees are
earned.




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, available to the Company, as may be required by
the Company from time to time in exchange for a payment of $10,000 per month.
The condensed consolidated statements of income for the three and six months
ended June 30, 2008 and 2009 each include $30,000 and $60,000, respectively,
related to this agreement. The agreement is terminable by either party upon six
months’ prior notice.





8.  Credit
Facility





On
October 1, 2008, the Company and City National Bank executed an amendment to the
credit agreement, dated as of November 9, 2006, as amended by a First Amendment
to Credit Agreement dated October 31, 2007 (the “Amended Credit Agreement”),
which provides for an extension of the Amended Credit Agreement through
September 30, 2009 and modifies certain provisions of the Amended Credit
Agreement (the “Second Amendment to Credit Agreement”). The Second Amendment to
Credit Agreement increases the rate at which borrowings will bear interest to,
at the Company’s option, either the LIBOR interest rate plus two and three
quarters percent (2.75%) per year or the fluctuating prime rate plus one half of
one percent (0.50%) per year.





9.  Securities
Repurchase Program





During
the three months ended June 30, 2009, the Company repurchased 18,063 shares for
$49,453 and 417,500 warrants for $146,125.  During the six months
ended June 30, 2009, the Company repurchased 33,705 shares for $83,727 and
417,500 warrants for $146,125.





Between
July 1, 2009 and August 10, 2009, the Company repurchased an additional
2,804,200 warrants for $1,402,100.  This repurchase of warrants was
approved by the Company’s Board of Directors as a transaction separate from the
Company’s securities repurchase program.  As of August 10, 2009, there
is $770,150 available for additional securities repurchases under the Company’s
securities repurchase program through December 31, 2009.





The
Company did not repurchase any securities during the three months ended June 30,
2008.  During the six months ended June 30, 2008, the Company
repurchased 1,836,292 warrants for $1,823,083 and redeemed 400,372 shares for
$1,735,611.





10.  Stockholders’
Equity





Dividends





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.


11


Highbury
Financial Inc. and Subsidiary
 
 Notes
to Unaudited Condensed Consolidated Financial Statements


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.





Equity
Incentive Plan





No awards
have been granted under the Company’s 2008 Equity Incentive Plan.




11.  Aston
Operating Allocation





Highbury
owns 65% of the membership interests of Aston, and eight employees of Aston (the
“Aston management members”) own 35% of the membership interests of
Aston.




Pursuant
to the Aston limited liability company agreement, 28% of the total revenues of
Aston net of sub-administrative fees, which we refer to as the owners’
allocation, is allocated to the owners of Aston. The owners’ allocation is
allocated among the members of Aston according to their relative ownership
interests. Currently, 18.2% of total revenues net of sub-administrative fees is
allocated to Highbury, and 9.8% of total revenues net of sub-administrative fees
is allocated to the Aston management members. The remaining revenues, which
we refer to as the operating allocation, of Aston are used to pay operating
expenses of Aston, including salaries and bonuses of all employees of Aston
(including the Aston management members).




Highbury’s
contractual share of revenues has priority over the distributions to the Aston
management members in the event Aston’s actual operating expenses exceed the
operating allocation. As a result, excess expenses first reduce the portion of
the owners’ allocation allocated to the Aston management members until the Aston
management members’ allocation is eliminated, then Highbury’s allocation is
reduced. Any reduction in the distribution of revenues to be paid to Highbury is
required to be paid to Highbury out of any future excess operating allocation
and the portion of future owners’ allocation allocated to the Aston management
members, with interest.  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
Aston management members’ share of the owners’ allocation.  During the
three months ended June 30, 2009, Aston’s operating expenses were $247,248 less
than the operating allocation.  This excess operating allocation for
the three months ended June 30, 2009 was allocated to the Aston management
members’ 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 six months ended June 30, 2009 exceeded the operating allocation by
$356,885.  These excess expenses were funded by a reduction in the
Aston management members’ share of the owners’ allocation and is reflected as a
reduction in net income attributable to noncontrolling interest.  In
no other prior period, including the three and six months ended June 30, 2008,
did Aston’s operating expenses exceed the operating allocation.





12.  Subsequent
Events





A. Three of
Highbury’s stockholders have sent letters to the Company’s Board of Directors
requesting, among other things, changes to management and the composition of the
Board of Directors.  In July and in response to the initiatives
of these stockholders, the Board of Directors has formed a Special Committee
consisting of all of the independent directors, Hoyt Ammidon Jr., who chairs the
Special Committee, Theodore M. Leary Jr. and Aidan J. Riordan, to explore and
evaluate strategic alternatives aimed at enhancing value for all
stockholders.  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.  The Company will incur significant fees and
expenses associated with the Special Committee and the consideration of
appropriate responses to these stockholders.  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. In the quarter ending September 30, 2009, Highbury
expects to incur substantial expenses related to these matters.  Such
expenses may continue to be incurred beyond the quarter ending September 30,
2009 in amounts which cannot presently be estimated, but which may continue to
be substantial.  These additional expenses may have a negative impact
on the Company’s results of operations for the quarter ending September 30, 2009
and beyond.




12


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 LLC units in Aston for newly authorized
Series B Convertible Preferred Stock of the Company, resulting in an aggregate
issuance of 1,000 shares of Series B Convertible Preferred Stock with a face
value of $22.5 million.  This Series B Preferred Stock carries a 4%
dividend, and may participate in any dividends paid to holders of the Company’s
common stock on an as-converted basis.  Each share of Series B
Convertible Preferred Stock is initially convertible into 4,500 shares of
common, reflecting an initial conversion price of $5.00 per share.
  The
Company has the right to redeem the Series B Convertible 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 Convertible 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 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 Convertible Preferred Stock may elect to convert the Series
B Convertible Preferred Stock into common stock under certain
circumstances.  Holders of Series B Convertible Preferred Stock may
also require the Company to redeem their shares of Series B Convertible
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.  Since such a
change of control is not an event certain to occur, we anticipate the Series B
Convertible Preferred Stock will have an equity classification on our balance
sheet. Since
this is an equity transaction, the Company will not recognize any gain or loss
in its condensed consolidated financial statements related to this
transaction.
  C.  On
August 10, 2009, the Company’s Board declared a dividend of one preferred
share purchase right (a "Right") for each outstanding share of common stock, par
value $0.0001 per share, of the Company (the "Common Stock").  The
dividend is payable 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 "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 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
together with this Summary of Rights.
  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.
  13
  The
purchase price payable, and the number of shares of 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 Preferred
Stock, (ii) upon the grant to holders of the Preferred Stock of certain rights
or warrants to subscribe for or purchase Preferred Stock at a price, or
securities convertible into Preferred Stock with a conversion price, less than
the then-current market price of the Preferred Stock or (iii) upon the
distribution to holders of the Preferred Stock of evidences of indebtedness or
assets (excluding regular periodic cash dividends or dividends payable in
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
Preferred Stock purchasable upon exercise of the Rights will not be
redeemable.  Each share of 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
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 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 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 Preferred Stock's dividend, liquidation and voting rights,
the value of the one one-thousandth interest in a share of 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 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 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 Preferred Stock (or other
preferred stock) equivalent in value thereto, per Right.
  At any
time prior to the time an Acquiring Person becomes such, the Board 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 shall
determine.


