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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 September 30, 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 November 10, 2003, there were 6,311,474 shares of Registrant's class A
nonvoting common stock issued and 5,981,779 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 (Loss) (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......................................9
Item 3. Quantitative and Qualitative Disclosures about Market Risk....12
Item 4. Controls and Procedures.......................................12
Part II. Other Information....................................................13
Item 6. Exhibits and Reports on Form 8-K......................................13
Signatures....................................................................14
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets
Assets
SEPTEMBER 30, 2003 JUNE 30, 2003
------------------ -------------
(UNAUDITED)
Current Assets
Cash and cash equivalents $1,505,502 $1,162,243
Due from brokers 40,951 3,889
Trading securities, at fair value 1,352,485 723,428
Receivables
Mutual funds - net of allowance of $25,301 and 973,967 966,260
$64,488 at September 30, 2003, and June 30, 2003,
respectively
Private advisory client 457,683 378,832
Litigation settlement --- 371,057
Employees 3,010 3,998
Other 71,935 20,536
Prepaid expenses 257,675 338,020
Deferred tax asset 249,737 372,084
Total Current Assets 4,912,945 4,340,347
Net Property and Equipment 1,848,031 1,778,832
Other Assets
Restricted investments 195,000 195,000
Long-term deferred tax asset 850,800 735,257
Investment securities available-for-sale,
at fair value 408,133 390,251
Total Other Assets 1,453,933 1,320,508
Total Assets $8,214,909 $7,439,687
The accompanying notes are an integral part of this statement.
1
Liabilities and Shareholders'Equity
SEPTEMBER 30, 2003 JUNE 30, 2003
------------------ -------------
(UNAUDITED)
Current Liabilities
Accounts payable $ 146,756 $ 70,437
Accrued compensation and related costs 268,034 264,697
Current portion of notes payable 71,178 70,033
Current portion of annuity and contractual obligation 10,648 10,464
Other accrued expenses 305,267 361,831
Total Current Liabilities 801,883 777,462
Notes payable-net of current portion 868,671 886,527
Annuity and contractual obligations 99,277 102,009
Total Non-Current Liabilities 967,948 988,536
Total Liabilities 1,769,831 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 10,821,020 10,806,655
Treasury stock, class A shares at cost; 334,756 and
361,948 shares at September 30, 2003, and June 30,
2003, respectively (615,780) (663,536)
Accumulated other comprehensive income (loss), net of
tax 10,874 (10,883)
Accumulated deficit (4,161,450) (4,848,961)
Total Shareholders' Equity 6,445,078 5,673,689
Total Liabilities and Shareholders' Equity $8,214,909 $7,439,687
The accompanying notes are an integral part of this statement.
2
Consolidated Statements of Operations and Comprehensive Income (Loss)
(Unaudited)
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------
2003 2002
--------------- ----------------
Revenues
Investment advisory fees $1,333,346 $1,227,783
Transfer agent fees 537,245 583,752
Custodial and administrative fees 35,229 34,880
Investment income (loss) 388,233 (121,087)
Private client advisory fees 291,882 205,365
Other 42,954 40,262
2,628,889 1,970,955
Expenses
General and administrative 1,896,542 1,805,265
Depreciation 26,490 29,876
Interest 22,749 21,513
1,945,781 1,856,654
Income Before Income Taxes 683,108 114,301
Provision for Federal Income Taxes
Tax (Benefit) Expense (4,403) 3,194
Net Income $ 687,511 $ 111,107
Other comprehensive income (loss), net of tax
Unrealized gains (losses) on
available-for-sale securities 21,757 (124,839)
Comprehensive Income (Loss) $ 709,268 $ (13,732)
Basic and Diluted Net Income per Share $ 0.09 $ 0.01
The accompanying notes are an integral part of this statement.
