UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended March 31, 1998
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ________ to _________
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Commission File Number 0-13928
U.S. GLOBAL INVESTORS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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TEXAS 74-1598370
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)
7900 CALLAGHAN ROAD 78229-2327
San Antonio, Texas (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(210) 308-1234
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Not Applicable
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
YES [X] NO [ ]
On April 28, 1998 there were 6,125,658 shares of Registrant's class A common
stock and 496,830 shares of Registrant's class C common stock issued and
outstanding.
<PAGE>
FORM 10-Q
U.S. GLOBAL INVESTORS, INC.
I N D E X
PART I. FINANCIAL INFORMATION PAGE NO.
ITEM 1. Financial Statements
Consolidated Balance Sheets
March 31, 1998, and June 30, 1997............................... 3
Consolidated Statements of Operations
Nine-Month and Three-Month Periods
Ended March 31, 1998, and 1997.................................. 5
Consolidated Statements of Changes in Cash Flows
Nine-Month Periods Ended March 31, 1998, and 1997............... 6
Notes to Consolidated Financial Statements...................... 7
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations....................... 10
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K........................... 14
Signatures............................................................... 15
Page 2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
ASSETS
MARCH 31, JUNE 30,
1998 1997
----------- -----------
(UNAUDITED)
CURRENT ASSETS
Cash and cash equivalents ................... $ 1,661,773 $ 722,121
Trading securities, at fair
value (Note B) .......................... 896,971 721,954
Receivables (Note C):
Mutual funds ............................ 759,830 1,080,046
Custodial fees .......................... 187,725 199,062
Employees ............................... 72,631 63,700
Receivable from brokers ................. 1,111 240,709
Residual equity interest ................ 217,861 --
Other ................................... 75,497 220,850
Prepaid expenses ............................ 497,500 475,577
Deferred tax asset (Note D) ................. 70,698 103,239
----------- -----------
TOTAL CURRENT ASSETS ........................ 4,441,597 3,827,258
----------- -----------
NET PROPERTY AND EQUIPMENT ....................... 2,563,648 2,536,081
----------- -----------
OTHER ASSETS
Restricted investments ...................... 271,172 642,528
Long-term receivables ....................... 272,959 424,026
Long-term deferred tax asset (Note D) ....... 985,398 1,102,531
Residual equity interest .................... -- 217,861
Investment securities available-for-sale,
at fair value (Note B) .................... 823,447 557,315
Equity investment in affiliate (Note A) ..... 1,118,276 1,322,032
Other ....................................... 60,909 83,143
----------- -----------
TOTAL OTHER ASSETS ...................... 3,532,161 4,349,436
----------- -----------
$10,537,406 $10,712,775
=========== ===========
The accompanying notes are an integral part of this statement.
Page 3
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LIABILITIES AND SHAREHOLDERS' EQUITY
MARCH 31, JUNE 30,
1998 1997
----------- -----------
(UNAUDITED)
CURRENT LIABILITIES
Current portion of capital lease obligation . $ -- $ 9,614
Current portion of notes payable ............ 62,200 44,899
Current portion of annuity and contractual
obligation ................................ 18,000 18,000
Accounts payable ............................ 337,939 367,163
Accrued compensation and related costs ...... 36,225 223,639
Accrued profit sharing and 401(k) ........... 72,322 109,251
Accrued vacation pay ........................ 107,369 107,369
Accrued legal fees .......................... 43,855 62,493
Litigation accrual (Note E) ................. -- 300,000
Other accrued expenses ...................... 225,893 144,632
----------- -----------
TOTAL CURRENT LIABILITIES ................... 903,803 1,387,060
----------- -----------
Notes payable-net of current portion ........ 1,209,704 1,215,386
Annuity and contractual obligations ......... 138,805 143,922
----------- -----------
TOTAL NON-CURRENT LIABILITIES ............... 1,348,509 1,359,308
----------- -----------
TOTAL LIABILITIES ........................... 2,252,312 2,746,368
----------- -----------
Commitments and contingent liabilities
SHAREHOLDERS' EQUITY
Common stock (Class A)-$0.05 par value;
non-voting; authorized,
7,000,000 shares ....................... 314,971 311,354
Common stock (Class C)-$.05 par value;
voting; authorized,
1,750,000 shares ....................... 24,843 28,110
Additional paid-in-capital .................. 10,591,708 10,587,909
Treasury stock at cost ...................... (454,910) (514,770)
Net unrealized gain (loss) on
available-for-sale securities
(net of tax of $96,635 and $91,212,
respectively) .......................... (187,587) (177,058)
Equity in net unrealized gain on
available-for-sale securities
held by affiliate (net of tax of
$13,801 and $10,237, respectively) ..... 26,789 19,873
Retained earnings (deficit) ................. (2,030,720) (2,289,011)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY .................. 8,285,094 7,966,407
----------- -----------
$10,537,406 $10,712,775
=========== ===========
The accompanying notes are an integral part of this statement.
