UNITED STATESSECURITIES AND EXCHANGE COMMISSION
Commission File Number 0-13928
U.S. GLOBAL INVESTORS, INC.
(210) 308-1234(Registrant’s Telephone Number, Including Area Code)
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.
On January 27, 2005 there were 6,316,474 shares of Registrant’s class A nonvoting common stock issued and 5,988,273 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
Assets
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 six-month and three-month period ended December 31, 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 December 31, 2004, and June 30, 2004, was $1,897,518 and $1,857,171, respectively. The market value of investments classified as trading at December 31, 2004, and June 30, 2004, was $1,717,390 and $1,672,354, respectively. The change in net unrealized holding gains and losses on trading securities held at December 31, 2004, and 2003, which has been included in income for the six-month period, was $4,689 and $1,582,294, respectively. Sales of trading securities generated realized losses of $726 and $11,012 for the six-month period ended December 31, 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 December 31, 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 December 31, 2004, and June 30, 2004, of $1,260,778 and $1,212,742, respectively, with $627,391 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 $158,388 for the six-month period ended December 31, 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 $30,879 for the six-month period ended December 31, 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 compensated 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 six-month period ended December 31, 2004, and 2003, were $706,442 and $753,744, respectively.
The investment advisory and related contracts between the Company and USGIF and USGAF will expire in February 2006 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 $17,362 and $13,731 in subadvisory revenues and $40,235 in performance fee revenues from this fee arrangement for the six months and three months, respectively, ended December 31, 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 recorded $577,528 and $285,646 in revenue from this fee arrangement for the six months and three months, respectively, ended December 31, 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 investment income.
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 December 31, 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). 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 Company has implemented the disclosure-only provisions of Statement of Financial Accounting Standards Board (“FAS”) No. 123, “Accounting for Stock-Based Compensation,” and FAS No. 148, “Accounting for Stock-Based Compensation Transition and Disclosure.”
The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FAS No. 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. A total of 20,000 options were granted to officers during the six months ended December 31, 2004, and no options were granted during the six months ended December 31, 2003. A total of 4,500 and no options were exercised during the six months ended December 31, 2004 and December 31, 2003, respectively.
Note 6. Earnings Per Share
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 six-months ended December 31, 2004, and December 31, 2003, options for 40,000 and 11,000 shares, respectively, were excluded from diluted EPS. For the three-month period ended December 31, 2004, and December 31, 2003, options for 20,000 and 1,000 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 December 31, 2004, the Company has alternative minimum tax (AMT) credits of approximately $28,000 with indefinite expirations. The long-term deferred tax asset is composed primarily of the AMT credits mentioned above as well as unrealized losses on available-for-sale securities. The current deferred tax liability is composed primarily of temporary differences in the deductibility of prepaid expenses.
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 December 31, 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, and 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. Executed settlement documents were received in November 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. (the Company or U.S. Global) has made forward-looking statements concerning the Company’s performance, financial condition, and operations in this quarterly 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
The Company, with principal operations in San Antonio, Texas, manages two business segments: (1) the Company provides investment management services, 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). USGAF has plans to launch a new fund in February 2005 called the Global Emerging Markets Fund. This fund will be subadvised by Charlemagne Capital Ltd., who also subadvises the Eastern European Fund.
Although the Company generates the majority of its revenues from this 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 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 six-month period ended December 31, 2004, mutual fund assets under management averaged $1.51 billion versus $1.19 billion for the same period ended December 31, 2003. During the three-month period ended December 31, 2004, mutual fund assets under management averaged $1.67 billion versus $1.31 billion for the same period ended December 31, 2003. These favorable trends were primarily due to significant increases in the Company’s foreign equity, natural resource, and gold funds. The Company realized the benefit of net inflows into these funds as well as market appreciation. This favorable trend has been partially offset by a reduction in assets in the money market and bond funds as investors seek alternative investments with higher yields.
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 $17,362 and $13,731and performance revenues of $40,235 from this fee arrangement for the six months and three months, respectively, ended December 31, 2004.
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 December 31, 2004, the Company held approximately $3.0 million in investment securities. The value of these investments is approximately 29 percent of total assets.
For the six-month period ended December 31, 2004, the Company had net realized losses on trading securities of $726 compared with net realized losses of $11,017 for the six-month period ended December 31, 2003. The change in net unrealized holding gains and losses on trading securities held at December 31, 2004, and 2003, which has been included in income for the six-month period, was $4,689 and $1,582,294, respectively.
