SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 2002
or
| | Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _____ to _____
COMMISSION FILE NUMBER 0-13928
U.S. GLOBAL INVESTORS, INC.
Incorporated in the State of Texas
IRS Employer Identification No. 74-1598370
Principal Executive Offices:
7900 Callaghan Road
San Antonio, Texas 78229
Telephone Number: 210-308-1234
Securities registered pursuant to Section 12(b) of the Act: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
CLASS A COMMON STOCK
($0.05 PAR VALUE PER SHARE)
REGISTERED: NASDAQ SMALL CAP ISSUES
Indicate by check mark whether the Company (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No | |
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. | |
The aggregate market value of the 4,204,217 shares of nonvoting class A common
stock held by nonaffiliates of the registrant on October 7, 2002 (based on the
last sale price on the Nasdaq as of such date), was $5,465,482. Registrant's
only voting stock is its class C common stock, par value of $0.05 per share, for
which there is no active market. The aggregate value of the 104,589 shares of
the class C common stock held by nonaffiliates of the registrant on October 7,
2002 (based on the last sale price of the class C common stock in a private
transaction) was $52,295. For purposes of this disclosure only, the registrant
has assumed that its directors, executive officers, and beneficial owners of 5%
or more of the registrant's common stock are affiliates of the registrant.
On October 7, 2002, there were 6,311,474 shares of Registrant's class A
nonvoting common stock issued and 5,979,202 shares of Registrant's class A
nonvoting common stock issued and outstanding, no shares of Registrant's class B
nonvoting common stock outstanding, and 1,496,800 shares of Registrant's class C
common stock issued and outstanding.
Documents incorporated by reference: None
TABLE OF CONTENTS
PART I OF ANNUAL REPORT ON FORM 10-K
Item 1. Business____________________________________________________________________________________1
Item 2. Properties__________________________________________________________________________________4
Item 3. Legal Proceedings___________________________________________________________________________4
Item 4. Submission of Matters to a Vote of Security Holders_________________________________________4
PART II OF ANNUAL REPORT ON FORM 10-K
Item 5. Market for Company's Common Equity and Related Shareholder Matters__________________________5
Item 6. Selected Financial Data_____________________________________________________________________6
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations_______________________________________________________________________________________6
Item 8. Financial Statements and Supplementary Data________________________________________________13
Item 9. Changes in and Disagreements With Accountants On Accounting and Financial Disclosure_______29
PART III OF ANNUAL REPORT ON FORM 10-K
Item 10. Directors and Executive Officers of the Company___________________________________________30
Item 11. Executive Compensation____________________________________________________________________31
Item 12. Security Ownership of Certain Beneficial Owners and Management____________________________35
Item 13. Certain Relationships and Related Transactions____________________________________________36
PART IV OF ANNUAL REPORT ON FORM 10-K
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K__________________________37
SIGNATURES________________________________________________________________________________________________40
CERTIFICATIONS____________________________________________________________________________________________41
EXHIBIT 11-- SCHEDULE OF COMPUTATION OF NET EARNINGS PER SHARE____________________________________________42
EXHIBIT 21-- SUBSIDIARIES OF THE COMPANY, JURISDICTION OF INCORPORATION, AND PERCENTAGE OF OWNERSHIP______43
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[Graphic: U.S. Global Invetors, Inc. Logo]
PART I OF ANNUAL REPORT ON FORM 10-K
ITEM 1. BUSINESS
U.S. Global Investors, Inc. (Company or U.S. Global) has made
forward-looking statements concerning the Company's performance,
financial condition, and operations in this 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, and (iv) market,
credit, and liquidity risks associated with the Company's
investment management activities. 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.
This discussion reviews and analyzes the consolidated results of
operations for the past three fiscal years and other factors that
may affect future financial performance. This discussion should be
read in conjunction with the Consolidated Financial Statements,
Notes to the Consolidated Financial Statements, and Selected
Financial Data.
U.S. Global, a Texas corporation organized in 1968, and its wholly
owned subsidiaries are in the mutual fund management business. 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, through the
Company or its subsidiaries, 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 nine and three
mutual funds, respectively, on a no-load basis.
As part of the mutual fund management business, the Company
provides: (1) investment advisory services through the Company or
its subsidiaries to institutions (namely, mutual funds) and other
persons; (2) transfer agency and record keeping services; (3)
mailing services; and (4) distribution services, through its
wholly owned broker/dealer, to mutual funds advised by the
Company. The fees from investment advisory and transfer agent
services, as well as investment income, are the primary sources of
the Company's revenue. Prior to June 30, 2001, the Company
provided custodial and administrative services through its wholly
owned trust company and administrator for IRAs and other types of
retirement plans. The fees from these custodial and administrative
services contributed to the Company's revenue. The Company will
continue to receive the majority of the aforementioned custodial
fees as it has contracted with another entity to assist with these
services.
In addition to managing USGIF and USGAF, the Company is actively
engaged in trading for its proprietary account. Management
believes it can more effectively manage the Company's cash
position by broadening the types of investments utilized in cash
management and continues to believe that such activities are in
the best interest of the Company. These activities are reviewed
and monitored by Company compliance personnel, and various reports
are provided to investment advisory clients.
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LINES OF BUSINESS
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INVESTMENT MANAGEMENT SERVICES
INVESTMENT ADVISORY SERVICES. The Company furnishes an investment
program for each of the mutual funds it manages and determines,
subject to overall supervision by the boards 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 as well as 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
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 boards of trustees of USGIF and USGAF will
consider renewal of the applicable agreements in February and May
2003, respectively. Management anticipates that the Advisory
Agreements will be renewed.
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 providing 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 for out-of-pocket
expenses. In connection with obtaining/providing administrative
services to the beneficial owners of fund shares through
institutions that provide such services and maintain an omnibus
account with USSI, each fund pays a monthly fee based on the
number of accounts or 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 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 for renewal by the boards of
trustees of USGIF and of USGAF in February and May 2003,
respectively, and management anticipates that the agreements will
be renewed.
BROKERAGE SERVICES. The Company has registered its wholly owned
subsidiary, U.S. Global Brokerage, Inc. (USGB), with the National
Association of Securities Dealers (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,
2
1998, USGB became the distributor for USGIF and USGAF fund shares.
For the fiscal year ended June 30, 2002, the Company has
capitalized USGB with approximately $671,399 to cover the costs
associated with continuing operations.
MAILING SERVICES. A&B Mailers, Inc., a wholly owned subsidiary of
the Company, provides mail-handling services to various entities.
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.
TRUST COMPANY SERVICES. Security Trust & Financial Company (STFC),
a wholly owned state chartered trust company, provided custodial
services for IRA and other retirement plans administered by U.S.
Global Administrators, Inc. until June 1, 2001. Management
determined that it was in the Company's best interest to exit the
401(k) plan administration business and to voluntarily withdraw
the charter of the trust company. The Company continues to collect
the majority of the fees for custodial services to the IRAs for
record keeping activities and has contracted with another entity
to act as custodian of these accounts.
CORPORATE INVESTMENTS
INVESTMENT ACTIVITIES. In addition to mutual fund activity, the
Company attempts to maximize its cash position by using a
diversified venture capital approach to investing. 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.
EMPLOYEES
As of June 30, 2002, U.S. Global and its subsidiaries employed 60
full-time employees and 6 part-time employees; as of June 30,
2001, it employed 66 full-time employees and 4 part-time
employees. The Company considers its relationship with its
employees to be excellent.
COMPETITION
The mutual fund industry is highly competitive. Recent reports
show there are approximately 8,000 domestically registered
open-end investment companies of varying sizes and investment
policies whose shares are being offered to the public worldwide.
Generally, there are two types of mutual funds: "load" and
"no-load." In addition, there are both load and no-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 the USGIF and USGAF funds, 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. Amendments to, and regulatory
pronouncements related to, the Glass-Stegall Act, the statute that
has prohibited banks from engaging in various 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
3
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 each fund's
investment performance, the quality of services provided to
shareholders, and the Company's efforts to market fund performance
effectively. 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). Costs of distribution
and compliance have put pressure on profit margins for the mutual
fund industry.
SUPERVISION AND REGULATION
The Company, USSI, USGB, 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. 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
has 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 and the NASD upon request. Moreover, the
funds managed by the Company are subject to regulation and
periodic reporting under the Investment Company Act of 1940 and,
with respect to their continuous public offering of shares, the
registration provisions of the Securities Act of 1933.
RELATIONSHIPS WITH THE FUNDS
The businesses of the Company are, to a very significant degree,
dependent on their associations and contractual relationships with
the Funds. In the event the advisory or transfer agent services
agreements with USGIF or USGAF are canceled or not renewed
pursuant to the terms thereof, the Company would be substantially
adversely affected. U.S. Global, USSI, and USGB consider their
relationships with the Funds 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 USGIF
and USGAF will choose to continue their relationships with the
Company, USSI, or USGB.
ITEM 2. PROPERTIES
The Company presently occupies an office building as its
headquarters in San Antonio, Texas. The office building is
approximately 46,000 square feet on approximately 2.5 acres of
land. This building is currently subject to a term loan for
$1,021,206.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings in which the Company is
involved. There are no material legal proceedings to which any
director, officer or affiliate of the Company or any associate of
any such director or officer is a party or has a material
interest, adverse to the Company or any of its subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during
fiscal year 2002.
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[Graphic: U.S. Global Investors, Inc. Logo]
PART II OF ANNUAL REPORT ON FORM 10-K
ITEM 5. MARKET FOR COMPANY'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 $0.05 per share.
There is no established public trading market for the Company's
class B and class C common stock.
The Company's class A and class B common stock have no voting
privileges.
The Company's class A common stock is traded over-the-counter and
is quoted daily under Nasdaq's Small Cap Issues. Trades are
reported under the symbol "GROW."
The following table sets forth the range of high and low sales
prices from Nasdaq for the fiscal years ended June 30, 2002 and
2001. The quotations represent prices between dealers and do not
include any retail markup, markdown, or commission.
SALES PRICE
2002 2001
------------------- --------------------
HIGH ($) LOW ($) HIGH ($) LOW ($)
-------- ------- -------- -------
First quarter (9/30) 1.050 0.900 1.750 1.500
Second quarter (12/31) 1.100 0.900 1.500 0.938
Third quarter (3/31) 1.800 1.000 1.375 0.875
Fourth quarter (6/30) 2.450 1.790 1.210 1.000
HOLDERS
On October 7, 2002, there were 270 holders of record of class A
common stock, no holders of record of class B common stock, and 71
holders of record of class C common stock.
Many of the class A common shares are held of record by nominees,
and management believes that as of October 7, 2002, 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 eighteen 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 on earnings, operations, capital
requirements, general financial condition of the Company, and
general business conditions.
5
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 noncumulative cash dividend equal
in the aggregate to 5% of the Company's net after-tax 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
holders of the class A common stock are protected in certain
instances against dilution of the dividend amount payable to such
holders.
ITEM 6. SELECTED FINANCIAL DATA
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
Management's Discussion and Analysis of Financial Condition and
Results of Operations, contained in this Form 10-K. The selected
financial data as of June 30, 1998, through June 30, 2002, and the
years then ended is derived from the Company's Consolidated
Financial Statements, which were audited by Ernst & Young LLP,
independent accountants.
