-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ATNRqegVoV/XRS6+scLu8eY/mOI2woBQg6OFMjzPY5f70k7j1nZUorgS6dcS6wm/ SwH1/j84tz3eLxMkOqRgVA== 0000754811-96-000025.txt : 19961001 0000754811-96-000025.hdr.sgml : 19961001 ACCESSION NUMBER: 0000754811-96-000025 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960930 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: U S GLOBAL INVESTORS INC CENTRAL INDEX KEY: 0000754811 STANDARD INDUSTRIAL CLASSIFICATION: INVESTMENT ADVICE [6282] IRS NUMBER: 741598370 STATE OF INCORPORATION: TX FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-13928 FILM NUMBER: 96636485 BUSINESS ADDRESS: STREET 1: 7900 CALLAGHAN RD CITY: SAN ANTONIO STATE: TX ZIP: 78229 BUSINESS PHONE: 2103081234 MAIL ADDRESS: STREET 1: 7900 CALLAGHAN ROAD CITY: SAN ANTONIO STATE: TX ZIP: 78229 FORMER COMPANY: FORMER CONFORMED NAME: UNITED SERVICES ADVISORS INC /TX/ DATE OF NAME CHANGE: 19950321 10-K405 1 ANNUAL REPORT ON FORM 10-K FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE - ---- SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the Fiscal Year Ended June 30, 1996 - ---- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from ____ to ____ Commission File Number 0-13928 U.S. GLOBAL INVESTORS, INC. (FORMERLY UNITED SERVICES ADVISORS, INC.) (Exact name of registrant as specified in its charter) 7900 CALLAGHAN ROAD, SAN ANTONIO, TX 78229 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: 210-308-1234 Texas 74-1598370 (State of Organization) (I.R.S. Employer Identification No.) ---------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: CLASS A COMMON STOCK, PAR VALUE $0.05 PER SHARE Indicate by check mark whether the Company (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of Registrant on September 9, 1996 was $476,324 Registrant's only voting stock is Class C Common Stock, par value $0.05 per share, for which there is no active market. The 171,348 shares of Class C Common Stock held by non-affiliates were valued at the average of the closing bid and asked prices of Registrant's Class A Common Stock as reported by NASDAQ, which was $2.69 per share. On September 9, 1996 there were 564,352 shares of Registrant's Class C Common Stock outstanding, no shares of Registrant's Class B non-voting common shares outstanding, and 6,219,422 shares of Registrant's Class A Common Stock issued and 6,042,476 shares of Registrant's Class A Common Stock issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Annual Report to Shareholders for the fiscal year ended June 30, 1996 are incorporated by reference in Part I, Item 1 and Part II, Items 6, 7 and 8 of this Form 10-K. TABLE OF CONTENTS Page Part I Item 1. Business.............................................................3 Item 2. Properties...........................................................3 Item 3. Legal Proceedings....................................................3 Item 4. Submission of Matters to a Vote of Security Holders..................3 Part II Item 5. Market for the Registrant's Common Equity and Related Shareholder Matters..................................................3 Item 6. Selected Financial Data..............................................4 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..................................4 Item 8. Financial Statements and Supplementary Data..........................4 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................................5 Part III Item 10. Directors and Executive Officers of the Registrant...................5 Item 11. Executive Compensation...............................................8 Item 12. Securities Ownership of Certain Beneficial Owners and Management....13 Item 13. Certain Relationships and Related Transactions......................14 Part IV Item 14. Exhibits and Reports on Form 8-K....................................15 Signatures....................................................................19 2 PART I ITEM 1. BUSINESS. There is incorporated in this Item 1 by reference that portion of the U.S. Global Investors, Inc. (formerly United Services Advisors, Inc.) ("USGI," the "Company" or "Registrant") Annual Report to shareholders, attached to this Form 10-K as Exhibit 13, appearing under the caption "The Company." ITEM 2. PROPERTIES. The Company presently occupies an office building with approximately 46,000 square feet and approximately 2.5 acres of land. The Company purchased this building from the Resolution Trust Corporation on February 28, 1992, for $1,018,165 (which included closing costs). To finance acquisition and improvements, the Company obtained a bank loan in the amount of $1,425,000 and refinanced the note during fiscal year 1994. (See Notes E and I to the Consolidated Financial Statements incorporated by reference from the Company's 1996 Annual Report to Shareholders in Item 8 of this Form 10-K.) The Company moved to its new headquarters during August 1992. The Company has made substantial improvements to the building and the Company and its subsidiaries, United Shareholder Services, Inc. ("USSI"), A&B Mailers, Inc., and Security Trust & Financial Company ("ST&FC"), occupy sections in the building. ITEM 3. LEGAL PROCEEDINGS. There is no material pending legal proceeding to which the Company is involved. There are no material legal proceedings to which any director, officer or affiliate of the Company or any associate of any such director or officer is a party or has a material interest, adverse to the Company or any of its subsidiaries. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. On May 9, 1996, a Consent in Lieu of Special Shareholder Meeting was entered into to vote on approving amendments to the Company's Articles of Incorporation. The Articles were amended to change the name of the Company from United Services Advisors, Inc. to U.S. (United Services) Global Investors, Inc. and subsequently to U.S. Global Investors, Inc. The Articles were also amended to change the names of two classes of the Company's stock. The Class A Common Stock was renamed Class C Common Stock, and the Preferred Stock was renamed Class A Common Stock. The rights and preferences of each class remain unchanged. Holders of 392,211 shares out of 564,352 shares (or 69.49%) of the voting Common Stock approved the action. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS. MARKET INFORMATION The Company has three classes of common equity--Class A, Class B and Class C Common Stock, par value $0.05 per share. There is no established public trading market for the Company's Class B and Class C Common Stock. The holders of the Company's Class C Common Stock of record on March 12, 1985 (and their transferees by gift, devise or descent) have the right to exchange their shares of Class C Common Stock for Class A Common Stock on a share-for-share basis until April 30, 2000. At September 9, 1996 the holders of 95,850 shares of Class C Common Stock have the right to exchange. The Company's Class A Common Stock is traded over-the-counter and is quoted daily under the NASDAQ Small-Cap Issues. Trades are reported under the symbol "GROW." 3 The following table sets forth the range of high and low closing bid quotations from the NASDAQ System for the fiscal years ended June 30, 1995 and 1996. The quotations represent prices between dealers and do not include any retail markup, markdown or commission and may not necessarily represent actual transactions. BID PRICE ($) ------------------------------------------------------- 1996 1995 ------------------------ ------------------------ High Low High Low First Quarter (9/30) 2 7/8 2 1/2 5 3 3/4 Second Quarter (12/31) 2 3/4 1 7/8 4 1/2 2 1/2 Third Quarter (3/31) 3 5/8 1 5/8 3 5/8 2 3/4 Fourth Quarter (6/30) 3 7/16 2 1/2 3 3/8 2 1/2 HOLDERS On September 9, 1996, there were 77 holders of record of Class C Common Stock, no holders of record of Class B Common Stock and 312 holders of record of the Class A Common Stock. A substantial number of the Class A Common shares are held of record by nominees and management believes that as of September 9, 1996, there were more than 1,000 beneficial owners of the Company's Class A Common Stock. DIVIDENDS The Company has not paid cash dividends on its Class C Common Stock during the last twelve fiscal years, and has never paid cash dividends on its Class A Common Stock. Payment of cash dividends is within the discretion of the Company's Board of Directors and is dependent upon earnings, operations, capital requirements, general financial condition of the Company and general business conditions. Holders of the outstanding shares of the Company's Class A Common Stock are entitled to receive, when and as declared by the Company's Board of Directors, a non-cumulative cash dividend equal in the aggregate to 5% of the Company's after-tax net earnings for its prior fiscal year. After such dividend has been paid, the holders of the outstanding shares of Class B Common Stock are entitled to receive, when and as declared by the Company's Board of Directors, cash dividends per share equal to the cash dividends per share paid to the holders of the Class A Common Stock. Holders of the outstanding shares of Class C Common Stock are entitled to receive when and as declared by the Company's Board of Directors, cash dividends per share equal to the cash dividends per share paid to the holders of the Class A and Class B Common Stock. Thereafter, if the Board of Directors determines to pay additional cash dividends, such dividends will be paid simultaneously on a prorata basis to holders of Class A, B and C Common Stock. The holders of the Class A Common Stock are protected in certain instances against dilution of the dividend amount payable to such holders. ITEM 6. SELECTED FINANCIAL DATA. There is incorporated by reference in this Item 6 that portion of the Company's 1996 Annual Report to shareholders appearing under the caption "Selected Financial Data." ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. There is incorporated by reference in this Item 7 that portion of the Company's 1996 Annual Report to shareholders appearing under the caption "Annual Status Report." ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The consolidated Financial Statements and notes thereto located in the Company's 1996 Annual Report to shareholders are incorporated herein by reference. 4 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Within twenty-four months prior to the date of Registrant's most recent financial statement, no Form 8-K recording a change of accountants due to a disagreement on any matter of accounting principles or practices or financial statement disclosure has been filed with the Commission. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY. The directors and executive officers of the Company are as follows: Name Age Position ---- --- -------- Bobby D. Duncan 39 President of the Company since September 1995, and Chief Financial Officer since March 1996 and Chief Operating Officer since September 1993. Formerly Executive Vice President and Chief Financial Officer of the Company from October 27, 1989 to September 1995. Executive Vice President, Chief Operating Officer of United Services Funds ("USF") since September 1993 and Chief Financial Officer since August 1996, formerly was Executive Vice President, Chief Financial Officer of USF from October 1988 to September 1995. Chief Executive Officer, President, Chief Operating Officer of USSI since September 1993. Director of A&B Mailers, Inc. since February 1988 and Chairman since July 1991. Director of the Company since 1986. Director, Executive Vice President, and Chief Financial Officer of ST&FC from November 1991 to March 1994 and President, Chief Executive Officer and Director of ST&FC since January 1996. Vice President and Trustee of Pauze/Swanson United Services Funds from November 1993 to February 1996 and Chief Financial Officer from November 1993 to September 1995. Executive Vice President, Chief Operating Officer of Accolade Funds since April 1993, Chief Financial Officer from April 1993 to September 1995. President, Chief Executive Officer and Trustee of United Services Insurance Funds since July 1994. Director and Chief Financial Officer of United Services Advisors (Canada), Inc. ("USACI," formerly United Services Advisors Wealth Management Inc.) since February 1995. Victor Flores 32 Executive Vice President, Chief Investment Officer and Director of the Company since February 1994. Executive Vice President, Chief Investment Officer of the Funds since February 1994. Portfolio Manager U.S. Gold Shares Fund since November 1992 and U.S. World Gold Fund since January 1990. Portfolio Manager, U.S. Global Resources Fund, from January 1990 to November 1992. Formerly Vice President, Portfolio Manager of the Company (July 1993 - February 1994). 5 Frank E. Holmes 41 Chairman of the Board of Directors and Chief Executive Officer of the Company since October 27, 1989, President from October 1989 to September 1995. Director of ST&FC since November 1991. President, Chief Executive Officer and Trustee of USF since October 1989. President, Chief Executive Officer and Trustee of Accolade Funds since April 1993. Director of U.S. Advisors (Guernsey) Limited, a wholly- owned subsidiary of Advisor, and of the Guernsey Funds managed by that Company since August 1993. Trustee of Pauze/Swanson United Services Funds from November 1993 to February 1996. Director of Franc-Or Resource Corp. since November 1994. Director of Marleau, Lemire Inc. from January 1995 to January 1996. Director and Chief Executive Officer of USACI since February 1995. Jerold H. Rubinstein 57 Mr. Rubinstein has been a Director of the Company since October 27, 1989. Since May 1986 he has served as Chairman of the Board of Directors and as Chief Executive Officer of DMX Inc., a publicly-traded media technology company. Roy D. Terracina 50 Director of the Company since December 1994. Director of ST&FC since August 1992. Owner of Sunshine Ventures, Inc., an investment company, since January 1994. Owner/President of Sterling Foods, Inc., food manufacturer, from May 1984 to December 1993. Marie A. Kriley 54 Vice President, Mailing Services of the Company since December 1991. President of A&B Mailers, Inc. since February 1983. Jane K. Hatton 29 Chief Accounting Officer and Treasurer of the Company since March 1996. Vice President, Chief Financial Officer, Chief Accounting Officer, Controller and Treasurer of the Company from September 1995 to March 1996. Controller of the Company from December 1994 to September 1995. Accounting Manager of the Company from November 1992 to December 1994. From 1989 to 1992 was Senior Auditor at Price Waterhouse. Susan B. McGee 37 Vice President, Corporate Secretary of the Company from September 1995 to present; Associate Counsel from August 1994 to present. Vice President, Secretary of USF since September 1995. Vice President, Counsel to ST&FC from September 1992 to present; Vice President-Operations of ST&FC from May 1993 to December 1994. Thomas D. Tays 39 Vice President-Special Counsel, Securities Specialist, Director of Compliance, Assistant Secretary of the Company from September 1995 to present; Associate Counsel, Assistant Secretary of the Company from September 1993 to September 1995. Vice President, Securities Specialist, Director of Compliance and Assistant Secretary of USF since September 1995. Vice President and Secretary of Accolade Funds since September 1995, was Assistant Secretary from September 1994 to September 1995. Vice President, Secretary of United Services Insurance Funds from June 1994 to present. Private practice of law from 1990 to August 1993. 6 None of the directors or executive officers of the Company has a family relationship with any of the other directors or executive officers. Each member of the Board of Directors is elected for a one-year term or until their successors are elected and qualify. The executive officers of the Company are appointed by, and serve at the pleasure of, the Board of Directors. The Company does not have a Nominating Committee. The Company's Compensation Committee consists of Messrs. Holmes, Terracina and Rubinstein. The Company's Audit Committee consists of Messrs. Duncan, Rubinstein and Terracina. The Board of Directors Stock Option Committee consists of Messrs. Rubinstein and Terracina. COMPLIANCE WITH SECTION 16(A) OF THE 1934 ACT Section 16(a) of the 1934 Act requires directors and officers of the Company, and persons who own more than 10 percent of the Company's Class A Common Stock, to file with the SEC initial reports of ownership and reports of changes in ownership of the stock. Directors, officers and more than 10 percent shareholders are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file. To the Company's knowledge, based solely on a review of the copies of such reports furnished to the Company and written representations that no other reports were required, during the year ended June 30, 1996, all Section 16(a) filing requirements applicable to its directors, officers and more than 10 percent beneficial owners were complied with. 7 ITEM 11. EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE Long Term Compensation ----------------------- Annual Compensation Awards ----------------------- (a) (b) (c) (d) (e) (f) (g) 3 Other 5 4 1,2 2 Annual Restricted Options/ Name and Principal Salary Bonus Compensation Stock Awards SARs osition during FY 96 Year ($) ($) ($) ($) (#) - -------------------------- ---- ---------- -------- ------------ ------------ -------- Frank E. Holmes 1996 $304,355 $140,240 $ 35,937 $ 1,250 1,000 Chairman, 1995 $303,835 $ 2,098 $ 46,326 $ 288 0 Chief Executive Officer 1994 $308,343 $ 74,024 $ 34,754 0 Victor Flores 1996 $150,304 $ 78,581 $ 7,694 $ 3,375 1,000 Exec. V.P, 1995 $150,292 $ 65,877 $ 14,877 $ 288 17,000 Chief Investment Officer 1994 $ 93,864 $ 97,848 $ 3,504 30,000 Bobby D. Duncan 1996 $110,594 $ 34,718 $ 15,998 $ 6,000 1,000 President, 1995 $103,854 $ 24,862 $ 16,820 $ 3,163 0 Chief Operating Officer 1994 $103,536 $ 15,963 $ 12,619 0 Thomas D. Tays 1996 $ 78,750 $ 28,291 $ 4,517 $ 1,649 2,000 V.P. - Special Counsel, 1995 $ 70,976 $ 5,055 $ 1,719 $ 1,662 500 Securities Specialist, 1994 $ 50,118 $ 1,762 $ 553 0 Director of Compliance The Company has intentionally omitted columns (h) and (i) as they are non applicable. 1 Includes amounts identified for 401(k) contributions and amounts for Company Savings Plans. The amounts are calculable through to the end of the June 30, 1996 fiscal year. 2 Does not include the cost to the Company of incidental personal use of automobiles furnished by the Company for use in its business and certain other personal benefits. The Company believes that the aggregate amounts of such omitted personal benefits do not exceed the lesser of $50,000 or 10% of the total of annual salary or bonus reported for the names executive officers in columns (c) and (d). 3 Other compensation including perquisites exceeding 25% of total perquisites: Name Description 1996 1995 1994 - --------------- -------------- ------- ------- ------- Frank E. Holmes Trustee fees $24,000 $24,000 $28,000 Profit sharing $3,000 $12,941 $0 Victor Flores Profit sharing $3,000 $10,183 $0 401 (k) match $3,000 $3,000 $3,000 Bobby D. Duncan Car allowance $8,523 $8,523 $8,523 Profit sharing $3,000 $6,202 $0 Thomas D. Tays Profit sharing $2,141 $0 $0 401 (k) match $2,141 $1,521 $368 4 All options pertain to Company Class A common stock. 5 The dollar value of the shares reflected in the table is based on the market value for the shares on the date the shares were awarded. Restricted stock balances of the Company's Class A common stock as of June 30, 1996: # of restricted value of restricted Name shares held @ 6/30/96 shares held @ 6/30/96 --------------- --------------------- --------------------- Frank E. Holmes 700 $2,013 Victor Flores 1,800 $5,175 Bobby D. Duncan 2,800 $8,050 Thomas D. Tays 1,402 $4,031 The closing price on 6/28/96 was $2.875 per share. No dividends have ever been paid on the Company's Class A common stock, however, the restricted stock would be eligible for dividends should one be declared.
