UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
D.C. 20549
 
  Form
10-Q
  (Mark
One)
 þ
                QUARTERLY REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 For
the quarterly period ended September 30, 2010
 OR
 
 o
                TRANSITION REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 For
the transition period
from             to
  Commission
file number: 000-53352
  Titanium
Asset Management Corp.
 (Exact
name of registrant as specified in its charter)
  Delaware
                  (State
      or other jurisdiction of
                  incorporation
      or organization)
                20-8444031
                  (I.R.S.
      Employer
                  Identification
      No.)777
      E. Wisconsin Avenue
                  Milwaukee,
      Wisconsin
                  (Address
      of principal executive offices)
                53202-5310
                  (Zip
      Code)
  (414)
765-1980
 (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 Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.  Yes þ No   ̈
  Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).  Yes  ̈
No   ̈
  Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.  (Check
one):
  Large
      accelerated filer  ̈
              Accelerated
      filer  ̈Non-accelerated
      filer  ̈
              Smaller
      reporting company þ(Do
      not check if a smaller reporting company)
  Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).  Yes  ̈  No  þ
  At
November 6,
2010, there were20,491,824 shares of
the registrant’s common stock and 612,716 shares of restricted stock
outstanding.
 TABLE
OF CONTENTS
 
 PagePART
      I. FINANCIAL INFORMATION
                                          1Item
      1.
                                          Financial
      Statements
                                          1Item
      2.
                                          Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                                          15Item
      3.
                                          Quantitative
      and Qualitative Disclosures About Market Risk
                                          28Item
      4T.
                                          Controls
      and Procedures.
                                          28PART
      II. OTHER INFORMATION
                                          29Item
      1.
                                          Legal
      Proceedings
                                          29Item
      1A.
                                          Risk
      Factors.
                                          29Item
      2.
                                          Unregistered
      Sales of Equity Securities and Use of Proceeds
                                          29Item
      3.
                                          Defaults
      Upon Senior Securities
                                          29Item
      4.
                                          (Removed
      and Reserved)
                                          29Item
      5.
                                          Other
      Information
                                          29Item
      6.
                                          Exhibits
                                          29
  i
  PART I.
                  FINANCIAL
      INFORMATION
  Item 1.
                Financial
      Statements
 Titanium
Asset Management Corp.
 Condensed
Consolidated Balance Sheets
 
 September 30,
                    2010
                  
                  
                  December 31,
                    2009(unaudited)AssetsCurrent
      assetsCash
      and cash equivalents
                  
                  $
                  1,599,000
                  
                  
                  $
                  4,773,000Investments
                  
                  
                  9,351,000
                  
                  
                  
                  12,549,000Accounts
      receivable
                  
                  
                  4,014,000
                  
                  
                  
                  5,030,000Other
      current assets
                  
                  
                  1,509,000
                  
                  
                  
                  1,162,000Total
      current assets
                  
                  
                  16,473,000
                  
                  
                  
                  23,514,000Investments
      in affiliates
                  
                  
                  6,423,000
                  
                  
                  
                  2,179,000Property
      and equipment, net
                  
                  
                  488,000
                  
                  
                  
                  427,000Goodwill
                  
                  
                  23,047,000
                  
                  
                  
                  28,147,000Intangible
      assets, net
                  
                  
                  22,434,000
                  
                  
                  
                  24,920,000Total
      assets
                  
                  $
                  68,865,000
                  
                  
                  $
                  79,187,000Liabilities
      and Stockholders’ EquityCurrent
      liabilitiesAccounts
      payable
                  
                  $
                  64,000
                  
                  
                  $
                  237,000Acquisition
      payments due
                  
                  
                  -
                  
                  
                  
                  1,746,000Other
      current liabilities
                  
                  
                  3,004,000
                  
                  
                  
                  3,504,000Total
      current liabilities
                  
                  
                  3,068,000
                  
                  
                  
                  5,487,000Acquisition
      payments due
                  
                  
                  960,000
                  
                  
                  
                  960,000Total
      liabilities
                  
                  
                  4,028,000
                  
                  
                  
                  6,447,000Commitments
      and contingencies Stockholders’ equityCommon
      stock, $0.0001 par value; 54,000,000 shares authorized; 20,491,824 shares
      issued and outstanding at September 30, 2010 and 20,564,816 shares issued
      and outstanding at December 31, 2009
                  
                  
                  2,000
                  
                  
                  
                  2,000Restricted
      common stock, $0.0001 par value; 720,000 shares authorized; 612,716 issued
      and outstanding at September 30, 2010 and December 31,
2009
                  
                  
                  -
                  
                  
                  
                  -Preferred
      stock, $0.0001 par value; 1,000,000 shares authorized; none
      issued
                  
                  
                  -
                  
                  
                  
                  -Additional
      paid-in capital
                  
                  
                  100,135,000
                  
                  
                  
                  100,332,000Accumulated
      deficit
                  
                  
                  (35,336,000
                  )
                  
                  
                  (27,766,000
                  )Other
      comprehensive income
                  
                  
                  36,000
                  
                  
                  
                  172,000Total
      stockholders’ equity
                  
                  
                  64,837,000
                  
                  
                  
                  72,740,000Total
      liabilities and stockholders’ equity
                  
                  $
                  68,865,000
                  
                  
                  $
                  79,187,000
 
 See Notes
to Condensed Consolidated Financial Statements contained herein and the Notes to
Consolidated Financial Statements in the Titanium Asset Management Corp. Annual
Report on Form 10-K for the year ended December 31, 2009 (the “2009 Form
10-K”).
  1
  Titanium
Asset Management Corp.
 Condensed
Consolidated Statements of Operations
 (unaudited)
 
 Three Months Ended
                      September 30,
                    
                    
                    Nine Months Ended
                      September 30,2010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009Operating
      revenues
                    
                    $
                    5,822,000
                    
                    
                    $
                    5,335,000
                    
                    
                    $
                    17,064,000
                    
                    
                    $
                    15,631,000Operating
      expenses:Administrative
                    
                    
                    5,668,000
                    
                    
                    
                    6,025,000
                    
                    
                    
                    18,057,000
                    
                    
                    
                    18,609,000Amortization
      of intangible assets
                    
                    
                    828,000
                    
                    
                    
                    1,020,000
                    
                    
                    
                    2,486,000
                    
                    
                    
                    3,059,000Impairment
      of goodwill
                    
                    
                    5,100,000
                    
                    
                    
                    4,847,000
                    
                    
                    
                    5,100,000
                    
                    
                    
                    4,847,000Total
      operating expenses
                    
                    
                    11,596,000
                    
                    
                    
                    11,892,000
                    
                    
                    
                    25,643,000
                    
                    
                    
                    26,515,000Operating
      loss
                    
                    
                    (5,774,000
                    )
                    
                    
                    (6,557,000
                    )
                    
                    
                    (8,579,000
                    )
                    
                    
                    (10,884,000
                    )Other
      incomeInterest
      income
                    
                    
                    69,000
                    
                    
                    
                    98,000
                    
                    
                    
                    233,000
                    
                    
                    
                    333,000Gain
      (loss) on investments
                    
                    
                    54,000
                    
                    
                    
                    28,000
                    
                    
                    
                    181,000
                    
                    
                    
                    (160,000
                    )Income
      from equity investees
                    
                    
                    167,000
                    
                    
                    
                    -
                    
                    
                    
                    611,000
                    
                    
                    
                    -Interest
      expense
                    
                    
                    -
                    
                    
                    
                    (15,000
                    )
                    
                    
                    (16,000
                    )
                    
                    
                    (44,000
                    )Loss
      before taxes
                    
                    
                    (5,484,000
                    )
                    
                    
                    (6,446,000
                    )
                    
                    
                    (7,570,000
                    )
                    
                    
                    (10,755,000
                    )Income
      tax benefit
                    
                    
                    -
                    
                    
                    
                    (249,000
                    )
                    
                    
                    -
                    
                    
                    
                    (1,821,000
                    )Net
      loss
                    
                    $
                    (5,484,000
                    )
                    
                    $
                    (6,197,000
                    )
                    
                    $
                    (7,570,000
                    )
                    
                    $
                    (8,934,000
                    )Earnings
      (loss) per shareBasic
                    
                    $
                    (0.27
                    )
                    
                    $
                    (0.30
                    )
                    
                    $
                    (0.37
                    )
                    
                    $
                    (0.43
                    )Diluted
                    
                    $
                    (0.27
                    )
                    
                    $
                    (0.30
                    )
                    
                    $
                    (0.37
                    )
                    
                    $
                    (0.43
                    )Weighted
      average number of common shares outstanding:Basic
                    
                    
                    20,683,824
                    
                    
                    
                    20,546,490
                    
                    
                    
                    20,691,303
                    
                    
                    
                    20,546,490Diluted
                    
                    
                    20,683,824
                    
                    
                    
                    20,546,490
                    
                    
                    
                    20,691,303
                    
                    
                    
                    20,546,490
 
 See Notes
to Condensed Consolidated Financial Statements contained herein and the Notes to
Consolidated Financial Statements in the 2009 Form 10-K.
  2
  Titanium
Asset Management Corp.
 Condensed
Consolidated Statements of Comprehensive Income
 (unaudited)
 
 Three Months Ended
                    September 30,
                  
                  
                  Nine Months Ended
                    September 30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Net
      loss
                  
                  $
                  (5,484,000
                  )
                  
                  $
                  (6,197,000
                  )
                  
                  $
                  (7,570,000
                  )
                  
                  $
                  (8,934,000
                  )Unrealized
      gains (losses) on available-for-sale securities
                  
                  
                  97,000
                  
                  
                  
                  283,000
                  
                  
                  
                  71,000
                  
                  
                  
                  234,000Net
      (gains) losses reclassified from accumulated other comprehensive income to
      earnings
                  
                  
                  (103,000
                  )
                  
                  
                  -
                  
                  
                  
                  (207,000
                  )
                  
                  
                  294,000Income
      tax on other comprehensive income items
                  
                  
                  -
                  
                  
                  
                  (110,000
                  )
                  
                  
                  -
                  
                  
                  
                  (202,000
                  )Other
      comprehensive income items, net of tax
                  
                  
                  (6,000
                  )
                  
                  
                  173,000
                  
                  
                  
                  (136,000
                  )
                  
                  
                  326,000Comprehensive
      loss
                  
                  $
                  (5,490,000
                  )
                  
                  $
                  (6,024,000
                  )
                  
                  $
                  (7,706,000
                  )
                  
                  $
                  (8,608,000
                  )
 
 See Notes
to Condensed Consolidated Financial Statements contained herein and the Notes to
Consolidated Financial Statements in the 2009 Form 10-K.
  3
  Titanium
Asset Management Corp.
 Consolidated
Statements of Changes in Stockholders’ Equity
 For
the Nine Months ended September 30, 2010 and 2009
 
 Common Stock
                        
                        
                        Restricted SharesShares
                        
                        
                        Shares
                          held by
                          TIP
                        
                        
                        Amount
                        
                        
                        Shares
                        
                        
                        Amount
                        
                        
                        Additional
                          Paid-in Capital
                        
                        
                        Retained
                          Earnings
                          (Deficit)
                        
                        
                        Other
                          Comprehensive
                          Income (Loss)
                        
                        
                        Total
                          Stockholders’
                          EquityBalances
      at December 31,  2008
                        
