e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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| [X] |
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Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for
the quarterly period ended December 31, 2010 |
OR
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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 |
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| U.S. GLOBAL INVESTORS, INC. |
| (Exact name of registrant as specified in its charter) |
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| Texas
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74-1598370 |
| (State or Other Jurisdiction of
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(IRS Employer Identification Number) |
| Incorporation or Organization) |
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| 7900 Callaghan Road
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78229-1234 |
| San Antonio, Texas
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(Zip Code) |
| (Address of Principal Executive Offices) |
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(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 (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or
for such shorter period that the registrant was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one):
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Large accelerated filer [ ]
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Accelerated filer [X]
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Non-accelerated filer [ ]
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Smaller Reporting Company [ ] |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
On January 27, 2011, there were 13,862,445 shares of Registrant’s class A nonvoting common stock
issued and 13,321,077 shares of Registrant’s class A nonvoting common stock issued and outstanding,
no shares of Registrant’s class B nonvoting common shares outstanding, and 2,073,103 shares of
Registrant’s class C voting common stock issued and outstanding.
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| U.S.
Global Investors, Inc. |
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| December 31, 2010, Quarterly Report on Form 10-Q
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Page 1 of 25 |
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets
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December 31, |
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June 30, |
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| Assets |
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2010 |
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2010 |
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(UNAUDITED) |
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Current Assets |
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Cash and cash equivalents |
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$ |
23,286,916 |
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$ |
23,837,479 |
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Trading securities, at fair value |
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5,875,757 |
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5,072,724 |
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Receivables |
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Mutual funds |
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4,166,528 |
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3,065,100 |
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Offshore clients |
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919,777 |
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29,070 |
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Employees |
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3,388 |
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1,885 |
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Other |
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6,917 |
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152,930 |
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Prepaid expenses |
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855,188 |
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756,394 |
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Deferred tax asset |
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- |
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200,129 |
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Total Current Assets |
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35,114,471 |
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33,115,711 |
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Net Property and Equipment |
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3,657,348 |
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3,906,712 |
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Other Assets |
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Deferred tax asset, long term |
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499,798 |
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933,241 |
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Investment securities available-for-sale, at fair value |
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4,803,855 |
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3,028,034 |
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Total Other Assets |
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5,303,653 |
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3,961,275 |
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Total Assets |
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$ |
44,075,472 |
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$ |
40,983,698 |
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The accompanying notes are an integral part of this statement.
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| U.S. Global Investors, Inc. |
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| December 31, 2010, Quarterly Report on Form 10-Q
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Page 2 of 25 |
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December 31, |
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June 30, |
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| Liabilities and Shareholders’ Equity |
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2010 |
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2010 |
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(UNAUDITED) |
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Current Liabilities |
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Accounts payable |
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$ |
59,413 |
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$ |
174,690 |
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Accrued compensation and related costs |
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2,210,912 |
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1,701,255 |
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Deferred tax liability |
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171,010 |
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- |
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Dividends payable |
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922,692 |
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921,514 |
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Other accrued expenses |
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2,173,719 |
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1,994,367 |
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Total Current Liabilities |
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5,537,746 |
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4,791,826 |
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Commitments and Contingencies |
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Shareholders’ Equity |
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Common stock (class A) - $0.025 par value; nonvoting; authorized, 28,000,000 shares; issued, 13,862,445 shares at
December 31, 2010, and June 30, 2010 |
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346,561 |
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346,561 |
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Common stock (class B) - $0.025 par value; nonvoting; authorized, 4,500,000 shares; no shares issued |
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- |
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- |
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Convertible common stock (class C) - $0.025 par value; voting; authorized, 3,500,000 shares; issued, 2,073,103 shares
at December 31, 2010, and June 30, 2010 |
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51,828 |
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51,828 |
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Additional paid-in-capital |
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15,142,466 |
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15,136,537 |
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Treasury stock, class A shares at cost; 545,868 and 573,764 shares at December 31, 2010, and June 30, 2010, respectively |
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(1,278,082) |
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(1,343,397) |
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Accumulated other comprehensive income, net of tax |
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1,079,352 |
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555,352 |
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Retained earnings |
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23,195,601 |
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21,444,991 |
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Total Shareholders’ Equity |
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38,537,726 |
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36,191,872 |
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Total Liabilities and Shareholders’ Equity |
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$ |
44,075,472 |
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$ |
40,983,698 |
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The accompanying notes are an integral part of this statement.
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| U.S. Global Investors, Inc. |
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| December 31, 2010, Quarterly Report on Form 10-Q
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Page 3 of 25 |
Consolidated Statements of Operations and Comprehensive Income (Unaudited)
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Six Months Ended December 31, |
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Three Months Ended December 31, |
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2010 |
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2009 |
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2010 |
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2009 |
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Revenues |
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Mutual fund advisory fees |
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$ |
12,429,836 |
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$ |
9,639,067 |
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$ |
7,058,638 |
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$ |
5,282,464 |
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Transfer agent fees |
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2,518,854 |
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2,780,472 |
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1,315,699 |
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1,455,622 |
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Distribution fees |
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2,809,025 |
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2,587,286 |
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1,528,950 |
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1,391,584 |
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Administrative services fees |
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901,082 |
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931,210 |
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491,168 |
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492,275 |
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Other advisory fees |
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1,159,378 |
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198,181 |
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992,544 |
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95,615 |
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Investment income |
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989,898 |
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896,194 |
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510,047 |
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296,741 |
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Other |
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23,406 |
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25,080 |
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13,692 |
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14,304 |
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20,831,479 |
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17,057,490 |
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11,910,738 |
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9,028,605 |
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Expenses |
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Employee compensation and benefits |
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6,656,080 |
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5,966,786 |
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3,928,059 |
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3,257,898 |
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General and administrative |
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4,466,774 |
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2,879,928 |
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2,259,756 |
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1,469,892 |
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Platform fees |
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2,864,982 |
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2,668,115 |
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1,536,401 |
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1,426,161 |
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Subadvisory fees |
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144,994 |
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279,989 |
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15,000 |
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151,325 |
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Advertising |
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952,084 |
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412,728 |
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459,239 |
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314,187 |
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Depreciation |
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147,042 |
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163,252 |
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71,990 |
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100,089 |
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15,231,956 |
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12,370,798 |
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8,270,445 |
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6,719,552 |
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Income Before Income Taxes |
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5,599,523 |
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4,686,692 |
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3,640,293 |
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2,309,053 |
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Provision for Federal Income Taxes |
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Tax expense |
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2,003,544 |
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1,782,133 |
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1,310,007 |
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801,001 |
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Net Income |
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3,595,979 |
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2,904,559 |
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2,330,286 |
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1,508,052 |
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Other Comprehensive Income, Net of Tax: |
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Unrealized gains on available-for-sale securities arising during period |
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564,630 |
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273,853 |
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104,948 |
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78,932 |
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Less: reclassification adjustment for gains/losses included in net income |
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(40,630) |
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- |
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(40,630) |
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- |
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Comprehensive Income |
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$ |
4,119,979 |
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$ |
3,178,412 |
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$ |
2,394,604 |
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$ |
1,586,984 |
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Basic Net Income per Share |
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$ |
0.23 |
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$ |
0.19 |
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$ |
0.15 |
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$ |
0.10 |
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Diluted Net Income per Share |
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$ |
0.23 |
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$ |
0.19 |
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$ |
0.15 |
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$ |
0.10 |
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Basic weighted average number of common shares outstanding |
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15,368,527 |
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15,324,269 |
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15,372,554 |
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15,336,967 |
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Diluted weighted average number of common shares outstanding |
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15,368,527 |
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15,327,924 |
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15,372,554 |
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|
15,340,847 |
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The accompanying notes are an integral part of this statement.
