Attached files

file filename
EX-31 - EX-31 - U S GLOBAL INVESTORS INCd84889exv31.htm
EX-32 - EX-32 - U S GLOBAL INVESTORS INCd84889exv32.htm
EXCEL - IDEA: XBRL DOCUMENT - U S GLOBAL INVESTORS INCFinancial_Report.xls
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
For the quarterly period ended September 30, 2011
     
[X]   Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 2011
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 No.)
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 (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.
YES [X]                       NO [ ]
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).
YES [X]                       NO [ ]
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):
Large accelerated filer [ ]   Accelerated filer [X]   Non-accelerated filer [ ] (Do not check if a smaller reporting company)   Smaller Reporting Company [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES [ ]                       NO [X]
On October 21, 2011, there were 13,862,505 shares of Registrant’s class A nonvoting common stock issued and 13,360,356 shares of Registrant’s class A nonvoting common stock issued and outstanding, no shares of Registrant’s class B nonvoting common shares outstanding, and 2,073,043 shares of Registrant’s class C voting common stock issued and outstanding.
 
 

 


 

TABLE OF CONTENTS
         
    1  
 
       
    1  
    1  
    3  
    4  
    5  
    14  
    17  
    17  
 
       
    18  
 
       
    18  
    18  
 
       
    19  
 EX-31
 EX-32
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT

 


Table of Contents

U.S. Global Investors, Inc.    
September 30, 2011, Quarterly Report on Form 10-Q   Page 1 of 23
 
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets
                 
    September 30,     June 30,  
Assets   2011     2011  
    (UNAUDITED)          
Current Assets
               
Cash and cash equivalents
  $ 28,124,089     $ 27,207,896  
Trading securities, at fair value
    5,109,717       5,703,916  
Receivables
               
Mutual funds
    2,826,878       3,259,251  
Offshore clients
    26,547       33,828  
Income tax
    -       244,149  
Employees
    1,189       2,200  
Other
    31,906       7,391  
Prepaid expenses
    602,339       816,814  
Deferred tax asset
    195,975       -  
 
           
Total Current Assets
    36,918,640       37,275,445  
 
           
 
               
Net Property and Equipment
    3,475,845       3,547,303  
 
           
 
               
Other Assets
               
Deferred tax asset, long term
    721,825       482,927  
Investment securities available-for-sale, at fair value
    3,996,444       4,660,928  
 
           
Total Other Assets
    4,718,269       5,143,855  
 
           
Total Assets
  $ 45,112,754     $ 45,966,603  
 
           
The accompanying notes are an integral part of this statement.

 


Table of Contents

U.S. Global Investors, Inc.    
September 30, 2011, Quarterly Report on Form 10-Q   Page 2 of 23
 
Consolidated Balance Sheets
    September 30,     June 30,  
Liabilities and Shareholders’ Equity   2011     2011  
    (UNAUDITED)          
Current Liabilities
               
Accounts payable
  $ 37,707     $ 55,181  
Accrued compensation and related costs
    1,267,847       1,734,267  
Deferred tax liability
    -       77,432  
Dividends payable
    926,121       924,672  
Other accrued expenses
    2,236,435       2,117,604  
 
           
Total Current Liabilities
    4,468,110       4,909,156  
 
           
 
               
Commitments and Contingencies
               
 
               
Shareholders’ Equity
               
Common stock (class A) — $0.025 par value; nonvoting; authorized, 28,000,000 shares; issued, 13,862,445 shares at September 30, 2011, and June 30, 2011
    346,561       346,561  
Common stock (class B) — $0.025 par value; nonvoting; authorized, 4,500,000 shares; no shares issued
    -       -  
Convertible common stock (class C) — $0.025 par value; voting; authorized, 3,500,000 shares; issued, 2,073,103 shares at September 30, 2011, and June 30, 2011
    51,828       51,828  
Additional paid-in-capital
    15,414,590       15,267,231  
Treasury stock, class A shares at cost; 502,149 and 526,583 shares at September 30, 2011, and June 30, 2011, respectively
    (1,175,720 )     (1,232,929 )
Accumulated other comprehensive income, net of tax
    602,388       1,042,462  
Retained earnings
    25,404,997       25,582,294  
 
           
Total Shareholders’ Equity
    40,644,644       41,057,447  
 
           
Total Liabilities and Shareholders’ Equity
  $ 45,112,754     $ 45,966,603  
 
           
The accompanying notes are an integral part of this statement.

