FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: MARCH 31, 1995
[ ] 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
UNITED SERVICES ADVISORS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 74-1598370
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
The Registrant has two classes of common stock outstanding of which, on May 12,
1995, there were 571,635 Class A shares outstanding and 1,000,000 Class B shares
outstanding.
The Registrant has one class of preferred stock outstanding of which, on May 12,
1995, there were 5,058,139 shares outstanding.
<PAGE>
UNITED SERVICES ADVISORS, INC.
I N D E X
PART I. FINANCIAL INFORMATION PAGE NO.
ITEM 1. Financial Statements ....................................... 1-2
Consolidated Balance Sheets -
March 31, 1995 and June 30, 1994
Consolidated Statements of Operations - ......................... 3-4
Nine-Month and Three-Month Periods Ended
March 31, 1995 and 1994
Consolidated Statements of Changes in Cash Flow ................. 5
Nine-Months Ended March 31, 1995 and 1994
Notes to Consolidated Financial Statements ......................... 6-11
ITEM 2. Management's Discussion and Analysis of .................... 12-15
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K ........................... 16
SIGNATURES ......................................................... 17
i
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
UNITED SERVICES ADVISORS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
MARCH 31, JUNE 30,
1995 1994
(UNAUDITED)
------------- -----------
CURRENT ASSETS
Cash and cash equivalents ............. $ 3,506,682 $ 1,258,599
Marketable securities (NOTE B) ........ 1,288,713 1,086,974
Receivables (NOTE C):
Mutual funds ........................ 725,692 579,025
Accrued interest .................... 479,104 --
Custodian fees ...................... 140,857 107,966
Employees ........................... 102,030 128,997
Receivable from brokers ............. 39,583 186,880
Other ............................... 17,873 120,714
Prepaid expenses ...................... 448,356 544,291
Deferred tax asset .................... -- 171,984
------------- -----------
TOTAL CURRENT ASSETS ............ 6,748,890 4,185,430
------------- -----------
BUILDING, LAND, AND IMPROVEMENTS ......... 2,389,559 2,360,712
FURNITURE AND EQUIPMENT .................. 4,339,346 3,992,882
Less accumulated depreciation
and amortization .................... (3,968,610) (3,591,000)
------------- -----------
NET FIXED ASSETS ................ 2,760,295 2,762,594
------------- -----------
OTHER ASSETS
Government securities (NOTE E) ........ 125,701,720 --
Restricted investments ................ 775,743 453,648
Deferred tax asset .................... 2,486,744 254,459
Investment in joint venture ........... 510,000 --
Residual equity interest .............. 217,861 217,861
Other investments (NOTE B) ............ 464,861 1,058,750
Receivables ........................... 304,009 144,187
Other ................................. 73,533 66,519
------------- -----------
TOTAL OTHER ASSETS .............. 130,534,471 2,195,424
------------- -----------
$ 140,043,656 $ 9,143,448
============= ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS STATEMENT.
1
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (CONTINUED).
UNITED SERVICES ADVISORS, INC.
CONSOLIDATED BALANCE SHEETS
(CONTINUED)
LIABILITIES AND SHAREHOLDERS' EQUITY
MARCH 31, JUNE 30,
1995 1994*
------------- -----------
(UNAUDITED)
CURRENT LIABILITIES
Current portion of subordinated
debenture (NOTE E) ........................ $ 612,061 $ --
Current portion of capital lease obligations 102,911 103,430
Current portion of notes payable ............ 37,526 35,321
Current portion of annuity obligations ...... 18,000 18,000
Securities sold under agreement to
repurchase (NOTE E) ....................... 123,622,632 --
Accounts payable ............................ 141,727 217,838
Accrued interest payable .................... 199,179 654
Accrued compensation and related costs ...... 10,875 10,000
Accrued profit sharing and 401(k) ........... 36,000 144,904
Accrued vacation pay ........................ 75,959 54,194
Accrued legal fees .......................... 33,818 97,310
Other accrued expenses ...................... 118,960 111,805
------------- -----------
TOTAL CURRENT LIABILITIES ............. 125,009,648 793,456
------------- -----------
SUBORDINATED DEBENTURE (NOTE E) ................ 5,387,939 --
CAPITAL LEASE OBLIGATIONS ...................... 41,824 118,013
NOTES PAYABLE - NET OF CURRENT PORTION ......... 1,311,768 1,340,064
ANNUITY OBLIGATIONS ............................ 157,761 161,912
COMMITMENTS AND CONTINGENCIES .................. -- --
------------- -----------
TOTAL NON CURRENT LIABILITIES ......... 6,899,292 1,619,989
------------- -----------
TOTAL LIABILITIES ..................... 131,908,940 2,413,445
------------- -----------
SHAREHOLDERS' EQUITY
Preferred stock--$.05 par value; non-voting;
authorized, 6,000,000 shares ................ 253,024 242,740
Common stock (Class A)--$.05 par value;
authorized, 4,000,000 shares ................ 28,538 29,449
Common stock (Class B)--$.05 par value;
authorized, 2,250,000 shares (NOTE E) ....... 50,000 --
Additional paid-in-capital .................. 12,825,979 7,305,344
Treasury stock at cost ...................... (157,519) (134,737)
Retained earnings (deficit) ................. (4,865,306) (712,793)
------------- -----------
TOTAL SHAREHOLDERS' EQUITY ............ 8,134,716 6,730,003
------------- -----------
$ 140,043,656 $ 9,143,448
============= ===========
*Reclassified for comparative purposes.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS STATEMENT.