                        
                        20,464,002
                        
                        
                        
                        (97,011
                        )
                        
                        $
                        2,000
                        
                        
                        
                        696,160
                        
                        
                        $
                        -
                        
                        
                        $
                        99,462,000
                        
                        
                        $
                        (6,597,000
                        )
                        
                        $
                        (163,000
                        )
                        
                        $
                        92,704,000Employee
      share grants
                        
                        
                        45,500
                        
                        
                        
                        55,322
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Equity
      compensation expense
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        313,000
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        313,000Net
      loss and comprehensive income (loss)
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (8,934,000
                        )
                        
                        
                        326,000
                        
                        
                        
                        (8,608,000
                        )Balances
      at September 30, 2009
                        
                        
                        20,509,502
                        
                        
                        
                        (41,689
                        )
                        
                        $
                        2,000
                        
                        
                        
                        612,716
                        
                        
                        $
                        -
                        
                        
                        $
                        99,775,000
                        
                        
                        $
                        (15,531,000
                        )
                        
                        $
                        163,000
                        
                        
                        $
                        84,409,000Balances
      at December 31, 2009
                        
                        
                        20,689,478
                        
                        
                        
                        (124,662
                        )
                        
                        $
                        2,000
                        
                        
                        
                        612,716
                        
                        
                        $
                        -
                        
                        
                        $
                        100,332,000
                        
                        
                        $
                        (27,766,000
                        )
                        
                        $
                        172,000
                        
                        
                        $
                        72,740,000Equity
      compensation expense
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        46,000
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        46,000Forfeitures
      of employee share grants
                        
                        
                        -
                        
                        
                        
                        (50,000
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (185,000
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (185,000
                        )Redemption
      of common stock
                        
                        
                        (22,991
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (58,000
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (58,000
                        )Net
      loss and comprehensive loss
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (7,570,000
                        )
                        
                        
                        (136,000
                        )
                        
                        
                        (7,706,000
                        )Balances
      at September 30, 2010
                        
                        
                        20,666,486
                        
                        
                        
                        (174,662
                        )
                        
                        $
                        2,000
                        
                        
                        
                        612,716
                        
                        
                        $
                        -
                        
                        
                        $
                        100,135,000
                        
                        
                        $
                        (35,336,000
                        )
                        
                        $
                        36,000
                        
                        
                        $
                        64,837,000
 
 See Notes
to Condensed Consolidated Financial Statements contained herein and the Notes to
Consolidated Financial Statements in the 2009 Form 10-K.
  4
  Titanium
Asset Management Corp.
 Condensed
Consolidated Statements of Cash Flows
 (unaudited)
  Nine Months Ended
                      September 30,2010
                    
                    
                    2009Cash
      flows from operating activitiesNet
      loss
                    
                    $
                    (7,570,000
                    )
                    
                    $
                    (8,934,000
                    )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Amortization
      of intangible assets
                    
                    
                    2,486,000
                    
                    
                    
                    3,059,000Impairment
      of goodwill
                    
                    
                    5,100,000
                    
                    
                    
                    4,847,000Depreciation
                    
                    
                    67,000
                    
                    
                    
                    80,000Share
      compensation expense (credit)
                    
                    
                    (139,000
                    )
                    
                    
                    313,000Loss
      (gain) on investments
                    
                    
                    (181,000
                    )
                    
                    
                    160,000Income
      from equity investees
                    
                    
                    (611,000
                    )
                    
                    
                    -Distributions
      from equity investees
                    
                    
                    367,000
                    
                    
                    
                    -Accretion
      of acquisition payments
                    
                    
                    16,000
                    
                    
                    
                    40,000Deferred
      income taxes
                    
                    
                    -
                    
                    
                    
                    (1,821,000
                    )Changes
      in assets and liabilities:Decrease
      in accounts receivable
                    
                    
                    1,016,000
                    
                    
                    
                    538,000Increase
      in other current assets
                    
                    
                    (347,000
                    )
                    
                    
                    (440,000
                    )Decrease
      in accounts payable
                    
                    
                    (173,000
                    )
                    
                    
                    (398,000
                    )Increase
      (decrease) in other current liabilities
                    
                    
                    (576,000
                    )
                    
                    
                    876,000Net
      cash used in operating activities
                    
                    
                    (545,000
                    )
                    
                    
                    (1,680,000
                    )Cash
      flows from investing activitiesPurchases
      of investments
                    
                    
                    (12,163,000
                    )
                    
                    
                    (16,340,000
                    )Sales
      and redemptions of investments
                    
                    
                    15,406,000
                    
                    
                    
                    13,929,000Investments
      in equity investees
                    
                    
                    (4,000,000
                    )
                    
                    
                    -Purchases
      of property and equipment
                    
                    
                    (128,000
                    )
                    
                    
                    (128,000
                    )Acquisitions
      of subsidiaries, net of cash acquired
                    
                    
                    (1,744,000
                    )
                    
                    
                    (8,151,000
                    )Net
      cash used in investing activities
                    
                    
                    (2,629,000
                    )
                    
                    
                    (10,690,000
                    )Net
      decrease in cash and cash equivalents
                    
                    
                    (3,174,000
                    )
                    
                    
                    (12,370,000
                    )Cash
      and cash equivalents:Beginning
                    
                    
                    4,773,000
                    
                    
                    
                    18,753,000Ending
                    
                    $
                    1,599,000
                    
                    
                    $
                    6,383,000
 
 See Notes
to Condensed Consolidated Financial Statements contained herein and the Notes to
Consolidated Financial Statements in the 2009 Form 10-K.
  5
  Titanium
Asset Management Corp.
 Notes
to Condensed Consolidated Financial Statements
 (unaudited)
  Note
1 – General
 
 Titanium
Asset Management Corp. (the “Company”) was incorporated on February 2, 2007. The
Company commenced operations as a special purpose acquisition company to acquire
one or more operating companies engaged in the asset management business. On
October 1, 2007, the Company acquired all of the voting common stock of Wood
Asset Management, Inc. (“Wood”) and all of the membership interests of Sovereign
Holdings, LLC (“Sovereign”), two asset management firms. On March 31, 2008, the
Company acquired all of the outstanding capital stock of National Investment
Services, Inc. (“NIS”), a third asset management firm. After such business
combinations, the Company ceased to act as a special purpose acquisition
vehicle. On December 31, 2008, the Company acquired all of the membership
interests of Boyd Watterson Asset Management, LLC (“Boyd”), a fourth asset
management firm. The Company’s strategy is to manage these operating
companies as an integrated business.
 
 The
accompanying unaudited interim condensed consolidated financial statements have
been prepared by the Company, in accordance with accounting principles generally
accepted in the United States (“GAAP”) and pursuant to the rules and regulations
of the Securities and Exchange Commission (the “SEC”) and, in the opinion of
management, include all adjustments (all of which were of a normal and recurring
nature) necessary for a fair statement of the information for each period
contained therein.
  The
preparation of consolidated financial statements in accordance with GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities as of the date of the consolidated financial statements, and the
reported amounts of revenues and expenses during the reporting period. These
estimates are based on information available as of the date of these
consolidated financial statements. Actual results could differ materially from
those estimates.
 
 The
information included in this Quarterly Report on Form 10-Q should be read in
conjunction with Management’s Discussion and Analysis of Financial Condition and
Results of Operations included herein and in the 2009 Form 10-K and the
Consolidated Financial Statements and the Notes thereto included in the 2009
Form 10-K.
 
 The cash
flow activity for the nine months ended September 30, 2009 related to the
payment of deferred acquisition obligations has been reclassified to be included
within investing activities.
 
 Note
2 – Adoption of New Accounting Standards
 
 The
Company’s significant accounting policies are discussed in the Notes to the
Company’s Consolidated Financial Statements in the 2009 Form 10-K.
 
 The
following new accounting standards and amendments to standards first became
effective for the fiscal year beginning January 1, 2010:
 
 
 ·
              A
      standard, which was issued by the Financial Accounting Standards Board
      (“FASB”) in June 2009, that requires entities to provide more information
      regarding sales of securitized financial assets and similar transaction.
      The adoption of this standard did not have a significant impact on the
      Company’s consolidated financial
statements.
  6
  Note
2 – Adoption of New Accounting Standards (continued)
 
 ·
              An
      amended standard, issued by the FASB in January 2010, that requires
      additional disclosures about significant transfers in and out of fair
      value measurement levels 1 and 2 and reasons for the transfers. In
      addition, the amended standard requires new disclosures relating to the
      reconciliation for fair value measurements using unobservable inputs
      (level 3) detailing information about purchases, issuances, and
      settlements on a gross basis. The adoption of these amended disclosure
      requirements did not have a significant impact on the Company’s
      consolidated financial statements.
 
 Note
3 – Investments
 
 The
Company’s current portfolio of debt securities and its investment in a
commingled stock fund that was originated in 2008 and liquidated in 2009 are
accounted for as available-for-sale securities. The Company’s investments in
affiliates are accounted for using the equity method of accounting because the
Company has significant influence over the management of the funds.
  Current
portfolio of debt securities
  Amortized cost
                    
                    
                    Unrealized gains
                    
                    
                    Unrealized
                      losses
                    
                    
                    Fair valueSeptember
      30, 2010
                    
                    $
                    9,230,000
                    
                    
                    $
                    136,000
                    
                    
                    $
                    (15,000
                    )
                    
                    $
                    9,351,000December
      31, 2009
                    
                    $
                    12,292,000
                    
                    
                    $
                    259,000
                    
                    
                    $
                    (2,000
                    )
                    
                    $
                    12,549,000
  Debt
securities accounted for as available-for-sale and held at September 30, 2010
mature as flows:
  Amortized cost
                    
                    
                    Fair valueWithin
      one year
                    
                    $
                    5,438,000
                    
                    
                    $
                    5,496,000After
      one year, but within five years
                    
                    $
                    3,792,000
                    
                    
                    $
                    3,855,000
 
 The
following is a summary of the realized gains and losses on the sale of
investments from the Company’s portfolio of debt securities for the three and
nine months ended September 30, 2010 and 2009. The specific identification
method is used to determine the realized gain or loss.
  Three Months Ended
                    September 30,
                  
                  
                  Nine Months Ended
                    September 30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Realized
      gains
                  
                  $
                  72,000
                  
                  
                  $
                  55,000
                  
                  
                  $
                  227,000
                  
                  
                  $
                  263,000Realized
      losses
                  
                  
                  (18,000
                  )
                  
                  
                  (27,000
                  )
                  
                  
                  (46,000
                  )
                  
                  
                  (42,000
                  )Net
      realized gains
                  
                  $
                  54,000
                  
                  
                  $
                  28,000
                  
                  
                  $
                  181,000
                  
                  
                  $
                  221,000
  7
  Note
3 – Investments (continued)
 
 Commingled
stock fund
  The
Company’s investment in a commingled stock fund consisted of its investment in
the Plurima Titanium U.S. Stock Fund, a sub-fund of the Dublin-based Plurima
Funds mutual funds complex, to which Wood served as investment advisor. In March
2009, the Company’s board of directors determined that additional investments
from other parties into the Plurima Titanium U.S. Stock Fund were likely not to
be forthcoming. As a result, the Company decided to liquidate its investment in
the commingled stock fund. Based on this decision, the Company recognized a
$381,000 impairment loss on this investment, including the previously
unrecognized loss of $294,000 that was reclassified out of accumulated other
comprehensive income into earnings. The Company subsequently liquidated its
investment and received proceeds of $587,000 from Plurima in 2009.
 
