FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark
One)
/ X / ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED JUNE 30, 1997
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM ----- TO -----
Commission File Number 0-13928
U.S. GLOBAL INVESTORS, INC.
(Exact name of registrant as specified in its charter)
7900 CALLAGHAN ROAD, SAN ANTONIO, TX 78229
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: 210-308-1234
TEXAS 74-1598370
(State of Organization) (I.R.S. Employer Identification No.)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: CLASS A COMMON
STOCK, PAR VALUE $0.05 PER SHARE
Indicate by check mark whether the Company (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 (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
Registrant on September 8, 1997, was $251,769 Registrant's only voting stock is
Class C common stock, par value $0.05 per share, for which there is no active
market. The 106,008 shares of Class C common stock held by non-affiliates were
valued at the last sale on September 8, 1997, of Registrant's Class A common
stock as reported by NASDAQ, which was $2.375 per share.
On September 8, 1997, there were 496,860 shares of Registrant's Class C common
stock outstanding, no shares of Registrant's Class B non-voting common shares
outstanding, and 6,292,414 shares of Registrant's Class A common stock issued
and 6,105,730 shares of Registrant's Class A common stock issued and
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the fiscal year ended June 30,
1997, are incorporated by reference in Part I, Item 1 and Part II, Items 6, 7, 8
and 13 of this Form 10-K.
<PAGE>
TABLE OF CONTENTS
PAGE
PART I
Item 1. Business................................................... 3
Item 2. Properties................................................. 3
Item 3. Legal Proceedings.......................................... 3
Item 4. Submission Of Matters To A Vote Of Security Holders........ 3
PART II
Item 5. Market For Registrant's Common Equity And Related
Shareholder Matters........................................ 4
Item 6. Selected Financial Data.................................... 5
Item 7. Management's Discussion And Analysis Of Financial
Condition And Results Of Operations........................ 5
Item 8. Financial Statements And Supplementary Data................ 5
Item 9. Changes In And Disagreements With Accountants On
Accounting And Financial Disclosure........................ 5
PART III
Item 10. Directors And Executive Officers Of The Company............ 6
Item 11. Executive Compensation..................................... 8
Item 12. Security Ownership Of Certain Beneficial Owners
And Management............................................ 12
Item 13. Certain Relationships And Related Transactions............. 14
PART IV
Item 14. Exhibits, Financial Statement Schedules And
Reports On Form 8-K........................................ 15
SIGNATURES............................................................... 17
EXHIBIT 11--SCHEDULE OF COMPUTATION OF NET EARNINGS PER SHARE............ 18
EXHIBIT 13--ANNUAL REPORT................................................ 19
EXHIBIT 21--SUBSIDIARIES OF THE REGISTRANT, JURISDICTION OF
INCORPORATION AND PERCENTAGE OF OWNERSHIP........................... 55
EXHIBIT 23.1--CONSENT OF INDEPENDENT ACCOUNTANTS ........................ 56
EXHIBIT 23.2--CONSENT OF INDEPENDENT ACCOUNTANTS ........................ 57
<PAGE>
Page 3
- --------------------------------------------------------------------------------
PART I
ITEM 1. BUSINESS
There is incorporated in this Item 1 by reference that portion of the U.S.
Global Investors, Inc. ("USGI," the "Company" or "Registrant") Annual Report to
Shareholders, attached to this Form 10-K as Exhibit 13, appearing under the
caption "The Company."
ITEM 2. PROPERTIES
The Company presently occupies an office building with approximately 46,000
square feet and approximately 2.5 acres of land. The Company purchased this
building from the Resolution Trust Corporation on February 28, 1992, for
$1,018,165 (which included closing costs). To finance acquisition and
improvements, the Company obtained a bank loan in the amount of $1,425,000 and
refinanced the note during fiscal year 1994. (See Notes E and I to the
Consolidated Financial Statements incorporated by reference from the Company's
1997 Annual Report to Shareholders in Item 8 of this Form 10-K.) The Company
moved to its new headquarters during August 1992. The Company has made
substantial improvements to the building and the Company and its subsidiaries,
United Shareholder Services, Inc. ("USSI"), A&B Mailers, Inc., and Security
Trust & Financial Company ("STFC"), occupy sections in the building.
ITEM 3. LEGAL PROCEEDINGS
There is no material pending legal proceeding in which the Company is involved.
There are no material legal proceedings to which any director, officer or
affiliate of the Company or any associate of any such director or officer is a
party or has a material interest, adverse to the Company or any of its
subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 16, 1997, shareholders of Class C common stock, by written consent,
elected J. Stephen Penner as a director of the Company. 68.85% of the holders of
Class C common stock voted in favor of said action.
On April 25, 1997, shareholders approved the U.S. Global Investors, Inc. 1997
Non-Qualified Stock Option Plan by written consent. 68.76% of the holders of
Class C common stock voted in favor of said action.
<PAGE>
Page 4
- --------------------------------------------------------------------------------
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
MARKET INFORMATION
The Company has three classes of common equity--Class A, Class B and Class C
common stock, par value $0.05 per share.
There is no established public trading market for the Company's Class B and
Class C common stock.
The holders of the Company's Class C common stock of record on March 12, 1985
(and their transferees by gift, devise or descent) have the right to exchange
their shares of Class C common stock for Class A common stock on a
share-for-share basis until April 30, 2000. At September 8, 1997, the holders of
28,358 shares of Class C common stock have the right to exchange.
The Company's Class A common stock is traded over-the-counter and is quoted
daily under the NASDAQ Small-Cap Issues. Trades are reported under the symbol
"GROW."
The following table sets forth the range of high and low closing bid quotations
from the NASDAQ System for the fiscal years ended June 30, 1997, and 1996. The
quotations represent prices between dealers and do not include any retail
markup, markdown or commission and may not necessarily represent actual
transactions.
BID PRICE ($)
-----------------------------------
1997 1996
----------------- ---------------
HIGH LOW HIGH LOW
------- ------- ------ -----
First Quarter (9/30) 3 1/8 2 3/8 2 7/8 2 1/2
Second Quarter (12/31) 2 13/16 2 1/4 2 3/4 1 7/8
Third Quarter (3/31) 3 1 3/4 3 5/8 1 5/8
Fourth Quarter (6/30) 2 1/8 1 11/16 3 7/16 2 1/2
HOLDERS
On September 8, 1997, there were 73 holders of record of Class C common stock,
no holders of record of Class B common stock and 321 holders of record of the
Class A common stock.
A substantial number of the Class A common shares are held of record by nominees
and management believes that as of September 8, 1997, there were more than 1,000
beneficial owners of the Company's Class A common stock.
DIVIDENDS
The Company has not paid cash dividends on its Class C common stock during the
last twelve fiscal years, and has never paid cash dividends on its Class A
common stock. Payment of cash dividends is within the discretion of the
Company's Board of Directors and is dependent upon earnings, operations, capital
requirements, general financial condition of the Company and general business
conditions.
Holders of the outstanding shares of the Company's Class A common stock are
entitled to receive, when and as declared by the Company's Board of Directors, a
non-cumulative cash dividend equal in the aggregate to 5% of the Company's
after-tax net earnings for its prior fiscal year. After such dividend has been
paid, the holders of the outstanding shares of Class B
<PAGE>
Page 5
- --------------------------------------------------------------------------------
common stock are entitled to receive, when and as declared by the Company's
Board of Directors, cash dividends per share equal to the cash dividends per
share paid to the holders of the Class A common stock. Holders of the
outstanding shares of Class C common stock are entitled to receive when and as
declared by the Company's Board of Directors, cash dividends per share equal to
the cash dividends per share paid to the holders of the Class A and Class B
common stock. Thereafter, if the Board of Directors determines to pay additional
cash dividends, such dividends will be paid simultaneously on a prorata basis to
holders of Class A, B and C common stock. The holders of the Class A common
stock are protected in certain instances against dilution of the dividend amount
payable to such holders.
ITEM 6. SELECTED FINANCIAL DATA
There is incorporated by reference in this Item 6 that portion of the Company's
1997 Annual Report to Shareholders appearing under the caption "Selected
Financial Data."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
There is incorporated by reference in this Item 7 that portion of the Company's
1997 Annual Report to Shareholders appearing under the caption "Annual Status
Report."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated Financial Statements and notes thereto located in the Company's
1997 Annual Report to Shareholders are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Within twenty-four months prior to the date of Registrant's most recent
financial statement, no Form 8-K recording a change of accountants due to a
disagreement on any matter of accounting principles or practices or financial
statement disclosure has been filed with the Commission.
<PAGE>
Page 6
- --------------------------------------------------------------------------------
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The directors and executive officers of the Company are as follows:
NAME AGE POSITION
- -------------------- --- ---------------------------------------------------
David J. Clark 36 Chief Financial Officer of the Company since May
1997. Foreign Service Officer with U.S. Agency for
International Development in the U.S. Embassy,
Bonn, West Germany from May 1992 to May 1997. Audit
Supervisor for University of Texas Health Science
Center from April 1991 to April 1992.
Auditor-in-Charge for Texaco, Inc. from August 1987
to June 1990.
Bobby D. Duncan 39 Director of the Company since 1986. Held various
positions with the company from January 1985 to
April 1997. Vice President, Chief Financial Officer
and other positions with U.S. Global Investors
Funds from May 1985 to April 1997. President, Chief
Operating Officer and other positions with United
Shareholder Services, Inc. from September 1988 to
April 1997. Director of A&B Mailers, Inc. from
February 1988 to April 1997. Executive Vice
President, Chief Executive Officer and other
positions with Security Trust & Financial Corp.
from November 1991 to April 1997. Executive Vice
President, Chief Financial Officer and other
positions with U.S. Global Accolade Funds from
September 1988 to April 1997. Chief Financial
Officer and Director of USACI from February 1995 to
April 1997. President, Chief Executive Officer and
other positions with United Services Insurance
Funds from June 1994 to April 1997. Vice President
and other positions with Pauze'/Swanson United
Services Funds from October 1993 to February 1996.
Frank E. Holmes 42 Chairman of the Board of Directors and Chief
Executive Officer of the Company since October 27,
1989, President from October 1989 to September 1995
and from March 1997 to present. Director of STFC
since November 1991. President, Chief Executive
Officer and Trustee of USGIF since October 1989.
President, Chief Executive Officer and Trustee of
USGAF since April 1993. Director of U.S. Advisors
(Guernsey) Limited, a wholly owned subsidiary of
Advisor, and of the Guernsey Funds managed by that
Company since August 1993. Trustee of
Pauze'/Swanson United Services Funds from November
1993 to February 1996. Director of Franc-Or
Resource Corp. from November 1994 to November 1996.
Director of Adventure Capital from January 1996 to
July 1997 and Director of Vedron Gold, Inc. from
August 1996 to March 1997. Director of 71316
Ontario, Inc. since April 1987 and of F. E. Holmes
Organization, Inc. since July 1978. Director of
Marleau, Lemire Inc. from January 1995 to January
1996. Director of USACI since February 1995,
Director and President from February 1995 to June
1997.
Marie A. Kriley 55 Vice President, Mailing Services of the Company
since December 1991. President of A&B Mailers, Inc.
since February 1983.
Thomas F. Lydon, Jr. 37 Director since June 1997. Chairman of the Board and
President of Lydon Asset Management, Inc. since
April 1996. President, Vice President and Account
Manager with Fabian Financial Services, Inc. from
April 1984 to March 1996.
<PAGE>
Page 7
- --------------------------------------------------------------------------------
NAME AGE POSITION
- -------------------- --- ---------------------------------------------------
Susan B. McGee 38 Executive Vice President, Corporate Secretary and
General Counsel of the Company since March 1997;
Vice President of the Company from September 1995
to March 1997; Associate Counsel from August 1994
to March 1997. Executive Vice President, General
Counsel Of USGIF since April 1997; Secretary of
USGIF since September 1995. President of STFC since
April 1997; Vice President, Counsel from September
1992 to April 1997; Vice President-Operations of
STFC from May 1993 to December 1994. Executive Vice
President, Assistant Secretary, to U.S. Global
Accolade Funds since March 1997 and Vice President,
Assistant Secretary from September 1995 to March
1997. Vice President, Secretary of A&B Mailers,
Inc. since March 1997 and Director since May 1997.
President, Secretary of United Shareholder
Services, Inc. since March 1997 and Director since
May 1997. Director of USACI since May 1997.
J. Stephen Penner 56 Director since May 1997. Senior Vice President of
LCG Associates, and since March 1982 has held
various positions with that company. Senior Vice
President of LCG Holdings, Inc. since November
1992.
Jerold H. Rubinstein 58 Mr. Rubinstein has been a Director of the Company
since October 27, 1989. Owner of EXTRA Music since
July 1997. He served as Chairman of the Board of
Directors and as Chief Executive Officer of DMX
Inc., a publicly-traded media technology company,
from May 1986 to July 1997.
Thomas D. Tays 40 Vice President, Securities Specialist, Director of
Compliance, Assistant Secretary of the Company from
September 1995 to present; Associate Counsel,
Assistant Secretary of the Company from September
1993 to September 1995. Chief Financial Officer of
USGIF and USGAF since March 1997. Vice President,
Securities Specialist, Director of Compliance and
Assistant Secretary of USGIF since September 1995.
Vice President and Secretary of USGAF since
September 1995, was Assistant Secretary from
September 1994 to September 1995. Vice President,
Secretary of United Services Insurance Funds from
June 1994 to present. Private practice of law from
1990 to August 1993.
Roy D. Terracina 51 Director of the Company since December 1994.
Director of STFC since August 1992. Owner of
Sunshine Ventures, Inc., an investment company,
since January 1994. Owner/President of Sterling
Foods, Inc., food manufacturer, from May 1984 to
December 1993.
None of the directors or executive officers of the Company has a family
relationship with any of the other directors or executive officers.
Each member of the Board of Directors is elected for a one-year term or until
their successors are elected and qualified. The executive officers of the
Company are appointed by, and serve at the pleasure of, the Board of Directors.
The Company does not have a Nominating Committee. The Company's Compensation
Committee consists of Messrs. Holmes, Terracina and Rubinstein. The Company's
Audit Committee consists of Messrs. Duncan, Rubinstein and Terracina. The Board
of Directors Stock Option Committee consists of Messrs. Rubinstein and
Terracina.
COMPLIANCE WITH SECTION 16(A) OF THE 1934 ACT
Section 16(a) of the 1934 Act requires directors and officers of the Company,
and persons who own more than 10 percent of the Company's Class A common stock,
to file with the SEC initial reports of ownership and reports of changes in
ownership of the stock. Directors, officers and more than 10 percent
shareholders are required by SEC regulations to furnish the Company with copies
of all Section 16(a) forms they file.
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during the year ended June 30, 1997, all Section 16(a)
filing requirements applicable to its directors, officers and more than 10
percent beneficial owners were complied with.
<PAGE>
Page 8
- --------------------------------------------------------------------------------
ITEM 11. EXECUTIVE COMPENSATION
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
---------------------------
ANNUAL COMPENSATION | AWARDS
--------------------------------------------|---------------------------
(A) (B) (C) (D) (E) | (F) (G)
OTHER |
ANNUAL |
COMPENSATION | 6 4
5 2 2 1,3 | RESTRICTED OPTIONS/
NAME AND PRINCIPAL | STOCK AWARDS SARS
POSITION DURING FY 97 YEAR SALARY ($) BONUS ($) ($) | ($) (#)
- --------------------------------------------------------------------------------------------------------|---------------------------
<S> <C> <C> <C> <C> <C> <C>
FRANK E. HOLMES ........................ 1997 $304,079 $128,848 $ 36,277 | $ 5,683 0
CHAIRMAN 1996 $304,355 $140,240 $ 32,937 | $ 1,268 1,000
CHIEF EXECUTIVE OFFICER 1995 $303,835 $ 2,098 $ 46,326 | $ 292 0
|
VICTOR FLORES .......................... 1997 $150,770 $120,253 $ 3,562 | $ 18,477 0
EXEC. V.P. 1996 $150,304 $ 78,581 $ 4,694 | $ 3,552 1,000
CHIEF INVESTMENT OFFICER 1995 $150,292 $ 65,877 $ 14,877 | $ 298 17,000
|
BOBBY D. DUNCAN ........................ 1997 $126,007 $ 54,560 $ 10,471 | $ 7,731 0
EXEC. V.P. 1996 $102,071 $ 34,718 $ 12,998 | $ 6,088 1,000
1995 $ 95,331 $ 24,862 $ 16,820 | $ 311 0
|
THOMAS D. TAYS ......................... 1997 $ 81,340 $ 45,644 $ 5,282 | $ 8,991 5,000
V.P. 1996 $ 78,750 $ 28,291 $ 2,376 | $ 2,948 2,000
SECURITIES SPECIALIST 1995 $ 70,976 $ 5,055 $ 1,719 | $ 311 500
|
SUSAN B. MCGEE ......................... 1997 $ 74,241 $ 34,818 $ 9,800 | $ 9,995 25,000
EXEC. V.P. 1996 $ 65,522 $ 22,757 $ 5,685 | $ 3,461 11,000
GENERAL COUNSEL 1995 $ 49,697 $ 5,030 $ 6,225 | $ 1,441 500
The Company has intentionally omitted columns (h) and (i) as they are non applicable.
<FN>
1 Includes amounts identified for 401(k) contributions (calculable through to the end of the June 30, 1997 fiscal year) and
amounts for Company Savings Plans (calculable through to the end of the June 30, 1996 fiscal year).
2 Does not include the cost to the Company of incidental personal use of automobiles furnished by the Company for use in its
business and certain other personal benefits. The Company believes that the aggregate amounts of such omitted personal benefits
do not exceed the lesser of $50,000 or 10% of the total of annual salary or bonus reported for the names executive officers in
columns (c) and (d).
3 Other compensation including perquisites exceeding 25% of total perquisites:
NAME DESCRIPTION 1997 1996 1995
--------------------------------- -------------- ------- ------- -------
Frank E. Holmes ................. Trustee fees $24,000 $24,000 $24,000
Profit sharing $ 3,000 $ 0 $12,941
Victor Flores ................... Profit sharing $ 3,000 $ 0 $10,183
401 (k) match $ 0 $ 3,000 $ 3,000
Bobby D. Duncan ................. Car allowance $ 2,841 $ 8,523 $ 8,523
Profit sharing $ 3,000 $ 0 $ 6,202
Thomas D. Tays .................. Profit sharing $ 2,141 $ 0 $ 0
401 (k) match $ 2,540 $ 2,141 $ 1,521
Susan B. McGee .................. Club dues $ 2,551 $ 1,345 $ 1,345
4 All options pertain to Company Class A common stock.
5 Mr. Duncan resigned his position with the Company on April 30, 1997. Mr. Duncan continues to be a member of the Company's Board
of Directors. Mr. Flores resigned his position with the Company on May 31, 1997.
6 The dollar value of the shares reflected in the table is based on the market value for the shares on the date the shares were
awarded.
</FN>
Restricted stock balances of the Company's Class A common stock as of June 30, 1997:
# OF RESTRICTED VALUE OF RESTRICTED
NAME SHARES HELD @ 6/30/97 SHARES HELD @ 6/30/97
---- --------------------- ---------------------
<S> <C> <C>
Frank E. Holmes .......... 2,832 $ 5,664
Victor Flores ............ 8,810 $17,620
Bobby D. Duncan .......... 4,152 $ 8,304
Thomas D. Tays ........... 4,822 $ 9,644
Susan B. McGee ........... 5,467 $10,934
The closing price on 6/30/97 was $2.00 per share.
No dividends have ever been paid on the Company's Class A common stock, however, the restricted stock would be eligible for
dividends should one be declared.
