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: SEPTEMBER 30, 1995
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/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from: to
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Commission File Number: 0-13928
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UNITED SERVICES ADVISORS, INC.
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TEXAS 74-1598370
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
7900 CALLAGHAN ROAD
SAN ANTONIO, TEXAS 78229-2327
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE)
(210) 308-1234
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
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(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes / X / No / /
APPLICABLE ONLY TO CORPORATE ISSUERS:
On October 31, 1995 there were 567,279 shares of Registrant's Class A common
stock outstanding and 1,000,000 shares of Registrant's Class B non-voting common
shares outstanding. In addition, there were 4,959,595 shares of Registrant's
Preferred Stock issued and outstanding.
<PAGE>
UNITED SERVICES ADVISORS, INC.
I N D E X
PART I. FINANCIAL INFORMATION PAGE NO.
ITEM 1. Financial Statements
Consolidated Balance Sheets - ............................................. 1-2
September 30, 1995 and June 30, 1995
Consolidated Statements of Operations - ................................... 3
Three-Months Ended
September 30, 1995 and 1994
Consolidated Statements of Changes in Cash Flows .......................... 4-5
Three-Months Ended
September 30, 1995 and 1994
Notes to Consolidated Financial Statements ................................ 6-11
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ................................................12-16
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings ................................................. 17
ITEM 2. Change in Securities .............................................. 17
ITEM 4. Submission of Matters to a Vote of Security Holders ............... 17
ITEM 6. Exhibits and Reports on Form 8-K .................................. 18
SIGNATURES ................................................................ 19
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
UNITED SERVICES ADVISORS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
SEPTEMBER 30, JUNE 30,
1995 1995
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents .................................................................... $ 2,069,161 $ 2,772,221
Trading securities at fair value (Note B) .................................................... 2,178,436 1,510,316
Receivables (Note C):
Mutual funds .............................................................................. 688,516 720,134
Accrued interest .......................................................................... 528,640 504,647
Custodian fees ............................................................................ 254,555 192,248
Employees ................................................................................. 101,296 98,121
Receivable from brokers ................................................................... 487,525 104,747
Other ..................................................................................... 87,231 77,098
Prepaid expenses ............................................................................. 473,509 488,773
Deferred tax asset ........................................................................... -- 63,771
------------ ------------
TOTAL CURRENT ASSETS .............................................................. 6,868,869 6,532,076
------------ ------------
NET PROPERTY AND EQUIPMENT ....................................................................... 2,573,389 2,664,820
------------ ------------
OTHER ASSETS
Government securities held-to-maturity (Note D) .............................................. 113,785,240 113,260,361
Restricted cash and investments .............................................................. 661,856 897,556
Long- term receivables ....................................................................... 281,128 219,982
Long-term deferred tax asset (Note G) ........................................................ 2,262,304 2,224,602
Residual equity interest ..................................................................... 217,861 217,861
Investment in joint venture .................................................................. 557,933 518,073
Investment securities available-for-sale, at fair value (Note B) ............................. 1,319,371 1,466,622
Other ........................................................................................ 68,793 71,169
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TOTAL OTHER ASSETS ................................................................ 119,154,486 118,876,226
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$128,596,744 $128,073,122
============ ============
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (CONTINUED).
UNITED SERVICES ADVISORS, INC.
CONSOLIDATED BALANCE SHEETS
(CONTINUED)
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
SEPTEMBER 30, JUNE 30,
1995 1995
------------- -------------
(UNAUDITED)
<S>
<C> <C>
CURRENT LIABILITIES
Current portion of capital lease obligations ................................................ $ 84,110 $ 93,658
Current portion of notes payable ............................................................ 39,148 38,325
Current portion of annuity obligations ...................................................... 18,000 18,000
Securities sold under agreement to repurchase (Note E) ...................................... 112,307,387 112,201,469
Accounts payable ............................................................................ 162,846 167,598
Accrued interest payable to third parties ................................................... 462,280 388,217
Accrued interest payable to related party (Note F) .......................................... 90,684 113,126
Accrued compensation and related costs ...................................................... 189,827 53,700
Accrued profit sharing and 401(k) ........................................................... 12,000 48,000
Accrued vacation pay ........................................................................ 75,959 75,959
Accrued legal fees .......................................................................... 20,936 50,722
Other accrued expenses ...................................................................... 195,667 146,508
Deferred tax liability (Note G) ............................................................. 153,423 --
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TOTAL CURRENT LIABILITIES ................................................................... 113,812,267 113,395,282
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Convertible Subordinated Debenture Held By a Related Party ...................................... 4,534,212 4,534,212
Capital Lease Obligations ....................................................................... 6,581 24,354
Notes Payable-Net of Current Portion ............................................................ 1,291,760 1,301,723
Annuity and Contractual Obligations ............................................................. 154,871 156,328
Commitments and Contingencies (Note H) .......................................................... -- --
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TOTAL NON-CURRENT LIABILITIES ............................................................ 5,987,424 6,016,617
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TOTAL LIABILITIES ........................................................................ 119,799,691 119,411,899
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SHAREHOLDERS' EQUITY
Preferred stock--$.05 par value; non-voting; authorized, 7,000,000 shares; .................. 253,575 253,575
Common stock (class A)--$.05 par value; authorized, 1,750,000 shares; ....................... 28,539 28,539
Common stock (class B)--$.05 par value; non-voting; authorized, 2,250,000
shares; .................................................................................. 50,000 50,000
Additional paid-in-capital .................................................................. 12,835,084 12,852,986
Treasury stock at cost; ..................................................................... (274,123) (198,366)
Net unrealized gain on available-for-sale securities (net of tax of $81,763
and $120,914, respectively) ................................................................. 158,715 234,716
Retained earnings (deficit) ................................................................. (4,254,737) (4,560,227)
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TOTAL SHAREHOLDERS' EQUITY ............................................................... 8,797,053 8,661,223
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$ 128,596,744 $ 128,073,122
============= =============
</TABLE>
The accompanying notes are an integral part of this statement
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (CONTINUED).
