A long post but this is a research report provided by ThinkEquity Partners back in 12/06. I have not been able to locate an updated copy as of yet.
Highbury Financial. Inc. HBRF - $5.82
Buy Price Target: $10
HBRF: Initiating Coverage With A Buy Rating And
$10 Price Target
THINK ACTION:
We are initiating coverage of Highbury Financial, Inc. with a Buy rating and
12-month price target of $10.00, calculated as 16x our cash EPS estimate of
$0.62 (fully diluted, assuming warrant and option exercise). Our cash estimate
is adjusted for intangible goodwill amortization and deferred taxes. Our
estimate of reported net income per share is $0.33 in 2007.
KEY POINTS:
Highbury Financial, Inc. (HFI) is a blank check company organized as a
SPAC—Special Purpose Acquisition Company—under the laws of the State of
Delaware on July 13, 2005, for the purpose of acquiring whole companies or
control of one or more financial businesses.
The shareholders of Highbury Financial have just approved, on
November 27, 2006, the proposal to acquire ABN AMRO's U.S. Mutual
Fund business for a purchase price of $38.6 million, or approximately 1x
LTM revenue and 5x EBITDA. The transaction closed on November 30, 2006.
Following the acquisition, Highbury is an investment management holding
company for which Aston will serve as the initial platform for internal growth
and add-on acquisitions. Over time, we believe the company will acquire both
more funds for the Aston fund family as well as additional financial service
companies, including mutual funds, funds of funds, hedge funds, and
investment management companies. We expect the company to make these
acquisitions at below-market multiples of EBITDA, and grow the businesses,
capturing the added margin for HFI shareholders. Aston Asset Management
provides investment advisory services to the 19 funds acquired by Highbury
from ABN AMRO. These funds are distributed or could be distributed in the
future through retail and institutional clients directly and through intermediaries,
including independent investment advisors, retirement plan sponsors,
broker-dealers, major fund marketplaces, and bank trust departments.
The acquisition of ABN AMRO funds consists of a group of 19 long-term equity
(15 funds) and bond (4 funds) no-load mutual funds, which have been owned
by ABN AMRO since 2001. No-load mutual funds are mutual funds whose
shares are sold without a commission or sales charge. Currently, two of the 19
funds are sub-advised by sub-advisors not affiliated with the sellers, ABN
AMRO. Aston will delegate the day-to-day portfolio management of each fund
to a sub-advisor. The investment advisory fee rate payable to Aston by each
fund will be the same rate payable under the current investment advisory
agreement with ABN AMRO Asset Management, Inc and its affiliates. Aston
will pay the sub-advisory fees to the sub-advisors out of the investment
advisory fees that Aston will receive from the funds.
Reason for Report:
Initiation of Coverage
Audrey Snell
212-468-7028, asnell@thinkequity.com
Changes Current Previous
Rating Buy --
Price Target $10.00 --
FY07E REV(mil) $7.4E --
FY08E REV(mil) NAE --
FY07E EPS $0.33E --
FY08E EPS NAE --
52 Week High: $6.25
52 Week Low: $5.30
Shr.O/S-Diluted (mil): 9.5
Mkt Cap (mil): $55.3
Avg Daily Vol: 57,475
Short Interest: 0.0%
Debt/Total Cap.: 0.0%
Net Cash per Share: $1.11
P/E (12-mo. Fwd): 17.8x
Est. LT EPS Growth: 20.0%
P/E/G: 89%
Fiscal Year End: Dec
NAE: Not applicable
REV(mil) 2006E 2007E 2008E
Mar NA $1.8E NA
Jun NA $1.8E NA
Sep NA $1.9E NA
Dec $0.1A $1.9E NA
FY $0.6E $7.4E NA
CY NA NA NA
FY P/S 92.2x 7.5x NM
CY P/S 92.2x 7.5x NM
EPS 2006E 2007E 2008E
Mar ($0.18)A $0.09E NA
Jun ($0.43)A $0.08E NA
Sep $0.05A $0.08E NA
Dec $0.08E $0.08E NA
FY ($0.48)E $0.33E NA
CY NA NA NA
FY P/E NM 17.6x NM
CY P/E NM 17.6x NM
December 12, 2006
Company Report
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December 12, 2006
Company Report
The investment advisor of the group of the funds, headed up by CEO Stuart D. Bilton, President Kenneth C. Anderson,
CFO Gerald F. Dillenburg, and Chief Administration Officer Christine R. Dragon, will remain with the acquired fund
company. The ABN AMRO Funds will be renamed the Aston Funds, with each investment fund’s individual name
retained. The investment advisor will be named Aston Management. On October 24, 2006, assets under management
(AUM) were $5.5 billion, with an additional $4 billion in money market funds, which it will continue to administer for ABN
AMRO. The current Aston management, headed up by Stuart D. Bilton, founded these funds in 1993, called Alleghany
Asset Management, and executed accretive acquisitions and incubated new managers to fuel growth, as the following
table illustrates. These funds grew from inception to approximately $3.5 billion in AUM when they were sold to ABN
AMRO in 2001. Under the same leadership, the funds grew to $5.5 billion in AUM by October 2006.
AUM ($Billions)
Investment Manager Year Acquired/Founded Ownership Acquired On Acquisition As of 06/30/06
Montag & Caldwell 1994 100% $2.0 $2.1
Chicago Capital 1997 100%
Veredus Asset Management 1998 50% $0.0 $2.4
Blairlogie Capital Management 1999 100% $1.0 Sold in 2002
TAMRO Capital Partners 2000 100% $0.0 $0.5
River Road Asset Management 2005 45% $0.0 $1.6
Source: Highbury Financial, Inc.
Merged in 2002
Highbury Background – Experienced Management in Mergers and Acquisitions of Financial Companies
On January 31, 2006, Highbury consummated a private placement to its officers and directors with proceeds of
$1,000,002 and an IPO of its equity securities from which it derived net proceeds of $42.8 million for a total of $43.8
million. These proceeds were placed in a trust account, earning interest until Highbury, with shareholder approval,
consummated a purchase of a financial institution, less any amount payable to Highbury Financial shareholders that voted
against the proposed acquisition. Highbury has 9,527,000 common shares and 15,820,000 warrants issued and
outstanding. Approximately 7.7 million common shares float in the public markets. We estimate that Aston will have
revenue of approximately $40 million in calendar 2006 ($32.5 million through September 2006) and produce EBITDA to
HFI (18.2% of total revenue) of approximately $7.3 million. The purchase price, therefore, of $38.6 million is an estimated
5.3x EBITDA or approximately 5x EBITDA less cash of $3.6 million on hand at the closing in the acquired business.
If Highbury Financial did not consummate a business combination by July 31, 2007, subject to extension to January 31,
2008, it would adopt a plan of dissolution and present it to its stockholders, and once approved by the shareholders, it
would distribute to its public stockholders the amount in its trust account, including any interest earned and dissolve the
corporation.
As a SPAC, or Special Purpose Acquisition Company, Highbury Financial was organized for the purpose of making
acquisitions in the financial industry on behalf of its shareholders. Shareholders have had the right to vote on the first
acquisition and if 20% or more of the initial shareholders had voted against the proposed acquisition, it would have been
defeated. The proposal passed, and was closed on November 30, 2006. Approximately 180,000 shares voted against the
proposal and have been converted to cash by the shareholders. We have estimated this number at 108,000 and deducted
it from the total common shares outstanding. Subsequent acquisitions will not need to be voted on by SPAC shareholders.
Highbury’s IPO offering took place on January 31, 2006, in which it offered 6,733,333 units with each unit consisting of
one share of its common stock, traded under the symbol HBRF on the OTC Bulletin Board, and two warrants (each to
purchase one share of common stock at an exercise price of $5.00 per share). The units were sold at an offering price of
$6.00 per unit, generating proceeds of $40.4 million and on February 3, 2006, the company sold an additional 1,010,000
units pursuant to the underwriter’s over-allotment option, raising additional gross proceeds of $6.06 million. Immediately
preceding the offering, all of the company’s initial stockholders, including all of its officers and directors, purchased an
aggregate of 166,667 units (consisting of one share of common and two warrants permitting the holder to purchase two
shares of common at $5.00 each) in a private placement at a price per unit of $6.00. The warrants separated on February
21, 2006, and today trade separately from the common under the symbol HBRFW (OTC.BB). The units also trade under
the symbol HBRFU.OB.
