FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
/ X / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: DECEMBER 31, 1995
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/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from: to
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Commission File Number: 0-13928
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UNITED SERVICES ADVISORS, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 74-1598370
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
7900 CALLAGHAN ROAD
SAN ANTONIO, TEXAS 78229-2327
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE)
(210) 308-1234
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
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(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes / X / No / /
APPLICABLE ONLY TO CORPORATE ISSUERS:
On January 15, 1996 there were 564,352 shares of Registrant's Class A common
stock outstanding and 6,077,922 shares of Registrant's preferred stock issued
and outstanding.
UNITED SERVICES ADVISORS, INC.
I N D E X
PART I. FINANCIAL INFORMATION
PAGE NO.
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets - ............................................. 1-2
December 31, 1995 and June 30, 1995
Consolidated Statements of Operations - ................................... 3
Six-Month and Three-Month Periods Ended
December 31, 1995 and 1994
Consolidated Statements of Changes in Cash Flows .......................... 4-5
Six-Months Ended
December 31, 1995 and 1994
Notes to Consolidated Financial Statements ................................ 6-11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ............................................12-16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS ................................................. 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K .................................. 17
SIGNATURES ................................................................ 18
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
UNITED SERVICES ADVISORS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31, JUNE 30,
1995 1995
(UNAUDITED)
------------ ------------
Current Assets
Cash and cash equivalents .............................................................. $ 1,393,827 $ 2,772,221
Trading securities at fair value (Note B) .............................................. 1,936,790 1,510,316
Receivables (Note C):
Mutual funds ........................................................................ 842,625 720,134
Accrued interest .................................................................... 414,385 504,647
Custodian fees ...................................................................... 73,992 192,248
Employees ........................................................................... 75,824 98,121
Receivable from brokers ............................................................. 193,176 104,747
Other ............................................................................... 85,485 77,098
Prepaid expenses ....................................................................... 617,727 488,773
Deferred tax asset ..................................................................... -- 63,771
------------ ------------
Total Current Assets ........................................................ 5,633,831 6,532,076
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Net Property and Equipment ................................................................. 2,572,710 2,664,820
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Other Assets
Government securities held-to-maturity/available-for-sale (Note B and D) ............... 52,818,651 113,260,361
Government securities available-for-sale, at fair value (Note B and D) ................. 16,219,000 ---
Restricted cash and investments ........................................................ 667,993 897,556
Long- term receivables ................................................................. 350,749 219,982
Long-term deferred tax asset (Note G) .................................................. 1,801,174 2,224,602
Residual equity interest ............................................................... 217,861 217,861
Investment in joint venture ............................................................ 696,915 518,073
Investment securities available-for-sale, at fair value (Note B) ....................... 2,099,465 1,466,622
Other .................................................................................. 66,423 71,169
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Total Other Assets .......................................................... 74,938,231 118,876,226
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$ 83,144,772 $128,073,122
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The accompanying notes are an integral part of this statement.
ITEM 1. FINANCIAL STATEMENTS (CONTINUED).
UNITED SERVICES ADVISORS, INC.
CONSOLIDATED BALANCE SHEETS
(Continued)
LIABILITIES AND SHAREHOLDERS' EQUITY
DECEMBER 31, JUNE 30,
1995 1995
(UNAUDITED)
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Current Liabilities
Current portion of capital lease obligations ......................................... $ 58,968 $ 93,658
Current portion of notes payable ..................................................... 39,987 38,325
Current portion of annuity obligations ............................................... 18,000 18,000
Current portion of subordinated debenture held by a related party .................... 653,981 --
Securities sold under agreement to repurchase (Note E) ............................... 68,356,213 112,201,469
Accounts payable ..................................................................... 231,364 167,598
Accrued interest payable to third parties ............................................ 131,957 388,217
Accrued interest payable to related party (Note F) ................................... 90,940 113,126
Accrued compensation and related costs ............................................... 231,443 53,700
Accrued profit sharing and 401(k) .................................................... 24,000 48,000
Accrued vacation pay ................................................................. 75,959 75,959
Accrued legal fees ................................................................... 106,727 50,722
Other accrued expenses ............................................................... 101,863 146,508
Deferred tax liability (Note G) ...................................................... 294,641 --
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Total Current Liabilities ............................................................ 70,416,043 113,395,282
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Subordinated Debenture Held By a Related Party ........................................... 3,546,035 4,534,212
Capital Lease Obligations ................................................................ 3,786 24,354
Notes Payable-Net of Current Portion ..................................................... 1,281,606 1,301,723
Annuity and Contractual Obligations ...................................................... 153,387 156,328
Commitments and Contingencies (Note H) ................................................... 300,000 --
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Total Non-Current Liabilities ..................................................... 5,284,814 6,016,617
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Total Liabilities ................................................................. 75,700,857 119,411,899
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Shareholders' Equity
Preferred stock--$.05 par value; non-voting; authorized, 7,000,000 shares; ........... 303,575 253,575
Common stock (class A)--$.05 par value; authorized, 1,750,000 shares; ................ 28,539 28,539
Common stock (class B)--$.05 par value; non-voting; authorized, 2,250,000
shares; ........................................................................... -- 50,000
Additional paid-in-capital ........................................................... 10,332,605 12,852,986
Treasury stock at cost; .............................................................. (275,241) (198,366)
Net unrealized gain on available-for-sale securities (net of tax of $239,057
and $120,914, respectively) .......................................................... 464,051 234,716
Retained earnings (deficit) .......................................................... (3,409,614) (4,560,227)
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Total Shareholders' Equity ........................................................ 7,443,915 8,661,223
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$ 83,144,772 $ 128,073,122
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The accompanying notes are an integral part of this statement.
ITEM 1. FINANCIAL STATEMENTS (continued).