Page 4
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, MARCH 31,
--------------------------- ---------------------------
1998 1997 1998 1997
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
REVENUE (NOTE C)
Investment advisory fee ............ $ 4,461,383 $ 5,046,596 $ 1,325,546 $ 1,702,315
Transfer agent fee ................. 2,503,159 2,517,000 797,348 803,139
Accounting fee ..................... 399,996 475,574 -- 216,697
Exchange fee ....................... 141,265 198,457 42,085 70,356
Custodial fee ...................... 384,430 407,754 102,075 119,413
Investment income .................. 250,792 843,449 78,891 (88,463)
Other .............................. 250,777 278,046 110,763 105,124
Government security interest income -- 760,124 -- 186,717
Government security accretion to par -- 306,926 -- 68,933
Gain (Loss) on changes of
interest in affiliate (Note A) . (1,600) 10,081 (7,609) 14,892
------------ ----------- ------------ -----------
8,390,202 10,844,007 2,449,099 3,199,123
EXPENSES
General and administrative ......... 7,335,698 8,640,679 2,181,603 2,943,160
Depreciation and amortization ...... 339,726 350,803 92,091 125,038
Interest-note payable and other .... 92,316 89,724 31,730 29,518
Interest expense-securities sold
under agreement to repurchase .. -- 1,007,099 -- 248,986
Interest expense-convertible
subordinated debenture ......... -- 73,006 -- 16,118
------------ ----------- ------------ -----------
7,767,740 10,161,311 2,305,424 3,362,820
------------ ----------- ------------ -----------
EARNINGS (LOSS) BEFORE MINORITY INTEREST,
EQUITY INTEREST AND INCOME TAXES ... 622,462 682,696 143,675 (163,697)
EQUITY IN NET EARNINGS (LOSS) OF JOINT
VENTURE (NOTE A) ................... -- (145,061) -- (47,449)
EQUITY IN NET EARNINGS OF
AFFILIATE (NOTE A) ................. (212,636) 287,068 (99,905) (2,278)
------------ ----------- ------------ -----------
EARNINGS (LOSS) BEFORE INCOME TAXES ..... 409,826 824,703 43,770 (213,424)
PROVISIONS FOR FEDERAL INCOME TAXES
Current ............................ -- 25,000 -- --
Deferred (Note F) .................. 151,535 221,497 14,755 (80,047)
------------ ----------- ------------ -----------
151,535 246,497 14,755 (80,047)
------------ ----------- ------------ -----------
NET EARNINGS ............................ $ 258,291 $ 578,206 $ 29,015 $ (133,377)
============ =========== ============ ===========
PER SHARE AMOUNTS
Primary and fully diluted .......... $ .04 $ .09 $ .00 $ (.02)
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING
Primary ............................ 6,667,718 6,585,290 6,671,560 6,559,396
Fully diluted ...................... 6,703,034 6,585,290 6,706,876 6,559,396
============ =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of this statement.
