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EX-32.1 - EXHIBIT 32.1 - Titanium Asset Management Corpv351320_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - Titanium Asset Management Corpv351320_ex31-2.htm
EX-32.2 - EXHIBIT 32.2 - Titanium Asset Management Corpv351320_ex32-2.htm
EX-31.1 - EXHIBIT 31.1 - Titanium Asset Management Corpv351320_ex31-1.htm

 

 

  

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

 


Form 10-Q

 

(Mark One)
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  For the quarterly period ended June 30, 2013
 

OR

 

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  For the transition period from             to

 

Commission file number: 000-53352

Titanium Asset Management Corp.

(Exact name of registrant as specified in its charter)

 

Delaware
(State or other jurisdiction of
incorporation or organization)
20-8444031
(I.R.S. Employer
Identification No.)
   
777 E. Wisconsin Avenue
Milwaukee, Wisconsin
(Address of principal executive offices)
53202-5310
(Zip Code)

 

(414) 765-1980

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No 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 þ 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 ¨ Accelerated filer ¨
Non-accelerated filer ¨ Smaller reporting company þ
(Do not check if a smaller reporting company)  

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

 

At August 2, 2013, there were 19,744,824 shares of the registrant’s common stock outstanding.

 

 
 

 

TABLE OF CONTENTS

 

  Page
   
PART I. FINANCIAL INFORMATION 1
Item 1. Financial Statements 1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
Item 4. Controls and Procedures 22
PART II. OTHER INFORMATION 23
Item 1. Legal Proceedings 23
Item 1A. Risk Factors 23
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 23
Item 3. Defaults Upon Senior Securities 23
Item 4. Mine Safety Disclosures 23
Item 5. Other Information 23
Item 6. Exhibits 23

 

i
 

 

PART I.FINANCIAL INFORMATION

 

Item 1.Financial Statements

 

Titanium Asset Management Corp.

Condensed Consolidated Balance Sheets

 

   June 30,
2013
   December 31, 2012 
   (unaudited)     
Assets          
Current assets          
Cash and cash equivalents  $6,119,000   $3,092,000 
Investments   4,438,000    5,644,000 
Accounts receivable   4,148,000    5,015,000 
Other current assets   1,058,000    854,000 
Total current assets   15,763,000    14,605,000 
           
Investments in equity investee   3,081,000    3,970,000 
Property and equipment, net   437,000    483,000 
Goodwill   13,264,000    13,264,000 
Intangible assets, net   4,824,000    5,309,000 
Total assets  $37,369,000   $37,631,000 
           
Liabilities and Stockholders’ Equity          
Current liabilities          
Accounts payable  $131,000   $166,000 
Other current liabilities   2,207,000    2,246,000 
Total current liabilities and total liabilities   2,338,000    2,412,000 
           
Commitments and contingencies          
           
Stockholders’ equity          
Common stock, $0.0001 par value; 54,000,000 shares authorized; 19,744,824 shares issued and outstanding at June 30, 2013 and 20,634,232 issued and outstanding at December 31, 2012   2,000    2,000 
Restricted common stock, $0.0001 par value; 720,000 shares authorized; none issued   -    - 
Preferred stock, $0.0001 par value; 1,000,000 shares authorized; none issued   -    - 
Additional paid-in capital   100,227,000    100,971,000 
Accumulated deficit   (65,130,000)   (65,711,000)
Other comprehensive loss   (68,000)   (43,000)
Total stockholders’ equity   35,031,000    35,219,000 
Total liabilities and stockholders’ equity  $37,369,000   $37,631,000 

 

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, 2012 (the “2012 Form 10-K”).

 

1
 

 

Titanium Asset Management Corp.

Condensed Consolidated Statements of Operations

(unaudited)

 

   Three Months Ended
June 30,
   Six Months Ended
June 30,
 
   2013   2012   2013   2012 
                 
Operating revenues  $5,984,000   $5,567,000   $11,899,000   $10,951,000 
                     
Operating expenses:                    
Administrative   5,675,000    5,008,000    10,975,000    10,158,000 
Amortization of intangible assets   242,000    2,401,000    485,000    4,802,000 
Total operating expenses   5,917,000    7,409,000    11,460,000    14,960,000 
                     
Operating income (loss)   67,000    (1,842,000)   439,000    (4,009,000)
                     
Other income                    
Interest income   9,000    20,000    10,000    37,000 
Net realized gains (losses) on investments   -    (5,000)   21,000    (7,000)
Income from equity investees   14,000    55,000    111,000    275,000 
                     
Income (loss) before income taxes   90,000    (1,772,000)   581,000    (3,704,000)
                     
Income tax expense   -    -    -    - 
                     
Net income (loss)  $90,000   $(1,772,000)  $581,000   $(3,704,000)
                     
Earnings (loss) per share                    
Basic  $0.00   $(0.09)  $0.03   $(0.18)
Diluted  $0.00   $(0.09)  $0.03   $(0.18)
                     
Weighted average number of common shares outstanding:                    
Basic   19,744,824    20,634,232    19,927,647    20,634,232 
Diluted   19,744,824    20,634,232    19,927,647    20,634,232 

 

See Notes to Condensed Consolidated Financial Statements contained herein and the Notes to Consolidated Financial Statements in the 2012 Form 10-K.

 

2
 

 

Titanium Asset Management Corp.

Consolidated Statements of Comprehensive Income (Loss)

(unaudited)

 

   Three Months Ended
June 30,
   Six Months Ended
June 30,
 
   2013   2012   2013   2012 
                 
Net income (loss)  $90,000   $(1,772,000)  $581,000   $(3,704,000)
                     
Other comprehensive income items:                    
Unrealized gains (losses) on available for sale securities   (14,000)   12,000    (4,000)   10,000 
Net losses (gains) reclassified from accumulated other comprehensive income to net realized gains (losses) on investments   1,000    3,000    (21,000)   6,000 
Income tax on other comprehensive income items   -    -    -    - 
Other comprehensive income items, net of tax   (13,000)   15,000    (25,000)   16,000 
                     
Comprehensive income (loss)  $77,000   $(1,757,000)  $556,000   $(3,688,000)

 

See Notes to Condensed Consolidated Financial Statements contained herein and the Notes to Consolidated Financial Statements in the 2012 Form 10-K.

