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 March 31, 2004
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 May 14, 2004, there were 6,311,474 shares of Registrant's class A nonvoting
common stock issued and 5,968,692 shares of Registrant's class A 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......16
Item 4. Controls and Procedures.........................................16
Part II. Other Information...................................................17
Item 6. Exhibits and Reports on Form 8-K................................17
Signatures...................................................................18
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets
Assets
MARCH 31, 2004 JUNE 30, 2003
=========================- ==================
(UNAUDITED)
Current Assets
Cash and cash equivalents $2,258,794 $1,162,243
Due from brokers 8,192 3,889
Trading securities, at fair value 2,313,244 723,428
Receivables
Mutual funds - net of allowance of $0 and $64,488 at 1,530,688 966,260
March 31, 2004, and June 30, 2003, respectively
Private advisory client -- 378,832
Litigation settlement -- 371,057
Employees 2,079 3,998
Other 24,931 20,536
Prepaid expenses 439,591 338,020
Deferred tax asset -- 372,084
--------- ---------
Total Current Assets 6,577,519 4,340,347
--------- ---------
Net Property and Equipment 1,818,042 1,778,832
--------- ---------
Other Assets
Restricted investments 180,000 195,000
Long-term deferred tax asset 193,680 735,257
Investment securities available-for-sale,
at fair value 1,482,681 390,251
--------- ---------
Total Other Assets 1,856,361 1,320,508
--------- ---------
Total Assets $10,251,922 $7,439,687
=========== ==========
Liabilities and Shareholders' Equity
MARCH 31, 2004 JUNE 30, 2003
--------------------------- -------------------
--------------------------- -------------------
(UNAUDITED)
Current Liabilities
Accounts payable $ 118,845 $ 70,437
Accrued compensation and related costs 407,890 264,697
Current portion of notes payable 112,923 70,033
Current portion of annuity and contractual obligation 11,026 10,464
Deferred tax liability 92,744 --
Other accrued expenses 515,745 361,831
--------- ---------
Total Current Liabilities 1,259,173 777,462
---------- ---------
Notes payable-net of current portion 298,237 886,527
Annuity and contractual obligations 93,668 102,009
--------- ---------
Total Non-Current Liabilities 391,905 988,536
--------- ---------
Total Liabilities 1,651,078 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 10,851,174 10,806,655
Treasury stock, class A shares at cost; 342,782 and
361,948 shares at March 31, 2004, and June 30, 2003,
respectively (671,942) (663,536)
Accumulated other comprehensive income (loss), net of
tax 704,258 (10,883)
Accumulated deficit (2,673,060) (4,848,961)
---------- ----------
Total Shareholders' Equity 8,600,844 5,673,689
---------- ----------
Total Liabilities and Shareholders' Equity $10,251,922 $7,439,687
============ ===========
Consolidated Statements of Operations and Comprehensive Income (Unaudited)
Nine Months Ended Three Months Ended
March 31, March 31,
2004 2003 2004 2003
Revenues
Investment advisory fees $5,981,761 $3,640,193 $2,641,460 $1,227,994
Transfer agent fees 1,785,998 1,655,045 616,731 492,632
Custodial and administrative fees 107,372 120,959 37,960 35,531
Investment income (loss) 1,492,393 (883) (219,291) 80,374
Private client advisory fees 670,387 308,678 92,859 (16,319)
Other 145,132 161,701 47,258 53,783
---------- ---------- ---------- ----------
10,183,043 5,885,693 3,216,977 1,873,995
Expenses
General and administrative 7,184,951 5,547,800 2,823,542 1,888,880
Depreciation 81,611 96,736 27,766 38,033
Interest 62,668 63,808 18,341 21,316
---------- ---------- ---------- ----------
7,329,230 5,708,344 2,869,649 1,948,229
---------- ---------- ---------- ----------
Income (Loss) Before Income Taxes 2,853,813 177,349 347,328 (74,234)
Provision for Federal Income Taxes
Current Tax Expense 39,912 -- 39,912 --
