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EX-10.1 - EX-10.1 - Titanium Asset Management Corp | y80387exv10w1.htm |
EX-10.2 - EX-10.2 - Titanium Asset Management Corp | y80387exv10w2.htm |
EX-99.1 - EX-99.1 - Titanium Asset Management Corp | y80387exv99w1.htm |
EX-32.2 - EX-32.2 - Titanium Asset Management Corp | y80387exv32w2.htm |
EX-32.1 - EX-32.1 - Titanium Asset Management Corp | y80387exv32w1.htm |
EX-31.2 - EX-31.2 - Titanium Asset Management Corp | y80387exv31w2.htm |
EX-31.1 - EX-31.1 - Titanium Asset Management Corp | y80387exv31w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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, 2009
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 | 20-8444031 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) | |
777 E. Wisconsin Avenue | ||
Milwaukee, Wisconsin | 53202-5310 | |
(Address of principal executive offices) | (Zip Code) |
(414) 765-1980
(Registrants telephone number, including area code)
(Registrants 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 the filing requirements for at least the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See 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 o | Accelerated filer o | Non-accelerated filer o | 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 o No þ
At November 10, 2009, there were 20,509,502 shares of the registrants common stock and
612,716 shares of restricted stock outstanding.
TABLE OF CONTENTS
i
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Titanium Asset Management Corp.
Condensed Consolidated Balance Sheets
Condensed Consolidated Balance Sheets
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
(unaudited) | ||||||||
Assets |
||||||||
Current assets |
||||||||
Cash and cash equivalents |
$ | 6,383,000 | $ | 18,753,000 | ||||
Securities available for sale |
11,473,000 | 10,683,000 | ||||||
Accounts receivable |
3,592,000 | 4,041,000 | ||||||
Other current assets |
1,932,000 | 1,420,000 | ||||||
Total current assets |
23,380,000 | 34,897,000 | ||||||
Securities available for sale |
2,074,000 | 672,000 | ||||||
Property and equipment, net |
485,000 | 456,000 | ||||||
Goodwill |
31,271,000 | 32,757,000 | ||||||
Intangible assets, net |
27,468,000 | 32,206,000 | ||||||
Deferred income taxes |
5,821,000 | 4,202,000 | ||||||
Total assets |
$ | 90,499,000 | $ | 105,190,000 | ||||
Liabilities and Stockholders Equity |
||||||||
Current liabilities |
||||||||
Accounts payable |
$ | 271,000 | $ | 663,000 | ||||
Acquisition payments due |
2,677,000 | 8,145,000 | ||||||
Other current liabilities |
2,182,000 | 1,789,000 | ||||||
Total current liabilities |
5,130,000 | 10,597,000 | ||||||
Acquisition payments due |
960,000 | 1,889,000 | ||||||
Total liabilities |
6,090,000 | 12,486,000 | ||||||
Commitments and contingencies |
||||||||
Stockholders equity |
||||||||
Common stock, $0.0001 par value; 54,000,000 shares
authorized; 20,509,502 and 20,464,002 shares issued
and outstanding at September 30, 2009 and December 31,
2008, respectively |
2,000 | 2,000 | ||||||
Restricted common stock, $0.0001 par value; 720,000
shares authorized; 612,716 issued and outstanding at
September 30, 2009 and December 31, 2008 |
| | ||||||
Preferred stock, $0.0001 par value; 1,000,000 shares
authorized; none issued |
| | ||||||
Additional paid-in capital |
99,775,000 | 99,462,000 | ||||||
Accumulated deficit |
(15,531,000 | ) | (6,597,000 | ) | ||||
Other comprehensive income (loss) |
163,000 | (163,000 | ) | |||||
Total stockholders equity |
84,409,000 | 92,704,000 | ||||||
Total liabilities and stockholders equity |
$ | 90,499,000 | $ | 105,190,000 | ||||
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, 2008 (the 2008 Form 10-K).
1
Table of Contents
Titanium Asset Management Corp.
Condensed Consolidated Statement of Operations
(unaudited)
Condensed Consolidated Statement of Operations
(unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Fee income |
$ | 5,047,000 | $ | 3,886,000 | $ | 14,887,000 | $ | 10,592,000 | ||||||||
Operating expenses: |
||||||||||||||||
Administrative |
5,737,000 | 4,913,000 | 17,865,000 | 10,901,000 | ||||||||||||
Amortization of intangible assets |
1,020,000 | 1,093,000 | 3,059,000 | 3,095,000 | ||||||||||||
Impairment of goodwill |
4,847,000 | | 4,847,000 | | ||||||||||||
Impairment of intangible assets |
| | | 1,792,000 | ||||||||||||
Total operating expenses |
11,604,000 | 6,006,000 | 25,771,000 | 15,788,000 | ||||||||||||
Operating loss |
(6,557,000 | ) | (2,120,000 | ) | (10,884,000 | ) | (5,196,000 | ) | ||||||||
Other income |
||||||||||||||||
Interest income |
98,000 | (94,000 | ) | 333,000 | 774,000 | |||||||||||
Interest expense |
(15,000 | ) | (14,000 | ) | (44,000 | ) | (14,000 | ) | ||||||||
Gain (loss) on investments |
28,000 | (38,000 | ) | (160,000 | ) | (38,000 | ) | |||||||||
Loss before taxes |
(6,446,000 | ) | (2,266,000 | ) | (10,755,000 | ) | (4,474,000 | ) | ||||||||
Income tax benefit |
(249,000 | ) | (664,000 | ) | (1,821,000 | ) | (1,384,000 | ) | ||||||||
Net loss |
$ | (6,197,000 | ) | $ | (1,602,000 | ) | $ | (8,934,000 | ) | $ | (3,090,000 | ) | ||||
Earnings (loss) per share |
||||||||||||||||
Basic |
$ | (0.30 | ) | $ | (0.08 | ) | $ | (0.43 | ) | $ | (0.15 | ) | ||||
Diluted |
$ | (0.30 | ) | $ | (0.08 | ) | $ | (0.43 | ) | $ | (0.15 | ) | ||||
Weighted average number of common
shares outstanding: |
||||||||||||||||
Basic |
20,546,490 | 20,451,502 | 20,546,490 | 20,451,502 | ||||||||||||
Diluted |
20,546,490 | 20,451,502 | 20,546,490 | 20,451,502 |
See Notes to Condensed Consolidated Financial Statements contained herein and the Notes to
Consolidated Financial Statements in the 2008 Form 10-K.
2
Table of Contents
Titanium Asset Management Corp.