SELECTED YEAR ENDED JUNE 30,
EARNINGS DATA
---------------------- --------------------------------------------------------------------------
2002 2001 2000 1999 1998
---------------------- --------------- ------------- ------------ --------------- ---------------
Revenues $ 7,767,514 $ 8,893,884 $10,912,764 $ 9,739,180 $10,195,349
Expenses 8,104,299 9,652,382 10,495,271 10,665,616 10,034,397
--------- --------- ---------- ---------- ----------
Income (loss) before
equity interest and
income taxes (336,785) (758,498) 417,493 (926,436) 160,952
Income tax (benefit)
expense (95,351) 36,181 (26,526) 183,329 (39,571)
Equity in income
(loss) of affiliate -- -- 51,739 (743,041) (1) (349,142) (1)
Net income (loss) (241,434) (794,679) 495,758 (1,852,806) (148,619)
Basic income (loss)
per share (0.03) (0.11) 0.07 (0.28) (0.02)
Working capital 2,930,974 3,246,792 3,138,009 2,441,109 3,719,539
Total assets 7,905,021 7,912,184 9,118,624 8,328,138 10,308,947
Long-term obligations 1,067,967 1,135,903 1,197,961 1,255,724 1,330,638
Shareholders' equity 5,580,059 5,715,520 6,484,486 5,912,238 7,941,859
------------------
(1) The gains (losses) on changes of interest in affiliate for
fiscal years 1999 and 1998 of $97,744 and ($17,146),
respectively, are included in equity in income (loss) of
affiliate.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BUSINESS SEGMENTS
U.S. Global Investors, Inc. (Company or U.S. Global), with
principal operations located in San Antonio, Texas, manages two
business segments: (1) the Company offers a broad range of
investment
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management products and services to meet the needs of individual
and institutional investors, and (2) the Company invests for its
own account in an effort to add growth and value to its cash
position.
The Company generates substantially all its operating revenues
from the investment management of products and services for the
U.S. Global Investors Funds (USGIF) and U.S. Global Accolade Funds
(USGAF). Notwithstanding the fact that the Company generates the
majority of its revenues from this segment, the Company holds a
significant amount of its total assets in investments. As of June
30, 2002, the Company held approximately $2.3 million in
investments, comprising 28.6% of its total assets. The following
is a brief discussion of the Company's two business segments.
INVESTMENT MANAGEMENT PRODUCTS AND SERVICES
As noted above, the Company generates substantially all of its
revenues from managing and servicing USGIF and USGAF. These
revenues are largely dependent on the total value and composition
of assets under its management. Fluctuations in the markets and
investor sentiment directly impact the funds' asset levels,
thereby affecting income and results of operations. During fiscal
year 2002, total average assets under management decreased 8.9% to
$1.2 billion primarily because of depreciation of the equity
markets and shareholder withdrawals from the Bonnel Growth Fund,
one of the USGAF funds.
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AVERAGE ASSETS UNDER MANAGEMENT
(DOLLARS IN MILLIONS)
-------------------------------------------------------------------------------------------------
2002 2001 % CHANGE 2001 2000 % CHANGE
USGIF - Money market $ 872 $ 910 (4.2)% $ 910 $ 928 (1.9)%
USGIF - Other 167 164 1.8 % 164 234 (29.9)%
------ ------ ---- ------ ------ ----
USGIF - Total 1,039 1,074 (3.3)% 1,074 1,162 (7.6)%
USGAF 126 205 (38.5)% 205 238 (13.9)%
------ ------ ---- ------ ------ ----
Total $1,165 $1,279 (8.9)% $1,279 $1,400 (8.6)%
------ ------ ---- ------ ------ ----
INVESTMENT ACTIVITIES
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. Management has reduced
these activities due to poor market conditions.
As of June 30, 2002 and 2001, the Company held approximately $2.3
and $1.9 million, respectively, in investments other than USGIF
money market mutual fund shares. In fiscal year 2000, the Company
received $701,000 in trading and available-for-sale securities in
liquidation of its investment in the U.S. Global Strategies Fund
Limited (Guernsey Fund), an offshore fund managed by the Company.
Investment income from the Company's investments includes realized
gains and losses, unrealized gains and losses on trading
securities, and dividend and interest income. 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 2002, 2001, and 2000, the Company had net realized gains
(losses) of approximately $(49,000), $383,000, and $550,000,
respectively. The Company expects that gains or losses will
continue to fluctuate in the future as fluctuations in the market
value of the Company's investments will affect the amounts of such
gains or losses.
CONSOLIDATED RESULTS OF OPERATIONS
The following is a discussion of the consolidated results of
operations of the Company and a more detailed discussion of the
Company's revenues and expenses.
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2002 2001 % CHANGE 2001 2000 % CHANGE
------ ------ ---- ------ ----- ------
Net income (loss) (in thousands) $(241) $(795) 69.7% $(795) $496 (260.3)%
Net income (loss) per share - $(0.03) $(0.11) 72.7% $(0.11) $0.07 (257.1)%
basic and diluted
Weighted average shares
outstanding (in thousands)
Basic 7,456 7,525 7,525 7,409
Diluted 7,456 7,525 7,525 7,411
YEAR ENDED JUNE 30, 2002, COMPARED WITH YEAR ENDED JUNE 30, 2001
The Company posted a net after-tax loss of $241,000 ($0.03 loss
per share) for the year ended June 30, 2002, compared with a net
after-tax loss of $795,000 ($0.11 loss per share) for the year
ended June 30, 2001. The decease in net loss for 2002 was
principally due to the Company's reduction of the overall expense
reimbursement levels of its funds. The Company has also undertaken
a significant realignment of its cost structures in order to
better cope with declining fund asset levels due to adverse market
conditions. However, offsetting these activities was a decline in
both investment advisory and transfer agent revenues, as well as
other ancillary operations.
YEAR ENDED JUNE 30, 2001, COMPARED WITH YEAR ENDED JUNE 30, 2000
The Company posted a net after-tax loss of $795,000 ($0.11 loss
per share) for the year ended June 30, 2001, compared with net
after-tax income of $496,000 ($0.07 income per share) for the year
ended June 30, 2000. The decrease in net income for 2001 was
principally due to declines in investment advisory and transfer
agent revenues and investment income. These decreases in revenues
were partially offset by reductions in general and administrative
expenses.
REVENUES
(DOLLARS IN THOUSANDS) 2002 2001 % CHANGE 2001 2000 % CHANGE
----------------------------- ------ ------ ----- ------ ------- -----
Investment advisory fees:
USGIF - Money market $2,710 $2,357 15.0% $2,357 $2,438 (3.3) %
USGIF - Other 1,110 1,081 2.7% 1,081 1,666 (35.1)%
------ ------ ----- ------ ------- -----
USGIF - Total 3,820 3,438 11.1% 3,438 4,104 (16.2)%
USGAF 1,275 2,060 (38.1)% 2,060 2,393 (13.9)%
Other -- -- N/A -- 9 (100.0)%
------ ------ ----- ------ ------- -----
Total investment advisory fees $5,095 $5,498 (7.3)% $5,498 $6,506 (15.5)%
Transfer agent fees 2,417 2,682 (9.9)% 2,682 2,934 (8.6)%
Custodial and administrative 157 302 (48.0)% 302 484 (37.6)%
fees
Mailing services fees 146 302 (51.7)% 302 368 (17.9)%
Investment income (168) 127 (232.3)% 127 556 (77.2)%
Other revenues 121 (18) 65 (127.7)%
------ ------ ----- ------ ------- -----
N/A (18)
Total $7,768 $8,894 (12.7)% $8,894 $10,913 (18.5)%
====== ====== ===== ====== ======= =====
INVESTMENT ADVISORY FEES. Investment advisory fees, the largest
component of the Company's revenues, are calculated as a
percentage ranging from 0.375% to 1.25% of average net assets and
are paid monthly. 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, in particular
the money market and fixed income funds. The aggregate amount of
fees waived and expenses born by the Company totaled $1,530,046,
$2,039,360, and $2,125,773 in 2002, 2001, and 2000, respectively.
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
8
fee waivers and expense limitations, the Company may reduce the
amount of fund expenses it is bearing.
Net investment advisory fees are also affected by changes in
assets under management, including market appreciation or
depreciation, the addition of new client accounts or client
contributions of additional assets to existing accounts,
withdrawals of assets from and termination of client accounts,
exchanges of assets between accounts or products with different
fee structures, and the amount of fees voluntarily reimbursed.
The decrease in net advisory fees in fiscal year 2002 of
approximately $402,000, or 7.3%, over fiscal year 2001 was largely
due to continued market declines and shareholder redemptions in
the Company's equity funds, particularly the Bonnel Growth Fund
and the All American Equity Fund. This is a trend experienced by
the entire industry as equity markets have not climbed back from
their negative returns as of yet. The Company has also experienced
net redemptions in its U.S. Government Securities Savings Fund.
Again, this is an industry trend as yields have fallen
significantly and money market funds have lost ground to other
higher-yielding products. The Company was able to mitigate this
loss and actually improve the margin on this fund with a reduced
amount of expense reimbursements. In contrast to its other equity
funds, the Company realized sizeable increases in its high-margin
gold funds. This sector had outstanding returns in response to the
downtrodden equity markets, deficit spending by the U.S.
government, 40-year lows in interest rates, and a weaker U.S.
dollar.
The decrease in net advisory fees in fiscal year 2001 of
approximately $1.0 million, or 15.5%, over fiscal year 2000 was
largely due to market declines in the Company's equity funds,
particularly in the Bonnel Growth Fund, World Gold Fund, and All
American Equity Fund, and shareholder withdrawals from the Bonnel
Growth Fund.
TRANSFER AGENT FEES. United Shareholder Services, Inc., a wholly
owned subsidiary of the Company, provides transfer agency,
lockbox, and printing services for Company clients. The Company
receives, as compensation for services rendered as transfer agent,
an annual fee per account and is reimbursed for out-of-pocket
expenses associated with processing shareholder information.
Transfer agent fees are therefore affected by the number of client
accounts.
The fee decrease in fiscal year 2002, compared with fiscal year
2001, is a result of a decrease in mutual fund shareholder
accounts from 97,932 to 92,210. The Company has continued to see a
decline in its number of accounts serviced as many smaller
accounts in the funds continue to close. In order to lower fund
expense ratios on its equity funds, the Company instituted a small
account fee for its equity and fixed income funds in January 2002.
This fee serves to encourage active investment and account growth
by shareholders of the funds and discourage the maintenance of
inactive accounts with small balances. As a result of this fee,
the Company expects to have a significant increase in the number
of client accounts closed for calendar year 2002. The Company
expects this to be a singular event, which, though painful in the
short-term, will result in improved long-term fund profitability
and lower expense ratios for its equity funds, improving their
competitive positioning against their respective peer groups.
The decrease in fees in fiscal year 2001, as compared with fiscal
year 2000, is a result of a decrease in mutual fund shareholder
accounts from 107,450 to 97,932.
CUSTODIAL AND ADMINISTRATIVE FEES. Security Trust & Financial
Company (STFC), a wholly owned state chartered trust company,
provided custodial and/or trustee services for IRAs and other
retirement plans administered by the Company. The custodial fees
were previously paid to STFC at calendar year-end upon separate
invoice to the customer, not the funds. Effective January 1, 2000,
U.S. Global Administrators, Inc. (USGA), a wholly owned subsidiary
of the Company, began providing qualified plan administration and
record keeping services for existing 401(k) clients, which
services were previously offered by STFC. The administrative fees
were paid to USGA on a quarterly basis by its clients. USGA ceased
revenue-generating operations on May 31, 2001. STFC continued to
collect its custodial fees through May 31, 2001, at which time a
majority of these fees transferred to USGI. Both companies were
liquidated during fiscal year 2002.
The decrease in custodial and administrative fees of approximately
$145,000, or 48.1%, for fiscal year 2002 from the previous year
was a result of the discontinuation of USGA's 401(k) servicing
9
operations, a decline in the number of custodial accounts
administered, and a revenue sharing agreement with the entity USGI
contracted to provide custodial services for these accounts.
Custodial and administrative fees decreased approximately
$180,000, or 37.6%, in fiscal year 2001. This decrease was
primarily due to the phasing out of USGA's 401(k) servicing
operations. Management made the determination that these
supplemental operations were not the Company's core strength and
required an excessive amount of capital to reach competitive
levels.
