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EX-31.1 - EXHIBIT 31.1 - Titanium Asset Management Corpv325437_ex31-1.htm
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EX-32.1 - EXHIBIT 32.1 - Titanium Asset Management Corpv325437_ex32-1.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 September 30, 2012
 

OR

 

¨ 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 

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨

 

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

 

  Large accelerated filer ¨ Accelerated filer ¨
  Non-accelerated filer ¨ Smaller reporting company þ
  (Do not check if a smaller reporting company)  

  

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

 

At November 9, 2012, there were 20,634,232 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 24
     
Item 4. Controls and Procedures. 24
     
PART II. OTHER INFORMATION 25
     
Item 1. Legal Proceedings 25
     
Item 1A. Risk Factors 25
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 25
     
Item 3. Defaults Upon Senior Securities 25
     
Item 4. Mine Safety Disclosures 25
     
Item 5. Other Information 25
     
Item 6. Exhibits 25

 

i
 

 

PART I. FINANCIAL INFORMATION
   
Item 1. Financial Statements

 

Titanium Asset Management Corp.

Condensed Consolidated Balance Sheets

 

   September 30,
2012
   December 31,
2011
 
   (unaudited)     
Assets          
Current assets          
Cash and cash equivalents  $3,210,000   $2,787,000 
Investments   5,089,000    2,990,000 
Accounts receivable   3,980,000    3,718,000 
Other current assets   780,000    828,000 
Total current assets   13,059,000    10,323,000 
           
Investments in equity investees   3,878,000    4,707,000 
Property and equipment, net   471,000    478,000 
Goodwill   13,264,000    13,264,000 
Intangible assets, net   7,710,000    14,913,000 
Total assets  $38,382,000   $43,685,000 
           
Liabilities and Stockholders’ Equity          
Current liabilities          
Accounts payable  $90,000   $91,000 
Other current liabilities   2,165,000    2,334,000 
Total current liabilities and total liabilities   2,255,000    2,425,000 
           
Commitments and contingencies          
           
Stockholders’ equity          
Common stock, $0.0001 par value; 54,000,000 shares authorized; 20,634,232 shares issued and outstanding at September 30, 2012 and December 31, 2011   2,000    2,000 
Restricted common stock, $0.0001 par value; 720,000 shares authorized; none issued at September 30, 2012 and 612,716 issued and outstanding at December 31, 2011   -    - 
Preferred stock, $0.0001 par value; 1,000,000 shares authorized; none issued   -    - 
Additional paid-in capital   100,971,000    100,971,000 
Accumulated deficit   (64,782,000)   (59,618,000)
Other comprehensive loss   (64,000)   (95,000)
Total stockholders’ equity   36,127,000    41,260,000 
Total liabilities and stockholders’ equity  $38,382,000   $43,685,000 

 

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, 2011 (the “2011 Form 10-K”).

 

1
 

 

Titanium Asset Management Corp.

Condensed Consolidated Statements of Operations

(unaudited)

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2012   2011   2012   2011 
                 
Operating revenues  $5,779,000   $5,390,000   $16,730,000   $16,292,000 
                     
Operating expenses:                    
Administrative   5,051,000    5,491,000    15,210,000    16,258,000 
Amortization of intangible assets   2,401,000    1,391,000    7,203,000    4,000,000 
Impairment of goodwill   -    -    -    3,500,000 
Total operating expenses   7,452,000    6,882,000    22,413,000    23,758,000 
                     
Operating loss   (1,673,000)   (1,492,000)   (5,683,000)   (7,466,000)
                     
Other income                    
Interest income   23,000    21,000    61,000    66,000 
Net realized gains (losses) on investments   13,000    (17,000)   6,000    (18,000)
Income (loss) from equity investees   177,000    (78,000)   452,000    342,000 
                     
Loss before income taxes   (1,460,000)   (1,566,000)   (5,164,000)   (7,076,000)
                     
Income tax benefit   -    -    -    - 
                     
Net loss  $(1,460,000)  $(1,566,000)  $(5,164,000)  $(7,076,000)
                     
Earnings (loss) per share                    
Basic  $(0.07)  $(0.08)  $(0.25)  $(0.34)
Diluted  $(0.07)  $(0.08)  $(0.25)  $(0.34)
                     
Weighted average number of common shares outstanding:                    
Basic   20,634,232    20,634,232    20,634,232    20,634,232 
Diluted   20,634,232    20,634,232    20,634,232    20,634,232 

 

See Notes to Condensed Consolidated Financial Statements contained herein and the Notes to Consolidated Financial Statements in the 2011 Form 10-K.

 

2
 

 

Titanium Asset Management Corp.

