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 SECURITIESEXCHANGE ACT
      OF 1934
 
 For
the quarterly period ended September 30, 2009
 
 o
              TRANSITION REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 
 For
the transition period from _____________ to _____________
  Commission
File Number 000-51682
  Highbury
Financial Inc.
 (Exact
name of registrant as specified in its charter)
  Delaware
                
                20-3187008(State
      or other jurisdiction of
                  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 x   No 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 o   No
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 o   No
x
  As of
November 16, 2009, 1,000 shares of Series B preferred stock, par value $0.0001
per share, were issued and outstanding, and 15,039,244 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
                    
                    16Item
      3 — Quantitative and Qualitative Disclosures About Market
      Risk
                    
                    31Item
      4 — Controls and Procedures
                    
                    31PART
      II. OTHER INFORMATIONItem
      1 — Legal Proceedings
                    
                    31Item
      1A — Risk Factors
                    
                    31Item
      2 — Unregistered Sales of Equity Securities and Use of
      Proceeds
                    
                    35Item
      6 — Exhibits
                    
                    36Signatures
                    
                    37
  2
  ITEM
1 - FINANCIAL STATEMENTS
  Highbury
Financial Inc. and Subsidiary
 
 Condensed
Consolidated Balance Sheets
  December 31,
                    
                    
                    September 30,2008
                    
                    
                    2009(audited)
                    
                    
                    (unaudited)ASSETSCurrent
      assetsCash
      and cash equivalents
                    
                    $
                    10,244,469
                    
                    
                    $
                    23,871,418Investments
                    
                    
                    4,186,552
                    
                    
                    
                    3,957,200Accounts
      receivable
                    
                    
                    2,448,572
                    
                    
                    
                    3,932,153Prepaid
      expenses
                    
                    
                    239,434
                    
                    
                    
                    89,696Prepaid
      taxes
                    
                    
                    278,444
                    
                    
                    
                    -Total
      current assets
                    
                    
                    17,397,471
                    
                    
                    
                    31,850,467Other
      assetsFixed
      assets, net
                    
                    
                    806,637
                    
                    
                    
                    683,032Identifiable
      intangibles
                    
                    
                    22,982,000
                    
                    
                    
                    22,982,000Goodwill
                    
                    
                    3,305,616
                    
                    
                    
                    3,305,616Deferred
      tax assets
                    
                    
                    1,097,620
                    
                    
                    
                    341,814Other
      long-term assets
                    
                    
                    157,092
                    
                    
                    
                    100,000Total
      other assets
                    
                    
                    28,348,965
                    
                    
                    
                    27,412,462Total
      assets
                    
                    $
                    45,746,436
                    
                    
                    $
                    59,262,929LIABILITIES
      AND EQUITYCurrent
      liabilitiesAccounts
      payable and accrued expenses
                    
                    $
                    3,407,601
                    
                    
                    $
                    3,966,391Dividends
      payable
                    
                    
                    -
                    
                    
                    
                    25,551,877Income
      taxes payable
                    
                    
                    -
                    
                    
                    
                    15,936Total
      current liabilities
                    
                    
                    3,407,601
                    
                    
                    
                    29,534,204Deferred
      rent
                    
                    
                    805,707
                    
                    
                    
                    771,954Total
      liabilities
                    
                    
                    4,213,308
                    
                    
                    
                    30,306,158Commitments
      and contingenciesEquityHighbury
      Financial Inc. stockholders’ equityPreferred
      stock, $0.0001 par value, authorized 1,000,000 shares; 0 and 1,000
      shares issued and outstanding as of December 31, 2008 and September
      30, 2009, respectively:
                      ·      Series
      A Junior Participating Preferred Stock (0 shares issued)
                      ·      Series B Convertible Preferred
      Stock (1,000 shares issued; liquidation value of $22,500,000 as of
      September 30, 2009)
                    
                    
                    -
                    
                    
                    
                    -Common
      stock, $0.0001 par value, authorized 50,000,000 shares; 9,118,740 and
      11,985,082 shares issued and outstanding as of December 31, 2008 and
      September 30, 2009, respectively
                    
                    
                    912
                    
                    
                    
                    1,199Additional
      paid-in capital
                    
                    
                    51,818,975
                    
                    
                    
                    38,114,939Accumulated
      deficit
                    
                    
                    (11,126,759
                    )
                    
                    
                    (9,159,367
                    )Total
      Highbury Financial Inc. stockholders’ equity
                    
                    
                    40,693,128
                    
                    
                    
                    28,956,771Noncontrolling
      interest
                    
                    
                    840,000
                    
                    
                    
                    -Total
      equity
                    
                    
                    41,533,128
                    
                    
                    
                    28,956,771Total
      liabilities and equity
                    
                    $
                    45,746,436
                    
                    
                    $
                    59,262,929
  See
accompanying Notes to Unaudited Condensed Consolidated Financial
Statements.
  3
  Highbury
Financial Inc. and Subsidiary
 
 Condensed
Consolidated Statements of Income
 (unaudited)
 
 Three Months Ended
                                  
                                  
                                  Nine Months EndedSeptember 30,
                                  
                                  
                                  September 30,2008
                                  
                                  
                                  2009
                                  
                                  
                                  2008
                                  
                                  
                                  2009Revenue
                                  
                                  $
                                  9,595,927
                                  
                                  
                                  $
                                  11,196,682
                                  
                                  
                                  $
                                  28,555,443
                                  
                                  
                                  $
                                  27,456,743Operating
      expensesDistribution
      and sub-advisory costs
                                  
                                  
                                  (4,395,372
                                  )
                                  
                                  
                                  (5,363,929
                                  )
                                  
                                  
                                  (13,182,141
                                  )
                                  
                                  
                                  (12,975,323
                                  )Compensation
      and related expenses
                                  
                                  
                                  (1,699,827
                                  )
                                  
                                  
                                  (1,716,422
                                  )
                                  
                                  
                                  (4,846,431
                                  )
                                  
                                  
                                  (5,000,412
                                  )Depreciation
      and amortization
                                  
                                  
                                  (45,998
                                  )
                                  
                                  
                                  (46,339
                                  )
                                  
                                  
                                  (141,054
                                  )
                                  
                                  
                                  (138,181
                                  )Other
      operating expenses
                                  
                                  
                                  (1,183,440
                                  )
                                  
                                  
                                  (2,578,351
                                  )
                                  
                                  
                                  (3,845,466
                                  )
                                  
                                  
                                  (5,110,205
                                  )Total
      operating expenses
                                  
                                  
                                  (7,324,637
                                  )
                                  
                                  
                                  (9,705,041
                                  )
                                  
                                  
                                  (22,015,092
                                  )
                                  
                                  
                                  (23,224,121
                                  )Operating
      income
                                  
                                  
                                  2,271,290
                                  
                                  
                                  
                                  1,491,641
                                  
                                  
                                  
                                  6,540,351
                                  
                                  
                                  
                                  4,232,622Other
      incomeInterest
      income
                                  
                                  
                                  43,114
                                  
                                  
                                  
                                  5,007
                                  
                                  
                                  
                                  117,249
                                  
                                  
                                  
                                  24,255Investment
      income (loss)
                                  
                                  
                                  (369,556
                                  )
                                  
                                  
                                  303,059
                                  
                                  
                                  
                                  (524,261
                                  )
                                  
                                  
                                  443,382Total
      other income (loss)
                                  
                                  
                                  (326,442
                                  )
                                  
                                  
                                  308,066
                                  
                                  
                                  
                                  (407,012
                                  )
                                  
                                  
                                  467,637Income
      before provision for income taxes
                                  
                                  
                                  1,944,848
                                  
                                  
                                  
                                  1,799,707
                                  
                                  
                                  
                                  6,133,339
                                  
                                  
                                  
                                  4,700,259Provision
      for income taxes
                                  
                                  
                                  (412,740
                                  )
                                  
                                  
                                  (207,420
                                  )
                                  
                                  
                                  (1,318,133
                                  )
                                  
                                  
                                  (833,642
                                  )Net
      income
                                  
                                  
                                  1,532,108
                                  
                                  
                                  
                                  1,592,287
                                  
                                  
                                  
                                  4,815,206
                                  
                                  
                                  
                                  3,866,617Net
      income attributable to noncontrolling interest
                                  
                                  
                                  (891,104
                                  )
                                  
                                  
                                  (740,707
                                  )
                                  
                                  
                                  (2,649,042
                                  )
                                  
                                  
                                  (1,899,225
                                  )Net
      income attributable to Highbury Financial Inc.
                                  
                                  
                                  641,004
                                  
                                  
                                  
                                  851,580
                                  
                                  
                                  
                                  2,166,164
                                  
                                  
                                  
                                  1,967,392Preferred
      stock dividends
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (127,174
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (127,174
                                  )Net
      income attributable to common stockholders
                                  
                                  $
                                  641,004
                                  
                                  
                                  $
                                  724,406
                                  
                                  
                                  $
                                  2,166,164
                                  
                                  
                                  $
                                  1,840,218Weighted
      average common shares outstanding, basic
                                  
                                  
                                  9,126,628
                                  
                                  
                                  
                                  9,378,117
                                  
                                  
                                  
                                  9,170,068
                                  
                                  
                                  
                                  9,196,216Net
      income per common share, basic
                                  
                                  $
                                  0.07
                                  
                                  
                                  $
                                  0.08
                                  
                                  
                                  $
                                  0.24
                                  
                                  
                                  $
                                  0.20Weighted
      average common shares outstanding, diluted
                                  
                                  
                                  9,126,628
                                  
                                  
                                  
                                  12,074,791
                                  
                                  
                                  
                                  9,170,068
                                  
                                  
                                  
                                  10,114,232Net
      income per common share, diluted
                                  
                                  $
                                  0.07
                                  
                                  
                                  $
                                  0.07
                                  
                                  
                                  $
                                  0.24
                                  
                                  
                                  $
                                  0.19Cash
      dividend per share of common stock – declared
                                  
                                  $
                                  0.00
                                  
                                  
                                  $
                                  1.55
                                  
                                  
                                  $
                                  0.00
                                  
                                  
                                  $
                                  1.65Cash
      dividend per share of common stock – paid
                                  
                                  $
                                  0.00
                                  
                                  
                                  $
                                  0.05
                                  
                                  
                                  $
                                  0.00
                                  
                                  
                                  $
                                  0.10
 
 See
accompanying Notes to Unaudited Condensed Consolidated Financial
Statements.
  4
  Highbury
Financial Inc. and Subsidiary
 
 Condensed
Consolidated Statements of Equity
 (unaudited)
 
 Highbury Financial Inc. StockholdersPreferred Stock
                    
                    
                    Common Stock
                    
                    
                    Additional
                      Paid-In
                    
                    
                    Accumulated
                    
                    
                    NoncontrollingShares
                    
                    
                    Amount
                    
                    
                    Shares
                    
                    
                    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
                    )
                    
                    
                    (3
                    )
                    
                    
                    (83,722
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (83,725
                    )Repurchase
      of warrants
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (1,548,225
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (1,548,225
                    )Issuance
      of Series B Convertible Preferred Stock upon acquisition of remaining 35%
      interest in Aston Asset Management LLC
                    
                    
                    1,000
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Issuance
      of common stock upon exchange of warrants
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    22,150
                    
                    
                    
                    2
                    
                    
                    
                    (2
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Issuance
      of common stock upon exercise of warrants
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    2,877,897
                    
                    
                    
                    288
                    
                    
                    
                    14,389,197
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    14,389,485Distribution
      to noncontrolling interest holders
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (840,000
                    )
                    
                    
                    (840,000
                    )Dividends
      paid
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (909,407
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (909,407
                    )Dividends
      declared and unpaid
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (25,551,877
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (25,551,877
                    )Net
      income attributable to Highbury Financial Inc. for the
    period
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,967,392
                    
                    
                    
                    1,899,225
                    
                    
                    
                    3,866,617Income
      distributable to noncontrolling interest
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (1,
      899,225
                    )
                    
                    
                    (1,899,225
                    )Balance
      at September 30, 2009
                    
                    
                    1,000
                    
                    
                    
                    -
                    
                    
                    
                    11,985,082
                    
                    
                    $
                    1,199
                    
                    
                    $
                    38,114,939
                    
                    
                    $
                    (9,159,367
                    )
                    
                    $
                    -
                    
                    
                    $
                    28,956,771
  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
                        
                        
                        Nine Months EndedSeptember 30,
                        
                        
                        September 30,2008
                        
                        
                        2009
                        
                        
                        2008
                        
                        
                        2009CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      income attributable to Highbury Financial Inc.
                        