 Investments
in Affiliates
  Investments
in affiliates include the Company’s investment in the Titanium TALF Opportunity
Fund (the “TALF Fund”), which it organized for its clients to invest in
securities participating in the Term Asset-Backed Securities Loan Facility
(“TALF”) of the Federal Reserve Bank of New York. The Company is the managing
member of the TALF Fund and serves as the investment manager for the TALF Fund
for which it receives management fees. As of September 30, 2010, the Company’s
investment in the TALF Fund (including an additional investment of $2,000,000
made during the nine months ended September 30, 2010) represents approximately
11% of the total investments in the TALF Fund. Because the Company has an equity
interest in the TALF Fund and has significant influence over the TALF Fund’s
daily activities through its role as managing member and investment manager, the
Company accounts for this investment using the equity method of
accounting.
  Investments
in affiliates also include the Company’s $2,000,000 investment in the NIS Fixed
Income Arbitrage Fund, LTD. (the “NIS ARB Fund”) made during the nine months
ended September 30, 2010. The Company is the managing member of the NIS ARB Fund
and serves as the investment manager for the NIS ARB Fund for which it receives
management fees. As of September 30, 2010, the Company’s investment in the NIS
ARB Fund represents approximately 15% of the total investments in the NIS ARB
Fund. Because the Company has an equity interest in the NIS ARB Fund and has
significant influence over the NIS ARB Fund’s daily activities through its role
as managing member and investment manager, the Company accounts for this
investment using the equity method of accounting.
  The
activity related to the Company’s investment in affiliates for the nine months
ended September 30, 2010 is as follows:
  Investment
      at December 31, 2009
                    
                    $
                    2,179,000Additional
      investments
                    
                    
                    4,000,000Distributions
                    
                    
                    (367,000
                    )Equity
      in income of affiliates
                    
                    
                    611,000Investments
      in affiliates at September 30, 2010
                    
                    $
                    6,423,000
  8
  Note
4 – Goodwill
 
 We
perform goodwill impairment tests annually, or whenever events or changes in
circumstances indicate that the carrying amount of goodwill might not be
recoverable, using a two-step process with the first step being a test for
potential impairment by comparing our reporting unit’s fair value with its
carrying amount (including goodwill). If the carrying amount of the reporting
unit exceeds its fair value, we complete the second step under which the fair
value of the reporting unit is allocated to its assets and liabilities,
including recognized and unrecognized intangibles. If the implied fair value of
the reporting unit’s goodwill is lower than its carrying amount, goodwill is
impaired and written down to its implied fair value. We complete our annual test
for impairment during our fourth quarter.
  For
purposes of testing goodwill for impairment, the Company attributes all goodwill
to a single reporting unit. We have aggregated all of our subsidiaries into a
single reporting unit because they provide similar services to similar clients,
operate in the same regulatory framework, and share similar economic
characteristics. The Company’s shared sales force is organized to market the
full range of the Company’s products and services.
  We
estimate fair value averaging fair value established using an income approach
and fair value established using a market approach. The fair value from the
income approach was weighted 75%, while the fair value from the market approach
was weighted 25%. The weighting reflects that the market approach includes more
mature asset management companies with greater scale than the Company. We use
independent valuation specialists to assist us in our valuation
process.
  The
income approach uses a discounted cash flow model that takes into account
assumptions that marketplace participants would use in their estimates of fair
value, current period actual results, and forecasted results for future periods
that have been reviewed by senior management. In preparing our forecasts, we
considered historical and projected growth rates, our business plans, prevailing
business conditions and trends, anticipated needs for working capital and
capital expenditures, and historical and expected levels and trends of operating
profitability.
 
 The
market approach employs market multiples for comparable companies. Fair value
estimates are established using multiples of assets under management and current
and forward multiples of revenue and earnings before income taxes, depreciation
and amortization (referred to as EBITDA).
 
 Based on
interim results through September 30, 2010, initial work in connection with
preparing our 2011 budget, and some trading activity in our common stock, we
determined that we should complete a goodwill impairment test as of September
30, 2010. For the current operating forecasts, our estimates for net inflows of
assets under management and market returns resulted in estimated revenue growth
rates of approximately 9% per annum, which are less than the estimated growth
rates in the immediately prior valuation. Cash flows beyond the five year
forecast period were projected at 4% per annum. We used a weighted average cost
of capital of 14.5% determined using the capital asset pricing model, which is
consistent with the rate used in the immediately prior valuation.
  Upon
completion of the goodwill impairment test as of September 30, 2010, we
concluded that our recorded goodwill balance was impaired and recorded an
impairment charge of $5,100,000 in the third quarter of 2010. In addition, we
expect to settle the remaining acquisition obligation for Boyd in the fourth
quarter for the full $8,000,000. This settlement would result in an additional
$8,000,000 of goodwill. However, based on the current estimates, we expect that
we will have to recognize an additional goodwill impairment charge for this
entire amount in the fourth quarter of 2010.
 
 During
2009, we incurred impairment charges of $8,489,000, of which $4,847,000 was
recorded in the third quarter of 2009 and $3,642,000 was recorded in the fourth
quarter of 2009.
  9
  Note
5 – Acquisition Obligations
  In
connection with the acquisitions of Wood, Sovereign, NIS and Boyd, the
acquisition agreements provided for deferred fixed payments and contingent
payments based on assets under management or revenues at specified future dates.
The deferred fixed amounts due as of September 30, 2010 and December 31, 2009
are as follows:
  September 30,
                      2010
                    
                    
                    December 31,
                      2009Current
      amounts:Sovereign
      acquisition obligation (a)
                    
                    $
                    -
                    
                    
                    $
                    1,033,000NIS
      acquisition obligation (b)
                    
                    
                    -
                    
                    
                    
                    713,000Current
      acquisition payments due
                    
                    $
                    -
                    
                    
                    $
                    1,746,000Noncurrent
      amount:Boyd
      acquisition obligation (c)
                    
                    $
                    960,000
                    
                    
                    $
                    960,000
  (a)
              During
      the period ended March 31, 2010, as part of a settlement agreement with
      the previous majority owner of Sovereign, the Company agreed to pay
      $1,015,000 in full satisfaction of all amounts due, or that would become
      due, under the acquisition agreement. This amount was paid in April
      2010.
  (b)
              The
      NIS acquisition obligation was paid in May
2010.
  (c)
              The
      Boyd acquisition obligation reflects a deferred stock grant of 192,000
      shares of common stock valued at the acquisition date at $960,000, payable
      in 2011.
  Under the
terms of the acquisition agreement for Wood, the seller may receive additional
payments should Wood achieve certain revenue and assets under management
milestones through September 30, 2011. At September 30, 2010, the remaining
maximum payments are $3,000,000, of which up to 50% is payable in Company common
stock. Based on current estimates for assets under management and revenues, the
Company estimates that approximately $825,000 will be due under the assets under
management provision in 2011 and that no amount will be due under the revenue
provision.
  Under the
terms of the acquisition agreement for Boyd, the sellers may receive an
additional deferred payment up to $8,000,000 based on the revenue run rate as of
December 31, 2010, payable in 2011. The current revenue run rate significantly
exceeds the target for the maximum. We expect to amend the acquisition
agreement, to accelerate the measurement date to November 30, 2010 and to make
the payment in cash prior to December 31, 2010.
  Note
6 – Stockholders’ Equity
 
 The
Company’s authorized capital consists of 54,000,000 shares of common stock with
a $0.0001 par value, 720,000 shares of restricted common stock with a $0.0001
par value, and 1,000,000 shares of preferred stock with a $0.0001 par value. The
restricted common stock shares carry voting rights and no rights to dividends
except in the case of liquidation of the Company. The restricted common stock
shares convert on a one-for-one basis to shares of common stock if at any time
within five years of their issue the ten-day average share price of the common
stock exceeds $6.90 or if there is a change in control (as defined in the
Company’s certificate of incorporation). No preferred stock had been issued at
September 30, 2010.
 
 At
December 31, 2009, the Company had outstanding compensatory stock grants for
55,322 shares of common stock held by Titanium Incentive Plan, LLC (“TIP”), a
wholly-owned subsidiary. During April 2010, an award for 50,000 shares was
forfeited resulting in the reversal of $185,000 of previously recognized
compensation expense. The remaining grants vested on June 21, 2010. At September
30, 2010, the Company had no further compensatory awards
outstanding.
  10
  Note
6 – Stockholders’ Equity (continued)
 
 In
connection with the Company’s 2007 private placement, the Company issued
20,000,000 warrants that entitle the holder to purchase one share of common
stock at $4.00 per share. The warrants expire in June 2011 unless earlier
redeemed by the Company. At September 30, 2010, all 20,000,000 warrants were
outstanding.
  As part
of the private placement, the Company granted an option to Sunrise Securities
Corp. to acquire 2 million units at a price of $6.60 (each unit consists of one
share of common stock and one warrant to acquire one share of common stock at
$4.00 per share). At September 30, 2010, all of these options were
outstanding.
 
 Note 7 –Income Taxes
 
 At
December 31, 2009, the Company had deferred tax assets of $10,273,000 including
deferred tax benefits related to federal net operating loss carryforwards of
approximately $10,636,000 that expire in 2028 and 2029 and state net operating
loss carryforwards totaling approximately $10,233,000 that expire between 2023
and 2029.
  In
assessing the realizability of the Company’s deferred tax assets, we consider
all relevant positive and negative evidence in determining whether it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. The realization of the gross deferred tax assets depends on several
factors, including the generation of sufficient taxable income prior to the
expiration of the net operating loss carryforwards. Pursuant to FASB guidance, a
cumulative loss in recent years is a significant piece of negative evidence to
be considered in evaluating the need for a valuation allowance that is difficult
to overcome. Based on the pretax losses in 2008 and 2009, we determined that it
was no longer appropriate to consider expected future income as the primary
factor in determining the realizability of our deferred tax assets. As a result,
the Company recognized a valuation allowance of $10,273,000 against the full
value of deferred tax assets as of December 31, 2009.
  Based on
the continuation of cumulative losses, the Company continued to fully offset any
additional deferred tax assets with additional valuation allowances during the
nine months ended September 30, 2010.
  11
  Note 8 –Earnings per
Share
 
 Basic
earnings per share (“EPS”) is computed by dividing net income (loss) by the
weighted average shares of common stock outstanding. In addition, in periods
following the acquisition of Boyd, basic weighted average shares include 192,000
shares of common stock to be issued to the sellers of Boyd in 2011, except under
certain circumstances described in the Boyd acquisition agreement. Diluted EPS
gives effect to all dilutive potential shares of common stock outstanding during
the period. Dilutive potential shares of common stock include the incremental
shares of common stock issued under the compensatory common stock grants
computed using the treasury stock method. No incremental shares of common stock
have been included for the 20,000,000 outstanding warrants as their effect would
have been antidilutive under the treasury stock method. The 612,716 shares of
restricted common stock have been excluded from the computation of diluted
weighted average shares because their conversion terms require the ten-day
average share price of the common stock to exceed $6.90 per share. In addition,
the option to acquire 2,000,000 units is excluded from the computation of
diluted weighted average shares because the effect would have been
antidilutive.
  The
computation of basic and diluted EPS is as follows:
  Three months ended
                    September 30,
                  
