EXHIBIT 13 - ANNUAL REPORT
TABLE OF CONTENTS
FOR FIELD PORTIONS
Page
The Company.....................................................................
Annual Status Report............................................................
Selected Financial Data ........................................................
Financial Statements............................................................
Report of Independent Accountants..........................................
Consolidated Balance Sheets................................................
Consolidated Statements of Operations......................................
Consolidated Statements of Cash Flow.......................................
Consolidated Statements of Shareholders' Equity............................
Notes to Consolidated Financial Statements.................................
THE COMPANY
U.S. Global Investors, Inc., a Texas corporation organized in 1968 (the
"Company" or "USGI"), and its wholly owned subsidiaries are in the mutual fund
management business. The Company provides: (1) investment advisory services to
institutions (namely, mutual funds) and other persons; (2) transfer agency and
record keeping services; (3) mailing services; and, (4) through its wholly-owned
trust company, custodial and administrative services for IRAs and other types of
retirement plans. The provision of investment advisory, transfer agent,
administrative and custodial services and investment income are the primary
sources of the Company's revenue. (See Consolidated Statements of Operations
included in this Annual Report.)
The Company is a registered investment adviser under the Investment
Advisers Act of 1940 and is principally engaged in the business of providing
investment advisory and other services to United Services Funds, a Massachusetts
business trust ("USF", "Trust" or "Funds"). USF is an open-end, management
investment company which offers shares of twelve mutual funds on a no-load
basis.
The Company also provides investment advisory and other services to
Accolade Funds, a Massachusetts business trust. Accolade Funds is an open-end
management investment company which, since October 1994, has offered shares of
Bonnel Growth Fund, on a no-load basis.
The Company organized U.S. Advisors (Guernsey) Ltd. in August 1993 for the
purpose of acting as investment advisor for investment companies whose shares
are offered to non-U.S. citizens. U.S. Advisors (Guernsey) Ltd. has delegated
its administrative duties to Butterfield Fund Managers (Guernsey) Limited and
its investment advisory duties to USGI.
Similarly, the Company has a one-third interest in a joint venture formed
in August 1994, United Services Advisors (Canada), Inc., to offer mutual funds
in Canada.
In addition to providing mutual fund management services to its clients,
the Company utilizes a diversified venture capital approach in trading for its
own account in an effort to add growth value to its cash position. Typical
investments include, among other things, early stage or start-up businesses
seeking initial financing as well as more mature businesses in need of capital
for expansion, acquisitions, management buyouts, or recapitalizations. In
addition, the Company may utilize investment techniques such as "private
placement arbitrage," which technique involves the contemporaneous purchase of a
quantity of an issuer's securities at a discount in a private placement and a
short sale of the same or substantially similarly security in the public market.
The activities are scrutinized by Company compliance personnel and reported to
investment advisory clients.
INVESTMENT MANAGEMENT SERVICES
The mutual funds are managed by the Company pursuant to advisory agreements
(the "Advisory Agreements").
The Company furnishes an investment program for each of the mutual funds it
manages and determines, subject to the overall supervision by the Board of
Trustees of the funds, the funds' investments. Consistent with the investment
restrictions, objectives and policies of the particular fund, the portfolio
manager for each fund determines what investments should be purchased, sold and
held, and makes changes in the portfolio deemed to be necessary or appropriate.
In the Advisory Agreements the Company is charged with seeking the best overall
terms in executing portfolio transactions and selecting brokers or dealers.
The Company also manages, supervises and conducts certain other affairs of
the funds, subject to the control of the Boards of Trustees. The Company
provides office space, facilities and certain business equipment and also
provides the services of executive, clerical and accounting personnel for
administering the affairs of the mutual funds. The Company and its affiliates
compensate all personnel, officers, directors and interested Trustees of the
funds if such persons are also employees of the Company or its affiliates.
However, the funds are required to reimburse the Company for a portion of the
compensation of the Company's employees who perform certain state and federal
securities law regulatory compliance work on behalf of the funds based upon the
time spent on such matters. The Company is responsible for costs associated with
marketing fund shares.
As required by the Investment Company Act of 1940, the Advisory Agreements
are subject to annual renewal and are terminable upon 60 days' notice. The Board
of Trustees of USF and of Accolade Funds will consider renewal of the applicable
agreement in October 1996 and March 1997, respectively. Management anticipates
that the Advisory Agreements will be renewed.
Investment company net assets under management (in thousands) at fiscal
year end for the past five years are:
1996 1995 1994 1993 1992
- ---------------------- ----------- ---------- ---------- ---------- ----------
USF Money Market $ 777,252 $ 719,745 $ 774,937 $ 588,306 $ 267,284
USF Gold Related 427,155 414,096 488,266 433,552 271,263
USF Other 84,245 87,179 99,941 82,421 57,705
- ---------------------- ----------- ---------- ---------- ---------- ----------
USF Total 1,288,652 1,221,020 1,363,144 1,104,279 596,252
Accolade Funds 86,302 13,842 -- -- --
- ---------------------- ----------- ---------- ---------- ---------- ----------
Total Assets under
Management $1,374,954 $1,234,862 $1,363,144 $1,104,279 $ 596,252
Under the Advisory Agreements, the Company receives an advisory fee for
each mutual fund computed and accrued daily based upon the net assets
represented by the particular fund on that day. The fees range from 0.375% to
1.25% of average net assets and are paid monthly.
As is set forth in detail in Note D to the Consolidated Financial
Statements included in this Annual Report, the Company has agreed to waive its
fee revenues and/or pay expenses for certain USF funds for purposes of enhancing
the funds' competitive market positions.
Investment advisory and administration fees (in thousands--net of expenses
paid by the Company or voluntary waivers) for the past three fiscal years are:
1996 1995 1994
- ------------------- ------ ------ ------
USF Money Market $ 835 $ 895 $ 760
USF Gold Related 4,185 4,089 4,006
USF Other 475 485 361
- ------------------- ------ ------ ------
USF Total 5,495 5,469 5,127
Accolade Funds 409 13 --
- ------------------- ------ ------ ------
Total $5,904 $5,482 $5,127
Transfer Agent and Other Services
The Company's wholly-owned subsidiary, United Shareholder Services, Inc.
("USSI"), is a transfer agent registered under the Securities Exchange Act of
1934, and provides transfer agency, bookkeeping, accounting, lockbox and
printing services to investment company clients. The transfer agency utilizes a
coordinated internal system connecting the Company's fund shareholder
communication network with computer equipment and software designed to meet the
operating requirements of a mutual fund transfer agency.
The transfer agency's duties encompass: (1) acting as servicing agent in
connection with dividend and distribution functions; (2) performing shareholder
account and administrative agent functions in connection with the issuance,
transfer
and redemption or repurchase of shares; (3) maintaining such records as are
necessary to document transactions in the funds' shares; (4) acting as servicing
agent in connection with mailing of shareholder communications, including
reports to shareholders, dividend and distribution notices, and proxy materials
for shareholder meetings; and (5) investigating and answering all shareholder
account inquiries.
The Transfer Agency Agreements provide that USSI will receive, as
compensation for services rendered as transfer agent, an annual fee per account,
except for money market accounts with monthly zero balances, and will be
reimbursed out-of-pocket expenses. During the fiscal year ended June 30, 1996,
the per account charge was increased. In connection with obtaining/providing
administrative services to the beneficial owners of Fund shares through
institutions which provide such services and maintain an omnibus account with
USSI, each fund pays a monthly fee based on the number of accounts and the value
of the shares of the fund held in accounts at the institution which payment
shall not exceed the per account charge on an annual basis.
The number of shareholder accounts at fiscal year end for the past five
years are:
1996 1995 1994 1993 1992
- ------------------------- ------- ------- ------- ------- -------
USF Money Market 35,019 34,998 32,769 27,493 21,338
USF Gold Related 68,688 77,120 82,156 82,350 84,898
USF Other 11,695 12,637 14,445 12,189 11,787
- ------------------------- ------- ------- ------- ------- -------
USF Total 115,402 124,755 129,370 122,032 118,023
Accolade Funds 5,075 1,444 -- -- --
- ------------------------- ------- ------- ------- ------- -------
TOTAL 120,477 126,199 129,370 122,032 118,023
========================= ======= ======= ======= ======= =======
Shareholder accounts at
Schwab, Fidelity and Jack
White 13,534 9,543 9,921 Unavailable Unavailable
- ------------------------- ------- ------- ------- ----------- -----------
For the three fiscal years ended June 30, 1996, 1995, and 1994, total
transfer agency fees (net of waivers) were approximately $3.3 million, $3.2
million and $3 million, respectively.
The Transfer Agency Agreements with USF and Accolade Funds are subject to
renewal on an annual basis and are terminable upon 60 days notice. The
Agreements will be considered by the Boards of Trustees of USF and of Accolade
Funds for renewal during October 1996 and March 1997, respectively, and
management anticipates that the agreements will be renewed.
USSI also maintains the books and records of each Trust and of each fund of
each Trust, including calculations of the daily net asset value per share. The
services are currently provided for an asset based fee on a tiered level of
average net assets -- subject to an annual minimum fee of at least $24,000. The
agreements may be terminated by either party without penalty by giving 60 days
written notice. For the three years ended June 30, 1996, 1995 and 1994
bookkeeping and accounting fees before waivers were approximately $523,000,
$420,000 and $388,000, respectively.
MAILING SERVICES
A&B Mailers, Inc., a wholly-owned subsidiary of the Company, provides mail
handling services to various persons. A&B Mailers' primary customers include the
Company in connection with its efforts to promote the funds and the Company's
investment company clients in connection with required mailings. Each service is
priced separately. For the three years ended June 30, 1996, 1995 and 1994, A&B
Mailers' revenues, after intercompany eliminating entries, were approximately
$231,000, $170,000, and $185,000 respectively.
TRUST COMPANY SERVICES
Security Trust and Financial Company ("ST&FC"), a wholly-owned state
chartered trust company provides custodial and tax reporting services for IRA
and other retirement plans funded with shares issued by the funds advised and
administered by the Company. ST&FC also actively markets 401(k) and other
retirement plans. The custodial fees are generally paid to ST&FC at year-end
upon separate invoice to the customer, not the fund. For the three years ended
June 30, 1996, 1995 and 1994 custodial fee revenues were approximately $545,000,
$503,000 and $363,000, respectively.
EMPLOYEES
As of June 30, 1996, the Company and its subsidiaries employed 99 full-time
employees and 8 part-time employees; and, as of June 30, 1995, it employed 100
full-time employees and 8 part-time employees. The Company considers its
relationship with its employees to be excellent.
COMPETITION
The mutual fund industry is highly competitive. As of June 30, 1996, there
were over 6,000 registered open-end management investment companies of varying
sizes and investment policies whose shares were being offered to the public.
Generally, there are two types of mutual funds: "load" and "no-load." In
addition there are both no-load and load funds which have "12b-1" plans
authorizing the payment of distribution costs of the funds out of fund assets,
such as Accolade Funds. 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 USF's, however, may be purchased directly
from the particular mutual fund organization and thus no sales commission is
charged.
In addition to competition from other mutual fund managers and investment
advisers, the Company and the mutual fund industry are in competition with
various investment alternatives offered by insurance companies, banks,
securities dealers and other financial institutions. Many of these institutions
are able to engage in more liberal advertising than mutual funds and may offer
accounts at competitive interest rates, which are insured by federally chartered
corporations such as the Federal Deposit Insurance Corporation. Recent
regulatory pronouncements related to the Glass-Steagall Act, the statute that
has prohibited banks from engaging in various securities activities, are
enabling banks to compete with the Company in a variety of areas.
A number of mutual fund groups are significantly larger than the funds
managed by the Company, offer a greater variety of investment objectives and
have more experience and greater resources to promote the sale of investments
therein. However, the Company believes it has the resources, products and
personnel to compete with these other mutual funds. Competition for sales of
fund shares is influenced by various factors, including investment objectives
and performance, advertising and sales promotional efforts, distribution
channels and the types and quality of services offered to fund shareholders.
Success in the investment advisory and mutual fund share distribution
businesses is substantially dependent on the funds' investment performance, the
quality of services provided to shareholders and the Company's efforts to
effectively market the performance. In other words, good performance combined
with a strong public relations program heightens investor awareness, stimulates
sales of the funds' shares and tends to keep redemptions low. Sales of funds'
shares generate management fees (which are based on assets of the funds) and
transfer agent fees (which are based on the number of fund accounts). Good
performance also attracts private institutional accounts to the Company.
Conversely, relatively poor performance results in decreased sales and increased
redemptions of the funds' shares and the loss of private accounts, with
corresponding decreases in revenues to the Company.
