UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended December 31, 1997
OR
[ ] 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
U.S. GLOBAL INVESTORS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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Texas 74-1598370
(STATE OR OTHER JURISDICTION (IRS EMPLOYER IDENTIFICATION NUMBER)
OF INCORPORATION OR ORGANIZATION)
7900 Callaghan Road
San Antonio, Texas 78229-2327
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(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 X NO
On January 23, 1998, there were 6,293,414 shares of Registrant's class A common
stock outstanding and 496,860 shares of Registrant's class C common stock issued
and outstanding.
U.S. GLOBAL INVESTORS, INC.
I N D E X
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements..............................................3
Consolidated Balance Sheets--
December 31, 1997, and June 30, 1997................................3
Consolidated Statements of Operations--
Six-Month and Three-Month Periods Ended
December 31, 1997, and 1966.........................................5
Consolidated Statements of Cash Flow--
Six-Month Periods Ended December 31, 1997, and 1996.................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.................................13
Signatures...............................................................14
Exhibit 11--Schedule of Computation of Net Earnings Per Share............15
2
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
U.S. GLOBAL INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, JUNE 30,
1997 1997
----------- -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents ................... $ 1,170,031 $ 722,121
Trading securities, at fair
value (Note B) .......................... 941,278 721,954
Receivables (Note C):
Mutual funds ............................ 886,677 1,080,046
Custodial fees .......................... 428,934 199,062
Employees ............................... 81,608 63,700
Receivable from brokers ................. 6,128 240,709
Residual equity interest ................ 217,861 --
Other ................................... 147,360 220,850
Prepaid expenses ............................ 520,719 475,577
Deferred tax asset (Note D) ................. 50,461 103,239
----------- -----------
TOTAL CURRENT ASSETS .................... 4,451,057 3,827,258
----------- -----------
NET PROPERTY AND EQUIPMENT ....................... 2,536,585 2,536,081
----------- -----------
OTHER ASSETS
Restricted investments ...................... 634,251 642,528
Long-term receivables ....................... 327,857 424,026
Long-term deferred tax asset (Note D) ....... 1,035,563 1,102,531
Residual equity interest .................... -- 217,861
Investment securities available-for-sale,
at fair value (Note B) .................... 589,018 557,315
Equity investment in affiliate (Note A) ..... 1,225,215 1,322,032
Other ....................................... 98,063 83,143
----------- -----------
TOTAL OTHER ASSETS ...................... 3,909,967 4,349,436
----------- -----------
$10,897,609 $10,712,775
=========== ===========
The accompanying notes are an integral part of this statement.
3
CONSOLIDATED BALANCE SHEETS (Continued)
DECEMBER 31, JUNE 30,
1997 1997
----------- -----------
(UNAUDITED)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of capital
lease obligation .......................... $ 953 $ 9,614
Current portion of notes payable ............ 46,681 44,899
Current portion of annuity and
contractual obligation .................... 18,000 18,000
Accounts payable ............................ 331,467 367,163
Accrued compensation and related costs ...... 128,015 223,639
Accrued profit sharing and 401(k) ........... 141,735 109,251
Accrued vacation pay ........................ 107,369 107,369
Accrued legal fees .......................... 50,746 62,493
Litigation accrual (Note E) ................. -- 300,000
Other accrued expenses ...................... 523,670 144,632
----------- -----------
TOTAL CURRENT LIABILITIES ................... 1,348,636 1,387,060
----------- -----------
