ITEM 1. BUSINESS
There is incorporated in this Item 1 by reference that portion of the U.S. Global Investors, Inc. (U.S. Global, the Company or Registrant) ANNUAL REPORT TO SHAREHOLDERS, attached to this Form 10-K as Exhibit 13, appearing under the caption "The Company."
ITEM 2.
ITEM 2. PROPERTIES
The Company presently occupies an office building as its headquarters located in San Antonio, Texas. The office building is approximately 46,000 square feet on approximately 2.5 acres of land. The Company purchased this building from the Resolution Trust Corporation in 1992 and financed the acquisition and improvements with a loan of $1,425,000. As of June 30, 1999, the balance of the note was approximately $1,169,000. The Company and its subsidiaries, United Shareholder Services, Inc. (USSI), A&B Mailers, Inc., Security Trust & Financial Company (STFC), U.S. Global Brokerage, Inc. (USGB) and U.S. Global Administrators, Inc. (USGA) occupy approximately 95 percent of the building.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
There is no material pending legal proceeding in which the Company is involved. There are no material legal proceedings to which any director, officer or affiliate of the Company or any associate of any such director or officer is a party or has a material interest, adverse to the Company or any of its subsidiaries.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during fiscal year 1999.
U.S. Global Investors, Inc. Annual Report on Form 10-K 1999 Page 4
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
MARKET INFORMATION
The Company has three classes of common equity-- class A, class B and class C common stock, par value $0.05 per share.
There is no established public trading market for the Company's class B and class C common stock.
The holders of the Company's class C common stock of record on March 12, 1985 (and their transferees by gift, devise or descent) have the right to exchange their shares of class C common stock for class A common stock on a share-for-share basis until April 30, 2000. At September 17, 1999, the holders of 28,358 shares of class C common stock have the right to exchange.
The Company's class A common stock is traded over-the-counter and is quoted daily under the Nasdaq Small Cap Issues. Trades are reported under the symbol "GROW."
The following table sets forth the range of high and low closing bid quotations from Nasdaq for the fiscal years ended June 30, 1999 and 1998. The quotations represent prices between dealers and do not include any retail markup, markdown or commission and may not necessarily represent actual transactions.
BID PRICE ($) ------------------------------------ 1999 1998 ---------------- ---------------- HIGH LOW HIGH LOW ------ ------ ------ ------ First Quarter (9/30) $1.875 $1.375 $3.000 $2.000 Second Quarter (12/31) $1.750 $1.313 $2.563 $1.750 Third Quarter (3/31) $2.906 $1.500 $2.813 $1.813 Fourth Quarter (6/30) $1.688 $1.250 $2.625 $1.875
HOLDERS
On September 17, 1999, there were 71 holders of record of class C common stock, no holders of record of class B common stock and 292 holders of record of the class A common stock.
Many of the class A common shares are held of record by nominees, and management believes that as of September 8, 1999, there were approximately 1,000 beneficial owners of the Company's class A common stock.
DIVIDENDS
The Company has not paid cash dividends on its class C common stock during the last thirteen fiscal years, and has never paid cash dividends on its class A common stock. Payment of cash dividends is within the discretion of the Company's board of directors and is dependent upon earnings, operations, capital requirements, general financial condition of the Company and general business conditions.
Holders of the outstanding shares of the Company's class A common stock are entitled to receive, when and as declared by the Company's board of directors, a non-cumulative cash dividend equal in the aggregate to 5 percent of the Company's after-tax net earnings for its prior fiscal year. After such dividend has been paid, the holders of the outstanding shares of class B common stock are entitled to receive, when and as declared by the Company's board of directors, cash dividends per share equal to the cash dividends per share paid to the holders of the class A common stock. Holders of the outstanding shares of class C common stock are entitled to receive when and as declared by the Company's board of directors, cash dividends per share equal to the cash dividends per share paid to the holders of the class A and class B common stock. Thereafter, if the board of directors determines to pay additional cash dividends, such dividends will be paid simultaneously on a prorated basis to holders of class A, B and C common stock. The
U.S. Global Investors, Inc. Annual Report on Form 10-K 1999 Page 5
holders of the class A common stock are protected in certain instances against dilution of the dividend amount payable to such holders.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
There is incorporated by reference in this Item 6 that portion of the Company's ANNUAL REPORT TO SHAREHOLDERS appearing under the caption "Selected Financial Data."
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
There is incorporated by reference in this Item 7 that portion of the Company's ANNUAL REPORT TO SHAREHOLDERS appearing under the caption "Annual Status Report."
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated Financial Statements and notes thereto located in the Company's ANNUAL REPORT TO Shareholders are incorporated herein by reference.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
As of June 5, 1998, U.S. Global Investors, Inc. discharged PricewaterhouseCoopers LLP as its independent accountants since the firm closed its local office. The report of PricewaterhouseCoopers LLP on the financial statements for the fiscal year 1997 contained no adverse opinion or disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope or accounting principle. The Registrant's Audit Committee participated in and approved the decision to change independent accountants. In connection with its audits for the fiscal year 1997 and through June 5, 1998, there have been no disagreements with PricewaterhouseCoopers LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements if not resolved to the satisfaction of PricewaterhouseCoopers LLP would have caused them to make reference thereto in their report on the financial statements for such years. During the fiscal year 1997 and through June 5, 1998, there have been no reportable events [as defined in Regulation S-K Item 304(a)(1)(v)].
PricewaterhouseCoopers LLP continued to audit investment companies managed by the Company in fiscal year 1999.
The Registrant engaged Ernst & Young LLP as its new independent accountants as of June 8, 1998. Since June 8, 1998, no Form 8-K recording a change of accountants due to a disagreement on any matter of accounting principles or practices or financial statement disclosure has been filed with the Commission.
U.S. Global Investors, Inc. Annual Report on Form 10-K 1999 Page 6
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The directors and executive officers of the Company are as follows:
NAME AGE POSITION - --------------------- --- ---------------------------------------------- David J. Clark 38 Chief Financial Officer of the Company since May 1997 and Chief Operating Officer since December 1997. Chief Financial Officer of USSI and STFC since June 1997 and September 1997, respectively. Treasurer of USGIF and USGAF since January 1998. Director of USGB since October 1997 and Chief Financial Officer since January 1998. Foreign Service Officer with U.S. Agency for International Development in the U.S. Embassy, Bonn, West Germany from May 1992 to May 1997.
J. Michael Edwards 32 Chief Accounting Officer of the Company since May 1997 and employed by the Company beginning February 1997. Chief Accounting Officer of USSI and STFC since June 1997 and September 1997, respectively. President of USGA since January 1999. Assistant Treasurer of USGIF and USGAF since January 1998. Assistant Controller for Grant-Lydick Beverage Co. from January 1995 to February 1997. Staff Accountant with PricewaterhouseCoopers LLP from August 1992 through January 1995.
Frank E. Holmes 44 Chairman of the Board of Directors and Chief Executive Officer of the Company since October 27, 1989, President from October 1989 to September 1995 and from March 1997 to February 1998, and Chief Investment Officer since June 4, 1999. Director of STFC since October 1989. President, Chief Executive Officer and Trustee of USGIF since January 1990. President, Chief Executive Officer and Trustee of USGAF since April 1993. Director of U.S. Global Brokerage, Inc. since October 1997. Director of U.S. Global Investors (Guernsey) Limited, a wholly owned subsidiary of the Company, and of the Guernsey Funds managed by that Company since September 1993. Director of 71316 Ontario, Inc. since April 1987. Director, President and Secretary of F.E. Holmes Organization, Inc. since July 1978. Director of USACI since February 1995, Director and President from February 1995 to June 1997.
Thomas F. Lydon, Jr. 39 Director of the Company since June 1997. Chairman of the Board and President of Global Trends Investments since April 1996. President, Vice President and Account Manager with Fabian Financial Services, Inc. from April 1984 to March 1996. Member of the Advisory Board for Schwab Institutional from 1989 to 1991 and from 1995 to 1996. Member of the Advisory Board of Rydex Series Trust since January 1999. Fund Relations Chair for SAAFTI since 1994.
Susan B. McGee 40 President of the Company since February 1998, General Counsel since March 1997. Since September 1992 Ms. McGee has served and continues to serve in various positions with the Company, its subsidiaries, and the investment companies it sponsors.
J. Stephen Penner 58 Director since May 1997. Senior Vice President of LCG Associates, and since March 1982 has held various positions with that Company. Senior Vice President of LCG Holdings, Inc. since November 1992.
U.S. Global Investors, Inc. Annual Report on Form 10-K 1999 Page 7
NAME AGE POSITION - --------------------- --- ---------------------------------------------- Anthony A. Rabago 32 Associate Counsel for the Company since August 1998. President of USGB since January 1999. Compliance Director for American General Corporation from August 1997 to July 1998. Compliance Administrator for American General Corporation for August 1995 to July 1997. Staff Attorney for the Texas State Securities Board from August 1994 until July 1995.
Jerold H. Rubinstein 61 Director of the Company since October 1989. Chairman and Chief Executive Officer of Xtra Music since July 1997. Chairman of the Board of Directors and Chief Executive Officer of DMX Inc. from May 1986 to July 1997.
Roy D. Terracina 53 Director of the Company since December 1994 and Vice Chairman of the Board of Directors since May 1997. Director of STFC since August 1992. Owner of Sunshine Ventures, Inc., an investment company, since January 1994.
None of the directors or executive officers of the Company has a family relationship with any of the other directors or executive officers.
Each member of the board of directors is elected for a one-year term or until their successors are elected and qualified. The executive officers of the Company are appointed by the board of directors. The Company does not have a Nominating Committee. The Company's Compensation Committee consists of Messrs. Holmes, Terracina and Rubinstein. The Company's Audit Committee consists of Messrs. Rubinstein and Terracina. The Stock Option Committee consists of Messrs. Rubinstein and Terracina.
COMPLIANCE WITH SECTION 16(A) OF THE 1934 ACT
Section 16(a) of the 1934 Act requires directors and officers of the Company, and persons who own more than 10 percent of the Company's class A common stock, to file with the Securities and Exchange Commission (SEC) initial reports of ownership and reports of changes in ownership of the stock. Directors, officers and more than 10 percent shareholders are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on a review of the copies of such reports furnished to the Company and written representations that no other reports were required, during the year ended June 30, 1999, all Section 16(a) filing requirements applicable to its directors, officers and more than 10 percent beneficial owners were met.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
U.S. Global Investors, Inc. Annual Report on Form 10-K 1999 Page 8
The Company has intentionally omitted columns (h) and (i) as they are not applicable.
Includes amounts identified for 401(k) contributions (calculable through the end of June 30, 1999, fiscal year) and amounts for company savings plans (calculable through the end of the June 30, 1999, fiscal year).
- ------------------ (1) Mr. Holmes also received trustee fees from U.S. Global Investors Funds and U.S. Global Accolade Funds in the amount of $24,000 in 1997, $28,000 in 1998, and $32,000 in 1999.
(2) The Company believes that the aggregate amounts of such omitted personal benefits do not exceed the lesser of $50,000 or 10 percent of the total of annual salary or bonus reported in columns (c) and (d) for the named executive officers.
(3) The dollar value of the shares reflected in the table is based on the market value for the shares on the date the shares were awarded. The dollar value of the long term compensation value is also factored in the bonus section of the annual compensation table.
(4) All options pertain to Company class A common stock.
INCENTIVE COMPENSATION
Executive officers, except Mr. Holmes, participate in a team performance pay program based on each employee's annual salary to recognize monthly completion of departmental goals. During fiscal year 1997, part 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 year 1998. Additionally, key executive officers are compensated based on individual performance pay arrangements.
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 percent of its net income before taxes during each fiscal year, limited to 15 percent 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. For the fiscal year ended June 30, 1999, the Company did not contribute 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 or match a certain percentage 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. For the fiscal year ended June 30, 1999, the Company has accrued $44,723, 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 using managed investment companies, which essentially all such employees accepted. Limited employee contributions to an Individual Retirement Account are matched by the Company. Similarly, certain employees may contribute monthly to the Tax Free Fund, the Company will match these contributions on a limited basis. Beginning in fiscal year 1997, a similar savings plan utilizing UGMA accounts has been offered to employees to save for their children's education. For the fiscal year ended June 30, 1999, the Company match aggregated in all programs to $57,317, reflected in base salary expense.
U.S. Global Investors, Inc. Annual Report on Form 10-K 1999 Page 9
STOCK OPTION PLANS
In March 1985, the board of directors of the Company adopted an Incentive Stock Option Plan (1985 Plan), which the shareholders of the Company approved 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 for employees who own more than 10 percent 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 percent of the fair market value as of the date of the grant, or 110 percent of the fair market value for any officer or employee holding more than 10 percent 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 17, 1999, grants covering 88,000 shares have been exercised under the 1985 plan. Grants covering 51,500 shares have expired.