2
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (CONTINUED).
UNITED SERVICES ADVISORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, MARCH 31,
-------------------------------- -------------------------------
1995 1994* 1995 1994*
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUE (NOTE C)
Investment advisory fee ........................ $ 4,152,347 $ 3,793,339 $ 1,271,589 $ 1,387,303
Transfer agency fees ........................... 2,437,464 2,248,769 765,455 760,851
Accounting fee ................................. 324,527 277,844 94,332 111,551
Exchange fee ................................... 202,235 250,935 68,410 96,585
Custodian fee .................................. 368,198 280,005 127,813 78,813
Investment income (loss) ....................... (171,453) 859,182 (14,197) 467,225
Government security
income ....................................... 3,414,058 -- 1,626,104 --
Other .......................................... 192,582 276,717 81,319 106,942
------------ ----------- ----------- -----------
10,919,958 7,986,791 4,020,825 3,009,270
EXPENSES
General and administrative ..................... 7,175,946 6,670,099 2,262,703 2,413,460
Interest ....................................... 231,822 126,995 41,880 38,841
Depreciation and amortization .................. 392,471 368,068 135,005 123,345
Government security
non-cash charge (NOTE E) ..................... 5,375,269 -- 2,801,425 --
Government security
interest (NOTE E) ............................ 3,702,846 -- 1,750,683 --
Subordinated debenture
interest (NOTE E) ............................ 320,000 -- 120,000 --
------------ ----------- ----------- -----------
17,198,354 7,165,162 7,111,696 2,575,646
------------ ----------- ----------- -----------
EARNINGS BEFORE INCOME TAXES
AND CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING .............................. (6,278,396) 821,629 (3,090,871) 433,624
Provisions for federal
income taxes
Current ........................................ -- 116,160 -- 116,160
Deferred ....................................... (2,082,599) (324,815) (1,148,285) (303,377)
------------ ----------- ----------- -----------
(2,082,599) (208,655) (1,148,285) (187,217)
------------ ----------- ----------- -----------
NET EARNINGS BEFORE CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING .................... (4,195,797) 1,030,284 (1,942,586) 620,841
CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING FOR
MARKETABLE SECURITIES ............................. 43,284 -- -- --
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING FOR INCOME TAXES ....................... -- 200,420 -- --
------------ ----------- ----------- -----------
NET EARNINGS ...................................... $ (4,152,513) $ 1,230,704 $(1,942,586) $ 620,841
============ =========== =========== ===========
</TABLE>
3
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (CONTINUED).
UNITED SERVICES ADVISORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, MARCH 31,
---------------------------- ----------------------------
1995 1994* 1995 1994*
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
PER SHARE AMOUNTS
Primary and fully diluted
Continuing operations ............................... $(.72) $.17 $(.30) $.10
Cumulative effect of
change in accounting .............................. .01 .03 .00 .00
--------- --------- --------- ---------
NET EARNINGS ............................................. $(.71) $.20 $(.30) $.10
========= ========= ========= =========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING
Primary and fully diluted .............................. 5,833,628 4,906,241 6,550,076 6,102,157
========= ========= ========= =========
</TABLE>
*Reclassified for comparative purposes.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
4
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (CONTINUED).
UNITED SERVICES ADVISORS, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED MARCH 31,
---------------------------
1995 1994*
------------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) .......................... $ (4,152,513) $ 1,230,704
Adjustments to reconcile to net cash
provided by operating activities:
Depreciation and amortization .............. 392,470 368,068
Government security accretion .............. (963,278) --
Government security charge ................. 5,375,269 --
Gain on sale of securities ................. (136,786) (961,829)
Gain on disposal of equipment .............. (500) --
Cumulative effect of change
in accounting (net of tax) ............... (43,284) (200,420)
Changes in assets and liabilities,
impacting cash from operations:
Restricted investments ..................... (322,095) (121,123)
Accounts receivable ........................ (685,566) (574,302)
Deferred tax asset ......................... (2,082,599) (208,655)
Trading securities ......................... 751,129 895,147
Prepaid expenses and other ................. 225,986 (149,818)
Accounts payable ........................... (76,111) 18,541
Accrued expenses ........................... 55,924 196,763
------------- -----------
TOTAL ADJUSTMENTS ....................... 2,490,559 (737,628)
------------- -----------
NET CASH USED FOR OPERATIONS ............ (1,661,954) 493,076
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of building improvements ............ (28,847) (86,964)
Purchase of furniture and equipment .......... (354,202) (154,431)
Purchase of government securities ............ (130,113,711) --
Purchase of available for sale
securities ................................. (156,611) (224,049)
Proceeds on sale of available
for sale securities ........................ -- 110,558
Proceeds on sale of equipment ................ 500 --
------------- -----------
(130,652,871) (354,886)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on annuity .......................... (4,151) (3,871)
Payments on bank loan ........................ (26,091) (25,186)
Payments on capital lease .................... (76,708) (87,072)
Proceeds from repurchase agreements .......... 123,622,632 --
Proceeds from issuance of
subordinated debenture ..................... 6,000,000 --
Proceeds from issuance of stock .............. 5,070,008 564,313
Purchase of Treasury stock (net) ............. (22,782) (41,249)
------------- -----------
134,562,908 406,935
NET INCREASE (DECREASE) IN CASH ................. 2,248,083 545,125
Beginning cash ............................... 1,258,599 865,940
------------- -----------
ENDING CASH ............................. $ 3,506,682 $ 1,411,065
============= ===========
Supplemental disclosure of cash flow information:
Cash paid for Interest ....................... $ 2,986,737 $ 126,995
*Reclassified for comparative purposes.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS STATEMENT.