 


Table of Contents

U.S. Global Investors, Inc.    
September 30, 2011, Quarterly Report on Form 10-Q   Page 3 of 23
 
Consolidated Statements of Operations and Comprehensive Income (Unaudited)
                 
    Three Months Ended September 30,  
    2011     2010  
Revenues
               
Mutual fund advisory fees
  $ 5,461,167     $ 5,371,198  
Distribution fees
    1,273,784       1,280,075  
Transfer agent fees
    1,091,665       1,203,155  
Administrative services fees
    411,906       409,914  
Other advisory fees
    94,697       166,834  
Other
    10,564       9,714  
Investment income
    (551,875 )     479,851  
 
           
 
    7,791,908       8,920,741  
 
           
Expenses
               
Employee compensation and benefits
    2,883,330       2,728,021  
General and administrative
    1,864,178       2,207,018  
Platform fees
    1,282,125       1,328,581  
Advertising
    513,731       492,845  
Depreciation
    71,458       75,052  
Subadvisory fees
    15,000       129,994  
 
           
 
    6,629,822       6,961,511  
 
           
Income Before Income Taxes
    1,162,086       1,959,230  
Provision for Federal Income Taxes
               
Tax expense
    412,568       693,537  
 
           
Net Income
    749,518       1,265,693  
Other Comprehensive Income, Net of Tax:
               
Unrealized gains (losses) on available-for-sale securities arising during period
    (440,074 )     459,682  
 
           
Comprehensive Income
  $ 309,444     $ 1,725,375  
 
           
Basic Net Income per Share
  $ 0.05     $ 0.08  
 
           
Diluted Net Income per Share
  $ 0.05     $ 0.08  
 
           
Basic weighted average number of common shares outstanding
    15,425,705       15,364,500  
Diluted weighted average number of common shares outstanding
    15,426,221       15,364,500  
The accompanying notes are an integral part of this statement.

 


Table of Contents

U.S. Global Investors, Inc.    
September 30, 2011, Quarterly Report on Form 10-Q   Page 4 of 23
 
Consolidated Statements of Cash Flows (Unaudited)
    Three Months Ended September 30,  
    2011     2010  
Cash Flows from Operating Activities:
               
Net income
  $ 749,518     $ 1,265,693  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation
    71,458       75,052  
Net recognized loss on disposal of fixed assets
    -       110,965  
Net recognized loss on securities
    2,675       -  
Provision for deferred taxes
    (285,600 )     43,914  
Stock bonuses
    150,213       -  
Stock-based compensation expense
    9,660       9,457  
Changes in operating assets and liabilities:
               
Accounts receivable
    660,299       20,295  
Prepaid expenses
    214,475       167,954  
Trading securities
    591,561       (455,145 )
Accounts payable and accrued expenses
    (365,063 )     41,669  
 
           
Total adjustments
    1,049,678       14,161  
 
           
Net cash provided by operating activities
    1,799,196       1,279,854  
 
           
Cash Flows from Investing Activities:
               
Purchase of property and equipment
    -       (24,616 )
Purchase of available-for-sale securities
    (2,332 )     (21,045 )
Return of capital on investment
    -       7,327  
 
           
Net cash used in investing activities
    (2,332 )     (38,334 )
 
           
Cash Flows from Financing Activities:
               
Issuance of common stock
    44,695       47,516  
Dividends paid
    (925,366 )     (921,872 )
 
           
Net cash used in financing activities
    (880,671 )     (874,356 )
 
           
Net increase in cash and cash equivalents
    916,193       367,164  
Beginning cash and cash equivalents
    27,207,896       23,837,479  
 
           
Ending cash and cash equivalents
  $ 28,124,089     $ 24,204,643  
 
           
Supplemental Disclosures of Cash Flow Information
               
Cash paid for income taxes
  $ -     $ 275,000  
The accompanying notes are an integral part of this statement.