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December 12, 2006
Company Report
Highbury’s officers and directors have had many years of experience in mergers and acquisitions of investment
management firms through forming Berkshire Capital Securities, LLC, a New York-based investment banking firm, in 2004
and, before that, with its predecessor, Berkshire Capital Corporation, founded in 1983, and with large Wall Street
investment banks, including Paine Webber. Highbury Financial was formed by these specialists in the financials services
business to provide permanent capital for investment managers and other financial services companies. We
believe that this focus on, and extensive knowledge of, the financial service business, and investment companies, in
particular, from the Highbury team, affords investors a significant investment advantage in owning shares of Highbury as it
grows through acquisitions of various financial companies. With the Aston Funds being the initial acquisition, Berkshire
Capital specializes in investment banking transactions in the financial services and investment management verticals,
and, we believe, brings a level of expertise to Highbury and Aston, which should help in identifying and acquiring funds,
fund managers, and company acquisitions for both Aston’s platform and Highbury on an integrated and standalone basis
on terms that should be favorable and potentially highly accretive to Highbury shareholders.
Highbury Officers
R. Bruce Cameron, CFA has been Chairman of the Board of Highbury since its inception. He is also the President and
CEO of Berkshire Capital Securities LLC, a position he has held since its formation in May, 2004. Mr. Cameron cofounded
Berkshire Capital Corporation, the predecessor firm to Berkshire Capital Securities, LLC, in 1983 as the first
independent investment bank covering the financial services industry, with a focus on investment management and capital
markets firms. Mr. Cameron and his partners have advised on approximately 203 mergers and acquisitions of
financial services companies, including high net worth managers, institutional investment managers, mutual fund
managers, real estate managers, brokerage firms, investment banks, and capital markets firms with aggregate
client assets under management of nearly $376 billion and aggregate transaction value in excess of $9.1 billion.
Mr. Cameron is also the managing member of Broad Hollow LLC, which owns 776,250 shares of Highbury common stock
and 75,000 of the Highbury units. He was formerly in the strategic planning group at Paine Webber and has focused on
analysis, merger and acquisitions in the financial services industry throughout his career. He is a graduate of Trinity
College and Harvard Business School.
Richard S. Foote, CFA, has been the President and CEO of Highbury Financial and a member of the Board of Directors
since Highbury’s inception. Mr. Foote has been a managing director of Berkshire Capital Securities LLC since its
formation in May 2004 and a managing director, principal and vice president of Berkshire Capital Corporation, the
predecessor firm to Berkshire Capital Securities LLC, since 1994. Throughout his career, Mr. Foote has specialized in
providing investment banking services to the financial services industry, including mergers and acquisitions, public
offerings and private placements of debt and equity securities, and negotiation and implementation of private equity
capital co-investment commitments. At Berkshire Capital Securities LLC and its predecessor, Mr. Foote has advised
owners of institutional equity and fixed income managers, high net worth managers, mutual fund managers and capital
markets firms in mergers and acquisitions. He is a graduate of Harvard College.
R. Bradley Forth, CFA has been Highbury’s EVP/CFO since its inception and he has been an associate at Berkshire
Capital Securities LLC since its formation in May 2004 and an associate and analyst at Berkshire Capital Corporation
since 2001. He has specialized in mergers and acquisitions for investment managements, high net worth managers, multifamily
offices, mutual fund managers, hedge fund of funds managers, retail brokerage firms, and real estate investment
management and services firms. He is a graduate of Duke University.
Highbury’s Business Strategy – Provide Capital to Managers While Preserving Autonomy
Highbury Financial was formed as an investment management holding company providing permanent capital solutions to
acquire companies or controlling interest in companies providing financial services that have growth dynamics and can
benefit from capital while maintaining the core of the business and its management upon acquisition. Typically these
target businesses are in service industries that have favorable demographics and market dynamics propelling aboveaverage
growth, along with actual or potentially significant operating leverage, as they require few numbers of personnel
to produce growing revenue and margins. Typically such businesses also require limited capital to grow, once the
infrastructure is built. What these funds and managers often do require is distribution and marketing to grow and attract
assets under management, and liquidity to provide management with either ownership or an exit strategy if it is a closely
held private firm. Often, investment management firms are partnerships or small corporations begun by a small group who
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Company Report
have no readily available means to provide liquidity to transfer ownership to the next generation or to retire. Or, the
organization may be owned by a larger corporation (as is the case with ABN AMRO) that seeks to divest the ownership,
and often, the investment management or investment advisory management would desire to own a portion of the
company, as in a management buy out (MBO).
Highbury can provide capital to enable a transfer of this type, while maintaining majority ownership for Highbury
shareholders. Highbury is thus taking advantage of its management’s skill sets in M&A, network of contacts in the financial
services industry, and in the growing trend of separating production (investment management) from marketing and
distribution of the product. As revenue grows in such businesses, incremental operating margins can rise faster than topline
growth as a by-product of limited incremental costs. Further, as most expenses in the investment management
business are variable, once the infrastructure is built, downside protection of income is afforded as variable costs are
reduced with lower volumes of assets under management (AUM) if the funds sustain outflows.
Investment Management Firms Provide Attractive Economics to Owners
Source: Highbury Financial, Inc.
Investment management firms provide attractive economics to owners. These include low financing capital
requirements, high intellectual capital requirements, high operating leverage, high cash flow, increasing demand
and upward market bias due to the growth of the money management industry as a result of the growth of the
target populations and market appreciation. All of these factors, in turn, drive growing margins and ROI for successful
managers with little additional capital investments. In addition, Highbury will seek to make acquisitions in any or all of the
segments of this industry that work well with its platform and afford HFI shareholders high returns and operating synergies
with the existing platform. These include institutional managers, high net worth managers, turnkey investment
management, hedge funds, fund of funds, private equity firms, real estate investment firms, mutual funds. This variety of
target types should enhance returns by enabling a diverse product set to capture more assets under management, scaling
them on existing platforms to drive margins. Highbury appears well-positioned to benefit from the trend in the industry
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Company Report
toward separation of “manufacturing” (portfolio management) and distribution (marketing and back office processing and
administration), as exemplified by the following recent acquisitions: Legg Mason/Citigroup; BlackRock/Merrill Lynch; and
Minnesota Mutual Life/Waddell & Reed.
In addition, there is robust deal flow in the investment management industry, according to data compiled through M&A
transactions by Berkshire Capital Securities, LLC. These statistics reveal that, within the industry, in the years between
1998 and 2005, there was an average of 125 transactions per year with average transaction values of $15 billion per year
in the industry, thus providing a rich potential pipeline of opportunities to Highbury and its shareholders in making diverse
acquisitions at below market valuations.
HFI’s strategy is to take advantage of this large deal flow, operating leverage, and industry knowledge to acquire firms that
enable HFI to have majority equity positions (at least 51%) in investment management firms with significant growth
potential, and partner with superior, experienced management teams. The reasons that these funds or firms may come up
for sale include: corporate divestitures, management buyouts, liquidity to unwind strategic joint ventures, liquidity for
departing industrial partners, diversification for funds and transition to the next generation, and exit strategies for private
equity funds. Highbury creates a “win-win” strategy for managers because it enables its affiliates to operate independently.
Highbury does not actively manage day-to-day management, and enables existing firm or fund managements (affiliate
management) to retain minority ownership interest, in order to align these interests with HIghbury’s shareholders and
motivate affiliate managers to grow the business and the margins. Highbury will seek to diversity the mix of affiliate
companies to expand its growth potential while reducing downside risk from asset outflows if a particular investment
management style is “our of favor” or a particular segment has poor or substandard near-term investment performance.
