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, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission File Number: 0-27077
TREMONT ADVISERS, INC.
----------------------
(Exact name of small business issuer as specified in its charter)
Delaware 06-1210532
-------- ----------
(State or other jurisdiction or (I.R.S. Employer Identification No)
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 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 August 7, 2000 was 1,740,292, and the
number of shares outstanding of the Registrant's Class B Common Stock, $0.01 par
value, was 5,029,333 as of the same date. Shares outstanding have been restated
to reflect the impact of a five-for-four stock split paid on August 8, 2000 to
shareholders of record on July 31, 2000.
<PAGE>
INDEX
Tremont Advisers, Inc.
PART I - FINANCIAL INFORMATION Page
Item 1. Financial Statements. (Unaudited)
Condensed Consolidated Balance Sheets - June 30, 2000 (unaudited)
and December 31, 1999 (audited) 1
Condensed Consolidated Statements of Income -
six and three months ended June 30, 2000 and 1999 2
Condensed Consolidated Statement of Shareholders' Equity -
six months ended June 30, 2000 3
Condensed Consolidated Statements of Cash Flows -
six months ended June 30, 2000 and 1999 4
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis 14
Part II - Other Information
Item 1. Legal Proceedings 19
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 20
Exhibit 27 - Financial Data Schedule 21
Exhibit 10.67 - Revolving Credit Promissory Note - Dated July 25, 2000 54
<PAGE>
Tremont Advisers, Inc.
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
-----------------------------------
(Unaudited) (Audited)
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 2,827,300 $ 2,879,300
Accounts receivable, net 3,299,300 3,682,700
Income taxes receivable 54,800 --
Dividend receivable 40,700 31,000
Prepaid expenses and other assets 303,300 263,800
-----------------------------------
Total current assets 6,525,400 6,856,800
Investments (cost $4,542,400 and $3,092,400) 5,982,600 4,243,500
Investments in joint ventures (cost $501,500 and $408,600) 1,943,300 2,231,700
Fixed assets, net 957,300 774,500
Goodwill, net 1,890,800 1,999,800
Other assets 33,500 30,300
-----------------------------------
Total assets $ 17,332,900 $ 16,136,600
===================================
Liabilities and shareholders' equity
Current liabilities
Accounts payable $ 299,100 $ 563,800
Accrued expenses 1,805,400 2,492,800
Deferred revenue 1,266,700 1,363,500
Income taxes payable -- 191,700
Deferred income taxes payable -- 32,600
-----------------------------------
Total current liabilities 3,371,200 4,644,400
Deferred income taxes payable 1,375,400 836,800
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, 1,990,292 and 1,993,855 shares issued and outstanding 20,000 16,000
Class B Common Stock, $0.01 par value, 10,000,000 shares
authorized, 5,029,333 and 5,025,381 shares issued and outstanding 50,300 40,200
Additional paid in capital 7,889,700 7,901,800
Retained earnings 4,609,300 2,698,200
Cumulative foreign currency translation adjustment 17,000 (800)
-----------------------------------
Total shareholders' equity 12,586,300 10,655,400
-----------------------------------
Total liabilities and shareholders' equity $ 17,332,900 $ 16,136,600
===================================
</TABLE>
See accompanying notes.
Note: The Condensed Consolidated Balance Sheet at December 31, 1999 has been
derived from the audited financial statements as of that date.
1
<PAGE>
Tremont Advisers, Inc.
Condensed Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
Six months ended Three months ended
June 30 June 30
2000 1999 2000 1999
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues
Proprietary asset-based $ 5,495,300 $ 3,664,700 $ 2,872,900 $ 1,903,500
Consulting fees 3,626,300 2,753,900 1,948,800 1,432,400
Database information sales 760,800 579,100 372,400 434,700
Commissions 163,000 247,100 78,100 146,700
Performance fees 98,100 130,800 16,100 80,500
---------------------------------------------------------------------
Total revenues 10,143,500 7,375,600 5,288,300 3,997,800
Expenses
Compensation 3,759,400 2,745,700 1,884,500 1,482,800
General and administrative 2,093,400 1,706,800 1,132,600 898,300
Consulting 1,079,700 785,900 550,500 412,900
Depreciation 180,900 114,100 95,600 62,900
Amortization of intangibles 109,000 407,200 54,500 296,300
---------------------------------------------------------------------
Total expenses 7,222,400 5,759,700 3,717,700 3,153,200
Equity earnings of investments 382,100 225,600 145,800 123,700
Loss from joint ventures (229,000) (3,100) (169,400) 5,000
Other income, net 34,300 23,500 30,500 12,900
---------------------------------------------------------------------
Income before income taxes 3,108,500 1,861,900 1,577,500 986,200
Provision for income taxes 1,197,400 655,400 591,500 365,300
---------------------------------------------------------------------
Net income $ 1,911,100 $ 1,206,500 $ 986,000 $ 620,900
=====================================================================
Net income per common share-basic $ 0.27 $ 0.18 $ 0.14 $ 0.09
=====================================================================
Net income per common share - assuming dilution $ 0.26 $ 0.17 $ 0.13 $ 0.08
=====================================================================
</TABLE>
See accompanying notes.
