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, 1999
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ________ to _________
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Commission File Number 0-13928
U.S. GLOBAL INVESTORS, INC.
(Exact name of registrant as specified in its charter)
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TEXAS 74-1598370
(State Or Other Jurisdiction Of (IRS Employer Identification Number)
Incorporation Or Organization)
7900 CALLAGHAN ROAD
SAN ANTONIO, TEXAS 78229-2327
(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 May 14, 1999, there were 6,299,444 shares of Registrant's class A common
stock and 496,830 shares of Registrant's class C common stock issued and
outstanding.
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<PAGE>
U.S. GLOBAL INVESTORS, INC.
I N D E X
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets--March 31, 1999,
and June 30, 1998 ............................................... 3
Consolidated Statements of Operations and Comprehensive
Income--Nine-Month and Three-Month Periods Ended
March 31, 1999 and 1998 ......................................... 5
Consolidated Statements of Cash Flows--Nine-Month Periods Ended
March 31, 1999 and 1998 ......................................... 6
Notes to Consolidated Financial Statements ........................ 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
Condition and Results of Operations.............................. 10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...... 15
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................ 16
Signatures .......................................................... 17
Exhibit 11--Schedule of Computation of Net Income per Share............. 18
<PAGE>
U.S. Global Investors, Inc.
March 31, 1999, Quarterly Report on Form 10-Q Page 3
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
ASSETS
MARCH 31, JUNE 30,
1999 1998
---------- -----------
(UNAUDITED)
CURRENT ASSETS
Cash and cash equivalents ......... $1,012,140 $ 1,391,867
Trading securities, at fair value . 1,136,229 901,647
Receivables
Mutual funds .................. 692,971 788,019
Custodial fees ................ 170,097 189,715
Employees ..................... 123,614 83,725
Receivable from brokers ....... 18,394 16,690
Residual equity interest ...... -- 675,613
Other ......................... 135,206 106,696
Prepaid expenses .................. 446,527 466,733
Deferred tax asset ................ 113,945 135,294
---------- -----------
TOTAL CURRENT ASSETS .......... 3,849,123 4,755,999
---------- -----------
NET PROPERTY AND EQUIPMENT ............. 2,393,351 2,596,091
---------- -----------
OTHER ASSETS
Restricted investments ............ 255,000 271,166
Long-term receivables ............. 86,565 218,212
Long-term deferred tax asset ...... 863,402 1,068,092
Investment securities
available-for-sale, at fair value 371,463 472,240
Equity investment in affiliate .... 1,104,165 866,288
Other ............................. 46,591 60,869
---------- -----------
TOTAL OTHER ASSETS ............ 2,727,186 2,956,867
---------- -----------
TOTAL ASSETS .................. $8,969,660 $10,308,957
========== ===========
The accompanying notes are an integral part of this statement.
<PAGE>
U.S. Global Investors, Inc.
March 31, 1999, Quarterly Report on Form 10-Q Page 4
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LIABILITIES AND SHAREHOLDERS' EQUITY
MARCH 31, JUNE 30,
1999 1998
------------ ------------
(UNAUDITED)
CURRENT LIABILITIES
Accounts payable ..................... $ 337,057 $ 275,963
Accrued compensation and related costs 149,793 226,324
Current portion of notes payable ..... 67,487 63,525
Current portion of annuity and
contractual obligation ............. 18,000 18,000
Accrued legal fees ................... 28,107 33,855
Other accrued expenses ............... 317,773 418,793
------------ ------------
TOTAL CURRENT LIABILITIES ........ 918,217 1,036,460
------------ ------------
Notes payable-net of current portion . 1,147,469 1,193,599
Annuity and contractual obligations .. 131,592 137,039
------------ ------------
TOTAL NON-CURRENT LIABILITIES .... 1,279,061 1,330,638
------------ ------------
TOTAL LIABILITIES ................ 2,197,278 2,367,098
------------ ------------
Commitments and contingent liabilities
SHAREHOLDERS' EQUITY
Common stock (Class A)-$.05 par value;
non-voting; authorized,
7,000,000 shares ................... 314,972 314,972
Common stock (Class C)-$.05 par value;
voting; authorized, 1,750,000 shares 24,842 24,842
Capital in excess of par value ....... 10,586,628 10,591,708
Treasury stock at cost ............... (645,735) (476,284)
Accumulated other comprehensive loss . (88,557) (75,744)
Retained earnings (deficit) .......... (3,419,768) (2,437,630)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY ....... 6,772,382 7,941,859
------------ ------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY ........... $ 8,969,660 $ 10,308,957
============ ============
The accompanying notes are an integral part of this statement.
<PAGE>
U.S. Global Investors, Inc.
