1 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, 2001 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 (I.R.S. Employer or incorporation or organization) 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 31, 2001 was 1,677,240, and the number of shares outstanding of the Registrant's Class B Common Stock, $0.01 par value, was 5,308,322 as of the same date. 2 INDEX TREMONT ADVISERS, INC. PART I - FINANCIAL INFORMATION PAGE ITEM 1. FINANCIAL STATEMENTS. (Unaudited) Condensed Consolidated Balance Sheets - June 30, 2001 (unaudited) and December 31, 2000 (audited)....... 1 Condensed Consolidated Statements of Income - six and three months ended June 30, 2001 and 2000............... 2 Condensed Consolidated Statements of Cash Flows - six months ended June 30, 2001 and 2000......................... 3 Notes to Condensed Consolidated Financial Statements.............. 4 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS........................ 8 PART II - OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 12 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................ 12 SIGNATURE............................................................ 13 3 ITEM 1. FINANCIAL STATEMENTS Tremont Advisers, Inc. Condensed Consolidated Balance Sheets JUNE 30 DECEMBER 31 2001 2000 (UNAUDITED) (NOTE A) ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 2,709,200 $ 3,481,600 Accounts receivable, less allowance for bad debts of $60,000 and $35,000 4,345,600 5,163,800 Income taxes receivable 425,900 130,300 Due from officers 570,000 -- Prepaid expenses and other current assets 393,600 178,800 ------------ ------------ Total current assets 8,444,300 8,954,500 Investments (cost $8,726,300 and $4,992,200) 10,877,100 6,677,000 Investments in joint ventures (cost $618,400 and $526,000) 961,700 1,368,200 Fixed assets, net 1,016,000 998,800 Goodwill, net 1,672,800 1,781,800 Other assets 246,100 98,000 ------------ ------------ Total assets $ 23,218,000 $ 19,878,300 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accrued expenses $ 2,731,500 $ 3,013,300 Deferred revenue 994,300 1,000,300 Accounts payable 439,100 375,500 ------------ ------------ Total current liabilities 4,164,900 4,389,100 Deferred income taxes payable 2,432,600 1,550,500 Revolving note payable 900,000 1,075,000 Deferred revenue 119,900 239,300 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; 1,980,430 and 1,985,418 shares issued and outstanding, including 250,000 shares held in treasury 19,800 19,900 Class B Common Stock, $0.01 par value, 20,000,000 and 10,000,000 shares authorized; 5,281,508 and 5,154,208 shares issued and outstanding, including 27,250 shares held in treasury 52,800 51,500 Additional paid in capital 8,985,600 8,405,800 Retained earnings 9,105,900 6,685,500 Cumulative foreign currency translation adjustment (18,200) 7,000 Common stock held in treasury, at cost (2,545,300) (2,545,300) ------------ ------------ Total shareholders' equity 15,600,600 12,624,400 ------------ ------------ Total liabilities and shareholders' equity $ 23,218,000 $ 19,878,300 ============ ============ See notes to condensed consolidated financial statements. 1 4 Tremont Advisers, Inc. Condensed Consolidated Statements of Income (Unaudited) SIX MONTHS ENDED THREE MONTHS ENDED JUNE 30 JUNE 30 2001 2000 2001 2000 ------------ ------------ ----------- ----------- REVENUES Proprietary investment funds $ 8,008,200 $ 5,498,700 $ 4,215,700 $ 2,876,300 Advisory fees 4,334,700 3,541,100 2,234,300 1,918,000 Information sales 911,100 764,900 452,100 370,600 Other 151,900 210,500 58,200 78,000 Performance fees 63,500 127,400 37,200 45,400 ------------ ------------ ----------- ----------- Total revenues 13,469,400 10,142,600 6,997,500 5,288,300 EXPENSES Compensation 5,098,800 3,760,200 2,655,800 1,884,500 General and administrative 2,667,000 2,094,800 1,378,700 1,131,600 Advisory 1,456,200 1,079,700 745,700 550,500 Depreciation 314,500 180,900 177,700 95,600 Amortization of intangibles 124,800 107,300 62,400 55,600 ------------ ------------ ----------- ----------- Total expenses 9,661,300 7,222,900 5,020,300 3,717,800 Equity earnings of investments 482,200 381,600 193,500 145,900 Loss from operations of joint ventures (455,600) (229,000) (220,600) (169,400) Other