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: June 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: 33-89966
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 July 30, 1999 was 1,596,145, 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 July 30, 1999, was 4,006,878 as of the same
date. Shares outstanding have been restated to reflect the impact of a
five-for-four stock split payable 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 - June 30, 1999 (unaudited)
and December 31, 1998 (audited) 1
Condensed Consolidated Statements of Income -
six and three months ended June 30, 1999 and 1998 2
Condensed Consolidated Statement of Shareholders' Equity -
six months ended June 30, 1999 3
Condensed Consolidated Statements of Cash Flows -
six months ended June 30, 1999 and 1998 4
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis 12
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 18
Signature 18
Exhibit 27 - Financial Data Schedule 19
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Tremont Advisers, Inc.
Condensed Consolidated Balance Sheets
<TABLE>
<S> <C> <C>
June 30, 1999 December 31, 1998
(Unaudited) (Audited)
--------------------------------------------------------
Assets
Current Assets
Cash and cash equivalents $ 2,557,600 $1,893,800
Accounts receivable, net 2,733,500 2,111,600
Income taxes receivable - 82,800
Prepaid expenses and other assets 335,100 327,900
--------------------------------------------------------
Total current assets 5,626,200 4,416,100
Investments in limited partnerships (cost $2,359,600 and $1,428,600) 3,191,300 2,034,700
Other investments (cost $719,900 and $469,900) 447,200 200,300
Fixed assets, net 636,600 449,700
Goodwill, net 2,108,900 -
Other assets 30,000 192,900
--------------------------------------------------------
Total assets $12,040,200 $ 7,293,700
========================================================
Liabilities and shareholders' equity
Current liabilities
Accounts payable $152,000 $ 283,300
Accrued expenses 1,818,200 1,111,200
Income taxes payable 95,000 -
Deferred income taxes payable 35,000 29,000
Deferred revenue 718,000 -
--------------------------------------------------------
Total current liabilities 2,818,200 1,423,500
Deferred income taxes payable 792,300 559,400
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, 1,596,145 and 1,605,898 shares issued and outstanding 16,000 12,800
Class B Common Stock, $0.01 par value, 10,000,000 shares
authorized, 4,006,878 and 3,674,505 shares issued and outstanding 40,100 29,400
Additional paid in capital 6,973,100 5,106,900
Retained earnings 1,373,500 167,000
Cumulative foreign currency translation adjustment 27,000 (5,300)
--------------------------------------------------------
Total shareholders' equity 8,429,700 5,310,800
--------------------------------------------------------
Total liabilities and shareholders' equity $12,040,200 $ 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
<TABLE>
<S> <C> <C> <C> <C>
Six Months Ended Three Months Ended
June 30 June 30
1999 1998 1999 1998
-----------------------------------------------------------------------------
Revenues
Consulting fees $6,997,700 $ 4,336,100 $ 3,770,600 $ 2,335,400
Performance fees 130,800 316,500 80,500 280,600
Commissions 247,100 218,200 146,700 97,800
-----------------------------------------------------------------------------
Total revenues 7,375,600 4,870,800 3,997,800 2,713,800
Expenses
Compensation 2,745,700 1,793,400 1,482,800 936,100
General and administrative 1,706,800 1,155,600 898,300 609,100
Consulting 785,900 660,900 412,900 344,900
Depreciation 114,100 82,500 62,900 42,000
Amortization of intangibles 407,200 - 296,300 -
-----------------------------------------------------------------------------
Total expenses 5,759,700 3,692,400 3,153,200 1,932,100
Equity in earnings of limited partnerships 225,600 151,500 123,700 73,900
Income (loss) from operations of joint ventures (3,100) (135,100) 5,000 (108,300)
Other income, net 23,500 15,700 12,900 7,600
-----------------------------------------------------------------------------
Income before income taxes 1,861,900 1,210,500 986,200 754,900
Provision for income taxes 655,400 409,200 365,300 222,400
-----------------------------------------------------------------------------
Net income $ 1,206,500 $801,300 $620,900 $532,500
=============================================================================
Net income per common share $ 0.22 $ 0.16 $0.11 $ 0.10
=============================================================================
Net income per common share - assuming dilution $0.21 $ 0.15 $ 0.10 $ 0.10
=============================================================================
See accompaning notes
</TABLE>
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 - - - 1,206,500 1,206,500
Foreign currency translation
adjustment - - - - 32,300
-----------------------------------------------------------------------------------------
Comprehensive Income 1,238,800
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
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
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) - -
(319,229 Class A Shares)
(801,376 Class B Shares)
-----------------------------------------------------------------------------------------
Balance at June 30, 1999 $16,000 $40,100 $ 6,973,100 $1,373,500 $ 8,429,700
=========================================================================================
</TABLE>
See accompanying notes.