UNITED SERVICES ADVISORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
----------------------------------
1995 1994*
----------- -----------
<S> <C> <C>
REVENUE (NOTE C)
Investment advisory fee .......................................................... $ 1,406,082 $ 1,409,955
Transfer agent fee ............................................................... 610,192 673,802
Accounting fee ................................................................... 129,750 114,067
Exchange fee ..................................................................... 64,710 69,325
Custodial fees ................................................................... 135,336 89,725
Investment income (loss) ......................................................... 582,530 (81,395)
Miscellaneous transfer agency fee ................................................ 148,261 133,554
Other ............................................................................ 60,241 52,375
Government security interest income .............................................. 1,354,513 514,153
Government security accretion to par ............................................. 524,880 196,917
----------- -----------
5,016,495 3,172,478
EXPENSES
General and administrative ....................................................... 2,513,239 2,279,123
Depreciation and amortization .................................................... 120,474 127,299
Interest-note payable and other .................................................. 34,132 151,402
Government security non-cash charge .............................................. -- 2,573,844
Interest expense-securities sold under agreement to repurchase ................... 1,733,832 728,014
Interest expense-convertible subordinated debenture .............................. 90,684 80,000
----------- -----------
4,492,361 5,939,682
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EARNINGS BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING ............................................ 524,134 (2,767,204)
PROVISIONS FOR FEDERAL INCOME TAXES
Current ........................................................................... -- --
Deferred (Note G) ................................................................. 218,644 (825,740)
----------- -----------
218,644 (825,740)
----------- -----------
EARNINGS BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING .............................................................. $ 305,490 $(1,941,464)
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING FOR MARKETABLE SECURITIES ................................................. $ -- $ 43,284
----------- -----------
NET EARNINGS ......................................................................... $ 305,490 $(1,898,180)
=========== ===========
PER SHARE AMOUNTS
Primary and fully diluted
Continuing operations ........................................................... $ .05 $ (.35)
Cumulative effect of change in accounting ....................................... -- .01
----------- -----------
NET EARNINGS ......................................................................... $ .05 $ (.34)
=========== ===========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING
Primary and fully diluted .......................................................... 6,611,599 5,626,280
=========== ===========
</TABLE>
*Reclassified for comparative purposes.
The accompanying notes are an integral part of these statements.
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (CONTINUED).
UNITED SERVICES ADVISORS, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------------------
1995 1994*
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) .................................................................. 305,490 (1,898,180)
----------- -----------
Adjustments to reconcile to net cash provided by operating activities:
Depreciation and amortization ........................................................ 120,474 127,299
Government security accretion ........................................................ (524,880) (196,918)
Government security charge ........................................................... -- 2,573,844
Net gain on sales of securities ...................................................... (228,240) (148,555)
Gain on disposal of equipment ........................................................ (257) --
Cumulative effect of change in accounting ............................................ -- (43,284)
Changes in assets and liabilities, impacting cash from operations:
Restricted investments ............................................................ 235,700 (763,722)
Accounts receivable ............................................................... (511,914) (486,235)
Deferred tax asset ................................................................ 218,644 (825,740)
Prepaid expenses and other ........................................................ (24,594) 23,405
Trading securities ................................................................ 40,488 968,576
Accounts payable .................................................................. (4,752) (67,767)
Accrued expenses .................................................................. 171,121 141,092
----------- -----------
Total adjustments .................................................................... (508,210) 1,301,995
----------- -----------
NET CASH USED FOR OPERATIONS ............................................................. (202,720) (596,185)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of building and land ........................................................ -- (12,397)
Purchase of furniture and equipment .................................................. (26,793) (104,066)
Net proceeds on sale of equipment .................................................... 381 --
Purchase of available-for-sale securities ............................................ (480,343) --
Net purchase of government securities held-to-maturity ............................... 32,074 (92,902,599)
----------- -----------
(474,681) (93,019,062)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on annuity .................................................................. (1,457) (1,360)
Payments on note payable to bank ..................................................... (9,140) (8,145)
Payments on capital lease ............................................................ (27,321) (25,007)
Net proceeds from securities sold under agreement to repurchase ...................... 105,918 86,911,731
Proceeds from issuance of subordinated debenture to related party .................... -- 6,000,000
Proceeds from issuance of preferred stock, warrants, and options ..................... -- 108,000
Proceeds from issuance of Common Stock (Class B) to related party .................... (17,902) --
Purchase of Treasury stock ........................................................... (75,757) --
----------- -----------
(25,659) 92,985,219
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ..................................... (703,060) (630,028)
BEGINNING CASH AND CASH EQUIVALENTS ...................................................... 2,772,221 1,258,599
ENDING CASH AND CASH EQUIVALENTS ......................................................... 2,069,161 628,571
</TABLE>
*Reclassified for comparative purposes
The accompanying notes are an integral part of this statement.