 

3
 

 

Titanium Asset Management Corp.
Consolidated Statements of Changes in Stockholders’ Equity
For the Six Months Ended June 30, 2013 and 2012
(unaudited)  

 

   Common Stock   Restricted Shares                 
   Shares   Amount   Shares   Amount   Additional
Paid-in Capital
   Accumulated
Deficit
   Other
Comprehensive
Income (Loss)
   Total
Stockholders’
Equity
 
                                 
Balances at January 1, 2012   20,634,232   $2,000    612,716   $-   $100,971,000   $(59,618,000)  $(95,000)  $41,260,000 
Redemption and cancellation of restricted shares   -    -    (612,716)   -    -    -    -    - 
Net loss and comprehensive loss   -    -    -    -    -    (3,704,000)   16,000    (3,688,000)
Balances at June 30, 2012   20,634,232   $2,000    -   $-   $100,971,000   $(63,322,000)  $(79,000)  $37,572,000 
                                         
Balances at January 1, 2013   20,634,232   $2,000    -   $-   $100,971,000   $(65,711,000)  $(43,000)  $35,219,000 
Repurchase of common stock shares   (889,408)   -    -    -    (744,000)   -    -    (744,000)
Net income and comprehensive income   -    -    -    -    -    581,000    (25,000)   556,000 
Balances at June 30, 2013   19,744,824   $2,000    -   $-   $100,227,000   $(65,130,000)  $(68,000)  $35,031,000 

 

See Notes to Condensed Consolidated Financial Statements contained herein and the Notes to Consolidated Financial Statements in the 2012 Form 10-K.

 

4
 

 

Titanium Asset Management Corp.

Condensed Consolidated Statements of Cash Flows

(unaudited)

 

   Six Months Ended
June 30,
 
   2013   2012 
         
Cash flows from operating activities          
Net income (loss)  $581,000   $(3,704,000)
Adjustments to reconcile net loss to net cash used in operating activities:          
Amortization of intangible assets   485,000    4,802,000 
Depreciation   74,000    63,000 
Net realized losses (gains) on investments   (21,000)   7,000 
Income from equity investees   (111,000)   (275,000)
Income distributions from equity investees   -    131,000 
Changes in assets and liabilities:          
Decrease (increase) in accounts receivable   867,000    (75,000)
Decrease (increase) in other current assets   (204,000)   228,000 
Increase (decrease) in accounts payable   (35,000)   53,000 
Decrease in other current liabilities   (39,000)   (320,000)
Net cash provided by operating activities   1,597,000    910,000 
           
Cash flows from investing activities          
Purchases of investments   (2,101,000)   (3,111,000)
Sales and redemptions of investments   3,303,000    2,314,000 
Redemption of equity investee   1,000,000    - 
Purchases of property and equipment   (28,000)   (36,000)
Net cash provided by (used in) investing activities   2,174,000    (833,000)
           
Cash flows from financing activities          
Repurchase of common stock   (744,000)   - 
Net cash used for financing activities   (744,000)   - 
           
Net increase in cash and cash equivalents   3,027,000    77,000 
           
Cash and cash equivalents:          
Beginning   3,092,000    2,787,000 
Ending  $6,119,000   $2,864,000 

 

See Notes to Condensed Consolidated Financial Statements contained herein and the Notes to Consolidated Financial Statements in the 2012 Form 10-K.

 

5
 

 

Titanium Asset Management Corp.

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

Note 1 – General

 

Titanium Asset Management Corp. (the “Company”) was incorporated on February 2, 2007. The Company commenced operations as a special purpose acquisition company to acquire one or more operating companies engaged in the asset management business. On October 1, 2007, the Company acquired all of the voting common stock of Wood Asset Management, Inc. (“Wood”) and all of the membership interests of Sovereign Holdings, LLC (“Sovereign”), two asset management firms. On March 31, 2008, the Company acquired all of the outstanding capital stock of National Investment Services, Inc. (“NIS”), a third asset management firm. After completing these business combinations, the Company ceased to act as a special purpose acquisition company. On December 31, 2008, the Company acquired all of the membership interests of Boyd Watterson Asset Management, LLC (“Boyd”), a fourth asset management firm. In 2010, the Company transferred the client accounts of Sovereign to Boyd and deregistered Sovereign as an investment adviser. The Company’s strategy is to manage these operating companies as an integrated business.

 

The accompanying unaudited interim condensed consolidated financial statements have been prepared by the Company, in accordance with accounting principles generally accepted in the United States (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) and, in the opinion of management, include all adjustments (all of which were of a normal and recurring nature) necessary for a fair statement of the information for each period contained therein.

 

The preparation of consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. These estimates are based on information available as of the date of these consolidated financial statements. Actual results could differ materially from those estimates.

 

The information included in this Quarterly Report on Form 10-Q should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations included herein and in the 2012 Form 10-K and the Consolidated Financial Statements and the Notes thereto included in the 2012 Form 10-K.

 

Note 2 – Adoption of New Accounting Standards

 

The Company’s significant accounting policies are discussed in the Notes to the Company’s Consolidated Financial Statements in the 2012 Form 10-K.

 

6
 

 

Note 3 – Investments

 

The Company’s investments include a current portfolio of debt securities, which are accounted for as available-for-sale securities, and investments in equity investees, which are accounted for using the equity method of accounting because the Company has significant influence over the management of the funds.

 

Current portfolio of debt securities

 

   Amortized cost   Unrealized gains   Unrealized losses   Fair value 
                     
June 30, 2013  $4,422,000   $17,000   $(1,000)  $4,438,000 
December 31, 2012  $5,603,000   $46,000   $(5,000)  $5,644,000 

 

Debt securities accounted for as available-for-sale and held at June 30, 2013 mature as flows:

 

   Amortized cost   Fair value 
Within one year  $4,172,000   $4,188,000 
After one year but within five years  $250,000   $250,000 

 

The following table provides a summary of the changes in and results of investment activities. The specific identification method is used to determine the cost basis of investments sold and the realized gain or loss.

 

   Three Months Ended
June 30,
   Six Months Ended
June 30,
 
   2013   2012   2013   2012 
                 
Proceeds from sale  $848,000   $1,654,000   $3,303,000   $2,314,000 
Gross realized gains on sales   1,000    5,000    27,000    10,000 
Gross realized losses on sales   (1,000)   (10,000)   (6,000)   (17,000)
Unrealized gains and losses   14,000    12,000    (4,000)   10,000 
Net gains (losses) reclassified out of accumulated other comprehensive income to earnings   1,000    (3,000)   21,000    (6,000)

 

 

7
 

 

Note 3 – Investments (continued)

 

Investments in Equity Investees

 

Investments in equity investees currently include the Company’s investment in the Titanium Absolute Return Fund (the “TARF Fund”). The Company is the managing member of the TARF Fund and serves as the investment manager for the TARF Fund for which it receives management fees. As of June 30, 2013, the Company’s investment in the TARF Fund represents approximately 7% of the total investments in the TARF Fund. Because the Company has an equity interest in the TARF Fund and has significant influence over the TARF Fund’s daily activities through its role as managing member and investment manager, the Company accounts for this investment using the equity method of accounting.

