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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended December 31, 1996
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 0-13928
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U.S. GLOBAL INVESTORS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Texas 74-1598370
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)
7900 Callaghan Road 78229-2327
San Antonio, Texas (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(210) 308-1234
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Not Applicable
(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 NO X
On January 23, 1997, there were 6,225,818 shares of Registrant's class A common
stock outstanding and 563,215 shares of Registrant's class C common stock issued
and outstanding.
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1
FORM 10-Q
U.S. GLOBAL INVESTORS, INC.
I N D E X
PART I. FINANCIAL INFORMATION PAGE NO.
ITEM 1. Financial Statements
Consolidated Balance Sheets -
December 31, 1996 and June 30, 1996........................3
Consolidated Statements of Operations -
Six-Month and Three-Month Periods Ended
December 31, 1996 and 1995.................................5
Consolidated Statements of Changes in Cash Flows
Six-Month Periods Ended December 31, 1996 and 1995.........6
Notes to Consolidated Financial Statements.................7
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.............10
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K..........................14
Signatures..................................................................15
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
U.S. GLOBAL INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31, JUNE 30,
1996 1996
------------ -----------
(UNAUDITED)
CURRENT ASSETS
Cash and cash equivalents ................... $ 1,095,202 $ 666,250
Trading securities, at fair
value (Note B) .......................... 1,197,101 999,500
Government securities available-
for-sale at fair
value (Note D and E) .................... 26,691,594 26,324,125
Receivables (Note C):
Mutual funds ............................ 922,913 1,092,961
Accrued interest ........................ 96,836 95,847
Custodial fees .......................... 325,446 163,296
Employees ............................... 16,787 92,765
Receivable from brokers ................. 105,723 75,054
Other ................................... 399,877 704,286
Prepaid expenses ............................ 697,684 454,567
Deferred tax asset (Note H) ................. 52,248 --
----------- -----------
TOTAL CURRENT ASSETS ........................ 31,601,411 30,668,651
----------- -----------
NET PROPERTY AND EQUIPMENT ....................... 2,613,760 2,621,052
----------- -----------
OTHER ASSETS
Restricted investments ...................... 658,562 642,380
Long-term receivables ....................... 225,456 368,742
Long-term deferred tax asset
(Note H) ............................... 1,093,630 1,096,268
Residual equity interest .................... 217,861 217,861
Investment in joint venture
(Note A & G ) .......................... 157,888 255,500
Investment securities available-
for-sale, at fair value (Note B) ....... 641,992 2,210,657
Equity investment in affiliate (Note A) ..... 1,689,473 1,164,415
Other ....................................... 56,916 61,670
----------- -----------
TOTAL OTHER ASSETS ...................... 4,741,778 6,017,493
----------- -----------
$38,956,949 $39,307,196
=========== ===========
The accompanying notes are an integral part of this statement.
3
LIABILITIES AND SHAREHOLDERS' EQUITY
DECEMBER 31, JUNE 30,
1996 1996
------------- -----------
(UNAUDITED)
CURRENT LIABILITIES
Current portion of capital lease
obligation ............................. $ 24,447 $ 24,354
Current portion of notes payable ............ 43,211 41,695
Current portion of annuity and
contractual obligation ................. 18,000 18,000
Subordinated debenture ...................... 1,233,131 1,533,131
Securities sold under agreements
to repurchase (Note E) ................. 26,557,969 26,404,375
Accounts payable ............................ 131,707 276,116
Accrued interest payable to third
parties ................................ 125,044 16,685
Accrued interest payable on
subordinated debenture (Note D and F) .. 26,888 70,017
Accrued compensation and related costs ...... 173,554 204,911
Accrued profit sharing and 401(k) ........... 150,330 110,489
Accrued vacation pay ........................ 75,959 75,959
Accrued legal fees .......................... 84,235 70,536
Deferred tax liability (Note H) ............. -- 11,312
Litigation accrual .......................... 300,000 300,000
Other accrued expenses ...................... 214,804 195,065
----------- -----------
TOTAL CURRENT LIABILITIES ................... 29,159,279 29,352,645
----------- -----------
Notes payable-net of current portion ........ 1,233,264 1,260,137
Annuity and contractual obligations ......... 147,188 150,342
----------- -----------
TOTAL NON-CURRENT LIABILITIES ............... 1,380,452 1,410,479
----------- -----------
TOTAL LIABILITIES ........................... 30,539,731 30,763,124
----------- -----------
Commitments and contingent liabilities
SHAREHOLDERS' EQUITY
Common stock (Class A)--$0.05
par value; non-voting;
authorized, 7,000,000shares ............ 311,291 310,971
Common stock (Class C)--$.05
par value; voting;
authorized, 1,750,000 shares ........... 28,173 28,218
Common stock (Class B)--$.05 par
value; non-voting;
authorized, 2,250,000 shares ........... -- --
Additional paid-in-capital .................. 10,588,389 10,586,666
Treasury stock at cost ...................... (667,208) (530,384)
Net unrealized gain on available-
for-sale securities (net of
tax of $(9,852) and $294,993,
respectively) .......................... (19,124) 572,634
Equity in net unrealized gain on
available-for-sale securities
held by affiliate (net of tax
of $19,201 and $76,823, respectively) .. 37,272 149,127
Retained earnings (deficit) ................. (1,861,575) (2,573,160)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY .................. 8,417,218 8,544,072
----------- -----------
$38,956,949 $39,307,196
=========== ===========
The accompanying notes are an integral part of this statement.
