UNITED STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-Q




(Mark
      One)x
            QUARTERLY REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the quarterly period ended March 31, 2009o
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF 1934For
      the transition period from _____________ to
  _____________




Commission
File Number 000-51682




Highbury
Financial Inc.


(Exact
name of registrant as specified in its charter)




Delaware
            
            20-3187008(State
      or other jurisdiction of
              incorporation
      or organization)
            
            (I.R.S.
      Employer
              Identification
      No.)999
      Eighteenth Street, Ste. 3000
              Denver,
      Colorado
            
            80202(Address
      of principal executive offices)
            
            (Zip
      Code)




(303)
357-4802


(Registrant's
telephone number, including area code)




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





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





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definitions of “large accelerated filer”, “accelerated filer”, and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.




Large
      Accelerated Filer  ̈
            
            Accelerated
      Filer  ̈Non-Accelerated
      Filer  ̈
              (Do
      not check if a smaller reporting company)
            
            Smaller
      Reporting Company x





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




As of
April 27, 2009, 9,087,055 shares of common stock, par value $0.0001 per share,
were issued and outstanding.









PagePART
      I. FINANCIAL INFORMATIONItem
      1— Financial Statements
            
            
            2Highbury
      Financial Inc.Condensed
      Consolidated Balance Sheets
            
            
            2Condensed
      Consolidated Statements of Income
            
            
            3Condensed
      Consolidated Statements of Equity
            
            
            4Condensed
      Consolidated Statements of Cash Flows
            
            
            5Notes
      to Unaudited Condensed Consolidated Financial Statements
            
            
            6Item
      2 — Management’s Discussion and Analysis of Financial Condition and
      Results of Operations
            
            
            12Item
      3 — Quantitative and Qualitative Disclosures About Market
      Risk
            
            
            26Item
      4 — Controls and Procedures
            
            
            26PART
      II. OTHER INFORMATIONItem
      1 — Legal Proceedings
            
            
            27Item
      1A — Risk Factors
            
            
            27Item
      2 — Unregistered Sales of Equity Securities and Use of
      Proceeds
            
            
            27Item
      5 — Other Information
            
            
            28Item
      6 — Exhibits
            
            
            28Signatures
            
            
            29




1




ITEM
1 - FINANCIAL STATEMENTS




Highbury
Financial Inc. and Subsidiary





Condensed
Consolidated Balance Sheets




December
      31,
                  
                  
                  March
31,2008
                  
                  
                  2009(audited)
                  
                  
                  (unaudited)ASSETSCurrent
      assetsCash
      and cash equivalents
                  
                  $
                  10,244,469
                  
                  
                  $
                  10,700,768Investments
                  
                  
                  4,186,552
                  
                  
                  
                  3,611,200Accounts
      receivable
                  
                  
                  2,448,572
                  
                  
                  
                  2,514,389Prepaid
      expenses
                  
                  
                  239,434
                  
                  
                  
                  191,187Prepaid
      taxes
                  
                  
                  278,444
                  
                  
                  
                  467,667Other
      current assets
                  
                  
                  -
                  
                  
                  
                  150,000Total
      current assets
                  
                  
                  17,397,471
                  
                  
                  
                  17,635,211Other
      assetsFixed
      assets, net
                  
                  
                  806,637
                  
                  
                  
                  760,716Identifiable
      intangibles
                  
                  
                  22,982,000
                  
                  
                  
                  22,982,000Goodwill
                  
                  
                  3,305,616
                  
                  
                  
                  3,305,616Deferred
      tax assets
                  
                  
                  1,097,620
                  
                  
                  
                  741,001Other
      long-term assets
                  
                  
                  157,092
                  
                  
                  
                  100,000Total
      other assets
                  
                  
                  28,348,965
                  
                  
                  
                  27,889,333Total
      assets
                  
                  $
                  45,746,436
                  
                  
                  $
                  45,524,544LIABILITIES
      AND EQUITYCurrent
      liabilitiesAccounts
      payable and accrued expenses
                  
                  $
                  3,407,601
                  
                  
                  $
                  3,282,929Total
      current liabilities
                  
                  
                  3,407,601
                  
                  
                  
                  3,282,929Deferred
      rent
                  
                  
                  805,707
                  
                  
                  
                  794,979Total
      liabilities
                  
                  
                  4,213,308
                  
                  
                  
                  4,077,908Commitments
      and contingenciesEquityHighbury
      Financial Inc. stockholders’ equityPreferred
      stock, $0.0001 par value, authorized 1,000,000 shares; none
      issued
                  
                  
                  -
                  
                  
                  
                  -Common
      stock, $0.0001 par value, authorized 50,000,000 shares; 9,118,740 and
      9,103,098 shares issued and outstanding as of December 31,
      2008 and March 31, 2009, respectively
                  
                  
                  912
                  
                  
                  
                  910Additional
      paid-in capital
                  
                  
                  51,818,975
                  
                  
                  
                  51,784,703Accumulated
      deficit
                  
                  
                  (11,126,759
                  )
                  
                  
                  (11,178,977
                  )Total
      Highbury Financial Inc. stockholders’ equity
                  
                  
                  40,693,128
                  
                  
                  
                  40,606,636Noncontrolling
      interest
                  
                  
                  840,000
                  
                  
                  
                  840,000Total
      equity
                  
                  
                  41,533,128
                  
                  
                  
                  41,446,636Total
      liabilities and equity
                  
                  $
                  45,746,436
                  
                  
                  $
                  45,524,544
 See
accompanying Notes to Unaudited Condensed Consolidated Financial
Statements.
  2




Highbury
Financial Inc. and Subsidiary





Condensed
Consolidated Statements of Income


(unaudited)




Three Months EndedMarch
      31,2008
            
            
            2009Revenue
            
            $
            9,279,047
            
            
            $
            7,028,667Operating
      expensesDistribution
      and sub-advisory costs
            
            
            (4,351,403
            )
            
            
            (3,250,239
            )Compensation
      and related expenses
            
            
            (1,534,184
            )
            
            
            (1,824,744
            )Depreciation
      and amortization
            
            
            (49,059
            )
            
            
            (45,921
            )Other
      operating expenses
            
            
            (1,334,468
            )
            
            
            (1,406,547
            )Total
      operating expenses
            
            
            (7,269,114
            )
            
            
            (6,527,451
            )Operating
      income
            
            
            2,009,933
            
            
            
            501,216Other
      (loss) incomeInterest
      income
            
            
            54,011
            
            
            
            12,465Investment
      (loss) income
            
            
            (178,824
            )
            
            
            104,323Total
      other (loss) income
            
            
            (124,813
            )
            
            
            116,788Income
      before provision for income taxes
            
            
            1,885,120
            
            
            
            618,004Provision
      for income taxes
            
            
            (400,834
            )
            
            
            (168,696
            )Net
      income
            
            
            1,484,286
            
            
            
            449,308Less:  Net
      income attributable to noncontrolling interest
            
            
            (860,007
            )
            
            
            (46,371
            )Net
      income attributable to Highbury Financial Inc.
            