                        $
                        641,004
                        
                        
                        $
                        851,580
                        
                        
                        $
                        2,166,164
                        
                        
                        $
                        1,967,392Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization
                        
                        
                        45,998
                        
                        
                        
                        46,339
                        
                        
                        
                        141,054
                        
                        
                        
                        138,181Deferred
      taxes
                        
                        
                        99,997
                        
                        
                        
                        171,952
                        
                        
                        
                        533,540
                        
                        
                        
                        755,806Investment
      (gain) loss
                        
                        
                        369,556
                        
                        
                        
                        (303,059
                        )
                        
                        
                        524,261
                        
                        
                        
                        (443,382
                        )Net
      income attributable to noncontrolling interest
                        
                        
                        891,104
                        
                        
                        
                        740,707
                        
                        
                        
                        2,649,042
                        
                        
                        
                        1,899,225Deferred
      rent
                        
                        
                        (10,017
                        )
                        
                        
                        (11,269
                        )
                        
                        
                        (29,255
                        )
                        
                        
                        (33,753
                        )Changes
      in operating assets and liabilities(Increase)
      decrease in:Accounts
      receivable
                        
                        
                        166,407
                        
                        
                        
                        (480,884
                        )
                        
                        
                        218,546
                        
                        
                        
                        (1,483,581
                        )Prepaid
      expenses
                        
                        
                        (59,867
                        )
                        
                        
                        38,038
                        
                        
                        
                        86,839
                        
                        
                        
                        149,738Prepaid
      taxes
                        
                        
                        (81,027
                        )
                        
                        
                        -
                        
                        
                        
                        (81,027
                        )
                        
                        
                        278,444Other
      long-term assets
                        
                        
                        -
                        
                        
                        
                        23,936
                        
                        
                        
                        -
                        
                        
                        
                        57,092Increase
      (decrease) in:Accounts
      payable and accrued expenses
                        
                        
                        657,366
                        
                        
                        
                        887,468
                        
                        
                        
                        49,186
                        
                        
                        
                        889,707Income
      taxes payable
                        
                        
                        (62,061
                        )
                        
                        
                        3,220
                        
                        
                        
                        (66,919
                        )
                        
                        
                        15,936Net
      cash provided by operating activities
                        
                        
                        2,658,460
                        
                        
                        
                        1,968,028
                        
                        
                        
                        6,191,431
                        
                        
                        
                        4,190,805CASH
      FLOWS FROM INVESTING ACTIVITIESPurchases
      of investments
                        
                        
                        -
                        
                        
                        
                        (3,888,759
                        )
                        
                        
                        (2,000,000
                        )
                        
                        
                        (3,888,759
                        )Proceeds
      from sales of investments
                        
                        
                        603,960
                        
                        
                        
                        3,881,819
                        
                        
                        
                        4,568,031
                        
                        
                        
                        4,561,494Increase
      in other long-term assets
                        
                        
                        (501,369
                        )
                        
                        
                        -
                        
                        
                        
                        (500,021
                        )
                        
                        
                        -Purchase
      of fixed assets
                        
                        
                        -
                        
                        
                        
                        (13,732
                        )
                        
                        
                        (2,756
                        )
                        
                        
                        (14,576
                        )Net
      cash provided by (used in) investing activities
                        
                        
                        102,591
                        
                        
                        
                        (20,672
                        )
                        
                        
                        2,065,254
                        
                        
                        
                        658,159CASH
      FLOWS FROM FINANCING ACTIVITIESDividends
      paid
                        
                        
                        -
                        
                        
                        
                        (454,252
                        )
                        
                        
                        -
                        
                        
                        
                        (909,407
                        )Distributions
      paid to noncontrolling interest holders
                        
                        
                        (914,637
                        )
                        
                        
                        (2,312,885
                        )
                        
                        
                        (2,723,439
                        )
                        
                        
                        (3,070,143
                        )Issuance
      of common stock upon exercise of warrants
                        
                        
                        -
                        
                        
                        
                        14,389,485
                        
                        
                        
                        -
                        
                        
                        
                        14,389,485Repurchase
      of common stock
                        
                        
                        -
                        
                        
                        
                        2
                        
                        
                        
                        (1,735,611
                        )
                        
                        
                        (83,725
                        )Repurchase
      of warrants
                        
                        
                        -
                        
                        
                        
                        (1,402,100
                        )
                        
                        
                        (1,823,083
                        )
                        
                        
                        (1,548,225
                        )Net
      cash provided by (used in) financing activities
                        
                        
                        (914,637
                        )
                        
                        
                        10,220,250
                        
                        
                        
                        (6,282,133
                        )
                        
                        
                        8,777,985Net
      increase in cash and cash equivalents
                        
                        
                        1,846,414
                        
                        
                        
                        12,167,606
                        
                        
                        
                        1,974,552
                        
                        
                        
                        13,626,949Cash
      and cash equivalents - beginning of period
                        
                        
                        7,404,683
                        
                        
                        
                        11,703,812
                        
                        
                        
                        7,276,545
                        
                        
                        
                        10,244,469Cash
      and cash equivalents - end of period
                        
                        $
                        9,251,097
                        
                        
                        $
                        23,871,418
                        
                        
                        $
                        9,251,097
                        
                        
                        $
                        23,871,418Supplemental
      schedule of non-cash investing and financing activities:Issuance
      of Series B Convertible Preferred Stock
                        
                        $
                        -
                        
                        
                        $
                        22,500,000
                        
                        
                        $
                        -
                        
                        
                        $
                        22,500,000Issuance
      of 22,150 shares of common stock upon exchange of 443,000
      warrants
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        -Dividends
      declared and not yet paid
                        
                        $
                        -
                        
                        
                        $
                        25,551,877
                        
                        
                        $
                        -
                        
                        
                        $
                        25,551,877Supplemental
      disclosure of cash flow information:Cash
      paid for income taxes
                        
                        $
                        460,000
                        
                        
                        $
                        32,258
                        
                        
                        $
                        936,708
                        
                        
                        $
                        32,258
  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
September 30, 2009 and for the three months and nine months ended September 30,
2009 and 2008 of Highbury Financial, Inc. and its 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.
  The
Company has evaluated the period beginning October 1, 2009 through November 16,
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, except as disclosed in notes 9 and 10.
 
 Investments
 
 The
Company carries its investments at fair value based on quoted market prices, a
Level 1 input, which is defined by Accounting Standards Codification (ASC) “Fair
Value Measurements and Disclosures” as quoted prices (unadjusted) in active
markets that are accessible at the measurement date for identical assets or
liabilities. The fair value hierarchy gives the highest priority to Level 1
inputs. The Company 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,
                    
                    
                    September 30,2008
                    
                    
                    2009Aston
      mutual funds
                    
                    $
                    725,752
                    
                    
                    $
                    -Other
      marketable securities
                    
                    
                    3,460,800
                    
                    
                    
                    3,957,200$
                    4,186,552
                    
                    
                    $
                    3,957,200
  Changes
in fair value of investments are included in investment income (loss) and are as
follows:
 
 Three Months Ended
                      September 30,
                    
                    
                    Nine Months Ended
                      September 30,2008
                    
                    
                    2009
                    
                    
                    2008
                    
                    
                    2009Aston
      mutual fundsRealized
      gains (losses)
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    (46,077
                    )Unrealized
      gains (losses)
                    
                    
                    (369,556
                    )
                    
                    
                    -
                    
                    
                    
                    (524,261
                    )
                    
                    
                    -Other
      marketable securitiesRealized
      gains (losses)
                    
                    
                    -
                    
                    
                    
                    421,019
                    
                    
                    
                    -
                    
                    
                    
                    421,019Unrealized
      gains (losses)
                    
                    
                    -
                    
                    
                    
                    (117,960
                    )
                    
                    
                    -
                    
                    
                    
                    68,440$
                    (369,556
                    )
                    
                    $
                    303,059
                    
                    
                    $
                    (524,261
                    )
                    
                    $
                    443,382
  7
  Highbury
Financial Inc. and Subsidiary
 
 Notes
to Unaudited Condensed Consolidated Financial Statements
 
 Recent
Accounting Pronouncements
 
 As of
September 30, 2009, we implemented the Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification (the “Codification” or “ASC”). All of
the content included in the Codification is considered authoritative. The
Codification is not intended to amend GAAP, but codifies previous accounting
literature. We changed the referencing of authoritative accounting literature to
conform to the Codification.
 
 In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements — an amendment of Accounting Research Bulletin
No. 51” or ASC 810.  ASC 810 addresses the accounting and reporting
standards for ownership interests in subsidiaries held by parties other than the
parent, the amount of consolidated net income attributable to the parent and to
the noncontrolling interest, changes in a parent’s ownership interest, and the
valuation of retained noncontrolling equity investments when a subsidiary is
deconsolidated. ASC 810 also establishes disclosure requirements that clearly
identify and distinguish between the interests of the parent and the interests
of the noncontrolling owners. ASC 810 is effective for fiscal years beginning
after December 15, 2008. The Company adopted the provisions of ASC 810 in the
first quarter of 2009. As a result of the adoption, the Company has reported
noncontrolling interests as a component of equity in the unaudited 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 ASC 810. Other than the change in presentation of noncontrolling
interests, the adoption of ASC 810 had no impact on the condensed consolidated
financial statements.
 
 In May
2009, the FASB issued SFAS No. 165, “Subsequent Events” or ASC 855. ASC 855 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 adoption of ASC 855 did not
have a material impact on the Company’s financial condition or results of
operations.
 
 Management
does not believe that any recently issued, but not yet effective, accounting
standard if currently adopted would have a material effect on the accompanying
condensed consolidated financial statements.
 
 2.  Accounts Payable and Accrued
Expenses
 
 Accounts
payable and accrued expenses consisted of the following:
 
 December 31,
                    
                    
                    September 30,2008
                    
                    
                    2009Payable to
      sub-advisors
                    
                    $
                    802,583
                    
                    
                    $
                    1,533,625Payable
      to brokers
                    
                    
                    321,261
                    
                    
                    
                    430,567Payable
      to noncontrolling interest
                    
                    
                    660,887
                    
                    
                    
                    329,969Accrued
      compensation payable
                    
                    
                    436,239
                    
                    
                    
                    740,183Accrued
      professional fees
                    
                    
                    552,647
                    
                    
                    
                    242,521Other
      payables
                    
                    
                    633,984
                    
                    
                    
                    689,526$
                    3,407,601
                    
                    
                    $
                    3,966,391
 
 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 nine months ended September 30, 2008 and 2009 each included $30,000 and
$90,000, respectively, related to this agreement. The agreement is terminable by
either party upon six months’ prior notice.
  8
 Highbury
Financial Inc. and Subsidiary
  Notes
to Unaudited Condensed Consolidated Financial Statements
 
 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, par value $0.0001 per share, of the Company (“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. The
holders of the Company’s Series B Convertible Preferred Stock, par value $0.0001
per share (“Series B Preferred Stock”), have registration rights with respect to
the shares of Common Stock issuable upon conversion of the Series B Preferred
Stock.  The holders of a majority of the shares issuable upon conversion of
the Series B Preferred Stock are entitled to make up to three demands that we
register the resale of the shares of Common Stock issuable upon the conversion
of shares of Series B Preferred Stock but only after the shares of Series B
Preferred Stock have been converted into Common Stock.  Each outstanding
share of Series B Preferred Stock is convertible into 4,500 shares of our Common
Stock, or 4,500,000 shares of Common Stock in the aggregate for the 1,000 shares
of outstanding Series B Preferred Stock, subject to customary anti-dilution
adjustments.  In addition, the holders of our Series B Preferred Stock have
certain “piggy-back” registration rights with respect to the shares of Common
Stock issuable upon conversion of our Series B Preferred Stock.  The
Company will bear the expenses incurred in connection with the filing of any of
the foregoing registration statements.
  d. Highbury
and Aston are subject to claims, legal proceedings and other contingencies in
the ordinary course of their business activities. Each of these matters is
subject to various uncertainties, and it is possible that some of these matters
may be resolved in a manner unfavorable to 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 accounted for approximately 97% of our assets under management as of
September 30, 2009, is comprised of 24 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 24 funds,
the Aston/Montag & Caldwell Growth Fund, the Aston/Optimum Mid Cap Fund,
Aston/TAMRO Small Cap Fund and the Aston/River Road Small Cap Value Fund
contributed approximately 37%, 16%, 15% and 10% of the revenues of Aston,
respectively, for the month of September 2009.  In the month of September
2008, the Aston/Montag & Caldwell Growth Fund, the Aston/Optimum Mid Cap
Fund and Aston/TAMRO Small Cap Fund contributed approximately 33%, 18% and 13%
of the revenues of Aston, respectively.  These client concentrations leave
the Company 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 nine month periods ended
September 30, 2008 and 2009 consist of the following:
 
 Three Months Ended
                    
                    
                    Nine Months EndedSeptember 30,
                    
                    
                    September 30,2008
                    
                    
                    2009
                    
                    
                    2008
                    
                    
                    2009CurrentFederal
                    
                    $
                    251,739
                    
                    
                    $
                    773
                    
                    
                    $
                    609,770
                    
                    
                    $
                    57,851State
                    
                    
                    60,460
                    
                    
                    
                    34,695
                    
                    
                    
                    174,823
                    
                    
                    
                    19,985DeferredFederal
                    
                    
                    88,970
                    
                    
                    
                    148,838
                    
                    
                    
                    472,135
                    
                    
                    
                    654,210State
                    
                    
                    11,571
                    
                    
                    
                    23,114
                    
                    
                    
                    61,405
                    
                    
                    
                    101,596$
                    412,740
                    
                    
                    $
                    207,420
                    
                    
                    $
                    1,318,133
                    
                    
                    $
                    833,642
  9
 Highbury
Financial Inc. and Subsidiary
  Notes
to Unaudited Condensed Consolidated Financial
Statements
 The
sources of the net deferred tax assets are as follows:
 
 December 31,
                    
                    
                    September
      30,2008
                    
                    
                    2009Expenses
      and net unrealized investment losses deferredfor
      income tax purposes
                    
                    $
                    492,258
                    
                    
                    $
                    437,166(Tax
      amortization of) / GAAP impairment of intangibles
                    
                    
                    605,362
                    
                    
                    
                    (95,352
                    )Net
      deferred tax assets
                    
                    $
                    1,097,620
                    
                    
                    $
                    341,814
  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 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
                          
                          
                          Nine Months EndedSeptember 30,
                          
                          
                          September 30,2008
                          
                          
                          2009
                          
                          
                          2008
                          
                          
                          2009Earnings
      Per Common Share – BasicNumerator:Net
      income attributable to common stockholders
                          
                          $
                          641,004
                          
                          
                          $
                          724,406
                          
                          
                          $
                          2,166,164
                          
                          
                          $
                          1,840,218Denominator:Average
      common shares outstanding - basic
                          
                          
                          9,126,628
                          
                          
                          
                          9,378,117
                          
                          
                          
                          9,170,068
                          
                          
                          
                          9,196,216Earnings
      Per Common Share – DilutedNumerator:Net
      income attributable to Highbury Financial Inc.
                          
