U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 1999
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: 0-27077
TREMONT ADVISERS, INC.
(Exact name of small business issuer as specified in its charter)
Delaware
(State or other jurisdiction 06-1210532
or incorporation or organization) (I.R.S. Employer Identification No)
555 Theodore Fremd Avenue, Rye, New York 10580
(Address of principal executive offices) (Zip Code)
(914) 925-1140
(Issuer's telephone number)
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period) that the issuer was required to file such reports, and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDING DURING THE
PRECEDING FIVE YEARS
Check whether the issuer filed all documents and reports required to be
filed by Section 12, 13, or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.
Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of the Registrant's Class A Common Stock, $0.01
par value, as of the close of business on November 5, 1999 was 1,596,118, and
the number of shares outstanding of the Registrant's Class B Common Stock, $0.01
par value, as of the close of business on November 5, 1999, was 4,014,099 as of
the same date. Shares outstanding have been restated to reflect the impact of a
five-for-four stock split paid on August 16, 1999 to shareholders of record on
July 30, 1999.
<PAGE>
INDEX
Tremont Advisers, Inc.
PART I - FINANCIAL INFORMATION
<TABLE>
<S> <C>
Item 1. Financial Statements. (Unaudited) Page
Condensed Consolidated Balance Sheets - September 30, 1999 (unaudited)
and December 31, 1998 (audited) 1
Condensed Consolidated Statements of Income -
nine and three months ended September 30, 1999 and 1998 2
Condensed Consolidated Statement of Shareholders' Equity -
nine months ended September 30, 1999 3
Condensed Consolidated Statements of Cash Flows -
nine months ended September 30, 1999 and 1998 4
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 6. Exhibits and Reports on Form 8-K 21
Signature 21
Exhibit 27 - Financial Data Schedule 22
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Tremont Advisers, Inc.
Condensed Consolidated Balance Sheets
September 30, 1999 December 31, 1998
(Unaudited) (Audited)
----------------------------------------
Assets
Current Assets
Cash and cash equivalents $ 2,763,400 $ 1,893,800
Accounts receivable, net 2,942,900 2,111,600
Income taxes receivable - 82,800
Prepaid expenses and other assets 212,900 327,900
----------------------------------------
Total current assets 5,919,200 4,416,100
Investments in limited partnerships (cost $2,346,600 and $1,428,600) 3,280,300 2,034,700
Other investments (cost $1,408,900 and $469,900) 1,099,100 200,300
Fixed assets, net 752,600 449,700
Goodwill, net 2,054,300 -
Other assets 30,200 192,900
----------------------------------------
Total assets $ 13,135,700 $ 7,293,700
========================================
Liabilities and shareholders' equity
Current liabilities
Accounts payable $ 271,400 $ 283,300
Accrued expenses 2,015,000 1,111,200
Income taxes payable 57,000 -
Deferred income taxes payable 32,600 29,000
Deferred revenue 760,100 -
----------------------------------------
Total current liabilities 3,136,100 1,423,500
Deferred income taxes payable 920,900 559,400
Shareholders' equity
Preferred Stock $1 par value, 350,000 shares
authorized, issued and outstanding - none - -
Class A Common Stock, $0.01 par value, 5,000,000 shares
authorized, 1,596,118 and 1,605,897 shares issued and outstanding 16,000 12,800
Class B Common Stock, $0.01 par value, 10,000,000 shares
authorized, 4,014,099 and 3,674,505 shares issued and outstanding 40,100 29,400
Additional paid in capital 6,999,300 5,106,900
Retained earnings 2,005,700 167,000
Cumulative foreign currency translation adjustment 17,600 (5,300)
----------------------------------------
Total shareholders' equity 9,078,700 5,310,800
----------------------------------------
Total liabilities and shareholders' equity $ 13,135,700 $ 7,293,700
========================================
See accompanying notes.
Note: The Condensed Consolidated Balance Sheet at December 31, 1998 has been derived from the audited
financial statements as of that date.
</TABLE>
1
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Tremont Advisers, Inc.
Condensed Consolidated Statements of Income
(Unaudited)
Nine months ended Three months ended
September 30 September 30
1999 1998 1999 1998
-----------------------------------------------------------
Revenues
Consulting fees $ 10,940,500 $ 6,982,900 $ 3,942,800 $ 2,646,800
Performance fees 190,800 324,400 60,000 7,800
Commissions 296,400 316,200 49,300 98,000
-----------------------------------------------------------
Total revenues 11,427,700 7,623,500 4,052,100 2,752,600
Expenses
Compensation 4,576,500 2,784,100 1,830,800 990,800
General and administrative 2,746,000 1,895,100 1,039,200 739,500
Consulting 1,160,800 993,800 374,900 332,800
Depreciation 191,800 133,600 77,700 51,100
Amortization of intangibles 609,800 - 202,600 -
-----------------------------------------------------------
Total expenses 9,284,900 5,806,600 3,525,200 2,114,200
Equity (loss) in earnings of limited partnerships 327,600 111,600 102,000 (39,900)
Equity (loss) in earnings of other investments 361,900 (201,600) 365,000 (66,400)
Other income, net 50,700 46,500 27,200 30,800
-----------------------------------------------------------
Income before income taxes 2,883,000 1,773,400 1,021,100 562,900
Provision for income taxes 1,044,300 655,600 388,900 246,400
-----------------------------------------------------------
Net income $ 1,838,700 $ 1,117,800 $ 632,200 $ 316,500
===========================================================
Net income per common share $0.33 $0.22 $ 0.11 $ 0.06
===========================================================
Net income per common share - assuming dilution $0.31 $0.21 $ 0.11 $ 0.06
===========================================================
</TABLE>
2
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Tremont Advisers, Inc.