Condensed Consolidated Statement of Cash Flows
(unaudited)
Condensed Consolidated Statement of Cash Flows
(unaudited)
Nine Months Ended | ||||||||
September 30, | ||||||||
2009 | 2008 | |||||||
Cash flows from operating activities |
||||||||
Net loss |
$ | (8,934,000 | ) | $ | (3,090,000 | ) | ||
Adjustments to reconcile net loss to net cash used in operating
activities: |
||||||||
Depreciation and amortization |
3,139,000 | 3,099,000 | ||||||
Impairment of intangible assets |
| 1,792,000 | ||||||
Impairment of goodwill |
4,847,000 | | ||||||
Noncash share compensation |
313,000 | | ||||||
Accretion of acquisition payments |
40,000 | 12,000 | ||||||
Loss on investments |
160,000 | 39,000 | ||||||
Deferred income taxes |
(1,821,000 | ) | (1,531,000 | ) | ||||
Changes in assets and liabilities: |
||||||||
Decrease (increase) in accounts receivable |
538,000 | (140,000 | ) | |||||
Decrease (increase) in other current assets |
(440,000 | ) | 425,000 | |||||
Increase (decrease) in accounts payable |
(398,000 | ) | 129,000 | |||||
Increase (decrease) in other current liabilities |
876,000 | (855,000 | ) | |||||
Net cash used in operating activities |
(1,680,000 | ) | (120,000 | ) | ||||
Cash flows from investing activities |
||||||||
Purchases of property and equipment |
(128,000 | ) | (72,000 | ) | ||||
Cash and cash equivalents released from trust |
| 55,587,000 | ||||||
Purchases of securities available for sale |
(16,340,000 | ) | (1,000,000 | ) | ||||
Sales and redemptions of securities available for sale |
13,929,000 | 34,000 | ||||||
Cash paid for acquisition of subsidiaries, net of cash acquired |
(6,000 | ) | (31,226,000 | ) | ||||
Net cash provided by (used in) investing activities |
(2,545,000 | ) | 23,323,000 | |||||
Cash flows from financing activities |
||||||||
Payment of deferred acquisition obligations |
(8,145,000 | ) | | |||||
Redemption of common stock |
| (12,017,000 | ) | |||||
Net cash used in financing activities |
(8,145,000 | ) | (12,017,000 | ) | ||||
Net increase (decrease) in cash and cash equivalents |
(12,370,000 | ) | 11,186,000 | |||||
Cash and cash equivalents: |
||||||||
Beginning |
18,753,000 | 19,388,000 | ||||||
Ending |
$ | 6,383,000 | $ | 30,574,000 | ||||
Supplemental disclosure of cash flow information |
||||||||
Income taxes refunded (paid) |
$ | 512,000 | $ | (630,000 | ) | |||
Supplemental disclosure of non-cash investing and financing activities |
||||||||
Paid-in capital attributed to common stock repurchase rights not
executed |
$ | | $ | 55,587,000 | ||||
Payments due in connection with acquisitions |
$ | 1,708,000 | $ | 1,903,000 |
See Notes to Condensed Consolidated Financial Statements contained herein and the Notes to
Consolidated Financial Statements in the 2008 Form 10-K.
3
Table of Contents
Titanium
Asset Management Corp.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
(unaudited)
Note 1 General
Titanium Asset Management Corp. (the Company) was incorporated on February 2, 2007 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 the membership interests of Boyd Watterson
Asset Management, LLC (Boyd), a fourth asset management firm. The Companys 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 (U.S. 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 U.S. 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 Managements Discussion and Analysis of Financial Condition and Results of Operations included
herein and in the 2008 Form 10-K and the Consolidated Financial Statements and the Notes thereto
included in the 2008 Form 10-K.
Note 2 Adoption of New Accounting Standards
The Companys significant accounting policies are discussed in the Notes to the Companys
Consolidated Financial Statements in the 2008 Form 10-K.
The following new accounting standards and amendments to standards first became effective for
the fiscal year beginning January 1, 2009:
| The Financial Accounting Standards Board (FASB) has issued revised standards concerning the accounting for business combinations that will require the expensing of acquisition costs incurred in future acquisitions and contingent consideration will be recorded at the acquisition date for future acquisitions. | |
| The FASB has recently issued guidance for determining the useful life of intangible assets. The adoption of this guidance did not have an impact on the Companys condensed consolidated financial statements. | |
| In May 2009, the FASB issued a standard that provides guidance to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. That standard requires public companies to evaluate subsequent events through the date that the financial statements are issued. The Company adopted this standard during the second quarter of 2009. The Company has evaluated subsequent events through the time of filing these financial statements with the SEC on November 10, 2009. |
4
Table of Contents
Note 2 Adoption of New Accounting Standards (continued)
The following new standards, amendments to standards and interpretations first became
effective for the fiscal year beginning January 1, 2009 but are not currently relevant to the
Company:
| An amended standard for disclosures about derivative instruments and hedging activities. | |
| A FASB staff position to partially defer certain provisions of its standard on fair value reporting for financial instruments. | |
| A FASB staff position that provides additional guidance for estimating fair values for financial instruments when the volume and level of activity for the asset or liability have significantly decreased. | |
| A FASB staff position that amends the other-than-temporary impairment guidance for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. | |
The following new standards have been issued, but are not yet effective, and have not been early adopted: | ||
| A standard, which was issued by the FASB in June 2009, that requires entities to provide more information regarding sales of securitized financial assets and similar transactions. This standard, which is effective for fiscal years beginning after November 15, 2009, is not expected to have a significant impact on the Companys consolidated financial statements. | |
| A standard, which was issued by the FASB in June 2009, that modifies how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The standard clarifies that the determination of whether a company is required to consolidate an entity is based on, among other things, an entitys purpose and design and a companys ability to direct the activities of the entity that most significantly impact the entitys performance. The standard requires an ongoing reassessment of whether a company is the primary beneficiary of a variable interest entity and also requires additional disclosures about a companys involvement in variable interest entities and any significant changes in risk exposure due to that involvement. This standard, which is effective for fiscal years beginning after November 15, 2009, is not expected to have a significant impact on the Companys consolidated financial statements. |
Note 3 Comprehensive Loss
Comprehensive loss for the periods ended September 30, 2009 and 2008 was as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Net loss |
$ | (6,197,000 | ) | $ | (1,602,000 | ) | $ | (8,934,000 | ) | $ | (3,090,000 | ) | ||||
Fair value gains
(losses) on
available-for-sale
securities, net of tax |
172,000 | | 326,000 | (34,000 | ) | |||||||||||
Comprehensive loss |
$ | (6,025,000 | ) | $ | (1,602,000 | ) | $ | (8,608,000 | ) | $ | (3,124,000 | ) | ||||
5
Table of Contents
Note 4 Goodwill and intangible assets
Pursuant to the acquisition agreements for Wood and Sovereign, the sellers may be owed additional
amounts based on the subsidiaries achieving certain revenue and assets under management milestones.
The Company preliminarily has determined that $900,000 and $808,000 are owed to the sellers of
Wood and Sovereign, respectively, based on their assets under management at September 30, 2009 and
that no amounts are due under the revenue milestones for Sovereign for the twelve months ended
September 30, 2009. The Company currently estimates that approximately $2,100,000 will be due
based on the assets under management milestones for September 30, 2011. These amounts are payable
in equal amounts of cash and shares of common stock.