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U.S. Global Investors, Inc. |
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December 31, 2010, Quarterly Report on Form 10-Q
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Page 4 of 25 |
Consolidated Statements of Cash Flows (Unaudited)
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Six Months Ended December 31, |
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2010 |
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2009 |
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Cash Flows from Operating Activities: |
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Net income |
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$ |
3,595,979 |
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$ |
2,904,559 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation |
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147,042 |
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163,252 |
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Net recognized loss on disposal of fixed assets |
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154,216 |
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- |
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Net recognized (gain) loss on securities |
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(62,864) |
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58,576 |
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Provision for deferred taxes |
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378,821 |
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433,527 |
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Stock bonuses |
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113,796 |
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196,558 |
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Stock-based compensation expense |
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18,913 |
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34,477 |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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(1,847,625) |
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207,002 |
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Prepaid expenses |
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(98,794) |
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(208,949) |
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Trading securities |
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(803,033) |
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(615,780) |
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Accounts payable and accrued expenses |
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573,732 |
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517,728 |
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Total adjustments |
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(1,425,796) |
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786,391 |
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Net cash provided by operating activities |
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2,170,183 |
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3,690,950 |
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Cash Flows from Investing Activities: |
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Purchase of property and equipment |
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(51,894) |
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(415,988) |
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Purchase of available-for-sale securities |
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(1,039,639) |
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(116,906) |
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Proceeds on sale of available-for-sale securities |
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99,287 |
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22 |
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Return of capital on investment |
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21,334 |
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- |
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Net cash used in investing activities |
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(970,912) |
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(532,872) |
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Cash Flows from Financing Activities: |
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Exercise of stock options |
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- |
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116,749 |
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Issuance of common stock |
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94,357 |
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|
92,967 |
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Dividends paid |
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(1,844,191) |
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(1,838,919) |
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Net cash used in financing activities |
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(1,749,834) |
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(1,629,203) |
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Net (decrease) increase in cash and cash equivalents |
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(550,563) |
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1,528,875 |
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Beginning cash and cash equivalents |
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|
23,837,479 |
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20,303,594 |
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Ending cash and cash equivalents |
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$ |
23,286,916 |
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$ |
21,832,469 |
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Supplemental Disclosures of Cash Flow Information |
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Cash paid for income taxes |
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$ |
1,325,000 |
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|
$ |
- |
|
The accompanying notes are an integral part of this statement.
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| U.S. Global Investors, Inc. |
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| December 31, 2010, Quarterly Report on Form 10-Q
|
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Page 5 of 25 |
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Notes to Consolidated Financial Statements (Unaudited)
Note 1. Basis of Presentation
U.S. Global Investors, Inc. (the “Company” or “U.S. Global”) has prepared the consolidated
financial statements pursuant to accounting principles generally accepted in the United States of
America (“U.S. GAAP”) and the rules and regulations of the United States Securities and Exchange
Commission (“SEC”) that permit reduced disclosure for interim periods. The financial information
included herein reflects all adjustments (consisting solely of normal recurring adjustments), which
are, in management’s opinion, 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 fiscal year ended June 30,
2010.
The consolidated financial statements include the accounts of the Company and its wholly owned
subsidiaries, United Shareholder Services, Inc. (“USSI”), U.S. Global Investors (Guernsey) Limited,
U.S. Global Brokerage, Inc., and U.S. Global Investors (Bermuda) Limited.
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 months ended December 31, 2010, are not necessarily indicative of the results to be expected
for the entire year.
The unaudited interim financial information in these condensed financial statements should be read
in conjunction with the consolidated financial statements contained in the Company’s annual report.
Recent Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (“FASB”) removed the concept of a qualifying
special-purpose entity and removed the exception from applying in consolidation of variable
interest entities to qualifying special-purpose entities in ASC 860 Transfers and Servicing
(formerly SFAS No. 166, Accounting for Transfers of Financial Assets – an amendment of FASB
Statement No. 140). This standard is effective for both interim and annual periods as of the
beginning of each reporting entity’s first annual reporting period that begins after November 15,
2009. The adoption of this standard did not have an impact on the Company’s consolidated financial
statements.
Effective for both interim and annual periods as of the beginning of each reporting entity’s first
annual report period beginning after November 15, 2009, enterprises are required to perform an
analysis to determine whether the enterprise’s variable interest or interests give it a controlling
financial interest in a variable interest entity, in accordance with ASC 810 Consolidation
(formerly SFAS No. 167, Amendments to FASB Interpretation No. 46(R)). The adoption of this standard
did not have an impact on the Company’s consolidated financial statements.
In January 2010, the FASB issued Accounting Standards Update (ASU) No. 2010-06, Improving
Disclosures about Fair Value Measurements. This ASU will add new requirements for disclosures into
and out of Levels 1 and 2 fair-value measurements and information on purchases, sales, issuances
and settlements on a gross basis in the reconciliation of Level 3 fair-value measurements. It also
clarifies existing fair value disclosures about the level of disaggregation, inputs and valuation
techniques. Except for the detailed Level 3 reconciliation disclosures, the guidance in the ASU is
effective for annual and interim reporting periods in fiscal years beginning after December 15,
2009. The new disclosures for Level 3 activity are effective for annual and interim reporting
periods in fiscal years beginning after December 15, 2010. The adoption of ASU 2010-06 by the
Company did not have a material effect on its consolidated financials statements except for
enhanced disclosure in the notes to its consolidated financial statements.