income, net 45,000 36,200 29,500 30,500 ------------ ------------ ----------- ----------- Income before income taxes 3,879,700 3,108,500 1,979,600 1,577,500 Provision for income taxes 1,459,300 1,197,400 710,300 591,500 ------------ ------------ ----------- ----------- Net income $ 2,420,400 $ 1,911,100 $ 1,269,300 $ 986,000 ============ ============ =========== =========== Net income per common share - basic $ 0.35 $ 0.27 $ 0.18 $ 0.14 ============ ============ =========== =========== Net income per common share - diluted $ 0.32 $ 0.26 $ 0.17 $ 0.13 ============ ============ =========== =========== See notes to condensed consolidated financial statements. 2 5 Tremont Advisers, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited) SIX MONTHS ENDED JUNE 30 2001 2000 ----------- ----------- OPERATING ACTIVITIES Net income $ 2,420,400 $ 1,911,100 Adjustments to reconcile net income to cash provided by operating activities: Depreciation 314,500 180,900 Amortization of intangibles 124,800 107,300 Equity earnings of investments (482,200) (381,600) Loss from operations of joint ventures 455,600 229,000 Deferred income taxes payable 882,100 506,000 Foreign currency translation adjustment (25,200) 17,800 Tax benefit from exercise of stock options 411,500 -- Changes in operating assets and liabilities: Accounts receivable, net 818,200 383,400 Due from officers (570,000) -- Dividend receivable -- (9,700) Prepaid expenses and other current assets (214,800) (38,300) Other assets (148,100) (3,200) Accrued expenses (281,800) (687,400) Deferred revenue (125,400) (96,800) Accounts payable 63,600 (264,700) Income taxes, net (295,600) (246,500) ----------- ----------- Net cash provided by operating activities 3,347,600 1,607,300 INVESTING ACTIVITIES Purchase of fixed assets (331,300) (363,700) Cash paid for investments (3,734,100) (1,550,000) Withdrawal from investments -- 193,000 Investments in joint ventures (111,500) (92,900) Distributions from joint ventures 62,400 152,300 ----------- ----------- Net cash used by investing activities (4,114,500) (1,661,300) FINANCING ACTIVITIES Borrowing from revolving note payable 1,000,000 -- Repayment of borrowing from revolving note payable (1,175,000) -- Exercise of Class B Common Stock Options 169,500 2,000 ----------- ----------- Net cash (used) provided by financing activities (5,500) 2,000 Net decrease in cash and cash equivalents (772,400) (52,000) Cash and cash equivalents at beginning of period 3,481,600 2,879,300 ----------- ----------- Cash and cash equivalents at end of period $ 2,709,200 $ 2,827,300 =========== =========== 3 6 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 accounting principles generally accepted in the United States. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2001 are not necessarily indicative of the results that may be expected for the year ending December 31, 2001. The balance sheet at December 31, 2000 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. 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 year ended December 31, 2000. Certain prior year balances have been reclassified to conform with the current period presentation. NOTE B - INVESTMENTS The following table sets forth summary financial information pertaining to the Company's domestic proprietary investment funds at June 30, 2001. AMERICAN MASTERS AMERICAN MASTERS AMERICAN MASTERS BROAD MARKET PRIME MARKET NEUTRAL BROAD MARKET FUND, FUND, L.P. FUND, L.P. L.P. Total assets $324,197,700 $606,452,600 $ 42,825,500 Total liabilities 3,011,400 142,296,800 1,817,100 Net investment income (loss) $ 3,519,800 $ 1,211,300 $ (45,300) Realized and unrealized gains 14,302,700 26,532,700 32,300 ------------ ------------ ------------ Net income $ 17,822,500 $ 27,744,000 $ (13,000) ============ ============ ============ General Partner TPI TPI TFI GP investment in partnership-at market value $ 1,359,800 $ 609,700 $ 321,100 GP investment in partnership-at cost 729,100 455,000 105,000 Proportionate share of earnings (*) 63,800 28,700 15,600 Proportionate share of fund's net assets 0.4% 0.1% 0.9% * Proportionate share of earnings is included in equity earnings of investments in the condensed consolidated statements of income. 