In connection with the initial preparation of our 2010 annual budget, we completed an evaluation of
the fair value of the Company and the impact of such on our goodwill balance as of September 30,
2009. We estimate fair value using a discounted cash flow analysis, which measures fair value by
reference to projected future cash flows over a five-year forecast period and an estimated residual
value and through the application of a discount rate to reflect those amounts at a present value.
In preparing our cash flow forecasts, we consider historical and projected growth rates, our
business plans, prevailing relevant business conditions and trends, anticipated needs for working
capital and capital expenditures, and historical and expected levels and trends in operating
profitability. In preparing our current forecast, we specifically considered that over the first
nine months of 2009, we have not met our expectations for new customer growth in our retail
marketing channel, particularly in our managed equity assets. We have noted that despite the
recovery that has occurred in the equity markets over the last six months, overall funds flowing
into the U.S. equity markets through mutual funds and exchange traded funds (EFTs) have been
significantly negative. While we expect this trend to revert back to more normal patterns in time,
we have reduced our current forecast to reflect more modest growth in our equity managed funds in
the near term. In addition, while we have achieved substantial progress in integrating the
operations of our four operating subsidiaries and reducing headcount, we continue to bear
significant legal and professional costs as a result of being both a U.S. reporting company and
listed on the London AIM market. While we continue to aggressively look for additional business
efficiencies and related cost savings, we have reduced our current forecast for achieving overall
cost savings over the short term.
Based on the changes in our current forecast, our evaluation of fair value at September 30, 2009
indicated potential impairment of goodwill. As a result, we completed a required second step to
assess the implied fair value of goodwill and concluded that the value of our goodwill was impaired
by $4,847,000.
The changes in goodwill for the nine months ended September 30, 2009 were as follows:
Goodwill at December 31, 2008 |
$ | 32,757,000 | ||
Adjustment to acquired Boyd assets and liabilities |
(26,000 | ) | ||
Change in estimated values for acquired intangible assets of Boyd |
1,679,000 | |||
Additional purchase consideration for Wood and Sovereign acquisitions |
1,708,000 | |||
Impairment of goodwill |
(4,847,000 | ) | ||
Goodwill at September 30, 2009 |
$ | 31,271,000 | ||
The changes in intangible assets for the nine months ended September 30, 2009 were as follows:
Intangible assets, net at December 31, 2008 |
$ | 32,206,000 | ||
Change in estimated values for acquired intangible assets of Boyd |
(1,679,000 | ) | ||
Amortization expense |
(3,059,000 | ) | ||
Intangible assets, net at September 30, 2009 |
$ | 27,468,000 | ||
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Table of Contents
Note 4 Goodwill and intangible assets (continued)
Identifiable intangible assets, net of amortization at September 30, 2009 and December 31, 2008,
were as follows:
September 30, 2009 | December 31, 2008 | |||||||||||||||||||||||
Accumulated | Accumulated | |||||||||||||||||||||||
Cost | Amortization | Net | Cost | Amortization | Net | |||||||||||||||||||
. | (unaudited) | (in thousands) | ||||||||||||||||||||||
Wood customer relationships |
$ | 12,026 | $ | 9,644 | $ | 2,382 | $ | 12,026 | $ | 8,850 | $ | 3,176 | ||||||||||||
Wood brand |
444 | 222 | 222 | 444 | 139 | 305 | ||||||||||||||||||
Sovereign customer relationships |
2,665 | 1,285 | 1,380 | 2,665 | 966 | 1,699 | ||||||||||||||||||
Sovereign non-compete agreement |
833 | 555 | 278 | 833 | 347 | 486 | ||||||||||||||||||
Sovereign brand |
181 | 120 | 61 | 181 | 76 | 105 | ||||||||||||||||||
NIS client referral relationship |
23,089 | 2,310 | 20,779 | 23,089 | 1,154 | 21,935 | ||||||||||||||||||
Boyd customer relationships |
2,821 | 455 | 2,366 | 4,500 | | 4,500 | ||||||||||||||||||
Totals |
$ | 42,059 | $ | 14,591 | $ | 27,468 | $ | 43,738 | $ | 11,532 | $ | 32,206 | ||||||||||||
The Company completed its valuation of the intangible assets acquired in the Boyd acquisition
during the quarter ended June 30, 2009. As a result, the estimated amount assigned to the
Boyd customer relationships intangible asset was reduced by $1,679,000 and the goodwill from the
Boyd acquisition was increased by the same amount. Also in connection with the completion of the
valuation, the originally estimated amortizable life for the Boyd customer relationships asset was
reduced based on the historical attrition rates of the customer base.
Note 5 Investments
The Companys available for sale securities, which are carried at fair value, were as follows:
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
(unaudited) | ||||||||
Current portfolio |
||||||||
Corporate bonds |
$ | 11,473,000 | $ | 10,683,000 | ||||
Noncurrent portfolio |
||||||||
Commingled fixed income fund |
$ | 2,074,000 | $ | | ||||
Commingled stock fund |
$ | | $ | 672,000 | ||||
The Companys investments in corporate bonds were made primarily to increase the Companys average
interest yield. The unrealized gain on corporate bonds was $190,000 and $32,000 at September 30,
2009 and December 31, 2008, respectively.
The Companys investment in a commingled fixed income fund relates to its investment in the
Titanium TALF Opportunity Fund (the TALF Fund), which it organized for its clients to invest
primarily in securities participating in the Term Asset-Backed Securities Loan Facility (TALF) of
the Federal Reserve Bank of New York. As of September 30, 2009, the Companys investment in the
TALF Fund represents approximately 22% of the total investments in the fund. The unrealized gain
on the investment in the commingled fixed income fund was $74,000 at September 30, 2009.
7
Table of Contents
Note 5 Investments (continued)
The Companys investment in a commingled stock fund relates to its investment in the Plurima
Titanium U.S. Stock Fund, a sub-fund of the Dublin-based Plurima Funds mutual fund complex, to
which Wood served as an investment advisor. The fund was initiated July 1, 2008. At December 31,
2008, the Companys unrealized loss in the fund was approximately $294,000, which reflected the
losses in the underlying values of the equity securities in which the fund was invested, reflective
of the general decline in the equity markets over the last half of 2008. Based on the Companys
ability and intent to hold this investment for a reasonable period of time sufficient for a
recovery of fair value, the Company did not consider this investment to be other-than-temporarily
impaired at December 31, 2008. In March 2009, the Companys board of directors determined that
additional investments from other parties into the Plurima Titanium U.S. Equity Fund were likely
not to be forthcoming. As a result, it decided to commence actions to liquidate the Companys
investment in the commingled stock fund. Based on this decision, the Company recognized a $381,000
loss on this investment, including the previously unrealized loss at December 31, 2008. At
September 30, 2009, the liquidation proceeds of $587,000 are classified as other current assets
pending the release of the funds by Plurima Funds.
Note 6 Stockholders Equity
The Companys 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. They 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 Companys certificate of incorporation). No preferred stock had been issued at the
balance sheet date and, accordingly, the rights attaching to the preferred stock have not been set.