MAILING SERVICES. A&B Mailers, Inc., a wholly owned subsidiary of
the Company, provides mail-handling services to various entities.
One of A&B Mailers' primary customers is the Company in connection
with its efforts to promote the funds. Each service is priced
separately.
The decrease in mailing service fees of approximately $156,000, or
51.7%, for fiscal year 2002 was a result of an adjustment to
revenues to properly reflect mailing volumes. The decrease also
resulted from overall decreased mailing volumes. This is a result
of several trends, including reduced numbers of smaller accounts
which require mailings and continued efforts to have shareholders
use electronic media such as the website and e-mail as a means of
communication. Mailing service fees decreased approximately
$66,000, or 17.9%, in fiscal year 2001. This decline was due
primarily to reduced mailing activities for USGIF and USGAF as
well as outside clients.
EXPENSES
(DOLLARS IN THOUSANDS) 2002 2001 % CHANGE 2001 2000 % CHANGE
-------- --------- -- ------- --------- ------- -- ------
Employee compensation and $ 4,479 $ 4,701 (4.7)% $ 4,701 $ 4,767 (1.4)%
benefits
General and administrative 2,982 4,304 (30.7)% 4,304 4,525 (4.9)%
Marketing and distribution 393 311 26.4 % 311 695 (55.3)%
Depreciation and 165 226 (27.0)% 226 395 (42.8)%
amortization
Interest and finance 85 110 (22.7)% 110 113 (2.7)%
------- ------- ----- ------- ------- ----
Total $ 8,104 $ 9,652 (16.0)% $ 9,652 $10,495 (8.0)%
EMPLOYEE COMPENSATION AND BENEFITS. Employee compensation and
benefits decreased in fiscal year 2002 over fiscal year 2001 by
$222,000, or 4.7%, due to continued staff reductions. These
reductions were primarily made in the shareholder communications
and marketing areas. This was in response to a reduced number of
accounts to service, a decline in the activity of existing
accounts, and an effort to streamline marketing efforts to reduce
overhead. Employee compensation and benefits decreased in fiscal
year 2001 over fiscal year 2000 by approximately $66,000, or 1.4%,
due to staff reductions implemented during the third and fourth
quarters of fiscal year 2001 in response to market downturns and
decreased shareholder activity.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
decreased by approximately $1.3 million, or 30.7%, in fiscal year
2002 over fiscal year 2001 primarily as a result of a decrease in
sub-advisory fees paid for portfolio management of the Bonnel
Growth Fund and an overall continued realignment of overhead costs
with reduced revenues. General and administrative expenses
decreased by approximately $221,000, or 4.9%, in fiscal year 2001
over fiscal year 2000 largely due to a decrease in sub-advisory
fees paid for management of the Bonnel Growth Fund and a decrease
in travel and training expenses incurred on behalf of company
personnel. These decreases were offset by increased professional
fees and leasing costs associated with equipment and computers.
MARKETING AND DISTRIBUTION. Fiscal year 2002 marketing and
distribution expenses increased by approximately $82,000, or
26.4%, over fiscal year 2001. The net increase was due to a
10
decreased percentage of marketing costs that were reimbursed by
12b-1 plans adopted by the funds despite an overall reduction in
marketing costs. Fiscal year 2001 marketing and distribution
expenses decreased by approximately $384,000, or 55.3%, over
fiscal year 2000. The net decrease was due to an overall reduction
of marketing expenditures as well as an increased percentage of
marketing costs that were reimbursed by 12b-1 plans adopted by the
funds. The Company expects that marketing and distribution costs
for fiscal year 2003 will approximate fiscal year 2002 levels.
DEPRECIATION AND AMORTIZATION. Depreciation expenses decreased by
approximately $61,000, or 27.0%, in fiscal year 2002 from 2001 due
to existing assets becoming fully depreciated without being
replaced with additional capital purchases. Depreciation expenses
decreased by approximately $169,000, or 42.8%, in fiscal year 2001
from fiscal year 2000 due to the Company's decision to lease its
computer equipment. As such, fully depreciated assets were
replaced by operating leases.
INTEREST AND FINANCE. Interest and finance charges are incurred
primarily from a note payable on the Company's building. The
decrease in interest expense of approximately $25,000, or 22.7%,
in fiscal year 2002 from fiscal year 2001 and the decrease in
interest expense of $3,000, or 2.7%, in fiscal year 2001 from
fiscal year 2000 were due to the continued amortization of the
note payable as well as the reduction of rates negotiated in
fiscal year 2001.
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, 2002, the Company has net operating losses (NOLs) of
approximately $2.8 million, which will expire between fiscal 2005
and 2011, charitable contribution carryovers of approximately
$54,000 expiring between fiscal 2004 and 2006, and alternative
minimum tax credits of $139,729 with indefinite expirations.
Certain changes in the Company's ownership may result in a
limitation on the amount of NOLs that could be utilized under
Section 382 of the Internal Revenue Code. If certain changes in
the Company's ownership occur subsequent to June 30, 2002, 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 $684,000 and $547,000 at June 30, 2002, and 2001,
respectively, providing for the utilization of NOLs, charitable
contributions, and investment tax credits against future taxable
income. The Company increased its valuation allowance due to an
overall evaluation of the likelihood that the deferred tax assets
will be realized.
LIQUIDITY AND CAPITAL RESOURCES
At year end, the Company had net working capital (current assets
minus current liabilities) of approximately $2.9 million and a
current ratio of 3.3 to 1. With approximately $989,000 in cash and
cash equivalents and almost $1.7 million in unencumbered
marketable securities, the Company has adequate liquidity to meet
its current debt obligations. Total shareholders' equity was
approximately $5.6 million, with cash, cash equivalents, and
unencumbered marketable securities comprising 21.3% of total
assets. With the exception of operating expenses, the Company's
only material commitment is the mortgage on its corporate
headquarters. The Company also has access to a $1 million credit
facility, which can be utilized for working capital purposes. The
Company's available working capital and potential cash flow are
expected to be sufficient to cover current expenses, including
debt service.
The investment advisory and related contracts between the Company
and USGIF and USGAF will expire on February 28, 2003, and May 31,
2003, respectively. Management anticipates the trustees of both
USGIF and USGAF will renew the contracts.
Management believes current cash reserves, financing obtained
and/or available, and potential cash flow from operations will be
sufficient to meet foreseeable cash needs or capital necessary for
the above-mentioned activities and allow the Company to take
advantage of investment opportunities whenever available.
11
MARKET RISK DISCLOSURES
The Company's balance sheet includes assets whose fair value is
subject to market risks. Due to the Company's investments in
equity securities, equity price fluctuations represent a market
risk factor affecting the Company's consolidated financial
position. The carrying values of investments subject to equity
price risks are based on quoted market prices or, if not actively
traded, management's estimate of fair value as of the balance
sheet date. Market prices fluctuate, and the amount realized in
the subsequent sale of an investment may differ significantly from
the reported market value. The Company's investment activities are
reviewed and monitored by Company compliance personnel, and
various reports are provided to investment advisory clients.
The table below summarizes the Company's equity price risks as of
June 30, 2002, and shows the effects of a hypothetical 25%
increase and a 25% decrease in market prices.
FAIR VALUE AT HYPOTHETICAL ESTIMATED FAIR INCREASE
VALUE AFTER (DECREASE) IN
HYPOTHETICAL SHAREHOLDERS'
JUNE 30, 2002 ($) PERCENTAGE CHANGE PRICE CHANGE ($) EQUITY ($)
------------------- ------------------ ------------------- ------------------ -------------------
Trading securities 1,409,474 25% increase 1,761,842 232,563
25% decrease 1,057,106 (232,563)
Available-for-sale 853,612 25% increase 1,067,015 140,846
25% decrease 640,209 (140,846)
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.
12
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of U.S. Global
Investors, Inc.
We have audited the accompanying consolidated statements of
financial condition of U.S. Global Investors, Inc. and
Subsidiaries (Company) as of June 30, 2002 and 2001, and the
related consolidated statements of operations and comprehensive
income (loss), shareholders' equity, and cash flows for each of
the three years in the period ended June 30, 2002. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States. 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, 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, 2002 and 2001, and the consolidated results of their
operations and their cash flows for each of the three years in the
period ended June 30, 2002, in conformity with accounting
principles generally accepted in the United States.
/s/ Ernst & Young LLP
Ernst & Young LLP
Dallas, Texas
October 9, 2002
13
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
ASSETS
JUNE 30,
2002 2001
---------- ----------
CURRENT ASSETS
Cash and cash equivalents $ 988,936 $1,333,922
Due from brokers 70,871 --
Trading securities, at fair value 1,409,474 1,163,693
Receivables
Mutual funds 963,730 773,595
Employees 78,070 77,774
Other 32,194 319,055
Prepaid expenses 279,273 203,565
Deferred tax asset 365,421 435,949
---------- ----------
TOTAL CURRENT ASSETS 4,187,969 4,307,553
---------- ----------
NET PROPERTY AND EQUIPMENT 1,869,990 2,029,899
---------- ----------
OTHER ASSETS
Restricted investments 210,000 225,000
Long-term deferred tax asset 739,154 605,066
Investment securities available-for-sale, at fair value 853,612 694,870
Other 44,296 49,796
---------- ----------
TOTAL OTHER ASSETS 1,847,062 1,574,732
---------- ----------
TOTAL ASSETS $7,905,021 $7,912,184
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 695,693 $ 280,587
Accrued compensation and related costs 221,282 224,094
Current portion of notes payable 65,637 69,094
Current portion of annuity and contractual obligation 9,758 9,100
Other accrued expenses 264,625 477,886
---------- ----------
TOTAL CURRENT LIABILITIES 1,256,995 1,060,761
---------- ----------
NONCURRENT LIABILITIES
Notes payable - net of current portion 955,569 1,013,747
Annuity and contractual obligations 112,398 122,156
---------- ----------
TOTAL NONCURRENT LIABILITIES 1,067,967 1,135,903
---------- ----------
TOTAL LIABILITIES 2,324,962 2,196,664
---------- ----------
SHAREHOLDERS' EQUITY
Common stock (class A) -- $0.05 par value; nonvoting; 315,574 314,974
authorized 7,000,000 shares; issued, 6,311,474 shares and
6,299,474 shares at June 30, 2002 and 2001, respectively
Common stock (class B) -- $0.05 par value; nonvoting; -- --
authorized 2,250,000 shares; no shares issued
Common stock (class C) -- $0.05 par value; voting; authorized 74,840 74,840
1,750,000 shares; issued, 1,496,800 shares
Additional paid-in capital 10,761,276 10,678,419
Treasury stock, class A shares at cost; 345,331 and 313,426 (639,407) (632,261)
shares at June 30, 2002, and 2001, respectively
Accumulated other comprehensive loss, net of tax (40,651) (102,364)
Accumulated deficit (4,891,573) (4,618,088)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 5,580,059 5,715,520
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $7,905,021 $7,912,184
========== ==========
The accompanying notes are an integral part of this statement.