In addition, Highbury Financial has focused on acquisitions in the financial services business because there are many
organizational or structural reasons why this group may afford Highbury many opportunities for accretive acquisitions.
Among them are that the majority of investment management companies are equity partnerships, which could lead to the
need for a liquidity event if a partner leaves or dies; corporate divestitures and/or the desire of managements to own the
investment manager; that founders of such companies want diversification or to transition a family business to the next
generation while liquidating holdings or extracting liquidity.
Highbury is, in many ways, viewed as an ideal acquirer by companies like this for several reasons, as follows.
First, Highbury enables its affiliates to maintain autonomy and control of the operating company and in doing so,
facilitates a type of MBO (management buy out) for the existing investment management team or investment advisor
team. As in the Aston management deal, Highbury will own the company but share a minority of revenue and profits with
operating management. We believe this ongoing split between Highbury and the operating managers creates incentives
for the management to drive the business, increase growth, and build incremental margins, which, in turn, should drive
valuations as this excess margin is capitalized over time.
Value Creation
Highbury, therefore, seeks to buy ongoing businesses which are intact, with current management on board, at a discount
to the normalized P/E (usually a multiple of EBITDA) and improve operations by providing financial incentives for the
manager/owners over time to build the valuation and capture both the ongoing profitability increases for shareholders but
also the incremental asset values as the capitalization valuation moves up over time. In addition, Aston Management is an
experienced distribution arm, and, along with Highbury’s seasoned operating management can, we believe, greatly assist
in growing AUM. As an approximate rule of thumb, we estimate HFI management would seek to acquire organizations at
5-6x EBITDA, to improve the organizational framework, take out costs, expand AUM and revenue, and move to capture a
trading multiple of 9-10x EBITDA, which is more in line with the market. This is the plan for the Aston Funds, we believe.
For example, Highbury is purchasing ABN AMRO funds for approximately $38.6 million, with potential adjustments up or
down of no more than $3.8 million in favor of Highbury or the sellers based upon post closing revenue milestones. This
contingent adjustment is payable in cash shortly after the second anniversary of the acquisition by the end of two years to
adjust for increases or decreases in revenue in the 24 months following purchase. If revenue exceeds $41.8 million at the
end of the milestone period, Aston and Highbury will collectively pay to ABN AMRO the difference between actual revenue
and $41.8 million up to a maximum adjustment of $3.8 million payment; or if revenue is less than $34.2 million at the end
of the milestone period, ABN AMRO will pay to Aston and Highbury the difference between the $34.2 million and the
actual revenue up to a total aggregate payment of $3.8 million.
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Company Report
In calendar, 2005 ABN AMRO funds generated revenue of $41.1 million, calculated as net advisory fees from funds
managed by affiliates when AUM was $6.3 billion, at the end of 2005. Revenues in the asset management business at
Aston are generated by management fees which are, on average, 0.70% of the weighted average assets under
management, although exact fees differ slightly from fund to fund. In addition Aston generates a small amount of revenue
from administrative fees. As AUM grows and/or expenses are reduced, margins will rise. We estimate acquired EBITDA
was approximately $7.0-7.5 million, on an annual run rate. Thus, Highbury acquired the funds for approximately 5.5x, or
about 5x if we subtract approximately $3.6 million of cash acquired in the acquisition as well. Subtracting HFI’s estimated
$500,000 of annual net holding company expenses, we calculate that HFI’s EBITDA is approximately $6.0-$6.5 million on
an annual basis. Its estimated net income is $3.7 million after taxes and cash net income, adding back intangible
amortization of goodwill and intangible related deferred taxes and affiliate deferred tax related to intangible assets is about
$5.0-$5.2 million currently. On a forward 12-month basis, we estimate that revenue can grow about 5% per year,
conservatively, at Aston, as it grows AUM, and that Highbury’s 2007 EBITDA could increase to nearly $7 million on its
share of Aston revenue, which we estimate at about $7.5 million. After interest income, and non cash adjustments to mark
to market the price of the warrants and underwriter’s purchase option (until exercised), we estimate pretax income of $5.6
million, net of $4.4 million and cash earnings of $5.9-$6.0 million (adding back non cash expenses). This produces GAAP
EPS of $0.33 and cash earnings of $0.62, we estimate.
Variety of Target Types
Source: Highbury Financial, Inc.
The key is that HFI management seeks to purchase acquisitions at EBITDA multiples of 5-7x while market
multiples in the industry are 9-10x, and subsequently to build the business, margins, and multiples for
shareholders over time.
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December 12, 2006
Company Report
This year, 2006, the funds have sustained a net outflow, as of October 2006, of $600 million as well as a downward
performance adjustment of $400 million, and were at $5.5 billion by the close of October, 2006. Net advisory fees from
funds managed by affiliates were annualizing at approximately $39-40 million given the results of the first six months of
2006. So, the price paid for the acquisition is approximately 1x current-year gross revenue and 5x annualized EBITDA,
This figure is below the average in the industry, which is typically 2-3x revenue and 7-10x EBITDA. Through cost
reductions, changes in fee schedules paid to investment advisory and distribution affiliates, and growth of the fund families
through marketing, performance improvement, and acquisitions, Highbury hopes to create value for shareholders in Aston
operations.
Sub-Advisory Fee Reduction Boosts Aston and Highbury Revenue Immediately Following Closing of Transaction
Upon acquisition, as detailed in the proxy, Highbury adjusted the fee structure of the investment sub advisory fees paid to
the Aston Funds sub advisory investment managers, from approximately 80% to 50% of the net advisory fees generated
from the funds managed by affiliates after the payment of third-party distribution fees. Pursuant to the sub-advisory
agreements that the acquired business entered into with ABN AMRO and its affiliated advisers, the acquired business and
the affiliated managers will share net advisory fees equally after payment of third-party distribution fees. This has the
effect of decreasing the amount paid to the sub advisors as a percent of the total net advisory fees generated by the
business and increasing net revenue to the acquired business (the Aston Funds). The proxy explains that if these new
agreements had been in place over the past 18 months, Aston net revenue would have increased by $4.5 million, $8.45
million, and $14.1 million in the first half of 2006, first half of 2005, and full year of calendar 2005, respectively, as the
following table illustrates.
Six months ended June 30, Year ended
AFTER ADJUSTMENT OF FEES
2006 2005 12/31/05
Net advisory fees from funds managed by affiliates $17,403,798 $20,796,201 $41,078,847
Less: third party distribution fees for funds managed by affiliates (1,964,376) (2,636,477) (5,290,395)
Subtotal 15,439,422 18,159,724 35,788,452
Less: sub-advisory fees paid to affiliates (7,719,711) (9,079,862) (17,894,226)
Net revenue to the acquired business $ 7,719,711 $9,079,862 $17,894,226
BEFORE ADJUSTMENT OF FEES
Sub-advisory fees paid to affiliates (12,217,056) (17,530,424) (31,976,793)
Net revenue to the acquired business 3,222,366 629,300 3,811,659
Pro forma adjustment (For new fee schedule) $ 4,497,345 $8,450,562 $14,082,567
Source: Highbury Financial, Inc. Proxy Statement, 10/06, page 40
Thus, Highbury has purchased the Aston Funds at a discount to market, and added revenue upon the completion
of the acquisition by negotiating a reduction in the fees paid to the sub advisors, with a 50% pay-out, compared
to an 80% pay-out previously, thereby generating approximately $4.5 million more in pro forma revenues for the
first half of 2006, to be allocated as 18.2% to HFI ($1.41 million) and 9.8% to Aston Fund management ($756,000)
(the owners allocation) and allocating 72% for expense allocation ($5.558 million), for a total after the adjustment
of $7.719 million, on a pro forma basis. According to the proxy, the sub advisory affiliates will be performing the same
investment management services for the Aston Funds after the acquisition as they provided to the seller, ABN AMRO.
