U.S. Global Investors, Inc.
Annual Report on Form 10-K 1998 Page 20
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EXHIBIT 13 -- ANNUAL REPORT
TABLE OF CONTENTS
FOR FIELD POSITIONS
Page
THE COMPANY...................................................................21
Investment Management Services...........................................21
Transfer Agent And Other Services........................................22
Brokerage Services.......................................................23
Mailing Services.........................................................23
Trust Company Services...................................................23
Employees................................................................24
Competition..............................................................24
Supervision and Regulation...............................................24
Relationships with the Funds.............................................25
ANNUAL STATUS REPORT..........................................................26
Preparing for the Future.................................................26
Results of Operations....................................................27
Net Income...............................................................28
Investment Activities....................................................29
Market Risk Disclosures..................................................29
Revenues.................................................................30
Government Securities....................................................30
Expenses.................................................................30
Liquidity and Capital Resources..........................................31
Liquidity............................................................31
Tax Loss Carryforwards...............................................31
Settlement Pool......................................................32
Litigation Accrual...................................................32
U.S. Global Brokerage, Inc...........................................32
Impact of the Year 2000 Issue........................................32
Conclusion...............................................................32
New Accounting Pronouncements............................................33
SELECTED FINANCIAL DATA.......................................................34
FINANCIAL STATEMENTS..........................................................35
Report of Independent Accountants........................................35
Report of Independent Accountants........................................36
Auditors' Report to the Members of U.S. Global Investors
(Guernsey) Limited..................................................37
Auditors' Report to the Shareholders of U.S. Global Strategies
Fund Limited.......................................................38
Consolidated Balance Sheets..............................................39
Consolidated Statements of Operations....................................41
Consolidated Statements of Cash Flow.....................................42
Consolidated Statements of Shareholders Equity...........................44
Notes to Consolidated Financial Statements...............................45
U.S. Global Investors, Inc.
Annual Report on Form 10-K 1998 Page 21
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THE COMPANY
U.S. Global Investors, Inc., a Texas corporation organized in 1968 (the
"Company" or "U.S. Global"), 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; (4) through its wholly owned
trust company, custodial and administrative services for IRAs and other types of
retirement plans; and (5) through its wholly owned broker/dealer, distribution
services to mutual funds advised by the Company. The provision of investment
advisory, transfer agent, fund distribution, administrative and custodial
services and investment income are the primary sources of the Company's revenue.
(See Consolidated Statements of Operations included in this Annual Report.)
The Company is a registered investment adviser under the Investment Advisers Act
of 1940 and is principally engaged in the business of providing investment
advisory and other services to U.S. Global Investors Funds ("USGIF") and U.S.
Global Accolade Funds ("USGAF"), both Massachusetts business trusts
(collectively, the "Trusts" or "Funds"). USGIF and USGAF are investment
companies offering shares of eleven and four mutual funds, respectively, on a
no-load basis.
The Company organized U.S. Global Investors (Guernsey) Limited ("USGG") in
August 1993 for the purpose of acting as investment adviser for investment
companies whose shares are offered to non-U.S. citizens. USGG has delegated its
administrative duties to Butterfield Fund Managers (Guernsey) Limited and its
investment advisory duties to U.S.
Global.
U.S. Global has formed a company that was originally incorporated in Texas in
1994. This company, U.S. Global Brokerage, Inc. ("USGB"), is now registered as a
broker/dealer with the National Association of Securities Dealers, Inc. ("NASD")
and the appropriate state regulatory agencies in order to provide distribution
services to the Company's mutual fund clients, USGIF and USGAF.
In addition to providing mutual fund management services to its clients, the
Company utilizes a diversified venture capital approach in trading for its own
account in an effort to add growth and value to its cash position. Typical
investments include, among other things, early stage or start-up businesses
seeking initial financing as well as more mature businesses in need of capital
for expansion, acquisitions, management buyouts, or recapitalizations. In
addition, the Company may utilize investment techniques such as "private
placement arbitrage," which technique involves the contemporaneous purchase of a
quantity of an issuer's securities at a discount in a private placement and a
short sale of the same, or substantially the same, security in the public
market. The activities are reviewed by Company compliance personnel and reported
to investment advisory clients.
INVESTMENT MANAGEMENT SERVICES
The Company furnishes an investment program for each of the mutual funds it
manages and determines, subject to the overall supervision by the board of
trustees of the funds, the funds' investments pursuant to pursuant to advisory
agreements (the "Advisory Agreements"). 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 and clerical 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, to the extent not otherwise covered by any fund distribution plans
adopted pursuant to Investment Company Act Rule 12b-1 ("12b-1 Plan").
U.S. Global Investors, Inc.
Annual Report on Form 10-K 1998 Page 22
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As required by the Investment Company Act of 1940, the Advisory Agreements are
subject to annual renewal and are terminable upon 60-day notice. The board of
trustees of USGIF and of USGAF will consider renewal of the applicable
agreements in January and March 1999, 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 were:
1998 1997 1996 1995 1994
-------------- ------------ ------------ ------------- -------------
USGIF Money Market $932,246 $923,704 $777,252 $719,745 $774,937
USGIF Gold Related 179,768 297,267 427,155 414,096 488,266
USGIF Other 104,375 116,791 84,245 87,179 99,941
-------------- ------------ ------------ ------------- -------------
USGIF Total 1,216,389 1,337,762 1,288,652 1,221,020 1,363,144
USGAF Total 143,533 127,851 86,302 13,842 --
-------------- ------------ ------------ ------------- -------------
Total Assets Under $1,359,922 $1,465,613 $1,374,954 $1,234,862 $1,363,144
Management ============== ============ ============ ============= ==============
Under the Advisory Agreements, the Company receives an advisory fee for each
mutual fund computed and accrued daily based upon the net assets represented by
the particular fund on that day. The fees range from 0.375 percent to 1.25
percent of average net assets and are paid monthly.
As is set forth in detail in Note C to the Consolidated Financial Statements
included in this Annual Report, the Company has agreed to waive its fee revenues
and/or pay expenses for certain USGIF funds for purposes of enhancing the funds'
competitive market positions.
Investment advisory and administration fees (net of expenses paid by the Company
or voluntary waivers) for the past five fiscal years were approximately:
1998 1997 1996 1995 1994
-------------- ------------ ------------ ------------- -------------
USGIF Money Market $ 929,000 $ 826,000 $ 835,000 $ 895,000 $ 760,000
USGIF Gold Related 2,431,000 3,835,000 4,185,000 4,089,000 4,006,000
USGIF Other 790,000 656,000 475,000 485,000 361,000
-------------- ------------ ------------ ------------- -------------
USGIF Total 4,150,000 5,317,000 5,495,000 5,469,000 5,127,000
USGAF Total 1,461,000 1,072,000 409,000 13,000 --
-------------- ------------ ------------ ------------- -------------
Total $5,611,000 $6,389,000 $ 5,904,000 $5,482,000 $5,127,000
============== ============ ============= ============= ==============
TRANSFER AGENT AND OTHER SERVICES
The Company's wholly owned subsidiary, United Shareholder Services, Inc.
("USSI"), is a transfer agent registered under the Securities Exchange Act of
1934, and provides transfer agency, lockbox and printing services to investment
company clients. The transfer agency utilizes a third-party external system
providing the Company's fund shareholder communication network with computer
equipment and software designed to meet the operating requirements of a mutual
fund transfer agency.
U.S. Global Investors, Inc.
Annual Report on Form 10-K 1998 Page 23
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The transfer agency's duties encompass: (1) acting as servicing agent in
connection with dividend and distribution functions; (2) performing shareholder
account and administrative agent functions in connection with the issuance,
transfer and redemption or repurchase of shares; (3) maintaining such records as
are necessary to document transactions in the funds' shares; (4) acting as
servicing agent in connection with mailing of shareholder communications,
including reports to shareholders, dividend and distribution notices, and proxy
materials for shareholder meetings; and (5) investigating and answering all
shareholder account inquiries.
The transfer agency agreements provide that USSI will receive, as compensation
for services rendered as transfer agent, an annual fee per account, and will be
reimbursed out-of-pocket expenses. In connection with obtaining/providing
administrative services to the beneficial owners of fund shares through
institutions which provide such services and maintain an omnibus account with
USSI, each fund pays a monthly fee based on the number of accounts and the value
of the shares of the fund held in accounts at the institution which payment
shall not exceed the per account charge on an annual basis.
The number of shareholder accounts at fiscal year end were 117,363; 120,900;
120,477; 126,199; and 129,370 in 1998, 1997, 1996, 1995, and 1994, respectively.
For the five fiscal years ended June 30, 1998, 1997, 1996, 1995, and 1994, total
transfer agency fees (net of waivers) were approximately $3.3, $3.3, $3.3, $3.2,
and $3.0 million, respectively.
The transfer agency agreements with USGIF and USGAF are subject to renewal on an
annual basis and are terminable upon 60-day notice. The agreements will be
considered by the boards of trustees of USGIF and of USGAF for renewal during
January and March 1999, respectively, and management anticipates that the
agreements will be renewed.
USSI formerly maintained the books and records of each trust and of each fund of
each trust, including calculations of the daily net asset value per share. In
1997, the Company decided to outsource such services to Brown Brothers Harriman
& Co. ("BBH"). The conversion to BBH was completed during the second quarter of
fiscal year 1998. The Company will forego accounting fees associated with this
function, but has experienced direct cost reductions for personnel and
equipment. For the five years ended June 30, 1998, 1997, 1996, 1995, and 1994,
bookkeeping and accounting fees net of waivers were approximately $400,000;
$731,000; $524,000; $420,000; and $388,000, respectively.
BROKERAGE SERVICES
The Company has registered its wholly owned subsidiary, U.S. Global Brokerage,
Inc. ("USGB"), with the NASD, the Securities and Exchange Commission ("SEC") and
appropriate state regulatory authorities as a limited-purpose broker/dealer for
the purpose of distributing USGIF and USGAF fund shares. Effective September 3,
1998, USGB is the distributor for USGIF and USGAF fund shares. To date, the
Company has capitalized USGB with approximately $79,000 to cover the costs
associated with this registration.
MAILING SERVICES
A&B Mailers, Inc., a wholly owned subsidiary of the Company, provides mail
handling services to various persons. A&B Mailers' primary customers include the
Company in connection with its efforts to promote the funds and the Company's
investment company clients in connection with required mailings. Each service is
priced separately. For the five years ended June 30, 1998, 1997, 1996, 1995, and
1994, A&B Mailers' revenues, after intercompany eliminating entries, were
approximately $306,000; $282,000; $231,000; $170,000; and $185,000,
respectively.
TRUST COMPANY SERVICES
Security Trust and Financial Company ("STFC"), a wholly owned state chartered
trust company, provides custodial services for IRA and other retirement plans
funded with shares issued by the funds advised and administered by the Company.
STFC also actively markets 401(k) and other retirement plans. The custodial fees
are generally paid to STFC
U.S. Global Investors, Inc.
Annual Report on Form 10-K 1998 Page 24
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at year-end upon separate invoice to the customer, not the fund. For the five
years ended June 30, 1998, 1997, 1996, 1995, and 1994, custodial fee revenues
were approximately $441,000; $530,000; $545,000; $503,000; and $363,000,
respectively.
EMPLOYEES
As of June 30, 1998, the Company and its subsidiaries employed 81 full-time
employees and 8 part-time employees; as of June 30, 1997, it employed 91
full-time employees and 8 part-time employees. The Company considers its
relationship with its employees to be excellent. Because of the outsourcing
discussed in the Annual Status Report, a portion of the employees providing
those services were terminated.
COMPETITION
The mutual fund industry is highly competitive. As of June 30, 1998, there were
approximately 9,000 registered open-end management investment companies of
varying sizes and investment policies whose shares were being offered to the
public. Generally, there are two types of mutual funds: "load" and "no-load." In
addition there are both no-load and load funds which have adopted plans
authorizing the payment of distribution costs of the funds out of fund assets
("12b-1" plans), such as USGAF. Load funds are typically sold through or
sponsored by brokerage firms, and a sales commission is charged on the amount of
the investment. No-load funds, such as USGIF's and USGAF's, however, may be
purchased directly from the particular mutual fund organization or through a
distributor, and no sales commissions are charged.
In addition to competition from other mutual fund managers and investment
advisers, the Company and the mutual fund industry are in competition with
various investment alternatives offered by insurance companies, banks,
securities dealers and other financial institutions. Many of these institutions
are able to engage in more liberal advertising than mutual funds and may offer
accounts at competitive interest rates, which are insured by federally chartered
corporations such as the Federal Deposit Insurance Corporation. Recent
regulatory pronouncements related to the Glass-Steagall Act, the statute that
has prohibited banks from engaging in various securities activities, are
enabling banks to compete with the Company in a variety of areas.
A number of mutual fund groups are significantly larger than the funds managed
by 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. Sales of fund shares generate management fees (which are
based on assets of the funds) and transfer agent fees (which are based on the
number of fund accounts). Good performance also attracts private institutional
accounts to the Company. Conversely, relatively poor performance results in
decreased sales and increased redemptions of the funds' shares and the loss of
private accounts, with corresponding decreases in revenues to the Company.
SUPERVISION AND REGULATION
The Company, USSI, USGB and the investment companies it manages and administers
operate under certain laws, including federal and state securities laws,
governing their organization, registration, operation, legal, financial and tax
status. STFC operates under certain laws, including Texas banking laws,
governing its organization, registration, operation, legal, financial and tax
status. Among the penalties for violation of the laws and regulations applicable
to the Company and its subsidiaries are fines, imprisonment, injunctions,
revocation of registration and certain additional
U.S. Global Investors, Inc.
Annual Report on Form 10-K 1998 Page 25
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administrative sanctions. Any determination that the Company or its management
had violated applicable laws and regulations could have a material adverse
effect on the business of the Company. Moreover, there is no assurance that
changes to existing laws, regulations or rulings promulgated by governmental
entities having jurisdiction over the Company and the funds will not have a
material adverse effect on the business of the Company.
The Company is a registered investment adviser subject to regulation by the SEC
pursuant to the Investment Advisers Act of 1940, the Investment Company Act of
1940 and the Securities Exchange Act of 1934 (the "1934 Act"). USSI is also
subject to regulation by the SEC under the 1934 Act. USGB is subject to
regulation by the SEC under the 1934 Act and regulation by the NASD, a
self-regulatory organization composed of other registered broker/dealers. The
Company, USSI and USGB are required to keep and maintain certain reports and
records which must be made available to the SEC upon request. Moreover, the
funds managed by the Company are subject to regulation and periodic reporting
under the Investment Company Act of 1940 and, with respect to their continuous
public offering of shares, the registration provisions of the Securities Act of
1933.
RELATIONSHIPS WITH THE FUNDS
The businesses of the Company are to a very significant degree dependent upon
their associations and contractual relationships with the Trusts. In the event
the advisory or transfer agent services agreements with USGIF or USGAF were
canceled or not renewed pursuant to the terms thereof, the Company would be
substantially adversely affected. The Company, USSI and STFC consider their
relationships with the Trusts to be good and they have no reason to believe that
their management and service contracts will not be renewed in the future;
however, there is no assurance that the Trusts will choose to continue their
relationships with the Company, USSI, and STFC.