At September 30, 2009, the Company had made common stock grants to certain employees that were
compensatory because the grants vest based on continuing employment. These compensatory common
stock grants include allocations of 55,322 shares of common stock held by Titanium Incentive Plan,
LLC (TIP), a wholly-owned subsidiary, that were allocated to certain employees during January
2009 and which vest June 21, 2010. The compensatory common stock grants also include 58,000 shares
of common stock granted to certain employees of Boyd in connection with the acquisition of Boyd,
which vest December 31, 2009. The aggregate fair value of these shares of common stock at their
grant dates was $503,000. During the nine months ended September 30, 2009, the Company recognized
$313,000 of compensation expense related to these grants and at September 30, 2009, there was
$191,000 of unrecognized compensation expense related to the non-vested common stock grants.
In connection with the Companys 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, 2009, 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, 2009, all
of these options were outstanding.
Note 7 Income Taxes
The interim income tax benefit is recognized based on managements estimate of the effective income
tax rate for the full year. The estimated effective annual rates for 2009 and 2008 were 37.4% and
30.9%, respectively, prior to giving effect to the valuation allowance in 2009. Based on the
forecasts prepared in connection with the evaluation of goodwill as of September 30, 2009, the
Company determined that a valuation allowance of $2,200,000 was required for its deferred tax
assets.
8
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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
issuable upon the exercise of the outstanding warrants computed using the treasury stock method and
the incremental shares of common stock issued under the compensatory common stock grants computed
using 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 | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Basic EPS: |
||||||||||||||||
Net loss |
$ | (6,197,000 | ) | $ | (1,602,000 | ) | $ | (8,934,000 | ) | $ | (3,090,000 | ) | ||||
Weighted average shares of common stock outstanding |
20,354,490 | 20,451,502 | 20,354,490 | 20,451,502 | ||||||||||||
Shares of common stock to be issued in Boyd acquisition |
192,000 | | 192,000 | | ||||||||||||
Basic weighted average shares of common stock outstanding |
20,546,490 | 20,451,502 | 20,546,490 | 20,451,502 | ||||||||||||
Basic EPS |
$ | (0.30 | ) | $ | (0.08 | ) | $ | (0.43 | ) | $ | (0.15 | ) | ||||
Diluted EPS: |
||||||||||||||||
Net loss |
$ | (6,197,000 | ) | $ | (1,602,000 | ) | $ | (8,934,000 | ) | $ | (3,090,000 | ) | ||||
Basic weighted average shares of common stock outstanding |
20,546,490 | 20,451,502 | 20,546,490 | 20,451,502 | ||||||||||||
Shares of common stock issuable under warrants |
| 5,803,423 | | 5,815,603 | ||||||||||||
Shares of common stock under compensatory common stock grants |
41,995 | | 63,137 | | ||||||||||||
Diluted weighted average shares of common stock outstanding |
20,588,485 | 26,254,925 | 20,609,627 | 26,267,104 | ||||||||||||
Diluted EPS |
$ | (0.30 | ) | $ | (0.08 | ) | $ | (0.43 | ) | $ | (0.15 | ) | ||||
The diluted weighted average shares amount for the three and nine months ended September 30, 2009
and 2008 are provided for informational purposes, as the net loss for these periods causes basic
earnings per share to be the most dilutive.
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Note 9 Contingencies
During the course of an internal investigation preceding the acquisition of NIS by the Company,
management of NIS found evidence suggesting that certain of its customers plan assets were
invested in a manner inconsistent with the plans authorized investment policies. Upon completion
of the investigation, NIS presented its findings to the respective customers, their third party
investment management consultants and in some instances customer counsel. Until all non-compliant
holdings have been sold, the Company is unable to reasonably estimate the amount, or range of
amounts, of possible additional losses associated with the resolution of this matter beyond what
has been recorded. NIS voluntarily settled with one of its affected customers in the amount of
$60,000 in 2008. Currently, there have been no claims asserted by any customer that is holding
non-compliant securities in its plan. While management cannot estimate the amount, or range of
amounts, of potential losses from this matter, the Companys maximum exposure is substantially
limited due to NISs professional liability and directors and officers liability insurance policy
and the indemnification provided by the sellers of NIS to the Company against losses from this and
other matters.
During 2008, the Company received an invoice for $670,000 from the lawyers who worked on the
placement of the Companys 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 Companys 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 Companys consolidated financial
position or results of operations.
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, including particularly the Managements 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, 2008 (the 2008 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 managements 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 Managements
Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated
Financial Statements and Notes thereto included in our 2008 Form 10-K.
Overview
We were incorporated on February 2, 2007, operating as a special purpose acquisition company
with the objective of acquiring one or more operating companies engaged in asset management. On
June 21, 2007, we completed a $120,000,000 private placement of 20,000,000 units, each unit
consisting of one share of common stock and one warrant. The proceeds of this private placement,
net of costs and working capital (approximately $110,673,000), were held in a trust fund pending
approval by our stockholders of business combinations with selected asset management firms that had
an aggregate transaction value (cash and other consideration, liabilities assumed and transaction
costs) of at least 70.0% of the amount initially held in the trust account.
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Following stockholder approval, on October 1, 2007, we acquired all of the outstanding capital
stock of Wood and all of the outstanding membership interests of Sovereign, each an asset
management firm. Following a second stockholder approval, on March 31, 2008, we acquired all of
the outstanding capital stock of NIS, another asset management firm. With the acquisition of NIS,
the aggregate transaction value in the stockholder-approved business combinations exceeded 70.0% of
the funds in the trust account. With no further action on our part, we ceased to exist as a
special purpose acquisition company and the balance of the funds remaining in the trust account was
released to us. On December 31, 2008, we purchased all of the membership interests of Boyd,
another asset management firm.
Currently, our efforts are focused on integrating these acquisitions. Our goal in the short
term is to obtain economies of scale by integrating the operational and administrative activities
of the four subsidiaries (as well as any future acquisitions), including accounting, information
technology, human resources and risk management. In addition, during the nine months ended
September 30, 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 customers and to prospects.
Over the long term, we expect to consolidate the various operations into one asset management
business, operating in multiple locations. During the second and third quarters, our integration
activities resulted in further reduction in headcount and annualized cost savings of approximately
$1,200,000. We expect to generate further savings over the balance of 2009 as we continue our
integration activities.
We believe that our institutional new business pipeline is strong and that it will result in
adding significant assets from new clients in the coming quarters. In particular, we expect our
participation in the U.S. Governments Term Asset-Backed Securities Loan Facility (TALF) program
on behalf of our clients to increase. We have also secured our first real estate client and expect
to secure more real estate business in the coming months.
We continue to review the possible acquisition of additional asset management firms. We
expect to fund any such acquisitions, partly from the cash balances that remain from our private
placement of units and partly through issuance of additional common stock (including through the
conversion of our outstanding warrants), although we may incur bank debt as well.
