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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: August 31, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to________
COMMISSION FILE NUMBER: 0-29346
FRMO CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3754422
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
271 NORTH AVENUE, NEW ROCHELLE, NY 10801
(Address of principal executive offices) (Zip Code)
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE): (914) 632-6730
--------------------------------------------------
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 / /
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by checkmark whether the registrant has filed all documents and reports
required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court. Yes ( ) No ( )
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding
of each of the issuer's classes of common stock, at September 7, 2003:
36,083,774
FRMO CORP.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 2003
Page No.
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PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements.................................................................. 2
Balance Sheets - August 31, 2003 (Unaudited) and February 28, 2003 ................... 2
Statements of Income (Unaudited) - Three and six months ended August 31, 2003 and 2002 3
Statements of Cash Flows (Unaudited) - Six months ended August 31, 2003 and 2002 ..... 4
Notes to Financial Statements (Unaudited) ............................................ 5
ITEM 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 7
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk ........................... 9
ITEM 4. Controls and Procedures .............................................................. 9
PART II - OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders .................................. 10
ITEM 6. Exhibits and Reports on Form 8-K
SIGNATURES ................................................................................... 10
CERTIFICATIONS ............................................................................... 11
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FRMO CORP.
BALANCE SHEETS
AUGUST 31, FEBRUARY 28,
2003 2003
--------------------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 141,300 $ 135,003
Accounts receivable
20,000 20,500
-------------------------
Total current assets 161,300 155,503
-------------------------
Other assets:
Intangible assets, net of accumulated
amortization of $16,932 at August 31, 2003
and $13,069 at February 28, 2003 60,321 64,184
Investments in unconsolidated subsidiaries 5,000 5,000
-------------------------
Total other assets 65,321 69,184
-------------------------
Total assets $ 226,621 $ 224,687
=========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 16,271 $ 20,551
Income taxes payable -- 11,587
Deferred income 4,667 7,008
-------------------------
Total current liabilities 20,938 39,146
Stockholders' equity:
Preferred stock - $.001 par value;
Authorized - 2,000,000 shares;
Issued and outstanding - 50 shares Series R -- --
Common stock - $.001 par value;
Authorized - 90,000,000 shares;
Issued and outstanding - 36,083,774 shares 36,083 36,083
Capital in excess of par value 3,328,135 3,322,136
Retained earnings 60,089 45,947
-------------------------
3,424,307 3,404,166
Less: Receivables from shareholders for
common stock issuance 3,218,625 3,218,625
-------------------------
Total stockholders' equity 205,682 185,541
-------------------------
Total liabilities and stockholders' equity $ 226,620 $ 224,687
=========================
See notes to interim financial statements.
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FRMO CORP.
STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
AUGUST 31, AUGUST 31,
2003 2002 2003 2002
------------------------- -------------------------
Revenues
Consulting $ 17,153 $ 23,814 $ 35,679 $ 42,540
Research fees 7,607 3,157 11,337 7,205
Subscription fees 1,667 -- 2,667 3,009
Income from investments in
unconsolidated subsidiaries -- 8,083 -- 13,751
------------------------- -------------------------
Total income 26,427 35,054 49,683 66,505
------------------------- -------------------------
Costs and expenses
Amortization 1,931 1,932 3,863 3,497
Contributed services 3,000 3,000 6,000 6,000
Accounting 2,250 4,493 4,500 5,993
Shareholder reporting 10,363 6,474 15,363 12,746
Office expenses 285 1,513 246 3,013
Other 116 203 236 251
------------------------- -------------------------
Total costs and expenses 17,945 17,615 30,208 31,500
------------------------- -------------------------
Income from operations 8,482 17,439 19,475 35,005
Dividend income 198 248 474 514
------------------------- -------------------------
Income from operations before provision
for income taxes 8,680 17,687 19,949 35,519
Provision for income taxes 2,613 6,334 5,807 8,999
------------------------- -------------------------
Net income $ 6,067 $ 11,353 $ 14,142 $ 26,520
========================= =========================
Basic earnings per common share $ 0.00 $ 0.00 $ 0.00 $ 0.01
========================= =========================
Diluted earnings per common share $ 0.00 $ 0.00 $ 0.00 $ 0.01
========================= =========================
Average shares of common stock outstanding:
Basic 3,897,524 3,897,524 3,897,524 3,897,524
========================= =========================
Diluted 3,947,524 3,947,524 3,947,524 3,947,524
========================= =========================
See notes to interim financial statements.