14
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
YEAR ENDED JUNE 30,
----------------------------------------
2002 2001 2000
------------ ------------ ------------
REVENUE
Investment advisory fees $ 5,095,343 $ 5,497,802 $ 6,505,552
Transfer agent fees 2,417,203 2,682,226 2,933,855
Custodial and administrative fees 156,688 302,017 484,441
Investment income (loss) (168,326) 127,395 556,165
Other 266,606 284,444 432,751
------------ ------------ ------------
7,767,514 8,893,884 10,912,764
------------ ------------ ------------
EXPENSES
General and administrative 7,854,241 9,315,982 9,987,166
Depreciation 164,674 226,150 395,452
Interest 85,384 110,250 112,653
------------ ------------ ------------
8,104,299 9,652,382 10,495,271
------------ ------------ ------------
INCOME (LOSS) BEFORE EQUITY INTEREST AND INCOME TAXES (336,785) (758,498) 417,493
------------ ------------ ------------
EQUITY IN NET INCOME OF AFFILIATE
-- -- 51,739
-- -- ------
INCOME (LOSS) BEFORE INCOME TAXES (336,785) (758,498) 469,232
PROVISION FOR FEDERAL INCOME TAXES
Tax (Benefit) Expense (95,351) 36,181 (26,526)
------------ ------------ ------------
NET INCOME (LOSS) (241,434) (794,679) 495,758
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on available-for-sale 61,713 (50,593) 23,167
securities
------------ ------------ ------------
COMPREHENSIVE INCOME (LOSS) $ (179,721) $(845,272) $ 518,925
=========== ========== =========
BASIC AND DILUTED NET INCOME (LOSS) PER SHARE $ (0.03) $ (0.11) $ 0.07
=========== ========== =========
The accompanying notes are an integral part of this statement.
15
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON COMMON ADDITIONAL ACCUMULATED TREASURY ACCUMULATED TOTAL
STOCK STOCK OTHER
(CLASS (CLASS PAID-IN COMPREHENSIVE
A) C) CAPITAL DEFICIT STOCK INCOME (LOSS)
-------- ------- ----------- ----------- --------- -------- ----------
$314,974 $24,840 $10,586,628 $(4,290,436) $(648,830) $(74,938) $5,912,238
BALANCE AT JUNE 30, 1999
(6,299,474 SHARES OF CLASS A;
496,800 SHARES OF CLASS C)
Purchase of 25,375 shares of
Common Stock (Class A) -- -- -- -- (43,862) -- (43,862)
Reissuance of 31,054 shares of
Common Stock (Class A) -- -- (8,209) -- 55,394 -- 47,185
Issuance of 1,000,000 shares of
Common Stock (Class C) to Frank
Holmes as deferred compensation -- 50,000 (50,000) -- -- -- --
Recognition of current year
portion of deferred compensation -- -- 50,000 -- -- -- 50,000
Unrealized gain (loss) on
securities available-for-sale
(net of tax) -- -- -- -- -- 23,167 23,167
Net Income -- -- -- 495,758 -- -- 495,758
-------- ------- ----------- ----------- --------- -------- ----------
BALANCE AT JUNE 30, 2000
(6,299,474 SHARES OF CLASS A;
1,496,800 SHARES OF CLASS C) 314,974 74,840 10,578,419 (3,794,678) (637,298) (51,771) 6,484,486
Purchase of 71,346 shares of
Common Stock (Class A) -- -- -- -- (81,326) -- (81,326)
Reissuance of 40,270 shares of
Common Stock (Class A) -- -- -- (28,731) 86,363 -- 57,632
Recognition of current year
portion of deferred compensation -- -- 100,000 -- -- -- 100,000
Unrealized gain (loss) on
securities available-for-sale
(net of tax) -- -- -- -- -- (50,593) (50,593)
Net Loss -- -- -- (794,679) -- (794,679)
-------- ------- ----------- ----------- --------- -------- ----------
BALANCE AT JUNE 30, 2001
(6,299,474 SHARES OF CLASS A;
1,496,800 SHARES OF CLASS C) 314,974 74,840 10,678,419 (4,618,088) (632,261) (102,364) 5,715,520
Purchase of 86,275 shares of -- -- -- -- (106,482) -- (106,482)
Common Stock (Class A)
Reissuance of 54,370 shares of
Common Stock (Class A) -- -- 6,679 (32,051) 99,336 -- 73,964
Exercise of 12,000 options for
Common Stock (Class A) 600 -- 26,178 -- -- -- 26,778
Recognition of current year
portion of deferred compensation -- -- 50,000 -- -- -- 50,000
Unrealized gain (loss) on -- -- -- -- -- 61,713 61,713
securities available-for-sale
(net of tax)
Net Loss -- -- -- (241,434) -- -- (241,434)
-------- ------- ----------- ----------- --------- -------- ----------
BALANCE AT JUNE 30, 2002
(6,311,474 SHARES OF CLASS A; $315,574 $74,840 $10,761,276 $(4,891,573) $(639,407) $(40,651) $5,580,059
1,496,800 SHARES OF CLASS C) ======== ======= =========== ============ ========== =========== ==========
The accompanying notes are an integral part of this statement.
16
CONSOLIDATED STATEMENTS OF CASH FLOW
YEAR ENDED JUNE 30,
-------------------------------------
2002 2001 2000
--------- --------- ---------
CASH FLOW FROM OPERATING ACTIVITIES
Net income (loss) $(241,434) $(794,679) $ 495,758
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation 164,674 226,150 395,452
Net loss (gain) on sales of securities 48,975 (383,379) (550,000)
Loss (gain) on disposal of equipment -- 97,752 (5,752)
Provision for deferred taxes (95,351) 36,181 (26,526)
Reserve against impairment of equipment -- 9,436 --
Changes in assets and liabilities, impacting
cash from operations:
Accounts receivable 96,430 56,933 (62,213)
Prepaid expenses and other (126,079) 142,964 46,134
Trading securities (90,009) 1,018,363 676,746
Accounts payable and accrued expenses 199,033 (376,866) 286,245
--------- --------- ---------
Total adjustments 197,673 827,534 760,086
--------- --------- ---------
NET CASH (USED IN) PROVIDED BY OPERATIONS (43,761) 32,855 1,255,844
--------- --------- ---------
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of property and equipment (4,765) (84,493) (258,644)
Proceeds on disposal of equipment -- -- 16,792
Purchase of available-for-sale securities (269,985) (233,310) (717,652)
Redemption in equity affiliate -- -- 100,000
Proceeds on sale of available-for-sale securities -- 246,269 --
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES (274,750) (71,534) (859,504)
--------- --------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Payments on annuity (9,100) (8,487) (7,915)
Payments on note payable (61,635) (52,121) (60,092)
Proceeds from issuance or exercise of stock, 150,742 157,632 47,185
warrants, and options
Purchase of treasury stock (106,482) (81,326) (43,862)
--------- --------- ---------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (26,475) 15,698 (64,684)
--------- --------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (344,986) (22,981) 331,656
BEGINNING CASH AND CASH EQUIVALENTS 1,333,922 1,356,903 1,025,247
--------- --------- ---------
ENDING CASH AND CASH EQUIVALENTS 988,936 1,333,922 1,356,903
========= ========= =========
SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES
Receipt of trading and available-for-sale -- -- $701,478
securities in liquidation of equity investment
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest $85,384 $133,250 $89,653
The accompanying notes are an integral part of this statement.
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. 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 that 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.
U.S. Global has formed the following companies to provide
supplementary services to USGIF and USGAF: United Shareholder
Services, Inc. (USSI), A&B Mailers, Inc. (A&B), U.S. Global
Brokerage, Inc. (USGB), U.S. Global Administrators, Inc. (USGA),
and Security Trust & Financial Company (STFC). USGA and STFC have
been liquidated as of fiscal year end.
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), is utilized in
conducting the Company's cash management activities.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements
include the accounts of the Company and its wholly owned
subsidiaries: USSI, A&B, USGG, and USGB. As of June 30, 2002, STFC
and USGA have been liquidated and are no longer included in the
consolidated financial statements.
All significant intercompany balances and transactions have been
eliminated in consolidation. Certain amounts have been
reclassified for comparative purposes.
ACCOUNTING FOR EQUITY INVESTMENTS. Before the liquidation of the
U.S. Global Strategies Fund (Guernsey Fund) in fiscal year 2000,
the Company accounted for its investment in the Guernsey Fund
under the equity method.
CASH AND CASH EQUIVALENTS. Cash consists of cash on hand and cash
equivalents with original maturities of three months or less.
DUE FROM BROKERS. The Company conducts business with various
brokers for its investment activities. The clearing and depository
operations for the investment activities are performed pursuant to
agreements with the brokers. The due from brokers balance
represents cash balances with these brokers. The Company is
subject to credit risk to the extent any broker with which the
Company conducts business is unable to deliver cash balances owed
the Company. Management monitors the financial condition of the
brokers with which the Company conducts business and believes the
likelihood of loss under the aforementioned circumstances is
remote.
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).
In accordance with SFAS 115, the Company classifies its
investments in equity and debt securities based on intent.
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 classified neither 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
19
these available-for-sale securities are excluded from earnings,
are reported, net of tax, as a separate component of shareholders'
equity, and are recorded in earnings on the date of sale.
The Company records security transactions on trade date.
Securities traded on a securities exchange are valued at the last
sale price. Securities for which over-the-counter market
quotations are available are valued at the mean price between the
last price bid and last price asked. Securities for which
quotations are not readily available or for which the Company owns
a significant portion of shares relative to trading volume are
valued at fair value, as determined by the Company's management.
Realized gains (losses) from security transactions are calculated
on the first-in/first-out cost basis, unless otherwise
identifiable, and are recorded in earnings on the date of sale.
For available-for-sale securities with declines in value that are
deemed permanent, the cost basis of the securities is reduced
accordingly, and the resulting loss is realized in earnings.
PROPERTY AND EQUIPMENT. Fixed assets are recorded at cost.
Depreciation for fixed assets is recorded using the straight-line
method over the estimated useful life of each asset as follows:
furniture and equipment are depreciated over 3 to 10 years, and
the building and related improvements are depreciated over 31.5 to
40 years.
The Company expenses insignificant purchases when the assets are
aquired. Approximately $85,000 was expensed in fiscal 2002 under
this policy. This amount is included in general and administrative
expenses on the statement of operations.
TREASURY STOCK. Treasury stock purchases are accounted for under
the cost method. The subsequent issuances of these shares are
accounted for based on their weighted-average cost basis.
INCOME TAXES. Provisions for income taxes include deferred taxes
for temporary differences in the bases of assets and liabilities
for financial and tax purposes, resulting from the use of the
liability method of accounting for income taxes. The liability
method requires that deferred tax assets be reduced by a valuation
allowance in cases where it is more likely than not that the
deferred tax assets will not be realized.
REVENUE RECOGNITION. Investment advisory fees, transfer agent
fees, custodian fees, and all other fees earned by the Company are
recorded as income during the period in which services are
performed.
DIVIDENDS AND INTEREST. Dividends are recorded on the ex-dividend
date, and interest income is recorded on an accrual basis.
ADVERTISING. The Company expenses advertising and sales promotion
costs as they are incurred. Net advertising and sales promotion
expenditures were approximately $373,000, $264,000, and $575,000
in 2002, 2001, and 2000, 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. Realized 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 requires
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.
19
NOTE 3. INVESTMENTS
The following table summarizes investment activity over the last
three fiscal years:
YEAR ENDED JUNE 30,
-----------------------------------
2002 2001 2000
--------- --------- ---------
Realized gains (losses) on sale of securities $(48,975) $383,379 $550,000
Trading securities, at cost 2,178,041 1,951,963 1,832,282
Trading securities, at fair value * 1,409,474 1,163,693 1,424,120
Net change in unrealized losses on trading securities 19,703 (379,861) 95,974
(included in earnings)
Available-for-sale securities, at cost 915,204 849,966 1,237,483
Available-for-sale securities, at fair value * 853,612 694,870 1,159,042
Unrealized loss recorded in shareholders' equity (net of (40,651) (102,364) (51,771)
tax)
Realized losses on available-for-sale securities deemed 51,887 -- --
to have other-than-temporary declines in value
----------------------
* These categories of securities are comprised primarily of equity
investments, including those investments discussed in footnote
15 regarding related party transactions.
A trading security was purchased in fiscal 2002 for approximately
$450,000. This security has a contingent payable that must be
paid upon liquidation of the security, net of any fees earned.