Consolidated Statements of Comprehensive Loss

(unaudited)

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2012   2011   2012   2011 
                 
Net loss  $(1,460,000)  $(1,566,000)  $(5,164,000)  $(7,076,000)
                     
Other comprehensive income items:                    
Unrealized gains (losses) on available for sale securities   18,000    (11,000)   28,000    (32,000)
Net losses (gains) reclassified from accumulated other comprehensive income to earnings   (3,000)   -    3,000    4,000 
Income tax on other comprehensive income items   -    -    -    - 
Other comprehensive income items, net of tax   15,000    (11,000)   31,000    (28,000)
                     
Comprehensive loss  $(1,445,000)  $(1,577,000)  $(5,133,000)  $(7,104,000)

 

See Notes to Condensed Consolidated Financial Statements contained herein and the Notes to Consolidated Financial Statements in the 2011 Form 10-K.

 

3
 

 

Titanium Asset Management Corp.
Consolidated Statements of Changes in Stockholders’ Equity
For the Nine Months Ended September 30, 2012 and 2011
(unaudited)

 

   Common Stock   Restricted Shares   Additional    Accumulated    Other
Comprehensive 
   Total
Stockholders’  
 
   Shares   Amount   Shares   Amount   Paid-in Capital   Deficit   Income (Loss)   Equity 
                                 
Balances at January 1, 2011   20,442,232   $2,000    612,716   $-   $100,971,000   $(41,368,000)  $(67,000)  $59,538,000 
Issuance of common stock in connection with deferred stock grant   192,000    -    -    -    -    -    -    - 
Net loss and comprehensive loss   -    -    -    -    -    (7,076,000)   (28,000)   (7,104,000)
Balances at September 30, 2011   20,634,232   $2,000    612,716   $-   $100,971,000   $(48,444,000)  $(95,000)  $52,434,000 
                                         
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   -    -    -    -    -    (5,164,000)   31,000    (5,133,000)
Balances at September 30, 2012   20,634,232   $2,000    -   $-   $100,971,000   $(64,782,000)  $(64,000)  $36,127,000 

 

See Notes to Condensed Consolidated Financial Statements contained herein and the Notes to Consolidated Financial Statements in the 2011 Form 10-K.

 

4
 

 

Titanium Asset Management Corp.

Condensed Consolidated Statements of Cash Flows

(unaudited)

 

   Nine Months Ended
September 30,
 
   2012   2011 
         
Cash flows from operating activities          
Net loss  $(5,164,000)  $(7,076,000)
Adjustments to reconcile net loss to net cash used in operating activities:          
Amortization of intangible assets   7,203,000    4,000,000 
Impairment of goodwill   -    3,500,000 
Depreciation   96,000    89,000 
Net realized losses (gains) on investments   (6,000)   18,000 
Income from equity investees   (452,000)   (342,000)
Income distributions from equity investees   96,000    438,000 
Changes in assets and liabilities:          
Decrease (increase) in accounts receivable   (262,000)   1,413,000 
Decrease (increase) in other current assets   48,000    (12,000)
Increase (decrease) in accounts payable   (1,000)   13,000 
Decrease in other current liabilities   (169,000)   (1,015,000)
Net cash provided by operating activities   1,389,000    1,026,000 
           
Cash flows from investing activities          
Purchases of investments   (5,748,000)   (4,563,000)
Sales and redemptions of investments   3,686,000    3,916,000 
Capital distributions from equity investee   1,185,000    - 
Purchases of property and equipment   (89,000)   (130,000)
Acquisitions of subsidiaries, net of cash acquired   -    (4,000,000)
Net cash used in investing activities   (966,000)   (4,777,000)
           
Net increase (decrease) in cash and cash equivalents   423,000    (3,751,000)
           
Cash and cash equivalents:          
Beginning   2,787,000    4,698,000 
Ending  $3,210,000   $947,000 

 

See Notes to Condensed Consolidated Financial Statements contained herein and the Notes to Consolidated Financial Statements in the 2011 Form 10-K.

 

5
 

 

Titanium Asset Management Corp.

Notes to Condensed Consolidated Financial Statements

(unaudited)

Note 1 – General

 

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

 

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

 

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

 

The information included in this Quarterly Report on Form 10-Q should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations included herein and in the 2011 Form 10-K and the Consolidated Financial Statements and the Notes thereto included in the 2011 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 2011 Form 10-K.

 

In June 2011, the FASB issued new guidance on the presentation of comprehensive income that requires entities to present each component of net income along with the total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. The guidance provides entities with the option to present the information in either a single continuous statement of comprehensive income or in two separate but consecutive statements and eliminates the previous option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The guidance became effective for interim reporting beginning on or after December 31, 2011, with retrospective application required. The Company has presented the information regarding comprehensive income in consecutive statements and the new guidance had no impact on its consolidated financial statements.