Page 5
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED
MARCH 31,
1998 1997
----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) ............................ $ 258,291 $ 578,206
Adjustments to reconcile to net cash provided
by operating activities:
Depreciation and amortization ............. 339,726 350,803
Government security accretion ............. -- (306,926)
Net gain on sales of securities ........... (169,194) (1,057,259)
Gain on disposal of equipment ............. (1,181) (64)
(Gain) loss on changes of interest in
affiliate ............................... 1,600 (10,081)
Treasury stock reissued ................... 75,565 388,610
Changes in assets and liabilities, impacting
cash from operations:
Restricted investments .................... 371,356 5,961
Accounts receivable ....................... 881,140 943,977
Deferred tax asset ........................ 151,535 221,497
Prepaid expenses and other ................ 212,851 (839,917)
Trading securities ........................ (200,738) 1,972,140
Accounts payable .......................... (29,224) 51,580
Accrued expenses .......................... (462,674) (87,545)
----------- ------------
Total adjustments .............................. 1,170,762 1,632,776
----------- ------------
NET CASH PROVIDED BY OPERATIONS ................ 1,429,053 2,210,982
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net purchase of furniture and equipment ... (319,570) (293,549)
Proceeds on sale of equipment ............. 1,155 800
Proceeds on sale of available-for-sale
securities .............................. 212,830 --
Purchase of available-for-sale securities . (300,000) (200,000)
Proceeds on maturation/sale of government
securities available-for-sale ........ -- 26,725,000
----------- ------------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES ......................... (405,585) 26,232,251
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on annuity ....................... (5,117) (4,773)
Payments on note payable to bank .......... (35,982) (36,178)
Proceeds from capital lease ............... -- 25,330
Payments on capital lease ................. (8,661) (33,719)
Net proceeds from securities sold under
agreement to repurchase ................. -- 420,844
Payments on securities sold under
agreement to repurchase ................. -- (26,825,219)
Payments on subordinated debenture ........ -- (1,533,131)
Proceeds from issuance of common
stock, warrants, and options ............ 12,420 8,250
Purchase of treasury stock ................ (46,476) (320,496)
----------- ------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES ......................... (83,816) (28,299,092)
----------- ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS ...... 939,652 144,141
BEGINNING CASH AND CASH EQUIVALENTS ............ 722,121 666,250
----------- ------------
ENDING CASH AND CASH EQUIVALENTS ............... $ 1,661,773 $ 810,391
=========== ============
SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Supplemental disclosures of cash
flow information:
Cash paid for interest .................... $ 92,316 $ 1,229,936
The accompanying notes are an integral part of this statement.
Page 6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A. BASIS OF PRESENTATION
The financial information included herein is unaudited; however, such
information reflects all adjustments (consisting solely of normal recurring
adjustments) that are, in the opinion of management, necessary for a fair
presentation of results for the interim periods presented. U.S. Global
Investors, Inc. (the "Company" or "U.S. Global") has consistently followed the
accounting policies set forth in the Notes to the Consolidated Financial
Statements in the Company's Form 10-K for the year ended June 30, 1997.
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries, United Shareholders Services, Inc. ("USSI"),
Security Trust and Financial Company ("STFC"), A&B Mailers, Inc. ("A&B") and
U.S. Global Investors (Guernsey) Limited ("USGG"). Additionally, the Company has
continued to account for its investment in the offshore fund, U.S. Global
Strategies Fund Limited (the "Guernsey Fund"), under the equity method of
accounting, as the Company held an 18% and 17% interest in the fund as of March
31, 1998, and 1997, respectively. This resulted in the Company recording
earnings (losses) of ($212,636) and $287,068 for the nine months ending March
31, 1998, and 1997, respectively, which is included in earnings before taxes in
the income statement. In addition, due to changes in its equity interest in the
fund during the nine months, the Company recorded earnings (losses) of ($1,600)
and $10,081 for the nine months ending March 31, 1998, and 1997, respectively.
Similarly, the Company had a one-third interest in United Services Advisors
Canada, Inc. ("USACI"), which was sold in June 1997 to the USACI management
group, which now controls 100% of USACI. However, utilizing the equity method of
accounting, for its interest in USACI, the Company recorded a net loss of
$145,061 for the nine months ending March 31, 1997.
U.S. Global has formed a company that was originally incorporated in Texas on
April 25, 1994. This company, U.S. Global Brokerage, Inc. ("USGB"), formerly
United Services Brokerage, Inc., is being registered as a broker-dealer so that
it may provide distribution services to the Company's mutual fund clients, U.S.
Global Investors Funds ("USGIF") and U.S. Global Accolade Funds ("USGAF").
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 nine-month period ended March 31, 1998, are
not necessarily indicative of the results to be expected for the entire year.