U.S. Global Investors, Inc.
Annual Report on Form 10-K 1998 Page 26
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ANNUAL STATUS REPORT
PREPARING FOR THE FUTURE
During fiscal year 1998, U.S. Global Investors, Inc. (the "Company") focused on
its goals of improving fund performance, expanding distribution channels, and
streamlining Company operations. The Company derives its revenues from managing
and servicing mutual funds. While the Company's servicing revenues remained
level during fiscal year 1998, its investment management fees declined as a
result of the worldwide global deflationary pressure on certain commodity
prices. For example, gold fell to 18-year lows in January 1998; in June 1998,
crude oil prices traded at $12.44, the lowest since October of 1988. While these
adverse conditions have had a negative impact on the Company's bottom-line, we
believe the Company is in an excellent position to capture market share and
benefit when these markets turn.
[GRAPHIC: Linear graph plotted from data in table below]
MICRO-CAP 50 INDEX GROW
------------------ -------------------
30-Jun-97 0.0% 0% 727.97 2
31-Jul-97 -0.3% 19% 725.79 2.375
29-Aug-97 11.5% 22% 811.89 2.438
30-Sep-97 25.8% 9% 915.79 2.188
31-Oct-97 26.6% 9% 921.27 2.188
28-Nov-97 14.5% 13% 833.5 2.25
31-Dec-97 -0.3% -6% 725.52 1.875
30-Jan-98 4.4% 0% 759.87 2
27-Feb-98 3.0% 19% 749.83 2.375
31-Mar-98 7.9% 31% 785.36 2.625
30-Apr-98 11.3% 28% 810.25 2.563
29-May-98 6.9% 13% 778.14 2.25
30-Jun-98 -0.1% 0% 727.12 2
Source: Bloomberg
The Company's stock price started and ended fiscal year 1998 at approximately $2
per share. As illustrated in the graph, fluctuations in the Company's stock
price throughout fiscal year 1998 tended to correlate with other micro-cap
companies (companies with market capitalization from $5 million to $50 million).
The small and micro-cap stocks have suffered, in part, due to institutional
investors favoring the liquidity of large cap issues in response to overall
market volatility.
In addition to the Company's stock trending with the micro-cap sector, the
Company's stock price historically has followed that of gold stock companies.
This correlation is due to the volatility and high margins of gold. As the
Company's high margin gold products subject it to overall movements in the gold
markets, the Company's stock has traded along a similar trend to that of other
gold-related companies. The following graph illustrates the correlation between
the Company's stock price and that of the Financial Times (FT) Gold Mine Index.
[GRAPHIC: Linear graph plotted from data in table below]
FT GOLD INDEX GROW FT GOLD INDEX GROW
------------- ----- -------------------
30-Jun-95 1927.52 2.875 0 0
7-Jul-95 1999.02 2.688 0.0370943 -0.06504
14-Jul-95 2046.34 2.625 0.06164398 -0.08696
21-Jul-95 1993.59 2.75 0.03427721 -0.04348
28-Jul-95 1956.87 2.625 0.01522682 -0.08696
4-Aug-95 2014.14 2.5 0.04493857 -0.13043
11-Aug-95 1992.09 2.563 0.033499 -0.10852
18-Aug-95 2047.45 2.625 0.06221985 -0.08696
25-Aug-95 2037.24 2.5 0.05692289 -0.13043
1-Sep-95 1966.49 2.625 0.02021769 -0.08696
8-Sep-95 2018.41 2.625 0.04715386 -0.08696
15-Sep-95 2025.72 2.5 0.05094629 -0.13043
22-Sep-95 1994.25 2.75 0.03461961 -0.04348
29-Sep-95 1985.73 2.5 0.03019943 -0.13043
6-Oct-95 1953.07 2.75 0.01325537 -0.04348
13-Oct-95 1921.04 2.5 -0.0033618 -0.13043
20-Oct-95 1815.17 2.5 -0.0582873 -0.13043
27-Oct-95 1738.08 2.625 -0.0982817 -0.08696
3-Nov-95 1772.23 2.125 -0.0805647 -0.26087
10-Nov-95 1920.47 2 -0.0036575 -0.30435
17-Nov-95 1867.2 2.5 -0.0312941 -0.13043
24-Nov-95 1836.83 1.875 -0.0470501 -0.34783
1-Dec-95 1863.61 2.25 -0.0331566 -0.21739
8-Dec-95 1969.82 2.125 0.0219453 -0.26087
15-Dec-95 1902.38 2 -0.0130427 -0.30435
22-Dec-95 1932.45 1.875 0.00255769 -0.34783
29-Dec-95 1913.46 1.875 -0.0072943 -0.34783
5-Jan-96 2120.36 1.875 0.10004565 -0.34783
12-Jan-96 2167.07 1.75 0.12427887 -0.3913
19-Jan-96 2187.96 1.875 0.13511663 -0.34783
26-Jan-96 2306.97 1.625 0.19685918 -0.43478
2-Feb-96 2515.96 2.25 0.30528347 -0.21739
9-Feb-96 2382.38 2.375 0.23598199 -0.17391
16-Feb-96 2382.91 2.375 0.23625695 -0.17391
23-Feb-96 2309.57 2.781 0.19820806 -0.0327
1-Mar-96 2337.81 3.375 0.21285901 0.173913
8-Mar-96 2243.07 3 0.16370777 0.043478
15-Mar-96 2265.25 3.188 0.17521478 0.10887
22-Mar-96 2284.96 2.75 0.18544036 -0.04348
29-Mar-96 2334.02 2.875 0.21089275 0
5-Apr-96 2296.91 2.75 0.19164003 -0.04348
12-Apr-96 2339.59 2.875 0.21378248 0
19-Apr-96 2242.12 2.875 0.16321491 0
26-Apr-96 2312.91 2.734 0.19994086 -0.04904
3-May-96 2296.61 2.75 0.19148439 -0.04348
10-May-96 2365.66 2.813 0.22730763 -0.02157
17-May-96 2357.4 2.75 0.22302233 -0.04348
24-May-96 2306.63 2.75 0.19668278 -0.04348
31-May-96 2376.96 2.75 0.23317008 -0.04348
7-Jun-96 2178 2.875 0.12994936 0
14-Jun-96 2085.93 2.813 0.08218332 -0.02157
21-Jun-96 2058.28 3.063 0.06783847 0.065391
28-Jun-96 2016.69 3.375 0.04626152 0.173913
5-Jul-96 2087.73 3.375 0.08311717 0.173913
12-Jul-96 2049.89 3 0.06348572 0.043478
19-Jul-96 1988.26 2.938 0.03151199 0.021913
26-Jul-96 1953.92 2.875 0.01369636 0
2-Aug-96 2040.21 2.875 0.05846373 0
9-Aug-96 2043.26 2.75 0.06004607 -0.04348
16-Aug-96 1981.71 2.813 0.02811385 -0.02157
23-Aug-96 2045.05 2.5 0.06097472 -0.13043
30-Aug-96 2031.43 2.375 0.05390865 -0.17391
6-Sep-96 2020.11 2.5 0.04803582 -0.13043
13-Sep-96 1991.33 2.5 0.03310471 -0.13043
20-Sep-96 1925.06 2.5 -0.0012763 -0.13043
27-Sep-96 1877.12 2.5 -0.0261476 -0.13043
4-Oct-96 1895 2.5 -0.0168714 -0.13043
11-Oct-96 1904.84 2.625 -0.0117664 -0.08696
18-Oct-96 1860.79 2.75 -0.0346196 -0.04348
25-Oct-96 1914.17 2.938 -0.006926 0.021913
1-Nov-96 1873.42 2.625 -0.0280672 -0.08696
8-Nov-96 1878.22 2.5 -0.0255769 -0.13043
15-Nov-96 1969.03 2.25 0.02153544 -0.21739
22-Nov-96 1905.67 2.25 -0.0113358 -0.21739
29-Nov-96 1875.25 2.375 -0.0271177 -0.17391
6-Dec-96 1873.1 2.375 -0.0282332 -0.17391
13-Dec-96 1828.5 2.438 -0.0513717 -0.152
20-Dec-96 1831.15 2.5 -0.0499969 -0.13043
27-Dec-96 1834.13 2.375 -0.0484509 -0.17391
3-Jan-97 1748.34 2.25 -0.0929588 -0.21739
10-Jan-97 1731.7 2.438 -0.1015917 -0.152
17-Jan-97 1726.93 2.156 -0.1040664 -0.25009
24-Jan-97 1709.05 2.375 -0.1133425 -0.17391
31-Jan-97 1698.33 2.313 -0.1189041 -0.19548
7-Feb-97 1703 2.375 -0.1164813 -0.17391
14-Feb-97 1770.55 2.5 -0.0814362 -0.13043
21-Feb-97 1864.43 2.375 -0.0327312 -0.17391
28-Feb-97 1907.49 2.75 -0.0103916 -0.04348
7-Mar-97 1778.18 2.375 -0.0774778 -0.17391
14-Mar-97 1792.69 2.5 -0.06995 -0.13043
21-Mar-97 1730.39 2.375 -0.1022713 -0.17391
28-Mar-97 1654.62 2.375 -0.1415809 -0.17391
4-Apr-97 1613.38 2.25 -0.1629763 -0.21739
11-Apr-97 1590.37 2.375 -0.1749139 -0.17391
18-Apr-97 1538.6 2.125 -0.2017722 -0.26087
25-Apr-97 1482.6 1.938 -0.2308251 -0.32591
2-May-97 1493.36 2 -0.2252428 -0.30435
9-May-97 1610.93 1.938 -0.1642473 -0.32591
16-May-97 1565.79 1.75 -0.187666 -0.3913
23-May-97 1553.37 1.688 -0.1941095 -0.41287
30-May-97 1569.89 1.875 -0.1855389 -0.34783
6-Jun-97 1542.97 1.75 -0.1995051 -0.3913
13-Jun-97 1553.94 1.75 -0.1938138 -0.3913
20-Jun-97 1446.83 1.875 -0.2493826 -0.34783
27-Jun-97 1402.79 1.813 -0.2722306 -0.36939
4-Jul-97 1335.44 1.875 -0.3071719 -0.34783
11-Jul-97 1360.44 1.938 -0.2942019 -0.32591
18-Jul-97 1403.54 1.938 -0.2718415 -0.32591
25-Jul-97 1370.52 2 -0.2889724 -0.30435
1-Aug-97 1407.61 2 -0.26973 -0.30435
8-Aug-97 1443.24 2.563 -0.2512451 -0.10852
15-Aug-97 1446.29 2.313 -0.2496628 -0.19548
22-Aug-97 1451.28 2.5 -0.247074 -0.13043
29-Aug-97 1411.93 2.375 -0.2674888 -0.17391
5-Sep-97 1397.44 2.375 -0.2750062 -0.17391
12-Sep-97 1348.46 2.6875 -0.3004171 -0.06522
19-Sep-97 1334.21 2.875 -0.30781 0
26-Sep-97 1424.59 2.4375 -0.2609208 -0.15217
3-Oct-97 1530.35 2.5 -0.2060523 -0.13043
10-Oct-97 1524.63 2.25 -0.2090199 -0.21739
17-Oct-97 1453.67 2.375 -0.245834 -0.17391
24-Oct-97 1376.02 2.4375 -0.286119 -0.15217
31-Oct-97 1241.63 2.4375 -0.3558407 -0.15217
7-Nov-97 1161.16 2.3125 -0.3975886 -0.19565
14-Nov-97 1086.26 2.5 -0.4364468 -0.13043
21-Nov-97 1076.54 2.5625 -0.4414896 -0.1087
28-Nov-97 977.62 2.1875 -0.4928094 -0.23913
5-Dec-97 931.03 2.3125 -0.5169804 -0.19565
12-Dec-97 940.7 2.0625 -0.5119636 -0.28261
19-Dec-97 1008.66 2.125 -0.4767058 -0.26087
26-Dec-97 1078.71 2.25 -0.4403638 -0.21739
2-Jan-98 1069.03 1.875 -0.4453858 -0.34783
9-Jan-98 929.38 1.875 -0.5178364 -0.34783
16-Jan-98 1036.08 1.875 -0.4624803 -0.34783
23-Jan-98 1082.52 1.875 -0.4383872 -0.34783
30-Jan-98 1117.83 1.875 -0.4200683 -0.34783
6-Feb-98 1122.7 1.875 -0.4175417 -0.34783
13-Feb-98 1099.82 1.875 -0.4294119 -0.34783
20-Feb-98 1037.69 1.875 -0.461645 -0.34783
27-Feb-98 1077.09 2 -0.4412042 -0.30435
6-Mar-98 1055.71 2.0625 -0.4522962 -0.28261
13-Mar-98 1070.75 2 -0.4444934 -0.30435
20-Mar-98 1003.14 2.5 -0.4795696 -0.13043
27-Mar-98 1151.78 2.375 -0.402455 -0.17391
3-Apr-98 1221.81 2.625 -0.3661233 -0.08696
10-Apr-98 1240.25 2.5 -0.3565566 -0.13043
17-Apr-98 1214.65 2.688 -0.3698379 -0.06504
24-Apr-98 1328.42 2.625 -0.3108139 -0.08696
1-May-98 1278.21 2.375 -0.3368629 -0.17391
8-May-98 1232.41 2.5 -0.360624 -0.13043
15-May-98 1240.37 2.5 -0.3564944 -0.13043
22-May-98 1198.5 2.5 -0.3782166 -0.13043
29-May-98 1087.12 2.5 -0.4360007 -0.13043
5-Jun-98 1039.38 2.5 -0.4607682 -0.13043
12-Jun-98 957.43 2.375 -0.503284 -0.17391
19-Jun-98 981.38 2.375 -0.4908587 -0.17391
26-Jun-98 954.37 2.25 -0.5048715 -0.21739
3-Jul-98 993.86 2.125 -0.4843841 -0.26087
Source: Bloomberg
U.S. Global Investors, Inc.
Annual Report on Form 10-K 1998 Page 27
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Since 1990, the Company has worked to change its reputation as a "gold only"
enterprise and thus insulate its investment management fee revenues from extreme
fluctuations in highly cyclical markets by introducing and marketing new product
offerings. Toward this goal, assets have grown in the All American Equity Fund
and with the creation of the U.S. Global Accolade Funds group of equity funds.
Also, the Company's U.S. Government Securities Savings Fund maintained its
ranking in the top ten for the government-only money market fund category. While
money market funds tend to be low in terms of cash flow, they balance the
volatile cash flow from gold funds and help create a platform for cross-selling
to the other funds. As a result of management's diversification strategy, the
non gold-related assets have shifted from 34 percent of total assets managed in
1990 to 82 percent in fiscal year 1998.