2
<PAGE>
Tremont Advisers, Inc.
Condensed Consolidated Statement of Shareholders' Equity
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Additional Total
Par Value Paid In Retained Shareholders'
Class A Class B Capital Earnings Equity
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1999 $ 16,000 $ 40,200 $ 7,901,800 $ 2,698,200 $10,655,400
Comprehensive Income:
Net Income -- -- -- 1,911,100 1,911,100
Foreign Currency Translation 17,800
---------------------------------------------------------------------------------
Comprehensive Income 1,928,900
Issuance of Class B Common Stock-
Exercise of Employee Options -- -- 2,000 -- 2,000
(312 shares pre split)
Conversion of Class A to Class B
Common Stock (2,850 shares pre split) -- -- -- -- --
5-for-4 Stock Split
(398,024 Class A Common Stock)
(1,005,822 Class B Common Stock) 4,000 10,100 (14,100) -- --
---------------------------------------------------------------------------------
Balance at June 30, 2000 $ 20,000 $ 50,300 $ 7,889,700 $ 4,609,300 $12,586,300
=================================================================================
</TABLE>
See accompanying notes.
3
<PAGE>
Tremont Advisers, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30
2000 1999
-------------------------------------
<S> <C> <C>
Operating Activities
Net income $ 1,911,100 $ 1,206,500
Adjustments to reconcile net income
to cash provided by operating activities:
Depreciation 180,900 114,100
Amortization of intangibles 109,000 407,200
Equity earnings of investments (382,100) (222,500)
Losses from joint ventures 229,000 --
Deferred income taxes payable 506,000 238,900
Foreign currency translation adjustment 17,800 32,300
Changes in operating assets and liabilities:
Accounts receivable, net 383,400 (437,400)
Dividend receivable (9,700) --
Other assets (3,200) 162,900
Prepaid expenses and other (39,500) 260,600
Accounts payable (264,700) (170,500)
Accrued expenses (687,400) (183,100)
Deferred revenue (96,800) (75,600)
Income taxes, net (246,500) 177,800
-------------------------------------
Net cash provided by operating activities 1,607,300 1,511,200
Investing activities
Purchase of fixed assets (363,700) (219,900)
Cash paid for investments (1,550,000) (1,131,000)
Withdrawal from investments 193,000 --
Cash acquired from acquisition of TASS -- 102,000
Investments in joint ventures (92,900) (50,000)
Return of capital from joint ventures 152,300 --
-------------------------------------
Net cash used by investing activities (1,661,300) (1,298,900)
Financing activities
Proceeds from issuance of Class B Common Stock -- 357,200
Exercise of Class B Common Stock options 2,000 75,000
Tax benefit from exercise of stock options -- 19,300
-------------------------------------
Net cash provided by financing activities 2,000 451,500
Net (decrease) increase in cash and cash equivalents (52,000) 663,800
Cash and cash equivalents at beginning of period 2,879,300 1,893,800
-------------------------------------
Cash and cash equivalents at end of period $ 2,827,300 $ 2,557,600
=====================================
</TABLE>
See accompanying notes.
4
<PAGE>
Tremont Advisers, Inc.
Condensed Consolidated Statements of Cash Flows (con't)
(Unaudited)
Supplemental disclosures of cash flow information:
<TABLE>
<CAPTION>
Six months ended
June 30
2000 1999
--------------------------
<S> <C> <C>
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 six and three months ended June 30, 2000 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2000. 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, 1999.
NOTE B - Summary of Significant Accounting Policies
Use of Estimates - 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
inter-company transactions and accounts have been eliminated in consolidation.
Goodwill - 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.