 

6
 

 

Note 3 – Investments

 

The Company’s investments include a current portfolio of debt securities that are accounted for as available-for-sale securities. The Company’s investments in equity investees include investments in two of its managed funds and 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 
                 
September 30, 2012  $5,068,000   $31,000   $(10,000)  $5,089,000 
December 31, 2011  $3,000,000   $7,000   $(17,000)  $2,990,000 

 

Debt securities accounted for as available-for-sale and held at September 30, 2012 mature as flows:

 

   Amortized cost   Fair value 
Within one year  $3,577,000   $3,594,000 
After one year but within five years  $1,491,000   $1,495,000 

 

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
September 30,
   Nine Months Ended
September 30,
 
   2012   2011   2012   2011 
                 
Proceeds from sale  $1,372,000   $1,383,000   $3,686,000   $3,916,000 
Gross realized gains on sales   21,000    2,000    31,000    14,000 
Gross realized losses on sales   (8,000)   (19,000)   (25,000)   (32,000)
Unrealized gains and losses   18,000    (11,000)   28,000    (32,000)
Net gains (losses) reclassified out of accumulated other comprehensive income to earnings   3,000    -    (3,000)   (4,000)

 

7
 

 

Note 3 – Investments (continued)

 

Investments in Equity Investees

 

Investments in equity investees include the Company’s investment in the Titanium TALF Opportunity Fund (the “TALF Fund”), which it organized for its clients to invest in securities participating in the Term Asset-Backed Securities Loan Facility (“TALF”) of the Federal Reserve Bank of New York. The Company is the managing member of the TALF Fund and serves as the investment manager for the TALF Fund for which it receives management fees. Because the Company has an equity interest in the TALF Fund and has significant influence over the TALF Fund’s daily activities through its role as managing member and investment manager, the Company accounts for this investment using the equity method of accounting.

 

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.

 

Investments in equity investees also include the Company’s investment in the Titanium Absolute Return Fund (the “TARF Fund”), formerly the NIS Fixed Income Arbitrage Fund, LTD. 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 September 30, 2012, the Company’s investment in the TARF Fund represents approximately 14% 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.

 

The activity related to the Company’s investment in equity investees for the nine months ended September 30, 2012 and 2011 is as follows:

 

Investments in equity investees at January 1, 2011  $5,898,000 
Equity in income of equity investees   342,000 
Income distributions   (438,000)
Investments in equity investees at September 30, 2011  $5,802,000 
      
Investments in equity investees at January 1, 2012  $4,707,000 
Equity in income of equity investees   452,000 
Income distributions   (96,000)
Return of capital distributions   (1,185,000)
Investments in equity investees at September 30, 2012  $3,878,000 

 

Note 4 – Acquisition Obligations

 

In connection with the acquisitions of Wood, Sovereign, NIS and Boyd, the acquisition agreements provided for deferred fixed payments and contingent payments based on assets under management or revenues at specified future dates.

 

The acquisition agreement for Wood provided for contingent payments related to revenue and assets under management milestones during the three-year period after closing. In November 2011, the Company made the final payment to the sellers totaling $540,000 in cash based on Wood’s assets under management as of September 30, 2011. This contingent payment resulted in an additional $540,000 of goodwill in 2011.

 

There are no further fixed or contingent acquisition obligations related to the acquisitions.

 

8
 

 

Note 5 – Goodwill and intangible assets

 

The Company earns referral fees on clients referred to a hedge fund manager with whom we have a referral arrangement. Following the end of the first quarter of 2011, the Company was notified by the hedge fund manager of redemptions and a reduction in its referral fee rates that significantly exceeded the estimates that were received in connection with the 2010 year end assessment of goodwill. From ensuing discussions with the management of hedge fund manager, the Company became aware of additional concerns with the relationship that may impact the marketing relationship beyond the current contractual period. These factors caused the Company to further reduce its long-term forecast of referral fee revenues and triggered an interim assessment of goodwill as of March 31, 2011. As a result of that assessment, the Company concluded that goodwill had been impaired and recognized an impairment charge of $3,500,000 as the reduction in the forecast long-term referral fee revenues had resulted in a reduced estimate of the Company’s value.

 

Note 6 – Stockholders’ Equity

 

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

 

The restricted common stock shares 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 into 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 September 30, 2012.

 

In connection with the Company’s 2007 private placement, the Company issued 20,000,000 warrants that entitled the holder to purchase one share of common stock at $4.00 per share. All of these warrants expired in June 2011.

 

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 consisted of one share of common stock and one warrant to acquire one share of common stock at $4.00 per share). Subsequent to the expiration of the warrants, the options were only exercisable for one share of common stock at an exercise price of $5.50 per share. All of these options expired in June 2012.

 

Note 7 Income Taxes

 

At December 31, 2011, the Company had deferred tax assets of $22,067,000 including the deferred tax benefits related to federal net operating loss carryforwards of approximately $20,363,000 that expire between 2028 and 2031 and state net operating loss carryforwards totaling approximately $17,264,000 that expire between 2023 and 2031.

 

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 2011, 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, 2011.

 

Based on the continuation of cumulative losses, the Company continued to fully offset any additional deferred tax assets with additional valuation allowances during the nine months ended September 30, 2012.