However, as a result of the new sub advisory agreements, they will receive a smaller share of the net advisory fees after
payments of third-party distribution fees than were received previously, in line with fee levels charged by the sub advisors
to other clients not affiliated with ABN AMRO. These are consistent with agreements and fees that Aston and Highbury
could obtain with other sub advisors, according to the proxy. Historically, these fees were not determined by market terms,
but rather, by internal allocations between commonly controlled corporate entities by ABN AMRO.
As a SPAC, Highbury was required to meet certain tests upon its first acquisition, which the Aston Funds (ABN AMRO
funds) have fulfilled, including targeting financial services companies that collectively have a fair market value equal to at
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December 12, 2006
Company Report
least 80% of Highbury’s net assets at the time of the acquisition. The $38.6 million purchase price, is more than 80% of
Highbury’s approximate $44 million in assets. Other growth characteristics that Highbury management seeks are growth
companies with experienced managers, at which discussions for future growth have been conducted with incumbent
management. Aston Asset Management, LLC fulfills these objectives.
Robust Deal Flow Within Investment Management Industry
Source: Berkshire Capital Securities, LLC
The Acquired Business
The acquired business (renamed Aston Asset Management, LLC) is engaged in the advisory, distribution, marketing,
operation, compliance, administration and other functions of operating mutual funds. The acquired business contracts with
institutional investment management firms in distinct investment styles to provide sub advisory services related to portfolio
management, research, and security selection and, typically, will co-brand each mutual fund with the name of the sub
adviser in addition to the name of the acquired business. Investment styles are investment approaches taken by
investment managers to reach their objectives. As investment adviser to the mutual funds, Aston will oversee the subadvisers,
will monitor the investment processes and compliance with the applicable fund prospectuses, and will provide
sales, marketing, operations, and compliance and administration functions to the mutual funds. The sub-advisors will be
responsible for day–to-day investment decisions of the funds, research leading to those investment decisions and portfolio
management of each of the funds. Highbury’s purchase is not contingent upon the retention of any of the management or
employees of the acquired business after the consummation of the acquisition. But after the consummation of the
acquisition, Aston intends to offer employment to substantially all of the current management and employees of the
acquired business.
This acquisition establishes Highbury as an investment management holding company for which Aston will serve as the
initial platform for internal growth and add on acquisitions. We believe the Highbury management team is experienced and
knowledgeable about the investment management business and financial services companies in general and will seek to
continue to add accretive acquisitions to the family of Highbury holdings. Highbury will also seek to work with existing
affiliate companies to execute add-on acquisitions, such as adding to the number and type of funds under the Aston Asset
Management fund umbrella.
Aston Funds (formerly part of the ABN AMRO fund family) consist of 19 funds, of which 15 funds are equity and four are
fixed income. The majority of the assets under management and majority of the fees earned are in the large growth style
and are known as Montag & Caldwell Growth fund and ABN AMRO Growth (renamed Aston Growth). Montag’s assets
under management at end of October 2006 were $2.1 billion and ABN AMRO Growth was $933 million. Montag carries a
four-star rating from Morningstar. In addition, other large cap growth and value funds in the Aston family are Veredus
Select Growth (five-star rated) and TAMRO large cap value (four-star rated). Most of the funds carry three- or four-star
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Company Report
ratings and represent small and mid-cap growth and value styles as well, but the majority of AUM is in large cap growth
and equity ($5.3 billion) rather than fixed income ($263 million). (See appendices 1 and 2 for a list of the funds, assets,
styles, Morningstar ratings, and annualized total returns for one, three, and five years.)
The Aston Funds offer a diversified mix of equity and fixed income mutual funds as a platform on which to build assets
under management from the current $5.5 billion level. The funds are managed by 7 sub-advisors with independent
investment styles and offer a competitive investment performance across the platform. Six of the funds have overall
Morningstar ratings of 4 or 5 stars; 7 funds have 3 stars. The funds offer large, medium and small cap equity product
spanning the style array from value to growth to a blend. The fixed income funds focus on intermediate duration product.
The open-architecture, sub-advised platform offers strategic relationships and limited non-competes in the current product
styles from the following managements:
• ABN AMRO Asset Management
• MFS Investment Management
• Montag & Caldwell (ABN AMRO Affiliate)
• Optimum Investment Advisors
• River Road Asset Management (ABN AMRO Affiliate)
• TARMO Capital Partners (ABN AMRO Affiliate)
• Veredus Asset Management (ABN AMRO Affiliate)
In addition, Highbury and Aston have negotiated favorable agreements with the sub-advisors including: competitive fees,
5-year no termination by ABN AMRO affiliate sub-advisors; non-compete provisions with respect to U.S. mutual fund
business; access to funds which may face capacity constraints (in which the funds may be closed to new investors for size
reasons).
Aston Management Team Has Strong Track Record
Guided growth of mutual fund platform since its inception in 1993
Source: Highbury Financial, Inc.
$0
$3
$6
$9
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2Q
2006
A UM ($bn)
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Company Report
Executed accretive acquisitions and incubated new managers expected to fuel growth of
Alleghany Asset Management
Source for historical data is ABN AMRO Asset Management
Broad Array of High-Quality Investment Products
• Diversified mix of equity and fixed income mutual funds
• Funds managed by 7 sub-advisors with independent investment styles
• Competitive investment performance across the platform
• 6 funds with Overall Morningstar Ratings of 4 or 5 stars; 7 funds with 3 stars
Source: Morningstar, Inc., as of June 30, 2006
Growth Strategy
We think the management of Highbury Financial, working both with Aston Asset Management, and independently, will
create shareholder value by growing the assets under management significantly in the next few years, and this additional
scale should add to operating margins over time. We think Aston has been in touch with additional funds that it hopes to
add in the next several months, and over the longer term, will seek to add approximately 8-10 new funds per year. Within
two years, management of Aston hopes to have a broad portfolio of funds representing all styles to market through
institutional distribution channels. Aston management is essentially a marketing and distribution organization that initially
built these funds in the 1990s and sold them to ABN AMRO in 2001. These funds were initially begun with $500 million in
assets in 1986 and sold in 2001 with AUM of $45 billion. We believe therefore that the management’s experience with this
fund family gives it a good head start in building and expanding these funds, once again. Highbury management can
assist Aston through its knowledge of the industry and network of contacts in the industry.
Year Acquired Ownership Assets Under Management ($bn)
Investment Manager or Founded Acquired On Acquistion As of 6/30/06
Montag & Caldwell 1994 100% $2.0 $21.0
Chicago Capital 1997 100% 0.0 Merged in 2002
Veredus Asset Management 1998 50% 0.0 2.4
Blairlogie Capital Management 1999 100% 1.0 Sold in 2002
TAMRO Capital Partners 2000 100% 0.0 0.5
River Road Asset Management 2005 45% 0.0 1.6
Page 11
December 12, 2006
Company Report
In addition, CEO R. Bruce Cameron and President and CEO Richard S. Foote have said that Highbury will position Aston
Funds as a platform for both internal growth and add-on acquisitions. Aston Asset Management, LLC, Highbury’s majorityowned
affiliate, will manage the business keeping its management team in place. Highbury will continue to pursue
acquisitions of majority equity interests in high quality investment management firms through Aston and directly, to build a
portfolio of companies within the Highbury platform, in a holding company structure. Highbury management believes that
its ability to provide permanent equity capital solutions to owners of investment management firms, and its desire to leave
material equity interests with management teams is attractive to potential partners. The key is to leverage the fund
structure and back office processing capability that has already been built by adding assets and funds under
management, thereby leveraging the operating structure and driving margins. Aston is a marketing and distribution
organization that has expertise and experience in marketing institutional funds and managers to a broad cross-section of
the asset allocation intermediaries such as consultants, 401k plans and their administrators, etc. Further, by acquiring
entities such as the ABN AMRO funds at a discount to potential public market valuations (5x EBITDA versus 7-8x
EBITDA), Highbury management seeks to capture that valuation increase for shareholders as the funds grow AUM and
profitability through performance improvement, fund growth, acquisitions, and costs and fee restructuring.