                          $
                          641,004
                          
                          
                          $
                          851,580
                          
                          
                          $
                          2,166,164
                          
                          
                          $
                          1,967,392Denominator:Average
      common shares outstanding - basic
                          
                          
                          9,126,628
                          
                          
                          
                          9,378,117
                          
                          
                          
                          9,170,068
                          
                          
                          
                          9,196,216Effect
      of dilutive instruments:Series
      B Preferred Stock
                          
                          
                          -
                          
                          
                          
                          2,601,563
                          
                          
                          
                          -
                          
                          
                          
                          885,638Warrants
                          
                          
                          -
                          
                          
                          
                          95,111
                          
                          
                          
                          -
                          
                          
                          
                          32,378Average
      common shares outstanding - diluted
                          
                          
                          9,126,628
                          
                          
                          
                          12,074,791
                          
                          
                          
                          9,170,068
                          
                          
                          
                          10,114,232
  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 for 2008 periods because the
Company’s weighted average share price during the 2008 periods was less than the
warrants’ exercise price.  As of September 30, 2008 and 2009, the Company
had 13,983,708 and 7,441,111 warrants outstanding, respectively.
 
 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. In
the three and nine months ended September 30, 2009, Aston earned advisory fees
of $10,114,500 and $24,217,918, respectively, and administrative fees of
$761,297 and $2,318,171, respectively, from the Aston Funds. These fees, in
total, accounted for approximately 97% of Aston’s total revenue during both
periods. In the three and nine months ended September 30, 2008, Aston earned
advisory fees of $8,164,734 and $24,263,297, respectively, and administrative
fees of $1,029,219 and $3,126,564, 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 September 30, 2009, the Company’s
balance sheets included accounts receivable of $2,039,687 and $3,622,904,
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.
  10
  Highbury
Financial Inc. and Subsidiary
 
 Notes
to Unaudited Condensed Consolidated Financial Statements
 
 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, 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 payment of
$10,000 per month. The condensed consolidated statements of income for the three
and nine months ended September 30, 2008 and 2009 each included $30,000 and
$90,000, respectively, related to this agreement. The agreement is terminable by
either party upon six months’ prior notice.
 
 8.  Credit
Facility
 
 On
October 1, 2009, 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 and a Second Amendment to Credit
Agreement dated October 1, 2008 (the “Amended Credit Agreement”), which provides
for an extension of the Amended Credit Agreement through September 30, 2010 and
modifies certain provisions of the Amended Credit Agreement (the “Third
Amendment to Credit Agreement”). The Third Amendment to Credit Agreement
increases the rate at which borrowings will bear interest to, at the Company’s
option, (i) for a LIBOR loan, the greater of (w) 3.50% and (x) the LIBOR
interest rate plus 2.75% per year or (ii) for a prime rate loan, the greater of
(y) 3.50% and (z) the fluctuating prime rate plus 0.50% per year.
 
 9. 
Securities Repurchases Program
 
 During
the three months ended September 30, 2009, the Company repurchased 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.  During the nine months ended September 30,
2009, the Company repurchased 33,705 shares for $83,725 and 3,221,700 warrants
for $1,548,225.
 
 Between
October 1, 2009 and November 16, 2009, the Company repurchased an additional
554,893 warrants for $148,014.  As of November 16, 2009, there is $622,136
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
September 30, 2008.  During the nine months ended September 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
 
 Issuance
of Preferred Stock
 
 As
further explained in Note 12 below, on August 10, 2009 the Company issued 1,000
shares of Series B Preferred Stock with a face value of $22.5 million. 
This Series B Preferred Stock carries a 4% annual dividend, payable quarterly,
and participates in any dividends paid to holders of Common Stock on an
as-converted basis.  Each share of Series B Preferred Stock is initially
convertible into 4,500 shares of Common Stock, reflecting an initial conversion
price of $5.00 per share.
 
 Exercise
of Warrants
 
 In
September 2009, holders of the Company’s warrants exercised 2,877,897 warrants
generating proceeds to the Company of $14,389,485.
 
 Between
October 1, 2009 and November 16, 2009, holders of the Company’s warrants
exercised 3,054,162 warrants generating proceeds to the Company of
$15,270,810.
 
 Exchange
of Warrants
 
 On
September 28, 2009, Highbury entered into an exchange agreement (the “Exchange
Agreement”) with an investor.  Pursuant to the Exchange Agreement, the
investor exchanged 443,000 of the Company’s warrants for 22,150 shares of Common
Stock.  The issuance of Common Stock under the Exchange Agreement was made
pursuant to a transaction exempt from registration under Rule 506 of the
Securities Act.
  11
  Highbury
Financial Inc. and Subsidiary
 
 Notes
to Unaudited Condensed Consolidated Financial Statements
 
 Dividends
 
 On
September 16, 2009, the Board of Directors authorized a dividend on the
outstanding Common Stock of the Company to be paid in cash.  As of
September 30, 2009, the Company had 11,985,082 shares of Common Stock and 1,000
shares of Series B Preferred Stock outstanding.  The Series B Preferred
Stock is convertible into 4,500,000 shares of Common Stock and eligible to
participate in any dividends paid to holders of Common Stock on an as-converted
basis.  As such, the Company accrued dividends payable as of September 30,
2009 of $25,551,877.  Between October 1, 2009 and October 6, 2009, holders
of the Company’s warrants exercised an additional 3,054,162 warrants resulting
in the issuance of 3,054,162 additional shares of Common Stock outstanding as of
the record date for the dividend.  On October 7, 2009, the Company paid a
dividend of $30,285,828 ($1.55 per share), based on the 15,039,244 shares of
Common Stock and 4,500,000 shares of Common Stock underlying the Series B
Preferred Stock then outstanding, to stockholders of record as of October 6,
2009.
 
 On June
15, 2009, the Board of Directors authorized a dividend on the outstanding Common
Stock of the Company to be paid in cash.  On July 15, 2009, the Company
paid a dividend of $454,252 ($0.05 per share) to stockholders of record as of
July 1, 2009.
 
 On 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
 
 For
periods ending prior to August 10, 2009, Highbury owned 65% of the membership
interests of Aston, and eight employees of Aston (the “Management Stockholders”)
owned 35% of the membership interests of Aston.  As of August 10, 2009,
Aston became 100% owned by Highbury.  See Note 12(b) for additional
information.
  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. Prior to August 10, 2009, Highbury owned 65% of Aston, and the
Management Stockholders owned 35% of Aston, so 18.2% and 9.8% of total revenues
net of sub-administrative fees were allocated to Highbury and the Management
Stockholders, respectively, during this period. Subsequent to August 10, 2009,
Highbury owned 100% of Aston, so 28.0% of total revenues net of
sub-administrative fees have been allocated to Highbury during this
period.  In all periods, the remaining revenues of Aston, which we
refer to as the operating allocation, were used to pay Aston’s operating
expenses, including salaries and bonuses of all employees of Aston (including
the Management Stockholders).
  Both
before and after August 10, 2009, Highbury’s contractual share of revenues has
had priority over the distributions to the Management Stockholders in the event
Aston’s actual operating expenses exceeded the operating allocation. As a
result, prior to August 10, 2009, excess expenses first reduced the portion of
the owners’ allocation allocated to the Management Stockholders until the
Management Stockholders’ allocation was eliminated, then Highbury’s allocation
was reduced. Any reduction in the distribution of revenues to be paid to
Highbury was required to be paid to Highbury out of any future excess operating
allocation and the portion of future owners’ allocation allocated to the
Management Stockholders, 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
Management Stockholders’ share of the owners’ allocation.  During the
period from April 1, 2009 through August 10, 2009, Aston’s operating expenses
were $546,818 less than the operating allocation.  This excess operating
allocation for the period from April 1, 2009 through August 10, 2009 was
allocated to the Management Stockholders’ share of the owners’ allocation to
partially offset the shortfall from the first quarter of 2009 and is reflected
as an increase in net income attributable to noncontrolling interest. 
Aston’s operating expenses in the nine months ended September 30, 2009 exceeded
the operating allocation by $57,614.  These excess expenses were funded by
a reduction in the Management Stockholders’ share of the owners’ allocation and
were reflected as a reduction in net income attributable to noncontrolling
interest.  In no other prior period, including the three and nine months
ended September 30, 2008, did Aston’s operating expenses exceed the operating
allocation.
  12
  Highbury
Financial Inc. and Subsidiary
 
 Notes
to Unaudited Condensed Consolidated Financial Statements
 
 12. 
Significant Events
 
 a. 
In July 2009, three of Highbury’s stockholders 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 response to the initiatives of
these stockholders, the Board of Directors formed a Special Committee consisting
entirely of 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 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 has incurred and may continue to 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 ended September 30, 2009, Highbury incurred
approximately $685,583 of expenses related to these matters.  These
expenses are included in operating expenses and include approximately $662,910
of professional fees (including but not limited to legal, accounting and
financial advisory fees), $15,142 of travel expenses and $7,531 of other
expenses.  Such expenses may continue to be incurred beyond the quarter
ended 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
December 31, 2009 and beyond.
 
 In
addition, one of Highbury’s stockholders has filed a preliminary proxy statement
in connection with the Company’s 2009 annual meeting which includes two
nonbinding stockholder proposals and nominates a candidate for election to the
Board of Directors.  As a result, we will incur fees and expenses in excess
of the fees and expenses associated with an uncontested proxy
solicitation.
  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 Preferred Stock of the Company, resulting in an
aggregate issuance of 1,000 shares of Series B Preferred Stock with a face value
of $22.5 million.  This Series B Preferred Stock carries a 4% dividend and
participates in any dividends paid to holders of Common Stock on an as-converted
basis.  Each share of Series B Preferred Stock is initially convertible
into 4,500 shares of Common Stock, reflecting an initial conversion price of
$5.00 per share.  In the quarter ended September 30, 2009, Highbury
incurred approximately $822,499 of one-time, non-recurring transaction expenses
related to these matters.  These expenses are included in operating
expenses and include approximately $803,551 of professional fees (including but
not limited to legal, accounting and financial advisory fees), $14,898 of travel
expenses and $4,050 of other expenses.
  The
Company has the right to redeem the Series B Preferred Stock, in whole but not
in part, in the event that the last sale price for the Common Stock of the
Company exceeds $8.50 per share for any 20 trading days in a 30-trading day
period at a redemption price equal to the face value plus any accrued but unpaid
dividends.  The Company may also redeem shares of Series B Preferred Stock
from a holder for a period of 120 days following the termination of such
holder’s employment with Aston at a redemption price ranging from $1.00 to fair
value, as defined, depending on the time and reason for such termination of
employment.  The Company also has the option to cause each holder of Series
B Preferred Stock to convert his shares into Common Stock immediately prior to a
merger by the Company with or into another entity or a sale of all or
substantially all of the assets of the Company and cause such holders to
participate in the sale event on the same terms and conditions as holders of
Common Stock.
  The
holders of Series B Preferred Stock may elect to convert the Series B Preferred
Stock into Common Stock under certain circumstances.  Holders of Series B
Preferred Stock may also require the Company to redeem their shares of Series B
Preferred Stock upon a change of control of the Company at a redemption price
per share equal to the greater of the face value of such preferred stock (plus
accrued and unpaid dividends) or fair value, as defined.  Since such a
change of control is not an event certain to occur, the Series B Preferred Stock
has 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.  The dividend was paid on August 25, 2009 to the stockholders of
record on August 11, 2009 (the "Record Date").  Each Right entitles the
registered holder to purchase from the Company one one-thousandth of a share of
Series A Junior Participating Preferred Stock, par value $0.0001 per share, of
the Company (the "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.
  13
  Highbury
Financial Inc. and Subsidiary
 
 Notes
to Unaudited Condensed Consolidated Financial Statements
 
 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.
  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.
  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.
  14
  Highbury
Financial Inc. and Subsidiary
 
 Notes
to Unaudited Condensed Consolidated Financial Statements
 
 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.
  15
  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 wholly owned 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 Aston
      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 additional
      investments in Aston, 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.
 