Consolidated Statement of Shareholders' Equity
Nine months ended September 30, 1999
(Unaudited)
Common Stock Additional Total
Par Value Paid In Retained Shareholders'
Class A Class B Capital Earnings Equity
------------------------------------------------------------------
Balance at
December 31, 1998 $ 12,800 $ 29,400 $5,106,900 $ 167,000 $5,310,800
Comprehensive Income:
Net Income - - - 1,838,700 1,838,700
Foreign currency translation
adjustment - - - - 22,900
------------------------------------------------------------------
Comprehensive Income 1,861,600
Issuance of Class B
Common Stock - MGL
purchase (47,619 shares) - 500 356,700 - 357,200
Issuance of Class B
Common Stock - TASS
Acquisition (190,477 shares) - 1,900 1,426,700 - 1,428,600
Issuance of Class B
Common Stock - exercise
of Director Options (21,250 shares) - 200 74,800 - 75,000
Issuance of Class B
Common Stock - exercise
of Employee Options (5,000 shares) - - 18,750 - 18,750
Income tax benefits
Related to exercise of
Stock Options - - 27,350 - 27,350
Conversion of Class A Common Stock
to Class B Common Stock (7,802 shares) - - - - -
5 for 4 Stock Split 3,200 8,100 (11,300) - -
(319,202 Class A Shares)
(801,349 Class B Shares)
Cash-in-lieu of fractional shares - - (600) - (600)
------------------------------------------------------------------
Balance at September 30, 1999 $ 16,000 $ 40,100 $6,999,300 $2,005,700 $9,078,700
==================================================================
</TABLE>
3
<PAGE>
<TABLE>
<S> <C> <C>
Tremont Advisers, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine months ended
September 30
1999 1998
------------------------------------
Operating Activities
Net income $ 1,838,700 $ 1,117,800
Adjustments to reconcile net income
to cash provided by operating activities:
Depreciation 191,800 133,600
Amortization of intangibles 609,800 -
Equity in earnings of limited partnerships (327,600) (111,600)
Loss from other investments 40,200 213,700
Deferred income taxes payable 365,100 176,600
Foreign currency translation adjustment 22,900 (5,300)
Minority Interest - (17,500)
Changes in operating assets and liabilities:
Accounts receivable, net (646,800) (657,100)
Receivable from officer - 200,000
Accounts payable (51,100) 4,500
Accrued expenses 13,700 216,400
Deferred revenue (33,500) -
Income taxes, net 139,800 (102,600)
Other assets 162,700 (1,100)
Prepaid expenses and other 234,800 19,600
------------------------------------
Net cash provided by operating activities 2,560,500 1,187,000
Investing activities
Purchase of fixed assets (413,600) (103,100)
Investments in limited partnerships (918,000) (710,000)
Cash acquired from acquisition of TASS 102,000 -
Investments in other investments (939,000) (254,200)
------------------------------------
Net cash used by investing activities (2,168,600) (1,067,300)
Financing activities
Proceeds from issuance of Class B Common Stock 357,200 -
Exercise of Class B Common Stock options 93,750 238,100
Tax benefit from exercise of stock options 27,350 126,100
Other (600) 17,500
------------------------------------
Net cash provided by financing activities 477,700 381,700
Net increase in cash and cash equivalents 869,600 501,400
Cash and cash equivalents at beginning of period 1,893,800 820,800
------------------------------------
Cash and cash equivalents at end of period $ 2,763,400 $ 1,322,200
====================================
</TABLE>
4
<PAGE>
<TABLE>
<S> <C> <C>
Tremont Advisers, Inc.
Condensed Consolidated Statements of Cash Flows (con't)
(Unaudited)
Supplemental disclosures of cash flow information:
Nine months ended
September 30
1999 1998
---------------------------------
Financing activities
Noncash transaction related to the
issuance of Class B Common Stock in
the TASS acquisition $ 1,428,600 $ -
Investing activities
Liabilities assumed in the TASS acquisition
Deferred revenue 793,600 -
Accounts payable 39,200 -
Accrued expenses 411,500 -
Short -term debt 236,800 -
Assets acquired in the TASS acquisition -
Fixed assets, net 81,100 -
Accounts receivable 184,500 -
Prepaid and other 47,000 -
Customer contracts 555,500 -
Goodwill 2,181,400 -
Accrued acquisition costs 241,800 -
Gain on receipt of stock of unconsolidated affiliate (402,100) -
Expense charge relating to distribution of stock of
unconsolidated affiliate 402,100 -
See accompanying notes.
</TABLE>
5
<PAGE>
Tremont Advisers, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE A - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310(b)
of Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) necessary for a fair presentation have been
included. Operating results for the nine and three months ended September 30,
1999 are not necessarily indicative of the results that may be expected for the
year ending December 31, 1999. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-KSB for the fiscal year ended December 31,
1998.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from such estimates.
Principles of Consolidation - The condensed consolidated financial statements
include the accounts of the Company and its majority owned subsidiaries.
Intangibles - Goodwill represents the excess of purchase price and related costs
over the value assigned to the net tangible assets of the business acquired.
Goodwill is amortized on a straight-line basis over ten years. Other intangible
assets, including customer contracts, which is included in prepaid expenses and
other assets, are amortized over their economic lives, generally one year.
Earnings per Share - Basic earnings per share is computed based on the weighted
average number of common shares outstanding. Diluted earnings per share reflects
the increase in the weighted average common shares outstanding that would result
from the assumed exercise of outstanding stock options, calculated using the
treasury stock method. All per share and share outstanding data have been
restated to reflect the impact of a five-for-four stock split (see Note G).
Minority Interest - The Company presently owns 65% of Tremont Investment
Management, Inc. ("TIMI").
Concentrations of Credit Risk - The Company's accounts receivable are not
concentrated in any specific geographic region, but are concentrated in the
investment industry. The Company's exposure to credit risk associated with
nonpayment by customers is affected by conditions within the investment
industry.