Note 2. Dividend
Payment of cash dividends is within the discretion of the Company’s board of directors and is
dependent on earnings, operations, capital requirements, general financial condition of the
Company, and general business conditions. A monthly dividend of $0.02 per share is authorized
through March 2011 and will be reviewed by the board quarterly.
|
|
|
| |
|
|
| U.S. Global Investors, Inc. |
|
|
| December 31, 2010, Quarterly Report on Form 10-Q
|
|
Page 6 of 25 |
| |
Note 3. Investments
As of December 31, 2010, the Company held investments with a market value of approximately $10.7
million and a cost basis of approximately $9.1 million. The market value of these investments is
approximately 24.2 percent of the Company’s total assets.
Investments in securities classified as trading are reflected as current assets on the consolidated
balance sheet at their fair market value. Unrealized holding gains and losses on trading securities
are included in earnings in the consolidated statements of operations and comprehensive income
(loss).
Investments in securities classified as available-for-sale, which may not be readily marketable,
are reflected as non-current assets on the consolidated balance sheet at their fair value.
Unrealized holding gains and losses on available-for-sale securities are excluded from earnings and
reported in other comprehensive income as a separate component of shareholders’ equity until
realized.
The Company records security transactions on trade date. Realized gains (losses) from security
transactions are calculated on the first-in/first-out cost basis, unless otherwise identifiable,
and are recorded in earnings on the date of sale.
The following summarizes the market value, cost, and unrealized gain or loss on investments as of
December 31, 2010, and June 30, 2010.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding |
|
| Securities |
|
Market Value |
|
|
Cost |
|
|
Unrealized Gain |
|
|
losses on available-for- |
|
| |
|
|
|
|
(Loss) |
|
|
sale securities, net of |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
tax |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Trading1 |
|
$ |
5,875,757 |
|
|
$ |
5,963,272 |
|
|
$ |
(87,515 |
) |
|
|
N/A |
Available-for-sale2 |
|
|
4,803,855 |
|
|
|
3,168,474 |
|
|
|
1,635,381 |
|
|
$ |
1,079,351 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total at December 31, 2010 |
|
$ |
10,679,612 |
|
|
$ |
9,131,746 |
|
|
$ |
1,547,866 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading1 |
|
$ |
5,072,724 |
|
|
$ |
5,963,272 |
|
|
$ |
(890,548 |
) |
|
|
N/A |
Available-for-sale2 |
|
|
3,028,034 |
|
|
|
2,186,591 |
|
|
|
841,443 |
|
|
$ |
555,352 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total at June 30, 2010 |
|
$ |
8,100,758 |
|
|
$ |
8,149,863 |
|
|
$ |
(49,105 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 Unrealized and realized gains and losses on trading securities are included in earnings in
the statement of operations.
2 Unrealized gains and losses on available-for-sale securities are excluded from earnings and
recorded in other comprehensive income as a separate component of shareholders’ equity until
realized.
|
|
|
| |
|
|
| U.S. Global Investors, Inc. |
|
|
| December 31, 2010, Quarterly Report on Form 10-Q
|
|
Page 7 of 25 |
| |
The following details the components of the Company’s available-for-sale investments as of December
31, 2010, and June 30, 2010.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, 2010 (in thousands) |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Gross Unrealized |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Cost |
|
|
Gains |
|
|
(Losses) |
|
|
Market Value |
|
|
|
|
|
|
|
|
|
Available-for-sale securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
$ |
930 |
|
|
$ |
1,029 |
|
|
$ |
(3 |
) |
|
$ |
1,956 |
|
|
|
|
|
|
|
|
|
Venture capital investments |
|
|
208 |
|
|
|
45 |
|
|
|
(7 |
) |
|
|
246 |
|
|
|
|
|
|
|
|
|
Mutual funds |
|
|
2,030 |
|
|
|
572 |
|
|
|
- |
|
|
|
2,602 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale securities |
|
$ |
3,168 |
|
|
$ |
1,646 |
|
|
$ |
(10 |
) |
|
$ |
4,804 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| |
|
June 30, 2010 (in thousands) |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Gross Unrealized |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Cost |
|
|
Gains |
|
|
(Losses) |
|
|
Market Value |
|
|
|
|
|
|
|
|
|
Available-for-sale securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
$ |
927 |
|
|
$ |
538 |
|
|
$ |
(11 |
) |
|
$ |
1,454 |
|
|
|
|
|
|
|
|
|
Venture capital investments |
|
|
230 |
|
|
|
45 |
|
|
|
(7 |
) |
|
|
268 |
|
|
|
|
|
|
|
|
|
Mutual funds |
|
|
1,030 |
|
|
|
277 |
|
|
|
(1 |
) |
|
|
1,306 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale securities |
|
$ |
2,187 |
|
|
$ |
860 |
|
|
$ |
(19 |
) |
|
$ |
3,028 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following tables show the gross unrealized losses and fair values of available-for-sale
investment securities with unrealized losses aggregated by investment category and length of time
that individual securities have been in a continuous unrealized loss position:
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, 2010 (in thousands) |
|
| |
|
Less Than 12 Months |
|
|
12 Months or Greater |
|
|
Total |
|
| |
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
| |
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
| |
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
Available-for-sale securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
$ |
3 |
|
|
$ |
(3 |
) |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
3 |
|
|
$ |
(3 |
) |
Venture capital investments |
|
|
118 |
|
|
|
(7 |
) |
|
|
- |
|
|
|
- |
|
|
|
118 |
|
|
|
(7 |
) |
Mutual funds |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale securities |
|
$ |
121 |
|
|
$ |
(10 |
) |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
121 |
|
|
$ |
(10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
June 30, 2010 (in thousands) |
|
| |
|
Less Than 12 Months |
|
|
12 Months or Greater |
|
|
Total |
|
| |
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
| |
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
| |
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
Available-for-sale securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
$ |
118 |
|
|
$ |
(11 |
) |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
118 |
|
|
$ |
(11 |
) |
Venture capital investments |
|
|
49 |
|
|
|
(7 |
) |
|
|
- |
|
|
|
- |
|
|
|
49 |
|
|
|
(7 |
) |
Mutual funds |
|
|
19 |
|
|
|
(1 |
) |
|
|
- |
|
|
|
- |
|
|
|
19 |
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale securities |
|
$ |
186 |
|
|
$ |
(19 |
) |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
186 |
|
|
$ |
(19 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| U.S. Global Investors, Inc. |
|
|
| December 31, 2010, Quarterly Report on Form 10-Q
|
|
Page 8 of 25 |
| |
Investment income can be volatile and varies depending on market fluctuations, the Company’s
ability to participate in investment opportunities, and timing of transactions. A significant
portion of the unrealized gains and losses for the three and six months ended December 31, 2010, is
concentrated in a small number of issuers. The Company expects that gains and losses will continue
to fluctuate in the future.