[GRAPHIC: Linear graph plotted from data in table below]
1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ----
Total Assets 660 607 623 782 1285 1326 1345 1450 1436
Gold-Related 436 364 331 263 479 482 481 425 259
Non Gold 224 243 292 519 806 844 864 1025 1177
The Company historically has marketed and distributed its mutual fund products
directly to investors. In response to changing investor needs and to more
aggressively market its mutual fund products, the Company registered its
broker/dealer subsidiary with the SEC and the NASD. The broker/dealer will
enhance efforts to establish sales relationships with other NASD member firms.
In this connection, the Company has coordinated efforts to have its mutual funds
participate in the National Securities Clearing Corporation's ("NSCC") Fund/Serv
system. This will allow the Company to expand into new distribution channels
thus making new markets available to mutual fund products. This system automates
and standardizes the processing of mutual fund purchases, redemptions and
exchanges through a network of nearly 2,000 brokers, dealers, banks, mutual
funds and other financial institutions.
In anticipation of expanding business opportunities, as well as to address
future needs, such as "Year 2000" computer system compliance issues, the Company
streamlined its transfer agent operations by partnering with DST of Kansas City,
Missouri. DST's TA2000 transfer agent system gives the Company a
state-of-the-art image-based work management system to provide shareholders with
superior services. During fiscal year 1998, the Company restructured its fund
accounting services and entered into a strategic relationship with Brown
Brothers Harriman & Co, a highly respected custodian with a global network
throughout the world. These actions have minimized the risk associated with both
Year 2000 issues and providing fund accounting services, thus allowing
management to focus on improving fund performance and increasing assets under
management.
The Company is poised to benefit substantially when global economic and market
conditions rebound. In the meantime, the Company is focused on its goals of
building its non-gold asset base through multiple distribution networks while
containing costs through streamlining of its operations.
RESULTS OF OPERATIONS
The economic meltdown in Asia helped ignite worldwide deflationary pressures on
certain commodity prices, such as gold and oil, thus negatively affecting the
Company's short-term earnings. Gold-related assets have decreased $167 million
(42 percent) in 1998 compared with 1997, thus reducing management fees by
approximately $1.4 million. Non-gold related assets did increase by $155 million
during this same period, helping offset the negative impact of the uncertain
gold market; however, non-gold assets are a lower risk and lower cash flow
product. In addition, total consolidated expenses for fiscal year 1998 decreased
approximately 26 percent over fiscal year 1997. The Company posted net after-tax
loss of $0.15 million ($0.02 per share) for fiscal year 1998.
The Company's core business generated the revenue necessary to meet ongoing
expenses and obligations associated with increasing its mutual fund operations.
Due primarily to a significant reduction in the Company's operating
U.S. Global Investors, Inc.
Annual Report on Form 10-K 1998 Page 28
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expenses in fiscal year 1998, its earnings before interest, taxes, depreciation
and amortization ("EBITDA") increased by nearly 100 percent over fiscal year
1997. EBITDA excludes realized and unrealized gains and losses, equity earnings
or losses and other investment income. The Company considers EBITDA an important
indicator of the operational strength of its business. The information below
provides detail of the Company's results of operations and its liquidity and
capital resources.
The table below summarizes the Company's operations including, for the periods
indicated, the increase (or decrease) from the previous period, and key revenue
and expense items as percentages of total revenues. General and Administrative
expenses are detailed for comparative purposes.
PERIOD-TO-PERIOD CHANGE
---------------------------------- PERCENTAGE OF TOTAL REVENUES
1998 1997 ----------------------------
COMPARED WITH COMPARED WITH YEARS ENDED JUNE 30,
1997 1996 1998 1997 1996
------------- ------------- ------ ------ ------
Revenues:
Investment Advisory Fee -13.6% 12.7% 57.7% 47.7% 29.4%
Transfer Agent Fee -0.3% 0.9% 33.2% 23.8% 16.4%
Accounting Fee -45.3% 39.6% 4.0% 5.2% 2.6%
Exchange Fee -28.2% -12.2% 1.8% 1.8% 1.4%
Custodial Fee -16.8% -2.8% 4.4% 3.8% 2.7%
Investment Income -140.5% -67.1% -4.2% 7.4% 15.6%
Gains on Changes of
Interest in Affiliate -263.5% -98.1% -0.2% 0.1% 2.8%
Government Securities
Income -100.0% -80.8% 0.0% 7.6% 27.5%
Other -8.1% 0.8% 3.3% 2.6% 1.6%
--------- ------- -------- -------- --------
Total Revenues -28.5% -30.7% 100.0% 100.0% 100.0%
--------- ------- -------- -------- --------
Expenses:
Salaries, Wages & Benefits -20.1% 15.0% 46.0% 41.2% 24.8%
Fund Expenses -43.4% -69.1% 1.8% 1.5% 3.3%
Marketing and Distribution -35.5% 21.4% 11.8% 13.1% 7.5%
Other General and
Administrative -11.4% 15.0% 33.2% 27.3% 16.5%
Interest and Finance -6.9% 3.9% 1.2% 0.9% 0.6%
Depreciation and
Amortization -5.0% 13.2% 4.6% 3.4% 2.1%
Reduction in Carrying Value
of Investment in JV 0.0% -100.0% 0.0% 0.0% 3.1%
Government Securities
Expenses -100.0% -80.6% 0.0% 7.7% 27.5%
--------- -------- -------- -------- -------
Total Expenses -25.9% -22.8% 98.6% 95.1% 85.4%
--------- -------- -------- -------- -------
NET INCOME
The Company posted net after-tax loss of $0.15 million ($0.02 per share) for
fiscal year 1998, $0.28 million in earnings ($0.04 per share) for fiscal year
1997, and $1.98 million in earnings ($0.30 per share) for fiscal year 1996.
These fluctuations are a result of the Company's investment activities, as well
as other factors discussed below.
Total consolidated revenues for fiscal year 1998 decreased approximately 29
percent over fiscal year 1997, primarily due to a 141 percent decrease in
investment income and the elimination of interest income and accretion of the
U.S. Government securities. Total consolidated revenues for fiscal year 1997
decreased approximately 31 percent over fiscal year 1996, primarily due to a 67
percent decrease in investment income and an 81 percent decrease in interest
income
U.S. Global Investors, Inc.
Annual Report on Form 10-K 1998 Page 29
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and accretion on the U.S. Government agency notes ("Notes") as discussed more
thoroughly in Note F in the Notes to Consolidated Financial Statements.
INVESTMENT ACTIVITIES
Investment income constituted -4 percent, 7 percent, and 16 percent, respective-
ly, of the Company's revenue in fiscal years 1998, 1997, and 1996. This source
of revenue does not remain at a consistent level and is dependent on market
fluctuations, the Company's ability to participate in investment opportunities,
and timing of transactions. For fiscal years 1998, 1997, and 1996, the Company
had realized gains (losses)of approximately ($349,000), $934,000 and $2,700,000,
respectively. The Company expects such revenues will continue to fluctuate in
the future; the magnitude of such amounts will be affected by fluctuations in
the market value of the Company's investments.
MARKET RISK DISCLOSURES
The Company's balance sheet includes assets whose fair value is subject to
market risks. As of June 30, 1998 and 1997, the Company held approximately $1.6
and $1.9 million, respectively, in securities (restricted, trading and
available-for-sale categories) other than the Notes and USGIF money market
mutual fund shares. The decrease in securities for fiscal year 1998 was due to
the favorable outcome of an appeal from a judgment entered against the Company
in 1995, thus allowing the Company to liquidate approximately $370,000 in
restricted investments previously reserved.
Management believes it can more effectively manage the Company's cash position
by broadening the types of investments utilized in cash management. Management
attempts to maximize the Company's cash position by using a diversified venture
capital approach to investing. Strategically, management invests in early-stage
or start-up businesses seeking initial financing as well as more mature
businesses in need of capital for expansion, acquisitions, management buyouts or
recapitalization. The Company also uses other investment techniques such as
private placement arbitrage. This involves the contemporaneous purchase of a
quantity of an issuer's securities at a discount in a private placement and a
short sale of the same, or substantially the same, security in the public
market. As can be seen from the graph at page 26, investment returns on
micro-cap stocks, companies with market capitalization from $5 to $50 million,
can experience wide fluctuations.
Due to the Company's investments in equity securities, equity price fluctuations
represent a market risk factor affecting the Company's consolidated financial
position. The carrying values of investments subject to equity price risks are
based on quoted market prices or management's estimate of fair value as of the
balance sheet date. Market prices fluctuate and the amount realized in the
subsequent sale of an investment may differ significantly from the reported
market value. The Company's investment activities are reviewed by Company
compliance personnel and reported to investment advisory clients.
The table below summarizes the Company's equity price risks as of June 30, 1998,
and shows the effects of a hypothetical 25 percent increase and a 25 percent
decrease in market prices. A comparison of quarter-end stock prices on the
individual stocks within the Company's equity portfolios over the three years
ending June 30, 1998, indicated that the change from one quarter to the next was
25 percent or less approximately 90 percent of the time. The selected
hypothetical change does not reflect what could be considered best- or
worst-case scenarios. Results could be significantly worse due to both the
nature of equity markets and the concentration of the Company's investment
portfolio.
U.S. Global Investors, Inc.
Annual Report on Form 10-K 1998 Page 30
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ESTIMATED HYPOTHETICAL
FAIR VALUE AFTER PERCENTAGES
FAIR VALUE AT HYPOTHETICAL HYPOTHETICAL INCREASE (DECREASE) IN
JUNE 30, 1998 PRICE CHANGE CHANGE IN PRICES SHAREHOLDERS' EQUITY
------------- ------------ ---------------- --------------------
Trading Securities $901,647 25% increase $1,127,059 $ 148,772
25% decrease $ 676,235 $(148,772)
Available-for-sale $472,240 25% increase $ 590,300 $ 77,920
25% decrease $ 354,180 $ (77,920)
REVENUES
The Company's principal business is managing, creating and marketing mutual
funds. Its primary sources of revenues from operations are investment advisory
fees and transfer agency fees. The Company's investment management fee revenue
is based on a percentage of average net assets under management; the transfer
agency fee revenue is based on the number of shareholder accounts being
serviced. Therefore, fluctuations in financial markets impact revenues and
results of operations.
Assets under management for USGIF for the fiscal years ended June 30, 1998,
1997, and 1996 have averaged $1.29 billion, $1.33 billion, and $1.30 billion,
respectively. Additionally, assets under management for the U.S. Global Accolade
Funds, which commenced operations in October 1994, averaged $146 million, $119
million, and $48 million for those same fiscal years, respectively. As a result
of the significant decrease in net assets of high- margin, gold-related funds,
and somewhat offset by increases in net assets of lower-margin, non-gold-related
funds, in fiscal year 1998 investment advisory fee revenue decreased by
approximately 14 percent over fiscal year 1997, and fiscal year 1997 investment
advisory fees increased by approximately 13 percent over fiscal year 1996.
Shareholder accounts serviced for fiscal years ended June 30, 1998, 1997, and
1996, were 117,363, 120,901, and 120,477, respectively. Management believes this
change may be partially 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.
GOVERNMENT SECURITIES
During fiscal year 1995, the Company arranged for the purchase of, and/or
purchased directly, approximately $130.5 million par value adjustable rate U.S.
Government agency notes ("Notes"). During fiscal year 1997, the balance of the
Notes matured and the subordinated debenture issued in connection with said
purchases was paid in full. See Note F in the Company's Notes to Consolidated
Financial Statements for additional information.
EXPENSES
Total consolidated expenses for fiscal year 1998 decreased approximately 26
percent over fiscal year 1997. This decrease was the direct result of: 1)
approximately $2.3 million less in general and administrative expenses, and 2)
approximately $1.1 million less in interest expense relating to the Notes. Total
consolidated expenses for fiscal year 1997 decreased by approximately 23 percent
over fiscal year 1996. This decrease was the direct result of: 1) approximately
$4.2 million less in interest expense relating to the Notes, and 2) $260,610
less in interest expense related to the subordinated debenture.
The decrease of $2.3 million less in general and administrative expenses for
fiscal year 1998 was primarily due to: 1) nearly $1.2 million less in salaries,
wages and benefits; 2) approximately $650,000 less in marketing and distribution
expenses; and 3) the reversal of approximately $758,000 in accrued legal fees.
The legal fees had been accrued pending the outcome of the Company's successful
appeal of a lawsuit brought against the Company in 1994, and the final
U.S. Global Investors, Inc.
Annual Report on Form 10-K 1998 Page 31
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payment into the Settlement Pool established under the June 1988 Settlement
Agreement relating to the original Prospector Fund. See Notes E and N to the
Consolidated Financial Statements for additional details.
Exclusive of the expenses attributable to the purchase and financing of the
Notes and exclusive of the reversal of the accrued legal fees, expenses of the
Company decreased approximately 13 percent in fiscal year 1998 over fiscal year
1997 and increased by almost 11 percent in fiscal year 1997 over fiscal year
1996. As shown on the table at page 28, salaries, wages and benefits are the
largest component of Company expenses. In fiscal year 1998, salaries, wages and
benefits decreased by 20 percent over 1997, and in fiscal year 1997 this expense
item increased by more than 15 percent from fiscal year 1996. The decrease in
1998 relates primarily to the Company successfully streamlining operations,
including strategic relationships with DST and BBH. It is anticipated that
salaries, wages and benefits will remain stable at fiscal year 1998 levels.
Marketing and distribution expenses represented approximately 12 percent, 13
percent, and 8 percent of total revenues during fiscal years 1998, 1997, and
1996, respectively. It is anticipated that 1999 marketing and distribution
expenditures will approximate fiscal year 1998 levels.
Fund expenses in 1998 paid by the Company pursuant to commitments to cap fund
expenses, net of fee waivers, decreased 44 percent compared with 1997. In this
regard, the Company has agreed to waive a portion of its fee revenues and/or pay
for certain mutual funds expenses to enhance 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.
As noted above, exclusive of the reversal of accrued legal fees, the Company's
operating expenses in fiscal year 1998 decreased by approximately 13 percent
from 1997. This reduction in operating expenses resulted in almost a 100 percent
increase in the Company's EBITDA.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
At year end, the Company had net working capital (current assets minus current
liabilities) of approximately $3.7 million and a current ratio of 4.59 to 1.
With approximately $1.4 million in cash and cash equivalents, more than $1.4
million in marketable securities, and a $1.0 million line of credit, the Company
has adequate liquidity to meet its current debt obligations. Total shareholders'
equity was approximately $8.0 million, with cash, cash equivalents, and
marketable securities comprising 27 percent of total assets. Except for ongoing
expenses of operations, the Company's only material commitment is the mortgage
on its corporate headquarters (a long-term debt). The Company's cash flow is
sufficient to cover current expenses, including debt service.
TAX LOSS CARRYFORWARDS
Management assessed the likelihood of realization of the recorded deferred tax
asset at June 30, 1998. Net operating losses of $1.4 million, primarily
resulting from the non-cash charge to earnings related to the purchase of the
Notes during fiscal year 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 generate the minimum amount of
future taxable income necessary to fully realize the deferred tax assets.
U.S. Global Investors, Inc.
