10-K 1 d362239d10k.htm FORM 10-K FORM 10-K
Table of Contents

 

 

UNITED STATES

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, 2012

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

($0.025 par value per share)

Registered: NASDAQ Capital Market

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.

Yes  ¨    No  x

Indicate by check mark whether the Company (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§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.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨

 

Accelerated filer x

 

Non-accelerated filer ¨

 

Small reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes  ¨    No  x

The aggregate market value of the 9,784,696 shares of nonvoting class A common stock held by nonaffiliates of the registrant was $59,001,717, based on the last sale price quoted on NASDAQ as of December 30, 2011, the last business day of the registrant’s most recently completed second fiscal quarter. Registrant’s only voting stock is its class C common stock, par value of $0.025 per share, for which there is no active market. The aggregate value of the 8,483 shares of the class C common stock held by nonaffiliates of the registrant on December 31, 2011 (based on the last sale price of the class C common stock in a private transaction) was $2,120.75. For purposes of this disclosure only, the registrant has assumed that its directors, executive officers, and beneficial owners of 5 percent or more of the registrant’s common stock are affiliates of the registrant.

On August 17, 2012, there were 13,862,505 shares of Registrant’s class A nonvoting common stock issued and 13,404,866 shares of Registrant’s class A nonvoting common stock issued and outstanding, no shares of Registrant’s class B nonvoting common stock outstanding, and 2,073,043 shares of Registrant’s class C voting common stock issued and outstanding.

Documents incorporated by reference: None

 

 

 


Table of Contents

                       Table of Contents

 

Part I of Annual Report on Form 10-K

     1   

Item 1. Business

     1   

Item 1A. Risk Factors

     7   

Item 1B. Unresolved Staff Comments

     10   

Item 2. Properties

     11   

Item 3. Legal Proceedings

     11   

Item 4. Mine Safety Disclosures

     11   

Part II of Annual Report on Form 10-K

     12   

Item  5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

     12   

Item 6. Selected Financial Data

     15   

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     16   

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

     29   

Item 8. Financial Statements and Supplementary Data

     30   

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     54   

Item 9A. Controls and Procedures

     54   

Item 9B. Other Information

     55   

Part III of Annual Report on Form 10-K

     56   

Item 10. Directors, Executive Officers and Corporate Governance

     56   

Item 11. Executive Compensation

     60   

Item  12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     67   

Item 13. Certain Relationships and Related Transactions, and Director Independence

     69   

Item 14. Principal Accounting Fees and Services

     70   

Part IV of Annual Report on Form 10-K

     71   

Item 15. Exhibits, Financial Statement Schedules

     71   

Signatures

     74   

Exhibit 10.16 — Modification dated February 28, 2012 to Line of Credit Note dated February 26, 2009

  

Exhibit 21 — Subsidiaries of the Company, Jurisdiction of Incorporation, and Percentage of Ownership

  

Exhibit 23.1 — BDO USA, LLP consent

  

Exhibit 31.1 — Rule 13a – 14(a) Certifications (under Section 302 of the Sarbanes-Oxley Act of 2002)

  

Exhibit 32.1 — Section 1350 Certifications (under Section 906 of the Sarbanes-Oxley Act of 2002)

  

 

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   Part I of Annual Report on Form 10-K    LOGO

Item 1. Business

This Annual Report on Form 10-K contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. In addition, U.S. Global Investors, Inc. and its subsidiaries (collectively, “U.S. Global” or the “Company”) may make other written and oral communications from time to time that contain such statements. Forward-looking statements include statements as to industry trends, future expectations of the Company, and other matters that do not relate strictly to historical facts and are based on certain assumptions by management. These statements are often identified by the use of words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “should,” “estimate,” or “continue,” and similar expressions or variations. These statements are based on the beliefs and assumptions of Company management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. Important factors that could cause actual results to differ materially from the forward-looking statements include, among others, the risks described in Part I, Item 1A, Risk Factors, and elsewhere in this report and other documents filed or furnished by U.S. Global from time to time with the U.S. Securities and Exchange Commission (“SEC”). U.S. Global cautions readers to carefully consider such factors. Furthermore, such forward-looking statements speak only as of the date on which such statements are made. Except to the extent required by applicable law, U.S. Global undertakes no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

U.S. Global, a Texas corporation organized in 1968, is a registered investment adviser under the Investment Advisers Act of 1940, as amended (“Advisers Act”). The Company and its subsidiaries are principally engaged in the business of providing investment advisory and other services to U.S. Global Investors Funds (“USGIF” or the “Funds”), a Delaware statutory trust, as well as offshore clients. USGIF is an investment company offering shares of thirteen mutual funds on a no-load basis.

As part of the mutual fund management business, the Company provides: (1) investment advisory services; (2) transfer agency and record keeping services; (3) distribution services; and (4) administrative services 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.

 

Lines of Business

Investment Management Services

Investment Advisory Services. The Company furnishes an investment program for each of the clients it manages and determines, subject to overall supervision by the applicable board of trustees of the clients, the clients’ investments pursuant to an advisory agreement (the “Advisory Agreement”). Consistent with the investment restrictions, objectives and policies of the particular client, the portfolio team for each client determines what investments should be purchased, sold, and held, and makes changes in the portfolio deemed necessary or appropriate. In the Advisory Agreement, the Company is charged with seeking the best overall terms in executing portfolio transactions and selecting brokers or dealers.

 

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As required by the Investment Company Act of 1940, as amended (“Investment Company Act”), the Advisory Agreement with USGIF is subject to annual renewal and is terminable upon 60-day notice. This agreement has been renewed through September 2013.

In addition to providing advisory services to USGIF, the Company provides advisory services to three offshore clients.

Net assets under management on June 30, 2012, and June 30, 2011, are detailed in the following table.

 

Assets Under Management (AUM)  

Fund

   Ticker    AUM at
June 30, 2012
(in thousands)
     AUM at
June 30, 2011
(in thousands)
 

U.S. Global Investors Funds Natural Resources

        

Global Resources

   PSPFX/PIPFX    $ 530,604       $ 903,926   

World Precious Minerals

   UNWPX/UNWIX      323,802         602,347   

Gold and Precious Metals

   USERX      155,570         238,164   
     

 

 

    

 

 

 

Total Natural Resources

        1,009,976         1,744,437   
     

 

 

    

 

 

 

International Equity

        

Eastern European

   EUROX      177,019         346,590   

China Region

   USCOX      28,272         42,501   

Global MegaTrends

   MEGAX/MEGIX      13,116         19,094   

Global Emerging Markets

   GEMFX      7,962         11,979   
     

 

 

    

 

 

 

Total International Equity

        226,369         420,164   
     

 

 

    

 

 

 

Fixed Income

        

U.S. Government Securities Savings

   UGSXX      156,307         188,886   

U.S. Treasury Securities Cash

   USTXX      85,427         96,000   

Near-Term Tax Free

   NEARX      38,253         31,823   

Tax Free

   USUTX      22,783         20,084   
     

 

 

    

 

 

 

Total Fixed Income

        302,770         336,793   
     

 

 

    

 

 

 

Domestic Equity

        

Holmes Growth

   ACBGX      35,805         42,758   

All American Equity

   GBTFX      17,010         18,370   
     

 

 

    

 

 

 

Total Domestic Equity

        52,815         61,128   
     

 

 

    

 

 

 

Total SEC-Registered Funds

        1,591,930         2,562,522   
     

 

 

    

 

 

 

Other Advisory Clients

        32,551         40,526   
     

 

 

    

 

 

 

Total AUM

      $ 1,624,481       $ 2,603,048   
     

 

 

    

 

 

 

 

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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 (“Exchange Act”), providing transfer agency, printing, and mailing 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, but are not limited to, the following: (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, certain annual and activity-based fees 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 value of the shares of the fund held in accounts at the institution.

The transfer agency agreement with USGIF is subject to renewal on an annual basis and is terminable upon 60-day notice. This agreement has been renewed through September 2013.

Distribution Services. The Company has registered its wholly-owned subsidiary, U.S. Global Brokerage, Inc. (“USGB”), with the Financial Industry Regulatory Authority (“FINRA”), the SEC and appropriate state regulatory authorities as a limited-purpose broker-dealer for the purpose of distributing Fund shares. The distribution agreement with USGIF is subject to annual renewal and is terminable upon 60-day notice. This agreement has been renewed through September 2013.

Administrative Services. The Company also manages, supervises and conducts certain other affairs of USGIF, subject to the control of the Funds’ board of trustees pursuant to an administrative agreement (the “Administrative Services Agreement”). 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 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. The Administrative Services Agreement with USGIF is subject to renewal on an annual basis and is terminable upon 60-day notice. This agreement has been renewed through September 2013.

 

Corporate Investments

Investment Activities. In addition to providing management and advisory services, the Company is actively engaged in trading for its own account. See segment information in the notes to the financial statements at Note 14 Financial Information by Business Segment.

 

Employees

As of June 30, 2012, U.S. Global and its subsidiaries employed 70 full-time employees and 4 part-time employees; as of June 30, 2011, it employed 82 full-time employees and 6 part-time employees. The Company considers its relationship with its employees to be good.

 

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Competition

The mutual fund industry is highly competitive. According to the Investment Company Institute, at the end of 2011 there were approximately 8,600 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 Rule 12b-1 plans authorizing the payment of distribution costs of the funds out of fund assets. USGIF is a trust with no-load funds that have adopted 12b-1 plans. 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 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 broker-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 may be insured by federally chartered corporations such as the Federal Deposit Insurance Corporation.

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. In particular, the Company is known for its expertise in the gold mining and exploration, natural resources and emerging markets. Competition for sales of fund shares is influenced by various factors, including investment objectives and performance, advertising and sales promotional efforts, distribution channels, and the types and quality of services offered to fund shareholders.

Success in the investment advisory and mutual fund 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 the funds effectively. Sales of fund shares generate management, distribution and administrative services fees (which are based on assets of the funds), and transfer agent fees (which are based on the number of fund accounts and the activity in those accounts). Costs of distribution and compliance continue to put pressure on profit margins for the mutual fund industry.

Despite the Company’s expertise in gold mining and exploration, natural resources, and emerging markets, the Company faces the same obstacle many advisers face, namely uncovering undervalued investment opportunities as the markets face further uncertainty and increased volatility. In addition, the growing number of alternative investments, especially in specialized areas, has created pressure on the profit margins and increased competition for available investment opportunities.

 

  Supervision and Regulation

The Company, USSI, USGB, and the clients the Company manages and administers operate under certain laws, including federal and state securities laws, governing their organization, registration, operation, and legal, financial, and tax status. Among the potential 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 the Company’s business. The Company has no control over regulatory rulemaking or the consequences it may have on the mutual fund and investment advisory industry.

 

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Recent and accelerating regulatory pronouncements and oversight have significantly increased the burden of compliance infrastructure with respect to the mutual fund industry and the capital markets. This momentum of new regulations has contributed significantly to the costs of managing and administering mutual funds.

U.S. Global is registered as an investment adviser with the SEC. As a registered investment adviser, it is subject to the requirements of the Advisers Act, and the SEC’s regulations thereunder, as well as to examination by the SEC’s staff. The Advisers Act imposes substantive regulation on virtually all aspects of the Company’s business and relationships with the Company’s clients. Applicable rules relate to, among other things, fiduciary duties to clients, transactions with clients, effective compliance programs, conflicts of interest, advertising, recordkeeping, reporting, and disclosure requirements. The Funds for which the Company acts as the investment adviser are registered with the SEC under the Investment Company Act. The Investment Company Act imposes additional obligations, including detailed operational requirements for both funds and their advisers. Moreover, an investment adviser’s contract with a registered fund may be terminated by the fund on not more than 60 days’ notice and is subject to annual renewal by the fund’s board after an initial two-year term. Both the Advisers Act and the Investment Company Act regulate the “assignment” of advisory contracts by the investment adviser. The SEC is authorized to institute proceedings and impose sanctions for violations of the Investment Advisers Act and the Investment Company Act, ranging from fines and censures to termination of an investment adviser’s registration. The failure of the Company, or the funds which the Company advises, to comply with the requirements of the SEC could have a material adverse effect on the Company. The Company is also subject to federal and state laws affecting corporate governance, including the Sarbanes-Oxley Act of 2002 (“S-Ox Act”), as well as rules adopted by the SEC.

USGB is subject to regulation by the SEC under the Exchange Act and regulation by FINRA, 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 FINRA upon request.

 

  Relationships with Clients

The businesses of the Company are to a very significant degree dependent on their associations and contractual relationships with USGIF. In the event the advisory, administrative or transfer agent services agreements with USGIF 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 will choose to continue its relationship with the Company, USSI, or USGB.

In addition, the Company is also dependent on its relationships with its offshore clients. Even though the Company views its relationship with its offshore clients as stable, the Company could be adversely affected if these relationships ended.

 

  Available Information

Available Information. The Company’s Internet website address is www.usfunds.com. Information contained on the Company’s website is not part of this annual report on Form 10-K. The Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed with (or furnished to) the SEC are available through a link on the Company’s Internet website, free of charge, soon after such material is filed or furnished. (The link to the Company’s SEC filings can be found at www.usfunds.com by clicking “About Us,” followed by “Investor Relations,” followed by “SEC Filings.”) The Company routinely posts important information on its website.

 

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The Company also posts its Corporate Governance Guidelines, Code of Business Conduct, Code of Ethics for Principal Executive and Senior Financial Officers and the charters of the audit and compensation committees of its Board of Directors on the Company’s website in the “Policies and Procedures” section. The Company’s SEC filings and governance documents are available in print to any stockholder that makes a written request to: Investor Relations, U.S. Global Investors, Inc., 7900 Callaghan Road, San Antonio, Texas 78229.

The Company files reports electronically with the SEC via the SEC’s Electronic Data Gathering, Analysis and Retrieval system (“EDGAR”), which may be accessed through the Internet. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC, at www.sec.gov.

The public may read and copy any materials filed by the Company with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.

 

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Item 1A. Risk Factors

The Company faces a variety of significant and diverse risks, many of which are inherent in the business. Described below are certain risks that could materially affect the Company. Other risks and uncertainties that the Company does not presently consider to be material, or of which the Company is not presently aware, may become important factors that affect it in the future. The occurrence of any of the risks discussed below could materially and adversely affect the business, prospects, financial condition, results of operations, or cash flow.

The investment management business is intensely competitive.

Competition in the investment management business is based on a variety of factors, including:

 

   

Investment performance;

   

Investor perception of an investment team’s drive, focus, and alignment of interest with them;

   

Quality of service provided to, and duration of relationships with, clients and shareholders;

   

Business reputation; and

   

Level of fees charged for services.

The Company competes with a large number of investment management firms, commercial banks, broker-dealers, insurance companies, and other financial institutions. Competitive risk is heightened by the fact that some competitors may invest according to different investment styles or in alternative asset classes which the markets may perceive as more attractive than the Company’s investment approach. If the Company is unable to compete effectively, revenues and earnings may be reduced and the business could be materially affected.

Poor investment performance could lead to a decline in revenues.

Success in the investment management industry is largely dependent on investment performance relative to market conditions and the performance of competing products. Good relative performance generally attracts additional assets under management, resulting in additional revenues. Conversely, poor performance generally results in decreased sales and increased redemptions with a corresponding decrease in revenues. Therefore, poor investment performance relative to the portfolio benchmarks and to competitors could impair the Company’s revenues and growth. Effective October 2009, a performance fee was implemented for the nine equity Funds whereby the base advisory fee is adjusted upwards or downwards by 0.25 percent if there is a performance difference of 5 percent or more between a Fund’s performance and that of its designated benchmark index over the prior rolling 12 months.

 

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The Company’s clients can terminate their agreements with the Company on short notice, which may lead to unexpected declines in revenue and profitability.

The Company’s investment advisory agreements are generally terminable on short notice and subject to annual renewal. If the Company’s investment advisory agreements are terminated, which may occur in a short time frame, the Company may experience a decline in revenues and profitability.

Difficult market conditions can adversely affect the Company by reducing the market value of the assets we manage or causing shareholders to make significant redemptions.

Changes in economic or market conditions may adversely affect the profitability, performance of and demand for the Company’s investment products and services. Under the Company’s advisory fee arrangements, the fees received are primarily based on the market value of assets under management. Accordingly, a decline in the price of securities held in the funds would be expected to cause revenues and net income to decline, which would result in lower advisory fees, or cause increased shareholder redemptions in favor of investments they perceive as offering greater opportunity or lower risk, which redemptions would also result in lower advisory fees. The ability of the Company to compete and grow is dependent on the relative attractiveness of the types of investment products the Company offers and its investment performance and strategies under prevailing market conditions.