In November 1989 the board of directors adopted the 1989 Non-Qualified Stock Option Plan (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, shareholders approved and amended the 1989 Plan 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, 1999, there were no grants. As of September 17, 1999, grants covering 393,000 shares have been exercised under the 1989 plan. Grants covering 121,400 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. All optionees accepted the amendment.
In April 1997, the board of directors adopted the 1997 Non-Qualified Stock Option Plan (1997 Plan), which shareholders approved on April 25, 1997. It 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, 1999, there were no grants. As of September 17, 1999, grants covering 6,000 shares have been exercised under the 1997 Plan, and grants covering 29,500 shares have expired. Shares available for stock option grants under the 1989 Plan and the 1997 Plan aggregate to approximately 66,700 and 55,000 shares, respectively, on September 17, 1999.
The following table shows, as to each officer of the Company listed in the cash compensation table, grants of stock options and freestanding stock appreciation rights made during the last fiscal year.
U.S. Global Investors, Inc. Annual Report on Form 10-K 1999 Page 10
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.
COMPENSATION OF DIRECTORS
The Company may grant non-employee directors 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. During the fiscal year ended June 30, 1999, the non-employee directors each received cash compensation of $12,000. Mr. Terracina is also a director of STFC where he received cash compensation of $3,300. Directors are reimbursed for reasonable travel expenses incurred in attending the meetings held by the board of directors.
REPORT ON EXECUTIVE COMPENSATION
The board appointed Messrs. Holmes, Terracina, and Rubinstein as members of the Executive Compensation Committee during fiscal year 1997, and they continue to serve on the committee. There are no compensation committee interlocks to report. Mr. Holmes served as an employee and officer of the Registrant. The board of directors reviews Mr. Holmes' compensation annually to determine an acceptable base compensation, reflecting an amount competitive with industry peers and taking into account the relative cost of living in San Antonio, Texas. The board of directors also reviews Mr. Holmes' performance in managing the company's securities portfolio with respect to which he is paid a cash bonus, which bonus is paid periodically throughout the year. During fiscal year 1999, Mr. Holmes, in addition to his other duties, became the company's chief investment officer responsible for supervising management of clients' portfolios. In June 1999, in part to compensate him for these efforts and upon cancellation of Mr. Holmes' warrants and option to acquire 986,122 shares of class C common stock, the board approved the issuance of 1,000,000 shares of class C common stock to Mr. Holmes to be vested over a ten-year period beginning with fiscal year 1999, with an annual compensation value of $50,000.
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 to enhance operational and fiscal efficiencies throughout the Company
U.S. Global Investors, Inc. Annual Report on Form 10-K 1999 Page 11
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, thereby 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.
COMPANY PERFORMANCE PRESENTATION
The graph below 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 Financial Times Gold Mine 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, 1994, and that all dividends are reinvested.
[LINEAR GRAPH PLOTTED FROM DATA IN TABLE BELOW]
DATE FINANCIAL TIMESPO500MINDIXNDEX GROW FT GOLD MINE INS&P 500 INDEXGROW
30-Jun-93 100.00 100.00 100.00 1904.13 450.53 5 30-Jul-93 106.31 99.47 112.50 2024.35 448.13 5.625 31-Aug-93 98.74 102.89 95.00 1880.17 463.56 4.75 30-Sep-93 88.09 101.86 80.00 1677.43 458.93 4 29-Oct-93 103.62 103.84 95.00 1973 467.83 4.75 30-Nov-93 101.34 102.50 97.50 1929.64 461.79 4.875 31-Dec-93 116.87 103.53 112.50 2225.36 466.45 5.625 31-Jan-94 113.68 106.90 115.00 2164.52 481.61 5.75 28-Feb-94 106.25 103.69 105.00 2023.09 467.14 5.25 31-Mar-94 106.90 98.94 107.50 2035.44 445.77 5.375 29-Apr-94 99.60 100.08 87.50 1896.43 450.91 4.375 31-May-94 102.64 101.33 97.50 1954.46 456.51 4.875 30-Jun-94 100.30 98.61 92.50 1909.93 444.27 4.625 29-Jul-94 103.01 101.72 85.00 1961.46 458.26 4.25 31-Aug-94 109.36 105.54 85.00 2082.37 475.5 4.25 30-Sep-94 122.06 102.70 92.50 2324.26 462.71 4.625 31-Oct-94 113.22 104.84 82.50 2155.91 472.35 4.125 30-Nov-94 99.22 100.70 75.00 1889.36 453.69 3.75 30-Dec-94 103.76 101.94 65.00 1975.79 459.27 3.25 31-Jan-95 86.02 104.41 67.50 1637.91 470.42 3.375 28-Feb-95 90.88 108.18 67.50 1730.51 487.39 3.375 31-Mar-95 101.35 111.14 67.50 1929.82 500.71 3.375 28-Apr-95 101.33 114.25 67.50 1929.38 514.71 3.375 31-May-95 99.84 118.39 55.00 1901.1 533.4 2.75 30-Jun-95 101.23 120.91 52.50 1927.52 544.75 2.625 31-Jul-95 102.41 124.76 52.50 1950.05 562.06 2.625 31-Aug-95 103.59 124.72 50.00 1972.57 561.88 2.5 29-Sep-95 104.29 129.72 52.50 1985.73 584.41 2.625 31-Oct-95 90.48 129.07 42.50 1722.93 581.5 2.125 30-Nov-95 99.12 134.37 37.50 1887.36 605.37 1.875 29-Dec-95 100.49 136.71 32.50 1913.46 615.93 1.625 31-Jan-96 121.09 141.17 60.00 2305.74 636.02 3 29-Feb-96 122.90 142.15 57.50 2340.21 640.43 2.875 29-Mar-96 122.58 143.28 54.68 2334.02 645.5 2.734 30-Apr-96 122.19 145.20 55.00 2326.67 654.17 2.75 31-May-96 124.83 148.52 67.50 2376.96 669.12 3.375 28-Jun-96 105.91 148.85 57.50 2016.69 670.63 2.875 31-Jul-96 104.81 142.04 47.50 1995.74 639.95 2.375 30-Aug-96 106.69 144.72 50.00 2031.43 651.99 2.5 30-Sep-96 97.25 152.56 53.76 1851.84 687.31 2.688 31-Oct-96 98.62 156.54 47.50 1877.76 705.27 2.375 29-Nov-96 98.48 168.03 47.50 1875.25 757.02 2.375 31-Dec-96 95.77 164.42 47.50 1823.55 740.74 2.375 31-Jan-97 89.19 174.50 55.00 1698.33 786.16 2.75 28-Feb-97 100.18 175.53 47.50 1907.49 790.82 2.375 31-Mar-97 85.97 168.05 41.26 1636.93 757.12 2.063 30-Apr-97 77.13 177.87 35.00 1468.6 801.34 1.75 30-May-97 82.45 188.28 36.26 1569.89 848.28 1.813 30-Jun-97 73.15 196.47 40.00 1392.84 885.14 2 31-Jul-97 74.27 211.81 47.50 1414.15 954.29 2.375 29-Aug-97 74.15 199.65 48.75 1411.93 899.47 2.4375 30-Sep-97 80.09 210.26 43.75 1525.05 947.28 2.1875 31-Oct-97 65.21 203.01 43.75 1241.63 914.62 2.1875 28-Nov-97 51.34 212.06 45.00 977.62 955.4 2.25 31-Dec-97 55.57 215.40 37.50 1058.22 970.43 1.875 30-Jan-98 58.71 217.58 40.00 1117.83 980.28 2 27-Feb-98 56.57 232.91 47.50 1077.09 1049.34 2.375 31-Mar-98 60.14 244.55 52.50 1145.12 1101.75 2.625 30-Apr-98 68.19 246.76 51.25 1298.43 1111.75 2.5625 29-May-98 57.09 242.12 45.00 1087.12 1090.82 2.25 30-Jun-98 52.19 251.67 40.00 993.86 1133.84 2 31-Jul-98 47.30 248.74 32.50 900.63 1120.67 1.625 31-Aug-98 36.85 212.48 28.76 701.58 957.28 1.438 30-Sep-98 57.82 225.74 31.26 1100.93 1017.01 1.563 30-Oct-98 58.46 243.86 26.26 1113.11 1098.67 1.313 30-Nov-98 55.41 258.28 31.26 1055.13 1163.63 1.563 31-Dec-98 49.08 272.84 31.26 934.49 1229.23 1.563 29-Jan-99 48.95 284.03 32.50 932.15 1279.64 1.625 26-Feb-99 45.77 274.86 41.26 871.43 1238.33 2.063 31-Mar-99 45.64 285.52 30.00 869.00 1286.37 1.5 30-Apr-99 53.46 296.36 27.50 1017.99 1335.18 1.375 31-May-99 43.50 288.96 28.76 828.32 1301.84 1.438 30-Jun-99 46.48 304.69 25.00 885.05 1372.71 1.25
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
CLASS C COMMON STOCK (VOTING STOCK). At September 17, 1999, there were 1,496,800 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 percent or more of the outstanding shares of class C common stock.
CLASS C PERCENT OF NAME AND ADDRESS COMMON SHARES SHARES ISSUED OF BENEFICIAL OWNER BENEFICIALLY OWNED OUTSTANDING --------------------- ------------------ ------------ Frank E. Holmes 1,392,211 93.01% 7900 Callaghan Road San Antonio, TX 78229
------------------- (1) Includes 1,000,000 shares of class C common stock issued to Mr. Holmes that will be vested in equal amounts over the next ten years and will be fully vested on June 30, 2008; 102,280 shares owned by F. E. Holmes Organization Inc.; 285,000 shares owned directly by Mr. Holmes; and 4,931 shares owned by Mr. Holmes in an IRA.
U.S. Global Investors, Inc. Annual Report on Form 10-K 1999 Page 12
CLASS A COMMON STOCK (NON-VOTING STOCK). At September 17, 1999, there were 6,026,703 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 percent or more of the outstanding shares of class A common stock.
CLASS A COMMON SHARES NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED PERCENT OF CLASS - ------------------------------------ --------------------- ---------------- Frank E. Holmes -- San Antonio, TX 380,782 6.31% Mason Hill Asset Management, Inc.-- New York, NY 409,000 6.78% Heartland Advisors, Inc.-- Milwaukee, WI 588,300 9.76%
- --------------------- (1) Detail of beneficial ownership set forth below under "Security Ownership of Management."
(2) Mason Hill Asset Management, Inc. owns 250,500 shares or 4.02 percent. Equinox Partners, LP owns 158,500 shares or 2.55 percent. 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 18, 1997.
(3) Information is from Schedule 13G, dated January 21, 1999, filed with the SEC.
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth, as of September 17, 1999, 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 sole voting power and investment power with respect to all such shares.
CLASS C COMMON STOCK CLASS A COMMON STOCK (1) ------------------------ ------------------------ BENEFICIAL OWNER NUMBER OF SHARES % NUMBER OF SHARES % - ---------------------- ---------------- ----- ---------------- ----- Frank E. Holmes 1,392,211 (2) 93.01% 380,782 (3) 6.31% Thomas F. Lydon, Jr -- -- 10,000 0.16% Susan B. McGee -- -- 52,035 0.86% J. Stephen Penner -- -- 10,000 0.16% Jerold H. Rubinstein -- -- 50,000 0.83% Roy D. Terracina -- -- 89,100 1.48% All directors and officers as a group 1,378,363 93.60% 649,392(4) 10.77% (11 persons)
- ----------------------------- (1) Includes shares of class A common stock underlying presently exercisable options held directly by each individual as follows: Mr. Holmes - 201,000 shares; Mr. Lydon - 10,000 shares; Ms. McGee - 36,500 shares; Mr. Penner - 10,000 shares; Mr. Rubinstein - 50,000 shares; and Mr. Terracina - 51,000 shares.
(2) Includes 1,000,000 shares of class C common stock issued to Mr. Holmes that will be vested in equal amounts over the next ten years and will be fully vested on June 30, 2008; 102,280 shares owned by F. E. Holmes Organization Inc.; 285,000 shares owned directly by Mr. Holmes; and 4,931 shares owned by Mr. Holmes in an IRA.
(3) Includes 79,782 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' 79,782 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 33,500 of class A common stock underlying presently exercisable options held by officers other than those listed above.
U.S. Global Investors, Inc. Annual Report on Form 10-K 1999 Page 13
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
U.S. Global is invested in several of the mutual funds it manages. There is incorporated in this Item 13 by reference that portion of the U.S. Global Investors, Inc. ANNUAL REPORT TO SHAREHOLDERS, attached to this Form 10-K as Exhibit 13, appearing under Note 17 to the Consolidated Financial Statements.