4
U.S. GLOBAL INVESTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
SIX MONTHS ENDED THREE MONTHS ENDED
DECEMBER 31 DECEMBER 31
----------------------------- ----------------------------
1996 1995 1996 1995
------------ ------------- ------------ ------------
REVENUE (NOTE C)
Investment advisory fee ............ $ 3,344,281 $ 2,716,507 $ 1,717,493 $ 1,310,425
Transfer agent fee ................. 1,713,861 1,624,965 881,127 866,512
Accounting fee ..................... 258,877 254,800 128,174 125,050
Exchange fee ....................... 128,101 120,915 69,236 56,205
Custodial fees ..................... 288,341 294,717 142,759 159,381
Investment income .................. 931,912 2,032,893 349,102 1,450,363
Other .............................. 172,922 146,177 113,410 85,936
Government security interest income 573,407 2,737,754 286,898 1,383,241
Government security accretion to par 237,993 1,016,697 107,591 491,817
Gain (Loss) on changes of
interest in affiliate (Note A) . (4,811) -- 19,114 --
------------ ------------ ------------ ------------
7,644,884 10,945,425 3,814,904 5,928,930
EXPENSES
General and administrative ......... 5,697,519 5,234,541 2,936,684 2,721,302
Depreciation and amortization ...... 225,765 240,948 118,327 120,474
Interest-note payable and other .... 60,206 62,457 35,174 28,325
Interest expense-securities sold
under agreement to repurchase .. 758,113 3,411,802 379,527 1,677,970
Interest expense-convertible
subordinated debenture ......... 56,888 181,368 26,485 90,684
------------ ------------ ------------ ------------
6,798,491 9,131,116 3,496,197 4,638,755
------------ ------------ ------------ ------------
EARNINGS (LOSS) BEFORE MINORITY INTEREST,
EQUITY INTEREST AND INCOME TAXES ... 846,393 1,814,309 318,707 1,290,175
EQUITY IN NET EARNINGS OF JOINT
VENTURE (NOTE A AND G) ............. (97,612) -- (56,482) --
EQUITY IN NET EARNINGS OF
AFFILIATE (NOTE A) ................. 289,346 -- (10,175) --
------------ ------------ ------------ ------------
EARNINGS (LOSS) BEFORE INCOME TAXES ..... 1,038,127 1,814,309 252,050 1,290,175
PROVISIONS FOR FEDERAL INCOME TAXES
Current ............................ 25,000 -- 13,000 --
Deferred (Note H) .................. 301,544 663,697 99,103 445,053
------------ ------------ ------------ ------------
326,544 663,697 112,103 445,053
------------ ------------ ------------ ------------
NET EARNINGS ............................ $ 711,583 $ 1,150,612 $ 139,947 $ 845,122
============ ============ ============ ============
PER SHARE AMOUNTS
Primary and fully diluted .......... $ .11 $ .18 $ .02 $ .13
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING
Primary and fully diluted .......... 6,600,802 6,574,570 6,589,134 6,562,222
============ ============ ============ ============
The accompanying notes are an integral part of this statement.