Annual Report on Form 10-K 1998 Page 32
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SETTLEMENT POOL
In June 1992, the Company made its final payment to the settlement pool
established under the June 1988 settlement agreement relating to the original
Prospector Fund (now operating as the Global Resources Fund), and the settlement
pool made the final payout to "Eligible Shareholders" thereof. See Note E to the
Consolidated Financial Statements for additional detail. Under the agreement,
any amounts payable to "Eligible Shareholders" who cannot be located, together
with interest thereon, will be held until June 22, 1998. At that time, such
amounts will be made available to all persons claiming subrogation. The Company
has first right of subrogation to these amounts. The amount of cash held at June
30, 1998, was approximately $676,000. As such, the Company increased the
residual equity interest to reflect the amounts subsequently received, thus
positively impacting future cash flow by the $676,000 and earnings by
approximately $457,000 for fiscal year 1998.
LITIGATION ACCRUAL
On November 12, 1997, the Fourth Court of Appeals in San Antonio, Texas reversed
a trial court 1994/95 decision and ruled in favor of the Company. The Texas
Supreme Court denied a writ of appeal, which has left the appellate court
actions intact. As a result, the Company reversed the $300,000 accrued for the
original judgment, thus positively impacting earnings for fiscal year 1998.
Additionally, during 1998, the Company liquidated the restricted investment
previously set aside under the bond posted for the appeal.
U.S. GLOBAL BROKERAGE, INC.
During fiscal year 1998, the Company registered its wholly owned subsidiary,
U.S. Global Brokerage, Inc. ("USGB"), formerly United Services Brokerage, Inc.,
with the Securities and Exchange Commission and the National Association of
Securities Dealers, Inc. as a broker/dealer for the limited purpose of
distributing USGIF and USGAF fund shares. To date, the Company has capitalized
USGB with approximately $79,000 to cover costs associated with this
registration. At June 30, 1998, USGB had net capital of $61,000. The purpose of
the broker/dealer is to enhance the marketing of fund shares and thereby
increase assets under management. Effective September 3, 1998, USGB is the
distributor for USGIF and USGAF fund shares. Since the fund's shares are sold on
a no-load basis, it is anticipated that USGB will not be a profit center, and
the Company will subsidize its expenses of about $60,000 per year to the extent
not covered by any fund distribution plans adopted pursuant to Investment
Company Act Rule 12b-1.
IMPACT OF THE YEAR 2000 ISSUE
The Company has taken an inventory of all hardware, software, networks and other
various processing platforms, and customer and vendor interdependencies. The
Company has initiated formal communications with all of its significant
suppliers and vendors to determine the extent to which the Company is vulnerable
to third party failure to remedy their own Year 2000 issues.
The Company is utilizing internal resources to reprogram, replace, and test the
software and hardware for Year 2000 modifications. Management currently
anticipates that the project will be completed no later than June 30, 1999, and
will not have a material impact on the Company's consolidated financial results
or position.
CONCLUSION
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, and will
also allow the Company to take advantage of investment opportunities whenever
available.
U.S. Global Investors, Inc.
Annual Report on Form 10-K 1998 Page 33
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NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive Income
("SFAS 130") and Statement No. 131, Disclosures about Segments of an Enterprise
and Related Information ("SFAS 131"). SFAS 130 establishes standards for
reporting and displaying comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general-purpose financial
statements. The Company plans to adopt SFAS 130 in fiscal year 1999. Management
has not yet determined the manner in which comprehensive income might be
displayed.
SFAS 131 establishes standards for reporting information in the annual financial
statements about a public entity's operating segments and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. The Company plans to adopt SFAS 131 in
fiscal year 1999. Management has not yet completed its determination of what, if
any, impact the "management approach" will have on its financial statement
disclosures. Note A in the Company's Notes to Consolidated Financial Statements
contains additional detail regarding these two accounting pronouncements.
In February 1998, the FASB issued Statement No. 132, Employers' Disclosures
about Pensions and Other Postretirement Benefits ("SFAS 132"). SFAS 132
standardizes the disclosure requirements for pensions and other postretirement
benefits to the extent practicable, and requires additional information on
changes in the benefit obligations and fair values of plan assets that will
facilitate financial analysis. As the Company does not offer pension or other
postretirement benefits, it is not anticipated this Statement will impact the
Company.
In June 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133"). SFAS 133 standardizes the
accounting for derivative instruments, including certain derivative instruments
imbedded in other contracts, by requiring that an entity recognize those items
as assets or liabilities in the statement of financial position and measure them
at fair value. SFAS 133 generally provides for matching the timing of gain or
loss recognition on the hedging instrument with the recognition of (a) the
changes in fair value of the hedged asset or liability or (b) the earnings of
the hedged forecasted transaction. This Statement is effective for fiscal years
beginning after June 15, 1999. Management is evaluating the impact of the
Statement on the Company.
The Accounting Standards Executive Committee ("AcSEC") recently issued Statement
of Position ("SOP") 98-5, Reporting on the Costs of Start-up Activities. The SOP
requires the costs of start-up activities to be expensed as incurred. In a
change from the Exposure Draft, start-up activities now include organization
costs, which could have significant ramifications to certain mutual funds. The
SOP applies to all nongovernmental entities and to start-up costs of
development-stage entities as well as established operating entities. The SOP is
effective for fiscal years beginning after December 15, 1998, except for certain
investment companies (primarily open-end investment funds), which must apply the
SOP prospectively beginning June 30, 1998. The adoption of this Statement is not
expected to materially impact the financial position or results of operations of
the Company.
U.S. Global Investors, Inc.
Annual Report on Form 10-K 1998 Page 34
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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, 1994 through June 30,
1997, and the years then ended is derived from the Company's Consolidated
Financial Statements which were examined by PricewaterhouseCoopers LLP,
independent public accountants. The selected financial data as of June 30, 1998,
and the year then ended is derived from the Company's Consolidated Financial
Statements which were examined by Ernst & Young LLP, independent public
accountants.
YEAR ENDED JUNE 30,
SELECTED EARNINGS DATA ------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------------- -------------- -------------- -------------- --------------
Revenues $10,022,456 $14,009,131 $20,214,546 $15,770,738 $10,879,156
Expenses 9,878,650 13,329,439 17,261,592 21,666,598 10,108,181
Earnings (Sloss) before minority
interest, equity interest, income
taxes and cumulative effect of
change in accounting 143,806 679,692 2,952,954 (5,895,860) 770,975
-------------- -------------- -------------- -------------- --------------
Income taxes (39,571) 331,976 1,013,517 (2,005,142) (178,665)
-------------- -------------- -------------- -------------- --------------
Minority interest -- -- (55,098) -- --
Equity in net loss of joint
venture -- (196,535) -- -- --
Equity in earnings (loss) of
affiliate (331,996) 132,968 102,728 -- --
-------------- -------------- -------------- -------------- --------------
Cumulative effect of change in
accounting -- -- -- 43,284 200,420
-------------- -------------- -------------- -------------- --------------
Net earnings (loss) (148,619) 284,149 1,987,067 (3,847,434) 1,150,060
Basic earnings (loss) per share (0.02) 0.04 0.30 (0.64) 0.19
Working capital 3,719,539 2,440,198 1,316,006 (1) (106,863,206) (1) 3,391,974
Total assets 10,308,957 10,712,775 39,307,196 128,073,122 9,143,448
Long-term obligations 1,330,638 1,359,308 1,410,479 6,016,617 1,619,989
Shareholders' equity 7,941,859 7,966,407 8,544,072 8,661,223 6,730,003
- ----------------------------------
<FN>
(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.)
</FN>
U.S. Global Investors, Inc.
Annual Report on Form 10-K 1998 Page 35
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of U. S. Global Investors, Inc.
We have audited the accompanying consolidated balance sheet of U.S. Global
Investors, Inc. and Subsidiaries (the Company) as of June 30, 1998 and the
related consolidated statements of operations, shareholders' equity, and cash
flows for the period ended June 30, 1998. These financial statements are the re-
sponsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit. We did not audit the
financial statements of U.S. Global Investors (Guernsey) Limited, a wholly owned
subsidiary, which statements reflect total assets of $1,213,339 as of June 30,
1998, and net loss of $432,453 for the year then ended. Those statements were
audited by other auditors whose report has been furnished to us, and our opinion
insofar as it relates to data included for U.S. Global Investors (Guernsey)
Limited, is based soley on the report of the other auditors. The financial
statements of U.S. Global Strategies Fund Limited, in which the Company has a
23% interest, have been audited by other auditors whose reports have been
furnished to use;insofar as our opinion on the consolidated financial statements
relates to data included for U.S. Global Strategies Fund Limited; it is based
solely on their reports.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, based on our audit and the report of other auditors, the con-
solidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of U.S. Global Investors,
Inc. and subsidiaries at June 30, 1998, and the consolidated results of their
operations and their cash flows for the period ended June 30, 1998, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Ernst & Young LLP
San Antonio, Texas
September 28, 1998
U.S. Global Investors, Inc.
Annual Report on Form 10-K 1998 Page 36
- --------------------------------------------------------------------------------
[GRAPHIC: PricewaterhouseCoopers Logo]
PricewaterhouseCoopers LLP
1201 Louisiana, Suite 2900
Houston TX 77002-5678
Telephone (713) 356 4000
Facsimile (713) 356 4717
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
of U.S. Global Investors, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, cash flows and shareholders' equity
present fairly, in all material respects, the financial position of U.S. Global
Investors, Inc. and its subsidiaries at June 30, 1997, and the results of their
operations and their cash flows for each of the two years in the period ended
June 30, 1997, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We 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. We have not audited the consolidated financial statements of U.S. Global
Investors, Inc. and its subsidiaries for any period subsequent to June 30, 1997.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
San Antonio, Texas
September 29, 1997
U.S. Global Investors, Inc.
Annual Report on Form 10-K 1998 Page 37
- --------------------------------------------------------------------------------
AUDITORS' REPORT TO THE MEMBERS OF U.S. GLOBAL INVESTORS (GUERNSEY) LIMITED
We have audited the financial statements on page 4 to 10 of U.S. Global
Investors (Guernsey) Fund.
RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS
As described on page 2 the Company's Directors are responsible for the
preparation of financial statements. It is our responsibility to form an
independent opinion, based on our audit, on those statements and to report our
opinion to you.
BASIS OF OPINION
We conducted our audit in accordance with Auditing Standards issued by the
Auditing Practices Board in the United Kingdom. An audit includes examination,
on a test basis, of evidence relevant to the amounts and disclosures in the
financial statements. It also includes an assessment of the significant
estimates and judgements made by the Directors in the preparation of the
financial statements, and of whether the accounting polices are appropriate to
the Company's circumstances, consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the financial statements
are free from material misstatements, whether caused by fraud or other
irregularity or error. In forming our opinion we also evaluated the overall
adequacy of the presentation of information in the financial statements.
OPINION
In our opinion the financial statements give a true and fair view of the state
of the company's affairs as at 30th of June, 1998 and of its profit for the year
then ended and have been properly prepared in accordance with the Companies
(Guernsey) Law, 1994.
/s/ PricewaterhouseCoopers
PricewaterhouseCoopers,
Chartered Accountants,
P.O. Box 321,
National Westminster House,
Le Truchot,
St Peter Port,
Guernsey, GY1 4ND
Channel Islands.
Date: 28th September, 1998
U.S. Global Investors, Inc.
Annual Report on Form 10-K 1998 Page 38
- --------------------------------------------------------------------------------
AUDITORS' REPORT TO THE SHAREHOLDERS OF U.S. GLOBAL STRATEGIES FUND LIMITED
We have audited the financial statements on pages 21 to 31 of U.S. Global
Strategies Fund Limited.
RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS
As described on page 3 the Company's Directors are responsible for the
preparation of financial statements. It is our responsibility to form an
independent opinion, based on our audit, on those statements and to report our
opinion to you.
BASIS OF OPINION
We conducted our audit in accordance with Auditing Standards issued by the
Auditing Practices Board in the United Kingdom. An audit includes examination,
on a test basis, of evidence relevant to the amounts and disclosures in the
financial statements. It also includes an assessment of the significant
estimates and judgements made by the Directors in the preparation of the
financial statements, and of whether the accounting policies are appropriate to
the Company's circumstances, consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the financial statements
are free from material misstatements, whether caused by fraud or other
irregularity or error. In forming our opinion we also evaluated the overall
adequacy of the presentation of information in the financial statements.
OPINION
In our opinion the financial statements give a true and fair view of the state
of the company's affairs as at 30th June, 1998 and of its net revenue for the
year then ended and have been properly prepared in accordance with The
Protection of Investors (Bailiwick of Guernsey) Law, 1987 and The Companies
(Guernsey) Law, 1994.
/s/ PricewaterhouseCoopers
PricewaterhouseCoopers,
Chartered Accountants,
P.O. Box 321,
National Westminister House,
Le Truchot,
St Peter Port,
Guernsey, GY1 4ND
Channel Islands
Date: 28th September, 1998
U.S. Global Investors, Inc.
Annual Report on Form 10-K 1998 Page 39
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
ASSETS
JUNE 30,
1998 1997
------------ ------------
Current Assets
Cash and cash equivalents $ 1,391,867 $ 722,121
Trading securities, at fair value 901,647 721,954
Receivables:
Mutual funds 788,019 1,080,046
Custodial fees 189,715 199,062
Employees 83,725 63,700
Receivable from brokers 16,690 240,709
Residual equity interest 675,613 --
Other 106,696 220,850
Prepaid expenses 466,733 475,577
Deferred tax asset 135,294 103,239
------------ ------------
Total Current Assets 4,755,999 3,827,258
------------ ------------
Net Property and Equipment 2,596,091 2,536,081
------------ ------------
Other Assets
Restricted investments 271,166 642,528
Long-term receivables 218,212 424,026
Long-term deferred tax asset 1,068,092 1,102,531
Residual equity interest -- 217,861
Investment securities available-for-sale, at fair value 472,240 557,315
Equity investment in affiliate 866,288 1,322,032
Other 60,869 83,143
------------ ------------
Total Other Assets 2,956,867 4,349,436
------------ ------------
$ 10,308,957 $ 10,712,775
============ ============
The accompanying notes are an integral part of this statement.
U.S. Global Investors, Inc.
