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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 September 30, 1999
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 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 [X] NO [ ]
On October 28, 1999, there were 6,299,474 shares of Registrant's class A common
stock outstanding and 1,496,800 shares of Registrant's class C common stock
issued and outstanding.
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U.S. GLOBAL INVESTORS, INC.
I N D E X
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets - September 30, 1999, and
June 30, 1999 ................................................... 3
Consolidated Statements of Operations and Comprehensive
Income(Unaudited) - Three-Month Period Ended
September 30, 1999 and 1998 ..................................... 5
Consolidated Statements of Cash Flows (Unaudited) -
Three-Month Period Ended September 30, 1999 and 1998............. 6
Notes to Consolidated Financial Statements (Unaudited)............. 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................................11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.........................................................15
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..............................17
SIGNATURES..................................................................18
EXHIBIT 11 - SCHEDULE OF COMPUTATION OF NET INCOME (LOSS) PER SHARE.........19
U.S. Global Investors, Inc.
September 30, 1999, Quarterly Report on Form 10-Q Page 3 of 19
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
ASSETS
SEPTEMBER 30, JUNE 30,
1999 1999
----------- -----------
(UNAUDITED)
CURRENT ASSETS
Cash and cash equivalents $1,052,350 $1,025,247
Trading securities, at fair value 804,005 884,837
Receivables
Mutual funds 905,208 794,562
Custodial fees 295,076 203,823
Employees 134,097 50,464
Other 181,039 167,530
Prepaid expenses 355,309 384,506
Deferred tax asset 176,367 141,551
---------- ----------
TOTAL CURRENT ASSETS 3,903,451 3,652,520
---------- ----------
NET PROPERTY AND EQUIPMENT 2,372,747 2,426,592
---------- ----------
OTHER ASSETS
Restricted investments 255,000 255,000
Long-term receivables 80,982 104,476
Long-term deferred tax asset 825,803 878,091
Investment securities available-for-sale,
at fair value 352,304 370,840
Equity investment in affiliate 701,478 749,739
Other 46,591 46,591
----------- -----------
TOTAL OTHER ASSETS 2,262,158 2,404,737
---------- ----------
TOTAL ASSETS $8,538,356 $8,483,849
========== ==========
U.S. Global Investors, Inc.
September 30, 1999, Quarterly Report on Form 10-Q Page 4 of 19
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LIABILITIES AND SHAREHOLDERS' EQUITY
SEPTEMBER 30, JUNE 30,
1999 1999
----------- -----------
(UNAUDITED)
CURRENT LIABILITIES
Accounts payable $ 417,729 $ 346,504
Accrued compensation and related costs 211,749 274,667
Current portion of notes payable 70,528 68,988
Current portion of annuity and
contractual obligation 18,000 18,000
Accrued legal fees 31,914 27,840
Other accrued expenses 502,147 579,888
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TOTAL CURRENT LIABILITIES 1,252,067 1,315,887
---------- ----------
Notes payable-net of current portion 1,112,595 1,126,066
Annuity and contractual obligations 127,730 129,658
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TOTAL NON-CURRENT LIABILITIES 1,240,325 1,255,724
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TOTAL LIABILITIES 2,492,392 2,571,611
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Commitments and contingent liabilities
SHAREHOLDERS' EQUITY
Common stock (Class A)-$.05 par value;
non-voting; authorized, 7,000,000 shares 314,974 314,974
Common stock (Class C)-$.05 par value;
voting; authorized, 1,750,000 shares 74,840 24,840
Capital in excess of par value 10,551,271 10,586,628
Treasury stock at cost (626,951) (648,830)
Accumulated other comprehensive loss,
net of tax (87,171) (74,938)
Retained earnings (deficit) (4,180,999) (4,290,436)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 6,045,964 5,912,238
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $8,538,356 $8,483,849
========== ==========
The accompanying notes are an integral part of this statement.
U.S. Global Investors, Inc.