March 31, 1999, Quarterly Report on Form 10-Q Page 5
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CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, MARCH 31,
-------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUE
Investment advisory fee .......... $ 3,407,614 $ 4,461,383 $ 1,118,442 $ 1,325,546
Transfer agent fee ............... 2,461,655 2,503,159 817,067 797,348
Accounting fee ................... -- 399,996 -- --
Exchange fee 99,360 .............. 141,265 26,645 42,085
Custodial fee .................... 363,920 384,430 114,140 102,075
Investment income ................ 196,745 250,792 183,975 78,891
Other ............................ 269,153 250,777 103,585 110,763
----------- ----------- ----------- -----------
6,798,447 8,391,802 2,363,854 2,456,708
EXPENSES
General and administrative ....... 6,730,094 7,335,698 2,243,988 2,181,603
Depreciation and amortization .... 368,034 339,726 122,294 92,091
Interest-notes payable and other . 82,460 92,316 23,367 31,730
----------- ----------- ----------- -----------
7,180,588 7,767,740 2,389,649 2,305,424
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE MINORITY INTEREST,
EQUITY INTEREST AND INCOME TAXES .... (382,141) 624,062 (25,795) 151,284
EQUITY IN NET LOSS OF AFFILIATE ....... (367,358) (214,236) (113,066) (107,514)
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES ..... (749,499) 409,826 (138,861) 43,770
PROVISIONS FOR FEDERAL INCOME TAXES
Deferred ......................... 232,639 151,535 132,363 14,755
----------- ----------- ----------- -----------
232,639 151,535 132,363 14,755
----------- ----------- ----------- -----------
NET INCOME (LOSS) (982,138) 258,291 (271,224) 29,015
Other comprehensive income (loss),
net of tax:
Unrealized gains (losses) on
available-for-sale securities . (12,813) (3,604) (19,020) 29,455
----------- ----------- ----------- -----------
COMPREHENSIVE INCOME (LOSS) ........... $ (994,951) $ 254,687 $ (290,244) $ 58,470
=========== =========== =========== ===========
Basic and Diluted Income (Loss)
Per Share ........................ $ (0.15) $ 0.04 $ (0.04) $ 0.00
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING
Basic ............................ 6,579,649 6,616,539 6,503,842 6,620,381
Diluted .......................... 6,581,532 6,667,718 6,510,578 6,669,457
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE>
U.S. Global Investors, Inc.
March 31, 1999, Quarterly Report on Form 10-Q Page 6
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CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED
MARCH 31,
1999 1998
----------- -----------
OPERATING ACTIVITIES:
Net income (loss) .................. $ (982,138) $ 258,291
Adjustments to reconcile to net cash
provided by operating activities:
Depreciation and amortization ...... 368,034 339,726
Net gain on sales of securities .... (77,523) (169,194)
Gain on disposal of equipment ...... (75) (1,181)
(Gain) loss on changes of interest
in affiliate ..................... (104,573) 1,600
Provision for deferred taxes ....... 232,639 151,535
Changes in assets and liabilities,
impacting cash from operations:
Restricted investments ............. 16,166 371,356
Accounts receivable ................ 851,822 881,140
Prepaid expenses and other ......... (42,469) 212,851
Trading securities ................. (35,002) (200,738)
Accounts payable ................... 61,094 (29,224)
Accrued expenses ................... (183,299) (462,674)
----------- -----------
Total adjustments ....................... 1,086,814 1,095,197
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 104,676 1,353,488
----------- -----------
INVESTING ACTIVITIES:
Net purchase of furniture
and equipment .................... (165,281) (319,570)
Proceeds on sale of equipment ...... 75 1,155
Proceeds on sale of
available-for-sale securities .... -- 212,830
Purchase of available-for-sale
securities ....................... (97,056) (300,000)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES ... (262,262) (405,585)
----------- -----------
FINANCING ACTIVITIES:
Payments on annuity ................ (5,447) (5,117)
Payments on note payable to bank ... (42,168) (35,982)
Payments on capital lease .......... -- (8,661)
Treasury stock reissued ............ 52,491 75,565
Proceeds from issuance of common
stock, warrants, and options ..... -- 12,420
Purchase of treasury stock ......... (227,017) (46,476)
----------- -----------
NET CASH USED IN FINANCING ACTIVITIES ... (222,141) (8,251)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ...................... (379,727) 939,652
BEGINNING CASH AND CASH EQUIVALENTS ..... 1,391,867 722,121
----------- -----------
ENDING CASH AND CASH EQUIVALENTS ........ $ 1,012,140 $ 1,661,773
=========== ===========
SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Supplemental disclosures of cash
flow information:
Cash paid for interest ............. $ 82,460 92,316
The accompanying notes are an integral part of this statement.
<PAGE>
U.S. Global Investors, Inc.
March 31, 1999, Quarterly Report on Form 10-Q Page 7
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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. 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, 1998.
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries, United Shareholder Services, Inc. (USSI),
Security Trust & Financial Company (STFC), A&B Mailers, Inc. (A&B), U.S. Global
Investors (Guernsey) Limited (USGG), and U.S. Global Brokerage, Inc. (USGB).
U.S. Global has formed a company that was originally incorporated in Texas on
October 23, 1998. This company, U.S. Global Administrators, Inc. (USGA), will
provide qualified plan administration services for existing clients. Although
the Company held a 64 percent and 18 percent interest in the U.S. Global
Strategies Fund Limited (the Guernsey Fund) at March 31, 1999 and 1998,
respectively, the Company has continued to account for its investment in the
offshore fund using the equity method of accounting. This resulted in the
Company recording losses of $367,358 and $214,236 for the nine months ending
March 31, 1999 and 1998, respectively, which is included in income before taxes
in the income statement. The increase in the interest held by the Company is
attributable to general market conditions, as well as shareholder activity.