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FRMO CORP.
Statements of Cash Flows
(Unaudited)
SIX MONTHS ENDED
AUGUST 31,
2003 2002
------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 14,142 $ 26,520
Adjustments to reconcile net income to net cash
provided by operating activities
Reinvested income -- (13,751)
Amortization 3,863 3,497
Contributed services 6,000 6,000
Changes in operating assets and liabilities:
Accounts receivable 500 (24,795)
Accounts payable and other current liabilities (15,867) 7,783
Deferred income (2,341) 179
------------------------
Net cash provided by operating activities 6,297 5,433
Net increase in cash and cash equivalents 6,297 5,433
Cash and cash equivalents, beginning of period 135,003 83,411
------------------------
Cash and cash equivalents, end of period $ 141,300 $ 88,844
========================
ADDITIONAL CASH FLOW INFORMATION
Interest paid $ -- $ --
========================
Income taxes paid $ 5,840 $ 2,983
========================
NONCASH INVESTING AND FINANCING ACTIVITIES
Reinvested income from investments in unconsolidated
subsidiaries $ -- $ 5,688
========================
See notes to interim financial statements.
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FRMO CORP.
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED AUGUST 31, 2003
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with accounting principles generally accepted in the United States for interim
financial information in response to the requirements of Article 10 of
Regulation S-X. Accordingly they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements. In the opinion of management, the
accompanying unaudited financial statements contain all adjustments (consisting
only of normal recurring items) necessary to present fairly the financial
position as of August 31, 2003; results of operations for the three and six
months ended August 31, 2003 and 2002; and cash flows for the six months ended
August 31, 2003 and 2002. For further information, refer to the Company's
financial statements and notes thereto included in the Company's Form 10-K for
the year ended February 28, 2003. The balance sheet at February 28, 2003 was
derived from the audited financial statements as of that date. Results of
operations for interim periods are not necessarily indicative of annual results
of operations.
2. INTANGIBLE ASSETS
RESEARCH AGREEMENTS
In March 2001, the Company acquired the research service fees that Horizon
Research Group receives from The Kinetics Paradigm Fund in exchange for 80,003
shares of common stock. The value of the shares issued in this transaction was
$51,003. The Company is amortizing the cost of The Kinetics Paradigm Fund
research agreement over ten years using the straight-line method.
SUBSCRIPTION REVENUES
In October 2001, the Company acquired a 2% interest in the subscription revenues
from subscribers to The Capital Structure Arbitrage Report that Horizon Research
Group and another third party receive. Consideration for this interest consisted
of the issuance of 50 shares of Series R preferred stock. The value of the
shares issued in both of these transactions aggregated $26,250. The Company is
amortizing the purchase of these subscription agreements over ten years using
the straight-line method. At the time of these transactions, a 2% interest in
the subscription revenues amounted to $3,018 per annum.
Intangible assets consist of the following:
AUGUST 31, FEBRUARY 28,
2003 2003
--------------------------
Research agreements $ 51,003 $ 51,003
Subscription revenue 26,250 26,250
--------------------------
77,253 77,253
Less accumulated amortization 16,932 13,069
--------------------------
Intangible assets, net $ 60,321 $ 64,184
==========================
For the six months ended August 31, 2003 and 2002, amortization of intangible
assets was $3,863 and $3,497.