                  
                  Nine months ended
                    September 30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Basic
      EPS:Net
      loss
                  
                  $
                  (5,484,000
                  )
                  
                  $
                  (6,197,000
                  )
                  
                  $
                  (7,570,000
                  )
                  
                  $
                  (8,934,000
                  )Weighted
      average shares of common stock outstanding
                  
                  
                  20,491,824
                  
                  
                  
                  20,354,490
                  
                  
                  
                  20,499,303
                  
                  
                  
                  20,354,490Shares
      of common stock to be issued in Boyd acquisition
                  
                  
                  192,000
                  
                  
                  
                  192,000
                  
                  
                  
                  192,000
                  
                  
                  
                  192,000Basic
      weighted average shares of common stock outstanding
                  
                  
                  20,683,824
                  
                  
                  
                  20,546,490
                  
                  
                  
                  20,691,303
                  
                  
                  
                  20,546,490Basic
      EPS
                  
                  $
                  (0.27
                  )
                  
                  $
                  (0.30
                  )
                  
                  $
                  (0.37
                  )
                  
                  $
                  (0.43
                  )Diluted
      EPS:Net
      loss
                  
                  $
                  (5,484,000
                  )
                  
                  $
                  (6,197,000
                  )
                  
                  $
                  (7,570,000
                  )
                  
                  $
                  (8,934,000
                  )Basic
      weighted average shares of common stock outstanding
                  
                  
                  20,683,824
                  
                  
                  
                  20,546,490
                  
                  
                  
                  20,691,303
                  
                  
                  
                  20,546,490Shares
      of common stock under compensatory common stock grants
                  
                  
                  -
                  
                  
                  
                  41,995
                  
                  
                  
                  14,474
                  
                  
                  
                  63,137Diluted
      weighted average shares of common stock outstanding
                  
                  
                  20,683,824
                  
                  
                  
                  20,588,485
                  
                  
                  
                  20,705,777
                  
                  
                  
                  20,609,627Diluted
      EPS
                  
                  $
                  (0.27
                  )
                  
                  $
                  (0.30
                  )
                  
                  $
                  (0.37
                  )
                  
                  $
                  (0.43
                  )
 
 The
diluted weighted average shares amount for the three and nine month periods
ended September 30, 2010 and 2009 are provided for informational purposes, as
the net loss for these periods causes basic earnings per share to be the most
dilutive.
  12
  Note 9 – Fair Value
Disclosures
  Under the
FASB’s fair value requirements, the fair values for assets and liabilities are
to be disclosed based on three levels of input: Level 1 – quoted prices in
active markets for identical assets or liabilities; Level 2 – observable inputs
other than Level 1 prices such as quoted prices for similar assets or
liabilities, quoted prices in markets that are not active, or other inputs that
are observable or can be corroborated by observable market data for
substantially the full term of the assets or liabilities; or Level 3 –
unobservable inputs that are supported by little or no market activity and that
are significant to the fair value of assets or liabilities. Level 3 assets and
liabilities include financial instruments the value of which is determined using
pricing models, discounted cash flow methodologies, or similar techniques, as
well as instruments for which the determination of fair value requires
significant judgment or estimation.
  The
Company measures the following assets at fair values on a recurring
basis:
  Category used for Fair ValuesLevel 1
                    
                    
                    Level 2
                    
                    
                    Level 3Assets at September 30,
2010Cash
      and cash equivalents
                    
                    $
                    1,599,000
                    
                    
                    $
                    -
                    
                    
                    $
                    -Current
      securities available for sale – Debt securities
                    
                    
                    -
                    
                    
                    
                    9,351,000
                    
                    
                    
                    -$
                    1,599,000
                    
                    
                    $
                    9,351,000
                    
                    
                    $
                    -Assets at December 31, 2009Cash
      and cash equivalents
                    
                    $
                    4,773,000
                    
                    
                    $
                    -
                    
                    
                    $
                    -Current
      securities available for sale – Debt securities
                    
                    
                    -
                    
                    
                    
                    12,549,000
                    
                    
                    
                    -$
                    4,773,000
                    
                    
                    $
                    12,549,000
                    
                    
                    $
                    -
  13
  Note 10 –Contingencies
 
 On
February 10, 2010, a former client filed suit in the United States District
Court for the Northern District of Illinois (the “US District Court”) against
the Company and its subsidiary Sovereign Holdings, LLC, alleging fraudulent
conduct and breach of fiduciary duty on the part of Sovereign in investing the
former client’s assets in auction-rate securities. The claim alleged, among
other things, that Sovereign failed to conduct adequate due diligence into the
auction rate securities purchased for the former client’s account, and that the
investment in the auction rate securities was outside the investment policy of
the former client. The former client’s suit sought $4,704,000 in
damages. On October 26, 2010, the US District Court granted our motion to
dismiss the suit with prejudice. At this time, we cannot predict what
further actions (if any) the former client may attempt to pursue in regards to
its claims. In any event, we believe the claims are without merit, and will
vigorously defend against them.
 
 The
Company's subsidiary, Sovereign, received a letter dated July 16, 2010 from a
former client demanding that Sovereign compensate it for losses relating to
allegedly unsuitable investments in approximately $30 million of various auction
rate securities purchased on its behalf by Sovereign.  The former client
has filed a claim against the underwriters for the purchased securities, but has
not to this point brought a claim against Sovereign. Management is in the
process of evaluating this demand and the former client's allegations to
determine whether there is any merit to them.  In the interim, we have
entered into a tolling agreement with the former client. At this preliminary
stage, the Company cannot determine the potential liability of the Company or
the likelihood of an unfavorable outcome.  In any event, management
believes the claim would be covered by insurance (up to $20 million), subject to
the payment of deductible amounts by the Company.
 
 During
2008, the Company received an invoice for $670,000 from the lawyers who worked
on the placement of the Company’s shares of common stock on AIM in June
2007. The Company is
disputing this invoice and at the current time believes there is no liability.
Accordingly, no provision has been made in these condensed consolidated
financial statements for the invoice. In the event that the Company must pay all
or a portion of this amount, the Company’s consolidated results of operations
will be unaffected and the Company does not expect its consolidated financial
position to materially change.
  The
Company is from time to time involved in legal matters incidental to the conduct
of its business and such matters can involve current and former employees and
vendors. Management does not expect these matters would have a material effect
on the Company’s consolidated financial position or results of
operations.
  14
  Item
      2.
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
  FORWARD-LOOKING
STATEMENTS
  This
Quarterly Report on Form 10-Q, including particularly the Management’s
Discussion and Analysis of Financial Condition and Results of Operations,
contains “forward-looking” statements within the meaning of the Private
Securities Litigation Reform Act of 1995, which provides a “safe harbor” for
statements about future events, products and future financial performance that
are based on the beliefs of, estimates made by and information currently
available to the management of Titanium Asset Management Corp., a Delaware
corporation (referred to as “we,” “our” or the “Company,” and, unless the
context indicates otherwise, includes our wholly owned asset management
subsidiaries, Wood Asset Management, Inc. (“Wood”), Sovereign Holdings LLC
(“Sovereign”), National Investment Services, Inc. (“NIS”), and Boyd Watterson
Asset Management, LLC (“Boyd”). We refer to Wood, Sovereign, NIS and Boyd
collectively as our subsidiaries. The outcome of the events described in these
forward-looking statements is subject to risks and uncertainties. Actual results
and the outcome or timing of certain events may differ significantly from those
projected in these forward-looking statements due to market fluctuations that
alter our assets under management; termination of investment advisory
agreements; loss of key personnel; loss of third-party distribution services;
impairment of goodwill and other intangible assets; our inability to compete;
market pressure on investment advisory fees; problems experienced in the
acquisition or integration of target businesses; changes in law, regulation or
tax rates; ineffective management of risk; inadequacy of insurance; changes in
interest rates, equity prices, liquidity of global markets and international and
regional political conditions; terrorism; changes in monetary and fiscal policy,
investor sentiment and availability and cost of capital; technological changes
and events; outcome of legal proceedings; changes in currency values, inflation
and credit ratings; failure of our systems to properly operate; or actions taken
by Clal Finance Ltd., (“Clal”), as our significant stockholder; factors listed
under “Risk Factors” in our Annual Report on Form 10-K for the year ended
December 31, 2009 (the “2009 Form 10-K”); and other factors listed in this
Quarterly Report on Form 10-Q and from time to time in our other filings with
the Securities and Exchange Commission (“SEC”). For this purpose, statements
relating to integrating the operational, administrative and sales activities of
our subsidiaries, earning of incentive fees, amount of future assets under
management, acquisitions of additional asset management firms and payment
therefor, payment of deferred consideration for the purchase of our subsidiaries
and anticipated levels of future revenues, expenses or earnings, among other
things; any statements using the terms “aim,” “anticipate,” “appear,” “based
on,” “believe,” “can,” “continue,” “could,” “are emerging,” “estimate,”
“expect,” “expectation,” “intend,” “may,” “ongoing,” “plan,” “possible”
“potential, “predict,” “project,” “should” and “would” or similar words or
phrases, or the negatives of those words or phrases; or discussions of strategy,
plans, objectives or goals, may identify forward-looking statements that involve
risks, uncertainties and other factors that could cause our actual results,
financial condition and the outcome and timing of certain events to differ
materially from those projected or management’s current expectations. By making
forward-looking statements, we have not assumed any obligation to, and you
should not expect us to, update or revise those statements because of new
information, future events or otherwise.
  The
following discussion is designed to provide a better understanding of
significant trends related to our consolidated financial condition and
consolidated results of operations. The discussion should be read in conjunction
with our condensed consolidated financial statements and notes thereto included
in this Quarterly Report on Form 10-Q, as well as the Management’s
Discussion and Analysis of Financial Condition and Results of Operations and the
Consolidated Financial Statements and Notes thereto included in our 2009 Form
10-K.
  General
  Our
principal business is providing investment advisory services to institutional
and retail clients. Our core strategy is to develop a broad array of investment
management expertise to enable us to offer a full range of investment strategies
to our clients. Although we manage and distribute a range of products and
services, we operate in one business segment, namely as an investment advisor to
institutional and retail clients.
  Through
four acquisitions, we have assembled a group of investment managers with solid
long-term track records to serve as our core asset management business. Through
these investment managers, we have expertise in both fixed-income and equity
investment strategies and have a client base that extends from individuals to a
range of institutional investors, as well as solid sub-advisory and referral
arrangements with a variety of broker-dealers. During 2009, we extended our
business to include real estate investment advisory services through the hiring
of two experienced real estate investment managers. As of September 30, 2010, we
had $8.5 billion of assets under management and an additional $1.0 billion of
assets, on which we earn referral fees.
  15
  Our asset
management services are typically delivered pursuant to investment advisory
agreements entered into between each subsidiary and its clients. Investment
advisory fees are generally received quarterly, based on the value of assets
under management on a particular date, such as the first or last day of a
quarter. Our institutional business is generally billed in arrears, whereas the
retail business is generally billed in advance. The majority of our investment
advisory contracts are generally terminable at any time or on notice of 30 days
or less. The nature of these agreements, the notice periods and the billing
cycles vary depending on the nature and the source of each client
relationship.
  Most of
our investment advisory services are provided through the management of separate
accounts. However, an increasing percentage of our services are provided through
private funds, which allow us to provide our investment strategies to our
institutional clients in a more cost efficient manner. We earn incentive fees on
two of the funds, which are organized to invest in preferred
stocks.
  We also
have a referral arrangement with a hedge fund manager through which were earn
fees for referring clients to its investment vehicles.
  Our
operating revenues are substantially influenced by the changes to our assets
under management and shifts in the distribution of assets under management among
types of securities and investment strategies. Our assets under management
fluctuate based primarily on our investment performance (both absolutely and
relative to other investment advisors) and the success of our sales and
marketing efforts. A material portion of our results will be influenced by
fluctuations in world financial markets. Because they comprise the largest part
of our assets under management, the performance of U.S. fixed-income securities
should have the greatest influence on our results.
  A
significant portion of our expenses, including employee compensation and
occupancy, do not vary directly with operating revenues. As a result, our
efforts to improve our cost structure have focused on integrating the
operational and administrative functions of the acquired subsidiaries, including
accounting, information technology, human resources, and risk management
activities. During 2009, we completed the staffing and reorganization of our
sales staff to better position us to sell the full range of our strategies to
our existing customer base and to prospective clients. In addition, we completed
the integration of our accounting operations.
  On
February 8, 2010, our Board of Directors announced that it had accepted the
resignation of Nigel Wightman as Chairman and Chief Executive Officer and had
named Mr. Robert Brooks as Chief Executive Officer. In addition to these
changes, the Board of Directors also announced the appointments of Mr. Brian
Gevry as Chief Operating Officer and Mr. Jonathan Hoenecke as Chief Financial
Officer. Further, on April 9, 2010, Mr. John Fisher resigned his positions as a
Managing Director and President and Chief Executive Officer of Wood and
Sovereign. These changes have centralized our management team, enhanced our
efforts to integrate our operations, and reduced our ongoing cost structure.
Since completion of the Boyd acquisition on December 31, 2008, we have reduced
our headcount from 97 to 82. Principally as a result of these reductions, we
have reduced our annualized administrative expenses from approximately $25.1
million at March 31, 2009 to $22.7 million at September 30, 2010.
  Market
Developments
  The fixed
income market performance during the three months ended September 30, 2010 was
solid with the Barclay’s Aggregate Index increasing 2.5% while the equity
markets recovered, with the S&P 500 Index increasing by 11.3%. For the
twelve months ended September 30, 2010, the Barclay’s Aggregate Index gained
10.2% while the S&P 500 Index gained 8.2%. As a result of the strong market
returns, our assets under management increased by $227.0 million, or 3%, since
September 30, 2009. The resultant increase in average assets under management
further resulted in a 9% increase in investment advisory fees for the three
months ended September 30, 2010 and a 9% increase for the nine months ended
September 30, 2010 compared to the prior year comparable
periods.
  16
  Assets
Under Management
  Our asset
management services are delivered pursuant to investment advisory agreements
with fees generally determined on a quarterly basis as a percentage (or range of
percentages) of either beginning or ending market value of assets under
management. Our investment advisory fees vary, among other things, by investment
strategy and by client type. Our average fee rates for equity investment
strategies generally are higher than those for fixed income strategies. In
general, our clients may terminate our services at any time with limited
notice.
  We manage
a portion of our assets under management through private funds that generally
are organized as limited liability companies. We believe the use of these funds
allows us to provide our investment strategies to our institutional clients in a
cost effective manner. We earn incentive fees on two of the funds, which are
organized to invest in preferred stocks.
  Assets
under management of $8.5 billion at September 30, 2010 were 5% higher than the
$8.2 billion reported at December 31, 2009 and 3% higher than the $8.3 billion
reported at September 30, 2009. The following table presents summary activity
for the three and nine months ended September 30, 2010 and 2009.
  Three Months Ended
                          