14




ITEM
2 - 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 the condensed consolidated financial
statements and the notes thereto included in this Quarterly Report on Form 10-Q
and the consolidated financial statements included in our Annual Report on Form
10-K for the fiscal year ended December 31, 2008, as filed with the Securities
and Exchange Commission on March 4, 2009.





Unless
otherwise provided in this Quarterly 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.





Forward
Looking Statements





This Quarterly Report on Form 10-Q
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. We have based these
forward-looking statements on our current expectations and projections about
future events. These forward-looking statements are subject to known and unknown
risks, uncertainties and assumptions about us that may cause our actual results
to be materially different from historical results and results expressed or
implied by such forward-looking statements. In some cases, you can identify
forward-looking statements by terminology such as “may,” “should,” “could,”
“would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “continue,” or
the negative of such terms or other similar expressions. Factors that might
cause or contribute to such a discrepancy include, but are not limited to, the
following:





·
            our performance is directly
      affected by changing conditions in global financial markets generally and
      in theequity markets particularly, and
      a decline or a lack of sustained growth in these markets may result in
      decreased advisory fees and administrative fees and a corresponding
      decline (or lack of growth) in our operating results and in the cash flow
      distributable to us from our existing or future
      affiliates;





·
            we cannot be certain that we will
      be successful in finding or investing in additional investment management
      firms on favorable terms, or that existing and future affiliates will have
      favorable operating results;





·
            we may need to raise capital by
      making long-term or short-term borrowings or by selling shares of our
      common stock or other securities in order to finance investments in
      additionalinvestment management firms or
      additional investments in our existing affiliate, and we cannot be sure
      that such capital will be available to us on acceptable terms, if at all;
      and





·
            those certain other factors
      discussed under the caption “Risk Factors” in our Annual Report on Form
      10-K for the year ended December 31, 2008, as filed with the Securities
      and Exchange Commission on March 4, 2009 and in any other filings we make
      with the Securities and Exchange Commission from time to
      time.





We
will not undertake and we specifically disclaim any obligation to release
publicly the result of any revisions which may be made to any forward-looking
statements to reflect events or circumstances which arise after the date of such
statements or to reflect the occurrence of events, whether or not anticipated.
In that respect, we wish to caution readers not to place undue reliance on any
such forward-looking statements, which speak only as of the date
made.


15




Overview




Highbury
is an investment management holding company providing permanent capital
solutions to mid-sized investment management firms. We pursue acquisition
opportunities and seek to establish accretive partnerships with high quality
investment management firms. Highbury’s strategy is to provide permanent equity
capital to fund buyouts from corporate parents, buyouts of founding or departing
partners, growth initiatives, or exit strategies for private equity funds. This
strategy includes leaving material equity interests with management teams to
align the interests of management and Highbury’s shareholders and, in general,
does not include integrating our acquisitions, although Highbury may execute
add-on acquisitions for its current or future affiliates. We seek to augment and
diversify our sources of revenue by asset class, investment style, distribution
channel, client type and management team. We intend to fund future acquisitions
with our revolving credit facility, other external borrowings, retained
earnings (if any), additional equity and other sources of capital, including
seller financing and contingent payments.




As of
June 30, 2009, the Company had approximately $5.1 billion of total assets under
management, compared to approximately $3.9 billion as of March 31, 2009 and
approximately $4.8 billion as of June 30, 2008. As of June 30, 2009, Aston
managed 25 no-load mutual funds, comprised of 24 equity funds and 1 fixed income
fund, with approximately $4.9 billion of mutual fund assets under
management.  Aston had $3.8 billion and $4.7 billion of mutual fund
assets under management as of March 31, 2009 and June 30, 2008, respectively. As
of June 30, 2009, 13 of the mutual funds carried an overall Morningstar
RatingTM of
three stars or better, including eight four-star funds and one five-star
fund. Of the 25 funds, eleven 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 June 30, 2009, Aston also managed
approximately $132 million of separate account assets, compared to approximately
$107 million as of March 31, 2009 and approximately $167 million as of June 30,
2008.  Aston intends to expand its assets under management with a
combination of internal growth, new product development and accretive
acquisitions.




Business Combination. On
November 30, 2006, we acquired from ABN AMRO Asset Management Holdings, Inc. and
certain of its affiliates, or the sellers, substantially all of the sellers’
business of providing investment advisory, administration, distribution and
related services to the funds specified in the asset purchase agreement, or the
acquired business.




The
acquired business was founded in 1993 within Alleghany Corporation by employees
of Aston to manage open-end investment funds for retail and institutional
clients in the United States. Originally, the acquired business 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.
Historically, the acquired business utilized seven different entities to manage
the equity funds, of which five were current or former affiliates of the sellers
and two were independent. Aston now employs 15 different sub-advisers of which
three are current affiliates of the sellers, two are former affiliates of the
sellers and nine are unrelated to the sellers.  In connection with the
consummation of the acquisition, Aston entered into agreements with each of the
sellers that managed the funds prior to the acquisition, pursuant to which each
such seller now acts as a sub-adviser to the applicable fund, each of which is
now rebranded as an Aston Fund. Pursuant to the asset purchase agreement, the
sellers have agreed not to terminate these agreements prior to November 30,
2011.  In general, sub-advisers unaffiliated with the sellers may
terminate their sub-advisory contracts upon 60 days’ written
notice.  Aston’s relationship with the sub-advisers currently or
formerly affiliated with the 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.