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. All per share and shares outstanding data have
been restated to reflect the impact of the five-for-four stock split paid on
August 8, 2000.
Minority Interest - The Company owns 65% of Tremont Investment Management Inc.
("TIMI"). For financial reporting purposes, the assets, liabilities and losses
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
6
<PAGE>
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 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.
Reclassifications - Certain prior year balances have been reclassified to
conform with current period presentation.
NOTE C - Investments
The following table sets forth financial information of the Company's
investments in certain proprietary limited partnerships at June 30, 2000.
<TABLE>
<CAPTION>
American Masters American Masters American Masters American Masters
Broad Market Broad Market Opportunity Market Neutral
Fund, L.P. Prime Fund, L.P. Fund, L.P. Fund, L.P.
-------------------------------------------------------------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Total assets $ 324,984,500 $ 448,231,100 $ 5,630,200 $ 14,762,800
Total liabilities 2,177,900 164,283,400 2,500 1,411,800
Net investment income/(loss) $ 4,065,200 $ (1,323,600) (2,500) (69,700)
Realized and unrealized gain 20,411,500 26,124,300 130,200 1,133,600
-------------------------------------------------------------------------------
Net income $ 24,476,700 $ 24,800,700 $ 127,700 $ 1,063,900
===============================================================================
General Partner TPI TPI TPI TFI
GP investment in partnership--at market value $ 1,038,100 $ 614,500 $ 511,600 $ 760,200
GP investment in partnership--at
cost 423,600 467,900 500,000 605,000
Proportionate share of earnings * 82,200 60,100 11,600 65,400
Proportionate share of fund's net assets 0.32% 0.22% 9.35% 5.69%
</TABLE>
* Proportionate share of earnings is included in equity in earnings of
investments in the condensed consolidated statements of income.
American Masters Opportunity Fund, L.P. - American Masters Opportunity Fund,
L.P. is a Delaware limited partnership that was organized for the purpose of
achieving long-term capital growth, generating positive returns irrespective of
stock market volatility, and preservation of capital utilizing a multi-manager,
multi-strategy approach. TPI invested $500,000 in the fund which was launched
June 1, 2000.
Tremont Broad Market Fund, LDC - Tremont Broad Market Fund, LDC ("TBMF") is a
Cayman Island limited duration corporation organized for the purpose of
achieving capital growth through hedged investments. At June 30, 2000 and
December 31, 1999, TBL's investment in TBMF was $1,787,700 (cost - $1,650,000)
and $640,900 (cost - $600,000), respectively. For the six months ended June 30,
2000, TBL's proportionate
7
<PAGE>
share of net income is $96,800. TBL serves as the investment adviser,
administrator and registrar and transfer agent of TBMF.
Meridian Horizon Fund, L.P. - Meridian Horizon Fund, L.P. ("Meridian") is a
Delaware limited partnership that was organized for the purpose of achieving a
high total return and preservation of capital utilizing a multi-manager approach
to investing. At June 30, 2000, total assets of the fund were $560 million. In
addition, net investment losses for the six and three months ended June 30, 2000
were $3.5 million and $1.8 million, respectively, and realized and unrealized
gains were $40.8 million and $.4 million, respectively, resulting in net income
(loss) of $37.4 million and $(1.4) million, respectively. At June 30, 2000, TPI
had an investment of $538,400 (cost - $250,000), representing .11% of Meridian's
net assets. For the six months ended June 30, 2000, TPI's proportionate share of
Meridian's income is $36,900.
NOTE D -Investments in Joint Ventures
At June 30, 2000, TBL's investment in Tremont MRM Services Limited ("TMRM"), an
international risk management company incorporated under the laws of Bermuda, in
which TBL has a 38.75% interest, was $392,200 (cost - nil). In addition, for the
six months ended June 30, 2000, TBL's proportionate share of net income was
$149,600. TMRM provides product development, marketing and administrative
services to TIIL. On April 11, 2000, TBL received from TMRM a dividend of
$111,600 and at June 30, 2000, had an additional dividend receivable of $40,700.
At June 30, 2000 and December 31, 1999, TBL's 24.5% interest in FITX Group
Limited ("FITX") was $1,489,900 (cost - $439,200) and $1,775,600 (cost -
$346,300), respectively. For the six and three months ended June 30, 2000, TBL's
proportionate share of losses were $378,600 and $209,000, respectively. In
addition, FITX has agreed to pay TBL on-going annual royalties for net revenues
earned in connection with the on-line usage of the TASS+ database. These
royalties were not significant for the six months ended June 30, 2000.