Deferred Tax Expense (Benefit) 638,000 (5,885) 67,519 (4,384)
---------- ---------- ---------- ----------
Net Income (Loss) $2,175,901 $ 183,234 $ 239,897 $ (69,850)
Other comprehensive income (loss), net of tax
Unrealized gains (losses) on
available-for-sale securities 715,141 (288,998) 691,777 (63,307)
---------- ---------- ---------- ----------
Comprehensive Income (Loss) $2,891,042 $ (105,764) $ 931,674 $ (133,157)
========== ========== ========== ==========
Basic and Diluted Net Income (Loss) per Share $ 0.29 $ 0.02 $ 0.03 $ (0.01)
========== ========== ========== ==========
Consolidated Statements of Cash Flows (Unaudited)
NINE MONTHS ENDED MARCH 31,
---------------------------------------------------
2004 2003
------------------------ -------------------
Cash Flows from Operating Activities:
Net income $ 2,175,901 $ 183,234
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 81,611 96,736
Net recognized gain on securities (113,092) (23,026)
Stock dividends on securities -- (5,249)
Provision for deferred taxes 638,000 (5,885)
Provision for losses on accounts receivable (64,488) --
Value of class A warrant issued to non-employees 17,600 --
Net loss on disposal of property & equipment 997 --
Changes in assets and liabilities, impacting cash from operations:
Accounts receivable 247,473 (72,453)
Prepaid expenses and other (90,874) (136,145)
Securities (1,600,828) 667,473
Accounts payable and accrued expenses 383,015 (584,750)
--------- ---------
Total adjustments (500,586) (63,299)
--------- ---------
Net Cash Provided by Operating Activities 1,675,315 119,935
--------- ---------
Cash Flows from Investing Activities:
Purchase of property and equipment (121,818) (9,271)
Purchase of available-for-sale securities (200,520) --
Proceeds on sale of available-for-sale securities 315,740 14,384
--------- ---------
Net Cash (Used in) Provided by Investing Activities (6,598) 5,113
--------- ---------
Cash Flow from Financing Activities:
Payments on annuity (7,779) (7,180)
Payments on note payable (545,400) (48,031)
Proceeds from issuance or exercise of stock, warrants,
and options 52,909 36,899
Purchase of treasury stock (71,896) (44,149)
--------- ---------
Net Cash Used in Financing Activities (572,166) (62,461)
--------- ---------
Net Increase in Cash and Cash Equivalents 1,096,551 62,587
Beginning Cash and Cash Equivalents 1,162,243 988,936
--------- ---------
Ending Cash and Cash Equivalents $ 2,258,794 $ 1,051,523
========== ==========
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 nine-month and three-month period ended March
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 March 31, 2004, and June 30,
2003, was $1,889,960 and $1,658,058, respectively. The market value of
investments classified as trading at March 31, 2004, and June 30, 2003, was
$2,313,244 and $723,428, respectively. The change in net unrealized holding
gains and losses on trading securities held at March 31, 2004, and 2003, which
has been included in income for the nine-month period, was $1,357,914 and
$(52,271), respectively. Sales of trading securities generated realized
(losses)gains of $(11,012) and $14,142 for the nine-month period ended March 31,
2004, and 2003, respectively.
The cost of investments in securities classified as available-for-sale, which
may not be readily marketable, was $415,624 and $406,739 at March 31, 2004, and
June 30, 2003, respectively. These investments are reflected as non-current
assets on the consolidated balance sheet at their fair market value at March 31,
2004, and June 30, 2003, of $1,482,681 and $390,251, respectively, with $704,258
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 $154,983 and $8,884
for the nine-month period ended March 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 $30,879 and $0 for the nine-month period ended March 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. 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 nine-month period ended March 31, 2004, and 2003, were
$1,110,241 and $1,172,904, respectively.