U.S. Global Investors, Inc. Annual Report on Form 10-K 1999 Page 14
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. FINANCIAL STATEMENTS
The Consolidated Financial Statements are incorporated herein by reference to the Company's ANNUAL REPORT TO SHAREHOLDERS as an exhibit hereto (see Item 8):
* Reports of Independent Accountants * Consolidated Balance Sheets at June 30, 1999 and 1998 * Consolidated Statements of Operation for the three years ended June 30, 1999 * Consolidated Statements for Cash Flows for the three years ended June 30, 1999 * Consolidated Statements of Shareholders' Equity for the three years ended June 30, 1999 * Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULES
None
3. EXHIBITS
3.1 Third Restated and Amended Articles of Incorporation of Registrant, incorporated by reference in the Registrant's Form 10-K for the fiscal year ended June 30, 1996 (EDGAR Accession Number 0000754811-96-000025).
3.2 By-Laws of Registrant, incorporated by reference to Exhibit D of the Registrant's Registration Statement No. 33-33012 filed on Form S-8 with the Commission on January 30, 1990, as amended.
10.1 Advisory Agreement dated October 27, 1989, by and between Registrant and United Services Funds (USF), incorporated by reference to Exhibit (4)(b) to the Registrant's Form 10-K for fiscal year ended June 30, 1990 (EDGAR Accession No. 0000101507-99-000019).
10.2 Advisory Agreement dated September 21, 1994, by and between Registrant and Accolade Funds, incorporated by reference to Exhibit 10.2 to Registrant's Form 10-K for fiscal year ended June 30, 1995 (EDGAR Accession Number 0000754811-95-000002).
10.3 Sub-Advisory Agreement dated September 21, 1994, by and between Registrant and Accolade Funds/Bonnel Growth Fund and Bonnel, Inc., incorporated by reference to Exhibit 10.3 to Registrant's Form 10-K for fiscal year ended June 30, 1995 (EDGAR Accession Number 0000754811-95-000002).
10.4 Transfer Agency Agreement dated September 21, 1994, by and between United Shareholder Services , Inc. ("USSI") and Accolade Funds/Bonnel Growth Fund, incorporated by reference to Exhibit 10.4 to Registrant's Form 10-K for fiscal year ended June 30, 1995 (EDGAR Accession Number 0000754811-95- 000002).
10.5 Transfer Agent Agreement by and between USSI and USF, incorporated by reference to Exhibit 10(b) to the Registrant's Form 10-K for the fiscal year ended June 30, 1989 Transfer Agency Agreement, as amended, between U.S. Global Investors Funds and United Shareholder Services, Inc. dated November 1, 1988, incorporated by reference to Post Effective Amendment No. 79 filed September 3, 1996 (EDGAR Accession No. 0000101507-96-000065).
10.6 Loan Agreement between Registrant and Bank One, dated April 12, 1994, and Modification Agreement, dated February 28, 1995, for $1,385,000 for refinancing new building, incorporated by reference to
U.S. Global Investors, Inc. Annual Report on Form 10-K 1999 Page 15
Exhibit 10.8 to Registrant's Form 10-K for fiscal year ended June 30, 1995 (EDGAR Accession Number 0000754811-95-000002).
10.7 United Services Advisors, Inc. 1985 Incentive Stock Option Plan as amended November 1989 and December 1991, incorporated by reference to Exhibit 4(b) of the Registrant's Registration Statement No. 33-3012, Post-Effective Amendment No. 2, filed on Form S-8 with the Commission on April 23, 1997 (EDGAR Accession No.754811-97-000004).
10.8 United Services Advisors, Inc. 1989 Non-Qualified Stock Option Plan, incorporated by reference to Exhibit 4(a) to the Registrant's Registration Statement No. 33-3012, Post-Effective Amendment No. 2, filed on Form S-8 with the Commission on April 23, 1997 (EDGAR Accession No. 754811-97-000004).
10.9 U.S. Global Investors, Inc. 1997 Non-Qualified Stock Option Plan, incorporated by reference to Exhibit 4 to the Registrant's Registration Statement No. 333-25699 filed on Form S-8 with the Commission on April 23, 1997 (EDGAR Accession No. 7548111-97-000003).
10.10Custodian Agreement between Registrant and Brown Brothers Harriman & Co. dated November 1, 1997, incorporated by reference from Post-Effective Amendment No. 82 filed September 2, 1998 (EDGAR Accession No. 0000101507-98-000031).
10.11Custodian Agreement dated November 1, 1998, between U.S. Global Accolade Funds and Brown Brothers Harriman & Co. of Massachusetts incorporated by reference to Post-Effective Amendment No. 13 dated January 29, 1998 (EDGAR Accession No. 0000902042-98-000006).
10.12Distribution Agreement by and between USGB and U.S. Global Accolade Funds dated September 3, 1998, incorporated by reference to Exhibit 10.12 to Registrant's Form 10-K for fiscal year ended June 30, 1998 (EDGAR Accession Number 0000754811-98-000009).
10.13Distribution Agreement by and between USGB and U.S. Global Investors Funds dated September 3, 1998, incorporated by reference to Exhibit 10.13 to Registrant's Form 10-K for fiscal year ended June 30, 1998 (EDGAR Accession Number 0000754811-98-000009).
11 Statement re: Computation of Per Share Earnings, filed herein.
13 Annual Report to Shareholders, filed herein.
21 List of Subsidiaries of the Registrant, filed herein.
23.1 Consent of Independent Accountant, Ernst & Young LLP, filed herein.
23.2 Consent of Independent Accountant, PricewaterhouseCoopers LLP, filed herein.
23.3 Consent of Independent Accountant, PricewaterhouseCoopers, filed herein.
24.1 Power of Attorney, incorporated by reference to Exhibit 24.1 to Registrant's Form 10-K for fiscal year ended June 30, 1998 (EDGAR Accession Number 0000754811-98-000009). 24.2 Power of Attorney, incorporated by reference to Exhibit 24.2 to Registrant's Form 10-K for fiscal year ended June 30, 1998 (EDGAR Accession Number 0000754811-98-000009).
27 Financial Data Schedule, filed herein.
(b) Reports on Form 8-K
None.
U.S. Global Investors, Inc. Annual Report on Form 10-K 1999 Page 16
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/ Susan B. McGee ______________________________ SUSAN B. MC GEE Date: September 28, 1999 President, General Counsel
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE CAPACITY IN WHICH SIGNED DATE
/S/ Frank S. Holmes - ------------------------------ FRANK E. HOLMES Chairman of the September 28, 1999 Board of Directors Chief Executive Officer
* /s/ Thomas F. Lydon, Jr. - ------------------------------
THOMAS F. LYDON, JR. Director September 28, 1999
* /s/ J. Stephen Penner - ------------------------------
J. STEPHEN PENNER Director September 28, 1999
* /s/ Jerold H. Rubinstein - ------------------------------
JEROLD H. RUBINSTEIN Director September 28, 1999
* /s/ Roy D. Terracina - ------------------------------
ROY D. TERRACINA Director September 28, 1999
/s/ David J. Clark - ------------------------------ DAVID J. CLARK Chief Financial Officer September 28, 1999 Chief Operating Officer
/s/ J. Michael Edwards - ------------------------------ J. MICHAEL EDWARDS Chief Accounting Officer September 28, 1999
*BY: /s/ Susan B. McGee - ------------------------------ SUSAN B. MCGEE Attorney -in-Fact under Powers of Attorney dated October 21, 1997, and September 18, 1998
U.S. Global Investors, Inc. Annual Report on Form 10-K 1999 Page 17
EXHIBIT 11 -- SCHEDULE OF COMPUTATION OF NET EARNINGS PER SHARE
U.S. Global Investors, Inc. Annual Report on Form 10-K 1999 Page 18
EXHIBIT 13 -- ANNUAL REPORT
THE COMPANY
U.S. Global Investors, Inc., a Texas corporation organized in 1968 (Company or U.S. Global), and its wholly owned subsidiaries are in the mutual fund management business. As part of 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; (4) custodial and administrative services, through its wholly owned trust company and administrator for IRAs and other types of retirement plans; and (5) distribution services, through its wholly owned broker/dealer, to mutual funds advised by the Company. The provision of investment advisory, transfer agent, fund distribution, administrative and custodial services and investment income are the primary sources of the Company's revenue.
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 three mutual funds, respectively, on a no-load basis.
The Company organized U.S. Global Investors (Guernsey) Limited (USGG) 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 U.S. Global.
U.S. Global has formed U.S. Global Brokerage, Inc. (USGB), a broker/dealer registered with the National Association of Securities Dealers, Inc. (NASD) and the appropriate state regulatory agencies to provide distribution services to the Company's mutual fund clients.
U.S. Global also formed U.S. Global Administrators, Inc. (USGA) in October 1998 to provide qualified plan administration services for 401(k) clients.
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 and 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 is out of the scope of clients. This 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. To assure no conflicts, these activities are reviewed by Company compliance personnel and reported to investment advisory clients.
MUTUAL FUND MANAGEMENT BUSINESS
INVESTMENT MANAGEMENT SERVICES. 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 pursuant to advisory agreements (Advisory Agreements). Consistent with the investment restrictions, objectives and policies of the particular fund, the portfolio team 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. It provides office space, facilities and certain business equipment and also provides the services of executive and clerical personnel for administering the affairs of the mutual funds. U.S. Global 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
U.S. Global Investors, Inc. Annual Report on Form 10-K 1999 Page 19
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 to the extent not otherwise covered by any fund distribution plans adopted pursuant to Investment Company Act Rule 12b-1 (12b-1 Plan).
As required by the Investment Company Act of 1940, the Advisory Agreements are subject to annual renewal and are terminable upon 60-day notice. The board of trustees of USGIF and of USGAF will consider renewal of the applicable agreements in February and March 2000, respectively. Management anticipates that the Advisory Agreements will be renewed.
Investment company average net assets under management (in millions) at fiscal year end for the past five years were:
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 percent to 1.25 percent of average net assets and are paid monthly.
As is set forth in detail in Note 3 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 fees (in thousands, net of expenses paid by the Company or voluntary waivers) for the past five fiscal years were approximately:
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, lockbox and printing services to investment company clients. The transfer agency utilizes a third-party external system providing 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, and will be reimbursed 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
U.S. Global Investors, Inc. Annual Report on Form 10-K 1999 Page 20
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 were 116,831; 117,363; 120,900; 120,477; and 126,199 in 1999, 1998, 1997, 1996, and 1995, respectively.
For the five fiscal years ended June 30, 1999, 1998, 1997, 1996, and 1995, total transfer agency fees (net of waivers) were approximately $3.2, $3.3, $3.3, $3.3, 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-day notice. The agreements will be considered by the boards of trustees of USGIF and of USGAF for renewal during January and March 2000, respectively, and management anticipates that the agreements will be renewed.
USSI formerly maintained the books and records of each trust and of each fund of each trust, including calculations of the daily net asset value per share. In 1997, the Company decided to outsource such services to Brown Brothers Harriman & Co. (BBH). The conversion to BBH was completed during the second quarter of fiscal year 1998.
U.S. Global will forego accounting fees associated with this function, but has experienced direct cost reductions for personnel and equipment. For the five years ended June 30, 1999, 1998, 1997, 1996, and 1995, bookkeeping and accounting fees net of waivers were approximately $0, $400,000; $731,000; $524,000; and $420,000, respectively.
BROKERAGE SERVICES. The Company has registered its wholly owned subsidiary, U.S. Global Brokerage, Inc. (USGB), with the NASD, the Securities and Exchange Commission (SEC) and appropriate state regulatory authorities as a limited-purpose broker/dealer for the purpose of distributing USGIF and USGAF fund shares. Effective September 3, 1998, USGB became the distributor for USGIF and USGAF fund shares. To date, the Company has capitalized USGB with approximately $150,000 to cover the costs associated with this registration.
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 five years ended June 30, 1999, 1998, 1997, 1996, and 1995, A&B Mailers' revenues, after intercompany eliminating entries, were approximately $293,000, $306,000; $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 services for IRA and other retirement plans administered by U.S. Global. 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 five years ended June 30, 1999, 1998, 1997, 1996, and 1995, custodial fee revenues were approximately $465,000, $441,000; $530,000; $545,000; and $503,000, respectively.
ADMINISTRATIVE SERVICES. Effective July 1, 1999, U.S. Global Administrators, Inc. (USGA), a wholly owned subsidiary of the Company, will provide qualified plan administration services for existing clients. The administrative fees will be paid to USGA on a monthly or quarterly basis by it clients.
EMPLOYEES
As of June 30, 1999, U.S. Global and its subsidiaries employed 84 full-time employees and 3 part-time employees; as of June 30, 1998, it employed 81 full-time employees and 8 part-time employees. The Company considers its relationship with its employees to be excellent.