                          
                          2010
                          
                          
                          Nine Months Ended
                          
                          
                          2010September 30,
                          
                          
                          vs.
                          
                          
                          September 30,
                          
                          
                          vs.(in millions)
                          
                          2010
                          
                          
                          2009
                          
                          
                          2009
                          
                          
                          2010
                          
                          
                          2009
                          
                          
                          2009Period
      Activity:Beginning
      balance
                          
                          $
                          8,415.8
                          
                          
                          $
                          7,614.9
                          
                          
                          
                          10
                          %
                          
                          $
                          8,151.4
                          
                          
                          $
                          7,573.2
                          
                          
                          
                          8
                          %Inflows
                          
                          
                          324.2
                          
                          
                          
                          779.1
                          
                          
                          
                          -58
                          %
                          
                          
                          1,157.9
                          
                          
                          
                          1,725.6
                          
                          
                          
                          -33
                          %Outflows(1)
                          
                          
                          (492.4
                          )
                          
                          
                          (446.5
                          )
                          
                          
                          10
                          %
                          
                          
                          (1,284.1
                          )
                          
                          
                          (1,531.0
                          )
                          
                          
                          -16
                          %Net
      flows
                          
                          
                          (168.2
                          )
                          
                          
                          332.6
                          
                          
                          NM
                          
                          
                          
                          (126.2
                          )
                          
                          
                          194.6
                          
                          
                          NMMarket
      value change
                          
                          
                          315.2
                          
                          
                          
                          372.6
                          
                          
                          
                          -15
                          %
                          
                          
                          537.6
                          
                          
                          
                          552.3
                          
                          
                          
                          -3
                          %Ending
      balance
                          
                          $
                          8,562.8
                          
                          
                          $
                          8,320.1
                          
                          
                          
                          3
                          %
                          
                          $
                          8,562.8
                          
                          
                          $
                          8,320.1
                          
                          
                          
                          3
                          %Average
      Assets Under Management (2)
                          
                          $
                          8,489.3
                          
                          
                          $
                          7,967.5
                          
                          
                          
                          6
                          %
                          
                          $
                          8,492.2
                          
                          
                          $
                          7,764.3
                          
                          
                          
                          9
                          %Average
      Fee Rate (basis points)
                          
                          
                          25
                          
                          
                          
                          24
                          
                          
                          
                          4
                          %
                          
                          
                          24
                          
                          
                          
                          24
                          
                          
                          NC
 
 (1)
              Outflows
      for the nine month period ended September 30, 2010 include the elimination
      of approximately $100 million of advisory-only accounts whose fees are not
      asset-based.
  (2)
              Average
      assets under management are calculated based on the quarter end balances
      and include amounts acquired in acquisitions in the first quarter
      following the acquisition.
  NM: Not
meaningful
 NC: No
change
  The
principle factors affecting our net flows during the periods ended September 30,
2010 and 2009 include the following:
 
 ·
              We
      generated approximately $700 million of new assets in the quarter ended
      September 30, 2009 through our participation in the Term Asset-Backed
      Securities Loan Facility (TALF”) of the Federal Reserve Bank of New York.
      These new assets under management were added through new separate client
      accounts and our Titanium TALF Opportunity Fund (“TALF Fund”). The
      securities purchased under the TALF program are beginning to mature and as
      a result we may begin to experience some downward pressure on assets under
      management over the next year.
  17
  ·
              Our
      real estate investment advisory services began adding clients during the
      third quarter of 2009. During the quarter ended September 30, 2010, we
      added approximately $90 million of new assets compared to approximately
      $20 million of new assets in the comparable prior year period. During the
      nine months ended September 30, 2010, we added approximately $170 million
      of new assets compared to $20 million of new assets in the comparable
      prior year period. We earn higher average fees on the real estate assets,
      and the growth in these assets resulted in the marginal improvement to our
      overall average fee rate for the quarter ended September 30,
      2010.
 
 ·
              During
      2009 and 2010, we experienced higher asset withdrawals by multiemployer
      pension clients of NIS due to their asset rebalancing activities and
      general economic conditions. During the quarter ended September 30, 2010,
      these withdrawals were approximately $110 million compared to
      approximately $80 million in the comparable prior year period. During the
      nine months ended September 30, 2010, these withdrawals were approximately
      $300 million compared to approximately $340 million for the comparable
      prior year period. We would expect these withdrawals to moderate with
      improved equity market returns and with improved economic
      conditions.
 
 ·
              During
      the second half of 2009, we lost approximately $500 million of client
      accounts at Sovereign due to the loss of one broker-dealer platform and
      its underlying retail accounts and several large institutional accounts.
      We made several management changes at Sovereign to address the underlying
      reasons for these client losses and the Sovereign activity has stabilized
      in 2010. These asset losses were approximately $195 million during the
      quarter ended September 30, 2009 and approximately $280 million during the
      nine months ended September 30,
2009.
 
 ·
              The
      lack of individual investor confidence in the equity markets has led to
      higher account closures and withdrawals of equity assets, particularly in
      our retail accounts. During the quarter ended September 30, 2010, the
      total outflows of equity assets were approximately $70 million compared to
      approximately $30 million in the comparable prior year period. During the
      nine months ended September 30, 2010, the total outflows of equity assets
      were approximately $140 million compared to $120 million in the comparable
      prior year period.
 
 Market
value changes reflect our investment performance for the respective periods.
Fixed income assets comprise approximately 89% of our total assets under
management at September 30, 2010. Fixed income returns as measured by the
Barclay’s Aggregate Index were 2.5% for the quarter ended September 30, 2010
(3.7% for the comparable 2009 period) and 8.0% for the nine months ended
September 30, 2010 (5.7% for the comparable 2009 period). For the nine months
ended September 30, 2010, approximately 87% of our fixed income assets with
defined performance benchmarks outperformed their respective
benchmarks.
 
 Equity
assets comprise approximately 9% of total assets under management at September
30, 2010. Equity returns as measured by the S&P 500 Index were 11.3% for the
quarter ended September 30, 2010 (15.6% for the comparable 2009 period) and 3.9%
for the nine months ended September 30, 2010 (19.3% for the comparable 2009
period). Our equity assets generally underperformed their respective benchmarks
for the nine months ended September 30, 2010.
  18
  The
following table presents summary breakdowns for our assets under management at
September 30, 2010 and 2009.
  2010
                    
                    
                    2009By
      investment strategy:Fixed
      income
                    
                    $
                    7,607.5
                    
                    
                    $
                    7,516.9
                    
                    
                    
                    1
                    %Equity
                    
                    
                    749.0
                    
                    
                    
                    780.0
                    
                    
                    
                    -4
                    %Real
      estate
                    
                    
                    206.3
                    
                    
                    
                    23.2
                    
                    
                    NMTotal
                    
                    $
                    8,562.8
                    
                    
                    $
                    8,320.1
                    
                    
                    
                    3
                    %By
      client type:Institutional
                    
                    $
                    7,286.9
                    
                    
                    $
                    6,634.3
                    
                    
                    
                    10
                    %Retail
                    
                    
                    1,275.9
                    
                    
                    
                    1,685.8
                    
                    
                    
                    -24
                    %Total
                    
                    $
                    8,562.8
                    
                    
                    $
                    8,320.1
                    
                    
                    
                    3
                    %By
      investment vehicle:Separate
      accounts
                    
                    $
                    7,630.2
                    
                    
                    $
                    7,798.9
                    
                    
                    
                    -2
                    %Private
      funds
                    
                    
                    932.6
                    
                    
                    