            $
            624,279
            
            
            $
            402,937Weighted
      average shares outstanding, basic
            
            
            9,261,221
            
            
            
            9,117,670Net
      income per share, basic
            
            $
            0.07
            
            
            $
            0.04Weighted
      average shares outstanding, diluted
            
            
            9,261,221
            
            
            
            9,117,670Net
      income per share, diluted
            
            $
            0.07
            
            
            $
            0.04Cash
      dividend per share of common stock – declared
            
            $
            -
            
            
            $
            0.05Cash
      dividend per share of common stock – paid
            
            $
            -
            
            
            $
            -





See
accompanying Notes to Unaudited Condensed Consolidated Financial
Statements.




3





Highbury
Financial Inc. and Subsidiary





Condensed
Consolidated Statements of Equity


(unaudited)





Highbury
      Financial Inc. StockholdersCommon Stock
                  
                  
                  Additional
                    Paid-In
                  
                  
                  Accumulated
                  
                  
                  NoncontrollingShares
                  
                  
                  Amount
                  
                  
                  Capital
                  
                  
                  Deficit
                  
                  
                  Interest
                  
                  
                  TotalBalance
      at December 31, 2008
                  
                  
                  9,118,740
                  
                  
                  $
                  912
                  
                  
                  $
                  51,818,975
                  
                  
                  $
                  (11,126,759
                  )
                  
                  $
                  840,000
                  
                  
                  $
                  41,533,128Repurchase
      of common stock
                  
                  
                  (15,642
                  )
                  
                  
                  (2
                  )
                  
                  
                  (34,272
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (34,274
                  )Common
      stock dividends declared - $0.05 per share
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (455,155
                  )
                  
                  
                  -
                  
                  
                  
                  (455,155
                  )Net
      income for the period
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  402,937
                  
                  
                  
                  46,371
                  
                  
                  
                  449,308Income
      distributable to noncontrolling interest
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (46,371
                  )
                  
                  
                  (46,371
                  )Balance
      at March 31, 2009
                  
                  
                  9,103,098
                  
                  
                  $
                  910
                  
                  
                  $
                  51,784,703
                  
                  
                  $
                  (11,178,977
                  )
                  
                  $
                  840,000
                  
                  
                  $
                  41,446,636




See
accompanying Notes to Unaudited Condensed Consolidated Financial
Statements.




4




Highbury
Financial Inc. and Subsidiary





Condensed
Consolidated Statements of Cash Flows


(unaudited)





Three Months EndedMarch
      31,2008
                
                
                2009CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      income attributable to Highbury Financial Inc.
                
                $
                624,279
                
                
                $
                402,937Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization
                
                
                49,059
                
                
                
                45,921Deferred
      taxes
                
                
                179,677
                
                
                
                356,619Investment
      (gain) loss
                
                
                178,824
                
                
                
                (104,323
                )Net
      income attributable to noncontrolling interest
                
                
                860,007
                
                
                
                46,371Deferred
      rent
                
                
                (9,470
                )
                
                
                (10,728
                )Changes
      in operating assets and liabilities(Increase)
      decrease in:Accounts
      receivable
                
                
                238,673
                
                
                
                (65,817
                )Prepaid
      taxes
                
                
                -
                
                
                
                (189,223
                )Prepaid
      expenses
                
                
                92,761
                
                
                
                48,247Other
      current assets
                
                
                -
                
                
                
                (150,000
                )Other
      assets
                
                
                -
                
                
                
                57,092Increase
      (decrease) in:Accounts
      payable and accrued expenses
                
                
                (877,393
                )
                
                
                34,689Income
      taxes payable
                
                
                90,657
                
                
                
                -Net
      cash provided by operating activities
                
                
                1,427,074
                
                
                
                471,785CASH
      FLOWS FROM INVESTING ACTIVITIESPurchases
      of investments
                
                
                (2,000,000
                )
                
                
                -Proceeds
      from sales of investments
                
                
                3,064,071
                
                
                
                679,675Payment
      of deferred acquisition costs
                
                
                (2,419
                )
                
                
                -Purchase
      of fixed assets
                
                
                (2,756
                )
                
                
                -Net
      cash provided by investing activities
                
                
                1,058,896
                
                
                
                679,675CASH
      FLOWS FROM FINANCING ACTIVITIESDistributions
      paid to noncontrolling interest holders
                
                
                (955,070
                )
                
                
                (660,887
                )Repurchase
      of common stock
                
                
                (1,735,611
                )
                
                
                (34,274
                )Repurchase
      of warrants
                
                
                (1,823,084
                )
                
                
                -Net
      cash used in financing activities
                
                
                (4,513,765
                )
                
                
                (695,161
                )Net
      (decrease) increase in cash and cash equivalents
                
                
                (2,027,795
                )
                
                
                456,299Cash
      and cash equivalents - beginning of period
                
                
                7,276,545
                
                
                
                10,244,469Cash
      and cash equivalents - end of period
                
                $
                5,248,750
                
                
                $
                10,700,768Supplemental
      disclosure of cash flow information:Noncash
      financing activityDividend
      declared
                
                $
                -
                
                
                $
                455,155Cash
      paid for income taxes
                
                $
                130,500
                
                
                $
                -





See
accompanying Notes to Unaudited Condensed Consolidated Financial
Statements.




5




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





Investments





The
Company carries its investments at fair value based on quoted market prices, a
Level 1 input, which is defined by Statement of Financial Accounting Standards
(“SFAS”) No. 157 “Fair Value Measurements” (“SFAS 157”) as quoted prices
(unadjusted) in active markets that are accessible at the measurement date for
identical assets or liabilities. The fair value hierarchy gives the highest
priority to Level 1 inputs. The Company reflected interest paid and accrued on
money market mutual funds and U.S. Treasury bills in interest income and changes
in fair value of marketable securities, including certain mutual funds managed
by its sole subsidiary, Aston Asset Management LLC (“Aston”), in investment
income (loss).