4 7 Tremont Advisers, Inc. Notes to Condensed Consolidated Financial Statements (continued) NOTE B - INVESTMENTS (CONTINUED) AMERICAN AMERICAN AMERICAN MASTERS MASTERS MASTERS OPPORTUNITY MULTI-TECH INSURANCE FUND, L.P. FUND, L.P. FUND, L.P. ------------ ------------ ------------ Total assets $ 32,602,200 $ 27,660,200 $ 85,329,700 Total liabilities 3,144,900 57,200 30,600 Net investment loss $ (30,000) $ (20,700) $ (60,000) Realized and unrealized gains 359,200 489,900 403,300 ------------ ------------ ------------ Net income $ 329,200 $ 469,200 $ 343,300 ============ ============ ============ General Partner TPI TPI TPI GP investment in partnership-at market value $ 2,249,400 $ 34,300 $ 51,300 GP investment in partnership-at cost 2,000,000 25,000 50,000 Proportionate share of earnings (*) 149,000 8,800 1,300 Proportionate share of fund's net assets 7.6% 0.1% 0.06% * Proportionate share of earnings is included in equity earnings of investments in the consolidated statements of income. The following table sets forth summary financial information for the offshore proprietary investment funds for which the Company is a sponsor or co-sponsor at June 30, 2001: AMERICAN MASTERS TREMONT BROAD FUND MARKET FUND, "AG ABSOLUTE THE TREMONT LDC SERIES" LIMITED MASTERS FUND ------------- --------------- ------------ Total assets $183,453,800 $ 135,411,700 $599,500 Total liabilities 6,741,100 703,600 -- Net investment income (loss) $ 603,600 $ (707,400) $ -- Realized and unrealized gains 2,607,900 14,562,600 5,300 ------------ ------------- -------- Net income $ 3,211,500 $ 13,855,200 $ 5,300 ============ ============= ======== Sponsor TBL TBL TIMI Investment at market value $ 3,859,100 $ 84,200 $599,500 Investment at cost 3,450,000 60,000 500,100 Proportionate share of earnings(*) 174,800 8,300 5,300 Proportionate share of fund's net assets 2.2% 0.06% 100.0% * Proportionate share of earnings is included in equity earnings of investments in the consolidated statements of income. 5 8 Tremont Advisers, Inc. Notes to Condensed Consolidated Financial Statements (continued) NOTE C - EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share: SIX MONTHS ENDED THREE MONTHS ENDED JUNE 30 JUNE 30 2001 2000 2001 2000 ---------- ---------- ---------- ---------- Numerator: Net Income - numerator for basic and dilutive earnings per share (income available to shareholders) $2,420,400 $1,911,100 $1,269,300 $ 986,000 Denominator: Denominator for basic earnings per share - weighted average shares 6,905,977 7,019,494 6,949,100 7,019,625 Effect of dilutive securities: Employee stock options 611,804 436,073 606,548 457,038 ---------- ---------- ---------- ---------- Denominator for diluted earnings per share - adjusted weighted-average shares and assumed conversions 7,517,781 7,455,567 7,555,648 7,476,663 ========== ========== ========== ========== Basic earnings per share $ 0.35 $ 0.27 $ 0.18 $ 0.14 ========== ========== ========== ========== Diluted earnings per share $ 0.32 $ 0.26 $ 0.17 $ 0.13 ========== ========== ========== ========== During April 2001, an executive officer of the Company exercised options and purchased 114,375 shares of the Company's Class B Common Stock at an exercise price of $1.12 per share. As a result of this transaction, the Company realized a tax benefit of approximately $411,500, which was recorded as an increase to additional paid in capital. In addition, during June 2001 certain employees exercised options and purchased 7,937 shares of the Company's Class B Common Stock. NOTE D - SEGMENT AND GEOGRAPHIC DATA The Company is a holding company having three principal areas of business: developing and managing proprietary investment funds, providing investment advisory services and retrieving and selling information. The Company's proprietary investment funds, generally offered under the "American Masters" name, are domestic and off-shore single and multi-manager investment funds from which the Company earns monthly or quarterly management fees based upon net assets. 