-----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, OKfNb/qO6g3bVoLD6HeUPtc7uMygRLHxvMKptzzKOsT7AO0gTVox8y9oMUNZD7XT qLVHcVrWF+yOw4aGikiAiw== 0000754811-02-000019.txt : 20021016 0000754811-02-000019.hdr.sgml : 20021016 20021015175616 ACCESSION NUMBER: 0000754811-02-000019 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20021016 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-13928 FILM NUMBER: 02789836 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-K 1 annualrpt.txt 10K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 2002 or | | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from _____ to _____ COMMISSION FILE NUMBER 0-13928 U.S. GLOBAL INVESTORS, INC. Incorporated in the State of Texas IRS Employer Identification No. 74-1598370 Principal Executive Offices: 7900 Callaghan Road San Antonio, Texas 78229 Telephone Number: 210-308-1234 Securities registered pursuant to Section 12(b) of the Act: None SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: CLASS A COMMON STOCK ($0.05 PAR VALUE PER SHARE) REGISTERED: NASDAQ SMALL CAP ISSUES Indicate by check mark whether the Company (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No | | Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. | | The aggregate market value of the 4,204,217 shares of nonvoting class A common stock held by nonaffiliates of the registrant on October 7, 2002 (based on the last sale price on the Nasdaq as of such date), was $5,465,482. Registrant's only voting stock is its class C common stock, par value of $0.05 per share, for which there is no active market. The aggregate value of the 104,589 shares of the class C common stock held by nonaffiliates of the registrant on October 7, 2002 (based on the last sale price of the class C common stock in a private transaction) was $52,295. For purposes of this disclosure only, the registrant has assumed that its directors, executive officers, and beneficial owners of 5% or more of the registrant's common stock are affiliates of the registrant. On October 7, 2002, there were 6,311,474 shares of Registrant's class A nonvoting common stock issued and 5,979,202 shares of Registrant's class A nonvoting common stock issued and outstanding, no shares of Registrant's class B nonvoting common stock outstanding, and 1,496,800 shares of Registrant's class C common stock issued and outstanding. Documents incorporated by reference: None
TABLE OF CONTENTS PART I OF ANNUAL REPORT ON FORM 10-K Item 1. Business____________________________________________________________________________________1 Item 2. Properties__________________________________________________________________________________4 Item 3. Legal Proceedings___________________________________________________________________________4 Item 4. Submission of Matters to a Vote of Security Holders_________________________________________4 PART II OF ANNUAL REPORT ON FORM 10-K Item 5. Market for Company's Common Equity and Related Shareholder Matters__________________________5 Item 6. Selected Financial Data_____________________________________________________________________6 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations_______________________________________________________________________________________6 Item 8. Financial Statements and Supplementary Data________________________________________________13 Item 9. Changes in and Disagreements With Accountants On Accounting and Financial Disclosure_______29 PART III OF ANNUAL REPORT ON FORM 10-K Item 10. Directors and Executive Officers of the Company___________________________________________30 Item 11. Executive Compensation____________________________________________________________________31 Item 12. Security Ownership of Certain Beneficial Owners and Management____________________________35 Item 13. Certain Relationships and Related Transactions____________________________________________36 PART IV OF ANNUAL REPORT ON FORM 10-K Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K__________________________37 SIGNATURES________________________________________________________________________________________________40 CERTIFICATIONS____________________________________________________________________________________________41 EXHIBIT 11-- SCHEDULE OF COMPUTATION OF NET EARNINGS PER SHARE____________________________________________42 EXHIBIT 21-- SUBSIDIARIES OF THE COMPANY, JURISDICTION OF INCORPORATION, AND PERCENTAGE OF OWNERSHIP______43
i [Graphic: U.S. Global Invetors, Inc. Logo] PART I OF ANNUAL REPORT ON FORM 10-K ITEM 1. BUSINESS U.S. Global Investors, Inc. (Company or U.S. Global) has made forward-looking statements concerning the Company's performance, financial condition, and operations in this report. The Company from time to time may also make forward-looking statements in its public filings and press releases. Such forward-looking statements are subject to various known and unknown risks and uncertainties and do not guarantee future performance. Actual results could differ materially from those anticipated in such forward-looking statements due to a number of factors, some of which are beyond the Company's control, including (i) the volatile and competitive nature of the investment management industry, (ii) changes in domestic and foreign economic conditions, (iii) the effect of government regulation on the Company's business, and (iv) market, credit, and liquidity risks associated with the Company's investment management activities. Due to such risks, uncertainties, and other factors, the Company cautions each person receiving such forward-looking information not to place undue reliance on such statements. All such forward-looking statements are current only as of the date on which such statements were made. This discussion reviews and analyzes the consolidated results of operations for the past three fiscal years and other factors that may affect future financial performance. This discussion should be read in conjunction with the Consolidated Financial Statements, Notes to the Consolidated Financial Statements, and Selected Financial Data. U.S. Global, a Texas corporation organized in 1968, and its wholly owned subsidiaries are in the mutual fund management business. The Company is a registered investment adviser under the Investment Advisers Act of 1940 and is principally engaged in the business of providing investment advisory and other services, through the Company or its subsidiaries, to U.S. Global Investors Funds (USGIF) and U.S. Global Accolade Funds (USGAF), both Massachusetts business trusts (collectively, the Trusts or Funds). USGIF and USGAF are investment companies offering shares of nine and three mutual funds, respectively, on a no-load basis. As part of the mutual fund management business, the Company provides: (1) investment advisory services through the Company or its subsidiaries to institutions (namely, mutual funds) and other persons; (2) transfer agency and record keeping services; (3) mailing services; and (4) distribution services, through its wholly owned broker/dealer, to mutual funds advised by the Company. The fees from investment advisory and transfer agent services, as well as investment income, are the primary sources of the Company's revenue. Prior to June 30, 2001, the Company provided custodial and administrative services through its wholly owned trust company and administrator for IRAs and other types of retirement plans. The fees from these custodial and administrative services contributed to the Company's revenue. The Company will continue to receive the majority of the aforementioned custodial fees as it has contracted with another entity to assist with these services. In addition to managing USGIF and USGAF, the Company is actively engaged in trading for its proprietary account. Management believes it can more effectively manage the Company's cash position by broadening the types of investments utilized in cash management and continues to believe that such activities are in the best interest of the Company. These activities are reviewed and monitored by Company compliance personnel, and various reports are provided to investment advisory clients. 1 LINES OF BUSINESS ------------------------------------------------------------------ INVESTMENT MANAGEMENT SERVICES INVESTMENT ADVISORY SERVICES. The Company furnishes an investment program for each of the mutual funds it manages and determines, subject to overall supervision by the boards of trustees of the funds, the funds' investments pursuant to advisory agreements (Advisory Agreements). Consistent with the investment restrictions, objectives and policies of the particular fund, the portfolio team for each fund determines what investments should be purchased, sold and held, and makes changes in the portfolio deemed to be necessary or appropriate. In the Advisory Agreements, the Company is charged with seeking the best overall terms in executing portfolio transactions and selecting brokers or dealers. The Company also manages, supervises, and conducts certain other affairs of the funds, subject to the control of the boards of trustees. It provides office space, facilities, and certain business equipment as well as the services of executive and clerical personnel for administering the affairs of the mutual funds. U.S. Global and its affiliates compensate all personnel, officers, directors, and interested trustees of the funds if such persons are also employees of the Company or its affiliates. However, the funds are required to reimburse the Company for a portion of the compensation of the Company's employees who perform certain state and federal securities law regulatory compliance work on behalf of the funds based upon the time spent on such matters. The Company is responsible for costs associated with marketing fund shares to the extent not otherwise covered by any fund distribution plans adopted pursuant to Investment Company Act Rule 12b-1 (12b-1 Plan). As required by the Investment Company Act of 1940, the Advisory Agreements are subject to annual renewal and are terminable upon 60-day notice. The boards of trustees of USGIF and USGAF will consider renewal of the applicable agreements in February and May 2003, respectively. Management anticipates that the Advisory Agreements will be renewed. TRANSFER AGENT AND OTHER SERVICES. The Company's wholly owned subsidiary, United Shareholder Services, Inc. (USSI), is a transfer agent registered under the Securities Exchange Act of 1934 providing transfer agency, lockbox, and printing services to investment company clients. The transfer agency utilizes a third-party external system providing the Company's fund shareholder communication network with computer equipment and software designed to meet the operating requirements of a mutual fund transfer agency. The transfer agency's duties encompass: (1) acting as servicing agent in connection with dividend and distribution functions; (2) performing shareholder account and administrative agent functions in connection with the issuance, transfer and redemption, or repurchase of shares; (3) maintaining such records as are necessary to document transactions in the funds' shares; (4) acting as servicing agent in connection with mailing of shareholder communications, including reports to shareholders, dividend and distribution notices, and proxy materials for shareholder meetings; and (5) investigating and answering all shareholder account inquiries. The transfer agency agreements provide that USSI will receive, as compensation for services rendered as transfer agent, an annual fee per account, and will be reimbursed for out-of-pocket expenses. In connection with obtaining/providing administrative services to the beneficial owners of fund shares through institutions that provide such services and maintain an omnibus account with USSI, each fund pays a monthly fee based on the number of accounts or the value of the shares of the fund held in accounts at the institution, which payment shall not exceed the per account charge on an annual basis. The transfer agency agreements with USGIF and USGAF are subject to renewal on an annual basis and are terminable upon 60-day notice. The agreements will be considered for renewal by the boards of trustees of USGIF and of USGAF in February and May 2003, respectively, and management anticipates that the agreements will be renewed. BROKERAGE SERVICES. The Company has registered its wholly owned subsidiary, U.S. Global Brokerage, Inc. (USGB), with the National Association of Securities Dealers (NASD), the Securities and Exchange Commission (SEC), and appropriate state regulatory authorities as a limited-purpose broker/dealer for the purpose of distributing USGIF and USGAF fund shares. Effective September 3, 2 1998, USGB became the distributor for USGIF and USGAF fund shares. For the fiscal year ended June 30, 2002, the Company has capitalized USGB with approximately $671,399 to cover the costs associated with continuing operations. MAILING SERVICES. A&B Mailers, Inc., a wholly owned subsidiary of the Company, provides mail-handling services to various entities. A&B Mailers' primary customers include the Company in connection with its efforts to promote the funds and the Company's investment company clients in connection with required mailings. TRUST COMPANY SERVICES. Security Trust & Financial Company (STFC), a wholly owned state chartered trust company, provided custodial services for IRA and other retirement plans administered by U.S. Global Administrators, Inc. until June 1, 2001. Management determined that it was in the Company's best interest to exit the 401(k) plan administration business and to voluntarily withdraw the charter of the trust company. The Company continues to collect the majority of the fees for custodial services to the IRAs for record keeping activities and has contracted with another entity to act as custodian of these accounts. CORPORATE INVESTMENTS INVESTMENT ACTIVITIES. In addition to mutual fund activity, the Company attempts to maximize its cash position by using a diversified venture capital approach to investing. Management invests in early-stage or start-up businesses seeking initial financing and more mature businesses in need of capital for expansion, acquisitions, management buyouts, or recapitalization. EMPLOYEES As of June 30, 2002, U.S. Global and its subsidiaries employed 60 full-time employees and 6 part-time employees; as of June 30, 2001, it employed 66 full-time employees and 4 part-time employees. The Company considers its relationship with its employees to be excellent. COMPETITION The mutual fund industry is highly competitive. Recent reports show there are approximately 8,000 domestically registered open-end investment companies of varying sizes and investment policies whose shares are being offered to the public worldwide. Generally, there are two types of mutual funds: "load" and "no-load." In addition, there are both load and no-load funds that have adopted 12b-1 plans authorizing the payment of distribution costs of the funds out of fund assets, such as USGAF. Load funds are typically sold through or sponsored by brokerage firms, and a sales commission is charged on the amount of the investment. No-load funds, such as the USGIF and USGAF funds, however, may be purchased directly from the particular mutual fund organization or through a distributor, and no sales commissions are charged. In addition to competition from other mutual fund managers and investment advisers, the Company and the mutual fund industry are in competition with various investment alternatives offered by insurance companies, banks, securities dealers, and other financial institutions. Many of these institutions are able to engage in more liberal advertising than mutual funds and may offer accounts at competitive interest rates, which are insured by federally chartered corporations such as the Federal Deposit Insurance Corporation. Amendments to, and regulatory pronouncements related to, the Glass-Stegall Act, the statute that has prohibited banks from engaging in various activities, are enabling banks to compete with the Company in a variety of areas. A number of mutual fund groups are significantly larger than the funds managed by U.S. Global, offer a greater variety of investment objectives, and have more experience and greater resources to promote the sale of investments therein. However, the Company believes it has the resources, products, and personnel to compete with these other mutual funds. Competition for sales of fund shares is influenced 3 by various factors, including investment objectives and performance, advertising and sales promotional efforts, distribution channels, and the types and quality of services offered to fund shareholders. Success in the investment advisory and mutual fund share distribution businesses is substantially dependent on each fund's investment performance, the quality of services provided to shareholders, and the Company's efforts to market fund performance effectively. Sales of fund shares generate management fees (which are based on assets of the funds) and transfer agent fees (which are based on the number of fund accounts). Costs of distribution and compliance have put pressure on profit margins for the mutual fund industry. SUPERVISION AND REGULATION The Company, USSI, USGB, and the investment companies it manages and administers operate under certain laws, including federal and state securities laws, governing their organization, registration, operation, legal, financial, and tax status. Among the penalties for violation of the laws and regulations applicable to the Company and its subsidiaries are fines, imprisonment, injunctions, revocation of registration, and certain additional administrative sanctions. Any determination that the Company or its management has violated applicable laws and regulations could have a material adverse effect on the business of the Company. Moreover, there is no assurance that changes to existing laws, regulations, or rulings promulgated by governmental entities having jurisdiction over the Company and the funds will not have a material adverse effect on its business. U.S. Global is a registered investment adviser subject to regulation by the SEC pursuant to the Investment Advisers Act of 1940, the Investment Company Act of 1940, and the Securities Exchange Act of 1934 (1934 Act). USSI is also subject to regulation by the SEC under the 1934 Act. USGB is subject to regulation by the SEC under the 1934 Act and regulation by the NASD, a self-regulatory organization composed of other registered broker/dealers. U.S. Global, USSI, and USGB are required to keep and maintain certain reports and records, which must be made available to the SEC and the NASD upon request. Moreover, the funds managed by the Company are subject to regulation and periodic reporting under the Investment Company Act of 1940 and, with respect to their continuous public offering of shares, the registration provisions of the Securities Act of 1933. RELATIONSHIPS WITH THE FUNDS The businesses of the Company are, to a very significant degree, dependent on their associations and contractual relationships with the Funds. In the event the advisory or transfer agent services agreements with USGIF or USGAF are canceled or not renewed pursuant to the terms thereof, the Company would be substantially adversely affected. U.S. Global, USSI, and USGB consider their relationships with the Funds to be good, and they have no reason to believe that their management and service contracts will not be renewed in the future; however, there is no assurance that USGIF and USGAF will choose to continue their relationships with the Company, USSI, or USGB. ITEM 2. PROPERTIES The Company presently occupies an office building as its headquarters in San Antonio, Texas. The office building is approximately 46,000 square feet on approximately 2.5 acres of land. This building is currently subject to a term loan for $1,021,206. ITEM 3. LEGAL PROCEEDINGS There are no material legal proceedings in which the Company is involved. There are no material legal proceedings to which any director, officer or affiliate of the Company or any associate of any such director or officer is a party or has a material interest, adverse to the Company or any of its subsidiaries. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during fiscal year 2002. 4 [Graphic: U.S. Global Investors, Inc. Logo] PART II OF ANNUAL REPORT ON FORM 10-K ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS MARKET INFORMATION The Company has three classes of common equity: class A, class B and class C common stock, par value $0.05 per share. There is no established public trading market for the Company's class B and class C common stock. The Company's class A and class B common stock have no voting privileges. The Company's class A common stock is traded over-the-counter and is quoted daily under Nasdaq's Small Cap Issues. Trades are reported under the symbol "GROW." The following table sets forth the range of high and low sales prices from Nasdaq for the fiscal years ended June 30, 2002 and 2001. The quotations represent prices between dealers and do not include any retail markup, markdown, or commission.