 


Table of Contents

U.S. Global Investors, Inc.    
September 30, 2011, Quarterly Report on Form 10-Q   Page 5 of 23
 
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, 2011.
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 three months ended September 30, 2011, 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 January 2010, the FASB issued Accounting Standards Update (ASU) No. 2010-06, Improving Disclosures about Fair Value Measurements. This ASU added 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 clarified 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 was 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 financial statements except for enhanced disclosure in the notes to its consolidated financial statements.
In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The ASU expands existing disclosure requirements and amends some fair value measurement principles. The ASU is effective for interim periods beginning on or after December 15, 2011, with early adoption prohibited and prospective application required. Management is evaluating the ASU and its potential impact on the financial statements.
In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income. This standard eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. Under this guidance, an entity can elect to present items of net income and other comprehensive income in one continuous statement or in two separate, but consecutive, statements. This guidance is effective for publicly traded companies for fiscal years beginning after December 15, 2011 and interim and annual periods thereafter. Early adoption is permitted, but full retrospective application is required. As the Company reports comprehensive income within its consolidated statement of operations, the adoption of this guidance will not result in a change in the presentation of comprehensive income in the Company’s consolidated financial statements.

 


Table of Contents

U.S. Global Investors, Inc.    
September 30, 2011, Quarterly Report on Form 10-Q   Page 6 of 23
 
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 December 2011 and will be reviewed by the board quarterly.
Note 3. Investments
As of September 30, 2011, the Company held investments with a market value of approximately $9.1 million and a cost basis of approximately $9.0 million. The market value of these investments is approximately 20.2 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.
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 September 30, 2011, and June 30, 2011.
                                 
                            Unrealized holding  
                            gains on available-for-  
Securities   Market Value     Cost     Unrealized Gain     sale securities,  
                    (Loss)     net of  
              tax  
Trading1
  $ 5,109,717     $ 5,960,634     $ (850,917 )     N/A  
Available-for-sale2
    3,996,444       3,083,735       912,709     $ 602,388  
 
                         
Total at September 30, 2011
  $ 9,106,161     $ 9,044,369     $ 61,792          
 
                         
 
                               
Trading1
  $ 5,703,916     $ 5,963,272     $ (259,356 )     N/A  
Available-for-sale2
    4,660,928       3,081,439       1,579,489     $ 1,042,462  
 
                         
Total at June 30, 2011
  $ 10,364,844     $ 9,044,711     $ 1,320,133          
 
                         
 
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.

 


Table of Contents

U.S. Global Investors, Inc.    
September 30, 2011, Quarterly Report on Form 10-Q   Page 7 of 23
 
The following details the components of the Company’s available-for-sale investments as of September 30, 2011, and June 30, 2011.
                                 
    September 30, 2011 (in thousands)  
            Gross Unrealized        
    Cost     Gains     (Losses)     Market Value  
Available-for-sale securities
                               
Common stock
  $ 920     $ 424     $ (21 )   $ 1,323  
Venture capital investments
    134       139       (13 )     260  
Mutual funds
    2,030       385       (2 )     2,413  
 
                       
Total available-for-sale securities
  $ 3,084     $ 948     $ (36 )   $ 3,996  
 
                       
                                 
    June 30, 2011 (in thousands)  
            Gross Unrealized        
    Cost     Gains     (Losses)     Market Value  
Available-for-sale securities
                               
Common stock
  $ 917     $ 777     $ (4 )   $ 1,690  
Venture capital investments
    134       122       (13 )     243  
Mutual funds
    2,030       698       -       2,728  
 
                       
Total available-for-sale securities
  $ 3,081     $ 1,597     $ (17 )   $ 4,661  
 
                       
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:
                                                 