NOTE E - Accrued Expenses
Accrued expenses consist of the following:
June 30, 2000 December 31, 1999
----------------------------------
(Unaudited) (Audited)
Consulting fees $ 715,200 $1,027,200
Compensation 592,200 507,000
Professional fees 224,800 262,500
Short-term notes payable 95,600 368,400
Employee benefits payable 60,000 138,800
Other 117,600 188,900
---------- ----------
$1,805,400 $2,492,800
========== ==========
8
<PAGE>
NOTE F - Shareholders Equity
On June 6, 2000, 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 was payable to Stockholders of
record on July 31, 2000, Class A Common Stock and Class B Common Stock were
increased and additional paid in capital was decreased by $4,000 and $10,100,
respectively. All per share and shares outstanding data have been restated to
reflect the impact of the stock split.
On June 6, 2000, the Board of Directors also approved a buy back of 200,000
shares of the Company's Class A Common Stock at a price of $11.50 per share (See
Note L - Subsequent Events).
NOTE G - Stock Options
A summary of the Company's stock option activity for the six months ended June
30, 2000 is as follows:
Outstanding-beginning of period: 978,590
Granted --
Exercised (390)
Lapsed --
--------
Outstanding-end of period 978,200
========
Exercisable at end of period 835,455
========
NOTE H - Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and deferred tax assets as of June 30,
2000 and December 31, 1999 are as follows:
9
<PAGE>
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
---------------------------------
(Unaudited) (Audited)
<S> <C> <C>
Deferred tax liabilities:
Tax over book depreciation $ 11,700 $ 16,600
Unrealized appreciation in limited partnerships 42,400 36,700
Undistributed earnings of foreign subsidiary 1,393,100 829,000
---------------------------------
Total deferred tax liabilities 1,447,200 882,300
Deferred tax assets:
Net operating loss carryforward of foreign subsidiaries 330,400 248,800
Bad debt reserves 4,100 4,100
Organization costs 200 800
Deferred revenue of foreign affiliate 71,800 8,000
Valuation allowance (330,400) (248,800)
---------------------------------
Total deferred tax assets 76,100 12,900
---------------------------------
Net deferred tax liability $ 1,371,100 $ 869,400
=================================
</TABLE>
The income tax provision gives effect to permanent differences between
financial and taxable income, resulting in a higher effective tax rate than
the statutory income tax rate. The unaudited reconciliation of income tax
attributable to income before income taxes computed at the U.S. federal
statutory tax rates to income tax expense is:
<TABLE>
<CAPTION>
Six months ended
June 30
2000 1999
---------------------------------------------------
Amount Percent Amount Percent
---------------------------------------------------
<S> <C> <C> <C> <C>
Statutory federal income tax rate $ 1,056,900 34.0% $ 635,800 34.0%
State taxes, net of federal benefit 92,800 3.0% 68,300 3.7%
Permanently reinvested foreign income - 0.0% (136,000) -7.3%
Change in valuation allowance 81,600 2.6% 144,100 7.7%
Other (33,900) -1.1% (56,800) -3.1%
---------------------------------------------------
$ 1,197,400 38.5% $ 655,400 35.0%
===================================================
<CAPTION>
Three months ended
June 30
2000 1999
---------------------------------------------------
Amount Percent Amount Percent
---------------------------------------------------
<S> <C> <C> <C> <C>
Statutory federal income tax rate $ 536,400 34.0% $ 338,100 34.0%
State taxes, net of federal benefit 39,900 2.5% 40,300 4.1%
Permanently reinvested foreign income - 0.0% (68,000) -6.8%
Change in valuation allowance 200 0.0% 115,500 11.7%
Other 15,000 1.0% (60,600) -6.3%
---------------------------------------------------
$ 591,500 37.5% $ 365,300 36.7%
===================================================
</TABLE>
10
<PAGE>
During the six months ended June 30, 2000, the Company made federal income tax
payments and state income, minimum and capital tax payments of $770,000 and
$172,000, respectively. Federal and state payments of $175,000 and $42,000,
respectively, were made for the six months ended June 30, 1999.
Deferred income taxes were not provided on certain undistributed foreign
earnings (cumulatively $1,170,000 at June 30, 2000) of TBL because such
undistributed earnings are expected to be reinvested indefinitely overseas. If
these amounts were not considered permanently reinvested, additional deferred
taxes of approximately $397,800 would have been provided.