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (CONTINUED).
UNITED SERVICES ADVISORS, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------------------
1995 1994*
----------- -----------
<S> <C> <C>
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of shares for investment in joint venture ............................... $ -- $ 510,000
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest ........................................................... 1,799,083 879,416
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE>
UNITED SERVICES ADVISORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A. BASIS OF PRESENTATION.
The financial information included herein is unaudited; however, such
information reflects all adjustments (consisting solely of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
presentation of results for the interim periods presented. United Services
Advisors, Inc. ("the Company" or "USAI") has consistently followed the
accounting policies set forth in the Notes to the Consolidated Financial
Statements in the Company's Form 10-K for the year ended June 30, 1995.
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, United Shareholders Services, Inc. ("USSI"),
Security Trust and Financial Company ("STFC"), A&B Mailers, Inc. ("A&B") and
U.S. Advisors (Guernsey), Ltd. ("USAG"). Additionally, the Company has
consolidated the balance sheet and results of operations of the Guernsey
offshore fund since it owned substantially all of the issued shares of the Fund
during the quarter. All inter-company balances and transactions have been
eliminated in consolidation. Certain amounts have been reclassified for
comparative purposes.
The results of operations for the three month period ended September 30,
1995 are not necessarily indicative of the results to be expected for the entire
year.
NOTE B. SECURITY INVESTMENTS.
In the first quarter of fiscal 1995, the Company adopted SFAS 115,
"Accounting for Certain Investments in Debt and Equity Securities," effective
July 1, 1994. The adoption of SFAS 115 changed 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 re-evaluates such designation as of each
reporting period date. If the securities are purchased with the intent and the
Company has the ability to hold the securities until maturity, they are
classified as securities held-to-maturity and carried at amortized cost.
Securities that are bought and held principally for the purpose of selling them
in the near-term are classified as trading securities and stated at fair value
with the unrealized gains and losses included in earnings. Securities which will
be held for indefinite periods of time are classified as available- for-sale and
stated at fair value with the unrealized gains and losses included as a separate
component of shareholder's equity. The Company recognized the cumulative effect
of adopting the pronouncement in the first quarter of fiscal 1995 as a change in
accounting principle. The financial impact of adopting SFAS 115 was a net
increase in earnings of $43,284 (net of taxes of $22,298) or $.01 per share
representing net unrealized gains on securities classified as trading securities
and $197,009 (net of taxes of $101,489) on net unrealized gains on securities
classified as available for sale which was reported as a separate component of
equity.
The market value of investments classified as trading at September 30, 1995
was $2,178,436. The net change from the market value as of June 30, 1995 and the
market value as of September 30, 1995 on trading securities that has been
included in earnings for the period was $302,583.
The estimated fair value of the investments classified as
available-for-sale at September 30, 1995 was $1,319,371 with $240,478 (before
tax) in unrealized gains being recorded as a separate component of Shareholders
Equity as of September 30, 1995. These investments are reflected as non-current
assets on the September 30, 1995 consolidated balance sheet. These investments
are in private placements which are restricted for sale as of September 30,
1995. It is anticipated the securities obtained in these private placements will
become free trading during fiscal 1996. During the quarter, the Company recorded
realized gains of $102,485, on securities which were transferred from
available-for-sale securities to trading securities upon becoming free trading.
The Company also recorded unrealized gains of $75,595 on securities which were
transferred from available-for-sale securities to trading securities upon
becoming free trading during the quarter which are included in the net change on
trading securities of $302,583.
Additionally, the Company holds Notes with an amortized cost of
$113,785,240 which are currently classified as held-to-maturity securities. (See
further discussion of these securities at Note D.)
In September 1994, subsequent to USAI's purchase of Notes discussed in Note
D 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 of USAI for the benefit of 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
$750,000 has been returned to the Company since the inception of the agreement
due to the reduced percentage of USG invested in the Notes in accordance with
the agreement. These assets are classified as part of Restricted Investments in
the consolidated balance sheet.
Restricted investments include cash of $72,268 and $24,241 held in margin
accounts at brokers at September 30, 1995 and September 30, 1994, respectively.
