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 December 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 January 29, 1999, there were 5,999,564 shares of Registrant's class A common
stock outstanding and 496,830 shares of Registrant's class C common stock issued
and outstanding.
<PAGE>
U.S. GLOBAL INVESTORS, INC.
I N D E X
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets--December 31, 1998,
and June 30, 1998 .................................................3
Consolidated Statements of Operations and Comprehensive
Income--Six-Month and Three-Month Periods Ended
December 31, 1998 and 1997 ........................................5
Consolidated Statements of Cash Flows--Six-Month Period Ended
December 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
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.
December 31, 1998, Quarterly Report on Form 10-Q Page 3
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31, JUNE 30,
1998 1998
---------- -----------
(UNAUDITED)
CURRENT ASSETS
Cash and cash equivalents ......... $ 859,548 $ 1,391,867
Trading securities, at fair value . 873,184 901,647
Receivables:
Mutual funds .................. 901,075 788,019
Custodial fees ................ 305,528 189,715
Employees ..................... 51,451 83,725
Receivable from brokers ....... 15,812 16,690
Residual equity interest ...... -- 675,613
Other ......................... 146,231 106,696
Prepaid expenses .................. 563,302 466,733
Deferred tax asset ................ 151,443 135,294
---------- -----------
TOTAL CURRENT ASSETS .......... 3,867,574 4,755,999
---------- -----------
NET PROPERTY AND EQUIPMENT ............. 2,490,402 2,596,091
---------- -----------
OTHER ASSETS
Restricted investments ............ 283,846 271,166
Long-term receivables ............. 62,069 218,212
Long-term deferred tax asset ...... 948,468 1,068,092
Investment securities
available-for-sale, at fair value 496,429 472,240
Equity investment in affiliate .... 1,218,139 866,288
Other ............................. 46,591 60,869
---------- -----------
TOTAL OTHER ASSETS ............ 3,055,542 2,956,867
---------- -----------
TOTAL ASSETS .................. $9,413,518 $10,308,957
========== ===========
The accompanying notes are an integral part of this statement.
<PAGE>
U.S. Global Investors, Inc.
December 31, 1998, Quarterly Report on Form 10-Q Page 4
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LIABILITIES AND SHAREHOLDERS' EQUITY
DECEMBER 31, JUNE 30,
1998 1998
------------ ------------
(UNAUDITED)
CURRENT LIABILITIES
Accounts payable ..................... $ 325,330 $ 275,963
Accrued compensation and
retirement costs ................ 219,643 226,324
Current portion of notes payable ..... 66,266 63,525
Current portion of annuity and
contractual obligation .......... 18,000 18,000
Accrued legal fees ................... 53,451 33,855
Other accrued expenses ............... 393,915 418,793
------------ ------------
TOTAL CURRENT LIABILITIES ............ 1,076,605 1,036,460
------------ ------------
Notes payable-net of current portion . 1,160,838 1,193,599
Annuity and contractual obligations .. 133,453 137,039
------------ ------------
TOTAL NON-CURRENT LIABILITIES ........ 1,294,291 1,330,638
------------ ------------
TOTAL LIABILITIES .................... 2,370,896 2,367,098
------------ ------------
Commitments and contingent liabilities
SHAREHOLDERS' EQUITY
Common stock (Class A)--$0.05
par value; non-voting; authorized,
7,000,000 shares ................ 314,972 314,972
Common stock (Class C)--$0.05 par
value; voting; authorized,
1,750,000 shares ................ 24,842 24,842
Additional paid-in capital ........... 10,589,541 10,591,708
Treasury stock at cost ............... (668,650) (476,289)
Accumulated other comprehensive loss . (69,537) (75,744)
Retained deficit ..................... (3,148,546) (2,437,630)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY ........... 7,042,622 7,941,859
------------ ------------
$ 9,413,518 $ 10,308,957
============ ============
The accompanying notes are an integral part of this statement.
<PAGE>
U.S. Global Investors, Inc.