September 30, 1999, Quarterly Report on Form 10-Q Page 5 of 19
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CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1999 1998
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REVENUE
Investment advisory fee $ 1,075,232 $ 1,135,032
Transfer agent fee 741,678 799,084
Exchange fee 17,155 36,290
Custodial fees 129,373 123,714
Investment loss (58,877) (82,920)
Other 95,592 85,286
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2,000,153 2,096,486
EXPENSES
General and administrative 1,817,020 2,165,991
Depreciation and amortization 88,194 123,446
Interest-note payable and other 13,468 28,208
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1,918,682 2,317,645
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INCOME (LOSS) BEFORE MINORITY INTEREST,
EQUITY INTEREST AND INCOME TAXES 81,471 (221,159)
Equity In Net Income (Loss) of
Affiliate 51,739 (128,205)
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INCOME (LOSS) BEFORE INCOME TAXES 133,210 (349,364)
PROVISION (BENEFIT) FOR FEDERAL
INCOME TAXES
Deferred 23,773 (17,261)
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NET INCOME (LOSS) $ 109,437 $ (332,103)
Other comprehensive income (loss),
net of tax:
Unrealized gains (losses) on
available-for-sale securities (12,233) (102,996)
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COMPREHENSIVE INCOME (LOSS) $ 97,204 $ (435,099)
=========== ===========
BASIC AND DILUTED INCOME (LOSS)
PER SHARE $ 0.02 $ (0.05)
=========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING:
Basic 7,078,439 6,624,639
Diluted 7,078,439 6,626,023
The accompanying notes are an integral part of this statement.
U.S. Global Investors, Inc.
September 30, 1999, Quarterly Report on Form 10-Q Page 6 of 19
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CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1999 1998
----------- -----------
OPERATING ACTIVITIES:
Net income (loss) $ 109,437 $ (332,103)
Adjustments to reconcile net
income (loss) to net cash provided
by operating activities:
Depreciation and amortization 88,194 123,446
Net gain on sales of securities -- (2,860)
(Gain) loss on changes of interest
in affiliate -- (96,289)
Provision for deferred taxes 23,773 (17,261)
Changes in assets and liabilities,
impacting cash from operations:
Restricted investments -- (3,639)
Accounts receivable (275,547) 467,685
Prepaid expenses and other 91,000 147,805
Trading securities (32,708) 110,353
Accounts payable 71,225 59,704
Accrued expenses (136,585) (100,709)
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Total adjustments (170,648) 688,235
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NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES (61,211) 356,132
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INVESTING ACTIVITIES:
Net purchase of furniture
and equipment (34,349) (105,605)
Proceeds from investment in equity
affiliate 100,000 --
---------- ----------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 65,651 (105,605)
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FINANCING ACTIVITIES:
Payments on annuity (1,928) (1,756)
Payments on note payable to bank (11,931) (14,856)
Treasury stock reissued 38,263 28,725
Purchase of treasury stock (1,741) (3,916)
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NET CASH PROVIDED BY FINANCING
ACTIVITIES 22,663 8,197
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NET INCREASE IN CASH AND
CASH EQUIVALENTS 27,103 258,724
BEGINNING CASH AND CASH EQUIVALENTS 1,025,247 1,391,867
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ENDING CASH AND CASH EQUIVALENTS $1,052,350 $1,650,591
========== ==========
SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Supplemental disclosures of cash
flow information:
Cash paid for interest $ 13,468 $ 28,208
The accompanying notes are an integral part of this statement.
U.S. Global Investors, Inc.
September 30, 1999, Quarterly Report on Form 10-Q Page 7 of 19
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. 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. 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, 1999.
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries, United Shareholder Services, Inc. (USSI),
Security Trust & Financial Company (STFC), A&B Mailers, Inc. (A&B), U.S. Global
Investors (Guernsey) Limited (USGG), U.S. Global Brokerage, Inc. (USGB), and
U.S. Global Administrators, Inc. (USGA). On August 11, 1999, the Board of
Directors of the U.S. Global Strategies Fund (the Guernsey Fund) voted to impose
the compulsory redemption provision in the Guernsey Fund's prospectus to close
the fund and redeem all outstanding shares. In accordance with the Guernsey
Fund's Articles of Association, the Company has suspended the determination of
the net asset value of the fund and has liquidated certain security holdings in
the fund to redeem all outside shareholders. The shareholders of record were
redeemed using a valuation date of September 22, 1999. Based on this valuation,
the Company recorded approximately $52,000 in equity income for its investment
in the Guernsey Fund for the period ended September 30, 1999, compared to an
equity loss of $128,205 for the period ended September 30, 1998. The Company
expects to receive its proportionate share of the liquidation proceeds either in
cash or securities during the second quarter of fiscal year 2000.
All significant inter-company balances and transactions have been eliminated in
consolidation. Certain amounts have been reclassified for comparative purposes.
The results of operations for the three-month period ended September 30, 1999,
are not necessarily indicative of the results to be expected for the entire
year.