At June 30, 2000 and 1999, the Company had no net operating loss carryforwards
for U.S. federal tax purposes. At June 30, 2000, TIMI, the Canadian subsidiary,
and TASS, the U.K. subsidiary, have generated cumulative net operating losses
for tax purposes of approximately $321,000 and $600,000, respectively, against
which a full valuation allowance has been recorded. The net operating loss carry
forward period for TIMI is seven years and there is no limitation on the carry
forward loss period for TASS.
NOTE I - Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Six months ended Three months ended
June 30 June 30
2000 1999 2000 1999
----------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Numerator:
Net Income - numerator for basic and dilutive earnings per share $1,911,100 $1,206,500 $ 986,000 $ 620,900
(income available to stockholders)
Denominator:
Denominator for basic earnings per share - weighted average shares 7,019,494 6,848,672 7,019,625 7,003,778
Effect of dilutive securities:
Employee stock options 436,073 382,546 457,038 418,165
---------- ---------- ---------- ----------
Denominator for diluted earnings per share - adjusted weighted-average
Shares and assumed conversions 7,455,567 7,231,218 7,476,663 7,421,943
========== ========== ========== ==========
Basic earnings per share $ 0.27 $ 0.18 $ 0.14 $ 0.09
========== ========== ========== ==========
Diluted earnings per share $ 0.26 $ 0.17 $ 0.13 $ 0.08
========== ========== ========== ==========
</TABLE>
11
<PAGE>
NOTE J - 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.
NOTE K - Segment and Geographic Data
The Company is a holding company having three core areas of business: consulting
services, information and research, and investment products. The Company's
clients are investment funds, investment managers, institutional investors and
high net worth individuals to whom the Company's subsidiaries provide advice
concerning the organization and management of their investment portfolio and
programs. The Company also provides specialized investment services, sponsors
and manages its own proprietary single-manager and multi-manager investment
funds, as well as providing consulting services to investment management firms
and individual investment advisers. The Company derives a significant portion of
its revenues from proprietary asset-based fees and consulting services
agreements with single-manager and multi-manager investment funds or their
sponsors and advisers.
The following table provides a summary of the types of fees earned with respect
to each of the Company's core areas of business:
<TABLE>
<CAPTION>
Six months ended Three months ended
June 30 June 30
2000 1999 2000 1999
--------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues
Proprietary investment funds
Asset-based fees $ 5,495,300 $ 3,664,700 $ 2,872,900 $ 1,903,500
Consulting services
Asset-based fees 2,794,100 1,945,700 1,553,400 962,400
Annual retainer and special project fees 638,100 693,200 299,200 375,100
Administration fees 189,000 115,000 96,200 94,900
Royalties 5,100 -- -- --
--------------------------------------------------------------------
3,626,300 2,753,900 1,948,800 1,432,400
Information sales 760,800 579,100 372,400 434,700
Commissions 163,000 247,100 78,100 146,700
Performance-based fees 98,100 130,800 16,100 80,500
--------------------------------------------------------------------
Total Revenues $10,143,500 $ 7,375,600 $ 5,288,300 $ 3,997,800
=========== =========== =========== ===========
</TABLE>
12
<PAGE>
The following table provides a summary of the types of fees earned by geographic
location:
<TABLE>
<CAPTION>
Revenues (a) Revenues (a)
Six months ended Three months ended
June 30 June 30
2000 1999 2000 1999
--------------------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
United States $ 5,904,300 $ 4,496,200 $ 3,022,400 $ 2,372,300
Bermuda 3,421,100 2,231,300 1,822,900 1,120,700
Canada -- -- -- --
United Kingdom 818,100 648,100 443,000 504,800
--------------------------------------------------------------------------------
Consolidated Total $10,143,500 $ 7,375,600 $ 5,288,300 $ 3,997,800
=========== =========== =========== ===========
</TABLE>
(a) Revenues are attributed to countries based on the location of the subsidiary
performing the services.
Long-lived assets are substantially located in the United States and the United
Kingdom.