Notes payable-net of current portion ........ 1,191,998 1,215,386
Annuity and contractual obligations ......... 140,541 143,922
----------- -----------
TOTAL NON-CURRENT LIABILITIES ............... 1,332,539 1,359,308
----------- -----------
TOTAL LIABILITIES ........................... 2,681,175 2,746,368
----------- -----------
Commitments and contingent liabilities
SHAREHOLDERS' EQUITY
Common stock (Class A)--$0.05 par value;
non-voting; authorized, 7,000,000 shares 314,671 311,354
Common stock (Class C)--$0.05 par value;
voting; authorized, 1,750,000 shares ..... 24,843 28,110
Additional paid-in capital .................. 10,581,797 10,587,909
Treasury stock at cost ...................... (454,888) (514,770)
Net unrealized gain on available-for-sale
securities (net of tax of $111,614
and $91,212, respectively) ............. (216,662) (177,058)
Equity in net unrealized gain on
available-for-sale securities
held by affiliate (net of tax of
$13,605 and $10,237, respectively) ..... 26,410 19,873
Retained earnings (deficit) ................. (2,059,737) (2,289,011)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY .................. 8,216,434 7,966,407
----------- -----------
$10,897,609 $10,712,775
=========== ===========
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,
--------------------------- ---------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
REVENUE (NOTE C)
Investment advisory fee ....................... $ 3,135,836 $ 3,344,281 $ 1,498,372 $ 1,717,493
Transfer agent fee ............................ 1,705,811 1,713,861 866,493 881,127
Accounting fee ................................ 399,996 258,877 139,684 128,174
Exchange fee .................................. 99,180 128,101 51,370 69,236
Custodial fee ................................. 282,355 288,341 149,323 142,759
Investment income ............................. 171,901 931,912 217,287 349,102
Other ......................................... 140,014 172,922 66,686 113,410
Government security interest income ........... -- 573,407 -- 286,898
Government security accretion to par .......... -- 237,993 -- 107,591
Gain (Loss) on changes of
interest in affiliate (Note A) ............ 6,009 (4,811) 4,326 19,114
----------- ----------- ----------- -----------
5,941,102 7,644,884 2,993,541 3,814,904
EXPENSES
General and administrative .................... 5,154,095 5,697,519 2,530,028 2,936,684
Depreciation and amortization ................. 247,635 225,765 123,517 118,327
Interest-note payable and other ............... 60,586 60,206 29,286 35,174
Interest expense-securities sold
under agreement to repurchase ............. -- 758,113 -- 379,527
Interest expense-convertible
subordinated debenture .................... -- 56,888 -- 26,485
----------- ----------- ----------- -----------
5,462,316 6,798,491 2,682,831 3,496,197
----------- ----------- ----------- -----------
EARNINGS BEFORE MINORITY INTEREST,
EQUITY INTEREST AND INCOME TAXES .............. 478,786 846,393 310,710 318,707
EQUITY IN NET EARNINGS (LOSS) OF JOINT
VENTURE (NOTE A) .............................. -- (97,612) -- (56,482)
EQUITY IN NET EARNINGS (LOSS) OF
AFFILIATE (NOTE A) ............................ (112,732) 289,346 (112,793) (10,175)
----------- ----------- ----------- -----------
EARNINGS (LOSS) BEFORE INCOME TAXES ................ 366,054 1,038,127 197,917 252,050
PROVISIONS FOR FEDERAL INCOME TAXES
Current ....................................... -- 25,000 -- 13,000
Deferred (Note D) ............................. 136,780 301,544 83,188 99,103
----------- ----------- ----------- -----------
136,780 326,544 83,188 112,103
----------- ----------- ----------- -----------
NET EARNINGS ....................................... $ 229,274 $ 711,583 $ 114,729 $ 139,947
=========== =========== =========== ===========
PER SHARE AMOUNTS
Primary and fully diluted ..................... $ 0.03 $ 0.11 $ 0.02 $ 0.02
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING
Primary and fully diluted ..................... 6,668,112 6,600,802 6,673,704 6,589,134
=========== =========== =========== ===========
The accompanying notes are an integral part of this statement.