5
U.S. GLOBAL INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
DECEMBER 31
1996 1995
------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) ......................... $ 711,583 $ 1,150,612
Adjustments to reconcile to net
cash provided by operating activities:
Depreciation and amortization ............... 225,765 240,949
Government security accretion ............... (237,993) (1,016,697)
Net gain on sales of securities ............. (892,092) (1,704,728)
Gain on disposal of equipment ............... (64) (257)
Gain on changes of interest in affiliate .... 4,811 --
Treasury stock reissued ..................... 163,274 86,803
Changes in assets and liabilities, impacting
cash from operations:
Restricted investments ...................... (16,182) 229,563
Accounts receivable ......................... 499,913 (119,259)
Deferred tax asset .......................... 301,544 663,697
Prepaid expenses and other .................. (844,855) (307,798)
Trading securities .......................... 1,437,077 504,487
Accounts payable ............................ (144,409) 63,766
Accrued expenses ............................ 107,153 186,657
----------- -----------
Total adjustments ................................ 603,942 (1,172,817)
----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATIONS ........ 1,315,525 (22,205)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net purchase of furniture and equipment ..... (214,451) (144,215)
Proceeds on sale of equipment ............... 800 381
Proceeds on sale of available-for-sale
securities ............................. -- 156,425
Purchase of available-for-sale securities ... (200,000) (802,666)
Proceeds on sale of government securities
available-for-sale ..................... -- 46,374,050
----------- -----------
NET CASH (USED IN) INVESTING ACTIVITIES .......... (413,651) 45,583,975
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on annuity ......................... (3,154) (2,941)
Payments on note payable to bank ............ (25,357) (18,455)
Proceeds from capital lease ................. 25,330 --
Payments on capital lease ................... (25,237) (55,258)
Net proceeds from securities sold under
agreement to repurchase ................ 153,594 674,119
Payments on securities sold under
agreement to repurchase ................ -- (44,519,375)
Payments on subordinated debenture .......... (300,000) (334,196)
Proceeds from issuance of common
stock, warrants, and options ........... 8,250 2,482,096
Purchase of common stock (Class B)
from related party ..................... -- (5,000,000)
Purchase of treasury stock .................. (306,348) (166,154)
----------- -----------
NET CASH USED IN FINANCING ACTIVITIES ............ (472,922) (46,940,164)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ............................ 428,952 (1,378,394)
BEGINNING CASH AND CASH EQUIVALENTS .............. 666,250 2,772,221
----------- -----------
ENDING CASH AND CASH EQUIVALENTS ................. $ 1,095,202 $ 1,393,827
=========== ===========
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest ...................... $ 795,527 $ 3,869,135
The accompanying notes are an integral part of this statement.
6
U.S. GLOBAL INVESTORS, 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) that are, in the opinion of management, necessary for a fair
presentation of results for the interim periods presented. U.S. Global
Investors, Inc. ("the Company" or "U.S. Global") 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, 1996.
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. Global Investors (Guernsey), Ltd [formerly U.S. Advisors
(Guernsey), Ltd.] ("USGG"). Additionally, the Company has continued to account
for its investment in the Guernsey offshore fund under the equity method of
accounting, as the Company held a 20% interest in the fund as of December 31,
1996. This resulted in the Company recording earnings of $289,346 for the six
months ending December 31, 1996, which is included in earnings before taxes in
the income statement. In addition, due to changes in its equity interest of the
fund during the six months, the Company recorded a loss of $4,811. Similarly,
the Company has a one-third interest in a joint venture formed in August 1994,
United Services Advisors Canada, Inc. ("USACI"), to offer mutual funds in
Canada. The joint venture became operational during August 1996 and the Company,
utilizing the equity method of accounting, recorded a net loss of $97,612 for
the six months ending December 31, 1996. 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
31,1996, are not necessarily indicative of the results to be expected for the
entire year.
NOTE B. SECURITY INVESTMENTS.
The Company accounts for its investment securities in accordance with
SFAS 115 "Accounting for Certain Investments in Debt and Equity Securities."
Accordingly, the market value of investments classified as trading at December
31, 1996, was $1,197,101. The net change between the market value as of June 30,
1996, and the market value as of December 31, 1996, on trading securities that
has been included in earnings for the six-month period is ($38,568).
