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: March 31, 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: 33-89966
TREMONT ADVISERS, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 06-1210532
(State or other jurisdiction (I.R.S. Employer Identification No)
or incorporation or organization)
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 b
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 May 7, 1999 was 1,284,718, and the
number of shares outstanding of the Registrant's Class B Common Stock, $0.01 par
value, was 3,197,700 as of the same date.
<PAGE>
INDEX
Tremont Advisers, Inc.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements. (Unaudited) Page
Condensed Consolidated Balance Sheets - March 31, 1999 (unaudited)
and December 31, 1998 (audited) 1
Condensed Consolidated Statements of Income -
three months ended March 31, 1999 and 1998 2
Condensed Consolidated Statement of Shareholders' Equity -
three months ended March 31, 1999 3
Condensed Consolidated Statements of Cash Flows -
three months ended March 31, 1999 and 1998 4
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis 13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 17
Signature 17
Exhibit 27 - Financial Data Schedule 18
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Tremont Advisers, Inc.
Condensed Consolidated Balance Sheets
<TABLE>
<S> <C> <C>
March 31, 1999 December 31, 1998
(Unaudited) (Audited)
--------------- ---------------
Assets
Current Assets
Cash and cash equivalents $2,173,500 $1,893,800
Accounts receivable, net 2,539,200 2,111,600
Income taxes receivable - 82,800
Prepaid expenses and other assets 827,700 327,900
--------------- ---------------
Total current assets 5,540,400 4,416,100
Investments in limited partnerships (cost $2,117,400 and $1,428,600) 2,825,400 2,034,700
Other investments (cost $469,900) 192,200 200,300
Fixed assets, net 539,700 449,700
Goodwill, net 2,163,200 -
Other assets 30,000 192,900
--------------- ---------------
Total assets $11,290,900 $7,293,700
=============== ===============
Liabilities and shareholders' equity
Current liabilities
Accounts payable $223,600 $283,300
Accrued expenses 1,724,200 1,111,200
Income taxes payable 122,900 -
Deferred income taxes payable 29,000 29,000
Deferred revenue 793,900 -
--------------- ---------------
Total current liabilities 2,893,600 1,423,500
Deferred income taxes payable 622,100 559,400
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, 1,284,718 shares issued and outstanding 12,800 12,800
Class B Common Stock, $0.01 par value, 5,000,000 shares
authorized, 3,197,700 and 2,939,604 shares issued and outstanding 32,000 29,400
Additional paid in capital 6,984,400 5,106,900
Retained earnings 752,600 167,000
Cumulative foreign currency translation adjustment (6,600) (5,300)
--------------- ---------------
Total shareholders' equity 7,775,200 5,310,800
--------------- ---------------
Total liabilities and shareholders' equity $11,290,900 $7,293,700
=============== ===============
</TABLE>
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.
1
<PAGE>
Tremont Advisers, Inc.
Condensed Consolidated Statements of Income
(Unaudited)
<TABLE>
<S> <C> <C>
Three Months Ended
March 31
1999 1998
--------------- ---------------
Revenues
Consulting fees $3,227,100 $2,000,800
Performance fees 50,300 35,900
Commissions 100,400 120,400
--------------- ---------------
Total revenues 3,377,800 2,157,100
Expenses
Compensation 1,262,900 857,300
General and administrative 808,500 546,600
Consulting 373,000 316,000
Depreciation 51,200 40,500
Amortization of intangibles 110,900 -
--------------- ---------------
Total expenses 2,606,500 1,760,400
Equity in earnings of limited partnerships 101,900 77,600
Loss from operations of joint ventures (8,100) (26,900)
Other income, net 10,600 8,200
--------------- ---------------
Income before income taxes 875,700 455,600
Provision for income taxes 290,100 186,800
--------------- ---------------
Net income $585,600 $268,800
=============== ===============
Net income per common share $0.14 $0.07
=============== ===============
Net income per common share - assuming dilution $0.13 $0.06
=============== ===============
</TABLE>
See accompanying notes.
2
<PAGE>
Tremont Advisers, Inc.
Consolidated Statement of Shareholders' Equity
(Unaudited)
<TABLE>
<S> <C> <C> <C> <C> <C>
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 - - - 585,600 585,600
Foreign currency translation
adjustment - - - - (1,300)
-------------------------------------------------------------------------------------
Comprehensive Income 584,300
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 (15,000 shares) - 150 56,100 - 56,250
Issuance of Class B
Tremont Advisers, Inc.