UNITED SERVICES ADVISORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
SIX MONTHS ENDED THREE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------------- -------------------------------
1995 1994* 1995 1994*
REVENUE (Note C)
Investment advisory fee ............................ $ 2,716,507 $ 2,880,758 $ 1,310,425 $ 1,470,803
Transfer agent fee ................................. 1,624,965 1,672,009 866,512 864,653
Accounting fee ..................................... 254,800 230,195 125,050 116,128
Exchange fee ....................................... 120,915 133,825 56,205 64,500
Custodial fees ..................................... 294,717 240,385 159,381 150,660
Investment income (loss) ........................... 2,032,893 (157,256) 1,450,363
(75,861)
Other .............................................. 146,177 111,263 85,936 58,888
Government security interest income ................ 2,737,754 1,302,912 1,383,241 788,759
Government security accretion to par ............... 1,016,697 485,042 491,817 288,125
---------- --------- --------- ---------
10,945,425 6,899,133 5,928,930 3,726,655
EXPENSES
General and administrative ......................... 5,234,541 4,913,243 2,721,302 2,634,120
Depreciation and amortization ...................... 240,948 257,466 120,474 130,167
Interest-note payable and other .................... 62,457 189,942 28,325 38,540
Government security non-cash charge ................ -- 2,573,844 -- --
Interest expense-securities sold under
agreement to repurchase ........................ 3,411,802 1,952,163 1,677,970 1,224,149
Interest expense subordinated debenture ............ 181,368 200,000 90,684 120,000
---------- --------- --------- ---------
9,131,116 10,086,658 4,638,755 4,146,976
EARNINGS BEFORE INCOME TAXES
AND CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING .......................................... 1,814,309 (3,187,525) 1,290,175 (420,321)
PROVISIONS FOR FEDERAL INCOME TAXES
Current ............................................ -- -- -- --
Deferred (Note G) .................................. 663,697 (934,314) 445,053 (108,574)
---------- --------- --------- ---------
663,697 (934,314) 445,053 (108,574)
EARNINGS BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING ................................ $ 1,150,612 $ (2,253,211) $ 845,122 $ (311,747)
CUMULATIVE EFFECT OF CHANGE IN
ACCTG FOR MARKETABLE SECURITIES ........................ $ -- $ 43,284 -- $ --
---------- --------- --------- ---------
NET EARNINGS ........................................... $ 1,150,612 $ (2,209,927) $ 845,122 $ (311,747)
PER SHARE AMOUNTS
Primary and fully diluted
Continuing operations .............................. $ .18 $ (.40) $ .13 $ (.05)
Cumulative effect of change in accounting .......... $ -- $ .01 $ -- $ --
---------- --------- --------- ---------
NET EARNINGS ........................................... $ .18 $ (.39) $ .13 $ (.05)
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING
Primary and fully diluted .......................... 6,574,570 5,634,226 6,562,222 5,840,338
*Reclassified for comparative purposes.
The accompanying notes are an integral part of these statements.
UNITED SERVICES ADVISORS, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
DECEMBER 31,
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1995 1994*
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Cash Flows From Operating Activities:
Net earnings (loss) .................................................................. $ 1,150,612 $ (2,209,927)
Adjustments to reconcile to net cash provided by operating activities:
Depreciation and amortization ..................................................... 240,949 257,466
Government security accretion ..................................................... (1,016,697) (485,042)
Government security charge ........................................................ -- 2,573,844
Net gain on sales of securities ................................................... (1,704,728) (152,530)
Gain on disposal of equipment ..................................................... (257) (500)
Cumulative effect of change in accounting ......................................... -- (43,284)
Treasury stock granted ............................................................ 86,803 --
Changes in assets and liabilities, impacting cash from operations:
Restricted investments ............................................................ 229,563 (801,086)
Accounts receivable ............................................................... (119,259) (546,652)
Deferred tax asset ................................................................ 663,697 (934,314)
Prepaid expenses and other ........................................................ (307,798) 131,808
Trading securities ................................................................ 504,487 1,033,525
Accounts payable .................................................................. 63,766 (41,742)
Accrued expenses .................................................................. 186,657 629,597
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Total adjustments .................................................................... (1,172,817) 1,621,090
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Net Cash Used For Operations ............................................................. (22,205) (588,837)
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Cash Flows From Investing Activities:
Purchase of building and land ........................................................ -- (20,625)
Purchase of furniture and equipment .................................................. (144,215) (245,383)
Net proceeds on sale of equipment .................................................... 381 500
Proceeds on sale of available-for-sale securities .................................... 156,425 --
Purchase of available-for-sale securities ............................................ (802,666) (50,250)
Net purchase of government securities held-to-maturity ............................... -- (92,902,599)
Proceeds on sale of government securities available-for-sale ......................... 46,374,050 --
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45,583,975 (93,218,357)
Cash Flows From Financing Activities:
Payments on annuity .................................................................. (2,941) (2,743)
Payments on note payable to bank ..................................................... (18,455) (16,746)
Payments on capital lease ............................................................ (55,258) (50,572)
Payments on subordinated debenture to related party .................................. (334,196) --
Net proceeds from securities sold under agreement to repurchase ...................... 674,119 86,635,113
Net payments on securities sold under agreement to repurchase ........................ (44,519,375) --
Proceeds from issuance of subordinated debenture to related party .................... -- 6,000,000
Proceeds from issuance of preferred stock, warrants, and options ..................... 2,482,096 114,275
Proceeds from issuance of common stock (Class B) to related party .................... -- 5,000,000
Purchase of Common Stock (Class B) from related party ................................ (5,000,000) --
Purchase of Treasury stock ........................................................... (166,154) (65,635)
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(46,940,164) 97,613,692
Net Increase (Decrease) in Cash and Cash Equivalents ..................................... (1,378,394) 3,806,498
Beginning cash and cash equivalents ...................................................... 2,772,221 1,258,599
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Ending Cash and Cash Equivalents ......................................................... $ 1,393,827 $ 5,065,097
============ =============
*Reclassified for comparative purposes
The accompanying notes are an integral part of this statement.
UNITED SERVICES ADVISORS, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
DECEMBER 31,
----------------------------------
1995 1994
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Schedule of Non-Cash Investing and Financing Activities:
Issuance of shares for investment in joint venture ............................................... $ -- $ 510,000
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest ........................................................................... 3,869,135 994,246
The accompanying notes are an integral part of this statement
ITEM 1. FINANCIAL STATEMENTS (CONTINUED).
UNITED SERVICES ADVISORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A. BASIS OF PRESENTATION.
The financial information included herein is unaudited; however, such
information reflects all adjustments (consisting solely of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
presentation of results for the interim periods presented. United Services
Advisors, Inc. ("the Company" or "USAI") has consistently followed the
accounting policies set forth in the Notes to the Consolidated Financial
Statements in the Company's Form 10-K for the year ended June 30, 1995.
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, United Shareholders Services, Inc. ("USSI"),
Security Trust and Financial Company ("STFC"), A&B Mailers, Inc. ("A&B") and
U.S. Advisors (Guernsey), Ltd. ("USAG"). Additionally, the Company has
consolidated the balance sheet and results of operations of the Guernsey
offshore fund since it owned substantially all of the issued shares of the Fund
during the quarter. All inter-company balances and transactions have been
eliminated in consolidation. Certain amounts have been reclassified for
comparative purposes.