NOTE B. SECURITY INVESTMENTS
The Company accounts for its investment securities in accordance with SFAS 115
"Accounting for Certain Investments in Debt and Equity Securities." Accordingly,
the market value of investments classified as trading was $896,971 and $721,954
held at March 31, 1998, and June 30, 1997, respectively. The net change in the
unrealized holding gain (loss) on trading securities held on March 31, 1998, and
1997, included in earnings for the nine-month period was ($29,948) and
($323,168), respectively.
The estimated fair value of the investments classified as available-for-sale at
March 31, 1998, was $823,447 with $284,222 (before tax) in unrealized losses
being recorded as a separate component of Shareholders' Equity as of March 31,
1998. These venture capital investments are reflected as non-current assets on
the March 31, 1998, consolidated balance sheet and consist of private placements
which are restricted for sale as of March 31, 1998. It is anticipated the
securities obtained in these private placements will become free trading within
one year. During the nine months, the Company recorded realized gains of
$103,205 on securities that were transferred from available-for-sale securities
to trading securities upon becoming free trading.
The estimated fair value of the investments classified as available-for-sale at
June 30, 1997, was $557,315 with $268,270 (before tax) in unrealized losses
being recorded as a separate component of Shareholders' Equity. During fiscal
1997, the Company recorded income related to realized gains of $218,860 and
unrealized gains of $100,349 on securities transferred from the
available-for-sale category to the trading category upon becoming free trading.
Page 7
<PAGE>
NOTE C. INVESTMENT MANAGEMENT, TRANSFER AGENT AND OTHER FEES
The Company serves as investment adviser and transfer agent to USGIF and USGAF.
For these services the Company receives fees based on a specified percentage of
net assets under management and the number of shareholder accounts. The Company
also provides in-house legal services to USGIF and USGAF. The Company outsourced
the bookkeeping and accounting functions performed by USSI during the second
quarter of fiscal 1998. Fees for providing services to USGIF and USGAF continue
to be the Company's primary revenue source.
U.S. Global receives additional revenue from several sources including STFC
custodian and administrative fee revenues, gains on marketable securities
transactions, revenues from miscellaneous transfer agency activities, including
lockbox functions and mailroom operations from A&B. Investment advisory fees,
transfer agency fees, accounting fees, custodian fees and all other fees to the
Company are recorded as income during the period in which services are
performed.
U.S. Global has voluntarily waived or reduced its advisory fee, guaranteed that
fund expenses will not exceed certain limits, and/or has agreed to pay expenses
on several USGIF funds, USGAF funds and the Guernsey Fund for purposes of
enhancing their performance. The aggregate amount of fees waived and expenses
borne by the Company for the nine-month periods ended March 31, 1998, and March
31, 1997, were $2,651,491 and $2,578,235, respectively. Receivables from mutual
funds represent amounts due the Company and its wholly owned subsidiaries for
investment advisory fees, transfer agent fees, and exchange fees and are net of
amounts payable to the mutual funds.
The investment advisory contract and related contracts between the Company and
USGIF and USGAF have been renewed and expire on or about January 21, 1999, and
March 8, 1999, respectively. Management anticipates the Trustees of both USGIF
and USGAF will continue to renew the contracts.
NOTE D. INCOME TAXES
The differences in income taxes attributable to continuing operations by
applying the U.S. federal statutory rate of 34% and the Company's effective tax
are summarized as follows:
NINE MONTHS ENDED
MARCH 31, 1998
---------
Tax expense at statutory rate $ 139,341
Non-deductible membership dues 9,218
Non-deductible meals and entertainment 22,260
Other (19,284)
---------
$ 151,535
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,
1998, are presented below:
MARCH 31, 1998
---------
Book/tax differences in the balance sheet:
Accumulated depreciation $ 96,981
Accrued expenses 43,284
Annuity obligations 53,314
Available-for-sale securities 96,635
Trading securities 27,413
---------
317,627
Page 8
<PAGE>
MARCH 31, 1998
----------
Tax carryovers:
NOL carryover 587,143
Contributions carryover 110,520
Minimum tax credits 115,228
----------
812,891
Total gross deferred tax asset 1,130,518
Affiliated investment (60,623)
Available-for-sale securities (96,635)
----------
Total gross deferred tax liability (157,258)
----------
Net deferred tax asset $ 973,260
==========
For federal income tax purposes at March 31, 1998, the Company has net operating
losses ("NOLs") of approximately $1.7 million that will expire in fiscal 2007
and 2010, charitable contribution carryovers of approximately $325,000 expiring
1998-2000, and alternative minimum tax credits of $115,228 with indefinite
expirations. Certain changes in the Company's ownership may result in a
limitation on the amount of NOLs that could be utilized under Section 382 of the
Internal Revenue Code. If certain changes in the Company's ownership should
occur subsequent to March 31, 1998, there could be an annual limitation on the
amount of NOLs that could be utilized.