 

9
 

 

Note 8 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
September 30,
   Nine months ended
September 30,
 
   2012   2011   2012   2011 
                 
Net loss  $(1,460,000)  $(1,566,000)  $(5,164,000)  $(7,076,000)
                     
Basic and diluted weighted average shares of common stock outstanding   20,634,232    20,634,232    20,634,232    20,634,232 
                     
Basic and diluted EPS  $(0.07)  $(0.08)  $(0.25)  $(0.34)

 

Note 9 – Fair Value Disclosures

 

Under the FASB’s fair value requirements, the fair values for assets and liabilities are to be disclosed based on three levels of input: Level 1 – quoted prices in active markets for identical assets or liabilities; Level 2 – observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; or Level 3 – unobservable inputs that are supported by little or no market activity and that are significant to the fair value of assets or liabilities. Level 3 assets and liabilities include financial instruments, the value of which is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation. The Company’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 September 30, 2012               
Cash and cash equivalents  $3,210,000   $-   $- 
Current securities available for sale – Debt securities   -    5,089,000    - 
   $3,210,000   $5,089,000   $- 
                
Assets at December 31, 2011               
Cash and cash equivalents  $2,787,000   $-   $- 
Current securities available for sale – Debt securities   -    2,990,000    - 
   $2,787,000   $2,990,000   $- 

 

10
 

 

Note 10 Contingencies

 

The Company’s subsidiary, 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 extends to August 10, 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 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 claim alleges, among other things, that Sovereign failed to conduct adequate due diligence into the auction-rate securities purchased for the client’s account, and that the investment in the auction-rate securities was outside the former client’s investment guidelines. The suit seeks $4.7 million in damages, plus pre-judgment interest. Previously, the former client had made a similar claim under federal securities statutes and that federal claim was dismissed with prejudice on October 26, 2010. The Company filed a motion to dismiss the state claim but that motion was denied May 11, 2012. While management believes the state claim is without merit and intends to defend vigorously against this action, at this preliminary stage, it cannot fully determine the potential liability of the Company, the likelihood of an unfavorable outcome, or the potential cost of defense. In any event, management believes the state claim is covered by insurance, subject to the payment of deductible amounts by the Company.

 

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, 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; actions taken by Clal Finance Ltd., (“Clal”), as our majority stockholder; factors listed under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2011 (the “2011 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 2011 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.

 

Through four acquisitions, we have assembled a group of investment managers with solid long-term track records to serve as our core asset management business. Through these investment managers, we have expertise in both fixed-income and equity investment strategies and have a client base that extends from individuals to a range of institutional investors, as well as sub-advisory and referral arrangements with a variety of broker-dealers. During 2009, we extended our business to include real estate investment advisory services through the hiring of two experienced real estate investment managers. As of September 30, 2012, we had $8.7 billion of assets under management and an additional $0.1 billion of assets, on which we earn referral fees.

 

12
 

 

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 generally terminable at any time or on notice of 30 days or less. The nature of these agreements, the notice periods and the billing cycles vary depending on the nature and the source of each client relationship. 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, some 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 certain of the private funds, including one that invests 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.

 

We also have a referral arrangement with a hedge fund manager through which we earn fees for referring clients to its investment vehicles. Our referral fees are generally calculated as a percentage of the fees earned by the hedge fund manager, whose fees vary based on the assets under its management.

 

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 on an absolute basis 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. Clal became the holder of approximately 44.1% of our Common Stock (42.8% of our voting stock) at that time as a result of the private placement. Clal subsequently acquired more than a majority of our Common Stock on May 1, 2008 when it purchased additional outstanding shares of Common Stock from another stockholder.

 

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. Seymour Pierce Limited serves as our Nomad.

 

13
 

 

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 2009, we extended our business to include real estate investment advisory services through the hiring of two experienced real estate investment managers.

 

During 2010, we substantially completed the reorganization of the four acquired businesses along functional lines. The reorganization allowed us to significantly reduce our structural administrative expenses, primarily through reductions to senior management and redundant operations. Since the acquisition of Boyd at the end of 2008, we have reduced headcount from 97 to 75 and have reduced annualized administrative expenses from approximately $25.1 million to $20.2 million. We expect to realize the full benefit of these reductions to our structural administrative expenses in 2012 as the severance costs and other transitional costs dissipate.

 

Market Developments

 

The fixed income market performance during the three months ended September 30, 2012 was strong with the Barclay’s Aggregate Index increasing 1.6% (3.8% for the comparable 2011 period) while the equity markets gained with the S&P 500 Index increasing by 6.4% (compared to a decrease of 13.9% for the comparable 2011 period). For the nine months ended September 30, 2012, the Barclay’s Aggregate Index gained 4.0% (6.7% for the comparable 2011 period) while the S&P 500 Index gained 16.4% (compared to a decrease of 8.7% for the comparable 2011 period). Because fixed income strategies represent approximately 90% 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 increasing by $188.4 million, or 2.2% for the three months ended September 30, 2012 ($49.3 million, or 0.6%, for the comparable 2011 period). For the nine month period ended September 30, 2012, our investment performance resulted in our assets under management increasing by $448.1 million, or 5.3% ($274.3 million, or 3.4% for the comparable 2011 period).