Investments
consist of the following:




December 31,
            
            March 31,2008
            
            2009Aston
      mutual funds
            
            $
            725,752
            
            
            $
            -Other
      marketable securities
            
            
            3,460,800
            
            
            
            3,611,200$
            4,186,552
            
            
            $
            3,611,200




6





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




Three
      Months Ended
              March
      31,2008
            
            
            2009Aston
      mutual fundsRealized
      gains (losses)
            
            $
            -
            
            
            $
            (46,077
            )Unrealized
      gains (losses)
            
            
            (178,824
            )
            
            
            -Other
      marketable securitiesRealized
      gains (losses)
            
            $
            -
            
            
            $
            -Unrealized
      gains (losses)
            
            
            -
            
            
            
            150,400$
            (178,824
            )
            
            $
            104,323





Recent
Accounting Pronouncements





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





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





Recently
Adopted Accounting Pronouncements





In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements — an amendment of Accounting Research Bulletin
No. 51” (“SFAS 160”). SFAS 160 addresses the accounting and reporting standards
for ownership interests in subsidiaries held by parties other than the parent,
the amount of consolidated net income attributable to the parent and to the
noncontrolling interest, changes in a parent’s ownership interest, and the
valuation of retained noncontrolling equity investments when a subsidiary is
deconsolidated. SFAS 160 also establishes disclosure requirements that clearly
identify and distinguish between the interests of the parent and the interests
of the noncontrolling owners. SFAS 160 is effective for fiscal years beginning
after December 15, 2008. The Company adopted the provisions of SFAS 160 in the
first quarter of 2009. As a result of the adoption, the Company has reported
noncontrolling interests as a component of equity in the
unaudited Condensed Consolidated Balance Sheets and the net income or loss
attributable to noncontrolling interests has been separately identified in the
unaudited Condensed Consolidated Statements of Operations. The prior periods
presented have also been retrospectively restated to conform to the current
classification required by SFAS 160. Other than the change in presentation of
noncontrolling interests, the adoption of SFAS 160 had no impact on the
financial statements.





2.  Accounts Payable and Accrued
Expenses





Accounts
payable and accrued expenses consisted of the following:





December 31,
            
            
            March 31,2008
            
            
            2009Payable to
      sub-advisors
            
            $
            802,583
            
            
            $
            888,799Payable
      to brokers
            
            
            321,261
            
            
            
            268,383Payable
      to noncontrolling interest
            
            
            660,887
            
            
            
            46,371Accrued
      compensation payable
            
            
            436,239
            
            
            
            774,074Accrued
      professional fees
            
            
            552,647
            
            
            
            340,081Dividend
      payable
            
            
            -
            
            
            
            455,155Other
      payables
            
            
            633,984
            
            
            
            510,066$
            3,407,601
            
            
            $
            3,282,929




7




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
ended March 31, 2008 and 2009 each include $30,000 related to this agreement.
The agreement is terminable by either party upon six months’ prior
notice.





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





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





4.  Economic
Dependency





Relationships
with a limited number of clients account for a significant majority of
Highbury’s revenue. Aston’s client, the Aston Funds, a Delaware business trust,
which accounts for approximately 97% of our assets under management as of March
31, 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 and the
Aston/TAMRO Small Cap Fund contributed approximately 39%, 14% and 11% of the
revenues of Aston, respectively, in March 2009.  In March 2008, the
Aston/Montag & Caldwell Growth Fund and the Aston/Optimum Mid Cap Fund
contributed approximately 36% and 18% of the revenues of Aston,
respectively.  These client concentrations leave Highbury vulnerable
to any adverse change in the financial condition of any of its major clients.
The loss of any of these relationships may have a material adverse impact on the
Company’s revenue, profitability and cash flow.




8





5.  Income Taxes





The
provisions (benefit) for income taxes for the three month periods ended March
31, 2008 and 2009 consist of the following:





Three Months EndedMarch 31,2008
            
            
            2009CurrentFederal
            
            $
            178,991
            
            
            $
            (130,330
            )State
            
            
            42,166
            
            
            
            (57,593
            )DeferredFederal
            
            
            158,998
            
            
            
            308,682State
            
            
            20,679
            
            
            
            47,937$
            400,834
            
            
            $
            168,696





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





December 31,
            
            March 31,2008
            
            2009Expenses
      and net unrealized investment losses
              deferred
      for income tax purposes
            
            $
            492,258
            
            
            $
            415,925(Tax
      amortization of) / GAAP impairment of intangibles
            
            
            605,362
            
            
            
            325,076Net
      deferred tax assets
            
            $
            1,097,620
            
            
            $
            741,001




6.  Earnings Per
Share





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





Three Months EndedMarch 31,2008
                            
                            
                            2009Numerator:Net
      income
                            
                            $
                            624,279
                            
                            
                            $
                            402,937Denominator:Average
      shares outstanding - basic
                            
                            
                            9,261,221
                            
                            
                            
                            9,117,670Effect
      of dilutive instruments:Warrants
                            
                            
                            —
                            
                            
                            
                            —Average
      shares outstanding - diluted
                            
                            
                            9,261,221
                            
                            
                            
                            9,117,670




The
dilutive effect of the warrants is calculated using the treasury stock method
and the average share price during the period.  There are no effects
of dilutive instruments included in the calculations because the Company’s
weighted average share price during the periods was less than the warrants’
exercise price.  As of March 31, 2008 and 2009, the Company had
13,983,708 warrants outstanding.




9





7.  Related Person
Transactions





Aston is
the investment advisor to the Aston Funds, a Delaware business trust. Aston’s
Chief Executive Officer is the Chairman of the Board of Trustees of the Aston
Funds. Aston’s President is the President and Chief Executive Officer of the
Aston Funds. Aston’s Chief Financial Officer and Chief Compliance Officer is the
Senior Vice President, Secretary, Treasurer, Chief Financial Officer, Chief
Operating Officer and Chief Compliance Officer of the Aston Funds. As a result
of these relationships, the Aston Funds may be considered related parties as
such are defined in SFAS No. 57, “Related Party Disclosures” (“SFAS 57”). In the
three months ended March 31, 2009, Aston earned advisory fees of $5,969,616 and
administrative fees of $759,296 from the Aston Funds. These fees, in total,
accounted for approximately 96% of Aston’s total revenue during the period. In
the three months ended March 31, 2008, Aston earned advisory fees of $7,859,616
and administrative fees of $1,046,718 from the Aston Funds. These fees, in
total, accounted for approximately 96% of Aston’s total revenue during the
period.  As of December 31, 2008 and March 31, 2009, the Company’s
balance sheets include accounts receivable of $2,039,687 and $2,220,247,
respectively, associated with these fees, as Aston is generally paid in the
first week of the month following the month in which fees are
earned.




The
Company presently occupies office space provided by Berkshire Capital. Berkshire
Capital has agreed that it will make such office space, as well as certain
office and secretarial services, available to the Company, as may be required by
the Company from time to time in exchange for a payment of $10,000 per month.
The condensed consolidated statements of income for the three months ended March
31, 2008 and 2009 each include $30,000 related to this agreement. The agreement
is terminable by either party upon six months’ prior notice.





8.  Credit
Facility





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





9.  Securities
Repurchase Program





During
the three months ended March 31, 2009, the Company repurchased 15,642 shares for
$34,274.  Between April 1, 2009 and April 27, 2009, the Company
repurchased an additional 16,043 shares for $42,030.  As of April 27,
2009, there is $923,696 available for additional securities repurchases through
December 31, 2009.





During
the three months ended March 31, 2008, the Company repurchased 1,836,292
warrants for $1,823,084 and redeemed 400,372 shares for $1,735,611.





10.  Stockholders’
Equity





Dividends





On March 18, 2009, the board of
directors authorized a dividend on the outstanding common stock and units 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.