SUPERVISION AND REGULATION
The Company, USSI, and the investment companies it manages and administers
operate under certain laws, including federal and state securities laws,
governing their organization, registration, operation, legal, financial and tax
status. ST&FC operates under certain laws, including Texas banking laws,
governing its organization, registration, operation, legal, financial and tax
status. Among the penalties for violation of the laws and regulations applicable
to the Company and its subsidiaries
are fines, imprisonment, injunctions, revocation of registration and certain
additional administrative sanctions. A determination that the Company or its
management had violated applicable laws and regulations could have a material
adverse effect on the business of the Company. Moreover, there is no assurance
that changes to existing laws, regulations or rulings promulgated by
governmental entities having jurisdiction over the Company and the funds will
not have a material adverse effect on the business of the Company.
The Company is a registered investment adviser subject to regulation by the
U.S. Securities and Exchange Commission ("SEC") pursuant to the Investment
Advisers Act of 1940, the Investment Company Act of 1940 and the Securities
Exchange Act of 1934 (the "1934 Act"). USSI is also subject to regulation by the
SEC under the 1934 Act. The Company and USSI are required to keep and maintain
certain reports and records which must be made available to the SEC upon
request. Moreover, the funds managed by the Company are subject to regulation
and periodic reporting under the Investment Company Act of 1940 and, with
respect to their continuous public offering of shares, the registration
provisions of the Securities Act of 1933.
RELATIONSHIPS WITH THE FUNDS
The businesses of the Company are to a very significant degree dependent
upon their associations and contractual relationships with the Trusts. In the
event any of the management or investment company services agreements with USF
were canceled or not renewed pursuant to the terms thereof, the Company would be
substantially adversely affected. The Company, USSI and ST&FC consider their
relationships with the Trusts to be good and they have no reason to believe that
their management and service contracts will not be renewed in the future;
however, there is no assurance that the Trusts will choose to continue its
relationships with the Company, USSI, and ST&FC.
ANNUAL STATUS REPORT
During the fiscal year ended June 30, 1996, the Company achieved net after
tax earnings of approximately $0.30 per share. Its core business generated the
revenue necessary to meet ongoing expenses, obligations associated with
increasing its mutual fund operations, and the extraordinary items which arose
during fiscal 1995. Management believes the Company's financial condition is
stable and the Company is in a position to take advantage of opportunities
presenting themselves for future growth. The discussion below provides detail of
the Company's results of operations and its liquidity and capital resources.
RESULTS OF OPERATIONS
A snapshot of the Company's operations is outlined in the following table,
which sets forth for the periods indicated, certain revenue and expense items as
percentages of total revenues and the increase (decrease) by item from the
previous period. "General and Administrative" expenses are detailed for
comparative purposes, and expenses associated with "Government Securities,"
which are discussed in detail below, are aggregated.
RESULTS OF OPERATIONS: PERCENTAGE OF TOTAL REVENUES PERIOD TO PERIOD CHANGE
---------------------------------------------------------
1996 1995
YEARS ENDED JUNE 30, COMPARED COMPARED
-----------------------------
1996 1995 1994 TO 1995 TO 1994
---------------------------------------------------------
REVENUES
INVESTMENT ADVISORY FEE 29.4% 34.9% 47.1% 7.7% 7.4%
TRANSFER AGENT FEE 16.4% 20.2% 27.7% 3.8% 5.9%
ACCOUNTING FEE 2.6% 2.7% 3.6% 24.3% 8.4%
EXCHANGE FEE 1.4% 1.7% 2.9% 4.6% -15.7%
CUSTODIAL FEES 2.7% 3.2% 3.3% 8.3% 38.7%
INVESTMENT INCOME 15.6% 1.7% 12.2% 1075.9% -79.9%
OTHER 1.6% 1.7% 3.2% 39.8% -23.2%
GAINS ON CHANGES OF INTEREST IN AFFILIATE (3) 2.8% 0.0% 0.0% -- --
GOVERNMENT SECURITY INCOME (1) 27.5% 33.9% 0.0% 3.9% --
---------------------------------------------------------
TOTAL REVENUES 100.0% 100.0% 100.0% 28.2% 45.0%
---------------------------------------------------------
EXPENSES
SALARIES, WAGES, & BENEFITS 24.8% 30.2% 41.2% 5.3% 6.5%
FUND EXPENSES 3.3% 4.2% 8.9% -0.2% -30.6%
MARKETING & DISTRIBUTION 7.5% 9.2% 16.1% 3.7% -16.8%
OTHER GENERAL & ADMINISTRATIVE 16.5% 16.0% 20.8% 32.3% 11.0%
INTEREST & FINANCE CHARGES 0.6% 1.7% 1.6% -52.4% 55.0%
DEPRECIATION & AMORTIZATION 2.1% 3.4% 4.4% -20.8% 11.7%
REDUCTION IN CARRYING VALUE OF INVESTMENT IN
JOINT VENTURE (3) 3.1% 0.0% 0.0% -- --
GOVERNMENT SECURITY EXPENSES (2) 27.5% 72.7% 0.0% -51.4% --
---------------------------------------------------------
TOTAL EXPENSES 85.4% 137.4% 93.0% -20.3% 114.3%
---------------------------------------------------------
(1) INCLUDES INTEREST INCOME AND ACCRETION
(2) INCLUDES GOVERNMENT SECURITY INTEREST EXPENSE AND DEBENTURE INTEREST. ALSO
INCLUDES NON-CASH CHARGE DURING FISCAL YEAR 1995
(3) THESE ITEMS ARE NON-CASH CREDITS AND/OR CHARGES INCURRED DURING FISCAL YEAR
1996
NET INCOME
As reflected in the table, USGI's net income has had dramatic fluctuations
over the past three years. The Company posted net after tax earnings of $1.98
million ($0.30 per share) for fiscal 1996, a net after tax loss of $3.85 million
($0.64 per share) for fiscal 1995; and net after tax earnings of $1.15 million
($0.19 per share) for fiscal 1994. The fluctuations are a short-term aberration
resulting from the Company's purchase of U.S. Government securities during
fiscal 1995, as well as other factors which are more fully discussed below.
Total consolidated revenues for fiscal 1996 increased approximately 28%
over fiscal 1995, primarily due to investment income and gains on changes of
interest in an affiliate. Total consolidated revenues increased approximately
45% from fiscal 1994 to fiscal 1995, primarily due to interest income and
accretion on the U.S. Government securities.
GOVERNMENT SECURITIES
Fiscal 1995 was a year of tremendous challenges which required a
significant commitment of management's time and Company resources in order to
overcome the effects of unusual and unexpected rising interest rates and
regulatory pronouncements, the consequences of which had a direct bearing on
USF's largest fund, the U.S. Government Securities Savings Fund ("USG"). As part
of USGI's response to this rise and these pronouncements issued to money market
funds in general, during fiscal 1995 USGI arranged for the purchase and/or
purchased directly approximately $130.5 million par value adjustable rate U.S.
Government agency notes ("Notes") from USG. These Notes were confused with high
risk securities like options, futures, structured notes, exotic floaters, or
CMOs, which contain a multiplicity of complex and undeterminable risks,
including extension, prepayment, and coupon cap risks. USGI acquired the Notes
from its top performing money market fund in order to calm any
derivative-induced fears and to maintain the confidence of our shareholders by
assuring a stable one dollar per share net asset value.
The purchases have had a dramatic impact on the Company's financial
statements. "Government Security Income" (interest and accretion) represented
28% and 34% of total revenue during fiscal 1996 and fiscal 1995, respectively;
and related expenses (including the fiscal 1995 non-cash charges of
approximately $5.4 million) represented 28% and 73% of total revenues for fiscal
1996 and fiscal 1995, respectively. There is no parallel effect for fiscal year
1994.
The Company purchased the Notes at USG's amortized cost of over $130
million but recorded the Notes at their fair value, approximately $125 million.
As a consequence, the Company recorded a pre-tax non-cash charge to the results
of operations of approximately $5.4 million during fiscal 1995. Since the Notes
were initially classified as held-to-maturity securities, the Company recognized
approximately $1.4 million and $1.5 million in non-cash income during fiscal
1996 and fiscal 1995, respectively, due to accretion of the discount.
To control the debt incurred upon purchase of the Notes, management
aggressively pursued avenues to accelerate the debt reduction. During fiscal
1996 the Notes were reclassified from the held-to-maturity category to the
available-for-sale category and certain of the Notes were sold. Upon this
reclassification, the Company began recording these Notes at fair value. The
Company sold $90.8 million and $13 million of the Notes during fiscal 1996 and
fiscal 1995, respectively. By selling these Notes USGI expects to save
approximately $1 million in annual interest costs on debt used to finance the
Notes. The remaining Notes acquired by USGI mature at their aggregate par value
of $26.7 million in February and March 1997.
USGI financed the original acquisition of the Notes as follows: 1)
approximately $120.9 million was provided by third party broker-dealers under
reverse repurchase agreements; 2) USGI issued a $6 million 8% subordinated
debenture to Marleau, Lemire Inc. ("ML"), the terms of which require principal
payments as the Notes mature and interest payments quarterly; and 3) USGI
utilized approximately $3.6 million of its own cash. At June 30, 1996, the
remaining Notes are financed with approximately $26.7 million from
broker-dealers, and the remaining balance under the debenture plus accrued
interest of approximately $1.6 million.
To protect against a sharp increase in interest rates, the Company
purchased put options on Eurodollar futures with the expectation that they would
reduce exposure to temporary declines in the value of the Notes and increased
interest costs of the reverse repurchase agreements. In light of the
stable-to-decreasing interest rate environment, USGI has not purchased options
to hedge its position in the Notes since the second quarter of fiscal 1996.
During fiscal 1997 the remaining Notes will mature or be sold prior to
their maturity if market and other conditions warrant; thereafter, issues
involved with the purchase and sale of the Notes will no longer demand
management's attention and the Company will be essentially debt free.
INVESTMENT ACTIVITIES
Management has been aggressively and effectively managing the Company's
cash position by utilizing a diversified venture capital approach to investing.
As shown in the table, investment income constituted 15% and 12%, respectively,
of USGI's revenue in fiscal 1996 and fiscal 1994. On the other hand, investment
income represented less than 2% of revenues in fiscal 1995. This source of
revenues is dependent on market fluctuations, the Company's ability to
participate in investment opportunities, and timing of transactions. As shown by
the table, it does not provide a consistent level of revenue.
Excluding the income and accretion from the Notes, revenue for fiscal 1996
increased approximately 41% over fiscal 1995, and revenue for fiscal 1995
decreased approximately 4% over fiscal 1994. The fiscal 1996 increase resulted
primarily from the fact that the Company recognized more realized gains of
approximately $2.8 million on the sale of investments during the year, while
unrealized holding gains from trading securities increased by approximately
$335,000. Included in fiscal 1996 revenue is approximately $556,000 resulting
from the accounting treatment for changes of interest in an affiliated company
(namely, unrealized gains of the offshore fund sponsored by the Company). The
Company expects such interests will change in the future as changes in ownership
of the affiliate occur; the magnitude of such amounts will be affected by
fluctuations in market value of the affiliate's investments.
The fiscal 1995 decrease resulted primarily from an 80% decrease in
investment income, which was due to: 1) the Company realizing more gains in
fiscal 1994 on sales of investments; and 2) the Company implementing SFAS 115
"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115")
as of July 1, 1994 which required the Company to recognize unrealized gains and
losses on investments defined as trading securities in the Company's income
statement. Approximately $151,000 of unrealized losses on trading securities
were included in earnings for fiscal 1995.
The growth of the amount invested has been enhanced by a strong bull
market. At the June 30, 1996, 1995, and 1994 fiscal year ends the Company held
approximately $3.9 million, $3.9 million, and $2.6 million, respectively, in
securities other than the Notes and USF money market mutual fund shares
(restricted, trading and available-for-sale categories). The activities are
scrutinized by Company compliance personnel and reported to investment advisory
clients.
OPERATING REVENUES
The Company's principal business is managing, creating and marketing mutual
funds and providing management and other services to such institutions. Its
primary sources of revenues from operations are investment advisory fees and
transfer agency fees. The Company's investment advisory fee revenue is based on
a percentage of average net assets under management; and the transfer agency fee
revenue is based, in large part, on the number of shareholder accounts being
serviced. Therefore, fluctuations in financial markets impact revenues and
results of operations.