NOTE 2. 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 cost of investments classified as trading at September 30, 1999, and June
30, 1999, was $1,197,353 and $1,197,233, respectively. The market value of
investments classified as trading at September 30, 1999, and June 30, 1999, was
$804,005 and $884,837, respectively. The net change in unrealized holding losses
on trading securities held at September 30, 1999, and 1998, which has been
included in income for the three-month period is $80,914 and $124,114,
respectively.
The cost of investments in securities classified as available-for-sale, which
may not be readily marketable at September 30, 1999, and June 30, 1999, was
$484,382. These investments are reflected as non-current assets on the
consolidated balance sheet at their fair value at September 30, 1999, and June
30, 1999, of $352,304 and $370,840, respectively, with $87,171 and $74,938,
respectively, net of tax, in unrealized losses being recorded as a separate
component of shareholders' equity. These investments are in private placements,
which are restricted for sale as of September 30, 1999. It is anticipated the
securities purchased in these private placements will become free trading within
one year. During the first quarter of fiscal year 1999 and 2000, the Company did
not record any unrealized gains or losses on securities transferred from
available-for-sale securities to trading securities.
NOTE 3. INVESTMENT MANAGEMENT, TRANSFER AGENT AND OTHER FEES
The Company serves as investment adviser to U.S. Global Investors Funds (USGIF)
and U.S. Global Accolade Funds (USGAF) and receives a fee based on a specified
percentage of net assets under management. The Company also serves as transfer
agent to USGIF and USGAF and receives a fee based on the number of shareholder
accounts. Additionally, the Company provides in-house legal services to USGIF
and USGAF, and the Company also receives
U.S. Global Investors, Inc.
September 30, 1999, Quarterly Report on Form 10-Q Page 8 of 20
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certain miscellaneous 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 custodian
and administrative fee revenues, gains on marketable securities transactions,
revenues from miscellaneous transfer agency activities including lockbox
functions as well as mailroom operations from A&B. Receivables from mutual funds
represent amounts due the Company and its wholly owned subsidiaries for
investment advisory fees, transfer agent fees, and exchange fees and are net of
amounts payable to the mutual funds.
U.S. Global has voluntarily waived or reduced its advisory fee, has guaranteed
that fund expenses will not exceed certain limits, and/or has agreed to pay
expenses on several USGIF and USGAF funds for purposes of enhancing their
performance. The aggregate amount of fees waived and expenses borne by the
Company for the three-month period ended September 30, 1999, and 1998, was
$530,442 and $802,241, respectively.
The investment advisory and related contracts between the Company and USGIF and
USGAF will expire on February 29, 2000, and on March 8, 2000, respectively.
Management anticipates the board of trustees of both USGIF and USGAF will renew
the contracts.
NOTE 4. NOTE PAYABLE
The Company has a note payable to a bank which is secured by land, an office
building and related improvements. As of September 30, 1999, the balance on the
note was $1,165,955. The loan is currently amortizing over a twenty-year period
with payments of both principal and interest due monthly based on the Bank One,
Texas, prime rate plus .25 percent. The current monthly payment is $11,750, and
matures July 2001. Under this agreement, the Company must maintain certain
financial covenants. Due primarily to noncash charges recorded in prior year as
a result of its equity investment in the Guernsey Fund, the Company is in
violation of certain debt covenants; however, the Company obtained a waiver of
the covenants from the bank through September 30, 1999. The Company anticipates
the bank will revise the present terms of the note payable to restructure the
debt covenants to maintain compliance in the future. If the debt covenants are
not revised, the Company believes it has the ability to refinance the debt with
another financial institution. Additionally, the Company believes it has
adequate cash, cash equivalents, and equity in the underlying asset to retire
the obligation if necessary.
NOTE 5. SHAREHOLDERS' EQUITY
During the fiscal year 1999, the Board of Directors of the Company approved the
issuance of one million shares of class C common stock to Frank Holmes in
exchange for services and cancellation of an option to purchase 400,000 shares
of class C common stock and the cancellation of warrants to purchase 586,122
shares of class C common stock held by Mr. Holmes and F.E. Holmes Organization,
Inc. These shares vest over a ten-year period beginning July 1, 1998, and will
vest fully on June 30, 2008, or in the event of Mr. Holmes death, and will be
valued at $.50 per share. The agreement was executed on August 10, 1999, and the
Company recorded the issuance of the shares during the first quarter of fiscal
year 2000.
NOTE 6. INCOME TAXES
Provisions for income taxes include deferred taxes for temporary differences in
the bases of assets and liabilities for financial and tax purposes, resulting
from the use of the liability method of accounting for income taxes. For federal
income tax purposes at September 30, 1999, the Company has net operating losses
(NOLs) of approximately $2.4 million, which will expire in fiscal 2007 and 2010,
charitable contribution carry-overs of approximately $390,000 expiring between
1999 and 2001, and alternative minimum tax credits of $115,228 with indefinite
expirations. Certain changes in the Company's ownership may result in a
limitation on the amount of NOLs that could be utilized
U.S. Global Investors, Inc.