Common Stock - exercise
of Employee Options (5,000 shares) - 50 18,700 - 18,750
Income tax benefits
Related to exercise of
Stock Options - - 19,300 - 19,300
-------------------------------------------------------------------------------------
Balance at March 31, 1999 $12,800 $32,000 $6,984,400 $752,600 $7,775,200
=====================================================================================
</TABLE>
See accompanying notes.
3
<PAGE>
Tremont Advisers, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<S> <C> <C>
Three Months Ended
March 31
1999 1998
------------- --------------
Operating Activities
Net income $585,600 $268,800
Adjustments to reconcile net income
to cash provided by operating activities:
Depreciation 51,200 40,500
Amortization of intangibles 110,900 -
Equity in earnings of limited partnerships (101,900) (77,600)
Loss from other investments 8,100 30,500
Deferred income taxes payable 62,700 -
Foreign currency translation adjustment (1,300) -
Changes in operating assets and liabilities:
Accounts receivable, net (243,100) (119,800)
Receivable from officer - 85,000
Accounts payable (98,900) 15,400
Accrued expenses (277,100) (353,700)
Deferred revenue 300 -
Income taxes, net 205,700 173,700
Other assets 162,900 -
Prepaid expenses and other 10,000 9,100
------------- --------------
Net cash provided by operating activities 475,100 71,900
Investing activities
Purchase of fixed assets (60,100) (19,600)
Investments in limited partnerships (688,800) (5,000)
Cash acquired from acquisition of TASS 102,000 -
Investments in joint ventures - (86,000)
------------- --------------
Net cash used by investing activities (646,900) (110,600)
Financing activities
Proceeds from issuance of Class B Common Stock 357,200 -
Exercise of Class B Common Stock options 75,000 -
Tax benefit from exercise of stock options 19,300 -
------------- --------------
Net cash provided by financing activities 451,500 -
Net increase (decrease) in cash and cash equivalents 279,700 (38,700)
Cash and cash equivalents at beginning of period 1,893,800 820,800
------------- --------------
Cash and cash equivalents at end of period $2,173,500 $782,100
============= ==============
</TABLE>
See accompanying notes.
4
<PAGE>
Supplemental disclosures of cash flow information:
<TABLE>
<S> <C> <C>
Three Months Ended
March 31
1999 1998
-------------------------------------------
Financing activities
Noncash transactions 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 acquistion costs 241,800 -
</TABLE>
See accompanying notes.
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 three months ended March 31, 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. All
material intercompany transactions and accounts have been eliminated in
consolidation.
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 are included in prepaid expenses and
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 number of common shares outstanding that
would result from the assumed exercise of outstanding stock options, calculated
using the treasury stock method.
Minority Interest - The Company presently owns 65% of Tremont Investment
Management Inc. ("TIMI"). For financial reporting purposes, the assets,
liabilities and earnings of TIMI have been included in the Company's condensed
consolidated financial statements.
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 provision for income taxes includes earnings of federal
and state taxes currently payable, after reduction for undistributed earnings of
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 - Business Combination
On March 11, 1999, the Company acquired all of the outstanding
common shares of TASS Management Limited ("TASS"), a London, England based
company specializing in the sale of electronic database information. The founder
and chief executive of TASS is Nicola Meaden, a nominee for Director of the
Company. The Company issued 190,477 shares of its Class B Common Stock at $7.50
per share in exchange for the TASS common shares, of which 64,170 shares were
received by Ms. Meaden. 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) will be 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.
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 (See Note F and Note H).
The following unaudited proforma information presents a summary of results of
operations for the three months ended March 31, 1999 and 1998, respectively,
assuming consumation of the purchase of TASS as of January 1, 1998.
<TABLE>
Three months ended
March 31
1999 1998
(Unaudited)
<S> <C> <C>
Net sales $3,721,500 $2,528,600
Net income 403,600 291,500
Per share data:
Basic Earnings 0.09 0.07
Diluted earnings 0.09 0.06
NOTE C - Prepaid Expense and Other Assets
March 31, 1999 December 31, 1998
(Unaudited) (Audited)
Current:
Customer contracts $ 462,900 $ --
Insurance receivable 257,500 257,500
Prepaid expenses 82,200 70,400
Other 25,100 --
------------ ------------
$ 827,700 $327,900
============ ============
Non-Current:
Deferred acquisition costs -- $162,900
Security deposits 30,000 30,000
------------ ---------
$ 30,000 $192,900
============ ==========
</TABLE>
Payroll Express, the Company's payroll preparation and withholding tax data
processing service from 1991 through September 1998, filed Chapter 11
bankruptcy. Payroll Express engaged in a fraudulent scheme by diverting the
Company's federal payroll tax withholdings amounting to $307,500 for the years
ended December 31, 1995 and 1996.
