Business Context and Reporting Period
Company: U.S. Global Investors, Inc. (U.S. Global)
Filing Type: Form 10-K (Annual Report)
Period Ended: June 30, 2010
Business Overview: U.S. Global is a registered investment adviser providing investment advisory, transfer agency, distribution, and administrative services to U.S. Global Investors Funds (USGIF), a Delaware statutory trust offering thirteen no-load mutual funds. The Company also advises two offshore clients and engages in corporate investment activities for its own account. The Company is headquartered in San Antonio, Texas.
Key Financial Metrics
| Metric | Fiscal Year 2010 | Fiscal Year 2009 |
|---|---|---|
| Total Revenues | $35,030,153 | $23,140,269 |
| Net Income (Loss) | $5,349,285 | $(2,237,579) |
| Earnings Per Share (Basic) | $0.35 | $(0.15) |
| Assets Under Management (AUM) | $2,402,319,000 | $2,221,654,000 |
| Working Capital | $28,323,885 | $27,363,133 |
| Total Assets | $40,983,698 | $37,153,846 |
| Shareholders' Equity | $36,191,872 | $34,627,994 |
| Net Cash Provided by Operations | $7,632,350 | $3,040,931 |
| Long-Term Debt | $0 | $0 |
Liquidity: The Company reported approximately $23.8 million in cash and cash equivalents and $8.1 million in marketable securities as of June 30, 2010. The current ratio was 6.9 to 1. The Company has access to a $1 million credit facility, which remained unutilized.
Material Changes vs. Prior Period
- Profitability Turnaround: The Company returned to profitability with a net income of $5.35 million in 2010, compared to a net loss of $2.24 million in 2009. This represents a 339% improvement in net income.
- Revenue Growth: Total revenues increased by 51.4% ($11.9 million) year-over-year. Key drivers included:
- Investment Income: Increased by $5.6 million due to a rebound in the market value of trading securities and the absence of significant other-than-temporary impairment charges that impacted 2009.
- Advisory Fees: Mutual fund advisory fees rose by $4.4 million (26.2%), driven by increased assets in natural resource funds and lower equity fund expense reimbursements following the implementation of expense caps.
- Distribution & Admin Fees: Increased by $2.4 million and $582,000 respectively, as 2010 included a full year of fees compared to nine months in 2009.
- Expense Management: Total consolidated expenses decreased slightly by 0.9% ($229,421). Significant reductions in subadvisory fees ($1.9 million) and general/administrative expenses ($1.8 million) were offset by a 19% increase in employee compensation ($1.9 million) due to performance bonuses and a 217% increase in advertising ($885,000).
- AUM Growth: Total AUM increased by approximately 8.1% to $2.40 billion, with natural resource funds seeing a 16.4% increase in average assets.
Guidance, Outlook, Risks, and Unusual Items
Outlook and Commentary: Management remains cautious regarding financial markets due to persistent high unemployment and weak housing markets. However, the Company has made progress in investment performance. The Company intends to pay regular monthly cash dividends of $0.02 per share, authorized through December 2010.
Key Risks:
- Market Volatility: Revenue is heavily dependent on assets under management (AUM). Declines in market prices or shareholder redemptions directly reduce advisory fees.
- Fee Waivers: The Company voluntarily waives fees or reimburses expenses for money market funds to maintain yields. These waivers totaled approximately $3.5 million in 2010 and could increase in the future, negatively impacting net income.
- Contract Renewals: Advisory, administrative, and transfer agent agreements with USGIF are terminable on 60-day notice and subject to annual renewal (next renewal September 2011).
- Regulatory Compliance: Increased regulatory oversight and new laws (e.g., Sarbanes-Oxley) continue to increase compliance costs.
Unusual Items:
- Impairments: Fiscal 2009 included $2.46 million in other-than-temporary impairment charges on available-for-sale securities. Fiscal 2010 included only $1,606 in such charges.
- Performance Fees: Effective October 2009, a performance fee mechanism was implemented for nine equity funds. In 2010, this resulted in an upward adjustment of base advisory fees by $168,534.
Investor Verification Checklist
- Fee Waiver Sustainability: Verify the extent of future fee waivers required to maintain yields on money market funds, as this directly impacts net income.
- Contract Renewal Status: Monitor the renewal of the primary advisory and service agreements with USGIF, which expire September 30, 2011.
- Investment Portfolio Performance: Review the performance of the Company's corporate investment portfolio (trading and available-for-sale securities), which contributed significantly to the 2010 revenue rebound but remains volatile.
- Dividend Continuity: Confirm the Board's decision on the continuation of the $0.02 monthly dividend after December 2010.
- Concentration Risk: Note that 98% of advisory fees come from SEC-registered mutual funds, creating concentration risk relative to offshore clients.