3
<PAGE>
Tremont Advisers, Inc.
Condensed Consolidated Statements of Cash Flows
Unaudited
<TABLE>
<S> <C> <C>
Six Months Ended
June 30
1999 1998
-------------------------------------------
Operating Activities
Net income $ 1,206,500 $ 801,300
Adjustments to reconcile net income
to cash provided (used) by operating activities:
Depreciation 114,100 82,500
Amortization of intangibles 407,200 -
Equity in earnings of limited partnerships (225,600) (151,500)
Loss from other investments 3,100 142,400
Deferred income taxes payable 238,900 70,100
Foreign currency translation adjustment 32,300 -
Changes in operating assets and liabilities:
Accounts receivable, net (437,400) (485,100)
Receivable from officer - 200,000
Accounts payable (170,500) (12,700)
Accrued expenses (183,100) (282,500)
Deferred revenue (75,600) -
Income taxes, net 177,800 16,700
Other assets 162,900 -
Prepaid expenses and other 260,600 15,000
-------------------------------------------
Net cash provided by operating activities 1,511,200 396,200
Investing activities
Purchase of fixed assets (219,900) (46,200)
Investments in limited partnerships (931,000) (105,000)
Cash acquired from acquisition of TASS 102,000 -
Investments in joint ventures (250,000) (161,000)
-------------------------------------------
Net cash used by investing activities (1,298,900) (312,200)
Financing activities
Proceeds from issuance of Class B Common Stock 357,200 -
Exercise of Class B Common Stock options 75,000 9,400
Tax benefit from exercise of stock options 19,300 -
-------------------------------------------
Net cash provided by financing activities 451,500 9,400
Net increase in cash and cash equivalents 663,800 93,400
Cash and cash equivalents at beginning of period 1,893,800 820,800
-------------------------------------------
Cash and cash equivalents at end of period $ 2,557,600 $ 914,200
===========================================
</TABLE>
See accompanying notes.
4
<PAGE>
Tremont Advisers, Inc.
Condensed Consolidated Statements of Cash Flows (con't)
Unaudited
<TABLE>
<S> <C> <C>
Supplemental disclosures of cash flow information:
Six Months Ended
June 30
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 acquisition 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 six and three months ended June 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 I).
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 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 - Prepaid Expense and Other Assets
<TABLE>
<S> <C> <C>
June 30, 1999 December 31, 1998
-------------------------- -----------------------------------
(Unaudited) (Audited)
Current:
Customer contracts $ 227,000 $ -
Insurance receivable - 257,500
Prepaid expenses 86,100 70,400
Other 22,000 -
-------------------------- -----------------------------------
$ 335,100 $ 327,900
========================== ===================================
Non-Current:
Deferred acquisition costs $ - $ 162,900
Security deposits 30,000 30,000
-------------------------- -----------------------------------
$ 30,000 $ 192,900
========================== ===================================
</TABLE>
NOTE C - Investments in Limited Partnerships
At June 30, 1999 and December 31, 1998, Tremont Partners, Inc.'s ("TPI")
investment in American Masters Broad Market Fund, L.P., (formerly The Broad
Market Fund, L.P.) was $895,100 and $807,200 representing .37% and .43%,
respectively, of the fund's net assets. Summarized financial information of such
fund is as follows:
<TABLE>
<S> <C> <C>
June 30, 1999 December 31, 1998
--------------------------- ----------------------------
(Unaudited) (Audited)
Total assets $ 242,802,800 $ 198,415,000
Total liabilities 426,700 10,725,000
Six months ended
June 30
1999 1998
-----------------------------------------------------------
(Unaudited) (Unaudited)
Net investment income (loss) $ (459,300) $ 1,472,100
Net realized and unrealized
gain on investments 22,613,000 13,023,500
--------------------------- ----------------------------
Net income $ 22,153,700 $ 14,495,600
=========================== ============================
</TABLE>
At June 30, 1999, investments in Meridian Horizon Fund, L.P., GamTree, L.P.,
American Masters Broad Market Prime Fund, L.P., (formerly, The Broad Market
Prime Fund, L.P.) and American Masters Market Neutral Fund, L.P. were $424,400,
$193,900, $513,300 and $640,700, respectively. In addition, TIMI launched the
Tremont Masters Fund effective February 1, 1999, and invested $500,000 therein.