Assets under management for USF for the fiscal years ended June 30, 1996,
1995 and 1994 have remained stable. They have averaged $1.30 billion, $1.32
billion and $1.28 billion, respectively. Additionally, assets under management
for the Accolade Funds ("Accolade"), which commenced operations in October 1994,
averaged $48 million, $5.6 million and $0 for those fiscal years, respectively.
In light of such, in fiscal 1996 investment advisory fee revenue has increased
approximately 8% over fiscal 1995, and in fiscal 1995 such revenue increased
approximately 7% over fiscal 1994.
Shareholder accounts serviced, on the other hand, have, since peaking in
fiscal 1994, declined to pre-1994 levels. Accounts serviced for fiscal years
ended June 30, 1996, 1995, and 1994 were 120,477, 126,199 and 129,370,
respectively. Management believes that, to some extent, this change may be
attributed to investors shifting from direct investment in the funds to omnibus
accounts through mutual fund trading facilities offered by broker-dealers such
as Schwab, Fidelity and Jack White. Notwithstanding such, due to a fee increase
and compensation related to omnibus accounts, in fiscal 1996 transfer agent fee
revenue increased approximately 4% over fiscal 1995; and in fiscal 1995 it
increased approximately 6% over fiscal 1994.
EXPENSES
Total consolidated expenses for fiscal 1996 decreased approximately 20%
over fiscal 1995. This decrease was the direct result of: 1) a non-recurring
non-cash charge of approximately $5.4 million relating to the purchase of the
Notes during 1995; 2) lower interest expense of approximately $414,000 on
securities sold under agreement to repurchase with broker-dealers and 3) lower
interest expense of approximately $100,000 on the subordinated debenture. Total
consolidated expenses for fiscal 1995 were more than double those of fiscal 1994
primarily as a result of expenses related to the Notes, such as: 1) a
non-recurring non-cash charge of approximately $5.4 million relating to the
purchase of the Notes; 2) interest expense of almost $5.6 million on securities
sold to broker-dealers under agreements to repurchase the Notes; and 3) interest
expense of $433,000 on the subordinated debenture.
Exclusive of the expenses attributable to the purchase and financing of the
Notes and exclusive of the reduction of the carrying value of investment in
joint venture, expenses of the Company increased almost 14% in fiscal 1996 over
fiscal 1995 and increased less than 1% in fiscal 1995 over fiscal 1994. As shown
on the table, excluding expenses associated with the Notes, "salaries, wages and
benefits" are the largest component of Company expenses and have remained
relatively stable over the last three fiscal years, averaging 45% of said
expenses. In fiscal 1996 this expense item increased over 5% from fiscal 1995,
and in fiscal 1995 this item increased almost 7% over fiscal 1994. The increases
relate primarily to incentive compensation and savings plans instituted to
reward employee efforts. Salaries, wages and benefits should continue at
historic levels.
Marketing and distribution expenses represented 17%, 14% and 17% of total
expenses (excluding those associated with the Notes and the reduction in
carrying value) during fiscal 1996, fiscal 1995 and fiscal 1994, respectively.
Actual expenditures increased in fiscal 1996 over fiscal 1995 due to additional
funds being available from the increase in revenues; however, expenditures were
below those in fiscal 1994, prior to purchasing the Notes. It is anticipated
that marketing and distribution expenditures will increase to 1994 levels during
fiscal 1997.
As shown in the table, fund expenses decreased dramatically (31%) in fiscal
1995 over fiscal 1994. This was due, in large part, to the Company's response to
burdens imposed by purchasing the Notes. In fiscal 1996 fund expenses continue
to be paid at fiscal 1995 levels. In this regard, the Company has agreed to
waive a portion of its fee revenues and/or pay for expenses of certain mutual
funds for purposes of enhancing the funds' competitive market position. Should
assets of these funds increase, fund expenses borne by the Company would
increase, but only to the extent that such expenses exceed any expense caps in
place. The Company expects to continue to waive fees and/or pay for fund
expenses as long as market and economic conditions warrant. However, subject to
the Company's commitment to certain funds with respect to fee waivers and
expense limitations, the Company may reduce the amount of fund expenses it is
bearing.
The reduction in carrying value in the table relates to the USGI-ML joint
venture agreement to offer mutual funds in Canada. As part of the agreement to
enter into a joint venture, USGI issued 120,000 shares of its Class A common
stock to ML. The estimated value of the stock upon issuance was $510,000, which
the Company recorded as its investment in the joint venture during the first
quarter of fiscal 1995. Also, USGI agreed to incur the initial organization and
development costs, including formation and registration of the Canadian mutual
funds up to a maximum of $250,000 (Canadian). In connection with the December
1995 agreement with ML discussed below, USGI agreed to pay an additional
$250,000 (Canadian) in expenses of the joint venture. The Company's commitment
to pay expenses for the joint venture is complete as of year end. The Company
will, if necessary, advance monies to the joint venture to cover its portion of
the expenses during the first half of fiscal 1997; however, it is anticipated
that the joint venture will become self supporting during fiscal 1997. During
June 1996, the U.S. Advisors, Canada Inc. ("USACI") Management Group acquired a
one-third interest in USACI. As a result of this negotiated sale, which diluted
USGI's interest from one-half to one-third, and other factors, the Company
reduced the carrying value of the asset by approximately $620,000. For a more
detailed discussion, see Note H to the Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
At year end the Company had working capital of approximately $1.32 million
and a current ratio of 1.04 to 1 (3.07 to 1, excluding assets and liabilities
related to the Notes). With approximately $666,000 in cash and cash equivalents
and more than $3.21 million in marketable securities, the Company has adequate
liquidity. Total shareholders' equity was approximately $8.54 million--with
cash, cash equivalents, and marketable securities (including the Notes)
comprising 77% of total assets. Moreover, the Company's cash flow (excluding
interest and accretion on the Notes) is sufficient to cover current expenses,
including debt service.
Except for ongoing expenses of operations, the Company's only material
commitments are to debt service related to the Notes (a short-term debt) and the
mortgage on its corporate headquarters (a long-term debt). Debt related to the
Notes aggregated approximately $27.95 million plus accrued interest as of June
30, 1996. The Notes mature in February and March 1997 at their par value of
approximately $26.73 million. The Company has sufficient liquid assets to cover
the approximate $1.22 million difference between par value and the amount
financed.
Management believes current cash reserves, plus financing obtained and/or
available, and cash flow from operations will be sufficient to meet foreseeable
cash needs or capital necessary for the above mentioned activities, as well as
allow the Company to take advantage of investment opportunities whenever
available.
ML TRANSACTIONS
Shareholders' equity at June 30, 1996, 1995 and 1994 was approximately $8.5
million, $8.7 million and $6.7 million, respectively. The increase in fiscal
1995 over 1994 was due in large part to the December 1994 transaction in which
ML invested funds in the Company in exchange for shares, warrants, conversion
and other contractual rights which would have resulted in ML obtaining a
controlling interest in the Company. During fiscal 1996 ML and the Company
entered into an agreement essentially reversing the 1994 transaction. The
Company repurchased ML's warrants and certain conversion and contractual rights,
and ML converted its share holdings from Class B common stock to preferred stock
(currently Class A common stock) and sold the shares. As a result of this
transaction, ML no longer is able to obtain voting control of the Company, and
the Company has simplified its balance sheet and capital structure and has also
reduced potential dilution and future interest costs. The Company does not
expect material changes to the Company's stock structure during fiscal 1997.
TAX LOSS CARRYFORWARDS
Management assessed the likelihood of realization of the recorded deferred
tax asset at June 30, 1996 to be "more likely than not." Net operating losses
("NOLs") of $2.8 million, primarily resulting from the non-cash charge to
earnings related to the purchase of the Notes during fiscal 1995, do not expire
until fiscal 2010. Based on the current level of earnings and management's
expectations for the future, management believes that operating income will
"more likely than not" generate the minimum amount of future taxable income
necessary to fully realize the deferred tax assets.
SELECTED FINANCIAL DATA
The following selected financial data is qualified by reference to, and
should be read in conjunction with, the Company's Consolidated Financial
Statements and related notes and the Annual Status Report -- that is,
Management's discussion and analysis of financial condition and results of
operations, contained in this Annual Report. The selected financial data as of
June 30, 1992 through June 30, 1996 and the years then ended is derived from the
Company's Consolidated Financial Statements which were examined by Price
Waterhouse LLP, independent certified public accountants.
Year Ended June 30,
-------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- -------------------------- ------------- ------------- ------------- ------------- -------------
Selected Earnings Data:
Revenues $ 20,214,546 $ 15,770,738 $ 10,879,156 $ 7,393,502 $ 6,979,845
Expenses 17,261,592 21,666,598 10,108,181 7,302,036 7,406,179
------------- ------------- ------------- ------------- -------------
Earnings (loss) before
minority interest, equity
interest, income taxes,
extra-ordinary item and
cumulative effect 2,952,954 (5,895,860) 770,975 91,466 (426,334)
------------- ------------- ------------- ------------- -------------
Income taxes and
extraordinary item 1,013,517 2,005,142 178,665 -- --
Minority interest (55,098) -- -- -- --
Equity in earnings
of affiliate 102,728 -- -- -- --
Cumulative effect of
change in accounting -- 43,284 200,420 -- --
------------- ------------- ------------- ------------- -------------
Net earnings (loss) 1,987,067 (3,847,434) 1,150,060 91,466 (426,334)
Earnings (loss) per share 0.30 (0.64) 0.19 0.02 (0.10)
Working capital $1,316,006(1) $(106,863,206)(1) $ 3,391,974 $ 2,952,737 $ 2,119,233
Total assets 39,307,196 128,073,122 9,143,448 7,224,495 4,918,085
Long-term obligations 1,410,479 6,016,617 1,619,989 1,718,518 1,181,245
Shareholders' equity 8,544,072 8,661,223 6,730,003 5,055,567 3,288,200
- ----------
1 Working capital includes amounts due to broker-dealers under reverse
repurchase agreements related to the Company's purchase of certain U.S.
Government securities but does not include the securities collateralizing
the obligations (See "Government Securities" discussed in Item 7 of this
Form 10-K and/or Note F to the Consolidated Financial Statements, Item 8 of
this Form 10-K.)
[GRAPHIC: PRICE WATERHOUSE LLP LETTERHEAD]
700 N. St. Mary's, Suite 900 Telephone 210-226-7700
San Antonio, TX 78205 Facsimile 210-226-7412
PRICE WATERHOUSE LLP
[GRAPHIC: PRICEWATERHOUSE LOGO]
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholders of
U.S. Global Investors, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, cash flows and shareholders' equity
present fairly, in all material respects, the financial position of U. S. Global
Investors, Inc. and its subsidiaries at June 30, 1996 and 1995, and the results
of their operations and their cash flows for each of the three years in the
period ended June 30, 1996, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
As discussed in Note B to the financial statements, the Company changed its
method of accounting for income taxes during the year ended June 30, 1994 and
its method of accounting for investments in debt and equity securities during
the year ended June 30, 1995.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
San Antonio, Texas
September 26, 1996
U.S. GLOBAL INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
Assets
June 30,
---------------------------
1996 1995
------------ ------------
Current Assets
Cash and cash equivalents (Notes A & O) $ 666,250 $ 2,772,221
Trading securities, at fair value (Note A & C) 999,500 1,510,316
Government securities available-for-sale at fair value (Note F and K) 26,324,125 --
Receivables:
Mutual funds (Note D) 1,092,961 720,134
Accrued interest (Note K) 95,847 504,647
Custodial fees 163,296 192,248
Employees 92,765 98,121
Receivable from brokers 75,054 104,747
Other 704,286 77,098
Prepaid expenses 454,567 488,773
Deferred tax asset (Note P) -- 63,771
------------ ------------
Total Current Assets 30,668,651 6,532,076
------------ ------------
Net Property and Equipment (Notes A & E) 2,621,052 2,664,820
------------ ------------
Other Assets
Government securities held-to-maturities (Note F) -- 113,260,361
Restricted investments (Note A,C, J & Q) 642,380 897,556
Long-term receivables 368,742 219,982
Long-term deferred tax asset (Note P) 1,096,268 2,224,602
Residual equity interest (Note G) 217,861 217,861
Investment in joint venture (Note H) 255,500 518,073
Investment securities available-for-sale, at fair value (Note A & C) 2,210,657 1,466,622
Equity investment in affiliate (Note A) 1,164,415 --
Other 61,670 71,169
------------ ------------
Total Other Assets 6,017,493 118,876,226
------------ ------------
$ 39,307,196 $128,073,122
============ ============
The accompanying notes are an integral part of this statement.