 

For the three months ended September 30, 2012, our average assets under management were up approximately 3% relative to the prior year average. For the nine months ended September 30, 2012, our average assets under management were up approximately 2% relative to the prior year average. For the three months ended September 30, 2012, the increase in average assets under management combined with a 7% increase in our average fee rate resulted in a 10% increase in our investment advisory fee revenues. For the nine months ended September 30, 2012, the increase in average assets under management combined with a 5% increase in our average fee rate resulted in a 7% 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.

 

14
 

 

Assets under management of $8.7 billion at September 30, 2012 were higher than the $8.3 billion reported at December 31, 2011 primarily due to positive investment returns. The following table presents summary activity for 2012 and 2011 periods.

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
(in millions)  2012   2011   2012   2011 
                 
Annual Activity:                    
Beginning balance  $8,575.6   $8,402.5   $8,316.8   $8,125.0 
                     
Inflows   438.5    473.6    1,521.6    1,343.7 
Outflows   (489.3)   (491.0)   (1,573.3)   (1,308.6)
Net flows   (50.8)   (17.4)   (51.7)   35.1 
                     
Market value change   188.4    49.3    448.1    274.3 
Ending balance  $8,713.2   $8,434.4   $8,713.2   $8,434.4 
                     
Average Assets Under Management (1)  $8,644.4   $8,418.4   $8,548.4   $8,351.1 

 

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

 

The principle factors affecting our net flows during the periods ended September 30, 2012 and 2011 include the following:

 

·Multiemployer pension and welfare plans represent approximately 36% 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. These factors have led to increased levels of outflows from our fixed income strategies throughout the last several years. For the three months ended September 30, 2012, net inflows from multiemployer pension and welfare plans were approximately $73 million compared to net inflows of approximately $43 million for the prior year period. For the nine month period ended September 30, 2012, net inflows were approximately $285 million compared to net inflows of approximately $51 million for the prior year period. The improvements in 2012 generally reflect new investments in both a real estate strategy and a preferred stock strategy, both of which carry higher than average fee rates. The net inflows for the nine months ended September 30, 2012 include approximately $80 million in new investments in the real estate strategy and approximately $80 million in new investments in the preferred stock strategy.

 

·Outflows for the nine month period ended September 30, 2012 include the liquidation of approximately $375 million of investments related to the TALF investment strategy. These assets carried annualized fees of approximately $375,000.

 

·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 $14 million for the three months ended September 30, 2012 compared to net outflows of $90 million for the prior year period. For the nine months ended September 30, 2012 the net flows related to these accounts were approximately breakeven compared to net inflows of $72 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 September 30, 2012. Fixed income returns as measured by the Barclay’s Aggregate Index were 1.6% for the three months ended September 30, 2012 (3.8% for the comparable 2011 period). For the nine months ended September 30, 2012, the Barclay’s Aggregate Index gained 4.0% (6.7% for the comparable 2011 period). For the twelve months ended September 30, 2012, approximately 85% of our fixed income assets with defined performance benchmarks outperformed their respective benchmarks.

 

15
 

 

Equity assets comprised approximately 7% of our total assets under management at September 30, 2012. Equity returns as measured by the S&P 500 Index were up 6.4% for the three months ended September 30, 2012 (compared to a decrease of 13.9% for the comparable 2011 period). For the nine months ended September 30, 2012, the S&P 500 Index gained 16.4% (compared to a decrease of 8.7% for the comparable 2011 period). Approximately 11% of our equity assets outperformed their respective benchmarks for the twelve months ended September 30, 2012.

 

The following table presents summary breakdowns for our assets under management at September 30, 2012 and December 31, 2011.

 

(in millions)  September 30,
2012
   % of
total
   December 31,
2011
   % of
total
 
                 
By investment strategy:                    
Fixed income  $7,772.4    89%  $7,483.4    90%
Equity   630.3    7%   621.4    7%
Real estate   310.5    4%   212.0    3%
Total  $8,713.2    100%  $8,316.8    100%
                     
By client type:                    
Institutional  $7,571.2    87%  $7,178.9    86%
Retail   1,142.0    13%   1,137.9    14%
Total  $8,713.2    100%  $8,316.8    100%
                     
By investment vehicle:                    
Separate accounts  $7,950.7    91%  $7,540.2    91%
Private funds   762.5    9%   776.6    9%
Total  $8,713.2    100%  $8,316.8    100%

 

Our mix of assets under management by investment strategy was relatively unchanged as fixed income assets comprised 89% of total assets under management at September 30, 2012 compared to 90% at December 31, 2011.

 

Our mix of assets under management by client type was relatively unchanged as institutional accounts comprised 87% of total assets under management at September 30, 2012 compared to 86% at December 31, 2011.

 

Our mix of assets under management by investment vehicle was unchanged as separate accounts comprised 91% of total assets under management at September 30, 2012 and December 31, 2011.