SALES PRICE 2002 2001 ------------------- -------------------- HIGH ($) LOW ($) HIGH ($) LOW ($) -------- ------- -------- ------- First quarter (9/30) 1.050 0.900 1.750 1.500 Second quarter (12/31) 1.100 0.900 1.500 0.938 Third quarter (3/31) 1.800 1.000 1.375 0.875 Fourth quarter (6/30) 2.450 1.790 1.210 1.000
HOLDERS On October 7, 2002, there were 270 holders of record of class A common stock, no holders of record of class B common stock, and 71 holders of record of class C common stock. Many of the class A common shares are held of record by nominees, and management believes that as of October 7, 2002, there were approximately 1,000 beneficial owners of the Company's class A common stock. DIVIDENDS The Company has not paid cash dividends on its class C common stock during the last eighteen fiscal years and has never paid cash dividends on its class A common stock. Payment of cash dividends is within the discretion of the Company's board of directors and is dependent on earnings, operations, capital requirements, general financial condition of the Company, and general business conditions. 5 Holders of the outstanding shares of the Company's class A common stock are entitled to receive, when and as declared by the Company's board of directors, a noncumulative cash dividend equal in the aggregate to 5% of the Company's net after-tax earnings for its prior fiscal year. After such dividend has been paid, the holders of the outstanding shares of class B common stock are entitled to receive, when and as declared by the Company's board of directors, cash dividends per share equal to the cash dividends per share paid to the holders of the class A common stock. Holders of the outstanding shares of class C common stock are entitled to receive when and as declared by the Company's board of directors, cash dividends per share equal to the cash dividends per share paid to the holders of the class A and class B common stock. Thereafter, if the board of directors determines to pay additional cash dividends, such dividends will be paid simultaneously on a prorated basis to holders of class A, B, and C common stock. The holders of the class A common stock are protected in certain instances against dilution of the dividend amount payable to such holders. ITEM 6. SELECTED FINANCIAL DATA The following selected financial data is qualified by reference to, and should be read in conjunction with, the Company's Consolidated Financial Statements and related notes and Management's Discussion and Analysis of Financial Condition and Results of Operations, contained in this Form 10-K. The selected financial data as of June 30, 1998, through June 30, 2002, and the years then ended is derived from the Company's Consolidated Financial Statements, which were audited by Ernst & Young LLP, independent accountants.
SELECTED YEAR ENDED JUNE 30, EARNINGS DATA ---------------------- -------------------------------------------------------------------------- 2002 2001 2000 1999 1998 ---------------------- --------------- ------------- ------------ --------------- --------------- Revenues $ 7,767,514 $ 8,893,884 $10,912,764 $ 9,739,180 $10,195,349 Expenses 8,104,299 9,652,382 10,495,271 10,665,616 10,034,397 --------- --------- ---------- ---------- ---------- Income (loss) before equity interest and income taxes (336,785) (758,498) 417,493 (926,436) 160,952 Income tax (benefit) expense (95,351) 36,181 (26,526) 183,329 (39,571) Equity in income (loss) of affiliate -- -- 51,739 (743,041) (1) (349,142) (1) Net income (loss) (241,434) (794,679) 495,758 (1,852,806) (148,619) Basic income (loss) per share (0.03) (0.11) 0.07 (0.28) (0.02) Working capital 2,930,974 3,246,792 3,138,009 2,441,109 3,719,539 Total assets 7,905,021 7,912,184 9,118,624 8,328,138 10,308,947 Long-term obligations 1,067,967 1,135,903 1,197,961 1,255,724 1,330,638 Shareholders' equity 5,580,059 5,715,520 6,484,486 5,912,238 7,941,859 ------------------ (1) The gains (losses) on changes of interest in affiliate for fiscal years 1999 and 1998 of $97,744 and ($17,146), respectively, are included in equity in income (loss) of affiliate. -------------------------------------------------------------------------------------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BUSINESS SEGMENTS U.S. Global Investors, Inc. (Company or U.S. Global), with principal operations located in San Antonio, Texas, manages two business segments: (1) the Company offers a broad range of investment 6 management products and services to meet the needs of individual and institutional investors, and (2) the Company invests for its own account in an effort to add growth and value to its cash position. The Company generates substantially all its operating revenues from the investment management of products and services for the U.S. Global Investors Funds (USGIF) and U.S. Global Accolade Funds (USGAF). Notwithstanding the fact that the Company generates the majority of its revenues from this segment, the Company holds a significant amount of its total assets in investments. As of June 30, 2002, the Company held approximately $2.3 million in investments, comprising 28.6% of its total assets. The following is a brief discussion of the Company's two business segments. INVESTMENT MANAGEMENT PRODUCTS AND SERVICES As noted above, the Company generates substantially all of its revenues from managing and servicing USGIF and USGAF. These revenues are largely dependent on the total value and composition of assets under its management. Fluctuations in the markets and investor sentiment directly impact the funds' asset levels, thereby affecting income and results of operations. During fiscal year 2002, total average assets under management decreased 8.9% to $1.2 billion primarily because of depreciation of the equity markets and shareholder withdrawals from the Bonnel Growth Fund, one of the USGAF funds.
------------------------------------------------------------------------------------------------- AVERAGE ASSETS UNDER MANAGEMENT (DOLLARS IN MILLIONS) ------------------------------------------------------------------------------------------------- 2002 2001 % CHANGE 2001 2000 % CHANGE USGIF - Money market $ 872 $ 910 (4.2)% $ 910 $ 928 (1.9)% USGIF - Other 167 164 1.8 % 164 234 (29.9)% ------ ------ ---- ------ ------ ---- USGIF - Total 1,039 1,074 (3.3)% 1,074 1,162 (7.6)% USGAF 126 205 (38.5)% 205 238 (13.9)% ------ ------ ---- ------ ------ ---- Total $1,165 $1,279 (8.9)% $1,279 $1,400 (8.6)% ------ ------ ---- ------ ------ ----
INVESTMENT ACTIVITIES Management believes it can more effectively manage the Company's cash position by broadening the types of investments used in cash management. Management attempts to maximize the Company's cash position by using a diversified venture capital approach to investing. Strategically, management invests in early-stage or start-up businesses seeking initial financing and more mature businesses in need of capital for expansion, acquisitions, management buyouts, or recapitalization. Management has reduced these activities due to poor market conditions. As of June 30, 2002 and 2001, the Company held approximately $2.3 and $1.9 million, respectively, in investments other than USGIF money market mutual fund shares. In fiscal year 2000, the Company received $701,000 in trading and available-for-sale securities in liquidation of its investment in the U.S. Global Strategies Fund Limited (Guernsey Fund), an offshore fund managed by the Company. Investment income from the Company's investments includes realized gains and losses, unrealized gains and losses on trading securities, and dividend and interest income. This source of revenue does not remain at a consistent level and is dependent on market fluctuations, the Company's ability to participate in investment opportunities, and timing of transactions. For fiscal years 2002, 2001, and 2000, the Company had net realized gains (losses) of approximately $(49,000), $383,000, and $550,000, respectively. The Company expects that gains or losses will continue to fluctuate in the future as fluctuations in the market value of the Company's investments will affect the amounts of such gains or losses. CONSOLIDATED RESULTS OF OPERATIONS The following is a discussion of the consolidated results of operations of the Company and a more detailed discussion of the Company's revenues and expenses. 7
2002 2001 % CHANGE 2001 2000 % CHANGE ------ ------ ---- ------ ----- ------ Net income (loss) (in thousands) $(241) $(795) 69.7% $(795) $496 (260.3)% Net income (loss) per share - $(0.03) $(0.11) 72.7% $(0.11) $0.07 (257.1)% basic and diluted Weighted average shares outstanding (in thousands) Basic 7,456 7,525 7,525 7,409 Diluted 7,456 7,525 7,525 7,411
YEAR ENDED JUNE 30, 2002, COMPARED WITH YEAR ENDED JUNE 30, 2001 The Company posted a net after-tax loss of $241,000 ($0.03 loss per share) for the year ended June 30, 2002, compared with a net after-tax loss of $795,000 ($0.11 loss per share) for the year ended June 30, 2001. The decease in net loss for 2002 was principally due to the Company's reduction of the overall expense reimbursement levels of its funds. The Company has also undertaken a significant realignment of its cost structures in order to better cope with declining fund asset levels due to adverse market conditions. However, offsetting these activities was a decline in both investment advisory and transfer agent revenues, as well as other ancillary operations. YEAR ENDED JUNE 30, 2001, COMPARED WITH YEAR ENDED JUNE 30, 2000 The Company posted a net after-tax loss of $795,000 ($0.11 loss per share) for the year ended June 30, 2001, compared with net after-tax income of $496,000 ($0.07 income per share) for the year ended June 30, 2000. The decrease in net income for 2001 was principally due to declines in investment advisory and transfer agent revenues and investment income. These decreases in revenues were partially offset by reductions in general and administrative expenses.
REVENUES (DOLLARS IN THOUSANDS) 2002 2001 % CHANGE 2001 2000 % CHANGE ----------------------------- ------ ------ ----- ------ ------- ----- Investment advisory fees: USGIF - Money market $2,710 $2,357 15.0% $2,357 $2,438 (3.3) % USGIF - Other 1,110 1,081 2.7% 1,081 1,666 (35.1)% ------ ------ ----- ------ ------- ----- USGIF - Total 3,820 3,438 11.1% 3,438 4,104 (16.2)% USGAF 1,275 2,060 (38.1)% 2,060 2,393 (13.9)% Other -- -- N/A -- 9 (100.0)% ------ ------ ----- ------ ------- ----- Total investment advisory fees $5,095 $5,498 (7.3)% $5,498 $6,506 (15.5)% Transfer agent fees 2,417 2,682 (9.9)% 2,682 2,934 (8.6)% Custodial and administrative 157 302 (48.0)% 302 484 (37.6)% fees Mailing services fees 146 302 (51.7)% 302 368 (17.9)% Investment income (168) 127 (232.3)% 127 556 (77.2)% Other revenues 121 (18) 65 (127.7)% ------ ------ ----- ------ ------- ----- N/A (18) Total $7,768 $8,894 (12.7)% $8,894 $10,913 (18.5)% ====== ====== ===== ====== ======= =====
INVESTMENT ADVISORY FEES. Investment advisory fees, the largest component of the Company's revenues, are calculated as a percentage ranging from 0.375% to 1.25% of average net assets and are paid monthly. The Company has agreed to waive its fee revenues and/or pay expenses for certain USGIF funds for purposes of enhancing the funds' competitive market positions, in particular the money market and fixed income funds. The aggregate amount of fees waived and expenses born by the Company totaled $1,530,046, $2,039,360, and $2,125,773 in 2002, 2001, and 2000, respectively. The Company expects to continue to waive fees and/or pay for fund expenses if market and economic conditions warrant. However, subject to the Company's commitment to certain funds with respect to 8 fee waivers and expense limitations, the Company may reduce the amount of fund expenses it is bearing. Net investment advisory fees are also affected by changes in assets under management, including market appreciation or depreciation, the addition of new client accounts or client contributions of additional assets to existing accounts, withdrawals of assets from and termination of client accounts, exchanges of assets between accounts or products with different fee structures, and the amount of fees voluntarily reimbursed. The decrease in net advisory fees in fiscal year 2002 of approximately $402,000, or 7.3%, over fiscal year 2001 was largely due to continued market declines and shareholder redemptions in the Company's equity funds, particularly the Bonnel Growth Fund and the All American Equity Fund. This is a trend experienced by the entire industry as equity markets have not climbed back from their negative returns as of yet. The Company has also experienced net redemptions in its U.S. Government Securities Savings Fund. Again, this is an industry trend as yields have fallen significantly and money market funds have lost ground to other higher-yielding products. The Company was able to mitigate this loss and actually improve the margin on this fund with a reduced amount of expense reimbursements. In contrast to its other equity funds, the Company realized sizeable increases in its high-margin gold funds. This sector had outstanding returns in response to the downtrodden equity markets, deficit spending by the U.S. government, 40-year lows in interest rates, and a weaker U.S. dollar. The decrease in net advisory fees in fiscal year 2001 of approximately $1.0 million, or 15.5%, over fiscal year 2000 was largely due to market declines in the Company's equity funds, particularly in the Bonnel Growth Fund, World Gold Fund, and All American Equity Fund, and shareholder withdrawals from the Bonnel Growth Fund. TRANSFER AGENT FEES. United Shareholder Services, Inc., a wholly owned subsidiary of the Company, provides transfer agency, lockbox, and printing services for Company clients. The Company receives, as compensation for services rendered as transfer agent, an annual fee per account and is reimbursed for out-of-pocket expenses associated with processing shareholder information. Transfer agent fees are therefore affected by the number of client accounts. The fee decrease in fiscal year 2002, compared with fiscal year 2001, is a result of a decrease in mutual fund shareholder accounts from 97,932 to 92,210. The Company has continued to see a decline in its number of accounts serviced as many smaller accounts in the funds continue to close. In order to lower fund expense ratios on its equity funds, the Company instituted a small account fee for its equity and fixed income funds in January 2002. This fee serves to encourage active investment and account growth by shareholders of the funds and discourage the maintenance of inactive accounts with small balances. As a result of this fee, the Company expects to have a significant increase in the number of client accounts closed for calendar year 2002. The Company expects this to be a singular event, which, though painful in the short-term, will result in improved long-term fund profitability and lower expense ratios for its equity funds, improving their competitive positioning against their respective peer groups. The decrease in fees in fiscal year 2001, as compared with fiscal year 2000, is a result of a decrease in mutual fund shareholder accounts from 107,450 to 97,932. CUSTODIAL AND ADMINISTRATIVE FEES. Security Trust & Financial Company (STFC), a wholly owned state chartered trust company, provided custodial and/or trustee services for IRAs and other retirement plans administered by the Company. The custodial fees were previously paid to STFC at calendar year-end upon separate invoice to the customer, not the funds. Effective January 1, 2000, U.S. Global Administrators, Inc. (USGA), a wholly owned subsidiary of the Company, began providing qualified plan administration and record keeping services for existing 401(k) clients, which services were previously offered by STFC. The administrative fees were paid to USGA on a quarterly basis by its clients. USGA ceased revenue-generating operations on May 31, 2001. STFC continued to collect its custodial fees through May 31, 2001, at which time a majority of these fees transferred to USGI. Both companies were liquidated during fiscal year 2002. The decrease in custodial and administrative fees of approximately $145,000, or 48.1%, for fiscal year 2002 from the previous year was a result of the discontinuation of USGA's 401(k) servicing 9 operations, a decline in the number of custodial accounts administered, and a revenue sharing agreement with the entity USGI contracted to provide custodial services for these accounts. Custodial and administrative fees decreased approximately $180,000, or 37.6%, in fiscal year 2001. This decrease was primarily due to the phasing out of USGA's 401(k) servicing operations. Management made the determination that these supplemental operations were not the Company's core strength and required an excessive amount of capital to reach competitive levels. MAILING SERVICES. A&B Mailers, Inc., a wholly owned subsidiary of the Company, provides mail-handling services to various entities. One of A&B Mailers' primary customers is the Company in connection with its efforts to promote the funds. Each service is priced separately. The decrease in mailing service fees of approximately $156,000, or 51.7%, for fiscal year 2002 was a result of an adjustment to revenues to properly reflect mailing volumes. The decrease also resulted from overall decreased mailing volumes. This is a result of several trends, including reduced numbers of smaller accounts which require mailings and continued efforts to have shareholders use electronic media such as the website and e-mail as a means of communication. Mailing service fees decreased approximately $66,000, or 17.9%, in fiscal year 2001. This decline was due primarily to reduced mailing activities for USGIF and USGAF as well as outside clients.