6 9 Tremont Advisers, Inc. Notes to Condensed Consolidated Financial Statements (continued) NOTE D - SEGMENT AND GEOGRAPHIC DATA (CONTINUED) Investment advisory activities include counseling clients about the organization and management of their investment portfolios or programs and providing specialized investment services to investment management firms and individual investment advisers. Advisory fees are generally based upon the amount of assets in the clients' investment vehicles. The research conducted by the Company on domestic and foreign investment advisors is critical to all aspects of its business. The Company has developed a proprietary program, which reviews and evaluates this information. Certain aspects of the program are sold to large institutions such as banks, foundations and government agencies, among others, as well as to high net worth individuals. Generally, these sales are made for a fixed fee and recorded as information sales. The following table provides a summary of the types of fees earned with respect to each of the Company's principal business areas: SIX MONTHS ENDED THREE MONTHS ENDED JUNE 30 JUNE 30 2001 2000 2001 2000 ----------- ----------- ---------- ---------- Proprietary investment funds $ 8,008,200 $ 5,498,700 $4,215,700 $2,876,300 Advisory services Asset-based fees 2,363,800 1,889,700 1,236,600 1,086,600 Fixed fees 445,000 547,000 219,600 278,300 Administration fees 986,500 527,300 508,800 271,900 Traditional fees 539,400 577,100 269,300 281,200 Other 151,900 210,500 58,200 78,000 Performance Fees 63,500 127,400 37,200 45,400 ----------- ----------- ---------- ---------- 4,550,100 3,879,000 2,329,700 2,041,400 Information sales 911,100 764,900 452,100 370,600 ----------- ----------- ---------- ---------- Total revenues $13,469,400 $10,142,600 $6,997,500 $5,288,300 =========== =========== ========== ========== The following table provides a summary of revenues earned by geographic location: SIX MONTHS ENDED THREE MONTHS ENDED JUNE 30 JUNE 30 2001 2000 2001 2000 ----------- ----------- ---------- ---------- United States $ 7,658,300 $ 5,903,400 $3,994,200 $3,022,400 Bermuda 4,759,700 3,421,100 2,414,400 1,822,900 United Kingdom 1,018,200 818,100 563,200 443,000 Canada 33,100 -- 25,700 -- ----------- ----------- ---------- ---------- Total revenues $13,469,400 $10,142,600 $6,997,500 $5,288,300 =========== =========== ========== ========== Revenues are attributed to countries based on the location of the subsidiary performing the services. Long-lived assets are substantially all located in the United States and the United Kingdom. 7 10 Tremont Advisers, Inc. Notes to Condensed Consolidated Financial Statements (continued) NOTE D - SUBSEQUENT EVENT On July 10, 2001, the Company filed a report on Form 8-K disclosing that it had entered into an Agreement and Plan of Merger by and among the Company, Oppenheimer Acquisition Corp., a Delaware corporation ("Oppenheimer"), and Joshua Acquisition Corp., a Delaware corporation, pursuant to which the Company would become a wholly-owned subsidiary of Oppenheimer. It is anticipated that the merger will be completed during the fourth quarter of 2001. 8 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS The Company's first six months of 2001 resulted in basic earnings per share growth of approximately 29.6% versus the first six months of 2000 with a total revenue increase of 32.8% over the first six months of 2000. The Company's second quarter 2001 results showed basic earnings per share growth of approximately 28.6% versus the second quarter of 2000 and a total revenue increase of 32.3% over the second quarter of 2000. Overall, revenue growth continues to be driven primarily by increased investor contributions into the Company's proprietary investment funds and an increase in advisory fees derived from the continued development of new asset-based fee client relationships. The Company continues to believe that its proprietary funds and advisory clients will contribute significantly to future growth in earnings in future periods. RESULTS OF OPERATIONS Proprietary Investment Funds Fees Fees from the Company's proprietary investment funds increased 45.6% during the first six months of 2001 to $8,008,200, up $2,509,500 over the first six months of 2000, and 46.6% in the second quarter of 2001 to $4,215,700, up $1,339,400 over the second quarter of 2000 due to the growth of the funds' net assets arising from additional investor capital contributions and overall positive investment performance. In addition, during the second half of fiscal 