 

As of October 31, 2012, our aggregate assets under management increased to approximately $8.8 billion.

 

16
 

 

We earn referral fees on clients referred to a hedge fund manager with whom we have a referral arrangement. The assets managed under this referral arrangement decreased from $374.0 million at December 31, 2011 to $140.0 million at September 30, 2012. The activity related to these referred assets was as follows:

 

   For the Three Months Ended   For the Nine Months Ended 
   September 30,   September 30, 
(in millions)  2012   2011   2012   2011 
                 
Annual Activity:                    
Beginning balance  $199.1   $814.7   $374.0   $894.4 
Inflows   -    -    -    8.2 
Outflows   (61.8)   (80.1)   (242.9)   (163.5)
Market value change   2.7    1.9    8.9    (2.5)
Ending balance  $140.0   $736.5   $140.0   $736.5 
                     
Average Referred Assets Under Management  $169.6   $775.6   $274.0   $838.5 

 

The assets under this referral arrangement have decreased significantly over the last two years for a variety of factors and as a result, our referral fees have been substantially reduced. 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 are invested. As a result, we expect that the referred assets and referral fees will be substantially eliminated as of December 31, 2012.

 

17
 

 

Results of Operations

 

Consolidated Results of Operations

 

   Three Months Ended   2012   Nine months Ended   2012 
   September 30,   vs.   September 30,   vs. 
   2012   2011   2011   2012   2011   2011 
Operating revenues  $5,779,000   $5,390,000    7%  $16,730,000   $16,292,000    3%
Operating expenses:                              
Administrative   5,051,000    5,491,000    -8%   15,210,000    16,258,000    -6%
Amortization of intangible assets   2,401,000    1,391,000    73%   7,203,000    4,000,000    80%
Impairment of goodwill   -    -    NM    -    3,500,000    NM 
Total operating expenses   7,452,000    6,882,000    8%   22,413,000    23,758,000    -6%
Operating loss   (1,673,000)   (1,492,000)   12%   (5,683,000)   (7,466,000)   -24%
Other income   213,000    (74,000)   NM    519,000    390,000    33%
Net income (loss)  $(1,460,000)  $(1,566,000)   -7%  $(5,164,000)  $(7,076,000)   -27%
Net income (loss) per share                              
Basic  $(0.07)  $(0.08)   -13%  $(0.25)  $(0.34)   -26%
Diluted  $(0.07)  $(0.08)   -13%  $(0.25)  $(0.34)   -26%

NM: Not meaningful

 

The decrease in the net loss for the three months ended September 30, 2012 compared to the three months ended September 30, 2011 is primarily attributable to the following:

 

·An increase in operating revenues of $389,000, or 7%, as a $529,000 increase in investment advisory fees was partially offset by a $140,000 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. The reduction in referral fees primarily reflects a reduction in assets under management under the referral arrangement.
·A decrease in administrative expenses of $440,000, or 8%. The reduction primarily reflects reduced severance costs.
·An increase in amortization charges of $1,010,000, reflecting the reduced estimated remaining life for the referral relationship intangible asset beginning in the fourth quarter of 2011.
·A $287,000 increase in other income primarily as a result of improved returns from our equity investments in one of our managed funds.

 

The decrease in the net loss for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011 is primarily attributable to the following:

 

·An increase in operating revenues of $438,000, as a $1,120,000 increase in investment advisory fees was partially offset by a $682,000 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. The reduction in referral fees reflects both a reduction in assets under management under the referral arrangement and a reduction in fees charged by the hedge fund manager.
·A decrease in administrative expenses of $1,048,000, or 6%. The reduction primarily reflects lower compensation costs as a result of reduced staff and reduced severance costs and lower professional fees.
·An increase in amortization charges of $3,203,000, reflecting the reduced estimated remaining life for the referral relationship intangible asset beginning in the fourth quarter of 2011.
·A goodwill impairment charge of $3,500,000 recognized in 2011, primarily due to the long-term impact of the reductions to the referral revenue stream with respect to the referral relationship.
·A $129,000 increase in other income primarily as a result of improved returns from our equity investments in two of our managed funds.

 

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

 

The following table provides a reconciliation of operating loss to the Adjusted EBITDA for the periods ended September 30, 2012 and 2011.

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2012   2011   2012   2011 
Operating loss  $(1,673,000)  $(1,492,000)  $(5,683,000)  $(7,466,000)
Amortization of intangible assets   2,401,000    1,391,000    7,203,000    4,000,000 
Impairment of goodwill   -    -    -    3,500,000 
Depreciation expense   33,000    34,000    96,000    89,000 
Adjusted EBITDA (deficit)  $761,000   $(67,000)  $1,616,000   $123,000 

 

The improvements to Adjusted EBITDA in the 2012 periods primarily reflect the increases in operating revenues and the reductions in administrative expenses.