Annual Report on Form 10-K 1998 Page 40
- --------------------------------------------------------------------------------
Consolidated Balance Sheets (Continued)
LIABILITIES AND SHAREHOLDERS' EQUITY
JUNE 30,
1998 1997
------------ ------------
Current Liabilities
Current portion of capital lease obligation $ -- $ 9,614
Current portion of notes payable 63,525 44,899
Current portion of annuity and contractual obligation 18,000 18,000
Accounts payable 275,963 367,163
Accrued sub-advisory fees 51,898 --
Accrued compensation and related costs 97,993 223,639
Accrued profit sharing and 401(k) 38,123 109,251
Accrued vacation pay 90,208 107,369
Accrued legal fees 33,855 62,493
Accrued shareholder processing 122,200 --
Litigation accrual -- 300,000
Other accrued expenses 244,695 144,632
------------ ------------
Total Current Liabilities 1,036,460 1,387,060
------------ ------------
Notes Payable-Net of Current Portion 1,193,599 1,215,386
Annuity and Contractual Obligations 137,039 143,922
------------ ------------
Total Non-Current Liabilities 1,330,638 1,359,308
------------ ------------
Total Liabilities 2,367,098 2,746,368
------------ ------------
Commitments and contingent liabilities
Shareholders' Equity
Common stock (class A) -- $0.05 par value;
non-voting; authorized, 7,000,000 shares; 6,299,444 and
6,227,074 issued and outstanding in 1998 and 1997, respectively. 314,972 311,354
Common stock (class C) (formerly class A)-- $.05 par value;
authorized 1,750,000 shares; 496,830 and 562,000 issued and
outstanding in 1998 and 1997, respectively 24,842 28,110
Additional paid-in-capital 10,591,708 10,587,909
Treasury stock at cost; 183,236 and 186,684 shares held in 1998
and 1997, respectively (476,289) (514,770)
Net unrealized gain (loss) on available-for-sale securities (net of tax
of $12,629 and $91,212, respectively) (24,514) (177,058)
Equity in net unrealized gain (loss) on available-for-sale securities held by
affiliate (net of tax of $26,391 and $10,237, respectively) (51,230) 19,873
Retained deficit (2,437,630) (2,289,011)
------------ ------------
Total Shareholders' Equity 7,941,859 7,966,407
------------ ------------
$ 10,308,957 $ 10,712,775
============ ============
The accompanying notes are an integral part of this statement.
U.S. Global Investors, Inc.
Annual Report on Form 10-K 1998 Page 41
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED JUNE 30,
---------------------------------------------
1998 1997* 1996*
------------- ------------- -------------
Revenue
Investment advisory fee $ 5,778,042 $6,686,769 $ 5,934,133
Transfer agent fee 3,325,513 3,336,376 3,306,568
Accounting fee 399,996 730,625 523,465
Exchange fee 178,115 248,112 282,651
Custodial fees 440,884 530,030 545,018
Investment income (loss) (419,096) 1,033,982 3,144,062
Mailroom operations 306,304 282,267 230,550
Government security income -- 1,067,050 5,559,879
Gain (loss) on changes of interest in affiliate (17,146) 10,490 555,905
Other 29,844 83,430 132,315
------------- ------------- -------------
10,022,456 14,009,131 20,214,546
------------- ------------- -------------
Expenses
General and administrative 9,298,734 11,636,195 10,520,912
Depreciation and amortization 457,386 481,510 425,301
Interest expense-note payable and other 122,530 131,633 126,732
Interest expense-securities sold under agreement to
repurchase -- 1,007,099 5,235,535
Interest expense-subordinated debenture
to a related party -- 73,002 333,612
Reduction in carrying value of investment in
joint venture -- -- 619,500
------------- ------------- -------------
9,878,650 13,329,439 17,261,592
------------- ------------- -------------
Earnings (Loss) Before Minority Interest,
Equity Interest and Income Taxes 143,806 679,692 2,952,954
------------- ------------- -------------
Minority Interest in Consolidated Company -- -- (55,098)
Equity in Net Loss of Joint Venture -- (196,535) --
Equity In Net Earnings (Loss) of affiliate (331,996) 132,968 102,728
------------- ------------- -------------
Earnings (Loss) Before Income Taxes (188,190) 616,125 3,000,584
Provision (Benefit) for Federal Income Taxes
Current -- -- 61,000
Deferred (39,571) 331,976 952,517
------------- ------------- -------------
(39,571) 331,976 1,013,517
------------- ------------- -------------
Net Earnings (Loss) $ (148,619) $ 284,149 $ 1,987,067
============= ============= =============
Basic and Diluted Earnings (Loss) per Share: $ (0.02) $ 0.04 $ 0.30
============= ============= =============
Weighted Average Number of Outstanding Shares:
Basic 6,617,153 6,606,211 6,562,830
Diluted 6,669,363 6,664,324 6,601,074
* Reclassed for comparative purposes
The accompanying notes are an integral part of this statement.
U.S. Global Investors, Inc.
Annual Report on Form 10-K 1998 Page 42
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOW
Year Ended June 30,
---------------------------------------------
1998 1997* 1996
------------- ------------- -------------
Cash Flow From Operating Activities:
Net earnings (loss) $ (148,619) $ 284,149 $ 1,987,067
Adjustments to reconcile to net cash provided by
operating activities:
Depreciation and amortization 457,386 481,510 425,301
Government security accretion -- (306,926) (1,363,051)
Net (gain) loss on sales of securities (net of minority
interest) 348,579 (934,123) (2,723,738)
Gain on disposal of equipment (1,266) (64) (296)
Reduction in carrying value of investment in joint
venture -- -- 619,500
(Gain) loss on changes of interest in affiliate 17,146 (10,490) (555,905)
Provision for deferred taxes (39,571) 331,976 952,517
Changes in assets and liabilities, impacting cash from operations:
Restricted investments 371,362 (148) 255,176
Accounts receivable 172,223 364,558 (675,974)
Prepaid expenses and other 579,710 (134,789) (1,065,278)
Trading securities (41,271) 2,034,637 2,674,344
Accounts payable (91,200) 91,047 108,518
Accrued expenses (269,364) (96,276) 167,429
------------- ------------- -------------
Total adjustments 1,503,734 1,820,912 (1,181,457)
------------- ------------- -------------
Net cash provided by operations 1,355,115 2,105,061 805,610
------------- ------------- -------------
Cash Flow From Investing Activities:
Purchase of furniture and equipment (469,633) (392,436) (372,211)
Proceeds on sale of equipment 1,240 800 469
Purchase of available-for-sale securities (383,630) (399,472) (896,791)
Proceeds on sale of available-for-sale securities 212,830 -- --
Proceeds on sale of government securities
available-for-sale -- -- 89,884,250
Proceeds on sale of government securities
held-to-maturity -- 26,725,000 --
------------- ------------- -------------
Net cash provided by (used in) investing activities (639,193) 25,933,892 88,615,717
------------- ------------- -------------
Cash Flow From Financing Activities:
Payments on annuity (6,883) (6,420) (5,986)
Payments on note payable to bank (50,762) (41,547) (38,216)
Proceeds from capital lease -- 25,330 --
Principal payments on capital lease obligation (8,661) (40,070) (93,658)
Net proceeds from securities sold under agreement
to repurchase -- 420,844 871,231
Payments on subordinated debenture to related party -- (1,533,131) (3,001,081)
Net payments on securities sold under agreement
to repurchase -- (26,825,219) (86,668,325)
Proceeds from issuance or exercise of preferred stock,
warrants, and options 12,420 8,250 295,875
Purchase of common stock (class B) from related party -- -- (2,538,945)
Treasury Stock reissued 75,565 346,163 139,595
Purchase of Treasury Stock (67,856) (337,282) (487,788)
------------- ------------- -------------
Net cash used in financing activities (46,176) (27,983,082) (91,527,298)
------------- ------------- -------------
The accompanying notes are an integral part of this statement.
U.S. Global Investors, Inc.
Annual Report on Form 10-K 1998 Page 43
- --------------------------------------------------------------------------------
Consolidated Statements of Cash Flow (Continued)
YEAR ENDED JUNE 30,
---------------------------------------------
1998 1997* 1996
------------- ------------- -------------
Net Increase (Decrease) In Cash and Cash Equivalents 669,746 55,871 (2,105,971)
Beginning Cash and Cash Equivalents 722,121 666,250 2,772,221
------------- ------------- -------------
Ending Cash and Cash Equivalents $ 1,391,867 $ 722,121 $ 666,250
============= ============= ==============
Schedule of Non-Cash Investing and
Financing Activities:
Purchase of equipment under capital lease $ -- $ 25,330 $ --
Supplemental Disclosures of Cash
Flow Information:
Cash paid for interest $ 122,530 $ 1,283,891 $ 6,088,853
* Reclassed for comparative purposes
The accompanying notes are an integral part of this statement.
U.S. Global Investors, Inc.
Annual Report on Form 10-K 1998 Page 44
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
U.S. GLOBAL INVESTORS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON COMMON COMMON
PREFERRED STOCK STOCK STOCK PAID-IN PREFERRED EARNINGS TREASURY
STOCK (CLASS A) (CLASS B) (CLASS C) CAPITAL WARRANTS (DEFICIT) STOCK
--------- --------- --------- --------- ------- --------- --------- ---------
Balance at June 30, S
1995 [5,071,495 shares
of Preferred stock;
570,779 shares of
Common stock (Class A)] $253,575 $0 $50,000 $28,539 $12,852,986 $0 ($4,560,227) ($198,366)
Conversion of Preferred
Stock to Common Stock
(Class A) (253,575) 253,575 - - - - - -
Purchase of 175,475
shares of Common Stock
(Class A) - - - - - - - (487,678)
Reissuance of 68,393
shares of Common Stock
(Class A) - - - - (16,175) - - 155,660
Conversion of 6,427 shares
of Common stock (Class C)
to Common Stock (Class A) - 321 - (321) - - - -
Conversion of 1,000,000
shares of Common stock
(Class B) to Common Stock
(Class A) - 50,000 (50,000) - - - - -
Purchase of Common Stock
(Class B) from related party
(Note N) - - - - (2,538,945) - - -
Exercise of 142,500
Stock Options - 7,075 - - 288,800 - - -
Unrealized loss on Notes
transferred from held-to-
maturity to available-for-
sale, at date of transfer
(net of tax) - - - - - - - -
Unrealized gain (loss)
on securities available-
for-sale (net of tax) - - - - - - - -
Equity in Unrealized gain
(loss) on available-for-sale
securities of affiliated
company (net of tax) - - - - - - - -
Net Earnings - - - - - - 1,987,067 -
Balance at June 30, 1996
[6,219,422 shares of
Preferred stock; 564,352
shares of Common stock
(Class A)] $0 $310,971 $0 $28,218 $10,586,666 $0 ($2,573,160) ($530,384)
Purchase of 141,250 shares
of Common Stock (Class A ) - - - - - - - (337,282)
Reissuance of 154,148
shares of Common Stock
(Class A) - - - - (6,732) - - 352,896
Exercise of 5,500 Stock
Options - 275 - - 7,975 - - -
Conversion of 2,152 shares
of Common stock (Class C)
to Common Stock (Class A) - 108 - (108) - - - -
Unrealized gain (loss) on
securities available-for-sale
(net of tax) - - - - - - - -
Equity in Unrealized gain
(loss) on available-for-sale
securities of affiliated
company (net of tax) - - - - - - - -
Net Earnings - - - - - - 284,149 -
Balance at June 30, 1997
[6,227,074 shares of Class A
(formerly preferred stock);
562,200 shares of Class C
(formerly Class A)] $0 $311,354 $0 $28,110 $10,587,909 $0 ($2,289,011) ($514,770)
Purchase of 29,525 shares
of Common Stock (Class A) - - - - - - - (67,856)
Reissuance of 32,972
shares of Common Stock
(Class A) - - - - (8,271) - - 106,337
Exercise of 7,000 Stock
Options - 350 - - (12,070) - - -
Conversion of 65,370 shares
of Common stock (Class C)
to Common Stock (Class A) - 3,269 - (3,269) - - - -
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 - - - - - - (148,619) -
Balance at June 30, 1998
[6,299,444 shares of Class A
(formerly preferred stock);
496,830 shares of Class C
(formerly Class A)] $0 $314,972 $0 $24,842 $10,591,708 $0 ($2,437,630) ($476,289)
== ======== == ======= =========== === ============ ==========
UNREALIZED
GAIN (LOSS)
ON SECURITIES
AVAILABLE
FOR SALE TOTAL
------------ -----------
Balance at June 30,
1995 [5,071,495 shares
of Preferred stock;
570,779 shares of
Common stock (Class A)] $234,716 $8,661,223
Conversion of Preferred
Stock to Common Stock
(Class A) - -
Purchase of 175,475
shares of Common Stock
(Class A) - (487,678)
Reissuance of 68,393
shares of Common Stock
(Class A) - 139,485
Conversion of 6,427 shares
of Common stock (Class C)
to Common Stock (Class A) - -
Conversion of 1,000,000
shares of Common stock
(Class B) to Common Stock
(Class A) - -
Purchase of Common Stock
(Class B) from related party
(Note N)
- ($2,538,945)
Exercise of 142,500
Stock Options - 295,875
Unrealized loss on Notes
transferred from held-to-
maturity to available-for-
sale, at date of transfer
(net of tax) (62,006) (62,006)
Unrealized gain (loss)
on securities available-
for-sale (net of tax) 399,924 399,924
Equity in Unrealized gain
(loss) on available-for-sale
securities of affiliated
company (net of tax) 149,127 149,127
Net Earnings - 1,987,067
Balance at June 30, 1996
[6,219,422 shares of
Preferred stock; 564,352
shares of Common stock
(Class A)] $721,761 $8,544,072
Purchase of 141,250 shares
of Common Stock (Class A ) - (337,282)
Reissuance of 154,148
shares of Common Stock
(Class A) - 346,164
Exercise of 5,500 Stock
Options - 8,250
Conversion of 2,152 shares
of Common stock (Class C)
to Common Stock (Class A) - 0
Unrealized gain (loss) on
securities available-for-sale
(net of tax) (749,692) (749,692)
Equity in Unrealized gain
(loss) on available-for-sale
securities of affiliated
company (net of tax) (129,254) (129,254)
Net Earnings - 284,149
Balance at June 30, 1997
[6,227,074 shares of Class A
(formerly preferred stock);
562,200 shares of Class C
(formerly Class A)] ($157,185) $7,966,407
Purchase of 29,525 shares
of Common Stock (Class A) - (67,856)
Reissuance of 32,972
shares of Common Stock
(Class A) - 98,066
Exercise of 7,000 Stock
Options - 12,420
Conversion of 65,370 shares
of Common stock (Class C)
to Common Stock (Class A) - 0
Unrealized gain (loss) on
securities available-for-sale
(net of tax) 152,544 152,544
Equity in Unrealized gain
(loss) on available-for-sale
securities of affiliated
company (net of tax) (71,103) (71,103)
Net Earnings - (148,619)
Balance at June 30, 1998
[6,299,444 shares of Class A
(formerly preferred stock);
496,830 shares of Class C
(formerly Class A)] ($75,744) $7,941,859
U.S. Global Investors, Inc.
Annual Report on Form 10-K 1998 Page 45
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A. SIGNIFICANT ACCOUNTING POLICIES
Organization. U.S. Global Investors, Inc. ("the Company" or "U.S. Global")
serves as investment adviser, investment manager and transfer agent to U.S.
Global Investors Funds ("USGIF") and U.S. Global Accolade Funds ("USGAF"), both
Massachusetts business trusts which are no-load, open-end investment companies
offering shares in numerous mutual funds to the investing public. The Company
has served as investment adviser and manager since the inception of USGIF and
USGAF and assumed the transfer agency function of USGIF in November 1984, and of
USGAF in October 1994, the commencement of operations. For these services, the
Company receives fees from USGIF and USGAF.