    September 30, 2011 (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
  $ 109     $ (21 )   $ -     $ -     $ 109     $ (21 )
Venture capital investments
    112       (13 )     -       -       112       (13 )
Mutual funds
    18       (2 )     -       -       18       (2 )
 
                                   
Total available-for-sale securities
  $ 239     $ (36 )   $ -     $ -     $ 239     $ (36 )
 
                                   
                                                 
    June 30, 2011 (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
  $ 31     $ (4 )   $ -     $ -     $ 31     $ (4 )
Venture capital investments
    112       (13 )     -       -       112       (13 )
Mutual funds
    -       -       -       -       -       -  
 
                                   
Total available-for-sale securities
  $ 143     $ (17 )   $ -     $ -     $ 143     $ (17 )
 
                                   

 


Table of Contents

U.S. Global Investors, Inc.    
September 30, 2011, Quarterly Report on Form 10-Q   Page 8 of 23
 
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 months ended September 30, 2011, 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   Three Months Ended September 30,  
    2011     2010  
Realized gains on sales of available-for-sale securities
  $ -     $ 1,303  
Realized losses on sales of trading securities
    (2,638 )     -  
Unrealized gains (losses) on trading securities
    (591,562 )     455,146  
Realized foreign currency losses
    (36 )     (1,431 )
Other-than-temporary declines in available-for-sale securities
    (37 )     -  
Dividend and interest income
    42,398       24,833  
 
           
Total Investment Income
  $ (551,875 )   $ 479,851  
 
           
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.
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

 


Table of Contents

U.S. Global Investors, Inc.    
September 30, 2011, Quarterly Report on Form 10-Q   Page 9 of 23
 
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 September 30, 2011, 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
  $ 192     $ 5     $ -     $ 197  
Mutual funds
    3,914       -       -       3,914  
Offshore fund
    -       999       -       999  
 
                       
Total trading securities
    4,106       1,004       -       5,110  
 
                       
Available-for-sale securities
                               
Common stock
    1,323       -       -       1,323  
Venture capital investments
    -       -       260       260  
Mutual funds
    2,413       -       -       2,413  
 
                       
Total available-for-sale securities
    3,736       -       260       3,996  
 
                       
Total Investments
  $ 7,842     $ 1,004     $ 260     $ 9,106  
 
                       
Approximately 86 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, 11 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 three 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 three months ended September 30, 2011.
In Level 2, the Company has an investment in an offshore fund with a fair value of $999,010 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.
The Company 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 September 30, 2011.
The Company has a venture capital investment with a fair value of $148,688 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 $111,528 that primarily invests in companies in the medical and medical technology sectors. The Company may redeem this investment with general partner approval. As of September 30, 2011, the Company has an unfunded commitment of $125,000 related to this investment.

 


Table of Contents

U.S. Global Investors, Inc.    
September 30, 2011, Quarterly Report on Form 10-Q   Page 10 of 23
 
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 Three Months Ended September 30, 2011 (in thousands)  
    Venture Capital  
    Investments  
Beginning Balance
  $ 243  
Return of capital
    -  
Total gains or losses (realized/unrealized)
    -  
Included in earnings (or changes in net assets)
    -  
Included in other comprehensive income
    17  
Purchases, issuances, and settlements
    -  
Transfers in and/or out of Level 3
    -  
 
     
Ending Balance
  $ 260  
 
     
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 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 months ended September 30, 2011, the Company adjusted its base advisory fees upwards by $265,133. For the corresponding period in fiscal 2011, base advisory fees were increased by $199,689.
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 months ended September 30, 2011, were $803,229 compared with $800,545 for the corresponding period in fiscal 2011.
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). Yields on such products have declined to record lows as a result of the decline in the federal funds’ rate pursuant to the Federal Reserve’s economic policy to spur economic growth through low interest rates and quantitative easing. For the three months ended September 30, 2011, total fees waived and/or expenses reimbursed as a result of this agreement were $405,150. For the corresponding period in fiscal year 2011, the total fees waived and/or expenses reimbursed were $374,701.
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, $1,562,956 through December 31, 2013, and $1,209,857 through December 31, 2014. Management believes these waivers could increase in the future. Such increases in fee waivers could be significant and will negatively impact the Company’s revenues and net income. Management cannot predict the impact of the waivers and/or reimbursements due to the number of variables and the range of potential outcomes.