Between
the consummation of the acquisition and June 30, 2009, Aston opened 14 new
equity mutual funds. These funds are set forth in the table
below.


16




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




Between
the consummation of the acquisition and June 30, 2009, Aston closed or merged
eight 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. Highbury owns 65% of the membership interests of Aston, and eight
employees of Aston, or the Aston management members, own 35% of the membership
interests of Aston.




Pursuant
to the limited liability company agreement, 28% of the total revenues of Aston
net of sub-administrative fees, which we refer to as the owners’
allocation, is allocated to the owners of Aston. The owners’ allocation is
allocated among the members of Aston according to their relative ownership
interests. Currently, 18.2% of total revenues net of sub-administrative fees is
allocated to Highbury and 9.8% of total revenues net of sub-administrative fees
is allocated to the Aston management members. The remaining revenues, which
we refer to as the operating allocation, of Aston are used to pay operating
expenses of Aston, including salaries and bonuses of all employees of Aston
(including the Aston management members).




Highbury’s
contractual share of revenues has priority over the distributions to the Aston
management members in the event Aston’s actual operating expenses exceed the
operating allocation. As a result, excess expenses first reduce the portion of
the owners’ allocation allocated to the Aston management members until the Aston
management members’ allocation is eliminated, then Highbury’s allocation is
reduced. Any reduction in the distribution of revenues to be paid to Highbury is
required to be paid to Highbury out of any future excess operating allocation
and the portion of future owners’ allocation allocated to the Aston management
members, with interest.  Aston’s operating expenses in the six months
ended June 30, 2009 exceeded the operating allocation by
$356,885.  These excess expenses were funded by a reduction in the
Aston management members’ share of the owners’ allocation.




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 June 30, 2009, Aston was reimbursing 7
mutual funds whose expenses exceed the applicable expense cap.


17




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 as of June
30, 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, Aston/TAMRO Small Cap Fund, the
Aston/Optimum Mid Cap Fund and the Aston/River Road Small Cap Value Fund
contributed approximately 38%, 15%, 14% and 10% of the revenues of Aston,
respectively, in June 2009.  In June 2008, the Aston/Montag &
Caldwell Growth Fund and the Aston/Optimum Mid Cap Fund contributed
approximately 34% and 20% of the revenues of Aston, respectively.  
These 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.




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;





·
            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.




Three of
our stockholders have 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, our
Board of Directors has formed a Special Committee consisting of all our
independent directors, Hoyt Ammidon Jr., who chairs the Special Committee,
Theodore M. Leary Jr. and Aidan J. Riordan, to explore and evaluate strategic
alternatives aimed at enhancing value for all of our stockholders. 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.  We will incur significant fees and expenses associated
with the Special Committee and considering appropriate responses to these
stockholders.  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. In the
quarter ending September 30, 2009, we expect to incur substantial
expenses  related to these matters.  Such expenses may
continue to be incurred beyond the quarter ending September 30, 2009 in amounts
which cannot presently be estimated, but which may continue to be
substantial.  These additional expenses may have a negative impact on
our results of operations for the quarter ending September 30, 2009 and
beyond.


18





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 in monthly installments), 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 (18.2%) of the total revenue, net of
      sub-administrative fees, earned by Aston. In addition, Highbury earns
      interest income on its cash balances which we recognize as non-operating
      income in the condensed 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 operating expenses (including
      distribution and sub-advisory costs and excluding certain non-cash,
      non-recurring items) to equal approximately 72% of the total revenue of
      Aston, as provided in Aston’s limited liability company agreement. Aston’s
      operating expenses in the six months ended June 30, 2009 exceeded the
      operating allocation by $356,885.  These excess expenses were
      funded by a reduction in the Aston management members’ share of the
      owners’ allocation.  At the Highbury level, we incur operating
      expenses in connection with our pursuit of accretive acquisitions,
      including expenses for travel, entertainment, legal services and due
      diligence. We also incur legal and accounting expenses in connection with
      our SEC filing requirements and expenses of directors’ and officers’
      insurance.




Description
of Certain Line Items




Following
is a description of the components of certain line items from our condensed
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.
      Finally, Aston earns monthly fees from Fortis Investment Management USA,
      Inc. or Fortis, in return for providing administration services to six
      money market funds which are advised by Fortis.  On June 8,
      2009, Fortis terminated this agreement with Aston effective December 8,
      2009.


19





·
            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 August 10, 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 three and six months ended June 30, 2009, the
      compensation and related expenses of Highbury include base salaries for
      the executive officers and related payroll taxes.  Highbury did
      not pay compensation of any kind in the three and six months ended June
      30, 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.




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 condensed
consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of America, or
GAAP, for interim financial information and with the instructions to Form 10-Q
and Rule 10-01 of Regulation S-X. The preparation of these condensed
consolidated 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
unaudited condensed consolidated financial statements included elsewhere herein
and in Note 1 to its audited financial statements included in its Annual Report
on Form 10-K for the year ended December 31, 2008, as filed with the Securities
and Exchange Commission on March 4, 2009. The following summaries should be read
in conjunction with those condensed consolidated financial statements and the
related notes. While all accounting policies affect the condensed 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 condensed 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.




20




Principles of Consolidation.
The condensed 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 an entity. Highbury is the manager member of
Aston and owns 65% of Aston. Highbury has a contractual arrangement with Aston
whereby a percentage of revenue is allocable to fund Aston’s operating expenses
(referred to as the operating allocation), while the remaining portion of
revenue (referred to as the owners’ allocation) is allocable to Highbury and the
other members, 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 Condensed Consolidated Statements of Income. Noncontrolling interest on
the Condensed 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.




Investments.In 2007, the
Company elected the early adoption provisions of Statement of Financial
Accounting Standards (“SFAS") No. 157 “Fair Value Measurements” (“SFAS 157”) and
SFAS No. 159 “The Fair Value Option for Financial Assets and Financial
Liabilities” (“SFAS 159”). The Company carries its investments at fair value
based on quoted market prices. 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 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.




We have
determined that the acquired mutual fund advisory contract meets the indefinite
life criteria outlined in SFAS No. 142, “Goodwill and Other Intangible Assets”
(“SFAS 142”), 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.




The
excess of the 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.




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.