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3. NET INCOME PER COMMON SHARE AND PER COMMON SHARE EQUIVALENT
Basic earnings per common share for the three and six months ended August 31,
2003 and 2002 are calculated by dividing net income by weighted average common
shares outstanding during the period. Diluted earnings per common share for the
three and six months ended August 31, 2003 and 2002, are calculated by dividing
net income by weighted average common shares outstanding during the period plus
dilutive potential common shares, which are determined as follows:
THREE AND SIX MONTHS ENDED
AUGUST 31,
2003 2002
------------------------
Weighted average common shares 3,897,524 3,897,524
Effect of dilutive securities:
Conversion of preferred stock 50,000 50,000
------------------------
Dilutive potential common shares 3,947,524 3,947,524
========================
4. COMPENSATION FOR CONTRIBUTED SERVICES
Two officers/shareholders performed services for the Company during the six
months ended August 31, 2003 and 2002 for which no compensation was paid. The
Company recorded a charge to operations for these contributed services of $6,000
and a corresponding credit to paid in capital for each period.
5. INCOME TAXES
The provision for income taxes consist of the following:
THREE MONTHS ENDED SIX MONTHS ENDED
AUGUST 31, AUGUST 31,
2003 2002 2003 2002
------------------------- -----------------------
Current:
Federal $ 1,600 $ 5,018 $ 3,554 $ 7,382
State 1,013 1,326 2,253 1,617
------------------------- -----------------------
Total current 2,613 6,344 5,807 8,999
------------------------- -----------------------
Deferred:
Federal -- -- -- --
State -- -- -- --
------------------------- -----------------------
Total deferred -- -- -- --
------------------------- -----------------------
Total $ 2,613 $ 6,344 $ 5,807 $ 8,999
========================= =======================
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
All statements contained herein that are not historical facts, including but not
limited to, statements regarding future operations, financial condition and
liquidity, capital requirements and the Company's future business plans are
based on current expectations. These statements are forward looking in nature
and involve a number of risks and uncertainties. Actual results may differ
materially. Among the factors that could cause actual results to differ
materially are changes in the financial markets, which affect investment
managers, investors, mutual funds and the Company's consulting clients, and
other risk factors described herein and in the Company's reports filed and to be
filed from time to time with the Commission. The discussion and analysis below
is based on the Company's unaudited Financial Statements for the three and six
months ended August 31, 2003 and 2002. The following should be read in
conjunction with the Management's Discussion and Analysis of results of
operations and financial condition included in Form 10-K for the year ended
February 28, 2003.
OVERVIEW
By reason of the spin-off transaction described in Form 10-K for the year ended
February 28, 2002, the Company had a new start in terms of its continuing
business and its financial statements. After the spin-off, its balance sheet
consisted of $10,000 in assets, no liabilities and 1,800,000 shares of common
stock. On January 23, 2001 the Company issued an additional 34,200,000 shares of
common stock for $3,258,000 to be paid as set forth in Item 1 of Form 10-K for
the year ended February 28, 2001.
Since its new start on January 23, 2001, FRM completed the following
transactions through August 31, 2003:
i. The Company invested $5,000 in FRM NY Capital, LLC, a limited
liability venture capital company whereby the substantial investment
of financial capital will be made by unrelated parties but where FRM
will have a carried interest based on leveraging the creative services
of its personnel (its intellectual capital).
ii. A consulting agreement was signed effective January 1, 2001, whereby
FRM is currently receiving approximately $20,000 a year from the
manager of Santa Monica Partners, LP, a director and shareholder of
FRM, for access to consultations with the Company's personnel
designated by Murray Stahl and Steven Bregman. Santa Monica Partners,
L.P. is a private fund, which owns 218,000 shares of common stock of
FRM.
iii. In March 2001 FRM acquired the research service fees that Horizon
Research Group had received from The Kinetics Paradigm Fund in
exchange for 80,003 shares of FRM common stock. Management believes
that the growth of that Fund in the current fiscal year and future
years will increase the current level of research fees for which the
stock consideration was paid. The Kinetics Paradigm Fund outperformed
the S&P 500 Index by approximately 13 percentage points in its first
fiscal year of operation, Calendar 2000. During 2001, it outperformed
the S&P 500 Index by 14 percentage points and, during 2002, by 17
percentage points. In August 2003, The Kinetics Paradigm Fund was
assigned a five-star rating by Morningstar, Inc., the fund rating
service. This is Morningstar's highest rating and is often the basis
on which mutual fund investors seek to select funds. During calendar
2003, through September 30, 2003, the Fund outperformed the S&P 500 by
a further 12 percentage points.