U.S. Global Investors, Inc. Annual Report on Form 10-K 1999 Page 21
COMPETITION
The mutual fund industry is highly competitive. As of June 30, 1999, there were approximately 9,000 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 that have adopted 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 or through a distributor, and no sales commissions are 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 U.S. Global, 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. Sales of fund 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, USGB, USGA 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. Any 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 its business.
U.S. Global is a registered investment adviser subject to regulation by the SEC pursuant to the Investment Advisers Act of 1940, the Investment Company Act of 1940 and the Securities Exchange Act of 1934 (1934 Act). USSI is also subject to regulation by the SEC under the 1934 Act. USGB is subject to regulation by the SEC under the 1934 Act and regulation by the NASD, a self-regulatory organization composed of other registered broker/dealers. U.S. Global,
USSI and USGB 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.
U.S. Global Investors, Inc. Annual Report on Form 10-K 1999 Page 22
RELATIONSHIPS WITH THE FUNDS
The businesses of the Company are to a very significant degree dependent on 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. U.S. Global, 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 their relationships with the Company, USSI, and STFC.
ANNUAL STATUS REPORT
PREPARING FOR THE FUTURE
During fiscal year 1999, U.S. Global Investors, Inc. (Company) focused on its goals of improving fund performance, expanding distribution channels, and streamlining Company operations. The Company generates its revenues from managing and servicing mutual funds. While the Company's servicing revenues remained level during fiscal year 1999, its investment management fees declined because of reduced assets under management. In particular, gold assets, following a decline in gold bullion, decreased approximately $81 million (34 percent) in fiscal year 1999 compared to 1998. The following graph illustrates the correlation between the decline in management fees and that of the spot gold prices. [GRAPHIC NOT INCLUDED]
Since 1990, the Company has worked to change its reputation as a "gold-only" enterprise and thus insulate the management fees from extreme fluctuations in highly cyclical markets. As a result of management's diversification strategy, the gold assets have shifted from 66 percent of total assets managed in fiscal year 1990 to less than 10 percent as of June 30, 1999. As of June 30, 1999, the Company's money market funds now approximate 70 percent of total assets, with equity and fixed income funds accounting for over 20 percent of total assets. While money market funds tend to be low in terms of margins, they balance the volatile cash flow from gold funds and help create a platform for cross-selling to the other funds.
During fiscal year 1999, Frank E. Holmes, Chairman and CEO of U.S. Global Investors, Inc., took over the position of Chief Investment Officer and is spearheading the effort to carry out a very disciplined investment philosophy. As a result, the Company has re-engineered its investment strategy to include a stringent model combining a top-down macro analysis and a bottom-up stock picking system. While many money managers use either a top-down or a bottom- up investing discipline, the Company uses a combination of both and monitor the purity of the screens on a monthly basis to provide appropriate feedback to the portfolio team.
U.S. Global Investors, Inc. Annual Report on Form 10-K 1999 Page 23
[GRAPHIC OMITTED]
Regarding fund performance, the All American Equity Fund earned Morningstar's highest rating of five stars out of 3,043 domestic equity funds for the 3-year period ended June 30, 1999. The Bonnel Growth Fund has outperformed the Russell 2000 index since its inception in 1994. Also, the Company's U.S. Government Securities Savings Fund maintained its ranking in the top ten for the government-only money market fund category. The Company is also now seeing the turnaround of markets in Asia and eastern Europe. The China Region Opportunity Fund saw calendar year-to-date returns as of June 30, 1999, soar to 45 percent, while the Regent Eastern European Fund saw returns of approximately 15 percent for the same period.
The Company has also historically marketed and distributed its mutual fund products directly to investors. To more aggressively market its mutual fund products, the Company registered its broker/dealer subsidiary with the SEC and the NASD during 1998. To further help the selling efforts of its investor representatives, the Company has entered into a strategic alliance with an experienced financial services firm to help expand the distribution of its clients' funds through registered investment advisors and broker/dealers.
[GRAPHIC OMITTED]
Besides growing its business through marketing directly to investors and focusing on financial intermediaries, the Company has recognized that one key to developing new distribution channels is providing better and faster information to its shareholders. To this end, the Company has redesigned its website with new features to allow its shareholders to more effectively manage their investments. Key activities now available to shareholders include on-line account access, retirement planning worksheets, asset allocation models and expanded information about mutual funds and retirement planning. In addition, shareholders will soon be able to transfer funds between their accounts, make purchases, download investment transactions, and perform certain on-line banking features using the U.S. Treasury Securities Cash Fund. Due to its focus on this distribution channel, the Company has seen the number of "site hits" increase from approximately 130,000 per month in January 1999, to over 500,000 per month as of August 1999.
The Company also recognizes that the 401(k) marketplace is another excellent opportunity to expand the distribution of its funds. The Company formed U.S. Global Administrators, Inc. (USGA) to provides qualified plan administration services for the Company's wholly owned state chartered trust company, Security Trust and Financial Company (STFC). STFC provides trustee and custodial services for 401(k) plans, IRAs, and other retirement plans. The Company has enhanced its technology in this area by upgrading the software to have state-of-the-art technology to provide its 401(k) clients with superior service.
The Company is poised to benefit as a result of staying focused on its goals of improving fund performance, building its non-gold asset base through multiple distribution networks, while containing costs by streamlining its operations through the introduction of new technology.
U.S. Global Investors, Inc. Annual Report on Form 10-K 1999 Page 24
RESULTS OF OPERATIONS
The worldwide deflationary pressures on various commodity prices, such as gold and oil, negatively affected the Company's short-term earnings. Average gold-related assets have decreased $94.4 million (36 percent) in fiscal year 1999 compared with 1998, thus reducing related management fees by approximately $835,000. It is important to note that despite the negative impact of these highly cyclical markets, the mutual funds managed by the Company experienced overall net investor purchases during fiscal year 1999 of slightly over $3.0 million. While average non- gold related assets did increase by $43.8 million during this same period, non-gold assets are a lower margin product; however, the asset fluctuations are less volatile. The Company also recorded net losses of approximately $743,000 relating to its equity share in the U.S. Global Strategies Fund Limited (Guernsey Fund). As a result of the decline in management fees and the net losses of the Guernsey Fund, the Company posted net after-tax loss of $1.9 million ($0.28 per share) for fiscal year 1999. In September 1999, the Company closed the Guernsey Fund.
The Company had negative earnings before interest, taxes, depreciation and amortization (EBITDA) of approximately $660,000. This was the result of a number of negative factors outside of management's control as noted above. Management has responded by reducing certain operating expenses in order to generate positive cash flows going forward.
The table below summarizes the Company's operations including, for the periods showed, the increase (or decrease) from the previous period, and key revenue and expense items as percentages of total revenues.
U.S. Global Investors, Inc. Annual Report on Form 10-K 1999 Page 25
REVENUES
The Company's principal business is managing, creating and marketing mutual funds. Its primary sources of revenue from operations are investment advisory fees and transfer agency fees. The Company's investment management fee revenue is based on a percentage of average net assets under management; the transfer agency fee revenue is based on the number of shareholder accounts being serviced. Therefore, fluctuations in financial markets and the market value of funds influence revenues and results of operations.
Assets under management for USGIF for the fiscal years ended June 30, 1999, 1998, and 1997 have averaged $1.26 billion, $1.29 billion, and $1.33 billion, respectively. Additionally, assets under management for the USGAF averaged $130 million, $146 million, and $119 million for those same fiscal years, respectively.
[GRAPHIC OMITTED]
Because of decreases in the net assets of high-margin, gold-related funds, fiscal year 1999 net investment advisory fee revenues decreased by approximately 22 percent over fiscal year 1998. Also for the same reason, fiscal year 1998 investment advisory fees decreased by approximately 14 percent over fiscal year 1997. Shareholder accounts serviced for fiscal years ended June 30, 1999, 1998, and 1997, were 116,831, 117,363, and 120,900, respectively. Management believes investors are shifting from direct investment in the funds to omnibus accounts through mutual fund trading facilities offered by broker/dealers such as Charles Schwab and Fidelity.
EXPENSES
Total consolidated expenses for fiscal year 1999 increased by approximately 0.7 percent over fiscal year 1998. This slight increase was the direct result of lower than usual legal fees recorded in 1998. Specifically, the Company reversed approximately $750,000 in accrued legal expenses in 1998 due to the successful appeal of a lawsuit brought against the Company in 1994. Total consolidated expenses for fiscal year 1998 decreased by approximately 26 percent over fiscal year 1997. This decrease was the direct result of: 1) approximately $2.3 million less in general and administrative expenses, and 2) approximately $1.1 million less in interest expense relating to the purchase of the Notes. Final payment on the Notes was made in fiscal year 1997.
Exclusive of the reversal of legal expenses in fiscal year 1998, the company's expenses decreased approximately $684,000, or 6 percent, for fiscal year 1999. In addition, exclusive of the expenses attributable to the purchase and financing of the Notes and the reversal of the accrued legal fees, expenses of the Company decreased approximately 13 percent in fiscal year 1998 over fiscal year 1997. As shown on the table at page 26, salaries, wages and benefits are the largest component of Company expenses. In fiscal year 1999, salaries, wages and benefits increased by 11 percent over 1998, and in fiscal year 1998 this expense item decreased by 20 percent from fiscal year 1997. The increase in 1999 relates primarily to the Company filling certain key positions in the investment management and legal departments within the company.
U.S. Global Investors, Inc. Annual Report on Form 10-K 1999 Page 26
Marketing and distribution expenses represented approximately 8 percent, 12 percent, and 13 percent of total revenues during fiscal years 1999, 1998, and 1997, respectively. The Company has anticipated that fiscal year 2000 marketing and distribution expenditures will approximate fiscal year 1999 levels.
The aggregate amount of fees voluntarily reimbursed totaled $3,052,054, $3,484,595, and $3,250,786, in 1999, 1998, and 1997, respectively, a decrease of 12 percent compared with fiscal year 1998. In this regard, the Company has agreed to waive part of its fee revenues and/or pay for certain mutual funds expenses to enhance the funds' competitive market position. The Company expects to continue to waive fees and/or pay for fund expenses if 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.
NET INCOME
The Company posted net after-tax loss of $1.9 million ($0.28 per share) for fiscal year 1999, $0.15 million net after-tax loss ($0.02 per share) for fiscal year 1998, and $0.28 million in earnings ($0.04 per share) for fiscal year 1997. These results are due to fluctuations in 1) assets under management, 2) net equity loss in the Guernsey Fund, and 3) gains or losses recorded from investment activities.
Total consolidated revenues for fiscal year 1999 decreased approximately 10 percent over fiscal year 1998, primarily due to a 22 percent decrease in net investment advisory fees and the elimination of accounting fees. Total consolidated revenues for fiscal year 1998 decreased approximately 29 percent over fiscal year 1997, primarily due to a 141 percent decrease in investment income and the elimination of interest income and accretion of certain U.S. Government agency notes (Notes) recorded by the Company.
Total consolidated expenses for fiscal year 1999 increased by less than 1.0 percent over fiscal year 1998. This slight increase was the direct result of lower than usual legal fees recorded in 1998. Specifically, the Company reversed approximately $750,000 in legal expenses in 1998 due to the successful appeal of a lawsuit brought against the Company in 1994. Exclusive of the reversal of legal expenses in fiscal year 1998, the company's consolidated expenses decreased approximately $684,000, or 6 percent, for fiscal year 1999. Total consolidated expenses for fiscal year 1998 decreased by approximately 26 percent over fiscal year 1997. This decrease was the direct result of: 1) approximately $2.3 million less in general and administrative expenses, and 2) approximately $1.1 million less in interest expense relating to the purchase of certain Notes. Final payment on the Notes was made in fiscal year 1997.
BUSINESS SEGMENTS
The Company operates principally in two business segments: providing mutual fund investment management services to its clients, and utilizing a diversified venture capital approach in trading for its own account in an effort to add growth and value to its cash position. The Company conducts operations in two principal geographic areas: the United States and Europe. Revenues by geographic area include fees charged to customers, and revenues from venture capital activities (See Note 16). The table below summarizes operating income and net income by each segment for each of the previous three years:
YEAR ENDED JUNE 30, ------------------------------------- 1999 1998 1997 ----------- --------- --------- Investment management services ........ $(1,123,579) $ 730,125 $(238,652) Venture capital ....................... 197,143 (569,173) 918,344 ----------- --------- --------- Income (loss) before income taxes and equity interest ................. $ (926,436) $ 160,952 $ 679,692 Net income (loss) ..................... $(1,852,806) $(148,619) $ 284,149
As discussed above, the decrease in both 1999 and 1998 net income (loss) was due primarily to decreases in investment advisory fees as a result of a decline in the net assets of high-margin, gold-related funds. Fiscal year 1999 net investment advisory fee revenues decreased by approximately 22 percent over fiscal year 1998, as well as fiscal year 1998 investment advisory fees decreased by approximately 14 percent over fiscal year 1997.