At June 30, 1999, TIMI's investment in Tremont Masters Fund was $523,900. 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
Tremont Masters Fund is as follows:
7
<PAGE>
<TABLE>
<S> <C> <C>
June 30, 1999 December 31, 1998
----------------------- ----------------------------
(Unaudited) (Audited)
Total assets $ 562,238,500 $ 483,231,000
Total liabilities 102,659,600 86,305,000
Six months ended
June 30
1999 1998
--------------------------------------------------------
(Unaudited) (Unaudited)
Net investment loss $ (2,645,700) $ (3,285,000)
Net realized and unrealized
gain on investments 55,611,900 35,312,600
----------------------- ----------------------------
Net income $ 52,966,200 $ 32,027,600
======================= ============================
NOTE D - Accrued Expenses
Accrued expenses consist of the following:
June 30, 1999 December 31, 1998
--------------------------- ----------------------------
(Unaudited) (Audited)
Professional and consulting fees $ 669,400 $ 579,300
Compensation 691,000 300,000
Short-term notes payable 245,800 39,800
Employee benefit plan 60,900 110,000
Printing and graphics 43,400 37,500
Other 107,700 44,600
----------------------------
---------------------------
$ 1,818,200 $ 1,111,200
=========================== ============================
</TABLE>
NOTE E - Stock Options
During the six months ended June 30, 1999, certain directors and an executive
officer exercised options to purchase an aggregate of 18,750 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 six months ended June 30, 1999 is as
follows:
Outstanding-beginning of period: 378,208
Granted 344,315
Exercised (25,000)
Lapsed -
------------------
Outstanding-end of period 697,523
==================
Exercisable at end of period 521,238
==================
Nicola Meaden, Chief Executive Officer of TASS Investment Research Limited
("TASS"), was granted two types of options (the "Group I Options" and the "Group
8
<PAGE>
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 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 15,000 shares of Class B Common Stock at
$12.00 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: 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 - Earnings Per Share
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<C> <S> <S> <S> <S>
Six months ended Three months ended
June 30 June 30
1999 1998 1999 1998
------------------------------------------------------------------------
Numerator:
Net Income- numerator
for basic and dilutive earnings
per share (income available
to shareholders) $1,206,500 $ 801,300 $620,900 $ 532,500
Denominator:
Denominator for basic earnings
per share - weighted -
average shares 5,478,938 5,109,401 5,603,023 5,110,279
Effect of dilutive securities:
Employee stock options 306,037 300,347 334,532 341,703
------------------------------------------------------------------------
Denominator for diluted
earnings per share - adjusted
weighted-average shares
and assumed conversions 5,784,975 5,409,748 5,937,555 5,451,982
========================================================================
Basic earnings per share $ 0.22 $0.16 $ 0.11 $ 0.10
========================================================================
Diluted earnings per share $ 0.21 $0.15 $ 0.10 $ 0.10
========================================================================
</TABLE>
NOTE G - 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,
9
<PAGE>
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 H - 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>
<S> <C> <C> <C> <C>
Six months ended Three months ended
June 30 June 30
1999 1998 1999 1998
---------------------------------------------------------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenues
Proprietary investment funds
Asset-based fees $3,664,600 $ 2,017,900 $ 1,903,400 $ 1,088,500
------------------- ---------------------------------- -------------------
Total revenue from proprietary
investment funds 3,664,600 2,017,900 1,903,400 1,088,500
Consulting clients
Asset-based fees 1,879,300 1,765,900 962,500 937,800
Performance-based fees 130,800 316,500 80,500 280,600
Annual retainer and special project fees 624,200 433,100 305,000 247,200
Administration fees 181,500 119,200 94,900 61,900
Information data services 648,100 - 504,800 -
------------------- ---------------------------------- -------------------
3,463,900 2,634,700 1,947,700 1,527,500
Other revenue (1) 247,100 218,200 146,700 97,800
------------------- ---------------------------------- -------------------
Total consolidated revenues $7,375,600 $4,870,800 $ 3,997,800 $ 2,713,800
=================== ================================== ===================
</TABLE>
(1) Other revenue consists of commissions earned through TSI (the Company's
wholly-owned introducing broker/dealer).