Certain proprietary investment funds accounted for significant percentages of
the Company's consolidated revenues, as follows:
<TABLE>
<CAPTION>
Six months ended Three months ended
June 30 June 30
2000 1999 2000 1999
-------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
American Masters Broad Market Fund, L.P. 13.9% 13.6% 13.6% 12.6%
American Masters Broad Market Prime Fund, L.P. 17.9% 17.4% 18.1% 16.4%
Kingate Global Fund Class B Shares 14.4% 15.4% 14.5% 14.4%
</TABLE>
NOTE L - Subsequent Events
On July 20, 2000 the Company's offer to purchase 200,000 shares of its Class A
Common Stock at a price of $11.50 per share in cash (the "Tender Offer")
terminated. After the completion of the Tender Offer, and as adjusted for the
five-for-four stock split paid on August 8, 2000, the number of outstanding
shares of the Company's Class A Common Stock and Class B Common Stock were
1,740,293 and 5,029,333, respectively.
On July 25, 2000, the Company executed a two-year Revolving Credit Promissory
Note, due on July 31, 2002 (the "Revolver") in an amount not to exceed $2.5
million. On July 26, 2000, the Company drew down $1,975,000 from the Revolver to
fund a portion of the purchase of the 200,000 shares of Class A Common Stock
pursuant to the Tender Offer. The balance of the Revolver will be used for
working capital needs arising from time to time. Borrowings under the Revolver
bear interest, at the Company's option, at the bank's prime rate or the London
Interbank Offered Rate plus a margin of 2%. The Revolver is secured by a pledge
of the management fees payable by certain proprietary products to TPI and TPI's
limited partnership interest in the
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<PAGE>
American Masters Opportunity Fund, L.P. which is currently valued at $1.8
million. The Company must also comply with certain debt covenants.
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
("TBL") in certain offshore mutual funds and Tremont Securities, Inc. ("TSI")
for assets placed in certain domestic limited partnerships. 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.
Proprietary asset-based fees for the six months ended June 30, 2000 increased
$1,830,600, or 50.0%, as compared to the six months ended June 30, 1999. At the
Company's principal domestic subsidiary, Tremont Partners, Inc. ("TPI"),
proprietary asset-based fees increased from $2,287,100 for the six months ended
June 30, 1999 to $3,232,500 for the six months ended June 30, 2000. This
increase was primarily due to increases in revenues from American Masters Broad
Market Prime Fund, L.P. ($539,800 increase) and American Masters Broad Market
Fund, L.P. ($407,100 increase). At TBL, proprietary asset-based fees increased
from $1,376,300 for the six months ended June 30, 1999 to $2,214,700 for the six
months ended June 30, 2000. This increase was primarily due to increases in
revenues from Tremont Broad Market Fund, LDC ($483,600 increase) and Kingate
Global Fund Class B Shares ($326,500 increase), as well as the addition of
American Masters AG Absolute Fund, LDC ($28,300 increase) which was launched
September 1, 1999. The remaining increase in proprietary asset based fees of
$46,800 was generated by American Masters Market Neutral Fund, L.P. whose
General Partner is Tremont Futures, Inc.
Proprietary asset-based fees for the three months ended June 30, 2000 increased
$969,400, or 50.9%, as compared to the three months ended June 30, 1999. At TPI,
proprietary asset-based fees increased from $1,201,100 for the three months
ended June 30, 1999 to $1,676,400 for the three months ended June 30, 2000. This
increase was primarily due to increases in revenues from American Masters Broad
Market Prime Fund, L.P. ($280,600 increase) and American Masters Broad Market
Fund, L.P. ($195,300 increase). At TBL, proprietary asset-based fees increased
from $700,000 for the three months ended June 30, 1999 to $1,170,900 for the
three months ended June 30, 2000. This increase was primarily due to increases
in revenues from Tremont Broad Market Fund, LDC ($249,600 increase) and Kingate
Global Fund Class B Shares ($169,900 increase), as well as, the addition of
American Masters AG Absolute Fund, LDC ($20,600 increase) which was launched
September 1, 1999. The remaining increase in proprietary asset based fees of
$23,200 was generated by American Masters Market Neutral Fund, L.P.
14
<PAGE>
Consulting fees for the six months ended June 30, 2000 increased $872,400, or
31.7%, as compared to the six months ended June 30, 1999. This increase was
primarily due to increased assets under management by the underlying investment
vehicles. At TPI, the increase was primarily due to increased revenues from
Meridian Horizon Fund, L.P. ($202,900 increase), Winston Partners, L.P. ($68,300
increase) and Security Equity Life Insurance Company ($61,100 increase). At TBL,
the increase was primarily a result of increased revenues from two new
unaffiliated clients ($255,700 increase). At TSI, consulting fees increased
$32,000 or 48.1% primarily as a result of increased assets under management in
certain domestic limited partnerships.