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax amount will not be realized. Management believes
that taxable income during the carryforward periods will be sufficient to
utilize the NOLs that give rise to the deferred tax asset.
NOTE E. LITIGATION ACCRUAL
As discussed in the Company's Form 10-K for fiscal year ended June 30, 1997,
Gerald C. Letch sued the Company in June 1994 in state district court in San
Antonio, Texas, for breach of contract and asked for an unspecified amount of
damages based upon an alleged oral promise by a deceased Company officer to pay
a finder's fee for introducing certain parties to the Company. In November 1995,
a judgment was entered in favor of Letch, with total damages aggregating
$296,637.
On November 12, 1997, the Fourth Court of Appeals reversed the trial court's
finding against the Company. Mr. Letch filed a motion for rehearing, which was
subsequently denied by the appellate court. Accordingly, the Company has retired
the bond posted in connection with the appeals and received the proceeds from
the restricted cash. In March 1998, Mr. Letch filed a writ of appeal with the
Texas Supreme Court.
The Company accrued approximately $100,000 (management's best estimate of the
fees and expenses necessary to fund an appeal) and $300,000 (the approximate
amount of the judgment) which were both recorded in the Company's Consolidated
Statement of Operations in fiscal 1996. As a result of the appellate court's
decision and legal counsel's estimate that this decision will most likely stand,
the Company reversed the $300,000 accrued for the original judgment.
Page 9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATION
NINE MONTHS ENDED MARCH 31, 1998 AND 1997
U.S. Global Investors, Inc. (the "Company" or "U.S. Global") posted net earnings
of $258,291 ($0.04 per share) for the nine months ended March 31, 1998, as
compared to net earnings of $578,206 ($0.09 per share) for the nine months ended
March 31, 1997.
ASSETS UNDER MANAGEMENT
The primary source of the Company's revenue is advisory fees from managing U.S.
Global Investors Funds ("USGIF") and U.S. Global Accolade Funds ("USGAF"), and
these fees are dependent on average net assets in the funds. Fluctuations in the
financial markets and investor sentiment directly impact the funds' asset
levels, therefore affecting income and results of operations. As of April 23,
1998, total assets under management for USGIF were approximately $1.31 billion
and total assets under management for USGAF were approximately $151 million.
Assets under management for USGIF for the nine months ended March 31, 1998,
averaged $1.30 billion compared to $1.33 billion for the nine months ended March
31, 1997. This decrease in average assets primarily resulted from a decrease in
the Company's two gold funds of approximately $200 million. This decrease was
partially offset by a $165 million increase in money market and equity fund
assets. Assets under management for USGAF averaged $143 million for the nine
months ended March 31, 1998, compared to $104 million for the nine months ended
March 31, 1997. This increase is due to an increase in assets of the Bonnel
Growth Fund, as well as the addition of the MegaTrends Fund (November 1996), the
Adrian Day Global Opportunity Fund (February 1997) , and the Regent Eastern
European Fund (April 1997) to the USGAF family of funds.
REVENUES
Total consolidated revenues for the nine months ended March 31, 1998, decreased
approximately $2,454,000 (23%) over the nine months ended March 31, 1997. This
decrease was attributable to a decrease of approximately $593,000 in investment
income, as well as an approximate $1,067,000 in interest income and accretion on
the U.S. Government agency notes ("Notes"). As previously disclosed in the
Company's Form 10-K for fiscal year end June 30, 1997, these Notes matured
during March 1997. Additionally, for the nine-month period ended March 31, 1998,
management advisory fees relating to the Company's two gold funds decreased
approximately $1,121,000 (40%) over the same period last year. However,
management fees increased by $508,000 (37%) from various other equity funds
under management.