10
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Revenues (a) Revenues (a)
Six months ended Three months ended
June 30 June 30
1999 1998 1999 1998
------------------------------------- ------------------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
United States $ 4,496,200 $ 3,240,800 $ 2,372,300 $1,736,400
Bermuda 2,231,300 1,630,000 1,120,700 977,400
Canada - - - -
United Kingdom 648,100 - 504,800 -
------------------- ----------------- ---------------- ------------------
Consolidated Total $ 7,375,600 $ 4,870,800 $ 3,997,800 $2,713,800
=================== ================= ================ ==================
</TABLE>
(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.
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 six and three months ended June 30, 1999 and 1998, American
Masters Broad Market Fund, L.P. accounted for approximately 13.6% versus 15.0%
and 13.1% versus 13.8%, respectively, of consolidated revenues. In addition, for
the six and three months ended June 30, 1999 and 1998, American Masters Broad
Market Prime Fund, L.P. accounted for approximately 17.4% versus 13.7% and 17.0%
versus 14.0%, respectively, of consolidated revenues.
Note I - Subsequent Events
On July 15, 1999, the Board of Directors approved a five-for-four stock split
(with no change in par value) on both the Company's Class A Common Stock and
Class B Common Stock. To reflect the split, which is payable to stockholders of
record on July 30, 1999, Class A Common Stock and Class B Common Stock was
increased and additional paid in capital was decreased by $3,200, and $8,100,
respectively. All per share and shares outstanding data have been restated to
reflect the impact of the split.
At June 30, 1999, the Company had 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, and are fully vested. At June 30, 1999,
the options were valued at zero by the Company. The Company exercised its option
on July 1, 1999 and purchased the 80,000 shares of stock for $80,000.
11
<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 six months ended June 30, 1999 increased by
$2,661,600, or 61.4%, from $4,336,100 for the six months ended June 30, 1998 to
$6,997,700 for the six months ended June 30, 1999. At the Company's principal
domestic subsidiary, Tremont Partners, Inc. ("TPI"), consulting fees increased
from $2,932,600 for the six months ended June 30, 1998 to approximately
$4,176,900 for the six months ended June 30, 1999. This increase was primarily
due to increases in revenues resulting from increased assets under management
from the following related entities: American Masters Broad Market Prime Fund,
L.P. ($617,200 increase), American Masters Broad Market Fund, L.P. ($273,000
increase) and the DaimlerChrysler Minority Equity Trust ($178,700 increase). At
TBL, consulting fees increased from $1,351,200 for the six months ended June 30,
1998 to approximately $2,100,500 for the six months ended June 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 ($648,300
increase), and increases in assets within the investment vehicles of other
clients. Additionally, $668,000 of the increase was primarily from TASS's sale
of electronic database information, as well as placement agent fees received by
the Company's wholly-owned broker dealer subsidiary, Tremont Securities, Inc.
("TSI").