3
Consolidated Statements of Cash Flows (Unaudited)
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------
2003 2002
------------ ----------------
Cash Flows from Operating Activities:
Net income $ 687,511 $ 111,107
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 26,490 29,876
Net recognized gain on securities (9,726) --
Provision for deferred taxes (4,403) 3,194
Provision for losses on accounts receivable (39,187) --
Compensation expense resulting from the issuance
of treasury stock -- 4,800
Changes in assets and liabilities, impacting cash from
operations:
Accounts receivable 273,275 47,363
Prepaid expenses and other 43,283 111,539
Trading securities (637,777) (975,556)
Accounts payable and accrued expenses 60,592 852,307
Total adjustments (287,453) 73,523
Net Cash Provided by Operating Activities 400,058 184,630
Cash Flows from Investing Activities:
Purchase of property and equipment (95,690) (2,388)
Purchase of available-for-sale securities (44,543) --
Proceeds on sale of available-for-sale securities 78,072 --
Net Cash Used in Investing Activities (62,161) (2,388)
Cash Flow from Financing Activities:
Payments on annuity (2,548) (2,301)
Payments on note payable (16,711) (15,624)
Proceeds from issuance or exercise of stock, warrants,
and options 25,360 16,184
Purchase of treasury stock (739)
--
Net Cash Provided by (Used in) Financing Activities 5,362 (1,741)
Net Increase in Cash and Cash Equivalents 343,259 180,501
Beginning Cash and Cash Equivalents 1,162,243 988,936
Ending Cash and Cash Equivalents $ 1,505,502 $ 1,169,437
The accompanying notes are an integral part of this statement.
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 three-month period ended September 30, 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 September 30, 2003, and June
30, 2003, was $1,913,108 and $1,658,058, respectively. The market value of
investments classified as trading at September 30, 2003, and June 30, 2003, was
$1,352,485 and $723,428, respectively. The change in net unrealized holding
losses on trading securities held at September 30, 2003, and 2002, which has
been included in income for the quarter, was $374,007 and $(129,623),
respectively. Sales of trading securities generated realized losses of $8,720
and $0 for quarter ended September 30, 2003, and 2002, respectively.
The cost of investments in securities classified as available-for-sale, which
may not be readily marketable, was $391,657 and $406,739 at September 30, 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 September
30, 2003, and June 30, 2003, of $408,133 and $390,251, respectively, with
$10,874 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 $32,672 and $0 for the
quarter ended September 30, 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
$14,226 and $0 for the quarter ended September 30, 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.
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 quarter ended September 30, 2003, and 2002, were $390,438 and
$400,885, 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, payable at the settlement of the sales.
The Company has recorded $291,882 and $205,365 in revenue from these fee
arrangements for the quarter ended September 30, 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 September 30, 2003, the balance on the note was
$939,849. 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 September 30, 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 September 30, 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), and related
interpretations, as allowed under Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation", (SFAS 123). In accordance
with APB 25, no compensation expense is recognized for stock options where the
exercise price equals or exceeds the underlying stock price on the date of
grant.
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:
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------
2003 2002
------------ -------------
Net Income, as reported $ 687,511 $ 111,107
Add: Stock-based employee compensation expense
included in reported net income, net of tax 8,250 10,501
Deduct: Total stock-based employee compensation expense
determined under fair value based method, net of tax (9,322) (11,627)
Pro forma net income $ 686,439 $ 109,981
Earnings per share:
Basic and Diluted - as reported $ 0.09 $ 0.01
Basic and Diluted - pro forma $ 0.09 $ 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 quarter ended September
30, 2003, and September 30, 2002, respectively. During the quarter ended
September 30, 2003, $37,500 of stock was issued in payment of bonuses accrued at
June 30, 2003.