September 30, 1999, Quarterly Report on Form 10-Q Page 9 of 19
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under Section 382 of the Internal Revenue Code. If certain changes in the
Company's ownership occur subsequent to September 30, 1999, 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. As such, management
continues to include a valuation allowance of approximately $840,000 at
September 30, 1999, providing for the utilization of NOLs, charitable
contributions, and investment tax credits against future taxable income.
NOTE 7. COMPREHENSIVE INCOME
Effective December 31, 1998, the Company adopted Statement No. 130, Reporting
Comprehensive Income (SFAS 130). SFAS 130 established standards for reporting
and display of comprehensive income and its components (revenues, expenses,
gains, and losses) in a full set of general-purpose financial statements. This
statement required that all items that are recognized under accounting standards
as components of comprehensive income be reported in a statement of financial
performance. The Company has disclosed the components of comprehensive income in
the consolidated statements of operations and comprehensive income and has
reclassified prior periods to conform with the new requirements. Additionally,
SFAS 130 requires disclosure of any reclassification adjustments. During the
first quarter of fiscal year 2000 and 1999, there were no securities transferred
from available-for-sale to free trading, and as such no reclassification
adjustment is necessary.
NOTE 8. FINANCIAL INFORMATION BY BUSINESS SEGMENT
The Company adopted SFAS 131, "Disclosures about Segments of an Enterprise and
Related Information" in fiscal year 1999. SFAS 131 requires companies to present
segment information using the management approach. The management approach is
based on the way that management organizes the segments within a Company for
making operating decisions and assessing performance. The Company's principal
operations are located in San Antonio, Texas. The Company operates principally
in two business segments: providing mutual fund investment management services
to its clients, and utilizing a diversified venture capital approach in
investing for its own account in an effort to add growth and value to its cash
position. The following schedule details total revenues and income (loss) by
business segment:
INVESTMENT
MANAGEMENT VENTURE
SERVICES CAPITAL CONSOLIDATED
---------- ----------- ----------
THREE MONTHS ENDED
SEPTEMBER 30, 1999:
Net revenues 2,081,067 $ (80,914) $2,000,153
========== =========== ==========
Income (loss) before
income taxes and equity
interest $ 162,385 $ (80,914) $ 81,471
Equity in net income
of affiliate -- 51,739 51,739
---------- ----------- ----------
Net income (loss) before
income taxes $ 162,385 $ (29,175) $ 133,210
========== =========== ==========
Depreciation and
amortization $88,194$ -- $ 88,194
========== =========== ==========
Interest expense $13,468$ -- $ 13,468
========== =========== ==========
Capital expenditures $34,349$ -- $ 34,349
========== =========== ==========
Gross identifiable assets
at September 30, 1999 $5,658,770 $ 1,790,244 $7,449,014
Deferred tax asset 1,002,170
Accumulated other
comprehensive loss 87,171
----------
Net identifiable assets at
September 30, 1999 $8,538,356
==========
U.S. Global Investors, Inc.
September 30, 1999, Quarterly Report on Form 10-Q Page 10 of 19
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INVESTMENT
MANAGEMENT VENTURE
SERVICES CAPITAL CONSOLIDATED
----------- ----------- -----------
THREE MONTHS ENDED
SEPTEMBER 30, 1998:
Net revenues $ 2,217,740 $ (121,254) $ 2,096,486
=========== =========== ===========
Income (loss) before
income taxes and equity
interest $ (99,905) $ (121,254) $ (221,159)
Equity in net loss of
affiliate -- (128,205) (128,205)
----------- ----------- -----------
Net income (loss) before
income taxes $ (99,905) $ (249,459) $ (349,364)
=========== =========== ===========
Depreciation and
amortization $123,433$ 13 $ 123,446
=========== =========== ===========
Interest expense $28,208$ -- $ 28,208
=========== =========== ===========
Capital expenditures $105,605$ -- $ 105,605
=========== =========== ===========
Gross identifiable assets at
September 30, 1998 $ 6,564,280 $ 1,824,324 $ 8,388,604
Deferred tax asset 1,273,706
Accumulated other
comprehensive loss 178,740
-----------
Net identifiable assets at
September 30, 1998 $ 9,841,050
===========
U.S. Global Investors, Inc.