U.S. GLOBAL INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
(Continued)
Liabilities and Shareholders' Equity
June 30,
------------------------------
1996 1995
------------- -------------
CURRENT LIABILITIES
Current portion of capital lease obligation (Note E) $ 24,354 $ 93,658
Current portion of notes payable (Note I) 41,695 38,325
Current portion of annuity and contractual obligation (Note J) 18,000 18,000
Subordinated debenture held by a related party (Note M) 1,533,131 --
Securities sold under agreements to repurchase (Note K) 26,404,375 112,201,469
Accounts payable 276,116 167,598
Accrued interest payable to third parties 16,685 388,217
Accrued interest payable to related party (Note M & O) 70,017 113,126
Accrued compensation and related costs 204,911 53,700
Accrued profit sharing and 401(k) (Note L) 110,489 48,000
Accrued vacation pay 75,959 75,959
Accrued legal fees 70,536 50,722
Deferred tax liability (Note P) 11,312 --
Litigation accrual (Note Q) 300,000 --
Other accrued expenses 195,065 146,508
------------- -------------
TOTAL CURRENT LIABILITIES 29,352,645 113,395,282
------------- -------------
Subordinated Debenture Held By a Related Party (Note M & O) -- 4,534,212
Capital Lease Obligations (Note E) -- 24,354
Notes Payable-Net of Current Portion (Note I) 1,260,137 1,301,723
Annuity and Contractual Obligations (Note J) 150,342 156,328
------------- -------------
TOTAL NON-CURRENT LIABILITIES 1,410,479 6,016,617
------------- -------------
TOTAL LIABILITIES 30,763,124 119,411,899
------------- -------------
Commitments and contingent liabilities (Note J, M, I, & K)
Shareholders' Equity (Note N)
Common stock (Class A) (formerly preferred stock)--$0.05 par value;
non-voting; authorized, 6,000,000 shares; issued and outstanding,
6,219,422 in 1996, 5,071,495 in 1995 310,971 253,575
Common stock (Class C) (formerly Class A)-- $.05 par value; authorized, 1,750,000
shares; issued and outstanding, 564,352 in 1996 and 570,779 in 1995 28,218 28,539
Common stock (Class B)--$.05 par value; non-voting; authorized, 2,250,000 shares;
issued and outstanding, 0 in 1996 and 1,000,000 in 1995 -- 50,000
Additional paid-in-capital 10,586,666 12,852,986
Treasury stock at cost; 199,582 and 92,500 shares held in 1996 and 1995, respectively (530,384) (198,366)
Net unrealized gain on available-for-sale securities (net of tax of $294,993
and $120,914, respectively) 572,634 234,716
Equity in net unrealized gain on available-for-sale securities held by affiliate
(net of tax of $76,823) 149,127 --
Retained earnings (deficit) (2,573,160) (4,560,227)
------------- -------------
TOTAL SHAREHOLDERS' EQUITY 8,544,072 8,661,223
------------- -------------
$ 39,307,196 $ 128,073,122
============= =============
The accompanying notes are an integral part of this statement.
U.S. GLOBAL INVESTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended June 30,
--------------------------------------------
1996 1995 1994
------------ ------------ ------------
REVENUE (NOTE D)
Investment advisory fee $ 5,934,133 $ 5,508,482 $ 5,126,858
Transfer agent fee 3,306,568 3,187,037 3,010,097
Accounting fee 523,465 421,190 388,454
Exchange fee 282,651 270,105 320,470
Custodial fees 545,018 503,225 362,758
Investment income 3,144,062 267,379 1,332,630
Mailroom operations 230,550 169,743 185,283
Other 132,315 89,868 152,606
Government security income (Note F) 5,559,879 5,353,709 --
Gains on changes of interest in affiliate (Note A) 555,905 -- --
------------ ------------ ------------
20,214,546 15,770,738 10,879,156
------------ ------------ ------------
EXPENSES
General and administrative 10,520,912 9,405,031 9,455,974
Depreciation and amortization 425,301 536,920 480,491
Interest expense-note payable and other 126,732 266,222 171,716
Government security non-cash charge (Note F) -- 5,375,269 --
Interest expense-securities sold under agreement
to repurchase (Note F & K) 5,235,535 5,650,020 --
Interest expense-subordinated debenture
to a related party (Note M & O) 333,612 433,136 --
Reduction in carrying value of investment in joint venture (Note H) 619,500 -- --
------------ ------------ ------------
17,261,592 21,666,598 10,108,181
------------ ------------ ------------
EARNINGS (LOSS) BEFORE MINORITY INTEREST, EQUITY INTEREST,
INCOME TAXES, AND CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING 2,952,954 (5,895,860) 770,975
------------ ------------ ------------
Minority Interest in Consolidated Company (Note A) (55,098) -- --
Equity In Net Earnings of affiliate (Note A) 102,728 -- --
------------ ------------ ------------
EARNINGS (LOSS) BEFORE INCOME TAXES, AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING 3,000,584 (5,895,860) 770,975
PROVISION (BENEFIT) FOR FEDERAL INCOME TAXES (NOTE P)
Current 61,000 -- 47,358
Deferred 952,517 (2,005,142) (226,023)
------------ ------------ ------------
1,013,517 (2,005,142) (178,665)
------------ ------------ ------------
NET EARNINGS (LOSS) BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING 1,987,067 (3,890,718) 949,640
Cumulative Effect of Change in Accounting for Marketable
Securities (net of taxes of $22,298) (Note B) -- 43,284 --
Cumulative Effect of Change in Accounting for Income Taxes
(Note B) -- -- 200,420
------------ ------------ ------------
NET EARNINGS (LOSS) $ 1,987,067 $ (3,847,434) $ 1,150,060
============ ============ ============
The accompanying notes are an integral part of these statements.
U.S. GLOBAL INVESTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Continued)
Year Ended June 30,
----------------------------------------------
1996 1995 1994
------------- ------------- -------------
PER SHARE AMOUNTS
PRIMARY AND FULLY DILUTED
Continuing operations $ 0.30 $ (0.65) $ 016
Cumulative effect of change in accounting -- 0.01 0.03
------------- ------------- -------------
Net Earnings $ 0.30 $ (0.64) $ 0.19
============= ============= =============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING
Primary and fully diluted 6,601,074 6,013,393 6,012,151
============= ============= =============
The accompanying notes are an integral part of these statements.
U.S. GLOBAL INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended June 30,
---------------------------------------------
1996 1995 1994
------------- -------------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ 1,987,067 $ (3,847,434) $ 1,150,060
Adjustments to reconcile to net cash provided by operating activities:
Depreciation and amortization 425,301 536,920 480,491
Government security accretion (1,363,051) (1,499,521) --
Government security charge -- 5,375,269 --
Net gain on sales of securities (net of minority interest) (3,279,643) (248,661) (1,383,246)
Gain on disposal of equipment (296) (1,100) --
Reduction in carrying value of investment in joint venture 619,500 -- --
Cumulative effect of change in accounting -- (43,284) (200,420)
Treasury Stock reissued 139,595 32,381 --
Changes in assets and liabilities, impacting cash from operations:
Restricted investments 255,176 (443,908) (108,648)
Accounts receivable (675,974) (793,395) (21,128)
Deferred tax asset 952,517 (2,005,142) (226,023)
Prepaid expenses and other (1,065,278) 177,487 (318,835)
Trading securities 2,674,344 894,453 --
Accounts payable 108,518 (50,240) 111,148
Accrued expenses 167,429 457,365 239,022
------------ ------------- -----------
Total adjustments (1,041,862) 2,388,624 (1,427,639)
------------ ------------- -----------
NET CASH PROVIDED BY (USED IN) OPERATIONS 945,205 (1,458,810) (277,579)
------------ ------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of building and land -- (27,461) (39,075)
Purchase of furniture and equipment (372,211) (402,190) (303,932)
Proceeds on sale of equipment 469 1,100 --
Purchase of securities -- -- (3,018,554)
Proceeds on sale of securities -- -- 3,644,777
Purchase of available-for-sale securities (896,791) (1,023,721) --
Purchase of government securities held-to-maturity -- (130,113,712) --
Proceeds on sale of government securities available-for-sale 89,884,250 -- --
Proceeds on sale of government securities held-to-maturity -- 12,945,530 --
------------ ------------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 88,615,717 (118,620,454) 283,216
------------ ------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on annuity (5,986) (5,584) (5,206)
Payments on note payable to bank (38,216) (35,337) (1,395,726)
Principal payments on capital lease obligation (93,658) (103,431) (111,807)
Proceeds from note payable to bank -- -- 1,375,385
Net proceeds from securities sold under agreement to repurchase 871,231 124,794,309 --
Proceeds from issuance of subordinated debenture to related party -- 6,000,000 --
Payments on subordinated debenture to related party (3,001,081) (1,465,788) --
Net payments on securities sold under agreement to repurchase (86,668,325) (12,592,840) --
Proceeds from issuance of preferred stock, warrants, and options 295,875 144,274 565,625
Proceeds from issuance of Common Stock (Class B) to related party -- 4,964,271 --
Purchase of Common Stock (Class B) from related party (2,538,945) -- --
Purchase of Treasury stock and warrants (487,788) (106,988) (41,249)
------------ ------------- -----------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (91,666,893) 121,592,886 387,022
------------ ------------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (2,105,971) 1,513,622 392,659
BEGINNING CASH AND CASH EQUIVALENTS 2,772,221 1,258,599 865,940
------------ ------------- -----------
ENDING CASH AND CASH EQUIVALENTS $ 666,250 $ 2,772,221 $ 1,258,599
============ ============= ===========
The accompanying notes are an integral part of this statement.
U.S. GLOBAL INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
Year Ended June 30,
-----------------------------------
1996 1995 1994
----------- ---------- --------
SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Purchase of equipment under capital lease $ -- $ -- $ 31,701
Issuance of shares for investment in joint venture -- 510,000 --
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid for interest 6,088,853 5,848,689 171,716
The accompanying notes are an integral part of this statement.