NOTE C. INVESTMENT MANAGEMENT, TRANSFER AGENT AND OTHER FEES.
The Company serves as investment advisor and transfer agent to USF. For
these services the Company receives fees based on a specified percentage of net
assets under management and the number of shareholder accounts. The Company also
provides accounting services to USF and is reimbursed for in-house legal
services. Accounting services are provided to USF for an annual fee. The Company
also receives exchange, maintenance, closing, and small account fees directly
from USF shareholders. Fees for providing services to USF continue to be the
Company's primary revenue source.
The Company also provides administrative services to Pauze'/Swanson United
Services Funds ("PSUSF"); is investment advisor and transfer agent to Accolade
Funds; and is the investment advisor and transfer agent to United Services
Insurance Funds ("USIF").
USAI receives additional revenue from several sources including STFC
custodian and administrative fee revenues, gains on marketable securities
transactions, revenues from miscellaneous transfer agency activities including
lockbox functions as well as mailroom operations (A&B).
Investment advisory fees, transfer agency fees, accounting fees, custodian
fees and all other fees to the Company are recorded as income during the period
in which services are performed.
USAI has voluntarily waived or reduced its advisory fee; guaranteed that
fund expenses will not exceed certain limits; and/or has agreed to pay expenses
on several USF funds for purposes of enhancing their performance. The aggregate
amount of fees waived and expenses borne by the Company for the three month
period ended September 30, 1995 and September 30, 1994 was $964,489, and
$1,038,043, respectively.
Receivables from mutual funds represent amounts due the Company and its
wholly-owned subsidiaries for investment advisory fees, transfer agent fees,
accounting fees, and exchange fees and are net of amounts payable to the mutual
funds.
The investment advisory contract and related contracts between the Company
and USF were recently renewed and expire on or about October 25, 1996.
Management anticipates the Trustees of USF will renew the contracts.
NOTE D. GOVERNMENT SECURITIES.
As previously reported, during the fiscal year ended June 30, 1995, USAI
purchased $130,525,000 par value U.S. Government agency notes ("Notes") from
USG, a USF fund, of which $117,525,000 par value Notes were held at September
30, 1995. The Notes were financed by utilizing third party broker-dealer reverse
repurchase agreements (see Note E), issuance of a subordinated debenture, as
well as USAI's cash. As the Notes were recorded at fair value, a pre-tax
non-cash charge to the results of operations of $5,375,269 was recorded during
fiscal 1995. It is USAI's intent, and management believes the Company has the
ability, to hold these Notes to maturity as defined by SFAS 115; and therefore
the Company anticipates ultimately realizing the Notes par value. However, in
accordance with SFAS 115, management re-evaluates the "held-to-maturity"
classification of the Notes each reporting period. Therefore, in accordance with
SFAS 115, the Company has currently classified the Notes as held- to-maturity
securities. As a result, the Company has recognized $524,880 in non-cash
accretion of the Notes during the quarter ended September 30, 1995.
USAI purchases put options on Eurodollar futures ("Options") with the
expectation that they will 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 significant increase in interest
rates. At September 30, 1995 USAI holds 140 Options expiring in December 1995
which reduce the risk of declines in the value of the Notes held by
approximately 24% of the Notes' $117.525 million par value. The Options 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 premiums invested
of $64,575.
NOTE E. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE.
As discussed in Note D, USAI financed the acquisition of the Notes by
entering into agreements to repurchase securities with third party
broker-dealers. The terms with the broker-dealers provide that the reverse
agreements must be collateralized by the Notes and/or cash. The Notes described
in Note D are held by the broker-dealers as collateral. Throughout fiscal 1995,
and as of November 1995, each reverse repurchase agreement has matured and has
been renewed on a 30, 45, 60 or 90 day basis. Management believes that the
reverse repurchase agreements can be periodically renewed until the Notes
mature. All reverse repurchase agreements are with major broker-dealers and are
secured by U.S. Government agency obligations. The following is a summary of
information as of September 30, 1995 on the securities sold under agreements to
repurchase and the repurchase liability:
MATURES
LESS THAN MATURES
30 DAYS 30 TO 90 DAYS TOTAL
------------ ------------ ------------
CARRYING AMOUNT OF COLLATERAL ..... $ 45,317,305 $ 68,467,935 $113,785,240
MARKET VALUE OF COLLATERAL ........ 45,494,375 69,082,131 114,576,506
REPURCHASE LIABILITY .............. 44,770,312 67,537,075 112,307,387
ACCRUED INTEREST RECEIVABLE ON
COLLATERAL ........................ 190,484 338,156 528,640
The amount of risk under the reverse agreements with Dean Witter Reynolds
Inc., was $1,604,483 and the reverse repurchase agreements had maturities of 81
days as of September 30, 1995.
NOTE F. RELATED PARTY TRANSACTIONS.