Management considers this increase to be temporary.
All significant inter-company balances and transactions have been eliminated in
consolidation. Certain amounts have been reclassified for comparative purposes.
The results of operations for the nine-month period ended March 31, 1999, 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 cost of investments classified as trading at March 31, 1999 and June 30,
1998, was $1,375,557 and $1,173,011, respectively. The market value of
investments classified as trading at March 31, 1999 and June 30, 1998, was
$1,136,229 and $901,647, respectively. The net change in unrealized holding
gains (losses) on trading securities held at March 31, 1999 and 1998, which has
been included in income for the nine-month period, is $31,816 and ($29,948),
respectively.
The cost of investments in securities classified as available-for-sale, which
may not be readily marketable at March 31, 1999, and June 30, 1998, was $484,382
and $509,382, respectively. These investments are reflected as non-current
assets on the consolidated balance sheet at their fair value at March 31, 1999,
and June 30, 1998, of $371,463 and $472,240, respectively, with $74,527 and
$24,514, respectively, net of tax, in unrealized losses being recorded as a
separate component of shareholders' equity. These investments are in private
placements, which are restricted for sale as of March 31, 1999. It is
anticipated the securities purchased in these private placements will become
free trading within one year. During fiscal year 1999, the Company recorded
unrealized gains of $344,394 on securities that were transferred from
available-for-sale securities to trading securities. During the fiscal year
ended June 30, 1998, the Company recorded realized losses of $349,579 and
unrealized gains of $103,205 on securities that were transferred from the
available-for-sale category to the trading category upon becoming free trading.
NOTE C. INVESTMENT MANAGEMENT, TRANSFER AGENT AND OTHER FEES
The Company serves as investment adviser to U.S. Global Investors Funds (USGIF),
U.S. Global Accolade Funds (USGAF) and the Guernsey Fund and receives a fee
based on a specified percentage of net assets under management. The Company also
serves as transfer agent to USGIF and USGAF and received a fee based on the
number of shareholder accounts. Additionally, the Company provides in-house
legal services to USGIF and USGAF, and the Company also receives certain
miscellaneous fees directly from USGIF and USGAF shareholders. Fees for
providing services to USGIF and USGAF
<PAGE>
U.S. Global Investors, Inc.
March 31, 1999, Quarterly Report on Form 10-Q Page 8
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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 as well as mailroom operations from A&B.
Investment advisory fees, transfer agency fees, and all other fees to the
Company are recorded as income during the period in which services are
performed.
Receivables from mutual funds represent amounts due the Company and its wholly
owned subsidiaries for investment advisory fees, transfer agent fees, and
exchange fees and are net of amounts payable to the mutual funds.
U.S. Global has voluntarily waived or reduced its advisory fee, has guaranteed
that fund expenses will not exceed certain limits, and/or has agreed to pay
expenses on several USGIF and USGAF funds 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 period ended March 31, 1999 and 1998,
was $2,315,837 and $2,651,491, respectively.
The investment advisory contract and related contracts between the Company and
USGIF were recently renewed and will expire on February 29, 2000. The contracts
between the Company and USGAF will expire on March 8, 2000. Management
anticipates the trustees of both USGIF and USGAF will renew the contracts.
NOTE D. INCOME TAXES
Provisions for income taxes include deferred taxes for temporary differences in
the bases of assets and liabilities for financial and tax purposes, resulting
from the use of the liability method of accounting for income taxes. For federal
income tax purposes at March 31, 1999, the Company has net operating losses
(NOLs) of approximately $1.8 million, which will expire in fiscal 2007 and 2010,
charitable contribution carryovers of approximately $370,000 expiring between
1999 and 2001, and alternative minimum tax credits of $115,228 with indefinite
expirations. Certain changes in the Company's ownership may result in a
limitation on the amount of NOLs that could be utilized under Section 382 of the
Internal Revenue Code. If certain changes in the Company's ownership occur
subsequent to March 31, 1999, there could be an annual limitation on the amount
of NOLs that could be utilized.
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax amount will not be realized. As such, management has
included a valuation allowance of approximately $460,000 at March 31, 1999,
providing for the utilization of NOLs, charitable contributions, and investment
tax credits against future taxable income.
NOTE E. COMPREHENSIVE INCOME
Effective December 31, 1998, the Company adopted Statement No. 130, Reporting
Comprehensive Income (SFAS 130). SFAS 130 established standards for reporting
and display of comprehensive income and its components (revenues, expenses,
gains, and losses) in a full set of general-purpose financial statements. This
statement required that all items that are recognized under accounting standards
as components of comprehensive income be reported in a statement of financial
performance. The Company has disclosed the components of comprehensive income in
the consolidated statements of operations and comprehensive income and has
reclassified prior periods to conform with the new requirements. Additionally,
SFAS 130 requires disclosure of any reclassification adjustments.
<PAGE>
U.S. Global Investors, Inc.