The results of operations for the six month period ended December 31, 1995
are not necessarily indicative of the results to be expected for the entire
year.
NOTE B. SECURITY INVESTMENTS.
Investments in securities are accounted for and reported in accordance with
SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities,"
effective July 1, 1994. Under this pronouncement, management determines the
appropriate classification of securities at the time of purchase and
re-evaluates such designation as of each reporting period date. If the
securities are purchased with the intent and the Company has the ability to hold
the securities until maturity, they are classified as securities
held-to-maturity and carried at amortized cost. Securities that are bought and
held principally for the purpose of selling them in the near-term are classified
as trading securities and stated at fair value with the unrealized gains and
losses included in earnings. Securities which will be held for indefinite
periods of time are classified as available-for-sale and stated at fair value
with the unrealized gains and losses included as a separate component of
shareholder's equity. The Company recognized the cumulative effect of adopting
the pronouncement in the first quarter of fiscal 1995 as a change in accounting
principle. All realized gains on the sale of securities are calculated using
cost determined on the specific identification method.
The market value of investments classified as trading at December 31, 1995
was approximately $1,900,000. The net change in the market value of trading
securities as of June 30, 1995 versus December 31, 1995 on trading securities
that has been included in earnings for the six month period was approximately
$250,000.
The Company holds U.S. Government agency notes ("Notes") with a par value of
$70,275,000 of which $53,725,000 are classified as held-to-maturity securities
and reported at their amortized cost of approximately $52,815,000. The remaining
$16,550,000 par value Note is classified as available-for-sale and is reported
at its market value of approximately $16,220,000 with approximately $101,000
(before tax) in unrealized losses recorded as a separate component of
Shareholders' Equity at December 31, 1995. The $16,550,000 par value Note was
reclassified from held-to-maturity to available-for-sale during December 1995 in
accordance with the FASB GUIDE TO IMPLEMENTATION OF STATEMENT 115 ON ACCOUNTING
FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES ("Special Report") at an
amortized cost of approximately $16,320,343. Additionally, Notes with a par
value of $47,250,000 and amortized cost of approximately $45,000,000 were also
reclassified from held-to-maturity to available-for-sale and then sold resulting
in a realized gain in excess of $1,000,000 in December 1995. See further
discussion of the Notes at Note D.
The estimated fair value of the investments classified as
available-for-sale at December 31, 1995, excluding the Notes classified as
available-for-sale discussed above, was approximately $2,100,000 with
approximately $800,000 (before tax) in unrealized gains recorded as a separate
component of Shareholders' Equity as of December 31, 1995. These investments are
reflected as non-current assets on the December 31, 1995 consolidated balance
sheet and are in private placements which were restricted for sale on the open
market as of December 31, 1995. It is anticipated the securities obtained in
these private placements will become free-trading within one year. During the
six month period, the Company recorded realized gains of approximately $127,000
on securities which were transferred from available-for-sale securities to
trading securities upon such securities becoming free trading. The Company also
recorded unrealized gains of approximately $26,600 on securities which were
transferred from available-for-sale securities to trading securities upon
becoming free trading during the six month period which are included in the net
change on trading securities of approximately $250,000.
In accordance with the agreement between the Company and United Services
Funds ("USF") discussed in detail in Note C of the Notes to the Consolidated
Financial Statements for the fiscal year ending June 30, 1995, collateral of
$750,000 has been returned to the Company since the inception of the agreement
due to the reduced percentage of USG invested in the Notes. Accordingly,
approximately $150,000 was classified as part of Restricted Investments in the
consolidated balance sheet at December 31, 1995.
NOTE C. INVESTMENT MANAGEMENT, TRANSFER AGENT AND OTHER FEES.
The Company serves as investment advisor and transfer agent to USF. For
these services the Company receives fees based on a specified percentage of net
assets under management and the number of shareholder accounts. The Company also
provides accounting services to USF and is reimbursed for in-house legal
services. Accounting services are provided to USF for an annual fee. The Company
also receives exchange, maintenance, closing, and small account fees directly
from USF shareholders. Fees for providing services to USF continue to be the
Company's primary revenue source.
The Company is also investment adviser and transfer agent to Accolade
Funds. Additionally, the Company provides administrative services to
Pauze/Swanson United Services Funds ("PSUSF") and is the investment advisor and
transfer agent to United Services Insurance Funds ("USIF"). The Company's
relationship with both PSUSF and USIF will terminate in the third quarter of the
fiscal year ending June 30, 1996.
USAI receives additional revenue from several sources including STFC
custodian and administrative fee revenues, gains on marketable securities
transactions, revenues from miscellaneous transfer agency activities including
lockbox functions as well as mailroom operations (A&B).
Investment advisory fees, transfer agency fees, accounting fees, custodian
fees and all other fees to the Company are recorded as income during the period
in which services are performed. Receivables from mutual funds represent amounts
due the Company and its wholly-owned subsidiaries for investment advisory fees,
transfer agent fees, accounting fees, and exchange fees and are net of amounts
payable to the mutual funds.
USAI has voluntarily waived or reduced its advisory fee, guaranteed that
fund expenses will not exceed certain limits, and/or has agreed to pay expenses
on several USF funds for purposes of enhancing their performance. The aggregate
amount of fees waived and expenses borne by the Company for the six month period
ended December 31, 1995 and December 31, 1994 was $1,808,696, and $1,720,400,
respectively.
Effective November 1, 1995, the Board of Trustees of USF approved an
increase in the base transfer agency fee charged to the Funds from $20 to $23
per account.
The investment advisory contract and related contracts between the Company
and USF were recently renewed and expire on or about October 25, 1996.
Management anticipates the Trustees of USF will renew the contracts.
NOTE D. GOVERNMENT SECURITIES.
As previously reported, during the fiscal year ended June 30, 1995, USAI
purchased $130,525,000 par value Notes from a USF fund of which $70,275,000 par
value Notes were held by USAI at December 31, 1995. The Notes were financed by
utilizing third party broker-dealer reverse repurchase agreements (see Note E),
issuance of a subordinated debenture, as well as USAI's cash. As the Notes were
recorded at fair value, a pre-tax non-cash charge to the results of operations
of $5,375,269 was recorded during fiscal 1995.