Investment income (loss) from the Company’s investments includes:
| |
• |
|
realized gains and losses on sales of securities; |
| |
• |
|
unrealized gains and losses on trading securities; |
| |
• |
|
realized foreign currency gains and losses; |
| |
• |
|
other-than-temporary impairments on available-for-sale securities; and |
| |
• |
|
dividend and interest income. |
The following summarizes investment income reflected in earnings for the periods discussed:
| |
|
|
|
|
|
|
|
|
| Investment Income |
|
Six Months Ended December 31, |
|
| |
|
2010 |
|
|
2009 |
|
Realized gains on sales of available-for-sale securities |
|
$ |
62,864 |
|
|
$ |
22 |
|
Realized losses on sales of trading securities |
|
|
- |
|
|
|
(58,598 |
) |
Unrealized gains on trading securities |
|
|
803,033 |
|
|
|
870,489 |
|
Realized foreign currency gains (losses) |
|
|
(3,833 |
) |
|
|
3,112 |
|
Dividend and interest income |
|
|
127,834 |
|
|
|
81,169 |
|
|
|
|
|
|
|
|
Total Investment Income |
|
$ |
989,898 |
|
|
$ |
896,194 |
|
|
|
|
|
|
|
|
| |
| Investment Income |
|
Three Months Ended December 31, |
|
| |
|
2010 |
|
|
2009 |
|
Realized gains on sales of available-for-sale securities |
|
$ |
61,561 |
|
|
$ |
22 |
|
Realized losses on sales of trading securities |
|
|
- |
|
|
|
(58,598 |
) |
Unrealized gains on trading securities |
|
|
347,887 |
|
|
|
314,141 |
|
Realized foreign currency gains (losses) |
|
|
(2,402 |
) |
|
|
147 |
|
Dividend and interest income |
|
|
103,001 |
|
|
|
41,029 |
|
|
|
|
|
|
|
|
Total Investment Income |
|
$ |
510,047 |
|
|
$ |
296,741 |
|
|
|
|
|
|
|
|
Note 4. Fair Value Disclosures
Accounting Standards Codification (ASC) 820, Fair Value Measurement and Disclosures (formerly SFAS
157), defines fair value as the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date. ASC 820
establishes a hierarchy that prioritizes inputs to valuation techniques used to measure fair value
and requires companies to disclose the fair value of their financial instruments according to a
fair value hierarchy (i.e., Levels 1, 2, and 3 inputs, as defined below). The fair value hierarchy
gives the highest priority to quoted prices in active markets for identical assets or liabilities
and the lowest priority to unobservable inputs. Additionally, companies are required to provide
enhanced disclosures regarding instruments in the Level 3 category (which have inputs to the
valuation techniques that are unobservable and require significant management judgment), including
a reconciliation of the beginning and ending values separately for each major category of assets or
liabilities.
Financial instruments measured and reported at fair value are classified and disclosed in one of
the following categories:
Level 1 – Valuations based on quoted prices in active markets for identical assets
or liabilities at the reporting date. Since valuations are based on quoted prices
that are readily and regularly available in an active market, value of these
products does not entail a significant degree of judgment.
Level 2 – Valuations based on quoted prices in markets that are not active or for
which all significant inputs are observable, directly or indirectly.
|
|
|
| |
|
|
| U.S. Global Investors, Inc. |
|
|
| December 31, 2010, Quarterly Report on Form 10-Q
|
|
Page 9 of 25 |
| |
Level 3 – Valuations based on inputs that are unobservable and significant to the
fair value measurement.
The Company’s assessment of the significance of a particular input to the fair value measurement in
its entirety requires judgment and considers factors specific to the financial instrument.
For actively traded securities, the Company values investments using the closing price of the
securities on the exchange or market on which the securities principally trade. If the security is
not actively traded, it is valued based on the last bid and/or ask quotation. Securities that are
not traded on an exchange or market are generally valued at cost, monitored by management and fair
value adjusted as considered necessary. The Company values the mutual funds, offshore funds and a
venture capital investment at net asset value.
The following table presents fair value measurements, as of December 31, 2010, for the three major
categories of U.S. Global’s investments measured at fair value on a recurring basis:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Fair Value Measurement using (in thousands) |
|
| |
|
|
|
|
|
|
|
|
|
Significant |
|
|
|
|
| |
|
|
|
|
|
Significant |
|
|
Unobservable |
|
|
|
|
| |
|
Quoted Prices |
|
|
Other Inputs |
|
|
Inputs |
|
|
Total |
|
| |
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
|
|
|
Trading securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
$ |
214 |
|
|
$ |
28 |
|
|
$ |
- |
|
|
$ |
242 |
|
Mutual funds |
|
|
4,008 |
|
|
|
- |
|
|
|
- |
|
|
|
4,008 |
|
Offshore fund |
|
|
- |
|
|
|
1,626 |
|
|
|
- |
|
|
|
1,626 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trading securities |
|
|
4,222 |
|
|
|
1,654 |
|
|
|
- |
|
|
|
5,876 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
|
1,956 |
|
|
|
- |
|
|
|
- |
|
|
|
1,956 |
|
Venture capital investments |
|
|
- |
|
|
|
- |
|
|
|
246 |
|
|
|
246 |
|
Mutual funds |
|
|
2,602 |
|
|
|
- |
|
|
|
- |
|
|
|
2,602 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale securities |
|
|
4,558 |
|
|
|
- |
|
|
|
246 |
|
|
|
4,804 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments |
|
$ |
8,780 |
|
|
$ |
1,654 |
|
|
$ |
246 |
|
|
$ |
10,680 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximately 82 percent of the Company’s financial assets measured at fair value are derived from
Level 1 inputs including SEC-registered mutual funds and equity securities traded on an active
market, 16 percent of the Company’s financial assets measured at fair value are derived from Level
2 inputs, including an investment in an offshore fund, and the remaining two percent are Level 3
inputs. The Company recognizes transfers between levels at the end of each quarter. The Company did
not transfer any securities between Level 1 and Level 2 during the six months ended December 31,
2010.
In Level 2, the Company has an investment in an offshore fund with a fair value of approximately
$1,626,025 that invests in companies in the energy and natural resources sectors. The Company may
redeem this investment on the first business day of each month after providing a redemption notice
at least forty-five days prior to the proposed redemption date.
U.S. Global held investments in three securities with a value of zero and two venture capital
investments that were measured at fair value using significant unobservable inputs (Level 3) at
December 31, 2010.