21




Revenue Recognition. Highbury
derives its operating revenues from Aston, its majority-owned subsidiary.
Highbury also earns interest income on its cash balances. Aston earns investment
advisory and administrative fees for services provided to the Aston Funds, six
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
collectibility 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 temporary 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 the Company’s
acquired intangible assets as well as certain expenses deferred for tax purposes
and the unrealized gains and losses on mutual fund investments. We amortize
acquired intangible assets over a 15-year period for tax purposes only, reducing
their tax basis and generating deferred taxes each reporting
period.




Recently
Issued Pronouncements




In April
2009, the Financial Accounting Standards Board (“FASB”) issued FSP No. 141R-1,
“Accounting for Assets Acquired and Liabilities Assumed in a Business
Combination That Arise from Contingencies” (“FSP 141R-1”). FSP 141R-1 amends the
provisions in SFAS 141R for the initial recognition and measurement, subsequent
measurement and accounting, and disclosures for assets and liabilities arising
from contingencies in business combinations. FSP 141R-1 eliminates the
distinction between contractual and non-contractual contingencies, including the
initial recognition and measurement criteria in SFAS 141R and instead carries
forward most of the provisions in SFAS 141 for acquired contingencies. FSP
141R-1 is effective for contingent assets and contingent liabilities acquired in
business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December
15, 2008. We expect FSP 141R-1 will have an impact on our consolidated financial
statements, but the nature and magnitude of the specific effects will depend
upon the nature, term and size of the acquired contingencies.





In May
2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”). SFAS 165
sets forth: (1) the period after the balance sheet date during which management
of a reporting entity should evaluate events or transactions that may occur for
potential recognition or disclosure in financial statements, (2) the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements and (3) the
disclosures that an entity should make about events or transactions that
occurred after the balance sheet date. The Company has evaluated the period
beginning July 1, 2009 through August 10, 2009, the date its condensed
consolidated financial statements were issued, and concluded there were no
events or transactions occurring during this period that required recognition or
disclosure in its condensed consolidated financial statements.





Management
does not believe any other recently issued, but not yet effective, accounting
standard if adopted in its current form would have a material effect on the
accompanying condensed consolidated financial statements.





Recently
Adopted Accounting Pronouncements





In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements — an amendment of Accounting Research Bulletin
No. 51” (“SFAS 160”). SFAS 160 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. SFAS 160 also establishes disclosure requirements that clearly
identify and distinguish between the interests of the parent and the interests
of the noncontrolling owners. SFAS 160 is effective for fiscal years beginning
after December 15, 2008. The Company adopted the provisions of SFAS 160 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 Condensed
Consolidated Balance Sheets and the net income or loss attributable to
noncontrolling interests has been separately identified in the unaudited
Condensed Consolidated Statements of Income. The prior periods presented have
also been retrospectively restated to conform to the current
classification required by SFAS 160. Other than the change in presentation of
noncontrolling interests, the adoption of SFAS 160 had no impact on the
condensed consolidated financial statements.


22




Results
of Operations





Three
months ended June 30, 2009 compared to three months ended June 30,
2008





For the
three months ended June 30, 2009, the Company earned net income attributable to
Highbury Financial Inc. of $712,875 on total revenue of $9,231,394, as
compared to net income attributable to Highbury Financial Inc. of $900,881 on
total revenue of $9,680,469 for the three months ended June 30, 2008. The
following table summarizes the components of revenue, weighted average assets
under management and the weighted average fee basis for the period.





For the three months ended
                                  June 30, 2008Total Fees
                                
                                
                                Weighted
                                  Average
                                  Assets
                                  Under
                                  Management
                                  ($M)
                                
                                
                                Weighted
                                  Average Fee
                                  Basis
                                  (Annualized)Net
      advisory fees
                                
                                $
                                8,489,683
                                
                                
                                $
                                4,867
                                (1)
                                
                                
                                0.70
                                %Net
      administrative fees(2)
                                
                                
                                515,576
                                
                                
                                
                                7,807
                                (3)
                                
                                
                                0.03
                                %Money
      market service fees
                                
                                
                                140,159
                                
                                
                                
                                3,106
                                
                                
                                
                                0.02
                                %(4)$
                                9,145,418
                                
                                
                                
                                4,867
                                (5)
                                
                                
                                0.75
                                %(5)




For the three months ended
                          June 30, 2009Total Fees
                        
                        
                        Weighted
                          Average
                          Assets
                          Under
                          Management
                          ($M)
                        
                        
                        Weighted
                          Average Fee
                          Basis
                          (Annualized)Net
      advisory fees
                        
                        $
                        8,296,316
                        
                        
                        $
                        4,648
                        (1)
                        
                        
                        0.71
                        %Net
      administrative fees(2)
                        
                        
                        385,390
                        
                        
                        
                        5,907
                        (3)
                        
                        
                        0.03
                        %Money
      market service fees
                        
                        
                        137,500
                        
                        
                        
                        1,384
                        
                        
                        
                        0.04
                        %(4)$
                        8,819,206
                        
                        
                        
                        4,648
                        (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 $1,050,627 and $797,577 in the three
      months ended June 30, 2008 and 2009,
  respectively.





(3)
            Aston provides administrative
      services to the Aston Funds, as well as six money market mutual funds
      managed by Fortis.





(4)
            Aston receives a money market
      service fee from Fortis equal to $550,000 per annum plus 0.0001% of the
      weighted average assets under management in the six money market mutual
      funds in excess of $3 billion. The fee is accrued and paid
      monthly.  On June 8, 2009, Fortis terminated this agreement with
      Aston 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 (see note 1
above).




23





As of
June 30, 2009, the Company had approximately $5.1 billion of total assets under
management, compared to approximately $3.9 billion as of March 31, 2009 and
approximately $4.8 billion as of June 30, 2008. As of June 30, 2009, mutual fund
assets under management were approximately $4.9 billion, compared to
approximately $3.8 billion as of March 31, 2009, an increase of approximately
31%, and approximately $4.7 billion as of June 30, 2008. This aggregate increase
in mutual fund assets under management of $1,165 million since March 31, 2009
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 $632 million and (ii) net
client inflows, which represent aggregate contributions from new and existing
clients less withdrawals, of approximately $533 million, during the three months
ended June 30, 2009. The Company believes that recent improvements in the
relative investment performance of many of the Aston Funds have led to our net
client inflows. During the three months ended June 30, 2008, mutual fund assets
under management increased $127 million 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 $156
million and (ii) net client outflows of approximately $29
million.  During the three months ended June 30, 2009, separate
account assets under management increased from $107 million to $132
million.