5
U.S. GLOBAL INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
SIX MONTHS ENDED
DECEMBER 31,
1997 1996
----------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings ................................ $ 229,274 $ 711,583
Adjustments to reconcile to net cash
provided by operating activities:
Depreciation and amortization ............... 247,635 225,765
Government security accretion ............... -- (237,993)
Net gain on sales of securities ............. (65,121) (892,092)
Gain on disposal of equipment ............... (1,011) (64)
Gain on changes of interest in affiliate .... (6,009) 4,811
Treasury stock reissued ..................... 53,434 163,274
Changes in assets and liabilities,
impacting cash from operations:
Restricted investments ...................... 8,277 (16,182)
Accounts receivable ......................... 372,331 499,913
Deferred tax asset .......................... 136,780 301,544
Prepaid expenses and other .................. 52,587 (844,855)
Trading securities .......................... (245,912) 1,437,077
Accounts payable ............................ (35,696) (144,409)
Accrued expenses ............................ 4,150 107,153
---------- ----------
Total adjustments ................................ 521,445 603,942
---------- ----------
NET CASH PROVIDED BY OPERATIONS .................. 750,719 1,315,525
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net purchase of furniture
and equipment ............................. (248,058) (214,451)
Proceeds on sale of equipment ............... 1,011 800
Purchase of available-for-sale
securities ................................ -- (200,000)
---------- ----------
NET CASH (USED IN) INVESTING ACTIVITIES .......... (247,047) (413,651)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on annuity ......................... (3,381) (3,154)
Payments on note payable to bank ............ (21,606) (25,357)
Proceeds from capital lease ................. -- 25,330
Payments on capital lease ................... (8,661) (25,237)
Net proceeds from securities sold
under agreement to repurchase ............. -- 153,594
Payments on subordinated debenture .......... -- (300,000)
Proceeds from issuance of common
stock, warrants, and options .............. 1,500 8,250
Purchase of treasury stock .................. (23,614) (306,348)
---------- ----------
NET CASH (USED IN) FINANCING ACTIVITIES .......... (55,762) (472,922)
---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS ....... 447,910 428,952
BEGINNING CASH AND CASH EQUIVALENTS .............. 722,121 666,250
---------- ----------
ENDING CASH AND CASH EQUIVALENTS ................. $1,170,031 $1,095,202
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest ...................... $ 60,586 $ 795,527
The accompanying notes are an integral part of this statement.
6
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. ("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, 1997.
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) Limited ("USGG"). Additionally, the Company has
continued to account for its investment in the offshore fund, U.S. Global
Strategies Fund Limited ("the Guernsey Fund"), under the equity method of
accounting, as the Company held a 16% and 20% interest in the fund as of
December 31, 1997, and 1996, respectively. This resulted in the Company
recording earnings (losses) of ( $112,732) and $289,346 for the six months
ending December 31, 1997, and 1996, respectively, which is included in earnings
before taxes in the income statement. In addition, due to changes in its equity
interest of the fund, the Company recorded earnings (losses) of $6,009 and
($4,811) for the six months ending December 31, 1997, and 1996, respectively.
Similarly, the Company had a one-third interest in United Services Advisors
Canada, Inc. ("USACI"), which was sold in June 1997, to the USACI management
group, which now controls 100% of USACI. However, utilizing the equity method of
accounting for its interest in USACI, the Company recorded a net loss of $97,612
for the six months ending December 31, 1996.
U.S. Global has formed a company that was originally incorporated in Texas on
April 25, 1994. This company, U.S. Global Brokerage, Inc. ("USGB"), formerly
United Services Brokerage, Inc., will provide distribution of mutual fund shares
for U.S. Global Investors Funds ("USGIF") and U.S. Global Accolade Funds
("USGAF").
All inter-company balances and transactions have been eliminated in
consolidation. The results of operations for the six-month period ended December
31, 1997, 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, 1997, was
$941,278. The net change in the unrealized holding gain (loss) on trading
securities held at December 31, 1997, and 1996, included in earnings for the
six-month period was $36,682 and ($38,568), respectively.