The Company has a venture capital investment with a fair value of approximately $128,000 that
primarily invests in companies in the energy and precious metals sectors. The Company may redeem
this investment at the end of a calendar quarter after providing a written redemption notice at
least thirty days prior, and the redemption prices are subject to a discount from the net value of
the dealer bid prices or estimated liquidation value at the time of redemption. It is estimated
that the underlying assets would be liquidated within the next three years. The Company also has a
venture capital investment with a fair value of approximately $118,000 that primarily invests in
companies in the medical and
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| U.S. Global Investors, Inc. |
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| December 31, 2010, Quarterly Report on Form 10-Q
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Page 10 of 25 |
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medical technology sectors. The Company may redeem this investment with general partner approval.
As of December 31, 2010, the Company has an unfunded commitment of $125,000 related to this
investment.
The following table presents additional information about investments measured at fair value on a
recurring basis and for which the Company has utilized significant unobservable inputs to determine
fair value:
| |
|
|
|
|
| Changes in Level 3 Assets Measured at Fair Value on a Recurring Basis |
|
| For the Six Months Ended December 31, 2010 (in thousands) |
|
| |
|
Venture Capital |
|
| |
|
Investments |
|
Beginning Balance |
|
$ |
267 |
|
Return of capital |
|
|
(21 |
) |
Total gains or losses (realized/unrealized) |
|
|
- |
|
Included in earnings (or changes in net assets) |
|
|
- |
|
Included in other comprehensive income |
|
|
- |
|
Purchases, issuances, and settlements |
|
|
- |
|
Transfers in and/or out of Level 3 |
|
|
- |
|
|
|
|
|
Ending Balance |
|
$ |
246 |
|
|
|
|
|
Note 5. Investment Management, Transfer Agent and Other Fees
The Company serves as investment adviser to U.S. Global Investors Funds (“USGIF”) and receives a
fee based on a specified percentage of net assets under management.
USSI also serves as transfer agent to USGIF and receives fees based on the number of shareholder
accounts as well as transaction and activity-based fees. Additionally, the Company receives certain
miscellaneous fees directly from USGIF shareholders. Fees for providing investment management,
administrative, distribution and transfer agent services to USGIF continue to be the Company’s
primary revenue source.
The advisory agreement for the nine equity funds provides for a base advisory fee that, beginning
in October 2009, is adjusted upwards or downwards by 0.25 percent when there is a performance
difference of 5 percent or more between a fund’s performance and that of its designated benchmark
index over the prior rolling 12 months. For the three and six months ended December 31, 2010, the
Company adjusted its base advisory fees upwards by $880,398 and $1,080,087.
The Company has voluntarily waived or reduced its fees and/or agreed to pay expenses on all
thirteen funds. These caps will continue on a voluntary basis at the Company’s discretion.
Effective with the March 1, 2010, offering of institutional class shares in three USGIF funds, the
Company voluntarily agreed to waive all institutional class-specific expenses. The aggregate fees
waived and expenses borne by the Company for the three and six months ended December 31, 2010, were
$737,765 and $1,538,309, respectively, compared with $654,385 and $1,879,199 for the corresponding
periods in fiscal 2010.
The above waived fees include amounts waived under an agreement whereby the Company has voluntarily
agreed to waive fees and/or reimburse the U.S. Treasury Securities Cash Fund and the U.S.
Government Securities Savings Fund to the extent necessary to maintain the respective fund’s yield
at a certain level as determined by the Company (Minimum Yield). Reflecting increased demand in the
market for government securities, yields on such products have decreased to record lows. For the
three and six months ended December 31, 2010, total fees waived and/or expenses reimbursed as a
result of this agreement were $381,055 and $755,756. For the corresponding period in fiscal year
2010, the total fees waived and/or expenses reimbursed were $354,367 and $665,204.
The Company may recapture any fees waived and/or expenses reimbursed within three years after the
end of the funds’ fiscal year of such waiver and/or reimbursement to the extent that such recapture
would not cause the funds’ yield to fall below the Minimum Yield. Thus, $170,642 of these waivers
is recoverable by the Company through December 31, 2011, $1,047,980 through December 31, 2012, and
$1,562,956 through December 31, 2013. Management believes these waivers could increase in the
future. Such increases in fee waivers could be significant and will negatively impact the
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| U.S. Global Investors, Inc. |
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| December 31, 2010, Quarterly Report on Form 10-Q
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Page 11 of 25 |
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Company’s revenues and net income. Management cannot predict the impact of the waivers due to the
number of variables and the range of potential outcomes.
The Company provides advisory services for two offshore clients and receives monthly advisory fees
based on the net asset values of the clients and performance fees, if any, based on the overall
increase in net asset values. The Company recorded fees from these clients totaling $992,544 and
$1,159,378 for the three and six months ended December 31, 2010, and $95,615 and $198,191 for the
corresponding periods in fiscal 2010. The performance fees for these clients are calculated and
recorded quarterly in accordance with the terms of the advisory agreements. These fees may
fluctuate significantly from year to year based on factors that may be out of the Company’s
control. Frank Holmes, CEO, serves as a director of the offshore clients.
The Company receives additional revenue from several sources including custodial fee revenues,
mailroom operations, as well as investment income.
Substantially all of the cash and cash equivalents included in the balance sheet at December 31,
2010, and June 30, 2010, is invested in USGIF money market funds.
Note 6. Borrowings
As of December 31, 2010, the Company has no long-term liabilities.
The Company has access to a $1 million credit facility with a one-year maturity for working capital
purposes. The credit agreement requires the Company to maintain certain quarterly financial
covenants to access the line of credit. As of December 31, 2010, this credit facility remained
unutilized by the Company.
Note 7. Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with ASC 718 Compensation – Stock
Compensation (formerly SFAS No. 123 (revised 2004) Share-Based Payment). Stock-based compensation
expense is recorded for the cost of stock options. Stock-based compensation expense for the three
and six months ended December 31, 2010, was $9,457 and $18,913, compared to $9,457 and $34,477 in
the corresponding periods in fiscal 2010. As of December 31,
2010, and 2009, respectively, there
was approximately $57,456 and $95,283 of total unrecognized share-based compensation cost related
to share-based compensation granted under the plans that will be recognized over the remainder of
their respective vesting periods.