Market-specific risks may negatively impact the Company’s earnings.

The Company manages certain funds in the emerging market and natural resource sectors, which are highly cyclical. The investments in the Funds are subject to significant loss due to political, economic and diplomatic developments, currency fluctuations, social instability, and changes in governmental policies. Foreign trading markets, particularly in some emerging market countries, are often smaller, less liquid, less regulated and significantly more volatile than the U.S. and other established markets.

In addition, yields on government securities, and the investment products investing in them, have decreased to record lows. Thus, the Company has voluntarily waived fees and/or reimbursed the USGIF money market funds to maintain each fund’s yield at a certain level as determined by the Company. These waivers could increase in the future. Such increases in fee waivers could be significant and would negatively affect the Company’s net income.

The market price and trading volume of the Company’s class A common stock may be volatile, which could result in rapid and substantial losses for the Company’s stockholders.

The market price of the Company’s class A common stock may be volatile and the trading volume may fluctuate, causing significant price variations to occur. If the market price of the Company’s class A common stock declines significantly, stockholders may be unable to sell their shares at or above their purchase price. The Company cannot assure that the market price of its class A common stock will not fluctuate or decline significantly in the future. Some of the factors that could negatively affect the price of the Company’s class A common stock, or result in fluctuations in price or trading volume, include:

 

   

Decreases in assets under management;

   

Variations in quarterly and annual operating results;

   

Publication of research reports about the Company or the investment management industry;

   

Departures of key personnel;

   

Adverse market reactions to any indebtedness the Company may incur, acquisitions or disposals the Company may make, or securities the Company may issue in the future;

   

Changes in market valuations of similar companies;

   

Changes or proposed changes in laws or regulations, or differing interpretations thereof, affecting the business, or enforcement of these laws and regulations, or announcements relating to these matters;

   

Adverse publicity about the asset management industry, generally, or individual scandals, specifically; and

   

General market and economic conditions.

 

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The market price of the Company’s class A common stock could decline due to the large number of shares of the Company’s class C common stock eligible for future sale upon conversion to class A shares.

The market price of the Company’s class A common stock could decline as a result of sales of a large number of shares of class A common stock eligible for future sale upon the conversion of class C shares, or the perception that such sales could occur. These sales, or the possibility that these sales may occur, also might make it more difficult for the Company to raise additional capital by selling equity securities in the future, at a time and price the Company deems appropriate.

Failure to comply with government regulations could result in fines, which could cause the Company’s earnings and stock price to decline.

The Company and its subsidiaries are subject to a variety of federal securities laws and agencies, including, but not limited to, the Advisers Act, the Investment Company Act, the S-Ox Act, the Gramm-Leach-Bliley Act of 1999, the Bank Secrecy Act of 1970, as amended, the USA PATRIOT Act of 2001, the SEC, FINRA, and NASDAQ. Moreover, financial reporting requirements and the processes, controls, and procedures that have been put in place to address them, are comprehensive and complex. While management has focused attention and resources on compliance policies and procedures, non-compliance with applicable laws or regulations could result in fines, sanctions or censures which could affect the Company’s reputation, and thus its revenues and earnings.

Our business is subject to substantial risk from litigation, regulatory investigations and potential securities laws liability.

Many aspects of U.S. Global’s business involve substantial risks of litigation, regulatory investigations and/or arbitration. The Company is exposed to liability under federal and state securities laws, other federal and state laws and court decisions, as well as rules and regulations promulgated by the SEC, FINRA and other regulatory bodies. U.S. Global, its subsidiaries, and/or officers could be named as parties in legal actions, regulatory investigations and proceedings. An adverse resolution of any lawsuit, legal or regulatory proceeding or claim against the Company could result in substantial costs or reputational harm to the Company, and have a material adverse effect on the Company’s business, financial condition or results of operations, which, in turn, may negatively affect the market price of the Company’s common stock and U.S. Global’s ability to pay dividends. In addition to these financial costs and risks, the defense of litigation or arbitration may divert resources and management’s attention from operations.

Higher insurance premiums and related insurance coverage risks could increase costs and reduce profitability.

While U.S. Global carries insurance in amounts and under terms that it believes are appropriate, the Company cannot assure that its insurance will cover most liabilities and losses to which it may be exposed, or that our insurance policies will continue to be available at acceptable terms and fees. U.S. Global is subject to regulatory and governmental inquiries and civil litigation. An adverse outcome of any such proceeding could involve substantial financial penalties. From time to time, various claims against us arise in the ordinary course of business, including employment-related claims. There has been increased incidence of litigation and regulatory investigations in the financial services industry in recent years, including customer claims and class action suits alleging substantial monetary damages. Certain insurance coverage may not be available or may be prohibitively expensive in future periods. As U.S. Global’s insurance policies come up for renewal, the Company may need to assume higher deductibles or co-insurance liabilities, or pay higher premiums, which would increase the Company’s expenses and reduce net income.

Increased regulatory and legislative actions and reforms could increase costs and negatively impact the Company’s profitability and future financial results.

During the past nine years, federal securities laws have been substantially augmented and made significantly more complex by the S-Ox Act and the USA PATRIOT Act of 2001. With new laws and changes in interpretations and enforcement of existing requirements, the associated time the Company must dedicate to, and related costs the Company must incur in, meeting the regulatory complexities of the business have increased. In order to comply with these new requirements, the Company has had to expend additional time and resources, including substantial efforts to conduct evaluations required to ensure compliance with the S-Ox Act.

 

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The Company is subject to financial services laws, regulations, corporate governance requirements, administrative actions and policies. During 2009 and 2010, as many emergency government programs slowed or wound down, global regulatory and legislative focus generally moved to a second phase of broader reform and a restructuring of financial institution regulation. On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), which fundamentally changed the U.S. financial regulatory landscape. The full scope of the regulatory changes imposed by the Dodd-Frank Act will only be determined once extensive rules and regulations have been proposed and become effective, which may result in significant changes in the manner in which the Company’s operations are regulated.

Further, adverse results of regulatory investigations of mutual fund, investment advisory, and financial services firms could tarnish the reputation of the financial services industry generally, and mutual funds and investment advisers more specifically, causing investors to avoid further fund investments or redeem their balances. Redemptions would decrease the Company’s assets under management, which would reduce its advisory revenues and net income.

The Company intends to pay regular dividends to its stockholders, but the ability to do so is subject to the discretion of the Board of Directors.

The Company intends to pay cash dividends on a monthly basis, but the Board of Directors, at its discretion, may decrease the level or frequency of dividends or discontinue payment of dividends entirely based on earnings, operations, capital requirements, general financial condition of the Company, and general business conditions.

One person beneficially owns substantially all of our voting stock and controls the outcome of all matters requiring a vote of stockholders, which may influence the value of our publicly traded non-voting stock.

Frank Holmes, CEO, is the beneficial owner of over 99 percent of our class C voting convertible common stock and controls the outcome of all issues requiring a vote of stockholders. All of our publicly traded stock is nonvoting stock. Consequently, except to the extent provided by law, stockholders other than Frank Holmes have no vote with respect to the election of directors or any other matter requiring a vote of stockholders. This lack of voting rights may adversely affect the market value of the publicly traded class A nonvoting common stock.

The loss of key personnel could negatively affect the Company’s financial performance.

The success of the Company depends on key personnel, including the portfolio managers, analysts, and executive officers. Competition for qualified, motivated, and skilled personnel in the asset management industry remains significant. As the business grows, the Company will likely need to increase the number of employees. Moreover, in order to retain certain key personnel, the Company may be required to increase compensation to such individuals, resulting in additional expense. The loss of key personnel or the Company’s failure to attract replacement personnel could negatively affect its financial performance.

The Company could be subject to losses if it fails to properly safeguard sensitive and confidential information.

As part of the Company’s normal operations, it maintains and transmits confidential information about the Company and the Funds’ clients as well as proprietary information relating to its business operations. These systems could be victimized by unauthorized users or corrupted by computer viruses or other malicious software code, or authorized persons could inadvertently or intentionally release confidential or proprietary information. Such a breach could subject the Company to liability for a failure to safeguard client data, result in the termination of relationships with our existing customers, require significant capital and operating expenditures to investigate and remediate the breach and subject the Company to regulatory action.

Item 1B. Unresolved Staff Comments

None

 

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Item 2. Properties

The Company presently owns and 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.

Item 3. Legal Proceedings

There are no material legal proceedings in which the Company is involved.

Item 4. Mine Safety Disclosures

Not applicable.

 

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Part II of Annual Report on Form 10-K

   LOGO

Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

 

Market Information

The Company has three classes of common equity: class A, class B, and class C common stock, par value $0.025 per share.

The Company’s class A common stock is traded over-the-counter and is quoted daily under NASDAQ’s Capital Markets. Trades are reported under the symbol “GROW.”

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 following table sets forth the range of high and low sales prices of “GROW” from NASDAQ for the fiscal years ended June 30, 2012, and June 30, 2011. The quotations represent prices between dealers and do not include any retail markup, markdown, or commission.

 

     Sales Price  
     2012      2011  
         High ($)              Low ($)              High ($)              Low ($)      

First quarter (9/30)

     8.70         6.00         6.93         5.26   

Second quarter (12/31)

     7.80         5.76         9.38         6.28   

Third quarter (3/31)

     7.83         6.03         8.44         7.00   

Fourth quarter (6/30)

     7.52         3.98         10.47         6.72   

 

Holders

On August 17, 2012, there were approximately 195 holders of record of class A common stock, no holders of record of class B common stock, and 43 holders of record of class C common stock.

 

Dividends

The Company declared cash dividends of $0.02 per share per month in fiscal 2012 and 2011 on all classes of common stock. A monthly dividend of $0.02 is authorized through December 2012 and will be considered for continuation at that time by the Board. 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.

 

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Securities authorized for issuance under equity compensation plans

Information relating to equity compensation plans under which our stock is authorized for issuance is set forth in Item 12 of Part III of this Form 10-K under the heading “Equity Compensation Plan Information.”

 

Purchases of equity securities by the issuer

The Company may repurchase stock from employees. There were no repurchases of classes A, B, or C common stock during the fiscal year ended June 30, 2012.

 

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Company Performance Presentation

The following graph compares the cumulative total return for the Company’s class A common stock (GROW) to the cumulative total return for the S&P 500 Index, the Russell 2000 Index, and the NYSE Arca Gold BUGS 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, 2007, and that all dividends are reinvested. Over the five-year period, an investment in the NYSE Arca Gold BUGS Index experienced the most appreciation and the S&P 500 Index and the Russell 2000 Index remained flat. A hypothetical investment in GROW declined in value, as the stock was coming off of its record highs during the fiscal year ended June 30, 2007. The historical information included in this graph is not necessarily indicative of future performance and the Company does not make or endorse any predictions as to future stock performance.

 

LOGO

 

     Fiscal Year-End Date  
       2007              2008              2009              2010              2011              2012      

U.S. Global Investors, Inc., class A (GROW)

   $ 10,000       $ 7,479       $ 4,287       $ 2,634       $ 3,536       $ 2,214   

S&P 500 Index

   $ 10,000       $ 8,689       $ 6,413       $ 7,338       $ 9,589       $ 10,110   

Russell 2000 Index

   $ 10,000       $ 8,382       $ 6,284       $ 7,635       $ 10,489       $ 10,270   

NYSE Arca Gold BUGS Index

   $ 10,000       $ 13,724       $ 10,433       $ 14,680       $ 16,220       $ 13,477   

 

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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, 2008, through June 30, 2012, and the years then ended, is derived from the Company’s audited Consolidated Financial Statements.

 

      Year Ended June 30,  

Selected

Financial Data

           2012                      2011                      2010                      2009                      2008           

Revenues

   $ 23,850,609      $ 41,933,626      $ 35,030,153      $ 23,140,269      $ 56,039,247   

Expenses

     21,351,222        29,903,607        26,521,396        26,750,817        39,457,020   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     2,499,387        12,030,019        8,508,757        (3,610,548     16,582,227   

Income tax expense (benefit)

     968,953        4,197,372        3,159,472        (1,372,969     5,745,417   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 1,530,434      $ 7,832,647      $ 5,349,285      $ (2,237,579   $ 10,836,810   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic income (loss) per share

     0.10        0.51        0.35        (0.15     0.71   

Working capital

     25,710,714        32,366,289        28,323,885        27,363,133        35,309,228   

Total assets

     41,755,794        45,966,603        40,983,698        37,153,846        45,494,619   

Dividends per common share

     0.24        0.24        0.24        0.24        0.21   

Shareholders’ equity

     38,709,646        41,057,447        36,191,872        34,627,994        39,233,744   

Net cash provided by operating activities

     1,817,046        7,718,529        7,632,350        3,040,931        14,309,886   

Net cash used in investing activities

     (4,894,472     (845,601     (739,266     (4,386,782     (1,180,602

Net cash used in financing activities

     (3,517,749     (3,502,511     (3,359,199     (3,485,630     (2,848,629

Average assets under management (in billions)

     2.06        2.82        2.56        2.53        5.44   

 

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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.

Recent Trends in Financial Markets

During the fiscal year ended June 30, 2012, the global financial markets continued to move slowly toward recovery, but encountered volatility at both the beginning and end of the period. General macro-economic concerns, such as political uncertainty, the continuing European financial crisis, the China slowdown and resulting fears of a “hard landing,” and the U.S. debt downgrade in August 2011 have caused investors to remain risk averse. As a consequence of these events, mutual funds in general have continued to see asset flows directed towards investments such as fixed income and cash.

The volatility in the Company’s revenue is correlated to the price swings in natural resources and emerging markets, which represent roughly 80 percent of assets under management. During the past fiscal year, U.S. stocks, the U.S. dollar and gold generally have been positive, while emerging markets stocks and commodity-related stocks generally have been lagging in performance. For the past 10 years, the one-year normal volatility of one standard deviation has been 18.9 percent for the S&P 500, approximately 31.1 percent for the MSCI emerging markets and nearly 37.2 percent for gold equities. To manage expenses, the Company maintains a flexible structure for one of its largest costs, compensation expense, by setting relatively lower base salaries with bonuses that are related to average assets under management and fund performance. Thus, our expense model expands and contracts with asset swings and performance.

 

Business Segments

The Company, with principal operations located in San Antonio, Texas, manages two business segments: (1) the Company offers a broad range of investment 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. Although the Company generates the majority of its revenues from its investment advisory segment, the Company holds a significant amount of its total assets in investments. The following is a brief discussion of the Company’s two business segments.

Investment Management Products and Services

The Company generates substantially all of its operating revenues from managing and servicing U.S. Global Investors Funds (“USGIF” or the “Funds”) and other advisory clients. 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.

Detailed information regarding the SEC-registered funds managed by the Company can be found on the Company’s website, www.usfunds.com, including performance information for each fund for various time periods, assets under management as of the most recent month end, and inception date of each fund.

SEC-registered mutual fund shareholders are not required to give advance notice prior to redemption of shares in the funds; however, the equity funds charge a redemption fee if the fund shares have been held for less than the applicable periods of time set forth in the funds’ prospectuses. The fixed income and money market funds charge no redemption fee. Detailed information about redemption fees can be found in the funds’ prospectus, which is available on the Company’s website, www.usfunds.com.

 

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The Company provides advisory services for three offshore clients and receives monthly advisory fees based on the net asset values of the clients and quarterly performance fees, if any, based on the overall increase in net asset values. In fiscal 2012, the Company recorded advisory and performance fees from these clients totaling $352,103 and $6,172, respectively, and $431,493 and $955,865, respectively, in fiscal 2011. The performance fees for these clients are calculated and recorded quarterly in accordance with the terms of the advisory agreements. These fees may fluctuate significantly from year to year based on factors that may be out of the Company’s control. Frank Holmes, CEO, serves as a director of the offshore clients.

On June 30, 2012, total assets under management as of period end, including both SEC-registered funds and offshore clients, were $1.624 billion versus $2.603 billion on June 30, 2011, a decrease of 37.6 percent. During fiscal 2012, average assets under management were $2.055 billion versus $2.819 billion in fiscal 2011. The decrease was primarily due to market depreciation and redemptions in the natural resources and emerging markets funds under management.