</TABLE>
<PAGE>
Page 9
- --------------------------------------------------------------------------------
INCENTIVE COMPENSATION
During the last fiscal year, the individuals listed in the compensation table
received the majority of their bonuses from individual performance pay
arrangements. Mr. Flores, as head of the Investment Division, received bonuses
based on a formula comparing performance of mutual funds he managed, or share
management, to various indices, peer rankings/comparisons, and duration of
sustained performance. Ms. McGee and Mr. Tays, as members of the Legal
Department, receive a bonus based on timing, accuracy and completion of
materials for the various boards of directors/trustees supported by the
department and regulatory filings for the various entities. Mr. Tay's program
also provides a bonus for results of regulatory examinations, fund accounting
and complete registration of new mutual funds. Mr. Duncan received monthly,
quarterly and/or annual bonuses based on the quality and timing of regulatory
filings and company audits. The Investment Division program has been in place
and is adjusted from time to time. The other arrangements were implemented
during the second half of fiscal 1996.
The named executive officers, except for Messrs. Flores and Holmes, also
participated in a team performance pay program based on each employee's annual
salary to recognize monthly completion of departmental goals. During fiscal
1995, 1996 and 1997, a portion of the team bonus was payable in the Company's
Class A common stock. The portion of the team performance program paid in
Company stock was suspended at the beginning of fiscal 1998, and alternatives
are being considered. In addition, the individuals listed could receive
semiannual perfect attendance awards based on employee classification.
PROFIT SHARING PLAN
In June 1983, the Company adopted a profit sharing plan in which all qualified
employees who have completed one year of employment with the Company are
included. Subject to Board action, the Company may contribute up to 15% of its
net income before taxes during each fiscal year, limited to 15% of qualifying
salaries, to a profit sharing plan, the beneficiaries of which are the eligible
employees of the Company. The Company's contribution to the plan is then
apportioned to each employee's account in the plan in an amount equal to the
percentage of the total basic compensation paid to all eligible employees which
each employee's individual basic compensation represents. An employee generally
becomes eligible to receive a distribution from the plan upon the occurrence of
retirement, death, total disability or termination. Distributions of an
employee's account may be made either in one lump sum or in installments over a
period not exceeding 15 years. For the fiscal year ended June 30, 1997, the
Company contributed $59,093 or 9.59% of net income before taxes to the profit
sharing plan. There have been no recent material changes to the plan.
401(K) PLAN
The Company adopted a 401(k) plan in October 1990 for the benefit of all
employees. The Company will contribute 50 cents for every $1.00 of the first 4%
of an employee's pay deferment. The Company will make contributions to employee
accounts at the end of each plan year if the employee is still employed on that
date. New employees may enroll on any quarterly entry date following six months
of employment. The Plan offers numerous investment options which represent
different levels of risk and return. Employees have the option to invest in most
of the USGIF and USGAF funds offered and the Company's Class A common stock. For
the fiscal year ended June 30, 1997, the Company has accrued $50,158 for its
401(k) plan matching contribution.
SAVINGS PLANS
The Company has continued the program pursuant to which it offers employees,
including its executive officers, an opportunity to participate in savings
programs utilizing managed investment companies, which was accepted by
essentially all such employees. Limited employee contributions to an Individual
Retirement Account are matched by the Company. Similarly, if such employees
contribute monthly to the U.S. Tax Free Fund, the Company will match these
contributions on a limited basis. Beginning in fiscal 1997 a similar savings
plan utilizing UGMA accounts has been offered to employees to save for their
children's education. Under each program, if the employee ceases to make
personal contributions or withdraws the money, their participation in the
program is terminated and they may not participate in the future. For the fiscal
year ended June 30, 1997, the Company match aggregated to $67,152, reflected in
base salary expense.
<PAGE>
Page 10
- --------------------------------------------------------------------------------
STOCK OPTION PLANS
In March 1985, the Board of Directors of the Company adopted an Incentive Stock
Option Plan ("1985 Plan") which was approved by the shareholders of the Company
on April 2, 1985. Under the terms of the 1985 Plan, certain executives and key
salaried employees of the Company and its subsidiaries were granted options to
purchase shares of the Company's Class A common stock. The maximum number of
shares of Class A common stock authorized for issuance under the 1985 Plan was
200,000 shares (subject to adjustment in the event of reorganization, merger,
consolidation, liquidation, recapitalization, or stock splits). Shares subject
to purchase pursuant to an option granted under the 1985 Plan may be either
authorized but unissued shares or shares that were once issued and subsequently
reacquired by the Company.
The 1985 Plan was amended on November 7, 1989 and December 6, 1991. In December
1991 it was amended to provide provisions to cause the plan and future grants
under the plan to qualify under 1934 Act Rule 16b-3. The 1985 Plan was
administered by a committee consisting of the two outside members of the Board
of Directors of the Company. The 1985 Plan terminated on December 31, 1994.
Options granted under the 1985 Plan were granted for a term of up to five years
in the case of employees who own in excess of 10% of the total combined voting
power of all classes of the Company's stock and for up to ten years for other
employees. The options were granted at an exercise price of not less than 100%
of the fair market value as of the date of the grant, or 110% of the fair market
value in the case of any officer or employee holding in excess of 10% of the
combined voting power of the Company's stock. The aggregate fair market value of
the Class A common stock for which any employee was granted options in any
calendar year could not exceed $100,000 plus any unused carry-over from a
preceding year. All of the options were granted at or above market price on the
date of the grant. As of September 8, 1997, option grants covering 85,500 shares
have been exercised under the 1985 Plan; and grants covering 52,000 shares have
expired.
In November 1989 the Board of Directors adopted the 1989 Non-Qualified Stock
Option Plan (the "1989 Plan") which provides for the granting of options to
purchase shares of the Company's Class A common stock to directors, officers and
employees of the Company and its subsidiaries. On December 6, 1991, the 1989
Plan was approved by shareholders and amended to provide provisions to cause the
plan and future grants under the plan to qualify under 1934 Act Rule 16b-3. The
1989 Plan is administered by a committee consisting of two outside members of
the Board of Directors. The maximum number of shares of Class A common stock
initially approved for issuance under the 1989 Plan is 800,000 shares. During
the fiscal year ended June 30, 1997, there were grants covering 30,000 shares at
an exercise price of $2.00 per share. All options were granted at or above
market price on the date of grant. As of September 8, 1997, grants covering
393,000 shares have been exercised under the 1989 Plan; and grants covering
156,400 shares have expired.
The Board of Directors, at a meeting held on July 14, 1992, amended the Stock
Option Agreement for stock options granted during November 1989 to provide for
an option period of ten years. The amendment was accepted by all optionees.
In April 1997, the Board of Directors adopted the 1997 Non-Qualified Stock
Option Plan (the "1997 Plan"), which was approved by shareholders on April 25,
1997, provides for the granting of stock appreciation rights ("SARs") and/or
options to purchase shares of the Company's Class A common stock to directors,
officers and employees of the Company and its subsidiaries. The 1997 Plan
expressly requires that all grants under the plan qualify under 1934 Act Rule
16b-3. The 1997 Plan is administered by a committee consisting of two outside
members of the Board of Directors. The maximum number of shares of Class A
common stock initially approved for issuance under the 1997 Plan is 200,000
shares. During the fiscal year ended June 30, 1997, there were grants covering
50,000 shares at an exercise price of $2.00 and 98,500 shares at an exercise
price of $1.82. All options were granted at or above market price on the date of
grant. To date, no options have been exercised and no options have expired.
<PAGE>
Page 11
- --------------------------------------------------------------------------------
The following table shows, as to each of the officers of the Company listed in
the cash compensation table, grants of stock options and freestanding stock
appreciation rights ("SARs") made during the last fiscal year.
<TABLE>
<CAPTION>
POTENTIAL REALIZED
VALUE AT ASSUMED
ANNUAL
RATES OF STOCK PRICE
APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM
- ----------------------------------------------------------------------------------------------- --------------------------
(A) (B) (C) (D) (E) (F) (G)
- ---------------------- ------------------- --------------- ------------- -------------------- ------------- ------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS/SARS EMPLOYEES IN BASE
NAME GRANTED (#) FISCAL YEAR PRICE ($/SH) EXPIRATION DATE 5% ($) 10% ($)
- ---------------------- ------------------- --------------- ------------- -------------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Frank E. Holmes 0/0 -- -- -- -- --
Thomas D. Tays 5,000/0 5.00% $1.82 June 4, 2007 $5,723 $14,505
Susan B. McGee 25,000/0 25.38% $1.82 June 4, 2007 $28,620 $72,525
Bobby D. Duncan 0/0 -- -- -- -- --
Victor Flores 0/0 -- -- -- -- --
The following table shows, as to each of the officers of the Company listed in
the cash compensation table, aggregated option exercises during the last fiscal
year and fiscal year-end option values.
- ---------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
- ---------------------------------------------------------------------------------------------------------------------------
NUMBER OF
SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED IN THE MONEY
OPTIONS/SARS OPTIONS/SARS AT
AT FY-END (#) FY-END($)
SHARES
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (#) REALIZED UNEXERCISABLE UNEXERCISABLE
- ---------------------------- ----------------------- ---------------------- ------------------ ------------------------
<S> <C> <C> <C> <C>
Frank E. Holmes 0 0 201,000/0 12,250/0
Thomas D. Tays 0 0 2,500/5,000 0/900
Susan B. McGee 0 0 11,500/25,000 0/4,500
Bobby D. Duncan 0 0 96,000/0 10,000/0
Victor Flores 0 0 51,000/0 500/0
</TABLE>
COMPENSATION OF DIRECTORS
The Company pays non-employee directors $500 per meeting and may grant them
options under the Company's 1989 and 1997 Stock Option Plans. Their compensation
is subject to a minimum of $3,000 in any quarter paid in arrears. Messrs. J.
Stephen Penner and Thomas F. Lydon Jr. were elected as non-employee directors on
May 15, 1997, and June 1, 1997, respectively. Mr. Bobby D. Duncan was a
non-employee director for a portion of the fiscal year following his termination
of employment with the Company. Messrs. Jerold H. Rubinstein and Roy D.
Terracina were non-employee directors for the full fiscal year. During the
fiscal year ended June 30, 1997, Messrs. Terracina and Rubinstein each received
cash
<PAGE>
Page 12
- --------------------------------------------------------------------------------
compensation of $12,000; Messrs. Penner and Lydon received $1,500 and $1,000
respectively. Mr. Duncan received $2,000. Mr. Terracina is also a director of
STFC where he received cash compensation of $2,400. Directors are reimbursed for
reasonable travel expenses incurred in attending the meetings held by the Board
of Directors. During fiscal year 1997, Messrs. Penner, Lydon and Rubinstein were
each awarded stock options covering 10,000 shares and Mr. Terracina was awarded
stock options covering 50,000 shares
REPORT ON EXECUTIVE COMPENSATION
The Board appointed Messrs. Holmes, Terracina and Rubinstein as members of the
Executive Compensation Committee during fiscal 1996, and they continue to serve
on the committee. There are no compensation committee interlocks or insider
participations to report. The Company's program regarding compensation of
executive officers is different from most public corporations' programs due to
the concentration of control in one individual. Mr. Holmes' compensation is
reviewed by the Board of Directors. Mr. Holmes, Chairman and Chief Executive
Officer of the Company, currently owns 77.95% of the Company's Class C common
stock. He informs the Board of Directors as to the amount of his proposed
remuneration and that of the Company's other executive officers. Mr. Holmes
recognizes that Registrant is a small business and believes that an acceptable
base compensation should reflect an amount competitive with industry peers
taking into account the relative cost of living in San Antonio, Texas. The base
pay of the executives is relatively fixed, but the executive has the opportunity
to increase his/her compensation by (1) participating in team building programs
in order to enhance operational and fiscal efficiencies throughout the Company
with a percent of resulting savings flowing to the executive; and (2)
participating directly in retirement and savings programs whereby the Company
will contribute amounts relative to the executive's contribution.
The Company has utilized option grants under the 1985 Plan, the 1989 Plan, and
the 1997 Plan to induce qualified individuals to join the Company with a base
pay consistent with the foregoing--providing the individual with an opportunity
to benefit if there is significant Company growth. Similarly, options have been
utilized to reward existing employees for long and faithful service and to
encourage them to stay with the Company. Messrs. Rubinstein and Terracina
constitute the Stock Option Committee of the Board of Directors. This Committee
acts upon recommendations of the Chief Executive Officer, President and
Executive Vice President. Shares available for stock option grants under the
1989 Plan and the 1997 Plan aggregate to approximately 101,700 and 51,000
shares, respectively, on September 8, 1997. There were grants from the 1989 Plan
during the fiscal year to directors of the Company.
COMPANY PERFORMANCE PRESENTATION
The graph at right compares the cumulative total return for the Company's Class
A common stock to the cumulative total return for the S&P 500 Composite Index
and the S&P Financial Index for the Company's last five fiscal years. The graph
assumes an investment of $100 in the Class A common stock and in each index as
of June 30, 1992, and that all dividends were reinvested.
[GRAPHIC: LINEAR GRAPH PLOTTED FROM DATA IN TABLE BELOW]
US GLOBAL S&P S&P
INVESTORS INC. 500 FINANCIALS
-36.00% 116.87% 181.26%
-------------- ------- ----------
Jun 92 .................. 100.00 100.00 100.00
Jul 92 .................. 104.00 103.94 102.52
Aug 92 .................. 96.00 101.44 97.65
Sep 92 .................. 112.00 102.37 100.87
Oct 92 .................. 110.02 102.58 103.19
Nov 92 .................. 104.00 105.69 109.94
Dec 92 .................. 98.02 106.76 114.54
Jan 93 .................. 96.00 107.51 118.35
Feb 93 .................. 96.00 108.63 120.64
Mar 93 .................. 120.00 110.67 125.21
Apr 93 .................. 168.00 107.85 120.95
May 93 .................. 168.00 110.30 120.42
Jun 93 .................. 160.00 110.39 117.31
Jul 93 .................. 180.00 109.80 128.80
Aug 93 .................. 152.00 113.58 131.96
Sep 93 .................. 128.00 112.44 134.34
Oct 93 .................. 152.00 114.62 126.39
Nov 93 .................. 156.00 113.14 121.85
Dec 93 .................. 180.00 114.29 124.01
Jan 94 .................. 184.00 117.99 130.11
Feb 94 .................. 168.00 114.46 123.00
Mar 94 .................. 172.00 109.22 117.73
Apr 94 .................. 140.00 110.48 121.57
May 94 .................. 156.00 111.85 127.76
Jun 94 .................. 148.00 108.85 123.75
Jul 94 .................. 136.00 112.28 126.39
Aug 94 .................. 136.00 116.50 130.50
Sep 94 .................. 148.00 113.37 120.78
Oct 94 .................. 132.00 115.73 122.49
Nov 94 .................. 120.00 111.16 114.96
Dec 94 .................. 104.00 112.53 115.99
Jan 95 .................. 108.00 115.26 123.05
Feb 95 .................. 108.00 119.42 129.52
Mar 95 .................. 108.00 122.68 129.69
Apr 95 .................. 108.00 126.11 134.06
May 95 .................. 88.00 130.69 144.09
Jun 95 .................. 84.00 133.47 144.62
Jul 95 .................. 84.00 137.71 148.49
Aug 95 .................. 80.00 137.67 156.52
Sep 95 .................. 84.00 143.19 166.19
Oct 95 .................. 68.00 142.48 160.95
Nov 95 .................. 60.00 148.32 172.16
Dec 95 .................. 52.00 150.91 173.59
Jan 96 .................. 96.00 155.83 182.27
Feb 96 .................. 92.00 156.91 185.29
Mar 96 .................. 87.49 158.16 187.07
Apr 96 .................. 88.00 160.28 183.36
May 96 .................. 108.00 163.94 186.92
Jun 96 .................. 92.00 164.31 188.60
Jul 96 .................. 76.00 156.80 184.31
Aug 96 .................. 80.00 159.75 190.14
Sep 96 .................. 86.02 168.41 202.73
Oct 96 .................. 76.00 172.80 217.42
Nov 96 .................. 76.00 185.48 237.90
Dec 96 .................. 76.00 181.49 228.88
Jan 97 .................. 88.00 192.62 247.34
Feb 97 .................. 76.00 193.76 256.67
Mar 97 .................. 66.02 185.50 238.04
Apr 97 .................. 56.00 196.34 254.65
May 97 .................. 58.02 207.84 266.13
Jun 97 .................. 64.00 216.87 281.26
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
CLASS C COMMON STOCK (VOTING STOCK). At September 8, 1997, there were 496,860
shares of the Company's Class C common stock outstanding. The following table
sets forth, as of such date, information regarding the beneficial ownership of
the Company's Class C common stock by each person known by the Company to own 5%
or more of the outstanding shares of Class C common stock.
<PAGE>
Page 13
- --------------------------------------------------------------------------------
CLASS C PERCENT OF
NAME AND ADDRESS COMMON SHARES OUTSTANDING SHARES ISSUED
OF BENEFICIAL OWNER BENEFICIALLY OWNED SHARES OWNED OUTSTANDING
- ------------------------- ------------------ ------------ -------------
Frank E. Holmes 1,373,402(1) 387,280 77.95%
7900 Callaghan Road
San Antonio, TX 78229
Marleau, Lemire Inc. 72,720 72,720 14.64%
1 Place Ville Marie
Suite 3601
Montreal, Quebec H3B 3P2
- -------------------
(1) Includes 586,122 shares of Class C common stock underlying presently
exercisable Class C common stock warrants held by Mr. Holmes and F. E.
Holmes Organization Inc., a corporation wholly owned by Mr. Holmes; 102,280
shares of Class C common stock owned by F. E. Holmes Organization Inc.;
400,000 shares obtainable upon exercise of a Class C common stock option
issued to Mr. Holmes; and 285,000 shares owned directly by Mr. Holmes.
CLASS A COMMON STOCK (NON-VOTING STOCK). At September 8, 1997, there were
6,105,730 shares of the Company's Class A common stock issued and outstanding.
The following table sets forth, as of such date, information regarding the
beneficial ownership of the Company's Class A common stock by each person known
by the Company to own 5% or more of the outstanding shares of Class A common
stock.
CLASS A
NAME AND ADDRESS OF COMMON SHARES
BENEFICIAL OWNER BENEFICIALLY OWNED PERCENT OF CLASS
------------------------ ------------------ ----------------
Robertson Stephens & Co. 1,562,620(1) 25.590%
San Francisco, CA
Quest Management Co. 407,205(2) 6.670%
New York, NY
Frank E. Holmes 361,899(3) 5.572%
San Antonio, TX
Constable Partners, L.P. 670,000(4) 10.970%
Radnor, PA
Mason Hill Asset 409,000(5) 6.700%
Management, Inc.
New York, NY
- --------------------
(1) Information is from Schedule 13D, dated December 16,1996, filed with the
SEC, covering Robertson Stephens & Co., the Robertson Stephens Orphan Fund
and the Robertson Stephens Contrarian Fund.
(2) Charles M. Royce controls Quest Advisory Corp. Quest Advisory Corp. owns
407,205 shares, or 6.67% of the Company's Class A common stock. Combined,
Mr. Royce controls 9.73% of the Class A common stock outstanding.
Information is from Schedule 13G filed with the SEC on February 15, 1997.
(3) Detail of beneficial ownership set forth below under "Security Ownership of
Management."
(4) Information is from Schedule 13D, dated May 9, 1996, filed with the SEC.
(5) Mason Hill Asset Management, Inc. owns 250,500 shares or 4.02%. Equinox
Partners, LP owns 158,500 shares or 2.55%. Mason Hill Asset Management, Inc.
and Equinox Partners, L.P. may be deemed to be under the common control of
William W. Strong. Information is from Schedule 13D filed with the SEC on
March 26, 1996.
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth, as of September 8, 1997, information regarding
the beneficial ownership of the Company's Class A and Class C common stock by
each director and by all directors and officers as a group. Except as otherwise
indicated in the notes below each director owns directly the number of shares
indicated in the table and has the sole voting power and investment power with
respect to all such shares.