 

Previously, investments in equity investees also included the Company’s investment in the Titanium TALF Opportunity Fund (the “TALF Fund”), which it organized for its clients to invest in securities participating in the Term Asset-Backed Securities Loan Facility (“TALF”) of the Federal Reserve Bank of New York. The Company was the managing member of the TALF Fund and served as the investment manager for the TALF Fund for which it received management fees. Because the Company had an equity interest in the TALF Fund and had significant influence over the TALF Fund’s daily activities through its role as managing member and investment manager, the Company accounted for this investment using the equity method of accounting. During June 2012, substantially all of the TALF Fund securities were liquidated and converted to cash equivalents. The remaining assets of the TALF Fund were distributed to the respective investors, including the Company in September 2012.

 

The activity related to the Company’s investment in equity investees for the six months ended June 30, 2013 and 2012 is as follows:

 

Investments in equity investees  at January 1, 2012  $4,707,000 
Equity in income of equity investees   275,000 
Income distributions   (131,000)
Investments in equity investees at June 30, 2012  $4,851,000 
      
Investments in equity investee  at January 1, 2013  $3,970,000 
Equity in income of equity investee   111,000 
Redemption of equity investee   (1,000,000)
Investments in equity investee at June 30, 2013  $3,081,000 

 

8
 

 

Note 4 – Stockholders’ Equity

 

The Company’s authorized capital consists of 54,000,000 shares of common stock with a $0.0001 par value, 720,000 shares of restricted common stock with a $0.0001 par value, and 1,000,000 shares of preferred stock with a $0.0001 par value.

 

The restricted common stock shares carried voting rights and had no rights to dividends except in the case of liquidation of the Company. The restricted common stock shares would have converted 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 exceeded $6.90 or if there was a change in control (as defined in the Company’s certificate of incorporation). Because none of the events that would have triggered conversion had occurred prior to the five year anniversary of the issuance of the restricted common stock shares, all of the restricted common stock shares were mandatorily redeemed at par value and cancelled as of March 2, 2012.

 

No preferred stock had been issued at June 30, 2013.

 

Note 5 Income Taxes

 

At December 31, 2012, the Company had deferred tax assets of $24,138,000 including the deferred tax benefits related to federal net operating loss carryforwards of approximately $22,166,000 that expire between 2028 and 2032 and state net operating loss carryforwards totaling approximately $17,975,000 that expire between 2023 and 2032.

 

The U.S. Internal Revenue Code (the “Code”) Section 382 imposes annual limits on a company’s ability to use preexisting tax attributes when there has been a change in ownership control as defined under the Code. As a result of the purchase of the controlling interest in the Company by TAMCO Holdings, LLC on December 18, 2012, portions of the future amortization deductions for the Company’s intangible assets and the use of the Company’s net operating loss carryforwards arising from periods prior to that date will be subject to the annual limitation. The annual limitation is based on an adjusted federal long-term rate and the value of the Company at the time of the change in control. The Company currently estimates that the future use of preexisting tax attributes will be limited to approximately $1,000,000 annually. Due to these annual limits, the Company believes it is likely that it may incur currently payable income tax for 2013. The amount of currently payable income tax largely will depend on the actual level of income before income taxes realized by the Company in 2013.

 

In assessing the realizability of the Company’s deferred tax assets, the Company considers all relevant positive and negative evidence in determining whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The realization of the gross deferred tax assets depends on several factors, including the generation of sufficient taxable income prior to the expiration of the net operating loss carryforwards. Pursuant to FASB guidance, a cumulative loss in recent years is a significant piece of negative evidence to be considered in evaluating the need for a valuation allowance that is difficult to overcome. Based on the pretax losses in 2008 through 2012, the Company determined that it was not appropriate to consider expected future income as the primary factor in determining the realizability of its deferred tax assets. As a result, the Company has recognized valuation allowances that fully offset all deferred tax assets as of December 31, 2012.

 

Based on the continuation of cumulative losses, the Company continued to fully offset any additional deferred tax assets with additional valuation allowances during the six months ended June 30, 2013.

 

9
 

 

Note 6 Earnings per Share

 

Basic earnings per share (“EPS”) is computed by dividing net income or loss by the weighted average shares of common stock outstanding. Diluted EPS gives effect to all dilutive potential shares of common stock outstanding during the period.

 

The computation of basic and diluted EPS is as follows:

 

   Three Months Ended
June 30,
   Six Months Ended
June 30,
 
   2013   2012   2013   2012 
                 
Net income (loss)  $90,000   $(1,772,000)  $581,000   $(3,704,000)
                     
Basic and diluted weighted average shares of common stock outstanding   19,744,824    20,634,232    19,927,647    20,634,232 
                     
Basic and diluted EPS  $0.00   $(0.09)  $0.03   $(0.18)

 

Note 7 – Fair Value Disclosures

 

Under the FASB’s fair value requirements, the fair values for assets and liabilities are to be disclosed based on three levels of input: Level 1 – quoted prices in active markets for identical assets or liabilities; Level 2 – observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; or Level 3 – unobservable inputs that are supported by little or no market activity and that are significant to the fair value of assets or liabilities. Level 3 assets and liabilities include financial instruments, the value of which is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation. The Company’s level 1 investments include investments in registered money market funds.

 

The Company measures the following assets at fair values on a recurring basis:

 

   Category used for Fair Values 
   Level 1   Level 2   Level 3 
             
Assets at June 30, 2013               
Cash and cash equivalents  $6,119,000   $-   $- 
Current securities available for sale – Debt securities   -    4,438,000    - 
   $6,119,000   $4,438,000   $- 
                
Assets at December 31, 2012               
Cash and cash equivalents  $3,092,000   $-   $- 
Current securities available for sale – Debt securities   -    5,644,000    - 
   $3,092,000   $5,644,000   $- 

 

10
 

 

Note 8 Contingencies

 

On October 25, 2011, a former client of Sovereign filed suit in the State of Illinois Circuit Court against Sovereign, alleging negligence and breach of fiduciary duty on the part of Sovereign in investing the former client’s assets in auction-rate securities. The suit sought damages of $4,700,000, plus pre-judgment interest. On May 29, 2013, the Company agreed to a settlement arrangement with the former client of Sovereign. Pursuant to the arrangement, the Company, without admitting liability, agreed to pay consideration to the former client in return for a general release from any claims of the former client. The settlement consideration was covered by the Company’s insurance, subject to the payment by the Company of the remaining deductible amount. A net charge of $266,000 representing the settlement net of the insurance recovery was charged to operating expense during the three months ended June 30, 2013.