 

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The following tables summarize the changes in assets under management for the SEC-registered funds for fiscal years 2012, 2011, and 2010:

 

     Changes in Assets Under Management
Year Ended June 30,
 
     2012  

(Dollars in Thousands)

   Equity      Money Market
and
Fixed Income
     Total  

Beginning Balance

   $     2,225,729       $ 336,793       $     2,562,522   

Market appreciation/(depreciation)

     (480,540)         2,774         (477,766)   

Dividends and distributions

     (117,744)         (1,506)         (119,250)   

Net shareholder purchases/(redemptions)

     (338,285)         (35,291)         (373,576)   
  

 

 

    

 

 

    

 

 

 

Ending Balance

   $ 1,289,160       $ 302,770       $ 1,591,930   
  

 

 

    

 

 

    

 

 

 

Average investment management fee

     0.99%         0.00%         0.83%   

Average net assets

   $ 1,699,921       $ 320,242       $ 2,020,163   
        
     Changes in Assets Under Management
Year Ended June 30,
 
     2011  

(Dollars in Thousands)

   Equity      Money Market
and
Fixed Income
     Total  

Beginning Balance

   $ 1,985,203       $ 382,062       $ 2,367,265   

Market appreciation/(depreciation)

     528,737         1,493         530,230   

Dividends and distributions

     (144,176)         (1,488)         (145,664)   

Net shareholder purchases/(redemptions)

     (144,035)         (45,274)         (189,309)   
  

 

 

    

 

 

    

 

 

 

Ending Balance

   $     2,225,729       $     336,793       $     2,562,522   
  

 

 

    

 

 

    

 

 

 

Average investment management fee

     1.00%         0.00%         0.87%   

Average net assets

   $ 2,418,615       $ 358,121       $ 2,776,736   
        
     Changes in Assets Under Management
Year Ended June 30,
 
     2010  

(Dollars in Thousands)

   Equity      Money Market
and
Fixed Income
     Total  

Beginning Balance

   $ 1,757,012       $ 439,942       $ 2,196,954   

Market appreciation/(depreciation)

     515,383         2,543         517,926   

Dividends and distributions

     (24,873)         (1,379)         (26,252)   

Net shareholder purchases/(redemptions)

     (262,319)         (59,044)         (321,363)   
  

 

 

    

 

 

    

 

 

 

Ending Balance

   $     1,985,203       $     382,062       $     2,367,265   
  

 

 

    

 

 

    

 

 

 

Average investment management fee

     0.99%         0.01%         0.83%   

Average net assets

   $ 2,117,843       $ 408,254       $ 2,526,097   

 

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As shown above, both average and period-end assets under management decreased in total in fiscal 2012 compared to fiscal 2011, but both increased in total in fiscal 2011 compared to fiscal 2010. The decrease in assets under management in fiscal 2012 was driven by market depreciation and redemptions in the equity funds, primarily in the natural resources and emerging markets funds. The increase in assets under management in fiscal 2011 was driven by market appreciation in the equity funds, primarily in the natural resources category. Money market and fixed income funds experienced a net decrease in both comparative periods as shareholders sought alternatives to low yields.

Stock market performance was marked by volatility at both the beginning and end of the fiscal year as global financial markets continue to move slowly toward recovery. Equities linked to gold and broader natural resources, where most of the assets managed by the Company are invested, were also volatile. The global financial crisis and subsequent volatility in markets, combined with fund performance, were significant factors in the shareholder activity shown in all periods.

The average annualized investment management fee rate (total mutual fund advisory fees, excluding performance fees, as a percentage of average assets under management) was 83 basis points in fiscal 2012, compared to 87 basis points in fiscal 2011, and 83 basis points in fiscal 2010. The average investment management fee for equity funds has remained relatively stable for fiscal 2012, 2011, and 2010 at 99, 100, and 99 basis points, respectively. The average investment management fee for the fixed income funds was nil or close to nil for fiscal 2012, 2011, and 2010. This is due to voluntary fee waivers on these funds as discussed in Note 4 to the financial statements, including a voluntary agreement to support the yields for the money market funds.

Investment Activities

Management believes it can more effectively manage the Company’s cash position by maintaining certain types of investments utilized in cash management and continues to believe that such activities are in the best interest of the Company.

The following summarizes the market value, cost, and unrealized gain or loss on investments as of June 30, 2012, and June 30, 2011.

 

Securities

   Market Value      Cost      Unrealized Gain
(Loss)
     Unrealized holding gains on
available-for- sale
securities, net of  tax
 

Trading¹

   $ 5,216,139       $ 5,960,634       $ (744,495)         N/A   

Available-for-sale²

     8,824,311         8,117,844         706,467       $ 466,268   
  

 

 

    

 

 

    

 

 

    

Total at June 30, 2012

   $ 14,040,450       $ 14,078,478       $ (38,028)      
  

 

 

    

 

 

    

 

 

    

Trading¹

   $ 5,703,916       $ 5,963,272       $ (259,356)         N/A   

Available-for-sale²

     4,660,928         3,081,439         1,579,489       $ 1,042,462   
  

 

 

    

 

 

    

 

 

    

Total at June 30, 2011

   $ 10,364,844       $ 9,044,711       $ 1,320,133      
  

 

 

    

 

 

    

 

 

    

 

  ¹

Unrealized and realized gains and losses on trading securities are included in earnings in the statement of operations.

  ²

Unrealized gains and losses on available-for-sale securities are excluded from earnings and recorded in other comprehensive income as a separate component of shareholders’ equity until realized.

As of June 30, 2012, and 2011, the Company held approximately $1.6 million and $2.3 million, respectively, in investments other than the clients the Company advises. Investments in securities classified as trading are reflected as current assets on the consolidated balance sheet at their fair market value. Unrealized holding gains and losses on trading securities are included in earnings in the

 

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consolidated statements of operations and comprehensive income. Investments in securities classified as available for sale, which may not be readily marketable, are reflected as non-current assets on the consolidated balance sheet at their fair value. Unrealized holding gains and losses on available-for-sale securities are excluded from earnings and reported in other comprehensive income as a separate component of shareholders’ equity until realized.

Investment income (loss) from the Company’s investments includes:

 

   

realized gains and losses on sales of securities;

   

unrealized gains and losses on trading securities;

   

realized foreign currency gains and losses;

   

other-than-temporary impairments on available-for-sale securities; and

   

dividend and interest income.

Investment income can be volatile and may vary depending on market fluctuations, the Company’s ability to participate in investment opportunities, and timing of transactions. A significant portion of the unrealized gains and losses is concentrated in a small number of issuers. For fiscal years 2012, 2011, and 2010, the Company had net recognized gains (losses) on sales or other-than-temporary impairment of securities of $157,668, $135,759, and ($60,182), respectively. Due to market volatility, the Company expects that gains or losses will continue to fluctuate in the future.

 

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Consolidated Results of Operations

The following is a discussion of the consolidated results of operations of the Company and a detailed discussion of the Company’s revenues and expenses.

 

     2012      2011      % Change      2011      2010      % Change  

Net income (in thousands)

   $ 1,530       $ 7,833         -80.5%       $ 7,833       $ 5,349         46.4%   

Net income per share

                 

Basic

   $ 0.10       $ 0.51         -80.4%       $ 0.51       $ 0.35         45.7%   

Diluted

   $ 0.10       $ 0.51         -80.4%       $ 0.51       $ 0.35         45.7%   

Weighted average shares

outstanding (in thousands)

                 

Basic

     15,441         15,384            15,384         15,339      

Diluted

     15,442         15,384            15,384         15,342      

Year Ended June 30, 2012, Compared with Year Ended June 30, 2011

The Company posted net income of $1,530,434 ($0.10 per share) for the year ended June 30, 2012, compared with net income of $7,832,647 ($0.51 per share) for the year ended June 30, 2011. This decrease in profitability is primarily attributable to the following factors:

Revenues

Total consolidated revenues for the year ended June 30, 2012, decreased $18,083,017, or 43.1 percent, compared with the year ended June 30, 2011. This decrease was primarily attributable to the following:

 

   

Mutual fund advisory fee revenue decreased by $11,996,085, or 45.1 percent, as a result of lower assets under management. Of that amount, $7,384,666 was attributable to a decrease in mutual fund management fees due to market depreciation and shareholder redemptions in the natural resources and emerging markets funds. In addition, $4,611,419 was attributable to a swing in performance fee adjustments driven by net payments to the funds in the current period versus net receipts from the funds in the prior period. Performance fees are paid or received when there is a performance difference of 5 percent or more between a fund’s performance and that of its designated benchmark index over the prior rolling 12 months.

   

Distribution fee revenue decreased by $1,918,511, or 32.0 percent, as a result of lower average net assets under management upon which these fees are based.

   

Transfer agent fee revenue decreased by $1,344,053, or 26.8 percent, as a result of a decline in the number of shareholder accounts and the number of transactions.

   

Investment income decreased by $1,185,529, or 117.5 percent, as a result of unrealized losses on trading securities.

   

Offshore fund advisory fee revenue decreased by $1,029,083, or 74.2 percent. Of that amount, $949,693 was attributable to a decline in performance fees, while $79,390 was attributable to a decline in offshore fund management fees.

 

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Expenses

Total consolidated expenses for the year ended June 30, 2012, decreased by $8,552,385, or 28.6 percent, compared with the prior year and was primarily attributable to the following:

 

   

Employee compensation and benefits decreased by $2,476,461, or 19.9 percent, primarily as a result of lower performance-based bonuses and fewer employees.

   

General and administrative expenses decreased by $2,361,115, or 28.8 percent, primarily due to prior period software implementation and consulting expenses.

   

Platform fees decreased by $2,308,399, or 36.6 percent, primarily due to lower assets held through broker-dealer platforms.

   

Advertising decreased $1,281,471, or 52.0 percent, as a result of decreased marketing and sales activity.

Year Ended June 30, 2011, Compared with Year Ended June 30, 2010

The Company posted net income of $7,832,647 ($0.51 per share) for the year ended June 30, 2011, compared with net income of $5,349,285 ($0.35 per share) for the year ended June 30, 2010. The increase in profitability in fiscal year 2011 primarily resulted from an increase in mutual fund advisory fee income of $5.4 million resulting from higher assets under management, as well as an increase in offshore fund advisory fees as a result of higher performance fees. Expenses increased by 12.8 percent in fiscal 2011, including a $1,684,989 million increase in general and administrative expenses related to sales-related conferences and consulting fees and software implementation and a $720,876 increase in platform fees due to higher assets under management.

 

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Revenues

 

(Dollars in Thousands)

   2012      2011      %
Change
     2011      2010      %
Change
 

Investment advisory fees:

                 

Natural resource funds

   $ 11,085       $ 20,341         (45.5%)       $ 20,341       $ 15,264         33.3%   

International equity funds

     3,104         5,735         (45.9%)         5,735         5,567         3.0%   

Domestic equity funds

     386         495         (22.0%)         495         299         65.6%   

Fixed income funds

     -         -         0.0%         -         33         (100.0%)   
  

 

 

    

 

 

       

 

 

    

 

 

    

Total mutual fund advisory fees

     14,575         26,571         (45.1%)         26,571         21,163         25.6%   

Other advisory fees

     358         1,387         (74.2%)         1,387         401         245.9%   
  

 

 

    

 

 

       

 

 

    

 

 

    

Total investment advisory fees

     14,933         27,958         (46.6%)         27,958         21,564         29.7%   

Transfer agent fees

     3,667         5,011         (26.8%)         5,011         5,350         (6.3%)   

Distribution fees

     4,070         5,988         (32.0%)         5,988         5,293         13.1%   

Administrative services fees

     1,321         1,922         (31.3%)         1,922         1,797         7.0%   

Investment income (loss)

     (177)         1,009         (117.5%)         1,009         979         3.1%   

Other revenues

     37         46         (19.6%)         46         47         (2.1%)   
  

 

 

    

 

 

       

 

 

    

 

 

    

Total

   $ 23,851       $ 41,934         (43.1%)       $ 41,934       $ 35,030         19.7%   
  

 

 

    

 

 

       

 

 

    

 

 

    

Investment Advisory Fees. Investment advisory fees, the largest component of the Company’s revenues, are derived from two sources: SEC-registered mutual fund advisory fees, which in fiscal 2012 accounted for 98 percent of the Company’s total advisory fees, and offshore investment advisory fees, which accounted for 2 percent of total advisory fees.

SEC-registered mutual fund investment advisory fees are calculated as a percentage of average net assets, ranging from 0.375 percent to 1.375 percent, and are paid monthly. These advisory fees decreased by approximately $12.0 million, or 45.1 percent, in fiscal 2012 compared to fiscal 2011 primarily as a result of decreased assets under management due to market depreciation and shareholder redemptions in the natural resources and emerging markets funds.

Mutual fund investment advisory fees are also affected by changes in assets under management, which include:

 

   

market appreciation or depreciation;

   

the addition of new client accounts;

   

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 nine equity USGIF funds include a base advisory fee that is adjusted upward or downward by 0.25 percent if there is a performance difference of 5 percent or more between a fund’s performance and that of its designated benchmark index over the prior rolling 12 months. For the year ended June 30, 2012, the Company adjusted its base advisory fees downward by $2,230,811. For the year ended June 30, 2011, the Company adjusted its base advisory fees upward by $2,380,608. For the year ended June 30, 2010 (the first fiscal year in which these performance fees were recorded), the Company adjusted its base advisory fees upward by $168,534.

Transfer Agent Fees. United Shareholder Services, Inc., a wholly owned subsidiary of the Company, provides transfer agency and mailing services for Company clients. The Company receives an annual fee per account as well as transaction and activity-based fees as compensation for services rendered as transfer agent and is reimbursed for out-of-pocket expenses associated with processing shareholder information. In addition, the Company collects custodial fees on IRAs and other types of retirement plans invested in USGIF. Transfer agent fees are therefore significantly affected by the number of client accounts. The Company also receives shareholder servicing fees based on the value of the Funds held through broker-dealer platforms.

 

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Transfer agent fees decreased by $1,344,053 and $339,029 in fiscal 2012 and 2011, respectively, primarily as a result of a decline in the number of shareholder accounts and number of transactions.

Distribution Fees. The Funds pay USGB a distribution fee, at an annual rate of 0.25 percent of the average daily net assets of the Investor Class of each of the nine equity USGIF funds. Distribution fees decreased by $1,918,511 in fiscal 2012 due to lower average net assets under management, upon which these fees are based. In fiscal year 2011, distribution fees increased by $695,538 due to higher average net assets under management.

Administrative Services Fees. The funds pay the Company compensation at an annual rate of 0.08 percent of the average daily net assets of each Fund for administrative services provided by the Company to the funds. Administrative services fees decreased by $600,474 in fiscal 2012 due to lower average net assets under management, upon which these fees are based. In fiscal year 2011, administrative services fees increased by $124,567.

Investment Income. Investment income (loss) from the Company’s investments includes:

 

   

realized gains and losses on sales of securities;

   

unrealized gains and losses on trading securities;

   

realized foreign currency gains and losses;

   

other-than-temporary impairments on available-for-sale securities; and

   

dividend and interest income.

This source of revenue is dependent on market fluctuations and does not remain at a consistent level. Timing of transactions and the Company’s ability to participate in investment opportunities largely affect this source of revenue.

Investment income decreased by $1,185,529 in fiscal 2012 due to unrealized losses in trading securities. Investment income was essentially flat in fiscal 2011, increasing by $29,453.

Included in investment income were other-than-temporary impairments of $19,073 in fiscal 2012, $3,699 in fiscal 2011, and $1,606 in fiscal 2010.

Expenses

 

(Dollars in Thousands)

   2012      2011      %
Change
     2011      2010      %
Change
 

Employee compensation and benefits

   $ 9,991       $ 12,468         (19.9%)       $ 12,468       $ 11,913         4.7%   

General and administrative

     5,841         8,201         (28.8%)         8,201         6,516         25.9%   

Platform fees

     3,995         6,304         (36.6%)         6,304         5,583         12.9%   

Advertising

     1,182         2,464         (52.0%)         2,464         1,625         51.6%   

Depreciation

     282         292         (3.4%)         292         321         (9.0%)   

Subadvisory fees

     60         175         (65.7%)         175         563         (68.9%)   
  

 

 

    

 

 

       

 

 

    

 

 

    

Total

   $ 21,351       $ 29,904         (28.6%)       $ 29,904       $ 26,521         12.8%   
  

 

 

    

 

 

       

 

 

    

 

 

    

Employee Compensation and Benefits. Employee compensation and benefits decreased by $2,476,461, or 19.9 percent, in fiscal 2012, as a result of lower performance-based bonuses and fewer employees. Employee compensation and benefits increased by $554,928, or 4.7 percent, in fiscal 2011 compared to the prior year. The 2011 increase was primarily due to higher performance-based bonuses.