EXPENSES (DOLLARS IN THOUSANDS) 2002 2001 % CHANGE 2001 2000 % CHANGE -------- --------- -- ------- --------- ------- -- ------ Employee compensation and $ 4,479 $ 4,701 (4.7)% $ 4,701 $ 4,767 (1.4)% benefits General and administrative 2,982 4,304 (30.7)% 4,304 4,525 (4.9)% Marketing and distribution 393 311 26.4 % 311 695 (55.3)% Depreciation and 165 226 (27.0)% 226 395 (42.8)% amortization Interest and finance 85 110 (22.7)% 110 113 (2.7)% ------- ------- ----- ------- ------- ---- Total $ 8,104 $ 9,652 (16.0)% $ 9,652 $10,495 (8.0)%
EMPLOYEE COMPENSATION AND BENEFITS. Employee compensation and benefits decreased in fiscal year 2002 over fiscal year 2001 by $222,000, or 4.7%, due to continued staff reductions. These reductions were primarily made in the shareholder communications and marketing areas. This was in response to a reduced number of accounts to service, a decline in the activity of existing accounts, and an effort to streamline marketing efforts to reduce overhead. Employee compensation and benefits decreased in fiscal year 2001 over fiscal year 2000 by approximately $66,000, or 1.4%, due to staff reductions implemented during the third and fourth quarters of fiscal year 2001 in response to market downturns and decreased shareholder activity. GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased by approximately $1.3 million, or 30.7%, in fiscal year 2002 over fiscal year 2001 primarily as a result of a decrease in sub-advisory fees paid for portfolio management of the Bonnel Growth Fund and an overall continued realignment of overhead costs with reduced revenues. General and administrative expenses decreased by approximately $221,000, or 4.9%, in fiscal year 2001 over fiscal year 2000 largely due to a decrease in sub-advisory fees paid for management of the Bonnel Growth Fund and a decrease in travel and training expenses incurred on behalf of company personnel. These decreases were offset by increased professional fees and leasing costs associated with equipment and computers. MARKETING AND DISTRIBUTION. Fiscal year 2002 marketing and distribution expenses increased by approximately $82,000, or 26.4%, over fiscal year 2001. The net increase was due to a 10 decreased percentage of marketing costs that were reimbursed by 12b-1 plans adopted by the funds despite an overall reduction in marketing costs. Fiscal year 2001 marketing and distribution expenses decreased by approximately $384,000, or 55.3%, over fiscal year 2000. The net decrease was due to an overall reduction of marketing expenditures as well as an increased percentage of marketing costs that were reimbursed by 12b-1 plans adopted by the funds. The Company expects that marketing and distribution costs for fiscal year 2003 will approximate fiscal year 2002 levels. DEPRECIATION AND AMORTIZATION. Depreciation expenses decreased by approximately $61,000, or 27.0%, in fiscal year 2002 from 2001 due to existing assets becoming fully depreciated without being replaced with additional capital purchases. Depreciation expenses decreased by approximately $169,000, or 42.8%, in fiscal year 2001 from fiscal year 2000 due to the Company's decision to lease its computer equipment. As such, fully depreciated assets were replaced by operating leases. INTEREST AND FINANCE. Interest and finance charges are incurred primarily from a note payable on the Company's building. The decrease in interest expense of approximately $25,000, or 22.7%, in fiscal year 2002 from fiscal year 2001 and the decrease in interest expense of $3,000, or 2.7%, in fiscal year 2001 from fiscal year 2000 were due to the continued amortization of the note payable as well as the reduction of rates negotiated in fiscal year 2001. INCOME TAXES Provisions for income taxes include deferred taxes for temporary differences in the bases of assets and liabilities for financial and tax purposes, resulting from the use of the liability method of accounting for income taxes. For federal income tax purposes at June 30, 2002, the Company has net operating losses (NOLs) of approximately $2.8 million, which will expire between fiscal 2005 and 2011, charitable contribution carryovers of approximately $54,000 expiring between fiscal 2004 and 2006, and alternative minimum tax credits of $139,729 with indefinite expirations. Certain changes in the Company's ownership may result in a limitation on the amount of NOLs that could be utilized under Section 382 of the Internal Revenue Code. If certain changes in the Company's ownership occur subsequent to June 30, 2002, there could be an annual limitation on the amount of NOLs that could be utilized. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax amount will not be realized. As such, management has included a valuation allowance of approximately $684,000 and $547,000 at June 30, 2002, and 2001, respectively, providing for the utilization of NOLs, charitable contributions, and investment tax credits against future taxable income. The Company increased its valuation allowance due to an overall evaluation of the likelihood that the deferred tax assets will be realized. LIQUIDITY AND CAPITAL RESOURCES At year end, the Company had net working capital (current assets minus current liabilities) of approximately $2.9 million and a current ratio of 3.3 to 1. With approximately $989,000 in cash and cash equivalents and almost $1.7 million in unencumbered marketable securities, the Company has adequate liquidity to meet its current debt obligations. Total shareholders' equity was approximately $5.6 million, with cash, cash equivalents, and unencumbered marketable securities comprising 21.3% of total assets. With the exception of operating expenses, the Company's only material commitment is the mortgage on its corporate headquarters. The Company also has access to a $1 million credit facility, which can be utilized for working capital purposes. The Company's available working capital and potential cash flow are expected to be sufficient to cover current expenses, including debt service. The investment advisory and related contracts between the Company and USGIF and USGAF will expire on February 28, 2003, and May 31, 2003, respectively. Management anticipates the trustees of both USGIF and USGAF will renew the contracts. Management believes current cash reserves, financing obtained and/or available, and potential cash flow from operations will be sufficient to meet foreseeable cash needs or capital necessary for the above-mentioned activities and allow the Company to take advantage of investment opportunities whenever available. 11 MARKET RISK DISCLOSURES The Company's balance sheet includes assets whose fair value is subject to market risks. Due to the Company's investments in equity securities, equity price fluctuations represent a market risk factor affecting the Company's consolidated financial position. The carrying values of investments subject to equity price risks are based on quoted market prices or, if not actively traded, management's estimate of fair value as of the balance sheet date. Market prices fluctuate, and the amount realized in the subsequent sale of an investment may differ significantly from the reported market value. The Company's investment activities are reviewed and monitored by Company compliance personnel, and various reports are provided to investment advisory clients. The table below summarizes the Company's equity price risks as of June 30, 2002, and shows the effects of a hypothetical 25% increase and a 25% decrease in market prices.
FAIR VALUE AT HYPOTHETICAL ESTIMATED FAIR INCREASE VALUE AFTER (DECREASE) IN HYPOTHETICAL SHAREHOLDERS' JUNE 30, 2002 ($) PERCENTAGE CHANGE PRICE CHANGE ($) EQUITY ($) ------------------- ------------------ ------------------- ------------------ ------------------- Trading securities 1,409,474 25% increase 1,761,842 232,563 25% decrease 1,057,106 (232,563) Available-for-sale 853,612 25% increase 1,067,015 140,846 25% decrease 640,209 (140,846)
The selected hypothetical change does not reflect what could be considered best- or worst-case scenarios. Results could be much worse due to both the nature of equity markets and the concentration of the Company's investment portfolio. 12 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of U.S. Global Investors, Inc. We have audited the accompanying consolidated statements of financial condition of U.S. Global Investors, Inc. and Subsidiaries (Company) as of June 30, 2002 and 2001, and the related consolidated statements of operations and comprehensive income (loss), shareholders' equity, and cash flows for each of the three years in the period ended June 30, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of U.S. Global Investors, Inc. and Subsidiaries at June 30, 2002 and 2001, and the consolidated results of their operations and their cash flows for each of the three years in the period ended June 30, 2002, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP Ernst & Young LLP Dallas, Texas October 9, 2002 13 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
ASSETS JUNE 30, 2002 2001 ---------- ---------- CURRENT ASSETS Cash and cash equivalents $ 988,936 $1,333,922 Due from brokers 70,871 -- Trading securities, at fair value 1,409,474 1,163,693 Receivables Mutual funds 963,730 773,595 Employees 78,070 77,774 Other 32,194 319,055 Prepaid expenses 279,273 203,565 Deferred tax asset 365,421 435,949 ---------- ---------- TOTAL CURRENT ASSETS 4,187,969 4,307,553 ---------- ---------- NET PROPERTY AND EQUIPMENT 1,869,990 2,029,899 ---------- ---------- OTHER ASSETS Restricted investments 210,000 225,000 Long-term deferred tax asset 739,154 605,066 Investment securities available-for-sale, at fair value 853,612 694,870 Other 44,296 49,796 ---------- ---------- TOTAL OTHER ASSETS 1,847,062 1,574,732 ---------- ---------- TOTAL ASSETS $7,905,021 $7,912,184 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 695,693 $ 280,587 Accrued compensation and related costs 221,282 224,094 Current portion of notes payable 65,637 69,094 Current portion of annuity and contractual obligation 9,758 9,100 Other accrued expenses 264,625 477,886 ---------- ---------- TOTAL CURRENT LIABILITIES 1,256,995 1,060,761 ---------- ---------- NONCURRENT LIABILITIES Notes payable - net of current portion 955,569 1,013,747 Annuity and contractual obligations 112,398 122,156 ---------- ---------- TOTAL NONCURRENT LIABILITIES 1,067,967 1,135,903 ---------- ---------- TOTAL LIABILITIES 2,324,962 2,196,664 ---------- ---------- SHAREHOLDERS' EQUITY Common stock (class A) -- $0.05 par value; nonvoting; 315,574 314,974 authorized 7,000,000 shares; issued, 6,311,474 shares and 6,299,474 shares at June 30, 2002 and 2001, respectively Common stock (class B) -- $0.05 par value; nonvoting; -- -- authorized 2,250,000 shares; no shares issued Common stock (class C) -- $0.05 par value; voting; authorized 74,840 74,840 1,750,000 shares; issued, 1,496,800 shares Additional paid-in capital 10,761,276 10,678,419 Treasury stock, class A shares at cost; 345,331 and 313,426 (639,407) (632,261) shares at June 30, 2002, and 2001, respectively Accumulated other comprehensive loss, net of tax (40,651) (102,364) Accumulated deficit (4,891,573) (4,618,088) ----------- ----------- TOTAL SHAREHOLDERS' EQUITY 5,580,059 5,715,520 ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $7,905,021 $7,912,184 ========== ==========
The accompanying notes are an integral part of this statement. 14 CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
YEAR ENDED JUNE 30, ---------------------------------------- 2002 2001 2000 ------------ ------------ ------------ REVENUE Investment advisory fees $ 5,095,343 $ 5,497,802 $ 6,505,552 Transfer agent fees 2,417,203 2,682,226 2,933,855 Custodial and administrative fees 156,688 302,017 484,441 Investment income (loss) (168,326) 127,395 556,165 Other 266,606 284,444 432,751 ------------ ------------ ------------ 7,767,514 8,893,884 10,912,764 ------------ ------------ ------------ EXPENSES General and administrative 7,854,241 9,315,982 9,987,166 Depreciation 164,674 226,150 395,452 Interest 85,384 110,250 112,653 ------------ ------------ ------------ 8,104,299 9,652,382 10,495,271 ------------ ------------ ------------ INCOME (LOSS) BEFORE EQUITY INTEREST AND INCOME TAXES (336,785) (758,498) 417,493 ------------ ------------ ------------ EQUITY IN NET INCOME OF AFFILIATE -- -- 51,739 -- -- ------ INCOME (LOSS) BEFORE INCOME TAXES (336,785) (758,498) 469,232 PROVISION FOR FEDERAL INCOME TAXES Tax (Benefit) Expense (95,351) 36,181 (26,526) ------------ ------------ ------------ NET INCOME (LOSS) (241,434) (794,679) 495,758 Other comprehensive income (loss), net of tax: Unrealized gains (losses) on available-for-sale 61,713 (50,593) 23,167 securities ------------ ------------ ------------ COMPREHENSIVE INCOME (LOSS) $ (179,721) $(845,272) $ 518,925 =========== ========== ========= BASIC AND DILUTED NET INCOME (LOSS) PER SHARE $ (0.03) $ (0.11) $ 0.07 =========== ========== =========
The accompanying notes are an integral part of this statement. 15 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON COMMON ADDITIONAL ACCUMULATED TREASURY ACCUMULATED TOTAL STOCK STOCK OTHER (CLASS (CLASS PAID-IN COMPREHENSIVE A) C) CAPITAL DEFICIT STOCK INCOME (LOSS) -------- ------- ----------- ----------- --------- -------- ---------- $314,974 $24,840 $10,586,628 $(4,290,436) $(648,830) $(74,938) $5,912,238 BALANCE AT JUNE 30, 1999 (6,299,474 SHARES OF CLASS A; 496,800 SHARES OF CLASS C) Purchase of 25,375 shares of Common Stock (Class A) -- -- -- -- (43,862) -- (43,862) Reissuance of 31,054 shares of Common Stock (Class A) -- -- (8,209) -- 55,394 -- 47,185 Issuance of 1,000,000 shares of Common Stock (Class C) to Frank Holmes as deferred compensation -- 50,000 (50,000) -- -- -- -- Recognition of current year portion of deferred compensation -- -- 50,000 -- -- -- 50,000 Unrealized gain (loss) on securities available-for-sale (net of tax) -- -- -- -- -- 23,167 23,167 Net Income -- -- -- 495,758 -- -- 495,758 -------- ------- ----------- ----------- --------- -------- ---------- BALANCE AT JUNE 30, 2000 (6,299,474 SHARES OF CLASS A; 1,496,800 SHARES OF CLASS C) 314,974 74,840 10,578,419 (3,794,678) (637,298) (51,771) 6,484,486 Purchase of 71,346 shares of Common Stock (Class A) -- -- -- -- (81,326) -- (81,326) Reissuance of 40,270 shares of Common Stock (Class A) -- -- -- (28,731) 86,363 -- 57,632 Recognition of current year portion of deferred compensation -- -- 100,000 -- -- -- 100,000 Unrealized gain (loss) on securities available-for-sale (net of tax) -- -- -- -- -- (50,593) (50,593) Net Loss -- -- -- (794,679) -- (794,679) -------- ------- ----------- ----------- --------- -------- ---------- BALANCE AT JUNE 30, 2001 (6,299,474 SHARES OF CLASS A; 1,496,800 SHARES OF CLASS C) 314,974 74,840 10,678,419 (4,618,088) (632,261) (102,364) 5,715,520 Purchase of 86,275 shares of -- -- -- -- (106,482) -- (106,482) Common Stock (Class A) Reissuance of 54,370 shares of Common Stock (Class A) -- -- 6,679 (32,051) 99,336 -- 73,964 Exercise of 12,000 options for Common Stock (Class A) 600 -- 26,178 -- -- -- 26,778 Recognition of current year portion of deferred compensation -- -- 50,000 -- -- -- 50,000 Unrealized gain (loss) on -- -- -- -- -- 61,713 61,713 securities available-for-sale (net of tax) Net Loss -- -- -- (241,434) -- -- (241,434) -------- ------- ----------- ----------- --------- -------- ---------- BALANCE AT JUNE 30, 2002 (6,311,474 SHARES OF CLASS A; $315,574 $74,840 $10,761,276 $(4,891,573) $(639,407) $(40,651) $5,580,059 1,496,800 SHARES OF CLASS C) ======== ======= =========== ============ ========== =========== ==========
The accompanying notes are an integral part of this statement. 16 CONSOLIDATED STATEMENTS OF CASH FLOW
YEAR ENDED JUNE 30, ------------------------------------- 2002 2001 2000 --------- --------- --------- CASH FLOW FROM OPERATING ACTIVITIES Net income (loss) $(241,434) $(794,679) $ 495,758 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation 164,674 226,150 395,452 Net loss (gain) on sales of securities 48,975 (383,379) (550,000) Loss (gain) on disposal of equipment -- 97,752 (5,752) Provision for deferred taxes (95,351) 36,181 (26,526) Reserve against impairment of equipment -- 9,436 -- Changes in assets and liabilities, impacting cash from operations: Accounts receivable 96,430 56,933 (62,213) Prepaid expenses and other (126,079) 142,964 46,134 Trading securities (90,009) 1,018,363 676,746 Accounts payable and accrued expenses 199,033 (376,866) 286,245 --------- --------- --------- Total adjustments 197,673 827,534 760,086 --------- --------- --------- NET CASH (USED IN) PROVIDED BY OPERATIONS (43,761) 32,855 1,255,844 --------- --------- --------- CASH FLOW FROM INVESTING ACTIVITIES Purchase of property and equipment (4,765) (84,493) (258,644) Proceeds on disposal of equipment -- -- 16,792 Purchase of available-for-sale securities (269,985) (233,310) (717,652) Redemption in equity affiliate -- -- 100,000 Proceeds on sale of available-for-sale securities -- 246,269 -- --------- --------- --------- NET CASH USED IN INVESTING ACTIVITIES (274,750) (71,534) (859,504) --------- --------- --------- CASH FLOW FROM FINANCING ACTIVITIES Payments on annuity (9,100) (8,487) (7,915) Payments on note payable (61,635) (52,121) (60,092) Proceeds from issuance or exercise of stock, 150,742 157,632 47,185 warrants, and options Purchase of treasury stock (106,482) (81,326) (43,862) --------- --------- --------- NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (26,475) 15,698 (64,684) --------- --------- --------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (344,986) (22,981) 331,656 BEGINNING CASH AND CASH EQUIVALENTS 1,333,922 1,356,903 1,025,247 --------- --------- --------- ENDING CASH AND CASH EQUIVALENTS 988,936 1,333,922 1,356,903 ========= ========= ========= SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Receipt of trading and available-for-sale -- -- $701,478 securities in liquidation of equity investment SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid for interest $85,384 $133,250 $89,653