The estimated fair value of the investments classified as available-for-sale at
December 31, 1997, was $589,018 with $328,276 (before tax) in unrealized losses
being recorded as a separate component of Shareholders' Equity as of December
31, 1997. These venture capital investments are reflected as non-current assets
on the December 31, 1997, consolidated balance sheet, and generally are in
private placements, which are restricted for sale as of December 31, 1997. It is
anticipated the securities obtained in these private placements will become free
trading within one year. During the six months, the Company recorded no realized
gains or losses as no securities were transferred from available-for-sale
securities to trading securities.
The estimated fair value of the investments classified as available-for-sale at
June 30, 1997, was $557,315 with $268,270 (before tax) in unrealized losses
being recorded as a separate component of Shareholders' Equity. During fiscal
1997, the Company recorded income related to realized gains of $218,860 and
unrealized gains of $100,349 on securities transferred from the
available-for-sale category to the trading category upon becoming free trading.
NOTE C--INVESTMENT MANAGEMENT, TRANSFER AGENT AND OTHER FEES
The Company serves as investment advisor and transfer agent to USGIF and USGAF.
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 USGIF and USGAF. The
Company outsourced the bookkeeping and accounting functions performed by USSI
during the second quarter of fiscal 1998. The Company also
7
receives exchange, maintenance, closing, and small account fees directly from
USGIF and USGAF shareholders. Fees for providing services to USGIF and USGAF
continue to be the Company's primary revenue source. 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 USGIF and USGAF funds and the Guernsey Fund 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, 1997, and December 31,
1996, were $1,894,259 and $1,559,852, 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
USGIF were recently renewed and expire on or about October 26, 1998. The
contracts between the Company and USGAF expire on or about March 8, 1998.
Management anticipates the Trustees of both USGIF and USGAF will continue to
renew the contracts.
NOTE D--INCOME TAXES
The differences in income taxes attributable to continuing operations determined
by applying the U.S. federal statutory rate of 34% and the Company's effective
tax rate are summarized as follows:
SIX MONTHS ENDED
DECEMBER 31,
1997
---------
Tax expense at statutory rate $ 124,459
Non-deductible membership dues 6,044
Non-deductible meals and entertainment 16,553
Other (10,276)
---------
$ 136,780
=========
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, 1997, is presented below:
DECEMBER 31,
1997
----------
Book/tax differences in the balance sheet:
Accumulated depreciation $ 100,748
Accrued expenses 46,035
Annuity obligations 53,904
Available-for-sale securities 111,614
Trading securities 4,426
----------
316,727
Tax carryovers:
NOL carryover 661,171
Contributions carryover 104,639
Minimum tax credits 114,270
----------
880,080
----------
Total gross deferred tax asset 1,196,807
----------
8
Affiliated investment (97,178)
Available-for-sale securities (111,614)
----------
Total gross deferred tax liability (208,792)
----------
Net deferred tax asset $ 988,015
==========
For federal income tax purposes at December 31, 1997, the Company has net
operating losses ("NOLs") of approximately $1.9 million that will expire, in
part, in fiscal 2007 and 2010, charitable contribution carryovers of
approximately $308,000 expiring 1998-2000, and alternative minimum tax credits
of $114,270 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 subsequently to December 31, 1997, 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 that give rise to the deferred tax asset.
NOTE E--LITIGATION ACCRUAL
As discussed in the Company's Form 10-K for fiscal year ended June 30, 1997,
Gerald C. Letch sued the Company in June 1994 in state district court in San
Antonio, Texas, for breach of contract and 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. In November 1995,
a judgment was entered in favor of Letch, with total damages aggregating
$296,637.
On November 12, 1997, the Fourth Court of Appeals reversed the trial court's
finding against the Company. Mr. Letch has filed a motion for rehearing;
therefore, the Company continues to post a bond secured by restricted cash in
connection with these appeals. The Company has no balance outstanding on this
letter of credit and has no plans to draw upon it anytime in the future as the
letter of credit was obtained solely to perfect the appeal.