September 30, 1999, Quarterly Report on Form 10-Q Page 11 of 19
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS--THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
U.S. Global Investors, Inc. (the Company or U.S. Global) posted net income of
$109,437 ($0.02 income per share) for the three months ended September 30, 1999,
compared to a net loss of $332,103 ($0.05 loss per share) for the three months
ended September 30, 1998. Although revenues decreased by approximately $96,000,
the Company's net income for the period was due to a reduction in total expenses
of almost $400,000 and also realizing approximately $52,000 in net income from
its affiliate.
The Company is focused on enhancing shareholder value by improving fund
performance and building its non-gold asset base through multiple distribution
networks. In addition, the Company has introduced new goals and procedures to
monitor the Company's cash flow in order to maximize the return on every dollar
spent.
ASSETS UNDER MANAGEMENT
The primary source of the Company's revenue is advisory fees that are dependent
on average net assets of the mutual funds managed by the Company. Fluctuations
in the markets and investor sentiment directly impact the funds' asset levels,
therefore, affecting income and results of operations. As of October 27, 1999,
total assets under management for U.S. Global Investors Funds (USGIF) and U.S.
Global Accolade Funds (USGAF) were approximately $1.20 billion and $141 million,
respectively.
Assets under management for USGIF for the three months ended September 30, 1999,
averaged $1.20 billion versus $1.23 billion for the three months ended September
30, 1998. This decrease in average assets is primarily a result of a decrease in
the value of gold-related assets, partially offset by increases in equity
related assets. Assets under management for USGAF averaged $146 million for the
three months ended September 30, 1999, versus almost $130 million for the three
months ended September 30, 1998. This increase in average assets is primarily
attributable to increases in the Bonnel Growth Fund.
REVENUES
Total consolidated revenues decreased approximately $96,000, or five percent.
The lingering deflationary pressure on certain commodity prices, such as gold
and natural resources, had a negative impact on the Company's revenues.
Gold-related assets decreased almost $46 million, or 29 percent, for the three
months ended September 30, 1999, compared to the same period ended September 30,
1998. The decrease in gold-related assets was partially offset by an increase in
emerging market assets of almost $10 million, or 64 percent for the same period.
Although gold and gold-related assets have recently rebounded, the rally took
place in late September, therefore, results for the quarter do not reflect the
market upswing. As a result of the decrease in average net assets under
management, net management advisory fees decreased almost $60,000, or five
percent, during this period. In addition, transfer agent fees decreased
approximately $58,000 for the period as shareholder accounts decreased by
approximately 11,000, or 9 percent. The decreases in these two fees were
partially offset by increases in custodial fees and other income.
Earnings before interest and investment income (expense), taxes, depreciation,
and amortization (EBITDA) for the three-month period ended September 30, 1999,
increased approximately $229,000, or 1,704 percent. EBITDA for the three-month
period ended September 30, 1999, approximated $242,000 ($0.03 per share)
compared to $13,000 ($0.00 per share) for the same period ended September 30,
1998. This increase was primarily due to a decrease in operating expenses of
$349,000, or 16 percent, partially offset by the decrease in management advisory
and transfer agent fees mentioned above.
U.S. Global Investors, Inc.
September 30, 1999, Quarterly Report on Form 10-Q Page 12 of 19
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EXPENSES
Total consolidated expenses for the three months ended September 30, 1999,
decreased almost $400,000, or 17 percent. As noted above, this is attributable
to a decrease in general and administrative expenses of the Company of almost
$350,000, or 16 percent, for the three months ended September 30, 1999. More
specifically, the major decreases in general and administrative expenses
included decreases in fund reimbursement expenditures, external professional
fees, and travel related costs.
BUSINESS SEGMENTS
The Company operates principally in two business segments: providing mutual fund
investment management services to its clients and utilizing a diversified
venture capital approach in investing for its own account in an effort to add
growth and value to its cash position. The Company's principal operations are
located in San Antonio, Texas.
INVESTMENT MANAGEMENT SERVICES. The Company serves as investment adviser to U.S.
Global Investors Funds (USGIF) and U.S. Global Accolade Funds (USGAF) and
receives a fee based on a specified percentage of net assets under management.
See Note 3 for a detailed discussion of these services.