We earn our operating revenues principally from investment advisory fees, which are based on a
percentage (or a range of percentages) of the market value of assets under management and vary
among security type and investment strategy and from client to client. We also earn performance
fees from certain NIS clients, as well as referral fees from clients referred by NIS to commingled
funds investing in hedge funds sponsored by Attalus Capital LP (Attalus). As a result, our
operating revenues are substantially influenced by the changes to our assets under management and
other fee paying assets and shifts in the distribution of assets under management among types of
securities and investment strategies. Our assets under management fluctuate based on our
investment performance (both absolutely and relative to other investment advisors), the success of
our sales and marketing efforts, and our acquisition of additional asset managers. 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 on a long-term basis, although our
recent performance has been substantially affected by the negative performance of the U.S. equity
markets and of hedge fund strategies during the second half of 2008.
While a significant portion of our expenses, including employee compensation and occupancy, do
not vary directly with operating revenues, as described above, we have generated economies in
operations in the first nine months of 2009 and we expect to generate further economies in
operational areas as we move forward with our integration efforts over the remainder of 2009.
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In connection with the initial preparation of our 2010 annual budget, we updated our current
forecast and completed an evaluation of the fair value of the Company and the impact of such on our
goodwill balance as of September 30, 2009. In preparing our current forecast, we specifically
considered that over the first nine months of 2009, we have not met our expectations for new
customer growth in our retail marketing channel, particularly in our managed equity assets. We
have noted that despite the recovery that has occurred in the equity markets over the last six
months, overall funds flowing into the U.S. equity markets through mutual funds and exchange traded
funds (EFTs) have been significantly negative. While we expect this trend to revert back to more
normal patterns in time, we have reduced our current forecast to reflect more modest growth in our
equity managed funds in the near term. In addition, while we have achieved substantial progress in
integrating the operations of our four operating subsidiaries and reducing headcount, we continue
to bear significant legal and professional costs as a result of being both a U.S. reporting company
and listed on the London AIM market. While we continue to aggressively look for additional
business efficiencies and related cost savings, we have reduced our current forecast for achieving
overall cost savings over the short term. Based on the changes in our current forecast, our
evaluation of fair value at September 30, 2009 indicated potential impairment of goodwill. As a
result, we completed a required second step to assess the implied fair value of goodwill and
concluded that the value of our goodwill was impaired by $4,847,000.
Assets Under Management
Assets under management in the aggregate increased between December 31, 2008 and September 30,
2009 primarily as result of new business resulting from our participation in the TALF program,
strong fixed income returns, and the market recovery in the U.S. equity markets. The activity
related to our assets under management by the Company and each subsidiary for the nine months ended
September 30, 2009 is shown in the following table:
Titanium | ||||||||||||||||||||||||
Real | ||||||||||||||||||||||||
Estate | Wood | Sovereign | NIS | Boyd | Total | |||||||||||||||||||
(in millions) | ||||||||||||||||||||||||
Balance at December 31, 2008 |
$ | | $ | 667.9 | $ | 1,163.6 | $ | 2,885.7 | $ | 2,856.0 | $ | 7,573.2 | ||||||||||||
New accounts |
23.2 | 12.3 | 89.2 | 26.3 | 550.3 | 701.3 | ||||||||||||||||||
Terminated accounts |
| (79.1 | ) | (282.5 | ) | (39.8 | ) | (82.9 | ) | (484.3 | ) | |||||||||||||
Other contributions (withdrawals) |
| 9.7 | (5.0 | ) | (285.3 | ) | 258.2 | (22.4 | ) | |||||||||||||||
Other activity, principally market movement |
| 64.0 | 72.4 | 280.9 | 135.0 | 552.3 | ||||||||||||||||||
Balance at September 30, 2009 |
$ | 23.2 | $ | 674.8 | $ | 1,037.7 | $ | 2,867.8 | $ | 3,716.6 | $ | 8,320.1 | ||||||||||||
% change from beginning balance |
1 | % | (11 | %) | (1 | %) | 30 | % | 10 | % |
Our net contribution activity from new and existing accounts was positive $194.6 million
(or 3% of beginning asset values) for the nine months ended September 30, 2009. That activity was
driven primarily from new and existing accounts for investments in the TALF program, offset
partially by withdrawals driven by cash requirements of certain institutional clients of NIS. We
experienced a net loss of assets under management at Sovereign as a result of poor performance of
certain strategies in 2008 and the reduction of some wrap business away from Sovereign. Market
movement for the nine months ended September 30, 2009 resulted in a 7% increase in assets under
management. The market movement reflects strong fixed income returns, while the U.S. equity market
also recovered from its low point in March 2009.
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Our assets under management by major investment strategy were as follows at September 30, 2009
and December 31, 2008.
September 30, 2009 | December 31, 2008 | |||||||||||||||
(in millions) | % of total | (in millions) | % of total | |||||||||||||
U.S. fixed income |
$ | 7,516.9 | 90.3 | % | $ | 6,674.8 | 88.2 | % | ||||||||
U.S. equity |
754.2 | 9.1 | % | 874.6 | 11.5 | % | ||||||||||
International equity |
25.9 | 0.3 | % | 23.8 | 0.3 | % | ||||||||||
Real estate |
23.2 | 0.3 | % | | | |||||||||||
Balance at end of period |
$ | 8,320.2 | 100.0 | % | $ | 7,573.2 | 100.0 | % | ||||||||
The decrease in U.S. equity investments under management is primarily the result of accounts
terminated at Wood due to client concerns about the equity market. This decrease continued to
negatively impact the investment advisory fees of Wood, which is primarily an equity investment
advisor.
Our assets under management by broad client type were as follows at September 30, 2009 and
December 31, 2008.
September 30, 2009 | December 31, 2008 | |||||||||||||||
(in millions) | % of total | (in millions) | % of total | |||||||||||||
Institutional Retirement plans |
$ | 3,871.6 | 46.5 | % | $ | 3,633.3 | 48.0 | % | ||||||||
Institutional Other |
2,762.7 | 33.2 | % | 2,197.3 | 29.0 | % | ||||||||||
Retail Broker/dealer accounts |
854.7 | 10.3 | % | 948.6 | 12.5 | % | ||||||||||
Retail Other |
831.2 | 10.0 | % | 794.0 | 10.5 | % | ||||||||||
Balance at end of period |
$ | 8,320.2 | 100.0 | % | $ | 7,573.2 | 100.0 | % | ||||||||
On July 10, 2009, one of Sovereigns broker/dealers, through which it conducts a significant
portion of its wrap business, notified Sovereign that it will be initiating a sell recommendation
to its customers for certain of the investment strategies employed by Sovereign. This
broker/dealer relationship included client accounts with approximately $195 million in
assets under management with approximately $400,000 in annualized revenue. As of September 30, 2009, Sovereign had lost a significant number of these accounts
and we expect the majority of these accounts will terminate their relationship with Sovereign prior to year end. In anticipation of the lost revenue, we have implemented cost reductions at Sovereign that we expect to save approximately $280,000 annually.