The Company is cooperating with the authorities in the ongoing criminal
investigation of Payroll Express and its principal and filed a proof of claim in
the Payroll Express bankruptcy. The Company also believes that its losses are
covered by its fidelity bond. A proof of loss, which seeks recovery of the
Company's losses and reimbursement for related professional fees, has been filed
with its insurance provider. Included in other assets at March 31, 1999 and
December 31, 1998, is $257,500 which represents a receivable from the insurance
provider pursuant to this claim. This amount reduced the related loss of
$307,500 recorded by the Company in general and administrative expenses during
1998.
7
<PAGE>
NOTE D - Investments in Limited Partnerships
At March 31, 1999 and December 31, 1998, Tremont Partners, Inc.'s ("TPI")
investment in The Broad Market Fund, L.P. was $854,500 and $807,200 representing
.38% and .43%, respectively, of the fund's net assets. Summarized financial
information of The Broad Market Fund, L.P. is as follows:
March 31, 1999 December 31, 1998
(Unaudited) (Audited)
Total assets $232,028,000 $198,415,000
Total liabilities 5,853,600 10,725,000
Three months ended
March 31
1999 1998
(Unaudited)
Net investment income (loss) $ (165,000) $ 981,200
Net realized and unrealized gain
on investments 11,886,200 6,268,600
---------- -----------
Net income $11,721,200 $7,249,800
============ ==========
At March 31, 1999, investments in Meridian Horizon Fund, L.P., GamTree, L.P.,
The Broad Market Prime Fund, L.P. and American Masters Market Neutral Fund, L.P.
were $398,700, $183,500, $259,900 and $623,500, respectively. In addition, TIMI
launched the Tremont Masters Fund effective February 1, 1999 with $500,100. At
March 31, 1999, TIMI's investment in Tremont Masters Fund was $505,300. At
December 31, 1998, investments in Meridian Horizon Fund, L.P., Gamtree, L.P.,
The 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 Tremont Masters
Fund is as follows:
March 31, 1999 December 31, 1998
(Unaudited) (Unaudited)
Total assets $509,401,700 $483,231,000
Total liabilities 92,154,300 86,305,000
Three months ended
March 31
1999 1998
(Unaudited)
Net investment loss $ (2,538,900) $ (750,400)
Net realized and unrealized gain
Investments 26,972,400 18,833,800
------------- ----------
Net income $ 24,433,500 $18,083,400
============ ===========
8
<PAGE>
NOTE E - Accrued Expenses
Accrued expenses consist of the following:
March 31, 1999 December 31, 1998
(Unaudited) (Audited)
Professional and consulting fees $ 744,900 $ 579,300
Compensation 440,300 300,000
Short-term notes payables 287,500 39,800
Employee benefit plan 137,600 110,000
Printing and graphics 52,700 37,500
Other 61,200 44,600
----------- ------------
$1,724,200 $1,111,200
=========== ============
NOTE F - Stock Options
During the three months ended March 31, 1999, certain directors and an executive
officer exercised options to purchase an aggregate of 15,000 and 5,000 shares,
respectively of the Company's Class B Common Stock at $3.75 per share. A summary
of the Company's stock option activity for three months ended March 31, 1999 is
as follows:
Outstanding-beginning of period: 302,566
Granted 275,452
Exercised (20,000)
Lapsed --
-----------------
Outstanding-end of period 558,018
=================
Exercisable at end of period 354,490
=================
Nicola Meaden, Chief Executive of TASS, was granted two types of
options (the "Group I Options" and the "Group II Options") to purchase 147,447
and 24,844 shares, respectively, of Class B Common Stock. Additionally, Laurence
Huntington Taylor II, a Principal of TASS, was granted 78,007 Group I Options
and 13,154 Group II Options. The Group I Options and Group II Options are
exercisable at $8.00 per share and $15.00 per share, respectively. Sixty percent
of the Group I Options became exercisable effective March 11, 1999, the balance
become exercisable at any time on or after March 11, 2000. One-third of the
Group II Options vested on March 11, 1999, the balance vest one-third each on or
after 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. The
stock options may not be transferred at any time 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 affiliate, the
Company has the right of first refusal to purchase the shares on the same terms
and conditions as the third party offer.