U.S. GLOBAL INVESTORS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Common Common
Preferred Stock Stock Stock Paid-in Preferred
Stock (Class A) (Class B) (Class C) Capital Warrants
----------------------------------------------------------------------------
Balance at June 30, 1993 (4,628,805 $ 231,440 $ 0 $ 0 $ 29,449 $6,751,019 $ 0
shares of Preferred stock; 588,969
shares of Common stock (Class A))
Purchase of 10,000 shares of
Preferred treasury stock -- -- -- -- -- --
Issuance of 226,000 shares of
Preferred stock 11,300 -- -- -- 554,325 --
Conversion of 12,752 shares of
Common stock (Class A)
to Preferred stock 638 -- -- (638) -- --
Net Earnings -- -- -- -- -- --
---------------------------------------------------------------------------
Balance at June 30, 1994 (4,867,557
shares of Preferred stock; 576,217 $ 243,378 $ 0 $ 0 $ 28,811 $7,305,344 $ 0
shares of Common stock (Class A))
Purchase of 35,000 shares of
Preferred treasury stock -- -- -- -- -- --
Reissuance of 11,200 shares of
Preferred treasury stock -- -- -- -- (10,978) --
Issuance of 198,500 shares of
Preferred stock 9,925 -- -- -- 644,349 --
Issuance of 1,000,000 shares of
Common stock (Class B) -- 0 50,000 -- 4,914,271 --
Conversion of 5,438 shares of
Common stock (Class A)
to Preferred stock 272 -- -- (272) -- --
Unrealized gain (loss) on securities
available-for-sale (net of tax)
upon adoption of SFAS 115 -- -- -- -- -- --
Unrealized gain (loss) on securities
available-for-sale (net of tax) -- -- -- -- -- --
Net Earnings -- -- -- -- -- --
---------------------------------------------------------------------------
Balance at June 30, 1995 (5,071,495 $ 253,575 $ 0 $ 50,000 $ 28,539 $12,852,986 $ 0
shares of Preferred stock; 570,779
shares of Common stock (Class A))
Conversion of Preferred Stock to
Common Stock (Class A) (253,575) 253,575 -- -- -- --
Purchase of 175,475 shares of Common
Stock (Class A) -- -- -- -- -- --
Reissuance of 68,393 shares of
Common Stock (Class A) -- -- -- -- (16,175) --
Conversion of 6,427 shares of Common
stock (Class C) to Common Stock (Class A) -- 321 -- (321) -- --
Conversion of 1,000,000 shares of Common
stock (Class B) to Common Stock (Class A) -- 50,000 (50,000) -- -- --
Purchase of Common Stock (Class B) from
related party (Note N) -- -- -- -- (2,538,945) --
Exercise of 141,500 Stock Options -- 7,075 -- -- 288,800 --
Unrealized loss on Notes transferred from
held-to-maturity to available-for-sale,
at date of transfer (net of tax) -- -- -- -- -- --
Unrealized gain (loss) on securities
available-for-sale (net of tax) -- -- -- -- -- --
Equity in Unrealized gain (loss) on
available-for-sale securities of
affiliated company (net of tax) -- -- -- -- -- --
Net Earnings -- -- -- -- -- --
-------------------------------------------------------------------------------
Balance at June 30, 1996 $ 0 $310,971 $ 0 $ 28,218 $10,586,666 $ 0
Unrealized
Gain (Loss)
on Securities
Earnings Treasury Available
(Deficit) Stock for Sale Total
-------------------------------------------------------
Balance at June 30, 1993 (4,628,805 ($1,862,853) ($ 93,488) $ 0 $5,055,567
shares of Preferred stock; 588,969
shares of Common stock (Class A))
Purchase of 10,000 shares of
Preferred treasury stock -- (41,249) -- (41,249)
Issuance of 226,000 shares of
Preferred stock -- -- -- 565,625
Conversion of 12,752 shares of
Common stock (Class A)
to Preferred stock -- -- -- --
Net Earnings 1,150,060 -- -- 1,150,060
--------------------------------------------------------
Balance at June 30, 1994 (4,867,557
shares of Preferred stock; 576,217 ($712,793) ($134,737) $ 0 $6,730,003
shares of Common stock (Class A))
Purchase of 35,000 shares of
Preferred treasury stock -- (106,988) -- (106,988)
Reissuance of 11,200 shares of
Preferred treasury stock -- 43,359 -- 32,381
Issuance of 198,500 shares of
Preferred stock -- -- -- 654,274
Issuance of 1,000,000 shares of
Common stock (Class B) -- -- -- 4,964,271
Conversion of 5,438 shares of
Common stock (Class A)
to Preferred stock -- -- -- --
Unrealized gain (loss) on securities
available-for-sale (net of tax)
upon adoption of SFAS 115 -- -- 197,009 197,009
Unrealized gain (loss) on securities
available-for-sale (net of tax) -- -- 37,707 37,707
Net Earnings (3,847,434) -- -- (3,847,434)
--------------------------------------------------------
Balance at June 30, 1995 (5,071,495 ($4,560,227) ($198,366) $ 234,716 $ 8,661,223
shares of Preferred stock; 570,779
shares of Common stock (Class A))
Conversion of Preferred Stock to
Common Stock (Class A) -- -- -- --
Purchase of 175,475 shares of Common
Stock (Class A) -- (487,678) -- (487,678)
Reissuance of 68,393 shares of
Common Stock (Class A) -- 155,660 -- 139,485
Conversion of 6,427 shares of Common
stock (Class C) to Common Stock (Class A) -- -- -- --
Conversion of 1,000,000 shares of Common
stock (Class B) to Common Stock (Class A) -- -- -- --
Purchase of Common Stock (Class B) from
related party (Note N) -- -- -- (2,538,945)
Exercise of 141,500 Stock Options -- -- -- 295,875
Unrealized loss on Notes transferred from
held-to-maturity to available-for-sale,
at date of transfer (net of tax) -- -- (62,006) (62,006)
Unrealized gain (loss) on securities
available-for-sale (net of tax) -- -- 399,924 399,924
Equity in Unrealized gain (loss) on
available-for-sale securities of
affiliated company (net of tax) -- -- 149,127 149,127
Net Earnings 1,987,067 -- -- 1,987,067
--------------------------------------------------------
Balance at June 30, 1996 ($2,573,160) ($530,384) $ 721,761 $ 8,544,072
The accompanying notes are an integral part of these statements.
U.S. GLOBAL INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A. SIGNIFICANT ACCOUNTING POLICIES.
ORGANIZATION
U.S. Global Investors, Inc. ("the Company" or "USGI") serves as investment
advisor, investment manager and transfer agent to United Services Funds ("USF")
and Accolade Funds, both Massachusetts business trusts which are no-load,
open-end investment companies offering shares in numerous mutual funds to the
investing public. The Company has served as investment adviser and manager since
the inception of USF and Accolade and assumed the transfer agency function of
USF in November 1984 and of Accolade in October 1994, the commencement of
operations. For these services, the Company receives fees from USF and Accolade.
The Company has formed a limited liability company which was incorporated
in Guernsey on August 20, 1993. This company, U.S. Advisors (Guernsey) Limited,
manages the portfolio of an offshore fund, U.S. Global Strategies Fund Limited
("the Guernsey Fund").
During July 1994, USGI agreed to form a joint venture with Marleau, Lemire
Inc. ("ML") of Montreal, Quebec, to offer mutual funds in Canada. In February
1995, United Services Wealth Management Co. ("USWMC"), a Montreal based company,
was formed. This Company is expected to begin operations in early fiscal 1997,
and is now named United Services Advisors, Canada, Inc. ("USACI").
The Company, through its wholly-owned subsidiary, Security Trust &
Financial Company, also serves as custodian for retirement accounts invested in
USF, Accolade, and other mutual funds.
On June 1, 1996 the Company changed its name from United Services Advisors,
Inc. to U.S. Global Investors, Inc.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, United Shareholder Services, Inc. ("USSI"),
Security Trust and Financial Company ("STFC" or "ST&FC"), A&B Mailers, Inc.
("A&B"), and U.S. Advisors (Guernsey) Limited ("USAG"). Additionally, the
Company has consolidated the balance sheet and results of operations of the
Guernsey Fund since it owned substantially all of the issued shares of the
Guernsey Fund during fiscal 1995 and for the first ten months of fiscal 1996.
During the fourth quarter of fiscal 1996 the Company's interest in the Guernsey
Fund declined below 50% and it began accounting for its investment in the
Guernsey Fund under the equity method of accounting. At June 30, 1996, the
Company held a 26% interest in the Guernsey Fund. The aggregate value of the
Company's investment at June 30, 1996 based on quoted market value was
approximately $1,164,415.
During fiscal 1996, the Guernsey Fund issued 27,375 net additional shares
for cash amounting to $2,719,998 to investors other than the Company. The
Company accounts for changes in interests of its investment in the Guernsey Fund
by charging or crediting income for the effects of such transactions when
consummated. The Company recorded $555,905 in gains on such transactions during
fiscal 1996 which are included as a separate line in the accompanying income
statement. Deferred income taxes have been provided on these gains.
All significant inter-company balances and transactions have been
eliminated in consolidation. Certain amounts have been reclassified for
comparative purposes.
CASH AND CASH EQUIVALENTS
Cash consists of cash on hand and cash equivalents with original maturities
of three months or less. Cash and cash equivalents at June 30, 1996 and at June
30, 1995 include $596,605 and $2,673,156, respectively, in USF money market
mutual funds (see Note O). This investment is valued at amortized cost which
approximates market. In addition, not included in cash and cash equivalents is
restricted cash of $633,169 and $315,000 at June 30, 1996 and June 30, 1995,
respectively, which was held in a USF money market mutual fund and classified as
a restricted investment on the June 30, 1996 and 1995 balance sheet (see Notes J
and Q).
FIXED ASSETS
Fixed assets are recorded at cost including capitalized interest.
Depreciation for owned fixed assets and capital leases is recorded using the
straight-line method over the estimated useful life of each asset as follows:
leasehold improvements, furniture, and equipment are depreciated over 3 years;
capitalized leased phone equipment is depreciated over 5 years; and the building
is depreciated over 31.5 years.
U.S. GLOBAL INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
INCOME TAXES
Income taxes are provided during the year in which transactions affect the
determination of financial statement income, regardless of when they are
recognized for tax purposes. Deferred income taxes are provided for temporary
differences between the tax and book bases of assets and liabilities.
Effective July 1, 1993, the company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (see Note B).
EARNINGS PER SHARE
Primary and fully diluted earnings per share are based on the weighted
average number of shares of Class A common stock (formerly called preferred
stock) Class B and Class C common stock outstanding during the year. All classes
of common are considered equivalent in the calculation of earnings per share
since each share has essentially equivalent interests in the income of the
Company. Warrants, convertible debentures and options are included to the extent
dilutive.
SECURITY INVESTMENTS
Effective July 1, 1994 the Company adopted Statement of Financial
Accounting Standards No. 115 "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS 115") (see Note B). Prior to implementation of SFAS
115, investments in securities were stated at the lower of aggregate cost or
market.
Under SFAS 115, the Company classifies its investments in equity and debt
securities into three categories. Management determines the appropriate
classification of securities at the time of purchase and reevaluates such
designation as of each reporting period date (see Note C).
Securities that are purchased and held principally for the purpose of
selling them in the near term are classified as trading securities and reported
at fair value. Unrealized gains and losses on these securities are included in
earnings.
Investments in debt securities for which the Company has the positive
intent and ability to hold to maturity are classified as held-to-maturity
securities. Held-to-maturity securities are reported at amortized cost. Discount
to par value is accreted, and recognized as income, over the remaining term to
maturity.
Investments not classified as trading securities nor as held-to-maturity
securities are classified as available-for-sale securities and reported at fair
value. Unrealized gains and losses on these securities are excluded from
earnings and reported, net of tax, as a separate component of shareholders'
equity and are recorded in earnings on trade date. Realized gains (losses) from
security transactions are calculated on the first-in/first-out cost basis and
are recorded in earnings on trade date.
FOREIGN CURRENCY TRANSACTIONS
Transactions between the Company and foreign entities are converted to U.S.
dollars using the exchange rate on the date of the transactions. Security
investments valued in foreign currencies are translated to U.S. dollars using
the applicable exchange rate as of the reporting date. Foreign currency gain
(loss) is included as a component of investment income.
ORGANIZATION COSTS
Organization costs in the amount of $5,013 and $14,509 net of amortization
at June 30, 1996, and 1995, respectively, which relate to the organization of
STFC and USAG, are amortized on a straight-line basis over 60 months. These
costs are included in other assets on the consolidated balance sheet.
U.S. GLOBAL INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of ("SFAS 121"), which requires impairment
losses to be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets carrying amount. SFAS 121 also
addresses the accounting for long-lived assets that are expected to be disposed
of. The Company will adopt SFAS 121 in the first quarter of fiscal 1997 and has
not yet assessed the effect of adoption.
In October 1995, the FASB issued Statement No. 123, Accounting for
Stock-Based Compensation ("SFAS 123"), which establishes fair value methods of
accounting for stock options and other forms of stock-based transactions. Under
SFAS 123, companies are not required to adopt a fair value method of accounting
for employee stock-based compensation. They are permitted to continue to account
for such transactions pursuant to Accounting Principles Board Opinion No. 25
("APB 25") but must disclose pro forma net income and earnings per share as if a
fair value method of accounting had been applied. The Company intends to
continue to account for employee stock option transactions in accordance with
the requirements of APB 25. The Company will adopt SFAS 123 in fiscal 1997.
In June 1995, the FASB issued Statement No. 125, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities ("SFAS
125"), which establishes criteria for recognition of sales related to asset
transfers, distinguishing between a sale of assets and a secured borrowing, and
of extinguishment of associated liabilities. SFAS 125 prohibits in-substance
defeasance of debt. SFAS 125 is effective for transactions occurring after
December 31, 1996. The Company has not yet assessed the effect of adoption.
NOTE B. CHANGE IN ACCOUNTING PRINCIPLE.
In the first quarter of fiscal 1995, the Company adopted SFAS 115,
"Accounting for Certain Investments in Debt and Equity Securities," effective
July 1, 1994. The adoption of SFAS 115 changed the method of accounting and
reporting for investments in equity securities that have readily determinable
fair values and for all investments in debt securities. The Company recognized
the cumulative effect of adopting the pronouncement in the first quarter of
fiscal 1995 as a change in accounting principle. The financial impact of
adopting SFAS 115 was a net increase in earnings of $43,284 (net of taxes of
$22,298) or $.01 per share representing net unrealized gains on securities
classified as trading securities and $197,009 (net of taxes of $101,489) on net
unrealized gains on securities classified as available for sale which was
reported as a separate component of equity.
In the first quarter of fiscal 1994, the Company adopted Statement of
Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income
Taxes," effective July 1, 1993. The adoption of SFAS 109 changed the Company's
method of accounting for income taxes from the deferred method to the liability
method of accounting for deferred income taxes. Under the liability method
prescribed by SFAS 109, deferred taxes are provided based upon enacted tax laws
and rates applicable to the periods in which taxes become payable. As permitted
by SFAS 109, prior years' financial statements were not restated to apply the
provisions of the new method. The Company recognized the cumulative effect of
adopting the pronouncement in the first quarter of fiscal 1994 as a change in
accounting principle. The cumulative effect of adoption on July 1, 1993 was to
increase deferred tax assets by $200,420. This amount primarily represented the
impact of recognizing the benefit of a net operating loss carryover that could
not be recorded under the previous method of accounting for income taxes. This
increased net income in fiscal year 1994 by $200,420 or $.03 per share.