10





11.  Aston
Operating Allocation





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




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




Highbury’s
contractual share of revenues has priority over the distributions to the Aston
management members in the event Aston’s actual operating expenses exceed the
operating allocation. As a result, excess expenses first reduce the portion of
the owners’ allocation allocated to the Aston management members until the Aston
management members’ allocation is eliminated, then Highbury’s allocation is
reduced. Any reduction in the distribution of revenues to be paid to Highbury is
required to be paid to Highbury out of any future excess operating allocation
and the portion of future owners’ allocation allocated to the Aston management
members, with interest.  Aston’s operating expenses in the three
months ended March 31, 2009 exceeded the operating allocation by
$604,432.  These excess expenses were funded by a reduction in the
Aston management members’ share of the owners’ allocation and is reflected as a
reduction in net income attributable to noncontrolling interest.





11





ITEM
2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS




You
should read this discussion and analysis of our financial condition and results
of operations in conjunction with the condensed consolidated financial
statements and the notes thereto included in this Quarterly Report on Form 10-Q
and the consolidated financial statements included in our Annual Report on Form
10-K for the fiscal year ended December 31, 2008, as filed with the Securities
and Exchange Commission on March 4, 2009.





Unless
otherwise provided in this Quarterly Report, references to the “Company,” the
“Registrant,” the “Issuer,” “we,” “us,” and “our” refer to Highbury Financial
Inc. and its subsidiary. References to Highbury refer solely to Highbury
Financial Inc. and references to Aston refer solely to Aston Asset Management
LLC, a subsidiary of Highbury.





Forward
Looking Statements





This Quarterly Report on Form 10-Q
includes forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, as amended, Section 27A of the Securities Act of
1933, as amended, or the Securities Act, and Section 21E of the Securities
Exchange Act of 1934, as amended, or the Exchange Act. We have based these
forward-looking statements on our current expectations and projections about
future events. These forward-looking statements are subject to known and unknown
risks, uncertainties and assumptions about us that may cause our actual results
to be materially different from historical results and results expressed or
implied by such forward-looking statements. In some cases, you can identify
forward-looking statements by terminology such as “may,” “should,” “could,”
“would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “continue,” or
the negative of such terms or other similar expressions. Factors that might
cause or contribute to such a discrepancy include, but are not limited to, the
following:





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





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





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





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





We
will not undertake and we specifically disclaim any obligation to release
publicly the result of any revisions which may be made to any forward-looking
statements to reflect events or circumstances 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.




12





Overview




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




As of
March 31, 2009, the Company had approximately $3.9 billion of total assets under
management, compared to approximately $3.5 billion as of December 31, 2008 and
approximately $4.7 billion as of March 31, 2008. As of March 31, 2009, Aston
managed 24 no-load mutual funds, comprised of 23 equity funds and 1 fixed income
fund, with approximately $3.8 billion of mutual fund assets under
management.  Aston had $3.4 billion and $4.5 billion of mutual fund
assets under management as of December 31, 2008 and March 31, 2008,
respectively. As of March 31, 2009, 13 of the mutual funds carried an overall
Morningstar RatingTM of
three stars or better, including six four-star funds and three five-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 March 31, 2009, Aston also managed
approximately $107 million of separate account assets, compared to approximately
$115 million as of December 31, 2008 and approximately $151 million as of March
31, 2008.  Aston intends to expand its assets under management with a
combination of internal growth, new product development and accretive
acquisitions.




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




The
acquired business was founded in 1993 within Alleghany Corporation by employees
of Aston to manage open-end investment funds for retail and institutional
clients in the United States. Originally, the acquired business employed
investment advisers affiliated with its parent to manage the assets of the
funds, while it centralized the distribution, marketing, reporting and other
operations of the fund family. As the business developed, the acquired business
created new mutual funds managed by experienced independent investment advisers.
Historically, the acquired business utilized seven different entities to manage
the equity funds, of which five were current or former affiliates of the sellers
and two were independent. Aston now employs 14 different sub-advisers of which
three are current affiliates of the sellers, two are former affiliates of the
sellers and nine are unrelated to the sellers.  In connection with the
consummation of the acquisition, Aston entered into agreements with each of the
sellers that managed the funds prior to the acquisition, pursuant to which each
such seller now acts as a sub-adviser to the applicable fund, each of which is
now rebranded as an Aston Fund. Pursuant to the asset purchase agreement, the
sellers have agreed not to terminate these agreements prior to November 30,
2011.  In general, sub-advisers unaffiliated with the sellers may
terminate their sub-advisory contracts upon 60 days’ written
notice.  Aston’s relationship with the sub-advisers currently or
formerly affiliated with the sellers is supported by limited non-compete
provisions and certain capacity guarantees in certain products to benefit Aston.
This arrangement is intended to ensure that the investment philosophies and
processes guiding the mutual funds in the future are consistent with their
historical investment philosophies and processes.




13




Between
the consummation of the acquisition and March 31, 2009, Aston opened 13 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/MB
      Enhanced Equity Income Fund
            
            Large
      ValueAston/New
      Century Absolute Return ETF Fund
            
            Moderate
      Allocation




Between
the consummation of the acquisition and March 31, 2009, Aston closed or merged
eight mutual funds as a result of poor investment performance, portfolio manager
turnover or other reasons, including two equity mutual funds closed during the
first quarter of 2009. Aston intends to manage its family of mutual funds in
response to client demands, and may open new funds or close existing funds over
time, as appropriate.




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




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




·
            wholesalers
      focused on the traditional retail broker
  channel.




Revenue Sharing Arrangement with
Aston. Highbury owns 65% of the membership interests of Aston, and eight
employees of Aston, or the Aston management members, own 35% of the membership
interests of Aston.




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




Highbury’s
contractual share of revenues has priority over the distributions to the Aston
management members in the event Aston’s actual operating expenses exceed the
operating allocation. As a result, excess expenses first reduce the portion of
the owners’ allocation allocated to the Aston management members until the Aston
management members’ allocation is eliminated, then Highbury’s allocation is
reduced. Any reduction in the distribution of revenues to be paid to Highbury is
required to be paid to Highbury out of any future excess operating allocation
and the portion of future owners’ allocation allocated to the Aston management
members, with interest.  Aston’s operating expenses in the three
months ended March 31, 2009 exceeded the operating allocation by
$604,432.  These excess expenses were funded by a reduction in the
Aston management members’ share of the owners’ allocation.




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 March 31, 2009, Aston was reimbursing 16
mutual funds whose expenses exceed the applicable expense cap.




14




Relationships
with a limited number of clients account for a significant majority of
Highbury’s revenue. Aston’s client, the Aston Funds, a Delaware business trust,
which accounts for approximately 97% of our assets under management as of March
31, 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 and the
Aston/TAMRO Small Cap Fund contributed approximately 39%, 14% and 11% of the
revenues of Aston, respectively, in March 2009.  In March 2008, the
Aston/Montag & Caldwell Growth Fund and the Aston/Optimum Mid Cap Fund
contributed approximately 36% and 18% of the revenues of Aston,
respectively.  These client concentrations leave Highbury vulnerable
to any adverse change in the financial condition of any of its major clients.
The loss of any of these relationships may have a material adverse impact on the
Company’s revenue.