 

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Subadvisory Fees. Through September 2010, subadvisory fees were calculated as a percentage of average net assets of the two funds that are subadvised by a third-party manager. From October 2010 to present, subadvisory fees were adjusted to a flat fee per month. The decrease in subadvisory fees of $114,994, or 65.7 percent, in fiscal 2012, and $388,041, or 68.9 percent, in fiscal 2011 is due to the restructured responsibilities of the third-party subadviser, as well as a decline in assets under management.

General and Administrative. The decrease in general and administrative expenses of $2,361,115, or 28.8 percent, in fiscal 2012 was primarily a result of prior period software implementation and consulting expenses. The increase in general and administrative expense of $1,684,989, or 25.9 percent, in fiscal 2011 was primarily attributable to sales-related conferences and consulting fees and implementation of new software.

Platform Fees. Broker-dealers typically charge an asset-based fee for assets held in their platforms. Platform fees decreased by $2,308,399, or 36.6 percent, in fiscal 2012, increased by $720,876, or 12.9 percent, in fiscal 2011 due to changes in assets held through the broker-dealer platforms. The incremental assets received through the broker-dealer platforms are not as profitable as those received from direct shareholder accounts due to margin compression resulting from paying platform fees on those assets.

Advertising. Advertising decreased by $1,281,471 or 52.0 percent, in fiscal 2012, and increased by $839,170, or 51.6 percent, in fiscal 2011 as a result of planned changes in marketing and sales activities.

Income Taxes

The Company and its subsidiaries file a consolidated federal income tax return. Provisions for income taxes include deferred taxes for temporary differences in the basis of assets and liabilities for financial and tax purposes, resulting from the use of the liability method of accounting for income taxes.

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 no valuation allowance at June 30, 2012.

Off Balance Sheet Arrangements

The Company does not have any off balance sheet arrangements.

Contractual Obligations

A summary of contractual obligations of the Company as of June 30, 2012, is as follows:

 

Contractual Obligations

   Payments due by period  
   Total      Less than      1-3      4-5      More than  
      1 year      years      years      5 years  

Operating lease obligations

   $ 225,616       $ 185,164       $ 40,452       $       $   

Contractual obligations

     747,860         537,190         210,670                   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 973,476       $ 722,354       $ 251,122       $       $   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Operating leases consist of office and mailroom equipment leased from several vendors. Contractual obligations include educational and charitable organization pledges, commitments to fund a venture capital investment and agreements for services used in daily operations.

The Board has authorized a monthly dividend of $0.02 per share through December 2012, at which time the Board will consider continuation of the dividend. 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. The total amount of cash dividends to be paid to class A and class C shareholders from July 2012 to December 2012 will be approximately $1,856,000.

 

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Liquidity and Capital Resources

At fiscal year end, the Company had net working capital (current assets minus current liabilities) of approximately $25.7 million and a current ratio (current assets divided by current liabilities) of 9.4 to 1. With approximately $20.6 million in cash and cash equivalents and $14 million in marketable securities, the Company has adequate liquidity to meet its current obligations. Total shareholders’ equity was approximately $38.7 million, with cash, cash equivalents, and marketable securities comprising 83 percent of total assets.

The Company has no long-term debt; thus, the Company’s only material commitment going forward is for operating expenses. 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 projected cash flow are expected to be sufficient to cover current expenses.

The investment advisory and related contracts between the Company and USGIF have been renewed through September 2013. With respect to offshore advisory clients, the contracts between the Company and the clients expire periodically and management anticipates that its offshore clients will renew the contracts.

Management believes current cash reserves, available financing, and projected 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.

Critical Accounting Estimates

The discussion and analysis of financial condition and results of operations are based on the Company’s financial statements, which have been prepared in accordance with generally accepted accounting principles in the U.S. (“GAAP”). The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, and expenses. Management reviews these estimates on an ongoing basis. Estimates are based on experience and on various other assumptions that the Company believes to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. While recent accounting policies are described in more detail in Note 2 to the consolidated financial statements, the Company believes the accounting policies that require management to make assumptions and estimates involving significant judgment are those relating to valuation of investments, income taxes, and valuation of stock-based compensation.

Investments. The Company accounts for its investments in securities in accordance with ASC 320 Investments – Debt and Equity Securities. 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 in the near term are classified as trading securities and reported at fair value. Unrealized gains and losses on these securities are included in earnings.

Investments in debt securities or mortgage-backed securities that are purchased with the intent and ability to hold until maturity are classified as held-to-maturity and measured at amortized cost. The Company currently has no investments in debt securities or mortgage-backed securities.

Investments classified as neither trading securities nor held-to-maturity securities are classified as available-for-sale securities and reported at fair value. Unrealized gains and losses on these available-for-sale securities are excluded from earnings, reported net of tax as a separate component of shareholders’ equity, and recorded in earnings when realized.

 

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The Company evaluates its investments for other-than-temporary declines in value on a periodic basis. This may exist when the fair value of an investment security has been below the current value for an extended period of time. When a security in the Company’s investment portfolio has an unrealized loss in fair value that is deemed to be other than temporary, the Company reduces the book value of such security to its current fair value, recognizing the credit related decline as a realized loss in the Consolidated Statements of Operations and Comprehensive Income and a revised GAAP cost basis for the security is established. For available-for-sale securities with declines in value deemed other than temporary, the unrealized loss recorded net of tax in accumulated other comprehensive income is realized as a charge to net income.

The Company records security transactions on trade date. Realized gains or 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.

Securities traded on a securities exchange are valued at the last sale price. Securities for which over-the-counter market quotations are available, but for which there was no trade on or near the balance sheet date, are valued at the mean price between the last price bid and last price asked. Securities for which quotations are not readily available are valued at management’s estimate of fair value.

Income Taxes. The Company’s annual effective income tax rate is based on the mix of income and losses in its U.S. and non-U.S. entities which are part of the Company’s Consolidated Financial Statements, statutory tax rates, and tax-planning opportunities available to the Company in the various jurisdictions in which it operates. Significant judgment is required in evaluating the Company’s tax positions.

Tax law requires certain items to be included in the tax return at different times from when these items are reflected in the Company’s Consolidated Statement of Operations and Comprehensive Income. As a result, the effective tax rate reflected in the Consolidated Financial Statements is different from the tax rate reported on the Company’s consolidated tax return. Some of these differences are permanent, such as expenses that are not deductible in the tax return, and some differences reverse over time, such as depreciation expense. These timing differences create deferred tax assets and liabilities. Deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and the tax basis of assets and liabilities and are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment dates. In addition, excess tax benefits associated with stock option exercises also create a difference between the tax rate used in the consolidated tax return and the effective tax rate in the Company’s Consolidated Statement of Operations and Comprehensive Income.

The Company assesses uncertain tax positions in accordance with ASC 740 Income Taxes (formerly FIN 48, Accounting for Uncertainty in Income Taxes). Judgment is used to identify, recognize, and measure the amounts to be recorded in the financial statements related to tax positions taken or expected to be taken in a tax return. A liability is recognized to represent the potential future obligation to the taxing authority for the benefit taken in the tax return. These liabilities are adjusted, including any impact of the related interest and penalties, in light of changing facts and circumstances such as the progress of a tax audit. A number of years may elapse before a particular matter for which a reserve has been established is audited and finally resolved. The number of years with open tax audits varies depending on the tax jurisdiction.

Judgment is used in classifying unrecognized tax benefits as either current or noncurrent liabilities in the Company’s Consolidated Balance Sheets. Settlement of any particular issue would usually require the use of cash. A liability associated with unrecognized tax benefits will generally be classified as a noncurrent liability because there will usually be a period of several years between the filing of the tax

 

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return and the final resolution of an uncertain tax position with the taxing authority. Favorable resolutions of tax matters for which reserves have been established are recognized as a reduction to income tax expense when the amounts involved become known.

Assessing the future tax consequences of events that have been recognized in the Company’s Consolidated Financial Statements or tax returns requires judgment. Variations in the actual outcome of these future tax consequences could materially impact the Company’s financial position, results of operations or cash flows.

Stock-Based Compensation. Stock-based compensation expense is measured at the grant date based on the fair value of the award, and the cost is recognized as expense ratably over the award’s vesting period. The Company measured the fair value of stock options granted in fiscal 2012 on the date of grant using a Black-Scholes option-pricing model. An option for 5,000 shares was granted in fiscal 2012, no options were granted in fiscal 2011 and an option for 2,000 shares was granted in fiscal year 2010.

The Company believes that the estimates related to stock-based compensation expense are critical accounting estimates because the assumptions used could significantly impact the timing and amount of stock-based compensation expense recorded in the Company’s Consolidated Financial Statements.

 

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

 

   Market Risk Disclosures

The Company’s balance sheet includes assets whose fair value is subject to market risk. 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 certain investment advisory clients. Written procedures are in place to manage compliance with the code of ethics and other policies affecting the Company’s investment practices.

The table below summarizes the Company’s equity price risks as of June 30, 2012, and shows the effects of a hypothetical 25 percent increase and a 25 percent decrease in market prices.

 

    Fair Value at
June 30, 2012
    Hypothetical
Percentage Change
  Estimated Fair
Value After
Hypothetical Price
Change
    Increase (Decrease) in
Shareholders’ Equity,
Net of Tax
 

Trading securities 1

    $5,216,139      25% increase     $6,520,174         $860,663   
    25% decrease     $3,912,104        ($860,663

Available-for-sale 2

    $8,824,311      25% increase     $11,030,389         $1,456,011   
    25% decrease     $6,618,233        ($1,456,011

¹ Unrealized and realized gains and losses on trading securities are included in earnings in the statement of operations.

² Unrealized and realized gains and losses on available-for-sale securities are excluded from earnings and recorded in other comprehensive income as a component of shareholders’ equity until realized.

The selected hypothetical changes do not reflect what could be considered best- or worst-case scenarios. Results could be significantly different due to both the nature of equity markets and the concentration of the Company’s investment portfolio.

 

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Item 8. Financial Statements and Supplementary Data

 

Report of Independent Registered Public Accounting Firm on Internal Control Over

Financial Reporting

Board of Directors and Stockholders

U.S. Global Investors, Inc.

San Antonio, Texas

We have audited U.S. Global Investors, Inc.’s (the “Company”) internal control over financial reporting as of June 30, 2012, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Item 9A, Management’s Report on Internal Control Over Financial Reporting.” Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2012, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balances sheets of U.S. Global Investors, Inc. as of June 30, 2012 and 2011, and the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended June 30, 2012 and our report dated August 29, 2012, expressed an unqualified opinion thereon.

 

/s/ BDO USA, LLP            

BDO USA, LLP
Dallas, Texas
August 29, 2012

 

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Report of Independent Registered Public Accounting Firm on Consolidated

Financial Statements

Board of Directors and Stockholders

U.S. Global Investors, Inc.

San Antonio, Texas

We have audited the accompanying consolidated balance sheets of U.S. Global Investors, Inc. (the “Company”) as of June 30, 2012 and 2011 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, 2012. 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 the standards of the Public Company Accounting Oversight Board (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, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. 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 financial position of U.S. Global Investors, Inc. at June 30, 2012 and 2011, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2012, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), U.S. Global Investors, Inc.’s internal control over financial reporting as of June 30, 2012, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated August 29, 2012, expressed an unqualified opinion thereon.

 

/s/ BDO USA, LLP            

BDO USA, LLP
Dallas, Texas
August 29, 2012

 

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U.S. GLOBAL INVESTORS, INC.

CONSOLIDATED BALANCE SHEETS

 

Assets    June 30,
2012
    June 30,
2011
 

Current Assets

    

Cash and cash equivalents

   $ 20,612,721      $ 27,207,896   

Trading securities, at fair value

     5,216,139        5,703,916   

Receivables

    

Mutual funds

     1,709,507        3,259,251   

Offshore clients

     33,354        33,828   

Income tax

     407,377        244,149   

Employees

     900        2,200   

Other

     8,247        7,391   

Prepaid expenses

     606,048        816,814   

Deferred tax asset

     162,569        -   
  

 

 

   

 

 

 

Total Current Assets

     28,756,862        37,275,445   
  

 

 

   

 

 

 

Net Property and Equipment

     3,359,376        3,547,303   
  

 

 

   

 

 

 

Other Assets

    

Deferred tax asset, long-term

     815,245        482,927   

Investment securities available-for-sale, at fair value

     8,824,311        4,660,928   
  

 

 

   

 

 

 

Total Other Assets

     9,639,556        5,143,855   
  

 

 

   

 

 

 

Total Assets

   $ 41,755,794      $ 45,966,603   
  

 

 

   

 

 

 

Liabilities and Shareholders’ Equity

    

Current Liabilities

    

Accounts payable

   $ 67,560      $ 55,181   

Accrued compensation and related costs

     1,040,262        1,734,267   

Deferred tax liability

     -        77,432   

Dividends payable

     927,820        924,672   

Other accrued expenses

     1,010,506        2,117,604   
  

 

 

   

 

 

 

Total Current Liabilities

     3,046,148        4,909,156   
  

 

 

   

 

 

 

Commitments and Contingencies

    

Shareholders’ Equity

    

Common stock (class A) - $0.025 par value; nonvoting; authorized, 28,000,000 shares; issued, 13,862,505 and 13,862,445 shares at June 30, 2012, and June 30, 2011, respectively

     346,563        346,561   

Common stock (class B) - $0.025 par value; nonvoting; authorized, 4,500,000 shares; no shares issued

     -        -   

Convertible common stock (class C) - $0.025 par value; voting; authorized, 3,500,000 shares; issued, 2,073,043 and 2,073,103 shares at June 30, 2012, and June 30, 2011, respectively

     51,826        51,828   

Additional paid-in-capital

     15,547,907        15,267,231   

Treasury stock, class A shares at cost; 472,685 and 526,583 shares at June 30, 2012, and June 30, 2011, respectively

     (1,106,733     (1,232,929

Accumulated other comprehensive income, net of tax

     466,268        1,042,462   

Retained earnings

     23,403,815        25,582,294   
  

 

 

   

 

 

 

Total Shareholders’ Equity

     38,709,646        41,057,447   
  

 

 

   

 

 

 

Total Liabilities and Shareholders’ Equity

   $                     41,755,794      $                     45,966,603   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these financial statements.

 

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U.S. GLOBAL INVESTORS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

 

     Year Ended June 30,  
   2012     2011     2010  

Revenues

  

Mutual fund advisory fees

   $ 14,575,009      $ 26,571,094      $ 21,163,003   

Transfer agent fees

     3,666,860        5,010,913        5,349,942   

Distribution fees

     4,069,656        5,988,167        5,292,629   

Administrative services fees

     1,321,156        1,921,630        1,797,063   

Other advisory fees

     358,275        1,387,358        400,663   

Investment income (loss)

     (176,961     1,008,568        979,115   

Other

     36,614        45,896        47,738   
  

 

 

   

 

 

   

 

 

 
     23,850,609        41,933,626        35,030,153   
  

 

 

   

 

 

   

 

 

 

Expenses

      

Employee compensation and benefits

     9,991,505        12,467,966        11,913,038   

General and administrative

     5,840,566        8,201,681        6,516,692   

Platform fees

     3,995,104        6,303,503        5,582,627   

Advertising

     1,182,287        2,463,758        1,624,588   

Subadvisory fees

     60,000        174,994        563,035   

Depreciation

     281,760        291,705        321,416   
  

 

 

   

 

 

   

 

 

 
     21,351,222        29,903,607        26,521,396   
  

 

 

   

 

 

   

 

 

 

Income Before Income Taxes

     2,499,387        12,030,019        8,508,757   

Provision for Federal Income Taxes

      

Tax expense

     968,953        4,197,372        3,159,472   
  

 

 

   

 

 

   

 

 

 

Net Income

     1,530,434        7,832,647        5,349,285   

Other comprehensive income (loss), net of tax:

      

Unrealized gains (losses) on available-for-sale securities arising during period

     (463,867     552,605        203,018   

Less: reclassification adjustment for gains included in net income

     (112,327     (65,495     -   
  

 

 

   

 

 

   

 

 

 

Comprehensive Income

   $ 954,240      $ 8,319,757      $ 5,552,303   
  

 

 

   

 

 

   

 

 

 

Basic Net Income per Share

   $ 0.10      $ 0.51      $ 0.35   
  

 

 

   

 

 

   

 

 

 

Diluted Net Income per Share

   $ 0.10      $ 0.51      $ 0.35   
  

 

 

   

 

 

   

 

 

 

Basic weighted average number of common shares outstanding

     15,441,464        15,384,435        15,339,038   

Diluted weighted average number of common shares outstanding

     15,441,582        15,384,435        15,341,820   

The accompanying notes are an integral part of these financial statements.