March 31, 1999, Quarterly Report on Form 10-Q Page 9
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NINE MONTHS ENDED
MARCH 31,
-------------------
1999 1998
-------------------
Unrealized gain (loss) on available-for-sale
securities .................................. $(25,313) $(3,604)
Less: reclassification adjustment for (gain)
loss included in net income ................. 12,500 --
Net unrealized gain (loss) on available-for-sale
securities, net of tax ....................... $(12,813) $(3,604)
======== =======
NOTE F. ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
No. 131, Disclosures about Segments of an Enterprise and Related Information
(SFAS 131). SFAS 131 establishes standards for reporting information in the
annual financial statements about a public entity's operating segments and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. SFAS 131 also
establishes standards for related disclosures regarding products and services,
geographic areas, and major customers. This statement is effective for financial
statements for periods beginning after December 15, 1997. In the initial year of
application, comparative information for earlier years is to be restated. The
Company plans to adopt SFAS 131 in fiscal year 1999. Management has not yet
completed its determination of what, if any, impact the "management approach"
will have on its financial statement disclosures.
In February 1998, the FASB issued Statement No. 132, Employers' Disclosures
about Pensions and Other Postretirement Benefits (SFAS 132). SFAS 132
standardizes the disclosure requirements for pensions and other postretirement
benefits to the extent practicable and requires additional information on
changes in the benefit obligations and fair values of plan assets that will
facilitate financial analysis. As the Company does not offer pension or other
postretirement benefits, it is not anticipated this statement will impact the
Company.
In June 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities (SFAS 133). SFAS 133 standardizes the
accounting for derivative instruments, including certain derivative instruments
imbedded in other contracts, by requiring that an entity recognize those items
as assets or liabilities in the statement of financial position and measure them
at fair value. SFAS 133 generally provides for matching the timing of gain or
loss recognition on the hedging instrument with the recognition of (a) the
changes in fair value of the hedged asset or liability or (b) the earnings of
the hedged forecasted transaction. This statement is effective for fiscal years
beginning after June 15, 1999. Management is evaluating the impact of the
statement on the Company.
The Accounting Standards Executive Committee (AcSEC) recently issued Statement
of Position (SOP) 98-5, Reporting on the Costs of Start-up Activities. The SOP
requires the costs of start-up activities to be expensed as incurred. In a
change from the Exposure Draft, start-up activities now include organization
costs, which could have significant ramifications for certain mutual funds. The
SOP applies to all nongovernmental entities and to start-up costs of
development-stage entities as well as established operating entities. The SOP is
effective for fiscal years beginning after December 15, 1998, except for certain
investment companies (primarily open-end mutual funds), which must apply the SOP
prospectively beginning June 30, 1998. The adoption of this statement is not
expected to materially impact the financial position or results of operations of
the Company.
<PAGE>
U.S. Global Investors, Inc.
March 31, 1999, Quarterly Report on Form 10-Q Page 10
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS--NINE MONTHS ENDED MARCH 31, 1999 AND 1998
U.S. Global Investors, Inc. (the Company or U.S. Global) posted a net loss of
$982,138 ($0.15 loss per share) for the nine months ended March 31, 1999,
compared to net income of $258,291 ($0.04 income per share) for the nine months
ended March 31, 1998. The net loss for the nine months ended March 31, 1999 was
primarily attributable to the Company recording non-cash equity losses of
$367,141 in the investment in an affiliate. This loss is due to a general
decline in market values of gold and natural resource investments held by the
affiliate. Also, the Company continues to take a conservative approach in
recording a valuation allowance of approximately $230,000 for the deferred tax
asset recognized for the $1.8 million in net operating losses (NOLs). Should the
Company realize taxable income in future periods, this valuation allowance would
be available to offset the tax liability.
ASSETS UNDER MANAGEMENT
The primary source of the Company's revenue is advisory fees that are dependent
on average net assets of the mutual funds managed by the Company. Fluctuations
in the markets and investor sentiment directly impact the funds' asset levels,
therefore affecting income and results of operations. As of April 23, 1999,
total assets under management for U.S. Global Investors Funds (USGIF) and U.S.
Global Accolade Funds (USGAF) were approximately $1.27 billion and $139 million,
respectively.
Assets under management for USGIF for the nine months ended March 31, 1999,
averaged $1.26 billion versus $1.30 billion for the nine months ended March 31,
1998. This decrease in average assets is primarily a result of a decrease in the
value of gold-related assets. Assets under management for USGAF averaged $127
million for the nine months ended March 31, 1999, versus $143 million for the
nine months ended March 31, 1998. This decrease in average assets is primarily
attributable to declines in market value and shareholder redemptions in several
funds.
REVENUES
Total consolidated revenues decreased approximately $1.6 million, or 19 percent.
The continued deflationary pressure on certain commodity prices, such as gold
and natural resources, as well as the depressed economies in emerging markets,
have had a negative impact on the Company's earnings. Gold-related assets
decreased $80 million, or 33 percent, for the nine months ended March 31, 1999,
compared to the same period ended March 31, 1998. Emerging market assets
decreased $20 million, or 48 percent, and the natural resource fund decreased
$16 million, or 50 percent, for the same period. As a result of the significant
decrease in average net assets of these high-margin funds, partially offset by
increases in net assets of lower margin money market assets, management advisory
fees decreased almost $1.1 million, or 24 percent, during this period. Also, the
Company did not receive any accounting fees, as the Company outsourced the
bookkeeping and accounting functions previously performed by USSI.