NOTE C. INVESTMENTS.
As discussed in Notes A and B, in fiscal 1995 the Company adopted SFAS 115,
which changed the method of accounting and reporting for investments in equity
securities that have readily determinable fair values and for all investments in
debt securities.
U.S. GLOBAL INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The cost and market value of investments classified as trading are as follows:
Date Cost Market Value
---- ---- ------------
June 30, 1996 $1,034,398 $ 999,500
June 30, 1995 $1,661,113 $1,510,316
The net change in the unrealized holding gain on trading securities held at June
30, 1996 that has been included in earnings for the period was $185,695 compared
to an unrealized loss of $150,797 for the period ended June 30, 1995.
The cost of investments in securities, which are classified as
available-for-sale, which may not be readily marketable at June 30, 1996 was
$1,249,081. These investments are reflected as non-current assets on the June
30, 1996 consolidated balance sheet. These investments are in private placements
which are restricted for sale as of June 30, 1996. It is anticipated the
securities obtained in these private placements will become free trading during
fiscal 1997. The fair value of the investments classified as available-for-sale
at June 30, 1996 was $2,210,657 with $961,576 in unrealized gains being recorded
as a separate component of shareholders' equity. Additionally, the Company holds
certain notes with a fair value of $26,324,125 (amortized cost of $26,418,074)
which are classified as available-for-sale securities resulting in an unrealized
loss of $93,949 as of June 30, 1996. (See further discussion of these securities
at Note F). During fiscal 1996, the Company recorded in income realized gains of
$780,492 and unrealized gains of approximately $122,000 on securities which were
transferred from the available-for-sale category to the trading category upon
becoming free trading.
The cost of investments in securities, which were classified as
available-for-sale, which were not readily marketable at June 30, 1995 was
$1,122,992. These investments were reflected as non-current assets on the June
30, 1995 consolidated balance sheet. These investments were private placements
which were restricted for sale as of June 30, 1995. The securities obtained in
these private placements became free trading during fiscal 1996. The fair value
of the investments classified as available-for- sale at June 30, 1995 was
$1,466,622 with $343,630 in unrealized gains being recorded as a separate
component of shareholders' equity. Approximately $12,000 was also recorded to
shareholders' equity for unrealized gains on short sales by the Company. During
fiscal 1995, the Company recorded realized gains of $202,441, on securities
which were transferred from available-for-sale securities to trading securities
upon becoming free trading. The Company also recorded unrealized gains of
$158,498 and unrealized losses of $188,124 on securities which were transferred
from available-for-sale securities to trading securities upon becoming free
trading during the year.
Additionally, at June 30, 1995 the Company held Notes with an amortized
cost of $113,260,361 which were classified as held-to-maturity securities. (See
further discussion of these securities at Note F.)
In September 1994, subsequent to the Company's purchase of the notes
discussed in Note F, the Company and USF entered into an agreement, under which
the Company agreed to transfer $900,000 in cash and securities into an account
at a financial institution in the name of the Company for the benefit of U.S.
Government Securities Savings Fund ("USG") under the control of USF's
independent Trustees. The agreement terminated the earlier of 1) when USG no
longer owned any of the variable rate government agency notes set forth under
the agreement; or 2) October 1997. The entire collateral was returned to the
Company during the fiscal year due to the reduced percentage of USG invested in
the notes in accordance with the agreement.
Restricted investments include cash of $ -0- and $76,604 held in margin
accounts at brokers at June 30, 1996 and June 30, 1995, respectively.
Prior to the implementation of SFAS 115, marketable securities which were
classified as current assets at June 30, 1994 had a cost (carrying amount) of
$1,086,974. Market value of these investments was $1,152,556, which exceeded
cost at June 30, 1994. Gross unrealized gains and losses amounted to $199,369
and ($133,787), respectively, at June 30, 1994. Net realized gains on sales of
securities of $1,383,246 were included in fiscal 1994 investment income.
U.S. GLOBAL INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE D. INVESTMENT MANAGEMENT, TRANSFER AGENT AND OTHER FEES.
The Company serves as investment advisor and transfer agent to USF and
Accolade. For these services the Company receives fees based on a specified
percentage of net assets both under management and the number of shareholder
accounts. The Company also provides in-house legal and accounting services to
USF and Accolade. The accounting services are provided to USF for an annual fee.
The Company also receives exchange, maintenance, closing and small account fees
directly from USF shareholders.
USGI receives additional revenue from several sources including: STFC
custodian and administrative fee revenues, gains on marketable securities
transactions, revenues from miscellaneous transfer agency activities including
lockbox functions as well as mailroom operations (A&B).
Investment advisory fees, transfer agency fees, accounting fees, custodian
fees and all other fees to the Company are recorded as income during the period
in which services are performed.
The Company has voluntarily waived or lowered its advisory fees and is
bearing expenses on several funds within USF:
The Company has unconditionally guaranteed that the total fund operating
expenses (as a percentage of average net assets) of the U.S. Tax Free Fund, the
United Services Intermediate Treasury Fund, United Services Near-Term Tax Free
Fund, and the U.S. Government Securities Savings Fund will not exceed 0.40% on
an annualized basis through June 30, 1997 or such later date as the Company
determines.
The Company has unconditionally guaranteed that the total fund operating
expenses (as a percentage of average net assets) of the U.S. All American Equity
will not exceed 0.70% on an annualized basis through June 30, 1997 or such later
date as the Company determines.
The Company has unconditionally guaranteed that the total fund operating
expenses (as a percentage of average net assets) of the China Region Opportunity
Fund will not exceed 2.25% on an annualized basis through June 30, 1997 or such
later date as the Company determines.
The aggregate amount of fees waived or expenses voluntarily reimbursed
totaled $3,362,050, $3,568,151 and $4,190,821 in 1996, 1995, and 1994,
respectively. The Company also reimbursed $ -0-, $-0-, and $14,234 in the
aggregate for each of the three fiscal years ended June 30, 1996, 1995, and 1994
respectively, to the funds for expenses in excess of state statutory limitation
requirements.
The following funds accounted for more than 10% of revenue [excluding
government security income (Notes F and K)] in the years indicated:
Year Ended June 30,
------------------------------
1996 1995 1994
----- ------ -----
U.S. Gold Shares Fund 21% 32% 31%
U.S. World Gold Fund 21% 25% 22%
U.S. Treasury Securities Cash Fund 9% 13% 10%
Receivables from mutual funds represent amounts due the Company, and its
wholly-owned subsidiaries, for investment advisory fees, transfer agent fees,
accounting fees, and exchange fees, net of amounts payable to the mutual funds.
The investment advisory contract and related contracts between the Company
and USF expire on or about October 25, 1996. Management anticipates the Trustees
of USF will renew the contracts.
U.S. GLOBAL INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE E. PROPERTY AND EQUIPMENT.
Property and equipment are composed of the following:
June 30,
--------------------------
1996 1995
----------- -----------
Leasehold improvements $ 182,887 $ 184,416
Capitalized leased equipment 519,768 519,768
Furniture and equipment 4,125,349 3,769,171
Building and land 2,203,757 2,203,757
---------- -----------
7,031,761 6,677,112
Accumulated depreciation and amortization (4,410,709) (4,012,292)
----------- -----------
Net property and equipment $2,621,052 $2,664,820
=========== ===========
At June 30, 1996 and 1995 accumulated amortization for capitalized leased
equipment was $510,961 and $450,303, respectively. Amortization expense for
capitalized leased equipment was $60,658, $125,198 and $116,391 for the fiscal
years ended June 30, 1996, 1995 and 1994, respectively. Minimum lease payments
required by obligations under capital leases are $24,354 in fiscal 1997.
On February 28, 1992, the Company acquired a 46,000 square foot office
building with approximately 2.5 acres of land from the Resolution Trust
Corporation. Total capitalized costs associated with the building and land are
approximately $2.2 million, including capitalized interest of $33,783, closing
costs and improvements. The Company made additional substantial improvements to
the building in order to accommodate the transfer of its headquarters.
Depreciation on the building and improvements commenced upon occupancy. The
building is pledged as collateral for the financing used to acquire the building
(see Note I).
NOTE F. GOVERNMENT SECURITIES.
USG, a USF fund, from its inception had invested in, among other types of
Government securities, certain Government agency notes whose interest rates
reset monthly based on a cost-of-funds index ("Notes"). This reset feature lags
changes in short-term interest rates. During fiscal 1995, due to such rates
rising dramatically and regulatory directives issued to money market funds in
general, the market value of the Notes was adversely effected. To reduce USG's
exposure to said Notes and in order to maintain a $1.00 per share net asset
value, USGI decided, in the first quarter of fiscal 1995, to arrange for USG to
sell $40 million par amount of Notes at USG's amortized cost of approximately
$39,777,000 plus accrued interest to ML. Thereafter, USGI decided to purchase
directly from the fund $90,525,000 par amount of Notes ($53,275,000 during the
first quarter of fiscal 1995 and $37,250,000 during the third quarter of fiscal
1995) at USG's amortized cost of approximately $90,337,000 plus accrued
interest. Additionally, in connection with such decision, USGI purchased the
Notes from ML for approximately $39,777,000 plus accrued interest during the
first quarter of fiscal 1995.
USGI recorded the Notes at their fair value. As the Notes had an aggregate
fair value of approximately $124,739,000 on the dates USGI acquired the
securities, the Company recorded pre-tax non-cash charges to the results of
operations of approximately $2,574,000 during the first quarter and $2,800,000
during the third quarter of fiscal 1995. The Company initially classified the
Notes as held-to-maturity securities. As a result, and in addition to periodic
receipts of interest income, USGI recognized $1,363,051 and $1,499,521 in
non-cash income during fiscal 1996 and 1995, respectively.
U.S. GLOBAL INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
In December 1995, $63,800,000 par value Notes were reclassified from the
held-to-maturity category to the available-for- sale category in accordance with
the one-time reassessment allowed by the FASB Guide to Implementation of
Statement 115 on Accounting for Certain Investments in Debt and Equity
Securities. The remaining $53,725,000 par value Notes retained their
held-to-maturity status as defined by SFAS115 until June 1996 when these were
re-classified to available-for-sale securities. Upon this re-classification the
Company began recording these Notes at fair value with any unrealized gain or
loss excluded from earnings and reported, net of tax, as a separate component of
shareholders' equity. At the June 1996 re- classification date, the unrealized
loss approximated the amount recorded at June 30, 1996 ($93,949). The Company
has sold the following Notes during the fiscal years 1996 and 1995.
DATE SOLD PAR VALUE REALIZED GAIN/(LOSS)
--------- ------------ --------------------
June 1995 $13,000,000 ($32,073)
December 1995 $47,250,000 $1,235,986
May 1996 $16,550,000 $1,267
June 1996 $27,000,000 ($74,766)
----------- ---------
$103,800,000 $1,130,414
============ ===========
The remaining Notes acquired by USGI mature at their aggregate $26,725,000
par amount as follows:
MATURITY PAR VALUE
-------- ---------
February 1997 $ 10,750,000
March 1997 $ 15,975,000
USGI financed the original acquisition of the Notes, including purchased
accrued interest, as follows: 1) approximately $120.9 million was provided by
third party broker-dealers under reverse repurchase agreements (see Note K); 2)
USGI issued a $6.0 million 8% subordinated debenture to ML, the terms of which
require principal payments as the Notes mature and interest payments quarterly
(see Note M); and 3) USGI utilized approximately $3,563,000 of its own cash.
During fiscal 1995, USGI purchased put options on Eurodollar futures
("Options") for approximately $274,125 in premiums which expired resulting in a
$231,625 loss. The options were purchased as portfolio insurance with the
expectation that they would reduce USGI's exposure to temporary declines in the
value of the Notes and reduce USGI's exposure to increased interest costs of the
reverse repurchase agreements in the event of a sharp increase in interest
rates. During the fourth quarter of fiscal 1995, USGI purchased 35 put options
on Eurodollar futures for approximately $13,700 in premiums which expired in
September 1995 These options were accounted for on a "mark-to-market" basis,
were exchange traded and required no cash requirements other than the initial
premiums, and USGI's exposure on the options was limited to the initial premium
invested.
During fiscal 1996 the Company purchased 175 put options on Eurodollar
futures for premiums of $73,938. All options were sold/expired during fiscal
1996 resulting in realized losses of approximately $50,000.