During March 1999, options to purchase 12,000 shares of Class B Common Stock at
$15.00 per share were granted to certain employees of TASS, other than Ms.
Meaden and Mr. Taylor. The options vest and become exercisable on the following
schedule: one-third on the date of the agreement, one-third on the first
anniversary of the agreement and one-third on the second anniversary of the
agreement.
9
<PAGE>
NOTE G - Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
Three months ended
March 31
1999 1998
(Unaudited)
<S> <C> <C>
Numerator:
Net Income - numerator for basic and diluted earnings
per share (income available to shareholders) $ 585,600 $ 268,800
Denominator:
Denominator for basic earnings per share - weighted-
average shares 4,285,767 4,086,822
Effect of dilutive securities:
Employee stock options 225,956 207,193
-------------------------------------------
Denominator for diluted earnings per share - adjusted
weighted-average shares and assumed conversions 4,511,723 4,294,015
===========================================
Basic earnings per share $ 0.14 $ 0.07
===========================================
Diluted earnings per share $ 0.13 $ 0.06
============================================
</TABLE>
NOTE H - Commitments
On March 11, 1999, the Company entered into two two-year employment agreements.
The first provides that Nicola Meaden will serve as Chief Executive Officer of
TASS. The second provides that Laurence Huntington Taylor, II will serve as the
Company's Senior Vice President of Global Marketing and Sales. Both agreements
provide for minimum base salaries of $150,000 per year, a guaranteed bonus of
$50,000 per year and such other bonus as may be determined by the Board of
Directors. Ms. Meaden's and Mr. Taylor's employment may be terminated by
consent, for cause, as a result of death or disability, and the Company is
expressly permitted to terminate without cause. If an employee's employment is
terminated for cause, the employee will be entitled to receive accrued salary,
guaranteed bonus, and the value of accrued but unused vacation time through the
date of termination. If an employee's employment is terminated for any reason
other than for cause, the employee will be entitled to the same amounts through
the end of the term of the employment agreement; however, the Company may offset
against payments due to the employee any compensation received by the employee
through any affiliation with a competing business prior to the end of the term.
NOTE I - Contingencies
The Company is being sued by a former employee for alleged breach of contract
and defamation. 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.
10
<PAGE>
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-affliated 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 of investment performance,
information data services and 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.
<TABLE>
Three Months Ended
March 31
1999 1998
--------------------------------------
(Unaudited)
<S> <C> <C>
Revenues
Proprietary investment funds
Asset-based fees $1,761,300 $ 929,500
------------ --------------
Total revenue from proprietary investment funds 1,761,300 929,500
Consulting clients
Asset-based fees 944,300 828,100
Performance-based fees 50,300 35,900
Annual retainer and special project fees 319,200 185,900
Administration fees 59,000 57,300
Information data services 143,300 --
------------- --------------
1,516,100 1,107,200
Other revenue (1) 100,400 120,400
------------- --------------
Total consolidated revenues $3,377,800 $2,157,100
============= ==============
</TABLE>
Other revenue consists of commissions earned through TSI (the Company's
wholly-owned introducing broker/dealer).
<TABLE>
<S> <C> <C>
Revenues (a)
March 31
1999 1998
----------------------------------
(Unaudited)
United States $2,123,900 $1,504,500
Bermuda 1,110,600 652,600
Canada -- --
United Kingdom 143,300 --
-------------- -------------
Consolidated total $3,377,800 $2,157,100
============== =============
</TABLE>
(a)Revenues are attributed to countries based on the location of the subsidiary
performing the services.
11
<PAGE>
Substantially all long-lived assets are located in the United States.
During the periods presented in the consolidated statements of income, certain
clients accounted for a significant percentage of the Company's consolidated
revenues. For the three months ended March 31, 1999 and 1998, The Broad Market
Fund, L.P. accounted for approximately 14% and 17%, respectively, of\
consolidated revenues. In addition, for the three months ended March 31, 1999
and 1998, The Broad Market Prime Fund, L.P. accounted for approximately 18 % and
13%, respectively, of consolidated revenues.