 


Table of Contents

U.S. Global Investors, Inc.    
September 30, 2011, Quarterly Report on Form 10-Q   Page 11 of 23
 
The Company provides advisory services for two offshore clients and receives monthly advisory fees based on the net asset values of the clients and quarterly performance fees, if any, based on the overall increase in net asset values. The Company recorded advisory and performance fees from these clients totaling $94,697 for the three months ended September 30, 2011, and $166,834 for the corresponding period in fiscal 2011. 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, and investment income.
Substantially all of the cash and cash equivalents included in the balance sheet at September 30, 2011, and June 30, 2011, is invested in USGIF money market funds.
Note 6. Borrowings
As of September 30, 2011, 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 September 30, 2011, 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 months ended September 30, 2011, was $9,660, compared to $9,457 in the corresponding period in fiscal 2011. As of September 30, 2011, and 2010, respectively, there was approximately $41,083 and $66,913 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 three months ended September 30, 2011.
                 
    Number of Options     Weighted Average  
        Exercise Price  
Options outstanding, beginning of year
    25,300     $ 19.40  
Granted
    5,000       6.54  
Exercised
    -       -  
Forfeited
    -       -  
 
           
Options outstanding, end of period
    30,300     $ 17.27  
 
           
Options exercisable, end of period
    20,180     $ 19.78  
 
           

 


Table of Contents

U.S. Global Investors, Inc.    
September 30, 2011, Quarterly Report on Form 10-Q   Page 12 of 23
 
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:
                 
    Three Months Ended September 30,  
    2011     2010  
Net income
  $ 749,518     $ 1,265,693  
 
               
Weighted average number of outstanding shares
               
Basic
    15,425,705       15,364,500  
 
               
Effect of dilutive securities
               
Employee stock options
    516       -  
 
           
Diluted
    15,426,221       15,364,500  
 
           
 
               
Earnings per share
               
Basic
  $ 0.05     $ 0.08  
Diluted
  $ 0.05     $ 0.08  
The diluted EPS calculation excludes the effect of stock options when their exercise prices exceed the average market price for the period. For the three months ended September 30, 2011, 25,300 options were excluded from diluted EPS, and 35,300 were excluded in the corresponding period in fiscal 2011.
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 three months ended September 30, 2011. 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 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.
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 September 30, 2011, or June 30, 2011.

 


Table of Contents

U.S. Global Investors, Inc.    
September 30, 2011, Quarterly Report on Form 10-Q   Page 13 of 23
 
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
Services
    Corporate
Investments
    Consolidated  
Three months ended September 30, 2011
                       
Net revenues
  $ 8,358,229     $ (566,321 )   $ 7,791,908  
 
                 
Net income (loss) before income taxes
    1,729,416       (567,330 )     1,162,086  
 
                 
Depreciation
    71,458             71,458  
 
                 
Capital expenditures
                 
 
                 
Gross identifiable assets at September 30, 2011
    35,070,740       9,124,214       44,194,954  
Deferred tax asset
                    917,800  
 
                     
Consolidated total assets at September 30, 2011
                  $ 45,112,754  
 
                     
Three months ended September 30, 2010
                       
Net revenues
  $ 8,440,946     $ 479,795     $ 8,920,741  
 
                 
Net income before income taxes
    1,480,426       478,804       1,959,230  
 
                 
Depreciation
    75,052             75,052  
 
                 
Capital expenditures
    24,616             24,616  
 
                 
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.
The Board has authorized a monthly dividend of $0.02 per share through December 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 October to December 2011 will be approximately $926,121.