5
NOTE A. BASIS OF PRESENTATION.
The financial information included herein is unaudited; however, such
information reflects all adjustments (consisting solely of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
presentation of results for the interim periods presented. United Services
Advisors, Inc. ("the Company" or "USAI") has consistently followed the
accounting policies set forth in the Notes to the Consolidated Financial
Statements in the Company's Form 10-K for the year ended June 30, 1994 except
for the adoption of a required accounting principal as discussed in Note B.
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, United Shareholders Services, Inc.
("USSI"), Security Trust and Financial Company ("STFC"), A&B Mailers, Inc.
("A&B") and U.S. Advisors (Guernsey), Ltd. ("USAG"). Additionally, the Company
has consolidated the balance sheet and results of operations of the Guernsey
offshore fund since it owned all of the issued shares of the Fund. All
inter-company balances and transactions have been eliminated in consolidation.
The results of operations for the three month period ended March 31,
1995 are not necessarily indicative of the results to be expected for the entire
year.
NOTE B. SECURITY INVESTMENTS.
In May 1993, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") 115, "Accounting for
Certain Investments in Debt and Equity Securities," effective for fiscal years
beginning after December 15, 1993. SFAS 115 changes the method of accounting and
reporting for investments in equity securities that have readily determinable
fair values and for all investments in debt securities. Under this
pronouncement, management determines the appropriate classification of
securities at the time of purchase and reevaluates such designation as of each
reporting period date. If the securities are purchased with the intent and
Company has the ability to hold the securities until maturity, they are
classified as securities held-to-maturity and carried at amortized cost.
Securities that are bought and held principally for the purpose of selling them
in the near-term are classified as trading securities and stated at fair value
with the unrealized gains and losses included in earnings. Securities which will
be held for indefinite periods of time are classified as available-for-sale
securities and stated at fair value with the unrealized gains and losses
included as a separate component of shareholder's equity. The Company adopted
SFAS 115 during the first quarter of fiscal year 1994 as a change in accounting
principal. The cumulative effect of adoption on July 1, 1994 was an increase in
earnings of $43,284 net of the tax effect. The net change in the unrealized
holding loss on trading securities held at March 31, 1995 that has been included
in earnings during the period was $45,161 partly resulting from the devaluation
of the Canadian dollar.
The cost of investments in securities, which are classified as
available-for-sale, which may not be readily marketable at March 31, 1995 was
$464,861. These investments are reflected as non-current assets on the March 31,
1995 Balance Sheet. These investments are in private placements which are
restricted for sale as of March 31, 1995. It is anticipated the securities
obtained in these private placements will become free trading during 1995.
Management considers the fair value of these investments to equal cost at March
31, 1995. Additionally, the Company holds Government Securities which are
classified as held-to-maturity securities. (See further discussion of these
securities at Note E.)
In September 1994, subsequent to USAI's purchase of the Notes discussed
in Note E to the Consolidated Financial Statements, the Company and United
Services Funds ("USF") entered into an agreement, under which USAI agreed to
transfer $900,000 in cash and securities into an account at a financial
institution in the name
6
<PAGE>
of USAI for the benefit of the U.S. Government Securities Savings Fund ("USG"),
under the control of USF's independent Trustee's. Under the terms of the
agreement, these assets may be drawn upon by USF, if necessary, to continue to
maintain the Fund's net asset value per share at $1.00. The agreement terminates
the earlier of 1) when USG no longer owns any of the variable rate government
agency Notes set forth under the agreement; or 2) October 1997. Collateral of
$500,000 was returned to the Company during the quarter due to the reduced
percentage of USG invested in the Notes in accordance with the agreement. These
assets are classified as part of Restricted Investments in the Consolidated
Balance Sheet.
NOTE C. INVESTMENT MANAGEMENT, TRANSFER AGENT AND OTHER FEES.