The Notes were initially recorded as held-to-maturity securities in
accordance with SFAS 115. However, as discussed in Note B, $63,800,000 par value
Notes were reclassified in December 1995 from the held-to-maturity category to
the available-for-sale category in accordance with the one-time reassessment
allowed by the FASB Special Report. The remaining $53,725,000 par value Notes
retain their held-to-maturity status as defined by SFAS 115 and therefore the
Company anticipates ultimately realizing the Notes par value. The Company has
recognized approximately $1,000,000 in non-cash accretion of the Notes during
the six months ended December 31, 1995.
Notes with a par value of $47,250,000 which were reclassified as
available-for-sale were sold in December 1995 resulting in realized gains in
excess of $1,000,000. Additionally, the Company expects to save over $500,000 in
annual interest costs on debt that was used to finance these Notes.
The remaining held-to-maturity Notes of $53,725,000 held at December 31,
1995 mature at their aggregate par amount during the period October 1996-March
1997 and $16,550,000 available-for-sale Note held at December 31, 1995 matures
during July 1997 unless otherwise sold prior to its stated maturity date.
NOTE E. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE.
As discussed in Note D, USAI financed the acquisition of the Notes by
entering into agreements to repurchase securities with third party
broker-dealers. The terms with the broker-dealers provide that the reverse
agreements must be collateralized by the Notes and/or cash. The Notes described
in Note D are held by the broker-dealers as collateral. Throughout fiscal 1995,
and as of January 1996, each reverse repurchase agreement has matured and has
been renewed. Management believes that the reverse repurchase agreements can be
periodically renewed until the Notes mature. All reverse repurchase agreements
are with major broker-dealers and are secured by U.S. Government Agency
obligations.
The following is a summary of information as of December 31, 1995 on the
securities sold under agreements to repurchase and the repurchase liability:
MATURES
LESS THAN 30 DAYS
-----------------
Carrying Amount of Collateral ................. $69,138,994
Market Value of Collateral .................... 68,570,256
Repurchase Liability .......................... 68,356,213
Accrued Interest Receivable on Collateral ..... 414,385
NOTE F. RELATED PARTY TRANSACTIONS.
USAI and Marleau, Lemire Inc. ("ML") closed a transaction on December 29,
1995 covering the issuance of preferred stock and the repurchase of convertible
non-voting common stock and closely related items as discussed below. Pursuant
to the agreement: (1) ML no longer has a right to return its one million shares
of Class B common stock to the Company at its original purchase price of
$5,000,000; (2) in this connection, the Company eliminated any future interest
costs it might have borne had ML converted its investment to debt; and, (3) the
Company canceled ML's warrants and options to acquire additional shares thus
reducing future dilution by approximately 1.65 million shares.
In connection with the December 1995 transaction, ML received $2,500,000
cash and 1,000,000 shares of preferred stock in exchange for USAI canceling (a)
ML's 1,000,000 shares of USAI's Class B common shares, (b) warrants giving ML
the right to acquire 1,000,000 shares of USAI's voting Class A common stock or
preferred stock, (c) ML's option to convert the remaining balance of its
subordinated debenture into approximately 648,000 shares of USAI's Preferred
stock, and (d) other rights under the December 1994 agreements relating to ML's
original purchase, including its right to obtain voting control of USAI. See
Notes N and O in the Notes to Consolidated Financial Statements for the fiscal
year ended June 30, 1995 for disclosure relating to the December 1994
transaction with ML.
As a result of the December 1995 transaction:
1. Messrs. Hubert Marleau and Richard Renaud, ML's representatives,
resigned from USAI's Board of Directors and Frank E. Holmes, USAI's
Chief Executive Officer, resigned from ML's Board of Directors;
2. USAI committed to prepay $50,000 per month toward the principal
balance outstanding on the debenture held by ML in accordance with the
prepayment clause set forth in the USAI-ML Subordinated Debenture
Agreement ("Debenture");
3. The Debenture is being amended to provide that in the event that
voting control of USAI changes, the balance owing ML under the
Debenture shall become due and payable prior to closing on the change
in control and the registration statement covering ML's 1,000,000
shares of preferred stock shall be declared effective by the SEC prior
to said closing;
4. ML has undertaken to immediately transfer the assets and the
management contract(s) of ML's Small Cap Fund ("Small Cap") from ML to
United Services Advisors Canada, Inc. ("USACI") (or one of its
designated subsidiaries), the USAI-ML joint venture previously named
United Services Advisors Wealth Management Inc, subject to regulatory
and shareholder approvals -- with all revenues generated by Small Cap,
effective January 1, 1996, whether the assets and management contracts
have been transferred or not, becoming the revenue of USACI.
5. USAI agreed to bear up to the next Cdn $250,000 in costs with respect
to USACI; and
6. The requirement that Mr. Holmes exchange 177,280 shares of USAI's
Class A common stock for 400,633 shares of ML (133,551 consolidated
shares based upon 1 new for 3 old) was canceled in its entirely; with
the understanding, however, that the 72,720 Class A common shares held
by ML and the ML shares held by Mr. Holmes are not subject to this
cancellation.
TRANSACTIONS WITH ML
During the six months ended December 31, 1995, USAI purchased 7,100 shares
of ML common stock through USAI's brokerage account at Marleau, Lemire
Securities Inc. ("MLSI"), a subsidiary of ML, for $28,324. USAI's position in ML
common stock is 42,219 shares, which represents less than 1% of the ML common
shares outstanding.
At various intervals during the quarter ended September 30, 1995, the
Company purchased 175 put options on Eurodollar futures ("Options") for premiums
of $73,938 through Marleau, Lemire Futures which is a division of MLSI. These
Options were purchased with the expectation that they will reduce USAI's
exposure to temporary declines in the value of the Notes discussed in Note D and
reduce USAI's exposure to increased interest costs on the reverse repurchase
agreements discussed in Note E in the event of a significant increase in
interest rates. These Options are exchange traded and require no cash
requirements other than the initial premiums paid. Due to the current interest
rate environment, all Options have expired as of December 31, 1995 resulting in
realized losses of approximately $50,000.
As of December 31, 1995, USAI has accrued approximately $91,000 in
subordinated debenture interest payable to ML. Additionally, in connection with
the sale of the Notes discussed in Note D, USAI repaid approximately $330,000 in
principal on the subordinated debenture.