The Company has formed a limited liability company which was incorporated in
Guernsey on August 20, 1993. This company, U.S. Global Investors (Guernsey)
Limited ("USGG"), manages the portfolio of an offshore fund, U.S. Global
Strategies Fund Limited ("the Guernsey Fund").
U.S. Global has formed a company that was originally incorporated in Texas on
April 24, 1994. This company, U.S. Global Brokerage, Inc. ("USGB"), formerly
United Services Brokerage, Inc., was registered as a broker/dealer with the
National Association of Securities Dealers, Inc. and the appropriate state
regulatory agencies so that it may provide distribution services for USGIF and
USGAF mutual fund shares.
The Company, through its wholly owned subsidiary, Security Trust & Financial
Company ("STFC"), also serves as custodian for retirement accounts invested in
USGIF, USGAF, and other mutual funds.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries, United Shareholder
Services, Inc. ("USSI"), STFC, A&B Mailers, Inc. ("A&B"), USGG, and USGB. During
the fourth quarter of fiscal year 1996 the Company's interest in the Guernsey
Fund declined below 50 percent and it began accounting for its investment in the
Guernsey Fund using the equity method of accounting. At June 30, 1998, and 1997,
the Company held a 23 percent and a 14 percent interest in the Guernsey Fund,
respectively. The aggregate value of the Company's investment at June 30, 1998,
and 1997, based on quoted market value was $866,288 and $1,322,032,
respectively.
The Guernsey Fund redeemed 36,436 shares for cash amounting to $3,457,017, and
issued 48,188 net additional shares for cash amounting to $5,616,825 to
investors other than the Company during fiscal years 1998 and 1997,
respectively. The Company accounts for changes in interest of its investment in
the Guernsey Fund by charging or crediting income for the effects of such
transactions when consummated. The Company recorded ($17,146) and $10,490 in
gains (losses) on such transactions during fiscal years 1998 and 1997,
respectively, which are included as a separate line in the accompanying income
statement. Deferred income taxes have been provided on these gains.
All significant inter-company balances and transactions have been eliminated in
consolidation. Certain amounts have been reclassified for comparative purposes.
CASH AND CASH EQUIVALENTS. Cash consists of cash on hand and cash equivalents
with original maturities of three months or less. Cash and cash equivalents at
June 30, 1998, and at June 30, 1997 include $1,280,321 and $690,543,
respectively, in USGIF money market mutual funds (see Note L). This investment
is valued at amortized cost which approximates market. Restricted cash of
$270,000 and $618,169, at June 30, 1998, and 1997, respectively, is included in
restricted investments (see Notes I and N).
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.
Annual Report on Form 10-K 1998 Page 46
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INCOME TAXES. Provisions for income taxes include deferred taxes for temporary
differences in the bases of assets and liabilities for financial and tax
purposes, resulting from the use of the liability method of accounting for
income taxes. The liability method requires that deferred tax assets be reduced
by a valuation allowance in cases where it is more likely than not that the
assets will not be realized.
EARNINGS PER SHARE. Basic and diluted earnings per share are based on the
weighted average number of shares of class A, class B, and class C common stock
outstanding during the year. All classes of common are considered equivalent in
the calculation of earnings per share since each share has essentially
equivalent interests in the income of the Company. Warrants and options are
included to the extent they are dilutive.
SECURITY INVESTMENTS. The Company accounts for its investments in securities in
accordance with Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities"("SFAS 115") (see Note B).
Under SFAS 115, the Company classifies its investments in equity and debt
securities into three categories. Management determines the appropriate
classification of securities at the time of purchase and reevaluates such
designation as of each reporting period date (see Note B).
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. For those securities with declines in
fair value which are considered other than temporary, the cost basis of the
security is written down as a new cost basis, and the amount of the write down
is included in earnings.
FOREIGN CURRENCY TRANSACTIONS. Transactions between the Company and foreign
entities are converted to U.S. dollars using the exchange rate on the date of
the transactions. Security investments valued in foreign currencies are
translated to U.S.dollars using the applicable exchange rate as of the reporting
date. Foreign currency gain (loss) is included as a component of investment
income.
USE OF ESTIMATES. The preparation of financial statements in conformity with
generally accepted accounting principles require the Company to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.
ACCOUNTING PRONOUNCEMENTS. In March 1997, the Financial Accounting Standards
Board ("FASB") issued Statement No. 128, Earnings per Share ("SFAS 128"), which
establishes standards for computing and presenting earnings per share ("EPS")
and applies to entities with publicly held common stock or potential common
stock. This Statement simplifies the standards for computing EPS previously
found in APB Opinion No 15, Earnings per Share, and makes them comparable to
international EPS standards. It replaces the presentation of primary EPS on the
face of the income statement for all entities with complex capital structures
and requires a reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS computation.
During fiscal year 1998, the Company adopted SFAS 128, and accordingly, all
prior period EPS amounts have been reclassed to conform with the new
requirements.
In June 1997, the FASB issued Statements No. 130, Reporting Comprehensive Income
("SFAS 130"). SFAS 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, and losses)
in a full set of general-purpose financial statements. This Statement requires
that all items that are recognized under accounting standards as components of
comprehensive income be reported in a statement of financial performance.
Although the Statement does not address disclosure format, it requires an
enterprise to (a) represent total comprehensive income for the financial
statement period, (b) classify items of other comprehensive income by their
nature in a financial statement and (c) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position. This
U.S. Global Investors, Inc.
Annual Report on Form 10-K 1998 Page 47
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Statement is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. The Company plans to adopt SFAS 130 in fiscal
year 1999. Management has not yet determined the manner in which comprehensive
income might be displayed.
In June 1997, the FASB issued Statement No. 131, Disclosures about Segments of
an Enterprise and Related Information ("SFAS 131"). SFAS 131 establishes
standards for reporting information in the annual financial statements about a
public entity's operating segments and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. SFAS 131 also establishes standards for related
disclosures regarding products and services, geographic areas, and major
customers. This Statement is effective for financial statements for periods
beginning after December 15, 1997. In the initial year of application,
comparative information for earlier years is to be restated. The Company plans
to adopt SFAS 131 in fiscal year 1999. Management has not yet completed its
determination of what, if any, impact the "management approach" will have on its
financial statement disclosures.
In February 1998, the FASB issued Statement No. 132, Employers' Disclosures
about Pensions and Other Postretirement Benefits ("SFAS 132"). SFAS 132
standardizes the disclosure requirements for pensions and other postretirement
benefits to the extent practicable, and requires additional information on
changes in the benefit obligations and fair values of plan assets that will
facilitate financial analysis. As the Company does not offer pension or other
postretirement benefits, it is not anticipated this Statement will impact the
Company.
In June 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133"). SFAS 133 standardizes the
accounting for derivative instruments, including certain derivative instruments
imbedded in other contracts, by requiring that an entity recognize those items
as assets or liabilities in the statement of financial position and measure them
at fair value. SFAS 133 generally provides for matching the timing of gain or
loss recognition on the hedging instrument with the recognition of (a) the
changes in fair value of the hedged asset or liability or (b) the earnings of
the hedged forecasted transaction. This Statement is effective for fiscal years
beginning after June 15, 1999. Management is evaluating the impact of the
Statement on the Company.
The Accounting Standards Executive Committee (AcSEC) recently issued Statement
of Position (SOP) 98-5, Reporting on the Costs of Start-up Activities. The SOP
requires the costs of start-up activities to be expensed as incurred. In a
change from the Exposure Draft, start-up activities now include organization
costs, which could have significant ramifications to certain mutual funds. The
SOP applies to all nongovernmental entities and to start-up costs of
development-stage entities as well as established operating entities. The SOP is
effective for fiscal years beginning after December 15, 1998, except for certain
investment companies (primarily open-end investment funds), which must apply the
SOP prospectively beginning June 30, 1998. The adoption of this Statement is not
expected to materially impact the financial position or results of operations of
the Company.
Note B. Investments
The cost and market value of investments classified as trading are as follows:
DATE COST MARKET VALUE
------------- ----------- ------------
June 30, 1998 $ 1,173,011 $ 901,647
June 30, 1997 $ 772,630 $ 721,954
June 30, 1996 $ 1,034,398 $ 999,500
The net change in the unrealized holding gain (loss) on trading securities held
at June 30, 1998, that has been included in earnings for the period was
($220,468), ($15,778), and $115,899 for the period ended June 30, 1998, 1997,
and 1996, respectively.
The cost of investments in securities, which are classified as
available-for-sale, which may not be readily marketable at June 30, 1998, was
$509,382. These investments are reflected as non-current assets on the June 30,
1998, consolidated balance sheet at their fair value at June 30, 1998, of
$472,240 with $24,514, net of tax, in unrealized losses being recorded as a
separate component of shareholders' equity. These investments are in private
placements
U.S. Global Investors, Inc.
Annual Report on Form 10-K 1998 Page 48
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which are restricted for sale as of June 30, 1998. It is anticipated the
securities obtained in these private placements will become free trading within
one year. During fiscal year 1998, the Company recorded realized losses of
$349,579 and recorded unrealized gains of $103,205 on securities which were
transferred from the available-for-sale category to the trading category upon
becoming free trading. The Company reduced the cost basis of investments held as
available-for-sale by approximately $350,000 for certain investments with
declines in fair value which were considered other than temporary.
The cost of investments in securities, which were classified as
available-for-sale, which were not readily marketable at June 30, 1997, was
$825,585. These investments were reflected as non-current assets on the June 30,
1997, consolidated balance sheet. These investments were in private placements
which were restricted for sale as of June 30, 1997. The fair value of the
investments classified as non-current available-for-sale securities at June 30,
1997, was $557,315 with $177,058, net of tax, in unrealized losses recorded as a
separate component of shareholders' equity. During fiscal year 1997, the Company
recorded in income realized gains of $218,860 and unrealized gains of
approximately $100,000 on securities which were transferred from the
available-for-sale category to the trading category upon becoming free trading.
During fiscal year 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.
NOTE C. INVESTMENT MANAGEMENT, TRANSFER AGENT AND OTHER FEES
The Company serves as investment adviser to USGIF, USGAF and the Guernsey Fund
and receives a fee based on a specified percentage of net assets under
management. The Company also serves as transfer agent to USGIF and USGAF and
receives a fee based on the number of shareholder accounts. The Company also
provides in-house legal services to USGIF and USGAF. During the second quarter
of fiscal year 1998, the Company outsourced the bookkeeping and accounting
functions performed by USSI. The Company also receives exchange, maintenance,
closing and small account fees directly from USGIF and USGAF shareholders. Fees
for providing services to USGIF and USGAF continue to be the Company's primary
revenue source.
The Company receives additional revenue from several sources including: STFC
custodian and administrative fee revenues, gains on marketable securities
transactions, revenues from miscellaneous transfer agency activities including
lockbox functions as well as mailroom operations (A&B).
Investment advisory fees, transfer agency fees, accounting fees, custodian fees
and all other fees earned by the Company are recorded as income during the
period in which services are performed.
The Company has voluntarily waived or lowered its advisory fees and is bearing
expenses on several funds within USGIF and USGAF.
The Company has unconditionally guaranteed that the total fund operating
expenses (as a percentage of average net assets) of the U.S. Government
Securities Savings Fund will not exceed 0.40 percent on an annualized basis
through June 30, 1999, 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 Tax Free Fund and
Near-Term Tax Free Fund will not exceed 0.70 percent on an annualized basis
through June 30, 1999, 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 All American Equity Fund
will not exceed 1.00 percent on an annualized basis through June 30, 1999, or
such later date as the Company determines.
The aggregate amount of fees waived or expenses voluntarily reimbursed totaled
$3,484,595, $3,250,786, and $3,362,050, in 1998, 1997, and 1996, respectively.
U.S. Global Investors, Inc.
Annual Report on Form 10-K 1998 Page 49
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The following funds accounted for more than 10 percent of revenue [excluding
government security income (Note F)] in the years indicated:
YEAR ENDED JUNE 30,
--------------------------
1998 1997 1996
---- ---- ----
Gold Shares Fund 15% 17% 21%
World Gold Fund 22% 24% 21%
U.S. Treasury Securities Cash Fund 13% 9% 9%
Bonnel Growth Fund 13% 9% 4%
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
USGIF expire on or about January 21, 1999, and the contracts between the Company
and USGAF expire on or about March 8, 1999. Management anticipates the trustees
of both USGIF and USGAF will renew the contracts.
NOTE D. PROPERTY AND EQUIPMENT
Property and equipment are composed of the following:
JUNE 30,
---------------------------
1998 1997
---------- ----------
Leasehold improvements $ 184,549 $ 182,887
Capitalized leased equipment 519,768 519,768
Furniture and equipment 5,034,174 4,514,171
Building and land 2,203,757 2,203,757
---------- ----------
7,942,248 7,420,583
Accumulated depreciation and amortization (5,346,157) (4,884,502)
---------- ----------
Net property and equipment $2,596,091 $2,536,081
========== ==========
At June 30, 1998 and 1997, the capitalized leased equipment was fully amortized.
Amortization expense for capitalized leased equipment was $0, $8,808, and
$60,658, for the fiscal years ended June 30, 1998, 1997, and 1996, respectively.
There are no minimum lease payments required by obligations under capital leases
for fiscal year 1999.
The building and land is pledged as collateral for the financing used to acquire
the building (see Note H).
NOTE E. RESIDUAL EQUITY INTEREST
In June 1992 the Company made its final payment to the Settlement Pool
established under the June 1988 Settlement Agreement relating to the original
Prospector Fund (now operating as the Global Resources Fund); and the Settlement
Pool made the final payout to "Eligible Shareholders" thereof in June 1992.
Under the 1988 Settlement Agreement, any amounts payable to "Eligible
Shareholders" who could not be located, together with interest thereon, would be
held for six years after the final payout against the claims of those
shareholders. At the end of six years, such amounts would be made available to
all persons claiming subrogation. The Company had first right of subrogation to
the amounts. Accordingly, the Company increased the residual equity interest to
$675,613 and recorded it as a current receivable at June 30, 1998, thus
positively affecting earnings by reducing general and administrative expenses by
approximately $457,000 for fiscal year 1998. The amount of cash, subsequently
received in July 1998, equaled the current receivable recorded at June 30, 1998.
U.S. Global Investors, Inc.
Annual Report on Form 10-K 1998 Page 50
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NOTE F. GOVERNMENT SECURITIES
The U.S. Government Securities Savings Fund ("USG"), a USGIF fund, from its
inception had invested in, among other types of Government securities, certain
Government agency notes whose interest rates reset monthly based on a
cost-of-funds index ("Notes"). This reset feature lags changes in short-term
interest rates.