We believe management will quickly do scalable rollups of small, independent mutual funds whose managers it knows
and will make them part of the fund family and provide back-office processing and marketing capability to these funds. We
think management will seek to roll out or acquire funds with small and mid-cap growth styles, global equity focus, and
global real estate.
We think there are three broad areas of growth open to both Aston and Highbury, beginning with the Aston Funds. Internal
growth of existing products to achieve better scale efficiencies: As a result of market appreciation, successful marketing,
attractive long-term performance record, future net asset flows and funds mergers and acquisitions, we think Aston should
be able to rationalize many of the smaller funds. There are currently 14 Aston funds with less than $200 million in assets
whose economics could vastly improve if scale economics were achieved.
Also, we think additional product lines could provide growth driven by enhancements of already-established large
institutional relationships, such as with fund mangers and ABN AMRO. Aston has signed an initial agreement with ABN
AMRO to provide administrative management to its 4 money market funds ($3.1 billion in assets at June 30, 2006). We
also expect Aston to expand its separately managed account platform, introduce principal-protected funds being
developed in conjunction with a major domestic insurance company, and incubate additional funds with existing and new
sub-advisers.
In addition, Highbury can provide ongoing strategic support to Aston in introductions to new business opportunities,
including acquisitions and strategic partnerships, industry insights, and professional relationships and potential capital
sources to fund growth initiatives. As a beginning source of potential acquisitions, Aston Management has strong
relationships with its investment managers, as the following table describes: (all ABN AMRO Funds renamed Aston
following close of acquisition).
Page 12
December 12, 2006
Company Report
Fund Sub-Advisor Funds Managed Description__________________
ABN AMRO Asset Mgt ABN AMRO Growth Fund Headquartered in Chicago; Founded 1991
Total AUM $21.5 billion ABN AMRO Mid Cap Growth Fund Wholly-owned by ABN AMRO
ABN AMRO Real Estate Fund Offers separately managed accounts
ABN AMRO Fixed & Money Market Funds Advises the ABN AMRO fund family
ABN AMRO Balanced Fund Exp. MMF,Fixed Inc,large cap equities
_______________________________________________________________________________________________
MFS Investment Mgt ABN AMRO/MFS Value Fund Headquartered in Mass. Founded 1924
AUM $168.2 billion 78% owned by Sun Life Financial; 22% by
Employees
Global Spectrum of investment expertise
Offers separately managed accounts,
Wrap accounts and advises mutual funds
_______________________________________________________________________________________________
Montag & Caldwell ABN AMRO/M&C Growth Fund Headquartered in Atlanta; founded 1945
AUM $21.0 billion Wholly-owned by ABN AMRO
Specialist manager, large cap growth style
$40 million separate account minimum
Advises mutual funds for institutions/retail
_____________________________________________________________________________________________
Optimum Investment Advisors ABN AMRO/Optimum Mid Cap fund Headquarters in Chicago; founded 1989
AUM $1.5 billion 76% owned by employees
24% owned by private outside investor
Expertise in value style; mid/ large cap
Offers separately managed accounts
Advises mutual funds for institutions/retail
Offers wrap accounts
________________________________________________________________________________________________
River Road Asset Mgt ABN AMRO/River Road Small Cap Value Headquartered in Louisville, founded 4/05
AUM $1.6 billion ABN AMRO/River Road Dynamic Income 55% owned employees;45% ABN AMRO
Small cap value/dividend specialist
Offers separately managed accounts
Advises US and European funds
________________________________________________________________________________________________
TAMRO Capital Partners ABN AMRO/TAMRO small cap fund Headquarter in Alexandria, VA founded 2000
AUM $460 million ABN AMRO/TAMRO Large cap value fund Balance sheet 100% owned by ABN AMRO
Income interests 17% owned by employees
Proprietary value expertise –lg/small equity
Offers separately managed accounts
Advises two mutual funds
Veredus Asset Management ABN AMRO/Veredus Aggressive Louisville, KY founded 1998
AUM $2.4 billion Growth Fund 50% owned by employees;50% ABN AMRO
ABN AMRO/Veredus Select Growth Fund Specialist in growth equities
ABN AMRO/Veredus Sci-Tech Fund Offers separately managed accounts
Advises four mutual funds
_______________________________________________________________________________________________
Source: Highbury Financial, Inc.
A Growing But Fragmented Industry
The mutual fund industry has approximately 20,000 funds and over 8,000 of these have less than $500 million in assets,
which, we believe, leaves a lot of opportunity for Highbury and Aston to grow the Aston Funds and for Highbury to make
Page 13
December 12, 2006
Company Report
additional acquisitions on attractive terms for its shareholders. The Highbury strategy is to buy companies at low P/Es and
grow with the managers, negotiating with the managers to split the equity ownership to motivate the management to
improve the business metrics, and sell to Highbury, to provide liquidity and exit strategy to the managers. The managers,
in effect, work for both themselves, and Highbury. All the while, however, Highbury intends to maintain at least 51%
ownership of all affiliates.
The Economics of the Aston Funds
In the case of the Aston Funds, Highbury owns 65% while Aston management owns 35%. Highbury will delegate the dayto-
day operations of Aston to its officers, subject to management and control by Highbury. Following the closing of the
acquisition, which took place on November 30, 2006, 18.2% of the total revenues of Aston were allocated to Highbury and
distributions to Highbury will have priority over distributions to other members. Pursuant to the limited liability company
agreement of Aston, 72% of the revenues (or operating allocation) of Aston is allocated for use by the management of
Aston to pay the operating expenses of Aston, including salaries and bonuses of all employees of Aston, which includes
Aston management members. No member of Highbury’s management will receive salary, bonus, or other payment from
Aston. The remaining 28% of the revenue (owner’s allocation) of Aston is allocated to the owners of Aston. The owner’s
allocation is allocated among the members of Aston according to their relative ownership interests. Thus, Highbury is
allocated 18.2% of the total revenues of Aston (65% of 28% of the revenue) and the Aston management team is allocated
9.8% (35% of 28%) of the total revenues of Aston. Highbury’s contractual share of revenues has priority over any
distribution to Aston management members, and Highbury must be made whole for any reduction to its priority revenue
share before any distributions are made to Aston management members.
Financial Outlook And Valuation
For the remaining one month of 2006 since the acquisition closed (month of December, 2006), we have estimated
revenue to Highbury of $607,00 calculated as 18.2% of one month of Aston revenue annualizing currently at
approximately $40 million, we believe. For 2007, we estimate that Aston revenue from net advisory fees from funds
managed (calculated at 0.70% of the weighted average assets under management) should increase by about 5%, while
the new sub advisory agreement should reduce fees paid to sub-advisors to 50% of net advisory fees after third-party
distribution fees, improving EBITDA margins, as we estimate holding company expenses as semi-fixed at approximately
$600,000. We also estimate some interest income from the $7 million on hand in cash at the close of the acquisition, plus
the potential cash received from warrant exercise, which we estimate at approximately $79 million at the 4Q07 period,
when we estimate HFI will force redemption of the warrants if its common stock price reaches $8.50. The $5 warrant
exercise price could produce $79 million of investable cash.
Together with some leverage and use of its current $12 million line of credit, HFI will have sufficient cash on hand to do
another sizable acquisition in 2007 or 2008, in our view, which we assume will be accretive to Highbury shareholders.
This, in turn, should produce some operating leverage in higher net advisory fees for more assets under management
without a commensurate increase in expenses, as the chassis is built. The strategy to “stairstep” increasing valuation is to
grow the initial acquisition through internal growth and prudent use of leverage to do serial acquisitions, and utilizing the
warrant proceeds to continue to make accretive acquisitions to produce higher revenue and higher valuations for the
holding company shareholders. In addition, HFI management wants to complete the range of offerings by expanding the
diversity of the funds owned and other types of investment managers in the portfolio of companies.