VENTURE CAPITAL. Management believes it can more effectively manage the
Company's cash position by broadening the types of investments utilized in cash
management, and continues to believe that such activities are in the best
interest of the Company. These activities are reviewed and monitored by Company
compliance personnel and various reports are provided to investment advisory
clients. On September 30, 1999, the Company held approximately $1.2 million in
investment securities. The value of these investments is approximately 14
percent of total assets and 19 percent of shareholders' equity at period end. Of
the $1.2 million in investment securities, the Company classified approximately
$800,000 as trading securities and approximately $350,000 as available-for-sale
securities. Available-for-sale securities are primarily private placements that
management expects will become free_trading within one year. During the three
months ended September 30, 1999, there were no realized gains or losses from the
sale of investments, compared with gains of $2,860 for the three months ended
September 30, 1998. The net change in the unrealized holding losses on trading
securities held at September 30, 1999 and 1998, which has been included in
earnings for the three_month period, was $80,914 and $124,114, respectively.
On August 11, 1999, the Board of Directors of the U.S. Global Strategies Fund
(the Guernsey Fund) voted to impose the compulsory redemption provision in the
Guernsey Fund's prospectus to close the fund and redeem all outstanding shares.
In accordance with the Guernsey Fund's Articles of Association, the Company has
suspended the determination of the net asset value of the fund and has
liquidated certain security holdings in the fund to redeem all outside
shareholders. The shareholders of record were redeemed using a valuation date of
September 22, 1999. Based on this valuation, the Company recorded approximately
$52,000 in equity income for its investment in the Guernsey Fund for the period
ended September 30, 1999. The Company expects to receive its proportionate share
of the liquidation proceeds either in cash or securities during the second
quarter of fiscal year 2000.
The table below summarizes operating income and net income by each segment.
THREE MONTHS ENDED
SEPTEMBER 30,
1999 1998
--------- ---------
Investment management services $ 162,382 $ (99,905)
Venture capital (80,914) (121,254)
--------- ---------
Income (loss) before income taxes
and equity interest $ 81,471 $(221,159)
Net income (loss) $ 109,437 $(332,103)
U.S. Global Investors, Inc.
September 30, 1999, Quarterly Report on Form 10-Q Page 13 of 19
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INCOME TAXES
Provisions for income taxes include deferred taxes for temporary differences in
the bases of assets and liabilities for financial and tax purposes, resulting
from the use of the liability method of accounting for income taxes. For federal
income tax purposes at September 30, 1999, the Company has net operating losses
(NOLs) of approximately $2.4 million, which will expire in fiscal 2007 and 2010,
charitable contribution carry-overs of approximately $390,000 expiring between
1999 and 2001, and alternative minimum tax credits of $115,228 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 occur,
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. As such, management has
continued to include a valuation allowance of approximately $840,000 at
September 30, 1999, providing for the utilization of NOLs, charitable
contributions, and investment tax credits against future taxable income.
FEE WAIVERS AND FUND REIMBURSEMENTS
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 increase. 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.
CAPITAL STRUCTURE
The board of directors approved a change in the capital structure of the Company
in August 1999, which involved the issuance of 1,000,000 shares of U.S. Global
Investors, Inc. class C common stock to Frank E. Holmes in exchange for services
and the cancellation of existing warrants to purchase 596,122 shares of class C
common stock (held by Mr. Holmes and F.E. Holmes Organization, Inc.) and the
cancellation of an option to purchase 400,000 shares of class C common stock
(held by Mr. Holmes). The 1,000,000 shares issued by the Company will vest over
a ten-year period beginning July 1, 1998, 100,000 shares per year. These shares
are not publicly traded.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, the Company had net working capital (current assets minus
current liabilities) of approximately $2.7 million and a current ratio of 3.1 to
1. With approximately $1.1 million in cash and cash equivalents and
approximately $1.2 million in marketable securities, the Company has adequate
liquidity to meet its current debt obligations. Total shareholders' equity was
approximately $6.0 million and cash, cash equivalents, and marketable securities
comprise 26 percent of total assets. With the exception of operating expenses,
the Company's only material commitment is the mortgage on its corporate
headquarters, a long-term debt. The Company's cash flow is expected to be
sufficient to cover current expenses, including debt service.
The Company's major source of cash flow, the investment advisory and related
contracts between the Company and USGIF and USGAF, will expire on February 29,
2000, and March 8, 2000, respectively. Management anticipates the board of
trustees of both USGIF and USGAF will renew the contracts.
As previously mentioned, the Company has mortgage which is secured by the
underlying land, office building and related improvements. As of September 30,
1999, the balance on the note was $1,165,955. The loan is currently amortized
over a twenty-year period with payments of both principal and interest due
monthly based on the lender's,
U.S. Global Investors, Inc.