The investment advisory and related contracts between the Company and USGIF and
USGAF (with the exception of the Bonnel Growth Fund discussed below) will expire
in February 2005 and May 2005, respectively. Management anticipates the board of
trustees of both USGIF and USGAF will renew the contracts. Bonnel, Inc., the
sub-advisor of the Bonnel Growth Fund, notified the Company that its portfolio
manager, Art Bonnel, will be taking an extended sabbatical beginning June 1,
2004, and, therefore, Bonnel, Inc. will no longer provide sub-advisory services
to the fund. The Company believes that it can continue to implement the
portfolio management strategy utilized by Mr. Bonnel and that the board of
trustees of the fund will approve the Company to provide investment advisory
services to the fund effective June 1, 2004. Upon appointment as advisor of the
fund, the Company expects to realize reduced expenses as it will no longer pay
sub-advisory fees to Bonnel, Inc. However, the Company will incur additional
costs associated with set-up, re-branding efforts, and the hiring of an
additional analyst.
The Company provided investment management services for a private advisory
client through March 2004. The Company had a fee arrangement for these services
whereby it received 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 potentially included amounts related to
unrealized appreciation that were not billable until the securities were sold.
The Company has recorded $670,387 and $308,678 in revenue from these fee
arrangements for the nine-month period ended March 31, 2004, and 2003,
respectively. As of March 31, 2004 all securities in the account were either
sold or had a final value determination. All outstanding fees from this
arrangement were collected prior to March 31, 2004.
The Company receives additional revenue from several sources including custodian
fee revenues, revenues from miscellaneous transfer agency activities including
flockbox 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 March 31, 2004, the balance on the note was
$411,160. 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, at which time a balloon payment of any unpaid
principal is due. Under this agreement, the Company must maintain certain
financial covenants. The Company is in full compliance with its financial
covenants at March 31, 2004.
Management believes that the Company has adequate cash, cash equivalents, and
equity in the underlying assets to retire the obligation if necessary. To this
end, the Company made an early repayment on the outstanding debt of $500,000
during March 2004.
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 March 31, 2004, this credit
facility remained unutilized by the Company.
Note 5. Stock-Based Compensation
The Company accounts for stock-based employee and director 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."
The following tables illustrate the effect on net income and earnings per share
if the Company had applied the fair value recognition provisions of SFAS 123:
NINE MONTHS ENDED MARCH 31,
---------------------------------------------------
2004 2003
------------------------ -------------------
Net income, as reported $ 2,175,901 $ 183,234
Add: Stock-based employee compensation expense
included in reported net income, net of tax 24,750 27,918
Deduct: Total stock-based employee compensation expense
determined under fair value based method, net of tax (27,967) (31,296)
---------- -----------
Pro forma net income $2,172,684 $ 179,856
========== ===========
Earnings per share:
Basic and diluted - as reported $ 0.29 $ 0.02
Basic and diluted - pro forma $ 0.29 $ 0.02
THREE MONTHS ENDED MARCH 31,
---------------------------------------------------
2004 2003
------------------------ -------------------
Net income (loss), as reported $ 239,897 $ (69,850)
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 (loss) $ 238,825 $ (70,976)
========= =========
Earnings per share:
Basic and diluted - as reported $ 0.03 $ (0.01)
Basic and diluted - pro forma $ 0.03 $ (0.01)
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 nine-months ended March
31, 2004, and March 31, 2003, respectively.
Transactions with other parties in which goods or services are exchanged for the
issuance of equity instruments are accounted for at fair value in accordance
with FAS 123. On March 15, 2004, a fully vested warrant to purchase 20,000
shares of class A stock was granted as payment for services to an outside
vendor. These warrants carry an exercise price of $4.35 and expire on May 15,
2005. The effect of this issuance was recorded in general and administrative
expenses on the Statement of Operations and Comprehensive Income based on the
fair value at grant date. The fair value was determined using a Black-Scholes
option-pricing model with the exercise price and expiration dates listed above
as well as an expected volatility of 0.56 and a risk-free interest rate of
1.25%.