December 31, 1998, Quarterly Report on Form 10-Q Page 5
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CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUE
Investment advisory fee ..................... $ 2,289,172 $ 3,135,836 $ 1,154,140 $ 1,498,372
Transfer agent fee .......................... 1,644,588 1,705,811 845,504 866,493
Accounting fee .............................. -- 399,996 -- 139,684
Exchange fee ................................ 72,715 99,180 36,425 51,370
Custodial fee ............................... 249,781 282,355 126,067 149,323
Investment income ........................... 12,770 171,901 95,690 217,287
Other ....................................... 165,567 140,014 80,281 66,686
----------- ----------- ----------- -----------
4,434,593 5,935,093 2,338,107 2,989,215
EXPENSES
General and administrative .................. 4,486,108 5,154,095 2,320,117 2,530,028
Depreciation and amortization ............... 245,740 247,635 122,294 123,517
Interest-note payable and other ............. 59,093 60,586 30,885 29,286
----------- ----------- ----------- -----------
4,790,941 5,462,316 2,473,296 2,682,831
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE MINORITY
INTEREST, EQUITY INTEREST AND
INCOME TAXES ................................ (356,348) 472,777 (135,189) 306,384
EQUITY IN NET LOSS OF AFFILIATE .................. (254,292) (106,723) (126,087) (108,467)
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES ................ (610,640) 366,054 (261,276) 197,917
PROVISIONS FOR FEDERAL INCOME TAXES
Deferred .................................... 100,276 136,780 117,537 83,188
----------- ----------- ----------- -----------
100,276 136,780 117,537 83,188
----------- ----------- ----------- -----------
NET INCOME (LOSS) ................................ $ (710,916) $ 229,274 $ (378,813) $ 114,729
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on
available-for-sale securities ............ 6,207 (33,067) 109,204 (30,074)
----------- ----------- ----------- -----------
COMPREHENSIVE INCOME (LOSS) ...................... $ (704,709) $ 196,207 $ (269,609) $ 84,655
=========== =========== =========== ===========
Basic and Diluted Income (Loss)
Per Share ..................................... $ (0.11) $ 0.03 $ (0.06) $ 0.02
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING
Basic ....................................... 6,617,553 6,614,618 6,610,467 6,620,210
Diluted ..................................... 6,618,370 6,668,112 6,624,856 6,660,534
The accompanying notes are an integral part of this statement.
</TABLE>
<PAGE>
U.S. Global Investors, Inc.
December 31, 1998, Quarterly Report on Form 10-Q Page 6
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CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED
DECEMBER 31,
1998 1997
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ....................... $ (710,916) $ 229,274
Adjustments to reconcile to net cash
provided by (used in) operating activities:
Depreciation and amortization ........... 245,740 247,635
Net gain on sales of securities ......... (1,253) (65,121)
Gain on disposal of equipment ........... (25) (1,011)
Gain on changes of interest in affiliate (90,126) (6,009)
Provision for deferred taxes ............ 100,276 136,780
Changes in assets and liabilities, impacting
cash from operations:
Restricted investments .................. (12,680) 8,277
Accounts receivable ..................... 596,505 372,331
Prepaid expenses and other .............. (286,758) 52,587
Trading securities ...................... 54,717 (245,912)
Accounts payable ........................ 49,367 (35,696)
Accrued and other expenses .............. (11,963) 4,150
----------- -----------
Total adjustments ............................ 643,800 468,011
----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATIONS .... (67,116) 697,285
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net purchase of furniture and equipment . (140,038) (248,058)
Proceeds on sale of equipment ........... 25 1,011
Purchase of available-for-sale securities (97,056) --
----------- -----------
NET CASH (USED IN) INVESTING ACTIVITIES ...... (237,069) (247,047)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on annuity ..................... (3,586) (3,381)
Payments on note payable to bank ........ (30,020) (21,606)
Payments on capital lease ............... -- (8,661)
Treasury stock reissued ................. 28,725 53,434
Proceeds from issuance of common stock,
warrants, and options ................. -- 1,500
Purchase of treasury stock .............. (223,253) (23,614)
----------- -----------
NET CASH (USED IN) FINANCING ACTIVITIES ...... (228,134) (2,328)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ........................... (532,319) 447,910
BEGINNING CASH AND CASH EQUIVALENTS .......... 1,391,867 722,121
----------- -----------
ENDING CASH AND CASH EQUIVALENTS ............. $ 859,548 $ 1,170,031
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid for interest .................. $ 59,093 $ 60,586
The accompanying notes are an integral part of this statement.
<PAGE>
U.S. Global Investors, Inc.
December 31, 1998, 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 and 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, and will commence operations on January 1, 1999. Although the Company
held a 65% and 16% interest in the U.S. Global Strategies Fund Limited (the
Guernsey Fund) as of December 31, 1998, and 1997, 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 $254,292
and $106,723 for the six months ending December 31, 1998, and 1997,
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 six month period ended December 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 cost of investments classified as trading at December 31, 1998, and June 30,
1998, was $1,198,105, and $1,173,011, respectively. The market value of
investments classified as trading at December 31, 1998, and June 30, 1998, was
$873,184 and $901,647, respectively. The net change in the unrealized holding
gain (loss) on trading securities held at December 31, 1998, and 1997, that has
been included in income for the six month period is ($53,796) and $36,682
respectively.