Consulting fees for the three months ended June 30, 2000 increased $516,400, or
36.1%, as compared to the three months ended June 30, 1999. This increase was
primarily due to increased assets under management. At TPI, the increase was
primarily due to increased revenues from Meridian Horizon Fund, L.P. ($95,100
increase), Winston Partners, L.P. ($36,300 increase) and Security Equity Life
Insurance Company ($32,000 increase). At TBL, the increase was primarily a
result of increased revenues from two new unaffiliated clients ($255,700
increase).
Database information sales increased by $181,700, or 31.4%, for the six months
ended June 30, 2000 as compared to the six months ended June 30, 1999 as a
result of the Company owning TASS for a different amount of time in each period.
Its operations have been included in the statements of income from the date of
acquisition (ie. four months in 1999 versus six months in 2000). Database
information sales decreased by $62,300, or 14.3%, for the three months ended
June 30, 2000 as compared to the three months ended June 30, 1999 due to the
delayed launch of the TASS+ database, which became available on July 1, 2000 and
the phase out of the previous database.
Commissions decreased by $84,100, or 34%, and $68,600, or 46.8%, for the six and
three months ended June 30, 2000 as compared to the six and three months ended
June 30, 1999. These decreases resulted primarily from decreased trading
activities at TSI.
Performance fees for the six and three months ended June 30, 2000 decreased by
$32,700, or 25%, and $64,400, or 80%, as compared to the six and three months
ended June 30, 1999 primarily as a result of an incentive fee paid in 1999
relating to 1998, which did not recur for the year ended December 31, 1999.
Management expects that during the remainder of 2000 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
proprietary products. In addition, management expects performance fee revenue to
increase during periods of positive market conditions, but management cannot
predict with any accuracy whether income from performance fees will continue in
the future due to changing market conditions and other outside factors.
Compensation expense increased for the six and three months ended June 30, 2000
by $1,013,700, or 36.9%, and $401,700, or 27.1%, as compared to the six and
three months ended June 30, 1999. This increase resulted from 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 51 at June 30, 1999 to 64 at June
30, 2000. Compensation expense also increased as a result of salary increases
15
<PAGE>
for certain employees that became effective January 1, 2000 and as a result of
increased health care costs and bonus accruals due to the increase in the 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 increased for the six and
three months ended June 30, 2000 by $386,600 or 22.7%, and $234,300, or 26.1%,
as compared to the six and three months ended June 30, 1999. The increase in
general and administrative expenses was primarily related to the Company's
continued expansion to service its growth and the inclusion of TASS for six
months ended June 30, 2000 versus four months for the period ended June 30,
1999.
Consulting expenses increased $293,800, or 37.4%, and $137,600, or 33.3%, for
the six and three months ended June 30, 2000 as compared to the six and three
months ended June 30, 1999 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.
Depreciation increased $66,800, or 55.6%, and $32,700, or 52%, for the six and
three months ended June 30, 2000 as compared to the six and three months ended
June 30, 1999 primarily as a result of fixed asset purchases after June 1999.
These purchases consisted of computer equipment for new employees as a result of
the Company's continued expansion, a software update to the Company's database,
as well as additional servers to upgrade the computer network system in the U.S.
and Bermuda offices.
Amortization of intangibles decreased $298,200, or 73.2%, and $241,800, or
81.6%, for the six and three months ended June 30, 2000 as compared to the six
and three months ended June 30, 1999. These decreases are a result of the
completion of the amortization of customer contracts recorded because of the
TASS acquisition in March 1999.
Equity earnings of investments increased $156,500, or 69.4%, and $22,100, or
17.9%, for the six and three months ended June 30, 2000 as compared to the six
and three months ended June 30, 1999. This increase was a result of an increase
in the amount invested by the Company. The Company invested $500,000 in its
newest proprietary product, American Masters Opportunity Fund, L.P., which
launched June 1, 2000. The Company also invested an additional $1,050,000 in
Tremont Broad Market Fund, LDC during the six months ended June 30, 2000.
Management expects equity earnings to continue to increase during periods of
positive market conditions, but management cannot predict with any accuracy
whether such earnings will continue in the future due to changing market
conditions.
Loss from joint ventures increased $225,900, and $174,400, primarily as a result
of the Company's proportionate share of losses of FITX Group Limited, offset by
its proportionate share of gains from Tremont MRM Services Limited.
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.
