UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended December 31, 2003
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ________ to _________
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Commission File Number 0-13928
U.S. GLOBAL INVESTORS, INC. (Exact name of registrant
as specified in its charter)
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Texas 74-1598370
(State or Other Jurisdiction of (IRS Employer Identification Number)
Incorporation or Organization)
7900 Callaghan Road 78229-1234
San Antonio, Texas (Zip Code)
(Address of Principal Executive Offices)
(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.
YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES [ ] NO [X]
On February 13, 2004, there were 6,311,474 shares of Registrant's class A
nonvoting common stock issued and 5,970,610 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.................................................1
Item 1. Financial Statements...............................................1
Consolidated Balance Sheets (Unaudited)............................1
Consolidated Statements of Operations and Comprehensive
Income (Unaudited).................................................3
Consolidated Statements of Cash Flows (Unaudited)..................4
Notes To Consolidated Financial Statements (Unaudited).............5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................11
Item 3. Quantitative and Qualitative Disclosures about Market Risk........15
Item 4. Controls and Procedures...........................................15
Part II. Other Information...................................................16
Item 6. Exhibits and Reports on Form 8-K..................................16
Signatures...................................................................17
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets
Assets
DECEMBER 31, 2003 JUNE 30, 2003
----------------- -------------
----------------- -------------
(UNAUDITED)
Current Assets
Cash and cash equivalents $1,465,856 $1,162,243
Due from brokers 152,928 3,889
Trading securities, at fair value 2,533,072 723,428
Receivables
Mutual funds-net of
allowance of $0 and $64,488 at 1,500,144 966,260
December 31, 2003, and June 30, 2003,
respectively
Private advisory client 702,142 378,832
Litigation settlement -- 371,057
Employees 9,370 3,998
Other 51,227 20,536
Prepaid expenses 263,815 338,020
Deferred tax asset -- 372,084
Total Current Assets 6,678,554 4,340,347
Net Property and Equipment 1,827,104 1,778,832
Other Assets
Restricted investments 180,000 195,000
Long-term deferred tax asset 687,295 735,257
Investment securities available-for-sale,
at fair value 445,264 390,251
Total Other Assets 1,312,559 1,320,508
Total Assets $9,818,217 $7,439,687
1
Liabilities and Shareholders' Equity
DECEMBER 31, 2003 JUNE 30, 2003
----------------- -------------
(UNAUDITED)
Current Liabilities
Accounts payable $ 76,208 $ 70,437
Accrued compensation and related costs 378,097 264,697
Current portion of notes payable 72,340 70,033
Current portion of annuity and
contractual obligation 10,835 10,464
Deferred tax liability 162,469 --
Other accrued expenses 510,718 361,831
Total Current Liabilities 1,210,667 777,462
Notes payable-net of current portion 850,690 886,527
Annuity and contractual obligations 96,497 102,009
Total Non-Current Liabilities 947,187 988,536
Total Liabilities 2,157,854 1,765,998
Shareholders' Equity
Common stock (Class A) - $.05 par value;
nonvoting; authorized, 7,000,000
shares; issued, 6,311,474 shares 315,574 315,574
Common stock (Class B) - $.05 par
value; nonvoting; authorized,
2,250,000 shares; no shares issued -- --
Common stock (Class C) - $.05 par value;
voting; authorized, 1,750,000 shares;
issued, 1,496,800 shares 74,840 74,840
Additional paid-in-capital 10,825,547 10,806,655
Treasury stock, class A shares at cost;
340,864 and 361,948 shares at
December 31, 2003, and June 30, 2003,
respectively (655,122) (663,536)
Accumulated other comprehensive income
(loss), net of tax 12,481 (10,883)
Accumulated deficit (2,912,957) (4,848,961)
Total Shareholders' Equity 7,660,363 5,673,689
Total Liabilities and Shareholders' Equity $9,818,217 $7,439,687
2
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED)
SIX MONTHS ENDED THREE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------------- --------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Revenues
Investment advisory fees $3,340,301 $2,412,199 $2,006,955 $1,184,416
Transfer agent fees 1,169,267 1,162,413 632,022 578,661
Custodial and administrative fees 69,412 85,428 34,183 50,548
Investment income (loss) 1,711,684 (79,729) 1,323,451 41,358
Private client advisory fees 577,528 324,997 285,646 119,632
Other 97,874 106,390 54,920 66,128
6,966,066 4,011,698 4,337,177 2,040,743
Expenses
General and administrative 4,361,409 3,658,919 2,464,867 1,853,654
Depreciation 53,845 58,704 27,355 28,828
Interest 44,327 42,492 21,578 20,979
4,459,581 3,760,115 2,513,800 1,903,461
Income Before Income Taxes 2,506,485 251,583 1,823,377 137,282
Provision for Federal Income Taxes
Tax Expense (Benefit) 570,481 (1,501) 574,884 (4,695)
Net Income $1,936,004 $ 253,084 $1,248,493 $ 141,977
Other comprehensive income (loss),
net of tax Unrealized gains(losses)
on available-for-sale securities 23,364 (225,691) 1,607 (100,852)
Comprehensive Income $ 1,959,368 $ 27,393 $1,250,100 $ 41,125
Basic and Diluted Net Income per Share $ 0.26 0.03 $ 0.17 $ 0.02
The accompanying notes are an integral part of this statement.