Earnings (losses) before interest and investment income (expense), taxes,
depreciation, and amortization (EBITDA) decreased approximately $933,000, or 116
percent, to a loss for the nine-month period of over $128,000 ($0.02 per share)
from earnings of $805,000 ($0.12 per share). This was primarily due to a
decrease in operating revenues of $1.5 million, or 19 percent, which was
partially offset by a corresponding decrease in general and administration
expenses of almost $606,000, or 8 percent.
EXPENSES
Total consolidated expenses for the nine months ended March 31, 1999, decreased
approximately $587,000. This is attributable to a decrease in general and
administrative expenses of the Company of $606,000, or 8 percent, for the nine
months ended March 31, 1999, resulting primarily from decreases in sales
promotion and fund reimbursement expenditures.
<PAGE>
U.S. Global Investors, Inc.
March 31, 1999, Quarterly Report on Form 10-Q Page 11
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RESULTS OF OPERATIONS--THREE MONTHS ENDED MARCH 31, 1999 AND 1998
U.S. Global Investors, Inc. posted a net loss of $271,224 ($0.04 loss per share)
for the quarter ended March 31, 1999, compared to net income of $29,015 ($0.00
income per share) for the quarter ended March 31, 1998. The net loss for the
three months ended March 31, 1999 was primarily attributable to the Company
recording non-cash equity losses of $113,066 in the investment in an affiliate.
This loss is due to a general decline in market values of gold and natural
resource investments held by the affiliate. Also, the Company continues to take
a conservative approach in recording a valuation allowance of approximately
$130,000 for the deferred tax asset recognized for the $1.8 million in net
operating losses (NOLs). Should the Company realize taxable income in future
periods, this valuation allowance would be available to offset the tax
liability.
ASSETS UNDER MANAGEMENT
As previously stated, the primary source of the Company's revenue is advisory
fees that are dependent on average net assets of the mutual funds managed by the
Company. Fluctuations in the markets and investor sentiment directly impact the
funds' asset levels, therefore affecting income and results of operations.
Average assets under management for USGIF increased for the quarter ended March
31, 1999, to an average of $1.28 billion versus $1.27 billion for the quarter
ended March 31, 1998. This increase in average assets primarily resulted from
increases in money market assets, offset by a decrease in the value of
gold-related and equity assets. Assets under management for USGAF averaged $134
million for the quarter ended March 31, 1999, versus $142 million for the
quarter ended March 31, 1998. This decrease in average assets is primarily
attributable to declines in market value and shareholder redemptions in several
funds.
REVENUES
Total consolidated revenues decreased approximately $93,000, or 4 percent.
Gold-related assets decreased $61 million, or 28 percent, for the three months
ended March 31, 1999, compared to the same period ended March 31, 1998. Emerging
market assets decreased $15 million, or 44 percent, and the natural resource
fund decreased $10 million, or 41 percent for the same period. As a result of
the significant decrease in average net assets of these high-margin funds,
partially offset by increases in net assets of lower margin money market assets,
management advisory fees decreased over $207,000, or 16 percent, during this
period. Additionally, the Company did not receive any accounting fees, as the
Company outsourced the bookkeeping and accounting functions previously performed
by USSI.
Earnings before interest and investment income (expense), taxes, depreciation,
and amortization (EBITDA) decreased approximately $260,000, or 132 percent, to a
loss for the quarter of over $64,000 ($0.01 per share) from earnings of $196,000
($0.03 per share). This was primarily due to a decrease in operating revenues of
almost $198,000, or 8 percent, as well as an increase in general and
administration expenses of over $62,000, or 3 percent.
EXPENSES
Total consolidated expenses for the three months ended March 31, 1999, increased
approximately $84,000. This is attributable to an increase in general and
administrative expenses of the Company of $62,000, or 3 percent for the quarter
ended March 31, 1999, resulting primarily from increases in salaries and related
benefits.
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. 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. On March 31, 1999,
<PAGE>
U.S. Global Investors, Inc.
March 31, 1999, Quarterly Report on Form 10-Q Page 12
- --------------------------------------------------------------------------------
the Company held approximately $1.5 million in investment securities. The value
of these investments is approximately 17 percent of total assets and 22 percent
of shareholders' equity at period end. Of the $1.5 million in investment
securities, the Company classified approximately $1.1 million as trading
securities and approximately $372,000 as available-for-sale securities.
Available-for-sale securities are primarily private placements that management
expects will become free-trading within one year. During the nine months ended
March 31, 1999, net realized gains from the sale of investments equaled
approximately $78,000, compared with approximately $170,000 for the nine months
ended March 31, 1998. The net change in the unrealized holding gain (loss) on
trading securities held at March 31, 1999 and 1998, which has been included in
earnings for the three-month period, is $31,816 and ($29,948), respectively.
Although the Company held a 64 percent and an 18 percent interest in the
Guernsey Fund as of March 31, 1999 and 1998, respectively, the Company has
continued to account for its investment in the offshore fund using the equity
method of accounting. The increase in the interest held by the Company is
attributable to a decline in general market conditions for micro cap equities in
the natural resource sector, as well as shareholder activity. Management
considers this increase to be temporary.