The Company 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 were both recorded in the Company's Consolidated
Statement of Operations in fiscal 1996. As a result of the appellate court's
decision and legal counsel's estimate that this decision will stand, the Company
reversed the $300,000 accrued for the original judgment.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 1997, AND 1996
The Company posted net earnings of $229,274 ($0.03 per share) for the six months
ended December 31, 1997, as compared with net earnings of $711,583 ($0.11 per
share) for the six months ended December 31, 1996.
ASSETS UNDER MANAGEMENT
The primary source of the Company's revenue is advisory fees from managing U.S.
Global Investors Funds ("USGIF") and U.S. Global Accolade Funds ("USGAF"), and
these fees are dependent on average net assets. Fluctuations in the financial
markets and investor sentiment directly impact the funds' asset levels,
therefore affecting income and results of operations. As of January 23, 1998,
total assets under management for USGIF were approximately $1.25 billion and
total assets under management for USGAF were $136 million.
Assets for the six months ended December 31, 1997, in the Company's two gold
funds decreased by approximately $200 million (43%) over the six months ended
December 31, 1996. However, because of the Company's diversification of fund
offerings, average assets under management for USGIF for the six month periods
ended December 31, 1997, and 1996, remained at $1.33 billion. Assets under
management for USGAF averaged $144 million for the six months ended December 31,
1997, versus $95 million for the six months ended December 31, 1996. This
increase was due to an increase in assets of the Bonnel Growth Fund, as well as
the addition of the MegaTrends Fund (November 1996), the Adrian Day Global
Opportunity Fund (February 1997), and the Regent Eastern European Fund (April
1997) to the USGAF family of funds.
REVENUES
Total consolidated revenues for the six months ended December 31, 1997,
decreased approximately $1,704,000 (22%) over the six months ended December 31,
1996. This decrease was due to a decrease of approximately $760,000 in
investment income, as well as an approximate $811,000 decrease in interest
income and accretion of the U.S. Government Agency Notes ("Notes"). As
previously disclosed in the Company's Form 10-K for fiscal year ended June 30,
1997, these Notes matured during March 1997. In addition, for the six months
ended December 31, 1997, management advisory fees relating to the Company's two
gold funds decreased approximately $736,000 (38%)over the same period last year.
However, due to the increase in assets of non-gold related funds, total
management fees remained constant for the six-month period ended December 31,
1997, versus the same period last year.
Earnings before interest and investment income (expense), taxes, depreciation
and amortization (EBITDA) for the six months ended December 31, 1997, increased
approximately $400,000 (192%) to $609,000 ($0.09 per share) from $209,000 ($0.03
per share) for the six months ended December 31, 1996. This was attributable to
a decrease of approximately $543,000 (10%)general and administration expenses as
discussed below.
EXPENSES
Total consolidated expenses decreased approximately $1,336,000 (20%) for the six
months ended December 31, 1997, versus the six months ended December 31, 1996.
This decrease resulted primarily from a decrease in general and administrative
expenses, as well as a decrease in interest expense of approximately $815,000 on
securities sold under repurchase agreements with broker-dealers from the
six-month period ended December 31, 1996. This interest expense was related to
$26.75 million par value Notes held during the six months ended December 31,
1996.
Exclusive of the expenses attributable to the purchase and financing of the
Notes, total expenses of the Company decreased approximately $521,000 (9%) over
the six months ended December 31, 1996, primarily due to decreases in
compensation costs, marketing expenditures, travel-related costs, as well as the
reversal of the litigation accrual discussed in Note E of the Consolidated
Financial Statements. Alternatively, these decreases were somewhat offset by
increased fund expenses to enhance performance for funds in USGIF and USGAF.
10
THREE MONTHS ENDED DECEMBER 31, 1997 AND 1996
The Company posted net earnings of $114,789 ($0.02 per share) for the three
months ended December 31, 1997, as compared with net earnings of $139,947 ($0.02
per share) for the three months ended December 31, 1996.