Stock compensation plans
The Company’s stock option plans provide for the granting of class A shares as either incentive or
nonqualified stock options to employees and non-employee directors. Options are subject to terms
and conditions determined by the Compensation Committee of the Board of Directors. The following
table summarizes information about the Company’s stock option plans for the six months ended
December 31, 2010.
| |
|
|
|
|
|
|
|
|
| |
|
Number of Options |
|
|
Weighted Average |
|
| |
|
|
|
Exercise Price |
|
Options outstanding, beginning of year |
|
|
55,300 |
|
|
$ |
19.21 |
|
Granted |
|
|
- |
|
|
|
- |
|
Exercised |
|
|
- |
|
|
|
- |
|
Forfeited |
|
|
(30,000 |
) |
|
|
19.06 |
|
|
|
|
|
|
|
|
Options outstanding, end of period |
|
|
25,300 |
|
|
$ |
19.40 |
|
|
|
|
|
|
|
|
Options exercisable, end of period |
|
|
20,180 |
|
|
$ |
19.78 |
|
|
|
|
|
|
|
|
|
|
|
| |
|
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| U.S. Global Investors, Inc. |
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| December 31, 2010, Quarterly Report on Form 10-Q
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Page 12 of 25 |
| |
Note 8. Earnings Per Share
The basic earnings per share (“EPS”) calculation excludes dilution and is computed by dividing net
income by the weighted average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution of EPS that could occur if options to issue common stock were
exercised.
The following table sets forth the computation for basic and diluted EPS:
| |
|
|
|
|
|
|
|
|
| |
|
Six Months Ended December 31, |
|
| |
|
2010 |
|
|
2009 |
|
Net income |
|
$ |
3,595,979 |
|
|
$ |
2,904,559 |
|
|
|
|
|
|
|
|
|
|
Weighted average number of outstanding shares |
|
|
|
|
|
|
|
|
Basic |
|
|
15,368,527 |
|
|
|
15,324,269 |
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities |
|
|
|
|
|
|
|
|
Employee stock options |
|
|
- |
|
|
|
3,655 |
|
|
|
|
|
|
|
|
Diluted |
|
|
15,368,527 |
|
|
|
15,327,924 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share |
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.23 |
|
|
$ |
0.19 |
|
Diluted |
|
$ |
0.23 |
|
|
$ |
0.19 |
|
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended December 31, |
|
| |
|
2010 |
|
|
2009 |
|
Net income |
|
$ |
2,330,286 |
|
|
$ |
1,508,052 |
|
| |
Weighted average number of outstanding shares |
|
|
|
|
|
|
|
|
Basic |
|
|
15,372,554 |
|
|
|
15,336,967 |
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities |
|
|
|
|
|
|
|
|
Employee stock options |
|
|
- |
|
|
|
3,880 |
|
|
|
|
|
|
|
|
Diluted |
|
|
15,372,554 |
|
|
|
15,340,847 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share |
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.15 |
|
|
$ |
0.10 |
|
Diluted |
|
$ |
0.15 |
|
|
$ |
0.10 |
|
The diluted EPS calculation excludes the effect of stock options when their exercise prices
exceed the average market price for the period. For both the three and six months ended December
31, 2010, 25,300 options were excluded from diluted EPS, and 45,300 were excluded in both
corresponding periods in fiscal 2010.
The Company may repurchase stock from employees. The Company made no repurchases of shares of its
class A, class B, or class C common stock during the six months ended December 31, 2010. Upon
repurchase, these shares are classified as treasury shares and are deducted from outstanding shares
in the earnings per share calculation.
Note 9. Income Taxes
The Company and its subsidiaries file a consolidated federal income tax return. Provisions for
income taxes include deferred taxes for temporary differences in the bases of assets and
liabilities for financial and tax purposes, resulting from the use of the liability method of
accounting for income taxes. The current deferred tax asset primarily consists of unrealized losses
on trading securities as well as temporary differences in the deductibility of prepaid expenses and
accrued liabilities. The long-term deferred tax asset is composed primarily of unrealized losses on
available-for-sale securities and the difference in tax treatment of stock options.
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| U.S. Global Investors, Inc. |
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| December 31, 2010, Quarterly Report on Form 10-Q
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Page 13 of 25 |
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A valuation allowance is provided when it is more likely than not that some portion of the deferred
tax amount will not be realized. No valuation allowance was included or deemed necessary at
December 31, 2010, or June 30, 2010.
Note 10. Financial Information by Business Segment
The Company operates principally in two business segments: providing investment management services
to the funds it manages 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 by business segment:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Investment |
|
|
|
|
|
|
|
| |
|
Management |
|
|
Corporate |
|
|
|
|
| |
|
Services |
|
|
Investments |
|
|
Consolidated |
|
Six months ended December 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
20,148,878 |
|
|
$ |
682,601 |
|
|
$ |
20,831,479 |
|
|
|
|
|
|
|
|
|
|
|
Net income before income taxes |
|
|
4,918,903 |
|
|
|
680,620 |
|
|
|
5,599,523 |
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
147,042 |
|
|
|
- |
|
|
|
147,042 |
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
51,894 |
|
|
|
- |
|
|
|
51,894 |
|
|
|
|
|
|
|
|
|
|
|
Gross identifiable assets at December 31, 2010 |
|
|
32,879,330 |
|
|
|
10,696,344 |
|
|
|
43,575,674 |
|
Deferred tax asset |
|
|
|
|
|
|
|
|
|
|
499,798 |
|
|
|
|
|
|
|
|
|
|
|
Consolidated total assets at December 31, 2010 |
|
|
|
|
|
|
|
|
|
$ |
44,075,472 |
|
|
|
|
|
|
|
|
|
|
|
Six months ended December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
16,242,467 |
|
|
$ |
815,023 |
|
|
$ |
17,057,490 |
|
|
|
|
|
|
|
|
|
|
|
Net income before income taxes |
|
|
3,879,201 |
|
|
|
807,491 |
|
|
|
4,686,692 |
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
163,252 |
|
|
|
- |
|
|
|
163,252 |
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
415,988 |
|
|
|
- |
|
|
|
415,988 |
|
|
|
|
|
|
|
|
|
|
|
Three months ended December 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
11,516,395 |
|
|
$ |
394,343 |
|
|
$ |
11,910,738 |
|
|
|
|
|
|
|
|
|
|
|
Net income before income taxes |
|
|
3,246,941 |
|
|
|
393,352 |
|
|
|
3,640,293 |
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
71,990 |
|
|
|
- |
|
|
|
71,990 |
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
27,278 |
|
|
|
- |
|
|
|
27,278 |
|
|
|
|
|
|
|
|
|
|
|
Three months ended December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
8,772,892 |
|
|
$ |
255,713 |
|
|
$ |
9,028,605 |
|
|
|
|
|
|
|
|
|
|
|
Net income before income taxes |
|
|
2,055,516 |
|
|
|
253,537 |
|
|
|
2,309,053 |
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
100,089 |
|
|
|
- |
|
|
|
100,089 |
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
174,050 |
|
|
|
- |
|
|
|
174,050 |
|
|
|
|
|
|
|
|
|
|
|
Note 11. Contingencies and Commitments
The Company continuously reviews all investor, employee and vendor complaints, and pending or
threatened litigation. The likelihood that a loss contingency exists is evaluated through
consultation with legal counsel, and a loss contingency is recorded if probable and reasonably
estimable.