8 INCENTIVE COMPENSATION Effective July 1, 1993, the Company implemented a team performance pay program based on each employee's annual salary to recognize monthly completion of departmental goals. Effective July 1, 1995 a portion of the team bonus became payable in the Company's Class A Common Stock. The Company also implemented semiannual perfect attendance awards based on employee classification. PROFIT SHARING PLAN In June 1983, the Company adopted a profit sharing plan in which all qualified employees who have completed one year of employment with the Company are included. Subject to Board action, the Company may contribute 15% of its net income before taxes during each fiscal year, limited to 15% of qualifying salaries, to a profit sharing plan, the beneficiaries of which are the eligible employees of the Company. The Company's contribution to the plan is then apportioned to each employee's account in the plan in an amount equal to the percentage of the total basic compensation paid to all eligible employees which each employee's individual basic compensation represents. An employee generally becomes eligible to receive a distribution from the plan upon the occurrence of retirement, death, total disability or termination. Distributions of an employee's account may be made either in one lump sum or in installments over a period not exceeding 15 years. For the fiscal year ended June 30, 1996 the Company contributed $60,000 or 2% of qualifying salaries to the profit sharing plan. There have been no recent material changes to the plan. 401(K) PLAN The Company adopted a 401(k) plan in October 1990 for the benefit of all employees. The Company will contribute 50 cents for every $1.00 of the first 4% of an employee's pay deferment. The Company will make contributions to employee accounts at the end of each plan year if the employee is still employed on that date. New employees may enroll on any quarterly entry date following six months of employment. The Plan offers numerous investment options which represent different levels of risk and return. Employees have the option to invest in most of the USF funds offered, the Company's Class A Common Stock or the Bonnel Growth Fund. For the fiscal year ended June 30, 1996, the Company has accrued $50,000 for its 401(k) plan matching contribution. SAVINGS PLANS The Company has continued the program pursuant to which it offers employees, including its executive officers, an opportunity to participate in savings programs utilizing managed investment companies, which was accepted by essentially all such employees. Limited employee contributions to an Individual Retirement Account are matched by the Company. Similarly, if such employees contribute monthly to the U.S. Tax Free Fund, the Company will match these contributions on a limited basis. Beginning in fiscal 1997 a similar savings plan utilizing UGMA accounts has been offered to employees to save for their childrens' education. Under each program, if the employee ceases to make personal contributions or withdraws the money, their participation in the program is terminated and they may not participate in the future. For the fiscal year ended June 30, 1996 the Company match aggregated to $75,901, reflected in base salary expense. STOCK OPTION PLANS In March 1985, the Board of Directors of the Company adopted an Incentive Stock Option Plan ("1985 Plan") which was approved by the shareholders of the Company on April 2, 1985. Under the terms of the 1985 Plan, certain executives and key salaried employees of the Company and its subsidiaries were granted options to purchase shares of the Company's Class A Common Stock. The maximum number of shares of Class A Common Stock authorized for issuance under the 1985 Plan was 200,000 shares (subject to adjustment in the event of reorganization, merger, consolidation, liquidation, recapitalization, or stock splits). Shares subject to purchase pursuant to an option granted under the 1985 Plan may be either authorized but unissued shares or shares that were once issued and subsequently reacquired by the Company. The 1985 Plan was amended on November 7, 1989 and December 6, 1991. In December 1991 it was amended to provide provisions to cause the plan and future grants under the plan to qualify under 1934 Act Rule 16b-3. The 1985 Plan was 9 administered by a committee consisting of the two outside members of the Board of Directors of the Company. The 1985 Plan terminated on December 31, 1994. Options granted under the 1985 Plan were granted for a term of up to five years in the case of employees who own in excess of 10% of the total combined voting power of all classes of the Company's stock and for up to ten years for other employees. The options were granted at an exercise price of not less than 100% of the fair market value as of the date of the grant, or 110% of the fair market value in the case of any officer or employee holding in excess of 10% of the combined voting power of the Company's stock. The aggregate fair market value of the Class A Common Stock for which any employee was granted options in any calendar year could not exceed $100,000 plus any unused carry-over from a preceding year. All of the options were granted at or above market price on the date of the grant. To date 79,000 option grants have been exercised under the 1985 Plan; and, grants covering 5,000 shares have expired. In November 1989 the Board of Directors adopted the 1989 Non-Qualified Stock Option Plan (the "1989 Plan") which provides for the granting of options to purchase shares of the Company's Class A Common Stock to directors, officers and employees of the Company and its subsidiaries. On December 6, 1991, the 1989 Plan was also amended to provide provisions to cause the plan and future grants under the plan to qualify under 1934 Act Rule 16b-3. The 1989 Plan is administered by a committee consisting of two outside members of the Board of Directors. The maximum number of shares of Class A Common Stock initially approved for issuance under the 1989 Plan is 800,000 shares. During the fiscal year ended June 30, 1996 there were 44,700 shares granted at exercise prices ranging from $2.1875 to $2.625 per share. All options were granted at or above market price on the date of grant. To date, 393,000 options have been exercised under the 1989 Plan; and 30,400 options have expired. The Board of Directors, at a meeting held on July 14, 1992, amended the Stock Option Agreement for stock options granted during November 1989 to provide for an option period of ten years. The amendment was accepted by all optionees. The following table shows, as to each of the officers of the Company listed in the cash compensation table, grants of stock options and freestanding stock appreciation rights ("SARs") made during the last fiscal year. Potential Realized Value at Assumed Annual Rates of Stock Price Appreciation Individual Grants for Option Term - ----------------------------------------------------------------------------------------------------------------------- (a) (b) (c) (d) (e) (f) (g) % of Total Number of Securities Options/SARs Underlying Granted to Exercise or Options/SARs Employees in Base Name Granted (#) Fiscal Year Price($/Sh) Expiration Date 5% ($) 10% ($) - ----------------------------------------------------------------------------------------------------------------------- Frank E. Holmes 1,000 2.31% $2.62 September 5, 2005 $1,651 $4,183 Bobby D. Duncan 1,000 2.31% $2.62 September 5, 2005 $1,651 $4,183 Victor Flores 1,000 2.31% $2.62 September 5, 2005 $1,651 $4,183 Thomas D. Tays 1,000 2.31% $2.62 September 5, 2005 $1,651 $4,183 1,000 2.31% $2.1875 November 7, 2005 $1,376 $3,486
The following table shows, as to each of the officers of the Company listed in the cash compensation table, aggregated option exercises during the last fiscal year and fiscal year-end option values. 10 (a) (b) (c) (d) (e) Number of Value of Unexercised Unexercised In the Money Options/SARs Options/SARs at at FY-End (#) FY-End($) Shares Name Acquired on Value Exercisable/ Exercisable/ Exercise (#) Realized Unexercisable Unexercisable - ------------------------------------------------------------------------------------------------------------ Frank E. Holmes -0- $-0- 200,000/1,000 $108,500/$250 Bobby D. Duncan -0- $-0- 95,000/1,000 $55,625/$250 Victor Flores -0- $-0- 18,400/32,600 $1,875/$250 Thomas D. Tays -0- $-0- 100/2,400 $25/$1,038
COMPENSATION OF DIRECTORS The Company pays non-employee directors $500 per meeting and may grant them options under the Company's 1989 Stock Option Plan. Their compensation is subject to a minimum of $3,000 in any quarter paid in arrears. Messrs. John A. M. Budden, Hubert Marleau, and Richard Renaud were non-employee directors during portions of the fiscal year. Messrs. Jerold H. Rubinstein and Roy D. Terracina were non-employee directors for the full fiscal year. During the fiscal year ended June 30, 1996 Messrs. Terracina and Rubinstein each received cash compensation of $12,000; Messrs. Marleau and Renaud received $9,000, respectively; and, Mr. Budden received $6,000. Mr. Terracina is also a Director of ST&FC where he received cash compensation of $2,400. Mr. Renaud is also a Director of U.S. Advisors (Guernsey) Ltd. for which he received no cash compensation. No stock options were granted to directors during the fiscal year. Directors are reimbursed for reasonable travel expenses incurred in attending the meetings held by the Board of Directors. REPORT ON EXECUTIVE COMPENSATION Effective February 1995 the Executive Compensation Committee of the Registrant's Board of Directors was comprised of Messrs. Budden, Holmes, Renaud and Rubinstein. With the resignations of Messrs. Budden and Renaud as directors of the Company, during fiscal 1996, the Board appointed Messrs. Holmes, Terracina and Rubinstein as members of the committee. The Company's program regarding compensation of executive officers is different from most public corporations' programs due to the concentration of control in one individual. Mr. Holmes' compensation is reviewed by the Board of Directors. Mr. Holmes, Chairman and Chief Executive Officer of the Company, owns 68.3% of the Company's Class C Common Stock. He informs the Board of Directors as to the amount of his proposed remuneration and that of the Company's other executive officers. Mr. Holmes recognizes that Registrant is a small business and believes that an acceptable base compensation should reflect an amount competitive with industry peers taking into account the relative cost of living in San Antonio, Texas. The base pay of the executives is relatively fixed but the executive has the opportunity to increase his/her compensation by (1) participating in team building programs in order to enhance operational and fiscal efficiencies throughout the Company with a percent of resulting savings flowing to the executive; and (2) participating directly in retirement and savings programs whereby the Company will contribute amounts relative to the executive's contribution. The Company has utilized option grants under the 1985 Plan and the 1989 Plan to induce qualified individuals to join the Company with a base pay consistent with the foregoing--providing the individual with an opportunity to benefit if there is significant Company growth. Similarly, options have been utilized to reward existing employees for long and faithful service and to encourage them to stay with the Company. Messrs. Rubinstein and Terracina constitute the Stock Option Committee of the Board of Directors. This Committee acts upon recommendations of the Chief Executive Office, President and Executive Vice President. Shares available for stock option grants under the 1989 Plan aggregate to less than 5,700 shares 11 remaining on August 21, 1996. There were grants from the 1989 Plan during the fiscal year to officers and employees of the Company. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION At the beginning of the fiscal year, the Compensation Committee of the Board of Directors consisted of John Budden, Jerold Rubinstein, Richard Renaud and Frank E. Holmes, Chairman and Chief Executive Officer. Mr. Renaud is also a member of the Marleau, Lemire Inc. ("ML") Board and serves on its Executive, Audit and Compensation Committees. In addition, he is a director of U.S. Advisors (Guernsey) Ltd. During the first half of the fiscal year, Mr. Holmes was a director of ML and served on its Management Committee. Mr. Holmes is currently director of USACI, a joint venture owned by the Company and ML. ML, the Company and Mr. Holmes had agreements that could have led to a change in control of the Company, which agreements were renegotiated, essentially reversing the earlier agreement, during December 1995; and as a consequence, Messrs. Marleau and Renaud resigned as directors of the Company. (See Item 13 of this Form 10-K.) COMPANY PERFORMANCE PRESENTATION The following graph compares the cumulative total return for the Company's Class A Common Stock to the cumulative total return for the S&P 500 Composite Index and the S&P Financial Index for the Company's last five fiscal years. The graph assumes an investment of $100 in the Class A Common Stock and in each index as of June 30, 1991, and that all dividends were reinvested. [LINEAR GRAPH PLOTTED FROM DATA IN TABLE BELOW]
MONTHLY INDEXED TOTAL RETURN U.S. Global Investors, Inc. IS&P 500 S&P Financial --------------- -------- ------------- Jun 91 .......... 100 100 100 Jul 91 .......... 105 104.47 105.62 Aug 91 .......... 90 106.52 110.04 Sep 91 .......... 80 105.34 110.14 Oct 91 .......... 95 106.56 111.36 Nov 91 .......... 90 101.89 103.6 Dec 91 .......... 110 114.1 119.54 Jan 92 .......... 115 111.83 117.54 Feb 92 .......... 130 112.89 122.1 Mar 92 .......... 110 111.23 120.31 Apr 92 .......... 105 114.31 121.55 May 92 .......... 105 114.42 123.7 Jun 92 .......... 122.5 113.33 126.99 Jul 92 .......... 130 117.8 130.19 Aug 92 .......... 120 114.97 124 Sep 92 .......... 135 116.92 129.01 Oct 92 .......... 137.5 117.17 131.99 Nov 92 .......... 130 120.69 140.62 Dec 92 .......... 122.5 122.77 147.39 Jan 93 .......... 120 123.65 152.3 Feb 93 .......... 120 124.94 155.25 Mar 93 .......... 150 128.13 162.17 Apr 93 .......... 210 124.87 156.66 May 93 .......... 210 127.7 155.97 Jun 93 .......... 200 128.72 164.78 Jul 93 .......... 225 128.03 167.81 Aug 93 .......... 190 132.46 171.94 Sep 93 .......... 160 132.03 176.1 Oct 93 .......... 190 134.59 165.67 Nov 93 .......... 195 132.87 159.72 Dec 93 .......... 225 135.08 163.65 Jan 94 .......... 230 139.48 172.12 Feb 94 .......... 210 135.28 162.32 Mar 94 .......... 215 130.02 156.52 Apr 94 .......... 175 131.51 161.62 May 94 .......... 195 133.14 169.85 Jun 94 .......... 185 130.58 165.75 Jul 94 .......... 170 134.7 169.28 Aug 94 .......... 170 139.75 174.79 Sep 94 .......... 185 136.96 163.05 Oct 94 .......... 165 139.8 165.36 Nov 94 .......... 150 134.29 155.19 Dec 94 .......... 130 136.94 157.98 Jan 95 .......... 135 140.25 167.6 Feb 95 .......... 135 145.32 176.41 Mar 95 .......... 135 150.22 178.01 Apr 95 .......... 135 154.42 184.01 May 95 .......... 110 160.03 197.78 Jun 95 .......... 105 164.5 199.89 Jul 95 .......... 105 169.75 205.23 Aug 95 .......... 100 169.69 216.31 Sep 95 .......... 105 177.54 231.17 Oct 95 .......... 85 176.66 223.89 Nov 95 .......... 75 183.92 239.47 Dec 95 .......... 65 188.19 243.1 Jan 96 .......... 120 194.33 255.26 Feb 96 .......... 115 195.68 259.49 Mar 96 .......... 109.37 198.29 263.65 Apr 96 .......... 110 200.96 258.36 May 96 .......... 135 205.54 263.41 Jun 96 .......... 115 207.16 267.48
12 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS CLASS C COMMON STOCK (VOTING STOCK) At September 9, 1996 there were 564,352 shares of the Company's Class C Common Stock outstanding. The following table sets forth, as of such date, information regarding the beneficial ownership of the Company's Class C Common Stock by each person known by the Company to own 5% or more of the outstanding shares of Class C Common Stock. Outstanding Percent of Name and Address Common Shares Shares Shares Issued of Beneficial Owner Beneficially Owned Owned Outstanding - -------------------------- -------------------- ------------- --------------- Frank E. Holmes 1,373,402(1) 387,280 68.62% 7900 Callaghan Road San Antonio, TX 78229 Marleau, Lemire Inc. 72,720 72,720 12.89% 1 Place Ville Marie Suite 3601 Montreal, Quebec H3B 3P2 Monyco, Inc. 64,140 64,140 11.37% 1740 Broadway New York, NY 10019 - ------------------------ (1) Includes 586,122 shares of Class C Common Stock underlying presently exercisable Class C Common Stock Warrants held by Mr. Holmes and F. E. Holmes Organization Inc.; 102,280 shares of Class C Common Stock owned by F. E. Holmes Organization Inc., a corporation wholly-owned by Mr. Holmes; 400,000 shares obtainable upon exercise of a Class C Common Stock option issued to Mr. Holmes; and 285,000 shares owned directly by Mr. Holmes. CLASS A COMMON STOCK (NON-VOTING STOCK) At September 9, 1996 there were 6,042,476 shares of the Company's Class A Common Stock issued and outstanding. The following table sets forth, as of such date, information regarding the beneficial ownership of the Company's Class A Common Stock by each person known by the Company to own 5% or more of the outstanding shares of Class A Common Stock. Name and Address Preferred Shares of Beneficial Owner Beneficially Owned Percent of Class - ---------------------------------- -------------------- ------------------ Robertson Stephens Orphan Fund 757,810(A) 12.31% San Francisco, CA Quest Management Co. 473,305(B) 7.69% New York, NY Frank E. Holmes 358,282(C) 5.82% Constable Partners, L.P. 670,000(D) 10.88% Radnor, PA Mason Hill Asset Management, Inc. 409,000(E) 6.64% - ---------- (A) Information is from Schedule 13D, dated December 23,1995, filed with the SEC. 13 (B) Charles M. Royce controls Quest Advisory Corp. as well as Quest Management Co. Quest Advisory Corp. owns 414,205 shares, or 6.66% of the Company's Class A Common Stock. Combined, Mr. Royce controls 9.73% of the Class A Common Stock outstanding. Information is from Schedule 13G filed with the SEC on February 14, 1996. (C) Detail of beneficial ownership set forth below under "Security Ownership of Management." (D) Information is from Schedule 13D, dated May 9, 1996 filed with the SEC. (E) Mason Hill Asset Management, Inc. owns 250,500 shares or 4.02%. Equinox Partners, LP owns 158,500 shares or 2.55%. Information is from Schedule 13D filed with the SEC on March 26, 1996. SECURITY OWNERSHIP OF MANAGEMENT The following table sets forth, as of September 9, 1995, information regarding the beneficial ownership of the Company's Class A and Class C Common Stock by each director and by all directors and officers as a group. Except as otherwise indicated in the notes below each director owns directly the number of shares indicated in the table and has the sole voting power and investment power with respect to all such shares. Class C Class A Beneficial Owner Common Stock % Common Stock (1) % - ---------------------- -------------- ------- ------------------ ------ Bobby D. Duncan 4,931 0.87% 114,552 1.81% Victor Flores -- 0% 66,660 1.06% Frank E. Holmes 1,373,402(2) 88.41% 358,282(3) 5.58% Jerold H. Rubinstein -- 0% 40,000 0.64% Roy D. Terracina -- 0% 39,000 0.63% All directors and 1,379,076 88.95% 730,223(4) 10.94% officers as a group ( 15 persons) - ---------- (1) Includes shares of Class A Common Stock underlying presently exercisable options held directly by each individual director as follows: Mr. Duncan - 96,000 shares; Mr. Flores - 51,000 shares; Mr. Holmes - 201,000 shares; Mr. Rubinstein -40,000 shares; and Mr. Terracina - 1,000 shares. (2) Includes 586,122 shares of Class C Common Stock underlying presently exercisable Class C Common Stock warrants held by Mr. Holmes and F. E. Holmes Organization Inc.; 400,000 shares underlying a presently exercisable option to purchase Class C Common Stock held by Mr. Holmes; 102,280 shares of Class C Common Stock owned by F. E. Holmes Organization Inc., a corporation wholly-owned by Mr. Holmes; and 285,000 shares owned directly by Mr. Holmes. (3) Includes 100,000 shares of Class A Common Stock held by F.E. Holmes Organization, Inc, a corporation wholly owned by Mr. Holmes. Also includes 1,300 shares of Class A Common Stock owned separately by Mr. Holmes' wife. Mr. Holmes disclaims beneficial ownership of these 1,300 shares of Class A Common Stock. (4) Includes the shares underlying presently exercisable options held by the directors and officers listed above and an additional 111,729 shares of Class A Common Stock underlying presently exercisable options held by officers other than those listed above. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. USGI is invested in several of the mutual funds it manages. (See Note O to the Consolidated Financial Statements contained in the Company's 1996 Annual Report to shareholders, Exhibit 13 to this Form 10-K). During July 1994 the Company issued a $6 million subordinated debenture to ML. The proceeds were utilized in connection with the Company's purchases of adjustable rate government securities. The debenture is collateralized only by said 14 government securities. (See Notes F and M to the Consolidated Financial Statements contained in the Company's 1996 Annual Report to shareholders, Exhibit 13 to this Form 10-K.) Portions of the principal of the note were repaid to ML during fiscal years 1995 and 1996, thereby reducing the balance under the debenture to $1,533,131 at June 30, 1996; plus, accrued interest of $70,000. On December 7, 1994, the Company and ML entered into an agreement whereby the Company issued to ML one million shares of a new class of convertible non-voting common stock (Class B) at $5.00 per share and a warrant to purchase an additional one million shares of capital stock at $6.00 per share in consideration of an investment of US $5 million. ML also held 120,000 shares of preferred stock (now Class A Common Stock). Pursuant to an agreement between ML and USGI in December 1995, all 1,000,000 shares of Class B non-voting common stock and the related warrants were cancelled. ML received 1,000,000 shares of preferred stock (now Class A Common Stock) in exchange for its 1,000,000 shares of Class B Common Stock which were cancelled. ML then sold 1,120,000 shares of preferred stock (now Class A Common Stock), representing its entire interest in non-voting stock of the Company. No single purchaser purchased more than ten percent of the outstanding shares of USGI Class A Common Stock as a result of this sale. ML retains control of 72,720 shares of Class C Common Stock (the only class of voting stock issued by USGI, formerly known as "Class A Common Stock") which represents 12.82% of the voting interest in USGI. In addition, the Agreement of December 7, 1994 called for the expansion of the Company's Board of Directors, inclusion of two ML representatives on the Company's Board of Directors, and various by-law amendments. Hubert Marleau and Richard Renaud became members of the Company's Board of Directors. The Agreement of December 1995 terminated the Agreement of December 7, 1994 and rescinded most changes made by the 1994 Agreement. Messrs. Marleau and Renaud resigned as Directors of the Company at that time. Agreements with ML regarding control of the Company in the event of Mr. Holmes untimely death or termination of employment with the Company also terminated pursuant to the December 1995 Agreement. During the year ended June 30, 1996, the Company purchased 7,100 shares of ML common stock through the Company's brokerage account at Marleau, Lemire Securities Inc. ("MLSI"), a subsidiary of ML, increasing USGI's position to 42,219 shares. Prior to year end, USGI sold its entire position of ML common shares. At various intervals during the quarter ended September 30, 1995, 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. (See Note O to the Consolidated Financial Statements contained in the Company's 1996 Annual Report to shareholders, Exhibit 13 to this Form 10-K for further information.) In addition, the Company purchased other securities at an aggregate price of $269,847 through MLSI from July 1995 through December 1995. During the quarter ended March 31, 1996, Mr. Jerold Rubinstein, a Director of the Company, exercised options covering 25,000 shares of the Company's Class A Common Stock at $1.50 per share and 25,000 shares at $2.25 per share. The Company 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 the quarter ended March 31, 1996, Mr. John Budden, a former Director of the Company who resigned during the current fiscal year, 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. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) The following documents are filed as part of this Report: 1. Financial Statements 15 The Consolidated Financial Statements are incorporated herein by reference to the Company's Annual Report to Shareholders as an exhibit hereto (see Item 8): Report of Independent Accountants Consolidated Balance Sheets at June 30, 1996 and 1995 Consolidated Statements of Operation for the three years ended June 30, 1996 Consolidated Statements for Cash Flows for the three years ended June 30, 1996 Consolidated Statements of Shareholders' Equity for the three years ended June 30, 1996 Notes to Consolidated Financial Statements 2. Financial Statement Schedules None 3. Exhibits 3.1* Third Restated and Amended Articles of Incorporation of Registrant, filed herein. 3.2 By-Laws of Registrant (incorporated by reference to Exhibit D to the Registrant's Registration Statement No. 33- 33012 filed on Form S-8 with the Commission on January 30, 1990). 3.3 Amendment to Article II, Section 2 of the By-Laws (incorporated by reference to Exhibit 3(e) to the Registrant's Form 10-K for the fiscal year ended June 30, 1991). 3.4 Amendment to By-Laws of (incorporated by reference to Exhibit 3(h) to the Registrant's Registration Statement No. 33-90518 filed on Form S-3 on March 16, 1995). 3.5* Amendment to By-Laws, filed herein. 10.1 Advisory Agreement dated October 27, 1989 by and between Registrant and United Services Funds ("USF") (incorporated by reference to Exhibit (4)(b) to the Registrant's Form 10-K for fiscal year ended June 30, 1990). 10.2 Advisory Agreement dated September 21, 1994 by and between Registrant and Accolade Funds (incorporated by reference to Exhibit 10.2 to Registrant's Form 10-K for fiscal year ended June 30, 1995). 10.3 Sub-Advisory Agreement dated September 21, 1994 by and between Registrant and Accolade Funds/Bonnel Growth Fund and Bonnel, Inc. (incorporated by reference to Exhibit 10.3 to Registrant's Form 10-K for fiscal year ended June 30, 1995). 10.4 Transfer Agency Agreement dated September 21, 1994 by and between United Shareholder Services , Inc. ("USSI") and Accolade Funds/Bonnel Growth Fund (incorporated by reference to Exhibit 10.4 to Registrant's Form 10-K for fiscal year ended June 30, 1995). 10.5 Transfer Agent Agreement by and between USSI and USF (incorporated by reference to Exhibit 10(b) to the Registrant's Form 10-K for the fiscal year ended June 30, 1989). 16 10.6 Loan Agreement between Registrant and Bank One, dated April 12, 1994, and Modification Agreement, dated February 28, 1995, for $1,385,000 for refinancing new building (incorporated by reference to Exhibit 10.8 to Registrant's Form 10-K for fiscal year ended June 30, 1995). 10.7 United Services Advisors, Inc. 1985 Incentive Stock Option Plan as amended November 1989 (incorporated by reference to Exhibit A to the Registrant's Registration Statement No. 33-3012 filed on Form S-8 with the Commission on January 16, 1990). 10.8 United Services Advisors, Inc. 1989 Non-Qualified Stock Option Plan (incorporated by reference to Exhibit B to the Registrant's Registration Statement No. 33-3012 filed on Form S-8 with the Commission on January 16, 1990). 10.9 Bookkeeping and Accounting Agreement by and between USSI and USF, dated February 1, 1992 (incorporated by reference to Exhibit E 1 to the Registrant's Form 10-Q dated December 31, 1991). 10.10 Joint Venture Agreement between Registrant and Marleau, Lemire Inc., dated July 28, 1994 (incorporated by reference to Exhibit 10(v) to Registrant's Form 10-K for fiscal year ended June 30, 1994). 10.11 Bookkeeping and Accounting Agreement by and between USSI and Accolade Funds, dated September 21, 1994 (incorporated by reference to Exhibit 10.21 to Registrant's Form 10-K for fiscal year ended June 30, 1995). 10.12 December 7, 1994 Subscription and Purchase Agreement among Registrant, Marleau, Lemire Inc., Frank E. Holmes and F.E. Holmes Organization (incorporated by reference to Exhibit 10 to the Registrant's Registration Statement No. 33-90518 filed on Form S-3 with the Commission on March 16, 1995). 10.13 December 7, 1994 Employment and Non-Competition Agreement between Registrant and Frank E. Holmes (incorporated by reference to Exhibit 10(b) to the Pre-Effective Amendment No. 1 to Registrant's Registration Statement No. 33-90518 on Form S-3 on May 12, 1995). 10.14 December 7, 1994 Shareholders' Agreement among Registrant, Mr. Frank E. Holmes, F.E. Holmes Organization Inc. and Marleau, Lemire Inc. (incorporated by reference to Exhibit 10(c) to the Pre-Effective Amendment No. 1 to Registrant's Registration Statement No. 3390518 filed on Form S-3 with the Commission on May 12, 1995). 10.15 December 29, 1995 Agreement among Registrant, Mr. Frank E. Holmes, F.E. Holmes Organization, Inc. and Marleau, Lemire Inc. (incorporated by reference to Exhibit 10(d) to Registrant's Form 10-Q for the quarter ended December 31, 1995). 11* Statement re: computation of per share earnings, filed herein. 13* Annual Report to Shareholders, filed herein. 21* List of subsidiaries of the Registrant, filed herein. 23* Consent of Independent Accountant, filed herein. 27* Financial Data Schedule, filed herein. (b) Reports on Form 8-K One report on Form 8-K was filed during the last quarter of the period covered by this report. On May 28 and June 10, 1996, Registrant reduced its investment in government notes financed by reverse repurchase agreements with various broker-dealers by selling an additional $28.745 million (par value) in notes in open market transactions. 17 The Form 8-K included proforma financial information: an unaudited consolidated balance sheet and a statement of operations, as of March 31, 1996. 18 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. U.S. GLOBAL INVESTORS, INC. By: /s/ Bobby D. Duncan BOBBY D. DUNCAN President, Chief Operating Officer, Chief Financial Officer Date: September 9, 1996 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. SIGNATURE CAPACITY IN WHICH SIGNED DATE - ------------------------ ------------------------------------ ----------------- /s/ Jerold H. Rubinstein Director September 9, 1996 - ------------------------ JEROLD H. RUBINSTEIN /s/ Roy D. Terracina Director September 9, 1996 - ------------------------ ROY D. TERRACINA /s/ Frank E. Holmes Chairman of the Board of Directors, September 9, 1996 - ------------------------ FRANK E. HOLMES Chief Executive Officer /s/ Bobby D. Duncan President, Chief Operating Officer, September 9, 1996 - ------------------------ BOBBY D. DUNCAN Chief Financial Officer, Director /s/ Victor Flores Executive Vice President, Chief September 9, 1996 - ------------------------ VICTOR FLORES Investment Officer, Director /s/ Jane K. Hatton Chief Accounting Officer, Treasurer September 9, 1996 - ------------------------ JANE K. HATTON 19 EX-3.(I) 2 THIRD RESTATED AND AMENDED ART. OF INC. THIRD RESTATED AND AMENDED ARTICLES OF INCORPORATION OF U.S. GLOBAL INVESTORS, INC. AS ADOPTED SEPTEMBER 20, 1996 ARTICLE I U.S. Global Investors, Inc., pursuant to the provisions of Article 4.07 of the Texas Business Corporation Act, hereby adopts Third Restated and Amended Articles of Incorporation which accurately copy the Articles of Incorporation and all amendments thereto that are in effect to date and as further amended by such Third Restated and Amended Articles of Incorporation and contain no change in any other provision thereof. ARTICLE II The following amendment to the Third Restated and Amended Articles of Incorporation was adopted by the shareholders of the Corporation on the 20th day of September, 1996. The amendment changes the name of the corporation in Article One to U.S. GLOBAL INVESTORS, INC. from U.S. (UNITED SERVICES) GLOBAL INVESTORS, INC. ARTICLE III The Articles of Incorporation and all amendments and supplements thereto are hereby superseded by the following Third Restated and Amended Articles of Incorporation which accurately copy the text thereof, as amended: THIRD RESTATED AND AMENDED ARTICLES OF INCORPORATION OF U.S. GLOBAL INVESTORS, INC. AS ADOPTED SEPTEMBER 20, 1996 ARTICLE ONE The name of the corporation is U.S. GLOBAL INVESTORS, INC.. ARTICLE TWO The period of its duration is perpetual, unless sooner dissolved according to law. ARTICLE THREE The purposes or purpose for which the corporation is organized are: 1. To serve as an investment advisor and to manage one or more mutual funds and engage in other investment advisory services permitted by the laws of the State of Texas and the United States of America; to engage in the business of advising others directly and through publications and/or writings as to the advisability of investing in, purchasing or selling securities; to engage in the business of buying and selling securities for its own account. 2. To provide information, pamphlets and data concerning securities. 3. To establish, operate and maintain one or more mutual funds, as permitted by the laws of the State of Texas and the United States of America. 4. To engage in any commercial and industrial enterprises calculated or designed to be profitable to the corporation and in conformity with the laws of the State of Texas; to engage in any business whatsoever either as principal or as agent or as both, or as a syndicate, which the corporation may deem convenient or proper in furtherance of any or the purposes hereinabove mentioned or otherwise; to conduct its business in any lawful manner in any place in the State, Nation, or any place or country in the world whenever desired and upon compliance and in accordance with and pursuant to the laws, rules, statutes, treaties, regulations and customs thereof; and to have and to execute all powers authorized by the laws of the State of Texas under which this corporation is formed, whether expressly set forth in this article or not, as such laws are now in effect, or may at any time hereafter be amended. ARTICLE FOUR 1. GENERAL. The corporation is authorized to issue three classes of Common Stock, one designated Class A Common Stock, one designated Class B Common Stock, and one designated Class C Common Stock (collectively referred to herein as "Common Stock"). The total number of shares which the corporation is authorized to issue is 11,000,000 shares. The number of shares of Class A Common Stock authorized is 7,000,000 and the par value of each such share is $0.05. The number of shares of Class B Common Stock authorized is 2,250,000, and the par value of each such share is $0.05. The number of shares of Class C Common Stock authorized is 1,750,000, and the par value of each such share is $0.05. The aggregate number of shares of Class B Common Stock and Class C Common Stock authorized is 4,000,000. As provided in Part 3.4 of this Article Four, the Class B Common Stock may be converted to Class C Common Stock. If and when the conversion right of Class B Common Stock is exercised, allowing shares of Class B Common Stock to be exchanged into Class C Common Stock, the number of authorized shares of Class B Common Stock shall be reduced by the number of Class B shares exchanged into Class C Common Stock shares, thereby allowing the total number of shares of Class B and Class C Common Stock authorized and outstanding to remain constant at all times. Except for the voting and conversion rights set forth in Parts 3.1 and 3.4 of this Article Four, all other rights and preferences of the Class B and Class C Common Stock are equal. 2. CLASS A COMMON STOCK. 2.1 VOTING RIGHTS. Except as otherwise expressly provided by law, all voting rights shall be in the Class C Common Stock as provided for in paragraph 3.1 below, and none in the Class A Common Stock. 2.2 DIVIDENDS. (1) AMOUNT; PARTICIPATING. In any fiscal year of the corporation, the holders of the Class A Common Stock at the time outstanding shall be entitled to receive, when and as declared by the Board of Directors of the corporation, out of any funds legally available therefor, noncumulative cash dividends in an aggregate amount up to 5% of the corporation's after-tax net earnings for its prior fiscal year. In any fiscal year of the corporation, until the holders of the Class A Common Stock shall have received cash dividends aggregating 5% of the corporation's after-tax net earnings for its prior fiscal year, no cash dividends shall be paid to the holders of the Class C Common Stock or Class B Common Stock. In any fiscal year of the corporation in which the holders of the Class A Common Stock shall have received cash dividends aggregating 5% of the corporation's after-tax net earnings for its prior fiscal year, the holders of the Class C Common Stock and Class B Common Stock shall then be entitled to receive, when and as declared by the Board of Directors, out of any funds legally available therefor, cash dividends per share up to the amount of cash dividends per share theretofore received during such fiscal adjustment as provided in paragraph 2.2(4) hereof. In any fiscal year of the corporation, when the cash dividends per share paid to the holders of the Class C Common Stock during such fiscal year shall be the maximum amount permitted pursuant to the preceding sentence, such cash dividends, if any, as the Board of Directors may elect to pay during the balance of such fiscal year, out of any funds legally available therefor, shall be paid simultaneously on the Class A Common Stock, the Class B Common Stock and the Class C Common Stock in the same proportionate amounts per share as theretofore paid during the fiscal year on the Class A Common Stock, Class B Common Stock and the Class C Common Stock. (2) NONCUMULATIVE. Dividends on Class A Common Stock shall be noncumulative and no rights shall accrue to the holders of Class A Common Stock in the event that, in any fiscal year, the corporation shall fail to declare or pay dividends of up to 5% of the after-tax net earnings of the corporation for its prior fiscal year, whether or not the earnings of the corporation for the prior fiscal year were sufficient to pay such dividend in whole or in part. (3) NET EARNINGS AFTER TAXES. Net earnings after taxes for any fiscal year shall be the amount shown as after-tax net earnings in the corporation's audited statement of operations or audited consolidated statement of operations for the fiscal year, as the case may be. Such audited statement of operations or audited consolidated statement of operations shall be prepared in accordance with generally accepted accounting principles. The amount shown as after-tax net earnings in the audited statement of operations or audited consolidated statement of operation shall be final and binding upon the holders of Class A Common Stock. (4) DIVIDEND DILUTION PROTECTION. In the event of any stock split, stock dividend or other stock subdivision or stock combination, of or with respect to the Class B Common Stock and the Class C Common Stock of the corporation (each of the foregoing hereinafter referred to as an "Event") but not including shares of Class B Common Stock or Class C Common Stock issued in a merger or other business combination, then the maximum cash dividends per share payable to the holders of shares of Class B Common Stock and Class C Common Stock pursuant to the third sentence of paragraph 2.2(1) hereof shall be adjusted by multiplying each such per share cash dividend amount by a fraction whose numerator shall be the number of shares of Class B Common Stock and Class C Common Stock outstanding immediately prior to such Event and whose denominator shall be the number of shares of Class B Common Stock and Class C Common Stock outstanding immediately following such Event. Such adjustment shall be made at the time of each occurrence of an Event, giving effect to all prior adjustments. Holders of shares of Class A Common Stock shall be entitled to notice of any Event within ten (10) business days of its occurrence. 2.3 PURCHASE. Nothing herein shall limit the right of the corporation to purchase any of its outstanding shares of Class A Common Stock in accordance with law, by public or private transaction. 2.4 CONVERSION RIGHTS. The shares of Class A Common Stock shall not be convertible into the shares of any other class of stock of the corporation. 2.5 LIQUIDATION PREFERENCE OVER CLASS C COMMON STOCK. In the event of dissolution, liquidation or winding up of the corporation (whether voluntary or involuntary), after payment or provision for payment of debts but before any distribution to the holders of shares of Class B Common Stock and Class C Common Stock, the holders of the shares of Class A Common Stock shall be entitled to receive $0.05 per share. Holders of shares of Class B Common Stock and Class C Common Stock shall then be entitled to receive $0.05 per share. All remaining assets of the corporation upon liquidation shall be distributed pro rata among the holders of the shares of Class A Common Stock, Class B Common Stock and Class C Common Stock. If the assets distributable among the holders of Class A Common Stock are insufficient to permit full payment to them of $0.05 per share, the entire assets of corporation shall be distributed prorata among the holders of the Class A Common Stock. None of the following events is a dissolution, liquidation or winding up within the meaning of this paragraph: consolidation, merger, or reorganization of the corporation with any other corporation or corporations, sale of all or substantially all the assets of the corporation, or any purchase or redemption by the corporation of any of its outstanding shares. 3. CLASS B AND CLASS C COMMON STOCK. 3.1 VOTING RIGHTS. The holders of shares of Class C Common Stock shall have full voting rights at any annual or special meeting of the shareholders and as provided for in the Texas Business Corporation Act. Except as otherwise expressly provided by law, the holders of shares of Class B Common Stock shall have no voting rights at any annual or special meeting of the shareholders. 3.2 DIVIDENDS. No cash dividends shall be declared or paid on Class C or Class B Common Stock in any fiscal year unless cash dividends paid during such fiscal year on outstanding Class A Common Stock shall equal at least 5% of the after-tax net earnings of the corporation for its prior fiscal year. 3.3 PURCHASE. No Class C Common Stock or Class B Common Stock shall be purchased by the corporation in any fiscal year unless cash dividends shall have been paid during such fiscal year on outstanding Class A Common Stock in the amount of at least 5% of the after-tax net earnings of the corporation for its prior fiscal year. Except as provided in the foregoing sentence, nothing herein shall limit the right of the corporation to purchase any of its outstanding shares of Class C Common Stock or Class B Common Stock in accordance with law, by public or private transaction. 3.4 CONVERSION RIGHT. The holders of the shares of Class B Common Stock shall have the right to convert Class B Common Stock shares into Class C Common Stock shares on a one-to-one ratio on such date as the Corporation's Board of Directors shall establish; and pending Board of Director action, the conversion date for Class B Common Stock to be issued shall be October 1, 1997. The holders of shares of Class B Common Stock shall have the right to convert Class B Common Stock shares into shares of Class A Common Stock, on a one-to-one basis, at any time after October 1, 1997, provided that the holders of shares of Class A Common Stock have approved an increase in the authorized number of shares of Class A Common Stock, as provided in Part 3.5 below. 3.5 CONVOCATION OF MEETING OF SHARES OF THE CORPORATION. The holders of shares of Class B Common Stock shall have the right to require the Corporation from its 1995 fiscal year to its 1997 fiscal year (exclusively), to validly call and hold meetings of the holders of each class of stock in the capital of the Corporation, at least once during each such fiscal year until the consents and approvals of such holders have been obtained so that there shall exist such number of authorized shares of Class A Common Stock as is equal to the aggregate of (i) the issued and outstanding shares of the Class A Common Stock at the time of such consents and approvals and (ii) the number of shares of Class A Common Stock as may be issuable pursuant to any outstanding subscriptions, calls, options, warrants, or other agreements or rights to sell, purchase or subscribe for any shares of Class A Common Stock or convert any obligations into shares of Class A Common Stock. 4. DENIAL OF PREEMPTIVE RIGHTS. No holder of shares of any class of the corporation, Class A Common Stock, Class B Common Stock or Class C Common Stock, shall have any preemptive right to subscribe for or acquire additional shares of the corporation of the same or any other class, whether such shares shall be hereby or hereafter authorized; and no holder of shares of any class of the corporation shall have any right to acquire any shares which may be held in the treasury of the corporation. All such additional or treasury shares may be sold for such consideration, at such time, and to such person or persons as the Board of Directors may from time to time determine. 