This payable is included in accounts payable in the statement of
financial condition. As the security rises or falls in value, the
security balance and the payable balance will be marked-to-market
appropriately. At June 30, 2002, these balances had been
marked-to-market to approximately $581,000. The Company has a fee
arrangement for this investment whereby it receives 2% of the
initial value of the investment plus 20% of any gains from the
sale of the investment, payable at the settlement of the sale. At
June 30, 2002, the Company has recorded $27,320 from this fee
arrangement in other income on the statement of operations.
NOTE 4. INVESTMENT MANAGEMENT, TRANSFER AGENT, AND OTHER FEES
The Company serves as investment adviser to USGIF and USGAF and
receives a fee based on a specified percentage of net assets under
management. USGAF are sub-advised by outside third-party managers,
who are in turn paid out of the investment advisory fees received
by the Company. In March 2002, an agreement was reached with one
of these sub-advisors whereby $165,000 of sub-advisory fees
payable were waived. The Company also serves as transfer agent to
USGIF and USGAF and receives a fee based on the number of
shareholder accounts serviced. The Company also provides in-house
legal services to USGIF and USGAF for which it is reimbursed. 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: custodian revenues, revenues from miscellaneous
transfer agency activities including lockbox and printing
functions, A&B mailroom operations, management of investments for
private investors, as well as gains on marketable securities
transactions.
The Company has voluntarily waived or reduced its advisory fees
and/or has agreed to pay expenses on several funds within USGIF
through June 30, 2003, or such later date as the Company
determines. The aggregate amount of fees waived and expenses borne
by the Company were $1,530,046, $2,039,360, and $2,125,773 in
2002, 2001, and 2000, respectively.
The investment advisory contract and related contracts between the
Company and USGIF expire in February 2003, and the contracts
between the Company and USGAF expire in May 2003. Management
anticipates the trustees of both USGIF and USGAF will renew the
contracts.
20
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment are composed of the following:
JUNE 30,
------------------------
2002 2001
----------- -----------
Building and land $2,271,613 $2,271,613
Furniture, equipment, and other 2,127,407 2,122,642
----------- -----------
4,399,020 4,394,255
Accumulated depreciation (2,529,030) (2,364,356)
----------- -----------
Net property and equipment $1,869,990 $2,029,899
=========== ===========
The building and land are pledged as collateral for the financing
used to acquire the building.
NOTE 6. BORROWINGS
The Company has a note payable to a bank, which is secured by
land, an office building, and related improvements. As of June 30,
2002, the balance on the note was $1,021,206. The loan is
currently being amortized over a twelve-year period with payments
of both principal and interest due monthly based on a fixed rate
of 6.50%. The current monthly payment is $10,840, and the note
matures on January 31, 2006. Under this agreement, the Company
must maintain certain financial covenants. The Company was not in
compliance with certain debt covenants but received a waiver from
the bank through June 30, 2002.
Management believes that the Company has adequate cash, cash
equivalents, and equity in the underlying asset to retire the
obligation if necessary.
The Company has access to a $1 million credit facility with a
one-year maturity for working capital purposes. Any use of this
credit facility will be secured by the Company's eligible accounts
receivable and pledged securities. As of June 30, 2002, this
credit facility remained unutilized by the Company.
Future principal payments to be made over the next four years
based on the note payable outstanding at June 30, 2002, are as
follows:
FISCAL YEAR AMOUNT
2003 $ 65,637
2004 70,033
2005 74,724
2006 810,812
----------
Total $1,021,206
NOTE 7. LEASE COMMITMENTS
The Company has operating leases for computers and equipment that
expire between fiscal years 2003 and 2006. Total lease expenses
were $222,983, $202,006, and $108,925 in fiscal years 2002, 2001,
and 2000, respectively. Future minimum lease payments required
under these leases are as follows:
FISCAL YEAR AMOUNT
2003 $ 171,874
2004 38,972
2005 9,036
2006 3,012
2007 --
---------
Total $ 222,894
21
NOTE 8. 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
noncompete/noninterference 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 the
balance was $210,000 at June 30, 2002, which is disclosed on the
statement of financial condition as restricted investments.
NOTE 9. BENEFIT PLANS
The Company has a contributory profit sharing plan, which includes
all qualified employees who have completed six months of
employment with the Company as of calendar quarter-end. The amount
of the annual contribution, which may not exceed 15% of earnings
before income taxes, is approved by the Company's board of
directors. The Company has neither accrued nor paid a contribution
for fiscal years 2002, 2001, and 2000.
The Company also has a savings and investment plan qualified under
Section 401(k) of the Internal Revenue Code, which it merged with
the profit sharing plan effective January 1, 2002. In connection
with this 401(k) plan, participants can voluntarily contribute a
portion of their compensation, up to certain limitations, to this
plan, and the Company will match 50% of their contribution up to
2% of compensation. The Company has recorded expenses related to
the 401(k) plan of $48,760, $37,477, and $48,743 for fiscal years
2002, 2001, and 2000, respectively.
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, and the Company will
match these contributions on a limited basis. A similar savings
plan utilizing UGMA accounts is offered to employees to save for
their children's education. The Company match, reflected in base
salary expense, aggregated in all programs to $52,692, $67,485,
and $53,417 in fiscal years 2002, 2001, and 2000, 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.
The Company has accrued an amount representing the Company's
estimate of claims incurred but not paid at June 30, 2002.
NOTE 10. SHAREHOLDERS' EQUITY
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% of the total combined
voting power of all classes of the Company's stock and up to ten
years for other employees. Options issued under the 1985 Plan vest
six months from the grant date or 20% on the first, second, third,
fourth and fifth anniversaries of the grant date. Since adoption
of the 1985 plan, options have been granted at prices ranging from
$1.50 to $4.50 per share, which equaled or exceeded the fair
market value at date of grant. As of June 30, 2002, options
covering 88,000 shares have been exercised, and options covering
112,000 shares have expired. The 1985 plan expired December 31,
1994; consequently, there will be no further option grants under
the 1985 plan.
22
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 2000,
options covering 22,000 shares were granted at an exercise price
of $1.50 per share. Options issued under the 1989 Plan vest six
months from the grant date or 20% on the first, second, third,
fourth and fifth anniversaries of the grant date. As of June 30,
2002, options covering 403,000 shares have been exercised under
this plan, and options covering 422,200 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 fiscal year 2000, options covering 72,000
shares were granted at an exercise price of $1.50 per share. As of
June 30, 2002, options covering 8,000 shares have been exercised
under this plan, and options covering 107,000 shares have expired.
During fiscal year 1999, the Board of Directors of the Company
approved the issuance of 1,000,000 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 held by
Mr. Holmes 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. The 1,000,000 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 were valued at
$.50 per share for compensation purposes. The agreement was
executed on August 10, 1999. At June 30, 2002, the unvested
balance of this deferred compensation arrangement is $350,0000 and
is included on the statement of financial condition as a contra
account to additional paid-in capital.
On a per share basis, the holders of the class C common stock and
the nonvoting class A common stock participate equally in
dividends as declared by the Company's board of directors, with
the exception that any dividends declared must first be paid to
the holders of the class A stock to the extent of 5% of the
Company's after-tax prior year net earnings.
The holders of the class A stock have a liquidation preference
equal to the par value of $.05 per share. Stock option
transactions under the various stock option plans are summarized
below:
SHARES WEIGHTED
AVERAGE
EXERCISE
PRICE ($)
---------- --------
OUTSTANDING JUNE 30, 1999 952,800 2.40
Granted 94,000 1.50
Canceled 666,000 2.40
Exercised -- --
----------
OUTSTANDING JUNE 30, 2000 380,800 2.16
Granted -- --
Canceled 39,000 1.58
Exercised -- --
----------
OUTSTANDING JUNE 30, 2001 341,800 2.23
Granted -- --
Canceled 150,300 2.62
Exercised 12,000 1.92
----------
OUTSTANDING JUNE 30, 2002 179,500 1.92
==========
As of June 30, 2002, 2001, and 2000, exercisable stock options
totaled 144,100, 293,000, and 295,700 shares and had weighted
average exercise prices of $2.02, $2.35, and $2.35 per share,
respectively.
23
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 after issuance of SFAS 123 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 $6,326, $7,670, and $1,227 in fiscal
years 2002, 2001, and 2000, respectively, and the pro forma net
income and income per share would have been as follows:
FISCAL YEAR ENDED JUNE 30,
----------------------------------
2002 2001 2000
--------- --------- --------
Pro forma net income (loss) $(247,760) $(802,349) $494,531
Pro forma income (loss) per
share - basic and diluted $(0.03) $(0.11) $0.07
The weighted average fair value of options granted during the
fiscal year ended June 30, 2000 was $0.81. Due to vesting
requirements, the pro forma effect of this grant was not reflected
until fiscal year 2001. For purposes of pro forma disclosure, the
estimated fair value of the options is amortized to expense over
the options' vesting period. The fair value of these options was
estimated at the date of the grant using a Black-Scholes
option-pricing model with the following weighted-average
assumptions:
FISCAL YEAR ENDED JUNE 30,
-------------------------------------------
2002 2001 2000
----------- ----------- -----------
Expected volatility 0.42 - 0.55 0.42 - 0.55 0.42 - 0.55
Expected dividend
yield -- -- --
Expected life (term) 8 years 8 years 8 years
Risk-free interest
rate 5.07% - 6.16% 5.07% - 6.16% 4.41% - 6.16%
Class A common stock options outstanding and exercisable at June
30, 2002, were as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
WEIGHTED WEIGHTED WEIGHTED
DATE OF AVERAGE REMAINING AVERAGE AVERAGE
OPTION OPTION NUMBER LIFE IN OPTION NUMBER OPTION
GRANT PRICE ($) OUTSTANDING YEARS PRICE ($) EXERCISABLE PRICE ($)
1985 PLAN 12/15/94 2.63 2,500 2.45 2.63 2,500 2.63
CLASS A
1989 PLAN 05/16/94 4.75 2,000 1.87 4.75 2,000 4.75
CLASS A
09/05/95 2.63 4,500 3.18 2.63 4,500 2.63
05/24/96 3.06 10,000 3.90 3.06 10,000 3.06
06/04/97 2.00 20,000 4.93 2.00 30,000 2.00
06/04/97 2.00 30,000 5.93 2.00 20,000 2.00
12/03/99 1.50 15,000 7.42 1.50 6,000 1.50
---- ------ ---- ---- ----- ----
1.50 - 4.75 51,500 3.27 2.22 42,500 2.38
24
1997 PLAN 06/04/97 1.82 31,500 4.93 1.82 31,500 1.82
CLASS A
06/04/97 2.00 50,000 4.93 2.00 50,000 2.00
12/03/99 1.50 44,000 7.42 1.50 17,600 1.50
---- ------ ---- ---- ----- ----
1.50 - 2.00 125,500 5.80 1.78 99,100 1.85
ALL PLANS 12/91 1.50 - 4.75 179,500 5.03 1.92 144,100 2.02
through =========== ======= ==== ==== ======= ====
12/99
During the fiscal years ended June 30, 2002 and 2001, the Company
purchased 86,275 and 71,346 shares, respectively, of its class A
common stock at an average price of $1.23 and $1.14, per share,
respectively.