Earnings before interest and investment income (expense), taxes, depreciation
and amortization ("EBITDA") for the nine months ended March 31, 1998, increased
approximately $522,000 (184%) to $805,000 ($0.12 per share) from $283,000 ($0.04
per share) for the nine months ended March 31, 1997. Although management fees
decreased by $585,000 (12%), general and administration expenses decreased by
$1,305,000 (15%) as discussed below, which led to the increase in EBITDA.
EXPENSES
Total consolidated expenses for the nine months ended March 31, 1998, decreased
approximately $2,394,000 (24%) over the nine months ended March 31, 1997. This
decrease resulted primarily from a decrease in general and administrative
expenses, as well as a decrease in interest expense of approximately $1,080,000
on securities sold under repurchase agreements with broker-dealers during the
nine-month period ended March 31, 1997. This interest expense was related to
$26.75 million par value Notes held during the nine months ended March 31, 1997.
Exclusive of the expenses attributable to the purchase and financing of the
Notes, total expenses of the Company decreased approximately $1,314,000 (14%)
over the nine months ended March 31, 1997, primarily due to decreases in
compensation costs, marketing expenditures, travel-related costs, as well as the
reversal of the litigation accrual discussed in Note E of the Consolidated
Financial Statements. These decreases were partially offset by increased fund
waivers and/or reimbursements to enhance the performance of certain USGIF and
USGAF funds, as well as increased sub-advisory fees related to the addition of
three new funds to the USGAF family as previously discussed.
Page 10
<PAGE>
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
The Company posted net earnings of $29,015 ($0.00 per share) for the three
months ended March 31, 1998, as compared to a net loss of $133,377 ($0.02 per
share) for the three months ended March 31, 1997.
ASSETS UNDER MANAGEMENT
As previously mentioned, the primary source of the Company's revenue is advisory
fees that are dependent on average net assets. Fluctuations in the financial
markets and investor sentiment directly impact the funds' asset levels,
therefore affecting income and results of operations.
Assets under management for USGIF for the three months ended March 31, 1998,
averaged $1.27 billion compared to $1.33 billion for the three months ended
March 31, 1997. This decrease in average assets primarily resulted from a
decrease in the Company's two gold funds of approximately $201 million, but was
partially offset by a $125 million increase in money market and equity fund
assets. Assets under management for USGAF averaged $142 million for the three
months ended March 31, 1998, compared to $121 million for the three months ended
March 31, 1997. As previously mentioned, this increase is due to increased
assets of the Bonnel Growth Fund as well as the addition of the MegaTrends Fund
(November 1996), the Adrian Day Global Opportunity Fund (February 1997), and the
Regent Eastern European Fund (April 1997) to the USGAF family of funds.
REVENUES
Total consolidated revenues for the three months ended March 31, 1998, decreased
approximately $750,000 (23%) over the three months ended March 31, 1997. This
decrease resulted primarily from a reduction in interest income and accretion of
approximately $256,000 (100%) on the Notes purchased during fiscal year ended
June 30, 1995. In addition, for the three months ended March 31, 1998,
management advisory fees relating to the Company's two gold funds decreased
approximately $385,000 (45%) over the same period last year, as well as the loss
of accounting fees of $217,000 (100%) as discussed above. These decreases in
revenue were partially offset by an increase of approximately $167,000 (189%) in
investment income.
EBITDA for the three months ended March 31, 1998, increased approximately
$122,000 (165%) to $196,000 ($0.03 per share) from $74,000 ($0.01 per share) for
the same period one year earlier. Although management advisory fees decreased by
$377,000 (22%), general and administration expenses decreased by $762,000 (26%)
as discussed below, which led to the increase in EBITDA.
EXPENSES
Total consolidated expenses for the three months ended March 31, 1998, decreased
approximately $1,057,000 (31%) over the three months ended March 31, 1997. This
decrease resulted primarily from a decrease of approximately $762,000 (26%) in
general and administrative expenses, as well as a decrease of approximately
$265,000 (100%) in interest expense on securities sold under repurchase
agreements with broker-dealers. The decrease in general and administrative
expenses resulted primarily from a decrease in compensation expense, marketing
and travel expenditures.
LIQUIDITY AND CAPITAL RESOURCES
INVESTMENT ACTIVITIES
Management believes it can more effectively manage the Company's cash position
by broadening the types of investments utilized in cash management. On March 31,
1998, the Company held approximately $1.7 million in investment securities. The
value of these investments is approximately 16% of total assets and 21% of
shareholders' equity at quarter end. Company investments in marketable
securities classified as trading securities totaled approximately $900,000. In
addition, there was approximately $820,000 of investments in securities
classified as available-for sale. These securities are primarily private
placements that management expects will become free-trading within one year.