Note 6. Earnings Per Share
The following tables set forth the computations for basic and diluted earnings
per share (EPS):
NINE MONTHS ENDED MARCH 31,
---------------------------------------------------
2004 2003
------------------------ -------------------
Basic and diluted net income $ 2,175,901 $ 183,234
Weighted average number of outstanding shares
Basic 7,469,213 7,462,437
Effect of dilutive securities
Employee stock options 65,643 7,785
--------- ---------
Diluted 7,534,856 7,470,222
========= =========
Earnings per share
Basic $ 0.29 $ 0.02
Diluted $ 0.29 $ 0.02
THREE MONTHS ENDED MARCH 31,
---------------------------------------------------
2004 2003
------------------------ -------------------
Basic and diluted net income $ 239,897 $ (69,850)
Weighted average number of outstanding shares
Basic 7,468,496 7,456,340
Effect of dilutive securities
Employee stock options 83,200 30,516
--------- ---------
Diluted 7,551,696 7,486,856
========= =========
Earnings per share
Basic $ 0.03 $ (0.01)
Diluted $ 0.03 $ (0.01)
The diluted EPS calculation excludes the effect of stock options when their
exercise prices exceed the average market price for the period. For the nine
months ended March 31, 2004, and March 31, 2003, options for 1,000 and 120,500
shares, respectively, were excluded from diluted EPS. Additionally, a warrant
for 20,000 shares was excluded for the nine months ended March 31, 2004. For the
three-month period ended March 31, 2004, and March 31, 2003, options for 1,000
and 162,500 shares, respectively, were excluded from diluted EPS. Additionally,
a warrant for 20,000 shares was excluded for the three months ended March 31,
2004.
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 March 31, 2004, the Company's net operating loss
carryovers (NOLs) have been utilized to offset current income. The Company has
charitable contribution carryovers of approximately $77,000 expiring between
2004 and 2008, and alternative minimum tax (AMT) credits of approximately
$154,000 with indefinite expirations. The long-term deferred tax asset is
primarily composed of the $154,000 of AMT credits listed above. 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 March
31, 2004 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
March 31, 2004, 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 March 31, 2004, 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:
Investment
Management Corporate
Services Investments Consolidated
Nine months ended March 31, 2004
Revenues $8,709,223 $ 1,473,820 $10,183,043
========= ========== ==========
Income before income taxes $1,381,402 $ 1,472,411 $ 2,853,813
========= ========== ==========
Depreciation $ 81,611 $ -- $ 81,611
========= ========== ==========
Interest expense $ 62,546 $ 122 $ 62,668
========= ========== ==========
Capital expenditures $ 121,818 $ -- $ 121,818
========= ========== ==========
Gross identifiable assets at March 31, 2004 $6,262,317 $ 3,795,925 $10,058,242
Deferred tax asset 193,680
-------
Consolidated total assets at March 31, 2004 $10,251,922
==========
Nine months ended March 31, 2003
Revenues (loss) $5,886,576 $ (883) $ 5,885,693
========= ========== ==========
Income (loss) before income taxes $ 178,857 $ (1,508) $ 177,349
========= ========== ==========
Depreciation $ 96,736 $ -- $ 96,736
========= ========== ==========
Interest expense $ 63,183 $ 625 $ 63,808
========= ========== ==========
Capital expenditures $ 9,271 $ -- $ 9,271
========= ========== ==========
Investment
Management Corporate
Services Investments Consolidated
Three months ended March 31, 2004
Revenues (loss) $3,441,948 $ (224,971) $3,216,977
========= ========== ==========
Income (loss) before income taxes $ 572,604 $ (225,276) $ 347,328
========= ========== ==========
Depreciation $ 27,766 $ -- $ 27,766
========= ========== ==========
Interest expense $ 18,219 $ 122 $ 18,341
========= ========== ==========
Capital expenditures $ 19,701 $ -- $ 19,701
========= ========== ==========
Three months ended March 31, 2003
Revenues $1,793,621 $ 80,374 $ 1,873,995
========= ========== ==========
Income (loss) before income taxes $ (154,608) $ 80,374 $ (74,234)
========= ========== ==========
Depreciation $ 38,033 $ -- $ 38,033
========= ========== ==========
Interest expense $ 21,316 $ -- $ 21,316
========= ========== ==========
Capital expenditures $ 8,411 $ -- $ 8,411
========= ========== ==========
Note 9. Contingencies
During fiscal year 2001, 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. The Company settled its portion of
this lawsuit for $7,500 subsequent to March 31, 2004.