 

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U.S. GLOBAL INVESTORS, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

 

     Common
Stock
(class A)
     Common
Stock
(class C)
    Additional
Paid-in
Capital
    Treasury
Stock
    Accumulated
Other
Comprehensive
Income (Loss)
    Retained
Earnings
    Total  

Balance at June 30, 2009 (13,819,673 shares of class A; 2,091,875 shares of class C)

   $ 345,492       $ 52,297      $ 14,628,431      $ (1,449,124   $ 352,334      $ 20,698,564      $ 34,627,994   

Purchases of stock under ESPP of 21,556 shares of Common Stock (class A)

     -         -        154,926        50,470        -        -        205,396   

Conversion of 18,772 shares of class C common stock for class A common stock

     469         (469     -        -        -        -        -   

Exercise of 24,000 options for Common Stock (class A)

     600         -        116,149        -        -        -        116,749   

Dividends declared

     -         -        -        -        -        (4,602,858     (4,602,858

Stock bonuses

     -         -        183,640        55,257        -        -        238,897   

Stock-based compensation expense

     -         -        53,391        -        -        -        53,391   

Unrealized gain on securities available-for-sale (net of tax)

     -         -        -        -        203,018        -        203,018   

Net income

     -         -        -        -        -        5,349,285        5,349,285   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2010 (13,862,445 shares of class A; 2,073,103 shares of class C)

     346,561         51,828        15,136,537        (1,343,397     555,352        21,444,991        36,191,872   

Purchases of stock under ESPP of 25,781 shares of Common Stock (class A)

     -         -        129,311        60,363        -        -        189,674   

Dividends declared

     -         -        -        -        -        (3,695,344     (3,695,344

Stock bonuses

     -         -        119,379        50,105        -        -        169,484   

Stock-based compensation expense

     -         -        (117,996     -        -        -        (117,996

Unrealized gain on securities available-for-sale (net of tax)

     -         -        -        -        487,110        -        487,110   

Net income

     -         -        -        -        -        7,832,647        7,832,647   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2011 (13,862,445 shares of class A; 2,073,103 shares of class C)

     346,561         51,828        15,267,231        (1,232,929     1,042,462        25,582,294        41,057,447   

Purchases of stock under ESPP of 28,998 shares of Common Stock (class A)

     -         -        120,121        67,895        -        -        188,016   

Conversion of 60 shares of class C common stock for class A common stock

     2         (2     -        -        -        -        -   

Dividends declared

     -         -        -        -        -        (3,708,913     (3,708,913

Stock bonuses

     -         -        134,920        58,301        -        -        193,221   

Stock-based compensation expense

     -         -        25,635        -        -        -        25,635   

Unrealized loss on securities available-for-sale (net of tax)

     -         -        -        -        (576,194     -        (576,194

Net income

     -         -        -        -        -        1,530,434        1,530,434   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2012 (13,862,505 shares of class A; 2,073,043 shares of class C)

   $ 346,563       $ 51,826      $ 15,547,907      $ (1,106,733   $ 466,268      $ 23,403,815      $ 38,709,646   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these financial statements.

 

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U.S. GLOBAL INVESTORS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     Year Ended June 30,  
     2012     2011     2010  

Cash Flows from Operating Activities:

      

Net income

   $ 1,530,434      $ 7,832,647      $ 5,349,285   

Adjustments to reconcile net income to net cash provided by operating activities:

      

Depreciation

     281,760        291,705        321,416   

Net recognized loss (gain) on disposal of fixed assets

     (75,459     154,216        98,908   

Net recognized loss (gain) on securities

     (157,668     (135,759     60,182   

Provision for deferred taxes

     (283,333     321,117        362,889   

Stock bonuses

     193,221        169,484        238,897   

Stock-based compensation expense

     33,476        37,825        53,391   

Changes in operating assets and liabilities:

      

Accounts receivable

     1,387,434        (297,834     594,927   

Prepaid expenses

     210,766        (60,420     (172,180

Trading securities

     485,139        (631,192     (619,825

Accounts payable and accrued expenses

     (1,788,724     36,740        1,344,460   
  

 

 

   

 

 

   

 

 

 

Total adjustments

     286,612        (114,118     2,283,065   
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     1,817,046        7,718,529        7,632,350   
  

 

 

   

 

 

   

 

 

 

Cash Flows from Investing Activities:

      

Purchase of property and equipment

     (18,374     (86,512     (554,933

Proceeds from sale of fixed assets

     -        -        1,017   

Purchase of available-for-sale securities

     (5,064,832     (1,056,384     (230,493

Proceeds on sale of available-for-sale securities

     170,192        201,772        22   

Return of capital on investment

     18,542        95,523        45,121   
  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (4,894,472     (845,601     (739,266
  

 

 

   

 

 

   

 

 

 

Cash Flows from Financing Activities:

      

Exercise of stock options

     -        -        116,749   

Issuance of common stock

     188,016        189,674        205,396   

Dividends paid

     (3,705,765     (3,692,185     (3,681,344
  

 

 

   

 

 

   

 

 

 

Net cash used in financing activities

     (3,517,749     (3,502,511     (3,359,199
  

 

 

   

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (6,595,175     3,370,417        3,533,885   

Beginning cash and cash equivalents

     27,207,896        23,837,479        20,303,594   
  

 

 

   

 

 

   

 

 

 

Ending cash and cash equivalents

   $ 20,612,721      $ 27,207,896      $ 23,837,479   
  

 

 

   

 

 

   

 

 

 

Supplemental Disclosures of Cash Flow Information

      

Cash paid for income taxes

   $ 1,365,000      $ 4,360,000      $ 1,365,000   

The accompanying notes are an integral part of these financial statements.

 

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Table of Contents

Notes to Consolidated Financial Statements

Note 1. Organization

U.S. Global Investors, Inc. (the “Company” or “U.S. Global”) serves as investment adviser to U.S. Global Investors Funds (“USGIF” or the “Funds”), a Delaware statutory trust that is a no-load, open-end investment company offering shares in numerous mutual funds to the investing public. The Company also provides administrative services, distribution, and transfer agency functions to USGIF. For these services, the Company receives fees from USGIF. The Company also provides advisory services to three offshore clients.

U.S. Global formed the following companies to provide supplementary services to USGIF: United Shareholder Services, Inc. (“USSI”) and U.S. Global Brokerage, Inc. (“USGB”).

The Company formed two subsidiaries utilized primarily for corporate investment purposes: U.S. Global Investors (Guernsey) Limited (“USGG”), incorporated in Guernsey, and U.S. Global Investors (Bermuda) Limited (“USBERM”), incorporated in Bermuda.

Note 2. Significant Accounting Policies

Principles of Consolidation. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries: USSI, USGG, USBERM, and USGB.

All significant intercompany balances and transactions have been eliminated in consolidation. Certain amounts have been reclassified for comparative purposes.

Cash and Cash Equivalents. Cash and cash equivalents include highly liquid investments with original maturities of three months or less.

Security Investments. The Company accounts for its investments in securities in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC’) 320 Investments – Debt and Equity Securities. 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 in the near term are classified as trading securities and reported at fair value. Unrealized gains and losses on these securities are included in earnings.

Investments in debt securities that are purchased with the intent and ability to hold until maturity are classified as held-to-maturity and measured at amortized cost. The Company currently has no investments in debt securities.

Investments classified as neither trading securities nor held-to-maturity securities are classified as available-for-sale securities and reported at fair value. Unrealized gains and losses on these available-for-sale securities are excluded from earnings, reported net of tax as a separate component of shareholders’ equity, and recorded in earnings on the date of sale.

The Company evaluates its investments for other-than-temporary decline in value on a periodic basis. This may exist when the fair value of an investment security has been below the current value for an extended period of time. When a security in the Company’s investment portfolio has an unrealized loss in fair value that is deemed to be other than temporary, the Company reduces the book value of such security to its current fair value, recognizing the credit related decline as a realized loss in the Consolidated Statements of Operations and Comprehensive Income and a revised GAAP cost basis for the security is established. For available-for-sale securities with declines in value deemed other than temporary, the unrealized loss recorded net of tax in accumulated other comprehensive income is realized as a charge to net income.

 

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Table of Contents

The Company records security transactions on trade date. 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.

Advisory Receivables. Advisory receivables consist primarily of monthly advisory, transfer agent and other fees owed to the Company by USGIF as well as receivables related to offshore investment advisory fees.

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 14 to 40 years.

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.

Stock-Based Compensation. The Company accounts for stock-based compensation in accordance with ASC 718 Compensation – Stock Compensation. Under this application, the Company is required to record compensation expense for all awards granted after the date of adoption and for the unvested portion of previously granted awards that remain outstanding at the date of adoption.

Income Taxes. The Company and its subsidiaries file a consolidated federal income tax return. 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.

The Company accounts for income taxes in accordance with ASC 740 Income Taxes. The Company’s policy is to recognize interest and penalties related to uncertain tax positions in income tax expense. As of June 30, 2012, the Company did not have any accrued interest or penalties related to uncertain tax positions. The tax years from 2008 through 2011 remain open to examination by the tax jurisdictions to which the Company is subject.

Revenue Recognition. The Company earns substantially all of its revenues from advisory, administrative, distribution and transfer agency services. Mutual fund advisory, administrative, and distribution fees are calculated as a percentage of assets under management and are recorded as revenue as services are performed. Offshore advisory client contracts provide for monthly management fees, in addition to a quarterly performance fees. Effective October 1, 2009, the advisory contract for the USGIF equity funds provides for a performance fee on the base advisory fee that are calculated and recorded monthly. Transfer agency fees are calculated using a charge based upon the number of shareholder accounts serviced as well as transaction and activity-based fees. Revenue shown on the Consolidated Statements of Operations and Comprehensive Income are net of any fee waivers.

Dividends and Interest. Dividends are recorded on the ex-dividend date, and interest income is recorded on an accrual basis. Both dividends and interest income are included in investment income.

Advertising Costs. The Company expenses advertising costs as they are incurred. Certain sales materials, which are considered tangible assets, are capitalized and then expensed during the period in which they are distributed. Net advertising expenditures were $1,182,287, $2,463,758, and $1,624,588 during fiscal 2012, 2011, and 2010 respectively.

 

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Table of Contents

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 gains and losses are immaterial and are therefore included as a component of investment income.

Fair Value of Financial Instruments. The financial instruments of the Company are reported on the consolidated balance sheet at market or fair values, or at carrying amounts that approximate fair values because of the short maturity of the instruments.

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.

Earnings Per Share. The Company computes and presents earnings per share in accordance with ASC 260, Earnings Per Share). Basic earnings per share (“EPS”) excludes dilution and is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution of EPS that could occur if options to issue common stock were exercised. The Company has two classes of common stock with outstanding shares. Both classes share equally in dividend and liquidation preferences.

Recent Accounting Pronouncements

The Company is subject to extensive and often complex, overlapping and frequently changing governmental regulation and accounting oversight. Moreover, financial reporting requirements, such as those listed below, and the processes, controls and procedures that have been put in place to address them, are comprehensive and complex. While management has focused considerable attention and resources on meeting these reporting requirements, interpretations by regulatory or accounting agencies that differ from those of the Company could negatively impact financial results.

In January 2010, the FASB issued Accounting Standards Update (ASU) No. 2010-06, Improving Disclosures about Fair Value Measurements. This ASU added new requirements for disclosures into and out of Levels 1 and 2 fair-value measurements and information on purchases, sales, issuances and settlements on a gross basis in the reconciliation of Level 3 fair-value measurements. It also clarified existing fair value disclosures about the level of disaggregation, inputs, and valuation techniques. Except for the detailed Level 3 reconciliation disclosures, the guidance in the ASU was effective for annual and interim reporting periods in fiscal years beginning after December 15, 2009. The new disclosures for Level 3 activity are effective for annual and interim reporting periods in fiscal years beginning after December 15, 2010. The adoption of ASU 2010-06 in fiscal 2012 by the Company did not have a material effect on its consolidated financial statements except for enhanced disclosure in the notes to its consolidated financial statements.

In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The ASU expands existing disclosure requirements and amends some fair value measurement principles. The ASU was effective for interim periods beginning on or after December 15, 2011, with early adoption prohibited and prospective application required. The adoption of ASU No. 2011-01 by the Company did not have a material effect on its consolidated financial statements except for enhanced disclosure in the notes to its consolidated financial statements.

In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income. This standard eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. Under this guidance, an entity can elect to present items of net income and other comprehensive income in one continuous statement or in two separate, but consecutive, statements. This guidance is effective for publicly traded companies for fiscal years beginning after December 15, 2011 and interim and annual periods thereafter. Early adoption is permitted, but full retrospective application is required. As the Company reports comprehensive income within its consolidated statement of operations, the adoption of this guidance will not result in a change in the presentation of comprehensive income in the Company’s consolidated financial statements.

 

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Table of Contents

Note 3. Investments

As of June 30, 2012, the Company held investments with a fair value of $14,040,450 and a cost basis of $14,078,478. The market value of these investments is approximately 33.6 percent of the Company’s total assets.

Investments in securities classified as trading are reflected as current assets on the consolidated balance sheet at their fair market value. Unrealized holding gains and losses on trading securities are included in earnings in the consolidated statements of operations and comprehensive income. Substantially all of the cash and cash equivalents included in the balance sheet on June 30, 2012, and June 30, 2011, are invested in USGIF money market funds.

Investments in securities classified as available-for-sale, which may not be readily marketable, are reflected as non-current assets on the consolidated balance sheet at their fair value. Unrealized holding gains and losses on available-for-sale securities are excluded from earnings and reported in other comprehensive income as a separate component of shareholders’ equity until realized.

The Company records security transactions on trade date. 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.

 

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Table of Contents

Investment Activity

The following table summarizes investment activity over the last three fiscal years:

 

     Year Ended June 30,  
     2012      2011      2010  

Realized losses on sale of trading securities

   $ (2,638)       $ -       $ (58,598)   

Trading securities, at cost

     5,960,634         5,963,272         5,963,272   

Trading securities, at fair value ¹

     5,216,139         5,703,916         5,072,724   

Net change in unrealized gains (losses) on trading securities (included in earnings)

     (485,139)         631,192         874,533   

Available-for-sale securities, at cost

     8,117,844         3,081,439         2,186,591   

Available-for-sale securities, at fair value ¹

     8,824,311         4,660,928         3,028,034   

Gross realized gains on sale of available-for-sale securities

     179,379         139,458         22   

Gross unrealized gains recorded in shareholders’ equity

     951,631         1,596,949         860,621   

Gross unrealized losses recorded in shareholders’ equity

     (245,164)         (17,460)         (19,178)   

Losses on available-for-sale securities deemed to have other-than-temporary declines in value

     (19,073)         (3,699)         (1,606)   

 

  ¹

These categories of securities are comprised primarily of equity investments, including those investments discussed in Note 15 regarding related party transactions.

The following summarizes investment income (loss) reflected in earnings for the periods discussed:

 

Investment Income (Loss)

   Year Ended June 30,  
   2012      2011      2010  

Realized losses on sales of trading securities

   $ (2,638)       $ -       $ (58,598)   

Realized gains on sales of available-for-sale securities

     179,379         139,458         22   

Unrealized gains (losses) on trading securities

     (485,139)         631,192         874,533   

Realized foreign currency gains (losses)

     (1,583)         3,013         (561)   

Other-than-temporary declines in available-for-sale securities

     (19,073)         (3,699)         (1,606)   

Dividend and interest income

     152,093         238,604         165,325   
  

 

 

    

 

 

    

 

 

 

Total Investment Income (Loss)

   $ (176,961)       $ 1,008,568       $ 979,115   
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Unrealized Losses

The following tables summarize equity investments that are in an unrealized loss position at each balance sheet date, categorized by how long they have been in a continuous loss position. These investments do not include trading securities or those available-for-sale securities with declines in value deemed other than temporary as their unrealized losses are recognized in earnings.