 

Sovereign received a letter dated July 16, 2010 from a former client demanding that Sovereign compensate it for losses related to allegedly unsuitable investments in approximately $30 million of various auction rate securities purchased on its behalf by Sovereign. The former client has filed a claim against the underwriters for the purchased securities, but has not to this point brought a claim against Sovereign. Management is in the process of evaluating this demand and the former client’s allegations to determine whether there is any merit to them. In the interim, the Company has entered into a tolling agreement with the former client that currently extends to October 9, 2013. At this preliminary stage, the Company cannot fully determine the potential liability of the Company or the likelihood of an unfavorable outcome. In any event, management believes the claim would be covered by insurance (up to $20 million), subject to the payment of deductible amounts by the Company.

 

On January 30, 2013, the Company reached a settlement with a former executive of the Company that had made a claim against the Company for severance, among other things, and against whom the Company filed a counterclaim for unjust enrichment. Pursuant to the terms of the settlement, the former executive and the Company agreed to mutual releases and waivers with respect to the claim and counterclaim, and the Company agreed to repurchase all 889,408 shares of common stock of the Company held by the former executive an certain of his affiliates for a total of $744,000, as well as to pay $100,000 towards the former executive’s legal fees.

 

The Company is from time to time involved in legal matters incidental to the conduct of its business and such matters can involve current and former employees and vendors. Management does not expect these matters would have a material effect on the Company’s consolidated financial position or results of operations.

 

11
 

 

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q, including particularly the Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995, which provides a “safe harbor” for statements about future events, products and future financial performance that are based on the beliefs of, estimates made by and information currently available to the management of Titanium Asset Management Corp., a Delaware corporation (referred to as “we,” “our” or the “Company,” and, unless the context indicates otherwise, includes our wholly owned asset management subsidiaries, Boyd Watterson Asset Management, LLC (“Boyd”), National Investment Services, Inc. (“NIS”), and Wood Asset Management, Inc. (“Wood”). In 2010, we transferred the client accounts of Sovereign Holdings, LLC (“Sovereign”) to Boyd and deregistered Sovereign as an investment advisor. We refer to Boyd, NIS and Wood 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; 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; actions taken by TAMCO Holdings, LLC. (“TAMCO”), as our majority stockholder; factors listed under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2012 (the “2012 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, and anticipated levels of future revenues, expenses or earnings, among other things; any statements using the terms “aim,” “anticipate,” “appear,” “based on,” “believe,” “can,” “continue,” “could,” “are emerging,” “estimate,” “expect,” “expectation,” “intend,” “may,” “ongoing,” “plan,” “possible” “potential, “predict,” “project,” “should” and “would” or similar words or phrases, or the negatives of those words or phrases; or discussions of strategy, plans, objectives or goals, may identify forward-looking statements that involve risks, uncertainties and other factors that could cause our actual results, financial condition and the outcome and timing of certain events to differ materially from those projected or management’s current expectations. By making forward-looking statements, we have not assumed any obligation to, and you should not expect us to, update or revise those statements because of new information, future events or otherwise.

 

The following discussion is designed to provide a better understanding of significant trends related to our consolidated financial condition and consolidated results of operations. The discussion should be read in conjunction with our condensed consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q, as well as the Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and Notes thereto included in our 2012 Form 10-K.

 

General

 

Our principal business is providing investment advisory services to institutional and retail clients. Our core strategy is to develop a broad array of investment management expertise to enable us to offer a full range of investment strategies to our clients. Although we manage and distribute a wide range of products and services, we operate in one business segment, namely as an investment advisor to institutional and retail clients.

 

We provide these services through a group of investment managers that have solid long-term track records. Through these investment managers, we have expertise in fixed-income, equity, and real estate investment strategies and have a client base that extends from individuals to a range of institutional investors, as well as sub-advisory and referral arrangements with a variety of broker-dealers. As of June 30, 2013, we had $8.9 billion of assets under management.

 

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Our asset management services are typically delivered pursuant to investment advisory agreements we enter into with our clients. Investment advisory fees are generally received quarterly, based on the value of assets under management on a particular date, such as the first or last day of a quarter. Our institutional business is generally billed in arrears, whereas the retail business is generally billed in advance. The majority of our investment advisory contracts are terminable on notice of 30 days or less. The nature of these agreements, the notice periods and the billing cycles vary depending on the nature and the source of each client relationship. Our assets under management primarily consist of fixed income and equity securities. We value substantially all fixed income securities based on prices from independent pricing services. We value equity securities at the last closing price on the primary exchange on which the securities are traded. The percentage of assets under management for which we estimate fair value is not significant to the value of our total assets under management. Most of our investment advisory services are provided through the management of separate accounts. However, a meaningful portion of our services are provided through private funds, which allow us to provide our investment strategies to our institutional clients in a more cost efficient manner.

 

We earn incentive fees on two of the private funds, one of which is organized to invest in preferred stocks. Our incentive fees are measured on the absolute investment performance over a calendar year performance period, and are subject to cumulative profit thresholds. Because investment returns on preferred stocks can be volatile, the level of incentive fees earned can vary significantly from year to year.

 

Our operating revenues are substantially influenced by changes to our assets under management and shifts in the distribution of assets under management among types of securities and investment strategies. Our assets under management fluctuate based primarily on our investment performance (both absolutely and relative to other investment advisors) and the success of our sales and marketing efforts. A material portion of our results will be influenced by fluctuations in world financial markets. Because they comprise the largest part of our assets under management, the performance of U.S. fixed-income securities will generally have the greatest influence on our financial results.

 

A significant portion of our expenses, including employee compensation and occupancy, do not vary directly with operating revenues.

 

Company History and Development

 

We were incorporated in Delaware on February 2, 2007, operating as a special purpose acquisition company. Our objective was to acquire one or more operating companies engaged in asset management.

 

On June 21, 2007, we completed a $120,000,000 private placement of units consisting of one share of our Common Stock and one Warrant. The Common Stock and the Warrants were also admitted to trading on AIM, a market operated by the London Stock Exchange, on June 21, 2007. Each company admitted to listing on AIM is required to have a Nomad who is responsible for, among other things, advising the company on its responsibilities under the AIM rules for companies. Cantor Fitzgerald Europe serves as our Nomad. All of the Warrants expired on June 21, 2011.