NOTE G. INCOME TAXES.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The tax effects of these
temporary differences that give rise to the deferred tax asset as of December
31, 1995 are presented below:
DECEMBER 31,
1995
-----------
Deferred Tax Assets
Book/tax differences in the balance sheet:
Accumulated depreciation ..................... $ 114,600
Accrued expenses ............................. 23,748
Annuity obligations .......................... 58,272
Net unrealized holding gain .................. 239,057
-----------
435,677
Tax carryovers:
NOL carryover ................................ 1,537,045
Investment credit carryover .................. 34,472
Minimum tax credits .......................... 56,786
-----------
1,628,303
-----------
Deferred tax asset .............................. 2,063,980
-----------
Deferred Tax Liabilities
Trading securities .............................. (79,333)
Investment securities available-for-sale ........ (239,057)
-----------
Deferred tax liability .......................... (318,390)
-----------
Net deferred tax asset .......................... $ 1,745,590
===========
For federal income tax purposes at December 31, 1995, the Company has net
operating losses ("NOLs") of approximately $4,500,000 which will expire in
fiscal 2007 and 2010, investment credits of $34,472 expiring in 1998 and minimum
tax credits of $56,786 with indefinite expirations. Certain changes in the
Company's ownership may result in a limitation on the amount of NOLs that could
be utilized under Section 382 of the Internal Revenue Code. If certain changes
in the Company's ownership should occur subsequent to December 31, 1995, there
could be an annual limitation on the amount of NOLs that could be utilized.
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax amount will not be realized. Management believes
that taxable income during the carryforward periods will be sufficient to
utilize the NOLs which give rise to the deferred tax asset.
NOTE H. COMMITMENTS AND CONTINGENCIES
As previously reported, on June 17, 1994, Gerald C. Letch sued the Company
in state district court located in San Antonio, Texas for breach of contract.
Mr. Letch asked for an unspecified amount of damages based upon an alleged oral
promise by a deceased Company officer to pay a finder's fee for introducing
certain parties to the Company leading to the organization of PSUSF. During
August 1994 Mr. Letch amended his complaint to include PSUSF and allegations of
fraud and conspiracy between USAI and PSUSF. During June 1995 a summary
judgement was rendered in favor of PSUSF which did not exist at the time the
alleged cause of action arose.
On November 21, 1995, judgment was entered in favor of Letch. While the
jury verdict found that there was no fraud, conspiracy or malice, the jury did
find that: (1) the Company had an oral agreement to pay Letch a fee equal to 1%
of assets existing in PSUSF after it had been in existence for one year; (2)
$187,000 is the amount of damages due Letch for breach of the oral agreement
(plus an additional $16,137 for prejudgment interest); and (3) that Letch is
entitled to 50% of said damages ($93,500) as reasonable attorney's fees. Total
damages therefore aggregate of $296,637.
The Company is currently pursing an appeal--reasserting that there is not
sufficient evidence to support the finding of an enforceable agreement; and,
assuming there is an agreement, that the "Statue of Frauds" applies and the
agreement is not valid because it is not in writing.
The Company has accrued approximately $100,000 (management's best estimate
of the fees and expenses necessary to fund an appeal) and $300,000 (the
approximate amount of the judgment) which are both reflected in the Company's
Consolidated Statement of Operations for the second quarter of fiscal 1996.
Through January 1996, legal fees and expenses to defend this action were in
excess of $210,000, a significant portion of which was incurred during fiscal
year 1995.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 1995 AND 1994
The Company posted net earnings of $1,150,612 ($0.18 per share) for the six
months ended December 31, 1995, as compared to a net loss of $2,209,627 ($0.39
per share) for the six months ended December 31, 1994.
ASSETS UNDER MANAGEMENT
The Company's investment advisory fee revenue is based upon a percentage of
average net assets under management. Therefore, fluctuations in financial
markets impact revenues and results of operations.
Assets under management for the United Services Funds ("USF") for the six
months ended December 31, 1995 averaged $1.26 billion versus $1.40 billion for
the six months ended December 31, 1994. This decrease in average assets
primarily resulted from a decline in the value of gold related assets. Assets
under management for the Accolade Funds ("Accolade"), which commenced operations
in October 1994, averaged $24 million for the six months ended December 31, 1995
versus $1 million for the period from commencement of operations to December 31,
1994.
As of January 25, 1996, total assets under management for USF were
approximately $1.4 billion with gold assets up over $100 million from their six
month average. Total assets under management for Accolade were approximately $39
million.
REVENUES
Total consolidated revenues for the six months ended December 31, 1995
increased approximately 59 % over the six months ended December 31, 1994. This
resulted primarily from interest income and accretion on the U.S. Government
Agency Notes ("Notes") purchased during the fiscal year ended June 30, 1995, a
majority of which were purchased during the first quarter of fiscal 1995 as well
as realized gains in excess of $1 million on the sale of Notes during December
1995. See Note D to the December 31, 1995 Notes to the Consolidated Financial
Statements for detail regarding the sale of the Notes.
Excluding the income and realized gains from the Notes, revenue for the
period ended December 31, 1995 increased approximately 17% over the six months
ended December 31, 1994. This increase resulted primarily from a significant
increase in investment income due to: 1) the Company recognizing approximately
$350,000 more realized gains on the sales of investments; and 2) the Company
implementing SFAS 115 "Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS 115") as of July 1, 1994 (fiscal 1995) which required the
Company to recognize the change in unrealized gains and losses on investments
defined as trading securities in the Company's income statement. Approximately
$252,000 of unrealized appreciation on trading securities was included in
operations for the six months ended December 31, 1995 compared to approximately
$370,000 of unrealized depreciation on trading securities was included in
operations for the six months ended December 31, 1994. This unrealized
appreciation on the Company's trading securities reflects improved market
conditions over the previous year.
EXPENSES
Total consolidated expenses for the six months ended December 31, 1995
decreased approximately 10 % over the six months ended December 31, 1994. This
net decrease resulted primarily from a combination of: 1) a non-recurring
non-cash charge of approximately $2.5 million relating to the purchase of the
Notes incurred in the first quarter of fiscal 1995; and 2) an increase in
interest expense of approximately $1.4 million on securities sold under
agreement to repurchase with broker-dealers from the previous six months. This
increase in interest expense is due to the fact that $93.275 million par value
Notes were purchased throughout the quarter ended September 30, 1994, while
$117.525 million par value Notes were held substantially for the entire six
months ended December 31, 1995.