Income Taxes - The provisions for income taxes include federal and state taxes
currently payable after reduction for undistributed foreign subsidiaries
considered permanently reinvested and those deferred because of temporary
differences between the financial statement and the tax basis of assets and
liabilities. A valuation allowance is recorded, based on available evidence when
it is more likely than not that some portion or all of the deferred tax assets
will not be realized.
6
<PAGE>
NOTE B - Investments in Limited Partnerships
At September 30, 1999 and December 31, 1998, Tremont Partners, Inc.'s ("TPI")
investment in American Masters Broad Market Fund, L.P., was $919,600 and
$807,200 representing .35% and .43%, respectively, of the fund's net assets.
Summarized financial information of such fund is as follows:
<TABLE>
<S> <C> <C>
September 30, 1999 December 31, 1998
-----------------------------------------------------
(Unaudited) (Audited)
Total assets $ 262,635,000 $ 198,415,000
Total liabilities 535,500 10,725,000
Nine months ended
September 30
1999 1998
-----------------------------------------------------
(Unaudited)
Net investment income $ 3,452,800 $ 2,414,600
Net realized and unrealized
gain on investments 25,088,900 16,544,300
-----------------------------------------------------
Net income $ 28,541,700 $ 18,958,900
=====================================================
</TABLE>
At September 30, 1999, investments in Meridian Horizon Fund, L.P., GamTree,
L.P., American Masters Broad Market Prime Fund, L.P., and American Masters
Market Neutral Fund, L.P. were $437,000, $192,400, $527,500 and $656,100,
respectively. In addition, TIMI launched The Tremont Masters Fund effective
February 1, 1999 and invested $500,000 therein. At September 30, 1999, TIMI's
investment in The Tremont Masters Fund was $547,700. At December 31, 1998,
investments in Meridian Horizon Fund, L.P., Gamtree, L.P., American Masters
Broad Market Prime Fund, L.P. and American Masters Market Neutral Fund, L.P.
were $378,600, $177,600, $56,700 and $614,600 respectively. The aggregated
summarized unaudited financial information of these entities and The Tremont
Masters Fund is as follows:
7
<PAGE>
<TABLE>
<S> <C> <C>
September 30, 1999 December 31, 1998
----------------------- ----------------------------
(Unaudited) (Audited)
Total assets $ 633,347,300 $ 483,231,000
Total liabilities 145,708,700 86,305,000
Nine months ended
September
1999 1998
--------------------------------------------------------
(Unaudited)
Net investment loss $ (3,345,800) $ (3,046,300)
Net realized and unrealized
gain on investments 66,423,500 31,616,400
----------------------- ----------------------------
Net income $ 63,077,700 $ 28,570,100
======================= ============================
</TABLE>
NOTE C - Other Investments
At December 31, 1998, TBL had a 40% interest (cost-$6,000) in an offshore
non-public venture that developed an independent electronic commerce vehicle,
HedgeWorld Ltd., to provide certain online services to the hedge fund community.
At December 31, 1998, TBL's investment was written down to zero to account for
its proportionate share of operating losses. At June 30, 1999, TBL had advances
to this entity that aggregated $117,000. At December 31, 1998, TBL also had an
investment of $19,000 in Fitx Capital Limited (formerly Tremont Capital
Limited), a Bermuda corporation formed to provide various investment services to
offshore clients. During the third quarter of 1999, in a series of transactions,
TBL transferred its interests in these entities, having an aggregate value of
$133,800, to Fitx Group Limited ("Fitx"), an exempt Bermuda Company in
consideration of 30% of its outstanding stock. Fitx was formed on June 23, 1999,
to deliver e-commerce portal solutions to niche markets thereby enabling the
exchange of information services and capital needed between money managers,
service providers and customers primarily within the hedge fund industry. In
September 1999 TBL invested an additional $209,100 in Fitx. The Company also
recognized a gain of $402,100 due to the distribution of 120,500 shares of Fitx
Group Limited stock to certain employees and directors of the Company. After
recording an estimated loss of $50,000, TBL's investment in Fitx was $292,900
(cost $342,900) at September 30, 1999.
American Masters LDC (formerly called Tremont Broad Market Fund, LDC) ("AMLDC")
is a Cayman Island limited duration corporation organized for the purpose of
achieving capital growth through hedged investments. At September 30, 1999,
TBL's investment in AMLDC was $617,900 (cost - $600,000). TBL had no investment
in this entity at December 31, 1998.
8
<PAGE>
NOTE D - Accrued Expenses
Accrued expenses consist of the following:
<TABLE>
<S> <C> <C>
September 30, 1999 December 31, 1998
------------------------------------------------------
(Unaudited) (Audited)
Professional and consulting fees $ 783,900 $ 579,300
Compensation 757,500 300,000
Short-term notes payable 236,900 39,800
Employee benefit plan 96,800 110,000
Printing and graphics 29,700 37,500
Other 110,200 44,600
------------------------------------------------------
$ 2,015,000 $ 1,111,200
======================================================
</TABLE>
NOTE E - Stock Options
During the nine months ended September 30, 1999, certain directors and an
executive officer exercised options to purchase an aggregate of 25,000 and 6,250
shares, respectively of the Company's Class B Common Stock at $3.00 per share. A
summary of the Company's stock option activity for the nine months ended
September 30, 1999 is as follows:
Outstanding-beginning of period: 378,207
Granted 344,316
Exercised (31,250)
Lapsed (1,250)
------------------
Outstanding-end of period 690,023
==================
Exercisable at end of period 514,676
==================
Nicola Meaden, Chief Executive Officer of TASS Investment Research Limited
("TASS"), was granted two types of options (the "Group I Options" and the "Group
II Options") to purchase 184,309 and 31,055 shares, respectively, of Class B
Common Stock. Additionally, Laurence Huntington Taylor II, a principal of TASS,
was granted 97,509 Group I Options and 16,443 Group II Options. The Group I
Options and Group II Options are exercisable at $6.40 per share and $12.00 per
share, respectively. Sixty percent of the Group I Options became exercisable
effective March 11, 1999; the balance will become exercisable on March 11, 2000.