5. CLASS A COMMON STOCK INTO CLASS C COMMON STOCK AND PREFERRED STOCK INTO CLASS A COMMON STOCK. Each outstanding share of Class A Common Stock shall become one share of Class C Common Stock, par value $0.05 per share, and each outstanding share of Preferred Stock, par value $0.05 per share, shall become one share of Class A Common Stock, par value $0.05 per share effective upon the issuance by the Secretary of State of the State of Texas of the Certificate of Amendment to the Second Restated and Amended Articles of Incorporation wherein this Article Four becomes part of the Second Restated and Amended Articles of Incorporation of the corporation. ARTICLE FIVE The corporation will not commence business until it has received for the issuance of its shares consideration of the value of ONE THOUSAND DOLLARS ($1,000.00). ARTICLE SIX The post office address of its registered office is 7900 Callaghan Road, San Antonio, Texas 78229, and the name of its registered agent at such address is Frank E. Holmes. ARTICLE SEVEN The number of directors constituting the present board of directors is five, and the names and addresses of those persons who presently serve as directors and who will continue to serve as directors until their successors are elected and qualified are: NAME ADDRESS -------------------- --------------------------------- Frank E. Holmes 7900 Callaghan Road San Antonio, TX 78229 Bobby D. Duncan 7900 Callaghan Road San Antonio, TX 78229 Victor Flores 7900 Callaghan Road San Antonio, TX 78229 Jerold H. Rubinstein 11400 W. Olympic Blvd., Ste. 1100 Los Angeles, CA 90064-1507 Roy D. Terracina 7900 Callaghan Road San Antonio, TX 78229 ARTICLE EIGHT [The name and address of each incorporator is omitted as permitted by Article 4.07 B of the Texas Business Corporation Act]. ARTICLE NINE The corporation shall have the power to indemnify its directors, officers, employees, and agents and to purchase and maintain liability insurance for those persons as, and to the fullest extent, permitted by Article 2.02-1 of the Texas Business Corporation Act, as now or hereafter amended, or by any successor provision thereto. ARTICLE TEN Any contract or other transaction between the corporation and one or more of its directors, or between the corporation and any firm of which one or more of its directors are members or employees, or in which they are interested, or between the corporation and any corporation or association of which one or more of its directors are shareholders, members, directors, officers, or in which they are interested, shall be valid for all purposes, notwithstanding the presence of the interested director or directors at the meeting of the Board of Directors of the corporation that acts upon, or in reference to, the contract or transaction, and notwithstanding his or their participation in the action, if the fact of such interest shall be disclosed or otherwise known to the Board of Directors and the Board of Directors shall nevertheless authorize or ratify the contract or transaction, the interested director or directors to be counted in determining whether a quorum is present and to be entitled to vote on such authorization or ratification; and no director shall be liable to account to the corporation for any profits realized by reason of interest therein when such contract or other transaction has been authorized or ratified in accordance with the foregoing. This Article Ten shall not be construed to invalidate any contract or transaction which would otherwise be valid in the absence of this provision. ARTICLE ELEVEN Notwithstanding any provision in Article Nine to the contrary, no director of the Company shall be liable to the Company or its shareholders for monetary damages or an act or omission in the director's capacity as a director, except for liability for (i) any breach of a director's duty of loyalty to the Company or its shareholders, (ii) an act or omission not in good faith or which involves intentional misconduct or a knowing violation of law, (iii) any transaction from which as director received an improper benefit, whether or not the benefit resulted from an action taken within the scope of the director's office, (iv) an act or omission for which the liability of a director is expressly provided for by statute or (v) an act related to an unlawful stock repurchase or payment of a dividend. If the Texas Miscellaneous Corporation Laws Act is hereafter amended to authorize the further elimination or limitation of the liability of directors, then the liability of a director of the Company, in addition to the limitation of personal liability provided herein, shall be limited to the fullest extent permitted by the amended Texas Miscellaneous Corporation Laws Act. Any repeal or modification of this paragraph by the shareholders of the Company shall be prospective only, and shall not adversely affect any limitation on the personal liability of a director of the Company existing at the time of such repeal or modification. ARTICLE TWELVE Any action required by the Texas Business Corporation Act to be taken at any annual or special meeting of shareholders, or any action which may be taken at any annual or special meeting of shareholders, may be taken without a meeting, without prior notice, and without a vote provided: (1) a consent or consents in writing, setting forth the action so taken, are signed by the holder or holders of shares having not less than the minimum number of votes that would be necessary to take such action at a meeting at which the holders of all shares entitled to vote on the action were present and voted; and (2) prompt notice of such action is given to those shareholders entitled to vote who did not consent in writing to the action. ARTICLE IV The amendment made by these Third Restated and Amended Articles of Incorporation has been effected in conformity with the provisions of the Texas Business Corporation Act, and such amendment was duly adopted by the holders of the Corporation's voting Common Stock (Class C Common Stock) by written consent on September 20, 1996. ARTICLE V The number of shares entitled to vote on the amendment made by these Third Restated and Amended Articles of Incorporation, the same constituting all of the outstanding shares of voting Common Stock (the Class C Common Stock) of the Corporation, was 563,904. The number of shares of Class C Common Stock which voted for such amendment by signing the written consent was 392,211 or 69.55% of the shares of Class C Common Stock outstanding. ARTICLE VI The amendment does not effect a change in the amount of the stated capital. IN WITNESS WHEREOF, we have hereunto set our hands this 20th day of September, 1996. U.S. GLOBAL INVESTORS, INC. by: /s/ Frank E. Holmes ----------------------------------------- FRANK E. HOLMES, CHIEF EXECUTIVE OFFICER by: /s/ Susan B. McGee ----------------------------------------- SUSAN B. MCGEE, SECRETARY STATE OF TEXAS COUNTY OF BEXAR Before me, a Notary Public, on this day personally appeared FRANK E. HOLMES and SUSAN B. McGEE, known to me to be the persons whose names are subscribed to the foregoing document, and being by me first duly sworn, declared that the statements therein contained are true and correct. Given under my hand and seal of office this 20th day of September, 1996. /s/ Cindy L. Neathery ---------------------------- Notary Public, State of Texas My Commission Expires: July 21, 1998 S E A L EX-3.(II) 3 AMENDMENT TO BY-LAWS UNITED SERVICES ADVISORS, INC. AMENDMENT TO BY-LAWS The By-Laws of the Corporation are hereby amended by action of the Board of Directors at a meeting held May 10, 1996. ARTICLE III DIRECTORS, Section 1.1 will be deleted. ARTICLE III DIRECTORS, Section 6.1 will be amended to read as follows: Section 6.1 There shall be at least 4 meetings of the Board of Directors of the Corporation annually and inasmuch as reasonably possible, one such meeting during each of its fiscal quarters. ARTICLE III DIRECTORS, Section 8.1 shall be amended to read as follows: Section 8.1 A quorum of a meeting of each of the Board of Directors and the audit or remuneration committee of the Corporation shall consist of a majority of the directors then forming part of the Board of Directors or such committee, respectively. ARTICLE III DIRECTORS, Section 9.1 shall be deleted. ARTICLE III DIRECTORS, a Section 12 shall be amended to read as follows: Section 12. BOOKS OF ACCOUNT AND RECORDS. The books of account and records of the Corporation shall be kept and maintained at all times at the head office of the Corporation. ARTICLE IV NOTICES, Sections 2.1 and 7.1 shall remain in the Bylaws and read as follows: Section 2.1 The presence in person or participation by conference call of a director at any such meeting shall be deemed to be a waiver of notice for the meeting, unless such director objects to the holding of the meeting on the basis that same is not regularly held or called. Section 7.1 Notices of convocation in respect of each regular or special meeting of the Board of Directors or the audit or remuneration committee of the Corporation shall be given to each director or member of such committee, respectively, at least 25 hours prior to each such meeting, containing an agenda for such meeting. Amended by action of the Board of Directors at a meeting held May 10, 1996. EX-11 4 STATEMENT RE COMPU. OF SHARE EARNINGS U.S. GLOBAL INVESTORS, INC. EXHIBIT 11 SCHEDULE OF COMPUTATION OF NET EARNINGS PER SHARE Year Ended June 30, 1996 1995 1994 ----------- ----------- ----------- Earnings (loss) before cumulative effect of change in accounting .............................$ 1,987,067 $(3,890,718) $ 949,640 Cumulative effect of change in accounting ............... -- 43,284 200,420 ----------- ----------- ----------- Net earnings ............................................$ 1,987,067 $(3,847,434) $ 1,150,060 =========== =========== =========== Primary Weighted average number shares outstanding during the year ..................................... 6,562,830 6,013,393 5,315,862 Add: Common stock equivalent shares (determined using the "treasury stock" method) representing shares issuable upon exercise of Preferred or Common stock warrants ........... -- -- 149,658 Common stock equivalent shares (determined using the "treasury stock" method) representing shares issuable upon exercise of Preferred or common stock options ............ 38,244 -- 546,631 ----------- ----------- ----------- Weighted average number of shares used in calculation of primary earnings per share ....... 6,601,074 6,013,393 6,012,151 =========== =========== =========== Primary earnings (loss) per share Net earnings before cumulative effect of change in accounting ..........................$ 0.30 $ (0.65) $ 0.16 Cumulative effect of change in accounting ........... -- 0.01 0.03 ----------- ----------- ----------- Net Earnings Per Share ..............................$ 0.30 $ (0.64) $ 0.19 =========== =========== =========== Fully Diluted Weighted average number of shares outstanding during the year ..................................... 6,562,830 6,013,393 5,315,862 Add: Common stock equivalent shares (determined using the "treasury stock" method) representing shares issuable upon exercise of Preferred or Common stock warrants ........... -- -- 90,808 Common stock equivalent shares (determined using the "treasury stock" method) representing shares issuable upon exercise of Preferred or common stock options ............ 38,244 -- 478,697 ----------- ----------- ----------- Weighted average number of shares used in calculation of fully diluted earnings per share ....................................... 6,601,074 6,013,393 5,885,367 =========== =========== =========== Fully diluted earnings (loss) per share Net earnings before cumulative effect Of change in accounting .........................$ 0.30 $ (0.65) $ 0.16 Cumulative effect of change in accounting .......... -- 0.01 0.03 ----------- ----------- ----------- Net Earnings Per Share ..........................$ 0.30 $ (0.64) $ 0.19 =========== =========== ===========
EX-13 5 ANNUAL REPORT TO USGI SHAREHOLDERS EXHIBIT 13 - ANNUAL REPORT TABLE OF CONTENTS FOR FIELD PORTIONS Page The Company..................................................................... Annual Status Report............................................................ Selected Financial Data ........................................................ Financial Statements............................................................ Report of Independent Accountants.......................................... Consolidated Balance Sheets................................................ Consolidated Statements of Operations...................................... Consolidated Statements of Cash Flow....................................... Consolidated Statements of Shareholders' Equity............................ Notes to Consolidated Financial Statements................................. THE COMPANY U.S. Global Investors, Inc., a Texas corporation organized in 1968 (the "Company" or "USGI"), and its wholly owned subsidiaries are in the mutual fund management business. The Company provides: (1) investment advisory services to institutions (namely, mutual funds) and other persons; (2) transfer agency and record keeping services; (3) mailing services; and, (4) through its wholly-owned trust company, custodial and administrative services for IRAs and other types of retirement plans. The provision of investment advisory, transfer agent, administrative and custodial services and investment income are the primary sources of the Company's revenue. (See Consolidated Statements of Operations included in this Annual Report.) The Company is a registered investment adviser under the Investment Advisers Act of 1940 and is principally engaged in the business of providing investment advisory and other services to United Services Funds, a Massachusetts business trust ("USF", "Trust" or "Funds"). USF is an open-end, management investment company which offers shares of twelve mutual funds on a no-load basis. The Company also provides investment advisory and other services to Accolade Funds, a Massachusetts business trust. Accolade Funds is an open-end management investment company which, since October 1994, has offered shares of Bonnel Growth Fund, on a no-load basis. The Company organized U.S. Advisors (Guernsey) Ltd. in August 1993 for the purpose of acting as investment advisor for investment companies whose shares are offered to non-U.S. citizens. U.S. Advisors (Guernsey) Ltd. has delegated its administrative duties to Butterfield Fund Managers (Guernsey) Limited and its investment advisory duties to USGI. Similarly, the Company has a one-third interest in a joint venture formed in August 1994, United Services Advisors (Canada), Inc., to offer mutual funds in Canada. In addition to providing mutual fund management services to its clients, the Company utilizes a diversified venture capital approach in trading for its own account in an effort to add growth value to its cash position. Typical investments include, among other things, early stage or start-up businesses seeking initial financing as well as more mature businesses in need of capital for expansion, acquisitions, management buyouts, or recapitalizations. In addition, the Company may utilize investment techniques such as "private placement arbitrage," which technique involves the contemporaneous purchase of a quantity of an issuer's securities at a discount in a private placement and a short sale of the same or substantially similarly security in the public market. The activities are scrutinized by Company compliance personnel and reported to investment advisory clients. INVESTMENT MANAGEMENT SERVICES The mutual funds are managed by the Company pursuant to advisory agreements (the "Advisory Agreements"). The Company furnishes an investment program for each of the mutual funds it manages and determines, subject to the overall supervision by the Board of Trustees of the funds, the funds' investments. Consistent with the investment restrictions, objectives and policies of the particular fund, the portfolio manager for each fund determines what investments should be purchased, sold and held, and makes changes in the portfolio deemed to be necessary or appropriate. In the Advisory Agreements the Company is charged with seeking the best overall terms in executing portfolio transactions and selecting brokers or dealers. The Company also manages, supervises and conducts certain other affairs of the funds, subject to the control of the Boards of Trustees. The Company provides office space, facilities and certain business equipment and also provides the services of executive, clerical and accounting personnel for administering the affairs of the mutual funds. The Company and its affiliates compensate all personnel, officers, directors and interested Trustees of the funds if such persons are also employees of the Company or its affiliates. However, the funds are required to reimburse the Company for a portion of the compensation of the Company's employees who perform certain state and federal securities law regulatory compliance work on behalf of the funds based upon the time spent on such matters. The Company is responsible for costs associated with marketing fund shares. As required by the Investment Company Act of 1940, the Advisory Agreements are subject to annual renewal and are terminable upon 60 days' notice. The Board of Trustees of USF and of Accolade Funds will consider renewal of the applicable agreement in October 1996 and March 1997, respectively. Management anticipates that the Advisory Agreements will be renewed. Investment company net assets under management (in thousands) at fiscal year end for the past five years are: 1996 1995 1994 1993 1992 - ---------------------- ----------- ---------- ---------- ---------- ---------- USF Money Market $ 777,252 $ 719,745 $ 774,937 $ 588,306 $ 267,284 USF Gold Related 427,155 414,096 488,266 433,552 271,263 USF Other 84,245 87,179 99,941 82,421 57,705 - ---------------------- ----------- ---------- ---------- ---------- ---------- USF Total 1,288,652 1,221,020 1,363,144 1,104,279 596,252 Accolade Funds 86,302 13,842 -- -- -- - ---------------------- ----------- ---------- ---------- ---------- ---------- Total Assets under Management $1,374,954 $1,234,862 $1,363,144 $1,104,279 $ 596,252
Under the Advisory Agreements, the Company receives an advisory fee for each mutual fund computed and accrued daily based upon the net assets represented by the particular fund on that day. The fees range from 0.375% to 1.25% of average net assets and are paid monthly. As is set forth in detail in Note D to the Consolidated Financial Statements included in this Annual Report, the Company has agreed to waive its fee revenues and/or pay expenses for certain USF funds for purposes of enhancing the funds' competitive market positions. Investment advisory and administration fees (in thousands--net of expenses paid by the Company or voluntary waivers) for the past three fiscal years are: 1996 1995 1994 - ------------------- ------ ------ ------ USF Money Market $ 835 $ 895 $ 760 USF Gold Related 4,185 4,089 4,006 USF Other 475 485 361 - ------------------- ------ ------ ------ USF Total 5,495 5,469 5,127 Accolade Funds 409 13 -- - ------------------- ------ ------ ------ Total $5,904 $5,482 $5,127 Transfer Agent and Other Services The Company's wholly-owned subsidiary, United Shareholder Services, Inc. ("USSI"), is a transfer agent registered under the Securities Exchange Act of 1934, and provides transfer agency, bookkeeping, accounting, lockbox and printing services to investment company clients. The transfer agency utilizes a coordinated internal system connecting the Company's fund shareholder communication network with computer equipment and software designed to meet the operating requirements of a mutual fund transfer agency. The transfer agency's duties encompass: (1) acting as servicing agent in connection with dividend and distribution functions; (2) performing shareholder account and administrative agent functions in connection with the issuance, transfer and redemption or repurchase of shares; (3) maintaining such records as are necessary to document transactions in the funds' shares; (4) acting as servicing agent in connection with mailing of shareholder communications, including reports to shareholders, dividend and distribution notices, and proxy materials for shareholder meetings; and (5) investigating and answering all shareholder account inquiries. The Transfer Agency Agreements provide that USSI will receive, as compensation for services rendered as transfer agent, an annual fee per account, except for money market accounts with monthly zero balances, and will be reimbursed out-of-pocket expenses. During the fiscal year ended June 30, 1996, the per account charge was increased. In connection with obtaining/providing administrative services to the beneficial owners of Fund shares through institutions which provide such services and maintain an omnibus account with USSI, each fund pays a monthly fee based on the number of accounts and the value of the shares of the fund held in accounts at the institution which payment shall not exceed the per account charge on an annual basis. The number of shareholder accounts at fiscal year end for the past five years are: 1996 1995 1994 1993 1992 - ------------------------- ------- ------- ------- ------- ------- USF Money Market 35,019 34,998 32,769 27,493 21,338 USF Gold Related 68,688 77,120 82,156 82,350 84,898 USF Other 11,695 12,637 14,445 12,189 11,787 - ------------------------- ------- ------- ------- ------- ------- USF Total 115,402 124,755 129,370 122,032 118,023 Accolade Funds 5,075 1,444 -- -- -- - ------------------------- ------- ------- ------- ------- ------- TOTAL 120,477 126,199 129,370 122,032 118,023 ========================= ======= ======= ======= ======= ======= Shareholder accounts at Schwab, Fidelity and Jack White 13,534 9,543 9,921 Unavailable Unavailable - ------------------------- ------- ------- ------- ----------- ----------- For the three fiscal years ended June 30, 1996, 1995, and 1994, total transfer agency fees (net of waivers) were approximately $3.3 million, $3.2 million and $3 million, respectively. The Transfer Agency Agreements with USF and Accolade Funds are subject to renewal on an annual basis and are terminable upon 60 days notice. The Agreements will be considered by the Boards of Trustees of USF and of Accolade Funds for renewal during October 1996 and March 1997, respectively, and management anticipates that the agreements will be renewed. USSI also maintains the books and records of each Trust and of each fund of each Trust, including calculations of the daily net asset value per share. The services are currently provided for an asset based fee on a tiered level of average net assets -- subject to an annual minimum fee of at least $24,000. The agreements may be terminated by either party without penalty by giving 60 days written notice. For the three years ended June 30, 1996, 1995 and 1994 bookkeeping and accounting fees before waivers were approximately $523,000, $420,000 and $388,000, respectively. MAILING SERVICES A&B Mailers, Inc., a wholly-owned subsidiary of the Company, provides mail handling services to various persons. A&B Mailers' primary customers include the Company in connection with its efforts to promote the funds and the Company's investment company clients in connection with required mailings. Each service is priced separately. For the three years ended June 30, 1996, 1995 and 1994, A&B Mailers' revenues, after intercompany eliminating entries, were approximately $231,000, $170,000, and $185,000 respectively. TRUST COMPANY SERVICES Security Trust and Financial Company ("ST&FC"), a wholly-owned state chartered trust company provides custodial and tax reporting services for IRA and other retirement plans funded with shares issued by the funds advised and administered by the Company. ST&FC also actively markets 401(k) and other retirement plans. The custodial fees are generally paid to ST&FC at year-end upon separate invoice to the customer, not the fund. For the three years ended June 30, 1996, 1995 and 1994 custodial fee revenues were approximately $545,000, $503,000 and $363,000, respectively. EMPLOYEES As of June 30, 1996, the Company and its subsidiaries employed 99 full-time employees and 8 part-time employees; and, as of June 30, 1995, it employed 100 full-time employees and 8 part-time employees. The Company considers its relationship with its employees to be excellent. COMPETITION The mutual fund industry is highly competitive. As of June 30, 1996, there were over 6,000 registered open-end management investment companies of varying sizes and investment policies whose shares were being offered to the public. Generally, there are two types of mutual funds: "load" and "no-load." In addition there are both no-load and load funds which have "12b-1" plans authorizing the payment of distribution costs of the funds out of fund assets, such as Accolade Funds. Load funds are typically sold through or sponsored by brokerage firms, and a sales commission is charged on the amount of the investment. No-load funds, such as USF's, however, may be purchased directly from the particular mutual fund organization and thus no sales commission is charged. In addition to competition from other mutual fund managers and investment advisers, the Company and the mutual fund industry are in competition with various investment alternatives offered by insurance companies, banks, securities dealers and other financial institutions. Many of these institutions are able to engage in more liberal advertising than mutual funds and may offer accounts at competitive interest rates, which are insured by federally chartered corporations such as the Federal Deposit Insurance Corporation. Recent regulatory pronouncements related to the Glass-Steagall Act, the statute that has prohibited banks from engaging in various securities activities, are enabling banks to compete with the Company in a variety of areas. A number of mutual fund groups are significantly larger than the funds managed by the Company, offer a greater variety of investment objectives and have more experience and greater resources to promote the sale of investments therein. However, the Company believes it has the resources, products and personnel to compete with these other mutual funds. Competition for sales of fund shares is influenced by various factors, including investment objectives and performance, advertising and sales promotional efforts, distribution channels and the types and quality of services offered to fund shareholders. Success in the investment advisory and mutual fund share distribution businesses is substantially dependent on the funds' investment performance, the quality of services provided to shareholders and the Company's efforts to effectively market the performance. In other words, good performance combined with a strong public relations program heightens investor awareness, stimulates sales of the funds' shares and tends to keep redemptions low. Sales of funds' shares generate management fees (which are based on assets of the funds) and transfer agent fees (which are based on the number of fund accounts). Good performance also attracts private institutional accounts to the Company. Conversely, relatively poor performance results in decreased sales and increased redemptions of the funds' shares and the loss of private accounts, with corresponding decreases in revenues to the Company. SUPERVISION AND REGULATION The Company, USSI, and the investment companies it manages and administers operate under certain laws, including federal and state securities laws, governing their organization, registration, operation, legal, financial and tax status. ST&FC operates under certain laws, including Texas banking laws, governing its organization, registration, operation, legal, financial and tax status. Among the penalties for