The Company serves as investment advisor to United Services Funds
("USF") and is transfer agent to USF. For these services the Company receives
fees based on a specified percentage of net assets under management and the
number of shareholder accounts. The Company also provides accounting services to
USF for a fee and is reimbursed for in-house legal services. The Company also
serves as investment advisor to Accolade Funds and provides administrative
services to Pauze' Swanson United Services Funds ("PSUSF").
USAI receives additional revenue from several sources including: STFC
custodian and administrative fee revenues; revenues from miscellaneous transfer
agency activities including lockbox functions; as well as mailroom operations
(A&B). All income is recognized and accrued as earned.
USAI has voluntarily waived or reduced its advisory fee; guaranteed
that fund expenses will not exceed certain limits; and/or has agreed to pay
expenses on several USF and Guernsey funds for purposes of enhancing their
performance. The aggregate amount of fees waived and expenses borne by the
Company for the nine month period ended March 31, 1995 and 1994 was $2,589,730,
and $2,439,690, 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, net of amounts payable to the mutual funds.
The investment advisory contract and related contracts between the
Company and USF expire on or about October 26, 1995. Management anticipates the
Trustees of USF will renew the contracts.
NOTE D. INVESTMENT IN JOINT VENTURE.
During the fiscal year ended June 30, 1994, USAI and Marleau, Lemire
Inc., a Canadian brokerage firm ("ML"), entered into discussions with respect to
potential joint enterprises. Such discussions culminated in USAI and ML entering
into a joint venture agreement on July 20, 1994 whereby USAI and ML are
undertaking to offer mutual funds in Canada, primarily through ML's broker
network located in Toronto, Montreal, Vancouver, and Victoria. As part of the
agreement to enter into a joint venture, USAI issued 120,000 shares of its
preferred stock to ML. The estimated value of the stock upon issuance was
$510,000, which the Company recorded as its investment in the joint venture
during the first quarter of fiscal 1995. In conjunction with this joint venture,
United Services Wealth Management Corp. was incorporated during the third
quarter of fiscal 1995. Also, USAI has agreed to incur the initial costs for
organization and development costs, including formation and registration of the
Canadian mutual funds up to a maximum of $250,000 (Canadian).
NOTE E. GOVERNMENT SECURITIES.
The U.S. Government Securities Savings Fund ("USG") from its inception
has invested in, among other types of Government securities, certain Government
agency notes whose interest rates reset monthly based on a cost-of-funds index
("Notes"). This reset feature lags changes in short-term interest rates. (See
Liquidity and
7
<PAGE>
Capital Resources under Management Discussion and Analysis of Financial
Condition and Results of Operations.) To reduce USG's exposure to said Notes and
in order to maintain a $1.00 per share net asset value, USAI decided, subsequent
to June 30, 1994, to arrange for USG to sell $40 million par amount of Notes at
USG's amortized cost of approximately $39,777,000 plus accrued interest to ML.
Thereafter, USAI decided to purchase directly from the fund $90,525,000 par
amount of Notes ($53,275,000 during the first quarter of fiscal 1995 and
$37,250,000 during the third quarter of fiscal 1995) at USG's amortized cost of
approximately $90,337,000 plus accrued interest. Additionally, in connection
with such decision, USAI purchased the Notes from ML for approximately
$39,777,000 plus accrued interest during the first quarter of fiscal 1995. The
Notes acquired by USAI mature at their aggregate $130,525,000 par amount as
follows:
MATURITY PAR VALUE
-------- ---------
September 1995 $13,000,000
October 1996-March 1997 $63,725,000
July 1997 $16,550,000
September 1997 $37,250,000
USAI recorded the Notes at their fair value. As the Notes had an
aggregate fair value of approximately $124,739,000 on the dates USAI acquired
the securities, the Company recorded pre-tax non-cash charges to the results of
operations of approximately $2,574,000 during the first quarter and $2,800,000
during the third quarter of fiscal 1995. It is USAI's intent, and management
believes the Company has the ability, to hold these Notes to maturity; and
therefore, the Company anticipates ultimately realizing the Notes' aggregate par
value. Therefore in accordance with SFAS 115, the Company has classified the
Notes as held-to-maturity securities. As a result, and in addition to periodic
receipts of interest income, USAI anticipates recognizing non-cash income by
accreting the discount to par value as follows:
Fiscal Year
ENDING JUNE 30, AMOUNT
--------------- ------
1995 $ 1,500,000
1996 $ 2,156,000
1997 $ 1,866,000
1998 $ 264,000
-----------
$ 5,786,000
===========
USAI financed the acquisition of the Notes, including purchased accrued
interest, as follows: 1) approximately $120.9 million was provided by third
party broker-dealers under reverse repurchase agreements; 2) USAI issued a $6.0
million 8% subordinated debenture to ML, the terms of which require principal
payments as the Notes mature and interest payments quarterly; and 3) USAI
utilized approximately $3,563,000 of its own cash. The terms with the
broker-dealers provide that the repurchase agreements must be collateralized by
the Notes and/or cash. The initial terms with the broker-dealers provided that
the repurchase agreements mature and are subject to renewal by both parties
every 30 days. As of May 15, 1995, each reverse repurchase agreement had matured
and been renewed, and several broker-dealers have extended the term of their
agreements to 60 to 90 days. Management believes that the reverse repurchase
agreements can be periodically renewed until the Notes mature. Although it is
USAI's intent, and Management believes that the Company has the ability to own
the Notes until maturity, under the terms of the subordinated debenture with ML,
ML has retained the right to acquire the Notes collateralizing the reverse
repurchase agreements should USAI sell the Notes. It is USAI's intent to use the
proceeds of the Notes at maturity to settle reverse repurchase agreements with
broker-dealers and its obligation under the debenture payable to ML.