iv. In October 2001, FRM acquired a 2% interest in the subscription
revenues from The Capital Structure Arbitrage Report that Horizon
Research Group and another third party receive, in exchange for 50
shares of Series R preferred stock. While the subscriptions are
minimal at the present time, management believes that they will grow
in future years.
v. In February 2002, FRM acquired a 7.71% interest in Kinetics Advisors,
LLC and the Finder's Fee Share Interest from the Stahl Bregman Group,
in exchange for 315 shares of FRM common stock. Kinetics Advisors, LLC
controls and provides investment advice to Kinetics Partners, LP, a
hedge fund and to Kinetics Fund, Inc., an offshore version of Kinetics
Partners. While these funds were quite small at the time
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of acquisition, they have expanded significantly and management
believes that they will continue to grow in future years. During its
first year of operation in 2000, and in 2001, Kinetics Partners
returned 23.7 and 21.6 percentage points more than the S&P 500 Index,
net of management and incentive fees. In 2002, it outperformed the S&P
500 Index by 33 percentage points. Through September 30, 2003, it has
outperformed the S&P 500 Index by a further 14 percentage points.
RESULTS OF OPERATIONS
2003 PERIOD COMPARED TO THE 2002 PERIOD
The Company's revenues from operations for the three months ended August 31,
2003 ("2003") was $26,400, a decrease of $8,600 or 25% as compared to the three
months ended August 31, 2002 ("2002"). The net decrease in the three-month
period was due primarily to the inclusion in 2002 of $8,100 of income from
investments in unconsolidated subsidiaries. However, for comparative purposes,
the $8,100 of income was completely offset during the fourth quarter of the
fiscal year ended February 28, 2003, when the Company reevaluated its accounting
for its investment in Kinetics Advisers, LLC and recorded an adjustment that
reduced second quarter revenues by approximately $8,100. The balance of the
decrease in 2003 revenues reflects a decrease of $6,700 in consulting revenues,
offset by a $6,100 increase in research and subscription fees versus the 2002
period. The Company's revenues from operations for the six months ended August
31, 2003 ("2003") was $49,700, a decrease of $16,800 or 25% as compared to the
six months ended August 31, 2002 ("2002"). The net decrease in the six-month
period was due primarily to the inclusion in 2002 of $13,800 of income from
investments in unconsolidated subsidiaries. However, for comparative purposes,
the $13,800 of income was completely offset during the fourth quarter of the
fiscal year ended February 28, 2003, when the company reevaluated its accounting
for its investment in Kinetics Advisers, LLC and recorded an adjustment that
reduced first half revenues by approximately $13,800. The balance of the
decrease in 2003 revenues reflects a decrease of $6,900 in consulting revenues,
offset by a $4,100 increase in research fees versus the 2002 period.
Costs and expenses from operations were $18,000 during the three months ended
both in August 2003 and 2002. During the six-month period ended in 2003 costs
and expenses from operations decreased by $1,300 (4%) to $30,200. The result for
the three-month period was due to an increase in shareholder reporting expenses,
offset by declines in accounting and office expenses. The decrease for the six
months ended in 2003 was due to an increase in shareholder reporting expenses,
offset by decreases in accounting and office expenses.
For the reasons noted above, the Company's net income for the three months ended
August 31, 2003 decreased by $5,300 to $6,100, as compared to net income of
$11,400 in 2002. For the same reasons, net income for the six months ended
August 31, 2003 was $14,100, as compared to net income of $26,500 for the same
period in 2002.