NOTE G. RESIDUAL EQUITY INTEREST.
In June 1992 the Company made its final payment to the Settlement Pool
established under the June 1988 Settlement Agreement relating to the original
Prospector Fund (now operating as the U.S. Global Resources Fund); and the
Settlement Pool made the final payout to "Eligible Shareholders" thereof in June
1992. Under the 1988 Settlement Agreement, any amounts payable to "Eligible
Shareholders" who cannot be located, together with interest thereon, will be
held for six years after the final payout against the claims of those
shareholders. At the end of six years, such amounts will be made available to
all persons claiming subrogation. The Company has first right of subrogation to
the amounts. The amount of cash held at June 28, 1996 was approximately
$616,000. Management believes the Company will receive a sum which will equal or
exceed the amount currently recorded as the Company's residual equity interest,
$217,861.
U.S. GLOBAL INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE H. INVESTMENT IN JOINT VENTURE.
During the fiscal 1995, USGI and ML, a Canadian brokerage firm, entered
into a joint venture agreement whereby USGI and ML agreed to undertake to offer
mutual funds in Canada, primarily through ML's broker network located in
Toronto, Montreal, Vancouver, and Victoria. As part of the agreement to enter
into a joint venture, USGI issued 120,000 shares of its preferred stock to ML.
The estimated value of the stock upon issuance was $510,000, which the Company
recorded as its investment in the joint venture during the first quarter of
fiscal 1995. In conjunction with this joint venture, United Services Advisors
Wealth Management Corp. was incorporated during the third quarter of fiscal 1995
with a 50% ownership to each USGI and ML . The joint venture has been renamed
United Services Advisors, Canada, Inc. ("USACI") during fiscal 1996. Also, USGI
agreed to incur the initial organization and development costs. Management
anticipates that USACI through its wholly-owned subsidiary United Services
Advisors Fund Management Inc., which was formed in September 1995 to provide
investment services to Canadian investors, will become the advisor to the ML
Small Cap Fund and will also offer other Canadian funds and investment products
and services during early fiscal 1997. During June 1996 the USACI management
group acquired a one-third interest in USACI. As a result of this negotiated
sale, which diluted USGI's interest from one-half to one-third, delays
associated with the joint venture becoming operational, and the Company's
reduced expectations of the joint venture's profitability, management has
reassessed the recoverability of its carrying value in the joint venture. The
Company determined that the carrying value should be reduced by $619,500 which
decreases the carrying value to reflect the amount of the Company's
proportionate one-third share of the underlying equity in net assets of USACI of
$255,500 at June 30, 1996. Upon commencement of USACI operations USGI's
investment in USACI will be accounted for under the equity method.
NOTE I. NOTE PAYABLE.
To facilitate the cost of acquiring the building and the necessary
improvements, the Company obtained permanent financing from a bank in the amount
of $1,425,000. On June 30, 1994 the Company re-financed the original building
loan with another bank on more favorable terms. As of June 30, 1996, the balance
on the note was $1,301,832. The loan is currently amortizing over a twenty-year
period with payments of both principal and interest due monthly based on a fixed
rate of 7.75%. The current monthly payment is $11,750. The loan matures July
2001. Under this agreement, the Company must maintain certain financial
covenants. Because of events described in Note F, the Company obtained a waiver
of the covenants from the bank through June 30, 1995 and subsequently negotiated
an amendment to the loan agreement and covenants with the bank to cover periods
beyond June 30, 1996. The Company is currently in compliance with all loan
covenants.
Future principal payments to be made over the next five years based on the
amount outstanding at June 30, 1996 are as follows:
Year Amount
---- ----------
1997 $41,695
1998 44,899
1999 48,504
2000 52,273
Thereafter 1,114,461
Total $1,301,832
NOTE J. ANNUITY AND CONTRACTUAL OBLIGATIONS.
On February 6, 1989, the Company entered into an agreement with Clark
Aylsworth ("Aylsworth") related to his retirement on December 31, 1988. This
agreement provided for the payment to Aylsworth of a monthly annuity of $1,500
for the remainder of his life or his wife's life, if he predeceases her. The
Company has recorded an obligation related to this agreement.
On December 30, 1990, the Company entered into a
non-compete/non-interference agreement, an executory contract, pursuant to which
it pays the Aylsworths $4,500 monthly, such amount to continue for the longer of
Aylsworth's or his wife's life. The Company determined that the executory
contract should be expensed as payments are made. The Company placed $360,000 in
escrow to cover the Company's obligation to the Aylsworths if the Company
defaults. The escrowed amount decreases $15,000 annually and amounted to
$300,000 at June 30, 1996.
U.S. GLOBAL INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE K. SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE.
As discussed in Note F, USGI financed the acquisition of the Notes by
entering into agreements to repurchase securities with third party
broker-dealers. The terms with the broker-dealers provide that the reverse
agreements must be collateralized by the Notes and/or cash. The Notes described
in Note F are held by the broker-dealers as collateral. Throughout fiscal 1995
and 1996, and as of September 1996, each reverse repurchase agreement has
matured and has been renewed on a 30-, 60-, or 90-day basis. Management believes
that the reverse repurchase agreements can be periodically renewed until the
Notes mature.
All reverse repurchase agreements are with major broker-dealers and are
secured by U.S. Government Agency obligations. Information on the reverse
repurchase agreements as of June 30, 1996 is as follows:
Matures
Greater than
30 days
------------
Carrying Amount (Fair Value): $26,324,125
Accrued Interest Receivable on Collateral: 95,847
Repurchase Liability (interest rate of 5.80%): 26,404,375
NOTE L. BENEFIT PLANS.
The Company and its subsidiaries have a contributory profit-sharing plan in
which all qualified employees who have completed one year of employment with the
Company are included. The amount of the annual contribution, which may not
exceed 15% of earnings before income taxes, is determined by the Company's Board
of Directors. At June 30, 1996, the Company has accrued $60,000 for fiscal 1996.
The Company and its subsidiaries also have a savings and investment plan
qualified under Section 401(k) of the Internal Revenue Code. The Company makes
contributions on behalf of eligible employees to fund this plan. In connection
with this 401(k) Plan, participants can voluntarily contribute up to 15% of
their compensation to this plan, and the Company will match their contribution
up to 2%. At June 30, 1996, the Company has accrued $50,000 for this matching
contribution.
Additionally, effective February 1, 1993, the Company began self-funding
its employee health care plan. The Company has obtained reinsurance with both a
specific and an aggregate stop-loss in the event of catastrophic claims. At June
30, 1996, the Company has accrued an amount representing the Company's estimate
of incurred but not reported claims.
NOTE M. SUBORDINATED DEBENTURE.
In conjunction with the purchase of the Notes described in Note F, USGI
issued a $6 million 8% subordinated debenture to ML, the terms of which require
principal payments as the Notes mature and quarterly interest payments. The
terms of the debenture were modified in December 1995, requiring monthly
principal payments in the amount of $50,000. In addition, the conversion feature
was terminated. During the course of the 1996 fiscal year the Company made
principal payments of approximately $2,700,000 to ML upon the sale of certain
par value Notes (Note F). The Company also made additional principal payments of
$300,000 during the fiscal year. The balance on the debenture was $1,533,131 at
June 30, 1996, the entirety of which will be payable in fiscal 1997.
NOTE N. SHAREHOLDERS' EQUITY.
During June of 1996 the Company reclassified its Class A Common Stock as
Class C Common Stock and reclassified its Preferred Stock as Class A Common
Stock with no change in existing rights, privileges, or preferences of each
respective class. Class B Common Stock remains unchanged. The descriptions in
this note have been changed to reflect these reclassifications.
U.S. GLOBAL INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
In a private placement on October 27, 1989, Frank E. Holmes and the F.E.
Holmes Organization, Inc. acquired control of the Company by purchasing for
$2,200,000, 550,000 shares of the Company's Class C common stock and warrants to
acquire an additional 550,000 shares of Class C common stock at $4.00 per share.
These warrants include a provision for adjustment to the number of warrants and
exercise price in the event additional securities are issued at an amount below
the exercise price of such outstanding warrants. At June 30, 1994, there were
outstanding Class C common stock warrants to purchase 586,122 shares at $3.75
per share expiring October 1994. Effective August 11, 1994 such warrants were
canceled and new agreements were approved providing for warrants to acquire
586,122 shares of common stock at the August 11, 1994 market price of $4.00 per
share expiring October 1999. These warrants were outstanding as of June 30,
1996.
In December 1991, the Company issued to Mr. Holmes options to purchase
400,000 shares of Class C common stock at $2.625 per share which equaled or
exceeded the fair value of the stock on the date of grant. During fiscal 1992,
the Board of Directors approved the issuance of 100,000 shares of Preferred
stock (now Class A common stock) to F.E. Holmes Organization, Inc. in exchange
for 100,000 shares of its class C common stock. Mr. Holmes now owns
approximately 68.27% of the outstanding shares of the Company's Class C common
stock, which is the only class of the Company's stock having voting rights.
In March 1985, the Board of Directors adopted an Incentive Stock Option
Plan (the "1985 Plan"), amended in November 1989 and December 1991, which
provides for the granting of options to purchase 200,000 shares of the Company's
Class A common stock, at or above fair market value, to certain executives and
key salaried employees of the Company and its subsidiaries. Options under the
1985 Plan may be granted for a term of up to five years in the case of employees
who own in excess of 10% of the total combined voting power of all classes of
the Company's stock and up to ten years for other employees. During the 1991
fiscal year, options covering 150,000 shares of Class A common stock were
granted at prices ranging from $1.50 to $1.65. During the fiscal year 1994,
options covering 10,500 shares were granted at an exercise price of $4.25 per
share and during fiscal year 1995, options covering 42,500 shares were granted
at an exercise price of $2.625 per share. As of June 30, 1996, options covering
79,000 shares have been exercised and options covering 5,000 shares have
expired. The 1985 plan expired December 31, 1994; as a consequence, there will
be no further option grants under the 1985 plan.
In November 1989, the Board of Directors adopted the 1989 Non-Qualified
Stock Option Plan (the "1989 Plan"), amended in December 1991, which provides
for the granting of options to purchase 800,000 shares of the Company's Class A
common stock to directors, officers and employees of the Company and its
subsidiaries. Since adoption of the 1989 Plan, options for 800,000 shares 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 the fiscal year 1993,
options covering 5,000 shares were granted at an exercise price of $3.00. During
the fiscal year 1994, options covering 22,000 shares were granted at exercise
prices ranging from $4.75 to $5.69 per share. During the fiscal year 1995
options covering 7,000 shares were granted at exercise prices ranging from
$2.625 to $3.375 per share. During fiscal 1996 options covering 44,700 shares
were granted at exercise prices ranging from $2.1875 to $2.625 per share. As of
June 30, 1996, options covering 393,000 shares have been exercised under this
plan and options covering 30,400 shares have expired.
Class A common stock options outstanding as of June 30, 1996 under the 1989
Plan are as follows:
Date of Option Number
Grant Price Outstanding
----- ----- -----------
11/07/89 $1.50 -0-
11/13/89 $2.25 95,000
12/06/91 $2.625 229,600
9/24/92 $3.00 5,000
2/16/94 $5.69 20,000
5/16/94 $4.75 2,000
12/15/94 $2.625 -0-
2/24/95 $3.375 5,000
9/15/95 $2.625 19,000
11/7/95 $2.1875 5,700
5/24/96 $3.06 20,000
--------
401,300
U.S. GLOBAL INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
On a per share basis, the holders of the Class C common stock and the
non-voting Class A stock participate equally in dividends as declared by the
Company's Board of Directors, with the exception that any dividends declared
must first be paid to the holders of the Class A stock to the extent of 5% of
the Company's after-tax prior year net earnings.
The holders of the Class A stock have a liquidation preference equal to the
par value of $.05 per share. Certain Class C common stock is exchangeable on a
one-for-one basis for Class A stock.
During the fiscal year ended June 30, 1996, the Company purchased 175,475
shares of its Class A common stock on the open market at an average price of
$2.78 per share.
At the end of September 1994, the Company and ML entered into a letter of
intent pursuant to which ML would purchase a significant ownership interest in
the Company. On December 7, 1994, the Company and ML entered into an agreement
whereby the Company issued to ML one million shares of new class of convertible
non-voting common stock (Class B) at $5.00 per share and warrant to purchase an
additional one million shares of capital stock at $6.00 per share in
consideration of an investment of $5 million.
On August 3, 1995, USGI shareholders approved an amendment to the Company's
Restated Articles of Incorporation providing for an increase in the number of
shares of Class A that the Company is authorized to issue by one million shares.