The accompanying notes are an integral part of this statement. 17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. ORGANIZATION U.S. Global Investors, Inc. (Company or U.S. Global) serves as investment adviser, investment manager, and transfer agent to U.S. Global Investors Funds (USGIF) and U.S. Global Accolade Funds (USGAF), both Massachusetts business trusts that are no-load, open end investment companies offering shares in numerous mutual funds to the investing public. The Company has served as investment adviser and manager since the inception of USGIF and USGAF and assumed the transfer agency function of USGIF in November 1984, and of USGAF in October 1994, the commencement of operations. For these services, the Company receives fees from USGIF and USGAF. U.S. Global has formed the following companies to provide supplementary services to USGIF and USGAF: United Shareholder Services, Inc. (USSI), A&B Mailers, Inc. (A&B), U.S. Global Brokerage, Inc. (USGB), U.S. Global Administrators, Inc. (USGA), and Security Trust & Financial Company (STFC). USGA and STFC have been liquidated as of fiscal year end. The Company has formed a limited liability company, which was incorporated in Guernsey on August 20, 1993. This company, U.S. Global Investors (Guernsey) Limited (USGG), is utilized in conducting the Company's cash management activities. NOTE 2. SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries: USSI, A&B, USGG, and USGB. As of June 30, 2002, STFC and USGA have been liquidated and are no longer included in the consolidated financial statements. All significant intercompany balances and transactions have been eliminated in consolidation. Certain amounts have been reclassified for comparative purposes. ACCOUNTING FOR EQUITY INVESTMENTS. Before the liquidation of the U.S. Global Strategies Fund (Guernsey Fund) in fiscal year 2000, the Company accounted for its investment in the Guernsey Fund under the equity method. CASH AND CASH EQUIVALENTS. Cash consists of cash on hand and cash equivalents with original maturities of three months or less. DUE FROM BROKERS. The Company conducts business with various brokers for its investment activities. The clearing and depository operations for the investment activities are performed pursuant to agreements with the brokers. The due from brokers balance represents cash balances with these brokers. The Company is subject to credit risk to the extent any broker with which the Company conducts business is unable to deliver cash balances owed the Company. Management monitors the financial condition of the brokers with which the Company conducts business and believes the likelihood of loss under the aforementioned circumstances is remote. SECURITY INVESTMENTS. The Company accounts for its investments in securities in accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (SFAS 115). In accordance with SFAS 115, the Company classifies its investments in equity and debt securities based on intent. Management determines the appropriate classification of securities at the time of purchase and reevaluates such designation as of each reporting period date. Securities that are purchased and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value. Unrealized gains and losses on these securities are included in earnings. Investments classified neither as trading securities nor as held-to-maturity securities are classified as available-for-sale securities and reported at fair value. Unrealized gains and losses on 19 these available-for-sale securities are excluded from earnings, are reported, net of tax, as a separate component of shareholders' equity, and are recorded in earnings on the date of sale. The Company records security transactions on trade date. Securities traded on a securities exchange are valued at the last sale price. Securities for which over-the-counter market quotations are available are valued at the mean price between the last price bid and last price asked. Securities for which quotations are not readily available or for which the Company owns a significant portion of shares relative to trading volume are valued at fair value, as determined by the Company's management. Realized gains (losses) from security transactions are calculated on the first-in/first-out cost basis, unless otherwise identifiable, and are recorded in earnings on the date of sale. For available-for-sale securities with declines in value that are deemed permanent, the cost basis of the securities is reduced accordingly, and the resulting loss is realized in earnings. PROPERTY AND EQUIPMENT. Fixed assets are recorded at cost. Depreciation for fixed assets is recorded using the straight-line method over the estimated useful life of each asset as follows: furniture and equipment are depreciated over 3 to 10 years, and the building and related improvements are depreciated over 31.5 to 40 years. The Company expenses insignificant purchases when the assets are aquired. Approximately $85,000 was expensed in fiscal 2002 under this policy. This amount is included in general and administrative expenses on the statement of operations. TREASURY STOCK. Treasury stock purchases are accounted for under the cost method. The subsequent issuances of these shares are accounted for based on their weighted-average cost basis. INCOME TAXES. Provisions for income taxes include deferred taxes for temporary differences in the bases of assets and liabilities for financial and tax purposes, resulting from the use of the liability method of accounting for income taxes. The liability method requires that deferred tax assets be reduced by a valuation allowance in cases where it is more likely than not that the deferred tax assets will not be realized. REVENUE RECOGNITION. Investment advisory fees, transfer agent fees, custodian fees, and all other fees earned by the Company are recorded as income during the period in which services are performed. DIVIDENDS AND INTEREST. Dividends are recorded on the ex-dividend date, and interest income is recorded on an accrual basis. ADVERTISING. The Company expenses advertising and sales promotion costs as they are incurred. Net advertising and sales promotion expenditures were approximately $373,000, $264,000, and $575,000 in 2002, 2001, and 2000, respectively. FOREIGN CURRENCY TRANSACTIONS. Transactions between the Company and foreign entities are converted to U.S. dollars using the exchange rate on the date of the transactions. Security investments valued in foreign currencies are translated to U.S. dollars using the applicable exchange rate as of the reporting date. Realized foreign currency gain (loss) is included as a component of investment income. USE OF ESTIMATES. The preparation of financial statements in conformity with generally accepted accounting principles requires the Company to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. 19 NOTE 3. INVESTMENTS The following table summarizes investment activity over the last three fiscal years:
YEAR ENDED JUNE 30, ----------------------------------- 2002 2001 2000 --------- --------- --------- Realized gains (losses) on sale of securities $(48,975) $383,379 $550,000 Trading securities, at cost 2,178,041 1,951,963 1,832,282 Trading securities, at fair value * 1,409,474 1,163,693 1,424,120 Net change in unrealized losses on trading securities 19,703 (379,861) 95,974 (included in earnings) Available-for-sale securities, at cost 915,204 849,966 1,237,483 Available-for-sale securities, at fair value * 853,612 694,870 1,159,042 Unrealized loss recorded in shareholders' equity (net of (40,651) (102,364) (51,771) tax) Realized losses on available-for-sale securities deemed 51,887 -- -- to have other-than-temporary declines in value ---------------------- * These categories of securities are comprised primarily of equity investments, including those investments discussed in footnote 15 regarding related party transactions.
A trading security was purchased in fiscal 2002 for approximately $450,000. This security has a contingent payable that must be paid upon liquidation of the security, net of any fees earned. This payable is included in accounts payable in the statement of financial condition. As the security rises or falls in value, the security balance and the payable balance will be marked-to-market appropriately. At June 30, 2002, these balances had been marked-to-market to approximately $581,000. The Company has a fee arrangement for this investment whereby it receives 2% of the initial value of the investment plus 20% of any gains from the sale of the investment, payable at the settlement of the sale. At June 30, 2002, the Company has recorded $27,320 from this fee arrangement in other income on the statement of operations. NOTE 4. INVESTMENT MANAGEMENT, TRANSFER AGENT, AND OTHER FEES The Company serves as investment adviser to USGIF and USGAF and receives a fee based on a specified percentage of net assets under management. USGAF are sub-advised by outside third-party managers, who are in turn paid out of the investment advisory fees received by the Company. In March 2002, an agreement was reached with one of these sub-advisors whereby $165,000 of sub-advisory fees payable were waived. The Company also serves as transfer agent to USGIF and USGAF and receives a fee based on the number of shareholder accounts serviced. The Company also provides in-house legal services to USGIF and USGAF for which it is reimbursed. The Company also receives exchange, maintenance, closing, and small account fees directly from USGIF and USGAF shareholders. Fees for providing services to USGIF and USGAF continue to be the Company's primary revenue source. The Company receives additional revenue from several sources including: custodian revenues, revenues from miscellaneous transfer agency activities including lockbox and printing functions, A&B mailroom operations, management of investments for private investors, as well as gains on marketable securities transactions. The Company has voluntarily waived or reduced its advisory fees and/or has agreed to pay expenses on several funds within USGIF through June 30, 2003, or such later date as the Company determines. The aggregate amount of fees waived and expenses borne by the Company were $1,530,046, $2,039,360, and $2,125,773 in 2002, 2001, and 2000, respectively. The investment advisory contract and related contracts between the Company and USGIF expire in February 2003, and the contracts between the Company and USGAF expire in May 2003. Management anticipates the trustees of both USGIF and USGAF will renew the contracts. 20 NOTE 5. PROPERTY AND EQUIPMENT Property and equipment are composed of the following: JUNE 30, ------------------------ 2002 2001 ----------- ----------- Building and land $2,271,613 $2,271,613 Furniture, equipment, and other 2,127,407 2,122,642 ----------- ----------- 4,399,020 4,394,255 Accumulated depreciation (2,529,030) (2,364,356) ----------- ----------- Net property and equipment $1,869,990 $2,029,899 =========== =========== The building and land are pledged as collateral for the financing used to acquire the building. NOTE 6. BORROWINGS The Company has a note payable to a bank, which is secured by land, an office building, and related improvements. As of June 30, 2002, the balance on the note was $1,021,206. The loan is currently being amortized over a twelve-year period with payments of both principal and interest due monthly based on a fixed rate of 6.50%. The current monthly payment is $10,840, and the note matures on January 31, 2006. Under this agreement, the Company must maintain certain financial covenants. The Company was not in compliance with certain debt covenants but received a waiver from the bank through June 30, 2002. Management believes that the Company has adequate cash, cash equivalents, and equity in the underlying asset to retire the obligation if necessary. The Company has access to a $1 million credit facility with a one-year maturity for working capital purposes. Any use of this credit facility will be secured by the Company's eligible accounts receivable and pledged securities. As of June 30, 2002, this credit facility remained unutilized by the Company. Future principal payments to be made over the next four years based on the note payable outstanding at June 30, 2002, are as follows: FISCAL YEAR AMOUNT 2003 $ 65,637 2004 70,033 2005 74,724 2006 810,812 ---------- Total $1,021,206 NOTE 7. LEASE COMMITMENTS The Company has operating leases for computers and equipment that expire between fiscal years 2003 and 2006. Total lease expenses were $222,983, $202,006, and $108,925 in fiscal years 2002, 2001, and 2000, respectively. Future minimum lease payments required under these leases are as follows: FISCAL YEAR AMOUNT 2003 $ 171,874 2004 38,972 2005 9,036 2006 3,012 2007 -- --------- Total $ 222,894 21 NOTE 8. ANNUITY AND CONTRACTUAL OBLIGATIONS On February 6, 1989, the Company entered into an agreement with Clark Aylsworth (Aylsworth) related to his retirement on December 31, 1988. This agreement provided for the payment to Aylsworth of a monthly annuity of $1,500 for the remainder of his life or his wife's life, if he predeceases her. The Company has recorded an obligation related to this agreement. On December 30, 1990, the Company entered into a noncompete/noninterference agreement, an executory contract, pursuant to which it pays the Aylsworths $4,500 monthly, such amount to continue for the longer of Aylsworth's or his wife's life. The Company determined that the executory contract should be expensed as payments are made. The Company placed cash in escrow to cover the Company's obligation to the Aylsworths if the Company defaults. The escrowed amount decreases $15,000 annually and the balance was $210,000 at June 30, 2002, which is disclosed on the statement of financial condition as restricted investments. NOTE 9. BENEFIT PLANS The Company has a contributory profit sharing plan, which includes all qualified employees who have completed six months of employment with the Company as of calendar quarter-end. The amount of the annual contribution, which may not exceed 15% of earnings before income taxes, is approved by the Company's board of directors. The Company has neither accrued nor paid a contribution for fiscal years 2002, 2001, and 2000. The Company also has a savings and investment plan qualified under Section 401(k) of the Internal Revenue Code, which it merged with the profit sharing plan effective January 1, 2002. In connection with this 401(k) plan, participants can voluntarily contribute a portion of their compensation, up to certain limitations, to this plan, and the Company will match 50% of their contribution up to 2% of compensation. The Company has recorded expenses related to the 401(k) plan of $48,760, $37,477, and $48,743 for fiscal years 2002, 2001, and 2000, respectively. The Company has continued the program pursuant to which it offers employees, including its executive officers, an opportunity to participate in savings programs using managed investment companies, which essentially all such employees accepted. Limited employee contributions to an Individual Retirement Account are matched by the Company. Similarly, certain employees may contribute monthly to the Tax Free Fund, and the Company will match these contributions on a limited basis. A similar savings plan utilizing UGMA accounts is offered to employees to save for their children's education. The Company match, reflected in base salary expense, aggregated in all programs to $52,692, $67,485, and $53,417 in fiscal years 2002, 2001, and 2000, respectively. Additionally, the Company self-funds its employee health care plan. The Company has obtained reinsurance with both a specific and an aggregate stop-loss in the event of catastrophic claims. The Company has accrued an amount representing the Company's estimate of claims incurred but not paid at June 30, 2002. NOTE 10. SHAREHOLDERS' EQUITY In March 1985, the board of directors adopted an Incentive Stock Option Plan (1985 Plan), amended in November 1989 and December 1991, which provides for the granting of options to purchase 200,000 shares of the Company's class A common stock, at or above fair market value, to certain executives and key salaried employees of the Company and its subsidiaries. Options under the 1985 Plan may be granted for a term of up to five years in the case of employees who own in excess of 10% of the total combined voting power of all classes of the Company's stock and up to ten years for other employees. Options issued under the 1985 Plan vest six months from the grant date or 20% on the first, second, third, fourth and fifth anniversaries of the grant date. Since adoption of the 1985 plan, options have been granted at prices ranging from $1.50 to $4.50 per share, which equaled or exceeded the fair market value at date of grant. As of June 30, 2002, options covering 88,000 shares have been exercised, and options covering 112,000 shares have expired. The 1985 plan expired December 31, 1994; consequently, there will be no further option grants under the 1985 plan. 22 In November 1989, the board of directors adopted the 1989 Non-Qualified Stock Option Plan (1989 Plan), amended in December 1991, which provides for the granting of options to purchase 800,000 shares of the Company's class A common stock to directors, officers, and employees of the Company and its subsidiaries. Since adoption of the 1989 Plan, options have been granted at prices ranging from $1.50 to $5.69 per share, which equaled or exceeded the fair market value at date of grant. During fiscal year 2000, options covering 22,000 shares were granted at an exercise price of $1.50 per share. Options issued under the 1989 Plan vest six months from the grant date or 20% on the first, second, third, fourth and fifth anniversaries of the grant date. As of June 30, 2002, options covering 403,000 shares have been exercised under this plan, and options covering 422,200 shares have expired. In April 1997, the board of directors adopted the 1997 Non-Qualified Stock Option Plan (1997 Plan), which provides for the granting of stock appreciation rights (SARs) and/or options to purchase 200,000 shares of the Company's class A common stock to directors, officers, and employees of the Company and its subsidiaries. During fiscal year 2000, options covering 72,000 shares were granted at an exercise price of $1.50 per share. As of June 30, 2002, options covering 8,000 shares have been exercised under this plan, and options covering 107,000 shares have expired. During fiscal year 1999, the Board of Directors of the Company approved the issuance of 1,000,000 shares of class C common stock to Frank Holmes in exchange for services and cancellation of the option to purchase 400,000 shares of class C common stock held by Mr. Holmes and the cancellation of warrants to purchase 586,122 shares of class C common stock held by Mr. Holmes and F.E. Holmes Organization, Inc. The 1,000,000 shares vest over a ten-year period beginning July 1, 1998, and will vest fully on June 30, 2008, or in the event of Mr. Holmes' death, and were valued at $.50 per share for compensation purposes. The agreement was executed on August 10, 1999. At June 30, 2002, the unvested balance of this deferred compensation arrangement is $350,0000 and is included on the statement of financial condition as a contra account to additional paid-in capital. On a per share basis, the holders of the class C common stock and the nonvoting class A common stock participate equally in dividends as declared by the Company's board of directors, with the exception that any dividends declared must first be paid to the holders of the class A stock to the extent of 5% of the Company's after-tax prior year net earnings. The holders of the class A stock have a liquidation preference equal to the par value of $.05 per share. Stock option transactions under the various stock option plans are summarized below:
SHARES WEIGHTED AVERAGE EXERCISE PRICE ($) ---------- -------- OUTSTANDING JUNE 30, 1999 952,800 2.40 Granted 94,000 1.50 Canceled 666,000 2.40 Exercised -- -- ---------- OUTSTANDING JUNE 30, 2000 380,800 2.16 Granted -- -- Canceled 39,000 1.58 Exercised -- -- ---------- OUTSTANDING JUNE 30, 2001 341,800 2.23 Granted -- -- Canceled 150,300 2.62 Exercised 12,000 1.92 ---------- OUTSTANDING JUNE 30, 2002 179,500 1.92 ========== As of June 30, 2002, 2001, and 2000, exercisable stock options totaled 144,100, 293,000, and 295,700 shares and had weighted average exercise prices of $2.02, $2.35, and $2.35 per share, respectively.