<PAGE>
Page 14
- --------------------------------------------------------------------------------
CLASS C -CLASS A
BENEFICIAL OWNER COMMON STOCK % COMMON STOCK(1) %
- --------------------------- ------------ ------ -------------- -----
Bobby D. Duncan 4,931 0.99% 20,652 0.33%
J. Stephen Penner 0 0.00% 10,000 0.16%
Frank E. Holmes 1,373,402(2) 92.61% 361,899(3) 5.57%
Jerold H. Rubinstein -- 0.00% 89,000 0.79%
Roy D. Terracina -- 0.00% 10,000 1.40%
All directors and
officers as a
group (15 persons 1,378,333 92.94% 659,377(4) 9.85%
--------- ----- ------- ----
- -------------------
(1) Includes shares of Class A common stock underlying presently exercisable
options held directly by each individual director as follows: Mr. Holmes -
201,000 shares; Mr. Rubinstein -50,000 shares; and Mr. Terracina - 51,000
shares.
(2) Includes 586,122 shares of Class C common stock underlying presently
exercisable Class C common stock warrants held by Mr. Holmes and F. E.
Holmes Organization Inc., a corporation wholly owned by Mr. Holmes; 400,000
shares underlying a presently exercisable option held by Mr. Holmes to
purchase Class C common stock; 102,280 shares of Class C common stock owned
by F. E. Holmes Organization Inc.; and 285,000 shares owned directly by Mr.
Holmes.
(3) Includes 60,899 shares and options to obtain 201,000 shares of class A
common stock as well as 100,000 shares of class A common stock held by F.E.
Holmes Organization, Inc. a corporation wholly owned by Mr. Holmes. Mr.
Holmes' 60,899 shares also include 1,300 shares of Class A common stock
owned separately by Mr. Holmes' wife. Mr. Holmes disclaims beneficial
ownership of these 1,300 shares of Class A common stock.
(4) Includes the shares underlying presently exercisable options held by the
directors and officers listed above and an additional 37,300 shares of Class
A common stock underlying presently exercisable options held by officers
other than those listed above.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
USGI is invested in several of the mutual funds it manages. There is
incorporated in this Item 13 by reference that portion of the U.S. Global
Investors, Inc. ("USGI," the "Company" or "Registrant") Annual Report to
Shareholders, attached to this Form 10-K as Exhibit 13, appearing under Note O
to the Consolidated Financial Statements.
<PAGE>
Page 15
- --------------------------------------------------------------------------------
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
1. FINANCIAL STATEMENTS
The Consolidated Financial Statements are incorporated herein by
reference to the Company's Annual Report to Shareholders as an exhibit
hereto (see Item 8):
Report of Independent Accountants
Consolidated Balance Sheets at June 30, 1997, and 1996
Consolidated Statements of Operation for the three years ended
June 30, 1997
Consolidated Statements for Cash Flows for the three years ended
June 30, 1997
Consolidated Statements of Shareholders' Equity for the three
years ended June 30, 1997
Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULES
None
3. EXHIBITS
3.1 Third Restated and Amended Articles of Incorporation of Registrant,
incorporated by reference in the Registrant's Form 10-K for the fiscal
year ended June 30, 1996 (EDGAR Accession Number 0000754811-96-
000025).
3.2 By-Laws of Registrant, incorporated by reference to Exhibit D to the
Registrant's Registration Statement No. 33-33012 filed on Form S-8
with the Commission on January 30, 1990.
3.3 Amendment to Article II, Section 2 of the By-Laws, incorporated by
reference to Exhibit 3(e) to the Registrant's Form 10-K for the fiscal
year ended June 30, 1991.
3.4 Amendment to By-Laws of Registrant, incorporated by reference to
Exhibit 3(h) to the Registrant's Registration Statement No. 33-90518
filed on Form S-3 on March 16, 1995.
3.5 Amendment to By-Laws, incorporated by reference in the Registrant's
Form 10-K for the fiscal year ended June 30, 1996 (EDGAR Accession No.
754811-96-000025).
10.1 Advisory Agreement dated October 27, 1989, by and between Registrant
and United Services Funds ("USF"), incorporated by reference to
Exhibit (4)(b) to the Registrant's Form 10-K for fiscal year ended
June 30, 1990.
10.2 Advisory Agreement dated September 21, 1994, by and between Registrant
and Accolade Funds, incorporated by reference to Exhibit 10.2 to
Registrant's Form 10-K for fiscal year ended June 30, 1995 (EDGAR
Accession Number 0000754811-95-000002).
10.3 Sub-Advisory Agreement dated September 21, 1994, by and between
Registrant and Accolade Funds/Bonnel Growth Fund and Bonnel, Inc.,
incorporated by reference to Exhibit 10.3 to Registrant's Form 10-K
for fiscal year ended June 30, 1995 (EDGAR Accession Number
0000754811-95-000002).
10.4 Transfer Agency Agreement dated September 21, 1994, by and between
United Shareholder Services, Inc. ("USSI") and Accolade Funds/Bonnel
Growth Fund, incorporated by reference to Exhibit 10.4 to Registrant's
Form 10-K for fiscal year ended June 30, 1995 (EDGAR Accession Number
0000754811-95-000002).
10.5 Transfer Agent Agreement by and between USSI and USF, incorporated by
reference to Exhibit 10(b) to the Registrant's Form 10-K for the
fiscal year ended June 30, 1989.
<PAGE>
Page 16
- --------------------------------------------------------------------------------
10.6 Loan Agreement between Registrant and Bank One, dated April 12, 1994,
and Modification Agreement, dated February 28, 1995, for $1,385,000
for refinancing new building, incorporated by reference to Exhibit
10.8 to Registrant's Form 10-K for fiscal year ended June 30, 1995
(EDGAR Accession Number 0000754811-95- 000002).
10.7 United Services Advisors, Inc. 1985 Incentive Stock Option Plan as
amended November 1989 and December 1991, incorporated by reference to
Exhibit 4(b) of the Registrant's Registration Statement No. 33-3012,
Post- Effective Amendment No. 2, filed on Form S-8 with the Commission
on April 23, 1997 (EDGAR Accession No.754811-97-000004).
10.8 United Services Advisors, Inc. 1989 Non-Qualified Stock Option Plan,
incorporated by reference to Exhibit 4(a) to the Registrant's
Registration Statement No. 33-3012, Post-Effective Amendment No. 2,
filed on Form S-8 with the Commission on April 23, 1997 (EDGAR
Accession No. 754811-97-000004).
10.9 U.S. Global Investors, Inc. 1997 Non-Qualified Stock Option Plan,
incorporated by reference to Exhibit 4 to the Registrant's
Registration Statement No. 333-25699 filed on Form S-8 with the
Commission on April 23, 1997 (EDGAR Accession No. 7548111-97-000003).
10.10 Bookkeeping and Accounting Agreement by and between USSI and USF,
dated February 1, 1992, incorporated by reference to Exhibit E 1 to
the Registrant's Form 10-Q dated December 31, 1991.
10.11 Bookkeeping and Accounting Agreement by and between USSI and Accolade
Funds, dated September 21, 1994, incorporated by reference to Exhibit
10.21 to Registrant's Form 10-K for fiscal year ended June 30, 1995
(EDGAR Accession Number 0000754811-95-000002).
11 Statement re: Computation of Per Share Earnings, filed herein.
13 Annual Report to Shareholders, filed herein.
21 List of Subsidiaries of the Registrant, filed herein.
23.1 Consent of Independent Accountant, Price Waterhouse LLP, filed herein.
23.2 Consent of Independent Accountant, Coopers & Lybrand, filed herein.
27 Financial Data Schedule, filed herein.
(b) Reports on Form 8-K
No Form 8-K was filed during the last quarter of the period covered by this
report.
<PAGE>
Page 17
- --------------------------------------------------------------------------------
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
U.S. GLOBAL INVESTORS, INC.
BY: /S/ David J. Clark
--------------------------
DAVID J. CLARK
Date: September 18, 1997 CHIEF FINANCIAL OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
SIGNATURE CAPACITY IN WHICH SIGNED DATE
- ------------------------ ------------------------ ------------------
/s/ Jerold H. Rubinstein Director September 18, 1997
- ------------------------
JEROLD H. RUBINSTEIN
/s/ Roy D. Terracina Director September 18, 1997
- ------------------------
ROY D. TERRACINA
/s/ Frank E. Holmes Chairman of the Board September 18, 1997
- ------------------------ of Directors
FRANK E. HOLMES Chief Executive Officer
/s/ Bobby D. Duncan Director September 18, 1997
- ------------------------
BOBBY D. DUNCAN
/s/ J. Stephen Penner Director September 18, 1997
- ------------------------
J. STEPHEN PENNER
/s/ Thomas F. Lydon, Jr. Director September 18, 1997
- ------------------------
THOMAS F. LYDON, JR.
/s/ David J. Clark Chief Financial Officer September 18, 1997
- ------------------------
DAVID J. CLARK
/s/ J. Michael Edwards Chief Accounting Officer September 18, 1997
- ------------------------
J. MICHAEL EDWARDS
Page 18
- --------------------------------------------------------------------------------
EXHIBIT 11--SCHEDULE OF COMPUTATION OF NET EARNINGS PER SHARE
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------------------------
1997 1996 1995
---------- ---------- -----------
<S> <C> <C> <C>
Earnings (loss) before cumulative effect
of change in accounting $ 284,149 $1,987,067 $(3,890,718)
Cumulative effect of change in accounting -- -- 43,284
---------- ---------- -----------
Net earnings $ 284,149 $1,987,067 $(3,847,434)
========== ========== ===========
PRIMARY
Weighted average number shares outstanding
during the year 6,606,211 6,562,830 6,013,393
Add:
Common stock equivalent shares (determined
using the "treasury stock" method)
representing shares issuable upon exercise
of common stock warrants -- -- --
Common stock equivalent shares (determined
using the "treasury stock" method)
representing shares issuable upon exercise
of common stock options 58,113 38,244 --
---------- ---------- -----------
Weighted average number of shares used in
calculation of primary earnings per share 6,664,324 6,601,074 6,013,393
========== ========== ===========
Primary earnings (loss) per share
Net earnings before cumulative effect
of change in accounting $ 0.04 $ 0.30 $ (0.65)
Cumulative effect of change in accounting -- -- 0.01
---------- ---------- -----------
Net Earnings Per Share $ 0.04 $ 0.30 $ (0.64)
========== ========== ===========
FULLY DILUTED
Weighted average number of shares outstanding
during the year 6,606,211 6,562,830 6,013,393
Add:
Common stock equivalent shares (determined
using the "treasury stock" method)
representing shares issuable upon exercise
of common stock warrants -- -- --
Common stock equivalent shares (determined
using the "treasury stock" method)
representing shares issuable upon exercise
of common stock options 58,113 38,244 --
---------- ---------- -----------
Weighted average number of shares used
in calculation of fully diluted earnings
per share 6,664,324 6,601,074 6,013,393
========== ========== ===========
Fully diluted earnings (loss) per share
Net earnings before cumulative effect
Of change in accounting $ 0.04 $ 0.30 $ (0.65)
Cumulative effect of change in accounting -- -- 0.01
---------- ---------- -----------
Net Earnings Per Share $ 0.04 $ 0.30 $ (0.64)
========== ========== ===========
</TABLE>
Page 19
- --------------------------------------------------------------------------------
EXHIBIT 13--ANNUAL REPORT
TABLE OF CONTENTS
FOR FIELD POSITIONS
THE COMPANY
Investment Management Services......................................... 2
Transfer Agent And Other Services...................................... 4
Mailing Services....................................................... 5
Trust Company Services................................................. 5
Employees.............................................................. 5
Competition............................................................ 5
Supervision And Regulation............................................. 6
Relationships With The Funds........................................... 6
ANNUAL STATUS REPORT
Diversification Strategy............................................... 7
Results Of Operations.................................................. 7
Government Securities.................................................. 8
Investment Activities.................................................. 9
Operating Revenues..................................................... 9
Expenses...............................................................10
Liquidity And Capital Resources........................................10
Liquidity..........................................................10
Tax Loss Carryforwards.............................................11
Settlement Pool....................................................11
Decision To Outsource..............................................11
SELECTED FINANCIAL DATA.....................................................12
FINANCIAL STATEMENTS
Report Of Independent Accountants......................................13
Auditors' Report To The Members Of U.S. Global
Investors (Guernsey) Limited [Formerly U.S.
Advisors (Guernsey) Limited].........................................14
Auditors' Report To The Shareholders Of U.S.
Global Strategies Fund Limited.......................................15
Consolidated Balance Sheets............................................16
Consolidated Statements Of Operations..................................19
Consolidated Statements Of Cash Flow...................................22
Consolidated Statements of Shareholder's Equity .......................23
Notes To Consolidated Financial Statements.............................24
<PAGE>
Page 20
- --------------------------------------------------------------------------------
THE COMPANY
U.S. Global Investors, Inc., a Texas corporation organized in 1968 (the
"Company" or "USGI"), and its wholly owned subsidiaries are in the mutual fund
management business. The Company provides: (1) investment advisory services to
institutions (namely, mutual funds) and other persons; (2) transfer agency and
record keeping services; (3) mailing services; and, (4) through its wholly owned
trust company, custodial and administrative services for IRAs and other types of
retirement plans. The provision of investment advisory, transfer agent,
administrative and custodial services and investment income are the primary
sources of the Company's revenue. (See Consolidated Statements of Operations
included in this Annual Report.)
The Company is a registered investment adviser under the Investment Advisers Act
of 1940 and is principally engaged in the business of providing investment
advisory and other services to U.S. Global Investors Funds ("USGIF") and U.S.
Global Accolade Funds ("USGAF"), both Massachusetts business trusts
(collectively, the "Trusts" or "Funds"). USGIF and USGAF are investment
companies offering shares of eleven and four mutual funds, respectively, on a
no-load basis.
The Company organized U.S. Global Investors (Guernsey) Limited ("USGG")
(formerly U.S. Advisors (Guernsey) Ltd.) in August 1993 for the purpose of
acting as investment adviser for investment companies whose shares are offered
to non-U.S. citizens. USGG has delegated its administrative duties to
Butterfield Fund Managers (Guernsey) Limited and its investment advisory duties
to USGI.
The Company's one-third interest in United Services Advisors, Canada, Inc.
("USACI"), which was formed in July of 1994 to offer mutual funds in Canada, was
sold in June 1997 to the USACI management group which now controls 100% of
USACI. The Company will provide investment advisory services to USACI.
In addition to providing mutual fund management services to its clients, the
Company utilizes a diversified venture capital approach in trading for its own
account in an effort to add growth value to its cash position. Typical
investments include, among other things, 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 recapitalizations. In
addition, the Company may utilize investment techniques such as "private
placement arbitrage," which technique 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. The activities are reviewed by Company compliance personnel and reported
to investment advisory clients.
INVESTMENT MANAGEMENT SERVICES
The mutual funds are managed by the Company pursuant to advisory agreements (the
"Advisory Agreements").
The Company furnishes an investment program for each of the mutual funds it
manages and determines, subject to the overall supervision by the Board of
Trustees of the funds, the funds' investments. Consistent with the investment
restrictions, objectives and policies of the particular fund, the portfolio
manager for each fund determines what investments should be purchased, sold and
held, and makes changes in the portfolio deemed to be necessary or appropriate.
In the Advisory Agreements the Company is charged with seeking the best overall
terms in executing portfolio transactions and selecting brokers or dealers.
The Company also manages, supervises and conducts certain other affairs of the
funds, subject to the control of the Boards of Trustees. The Company provides
office space, facilities and certain business equipment and also provides the
services of executive, clerical and accounting personnel for administering the
affairs of the mutual funds. The Company and its affiliates compensate all
personnel, officers, directors and interested Trustees of the funds if such
persons are also employees of the Company or its affiliates. However, the funds
are required to reimburse the Company for a portion of the compensation of the
Company's employees who perform certain state and federal securities law
regulatory compliance work on behalf of the funds based upon the time spent on
such matters. The Company is responsible for costs associated with marketing
fund shares.
As required by the Investment Company Act of 1940, the Advisory Agreements are
subject to annual renewal and are terminable upon 60 days' notice. The Board of
Trustees of USGIF and of USGAF will consider renewal of the applicable agreement
in October 1997 and March 1998, respectively. Management anticipates that the
Advisory Agreements will be renewed.
<PAGE>
Page 21
- --------------------------------------------------------------------------------
Investment company net assets under management (in thousands) at fiscal year end
for the past five years were:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
USGIF Money Markets $ 923,704 $ 777,252 $ 719,745 $ 774,937 $ 588,306
USGIF Gold Related 297,267 427,155 414,096 488,266 433,552
USGIF Other 116,791 84,245 87,179 99,941 82,421
---------- ---------- ---------- ---------- ----------
USGIF Total 1,337,762 1,288,652 1,221,020 1,363,144 1,104,279
USGAF Total 127,851 86,302 13,842 -- --
---------- ---------- ---------- ---------- ----------
Total Assets Under Management $1,465,613 $1,374,954 $1,234,862 $1,363,144 $1,104,279
========== ========== ========== ========== ==========
</TABLE>
Under the Advisory Agreements, the Company receives an advisory fee for each
mutual fund computed and accrued daily based upon the net assets represented by
the particular fund on that day. The fees range from 0.375% to 1.25% of average
net assets and are paid monthly.
As is set forth in detail in Note D to the Consolidated Financial Statements
included in this Annual Report, the Company has agreed to waive its fee revenues
and/or pay expenses for certain USGIF funds for purposes of enhancing the funds'
competitive market positions.
Investment advisory and administration fees (net of expenses paid by the Company
or voluntary waivers) for the past three fiscal years were approximately:
1997 1996 1995
---------- ---------- ----------
USGIF Money Market $ 826,000 $ 835,000 $ 895,000
USGIF Gold Related 3,835,000 4,185,000 4,089,000
USGIF Other 656,000 475,000 485,000
---------- ---------- ----------
USGIF Total 5,317,000 5,495,000 5,469,000
USGAF Total 1,072,000 409,000 13,000
---------- ---------- ----------
Total $6,389,000 $5,904,000 $5,482,000
========== ========== ==========
TRANSFER AGENT AND OTHER SERVICES
The Company's wholly-owned subsidiary, United Shareholder Services, Inc.
("USSI"), is a transfer agent registered under the Securities Exchange Act of
1934, and provides transfer agency, bookkeeping, accounting, lockbox and
printing services to investment company clients. The transfer agency utilizes a
coordinated internal system connecting the Company's fund shareholder
communication network with computer equipment and software designed to meet the
operating requirements of a mutual fund transfer agency.
The transfer agency's duties encompass: (1) acting as servicing agent in
connection with dividend and distribution functions; (2) performing shareholder
account and administrative agent functions in connection with the issuance,
transfer and redemption or repurchase of shares; (3) maintaining such records as
are necessary to document transactions in the funds' shares; (4) acting as
servicing agent in connection with mailing of shareholder communications,
including reports to shareholders, dividend and distribution notices, and proxy
materials for shareholder meetings; and (5) investigating and answering all
shareholder account inquiries.
The transfer agency agreements provide that USSI will receive, as compensation
for services rendered as transfer agent, an annual fee per account, except for
money market accounts with monthly zero balances, and will be reimbursed
<PAGE>
Page 22
- --------------------------------------------------------------------------------
out-of-pocket expenses. In connection with obtaining/providing administrative
services to the beneficial owners of fund shares through institutions which
provide such services and maintain an omnibus account with USSI, each fund pays
a monthly fee based on the number of accounts and the value of the shares of the
fund held in accounts at the institution which payment shall not exceed the per
account charge on an annual basis.