3
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED DECEMBER 31,
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2003 2002
----------------- ----------------
Cash Flows from Operating Activities:
Net income $ 1,936,004 $ 253,084
Adjustments to reconcile
net income to net cash provided by operating activities:
Depreciation 53,845 58,704
Net recognized gain on securities (116,497) --
Provision for deferred taxes 570,481 (1,501)
Provision for losses on accounts receivable (64,488) --
Changes in assets and liabilities, impacting cash from operations:
Accounts receivable (457,712) (166,062)
Prepaid expenses and other (59,834) (38,289)
Trading securities (1,820,656) 675,145
Accounts payable and accrued expenses 305,558 (510,139)
Total adjustments (1,589,303) 17,858
Net Cash Provided by Operating Activities 346,701 270,942
Cash Flows from Investing Activities:
Purchase of property and equipment (102,117) (860)
Purchase of available-for-sale securities (200,520) --
Proceeds on sale of available-for-sale securities 308,414 --
Net Cash Provided by (Used in) Investing Activities 5,777 (860)
Cash Flow from Financing Activities:
Payments on annuity (5,141) (4,719)
Payments on note payable (33,530) (31,338)
Proceeds from issuance or exercise of stock, warrants,
and options 38,822 20,984
Purchase of treasury stock (49,016) (31,263)
Net Cash Used in Financing Activities (48,865) (46,336)
Net Increase in Cash and Cash Equivalents 303,613 223,746
Beginning Cash and Cash Equivalents 1,162,243 988,936
Ending Cash and Cash Equivalents $ 1,465,856 $ 1,212,682
4
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, 2003.
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, 2003, 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, 2003, and June 30,
2003, was $1,885,408 and $1,658,058, respectively. The market value of
investments classified as trading at December 31, 2003, and June 30, 2003, was
$2,533,072 and $723,428, respectively. The change in net unrealized holding
gains and losses on trading securities held at December 31, 2003, and 2002,
which has been included in income for the six-month period, was $1,582,294 and
$(95,128), respectively. Sales of trading securities generated realized losses
of $11,012 and $0 for the six-month period ended December 31, 2003, and 2002,
respectively.
The cost of investments in securities classified as available-for-sale, which
may not be readily marketable, was $426,354 and $406,739 at December 31, 2003,
and June 30, 2003, respectively. These investments are reflected as non-current
assets on the consolidated balance sheet at their fair market value at December
31, 2003, and June 30, 2003, of $445,264 and $390,251, respectively, with
$12,481 and $(10,883), respectively, net of tax, in unrealized gains (losses)
being recorded as a separate component of shareholders' equity. Sales of
available-for-sale securities generated realized gains of $158,388 and $0 for
the six-month period ended December 31, 2003, and 2002, 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 $30,879 and $0 for the six-month period ended December 31,
2003, and 2002, 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. 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 or, in the
case of broker/dealer accounts, based upon underlying assets or positions.
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, 2004, 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, 2003, and 2002, were
$753,744 and $782,366, respectively.
5
The investment advisory and related contracts between the Company and USGIF and
USGAF will expire in February 2004 and May 2004, respectively. Management
anticipates the board of trustees of both USGIF and USGAF will renew the
contracts.
The Company provides investment management services for a private advisory
client. The Company has a fee arrangement for these services whereby it receives
an administrative fee annually plus a percentage of any gains from the sale of
the securities in the client account. As a result of this arrangement, the fees
receivable may include amounts related to unrealized appreciation that are not
billable until the securities are sold. The Company has recorded $577,528 and
$324,997 in revenue from these fee arrangements for the six-month period ended
December 31, 2003, and 2002, respectively.