NOTE 11. INCOME TAXES The reconciliation of income tax computed at
the U.S. federal statutory rates to income tax expense is:
YEAR ENDED JUNE 30,
-----------------------------------
2002 2001 2000
--------- -------- ---------
Tax expense (benefit) at statutory rate $(114,507) $(257,889) $ 159,539
Nondeductible membership dues 14,754 10,788 11,379
Nondeductible meals and entertainment 14,242 18,758 27,813
Change in valuation allowance 137,928 253,966 (258,095)
Other (147,768) 10,558 32,838
--------- -------- ---------
$(95,351) $ 36,181 $(26,526)
========= ======== =========
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,
-----------------------
2002 2001
---------- --------
BOOK/TAX DIFFERENCES IN THE BALANCE SHEET
Trading securities $ 306,110 $ 268,012
Accumulated depreciation 31,930 --
Accrued expenses 59,311 115,202
Available-for-sale securities 20,942 52,733
Reduction in cost basis of available-for-sale securities 195,107 177,466
Annuity obligations 41,533 44,627
---------- --------
654,933 658,040
25
TAX CARRYOVERS
Net operating loss (NOL) carryover 941,357 699,061
Charitable contributions carryover 18,545 78,363
Investment tax credit 34,472 34,472
Alternative minimum tax credits 139,729 139,729
----------- -----------
1,134,103 951,625
---------- --------
TOTAL GROSS DEFERRED TAX ASSET 1,789,036 1,609,665
---------- --------
BOOK/TAX DIFFERENCES IN THE BALANCE SHEET
Accumulated depreciation -- (22,117)
Unrealized loss on available-for-sale securities (20,942) (52,733)
---------- --------
TOTAL GROSS DEFERRED TAX LIABILITY (20,942) (74,850)
---------- --------
DEFERRED TAX ASSET 1,768,094 1,534,815
VALUATION ALLOWANCE (684,461) (546,533)
---------- --------
NET DEFERRED TAX ASSET $1,083,633 $988,282
========== ========
For federal income tax purposes at June 30, 2002, the Company has
NOLs of approximately $2.8 million, which will begin expiring
between fiscal 2005 and 2011, charitable contribution carryovers
of approximately $54,000 expiring between 2004 and 2006, and
alternative minimum tax credits of $139,729 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 $684,461 and $546,533
June 30, 2002 and 2001, respectively, providing for the
utilization of NOLs, charitable contributions, and investment tax
credits against future taxable income. The Company increased its
valuation allowance due to an overall evaluation of the likelihood
that the deferred tax assets will be realized.
NOTE 12. EARNINGS PER SHARE The following table sets forth the
computation for basic and diluted earnings per share (EPS):
YEAR ENDED JUNE 30,
-------------------------------------
2002 2001 2000
-------- -------- -------
BASIC AND DILUTED NET INCOME (LOSS) $(241,434) $(794,679) $ 495,758
WEIGHTED AVERAGE NUMBER OF OUTSTANDING SHARES
Basic 7,456,181 7,524,913 7,408,821
EFFECT OF DILUTIVE SECURITIES
Employee stock options -- -- 2,278
-------- -------- -------
Diluted 7,456,181 7,524,913 7,411,099
========= ========= =======
EARNINGS (LOSS) PER SHARE
Basic $ (0.03) $ (0.11) $ 0.07
========= ========= =======
Diluted $ (0.03) $ (0.11) $ 0.07
========= ========= =======
26
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, 2002, 2001, and 2000, options
for 179,500, 341,800, and 296,800 shares, respectively, were
excluded from diluted EPS.
NOTE 13. COMPREHENSIVE INCOME (LOSS)
The Company has disclosed the components of comprehensive income
in the consolidated statements of operations and comprehensive
income.
TAX
BEFORE-TAX (EXPENSE) OR NET-OF-TAX
AMOUNT BENEFIT ($) AMOUNT ($)
JUNE 30, 2002
Unrealized gains (losses) on $ 93,504 $ (31,791) $ 61,713
-------- ---------- --------
available-for-sale securities
Other comprehensive income (loss) $ 93,504 $ (31,791) $ 61,713
======== ========== ========
JUNE 30, 2001
Unrealized gains (losses) on $(76,656) $26,063 $(50,593)
--------- ------- ---------
available-for-sale securities
Other comprehensive income (loss) $(76,656) $26,063 $(50,593)
========= ======= =========
JUNE 30, 2000
Unrealized gains (losses) on $ 35,101 $ (11,934) $ 23,167
-------- ---------- --------
available-for-sale securities
Other comprehensive income (loss) $ 35,101 $ (11,934) $ 23,167
======== ========== ========
NOTE 14. FINANCIAL INFORMATION BY BUSINESS SEGMENT
The Company operates principally in two business segments:
providing mutual fund investment management services to its
clients and investing for its own account in an effort to add
growth and value to its cash position. The following details total
revenues and income (loss) by business segment:
INVESTMENT CORPORATE CONSOLI-
MANAGEMENT INVESTMENT DATED
SERVICES ($) ($) ($)
YEAR ENDED JUNE 30, 2002
Net revenues 7,975,056 (207,542) 7,767,514
========= ======== =========
Net income (loss) before income taxes (128,643) (208,142) (336,785)
========= ======== =========
Depreciation and amortization 164,674 -- 164,674
========= ======== =========
Interest expense 84,810 574 85,384
========= ======== =========
Capital expenditures 4,765 -- 4,765
========= ======== =========
Gross identifiable assets at June 30, 2002 4,496,709 2,263,086 6,759,795
Deferred tax asset 1,104,575
Accumulated other comprehensive loss
40,651
---------
Consolidated total assets at June 30, 2002 7,905,021
==========
YEAR ENDED JUNE 30, 2001
Net revenues 8,881,776 12,108 8,893,884
========= ======== =========
Net income (loss) before income taxes (742,801) (15,697) (758,498)
========= ======== =========
Depreciation and amortization 226,150 -- 226,150
========= ======== =========
Interest expense 109,995 255 110,250
========= ======== =========
Capital expenditures 84,493 -- 84,493
========= ======== =========
Gross identifiable assets at June 30, 2001 4,910,242 1,858,563 6,768,805
Deferred tax asset 1,041,015
Accumulated other comprehensive loss
102,364
Consolidated total assets at June 30, 2001 ---------
7,912,184
=========
27
YEAR ENDED JUNE 30, 2000
Net revenues 10,458,738 454,026 10,912,764
========= ======== =========
Income (loss) before income taxes and equity (36,533) 454,026 417,493
interest
Equity in net loss of affiliate
-- 51,739 51,739
Net income (loss) before income taxes (36,533) 505,765 469,232
========= ======== =========
Depreciation and amortization 395,452 -- 395,452
========= ======== =========
Interest expense 111,757 896 112,653
========= ======== =========
Capital expenditures 247,421 -- 247,421
========= ======== =========
Gross identifiable assets at June 30, 2000 6,700,188 1,315,532 8,015,720
Deferred tax asset 1,051,133
Accumulated other comprehensive loss 51,771
---------
Consolidated total assets at June 30, 2000 9,118,624
=========
NOTE 15. RELATED PARTY TRANSACTIONS
In addition to the Company's receivable from USGIF and USGAF
relating to investment management, transfer agent, and other fees,
the Company had $969,087 and $1,303,789 invested in USGIF money
market mutual funds at June 30, 2002 and 2001, respectively.
Receivables from mutual funds represent amounts due the Company
and its wholly owned subsidiaries for investment advisory fees,
transfer agent fees, and out-of-pocket expenses, net of amounts
payable to the mutual funds.
Frank Holmes, a director and CEO of the Company, has served as an
independent director of Franc-Or Resources beginning in June 2000
and chairman of Consolidated Fortress Resources in November 2000.
He also served as an independent director for Broadband
Collaborative Solutions, a private company, since May 2000 but had
resigned his directorship prior to June 30, 2002. The Company owns
a position in Franc-Or Resources at June 30, 2002, with an
estimated fair value of $304,900, recorded as a trading security
on the statement of financial condition. The Company also owns
positions in Consolidated Fortress Resources and Broadband
Collaborative Solutions at June 30, 2002, with estimated fair
values of $23,067 and $469,748, respectively, recorded as
investment securities available-for-sale on the statement of
financial condition. Mr. Holmes personally owns 100,000 shares of
Broadband Collaborative Solutions at June 30, 2002.
Mr. Holmes had advances at June 30, 2002 of $76,651, and this
amount has been repaid from bonuses paid to Mr. Holmes after June
30, 2002. Additionally, Mr. Holmes had an outstanding payable of
$43,567.
During fiscal year 2002, J. Stephen Penner, a former director of
the Company who resigned during fiscal year 2002, exercised
options for 10,000 shares of Class A stock at $2.00 per share.
NOTE 16. RECEIVABLE ADJUSTMENTS
In fiscal year 2001, the Company paid $182,115 for losses from
shareholder activity incurred by USGIF in previous years.
Management consulted with its insurance carrier and determined
that it was probable that this sum could be claimed against the
Company's insurance policy. The deductible on this policy was
$25,000, which amount was expensed in fiscal 2000. The balance of
approximately $157,000 was booked as a receivable at June 30,
2001. In fiscal year 2002, discussions with the insurance carrier
indicated that the possibility of recovery was not likely, and as
such, the entire receivable balance was expensed. Any subsequent
collections on this claim will result in a reversal of this
expense to the extent of collection.
During fiscal 2002, an adjustment was made to the billing
practices related to the Company's mail services. As a result, an
overall reduction of $104,000 was applied to mail service revenues
and related receivables in order to reflect billing volumes
properly.
28
NOTE 17. CONTINGENCIES
The Company has been named as one of several defendants in a civil
law suit filed in New York. Management consulted with legal
counsel and determined that the Company has strong merits for
either having the case dismissed or obtaining a favorable ruling.
In addition, the Company has filed a claim against its insurance
policy, and the carrier has agreed to coverage of this claim.
Legal expenses associated with this lawsuit have been expensed as
incurred. As the insurance carrier makes reimbursements on the
charges, these expenses are reversed. The Company received $66,000
in reimbursements from its insurance carrier during fiscal year
2002. These amounts were recorded as a reduction in general and
administrative expenses on the statement of operations.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Within twenty-four months prior to the date of the Company's most
recent financial statement, no Form 8-K recording a change of
accountants due to a disagreement on any matter of accounting
principles or practices or financial statement disclosure has been
filed with the Commission.
29
[Graphic: U.S. Global Investors, Inc. Logo]
PART III OF ANNUAL REPORT ON FORM 10-K
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The directors and executive officers of the Company are as
follows:
NAME AGE POSITION
Frank E. Holmes 47 Chairman of the Board of Directors and Chief Executive Officer of the
Company since October 1989, and Chief Investment Officer since June
1999. Since October 1989, Mr. Holmes has served and continues to
serve in various positions with the Company, its subsidiaries, and
the investment companies it sponsors. Mr. Holmes has also served as
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. Mr. Holmes has served as director of
Franc-Or Resources Corporation since June 2000 and Consolidated
Fortress since November 2000.
Jerold H. Rubinstein 64 Director of the Company since October 1989. Chief Executive Officer
and founder of Music Imaging & Media, Inc. from July 2002 to present.
Chairman of Musicplex, Inc. from September 1999 to June 2002.
Chairman and Chief Executive Officer of Xtra Music from July 1997 to
May 2000. Chairman of the Board of Directors and Chief Executive
Officer of DMX Inc. from May 1986 to July 1997.
Roy D. Terracina 56 Director of the Company since December 1994 and Vice Chairman of the
Board of Directors since May 1997. Owner of Sunshine Ventures, Inc.,
an investment company, since January 1994.
Thomas F. Lydon, Jr. 42 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 43 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.
Tracy Peterson 30 Chief Financial Officer of the Company since January 2002. Since
1997, Mr. Peterson has served and continues to serve in various
positions with the Company, its subsidiaries, and the investment
companies it sponsors.
None of the directors or executive officers of the Company has a
family relationship with any of the other directors or executive
officers.
The members of the board of directors are elected for one-year
terms or until their successors are elected and qualified. The
board of directors appoints the executive officers of the Company.
The Company's Executive Compensation Committee consists of Messrs.
Holmes, Lydon, Rubinstein, and Terracina. The Company's Audit
Committee consists of Messrs. Rubinstein and Terracina. The Stock
Option Committee consists of Mr. Rubinstein. The Company does not
have a Nominating Committee.