During the normal course of business, the Company may be subject to claims, legal proceedings, and
other contingencies. These matters are subject to various uncertainties, and it is possible that
some of these matters may be resolved unfavorably. The Company establishes accruals for matters for
which the outcome is probable and can be reasonably estimated. Management believes that any
liability in excess of these accruals upon the ultimate resolution of these matters will not have a
material adverse effect on the consolidated financial statements of the Company.
|
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| U.S. Global Investors, Inc. |
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| December 31, 2010, Quarterly Report on Form 10-Q
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|
Page 14 of 25 |
| |
The Board has authorized a monthly dividend of $0.02 per share through March 2011, at which time it
will be considered for continuation by the Board. Payment of cash dividends is within the
discretion of the Company’s Board of Directors and is dependent on earnings, operations, capital
requirements, general financial condition of the Company, and general business conditions. The
total amount of cash dividends to be paid to class A and class C shareholders from January 2011 to
March 2011 will be approximately $923,000.
Note 12. Subsequent Events
The Company has evaluated subsequent events that occurred after December 31, 2010, through the
filing of this Form 10-Q. Any material subsequent events that occurred during this time have been
properly recognized or disclosed in our financial statements.
|
|
|
| U.S. Global Investors, Inc. |
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|
| December 31, 2010, Quarterly Report on Form 10-Q
|
|
Page 15 of 25 |
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|
|
| |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
U.S. Global has made forward-looking statements concerning the Company’s performance, financial
condition, and operations in this 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 located in San Antonio, Texas, manages two business
segments: (1) the Company offers a broad range of investment management products and services to
meet the needs of individual and institutional investors; and (2) the Company invests for its own
account in an effort to add growth and value to its cash position. Although the Company generates
the majority of its revenues from its investment advisory segment, the Company holds a significant
amount of its total assets in investments. The following is a brief discussion of the Company’s
two business segments.
Investment Management Products and Services
The Company generates substantially all of its operating revenues from managing and servicing USGIF
and other advisory clients. 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.
The Company provides advisory services for two offshore clients and receives monthly advisory fees
based on the net asset values of the clients and performance fees, if any, based on the overall
increase in net asset values. The Company recorded advisory and performance fees from these
clients totaling $992,544 and $1,159,378 for the three and six months ended December 31, 2010, and
$95,615 and $198,181 for the corresponding periods in fiscal 2010. The performance fees for these
clients are calculated and recorded quarterly in accordance with the terms of the advisory
agreements. These fees may fluctuate significantly from year to year based on factors that may be
out of the Company’s control. Frank Holmes, CEO, serves as a director of the offshore clients.
At December 31, 2010, total assets under management as of period end, including both SEC-registered
funds and offshore clients, were $3.044 billion versus $2.669 billion at December 31, 2009, an
increase of 14 percent. During the six months ended December 31, 2010, average assets under
management were $2.648 billion versus $2.509 billion during the six months ended December 31, 2009.
The increase was primarily due to an increase in the natural resources funds under management.
Total assets under management at June 30, 2010, were $2.402 billion versus $3.044 billion at
December 31, 2010.
|
|
|
| U.S. Global Investors, Inc. |
|
|
| December 31, 2010, Quarterly Report on Form 10-Q
|
|
Page 16 of 25 |
| |
|
|
| |
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. The Company’s investment activities are reviewed and monitored by
Company compliance personnel, and various reports are provided to certain investment advisory
clients. Written procedures are in place to manage compliance with the code of ethics and other
policies affecting the Company’s investment practices. This source of revenue does not remain
consistent and is dependent on market fluctuations, the Company’s ability to participate in
investment opportunities, and timing of transactions.
As of December 31, 2010, the Company held investments with a market value of approximately $10.7
million and a cost basis of approximately $9.1 million. The market value of these investments is
approximately 24.2 percent of the Company’s total assets. See Note 3 (Investments) and Note 4
(Fair Value Disclosures) for additional detail regarding investment activities.
|
|
|
| U.S. Global Investors, Inc. |
|
|
| December 31, 2010, Quarterly Report on Form 10-Q
|
|
Page 17 of 25 |
| |
|
|
| |
RESULTS
OF OPERATIONS – THREE MONTHS ENDED DECEMBER 31, 2010, AND 2009
The Company posted net income of $2,330,286 ($0.15 income per share) for the three months ended
December 31, 2010, compared with net income of $1,508,052 ($0.10 income per share) for the three
months ended December 31, 2009, an increase of $822,234, or 54.5 percent.
Revenues
Total consolidated revenues for the three months ended December 31, 2010, increased $2,882,133, or
31.9 percent, compared with the three months ended December 31, 2009. This increase was primarily
attributable to the following:
| |
• |
|
Mutual fund advisory fees increased by $1,776,174, or 33.6 percent. Of that increase,
mutual fund management fees contributed $498,683, primarily due to market appreciation in
the natural resources funds, while mutual fund performance fees contributed $1,277,491.
Performance fees are paid when there is a performance difference of 5 percent or more
between a fund’s performance and that of its designated benchmark index over the prior
rolling 12 months. See Note 5 for additional information regarding performance fees. |
| |
• |
|
Other advisory fees increased by $896,929, or 938.1 percent, primarily as a result of an
increase in offshore fund performance fees due to natural resources-related market
appreciation of fund holdings. |
| |
• |
|
Investment income increased by $213,306, or 71.9 percent, primarily due to unrealized
gains on trading securities. |
Expenses
Total consolidated expenses for the three months ended December 31, 2010, increased $1,550,893, or
23.1 percent, compared with the three months ended December 31, 2009. This was largely
attributable to the following:
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General and administrative expenses increased by $789,864, or 53.7 percent, primarily
due to investment-related travel and sales-related conference and consulting fees. |
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Employee compensation increased by $670,161, or 20.6 percent, primarily due to
performance-based bonuses. |
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Advertising increased by $145,052, or 46.2 percent, primarily as a result of increased
marketing and sales activities. |
RESULTS
OF OPERATIONS – SIX MONTHS ENDED DECEMBER 31, 2010, AND 2009
The Company posted net income of $3,595,979 ($0.23 income per share) for the six months ended
December 31, 2010, compared with net income of $2,904,559 ($0.19 income per share) for the six
months ended December 31, 2009, an increase of $691,420, or 23.8 percent.