The cost of investments in securities classified as available-for-sale, which
may not be readily marketable at December 31, 1998, and June 30, 1998, was
$581,438 and $509,382, respectively. These investments are reflected as
non-current assets on the consolidated balance sheet at their fair value at
December 31, 1998, and June 30, 1998, of $496,429 and $472,240, respectively,
with $56,106, and $24,514, 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 December 31, 1998. It is
anticipated the securities obtained in these private placements will become free
trading within one year. During fiscal year 1999, the Company recorded
unrealized gains of $41,450 on securities which 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 which 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
<PAGE>
U.S. Global Investors, Inc.
December 31, 1998, Quarterly Report on Form 10-Q Page 8
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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 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, 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 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 six month period ended December 31, 1998, and December 31, 1997,
was $1,620,778, and $1,894,259, respectively.
Receivables from mutual funds represent amounts due the Company and its
wholly-owned subsidiaries for investment advisory fees, transfer agent fees,
accounting fees, and exchange fees and are net of amounts payable to the mutual
funds.
The investment advisory contract and related contracts between the Company and
USGIF will expire on or about March 6, 1999, and the contracts between the
Company and USGAF expire on or about March 8, 1999. 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 December 31, 1998, the Company has net operating losses
(NOLs) of approximately $1.7 million which will expire in fiscal 2007 and 2010,
charitable contribution carryovers of approximately $354,000 expiring 1999-2001,
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 should occur subsequent to
December 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. As such, management has
included a valuation allowance of approximately $290,000 at December 31, 1998,
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.
December 31, 1998, Quarterly Report on Form 10-Q Page 9
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SIX MONTHS ENDED
DECEMBER 31,
-------------------
1998 1997
-------- --------
Unrealized gain (loss) on available-for sale
securities .................................. $ (6,293) $(33,067)
Less: reclassification adjustment for (gain)
loss included in net income ................. 12,500 --
-------- --------
Net unrealized gain (loss) on available-for sale
securities, net of tax ....................... $ 6,207 $(33,067)
======== ========
NOTE F. ACCOUNTING PRONOUNCEMENTS.
In June 1997, the 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 to 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 investment 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.
December 31, 1998, 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--SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997
U.S. Global Investors, Inc. (the Company or U.S. Global) posted a net loss of
$710,916 ($0.11 loss per share) for the six months ended December 31, 1998,
compared to net income of $229,274 ($0.03 income per share) for the six months
ended December 31, 1997.
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 January 22, 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 $136 million,
respectively.
Assets under management for USGIF for the six months ended December 31, 1998,
averaged $1.26 billion versus $1.33 billion for the six months ended December
31, 1997. This decrease in average assets primarily resulted from a decrease in
the value of gold related assets, partially offset by an increase in money
market assets. Assets under management for USGAF averaged $125 million for the
six months ended December 31, 1998 versus $144 million for the six months ended
December 31, 1997. This decrease in average assets is attributable to a decrease
in assets in the Bonnel Growth Fund.
REVENUES
Total consolidated revenues decreased approximately $1.5 million, or 25 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 $96 million, or 37 percent, for the six months ended December 31,
1998, compared to the same period ended December 31, 1997. Emerging market
assets decreased $23 million, or 51 percent, and the natural resource fund
decreased $20 million or 56 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 $850,000, or 27 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 before interest and investment income (expense), taxes, depreciation
and amortization (EBITDA) decreased approximately $673,000 or 111 percent to a
loss for the six month period of over $64,000 (0.01 per share) from earnings of
$609,000 ($0.09 per share). This was primarily due to a decrease in operating
revenues of $1.3 million, which was partially offset by a corresponding decrease
in general and administration expenses of over $668,000 or 13 percent.
EXPENSES
Total consolidated expenses for the six months ended December 31, 1998,
decreased approximately $671,000. This is attributable to a decrease in general
and administrative expenses of the Company of $668,000 or 13 percent for the six
months ended December 31, 1998, resulting primarily from decreases in sales
promotion and fund reimbursement expenditures.
<PAGE>
U.S. Global Investors, Inc.