Exclusive of the expenses attributable to the purchase and financing of the
Notes, expenses of the Company for the six month period ended December 31, 1995
increased 3% over the six months ended December 31, 1994 primarily as a result
of an increase in legal fees of approximately $130,000 and the settlement
accrual of $300,000 related to the Letch litigation (see detail of the fact
pattern relating to the Letch litigation at Note H to the December 31, 1995
Consolidated Financial Statements). On the other hand, sales promotion costs
decreased primarily due to more efficient uses of our marketing resources. The
Company does not expect any further significant charges relating to the Letch
litigation.
THREE MONTHS ENDED DECEMBER 31, 1995 AND 1994
The Company posted net earnings of $845,122 ($0.13 per share) for the three
months ended December 31, 1995, as compared to a net loss of $311,747 ($0.05 per
share) for the three months ended December 31, 1994.
ASSETS UNDER MANAGEMENT
The Company's investment advisory fee revenue is based upon a percentage of
average net assets under management. Therefore, fluctuations in financial
markets impact revenues and results of operations.
Assets under management for USF for the three months ended December 31,
1995 averaged $1.24 billion versus $1.39 billion for the three months ended
December 31, 1994. This decrease in average assets primarily resulted from a
decline in the value of gold related assets. To help offset this decrease,
assets under management for Accolade, which commenced operations in October
1994, averaged $29 million for the three months ended December 31, 1995 versus
$1 million for the period from commencement of operations to December 31, 1994.
REVENUES
Total consolidated revenues for the three months ended December 31, 1995
increased approximately 59 % over the three months ended December 31, 1994. This
resulted primarily from interest income and accretion on the Notes purchased
during the fiscal year ended June 30, 1995, a majority of which were purchased
during the first quarter of fiscal 1995, as well as realized gains in excess of
$1 million on the sale of Notes during December 1995.
Excluding the interest and accretion income and realized gains from the
Notes, revenue for the three months ended December 31, 1995 increased
approximately 7% over the three months ended December 31, 1994. This increase
resulted primarily from: 1) the Company recognizing approximately $270,000 more
in realized gains on the sales of investments during the three months ended
December 31, 1995 versus the three months ended December 31, 1994; and 2)
approximately $50,000 of unrealized depreciation on trading securities was
included in operations for the three months ended December 31, 1995 compared to
approximately $120,000 of unrealized depreciation on trading securities which
was included in operations for the three months ended December 31, 1994.
EXPENSES
Total consolidated expenses for the three months ended December 31, 1995
increased approximately 12 % over the three months ended December 31, 1994. A
significant portion of this increase resulted from an increase in interest
expense of approximately $425,000 on securities sold under agreement to
repurchase with broker-dealers from the previous three months. This increase in
interest expense is due to the fact that the Company held only $93.275 million
par value Notes throughout the quarter ended December 31, 1994, while the
Company held $117.525 million par value Notes for the majority of the quarter
ended December 31, 1995.
Exclusive of the expenses attributable to the purchase and financing of the
Notes, expenses of the Company increased 2% over the three months ended December
31, 1994 primarily as a result of an increase in legal fees and the settlement
accrual relating to the Letch litigation discussed above. On the other hand,
sales promotion costs and salaries decreased primarily due to a more efficient
uses of our Company's marketing and personnel resources.
LIQUIDITY AND CAPITAL RESOURCES
During the first six months of fiscal year 1996, the Company experienced a
decrease in cash and cash equivalents. This net decrease was primarily due to
the cash outflows associated with the transaction with Marleau, Lemire Inc.
("ML") in December 1995. On the other hand, the Company realized positive cash
inflows related to its investment activities.
DECEMBER 1995 MARLEAU, LEMIRE TRANSACTION
As fully disclosed in Note F to the December 31, 1995 Notes to the
Consolidated Financial Statements, USAI and Marleau, Lemire Inc. ("ML") closed a
transaction on December 29, 1995 covering the issuance of preferred stock and
the repurchase of convertible non-voting common stock. Pursuant to the
agreement: (1) ML on longer has a right to return its one million shares of
Class B common stock to the Company at its original purchase price of
$5,000,000; (2) in this connection, the Company eliminated any future interest
costs it might have borne had ML converted its investment to debt; and, (3) the
Company canceled of ML's warrants and options to acquire additional shares
reduce future dilution by approximately 1.65 million shares.
In connection with the December 1995 transaction, ML received $2,500,000
cash and 1,000,000 shares of preferred stock in exchange for USAI cancelling (a)
ML's 1,000,000 shares of USAI's Class B common shares, (b) warrants giving ML
the right to acquire 1,000,000 shares of USAI's voting Class A common stock or
preferred stock, (c) ML's option to convert the remaining balance of its
subordinated debenture into approximately 648,000 shares of USAI's preferred
stock, and (d) other rights under the December 1994 agreements relating to ML's
original purchase, including its right to obtain voting control of USAI. See
Notes N and O in the Notes to Consolidated Financial Statements for the fiscal
year ended June 30, 1995 for additional disclosure relating to the December 1994
transaction with ML.
Additionally, as result of the December 1995 transaction: (1) USAI
committed to prepay $50,000 per month toward the principal balance outstanding
of the debenture held by ML; (2) ML has undertaken to immediately transfer the
assets and the management contract(s) of ML's Small Cap Fund ("Small Cap") from
ML to United Services Advisors Canada, Inc. ("USACI") (or one of its designated
subsidiaries), the USAI-ML joint venture previously named United Services
Advisors Wealth Management Inc, subject to regulatory and shareholder approvals
- -- with all revenues generated by Small Cap, effective January 1, 1996, whether
the assets and management contracts have been transferred or not, becoming the
revenue of USACI; (3) USAI agreed to bear up to the next Cdn $250,000 in costs
with respect to USACI.
As a result of this transaction, ML no longer is able to obtain voting
control of the Company and the Company has simplified its balance sheet and
capital structure and has also reduced potential dilution and future interest
costs. The Company does not expect any more material changes to the Company's
common or preferred stock during fiscal 1996.
GOVERNMENT SECURITIES
As previously reported, during the fiscal year ended June 30, 1995, USAI
purchased $130.525 million par value Notes from a USF fund of which $70.275
million par value Notes were held by USAI at December 31, 1995. The Notes were
financed by utilizing third party broker-dealer reverse repurchase agreements,
issuance of a subordinated debenture to ML, as well as USAI's cash. As the Notes
were recorded at fair value, a pre-tax non-cash charge to the results of
operations of $5,375,269 was recorded during fiscal 1995.