Beginning in July 2003, the Company 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 March 31, 2004, was $39,387. Due to
the unpredictability of future yields, the Company has not recorded a receivable
for this amount in its financial statements.
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 nine-month period ended March 31, 2004, mutual fund assets under
management averaged $1.31 billion versus $1.08 billion for the same period ended
March 31, 2003. During the three-month period ended March 31, 2004, mutual fund
assets under management averaged $1.54 billion versus $1.07 billion for the same
period ended March 31, 2003. These favorable trends were primarily due to
significant increases in the Company's gold, natural resource, 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 entered into an advisory arrangement with a private client and had a
fee arrangement for the securities in the private client account whereby it
received 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 $670,387 and $308,678 from these fee arrangements for the nine-month
periods ended March 31, 2004, and 2003, respectively. In addition, the Company
recorded $92,859 and $(16,319) in fees during the three-month periods ended
March 31, 2004, and 2003, respectively. These amounts have been classified as
private client advisory fees on the statement of operations. As of March 31,
2004, all securities in the account were either sold or had a final value
determination.. All outstanding fees from the arrangement were collected prior
to March 31, 2004. As this private client advisory agreement was ended as of
March 31, 2004, these fees will not continue into future periods. The Company
will continue to explore opportunities to earn additional revenues through
advisory services provided to private clients or alternative investments, and,
to this end, is finalizing an arrangement to perform sub-advisory services for a
management company registered in the British Virgin Islands.
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 reviewed and monitored these activities, and various
reports are provided to investment advisory clients. On March 31, 2004, the
Company held approximately $3.8 million in investment securities. The value of
these investments is approximately 37 percent of total assets and 44 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 nine-month period ended March 31, 2004, the Company had net realized
gains of $146,785 compared with $23,026 for the nine-month period ended March
31, 2003. The change in net unrealized holding gains and losses on trading
securities held at March 31, 2004, and 2003, which has been included in income
for the nine-month period, was $1,357,914 and $(52,271), respectively. A
significant portion of the unrealized gains for the nine-month period ending
March 31, 2004, is concentrated in a single issuer. For the three-month period
ended March 31, 2004, the Company had net realized losses of $(591) compared
with realized gains of $23,026 for the three-month period ended March 31, 2003.
The change in net unrealized holding gains and losses on trading securities held
at March 31, 2004, and 2003, which has been included in income for the
three-month period, was $(224,380) and $42,857, respectively. The Company
expects that gains and losses will continue to fluctuate in the future.
The Company records unrealized gains and losses on available-for-sale
securities, net of tax, as a separate component of shareholders' equity with any
changes for the period included as other comprehensive income (loss). The change
in net unrealized holding gains and losses on available-for-sale securities held
at March 31, 2004, and 2003, which has been included as other comprehensive
income (loss), net of tax, for the nine-month period, was $715,141 and
$(288,998), respectively. This change was the result of the increased value of a
security acquired during fiscal 2004. The change in net unrealized holding gains
and losses on available-for-sale securities held at March 31, 2004, and 2003,
which has been included as other comprehensive income (loss), net of tax, for
the three-month period was $691,777 and $(63,307), 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 as an investment loss on the Statement of
Operations and Comprehensive Income. The Company recorded other than temporary
declines of $30,879 and $0 for the nine-month period ended March 31, 2004, and
2003, respectively. During the three-month period ended March 31, 2004, and
2003, the Company recorded no other than temporary declines.