U.S. Global Investors, Inc. Annual Report on Form 10-K 1999 Page 27
INVESTMENT ACTIVITIES7
Investment income, which includes realized and unrealized gains and losses on trading securities and dividend and interest income, was approximately 4 percent, -4 percent, and 7 percent, respectively, of the Company's revenue in fiscal years 1999, 1998, and 1997. This source of revenue does not remain at a consistent level and is dependent on market fluctuations, the Company's ability to participate in investment opportunities, and timing of transactions. For fiscal years 1999, 1998, and 1997, the Company had realized gains (losses) of approximately $238,000, ($349,000) and $934,000, respectively. The Company expects such revenues will continue to fluctuate in the future; fluctuations in the market value will affect the size of such amounts of the Company's investments.
MARKET RISK DISCLOSURES
The Company's balance sheet includes assets whose fair value is subject to market risks. As of June 30, 1999 and 1998, the Company held approximately $1.5 and $1.6 million, respectively, in investments other than USGIF money market mutual fund shares.
Management believes it can more effectively manage the Company's cash position by broadening the types of investments used in cash management. Management attempts to maximize the Company's cash position by using a diversified venture capital approach to investing. Strategically, management invests in early-stage or start-up businesses seeking initial financing and more mature businesses in need of capital for expansion, acquisitions, management buyouts or recapitalization. The Company also uses other investment techniques such as private placement arbitrage. This involves the contemporaneous purchase of a quantity of an issuer's securities at a discount in a private placement and a short sale of the same, or substantially the same, security in the public market.
Due to the Company's investments in equity securities, equity price fluctuations represent a market risk factor affecting the Company's consolidated financial position. The carrying values of investments subject to equity price risks are based on quoted market prices or management's estimate of fair value as of the balance sheet date. Market prices fluctuate and the amount realized in the subsequent sale of an investment may differ significantly from the reported market value. Company compliance personnel review the Company's investment activities and report to investment advisory clients.
The table below summarizes the Company's equity price risks as of June 30, 1999, and shows the effects of a hypothetical 25 percent increase and a 25 percent decrease in market prices. A comparison of quarter-end stock prices on the individual stocks within the Company's equity portfolios over the three years ending June 30, 1999, showed that the change from one quarter to the next was 25 percent or less approximately 90 percent of the time. The selected hypothetical change does not reflect what could be considered best- or worst-case scenarios. Results could be much worse due to both the nature of equity markets and the concentration of the Company's investment portfolio.
ESTIMATED INCREASE FAIR VALUE AFTER (DECREASE) IN FAIR VALUE AT HYPOTHETICAL HYPOTHETICAL SHAREHOLDERS' JUNE 30, 1999 PERCENTAGE CHANGE PRICE CHANGE EQUITY ------------- ----------------- ---------------- ------------- Trading Securities .....$884,837 25% increase $1,106,046 $ 145,988 25% decrease $663,628 $(145,998) Available-for- sale ...........$370,840 25% increase $ 463,550 $ 61,189 25% decrease $ 278,130 $ (61,189)
INCOME TAXES
Provisions for income taxes include deferred taxes for temporary differences in the bases of assets and liabilities for financial and tax purposes, resulting from the use of the liability method of accounting for income taxes. For federal income tax purposes at June 30, 1999, the Company has net operating losses (NOLs) of approximately $2.6 million, which will expire in fiscal 2007 and 2010, charitable contribution carry-overs of approximately $385,000 expiring
U.S. Global Investors, Inc. Annual Report on Form 10-K 1999 Page 28
between 1999 and 2001, and alternative minimum tax credits of $115,228 with indefinite expirations. Certain changes in the Company's ownership may result in a limitation on the amount of NOLs that could be utilized under Section 382 of the Internal Revenue Code. If certain changes in the Company's ownership occur, there could be an annual limitation on the amount of NOLs that could be utilized.
A valuation allowance is provided when it is more likely than not that some portion of the deferred tax amount will not be realized. As such, management has included a valuation allowance of approximately $921,000 at June 30, 1999, providing for the utilization of NOLs, charitable contributions, and investment tax credits against future taxable income.
SUBSEQUENT EVENTS
The Company's investment in the Guernsey Fund increased to approximately 64%, and as a result recorded over $743,000 in equity losses during fiscal year 1999. On August 11, 1999, the Directors of the Guernsey Fund agreed to close the fund and redeem all outstanding shares. In accordance with the fund's Articles of Association, the Company has suspended the determination of the net asset value of the fund and is proceeding to liquidate the positions in the fund to redeem shareholders. Management anticipates the liquidation to be completed during the second quarter of fiscal year 2000.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
At year end, the Company had net working capital (current assets minus current liabilities) of approximately $2.4 million and a current ratio of 3.1 to 1. With approximately $1.0 million in cash and cash equivalents and more than $1.3 million in marketable securities the Company has adequate liquidity to meet its current debt obligations. Total shareholders' equity was approximately $6.0 million, with cash, cash equivalents, and marketable securities comprising 27 percent of total assets. With the exception of operating expenses, the Company's only material commitment is the mortgage on its corporate headquarters (a long-term debt). The Company's cash flow is expected to be sufficient to cover current expenses, including debt service.
The investment advisory contract and related contracts between the Company and USGIF and USGAF were recently renewed and will expire on February 29, 2000, and March 8, 2000, respectively. Management anticipates the trustees of both USGIF and USGAF will renew the contracts.
The Company has a note payable to a bank which is secured by land, an office building and related improvements. As of June 30, 1999, the balance on the note was $1,169,367. 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 percent. The current monthly payment is $11,750, and matures July 2001. Under this agreement, the Company must maintain certain financial covenants. Due primarily to noncash charges as a result of its equity investment in the Guernsey Fund, the Company is in violation of certain debt covenants; however, the Company obtained a waiver of the covenants from the bank through June 30, 1999. The Company anticipates the bank will revise the present terms of the note payable to restructure the debt covenants to maintain compliance in the future. If the debt covenants are not revised, the Company believes it has the ability to refinance the debt with another financial institution. Additionally, the Company believes it has adequate cash, cash equivalents, and equity in the underlying asset to retire the obligation if necessary.
Management believes current cash reserves, and financing obtained and/or available, and cash flow from operations will be sufficient to meet foreseeable cash needs or capital necessary for the above mentioned activities and allow the Company to take advantage of investment opportunities whenever available.
CAPITAL STRUCTURE
The board of directors has approved a change in the capital structure which was effected during the first quarter of fiscal year 2000. The transaction involved the issuance of 1,000,000 shares of the Company's class C common (voting) stock to Frank E. Holmes in exchange for services and the cancellation of existing warrants to purchase 586,122 shares of class C common stock (held by Mr. Holmes and F.E. Holmes Organization, Inc.) and the cancellation of an option to purchase 400,000 shares of class C common stock (held by Mr. Holmes). The 1,000,000 shares issued by the Company will vest over a ten-year period beginning July 1, 1998, and will be fully vested on June 30, 2008. These shares are not publicly traded.
U.S. Global Investors, Inc. Annual Report on Form 10-K 1999 Page 29
YEAR 2000 DISCLOSURE
SUMMARY
The Company has been actively addressing the potential impact of the Year 2000 (Y2K) problems and has established a proactive approach to help ensure that the Company's critical systems can operate before, during, and after the century date rollover. The scope of the Company's Y2K project, including related costs, is expected to total approximately $110,000. As the Company outsourced many technology-based operations, there is a only a small base of proprietary code that had to be analyzed and upgraded with respect to Y2K compliance. While the Company has taken measures reasonably designed to prevent a negative impact resulting from Y2K problems, there is no assurance that factors outside the Company's control will not disrupt its operations.
STATE OF READINESS
The Company has taken steps to increase the awareness of its employees and associated persons with respect to the Y2K problem and the current actions being taken to address such problems. The Company has formed a Y2K team, which includes senior management and experienced analysts and programmers, which meets on a regular basis to carry out and monitor the Company's Y2K project.
As of June 30, 1999, the Company identified all of its mission-critical systems and completed an inventory of all hardware, software, networks, and other various processing platforms, and also customer and vendor interdependencies. The Company completed an assessment of the systems inventoried to decide their susceptibility to Y2K issues. This assessment included inquiries to service providers, vendors, and manufacturers of all systems inventoried to determine and document if such systems are Y2K compliant. The Company completed the testing of its mission-critical systems and made the necessary upgrades to ensure that all mission-critical systems and software are Y2K compliant.
BUDGET
As of June 30, 1999, the Company had incurred and expended approximately $100,000 concerning its Y2K project. The Company estimates its total remaining cost to approximate $12,000, which it will expend as incurred through the next six months.
The Company's ability to complete its Y2K project by the dates projected and the total costs incurred to accomplish those efforts are based on estimates that the Company's management made in reliance on certain assumptions. The goal will be to maximize the functionality and speed resolution of systems due to any Y2K problems, with a minimal deployment of resources and minimal disruption in the financial stability of the Company. Should the Company detect problems related to mission critical systems, the Company may need to revise the budget accordingly.
MASTER SCHEDULE
The Company has completed the inventory of its systems and assessed its susceptibility to Y2K problems. The Company has completed the testing of its mission-critical systems and has remediated any known defects.
CERTAIN RISKS AND CONTINGENCY PLAN
The Company designed the Company's contingency plan to mitigate the risks to operations or its core business resulting from any failure to successfully complete its Y2K project. The Company is dependent on third-party software and vendor services. The Company believes that any risk from the Y2K transition will result from its reliance on vendors to finish their own Y2K projects successfully and on time. The Company does not ensure the compliance of such vendors and suppliers. The Company has updated its contingency plan to include alternatives that would be used in case of any business interruptions. The plan is approximately 50 percent complete and will be tested and upgraded as needed throughout the year.
U.S. Global Investors, Inc. Annual Report on Form 10-K 1999 Page 30 - --------------------------------------------------------------------------------
FORWARD-LOOKING INFORMATION
The Company has made forward-looking statements concerning the Company's performance, financial condition, and operations in this quarterly report. The Company from time to time may also make forward-looking statements in its public filings and press releases. Such forward-looking statements are subject to various known and unknown risks and uncertainties and do not guarantee future performance. Actual results could differ materially from those anticipated in such forward-looking statements due to a number of factors, some of which are beyond the Company's control, including (I) the volatile and competitive nature of the investment management industry, (ii) changes in domestic and foreign economic conditions, (iii) the effect of government regulation on the Company's business, (iv) market, credit, and liquidity risks associated with the Company's investment management activities, and (v) failure of the Company, its vendors, or other third parties to achieve Y2K compliance. Due to such risks, uncertainties, and other factors, the Company cautions each person receiving such forward looking information not to place undue reliance on such statements. All such forward looking statements are current only as of the date on which such statements were made.
U.S. Global Investors, Inc. Annual Report on Form 10-K 1999 Page 31
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, 1995 through June 30, 1997 and the years then ended is derived from the Company's Consolidated Financial Statements, which were audited by PricewaterhouseCoopers LLP, independent accountants. The selected financial data as of June 30, 1998, through June 30, 1999, and the year then ended is derived from the Company's Consolidated Financial Statements, which were audited by Ernst & Young LLP, independent accountants.
U.S. Global Investors, Inc. Annual Report on Form 10-K 1999 Page 32
FINANCIAL STATEMENTS
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of U. S. Global Investors, Inc.
We have audited the accompanying consolidated balance sheets of U.S. Global Investors, Inc. and Subsidiaries (Company) as of June 30, 1999 and 1998, and the related consolidated statements of operations and comprehensive loss, shareholders' equity, and cash flows for the two year period ended June 30, 1999. 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 audit. We did not audit the financial statements of U.S. Global Investors (Guernsey) Limited, a wholly owned subsidiary, which statements reflect total assets of $1,213,339 as of June 30, 1998, and net loss of $432,453 for the year ended June 30, 1998. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to data included for U.S. Global Investors (Guernsey) Limited, is based solely on the report of the other auditors. The June 30, 1998 financial statements of U.S. Global Strategies Fund Limited, in which the Company has a 23% interest, have been audited by other auditors whose report has been furnished to us; insofar as our opinion on the consolidated financial statements relates to data included for U.S. Global Strategies Fund Limited, it is based solely on their report.