23 The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations in accounting for its stock option plans as allowed under Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). Accordingly, the Company has not recognized compensation expense for its stock options granted subsequent to December 15, 1994, the effective date of the Statement. Had compensation expense for the Company's stock options granted after issuance of SFAS 123 been determined based on the fair value at the grant dates consistent with the methodology of SFAS 123, such compensation expense, net of tax benefit, would have been $6,326, $7,670, and $1,227 in fiscal years 2002, 2001, and 2000, respectively, and the pro forma net income and income per share would have been as follows: FISCAL YEAR ENDED JUNE 30, ---------------------------------- 2002 2001 2000 --------- --------- -------- Pro forma net income (loss) $(247,760) $(802,349) $494,531 Pro forma income (loss) per share - basic and diluted $(0.03) $(0.11) $0.07 The weighted average fair value of options granted during the fiscal year ended June 30, 2000 was $0.81. Due to vesting requirements, the pro forma effect of this grant was not reflected until fiscal year 2001. For purposes of pro forma disclosure, the estimated fair value of the options is amortized to expense over the options' vesting period. The fair value of these options was estimated at the date of the grant using a Black-Scholes option-pricing model with the following weighted-average assumptions: FISCAL YEAR ENDED JUNE 30, ------------------------------------------- 2002 2001 2000 ----------- ----------- ----------- Expected volatility 0.42 - 0.55 0.42 - 0.55 0.42 - 0.55 Expected dividend yield -- -- -- Expected life (term) 8 years 8 years 8 years Risk-free interest rate 5.07% - 6.16% 5.07% - 6.16% 4.41% - 6.16% Class A common stock options outstanding and exercisable at June 30, 2002, were as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE WEIGHTED WEIGHTED WEIGHTED DATE OF AVERAGE REMAINING AVERAGE AVERAGE OPTION OPTION NUMBER LIFE IN OPTION NUMBER OPTION GRANT PRICE ($) OUTSTANDING YEARS PRICE ($) EXERCISABLE PRICE ($) 1985 PLAN 12/15/94 2.63 2,500 2.45 2.63 2,500 2.63 CLASS A 1989 PLAN 05/16/94 4.75 2,000 1.87 4.75 2,000 4.75 CLASS A 09/05/95 2.63 4,500 3.18 2.63 4,500 2.63 05/24/96 3.06 10,000 3.90 3.06 10,000 3.06 06/04/97 2.00 20,000 4.93 2.00 30,000 2.00 06/04/97 2.00 30,000 5.93 2.00 20,000 2.00 12/03/99 1.50 15,000 7.42 1.50 6,000 1.50 ---- ------ ---- ---- ----- ---- 1.50 - 4.75 51,500 3.27 2.22 42,500 2.38 24 1997 PLAN 06/04/97 1.82 31,500 4.93 1.82 31,500 1.82 CLASS A 06/04/97 2.00 50,000 4.93 2.00 50,000 2.00 12/03/99 1.50 44,000 7.42 1.50 17,600 1.50 ---- ------ ---- ---- ----- ---- 1.50 - 2.00 125,500 5.80 1.78 99,100 1.85 ALL PLANS 12/91 1.50 - 4.75 179,500 5.03 1.92 144,100 2.02 through =========== ======= ==== ==== ======= ==== 12/99
During the fiscal years ended June 30, 2002 and 2001, the Company purchased 86,275 and 71,346 shares, respectively, of its class A common stock at an average price of $1.23 and $1.14, per share, respectively. NOTE 11. INCOME TAXES The reconciliation of income tax computed at the U.S. federal statutory rates to income tax expense is:
YEAR ENDED JUNE 30, ----------------------------------- 2002 2001 2000 --------- -------- --------- Tax expense (benefit) at statutory rate $(114,507) $(257,889) $ 159,539 Nondeductible membership dues 14,754 10,788 11,379 Nondeductible meals and entertainment 14,242 18,758 27,813 Change in valuation allowance 137,928 253,966 (258,095) Other (147,768) 10,558 32,838 --------- -------- --------- $(95,351) $ 36,181 $(26,526) ========= ======== =========
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company's deferred total assets and liabilities are as follows:
YEAR ENDED JUNE 30, ----------------------- 2002 2001 ---------- -------- BOOK/TAX DIFFERENCES IN THE BALANCE SHEET Trading securities $ 306,110 $ 268,012 Accumulated depreciation 31,930 -- Accrued expenses 59,311 115,202 Available-for-sale securities 20,942 52,733 Reduction in cost basis of available-for-sale securities 195,107 177,466 Annuity obligations 41,533 44,627 ---------- -------- 654,933 658,040 25 TAX CARRYOVERS Net operating loss (NOL) carryover 941,357 699,061 Charitable contributions carryover 18,545 78,363 Investment tax credit 34,472 34,472 Alternative minimum tax credits 139,729 139,729 ----------- ----------- 1,134,103 951,625 ---------- -------- TOTAL GROSS DEFERRED TAX ASSET 1,789,036 1,609,665 ---------- -------- BOOK/TAX DIFFERENCES IN THE BALANCE SHEET Accumulated depreciation -- (22,117) Unrealized loss on available-for-sale securities (20,942) (52,733) ---------- -------- TOTAL GROSS DEFERRED TAX LIABILITY (20,942) (74,850) ---------- -------- DEFERRED TAX ASSET 1,768,094 1,534,815 VALUATION ALLOWANCE (684,461) (546,533) ---------- -------- NET DEFERRED TAX ASSET $1,083,633 $988,282 ========== ========
For federal income tax purposes at June 30, 2002, the Company has NOLs of approximately $2.8 million, which will begin expiring between fiscal 2005 and 2011, charitable contribution carryovers of approximately $54,000 expiring between 2004 and 2006, and alternative minimum tax credits of $139,729 with indefinite expirations. If certain changes in the Company's ownership should occur, there could be an annual limitation on the amount of NOLs that could be utilized. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax amount will not be realized. Management included a valuation allowance of $684,461 and $546,533 June 30, 2002 and 2001, respectively, providing for the utilization of NOLs, charitable contributions, and investment tax credits against future taxable income. The Company increased its valuation allowance due to an overall evaluation of the likelihood that the deferred tax assets will be realized. NOTE 12. EARNINGS PER SHARE The following table sets forth the computation for basic and diluted earnings per share (EPS):
YEAR ENDED JUNE 30, ------------------------------------- 2002 2001 2000 -------- -------- ------- BASIC AND DILUTED NET INCOME (LOSS) $(241,434) $(794,679) $ 495,758 WEIGHTED AVERAGE NUMBER OF OUTSTANDING SHARES Basic 7,456,181 7,524,913 7,408,821 EFFECT OF DILUTIVE SECURITIES Employee stock options -- -- 2,278 -------- -------- ------- Diluted 7,456,181 7,524,913 7,411,099 ========= ========= ======= EARNINGS (LOSS) PER SHARE Basic $ (0.03) $ (0.11) $ 0.07 ========= ========= ======= Diluted $ (0.03) $ (0.11) $ 0.07 ========= ========= =======
26 The diluted EPS calculation excludes the effect of stock options when their exercise prices exceed the average market price for the period. For the years ended June 30, 2002, 2001, and 2000, options for 179,500, 341,800, and 296,800 shares, respectively, were excluded from diluted EPS. NOTE 13. COMPREHENSIVE INCOME (LOSS) The Company has disclosed the components of comprehensive income in the consolidated statements of operations and comprehensive income.
TAX BEFORE-TAX (EXPENSE) OR NET-OF-TAX AMOUNT BENEFIT ($) AMOUNT ($) JUNE 30, 2002 Unrealized gains (losses) on $ 93,504 $ (31,791) $ 61,713 -------- ---------- -------- available-for-sale securities Other comprehensive income (loss) $ 93,504 $ (31,791) $ 61,713 ======== ========== ======== JUNE 30, 2001 Unrealized gains (losses) on $(76,656) $26,063 $(50,593) --------- ------- --------- available-for-sale securities Other comprehensive income (loss) $(76,656) $26,063 $(50,593) ========= ======= ========= JUNE 30, 2000 Unrealized gains (losses) on $ 35,101 $ (11,934) $ 23,167 -------- ---------- -------- available-for-sale securities Other comprehensive income (loss) $ 35,101 $ (11,934) $ 23,167 ======== ========== ======== NOTE 14. FINANCIAL INFORMATION BY BUSINESS SEGMENT The Company operates principally in two business segments: providing mutual fund investment management services to its clients and investing for its own account in an effort to add growth and value to its cash position. The following details total revenues and income (loss) by business segment: INVESTMENT CORPORATE CONSOLI- MANAGEMENT INVESTMENT DATED SERVICES ($) ($) ($) YEAR ENDED JUNE 30, 2002 Net revenues 7,975,056 (207,542) 7,767,514 ========= ======== ========= Net income (loss) before income taxes (128,643) (208,142) (336,785) ========= ======== ========= Depreciation and amortization 164,674 -- 164,674 ========= ======== ========= Interest expense 84,810 574 85,384 ========= ======== ========= Capital expenditures 4,765 -- 4,765 ========= ======== ========= Gross identifiable assets at June 30, 2002 4,496,709 2,263,086 6,759,795 Deferred tax asset 1,104,575 Accumulated other comprehensive loss 40,651 --------- Consolidated total assets at June 30, 2002 7,905,021 ========== YEAR ENDED JUNE 30, 2001 Net revenues 8,881,776 12,108 8,893,884 ========= ======== ========= Net income (loss) before income taxes (742,801) (15,697) (758,498) ========= ======== ========= Depreciation and amortization 226,150 -- 226,150 ========= ======== ========= Interest expense 109,995 255 110,250 ========= ======== ========= Capital expenditures 84,493 -- 84,493 ========= ======== ========= Gross identifiable assets at June 30, 2001 4,910,242 1,858,563 6,768,805 Deferred tax asset 1,041,015 Accumulated other comprehensive loss 102,364 Consolidated total assets at June 30, 2001 --------- 7,912,184 ========= 27 YEAR ENDED JUNE 30, 2000 Net revenues 10,458,738 454,026 10,912,764 ========= ======== ========= Income (loss) before income taxes and equity (36,533) 454,026 417,493 interest Equity in net loss of affiliate -- 51,739 51,739 Net income (loss) before income taxes (36,533) 505,765 469,232 ========= ======== ========= Depreciation and amortization 395,452 -- 395,452 ========= ======== ========= Interest expense 111,757 896 112,653 ========= ======== ========= Capital expenditures 247,421 -- 247,421 ========= ======== ========= Gross identifiable assets at June 30, 2000 6,700,188 1,315,532 8,015,720 Deferred tax asset 1,051,133 Accumulated other comprehensive loss 51,771 --------- Consolidated total assets at June 30, 2000 9,118,624 =========
NOTE 15. RELATED PARTY TRANSACTIONS In addition to the Company's receivable from USGIF and USGAF relating to investment management, transfer agent, and other fees, the Company had $969,087 and $1,303,789 invested in USGIF money market mutual funds at June 30, 2002 and 2001, respectively. Receivables from mutual funds represent amounts due the Company and its wholly owned subsidiaries for investment advisory fees, transfer agent fees, and out-of-pocket expenses, net of amounts payable to the mutual funds. Frank Holmes, a director and CEO of the Company, has served as an independent director of Franc-Or Resources beginning in June 2000 and chairman of Consolidated Fortress Resources in November 2000. He also served as an independent director for Broadband Collaborative Solutions, a private company, since May 2000 but had resigned his directorship prior to June 30, 2002. The Company owns a position in Franc-Or Resources at June 30, 2002, with an estimated fair value of $304,900, recorded as a trading security on the statement of financial condition. The Company also owns positions in Consolidated Fortress Resources and Broadband Collaborative Solutions at June 30, 2002, with estimated fair values of $23,067 and $469,748, respectively, recorded as investment securities available-for-sale on the statement of financial condition. Mr. Holmes personally owns 100,000 shares of Broadband Collaborative Solutions at June 30, 2002. Mr. Holmes had advances at June 30, 2002 of $76,651, and this amount has been repaid from bonuses paid to Mr. Holmes after June 30, 2002. Additionally, Mr. Holmes had an outstanding payable of $43,567. During fiscal year 2002, J. Stephen Penner, a former director of the Company who resigned during fiscal year 2002, exercised options for 10,000 shares of Class A stock at $2.00 per share. NOTE 16. RECEIVABLE ADJUSTMENTS In fiscal year 2001, the Company paid $182,115 for losses from shareholder activity incurred by USGIF in previous years. Management consulted with its insurance carrier and determined that it was probable that this sum could be claimed against the Company's insurance policy. The deductible on this policy was $25,000, which amount was expensed in fiscal 2000. The balance of approximately $157,000 was booked as a receivable at June 30, 2001. In fiscal year 2002, discussions with the insurance carrier indicated that the possibility of recovery was not likely, and as such, the entire receivable balance was expensed. Any subsequent collections on this claim will result in a reversal of this expense to the extent of collection. During fiscal 2002, an adjustment was made to the billing practices related to the Company's mail services. As a result, an overall reduction of $104,000 was applied to mail service revenues and related receivables in order to reflect billing volumes properly. 28 NOTE 17. CONTINGENCIES The Company has been named as one of several defendants in a civil law suit filed in New York. Management consulted with legal counsel and determined that the Company has strong merits for either having the case dismissed or obtaining a favorable ruling. In addition, the Company has filed a claim against its insurance policy, and the carrier has agreed to coverage of this claim. Legal expenses associated with this lawsuit have been expensed as incurred. As the insurance carrier makes reimbursements on the charges, these expenses are reversed. The Company received $66,000 in reimbursements from its insurance carrier during fiscal year 2002. These amounts were recorded as a reduction in general and administrative expenses on the statement of operations. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Within twenty-four months prior to the date of the Company's most recent financial statement, no Form 8-K recording a change of accountants due to a disagreement on any matter of accounting principles or practices or financial statement disclosure has been filed with the Commission. 29 [Graphic: U.S. Global Investors, Inc. Logo] PART III OF ANNUAL REPORT ON FORM 10-K ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY The directors and executive officers of the Company are as follows:
NAME AGE POSITION Frank E. Holmes 47 Chairman of the Board of Directors and Chief Executive Officer of the Company since October 1989, and Chief Investment Officer since June 1999. Since October 1989, Mr. Holmes has served and continues to serve in various positions with the Company, its subsidiaries, and the investment companies it sponsors. Mr. Holmes has also served as Director of 71316 Ontario, Inc. since April 1987. Director, President, and Secretary of F.E. Holmes Organization, Inc. since July 1978. Director of USACI since February 1995, Director, and President from February 1995 to June 1997. Mr. Holmes has served as director of Franc-Or Resources Corporation since June 2000 and Consolidated Fortress since November 2000. Jerold H. Rubinstein 64 Director of the Company since October 1989. Chief Executive Officer and founder of Music Imaging & Media, Inc. from July 2002 to present. Chairman of Musicplex, Inc. from September 1999 to June 2002. Chairman and Chief Executive Officer of Xtra Music from July 1997 to May 2000. Chairman of the Board of Directors and Chief Executive Officer of DMX Inc. from May 1986 to July 1997. Roy D. Terracina 56 Director of the Company since December 1994 and Vice Chairman of the Board of Directors since May 1997. Owner of Sunshine Ventures, Inc., an investment company, since January 1994. Thomas F. Lydon, Jr. 42 Director of the Company since June 1997. Chairman of the Board and President of Global Trends Investments since April 1996. President, Vice President and Account Manager with Fabian Financial Services, Inc. from April 1984 to March 1996. Member of the Advisory Board for Schwab Institutional from 1989 to 1991 and from 1995 to 1996. Member of the Advisory Board of Rydex Series Trust since January 1999. Fund Relations Chair for SAAFTI since 1994. Susan B. McGee 43 President of the Company since February 1998, General Counsel since March 1997. Since September 1992, Ms. McGee has served and continues to serve in various positions with the Company, its subsidiaries, and the investment companies it sponsors. Tracy Peterson 30 Chief Financial Officer of the Company since January 2002. Since 1997, Mr. Peterson has served and continues to serve in various positions with the Company, its subsidiaries, and the investment companies it sponsors.