The
Company generated total revenue during the three months ended June 30, 2009
of $9,231,394, as compared to $9,680,469 during the three months ended June 30,
2008. This 5% decrease in revenue was largely attributable to the overall
decline in weighted average assets under management from 2008 to 2009. Weighted
average assets under management, as presented above, decreased from
approximately $4.9 billion in the second quarter of 2008 to approximately $4.6
billion in the second quarter of 2009, a decline of approximately 5%. The
Company’s overall weighted average fee basis increased from 0.75% for the three
months ended June 30, 2008 to 0.76% for the three months ended June 30, 2009 as
a result of a proportionally greater allocation of assets under management to
mutual funds with higher fee rates. Net advisory fees decreased from $8,489,683
in the second quarter of 2008 to $8,296,316 for the same period in 2009,
primarily as a result of lower weighted average assets under management. For the
same reason, gross administration fees decreased from $1,050,627 in the second
quarter of 2008 to $797,578 in the second quarter of 2009. Net administration
fees declined from $515,576 in the second quarter of 2008 to $385,390 in the
second quarter of 2009. Aston also earned money market service fees from Fortis
of $137,500 in the three months ended June 30, 2009, down from $140,159 in the
three months ended June 30, 2008.




Distribution
and sub-advisory costs declined from $4,435,366 for the three months ended June
30, 2008 to $4,361,155 in the corresponding period in 2009. This 2% decline is
attributable to the decline 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 $1,459,246 for the three months ended June 30, 2009.
Compensation and related expenses were $1,612,420 for the three months ended
June 30, 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.  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 Aston management members’ share of the owners’
allocation.  During the three months ended June 30, 2009, Aston’s
operating expenses were $247,248 less than the operating
allocation.  This excess operating allocation for the three months
ended June 30, 2009 was allocated to the Aston management members’ share of the
owners’ allocation to partially offset the shortfall from the first quarter of
2009.  Because Aston’s expenses exceeded the operating allocation for
the six months ended June 30, 2009, there was no excess operating allocation
available to pay as compensation to the Aston management team in the second
quarter of 2009.  In addition, compensation and related expenses for
the three months ended June 30, 2009 includes $152,175 paid to Highbury’s
executive officers.  There were no corresponding payments to
Highbury’s executive officers in the three months ended June 30,
2008.




The
Company incurred $45,921 of depreciation expense relating to Aston’s fixed
assets in the second quarter of 2009, compared to $45,997 in the second quarter
of 2008.


24




Other
operating expenses decreased from $1,327,558 for the three months ended June 30,
2008 to $1,125,307 for the three months ended June 30, 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 the three months ended June 30, 2008 were
$1,038,311, as compared to $802,650 during the three months ended June 30,
2009.





Highbury’s
direct operating expenses, including compensation and related expenses, for the
three months ended June 30, 2008 and 2009 were as follows:





Three Months Ended,June 30,2008
                    
                    
                    2009Professional
      fees
                    
                    $
                    143,092
                    
                    
                    $
                    189,690Compensation
      and related expenses
                    
                    
                    -
                    
                    
                    
                    152,175Insurance
                    
                    
                    55,701
                    
                    
                    
                    39,233Administrative
      fees
                    
                    
                    30,000
                    
                    
                    
                    30,000Travel
      and entertainment
                    
                    
                    33,791
                    
                    
                    
                    29,535Other
      expenses
                    
                    
                    26,663
                    
                    
                    
                    34,199$
                    289,247
                    
                    
                    $
                    474,832




Non-operating
income consists primarily of earnings on cash and cash equivalent balances and
short-term investments in U.S. Treasury bills and Aston mutual funds. For the
three months ended June 30, 2009, Highbury earned interest income on its cash
and cash equivalent balances of $6,783. The Company also had investment income
of $36,000 related to unrealized gains in other marketable securities. For the
three months ended June 30, 2008, Highbury earned $17,280 on its cash and cash
equivalent balances and had unrealized gains of $26,963 related to investments
in Aston mutual funds.




For the
three months ended June 30, 2009, the Company recorded income before provisions
for income taxes of $2,282,548. For the three months ended June 30, 2008, the
Company recorded income before provisions for income taxes of
$2,303,371.




The
following table outlines Highbury’s income tax expenses for the three months
ended June 30, 2008 and 2009:





Three Months Ended
                      June 30,2008
                    
                    
                    2009Current
                    
                    $
                    251,237
                    
                    
                    $
                    230,291Deferred -
      intangible related
                    
                    
                    233,262
                    
                    
                    
                    210,214Deferred
      – other
                    
                    
                    20,060
                    
                    
                    
                    17,021Total
                    
                    $
                    504,559
                    
                    
                    $
                    457,526





For
further discussion of the Company’s income taxes, please refer to Note 5 of the
condensed consolidated financial statements included elsewhere in this
document.





Highbury
earned net income attributable to Highbury Financial Inc. of $712,875 in the
three months ended June 30, 2009, compared to $900,881 during the three months
ended June 30, 2008.




Six
months ended June 30, 2009 compared to six months ended June 30,
2008





For the
six months ended June 30, 2009, the Company earned net income attributable to
Highbury Financial Inc. of $1,115,812 on total revenue of $16,260,061, as
compared to net income attributable to Highbury Financial Inc. of $1,525,160 on
total revenue of $18,959,516 for the six months ended June 30,
2008.


25




As of
June 30, 2009, the Company had approximately $5.1 billion of total assets under
management, compared to approximately $3.5 billion as of December 31, 2008 and
approximately $4.8 billion as of June 30, 2008. As of June 30, 2009, mutual fund
assets under management were approximately $4.9 billion, compared to
approximately $3.4 billion as of December 31, 2008, an increase of approximately
44%, and approximately $4.7 billion as of June 30, 2008. This aggregate increase
in mutual fund assets under management of $1,522 million since December 31, 2008
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 $416 million and (ii) net
client inflows, which represent aggregate contributions from new and existing
clients less withdrawals, of approximately $1,106 million, during the six months
ended June 30, 2009. The Company believes that recent improvements in the
relative investment performance of many of the Aston Funds have led to our net
client inflows. During the six months ended June 30, 2008, mutual fund assets
under management decreased $308 million from a combination of (i) negative
market appreciation and other adjustments, including distributions of income and
gain, reinvestments of distributions, and other items, of approximately $296
million and (ii) net client outflows of approximately $17
million.  During the six months ended June 30, 2009, separate account
assets under management increased from $115 million to $132
million.