During the first quarter, USAI purchased put options on Eurodollar
futures for approximately $180,000 in premiums which expired in December 1994
resulting in a $138,250 loss. Upon expiration, USAI purchased new put options on
Eurodollar futures for approximately $44,400 in premiums. These options expired
worthless
8
<PAGE>
in March 1995 resulting in a $44,000 realized loss. The options were purchased
as portfolio insurance with the expectation that they would reduce USAI's
exposure to temporary declines in the value of the Notes and reduce USAI's
exposure to increased interest costs of the reverse repurchase agreements in the
event of a sharp increase in interest rates. Subsequent to March 31, 1995, USAI
purchased 225 put options on Eurodollar futures for approximately $49,000 in
premiums which expire in June 1995. These options will be accounted for on a
"mark-to-market" basis with unrealized appreciation or depreciation included in
the results of operations. The options purchased are exchange traded and require
no cash requirements other than the initial premiums and USAI's exposure on the
options is limited to the initial premium invested.
NOTE F. INCOME TAXES.
In the first quarter of fiscal 1994, the Company adopted SFAS No. 109
"Accounting for Income Taxes," effective July 1, 1993. Under the liability
method prescribed by SFAS 109, deferred taxes are provided based upon enacted
tax laws and rates applicable to the periods in which taxes become payable. As
permitted by SFAS 109, prior years' financial statements have not been restated
to apply the provisions of the new method. The effect of adopting the Standard
was recorded as an increase to net income of $200,420 or $.03 per share for the
quarter ended September 30, 1993.
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
March 31, 1995 are presented below:
Book/tax differences in the balance sheet:
Marketable securities $ 129,426
Accumulated depreciation 61,578
Accrued expenses 18,709
Annuity obligations 59,759
----------
269,472
Tax carryovers:
NOL carryover 2,092,649
Contributions carryover 33,365
Investment credit carryover 34,472
Minimum tax credits 56,786
----------
2,217,272
----------
Total deferred tax asset $2,486,744
==========
For federal income tax purposes at March 31, 1995, the Company has NOLs
of approximately $6,150,000, which will expire in fiscal 2010, charitable
contribution carryovers of approximately $98,000 expiring 1998-2000, investment
credits of $34,472 expiring in 1998 and minimum tax credits of $56,786 with
indefinite expirations.
If certain changes in the Company's ownership should occur, there could
be an annual limitation on the amount of NOLs that could be utilized. The
issuance of the Class B common stock and warrant described in Note G has not
triggered a limitation on the amount of NOLs that could be utilized at this
time.
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
<PAGE>
NOTE G. CLASS B COMMON STOCK.
At the end of September 1994, the Company and ML entered into a letter
of intent pursuant to which ML would purchase a significant ownership interest
in the Company. On December 7, 1994, the Company and ML entered into an
agreement whereby the Company issued to ML one million shares of new class of
convertible non-voting common stock (Class B) at $5.00 per share and warrant to
purchase an additional one million share of capital stock of $6.00 per share in
consideration of an investment of $5 million. The warrant allows ML, at its
option, to purchase either one million shares of Class A Common Stock or one
million shares of Preferred Stock at a price of $6.00 per share during the six
month period between October 1, 1997 and March 31, 1998. In addition, an
existing $6 million subordinated debenture of the Company held by ML was amended
so as to be convertible at the option of ML into Preferred Stock at a price of
$7.00 per share. The aggregate number of shares of Preferred Stock ML could
purchase under the warrant, by conversion with the promissory note and by
conversion of its Class B Common Stock is 2,857,142 shares.
Preferred shareholder approval for an increase in the number of
authorized shares of Preferred Stock is required so that the Company may have
sufficient shares of Preferred Stock in the event ML decides to convert its
Class B shares to shares of Preferred Stock.
ML can only convert its Class B shares to Class A shares after mutual
fund shareholders approve continuation of the investment advisory agreements
with the Company because such conversion would be deemed a change in control and
an assignment of the investment advisory agreement.
As part of the transaction, Mr. Frank E. Holmes, Chairman, President
and CEO of the Company, exchanged 72,720 shares of the Company Class A Common
Stock for 164,347 shares of ML common stock. In addition, subject to certain
conditions, including obtaining mutual fund shareholder approvals in the future,
Mr. Holmes will exchange an additional 177,280 Class A common shares for 400,653
shares of ML, and ML will convert its Class B shares to Class A shares,
whereupon ML will own more than 50% of the issued and outstanding voting shares
of the Company, and Mr. Holmes would then own approximately 3% of the total
outstanding common shares of ML.