violation of the laws and regulations applicable to the Company and its subsidiaries are fines, imprisonment, injunctions, revocation of registration and certain additional administrative sanctions. A determination that the Company or its management had violated applicable laws and regulations could have a material adverse effect on the business of the Company. Moreover, there is no assurance that changes to existing laws, regulations or rulings promulgated by governmental entities having jurisdiction over the Company and the funds will not have a material adverse effect on the business of the Company. The Company is a registered investment adviser subject to regulation by the U.S. Securities and Exchange Commission ("SEC") pursuant to the Investment Advisers Act of 1940, the Investment Company Act of 1940 and the Securities Exchange Act of 1934 (the "1934 Act"). USSI is also subject to regulation by the SEC under the 1934 Act. The Company and USSI are required to keep and maintain certain reports and records which must be made available to the SEC upon request. Moreover, the funds managed by the Company are subject to regulation and periodic reporting under the Investment Company Act of 1940 and, with respect to their continuous public offering of shares, the registration provisions of the Securities Act of 1933. RELATIONSHIPS WITH THE FUNDS The businesses of the Company are to a very significant degree dependent upon their associations and contractual relationships with the Trusts. In the event any of the management or investment company services agreements with USF were canceled or not renewed pursuant to the terms thereof, the Company would be substantially adversely affected. The Company, USSI and ST&FC consider their relationships with the Trusts to be good and they have no reason to believe that their management and service contracts will not be renewed in the future; however, there is no assurance that the Trusts will choose to continue its relationships with the Company, USSI, and ST&FC. ANNUAL STATUS REPORT During the fiscal year ended June 30, 1996, the Company achieved net after tax earnings of approximately $0.30 per share. Its core business generated the revenue necessary to meet ongoing expenses, obligations associated with increasing its mutual fund operations, and the extraordinary items which arose during fiscal 1995. Management believes the Company's financial condition is stable and the Company is in a position to take advantage of opportunities presenting themselves for future growth. The discussion below provides detail of the Company's results of operations and its liquidity and capital resources. RESULTS OF OPERATIONS A snapshot of the Company's operations is outlined in the following table, which sets forth for the periods indicated, certain revenue and expense items as percentages of total revenues and the increase (decrease) by item from the previous period. "General and Administrative" expenses are detailed for comparative purposes, and expenses associated with "Government Securities," which are discussed in detail below, are aggregated. RESULTS OF OPERATIONS: PERCENTAGE OF TOTAL REVENUES PERIOD TO PERIOD CHANGE --------------------------------------------------------- 1996 1995 YEARS ENDED JUNE 30, COMPARED COMPARED ----------------------------- 1996 1995 1994 TO 1995 TO 1994 --------------------------------------------------------- REVENUES INVESTMENT ADVISORY FEE 29.4% 34.9% 47.1% 7.7% 7.4% TRANSFER AGENT FEE 16.4% 20.2% 27.7% 3.8% 5.9% ACCOUNTING FEE 2.6% 2.7% 3.6% 24.3% 8.4% EXCHANGE FEE 1.4% 1.7% 2.9% 4.6% -15.7% CUSTODIAL FEES 2.7% 3.2% 3.3% 8.3% 38.7% INVESTMENT INCOME 15.6% 1.7% 12.2% 1075.9% -79.9% OTHER 1.6% 1.7% 3.2% 39.8% -23.2% GAINS ON CHANGES OF INTEREST IN AFFILIATE (3) 2.8% 0.0% 0.0% -- -- GOVERNMENT SECURITY INCOME (1) 27.5% 33.9% 0.0% 3.9% -- --------------------------------------------------------- TOTAL REVENUES 100.0% 100.0% 100.0% 28.2% 45.0% --------------------------------------------------------- EXPENSES SALARIES, WAGES, & BENEFITS 24.8% 30.2% 41.2% 5.3% 6.5% FUND EXPENSES 3.3% 4.2% 8.9% -0.2% -30.6% MARKETING & DISTRIBUTION 7.5% 9.2% 16.1% 3.7% -16.8% OTHER GENERAL & ADMINISTRATIVE 16.5% 16.0% 20.8% 32.3% 11.0% INTEREST & FINANCE CHARGES 0.6% 1.7% 1.6% -52.4% 55.0% DEPRECIATION & AMORTIZATION 2.1% 3.4% 4.4% -20.8% 11.7% REDUCTION IN CARRYING VALUE OF INVESTMENT IN JOINT VENTURE (3) 3.1% 0.0% 0.0% -- -- GOVERNMENT SECURITY EXPENSES (2) 27.5% 72.7% 0.0% -51.4% -- --------------------------------------------------------- TOTAL EXPENSES 85.4% 137.4% 93.0% -20.3% 114.3% --------------------------------------------------------- (1) INCLUDES INTEREST INCOME AND ACCRETION (2) INCLUDES GOVERNMENT SECURITY INTEREST EXPENSE AND DEBENTURE INTEREST. ALSO INCLUDES NON-CASH CHARGE DURING FISCAL YEAR 1995 (3) THESE ITEMS ARE NON-CASH CREDITS AND/OR CHARGES INCURRED DURING FISCAL YEAR 1996
NET INCOME As reflected in the table, USGI's net income has had dramatic fluctuations over the past three years. The Company posted net after tax earnings of $1.98 million ($0.30 per share) for fiscal 1996, a net after tax loss of $3.85 million ($0.64 per share) for fiscal 1995; and net after tax earnings of $1.15 million ($0.19 per share) for fiscal 1994. The fluctuations are a short-term aberration resulting from the Company's purchase of U.S. Government securities during fiscal 1995, as well as other factors which are more fully discussed below. Total consolidated revenues for fiscal 1996 increased approximately 28% over fiscal 1995, primarily due to investment income and gains on changes of interest in an affiliate. Total consolidated revenues increased approximately 45% from fiscal 1994 to fiscal 1995, primarily due to interest income and accretion on the U.S. Government securities. GOVERNMENT SECURITIES Fiscal 1995 was a year of tremendous challenges which required a significant commitment of management's time and Company resources in order to overcome the effects of unusual and unexpected rising interest rates and regulatory pronouncements, the consequences of which had a direct bearing on USF's largest fund, the U.S. Government Securities Savings Fund ("USG"). As part of USGI's response to this rise and these pronouncements issued to money market funds in general, during fiscal 1995 USGI arranged for the purchase and/or purchased directly approximately $130.5 million par value adjustable rate U.S. Government agency notes ("Notes") from USG. These Notes were confused with high risk securities like options, futures, structured notes, exotic floaters, or CMOs, which contain a multiplicity of complex and undeterminable risks, including extension, prepayment, and coupon cap risks. USGI acquired the Notes from its top performing money market fund in order to calm any derivative-induced fears and to maintain the confidence of our shareholders by assuring a stable one dollar per share net asset value. The purchases have had a dramatic impact on the Company's financial statements. "Government Security Income" (interest and accretion) represented 28% and 34% of total revenue during fiscal 1996 and fiscal 1995, respectively; and related expenses (including the fiscal 1995 non-cash charges of approximately $5.4 million) represented 28% and 73% of total revenues for fiscal 1996 and fiscal 1995, respectively. There is no parallel effect for fiscal year 1994. The Company purchased the Notes at USG's amortized cost of over $130 million but recorded the Notes at their fair value, approximately $125 million. As a consequence, the Company recorded a pre-tax non-cash charge to the results of operations of approximately $5.4 million during fiscal 1995. Since the Notes were initially classified as held-to-maturity securities, the Company recognized approximately $1.4 million and $1.5 million in non-cash income during fiscal 1996 and fiscal 1995, respectively, due to accretion of the discount. To control the debt incurred upon purchase of the Notes, management aggressively pursued avenues to accelerate the debt reduction. During fiscal 1996 the Notes were reclassified from the held-to-maturity category to the available-for-sale category and certain of the Notes were sold. Upon this reclassification, the Company began recording these Notes at fair value. The Company sold $90.8 million and $13 million of the Notes during fiscal 1996 and fiscal 1995, respectively. By selling these Notes USGI expects to save approximately $1 million in annual interest costs on debt used to finance the Notes. The remaining Notes acquired by USGI mature at their aggregate par value of $26.7 million in February and March 1997. USGI financed the original acquisition of the Notes as follows: 1) approximately $120.9 million was provided by third party broker-dealers under reverse repurchase agreements; 2) USGI issued a $6 million 8% subordinated debenture to Marleau, Lemire Inc. ("ML"), the terms of which require principal payments as the Notes mature and interest payments quarterly; and 3) USGI utilized approximately $3.6 million of its own cash. At June 30, 1996, the remaining Notes are financed with approximately $26.7 million from broker-dealers, and the remaining balance under the debenture plus accrued interest of approximately $1.6 million. To protect against a sharp increase in interest rates, the Company purchased put options on Eurodollar futures with the expectation that they would reduce exposure to temporary declines in the value of the Notes and increased interest costs of the reverse repurchase agreements. In light of the stable-to-decreasing interest rate environment, USGI has not purchased options to hedge its position in the Notes since the second quarter of fiscal 1996. During fiscal 1997 the remaining Notes will mature or be sold prior to their maturity if market and other conditions warrant; thereafter, issues involved with the purchase and sale of the Notes will no longer demand management's attention and the Company will be essentially debt free. INVESTMENT ACTIVITIES Management has been aggressively and effectively managing the Company's cash position by utilizing a diversified venture capital approach to investing. As shown in the table, investment income constituted 15% and 12%, respectively, of USGI's revenue in fiscal 1996 and fiscal 1994. On the other hand, investment income represented less than 2% of revenues in fiscal 1995. This source of revenues is dependent on market fluctuations, the Company's ability to participate in investment opportunities, and timing of transactions. As shown by the table, it does not provide a consistent level of revenue. Excluding the income and accretion from the Notes, revenue for fiscal 1996 increased approximately 41% over fiscal 1995, and revenue for fiscal 1995 decreased approximately 4% over fiscal 1994. The fiscal 1996 increase resulted primarily from the fact that the Company recognized more realized gains of approximately $2.8 million on the sale of investments during the year, while unrealized holding gains from trading securities increased by approximately $335,000. Included in fiscal 1996 revenue is approximately $556,000 resulting from the accounting treatment for changes of interest in an affiliated company (namely, unrealized gains of the offshore fund sponsored by the Company). The Company expects such interests will change in the future as changes in ownership of the affiliate occur; the magnitude of such amounts will be affected by fluctuations in market value of the affiliate's investments. The fiscal 1995 decrease resulted primarily from an 80% decrease in investment income, which was due to: 1) the Company realizing more gains in fiscal 1994 on sales of investments; and 2) the Company implementing SFAS 115 "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115") as of July 1, 1994 which required the Company to recognize unrealized gains and losses on investments defined as trading securities in the Company's income statement. Approximately $151,000 of unrealized losses on trading securities were included in earnings for fiscal 1995. The growth of the amount invested has been enhanced by a strong bull market. At the June 30, 1996, 1995, and 1994 fiscal year ends the Company held approximately $3.9 million, $3.9 million, and $2.6 million, respectively, in securities other than the Notes and USF money market mutual fund shares (restricted, trading and available-for-sale categories). The activities are scrutinized by Company compliance personnel and reported to investment advisory clients. OPERATING REVENUES The Company's principal business is managing, creating and marketing mutual funds and providing management and other services to such institutions. Its primary sources of revenues from operations are investment advisory fees and transfer agency fees. The Company's investment advisory fee revenue is based on a percentage of average net assets under management; and the transfer agency fee revenue is based, in large part, on the number of shareholder accounts being serviced. Therefore, fluctuations in financial markets impact revenues and results of operations. Assets under management for USF for the fiscal years ended June 30, 1996, 1995 and 1994 have remained stable. They have averaged $1.30 billion, $1.32 billion and $1.28 billion, respectively. Additionally, assets under management for the Accolade Funds ("Accolade"), which commenced operations in October 1994, averaged $48 million, $5.6 million and $0 for those fiscal years, respectively. In light of such, in fiscal 1996 investment advisory fee revenue has increased approximately 8% over fiscal 1995, and in fiscal 1995 such revenue increased approximately 7% over fiscal 1994. Shareholder accounts serviced, on the other hand, have, since peaking in fiscal 1994, declined to pre-1994 levels. Accounts serviced for fiscal years ended June 30, 1996, 1995, and 1994 were 120,477, 126,199 and 129,370, respectively. Management believes that, to some extent, this change may be attributed to investors shifting from direct investment in the funds to omnibus accounts through mutual fund trading facilities offered by broker-dealers such as Schwab, Fidelity and Jack White. Notwithstanding such, due to a fee increase and compensation related to omnibus accounts, in fiscal 1996 transfer agent fee revenue increased approximately 4% over fiscal 1995; and in fiscal 1995 it increased approximately 6% over fiscal 1994. EXPENSES Total consolidated expenses for fiscal 1996 decreased approximately 20% over fiscal 1995. This decrease was the direct result of: 1) a non-recurring non-cash charge of approximately $5.4 million relating to the purchase of the Notes during 1995; 2) lower interest expense of approximately $414,000 on securities sold under agreement to repurchase with broker-dealers and 3) lower interest expense of approximately $100,000 on the subordinated debenture. Total consolidated expenses for fiscal 1995 were more than double those of fiscal 1994 primarily as a result of expenses related to the Notes, such as: 1) a non-recurring non-cash charge of approximately $5.4 million relating to the purchase of the Notes; 2) interest expense of almost $5.6 million on securities sold to broker-dealers under agreements to repurchase the Notes; and 3) interest expense of $433,000 on the subordinated debenture. Exclusive of the expenses attributable to the purchase and financing of the Notes and exclusive of the reduction of the carrying value of investment in joint venture, expenses of the Company increased almost 14% in fiscal 1996 over fiscal 1995 and increased less than 1% in fiscal 1995 over fiscal 1994. As shown on the table, excluding expenses associated with the Notes, "salaries, wages and benefits" are the largest component of Company expenses and have remained relatively stable over the last three fiscal years, averaging 45% of said expenses. In fiscal 1996 this expense item increased over 5% from fiscal 1995, and in fiscal 1995 this item increased almost 7% over fiscal 1994. The increases relate primarily to incentive compensation and savings plans instituted to reward employee efforts. Salaries, wages and benefits should continue at historic levels. Marketing and distribution expenses represented 17%, 14% and 17% of total expenses (excluding those associated with the Notes and the reduction in carrying value) during fiscal 1996, fiscal 1995 and fiscal 1994, respectively. Actual expenditures increased in fiscal 1996 over fiscal 1995 due to additional funds being available from the increase in revenues; however, expenditures were below those in fiscal 1994, prior to purchasing the Notes. It is anticipated that marketing and distribution expenditures will increase to 1994 levels during fiscal 1997. As shown in the table, fund expenses decreased dramatically (31%) in fiscal 1995 over fiscal 1994. This was due, in large part, to the Company's response to burdens imposed by purchasing the Notes. In fiscal 1996 fund expenses continue to be paid at fiscal 1995 levels. In this regard, the Company has agreed to waive a portion of its fee revenues and/or pay for expenses of certain mutual funds for purposes of enhancing the funds' competitive market position. Should assets of these funds increase, fund expenses borne by the Company would increase, but only to the extent that such expenses exceed any expense caps in place. The Company expects to continue to waive fees and/or pay for fund expenses as long as market and economic conditions warrant. However, subject to the Company's commitment to certain funds with respect to fee waivers and expense limitations, the Company may reduce the amount of fund expenses it is bearing. The reduction in carrying value in the table relates to the USGI-ML joint venture agreement to offer mutual funds in Canada. As part of the agreement to enter into a joint venture, USGI issued 120,000 shares of its Class A common stock to ML. The estimated value of the stock upon issuance was $510,000, which the Company recorded as its investment in the joint venture during the first quarter of fiscal 1995. Also, USGI agreed to incur the initial organization and development costs, including formation and registration of the Canadian mutual funds up to a maximum of $250,000 (Canadian). In connection with the December 1995 agreement with ML discussed below, USGI agreed to pay an additional $250,000 (Canadian) in expenses of the joint venture. The Company's commitment to pay expenses for the joint venture is complete as of year end. The Company will, if necessary, advance monies to the joint venture to cover its portion of the expenses during the first half of fiscal 1997; however, it is anticipated that the joint venture will become self supporting during fiscal 1997. During June 1996, the U.S. Advisors, Canada Inc. ("USACI") Management Group acquired a one-third interest in USACI. As a result of this negotiated sale, which diluted USGI's interest from one-half to one-third, and other factors, the Company reduced the carrying value of the asset by approximately $620,000. For a more detailed discussion, see Note H to the Consolidated Financial Statements. LIQUIDITY AND CAPITAL RESOURCES LIQUIDITY At year end the Company had working capital of approximately $1.32 million and a current ratio of 1.04 to 1 (3.07 to 1, excluding assets and liabilities related to the Notes). With approximately $666,000 in cash and cash equivalents and more than $3.21 million in marketable securities, the Company has adequate liquidity. Total shareholders' equity was approximately $8.54 million--with cash, cash equivalents, and marketable securities (including the Notes) comprising 77% of total assets. Moreover, the Company's cash flow (excluding interest and accretion on the Notes) is sufficient to cover current expenses, including debt service. Except for ongoing expenses of operations, the Company's only material commitments are to debt service related to the Notes (a short-term debt) and the mortgage on its corporate headquarters (a long-term debt). Debt related to the Notes aggregated approximately $27.95 million plus accrued interest as of June 30, 1996. The Notes mature in February and March 1997 at their par value of approximately $26.73 million. The Company has sufficient liquid assets to cover the approximate $1.22 million difference between par value and the amount financed. Management believes current cash reserves, plus financing obtained and/or available, and cash flow from operations will be sufficient to meet foreseeable cash needs or capital necessary for the above mentioned activities, as well as allow the Company to take advantage of investment opportunities whenever available. ML TRANSACTIONS Shareholders' equity at June 30, 1996, 1995 and 1994 was approximately $8.5 million, $8.7 million and $6.7 million, respectively. The increase in fiscal 1995 over 1994 was due in large part to the December 1994 transaction in which ML invested funds in the Company in exchange for shares, warrants, conversion and other contractual rights which would have resulted in ML obtaining a controlling interest in the Company. During fiscal 1996 ML and the Company entered into an agreement essentially reversing the 1994 transaction. The Company repurchased ML's warrants and certain conversion and contractual rights, and ML converted its share holdings from Class B common stock to preferred stock (currently Class A common stock) and sold the shares. As a result of this transaction, ML no longer is able to obtain voting control of the Company, and the Company has simplified its balance sheet and capital structure and has also reduced potential dilution and future interest costs. The Company does not expect material changes to the Company's stock structure during fiscal 1997. TAX LOSS CARRYFORWARDS Management assessed the likelihood of realization of the recorded deferred tax asset at June 30, 1996 to be "more likely than not." Net operating losses ("NOLs") of $2.8 million, primarily resulting from the non-cash charge to earnings related to the purchase of the Notes during fiscal 1995, do not expire until fiscal 2010. Based on the current level of earnings and management's expectations for the future, management believes that operating income will "more likely than not" generate the minimum amount of future taxable income necessary to fully realize the deferred tax assets. SELECTED FINANCIAL DATA The following selected financial data is qualified by reference to, and should be read in conjunction with, the Company's Consolidated Financial Statements and related notes and the Annual Status Report -- that is, Management's discussion and analysis of financial condition and results of operations, contained in this Annual Report. The selected financial data as of June 30, 1992 through June 30, 1996 and the years then ended is derived from the Company's Consolidated Financial Statements which were examined by Price Waterhouse LLP, independent certified public accountants. Year Ended June 30, ------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 - -------------------------- ------------- ------------- ------------- ------------- ------------- Selected Earnings Data: Revenues $ 20,214,546 $ 15,770,738 $ 10,879,156 $ 7,393,502 $ 6,979,845 Expenses 17,261,592 21,666,598 10,108,181 7,302,036 7,406,179 ------------- ------------- ------------- ------------- ------------- Earnings (loss) before minority interest, equity interest, income taxes, extra-ordinary item and cumulative effect 2,952,954 (5,895,860) 770,975 91,466 (426,334) ------------- ------------- ------------- ------------- ------------- Income taxes and extraordinary item 1,013,517 2,005,142 178,665 -- -- Minority interest (55,098) -- -- -- -- Equity in earnings of affiliate 102,728 -- -- -- -- Cumulative effect of change in accounting -- 43,284 200,420 -- -- ------------- ------------- ------------- ------------- ------------- Net earnings (loss) 1,987,067 (3,847,434) 1,150,060 91,466 (426,334) Earnings (loss) per share 0.30 (0.64) 0.19 0.02 (0.10) Working capital $1,316,006(1) $(106,863,206)(1) $ 3,391,974 $ 2,952,737 $ 2,119,233 Total assets 39,307,196 128,073,122 9,143,448 7,224,495 4,918,085 Long-term obligations 1,410,479 6,016,617 1,619,989 1,718,518 1,181,245 Shareholders' equity 8,544,072 8,661,223 6,730,003 5,055,567 3,288,200 - ---------- 1 Working capital includes amounts due to broker-dealers under reverse repurchase agreements related to the Company's purchase of certain U.S. Government securities but does not include the securities collateralizing the obligations (See "Government Securities" discussed in Item 7 of this Form 10-K and/or Note F to the Consolidated Financial Statements, Item 8 of this Form 10-K.)