 

     June 30, 2012 (in thousands)  
     Less Than 12 Months      12 Months or Greater      Total  
     Fair Value      Gross
Unrealized
Losses
     Fair Value      Gross
Unrealized
Losses
     Fair Value      Gross
Unrealized
Losses
 

Available-for-sale securities

                 

Common stock

   $ 135       $ (52)       $ -       $ -       $ 135       $ (52)   

Offshore Fund

     4,811         (189)         -         -         4,811         (189)   

Mutual funds

     16         (4)         -         -         16         (4)   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale securities

   $ 4,962       $ (245)       $ -       $ -       $ 4,962       $ (245)   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
                 
     June 30, 2011 (in thousands)  
     Less Than 12 Months      12 Months or Greater      Total  
     Fair Value      Gross
Unrealized
Losses
     Fair Value      Gross
Unrealized
Losses
     Fair Value      Gross
Unrealized
Losses
 

Available-for-sale securities

                 

Common stock

   $ 31       $ (4)       $ -       $ -       $ 31       $ (4)   

Venture capital investments

     112         (13)         -         -         112         (13)   

Mutual funds

     -         -         -         -         -         -   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale securities

   $ 143       $ (17)       $ -       $ -       $ 143       $ (17)   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Many of the investments included above are early-stage or start-up businesses whose fair values fluctuate.

Fair Value Hierarchy

ASC 820, Fair Value Measurement and Disclosures, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 establishes a hierarchy that prioritizes inputs to valuation techniques used to measure fair value and requires companies to disclose the fair value of their financial instruments according to a fair value hierarchy (i.e., Levels 1, 2, and 3 inputs, as defined below). The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. Additionally, companies are required to provide enhanced disclosures regarding instruments in the Level 3 category (which have inputs to the valuation techniques that are unobservable and require significant management judgment), including a reconciliation of the beginning and ending values separately for each major category of assets or liabilities.

Financial instruments measured and reported at fair value are classified and disclosed in one of the following categories:

Level 1 – Valuations based on quoted prices in active markets for identical assets or liabilities at the reporting date. Since valuations are based on quoted prices that are readily and regularly available in an active market, value of these products does not entail a significant degree of judgment.

 

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Table of Contents

Level 2 – Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, directly or indirectly.

Level 3 – Valuations based on inputs that are unobservable and significant to the fair value measurement.

The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the financial instrument.

The following tables present fair value measurements, as of each balance sheet date, for the three major categories of U.S. Global’s investments measured at fair value on a recurring basis:

 

     Fair Value Measurement using (in thousands)  
     June 30, 2012  
     Quoted Prices
(Level 1)
     Significant Other
Inputs 
(Level 2)
     Significant
Unobservable Inputs

(Level 3)
     Total  

Trading securities

           

Common stock

   $ 185       $ 26       $ -       $ 211   

Mutual funds

     3,980         -         -         3,980   

Offshore fund

     -         1,025         -         1,025   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total trading securities

     4,165         1,051         -         5,216   
  

 

 

    

 

 

    

 

 

    

 

 

 

Available-for-sale securities

           

Common stock

     1,228         -         -         1,228   

Venture capital investments

     -         -         168         168   

Mutual funds

     2,617         -         -         2,617   

Offshore fund

     -         4,811         -         4,811   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale securities

     3,845         4,811         168         8,824   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Investments

   $ 8,010       $ 5,862       $ 168       $ 14,040   
  

 

 

    

 

 

    

 

 

    

 

 

 
           
     Fair Value Measurement using (in thousands)  
     June 30, 2011  
     Quoted Prices
(Level 1)
     Significant Other
Inputs
(Level 2)
     Significant
Unobservable  Inputs

(Level 3)
     Total  

Trading securities

           

Common stock

   $ 267       $ 57       $ -       $ 324   

Mutual funds

     4,043         -         -         4,043   

Offshore fund

     -         1,337         -         1,337   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total trading securities

     4,310         1,394         -         5,704   
  

 

 

    

 

 

    

 

 

    

 

 

 

Available-for-sale securities

           

Common stock

     1,690         -         -         1,690   

Venture capital investments

     -         -         243         243   

Mutual funds

     2,728         -         -         2,728   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale securities

     4,418         -         243         4,661   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Investments

   $ 8,728       $ 1,394       $ 243       $ 10,365   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Approximately 57 percent of the Company’s financial assets measured at fair value are derived from Level 1 inputs including SEC-registered mutual funds and equity securities traded on an active market, 42 percent of the Company’s financial assets measured at fair value are derived from Level 2 inputs, including investments in two offshore funds, and the remaining one percent are Level 3 inputs.

In Level 2, the Company has an investment in an offshore fund with a fair value of $1,024,879 that invests in companies in the energy and natural resource sectors. The Company may redeem this investment on the first business day of each month after providing a redemption notice at least forty-five days prior to the proposed redemption date.

The Company has a Level 2 investment in an offshore fund with a fair value of $4,810,725 that invests in dividend-paying equity and debt securities of companies located around the world. The Company may redeem this investment on the first business day of each month after providing a redemption notice at least forty-five days prior to the proposed redemption date.

In Level 3, the Company held investments in three securities with a value of zero and one venture capital investment that was measured at fair value using significant unobservable inputs on June 30, 2012.

During the quarter ended March 31, 2012, the Company redeemed its Level 3 investment in a venture capital investment that primarily invests in companies in the energy and precious metals sectors for a realized gain of $179,379.

The Company also has a venture capital investment with a fair value of approximately $168,464 that primarily invests in companies in the medical and medical technology sectors. The Company may redeem this investment with general partner approval. As of June 30, 2012, the Company has an unfunded commitment of $62,500 related to this investment.

The following table presents additional information about investments measured at fair value on a recurring basis and for which the Company has utilized unobservable inputs to determine fair value:

 

Changes in Level 3 Assets Measured at Fair Value on a Recurring Basis

 
     Venture Capital Investments
Year Ended June 30,
 

(Dollars in Thousands)

   2012     2011  

Beginning Balance

   $ 243      $ 267   

Return of capital

     (19     (95

Total gains or losses (realized/unrealized)

    

Included in earnings (investment income)

     160        -   

Included in other comprehensive income

     (108     71   

Purchases, sales, issuances, and settlements

     (108     -   

Transfers in and/or out of Level 3

     -        -   
  

 

 

   

 

 

 

Ending Balance

   $ 168      $ 243   
  

 

 

   

 

 

 

Note 4. Investment Management, Transfer Agent, and Other Fees

The Company serves as investment adviser to USGIF and receives a fee based on a specified percentage of net assets under management. Two of the thirteen Funds within USGIF, Eastern European Fund and Global Emerging Markets Fund, are subadvised by a third-party subadviser, Charlemagne Capital (IOM) Limited (“Charlemagne”), although the Company has primary day-to-day management of both Funds. On March 1, 2010, three funds within USGIF (Global MegaTrends Fund, Global Resources Fund and World Precious Minerals Fund) began offering institutional class shares.

 

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USSI also serves as transfer agent to USGIF and receives fees based on the number of shareholder accounts as well as transaction- and activity-based fees. Additionally, the Company receives certain miscellaneous fees directly from USGIF shareholders. Fees for providing investment management, administrative, distribution, and transfer agent services to USGIF continue to be the Company’s primary revenue source.

The advisory agreement for the nine equity Funds provides for a base advisory fee that, beginning in October 2009, is adjusted upwards or downwards by 0.25 percent if there is a performance difference of 5 percent or more between a Fund’s performance and that of its designated benchmark index over the prior rolling 12 months. For the year ended June 30, 2012, the Company realized a decrease in its base advisory fee of $2,230,811, and for the year ended June 30, 2011, the Company realized an increase in its base advisory fees of $2,380,608. For the year ended June 30, 2010 (the first fiscal year in which these performance fees were recorded), the Company realized an increase in its base advisory fees of $168,534.

Effective September 30, 2009, the Company agreed to voluntarily cap the expenses of all thirteen funds. These caps will continue on a modified and voluntary basis at the Company’s discretion. The aggregate fees waived and expenses borne by the Company were $3,132,831, $3,131,906, and $3,507,140 in 2012, 2011, and 2010 respectively.

The above waived fees include amounts waived under an agreement whereby the Company has voluntarily agreed to waive fees and/or reimburse U.S. Treasury Securities Cash Fund and U.S. Government Securities Savings Fund to the extent necessary to maintain the respective Fund’s yield at a certain level as determined by the Company (Minimum Yield). For the fiscal year ended June 30, 2012, fees waived and/or expenses reimbursed as a result of this agreement were $802,363 and $655,230 for the U.S. Treasury Securities Cash Fund and the U.S. Government Securities Savings Fund, respectively.

The Company may recapture any fees waived and/or expenses reimbursed within three years after the end of the Funds’ fiscal year of such waiver and/or reimbursement to the extent that such recapture would not cause the Funds’ yield to fall below the Minimum Yield. Thus, $1,047,980 of these waivers is recoverable by the Company through December 31, 2012, $1,562,956 through December 31, 2013, $1,604,076 through December 31, 2014, and $658,224 through December 31, 2015. Management believes these waivers could increase in the future. Such increases in fee waivers could be significant and will negatively impact the Company’s revenues and net income. Management cannot predict the impact of the waivers due to the number of variables and the range of potential outcomes.

The Company continues to provide advisory services to three offshore clients and receives a monthly advisory fee based on the net asset values of the clients and performance fees, if any, based on the overall increase in net asset values. The contracts between the Company and the offshore clients expire periodically, and management anticipates that its offshore clients will renew the contracts.

The Company receives additional revenue from several sources including custodial fee revenues, mailroom operations, as well as investment income.

Note 5. Property and Equipment

Property and equipment are composed of the following:

 

     June 30,  
     2012     2011  

Building and land

   $ 4,568,481      $ 4,568,481   

Furniture, equipment, and other

     1,708,261        1,773,947   
  

 

 

   

 

 

 
     6,276,742        6,342,428   

Accumulated depreciation

     (2,917,366     (2,795,125
  

 

 

   

 

 

 

Net property and equipment

   $ 3,359,376      $ 3,547,303   
  

 

 

   

 

 

 

Depreciation expense totaled $281,760, $291,705, and $321,416 in 2012, 2011, and 2010, respectively.

 

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Note 6. Other Accrued Expenses

Other accrued expenses consist of the following:

 

     June 30,  
     2012      2011  

Legal, professional and consulting fees

   $ 303,156       $ 303,067   

Platform fees

     295,383         545,679   

Vendors payable

     179,434         1,181,990   

Performance fees

     123,968         -   

Taxes payable

     103,468         78,850   

Subadvisory fees

     5,000         5,000   

Other

     97         3,018   
  

 

 

    

 

 

 

Other accrued expenses

   $ 1,010,506       $ 2,117,604   
  

 

 

    

 

 

 

Note 7. Borrowings

As of June 30, 2012, the Company has no long-term liabilities.

The Company has access to a $1 million credit facility with a one-year maturity for working capital purposes. The credit agreement was renewed effective February 28, 2012, and requires the Company to maintain certain quarterly financial covenants to access the line of credit. The amended credit agreement will expire on May 31, 2013, and the Company intends to renew annually. The Company has been in compliance with all financial covenants during the fiscal year. As of June 30, 2012, the credit facility remains unutilized by the Company.

Note 8. Lease Commitments

The Company has operating leases for computers and equipment that expire between fiscal years 2013 and 2014. Lease expenses totaled $572,148, $610,256, and $454,806 in fiscal years 2012, 2011, and 2010, respectively. Minimum non-cancelable lease payments required under operating leases for the years subsequent to June 30, 2012, are as follows:

 

                                                     Fiscal Year

   Amount       

                                                             2013

   $ 185,164      

                                                             2014

     40,452      

                                                             2015

     -      

                                                             2016

     -      

                                                             2017

     -      
  

 

 

    

                                                             Total

   $  225,616      
  

 

 

    

Note 9. Benefit Plans

The Company offers a savings and investment plan qualified under Section 401(k) of the Internal Revenue Code covering substantially all employees. 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 100 percent of participants’ contributions up to the first 3 percent of compensation and 50 percent of the next 2 percent of compensation. The Company has recorded expenses related to the 401(k) plan for contributions of $205,480, $228,612, and $246,556 for fiscal years 2012, 2011, and 2010, respectively.

 

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The 401(k) plan allows for a discretionary profit sharing contribution by the Company, as authorized by the Board of Directors. The Company made profit sharing contributions of $400,000, $300,000, and $300,000 in fiscal years 2012, 2011, and 2010, respectively.

The Company offers employees, including its executive officers, an opportunity to participate in savings programs using mutual funds managed by the Company, which a majority of employees have accepted. Employees may contribute to an IRA, and the Company matches these contributions on a limited basis. Similarly, certain employees may contribute to the Tax Free Fund, and the Company will match these contributions on a limited basis. A similar savings plan utilizing Uniform Gifts to Minors Act (“UGMA”) accounts is offered to employees to save for their minor relatives. The Company match, reflected in base salary expense, aggregated in all programs to $77,049, $74,644, and $73,312 in fiscal years 2012, 2011, and 2010, respectively.

The Company has an Employee Stock Purchase Plan, subject to a current registration statement, whereby eligible employees can purchase treasury shares, at market price, and the Company will match their contributions up to 3 percent of gross salary. During fiscal years 2012, 2011, and 2010, employees purchased 28,998, 25,781, and 21,556 shares of treasury stock from the Company, 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, 2012.

Note 10. Shareholders’ Equity

The monthly dividend of $0.02 is authorized through December 2012 and will be considered for continuation at that time by the Board. 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. 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.

During the fiscal years ended June 30, 2012, 2011, and 2010, the Company did not purchase any of its class A common stock.

During the years ended June 30, 2012, 2011, and 2010, the Company granted 15,600, 35,300, and 7,200 shares of class A common stock to certain employees at a weighted average fair value on grant date of $4.73, $8.12, and $12.62. Grants vest immediately after issuance.

The Company granted 3,600, 3,300, and 2,400 shares of class A common stock at a weighted average fair value of $6.65, $8.10, and $11.00 to its non-employee Directors in fiscal years 2012, 2011, and 2010, respectively. Grants vest immediately after issuance.

Shareholders of class C shares are allowed to convert to class A. During fiscal years 2012, 2011, and 2010, 60, 0, and 18,772 shares, respectively, were converted from class C to class A.

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 1,600,000 shares of the Company’s class A common stock to directors, officers and employees of the Company and its subsidiaries. Options issued under the 1989 Plan vest six months from the grant date or 20 percent on the first, second, third, fourth, and fifth anniversaries of the grant date. Options issued under the 1989 Plan expire ten years after issuance. As of June 30, 2012, there were no options outstanding under the 1989 Plan.

 

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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 400,000 shares of the Company’s class A common stock to directors, officers, and employees of the Company and its subsidiaries. Options issued under the 1997 Plan expire ten years after issuance. One option for 5,000 shares was granted in fiscal year 2012 with a fair value, net of tax, of $8,052. The option will vest over five years with 20 percent vesting on each anniversary date. No options were granted in fiscal year 2011. One option for 2,000 shares was granted in fiscal year 2010 with a fair value, net of tax, of $11,537. The option vested over two years, with 50 percent vesting on the first and second anniversary dates.

The estimated fair value of options granted is amortized to expense over the options’ vesting period. The fair value of these options is estimated at the date of the grant using a Black-Scholes option pricing model with the following assumptions for options granted in fiscal 2012 and 2010, respectively: expected volatility factor based on historical volatility of 49.9 percent and 81.4 percent, risk-free interest rate of 2.4 percent and 3.7 percent and an expected life of 5.67 and 10 years for all options granted.

Stock option transactions under the various employee stock option plans for the past three fiscal years are summarized below:

 

     Shares      Weighted Average
Exercise Price
     Weighted
Average Remaining
Contractual Life in
Yrs
     Aggregate Intrinsic
Value (net of tax)
 

Outstanding June 30, 2009

     77,300       $ 13.66         

Granted

     2,000       $ 12.31         

Exercised

     24,000       $ 0.75         

Forfeited

     -         n/a         
  

 

 

          

Outstanding June 30, 2010

     55,300       $ 19.21         

Granted

     -         n/a         

Exercised

     -         n/a         

Forfeited

     30,000       $ 19.06         
  

 

 

          

Outstanding June 30, 2011

     25,300       $ 19.40         

Granted

     5,000       $ 6.54         

Exercised

     -         n/a         

Forfeited

     1,300       $ 22.63         
  

 

 

          

Outstanding June 30, 2012

     29,000       $ 17.03         6.04       $ 200,336   

As of June 30, 2012, 2011, and 2010, exercisable employee stock options totaled 22,000, 20,180, and 47,120 shares and had weighted average exercise prices of $19.21, $19.78, and $19.50 per share, respectively.