The number of shareholder accounts at fiscal year end for the past five years
are:
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
USGIF Money Markets 35,577 35,019 34,998 32,769 27,493
USGIF Gold Related 63,664 68,688 77,120 82,156 82,350
USGIF Other 12,803 11,695 12,637 14,445 12,189
------- ------- ------- ------- -------
USGIF Total 112,044 115,402 124,755 129,370 122,032
USGAF Total 8,856 5,075 1,444 -- --
------- ------- ------- ------- -------
TOTAL 120,900 120,477 126,199 129,370 122,032
======= ======= ======= ======= =======
Shareholder Accounts at
Schwab, Fidelity and
Jack White 14,841 13,534 9,543 9,921 Unavailable
For the three fiscal years ended June 30, 1997, 1996, and 1995, total transfer
agency fees (net of waivers) were approximately $3.3 million, $3.3 million, and
$3.2 million, respectively.
The transfer agency agreements with USGIF and USGAF are subject to renewal on an
annual basis and are terminable upon 60 days notice. The agreements will be
considered by the Boards of Trustees of USGIF and of USGAF for renewal during
October 1997 and March 1998, respectively, and management anticipates that the
agreements will be renewed.
USSI also maintains the books and records of each trust and of each fund of each
trust, including calculations of the daily net asset value per share. The
services are currently provided for an asset based fee on a tiered level of
average net assets --subject to an annual minimum fee of at least $24,000. As
discussed in the Annual Status Report portion of this annual report, management
has concluded that it is in the best interest of the Company to terminate the
provision of these services and taken steps to effect such decision. The
agreements may be terminated by either party without penalty by giving 60-day
written notice. For the three years ended June 30, 1997, 1996, and 1995
bookkeeping and accounting fees net of waivers were approximately $731,000,
$524,000, and $421,000, respectively.
MAILING SERVICES
A&B Mailers, Inc., a wholly-owned subsidiary of the Company, provides mail
handling services to various persons. A&B Mailers' primary customers include the
Company in connection with its efforts to promote the funds and the Company's
investment company clients in connection with required mailings. Each service is
priced separately. For the three years ended June 30, 1997, 1996, and 1995, A&B
Mailers' revenues, after intercompany eliminating entries, were approximately
$282,000, $231,000, and $170,000 respectively.
TRUST COMPANY SERVICES
Security Trust and Financial Company ("STFC"), a wholly-owned state chartered
trust company provides custodial and tax reporting services for IRA and other
retirement plans funded with shares issued by the funds advised and administered
by the Company. STFC also actively markets 401(k) and other retirement plans.
The custodial fees are generally paid to STFC at year-end upon separate invoice
to the customer, not the fund. For the three years ended June 30, 1997, 1996,
and 1995 custodial fee revenues were approximately $530,000, $545,000, and
$503,000, respectively.
<PAGE>
Page 23
- --------------------------------------------------------------------------------
EMPLOYEES
As of June 30, 1997, the Company and its subsidiaries employed 91 full-time
employees and 8 part-time employees; and as of June 30, 1996, it employed 99
full-time employees and 8 part-time employees. The Company considers its
relationship with its employees to be excellent. Because of the outsourcing
discussed in the Annual Status Report, a portion of the employees providing
those services will be terminated.
COMPETITION
The mutual fund industry is highly competitive. As of June 30, 1997, there were
over 8,000 registered open-end management investment companies of varying sizes
and investment policies whose shares were being offered to the public.
Generally, there are two types of mutual funds: "load" and "no-load." In
addition there are both no-load and load funds which have "12b-1" plans
authorizing the payment of distribution costs of the funds out of fund assets,
such as USGAF. Load funds are typically sold through or sponsored by brokerage
firms, and a sales commission is charged on the amount of the investment.
No-load funds, such as USGIF's and USGAF's, however, may be purchased directly
from the particular mutual fund organization and thus no sales commission is
charged.
In addition to competition from other mutual fund managers and investment
advisers, the Company and the mutual fund industry are in competition with
various investment alternatives offered by insurance companies, banks,
securities dealers and other financial institutions. Many of these institutions
are able to engage in more liberal advertising than mutual funds and may offer
accounts at competitive interest rates, which are insured by federally chartered
corporations such as the Federal Deposit Insurance Corporation. Recent
regulatory pronouncements related to the Glass-Steagall Act, the statute that
has prohibited banks from engaging in various securities activities, are
enabling banks to compete with the Company in a variety of areas.
A number of mutual fund groups are significantly larger than the funds managed
by the Company, offer a greater variety of investment objectives and have more
experience and greater resources to promote the sale of investments therein.
However, the Company believes it has the resources, products and personnel to
compete with these other mutual funds. Competition for sales of fund shares is
influenced by various factors, including investment objectives and performance,
advertising and sales promotional efforts, distribution channels and the types
and quality of services offered to fund shareholders.
Success in the investment advisory and mutual fund share distribution businesses
is substantially dependent on the funds' investment performance, the quality of
services provided to shareholders and the Company's efforts to effectively
market the performance. In other words, good performance combined with a strong
public relations program heightens investor awareness, stimulates sales of the
funds' shares and tends to keep redemptions low. Sales of funds' shares generate
management fees (which are based on assets of the funds) and transfer agent fees
(which are based on the number of fund accounts). Good performance also attracts
private institutional accounts to the Company. Conversely, relatively poor
performance results in decreased sales and increased redemptions of the funds'
shares and the loss of private accounts, with corresponding decreases in
revenues to the Company.
SUPERVISION AND REGULATION
The Company, USSI, and the investment companies it manages and administers
operate under certain laws, including federal and state securities laws,
governing their organization, registration, operation, legal, financial and tax
status. STFC operates under certain laws, including Texas banking laws,
governing its organization, registration, operation, legal, financial and tax
status. Among the penalties for violation of the laws and regulations applicable
to the Company and its subsidiaries are fines, imprisonment, injunctions,
revocation of registration and certain additional administrative sanctions. A
determination that the Company or its management had violated applicable laws
and regulations could have a material adverse effect on the business of the
Company. Moreover, there is no assurance that changes to existing laws,
regulations or rulings promulgated by governmental entities having jurisdiction
over the Company and the funds will not have a material adverse effect on the
business of the Company.
The Company is a registered investment adviser subject to regulation by the U.S.
Securities and Exchange Commission ("SEC") pursuant to the Investment Advisers
Act of 1940, the Investment Company Act of 1940 and the Securities Exchange Act
of 1934 (the "1934 Act"). USSI is also subject to regulation by the SEC under
the 1934 Act. The Company and USSI
<PAGE>
Page 24
- --------------------------------------------------------------------------------
are required to keep and maintain certain reports and records which must be made
available to the SEC upon request. Moreover, the funds managed by the Company
are subject to regulation and periodic reporting under the Investment Company
Act of 1940 and, with respect to their continuous public offering of shares, the
registration provisions of the Securities Act of 1933.
RELATIONSHIPS WITH THE FUNDS
The businesses of the Company are to a very significant degree dependent upon
their associations and contractual relationships with the Trusts. In the event
the advisory or transfer agent services agreements with USGIF or USGAF were
canceled or not renewed pursuant to the terms thereof, the Company would be
substantially adversely affected. The Company, USSI and STFC consider their
relationships with the Trusts to be good and they have no reason to believe that
their management and service contracts will not be renewed in the future;
however, there is no assurance that the Trusts will choose to continue its
relationships with the Company, USSI, and STFC.
<PAGE>
Page 25
- --------------------------------------------------------------------------------
ANNUAL STATUS REPORT
DIVERSIFICATION STRATEGY
A key objective of management since fiscal 1990 has been to diversify the
Company's core asset base toward a more balanced product offering. As a result,
non gold-related assets have increased as a percentage of average net assets
under management from 34% in fiscal 1990 to 71% in fiscal 1997. The graph
illustrates this positive trend.
While this strategy has required the use of significant resources, thus
impacting short-term earnings, management is pleased that it has provided a
foundation for the Company's long-term earnings prospects. For example,
notwithstanding the highly volatile and uncertain gold market, including the
fact that gold hit an 11-year low of $314.60 an ounce in July 1997, investment
advisory fees have increased 60% since fiscal 1990.
[GRAPHIC: LINEAR GRAPH PLOTTED FROM DATA IN TABLE BELOW]
<TABLE>
<CAPTION>
1990 1991 1992 1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Average Net Assets
Under Management 659873000 606857000 623244000 782363000 1285067000 1326203000 1345332000 1452020000
Gold-Related 436255000 363954000 331452000 263344000 479206000 482034000 481364000 425292000
Non-Gold Related 223618000 242903000 291792000 519019000 805861000 844169000 947799000 1026728000
</TABLE>
RESULTS OF OPERATIONS
During the fiscal year ended June 30, 1997, the Company posted net after tax
earnings of $0.04 per share. Its core business generated the revenue necessary
to meet ongoing expenses and obligations associated with increasing its mutual
fund operations and to meet the expenses associated with the significant events
that occurred during fiscal 1995. Management believes the Company's financial
condition is stable and the Company is positioned to take advantage of
opportunities for future growth. The discussion below provides detail of the
Company's results of operations and its liquidity and capital resources.
A snapshot of the Company's operations is outlined in the following table, which
sets forth for the periods indicated, the increase (decrease) by item from the
previous period and key revenue expense items as percentages of total revenues.
"General and Administrative" expenses are detailed for comparative purposes.
Expenses associated with "Government Securities," which are discussed in detail
below, are combined.
Period-to-Period | Percentage of
Change | Total Revenues
---------------- | ----------------------
1997 1996 | Years Ended June 30,
Compared Compared | ----------------------
to 1996 to 1995 | 1997 1996 1995
----- ----- | ---- ---- -----
Revenues: |
Investment Advisory Fee 12.7% 7.7% | 47.7% 29.4% 34.9%
Transfer Agent Fee 0.9% 3.8% | 23.8% 16.4% 20.2%
Accounting Fee 39.6% 24.3% | 5.2% 2.6% 2.7%
Exchange Fee -12.2% 4.6% | 1.8% 1.4% 1.7%
Custodial Fee -2.8% 8.3% | 3.8% 2.7% 3.2%
Investment Income -67.1% 1075.9% | 7.4% 15.6% 1.7%
Gains on Changes of |
Interest in Affiliate -98.1% 100% | 0.1% 2.8% 0.0%
Government Security Income -80.8% 3.9% | 7.6% 27.5% 33.9%
Other 0.8% 39.8% | 2.6% 1.6% 1.7%
----- ----- | ---- ---- -----
|
Total Revenues -30.7% 28.2% | 100% 100% 100%
----- ----- | ---- ---- -----
|
Expenses: |
Salaries, Wages & Benefits 15.0% 5.3% | 41.2% 24.8% 30.2%
<PAGE>
Page 26
- --------------------------------------------------------------------------------
Period-to-Period | Percentage of
Change | Total Revenues
---------------- | ----------------------
1997 1996 | Years Ended June 30,
Compared Compared | ----------------------
to 1996 to 1995 | 1997 1996 1995
----- ----- | ---- ---- ----
Fund Expenses -69.1% -0.2% | 1.5% 3.3% 4.2%
Marketing & Distribution 21.4% 3.7% | 13.1% 7.5% 9.2%
Other General & Administrative 15.0% 32.3% | 27.3% 16.5% 16.0%
Interest & Finance 3.9% -52.4% | 0.9% 0.6% 1.7%
Depreciation & Amortization 13.2% -20.8% | 3.4% 2.1% 3.4%
Reduction in Carrying Value |
of Investment in JV -100.0% 100.0% | 0.0% 3.1% 0.0%
Government Security Expenses -80.6% -51.4% | 7.7% 27.5% 72.7%
----- ----- | ---- ---- -----
Total Expenses -22.8% -20.3% | 95.1% 85.4% 137.4%
----- ----- | ---- ---- -----
NET INCOME
U.S. Global's net income has had dramatic fluctuations over the past three
years. The Company posted net after tax earnings of $.28 million ($0.04 per
share) for fiscal 1997, $1.98 million ($0.30 per share) for fiscal 1996, and a
net after tax loss of $3.85 million ($0.64 per share) for fiscal 1995. The
short-term fluctuations are a result of the Company's purchase of certain U.S.
Government securities during fiscal 1995, as well as other factors that are more
fully discussed below.
Total consolidated revenues for fiscal 1997 decreased approximately 31% over
fiscal 1996, primarily due to a 67% decrease in investment income and an 81%
decrease in interest income and accretion on the U.S. Government securities.
Total consolidated revenues for fiscal 1996 increased approximately 28% over
fiscal 1995, primarily due to investment income and gains on changes of interest
in an affiliate.
GOVERNMENT SECURITIES
Fiscal 1995 was a year of tremendous challenges that required a significant
commitment of management's time and Company resources in order to overcome the
effects of unusual and unexpected rising interest rates and regulatory
pronouncements, the consequences of which had a direct bearing on USGIF's
largest fund, the U.S. Government Securities Savings Fund ("USG"). As part of
U.S. Global's response to this rise and these pronouncements issued to money
market funds in general, during fiscal 1995, U.S. Global arranged for the
purchase and/or purchased directly approximately $130.5 million par value
adjustable rate U.S. Government agency notes ("Notes") from USG. These Notes
were confused with high risk securities like options, futures, structured notes,
exotic floaters, or CMOs, which contain a multiplicity of complex and
undeterminable risks, including extension, prepayment, and coupon cap risks.
U.S. Global acquired the Notes from its top performing money market fund in
order to calm any derivative-induced fears and to maintain the confidence of our
shareholders by assuring a stable one dollar per share net asset value.
The purchases have had a dramatic impact on the Company's financial statements.
"Government Security Income" (interest and accretion) represented 8%, 28%, and
34% of total revenue during fiscal 1997, 1996, and 1995, respectively. Related
expenses (including the fiscal 1995 non-cash charges of approximately $5.4
million) represented 8%, 28%, and 73% of total revenues for fiscal 1997, 1996,
and 1995, respectively.
The Company purchased the Notes at USG's amortized cost of over $130 million,
but recorded the Notes at their fair value, approximately $125 million. As a
consequence, the Company recorded a pretax non-cash charge to the results of
operations of approximately $5.4 million during fiscal 1995. The Company also
recognized approximately $.3 million, $1.4 million and $1.5 million in non-cash
income during fiscal 1997, 1996, and 1995, respectively, due to accretion of the
discount.
U.S. Global financed the original acquisition of the Notes as follows: 1)
approximately $120.9 million was provided by third party broker-dealers under
reverse repurchase agreements; 2) U.S. Global issued a $6 million 8%
subordinated debenture to Marleau, Lemire Inc. ("ML"), the terms of which
required principal payments as the Notes matured and quarterly interest
payments; and 3) U.S. Global used approximately $3.6 million of its own cash.
During fiscal 1997, the balance of the Notes matured and the subordinated
debenture was paid in full. The issues involved with the purchase and sale of
the Notes no longer demand management's attention and, except for the debt
associated with the purchase of U.S. Global's corporate headquarters, the
Company is now essentially debt free.
<PAGE>
Page 27
- --------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Management has been aggressively and effectively managing the Company's cash
position by using a diversified venture capital approach to investing. As shown
in the table, investment income constituted 7%, 16%, and 2%, respectively, of
U.S. Global's revenue in fiscal 1997, 1996, and 1995. This source of revenues is
dependent on market fluctuations, the Company's ability to participate in
investment opportunities, and timing of transactions. As shown by the table, it
does not provide a consistent level of revenue.
The fiscal 1997 decrease resulted primarily from the fact that the Company
recognized $1.9 million less in realized gains on the sale of investments during
the year. The fiscal 1996 increase was due to the Company recognizing $2.8
million more in realized gains on the sale of investments during the year. Also,
fiscal 1996 unrealized holding gains from trading securities increased by
approximately $335,000. Included in fiscal 1996 revenue was approximately
$556,000 reflecting the accounting treatment for changes of interest in an
affiliated company (namely, unrealized gains of the offshore fund sponsored by
the Company). Revenues from changes of interest in an affiliated company during
1997 approximated $10,000. The Company expects such revenues will continue to
fluctuate in the future as changes in ownership of the affiliate occur; the
magnitude of such amounts will be affected by fluctuations in the market value
of the affiliate's investments.
As of June 30, 1997, 1996, and 1995, the Company held approximately $1.9
million, $3.9 million, and $3.9 million, respectively, in securities
(restricted, trading and available-for-sale categories) other than the Notes and
USGIF money market mutual fund shares. In addition to market factors, the amount
invested in such securities decreased during fiscal 1997 when they were sold and
proceeds were utilized to retire debt associated with holding the Government
securities. The Company's investment activities are reviewed by Company
compliance personnel and reported to investment advisory clients.
OPERATING REVENUES
The Company's principal business is managing, creating and marketing mutual
funds and providing management and other services to such institutions. Its
primary sources of revenues from operations are investment advisory fees and
transfer agency fees. The Company's investment advisory fee revenue is based on
a percentage of average net assets under management; and the transfer agency fee
revenue is based on the number of shareholder accounts being serviced.
Therefore, fluctuations in financial markets impact revenues and results of
operations.
Assets under management for USGIF for the fiscal years ended June 30, 1997,
1996, and 1995 have averaged $1.33 billion, $1.30 billion, and $1.32 billion,
respectively. Additionally, assets under management for the U.S. Global Accolade
Funds ("USGAF"), which commenced operations in October 1994, averaged $122
million, $48 million, and $5.6 million for those fiscal years, respectively. As
a result, in fiscal 1997 investment advisory fee revenue increased approximately
13% over fiscal 1996, and fiscal 1996 investment advisory fees increased
approximately 8% over fiscal 1995.
Shareholder accounts serviced, on the other hand, peaked in fiscal 1994.
Accounts serviced for fiscal years ended June 30, 1997, 1996, and 1995, were
120,901, 120,477, and 126,199, respectively. Management believes that, to some
extent, this change may be attributed to investors shifting from direct
investment in the funds to omnibus accounts through mutual fund trading
facilities offered by broker-dealers such as Schwab, Fidelity and Jack White.
Notwithstanding such, as is reflected in the table, transfer agent fee revenue
increased year over year.
EXPENSES
Total consolidated expenses for fiscal 1997 decreased approximately 23% over
fiscal 1996. This decrease was the direct result of: 1) approximately $4.2
million less in interest expense relating to the Notes, and 2) $260,610 less in
interest expense related to the subordinated debenture. Total consolidated
expenses for fiscal 1996 decreased approximately 20% over fiscal 1995. This
decrease was the direct result of: 1) a non-recurring non-cash charge of
approximately $5.4 million relating to the purchase of the Notes during 1995; 2)
lower interest expense of approximately $414,000 on securities sold under
agreement to repurchase with broker-dealers; and 3) lower interest expense of
approximately $100,000 related to the subordinated debenture.
<PAGE>
Page 28
- --------------------------------------------------------------------------------
Exclusive of the expenses attributable to the purchase and financing of the
Notes and exclusive of the reduction of the carrying value of investment in
joint venture, expenses of the Company increased approximately 11% in fiscal
1997 over fiscal 1996 and increased almost 14% in fiscal 1996 over fiscal 1995.
As shown on the table, excluding expenses associated with the Notes, "salaries,
wages and benefits" are the largest component of Company expenses. In fiscal
1997, salaries, wages and benefits increased 15% over 1996, and in fiscal 1996
this expense item increased over 5% from fiscal 1995. The increases relate
primarily to the Company's need to pay market-driven salaries to retain
qualified employees and to provide incentive compensation and savings plans to
reward employee contributions. It is anticipated that salaries, wages and
benefits should remain stable at fiscal 1997 levels.
Marketing and distribution expenses represented approximately 13%, 8%, and 9% of
total revenues during fiscal 1997, 1996, and 1995, respectively. It is
anticipated that 1998 marketing and distribution expenditures will approximate
fiscal 1997 levels.
As shown in the table, 1997 fund expenses, net of fee waivers, decreased 69%
compared to 1996. In this regard, the Company has agreed to waive a portion of
its fee revenues and/or pay for expenses of certain mutual funds for purposes of
enhancing the funds' competitive market position. Should assets of these funds
increase, fund expenses borne by the Company would increase, but only 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.