Note 6. Earnings Per Share
The following table sets forth the computation for basic and diluted earnings
per share (EPS):
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------
2003 2002
------------ --------------
Basic and diluted net income $ 687,511 $ 111,107
Weighted average number of outstanding shares
Basic 7,465,593 7,465,845
Effect of dilutive securities
Employee stock options 34,160 5,657
Diluted 7,499,753 7,471,502
Earnings per share
Basic $ 0.09 $ 0.01
Diluted $ 0.09 $ 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 quarter
ended September 30, 2003, and September 30, 2002, options for 16,000 and 120,000
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 September 30, 2003, the Company has net operating loss
carryovers (NOLs) of approximately $1.7 million, which will expire between
fiscal 2010 and 2022, charitable contribution carryovers of approximately
$69,000 expiring between 2004 and 2007, and alternative minimum tax credits of
approximately $140,000 with indefinite expirations. The long-term deferred tax
asset includes approximately $109,000 of unrealized losses on available-for-sale
securities, approximately $22,000 associated with the difference between book
and tax depreciation, and approximately
7
$37,000 from annuity obligations. If certain changes in the Company's ownership
occur subsequent to September 30, 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 $87,000 and $315,000 at September 30, 2003,
and June 30, 2003, respectively, providing for the utilization of NOLs,
charitable contributions, and 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
Three months ended September 30, 2003
Revenues $2,243,701 $ 385,188 $ 2,628,889
Income before income taxes $ 297,920 $ 385,188 $ 683,108
Depreciation $ 26,490 $ -- $ 26,490
Interest expense $ 22,749 $ -- $ 22,749
Capital expenditures $ 95,690 $ -- $ 95,690
Gross identifiable assets at September 30, 2003 $5,258,822 $ 1,855,550 $7,114,372
Deferred tax asset 1,100,537
Consolidated total assets at September 30, 2003 $ 8,214,909
Three months ended September 30, 2002
Revenues $2,100,401 $ (129,446) $ 1,970,955
Income (loss) before income taxes $ 244,372 $ (130,071) $ 114,301
Depreciation $ 29,876 $ -- $ 29,876
Interest expense $ 20,888 $ 625 $ 21,513
Capital expenditures $ 2,388 $ -- $ 2,388
Gross identifiable assets at September 30, 2002 $4,447,855 $ 3,125,509 $7,573,364
Deferred tax asset 1,173,292
Consolidated total assets at September 30, 2002 $ 8,746,656
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. Management consulted with legal counsel and
determined that the Company has strong merits for obtaining a favorable ruling.
The Company was the plaintiff in a lawsuit filed in Ontario, Canada and a
mediation was held during June 2003. During this mediation, the Company and the
defendant agreed to a settlement in the amount of $371,057, which was recorded
as a receivable on the balance sheet at June 30, 2003. Payment on the settlement
was received by the Company during the quarter ended September 30, 2003, and the
case has been formally dismissed.
8
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 quarter ended September 30, 2003, mutual fund assets under management
averaged $1.07 billion versus $1.11 billion for the same period ended September
30, 2002. This decline was primarily due to shareholder redemptions in the U.S.
Government Securities Savings Fund as money market investors seek alternative
short-term investments with higher yields. This industry trend, as reflected in
Investment Company Institute (ICI) mutual fund money flow data, has been
partially offset by a significant increase in assets in the Company's gold, tax
free bond, and foreign equity funds.
The Company has entered into an 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 has recorded
$291,882 and $205,365 from these fee arrangements for the quarter ended
September 30, 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
compliance personnel reviewed and monitored these activities, and various
reports are provided to investment advisory clients. On September 30, 2003, the
Company held approximately $1.8 million in investment securities. The value of
these investments is approximately 21 percent of total assets and 27 percent of
9
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
quarter ended September 30, 2003, the Company had net realized gains of $23,952
compared with $0 for the quarter ended September 30, 2002. The change in net
unrealized holding losses on trading securities held at September 30, 2003, and
2002, which has been included in income for the three-month period, was $374,007
and $(129,623), respectively. 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 $14,226 and $0
for the quarter ended September 30, 2003, and 2002, respectively.
RESULTS OF OPERATIONS - QUARTER ENDED SEPTEMBER 30, 2003 AND 2002
The Company posted net after-tax income of $687,511 ($.09 income per share) for
the quarter ended September 30, 2003, compared with a net after-tax income
$111,107 ($.01 income per share) for the quarter ended September 30, 2002
Revenues
Total consolidated revenues for the quarter ended September 30, 2003, increased
$657,934, or 33 percent, compared with the quarter ended September 30, 2002.
This increase was primarily attributable to unrealized gains on trading
securities of $374,007 for the quarter ended September 30, 2003, compared to
unrealized losses of $(129,623) for the quarter ended September 30, 2002. The
Company also realized an increase in investment advisory fees of $105,563 as a
result of improved profit margins on its assets under management. Redemptions in
low margin money market funds were offset by market gains and purchases in high
margin gold and foreign equity funds. The Company also had an increase in
private client advisory fees of $86,517 due to continued asset appreciation in
the client account. Offsetting these favorable trends was a decrease of $46,507
in transfer agent fees due to a decline in the consolidated number of mutual
fund shareholder accounts.