 

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Table of Contents

Class A common stock options outstanding and exercisable under the employee stock option plans at June 30, 2012, were as follows:

 

     Options Outstanding      Options Exercisable  
   Date of
Option
Grant
     Number
Outstanding
     Remaining
Life in Years
     Weighted
Average
Exercise
Price ($)
     Number
Exercisable
     Weighted
Average
Option Price
($)
 

1997 Plan Class A

     06/20/07         2,000         4.97       $  24.74         2,000       $  24.74   
     10/03/07         20,000         5.25       $ 19.36         18,000       $ 19.36   
     10/07/09         2,000         7.27       $ 12.31         2,000       $ 12.31   
     08/23/11         5,000         9.15       $ 6.54         -       $ 6.54   
     

 

 

          

 

 

    
        29,000         6.04       $ 17.03         22,000       $ 19.21   
     

 

 

          

 

 

    

Note 11. Income Taxes

The Company and its subsidiaries file a consolidated federal income tax return. 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 current deferred tax liability primarily consists of temporary differences in the deductibility of prepaid expenses and accrued liabilities. The long-term deferred tax asset is composed primarily of unrealized losses and other than temporary impairments on available-for-sale securities.

A valuation allowance is provided when it is more likely than not that some portion of the deferred tax amount will not be realized. No valuation allowance was included at June 30, 2012, 2011, or 2010.

The reconciliation of income tax computed at the U.S. federal statutory rates to income tax expense is:

 

     Year ended June 30,  
     2012      % of Pretax      2011      % of Pretax      2010      % of Pretax  

Tax expense

at statutory rate

   $ 849,792         34.0%       $ 4,090,206         34.0%       $ 2,892,977         34.0%   

Other

     119,161         4.8%         107,166         0.9%         266,495         3.1%   
  

 

 

       

 

 

       

 

 

    

Total tax expense

   $ 968,953         38.8%       $ 4,197,372         34.9%       $ 3,159,472         37.1%   
  

 

 

       

 

 

       

 

 

    

Components of total tax expense (benefit) are as follows:

 

     Year ended June 30,  
     2012     2011      2010  

Current tax expense

   $ 1,252,286      $ 3,876,255       $ 2,796,583   

Deferred tax expense (benefit)

     (283,333     321,117         362,889   
  

 

 

   

 

 

    

 

 

 

Total tax expense

   $ 968,953      $ 4,197,372       $ 3,159,472   
  

 

 

   

 

 

    

 

 

 

 

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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 assets and liabilities using the effective statutory tax rate (34.0 percent for 2012 and 2011) are as follows:

 

     Year ended June 30,  
     2012     2011  

Book/tax differences in the balance sheet

  

Available-for-sale securities

   $ 640,280      $ 336,968   

Trading securities

     253,128        88,181   

Stock-based compensation expense

     114,129        110,588   

Accrued expenses

     110,564        90,834   

Accumulated depreciation

     60,837        35,372   

Prepaid expenses

     (201,124     (256,448
  

 

 

   

 

 

 

Net deferred tax asset

   $ 977,814      $ 405,495   
  

 

 

   

 

 

 

Note 12. Earnings Per Share

The following table sets forth the computation for basic and diluted earnings per share (EPS):

 

     Year Ended June 30,  
     2012      2011      2010  

Basic and diluted net income

   $ 1,530,434       $ 7,832,647       $ 5,349,285   

Weighted average number of outstanding shares

        

Basic

     15,441,464         15,384,435         15,339,038   

Effect of dilutive securities

        

Employee stock options

     118         -         2,782   
  

 

 

    

 

 

    

 

 

 

Diluted

     15,441,582         15,384,435         15,341,820   
  

 

 

    

 

 

    

 

 

 

Earnings per share

        

Basic

     $0.10         $0.51         $0.35   

Diluted

     $0.10         $0.51         $0.35   

The diluted EPS calculation excludes the effect of stock options when their exercise prices exceed the average market price for the period. For the year ended June 30, 2012, employee stock options for 24,000 shares were excluded from diluted EPS. For the year ended June 30, 2011, employee stock options for 25,300 shares were excluded from diluted EPS. For the year ended June 30, 2010, employee stock options for 45,300 shares were excluded from diluted EPS. The Company did not repurchase any shares of its class A common stock from employees during fiscal 2012, 2011, or 2010. Repurchased shares are classified as treasury shares and are deducted from outstanding shares in the earnings per share calculation.

 

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Table of Contents

Note 13. Comprehensive Income

The Company has disclosed the components of comprehensive income in the consolidated statements of operations and comprehensive income.

 

     Before-Tax
Amount
     Tax
Effect
     Net-of-Tax
Amount
 

June 30, 2010

  

Unrealized gains (losses) on available-for- sale securities

   $ 307,603       $ (104,585)       $ 203,018   

Less: reclassification adjustment for gains included in net income

     -         -         -   
  

 

 

    

 

 

    

 

 

 

Other comprehensive income

   $ 307,603       $ (104,585)       $ 203,018   
  

 

 

    

 

 

    

 

 

 

June 30, 2011

  

Unrealized gains (losses) on available-for- sale securities

   $ 837,281       $ (284,676)       $ 552,605   

Less: reclassification adjustment for gains included in net income

     (99,235)         33,740         (65,495)   
  

 

 

    

 

 

    

 

 

 

Other comprehensive income

   $ 738,046       $ (250,936)       $ 487,110   
  

 

 

    

 

 

    

 

 

 

June 30, 2012

  

Unrealized gains (losses) on available-for- sale securities

   $ (702,829)       $ 238,962       $ (463,867)   

Less: reclassification adjustment for gains included in net income

     (170,192)         57,865         (112,327)   
  

 

 

    

 

 

    

 

 

 

Other comprehensive income

   $ (873,021)       $ 296,827       $ (576,194)   
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Note 14. Financial Information by Business Segment

The Company operates principally in two business segments: providing investment management services to the funds it manages, and investing for its own account in an effort to add growth and value to its cash position. The following schedule details total revenues and income by business segment:

 

     Investment
Management Services
     Corporate
Investments
    Consolidated  

Year ended June 30, 2010

       

Net revenues

   $ 34,216,362       $ 813,791      $ 35,030,153   
  

 

 

    

 

 

   

 

 

 

Net income before income taxes

     7,711,472         797,285        8,508,757   
  

 

 

    

 

 

   

 

 

 

Depreciation

     321,416         —          321,416   
  

 

 

    

 

 

   

 

 

 

Capital expenditures

     554,933         —          554,933   
  

 

 

    

 

 

   

 

 

 

Year ended June 30, 2011

       

Net revenues

   $ 41,051,275       $ 882,351      $ 41,933,626   
  

 

 

    

 

 

   

 

 

 

Net income before income taxes

     11,157,470         872,549        12,030,019   
  

 

 

    

 

 

   

 

 

 

Depreciation

     291,705         —          291,705   
  

 

 

    

 

 

   

 

 

 

Capital expenditures

     86,512         —          86,512   
  

 

 

    

 

 

   

 

 

 

Year ended June 30, 2012

       

Net revenues

   $ 24,066,909       $ (216,300   $ 23,850,609   
  

 

 

    

 

 

   

 

 

 

Net income before income taxes

     2,727,344         (227,957     2,499,387   
  

 

 

    

 

 

   

 

 

 

Depreciation

     281,760         —          281,760   
  

 

 

    

 

 

   

 

 

 

Capital expenditures

     18,374         —          18,374   
  

 

 

    

 

 

   

 

 

 

Gross identifiable assets at June 30, 2012

     26,717,806         14,060,174        40,777,980   
  

 

 

    

 

 

   

 

 

 

Deferred tax asset

          977,814   
       

 

 

 

Consolidated total assets at June 30, 2012

        $ 41,755,794   
       

 

 

 

Note 15. Related Party Transactions

On June 30, 2012, and June 30, 2011, respectively, the Company had $32.9 million and $35.2 million at fair value invested in USGIF and offshore clients the Company advises, and these amounts were included in the balance sheet in cash and cash equivalents and trading securities. The Company recorded $117,234, $238,604, and $102,132 in dividend income and $50,480, $725,512, and ($124,569) in net unrealized gains (losses) on its investments in the Funds and offshore clients for fiscal years 2012, 2011, and 2010, respectively. Receivables from mutual funds shown on the Consolidated Balance Sheets represent amounts due the Company and its wholly-owned subsidiaries for investment advisory fees, administrative fees, distribution fees, transfer agent fees and out-of-pocket expenses, net of amounts payable to the mutual funds. Frank Holmes, a director and Chief Executive Officer of the Company, is a trustee of USGIF.

The Company provides advisory services for the Meridian Global Gold and Resources Fund Ltd., an offshore fund. The Company receives a monthly advisory fee and a quarterly performance fee, if any, based on the overall increase in value of the net assets in the fund for the quarter. The Company recorded fees totaling $211,960, $1,129,271, and $262,789 for the years ended June 30, 2012, 2011, and 2010, respectively. Frank Holmes, a director and Chief Executive Officer of the Company, is a director of Meridian Global Gold and Resources Fund Ltd. and Meridian Fund Managers Ltd., the manager of the Meridian Global Gold and Resources Fund Ltd.

 

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The Company provides advisory services for the Meridian Global Energy and Resources Fund Ltd., an offshore fund. The Company receives a monthly advisory fee and a quarterly performance fee, if any, based on the overall increase in value of the net assets in the fund for the quarter. The Company recorded fees totaling $122,182, $258,087, and $137,874 for the years ended June 30, 2012, 2011, and 2010, respectively. Mr. Holmes is a director of Meridian Global Energy and Resources Fund Ltd. and Meridian Fund Managers Ltd., and the manager of the Meridian Global Energy and Resources Fund Ltd. In addition, the Company has an investment in the Meridian Global Energy and Resources Fund Ltd. classified as trading with a value of $1,024,879 on June 30, 2012.

The Company provides advisory services for the Meridian Global Dividend Income Fund Ltd., an offshore fund. The Company receives a monthly advisory fee and a quarterly performance fee, if any, based on the overall increase in value of the net assets in the fund for the quarter. The Company recorded fees totaling $24,133 for the year ended June 30, 2012, the first year in which services were provided. Mr. Holmes is a director of Meridian Global Dividend and Income Fund Ltd. and Meridian Fund Managers Ltd., and the manager of the Meridian Global Dividend Income Fund Ltd. In addition, the Company has an investment in the Meridian Global Dividend and Income Fund Ltd. classified as available-for-sale with a value of $4,810,725 at June 30, 2012.

The Company owns a position in Charlemagne Capital Limited on June 30, 2012, valued at approximately $531,224 and recorded as an available-for-sale security. Charlemagne Capital (IOM) Limited, a wholly owned subsidiary of Charlemagne Capital Limited, specializes in emerging markets and is the non-discretionary subadviser to the Eastern European Fund and Global Emerging Markets Fund, two funds in USGIF.

Note 16. Contingencies and Commitments

The Company continuously reviews all investor, employee, and vendor complaints and pending or threatened litigation. The likelihood that a loss contingency exists is evaluated through consultation with legal counsel, and a loss contingency is recorded if probable and reasonably estimable.

During the normal course of business, the Company may be subject to claims, legal proceedings, and other contingencies. These matters are subject to various uncertainties, and it is possible that some of these matters may be resolved unfavorably. The Company establishes accruals for matters for which the outcome is probable and can be reasonably estimated. Management believes that any liability in excess of these accruals upon the ultimate resolution of these matters will not have a material adverse effect on the consolidated financial statements of the Company.

The Board has authorized a monthly dividend of $0.02 per share through December 2012, at which time it will be considered for continuation by the Board. 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. The total amount of cash dividends to be paid to class A and class C shareholders from July 2012 to December 2012 will be approximately $1,856,000.

 

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Note 17. Selected Quarterly Financial Data (Unaudited)

Note that some rows may not add to the correct annual total due to rounding.

 

Fiscal 2012

   1st Quarter      2nd Quarter      3rd Quarter      4th Quarter  

(in thousands except per share figures)

  

Revenues

   $ 7,792       $ 5,880       $ 5,538       $ 4,641   

Expenses

     6,630         5,217         4,743         4,761   

Income (loss) before taxes

     1,162         663         795         (120

Net income (loss)

     750         409         487         (116

Comprehensive income (loss)

     309         436         639         (430

Earnings (loss) per share:

           

Basic

   $ 0.05       $ 0.03       $ 0.03       $ (0.01

Diluted

   $ 0.05       $ 0.03       $ 0.03       $ (0.01
           

Fiscal 2011

   1st Quarter      2nd Quarter      3rd Quarter      4th Quarter  

(in thousands except per share figures)

  

Revenues

   $ 8,921       $ 11,911       $ 11,410       $ 9,692   

Expenses

     6,962         8,271         7,361         7,311   

Income before taxes

     1,959         3,640         4,049         2,381   

Net income

     1,266         2,330         2,694         1,543   

Comprehensive income

     1,725         2,395         2,839         1,361   

Earnings per share:

           

Basic

   $ 0.08       $ 0.15       $ 0.17       $ 0.11   

Diluted

   $ 0.08       $ 0.15       $ 0.17       $ 0.11   

 

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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

There were no changes in or disagreements with accountants on accounting and financial disclosure during the two most recent fiscal years.

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures. An evaluation was conducted under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of June 30, 2012. Based on that evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2012, to ensure that information required to be disclosed in the reports that it files or submits under the Exchange Act is: (1) recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms; and (2) accumulated and communicated to management, including the principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure.

Management’s Report on Internal Control over Financial Reporting. The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined by Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

The Company’s management assessed the effectiveness of its internal control over financial reporting as of June 30, 2012. In making this assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework. Based on the Company’s assessment, management believes that, as of June 30, 2012, the Company’s management has maintained effective internal control over financial reporting.

The effectiveness of the Company’s internal control over financial reporting as of June 30, 2012, has been audited by BDO USA, LLP, the independent registered public accounting firm who also audited the Company’s consolidated financial statements. Its report appears in Item 8.

Changes in Internal Control over Financial Reporting. There have not been any changes in the Company’s internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) during the fourth quarter ended June 30, 2012, that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

Inherent Limitation of the Effectiveness of Internal Control. A control system, no matter how well conceived, implemented and operated, can provide only reasonable, not absolute, assurance that the objectives of the internal control system are met. Because of such inherent limitations, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company or any division of a company have been detected.

 

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Item 9B. Other Information

In light of Frank Holmes’ ownership of 99.59 percent of the class C voting shares, the Company is eligible to rely on the exemption from certain of the NASDAQ corporate governance listing requirements relating to the independence of the Board of Directors and certain committees that is afforded to controlled companies. Under NASDAQ rules, a controlled company is a company of which more than 50 percent of the voting power for the election of directors is held by an individual, a group or another company.

 

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   Part III of Annual Report on Form 10-K    LOGO

Item 10. Directors, Executive Officers and Corporate Governance

 

The directors and executive officers of the Company are as follows:

 

Name

  

Age

  

Position

Frank E. Holmes

   57   

Director of the Company 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 served as Trustee of U.S. Global Investors Funds since August 1989 and Trustee of U.S. Global Accolade Funds from April 1993 to October 2008. Mr. Holmes has also served as Director of Meridian Fund Managers Ltd. since November 2003, Director of Meridian Global Gold & Resources Fund Ltd. since December 2003, Director of Meridian Global Energy & Resources Fund Ltd. since April 2006, Director of Meridian Global Dividend Income Fund since April 2011 and Chairman of Endeavour Financial Corp. from October 2005 to November 2008. Mr. Holmes served as Director of 71316 Ontario, Inc. from April 1987 to October 2006, and Director, President, and Secretary of F.E. Holmes Organization, Inc. from July 1978 to July 2009.

Jerold H. Rubinstein

   74   

Chairman of the Board of Directors since February 2006 and Director of the Company since October 1989. Board member and Chairman of the Audit Committee of CKE Restaurants since June 2006; Board member and Chairman of the Audit Committee of Stratus Media Group, Inc. since April 2011. Founder and Chief Executive Officer of Music Imaging & Media, Inc. from July 2002 to January 2010. Board member, Chief Executive Officer, and Chairman of the Board for ProElite, Inc. since June 2012.

Roy D. Terracina

   65   

Director of the Company since December 1994 and Vice Chairman of the Board of Directors since May 1997. Owner of Sunshine Ventures, Inc., a company formed to hold investments, since January 1994. Chairman of the Board of Our Lady of the Lake University since May 2010.

Thomas F. Lydon, Jr.