                    521.2
                    
                    
                    
                    79
                    %Total
                    
                    $
                    8,562.8
                    
                    
                    $
                    8,320.1
                    
                    
                    
                    3
                    %
 
 Our mix
of assets under management by investment strategy was relatively unchanged as
fixed income assets comprised 89% of total assets under management in 2010
compared to 90% in 2009.
  During
2010, our mix of assets under management with institutional clients increased to
85% compared to 78% in 2009, primarily due to the loss of retail accounts at
Sovereign during the latter half of 2009. The modest change in mix did not
result in a significant change in our average fee rate.
  The
increase in assets managed through private funds reflects our organization
during the third quarter of 2009 of the TALF Fund. At September 30, 2010, we had
approximately $314.3 million of assets under management in the TALF
Fund.
  Through
October 31, 2010, our aggregate assets under management remained approximately
the same at $8.5 billion.
  We
have a referral arrangement with Attalus Capital (“Attalus”), whereby we refer
investors to investment vehicles sponsored by Attalus and in turn receive a
referral fee equal to a percentage of the fees received by Attalus from the new
clients. The assets managed by Attalus under this arrangement increased slightly
from $974.9 million at December 31, 2009 to $997.5 million at September 30,
2010. The activity related to these assets was as follows:
  Three Months Ended
                  
                  
                  Nine Months EndedSeptember 30,
                  
                  
                  September 30,(in millions)
                  
                  2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Annual
      Activity:Beginning
      balance
                  
                  $
                  955.6
                  
                  
                  $
                  860.4
                  
                  
                  $
                  974.9
                  
                  
                  $
                  806.2Inflows
                  
                  
                  -
                  
                  
                  
                  63.1
                  
                  
                  
                  24.2
                  
                  
                  
                  67.6Outflows
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Market
      value change
                  
                  
                  41.9
                  
                  
                  
                  46.4
                  
                  
                  
                  (1.6
                  )
                  
                  
                  96.1Ending
      balance
                  
                  $
                  997.5
                  
                  
                  $
                  969.9
                  
                  
                  $
                  997.5
                  
                  
                  $
                  969.9Average
      Assets Under Management
                  
                  $
                  976.6
                  
                  
                  $
                  915.2
                  
                  
                  $
                  980.0
                  
                  
                  $
                  864.7Average
      Referral Fee Rate (basis points)
                  
                  
                  25
                  
                  
                  
                  25
                  
                  
                  
                  25
                  
                  
                  
                  26
  19
  Results
of Operations
  Consolidated
Results of Operations
  Three Months Ended
                      
                      
                      2010
                      
                      
                      Nine Months Ended
                      
                      
                      2010September 30,
                      
                      
                      vs.
                      
                      
                      September 30,
                      
                      
                      vs.2010
                      
                      
                      2009
                      
                      
                      2009
                      
                      
                      2010
                      
                      
                      2009
                      
                      
                      2009Operating
      revenues
                      
                      $
                      5,822,000
                      
                      
                      $
                      5,335,000
                      
                      
                      
                      9
                      %
                      
                      $
                      17,064,000
                      
                      
                      $
                      15,631,000
                      
                      
                      
                      9
                      %Operating
      expenses:Administrative
                      
                      
                      5,668,000
                      
                      
                      
                      6,025,000
                      
                      
                      
                      -6
                      %
                      
                      
                      18,057,000
                      
                      
                      
                      18,609,000
                      
                      
                      
                      -3
                      %Amortization
      of intangible assets
                      
                      
                      828,000
                      
                      
                      
                      1,020,000
                      
                      
                      
                      -19
                      %
                      
                      
                      2,486,000
                      
                      
                      
                      3,059,000
                      
                      
                      
                      -19
                      %Impairment
      of goodwill
                      
                      
                      5,100,000
                      
                      
                      
                      4,847,000
                      
                      
                      
                      5
                      %
                      
                      
                      5,100,000
                      
                      
                      
                      4,847,000
                      
                      
                      
                      5
                      %Total
      operating expenses
                      
                      
                      11,596,000
                      
                      
                      
                      11,892,000
                      
                      
                      
                      -2
                      %
                      
                      
                      25,643,000
                      
                      
                      
                      26,515,000
                      
                      
                      
                      -3
                      %Operating
      loss
                      
                      
                      (5,774,000
                      )
                      
                      
                      (6,557,000
                      )
                      
                      
                      -12
                      %
                      
                      
                      (8,579,000
                      )
                      
                      
                      (10,884,000
                      )
                      
                      
                      -21
                      %Other
      income and expense
                      
                      
                      290,000
                      
                      
                      
                      111,000
                      
                      
                      
                      161
                      %
                      
                      
                      1,009,000
                      
                      
                      
                      129,000
                      
                      
                      
                      682
                      %Loss
      before taxes
                      
                      
                      (5,484,000
                      )
                      
                      
                      (6,446,000
                      )
                      
                      
                      -15
                      %
                      
                      
                      (7,570,000
                      )
                      
                      
                      (10,755,000
                      )
                      
                      
                      -30
                      %Income
      tax benefit
                      
                      
                      -
                      
                      
                      
                      (249,000
                      )
                      
                      NM
                      
                      
                      
                      -
                      
                      
                      
                      (1,821,000
                      )
                      
                      NMNet
      loss
                      
                      $
                      (5,484,000
                      )
                      
                      $
                      (6,197,000
                      )
                      
                      
                      -12
                      %
                      
                      $
                      (7,570,000
                      )
                      
                      $
                      (8,934,000
                      )
                      
                      
                      -15
                      %Net
      loss per sharebasic
                      
                      $
                      (0.27
                      )
                      
                      $
                      (0.30
                      )
                      
                      
                      
                      
                      
                      $
                      (0.37
                      )
                      
                      $
                      (0.43
                      )diluted
                      
                      $
                      (0.27
                      )
                      
                      $
                      (0.30
                      )
                      
                      
                      
                      
                      
                      $
                      (0.37
                      )
                      
                      $
                      (0.43
                      )
  NM: Not
meaningful
  The
decrease in the net loss for the three months ended September 30, 2010 compared
to the three months ended September 30, 2009 is primarily attributable to the
following:
  ·
              An
      increase in revenue of $487,000, or 9%, reflecting both an increase in
      average assets under management and a modest increase in our average fee
      rate.
 ·
              A
      decrease in administrative expenses of $357,000, primarily reflecting
      compensation reductions.
 ·
              A
      decrease in amortization charges from $1,020,000 to $828,000, reflecting
      the write off of intangible assets during
2009.
 ·
              An
      impairment charge for goodwill of $5,100,000 recognized in 2010 compared
      to a charge of $4,847,000 recognized in
2009.
 ·
              An
      increase in other income of $179,000, primarily reflecting the income from
      two equity investees in 2010.
 ·
              A
      $249,000 decrease in income tax benefits, reflecting the continued
      establishment of valuation allowances for all deferred tax
      assets.
  20
  The
decrease in the net loss for the nine months ended September 30, 2010 compared
to the nine months ended September 30, 2009 is primarily attributable to the
following:
  ·
              An
      increase in revenue of $1,433,000, or 9%, reflecting an increase in
      average assets under management.
 ·
              A
      decrease in administrative expenses of $552,000, despite incurring
      $813,000 of severance costs in the 2010 period, primarily reflecting
      compensation reductions.
 ·
              A
      decrease in amortization charges from $3,059,000 to $2,486,000, reflecting
      the write off of intangible assets during
2009.
 ·
              An
      impairment charge for goodwill of $5,100,000 recognized in 2010 compared
      to a charge of $4,847,000 recognized in
2009.
 ·
              An
      increase in other income of $880,000, primarily reflecting income from two
      equity investees in the 2010 period compared to a $381,000 impairment loss
      on a commingled stock fund recognized in the 2009
  period.
 ·
              A
      $1,821,000 decrease in income tax benefits reflecting the continued
      establishment of valuation allowances for all deferred tax
      assets.
 
 In
evaluating operating performance, we consider operating income and net income,
which are calculated in accordance with accounting principles generally accepted
in the United States (“GAAP”), as well as Adjusted EBITDA, an internally derived
non-GAAP performance measure. We define Adjusted EBITDA as operating income or
loss before non-cash charges for amortization and impairment of intangible
assets and goodwill, depreciation, and share compensation expense. We believe
Adjusted EBITDA is useful as an indicator of our ongoing performance and our
ability to service debt, make new investments, and meet working capital
requirements. Adjusted EBITDA, as we calculate it, may not be consistent with
computations made by other companies. We believe that many investors use this
information when analyzing the operating performance, liquidity, and financial
position of companies in the investment management industry. The following table
provides a reconciliation of operating income to Adjusted EBITDA for the three
and nine month periods ended September 30, 2010 and 2009.
  Three Months Ended
                        
                        
                        2010
                        
                        
                        Nine Months Ended
                        
                        
                        2010September 30,
                        
                        
                        vs.
                        
                        
                        September 30,
                        
                        
                        vs.2010
                        
                        
                        2009
                        
                        
                        2009
                        
                        
                        2010
                        
                        
                        2009
                        
                        
                        2009Operating
      loss
                        
                        $
                        (5,774,000
                        )
                        
                        $
                        (6,557,000
                        )
                        
                        
                        -12
                        %
                        
                        $
                        (8,579,000
                        )
                        
                        $
                        (10,884,000
                        )
                        
                        
                        -21
                        %Amortization
      of intangible assets
                        
                        
                        828,000
                        
                        
                        
                        1,020,000
                        
                        
                        
                        -19
                        %
                        
                        
                        2,487,000
                        
                        
                        
                        3,059,000
                        
                        
                        
                        -19
                        %Impairment
      of goodwill
                        
                        
                        5,100,000
                        
                        
                        
                        4,847,000
                        
                        
                        
                        5
                        %
                        
                        
                        5,100,000
                        
                        
                        
                        4,847,000
                        
                        
                        
                        5
                        %Depreciation
      expense
                        
                        
                        20,000
                        
                        
                        
                        26,000
                        
                        
                        
                        -23
                        %
                        
                        
                        67,000
                        
                        
                        
                        80,000
                        
                        
                        
                        -16
                        %Share
      compensation expense
                        
                        
                        -
                        
                        
                        
                        107,000
                        
                        
                        NM
                        
                        
                        
                        (139,000
                        )
                        
                        
                        314,000
                        
                        
                        NMAdjusted
      EBITDA
                        
                        $
                        174,000
                        
                        
                        $
                        (557,000
                        )
                        
                        NM
                        
                        
                        $
                        (1,064,000
                        )
                        
                        $
                        (2,584,000
                        )
                        
                        
                        -58
                        %
  NM: Not
meaningful
  Adjusted
EBITDA for the nine months ended September 30, 2010 includes severance costs of
$813,000. Excluding severance costs, our Adjusted EBITDA deficit would have been
$251,000.
  21
  Operating
Revenues
  Our
operating revenues include investment advisory fees received for the management
of assets within separate accounts and private funds. We also receive incentive
fees on an annual basis from the management of two of the private funds that
invest in preferred stocks. Our operating revenues also include referral fees
earned in connection with NIS’s referral arrangement with Attalus. Operating
revenues increased by $487,000, or 9%, in the three months ended September 30,
2010 and by $1,433,000, or 9%, for the nine months ended September 30, 2010
primarily due to the increase in average assets under management. The changes by
revenue category are more fully described below.
  Three Months Ended
                        
                        
                        2010
                        
                        
                        Nine Months Ended
                        
                        
                        2010September 30,
                        
                        
                        vs.
                        