 Overview
  Highbury
is an investment management holding company.  Aston Asset Management LLC,
Highbury’s wholly owned subsidiary, or Aston, is an investment management firm
that is the investment adviser to the Aston Funds, a Delaware business trust,
and a variety of separately managed accounts.  Historically, Highbury has
pursued acquisition opportunities and sought to establish accretive partnerships
with high-quality investment management firms.  We are currently evaluating
strategic alternatives, and while we evaluate strategic alternatives, we will
not pursue acquisition opportunities other than add-on acquisitions for
Aston.  Aston intends to expand its assets under management with a
combination of internal growth, new product development and accretive
acquisitions.
  As of
September 30, 2009, we had approximately $6.2 billion of total assets under
management, compared to approximately $5.1 billion as of June 30, 2009 and
approximately $4.5 billion as of September 30, 2008. As of September 30, 2009,
Aston managed 24 no-load mutual funds, comprised of 23 equity funds and one
fixed income fund, with approximately $6.0 billion of mutual fund assets under
management.  Aston had $4.9 billion and $4.3 billion of mutual fund assets
under management as of June 30, 2009 and September 30, 2008, respectively. As of
September 30, 2009, 14 of the mutual funds carried an overall Morningstar
RatingTM of
three stars or better, including eight four-star funds. Of the 24 funds, ten are
relatively new and are not currently rated by Morningstar. The 23 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 September 30, 2009, Aston also managed
approximately $160 million of separate account assets, compared to approximately
$132 million as of June 30, 2009 and approximately $159 million as of September
30, 2008.
  16
 
 Business Combination. On
November 30, 2006, we acquired from ABN AMRO Asset Management Holdings, Inc.
(“ABN AMRO”) 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 ten 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 September 30, 2009, Aston opened 14 new
equity mutual funds. These funds are set forth in the table below.
 
 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 September 30, 2009, Aston closed or
merged nine mutual funds as a result of poor investment performance, portfolio
manager turnover or other reasons. Aston intends to manage its family of mutual
funds in response to client demands, and may open new funds or close existing
funds over time, as appropriate.
  In
addition, Aston may be able to develop new distribution channels
including:
  ·
              arrangements with banks and
      insurance companies which, like ABN AMRO, elect to divest their mutual
      fund operations but enter into agreements with Aston to service their
      customers; and
 
 ·
              wholesalers focused on the
      traditional retail broker
channel.
  Revenue Sharing Arrangement with
Aston Prior to August 10, 2009. From the consummation of the acquisition
through August 10, 2009, Highbury owned 65% of the membership interests of
Aston, and eight employees of Aston, or the Management Stockholders, owned 35%
of the membership interests of Aston.
  17
  
 Pursuant
to the limited liability company agreement in place during the period from the
consummation of the acquisition through August 10, 2009, 28% of the total
revenues of Aston net of sub-administrative fees, which we refer to as
the owners’ allocation, was allocated to the owners of Aston. The owners’
allocation was allocated among the members of Aston according to their relative
ownership interests. Between the consummation of the acquisition and August 10,
2009, 18.2% of total revenues net of sub-administrative fees was allocated to
Highbury and 9.8% of total revenues net of sub-administrative fees was allocated
to the Management Stockholders. The remaining revenues, which we refer to
as the operating allocation, of Aston were used to pay operating expenses
of Aston, including salaries and bonuses of all employees of Aston (including
the Management Stockholders).
  Highbury’s
contractual share of revenues had priority over the distributions to the
Management Stockholders in the event Aston’s actual operating expenses exceeded
the operating allocation. As a result, excess expenses first reduced the portion
of the owners’ allocation allocated to the Management Stockholders until the
Management Stockholders’ allocation was eliminated, then Highbury’s allocation
was reduced. Any reduction in the distribution of revenues to be paid to
Highbury was required to be paid to Highbury out of any future excess operating
allocation and the portion of future owners’ allocation allocated to the
Management Stockholders, with interest.  Aston’s operating expenses in the
period from January 1, 2009 through August 10, 2009 exceeded the operating
allocation by $57,614.  These excess expenses were funded by a reduction in
the Management Stockholders’ share of the owners’ allocation.
  Accretive Acquisition of Minority
Interest in Aston. On August 10, 2009, Highbury entered into an Exchange
Agreement (the “Aston Exchange Agreement”) with the holders (the “B Investors”)
of Series B limited liability company interests (the “Series B LLC Units”) of
Aston and the Management Stockholders each of whom owned interests in certain of
the B Investors.  Pursuant to the Exchange Agreement, the B Investors sold
all of their Series B LLC Units to Highbury in exchange for shares of Series B
Convertible Preferred Stock, par value $0.0001 per share, of Highbury (“Series B
Preferred Stock”).  As a result of the Aston Exchange Agreement, Aston
became a wholly owned subsidiary of Highbury.  A description of the terms
of the Aston Exchange Agreement can be found in Part II, Item 2 “Unregistered Sales of Equity
Securities and Use of Proceeds - Aston Exchange Agreement” included
elsewhere herein.  Highbury incurred $822,499 of one-time, non-recurring
transaction expenses related to this acquisition.  These expenses include
approximately $803,551 of professional fees (including but not limited to legal,
accounting and financial advisory fees), $14,898 of travel expenses and $4,050
of other expenses.
 
 In
connection with the Aston Exchange Agreement, the Company entered into a
management agreement with the Management Stockholders and Aston which delegates
certain powers to a management committee composed initially of certain
Management Stockholders to operate the business of Aston.  Pursuant to the
management agreement, the operating allocation of Aston continues to be 72% of
Aston’s total revenues net of sub-administrative fees and may be allocated by
Aston’s management committee to pay the operating expenses of Aston, including
salaries and bonuses.  In addition, the owner’s allocation continues to be
28% of Aston’s total revenues net of sub-administrative fees and is paid to
Highbury as the sole owner of the business.  Highbury’s contractual share
of revenues has priority over any payment of the operating allocation.  Any
reduction in revenues to be paid to Highbury as a result of operating expenses
exceeding the operating allocation is required to be paid to Highbury out of
future operating allocation before any compensation may be paid to the
Management Stockholders.
 
 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 September 30, 2009, Aston was reimbursing
14 mutual funds whose expenses exceeded the applicable expense cap.
 
 Relationships
with a limited number of clients account for a significant majority of the
revenue of Aston and, therefore, Highbury. Aston’s client, the Aston Funds,
which accounts for approximately 97% of our assets under management as of
September 30, 2009, is comprised of 24 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 24 funds,
the Aston/Montag & Caldwell Growth Fund, the Aston/Optimum Mid Cap Fund,
Aston/TAMRO Small Cap Fund and the Aston/River Road Small Cap Value Fund
contributed approximately 37%, 16%, 15% and 10% of the revenues of Aston,
respectively, in the month of September 2009.  In the month of September
2008, the Aston/Montag & Caldwell Growth Fund, the Aston/Optimum Mid Cap
Fund and Aston/TAMRO Small Cap Fund contributed approximately 33%, 18% and 13%
of the revenues of Aston, respectively.  These client concentrations leave
the Company 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.
  18
  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 level of intangible assets
      and the associated amortization expense resulting from our
      acquisitions;
 
 ·
              the level of expenses incurred
      for holding company operations;
and
 
 ·
              the level of taxation to which we
      are subject.
  In July
2009, three of our stockholders sent letters to our Board of Directors
requesting, among other things, changes to our management and the composition of
our Board of Directors.  In response to the initiatives of these
stockholders, in August 2009, our Board of Directors formed a Special Committee
consisting of, Hoyt Ammidon Jr., who chairs the Special Committee, Theodore M.
Leary Jr. and Aidan J. Riordan, each of whom is an independent director, to
explore and evaluate strategic alternatives aimed at enhancing value for all of
our stockholders. The Special Committee hired the investment banking firm of
Sandler O’Neill & Partners, L.P. and the law firm of Debevoise &
Plimpton LLP to provide financial advisory and legal services, respectively, to
the Special Committee.  We have incurred and may continue to 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
addition, one of our stockholders has filed a preliminary proxy statement in
connection with our 2009 annual meeting which includes two non-binding
stockholder proposals and nominates a candidate for election to our Board of
Directors.  As a result, we will incur fees and expenses in excess of the
fees and expenses associated with an uncontested proxy
solicitation.
 
 For the
quarter ended September 30, 2009, we incurred $685,583 of expenses related
to the Special Committee and the contested proxy solicitation in connection with
our 2009 annual meeting.  These expenses include approximately $662,910 of
professional fees (including but not limited to legal, accounting and financial
advisory fees), $15,142 of travel expenses and $7,531 of other expenses. 
Such expenses may continue to be incurred beyond the quarter ended September 30,
2009 in amounts which cannot presently be estimated, but which may continue to
be substantial.  These additional expenses have had a negative impact on
our results of operations during the quarter ended September 30, 2009 and may
have a negative impact on our results in future periods.
 
 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 of the total revenue, net of
      sub-administrative fees, earned by Aston. Between the consummation of the
      acquisition and August 10, 2009, Highbury received 18.2% of Aston’s total
      revenue, net of sub-administrative fees.  Subsequent to the
      consummation of the Aston Exchange Agreement, Highbury receives 28.0% of
      Aston’s total revenue, net of sub-administrative fees. In addition,
      Highbury earns interest income on its cash balances which we recognize as
      other income in the condensed consolidated financial
      statements.
  19
 
 ·
              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. In the period from January 1, 2009 through August 9, 2009, Aston’s
      operating expenses exceeded the operating allocation by $57,614. 
      These excess expenses were funded by a reduction in the Management
      Stockholders’ share of the owners’ allocation.  In the period from
      August 10, 2009 through September 30, 2009, Aston’s operating expenses,
      including compensation, equaled approximately 72% of the total revenue of
      Aston.  At the Highbury level, we incurred operating expenses in
      connection with our pursuit of accretive acquisitions, although as of
      August 2009 our Board of Directors has determined to cease pursuing
      acquisitions unrelated to Aston while we are pursuing strategic
      alternatives. 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, and in July 2009, withdrew
      all of its assets under administration from Aston.  Under the terms
      of the administration agreement, Fortis has continued and will continue to
      pay a monthly fee to Aston through December 8, 2009.  This fee from
      Fortis accounted for approximately 1% of our revenues for the three month
      period ended September 30,
2009.
 
 ·
              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 November 16, 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 nine months ended September 30, 2009, the compensation and
      related expenses of Highbury included base salaries for the executive
      officers and related payroll taxes.  Highbury did not pay
      compensation of any kind in the three and nine months ended September 30,
      2008.
  20
 
 ·
              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
audited financial statements and the related notes thereto. 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.
  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 owned 65% of Aston through August 10, 2009 and has owned 100% since
August 10, 2009. Highbury has had a contractual arrangement with Aston (prior to
August 10, 2009) and the Management Stockholders (since August 10, 2009) whereby
a percentage of revenue is allocated to fund Aston’s operating expenses
(referred to as the operating allocation).  The balance of the revenue
(referred to as the owners’ allocation) is allocable to Highbury and the other
members of Aston, with a priority to Highbury.  The portion of the income
of Aston allocated to owners other than Highbury is included in noncontrolling
interest in the Condensed Consolidated Statements of Income. 
Noncontrolling interest on the Condensed Consolidated Balance Sheets includes
the capital owned by the management members of Aston. All material intercompany
balances and transactions have been eliminated in consolidation.
  Investments.The Company
carries its investments at fair value based on quoted market prices in
accordance with the ASC on “Fair Value Measurements and
Disclosures”. The Company reflects interest paid and accrued on money
market mutual funds and U.S. Treasury bills in interest income and changes in
fair value of investments in investment income (loss).
  Goodwill and Intangible
Assets. The purchase price and the capitalized transaction costs incurred
in connection with the acquisition of the acquired business are allocated based
on the fair value of the assets acquired, which is primarily the acquired mutual
fund advisory contract. In determining the allocation of the purchase price to
the acquired mutual fund advisory contract, we have analyzed the present value
of the acquired business’ existing mutual fund advisory 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 ASC 350-30-35, because we expect both the contract and
the cash flows generated by the contract to continue indefinitely due to the
likelihood of continued renewal at little or no cost. Accordingly, we do not
amortize this intangible asset, but instead review this asset at least annually
for impairment. If the carrying amount of this intangible asset exceeds the fair
value, an impairment loss is recorded in an amount equal to that excess.
Additionally, each reporting period, we assess whether events or circumstances
have occurred which indicate that the indefinite life criteria are no longer
met. If the indefinite life criteria are no longer met, we will amortize the
intangible asset over its remaining useful life.
  21
 
 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.
 