We conducted our audits in accordance with generally accepted auditing standards. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audit and the report of other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of U.S. Global Investors, Inc. and Subsidiaries at June 30, 1999 and 1998, and the consolidated results of their operations and their cash flows for the years ended June 30, 1999 and 1998, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Ernst & Young LLP San Antonio, Texas September 28, 1999
U.S. Global Investors, Inc. Annual Report on Form 10-K 1999 Page 33
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of U.S. Global Investors, Inc.
In our opinion, the consolidated statements of operations and comprehensive loss, of shareholders' equity and of cash flows for the period ended June 30, 1997, (appearing on pages 38 through 41 of the U.S. Global Investors, Inc. 1999 Annual Report to Shareholders, which has been incorporated by reference in this Form 10-K Annual Report) present fairly, in all material respects, the results of operations and cash flows of U.S. Global Investors, Inc. and its subsidiaries for 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 audit. We conducted our audit 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 audit provides a reasonable basis for the opinion expressed above. We have not audited the consolidated financial statements of U.S. Global Investors, Inc. for any period subsequent to June 30, 1997.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP San Antonio, Texas September 29, 1997
U.S. Global Investors, Inc. Annual Report on Form 10-K 1999 Page 34
AUDITORS' REPORT TO THE MEMBERS OF U.S. GLOBAL INVESTORS (GUERNSEY) LIMITED
We have audited the financial statements on page 4 to 10 of U.S. Global Investors (Guernsey) Limited.
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 judgements 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, 1998 and of its profit for the year then ended and have been properly prepared in accordance with the Companies (Guernsey) Law, 1994.
/s/ PricewaterhouseCoopers
PricewaterhouseCoopers, Chartered Accountants, P.O. Box 321, National Westminster House, Le Truchot, St Peter Port, Guernsey, GY1 4ND Channel Islands.
Date: 28th September, 1998
U.S. Global Investors, Inc. Annual Report on Form 10-K 1999 Page 35
AUDITORS' REPORT TO THE SHAREHOLDERS OF U.S. GLOBAL STRATEGIES FUND LIMITED
We have audited the financial statements on pages 20 to 30 of U.S. Global Strategies Fund Limited.
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 judgements 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, 1998 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/ PricewaterhouseCoopers
PricewaterhouseCoopers, Chartered Accountants, P.O. Box 321, National Westminister House, Le Truchot, St Peter Port, Guernsey, GY1 4ND Channel Islands
Date: 28th September, 1998
U.S. Global Investors, Inc. Annual Report on Form 10-K 1999 Page 36
CONSOLIDATED BALANCE SHEETS
ASSETS
JUNE 30, ---------------------------- 1999 1998 ----------- ----------- CURRENT ASSETS Cash and cash equivalents ................ $ 1,025,247 $ 1,391,867 Trading securities, at fair value ........ 884,837 901,647 Receivables: Mutual funds .......................... 794,562 788,019 Custodial fees ........................ 203,823 189,715 Employees ............................. 50,464 83,725 Receivable from brokers ............... 19,628 16,690 Residual equity interest .............. -- 675,613 Other ................................. 96,667 106,696 Prepaid expenses ......................... 384,506 466,733 Deferred tax asset ....................... 141,551 135,294 ----------- -----------
TOTAL CURRENT ASSETS ................ 3,601,285 4,755,999 ----------- -----------
NET PROPERTY AND EQUIPMENT ................... 2,426,592 2,596,091 ----------- -----------
OTHER ASSETS Restricted investments ................... 255,000 271,166 Long-term receivables .................... -- 218,212 Long-term deferred tax asset ............. 878,091 1,068,092 Investment securities available-for-sale, at fair value .......................... 370,840 472,240 Equity investment in affiliate ........... 749,739 866,288 Other .................................... 46,591 60,869 ----------- -----------
TOTAL OTHER ASSETS ................ 2,300,261 2,956,867 ----------- -----------
$ 8,328,138 $10,308,957 =========== ===========
The accompanying notes are an integral part of this statement.
U.S. Global Investors, Inc. Annual Report on Form 10-K 1999 Page 37
Consolidated Balance Sheets (Continued)
LIABILITIES AND SHAREHOLDERS' EQUITY
JUNE 30, ---------------------------- 1999 1998 ------------ ------------- CURRENT LIABILITIES Accounts payable ......................... $ 346,504 $ 275 963 Accrued compensation and related costs .......................... 274,667 226,324 Current portion of notes payable ......... 68,988 63,525 Current portion of annuity and contractual obligation ............. 18,000 18,000 Accrued legal fees ....................... 27,840 33,855 Other accrued expenses ................... 424,177 418,793 ------------ -------------
TOTAL CURRENT LIABILITIES ................ 1,160,176 1,036,460 ----------- ------------
NON-CURRENT LIABILITIES Notes payable - net of current portion ........................ 1,126,066 1,193,599 Annuity and contractual obligations ............................ 129,658 137,039 ------------ ----------
TOTAL NON-CURRENT LIABILITIES ............ 1,255,724 1,330,638 ----------- ------------
TOTAL LIABILITIES ........................ 2,415,900 2,367,098 ------------ ------------
Commitments and contingent liabilities
SHAREHOLDERS' EQUITY Common stock (class A) -- $0.05 par value; non-voting; authorized, 7,000,000 shares; 6,299,474 and 6,299,444 issued and outstanding in 1999 and 1998, respectively. .......................... 314,974 314,972 Common stock (class C) (formerly class A)-- $.05 par value; authorized 1,750,000 shares; 496,800 and 496,830 issued and outstanding in 1999 and 1998, respectively ........................... 24,840 24,842 Additional paid-in-capital ............... 10,586,628 10,591,708 Treasury stock, class A shares at cost; 288,029 and 183,236 shares held in 1999 and 1998, respectively ................. (648,830) (476,289) Accumulated other comprehensive loss ..... (74,938) (75,744) Retained deficit ......................... (4,290,436) (2,437,630) ------------- ------------
TOTAL SHAREHOLDERS' EQUITY ............... 5,912,238 7,941,859 ------------- ------------- $ 8,328,138 $10,308,957 ============ ===========
The accompanying notes are an integral part of this statement.
U.S. Global Investors, Inc. Annual Report on Form 10-K 1999 Page 38
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
YEAR ENDED JUNE 30, -------------------------------------------- 1999 1998 1997 ------------ ------------ ------------ REVENUE Investment advisory fee ...................... $ 4,513,844 $ 5,778,042 $ 6,686,769 Transfer agent fee ......... 3,201,675 3,325,513 3,336,376 Accounting fee ............. -- 399,996 730,625 Exchange fee ............... 127,305 178,115 248,112 Custodial fees ............. 464,666 440,884 530,030 Investment income (loss) ... 352,205 (419,096) 1,033,982 Mailroom operations ........ 293,043 306,304 282,267 Government security income ................... -- -- 1,067,050 Gains on changes of interest in affiliate -- -- 10,490 Other ...................... 65,334 29,844 83,430 ------------ ------------ ------------ 9,018,072 10,039,602 14,009,131 ------------ ------------ ------------
EXPENSES General and administrative ........... 9,324,979 9,298,734 11,636,195 Depreciation and amortization ............. 492,581 457,386 481,510 Interest expense-note payable and other ........ 126,948 122,530 131,633 Interest expense- securities sold under agreement to repurchase ............... -- -- 1,007,099 Interest expense- subordinated debenture to a related party ............ -- -- 73,002 ------------ ------------ ------------
9,944,508 9,878,650 13,329,439 ------------ ------------ ------------
(LOSS) INCOME BEFORE MINORITY INTEREST, EQUITY INTEREST AND INCOME TAXES ................. (926,436) 160,952 679,692 ------------ ------------ ------------
Equity in Net Loss of Joint Venture ...................... -- -- (196,535) Equity In Net (Loss) Income of Affiliate ................. (743,041) (349,142) 132,968 ------------ ------------ ------------
(LOSS) INCOME BEFORE INCOME TAXES ........................ (1,669,477) (188,190) 616,125
PROVISION (BENEFIT) FOR FEDERAL INCOME TAXES Deferred ................... 183,329 (39,571) 331,976 ------------ ------------ ------------ 183,329 (39,571) 331,976 ------------ ------------ ------------ NET (LOSS) INCOME .............. (1,852,806) (148,619) 284,149
Other comprehensive income (loss), net of tax: Unrealized gains (losses) on available-for-sale securities .............. 806 81,441 (878,946) ------------ ------------ ------------
COMPREHENSIVE LOSS ............. $ (1,852,000) $ (67,178) $ (594,797) ============ ============ ============
BASIC AND DILUTED (LOSS) INCOME PER SHARE: ................... $ (0.28) $ (0.02) $ 0.04 ============ ============ ============
WEIGHTED AVERAGE NUMBER OF OUTSTANDING SHARES: Basic ...................... 6,562,140 6,617,153 6,606,211 Diluted .................... 6,563,844 6,669,363 6,664,324
The accompanying notes are an integral part of this statement.
U.S. Global Investors, Inc. Annual Report on Form 10-K 1999 Page 39
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
The accompanying notes are an integral part of this statement.
U.S. Global Investors, Inc. Annual Report on Form 10-K 1999 Page 40
CONSOLIDATED STATEMENTS OF CASH FLOW
YEAR ENDED JUNE 30, ------------------------------------------ 1999 1998 1997 ----------- ----------- ------------ CASH FLOW FROM OPERATING ACTIVITIES: Net (loss) income ............ $(1,852,806) $ (148,619) $ 284,149 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization ........... 492,581 457,386 481,510 Government security accretion .............. -- -- (306,926) Net (gain) loss on sales of securities .......... (238,394) 348,579 (934,123) Gain on disposal of equipment .............. (75) (1,266) (64) (Gain) loss on changes of interest in affiliate ............. (97,744) 17,146 (10,490) Provision for deferred taxes ................. 183,329 (39,571) 331,976 Changes in assets and liabilities, impacting cash from operations: Restricted investments ... 16,166 371,362 (148) Accounts receivable ...... 913,527 172,223 364,558 Prepaid expenses and other .................. 938,405 579,710 (134,789) Trading securities ....... 377,260 (41,271) 2,034,637 Accounts payable ......... 70,541 (91,200) 91,047 Accrued expenses ......... 47,712 (269,364) (96,276) ----------- ----------- ------------ Total adjustments ........ 2,703,308 1,503,734 1,820,912 ----------- ----------- ------------ NET CASH PROVIDED BY OPERATIONS ... 850,502 1,355,115 2,105,061 ----------- ----------- ------------
CASH FLOW FROM INVESTING ACTIVITIES: Purchase of furniture and equipment .................. (323,069) (469,633) (392,436) Proceeds on sale of equipment .................. 75 1,240 800 Purchase of available-for- sale securities ............ (97,056) (383,630) (399,472) Investment in equity affiliate .................. (550,000) -- -- Proceeds on sale of available-for-sale securities ................. -- 212,830 -- Proceeds on sale of government securities held-to-maturity ........... -- -- 26,725,000 ----------- ----------- ------------ NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES ......... (970,050) (693,193) 25,933,892 ----------- ----------- ------------
CASH FLOW FROM FINANCING ACTIVITIES: Payments on annuity .......... (7,381) (6,883) (6,420) Payments on note payable to bank .................... (62,070) (50,762) (41,547) Proceeds from capital lease .. -- -- 25,330 Principal payments on capital lease obligation ... -- (8,661) (40,070) Net proceeds from securities sold under agreement to repurchase .............. -- -- 420,844 Payments on subordinated debenture to related party . -- -- (1,533,131) Net payments on securities sold under agreement to repurchase .............. -- -- (26,825,219) Proceeds from issuance or exercise of preferred stock, warrants, and options ...... -- 12,420 8,250 Treasury Stock reissued ...... 52,492 75,565 346,163 Purchase of Treasury Stock ... (230,113) (67,856) (337,282) ----------- ----------- ------------ NET CASH USED IN FINANCING ACTIVITIES ...................... (247,072) (46,176) (27,983,082) ----------- ----------- ------------
The accompanying notes are an integral part of this statement.
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Consolidated Statements of Cash Flow (Continued)
The accompanying notes are an integral part of this statement.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION. U.S. Global Investors, Inc. (Company or U.S. Global) serves as investment adviser, investment manager and transfer agent to U.S. Global Investors Funds (USGIF) and U.S. Global Accolade Funds (USGAF), 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), manages the portfolio of an offshore fund, U.S. Global Strategies Fund Limited (Guernsey Fund) (See Note 18).