RESULTS OF OPERATIONS - NINE MONTHS ENDED MARCH 31, 2004 AND 2003
The Company posted net after-tax income of $2,175,901 ($.29 income per share)
for the nine-month period ended March 31, 2004, compared with net after-tax
income of $183,234 ($.02 income per share) for the nine-month period ended March
31, 2003.
Revenues
Total consolidated revenues for the nine-month period ended March 31, 2004,
increased $4,297,350, or 73 percent, compared with the nine-month period ended
March 31, 2003. This increase was primarily a result of improved markets for
gold-related assets, natural resource commodities, and foreign equities. The
Company's advisory fees, boosted by the positive impact of market gains and
shareholder investments in higher margin gold, natural resource and foreign
equity funds, increased by $2,341,568. These increases were partially offset by
redemptions in lower margin money market funds. Additionally, the Company's
proprietary investment portfolio benefited from the rising gold markets,
resulting in unrealized gains on trading securities of $1,357,914 for the
nine-month period ended March 31, 2004, compared to unrealized losses of
$(52,271) for the nine months ended March 31, 2003. The Company also had an
increase in private client advisory fees of $361,709 due to continued asset
appreciation in the client account.
Expenses
Total consolidated expenses for the nine-month period ended March 31, 2004,
increased $1,620,886, or 28 percent, compared with the nine-month period ended
March 31, 2003. Incentive bonuses associated with strong mutual fund
performance, mutual fund asset growth and increased accounts have resulted in an
increase in personnel costs of $586,113. Consistent with the growth in assets
under management has been an increase in sub-advisory fees of $262,207, which
resulted from the sizeable growth in assets in the Eastern European Fund. 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 in their platforms. Accordingly, the Company has recognized
an increase in net omnibus fee expenses of $445,709 during the period. Since
these platforms represent numerous, and often large, accounts, the assets held
through these distribution channels can be more volatile than direct-held
accounts.
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:
NINE MONTHS ENDED MARCH 31,
---------------------------------------------------
2004 2003
------------------------ -------------------
Net Income $2,175,901 $ 183,234
Adjustments:
Federal income tax expense (benefit) 677,912 (5,885)
Interest 62,668 63,808
Depreciation 81,611 96,736
Net recognized gain on securities (113,092) (23,026)
Net unrealized (gain) loss on trading securities (1,357,914) 52,271
--------- ---------
EBITDA $1,527,086 $ 367,138
========= =========
EBITDA for the nine-month period ended March 31, 2004, was $1,527,086, which was
an increase of $1,159,948, or 316 percent, from an EBITDA of $367,138 for the
nine-month period ended March 31, 2003. The increase in EBITDA is primarily
related to increased investment advisory fees of $2,341,568 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 nine-month period
ended March 31, 2004, boosting operational returns by $361,709 relative to prior
year. Conversely, during the same period the Company experienced an increase in
general and administrative expenses of $1,637,151. 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 MARCH 31, 2004 AND 2003
The Company posted net after-tax income of $239,897 ($.03 income per share) for
the quarter ended March 31, 2004, compared with a net after-tax loss of
$(69,850) ($.01 loss per share) for the quarter ended March 31, 2003.
Revenues
Total consolidated revenues for the quarter ended March 31, 2004, increased
$1,342,982, or 72 percent, compared with the quarter ended March 31, 2003.
Again, the significant and rapid growth in the gold-related, natural resource
and foreign equity markets was particularly strong in the quarter ended March
31, 2004. The Company realized an increase in investment advisory fees of
$1,413,466 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.
Expenses
Total consolidated expenses for the quarter ended March 31, 2004, increased
$921,420, or 47 percent, compared with the quarter ended March 31, 2003. Much of
the mutual fund asset growth has been realized through broker/dealer platforms.