                        
                        September 30,
                        
                        
                        vs.2010
                        
                        
                        2009
                        
                        
                        2009
                        
                        
                        2010
                        
                        
                        2009
                        
                        
                        2009Investment
      advisory fees
                        
                        $
                        5,220,000
                        
                        
                        $
                        4,760,000
                        
                        
                        
                        10
                        %
                        
                        $
                        15,240,000
                        
                        
                        $
                        13,973,000
                        
                        
                        
                        9
                        %Referral
      fees
                        
                        
                        602,000
                        
                        
                        
                        575,000
                        
                        
                        
                        5
                        %
                        
                        
                        1,824,000
                        
                        
                        
                        1,658,000
                        
                        
                        
                        10
                        %Total
      operating revenues
                        
                        $
                        5,822,000
                        
                        
                        $
                        5,335,000
                        
                        
                        
                        9
                        %
                        
                        $
                        17,064,000
                        
                        
                        $
                        15,631,000
                        
                        
                        
                        9
                        %
 
 For the
three month periods, investment advisory fees increased by $460,000, or 10%, in
2010 due to the increase in average assets under management from $8.0 billion in
2009 to $8.5 billion in 2010 and a modest increase in the average fee rate. The
6% increase in average assets under management was principally the result of
strong fixed income returns and the new business generated from the TALF
program. For the nine month periods, investment advisory fees increased by
$1,267,000, or 9%, due to the increase in average assets under management from
$7.8 billion in 2009 to $8.5 billion in 2010.
 
 The
$27,000 increase in referral fees for the three month period and the $166,000
increase for the nine month period primarily reflect the increase in average
assets under management with Attalus under NIS’s referral
arrangement.
  We also
earn annual incentive fees from two private preferred stock funds managed by
NIS. These fees are based on a calendar year performance period and we recognize
the fees at the conclusion of the performance period. In 2009, we earned
incentive fees of $1,256,000, which were recognized in December 2009. While
preferred stock returns are volatile, based on performance through September 30,
2010, we expect to earn incentive fees of approximately
$600,000.
  22
  Administrative
Expenses
  Administrative
expenses for the three month period ended September 30, 2010 decreased by
$357,000 compared to the 2009 period. The decrease primarily reflects a $368,000
reduction in ongoing cash compensation costs. Administrative expenses for the
nine month period ended September 30, 2010 decreased by $552,000 compared to the
2009 period, despite incurring $813,000 of severance costs during the 2010
period. The decrease primarily reflects a $1,140,000 reduction in cash
compensation costs. Other changes by expense category are more fully described
below.
 
 Three Months Ended
                        
                        
                        2010
                        
                        
                        Nine Months Ended
                        
                        
                        2010September 30,
                        
                        
                        vs.
                        
                        
                        September 30,
                        
                        
                        vs.2010
                        
                        
                        2009
                        
                        
                        2009
                        
                        
                        2010
                        
                        
                        2009
                        
                        
                        2009Employee
      compensation:Cash
      compensation
                        
                        $
                        3,368,000
                        
                        
                        $
                        3,736,000
                        
                        
                        
                        -10
                        %
                        
                        $
                        11,081,000
                        
                        
                        $
                        11,408,000
                        
                        
                        
                        -3
                        %Share-based
      compensation
                        
                        
                        -
                        
                        
                        
                        107,000
                        
                        
                        NM
                        
                        
                        
                        (139,000
                        )
                        
                        
                        314,000
                        
                        
                        NMTotal
      compensation
                        
                        
                        3,368,000
                        
                        
                        
                        3,843,000
                        
                        
                        
                        -12
                        %
                        
                        
                        10,942,000
                        
                        
                        
                        11,722,000
                        
                        
                        
                        -7
                        %Third
      party distribution expense
                        
                        
                        291,000
                        
                        
                        
                        212,000
                        
                        
                        
                        38
                        %
                        
                        
                        902,000
                        
                        
                        
                        627,000
                        
                        
                        
                        44
                        %Investment
      management expense
                        
                        
                        521,000
                        
                        
                        
                        440,000
                        
                        
                        
                        18
                        %
                        
                        
                        1,479,000
                        
                        
                        
                        1,213,000
                        
                        
                        
                        22
                        %Legal,
      audit, and other professional services
                        
                        
                        357,000
                        
                        
                        
                        443,000
                        
                        
                        
                        -19
                        %
                        
                        
                        1,347,000
                        
                        
                        
                        1,614,000
                        
                        
                        
                        -17
                        %Occupancy
                        
                        
                        311,000
                        
                        
                        
                        330,000
                        
                        
                        NC
                        
                        
                        
                        969,000
                        
                        
                        
                        989,000
                        
                        
                        NCOther
      administrative expenses
                        
                        
                        820,000
                        
                        
                        
                        757,000
                        
                        
                        
                        8
                        %
                        
                        
                        2,418,000
                        
                        
                        
                        2,444,000
                        
                        
                        
                        -1
                        %Total
      administrative expenses
                        
                        $
                        5,668,000
                        
                        
                        $
                        6,025,000
                        
                        
                        
                        -6
                        %
                        
                        $
                        18,057,000
                        
                        
                        $
                        18,609,000
                        
                        
                        
                        -3
                        %
 
 NM: Not
meaningful
 NC: No
change
 
 Cash
compensation includes salaries and wages, sales incentives and other cash
bonuses, and other payroll related taxes and benefits. For the three month
period ended September 30, 2010, cash compensation decreased by $368,000, or
10%, compared to the 2009 period, primarily due to reduced headcount. For the
nine month period ended September 30, 2010, cash compensation decreased by
$327,000 compared to the 2009 period despite $813,000 of severance costs.
Excluding severance, our cash compensation for the nine month periods decreased
by $1,140,000, or 10%. Overall, we reduced headcount from 90 at September 30,
2009 to 82 at September 30, 2010.
  The
credit for share-based compensation in the nine months ended September 30, 2010
reflects the forfeiture of a share grant in the second quarter and the reversal
of previously recognized compensation expense. At September 30, 2010 there were
no outstanding stock awards.
  Third
party distribution expense represents payments made to broker-dealer networks
and other outside sales commissions. The increases in 2010 reflect increased
levels of business conducted through an outside sales agent and a broker dealer
network.
  Investment
management expense includes pricing, trading, compliance, and other investment
management service costs and subadvisory service fees for outside assistance in
the management of a certain asset class. The increase in investment management
expense primarily reflects increased subadvisory service fees resulting from
growth in that class of assets.
  23
  The
$267,000 decrease in legal, audit and other professional services expense for
the nine months ended September 30, 2010 primarily reflects reduced legal and
accounting services. During the first quarter of 2009, we incurred significant
legal and accounting costs in connection with the completion of our initial Form
10-K.
  Other
administrative expenses principally include travel and other marketing related
expenses, insurance expense, and other operating expenses.
  Goodwill
Impairment
  We
perform goodwill impairment tests annually, or whenever events or changes in
circumstances indicate that the carrying amount of goodwill might not be
recoverable, using a two-step process with the first step being a test for
potential impairment by comparing our reporting unit’s fair value with its
carrying amount (including goodwill). If the carrying amount of the reporting
unit exceeds its fair value, we complete the second step under which the fair
value of the reporting unit is allocated to its assets and liabilities,
including recognized and unrecognized intangibles. If the implied fair value of
the reporting unit’s goodwill is lower than its carrying amount, goodwill is
impaired and written down to its implied fair value. We complete our annual test
for impairment during our fourth quarter.
  For
purposes of testing goodwill for impairment, the Company attributes all goodwill
to a single reporting unit. We have aggregated all of our subsidiaries into a
single reporting unit because they provide similar services to similar clients,
operate in the same regulatory framework, and share similar economic
characteristics. The Company’s shared sales force is organized to market the
full range of the Company’s products and services.
  We
estimate fair value averaging fair value established using an income approach
and fair value established using a market approach. The fair value from the
income approach was weighted 75%, while the fair value from the market approach
was weighted 25%. The weighting reflects that the market approach includes more
mature asset management companies with greater scale than the Company. We use
independent valuation specialists to assist us in our valuation
process.
  The
income approach uses a discounted cash flow model that takes into account
assumptions that marketplace participants would use in their estimates of fair
value, current period actual results, and forecasted results for future periods
that have been reviewed by senior management. In preparing our forecasts, we
considered historical and projected growth rates, our business plans, prevailing
business conditions and trends, anticipated needs for working capital and
capital expenditures, and historical and expected levels and trends of operating
profitability.
 
 The
market approach employs market multiples for comparable companies. Fair value
estimates are established using multiples of assets under management and current
and forward multiples of revenue and earnings before income taxes, depreciation
and amortization (referred to as EBITDA).
 
 Based on
interim results through September 30, 2010, initial work in connection with
preparing our 2011 budget, and some trading activity in our common stock, we
determined that we should complete a goodwill impairment test as of September
30, 2010. For the current operating forecasts, our estimates for net inflows of
assets under management and market returns resulted in estimated revenue growth
rates of approximately 9% per annum, which are less than the estimated
growth rates in the immediately prior valuation. Cash flows beyond the five year
forecast period were projected at 4% per annum. We used a weighted average cost
of capital of 14.5% determined using the capital asset pricing model, which is
consistent with the rate used in the immediately prior valuation.
  Upon
completion of the goodwill impairment test as of September 30, 2010, we
concluded that our recorded goodwill balance was impaired and recorded an
impairment charge of $5,100,000 in the third quarter of 2010. In addition, we
expect to settle the remaining acquisition obligation for Boyd in the fourth
quarter for the full $8,000,000. This settlement would result in an additional
$8,000,000 of goodwill. However, based on the current estimates, we expect that
we will have to recognize an additional goodwill impairment charge for this
entire amount in the fourth quarter of 2010.
  24
  During
2009, we incurred impairment charges of $8,489,000, of which $4,847,000 was
recorded in the third quarter of 2009 and $3,642,000 was recorded in the fourth
quarter of 2009.
  Other
Income and Expense
  Other
income and expense includes investment income from the investment of excess cash
balances offset by interest expense that represents accretion of discounted
acquisition obligations.
  Three Months Ended
                        
                        
                        2010
                        
                        
                        Nine Months Ended
                        
                        
                        2010September 30,
                        
                        
                        vs.
                        