U.S. Global has also formed a company, U.S. Global Brokerage, Inc. (USGB), formerly United Services Brokerage, Inc., originally incorporated in Texas on April 24, 1994. USGB was registered as a broker/dealer with the National Association of Securities Dealers, Inc. and the appropriate state regulatory agencies so that it may provide distribution services for USGIF and USGAF mutual fund shares. The Company has also formed U.S. Global Administrators, Inc. (USGA), incorporated in Texas on October 23, 1998, to provide qualified plan administration services for existing clients. Through its wholly owned subsidiary, Security Trust & Financial Company (STFC), it also serves as custodian for retirement accounts invested in USGIF, USGAF, and other mutual funds.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, United Shareholder Services, Inc. (USSI), STFC, A&B Mailers, Inc. (A&B), USGG, USGB, and USGA. Although the Company held a 64 percent and 23 percent interest in the Guernsey Fund at June 30, 1999, and 1998, respectively, due to the Guernsey Fund being liquidated during fiscal year 2000, the Company believes its' investment to be temporary. As such it has continued to account for its investment using the equity method of accounting, The fair value of the Company's investment at June 30, 1999, and 1998, was $749,739 and $866,288, respectively.
The Guernsey Fund issued 18,188 net additional shares for cash amounting to $5,616,825 to investors other than the Company during fiscal 1997. 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 in gains on such transactions during fiscal 1997, which is included as a separate line in the accompanying income statement. Deferred income taxes have been provided on these gains.
All significant intercompany 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, 1999, and at June 30, 1998 include $892,778 and $1,280,321, respectively, in USGIF money market mutual funds (see Note 18). This investment is valued at amortized cost which approximates market. Restricted cash of $255,000 and $270,000, at June 30, 1999, and 1998, respectively, is included in restricted investments (see Notes 9).
FIXED ASSETS. Fixed assets are recorded at cost. 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: building 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.
REVENUE RECOGNITION. 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.
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 asset be reduced by a valuation allowance in cases where it is more likely than not that the deferred tax assets will not be realized.
EARNINGS PER SHARE. Basic and diluted earnings per share are based on the weighted average number of shares of class A, class B, and class C common stock outstanding during the year. All classes of common are considered equivalent
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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 they are 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 2).
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.
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 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. For those securities with declines in fair value which are considered other than temporary, the cost basis of the security is written down as a new cost basis, and the amount of the write down is included in earnings.
ADVERTISING. The Company expenses advertising and sales promotion costs as they are incurred. Total advertising and sales promotion expenditures were approximately $741,000, $820,000, and $1,523,000 in 1999, 1998, and 1997, respectively.
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.
USE OF ESTIMATES. The preparation of financial statements in conformity with generally accepted accounting principles require the Company to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates.
ACCOUNTING PRONOUNCEMENTS. In July 1998, the Company adopted FASB Statement No. 130, "Reporting Comprehensive Income" (SFAS 130). SFAS 130 establishes standards for reporting and display of comprehensive income and its components; however, the statement had no impact on the Company's net income or shareholders' equity. This statement requires unrealized gains and losses on the Company's available-for-sale securities, which previously were recorded as a separate component of shareholders' equity, be included in other accumulated comprehensive income or loss. Prior year financial statements have been reclassified to conform to the requirements of SFAS 130.
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. The Company adopted SFAS 131 during fiscal year 1999 and has included the necessary disclosures. These disclosure requirements did not impact the Company's financial position or operating results.
In February 1998, the FASB issued Statement No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" (SFAS 132). SFAS 132 standardized the disclosure requirements for pensions and other postretirement benefits to the extent practicable, and requires additional information on changes in the benefit obligations and fair values of plan assets that will facilitate financial analysis. As the Company does not offer pension or other postretirement benefits, this Statement did not impact the Company.
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NOTE 2. INVESTMENTS
The cost and market value of investments classified as trading are as follows:
DATE COST MARKET VALUE ------------- ---------- ------------ June 30, 1999 $1,197,233 $884,837 June 30, 1998 $1,173,011 $901,647 June 30, 1997 $ 772,630 $721,954
The net change in the unrealized holding losses on trading securities held at June 30, 1999, that has been included in earnings for the period was $41,251, $220,468, and $15,778, for the period ended June 30, 1999, 1998, and 1997, respectively.
The cost of investments in securities, which are classified as available-for-sale, which may not be readily marketable at June 30, 1999, was $484,382. These investments are reflected as non-current assets on the June 30, 1999 consolidated balance sheet at their fair value at June 30, 1999 of $370,840 with $74,938, net of tax, in unrealized losses being recorded as a component of shareholders' equity. These investments are in private placements which are restricted for sale as of June 30, 1999. It is anticipated the securities obtained in these private placements will become free trading within one year. During fiscal year 1999, the Company recorded realized gains of $238,394 and recorded unrealized gains of $344,394 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, 1998, was $509,382. These investments were reflected as non-current assets on the June 30, 1998 consolidated balance sheet. These investments were in private placements which were restricted for sale as of June 30, 1998. The fair value of the investments classified as non-current available-for-sale securities at June 30, 1998, was $472,240 with $24,514, net of tax, in unrealized losses recorded as a component of shareholders' equity. During fiscal year 1998, the Company recorded in income realized losses of $349,579 and recorded unrealized gains of approximately $103,205 on securities which were transferred from the available-for-sale category to the trading category upon becoming free trading. The Company reduced the carrying value of investments held as available-for- sale by approximately $350,000 for certain investments with declines in fair value which were considered other than temporary.
During fiscal year 1997, the Company recorded in income realized gains of $218,860 and unrealized gains of approximately $100,000 on securities which were transferred from the available-for-sale category to the trading category upon becoming free trading.
NOTE 3. 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 services to USGIF and USGAF. During the second quarter of fiscal year 1998, the Company outsourced the bookkeeping and accounting functions performed by USSI. The Company also receives exchange, maintenance, closing and small account fees directly from USGIF and USGAF shareholders. Fees for providing services to USGIF and USGAF continue to be the Company's primary revenue source.
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).
The Company has voluntarily waived or lowered its advisory fees and is bearing expenses on several funds within USGIF and USGAF through June 30, 2000, or such later date as the Company determines. The aggregate amount of fees voluntarily reimbursed totaled $3,052,054, $3,484,595, and $3,250,786, in 1999, 1998, and 1997, respectively.
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The following funds accounted for more than 10 percent of revenue [excluding government security income (Note 6)] in the years indicated:
YEAR ENDED JUNE 30, ------------------ 1999 1998 1997 ---- ---- ---- Gold Shares Fund 12% 15% 17% World Gold Fund 18% 22% 24% U.S. Treasury Securities Cash Fund 13% 13% 9% Bonnel Growth Fund 13% 13% 9%
The investment advisory contract and related contracts between the Company and USGIF expire in February 2000, and the contracts between the Company and USGAF expire in March 2000. Management anticipates the trustees of both USGIF and USGAF will renew the contracts.
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment are composed of the following:
JUNE 30, -------------------------- 1999 1998 ----------- ----------- Building improvements $ 186,549 $ 184,549 Capitalized leased equipment 519,768 519,768 Furniture and equipment 5,350,812 5,034,174 Building and land 2,203,757 2,203,757 ----------- ----------- 8,260,886 7,942,248 Accumulated depreciation and amortization (5,834,294) (5,346,157) ----------- ----------- Net property and equipment $ 2,426,592 $ 2,596,091 =========== ===========
At June 30, 1999 and 1998, capitalized leased equipment was fully amortized. Amortization expense for capitalized leased equipment was $8,808, for the fiscal year ended June 30, 1997. There are no minimum lease payments required by obligations under capital leases for fiscal year 2000. The building and land is pledged as collateral for the financing used to acquire the building.
NOTE 5. 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 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 could not be located, together with interest thereon, would be held for six years after the final payout against the claims of those shareholders. At the end of six years, such amounts would be made available to all persons claiming subrogation. The Company had first right of subrogation to the amounts. Accordingly, the Company increased the residual equity interest to $675,613, and recorded it as a current receivable at June 30, 1998, thus positively affecting earnings by reducing general and administrative expenses by approximately $457,000 for fiscal year 1998. The amount of cash subsequently received in July 1998 equaled the current receivable recorded at June 30, 1998.
NOTE 6. 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 year 1995, the market value of the Notes was adversely affected. To reduce USG's exposure to said Notes and in order to maintain a $1.00 per share net asset value, U.S. Global arranged, in the first quarter of fiscal year 1995, 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 in fiscal year 1995, U.S. Global purchased directly from the fund $90,525,000 par amount of Notes 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 year 1995. 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; 2) U.S. Global issued a $6.0 million 8 percent subordinated debenture to ML; and 3) U.S. Global utilized approximately $3,563,000 of its own cash.
The Notes were classified as available-for-sale securities during fiscal year 1997 and recorded at fair value with any unrealized gain or loss excluded from earnings and reported, net of tax, as a separate component of shareholders' equity. In addition to periodic receipts of interest income, U.S. Global recognized $306,926 in non-cash income during the fiscal year 1997 related to the amortization of the difference between fair value at the time of purchase and the par amount of the securities.
The Company sold the Notes with a par value of $103,800,000 during the fiscal years 1996 and 1995 for a net realized gain of $1,130,414. The remaining Notes acquired by U.S. Global matured during fiscal year 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.
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NOTE 7. INVESTMENT IN JOINT VENTURE
During the fiscal year 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. 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 year 1997. In June 1997, the Company sold its remaining interest in the joint venture for approximately $134,000 to the joint venture management group which resulted in a net charge to income of approximately $100,000.
NOTE 8. 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, 1999, the balance on the note was $1,169,367. 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 percent. The current monthly payment is $11,750, and matures July 2001. Under this agreement, the Company must maintain certain financial covenants. Due primarily to noncash charges as a result of its equity investment in the Guernsey Fund, the Company is in violation of certain debt covenants; however, the Company obtained a waiver of the covenants from the bank through June 30, 1999. The Company anticipates the bank will revise the present terms of the note payable to restructure the debt covenants to maintain compliance in the future. If the debt covenants are not revised, the Company believes it has the ability to refinance the debt with another financial institution. Additionally, the Company believes it has adequate cash, cash equivalents, and equity in the underlying asset to retire the obligation if necessary.
Future principal payments to be made over the next five years based on the notes payable outstanding at June 30, 1999, are as follows:
FISCAL YEAR AMOUNT ----------- ----------- 2000 $ 68,988 2001 1,126,066 Thereafter 0 Total $1,195,054
During the current fiscal year, the Company did not renew a $1 million line of credit (LOC) as the Company has had adequate working capital to meet operating needs.
NOTE 9. 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 $255,000 at June 30, 1999.
NOTE 10. BENEFIT PLANS
The Company has a contributory profit-sharing plan in which all qualified employees who have completed one year of employment as of June 30 with the Company are included. The amount of the annual contribution, which may not exceed 15 percent of earnings before income taxes, is approved by the Company's board of directors. At June 30, 1999, and June 30, 1998, the Company has not accrued a contribution for the fiscal years 1999 and 1998. The Company has recorded expense related to the profit sharing plan of $90,512 for fiscal year 1997.
The Company also has 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 percent of their compensation to this plan, and the Company will match 50 percent of their contribution up to 4 percent. At June 30, 1999, and June 30, 1998, the Company has accrued
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$44,723 and $38,123, respectively, for this matching contribution. The Company has recorded expense related to the 401(k) plan of $38,674; $45,143; $50,158; for fiscal year 1999, 1998, and 1997, respectively.
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, 1999, the Company has accrued an amount representing the Company's estimate of incurred but not reported claims.
NOTE 11. 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, 1999.
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 year 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, 1999, Mr. Holmes owned approximately 79 percent 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.
During the fiscal year 1999, the Board of Directors of the Company approved the issuance of one million shares of class C common stock to Frank Holmes in exchange for services and cancellation of the option to purchase 400,000 shares of Class C common stock and the cancellation of warrants to purchase 586,122 shares of class C common stock held by Mr. Holmes and F.E. Holmes Organization, Inc. These shares vest over a ten-year period beginning July 1, 1998 and will vest fully on June 30, 2008, or in the event of Mr. Holmes death, and will be valued at $.50 per share. The agreement was executed on August 10, 1999.
In March 1985, the board of directors adopted an Incentive Stock Option Plan (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 percent 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 percent 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. As of June 30, 1999, options covering 88,000 shares have been exercised and options covering 50,500 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 (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 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 fiscal year 1997, options covering 30,000 shares were granted at an exercise price
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of $2.00 per share. Options issued under the 1989 Plan vest six months from the grant date or 20 percent on the first, second, third, fourth and fifth anniversaries of the grant date. As of June 30, 1999, options covering 393,000 shares have been exercised under this plan and options covering 120,900 shares have expired.