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 a note payable to a bank secured by land, an office building,
and related improvements. As of December 31, 2003, the balance on the note was
$923,030. The loan is currently amortizing over a twelve-year period with
payments of both principal and interest due monthly based on a fixed rate of
6.50 percent annually. The current monthly payment is $10,840, and the note
matures on January 31, 2006. Under this agreement, the Company must maintain
certain financial covenants. The Company is in full compliance with its
financial covenants at December 31, 2003.
Management believes that the Company has adequate cash, cash equivalents, and
equity in the underlying assets to retire the obligation if necessary.
The Company has access to a $1 million credit facility with a one-year maturity
for working capital purposes. Any use of this credit facility will be secured by
the Company's eligible accounts receivable. As of December 31, 2003, 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 No. ("FAS") 123, "Accounting for Stock-Based
Compensation," and FAS 148, "Accounting for Stock-Based Compensation Transition
and Disclosure."
6
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:
SIX MONTHS ENDED DECEMBER 31,
-----------------------------
2003 2002
--------- ---------
Net Income, as reported $1,936,004 $ 253,084
Add: Stock-based employee compensation expense
included in reported net income, net of tax 16,500 19,668
Deduct: Total stock-based employee compensation expense
determined under fair value based method, net of tax (18,645) (21,920)
Pro forma net income $1,933,859 $ 250,832
Earnings per share:
Basic and Diluted - as reported $ 0.26 $ 0.03
Basic and Diluted - pro forma $ 0.26 $ 0.03
THREE MONTHS ENDED DECEMBER 31,
2003 2002
--------- ---------
Net Income, as reported $1,248,493 $141,977
Add: Stock-based employee compensation expense
included in reported net income, net of tax 8,250 8,250
Deduct: Total stock-based employee compensation expense
determined under fair value based method, net of tax (9,322) (9,376)
Pro forma net income $1,247,421 $140,851
Earnings per share:
Basic and Diluted - as reported $ 0.17 $ 0.02
Basic and Diluted - pro forma $ 0.17 $ 0.02
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 six-months ended
December 31, 2003, and December 31, 2002, respectively.
Note 6. Earnings Per Share
The following table sets forth the computation for basic and diluted earnings
per share (EPS):
SIX MONTHS ENDED DECEMBER 31,
2003 2002
--------- ---------
Basic and diluted net income $1,936,004 $ 253,084
Weighted average number of outstanding shares
Basic 7,469,568 7,465,419
Effect of dilutive securities
Employee stock options 53,772 2,490
Diluted 7,523,340 7,467,909
Earnings per share
Basic $ 0.26 $ 0.03
Diluted $ 0.26 $ 0.03
7
THREE MONTHS ENDED DECEMBER 31,
2003 2002
--------- ---------
Basic and diluted net income $1,248,493 $ 141,977
Weighted average number of outstanding shares
Basic 7,473,542 7,464,993
Effect of dilutive securities
Employee stock options 68,882 --
Diluted 7,542,424 7,464,993
Earnings per share
Basic $ 0.17 $ 0.02
Diluted $ 0.17 $ 0.02
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, 2003, and December 31, 2002, options for 11,000
and 120,500 shares, respectively, were excluded from diluted EPS. For the
three-month period ended December 31, 2003, and December 31, 2002, options for
1,000 and 162,500 shares, respectively, were excluded from diluted EPS.
Note 7. Income Taxes
Provisions for income taxes include deferred taxes for temporary differences in
the bases of assets and liabilities for financial and tax purposes, resulting
from the use of the liability method of accounting for income taxes. For federal
income tax purposes at December 31, 2003, the Company has net operating loss
carryovers (NOLs) of approximately $465,000, which will expire between fiscal
2010 and 2022, charitable contribution carryovers of approximately $72,000
expiring between 2004 and 2008, and alternative minimum tax credits of
approximately $140,000 with indefinite expirations. The long-term deferred tax
asset includes approximately $308,000 from unrealized losses on
available-for-sale securities, approximately $21,000 associated with the
difference between book and tax depreciation, and approximately $36,000 from
annuity obligations. The current deferred tax liability primarily consists of
unrealized gains on trading securities. The change in the net deferred tax asset
from June 30, 2003 to December 31, 2003 was primarily attributable to earnings
during the period and an increase in unrealized appreciation in trading and
available-for-sale securities. If certain changes in the Company's ownership
occur subsequent to December 31, 2003, there could be an annual limitation on
the NOLs that could be utilized.