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




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




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




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




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




·
            our
      success in making new acquisitions and the terms upon which such
      transactions are completed;




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




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




·
            the
      level of taxation to which we are
subject.




Recent
Market Developments





In
reaction to the global credit crisis and recession, global equity markets have
declined significantly over the last year. For example, the S&P 500 Index
declined approximately 40% between March 31, 2008 and March 31, 2009. Our assets
under management have declined approximately 17% during this period. Continuing
deterioration in market conditions and/or declines in our assets under
management could materially impact our revenue, operating margin and net income
in 2009.




15





Key
Operating Measures




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




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




·
            Total Revenue. Total
      revenue for Aston is equal to the sum of the advisory fees, administrative
      fees and money market service fees earned by the business in a given
      period. We operate Aston under a revenue sharing structure through which
      Highbury receives a fixed percentage (18.2%) of the total revenue, net of
      sub-administrative fees, earned by Aston. In addition, Highbury earns
      interest income on its cash balances which we recognize as non-operating
      income in the condensed consolidated financial
  statements.




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




·
            Total Operating
      Expenses. The total operating expenses include the operating
      expenses of Aston as well as Highbury. At the Aston level, we monitor
      total operating expenses relative to Aston’s total revenue to ensure there
      is sufficient operating margin to cover expenses. We expect Aston’s
      operating expenses (including distribution and sub-advisory costs and
      excluding certain non-cash, non-recurring items) to equal approximately
      72% of the total revenue of Aston, as provided in Aston’s limited
      liability company agreement. Aston’s operating expenses in the three
      months ended March 31, 2009 exceeded the operating allocation by
      $604,432.  These excess expenses were funded by a reduction in
      the Aston management members’ share of the owners’
      allocation.  At the Highbury level, we incur operating expenses
      in connection with our pursuit of accretive acquisitions, including
      expenses for travel, entertainment, legal services and due diligence. We
      also incur legal and accounting expenses in connection with our SEC filing
      requirements and expenses of directors’ and officers’
      insurance.




Description
of Certain Line Items




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




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




16




·
            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 April 27, 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 months ended
      March 31, 2009, the compensation and related expenses of Highbury include
      base salaries for the executive officers and related payroll
      taxes.  Highbury did not pay compensation of any kind in the
      three months ended March 31, 2008.





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




Critical
Accounting Policies




The
Company’s discussion and analysis of its financial condition and results of
operations for the purposes of this document are based upon its condensed
consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of America, or
GAAP, for interim financial information and with the instructions to Form 10-Q
and Rule 10-01 of Regulation S-X. The preparation of these condensed
consolidated financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues,
expenses and related disclosures. Actual results could differ from those
estimates.





The
Company’s significant accounting policies are presented in Note 1 to its
unaudited condensed consolidated financial statements included elsewhere herein
and in Note 1 to its audited financial statements included in its Annual Report
on Form 10-K for the year ended December 31, 2008, as filed with the Securities
and Exchange Commission on March 4, 2009. The following summaries should be read
in conjunction with those condensed consolidated financial statements and the
related notes. While all accounting policies affect the condensed consolidated
financial statements, certain policies may be viewed as critical. Critical
accounting policies are those that are both most important to the portrayal of
the condensed consolidated financial statements and results of operations and
that require management’s most subjective or complex judgments and estimates. We
believe the policies that fall within this category are the policies related to
principles of consolidation, investments, goodwill and intangible assets,
revenue recognition and income taxes.




17




Principles of Consolidation.
The condensed consolidated financial statements include the accounts of Highbury
and Aston, in which Highbury has a controlling financial interest. Generally, an
entity is considered to have a controlling financial interest when it owns a
majority of the voting interest in an entity. Highbury is the manager member of
Aston and owns 65% of Aston. Highbury has a contractual arrangement with Aston
whereby a percentage of revenue is allocable to fund Aston’s operating expenses
(referred to as the operating allocation), while the remaining portion of
revenue (referred to as the owners’ allocation) is allocable to Highbury and the
other members, with a priority to Highbury. The portion of the income of Aston
allocated to owners other than Highbury is included in noncontrolling interest
in the Condensed Consolidated Statements of Income. Noncontrolling interest on
the Condensed Consolidated Balance Sheets includes capital and undistributed
income owned by the management members of Aston. All material intercompany
balances and transactions have been eliminated in consolidation.




Investments.In 2007, the
Company elected the early adoption provisions of Statement of Financial
Accounting Standards (“SFAS") No. 157 “Fair Value Measurements” (“SFAS 157”) and
SFAS No. 159 “The Fair Value Option for Financial Assets and Financial
Liabilities” (“SFAS 159”). The Company carries its investments at fair value
based on quoted market prices. The Company reflects interest paid and accrued on
money market mutual funds and U.S. Treasury bills in interest income and changes
in fair value of investments in investment income (loss).




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




We have
determined that the acquired mutual fund advisory contract meets the indefinite
life criteria outlined in SFAS No. 142, “Goodwill and Other Intangible Assets”
(“SFAS 142”), because we expect both the contract and the cash flows generated
by the contract to continue indefinitely due to the likelihood of continued
renewal at little or no cost. Accordingly, we do not amortize this intangible
asset, but instead review this asset at least annually for impairment. If the
carrying amount of this intangible asset exceeds the fair value, an impairment
loss is recorded in an amount equal to that excess. Additionally, each reporting
period, we assess whether events or circumstances have occurred which indicate
that the indefinite life criteria are no longer met. If the indefinite life
criteria are no longer met, we will amortize the intangible asset over its
remaining useful life.




The
excess of 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.




18




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




Income Taxes. Deferred tax
assets and liabilities are primarily the result of temporary differences between
the carrying value of assets and liabilities and the deductibility of operating
expenses for financial reporting and income tax purposes. Deferred tax assets
arise from financial statement impairment and tax amortization of the Company’s
acquired intangible assets as well as certain expenses deferred for tax purposes
and the unrealized gains and losses on mutual fund investments. We amortize
acquired intangible assets over a 15-year period for tax purposes only, reducing
their tax basis and generating deferred taxes each reporting
period.




Recently
Issued Pronouncements




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




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





Recently
Adopted Accounting Pronouncements





In
December 2007 the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements — an amendment of Accounting Research Bulletin
No. 51” (“SFAS 160”). SFAS 160 addresses the accounting and reporting standards
for ownership interests in subsidiaries held by parties other than the parent,
the amount of consolidated net income attributable to the parent and to the
noncontrolling interest, changes in a parent’s ownership interest, and the
valuation of retained noncontrolling equity investments when a subsidiary is
deconsolidated. SFAS 160 also establishes disclosure requirements that clearly
identify and distinguish between the interests of the parent and the interests
of the noncontrolling owners. SFAS 160 is effective for fiscal years beginning
after December 15, 2008. The Company adopted the provisions of SFAS 160 in the
first quarter of 2009. As a result of the adoption, the Company has reported
noncontrolling interests as a component of equity in the unaudited Condensed
Consolidated Balance Sheets and the net income or loss attributable to
noncontrolling interests has been separately identified in the unaudited
Condensed Consolidated Statements of Operations. The prior periods presented
have also been retrospectively restated to conform to the current
classification required by SFAS 160. Other than the change in presentation of
noncontrolling interests, the adoption of SFAS 160 had no impact on the
financial statements.