The 1996 reduction in carrying value in the table relates to the U.S. Global-ML
joint venture agreement to offer mutual funds in Canada. During June 1996, the
USACI management group acquired a one-third interest in USACI. As a result of
this negotiated sale, which diluted U.S. Global's interest from one-half to
one-third, and other factors, the Company reduced the carrying value of the
asset by approximately $620,000. During June 1997, the Company sold its
remaining interest in USACI for approximately $134,000. U.S. Global will,
however, continue to provide investment advisory services through USACI for a
fee. For a more detailed discussion, see Note H to the Consolidated Financial
Statements.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
At year end, the Company had working capital of approximately $2.4 million and a
current ratio of 2.76 to 1. With approximately $722,000 in cash and cash
equivalents, more than $1.3 million in marketable securities, and a $1.0 million
line of credit, the Company has adequate liquidity. Total shareholders' equity
was approximately $8.0 million--with cash, cash equivalents, and marketable
securities comprising 18% of total assets. Moreover, the Company's cash flow is
sufficient to cover current expenses, including debt service.
Except for ongoing expenses of operations, the Company's only material
commitment is the mortgage on its corporate headquarters (a long-term debt).
TAX LOSS CARRYFORWARDS
Management assessed the likelihood of realization of the recorded deferred tax
asset at June 30, 1997. Net operating losses ("NOLs") of $2.5 million, primarily
resulting from the non-cash charge to earnings related to the purchase of the
Notes during fiscal 1995, do not expire until fiscal 2010. Based on the current
level of earnings and management's expectations for the future, management
believes that operating income will not generate the minimum amount of future
taxable income necessary to fully realize the deferred tax assets. As such,
management has included a valuation allowance of $66,458 at June 30, 1997,
providing for the utilization of charitable contributions and investment tax
credit carryovers 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 U.S. Global Resources Fund); and the
settlement pool made the final payout to "Eligible Shareholders" thereof in June
1992. See Note G to the Consolidated Financial
<PAGE>
Page 29
- --------------------------------------------------------------------------------
Statements for additional detail. Under the agreement, any amounts payable to
"Eligible Shareholders" who cannot be located, together with interest thereon,
will be held until June 30, 1998. At that time, such amounts will be made
available to all persons claiming subrogation. The Company has first right of
subrogation to the amounts. The amount of cash held at June 30, 1997, was
approximately $641,000. Management believes the Company will receive a sum that
will equal or exceed the amount currently recorded as the Company's residual
equity interest, $217,861.
DECISION TO OUTSOURCE
To continue to provide competitive and technologically advanced fund accounting
and shareholder record keeping services to its mutual fund clients, the Company
has made the decision to: 1) outsource the bookkeeping and accounting functions
currently performed by its wholly owned subsidiary, USSI, to Brown Brothers
Harriman & Co. (BBH), and 2) license DST's mutual fund software system for its
transfer agent/shareholder record keeping functions.
It is anticipated that the conversion to BBH will be completed during the second
quarter of fiscal 1998. While the Company will forego accounting fees associated
with this function, the company will experience corresponding reductions in
current direct departmental expenses, estimated costs required to hire
additional personnel, and expenses to maintain and upgrade equipment. In
addition, the decision to engage BBH will allow the Company to take advantage of
BBH's established international network with on-site contacts in the markets in
which the Company invests.
The decision to remotely utilize the DST transfer agent and image-based work
management system allows the Company to transfer the inherent technological
risks and associated significant capital expenditures required to update and
maintain a transfer agency system. It is expected that the conversion to the DST
mutual fund software will be completed by the end of the third quarter of fiscal
1998.
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.
<PAGE>
Page 30
- --------------------------------------------------------------------------------
SELECTED FINANCIAL DATA
The following selected financial data is qualified by reference to, and should
be read in conjunction with, the Company's Consolidated Financial Statements and
related notes and the Annual Status Report --- that is, Management's discussion
and analysis of financial condition and results of operations, contained in this
Annual Report. The selected financial data as of June 30, 1993 through June 30,
1997, and the years then ended is derived from the Company's Consolidated
Financial Statements which were examined by Price Waterhouse LLP, independent
public accountants.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
SELECTED EARNINGS DATA -----------------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Revenues $14,009,131 $20,214,546 $15,770,738 $10,879,156 $7,393,502
Expenses 13,329,439 17,261,592 21,666,598 10,108,181 7,302,036
Earnings (loss) before minority
interest, equity interest, income
taxes, extra-ordinary item and
cumulative effect 679,692 2,952,954 (5,895,860) 770,975 91,466
----------- ----------- ----------- ----------- ----------
Income taxes and extraordinary
items 331,976 1,013,517 (2,005,142) (178,665) --
----------- ----------- ----------- ----------- ----------
Minority interest -- (55,098) -- -- --
Equity in net loss of joint venture (196,535) -- -- -- --
Equity in earnings of affiliate 132,968 102,728 -- -- --
----------- ----------- ----------- ----------- ----------
Cumulative effect of change in
accounting -- -- 43,284 200,420 --
----------- ----------- ----------- ----------- ----------
Net earnings (loss) 284,149 1,987,067 (3,847,434) 1,150,060 91,466
Earnings (loss) per share 0.04 0.30 (0.64) 0.19 0.02
Working capital 2,440,198 1,316,006(1) (106,863,206)(1) 3,391,974 2,952,737
Total assets 10,712,775 39,307,196 128,073,122 9,143,448 7,224,495
Long-term obligations 1,359,308 1,410,479 6,016,617 1,619,989 1,718,818
Shareholders' equity 7,966,407 8,544,072 8,661,223 6,730,003 5,055,567
- --------------------
(1) Working capital includes amounts due to broker-dealers under reverse
repurchase agreements related to the Company's purchase of certain U.S.
Government securities but does not include the securities collateralizing
the obligations. (See "Government Securities" discussed in Item 7 of this
Form 10-K and/or Note F to the Consolidated Financial Statements, Item 8 of
this Form 10-K.)
</TABLE>
<PAGE>
Page 31
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of U. S. Global Investors, Inc.
In our opinion, based upon our audits and the reports of other auditors, the
accompanying consolidated balance sheets and the related consolidated statements
of operations, cash flows and shareholders' equity present fairly, in all
material respects, the financial position of U. S. Global Investors, Inc. and
its subsidiaries at June 30, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1997, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the financial statements of U. S. Global Investors
(Guernsey) Limited, a wholly-owned subsidiary, or U. S. Global Strategies Fund
Limited, an equity investment, which statements collectively reflect total
assets and revenues constituting 21 percent and 9 percent, respectively, of the
related consolidated totals at June 30, 1997 and for the year then ended. Those
statements were audited by other auditors whose reports thereon have been
furnished to us, and our opinion expressed herein, insofar as it relates to the
amounts included for U. S. Global Investors (Guernsey) Limited and U. S. Global
Strategies Fund Limited before adjustments to conform with the accounting
principles used by U.S. Global Investors, Inc., is based solely on the reports
of the other auditors. We conducted our audits of these statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits and the reports of other auditors provide a
reasonable basis for the opinion expressed above.
As discussed in Note B to the financial statements, the Company changed its
method of accounting for investments in debt and equity securities during the
year ended June 30, 1995.
PRICE WATERHOUSE LLP
/s/ Price Waterhouse LLP
San Antonio, Texas
September 29, 1997
<PAGE>
Page 32
- --------------------------------------------------------------------------------
AUDITORS' REPORT TO THE MEMBERS OF U.S. GLOBAL INVESTORS (GUERNSEY) LIMITED
[FORMERLY U.S. ADVISORS (GUERNSEY) LIMITED]
We have audited the financial statements on pages 4 to 12 which have been
prepared under the historical cost convention as modified for the revaluation of
investments and the accounting policies set out on page 7.
RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS
As described on page 2 the Company's Directors are responsible for the
preparation of financial statements. It is our responsibility to form an
independent opinion, based on our audit, on those statements and to report our
opinion to you.
BASIS OF OPINION
We conducted our audit in accordance with Auditing Standards issued by the
Auditing Practices Board in the United Kingdom. An audit includes examination,
on a test basis, of evidence relevant to the amounts and disclosures in the
financial statements. It also includes an assessment of the significant
estimates and judgments made by the Directors in the preparation of the
financial statements, and of whether the accounting polices are appropriate to
the Company's circumstances, consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the financial statements
are free from material misstatements, whether caused by fraud or other
irregularity or error. In forming our opinion we also evaluated the overall
adequacy of the presentation of information in the financial statements.
OPINION
In our opinion the financial statements give a true and fair view of the state
of the Company's affairs as at 30th of June, 1997 and of its profit for the year
then ended and have been properly prepared in accordance with the Companies
(Guernsey) Law, 1994.
/s/ Coopers & Lybrand
COOPERS & LYBRAND
PO Box 321
National Westminster House,
Le Truchot,
St Peter Port,
Guernsey, GY1 4ND
Channel Islands.
Date: 29th September, 1997
<PAGE>
Page 33
- --------------------------------------------------------------------------------
AUDITORS' REPORT TO THE SHAREHOLDERS OF U.S. GLOBAL STRATEGIES FUND LIMITED
We have audited the financial statements on pages 20 to 29.
RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS
As described on page 3 the company's directors are responsible for the
preparation of financial statements. It is our responsibility to form an
independent opinion, based on our audit, on those statements and to report our
opinion to you.
BASIS OF OPINION
We conducted our audit in accordance with Auditing Standards issued by the
Auditing Practices Board in the United Kingdom. An audit includes examination,
on a test basis, of evidence relevant to the amounts and disclosures in the
financial statements. It also includes an assessment of the significant
estimates and judgments made by the directors in the preparation of the
financial statements, and of whether the accounting policies are appropriate to
the company's circumstances, consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the financial statements
are free from material misstatements, whether caused by fraud or other
irregularity or error. In forming our opinion we also evaluated the overall
adequacy of the presentation of information in the financial statements.
OPINION
In our opinion the financial statements give a true and fair view of the state
of the Company's affairs as at 30th June, 1997 and of its net revenue for the
year then ended and have been properly prepared in accordance with The
Protection of Investors (Bailiwick of Guernsey) Law, 1987 and the Companies
(Guernsey) Law, 1994.
/s/ Coopers & Lybrand
COOPERS & LYBRAND
PO Box 321
National Westminister House
Le Truchot
St Peter Port
Guernsey
GY1 4ND
Date: 29th September, 1997
<PAGE>
Page 34
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
ASSETS
JUNE 30,
-------------------------
1997 1996
----------- -----------
CURRENT ASSETS
Cash and cash equivalents (Notes A & O) $ 722,121 $ 666,250
Trading securities, at fair value (Notes A & C) 721,954 999,500
Government securities available-for-sale
at fair value (Notes F and K) -- 26,324,125
Receivables:
Mutual funds (Note D) 1,080,046 1,092,961
Accrued interest -- 95,847
Custodial fees 199,062 163,296
Employees 63,700 92,765
Receivable from brokers 240,709 75,054
Other 220,850 704,286
Prepaid expenses 475,577 454,567
Deferred tax asset (Note P) 103,239 --
----------- -----------
TOTAL CURRENT ASSETS 3,827,258 30,668,651
----------- -----------
NET PROPERTY AND EQUIPMENT (NOTES A & E) 2,536,081 2,621,052
----------- -----------
OTHER ASSETS
Restricted investments (Notes A, J & Q) 642,528 642,380
Long-term receivables 424,026 368,742
Long-term deferred tax asset (Note P) 1,102,531 1,096,268
Residual equity interest (Note G) 217,861 217,861
Investment in joint venture (Note H) -- 255,500
Investment securities available-for-sale,
at fair value (Notes A & C) 557,315 2,210,657
Equity investment in affiliate (Note A) 1,322,032 1,164,415
Other 83,143 61,670
----------- -----------
TOTAL OTHER ASSETS 4,349,436 6,017,493
----------- -----------
$10,712,775 $39,307,196
=========== ===========
The accompanying notes are an integral part of this statement.
<PAGE>
Page 35
- --------------------------------------------------------------------------------
Consolidated Balance Sheets (Continued)
LIABILITIES AND SHAREHOLDERS' EQUITY
JUNE 30,
----------------------------
1997 1996
------------ ------------
CURRENT LIABILITIES
Current portion of capital lease
obligation (Note E) $ 9,614 $ 24,354
Current portion of notes payable (Note I) 44,899 41,695
Current portion of annuity and contractual
obligation (Note J) 18,000 18,000
Subordinated debenture held by a related
party (Note M) -- 1,533,131
Securities sold under agreements to
repurchase (Note K) -- 26,404,375
Accounts payable 367,163 276,116
Accrued interest payable to third parties -- 16,685
Accrued interest payable to related
party (Notes M & O) -- 70,017
Accrued compensation and related costs 223,639 204,911
Accrued profit sharing and 401(k) (Note L) 109,251 110,489
Accrued vacation pay 107,369 75,959
Accrued legal fees 62,493 70,536
Deferred tax liability (Note P) -- 11,312
Litigation accrual (Note Q) 300,000 300,000
Other accrued expenses 144,632 195,065
------------ ------------
TOTAL CURRENT LIABILITIES 1,387,060 29,352,645
------------ ------------
Notes Payable-Net of Current Portion (Note I) 1,215,386 1,260,137
Annuity and Contractual Obligations (Note J) 143,922 150,342
------------ ------------
TOTAL NON-CURRENT LIABILITIES 1,359,308 1,410,479
------------ ------------
TOTAL LIABILITIES 2,746,368 30,763,124
------------ ------------
Commitments and contingent liabilities
(Notes J & I)
SHAREHOLDERS' EQUITY (NOTE N)
Common stock (class A) (formerly preferred
stock) --$0.05 par value; non-voting;
authorized, 7,000,000 shares; 6,227,074
and 6,219,422 issued and outstanding
in 1997 and 1996, respectively 311,354 310,971
Common stock (class C) (formerly class A)
--$.05 par value; authorized, 1,750,000
shares; 562,000 and 564,352 issued and
outstanding in 1997 and 1996,
respectively 28,110 28,218
Additional paid-in-capital 10,587,909 10,586,666
Treasury stock at cost; 186,684 and 199,582
shares held in 1997 and 1996, respectively (514,770) (530,384)
Net unrealized gain (loss) on available-for-
sale securities (net of tax of $91,212 and
$294,993, respectively) (177,058) 572,634
Equity in net unrealized gain on available-for-
sale securities held by affiliate (net of
tax of $10,237 and $76,823, respectively) 19,873 149,127
Retained earnings (deficit) (2,289,011) (2,573,160)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 7,966,407 8,544,072
------------ ------------
$ 10,712,775 $39,307,19
============ ============
The accompanying notes are an integral part of this statement.
<PAGE>
Page 36
- -------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED JUNE 30,
--------------------------------------------
1997 1996 1995
------------ ------------ ------------
REVENUE (NOTE D)
Investment advisory fee $ 6,686,769 $ 5,934,133 $ 5,508,482
Transfer agent fee 3,336,376 3,306,568 3,187,037
Accounting fee 730,625 523,465 421,190
Exchange fee 248,112 282,651 270,105
Custodial fees 530,030 545,018 503,225
Investment income 1,033,982 3,144,062 267,379
Mailroom operations 282,267 230,550 169,743
Government security income
(Note F) 1,067,050 5,559,879 5,353,709
Gains on changes of interest
in affiliate (Note A) 10,490 555,905 --
Other 83,430 132,315 89,868
------------ ------------ ------------
14,009,131 20,214,546 15,770,738
------------ ------------ ------------
EXPENSES
General and administrative 11,636,195 10,520,912 9,405,031
Depreciation and amortization 481,510 425,301 536,920
Interest expense-note payable
and other 131,633 126,732 266,222
Government security non-cash
charge (Note F) -- -- 5,375,269
Interest expense-securities
sold under agreement
to repurchase (Notes F & K) 1,007,099 5,235,535 5,650,020
Interest expense-subordinated
debenture to a related party
(Notes M & O) 73,002 333,612 433,136
Reduction in carrying value of
investment in joint venture
(Note H) -- 619,500 --
------------ ------------ ------------
13,329,439 17,261,592 21,666,598
------------ ------------ ------------
EARNINGS (LOSS) BEFORE MINORITY
INTEREST, EQUITY INTEREST,
INCOME TAXES, AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING 679,692 2,952,954 (5,895,860)
------------ ------------ ------------
Minority Interest in Consolidated
Company (Note A) -- (55,098) --
Equity in Net Loss of Joint
Venture (Note A) (196,535) -- --
Equity In Net Earnings of
affiliate (Note A) 132,968 102,728 --
------------ ------------ ------------
EARNINGS (LOSS) BEFORE INCOME
TAXES, AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING 616,125 3,000,584 (5,895,860)
PROVISION (BENEFIT) FOR FEDERAL
INCOME TAXES (NOTE P)
Current -- 61,000 --
Deferred 331,976 952,517 (2,005,142)
------------ ------------ ------------
331,976 1,013,517 (2,005,142)
------------ ------------ ------------
NET EARNINGS (LOSS) BEFORE
CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING 284,149 1,987,067 (3,890,718)
Cumulative Effect of Change in
Accounting for Marketable
Securities (net of taxes
of $22,298) (Note B) -- -- 43,284
------------ ------------ ------------
NET EARNINGS (LOSS) $ 284,149 $ 1,987,067 $ (3,847,434)
============ ============ ============
The accompanying notes are an integral part of this statement.
<PAGE>
Page 37
- --------------------------------------------------------------------------------
Consolidated Statements of Operations (Continued)
YEAR ENDED JUNE 30,
--------------------------------------------
1997 1996 1995
------------ ------------ ------------
PER SHARE AMOUNTS
Primary and fully diluted
Continuing operations $ 0.04 $ 0.30 $ (0.65)
Cumulative effect of change
in accounting -- -- 0.01
------------ ------------ ------------
Net Earnings $ 0.04 $ 0.30 $ (0.64)
============ ============ ============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING
Primary and fully diluted 6,664,324 6,601,074 6,013,393
============ ============ ============
The accompanying notes are an integral part of this statement.
<PAGE>
Page 38
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOW
YEAR ENDED JUNE 30,
-----------------------------------------
1997 1996* 1995
----------- ----------- -----------
Cash Flow From Operating
Activities:
Net earnings (loss) $ 284,149 $ 1,987,067 $ (3,847,434)
Adjustments to reconcile to
net cash provided by
operating activities:
Depreciation and amortization 481,510 425,301 536,920
Government security accretion (306,926) (1,363,051) (1,499,521)
Government security charge -- -- 5,375,269
Net gain on sales of securities
(net of minority interest) (934,123) (2,723,738) (248,661)
Gain on disposal of equipment (64) (296) (1,100)
Reduction in carrying value
of investment in joint
venture -- 619,500 --
Cumulative effect of change
in accounting -- -- (43,284)
Gain on changes of interest
in affiliate (10,490) (555,905) --
Treasury Stock reissued 346,163 139,595 32,381
Changes in assets and
liabilities, impacting cash
from operations:
Restricted investments (148) 255,176 (443,908)
Accounts receivable 364,558 (675,974) (793,395)
Deferred tax asset 331,976 952,517 (2,005,142)
Prepaid expenses and other (134,789) (1,065,278) 177,487
Trading securities 2,034,637 2,674,344 894,453
Accounts payable 91,047 108,518 (50,240)
Accrued expenses (96,276) 167,429 457,365
----------- ----------- -----------
Total adjustments 2,167,075 (1,041,862) 2,388,624
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN)
OPERATIONS 2,451,224 945,205 (1,458,810)
----------- ----------- -----------
CASH FLOW FROM INVESTING
ACTIVITIES:
Purchase of building and land -- -- (27,461)
Purchase of furniture and equipment (392,436) (372,211) (402,190)
Proceeds on sale of equipment 800 469 1,100
Purchase of available-for-sale
securities (399,472) (896,791) (1,023,721)
Purchase of government securities
held-to-maturity -- -- (130,113,712)
Proceeds on sale of government
securities available-for-sale -- 89,884,250 --
Proceeds on sale of government
securities held-to-maturity 26,725,000 -- 12,945,530
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 25,933,892 88,615,717 (118,620,454)
----------- ----------- -----------
CASH FLOW FROM FINANCING
ACTIVITIES:
Payments on annuity (6,420) (5,986) (5,584)
Payments on note payable to bank (41,547) (38,216) (35,337)
Proceeds from capital lease 25,330 -- --
Principal payments on capital
lease obligation (40,070) (93,658) (103,431)
Net proceeds from securities
sold under agreement to
repurchase 420,844 871,231 124,794,309
Proceeds from issuance of
subordinated debenture to
related party -- -- 6,000,000
Payments on subordinated debenture
to related party (1,533,131) (3,001,081) (1,465,788)
Net payments on securities sold
under agreement to repurchase (26,825,219) (86,668,325) (12,592,840)
Proceeds from issuance of
preferred stock, warrants,
and options 8,250 295,875 144,274
The accompanying notes are an integral part of this statement.