In addition, our distribution relationship with Attalus on which we earn referral fees saw an
increase in assets under management due principally to positive market returns. The changes in
those distribution assets are as follows (in millions):
Balance at December 31, 2008 |
$ | 806.2 | ||
New accounts |
67.6 | |||
Other activity, principally market movement |
96.1 | |||
Balance at September 30, 2009 |
$ | 969.9 | ||
% change from beginning balance |
20.3 | % |
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Results of Operations
Consolidated Results of Operations
Our results for the three and nine month periods ended September 30, 2009 include the Company
and the operating results for Wood, Sovereign, NIS and Boyd. Our results for the three months
ended September 30, 2008 include only the Company and the operating results for Wood, Sovereign and
NIS. The results for the nine months ended September 30, 2008 include the Company and the operating
results of Wood and Sovereign for the full nine months and NIS subsequent to its acquisition as of
March 31, 2008. Boyd was acquired after these 2008 periods.
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Operating revenues: |
||||||||||||||||
Investment advisory fees |
$ | 4,472,000 | $ | 3,304,000 | $ | 13,229,000 | $ | 9,359,000 | ||||||||
Referral fees |
575,000 | 582,000 | 1,658,000 | 1,233,000 | ||||||||||||
Total operating revenues |
5,047,000 | 3,886,000 | 14,887,000 | 10,592,000 | ||||||||||||
Operating expenses: |
||||||||||||||||
Administrative |
5,737,000 | 4,913,000 | 17,865,000 | 10,901,000 | ||||||||||||
Amortization of intangible assets |
1,020,000 | 1,093,000 | 3,059,000 | 3,095,000 | ||||||||||||
Impairment of goodwill |
4,847,000 | | 4,847,000 | | ||||||||||||
Impairment of intangible assets |
| | | 1,792,000 | ||||||||||||
Total operating expenses |
11,604,000 | 6,006,000 | 25,771,000 | 15,788,000 | ||||||||||||
Operating loss |
(6,557,000 | ) | (2,120,000 | ) | (10,884,000 | ) | (5,196,000 | ) | ||||||||
Interest income |
98,000 | (94,000 | ) | 333,000 | 774,000 | |||||||||||
Interest expense |
(15,000 | ) | (14,000 | ) | (44,000 | ) | (14,000 | ) | ||||||||
Investment gains (losses) |
28,000 | (38,000 | ) | (160,000 | ) | (38,000 | ) | |||||||||
Loss before taxes |
(6,446,000 | ) | (2,266,000 | ) | (10,755,000 | ) | (4,474,000 | ) | ||||||||
Income tax benefit |
(249,000 | ) | (664,000 | ) | (1,821,000 | ) | (1,384,000 | ) | ||||||||
Net loss |
$ | (6,197,000 | ) | $ | (1,602,000 | ) | $ | (8,934,000 | ) | $ | (3,090,000 | ) | ||||
Earnings (loss) per share |
||||||||||||||||
Basic |
$ | (0.30 | ) | $ | (0.08 | ) | $ | (0.43 | ) | $ | (0.15 | ) | ||||
Diluted |
$ | (0.30 | ) | $ | (0.08 | ) | $ | (0.43 | ) | $ | (0.15 | ) | ||||
Operating Revenues |
Our investment advisory fees by subsidiary were as follows:
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Wood |
$ | 594,000 | $ | 990,000 | $ | 1,838,000 | $ | 3,295,000 | ||||||||
Sovereign |
568,000 | 590,000 | 1,792,000 | 2,370,000 | ||||||||||||
NIS |
1,783,000 | 1,724,000 | 5,356,000 | 3,694,000 | ||||||||||||
Boyd |
1,525,000 | | 4,241,000 | | ||||||||||||
Titanium Real Estate |
2,000 | | 2,000 | | ||||||||||||
Total |
$ | 4,472,000 | $ | 3,304,000 | $ | 13,229,000 | $ | 9,359,000 | ||||||||
During the three months ended September 30, 2009, our investment advisory fees for Wood
decreased by 40% relative to the same period last year. During the nine months ended September 30,
2009, our investment advisory fees for Wood decreased by 44% relative to the same period last year.
The decrease in investment advisory fees reflects the loss of accounts in the first half of 2008
following the death of Gary Wood, Woods founder, and the decrease in values of equity investments
under management, which intensified over the second half of 2008 and
continued into the first quarter of 2009. Since March 2009, the equity investments under
management began to recover some of their value.
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During the three months ended September 30, 2009, our investment advisory fees for
Sovereign decreased by 4% relative to the same period last year. During the nine months ended
September 30, 2009, our investment advisory fees for Sovereign decreased by 24% relative to the
same period last year. The decrease in investment advisory fees reflects the loss of a $355
million account, as well as a number of smaller Sovereign accounts, in the first half of 2008.
During the three months ended September 30, 2009, our investment advisory fees for NIS
increased by 2% relative to the same period last year. The increase is primarily attributable to
strong market returns offset in part by client withdrawals to meet cash requirements.
During the nine months ended September 30, 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
customers and to prospects. We believe we have a strong pipeline of new institutional business
opportunities at September 30, 2009 and are encouraged by the general recovery in the financial
markets over the most recent two quarters. In particular, we expect our participation in the TALF
program on behalf of our clients will increase. We have also secured our first real estate client
and expect to secure more business in the coming months.
Our referral fees are attributable to NISs distribution agreement with Attalus. The referral
fees for the three months ended September 30, 2009 decreased nominally relative to the three months
ended September 30, 2008 primarily due to negative hedge fund returns over the second half of 2008
which impacted the asset balances managed by Attalus, substantially offset by fees related to new
accounts.
NIS earns performance fees through its management of two preferred stock limited liability
companies. These fees are based on a calendar year performance period and we recognize performance
fees at the conclusion of the performance period when all contingencies are resolved. In 2008, NIS
earned performance fees of $518,000, which were recognized in December 2008. While fixed income
returns are volatile, based on performance through September 30, 2009, NIS would have earned
performance fees of approximately $1,072,000, an increase of $492,000 from the amount as of June
30, 2009. While the performance of these funds has continued to improve since September 30, 2009,
there can be no assurance as to the actual amount of performance fees that may be realized, if any.
Operating
Expenses
Administrative expenses included the following:
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Employee compensation |
$ | 3,736,000 | $ | 2,727,000 | $ | 11,408,000 | $ | 6,030,000 | ||||||||
Share-based compensation |
107,000 | | 314,000 | | ||||||||||||
Professional fees |
553,000 | 1,139,000 | 1,975,000 | 2,085,000 | ||||||||||||
Occupancy |
274,000 | 246,000 | 837,000 | 570,000 | ||||||||||||
Other operating expenses |
1,067,000 | 801,000 | 3,331,000 | 2,216,000 | ||||||||||||
Total |
$ | 5,737,000 | $ | 4,913,000 | $ | 17,865,000 | $ | 10,901,000 | ||||||||
The increase in employee compensation expense of $1,009,000 in three months ended September
30, 2009 over the same period last year was principally due to Boyd compensation expense of
$961,000. The increase in employee compensation of $5,378,000 in the nine months ended September
30, 2009 over the same period last year was principally due to nine months of compensation for NIS
in 2009 compared to six months in 2008, and Boyd compensation expense of $2,748,000. As a percent
of revenues, employee compensation and benefits expense as a percent of revenues increased from 57%
to 77% primarily due to the decrease in revenues at Wood and Sovereign.