 Revenue Recognition. Highbury
derives its operating revenues from Aston, of which it owned 65% through August
10, 2009 and has owned 100% since August 10, 2009. Highbury also earns interest
income on its cash balances. Aston earns investment advisory and administrative
fees for services provided to the Aston Funds and a limited number of separately
managed accounts. These fees are primarily based on predetermined percentages of
the market value of the assets under management and are billed in arrears for
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
  As of September 30, 2009, we
implemented the Financial Accounting Standards Board (“FASB”) Accounting
Standards Codification (the “Codification” or “ASC”). All of the content
included in the Codification is considered authoritative. The Codification is
not intended to amend GAAP, but codifies previous accounting literature. We
changed the referencing of authoritative accounting literature to conform to the
Codification.  The adoption of the Codification has not had an impact on
our consolidated financial statements.
 
 In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements — an amendment of Accounting Research Bulletin
No. 51” or ASC 810.  ASC 810 addresses the accounting and reporting
standards for ownership interests in subsidiaries held by parties other than the
parent, the amount of consolidated net income attributable to the parent and to
the noncontrolling interest, changes in a parent’s ownership interest, and the
valuation of retained noncontrolling equity investments when a subsidiary is
deconsolidated. ASC 810 also establishes disclosure requirements that clearly
identify and distinguish between the interests of the parent and the interests
of the noncontrolling owners. ASC 810 is effective for fiscal years beginning
after December 15, 2008. The Company adopted the provisions of ASC 810 in the
first quarter of 2009. As a result of the adoption, the Company has reported
noncontrolling interests as a component of equity in the unaudited 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 ASC 810. Other than the change in presentation of noncontrolling
interests, the adoption of ASC 810 had no impact on the condensed consolidated
financial statements.
 
 In May
2009, the FASB issued SFAS No. 165, “Subsequent Events” or ASC 855. ASC 855 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 adoption of ASC 855 did not
have a material impact on the Company’s financial condition or results of
operations.
  22
 
 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.
 
 Results
of Operations
 
 Three
months ended September 30, 2009 compared to three months ended September 30,
2008
 
 For the
three months ended September 30, 2009, the Company earned net income
attributable to Highbury Financial Inc. of $851,580 on total revenue
of $11,196,682, as compared to net income attributable to Highbury Financial
Inc. of $641,004 on total revenue of $9,595,927 for the three months ended
September 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
                            September 30, 2008Total Fees
                          
                          
                          Weighted
                            Average
                            Assets
                            Under
                            Management
                            ($M)
                          
                          
                          Weighted
                            Average Fee
                            Basis
                            (Annualized)Net
      advisory fees
                          
                          $
                          8,428,388
                          
                          
                          $
                          4,767
                          (1)
                          
                          
                          0.71
                          %Net
      administrative fees(2)
                          
                          
                          506,678
                          
                          
                          
                          7,570
                          (3)
                          
                          
                          0.03
                          %Money
      market service fees
                          
                          
                          138,320
                          
                          
                          
                          2,971
                          
                          
                          
                          0.02
                          %(4)$
                          9,073,386
                          
                          
                          
                          4,767
                          (5)
                          
                          
                          0.76
                          %(5)
  For the three months ended
                            September 30, 2009Total Fees
                          
                          
                          Weighted
                            Average
                            Assets
                            Under
                            Management
                            ($M)
                          
                          
                          Weighted
                            Average Fee
                            Basis
                            (Annualized)Net
      advisory fees
                          
                          $
                          10,297,885
                          
                          
                          $
                          5,644
                          (1)
                          
                          
                          0.73
                          %Net
      administrative fees(2)
                          
                          
                          373,134
                          
                          
                          
                          5,535
                          (3)
                          
                          
                          0.03
                          %Money
      market service fees
                          
                          
                          137,500
                          
                          
                          
                          30
                          
                          
                          
                          NM
                          (4)$
                          10,808,519
                          
                          
                          
                          5,644
                          (5)
                          
                          
                          0.77
                          %(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 $1,029,219 and $761,297 in the three
      months ended September 30, 2008 and 2009,
    respectively.
 
 (3)
              Aston provides administrative
      services to the Aston Funds and provided administrative services to six
      money market mutual funds managed by Fortis through July
      2009.
 
 (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 and withdrew all of its assets under administration in
      July 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
September 30, 2009, the Company had approximately $6.2 billion of total assets
under management, compared to approximately $5.1 billion as of June 30, 2009 and
approximately $4.5 billion as of September 30, 2008. As of September 30, 2009,
mutual fund assets under management were approximately $6.0 billion, compared to
approximately $4.9 billion as of June 30, 2009, an increase of approximately
22%, and approximately $4.3 billion as of September 30, 2008, an increase of
approximately 39%. This aggregate increase in mutual fund assets under
management of $1,104 million since June 30, 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 $765 million and (ii) net client inflows, which represent
aggregate contributions from new and existing clients less withdrawals, of
approximately $339 million, during the three months ended September 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 September 30, 2008, mutual fund assets under
management decreased $338 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 $488 million
and (ii) net client inflows of approximately $150 million.  During the
three months ended September 30, 2009, separate account assets under management
increased from $132 million to $160 million.
  The
Company generated total revenue during the three months ended September 30,
2009 of $11,196,682, as compared to $9,595,927 during the three months ended
September 30, 2008. This 17% increase in revenue was largely attributable to the
overall increase in weighted average assets under management from 2008 to 2009.
Weighted average assets under management, as presented above, increased from
approximately $4.8 billion in the third quarter of 2008 to approximately $5.6
billion in the third quarter of 2009, an increase of approximately 18%. The
Company’s overall weighted average fee basis increased from 0.76% for the three
months ended September 30, 2008 to 0.77% for the three months ended September
30, 2009 as a result of a proportionally greater allocation of assets under
management to mutual funds with higher fee rates. Net advisory fees increased
from $8,428,388 in the third quarter of 2008 to $10,297,885 for the same period
in 2009, primarily as a result of higher weighted average assets under
management. Gross administration fees decreased from $1,029,219 in the third
quarter of 2008 to $761,297 in the third quarter of 2009 as a result of the
declining balances in the money market mutual funds managed by Fortis and the
subsequent withdrawal of the assets. Net administration fees declined from
$506,678 in the third quarter of 2008 to $373,134 in the third quarter of 2009.
Aston also earned money market service fees from Fortis of $137,500 in the three
months ended September 30, 2009, down from $138,320 in the three months ended
September 30, 2008.
  Distribution
and sub-advisory costs increased from $4,395,372 for the three months ended
September 30, 2008 to $5,363,929 in the corresponding period in 2009. This 22%
increase is attributable to the increase in weighted average assets under
management from 2008 to 2009, as these expenses are directly related to the
value of assets under management.
 
 Compensation
and related expenses were $1,716,422 for the three months ended September 30,
2009 compared to $1,699,827 for the three months ended September 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 Management Stockholders’
share of the owners’ allocation.  During the period from April 1, 2009 to
August 10, 2009, Aston’s operating expenses were $546,818 less than the
operating allocation.  This excess operating allocation was allocated to
the Management Stockholders’ 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 period from January 1, 2009 through
August 10, 2009, there was no excess operating allocation available to pay as
compensation to the Aston management team for that period.  For the period
from August 10, 2009 through September 30, 2009, there was $401,425 of excess
operating allocation available as compensation to the Aston management
team.  Compensation and related expenses for the three months ended
September 30, 2009 also included $152,175 paid to Highbury’s executive
officers.  There were no corresponding payments made to Highbury’s
executive officers in the three months ended September 30, 2008.
  The
Company incurred $46,339 of depreciation expense relating to Aston’s fixed
assets in the third quarter of 2009, compared to $45,998 in the third quarter of
2008.
 
 Other
operating expenses increased from $1,183,440 for the three months ended
September 30, 2008 to $2,578,351 for the three months ended September 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 September 30, 2008 were $928,234, as compared to $908,324 during the three
months ended September 30, 2009.
 
 Highbury’s
direct operating expenses, including compensation and related expenses, for the
three months ended September 30, 2008 and 2009 were as follows:
 
 Three Months Ended,September 30,2008
                            
                            
                            2009Professional
      fees
                            
                            $
                            125,287
                            
                            
                            $
                            1,531,617Compensation
      and related expenses
                            
                            
                            -
                            
                            
                            
                            152,175Insurance
                            
                            
                            44,355
                            
                            
                            
                            34,794Administrative
      fees
                            
                            
                            30,000
                            
                            
                            
                            30,000Travel
      and entertainment
                            
                            
                            20,475
                            
                            
                            
                            41,813Other
      expenses
                            
                            
                            35,089
                            
                            
                            
                            31,803$
                            255,206
                            
                            
                            $
                            1,822,202
  24
  As
discussed above, we incurred $685,583 of expenses related to the Special
Committee and the contested proxy solicitation in connection with our 2009
annual meeting in the quarter ended September 30, 2009.  These expenses
include approximately $662,910 of professional fees (including but not limited
to legal, accounting and financial advisory fees), $15,142 of travel expenses
and $7,531 of other expenses.  Such expenses may continue to be incurred
beyond the quarter ended September 30, 2009 in amounts which cannot presently be
estimated, but which may continue to be substantial.  In addition, we
incurred $822,499 of one-time, non-recurring transaction expenses related to the
accretive acquisition of the balance of the equity interests in Aston from the
Management Stockholders in the quarter ended September 30, 2009.  These
expenses include approximately $803,551 of professional fees (including but not
limited to legal, accounting and financial advisory fees), $14,898 of travel
expenses and $4,050 of other expenses.  There were no similar costs
incurred in the three months ended September 30, 2008.
 
 Other
income consists primarily of earnings on cash and cash equivalent balances and
short-term investments in U.S. Treasury bills, Aston mutual funds and other
marketable securities. For the three months ended September 30, 2009, Highbury
earned interest income on its cash and cash equivalent balances of $5,007. The
Company also had investment income of $303,059 related to realized and
unrealized gains in other marketable securities. For the three months ended
September 30, 2008, Highbury earned $19,643 on its cash and cash equivalent
balances and had unrealized losses of $346,085 related to investments in Aston
mutual funds.
  For the
three months ended September 30, 2009, the Company recorded income before
provisions for income taxes of $1,799,707 compared to $1,944,848 for the same
period in 2008.
  The
following table outlines the Company’s income tax expenses for the three months
ended September 30, 2008 and 2009:
 
 Three Months Ended
                        September 30,2008
                      
                      
                      2009Current
                      
                      $
                      312,199
                      
                      
                      $
                      35,468Deferred -
      intangible related
                      
                      
                      233,263
                      
                      
                      
                      210,214Deferred
      – other
                      
                      
                      (132,722
                      )
                      
                      
                      (38,262
                      )Totals
                      
                      $
                      412,740
                      
                      
                      $
                      207,420
 
 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 $851,580 in the
three months ended September 30, 2009, compared to $641,004 during the three
months ended September 30, 2008.
  Nine
months ended September 30, 2009 compared to nine months ended September 30,
2008
 
 For the
nine months ended September 30, 2009, the Company earned net income attributable
to Highbury Financial Inc. of $1,967,392 on total revenue of $27,456,743, as
compared to net income attributable to Highbury Financial Inc. of $2,166,164 on
total revenue of $28,555,443 for the nine months ended September 30,
2008.
 