The Notes were initially recorded as held-to-maturity securities in
accordance with SFAS 115. However, as discussed in Note B to the December 31,
1995 Notes to the Consolidated Financial Statements, $63.8 million par value
Notes were reclassified in December 1995 from the held-to-maturity category to
the available-for-sale category in accordance with the one-time reassessment
allowed by the FASB Special Report. The remaining $53.725 million par value
Notes retain their held-to-maturity status as defined by SFAS 115; and therefore
the Company anticipates ultimately realizing the Notes' par value. The Company
has recognized approximately $1 million in non-cash accretion on the Notes
during the six months ended December 31, 1995. The Company expects to sell the
remaining $16.55 par value Note classified as available-for-sale when market
conditions warrant, or in absence of satisfactory market conditions, to hold
this Note to maturity thereby recognizing the Note's full par value.
Notes with a par value of $47.250 million, which were reclassified as
available-for-sale, were sold in December 1995 resulting in realized gains and
cash flow in excess of $1 million. Additionally, the Company expects to save
over $500,000 in annual interest costs on debt that was used to finance these
Notes.
During calendar 1994 the Federal Reserve Board raised interest rates to
address perceived inflationary pressures and could raise rates for such reason
in the future. Notwithstanding the fact that the coupon on the Notes resets
every 30 days, the Notes have been and may in the future be priced to actual
maturity as opposed to the reset date due to the lagging index used to determine
the coupon rate. As a consequence, as interest rates increase, the market value
of the Notes may decrease, which could result in the broker-dealers under the
reverse repurchase agreements requesting additional collateral. In addition, the
spread between interest due to the broker-dealers and the interest earning on
the Notes with a lagging index may increase, increasing the Company's interest
expense. To reduce this risk the Company may purchase put options on Eurodollar
futures ("Options"). In light of the current stable-to-decreasing interest rate
environment, the Company holds no Options as of December 31, 1995. The Company
will continue to monitor the interest rate environment and evaluate the
necessity of purchasing Options in the future to reduce its interest rate risk.
SUBORDINATED DEBENTURE
In conjunction with the purchase of the Notes described above, USAI issued
a $6 million 8% subordinated debenture to ML, the terms of which require
quarterly interest payments and principal payments as the Notes mature.
Principal payments of approximately $1.5 million were made during fiscal 1995
and a payment of approximately $330,000 was made during the quarter ended
December 31, 1995 leaving an outstanding balance of approximately $4.2 million.
Additionally, due to the ML transaction discussed above, beginning in the third
quarter of fiscal 1996, USAI will prepay $50,000 per month to ML on the
outstanding principal balance of the debenture. All interest payments to ML have
been made in a timely manner.
INVESTMENT ACTIVITIES
Management believes it can more effectively manage the Company's cash
position by broadening the types of investments utilized in cash management. At
December 31, 1995, the Company held approximately $4 million in investment
securities other than the Notes. The value of these investments is approximately
54 % of stockholders' equity at December 31, 1995. Company investments in
marketable securities classified as trading securities totaled approximately
$1.9 million (market value). In addition, there was approximately $2.1 million
in investments in securities classified as available for sale. These securities
are primarily private placements that Management expects will become
free-trading within one year. During the six months ended December 31, 1995 net
realized gains from the sale of investments aggregated approximately $520,000
which excludes the sales of Notes or expirations of Options, compared to
approximately $291,000 for the six months ended December 31, 1994. Management
believes that such activities are in the best interest of the Company and the
activities are scrutinized by Company compliance personnel and reported to
investment advisory clients.
FEE WAIVERS
The Company has agreed to waive a portion of its fee revenues and/or to pay
for expenses of certain mutual funds for purposes of enhancing the funds'
competitive market position. Should assets of these funds increase, fund
expenses borne by the Company would increase to the extent that such expenses
exceed any expense caps in place. The Company expects to continue to waive fees
and/or pay for fund expenses as long as market and economic conditions warrant.
However, subject to the Company's commitment to certain funds with respect to
fee waivers and expense limitations, the Company may reduce the amount of fund
expenses it is bearing. Further, the Company, in conjunction with USF's Board of
Trustees, has been assessing the viability of the funds receiving such support.
In this regard, one small USF fund (with no asset growth and less than $6
million in average net assets) was closed during the quarter ended December 31,
1995. It is anticipated that the assessment of funds will continue in the future
and other such funds may be closed, thereby reducing the amount of fees waived
and/or expenses borne by the Company.
CONCLUSION
At December 31, 1995, the Notes purchased by the Company had an average
maturity of approximately fifteen months. The Notes have a face value of $70.275
million which is greater than the Company's purchase price. As of December 31,
1995 the Company had approximately $72.5 million in debt related to the Notes
(comprised of the $4.2 million balance on the ML debenture and $68.3 million
advanced by brokers pursuant to reverse repurchase agreement transactions). The
ML note is essentially unsecured with ML looking to the collateral under the
reverse repurchase agreements as its primary source of repayment. The reverse
repurchase agreements with the broker-dealers are backed with collateral valued
at approximately $68.6 million. The broker-dealers have and continue to extend
the agreements; however, if all of the broker-dealers refused to roll-over their
repurchase agreements, there would be sufficient collateral to cover the brokers
and there would be approximately $214,000 available to repay the ML note,
leaving a balance to ML of $4 million. As of December 31, 1995, USAI had
unrestricted cash and investment securities with an aggregate value of over $5.4
million which could be used to fully retire the debt related to the notes as
well as sustain the continued operations of the Company.
Based upon available information and internal analyses, through the last
maturity date of the Notes, Management anticipates positive cash flow and net
income in the related fiscal years, which income will include accretion related
to the Notes in excess of the non-cash charge discussed above. Management
believes current cash reserves, plus financing obtained and cash flow from
operations, will be sufficient to meet foreseeable cash needs or capital
necessary for the above mentioned activities, as well as allow the Company to
take advantage of investment opportunities whenever available. However, it is
difficult to predict future events and should cash flow be insufficient due to
some unexpected event, the Company would seek additional sources of financing to
meet future working capital requirements.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The information required by this item is contained in the accompanying
financial statements, Part I, Item 1, Note H "Commitments and Contingencies."
Note H is hereby incorporated by reference into Part II.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
(10)(a) December 7, 1994 Subscription and Purchase Agreement between
Registrant, Marleau, Lemire Inc., Frank E. Holmes and F.E. Holmes
Organization Inc. (incorporated by reference to Exhibit 10 to Registrant's
Registration Statement No. 33-90518 filed on Form S-3 with the Commission
on March 16, 1995).