In April 1997, the board of directors adopted the 1997 Non-Qualified Stock Option Plan (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. During the fiscal year 1999, options covering 20,000 shares were granted at an exercise price of $1.56 per share. As of June 30, 1999, options covering 6,000 shares have been exercised under this plan and options covering 14,500 shares 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 percent 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 --------- ------ Granted 178,500 $ 1.90 Canceled 33,500 $ 2.67 Exercised 5,500 $ 1.50 --------- ------ Outstanding June 30, 1997 1,058,800 $ 2.53
Granted -- -- Canceled 80,200 $ 3.96 Exercised 7,000 $ 1.94 --------- ------ Outstanding June 30, 1998 971,600 $ 2.41
Granted 20,000 $ 1.56 Canceled 38,800 $ 2.48 Exercised -- -- --------- ------ Outstanding June 30, 1999 952,800 $ 2.40 ========= ======
As of June 30, 1999, 1998, and 1997, exercisable stock options totaled 948,020, 958,580, and 1,027,140, shares and had weighted average exercise prices of $2.39, $2.41, and $2.51, 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 year 1999 and 1997 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 $13,121, $2,567, and $134,532 in fiscal years 1999, 1998, and 1997, respectively, and the pro forma net income and income per share would have been as follows:
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FISCAL YEAR ENDED JUNE 30, --------------------------------------------- 1999 1998 1997 ------------ ---------- --------- Pro forma net income (loss) ($ 1,865,927) ($ 151,186) $ 149,615 Pro forma income per share: Basic and diluted ($ 0.28) ($ 0.02) $ 0.02
The weighted average fair value of options granted during the fiscal years ended June 30, 1999, and 1997 was $0.85 and $1.10, 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, ---------------------------------------------- 1999 1998 1997 ------------ ------------ ------------ Expected volatility 0.42-- 0.55 0.50-- 0.55 0.50-- 0.55 Expected dividend yield -- -- -- Expected life (term) 8 Years 8 Years 8 Years Risk-free interest rate 4.41%--5.47% 5.07%--5.47% 5.07%--5.47%
Class A and class C common stock options outstanding and exercisable at June 30, 1999, were as follows:
During the fiscal years ended June 30, 1999, and June 30, 1998, the Company purchased 133,685 and 29,525 shares of its class A common stock at an average price of $1.72 and $2.30 per share, respectively.
NOTE 12. INCOME TAXES
The reconciliation of income tax computed at the U.S. federal statutory rates to income tax expense is:
YEAR ENDED JUNE 30, ----------------------------------- 1999 1998 1997 --------- --------- --------- Tax expense (benefit) at statutory rate . $(563,373) $ 63,984 $ 209,483 Exercise of non-qualified stock options treated as equity for financial statements ............................ -- -- (2,412) Non-deductible membership dues .......... 12,238 11,880 13,713 Non-deductible meals & entertainment .... 35,194 31,401 25,419 Valuation allowance ..................... 886,891 (31,986) 66,458 Other ................................... (187,621) 13,118 19,315 --------- --------- --------- $ 183,329 $ (39,571) $ 331,976 ========= ========= =========
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 Company's deferred total assets and liabilities are as follows:
YEAR ENDED JUNE 30, ------------------------ 1999 1998 ---------- ---------- Book/tax differences in the balance sheet: Trading securities ............................ $ 106,214 $ 92,577 Accumulated depreciation ........................... 148,169 93,730 Accrued expenses .............................. 35,335 42,717 Available-for-sale securities ................. 38,604 39,020 Reduction in cost basis of AFS securities ..... 177,466 177,466 Annuity obligations ........................... 50,204 52,713 Affiliated investment ......................... 217,542 11,253 ---------- ---------- 773,534 509,476 Tax carryovers: Net operating loss (NOL) carryover ............ 886,891 465,143 Charitable contributions carryover ............ 130,879 113,539 Investment tax credit ......................... 34,472 34,472 Alternative minimum tax credits ............... 115,228 115,228 ---------- ---------- 1,167,470 728,382 Total gross deferred tax asset ..................... 1,941,004 1,237,858 ---------- ----------
U.S. Global Investors, Inc. Annual Report on Form 10-K 1999 Page 51
Available-for-sale securities ................ (38,604) (12,629) Net unrealized holding loss (affiliated) ..... -- (26,391) ----------- ----------- Total gross deferred tax liability ........... (38,604) (39,020) ----------- ----------- Deferred tax asset ........................... 1,902,400 1,198,848 Valuation allowance .......................... (921,363) (34,472) ----------- ----------- Net deferred tax asset ....................... $ 981,037 $ 1,174,366 =========== ===========
For federal income tax purposes at June 30, 1999, the Company has NOLs of approximately $2.6 million which will begin expiring in fiscal 2010, charitable contribution carryovers of approximately $385,000 expiring 1999-2001, and minimum tax credits of $115,228 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 included a valuation allowance of $921,363 and $34,472 at June 30, 1999 and 1998, respectively, providing for the utilization of NOLs, charitable contributions and investment tax credits against future taxable income.
NOTE 13. LITIGATION ACCRUAL
As discussed in the Company's Form 10-K for fiscal year ended June 30, 1997, Gerald C. Letch sued the Company in June 1994 in state district court in San Antonio, Texas, for breach of contract based upon an alleged oral promise by a Company officer (later deceased) to pay a finder's fee for introducing certain parties to the Company. In November 1995, a judgment was entered in favor of Letch, with total damages aggregating $296,637.
On November 12, 1997, the Fourth Court of Appeals reversed the trial court's finding against the Company. Mr. Letch filed a motion for rehearing, which was subsequently denied by the appellate court. In March 1998, Mr. Letch filed a writ of appeal with the Texas Supreme Court, which was denied. Accordingly, the Company has retired the bond posted in connection with the appeals and received the proceeds from the restricted cash.
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 year 1996. Since the decision in favor of the Company is final, the Company reversed the $300,000 accrued for the original judgment, and thus positively affected earnings by reducing general and administrative expenses for fiscal year 1998.
NOTE 14. EARNINGS PER SHARE
The following table sets forth the computation for basic and diluted earnings per share (EPS):
YEAR ENDED JUNE 30, ---------------------------------------- 1999 1998 1997 ----------- ----------- ---------- Basic and diluted net income (loss) . $(1,852,806) $ (148,619) $ 284,149
Weighted average number of outstanding shares: Basic .......................... 6,562,140 6,617,153 6,606,211
Effect of dilutive securities: Employee stock options ......... 1,704 52,210 58,113 ----------- ----------- ---------- Potential dilutive common shares ....................... 1,704 52,210 58,113 ----------- ----------- ----------
Diluted ........................ 6,563,844 6,669,363 6,664,324 =========== =========== ==========
Earnings (loss) per share: Basic .......................... $ (0.28) $ (0.02) $ 0.04 =========== =========== ========== Diluted ........................ $ (0.28) $ (0.02) $ 0.04 =========== =========== ==========
U.S. Global Investors, Inc. Annual Report on Form 10-K 1999 Page 52
The diluted EPS calculation excludes the effect of stock options when their exercise prices exceed the average market price for the period. For the years ended June 30, 1999, 1998, and 1997, options for 910,800, 650,400, and 726,100 shares, respectively, were excluded from diluted EPS. Additionally, for the years ended June 30, 1999, 1998, and 1997, there were 586,122 warrants outstanding which had no dilutive effect and were excluded from diluted EPS.
NOTE 15. COMPREHENSIVE INCOME. In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive Income (SFAS 130) and Statement No. 131, Disclosures about Segments of an Enterprise and Related Information (SFAS 131). SFAS 130 establishes standards for reporting and displaying comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of general-purpose financial statements. The Company adopted SFAS 130 during fiscal year 1999.
TAX BEFORE-TAX (EXPENSE) NET-OF-TAX AMOUNT OR BENEFIT AMOUNT ----------- --------- --------- JUNE 30, 1999: Unrealized gains (losses) on securities: Unrealized holding gains arising period ............. $ (333,172) $ 113,278 $(219,894) Less: reclassification adjustment for gains (losses) in net income ..... 334,394 (113,694) 220,700 ----------- --------- --------- Other comprehensive income (loss) ........................ $ 1,222 $ (416) $ 806 =========== ========= =========
JUNE 30, 1998: Unrealized gains (losses) on securities: Unrealized holding gains arising period ............. $ 20,191 $ (6,865) $ 13,326 Less: reclassification adjustment for gains (losses) in net income ..... 103,205 (35,090) 68,115 ----------- --------- --------- Other comprehensive income (loss) ........................ $ 123,396 $ (41,955) $ 81,441 =========== ========= =========
JUNE 30, 1997: Unrealized gains (losses) on securities: Unrealized holding gains arising period ............. $(1,453,737) $ 494,271 $(959,466) Less: reclassification adjustment for gains (losses) in net income ..... 122,000 (41,480) 80,520 ----------- --------- --------- Other comprehensive income (loss) ....................... $(1,331,737) $ 452,791 $(878,946) =========== ========= =========
NOTE 16. FINANCIAL INFORMATION BY BUSINESS SEGMENT
The Company adopted SFAS 131, "Disclosures about Segments of an Enterprise and Related Information" in 1999. SFAS 131 requires companies to present segment information using the management approach. The management approach is based on the way that management organizes the segments within a Company for making operating decisions and assessing performance. The Company conducts operations in two principal geographic areas: the United States and Europe. Revenues by geographic area include fees charged to customers, and revenues from venture capital activities. Identifiable assets are those assets used exclusively in the operations, or investments held in each geographic area.
NOTE 17. RELATED PARTY TRANSACTIONS
In addition to the Company's receivable from USGIF and USGAF relating to investment management, transfer agency and other fees (see Note 3), the Company had $892,778 and $1,280,321 invested in USGIF money market mutual funds at June 30, 1999, and 1998, respectively. Dividend income earned from these investments in USGIF totaled $94,267, $98,450, and $83,317 for the years ended June 30, 1999, 1998, and 1997, respectively. Receivables from mutual funds represent amounts due the Company, and its wholly owned subsidiaries, for investment advisory fees, transfer agent fees, accounting fees, and exchange fees, net of amounts payable to the mutual funds.
During fiscal year 1998, the Company purchased 4,378 shares for $200,000 of Xtra Music Limited, of which Jerold H. Rubinstein, a director of the Company, has controlling interest. Additionally, during fiscal year 1998, the Company paid Bobby D. Duncan, a former director of the Company, approximately $60,000 in consulting fees.
NOTE 18. SUBSEQUENT EVENTS
On August 11, 1999, the Directors of the Guernsey Fund agreed to close the fund and redeem all outstanding participating shares. In accordance with the fund's Articles of Association, the Company has suspended the determination of the net asset value of the fund and is proceeding to liquidate the positions in the fund to redeem shareholders.
U.S. Global Investors, Inc. Annual Report on Form 10-K 1999 Page 55
EXHIBIT 21 -- SUBSIDIARIES OF THE REGISTRANT, JURISDICTION OF INCORPORATION AND PERCENTAGE OF OWNERSHIP
1. United Shareholder Services, Inc.; incorporated in Texas and wholly owned by the Registrant
2. A & B Mailers, Inc.; incorporated in Texas and wholly owned by the Registrant
3. Securities Trust and Financial Company; incorporated in Texas and wholly owned by the Registrant
4. U.S. Advisors (Guernsey) Limited; incorporated in Guernsey, Channel Islands and wholly owned by the Registrant
5. U.S. Global Brokerage, Inc.; incorporated in Texas and wholly owned by the Registrant.
6. U.S. Global Administrators, Inc.; incorporated in Texas and wholly owned by the Registrant.
U.S. Global Investors, Inc. Annual Report on Form 10-K 1999 Page 56
EXHIBIT 23.1 -- CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements(Form S-8 No. 33-33012) pertaining to the 1989 Non-Qualified Stock Option Plan and the 1985 Incentive Stock Option Plan and (Form S-8 No. 333-25699) pertaining to the 1997 Non-Qualified Stock Option Plan of our report dated September 28, 1999, with respect to the consolidated financial statemments of U.S. Global Investors, Inc. and Subsidiaries incorporated by reference in the Annual Report (Form 10-K) for the year ended June 30, 1999.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
San Antonio, Texas September 28, 1999
U.S. Global Investors, Inc. Annual Report on Form 10-K 1999 Page 57
EXHIBIT 23.2 -- CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 33-33012 and No. 333-25699) of U.S. Global Investors, Inc. of our report dated September 29, 1997, relating to the financial statements which appear in the ANNUAL REPORT TO SHAREHOLDERS, which is incorporated in this Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP Houston, Texas
September 28, 1999
U.S. Global Investors, Inc. Annual Report on Form 10-K 1999 Page 58
EXHIBIT 23.3 -- CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 33-33012 and No. 333-25699) of U.S. Global Investors, Inc. of our report dated September 28, 1998, appearing in the ANNUAL REPORT TO SHAREHOLDERS which is incorporated in this Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers
PricewaterhouseCoopers PO Box 321 National Westminister House Le Truchot St Peter Port Guernsey GY1 4ND
September 28, 1999