UNITED STATESSECURITIES AND EXCHANGE COMMISSION
OR
Commission File Number 0-13928
U.S. GLOBAL INVESTORS, INC.
(210) 308-1234
Not Applicable(Former Name, Former Address, and Former Fiscal Year, if Changed since Last Report)
Indicate by check mark whether the registrant (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, and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
On November 4, 2004, there were 6,311,974 shares of Registrant’s class A nonvoting common stock issued and 5,980,875 shares of Registrant’s class A nonvoting common stock issued and outstanding, no shares of Registrant’s class B nonvoting common shares outstanding, and 1,496,800 shares of Registrant’s class C common stock issued and outstanding.
Table of Contents
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets
The accompanying notes are an integral part of this statement.
Liabilities and Shareholders’ Equity
Consolidated Statements of Operations and Comprehensive Income (Unaudited)
Consolidated Statements of Cash Flows (Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1. Basis of Presentation
The Consolidated Financial Statements have been prepared by U.S. Global Investors, Inc. (the Company or U.S. Global) pursuant to accounting principles generally accepted in the United States of America and the rules and regulations of the Securities and Exchange Commission that permit reduced disclosure for interim periods. The financial information included herein reflects all adjustments (consisting solely of normal recurring adjustments), which are, in the opinion of management, necessary for a fair presentation of results for the interim periods presented. The Company has consistently followed the accounting policies set forth in the Notes to the Consolidated Financial Statements in the Company’s Form 10-K for the year ended June 30, 2004.
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, United Shareholder Services, Inc. (USSI), A&B Mailers, Inc. (A&B), U.S. Global Investors (Guernsey) Limited (USGG), and U.S. Global Brokerage, Inc. (USGB).
All significant intercompany balances and transactions have been eliminated in consolidation. Certain amounts have been reclassified for comparative purposes. The results of operations for the three-month period ended September 30, 2004, are not necessarily indicative of the results to be expected for the entire year.
Note 2. Investments
The cost of investments classified as trading at September 30, 2004, and June 30, 2004, was $1,856,916 and $1,857,171, respectively. The market value of investments classified as trading at September 30, 2004, and June 30, 2004, was $1,636,429 and $1,672,354 respectively. The change in net unrealized holding losses on trading securities held at September 30, 2004, and 2003, which has been included in income for the quarter, was $(35,670) and $374,007, respectively. Sales of trading securities generated realized losses of $0 and $8,720 for quarter ended September 30, 2004, and 2003, respectively.
The cost of investments in securities classified as available-for-sale, which may not be readily marketable, was $310,185 and $405,055 at September 30, 2004, and June 30, 2004, respectively. These investments are reflected as non-current assets on the consolidated balance sheet at their fair market value at September 30, 2004, and June 30, 2004, of $1,358,323 and $1,212,742, respectively, with $691,772 and $533,074, respectively, net of tax, in unrealized gains being recorded as a separate component of shareholders’ equity. Sales of available-for-sale securities generated realized gains of $0 and $32,672 for the quarter ended September 30, 2004, and 2003, respectively. For available-for-sale securities with declines in value that are deemed other than temporary, the cost basis of the securities is reduced accordingly, and the resulting loss is realized in earnings. The company recorded other than temporary declines of $94,870 and $14,226 for the quarter ended September 30, 2004, and 2003, respectively.
Note 3. Investment Management, Transfer Agent and Other Fees
The Company serves as investment adviser to U.S. Global Investors Funds (USGIF) and U.S. Global Accolade Funds (USGAF) and receives a fee based on a specified percentage of net assets under management. Two funds within USGAF are sub-advised by outside third-party managers, who are in turn paid out of the investment advisory fees received by the Company. The Company also serves as transfer agent to USGIF and USGAF and receives a fee based on the number of shareholder accounts. Additionally, the Company provides in-house legal services to USGIF and USGAF, and the Company also receives certain miscellaneous fees directly from USGIF and USGAF shareholders. Fees for providing services to USGIF and USGAF continue to be the Company’s primary revenue source.