OUTSOURCING TECHNOLOGY-BASED OPERATIONS
To provide competitive and technologically advanced shareholder record keeping
services to its mutual fund shareholders into the next century, the Company
completed the conversion to DST's mutual fund transfer agent software during
March 1998. As a result of the Company's strategy of outsourcing
technology-based operations, the Company anticipates additional annual operating
expenses of approximately $300,000.
FEE WAIVERS AND FUND REIMBURSEMENTS
The Company has agreed to waive a portion of its fee revenues and/or to pay for
expenses of certain mutual funds for purposes of enhancing the funds'
competitive market position. Should assets of these funds increase, fund
expenses borne by the Company 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.
TAX LOSS CARRYFORWARDS
Management assessed the likelihood of realization of the recorded deferred tax
asset at December 31, 1998. NOLs of $1.8 million, primarily resulting from the
non-cash charge to earnings related to the purchase of certain government agency
notes during fiscal 1995, do not expire until fiscal 2010. A valuation allowance
is provided when it is more likely than not that some portion of the deferred
tax amount will not be realized. As such, management has included a valuation
allowance of approximately $370,000 at March 31, 1999, providing for the
utilization of NOLs, charitable contributions, and investment tax credits
against future taxable income.
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 Global Resources Fund), and the settlement pool made
the final payout to eligible shareholders. Under the agreement, any amounts
payable to eligible shareholders who could not be located, together with
interest thereon, would be held until June 22, 1998. At that time, such amounts
would be made available to all persons claiming subrogation. The Company had
first right of subrogation to these amounts. As such, the Company subsequently
received approximately $676,000 in July 1998, thus relieving the outstanding
residual equity interest.
U.S. GLOBAL ADMINISTRATORS, INC.
U.S. Global has formed a company that was incorporated in Texas on October 23,
1998. This company, U.S. Global Administrators, Inc. (USGA) will provide
qualified plan administration services for existing clients.
<PAGE>
U.S. Global Investors, Inc.
March 31, 1999, Quarterly Report on Form 10-Q Page 13
- --------------------------------------------------------------------------------
INVESTMENT ADVISORY CONTRACTS
The investment advisory contract and related contracts between the Company and
USGIF and USGAF were recently renewed and will expire on February 29, 2000, and
March 8, 2000, respectively. Management anticipates the trustees of both USGIF
and USGAF will renew the contracts.
CAPITAL STRUCTURE
The board of directors has approved a change in the capital structure which is
expected to materialize in the fourth fiscal quarter. The transaction involves
the issuance of 1,000,000 shares of U.S. Global class C common stock to Frank E.
Holmes in exchange for services and the cancellation of existing warrants to
purchase 596,122 shares of class C common stock (held by Mr. Holmes and F.E.
Holmes Organization, Inc.) and the cancellation of an option to purchase 400,000
shares of class C common stock (held by Mr. Holmes). The 1,000,000 shares to be
issued by the Company will vest over a ten-year period, 100,000 shares per year.
These shares are not publicly traded.
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, as well as
allow the Company to take advantage of investment opportunities whenever
available.
YEAR 2000 DISCLOSURE
SUMMARY
The Company has been actively addressing the potential impact of the Year 2000
(Y2K) problems and has established a proactive approach to help ensure that the
Company's critical systems will be able to operate before, during, and after the
century date rollover. While the Company has taken measures reasonably designed
to prevent a negative impact resulting from Year 2000 problems, there can be no
assurance that factors outside the Company's control will not disrupt its
operations.
STATE OF READINESS
The Company has taken steps to increase the awareness of its employees and
associated persons with respect to the Year 2000 problem and the current actions
being taken to address such problems. The Company has formed a Year 2000
committee which meets on a regular basis to implement and monitor the Company's
Year 2000 project.
The Company has identified the systems utilized by the Company and completed an
inventory of all hardware, software, networks, and other various processing
platforms, as well as customer and vendor interdependencies. The Company
completed an assessment of the systems inventoried to determine their
susceptibility to Year 2000 issues. This assessment included inquiries to
service providers, vendors, and manufacturers of all systems inventoried
concerned to determine and document if such systems are Year 2000 compliant. The
Company has commenced a testing program to confirm that all mission-critical
systems and software are Year 2000 compliant.
BUDGET
As of March 31, 1999, the Company had incurred and expended approximately
$27,000 in connection with its Year 2000 project. The Company estimates its
total remaining cost to approximate $48,000, which will be expended as incurred
through the next eight months.
The Company's ability to complete its Year 2000 project by the dates projected
and the total costs incurred to accomplish those efforts are based on estimates
that the Company's management in reliance on certain assumptions. The goal will
be to maximize the functionality and speed resolution of systems due to any Year
2000 problems, with a minimal deployment of resources and minimal disruption in
the financial stability of the Company. Should the Company detect problems
related to mission critical systems, the Company may need to revise the budget
accordingly.
MASTER SCHEDULE
The Company has completed the inventory of its systems and assessed its
susceptibility to Year 2000 problems. The Company is currently testing its
mission-critical systems and remediating any known defects. Management currently
<PAGE>
U.S. Global Investors, Inc.