September 30, 1999, Quarterly Report on Form 10-Q Page 14 of 19
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Bank One, Texas, prime rate plus .25 percent. The current monthly payment is
$11,750, and the note matures July 2001. Under this agreement, the Company must
maintain certain financial covenants. Due primarily to noncash charges as a
result of its equity investment in the Guernsey Fund, the Company did not meet
certain debt covenants; however, the Company obtained a waiver of the covenants
from the bank through September 30, 1999. The Company is currently negotiating a
revision of present terms of the note payable to maintain compliance in the
future. If the debt covenants are not revised, the Company believes it has the
ability to refinance the debt with another financial institution. Additionally,
the Company believes it has adequate cash, cash equivalents, and equity in the
underlying asset to retire the obligation if necessary.
Management believes current cash reserves, 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 allow the Company to
take advantage of investment opportunities whenever available.
YEAR 2000 DISCLOSURE
SUMMARY
The Company has been actively addressing the potential impact of the Year 2000
(Y2K) problems and has established a proactive approach to help ensure that the
Company's critical systems can operate before, during, and after the century
date rollover. The scope of the Company's Y2K project, including related costs,
is expected to total approximately $150,000. As the Company outsourced many
technology-based operations, there is a only a small base of proprietary code
that had to be analyzed and upgraded with respect to Y2K compliance. While the
Company has taken measures reasonably designed to prevent a negative impact
resulting from Y2K problems, there is no assurance that factors outside the
Company's control will not disrupt its operations.
STATE OF READINESS
The Company has taken steps to increase the awareness of its employees and
associated persons with respect to the Y2K problem and the current actions being
taken to address such problems. The Company has formed a Y2K team, which
includes senior management and experienced analysts and programmers, which meets
on a regular basis to carry out and monitor the Company's Y2K project.
As of June 30, 1999, the Company identified all of its mission-critical systems
and completed an inventory of all hardware, software, networks, and other
various processing platforms, and also customer and vendor interdependencies.
The Company completed an assessment of the systems inventoried to decide their
susceptibility to Y2K issues. This assessment included inquiries to service
providers, vendors, and manufacturers of all systems inventoried to determine
and document if such systems are Y2K compliant. All of the Company's mission
critical service providers, vendors and manufactures responded that they are Y2K
ready. The Company also completed the testing of its mission-critical systems
and made the necessary upgrades to ensure that all mission-critical systems and
software are Y2K compliant.
BUDGET
As of September 30, 1999, the Company had incurred and expended approximately
$115,000 concerning its Y2K project. The Company estimates its total remaining
cost to approximate $35,000 which it will expend as incurred through the next
three months.
The Company's ability to complete its Y2K project by the dates projected and the
total costs incurred to accomplish those efforts are based on estimates that the
Company's management made in reliance on certain assumptions. The goal will be
to maximize the functionality and speed resolution of systems due to any Y2K
problems, with a minimal
U.S. Global Investors, Inc.
September 30, 1999, Quarterly Report on Form 10-Q Page 15 of 19
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deployment of resources and minimal disruption in the financial stability of the
Company. Should the Company detect problems related to mission critical systems,
the Company may need to revise the budget accordingly.
MASTER SCHEDULE
The Company has completed the inventory of its systems and assessed its
susceptibility to Y2K problems. The Company has completed the testing of its
mission-critical systems and has remediated any known defects.
CERTAIN RISKS AND CONTINGENCY PLAN
The Company designed the Company's contingency plan to mitigate the risks to
operations or its core business resulting from any failure to successfully
complete its Y2K project. The Company is dependent on third-party software and
vendor services. The Company believes that any risk from the Y2K transition will
result from its reliance on vendors to finish their own Y2K projects
successfully and on time. The Company does not ensure the compliance of such
vendors and suppliers. The Company has updated its contingency plan to include
alternatives that would be used in case of any business interruptions. The plan
is completed and will be tested and upgraded as needed throughout the year.
FORWARD-LOOKING INFORMATION
The Company has made forward-looking statements concerning the Company's
performance, financial condition, and operations in this quarterly report. The
Company from time to time may also make forward-looking statements in its public
filings and press releases. Such forward-looking statements are subject to
various known and unknown risks and uncertainties and do not guarantee future
performance. Actual results could differ materially from those anticipated in
such forward-looking statements due to a number of factors, some of which are
beyond the Company's control, including (I) the volatile and competitive nature
of the investment management industry, (ii) changes in domestic and foreign
economic conditions, (iii) the effect of government regulation on the Company's
business, (iv) market, credit, and liquidity risks associated with the Company's
investment management activities, and (v) failure of the Company, its vendors,
or other third parties to achieve Y2K compliance. Due to such risks,
uncertainties, and other factors, the Company cautions each person receiving
such forward looking information not to place undue reliance on such statements.