 

We used a substantial portion of the proceeds of the private placement to acquire four asset management firms in four separate transactions. We purchased Wood and Sovereign as of October 1, 2007, we purchased NIS as of March 31, 2008, and we purchased Boyd as of December 31, 2008.

 

During 2010 and 2011, we reorganized the acquired businesses such that we significantly reduced our structural administrative expenses, primarily through reductions to senior management and redundant operations.

 

In connection with the private placement, Clal Finance Ltd. (“Clal”) purchased 10,100,000 shares of Common Stock. Clal subsequently purchased 485,400 additional outstanding shares of Common Stock from other stockholders and increased its total interest in our Common Stock to 51.3%.

 

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On December 18, 2012, TAMCO, an entity principally owned and controlled by the senior management of the Company, acquired all 10,585,400 shares of Common Stock held by Clal for $18,500,000 pursuant to a securities purchase agreement. As of June 30, 2013, TAMCO and its affiliates hold total beneficial interests in 11,920,569 shares of Common Stock, representing approximately 60.4% of the currently outstanding Common Stock.

 

On April 22, 2013, the Company received a proposal from TAMCO that it wished to acquire, through a tender offer, the remaining outstanding equity interests of the Company that it did not already own at $1.00 per share. The Company’s board of directors has appointed a special committee, consisting solely of its independent directors, to consider the terms of the proposed transaction. The special committee has engaged independent advisors and is considering the proposal and its implications, in accordance with applicable state and federal laws. The special committee will inform shareholders of its activities in due course. There can be no assurance that the proposed transaction will be approved or completed.

 

Market Developments

 

With interest rates increasing sharply during May and June, the fixed income market performance during the three months ended June 30, 2013 was negative, with the Barclay’s Aggregate Index decreasing 2.3% (compared to an increase of 2.1% for the comparable 2012 period). Meanwhile the equity markets gained, with the S&P 500 Index increasing by 2.9% (compared to a decrease of 2.8% for the comparable 2012 period). For the six months ended June 30, 2013, the Barclay’s Aggregate Index decreased 2.4% (compared to a gain of 2.4% for the comparable 2012 period) while the S&P 500 Index gained 13.8% (compared to a 9.5% gain for the comparable 2012 period). Because fixed income strategies represent approximately 89% of our assets under management, the fixed income markets have the most significant impact on our assets under management. Our overall investment performance resulted in our assets under management decreasing by $118.5 million, or 1.3%, for the three months ended June 30, 2013 (compared to an increase of $102.2 million, or 1.4%, for the comparable 2012 period). For the six months ended June 30, 2013, our investment performance resulted in our assets under management decreasing by $41.0 million, or 0.5% (compared to an increase of $259.8 million, or 3.1%, for the comparable 2012 period).

 

For the three months ended June 30, 2013, our average assets under management were $8,921.6 million, up approximately 4% relative to the prior year average. For the three months ended June 30, 2013, the increase in average assets under management combined with a 5% increase in our average fee rate resulted in a 9% increase in our investment advisory fee revenues. For the six months ended June 30, 2013, our average assets under management were $8,899.2 million, up approximately 5% relative to the prior year average. For the six months ended June 30, 2013, the increase in average assets under management combined with a 6% increase in our average fee rate resulted in a 10% increase in our investment advisory fee revenues.

 

Assets Under Management

 

Our asset management services are delivered pursuant to investment advisory agreements with fees generally determined on a quarterly basis as a percentage (or range of percentages) of either the beginning or the ending market value of the assets being managed. Our investment advisory fees vary, among other things, by investment strategy and by client type. Our average fee rates for equity investment strategies generally are higher than those for fixed income strategies. In general, our clients may terminate our services at any time with limited notice.

 

We manage a portion of our assets under management through private funds that are organized as limited liability companies. We believe the use of these funds allows us to provide our investment strategies to our institutional clients in a more cost effective manner. We earn incentive fees on certain of the private funds, including one that invests in preferred stocks.

 

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Assets under management of $8.9 billion at June 30, 2013 were consistent with the $8.9 billion reported at December 31, 2012 as net inflows were largely offset by negative investment returns. The following table presents summary activity for 2013 and 2012 periods.

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
(in millions)  2013   2012   2013   2012 
                 
Annual Activity:                    
Beginning balance  $8,966.8   $8,587.8   $8,854.6   $8,316.8 
                     
Inflows   395.5    587.1    827.6    1,083.1 
Outflows   (367.5)   (701.5)   (764.9)   (1,084.1)
Net flows   28.0    (114.4)   62.7    (1.0)
                     
Market value change   (118.5)   102.2    (41.0)   259.8 
Ending balance  $8,876.3   $8,575.6   $8,876.3   $8,575.6 
                     
Average Assets Under Management (1)  $8,921.6   $8,581.7   $8,899.2   $8,493.4 
Average Fee Rate (basis points)   26.8    25.6    26.7    25.3 

 

(1)Average assets under management are calculated based on the quarter end balances.

 

The principle factors affecting our net flows during the periods ended June 30, 2013 and 2012 include the following:

 

·Outflows for the three and six month periods ended June 30, 2012 include the liquidation of approximately $280 million of investments related to an investment strategy that invested in securities participating in the TALF program of the Federal Reserve Bank of New York. These assets carried annualized fees of approximately $280,000.

 

·Multiemployer pension and welfare plans represent approximately 38% of our client base, and these plans have been faced with a challenging economic environment over the last several years. The current economic environment has generally led to reduced employer contributions and increased withdrawals. For the three months ended June 30, 2013, net inflows from multiemployer pension and welfare plans were approximately $53 million compared to net inflows of approximately $100 million for the prior year period. For the six months ended June 30, 2013, net inflows from multiemployer pension and welfare plans were $66 million compared to net inflows of $212 million for the prior year.

 

·Inflows and outflows are also significantly affected by the timing of tax receipts and disbursements for several public entity accounts that we manage. Net outflows related to these accounts were $66 million for the three months ended June 30, 2013 compared to net outflows of $48 million for the prior year period. For the six months ended June 30, 2013, net outflows were $24 million compared to net inflows of $14 million for the prior year period. While these flows can fluctuate significantly from period to period, they do not have a significant impact on our overall fees due to low or fixed fee rates.