Consulting fees for the Company for the three months ended June 30, 1999
increased by $1,435,200, or approximately 61.5%, as compared to the three months
ended June 30, 1998. 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 $1,556,800 for
the three months ended June 30, 1998 to approximately $2,183,500 for the three
months ended June 30, 1999. The increase is primarily due to increases in
revenues from American Masters Broad Market Prime Fund, L.P. ($299,000
increase), American Masters Broad Market Fund, L.P. ($149,500 increase) and the
DaimlerChrysler Minority Equity Trust ($79,000 increase). TBL's consulting fees
increased from $734,500 for the three months ended June 30 1998 to approximately
$1,040,300 for the three months ended June 30, 1999. The increase is
attributable to increased revenues from Kingate Global Fund Class B Shares
($336,500 increase). Additionally, $502,700 of the increase was from TASS' sale
of electronic database information, offset by a decrease in placement agent fees
from TSI.
Performance fees for the six and three months ended June 30, 1999 decreased by
$185,700, or 58.7%, and $200,100, or 71.3%, respectively, as compared to the six
and three months ended June 30, 1998 primarily because certain clients'
underlying investment vehicles did not obtain and/or outperform certain
pre-established benchmarks.
Commissions received by TSI increased by $28,900, or 13.2%, and $48,900, or 50%,
respectively, for the six and three months ended June 30, 1999 compared to
similar periods in 1998, primarily as a result of the mix of money managers
executing trades and increased trading by TSI's clients.
12
<PAGE>
Management expects that during the remainder of 1999 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
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 will be called Credit Suisse First Boston Tremont Index LLC. The CFSB
Tremont Hedge FUnd Index, a capital-weighted master index, anticipated to be
launched during the fourt quarter of 1999, followed by a series of capital
weighted sub-indices 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 six and three months ended June 30, 1999
by $952,300, or 53.1%, and $546,700 or 58.4%, respectively as compared to the
six and three months ended June 30, 1998, as a result of the Company's
acquisition of TASS, and the Company's 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 June 30, 1998 to 51 at June
30, 1999. Compensation expense also increased due to salary increases for
certain employees that became effective January 1, 1999 and the increased health
care costs arising from the increased number of employees.
General and administrative expenses consist primarily of rent,
telecommunications, travel and entertainment, professional fees and other
related expenses. General and administrative expenses for the six and three
months ended June 30, 1999 increased by $551,200, or 47.7%, and $289,200, or
47.5%, respectively as compared to the six and three months ended June 30, 1998.
This increase was primarily due to the acquisition of TASS on March 11, 1999,
increased professional fees associated with the Payroll Express Company
bankruptcy investigation and costs related to the Company's continued expansion
to service its growth, including the expansion of its office space in September
1998.
Consulting expenses increased $125,000, or 18.9%, and $68,000, or 19.7%,
respectively for the six and three months ended June 30, 1999 as compared to the
six and three months ended June 30, 1998, primarily as a result of the increase
in revenues from the clients that participate in revenue sharing arrangements.
For example, TPI and TBL have revenue sharing arrangements with other parties
relating to certain clients.
Equity earnings from limited partnerships increased $74,100, or 48.9%, and
$49,800, or 67.4%, respectively for the six and three months ended June 30, 1999
as compared to the six and three months ended June 30, 1998, as a result of
increased performance and a greater asset base due to increased investments by
the Company.
The change in loss from operations of joint ventures, net for the six and three
months ended June 30, 1999, primarily represents significant losses of a
twenty-five percent owned joint venture operation incurring significant
operating costs during 1998. The Company closed this joint venture effective
December 31, 1998.
Amortization of intangibles increased approximately $407,200 for the six months
ended June 30, 1999 as compared to the six months ended June 30, 1998, because
of the TASS acquisition.
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 has been accounted for using the purchase method of accounting.