None of the directors or executive officers of the Company has a family relationship with any of the other directors or executive officers. The members of the board of directors are elected for one-year terms or until their successors are elected and qualified. The board of directors appoints the executive officers of the Company. The Company's Executive Compensation Committee consists of Messrs. Holmes, Lydon, Rubinstein, and Terracina. The Company's Audit Committee consists of Messrs. Rubinstein and Terracina. The Stock Option Committee consists of Mr. Rubinstein. The Company does not have a Nominating Committee. 30 COMPLIANCE WITH SECTION 16(A) OF THE 1934 ACT Section 16(a) of the 1934 Act requires directors and officers of the Company, and persons who own more than 10% of the Company's class A common stock, to file with the Securities and Exchange Commission (SEC) initial reports of ownership and reports of changes in ownership of the stock. Directors, officers and more than 10% shareholders are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file. To the Company's knowledge, based solely on a review of the copies of such reports furnished to the Company and written representations that no other reports were required, during the year ended June 30, 2002, all Section 16(a) filing requirements applicable to its directors, officers, and more than 10% beneficial owners were met. ITEM 11. EXECUTIVE COMPENSATION The Company has intentionally omitted columns (h) and (i) as they are not applicable. Includes amounts identified for 401(k) contributions (calculable through the end of June 30, 2002, fiscal year) and amounts for Company savings plans (calculable through the end of the June 30, 2002, fiscal year).
ANNUAL COMPENSATION LONG-TERM COMPENSATION AWARDS ----------------------------------------------------------------------- ------------------------- (A) (B) (C) (D) (E) (F) (G) --------------------------- ------ ----------- ----------- ------------ ------------ ------------ NAME AND YEAR SALARY ($) BONUS ($) OTHER RESTRICTED NUMBER OF PRINCIPAL POSITION ANNUAL STOCK OPTIONS/ DURING FY 2002 COMPEN- AWARDS ($) SARS (2) SATION (1) ($) --------------------------- ------ ----------- ----------- ------------ ------------ ------------ Frank E. Holmes 2002 318,280 103,715 68,106(3) 50,000 (4) -- Chairman, Chief Executive 2001 318,280 141,918 64,817 100,000 (4) -- Officer 2000 318,280 58,602 48,640 50,000 (4) -- --------------------------- ------ ----------- ----------- ------------ ------------ ------------ Susan B. McGee 2002 151,610 49,536 -- 5,300 -- President, General Counsel 2001 139,054 46,867 -- -- -- 2000 135,886 55,857 -- -- 15,000 (1) The Company believes that the aggregate amounts of such omitted personal benefits do not exceed the lesser of $50,000 or 10% of the total of annual salary and bonus reported in columns (c) and (d) for the named executive officers. (2) All options pertain to Company class A common stock (3) Includes trustee fees of $38,200 paid by the Company. (4) Includes the board's issuance, in June 1999, of 1,000,000 shares of class C common stock to be vested over a ten-year period beginning with fiscal year 1999, with an annual compensation value of $50,000. Mr. Holmes will be fully vested on June 30, 2008. Issuance was in part to compensate him for his efforts and upon cancellation of Mr. Holmes' warrants and option to acquire 986,122 shares of class C common stock.
INCENTIVE COMPENSATION Executive officers, except Mr. Holmes, participate in a team performance pay program based on each employee's annual salary to recognize monthly completion of departmental goals. Additionally, key executive officers are compensated based on individual performance pay arrangements. 31 PROFIT SHARING PLAN AND 401(K) PLAN In June 1983, the Company adopted a profit sharing plan in which all qualified employees who have completed one year of employment with the Company are included. Subject to board action, the Company may contribute up to 15% of its net income before taxes during each fiscal year, limited to 15% of qualifying salaries, to a profit sharing plan, the beneficiaries of which are the eligible employees of the Company. The Company's contribution to the plan is then apportioned to each employee's account in the plan in an amount equal to the percentage of the total basic compensation paid to all eligible employees, which each employee's individual basic compensation represents. For the fiscal year ended June 30, 2002, the Company did not contribute to the profit sharing plan. The Company adopted a 401(k) plan in October 1990 for the benefit of all employees. The Company will match a certain percentage of a participating employee's pay deferment. The Company contributes to participants' accounts at the same time that the employee's pay deferral is made. Effective January 1, 2002, the profit sharing plan and 401(k) plan were merged to provide a more efficient manner of administration. There were no other material changes in plan. SAVINGS PLANS The Company has continued the program pursuant to which it offers employees, including its executive officers, an opportunity to participate in savings programs using managed investment companies, which essentially all such employees accepted. Limited employee contributions to an Individual Retirement Account are matched by the Company. Similarly, certain employees may contribute monthly to the Tax Free Fund, and the Company will match these contributions on a limited basis. A similar savings plan utilizing UGMA accounts is offered to employees to save for their children's education. STOCK OPTION PLANS In March 1985, the board of directors of the Company adopted an Incentive Stock Option Plan (1985 Plan), giving certain executives and key salaried employees of the Company and its subsidiaries options to purchase shares of the Company's class A common stock. The 1985 Plan was amended on November 7, 1989 and December 6, 1991. In December 1991, it was amended to provide provisions to cause the plan and future grants under the plan to qualify under the Securities Exchange Act of 1934 (1934 Act) Rule 16b-3. As of June 30, 2002, under this plan, 202,500 options were granted, 88,000 options had been exercised, 112,000 options had expired, and 2,500 options remained outstanding. The 1985 Plan, as amended, terminated on December 31, 1994. In November 1989 the board of directors adopted the 1989 Non-Qualified Stock Option Plan (1989 Plan) which provides for the granting of options to purchase shares of the Company's class A common stock to directors, officers and employees of the Company and its subsidiaries. On December 6, 1991, shareholders approved and amended the 1989 Plan to provide provisions to cause the plan and future grants under the plan to qualify under 1934 Act Rule 16b-3. The 1989 Plan is administered by a committee consisting of three outside members of the board of directors. The maximum number of shares of class A common stock initially approved for issuance under the 1989 Plan is 800,000 shares. During the fiscal year ended June 30, 2002, there were no grants. As of June 30, 2002, under this amended plan, 876,700 options had been granted, 403,000 options had been exercised, 422,200 options had expired, and 51,500 options remained outstanding. In April 1997, the board of directors adopted the 1997 Non-Qualified Stock Option Plan (1997 Plan), which shareholders approved on April 25, 1997. It provides for the granting of stock appreciation rights (SARs) and/or options to purchase shares of the Company's class A common stock to directors, officers, and employees of the Company and its subsidiaries. The 1997 Plan expressly requires that all grants under the plan qualify under 1934 Act Rule 16b-3. The 1997 Plan is administered by a committee consisting of three outside members of the board of directors. The maximum number of shares of class A common stock initially approved for issuance under the 1997 Plan is 200,000 shares. During the fiscal year ended June 30, 2002, there were no options granted. As of June 30, 2002, 240,500 options had been granted; 8,000 shares had been exercised; 107,000 options had expired; 125,500 options remained outstanding. 32 Shares available for stock option grants under the 1989 Plan and the 1997 Plan aggregate to approximately 345,500 and 66,500 shares, respectively, on September 20, 2002. The following table shows, as to each officer of the Company listed in the cash compensation table, grants of stock options and freestanding stock appreciation rights made during the last fiscal year.
OPTION/SAR GRANTS IN LAST FISCAL YEAR ------------------------------------------------------------------------------------------------- INDIVIDUAL GRANTS POTENTIAL REALIZED VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE APPRECIATION FOR OPTION TERM ------------------------------------------------------------------------------ ------------------ (A) (B) (C) (D) (E) (F) (G) ------------------- --------------- ---------------- ------------- ----------- -------- --------- NUMBER OF % OF TOTAL SECURITIES OPTIONS/SARS EXERCISE OF NAME UNDERLYING GRANTED TO BASE PRICE EXPIRATION 5% ($) 10% ($) OPTIONS/SARS EMPLOYEES IN ($/SH) DATE GRANTED FISCAL YEAR ------------------- --------------- ---------------- ------------- ----------- -------- --------- Frank E. Holmes 0/0 0/0 0 N/A 0 0 Susan B. McGee 0/0 0/0 0 N/A 0 0
The following table shows, as to each of the officers of the Company listed in the cash compensation table, aggregated option exercises during the last fiscal year and fiscal year-end option values.
(A) (B) (C) (D) (E) ----------------------- ------------------ ------------- ------------------- -------------------- NUMBER OF VALUE OF SECURITIES UNDERLYING UNEXERCISED UNEXERCISED IN-THE-MONEY OPTIONS/SARS OPTIONS/SARS AT FY END AT FY END (%) -------------------------------------------------------- ------------------- -------------------- NAME NUMBER OF VALUE EXERCISABLE/ EXERCISABLE/ SHARES REALIZED UNEXERCISABLE UNEXERCISABLE ACQUIRED ON EXERCISE ----------------------- ------------------ ------------- ------------------- -------------------- Frank E. Holmes 0 0 1,000/0 $0/$0 Susan B. McGee 0 0 51,000/0 $0/$0
COMPENSATION OF DIRECTORS The Company may grant nonemployee directors options under the Company's 1989 and 1997 Stock Option Plans. Their compensation is subject to a minimum of $3,000 in any quarter paid in advance. During the fiscal year ended June 30, 2002, the nonemployee directors each received cash compensation of $12,000. Directors are reimbursed for reasonable travel expenses incurred in attending the meetings held by the board of directors. REPORT ON EXECUTIVE COMPENSATION The board appointed Messrs. Holmes, Terracina, and Rubinstein as members of the Executive Compensation Committee during fiscal year 1997, and they continue to serve on the committee. The board appointed Mr. Lydon to the Executive Compensation Committee during fiscal year 2002. There are no compensation committee interlocks to report. Mr. Holmes served as an employee and officer of the Company. The board of directors reviews Mr. Holmes' compensation annually to determine an 33 acceptable base compensation, reflecting an amount competitive with industry peers and taking into account the relative cost of living in San Antonio, Texas. The board of directors also reviews Mr. Holmes' performance in managing the Company's securities portfolio with respect to which he is paid a cash bonus, which bonus is paid periodically throughout the year. During fiscal year 1999, Mr. Holmes, in addition to his other duties, became the Company's chief investment officer responsible for supervising management of clients' portfolios. In August 1999, in part to compensate him for these efforts and upon cancellation of Mr. Holmes' warrants and option to acquire 986,122 shares of class C common stock, the board approved the issuance of 1,000,000 shares of class C common stock to Mr. Holmes to be vested over a ten-year period beginning with fiscal year 1998, with an annual compensation value of $50,000. Mr. Holmes will be fully vested on June 30, 2008. The base pay of the executives is relatively fixed, but the executive has the opportunity to increase his/her compensation by participating directly in retirement and savings programs whereby the Company will contribute amounts relative to the executive's contribution. The Company has utilized option grants under the 1985 Plan, the 1989 Plan, and the 1997 Plan to induce qualified individuals to join the Company with a base pay consistent with the foregoing, thereby providing the individual with an opportunity to benefit if there is significant Company growth. Similarly, options have been utilized to reward existing employees for long and faithful service and to encourage them to stay with the Company. Mr. Rubinstein is the sole member of the Stock Option Committee of the board of directors. This committee acts upon recommendations of the Chief Executive Officer. COMPANY PERFORMANCE PRESENTATION [GRAPHIC: Graph plotted from data points in following chart] S&P 500 RUSSELL FT GOLD U.S. TOTAL 2000 MINES GLOBAL RETURN TOTAL INDEX INVESTORS INDEX RETURN (PRICE CLASS INDEX RETURN A ONLY) ------ ------ ------ ------ 6/30/1997 10,000 10,000 10,000 10,000 7/31/1997 10,796 10,465 10,153 11,875 8/31/1997 10,191 10,705 10,137 12,188 9/30/1997 10,749 11,488 10,949 10,938 10/31/1997 10,390 10,984 8,914 10,938 11/30/1997 10,871 10,913 7,019 11,250 12/31/1997 11,058 11,104 7,598 9,375 1/31/1998 11,180 10,928 8,026 10,000 2/28/1998 11,986 11,736 7,733 11,875 3/31/1998 12,600 12,220 8,221 13,125 4/30/1998 12,727 12,288 9,322 12,813 5/31/1998 12,508 11,626 7,805 11,250 6/30/1998 13,016 11,651 7,135 10,000 7/31/1998 12,878 10,708 6,466 8,125 8/31/1998 11,016 8,628 5,037 7,188 9/30/1998 11,722 9,304 7,904 7,813 10/31/1998 12,675 9,683 7,992 6,563 11/30/1998 13,443 10,190 7,575 7,813 12/31/1998 14,218 10,821 6,709 7,813 1/31/1999 14,812 10,965 6,692 8,125 2/28/1999 14,352 10,077 6,256 10,313 3/31/1999 14,926 10,234 6,239 7,500 4/30/1999 15,504 11,151 7,309 6,875 5/31/1999 15,138 11,314 5,947 7,188 6/30/1999 15,978 11,826 6,354 6,250 7/31/1999 15,479 11,501 6,064 6,875 8/31/1999 15,403 11,075 6,447 7,188 9/30/1999 14,981 11,078 8,108 7,500 10/31/1999 15,928 11,123 7,034 8,125 11/30/1999 16,252 11,787 6,721 7,500 12/31/1999 17,209 13,121 6,665 7,500 1/31/2000 16,345 12,910 5,882 8,125 2/29/2000 16,035 15,042 6,067 10,938 3/31/2000 17,604 14,051 5,612 8,125 4/30/2000 17,075 13,205 5,430 7,500 5/31/2000 16,724 12,435 5,594 8,438 6/30/2000 17,137 13,519 5,797 8,750 7/31/2000 16,869 13,085 5,232 8,438 8/31/2000 17,916 14,083 5,297 7,813 9/30/2000 16,971 13,669 5,016 7,500 10/31/2000 16,899 13,059 4,252 7,032 11/30/2000 15,566 11,718 4,485 5,625 12/31/2000 15,643 12,725 4,908 5,313 1/31/2001 16,198 13,387 4,792 5,625 2/28/2001 14,721 12,509 5,132 6,094 3/31/2001 13,788 11,897 4,627 5,938 4/30/2001 14,860 12,828 5,394 5,750 5/31/2001 14,959 13,143 5,579 5,250 6/30/2001 14,595 13,597 5,574 5,350 7/31/2001 14,451 12,861 5,441 5,250 8/31/2001 13,547 12,445 5,789 5,000 9/30/2001 12,453 10,770 6,315 4,500 10/31/2001 12,690 11,400 6,040 4,750 11/30/2001 13,664 12,283 5,798 4,850 12/31/2001 13,783 13,041 6,021 5,250 1/31/2002 13,582 12,905 6,881 5,350 2/28/2002 13,320 12,552 7,564 5,900 3/31/2002 13,821 13,561 8,340 9,000 4/30/2002 12,983 13,684 8,895 10,750 5/31/2002 12,888 13,077 10,192 11,945 6/30/2002 11,970 12,428 8,730 10,000 The graph above compares the cumulative total return for the Company's class A common stock to the cumulative total return for the Financial Times Gold Mines Index (without dividend reinvestment), S&P 500 Composite Index, and Russell 2000 Index for the Company's last five fiscal years. The graph assumes an investment of $10,000 in the class A common stock and in each index as of June 30, 1997, and that all dividends are reinvested. Due to the branding of and leverage in cash flows from the Company's gold products, the Company's shares appear to highly correlate with the Financial Times Gold Mines Index. 34 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS CLASS C COMMON STOCK (VOTING STOCK) On October 7, 2002, there were 1,496,800 shares of the Company's class C common stock outstanding. The following table sets forth, as of such date, information regarding the beneficial ownership of the Company's class C common stock by each person known by the Company to own 5% or more of the outstanding shares of class C common stock.