12
<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 Tremont (Bermuda) Limited 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. Effective with the purchase of TASS Management Limited ("TASS") on
March 11, 1999, the Company will recognize data sales 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 taking advantage of its growing world-wide relationships to expand its
operations.
Consulting fees earned for the three months ended March 31, 1999 increased by
$1,226,300, or 61.3%, from $2,000,800 for the three months ended March 31, 1998
to $3,227,100 for the three months ended March 31, 1999. At the Company's
principal domestic subsidiary, Tremont Partners, Inc., consulting fees increased
from $1,375,900 for the three months ended March 31, 1998 to approximately
$1,993,400 for the three months ended March 31, 1999. This increase was
primarily due to increases in revenues from the following related entities: The
Broad Market Prime Fund, L.P. ($318,200 increase), The Broad Market Fund, L.P.
($123,500 increase), and the Daimler Chrysler Minority Equity Trust ($99,710
increase). At Tremont (Bermuda) Limited, consulting fees increased from $616,700
for the three months ended March 31, 1998 to approximately $1,059,000 for the
three months ended March 31, 1999. This increase was primarily due to an
increase in revenues from Kingate Global Fund Class B Shares ($311,800
increase), and increases in assets within the respective investment vehicles of
clients. The remaining increase ($166,500) was from TASS's sale of electronic
database information, as well as placement agent fees received by Tremont
Securities, Inc.
Performance fees for the three months ended March 31, 1999 increased by $14,400,
or 40.1%, as compared to the three months ended March 31, 1998 primarily as a
result of underlying investment vehicles outperforming pre-established
benchmarks.
Commissions decreased by $20,000, or 16.7%, for the three months ended March 31,
1999 compared to the three months ended March 31, 1998. This decrease resulted
primarily from decreased trading activities of TSI's clients.
Management expects that during the remainder of 1999 the Company will continue
to develop relationships with additional entities. The Company is also utilizing
these relationships to create diversified ways to package and distribute its
investment products. 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 three months ended March 31, 1999 by
$405,600, or 47.3%, as compared to the three months ended March 31, 1998, as a
result of the Company's acquisition of TASS, as well as its continued efforts to
attract and retain qualified employees. These efforts, as well as the
acquisition of TASS, resulted in an increase in the number of employees from 31
at March 31, 1998 to 51 at March 31, 1999. Compensation expense also increased
due to salary increases for certain employees that became effective January 1,
1999 and as a result of increased health care costs due to the increase in the
number of employees.
13
<PAGE>
General and administrative expenses consist primarily of rent,
telecommunications, travel and entertainment, professional fees and other
related expenses. General and administrative expenses for the three months ended
March 31, 1999 increased by $261,900 or 47.9%, as compared to the three months
ended March 31, 1998. The increase in general and administrative expenses was
primarily due to increased professional fees and consulting expenses associated
with the Year 2000 issue, the Payroll Express Company bankruptcy investigation,
as well as costs related to the Company's continued expansion to service its
growth, including expanding its office facility in September 1998.
Consulting expenses increased $57,000 or 18.0% for the three months ended March
31, 1999 as compared to the three months ended March 31, 1998 primarily as a
result of the increase in revenues from the clients that participate in revenue
sharing arrangements. For example, Tremont Partners, Inc. and Tremont (Bermuda)
Limited have revenue sharing arrangements with other parties relating to certain
clients.
Equity earnings of limited partnerships increased $24,300, or 31.3%, for the
three months ended March 31, 1999 as compared to the three months ended March
31, 1998. This increase was a result of increased performance as well as an
increase in the amount invested by the Company.
On March 11, 1999, the Company acquired all of the outstanding ordinary (common)
shares of TASS Management Limited ("TASS"), a London, England - based company
specializing in the sale of electronic databases; the founder and chief
executive of TASS is Nicola Meaden, a nominee for Director of the Company. The
Company issued 190,477 shares of its Class B Common Stock at $7.50 per share in
exchange for the TASS common shares, of which 64,170 shares were received by Ms.
Meaden. The transaction has been 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) will be 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 in March were $143,300, expenses totaled $117,100, resulting in
additional income before taxes of $26,200. 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.
Profitability is dependent on the ability of the Company 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.