[GRAPHIC: PRICE WATERHOUSE LLP LETTERHEAD] 700 N. St. Mary's, Suite 900 Telephone 210-226-7700 San Antonio, TX 78205 Facsimile 210-226-7412 PRICE WATERHOUSE LLP [GRAPHIC: PRICEWATERHOUSE LOGO] REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of U.S. Global Investors, Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, cash flows and shareholders' equity present fairly, in all material respects, the financial position of U. S. Global Investors, Inc. and its subsidiaries at June 30, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As discussed in Note B to the financial statements, the Company changed its method of accounting for income taxes during the year ended June 30, 1994 and its method of accounting for investments in debt and equity securities during the year ended June 30, 1995. /s/ Price Waterhouse LLP PRICE WATERHOUSE LLP San Antonio, Texas September 26, 1996 U.S. GLOBAL INVESTORS, INC. CONSOLIDATED BALANCE SHEETS Assets June 30, --------------------------- 1996 1995 ------------ ------------ Current Assets Cash and cash equivalents (Notes A & O) $ 666,250 $ 2,772,221 Trading securities, at fair value (Note A & C) 999,500 1,510,316 Government securities available-for-sale at fair value (Note F and K) 26,324,125 -- Receivables: Mutual funds (Note D) 1,092,961 720,134 Accrued interest (Note K) 95,847 504,647 Custodial fees 163,296 192,248 Employees 92,765 98,121 Receivable from brokers 75,054 104,747 Other 704,286 77,098 Prepaid expenses 454,567 488,773 Deferred tax asset (Note P) -- 63,771 ------------ ------------ Total Current Assets 30,668,651 6,532,076 ------------ ------------ Net Property and Equipment (Notes A & E) 2,621,052 2,664,820 ------------ ------------ Other Assets Government securities held-to-maturities (Note F) -- 113,260,361 Restricted investments (Note A,C, J & Q) 642,380 897,556 Long-term receivables 368,742 219,982 Long-term deferred tax asset (Note P) 1,096,268 2,224,602 Residual equity interest (Note G) 217,861 217,861 Investment in joint venture (Note H) 255,500 518,073 Investment securities available-for-sale, at fair value (Note A & C) 2,210,657 1,466,622 Equity investment in affiliate (Note A) 1,164,415 -- Other 61,670 71,169 ------------ ------------ Total Other Assets 6,017,493 118,876,226 ------------ ------------ $ 39,307,196 $128,073,122 ============ ============
The accompanying notes are an integral part of this statement. U.S. GLOBAL INVESTORS, INC. CONSOLIDATED BALANCE SHEETS (Continued) Liabilities and Shareholders' Equity June 30, ------------------------------ 1996 1995 ------------- ------------- CURRENT LIABILITIES Current portion of capital lease obligation (Note E) $ 24,354 $ 93,658 Current portion of notes payable (Note I) 41,695 38,325 Current portion of annuity and contractual obligation (Note J) 18,000 18,000 Subordinated debenture held by a related party (Note M) 1,533,131 -- Securities sold under agreements to repurchase (Note K) 26,404,375 112,201,469 Accounts payable 276,116 167,598 Accrued interest payable to third parties 16,685 388,217 Accrued interest payable to related party (Note M & O) 70,017 113,126 Accrued compensation and related costs 204,911 53,700 Accrued profit sharing and 401(k) (Note L) 110,489 48,000 Accrued vacation pay 75,959 75,959 Accrued legal fees 70,536 50,722 Deferred tax liability (Note P) 11,312 -- Litigation accrual (Note Q) 300,000 -- Other accrued expenses 195,065 146,508 ------------- ------------- TOTAL CURRENT LIABILITIES 29,352,645 113,395,282 ------------- ------------- Subordinated Debenture Held By a Related Party (Note M & O) -- 4,534,212 Capital Lease Obligations (Note E) -- 24,354 Notes Payable-Net of Current Portion (Note I) 1,260,137 1,301,723 Annuity and Contractual Obligations (Note J) 150,342 156,328 ------------- ------------- TOTAL NON-CURRENT LIABILITIES 1,410,479 6,016,617 ------------- ------------- TOTAL LIABILITIES 30,763,124 119,411,899 ------------- ------------- Commitments and contingent liabilities (Note J, M, I, & K) Shareholders' Equity (Note N) Common stock (Class A) (formerly preferred stock)--$0.05 par value; non-voting; authorized, 6,000,000 shares; issued and outstanding, 6,219,422 in 1996, 5,071,495 in 1995 310,971 253,575 Common stock (Class C) (formerly Class A)-- $.05 par value; authorized, 1,750,000 shares; issued and outstanding, 564,352 in 1996 and 570,779 in 1995 28,218 28,539 Common stock (Class B)--$.05 par value; non-voting; authorized, 2,250,000 shares; issued and outstanding, 0 in 1996 and 1,000,000 in 1995 -- 50,000 Additional paid-in-capital 10,586,666 12,852,986 Treasury stock at cost; 199,582 and 92,500 shares held in 1996 and 1995, respectively (530,384) (198,366) Net unrealized gain on available-for-sale securities (net of tax of $294,993 and $120,914, respectively) 572,634 234,716 Equity in net unrealized gain on available-for-sale securities held by affiliate (net of tax of $76,823) 149,127 -- Retained earnings (deficit) (2,573,160) (4,560,227) ------------- ------------- TOTAL SHAREHOLDERS' EQUITY 8,544,072 8,661,223 ------------- ------------- $ 39,307,196 $ 128,073,122 ============= =============
The accompanying notes are an integral part of this statement. U.S. GLOBAL INVESTORS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS Year Ended June 30, -------------------------------------------- 1996 1995 1994 ------------ ------------ ------------ REVENUE (NOTE D) Investment advisory fee $ 5,934,133 $ 5,508,482 $ 5,126,858 Transfer agent fee 3,306,568 3,187,037 3,010,097 Accounting fee 523,465 421,190 388,454 Exchange fee 282,651 270,105 320,470 Custodial fees 545,018 503,225 362,758 Investment income 3,144,062 267,379 1,332,630 Mailroom operations 230,550 169,743 185,283 Other 132,315 89,868 152,606 Government security income (Note F) 5,559,879 5,353,709 -- Gains on changes of interest in affiliate (Note A) 555,905 -- -- ------------ ------------ ------------ 20,214,546 15,770,738 10,879,156 ------------ ------------ ------------ EXPENSES General and administrative 10,520,912 9,405,031 9,455,974 Depreciation and amortization 425,301 536,920 480,491 Interest expense-note payable and other 126,732 266,222 171,716 Government security non-cash charge (Note F) -- 5,375,269 -- Interest expense-securities sold under agreement to repurchase (Note F & K) 5,235,535 5,650,020 -- Interest expense-subordinated debenture to a related party (Note M & O) 333,612 433,136 -- Reduction in carrying value of investment in joint venture (Note H) 619,500 -- -- ------------ ------------ ------------ 17,261,592 21,666,598 10,108,181 ------------ ------------ ------------ EARNINGS (LOSS) BEFORE MINORITY INTEREST, EQUITY INTEREST, INCOME TAXES, AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING 2,952,954 (5,895,860) 770,975 ------------ ------------ ------------ Minority Interest in Consolidated Company (Note A) (55,098) -- -- Equity In Net Earnings of affiliate (Note A) 102,728 -- -- ------------ ------------ ------------ EARNINGS (LOSS) BEFORE INCOME TAXES, AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING 3,000,584 (5,895,860) 770,975 PROVISION (BENEFIT) FOR FEDERAL INCOME TAXES (NOTE P) Current 61,000 -- 47,358 Deferred 952,517 (2,005,142) (226,023) ------------ ------------ ------------ 1,013,517 (2,005,142) (178,665) ------------ ------------ ------------ NET EARNINGS (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING 1,987,067 (3,890,718) 949,640 Cumulative Effect of Change in Accounting for Marketable Securities (net of taxes of $22,298) (Note B) -- 43,284 -- Cumulative Effect of Change in Accounting for Income Taxes (Note B) -- -- 200,420 ------------ ------------ ------------ NET EARNINGS (LOSS) $ 1,987,067 $ (3,847,434) $ 1,150,060 ============ ============ ============
The accompanying notes are an integral part of these statements. U.S. GLOBAL INVESTORS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Continued) Year Ended June 30, ---------------------------------------------- 1996 1995 1994 ------------- ------------- ------------- PER SHARE AMOUNTS PRIMARY AND FULLY DILUTED Continuing operations $ 0.30 $ (0.65) $ 016 Cumulative effect of change in accounting -- 0.01 0.03 ------------- ------------- ------------- Net Earnings $ 0.30 $ (0.64) $ 0.19 ============= ============= ============= WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING Primary and fully diluted 6,601,074 6,013,393 6,012,151 ============= ============= =============
The accompanying notes are an integral part of these statements. U.S. GLOBAL INVESTORS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended June 30, --------------------------------------------- 1996 1995 1994 ------------- -------------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings (loss) $ 1,987,067 $ (3,847,434) $ 1,150,060 Adjustments to reconcile to net cash provided by operating activities: Depreciation and amortization 425,301 536,920 480,491 Government security accretion (1,363,051) (1,499,521) -- Government security charge -- 5,375,269 -- Net gain on sales of securities (net of minority interest) (3,279,643) (248,661) (1,383,246) Gain on disposal of equipment (296) (1,100) -- Reduction in carrying value of investment in joint venture 619,500 -- -- Cumulative effect of change in accounting -- (43,284) (200,420) Treasury Stock reissued 139,595 32,381 -- Changes in assets and liabilities, impacting cash from operations: Restricted investments 255,176 (443,908) (108,648) Accounts receivable (675,974) (793,395) (21,128) Deferred tax asset 952,517 (2,005,142) (226,023) Prepaid expenses and other (1,065,278) 177,487 (318,835) Trading securities 2,674,344 894,453 -- Accounts payable 108,518 (50,240) 111,148 Accrued expenses 167,429 457,365 239,022 ------------ ------------- ----------- Total adjustments (1,041,862) 2,388,624 (1,427,639) ------------ ------------- ----------- NET CASH PROVIDED BY (USED IN) OPERATIONS 945,205 (1,458,810) (277,579) ------------ ------------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of building and land -- (27,461) (39,075) Purchase of furniture and equipment (372,211) (402,190) (303,932) Proceeds on sale of equipment 469 1,100 -- Purchase of securities -- -- (3,018,554) Proceeds on sale of securities -- -- 3,644,777 Purchase of available-for-sale securities (896,791) (1,023,721) -- Purchase of government securities held-to-maturity -- (130,113,712) -- Proceeds on sale of government securities available-for-sale 89,884,250 -- -- Proceeds on sale of government securities held-to-maturity -- 12,945,530 -- ------------ ------------- ----------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 88,615,717 (118,620,454) 283,216 ------------ ------------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments on annuity (5,986) (5,584) (5,206) Payments on note payable to bank (38,216) (35,337) (1,395,726) Principal payments on capital lease obligation (93,658) (103,431) (111,807) Proceeds from note payable to bank -- -- 1,375,385 Net proceeds from securities sold under agreement to repurchase 871,231 124,794,309 -- Proceeds from issuance of subordinated debenture to related party -- 6,000,000 -- Payments on subordinated debenture to related party (3,001,081) (1,465,788) -- Net payments on securities sold under agreement to repurchase (86,668,325) (12,592,840) -- Proceeds from issuance of preferred stock, warrants, and options 295,875 144,274 565,625 Proceeds from issuance of Common Stock (Class B) to related party -- 4,964,271 -- Purchase of Common Stock (Class B) from related party (2,538,945) -- -- Purchase of Treasury stock and warrants (487,788) (106,988) (41,249) ------------ ------------- ----------- NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (91,666,893) 121,592,886 387,022 ------------ ------------- ----------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (2,105,971) 1,513,622 392,659 BEGINNING CASH AND CASH EQUIVALENTS 2,772,221 1,258,599 865,940 ------------ ------------- ----------- ENDING CASH AND CASH EQUIVALENTS $ 666,250 $ 2,772,221 $ 1,258,599 ============ ============= ===========
The accompanying notes are an integral part of this statement. U.S. GLOBAL INVESTORS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) Year Ended June 30, ----------------------------------- 1996 1995 1994 ----------- ---------- -------- SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Purchase of equipment under capital lease $ -- $ -- $ 31,701 Issuance of shares for investment in joint venture -- 510,000 -- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for interest 6,088,853 5,848,689 171,716
The accompanying notes are an integral part of this statement. U.S. GLOBAL INVESTORS, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Common Common Common Preferred Stock Stock Stock Paid-in Preferred Stock (Class A) (Class B) (Class C) Capital Warrants ---------------------------------------------------------------------------- Balance at June 30, 1993 (4,628,805 $ 231,440 $ 0 $ 0 $ 29,449 $6,751,019 $ 0 shares of Preferred stock; 588,969 shares of Common stock (Class A)) Purchase of 10,000 shares of Preferred treasury stock -- -- -- -- -- -- Issuance of 226,000 shares of Preferred stock 11,300 -- -- -- 554,325 -- Conversion of 12,752 shares of Common stock (Class A) to Preferred stock 638 -- -- (638) -- -- Net Earnings -- -- -- -- -- -- --------------------------------------------------------------------------- Balance at June 30, 1994 (4,867,557 shares of Preferred stock; 576,217 $ 243,378 $ 0 $ 0 $ 28,811 $7,305,344 $ 0 shares of Common stock (Class A)) Purchase of 35,000 shares of Preferred treasury stock -- -- -- -- -- -- Reissuance of 11,200 shares of Preferred treasury stock -- -- -- -- (10,978) -- Issuance of 198,500 shares of Preferred stock 9,925 -- -- -- 644,349 -- Issuance of 1,000,000 shares of Common stock (Class B) -- 0 50,000 -- 4,914,271 -- Conversion of 5,438 shares of Common stock (Class A) to Preferred stock 272 -- -- (272) -- -- Unrealized gain (loss) on securities available-for-sale (net of tax) upon adoption of SFAS 115 -- -- -- -- -- -- Unrealized gain (loss) on securities available-for-sale (net of tax) -- -- -- -- -- -- Net Earnings -- -- -- -- -- -- --------------------------------------------------------------------------- Balance at June 30, 1995 (5,071,495 $ 253,575 $ 0 $ 50,000 $ 28,539 $12,852,986 $ 0 shares of Preferred stock; 570,779 shares of Common stock (Class A)) Conversion of Preferred Stock to Common Stock (Class A) (253,575) 253,575 -- -- -- -- Purchase of 175,475 shares of Common Stock (Class A) -- -- -- -- -- -- Reissuance of 68,393 shares of Common Stock (Class A) -- -- -- -- (16,175) -- Conversion of 6,427 shares of Common stock (Class C) to Common Stock (Class A) -- 321 -- (321) -- -- Conversion of 1,000,000 shares of Common stock (Class B) to Common Stock (Class A) -- 50,000 (50,000) -- -- -- Purchase of Common Stock (Class B) from related party (Note N) -- -- -- -- (2,538,945) -- Exercise of 141,500 Stock Options -- 7,075 -- -- 288,800 -- Unrealized loss on Notes transferred from held-to-maturity to available-for-sale, at date of transfer (net of tax) -- -- -- -- -- -- Unrealized gain (loss) on securities available-for-sale (net of tax) -- -- -- -- -- -- Equity in Unrealized gain (loss) on available-for-sale securities of affiliated company (net of tax) -- -- -- -- -- -- Net Earnings -- -- -- -- -- -- ------------------------------------------------------------------------------- Balance at June 30, 1996 $ 0 $310,971 $ 0 $ 28,218 $10,586,666 $ 0 Unrealized Gain (Loss) on Securities Earnings Treasury Available (Deficit) Stock for Sale Total ------------------------------------------------------- Balance at June 30, 1993 (4,628,805 ($1,862,853) ($ 93,488) $ 0 $5,055,567 shares of Preferred stock; 588,969 shares of Common stock (Class A)) Purchase of 10,000 shares of Preferred treasury stock -- (41,249) -- (41,249) Issuance of 226,000 shares of Preferred stock -- -- -- 565,625 Conversion of 12,752 shares of Common stock (Class A) to Preferred stock -- -- -- -- Net Earnings 1,150,060 -- -- 1,150,060 -------------------------------------------------------- Balance at June 30, 1994 (4,867,557 shares of Preferred stock; 576,217 ($712,793) ($134,737) $ 0 $6,730,003 shares of Common stock (Class A)) Purchase of 35,000 shares of Preferred treasury stock -- (106,988) -- (106,988) Reissuance of 11,200 shares of Preferred treasury stock -- 43,359 -- 32,381 Issuance of 198,500 shares of Preferred stock -- -- -- 654,274 Issuance of 1,000,000 shares of Common stock (Class B) -- -- -- 4,964,271 Conversion of 5,438 shares of Common stock (Class A) to Preferred stock -- -- -- -- Unrealized gain (loss) on securities available-for-sale (net of tax) upon adoption of SFAS 115 -- -- 197,009 197,009 Unrealized gain (loss) on securities available-for-sale (net of tax) -- -- 37,707 37,707 Net Earnings (3,847,434) -- -- (3,847,434) -------------------------------------------------------- Balance at June 30, 1995 (5,071,495 ($4,560,227) ($198,366) $ 234,716 $ 8,661,223 shares of Preferred stock; 570,779 shares of Common stock (Class A)) Conversion of Preferred Stock to Common Stock (Class A) -- -- -- -- Purchase of 175,475 shares of Common Stock (Class A) -- (487,678) -- (487,678) Reissuance of 68,393 shares of Common Stock (Class A) -- 155,660 -- 139,485 Conversion of 6,427 shares of Common stock (Class C) to Common Stock (Class A) -- -- -- -- Conversion of 1,000,000 shares of Common stock (Class B) to Common Stock (Class A) -- -- -- -- Purchase of Common Stock (Class B) from related party (Note N) -- -- -- (2,538,945) Exercise of 141,500 Stock Options -- -- -- 295,875 Unrealized loss on Notes transferred from held-to-maturity to available-for-sale, at date of transfer (net of tax) -- -- (62,006) (62,006) Unrealized gain (loss) on securities available-for-sale (net of tax) -- -- 399,924 399,924 Equity in Unrealized gain (loss) on available-for-sale securities of affiliated company (net of tax) -- -- 149,127 149,127 Net Earnings 1,987,067 -- -- 1,987,067 -------------------------------------------------------- Balance at June 30, 1996 ($2,573,160) ($530,384) $ 721,761 $ 8,544,072
The accompanying notes are an integral part of these statements. U.S. GLOBAL INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A. SIGNIFICANT ACCOUNTING POLICIES. ORGANIZATION U.S. Global Investors, Inc. ("the Company" or "USGI") serves as investment advisor, investment manager and transfer agent to United Services Funds ("USF") and Accolade Funds, both Massachusetts business trusts which are no-load, open-end investment companies offering shares in numerous mutual funds to the investing public. The Company has served as investment adviser and manager since the inception of USF and Accolade and assumed the transfer agency function of USF in November 1984 and of Accolade in October 1994, the commencement of operations. For these services, the Company receives fees from USF and Accolade. The Company has formed a limited liability company which was incorporated in Guernsey on August 20, 1993. This company, U.S. Advisors (Guernsey) Limited, manages the portfolio of an offshore fund, U.S. Global Strategies Fund Limited ("the Guernsey Fund"). During July 1994, USGI agreed to form a joint venture with Marleau, Lemire Inc. ("ML") of Montreal, Quebec, to offer mutual funds in Canada. In February 1995, United Services Wealth Management Co. ("USWMC"), a Montreal based company, was formed. This Company is expected to begin operations in early fiscal 1997, and is now named United Services Advisors, Canada, Inc. ("USACI"). The Company, through its wholly-owned subsidiary, Security Trust & Financial Company, also serves as custodian for retirement accounts invested in USF, Accolade, and other mutual funds. On June 1, 1996 the Company changed its name from United Services Advisors, Inc. to U.S. Global Investors, Inc. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, United Shareholder Services, Inc. ("USSI"), Security Trust and Financial Company ("STFC" or "ST&FC"), A&B Mailers, Inc. ("A&B"), and U.S. Advisors (Guernsey) Limited ("USAG"). Additionally, the Company has consolidated the balance sheet and results of operations of the Guernsey Fund since it owned substantially all of the issued shares of the Guernsey Fund during fiscal 1995 and for the first ten months of fiscal 1996. During the fourth quarter of fiscal 1996 the Company's interest in the Guernsey Fund declined below 50% and it began accounting for its investment in the Guernsey Fund under the equity method of accounting. At June 30, 1996, the Company held a 26% interest in the Guernsey Fund. The aggregate value of the Company's investment at June 30, 1996 based on quoted market value was approximately $1,164,415. During fiscal 1996, the Guernsey Fund issued 27,375 net additional shares for cash amounting to $2,719,998 to investors other than the Company. The Company accounts for changes in interests of its investment in the Guernsey Fund by charging or crediting income for the effects of such transactions when consummated. The Company recorded $555,905 in gains on such transactions during fiscal 1996 which are included as a separate line in the accompanying income statement. Deferred income taxes have been provided on these gains. All significant inter-company balances and transactions have been eliminated in consolidation. Certain amounts have been reclassified for comparative purposes. CASH AND CASH EQUIVALENTS Cash consists of cash on hand and cash equivalents with original maturities of three months or less. Cash and cash equivalents at June 30, 1996 and at June 30, 1995 include $596,605 and $2,673,156, respectively, in USF money market mutual funds (see Note O). This investment is valued at amortized cost which approximates market. In addition, not included in cash and cash equivalents is restricted cash of $633,169 and $315,000 at June 30, 1996 and June 30, 1995, respectively, which was held in a USF money market mutual fund and classified as a restricted investment on the June 30, 1996 and 1995 balance sheet (see Notes J and Q). FIXED ASSETS Fixed assets are recorded at cost including capitalized interest. Depreciation for owned fixed assets and capital leases is recorded using the straight-line method over the estimated useful life of each asset as follows: leasehold improvements, furniture, and equipment are depreciated over 3 years; capitalized leased phone equipment is depreciated over 5 years; and the building is depreciated over 31.5 years. U.S. GLOBAL INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) INCOME TAXES Income taxes are provided during the year in which transactions affect the determination of financial statement income, regardless of when they are recognized for tax purposes. Deferred income taxes are provided for temporary differences between the tax and book bases of assets and liabilities. Effective July 1, 1993, the company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (see Note B). EARNINGS PER SHARE Primary and fully diluted earnings per share are based on the weighted average number of shares of Class A common stock (formerly called preferred stock) Class B and Class C common stock outstanding during the year. All classes of common are considered equivalent in the calculation of earnings per share since each share has essentially equivalent interests in the income of the Company. Warrants, convertible debentures and options are included to the extent dilutive. SECURITY INVESTMENTS Effective July 1, 1994 the Company adopted Statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115") (see Note B). Prior to implementation of SFAS 115, investments in securities were stated at the lower of aggregate cost or market. Under SFAS 115, the Company classifies its investments in equity and debt securities into three categories. Management determines the appropriate classification of securities at the time of purchase and reevaluates such designation as of each reporting period date (see Note C). Securities that are purchased and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value. Unrealized gains and losses on these securities are included in earnings. Investments in debt securities for which the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity securities. Held-to-maturity securities are reported at amortized cost. Discount to par value is accreted, and recognized as income, over the remaining term to maturity. Investments not classified as trading securities nor as held-to-maturity securities are classified