ASSETS UNDER MANAGEMENT
As previously stated, 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 affecting income and results of operations.
Assets under management for USGIF for the three months ended December 31, 1997,
averaged $1.30 billion versus $1.33 billion for the three months ended December
31, 1996. This decrease in average assets primarily resulted from a decrease of
$215 million (48%) in assets held in the Company's two gold funds during this
same period. This decrease was partially offset by an increase in non-gold
related assets. Assets under management for USGAF averaged $145 million for the
quarter ended December 31, 1997, versus $108 million for the quarter ended
December 31, 1996. This increase is attributable to the addition of three new
funds as discussed previously.
REVENUES
Total consolidated revenues for the three months ended December 31, 1997,
decreased approximately $821,000 (22%) over the three months ended December 31,
1996. 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, for the three months ended December 31, 1997, management advisory fees
relating to the Company's two gold funds decreased approximately $398,000 (43%)
over the same period last year.
EBITDA for the three months ended December 31, 1997, increased approximately
$126,000 (109%) to $242,000 ($0.04 per share), from $116,000 ($0.02 per share)
for the same period one year earlier. This is primarily attributable to a
decrease in general and administrative expenses as discussed below.
EXPENSES
Total consolidated expenses for the three months ended December 31, 1997,
decreased approximately $813,000 (23%) over the three months ended December 31,
1996. This decrease resulted primarily from a decrease of approximately $407,000
(14%) in general and administrative expenses, as well as a decrease of
approximately $406,000 in interest expense on securities sold under repurchase
agreements with broker-dealers.
General and administrative expenses of the Company decreased approximately
$407,000 (13%) over the three months ended December 31, 1996, primarily as a
result of a decrease in compensation expense, marketing expenditures, and the
reversal of the litigation accrual discussed earlier in this report and also in
"Liquidity and Capital Resources."
LIQUIDITY AND CAPITAL RESOURCES
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 may decrease to the extent that such expense caps
exceed fund expenses; therefore, the Company may collect more fee revenues from
the funds. 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.
TAX LOSS CARRYFORWARDS
Management assessed the likelihood of realization of the recorded deferred tax
asset at December 31, 1997. Net operating losses ("NOLs") of $1.9 million,
primarily resulting from the non-cash charge to earnings related to the purchase
of the Notes during fiscal 1995 do not expire until fiscal 2010. Based on the
current level of earnings and management's
11
expectations for the future, management believes that operating income will
generate the minimum amount of future taxable income necessary to fully realize
the deferred tax assets. As such, management has not included a valuation
allowance at December 31, 1997.
SETTLEMENT POOL
In June 1992, the Company made its final payment to the settlement pool
established under the June 1988 settlement agreement relating to the original
Prospector Fund (now operating as the U.S. Global Resources Fund), and the
settlement pool made the final payout to "Eligible Shareholders" thereof in June
1992. Under the agreement, any amounts payable to "Eligible Shareholders" who
cannot be located, together with interest thereon, will be held until June 30,
1998. At that time, such amounts will be made available to all persons claiming
subrogation. The Company has first right of subrogation to the amounts. Cash
held at December 31, 1997, was approximately $658,000. Management believes the
Company will receive a sum that will equal or exceed the amount currently
recorded as the Company's residual equity interest, $217,861, and accordingly
the Company would recognize income to the extent the amount of cash received
exceeds the residual equity interest.
DECISION TO OUTSOURCE
To continue to provide competitive and technologically advanced fund accounting
and shareholder record keeping services to its mutual fund clients, during the
previous quarter the Company made the decision to: (1) outsource the bookkeeping
and accounting functions currently performed by its wholly owned subsidiary,
United Shareholder Services, Inc., to Brown Brothers Harriman & Co. ("BBH"), and
(2) license DST's mutual fund software system for its transfer agent/shareholder
record keeping functions.