The estimated fair value of the investments classified as
available-for-sale at December 31, 1996, was $641,992 with $64,502 (before tax)
in unrealized losses being recorded as a separate component of Shareholders'
Equity as of December 31, 1996. These venture capital investments are reflected
as non-current assets on the December 31, 1996, consolidated balance sheet.
These investments are in private placements which are restricted for sale as of
December 31, 1996. It is anticipated the securities obtained in these private
placements will become free trading within one year. During the six months, the
Company recorded realized gains of $251,707 on securities that were transferred
from available-for-sale securities to trading securities upon becoming free
trading. The Company also recorded unrealized losses of $242,665 on securities
that were transferred from available-for-sale securities to trading securities
upon becoming free trading during the six months that are included in the net
change on trading securities of ($38,568) mentioned above.
The Company also holds par value U.S. Government agency notes that are
discussed in Note D.
NOTE C. INVESTMENT MANAGEMENT, TRANSFER AGENT AND OTHER FEES.
The Company serves as investment advisor and transfer agent to United
Services Funds ("USF") and Accolade Funds ("Accolade"). 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
in-house legal and accounting services to USF and Accolade and receives
exchange, maintenance, closing, and small account fees directly from USF and
Accolade shareholders. Fees for providing services to USF continue to be the
Company's primary revenue source.
7
U.S. Global 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 and mailroom operations from 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.
U.S. Global 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 periods ended December 31, 1996, and December 31,
1995, were $1,528,278 and $1,808,696, respectively. 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.
The investment advisory contract and related contracts between the
Company and USF were recently renewed and expire on or about October 26, 1997.
Management anticipates the Trustees of USF will continue to renew the contracts.
NOTE D. GOVERNMENT SECURITIES.
As previously reported, during the fiscal year ended June 30, 1995,
U.S. Global purchased certain U.S. Government agency notes ("Notes") with a par
value of $130,525,000 from the U.S. Government Securities Fund ("USG"). By
December 31, 1996, the Company had reduced its holdings of the Notes to
$26,725,000 par value, with an amortized cost of $26,656,067 and a market value
of $26,691,594. In accordance with SFAS 115, the Company has currently
classified the Notes as available-for-sale securities which resulted in an
unrealized gain (before tax) in the amount of $35,527. The Notes were financed
by utilizing third party broker-dealer reverse repurchase agreements (see Note
E), by the issuance of a subordinated debenture (see Note F), as well as U.S.
Global's cash. The Company has also recognized $237,993 and $1,016,697 in
non-cash accretion of the Notes during the six months ended December 31, 1996,
and 1995, respectively.
NOTE E. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE.
As discussed in Note D, U.S. Global 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
repurchase 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 1997 and as of January 23, 1997, each reverse repurchase agreement has
matured and has been renewed on a 30-day basis. Management believes that the
reverse repurchase agreements can be periodically renewed until the Notes
mature. All reverse repurchase agreements are with a major broker-dealer and are
secured by these U.S. Government agency obligations.
The following is a summary of information as of December 31, 1996, on
the securities sold under agreements to repurchase and the repurchase liability:
Matures
Less Than
30 Days
-----------
Carrying amount (fair value) .......................$26,691,594
Accrued interest receivable on collateral .......... 96,836
Repurchase liability (interest rate of 5.65%) ...... 26,557,969
NOTE F. SUBORDINATED DEBENTURE.
In conjunction with the purchase of the Notes previously described,
U.S. Global issued a $6 million 8% subordinated debenture to Marleau, Lemire
Inc. ("ML"), the terms of which require monthly principal payments and quarterly
interest payments as the Notes mature with the balance due upon maturation of
the Notes. Payments of $300,000 have been made during fiscal year 1997 leaving
an outstanding balance of approximately $1.2 million. As of December 31, 1996,
the Company has accrued $26,888 in interest payable related to the subordinated
debenture. All principal and interest payments to ML have been made in a timely
manner.
8
NOTE G. INVESTMENT IN JOINT VENTURE.
As previously reported, U.S. Global currently holds a one-third
interest in USACI, which became operational during the first quarter of fiscal
year 1997. The Company accounts for its interest in the joint venture using the
equity method of accounting. As a result, the Company recorded a net loss in
equity earnings in the joint venture in the amount of $97,612 for the six months
ended December 31,1996, which is included in earnings before taxes in the income
statement.
