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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: November 30, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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COMMISSION FILE NUMBER: 0-29346
FRMO CORP.
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(Exact name of registrant as specified in its charter)
DELAWARE 13-3754422
(State or other jurisdiction of (I.R.S. Employer
incorporation Identification No.)
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
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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 January 8, 2004: 36,083,774
FRMO CORP.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED NOVEMBER 30, 2003
Page No.
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PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements ....................................... 2
Balance Sheets - November 30, 2003 (Unaudited) and
February 28, 2003 ........................................ 2
Statements of Income (Unaudited) - Three and nine
months ended November 30, 2003 and 2002 .................. 3
Statements of Cash Flows (Unaudited) - Nine months
ended November 30, 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 6. Exhibits and Reports on Form 8-K .......................... 10
SIGNATURES ........................................................... 10
CERTIFICATIONS ....................................................... 11
- 1 -
FRMO CORP.
BALANCE SHEETS
NOVEMBER 30, FEBRUARY 28,
2003 2003
---- ----
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 354,472 $ 135,003
Accounts receivable 13,051 20,500
---------- ----------
Total current assets 367,523 155,503
---------- ----------
Other assets:
Intangible assets, net of accumulated
amortization of $18,863 at November 30, 2003
and $13,069 at February 28, 2003 58,390 64,184
Investments in unconsolidated subsidiaries 5,000 5,000
---------- ----------
Total other assets 63,390 69,184
---------- ----------
Total assets $ 430,913 $ 224,687
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 19,115 $ 20,551
Income taxes payable 1,993 11,587
Deferred income 1,556 7,008
---------- ----------
Total current liabilities 22,664 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 36,084 36,083
Capital in excess of par value 3,331,135 3,322,136
Retained earnings 81,135 45,947
---------- ----------
3,448,354 3,404,166
Less: Receivables from shareholders for
common stock issuance 3,040,105 3,218,625
---------- ----------
Total stockholders' equity 408,249 185,541
---------- ----------
Total liabilities and stockholders' equity $ 430,913 $ 224,687
========== ==========
See notes to interim financial statements.
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FRMO CORP.
STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
------------ ------------
2003 2002 2003 2002
---- ---- ---- ----
Revenues
Consulting $ 27,907 $ 23,686 $ 63,586 $ 66,226
Research fees 9,496 2,928 20,833 10,133
Subscription fees 3,111 -- 5,778 3,009
Income from investments in
unconsolidated subsidiaries -- 8,351 -- 22,102
---------- ---------- ---------- ----------
Total income 40,514 34,965 90,197 101,470
---------- ---------- ---------- ----------
Costs and expenses
Amortization 1,931 1,931 5,794 5,428
Contributed services 3,000 3,000 9,000 9,000
Accounting 2,250 1,667 6,750 7,660
Shareholder reporting 5,000 5,625 20,363 18,371
Office expenses 234 1,586 480 4,772
Other 371 280 606 358
---------- ---------- ---------- ----------
Total costs and expenses 12,786 14,089 42,993 45,589
---------- ---------- ---------- ----------
Income from operations 27,728 20,876 47,204 55,881
Dividend income 273 258 747 772
---------- ---------- ---------- ----------
Income from operations before provision
for income taxes 28,801 21,134 47,951 56,653
Provision for income taxes 6,954 10,744 12,762 19,743
---------- ---------- ---------- ----------
Net income $ 21,047 $ 10,390 $ 35,189 $ 36,910
========== ========== ========== ==========
Basic earnings per common share $ 0.00 $ 0.00 $ 0.01 $ 0.01
========== ========== ========== ==========
Diluted earnings per common share $ 0.00 $ 0.00 $ 0.01 $ 0.01
========== ========== ========== ==========
Average shares of common stock outstanding:
Basic 4,485,902 3,897,524 4,093,650 3,897,524
========== ========== ========== ==========
Diluted 4,535,902 3,947,524 4,143,650 3,947,524
========== ========== ========== ==========
See notes to interim financial statements.
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FRMO CORP.
Statements of Cash Flows
(Unaudited)
NINE MONTHS ENDED
NOVEMBER 30,
------------
2003 2002
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 35,189 $ 36,910
Adjustments to reconcile net income to net cash
provided by operating activities
Reinvested income -- (22,102)
Amortization 5,794 5,428
Contributed services 9,000 9,000
Changes in operating assets and liabilities:
Accounts receivable 7,449 (40,302)
Accounts payable and other current liabilities (11,030) 18,844
Deferred income (5,453) 4,241
--------- ---------
Net cash provided by operations 40,949 12,019
Cash flows from financing activities
Proceeds from common stock subscriptions receivable 178,520 --
--------- ---------
Net cash provided by financing activities 178,520 --
--------- ---------
Net increase in cash and cash equivalents 219,469 12,019
Cash and cash equivalents, beginning of period 135,003 83,411
--------- ---------
Cash and cash equivalents, end of period $ 354,472 $ 95,430
========= =========
ADDITIONAL CASH FLOW INFORMATION
Interest paid $ -- $ --
--------- ---------
Income taxes paid $ 3,590 $ 2,983
========= =========
NON-CASH INVESTING AND FINANCING ACTIVITIES
Reinvested income from investments in unconsolidated
subsidiaries $ -- $ 22,102
========= =========
See notes to interim financial statements.
- 4 -
FRMO CORP.