During fiscal year 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 affected. To reduce USG's exposure to said Notes and in
order to maintain a $1.00 per share net asset value, U.S. Global decided, in the
first quarter of fiscal year 1995, to arrange for USG to sell $40 million par
amount of Notes at USG's amortized cost of approximately $39,777,000 plus
accrued interest to Marleau, Lemire Inc.("ML"). Thereafter, U.S. Global decided
to purchase directly from the fund $90,525,000 par amount of Notes ($53,275,000
during the first quarter of fiscal year 1995 and $37,250,000 during the third
quarter of fiscal year 1995) at USG's amortized cost of approximately
$90,337,000 plus accrued interest. Additionally, in connection with such
decision, U.S. Global purchased the Notes from ML for approximately $39,777,000
plus accrued interest during the first quarter of fiscal year 1995.
U.S. Global recorded the Notes at their fair value. As the Notes had an
aggregate fair value of approximately $124,739,000 on the dates U.S. Global
acquired the securities, the Company recorded pre-tax non-cash charges to the
results of operations of approximately $2,574,000 during the first quarter and
$2,800,000 during the third quarter of fiscal year 1995. The Company initially
classified the Notes as held-to-maturity securities and in addition to periodic
receipts of interest income, U.S. Global recognized $306,926, $1,363,051, and
$1,499,521 in non-cash income during fiscal years 1997, 1996, and 1995,
respectively.
In December 1995, $63,800,000 par value Notes were reclassified from the
held-to-maturity category to the available-for-sale category in accordance with
the one-time reassessment allowed by the FASB Guide to Implementation of
Statement 115 on Accounting for Certain Investments in Debt and Equity
Securities. The remaining $53,725,000 par value Notes retained their
held-to-maturity status as defined by SFAS 115 until June 1996 when these were
re-classified to available-for-sale securities. Upon this re-classification the
Company began recording these Notes at fair value with any unrealized gain or
loss excluded from earnings and reported, net of tax, as a separate component of
shareholders' equity. At the June 1996 re-classification date, the unrealized
loss approximated the amount recorded at June 30, 1996 ($93,949).
U.S. Global financed the original acquisition of the Notes, including purchased
accrued interest, as follows: 1) approximately $120.9 million was provided by
third party broker/dealers under reverse repurchase agreements (see Note K); 2)
U.S. Global issued a $6.0 million 8 percent subordinated debenture to ML, the
terms of which require principal payments as the Notes mature and interest
payments quarterly; and 3) U.S. Global utilized approximately $3,563,000 of its
own cash.
The Company 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 U.S. Global matured during fiscal year 1997 at
their aggregate $26,725,000 par amount and the Company made the final payments
on the reverse repurchase agreements and the subordinated debenture.
U.S. Global Investors, Inc.
Annual Report on Form 10-K 1998 Page 51
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NOTE G. INVESTMENT IN JOINT VENTURE
During the fiscal year 1995, U.S. Global and ML, a Canadian brokerage firm,
entered into a joint venture agreement whereby U.S. Global and ML agreed to
undertake to offer mutual funds in Canada, primarily through ML's broker network
located in Toronto, Montreal, Vancouver, and Victoria. As part of the agreement
to enter into a joint venture, U.S. Global issued 120,000 shares of its
preferred stock to ML. The estimated value of the stock upon issuance was
$510,000, which the Company recorded as its investment in the joint venture
during the first quarter of fiscal year 1995. In conjunction with this joint
venture, United Services Advisors Wealth Management Corp. was incorporated
during the third quarter of fiscal year 1995 with a 50 percent ownership to each
U.S. Global and ML . The joint venture was renamed United Services Advisors,
Canada, Inc. ("USACI") during fiscal year 1996. Also, U.S. Global agreed to
incur the initial organization and development costs. During June 1996 the USACI
management group acquired a one-third interest in USACI. As a result of this
negotiated sale, which diluted U.S. Global's interest from one-half to
one-third, delays associated with the joint venture becoming operational, and
the Company's reduced expectations of the joint venture's profitability,
management reassessed the recoverability of its carrying value in the joint
venture. The Company determined that the carrying value should be reduced by
$619,500 which decreased the carrying value to reflect the amount of the
Company's proportionate one-third share of the underlying equity in net assets
of USACI of $255,500 at June 30, 1996.
The joint venture became operational during August 1996, and the Company,
utilizing the equity method of accounting, recorded a net loss of $196,535
during fiscal year 1997. In June 1997, the Company sold its remaining interest
in USACI for approximately $134,000 to the USACI management group which resulted
in a net charge to income of approximately $100,000.
NOTE H. NOTE PAYABLE AND LINE OF CREDIT
The Company has a note payable to a bank which is secured by land, an office
building and related improvements. As of June 30, 1998, the balance on the note
was $1,216,415. The loan is currently amortizing over a twenty-year period with
payments of both principal and interest due monthly based on a fixed rate of
7.75 percent. The current monthly payment is $11,750, and matures July 2001.
Under this agreement, the Company must maintain certain financial covenants.
Because of events described in Note F, the Company obtained a waiver of the
covenants from the bank through June 30, 1995 and subsequently negotiated an
amendment to the loan agreement and covenants with the bank to cover periods
beyond June 30, 1996. The Company is in compliance with all loan covenants at
June 30, 1998. Additionally, the Company has a 36-month note payable secured by
a vehicle with payments of both principal and interest of $1,556 due monthly
based on a fixed rate of 10.75 percent. As of June 30, 1998, the outstanding
balance on the note was $40,708.
Future principal payments to be made over the next five years based on the notes
payable outstanding at June 30, 1998, are as follows:
FISCAL
YEAR AMOUNT
---- ------------
1999 $ 63,525
2000 68,988
2001 1,124,611
Thereafter 0
Total $1,257,124
During the current fiscal year, the Company renewed a $1 million line of credit
("LOC") under which there was no balance outstanding as of June 30, 1998. This
LOC was obtained to provide financing for the working capital needs of the
Company and expires in March 1999. Borrowings under the LOC are at a floating
interest rate comprising of the Bank One, Texas N.A. Base Rate + 3/4 percent,
plus a commitment fee of 15 basis points on the unused portion of the LOC
amount. Total commitment fees paid on the unused LOC amounted to $1,033, and
$425 for fiscal years 1998, and 1997, respectively.
U.S. Global Investors, Inc.
Annual Report on Form 10-K 1998 Page 52
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NOTE I. ANNUITY AND CONTRACTUAL OBLIGATIONS
On February 6, 1989, the Company entered into an agreement with Clark Aylsworth
("Aylsworth") related to his retirement on December 31, 1988. This agreement
provided for the payment to Aylsworth of a monthly annuity of $1,500 for the
remainder of his life or his wife's life, if he predeceases her. The Company has
recorded an obligation related to this agreement.
On December 30, 1990, the Company entered into a non-compete/non-interference
agreement, an executory contract, pursuant to which it pays the Aylsworths
$4,500 monthly, such amount to continue for the longer of Aylsworth's or his
wife's life. The Company determined that the executory contract should be
expensed as payments are made. The Company placed cash in escrow to cover the
Company's obligation to the Aylsworths if the Company defaults. The escrowed
amount decreases $15,000 annually and amounted to $270,000 at June 30, 1998.
NOTE J. 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 as of
June 30 with the Company are included. The amount of the annual contribution,
which may not exceed 15 percent of earnings before income taxes, is determined
by the Company's board of directors. At June 30, 1998, and June 30, 1997, the
Company has accrued $0 and $59,093 for the fiscal years 1998 and 1997
contributions, respectively.
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 percent
of their compensation to this plan, and the Company will match 50 percent of
their contribution up to 4 percent. At June 30, 1998, and June 30, 1997, the
Company has accrued $38,123 and $50,158, respectively, for this matching
contribution.
Additionally, the Company self-funds its employee health care plan. The Company
has obtained reinsurance with both a specific and an aggregate stop-loss in the
event of catastrophic claims. At June 30, 1998, the Company has accrued an
amount representing the Company's estimate of incurred but not reported claims.
NOTE K. SHAREHOLDERS' EQUITY
During June of 1996 the Company reclassified its class A common stock as class C
common stock and reclassified its preferred stock as class A common stock with
no change in existing rights, privileges, or preferences of each respective
class. Class B common stock remains unchanged. The descriptions in this note
have been changed to reflect these reclassifications.
In a private placement on October 27, 1989, Frank E. Holmes and the F.E. Holmes
Organization, Inc. acquired control of the Company by purchasing for $2,200,000,
550,000 shares of the Company's class C common stock and warrants to acquire an
additional 550,000 shares of class C common stock at $4.00 per share. These
warrants include a provision for adjustment to the number of warrants and
exercise price in the event additional securities are issued at an amount below
the exercise price of such outstanding warrants. At June 30, 1994, there were
outstanding class C common stock warrants to purchase 586,122 shares at $3.75
per share expiring October 1994. Effective August 11, 1994, such warrants were
canceled and new agreements were approved providing for warrants to acquire
586,122 shares of common stock at the August 11, 1994, market price of $4.00 per
share expiring October 1999. These warrants were outstanding as of June 30,
1998.
In December 1991, the Company issued to Mr. Holmes options to purchase 400,000
shares of class C common stock at $2.625 per share which equaled or exceeded the
fair value of the stock on the date of grant. These options vested six-months
after the issuance date and expire on December 6, 2001. During fiscal year 1992,
the board of directors approved the issuance of 100,000 shares of class A common
stock to F.E. Holmes Organization, Inc. in exchange for 100,000 shares of its
class C common stock. At June 30, 1998, Mr. Holmes owned approximately 78
percent of the
U.S. Global Investors, Inc.
Annual Report on Form 10-K 1998 Page 53
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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 percent of the total combined voting power of all classes of
the Company's stock and up to ten years for other employees. Options issued
under the 1985 Plan vest six months from the grant date or 20 percent on the
first, second, third, fourth and fifth anniversaries of the grant date. Since
adoption of the 1985 plan, options have been granted at prices ranging from
$1.50 to $4.50 per share, which equaled or exceeded the fair market value at
date of grant. As of June 30, 1998, options covering 88,000 shares have been
exercised and options covering 47,500 shares have expired. The 1985 plan expired
December 31, 1994; as a consequence, there will be no further option grants
under the 1985 plan.
In November 1989, the board of directors adopted the 1989 Non-Qualified Stock
Option Plan (the "1989 Plan"), amended in December 1991, which provides for the
granting of options to purchase 800,000 shares of the Company's class A common
stock to directors, officers and employees of the Company and its subsidiaries.
Since adoption of the 1989 Plan, options have been granted at prices ranging
from $1.50 to $5.69 per share, which equaled or exceeded the fair market value
at date of grant. During fiscal year 1996, options covering 44,700 shares were
granted at exercise prices ranging from $2.1875 to $2.625 per share. During
fiscal year 1997, options covering 30,000 shares were granted at an exercise
price of $2.00 per share. Options issued under the 1989 Plan vest six months
from the grant date or 20 percent on the first, second, third, fourth and fifth
anniversaries of the grant date. As of June 30, 1998, options covering 393,000
shares have been exercised under this plan and options covering 101,500 shares
have expired.
In April 1997, the board of directors adopted the 1997 Non-Qualified Stock
Option Plan (the "1997 Plan") which provides for the granting of stock
appreciation rights ("SARs") and/or options to purchase 200,000 shares of the
Company's class A common stock to directors, officers and employees of the
Company and its subsidiaries. During the fiscal year 1998, options covering
148,500 shares were granted at exercise prices ranging from $1.82 to $2.00 per
share. As of June 30, 1998, options covering 6,000 shares have been exercised
under this plan and options covering 500 shares have expired.
On a per share basis, the holders of the class C common stock and the non-voting
class A common stock participate equally in dividends as declared by the
Company's board of directors, with the exception that any dividends declared
must first be paid to the holders of the class A stock to the extent of 5
percent of the Company's after-tax prior year net earnings.
The holders of the class A stock have a liquidation preference equal to the par
value of $.05 per share. Certain class C common stock is exchangeable on a
one-for-one basis for class A stock.
Stock option transactions under the various stock option plans are summarized
below:
WEIGHTED AVERAGE
-----------------------------------
SHARES EXERCISE PRICE
--------- --------------
Outstanding July 1, 1995 1,041,800 $2.57
Granted 44,700 $2.76
Canceled 25,700 $2.63
Exercised 141,500 $2.09
----------
Outstanding June 30, 1996 919,300 $2.65
U.S. Global Investors, Inc.
Annual Report on Form 10-K 1998 Page 54
- --------------------------------------------------------------------------------
WEIGHTED AVERAGE
------------------------------------
SHARES EXERCISE PRICE
---------- --------------
Granted 178,500 $1.90
Canceled 33,500 $2.67
Exercised 5,500 $1.50
---------
Outstanding June 30, 1997 1,058,800 $2.53
Granted 0 $0.00
Canceled 80,200 $3.96
Exercised 7,000 $1.94
----------
Outstanding June 30, 1998 971,600 $2.41
==========
As of June 30, 1998, 1997, and 1996, exercisable stock totaled 958,580,
1,027,140, and 851,150, shares and had weighted average exercise prices of
$2.41, $2.51, $2.59 per share, respectively.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" and related interpretations in accounting for its
stock option plans as allowed under Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). Accordingly,
the Company has not recognized compensation expense for its stock options
granted subsequent to December 15, 1994, the effective date of the Statement.
Had compensation expense for the Company's stock options granted in fiscal year
1997 and 1996 been determined based on the fair value at the grant dates
consistent with the methodology of SFAS 123, such compensation expense, net of
tax benefit, would have been $2,567, $134,532 and $25,493 in fiscal years 1998,
1997, and 1996, respectively, and the pro forma net income and income per share
would have been as follows:
FISCAL YEAR ENDED JUNE 30,
-----------------------------------------
1998 1997 1996
--------- --------- ---------
Pro forma net income (loss) ($151,186) $149,615 $1,961,574
Pro forma income per share:
Basic and diluted ($0.02) $0.02 $0.30
The weighted average fair value of options granted during the fiscal years ended
June 30, 1997, and 1996 was $1.10 and $1.78, respectively. Because SFAS 123 is
applicable only to options granted in fiscal years beginning subsequent to
December 15, 1994, its pro forma effect will not be fully reflected until fiscal
2001 due to vesting requirements.
For purposes of pro forma disclosure, the estimated fair value of the options is
amortized to expense over the options' vesting period. The fair value of these
options was estimated at the date of the grant using a Black-Scholes option
pricing model with the following weighted-average assumptions:
FISCAL YEAR ENDED JUNE 30,
-----------------------------------------
1998 1997 1996
------------- ------------- -------------
Expected volatility 0.50 - 0.55 0.50 - 0.55 0.52 - 0.55
Expected dividend yield -- -- --
Expected life (term) 8 Years 8 Years 8 Years
Risk-free interest rate 5.07% - 5.47% 5.07% - 5.47% 5.18% - 5.47%
U.S. Global Investors, Inc.