In the case of Aston, the sources of revenue are advisory fees for AUM after expenses to third-party distribution and
portfolio management affiliates. As scale, operating leverage, and AUM grow, as well as potential fee structures for
additional types of funds, both revenue and EBITDA should expand. We think, over time, that EBITDA and revenue
growth rates could be 10-15% organic growth and 20% with acquisitions that are accretive. Our 12-month price target on
the shares is calculated at 16.5x our estimated cash earnings per share in 2007 of $0.62, calculated by taking net income
per share and adding back non-cash expenses of goodwill amortization and deferred taxes due to the goodwill. Our
estimate of Highbury’s 18.2% share of Aston revenue is $7.4 million, with EBITDA to HFI of approximately $6.8 million
and GAAP reported EPS of $0.33. We are also assuming exercise of all warrants by 4Q07 for a fully-diluted common
share base of 26.357 million exiting 2007 and 9.5 million in the first three quarters of 2007. If HFI management is able to
make acquisitions in 2007, our estimates may prove to be low, as this is an easily scaleable business.
Page 14
December 12, 2006
Company Report
Competition/Comparables
Theoretically, all funds compete with all others in the industry, as perfect substitutes for investors’ capital. However, in the
area of newly public, or relatively young, investment holding companies operating in a similar style to the Highbury model,
(i.e., owning other managers in a portfolio or holding company structure and benefiting from the increase in AUM and
EBITDA), we would point to Affiliated Manager’s Group (NYSE: AMG, Not Rated) and National Financial Partners (NYSE:
NFG, Not Rated). AMG shares trade at 18.6x its EPS estimate of $5.60, according to First Call consensus estimates, on
the current calendar year and 15.7x the estimate of EPS on 2007 calendar year, which seems to be in line with its 18%
EPS growth rate, according to First Call. Shares of another comparable company, National Financial Partners, (NYSE:
NFP, Not Rated) trade at 17.6x EPS estimates of the current 2006 calendar year of $2.61 and 14.6x EPS estimates for
2007 of $3.15, or about a PEG of 0.84, per First Call consensus estimates. What is noteworthy here is that both stocks
have done well as equities (YTD, AMG shares are up 30 %.) Both use leverage to enhance returns (which we expect
Highbury to employ, as well), and both are growing at above-average rates. AMG, for example, has long-term debt of $1.2
billion, which has increased from $900 million at the close of 2005 (or 33%) and has helped to expand operations and
EBITDA by an equal amount and should contribute to faster earnings and EBITDA growth in the future as more
acquisitions are made. We would expect the pace of acquisitions for all these companies to increase, as investment funds
continue to pour into the equity and fixed income markets from global and U.S.-based demographic expansion. Further,
with few infrastructure needs, as service companies with expanding EBITDA, AMG and NFP generate significant amounts
of cash—on average, $200-220 million per year, respectively.
Risks
Highbury is a newly formed firm (IPO in January, 2006) that has just made its first acquisition of a mutual fund company.
Therefore, investors have little operating history by which to estimate Highbury, or Aston’s future performance, although
Aston funds (formerly ABN AMRO and Alleghany Funds) do have many years of operating history under former
ownership.
Highbury’s performance, as a result of its ownership allocation of Aston’s revenue, is directly affected by changing
conditions in global financial markets, generally, and in equity and fixed income markets, particularly. A decline or a lack of
sustained growth in these markets could result in decreased advisory fees and a potential corresponding decline in
operating results and cash flow from affiliated companies. Also, a downturn in the global financial markets could make it
more difficult to attract assets under management, although potential offsets could emerge from potentially lower
acquisition prices to expand the numbers of companies in the Highbury operating structure. Highbury intends to utilize
leverage in the future to make acquisitions. There can be no assurance that the use of leverage in general or particular
debt instruments will be accretive to income or available on favorable terms when needed.
In general, the type of acquisitions at the prices desired by Highbury may not be available. We think this risk is mitigated
by a substantial current pipeline of potential targets. We believe that through growth, Highbury will add to its income and
diversify risk created by changing market conditions and environments. An ability to grow is, thus, considered critical. If
Highbury cannot make accretive acquisitions, we think risks to revenue and income could increase.
Page 15
December 12, 2006
Company Report
Appendix 1: Highbury Financial, Inc. – The Aston Asset Management Funds
Diverse Family of Mutual Funds
Source: Morningstar, Inc., as of June 30, 2006
Morningstar AUM ($m) % of Total
Fund Advisor or Subadvisor Morningstar Category Rating Inception 6/30/06 AUM
EQUITY FUNDS
ABN AMRO Montag & Caldwell Growth Montag & Caldwell Large Growth HHHH Nov 1994 $ 2,194 39.4%
ABN AMRO Growth ABN AMRO Asset Management Large Growth HHH Dec 1993 933 16.7%
ABN AMRO Veredus Aggressive Growth Veredus Asset Management Small Growth HH Jun 1998 680 12.2%
ABN AMRO Mid Cap Optimum Investment Advisors Mid-Cap Blend HHH Sep 1994 655 11.8%
ABN AMRO Value MFS Institutional Advisors Large Value HHH Jan 1993 323 5.8%
ABN AMRO TAMRO Small Cap TAMRO Capital Small Blend HHHH Nov 2000 193 3.5%
ABN AMRO Real Estate ABN AMRO Asset Management Specialty-Real Estate HHH Dec 1997 106 1.9%
ABN AMRO Balanced ABN AMRO Asset Management Moderate Allocation HH Sep 1995 66 1.2%
ABN AMRO River Road Small Cap Value River Road Asset Management Small Value -- Jun 2005 53 0.9%
ABN AMRO Montag & Caldwell Balanced Montag & Caldwell Moderate Allocation HH Nov 1994 43 0.8%
ABN AMRO Veredus Select Growth Veredus Asset Management Large Growth HHHHH Dec 2001 32 0.6%
ABN AMRO TAMRO Large Cap Value TAMRO Capital Large Value HHHH Nov 2000 16 0.3%
ABN AMRO River Road Dynamic Equity River Road Asset Management Mid Cap Value -- Jun 2005 8 0.1%
ABN AMRO Veredus Science Technology Veredus Asset Management Specialty-Technology HHHH Jun 2000 4 0.1%
ABN AMRO Mid Cap Growth ABN AMRO Asset Management Mid-Cap Growth -- Dec 2005 1 0.0%
Total Equity Funds 5,306 95.3%
FIXED INCOME FUNDS
ABN AMRO Bond ABN AMRO Asset Management Int. Term Bond HHH Dec 1993 $ 149 2.7%
ABN AMRO Municipal Bond ABN AMRO Asset Management Muni National Interm HHH Dec 1993 63 1.1%
ABN AMRO Investment Grade Bond ABN AMRO Asset Management Short Term Bond HHHH Oct 1995 29 0.5%
ABN AMRO High Yield ABN AMRO Asset Management High Yield Bond HHH Jun 2003 21 0.4%
Total Fixed Income Funds 263 4.7%
Total AUM $ 5,569 100.0%
Page 16
December 12, 2006
Company Report