2000, the Company successfully launched two new proprietary funds, American Masters Opportunity Fund, L.P. and American Masters Multi-Tech Fund, L.P. These funds have experienced continued growth through the success of our growing distribution network. In addition, during the first quarter of 2001, the Company launched its American Masters Opportunity Insurance Fund, L.P. which has contributed significantly to growth in proprietary investment fund fees. Advisory Fees Advisory fees are earned from unaffiliated clients and are based upon the underlying net asset value of their investment vehicles. Advisory fees consist of asset-based fees, fixed-fee arrangements, traditional (i.e. non-alternative) investment advisory fees and administration fees. Overall, advisory fees increased 22.4% during the first six months of 2001 to $4,334,700, up $793,600 over the first six months of 2000, and 16.5% in the second quarter of 2001 to $2,234,300, up $316,300 over the second quarter of 2000. These increases are due to the growth of the net asset value of clients' investment funds arising from additional capital contributions by investors and positive investment performance. Asset-based fees continue to represent the most significant portion of total advisory fees, and they continue to represent a significant portion of the overall increase in advisory fees as a result of growth of clients' underlying investment vehicles arising from investor contributions and positive investment performance. A substantial portion of the increase in asset-based fees during the six and three months, respectively, ended June 30, 2001 is due to new client relationships established within the past eighteen months. One such relationship commenced subsequent to March 31, 2000 and was obtained as a result of the efforts of an unaffiliated third-party advisor. As discussed further under "Advisory Expenses", this particular arrangement provides for a revenue-sharing arrangement that exceeds the Company's customary revenue-sharing arrangements with other such third-party advisors. As this particular new client has contributed substantially to the growth in advisory asset-based fees, the Company has also experienced a corresponding substantial increase in its advisory expenses. Fixed fees decreased during the first six months of 2001 and the second quarter of 2001, in comparison to the first six months of 2000 and the second quarter of 2000, because of the termination of a client 9 12 relationship and as a result of TASS performing certain non-recurring consulting services during the first quarter of 2000. Traditional advisory fees have continued to decrease primarily as a result of poor market performance of the underlying mutual fund investment vehicles coupled with the fact that no new assets have been added to any of the Company's traditional consulting clients' portfolio's. Administration fees, representing the second largest component of advisory fees, continue to grow almost entirely from increases in the net assets of one of the Company's significant unaffiliated administration clients. In addition, the Company continues to experience growth in fees from certain of its proprietary products as well as other unaffiliated administration clients. The Company does not expect administration fees to increase as rapidly in future periods as the above mentioned significant client does not anticipate that its funds for which we provide administrative services will continue to grow as rapidly as they have in recent periods. Information Sales Information sales increased 19.1% during the first six months of 2001 to $911,100, up $146,200 over the first six months of 2000, and 22.0% in the second quarter of 2001 to $452,100, up $81,500 over the second quarter of 2000 due to an increase in sales of the Company's information database products. Information sales for each of the first six-month periods and each of the second quarters of 2001 and 2000 include approximately $125,000 and $62,500, respectively, from the grant of a license to FITX in December 1999. Compensation Expenses Compensation expenses increased 35.6% during the first six months of 2001 to $5,098,800, up $1,338,600 over the first six months of 2000, and 40.9% in the second quarter of 2001 to $2,655,800, up $771,300 over the second quarter of 2000 due to the Company's continuing efforts to attract and retain qualified employees to fill positions primarily within its marketing, client services and information management departments. The Company has also recently hired several new senior managers within its manager research and risk management departments. In addition, compensation levels of certain professionals within the firm have been increased in an effort to maintain competitive compensation packages. General and Administrative Expenses General and administrative expenses, consisting primarily of rent, telecommunications, travel and entertainment, professional fees and other ordinary operating expenses, increased 27.3% during the first six months of 2001 to $2,667,000, up $572,200 over the first six months of 2000, and 21.8% in the second quarter of 2001 to $1,378,700, up $247,100 over the second quarter of 2000 as a result of the Company's continued growth. For example, the Company continues to expand its corporate office space to accommodate growth in the number of employees. The Company has also completed various upgrades and enhancements to existing computer systems and software applications to accommodate the continued growth of the Company, which has resulted in increases in consulting costs. Travel costs have also increased substantially as the Company continues to pursue the development of advisory client relationships throughout the United States and Europe. Such efforts have resulted in the addition of certain new clients domestically and abroad. Advisory Expenses Advisory expenses, which are fees paid to other advisers or consultants as introducer or agent fees (including performance fees) and as commission rebates earned from soft-dollar related transactions, increased 34.9% during the first six months of 2001 to $1,456,200, up $376,500 over the first six months of 2000, and 35.5% in the second quarter of 2001 to $745,700, up $195,200 over the second quarter of 2000 due to increased revenues from the underlying investment vehicles of the applicable client arrangements. The increases in the underlying investment vehicles were due largely to additional 10 13 investor contributions. In addition, as discussed above under the caption "Advisory Fees", subsequent to the first quarter of 2000, the Company entered into a new advisory agreement of which the portion of revenues shared is higher than under other agreements. In addition, the Company shares a portion of its management fees earned from American Masters Opportunity Insurance Fund, L.P., its newest proprietary fund that was launched effective March 1, 2001. Depreciation Depreciation increased 73.9% during the first six months of 2001 to $314,500, up $133,600 over the first six months of 2000, and 85.9% in the second quarter of 2001 to $177,700, up $82,100 over the second quarter of 2000 as a result of fixed asset purchases made subsequent to June 30, 2000. These assets includes computer equipment for new employees, software updates for the Company's information database and hardware upgrades for its worldwide computer network system to accommodate the Company's ongoing growth. Equity Earnings of Investments Equity earnings of investments increased 26.4% during the first six months of 2001 to $482,200, up $100,600 over the first six months of 2000, and 32.6% in the second quarter of 2001 to $193,500, up $47,600 over the second quarter of 2000 as a result of overall positive investment performance and additional capital investments by the Company into certain of its proprietary investment funds, including an investment of $2,000,000 in the American Masters Opportunity Fund, L.P., which was launched June 1, 2000. Earnings (losses) from Operations of Joint Ventures Joint venture operations resulted in net losses of $455,600 for the first six months of 2001 and $220,600 in the second quarter of 2001 as a result of the continued anticipated losses of FITX ($555,000). These losses were offset by the positive performance of Tremont MRM Services Limited ($99,400). The Company anticipates that FITX will continue to operate at a loss for the remainder of 2001. LIQUIDITY AND CAPITAL RESOURCES At June 30, 2001, the Company had $2,709,200 in cash and