 

Market value changes reflect our investment performance. Fixed income assets comprised approximately 89% of our total assets under management at June 30, 2013. For the three months ended June 30, 2013, the overall market value change related to fixed income assets was a decrease of approximately $145.2 million, or -1.8% (compared to an increase of $121.3 million, or 1.6%, for the comparable 2012 period). For the three months ended June 30, 2013, fixed income returns as measured by the Barclay’s Aggregate Index were -2.3% (compared to 2.1% for the comparable 2012 period). For the six months ended June 30, 2013, the overall market value change related to fixed income assets was a decrease of approximately $106.1, or -1.3% (compared to an increase of $215.9 million, or 2.9% for the comparable 2012 period). For the six months ended June 30, 2013, fixed income returns as measured by the Barclay’s Aggregate Index were -2.4% (compared to a gain of 2.4% for the comparable 2012 period). For the twelve months ended June 30, 2013, approximately 82% of our fixed income assets with defined performance benchmarks outperformed their respective benchmarks.

 

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Equity assets comprised approximately 7% of our total assets under management at June 30, 2013. For the three months ended June 30, 2013, the overall market value change related to equity assets was an increase of approximately $26.8 million, or 4.1% (compared to a decrease of $19.1 million, or -2.9%, for the comparable 2012 period). For the three months ended June 30, 2013, equity returns as measured by the S&P 500 Index were 2.9% (compared to -2.8% for the comparable 2012 period). For the six months ended June 30, 2013, the overall market value change related to equity assets was an increase of approximately $67.7, or 11.2% (compared to an increase of $44.0 million, or 7.1% for the comparable 2012 period). For the six months ended June 30, 2013, equity returns as measured by the S&P 500 Index were 13.8% (compared to 9.5% for the comparable 2012 period). Approximately 18% of our equity assets outperformed their respective benchmarks for the twelve months ended June 30, 2013.

 

The following table presents summary breakdowns for our assets under management at June 30, 2013 and December 31, 2012.

 

(in millions)  June 30,
2013
   % of
total
   December 31,
2012
   % of
total
 
                 
By investment strategy:                    
Fixed income  $7,900.7    89%  $7,914.9    89%
Equity   623.0    7%   595.6    7%
Real estate   352.6    4%   344.1    4%
Total  $8,876.3    100%  $8,854.6    100%
                     
By client type:                    
Institutional  $7,870.1    89%  $7,748.7    88%
Retail   1,006.2    11%   1,105.9    12%
Total  $8,876.3    100%  $8,854.6    100%
                     
By investment vehicle:                    
Separate accounts  $8,021.9    90%  $8,009.1    90%
Private funds   854.4    10%   845.5    10%
Total  $8,876.3    100%  $8,854.6    100%

 

Our mix of assets under management by investment strategy was unchanged as fixed income assets comprised 89% of total assets under management at June 30, 2013 and December 31, 2012.

 

Our mix of assets under management by client type was relatively unchanged as institutional accounts comprised 89% of total assets under management at June 30, 2013 compared to 88% at December 31, 2012.

 

Our mix of assets under management by investment vehicle was unchanged as separate accounts comprised 90% of total assets under management at June 30, 2013 and December 31, 2012.

 

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Results of Operations

 

Consolidated Results of Operations

 

   Three Months Ended   2013  Six Months Ended   2013
   June 30,   vs.  June 30,   vs.
   2013   2012   2012  2013   2012   2012
Operating revenues  $5,984,000   $5,567,000   7%  $11,899,000   $10,951,000   9%
Operating expenses:                          
Administrative   5,675,000    5,008,000   13%   10,975,000    10,158,000   8%
Amortization of intangible assets   242,000    2,401,000   (90)%   485,000    4,802,000   (90)%
Total operating expenses   5,917,000    7,409,000   (20)%   11,460,000    14,960,000   (23)%
Operating income (loss)   67,000    (1,842,000)  NM   439,000    (4,009,000)  NM
Other income   23,000    70,000   (67)%   142,000    305,000   (53)%
Income (loss) before income taxes   90,000    (1,772,000)  NM   581,000    (3,704,000)  NM
Income tax expense   -    -   NM   -    -   NM
Net income (loss)  $90,000   $(1,772,000)  NM  $581,000   $(3,704,000)  NM
Net income (loss) per share                          
Basic  $0.00   $(0.09)  NM  $0.03   $(0.18)  NM
Diluted  $0.00   $(0.09)  NM  $0.03   $(0.18)  NM

 

NM: Not meaningful

 

The increase in profitability from a net loss for the three months ended June 30, 2012 to net income for the three months ended June 30, 2013 is primarily attributable to the following:

 

·An increase in operating revenues of $417,000, or 7%, as a $491,000 increase in investment advisory fees was partially offset by a $74,000 decrease in referral fee revenue. The increase in investment advisory fees reflects both an increase in average assets under management and an improved average fee rate.

 

·An increase in administrative expenses of $667,000, or 13%. The increase primarily reflects a $266,000 net charge related to the settlement of one of the Company’s contingency matters, increased incentive compensation, and expenses incurred in connection with the Company’s evaluation of the tender offer proposal made by TAMCO.

 

·A decrease in amortization charges of $2,159,000, reflecting the elimination of amortization related to the referral relationship intangible asset as of December 31, 2012 as it became fully amortized.

 

·A $47,000 decrease in other income primarily as a result of liquidation of one of the equity investee funds during 2012.

 

The increase in profitability from a net loss for the six months ended June 30, 2012 to net income for the six months ended June 30, 2013 is primarily attributable to the following:

 

·An increase in operating revenues of $948,000, or 9%, as a $1,115,000 increase in investment advisory fees was partially offset by a $199,000 decrease in referral fee revenue. The increase in investment advisory fees reflects both an increase in average assets under management and an improved average fee rate.

 

·An increase in administrative expenses of $817,000, or 8%. The increase primarily reflects a $266,000 net charge related to the settlement of one of the Company’s contingency matters, increased incentive compensation, and expenses incurred in connection with the Company’s evaluation of the tender offer proposal made by TAMCO.

 

·A decrease in amortization charges of $4,317,000, reflecting the elimination of amortization related to the referral relationship intangible asset as of December 31, 2012 as it became fully amortized.

 

·A $163,000 decrease in other income primarily as a result of liquidation of one of the equity investee funds during 2012.

 

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Non - GAAP Performance Measures

 

In evaluating operating performance, we consider operating income and net income, which are calculated in accordance with accounting principles generally accepted in the United States (“GAAP”), as well as Adjusted EBITDA, an internally derived non-GAAP performance measure. We define Adjusted EBITDA as operating income or loss before non-cash charges for amortization and impairment of intangible assets and goodwill, depreciation, and share-based compensation expense. We believe Adjusted EBITDA is useful as an indicator of our ongoing performance and our ability to service debt, make new investments, and meet working capital requirements. Adjusted EBITDA, as we calculate it, may not be consistent with computations made by other companies. We believe that many investors use this information when analyzing the operating performance, liquidity, and financial position of companies in the investment management industry.