19





Results
of Operations





Three
months ended March 31, 2009 compared to three months ended March 31,
2008





For the
three months ended March 31, 2009, the Company earned net income of $402,937 on
total revenue of $7,028,667, as compared to net income of $624,279 and revenue
of $9,279,047 for the three months ended March 31, 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
              March
      31, 2008Total Fees
            
            
            Weighted
              Average
              Assets
              Under
              Management
              ($M)
            
            
            Weighted
              Average Fee
              Basis
              (Annualized)Net
      advisory fees
            
            $
            8,090,281
            
            
            $
            4,724
            (1)
            
            
            0.68
            %Net
      administrative fees(2)
            
            
            511,697
            
            
            
            7,758
            (3)
            
            
            0.03
            %Money
      market service fees
            
            
            142,048
            
            
            
            3,181
            
            
            
            0.02
            %(4)$
            8,744,026
            
            
            
            4,724
            (5)
            
            
            0.74
            %(5)




For
      the three months ended
              March
      31, 2009Total Fees
            
            
            Weighted
              Average
              Assets
              Under
              Management
              ($M)
            
            
            Weighted
              Average Fee
              Basis
              (Annualized)Net
      advisory fees
            
            $
            6,131,871
            
            
            $
            3,492
            (1)
            
            
            0.70
            %Net
      administrative fees(2)
            
            
            364,418
            
            
            
            5,549
            (3)
            
            
            0.03
            %Money
      market service fees
            
            
            137,500
            
            
            
            2,163
            
            
            
            0.03
            %(4)$
            6,633,789
            
            
            
            3,492
            (5)
            
            
            0.76
            %(5)




(1)
            Includes
      long-term mutual fund and separate account assets under
      management.(2)
            Administrative
      fees are presented net of sub-administration fees paid to a third party to
      be consistent with the methodology used in calculating the revenue sharing
      arrangement with Aston. Gross administration fees were $1,046,718 and
      $759,296 in the three months ended March 31, 2008 and 2009,
      respectively.




(3)
            Aston
      provides administrative services to the Aston Funds, as well as six money
      market mutual funds managed by Fortis.(4)
            Aston
      receives a money market service fee from Fortis equal to $550,000 per
      annum plus 0.0001% of the weighted average assets under management in the
      six money market mutual funds in excess of $3 billion. The fee is accrued
      and paid monthly.





(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).




20




As of
March 31, 2009, the Company had approximately $3.9 billion of total assets under
management, compared to approximately $3.5 billion as of December 31, 2008 and
approximately $4.7 billion as of March 31, 2008. As of March 31, 2009, mutual
fund assets under management were approximately $3.8 billion, compared to
approximately $3.4 billion as of December 31, 2008, an increase of approximately
10%, and approximately $4.5 billion as of March 31, 2008. This aggregate
increase in mutual fund assets under management of $357 million since December
31, 2008 resulted 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 $216 million and (ii) net
client inflows, which represent aggregate contributions from new and existing
clients less withdrawals, of approximately $573 million, during the three months
ended March 31, 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 March 31, 2008, mutual fund assets
under management decreased $445 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 $457
million and (ii) net client inflows of approximately $12
million.  During the three months ended March 31, 2009, separate
account assets under management decreased from $115 million to $107
million.




The
Company generated total operating revenue during the three months ended March
31, 2009 of $7,028,667, as compared to $9,279,047 during the three months ended
March 31, 2008. This 24% decrease in revenue was largely attributable to the
overall decline in assets under management from 2008 to 2009. Weighted average
assets under management, as presented above, decreased from approximately $4.7
billion in the first quarter of 2008 to approximately $3.5 billion in the first
quarter of 2009, a decline of approximately 26%. The Company’s overall weighted
average fee basis increased from 0.74% for the three months ended March 31, 2008
to 0.76% for the three months ended March 31, 2009 as a result of a
proportionally greater allocation of assets under management to mutual funds
with higher fee rates. Net advisory fees decreased from $8,090,281 in the first
quarter of 2008 to $6,131,871 for the same period in 2009, primarily as a result
of lower weighted average assets under management. For the same reason, gross
administration fees decreased from $1,046,718 in the first quarter of 2008 to
$759,296 in the first quarter of 2009. Net administration fees declined from
$511,697 in the first quarter of 2008 to $364,418 in the first quarter of 2009.
Aston also earned money market service fees from Fortis of $137,500 in the three
months ended March 31, 2009, down from $142,048 in the three months ended March
31, 2008.




Distribution
and sub-advisory costs declined from $4,351,403 for the three months ended March
31, 2008 to $3,250,239 in the corresponding period in 2009. This 25% decline is
attributable to the decline in weighted average assets under management from
2008 to 2009, as these expenses are directly related to the value of assets
under management.





Compensation
and related expenses were $1,824,744 for the three months ended March 31, 2009.
Compensation and related expenses were $1,534,184 for the three months ended
March 31, 2008.  This increase is largely attributable to the increase
in sales commissions payable to Aston’s sales and marketing
professionals.  Sales commissions payable to Aston’s sales and
marketing professionals increased because net client inflows, the basis for
determining Aston’s sales commission payments, increased from $12 million in the
three months ended March 31, 2008 to $573 million during the three months ended
March 31, 2009.  The Aston management team participates directly in
the profitability of the business through their retention of any excess
operating allocation which is paid as compensation.  Because of the
lower level of assets under management, and therefore revenue, in the first
quarter of 2009 compared to the first quarter of 2008 and the higher level of
sales commission payments, there was no excess operating allocation available to
pay as compensation to the Aston management team. In addition, compensation and
related expenses for the three months ended March 31, 2009 includes $152,175
paid to Highbury’s executive officers.  There were no corresponding
payments to Highbury’s executive officers in the three months ended March 31,
2008.




The
Company incurred $45,921 of depreciation expense relating to Aston’s fixed
assets in the first quarter of 2009, compared to $49,059 in the first quarter of
2008.




21





Other
operating expenses increased from $1,334,468 for the three months ended March
31, 2008 to $1,406,547 for the three months ended March 31, 2009. These expenses
include the operating expenses of Aston and Highbury for the periods and consist
primarily of legal, accounting, insurance, occupancy and administrative fees.
Aston’s direct operating expenses for the three months ended March 31, 2008 were
$918,797, as compared to $810,863 during the three months ended March 31,
2009.