Three members of the Company's Board of Directors are also directors and/or
officers of Marleau, Lemire Inc. ("ML"). 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 warrants to purchase an additional one million share of capital stock of
$6.00 per share in consideration of an investment of $5 million. 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. On August 3,
1995, USAI shareholders approved an amendment to the Company's Restated Articles
of Incorporation providing for an increase in the number of shares of Preferred
Stock that the Company is authorized to issue by one million shares.
The ML transaction includes a possible change-in-control for the Company.
As part of the transaction, Mr. Frank E. Holmes, Chairman and CEO of the
Company, exchanged shares of the Company Class A Common Stock for shares of ML
common stock. Subject to certain conditions, including obtaining mutual fund
shareholder approvals in the future, ML will own more that 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.
In connection with ML's investment in the Company, the Company's Board of
Directors was expanded from five to nine and includes two ML representatives
(including ML's Chairman and Chief Executive Officer) and the Company's Chairman
and Chief Executive Officer became a director of ML.
TRANSACTIONS WITH ML
During the quarter ended September 30, 1995, USAI purchased 2,700 shares of
ML common stock through USAI's brokerage account at Marleau, Lemire Securities
Inc. ("MLSI"), a subsidiary of ML, for $10,675. USAI's position in ML common
stock is 42,219 shares, which represents less than 1% of the ML common shares
outstanding.
At various intervals during the quarter, the Company purchased 175 put
options on Eurodollar futures for premiums of $73,938 through Marleau, Lemire
Futures which is a division of MLSI.
As of September 30, 1995, USAI has accrued approximately $90,000 in
subordinated debenture interest payable to ML.
NOTE G. INCOME TAXES.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The tax effects of these
temporary differences that give rise to the deferred tax asset as of September
30, 1995 are presented below:
SEPTEMBER 30,
1995
-----------
DEFERRED TAX ASSETS
BOOK/TAX DIFFERENCES IN THE BALANCE SHEET:
ACCUMULATED DEPRECIATION ................................ $ 110,350
ACCRUED EXPENSES ........................................ 24,944
ANNUITY OBLIGATIONS ..................................... 58,776
NET UNREALIZED HOLDING GAIN ............................. 81,763
-----------
275,833
TAX CARRYOVERS:
NOL CARRYOVER ........................................... 1,964,060
CONTRIBUTIONS CARRYOVER ................................. 37,859
INVESTMENT CREDIT CARRYOVER ............................. 34,472
MINIMUM TAX CREDITS ..................................... 56,786
-----------
2,093,177
-----------
DEFERRED TAX ASSET ......................................... 2,369,010
-----------
DEFERRED TAX LIABILITIES
TRADING SECURITIES ......................................... (96,604)
INVESTMENT SECURITIES AVAILABLE-FOR-SALE ................... (81,763)
-----------
DEFERRED TAX LIABILITY ..................................... (178,367)
-----------
NET DEFERRED TAX ASSET ..................................... $ 2,190,643
===========
For federal income tax purposes at September 30, 1995, the Company has net
operating losses ("NOLs") of approximately $5,775,000 which will expire in
fiscal 2007 and 2010, charitable contribution carryovers of approximately
$110,000 expiring 1998-2000, investment credits of $34,472 expiring in 1998 and
minimum tax credits of $56,786 with indefinite expirations. Certain changes in
the Company's ownership may result in a limitation on the amount of NOLs that
could be utilized under Section 382 of the Internal Revenue Code. If certain
changes in the Company's ownership should occur subsequent to September 30,
1995, there could be an annual limitation on the amount of NOLs that could be
utilized.
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax amount will not be realized. Management believes
that taxable income during the carryforward periods will be sufficient to
utilize the NOLs which give rise to the deferred tax asset.
NOTE H. SUBSEQUENT EVENT.
As previously reported, on June 17, 1994, Gerald C. Letch sued the Company
in state district court located in San Antonio, Texas for breach of contract.
Mr. Letch asked for an unspecified amount of damages based upon an alleged oral
promise by a deceased Company officer to pay a finder's fee for introducing
certain parties to the Company leading to the organization of PSUSF. During
August 1994 Mr. Letch amended his complaint to include PSUSF and allegations of
fraud and conspiracy between USAI and PSUSF. During June 1995 a summary
judgement was rendered in favor of PSUSF which did not exist at the time the
alleged cause of action arose. Through October 1995 legal fees and expenses to
defend this action were in excess of $205,000, a significant portion of which
was incurred during fiscal year 1995. The matter was docketed for hearing in
October 1995.
On October 31, 1995 the Court submitted the case to a jury. While the jury
verdict found that there was no fraud, conspiracy or malice, the jury did find
that: (1) the Company and Letch had an oral agreement to pay Letch a fee equal
to 1% of assets existing in PSUSF after it had been in existence for one year;
(2) $187,000 is the amount of damages due Letch for breach of the oral
agreement; and (3) 50% of said damages ($93,500) constitute reasonable attorneys
fees.