For the three-month period ended December 31, 2004, the Company had net realized losses on trading securities of $726 compared with net realized losses of $2,292 for the three-month period ended December 31, 2003. The change in net unrealized holding gains and losses on trading securities held at December 31, 2004, and 2003, which has been included in income for the three-month period, was ($32,998) and $1,208,286, respectively.
A significant portion of the unrealized gains and losses for the six-month and three-month periods ending December 31, 2004, is concentrated in a single issuer. The Company expects that gains and losses will continue to fluctuate in the future.
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 $30,879 for the six-month period ended December 31, 2004, and 2003, respectively. During the three-month period ended December 31, 2004, and 2003, the Company recorded other than temporary declines of $0 and $16,654, respectively.
RESULTS OF OPERATIONS – SIX MONTHS ENDED DECEMBER 31, 2004 AND 2003
The Company posted net after-tax income of $647,650 ($.09 income per share) for the six-month period ended December 31, 2004, compared with net after-tax income of $1,936,004 ($.26 income per share) for the six-month period ended December 31, 2003.
Revenues
Total consolidated revenues for the six-month period ended December 31, 2004, increased $101,000 or 1 percent, compared with the six-month period ended December 31, 2003. This increase was largely attributable to an increase of $2.2 million in investment advisory fees as a result of increased assets under management. The Company also had an increase in transfer agent fees of $230,000 primarily as a result of growth in the number of fund shareholder accounts. Offsetting these favorable trends was a decrease in investment income of $1.8 million primarily due to a reduction in unrealized gains on trading securities. In addition, separate account advisory fees decreased by $520,000 due to the termination of a prior advisory agreement in March 2004.
Expenses
Total consolidated expenses for the six-month period ended December 31, 2004, increased $1.7 million, or 37 percent, compared with the six-month period ended December 31, 2003. Incentive bonuses associated with strong mutual fund performance, mutual fund asset growth and increased accounts have resulted in increased employee compensation expense of $456,000. Consistent with the growth in assets under management has been an increase in sub-advisory fees of $483,000, primarily resulting from an increase in assets in the Eastern European Fund. The mutual fund asset growth has been largely realized through broker/dealer platforms. These broker/dealers typically charge an asset-based fee for assets held in their platforms. Accordingly, net omnibus platform fee expenses have increased $346,000 during the period. General and administrative expenses increased $391,000 primarily as a result of increased consulting, insurance and audit fees.
RESULTS OF OPERATIONS – QUARTER ENDED DECEMBER 31, 2004 AND 2003
The Company posted net after-tax income of $407,187 ($.05 income per share) for the three-month period ended December 31, 2004, compared with net after-tax income of $1,248,495 ($.17 income per share) for the three-month period ended December 31, 2003.
Total consolidated revenues for the quarter ended December 31, 2004, decreased $231,000 or 5 percent, compared with the quarter ended December 31, 2003. This decrease was largely attributable to a decrease in investment income of $1.3 million, primarily due to a reduction in unrealized trading gains on trading securities. In addition, separate account advisory fees decreased by $232,000 due to the termination of a prior advisory agreement in March 2004. Offsetting these decreases was an increase of $1.2 million in investment advisory fees as a result of increased assets under management. The Company also had an increase in transfer agent fees of $107,000 primarily as a result of growth in the number of shareholder accounts.
Total consolidated expenses for the quarter ended December 31, 2004, increased $982,000, or 39 percent, compared with the quarter ended December 31, 2003. Incentive bonuses associated with strong mutual fund performance, mutual fund asset growth and increased accounts have resulted in increased employee compensation expense of $267,000. Consistent with the growth in assets under management has been an increase in sub-advisory fees of $336,000, primarily resulting from an increase in assets in the Eastern European Fund. The mutual fund asset growth has been largely realized through broker/dealer platforms. These broker/dealers typically charge an asset-based fee for assets held in their platforms. Accordingly, net omnibus platform fee expenses have increased $131,000 during the quarter. General and administrative expenses increased $264,000 primarily as a result of increased consulting, insurance and audit fees.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2004, the Company had net working capital (current assets minus current liabilities) of approximately $6.2 million and a current ratio (current assets divided by current liabilities) of 6.5 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 $9.3 million, with cash, cash equivalents, and marketable securities comprising 59.3% 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 $17,362 in subadvisory revenues and $40,235 in performance fee revenues from this fee arrangement for the six months ended December 31, 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 calculation of the performance fees will be made as of December 31 of each year 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 December 31, 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 December 31, 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 the Company’s disclosure controls and procedures were effective as of December 31, 2004.
There has been no change in the Company’s internal control over financial reporting that occurred during the quarter ended December 31, 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
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.