Expenses
Total consolidated expenses for the quarter ended September 30, 2003, increased
$89,127, or 5 percent, compared with the quarter ended September 30, 2002. The
Company has increased marketing expenditures and has incurred additional
sub-advisory fees associated with asset growth in the Eastern European Fund.
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 Income Before Income Taxes to EBITDA:
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------
2003 2002
------------ -------------
Income Before Income Taxes $ 683,108 $ 114,301
Adjustments:
Interest 22,749 21,513
Depreciation 26,490 29,876
Net recognized gain on securities (9,726) --
Net unrealized (gain) loss on trading securities (374,007) 129,623
EBITDA $ 348,614 $ 295,313
EBITDA for the quarter ended September 30, 2003, was $348,614, which was an
increase of $53,301, or 18 percent, from an EBITDA of $295,313 for the quarter
ended September 30, 2002. 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 outstanding performance in the quarter ended September 30, 2003,
boosting operational returns relative to prior year. In addition, the Company
had increased investment advisory fees as a result of growth in higher margin
mutual funds. Conversely, during the same period the Company experienced a
reduction in transfer agent fee revenues and an increase in operating expenses.
10
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 September 30, 2003, the Company has net operating loss
carryovers (NOLs) of approximately $1.7 million, which will expire between
fiscal 2010 and 2022, charitable contribution carryovers of approximately
$69,000 expiring between 2004 and 2006, and alternative minimum tax credits of
approximately $140,000 with indefinite expirations. The long-term deferred tax
asset includes approximately $109,000 of unrealized losses on available-for-sale
securities, approximately $22,000 associated with the difference between book
and tax depreciation, and approximately $37,000 from annuity obligations. If
certain changes in the Company's ownership occur subsequent to September 30,
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 $87,000 and $315,000 at September 30, 2003,
and June 30, 2003, respectively, providing for the utilization of NOLs,
charitable contributions, and investment tax credits against future taxable
income.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2003, the Company had net working capital (current assets minus
current liabilities) of approximately $4.1 million and a current ratio of 6.1 to
1. The increase in net working capital of $548,177 from June 30, 2003 to
September 30, 2003, was primarily due to unrealized appreciation in the value of
trading securities. In addition, working capital increased as a result of the
Company recording additional receivables from the private advisory client to
reflect its share of unrealized appreciation in the client account. With
approximately $1.5 million in cash and cash equivalents and more than $1.7
million in marketable securities, the Company has adequate liquidity to meet its
current debt obligations. Cash and cash equivalents increased by more than
$343,000 from June 30, 2003 to September 30, 2003, as the Company was able to
collect the monies due from a litigation settlement. 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 September 30, 2003. Total shareholders' equity was approximately $6.4
million, with cash, cash equivalents, and marketable securities comprising 40
percent of total assets. With the exception of operating expenses, the Company's
only material commitment is its note payable to the bank. 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.
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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
September 30, 2003, and shows the effects of a hypothetical 25 percent increase
and a 25 percent decrease in market prices.
SENSITIVITY ANALYSIS Estimated Increase
Hypothetical Fair Value after (Decrease) in
Fair Value at Percentage Hypothetical Shareholders'
September 30, 2003 Change Percent Change Equity
Trading Securities $ 1,352,485 25% increase $ 1,690,606 $ 223,160
25% decrease $ 1,014,364 $ (223,160)
Available-for-Sale $ 408,133 25% increase $ 510,166 $ 67,342
25% decrease $ 306,100 $ (67,342)
The selected hypothetical change does not reflect what could be considered best-
or worst-case scenarios. Results could be significantly worse due to both the
nature of equity markets and the concentration of the Company's investment
portfolio.
ITEM 4. CONTROLS AND PROCEDURES
An evaluation of the effectiveness of the design and operation of the Company's
disclosure controls and procedures as of September 30, 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 September 30, 2003.
There has been no change in the Company's internal control over financial
reporting that occurred during the quarter ended September 30, 2003, that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
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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
None
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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: November 14, 2003 BY: /s/ Frank E. Holmes
---------------------------
Frank E. Holmes
Chief Executive Officer
DATED: November 14, 2003 BY: /s/ Tracy C. Peterson
---------------------------
Tracy C. Peterson
Chief Financial Officer
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