Highbury’s
direct operating expenses, including compensation and related expenses, for the
three months ended March 31, 2009 and 2008 were as follows:





Three
      Months Ended,March
      31,2008
            
            
            2009Professional
      fees
            
            $
            291,196
            
            
            $
            440,534Compensation
      and related expenses
            
            
            -
            
            
            
            152,175Insurance
            
            
            55,914
            
            
            
            39,340Administrative
      fees
            
            
            30,000
            
            
            
            30,000Travel
      and entertainment
            
            
            10,453
            
            
            
            62,586Other
      expenses
            
            
            28,108
            
            
            
            23,224$
            415,671
            
            
            $
            747,859








Non-operating
income consists primarily of earnings on cash and cash equivalent balances and
short-term investments in U.S. Treasury bills and Aston mutual funds. For the
three months ended March 31, 2009, Highbury earned interest income on its cash
and cash equivalent balances of $12,465. The Company also had investment income
of $104,323 including realized losses of $46,077 related to investments in Aston
mutual funds and unrealized gains of $150,400 related to investment in other
marketable securities. For the three months ended March 31, 2008, Highbury
earned $54,011 on its cash and cash equivalent balances and had unrealized
losses of $178,824 related to investments in Aston mutual funds.




For the
three months ended March 31, 2009, the Company recorded income before provisions
for income taxes of $618,004. For the three months ended March 31, 2008, the
Company recorded income before provisions for income taxes of
$1,885,120.




The
following table outlines Highbury’s income tax expenses for the three months
ended March 31, 2008 and 2009:





Three
      Months Ended
              March
      31,2008
            
            
            2009Current
            
            $
            221,157
            
            
            $
            (187,923
            )Deferred -
      intangible related
            
            
            233,263
            
            
            
            210,214Deferred
      – other
            
            
            (53,586
            )
            
            
            146,405Total
            
            $
            400,834
            
            
            $
            168,696





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 $402,937 in the three months ended March 31, 2009, compared
to $624,279 during the three months ended March 31, 2008.




22




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.




Three
      Months Ended
                    March
      31,2008
                  
                  
                  2009Net
      income
                  
                  $
                  624,279
                  
                  
                  $
                  402,937Intangible
      amortization
                  
                  
                  -
                  
                  
                  
                  -Intangible-related
      deferred taxes
                  
                  
                  233,263
                  
                  
                  
                  210,214Affiliate
      depreciation
                  
                  
                  49,059
                  
                  
                  
                  45,921Other
      non-cash expenses
                  
                  
                  -
                  
                  
                  
                  -Cash
      Net Income
                  
                  $
                  906,601
                  
                  
                  $
                  659,072




Liquidity
and Capital Resources




Highbury funds its business activities
with a combination of operating income and the interest income earned on its
cash and cash equivalent balances and expects to fund future acquisitions with
retained net income or the issuance of debt or equity. Aston funds its business
activities with cash flows from operations. Highbury may occasionally provide
capital to Aston to help finance the development of new products or execute
accretive acquisitions. Because Aston, like most investment management
businesses, does not require a high level of capital expenditures, such as for
purchases of inventory, property, plant or equipment, liquidity is less of a
concern than for a company that sells physical assets.




As of
March 31, 2009, Highbury had no borrowings outstanding. In the future, however,
we will closely review our ratio of debt to Adjusted EBITDA (our “leverage
ratio”) as an important gauge of our ability to service debt, make new
investments and access capital. The leverage covenant of our credit facility
provides for a maximum total leverage ratio (including debt from all sources) of
5.0 times Adjusted EBITDA, although borrowings under the credit agreement are
limited to 2.0 times Adjusted EBITDA. We believe this level is prudent for our
business, although substantially higher levels of senior and subordinated debt
in relation to Adjusted EBITDA may also be prudent to fund future acquisitions.
Adjusted EBITDA means the sum of (a) net income determined in accordance with
GAAP, plus (b) amortization of intangible assets, plus (c) interest expense,
plus (d) depreciation, plus (e) other non-cash expenses, plus (f) income tax
expense. This definition of Adjusted EBITDA is consistent with the definition of
EBITDA used in our credit facility. Adjusted EBITDA, as calculated by us, may
not be consistent with computations of Adjusted EBITDA by other companies. For
further information about our credit facility, please refer to the section
entitled “Credit Facility.”




23




Current
market conditions may make it more difficult for us to complete an acquisition
through the use of debt financing because of the reduced availability of debt at
appropriate terms. A decrease in our assets under management caused by negative
market conditions could have an adverse effect on the distributions we receive
from Aston and potential future affiliates and limit our ability to repay our
borrowings, including any debt issued to finance an acquisition. In addition,
our ability to make accretive acquisitions through the issuance of additional
equity is dependent upon the relationship between the market value of our
outstanding common stock and the pricing of any transaction. If the price of our
common stock remains at or near its current level, it may be more difficult for
us to issue additional equity to finance an acquisition. The inability to
complete accretive acquisitions may negatively impact our growth, results of
operations or financial condition.




As of
March 31, 2009, the Company had $10,700,768 of cash and equivalents, $3,611,200
of investments and $2,514,389 of accounts receivable. The accounts receivable
are primarily related to the investment advisory fees, administrative fees and
money market service fees earned by Aston in March 2009. Aston receives its
revenues generally within the first week of the month following the month in
which they are earned. At March 31, 2009, the Company had accounts payable and
accrued expenses of $3,282,929, 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 $46,371 of distributions
payable to the Aston management members, which were subsequently paid in April
2009. Because Aston is able to finance its day-to-day operations with operating
cash flow, it does not need to retain a significant amount of cash on its
balance sheet. Going forward, we expect Aston will distribute all of its excess
cash and cash equivalents on a quarterly basis to its owners, so we do not
expect large cash and cash equivalents balances to accrue within Aston. Highbury
expects to use its cash and cash equivalents to fund acquisitions, pay
dividends, service debt, if any, or repurchase our securities, if
appropriate.




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




Management
believes our existing liquid assets, together with the expected continuing cash
flow from operations, our borrowing capacity under the current credit facility
and our ability to issue debt or equity securities will be sufficient to meet
our present and reasonably foreseeable operating cash needs and future
commitments.




Cash Flow from Operating
Activities. Cash flow from operations generally represents net income
plus non-cash charges for amortization, deferred taxes, depreciation and other
items as well as the changes in our consolidated working capital. For the three
months ended March 31, 2009, the Company received $471,785 of net cash flow from
its operating activities. In addition to net income of $402,937, the Company’s
cash flow increased by $356,619 due to deferred taxes related primarily to the
amortization of goodwill and intangible assets for income tax purposes and by
$46,371 due to the noncontrolling interest holders of Aston. Cash flow decreased
by $189,223 due to an increase in prepaid taxes. For the three months ended
March 31, 2008, the Company received $1,427,074 of net cash flow from its
operating activities. In addition to net income of $624,279, the Company’s cash
flow was increased by $179,677 relating to deferred taxes related primarily to
the amortization of goodwill and intangible assets for income tax purposes, by
$178,824 relating to net unrealized losses on investments in Aston mutual funds
and by $860,007 relating to the Company’s minority interest in its affiliate.
Accounts payable decreased by $877,393, primarily as a result of a decrease in
distribution and sub-advisory fees payable, which reduced net cash
flow.