The Company completed the conversion to BBH during the second quarter of fiscal
1998. While the Company will forego accounting fees associated with this
function, the company will experience corresponding reductions in current direct
departmental expenses, estimated costs required to hire additional personnel,
and expenses to maintain and upgrade equipment. In addition, the decision to
engage BBH will allow the Company to take advantage of BBH's established
international network with on-site contacts in the markets in which the Company
invests.
The decision to remotely utilize the DST transfer agent and image-based work
management system allows the Company to transfer the inherent technological
risks and associated significant capital expenditures required to update and
maintain a competitive transfer agency system. It is expected that the
conversion to the DST mutual fund software will be completed by the end of the
third quarter of fiscal 1998.
LITIGATION ACCRUAL
On November 12, 1997, the Fourth Court of Appeals in San Antonio, Texas reversed
the trial court's finding against the Company in a lawsuit brought against the
Company in 1995. The Company believes the court's decision is consistent with
the position the Company asserted throughout the litigation. In the case Mr.
Letch alleged that a deceased Company officer, in a private meeting prior to his
death, orally promised Mr. Letch compensation in exchange for introducing the
Company to another person Mr. Letch had never met. The Company reversed the
$300,000 accrued for the original judgment, thus positively impacting earnings
for the current period.
U.S. GLOBAL BROKERAGE, INC.
The Company is in the process of registering its wholly owned subsidiary, U.S.
Global Brokerage, Inc. ("USGB"), formerly United Services Brokerage, Inc., with
the Securities and Exchange Commission and the National Association of
Securities Dealers, Inc. as a broker-dealer for the limited purpose of
distributing mutual fund shares. To date, the Company has capitalized USGB with
approximately $67,000 to cover costs associated with this registration.
CONCLUSION
Management believes current cash reserves, plus financing obtained and/or
available, and cash flow from operations will be sufficient to meet foreseeable
cash needs or capital necessary for the above-mentioned activities, and also
allow the Company to take advantage of investment opportunities whenever
available.
12
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 15
27 Financial Data Schedule
2. Reports on Form 8-K None
13
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, 1998 U.S. GLOBAL INVESTORS, INC.
/S/ SUSAN B. MCGEE
-------------------------------
BY: Susan B. McGee
Executive Vice President
Corporate Secretary
General Counsel
DATED: January 30, 1998 /S/ DAVID J. CLARK
-------------------------------
BY: David J. Clark
Chief Financial Officer
Chief Operating Officer
DATED: January 30, 1998 /S/ J. MICHAEL EDWARDS
-------------------------------
BY: J. Michael Edwards
Chief Accounting Officer
EXHIBIT 11--SCHEDULE OF COMPUTATION OF NET EARNINGS PER SHARE
SIX MONTHS ENDED THREE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
----------------------- -----------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
Net earnings .............................. $ 229,274 $ 711,583 $ 114,729 $ 139,947
========== ========== ========== ==========
PRIMARY
Weighted average number shares
outstanding during the period ........ 6,614,618 6,568,383 6,620,210 6,556,715
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 ......................... 53,494 32,419 53,494 32,419
---------- ---------- ---------- ----------
Weighted average number of shares
used in calculation of primary
earnings per share .............. 6,668,112 6,600,802 6,673,704 6,589,134
========== ========== ========== ==========
Primary earnings (loss) per share
Net Earnings Per Share ............... $ 0.03 $ 0.11 $ 0.02 $ 0.02
========== ========== ========== ==========
FULLY DILUTED
Weighted average number of shares
outstanding during the period ........ 6,614,618 6,568,383 6,620,210 6,556,715
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 53,494 32,419 53,494 32,419
---------- ---------- ---------- ----------
Weighted average number of shares used
in calculation of fully diluted
earnings, per share ............. 6,668,112 6,600,802 6,673,704 6,589,134
========== ========== ========== ==========
Fully diluted earnings (loss) per share
Net Earnings Per Share ............... $ 0.03 $ 0.11 $ 0.02 $ 0.02
========== ========== ========== ==========
15