 

The following table provides a reconciliation of operating income (loss) to the Adjusted EBITDA for the periods ended June 30, 2013 and 2012.

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2013   2012   2013   2012 
Operating income (loss)  $67,000   $(1,842,000)  $439,000   $(4,009,000)
Amortization of intangible assets   242,000    2,401,000    485,000    4,802,000 
Depreciation expense   37,000    32,000    74,000    63,000 
Adjusted EBITDA  $346,000   $591,000   $998,000   $856,000 

 

Adjusted EBITDA for the three months ended June 30, 2013 was $346,000 and included a net charge of $266,000 related to a settlement arrangement for one of the contingency matters. Excluding the settlement provision, Adjusted EBITDA for the three months ended June 30, 2013 was $612,000, compared to Adjusted EBITDA of $591,000 for the comparable period last year. For the six months ended June 30, 2013, Adjusted EBITDA was $998,000. Excluding the net settlement provision, Adjusted EBITDA for the six months ended June 30, 2013 was $1,264,000, compared to Adjusted EBITDA of $856,000 for the same period last year. The improvements to Adjusted EBITDA for the periods ended June 30, 2013 primarily reflect the increases in operating revenues.

 

Operating Revenues

 

Our operating revenues include investment advisory fees received for the management of assets within separate accounts and private funds. Prior to 2013, our operating revenues also included referral fees earned in connection with NIS’s referral arrangement with an unaffiliated hedge fund manager. In September 2012, the hedge fund manager announced that it would complete an orderly liquidation of the remaining assets of the primary fund in which the majority of the referred assets were invested. As a result, the referred assets and referral fees were substantially eliminated as of December 31, 2012. Operating revenues increased by $417,000, or 7%, in the three months ended June 30, 2013 and by $948,000, or 9%, in the six months ended June 30, 2013. The changes by revenue category are more fully described below.

 

   Three months ended   2013  Six months ended   2013
   June 30,   vs.  June 30,   vs.
   2013   2012   2012  2013   2012   2012
Investment advisory fees  $5,984,000   $5,493,000   9%  $11,867,000   $10,752,000   10%
Incentive fees   -    -   NM   32,000    -   NM
Referral fees   -    74,000   NM   -    199,000   NM
Total operating revenues  $5,984,000   $5,567,000   7%  $11,899,000   $10,951,000   9%

 

NM: Not meaningful

 

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For the three month periods, our investment advisory fees increased by $491,000, or 9%, due to a 4% increase in our average assets under management and a 5% increase in our average fee rate. For the six month periods, our investment advisory fees increased by $1,115,000, or 10%, due to a 5% increase in our average assets under management and a 6% increase in our average fee rate.

 

We also receive incentive fees on an annual basis from the management of certain of our private funds, including one that invests in preferred stocks. Because investment returns on preferred stocks can be volatile, the level of incentive fees earned can vary significantly from year to year. These fees generally are based on a calendar year performance period and we recognize the fees at the conclusion of the performance period or on an interim basis if accounts terminate. In 2012, we earned incentive fees of $1,165,000, which were recognized in December 2012. Based on performance through June 30, 2013, we would have earned incentive fees of approximately $275,000 (of which $32,000 was recognized due to withdrawals). Because these fees are primarily earned on calendar year performance, the results for the first six months are not necessarily indicative of the fees to be expected for the full year.

 

Administrative Expenses

 

Administrative expenses for the three month period ended June 30, 2013 increased by $667,000, or 13%, compared to the 2012 period and for the six month period ended June 30, 2013 administrative expenses increased by $817,000, or 8%, compared to the 2013 period. Changes by expense category are more fully described below.

 

   Three months ended   2013  Six months ended   2013
   June 30,   vs.  June 30,   vs.
   2013   2012   2012  2013   2012   2012
                       
Employee compensation -                          
Recurring compensation  $3,057,000   $2,907,000   5%  $6,168,000   $5,951,000   4%
Third party distribution expense   443,000    399,000   11%   871,000    753,000   16%
Investment management expense   459,000    390,000   18%   913,000    787,000   16%
Legal, audit, and other professional fees   363,000    211,000   72%   693,000    545,000   27%
Occupancy   290,000    283,000   2%   578,000    610,000   (5)%
Other administrative expenses   1,063,000    818,000   30%   1,752,000    1,512,000   16%
Total administrative expenses  $5,675,000   $5,008,000   13%  $10,975,000   $10,158,000   8%

 

Employee compensation includes salaries and wages, sales incentives and other incentive compensation, and other payroll related taxes and benefits. The increase in recurring employee compensation primarily reflects increased incentive compensation costs.

 

Third party distribution expense represents payments made to broker-dealer networks and other outside sales commissions. The increase in 2013 reflects increased levels of business conducted through a broker-dealer network and the use of a third party marketer.

 

Investment management expense includes pricing, trading, compliance, and other investment management service costs and subadvisory service fees for outside assistance in the management of certain asset classes. The increase in 2013 primarily reflects the use of a consultant in connection with the certain of our managed real estate assets.

 

Legal, audit and other professional fees increased in 2013 primarily due to professional fees incurred in connection with the Company’s evaluation of the tender offer proposal made by TAMCO.

 

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Other administrative expenses include travel and other marketing related expenses, insurance expense, and other operating expenses. In addition, other administrative expenses for the 2013 periods also include a $266,000 net charge incurred to settle one of the Company’s outstanding contingency matters.

 

Amortization of Intangible Assets

 

Amortization of intangible assets decreased by $2,159,000 for the three months ended June 30, 2013 and $4,317,000 for the six months ended June 30, 2013. The reduction reflects the elimination of amortization expense related to the NIS referral relationship intangible asset in 2013 as the asset was fully amortized as of December 31, 2012.

 

Other Income and Expense

 

Other income and expense includes investment income from the investment of excess cash balances.

 

   Three months ended   2013  Six months ended   2013
   June 30,   vs.  June 30,   vs.
   2013   2012   2012  2013   2012   2012
Interest income  $9,000   $20,000   (55)%  $10,000   $37,000   (73)%
Net realized gains (losses) on investments   -    (5,000)  NM   21,000    (7,000)  NM
Income from equity investees   14,000    55,000   (75)%   111,000    275,000   (60)%
Total other income  $23,000   $70,000   (67)%  $142,000   $305,000   (53)%

 

NM: Not meaningful

 

We earn interest income and realize investment gains or losses on a portfolio of debt securities managed to enhance our yield on cash not immediately needed for operations.