Cash provided by operations was $475,100 for the three months ended March 31,
1999 as compared to cash provided by operations of $71,900 for the three months
ended March 31 1998. Cash provided by operating activities was primarily a
result of profitable operations, a decrease in other assets and increased taxes
payable partially offset by increases in accounts receivable and decreases in
accrued expenses, net of the liabilities acquired in the TASS acquisition. These
positive changes in cash flow, as well as the issuance of Common Stock
($451,500) during the quarter, were offset by investing activities of $646,900.
At March 31, 1999, the Company owned options to purchase 8,000 shares of a
non-publicly registered investment adviser specializing in 401(k) investment
allocation advice over the Internet. The options were granted at $10 per share
and are fully vested. The options have a five year term and were valued at zero
by the Company at March 31, 1999.
At March 31, 1999 the Company owned 30,000 shares of common stock of a non-
public financial services company formed in 1996. The shares were received by
the Company as a result of an employee's participation as a board member of such
company. At March 31, 1999, the shares of common stock were valued at zero.
14
<PAGE>
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 these, as well as from existing products, will be
sufficient to support future growth. The Company has no material short term or
long term debt obligations
The Company is being sued by a former employee for alleged breach of contract
and defamation. 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 or 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 of 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.
To date the Company has completed approximately 50% of the remediation phase of
its information technology and expects to complete software reprogramming and
replacement no later than June 30, 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 75% of its testing and has implemented 50% of its
remediated systems. Completion of the testing phase for all significant systems
is expected by June 30, 1999, with 100% completion targeted for September 30,
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 that Year
2000 compliance and continues to monitor their compliance. To date, the Compan
is not aware of any external agent Year 2000 issue that would materially impac
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
15
<PAGE>
adversely impact the Company's revenues as a significant portion of the
Company's revenues are 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 will utilize 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 $500,000
and is being funded through operating cash flows. To date, the Company has
incurred approximately $130,000, which is capitalized for the new systems and
equipment. Of the total remaining project costs, approximately $230,000 will be
attributable to the purchase of new software and hardware, which will be
capitalized. The remaining $140,000 relates to consulting fees which will be
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
third 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
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.
16
<PAGE>
PART II - OTHER INFORMATION
Item I. 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 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 has created an
additional federal tax liability for the Company in the amount of $307,500 for
the years 1995 and 1996. 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 is cooperating with the authorities in its ongoing criminal
investigation of Payroll Express and Kast and has filed a Proof of Claim in the
Payroll Express bankruptcy proceeding. The Company also believes that, subject
to a $50,000 deductible, its losses are covered by a fidelity bond issued by the
Gulf Insurance Group ("Gulf"). A Proof of Loss seeking recovery of the Company's
losses and reimbursement for professional fees incurred in connection with this
matter has been filed with Gulf which is in the process of investigating the
Company's claim. The Company is not aware of any reason for denial of coverage
by Gulf.
Vasu. The Company is being sued by a former employee for alleged breach of
contract and defamation. 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 March 31, 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: May 13, 1999 /s/ Stephen T. Clayton
-------------------
Stephen T. Clayton
Chief Financial Officer
(Duly authorized Officer and
Principal Financial and Accounting
Officer)
17
<PAGE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
EXHIBIT 27
FINANCIAL DATA SCHEDULE
TREMONT ADVISERS, INC.
MARCH 31, 1999
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS UNAUDITED SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE CONDENSED FINANCIAL STATEMENTS AS OF MARCH 31, 1999 AND FOR THE QUARTER 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 2,173,500
<SECURITIES> 0
<RECEIVABLES> 2,574,200
<ALLOWANCES> (35,000)
<INVENTORY> 0
<CURRENT-ASSETS> 5,540,400
<PP&E> 1,268,100
<DEPRECIATION> (728,400)
<TOTAL-ASSETS> 11,290,900
<CURRENT-LIABILITIES> 2,893,600
<BONDS> 0
0
0
<COMMON> 44,800
<OTHER-SE> 7,730,400
<TOTAL-LIABILITY-AND-EQUITY> 11,290,900
<SALES> 0
<TOTAL-REVENUES> 3,377,800
<CGS> 0
<TOTAL-COSTS> 2,606,500
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 875,700
<INCOME-TAX> 290,100
<INCOME-CONTINUING> 585,600
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 585,600
<EPS-PRIMARY> 0.14
<EPS-DILUTED> 0.13
</TABLE>