 As of
September 30, 2009, the Company had approximately $6.2 billion of total assets
under management, compared to approximately $3.5 billion as of December 31, 2008
and approximately $4.5 billion as of September 30, 2008. As of September 30,
2009, mutual fund assets under management were approximately $6.0 billion,
compared to approximately $3.4 billion as of December 31, 2008, an increase of
approximately 77%, and approximately $4.3 billion as of September 30, 2008, an
increase of approximately 39%. This aggregate increase in mutual fund assets
under management of $2,626 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 $1,182 million and (ii) net client inflows, which
represent aggregate contributions from new and existing clients less
withdrawals, of approximately $1,444 million, during the nine months ended
September 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 nine months ended September 30, 2008, mutual fund
assets under management decreased $651 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 $790 million and (ii) net client inflows of approximately $139
million.  During the nine months ended September 30, 2009, separate account
assets under management increased from $115 million to $160
million.
  25
  The
Company generated total revenue during the nine months ended September 30, 2009
of $27,456,743, as compared to $28,555,443 during the nine months ended
September 30, 2008. This 4% decrease in revenue was largely attributable to the
overall decline in weighted average assets under management from 2008 to 2009.
Specifically, assets under management declined and reached its lowest level in
the first quarter of 2009 before increasing substantially to the level at
September 30, 2009.  Net advisory fees decreased from $25,008,352 in the
first nine months of 2008 to $24,726,072 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 $3,126,564 in the first nine
months of 2008 to $2,318,171 in the first nine months of 2009. Net
administration fees declined from $1,533,951 in the first nine months of 2008 to
$1,122,941 in the first nine months of 2009. Aston also earned money market
service fees from Fortis of $412,500 in the nine months ended September 30,
2009, down from $420,527 in the nine months ended September 30,
2008.
  Distribution
and sub-advisory costs declined from $13,182,141 for the nine months ended
September 30, 2008 to $12,975,323 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 $5,000,412 for the nine months ended September 30,
2009 compared to $4,846,431 for the nine months ended September 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 Management Stockholders’
share of the owners’ allocation.  During the period from April 1, 2009 to
August 10, 2009, Aston’s operating expenses were $546,818 less than the
operating allocation.  This excess operating allocation was allocated to
the Management Stockholders’ 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 period from January 1, 2009 through
August 10, 2009, there was no excess operating allocation available to pay as
compensation to the Aston management team for that period.  For the period
from August 10, 2009 through September 30, 2009, there was $401,425 of excess
operating allocation available as compensation to the Aston management
team.  In addition, compensation and related expenses for the nine months
ended September 30, 2009 included $456,525 paid to Highbury’s executive
officers.  There were no corresponding payments made to Highbury’s
executive officers in the nine months ended September 30, 2008.
  The
Company incurred $138,181 of depreciation expense relating to Aston’s fixed
assets in the first nine months of 2009, compared to $141,054 in the first nine
months of 2008.
  Other
operating expenses increased from $3,845,466 for the nine months ended September
30, 2008 to $5,110,205 for the nine months ended September 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 nine months ended
September 30, 2008 were $2,885,342, as compared to $2,521,837 during the nine
months ended September 30, 2009.
 
 Highbury’s
direct operating expenses, including compensation and related expenses, for the
nine months ended September 30, 2008 and 2009 were as follows:
 
 Nine Months Ended,September 30,2008
                        
                        
                        2009Professional
      fees
                        
                        $
                        559,575
                        
                        
                        $
                        2,161,841Compensation
      and related expenses
                        
                        
                        -
                        
                        
                        
                        456,525Insurance
                        
                        
                        155,970
                        
                        
                        
                        113,367Administrative
      fees
                        
                        
                        90,000
                        
                        
                        
                        90,000Travel
      and entertainment
                        
                        
                        64,719
                        
                        
                        
                        133,934Other
      expenses
                        
                        
                        89,860
                        
                        
                        
                        89,226$
                        960,124
                        
                        
                        $
                        3,044,893
  26
 
 As
discussed above, we incurred $685,583 of expenses related to the Special
Committee and the contested proxy solicitation in connection with our 2009
annual meeting during the nine months ended September 30, 2009.  These
expenses include approximately $662,910 of professional fees (including but not
limited to legal, accounting and financial advisory fees), $15,142 of travel
expenses and $7,531 of other expenses.  Such expenses may continue to be
incurred beyond the quarter ended September 30, 2009 in amounts which cannot
presently be estimated, but which may continue to be substantial.  In
addition, we incurred $822,499 one-time, non-recurring transaction of expenses
related to the accretive acquisition of the balance of the equity interests in
Aston from the Management Stockholders during the nine months ended September
30, 2009.  These expenses include approximately $803,551 of professional
fees (including but not limited to legal, accounting and financial advisory
fees), $14,898 of travel expenses and $4,050 of other expenses.  There were
no similar costs incurred in the nine months ended September 30,
2008.
 
 Other
income consists primarily of earnings on cash and cash equivalent balances and
short-term investments in U.S. Treasury bills, Aston mutual funds and other
marketable securities. For the nine months ended September 30, 2009, Highbury
earned interest income on its cash and cash equivalent balances of $24,255. The
Company also had investment income of $443,382 including realized losses of
$46,077 related to investments in Aston mutual funds and realized and unrealized
gains of $489,459 related to investments in other marketable securities. For the
nine months ended September 30, 2008, Highbury earned $90,934 on its cash and
cash equivalent balances and had unrealized losses of $497,946 related to
investments in Aston mutual funds.
 
 For the
nine months ended September 30, 2009, the Company recorded income before
provisions for income taxes of $4,700,259. For the nine months ended September
30, 2008, the Company recorded income before provisions for income taxes of
$6,133,339.
  The
following table outlines the Company’s income tax expenses for the nine months
ended September 30, 2008 and 2009:
 
 Nine Months Ended
                        September 30,2008
                      
                      
                      2009Current
                      
                      $
                      784,593
                      
                      
                      $
                      77,836Deferred -
      intangible related
                      
                      
                      699,788
                      
                      
                      
                      630,643Deferred
      – other
                      
                      
                      (166,248
                      )
                      
                      
                      125,163Total
                      
                      $
                      1,318,133
                      
                      
                      $
                      833,642
 
 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 of $1,967,392 in the nine months ended September 30, 2009,
compared to $2,166,164 during the nine months ended September 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.
 
 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.
  27
 
 Three Months Ended
                              September 30,
                            
                            
                            Nine Months Ended
                              September 30,2008
                            
                            
                            2009
                            
                            
                            2008
                            
                            
                            2009Net
      Income attributable to Highbury Financial Inc.
                            
                            $
                            641,004
                            
                            
                            $
                            851,580
                            
                            
                            $
                            2,166,164
                            
                            
                            $
                            1,967,392Intangible
      amortization
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —Intangible-related
      deferred taxes
                            
                            
                            233,263
                            
                            
                            
                            210,215
                            
                            
                            
                            699,788
                            
                            
                            
                            630,643Affiliate
      depreciation
                            
                            
                            45,998
                            
                            
                            
                            46,339
                            
                            
                            
                            141,054
                            
                            
                            
                            138,181Other
      non-cash expenses
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —Cash
      Net Income attributable to Highbury Financial Inc.
                            
                            $
                            920,265
                            
                            
                            $
                            1,108,134
                            
                            
                            $
                            3,007,006
                            
                            
                            $
                            2,736,216Preferred
      dividends
                            
                            
                            —
                            
                            
                            
                            (127,174
                            )
                            
                            
                            —
                            
                            
                            
                            (127,174
                            )Cash
      Net Income attributable to common stockholders
                            
                            $
                            920,265
                            
                            
                            $
                            980,960
                            
                            
                            $
                            3,007,006
                            
                            
                            $
                            2,609,042
  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. 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
September 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. 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
related to Aston through the use of debt financing because of the reduced
availability of debt at acceptable 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 limit our ability to repay our
borrowings, including any debt issued to finance an acquisition related to
Aston. In addition, our ability to make accretive acquisitions related to Aston
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 related to Aston. The inability to complete accretive acquisitions
related to Aston may negatively impact our growth, results of operations or
financial condition.
 
 As of
September 30, 2009, the Company had $23,871,418 of cash and equivalents,
$3,957,200 of investments and $3,932,153 of accounts receivable. A significant
portion of the increase in the Company’s cash and equivalents from June 30, 2009
is attributable to the $14,389,485 of proceeds received by the Company from the
exercise of 2,877,897 of the Company’s warrants in September 2009.  The
accounts receivable are primarily related to the investment advisory fees,
administrative fees and money market service fees earned by Aston in September
2009. Aston receives its revenues generally within the first week of the month
following the month in which they are earned. At September 30, 2009, the Company
had accounts payable and accrued expenses of $3,966,391 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
$329,969 of distributions payable to the Management Stockholders, which were
subsequently paid in October 2009. The Company also had dividends payable of
$25,551,877 which were subsequently paid on October 7, 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 related to Aston, pay
dividends, service debt, if any, or repurchase its securities, if
appropriate.
  28
 
 On July
15, 2009, Highbury paid a dividend of $454,252 ($0.05 per share) to stockholders
of record on July 1, 2009.
 
 In
addition, on October 7, 2009 Highbury paid (i) a special dividend of $29,308,866
($1.50 per share) and (ii) a dividend of $976,962 ($0.05 per share), in each
case to stockholders of record on October 6, 2009.  As of September 30,
2009, the Company had 11,985,082 shares of Common Stock and 1,000 shares of
Series B Preferred Stock outstanding.  The Series B Preferred Stock is
convertible into 4,500,000 shares of Common Stock and eligible to participate in
any dividends paid to holders of Common Stock on an as-converted basis.  As
such, the Company accrued dividends payable as of September 30, 2009 of
$25,551,877.  Between October 1, 2009 and October 6, 2009, holders of
Highbury’s warrants exercised an additional 3,054,162 warrants resulting in the
issuance of 3,054,162 additional shares of Common Stock outstanding as of the
record date for the dividend.  Therefore the dividend payment on October 7,
2009 was based on the 15,039,244 shares of Common Stock and 4,500,000 shares of
Common Stock underlying the Series B Preferred Stock outstanding as of October
6, 2009.
  Management
believes our existing liquid assets, together with the expected continuing cash
flow from operations, our borrowing capacity under our current credit facility
and our ability to issue debt or equity securities will be sufficient to meet
our present and reasonably foreseeable operating cash needs and future
commitments over the next 12 months.
  Cash Flow from Operating
Activities. Cash flow from operations 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 September 30, 2009, the Company received $1,968,028 of net cash
flow from its operating activities. In addition to net income of $851,580, the
Company’s cash flow increased by $171,952 due to deferred taxes related
primarily to the amortization of goodwill and intangible assets for income tax
purposes, by $740,707 due to the net income attributable to the noncontrolling
interest holders of Aston and by $887,468 due to an increase in accounts payable
and accrued expenses.  Cash flow decreased by $480,884 due to an increase
in accounts receivable.  For the nine months ended September 30, 2009, the
Company received $4,190,805 of net cash flow from its operating activities. In
addition to net income of $1,967,392, the Company’s cash flow increased by
$755,806 due to deferred taxes related primarily to the amortization of goodwill
and intangible assets for income tax purposes, by $1,899,225 due to the net
income attributable to the noncontrolling interest holders of Aston and by
$889,707 due to an increase in accounts payable and accrued expenses. Cash flow
decreased by $1,483,581 due to an increase in accounts receivable.
 
 For the
three months ended September 30, 2008, the Company received $2,658,460 of net
cash flow from its operating activities. In addition to net income of $641,004,
the Company’s cash flow was increased by $99,997 relating to deferred taxes
related primarily to the amortization of goodwill and intangible assets for
income tax purposes and by $891,104 relating to the Company’s minority interest
in its affiliate. Cash flow was further increased by $657,366 relating to an
increase in accounts payable and accrued expenses.  For the nine months
ended September 30, 2008, the Company received $6,191,431 of net cash flow from
its operating activities. In addition to net income of $2,166,164, the Company’s
cash flow was increased by $533,540 relating to deferred taxes related primarily
to the amortization of goodwill and intangible assets for income tax purposes
and by $2,649,042 relating to the Company’s minority interest in its affiliate.
Cash flow was further increased by $49,186 relating to an increase 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 third quarter of 2009, Highbury sold certain marketable
securities generating $3,881,819 and purchased other marketable securities for
$3,888,759.  In the three and nine months ended September 30, 2009,
Highbury made $13,732 and $14,576 of capital expenditures, respectively. 
Investing activities used $20,672 of cash flow in the three months ended
September 30, 2009 and provided $658,159 of cash flow in the nine months ended
September 30, 2009.
 
 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. In
the third quarter of 2008, Highbury liquidated its investment in the Aston/New
Century Absolute Return ETF Fund generating proceeds of $603,960.
 
 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
September 30, 2009, the Company distributed $2,312,885 to Aston’s noncontrolling
interest holders and paid a dividend of $454,252.  The Company also
repurchased 2,804,200 warrants for $1,402,100.  During the nine months
ended September 30, 2009, the Company distributed $3,070,143 to Aston’s
noncontrolling interest holders and paid dividends of $909,407.  The
Company also repurchased 33,705 shares of Common Stock for $83,725 and 3,221,700
warrants for $1,548,225 during the period.  In September 2009, holders of
the Company’s warrants exercised 2,877,897 warrants generating proceeds to the
Company of $14,389,485.  Cash flow provided by in financing
activities was $10,220,250 in the three months ended September 30, 2009
and $8,777,985 in the nine months ended September 30,
2009.
  29
  Additionally,
between October 1, 2009 and November 16, 2009, holders of Highbury’s warrants
exercised 3,054,162 warrants generating proceeds to the Company of
$15,270,810.
 