Some discussion is required with respect to an asset that is presently carried
at zero cost on the FRMO balance sheet and which had a negligible accounting
impact on earnings in fiscal 2003 and during the six months ended August 31,
2003, yet which has a very significant economic impact on FRMO. This is the
investment in Kinetics Advisers, LLC ("Kinetics Advisers"), which was acquired
in February 2002 (as discussed in Part I, Item 1, under the heading Specific
Business Activities, of the Form 10-K for the fiscal 2003 year). This investment
takes the form of a minority interest in Kinetics Advisers, which controls and
provides investment advice to two hedge funds. Kinetics Advisers has elected to
reinvest in these two funds the fees to which it is entitled from them. As a
consequence, FRMO will not receive its proportional interest in those fees until
such time that Kinetics Advisers itself elects to receive them. Under generally
accepted accounting principles, FRMO must record this investment on a cost
basis, which was $205 as of February 28, 2002. However, on an economic basis,
FRMO's proportional share of Kinetics Advisers' capital accounts in those funds
was approximately $424,000 (pre-tax and unaudited) as of September 30, 2003,
predominantly from fee income and appreciation (also pre-tax and unaudited).
- 8 -
LIQUIDITY AND CAPITAL RESOURCES
The Company's activities during the six months ended August 31, 2003 resulted in
an increase in cash of $6,300. The $6,300 increase in cash in 2003 was due to
income, after adjusting for amortization and contributed services, of $24,000,
offset by fluctuations in operating assets and liabilities primarily caused by
timing differences. In 2002, the Company started recording non-cash compensation
for contributed services from two of its executives. In 2001, those executives,
who are responsible for all of the company's operations, agreed not to draw any
salaries during the period of formation. There were no cash flows provided by or
used in investing or financing activities during both of the six-month periods
ended in 2003 and 2002. The Company expects its business to develop without the
outlay of cash, since growth is expected to be a function of its intellectual
property as presently represented by consulting, research and subscription fees
as well as its asset-based general partner interest.
EFFECTS OF NEW ACCOUNTING PRONOUNCEMENTS
None.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
On January 23, 2001 the Company issued 34,200,000 shares of $.001 par value
stock for $3,258,000. Only $39,375 was paid for at the time and the balance of
$3,218,625 will be paid to the Company as set forth in Item 1 of Form 10-K for
the year ended February 28, 2001. The Company's market risk arises principally
from the obligations of the shareholders to pay for the shares of common stock
of the Company based on dividends from outside sources and the income generated
from the management of mutual funds.
ITEM 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including
our principal executive officer and principal financial officer, we have
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures within 90 days of the filing date of this quarterly
report, and, based on their evaluation, our principal executive officer and
principal financial officer have concluded that these controls and procedures
are effective. There were no significant changes in our internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation.
Disclosure controls and procedures are our controls and other procedures that
are designed to ensure that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the Securities and
Exchange Commission's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by us in the reports that we file under the
Exchange Act is accumulated and communicated to our management, including our
principal executive officer and principal financial officer, as appropriate to
allow timely decisions regarding required disclosure.
- 9 -
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Shareholders held on July 17, 2003, the persons elected
as directors of the Company and the voting for such persons were as follows:
Authorization
Name Votes For Withheld
- ---- --------- --------
Murray Stahl 28,836,507 9,461
Steven Bregman 28,836,616 9,352
Peter Doyle 28,836,866 7,102
Lawrence J. Goldstein 28,836,616 9,352
Allan Kornfeld 28,838,866 7,102
David Michael 28,838,866 7,102
Lester Tanner 28,838,859 7,109
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A) EXHIBITS
31.1 - Certification by the Chief Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 - Certification by the Chief Financial Officer Pursuant to Section 302
of the Sbarbanes-Oxley Act of 2002.
32.1 - Certification of the Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350 Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
B) REPORTS ON FORM 8-K
None.
SIGNATURE
---------
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, thereunto duly authorized.
FRMO CORP.
By: /s/ Steven Bregman
-----------------------
Steven Bregman
President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Dated: October 13, 2003
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