The conversion feature allowing ML to convert its Class B shares to
Preferred Stock would allow ML to sell said shares in a public offering in the
event mutual fund shareholder approval is not obtained. Alternatively, in the
event Company Shareholders do not authorize additional Preferred Stock and/or
mutual fund shareholders do not approve continuation of the Advisory Agreement
with ML owning control of the Company, ML may opt, during prescribed periods in
1996 and 1997, to convert its investment into a US $5 million debenture payable
by USAI over a two-year period from the date of ML's conversion. The interest
rate on the debenture would be equal to an annual rate of 1% plus the annual
rate of interest established by Bankers Trust of New York for U.S. dollar
commercial demand loans to its U.S. customers.
As discussed in Note F, certain changes in the Company's ownership may
trigger a limitation on the amount of NOLs that could be utilized under Section
382 of the Internal Revenue Code. The Company reviewed Section 382 and
determined that no change in control/ownership existed upon issuance of the
shares and warrants to ML therefore not triggering a Section 382 limitation on
the Company's NOLs.
NOTE H. RELATED PARTY TRANSACTION.
In connection with ML's investment in the Company as described in Note
G, the Company's Board of Directors was expanded from five to nine and includes
two ML representatives (including ML's Chairman and CEO); and, Mr. Holmes has
been elected to ML's Board of Directors. During the quarter USAI purchased
approximately 85,000 shares of ML common stock through USAI's brokerage account
at Marleau, Lemire
10
<PAGE>
Securities Inc., a subsidiary of ML. This increased USAI's position in ML to
approximately 105,000 shares which represents less than 1% of the ML common
shares outstanding.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
NINE MONTHS ENDED MARCH 31, 1995 AND 1994
During the nine months ended March 31, 1995, United Services Advisors,
Inc. ("USAI" or the "Company") acquired $93.275 million in the first quarter and
$37.25 million in the third quarter of U.S. Government Agency Notes ("Notes")
from the U.S. Government Securities Savings Fund ("USG"). In this connection,
the Company recorded non-cash charges in the aggregate of $5.375 million. These
non-cash charges reflect the difference between the Company's purchase price and
the fair value of the Notes on the dates of acquisition. As the Notes have been
classified as held-to-maturity securities in accordance with SFAS115, the
Company will accrete the Notes from their fair value on the date of acquisition
up to their par value, and as a result, recognize non-cash income of $5,375,000
over the remaining life of the Notes, thus fully recouping this non-cash charge.
The Company will also recognize $411,000 of cash income when the notes mature
(see further discussion of the purchase of the Notes at Note E to the
Consolidated Financial Statements).
Due primarily to the non-cash charges described above, USAI posted a
net loss of $4,152,513 [$(.71) per share] for the nine months ended March 31,
1995 after giving effect to the Company recording a deferred tax asset of
approximately $2,083,000. As indicated above, Management believes that a
substantial portion of the net loss will be recouped in future periods. This net
loss compares to net earnings of $1,230,704 for the nine months ended March 31,
1994.
ASSETS UNDER MANAGEMENT
For the nine months ended March 31, 1995, mutual fund assets managed or
administered by USAI averaged approximately $1.35 billion as compared to
approximately $1.26 billion for the nine months ended March 31, 1994 primarily
as a result of an increase in the value of gold related assets.
REVENUES
Excluding the revenue effect of the Notes, total consolidated revenues
for the nine months ended March 1995 decreased approximately 6%. While
investment advisory fees, transfer agent fees, accounting fees and custodian
fees grew approximately 9%, 8%, 17% and 32%, respectively, investment income
decreased by approximately $1,030,600 due primarily to (1) the recognition of
approximately $800,000 less in net realized gains on the sales of securities in
1995 compared to 1994, and (2) approximately $350,000 of unrealized holding
losses on investments, partly resulting from the devaluation of the Canadian
dollar. However, an increase in interest and dividend income of approximately
$70,000 due to increased cash balances on deposit offset other decreases in
investment income.
EXPENSES
Due primarily to the non-cash charges discussed above, total expenses
increased approximately 140%. Although approximately 41% of this percentage
increase related to higher interest expenses resulting from financing the Notes,
this expense was substantially offset by investment income relating to the
Notes. General and administrative expenses increased primarily due to: (i)
higher salaries, wages and benefits as a result of attracting and retaining
portfolio management and research talent as well as from increases in other
staff to absorb growing responsibilities associated with the Company expanding
its product and service offerings to investors; (ii) incurring increased
expenses associated with participation in mutual fund market place programs
sponsored by various discount brokerage firms, which fees are based on the level
of assets placed under management; and (iii) an increase in sub-advisory fees
for the China Region Opportunities Fund which did not commence operations until
February 1994. Also, the Company incurred employee severance charges in December
as a result of a continual re-engineering strategy.