Annual Report on Form 10-K 1998 Page 55
- --------------------------------------------------------------------------------
Class A and class C common stock options outstanding and exercisable at June 30,
1998, were as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------------------- ------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
DATE OF OPTION NUMBER REMAINING OPTION NUMBER OPTION
GRANT PRICE OUTSTANDING LIFE IN YEARS PRICE EXERCISABLE PRICE
-------- ------ ----------- ------------- -------- ----------- -------
1985 Plan 11/07/89 $1.65 35,000 1.35 $1.65 35,000 $1.65
Class A 11/07/89 $1.50 23,000 1.35 $1.50 23,000 $1.50
09/13/93 $4.25 0 n/a $4.25 0 $4.25
10/05/94 $4.50 0 n/a $4.50 0 $4.50
12/15/94 $2.63 11,000 6.46 $2.63 6,600 $2.63
----- ------ ---- ----- ------ -----
$1.50 - $2.63 69,000 2.16 $1.76 64,600 $1.70
1989 Plan 11/07/89 $1.50 0 n/a $1.50 0 $1.50
Class A 11/13/89 $2.25 90,000 1.37 $2.25 90,000 $2.25
12/06/91 $2.63 199,900 3.43 $2.63 199,900 $2.63
08/24/92 $3.00 5,000 4.15 $3.00 5,000 $3.00
02/14/94 $5.69 0 n/a $5.69 0 $5.69
05/16/94 $4.75 2,000 0.87 $4.75 1,600 $4.75
12/15/94 $2.63 0 n/a $2.63 0 $2.63
02/24/95 $3.38 0 n/a $3.38 0 $3.38
09/05/95 $2.63 11,000 7.18 $2.63 4,400 $2.63
11/07/95 $2.19 2,700 7.35 $2.19 1,080 $2.19
05/24/96 $3.06 20,000 7.90 $3.06 20,000 $3.06
06/04/97 $2.00 30,000 8.93 $2.00 30,000 $2.00
----- ------ ---- ----- ------ -----
$1.50 - $4.75 360,600 3.76 $2.52 351,980 $2.51
1997 Plan 06/04/97 $1.82 92,000 8.93 $1.82 92,000 $1.82
Class A 06/04/97 $2.00 50,000 8.93 $2.00 50,000 $2.00
----- ------ ---- ----- ------ -----
$1.82 - $2.00 142,000 8.93 $1.88 142,000 $1.88
Class C 12/06/91 $2.63 400,000 4.43 $2.63 400,000 $2.63
----- ------- ---- ----- ------- -----
All Plans 11/89
thru
06/97 $1.50 - $5.69 971,600 4.27 $2.41 958,580 $2.41
============= ======= ==== ===== ======= =====
During the fiscal years ended June 30, 1998, and June 30, 1997, the Company
purchased 29,525 and 141,250 shares of its class A common stock at an average
price of $2.30 and $2.39 per share, respectively.
At the end of September 1994, the Company and ML entered into a letter of intent
pursuant to which ML would purchase a significant ownership interest in the
Company. On December 7, 1994, the Company and ML entered into an agreement
whereby the Company issued to ML one million shares of new class of convertible
non-voting common stock (class B) at $5.00 per share and warrant to purchase an
additional one million shares of capital stock at $6.00 per share in
consideration of an investment of $5 million.
On August 3, 1995, U.S. Global shareholders approved an amendment to the
Company's Restated Articles of Incorporation providing for an increase in the
number of shares of class A that the Company is authorized to issue by one
million shares.
U.S. Global Investors, Inc.
Annual Report on Form 10-K 1998 Page 56
- --------------------------------------------------------------------------------
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 percent of the issued and outstanding voting shares of
the Company, and Mr. Holmes would then own approximately 3 percent of the total
outstanding common shares of ML.
U.S. Global and ML closed a transaction on December 29, 1995 covering the
issuance of class A stock and the repurchase of convertible non-voting class B
common stock and closely related items as discussed below. Pursuant to the
agreement: (1) ML no longer has a right to return its one million shares of
class B common stock to the Company at its original purchase price of
$5,000,000; (2) in this connection, the Company eliminated any future interest
costs it might have borne had ML converted its investment to debt; and (3) the
Company canceled ML's warrant and options to acquire additional shares thus
reducing future dilution by approximately 1.65 million shares.
In connection with the December 1995 transaction, ML received $2,500,000 cash
and 1,000,000 shares of class A stock in exchange for U.S. Global canceling (a)
ML's 1,000,000 shares of U.S. Global's class B common shares, (b) a warrant
giving ML the right to acquire 1,000,000 shares of U.S. Global'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 U.S.
Global's preferred stock, and (d) other rights under the December 1994
agreements relating to ML's original purchase, including its right to obtain
voting control of U.S. Global.
As a result of the December 1995 transaction: (1) Messrs. Hubert Marleau and
Richard Renaud, ML's representatives, resigned from U.S. Global's board of
directors and Frank E. Holmes, U.S. Global's Chief Executive Officer, resigned
from ML's board of directors; (2) U.S. Global committed to prepay $50,000 per
month toward the principal balance outstanding on the debenture held by ML in
accordance with the prepayment clause set forth in the U.S. Global-ML
Subordinated Debenture Agreement ("Debenture"); (3) The Debenture was amended to
provide that in the event that voting control of U.S. Global changes, the
balance owing ML under the Debenture shall become due and payable prior to
closing on the change in control and the registration statement covering ML's
1,000,000 shares of preferred stock shall be declared effective by the SEC prior
to said closing; (4) ML transferred the assets and the management contract(s) of
ML's Small Cap Fund ("Small Cap") from ML to USACI with all revenues generated
by Small Cap, effective January 1, 1996, whether the assets and management
contracts have been transferred or not, becoming the revenue of USACI; (5) U.S.
Global agreed to bear up to the next Cdn $250,000 in costs with respect to
USACI; and (6) the requirement that Mr. Holmes exchange 177,280 shares of U.S.
Global's class C common stock for 400,633 shares of ML (133,551 consolidated
shares based upon 1 new for 3 old) was canceled in its entirety; with the
understanding, however, that the 72,720 class C common shares held by ML and the
ML shares held by Mr. Holmes are not subject to this cancellation.
As discussed in Note M, 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 L. RELATED PARTY TRANSACTIONS
In addition to the Company's receivable from USGIF relating to investment
management, transfer agent and other fees (see Note C), the Company had
$1,280,321 and $690,543 invested in USGIF money market mutual funds at June 30,
1998, and 1997, respectively. Dividend income earned from these investments in
USGIF totaled $98,450, $83,317 and $113,904 for the years ended June 30, 1998,
1997 and 1996, respectively.
U.S. Global Investors, Inc.
Annual Report on Form 10-K 1998 Page 57
- --------------------------------------------------------------------------------
Transactions With ML. During fiscal year 1996, U.S. Global and ML closed a
transaction covering the issuance of class A common stock ( Note K).
During the year ended June 30, 1996, U.S. Global purchased 7,100 shares of ML
common stock through U.S. Global's brokerage account at Marleau, Lemire
Securities Inc. ("MLSI"), a subsidiary of ML, increasing U.S. Global's position
to 42,219 shares. Prior to fiscal year 1996 year end, U.S. Global sold its
entire position of ML common shares.
During fiscal year 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 year 1996 resulting in realized losses of approximately $50,000.
In addition, the Company purchased other securities at an aggregate price of
$269,847 through MLSI from July 1995 through December 1995.
During fiscal year 1996, pursuant to agreements with ML (Note K), U.S. Global
filed a post-effective amendment to the Registration Statement on Form S-3
covering ML's offering of 120,000 shares of U.S. Global stock filed in fiscal
year 1995 and a Registration Statement on Form S-3 covering ML's offering of
1,000,000 shares of U.S. Global stock, which offerings were completed during
fiscal year 1996. U.S. Global incurred approximately $21,000 in fiscal year 1996
in costs associated with these offerings.
Further, during this period, ML sold 18,225 shares of class A common stock to
STFC at the direction of the beneficial owners of various STFC custodial
retirement accounts, and 6,775 shares for $17,784 to U.S. Global, which shares
are included in treasury stock as of June 30, 1996.
As of June 30, 1996, U.S. Global had accrued approximately $70,000 in
subordinated debenture interest payable to ML. Additionally, in connection with
the sale of the Notes discussed in Note F, U.S. Global repaid approximately
$2,700,000 in principal on the subordinated debenture during the year ending
June 30, 1996. U.S. Global also paid an additional $300,000 in principal
payments on the subordinated debenture during the year ended June 30, 1996.
There were additional related party transactions involving ML related to a joint
venture to market mutual funds in Canada (see Note G) and the purchase of U.S.
Government securities (see Note F).
OTHER TRANSACTIONS. During fiscal year 1998, the Company purchased 4,378 shares
for $200,000 of Xtra Music Limited, of which Jerold H. Rubinstein, a director of
the Company, has controlling interest. Additionally, during fiscal year 1998,
the Company paid Bobby D. Duncan, a director of the Company, approximately
$60,000 in consulting fees. During fiscal year 1996, Mr. Jerold Rubinstein, a
director of the Company, exercised options covering 25,000 shares at $1.50 per
share and 25,000 shares at $2.25 per share. U.S. Global purchased the shares
issued from the exercise of Mr. Rubinstein's stock options for $3.375 per share,
the market price on the day of exercise, which shares are included in treasury
stock as of June 30, 1996. Additionally, during fiscal year 1996, Mr. John
Budden, a former director of the Company who resigned during the fiscal year
1996, exercised options covering 25,000 shares at $1.50 per share, 25,000 shares
at $2.25 per share and 40,000 shares at $2.625 per share.
NOTE M. INCOME TAXES
The differences in income taxes attributable to continuing operations determined
by applying the U.S. federal statutory rate of 34 percent and the Company's
effective tax rate are summarized as follows:
U.S. Global Investors, Inc.
Annual Report on Form 10-K 1998 Page 58
- --------------------------------------------------------------------------------
YEAR ENDED JUNE 30,
-------------------------------------------
1998 1997 1996
------------ ------------ ------------
Tax expense (benefit) at statutory rate $ (63,984) $ 209,483 $ 1,020,198
Exercise of non-qualified stock options
treated as equity for financial statements -- (2,412) (61,487)
Non-deductible membership dues 11,880 13,713 14,112
Non-deductible meals & entertainment 31,401 25,419 23,090
Valuation allowance (31,986) 66,458 --
Other (13,118) 19,315 17,604
------------ ------------ ------------
$ (39,571) $ 331,976 $ 1,013,517
============ ============ ============
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The tax effects of these
temporary differences that give rise to the deferred tax asset are presented
below:
YEAR ENDED JUNE 30,
-------------------------------------------
1998 1997 1996
------------ ------------ ------------
Book/tax differences in the balance sheet:
Trading securities $ 92,577 $ 55,917 $ --
Accumulated depreciation 93,730 93,113 108,744
Accrued expenses 42,717 47,323 14,800
Available-for-sale securities 39,020 91,212 --
Reduction in carrying value of joint venture -- -- 210,630
Reduction in cost basis of AFS securities 177,466 -- --
Annuity obligations 52,713 55,053 57,236
Net unrealized holding gain (affiliated) -- 10,237 76,823
Net unrealized holding gain -- -- 294,993
Affiliated investment 11,253 -- --
------------ ------------ ------------
509,476 352,855 763,226
Tax carryovers:
Net operating loss ("NOL") carryover 465,143 855,211 957,154
Contributions carryover 113,539 57,709 66,459
Investment credit carryover -- -- 34,472
Minimum tax credits 115,228 114,270 117,786
------------ ------------ ------------
693,910 1,027,190 1,175,871
------------ ------------ ------------
Total gross deferred tax asset 1,203,386 1,380,045 1,939,097
------------ ------------ ------------
Affiliated investment -- (164,038) (153,032)
Trading securities -- -- (34,302)
Available-for-sale securities -- -- (294,993)
Net unrealized holding loss (affiliated) -- -- --
Net unrealized holding loss -- (91,212) --
------------ ------------ ------------
Total gross deferred tax liability -- (255,250) (482,327)
------------ ------------ ------------
Net deferred tax asset $ 1,203,386 $ 1,124,795 $ 1,456,770
============ ============ ============
For federal income tax purposes at June 30, 1998, the Company has NOLs of
approximately $1.4 million which will expire in fiscal 2010, charitable
contribution carryovers of approximately 334,000 expiring 1999-2001, and minimum
tax credits of $115,228 with indefinite expirations. If certain changes in the
Company's ownership should occur, there could be an annual limitation on the
amount of NOLs that could be utilized.
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax amount will not be realized. Management included a
valuation allowance of $34,472 and $66,458 at June 30, 1998, and 1997, respec-
tively, providing for the utilization of charitable contributions and investment
tax credit carryovers against future taxable income.
U.S. Global Investors, Inc.
Annual Report on Form 10-K 1998 Page 59
- --------------------------------------------------------------------------------
NOTE N. LITIGATION ACCRUAL
As discussed in the Company's Form 10-K for fiscal year ended June 30, 1997,
Gerald C. Letch sued the Company in June 1994 in state district court in San
Antonio, Texas, for breach of contract based upon an alleged oral promise by a
Company officer (later deceased) to pay a finder's fee for introducing certain
parties to the Company. In November 1995, a judgment was entered in favor of
Letch, with total damages aggregating $296,637.
On November 12, 1997, the Fourth Court of Appeals reversed the trial court's
finding against the Company. Mr. Letch filed a motion for rehearing, which was
subsequently denied by the appellate court. In March 1998, Mr. Letch filed a
writ of appeal with the Texas Supreme Court, which was denied. Accordingly, the
Company has retired the bond posted in connection with the appeals and received
the proceeds from the restricted cash.
The Company accrued approximately $100,000 (management's best estimate of the
fees and expenses necessary to fund an appeal) and $300,000 (the approximate
amount of the judgment) which were both recorded in the Company's Consolidated
Statement of Operations in fiscal year 1996. Since the decision in favor of the
Company is final, the Company has reversed the $300,000 accrued for the original
judgment, thus positively affecting earnings by reducing general and administra-
tive expenses during fiscal year 1998.
NOTE O. EARNINGS PER SHARE
The following table sets forth the computation for basic and diluted earnings
per share ("EPS") in accordance with SFAS 128:
YEAR ENDED JUNE 30,
-------------------------------------------
1998 1997 1996
------------ ------------ ------------
Basic and diluted net income (loss) $ (148,619) $ 284,149 $ 1,987,067
Weighted average number of outstanding shares:
Basic 6,617,153 6,606,211 6,562,830
Effect of dilutive securities:
Employee stock options 52,210 58,113 38,244
------------ ------------ ------------
Potential dilutive common shares 52,210 58,113 38,244
------------ ------------ ------------
Diluted 6,669,363 6,664,324 6,601,074
------------ ------------ ------------
Earnings (loss) per share:
Basic $ (0.02) $ 0.04 $ 0.30
============ ============ ============
Diluted $ (0.02) $ 0.04 $ 0.30
============ ============ ============
For additional disclosures regarding outstanding common stock, employee stock
options, and warrants, see Note K.
The diluted EPS calculation excludes the effect of stock options when their
exercise prices exceed the average market price for the period. For the years
ended June 30, 1998, 1997, and 1996, options for 650,400, 726,100, and 752,600
shares, respectively, were excluded from diluted EPS. Additionally, for the
years ended June 30, 1998, 1997, and 1996, there were 586,122 warrants
outstanding which were excluded from diluted EPS.