The
Company generated total revenue during the six months ended June 30, 2009 of
$16,260,061, as compared to $18,959,516 during the six months ended June 30,
2008. This 14% decrease in revenue was largely attributable to the overall
decline in weighted average assets under management from 2008 to 2009. Net
advisory fees decreased from $16,579,964 in the first six months of 2008 to
$14,428,187 for the same period in 2009, primarily as a result of lower weighted
average assets under management. For the same reason, gross administration fees
decreased from $2,097,345 in the first six months of 2008 to $1,556,874 in the
first six months of 2009. Net administration fees declined from $1,027,273 in
the first six months of 2008 to $749,808 in the first six months of 2009. Aston
also earned money market service fees from Fortis of $275,000 in the six months
ended June 30, 2009, down from $282,207 in the six months ended June 30,
2008.




Distribution
and sub-advisory costs declined from $8,786,769 for the six months ended June
30, 2008 to $7,611,394 in the corresponding period in 2009. This 13% decline is
attributable to the decline 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 $3,283,990 for the six months ended June 30, 2009.
Compensation and related expenses were $3,146,604 for the six months ended June
30, 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.  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 Aston management members’ share of the owners’
allocation.  During the three months ended June 30, 2009, Aston’s
operating expenses were $247,248 less than the operating
allocation.  This excess operating allocation for the three months
ended June 30, 2009 was allocated to the Aston management members’ share of the
owners’ allocation to partially offset the shortfall from the first quarter of
2009.  Because Aston’s expenses exceeded the operating allocation for
the six months ended June 30, 2009, there was no excess operating allocation
available to pay as compensation to the Aston management team in the second
quarter of 2009.  In addition, compensation and related expenses for
the six months ended June 30, 2009 includes $304,350 paid to Highbury’s
executive officers.  There were no corresponding payments to
Highbury’s executive officers in the six months ended June 30,
2008.




The
Company incurred $91,842 of depreciation expense relating to Aston’s fixed
assets in the first six months of 2009, compared to $95,056 in the first six
months of 2008.




Other
operating expenses decreased from $2,662,026 for the six months ended June 30,
2008 to $2,531,854 for the six months ended June 30, 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 the six months ended June 30, 2008 were
$1,957,108, as compared to $1,613,513 during the six months ended June 30,
2009.


26





Highbury’s
direct operating expenses, including compensation and related expenses, for the
six months ended June 30, 2008 and 2009 were as follows:





Six Months Ended,June 30,2008
                    
                    
                    2009Professional
      fees
                    
                    $
                    434,288
                    
                    
                    $
                    630,224Compensation
      and related expenses
                    
                    
                    -
                    
                    
                    
                    304,350Insurance
                    
                    
                    111,615
                    
                    
                    
                    78,573Administrative
      fees
                    
                    
                    60,000
                    
                    
                    
                    60,000Travel
      and entertainment
                    
                    
                    44,244
                    
                    
                    
                    92,121Other
      expenses
                    
                    
                    54,771
                    
                    
                    
                    57,423$
                    704,918
                    
                    
                    $
                    1,222,691




Non-operating
income consists primarily of earnings on cash and cash equivalent balances and
short-term investments in U.S. Treasury bills and Aston mutual funds. For the
six months ended June 30, 2009, Highbury earned interest income on its cash and
cash equivalent balances of $19,248. The Company also had investment income of
$140,323 including realized losses of $46,077 related to investments in Aston
mutual funds and unrealized gains of $186,400 related to investments in other
marketable securities. For the six months ended June 30, 2008, Highbury earned
$71,291 on its cash and cash equivalent balances and had unrealized losses of
$151,861 related to investments in Aston mutual funds.





For the
six months ended June 30, 2009, the Company recorded income before provisions
for income taxes of $2,900,552. For the six months ended June 30, 2008, the
Company recorded income before provisions for income taxes of
$4,188,491.




The
following table outlines Highbury’s income tax expenses for the six months ended
June 30, 2008 and 2009:





Six Months Ended
                      June 30,2008
                    
                    
                    2009Current
                    
                    $
                    472,394
                    
                    
                    $
                    42,368Deferred -
      intangible related
                    
                    
                    466,525
                    
                    
                    
                    420,428Deferred
      – other
                    
                    
                    (33,526
                    )
                    
                    
                    163,426Total
                    
                    $
                    905,393
                    
                    
                    $
                    626,222





For
further discussion of the Company’s income taxes, please refer to Note 5 of the
condensed consolidated financial statements included elsewhere in this
document.





Highbury
earned net income attributable to Highbury Financial Inc. of $1,115,812 in
the six months ended June 30, 2009, compared to $1,525,160 during the six months
ended June 30, 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 represents
operating performance before non-cash expenses relating to the acquisition of
our interest in our affiliated investment management firm. 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 performance
benchmark.


27




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 benefits would
be realized only in the event of a future sale of Aston or an impairment charge.
We 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.




Three Months Ended
                      June 30,
                    
                    
                    Six Months Ended
                      June 30,2008
                    
                    
                    2009
                    
                    
                    2008
                    
                    
                    2009Net
      Income attributable to Highbury Financial Inc.
                    
                    $
                    900,881
                    
                    
                    $
                    712,875
                    
                    
                    $
                    1,525,160
                    
                    
                    $
                    1,115,812Intangible
      amortization
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Intangible-related
      deferred taxes
                    
                    
                    233,262
                    
                    
                    
                    210,214
                    
                    
                    
                    466,525
                    
                    
                    
                    420,428Affiliate
      depreciation
                    
                    
                    45,997
                    
                    
                    
                    45,921
                    
                    
                    
                    95,056
                    
                    
                    
                    91,842Other
      non-cash expenses
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Cash
      Net Income
                    
                    $
                    1,180,140
                    
                    
                    $
                    969,010
                    
                    
                    $
                    2,086,741
                    
                    
                    $
                    1,628,082




Liquidity
and Capital Resources




Highbury
funds its business activities with a combination of operating income and the
interest income earned on its cash and cash equivalent balances and expects to
fund future acquisitions with retained net income or the issuance of debt or
equity. Aston funds its business activities with cash flows from operations.
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.