March 31, 1999, Quarterly Report on Form 10-Q Page 14
- --------------------------------------------------------------------------------
anticipates that the testing and remediation plan will be completed no later
than June 30, 1999, and will not have a material impact on the Company's
consolidated financial results or position.
CERTAIN RISKS AND CONTINGENCY PLAN
The Company's contingency plan is designed to mitigate the risks to operations
or its core business resulting from any failure to successfully complete its
Year 2000 project. The Company is dependent on third-party software and vendor
services. The Company believes that any risk from the Year 2000 transition will
result from its reliance on vendors to finish their own Year 2000 projects
successfully and on time. The Company does not ensure the compliance of such
vendors and suppliers. To date, the Company's initial contingency plan is
approximately 25 percent complete.
FORWARD-LOOKING INFORMATION
The Company has made forward-looking statements concerning the Company's
performance, financial condition, and operations in this quarterly report. The
Company from time to time may also make forward-looking statements in its public
filings and press releases. Such forward-looking statements are subject to
various known and unknown risks and uncertainties and do not guarantee future
performance. Actual results could differ materially from those anticipated in
such forward-looking statements due to a number of factors, some of which are
beyond the Company's control, including (i) the volatile and competitive nature
of the investment management industry, (ii) changes in domestic and foreign
economic conditions, (iii) the effect of government regulation on the Company's
business, (iv) market, credit, and liquidity risks associated with the Company's
investment management activities, and (v) failure of the Company, its vendors,
or other third parties to achieve Year 2000 compliance. Due to such risks,
uncertainties, and other factors, the Company cautions each person receiving
such forward looking information not to place undue reliance on such statements.
All such forward looking statements are current only as of the date on which
such statements were made.
ACCOUNTING PRONOUNCEMENTS
Effective December 31, 1998, the Company adopted Statement No. 130, Reporting
Comprehensive Income (SFAS 130). SFAS 130 established standards for reporting
and display of comprehensive income and its components (revenues, expenses,
gains, and losses) in a full set of general-purpose financial statements. This
statement required that all items that are recognized under accounting standards
as components of comprehensive income be reported in a statement of financial
performance. The Company has disclosed the components of comprehensive income in
the consolidated statements of operations and comprehensive income and has
reclassified prior periods to conform with the new requirements.
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
No. 131, Disclosures about Segments of an Enterprise and Related Information
(SFAS 131). SFAS 131 establishes standards for reporting information in the
annual financial statements about a public entity's operating segments and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. SFAS 131 also
establishes standards for related disclosures regarding products and services,
geographic areas, and major customers. This statement is effective for financial
statements for periods beginning after December 15, 1997. In the initial year of
application, comparative information for earlier years is to be restated. The
Company plans to adopt SFAS 131 in fiscal year 1999. Management has not yet
completed its determination of what, if any, impact the "management approach"
will have on its financial statement disclosures.
In February 1998, the FASB issued Statement No. 132, Employers' Disclosures
about Pensions and Other Postretirement Benefits (SFAS 132). SFAS 132
standardizes the disclosure requirements for pensions and other postretirement
benefits to the extent practicable and requires additional information on
changes in the benefit obligations and fair values of plan assets that will
facilitate financial analysis. As the Company does not offer pension or other
postretirement benefits, it is not anticipated this statement will impact the
Company.
In June 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities (SFAS 133). SFAS 133 standardizes the
accounting for derivative instruments, including certain derivative instruments
imbedded
<PAGE>
U.S. Global Investors, Inc.
March 31, 1999, Quarterly Report on Form 10-Q Page 15
- --------------------------------------------------------------------------------
in other contracts, by requiring that an entity recognize those items as assets
or liabilities in the statement of financial position and measure them at fair
value. SFAS 133 generally provides for matching the timing of gain or loss
recognition on the hedging instrument with the recognition of (a) the changes in
fair value of the hedged asset or liability or (b) the earnings of the hedged
forecasted transaction. This statement is effective for fiscal years beginning
after June 15, 1999. Management is evaluating the impact of the statement on the
Company.
The Accounting Standards Executive Committee (AcSEC) recently issued Statement
of Position (SOP) 98-5, Reporting on the Costs of Start-up Activities. The SOP
requires the costs of start-up activities to be expensed as incurred. In a
change from the Exposure Draft, start-up activities now include organization
costs, which could have significant ramifications for certain mutual funds. The
SOP applies to all nongovernmental entities and to start-up costs of
development-stage entities as well as established operating entities. The SOP is
effective for fiscal years beginning after December 15, 1998, except for certain
investment companies (primarily open-end mutual funds), which must apply the SOP
prospectively beginning June 30, 1998. The adoption of this statement is not
expected to materially impact the financial position or results of operations of
the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's balance sheet includes assets whose fair value is subject to
market risks. At March 31, 1999, the Company held approximately $1.5 million in
securities (trading and available-for-sale categories) other than USGIF money
market mutual fund shares.
Management believes it can more effectively manage the Company's cash position
by broadening the types of investments utilized in cash management. Management
attempts to maximize the Company's cash position by using a diversified venture
capital approach to investing. Strategically, management invests in early-stage
or start-up businesses seeking initial financing as well as more mature
businesses in need of capital for expansion, acquisitions, management buyouts,
or recapitalization. The Company also uses other investment techniques such as
private placement arbitrage. This involves the contemporaneous purchase of a
quantity of an issuer's securities at a discount in a private placement and a
short sale of the same, or substantially the same, security in the public
market.