as available-for-sale securities and reported at fair value. Unrealized gains and losses on these securities are excluded from earnings and reported, net of tax, as a separate component of shareholders' equity and are recorded in earnings on trade date. Realized gains (losses) from security transactions are calculated on the first-in/first-out cost basis and are recorded in earnings on trade date. FOREIGN CURRENCY TRANSACTIONS Transactions between the Company and foreign entities are converted to U.S. dollars using the exchange rate on the date of the transactions. Security investments valued in foreign currencies are translated to U.S. dollars using the applicable exchange rate as of the reporting date. Foreign currency gain (loss) is included as a component of investment income. ORGANIZATION COSTS Organization costs in the amount of $5,013 and $14,509 net of amortization at June 30, 1996, and 1995, respectively, which relate to the organization of STFC and USAG, are amortized on a straight-line basis over 60 months. These costs are included in other assets on the consolidated balance sheet. U.S. GLOBAL INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ACCOUNTING PRONOUNCEMENTS In March 1995, the Financial Accounting Standards Board (FASB) issued Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of ("SFAS 121"), which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets carrying amount. SFAS 121 also addresses the accounting for long-lived assets that are expected to be disposed of. The Company will adopt SFAS 121 in the first quarter of fiscal 1997 and has not yet assessed the effect of adoption. In October 1995, the FASB issued Statement No. 123, Accounting for Stock-Based Compensation ("SFAS 123"), which establishes fair value methods of accounting for stock options and other forms of stock-based transactions. Under SFAS 123, companies are not required to adopt a fair value method of accounting for employee stock-based compensation. They are permitted to continue to account for such transactions pursuant to Accounting Principles Board Opinion No. 25 ("APB 25") but must disclose pro forma net income and earnings per share as if a fair value method of accounting had been applied. The Company intends to continue to account for employee stock option transactions in accordance with the requirements of APB 25. The Company will adopt SFAS 123 in fiscal 1997. In June 1995, the FASB issued Statement No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities ("SFAS 125"), which establishes criteria for recognition of sales related to asset transfers, distinguishing between a sale of assets and a secured borrowing, and of extinguishment of associated liabilities. SFAS 125 prohibits in-substance defeasance of debt. SFAS 125 is effective for transactions occurring after December 31, 1996. The Company has not yet assessed the effect of adoption. NOTE B. CHANGE IN ACCOUNTING PRINCIPLE. In the first quarter of fiscal 1995, the Company adopted SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities," effective July 1, 1994. The adoption of SFAS 115 changed the method of accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities. The Company recognized the cumulative effect of adopting the pronouncement in the first quarter of fiscal 1995 as a change in accounting principle. The financial impact of adopting SFAS 115 was a net increase in earnings of $43,284 (net of taxes of $22,298) or $.01 per share representing net unrealized gains on securities classified as trading securities and $197,009 (net of taxes of $101,489) on net unrealized gains on securities classified as available for sale which was reported as a separate component of equity. In the first quarter of fiscal 1994, the Company adopted Statement of Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes," effective July 1, 1993. The adoption of SFAS 109 changed the Company's method of accounting for income taxes from the deferred method to the liability method of accounting for deferred income taxes. Under the liability method prescribed by SFAS 109, deferred taxes are provided based upon enacted tax laws and rates applicable to the periods in which taxes become payable. As permitted by SFAS 109, prior years' financial statements were not restated to apply the provisions of the new method. The Company recognized the cumulative effect of adopting the pronouncement in the first quarter of fiscal 1994 as a change in accounting principle. The cumulative effect of adoption on July 1, 1993 was to increase deferred tax assets by $200,420. This amount primarily represented the impact of recognizing the benefit of a net operating loss carryover that could not be recorded under the previous method of accounting for income taxes. This increased net income in fiscal year 1994 by $200,420 or $.03 per share. NOTE C. INVESTMENTS. As discussed in Notes A and B, in fiscal 1995 the Company adopted SFAS 115, which changed the method of accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities. U.S. GLOBAL INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The cost and market value of investments classified as trading are as follows: Date Cost Market Value ---- ---- ------------ June 30, 1996 $1,034,398 $ 999,500 June 30, 1995 $1,661,113 $1,510,316 The net change in the unrealized holding gain on trading securities held at June 30, 1996 that has been included in earnings for the period was $185,695 compared to an unrealized loss of $150,797 for the period ended June 30, 1995. The cost of investments in securities, which are classified as available-for-sale, which may not be readily marketable at June 30, 1996 was $1,249,081. These investments are reflected as non-current assets on the June 30, 1996 consolidated balance sheet. These investments are in private placements which are restricted for sale as of June 30, 1996. It is anticipated the securities obtained in these private placements will become free trading during fiscal 1997. The fair value of the investments classified as available-for-sale at June 30, 1996 was $2,210,657 with $961,576 in unrealized gains being recorded as a separate component of shareholders' equity. Additionally, the Company holds certain notes with a fair value of $26,324,125 (amortized cost of $26,418,074) which are classified as available-for-sale securities resulting in an unrealized loss of $93,949 as of June 30, 1996. (See further discussion of these securities at Note F). During fiscal 1996, the Company recorded in income realized gains of $780,492 and unrealized gains of approximately $122,000 on securities which were transferred from the available-for-sale category to the trading category upon becoming free trading. The cost of investments in securities, which were classified as available-for-sale, which were not readily marketable at June 30, 1995 was $1,122,992. These investments were reflected as non-current assets on the June 30, 1995 consolidated balance sheet. These investments were private placements which were restricted for sale as of June 30, 1995. The securities obtained in these private placements became free trading during fiscal 1996. The fair value of the investments classified as available-for- sale at June 30, 1995 was $1,466,622 with $343,630 in unrealized gains being recorded as a separate component of shareholders' equity. Approximately $12,000 was also recorded to shareholders' equity for unrealized gains on short sales by the Company. During fiscal 1995, the Company recorded realized gains of $202,441, on securities which were transferred from available-for-sale securities to trading securities upon becoming free trading. The Company also recorded unrealized gains of $158,498 and unrealized losses of $188,124 on securities which were transferred from available-for-sale securities to trading securities upon becoming free trading during the year. Additionally, at June 30, 1995 the Company held Notes with an amortized cost of $113,260,361 which were classified as held-to-maturity securities. (See further discussion of these securities at Note F.) In September 1994, subsequent to the Company's purchase of the notes discussed in Note F, the Company and USF entered into an agreement, under which the Company agreed to transfer $900,000 in cash and securities into an account at a financial institution in the name of the Company for the benefit of U.S. Government Securities Savings Fund ("USG") under the control of USF's independent Trustees. The agreement terminated the earlier of 1) when USG no longer owned any of the variable rate government agency notes set forth under the agreement; or 2) October 1997. The entire collateral was returned to the Company during the fiscal year due to the reduced percentage of USG invested in the notes in accordance with the agreement. Restricted investments include cash of $ -0- and $76,604 held in margin accounts at brokers at June 30, 1996 and June 30, 1995, respectively. Prior to the implementation of SFAS 115, marketable securities which were classified as current assets at June 30, 1994 had a cost (carrying amount) of $1,086,974. Market value of these investments was $1,152,556, which exceeded cost at June 30, 1994. Gross unrealized gains and losses amounted to $199,369 and ($133,787), respectively, at June 30, 1994. Net realized gains on sales of securities of $1,383,246 were included in fiscal 1994 investment income. U.S. GLOBAL INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE D. INVESTMENT MANAGEMENT, TRANSFER AGENT AND OTHER FEES. The Company serves as investment advisor and transfer agent to USF and Accolade. For these services the Company receives fees based on a specified percentage of net assets both under management and the number of shareholder accounts. The Company also provides in-house legal and accounting services to USF and Accolade. The accounting services are provided to USF for an annual fee. The Company also receives exchange, maintenance, closing and small account fees directly from USF shareholders. USGI receives additional revenue from several sources including: STFC custodian and administrative fee revenues, gains on marketable securities transactions, revenues from miscellaneous transfer agency activities including lockbox functions as well as mailroom operations (A&B). Investment advisory fees, transfer agency fees, accounting fees, custodian fees and all other fees to the Company are recorded as income during the period in which services are performed. The Company has voluntarily waived or lowered its advisory fees and is bearing expenses on several funds within USF: The Company has unconditionally guaranteed that the total fund operating expenses (as a percentage of average net assets) of the U.S. Tax Free Fund, the United Services Intermediate Treasury Fund, United Services Near-Term Tax Free Fund, and the U.S. Government Securities Savings Fund will not exceed 0.40% on an annualized basis through June 30, 1997 or such later date as the Company determines. The Company has unconditionally guaranteed that the total fund operating expenses (as a percentage of average net assets) of the U.S. All American Equity will not exceed 0.70% on an annualized basis through June 30, 1997 or such later date as the Company determines. The Company has unconditionally guaranteed that the total fund operating expenses (as a percentage of average net assets) of the China Region Opportunity Fund will not exceed 2.25% on an annualized basis through June 30, 1997 or such later date as the Company determines. The aggregate amount of fees waived or expenses voluntarily reimbursed totaled $3,362,050, $3,568,151 and $4,190,821 in 1996, 1995, and 1994, respectively. The Company also reimbursed $ -0-, $-0-, and $14,234 in the aggregate for each of the three fiscal years ended June 30, 1996, 1995, and 1994 respectively, to the funds for expenses in excess of state statutory limitation requirements. The following funds accounted for more than 10% of revenue [excluding government security income (Notes F and K)] in the years indicated: Year Ended June 30, ------------------------------ 1996 1995 1994 ----- ------ ----- U.S. Gold Shares Fund 21% 32% 31% U.S. World Gold Fund 21% 25% 22% U.S. Treasury Securities Cash Fund 9% 13% 10% Receivables from mutual funds represent amounts due the Company, and its wholly-owned subsidiaries, for investment advisory fees, transfer agent fees, accounting fees, and exchange fees, net of amounts payable to the mutual funds. The investment advisory contract and related contracts between the Company and USF expire on or about October 25, 1996. Management anticipates the Trustees of USF will renew the contracts. U.S. GLOBAL INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE E. PROPERTY AND EQUIPMENT. Property and equipment are composed of the following: June 30, -------------------------- 1996 1995 ----------- ----------- Leasehold improvements $ 182,887 $ 184,416 Capitalized leased equipment 519,768 519,768 Furniture and equipment 4,125,349 3,769,171 Building and land 2,203,757 2,203,757 ---------- ----------- 7,031,761 6,677,112 Accumulated depreciation and amortization (4,410,709) (4,012,292) ----------- ----------- Net property and equipment $2,621,052 $2,664,820 =========== =========== At June 30, 1996 and 1995 accumulated amortization for capitalized leased equipment was $510,961 and $450,303, respectively. Amortization expense for capitalized leased equipment was $60,658, $125,198 and $116,391 for the fiscal years ended June 30, 1996, 1995 and 1994, respectively. Minimum lease payments required by obligations under capital leases are $24,354 in fiscal 1997. On February 28, 1992, the Company acquired a 46,000 square foot office building with approximately 2.5 acres of land from the Resolution Trust Corporation. Total capitalized costs associated with the building and land are approximately $2.2 million, including capitalized interest of $33,783, closing costs and improvements. The Company made additional substantial improvements to the building in order to accommodate the transfer of its headquarters. Depreciation on the building and improvements commenced upon occupancy. The building is pledged as collateral for the financing used to acquire the building (see Note I). NOTE F. GOVERNMENT SECURITIES. USG, a USF fund, from its inception had invested in, among other types of Government securities, certain Government agency notes whose interest rates reset monthly based on a cost-of-funds index ("Notes"). This reset feature lags changes in short-term interest rates. During fiscal 1995, due to such rates rising dramatically and regulatory directives issued to money market funds in general, the market value of the Notes was adversely effected. To reduce USG's exposure to said Notes and in order to maintain a $1.00 per share net asset value, USGI decided, in the first quarter of fiscal 1995, to arrange for USG to sell $40 million par amount of Notes at USG's amortized cost of approximately $39,777,000 plus accrued interest to ML. Thereafter, USGI decided to purchase directly from the fund $90,525,000 par amount of Notes ($53,275,000 during the first quarter of fiscal 1995 and $37,250,000 during the third quarter of fiscal 1995) at USG's amortized cost of approximately $90,337,000 plus accrued interest. Additionally, in connection with such decision, USGI purchased the Notes from ML for approximately $39,777,000 plus accrued interest during the first quarter of fiscal 1995. USGI recorded the Notes at their fair value. As the Notes had an aggregate fair value of approximately $124,739,000 on the dates USGI acquired the securities, the Company recorded pre-tax non-cash charges to the results of operations of approximately $2,574,000 during the first quarter and $2,800,000 during the third quarter of fiscal 1995. The Company initially classified the Notes as held-to-maturity securities. As a result, and in addition to periodic receipts of interest income, USGI recognized $1,363,051 and $1,499,521 in non-cash income during fiscal 1996 and 1995, respectively. U.S. GLOBAL INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) In December 1995, $63,800,000 par value Notes were reclassified from the held-to-maturity category to the available-for- sale category in accordance with the one-time reassessment allowed by the FASB Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities. The remaining $53,725,000 par value Notes retained their held-to-maturity status as defined by SFAS115 until June 1996 when these were re-classified to available-for-sale securities. Upon this re-classification the Company began recording these Notes at fair value with any unrealized gain or loss excluded from earnings and reported, net of tax, as a separate component of shareholders' equity. At the June 1996 re- classification date, the unrealized loss approximated the amount recorded at June 30, 1996 ($93,949). The Company has sold the following Notes during the fiscal years 1996 and 1995. DATE SOLD PAR VALUE REALIZED GAIN/(LOSS) --------- ------------ -------------------- June 1995 $13,000,000 ($32,073) December 1995 $47,250,000 $1,235,986 May 1996 $16,550,000 $1,267 June 1996 $27,000,000 ($74,766) ----------- --------- $103,800,000 $1,130,414 ============ =========== The remaining Notes acquired by USGI mature at their aggregate $26,725,000 par amount as follows: MATURITY PAR VALUE -------- --------- February 1997 $ 10,750,000 March 1997 $ 15,975,000 USGI financed the original acquisition of the Notes, including purchased accrued interest, as follows: 1) approximately $120.9 million was provided by third party broker-dealers under reverse repurchase agreements (see Note K); 2) USGI issued a $6.0 million 8% subordinated debenture to ML, the terms of which require principal payments as the Notes mature and interest payments quarterly (see Note M); and 3) USGI utilized approximately $3,563,000 of its own cash. During fiscal 1995, USGI purchased put options on Eurodollar futures ("Options") for approximately $274,125 in premiums which expired resulting in a $231,625 loss. The options were purchased as portfolio insurance with the expectation that they would reduce USGI's exposure to temporary declines in the value of the Notes and reduce USGI's exposure to increased interest costs of the reverse repurchase agreements in the event of a sharp increase in interest rates. During the fourth quarter of fiscal 1995, USGI purchased 35 put options on Eurodollar futures for approximately $13,700 in premiums which expired in September 1995 These options were accounted for on a "mark-to-market" basis, were exchange traded and required no cash requirements other than the initial premiums, and USGI's exposure on the options was limited to the initial premium invested. During fiscal 1996 the Company purchased 175 put options on Eurodollar futures for premiums of $73,938. All options were sold/expired during fiscal 1996 resulting in realized losses of approximately $50,000. NOTE G. RESIDUAL EQUITY INTEREST. In June 1992 the Company made its final payment to the Settlement Pool established under the June 1988 Settlement Agreement relating to the original Prospector Fund (now operating as the U.S. Global Resources Fund); and the Settlement Pool made the final payout to "Eligible Shareholders" thereof in June 1992. Under the 1988 Settlement Agreement, any amounts payable to "Eligible Shareholders" who cannot be located, together with interest thereon, will be held for six years after the final payout against the claims of those shareholders. At the end of six years, such amounts will be made available to all persons claiming subrogation. The Company has first right of subrogation to the amounts. The amount of cash held at June 28, 1996 was approximately $616,000. Management believes the Company will receive a sum which will equal or exceed the amount currently recorded as the Company's residual equity interest, $217,861. U.S. GLOBAL INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE H. INVESTMENT IN JOINT VENTURE. During the fiscal 1995, USGI and ML, a Canadian brokerage firm, entered into a joint venture agreement whereby USGI and ML agreed to undertake to offer mutual funds in Canada, primarily through ML's broker network located in Toronto, Montreal, Vancouver, and Victoria. As part of the agreement to enter into a joint venture, USGI issued 120,000 shares of its preferred stock to ML. The estimated value of the stock upon issuance was $510,000, which the Company recorded as its investment in the joint venture during the first quarter of fiscal 1995. In conjunction with this joint venture, United Services Advisors Wealth Management Corp. was incorporated during the third quarter of fiscal 1995 with a 50% ownership to each USGI and ML . The joint venture has been renamed United Services Advisors, Canada, Inc. ("USACI") during fiscal 1996. Also, USGI agreed to incur the initial organization and development costs. Management anticipates that USACI through its wholly-owned subsidiary United Services Advisors Fund Management Inc., which was formed in September 1995 to provide investment services to Canadian investors, will become the advisor to the ML Small Cap Fund and will also offer other Canadian funds and investment products and services during early fiscal 1997. During June 1996 the USACI management group acquired a one-third interest in USACI. As a result of this negotiated sale, which diluted USGI's interest from one-half to one-third, delays associated with the joint venture becoming operational, and the Company's reduced expectations of the joint venture's profitability, management has reassessed the recoverability of its carrying value in the joint venture. The Company determined that the carrying value should be reduced by $619,500 which decreases the carrying value to reflect the amount of the Company's proportionate one-third share of the underlying equity in net assets of USACI of $255,500 at June 30, 1996. Upon commencement of USACI operations USGI's investment in USACI will be accounted for under the equity method. NOTE I. NOTE PAYABLE. To facilitate the cost of acquiring the building and the necessary improvements, the Company obtained permanent financing from a bank in the amount of $1,425,000. On June 30, 1994 the Company re-financed the original building loan with another bank on more favorable terms. As of June 30, 1996, the balance on the note was $1,301,832. The loan is currently amortizing over a twenty-year period with payments of both principal and interest due monthly based on a fixed rate of 7.75%. The current monthly payment is $11,750. The loan matures July 2001. Under this agreement, the Company must maintain certain financial covenants. Because of events described in Note F, the Company obtained a waiver of the covenants from the bank through June 30, 1995 and subsequently negotiated an amendment to the loan agreement and covenants with the bank to cover periods beyond June 30, 1996. The Company is currently in compliance with all loan covenants. Future principal payments to be made over the next five years based on the amount outstanding at June 30, 1996 are as follows: Year Amount ---- ---------- 1997 $41,695 1998 44,899 1999 48,504 2000 52,273 Thereafter 1,114,461 Total $1,301,832 NOTE J. ANNUITY AND CONTRACTUAL OBLIGATIONS. On February 6, 1989, the Company entered into an agreement with Clark Aylsworth ("Aylsworth") related to his retirement on December 31, 1988. This agreement provided for the payment to Aylsworth of a monthly annuity of $1,500 for the remainder of his life or his wife's life, if he predeceases her. The Company has recorded an obligation related to this agreement. On December 30, 1990, the Company entered into a non-compete/non-interference agreement, an executory contract, pursuant to which it pays the Aylsworths $4,500 monthly, such amount to continue for the longer of Aylsworth's or his wife's life. The Company determined that the executory contract should be expensed as payments are made. The Company placed $360,000 in escrow to cover the Company's obligation to the Aylsworths if the Company defaults. The escrowed amount decreases $15,000 annually and amounted to $300,000 at June 30, 1996. U.S. GLOBAL INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE K. SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE. As discussed in Note F, USGI financed the acquisition of the Notes by entering into agreements to repurchase securities with third party broker-dealers. The terms with the