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax amount will not be realized. Management included a
valuation allowance of approximately $34,000 and $315,000 at December 31, 2003,
and June 30, 2003, respectively, providing for the utilization of investment tax
credits against future taxable income.
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:
8
Investment
Management Corporate
Services Investments Consolidated
Six months ended December 31, 2003
Revenues $5,267,275 $1,698,791 $6,966,066
Income before income taxes $ 808,798 $1,697,687 $2,506,485
Depreciation $ 53,845 $ -- $ 53,845
Interest expense $ 44,327 $ -- $ 44,327
Capital expenditures $ 102,117 $ -- $ 102,117
Gross identifiable assets at December 31, 2003 $6,152,586 $2,978,336 $9,130,922
Deferred tax asset 687,295
Consolidated total assets at December 31, 2003 $9,818,217
Six months ended December 31, 2002
Revenues $4,091,427 $ (79,729) $4,011,698
Income (loss) before income taxes $ 331,937 $ (80,354) $ 251,583
Depreciation $ 58,704 $ -- $ 58,704
Interest expense $ 41,867 $ 625 $ 42,492
Capital expenditures $ 860 $ -- $ 860
Gross identifiable assets at December 31, 2002 $4,900,012 $1,245,985 $6,145,997
Deferred tax asset 1,229,942
Consolidated total assets at December 31, 2002 $7,375,939
Investment
Management Corporate
Services Investments Consolidated
Three months ended December 31, 2003
Revenues $3,023,574 $ 1,313,603 $4,337,177
Income before income taxes $ 510,878 $ 1,312,499 $1,823,377
Depreciation $ 27,355 $ -- $ 27,355
Interest expense $ 21,578 $ -- $ 21,578
Capital expenditures $ 6,427 $ -- $ 6,427
Three months ended December 31, 2002
Revenues $1,991,026 $ 49,717 $2,040,743
Income before income taxes $ 87,565 $ 49,717 $ 137,282
Depreciation $ 28,828 $ -- $ 28,828
Interest expense $ 20,979 $ -- $ 20,979
Capital expenditures $ -- $ -- $ --
9
Note 9. Contingencies
The Company was named as one of several defendants in a civil lawsuit filed in
New York. During June 2003, this lawsuit was dismissed. However, during July
2003, the plaintiff filed an appeal. In November 2003, the Company's insurance
carrier authorized a $40,000 settlement offer which is still pending. This
settlement will be paid by the carrier, therefore, it will have no impact on the
Company's earnings. In addition, during October 2003, USGI was named as one of
two defendants in a lawsuit with damages listed at $23,730. The Company and the
other defendant are currently negotiating a settlement amount and also
negotiating which party is responsible for the cost of the settlement.
The Company has agreed to maintain a minimum yield on its U.S. Treasury
Securities Cash Fund. In order to comply with this arrangement, it may be
necessary for the Company to waive a portion of its management fees. These fee
waivers are recorded as incurred. If in future periods the yield exceeds the
minimum, the Company may be eligible to recover previously waived amounts. The
amount of fees waived through December 31, 2003, were $28,023. Due to the
unpredictability of future yields, the Company has not recorded a receivable for
this amount in its financial statements.
10
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 the majority of its operating revenues from the investment
management of products and from providing services for the U.S. Global Investors
Funds (USGIF) and U.S. Global Accolade Funds (USGAF). Notwithstanding that the
Company generates the majority of its revenues from this segment, the Company
holds a significant portion 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
As noted above, the Company generates the majority of its revenues from managing
and servicing USGIF and USGAF. These revenues are largely dependent on the total
value and composition of assets under its management. Fluctuations in the
markets and investor sentiment directly impact the funds' asset levels, thereby
affecting income and results of operations.
During the six-month period ended December 31, 2003, mutual fund assets under
management averaged $1.19 billion versus $1.08 billion for the same period ended
December 31, 2002. During the three-month period ended December 31, 2003, mutual
fund assets under management averaged $1.31 billion versus $1.06 billion for the
same period ended December 31, 2002. These favorable trends were primarily due
to significant increases in the Company's gold and natural resource, bond and
foreign equity funds. The Company realized 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 funds as investors seek alternative
short-term investments with higher yields.