One-third of the Group II Options vested on March 11, 1999, the balance vest
one-third each on March 11, 2000 and 2001. Both the Group I Options and the
Group II Options become immediately exercisable upon a change in control of the
Company. These options may not be transferred without the prior written consent
of the Company. In the event that either employee seeks to sell or transfer any
shares of the Company's stock other than to a family member, the Company has the
right of first refusal to purchase the shares on the same terms and conditions
as the third party offer.
9
<PAGE>
During March 1999, options to purchase 15,000 shares of Class B Common Stock at
$12.00 per share were granted to certain other employees of TASS. The options
vest and became or will become exercisable on the following schedule: 33.3% on
the date of the agreement, 33.3% on the first anniversary of the agreement and
33.4% on the second anniversary of the agreement.
NOTE F - Income Taxes
The income tax provision gives effect to permanent differences between financial
and taxable income, resulting in a higher effective tax rate than the statutory
income tax rate. The reconciliation of income tax attributable to income before
income taxes computed at the U.S. federal statutory tax rates to income tax
expense is:
<TABLE>
<S> <C> <C> <C> <C>
Nine months ended
September 30
1999 1998
------------------------------------------------------------
Amount Percent Amount Percent
------------------------------------------------------------
Statutory federal income tax rate $ 980,200 34.0 $ 603,000 34.0
State taxes, net of federal benefit 114,300 4.0 82,700 4.7
Permanently reinvested foreign income (204,000) (7.1) (68,000) (3.8)
Change in valuation allowance relating
to losses of foreign subsidiaries 215,500 7.5 14,800 0.8
Other (61,700) (2.1) 23,100 1.3
------------------------------------------------------------
$ 1,044,300 36.3 $ 655,600 37.0
============================================================
Three months ended
September 30
1999 1998
------------------------------------------------------------
Amount Percent Amount Percent
------------------------------------------------------------
Statutory federal income tax rate $ 347,200 34.0 $ 191,400 34.0
State taxes, net of federal benefit 45,900 4.5 25,200 4.5
Permanently reinvested foreign income (68,000) (6.7) - 0.0
Change in valuation allowance relating
to losses of foreign subsidiaries 84,200 8.2 14,800 2.6
Other (20,400) (2.1) 15,000 2.7
------------------------------------------------------------
$ 388,900 37.9 $ 246,400 43.8
============================================================
</TABLE>
Deferred income taxes were not provided on certain undistributed foreign
earnings of TBL (cumulatively $1,000,000 at September 30, 1999) because such
undistributed earnings are expected to be reinvested indefinitely overseas. If
these amounts were not considered permanently reinvested, additional deferred
taxes of approximately $340,000 would have been provided.
10
<PAGE>
NOTE G - Earnings Per Share
On July 15, 1999, the Board of Directors approved a five-for-four stock split
(with no change in par value) of both the Company's Class A Common Stock and
Class B Common Stock. The split was payable to stockholders of record on July
30, 1999. All per share and shares outstanding data have been restated to
reflect the impact of the split.
<TABLE>
<S> <C> <C> <C> <C>
The following table sets forth the computation of basic and diluted earnings per share:
Nine months ended Three months ended
September 30 September 30
1999 1998 1999 1998
----------------------------- -------------------------------
Numerator:
Net Income- numerator
for basic and dilutive earnings
per share (income available
to shareholders) $ 1,838,700 $ 1,117,800 $632,200 $ 316,500
Denominator:
Denominator for basic earnings
per share - weighted
average shares 5,521,330 5,139,856 5,606,080 5,199,968
Effect of dilutive securities:
Stock options 322,735 169,259 356,130 248,785
------------- -------------- -------------- --------------
Denominator for diluted
earnings per share - adjusted
weighted-average shares
and assumed conversions 5,844,065 5,309,115 5,962,210 5,448,753
============= ============== ============== ==============
Basic earnings per share $ 0.33 $ 0.22 $ 0.11 $ 0.06
============= ============== ============== ==============
Diluted earnings per share $ 0.31 $ 0.21 $ 0.11 $ 0.06
============= ============== ============== ==============
</TABLE>
NOTE H - Commitments
TASS entered into an office lease guaranteed by Tremont Advisers, Inc. in
September 1999. It expires in June 2005 but TASS may renew the lease for two
additional five-year periods. The monthly rent is approximately $14,000.
11
<PAGE>
NOTE I - Contingencies
The Company is being sued by a former employee for alleged breach of contract
and defamation. In a decision dated September 21, 1999, the District Court held
that the claim for defamation must be arbitrated under NASD rules. Plaintiff has
not commenced arbitration proceedings. By Notice of Motion dated October 18,
1999, the Company moved to dismiss the complaint in its entirety. The Company
believes that the suit is without merit; however, should the plaintiff prevail,
the Company believes that it is likely that the damages will not be material to
the Company's consolidated financial condition or results of operations.
NOTE J - Segment and Geographic Data
The Company operates principally in a single segment. It provides various
alternative investment services using a single and multi-manager investment
approach to placing investment funds with independent asset managers. This
segment consists of one operating unit that provides services to two types of
clients: the Company's proprietary investment funds sponsored by certain
subsidiaries and to non-affiliated investment fund sponsors, institutional
investors and high net-worth individual investors.
For the proprietary investment funds (typically structured as limited
partnerships), the Company serves as the general or co-general partner
participating in organizing the funds, selecting the asset classes for
investment and providing the day-to-day management and administration for the
operation of the funds, but does not make direct investment decisions.
For the non-affiliated investment fund sponsors, institutional investors and
high net-worth investors, the Company provides the following services:
consulting regarding the organization of funds, establishment of investment
objectives and guidelines, definition of suitable asset classes, negotiation of
fees with asset managers and other professionals, monitoring the investment
performance information data services and providing periodic reports.