Letch has filed a motion requesting the Court to enter judgment requiring
the Company to pay $187,000 of contractual damages, pre-judgment interest of
$16,137 and attorneys fees of $93,500 (an aggregate of $296,637). This motion is
scheduled for hearing on November 21, 1995. The Company is considering various
courses of action including, but not limited to, filing a motion asking the
Court to disregard the jury findings and, if necessary, appealing-- reasserting
that there is not sufficient evidence to support the finding of an enforceable
agreement; and, assuming there is an agreement, that the "Statue of Frauds"
applies and the agreement is not valid because it is not in writing.
Notwithstanding the various courses of action available to the Company, the
Company will accrue approximately $100,000 (management's best estimate of the
fees and expenses necessary to fund an appeal) which will be reflected in the
Company's Consolidated Statement of Operations for the second quarter of fiscal
1996.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
The Company posted net earnings of $305,490 ($0.05 per share) for the
quarter ended September 30, 1995, as compared to a net loss of $1,898,180 ($0.34
per share) for the quarter ended September 30, 1994.
ASSETS UNDER MANAGEMENT
The Company's investment advisory fee revenue is based upon a percentage of
average net assets under management. Therefore, fluctuations in financial
markets impact revenues and results of operations.
Assets under management for the United Services Funds ("USF") for the
quarter ended September 30, 1995 averaged $1.27 billion versus $1.40 billion for
the quarter ended September 30, 1994. This decrease in average assets primarily
resulted from a decline in the value of gold related assets. Assets under
management for the Accolade Funds ("Accolade"), which commenced operations in
October 1994, averaged $19 million for the quarter ended September 30, 1995.
As of November 9, 1995, total assets under management for USF were
approximately $1.28 billion and total assets under management for Accolade were
$28.8 million.
REVENUES
Total consolidated revenues for the quarter ended September 30, 1995
increased approximately 58% over the quarter ended September 30, 1994. This
resulted primarily from interest income and accretion on the U.S. Government
Agency Notes ("Notes") purchased during the fiscal year ended June 30, 1995, a
majority of which were purchased during the first quarter of fiscal 1995.
Excluding the income from the Notes, revenue for the period ended September
30, 1995 increased approximately 27% over the quarter ended September 30, 1994.
This increase resulted primarily from a significant increase in investment
income due to: 1) the Company recognized more realized gains on the sales of
investments; and 2) the Company implemented SFAS 115 "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS 115") as of July 1, 1994
(fiscal 1995) which required the Company to recognize the change in unrealized
gains and losses on investments defined as trading securities in the Company's
income statement. Approximately $302,000 of unrealized appreciation on trading
securities was included in operations for the quarter ended September 30, 1995
compared to approximately $245,000 of unrealized losses on trading securities
was included in operations for the quarter ended September 30, 1994. This
unrealized appreciation on our trading securities reflects improved market
conditions over the previous year.
EXPENSES
Exclusive of the expenses attributable to the purchase and financing of the
Notes, expenses of the Company increased only 4% over the quarter ended
September 30, 1994 due to increases in legal expenses, travel, education and
training, and salaries.
Total consolidated expenses for the quarter ended September 30, 1995
decreased approximately 24% over the quarter ended September 30, 1994. This net
decrease resulted primarily from: 1) a non-recurring non-cash charge of
$2,279,123 relating to the purchase of the Notes incurred in the first quarter
of fiscal 1995; and 2) an increase in interest expense of $1,005,818 on
securities sold under agreement to repurchase to broker-dealers from the
previous first quarter. This increase is due to the fact that $93.275 million
par value Notes were purchased throughout the quarter of ended September 30,
1994, while $117.525 million par value Notes were held throughout the entire
quarter ended September 30, 1995.
LIQUIDITY AND CAPITAL RESOURCES
DECEMBER 1994 MARLEAU, LEMIRE TRANSACTION
Marleau, Lemire Inc. ("ML"), a public company whose shares are traded on
the Toronto Stock Exchange and the Montreal Exchange (Symbol "MRM"), is an
investment dealer in the small and mid-cap Canadian market. On December 7, 1994,
the Company and ML entered into an agreement whereby the Company issued to ML
one million shares of a new class of convertible non-voting common stock (Class
B) at $5.00 per share and a warrant to purchase an additional one million shares
of capital stock at $6.00 per share in consideration of an investment of $5
million. In addition, an existing $6 million subordinated debenture note 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. On August 3, 1995, shareholders approved a one
million share increase in the number of authorized shares of Preferred Stock.
ML may not convert its Class B shares to Class A shares until after mutual
fund shareholders approve continuation of the investment advisory agreements
with the Company in light of ML having voting control. Management anticipates
seeking mutual fund shareholder approval sometime in 1996.
The ML transaction includes a possible change-in-control for the Company.
As part of the transaction, Mr. Frank E. Holmes, Chairman and CEO of the
Company, agreed to exchange shares of the Company's Class A Common Stock for
shares of ML common stock. Subject to certain conditions, including obtaining
mutual fund shareholder approvals in the future, ML would 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.
In the event Company shareholders do not authorize additional Preferred
Stock and/or USF 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.