During the nine months ending March 31, 1998, net realized gains from the sale
of investments aggregated approximately $170,000, compared to approximately $1.1
million for the nine months ending March 31, 1997. Management believes that such
activities are in the best interest of the Company. These activities are
reviewed by Company compliance personnel and reported to investment advisory
clients.
Page 11
<PAGE>
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 may decrease to the extent that fund expenses are lower than the
expense caps. Therefore, the Company may bear less fund expenses and collect
more fee revenues from the funds. The Company expects to continue to waive fees
and/or pay for fund expenses as long as market and economic conditions warrant.
However, subject to the Company's commitment to certain funds with respect to
fee waivers and expense limitations, the Company may reduce the amount of fund
expenses it is bearing.
TAX LOSS CARRYFORWARDS
Management assessed the likelihood of realization of the recorded deferred tax
asset at March 31, 1998. Net operating losses ("NOLs") of $1.7 million,
primarily resulting from the non-cash charge to earnings related to the purchase
of the Notes during fiscal 1995 do not expire until fiscal 2007 and 2010. Based
on the current level of earnings and management's expectations for the future,
management believes that operating income will generate the minimum amount of
future taxable income necessary to fully realize the deferred tax assets.
Therefore, management has not included a valuation allowance at March 31, 1998.
SETTLEMENT POOL
In June 1992, the Company made its final payment to the settlement pool
established under the June 1988 settlement agreement relating to the Prospector
Fund (now operating as the U.S. Global Resources Fund), and the settlement pool
made the final payout to "Eligible Shareholders" in June 1992. Under the
agreement, any amounts payable to "Eligible Shareholders" who cannot be located,
together with interest thereon, will be held until June 30, 1998. At that time,
such amounts will be made available to all persons claiming subrogation. The
Company has first right of subrogation to the amounts. Cash held at March 31,
1998, was approximately $666,000. Management believes the Company will receive a
sum that will equal or exceed the amount currently recorded as the Company's
residual equity interest, $217,86; accordingly, the Company would recognize
income to the extent the amount of cash received exceeds the residual equity
interest.
DECISION TO OUTSOURCE
To continue to provide competitive and technologically advanced fund accounting
and shareholder record keeping services to its mutual fund clients, during the
previous quarter the Company made the decision to: (1) outsource the bookkeeping
and accounting functions currently performed by its wholly owned subsidiary,
United Shareholder Services, Inc., to Brown Brothers Harriman & Co. ("BBH"); and
(2) license DST's mutual fund software system for its transfer agent record
keeping functions.
The Company completed the conversion to BBH during the second quarter of fiscal
1998. While the Company will forego accounting fees associated with this
function, the company will experience corresponding reductions in current direct
departmental expenses, costs required to hire additional personnel, and expenses
to maintain and upgrade equipment. In addition, the decision to engage BBH will
allow the Company to take advantage of BBH's established international network
with on-site contacts in the markets in which the Company invests.
The decision to remotely utilize the DST transfer agent and image-based work
management system allows the Company to transfer the inherent technological
risks and associated significant capital expenditures required to update and
maintain a competitive transfer agency system. The Company completed the
conversion to the DST mutual fund software during March 1998. The Company
anticipates this conversion should increase general and administrative expenses
approximately $400,000 annually.
Page 12
<PAGE>
LITIGATION ACCRUAL
On November 12, 1997, the Fourth Court of Appeals in San Antonio, Texas reversed
the trial court's finding against the Company in a lawsuit brought against the
Company in 1995. The Company believes the court's decision is consistent with
the position the Company asserted throughout the litigation. This matter has
recently been appealed to the Texas Supreme Court. After discussions with
counsel, the Company reversed the $300,000 accrued for the original judgment,
thus positively impacting earnings for the current period. Additionally, during
March 1998, the Company liquidated the restricted investment previously set
aside under the bond posted for the appeal.
U.S. GLOBAL BROKERAGE, INC.
The Company is in the process of registering its wholly owned subsidiary, U.S.