30
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% 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% 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, 2002, all Section 16(a) filing requirements
applicable to its directors, officers, and more than 10%
beneficial owners were met.
ITEM 11. EXECUTIVE COMPENSATION
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, 2002, fiscal year) and amounts for
Company savings plans (calculable through the end of the June 30,
2002, fiscal year).
ANNUAL COMPENSATION LONG-TERM
COMPENSATION
AWARDS
----------------------------------------------------------------------- -------------------------
(A) (B) (C) (D) (E) (F) (G)
--------------------------- ------ ----------- ----------- ------------ ------------ ------------
NAME AND YEAR SALARY ($) BONUS ($) OTHER RESTRICTED NUMBER OF
PRINCIPAL POSITION ANNUAL STOCK OPTIONS/
DURING FY 2002 COMPEN- AWARDS ($) SARS (2)
SATION (1)
($)
--------------------------- ------ ----------- ----------- ------------ ------------ ------------
Frank E. Holmes 2002 318,280 103,715 68,106(3) 50,000 (4) --
Chairman, Chief Executive 2001 318,280 141,918 64,817 100,000 (4) --
Officer 2000 318,280 58,602 48,640 50,000 (4) --
--------------------------- ------ ----------- ----------- ------------ ------------ ------------
Susan B. McGee 2002 151,610 49,536 -- 5,300 --
President, General Counsel 2001 139,054 46,867 -- -- --
2000 135,886 55,857 -- -- 15,000
(1) The Company believes that the aggregate amounts of such
omitted personal benefits do not exceed the lesser of $50,000
or 10% of the total of annual salary and bonus reported in
columns (c) and (d) for the named executive officers.
(2) All options pertain to Company class A common stock
(3) Includes trustee fees of $38,200 paid by the Company.
(4) Includes the board's issuance, in June 1999, of 1,000,000
shares of class C common stock to be vested over a ten-year
period beginning with fiscal year 1999, with an annual
compensation value of $50,000. Mr. Holmes will be fully vested
on June 30, 2008. Issuance was in part to compensate him for
his efforts and upon cancellation of Mr. Holmes' warrants and
option to acquire 986,122 shares of class C 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. Additionally,
key executive officers are compensated based on individual
performance pay arrangements.
31
PROFIT SHARING PLAN AND 401(K) PLAN
In June 1983, the Company adopted a profit sharing plan in which
all qualified employees who have completed one year of employment
with the Company are included. Subject to board action, the
Company may contribute up to 15% of its net income before taxes
during each fiscal year, limited to 15% of qualifying salaries, to
a profit sharing plan, the beneficiaries of which are the eligible
employees of the Company. The Company's contribution to the plan
is then apportioned to each employee's account in the plan in an
amount equal to the percentage of the total basic compensation
paid to all eligible employees, which each employee's individual
basic compensation represents. For the fiscal year ended June 30,
2002, the Company did not contribute to the profit sharing plan.
The Company adopted a 401(k) plan in October 1990 for the benefit
of all employees. The Company will match a certain percentage of a
participating employee's pay deferment. The Company contributes to
participants' accounts at the same time that the employee's pay
deferral is made. Effective January 1, 2002, the profit sharing
plan and 401(k) plan were merged to provide a more efficient
manner of administration. There were no other material changes in
plan.
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, and the Company will
match these contributions on a limited basis. A similar savings
plan utilizing UGMA accounts is offered to employees to save for
their children's education.
STOCK OPTION PLANS
In March 1985, the board of directors of the Company adopted an
Incentive Stock Option Plan (1985 Plan), giving certain executives
and key salaried employees of the Company and its subsidiaries
options to purchase shares of the Company's class A common stock.
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
the Securities Exchange Act of 1934 (1934 Act) Rule 16b-3. As of
June 30, 2002, under this plan, 202,500 options were granted,
88,000 options had been exercised, 112,000 options had expired,
and 2,500 options remained outstanding. The 1985 Plan, as amended,
terminated on December 31, 1994.
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
three 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, 2002, there were no grants. As of June 30,
2002, under this amended plan, 876,700 options had been granted,
403,000 options had been exercised, 422,200 options had expired,
and 51,500 options remained outstanding.
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 three 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, 2002, there were no options
granted. As of June 30, 2002, 240,500 options had been granted;
8,000 shares had been exercised; 107,000 options had expired;
125,500 options remained outstanding.
32
Shares available for stock option grants under the 1989 Plan and
the 1997 Plan aggregate to approximately 345,500 and 66,500
shares, respectively, on September 20, 2002.
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.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
-------------------------------------------------------------------------------------------------
INDIVIDUAL GRANTS POTENTIAL
REALIZED VALUE
AT ASSUMED
ANNUAL RATES
OF STOCK PRICE
APPRECIATION
FOR OPTION
TERM
------------------------------------------------------------------------------ ------------------
(A) (B) (C) (D) (E) (F) (G)
------------------- --------------- ---------------- ------------- ----------- -------- ---------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARS EXERCISE OF
NAME UNDERLYING GRANTED TO BASE PRICE EXPIRATION 5% ($) 10% ($)
OPTIONS/SARS EMPLOYEES IN ($/SH) DATE
GRANTED FISCAL YEAR
------------------- --------------- ---------------- ------------- ----------- -------- ---------
Frank E. Holmes 0/0 0/0 0 N/A 0 0
Susan B. McGee 0/0 0/0 0 N/A 0 0
The following table shows, as to each of the officers of the
Company listed in the cash compensation table, aggregated option
exercises during the last fiscal year and fiscal year-end option
values.
(A) (B) (C) (D) (E)
----------------------- ------------------ ------------- ------------------- --------------------
NUMBER OF VALUE OF
SECURITIES
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS OPTIONS/SARS
AT FY END AT FY END (%)
-------------------------------------------------------- ------------------- --------------------
NAME NUMBER OF VALUE EXERCISABLE/ EXERCISABLE/
SHARES REALIZED UNEXERCISABLE UNEXERCISABLE
ACQUIRED ON
EXERCISE
----------------------- ------------------ ------------- ------------------- --------------------
Frank E. Holmes 0 0 1,000/0 $0/$0
Susan B. McGee 0 0 51,000/0 $0/$0
COMPENSATION OF DIRECTORS
The Company may grant nonemployee 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 advance.
During the fiscal year ended June 30, 2002, the nonemployee
directors each received cash compensation of $12,000. 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. The board
appointed Mr. Lydon to the Executive Compensation Committee during
fiscal year 2002. There are no compensation committee interlocks
to report. Mr. Holmes served as an employee and officer of the
Company. The board of directors reviews Mr. Holmes' compensation
annually to determine an
33
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 August 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 1998, with an annual
compensation value of $50,000. Mr. Holmes will be fully vested on
June 30, 2008.
The base pay of the executives is relatively fixed, but the
executive has the opportunity to increase his/her compensation by
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. Mr.
Rubinstein is the sole member of the Stock Option Committee of the
board of directors. This committee acts upon recommendations of
the Chief Executive Officer.
COMPANY PERFORMANCE PRESENTATION
[GRAPHIC: Graph plotted from data points in following chart]
S&P 500 RUSSELL FT GOLD U.S.
TOTAL 2000 MINES GLOBAL
RETURN TOTAL INDEX INVESTORS
INDEX RETURN (PRICE CLASS
INDEX RETURN A
ONLY)
------ ------ ------ ------
6/30/1997 10,000 10,000 10,000 10,000
7/31/1997 10,796 10,465 10,153 11,875
8/31/1997 10,191 10,705 10,137 12,188
9/30/1997 10,749 11,488 10,949 10,938
10/31/1997 10,390 10,984 8,914 10,938
11/30/1997 10,871 10,913 7,019 11,250
12/31/1997 11,058 11,104 7,598 9,375
1/31/1998 11,180 10,928 8,026 10,000
2/28/1998 11,986 11,736 7,733 11,875
3/31/1998 12,600 12,220 8,221 13,125
4/30/1998 12,727 12,288 9,322 12,813
5/31/1998 12,508 11,626 7,805 11,250
6/30/1998 13,016 11,651 7,135 10,000
7/31/1998 12,878 10,708 6,466 8,125
8/31/1998 11,016 8,628 5,037 7,188
9/30/1998 11,722 9,304 7,904 7,813
10/31/1998 12,675 9,683 7,992 6,563
11/30/1998 13,443 10,190 7,575 7,813
12/31/1998 14,218 10,821 6,709 7,813
1/31/1999 14,812 10,965 6,692 8,125
2/28/1999 14,352 10,077 6,256 10,313
3/31/1999 14,926 10,234 6,239 7,500
4/30/1999 15,504 11,151 7,309 6,875
5/31/1999 15,138 11,314 5,947 7,188
6/30/1999 15,978 11,826 6,354 6,250
7/31/1999 15,479 11,501 6,064 6,875
8/31/1999 15,403 11,075 6,447 7,188
9/30/1999 14,981 11,078 8,108 7,500
10/31/1999 15,928 11,123 7,034 8,125
11/30/1999 16,252 11,787 6,721 7,500
12/31/1999 17,209 13,121 6,665 7,500
1/31/2000 16,345 12,910 5,882 8,125
2/29/2000 16,035 15,042 6,067 10,938
3/31/2000 17,604 14,051 5,612 8,125
4/30/2000 17,075 13,205 5,430 7,500
5/31/2000 16,724 12,435 5,594 8,438
6/30/2000 17,137 13,519 5,797 8,750
7/31/2000 16,869 13,085 5,232 8,438
8/31/2000 17,916 14,083 5,297 7,813
9/30/2000 16,971 13,669 5,016 7,500
10/31/2000 16,899 13,059 4,252 7,032
11/30/2000 15,566 11,718 4,485 5,625
12/31/2000 15,643 12,725 4,908 5,313
1/31/2001 16,198 13,387 4,792 5,625
2/28/2001 14,721 12,509 5,132 6,094
3/31/2001 13,788 11,897 4,627 5,938
4/30/2001 14,860 12,828 5,394 5,750
5/31/2001 14,959 13,143 5,579 5,250
6/30/2001 14,595 13,597 5,574 5,350
7/31/2001 14,451 12,861 5,441 5,250
8/31/2001 13,547 12,445 5,789 5,000
9/30/2001 12,453 10,770 6,315 4,500
10/31/2001 12,690 11,400 6,040 4,750
11/30/2001 13,664 12,283 5,798 4,850
12/31/2001 13,783 13,041 6,021 5,250
1/31/2002 13,582 12,905 6,881 5,350
2/28/2002 13,320 12,552 7,564 5,900
3/31/2002 13,821 13,561 8,340 9,000
4/30/2002 12,983 13,684 8,895 10,750
5/31/2002 12,888 13,077 10,192 11,945
6/30/2002 11,970 12,428 8,730 10,000
The graph above compares the cumulative total return for the
Company's class A common stock to the cumulative total return for
the Financial Times Gold Mines Index (without dividend
reinvestment), S&P 500 Composite Index, and Russell 2000 Index for
the Company's last five fiscal years. The graph assumes an
investment of $10,000 in the class A common stock and in each
index as of June 30, 1997, and that all dividends are reinvested.
Due to the branding of and leverage in cash flows from the
Company's gold products, the Company's shares appear to highly
correlate with the Financial Times Gold Mines Index.
34
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
CLASS C COMMON STOCK (VOTING STOCK)
On October 7, 2002, 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% or more of the outstanding shares of class C
common stock.
NAME AND ADDRESS OF BENEFICIAL OWNER CLASS C COMMON PERCENT OF
SHARES
BENEFICIALLY
OWNED CLASS (%)
---------------------------------------- -------------------- ----------------
<s>
Frank E. Holmes 1,392,211 (1) 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 a ten-year period 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.