NOTE H. 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, 1996, are presented below:
December 31,
1996
-----------
Book/tax differences in the balance sheet:
Accumulated depreciation ................... $ 98,401
Accrued expenses ........................... 41,047
Annuity obligations ........................ 56,164
Reduction in carrying value of joint venture 210,630
Net unrealized holding gain (affiliate) .... 19,201
Net unrealized holding gain ................ (9,852)
-----------
415,591
Tax carryovers:
NOL carryover .............................. 558,075
Contributions carryover .................... 72,702
Investment credit carryover ................ 34,472
Minimum tax credits ........................ 129,786
-----------
795,035
Total gross deferred tax asset ............. 1,210,626
Affiliated investment ............................... (84,638)
Trading securities .................................. 19,387
Available-for-sale securities ....................... 9,852
-----------
Total gross deferred tax liability .................. (55,399)
-----------
Net deferred tax asset .............................. $ 1,155,227
===========
For federal income tax purposes at December 31, 1996, the Company has
net operating losses ("NOLs") of approximately $1.6 million that will expire in
fiscal 2007 and 2010, charitable contribution carryovers of approximately
$215,000 expiring 1998-2000, investment tax credits of $34,472 expiring in 1998,
and alternative minimum tax credits of $129,786 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, 1996, 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.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995
The Company posted net earnings of $711,583 ($0.11 per share) for the
six months ended December 31, 1996, as compared to a net earnings of $1,150,612
($0.18 per share) for the six months ended December 31, 1995.
ASSETS UNDER MANAGEMENT
The primary source of the Company's revenue is advisory fees that are
dependent on average net assets. Fluctuations in the financial markets and
investor sentiment directly impact the funds' asset levels, therefore effecting
income and results of operations. As of January 17, 1997, total assets under
management for USF were approximately $1.37 billion and total assets under
management for Accolade were $125 million.
Assets under management for United Services Funds ("USF") for the six
months ended December 31, 1996, averaged $1.33 billion versus $1.26 billion for
the six months ended December 31, 1995. This increase in average assets
primarily resulted from an increase in money market and gold-related assets.
Assets under management for the Accolade Funds ("Accolade") averaged $95 million
for the six months ended December 31, 1996, versus $24 million for the six
months ended December 31, 1995. This increase is due to increased assets of the
Bonnel Growth Fund as well as the addition of the MegaTrends Fund to the
Accolade Fund group in November 1996.
REVENUES
Total consolidated revenues for the six months ended December 31, 1996,
decreased approximately 30% over the six months ended December 31, 1995. This
decrease resulted primarily from a reduction in interest income and accretion on
the Notes purchased during the fiscal year ended June 30, 1995. In addition,
during the six-month period ending December 31, 1995, the Company recognized
approximately $1.2 million in realized gains associated with the sale of $47.25
million par value Notes.
Excluding the income from the Notes, revenue for the six months ended
December 31, 1996, increased approximately 14% over the six months ended
December 31, 1995. An increase in advisory fees and transfer agency fees from
additional assets under management contributed to this increase.
EXPENSES
At the same time, total consolidated expenses for the six months ended
December 31, 1996, decreased approximately 26% over the six months ended
December 31, 1995. This net decrease resulted primarily from a decrease in
interest expense of $2.7 million on securities sold under repurchase agreements
with broker-dealers from the previous six-month period. This decrease in
interest expense is due to the fact that $26.75 million par value Notes were
held throughout the six months ended December 31, 1996, 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 increased approximately 8% over the six
months ended December 31, 1995, due to increases in travel and marketing to
promote the top performing funds within the USF and Accolade fund groups.
Performance based compensation to employees also increased accordingly. On the
other hand, fund expenses and legal related expenses declined significantly over
the same period.
THREE MONTHS ENDED DECEMBER 31, 1996 AND 1995
The Company posted net earnings of $139,947 ($0.02 per share) for the
three months ended December 31, 1996, as compared to net earnings of $845,122
($0.13 per share) for the three months ended December 31, 1995.
10
ASSETS UNDER MANAGEMENT
The primary source of the Company's revenue is advisory fees that are
dependent on average net assets. Fluctuations in the financial markets and
investor sentiment directly impact the funds' asset levels, therefore effecting
income and results of operations.