                        
                        September 30,
                        
                        
                        vs.2010
                        
                        
                        2009
                        
                        
                        2009
                        
                        
                        2010
                        
                        
                        2009
                        
                        
                        2009Interest
      income
                        
                        $
                        69,000
                        
                        
                        $
                        98,000
                        
                        
                        
                        -30
                        %
                        
                        $
                        233,000
                        
                        
                        $
                        334,000
                        
                        
                        
                        -30
                        %Realized
      gains on investments
                        
                        
                        54,000
                        
                        
                        
                        28,000
                        
                        
                        
                        89
                        %
                        
                        
                        181,000
                        
                        
                        
                        220,000
                        
                        
                        
                        -18
                        %Impairment
      loss on investment in commingled stock fund
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        NC
                        
                        
                        
                        -
                        
                        
                        
                        (381,000
                        )
                        
                        NMIncome
      from equity investees
                        
                        
                        167,000
                        
                        
                        
                        -
                        
                        
                        NM
                        
                        
                        
                        611,000
                        
                        
                        
                        -
                        
                        
                        NMInterest
      expense
                        
                        
                        -
                        
                        
                        
                        (15,000
                        )
                        
                        NM
                        
                        
                        
                        (16,000
                        )
                        
                        
                        (44,000
                        )
                        
                        
                        -64
                        %Total
      other income (expense)
                        
                        $
                        290,000
                        
                        
                        $
                        111,000
                        
                        
                        
                        161
                        %
                        
                        $
                        1,009,000
                        
                        
                        $
                        129,000
                        
                        
                        
                        682
                        %
 
 NM: Not
meaningful
 NC: No
change
 
 We earn
interest income and realize investment gains on a portfolio of debt securities
managed to enhance our yield on cash not immediately needed for operations. At
September 30, 2010, we had $9,351,000 invested in the portfolio of debt
securities compared to $11,473,000 at September 30, 2009. Since December 31,
2009, we used $6,000,000 of these funds to invest in two of our private funds.
The decrease in interest income and realized gains reflects a reduction in the
average level of assets in the portfolio.
  The
impairment loss represents a loss incurred in connection with our investment in
the Plurima Titanium U.S. Stock Fund, a sub-fund of the Dublin-based Plurima
Funds mutual funds complex, to which Wood served as investment advisor. During
2008, we invested $968,000 in the commingled stock fund as seed money for its
development. In March 2009, the Company’s board of directors determined that
additional investments from other parties into the Plurima Titanium U.S. Stock
Fund were likely not to be forthcoming. As a result, we decided to liquidate our
investment in the commingled stock fund. Based on this decision, we recognized a
$381,000 impairment loss on this investment. We subsequently liquidated our
investment and received proceeds of $587,000 from Plurima in 2009.
  25
  Income
from equity investees represents our share of the net income of two investments
in affiliates.
  Our
investment in affiliates includes an investment in the Titanium TALF Opportunity
Fund, which we organized for our clients to invest primarily in securities
participating in the Term Asset-Backed Securities Loan Facility of the Federal
Reserve Bank of New York. We are the managing member of the TALF Fund and serve
as the investment manager for the TALF Fund for which we receive management
fees. As of September 30, 2010, our investment in the TALF Fund represents
approximately 11% of the total investments in the TALF Fund. Because we have an
equity interest in the TALF Fund and have significant influence over the TALF
Fund’s daily activities through our role as managing member and investment
manager, we account for this investment using the equity method of
accounting.
  Our
investment in affiliates also includes a $2,000,000 investment in the NIS Fixed
Income Arbitrage Fund, LTD. (the “NIS ARB Fund”) made during the three months
ended March 31, 2010. We are the managing member of the NIS ARB Fund and serve
as the investment manager for the NIS ARB Fund for which we receive management
fees. As of September 30, 2010, our investment in the NIS ARB Fund represents
approximately 15% of the total investments in the NIS ARB Fund. Because we have
an equity interest in the NIS ARB Fund and have significant influence over the
NIS ARB Fund’s daily activities through our role as managing member and
investment manager, we account for this investment using the equity method of
accounting.
  Liquidity
and Capital Resources
  At
September 30, 2010, we had $17,373,000 of funds available consisting of
$1,599,000 of cash and cash equivalents, $9,351,000 of securities available for
sale, and $6,423,000 invested in the two private funds that we manage. At
December 31, 2009, these combined balances were $19,501,000. The $2,128,000
reduction primarily reflects the $1,744,000 of acquisition obligation payments
made during the nine months ended September 30, 2010.
  Nine Months Ended
                      September 30,2010
                    
                    
                    2009Net
      cash used in operating activities
                    
                    $
                    (545,000
                    )
                    
                    $
                    (1,680,000
                    )Net
      cash used in investing activities
                    
                    $
                    (2,629,000
                    )
                    
                    $
                    (10,690,000
                    )
 
 Net cash
used in operating activities decreased from $1,680,000 in 2009 to $545,000 in
2010 primarily due to increased operating revenues, decreases in administrative
expenses, and increased investment income.
  Net cash
used in investing activities in 2010 primarily reflects the use of approximately
$4,000,000 for additional investments in two private funds that we manage,
payments of $1,744,000 for the final acquisition obligations related to our
acquisitions of NIS and Sovereign, partially offset by a $3,243,000 net decrease
in invested assets. Net cash used in investing activities in 2009 reflects
payments of $8,151,000 for acquisition obligations related to our acquisitions
of Boyd and NIS and a $2,411,000 net increase in invested
assets.
  26
  In
connection with the acquisitions of Wood, Sovereign, NIS and Boyd, the
acquisition agreements provided for deferred fixed payments and contingent
payments based on assets under management or revenues at specified future dates.
The deferred fixed amounts due as of September 30, 2010 and December 31, 2009
are as follows:
  September 30,
                      2010
                    
                    
                    December 31,
                      2009Current
      amounts:Sovereign
      acquisition obligation (a)
                    
                    $
                    -
                    
                    
                    $
                    1,033,000NIS
      acquisition obligation (b)
                    
                    
                    -
                    
                    
                    
                    713,000Current
      acquisition payments due
                    
                    $
                    -
                    
                    
                    $
                    1,746,000Noncurrent
      amount -Boyd
      acquisition obligation (c)
                    
                    $
                    960,000
                    
                    
                    $
                    960,000
  (a)
              During
      the period ended March 31, 2010, as part of a settlement agreement with
      the previous majority owner of Sovereign, the Company agreed to pay
      $1,015,000 in full satisfaction of all amounts due, or that would become
      due, under the acquisition agreement. This amount was paid in April
      2010.
 (b)
                The
      NIS acquisition obligation was paid in May
2010.
 (c)
              The
      Boyd acquisition obligation reflects a deferred stock grant of 192,000
      shares of common stock valued at the acquisition date at $960,000, payable
      in 2011.
  Under the
terms of the acquisition agreement for Wood, the seller may receive additional
payments should Wood achieve certain revenue and assets under management
milestones through September 30, 2011. At September 30, 2010, the remaining
maximum payments are $3,000,000, of which up to 50% is payable in Titanium
common stock. Based on current estimates for assets under management and
revenues, the Company estimates that approximately $825,000 will be due under
the assets under management provision in 2011 and that no amount will be due
under the revenue provision.
  Under the
terms of the acquisition agreement for Boyd, the sellers may receive an
additional deferred payment up to $8,000,000 based on the revenue run rate as of
December 31, 2010, payable in 2011. The current revenue run rate significantly
exceeds the target for the maximum. We expect to amend the acquisition
agreement, to accelerate the measurement date to November 30, 2010 and to make
the payment in cash prior to December 31, 2010.
  We
believe our current level of cash and cash equivalents and short-term securities
available for sale are sufficient to fund our ongoing operations, to fund
current obligations under our completed acquisitions, to fund the expected cash
portion of contingent payments due under our completed acquisitions, and to
provide consideration for additional acquisitions. We expect to fund future
acquisitions partly through issuance of additional common stock and with cash
from the conversion of our outstanding warrants, although we may incur bank debt
as well.
  Critical
Accounting Policies
  Our
condensed consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America.
Preparation of these statements requires us to make judgments and estimates.
Some accounting policies have a significant impact on amounts reported in these
financial statements. A summary of significant accounting policies and a
description of critical accounting estimates may be found in our 2009 Form 10-K
in the Notes to the Consolidated Financial Statements and the Critical
Accounting Estimates section of Management’s Discussion and Analysis of
Financial Condition and Results of Operations.
  27
  Recent
Accounting Pronouncements
  The
following new accounting standards and amendments to standards first became
effective for the fiscal year beginning January 1, 2010:
  ·
              A
      standard, which was issued by the Financial Accounting Standards Board
      (“FASB”) in June 2009, that requires entities to provide more information
      regarding sales of securitized financial assets and similar transaction.
      The adoption of this standard did not have a significant impact on the
      Company’s consolidated financial
  statements.
 
 ·
              An
      amended standard, issued by the FASB in January 2010, that require
      additional disclosures about significant transfers in and out of fair
      value measurement levels 1 and 2 and reasons for the transfers. In
      addition, the amended standard requires new disclosures relating to the
      reconciliation for fair value measurements using unobservable inputs
      (level 3) detailing information about purchases, issuances, and
      settlements on a gross basis. The adoption of these amended disclosure
      requirements did not have a significant impact on the company’s
      consolidated financial statements.
 
 Item
      3.
              Quantitative
      and Qualitative Disclosures About Market
Risk
  Not
applicable.
  Item
      4T.
              Controls
      and Procedures
  Evaluation of disclosure controls
and procedures. Based on the evaluation of our disclosure controls and
procedures (as defined in the Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the “Exchange Act”), required by Exchange Act
Rules 13a-15(b) or 15d-15(b)), our principal executive officer and principal
financial officer have concluded that our disclosure controls and procedures
were 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 Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the SEC’s rules and forms, and include controls
and procedures designated to ensure that information required to be disclosed by
us in such reports is accumulated and communicated to our management, including
the principal executive officer and principal financial officer, as appropriate
to allow timely decisions regarding required disclosure.
  Changes in internal control over
financial reporting. There were no changes in our internal control over
financial reporting that occurred during the three months ended September 30,
2010 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
  28
  PART
      II.
              OTHER
      INFORMATION
  Item
      1.
              Legal
      Proceedings
  For
information regarding legal proceedings related to the Company, see Note 10 –
Contingencies.
  Item
      1A.
              Risk
      Factors
  Not
applicable.
 
 Item
      2.
              Unregistered
      Sales of Equity Securities and Use of
Proceeds
  None.
  Item
      3.
              Defaults
      Upon Senior Securities
  None.
 
 Item
      4.
              (Removed
      and Reserved)
  Not
applicable.
  Item
      5.
              Other
      Information
  None.
  Item
      6.
              Exhibits
  Exhibit Number
                  
                  Description31.1
                  
                  Chief
      Executive Officer Certification pursuant to Rule 13a-14(a) of the
      Securities Exchange Act of 1934.31.2
                  
                  Chief
      Financial Officer Certification pursuant to Rule 13a-14(a) of the
      Securities Exchange Act of 1934.32.1
                  
                  Certification
      of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002.32.2
                  
                  Certification
      of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002.
  29
  SIGNATURES
  Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
  TITANIUM
      ASSET MANAGEMENT CORP.November
      15, 2010
                By:
                /s/ Robert BrooksName:
      Robert BrooksTitle:
      Chief Executive Officer (Principal Executive
                  Officer)November
      15, 2010
                By:
                /s/ Jonathan HoeneckeName:
      Jonathan HoeneckeTitle:
      Chief Financial Officer (Principal Financial Officer
                  and
      Principal Accounting Officer)
  30
  EXHIBIT
INDEX
   Exhibit
      Number
                  
                  Description31.1
                  
                  Chief
      Executive Officer Certification pursuant to Rule 13a-14(a) of the
      Securities Exchange Act of 1934.31.2
                  
                  Chief
      Financial Officer Certification pursuant to Rule 13a-14(a) of the
      Securities Exchange Act of 1934.32.1
                  
                  Certification
      of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002.32.2
                  
                  Certification
      of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002.
  31