CLASS A COMMON STOCK (NONVOTING STOCK)
On October 7, 2002, there were 5,979,202 shares of the Company's
class A common stock issued and outstanding. The following table
sets forth, as of such date, information regarding the beneficial
ownership of the Company's class A common stock by each person
known by the Company to own 5% or more of the outstanding shares
of class A common stock.
NAME AND ADDRESS OF BENEFICIAL OWNER CLASS A COMMON PERCENT OF
SHARES
BENEFICIALLY
OWNED CLASS (%)
------------------------------------------------------------- ------------------- ---------------
Royce & Associates, Inc. - New York, New York (1) 886,305(1) 14.82%
(1) Information is from Schedule 13F for period ending June 30,
2002, filed with the SEC August 8, 2002.
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth, as of October 7, 2002, information
regarding the beneficial ownership of the Company's class A and
class C common stock by each director and by all directors and
executive 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 CLASS A
COMMON STOCK COMMON STOCK
-------------------------------------------------- ------------------------ ---------------------
BENEFICIAL OWNER NUMBER % NUMBER %
OF OF
SHARES SHARES
-------------------------------------------------- -------------- --------- ------------- -------
Frank E. Holmes 1,392,211(1) 93.01% 248,612 4.15%
Thomas F. Lydon, Jr. -- -- 10,000 0.17%
35
Susan B. McGee -- -- 61,757 1.03%
Jerold H. Rubinstein -- -- 50,000(3) 0.83%
Roy D. Terracina -- -- 89,100(3) 1.49%
All directors and executive officers as a group 1,392,211 93.01% 459,469 7.68%
(five persons)
------------------------
(1) Includes 1,000,000 shares of class C common stock issued to Mr. Holmes that will be
vested in equal amounts over a period of 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.
(2) Includes options to obtain 1,000 shares of class A common stock, 100,000 shares of
class A common stock held by F.E. Holmes Organization, Inc., a corporation wholly owned by
Mr. Holmes, 81,495 shares owned directly by Mr. Holmes, 64,817 shares owned by Mr. Holmes
in retirement accounts, and 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.
(3) Includes shares of class A common stock underlying presently exercisable options held
directly by each individual as follows: Mr. Lydon - 10,000 shares; Ms. McGee - 51,500
shares; Mr. Rubinstein - 10,000 shares; and Mr. Terracina - 51,000 shares.
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 those items appearing under
Note 14 to the Consolidated Financial Statements and filed as a
part of this report. Mr. Holmes received bonus advances for
improvements in fund performance, in particular the gold funds.
The amount of these advances at June 30, 2002 was $76,651, and
this amount has been repaid from bonuses paid after June 30, 2002.
Additionally, Mr. Holmes had an outstanding payable of $43,567
which has been settled subsequent to June 30, 2002.
36
PART IV OF ANNUAL REPORT ON FORM 10-K
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 including:
o Report of Independent Accountants
o Consolidated Statements of Financial Condition as of at
June 30, 2002 and 2001
o Consolidated Statements of Operations and Comprehensive
Income (Loss) for the three years ended June 30, 2002
o Consolidated Statements of Shareholders' Equity for the three
years ended June 30, 2002
o Consolidated Statements of Cash Flows for the three years
ended June 30, 2002
o Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULES
None.
3. EXHIBITS
3.1 Third Restated and Amended Articles of Incorporation of
Company, incorporated by reference to the Company's Form
10-K for the fiscal year ended June 30, 1996 (EDGAR
Accession Number 0000754811-96-000025).
3.2 By-Laws of Company, incorporated by reference to Exhibit D
of the Company's Registration Statement No. 33-33012 filed
on Form S-8 with the Commission on January 30, 1990, as
amended (EDGAR Accession Number 0000754811-00-000017).
10.1 Advisory Agreement dated October 27, 1989, by and between
Company and United Services Funds, incorporated by
reference to Exhibit (4)(b) of the Company'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
Company and Accolade Funds, incorporated by reference to
Exhibit 10.2 of Company'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 Company, Accolade Funds/Bonnel Growth Fund and
Bonnel, Inc., incorporated by reference to Exhibit 10.3 of
Company's Form 10-K for fiscal year ended June 30, 1995
(EDGAR Accession Number 0000754811-95-000002).
37
10.4 Sub-Advisory Agreement dated November 15, 1996, by and
between Company, U.S. Global Accolade Funds/MegaTrends
Fund, and Money Growth Institute, Inc., incorporated by
reference to Post-Effective Amendment No. 5 to Registration
Statement on Form N-1A dated June 21, 1996 (EDGAR Accession
No. 0000902042-96-000046).
10.5 Sub-Advisory Agreement dated January 25, 2002, by and
between Company, U.S. Global Accolade Funds/ Eastern
European Fund, and Charlemagne Capital Limited, included
herein.
10.6 Transfer Agency Agreement dated December 15, 2000, by and
between United Shareholder Services, Inc. and U.S. Global
Accolade Funds incorporated by reference to Post-Effective
Amendment No. 18 to Registration Statement on Form N-1A
dated February 28, 2001 (EDGAR Accession No.
0000902042-01-500005).
10.7 Transfer Agency Agreement dated February 21, 2001, by and
between United Shareholder Services, Inc. and U.S. Global
Investors Funds, incorporated by reference to Annual Report
on Form 10-K for fiscal year ended June 30, 2001 (EDGAR
Accession No. 0000754811-01-500016).
10.8 Loan Agreement between Company and Bank One NA, dated
February 1, 2001, for refinancing building, incorporated by
reference to Annual Report on Form 10-K for fiscal year
ended June 30, 2001 (EDGAR Accession No.
0000754811-01-500016).
10.9 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 Company'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. 0000754811-97-000004).
10.10 United Services Advisors, Inc. 1989 Non-Qualified Stock
Option Plan, incorporated by reference to Exhibit 4(a) of
the Company'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.
0000754811-97-000004).
10.11 U.S. Global Investors, Inc. 1997 Non-Qualified Stock Option
Plan, incorporated by reference to Exhibit 4 of the
Company's Registration Statement No. 333-25699 filed on
Form S-8 with the Commission on April 23, 1997 (EDGAR
Accession No. 0000754811-97-000003).
10.12 Custodian Agreement dated November 1, 1997, between U.S.
Global Investors Funds and Brown Brothers Harriman & Co.
incorporated by reference to Post-Effective Amendment No.
82 to Registration Statement on Form N-1A dated September
2, 1998 (EDGAR Accession No. 0000101507-98-000031).
10.13 Amendment dated June 30, 2001, to Custodian Agreement dated
November 1, 1997, between U.S. Global Investors Funds and
Brown Brothers Harriman & Co., incorporated by reference to
Annual Report on Form 10-K for fiscal year ended June 30,
2001 (EDGAR Accession No. 0000754811-01-500016).
10.14 Appendix A to Custodian Agreement dated November 1, 1997,
between U.S. Global Investors Funds and Brown Brothers
Harriman & Co., incorporated by reference to Annual Report
on Form 10-K for fiscal year ended June 30, 2001 (EDGAR
Accession No. 0000754811-01-500016).
10.15 Amendment dated February 21, 2001, to Appendix B of the
Custodian Agreement dated November 1, 1997, between U.S.
Global Investors Funds and Brown Brothers Harriman & Co.,
incorporated by reference to Annual Report on Form 10-K for
fiscal year ended June 30, 2001 (EDGAR Accession No.
0000754811-01-500016).
38
10.16 Custodian Agreement dated November 1, 1997, between U.S.
Global Accolade Funds and Brown Brothers Harriman & Co.
incorporated by reference to Post-Effective Amendment No.
13 to Registration Statement on Form N-1A dated January 29,
1998 (EDGAR Accession No. 0000902042-98-000006).
10.17 Amendment dated May 14, 1999, to Custodian Agreement dated
November 1, 1997, between U.S. Global Accolade Funds and
Brown Brothers Harriman & Co. incorporated by reference to
Post-Effective Amendment No. 16 to Registration Statement
on Form N-1A dated February 29, 1999 (EDGAR Accession No.
0000902042-99-000004).
10.18 Amendment dated June 30, 2001, to Custodian Agreement dated
November 1, 1997, between U.S. Global Accolade Funds and
Brown Brothers Harriman & Co., incorporated by reference to
Annual Report on Form 10-K for fiscal year ended June 30,
2001 (EDGAR Accession No. 0000754811-01-500016).
10.19 Appendix A to Custodian Agreement dated November 1, 1997,
between U.S. Global Accolade Funds and Brown Brothers
Harriman & Co., incorporated by reference to Annual Report
on Form 10-K for fiscal year ended June 30, 2001 (EDGAR
Accession No. 0000754811-01-500016).
10.20 Amendment dated February 16, 2001, to Appendix B of the
Custodian Agreement dated November 1, 1997, between U.S.
Global Accolade Funds and Brown Brothers Harriman & Co.
incorporated by reference to Post-Effective Amendment No.
18 to Registration Statement on Form N-1A dated February
28, 2001 (EDGAR Accession No. 0000902042-01-500005).
10.21 Distribution Agreement by and between U.S. Global
Brokerage, Inc. and U.S. Global Accolade Funds dated
September 3, 1998, incorporated by reference to Exhibit
10.12 of Company's Form 10-K for fiscal year ended June 30,
1998 (EDGAR Accession Number 0000754811-98-000009).
10.22 Distribution Agreement by and between U.S. Global
Brokerage, Inc. and U.S. Global Investors Funds dated
September 3, 1998, incorporated by reference to Exhibit
10.13 of Company's Form 10-K for fiscal year ended June 30,
1998 (EDGAR Accession Number 0000754811-98-000009).
11 Statement regarding Computation of Per Share Earnings,
included herein.
21 List of Subsidiaries of the Company, included herein.
24 Power of Attorney, incorporated by reference to Annual
Report on Form 10-K for fiscal year ended June 30, 2001
(EDGAR Accession No. 0000754811-01-500016).
(b) Reports on Form 8-K
None.
39
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/ FRANK E. HOLMES
-----------------------------------------------------------
FRANK E. HOLMES
Date: October 15, 2002 Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the dates
indicated.
SIGNATURE CAPACITY IN WHICH SIGNED DATE
/S/ FRANK E. HOLMES
--------------------------------
FRANK E. HOLMES Chairman of the Board of Directors October 15, 2002
Chief Executive Officer
Chief Investment Officer
* /s/ Thomas F. Lydon, Jr.
--------------------------------
THOMAS F. LYDON, JR. Director October 15, 2002
* /s/ Jerold H. Rubinstein
--------------------------------
JEROLD H. RUBINSTEIN Director October 15, 2002
* /s/ Roy D. Terracina
--------------------------------
ROY D. TERRACINA Director October 15, 2002
/S/ TRACY C. PETERSON
--------------------------------
TRACY C. PETERSON Chief Financial Officer October 15, 2002
*BY: /S/ SUSAN B. MC GEE
--------------------------------
Susan B. McGee October 15, 2002
Attorney-in-Fact under Power
of Attorney dated
September 26, 2001
40
CERTIFICATIONS
I, Frank E. Holmes, certify that:
1. I have reviewed this annual report on Form 10-K of U.S.
Global Investors, Inc.;
2. Based on my knowledge, this annual report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in
light of the circumstances under which such statements were
made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
annual report.
Date: October 15, 2002 /S/ FRANK E. HOLMES
----------------------------
Frank E. Holmes
Chairman of the Board,
Chief Executive Officer
================================================================================
I, Tracy C. Peterson, certify that:
1. I have reviewed this annual report on Form 10-K of U.S.
Global Investors, Inc.;
2. Based on my knowledge, this annual report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in
light of the circumstances under which such statements were
made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
annual report.
Date: October 15, 2002 /S/ TRACY C. PETERSON
-----------------------------
Tracy C. Peterson
Chief Financial Officer
41