December 31, 1998, Quarterly Report on Form 10-Q Page 11
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RESULTS OF OPERATIONS--THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997
U.S. Global Investors, Inc. posted a net loss of $378,813 ($0.06 loss per share)
for the quarter ended December 31, 1998, compared to net income of $114,729
($0.02 income per share) for the quarter ended December 31, 1997.
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 also decreased for the three month
period ended December 31, 1998, to an average of $1.28 billion versus $1.30
billion for the quarter ended December 31, 1997. This decrease in average assets
primarily resulted from a decrease in the value of gold related and equity
assets, partially offset by increases in money market assets. Assets under
management for USGAF averaged $119 million for the quarter ended December 31,
1998, versus $145 million for the quarter ended December 31, 1997. This decrease
in average assets is attributable to a decrease in assets in the Bonnel Growth
Fund.
REVENUES
Total consolidated revenues decreased approximately 650,000 or 22 percent.
Gold-related assets decreased $61 million, or 26 percent, for the three months
ended December 31, 1998, compared to the same period ended December 31, 1997.
Emerging market assets decreased $18 million, or 45 percent, and the natural
resource fund decreased $22 million or 58 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 $350,000, or 23 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 $320,000 or 132 percent to a
loss for the quarter of almost $78,000 (0.01 per share) from $242,000 ($0.04 per
share). This was primarily due to a decrease in operating revenues of almost
$530,000 which was partially offset by a corresponding decrease in general and
administration expenses of almost $210,000 or 8 percent.
EXPENSES
Total consolidated expenses for the three months ended December 31, 1998,
decreased approximately $210,000. This is attributable to a decrease in general
and administrative expenses of the Company of $210,000 or 8 percent for the
quarter ended December 31, 1998, resulting primarily from decreases in sales
promotion and fund reimbursement 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. 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 December 31, 1998, the Company held
approximately $1.4 million in investment securities. The value of these
investments is approximately 15 percent of total assets and 19 percent of
shareholders' equity at period end. Of the $1.4 million in investment
securities, the Company classified approximately $870,000 as trading securities
and
<PAGE>
U.S. Global Investors, Inc.
December 31, 1998, Quarterly Report on Form 10-Q Page 12
- --------------------------------------------------------------------------------
approximately $500,000 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 six months ended December 31, 1998, net
realized gains from the sale of investments aggregated approximately $1,300,
compared to approximately $65,000 for the six months ended December 31, 1997.
The net change in the unrealized holding gain (loss) on trading securities held
at December 31, 1998, and 1997, that has been included in earnings for the
three-month period is ($53,796) and $36,682, respectively. Although the Company
held a 65 percent and 16 percent interest in the U.S. Global Strategies Fund
Limited (the Guernsey Fund) as of December 31, 1998, and 1997, 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 microcap
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 incurred initial conversion
expenditures of $75,000, and 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. Net operating losses (NOLs) of $1.7 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 $290,000 at
December 31, 1998, 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 original
Prospector Fund (now operating as the Global Resources Fund), and the settlement
pool made the final payout to "Eligible Shareholders" thereof. 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.
<PAGE>
U.S. Global Investors, Inc.
December 31, 1998, Quarterly Report on Form 10-Q Page 13
- --------------------------------------------------------------------------------
U.S. GLOBAL ADMINISTRATOR, INC.
U.S. Global has formed a company that was originally incorporated in Texas on
October 23, 1998. This company, U.S. Global Administrator, Inc. (USGA) will
provide qualified plan administration services for existing clients, and will
commence operations on January 1, 1999.
INVESTMENT ADVISORY CONTRACTS
The investment advisory contract and related contracts between the Company and
USGIF will expire on or about March 6, 1999, and the contracts between the
Company and USGAF expire on or about March 8, 1999. Management anticipates the
Trustees of both USGIF and USGAF will renew the contracts.
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 employee 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 regularly 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 so as to determine their
susceptibility to the Year 2000 problem. This assessment included inquiries to
service providers, vendors, and manufacturers of all systems inventoried in
order 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 December 31, 1998, the Company had incurred and expended approximately
$5,000 in connection with its Year 2000 project. The Company estimates its total
remaining cost to approximate $50,000, which will be expended as incurred
through the next 12 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
<PAGE>
U.S. Global Investors, Inc.
December 31, 1998, Quarterly Report on Form 10-Q Page 14
- --------------------------------------------------------------------------------
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
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 planning is
approximately 25 percent complete.