The Company has voluntarily waived or reduced its advisory fee and/or has agreed to pay expenses on several USGIF funds through June 30, 2005, or such later date as the Company determines. The aggregate fees waived and expenses borne by the Company for the quarter ended September 30, 2004, and 2003, were $353,432 and $390,438, respectively.
The investment advisory and related contracts between the Company and USGIF and USGAF will expire in February 2005 and May 2005, respectively. Management anticipates the board of trustees of both USGIF and USGAF will renew the contracts.
The Company began providing investment subadvisory services for a client in the first quarter of fiscal year 2005. The Company has a fee arrangement for these services whereby it receives a monthly subadvisory fee and an annual performance fee based on the overall increase in value of the net assets in the fund for the period. The Company has recorded subadvisory revenues of $3,631 from this fee arrangement for the quarter ended September 30, 2004.
The Company also provided investment management services for a separate advisory client through March 2004. The Company had a fee arrangement whereby it received an annual administrative fee plus a percentage of any gains from the sale of the securities in the client account, payable at the settlement of the sales. The Company had recorded $291,882 in revenue from this fee arrangement for the quarter ended September 30, 2003.
The Company receives additional revenue from several sources including custodian fee revenues, revenues from miscellaneous transfer agency activities including lockbox functions, mailroom operations from A&B, as well as gains on marketable securities transactions for the Company’s proprietary account.
Note 4. Borrowings
The Company has access to a $1 million credit facility with a one-year maturity for working capital purposes. Any use of this credit facility will be secured by the Company’s eligible accounts receivable. As of September 30, 2004, this credit facility remained unutilized by the Company.
Note 5. Stock-Based Compensation
The Company accounts for stock-based compensation using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25), and related interpretations, as allowed under Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation”, (SFAS 123). In accordance with APB 25, no compensation expense is recognized for stock options where the exercise price equals or exceeds the underlying stock price on the date of grant.
The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS 123:
For purposes of pro forma disclosure, the estimated fair value of the options is amortized to expense over the options’ vesting period. The fair value of these options was estimated at the date of the grant using a Black-Scholes option-pricing model. No options were granted during the quarters ended September 30, 2004, and September 30, 2003, respectively.
Note 6. 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 following table sets forth the computation for basic and diluted earnings per share (EPS):
The diluted EPS calculation excludes the effect of stock options when their exercise prices exceed the average market price for the period. For the quarter ended September 30, 2004, and September 30, 2003, options for 20,000 and 16,000 shares, respectively, were excluded from diluted EPS.
Note 7. 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. For federal income tax purposes at September 30, 2004, the Company has charitable contribution carryovers of approximately $10,000 expiring in 2010, and alternative minimum tax (AMT) credits of approximately $67,000 with indefinite expirations. The current deferred tax asset primarily consists of unrealized losses on trading securities. The long-term deferred tax asset is composed primarily of the $67,000 of AMT credits mentioned above. The change in the net deferred tax asset from June 30, 2004 to September 30, 2004 was primarily attributable to partial utilization of the AMT credit.
A valuation allowance is provided when it is more likely than not that some portion of the deferred tax amount will not be realized. Management included a valuation allowance of approximately $4,000 and $34,000 at September 30, 2004, and June 30, 2004, respectively, providing for the utilization of investment tax credits.
Note 8. Financial Information by Business Segment
The Company operates principally in two business segments: providing investment management services to its mutual funds and private client, 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 (loss) by business segment:
Note 9. Contingencies
During fiscal 2001, the Company was named as one of several defendants in a civil lawsuit filed in New York. In June 2003, this lawsuit was dismissed. However, in July 2003, the plaintiff filed an appeal. In November 2003, the Company’s insurance carrier authorized a settlement offer, which was accepted in August 2004. This settlement was paid by the carrier; therefore, it had no impact on the Company’s earnings.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
U.S. Global Investors, Inc. (Company or U.S. Global) has made forward-looking statements concerning the Company’s performance, financial condition, and operations in this report. The Company from time to time may also make forward-looking statements in its public filings and press releases. Such forward-looking statements are subject to various known and unknown risks and uncertainties and do not guarantee future performance. Actual results could differ materially from those anticipated in such forward-looking statements due to a number of factors, some of which are beyond the Company’s control, including (i) the volatile and competitive nature of the investment management industry, (ii) changes in domestic and foreign economic conditions, (iii) the effect of government regulation on the Company’s business, and (iv) market, credit, and liquidity risks associated with the Company’s investment management activities. Due to such risks, uncertainties, and other factors, the Company cautions each person receiving such forward-looking information not to place undue reliance on such statements. All such forward-looking statements are current only as of the date on which such statements were made.
