-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CjW2guvQfqKn6ewylN5Q8KXngMe5NcXCA1BPozJjNUm05YblsfqpmAnBBbPjaSZB vHQtjKFE/X65Wk9+rm2s7Q== 0000754811-97-000014.txt : 19971024 0000754811-97-000014.hdr.sgml : 19971024 ACCESSION NUMBER: 0000754811-97-000014 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19971023 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: U S GLOBAL INVESTORS INC CENTRAL INDEX KEY: 0000754811 STANDARD INDUSTRIAL CLASSIFICATION: INVESTMENT ADVICE [6282] IRS NUMBER: 741598370 STATE OF INCORPORATION: TX FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 000-13928 FILM NUMBER: 97699605 BUSINESS ADDRESS: STREET 1: 7900 CALLAGHAN RD CITY: SAN ANTONIO STATE: TX ZIP: 78229 BUSINESS PHONE: 2103081234 MAIL ADDRESS: STREET 1: 7900 CALLAGHAN ROAD CITY: SAN ANTONIO STATE: TX ZIP: 78229 FORMER COMPANY: FORMER CONFORMED NAME: UNITED SERVICES ADVISORS INC /TX/ DATE OF NAME CHANGE: 19950321 10-K/A 1 AMENDMENT NO. 1 TO ANNUAL REPORT ON FORM 10-K FORM 10-K Amendment No. 1 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 AMENDED OCTOBER 23, 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. - -------------------------------------------------------------------------------- SEE ANNUAL REPORT ON FORM 10-K FILED SEPTEMBER 29, 1997, ACCESSION NUMBER 0000754811-97-000013, FOR REMAINING SECTIONS AND EXHIBITS. - -------------------------------------------------------------------------------- ITEM 11. EXECUTIVE COMPENSATION 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. Tays' 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. 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 32,000 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 80,400 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 $1.82. All options were granted at or above market price on the date of grant. To date, no options have been exercised and no options have expired. The following table shows, as to each of the officers of the Company listed in the cash compensation table, grants of stock options and freestanding stock appreciation rights ("SARs") made during the last fiscal year.
POTENTIAL REALIZED VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE APPRECIATION INDIVIDUAL GRANTS FOR OPTION TERM - ----------------------------------------------------------------------------------------------- -------------------------- (A) (B) (C) (D) (E) (F) (G) - ---------------------- ------------------- --------------- ------------- -------------------- ------------- ------------ NUMBER OF % OF TOTAL SECURITIES OPTIONS/SARS UNDERLYING GRANTED TO EXERCISE OR OPTIONS/SARS EMPLOYEES IN BASE NAME GRANTED (#) FISCAL YEAR PRICE ($/SH) EXPIRATION DATE 5% ($) 10% ($) - ---------------------- ------------------- --------------- ------------- -------------------- ------------- ------------ 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 - ---------------------------- ----------------------- ---------------------- ------------------ ------------------------ 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
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 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. [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 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. 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. 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. CLASS C -CLASS A BENEFICIAL OWNER COMMON STOCK % COMMON STOCK(1) % - --------------------------- ------------ ------ -------------- ----- Bobby D. Duncan 4,931 0.99% 116,652 1.84% 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% 755,377(4) 11.12% --------- ----- ------- ---- - ------------------- (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. Duncan - 96,000 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. - -------------------------------------------------------------------------------- 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: October 23, 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 - ------------------------ ------------------------ ------------------ Director October 23, 1997 - ------------------------ JEROLD H. RUBINSTEIN * /s/ Roy D. Terracina Director October 23, 1997 - ------------------------ ROY D. TERRACINA * /s/ Frank E. Holmes Chairman of the Board October 23, 1997 - ------------------------ of Directors FRANK E. HOLMES Chief Executive Officer * /s/ Bobby D. Duncan Director October 23, 1997 - ------------------------ BOBBY D. DUNCAN * /s/ J. Stephen Penner Director October 23, 1997 - ------------------------ J. STEPHEN PENNER * /s/ Thomas F. Lydon, Jr. Director October 23, 1997 - ------------------------ THOMAS F. LYDON, JR. /s/ David J. Clark Chief Financial Officer October 23, 1997 - ------------------------ DAVID J. CLARK /s/ J. Michael Edwards Chief Accounting Officer October 23, 1997 - ------------------------ J. MICHAEL EDWARDS * BY: /s/ Susan B. McGee - ------------------------ SUSAN B. MC GEE Executive Vice President, Corporate Secretary Power of Attorney EX-13 2 AMENDMENT TO EXHIBIT 13, ANNUAL REPORT - -------------------------------------------------------------------------------- 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 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 21 - -------------------------------------------------------------------------------- Investment company net assets under management (in thousands) at fiscal year end for the past five years were:
1997 1996 1995 1994 1993 ---------- ---------- ---------- ---------- ---------- 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 ========== ========== ========== ========== ==========
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 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 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 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 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]
1990 1991 1992 1993 1994 1995 1996 1997 --------- --------- --------- --------- ---------- ---------- ---------- ---------- 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
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 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 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 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 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 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.
YEAR ENDED JUNE 30, SELECTED EARNINGS DATA ----------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 ----------- ----------- ----------- ----------- ---------- 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.)
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 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 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 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 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 $39,307,196 ============ ============ The accompanying notes are an integral part of this statement. 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 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 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 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 40 - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
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) --------- -------- -------- ----------- ------------ ------ ----------- 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 --------- --------- ----------- 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
The accompanying notes are an integral part of this statement. 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 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 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 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 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 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 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 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 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 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:
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 -------- ------- ----------- ------------- ------- ----------- ------- 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 ========== ===== ===== ========= ==== ======= ========= =======
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 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 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 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. -----END PRIVACY-ENHANCED MESSAGE-----