 The
Company distributed $914,637 and $2,723,439 to Aston’s minority interest holders
during the three and nine months ended September 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 of Common Stock for
$1,735,611.  Cash flow from financing activities used $914,637 in the three
months ended September 30, 2008 and used $6,282,133 in the nine months ended
September 30, 2008.
  Credit
Facility
  On
October 1, 2009, we entered into a Third Amendment to our credit agreement with
City National Bank. The credit agreement, as amended, expires on September 30,
2010 and provides for a revolving line of credit of up to $12.0 million. The
credit agreement provides for a maximum total leverage ratio (including debt
from all sources) of 5.0 times Adjusted EBITDA, although borrowings under the
credit agreement are limited to 2.0 times Adjusted EBITDA, and incorporates a
minimum fixed charge coverage ratio of 1.25x and a minimum net worth of $20
million. The credit facility may be used for working capital, general corporate
purposes and repurchases of our outstanding securities, if
appropriate.
  Borrowings
under our credit facility will bear interest, at our option, at (i) for a LIBOR
loan, the greater of (w) 3.50% and (x) the LIBOR interest rate plus 2.75% per
year or (ii) for a prime rate loan, the greater of (y) 3.50% and (z) the
fluctuating prime rate plus 0.50% per year.  In addition, we will be
required to pay annually a fee of one quarter of one percent (0.25%) on the
average daily balance of the unused portion of the credit facility. We are
required to make interest payments monthly for any prime rate borrowings. For
any LIBOR borrowings, interest payments are required to be made at the end of
any LIBOR contract or quarterly, whichever is sooner. Any outstanding principal
is due at maturity on September 30, 2010. For so long as certain events of
default continue, upon notice by City National Bank, the interest rate on any
outstanding loans will increase by three percent (3%). As of September 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 September 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.
 
 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
                              September 30,
                            
                            
                            Nine Months Ended
                              September 30,2008
                            
                            
                            2009
                            
                            
                            2008
                            
                            
                            2009Net
      Income attributable to Highbury Financial Inc.
                            
                            $
                            641,004
                            
                            
                            $
                            851,580
                            
                            
                            $
                            2,166,164
                            
                            
                            $
                            1,967,392Provision
      for income taxes
                            
                            
                            412,740
                            
                            
                            
                            207,420
                            
                            
                            
                            1,318,133
                            
                            
                            
                            833,642Interest
      expense
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —Intangible
      amortization
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —Depreciation
      and other amortization
                            
                            
                            45,998
                            
                            
                            
                            46,339
                            
                            
                            
                            141,054
                            
                            
                            
                            138,181Other
      non-cash expenses
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —Adjusted
      EBITDA
                            
                            $
                            1,099,742
                            
                            
                            $
                            1,105,339
                            
                            
                            $
                            3,625,351
                            
                            
                            $
                            2,939,215
  30
 
 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 ASC 815-10-15-74 and are
accordingly not accounted for as derivatives for purposes of ASC 815, but
instead are accounted for as equity.
 
 Impact
of Inflation
  Our
revenue is directly linked to the total assets under management within the 24
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 nine months ended September 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
September 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 the Securities and
Exchange Commission’s rules and forms.
 
 During
the quarter ended September 30, 2009, there has been no change in our internal
control over financial reporting that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
 
 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, one of our stockholders has filed a
preliminary proxy statement in connection with our 2009 annual meeting which
includes two non-binding stockholder proposals and nominates a candidate for
election to our Board of Directors.  If this stockholder continues to
pursue a proxy contest 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, the employees of
Aston, the board of trustees of the Aston Funds and the persons invested in the
Aston Funds.
  31
 
 The
agreed-upon expense allocation under the management agreement with Aston and the
Management Stockholders may not be large enough to pay for all of Aston’s
operating expenses.
 
 In
connection with the Aston Exchange Agreement, Highbury entered into a management
agreement with each of the Management Stockholders and Aston which delegates
certain powers to a management committee composed initially of Management
Stockholders to operate the business of Aston. Pursuant to the management
agreement, 72% of the revenues of Aston are to be allocated by a management
committee for use by management of Aston to pay the operating expenses of Aston,
including salaries and bonuses. The remaining 28% of revenues of Aston is paid
to Highbury as the owner of the business.  The management agreement may not
properly anticipate or reflect possible changes in Aston’s revenue and expense
base, and the agreed-upon expense allocation may not be large enough to pay for
all of Aston’s operating expenses. We may elect to defer the receipt of our
share of Aston’s revenue to permit Aston to fund such operating expenses, or we
may restructure our relationship with Aston with the aim of maximizing the
long-term benefits to us. We cannot be certain, however, that any such deferral
or restructured relationship would be of any greater benefit to us. Such a
deferral or restructured relationship might have an adverse effect on our
near-term or long-term profitability and financial condition.
 
 The
failure to receive regular distributions from Aston will adversely affect us. In
addition, our holding company structure results in substantial structural
subordination that may affect our ability to make payments on our
obligations.
 
 Because
we are a holding company, we receive substantially all of our cash from
distributions made to us by Aston. Aston’s payment of distributions to us may be
subject to claims by Aston’s creditors and to limitations applicable to Aston
under federal and state laws, including securities and bankruptcy laws.
Additionally, Aston may default on some or all of the distributions that are
payable to us. As a result, we cannot guarantee we will always receive these
distributions from Aston. The failure to receive the distributions to which we
are entitled under the management agreement with Aston and the Management
Stockholders would adversely affect us, and may affect our ability to make
payments on our obligations.
 
 Our right
to receive any assets of Aston upon its liquidation or reorganization, and thus
the right of our stockholders to participate in those assets, typically would be
subordinated to the claims of Aston’s creditors. In addition, even if we were a
creditor of Aston, our rights as a creditor would be subordinated to any
security interest and indebtedness of Aston that is senior to us.
 
 Aston’s
autonomy limits our ability to alter its day-to-day activities, and we may be
held responsible for liabilities it incurs.
 
 Although
the management agreement with the Management Stockholders and Aston gives us the
authority to control or give our consent with respect to Aston’s business
activities, we generally are not directly involved in managing its day-to-day
activities, including satisfaction of the contractual terms of the advisory,
sub-advisory and other contracts, product development, client relationships,
compensation programs and compliance activities. As a consequence, our financial
condition and results of operations may be adversely affected by problems
stemming from the day-to-day operations of Aston.
 
 In
addition, we may be held liable in some circumstances as a control person for
the acts of Aston or its employees. For example, if Highbury exercises or
refuses to exercise its approval right as the manager member to settle potential
litigation and does not use due care in exercising this authority or Aston
issues securities in violation of laws, Highbury may be exposed to liability
related to Aston’s actions. While Highbury maintains directors’ and officers’
insurance and Aston maintains errors and omissions and general liability
insurance in amounts believed to be adequate to cover certain potential
liabilities, we may have claims that exceed the limits of available insurance
coverage. Furthermore, insurers may not remain solvent, meet their obligations
to provide coverage, or coverage may not continue to be available with
sufficient limits and at a reasonable cost. A judgment against us or Aston in
excess of available insurance coverage could have a material adverse effect on
us.
 
 Our
outstanding warrants may be exercised, and our outstanding Series B Preferred
Stock may be converted into common stock, in the future, which would increase
the number of shares eligible for future resale in the public market and result
in dilution to our stockholders. This might have an adverse effect on the market
price of the common stock.
 
 Outstanding
redeemable warrants, each to purchase one share of our common stock, to purchase
in the aggregate 15,820,000 shares of common stock became exercisable on January
25, 2007. As of November 16, 2009, 5,932,059 of the warrants have been exercised
and 3,832,056 warrants remain outstanding.  The remaining outstanding
warrants are exercisable on or before January 25, 2010.
  32
 
 As of
November 16, 2009, 1,000 shares of our Series B Preferred Stock were
outstanding.  Each outstanding share of Series B Preferred Stock is
convertible into 4,500 shares of common stock, or 4,500,000 shares of common
stock in the aggregate for the 1,000 shares of outstanding Series B Preferred
Stock, subject to customary anti-dilution adjustments.  Each share of
Series B Preferred Stock is initially convertible into 4,500 shares of the
common stock upon certain events described below, which reflects an initial
conversion price of $5.00, subject to customary anti-dilution
adjustments.
 
 The
holders of Series B Preferred Stock may elect to convert the Series B Preferred
Stock into common stock (i) in the event that the last sale price for our common
stock exceeds $8.50 per share for any 20 trading days in a 30-trading day period
and we elect to redeem the Series B Preferred Stock, (ii) upon our liquidation,
including a sale of substantially all of our assets, (iii) a change of control
of us, (iv) upon the termination or other relinquishment of asset management
contracts, in a single transaction or series of related transactions, which
contracts represented more than 50% of Aston’s aggregate revenues for the 12
month period preceding such transaction or series of related transactions and
(v) upon the termination of employment of such holder of Series B Preferred
Stock as a result of death, permanent incapacity, termination without cause or
retirement.
 
 In
addition, during each Applicable Period (as defined below), each holder of
Series B Preferred Stock (collectively with its permitted transferees) has the
right, in its, his or her sole discretion, to convert up to 10% of the aggregate
number of shares of Series B Preferred Stock initially granted to such person
under the Aston Exchange Agreement into common stock.  However, the
aggregate amount of Series B Preferred Stock converted by any holder
(collectively with its permitted transferees) pursuant to the Optional Limited
Conversion (as defined below) may not exceed 50% of the aggregate number of
shares of Series B Preferred Stock initially issued to such person in the
exchange transaction.  In addition, the aggregate number of shares of
Series B Preferred Stock converted by all holders of Series B Preferred Stock
during any Applicable Period may not exceed 5% of the aggregate number of shares
of Series B Preferred initially issued pursuant to the Aston Exchange
Agreement.  If dividends are not paid for four consecutive quarters, the
Series B Preferred Stock shall be immediately convertible into common stock at
the option of the holder at the conversion ratio.  We have the option to
cause each holder of Series B Preferred Stock to convert its, his or her shares
into common stock immediately prior to merger by us with or into another entity
or a sale of all or substantially all of our assets and cause such holders to
participate in the sale event on the same terms and conditions as holders of
common stock.
 
 To the
extent warrants are exercised, additional shares of our common stock will be
issued, which will result in dilution to our stockholders and increase the
number of shares eligible for resale in the public market.  To the extent
shares of Series B Preferred Stock are converted, additional shares of our
common stock will be issued, which may result in dilution to our stockholders,
and may increase the number of shares eligible for resale in the public market
if such shares of common stock are registered or sold pursuant to an exemption
from registration under the Securities Act. Sales of substantial numbers of such
shares in the public market could adversely affect the market price of our
shares.
 
 If
stockholders to whom we have granted registration rights exercise their
registration rights or sell their securities, it may have an adverse effect on
the market price of our common stock.
 
 Our
stockholders who acquired their shares prior to our initial public offering, or
our initial stockholders, are entitled to make up to two demands that we
register the resale of their 1,725,000 shares of common stock owned prior to our
initial public offering. The holders of the majority of these shares may elect
to exercise these registration rights.  Holders may also sell all or a
portion of such shares pursuant to Rule 144 under the Securities Act. In
addition, our initial stockholders hold 500,001 shares (which includes 333,334
shares issued upon the exercise of warrants) purchased in a private placement
contemporaneously with our initial public offering that are now eligible for
registration. The holders of the majority of these shares may make up to two
demands that we register the resale of their 500,001 shares.  The
500,001 shares (which includes 333,334 shares issued upon the exercise of
warrants) purchased in the private placement contemporaneously with the initial
public offering are also be eligible for resale pursuant to Rule 144 under the
Securities Act. In addition, our initial stockholders have certain “piggy-back”
registration rights with respect to the 1,725,000 shares of common stock owned
by them prior to our initial public offering and the 500,001 (which includes
333,334 shares issued upon the exercise of warrants) shares purchased by
them in a private placement contemporaneously with our initial public
offering.  If all these shares are registered, there will be an additional
2,225,001 shares of common stock eligible for trading in the public
market.
 
 The
holders of our Series B Preferred Stock have registration rights with respect to
the shares of common stock issuable upon conversion of the Series B Preferred
Stock.  The holders of a majority of the shares issuable upon conversion of
the Series B Preferred Stock are entitled to make up to three demands that we
register the resale of the shares of common stock issuable upon the conversion
of shares of Series B Preferred Stock, but such a demand may be made only after
the shares of Series B Preferred Stock have been converted into common
stock.  Each outstanding share of Series B Preferred Stock is convertible
into 4,500 shares of our common stock, or 4,500,000 shares of common stock in
the aggregate for the 1,000 shares of outstanding Series B Preferred Stock,
subject to customary anti-dilution adjustments.  In addition, the holders
of our Series B Preferred Stock have certain “piggy-back” registration rights
with respect to the shares of common stock issuable upon conversion of our
Series B Preferred Stock.
  33
 
 The
presence of additional shares of common stock eligible for trading in the public
market as a result of the registration rights described above may have an
adverse effect on the market price of our common stock.
 
 Future
sales of our common stock may depress the price of our common
stock.
 