NAME AND ADDRESS OF BENEFICIAL OWNER CLASS C COMMON PERCENT OF SHARES BENEFICIALLY OWNED CLASS (%) ---------------------------------------- -------------------- ---------------- Frank E. Holmes 1,392,211 (1) 93.01% 7900 Callaghan Road San Antonio, TX 78229 ---------------------- (1) Includes 1,000,000 shares of class C common stock issued to Mr. Holmes that will be vested in equal amounts over a ten-year period and will be fully vested on June 30, 2008, 102,280 shares owned by F. E. Holmes Organization Inc., 285,000 shares owned directly by Mr. Holmes, and 4,931 shares owned by Mr. Holmes in an IRA.
CLASS A COMMON STOCK (NONVOTING STOCK) On October 7, 2002, there were 5,979,202 shares of the Company's class A common stock issued and outstanding. The following table sets forth, as of such date, information regarding the beneficial ownership of the Company's class A common stock by each person known by the Company to own 5% or more of the outstanding shares of class A common stock.
NAME AND ADDRESS OF BENEFICIAL OWNER CLASS A COMMON PERCENT OF SHARES BENEFICIALLY OWNED CLASS (%) ------------------------------------------------------------- ------------------- --------------- Royce & Associates, Inc. - New York, New York (1) 886,305(1) 14.82% (1) Information is from Schedule 13F for period ending June 30, 2002, filed with the SEC August 8, 2002.
SECURITY OWNERSHIP OF MANAGEMENT The following table sets forth, as of October 7, 2002, information regarding the beneficial ownership of the Company's class A and class C common stock by each director and by all directors and executive officers as a group. Except as otherwise indicated in the notes below, each director owns directly the number of shares indicated in the table and has sole voting power and investment power with respect to all such shares.
CLASS C CLASS A COMMON STOCK COMMON STOCK -------------------------------------------------- ------------------------ --------------------- BENEFICIAL OWNER NUMBER % NUMBER % OF OF SHARES SHARES -------------------------------------------------- -------------- --------- ------------- ------- Frank E. Holmes 1,392,211(1) 93.01% 248,612 4.15% Thomas F. Lydon, Jr. -- -- 10,000 0.17% 35 Susan B. McGee -- -- 61,757 1.03% Jerold H. Rubinstein -- -- 50,000(3) 0.83% Roy D. Terracina -- -- 89,100(3) 1.49% All directors and executive officers as a group 1,392,211 93.01% 459,469 7.68% (five persons) ------------------------ (1) Includes 1,000,000 shares of class C common stock issued to Mr. Holmes that will be vested in equal amounts over a period of ten years and will be fully vested on June 30, 2008, 102,280 shares owned by F. E. Holmes Organization Inc., 285,000 shares owned directly by Mr. Holmes, and 4,931 shares owned by Mr. Holmes in an IRA. (2) Includes options to obtain 1,000 shares of class A common stock, 100,000 shares of class A common stock held by F.E. Holmes Organization, Inc., a corporation wholly owned by Mr. Holmes, 81,495 shares owned directly by Mr. Holmes, 64,817 shares owned by Mr. Holmes in retirement accounts, and 1,300 shares of class A common stock owned separately by Mr. Holmes' wife. Mr. Holmes disclaims beneficial ownership of these 1,300 shares of class A common stock. (3) Includes shares of class A common stock underlying presently exercisable options held directly by each individual as follows: Mr. Lydon - 10,000 shares; Ms. McGee - 51,500 shares; Mr. Rubinstein - 10,000 shares; and Mr. Terracina - 51,000 shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS U.S. Global is invested in several of the mutual funds it manages. There is incorporated in this Item 13 those items appearing under Note 14 to the Consolidated Financial Statements and filed as a part of this report. Mr. Holmes received bonus advances for improvements in fund performance, in particular the gold funds. The amount of these advances at June 30, 2002 was $76,651, and this amount has been repaid from bonuses paid after June 30, 2002. Additionally, Mr. Holmes had an outstanding payable of $43,567 which has been settled subsequent to June 30, 2002. 36 PART IV OF ANNUAL REPORT ON FORM 10-K ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: 1. FINANCIAL STATEMENTS The Consolidated Financial Statements including: o Report of Independent Accountants o Consolidated Statements of Financial Condition as of at June 30, 2002 and 2001 o Consolidated Statements of Operations and Comprehensive Income (Loss) for the three years ended June 30, 2002 o Consolidated Statements of Shareholders' Equity for the three years ended June 30, 2002 o Consolidated Statements of Cash Flows for the three years ended June 30, 2002 o Notes to Consolidated Financial Statements 2. FINANCIAL STATEMENT SCHEDULES None. 3. EXHIBITS 3.1 Third Restated and Amended Articles of Incorporation of Company, incorporated by reference to the Company's Form 10-K for the fiscal year ended June 30, 1996 (EDGAR Accession Number 0000754811-96-000025). 3.2 By-Laws of Company, incorporated by reference to Exhibit D of the Company's Registration Statement No. 33-33012 filed on Form S-8 with the Commission on January 30, 1990, as amended (EDGAR Accession Number 0000754811-00-000017). 10.1 Advisory Agreement dated October 27, 1989, by and between Company and United Services Funds, incorporated by reference to Exhibit (4)(b) of the Company's Form 10-K for fiscal year ended June 30, 1990 (EDGAR Accession No. 0000101507-99-000019). 10.2 Advisory Agreement dated September 21, 1994, by and between Company and Accolade Funds, incorporated by reference to Exhibit 10.2 of Company's Form 10-K for fiscal year ended June 30, 1995 (EDGAR Accession Number 0000754811-95-000002). 10.3 Sub-Advisory Agreement dated September 21, 1994, by and between Company, Accolade Funds/Bonnel Growth Fund and Bonnel, Inc., incorporated by reference to Exhibit 10.3 of Company's Form 10-K for fiscal year ended June 30, 1995 (EDGAR Accession Number 0000754811-95-000002). 37 10.4 Sub-Advisory Agreement dated November 15, 1996, by and between Company, U.S. Global Accolade Funds/MegaTrends Fund, and Money Growth Institute, Inc., incorporated by reference to Post-Effective Amendment No. 5 to Registration Statement on Form N-1A dated June 21, 1996 (EDGAR Accession No. 0000902042-96-000046). 10.5 Sub-Advisory Agreement dated January 25, 2002, by and between Company, U.S. Global Accolade Funds/ Eastern European Fund, and Charlemagne Capital Limited, included herein. 10.6 Transfer Agency Agreement dated December 15, 2000, by and between United Shareholder Services, Inc. and U.S. Global Accolade Funds incorporated by reference to Post-Effective Amendment No. 18 to Registration Statement on Form N-1A dated February 28, 2001 (EDGAR Accession No. 0000902042-01-500005). 10.7 Transfer Agency Agreement dated February 21, 2001, by and between United Shareholder Services, Inc. and U.S. Global Investors Funds, incorporated by reference to Annual Report on Form 10-K for fiscal year ended June 30, 2001 (EDGAR Accession No. 0000754811-01-500016). 10.8 Loan Agreement between Company and Bank One NA, dated February 1, 2001, for refinancing building, incorporated by reference to Annual Report on Form 10-K for fiscal year ended June 30, 2001 (EDGAR Accession No. 0000754811-01-500016). 10.9 United Services Advisors, Inc. 1985 Incentive Stock Option Plan as amended November 1989 and December 1991, incorporated by reference to Exhibit 4(b) of the Company's Registration Statement No. 33-3012, Post-Effective Amendment No. 2, filed on Form S-8 with the Commission on April 23, 1997 (EDGAR Accession No. 0000754811-97-000004). 10.10 United Services Advisors, Inc. 1989 Non-Qualified Stock Option Plan, incorporated by reference to Exhibit 4(a) of the Company's Registration Statement No. 33-3012, Post-Effective Amendment No. 2, filed on Form S-8 with the Commission on April 23, 1997 (EDGAR Accession No. 0000754811-97-000004). 10.11 U.S. Global Investors, Inc. 1997 Non-Qualified Stock Option Plan, incorporated by reference to Exhibit 4 of the Company's Registration Statement No. 333-25699 filed on Form S-8 with the Commission on April 23, 1997 (EDGAR Accession No. 0000754811-97-000003). 10.12 Custodian Agreement dated November 1, 1997, between U.S. Global Investors Funds and Brown Brothers Harriman & Co. incorporated by reference to Post-Effective Amendment No. 82 to Registration Statement on Form N-1A dated September 2, 1998 (EDGAR Accession No. 0000101507-98-000031). 10.13 Amendment dated June 30, 2001, to Custodian Agreement dated November 1, 1997, between U.S. Global Investors Funds and Brown Brothers Harriman & Co., incorporated by reference to Annual Report on Form 10-K for fiscal year ended June 30, 2001 (EDGAR Accession No. 0000754811-01-500016). 10.14 Appendix A to Custodian Agreement dated November 1, 1997, between U.S. Global Investors Funds and Brown Brothers Harriman & Co., incorporated by reference to Annual Report on Form 10-K for fiscal year ended June 30, 2001 (EDGAR Accession No. 0000754811-01-500016). 10.15 Amendment dated February 21, 2001, to Appendix B of the Custodian Agreement dated November 1, 1997, between U.S. Global Investors Funds and Brown Brothers Harriman & Co., incorporated by reference to Annual Report on Form 10-K for fiscal year ended June 30, 2001 (EDGAR Accession No. 0000754811-01-500016). 38 10.16 Custodian Agreement dated November 1, 1997, between U.S. Global Accolade Funds and Brown Brothers Harriman & Co. incorporated by reference to Post-Effective Amendment No. 13 to Registration Statement on Form N-1A dated January 29, 1998 (EDGAR Accession No. 0000902042-98-000006). 10.17 Amendment dated May 14, 1999, to Custodian Agreement dated November 1, 1997, between U.S. Global Accolade Funds and Brown Brothers Harriman & Co. incorporated by reference to Post-Effective Amendment No. 16 to Registration Statement on Form N-1A dated February 29, 1999 (EDGAR Accession No. 0000902042-99-000004). 10.18 Amendment dated June 30, 2001, to Custodian Agreement dated November 1, 1997, between U.S. Global Accolade Funds and Brown Brothers Harriman & Co., incorporated by reference to Annual Report on Form 10-K for fiscal year ended June 30, 2001 (EDGAR Accession No. 0000754811-01-500016). 10.19 Appendix A to Custodian Agreement dated November 1, 1997, between U.S. Global Accolade Funds and Brown Brothers Harriman & Co., incorporated by reference to Annual Report on Form 10-K for fiscal year ended June 30, 2001 (EDGAR Accession No. 0000754811-01-500016). 10.20 Amendment dated February 16, 2001, to Appendix B of the Custodian Agreement dated November 1, 1997, between U.S. Global Accolade Funds and Brown Brothers Harriman & Co. incorporated by reference to Post-Effective Amendment No. 18 to Registration Statement on Form N-1A dated February 28, 2001 (EDGAR Accession No. 0000902042-01-500005). 10.21 Distribution Agreement by and between U.S. Global Brokerage, Inc. and U.S. Global Accolade Funds dated September 3, 1998, incorporated by reference to Exhibit 10.12 of Company's Form 10-K for fiscal year ended June 30, 1998 (EDGAR Accession Number 0000754811-98-000009). 10.22 Distribution Agreement by and between U.S. Global Brokerage, Inc. and U.S. Global Investors Funds dated September 3, 1998, incorporated by reference to Exhibit 10.13 of Company's Form 10-K for fiscal year ended June 30, 1998 (EDGAR Accession Number 0000754811-98-000009). 11 Statement regarding Computation of Per Share Earnings, included herein. 21 List of Subsidiaries of the Company, included herein. 24 Power of Attorney, incorporated by reference to Annual Report on Form 10-K for fiscal year ended June 30, 2001 (EDGAR Accession No. 0000754811-01-500016). (b) Reports on Form 8-K None. 39 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. U.S. GLOBAL INVESTORS, INC. BY: /S/ FRANK E. HOLMES ----------------------------------------------------------- FRANK E. HOLMES Date: October 15, 2002 Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE CAPACITY IN WHICH SIGNED DATE /S/ FRANK E. HOLMES -------------------------------- FRANK E. HOLMES Chairman of the Board of Directors October 15, 2002 Chief Executive Officer Chief Investment Officer * /s/ Thomas F. Lydon, Jr. -------------------------------- THOMAS F. LYDON, JR. Director October 15, 2002 * /s/ Jerold H. Rubinstein -------------------------------- JEROLD H. RUBINSTEIN Director October 15, 2002 * /s/ Roy D. Terracina -------------------------------- ROY D. TERRACINA Director October 15, 2002 /S/ TRACY C. PETERSON -------------------------------- TRACY C. PETERSON Chief Financial Officer October 15, 2002 *BY: /S/ SUSAN B. MC GEE -------------------------------- Susan B. McGee October 15, 2002 Attorney-in-Fact under Power of Attorney dated September 26, 2001
40 CERTIFICATIONS I, Frank E. Holmes, certify that: 1. I have reviewed this annual report on Form 10-K of U.S. Global Investors, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report. Date: October 15, 2002 /S/ FRANK E. HOLMES ---------------------------- Frank E. Holmes Chairman of the Board, Chief Executive Officer ================================================================================ I, Tracy C. Peterson, certify that: 1. I have reviewed this annual report on Form 10-K of U.S. Global Investors, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report. Date: October 15, 2002 /S/ TRACY C. PETERSON ----------------------------- Tracy C. Peterson Chief Financial Officer 41 EX-10 3 ex10-5.txt SUBADVISORY AGREEMENT SUBADVISORY AGREEMENT AGREEMENT made as of the 25th day of January 2002 between U.S. GLOBAL INVESTORS, INC., a corporation organized under the laws of the State of Texas ("Adviser"), U.S. GLOBAL ACCOLADE FUNDS, a Massachusetts business trust having its principal place of business in San Antonio, Texas ("Trust"), on behalf of the Regent Eastern European Fund ("Fund"), a series of shares of the Trust, and CHARLEMAGNE CAPITAL LIMITED ("Subadviser"), a corporation organized under the laws of the Cayman Islands. WHEREAS, the Adviser is engaged in the business of rendering investment management services to the Trust; and WHEREAS, the Trust is an open-end management investment company and is so registered under the Investment Company Act of 1940 ("1940 Act"); and WHEREAS, the Trust is operated as a "series company" within the meaning of Rule 18f-2 under the 1940 Act and has separate series of shares of beneficial interest, one of which series is the Fund. NOW, THEREFORE, WITNESSETH: That it is hereby agreed between the parties hereto as follows: 1. APPOINTMENT OF SUBADVISER The Subadviser is hereby appointed to provide investment advisory services to the Fund for the period and on the terms herein set forth. The Subadviser accepts such appointment and agrees to render the services herein set forth, for the compensation herein provided. To enable the Subadviser to exercise fully its discretion and authority as provided in this Section 1, the Trust hereby constitutes and appoints the Subadviser as the Trust's agent and attorney-in-fact with full power and authority for the Trust and on the Trust's behalf to buy, sell, and otherwise deal in securities and contracts relating to same for the Fund. 2. DUTIES OF SUBADVISER (a) The Subadviser is hereby authorized and directed and hereby agrees, subject to the stated investment objectives and policies of the Fund as set forth in the Fund's Prospectus (as defined below) and subject to the supervision of the Adviser and the Board of Trustees of the Trust, (i) to develop, recommend and implement such investment program and strategy for the Fund as may from time to time under the circumstances appears most appropriate to the achievement of the investment objective of the Fund as stated in the aforesaid Prospectus, (ii) to provide research and analysis relative to the investment program and investments of the Fund, (iii) to determine which securities should be purchased and sold and what portion of the assets of the Fund should be held in cash or cash equivalents, and (iv) to monitor on a continuing basis the performance of the portfolio securities of the Fund. The Subadviser will advise the Trust's custodian and the Adviser on a prompt basis of each purchase and sale of a portfolio security specifying the name of the issuer, the description and amount or number of shares of the security purchased, the market price, commission and gross or net price, trade date, settlement date and identity of the effecting broker or dealer; and will review the accuracy of the pricing of portfolio securities in accordance with Trust procedures. From time to time, as the Trustees of the Trust or the SUBADVISORY AGREEMENT - CHARLEMAGNE CAPITAL LIMITED DATED JANUARY 25, 2002 PAGE 2 OF 7 Adviser may reasonably request, the Subadviser will furnish to the Trust's officers and to each of its Trustees reports on portfolio transactions and reports on issues of securities held in the portfolio, all in such detail as the Trust or the Adviser may reasonably request. The Subadviser will also inform the Trust's officers and Trustees on a current basis of changes in investment strategy or tactics. The Subadviser will