The Company has entered into an advisory arrangement with a private client and
has a fee arrangement for the securities in the private client account whereby
it receives an administrative fee annually plus a percentage of any gains from
the sale of the securities, payable at the settlement of the sales. The Company
recorded $577,528 and $324,997 from these fee arrangements for the six-month
periods ended December 31, 2003, and 2002, respectively. In addition, the
Company recorded $285,646 and $119,632 in fees during the three-month periods
ended December 31, 2003, and 2002, respectively. These amounts have been
classified as private client advisory fees on the statement of operations.
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
11
compliance personnel reviewed and monitored these activities, and various
reports are provided to investment advisory clients. On December 31, 2003, the
Company held approximately $3.0 million in investment securities. The value of
these investments is approximately 30 percent of total assets and 39 percent of
shareholders' equity at period end. Income from these investments includes
realized gains and losses, unrealized gains and losses on trading securities,
and dividend and interest income. This source of revenue does not remain at a
consistent level and is dependent on market fluctuations, the Company's ability
to participate in investment opportunities, and timing of transactions. For the
six-month period ended December 31, 2003, the Company had net realized gains of
$147,376 compared with $0 for the six-month period ended December 31, 2002. The
change in net unrealized holding gains and losses on trading securities held at
December 31, 2003, and 2002, which has been included in income for the six-month
period, was $1,582,294 and $(95,128), respectively. For the three-month period
ended December 31, 2003, the Company had net realized gains of $106,771 compared
with $0 for the three-month period ended December 31, 2002. The change in net
unrealized holding gains and losses on trading securities held at December 31,
2003, and 2002, which has been included in income for the three-month period,
was $1,208,286 and $34,495, respectively. A significant portion of the
unrealized gains for the six-month and three-month periods ending December 31,
2003, 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
$30,879 and $0 for the six-month period ended December 31, 2003, and 2002,
respectively. During the three-month period ended December 31, 2003, and 2002,
the Company recorded other than temporary declines of $16,654 and $0,
respectively.
RESULTS OF OPERATIONS - SIX MONTHS ENDED DECEMBER 31, 2003 AND 2002
The Company posted net after-tax income of $1,936,004 ($.26 income per share)
for the six-month period ended December 31, 2003, compared with net after-tax
income of $253,084 ($.03 income per share) for the six-month period ended
December 31, 2002.
Revenues
Total consolidated revenues for the six-month period ended December 31, 2003,
increased $2,954,368, or 74 percent, compared with the six-month period ended
December 31, 2002. This increase was largely attributable to unrealized gains on
trading securities of $1,582,294 for the six-month period ended December 31,
2003, compared to unrealized losses of $(95,128) for the six months ended
December 31, 2002. These gains have resulted from market value increases in
securities held in the Company's proprietary investment portfolio. The Company
also realized an increase in investment advisory fees of $928,102 as a result of
growth in assets under management in many of the mutual funds it manages. The
positive impact of market gains and shareholder investments in higher margin
gold, natural resource and foreign equity funds were partially offset by
redemptions in lower margin money market funds. The Company also had an increase
in private client advisory fees of $252,531 due to continued asset appreciation
in the client account.
Expenses
Total consolidated expenses for the six-month period ended December 31, 2003,
increased $699,466, or 19 percent, compared with the six-month period ended
December 31, 2002. Incentive bonuses associated with strong mutual fund
performance, mutual fund asset growth and increased accounts have resulted in an
increase in personnel costs of $318,469. Consistent with the growth in assets
under management has been an increase in sub-advisory fees of $101,667, which
primarily resulted 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, the Company has recognized an increase in
net omnibus fee expenses of $182,499 during the period.