The following table provides a summary of the types of fees earned with respect
to each of the two primary client types discussed above.
12
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Nine months ended Three months ended
September 30 September 30
1999 1998 1999 1998
------------------------------- ----------------------------
(Unaudited) (Unaudited)
Revenues
Proprietary investment funds
Asset-based fees $ 5,773,000 $ 3,412,800 $ 2,108,400 $ 1,394,900
-------------- --------------- -------------- -------------
Total revenue from proprietary
investment funds 5,773,000 3,412,800 2,108,400 1,394,900
Consulting clients
Asset-based fees 2,935,000 2,706,300 1,055,700 940,400
Performance-based fees 190,800 324,400 60,000 7,800
Annual retainer and special project fees 911,700 711,300 287,500 278,200
Administration fees 274,000 152,500 92,500 33,300
Information data services 1,046,800 - 398,700 -
-------------- --------------- -------------- -------------
5,358,300 3,894,500 1,894,400 1,259,700
Other revenue (1) 296,400 316,200 49,300 98,000
-------------- --------------- -------------- -------------
Total revenues $ 11,427,700 $7,623,500 $ 4,052,100 $ 2,752,600
============== =============== ============== =============
(1) Other revenue consists of commissions earned through TSI (the Company's wholly-owned introducing
broker/dealer).
</TABLE>
13
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Revenues (a) Revenues (a)
Nine months ended Three months ended
September 30 September 30
1999 1998 1999 1998
-------------------------------------------------------------------
(Unaudited) (Unaudited)
United States $ 6,946,000 $5,091,200 $ 2,449,800 $ 1,850,400
Bermuda 3,434,900 2,532,300 1,203,600 902,200
Canada - - - -
United Kingdom 1,046,800 - 398,700 -
------------------- ----------------------------- ---------------
Total Revenues $11,427,700 $7,623,500 $ 4,052,100 $ 2,752,600
=================== ============================= ===============
(a) Revenues attributed to countries based on the location of the subsidiary performing the services.
Substantially all long-lived assets are located in the United States.
</TABLE>
During the periods presented in the consolidated statements of income, two
clients accounted for a significant percentage of the Company's consolidated
revenues. For the nine and three months ended September 30, 1999 and 1998,
American Masters Broad Market Fund, L.P. accounted for approximately 13.6%
versus 13.7% and 14.8% versus 14.6%, respectively, of consolidated revenues. In
addition, for the nine and three months ended September 30, 1999 and 1998,
American Masters Broad Market Prime Fund, L.P. accounted for approximately 17.6%
versus 18.0% and 15.4% versus 18.4%, respectively, of consolidated revenues.
14
<PAGE>
Item 2. Management's Discussion and Analysis
The Company's revenues are derived from consulting and specialized investment
services provided to institutional and other clients, as well as management fees
from certain funds under management. Consulting fees are generally a function of
the amount of assets under management and the percentage fees charged to
clients. Management fees are based on a percentage of the assets of the managed
fund and are usually paid on a monthly or quarterly basis. The Company also
receives asset-based fees for investments placed by its subsidiary, Tremont
(Bermuda) Limited ("TBL"), in certain offshore mutual funds. The Company
provides other consulting services generally on a fixed fee basis, whether as
annual retainer fees or single project fees. With the purchase of TASS
Investment Research Limited ("TASS") on March 11, 1999, the Company also has
revenues from the sale of electronic database information. The Company's
principal operating expenses consist of its costs of personnel and independent
consultants. It is management's intention to continue the Company's focus on
launching new products and to take advantage of its growing world-wide
relationships to expand its operations.
Consulting fees earned for the nine months ended September 30, 1999 increased by
$3,957,600, or 56.7%, from $6,982,900 for the nine months ended September 30,
1998 to $10,940,500 for the nine months ended September 30, 1999. At the
Company's principal domestic subsidiary, Tremont Partners, Inc. ("TPI"),
consulting fees increased from $4,665,600 for the nine months ended September
30, 1998 to $6,481,300 for the nine months ended September 30, 1999. This
increase was primarily due to increases in revenues resulting from increased
assets under management in the following related entities: American Masters
Broad Market Prime Fund, L.P. ($840,900 increase), American Masters Broad Market
Fund, L.P. ($426,700 increase) and the DaimlerChrysler Minority Equity Trust
($269,100 increase). At TBL, consulting fees increased from $2,245,700 for the
nine months ended September 30, 1998 to $3,304,100 for the nine months ended
September 30, 1999. This increase was primarily due to an increase in revenues
as a result of increased assets under management from Kingate Global Fund Class
B Shares ($883,500 increase) and within the investment vehicles of other
clients. Additionally, $1,046,800 of the increase was from TASS's sale of
electronic database information. The placement agent fees received by Tremont
Securities, Inc. ("TSI"), the Company's wholly-owned broker-dealer subsidiary,
increased from $71,500 for the nine months ended September 30, 1998 to $97,300
for the nine months ended September 30, 1999. The remaining increase in
consulting fees was from Tremont Futures, Inc. ($10,900 increase) which was
formed in July, 1998.
Consulting fees for the Company for the three months ended September 30, 1999
increased by $1,296,000, or approximately 49.0 %, from $2,646,800 for the three
months ended September 30, 1998 to $3,942,800 for the three months ended
September 30, 1999. The increase was due to increases in the assets managed,
increases in the value of the assets within the respective investment vehicles
and a larger client base. TPI's consulting fees increased from $1,733,000 for
the three months ended September 30, 1998 to approximately $2,304,400 for the
three months ended September 30, 1999. The increase is primarily due to
increases in revenues from American Masters Broad Market Prime Fund, L.P.