12
<PAGE>
THREE MONTHS ENDED MARCH 31, 1995 AND 1994
During the three months ended March 31, 1995, USAI acquired a $37.25
million Note from USG. In this connection, the Company recorded a non-cash
charge of $2.8 million. This non-cash charge reflects the difference between the
Company's purchase price and the fair value of the Note on the date of
acquisition. As the Note has been classified as a held-to-maturity security in
accordance with SFAS 115, the Company will accrete the Note from its fair value
on the date of acquisition up to its par value, and as a result recognize
non-cash income of $2.8 million over the remaining life of the Note, thus fully
recouping this non-cash charge. The Company will also recognize $40,000 of cash
income when the Note matures.
Due primarily to the non-cash charge described above, USAI posted a net loss
before income taxes of $(1,942,586) [$(.30) per share] for the three months
ended March 31, 1995, as compared to net earnings of $620,841 ($.10 per share)
for the three months ended March 31, 1994.
ASSETS UNDER MANAGEMENT
For the quarter ended March 31, 1995, mutual fund assets managed or
administered by USAI averaged approximately $1.27 billion as compared to
approximately $1.34 billion for the quarter ended March 31, 1994. This decrease
in average assets resulted from a decline in the value of gold related assets.
REVENUES
Excluding the revenue effect of the Notes, total consolidated revenue
for the three months ended March 31, 1995 decreased 20%. While investment
advisory fees, accounting fees and exchange fees decreased approximately 8%,
15%, and 29%, respectively, custodian fees and transfer agency fees increased
62% and 1% respectively. Investment income also decreased by approximately
$481,000 due primarily to (1) the recognition of $500,000 less in realized gains
on the sale of securities in the third quarter of 1995 compared to the third
quarter of 1994, and (2) approximately $45,161 of unrealized holding losses on
investments partly resulting from devaluation of the Canadian dollar. However,
an increase in interest and dividend income of approximately $40,000 due to
increased cash balances on deposit offset other decreases in investment income.
EXPENSES
General and administrative expenses for the quarter ended March 31,
1995 decreased approximately 6% when compared to the same period one year
earlier. This decrease is attributable to a decrease in salaries, wages, and
benefits due to the Company's re-engineering strategy in December, 1994, a
decrease in fund expenses due to the Company paying less expenses on the behalf
of USG, and a decrease in marketing and distribution. Increased interest charges
are a result of financing the Notes, and were substantially offset by investment
income relating to the Notes.
LIQUIDITY AND CAPITAL RESOURCES
To finance the purchase of the Notes described above, the Company
entered into reverse repurchase agreements with various broker-dealers which
require that the Company secure its obligation by pledging collateral valued in
excess of the amount funded -- namely, the Notes purchased. The Company pays
interest to the third party broker-dealers as each reverse repurchase agreement
matures based on short-term rates. To the extent of further increases in
short-term interest rates, the Company's interest cost to the broker-dealers
could increase. Further, in maintaining the required collateral under the terms
of the reverse repurchase agreements with the broker-dealers, to the extent of
decreases in the prices of the Notes at which a broker-dealer would enter into a
repurchase agreement, the Company may have to pledge additional collateral. The
Company
13
<PAGE>
has purchased and intends to continue to purchase financial futures and/or
related options as portfolio insurance designed to reduce its exposure to
temporary declines in the value of the Notes and reduce its exposure to
increased interest costs of the reverse repurchase agreements in the event of a
sharp increase in interest rates. On the other hand, as the Notes approach
maturity the prices ascribed to the Notes by the broker-dealers will approach
their par value resulting in broker-dealers returning collateral to the Company.
The balance of the purchase price was provided by Marleau, Lemire Inc. ("ML")
and Company cash. Interest associated with the subordinated debenture issued to
ML is fixed at 8% annually and payable quarterly. It is USAI's intent to use the
proceeds of the Notes at maturity to settle reverse repurchase agreements with
broker-dealers and its obligation under the debenture payable to ML (see Note E
to the Consolidated Financial Statements).
The Notes currently have a weighted average maturity of approximately
21 months, $13.0 million of which matures September, 1995 and the latest Note
matures September, 1997. Due to the length of the maturity of the Notes, any
deterioration in the market prices for the Notes management would consider
temporary in nature since, as the Notes approach maturity, their market prices
will approach their par value.
To help offset the costs of financing said Notes, the Company receives
interest income on the Notes at staggered intervals on a quarterly basis.
Further, USG has reinvested the proceeds received from the Company at a higher
rate of return, thereby increasing the income earned by the Fund. This allows
USG to bear more of its own expenses, many of which were previously borne by the
Company. On the other hand, the Company has committed to bear USG's expenses in
excess of 40 basis points (0.40% of net assets) until June 30, 1995. Be that as
it may, the Company anticipates that it will pay fewer expenses on behalf of USG
and/or receive more fees under its various services agreements with USG.
Accordingly, the increased income received by the Company will help offset the
costs of financing.