Earnings before Interest, Taxes, Depreciation, and Amortization (EBITDA)
Management considers EBITDA to be the best measure of the Company's financial
performance since this measurement reflects the operations of the Company's
primary business segment, managing and servicing USGIF and USGAF. The following
is a reconciliation of Net Income to EBITDA:
12
SIX MONTHS ENDED DECEMBER 31,
-----------------------------
2003 2002
------------ ---------
Net Income $ 1,936,004 $ 253,084
Adjustments:
Federal income tax expense (benefit) 570,481 (1,501)
Interest 44,327 42,492
Depreciation 53,845 58,704
Net recognized gain on securities (116,497) --
Net unrealized (gain) loss on
trading securities (1,582,294) 95,128
----------- ----------
EBITDA $ 905,866 $ 447,907
EBITDA for the six-month period ended December 31, 2003, was $905,866, which was
an increase of $457,959, or 102 percent, from an EBITDA of $447,907 for the
six-month period ended December 31, 2002. The increase in EBITDA is primarily
related to increased investment advisory fees as a result of an overall growth
in mutual fund assets, particularly higher margin gold, natural resource and
foreign equity funds. In addition, the Company has been able to utilize its
expertise in the field of gold and precious minerals to provide investment
management services to a private advisory client whereby the Company earns a
percentage of the gains realized in the client account. The underlying
investments in this account had strong performance during the six-month period
ended December 31, 2003, boosting operational returns by $252,531 relative to
prior year. Conversely, during the same period the Company experienced an
increase in operating expenses. This was largely due to an increase in omnibus
fees, sub-advisory fees and incentive bonuses that resulted from strong fund
performance and an increase in mutual fund assets and accounts.
RESULTS OF OPERATIONS - QUARTER ENDED DECEMBER 31, 2003 AND 2002
The Company posted net after-tax income of $1,248,493 ($.17 income per share)
for the quarter ended December 31, 2003, compared with a net after-tax income
$141,977 ($.02 income per share) for the quarter ended December 31, 2002.
Revenues
Total consolidated revenues for the quarter ended December 31, 2003, increased
$2,296,434, or 113 percent, compared with the quarter ended December 31, 2002.
This increase was primarily attributable to unrealized gains on trading
securities of $1,208,286 for the quarter ended December 31, 2003, compared to
unrealized gains of $34,495 for the quarter ended December 31, 2002. The Company
also realized an increase in investment advisory fees of $822,539 as a result of
significant increases in assets under management. Market gains and shareholder
purchases in higher margin gold and foreign equity funds were partially offset
by redemptions in lower margin money market funds. The Company also had an
increase in private client advisory fees of $166,014 due to continued asset
appreciation in the client account.
Expenses
Total consolidated expenses for the quarter ended December 31, 2003, increased
$610,339, or 32 percent, compared with the quarter ended December 31, 2002. This
is primarily attributable to an increase of $310,326 in personnel costs as a
result of incentive bonuses related to strong fund performance and an increase
in mutual fund assets and accounts. Consistent with the growth in assets under
management has been an increase in sub-advisory fees of $73,735, resulting
primarily from increased assets in the Eastern European Fund. In addition, the
mutual fund asset growth has been largely realized through broker/dealer
platforms. Accordingly, the Company has recognized an increase in net omnibus
fee expenses of $190,902 during the period.
Earnings before Interest, Taxes, Depreciation, and Amortization (EBITDA)
Management considers EBITDA to be the best measure of the Company's financial
performance since this measurement reflects the operations of the Company's
primary business segment, managing and servicing USGIF and USGAF. The following
is a reconciliation of Net Income to EBITDA:
13
THREE MONTHS ENDED DECEMBER 31,
-------------------------------
2003 2002
----------- -----------
Net Income $ 1,248,493 $ 141,977
Adjustments:
Federal income tax expense (benefit) 574,884 (4,695)
Interest 21,578 20,979
Depreciation 27,355 28,828
Net recognized gain on securities (106,771) --
Net unrealized (gain) on trading securities (1,208,286) (34,495)
------------ -----------
EBITDA $ 557,253 $ 152,594
EBITDA for the quarter ended December 31, 2003, was $557,253, which was an
increase of $404,659, or 265 percent, from an EBITDA of $152,594 for the quarter
ended December 31, 2002. The increase in EBITDA is primarily related to
increased investment advisory fees as a result of an overall growth in mutual
fund assets, particularly higher margin gold, natural resource and foreign
equity funds. In addition, the Company has been able to utilize its expertise in
the field of gold and precious minerals to provide investment management
services to a private advisory client whereby the Company earns a percentage of
the gains realized in the client account. The underlying investments in this
account had strong performance during the quarter ended December 31, 2003,
boosting operational returns by $166,014 relative to prior year. Conversely,
during the same period the Company experienced an increase in operating
expenses. This was largely due to an increase in omnibus fees, sub-advisory fees
and incentive bonuses that resulted from strong fund performance and an increase
in mutual fund assets and accounts.