ML could only convert its Class B shares to Class C shares after mutual
fund shareholders approve continuation of the investment advisory agreements
with the Company because the agreements contain a statutory contractual
provision providing for automatic termination upon an assignment of the
investment advisory agreement. Such conversion would be deemed a change in
control and, thereby, an assignment of the contract.
As part of the transaction, Mr. Frank E. Holmes, Chairman, President and
CEO of the Company, exchanged 72,720 shares of the Company Class C common Stock
for 164,347 shares of ML common stock. In addition, subject to certain
conditions, including obtaining mutual fund shareholder approvals in the future,
Mr. Holmes would exchange an additional 177,280 Class C common shares for
400,653 shares of ML, and ML would convert its Class B shares to Class C shares,
whereupon ML would own more that 50% of the issued and outstanding voting shares
of the Company, and Mr. Holmes would then own approximately 3% of the total
outstanding common shares of ML.
USGI and ML closed a transaction on December 29, 1995 covering the issuance
of Class A stock and the repurchase of convertible non-voting Class B common
stock and closely related items as discussed below. Pursuant to the agreement:
(1) ML no longer has a right to return its one million shares of Class B common
stock to the Company at its original purchase price of $5,000,000; (2) in this
connection, the Company eliminated any future interest costs it might have borne
had ML converted its investment to debt; and, (3) the Company canceled ML's
warrant and options to acquire additional shares thus reducing future dilution
by approximately 1.65 million shares.
In connection with the December 1995 transaction, ML received $2,500,000
cash and 1,000,000 shares of Class A stock in exchange for USGI canceling (a)
ML's 1,000,000 shares of USGI's Class B common shares, (b) a warrant giving ML
the right to acquire 1,000,000 shares of USGI's voting Class C common stock or
Class A common stock, (c) ML's option to convert the remaining balance of its
subordinated debenture into approximately 648,000 shares of USGI's preferred
stock, and (d) other rights under the December 1994 agreements relating to ML's
original purchase, including its right to obtain voting control of USGI.
U.S. GLOBAL INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
As a result of the December 1995 transaction: (1) Messrs. Hubert Marleau
and Richard Renaud, ML's representatives, resigned from USGI's Board of
Directors and Frank E. Holmes, USGI's Chief Executive Officer, resigned from
ML's Board of Directors; (2) USGI committed to prepay $50,000 per month toward
the principal balance outstanding on the debenture held by ML in accordance with
the prepayment clause set forth in the USGI-ML Subordinated Debenture Agreement
("Debenture"); (3) The Debenture was amended to provide that in the event that
voting control of USGI changes, the balance owing ML under the Debenture shall
become due and payable prior to closing on the change in control and the
registration statement covering ML's 1,000,000 shares of preferred stock shall
be declared effective by the SEC prior to said closing; (4) ML transferred the
assets and the management contract(s) of ML's Small Cap Fund ("Small Cap") from
ML to USACI with all revenues generated by Small Cap, effective January 1, 1996,
whether the assets and management contracts have been transferred or not,
becoming the revenue of USACI; (5) USGI agreed to bear up to the next Cdn
$250,000 in costs with respect to USACI; and (6) the requirement that Mr. Holmes
exchange 177,280 shares of USGI's Class C common stock for 400,633 shares of ML
(133,551 consolidated shares based upon 1 new for 3 old) was canceled in its
entirety; with the understanding, however, that the 72,720 Class C common shares
held by ML and the ML shares held by Mr. Holmes are not subject to this
cancellation.
As discussed in Note P, certain changes in the Company's ownership may
trigger a limitation on the amount of net operating losses ("NOLs") that could
be utilized under Section 382 of the Internal Revenue Code. The Company reviewed
Section 382 and determined that no change in control/ownership existed upon
issuance of the shares and warrants to ML therefore not triggering a Section 382
limitation on the Company's NOLs.
NOTE O. RELATED PARTY TRANSACTIONS.
In addition to the Company's receivable from USF relating to investment
management, transfer agent and other fees (see Note D), the Company had $596,605
and $2,673,156 invested in USF money market mutual funds at June 30, 1996 and
1995, respectively. Dividend income earned from these investments in USF totaled
$113,904, $132,881 and $47,739 for the years ended June 30, 1996, 1995 and 1994
respectively.
TRANSACTIONS WITH ML
During fiscal 1996, USGI and ML closed a transaction covering the issuance
of Class A common stock (see Note N).
During the year ended June 30, 1996, USGI purchased 7,100 shares of ML
common stock through USGI's brokerage account at Marleau, Lemire Securities Inc.
("MLSI"), a subsidiary of ML, increasing USGI's position to 42,219 shares. Prior
to year end, USGI sold its entire position of ML common shares.
During fiscal 1996, the Company purchased 175 put options on Eurodollar
futures ("Options") for premiums of $73,938 through Marleau, Lemire Futures
which is a division of MLSI. Options were exchange traded and required no cash
requirements other than the initial premiums paid. All Options were sold/expired
during fiscal 1996 resulting in realized losses of approximately $50,000. In
addition, the Company purchased other securities at an aggregate price of
$269,847 through MLSI from July 1995 through December 1995.
At various intervals during fiscal 1995, the Company purchased 700 put
options on Eurodollar futures for premiums of $165,375 through Marleau, Lemire
Futures. The Company also purchased securities which MLSI was either the agent
or underwriter of the share offering at a cost of $199,609. Additionally, the
Company purchased a security for $110,685 for which Griffiths McBurney &
Partners acted as Agent. Eugene McBurney, a director of USGI from December 1994
to July 1995, is a partner in Griffiths McBurney & Partners.
During fiscal 1996, pursuant to agreements with ML (Note N), USGI filed a
post-effective amendment to the Registration Statement on Form S-3 covering ML's
offering of 120,000 shares of USGI stock filed in fiscal 1995 and a Registration
Statement on Form S-3 covering ML's offering of 1,000,000 shares of USGI stock,
which offerings were completed during fiscal 1996. USGI incurred approximately
$21,000 in fiscal 1996 in costs associated with these offerings.
Further, during this period, ML sold 18,225 shares of Class A common stock
to STFC at the direction of the beneficial owners of various STFC custodial
retirement accounts, and 6,775 shares for $17,784 to USGI, which shares are
included in treasury stock as of June 30, 1996.
U.S. GLOBAL INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
As of June 30, 1996, USGI has accrued approximately $70,000 in subordinated
debenture interest payable to ML. Additionally, in connection with the sale of
the Notes discussed in Note F, USGI repaid approximately $2,700,000 in principal
on the subordinated debenture during the year ending June 30, 1996. USGI has
also paid an additional $300,000 in principal payments on the subordinated
debenture during the year ended June 30, 1996.
OTHER TRANSACTIONS
During fiscal 1996, Mr. Jerold Rubinstein, a Director of the Company,
exercised options covering 25,000 shares at $1.50 per share and 25,000 shares at
$2.25 per share. USGI purchased the shares issued from the exercise of Mr.
Rubinstein's stock options for $3.375 per share, the market price on the day of
exercise, which shares are included in treasury stock as of June 30, 1996.
Additionally, during fiscal 1996, Mr. John Budden, a former Director of the
Company who resigned during the fiscal 1996, exercised options covering 25,000
shares at $1.50 per share, 25,000 shares at $2.25 per share and 40,000 shares at
$2.625 per share.
There were additional related party transactions involving ML related to a
joint venture to market mutual funds in Canada (see Note H) and the purchase of
U.S. Government securities (see Note F).
NOTE P. INCOME TAXES.
As discussed in Note B, in fiscal 1994 the Company adopted SFAS 109, which
changed the method of accounting for income taxes.
The differences in income taxes attributable to continuing operations
determined by applying the U.S. federal statutory rate of 34% and the Company's
effective tax rate are summarized as follows:
Year Ended June 30,
-------------------------------------
1996 1995 1994
----------- ------------ ----------
Tax expense at statutory rate $1,020,198 $(2,004,592) $ 262,132
Exercise of non-qualified stock
options treated as equity for
financial statements (61,487) (59,885) (191,186)
Non-deductible membership dues 14,112 13,825 6,686
Non-deductible meals & entertainment 23,090 17,668 6,093
Utilization of valuation allowance --- --- (249,042)
Other 17,604 50,140 (13,348)
----------- ------------ -----------
$1,013,517 $(1,982,844) ($178,665)
========== ============ ==========
U.S. GLOBAL INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Deferred income taxes for fiscal 1996, 1995 and 1994, after adoption of
SFAS 109, reflect the net tax effects of temporary differences between the
carrying amount of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. The tax effects of these temporary
differences that give rise to the deferred tax asset as of June 30, 1994, June
30, 1995, and June 30, 1996 are presented below:
June 30, June 30, June 30,
1996 1995 1994
-------- -------- --------
Book/tax differences in the balance sheet:
Trading securities $ -- $ 33,995 --
Marketable securities -- -- $ 40,642
Accumulated depreciation 108,744 106,100 82,105
Accrued expenses 14,800 29,776 20,160
Reduction in carrying value of joint venture 210,630 -- --
Annuity obligations 57,236 59,272 61,170
Net unrealized holding gain (affiliated) 76,823 -- --
Net unrealized holding gain 294,993 120,914 --
----------- ----------- --------
763,226 350,057 204,077
Tax carryovers:
NOL carryover 957,154 2,044,251 102,778
Contributions carryover 66,459 44,635 18,829
Investment credit carryover 34,472 34,472 37,615
Minimum tax credits 117,786 56,786 63,144
----------- ----------- --------
1,175,871 2,180,144 222,366
----------- ----------- --------
Total gross deferred tax asset 1,939,097 2,530,201 426,443
----------- ----------- --------
Affiliated Investment (153,032) -- --
Trading Securities (34,302) -- --
Available-for-sale securities (294,993) (120,914) --
----------- ----------- --------
Total gross deferred tax liability (482,327) (120,914) --
----------- ----------- --------
Net deferred tax asset $ 1,456,770 $ 2,409,287 $426,443
=========== =========== ========
For federal income tax purposes at June 30, 1996, the Company has NOLs of
approximately $2,800,000 which will expire in fiscal 2010, charitable
contribution carryovers of approximately $195,000 expiring 1998-2000, investment
credits of $34,427 expiring in 1998 and minimum tax credits of $117,786 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 believes
that taxable income during the carry forward periods will be sufficient to
utilize the NOLs which give rise to the deferred tax asset.
NOTE Q. LITIGATION ACCRUAL.
On June 17, 1994, Gerald C. Letch sued the Company in state district court
located in San Antonio, Texas for breach of contract. Mr. Letch asked for an
unspecified amount of damages based upon an alleged oral promise by a deceased
Company officer to pay a finder's fee for introducing certain parties to the
Company leading to the organization of Pauze/Swanson United Services Funds
("PSUSF"). During August 1994 Mr. Letch amended his complaint to include PSUSF
and allegations of fraud and conspiracy between USGI and PSUSF. During June 1995
a summary judgment was rendered in favor of PSUSF, which did not exist at the
time the alleged cause of action arose.
On November 21, 1995, a judgment was entered in favor of Letch. While the
jury verdict found that there was no fraud, conspiracy or malice, the jury did
find that: (1) the Company had an oral agreement to pay Letch a fee equal to 1%
of assets existing in the particular fund after it had been in existence for one
year; (2) $187,000 is the amount of damages due Letch for breach of the oral
agreement (plus an additional $16,137 for prejudgment interest); and (3) that
Letch is entitled to 50% of said damages ($93,500) as reasonable attorney's
fees. Total damages therefore aggregate $296,637.
The Company is currently pursuing an appeal--the Company has posted a bond
in connection with perfecting the appeal. The bond is secured by a letter of
credit in the amount of $333,169, which, in turn, is secured by restricted cash
of $333,169. The Company has no balance outstanding on this letter of credit and
has no plans to draw upon it at any time in the future as the letter of credit
was obtained solely to perfect the appeal.
The Company accrued approximately $100,000 (management's best estimate of
the fees and expenses necessary to fund an appeal) and $300,000 (the approximate
amount of the judgment) which were both recorded in the Company's Consolidated
Statement of Operations in fiscal 1996. The remaining balances at June 30, 1996
are $70,000 and $300,000, respectively.
Through June 1996, legal fees and expenses to defend this action were in
excess of $220,000, a significant portion of which was incurred during fiscal
year 1995. Of this amount, approximately $56,000 was reimbursed to USGI in
fiscal 1996 by a co-defendant for the allocable portion of legal representation
fees paid by USGI on behalf of the co-defendant.