As of
June 30, 2009, Highbury had no borrowings outstanding. In the future, however,
we will closely review our ratio of debt to Adjusted EBITDA (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 agreement are
limited to 2.0 times Adjusted EBITDA. We believe this level is prudent for our
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 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. This definition of Adjusted EBITDA is consistent with the definition of
EBITDA used in our credit facility. Adjusted EBITDA, as calculated by us, may
not be consistent with computations of Adjusted EBITDA by other companies. For
further information about our credit facility, please refer to the section
entitled “Credit Facility.”




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.


28




As of
June 30, 2009, the Company had $11,703,812 of cash and equivalents, $3,647,200
of investments and $3,451,269 of accounts receivable. The accounts receivable
are primarily related to the investment advisory fees, administrative fees and
money market service fees earned by Aston in June 2009. Aston receives its
revenues generally within the first week of the month following the month in
which they are earned. At June 30, 2009, the Company had accounts payable and
accrued expenses of $4,315,352, primarily attributable to the revenue sharing
payments owed to Aston’s distribution partners and the investment sub-advisers.
These payments are generally paid shortly after the receipt of the revenue
discussed above. In addition, this figure includes $1,099,258 of distributions
payable to the Aston management members, which were subsequently paid in July
2009. 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. Going forward, we expect Aston will distribute all of its excess
cash and cash equivalents on a quarterly basis to its owners, so we do not
expect large cash and cash equivalents balances to accrue within Aston. Highbury
expects to use its cash and cash equivalents to fund acquisitions, pay
dividends, service debt, if any, or repurchase our 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.  On July 15, 2009, Highbury paid a
dividend of $454,252 ($0.05 per share) to stockholders of record on July 1,
2009.




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.




Cash Flow from Operating
Activities. Cash flow from operations generally represents net income
plus non-cash charges for amortization, deferred taxes, depreciation and other
items as well as the changes in our consolidated working capital. For the three
months ended June 30, 2009, the Company received $1,750,992 of net cash flow
from its operating activities. In addition to net income of $712,875, the
Company’s cash flow increased by $227,235 due to deferred taxes related
primarily to the amortization of goodwill and intangible assets for income tax
purposes, by $1,112,147 due to the net income attributable to the noncontrolling
interest holders of Aston and by $467,667 due to a decrease in prepaid taxes.
Cash flow decreased by $936,880 due to an increase in accounts
receivable.  For the six months ended June 30, 2009, the Company
received $2,222,777 of net cash flow from its operating activities. In addition
to net income of $1,115,812, the Company’s cash flow increased by $583,854 due
to deferred taxes related primarily to the amortization of goodwill and
intangible assets for income tax purposes, by $1,158,518 due to the net income
attributable to the noncontrolling interest holders of Aston and by $278,444 due
to a decrease in prepaid taxes. Cash flow decreased by $1,002,697 due to an
increase in accounts receivable.





For the
three months ended June 30, 2008, the Company received $2,103,053 of net cash
flow from its operating activities. In addition to net income of $900,881, the
Company’s cash flow was increased by $253,866 relating to deferred taxes related
primarily to the amortization of goodwill and intangible assets for income tax
purposes, by $269,213 relating to an increase in accounts payable and accrued
expenses and by $897,931 relating to the Company’s net income attributable to
the noncontrolling interest holders. For the six months ended June 30, 2008, the
Company received $3,530,127 of net cash flow from its operating activities. In
addition to net income of $1,525,160, the Company’s cash flow was increased by
$433,543 relating to deferred taxes related primarily to the amortization of
goodwill and intangible assets for income tax purposes and by $1,757,938
relating to the Company’s net income attributable to the noncontrolling interest
holders. Cash flow was reduced by a $608,180 relating to a decrease in accounts
payable and accrued expenses.




Cash Flow from Investing
Activities. Changes in net cash flow from investing activities will
result primarily from capital expenditures, investments in new affiliates or,
from time to time, investments in new mutual funds created by Aston or other
marketable securities. In the first three months of 2009, Highbury sold its
remaining investments in Aston mutual funds for total proceeds of
$679,675.  In the three months ended June 30, 2009, Highbury made $844
of capital expenditures.  Investing activities used $844 of cash flow
in the three months ended June 30, 2009 and provided $678,831 of cash flow in
the six months ended June 30, 2009.


29





In
January 2008, Highbury invested $1,000,000 in the Aston/Smart Allocation ETF
Fund, and in March 2008, Highbury invested $1,000,000 in the Aston/New Century
Absolute Return ETF Fund. Highbury financed these investments through the sale
of investments in U.S. treasury securities.  In January 2008, Highbury
invested $1,000,000 in the Aston/Smart Allocation ETF Fund, and in March 2008,
Highbury invested $1,000,000 in the Aston/New Century Absolute Return ETF Fund.
Highbury financed these investments through the sale of investments in U.S.
treasury securities. In the second quarter of 2008, Highbury sold $400,000 of
investments in the Aston/New Century Absolute Return ETF Fund and $500,000 of
investments in the Aston/Smart Allocation ETF Fund.  Cash flow from
investing activities provided $906,611 in the three months ended June 30, 2008
and provided $1,965,507 in the six months ended June 30, 2008.





Cash Flow from Financing
Activities. Changes in net cash flow from financing activities will
result primarily from the issuance of equity or debt or the repayment of any
obligations which may arise thereunder, the repurchase of the Company’s
outstanding securities, the payment of distributions to Aston’s noncontrolling
interest holders or the payment of dividends. During the three months ended June
30, 2009, the Company distributed $96,371 to Aston’s noncontrolling interest
holders and paid a dividend of $455,155.  The Company also repurchased
18,063 shares of common stock for $49,453 and 417,500 warrants for
$146,125.  During the six months ended June 30, 2009, the Company
distributed $757,258 to Aston’s noncontrolling interest holders and paid a
dividend of $455,155.  The Company also repurchased 33,705 shares of
common stock for $83,727 and 417,500 warrants for $146,125 during the
period.  Cash flow used in financing activities were
$747,104 in the three months ended June 30, 2009 and $1,442,265 in the six
months ended June 30, 2009.





The
Company distributed $853,731 and $1,808,802 to Aston’s minority interest holders
during the three and six months ended June 30, 2008, respectively. Additionally,
during the first quarter of 2008, the Company repurchased 1,836,292 warrants for
$1,823,083 and 400,372 shares for $1,735,611. Cash flow used
in financing activities were $853,731 in the three months ended June
30, 2008 and $5,367,496 in the six months ended June 30, 2008.