 


Table of Contents

U.S. Global Investors, Inc.    
September 30, 2011, Quarterly Report on Form 10-Q   Page 14 of 23
 
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.
Detailed information regarding the SEC-registered funds managed by the Company can be found on the Company’s website, www.usfunds.com, including performance information for each fund for various time periods, assets under management as of the most recent month end and inception date of each fund.
SEC-registered mutual fund shareholders are not required to give advance notice prior to redemption of shares in the funds; however, the equity funds charge a redemption fee if the fund shares have been held for less than the applicable periods of time set forth in the funds’ prospectuses. The fixed income and money market funds charge no redemption fee. Detailed information about redemption fees can be found in the funds’ prospectus, which is available on the Company’s website, www.usfunds.com.
The Company provides advisory services for two offshore clients and receives monthly advisory fees based on the net asset values of the clients and quarterly performance fees, if any, based on the overall increase in net asset values. The Company recorded advisory and performance fees from these clients totaling $94,697 and $0, respectively, for the three months ended September 30, 2011, and $166,834 and $102,566 for the corresponding period in fiscal 2011. 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 September 30, 2011, total assets under management as of period-end, including both SEC-registered funds and offshore clients, were $2.050 billion versus $2.625 billion at September 30, 2010, a decrease of 22 percent. During the three months ended September 30, 2011, average assets under management were $2.453 billion versus $2.450 billion during the three months ended September 30, 2010. Total assets under management as of period-end at September 30, 2011, were $2.050 billion versus $2.603 billion at June 30, 2011, the Company’s prior fiscal year end.

 


Table of Contents

U.S. Global Investors, Inc.    
September 30, 2011, Quarterly Report on Form 10-Q   Page 15 of 23
 
The following tables summarize the changes in assets under management for the SEC-registered funds for the three months ended September 30, 2011, and 2010:
                                                 
    Changes in Assets Under Management  
    Three Months Ended September 30,  
            2011                     2010        
            Money Market                     Money Market        
            and                     and        
(Dollars in Thousands)   Equity     Fixed Income     Total     Equity     Fixed Income     Total  
Beginning Balance
  $    2,225,729     $ 336,793     $   2,562,522     $   1,985,203     $   382,062     $   2,367,265  
Market appreciation/(depreciation)
    (416,835 )     991       (415,844 )     334,320       1,083       335,403  
Dividends and distributions
          (365 )     (365 )           (360 )     (360 )
Net shareholder purchases/(redemptions)
    (125,847 )     (2,697 )     (128,544 )     (106,030 )     (10,727 )     (116,757 )
 
                                   
Ending Balance
  $ 1,683,047     $ 334,722     $ 2,017,769     $ 2,213,493     $ 372,058     $ 2,585,551  
 
                                   
 
Average investment management fee
    0.99 %     0.00 %     0.85 %     1.01 %     0.00 %     0.85 %
Average net assets
  $ 2,079,705     $ 335,278     $ 2,414,983     $ 2,035,267     $ 378,405     $ 2,413,672  
As shown above, average assets under management were consistent for the three months ended September 30, 2011, compared to the same time period for fiscal year 2011, although assets under management at period end were approximately 22% lower than the same period end last year. The decrease in assets under management during the three months ended September 30, 2011, was driven by both shareholder redemptions and market depreciation in the equity funds, primarily in the natural resources category. Fixed income funds experienced a net decrease as shareholders sought alternatives to low yields.
The average annualized investment management fee rate (total mutual fund advisory fees, excluding performance fees, as a percentage of average assets under management) was 85 basis points in the first quarter of fiscal 2012 and 2011. The average investment management fee for the fixed income funds is nil or close to nil for the periods. This is due to voluntary fee waivers on these funds as discussed in Note 5 to the financial statements, including a voluntary agreement to support the yields for the money market funds.
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 September 30, 2011, the Company held investments with a market value of approximately $9.1 million and a cost basis of approximately $9.0 million. The market value of these investments is approximately 20.2 percent of the Company’s total assets. See Note 3 (Investments) and Note 4 (Fair Value Disclosures) for additional detail regarding investment activities.