The Notes are adjustable rate U.S. Government Agency Notes that have
interest rates which reset every thirty days based on the cost of funds to
thrift institutions in the Eleventh Federal Home Loan Bank District ("FHLB Rate"
or also known as "COFI"). Unlike most of the government notes linked to the FHLB
Rate, the Notes do not have extension or prepayment risks or caps on their
coupon. Also, the Notes are not asset backed securities.
Since February 1994, the Federal Reserve has increased short-term
interest rates seven times for a total of 300 basis points. After experiencing a
decline through March of 1994, the FHLB Rate has been steadily increasing and
has increased by approximately 138 basis points through April 1995.
On the last day of each month, the Federal Home Loan Bank of San
Francisco calculates FHLB Rate for the prior month. In otherwords, the FHLB Rate
issued at the end of December 1994 represents the rate for the month of November
1994. Further, increases in the FHLB rate result in additional interest income
to the Company which provides an offset to the expense associated with financing
the Notes. Additionally, should current market interest rates continue to level
off and/or decline the rate of increase in the FHLB rate could slow, level off
and decline in response thereto. On the other hand, because of its historical
lagging nature, the FHLB rate would not be expected to decline commensurate with
a leveling off or decline in short-term rates. Under these circumstances the
Company's financing costs could level off or decline.
At current average asset levels in mutual funds managed by the Company
and with the existing interest rate environment, cash generated from operations
and current and projected interest earned on the Notes should be sufficient to
satisfy Company expenses. However, if the sources described above are not
sufficient to meet cash flow needs of the Note obligations, the Company would
implement additional cost reduction programs to further supplement cash flow and
earnings.
In September 1994, subsequent to USAI's purchase of the Notes, the
Company and United Services
14
<PAGE>
Funds ("USF") entered into an agreement under which USAI transferred cash and
securities into an account at a financial institution in the name of USAI for
the benefit of USG, under the control of USF's independent Trustees. Currently
$400,000 in cash and securities are subject to the agreement, and are classified
as restricted investments on the Company's balance sheet.
In connection with a joint venture with ML to offer mutual funds in
Canada, the Company has agreed to incur the initial organizational and
development costs, including formation and registration of the Canadian mutual
funds up to a maximum level of $250,000 (Canadian).
The Company has agreed to waive a portion of its fee revenues and/or
pay for expenses of certain mutual funds for purposes of enhancing the funds'
competitive market position. Should assets of these funds increase, fund
expenses borne by the Company would increase to the extent that such expenses
would exceed any expense caps on any mutual fund the amount of which the Company
has agreed to bear. 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 of certain funds with respect to fee waivers
and expense limitations, the Company may reduce the amount of fund expenses it
is bearing.
SFAS No. 109 "Accounting for Income Taxes" requires tax benefits of net
operating losses, book/tax timing differences, and various tax credits be
recorded as a deferred tax asset. Management has assessed the likelihood of
realization of the recorded deferred tax asset to be "more likely than not".
Based on Management's expectations for the future, management believes that
operating income will "more likely than not" generate the minimum amount of
future taxable income necessary to fully realize the deferred tax assets.
On December 7, 1994, USAI and ML completed an agreement whereby USAI,
in consideration of an investment of US $5 million, issued to ML 1 million
shares of a new class of convertible non-voting common stock (Class B) and
warrants to purchase an additional 1 million shares at US $6.00 per share. See
Note G to the financial statements.
CONCLUSION
Based upon available information and internal analyses, through the
last maturity date of the Notes, given current average asset levels in mutual
funds managed by the Company and with the existing interest rate environment,
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, the
company would seek additional sources of financing to meet future working
capital requirements.
15
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. PAGE NO.
--------
A. EXHIBITS - - -
B. REPORTS ON FORM 8-K - - -
No reports on Form 8-K have been filed during
the quarter for which this Form 10-Q is filed.
16
<PAGE>
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.
UNITED SERVICES ADVISORS, INC.
DATED: May 15, 1995 BY: BOBBY D. DUNCAN
Executive Vice President
Chief Operating Officer
Chief Financial Officer
DATED: MAY 15, 1995 BY: JANE K. HATTON
Controller
17
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED MARCH
31,1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-END> MAR-31-1995
<CASH> 3,506,682
<SECURITIES> 127,455,294
<RECEIVABLES> 1,809,148
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,748,890
<PP&E> 6,728,905
<DEPRECIATION> (3,968,610)
<TOTAL-ASSETS> 140,043,656
<CURRENT-LIABILITIES> 125,009,648
<BONDS> 0
<COMMON> 78,538
0
253,024
<OTHER-SE> 7,803,154
<TOTAL-LIABILITY-AND-EQUITY> 140,043,656
<SALES> 7,484,771
<TOTAL-REVENUES> 10,919,958
<CGS> 0
<TOTAL-COSTS> 17,198,354
<OTHER-EXPENSES> 12,943,686
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,254,668
<INCOME-PRETAX> (6,278,396)
<INCOME-TAX> (2,082,599)
<INCOME-CONTINUING> (4,195,797)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 43,284
<NET-INCOME> (4,152,513)
<EPS-PRIMARY> (.71)
<EPS-DILUTED> (.71)
</TABLE>