($233,600 increase), American Masters Broad Market Fund, L.P. ($153,700
increase) and the DaimlerChrysler Minority Equity Trust ($90,400 increase).
TBL's consulting fees increased from $894,500 for the three months ended
September 30, 1998 to $1,203,500 for the three months ended September 30, 1999.
The increase is attributable to increased revenues from Kingate Global Fund
Class B Shares ($235,200 increase), and American Masters LDC (formerly called
Tremont Broad Market Fund, LDC) ($98,500 increase), offset by a decrease in
revenues from Starvest Funds, Ltd. ($44,900 decrease). Additionally, $398,700 of
the increase was from TASS' sale of electronic database information, as well as
an increase in placement agent fees received by TSI ($11,700 increase) for the
three months ended September 30, 1999. The remaining increase in consulting fees
is from Tremont Futures, Inc. ($5,200 increase).
15
<PAGE>
Performance fees for the nine months ended September 30, 1999 decreased by
$133,600, or 41.2%, as compared to the nine months ended September 30, 1998
primarily because certain clients' underlying investment vehicles did not obtain
and/or outperform certain pre-established benchmarks. For example, a client of
TBL's paid an incentive fee of $242,000 in April 1998; such incentive fee did
not recur for the year ended December 31, 1998. Performance fees increased by
$52,200 from $7,800 for the three months ended September 30, 1998 to $60,000 for
the three months ended September 30, 1999, primarily as a result of certain
clients' underlying investment vehicles outperforming their pre-established
benchmarks.
Commissions received by TSI decreased by $19,800, or 6.3%, and $48,700, or
50.0%, respectively, for the nine and three months ended September 30, 1999
compared to the similar periods in 1998, primarily as a result of the commission
flow being more extensive in 1998 than in 1999. In addition, commissions
decreased in 1999 as a result of a different mix of money managers executing
trades through TSI.
Management expects that during the remainder of 1999 that the Company will
continue to develop relationships with additional potential clients and will
utilize these relationships to create diversified ways to package and distribute
its proprietary products. For instance, the Company has entered into a joint
venture agreement with Credit Suisse First Boston to form a series of benchmarks
for the hedge fund industry and to start a line of investable indexed products.
The joint venture is called Credit Suisse First Boston Tremont Index LLC. The
CSFB Tremont Hedge Fund Index, a capital-weighted master index, is anticipated
to be launched during the fourth quarter of 1999, followed by a series of
capital weighted sub-indicies based on various investment strategies and styles.
It is also anticipated that the joint venture will launch investable index
products during 2000. In addition, management expects performance fee revenue to
increase during periods of positive market conditions, but management cannot
predict with any accuracy whether such income from performance fees will
continue in the future due to changing market conditions and outside factors.
Compensation expense increased for the nine and three months ended September 30,
1999 by $1,792,400, or 64.4%, and $840,000, or 84.8%, respectively as compared
to the nine and three months ended September 30, 1998. These increases result
from the Company's acquisition of TASS on March 11, 1999, salary increases for
certain employees that became effective January 1, 1999, the increased health
care costs arising from the increased number of employees from 31 at September
30, 1998 to 51 at September 30, 1999, increased bonus accruals of on average
$45,000 per month; and a charge of $402,100 in August 1999 relating to the
distribution of 120,500 shares of Fitx Group Limited stock to certain employees
and directors of the Company.
General and administrative expenses consist primarily of rent,
telecommunications, travel and entertainment, professional fees and other
related expenses. General and administrative expenses for the nine and three
months ended September 30, 1999 increased by $850,900, or 44.9%, and $299,700,
or 40.5%, respectively as compared to the nine and three months ended September
30, 1998. This increase was primarily due to the acquisition of TASS, increased
professional fees associated with the Payroll Express Company bankruptcy
investigation and costs related to the Company's continued expansion, including
the expansion of its office space in September 1998 and the opening of a
Canadian subsidiary and office in July, 1998.
Consulting expenses increased $167,000, or 16.8%, and $42,100, or 12.6%,
respectively for the nine and three months ended September 30, 1999 as compared
to the nine and three months ended September 30, 1998, primarily as a result of
the increase in revenues from the clients that participate in revenue sharing
arrangements. For example, TSI has a clearing arrangement with Bear Stearns,
Inc. whereby 25% of the commissions are shared with Bear Stearns, Inc. Also, TPI
and TBL have revenue sharing arrangements with various clients whereby earned
management fees are split with third party solicitors.
16
<PAGE>
Amortization of intangibles increased approximately $609,800 and $202,600 for
the nine and three months ended September 30, 1999 as compared to the nine and
three months ended September 30, 1998, because of the TASS acquisition on March
11, 1999.
Equity earnings from limited partnerships increased $216,000, or 193.5%, and
$141,900, or 355.6%, respectively for the nine and three months ended September
30, 1999 as compared to the nine and three months ended September 30, 1998, as a
result of increased performance and a greater asset base due to increased
investments by the Company. During 1999, the Company invested $500,000 into the
Tremont Masters Fund when it was launched on February 1, 1999 by the Company's
Canadian subsidiary, Tremont Investment Management, Inc. In addition, the
Company invested $417,900 through TPI, into the American Masters Broad Market
Prime Fund, L.P.
Equity earnings from other investments increased $563,500, or 279.6%, and
$431,400, or 649.7%, for the nine and three months ended September 30, 1999 as
compared to the nine and three months ended September 30, 1998. This was
primarily as a result of increased performance and a greater asset base due to
increased investments by the Company. During 1999, TBL invested $600,000 in
American Masters LDC, (formerly called Tremont Broad Market Fund, LDC), a Cayman
Island corporation organized for the purpose of achieving capital growth through
hedged investments. TBL also invested $209,100 in Fitx Group Limited, a Bermuda
Company formed on June 23, 1999. The Company also recognized a gain of $402,100
due to the distribution of 120,500 shares of Fitx Group Limited stock to certain
employees and directors of the Company. In addition, the Company owned
twenty-five percent of a joint venture operation which suffered a $200,000 loss
in 1998. The Company closed this joint venture effective December 31, 1998.