 


Table of Contents

U.S. Global Investors, Inc.    
September 30, 2011, Quarterly Report on Form 10-Q   Page 16 of 23
 
RESULTS OF OPERATIONS — THREE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
The Company posted net income of $749,518 ($0.05 per share) for the three months ended September 30, 2011, compared with net income of $1,265,693 ($0.08 per share) for the three months ended September 30, 2010, a decrease of $516,175, or 40.8 percent.
Revenues
Total consolidated revenues for the three months ended September 30, 2011, decreased $1,128,833, or 12.7 percent, compared with the three months ended September 30, 2010. This decrease was primarily attributable to the following:
    Investment income decreased $1,031,726, or 215.0 percent, primarily due to unrealized losses on trading securities for the three months ended September 30, 2011, compared to unrealized gains on trading securities for the three months ended September 30, 2010.
Expenses
Total consolidated expenses for the three months ended September 30, 2011, decreased $331,689, or 4.8 percent, compared with the three months ended September 30, 2010. This was largely attributable to the following:
    General and administrative expense decreased by $342,840, or 15.5 percent, primarily due to prior period implementation of new investment management and trading software.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2011, the Company had net working capital (current assets minus current liabilities) of approximately $32.5 million and a current ratio (current assets divided by current liabilities) of 8.3 to 1. With approximately $28.1 million in cash and cash equivalents and approximately $9.1 million in marketable securities, the Company has adequate liquidity to meet its current obligations. Total shareholders’ equity was approximately $40.6 million, with cash, cash equivalents, and marketable securities comprising 82.5 percent of total assets.
As of September 30, 2011, 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 September 30, 2011, 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, 2011. 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, 2011. As discussed in

 


Table of Contents

U.S. Global Investors, Inc.    
September 30, 2011, Quarterly Report on Form 10-Q   Page 17 of 23
 
Note 1 of the Notes to Consolidated Financial Statements, the Company has adopted certain recently issued financial accounting pronouncements.
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 September 30, 2011, and shows the effects of a hypothetical 25 percent increase and a 25 percent decrease in market prices.
                                 
                    Estimated Fair        
                    Value After     Increase (Decrease) in  
    Fair Value at     Hypothetical     Hypothetical Price     Shareholders’ Equity,  
    September 30, 2011     Percentage Change     Change     Net of Tax  
Trading securities 1
    $5,109,717     25% increase     $6,387,146       $843,103  
 
          25% decrease     $3,832,288       ($843,103 )
Available-for-sale 2
    $3,996,444     25% increase     $4,995,555       $659,413  
 
          25% decrease     $2,997,333       ($659,413 )
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 September 30, 2011, 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 September 30, 2011.
There has been no change in the Company’s internal control over financial reporting that occurred during the three months ended September 30, 2011, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 


Table of Contents

U.S. Global Investors, Inc.    
September 30, 2011, Quarterly Report on Form 10-Q   Page 18 of 23
 
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, 2011. There has been no material changes since fiscal year end to the risk factors listed therein.
ITEM 6. EXHIBITS
1. Exhibits —
  31   Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act Of 2002
 
  32   Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act Of 2002
 
 
101.INS
  XBRL Instance Document
 
 
101.SCH
  XBRL Taxonomy Extension Schema Document
 
 
101.CAL
  XBRL Taxonomy Extension Calculation Linkbase Document
 
 
101.DEF
  XBRL Taxonomy Extension Definition Linkbase Document
 
 
101.LAB
  XBRL Taxonomy Extension Labels Linkbase Document
 
 
101.PRE
  XBRL Taxonomy Extension Presentation Linkbase Document

 


Table of Contents

U.S. Global Investors, Inc.    
September 30, 2011, Quarterly Report on Form 10-Q   Page 19 of 23
 
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized.
         
 
U.S. GLOBAL INVESTORS, INC.
 
 
DATED: November 3, 2011  BY:   /s/ Frank E. Holmes    
      Frank E. Holmes   
      Chief Executive Officer   
 
DATED: November 3, 2011  BY:   /s/ Catherine A. Rademacher    
      Catherine A. Rademacher   
      Chief Financial Officer