 

Income from equity investees represents our share of the net income of two investments in affiliates.

 

Our investment in affiliates currently includes our investment in the Titanium Absolute Return Fund (the “TARF Fund”). We are the managing member of the TARF Fund and serve as the investment manager for the TARF Fund for which we receive management fees. As of June 30, 2013, our investment in the TARF Fund represented approximately 7% of the net assets in the TARF Fund. Because we have an equity interest in the TARF Fund and have significant influence over the TARF Fund’s daily activities through our role as managing member and investment manager, we account for this investment using the equity method of accounting.

 

Previously, our investment in affiliates also included an investment in the Titanium TALF Opportunity Fund (the “TALF Fund”), which we organized for our clients to invest primarily in securities participating in the Term Asset-Backed Securities Loan Facility of the Federal Reserve Bank of New York. We are the managing member of the TALF Fund and serve as the investment manager for the TALF Fund for which we receive management fees. Because we have an equity interest in the TALF Fund and have significant influence over the TALF Fund’s daily activities through our role as managing member and investment manager, we account for this investment using the equity method of accounting. During June 2012, substantially all of the TALF Fund securities were liquidated and converted to cash equivalents. The remaining assets of the TALF Fund were distributed to the respective investors, including the Company in September 2012.

 

The decrease in income from equity investees in 2013 primarily reflects the redemption of the investment in the TALF Fund in 2012.

 

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Liquidity and Capital Resources

 

At June 30, 2013, we had $13,638,000 of funds available consisting of $6,119,000 of cash and cash equivalents, $4,438,000 of securities available for sale, and $3,081,000 invested in one of the private funds that we manage. At December 31, 2012, these combined balances were $12,706,000. The $932,000 increase primarily reflects cash provided by operating activities, offset in part by cash used to repurchase common stock.

 

   Six months ended
June 30,
 
   2013   2012 
         
Net cash provided by operating activities  $1,597,000   $910,000 
Net cash provided by (used in) investing activities  $2,174,000   $(833,000)
Net cash used for financing activities  $(744,000)   - 

 

Net cash provided by operating activities was $1,597,000 for the six months ended June 30, 2013; an increase of $687,000 compared to the net cash provided by operating activities during the six months ended June 30, 2012. The improvement primarily reflects increases in operating revenues and the collection of the incentive fees recognized at December 31, 2012, offset in part by increased administrative expenses.

 

Net cash provided by investing activities during the six months ended June 30, 2013 primarily reflects a $1,000,000 redemption of our investment in an equity investee and a net decrease in other invested assets. Net cash used in investing activities during the six months ended June 30, 2012 primarily reflects a net increase in other invested assets.

 

Net cash used for financing activities during the six months ended June 30, 2013 reflects the repurchase of common stock.

 

As of June 30, 2013, we have no current or contingent financial obligations.

 

We believe our current level of cash and cash equivalents and short-term securities available for sale are sufficient to fund our ongoing operations and to provide consideration for additional acquisitions. We may fund future acquisitions (if any) partly through issuance of additional common stock, although we may incur bank debt as well.

 

Critical Accounting Policies

 

Our condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. Preparation of these statements requires us to make judgments and estimates. Some accounting policies have a significant impact on amounts reported in these financial statements. A summary of significant accounting policies and a description of critical accounting estimates may be found in our 2012 Form 10-K in the Notes to the Consolidated Financial Statements and the Critical Accounting Estimates section of Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

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Recent Accounting Pronouncements

 

There were no new accounting standards and amendments to standards that first became effective for the fiscal year beginning January 1, 2013 that had a significant impact on the Company’s financial statements.

 

Item 3.Quantitative and Qualitative Disclosures About Market Risk

 

Not applicable.

 

Item 4.Controls and Procedures

 

Evaluation of disclosure controls and procedures. Based on the evaluation of our disclosure controls and procedures (as defined in the Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), required by Exchange Act Rules 13a-15(b) or 15d-15(b)), our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and include controls and procedures designated to ensure that information required to be disclosed by us in such reports is accumulated and communicated to our management, including the principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

 

Changes in internal control over financial reporting. There were no changes in our internal control over financial reporting that occurred during the three months ended June 30, 2013 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

 

For information regarding legal proceedings related to the Company, see Note 8 – Contingencies.

 

Item 1A.Risk Factors

 

Not applicable.

 

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

 

None.

 

Item 3.Defaults Upon Senior Securities

 

None.

 

Item 4.Mine Safety Disclosures

 

Not applicable.

 

Item 5.Other Information

 

None.

 

Item 6.Exhibits

 

Exhibit Number Description
   
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.
101* Furnished with this quarterly report on Form 10-Q are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets at June 30, 2013 and December 31, 2012, (ii) the Condensed Consolidated Statements of Operations for the three and six month periods ended June 30, 2013 and 2012, (iii) the Consolidated Statements of Comprehensive Income (Loss) for the three and six month periods ended June 30, 2013 and 2012, (iv) the Consolidated Statements of Changes in Stockholders’ Equity for the six month periods ended June 30, 2013 and 2012, (v) the Condensed Consolidated Statements of Cash Flows for the six month periods ended June 30, 2013 and 2012, (vi) Notes to Condensed Consolidated Financial Statements, and (vii) document and entity information.

 

* The information in these exhibits shall not be deemed to be "filed" for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to liability under that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, except as expressly set forth by specific reference in such filing.

 

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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.
       
       
       
August 13, 2013 By: /s/ Brian Gevry  
    Name: Brian Gevry
    Title: Chief Executive Officer (Principal Executive Officer)
       
       
August 13, 2013 By: /s/ Jonathan Hoenecke  
    Name: Jonathan Hoenecke
    Title: Chief Financial Officer (Principal Financial Officer
and Principal Accounting Officer)

 

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exhibit Index

 

Exhibit Number Description
   
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.
101 * Furnished with this quarterly report on Form 10-Q are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets at June 30, 2013 and December 31, 2012, (ii) the Condensed Consolidated Statements of Operations for the three and six month periods ended June 30, 2013 and 2012, (iii) the Consolidated Statements of Comprehensive Income (Loss) for the three and six month periods ended June 30, 2013 and 2012, (iv) the Consolidated Statements of Changes in Stockholders’ Equity for the six month periods ended June 30, 2013 and 2012, (v) the Condensed Consolidated Statements of Cash Flows for the six month periods ended June 30, 2013 and 2012, (vi) Notes to Condensed Consolidated Financial Statements, and (vii) document and entity information.

 

* The information in these exhibits shall not be deemed to be "filed" for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to liability under that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, except as expressly set forth by specific reference in such filing.

 

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