Profitability is dependent on the Company's ability to maintain existing client
relationships, several of which currently account for a significant portion of
the Company's revenues, to increase assets under management for its clients, and
to market its services to new accounts.
On March 11, 1999, the Company acquired all of the outstanding ordinary (common)
shares of TASS, a London, England based company specializing in the sale of
electronic database information. The Company issued 238,096 shares (190,477
shares pre-split) of its Class B Common Stock at $6.00 per share in exchange for
the TASS common shares, of which 80,212 shares (64,170 shares pre-split) were
received by Nicola Meaden, the founder and chief executive officer of TASS. The
transaction was accounted for using the purchase method of accounting.
Accordingly, the excess of cost over the fair market value of net assets
acquired (approximately $2.2 million) is being amortized on a straight line
basis over a ten year period. The operations of TASS have been included in the
consolidated statement of operations from the date of closing. Revenues included
for the period from acquisition through September 30, 1999 were $1,046,800 and
expenses totaled $1,346,000, resulting in a loss before taxes of $299,200. In
connection with the acquisition, employment agreements were entered into with
two key employees of TASS, including Ms. Meaden, who were also granted options
to purchase shares of the Company's Class B Common Stock and certain
registration rights.
Cash provided by operations increased by $1,373,500 from $1,187,000 for the nine
months ended September 30, 1998 to $2,560,500 for the nine months ended
September 30, 1999. This increase was primarily due to profitable operations,
decreases in prepaid expenses and other assets, and increased taxes payable, and
partially offset by increases in accounts receivable and decreases in accounts
payable, net of liabilities acquired in the TASS acquisition. These positive
changes in cash flow, as well as the issuance's of Common Stock ($477,700), were
substantially offset by investing activities of $2,168,600, resulting in cash
and cash equivalents increasing by $869,600 for the nine months ended September
30, 1999.
17
<PAGE>
On July 15, 1999, the Company's Board of Directors approved a five-for-four
stock split (with no change in par value) of both its outstanding Class A Common
Stock and its Class B Common Stock, which was paid to stockholders of record on
July 30, 1999. All per share and shares outstanding data have been restated to
reflect the impact of the split.
On July 1, 1999, the Company exercised options to purchase 80,000 shares of a
nonpublic registered investment advisor specializing in 401(k) investment
allocation advice over the internet. The options were granted at $1.00 per
share, as adjusted for a stock split. At September 30, 1999, the investment was
valued at $80,000 by the Company and is included in other investments.
At September 30, 1999, the Company owned 30,000 shares of common stock of a
non-public financial services company. The shares were received by the Company
as a result of an employee's serving as a board member of such company. At
September 30, 1999, the shares of common stock were valued at zero by the
Company.
The Company believes it has adequate capital resources and working capital to
bring to market those products currently in the developmental stage, and that
the revenue stream from them and existing products, will be sufficient to
support future growth. The Company has no material short term or long term debt
obligations.
TASS entered into an office lease guaranteed by Tremont Advisers, Inc. in
September 1999. It expires in June 2005 but the Company may renew the lease for
two additional five-year periods. The monthly rent is approximately $14,000.
The Company is being sued by a former employee for alleged breach of contract
and defamation. In a decision dated September 21, 1999, the District Court held
that the claim for defamation must be arbitrated under NASD rules. Plaintiff has
not commenced arbitration proceedings. By Notice of Motion dated October 18,
1999, the Company moved to dismiss the complaint in its entirety. The Company
believes that the suit is without merit; however, should the plaintiff prevail,
the Company believes that it is likely that the damages will not be material to
the Company's consolidated financial condition or results of operations.
The Year 2000 Issue is a result of computer programs being written using two
digits rather than four to determine the applicable year. Any computer programs
that have time sensitive software or embedded chips may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing significant disruptions of operations,
including, among other things, a temporary inability to process transactions or
engage in similar normal business activities.
Based on recent assessments, the Company determined that it will be required to
modify or replace certain portions of its software and certain hardware so that
those systems will properly utilize dates beyond December 31, 1999. The Company
presently believes that with modifications or replacements of certain existing
software and certain hardware, the Year 2000 Issue can be mitigated. However, if
such modifications and replacements are not made, or are not completed timely,
the Year 2000 Issue could have a material impact on the operations of the
Company.
The Company's plan to resolve the Year 2000 Issue involves the following four
phases: assessment, remediation, testing, and implementation. To date, the
Company has fully completed its assessment of all systems that could be
significantly affected by the Year 2000. The completed assessment indicated that
certain of the Company's significant information technology systems could be
affected, particularly the network computing platform's operating system
software, certain spreadsheet applications and the Company's proprietary Hedge
Fund Research database software.
18
<PAGE>
To date, the Company has completed approximately 90% of the remediation phase
for its information technology and expects to complete software reprogramming
and replacement no later than December 15, 1999. Once software is reprogrammed
or replaced for a system, the Company begins testing and implementation. These
phases run concurrently for different systems. To date, the Company has
completed approximately 90% of its testing and has implemented more than 90% of
its remediated systems. Completion of the testing phase for all significant
systems is expected to be completed by December 15, 1999.
In the event that the Company does not complete any additional phases of the
remediation process, the Company would be able to provide the minimum necessary
level of alternative investment research information, which is critical to its
consulting services, and it would be able to process the relevant accounting
transactions manually.
The Company has queried its important suppliers and subcontractors that do not
share information systems with the Company (external agents) about Year 2000
compliance and continues to monitor their compliance. To date, the Company is
not aware of any external agent Year 2000 Issue that would materially impact the
Company's results of operations, liquidity, or capital resources. However, the
Company has no means of ensuring that external agents will be Year 2000 ready.