cash equivalents and working capital of $4,279,400, as compared to cash and cash equivalents of $3,481,600 and working capital of $4,565,400 at December 31, 2000. Cash flow provided by operating activities was $3,347,600 for the six months ended June 30, 2001, compared to $1,607,300 for the six months ended June 30, 2000. This increase resulted from increases in net income, deferred income taxes payable, losses from operations of joint ventures, and tax benefits from the exercise of stock options, as well as a decrease in accounts receivable. Cash used by operations offsetting the above increases resulted from increases in prepaid expenses and other current assets, other assets, and the advancement of loans to certain executive officers, as well as decreases in accrued expenses and deferred revenue. In addition, equity earnings of investments resulted in a reduction of cash provided by operating activities. Cash flow used by investing activities was $4,114,500 for the six months ended June 30, 2001, compared to $1,661,300 for the six months ended June 30, 2000. The uses of cash resulted from additional investments into certain of the Company's onshore and offshore proprietary investment funds, purchases of computer equipment and furniture to support the continued growth of the Company's personnel base and technology infrastructure, and additional investments in the Company's joint venture with FITX. These uses of cash were partially offset by dividend distributions received from the Company's joint venture with Tremont MRM Services Limited. During April 2001, the Company advanced a loan to an executive officer of $370,000 that matures on April 1, 2002. 11 14 During July 2001, the Company executed a $1,000,000 letter of credit of in order to secure a ten-year lease entered into with its landlord for expanded corporate office space at its existing location beginning in 2002. The letter of credit is with the same bank that issued the Company its revolving note payable. Under the terms of the letter of credit the amount available under the revolving note payable is reduced from $2.5 million to $1.5 million, effective immediately. The Company believes that it has adequate capital resources and working capital to bring the products it developed in late 2000 and those it expects to develop in early 2001 to market and that the revenue stream from these products, as well as from existing products, will be sufficient to support future growth. The Company has no material short or long term debt obligations, other than as noted above. 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. 12 15 PART II - OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the Company's Annual Meeting of Shareholders held on June 12, 2001, and adjourned to, and reconvened on, June 28, 2001 for the purposes of confirming receipt and tabulation of shareholder votes, 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 WITHHOLD --- -------- Sandra L. Manzke 9,469,243 15,889 Robert I. Schulman 9,460,199 24,933 John J. Keeley, Jr. 9,469,243 15,889 Jimmy L. Thomas 9,469,243 15,889 Alan A. Rhein 9,469,243 15,889 Richard O'Brien 9,461,431 23,701 Nicola Meaden 9,469,243 15,889 Bruce D. Ruehl 9,421,284 63,848 The Stockholders also voted to amend its Certificate of Incorporation to increase the number of authorized shares of Class B Common Stock from 10 million Shares to 20 million Shares. The vote was as follows: FOR AGAINST ABSTAIN --- ------- ------- 6,811,917 2,672,486 -- 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, 2001. The vote was as follows: FOR AGAINST ABSTAIN --- ------- ------- 9,485,127 -- -- ITEM 6. REPORTS ON FORM 8-K The Company filed a report on Form 8-K dated July 10, 2001 disclosing that it had entered into an Agreement and Plan of Merger by and among the Company, Oppenheimer Acquisition Corp., a Delaware corporation ("Oppenheimer"), and Joshua Acquisition Corp., a Delaware corporation, pursuant to which the Company would become a wholly-owned subsidiary of Oppenheimer. 13 16 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 7, 2001 /s/ Stephen T. Clayton ------------------------ Stephen T. Clayton Chief Financial and Administrative Officer (Duly authorized Officer and Principal Financial and Accounting Officer) 14