FORWARD LOOKING INFORMATION
The Company has made in this quarterly report, and from time to time may make in
its public filings, press releases and statements by management, forward looking
statements concerning the Company's performance, financial condition and
operations. 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 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
<PAGE>
U.S. Global Investors, Inc.
December 31, 1998, Quarterly Report on Form 10-Q Page 15
- --------------------------------------------------------------------------------
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 to 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 investment 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 December 31, 1998, and June 30, 1998, the Company held
approximately $1.4 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 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 reported to investment advisory clients.
The table below summarizes the Company's equity price risks at December 31,
1998, 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
<PAGE>
U.S. Global Investors, Inc.
December 31, 1998, Quarterly Report on Form 10-Q Page 16
- --------------------------------------------------------------------------------
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 PERCENTAGES
FAIR VALUE AT HYPOTHETICAL HYPOTHETICAL INCREASE (DECREASE) IN
DECEMBER 31, 1998 PRICE CHANGE CHANGE IN PRICES SHAREHOLDERS' EQUITY
----------------- ---------------- ---------------- ----------------------
<S> <C> <C> <C> <C>
TRADING SECURITIES $873,184 25% increase $1,091,480 $ 144,075
25% decrease $ 654,888 $(144,075)
AVAILABLE-FOR-SALE $496,429 25% increase $ 620,536 $ 81,911
25% decrease $ 372,322 $ (81,911)
</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.
December 31, 1998, Quarterly Report on Form 10-Q Page 17
- --------------------------------------------------------------------------------
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
1. Exhibits
11 Statement re: Computation of Per Share Earnings
27 Financial Data Schedule
2. Reports on Form 8-K
None
<PAGE>
U.S. Global Investors, Inc.
December 31, 1998, Quarterly Report on Form 10-Q Page 18
- --------------------------------------------------------------------------------
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: February 16, 1999 BY: /s/ Susan B. McGee
----------------------------
Susan B. McGee
President
General Counsel
DATED: February 16, 1999 BY: /s/ David J. Clark
----------------------------
David J. Clark
Chief Financial Officer
Chief Operating Officer
DATED: February 16, 1999 BY: /s/ J. Michael Edwards
----------------------------
J. Michael Edwards
Chief Accounting Officer
<PAGE>
U.S. Global Investors, Inc.
December 31, 1998, Quarterly Report on Form 10-Q Page 19
- --------------------------------------------------------------------------------
EXHIBIT 11--SCHEDULE OF COMPUTATION OF NET EARNINGS PER SHARE
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------- -------------------------
1998 1997 1998 1997
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Net income (loss) ...................... $ (710,916) $ 229,274 $ (378,813) $ 114,729
=========== ========== =========== ==========
BASIC
Weighted average number shares
outstanding during the period ..... 6,617,553 6,614,618 6,610,467 6,620,210
Basic income (loss) per share .......... $ (0.11) $ 0.03 $ (0.06) $ 0.02
=========== ========== =========== ==========
DILUTED
Weighted average number of shares
outstanding during the period ..... 6,617,553 6,614,618 6,610,467 6,620,210
Effect of dilutive securities:
Common stock equivalent shares
(determined using the "treasury
stock" method) representing
shares issuable upon exercise
of preferred or common stock
options ....................... 817 53,494 14,389 40,324
----------- ---------- ----------- ----------
Weighted average number of shares
used in calculation of diluted
income per share .............. 6,618,370 6,668,112 6,624,856 6,660,534
=========== ========== =========== ==========
Diluted income (loss) per share ........ $ (0.11) $ 0.03 $ (0.06) $ 0.02
=========== ========== =========== ==========
</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 December
31, 1998, and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> DEC-31-1998
<CASH> 859,548
<SECURITIES> 1,369,613
<RECEIVABLES> 1,482,166
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,867,574
<PP&E> 8,077,855
<DEPRECIATION> (5,587,453)
<TOTAL-ASSETS> 9,413,518
<CURRENT-LIABILITIES> 1,076,605
<BONDS> 0
0
0
<COMMON> 339,814
<OTHER-SE> 6,702,808
<TOTAL-LIABILITY-AND-EQUITY> 9,413,518
<SALES> 4,434,593
<TOTAL-REVENUES> 4,434,593
<CGS> 0
<TOTAL-COSTS> 4,790,941
<OTHER-EXPENSES> 4,731,848
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 59,093
<INCOME-PRETAX> (610,640)
<INCOME-TAX> 100,276
<INCOME-CONTINUING> (710,916)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (710,916)
<EPS-PRIMARY> (.11)
<EPS-DILUTED> (.11)
</TABLE>