13
<PAGE>
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 June 30, 1999 were $648,100 and expenses
totaled $784,100, resulting in a loss before taxes of $136,000. 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 was $1,511,200 for the six months ended June 30,
1999 as compared to cash provided by operations of $396,200 for the six months
ended June 30 1998. Cash provided by operating activities primarily resulted
profitable operations, decreases in prepaid expenses and other assets and
increased taxes payable partially offset by increases in accounts receivable and
decreases in accounts payable and accrued expenses, net of the liabilities
acquired in the TASS acquisition. These positive changes in cash flow, as well
as the issuances of Common Stock ($451,500) , were substantially offset by
investing activities of $1,298,900, and cash and cash equivalents increased by
$663,800 for the six months ended June 30, 1999.
On July 15, 1999, the Company's Board of Directors approved a five-for-four
stock split (with no change in par value) on both its outstanding Class A Common
Stock and its Class B Common Stock, payable to stockholders of record on July
30, 1999. To reflect the split, Class A Common Stock was increased and
additional paid in capital was decreased by $3,200 and Class B Common Stock was
increased and additional paid in capital was decreased by $8,100. All per share
and shares outstanding data have been restated to reflect the impact of the
split.
At June 30, 1999, the Company had 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, and are fully vested. At June 30, 1999,
the options were valued at zero by the Company. The Company exercised its option
on July 1, 1999 and purchased 80,000 shares of stock for $80,000.
At June 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 June
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 product, 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 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
14
<PAGE>
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.
To date the Company has completed approximately 75% of the remediation phase for
its information technology and expects to complete software reprogramming and
replacement no later than September 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 75% of its
remediated systems. Completion of the testing phase for all significant systems
is expected by September 30, 1999, with 100% completion targeted for 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 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 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 $289,900, 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 $160,100 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
forth 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.
15
<PAGE>
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 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 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 has received funds from its insurance carrier as reimbursement 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. 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 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Stockholders held on June 10, 1999, the
stockholders elected the following to serve as directors until the next Annual
Meeting of Stockholders and until their successors are duly elected and
qualified.
<TABLE>
<S> <C> <C> <C>
For Against
Sandra L. Manzke 7,502,835 45,890
Robert I. Schulman 7,502,835 45,890
John L. Keeley, Jr. 7,502,835 45,890
Jimmy L. Thomas 7,502,835 45,890
Alan A. Rhein 7,502,835 45,890
Richard E. O'Brien 7,502,835 45,890
Nicola Meaden 7,502,835 45,890
Bruce Ruehl 7,480,055 68,670
The stockholders also voted to ratify the appointment of Ernst & Young LLP to
serve as the Company's independent auditors for the fiscal year ending December
31, 1999. The vote was as follows:
For Against Abstain
7,546,600 1,125 1,000
17
<PAGE>
The stockholders also voted to ratify the approval of the Tremont Advisers, Inc.
1998 Stock Option Plan. The vote was as follows:
For Against Abstain
7,463,333 54,413 30,980
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended June 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: August 11, 1999 /s/ Stephen T. Clayton
Stephen T. Clayton
Chief Financial Officer
(Duly authorized Officer and
Principal Financial and Accounting
Officer)
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
EXHIBIT 27
FINANCIAL DATA SCHEDULE
TREMONT ADVISERS, INC.
JUNE 30, 1999
THIS SCHEDULE CONTAINS UNAUDITED SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE CONDENSED FINANCIAL STATEMENTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTH
PERIOD 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-1-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 2,557,600
<SECURITIES> 0
<RECEIVABLES> 2,768,500
<ALLOWANCES> (35,000)
<INVENTORY> 0
<CURRENT-ASSETS> 5,626,200
<PP&E> 1,425,700
<DEPRECIATION> (789,100)
<TOTAL-ASSETS> 12,040,200
<CURRENT-LIABILITIES> 2,818,200
<BONDS> 0
0
0
<COMMON> 56,100
<OTHER-SE> 8,373,600
<TOTAL-LIABILITY-AND-EQUITY> 12,040,200
<SALES> 0
<TOTAL-REVENUES> 7,375,600
<CGS> 0
<TOTAL-COSTS> 5,759,700
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,861,900
<INCOME-TAX> 655,400
<INCOME-CONTINUING> 1,206,500
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,206,500
<EPS-BASIC> 0.22
<EPS-DILUTED> 0.21
</TABLE>