Revenues
Total consolidated revenues for the six months ended December 31, 2010, increased $3,773,989, or
22.1 percent, compared with the six months ended December 31, 2009. This increase was primarily
attributable to the following:
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Mutual fund advisory fees increased by $2,790,769, or 29.0 percent. Of that increase,
mutual fund management fees contributed $1,313,589, primarily due to market appreciation in
the natural resources funds, while mutual fund performance fees contributed $1,477,180.
Performance fees are paid when there is a performance difference of 5 percent or more
between a fund’s performance and that of its designated benchmark index over the prior
rolling 12 months. See Note 5 for additional information regarding performance fees. |
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Other advisory fees increased by $961,197, or 485.0 percent, primarily as a result of an
increase in offshore fund performance fees due to natural resources-related market
appreciation of fund holdings. |
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Distribution fees increased by $221,739, or 8.6 percent, as a result of increased assets
under management. |
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The above increases in revenue were slightly offset by a decline in transfer agent fees
of $261,618 or 9.4 percent, due to a decline in the number of accounts and transactions in
USGIF. |
Expenses
Total consolidated expenses for the six months ended December 31, 2010, increased $2,861,158, or
23.1 percent, compared with the six months ended December 31, 2009. This was largely attributable
to the following:
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| December 31, 2010, Quarterly Report on Form 10-Q
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Page 18 of 25 |
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General and administrative expenses increased by $1,586,846, or 55.1 percent, primarily
relating to investment-related travel, sales-related conference and consulting fees, and
implementation of new investment management and trading software. |
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Employee compensation increased by $689,294, or 11.6 percent, primarily due to
performance-based bonuses. |
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Advertising increased by $539,356, or 130.7 percent, primarily as a result of increased
marketing and sales activities. |
LIQUIDITY AND CAPITAL RESOURCES
At
December 31, 2010, the Company had net working capital (current assets minus current
liabilities) of approximately $29.6 million and a current ratio (current assets divided by current
liabilities) of 6.3 to 1. With approximately $23.3 million in cash and cash equivalents and
approximately $10.7 million in marketable securities, the Company has adequate liquidity to meet
its current obligations. Total shareholders’ equity was approximately $38.5 million, with cash,
cash equivalents, and marketable securities comprising 77.1 percent of total assets.
As of December 31, 2010, the Company has no long-term liabilities. The Company has access to a $1
million credit facility with a one-year maturity for working capital purposes. The credit agreement
requires the Company to maintain certain quarterly financial covenants to access the line of
credit. As of December 31, 2010, this credit facility remained unutilized by the Company.
Management believes current cash reserves, financing 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.
Market volatility may cause the price of the Company’s publicly traded class A shares to fluctuate,
which in turn may allow the Company an opportunity to buy back stock at favorable prices.
The investment advisory and related contracts between the Company and USGIF were renewed effective
October 1, 2010. The Company provides advisory services to two offshore clients for which the
Company receives a monthly advisory fee and a quarterly performance fee, if any, based on
agreed-upon performance measurements. The contracts between the Company and these offshore clients
expire periodically, and management anticipates that its offshore clients will renew the contracts.
The Company receives additional revenue from several sources including custodial fee revenues,
mailroom operations, and investment income.
CRITICAL ACCOUNTING ESTIMATES
For a discussion of critical accounting policies that the Company follows, please refer to the
notes to the consolidated financial statements included in the Annual Report on Form 10-K for the
year ended June 30, 2010. As discussed in Note 1 of the Notes to Consolidated Financial
Statements, the Company has adopted certain recently issued financial accounting pronouncements.
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| U.S. Global Investors, Inc. |
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| December 31, 2010, Quarterly Report on Form 10-Q
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Page 19 of 25 |
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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, if not actively traded,
management’s estimate of fair value as of the balance sheet date. Market prices fluctuate, and the
amount realized in the subsequent sale of an investment may differ significantly from the reported
market value.
The Company’s investment activities are reviewed and monitored by Company compliance personnel, and
various reports are provided to certain investment advisory clients. Written procedures are in
place to manage compliance with the code of ethics and other policies affecting the Company’s
investment practices.
The table below summarizes the Company’s equity price risks as of December 31, 2010, and shows the
effects of a hypothetical 25 percent increase and a 25 percent decrease in market prices.
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Estimated Fair |
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Value After |
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Increase (Decrease) in |
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Fair Value at |
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Hypothetical |
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Hypothetical Price |
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Shareholders’ Equity, |
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December 31, 2010 |
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Percentage Change |
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Change |
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Net of Tax |
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Trading securities 1 |
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$5,875,757 |
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25% increase |
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$7,344,696 |
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$969,500 |
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25% decrease |
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$4,406,818 |
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($969,500 |
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Available-for-sale 2 |
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$4,803,855 |
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25% increase |
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$6,004,819 |
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$792,636 |
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25% decrease |
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$3,602,891 |
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($792,636 |
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1 Unrealized and realized gains and losses on trading securities are included in earnings in the
statement of operations.
2 Unrealized and realized gains and losses on available-for-sale securities are excluded from
earnings and recorded in other comprehensive income as a component of shareholders’ equity until
realized.
The selected hypothetical changes do not reflect what could be considered best- or worst-case
scenarios. Results could be significantly different 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, 2010, was conducted under the supervision and with the
participation of management, including our Chief Executive Officer and Chief Financial Officer.
Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that
the disclosure controls and procedures were effective as of December 31, 2010.
There has been no change in the Company’s internal control over financial reporting that occurred
during the three months ended December 31, 2010, that has materially affected, or is reasonably
likely to materially affect, the Company’s internal control over financial reporting.
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| U.S. Global Investors, Inc. |
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| December 31, 2010, Quarterly Report on Form 10-Q
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Page 20 of 25 |
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PART II. OTHER INFORMATION
ITEM 1A. RISK FACTORS
For a discussion of risk factors which could affect the Company, please refer to Item 1A, “Risk
Factors” in the Annual Report on Form 10-K for the year ended June 30, 2010. There has been no
material changes since fiscal year end to the risk factors listed therein.
ITEM 6. EXHIBITS
1.
Exhibits –
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31 |
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Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act Of 2002 |
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32 |
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Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act Of 2002 |
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| U.S. Global Investors, Inc. |
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| December 31, 2010, Quarterly Report on Form 10-Q
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Page 21 of 25 |
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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.
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U.S. GLOBAL INVESTORS, INC. |
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DATED: February 2, 2011
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BY:
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/s/ Frank E. Holmes |
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Frank E. Holmes
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Chief Executive Officer |
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DATED: February 2, 2011
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BY:
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/s/ Catherine A. Rademacher |
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Catherine A. Rademacher
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Chief Financial Officer |
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