 

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Operating Revenues

 

Our operating revenues include investment advisory fees received for the management of assets within separate accounts and private funds. Our operating revenues also include referral fees earned in connection with NIS’s referral arrangement with an unaffiliated hedge fund manager. Operating revenues increased by $389,000, or 7%, in the three months ended September 30, 2012 and by $438,000, or 3%, in the nine months ended September 30, 2012. The changes by revenue category are more fully described below.

 

   Three months ended   2012   Nine months ended   2012 
   September 30,   vs.   September 30,   vs. 
   2012   2011   2011   2012   2011   2011 
Investment advisory fees  $5,715,000   $5,186,000    10%  $16,467,000   $15,347,000    7%
Referral fees   64,000    204,000    -69%   263,000    945,000    -72%
Total operating revenues  $5,779,000   $5,390,000    7%  $16,730,000   $16,292,000    3%
                               
Average Assets Under Management (in millions)  $8,644.4   $8,418.4    3%  $8,548.4   $8,351.1    2%
Average Fee Rate (basis points)   26.4    24.6    7%   25.7    24.5    5%
                               
Average Referred Assets Under Management (in millions)  $169.6   $775.6    -78%  $274.0   $838.5    -67%
Average Referral Fee Rate (basis points)   14.9    10.5    42%   12.8    15.0    -15%

 

For the three month periods, our investment advisory fees increased by $529,000, or 10%, due to a 3% increase in our average assets under management and a 7% increase in our average fee rate. For the nine month periods, our investment advisory fees increased by $1,120,000, or 7%, due to a 2% increase in our average assets under management and a 5% increase in our average fee rate.

 

For the three month periods, our referral fees decreased by $140,000, or 69%, primarily due to a 78% decrease in the average assets under the referral arrangement. For the nine month periods, our referral fees decreased $682,000, or 72%, due to a 67% decrease in the average assets under the referral arrangement and a 15% decrease in our average referral fee rate.

 

The assets under this referral arrangement have decreased significantly over the last two years for a variety of factors and as a result, our referral fees have been substantially reduced. 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 are invested. As a result, we expect that the referred assets and referral fees will be substantially eliminated as of December 31, 2012.

 

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. In 2011, we earned incentive fees of $262,000, which were recognized in December 2011. Based on performance through September 30, 2012, we would have earned incentive fees of approximately $900,000, but results for the first nine months of the year are not necessarily indicative of results to be expected for the full year.

 

20
 

 

Administrative Expenses

 

Administrative expenses for the three month period ended September 30, 2012 decreased by $440,000, or 8%, compared to the 2011 period. Administrative expenses for the nine month period ended September 30, 2012 decreased by $1,048,000, or 6%, compared to the 2011 period. The decreases are largely due to reduced provisions for severance. Other changes by expense category are more fully described below.

 

   Three months ended   2012   Nine months ended   2012 
   September 30,   vs.   September 30,   vs. 
   2012   2011   2011   2012   2011   2011 
                         
Employee compensation:                              
Recurring compensation  $2,925,000   $2,857,000    2%  $8,876,000   $9,172,000    -3%
Severance costs   91,000    469,000    -81%   91,000    469,000    -81%
Total compensation   3,016,000    3,326,000    -9%   8,967,000    9,641,000    -7%
Third party distribution expense   460,000    348,000    32%   1,213,000    986,000    23%
Investment management expense   400,000    402,000    -%    1,187,000    1,200,000    -1%
Legal, audit, and other professional fees   210,000    368,000    -43%   755,000    1,119,000    -33%
Occupancy   277,000    283,000    -2%   887,000    833,000    6%
Other administrative expenses   688,000    764,000    -10%   2,201,000    2,479,000    -11%
Total administrative expenses  $5,051,000   $5,491,000    -8%  $15,210,000   $16,258,000    -6%

 

Employee compensation includes salaries and wages, sales incentives and other incentive compensation, and other payroll related taxes and benefits. For the three months ended September 30, 2012, the increase in recurring employee compensation reflects increased incentive compensation costs. For the nine months ended September 30, 2012, the decrease in recurring employee compensation is primarily due to reduced staff levels.

 

Third party distribution expense represents payments made to broker-dealer networks and other outside sales commissions. The increases in 2012 reflect 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 decrease in legal, audit, and other professional fees primarily reflects reduced audit costs based on the timing of year-end audit work and reduced legal services in 2012.

 

Other administrative expenses include travel and other marketing related expenses, insurance expense, and other operating expenses. The decrease in other administrative expenses primarily reflects reduced insurance costs that were enabled by our ability to reduce coverage levels in the latter half of 2011.