INVESTMENT IN JOINT VENTURE
USAI and ML entered 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. In
conjunction with this joint venture, United Services Advisors Wealth Management
Corporation ("WMC") was incorporated during the third quarter of fiscal 1995
with a 50% ownership to each USAI and ML. Also, USAI has agreed to incur the
initial organization and development costs, including formation and registration
of the Canadian mutual funds up to a maximum of $250,000 (Canadian) for which
approximately $65,000 Canadian was spent as of September 30, 1995 with an
additional $135,000 Canadian spent in October 1995. Management anticipates that
WMC, through its wholly-owned subsidiary United Services Advisors Fund
Management Inc. which was formed in September 1995 to provide investment
services to Canadian investors, will become the advisor to the ML Small Cap Fund
and will also offer other Canadian funds and investment products and services
during fiscal 1996. Upon commencement of WMC operations, USAI's investment in
WMC will be accounted for under the equity method.
GOVERNMENT SECURITIES
As previously reported, during the fiscal year ended June 30, 1995, USAI
purchased $130,525,000 par value U.S. Government agency notes ("Notes") from
USG, a USF fund, of which $117,525,000 par value Notes were held at September
30, 1995. The Notes were financed by utilizing third party broker-dealer reverse
repurchase agreements, issuance of a subordinated debenture to ML, as well as
USAI's cash. As the Notes were recorded at fair value, USAI recorded pre-tax
non-cash charges in fiscal 1995 of approximately $2,574,000 during the first
quarter and $2,800,000 during the third quarter to the results of operations. It
is USAI's intent, and management believes the Company has the ability, to hold
these Notes to maturity as defined by SFAS 115; and therefore the Company
anticipates ultimately realizing the Notes' par value. However, in accordance
with SFAS 115, management reevaluates the "held-to-maturity" classification of
the Notes each reporting period. Therefore, in accordance with SFAS 115, the
Company has currently classified the Notes as held-to-maturity securities. As a
result, the Company has recognized $524,880 and $196,917 in non-cash accretion
of the Notes during the quarters ended September 30, 1995 and 1994,
respectively.
During calendar 1994 the Federal Reserve Board raised interest rates to
address perceived inflationary pressures and could raise rates for such reason
in the future. Notwithstanding the fact that the coupon on the Notes resets
every 30 days, the Notes have been and may in the future be priced to actual
maturity as opposed to the reset date due to the lagging index used to determine
the coupon rate. As a consequence, as interest rates increase the market value
of the Notes may decrease, which could result in the broker-dealers under the
reverse repurchase agreements requesting additional collateral. In addition, the
spread between interest due to the broker-dealers and the interest earning on
the Notes with a lagging index may increase, increasing the Company's interest
expense. To reduce this risk the Company purchases Eurodollar puts.
USAI purchases put options on Eurodollar futures ("Options") with the
expectation that they will 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 significant increase in interest
rates. At September 30, 1995 USAI holds 140 Options expiring in December 1995
which reduce the risk of declines in the value of the Notes held by
approximately 24% of the Notes' $117.525 million par value. The Options 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 premiums invested
of $64,575.
CONVERTIBLE SUBORDINATED DEBENTURE
In conjunction with the purchase of the Notes described above, USAI issued
a $6 million 8% subordinated debenture to ML, the terms of which require
principal payments as the Notes mature and quarterly interest payments. Payments
of approximately $1.5 million were made during fiscal 1995 leaving an
outstanding balance of approximately $4.5 million. All interest payments to ML
have been made in a timely manner.
INVESTMENT ACTIVITIES
Management believes it can more effectively manage the Company's cash
position by broadening the types of investments utilized in cash management. At
quarter end the Company held approximately $3.497 million in investment
securities other than the Notes. The value of these investments is approximately
40% of stockholders' equity at quarter end. Company investments in marketable
securities classified as trading securities totaled approximately $2,178,000
(market value). In addition, there was approximately $1,319,000 in investments
in securities classified as available for sale. These securities are primarily
private placements that Management expects will become free-trading within one
year. During the quarter net realized gains from the sale of investments
aggregated approximately $226,000 which excludes the sales or expirations of
Eurodollar puts, compared to approximately $148,500 for the September 30, 1994
quarter. Management believes that such activities are in the best interest of
the Company. The activities are scrutinized by Company compliance personnel and
reported to investment advisory clients.
FEE WAIVERS
The Company has agreed to waive a portion of its fee revenues and/or to pay
for expenses of certain mutual funds for purposes of enhancing the funds'
competitive market position. Should assets of these funds increase, fund
expenses borne by the Company would increase to the extent that such expenses
exceed any expense caps in place. The Company expects to continue to waive fees
and/or pay for fund expenses as long as market and economic conditions warrant.
However, subject to the Company's commitment to certain funds with respect to
fee waivers and expense limitations, the Company may reduce the amount of fund
expenses it is bearing.
