10-Q 1 qdec2003.txt QUARTERLY REPORT FOR PERIOD ENDED 12/31/2003 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------------------------------ FORM 10-Q ------------------------------------------------------ [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 _________ ---------------------------------------------- Commission File Number 0-13928 U.S. GLOBAL INVESTORS, INC. (Exact name of registrant as specified in its charter) ---------------------------------------------- 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, --------------------------------------------------- 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