<PAGE>
Page 39
- ------------------------------------------------------------------------------
Consolidated Statements Of Cash Flow (Continued)
YEAR ENDED JUNE 30,
------------------------------------------
1997 1996* 1995
------------ ------------ ------------
Proceeds from issuance of common
stock (class B) to related
party -- -- 4,964,271
Purchase of common stock
(class B) from related party -- (2,538,945) --
Purchase of Treasury stock
and warrants (337,282) (487,788) (106,988)
------------ ------------ ------------
NET CASH (USED IN) PROVIDED
BY FINANCING ACTIVITIES (28,329,245) (91,666,893) 121,592,886
------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS 55,871 (2,105,971) 1,513,622
BEGINNING CASH AND CASH
EQUIVALENTS 666,250 2,772,221 1,258,599
------------ ------------ ------------
ENDING CASH AND CASH EQUIVALENTS $ 722,121 $ 666,250 $ 2,772,221
============ ============ ============
SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Purchase of equipment under
capital lease $ 25,330 $ -- $ --
Issuance of shares for
investment in joint venture -- -- 510,000
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid for interest $ 1,283,891 $ 6,088,853 $ 5,848,689
- --------------------
* Reclassed for comparative purposes
The accompanying notes are an integral part of this statement.
<PAGE>
Page 40
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
PRE-
COMMON COMMON COMMON FERRED
PREFERRED STOCK STOCK STOCK PAID-IN WAR- EARNINGS
STOCK (CLASS A) (CLASS B) (CLASS C) CAPITAL RANTS (DEFICIT)
--------- -------- -------- ----------- ------------ ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1994 (4,867,557 shares
of Preferred stock; 576,217 shares of
Common stock (Class A)) $ 243,378 $ 0 $ 0 $ 28,811 $ 7,305,344 $0 ($ 712,793)
Purchase of 35,000 shares of Preferred
treasury stock -- -- -- -- -- -- --
Reissuance of 11,200 shares of Preferred
treasury stock -- -- -- -- (10,978) -- --
Issuance of 198,500 shares of Preferred
stock 9,925 -- -- -- 644,349 -- --
Issuance of 1,000,000 shares of Common
stock (Class B) -- -- 50,000 -- 4,914,271 -- --
Conversion of 5,438 shares of Common stock
(Class A) to Preferred stock 272 -- -- (272) -- -- --
Unrealized gain (loss) on securities
available-for-sale (net of tax)
upon adoption of SFAS 115 -- -- -- -- -- -- --
Unrealized gain (loss) on securities
available-for-sale (net of tax) -- -- -- -- -- -- --
Net Earnings -- -- -- -- -- -- (3,847,434)
--------- -------- -------- ----------- ------------ -- -----------
Balance at June 30, 1995 (5,071,495 shares
of Preferred stock; 570,779 shares of Common
stock (Class A)) $ 253,575 $ 0 $ 50,000 $ 28,539 $ 12,852,986 $0 ($4,560,227)
Conversion of Preferred Stock to Common Stock
Common Stock (Class A) (253,575) 253,575 -- -- -- -- --
Purchase of 175,475 shares of Common Stock
(Class A) -- -- -- -- -- -- --
Reissuance of 68,393 shares of Common Stock
(Class A) -- -- -- -- (16,175) -- --
Conversion of 6,427 shares of Common stock
(Class C) to Common Stock (Class A) -- 321 -- (321) -- -- --
Conversion of 1,000,000 shares of Common
stock (Class B) to Common Stock (Class A) -- 50,000 (50,000) -- -- -- --
Purchase of Common Stock (Class B) from
related party (Note N) -- -- -- -- (2,538,945) -- --
Exercise of 142,500 Stock Options -- 7,075 -- -- 288,800 -- --
Unrealized loss on Notes transferred from
held-to-maturity to available-for-sale,
at date of transfer (net of tax) -- -- -- -- -- -- --
Unrealized gain (loss) on securities
available-for-sale (net of tax) -- -- -- -- -- -- --
Equity in Unrealized gain (loss) on
available-for-sale securities of affiliated
company (net of tax) -- -- -- -- -- -- --
Net Earnings -- -- -- -- -- -- 1,987,067
--------- -------- -------- ----------- ------------ -- -----------
Balance at June 30, 1996 (6,219,422
shares of Preferred stock;
564,352 shares of Common stock (Class A)) $ 0 $310,971 $ 0 $ 28,218 $ 10,586,666 $0 ($2,573,160)
Purchase of 141,250 shares of Common
Stock (Class A) -- -- -- -- -- -- --
Reissuance of 154,148 shares of Common
Stock (Class A) -- -- -- -- (6,732) -- --
Exercise of 5,500 Stock Options -- 275 -- -- 7,975 -- --
Conversion of 2,152 shares of Common stock
(Class C) to Common Stock (Class A) -- 108 -- (108) -- -- --
Unrealized gain (loss) on securities
available-for-sale (net of tax) -- -- -- -- -- -- --
Equity in Unrealized gain (loss) on
available-for-sale securities of
affiliated company (net of tax) -- -- -- -- -- -- --
Net Earnings -- -- -- -- -- -- 284,149
--------- -------- -------- ----------- ------------ -- -----------
Balance at June 30, 1997 (6,227,074 shares
of Class A (formerly preferred stock);
562,200 shares of Class C (formerly
Class A)) $ 0 $311,354 $ 0 $ 28,110 $ 10,587,909 $0 ($2,289,011)
UNREALIZED
GAIN (LOSS)
ON
SECURITIES
TREASURY AVAILABLE
STOCK FOR SALE TOTAL
--------- --------- -----------
<S> <C> <C> <C>
Balance at June 30, 1994 (4,867,557 shares
of Preferred stock; 576,217 shares of
Common stock (Class A)) ($134,737) $ 0 $ 6,730,003
Purchase of 35,000 shares of Preferred
treasury stock (106,988) -- (106,988)
Reissuance of 11,200 shares of Preferred
treasury stock 43,359 -- 32,381
Issuance of 198,500 shares of Preferred
stock -- -- 654,274
Issuance of 1,000,000 shares of Common
stock (Class B) -- -- 4,964,271
Conversion of 5,438 shares of Common stock
(Class A) to Preferred stock -- -- --
Unrealized gain (loss) on securities
available-for-sale (net of tax)
upon adoption of SFAS 115 -- 197,009 197,009
Unrealized gain (loss) on securities
available-for-sale (net of tax) -- 37,707 37,707
Net Earnings -- -- (3,847,434)
--------- --------- -----------
Balance at June 30, 1995 (5,071,495 shares
of Preferred stock; 570,779 shares of Common
stock (Class A)) ($198,366) $ 234,716 $ 8,661,223
Conversion of Preferred Stock to Common Stock
Common Stock (Class A) -- -- --
Purchase of 175,475 shares of Common Stock
(Class A) (487,678) -- (487,678)
Reissuance of 68,393 shares of Common Stock
(Class A) 155,660 -- 139,485
Conversion of 6,427 shares of Common stock
(Class C) to Common Stock (Class A) -- -- --
Conversion of 1,000,000 shares of Common
stock (Class B) to Common Stock (Class A) -- -- --
Purchase of Common Stock (Class B) from
related party (Note N) -- -- (2,538,945)
Exercise of 142,500 Stock Options -- -- 295,875
Unrealized loss on Notes transferred from
held-to-maturity to available-for-sale,
at date of transfer (net of tax) -- (62,006) (62,006)
Unrealized gain (loss) on securities
available-for-sale (net of tax) -- 399,924 399,924
Equity in Unrealized gain (loss) on
available-for-sale securities of affiliated
company (net of tax) -- 149,127 149,127
Net Earnings -- -- 1,987,067
--------- --------- -----------
Balance at June 30, 1996 (6,219,422
shares of Preferred stock;
564,352 shares of Common stock (Class A)) ($530,384) $ 721,761 $ 8,544,072
Purchase of 141,250 shares of Common
Stock (Class A) (337,282) -- (337,282
Reissuance of 154,148 shares of Common
Stock (Class A) 352,896 -- 346,164
Exercise of 5,500 Stock Options -- -- 8,250
Conversion of 2,152 shares of Common stock
(Class C) to Common Stock (Class A) -- -- 0
Unrealized gain (loss) on securities
available-for-sale (net of tax) -- (749,692) (749,692)
Equity in Unrealized gain (loss) on
available-for-sale securities of
affiliated company (net of tax) -- (129,254) (129,254)
Net Earnings -- -- 284,149
--------- --------- -----------
Balance at June 30, 1997 (6,227,074 shares
of Class A (formerly preferred stock);
562,200 shares of Class C (formerly
Class A)) ($514,770) ($157,185) $ 7,966,407
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE>
Page 41
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A. SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION. U.S. Global Investors, Inc. ("the Company" or "U.S. Global")
serves as investment adviser, investment manager and transfer agent to U.S.
Global Investors Funds ("USGIF"), formerly United Services Funds, and U.S.
Global Accolade Funds ("USGAF"), formerly Accolade Funds, both Massachusetts
business trusts which are no-load, open-end investment companies offering shares
in numerous mutual funds to the investing public. The Company has served as
investment adviser and manager since the inception of USGIF and USGAF and
assumed the transfer agency function of USGIF in November 1984 and of USGAF in
October 1994, the commencement of operations. For these services, the Company
receives fees from USGIF and USGAF.
The Company has formed a limited liability company which was incorporated in
Guernsey on August 20, 1993. This company, U.S. Global Investors (Guernsey)
Limited ("USGG"), formerly U.S. Advisors (Guernsey) Limited, manages the
portfolio of an offshore fund, U.S. Global Strategies Fund Limited ("the
Guernsey Fund").
The Company's one-third interest in United Services Advisors, Canada, Inc.
("USACI"), which was formed in July of 1994 to offer mutual funds in Canada, was
sold in June 1997 to the USACI Management group which now controls 100% of
USACI.
The Company, through its wholly owned subsidiary, Security Trust & Financial
Company, also serves as custodian for retirement accounts invested in USGIF,
USGAF, and other mutual funds.
On June 1, 1996 the Company changed its name from United Services Advisors, Inc.
to U.S. Global Investors, Inc.
PRINCIPLES OF CONSOLIDATION. 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"), and USGG. During the fourth quarter of fiscal 1996 the
Company's interest in the Guernsey Fund declined below 50% and it began
accounting for its investment in the Guernsey Fund using the equity method of
accounting. At June 30, 1997, and 1996, the Company held a 14% and a 26%
interest in the Guernsey Fund, respectively. The aggregate value of the
Company's investment at June 30, 1997, and 1996, based on quoted market value
was $1,322,032 and $1,164,415, respectively.
The Guernsey Fund issued 48,188 and 30,644 net additional shares for cash
amounting to $5,616,825 and $3,080,272 to investors other than the Company
during fiscal 1997 and 1996, respectively. The Company accounts for changes in
interest of its investment in the Guernsey Fund by charging or crediting income
for the effects of such transactions when consummated. The Company recorded
$10,490 and $555,905 in gains on such transactions during fiscal 1997 and 1996,
respectively, which are included as a separate line in the accompanying income
statement. Deferred income taxes have been provided on these gains.
All significant inter-company balances and transactions have been eliminated in
consolidation. Certain amounts have been reclassified for comparative purposes.
CASH AND CASH EQUIVALENTS. Cash consists of cash on hand and cash equivalents
with original maturities of three months or less. Cash and cash equivalents at
June 30, 1997, and at June 30, 1996 include $690,543 and $596,605, respectively,
in USGIF money market mutual funds (see Note O). This investment is valued at
amortized cost which approximates market. Restricted cash of $618,169 and
$633,169, at June 30, 1997, and 1996, respectively, is included in restricted
investments (see Notes J and Q).
FIXED ASSETS. Fixed assets are recorded at cost including capitalized interest.
Depreciation for owned fixed assets and capital leases is recorded using the
straight-line method over the estimated useful life of each asset as follows:
leasehold improvements, furniture and equipment are depreciated over 3 years;
capitalized leased phone equipment is depreciated over 5 years; and the building
is depreciated over 31.5 years.
<PAGE>
Page 42
- --------------------------------------------------------------------------------
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. The liability method requires that deferred tax assets be reduced
by a valuation allowance in cases where it is more likely than not that the
assets will not be realized.
EARNINGS PER SHARE. Primary and fully diluted earnings per share are based on
the weighted average number of shares of class A common stock class B and class
C common stock outstanding during the year. All classes of common are considered
equivalent in the calculation of earnings per share since each share has
essentially equivalent interests in the income of the Company. Warrants and
options are included to the extent dilutive.
SECURITY INVESTMENTS. The Company accounts for its investments in securities in
accordance with Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities" ("SFAS 115") (see Note
B).
Under SFAS 115, the Company classifies its investments in equity and debt
securities into three categories. Management determines the appropriate
classification of securities at the time of purchase and reevaluates such
designation as of each reporting period date (see Note C).
Securities that are purchased and held principally for the purpose of selling
them in the near term are classified as trading securities and reported at fair
value. Unrealized gains and losses on these securities are included in earnings.
Investments in debt securities for which the Company has the positive intent and
ability to hold to maturity are classified as held-to-maturity securities.
Held-to-maturity securities are reported at amortized cost. Discount to par
value is accreted, and recognized as income, over the remaining term to
maturity.
Investments not classified as trading securities nor as held-to-maturity
securities are classified as available-for-sale securities and reported at fair
value. Unrealized gains and losses on these securities are excluded from
earnings and reported, net of tax, as a separate component of shareholders'
equity and are recorded in earnings on trade date. Realized gains (losses) from
security transactions are calculated on the first-in/first-out cost basis and
are recorded in earnings on trade date.
FOREIGN CURRENCY TRANSACTIONS. Transactions between the Company and foreign
entities are converted to U.S. dollars using the exchange rate on the date of
the transactions. Security investments valued in foreign currencies are
translated to U.S. dollars using the applicable exchange rate as of the
reporting date. Foreign currency gain (loss) is included as a component of
investment income.
ORGANIZATION COSTS. Organization costs in the amount of $175 and $5,013 net of
amortization at June 30, 1997, and 1996, respectively, which relate to the
organization of STFC and USGG, are amortized on a straight-line basis over 60
months. These costs are included in other assets on the consolidated balance
sheet.
ACCOUNTING PRONOUNCEMENTS. In March 1997, the Financial Accounting Standards
Board ("FASB") issued Statement No. 128, Earnings per Share ("SFAS 128"), which
establishes standards for computing and presenting earnings per share ("EPS")
and applies to entities with publicly held common stock or potential common
stock. This Statement simplifies the standards for computing EPS previously
found in APB Opinion No 15, EARNINGS PER SHARE, and makes them comparable to
international EPS standards. It replaces the presentation of primary EPS on the
face of the income statement for all entities with complex capital structures
and requires a reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS computation. The
Company will adopt SFAS 128 in the first quarter of fiscal 1998 and does not
believe that adoption will have a material impact on the EPS computation or
disclosure. Upon adoption, prior-period EPS data will be restated.
In March 1997, the FASB issued Statement No. 129, Disclosure of Information
about Capital Structure ("SFAS 129"). SFAS 129 establishes standards for
disclosing information about an entity's capital structure. The Company will
adopt SFAS 129 fiscal 1998 and does not believe that adoption will have a
material effect on financial statement disclosures.
In June 1997, the FASB issued Statements No. 130, Reporting Comprehensive Income
("SFAS 130"). SFAS 130 establishes 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 requires
that all items that are recognized under accounting standards as components of
comprehensive income be reported in a statement of financial performance.
Although the Statement does not address disclosure format, it requires an
enterprise to (a) represent total comprehensive
<PAGE>
Page 43
- --------------------------------------------------------------------------------
income for the financial statement period and a per share amount for that total,
(b) classify items of other comprehensive income by their nature in a financial
statement and (c) display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of a statement of financial position. This Statement is effective for
fiscal years beginning after December 15, 1997. Reclassification of financial
statements for earlier periods provided for comparative purposes is required.
The Company plans to adopt SFAS 130 in fiscal 1999. Management has not yet
determined the manner in which comprehensive income might be displayed.
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 1999. Management has not yet completed its
determination of what, if any, impact the "management approach" will have on its
financial statement disclosures.
NOTE B. CHANGE IN ACCOUNTING PRINCIPLE
In the first quarter of fiscal 1995, the Company adopted SFAS 115, "Accounting
for Certain Investments in Debt and Equity Securities," effective July 1, 1994.
The adoption of SFAS 115 changed the method of accounting and reporting for
investments in equity securities that have readily determinable fair values and
for all investments in debt securities. The Company recognized the cumulative
effect of adopting the pronouncement in the first quarter of fiscal 1995 as a
change in accounting principle. The financial impact of adopting SFAS 115 was a
net increase in earnings of $43,284 (net of taxes of $22,298) or $.01 per share
representing net unrealized gains on securities classified as trading securities
and $197,009 (net of taxes of $101,489) on net unrealized gains on securities
classified as available for sale which was reported as a separate component of
equity.
NOTE C. INVESTMENTS
The cost and market value of investments classified as trading are as follows:
DATE COST MARKET VALUE
------------- ---------- ------------
June 30, 1997 $ 772,630 $ 721,954
June 30, 1996 $1,034,398 $ 999,500
June 30, 1995 $1,661,113 $1,510,316
The net change in the unrealized holding gain (loss) on trading securities held
at June 30, 1997, that has been included in earnings for the period was
($15,778), $115,899, and ($150,797) for the period ended June 30, 1997, 1996 and
1995, respectively.
The cost of investments in securities, which are classified as
available-for-sale, which may not be readily marketable at June 30, 1997, was
$825,585. These investments are reflected as non-current assets on the June 30,
1997, consolidated balance sheet at their fair value at June 30, 1997, of
$557,315 with $177,058, 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 June 30, 1997. It is anticipated
the securities obtained in these private placements will become free trading
within one year. During fiscal 1997, the Company recorded income related to
realized gains of $218,860 and unrealized gains of $100,349 on securities which
were transferred from the available-for-sale category to the trading category
upon becoming free trading.
The cost of investments in securities, which were classified as
available-for-sale, which were not readily marketable at June 30, 1996 was
$1,249,081. These investments were reflected as non-current assets on the June
30, 1996 consolidated balance sheet. These investments were in private
placements which were restricted for sale as of June 30, 1996. The fair value of
the investments classified as non-current available-for-sale securities at June
30, 1996 was $2,210,657 with $572,634, net of tax, in unrealized gains recorded
as a separate component of shareholders' equity. Additionally, the Company held
certain notes with a fair value of $26,324,125 (amortized cost of $26,418,074)
which were classified as
<PAGE>
Page 44
- --------------------------------------------------------------------------------
current available-for-sale securities resulting in an unrealized loss of $93,949
as of June 30, 1996. (See further discussion of these securities at Note F).
During fiscal 1996, the Company recorded in income realized gains of $780,492
and unrealized gains of approximately $122,000 on securities which were
transferred from the available-for-sale category to the trading category upon
becoming free trading.