Assets under management for USF for the three months ended December 31,
1996, averaged $1.33 billion versus $1.24 billion for the three months ended
December 31, 1995. This increase in average assets primarily resulted from an
increase in money market and gold-related assets. Assets under management for
Accolade averaged $108 million for the quarter ended December 31, 1996 versus
$29 million for the quarter ended December 31, 1995. As previously mentioned,
this increase is due to increased assets of the Bonnel Growth fund as well as
the addition of the MegaTrends Fund to the Accolade Fund group in November 1996.
REVENUES
Total consolidated revenues for the three months ended December 31,
1996, decreased approximately 36% over the three months ended December 31, 1995.
This decrease resulted primarily from a reduction in interest income and
accretion on the Notes purchased during the fiscal year ended June 30, 1995, as
well as realized gains in excess of $1 million on the sale of Notes during
December 1995.
However, when excluding the interest and accretion income and realized
gains from the Notes, revenue for the three months ended December 31, 1996,
increased approximately 19% over the three months ended December 31, 1995. This
increase resulted primarily from an increase in advisory fee and transfer agency
fee income due to increased assets under management.
EXPENSES
Total consolidated expenses for the three months ended December 31,
1996, decreased approximately 25% over the three months ended December 31, 1995.
This decrease resulted primarily from a decrease in interest expense of $1.3
million on securities sold under repurchase agreements with broker-dealers from
the previous quarter. This decrease in interest expense is due to the fact that
$26.75 million par value Notes were held throughout the quarter ended December
31, 1996, while $117.525 million par value Notes were held substantially for the
entire quarter ended December 31, 1995.
Exclusive of the expenses attributable to the purchase and financing of
the Notes, expenses of the Company increased approximately 8% over the three
months ended December 31, 1995, primarily as a result of an increase in travel
and marketing to promote the top performing funds within the USF and Accolade
fund groups. Performance based compensation to employees also increased
accordingly. On the other hand, fund expenses and legal related expenses
decreased significantly over the same period.
LIQUIDITY AND CAPITAL RESOURCES
EQUITY INVESTMENT IN JOINT VENTURE AND AFFILIATE
As previously reported, U.S. Global currently holds a one-third
interest in USACI. During the first quarter of fiscal year 1997, the joint
venture became operational. The Company accounts for its interest in the joint
venture using the equity method of accounting. As a result, the Company recorded
a net loss in equity earnings in the joint venture in the amount of $97,612 for
the six months ended December 31, 1996, which is included in earnings before
taxes in the income statement.
The Company has continued to account for its investment in the Guernsey
offshore fund under the equity method of accounting as the Company held a 20%
interest in the fund on December 31, 1996. As a result, the Company recorded
earnings of $289,346 for the six months ended December 31, 1996, which is
included in earnings before taxes in the income statement.
11
GOVERNMENT SECURITIES/SUBORDINATED DEBENTURE
As previously reported, during the fiscal year ended June 30, 1995,
U.S. Global purchased $130,525,000 par value Notes from USG, a USF fund, of
which $26,725,000 par value Notes with a market value of $26,691,594 were held
at December 31, 1996. The Notes were financed by utilizing third party
broker-dealer reverse repurchase agreements, by the issuance of a subordinated
debenture to Marleau, Lemire Inc. ("ML"), as well as U.S. Global's cash. In
accordance with SFAS 115, the Company has currently classified the Notes as
available-for-sale securities that has resulted in an unrealized gain in the
amount of $35,527. The Company has also recognized $237,993 and $1,016,697 in
non-cash accretion of the Notes during the six months ended December 30, 1996,
and 1995, respectively.
In conjunction with the purchase of the Notes described previously,
U.S. Global issued a $6 million 8% subordinated debenture to ML, the terms of
which require monthly principal payments and quarterly interest payments until
the Notes mature with the balance due upon maturation of the Notes. Payments of
$300,000 have been made during fiscal year 1997 leaving an outstanding balance
of approximately $1.2 million on December 31, 1996, compared to a balance of
approximately $4.2 million on December 31, 1995. The Company has accrued
approximately $27,000 in interest payable related to the subordinated debenture,
while on December 31, 1995, the Company had accrued interest of approximately
$91,000. All principal and interest payments to ML have been made in a timely
manner.