broker-dealers provide that the reverse agreements must be collateralized by the Notes and/or cash. The Notes described in Note F are held by the broker-dealers as collateral. Throughout fiscal 1995 and 1996, and as of September 1996, each reverse repurchase agreement has matured and has been renewed on a 30-, 60-, or 90-day basis. Management believes that the reverse repurchase agreements can be periodically renewed until the Notes mature. All reverse repurchase agreements are with major broker-dealers and are secured by U.S. Government Agency obligations. Information on the reverse repurchase agreements as of June 30, 1996 is as follows: Matures Greater than 30 days ------------ Carrying Amount (Fair Value): $26,324,125 Accrued Interest Receivable on Collateral: 95,847 Repurchase Liability (interest rate of 5.80%): 26,404,375 NOTE L. BENEFIT PLANS. The Company and its subsidiaries have a contributory profit-sharing plan in which all qualified employees who have completed one year of employment with the Company are included. The amount of the annual contribution, which may not exceed 15% of earnings before income taxes, is determined by the Company's Board of Directors. At June 30, 1996, the Company has accrued $60,000 for fiscal 1996. The Company and its subsidiaries also have a savings and investment plan qualified under Section 401(k) of the Internal Revenue Code. The Company makes contributions on behalf of eligible employees to fund this plan. In connection with this 401(k) Plan, participants can voluntarily contribute up to 15% of their compensation to this plan, and the Company will match their contribution up to 2%. At June 30, 1996, the Company has accrued $50,000 for this matching contribution. Additionally, effective February 1, 1993, the Company began self-funding its employee health care plan. The Company has obtained reinsurance with both a specific and an aggregate stop-loss in the event of catastrophic claims. At June 30, 1996, the Company has accrued an amount representing the Company's estimate of incurred but not reported claims. NOTE M. SUBORDINATED DEBENTURE. In conjunction with the purchase of the Notes described in Note F, USGI issued a $6 million 8% subordinated debenture to ML, the terms of which require principal payments as the Notes mature and quarterly interest payments. The terms of the debenture were modified in December 1995, requiring monthly principal payments in the amount of $50,000. In addition, the conversion feature was terminated. During the course of the 1996 fiscal year the Company made principal payments of approximately $2,700,000 to ML upon the sale of certain par value Notes (Note F). The Company also made additional principal payments of $300,000 during the fiscal year. The balance on the debenture was $1,533,131 at June 30, 1996, the entirety of which will be payable in fiscal 1997. NOTE N. SHAREHOLDERS' EQUITY. During June of 1996 the Company reclassified its Class A Common Stock as Class C Common Stock and reclassified its Preferred Stock as Class A Common Stock with no change in existing rights, privileges, or preferences of each respective class. Class B Common Stock remains unchanged. The descriptions in this note have been changed to reflect these reclassifications. U.S. GLOBAL INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) In a private placement on October 27, 1989, Frank E. Holmes and the F.E. Holmes Organization, Inc. acquired control of the Company by purchasing for $2,200,000, 550,000 shares of the Company's Class C common stock and warrants to acquire an additional 550,000 shares of Class C common stock at $4.00 per share. These warrants include a provision for adjustment to the number of warrants and exercise price in the event additional securities are issued at an amount below the exercise price of such outstanding warrants. At June 30, 1994, there were outstanding Class C common stock warrants to purchase 586,122 shares at $3.75 per share expiring October 1994. Effective August 11, 1994 such warrants were canceled and new agreements were approved providing for warrants to acquire 586,122 shares of common stock at the August 11, 1994 market price of $4.00 per share expiring October 1999. These warrants were outstanding as of June 30, 1996. In December 1991, the Company issued to Mr. Holmes options to purchase 400,000 shares of Class C common stock at $2.625 per share which equaled or exceeded the fair value of the stock on the date of grant. During fiscal 1992, the Board of Directors approved the issuance of 100,000 shares of Preferred stock (now Class A common stock) to F.E. Holmes Organization, Inc. in exchange for 100,000 shares of its class C common stock. Mr. Holmes now owns approximately 68.27% of the outstanding shares of the Company's Class C common stock, which is the only class of the Company's stock having voting rights. In March 1985, the Board of Directors adopted an Incentive Stock Option Plan (the "1985 Plan"), amended in November 1989 and December 1991, which provides for the granting of options to purchase 200,000 shares of the Company's Class A common stock, at or above fair market value, to certain executives and key salaried employees of the Company and its subsidiaries. Options under the 1985 Plan may be granted for a term of up to five years in the case of employees who own in excess of 10% of the total combined voting power of all classes of the Company's stock and up to ten years for other employees. During the 1991 fiscal year, options covering 150,000 shares of Class A common stock were granted at prices ranging from $1.50 to $1.65. During the fiscal year 1994, options covering 10,500 shares were granted at an exercise price of $4.25 per share and during fiscal year 1995, options covering 42,500 shares were granted at an exercise price of $2.625 per share. As of June 30, 1996, options covering 79,000 shares have been exercised and options covering 5,000 shares have expired. The 1985 plan expired December 31, 1994; as a consequence, there will be no further option grants under the 1985 plan. In November 1989, the Board of Directors adopted the 1989 Non-Qualified Stock Option Plan (the "1989 Plan"), amended in December 1991, which provides for the granting of options to purchase 800,000 shares of the Company's Class A common stock to directors, officers and employees of the Company and its subsidiaries. Since adoption of the 1989 Plan, options for 800,000 shares have been granted at prices ranging from $1.50 to $5.69 per share, which equaled or exceeded the fair market value at date of grant. During the fiscal year 1993, options covering 5,000 shares were granted at an exercise price of $3.00. During the fiscal year 1994, options covering 22,000 shares were granted at exercise prices ranging from $4.75 to $5.69 per share. During the fiscal year 1995 options covering 7,000 shares were granted at exercise prices ranging from $2.625 to $3.375 per share. During fiscal 1996 options covering 44,700 shares were granted at exercise prices ranging from $2.1875 to $2.625 per share. As of June 30, 1996, options covering 393,000 shares have been exercised under this plan and options covering 30,400 shares have expired. Class A common stock options outstanding as of June 30, 1996 under the 1989 Plan are as follows: Date of Option Number Grant Price Outstanding ----- ----- ----------- 11/07/89 $1.50 -0- 11/13/89 $2.25 95,000 12/06/91 $2.625 229,600 9/24/92 $3.00 5,000 2/16/94 $5.69 20,000 5/16/94 $4.75 2,000 12/15/94 $2.625 -0- 2/24/95 $3.375 5,000 9/15/95 $2.625 19,000 11/7/95 $2.1875 5,700 5/24/96 $3.06 20,000 -------- 401,300 U.S. GLOBAL INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) On a per share basis, the holders of the Class C common stock and the non-voting Class A stock participate equally in dividends as declared by the Company's Board of Directors, with the exception that any dividends declared must first be paid to the holders of the Class A stock to the extent of 5% of the Company's after-tax prior year net earnings. The holders of the Class A stock have a liquidation preference equal to the par value of $.05 per share. Certain Class C common stock is exchangeable on a one-for-one basis for Class A stock. During the fiscal year ended June 30, 1996, the Company purchased 175,475 shares of its Class A common stock on the open market at an average price of $2.78 per share. At the end of September 1994, the Company and ML entered into a letter of intent pursuant to which ML would purchase a significant ownership interest in the Company. On December 7, 1994, the Company and ML entered into an agreement whereby the Company issued to ML one million shares of new class of convertible non-voting common stock (Class B) at $5.00 per share and warrant to purchase an additional one million shares of capital stock at $6.00 per share in consideration of an investment of $5 million. On August 3, 1995, USGI shareholders approved an amendment to the Company's Restated Articles of Incorporation providing for an increase in the number of shares of Class A that the Company is authorized to issue by one million shares. ML could only convert its Class B shares to Class C shares after mutual fund shareholders approve continuation of the investment advisory agreements with the Company because the agreements contain a statutory contractual provision providing for automatic termination upon an assignment of the investment advisory agreement. Such conversion would be deemed a change in control and, thereby, an assignment of the contract. As part of the transaction, Mr. Frank E. Holmes, Chairman, President and CEO of the Company, exchanged 72,720 shares of the Company Class C common Stock for 164,347 shares of ML common stock. In addition, subject to certain conditions, including obtaining mutual fund shareholder approvals in the future, Mr. Holmes would exchange an additional 177,280 Class C common shares for 400,653 shares of ML, and ML would convert its Class B shares to Class C shares, whereupon ML would own more that 50% of the issued and outstanding voting shares of the Company, and Mr. Holmes would then own approximately 3% of the total outstanding common shares of ML. USGI and ML closed a transaction on December 29, 1995 covering the issuance of Class A stock and the repurchase of convertible non-voting Class B common stock and closely related items as discussed below. Pursuant to the agreement: (1) ML no longer has a right to return its one million shares of Class B common stock to the Company at its original purchase price of $5,000,000; (2) in this connection, the Company eliminated any future interest costs it might have borne had ML converted its investment to debt; and, (3) the Company canceled ML's warrant and options to acquire additional shares thus reducing future dilution by approximately 1.65 million shares. In connection with the December 1995 transaction, ML received $2,500,000 cash and 1,000,000 shares of Class A stock in exchange for USGI canceling (a) ML's 1,000,000 shares of USGI's Class B common shares, (b) a warrant giving ML the right to acquire 1,000,000 shares of USGI's voting Class C common stock or Class A common stock, (c) ML's option to convert the remaining balance of its subordinated debenture into approximately 648,000 shares of USGI's preferred stock, and (d) other rights under the December 1994 agreements relating to ML's original purchase, including its right to obtain voting control of USGI. U.S. GLOBAL INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) As a result of the December 1995 transaction: (1) Messrs. Hubert Marleau and Richard Renaud, ML's representatives, resigned from USGI's Board of Directors and Frank E. Holmes, USGI's Chief Executive Officer, resigned from ML's Board of Directors; (2) USGI committed to prepay $50,000 per month toward the principal balance outstanding on the debenture held by ML in accordance with the prepayment clause set forth in the USGI-ML Subordinated Debenture Agreement ("Debenture"); (3) The Debenture was amended to provide that in the event that voting control of USGI changes, the balance owing ML under the Debenture shall become due and payable prior to closing on the change in control and the registration statement covering ML's 1,000,000 shares of preferred stock shall be declared effective by the SEC prior to said closing; (4) ML transferred the assets and the management contract(s) of ML's Small Cap Fund ("Small Cap") from ML to USACI with all revenues generated by Small Cap, effective January 1, 1996, whether the assets and management contracts have been transferred or not, becoming the revenue of USACI; (5) USGI agreed to bear up to the next Cdn $250,000 in costs with respect to USACI; and (6) the requirement that Mr. Holmes exchange 177,280 shares of USGI's Class C common stock for 400,633 shares of ML (133,551 consolidated shares based upon 1 new for 3 old) was canceled in its entirety; with the understanding, however, that the 72,720 Class C common shares held by ML and the ML shares held by Mr. Holmes are not subject to this cancellation. As discussed in Note P, certain changes in the Company's ownership may trigger a limitation on the amount of net operating losses ("NOLs") that could be utilized under Section 382 of the Internal Revenue Code. The Company reviewed Section 382 and determined that no change in control/ownership existed upon issuance of the shares and warrants to ML therefore not triggering a Section 382 limitation on the Company's NOLs. NOTE O. RELATED PARTY TRANSACTIONS. In addition to the Company's receivable from USF relating to investment management, transfer agent and other fees (see Note D), the Company had $596,605 and $2,673,156 invested in USF money market mutual funds at June 30, 1996 and 1995, respectively. Dividend income earned from these investments in USF totaled $113,904, $132,881 and $47,739 for the years ended June 30, 1996, 1995 and 1994 respectively. TRANSACTIONS WITH ML During fiscal 1996, USGI and ML closed a transaction covering the issuance of Class A common stock (see Note N). During the year ended June 30, 1996, USGI purchased 7,100 shares of ML common stock through USGI's brokerage account at Marleau, Lemire Securities Inc. ("MLSI"), a subsidiary of ML, increasing USGI's position to 42,219 shares. Prior to year end, USGI sold its entire position of ML common shares. During fiscal 1996, the Company purchased 175 put options on Eurodollar futures ("Options") for premiums of $73,938 through Marleau, Lemire Futures which is a division of MLSI. Options were exchange traded and required no cash requirements other than the initial premiums paid. All Options were sold/expired during fiscal 1996 resulting in realized losses of approximately $50,000. In addition, the Company purchased other securities at an aggregate price of $269,847 through MLSI from July 1995 through December 1995. At various intervals during fiscal 1995, the Company purchased 700 put options on Eurodollar futures for premiums of $165,375 through Marleau, Lemire Futures. The Company also purchased securities which MLSI was either the agent or underwriter of the share offering at a cost of $199,609. Additionally, the Company purchased a security for $110,685 for which Griffiths McBurney & Partners acted as Agent. Eugene McBurney, a director of USGI from December 1994 to July 1995, is a partner in Griffiths McBurney & Partners. During fiscal 1996, pursuant to agreements with ML (Note N), USGI filed a post-effective amendment to the Registration Statement on Form S-3 covering ML's offering of 120,000 shares of USGI stock filed in fiscal 1995 and a Registration Statement on Form S-3 covering ML's offering of 1,000,000 shares of USGI stock, which offerings were completed during fiscal 1996. USGI incurred approximately $21,000 in fiscal 1996 in costs associated with these offerings. Further, during this period, ML sold 18,225 shares of Class A common stock to STFC at the direction of the beneficial owners of various STFC custodial retirement accounts, and 6,775 shares for $17,784 to USGI, which shares are included in treasury stock as of June 30, 1996. U.S. GLOBAL INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) As of June 30, 1996, USGI has accrued approximately $70,000 in subordinated debenture interest payable to ML. Additionally, in connection with the sale of the Notes discussed in Note F, USGI repaid approximately $2,700,000 in principal on the subordinated debenture during the year ending June 30, 1996. USGI has also paid an additional $300,000 in principal payments on the subordinated debenture during the year ended June 30, 1996. OTHER TRANSACTIONS During fiscal 1996, Mr. Jerold Rubinstein, a Director of the Company, exercised options covering 25,000 shares at $1.50 per share and 25,000 shares at $2.25 per share. USGI purchased the shares issued from the exercise of Mr. Rubinstein's stock options for $3.375 per share, the market price on the day of exercise, which shares are included in treasury stock as of June 30, 1996. Additionally, during fiscal 1996, Mr. John Budden, a former Director of the Company who resigned during the fiscal 1996, exercised options covering 25,000 shares at $1.50 per share, 25,000 shares at $2.25 per share and 40,000 shares at $2.625 per share. There were additional related party transactions involving ML related to a joint venture to market mutual funds in Canada (see Note H) and the purchase of U.S. Government securities (see Note F). NOTE P. INCOME TAXES. As discussed in Note B, in fiscal 1994 the Company adopted SFAS 109, which changed the method of accounting for income taxes. The differences in income taxes attributable to continuing operations determined by applying the U.S. federal statutory rate of 34% and the Company's effective tax rate are summarized as follows: Year Ended June 30, ------------------------------------- 1996 1995 1994 ----------- ------------ ---------- Tax expense at statutory rate $1,020,198 $(2,004,592) $ 262,132 Exercise of non-qualified stock options treated as equity for financial statements (61,487) (59,885) (191,186) Non-deductible membership dues 14,112 13,825 6,686 Non-deductible meals & entertainment 23,090 17,668 6,093 Utilization of valuation allowance --- --- (249,042) Other 17,604 50,140 (13,348) ----------- ------------ ----------- $1,013,517 $(1,982,844) ($178,665) ========== ============ ========== U.S. GLOBAL INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Deferred income taxes for fiscal 1996, 1995 and 1994, after adoption of SFAS 109, reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The tax effects of these temporary differences that give rise to the deferred tax asset as of June 30, 1994, June 30, 1995, and June 30, 1996 are presented below: June 30, June 30, June 30, 1996 1995 1994 -------- -------- -------- Book/tax differences in the balance sheet: Trading securities $ -- $ 33,995 -- Marketable securities -- -- $ 40,642 Accumulated depreciation 108,744 106,100 82,105 Accrued expenses 14,800 29,776 20,160 Reduction in carrying value of joint venture 210,630 -- -- Annuity obligations 57,236 59,272 61,170 Net unrealized holding gain (affiliated) 76,823 -- -- Net unrealized holding gain 294,993 120,914 -- ----------- ----------- -------- 763,226 350,057 204,077 Tax carryovers: NOL carryover 957,154 2,044,251 102,778 Contributions carryover 66,459 44,635 18,829 Investment credit carryover 34,472 34,472 37,615 Minimum tax credits 117,786 56,786 63,144 ----------- ----------- -------- 1,175,871 2,180,144 222,366 ----------- ----------- -------- Total gross deferred tax asset 1,939,097 2,530,201 426,443 ----------- ----------- -------- Affiliated Investment (153,032) -- -- Trading Securities (34,302) -- -- Available-for-sale securities (294,993) (120,914) -- ----------- ----------- -------- Total gross deferred tax liability (482,327) (120,914) -- ----------- ----------- -------- Net deferred tax asset $ 1,456,770 $ 2,409,287 $426,443 =========== =========== ========
For federal income tax purposes at June 30, 1996, the Company has NOLs of approximately $2,800,000 which will expire in fiscal 2010, charitable contribution carryovers of approximately $195,000 expiring 1998-2000, investment credits of $34,427 expiring in 1998 and minimum tax credits of $117,786 with indefinite expirations. If certain changes in the Company's ownership should occur, there could be an annual limitation on the amount of NOLs that could be utilized. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax amount will not be realized. Management believes that taxable income during the carry forward periods will be sufficient to utilize the NOLs which give rise to the deferred tax asset. NOTE Q. LITIGATION ACCRUAL. On June 17, 1994, Gerald C. Letch sued the Company in state district court located in San Antonio, Texas for breach of contract. Mr. Letch asked for an unspecified amount of damages based upon an alleged oral promise by a deceased Company officer to pay a finder's fee for introducing certain parties to the Company leading to the organization of Pauze/Swanson United Services Funds ("PSUSF"). During August 1994 Mr. Letch amended his complaint to include PSUSF and allegations of fraud and conspiracy between USGI and PSUSF. During June 1995 a summary judgment was rendered in favor of PSUSF, which did not exist at the time the alleged cause of action arose. On November 21, 1995, a judgment was entered in favor of Letch. While the jury verdict found that there was no fraud, conspiracy or malice, the jury did find that: (1) the Company had an oral agreement to pay Letch a fee equal to 1% of assets existing in the particular fund after it had been in existence for one year; (2) $187,000 is the amount of damages due Letch for breach of the oral agreement (plus an additional $16,137 for prejudgment interest); and (3) that Letch is entitled to 50% of said damages ($93,500) as reasonable attorney's fees. Total damages therefore aggregate $296,637. The Company is currently pursuing an appeal--the Company has posted a bond in connection with perfecting the appeal. The bond is secured by a letter of credit in the amount of $333,169, which, in turn, is secured by restricted cash of $333,169. The Company has no balance outstanding on this letter of credit and has no plans to draw upon it at any time in the future as the letter of credit was obtained solely to perfect the appeal. The Company accrued approximately $100,000 (management's best estimate of the fees and expenses necessary to fund an appeal) and $300,000 (the approximate amount of the judgment) which were both recorded in the Company's Consolidated Statement of Operations in fiscal 1996. The remaining balances at June 30, 1996 are $70,000 and $300,000, respectively. Through June 1996, legal fees and expenses to defend this action were in excess of $220,000, a significant portion of which was incurred during fiscal year 1995. Of this amount, approximately $56,000 was reimbursed to USGI in fiscal 1996 by a co-defendant for the allocable portion of legal representation fees paid by USGI on behalf of the co-defendant. EX-21 6 SUBSIDIARIES OF USGI LIST OF SUBSIDIARIES OF THE REGISTRANT, JURISDICTION OF INCORPORATION AND PERCENTAGE OF OWNERSHIP 1. United Shareholder Services, Inc.; Texas; wholly-owned by the Registrant 2. A & B Mailers, Inc.; Texas; wholly-owned by the Registrant 3. Securities Trust and Financial Company; Texas; wholly-owned by the Registrant 4. U.S. Advisors (Guernsey) Limited; Guernsey, Channel Islands; wholly-owned by the Registrant 5. United Services Advisors (Canada) Inc.; Montreal, Quebec, Canada; 33% owned by theRegistrant EX-23 7 CONSENT OF INDEPENDENT ACCOUNTANT EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Prospectus constituting part of the Registration Statement on Form S-8 (No. 38-33012) of U.S. Global Investors, Inc. of our report dated September 26, 1996 appearing in the Annual Report to Shareholders which is incorporated in this Annual Report on Form 10-K. PRICE WATERHOUSE LLP San Antonio, Texas September 26, 1996 EX-27 8 FDS --
5 THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE PERIOD ENDED JUNE 30, 1996 AND IS QUALIFIED IN IT ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR JUN-30-1996 JUN-30-1996 666250 29534282 2592951 0 0 30668651 7031761 (4410709) 39307196 29352645 0 0 0 339189 8204883 39307196 14098762 20262176 0 17261592 11565713 0 5695879 3000584 1013517 1987067 0 0 0 1987067 .30 .30
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