Accordingly, the Company has recognized an increase in net omnibus fee expenses
of $263,210 during the period. Also consistent with the growth in assets under
management has been an increase in sub-advisory fees of $160,540, resulting from
asset growth in the Eastern European Fund. Another increased expense was
personnel costs which increased by $267,644 as a result of incentive bonuses
related to strong fund performance and an increase in mutual fund assets and
accounts.
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:
THREE MONTHS ENDED MARCH 31,
---------------------------------------------------
2004 2003
------------------------ -------------------
Net Income (Loss) $ 239,897 $ (69,850)
Adjustments:
Federal income tax expense (benefit) 107,431 (4,384)
Interest 18,341 21,316
Depreciation 27,766 38,032
Net recognized loss (gain) on securities 591 (23,026)
Net unrealized loss (gain) on trading securities 224,380 (42,857)
--------- ----------
EBITDA $ 618,406 $ (80,769)
========= ==========
EBITDA for the quarter ended March 31, 2004, was $618,406, which was an increase
of $699,175 from an EBITDA loss of $80,769 for the quarter ended March 31, 2003.
The increase in EBITDA was primarily related to increased investment advisory
fees of $1,413,466 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
solid performance during the quarter ended March 31, 2004, boosting operational
returns by $109,178 relative to prior year. Conversely, during the same period
the Company experienced an increase in general and administrative expenses of
$934,662. 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 March 31, 2004, the Company had net working capital (current assets minus
current liabilities) of approximately $5.3 million and a current ratio of 5.2 to
1. The increase in net working capital of $1.8 million from June 30, 2003 to
March 31, 2004, was primarily due to unrealized appreciation in the value of
trading securities. In addition, working capital increased as a result of $1.7
million in positive operating cash flow during the period. Partially offsetting
this increase was a $500,000 early repayment on the Company's note payable to
the bank. With over $2.2 million in cash and cash equivalents and more than $3.7
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 March 31, 2004.
Total shareholders' equity was approximately $8.6 million, with cash, cash
equivalents, and marketable securities comprising 59 percent of total assets.
With the exception of operating expenses, the Company's only material commitment
is its note payable to the bank of $411,160. 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 (with the exception of the Bonnel Growth Fund discussed below) will expire
in February 2005 and May 2005, respectively. Management anticipates the board of
trustees of both USGIF and USGAF will renew the contracts.
Bonnel Inc., the sub-advisor of the Bonnel Growth Fund, notified the Company
that its portfolio manager, Art Bonnel, will be taking an extended sabbatical
beginning June 1, 2004, and, therefore, Bonnel, Inc. will no longer provide
sub-advisory services for the fund. The Company believes that it can continue to
implement the portfolio management strategy utilized by Mr. Bonnel and that the
board of trustees of the fund will approve the Company to provide investment
advisory services to the fund effective June 1, 2004. Upon appointment as
advisor of the fund, the Company expects to realize reduced expenses as it will
no longer pay sub-advisory fees to Bonnel, Inc. However, the Company will incur
additional costs associated with set-up, re-branding efforts, and the hiring of
an additional analyst.
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.
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
March 31, 2004, 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
March 31, 2004 Change Percent Change (net of tax)
Trading Securities $ 2,313,244 25% increase $ 2,891,555 $ 381,685
25% decrease $ 1,734,933 $ (381,685)
Available-for-Sale $ 1,482,681 25% increase $ 1,853,351 $ 244,642
25% decrease $ 1,112,011 $ (244,642)
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 March 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 our
disclosure controls and procedures were effective as of March 31, 2004.
There has been no change in the Company's internal control over financial
reporting that occurred during the quarter ended March 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
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 February 13, 2004, filing of Press Release
Reporting Earnings and Other Financial Results for the second quarter ended
December 31, 2003.
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: May 17, 2004 BY: /s/Frank E. Holmes
---------------------------
Frank E. Holmes
Chief Executive Officer
DATED: May 17, 2004 BY: /s/Tracy C. Peterson
---------------------------
Tracy C. Peterson
Chief Financial Officer