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 three months ended March 31, 2009, Highbury sold
its remaining investments in Aston mutual funds for total proceeds of
$679,675.  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. Cash
flow from investing activities provided $679,675 in the three months ended March
31, 2009 compared to $1,058,896 in the three months ended March 31,
2008.




24





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. The Company distributed $660,887
to Aston’s noncontrolling interest holders during the three months ended March
31, 2009. The Company also repurchased 15,642 shares for $34,274 during the
period.  During the three months ended March 31, 2008, the Company
repurchased 1,836,292 warrants for $1,823,084 and 400,372 shares for $1,735,611.
The Company also distributed $955,070 to Aston’s noncontrolling interest holders
during the three months ended March 31, 2008. Cash flow from financing
activities used $695,161 in the three months ended March 31, 2009 compared to a
use of $4,513,765 in the three months ended March 31, 2008.




Credit
Facility




On
October 1, 2008, we entered into a Second Amendment to our credit agreement with
City National Bank. The credit agreement, as amended, expires on September 30,
2009 and provides for a revolving line of credit of up to $12.0 million. The
credit agreement provides for a maximum total leverage ratio (including debt
from all sources) of 5.0 times Adjusted EBITDA, although borrowings under the
credit agreement are limited to 2.0 times Adjusted EBITDA, and incorporates a
minimum fixed charge coverage ratio of 1.25x and a minimum net worth of $20
million. The credit facility may be used for working capital, general corporate
purposes and repurchases of our outstanding securities, if
appropriate.




Borrowings
under our credit facility will bear interest, at our option, at either the
fluctuating prime rate plus one-half of one percent (0.50%) per year or the
LIBOR interest rate plus two and three-quarters percent (2.75%) per year. In
addition, we will be required to pay annually a fee of one quarter of one
percent (0.25%) on the average daily balance of the unused portion of the credit
facility. We will have to make interest payments monthly for any prime rate
borrowings. For any LIBOR borrowings, interest payments will be made at the end
of any LIBOR contract or quarterly, whichever is sooner. Any outstanding
principal is due at maturity on September 30, 2009. For so long as certain
events of default continue, upon notice by City National Bank, the interest rate
on any outstanding loans will increase by three percent (3%). As of March 31,
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 March 31, 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.




25





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




Three
      Months Ended
              March
      31,2008
            
            
            2009Net
      income
            
            $
            624,279
            
            
            $
            402,937Income
      tax expense
            
            
            400,834
            
            
            
            168,696Interest
      expense
            
            
            -
            
            
            
            -Intangible
      amortization
            
            
            -
            
            
            
            -Depreciation
      and other amortization
            
            
            49,059
            
            
            
            45,921Other
      non-cash expenses
            
            
            -
            
            
            
            -Adjusted
      EBITDA
            
            $
            1,074,172
            
            
            $
            617,554





Off-Balance
Sheet Arrangements




Warrants
issued in conjunction with our initial public offering are equity linked
derivatives and accordingly represent off-balance sheet arrangements. The
warrants meet the scope exception in paragraph 11(a) of SFAS 133 and are
accordingly not accounted for as derivatives for purposes of SFAS 133, but
instead are accounted for as equity.





Impact
of Inflation




Our
revenue is directly linked to the total assets under management within the 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 three months ended March 31, 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
March 31, 2009. Based on that evaluation, our chief executive officer and chief
financial officer concluded that our disclosure controls and procedures are
effective as of the end of the period covered by this report to ensure that
information required to be disclosed by us in reports that we file or submit
under the Securities Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission’s rules and forms.




26




During
the most recently completed fiscal quarter, there has been no change in our
internal control over financial reporting that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.





PART
II.


OTHER
INFORMATION




ITEM
1. LEGAL PROCEEDINGS





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




ITEM
1A. RISK FACTORS





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




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




Issuer
Purchases of Equity Securities




On
January 15, 2009, our Board of Directors approved a Securities Repurchase
Program authorizing the use of up to $1,000,000 to acquire common shares,
warrants or a combination thereof in the open market or in any private
transaction, from time to time and in accordance with applicable laws, rules and
regulations. The Securities Repurchase Program will be in effect until December
31, 2009 and may be suspended, from time to time and in accordance with
applicable laws, rules and regulations.




During
the quarter ended March 31, 2009, we did not repurchase any of our outstanding
warrants. The following table sets forth information with respect to repurchases
of our common stock during the quarter ended March 31, 2009:




Period
            
            Total
      Number of Shares Purchased
            
            
            Average
      Price Paid per Share
            
            
            Total
      Number of Shares Purchased as Part of Publicly Announced Plans or
      Programs(1)
            
            
            Maximum
      Dollar Value of Securities that May Yet Be Purchased Under the Plans or
      ProgramsJanuary
      1, 2009 to January 31, 2009February
      1, 2009 to February 28, 2009March
      1, 2009 to March 31, 2009
            
            
            15,642
            
            
            $
            2.19
            
            
            
            15,642
            
            
            $
            965,726


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




Between
April 1, 2009 and April 27, 2009, the Company repurchased an additional 16,043
shares for $42,030.




27





ITEM
5. OTHER INFORMATION





Entry
into a Material Definitive Agreement





On April
27, 2009, our Board of Directors approved a form indemnification agreement to be
entered into by the Company with each of our three independent directors,
Messrs. Hoyt Ammidon Jr., Theodore M. Leary Jr. and Aidan J.
Riordan.  These agreements, among other things, require us to
indemnify, and to advance expenses on behalf of, each such person to the fullest
extent permitted by Delaware law for all judgments, fines and amounts paid in
settlement, whether brought in our right or otherwise, arising out of such
person’s service as a director.  In addition, we have agreed to
advance and indemnify each independent director for expenses such as attorneys’
fees, court costs, travel expenses and all other disbursements or expenses of
the types customarily incurred in connection with prosecuting or defending any
threatened, pending or completed action that is indemnifiable under the
indemnification agreement.




ITEM
6. EXHIBITS





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




28




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:
      April 29, 2009
            By: /s/
      Richard S.
      FooteRichard
      S. Foote
              President
      and Chief Executive Officer
              (Principal
      Executive Officer)Dated:
      April 29, 2009
            By:
      /s/ R. Bradley
      ForthR.
      Bradley Forth
              Executive
      Vice President, Chief Financial Officer and Secretary
              (Principal
      Financial and Accounting Officer)




29




EXHIBIT
INDEX





Exhibit
              Number
            
            Description
      of Document10.1
            
            Form
      of Highbury Financial Inc. Indemnification Agreement.31.1
            
            Section
      302 Certification by CEO.31.2
            
            Section
      302 Certification by CFO.32
            
            Section
      906 Certification by CEO and CFO.




30