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During the second and
third quarters, our integration activities resulted in a reduction in headcount from 97 at March
31, 2009 to 90 at September 30, 2009 and annualized cost savings of approximately $1,200,000 that
will be realized
over the next twelve months. We expect to generate further savings as we continue our
integration activities over the balance of 2009.
Share-based compensation is a non-cash expense related to common stock grants that were made
to certain Boyd employees in connection with our acquisition of Boyd and to certain other employees
in December 2008 and January 2009. The aggregate value of these shares of common stock at their
respective grant dates was $503,000, which is being recognized as compensation over the respective
vesting periods of the shares.
The decrease in professional fees expense of $586,000 in three months ended September 30, 2009
over the same period last year and $110,000 for the nine months ended September 30, 2009 over the
same period last year was primarily due to the registration process for our common stock under the
Securities Exchange Act of 1934 in the during 2008. We incurred significant legal and audit fees
in connection with the preparation of our Form 10 filing and continued to incur significant legal
and audit fees in connection with our 2008 annual audit and the preparation of our 2008 Form 10-K
and other annual reports through the first quarter of 2009. We expect our quarterly totals for
such fees will decrease significantly over the remainder of 2009.
The increase in occupancy expense of $267,000 in the nine months ended September 30, 2009 over
the same period last year was principally due to nine months of NIS occupancy expense in 2009
relative to six months in 2008 and nine months of Boyd occupancy expense in 2009.
In connection with the initial preparation of our 2010 annual budget, we completed an
evaluation of the fair value of the Company and the impact of such on our goodwill balance as of
September 30, 2009. We estimate fair value using a discounted cash flow analysis, which measures
fair value by reference to projected future cash flows over a five-year forecast period and an
estimated residual value and through the application of a discount rate to reflect those amounts at
a present value. In preparing our cash flow forecasts, we consider historical and projected growth
rates, our business plans, prevailing relevant business conditions and trends, anticipated needs
for working capital and capital expenditures, and historical and expected levels and trends in
operating profitability. In preparing our current forecast, we specifically considered that over
the first nine months of 2009, we have not met our expectations for new customer growth in our
retail marketing channel, particularly in our managed equity assets. We have noted that despite
the recovery that has occurred in the equity markets over the last six months, overall funds
flowing into the U.S. equity markets through mutual funds and exchange traded funds (EFTs) have
been significantly negative. While we expect this trend to revert back to more normal patterns in
time, we have reduced our current forecast to reflect more modest growth in our equity managed
funds in the near term. In addition, while we have achieved substantial progress in integrating the
operations of our four operating subsidiaries and reducing headcount, we continue to bear
significant legal and professional costs as a result of being both a U.S. reporting company and
listed on the London AIM market. While we continue to aggressively look for additional business
efficiencies and related cost savings, we have reduced our current forecast for achieving overall
cost savings over the short term.
Based on the changes in our current forecast, our evaluation of fair value at September 30,
2009 indicated potential impairment of goodwill. As a result, we completed a required second step
to assess the implied fair value of goodwill and concluded that the value of our goodwill was
impaired by $4,847,000.
Amortization and impairment of intangible assets are non-cash charges related to the
intangible assets acquired in the purchases of Wood, Sovereign, NIS, and Boyd. During the second
quarter of 2008, we recognized impairment charges of $1,792,000 related to the loss of
institutional accounts at Wood and Sovereign. In the fourth quarter of 2008, we recognized further
impairment charges of $4,741,000 related to these assets primarily due to the significant equity
market decreases over the second half of 2008. The year-over-year change in amortization expense
reflects the reduced charges related to the Wood and Sovereign intangible assets as a result of the
impairment charges recognized in the second and fourth quarters of 2008. The additional
amortization charges related to the acquired NIS and Boyd intangible assets partially offset these
reductions in the three and nine months ended September 30, 2009.
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Our interest income was $333,000 in the nine months ended September 30, 2009 compared to
$774,000 for the same period last year. Substantially all of our interest income is earned from
invested cash balances remaining
from our $120,000,000 private placement of units. The decrease in our interest income
reflects the use of the funds to pay for the NIS and Boyd acquisitions and the fall in short term
interest rates.
During the nine months ended September 30, 2009, we realized investment gains of $221,000 from
the sale of corporate bonds.
In March 2009, our board of directors determined that additional investments from other
parties into the Plurima Titanium U.S. Equity Fund, for which we served as investment advisor, were
likely not to be forthcoming. As a result, our board of directors decided to commence actions to
liquidate our investment in the commingled stock fund and during the three months ended March 31,
2009, we recognized a $381,000 loss on this investment.
Our income tax benefit consists of deferred tax benefits recognized for federal and state net
operating loss carryforwards and other deductible temporary differences. The effective tax rate of
16.9% for 2009 principally reflects federal taxes at the statutory rate, state income taxes, and
the impact of recognizing a valuation allowance for our deferred tax assets. The effective tax
rate of 30.9% for 2008 reflects a proportionately higher level of nondeductible expenses.
At September 30, 2009 and December 31, 2008, our deferred tax assets before valuation
allowances were $8,021,000 and $4,202,000, respectively. Under standards for accounting for
income taxes, we regularly consider both positive and negative information in assessing the whether
a valuation allowance is required for our deferred tax assets. Based on our current operating
forecasts, we determined that a valuation allowance of $2,200,000 was required at September 30,
2009 and reduced our deferred tax assets to $5,821,000.
Liquidity and Capital Resources
At September 30, 2009, we had $19,930,000 of cash and cash equivalents and securities
available for sale to fund operations and acquisition obligations. At December 31, 2008, these
combined balances were $29,436,000. The decrease primarily reflects the payments of $7,500,000 in
connection with the Boyd acquisition, $655,000 due in deferred payments for the NIS acquisition and
$1,680,000 used in operating activities during the nine months ended September 30, 2009.
At September 30, 2009, we had a remaining cash obligation due under our NIS acquisition
agreement of $1,000,000 (carried at a discounted value of $969,000), which is payable March 31,
2010. In addition to this cash obligation, we have a $960,000 obligation due in 2011 under the
Boyd acquisition agreement that will be settled in 192,000 shares of common stock, except under
certain circumstances as described in the agreement.
As described in the Liquidity and Capital Resources section of Managements Discussion and
Analysis of Financial Condition and Results of Operations in our 2008 Form 10-K, we have additional
contingent payments that may come due under our acquisition agreements for Wood, Sovereign, and
Boyd. Pursuant to the acquisition agreements for Wood and Sovereign, the sellers may be owed
additional amounts based on the subsidiaries achieving certain revenue and assets under management
milestones. The Company preliminarily has determined that $900,000 and $808,000 are owed to the
sellers of Wood and Sovereign, respectively, based on their assets under management at September
30, 2009 and that no amounts are due under the revenue milestones for Sovereign for the twelve
months ended September 30, 2009. The Company currently estimates that approximately $2,100,000
will be due based on the assets under management milestones for September 30, 2011. These amounts
are payable in equal amounts of cash and shares of common stock.