During fiscal 1995, the Company recorded realized gains of $202,441, on
securities which were transferred from available- for-sale securities to trading
securities upon becoming free trading. The Company also recorded unrealized
gains of $158,498 and unrealized losses of $188,124 on securities which were
transferred from available-for-sale securities to trading securities upon
becoming free trading during the fiscal year 1995.
NOTE D. INVESTMENT MANAGEMENT, TRANSFER AGENT AND OTHER FEES
The Company serves as investment adviser to USGIF, 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
receives a fee based on the number of shareholder accounts. The Company also
provides in-house legal and accounting services to USGIF and USGAF. The Company
also receives exchange, maintenance, closing and small account fees directly
from USGIF and USGAF shareholders.
The Company receives additional revenue from several sources including: STFC
custodian and administrative fee revenues, gains on marketable securities
transactions, revenues from miscellaneous transfer agency activities including
lockbox functions as well as mailroom operations (A&B).
Investment advisory fees, transfer agency fees, accounting fees, custodian fees
and all other fees earned by the Company are recorded as income during the
period in which services are performed.
The Company has voluntarily waived or lowered its advisory fees and is bearing
expenses on several funds within USGIF and USGAF.
The Company has unconditionally guaranteed that the total fund operating
expenses (as a percentage of average net assets) of the U.S. Government
Securities Savings Fund will not exceed 0.40% on an annualized basis through
June 30, 1998 or such later date as the Company determines.
The Company has unconditionally guaranteed that the total fund operating
expenses (as a percentage of average net assets) of the U.S. Tax Free Fund and
United Services Near-Term Tax Free Fund will not exceed 0.70% on an annualized
basis through June 30, 1998 or such later date as the Company determines.
The Company has unconditionally guaranteed that the total fund operating
expenses (as a percentage of average net assets) of the U.S. All American Equity
will not exceed 1.00% on an annualized basis through June 30, 1998 or such later
date as the Company determines.
The Company has unconditionally guaranteed that the total fund operating
expenses (as a percentage of average net assets) of the Regent Eastern European
Fund will not exceed 3.25% on an annualized basis through June 30, 1998 or such
later date as the Company determines.
The aggregate amount of fees waived or expenses voluntarily reimbursed totaled
$3,250,786, $3,362,050, and $3,568,151 in 1997, 1996, and 1995, respectively.
The following funds accounted for more than 10% of revenue [excluding government
security income (Note F)] in the years indicated: YEAR ENDED JUNE 30,
1997 1996 1995
---- ---- ----
U.S. Gold Shares Fund 17% 21% 32%
U.S. World Gold Fund 24% 21% 25%
U.S. Treasury Securities Cash Fund 9% 9% 13%
Receivables from mutual funds represent amounts due the Company, and its wholly
owned subsidiaries, for investment advisory fees, transfer agent fees,
accounting fees, and exchange fees, net of amounts payable to the mutual funds.
<PAGE>
Page 45
- --------------------------------------------------------------------------------
The investment advisory contract and related contracts between the Company and
USGIF expire on or about October 6, 1997, and the contracts between the Company
and USGAF expire on or about March 8, 1998. Management anticipates the Trustees
of both USGIF and USGAF will renew the contracts.
NOTE E. PROPERTY AND EQUIPMENT
Property and equipment are composed of the following:
JUNE 30,
----------------------------
1997 1996
----------- -----------
Leasehold improvements $ 182,887 $ 182,887
Capitalized leased equipment 519,768 519,768
Furniture and equipment 4,514,171 4,125,349
Building and land 2,203,757 2,203,757
----------- -----------
7,420,583 7,031,761
Accumulated depreciation and amortization (4,884,502) (4,410,709)
----------- -----------
Net property and equipment $ 2,536,081 $ 2,621,052
=========== ===========
At June 30, 1997, and 1996 accumulated amortization for capitalized leased
equipment was $519,769 and $510,961, respectively. Amortization expense for
capitalized leased equipment was $8,808, $60,658, and $125,198, for the fiscal
years ended June 30, 1997, 1996, and 1995, respectively. Minimum lease payments
required by obligations under capital leases are $9,614 in fiscal 1998.
The building and land is pledged as collateral for the financing used to acquire
the building (see Note I).
NOTE F. GOVERNMENT SECURITIES
The U.S. Government Securities Savings Fund ("USG"), a USGIF fund, from its
inception had invested in, among other types of Government securities, certain
Government agency notes whose interest rates reset monthly based on a
cost-of-funds index ("Notes"). This reset feature lags changes in short-term
interest rates.
During fiscal 1995, due to such rates rising dramatically and regulatory
directives issued to money market funds in general, the market value of the
Notes was adversely effected. To reduce USG's exposure to said Notes and in
order to maintain a $1.00 per share net asset value, U.S. Global decided, in the
first quarter of fiscal 1995, to arrange for USG to sell $40 million par amount
of Notes at USG's amortized cost of approximately $39,777,000 plus accrued
interest to Marleau, Lemire Inc. ("ML"). Thereafter, U.S. Global decided to
purchase directly from the fund $90,525,000 par amount of Notes ($53,275,000
during the first quarter of fiscal 1995 and $37,250,000 during the third quarter
of fiscal 1995) at USG's amortized cost of approximately $90,337,000 plus
accrued interest. Additionally, in connection with such decision, U.S. Global
purchased the Notes from ML for approximately $39,777,000 plus accrued interest
during the first quarter of fiscal 1995.
U.S. Global recorded the Notes at their fair value. As the Notes had an
aggregate fair value of approximately $124,739,000 on the dates U.S. Global
acquired the securities, the Company recorded pre-tax non-cash charges to the
results of operations of approximately $2,574,000 during the first quarter and
$2,800,000 during the third quarter of fiscal 1995. The Company initially
classified the Notes as held-to-maturity securities and in addition to periodic
receipts of interest income, U.S. Global recognized $306,926, $1,363,051, and
$1,499,521 in non-cash income during fiscal 1997, 1996, and 1995, respectively.
In December 1995, $63,800,000 par value Notes were reclassified from the
held-to-maturity category to the available-for- sale category in accordance with
the one-time reassessment allowed by the FASB GUIDE TO IMPLEMENTATION OF
STATEMENT 115 ON ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY
SECURITIES. The remaining $53,725,000 par value Notes retained their
held-to-maturity status as defined by SFAS 115 until June 1996 when these were
re-classified to available-for- sale securities. Upon this re-classification the
Company began recording these Notes at fair value with any unrealized gain or
loss excluded from earnings and reported, net of tax, as a separate component of
shareholders' equity. At the June 1996 re-classification date, the unrealized
loss approximated the amount recorded at June 30, 1996 ($93,949).
<PAGE>
Page 46
- --------------------------------------------------------------------------------
U.S. Global financed the original acquisition of the Notes, including purchased
accrued interest, as follows: 1) approximately $120.9 million was provided by
third party broker-dealers under reverse repurchase agreements (see Note K); 2)
U.S. Global issued a $6.0 million 8% subordinated debenture to ML, the terms of
which require principal payments as the Notes mature and interest payments
quarterly (see Note M); and 3) U.S. Global utilized approximately $3,563,000 of
its own cash.
The Company has sold the following Notes during the fiscal years 1996 and 1995:
REALIZED GAIN
DATE SOLD PAR VALUE (LOSS)
------------- ------------ -----------
June 1995 $ 13,000,000 ($ 32,073)
December 1995 $ 47,250,000 $ 1,235,986
May 1996 $ 16,550,000 $ 1,267
June 1996 $ 27,000,000 ($ 74,766)
------------ -----------
$103,800,000 $ 1,130,414
============ ===========
The remaining Notes acquired by U.S. Global matured during fiscal 1997 at their
aggregate $26,725,000 par amount and the Company made the final payments on the
reverse repurchase agreements and the subordinated debenture.
NOTE G. RESIDUAL EQUITY INTEREST
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 U.S. Global Resources Fund); and the
Settlement Pool made the final payout to "Eligible Shareholders" thereof in June
1992. Under the 1988 Settlement Agreement, any amounts payable to "Eligible
Shareholders" who cannot be located, together with interest thereon, will be
held for six years after the final payout against the claims of those
shareholders. At the end of six years, such amounts will be made available to
all persons claiming subrogation. The Company has first right of subrogation to
the amounts. The amount of cash held at June 30, 1997, was $640,890. Management
believes the Company will receive a sum which will equal or exceed the amount
currently recorded as the Company's residual equity interest, $217,861.
NOTE H. INVESTMENT IN JOINT VENTURE
During the fiscal 1995, U.S. Global and ML, a Canadian brokerage firm, entered
into a joint venture agreement whereby U.S. Global and ML agreed to undertake to
offer mutual funds in Canada, primarily through ML's broker network located in
Toronto, Montreal, Vancouver, and Victoria. As part of the agreement to enter
into a joint venture, U.S. Global issued 120,000 shares of its preferred stock
to ML. The estimated value of the stock upon issuance was $510,000, which the
Company recorded as its investment in the joint venture during the first quarter
of fiscal 1995. In conjunction with this joint venture, United Services Advisors
Wealth Management Corp. was incorporated during the third quarter of fiscal 1995
with a 50% ownership to each U.S. Global and ML. The joint venture was renamed
United Services Advisors, Canada, Inc. ("USACI") during fiscal 1996. Also, U.S.
Global agreed to incur the initial organization and development costs. During
June 1996 the USACI management group acquired a one-third interest in USACI. As
a result of this negotiated sale, which diluted U.S. Global's interest from
one-half to one-third, delays associated with the joint venture becoming
operational, and the Company's reduced expectations of the joint venture's
profitability, management reassessed the recoverability of its carrying value in
the joint venture. The Company determined that the carrying value should be
reduced by $619,500 which decreased the carrying value to reflect the amount of
the Company's proportionate one-third share of the underlying equity in net
assets of USACI of $255,500 at June 30, 1996.
The joint venture became operational during August 1996, and the Company,
utilizing the equity method of accounting, recorded a net loss of $196,535
during fiscal 1997. In June 1997, the Company sold its remaining interest in
USACI for approximately $134,000 to the USACI management group which resulted in
a net charge to income of approximately $100,000.
<PAGE>
Page 47
- --------------------------------------------------------------------------------
NOTE I. NOTE PAYABLE AND LINE OF CREDIT
The Company has a note payable to a bank which is secured by land, an office
building and related improvements. As of June 30, 1997, the balance on the note
was $1,260,285. The loan is currently amortizing over a twenty-year period with
payments of both principal and interest due monthly based on a fixed rate of
7.75%. The current monthly payment is $11,750. The loan matures July 2001. Under
this agreement, the Company must maintain certain financial covenants. Because
of events described in Note F, the Company obtained a waiver of the covenants
from the bank through June 30, 1995 and subsequently negotiated an amendment to
the loan agreement and covenants with the bank to cover periods beyond June 30,
1996. The Company is in compliance with all loan covenants at June 30, 1997.
Future principal payments to be made over the next five years based on the
amount outstanding at June 30, 1997, are as follows:
FISCAL
YEAR AMOUNT
------ ----------
1998 $ 44,899
1999 48,504
2000 52,273
2001 1,114,609
----------
Total $1,260,285
==========
During the current fiscal year, the Company obtained a $1 million line of credit
("LOC") under which there was no balance outstanding as of June 30, 1997. This
LOC was obtained to provide financing for the working capital needs of the
Company and expires in March 1998. Borrowings under the LOC are at a floating
interest rate comprising of the Bank One, Texas N.A. Base Rate + 3/4%, plus a
commitment fee of 15 basis points on the unused portion of the LOC amount. The
Company has the ability to renew the LOC. Total commitment fees paid on the
unused LOC amounted to $425 for fiscal 1997.
NOTE J. ANNUITY AND CONTRACTUAL OBLIGATIONS
On February 6, 1989, the Company entered into an agreement with Clark Aylsworth
("Aylsworth") related to his retirement on December 31, 1988. This agreement
provided for the payment to Aylsworth of a monthly annuity of $1,500 for the
remainder of his life or his wife's life, if he predeceases her. The Company has
recorded an obligation related to this agreement.
On December 30, 1990, the Company entered into a non-compete/non-interference
agreement, an executory contract, pursuant to which it pays the Aylsworths
$4,500 monthly, such amount to continue for the longer of Aylsworth's or his
wife's life. The Company determined that the executory contract should be
expensed as payments are made. The Company placed cash in escrow to cover the
Company's obligation to the Aylsworths if the Company defaults. The escrowed
amount decreases $15,000 annually and amounted to $285,000 at June 30, 1997.
NOTE K. SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE
As discussed in Note F, U.S. Global financed the acquisition of the Notes by
entering into agreements to repurchase securities with third party
broker-dealers. The terms with the broker-dealers provided that the reverse
repurchase agreements must be collateralized by the Notes and/or cash. The Notes
described in Note F were held by the broker-dealers as collateral. Due to the
maturation of the Notes discussed in Note F, there are no reverse repurchase
agreements outstanding at June 30, 1997. As of June 30, 1996, there were
$26,404,375 in reverse repurchase agreements outstanding.
NOTE L. BENEFIT PLANS
The Company and its subsidiaries have a contributory profit-sharing plan in
which all qualified employees who have completed one year of employment with the
Company are included. The amount of the annual contribution, which may not
exceed 15% of earnings before income taxes, is determined by the Company's Board
of Directors. At June 30, 1997, and June 30, 1996, the Company has accrued
$59,093 and $60,000 for the fiscal 1997 and 1996 contributions, respectively.
<PAGE>
Page 48
- --------------------------------------------------------------------------------
The Company and its subsidiaries also have a savings and investment plan
qualified under Section 401(k) of the Internal Revenue Code. The Company makes
contributions on behalf of eligible employees to fund this plan. In connection
with this 401(k) Plan, participants can voluntarily contribute up to 15% of
their compensation to this plan, and the Company will match their contribution
up to 2%. At June 30, 1997, and June 30, 1996, the Company has accrued $50,158
and $50,000, respectively, for this matching contribution.
Additionally, the Company self-funds its employee health care plan. The Company
has obtained reinsurance with both a specific and an aggregate stop-loss in the
event of catastrophic claims. At June 30, 1997, the Company has accrued an
amount representing the Company's estimate of incurred but not reported claims.
NOTE M. SUBORDINATED DEBENTURE
In conjunction with the purchase of the Notes previously described, U.S. Global
issued a $6 million 8% subordinated debenture to ML, the terms of which require
monthly principal payments and quarterly interest payments as the Notes mature
with the balance due upon maturation of the notes. Due to the maturation of the
Notes during the year, the remaining principal payments were made and no balance
on the debenture remained outstanding at June 30, 1997. As of June 30, 1996, the
balance of the subordinated debenture outstanding was $1,533,131.
NOTE N. SHAREHOLDERS' EQUITY
During June of 1996 the Company reclassified its class A common stock as class C
common stock and reclassified its preferred stock as class A common stock with
no change in existing rights, privileges, or preferences of each respective
class. Class B common stock remains unchanged. The descriptions in this note
have been changed to reflect these reclassifications.
In a private placement on October 27, 1989, Frank E. Holmes and the F.E. Holmes
Organization, Inc. acquired control of the Company by purchasing for $2,200,000,
550,000 shares of the Company's class C common stock and warrants to acquire an
additional 550,000 shares of class C common stock at $4.00 per share. These
warrants include a provision for adjustment to the number of warrants and
exercise price in the event additional securities are issued at an amount below
the exercise price of such outstanding warrants. At June 30, 1994, there were
outstanding class C common stock warrants to purchase 586,122 shares at $3.75
per share expiring October 1994. Effective August 11, 1994 such warrants were
canceled and new agreements were approved providing for warrants to acquire
586,122 shares of common stock at the August 11, 1994 market price of $4.00 per
share expiring October 1999. These warrants were outstanding as of June 30,
1997.
In December 1991, the Company issued to Mr. Holmes options to purchase 400,000
shares of class C common stock at $2.625 per share which equaled or exceeded the
fair value of the stock on the date of grant. These options vested six months
after the issuance date and expire on December 6, 2001. During fiscal 1992, the
Board of Directors approved the issuance of 100,000 shares of class A common
stock to F.E. Holmes Organization, Inc. in exchange for 100,000 shares of its
class C common stock. At June 30, 1997, Mr. Holmes owned approximately 69% of
the outstanding shares of the Company's class C common stock, which is the only
class of the Company's stock having voting rights.
In March 1985, the Board of Directors adopted an Incentive Stock Option Plan
(the "1985 Plan"), amended in November 1989 and December 1991, which provides
for the granting of options to purchase 200,000 shares of the Company's class A
common stock, at or above fair market value, to certain executives and key
salaried employees of the Company and its subsidiaries. Options under the 1985
Plan may be granted for a term of up to five years in the case of employees who
own in excess of 10% of the total combined voting power of all classes of the
Company's stock and up to ten years for other employees. Options issued under
the 1985 Plan vest six months from the grant date or 20% on the first, second,
third, fourth and fifth anniversaries of the grant date. Since adoption of the
1985 plan, options have been granted at prices ranging from $1.50 to $4.50 per
share, which equaled or exceeded the fair market value at date of grant. During
fiscal year 1995, options covering 42,500 shares were granted at an exercise
price of $2.625 per share. As of June 30, 1997, options covering 85,500 shares
have been exercised and options covering 13,500 shares have expired. The 1985
plan expired December 31, 1994; as a consequence, there will be no further
option grants under the 1985 plan.
In November 1989, the Board of Directors adopted the 1989 Non-Qualified Stock
Option Plan (the "1989 Plan"), amended in December 1991, which provides for the
granting of options to purchase 800,000 shares of the Company's class A common
stock to directors, officers and employees of the Company and its subsidiaries.
Since adoption of the 1989 Plan, options have
<PAGE>
Page 49
- --------------------------------------------------------------------------------
been granted at prices ranging from $1.50 to $5.69 per share, which equaled or
exceeded the fair market value at date of grant. During the fiscal year 1995
options covering 7,000 shares were granted at exercise prices ranging from
$2.625 to $3.375 per share. During fiscal 1996 options covering 44,700 shares
were granted at exercise prices ranging from $2.1875 to $2.625 per share. During
fiscal 1997, options covering 30,000 shares were granted at an exercise price of
$2.00 per share. Options issued under the 1989 Plan vest six months from the
grant date or 20% on the first, second, third, fourth and fifth anniversaries of
the grant date. As of June 30, 1997, options covering 393,000 shares have been
exercised under this plan and options covering 55,400 shares have expired.
In April 1997, the Board of Directors adopted the 1997 Non-Qualified Stock
Option Plan (the "1997 Plan") which provides for the granting of stock
appreciation rights ("SARs") and/or options to purchase 200,000 shares of the
Company's class A common stock to directors, officers and employees of the
Company and its subsidiaries. During the fiscal year 1997, options covering
148,500 shares were granted at exercise prices ranging from $1.82 to $2.00 per
share. As of June 30, 1997, no options have been exercised or have expired.
On a per share basis, the holders of the class C common stock and the non-voting
class A common stock participate equally in dividends as declared by the
Company's Board of Directors, with the exception that any dividends declared
must first be paid to the holders of the class A stock to the extent of 5% of
the Company's after-tax prior year net earnings.
The holders of the class A stock have a liquidation preference equal to the par
value of $.05 per share. Certain class C common stock is exchangeable on a
one-for-one basis for class A stock.