NOTES TO FINANCIAL STATEMENTS
NINE MONTHS ENDED NOVEMBER 30, 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 November 30, 2003; results of operations for the three and nine
months ended November 30, 2003 and 2002; and cash flows for the nine months
ended November 30, 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:
NOVEMBER 30, FEBRUARY 28,
2003 2003
---- ----
Research agreements $51,003 $51,003
Subscription revenue 26,250 26,250
------- -------
77,253 77,253
Less accumulated amortization 18,863 13,069
------- -------
Intangible assets, net $58,390 $64,184
======= =======
For the nine months ended November 30, 2003 and 2002, amortization of intangible
assets was $5,794 and $5,428.
- 5 -
FRMO CORP.
NOTES TO FINANCIAL STATEMENTS
NINE MONTHS ENDED NOVEMBER 30, 2003
(UNAUDITED)
3. NET INCOME PER COMMON SHARE AND PER COMMON SHARE EQUIVALENT
Basic earnings per common share for the three and nine months ended November 30,
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 nine months ended November 30, 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 NINE MONTHS
ENDED
NOVEMBER 30,
------------
2003 2002
---- ----
Weighted average common shares 4,485,902 3,897,524
Effect of dilutive securities:
Conversion of preferred stock 50,000 50,000
--------- ---------
Dilutive potential common shares 4,535,902 3,947,524
========= =========
4. COMPENSATION FOR CONTRIBUTED SERVICES
Two officers/shareholders performed services for the Company during the nine
months ended November 30, 2003 and 2002 for which no compensation was paid. The
Company recorded a charge to operations for these contributed services of $9,000
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 NINE MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
------------ ------------
2003 2002 2003 2002
---- ---- ---- ----
Current:
Federal $ 4,245 $ 7,837 $ 7,800 $15,219
State 2,709 2,907 4,962 4,524
------- ------- ------- -------
Total current 6,954 10,744 12,762 19,743
------- ------- ------- -------
Deferred:
Federal -- -- -- --
State -- -- -- --
------- ------- ------- -------
Total deferred -- -- -- --
------- ------- ------- -------
Total $ 6,954 $10,744 $12,762 $19,743
======= ======= ======= =======
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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 nine
months ended November 30, 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 November 30, 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.
For calendar 2003, the Fund outperformed the S&P 500 by a further 19
percentage points. On a cumulative basis, over the four-year period
from inception through year-end 2003, the Kinetics Paradigm Fund has
returned 50%, whereas the S&P 500 Index has lost (20%).
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
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Kinetics Fund, Inc., an offshore version of Kinetics Partners. While
these funds were quite small at the time 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 December 31, 2003, it has outperformed
the S&P 500 Index by a further 23 percentage points. On a cumulative
basis, over the 3-year 4-month period from inception through
year-end 2003, the Kinetics Partners Fund has returned 92%, whereas
the S&P 500 Index has lost (23%).
RESULTS OF OPERATIONS
2003 PERIOD COMPARED TO THE 2002 PERIOD
The Company's revenues from operations for the three months ended November 30,
2003 ("2003") were $40,500, an increase of $5,500 or 16% as compared to the
three months ended November 30, 2002 ("2002"). The net increase in the
three-month period was due to increases in consulting, research and subscription
revenues. The 2002 period included $8,400 of income from investments in
unconsolidated subsidiaries, which for comparative purposes 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 $8,400. The Company's revenues from operations for the nine months
ended November 30, 2003 ("2003") was $90,200, a decrease of $11,300 or 11% as
compared to the nine months ended November 30, 2002 ("2002"). The net decrease
in the nine-month period was due primarily to the inclusion in 2002 of $22,100
of income from investments in unconsolidated subsidiaries. However, for
comparative purposes, the $22,100 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 first half revenues by approximately
$22,100. These decreases in 2003 revenues were partially offset by an increase
of $10,700 in research fees.
Costs and expenses from operations were $12,800 during the three months ended in
November 2003, a decrease of $1,300 or (9%) from the comparable 2002 period.
During the nine-month period ended in 2003 costs and expenses from operations
decreased by $2,600 (6%) to $43,000. The result for the three-month period was
primarily due to an increase in accounting expenses, offset by declines in
shareholder reporting and office expenses. The decrease for the nine months
ended in 2003 was primarily 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
November 30, 2003 increased by $10,600 to $21,000, as compared to net income of
$10,400 in 2002. For the same reasons, net income for the nine months ended
November 30, 2003 was $35,200, as compared to net income of $36,900 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 nine months ended November 30,
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 $708,600 (pre-tax and unaudited) as of November 30, 2003,
predominantly from fee income and appreciation (also pre-tax and unaudited).
- 8 -
LIQUIDITY AND CAPITAL RESOURCES
The Company's activities during the nine months ended November 30, 2003 resulted
in an increase in cash of $219,500. The $219,500 increase in cash in 2003 was
due to income, after adjusting for amortization and contributed services, of
$50,000, reduced by ($9,000) due to fluctuations in operating assets and
liabilities primarily caused by timing differences, and increased by the receipt
of $178,520 in proceeds from common stock subscriptions for 1,785,200 shares.
The subscription proceeds represent partial payment for shares of common stock
held in escrow as set forth in Item 1 of Form 10-K for the year ended February
28, 2001. 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 nine-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 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 Sarbanes-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: January 8, 2004
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