16
<PAGE>
Cash provided by operations increased $96,100, or 6.4%, for the six months ended
June 30, 2000 as compared to the six months ended June 30, 1999. This increase
was primarily a result of an increase in net income as well as changes in
accounts receivable, deferred taxes, and losses from joint ventures, offset by
changes in accrued expenses, prepaid expenses, other assets, and equity in
earnings of investments. Cash used in investing activities increased as a result
of increased investing activities offset by a return of capital from Gamtree,
L.P. and Tremont MRM Services Limited. Cash provided by financing activities
decreased due to issuance of Class B Common Stock during the six months ended
June 30, 1999 that did not recur in the six months ended June 30, 2000.
On July 20, 2000, the Company's offer to purchase 200,000 shares of its Class A
Common Stock at a price of $11.50 per share in cash (the "Tender Offer")
terminated. After the completion of the Tender Offer, and adjusted for the
five-for-four stock split paid on August 8, 2000, the number of outstanding
shares of the Company's Class A Common Stock and Class B Common Stock were
1,740,293 and 5,029,333, respectively.
On July 25, 2000, the Company executed a two-year Revolving Credit Promissory
Note, due on July 31, 2002 (the "Revolver") in an amount not to exceed $2.5
million. On July 26, 2000, the Company drew down $1,975,000 from the Revolver to
fund a portion of the purchase of the 200,000 shares of Class A Common Stock
pursuant to the Tender Offer. The balance of the Revolver will be used for
working capital needs arising from time to time. Borrowings under the Revolver
will bear interest, at the Company's option, at the bank's prime rate or the
London Interbank Offered Rate plus a margin of 2%. The Revolver is secured by a
pledge of the management fees payable by certain proprietary products to TPI and
TPI's limited partnership interest in the American Masters Opportunity Fund,
L.P. which is currently valued at $1.8 million. The Company must also comply
with certain debt covenants.
At June 30, 2000 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 June 30, 2000, the shares of common stock were valued at zero.
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 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.
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
17
<PAGE>
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.
18
<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 amounts do not include interest or penalties
since the Company has been informed by the IRS that, based upon its initial
review of this matter, interest and penalties may not be assessed.
The Company has been reimbursed by its insurance carrier for a substantial
portion of the above federal tax liability. The Company is also cooperating with
the authorities in its ongoing criminal investigation of Payroll Express and
Kast and has filed a Proof of Claim in the Payroll Express bankruptcy
proceeding.
Vasu. The Company has been sued by a former employee for alleged breach of
contract and defamation. In a decision dated September 21, 1999, the Connecticut
District Court held that the claim for defamation must be arbitrated under NASD
rules. Plaintiff has not commenced arbitration proceedings. By Notice of Motion
dated October 18, 1999, the Company moved to dismiss the complaint in its
entirety. The Company believes that the suit is without merit; however, should
the plaintiff prevail, the Company believes that it is likely that the damages
will not be material to the Company's consolidated financial condition or
results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Stockholders held on June 6, 2000. 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.
For Against
------------------------------
Sandra L. Manzke 9,097,876 17,087
Robert I. Schulman 9,097,876 17,087
John L. Keeley, Jr. 9,097,876 17,087
Jimmy L. Thomas 9,097,876 17,087
Alan A. Rhein 9,097,876 17,087
Richard E. O'Brien 9,097,876 17,087
Nicola Meaden 9,097,751 17,212
Bruce Ruehl 9,082,391 32,572
19
<PAGE>
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, 2000. The vote was as follows:
For Against Abstain
---------------------------------------------------
9,104,751 10,212 -
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
The following exhibits are included herein:
Exhibit 27 - Financial Data Schedule
Exhibit 10.67 - Revolving Credit Promissory Note - Dated July 25, 2000
b) Reports on Form 8-K
The Company filed a report on Form 8-K dated June 14, 2000 describing the offer
to buy back up to 200,000 shares of the Company's outstanding shares of Class A
Common Stock. The report also described the five-for-four stock split, approved
by the Company's Board of Directors, of both the Company's Class A Common Stock
and Class B Common Stock, with no change in par value. Shareholders of record as
of July 31, 2000 were eligible for the stock split which was paid on August 8,
2000.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Tremont Advisers, Inc.
Date: August 10, 2000 /s/ Stephen T. Clayton
------------------------------
Stephen T. Clayton
Chief Financial Officer
(Duly authorized Officer and
Principal Financial and Accounting Officer)
20