   52   

Director of the Company since June 1997. Chairman of the Board and President of Global Trends Investments since April 1996. Member of the Board of Trustees of Rydex/SGI since June 2005 (Rydex/SGI purchased by Guggenheim Investments as of February 2012).

Susan B. McGee

   53   

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.

Catherine A. Rademacher

   52   

Chief Financial Officer of the Company since August 2004. Controller of the Company from April 2004 until August 2004. Since April 2004, Ms. Rademacher 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.

 

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Director Independence. The Company’s Board of Directors is currently composed of four members. The Board of Directors has determined that three of the four members meet the definition of an independent director set forth in NASDAQ Rule 5605(a)(2), the exception being Frank Holmes who is the Chief Executive Officer and Chief Investment Officer of the Company. In assessing the independence of directors, the Board of Directors considered the business relationships between the Company and its directors or their affiliated businesses, including businesses owned and operated by family members, other than ordinary investment relationships. Furthermore, the Board has determined that none of the members of the two standing committees of the Board of Directors in existence during the 2012 fiscal year has any material relationship with the Company (either directly or as a partner, stockholder or officer of an organization that has a relationship with the Company) and that each such member is “independent” within the meaning of the independence standards applicable to each such committee.

The Board of Directors held five meetings over the past fiscal year. All incumbent directors attended 75 percent or more of the Board meetings and meetings of the committees on which they served during the last fiscal year. Directors are encouraged to attend the Annual Meeting of Shareholders. All directors attended the 2011 Annual Meeting. The standing committees of the Board of Directors currently consist of the Audit Committee and the Compensation Committee. The membership and responsibilities of those committees are described below

 

Independent Directors    Audit Committee    Compensation Committee   

Roy D. Terracina

  

Chairman

  

Member

  

Thomas F. Lydon, Jr.

  

Member

  

Chairman

  

Jerold H. Rubinstein

  

Member

  

Member

  

Audit Committee. The Company has a separately designated Audit Committee, established in accordance with Section 3(a)(58)(A) of the Exchange Act. The Audit Committee assists the Board of Directors in monitoring the integrity of the financial statements of the Company; the independent auditor’s qualifications and independence; the performance of the Company’s internal audit function and independent auditors; complaints relating to the Company’s accounting, internal accounting controls and audit matters; and the Company’s accounting and financial reporting processes and audits of the Company’s financial statements. The Board of Directors has determined that Director Roy Terracina qualifies as an “audit committee financial expert” as defined in Item 401(e) of Regulation S-K under the Exchange Act. Mr. Terracina’s pertinent experience, qualifications, attributes, and skills include: a bachelor’s degree and a master’s degree in finance, financial experience as a treasurer of a publicly traded company, managerial experience attained as the owner of a company responsible as a major supplier of baked and packaged goods primarily through the Department of Defense, the knowledge and experience he has attained from service on other boards and the knowledge and experience he has attained from his service on U.S. Global’s Board. The Audit Committee met six times during the past fiscal year. All incumbent committee members attended 75 percent or more of the committee meeting on which they served during the last fiscal year.

Report of the Audit Committee. Management is responsible for U.S. Global’s internal controls and financial reporting process. BDO USA, LLP, U.S. Global’s independent registered public accounting firm for the fiscal year ended June 30, 2012, is responsible for performing an independent audit of U.S. Global’s consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (“PCAOB”), and an audit of the effectiveness of U.S. Global’s internal control over financial reporting in accordance with the standards of the PCAOB and to issue its reports thereon. The Audit Committee monitors and oversees these processes. The Audit Committee approves the selection and appointment of U.S. Global’s independent registered public accounting firm and recommends the ratification of such selection and appointment to U.S. Global’s Board of Directors.

The Audit Committee has reviewed and discussed U.S. Global’s audited financial statements with management and BDO USA, LLP. The committee has discussed with BDO USA, LLP the matters required to be discussed by the Statement on Auditing Standards No. 61, as amended (AICPA, Professional Standards, Vol. 1, AU section 380), as adopted by the PCAOB in Rule 3200T, which relates to the conduct of our audit, including our auditors’ judgment about the quality of the accounting principles applied in our fiscal 2012 audited consolidated financial statements. The Audit Committee has received the written disclosures and the letter from BDO USA, LLP required by applicable requirements of the PCAOB regarding the independent accountant’s communications with the committee concerning independence and has discussed with BDO USA, LLP that firm’s independence.

Based on the foregoing review and discussions and such other matters the Audit Committee considered relevant and appropriate, the committee recommended to the Board that the audited financial statements of U.S. Global be included in its Annual Report on Form 10-K for the year ended June 30, 2012.

 

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Compensation Committee. The Compensation Committee assists the Board of Directors in carrying out its responsibilities with respect to employee qualified benefit plans and employee programs, executive compensation programs, stock option plans and director compensation programs. The Compensation Committee has broad responsibility for assuring that the Company’s executive officers, including the Company’s Chief Executive Officer, are effectively compensated in terms of salaries, supplemental compensation and benefits that are internally equitable and externally competitive. Additional responsibilities include the review and approval of corporate goals and objectives relevant to the Chief Executive Officer. The Compensation Committee reviews all components of compensation, including salaries, cash incentive plans, long-term incentive plans and various employee benefit matters. The Compensation Committee met two times during the past fiscal year. All incumbent committee members attended 75 percent or more of the committee meetings on which they served during the last fiscal year.

Compensation Committee Interlocks and Insider Participation. During fiscal year 2012, the Compensation Committee consisted of Roy D. Terracina, Thomas F. Lydon, Jr., and Jerold H. Rubinstein. All members of the Compensation Committee were independent directors, and no member was an employee or former employee. During fiscal year 2012, none of the Company’s executive officers served on the compensation committee (or its equivalent) or board of directors of another entity whose executive officer served on the Company’s Compensation Committee.

Nomination of Directors. Although the Company does not have a standing nominating committee, the Company’s Corporate Governance Guidelines effectively provide guidance on selection and nomination process whenever a vacancy occurs on the Board of Directors. Due to the longevity of service of the current Board of Directors, those Directors have not participated in consideration of director nominees.

The Company believes generally that its Board as a whole should encompass a range of talent and expertise enabling it to provide sound guidance with respect to the Company’s operations and interests. Whenever a vacancy occurs on the Board of Directors, the Board is responsible for identifying one or more candidates to fill that vacancy, investigating each candidate and evaluating their suitability for service on the Board. The following attributes or qualifications will be considered by the Board in evaluating a person’s candidacy:

 

   

Management and leadership experience;

 

   

Skilled and diverse background; and

 

   

Integrity and professionalism.

The Board is authorized to use any methods it deems appropriate for identifying candidates for Board membership. In addition, candidates recommended by the Company’s stockholders, pursuant to a Director Recommendation Form, are considered in the same manner as other candidates.

The Company’s policy is to have at least a majority of directors qualify as “independent” under the NASDAQ Listing Rules and the Company’s Corporate Governance Guidelines, which are available at the Company’s website at www.usfunds.com.

 

Code of Ethics for Principal Executive and Senior Financial Officers

The Company has adopted a Code of Ethics for Principal Executive and Senior Financial Officers that applies to the Company’s principal executive officer and principal financial officer. This code charges these individuals with responsibilities regarding honest and ethical conduct, the preparation and quality of the disclosures in documents and reports the Company files with the SEC, and compliance with applicable laws, rules, and regulations.

 

Compliance with Section 16(a) of the 1934 Act

Section 16(a) of the 1934 Act requires directors and officers of the Company, and persons who own more than 10 percent of the Company’s class A common stock, to file with the SEC initial reports of ownership and reports of changes in ownership of the stock. Directors, officers and more than 10 percent shareholders are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file.

 

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Based solely on the Company’s review of the copies of such reports received by the Company and on written representations by the Company’s officers and directors regarding their compliance with the applicable reporting requirements under Section 16(a) of the Exchange Act, the Company believes that, with respect to the fiscal year ended June 30, 2012, its officers and directors, and all of the persons known to it to own more than 10 percent of its common stock, filed all required reports on a timely basis.

 

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Item 11. Executive Compensation

Compensation Discussion and Analysis

Overview

The following section provides a discussion and analysis of the basis for the compensation awarded to the CEO, the CFO, and our other most highly compensated executive officer of the Company (“Named Executive Officers” or “NEOs”), as well as our directors in fiscal 2012. We provide investment advisory and other services to our clients. Our long-term success depends on our ability to provide superior investment returns and outstanding client service. As such, one of our greatest assets is the collective skill, experience and efforts of our employees. To achieve success, we must be able to attract, retain and motivate professionals within all levels of our Company who are committed to our core values.

We place great significance on our values of performance, teamwork, initiative, responsiveness, focused work ethic, and intellectual curiosity. We believe that adherence to these core values will contribute to the long-term success of the Company and our shareholders.

We compete for talent with a large number of investment management and financial services companies, many of which have significantly larger market capitalization than we do. Our relatively small size within the industry, geographic location, and lean executive management team provide unique challenges.

Setting Executive Compensation

The Compensation Committee of our Board of Directors is responsible for reviewing and approving corporate goals and objectives relevant to the CEO, Frank Holmes; evaluating the CEO’s performance in light of those goals and objectives; and determining and approving the CEO’s compensation level based on this evaluation. In addition, the committee is responsible for reviewing and approving compensation recommended by Mr. Holmes for our other executive officers. The Board appointed Messrs. Lydon, Terracina, and Rubinstein as members of the Compensation Committee. Mr. Lydon serves as the chairman of the Compensation Committee. There are no Compensation Committee interlocks to report. The Compensation Committee has a charter that is available for review on our website at www.usfunds.com by clicking “About Us,” followed by “Investor Relations,” then “Policies and Procedures.”

The individuals listed below are the CEO and CFO, plus our other most highly compensated NEO in fiscal 2012.

 

Name   Title

Frank E. Holmes

 

Chief Executive Officer and Chief Investment Officer

Catherine A. Rademacher

 

Chief Financial Officer

Susan B. McGee

 

President and General Counsel

In establishing total annual compensation for Mr. Holmes, the Compensation Committee considers a number of factors. For assistance in determining the appropriate factors to consider, the Compensation Committee consulted in 2005 with Moss Adams LLP, an executive compensation consulting firm. Importantly, the Compensation Committee considers the various functions Mr. Holmes assumes, including the dual role of CEO and Chief Investment Officer (“CIO”). In addition, the Compensation Committee considers various measures of company performance, including profitability and total shareholder return. The Compensation Committee also reviews Mr. Holmes’ performance in managing our corporate investments, in overseeing the management of our client portfolios and the results of our operational earnings.

In addition to his base salary, Mr. Holmes receives a bonus based on operational earnings, which are substantially derived from assets under management, based on a percentage of operational earnings, and capped at a predetermined dollar amount, as computed for financial reporting purposes in accordance with GAAP (before consideration of this fee).

Mr. Holmes also receives a bonus when our investment team meets their goal of being in the top half of their peer group. The bonus is based on fund performance bonuses paid to the investment team and is in recognition of Mr. Holmes’ creation and oversight of the investment processes and strategy.

 

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In addition, Mr. Holmes receives a percentage of offshore fund management and performance fees in recognition of attracting and managing offshore client accounts, and a percentage of realized gains on investments, offset by realized losses and other-than-temporary write-downs, in recognition of his expertise in managing the investments of the company.

The committee has delegated to Mr. Holmes the responsibility for reviewing the performance of, and recommending the compensation levels for, our other NEOs. The committee does not use rigid formulas with respect to the compensation of NEOs. Mr. Holmes makes a recommendation based on the achievement of qualitative goals that apply to all employees, quantitative goals that apply to an executive officer’s specific job responsibilities and other accomplishments, such as expansion in functional responsibility. In forming his recommendations, Mr. Holmes also considers the responsibilities and workload of the executive officer; the explicit and tacit knowledge required to perform these responsibilities, including any professional designations; the profitability of the company; and the cost of living in San Antonio, Texas.

Objectives

Our executive compensation programs are designed to:

 

   

attract and retain key executives,

 

   

align executive performance with our long-term interests and those of our shareholders and

 

   

link executive pay with performance.

Elements of Executive Compensation

The committee reviews and approves all components of executive officer compensation. The principal elements of executive compensation, other than Mr. Holmes, are:

 

   

base salary,

 

   

performance-based cash and stock bonuses,

 

   

long-term incentive awards, and

 

   

other compensation and benefits.

Base Salary

Base salaries for NEOs are reviewed annually by the Compensation Committee. Generally, the salaries of NEOs are occasionally adjusted to recognize expansion of an individual’s role, outstanding and sustained performance, or to bring the officer’s pay into alignment with the market. We did not use any benchmarking studies in fiscal 2012 to obtain market information. In addition, the Compensation Committee did not consider the equity ownership of the Company by Mr. Holmes when setting his compensation. Nor did the committee aim for a specific relationship between Mr. Holmes and the other executive officers. Base salaries paid to NEOs during the fiscal year are shown in the Summary Compensation Table.

Performance-Based Cash Bonuses

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. Discretionary cash bonuses are awarded from time to time for such things as completion of critical projects or outstanding performance.

Mr. Holmes considers a matrix of factors in reviewing the performance of, and compensation for, the CFO, Catherine Rademacher. Mr. Holmes considers such things as responsibilities, productivity, results of the Company’s actual versus targeted goals, hours of work, profitability of the Company, timely and accurate financial regulatory filings, unqualified S-Ox and audit results and the cost of living in San Antonio. Ms. Rademacher receives a monthly bonus when certain fund performance criteria are met and a monthly bonus when certain other financial metrics are met. Occasionally, Ms. Rademacher receives discretionary bonuses for the completion of special projects.

 

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In reviewing the performance of and compensation for the President and General Counsel Susan McGee, Mr. Holmes considers a matrix of factors including responsibilities, productivity, hours of work, profitability of the Company, timely and accurate regulatory filings, completion of regulatory examinations, and the cost of living in San Antonio. In addition to her base salary, Ms. McGee is paid a monthly bonus based on new assets flowing through institutional accounts in recognition of her leadership and strategic guidance of the institutional sales department. Ms. McGee receives a monthly bonus when certain financial metrics are met. Occasionally Ms. McGee receives discretionary bonuses for special projects such as completion of regulatory exams or managing significant new business relationships.

Long-Term Incentive Awards

Long-term incentive awards include stock options and restricted shares. We have utilized option grants to induce qualified individuals to join us, thereby providing the individual with an opportunity to benefit if we have significant growth. Similarly, options have been utilized to reward existing employees, including NEOs, for long and faithful service and to encourage them to stay with us. The Compensation Committee administers the stock option plans. Although the Company has no written policy for allocating between cash and equity, or current and long-term compensation for the CEO and other NEOs, the weighting has generally been in the range of less than 5 percent long-term compensation in the form of options or stock awards, with the remaining compensation in cash.

Stock Option Plans

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 our class A common stock to directors, officers, and employees. 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 the Compensation 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 1,600,000 shares. During the fiscal year ended June 30, 2012, no stock options were granted. As of June 30, 2012, under this amended plan, 1,733,400 options had been granted, 883,000 options had been exercised, 850,400 options had expired, no options remained outstanding and 717,000 options are available for grant.

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 our class A common stock to directors, officers and employees. The 1997 Plan expressly requires that all grants under the plan qualify under 1934 Act Rule 16b-3. The 1997 Plan is administered by the Compensation 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 400,000 shares. During the fiscal year ended June 30, 2012, an option for 5,000 shares was granted. As of June 30, 2012, 581,300 options had been granted, 257,000 shares had been exercised, 295,300 options had expired, 29,000 options remained outstanding and 114,000 options are available for grant.

2010 Stock Incentive Plan

In October 2010, at the Annual Meeting of Shareholders, the class C shareholders voted to adopt the 2010 Stock Incentive Plan. The 2010 Stock Incentive Plan is intended to promote the interests of the Company by providing eligible persons in the Company’s service with the opportunity to acquire a proprietary interest, or otherwise increase their proprietary interest, in the Company to align such persons’ interests with those of the Company’s shareholders and as an incentive for them to remain in such service. During fiscal 2012, stock bonuses totaling $23,913 were awarded to NEOs, some of which were distributed in fiscal 2013.

Assessment of Risk

By design, the Company’s compensation program for all employees, including executive officers, does not incentivize excessive risk-taking. The Company’s base salary component of compensation does not encourage risk-taking because it is a fixed amount. Generally, incentive awards have the following risk-limiting characteristics:

 

   

Awards are made based on a review of a variety of indicators of performance, thus diversifying the risk associated with any single indicator of performance;