The remaining Notes held by the Company on December 31, 1996, are
scheduled to mature during the third quarter of fiscal year 1997. The Notes have
a face value of $26.725 million which is greater than the Company's purchase
price. As of December 31, 1996, the Company had approximately $27.8 million in
debt related to the Notes (comprised of the $1.2 million balance on the ML
debenture and $26.6 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 $26.7 million. The broker-dealers have
and continue to extend the agreements. When the Notes mature the cash received
will be used to cover Company obligations to the brokers. On December 31, 1996,
U.S. Global had unrestricted cash and marketable securities with an aggregate
value of approximately $2.3 million that could be used to fully retire the
remaining debt related to the Notes as well as sustain the continued operations
of the Company.
INVESTMENT ACTIVITIES
Management believes it can more effectively manage the Company's cash
position by broadening the types of investments utilized in cash management. On
December 31, 1996, the Company held approximately $1.8 million in investment
securities other than the Notes. The value of these investments is approximately
22% of stockholders' equity at quarter end. Company investments in marketable
securities classified as trading securities totaled approximately $1.2 million
(market value). In addition, there was approximately $642,000 of 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 ending December 31, 1996, net realized gains from
the sale of investments aggregated approximately $892,000, compared to
approximately $517,000 (which excluded the sale of Notes and sales or
expirations of Eurodollar puts) for the six months ending December 31, 1995.
Management believes that such activities are in the best interest of the
Company. 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'
performance and, subsequently, their 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 these waivers and expense limitations, the Company
may reduce the amount of fund expenses it is bearing.
12
CONCLUSION
Based upon available information and internal analyses, management
anticipates positive cash flow and net income in the current fiscal year.
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.
13
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K PAGE NO.
1. Exhibits
11 Statement re: Computation of Per Share Earnings 16
27 Financial Data Schedule
2. Reports on Form 8-K None
14
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.
U.S. GLOBAL INVESTORS, INC.
DATED: January 30, 1997 BY: /S/ BOBBY D. DUNCAN
---------------------
Bobby D. Duncan
President
Chief Financial Officer
Chief Operating Officer
DATED: January 30, 1997 BY: /S/ KEVIN C. WHITE
------------------
Kevin C. White
Chief Accounting Officer
15
EXHIBIT 11
U.S. GLOBAL INVESTORS, INC.
SCHEDULE OF COMPUTATION OF NET EARNINGS PER SHARE
SIX MONTHS ENDED THREE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1996 1995 1996 1995
------------ ------------ ----------- -------------
Net earnings ............................ $ 711,583 $ 1,150,612 $ 139,947 $ 845,122
============ ============ ============ ============
PRIMARY
Weighted average number shares
outstanding during the period ...... 6,568,383 6,533,574 6,556,715 6,521,226
Add:
Common stock equivalent shares
(determined using the
"treasury stock" method)
representing shares issuable
upon exercise of common stock
warrants ....................... -- -- -- --
Common stock equivalent shares
(determined using the "treasury
stock" method) representing
shares issuable upon exercise
of common stock options ........ 32,419 40,996 32,419 40,996
------------ ------------ ------------ ------------
Weighted average number of shares
used in calculation of primary
earnings per share ............. 6,600,802 6,574,570 6,589,134 6,562,223
============ ============ ============ ============
Primary earnings (loss) per share
Net Earnings Per Share ............. $ 0.11 $ 0.18 $ 0.02 $ 0.13
============ ============ ============ ============
FULLY DILUTED
Weighted average number of shares
outstanding during the period ...... 6,568,383 6,533,574 6,556,715 6,521,226
Add:
Common stock equivalent shares
(determined using the "treasury
stock" method) representing
shares issuable upon exercise
of common stock warrants ...... -- -- -- --
Common stock equivalent shares
(determined using the "treasury
stock" method) representing
shares issuable upon exercise
of common stock options ....... 32,419 40,996 32,419 40,996
------------ ------------ ------------ ------------
Weighted average number of shares used
in calculation of fully diluted
earnings, per share ............ 6,600,802 6,574,570 6,589,134 6,562,223
============ ============ ============ ============
Fully diluted earnings (loss) per share
Net Earnings Per Share ............. $ 0.11 $ 0.18 $ 0.02 $ 0.13
============ ============ ============ ============
16