Stock option transactions under the various stock option plans are summarized
below:
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
Outstanding July 1, 1994 1,071,500 $ 2.48
Granted 49,500 $ 3.35
Canceled 700 $ 2.63
Exercised 78,500 $ 1.84
---------
Outstanding June 30, 1995 1,041,800 $ 2.57
Granted 44,700 $ 2.76
Canceled 25,700 $ 2.63
Exercised 141,500 $ 2.09
---------
Outstanding June 30, 1996 919,300 $ 2.65
Granted 178,500 $ 1.90
Canceled 33,500 $ 2.67
Exercised 5,500 $ 1.50
---------
Outstanding June 30, 1997 1,058,800 $ 2.53
=========
As of June 30, 1997, 1996 and 1995, exercisable stock totaled 1,027,140,
851,150, and 973,125 shares and had weighted average exercise prices of $2.51,
$2.59, and $2.47 per share, respectively.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" and related interpretations in accounting for its
stock option plans as allowed under Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). Accordingly,
the Company has not recognized compensation expense for its stock options
granted subsequent to December 15, 1994, the effective date of the statement.
Had compensation expense for the Company's stock options granted in fiscal 1997
and 1996 been determined based on the fair value at the grant dates consistent
with the methodology of SFAS 123, such compensation expense, net of tax benefit,
would have been $134,532 and $25,493, respectively, and the pro forma net income
and income per share would have been as follows:
<PAGE>
Page 50
- --------------------------------------------------------------------------------
FISCAL YEAR ENDED JUNE 30,
---------------------------
1997 1996
--------- -------------
Pro Forma Net Income $ 149,615 $ 1,961,574
Pro Forma Income Per Share:
Primary and Fully Diluted $ 0.02 $ 0.30
The weighted average fair value of options granted during the fiscal years ended
June 30, 1997, and 1996 was $1.10 and $1.78, respectively. Because SFAS 123 is
applicable only to options granted in fiscal years beginning subsequent to
December 15, 1994, its pro forma effect will not be fully reflected until fiscal
2001 due to vesting requirements.
For purposes of pro forma disclosure, the estimated fair value of the options is
amortized to expense over the options' vesting period. The fair value of these
options was estimated at the date of the grant using a Black-Scholes option
pricing model with the following weighted-average assumptions:
FISCAL YEAR ENDED JUNE 30,
--------------------------------
1997 1996
------------- --------------
Expected Volatility 0.50 - 0.55 0.52 - 0.55
Expected Dividend Yield -- --
Expected Life (Term) 8 Years 8 Years
Risk-Free Interest Rate 5.07% - 5.47% 5.18% - 5.47%
Class A and class C common stock options outstanding and exercisable at June 30,
1997, were as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------------------------------------ -------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
DATE OF OPTION NUMBER REMAINING OPTION NUMBER OPTION
GRANT PRICE OUTSTANDING LIFE IN YEARS PRICE EXERCISABLE PRICE
-------- ------- ----------- ------------- ------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1985 Plan 11/07/89 $ 1.65 35,000 2.35 $ 1.65 35,000 $ 1.65
Class A 11/07/89 $ 1.50 24,000 2.35 $ 1.50 24,000 $ 1.50
09/13/93 $ 4.25 10,000 1.20 $ 4.25 25,500 $ 4.25
10/05/94 $ 4.50 17,000 7.26 $ 4.50 6,800 $ 4.50
12/15/94 $ 2.63 18,000 7.46 $ 2.63 7,200 $ 2.63
------- ------- ---- ------- ------- -------
$1.50 - $4.50 104,000 3.93 $ 2.50 98,500 $ 2.55
1989 Plan 11/07/89 $ 1.50 0 n/a $ 1.50 0 $ 1.50
Class A 11/13/89 $ 2.25 90,000 2.37 $ 2.25 90,000 $ 2.25
12/06/91 $ 2.63 217,600 4.43 $ 2.63 217,600 $ 2.63
08/24/92 $ 3.00 5,000 5.15 $ 3.00 5,000 $ 3.00
02/14/94 $ 5.69 20,000 1.62 $ 5.69 12,000 $ 5.69
05/16/94 $ 4.75 2,000 1.87 $ 4.75 1,200 $ 4.75
12/15/94 $ 2.63 0 n/a $ 2.63 0 $ 2.63
02/24/95 $ 3.38 0 n/a $ 3.38 0 $ 3.38
09/05/95 $ 2.63 16,500 8.18 $ 2.63 3,300 $ 2.63
11/07/95 $ 2.19 5,200 8.35 $ 2.19 1,040 $ 2.19
05/24/96 $ 3.06 20,000 8.90 $ 3.06 20,000 $ 3.06
06/04/97 $ 2.00 30,000 9.93 $ 2.00 30,000 $ 2.00
------- ------- ---- ------- ------- -------
$1.50 - $5.69 406,300 4.66 $ 2.68 380,140 $ 2.62
1997 Plan 06/04/97 $ 1.82 98,500 9.93 $ 1.82 98,500 $ 1.82
Class A 06/04/97 $ 2.00 50,000 9.93 $ 2.00 50,000 $ 2.00
------- ------- ---- ------- ------- -------
$1.82 - $2.00 148,500 9.93 $ 1.88 148,500 $ 1.88
Class C 12/06/91 $ 2.63 400,000 4.43 $ 2.63 400,000 $ 2.63
------- ------- ---- ------- ------- -------
All Plans 11/89-6/97 $1.50 - $5.69 1,058,800 5.24 $ 2.53 1,027,140 $ 2.51
========== ===== ===== ========= ==== ======= ========= =======
</TABLE>
During the fiscal years ended June 30, 1997, and June 30, 1996, the Company
purchased 141,250 and 175,475 shares of its class A common stock at an average
price of $2.39 and $2.78 per share, respectively.
At the end of September 1994, the Company and ML entered into a letter of intent
pursuant to which ML would purchase a significant ownership interest in the
Company. On December 7, 1994, the Company and ML entered into an agreement
whereby the Company issued to ML one million shares of new class of convertible
non-voting common stock (class B) at $5.00 per share and warrant to purchase an
additional one million shares of capital stock at $6.00 per share in
consideration of an investment of $5 million.
On August 3, 1995, U.S. Global shareholders approved an amendment to the
Company's Restated Articles of Incorporation providing for an increase in the
number of shares of class A that the Company is authorized to issue by one
million shares.
ML could only convert its class B shares to class C shares after mutual fund
shareholders approve continuation of the investment advisory agreements with the
Company because the agreements contain a statutory contractual provision
providing for automatic termination upon an assignment of the investment
advisory agreement. Such conversion would be deemed a change in control and,
thereby, an assignment of the contract.
As part of the transaction, Mr. Frank E. Holmes, Chairman, President and CEO of
the Company, exchanged 72,720 shares of the Company class C common Stock for
164,347 shares of ML common stock. In addition, subject to certain conditions,
including obtaining mutual fund shareholder approvals in the future, Mr. Holmes
would exchange an additional 177,280 class C common shares for 400,653 shares of
ML, and ML would convert its class B shares to class C shares, whereupon ML
would own more that 50% of the issued and outstanding voting shares of the
Company, and Mr. Holmes would then own approximately 3% of the total outstanding
common shares of ML.
U.S. Global and ML closed a transaction on December 29, 1995 covering the
issuance of class A stock and the repurchase of convertible non-voting class B
common stock and closely related items as discussed below. Pursuant to the
agreement: (1) ML no longer has a right to return its one million shares of
class B common stock to the Company at its original purchase price of
$5,000,000; (2) in this connection, the Company eliminated any future interest
costs it might have borne had ML converted its investment to debt; and (3) the
Company canceled ML's warrant and options to acquire additional shares thus
reducing future dilution by approximately 1.65 million shares.
In connection with the December 1995 transaction, ML received $2,500,000 cash
and 1,000,000 shares of class A stock in exchange for USGI canceling (a) ML's
1,000,000 shares of USGI's class B common shares, (b) a warrant giving ML the
right to acquire 1,000,000 shares of USGI's voting class C common stock or class
A common stock, (c) ML's option to convert the remaining balance of its
subordinated debenture into approximately 648,000 shares of USGI's preferred
stock, and (d) other rights under the December 1994 agreements relating to ML's
original purchase, including its right to obtain voting control of U.S. Global.
As a result of the December 1995 transaction: (1) Messrs. Hubert Marleau and
Richard Renaud, ML's representatives, resigned from U.S. Global's Board of
Directors and Frank E. Holmes, U.S. Global's Chief Executive Officer, resigned
from ML's Board of Directors; (2) U.S. Global committed to prepay $50,000 per
month toward the principal balance outstanding on the debenture held by ML in
accordance with the prepayment clause set forth in the U.S. Global-ML
Subordinated Debenture Agreement ("Debenture"); (3) The Debenture was amended to
provide that in the event that voting control of U.S. Global changes, the
balance owing ML under the Debenture shall become due and payable prior to
closing on the change in control and the registration statement covering ML's
1,000,000 shares of preferred stock shall be declared effective by the SEC prior
to said closing; (4) ML transferred the assets and the management contract(s) of
ML's Small Cap Fund ("Small Cap") from ML to USACI with all revenues generated
by Small Cap, effective January 1, 1996, whether the assets and management
contracts have been transferred or not, becoming the revenue of USACI; (5) U.S.
Global agreed to bear up to the next Cdn $250,000 in costs with respect to
USACI; and (6) the requirement that Mr. Holmes exchange 177,280 shares of U.S.
Global's class C common stock for 400,633 shares of ML (133,551 consolidated
shares based upon 1 new for 3 old) was canceled in its entirety; with the
understanding, however, that the 72,720 class C common shares held by ML and the
ML shares held by Mr. Holmes are not subject to this cancellation.
<PAGE>
Page 52
- --------------------------------------------------------------------------------
As discussed in Note P, certain changes in the Company's ownership may trigger a
limitation on the amount of net operating losses ("NOLs") that could be utilized
under Section 382 of the Internal Revenue Code. The Company reviewed Section 382
and determined that no change in control/ownership existed upon issuance of the
shares and warrants to ML therefore not triggering a Section 382 limitation on
the Company's NOLs.
NOTE O. RELATED PARTY TRANSACTIONS
In addition to the Company's receivable from USGIF relating to investment
management, transfer agent and other fees (see Note D), the Company had $690,543
and $596,605 invested in USGIF money market mutual funds at June 30, 1997, and
1996, respectively. Dividend income earned from these investments in USGIF
totaled $83,317, $113,904, and $132,881 for the years ended June 30, 1997, 1996
and 1995, respectively.
TRANSACTIONS WITH ML. During fiscal 1996, U.S. Global and ML closed a
transaction covering the issuance of class A common stock ( Note N).
During the year ended June 30, 1996, U.S. Global purchased 7,100 shares of ML
common stock through U.S. Global's brokerage account at Marleau, Lemire
Securities Inc. ("MLSI"), a subsidiary of ML, increasing U.S. Global's position
to 42,219 shares. Prior to fiscal 1996 year end, U.S. Global sold its entire
position of ML common shares.
During fiscal 1996, the Company purchased 175 put options on Eurodollar futures
("Options") for premiums of $73,938 through Marleau, Lemire Futures which is a
division of MLSI. Options were exchange traded and required no cash requirements
other than the initial premiums paid. All Options were sold/expired during
fiscal 1996 resulting in realized losses of approximately $50,000. In addition,
the Company purchased other securities at an aggregate price of $269,847 through
MLSI from July 1995 through December 1995.
During fiscal 1996, pursuant to agreements with ML (Note N), U.S. Global filed a
post-effective amendment to the Registration Statement on Form S-3 covering ML's
offering of 120,000 shares of U.S. Global stock filed in fiscal 1995 and a
Registration Statement on Form S-3 covering ML's offering of 1,000,000 shares of
U.S. Global stock, which offerings were completed during fiscal 1996. USGI
incurred approximately $21,000 in fiscal 1996 in costs associated with these
offerings.
Further, during this period, ML sold 18,225 shares of class A common stock to
STFC at the direction of the beneficial owners of various STFC custodial
retirement accounts, and 6,775 shares for $17,784 to U.S. Global, which shares
are included in treasury stock as of June 30, 1996.
As of June 30, 1996, U.S. Global had accrued approximately $70,000 in
subordinated debenture interest payable to ML. Additionally, in connection with
the sale of the Notes discussed in Note F, U.S. Global repaid approximately
$2,700,000 in principal on the subordinated debenture during the year ending
June 30, 1996. U.S. Global also paid an additional $300,000 in principal
payments on the subordinated debenture during the year ended June 30, 1996.
There were additional related party transactions involving ML related to a joint
venture to market mutual funds in Canada (see Note H) and the purchase of U.S.
Government securities (see Note F).
OTHER TRANSACTIONS. During fiscal 1996, Mr. Jerold Rubinstein, a director of the
Company, exercised options covering 25,000 shares at $1.50 per share and 25,000
shares at $2.25 per share. U.S. Global purchased the shares issued from the
exercise of Mr. Rubinstein's stock options for $3.375 per share, the market
price on the day of exercise, which shares are included in treasury stock as of
June 30, 1996. Additionally, during fiscal 1996, Mr. John Budden, a former
director of the Company who resigned during the fiscal 1996, exercised options
covering 25,000 shares at $1.50 per share, 25,000 shares at $2.25 per share and
40,000 shares at $2.625 per share.
NOTE P. INCOME TAXES
The differences in income taxes attributable to continuing operations determined
by applying the U.S. federal statutory rate of 34% and the Company's effective
tax rate are summarized as follows:
<PAGE>
Page 53
- --------------------------------------------------------------------------------
YEAR ENDED JUNE 30,
-------------------------------------------
1997 1996 1995
----------- ----------- -----------
Tax expense at statutory rate $ 209,483 $ 1,020,198 $(2,004,592)
Exercise of non-qualified stock
options treated as equity for
financial statements (2,412) (61,487) (59,885)
Non-deductible membership dues 13,713 14,112 13,825
Non-deductible meals &
entertainment 25,419 23,090 17,668
Valuation allowance 66,458 -- --
Other 19,315 17,604 50,140
----------- ----------- -----------
$ 331,976 $ 1,013,517 $(1,982,844)
=========== =========== ===========
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The tax effects of these
temporary differences that give rise to the deferred tax asset are presented
below:
JUNE 30, JUNE 30, JUNE 30,
1997 1996 1995
----------- ----------- -----------
Book/tax differences in the
balance sheet:
Trading securities $ 55,917 $ -- $ 33,995
Accumulated depreciation 93,113 108,744 106,100
Accrued expenses 47,323 14,800 29,776
Available-for-sale
securities 91,212 -- --
Reduction in carrying
value of joint venture -- 210,630 --
Annuity obligations 55,053 57,236 59,272
Net unrealized holding
gain (affiliated) 10,237 76,823 --
Net unrealized holding gain -- 294,993 120,914
----------- ----------- -----------
352,855 763,226 350,057
Tax carryovers:
Net operating loss
("NOL") carryover 855,211 957,154 2,044,251
Contributions carryover 57,709 66,459 44,635
Investment credit carryover -- 34,472 34,472
Minimum tax credits 114,270 117,786 56,786
----------- ----------- -----------
1,027,190 1,175,871 2,180,144
----------- ----------- -----------
Total gross deferred tax asset 1,380,045 1,939,097 2,530,201
----------- ----------- -----------
Affiliated Investment (164,038) (153,032) --
Trading Securities -- (34,302) --
Available-for-sale securities -- (294,993) (120,914)
Net unrealized holding loss (91,212) -- --
----------- ----------- -----------
Total gross deferred tax
liability (255,250) (482,327) (120,914)
----------- ----------- -----------
Net deferred tax asset $ 1,124,795 $ 1,456,770 $ 2,409,287
=========== =========== ===========
For federal income tax purposes at June 30, 1997, the Company has NOLs of
approximately $2,500,000 which will expire in fiscal 2010, charitable
contribution carryovers of approximately $264,000 expiring 1999-2001, and
minimum tax credits of $114,270 with indefinite expirations. If certain changes
in the Company's ownership should occur, there could be an annual limitation on
the amount of NOLs that could be utilized.
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax amount will not be realized. Management has included
a valuation allowance of $66,458 at June 30, 1997, providing for the utilization
of charitable contributions and investment tax credit carryovers against future
taxable income.
NOTE Q. LITIGATION ACCRUAL
On June 17, 1994, Gerald C. Letch sued the Company in state district court
located in San Antonio, Texas for breach of contract. Mr. Letch asked for an
unspecified amount of damages based upon an alleged oral promise by a deceased
Company officer to pay a finder's fee for introducing certain parties to the
Company leading to the organization of Pauze'/Swanson United Services Funds
("PSUSF"). During August 1994 Mr. Letch amended his complaint to include PSUSF
and
<PAGE>
Page 54
- --------------------------------------------------------------------------------
allegations of fraud and conspiracy between USGI and PSUSF. During June 1995 a
summary judgment was rendered in favor of PSUSF, which did not exist at the time
the alleged cause of action arose.
On November 21, 1995, a judgment was entered in favor of Letch. While the jury
verdict found that there was no fraud, conspiracy or malice, the jury did find
that: (1) the Company had an oral agreement to pay Letch a fee equal to 1% of
assets existing in the particular fund after it had been in existence for one
year; (2) $187,000 is the amount of damages due Letch for breach of the oral
agreement (plus an additional $16,137 for prejudgment interest); and (3) that
Letch is entitled to 50% of said damages ($93,500) as reasonable attorney's
fees. Total damages therefore aggregate $296,637.
The Company is currently pursuing an appeal and has posted a bond in connection
with perfecting the appeal. The bond is secured by a letter of credit in the
amount of $333,169, which, in turn, is secured by restricted cash of $333,169.
The Company has no balance outstanding on this letter of credit and has no plans
to draw upon it at any time in the future as the letter of credit was obtained
solely to perfect the appeal.
The Company accrued approximately $100,000 (management's best estimate of the
fees and expenses necessary to fund an appeal) and $300,000 (the approximate
amount of the judgment) which were both recorded in the Company's Consolidated
Statement of Operations in fiscal 1996. The remaining balances at June 30, 1997,
are approximately $50,000 and $300,000, respectively.
Page 55
- --------------------------------------------------------------------------------
EXHIBIT 21--SUBSIDIARIES OF THE REGISTRANT, JURISDICTION OF INCORPORATION AND
PERCENTAGE OF OWNERSHIP
1. United Shareholder Services, Inc.; incorporated in Texas and wholly owned
by the Registrant
2. A & B Mailers, Inc.; incorporated in Texas and wholly owned by the
Registrant
3. Securities Trust and Financial Company; incorporated in Texas and wholly
owned by the Registrant
4. U.S. Advisors (Guernsey) Limited; incorporated in Guernsey, Channel Islands
and wholly owned by the Registrant
Page 56
- --------------------------------------------------------------------------------
EXHIBIT 23.1--CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 33-33012 and No. 333-25699) of U.S. Global
Investors, Inc. of our report dated September 29, 1997, appearing in the Annual
Report to Shareholders which is incorporated in this Annual Report on Form 10-K.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
San Antonio, Texas
September 29, 1997
Page 57
- --------------------------------------------------------------------------------
EXHIBIT 23.2--CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 33-33012 and No. 333-25699) of U.S. Global
Investors, Inc. of our reports dated September 29, 1997, appearing in the Annual
Report to Shareholders which is incorporated in this Annual Report on Form 10-K.
/s/ Coopers & Lybrand
COOPERS & LYBRAND
PO Box 321
National Westminister House
Le Truchot
St Peter Port
Guernsey
GY1 4ND
September 29, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE PERIOD ENDED JUNE 30,
1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0000754811
<NAME> U.S. GLOBAL INVESTORS, INC.
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 722121
<SECURITIES> 1279269
<RECEIVABLES> 2228393
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3827258
<PP&E> 7420583
<DEPRECIATION> (4884502)
<TOTAL-ASSETS> 10712775
<CURRENT-LIABILITIES> 1387060
<BONDS> 0
0
0
<COMMON> 339464
<OTHER-SE> 7626943
<TOTAL-LIABILITY-AND-EQUITY> 10712775
<SALES> 12931591
<TOTAL-REVENUES> 13945564
<CGS> 0
<TOTAL-COSTS> 13329439
<OTHER-EXPENSES> 12117705
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1211734
<INCOME-PRETAX> 616125
<INCOME-TAX> 331976
<INCOME-CONTINUING> 284179
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 284179
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