Appendix 2: Diverse Family of Mutual Funds Highbury Financial, Inc. – The Aston Asset Management Funds
Source: Morningstar, Inc., as of June 30, 2006
Morningstar AUM ($m) Annualized Total Returns
Fund Advisor or Subadvisor Morningstar Category Rating 6/30/06 1-Year 3-Years 5-Years
EQUITY FUNDS
ABN AMRO Montag & Caldwell Growth Montag & Caldwell Large Growth HHHH $ 2,194 6.6% 6.3% 0.0%
ABN AMRO Growth ABN AMRO Asset Management Large Growth HHH 933 2.5% 6.2% -0.5%
ABN AMRO Veredus Aggressive Growth Veredus Asset Management Small Growth HH 680 6.9% 13.7% -0.9%
ABN AMRO Mid Cap Optimum Investment Advisors Mid-Cap Blend HHH 655 9.5% 13.6% 9.3%
ABN AMRO Value MFS Institutional Advisors Large Value HHH 323 11.6% 14.8% 4.7%
ABN AMRO TAMRO Small Cap TAMRO Capital Small Blend HHHH 193 18.3% 18.3% 12.7%
ABN AMRO Real Estate ABN AMRO Asset Management Specialty-Real Estate HHH 106 22.1% 27.7% 19.9%
ABN AMRO Balanced ABN AMRO Asset Management Moderate Allocation HH 66 1.4% 4.9% 1.5%
ABN AMRO River Road Small Cap Value River Road Asset Management Small Value -- 53 24.9% --- ---
ABN AMRO Montag & Caldwell Balanced Montag & Caldwell Moderate Allocation HH 43 2.9% 3.7% 1.1%
ABN AMRO Veredus Select Growth Veredus Asset Management Large Growth HHHHH 32 7.4% 15.5% ---
ABN AMRO TAMRO Large Cap Value TAMRO Capital Large Value HHHH 16 7.4% 10.9% 5.0%
ABN AMRO River Road Dynamic Equity River Road Asset Management Mid Cap Value -- 8 15.0% --- ---
ABN AMRO Veredus Science Technology Veredus Asset Management Specialty-Technology HHHH 4 15.7% 8.9% -1.0%
ABN AMRO Mid Cap Growth ABN AMRO Asset Management Mid-Cap Growth -- 1 --- --- ---
Total Equity Funds 5,306
FIXED INCOME FUNDS
ABN AMRO Bond ABN AMRO Asset Management Int. Term Bond HHH $ 149 -1.2% 1.8% 3.9%
ABN AMRO Municipal Bond ABN AMRO Asset Management Muni National Interm HHH 63 0.1% 1.6% 3.8%
ABN AMRO Investment Grade Bond ABN AMRO Asset Management Short Term Bond HHHH 29 -0.3% 1.2% 3.9%
ABN AMRO High Yield ABN AMRO Asset Management High Yield Bond HHH 21 3.6% 6.7% ---
Total Fixed Income Funds 263
Total AUM $ 5,569
Page 17
December 12, 2006
Company Report
Unaudited Pro Forma Condensed Combined Balance Sheet
Assumes No Conversion
June 30, 2006
Acquired
Business
Highbury
Financial
Inc. Pro Forma
Adjustments Pro Forma
Combined
Assets
Current assets:
Cash and cash equivalents $5,825,615 $566,986 $43,890,907 (a) $7,023,677
(2,325,615 )(b)
(38,600,000)(c)
(2,000,000 )(c)
347,256 (h)
(673,333 )(d)
(8,139 )(e)
Cash and cash equivalents, held in trust — 43,890,907 (43,890,907)(a) —
Advisory and administrative fees receivable 3,650,918 — (3,650,918 )(f) —
Prepaid expenses and other current assets — 105,355 — 105,355
Total current assets 9,476,533 44,563,248 (46,910,749) 7,129,032
Goodwill 10,518,750 — (10,518,750)(g) 23,618,000
23,618,000 (c)
Other intangible assets, net 22,045,000 — (22,045,000)(g) —
Identifiable intangibles — — 13,032,000 (c) 13,032,000
Deferred acquisition costs — 756,965 (756,965 )(h) —
Deferred tax assets, net — 128,175 (128,175 )(i) —
Other assets 1,635 — 448,365 (c) 450,000
Total assets $42,041,918 $45,448,388 $(43,261,274) $44,229,032
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued liabilities $— $496,608 $(409,709 )(h) $86,899
Accounts payable - affiliates 1,408,688 — (1,408,688 )(f) —
Accrued compensation and benefits 477,547 — (477,547 )(f) —
Income taxes payable — 68,185 (128,175 )(i) (59,990 )
Common stock warrants — 14,238,000 — 14,238,000
Underwriters’ purchase option — 788,000 — 788,000
Deferred underwriting fees — 673,333 (673,333 )(d) —
Deferred investment income — 112,795 (8,139 )(e) —
(104,656 )(j)
Total current liabilities 1,886,235 16,376,921 (3,210,247 ) 15,052,909
Other accrued liabilities 765,612 — (765,612 )(f) —
Total liabilities 2,651,847 16,376,921 (3,975,859 ) 15,052,909
Common stock, subject to possible conversion — 8,657,910 (8,657,910 )(k) —
Stockholders’ equity:
Common stock 964 — 964
Additional paid-in capital 39,390,071 25,834,808 (2,325,615 )(b) 34,492,718
(1,501,635 )(c)
Page 18
December 12, 2006
Company Report
(2,000,000 )(c)
(999,071 )(f)
(10,518,750)(g)
(22,045,000)(g)
8,657,910 (k)
Income (deficit) accumulated (5,422,215 ) 104,656 (j) (5,317,559 )
Total stockholders’ equity 39,390,071 20,413,557 (30,627,505) 29,176,123
Total liabilities and stockholders’ equity $42,041,918 $45,448,388 $(43,261,274) $44,229,032
Source: Highbury Financial proxy, November 3, 2006, Page 26
Highbury Financial Inc. and Subsidiary
(a company in the development stage)
Condensed Consolidated Balance Sheets
Restated
June 30,
2006 December 31,
2005
(unaudited)
Current assets:
Cash $ 566,986 $ 36,902
Investments in Trust Account (Notes 2, 4) 43,890,907 —
Prepaid expenses 105,355 —
Total current assets 44,563,248 36,902
Deferred registration costs (Note 2) — 483,492
Deferred acquisition costs (Note 2) 756,965 —
Deferred income taxes (Notes 2, 8) 128,175 —
Total assets $ 45,448,388 $ 520,394
Current liabilities:
Accounts payable and accrued expenses $ 496,608 $ 427,846
Income taxes payable 68,185 —
Deferred underwriting fees (Note 6) 673,333 —
Deferred investment income (Note 2) 112,795 —
Common stock warrants (Note 3) 14,238,000 —
Underwriters’ purchase option (Note 3) 788,000 —
Notes payable, stockholders (Note 7) — 70,000
Total current liabilities 16,376,921 497,846
Common stock, subject to possible conversion, 1,548,666 shares at conversion value (Note 2) 8,657,910 —
Stockholders’ equity (Notes 2, 3, 4, 5, 6, 9):
Preferred stock, $.0001 par value, authorized 1,000,000 shares; none issued — —
Common stock, $.0001 par value, authorized 50,000,000 shares; issued and outstanding
9,635,000 shares (which includes 1,548,666 subject to possible conversion) and
1,725,000, respectively 964 173
Additional paid-in capital 25,834,808 24,827
Deficit accumulated during the development stage (5,422,215 ) (2,452 )
Total stockholders’ equity 20,413,557 22,548
Total liabilities and stockholders’ equity $ 45,448,388 $ 520,394
Page 19
December 12, 2006
Company Report
Highbury Financial Inc. and Subsidiary
(a company in the development stage)
Condensed Consolidated Statements of Operations
Restated
Three Months
Ended
June 30, 2006
Restated
Six Months
Ended
June 30, 2006
Restated
Period from
July 13, 2005
(inception) to
June 30, 2006
(unaudited) (unaudited) (unaudited)
Operating expenses:
Professional fees $(76,639 ) $(108,954 ) $(108,954 )
D&O insurance (22,958 ) (39,745 ) (39,745 )
Administrative fees (22,500 ) (38,952 ) (38,952 )
Franchise taxes (15,063 ) (30,025 ) (32,021 )
Travel and entertainment (18,435 ) (25,486 ) (25,486 )
Other expenses (14,926 ) (17,512 ) (17,968 )
Total expenses (170,521 ) (260,674 ) (263,126 )
Operating loss (170,521 ) (260,674 ) (263,126 )
Non-operating income / (loss):
Interest income 3,376 3,376 3,376
Investment income 474,042 718,545 718,545
Loss from derivative liabilities—Warrants (4,271,400) (5,537,000) (5,537,000)
Loss from derivative liabilities—UPO (56,000 ) (174,000 ) (174,000 )
Total non-operating loss (3,849,982) (4,989,079) (4,989,079)
Loss before provision for income taxes (4,020,503) (5,249,753) (5,252,205)
Provision for income taxes (Note 8):