Due to the Company's investments in equity securities, equity price fluctuations
represent a market risk factor affecting the Company's consolidated financial
position. The carrying values of investments subject to equity price risks are
based on quoted market prices or if not actively traded based on management's
estimate of fair value as of the balance sheet date. Market prices fluctuate,
and the amount realized in the subsequent sale of an investment may differ
significantly from the reported market value. The Company's investment
activities are reviewed by Company compliance personnel and as required by the
code of ethics reported to investment advisory clients.
The table below summarizes the Company's equity price risks at March 31, 1999,
and shows the effects of a hypothetical 25 percent increase and a 25 percent
decrease in market prices. A comparison of quarter-end stock prices on the
individual stocks within the Company's equity portfolios over the three years
ending June 30, 1998, indicated that the change from one quarter to the next was
25 percent or less approximately 90 percent of the time.
<TABLE>
<CAPTION>
ESTIMATED
HYPOTHETICAL FAIR VALUE AFTER
FAIR VALUE AT PERCENTAGE HYPOTHETICAL INCREASE (DECREASE) IN
MARCH 31, 1999 CHANGE PERCENT CHANGE SHAREHOLDERS' EQUITY
-------------- -------------- -------------- --------------------
<S> <C> <C> <C> <C>
TRADING SECURITIES $ 1,136,229 25% INCREASE $ 1,420,286 $ 284,057
25% DECREASE $ 852,172 $ (284,057)
AVAILABLE-FOR-SALE $ 371,463 25% increase $ 464,329 $ 92,866
25% decrease $ 278,597 $ (92,866)
</TABLE>
The selected hypothetical change does not reflect what could be considered best-
or worst-case scenarios. Results could be significantly worse due to both the
nature of equity markets and the concentration of the Company's investment
portfolio.
<PAGE>
U.S. Global Investors, Inc.
March 31, 1999, Quarterly Report on Form 10-Q Page 16
- --------------------------------------------------------------------------------
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
1. Exhibits
11 Statement re: Computation of Per Share Income
27 Financial Data Schedule
2. Reports on Form 8-K
None
<PAGE>
U.S. Global Investors, Inc.
March 31, 1999, Quarterly Report on Form 10-Q Page 17
- --------------------------------------------------------------------------------
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: May 14, 1999 BY: /s/ Susan B. McGee
-----------------------------------------------
Susan B. McGee
President
General Counsel
DATED: May 14, 1999 BY: /s/ David J. Clark
--------------------------------------------------
David J. Clark
Chief Financial Officer
Chief Operating Officer
DATED: May 14, 1999 BY: /s/ J. Michael Edwards
------------------------------------------------
J. Michael Edwards
Chief Accounting Officer
<PAGE>
U.S. Global Investors, Inc.
March 31, 1999, Quarterly Report on Form 10-Q Page 18
- --------------------------------------------------------------------------------
EXHIBIT 11SCHEDULE OF COMPUTATION OF NET INCOME PER SHARE
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, MARCH 31,
-------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income (loss) ..................... $ (982,138) $ 258,291 $ (271,224) $ 29,015
=========== =========== =========== ===========
Basic
Weighted average number of shares
outstanding during the period .... 6,579,649 6,616,539 6,503,842 6,620,381
Basic income (loss) per share ......... $ ( 0.15) $ 0.04 $ ( 0.04) $ 0.00
=========== =========== =========== ===========
Diluted
Weighted average number of shares
outstanding during the period .... 6,579,649 6,616,539 6,503,842 6,620,381
Effect of dilutive securities:
Common stock equivalent shares
(determined using the
"treasury stock" method)
representing shares issuable
upon exercise of Class A or
Class C common stock options . 1,883 51,179 6,736 49,076
----------- ----------- ----------- -----------
Weighted average number of shares
used in calculation of diluted
income per share ............. 6,581,532 6,667,718 6,510,578 6,669,457
=========== =========== =========== ===========
Diluted income (loss) per share ....... $ ( 0.15) $ 0.04 $ (0.04) $ 0.00
=========== =========== =========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The financial data schedule contains summary financial information extracted
from the company's quarterly report on Form 10-Q for the period ended March 31,
1999, and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,012,140
<SECURITIES> 1,507,692
<RECEIVABLES> 1,140,282
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,849,123
<PP&E> 8,103,098
<DEPRECIATION> (5,709,747)
<TOTAL-ASSETS> 8,969,660
<CURRENT-LIABILITIES> 918,217
<BONDS> 0
0
0
<COMMON> 339,814
<OTHER-SE> 6,432,568
<TOTAL-LIABILITY-AND-EQUITY> 8,969,660
<SALES> 6,798,447
<TOTAL-REVENUES> 6,798,447
<CGS> 0
<TOTAL-COSTS> 7,098,128
<OTHER-EXPENSES> 7,180,588
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 82,460
<INCOME-PRETAX> (749,499)
<INCOME-TAX> 232,639
<INCOME-CONTINUING> (982,138)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (982,138)
<EPS-PRIMARY> (.15)
<EPS-DILUTED> (.15)
</TABLE>