Global Brokerage, Inc. ("USGB"), formerly United Services Brokerage, Inc., with
the Securities and Exchange Commission and the National Association of
Securities Dealers, Inc. as a broker-dealer for the limited purpose of
distributing USGIF and USGAF fund shares. To date, the Company has capitalized
USGB with approximately $70,000 to cover costs associated with this
registration.
CONCLUSION
Management believes current cash reserves, plus financing obtained and/or
available, and cash flow from operations will be sufficient to meet foreseeable
cash needs or capital necessary for the above-mentioned activities, and will
also allow the Company to take advantage of investment opportunities whenever
available.
Page 13
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K PAGE NO.
1. Exhibits
11 -- Statement Regarding Computation of Per Share Earnings ...... 16
27 -- Financial Data Schedule
2. Reports on Form 8-K .............................................. None
Page 14
<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.
U.S. GLOBAL INVESTORS, INC.
DATED: April 30, 1998 /S/ SUSAN B. MCGEE
---------------------------
BY: Susan B. McGee
President
Corporate Secretary
General Counsel
DATED: April 30, 1998 /S/ DAVID J. CLARK
---------------------------
BY: David J. Clark
Chief Financial Officer
Chief Operating Officer
DATED: April 30, 1998 /S/ J. MICHAEL EDWARDS
---------------------------
BY: J. Michael Edwards
Chief Accounting Officer
Page 15
<PAGE>
EXHIBIT 11--SCHEDULE OF COMPUTATION OF NET EARNINGS PER SHARE
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, MARCH 31,
1998 1997 1998 1997
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Net earnings .............................. $ 258,291 $ 578,206 $ 29,015 ($ 133,377)
========== ========== ========== ===========
PRIMARY
Weighted average number shares
outstanding during the period ........ 6,616,539 6,555,195 6,620,381 6,529,301
Add:
Common stock equivalent shares
(determined using the "treasury
stock" method) representing
shares issuable upon exercise
of common stock warrants ........... -- -- -- --
Common stock equivalent shares
(determined using the "treasury
stock" method) representing shares
issuable upon exercise of common
stock options .................... 51,179 30,095 51,179 30,095
---------- ---------- ---------- -----------
Weighted average number of shares
used in calculation of primary
earnings per share ............... 6,667,718 6,585,290 6,671,560 6,559,396
========== ========== ========== ===========
Primary earnings (loss) per share
Net Earnings Per Share ............... $ 0.04 $ 0.09 $ 0.00 $ (0.02)
========== ========== ========== ===========
FULLY DILUTED
Weighted average number of shares
outstanding during the period ........ 6,616,539 6,555,195 6,620,381 6,529,301
Add:
Common stock equivalent shares
(determined using the
"treasury stock" method)
representing shares issuable
upon exercise of common
stock warrants ..................... -- -- -- --
Common stock equivalent shares
(determined using the "treasury
stock" method) representing
shares issuable upon exercise
of common stock options ............ 86,495 30,095 86,495 30,095
---------- ---------- ---------- -----------
Weighted average number of shares
used in calculation of fully
diluted earnings, per share ........ 6,703,034 6,585,290 6,706,876 6,559,396
========== ========== ========== ===========
Fully diluted earnings (loss) per share
Net Earnings Per Share ............... $ 0.04 $ 0.09 $ 0.00 $ (0.02)
========== ========== ========== ===========
</TABLE>
Page 16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This financial data schedule contains summary financial information extracted
from the Company's Quarterly Report on Form 10-Q for the period ended March 31,
1998 and qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,661,773
<SECURITIES> 1,720,418
<RECEIVABLES> 1,587,614
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,441,597
<PP&E> 7,787,754
<DEPRECIATION> (5,224,107)
<TOTAL-ASSETS> 10,537,406
<CURRENT-LIABILITIES> 903,803
<BONDS> 0
0
0
<COMMON> 339,814
<OTHER-SE> 7,945,280
<TOTAL-LIABILITY-AND-EQUITY> 10,537,406
<SALES> 8,141,010
<TOTAL-REVENUES> 8,390,202
<CGS> 0
<TOTAL-COSTS> 7,767,740
<OTHER-EXPENSES> 7,675,424
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 92,316
<INCOME-PRETAX> 409,826
<INCOME-TAX> 151,535
<INCOME-CONTINUING> 258,291
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 258,291
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