 

Amortization of Intangible Assets and Impairment of Goodwill

 

Amortization of intangible assets is recognized in periods following acquisitions based on the estimated useful lives of the respective assets. We periodically reassess the remaining useful lives of these intangible assets based on significant terminations or redemption activity that might indicate that respective attrition rates have changed substantively. Throughout 2011, we considered the impact of recurring redemptions of the referred assets and their impact on the remaining useful life of its NIS referral relationship intangible asset. The most recent assessment at 2011 year end resulted in reducing the estimated remaining useful life to approximately 15 months as of October 1, 2011. The $3,203,000 increase in amortization expense in 2012 reflects these revisions to the remaining estimated useful life of the intangible asset related to the referral relationship. As a result of the most recent revision to the estimated remaining useful life of the NIS referral relationship intangible asset, we expect that asset will be fully amortized at the end of 2012 and that the total annual amortization expense will increase to $9,604,000 for 2012. For 2013, we expect that the total annual amortization will decrease to $970,000.

 

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Following the end of the first quarter of 2011, we were notified by the hedge fund manager of redemptions and a reduction in its referral fee rates that significantly exceeded the estimates that were received in connection with the 2010 year end assessment of goodwill. From ensuing discussions with the hedge fund manager, we became aware of additional concerns with the relationship that may impact the marketing relationship beyond the current contractual period. These factors caused us to further reduce our long-term forecast of referral fee revenues and triggered an interim assessment of goodwill as of March 31, 2011. As a result of that assessment, we concluded that goodwill had been impaired and recognized an impairment charge of $3,500,000 as the reduction in the forecast long-term referral fee revenues had resulted in a reduced estimate of our value.

 

Other Income and Expense

 

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

 

   Three months ended   2012   Nine months ended   2012 
   September 30,   vs.   September 30,   vs. 
   2012   2011   2011   2012   2011   2011 
Interest income  $23,000   $21,000    10%  $61,000   $66,000    -8%
Net realized gains (losses) on investments   13,000    (17,000)   NM    6,000    (18,000)   NM 
Income (loss) from equity investees   177,000    (78,000)   NM    452,000    342,000    32%
Total other income (expense)  $213,000   $(74,000)   NM   $519,000   $390,000    33%

 

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 (loss) from equity investees represents our share of the net income or loss of two investments in affiliates.

 

Our investment in affiliates includes 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.

 

Our investment in affiliates also includes our investment in the Titanium Absolute Return Fund (formerly, the NIS Fixed Income Arbitrage Fund, LTD.) (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 September 30, 2012, our investment in the TARF Fund represented approximately 14% 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.

 

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Liquidity and Capital Resources

 

At September 30, 2012, we had $12,177,000 of funds available consisting of $3,210,000 of cash and cash equivalents, $5,089,000 of securities available for sale, and $3,878,000 invested in one of the private funds that we manage. At December 31, 2011, these combined balances were $10,484,000. The $1,693,000 increase primarily reflects cash provided by operating activities.

 

   Nine months ended September 30, 
   2012   2011 
         
Net cash provided by operating activities  $1,389,000   $1,026,000 
Net cash used in investing activities  $(966,000)  $(4,777,000)

 

Net cash provided by operating activities was $1,389,000 for the nine months ended September 30, 2012; an increase of $363,000 compared to the net cash provided by operating activities during the nine months ended September 30, 2011. The improvement primarily reflects increases in operating revenues, reductions in administrative expenses, and an increase in investment income.

 

Net cash used in investing activities during the nine months ended September 30, 2012 primarily reflects a net increase in other invested assets. Net cash used in investing activities during the nine months ended September 30, 2011 primarily reflects a payment of $4,000,000 for the final obligation related to our acquisition of Boyd and a net increase in other invested assets.

 

As of September 30, 2012, we have no further current or contingent financial obligations due under our acquisition agreements.

 

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 2011 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, 2012 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 September 30, 2012 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 10 – Contingencies.

 

Item 1A. Risk Factors

 

Not applicable.

 

 

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

 

None.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. 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 September 30, 2012 and December 31, 2011, (ii) the Condensed Consolidated Statements of Operations for the three and nine month periods ended September 30, 2012 and 2011, (iii) the Consolidated Statements of Comprehensive Loss for the three and nine month periods ended September 30, 2012 and 2011, (iv) the Consolidated Statements of Changes in Stockholders’ Equity for the nine month periods ended September 30, 2012 and 2011, (v) the Condensed Consolidated Statements of Cash Flows for the nine month periods ended September 30, 2012 and 2011, (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.
   
November 12, 2012 By:  /s/ Robert Brooks
    Name: Robert Brooks
    Title: Chief Executive Officer (Principal Executive Officer)
     
November 12, 2012 By:  /s/ Jonathan Hoenecke
    Name: Jonathan Hoenecke
    Title: Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

 

 
 

 

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 September 30, 2012 and December 31, 2011, (ii) the Condensed Consolidated Statements of Operations for the three and nine month periods ended September 30, 2012 and 2011, (iii) the Consolidated Statements of Comprehensive Loss for the three and nine month periods ended September 30, 2012 and 2011, (iv) the Consolidated Statements of Changes in Stockholders’ Equity for the nine month periods ended September 30, 2012 and 2011, (v) the Condensed Consolidated Statements of Cash Flows for the nine month periods ended September 30, 2012 and 2011, (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.