Credit
Facility




On
October 1, 2008, we entered into a Second Amendment to our credit agreement with
City National Bank. The credit agreement, as amended, expires on September 30,
2009 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.




Borrowings
under our credit facility will bear interest, at our option, at either the
fluctuating prime rate plus one-half of one percent (0.50%) per year or the
LIBOR interest rate plus two and three-quarters percent (2.75%) 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 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. Any outstanding
principal is due at maturity on September 30, 2009. 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%). As of June 30,
2009, we 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 June 30, 2009, we were in compliance with all of the
covenant requirements under this credit facility.




Contractual
Obligations




As a
“Smaller Reporting Company” we are not required to include Contractual
Obligations.


30




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. We provide
this non-GAAP measure because our management uses this information when
analyzing the Company’s financial position.




The
following table provides a reconciliation of net income to Adjusted
EBITDA:




Three Months Ended
                      June 30,
                    
                    
                    Six Months Ended
                      June 30,2008
                    
                    
                    2009
                    
                    
                    2008
                    
                    
                    2009Net
      Income attributable to Highbury Financial Inc.
                    
                    $
                    900,881
                    
                    
                    $
                    712,875
                    
                    
                    $
                    1,525,160
                    
                    
                    $
                    1,115,812Provision
      for income taxes
                    
                    
                    504,559
                    
                    
                    
                    457,526
                    
                    
                    
                    905,393
                    
                    
                    
                    626,222Interest
      expense
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Intangible
      amortization
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Depreciation
      and other amortization
                    
                    
                    45,997
                    
                    
                    
                    45,921
                    
                    
                    
                    95,056
                    
                    
                    
                    91,842Other
      non-cash expenses
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Adjusted
      EBITDA
                    
                    $
                    1,451,437
                    
                    
                    $
                    1,216,322
                    
                    
                    $
                    2,525,609
                    
                    
                    $
                    1,833,876





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 paragraph 11(a) of SFAS 133 and are
accordingly not accounted for as derivatives for purposes of SFAS 133, but
instead are accounted for as equity.





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 may
be less than the rate of inflation.  As a result, the impact of
inflation may erode our purchasing power.




ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.





There
have been no material changes to our Quantitative and Qualitative Disclosures
About Market Risk in the six months ended June 30, 2009.  Please refer to
Item 7A in our Annual Report on Form 10-K for the fiscal year ended December 31,
2008, filed with the Securities and Exchange Commission on March 4,
2009.




ITEM
4. CONTROLS AND PROCEDURES.




We
carried out an evaluation, under the supervision and with the participation of
our management, including our chief executive officer and chief financial
officer, of the effectiveness of our disclosure controls and procedures as of
June 30, 2009. Based on that evaluation, our chief executive officer and chief
financial officer concluded that our disclosure controls and procedures are
effective as of the end of the period covered by this report to ensure that
information required to be disclosed by us in reports that we file or submit
under the Securities Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission’s rules and forms.


31




During
the most recently completed fiscal quarter, 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.





PART
II.


OTHER
INFORMATION




ITEM
1. 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. 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
1A. RISK FACTORS





Actions
Pursued by Stockholders may be Costly and Disruptive to our Business
Operations





Three of
our stockholders have 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 our Board of
Directors has established a Special Committee of our independent directors. The
Special Committee has engaged separate financial and legal advisers to advise
the Special Committee. We have agreed to pay additional fees to our independent
directors for their service on this committee. In addition, we have incurred
additional legal cost in considering appropriate responses to the initiatives of
these stockholders. These additional expenses may have an adverse effect on our
future results of operations. Further, if a proxy contest is pursued by any of
these stockholders it could result in substantial expense to us and consume
significant attention of our management and Board of Directors. Moreover, if the
proxy contest is intended to effect changes in our management and strategic
direction, it could disrupt our operations and our ability to achieve our
strategic goals by creating uncertainty for our employees, potential acquisition
candidates and for the board of trustees of the Aston Funds.





There
have been no other material changes from the risk factors previously disclosed
in Item 1A “Risk Factors” of our Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 4, 2009.




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




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 will be in effect until December
31, 2009 and may be suspended, from time to time and in accordance with
applicable laws, rules and regulations.





The
following table sets forth information with respect to repurchases of our common
stock and warrants to purchase common stock during the three months ended June
30, 2009:


32




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
                                                  ProgramsApril 1, 2009 to April 30, 2009
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                $
                                                923,697Shares(1)
                                                
                                                16,043
                                                
                                                
                                                $
                                                2.62
                                                
                                                
                                                16,043Warrants
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                —May
      1, 2009 to May 31, 2009
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                $
                                                921,919Shares(1)
                                                
                                                600
                                                
                                                
                                                $
                                                2.96
                                                
                                                
                                                600Warrants
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                —June
      1, 2009 to June 30, 2009
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                $
                                                770,150Shares(1)
                                                
                                                
                                                1,420
                                                
                                                
                                                $
                                                3.97
                                                
                                                
                                                
                                                1,420Warrants(2)
                                                
                                                
                                                417,500
                                                
                                                
                                                $
                                                0.35
                                                
                                                
                                                
                                                417,500





(1) All
of the share repurchases were made on the open market at prevailing market rates
plus related expenses under our stock repurchase program.





(2) The
417,500 warrants were repurchased in a single, privately negotiated
transaction.




Between
July 1, 2009 and August 10, 2009, our Board of Directors approved and the
Company repurchased an additional 2,804,200 warrants for $1,402,100, or $0.50
per warrant, in a privately negotiated transaction.  The Board of
Directors approved this repurchase outside of the current Securities Repurchase
Program.




ITEM
6. EXHIBITS





The
exhibits are listed on the Exhibit Index and are included elsewhere in this
Quarterly Report on Form 10-Q.




33




SIGNATURES





Pursuant
to the requirements of the 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.Dated: August 11, 2009
              By: /s/ Richard S. FooteRichard S. Foote
                President and Chief Executive Officer
                (Principal Executive Officer)Dated: August 11, 2009
              By: /s/ R. Bradley ForthR. Bradley Forth
                Executive Vice President, Chief Financial
                Officer and Secretary
                (Principal Financial and Accounting Officer)


34


EXHIBIT
INDEX





Exhibit
                  Number
                
                Description of Document31.1
                
                Section
      302 Certification by CEO.31.2
                
                Section
      302 Certification by CFO.32
                
                Section
      906 Certification by CEO and
CFO.




35