The inability of external agents to complete their Year 2000 resolution process
in a timely fashion could have a material impact on the Company. The effect of
non-compliance by external agents is not determinable.
In addition, disruptions in the economy generally resulting from Year 2000
Issues could also materially adversely affect the Company. In particular,
unexpected volatilities within the investment industry could adversely impact
the Company's revenues, as a significant portion of the Company's revenues is
based solely upon the net asset value of funds under management. The amount of
potential lost revenue cannot be reasonably estimated at this time.
The Company is utilizing both internal and external resources to reprogram,
replace, test and implement the software and operating equipment for Year 2000
modifications. The total cost of the Year 2000 project is estimated at $550,000
and is being funded through operating cash flows. To date, the Company has
incurred approximately $315,000, which is capitalized for the new systems and
equipment. Of the total remaining project costs, approximately $100,000 will be
attributable to the purchase of new software and hardware, which will also be
capitalized. The remaining $135,000 relates to consulting fees which are being
expensed as incurred.
Management believes it has an effective program in place to resolve the Year
2000 issue in a timely manner. As noted above, the Company has not completed all
necessary phases of its Year 2000 program, but expects to be completed in the
fourth quarter of 1999. The Company has contingency plans for certain critical
applications and is working on such plans for others. These contingency plans
involve, among other things, manual workarounds and adjusting staffing
strategies.
Certain statements in this Management's Discussion and Analysis constitute
"forward looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward looking statements involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance, or achievements of the Company to be materially different
from any future results, performance, or achievements expressed or implied by
such forward looking statements. These forward looking statements were based on
various factors and were derived utilizing numerous important assumptions and
other factors that could cause actual results to differ materially from those in
the forward looking statements, including, but not limited to: uncertainty as to
the Company's future profitability and the Company's ability to develop and
implement operational and financial systems to manage rapidly growing
operations, competition in the Company's existing and potential future lines of
business, and other factors. Other factors and assumptions not identified above
19
<PAGE>
were also involved in the derivation of these forward looking statements, and
the failure of such other assumptions to be realized, as well as other factors,
may also cause actual results to differ materially from those projected. The
Company assumes no obligation to update these forward looking statements to
reflect actual results, changes in assumptions or changes in other factors
affecting such forward looking statements.
20
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Payroll Express. In 1991, the Company engaged KPM, Inc. d/b/a/ Payroll Express
("Payroll Express") to perform certain data processing services, including
preparing Forms 941 and filing them with the Internal Revenue Service ("IRS")
and paying payroll and other taxes on behalf of the Company. The Company
terminated its relationship with Payroll Express upon being informed by the
Chapter 11 Trustee for Payroll Express that the Company had suffered a potential
loss as a result of a fraudulent scheme undertaken by Payroll Express and its
principal, David S. Kast. It appears that Payroll Express failed to make certain
payments to the IRS on the Company's behalf and falsely and fraudulently
misrepresented to the Company the dollar amount of taxes actually paid to the
IRS. It also appears that a substantial portion of these funds (approximately
$400,000) was wrongfully appropriated by Payroll Express and Kast. This theft
created an additional federal tax liability for the Company in the amount of
$307,500 for the years 1995 and 1996 which has been paid. These sums do not
include interest or penalties since the Company has been informed by the IRS
that, based upon its initial review of this matter, interest and penalties may
not be assessed.
The Company has been reimbursed by its insurance carrier for a substantial
portion of the above federal tax liability. The Company is also cooperating with
the authorities in their ongoing criminal investigation of Payroll Express and
Kast, and has filed a Proof of Claim in the Payroll Express bankruptcy
proceeding.
Vasu. The Company is being sued by a former employee for alleged breach of
contract and defamation. In a decision dated September 21, 1999, the District
Court held that the claim for defamation must be arbitrated under NASD rules.
Plaintiff has not commenced arbitration proceedings. By Notice of Motion dated
October 18, 1999, the Company moved to dismiss the complaint in its entirety.
The Company believes that the suit is without merit; however, should the
plaintiff prevail, the Company believes that it is likely that the damages will
not be material to the Company's consolidated financial condition or results of
operations.
Item 6. Exhibits and Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended September 30,
1999.
Signature
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.
Tremont Advisers, Inc.
Date: November 12, 1999 /s/ Stephen T. Clayton
Stephen T. Clayton
Chief Financial Officer
(Duly authorized Officer and
Principal Financial and Accounting
Officer)
21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
EXHIBIT 27
FINANCIAL DATA SCHEDULE
TREMONT ADVISERS, INC.
SEPTEMBER 30, 1999
THIS SCHEDULE CONTAINS UNAUDITED SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE CONDENSED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 1999 AND FOR THE NINE
MONTHS THEN ENDED. THIS INFORMATION IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH CONDENSED FINANCIAL STATEMENTS.
</LEGEND>
<CIK>0000880320
<NAME> Tremont Advisers, Inc.
<MULTIPLIER> 1
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-1-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 2,763,400
<SECURITIES> 0
<RECEIVABLES> 2,977,900
<ALLOWANCES> (35,000)
<INVENTORY> 0
<CURRENT-ASSETS> 5,919,200
<PP&E> 1,302,200
<DEPRECIATION> (549,600)
<TOTAL-ASSETS> 13,135,700
<CURRENT-LIABILITIES> 3,136,100
<BONDS> 0
0
0
<COMMON> 56,100
<OTHER-SE> 9,022,600
<TOTAL-LIABILITY-AND-EQUITY> 13,135,700
<SALES> 0
<TOTAL-REVENUES> 11,427,700
<CGS> 0
<TOTAL-COSTS> 9,284,900
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,883,000
<INCOME-TAX> 1,044,300
<INCOME-CONTINUING> 1,838,700
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,838,700
<EPS-BASIC> 0.33
<EPS-DILUTED> 0.31
</TABLE>