All such forward looking statements are current only as of the date on which
such statements were made.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's balance sheet includes assets whose fair value is subject to
market risks. At September 30, 1999, the Company held approximately $1.2 million
in securities (trading and available-for-sale categories) other than USGIF
money market mutual fund shares.
Management believes it can more effectively manage the Company's cash position
by broadening the types of investments utilized in cash management. Management
attempts to maximize the Company's cash position by using a diversified venture
capital approach to investing. Strategically, management invests in early-stage
or start-up businesses seeking initial financing as well as more mature
businesses in need of capital for expansion, acquisitions, management buyouts,
or recapitalization. The Company also uses other investment techniques such as
private placement arbitrage. This involves the contemporaneous purchase of a
quantity of an issuer's securities at a discount in a private placement and a
short sale of the same, or substantially the same, security in the public
market.
Due to the Company's investments in equity securities, equity price fluctuations
represent a market risk factor affecting the Company's consolidated financial
position. The carrying values of investments subject to equity price risks are
based on quoted market prices or if not actively traded based on management's
estimate of fair value as of the balance sheet date. Market prices fluctuate,
and the amount realized in the subsequent sale of an investment
U.S. Global Investors, Inc.
September 30, 1999, Quarterly Report on Form 10-Q Page 16 of 19
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may differ significantly from the reported market value. The Company's
investment activities are reviewed and monitored by Company compliance personnel
and various reports are provided to investment advisory clients.
The table below summarizes the Company's equity price risks at September 30,
1999, and shows the effects of a hypothetical 25 percent increase and a 25
percent decrease in market prices. A comparison of quarter-end stock prices on
the individual stocks within the Company's equity portfolios over the three
years ending June 30, 1999, indicated that the change from one quarter to the
next was 25 percent or less approximately 90 percent of the time.
ESTIMATED
FAIR VALUE AFTER INCREASE
FAIR VALUE AT HYPOTHETICAL HYPOTHETICAL (DECREASE) IN
SEPTEMBER 30, PERCENTAGE PERCENT SHAREHOLDERS'
1999 CHANGE CHANGE EQUITY
-------- ------------ ---------- ---------
Trading $804,005 25% increase $1,005,006 $ 132,661
Securities
25% decrease $ 603,004 $(132,661)
Available- $352,304 25% increase $ 440,380 $ 58,130
for-Sale 25% decrease $ 264,228 $ (58,130)
The selected hypothetical change does not reflect what could be considered best-
or worst-case scenarios. Results could be significantly worse due to both the
nature of equity markets and the concentration of the Company's investment
portfolio.
U.S. Global Investors, Inc.
September 30, 1999, Quarterly Report on Form 10-Q Page 17 of 19
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
1. Exhibits
11 Statement re: Computation of Per Share Income
27 Financial Data Schedule
2. Reports on Form 8-K
None
U.S. Global Investors, Inc.
September 30, 1999, Quarterly Report on Form 10-Q Page 18 of 19
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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: November 15, 1999 BY: /S/ SUSAN B. MCGEE
--------------------------------------
Susan B. McGee
President
General Counsel
DATED: November 15, 1999 BY: /S/ DAVID J. CLARK
--------------------------------------
David J. Clark
Chief Financial Officer
Chief Operating Officer
DATED: November 15, 1999 BY: /S/ J. MICHAEL EDWARDS
--------------------------------------
J. Michael Edwards
Chief Accounting Officer
U.S. Global Investors, Inc.
September 30, 1999, Quarterly Report on Form 10-Q Page 19 of 19
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EXHIBIT 11--SCHEDULE OF COMPUTATION OF NET INCOME (LOSS) PER SHARE
THREE MONTHS ENDED
SEPTEMBER 30,
1999 1998
---------- -----------
Net income (loss) $ 109,103 $ (332,103)
========== ===========
BASIC
Weighted average number shares
outstanding during the year: 7,078,439 6,624,639
Basic income (loss) per share $ 0.02 $ (0.05)
========== ===========
DILUTED
Weighted average number shares
outstanding during the year: 7,078,439 6,624,639
Effect of dilutive securities:
Common stock equivalent shares
(determined using the
"treasury stock" method)
representing shares issuable
upon exercise of preferred
or common stock options -- 1,384
Weighted average number of shares
used in calculation of diluted
earnings per share 7,078,439 6,626,023
========== ===========
Diluted income (loss) per share $ 0.02 $ (0.05)
========== ===========