FINANCIAL CONDITION
At December 31, 2003, the Company had net working capital (current assets minus
current liabilities) of approximately $5.5 million and a current ratio of 5.5 to
1. The increase in net working capital of $1.9 million from June 30, 2003 to
December 31, 2003, was primarily due to unrealized appreciation in the value of
trading securities. In addition, working capital increased as a result of
$346,701 in positive operating cash flow during the period which resulted from
the collection of a $371,057 litigation settlement. With over $1.4 million in
cash and cash equivalents and more than $2.9 million in marketable securities,
the Company has adequate liquidity to meet its current debt obligations. The
Company has a note payable to a bank whereby it must maintain certain financial
covenants. One of the covenants requires that the Company maintain cash and cash
equivalents and eligible marketable securities to meet or exceed $1 million at
the end of each quarter. The Company is in full compliance with all of its
financial covenants at December 31, 2003. Total shareholders' equity was
approximately $7.7 million, with cash, cash equivalents, and marketable
securities comprising 45 percent of total assets. With the exception of
operating expenses, the Company's only material commitment is its note payable
to the bank of $923,030. 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 and debt service.
The investment advisory and related contracts between the Company and USGIF and
USGAF will expire on February 29, 2004, and May 31, 2004, 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.
14
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 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. Company compliance personnel reviewed and monitored
the Company's investment activities, and various reports are provided to
investment advisory clients.
The sensitivity analysis below summarizes the Company's equity price risks as of
December 31, 2003, and shows the effects of a hypothetical 25 percent increase
and a 25 percent decrease in market prices.
SENSITIVITY ANALYSIS Increase
Estimated (Decrease) in
Hypothetical Fair Value after Shareholders'
Fair Value at Percentage Hypothetical Equity
December 31, 2003 Change Percent Change (net of tax)
Trading Securities $ 2,533,072 25% increase $ 3,166,340 $ 417,957
25% decrease $ 1,899,804 $ (417,957)
Available-for-Sale $ 445,264 25% increase $ 556,580 $ 73,469
25% decrease $ 333,948 $ (73,469)
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, 2003, 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 December 31, 2003.
There has been no change in the Company's internal control over financial
reporting that occurred during the quarter ended December 31, 2003, that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
15
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
1. Exhibits
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
2. Reports on Form 8-K
Current Report on Form 8-K filed November 10, 2003, Changes in Registrant's
Certifying Accountant.
Current Report on Form 8-K filed December 3, 2003, filing of Press Release
Reporting Earnings and Other Financial Results for the first quarter ended
September 30, 2003.
16
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.
U.S. GLOBAL INVESTORS, INC.
DATED: February 17, 2004 BY: /s/Frank E. Holmes
---------------------------
Frank E. Holmes
Chief Executive Officer
DATED: February 17, 2004 BY: /s/Tracy C. Peterson
---------------------------
Tracy C. Peterson
Chief Financial Officer
17
EXHIBIT 31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Frank E. Holmes, certify that:
1. I have reviewed this quarterly report on Form 10-Q of U.S. Global
Investors, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: February 17, 2004
/s/Frank E. Holmes
- -----------------------
Frank E. Holmes
Chief Executive Officer
18
EXHIBIT 31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Tracy C. Peterson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of U.S. Global
Investors, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: February 17, 2004
/s/Tracy C. Peterson
- -----------------------
Tracy C. Peterson
Chief Financial Officer
19
EXHIBIT 32.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and
(b) of Section 1350, Chapter 63 of Title 18, United States Code), the
undersigned officer of U.S. Global Investors, Inc. (the "Company") does hereby
certify, to such officer's knowledge, that:
The Quarterly Report on Form 10-Q for the quarter ended December 31, 2003, of
the Company fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934 and information contained in the Form 10-Q
fairly presents, in all material respects, the financial condition and results
of the operations of the Company.
Date: February 17, 2004 /s/Frank E. Holmes
-----------------------
Frank E. Holmes
Chief Executive Officer
20
EXHIBIT 32.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and
(b) of Section 1350, Chapter 63 of Title 18, United States Code), the
undersigned officer of U.S. Global Investors, Inc. (the "Company") does hereby
certify, to such officer's knowledge, that:
The Quarterly Report on Form 10-Q for the quarter ended December 31, 2003, of
the Company fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934 and information contained in the Form 10-Q
fairly presents, in all material respects, the financial condition and results
of the operations of the Company.
Date: February 17, 2004 /s/Tracy C. Peterson
-----------------------
Tracy C. Peterson
Chief Financial Officer
21