BUSINESS SEGMENTS
U.S. Global Investors, Inc. (Company or U.S. Global), with principal operations located in San Antonio, Texas, manages two business segments: (1) the Company offers a broad range of investment management products and services to meet the needs of individual and institutional investors, and (2) the Company invests for its own account in an effort to add growth and value to its cash position.
The Company generates substantially all its operating revenues from the investment management of products and services for the U.S. Global Investors Funds (USGIF) and U.S. Global Accolade Funds (USGAF). Although the Company generates the majority of its revenues from this segment, the Company holds a significant amount of its total assets in proprietary 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 USGIF and USGAF. These revenues are largely dependent on the total value and composition of assets under its management. Fluctuations in the markets and investor sentiment directly impact the funds’ asset levels, thereby affecting income and results of operations.
During the quarter ended September 30, 2004, mutual fund assets under management averaged $1.35 billion versus $1.07 billion for the same period ended September 30, 2003. This increase was primarily due to significant increase in the Company’s gold, natural resource, and foreign equity funds.
Investment Activities
Management believes it can more effectively manage the Company’s cash position by broadening the types of investments used in cash management and continues to believe that such activities are in the best interest of the Company. Company compliance personnel review and monitor these activities, and various reports are provided to investment advisory clients.
Investment income (loss) from the Company’s investments includes:
This source of revenue does not remain at a consistent level and is dependent on market fluctuations, the Company’s ability to participate in investment opportunities, and timing of transactions.
As of September 30, 2004, the Company held approximately $3.0 million in investment securities. The value of these investments is approximately 30 percent of total assets at period end. For the quarter ended September 30, 2004, and 2003, respectively, sales of available-for-sale securities generated realized gains of $0 and $32,672. For available-for-sale securities with declines in value that are deemed other than temporary, the cost basis of the securities is reduced accordingly, and the resulting loss is realized in earnings. The company recorded other than temporary declines of $94,870 and $14,226 for the quarter ended September 30, 2004, and 2003, respectively.
RESULTS OF OPERATIONS – QUARTER ENDED SEPTEMBER 30, 2004 AND 2003
The Company posted net after-tax income of $240,462 ($0.03 income per share) for the quarter ended September 30, 2004, compared with a net after-tax income $687,511 ($0.09 income per share) for the quarter ended September 30, 2003.
Revenues
Total consolidated revenues for the quarter ended September 30, 2004, increased $333,000, or 13 percent, compared with the quarter ended September 30, 2003. This increase was primarily attributable to increased mutual fund investment advisory fees of $1,021,000, or 77%, as a result of increased assets under management. The Company also had a corresponding increase in transfer agent fees of $123,000, or 21%. Offsetting these favorable trends were a decrease of $511,000, or 132%, in investment income due to a reduction in the unrealized gains on trading securities for the quarter ending September 30, 2004, and a decrease in separate account advisory fees of $288,000, or 99%, due to termination of a prior advisory agreement in March 2004.
Expenses
Total consolidated expenses for the quarter ended September 30, 2004, increased $685,000, or 35 percent, compared with the quarter ended September 30, 2003. This increase was primarily attributable to increased omnibus fees of $215,000, or 491%, increased performance-driven compensation expense of $189,000, or 18%, additional subadvisory fees of $148,000, or 94%, associated mainly with asset growth in the Eastern European Fund, increased miscellaneous general and administrative expenses of $73,000, or 45%, (primarily insurance and the reversal of an allowance for doubtful accounts) and increased sales and marketing expenses of $54,000, or 51%.
Much of the mutual fund asset growth across all funds has been realized through broker/dealer platforms. These broker/dealers typically charge an asset-based fee for assets held through their platforms. Accordingly, net platform distribution fees have increased as assets have grown through these platforms.