CONCLUSION
At quarter end the Notes purchased by the Company had an average maturity
of less than two years. The Notes have a face value of $117.525 million which is
greater than the Company's purchase price. As of September 30, 1995 the Company
had approximately $116.8 million in debt related to the Notes (comprised of the
$4.5 million balance on the ML debenture and $112.3 million advanced by brokers
pursuant to reverse repurchase agreement transactions). The ML note is
essentially unsecured with ML looking to the collateral under the reverse
repurchase agreements as its primary source of repayment. The reverse repurchase
agreements with the broker-dealers are backed with collateral valued at
approximately $114.5 million. The broker-dealers have and continue to extend the
agreements; however, if all of the broker-dealers refused to roll-over their
repurchase agreements there would be sufficient collateral to cover the brokers
and there would be approximately $2.27 million to repay the ML note, leaving a
balance to ML of $2.23 million. As of September 30, 1995, USAI had unrestricted
cash and marketable securities with an aggregate value of almost $4.3 million
which could be used to fully retire the debt related to the notes as well as
sustain the continued operations of the Company.
Based upon available information and internal analyses, through the last
maturity date of the Notes, Management anticipates positive cash flow and net
income in the related fiscal years, which income will include accretion related
to the Notes in excess of the non-cash charge discussed above. Management
believes current cash reserves, plus financing obtained and cash flow from
operations, will be sufficient to meet foreseeable cash needs or capital
necessary for the above mentioned activities, as well as allow the Company to
take advantage of investment opportunities whenever available. However, it is
difficult to predict future events and should cash flow be insufficient due to
some unexpected event, the Company would seek additional sources of financing to
meet future working capital requirements.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The information required by this item is contained in the accompanying
financial statements, Part I, Item 1, Note H "Subsequent Event." Note H is
hereby incorporated by reference into Part II.
ITEM 2. CHANGES IN SECURITIES.
The Company's Articles of Incorporation were amended, after shareholder
approval, on August 7, 1995 to increase the number of authorized shares of
preferred stock from 6,000,000 to 7,000,000 shares and, consequently, the total
number of shares which the corporation is authorized to issue from 10,000,000 to
11,000,000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On August 3, 1995 a special meeting of shareholders was held to vote on
increasing the number of shares which the Company is authorized to issue. On
that date, there were 570,770 shares of Class A Common Stock outstanding,
1,000,000 shares of Class B Common Stock outstanding and 4,991,495 shares of
Preferred Stock outstanding. Passage of the proposal required the affirmative
vote of two-thirds of each class of shares outstanding.
The first proposal presented to shareholders was the increase of authorized
preferred shares from 6,000,000 to 12,000,000 and an increase of total
authorized shares from 10,000,000 to 16,000,000. There were insufficient votes
to pass this proposal. The votes on this proposal were as follows:
CLASS A COMMON STOCK
For: 536,038
Against: 752
Abstained: 0
Broker Nonvotes: 0
CLASS B COMMON STOCK
For: 1,000,000
Against: 0
Abstained: 0
Broker Nonvotes: 0
PREFERRED STOCK
For: 2,281,768
Against: 1,071,725
Abstained: 514,325
Broker Nonvotes: 0
An alternate proposal presented to shareholders for approval was the
increase of authorized preferred shares from 6,000,000 to 7,000,000 and an
increase of total authorized shares from 10,000,000 to 11,000,000. The alternate
proposal obtained the necessary votes for approval. The following votes on this
alternate proposal were cast as follows:
CLASS A COMMON STOCK
For: 536,038
Against: 752
Abstained: 0
Broker Nonvotes: 0
CLASS B COMMON STOCK
For: 1,000,000
Against: 0
Abstained: 0
Broker Nonvotes: 0
PREFERRED STOCK
For: 3,582,573
Against: 253,225
Abstained: 32,020
Broker Nonvotes: 0
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
PAGE NO.
a. Exhibits
None
b. Reports on Form 8-K
None
<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: November 14, 1995 BY: /s/ BOBBY D. DUNCAN
----------------------------------------
BOBBY D. DUNCAN
PRESIDENT
CHIEF OPERATING OFFICER
DATED: November 14, 1995 BY: /s/ JANE K. HATTON
----------------------------------------
JANE K. HATTON
VICE PRESIDENT
CHIEF FINANCIAL OFFICER
<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 SEPTEMBER
30, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> SEP-30-1995
<CASH> 2069161
<SECURITIES> 117283047
<RECEIVABLES> 2147763
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6868869
<PP&E> 6694876
<DEPRECIATION> (4121487)
<TOTAL-ASSETS> 128596744
<CURRENT-LIABILITIES> 113812267
<BONDS> 0
<COMMON> 78539
0
253575
<OTHER-SE> 8464939
<TOTAL-LIABILITY-AND-EQUITY> 128596744
<SALES> 2494331
<TOTAL-REVENUES> 5016495
<CGS> 0
<TOTAL-COSTS> 4492361
<OTHER-EXPENSES> 2633713
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1858648
<INCOME-PRETAX> 524134
<INCOME-TAX> 218644
<INCOME-CONTINUING> 305490
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 305490
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
</TABLE>