make its officers and employees available to meet with the Trust's officers and Trustees on due notice to review the investments and investment program of the Fund in the light of current and prospective economic and market conditions. The Subadviser shall place all orders for the purchase and sale of portfolio securities for the account of the Fund with brokers or dealers selected by the Subadviser, although the Trust will pay the actual brokerage commissions and any transfer taxes with respect to transactions in the portfolio securities of the Trust. The Subadviser is authorized to submit any such order collectively with orders on behalf of other accounts under its management, provided that the Subadviser shall have determined that such action is in the best interest of the Fund and is in accordance with applicable law, including, without limitation, Rule 17d-1 under the 1940 Act. In executing portfolio transactions and selecting brokers or dealers, the Subadviser will use its best efforts to seek on behalf of the Fund the best overall terms available. In assessing the best overall terms available for any transaction, the Subadviser shall consider all factors it deems relevant, including the breadth of the market in the security, the price of the security, the financial condition and execution capability of the broker or dealer, and the reasonableness of the commission, if any (for the specific transaction and on a continuing basis). In evaluating the best overall terms available, and in selecting the broker or dealer to execute a particular transaction, the Subadviser may also consider the brokerage and research services [as those terms are defined in Section 28(e) of the Securities Exchange Act of 1934] provided to the Fund and/or other accounts over which the Subadviser or an affiliate of the Subadviser exercises investment discretion. The Subadviser is authorized to pay to a broker or dealer who provides such brokerage and research services a commission for executing a portfolio transaction for the Fund which is in excess of the amount of commission another broker or dealer would have charged for effecting that transaction if, but only if, the Subadviser determines in good faith that such commission was reasonable in relation to the value of the brokerage and research services provided by such broker or dealer, viewed in terms of that particular transaction or in terms of all of the accounts over which investment discretion is so exercised. An affiliated person of the Subadviser may provide brokerage services to the Fund provided that the Subadviser shall have determined that such action is consistent with its obligation to seek the best overall terms available and is in accordance with applicable law, including, without limitation, Section 17(e) of the 1940 Act. The foregoing shall not be deemed to authorize an affiliated person of the Subadviser to enter into transactions with the Fund as principal. In the performance of its duties hereunder, the Subadviser is and shall be an independent contractor and unless otherwise expressly provided or authorized shall have no authority to act for or represent the Trust in any way or otherwise be deemed to be an agent of the Trust or of the Adviser. (b) DELIVERY OF DOCUMENTS. The Adviser will furnish upon request or has previously furnished the Subadviser with true copies of each of the following: SUBADVISORY AGREEMENT - CHARLEMAGNE CAPITAL LIMITED DATED JANUARY 25, 2002 PAGE 3 OF 7 (i) The Trust's Master Trust Agreement dated April 15, 1993 as filed with the Secretary of State of the Commonwealth of Massachusetts and all amendments thereto (such Master Trust Agreement, as presently in effect and as it shall from time to time be amended, is herein called the "Master Trust Agreement"); (ii) The Trust's By-Laws and amendments thereto (such By-Laws, as presently in effect and as it shall from time to time be amended, are herein called the "By-Laws"); (iii) Resolutions of the Trust's Board of Trustees authorizing the appointment of the Adviser and Subadviser and approving the Advisory Agreement and this Agreement; (iv) The most recent Post-Effective Amendment to the Trust's Registration Statement on Form N-1A under the Securities Act of 1933 as amended ("1933 Act") and the 1940 Act as filed with the Securities and Exchange Commission; (v) The Fund's most recent prospectus (such prospectus, as presently in effect and all amendments and supplements thereto being referred to herein as the "Prospectus"); and (vi) All resolutions of the Board of Trustees of the Trust pertaining to the management of the assets of the Fund. During the term of this Agreement, the Adviser shall not use or implement any amendment or supplement that relates to or affects the obligations of the Subadviser hereunder if the Subadviser reasonably objects in writing within five business days after delivery thereof (or such shorter period of time as the Adviser shall specify upon delivery, if such shorter period of time is reasonable under the circumstances). 3. ADVISORY FEE (a) For the services to be provided to the Fund by the Subadviser as provided in Paragraph 2 hereof, the Adviser will pay the Subadviser in accordance with the following: (i) The Fund will pay a one and one quarter percent (1.25%) annual management fee to the Adviser. The Adviser will pay to the Subadviser fifty percent (50%) of the management fee received net of all waivers and reimbursements. (ii) The Fund is not responsible for paying any portion of the Subadviser's fees. (iii) The fee is payable in monthly installments in arrears. The "Management Fee" means the management fee paid by the Trust to the Adviser under the Addendum to the Advisory Agreement, dated as of February 28, 1997, between the Trust and the Adviser with respect to the management of the Fund. SUBADVISORY AGREEMENT - CHARLEMAGNE CAPITAL LIMITED DATED JANUARY 25, 2002 PAGE 4 OF 7 (b) In the case of termination of the Agreement during any calendar month, the fee with respect to that month shall be reduced proportionately based upon the number of calendar days during which it is in effect and the fee shall be computed upon the average net assets of the Fund for the days during which it is so in effect. (c) The "Monthly Average Net Assets" of the Fund for any calendar month shall be equal to the quotient produced by dividing (i) the sum of the net assets of the Fund, determined in accordance with procedures established from time to time by or under the direction of the Board of Trustees of the Trust in accordance with the Master Trust Agreement, as of the close of business on each day during such month that the Fund was open for business, by (ii) the number of such days. 4. EXPENSES During the term of this Agreement, the Subadviser will bear all expenses incurred by it in the performance of its duties hereunder. 5. FUND TRANSACTIONS The Subadviser agrees that neither it nor any of its employees, officers, or directors will take any short-term position in the shares of the Fund for trading purposes provided, however, that such prohibition shall not prevent the purchase of shares of the Fund by any of the persons above described for their account and for investment at the price at which such shares are available to the public at the time of purchase. 6. REPRESENTATION aND WARRANTY The Subadviser hereby represents and warrants to the Adviser that it is duly registered as an investment Adviser, or is exempt from registration, under the Investment Adviser's Act of 1940, as amended, and that it shall maintain such registration or exemption at all times during which this Agreement is in effect. 7. LIABILITY OF SUBADVISER In the performance of its duties under this Agreement, the Subadviser shall act in conformity with and in compliance with the requirements of the 1940 Act and all other applicable U.S. Federal and state laws and regulations and shall not cause the Fund to take any action that would require the Fund or any affiliated person thereof to register as a commodity pool operator under the terms of the U.S. Commodity Exchange Act, as amended (it being understood by the Subadviser that a notice of eligibility may be filed on behalf of the Trust pursuant to Rule 4.5 promulgated under said Act). The Subadviser shall be responsible for maintaining such procedures as may be reasonably necessary to ensure that the investment and reinvestment of the Fund's assets are made in compliance with its investment objectives and policies and with all applicable statutes and regulations and that the Fund qualifies as a regulated investment company under Subchapter M of the Internal Revenue Code. No provision of this Agreement shall be deemed to protect the Subadviser against any liability to the Trust or its shareholders to which it might otherwise be SUBADVISORY AGREEMENT - CHARLEMAGNE CAPITAL LIMITED DATED JANUARY 25, 2002 PAGE 5 OF 7 subject by reason of any willful misfeasance, bad faith, or gross negligence in the performance of its duties or the reckless disregard of its obligations and duties under this Agreement. 8. REPORTS The Subadviser shall render to the Board of Trustees of the Trust such periodic and special reports as the Board of Trustees may reasonably request with respect to matters relating to duties of the Subadviser set forth herein. 9. DURATION aND TERMINATION OF THIS AGREEMENT (a) DURATION. With respect to the Trust, this Agreement shall become effective upon the date hereof and shall continue in full force and effect through May 31, 2002, and from year to year thereafter so long as such continuance is approved at least annually (i) by either the Trustees of the Trust or by vote of a majority of the outstanding voting securities (as defined in the 1940 Act) of the Fund, and (ii) in either event by the vote of a majority of the Trustees of the Trust who are not parties to this Agreement or "interested persons" (as defined in the 1940 Act) of any such party, cast in person at a meeting called for the purpose of voting on such approval. (b) TERMINATION. With respect to the Trust, this Agreement may be terminated at any time, without payment of any penalty (i) by vote of the Trustees of the Trust or by vote of a majority of the outstanding voting securities of the Fund (as defined in the 1940 Act) on sixty (60) days' written notice to the other parties, (ii) by the Adviser on sixty (60) days' written notice to the other parties or, (iii) by the Subadviser on ninety (90) days' written notice to the other parties. (c) AUTOMATIC TERMINATION. With respect to the Trust, this Agreement shall automatically and immediately terminate in the event of its assignment or upon expiration of the Advisory Agreement now or hereafter in effect between the Adviser and the Trust with respect to the Fund. 10. SERVICES NOT EXCLUSIVE The services of the Subadviser of the Fund hereunder are not to be deemed exclusive, and the Subadviser shall be free to render similar services to others. 11. LIMITATION OF LIABILITY (a) THE TRUST. The term "U.S. Global Accolade Funds" means and refers to the Trustees from time to time serving under the Master Trust Agreement. It is expressly agreed that the obligations of the Trust hereunder shall not be binding upon any of the Trustees, shareholders, nominees, officers, agents, or employees of the Trust, personally, but bind only the assets and property of the Trust, as provided in the Master Trust Agreement. The execution and delivery of the Agreement have been authorized by the Trustees and shareholders of the Trust and signed by an authorized officer of the Trust, acting as such, and neither such authorization by SUBADVISORY AGREEMENT - CHARLEMAGNE CAPITAL LIMITED DATED JANUARY 25, 2002 PAGE 6 OF 7 such Trustees and shareholders nor such execution and delivery by such officer shall be deemed to have been made by any of them individually or to impose any liability on any of them personally, but shall bind only the assets and property of the Trust as provided in its Master Trust Agreement. (b) THE ADVISER AND SUBADVISER. It is expressly agreed that the obligations of the Adviser and Subadviser hereunder shall not be binding upon any of the shareholders, nominees, officers, agents, or employees of the Adviser or Subadviser, personally, but bind only the assets and property of the Adviser and Subadviser, respectively. The execution and delivery of the Agreement have been authorized by the directors and officers of the Adviser and Subadviser and signed by an authorized officer of the Adviser and Subadviser, acting as such, and neither such authorization by such directors and officers nor such execution and delivery by such officer shall be deemed to have been made by any of them individually or to impose any liability on any of them personally, but shall bind only the assets and property of the Adviser and Subadviser, respectively. This limitation of liability shall not be deemed to protect the shareholders, nominees, officers, agents, or employees of the Adviser and Subadviser against any liability to the Trust or its shareholders to which they might otherwise be subject by reason of any willful misfeasance, bad faith, or gross negligence in the performance of their duties or the reckless disregard of their obligations and duties under this Agreement. 12. MISCELLANEOUS. (a) NOTICE. Any notice under this Agreement shall be in writing, addressed and delivered or mailed, postage prepaid, to the other parties at such address as such other parties may designate in writing for the receipt of such notices. (b) SEVERABILITY. If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule, or otherwise, the remainder shall not be thereby affected. (c) APPLICABLE LAW. This Agreement shall be construed in accordance with and governed by the laws of the State of Texas. (d) This Agreement constitutes the entire agreement of the parties and supersedes all prior or contemporaneous written or oral negotiations, correspondence, agreements, and understandings, regarding the subject matter hereof. 13. STANDARD oF CARE To the extent permitted under applicable law (including section 36 of the 1940 Act), the Subadviser will not be liable to the Trust or the Adviser for any losses incurred by the Trust, the Fund or the Adviser that arise out of or are in any way connected with any recommendation or other act or failure to act of the Subadviser under this Agreement, including, but not limited to, any error in judgment with respect to the Fund, so long as such recommendation or other act or failure to act does not constitute a breach of the Subadviser's fiduciary duty to the Trust, the Fund, or the Adviser. Anything in this section 13 or otherwise in this Agreement to the contrary SUBADVISORY AGREEMENT - CHARLEMAGNE CAPITAL LIMITED DATED JANUARY 25, 2002 PAGE 7 OF 7 notwithstanding, however, nothing herein shall constitute a waiver or limitation of any rights that the Trust, the Adviser, or the Fund may have under any Federal or state securities laws. IN WITNESS WHEREOF, the Adviser, the Trust, and the Subadviser have caused this Agreement to be executed on the day and year first above written. U.S. GLOBAL INVESTORS, INC. By: /s/ Susan B. McGee Title: President, General Counsel U.S. GLOBAL ACCOLADE FUNDS By: /s/ Susan B. McGee Title: Executive Vice President CHARLEMAGNE CAPITAL LIMITED By: /s/ J. W. Hemmant Title: Authorised Signatory Compliance Officer EX-11 4 ex11.txt SCHEDULE COMPUTATION NET EARNINGS PER SHARE EXHIBIT 11 -- SCHEDULE OF COMPUTATION OF NET EARNINGS PER SHARE YEAR ENDED JUNE 30, ------------------------------------- 2002 2001 2000 ---------- ---------- ---------- Net income(loss) $ (241,434) $ (794,679) $ 495,758 BASIC Weighted average number of 7,456,181 7,524,913 7,408,821 shares outstanding during the year Basic income (loss) per share: Net income (loss) $ (0.03) $ (0.11) $ 0.07 ========== ========== ========== DILUTED Weighted average number of 7,456,181 7,524,913 7,408,821 shares outstanding during the year Effect of dilutive securities: Common stock equivalent shares (determined using the "treasury stock" method representing shares issuable upon exercise of common stock options -- -- 2,278 ---------- ---------- ---------- Weighted average number of shares used in calculation of diluted earnings per 7,456,181 7,524,913 7,411,099 share ========== =========== ========== Diluted income (loss) per share: Net income (loss) $ (0.03) $ (0.11) $ 0.07 ========== =========== ========== EX-21 5 ex21.txt SUBSIDIARIES OF CO, JURISDICTION OF INC., & % OF OWNERSHP EXHIBIT 21 - SUBSIDIARIES OF THE COMPANY, JURISDICTION OF INCORPORATION, AND PERCENTAGE OF OWNERSHIP 1. United Shareholder Services, Inc. - incorporated in Texas and wholly owned by the Company 2. A & B Mailers, Inc. - incorporated in Texas and wholly owned by the Company 3. U.S. Global Investors (Guernsey) Limited - incorporated in Guernsey, Channel Islands, and wholly owned by the Company 4. U.S. Global Brokerage, Inc. - incorporated in Texas and wholly owned by the Company 5. iWeblabs, Inc. - incorporated in Texas and wholly owned by the Company -----END PRIVACY-ENHANCED MESSAGE-----