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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.
Cash used in operating activities was $1,680,000 for the nine months ended September 30, 2009
compared to cash used in operating activities of $120,000 for the nine months ended September 30,
2008. The decrease in cash from operating activities primarily reflects the decrease in revenues for Wood and
Sovereign and the decrease in interest income in the nine months ended September 30, 2009 from the
same period last year.
Cash used in investing activities was $2,545,000 for the nine months ended September 30, 2009
compared to cash provided investing activities of $23,323,000 in the same period last year. The
cash used in investing activities in the nine months ended September 30, 2009 primarily reflects
the investment of $2,000,000 in the commingled fixed income fund. The cash provided by investing
activities in the nine months ended September 30, 2008 primarily reflects the release of
$55,587,000 of proceeds from our private placement from the trust account offset by the use of
$31,226,000 to acquire NIS.
Cash used in financing activities was $8,145,000 for the nine months ended September 30, 2009,
which reflects payments in connection with the NIS and Boyd acquisitions. During the nine months
ended September 30, 2008, $12,017,000 of cash was used to redeem common stock from stockholders
that voted against the NIS acquisition and elected to have their common stock shares repurchased.
With the completion of the Wood, Sovereign, and NIS acquisitions, the Company met its investment
requirements related to the 2007 issuance of units and it has no further obligations to repurchase
common stock issued as part of those units.
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Critical Accounting Policies
Our condensed consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America (U.S. GAAP).
Preparation of these statements requires us to make judgments and estimates. Some accounting
policies have a significant impact on amounts reported in these condensed consolidated financial
statements. A summary of significant accounting policies and a description of critical accounting
estimates may be found in our 2008 Form 10-K in the Notes to the Consolidated Financial Statements
and the Critical Accounting Estimates section of Managements Discussion and Analysis of Financial
Condition and Results of Operations.
Recent Accounting Pronouncements
The following new accounting standards and amendments to standards first became effective for
the fiscal year beginning January 1, 2009:
| The Financial Accounting Standards Board (FASB) has issued revised standards concerning the accounting for business combinations that will require the expensing of acquisition costs incurred in future acquisitions and contingent consideration will be recorded at the acquisition date for future acquisitions. | |
| The FASB has recently issued guidance for determining the useful life of intangible assets. The adoption of this guidance did not have an impact on the Companys condensed consolidated financial statements. | |
| In May 2009, the FASB issued a standard that provides guidance to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. That standard requires public companies to evaluate subsequent events through the date that the financial statements are issued. The Company adopted this standard during the second quarter of 2009. The Company has evaluated subsequent events through the time of filing these financial statements with the SEC on November 10, 2009. |
The following new standards, amendments to standards and interpretations first became
effective for the fiscal year beginning January 1, 2009 but are not currently relevant to the
Company:
| An amended standard for disclosures about derivative instruments and hedging activities. | |
| A FASB staff position to partially defer certain provisions of its standard on fair value reporting for financial instruments. | |
| A FASB staff position that provides additional guidance for estimating fair values for financial instruments when the volume and level of activity for the asset or liability have significantly decreased. | |
| A FASB staff position that amends the other-than-temporary impairment guidance for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. |
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The following new standards have been issued, but are not yet effective, and have not been
early adopted:
| A standard, which was issued by the FASB in June 2009, that requires entities to provide more information regarding sales of securitized financial assets and similar transactions. This standard, which is effective for fiscal years beginning after November 15, 2009, is not expected to have a significant impact on the Companys consolidated financial statements. | |
| A standard, which was issued by the FASB in June 2009, that modifies how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The standard clarifies that the determination of whether a company is required to consolidate an entity is based on, among other things, an entitys purpose and design and a companys ability to direct the activities of the entity that most significantly impact the entitys performance. The standard requires an ongoing reassessment of whether a company is the primary beneficiary of a variable interest entity and also requires additional disclosures about a companys involvement in variable interest entities and any significant changes in risk exposure due to that involvement. This standard, which is effective for fiscal years beginning after November 15, 2009, is not expected to have a significant impact on the Companys 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 SECs 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 third quarter of fiscal year 2009 that
have materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
There were no changes with respect to legal or other proceedings from the 2008 Form 10-K.
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. Submission of Matters to a Vote of Security Holders
Pursuant to the terms of our certificate of incorporation and bylaws, Clal Finance Ltd.
(Clal) currently has the exclusive right at any time to vote as a separate class and elect up to
six individuals to serve on our Board of Directors. Pursuant to a written consent in lieu of a
special meeting of stockholders, on July 1, 2009, Clal elected a third individual, Shy Talmon, to
serve on the Board of Directors. All of our directors prior to Mr. Talmons election by Clal
continued in office following his election. These directors are Nigel Wightman, Robert Kelly,
Thomas Hamilton, T. Raymond Suplee, CPA, Avigdor Kaplan, and Yehoshua Abramovich.
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Item 5. Other Information
On November 11, 2009, NIS and Robert J.
Siefert entered into an amendment to his employment agreement to facilitate a reduced workload. The amended
agreement reduces his annual compensation to reflect the reduced workload, fixes his employment term through
June 30, 2013, and contains certain additional nonsolicitation provisions. All other terms of the employment agreement
remain the same. The amendment to the employment agreement is filed herewith as Exhibit 10.1.
Attached as Exhibit 99.1 and
incorporated herein by reference is Titanium Asset Managements
press release to the AIM, a market operated by the London Stock Exchange, dated November 11, 2009,
announcing its financial results for the quarter ended September 30, 2009. The information
provided in this item and this exhibit shall not be treated as filed for purposes of the Exchange
Act.
Item 6. Exhibits
Exhibit Number | Description | |
10.1
|
Amended Employment Agreement between Robert J. Siefert and National Investment Services, Inc. | |
10.2
|
Indemnification Agreement dated November 3, 2009 between Titanium Asset Management Corp. and Ron Braverman. | |
31.1
|
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. | |
99.1
|
Press release of Titanium Asset Management to the AIM, a market operated by the London Stock Exchange, dated November 11, 2009 |
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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 12, 2009 | By: | /s/ Nigel Wightman | ||
Name: | Nigel Wightman | |||
Title: | Chairman and Chief Executive Officer | |||
November 12, 2009 | By: | /s/ Larry Haslee | ||
Name: | Larry Haslee | |||
Title: | Chief Financial Officer (Principal Financial
Officer and Principal Accounting Officer) |
Table of Contents
EXHIBIT INDEX
Exhibit Number | Description | |
10.1
|
Amended Employment Agreement between Robert J. Siefert and National Investment Services, Inc. | |
10.2
|
Indemnification Agreement dated November 3, 2009 between Titanium Asset Management Corp. and Ron Braverman. | |
31.1
|
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. | |
99.1
|
Press release of Titanium Asset Management to the AIM, a market operated by the London Stock Exchange, dated November 11, 2009 |