 As of
November 16, 2009, there were 15,039,244 shares of our common stock and
3,832,056 warrants, each to purchase one share of our common stock,
outstanding.  If all 3,832,056 warrants are exercised, 3,832,056 additional
shares of our common stock may be issued.   In addition, as of
November 16, 2009, there were 1,000 shares of our Series B Preferred Stock
outstanding.  Each share of Series B Preferred Stock is convertible into
4,500 shares of our common stock, upon the occurrence of certain events as
describe above.  Sales of a substantial number of these shares in the
public market could decrease the market price of our common stock. In addition,
the perception that such sales might occur may cause the market price of our
common stock to decline. In addition, future issuances or sales of our common
stock, other than as a result of the exercise of warrants or the conversion of
shares of Series B Preferred Stock, could have an adverse effect on the market
price of our common stock.
 
 Anti-takeover
defense provisions in our Restated Certificate of Incorporation and Amended and
Restated By-laws, and our Rights Agreement, may deter potential acquirers and
depress the price of our common stock.
 
 Because
we are a Delaware corporation, the anti-takeover provisions of Delaware law
could make it more difficult for a third party to acquire control of us, even if
the change in control would be beneficial to stockholders. We are subject to the
provisions of Section 203 of the Delaware General Corporation Law, or the DGCL,
which prohibits us from engaging in certain business combinations, unless the
business combination is approved in a prescribed manner. In addition, our
Restated Certificate of Incorporation and Amended and Restated bylaws contain
certain provisions that may make a third-party acquisition of us difficult,
including (i) our Board of Directors is classified, (ii) our Board of Directors
may issue preferred stock with such voting power, designations, preferences or
other rights and such qualifications, limitations and restrictions as it may
choose and as may be permitted by the DGCL, (iii) advance notice provisions for
the nomination of directors and the proposal of other matters to be considered
at the annual meeting of stockholders, (iv) our stockholders may not call a
special meeting of stockholders, and (v) vacancies in our Board of Directors may
be filled only by our Board of Directors.
 
 On August
10, 2009, our Board of Directors declared a dividend of one preferred share
purchase right, each a Right, for each outstanding share of our common
stock.  In connection with the issuance of the Rights, we entered into a
Rights Agreement which describes and sets forth the terms of the
Rights.
 
 Section
203 of the DGCL, the provisions of our Restated Certificate of Incorporation and
Amended and Restated By-laws and the outstanding Rights may deter potential
acquirers or investors, discourage certain types of transactions in which our
stockholders might otherwise receive a premium for their shares over the then
current market price, and limit the ability of our stockholders to approve
transactions that they think may be in their best interests.
 
 Our
executive officers and directors and their respective affiliates own a large
percentage of our common stock and could limit stockholders’ influence on
corporate decisions.
 
 As of
November 16, 2009, our executive officers and directors and their respective
affiliates own, in the aggregate, shares of common stock representing
approximately 22.5% of the voting power of our outstanding common stock. 
In addition, the holders of our Series B Preferred Stock, which are all
affiliates of and controlled by employees of Aston, including Stuart D. Bilton
and Kenneth C. Anderson who are two of our directors, are entitled to (i) elect
25% of our Board of Directors voting separately as a class and (ii) vote on
certain matters including a merger or consolidation of us with or into another
entity as a result of which all of our common stock is converted into or
exchanged for the right to receive cash, securities or other property or is
cancelled, a sale of all or substantially all of our assets, our dissolution or
an amendment to our Restated Certificate of Incorporation.  As of November
16, 2009, with respect a matter that the holders of the Series B Preferred Stock
have the right to vote on, our executive officers and directors and their
respective affiliates own, in the aggregate, shares of common stock representing
approximately 36.8% of the voting power of our outstanding common
stock.
 
 Should
some of these stockholders act together, they would be able to exert influence
on all matters requiring approval by our stockholders, including mergers, sales
of assets, and other significant corporate transactions. The interests of these
stockholders may not always coincide with our corporate interests or the
interests of other stockholders, and they may act in a manner with which you may
not agree or that may not be in the best interests of our other
stockholders.
 
 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.
  34
 
 ITEM
2.  Unregistered Sales of Equity Securities and Use of
Proceeds.
 
 Unregistered
Sales of Equity Securities
 
 Aston
Exchange Agreement
 
 On August
10, 2009, Highbury entered into the Aston Exchange Agreement with the B
Investors and the Management Stockholders.  Pursuant to the Aston Exchange
Agreement, the B Investors sold all of their Series B LLC Units to Highbury in
exchange for shares of Series B Preferred Stock of Highbury.  As a result
of the transaction, Aston became a wholly owned subsidiary of
Highbury.
 
 Pursuant
to the terms of the Aston Exchange Agreement, each holder of Series B LLC Units
received in exchange for each Series B LLC Unit, 2.8571 shares of Series B
Preferred Stock which resulted in an aggregate issuance of 1,000 shares of
Series B Preferred Stock with a face value of $22.5 million.  The issuance
of the Series B Preferred Stock pursuant to the Aston Exchange Agreement was
made pursuant to a transaction exempt from registration under Rule 506 of the
Securities Act.
 
 Each
share of Series B Preferred Stock is initially convertible into 4,500 shares of
the common stock upon certain events described below, which reflects an initial
conversion price of $5.00, subject to customary anti-dilution adjustments. 
The holders of Series B Preferred Stock may elect to convert the Series B
Preferred Stock into common stock (i) in the event that the last sale price for
our common stock exceeds $8.50 per share for any 20 trading days in a 30-trading
day period and we elect to redeem the Series B Preferred Stock, (ii) upon our
liquidation, including a sale of substantially all of our assets, (iii) a change
of control of us, (iv) upon the termination or other relinquishment of asset
management contracts, in a single transaction or series of related transactions,
which contracts represented more than 50% of Aston’s aggregate revenues for the
12 month period preceding such transaction or series of related transactions and
(v) upon the termination of employment of such holder of Series B Preferred
Stock as a result of death, permanent incapacity, termination without cause or
retirement.  In addition, during the 12-month period commencing April 20,
2011, and during each 12-month period commencing on each April 20 thereafter
(each an “Applicable Period”), each holder of Series B Preferred Stock
(collectively with its permitted transferees) has the right, in its, his or her
sole discretion, to convert up to 10% of the aggregate number of shares of
Series B Preferred Stock initially granted to such person under the Aston
Exchange Agreement into common stock (the “Optional Limited Conversion”). 
However, the aggregate amount of Series B Preferred Stock converted by any
holder (collectively with its permitted transferees) pursuant to the Optional
Limited Conversion may not exceed 50% of the aggregate number of shares of
Series B Preferred Stock initially issued to such person in the exchange
transaction.  In addition, the aggregate number of shares of Series B
Preferred Stock converted by all holders of Series B Preferred Stock during any
Applicable Period may not exceed 5% of the aggregate number of shares of Series
B Preferred Stock initially issued pursuant to the Aston Exchange
Agreement.  If dividends are not paid for four consecutive quarters, the
Series B Preferred Stock shall be immediately convertible into common stock at
the option of the holder at the conversion ratio.
 
 We have
the option to cause each holder of Series B Preferred Stock to convert his
shares into common stock immediately prior to merger by us with or into another
entity or a sale of all or substantially all of our assets and cause such
holders to participate in the sale event on the same terms and conditions as
holders of common stock.
 
 The
rights of the holders of Series B Preferred Stock, including dividend and voting
rights in addition to those set forth above, are set forth in the Certificate of
Designation of the Series B Preferred Stock which was filed as an exhibit to our
Current Report on Form 8-K filed with the SEC on August 11, 2009.
 
 Second
Exchange Agreement
 
 On September 14, 2009, Highbury entered
into an Exchange Agreement (the “Second Exchange Agreement”) with the B
Investors.  Pursuant to the Second Exchange Agreement, the B Investors
agreed to exchange up to 36% of their shares of Series B Preferred Stock to
Highbury for up to 1,620,000 shares of common stock.  The agreed upon sale
of common stock of Highbury pursuant to the Second Exchange Agreement was made
pursuant to a transaction exempt from registration under Rule 506 of the
Securities Act.
 
 Pursuant to the Second Exchange
Agreement, each time a person becomes a beneficial owner of 25% or more of the
outstanding voting securities of Highbury, or a 25% Stockholder, Highbury
simultaneously will issue to each B Investor its pro rata share of the “Exchange
Shares.”  “Exchange Shares” means the number of shares of common stock that
Highbury must issue such that after such issuance the number of voting
securities held by the 25% Stockholder that triggered the Exchange will be equal
to one share less than 25% of the outstanding voting securities.  In
exchange for the Exchange Shares, each B Investor will assign to Highbury such
number of shares or fractional shares of Series B Preferred Stock (which shall
not exceed 360 shares of Series B Preferred Stock in the aggregate) equal to the
quotient of (x) the number of Exchange Shares issued to such B Investor and (y)
the “Conversion Number.”  The “Conversion Number” is 4,500, subject to
standard anti-dilution provisions.  The number of shares of common stock to
be received in exchange for each share of Series B Preferred Stock is the same
as the number of shares of common stock into which the Series B Preferred Stock
is presently convertible.
  35
 
 The maximum number of shares of common
stock that Highbury may be required to issue in exchange for Series B Preferred
Stock pursuant to the Second Exchange Agreement is 1,620,000.  An exchange
may not occur after the earlier to occur of (i) the first anniversary of the
date of the Second Exchange Agreement and (ii) a transaction that would
constitute a Change of Control (as defined in the Certificate of Designation of
the Series B Preferred Stock) of Highbury. If an exchange does not occur on or
before the first anniversary of the date of the Second Exchange Agreement, the
Second Exchange Agreement will terminate. As of September 30, 2009, no exchange
has been consummated under the Second Exchange Agreement.
 
 Other
Issuances of Unregistered Securities
 
 On September 28, 2009, Highbury entered
into an exchange agreement (the “Exchange Agreement”) with an investor. 
Pursuant to the Exchange Agreement, the investor exchanged 443,000 warrants of
Highbury for 22,150 shares of common stock of Highbury.  The issuance of
common stock of Highbury under the Exchange Agreement was made pursuant to a
transaction exempt from registration under Rule 506 of the Securities
Act.
  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
September 30, 2009:
 
 Period
                  
                  Total
                    Number
                    of
                    Securities
                    Purchased
                  
                  
                  Average
                    Price Paid
                    per Share
                    or
                    Warrant
                  
                  
                  Total
                    Number of
                    Shares or
                    Warrants
                    Purchased
                    as Part of
                    Publicly
                    Announced
                    Plans or
                    Programs
                  
                  
                  Maximum
                    Dollar
                    Value of
                    Securities
                    that May
                    Yet Be
                    Purchased
                    Under the
                    Plans or
                    ProgramsJuly 1, 2009 to July 31, 2009
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  770,150Shares
                  
                  
                  —
                  
                  
                  $
                  —
                  
                  
                  
                  —Warrants(1)
                  
                  
                  2,804,200
                  
                  
                  
                  0.50
                  
                  
                  
                  —August
      1, 2009 to August 31, 2009
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  770,150Shares
                  
                  
                  —
                  
                  
                  $
                  —
                  
                  
                  
                  —Warrants
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —September
      1, 2009 to September 30, 2009
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  770,150Shares
                  
                  
                  —
                  
                  
                  $
                  —
                  
                  
                  
                  —Warrants(2)
                  
                  
                  443,000
                  
                  
                  $
                  —
                  
                  
                  
                  —
 
 (1)
              The
      2,804,200 warrants were repurchased in a single, privately negotiated
      transaction.  The Board of Directors approved this repurchase outside
      of the current Securities Repurchase
Program.
 (2)
              On
      September 28, 2009, Highbury entered into an exchange agreement (the
      “Exchange Agreement”) with an investor.  Pursuant to the Exchange
      Agreement, the investor exchanged 443,000 of Highbury’s warrants for
      22,150 shares of Common Stock.  The issuance of Common Stock under
      the Exchange Agreement was made pursuant to a transaction exempt from
      registration under Rule 506 of the Securities
  Act.
 
 Between
October 1, 2009 and November 16, 2009, our Board of Directors approved and the
Company repurchased an additional 554,893 warrants for $148,014, or
approximately $0.27 per warrant, in three privately negotiated
transactions.  As of November 16, 2009, there is $662,136 available for
additional securities repurchases under the Company’s securities repurchase
program through December 31, 2009.
  ITEM
6. EXHIBITS
 
 The
exhibits are listed on the Exhibit Index and are included elsewhere in this
Quarterly Report on Form 10-Q.
  36
  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: November
      16, 2009
                      By: /s/ Richard S. FooteRichard S. Foote
                        President and Chief Executive Officer
                        (Principal Executive Officer)Dated: November
      16, 2009
                      By: /s/ R. Bradley ForthR. Bradley Forth
                        Executive Vice President, Chief Financial
                        Officer and Secretary
                        (Principal Financial and Accounting Officer)
  37
  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.
  38