(10)(b) December 7, 1994 Employment and Non-Competition Agreement between
United Services Advisors, Inc. and Frank E. Holmes (incorporated by
reference to Exhibit 10(b) to the Pre-Effective Amendment No. 1 to
Registrant's Registration Statement No. 33-90518 filed on Form S-3 with the
Commission on May 12, 1995).
(10)(c) December 7, 1994 Shareholders' Agreement among United Services
Advisors, Inc., Mr. Frank E. Holmes, F.E. Holmes Organization Inc., and
Marleau, Lemire Inc. (incorporated by reference to Exhibit 10(c) to the
Pre-Effective Amendment No. 1 to Registrant's Registration Statement No.
33-90518 filed on Form S-3 with the Commission on May 12, 1995).
*(10)(d) December 29, 1995 Agreement among United Services Advisors, Inc.
Mr. Frank E. Holmes, F.E. Holmes Organization Inc., and Marleau, Lemire
Inc. filed herewith.
(b) No Reports on Form 8-K were filed during the quarter ended December 31, 1995
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 thereto duly authorized.
DATED: January 30, 1996 UNITED SERVICES ADVISORS, INC.
By: /s/ BOBBY D. DUNCAN
-----------------------------------------
Bobby D. Duncan
President
Chief Operating Officer
DATED: January 30, 1996 UNITED SERVICES ADVISORS, INC.
By: /s/ JANE K. HATTON
-----------------------------------------
Jane K. Hatton
Vice President
Chief Financial Officer
EXHIBIT (10)(d)
[United Services Advisors, Inc. Logo]
December 29, 1995
FINAL VERSION
Marleau, Lemire Inc.
1 Place Ville-Marie
Suite 3601
Montreal, Quebec H3B 3P2
Attention: Mr. Hubert Marleau, Chairman
Dear Sirs:
This letter supersedes the letter of December 28, 1995 and will serve to confirm
our most recent discussions. For consideration of $US 2,500,000 United Services
Advisors, Inc. ("USAI") will repurchase 500,000 of ML's 1,000,000 Class B Common
Shares ("B Shares") issued to Marleau, Lemire Inc. ("ML") by USAI pursuant to
that certain Subscription and Purchase Agreement dated December 7, 1994
("Purchase Agreement") between USAI, ML, Mr. Frank Holmes and F.E. Holmes
Organization, Inc. ("Holmes"). Further, USAI will exchange 1,000,000 shares of
its Preferred Class ("Preferred") for ML's remaining 500,000 B Shares and the
following consideration. Simultaneous with the completion of these two events
the 1 million purchase warrants issued to ML pursuant to the Purchase Agreement
and the option provided for in the subordinated debenture for ML to convert the
remaining balance of its subordinated debenture into Preferred will be cancelled
in their entirety. In addition, to avoid the expense to ML of outside counsel,
USAI will commence work in January 1996 on a registration statement on Form S-3
to be filed with the SEC so that ML will have free trading shares.
Conditions Precedent:
1. The Purchase Agreement, the Shareholder's Agreement and the Employment and
Non-competition Agreement all dated December 7, 1994 will be cancelled in
their entirety;
2. Messrs. Hubert Marleau and Richard Renaud will resign from USAI's Board of
Directors and Frank E. Holmes will resign from ML's Board of Directors;
3. Approval of the respective Board of Directors of USAI and ML;
4. Reclassification and sale of certain Government Notes (Cusip 3133883Q1 par
value $37,250,000 and Cusip 313311W81 par value $10,000,000);
Final Version
Page 2 of 3
5. Beginning January 15, 1996 and for every month thereafter, USAI will commit
to prepay $50,000 per month toward the principal balance outstanding in
accordance with the prepayment clause set forth in that certain
Subordinated Debenture Agreement amended December 7, 1994 ("Debenture");
6. Reclassification as available-for-sale that certain Government Note (Cusip
313388X88 par value $16,550,000) which will generate upon sale and/or
prepayment approximately $959,000 as principal repayment under the
Debenture;
7. The Debenture shall be amended to provide that in the event voting control
of USAI changes, the balance owing ML under the Debenture shall become due
and payable prior to closing on the change of control and the registration
statement covering ML's 1,000,000 shares shall be declared effective by the
SEC prior to said closing;
8. ML undertakes to transfer immediately the assets and the management
contract(s) of ML's Small Cap Fund from ML to United Services Advisors
Canada, Inc. (or one of its designated subsidiaries) ("USACI"), subject to
regulatory and shareholder approvals. All revenues generated by ML's Small
Cap Fund effective January 1, 1996, whether the assets and the management
contracts have been transferred or not, will become the revenue of USACI;
9. USAI agrees to bear up to the next $Cdn. 250,000 in costs with respect to
ML's and USAI's joint venture USACI.
10. Upon the transfer of any monies by USAI to ML, the purpose of which is for
USAI to acquire from ML any Class B Common Shares or Preferred Shares or
any warrants or options to convert into any Class of Shares then authorized
and issued by USAI; any certificate, document, letter, writing or any
understanding evidencing ownership by ML or any affiliate will be deemed to
be and will be cancelled. ML will forward to USAI all USAI stock
certificates, warrants and other such documents and agreements simultaneous
with the transfer of monies to ML. It is understood that the 72,720 Class A
Common Shares held by ML are not subject to this paragraph 9; and
11. Subject to paragraph 9, the requirement that Mr. Holmes exchange 177,280
Class A Common Shares for 133,551 Shares (consolidated shares based on 1
new for 3 old) of ML pursuant to the terms and conditions of the Purchase
and Shareholders Agreement dated December 7, 1994 will be cancelled in its
entirety.
Final Version
Page 3 of 3
All of the foregoing shall be evidenced in a more formal agreement to be entered
into in connection with the transaction. If the foregoing correctly sets forth
the terms of our understanding, please indicate your agreement by signing below.
All the foregoing is subject to general market conditions and the absence of any
material adverse conditions or changes to USAI.
Yours truly,
United Services Advisors, Inc.
By: /s/ BOBBY D. DUNCAN
-------------------------
Bobby D. Duncan
Authorized Officer
Agreed and Accepted this 29th day of December, 1995.
Marleau, Lemire Inc.
By: /s/ HUBERT MARLEAU By: /s/ PAUL R. MOASE
------------------------- -------------------------
Hubert Marleau and Authorized Officer
Frank E. Holmes F.E. Holmes Organization, Inc.
/s/ FRANK HOLMES By: /s/ FRANK HOLMES
------------------------- -------------------------
Frank E. Holmes