Current (188,687 ) (298,185 ) (298,185 )
Deferred 75,872 128,175 128,175
Net loss for the period $(4,133,318) $(5,419,763) $(5,422,215)
Weighted average shares outstanding, basic and diluted 9,635,000 8,502,722 5,190,881
Net loss per share, basic and diluted $(0.43 ) $(0.64 ) $(1.04 )
Page 20
December 12, 2006
Company Report
Highbury Financial Inc. and Subsidiary
(a company in the development stage)
Condensed Consolidated Statements of Cash Flows
Restated
Six Months
Ended
June 30, 2006
Restated
Period from
July 13, 2005
(inception) to
June 30, 2006
(unaudited) (unaudited)
Cash flows from operating activities:
Net loss for the period $(5,419,763 ) $(5,422,215 )
Adjustments to reconcile net loss to net cash used in operating activities:
(Increase) / decrease in deferred taxes (128,175 ) (128,175 )
Loss on derivatives—Warrants 5,537,000 5,537,000
Loss on derivatives—underwriters’ purchase option 174,000 174,000
Changes in operating assets and liabilities:
(Increase) / decrease in trust account (601,340 ) (601,340 )
(Increase) / decrease in prepaid expenses (105,355 ) (105,355 )
Increase / (decrease) in accounts payable and accrued expenses (262,809 ) (260,357 )
Increase / (decrease) in deferred investment income 112,795 112,795
Increase / (decrease) in income taxes payable 68,185 68,185
Net cash used in operating activities (625,462 ) (625,462 )
Cash flows from investing activities:
Cash held in trust fund (43,289,567) (43,289,567)
Net cash used in investing activities (43,289,567) (43,289,567)
Cash flows from financing activities:
Proceeds from sale of shares of common stock and warrants 47,460,000 47,485,000
Proceeds from issuance of option 100 100
Proceeds from notes payable, stockholders — 70,000
Payments of notes payable, stockholders (70,000 ) (70,000 )
Payment of costs of public offering (2,944,987 ) (3,003,085 )
Net cash provided by financing activities 44,445,113 44,482,015
Net increase in cash 530,084 566,986
Cash at beginning of period 36,902 —
Cash at end of period $566,986 $566,986
Supplemental schedule of non-cash financing activities:
Accrual of costs of acquisition $756,965 $756,965
Accrual of deferred underwriting fees 673,333 673,333
Supplemental disclosure of cash flow information:
Cash paid for taxes $232,146 $232,146
Highbury Proxy, November 3, 2006, Pages F34-37
Page 21
Highbury Financial, Inc.
Quarterly Income Statement Restated Restated
Dec. year Dec-05A Mar-06A Jun-06A Sept-06A Dec.-06E 2006E Mar-07E Jun-07E Sept-7E Dec.-07E 2007E
Operating Income:
Aston revenue (18.2% net owner's allocation) 607,000 607,000 1,820,000 1,843,000 1,865,500 1,911,000 7,439,500
Operating Expenses:
Professional fees 32,315 76,639 60,619 60,100 229,673 61,200 62,300 62,300 63,300 249,100
D&O Insurance 16,787 22,958 22,958 22,958 85,661 22,958 22,958 22,958 22,958 91,832
Administrative fees 16,452 22,500 22,500 22,500 83,952 22,500 22,500 22,500 22,500 90,000
Franchise taxes 1,996 14,962 15,063 15,374 15,374 60,773 15,374 15,374 15,374 15,374 61,496
Travel and Entertainment 7,051 18,435 7,810 11,520 44,816 11,650 12,120 12,300 12,500 48,570
Other expenses 456 2,586 14,926 18,388 19,525 55,425 19,525 19,600 19,700 19,800 78,625
Total Expenses 2,452 90,153 170,521 147,649 151,977 560,300 153,207 154,852 155,132 156,432 619,623
Operating Income (loss) (2,452) (90,153) (170,521) (147,649) 455,023 46,700 1,666,793 1,688,148 1,710,368 1,754,568 6,819,877
Non Operating income(loss):
Interest Income 3,376 5,812 5,750 14,938 5,750 5,750 5,750 5,750 23,000
Investment Income 244,503 474,042 461,190 395,500 1,575,235 88,750 89,859 89,873 1,110,313 1,378,795
Loss from derivative liabilities - warrants (1,265,600) (4,271,400) 158,200 (258,200) (5,637,000) (358,200) (458,000) (445,200) 0 (1,261,400)
Loss from derivative liabilities - UPO (118,000) (56,000) 100,000 (300,000) (374,000) (400,000) (450,000) (500,000) 0 (1,350,000)
Total non-operating income (loss) (1,139,097) (3,849,982) 725,202 (156,950) (4,420,827) (663,700) (812,391) (849,577) 1,116,063 (1,209,605)
Income (loss) before income taxes (1,229,250) (4,020,503) 577,553 298,073 (4,374,127) 1,003,093 875,757 860,791 2,870,631 5,610,272
(Provision) benefit for income taxes
Current (109,498) (188,687) (194,181) (110,466) (602,832) (371,746) (324,556) (319,009) (1,063,856) (2,079,167)
Deferred 52,303 75,872 75,841 150,899 354,915 226,349 226,349 226,349 226,349 905,396
Net income/(Loss) for the period (2,452) (1,286,445) (4,133,318) 459,213 338,506 (4,622,044) 857,696 777,551 768,131 2,033,124 4,436,501
Weighted average shares outstanding, basic and diluted 1,725,000 7,345,000 9,635,000 9,635,000 9,527,000 8,631,306 9,527,000 9,527,000 9,527,000 26,357,001 13,443,939
Net income (loss) per share, basic and diluted $0.00 ($0.18) ($0.43) $0.05 $0.08 ($0.48) $0.09 $0.08 $0.08 $0.08 $0.33
Cash Net Income:
Net Income (4,622,044) 857,696 777,551 768,131 2,033,124 4,436,501
Amortization of goodwill of acquistion for tax purposes 203,611 610,764 610,764 610,764 610,764 610,764
Deferred taxes related to intangible assets plus affiliate depreciation 354,915 226,349 226,349 226,349 226,349 905,396
Total cash income (4,063,518) 1,694,809 1,614,663 1,605,244 2,870,237 5,952,661
Per share ($0.47) $0.18 $0.17 $0.17 $0.11 $0.62
Highbury share of Aston revenue is 18.2% ; acquisition closed 11/30/06 revenue shown for one month (Dec., 2006)
Aston 2006 reveneu run rate approx $40 mil: HFI share=18.2% after 72% of rev. allocated to Aston expenses
Note: UPO is underwriter's purchase option
UPO=336,667 units@$7.50 strike price=1,010,001 common shares
Assume warrants redeemed and UPO exercised 4Q07; shares increase by 16.83 million and proceeds of $81.625 million
Assume 9.527 million common and 15.820 million warrants exercisable at $5.00
Loss from derivatives - warrants and UPO is a NONCASH accntg adjustment
Source: Company reports and ThinkEquity Partners LLC estimates
Assumptions
Highbury closes on Aston Asset Mgt Funds Acquistion 11/30/06
Annual revenue run rate on Aston Funds $40 million at 12/1/06
Highbury receives 18.2% of annual revenue from Aston, beginning at 11/30/06 closing
Aston grows revenue 5% each year beginning 2007
Aston revenue estimate $40 million Q107; $42 million Q407
Highbury does no acquisitions in 2007
Highbury calls warrants when common price $8.50.
Acquisition goodwill of $36.6 million amortizes at $2.44 million per year, providing tax shelter on pretax income
Tax rate is 37.5%; goodwill amortization provides deferred tax benefit
Estimate interest income at rate of 5.0% yield.
Note: fair value of the warrants issued in IPO units have been reported as a liability
The warrants and UPO are reported as a liability until exercised, expire or redeemed by Highbury
Warrants are redeemable if common stock attains the level of $8.50 per share
The warrant liability is estimated from the change in the valuaion of the warrants during the period.
UPO is underwriter's purchase option to purchase 336667 units at $7.50 in connection with the IPO
UPO is reported as a liability with period changes in valuation estimated for each period |