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. For federal income tax purposes at September 30, 2004, the Company has charitable contribution carryovers of approximately $10,000 expiring in 2010, and alternative minimum tax (AMT) credits of approximately $67,000 with indefinite expirations. The current deferred tax asset primarily consists
of unrealized losses on trading securities. The long-term deferred tax asset is composed primarily of the $67,000 of AMT credits mentioned above.
The change in the net deferred tax asset from June 30, 2004 to September 30, 2004 was primarily attributable to partial utilization of the AMT credit.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2004, the Company had net working capital (current assets minus current liabilities) of approximately $5.7 million and a current ratio (current assets divided by current liabilities) of 6.6 to 1. With approximately $3.2 million in cash and cash equivalents and approximately $3.0 million in marketable securities, the Company has adequate liquidity to meet its current obligations. Total shareholders’ equity was approximately $8.9 million, with cash, cash equivalents, and marketable securities comprising 62.9% of total assets.
The Company paid the mortgage on its corporate headquarters in full in fiscal 2004. 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 potential cash flow are expected to be sufficient to cover current expenses.
The investment advisory and related contracts between the Company and USGIF and USGAF will expire on February 28, 2005, and May 31, 2005, respectively. Management anticipates the board of trustees of both USGIF and USGAF will renew the contracts.
Management believes current cash reserves, financing obtained and/or available, and potential cash flow from operations will be sufficient to meet foreseeable cash needs or capital necessary for the above-mentioned activities and allow the Company to take advantage of opportunities for growth whenever available.
CRITICAL ACCOUNTING POLICIES
In addition to the critical accounting policies included in the Annual Report on Form 10-K, the following policy has arisen because of a new contract in fiscal 2005. For further discussions of other significant accounting policies that we follow, please refer to the notes to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended June 30, 2004.
Revenue Recognition on Subadvisory Contract. The Company began providing investment subadvisory services for a client in the first quarter of fiscal year 2005. The Company has a fee arrangement for these services whereby it receives a monthly subadvisory fee and an annual performance fee based on the overall increase in value of the net assets in the fund for the period. The Company has recorded subadvisory revenues of $3,631 from this fee arrangement for the quarter ended September 30, 2004. Since the performance fee is paid annually, the fees will fluctuate on an annual basis based on the net asset value of the fund. The final calculation of the performance fees will be made at December 31, 2004, and each year thereafter while the agreement is in place, at which time the fees will be paid to the Company and recognized.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company’s balance sheet includes assets whose fair value is subject to market risks. Due to the Company’s investments in equity securities, equity price fluctuations represent a market risk factor affecting the Company’s consolidated financial position. The carrying values of investments subject to equity price risks are based on quoted market prices or, if not actively traded, management’s estimate of fair value as of the balance sheet date. Market prices fluctuate, and the amount realized in the subsequent sale of an investment may differ significantly from the reported market value.
The Company’s investment activities are reviewed and monitored by Company compliance personnel, and various reports are provided to investment advisory clients. The Company has in place a code of ethics that requires pre-clearance of any trading activity by the Company. Written procedures are also in place to manage compliance with the code of ethics.
The table below summarizes the Company’s equity price risks as of September 30, 2004, and shows the effects of a hypothetical 25% increase and a 25% decrease in market prices.
SENSITIVITY ANALYSIS
The selected hypothetical change does not reflect what could be considered best- or worst-case scenarios. Results could be significantly worse due to both the nature of equity markets and the concentration of the Company’s investment portfolio.
ITEM 4. CONTROLS AND PROCEDURES
An evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of September 30, 2004, was conducted under the supervision and with the participation of management, including our chief executive officer and chief financial officer. Based on that evaluation, the chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of September 30, 2004.
There has been no change in the Company’s internal control over financial reporting that occurred during the quarter ended September 30, 2004, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
1. Exhibits
2. Reports on Form 8-K
Current Report on Form 8-K filed September 27, 2004, filing of Press Release Reporting Earnings and Other Financial Results for the year ended June 30, 2004.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized.