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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: February 29, 2004
[_] 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
incorporation or organization) Identification No.)
30 HAIGHTS CROSS ROAD, CHAPPAQUA, NY 10514
(Address of principal executive offices) (Zip Code)
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE): (914) 632-6730
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Title of Each Class
-------------------
Common Stock, $.001 par value
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (x)
The aggregate market value of the voting stock held by non-affiliates of
the registrant at May 20, 2004 was $902,108.
The number of shares outstanding of the registrant's Common Stock as of
May 20, 2004 was 36,083,774 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Form 10-K incorporates information by reference from the
registrant's definitive proxy statement to be filed with the Securities and
Exchange Commission within 120 days after the close of the year ended February
29, 2004.
FRMO CORP.
May 25, 2004
Dear Fellow Shareholder:
The writers of the following passages still choose to use such adjectives
as "small" in reference to FRMO Corp. As evidence of the appropriate use to the
term, please observe that our shareholders' equity as of fiscal year end is only
$486,774, rounded to the nearest dollar. This is far greater than the $185,541
recorded as of February 2003. Its purchasing power is 486 years of round trip
NYC subway rides based on the assumption of 5 round trips per week for 50 weeks
each year.
However, as small as this figure is, it will surely astonish the reader to
learn that it is substantially more shareholders' equity than certain publicly
traded multi-billion dollar market capitalization firms. This remark is not made
as a prelude to a valuation claim on behalf of our firm. It is merely an
illustration of the temper of the times
Our primary assets are clearly related to equity markets and must function
in an environment of historically expensive valuations. Nonetheless, our assets
continue to progress. For instance, the research fees that FRMO Corp. receives
from the Paradigm Fund have increased substantially. Last year, the Paradigm
Fund had $25 million in assets under management. As of this writing, assets
under management for this fund now exceed $60 million. The fund outperformed the
S&P 500 Index in 2000, 2001, 2002 and 2003. It continues to be rated 5 star by
Morningstar.
A more substantive asset is our interest in the Kinetics Advisors hedge
funds. The FRMO Corp. proportionate capital interest is estimated to exceed
$644,000 as of April 30, 2004. It was $620,000 at fiscal year end. This is over
a three-fold increase from the past year. Of course, we have not been permitted
to display this asset on our balance sheet at its actual value due to the
requirements of GAAP accounting. However, we are permitted to disclose this
fact. The reality of this asset should be at least partially apparent to our
shareholders, since we were compelled for tax reasons to recognize and collect
$34,196 of income from Kinetics Advisors in fiscal 2004. We would have much
preferred not to collect such income, since collection exposes the capital to
taxation and this eliminates our theoretical "interest free" loan from the
government. We will try to defer taxation on our asset for as long as this is
legally permissible. The capital can be subject to appreciation or depreciation,
since it is invested in securities both long and short. Of course, we will do
our best to see that this asset appreciates. Yet, we can offer no guarantees.
Another fact that might intrigue readers is that the assets under
management at Kinetics Advisors now exceed $500 million. The fund collects a fee
of 1% on assets under management as well as 20% of profits. Kinetics Advisors
does have a variety of expenses. However, given the arithmetic characteristics
of the hedge fund business, the FRMO proportionate 8.44% interest could
appreciate quite substantially. We must again caution the reader that we can
offer no guarantees.
In order for a hedge to be successful, at least several remunerative
investment ideas are required. The current environment does not lend itself to
the discovery of very many such ideas. The investment world is quite literally
awash in funds of every conceivable type. Money continues to be invested most
unwisely, although we hope not by us. In any case, current share valuations are
a circumstance that cannot possibly endure. History will repeat itself, we
believe, funds will one day exit the business, perhaps in the customary state of
panic, and opportunities will thereby be created. Some investment patience is
therefore required and we will endeavor to exhibit such patience.
Although it might seem hard to believe, patient inactivity is hard,
demanding and exhausting work. Yet, management continues to accept no cash or
equity compensation. This fact does not stop our auditors from recording such
compensation as if it were accepted, with the caveat that it is recorded as a
non-cash charge, since we don't accept any cash. We also don't accept non-cash
compensation. Accounting conventions as well as other regulations require such
entries that have the effect or reducing our company accounting profits although
our actual cash profits are not reduced. In the days of Soviet era communism,
the local wits had an expression for this type of situation. It was "We pretend
to work and they pretend to pay us." In our situation, we promise you that we
will work and we further pledge that we will pretend to pay ourselves as long as
this pretense is legally required.
In essence, if one sums current shareholders' equity and the FRMO
unrecognized proportionate capital interest in Kinetics Advisors, shareholders
now have one $1.1 million of capital employed on their behalf. This is a
milestone of sorts and we are pleased to be able to report these facts. Doing
something intelligent with one million dollars once it has been earned has
generally proven to be far more difficult than actually obtaining one million
dollars. A certain lassitude regarding the expenditure of such sums is required
merely to retain such sums. Lassitude is most assuredly a character trait that
we possess. It is in this light that the management would like to be regarded.
We feel confident that at least in this aspect our shareholders will agree with
management.
______________________________ ______________________________
Steven Bregman, President Murray Stahl, Chairman
and Chief Operating Officer and Chief Executive Officer
Postscript:
Such is the speed and fluidity with which the accounting profession, perhaps
necessarily, must adjust to the investing profession that between the time that
this letter was drafted and its publication date, our auditors have informed us
of a new accounting standard that has significance to FRMO and to this very
letter. In March 2004, a seemingly obscure accounting convention was ratified by
the body known as the Financial Accounting Standards Board, more specifically by
its Emerging Issues Task Force. The accounting convention ratified by the Task
Force is known as Issue No. 03-16. This will require that FRMO must, after all,
reflect the income from its proportional interest in Kinetics Advisors on the
FRMO income statement, whereas FRMO was previously prohibited from doing so.
This will become effective for us as of September 1st of this year. Perhaps, as
is the practice in preparing accounting documents, some elements of paragraph 4
of this letter should therefore be revised for being outmoded. However, we are
informed that the Shareholders' Letter grants somewhat broader artistic license.
FRMO CORP.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED FEBRUARY 29, 2004
Page No.
PART I
Item 1. Business ....................................................... 1
Item 2. Properties ..................................................... 4
Item 3. Legal Proceedings .............................................. 4
Item 4. Submission of Matters to a Vote of Security Holders and Other
Information ................................................. 4
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters ........................................................ 5
Item 6. Selected Financial Data ........................................ 6
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations ....................................... 7
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ..... 10
Item 8. Financial Statements and Supplementary Data .................... 10
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure ........................................ 10
Item 9A. Controls and Procedures ........................................ 10
PART III
Item 10. Directors and Executive Officers of the Registrant ............. 10
Item 11. Executive Compensation ......................................... 10
Item 12. Security Ownership of Certain Beneficial Owners and Management 10
Item 13. Certain Relationships and Related Transactions ................. 10
Item 14. Principal Accountants Fees and Services......................... 11
PART IV
Item 15. Exhibits, Financial Statements, Schedules and Reports on Form
8-K ......................................................... 12
PART I
ITEM 1. BUSINESS
ORGANIZATION OF THE COMPANY
FRMO CORP. (the "Company or "FRMO") was incorporated in November 1993, under the
laws of the State of Delaware under the name of PSI Settlement Corp, (initially
changed to FRM Nexus, Inc. and then to FRMO Corp on November 29, 2001). One of
the Company's former subsidiaries was MFC Development Corp.("MFC"). On August
31, 2000, FRMO transferred to MFC all of its assets (except for $10,000),
including all the shares of its wholly owned subsidiaries, subject to all of its
liabilities which were assumed by MFC. This transfer was made in contemplation
of a spin-off of the common shares of MFC to the Company's shareholders.
SPIN-OFF OF MFC
On August 31, 2000, FRMO filed Form 8-K with the Securities and Exchange
Commission, which disclosed that FRMO contemplated distributing to its
shareholders one share of MFC common stock for each one share of FRMO's
1,800,000 shares of outstanding common stock at the close of business on
November 1, 2000 (the record date). The MFC shares were distributed to
shareholders of FRMO on January 23, 2001.
FRM CONTROL GROUP
After the spin-off, FRMO was recapitalized privately by the FRM Control Group
(described below) purchasing 34,200,000 shares of common stock for $3,258,000
($0.095 per share). By retaining only $10,000 in cash in FRMO, the shareholders'
book value for the 1,800,000 shares outstanding was less than $.01 per share. By
fixing the price that the new Control Group paid for their 95% ownership at
$.095 per share, the existing shareholders realized an increase in book value
from about $.01 per share to about $.091 per share and the shares of the new FRM
Control Group were diluted from about $.095 to about $.091 per share. Book value
of FRMO did not take into account its existing structure and status as a public
company with a reporting history which was considered in the transaction. The
FRM Control Group has benefited from that as well as the $10,000 in cash
remaining in FRMO.
Murray Stahl and Steven Bregman, Chairman and President of the Company,
respectively, are the principal persons in the FRM Control Group, which includes
the other persons who purchased the shares for the consideration stated below.
Messrs. Stahl and Bregman have worked together at Horizon Research Group since
1994 and before that at Bankers Trust Company. They are also part of the
ownership of Kinetics Asset Management, Inc., which is the investment adviser to
several mutual funds and hedge funds, including The Internet Fund, The Paradigm
Fund and Kinetics Partners, L.P.
The 34,200,000 shares of common stock of FRMO sold after the spin-off
distribution date were issued to the FRM Control Group as follows:
(i) 28,800,000 shares of common stock of FRMO Corp. were issued to
Peter Doyle, as Voting Trustee of 8.1% of the issued and outstanding
shares of Kinetics Asset Management Inc. ("Kinetics") and Murray Stahl
(the "Stahl Bregman Group") for $2,880,000, payable as set forth below.
The Stahl Bregman Group includes Murray Stahl, Steven Bregman, John
Meditz, Peter Doyle, Catherine Bradford, Thomas C. Ewing and Katherine
Ewing. That group will be in control of FRMO Corp. and together with the
persons named below are the "FRM Control Group". The 28,800,000 shares
were issued to the Stahl Bregman Group on January 23, 2001 but are held in
escrow and delivered as paid at the rate of ten cents ($.10) per share.
The Stahl Bregman Group is obligated to pay to FRMO the after tax amount
1
(fixed at 54% of the dividend) of all dividends they receive from Kinetics
until the total $2,880,000 has been paid. The Stahl Bregman Group expects
the $2,880,000 to be paid to FRMO in about five years. The installment
payments depend on actual future dividends received from Kinetics. The
Stahl Bregman Group may make additional payments at its discretion but the
payment based on the Kinetics dividend is obligatory until the fixed
purchase is paid. The members of the Stahl Bregman Group have no
obligation other than to pay the net dividends from Kinetics until the
fixed purchase price is paid. The Stahl Bregman Group has agreed that it
will not divest itself of any part of its Kinetics shares or change the
character of its ownership so as to reduce the pro-rata share of the
dividends it currently receives from Kinetics without, as a condition
thereof, paying toward the fixed purchase price of its FRMO shares the
after-tax proceeds of that part divested, as if the divestiture had not
occurred.
(ii) 3,600,000 shares of common stock of FRMO were issued to Lestar
Partners, LLC, ("LPC") a New York Limited Liability Company owned by
Lester Tanner, Secretary and a director of FRMO, together with members of
his family, for $360,000 payable as set forth below. The 3,600,000 shares
were issued to LPC on January 23, 2001 but are held in escrow and
delivered as paid at the rate of ten cents ($.10) per share. LPC is
obligated to pay to FRMO in cash an amount equal to 12.5% of each payment
made by the Stahl Bregman Group until the purchase price of $360,000 is
paid.
(iii) 1,800,000 shares of common stock of FRMO were issued to
Lawrence J. Goldstein for $18,000 paid on January 23, 2001. Mr. Goldstein
is a director of FRMO and the General Partner of Santa Monica Partners,
LP, a private fund, which owns 218,000 shares of common stock of FRMO.
BUSINESS OF FRMO
FRMO Corp. is an intellectual capital firm. The experience of its management has
been in the analysis of public companies within a framework of identifying
investment strategies and techniques that reduce risk. The business will include
identification of assets, particularly in the early stages of the expression of
their ultimate value, and the participation with them in ways that are
calculated to increase the value of the shareholders' interest in FRMO. Such
assets are expected to include, but are not limited to, those whose values and
earnings are based on intellectual capital. Of the many varieties of capital
upon which investors have earned returns, ranging from real estate to silicon,
perhaps the highest returns on capital have been earned on intellectual capital.
It is the goal of FRMO to maximize its return on this form of asset. The
identification of any business opportunities will follow the process employed by
Horizon Research Group to select and evaluate investment opportunities and
strategies.
Horizon Research Group is a division of Horizon Asset Management, Inc., which
was co-founded by Murray Stahl and Steven Bregman in 1994. It is an independent
research firm serving primarily mutual fund managers and the hedge fund
community. It provides in-depth analysis of under-researched companies and
strategies to identify complex or overlooked situations that can offer
asymmetric risk/return advantages to the investor. These publications are
addressed to investment managers, but the concepts and process behind them are
expected to serve FRMO's efforts to identify business opportunities in public
and private ventures.
SPECIFIC BUSINESS ACTIVITIES
Since its new start on January 23, 2001, FRMO completed the following
transactions through February 29, 2004:
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 FRMO will have a
2
carried interest based on leveraging the creative services of its
personnel (its intellectual capital). This interest was inactive and the
investment was sold at cost during the fiscal 2004 year.
ii. A consulting agreement was signed effective January 1, 2001, whereby
FRMO is currently receiving approximately $27,000 a year from the manager
of Santa Monica Partners, LP, a director and shareholder of FRMO, for
access to consultations with the Company's personnel. Santa Monica
Partners, L.P. is a private fund, which owns 218,000 shares of common
stock of FRMO.
iii. In March 2001, FRMO acquired the research service fees that Horizon
Research Group had received from The Paradigm Fund in exchange for 80,003
shares of FRMO 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
Paradigm Fund outperformed the S&P 500 Index by approximately 13
percentage points in its first fiscal year of operation, Calendar 2000.
From inception through Calendar 2003, it outperformed the S&P 500 Index by
68 percentage points, or in the parlance of investment professionals, by
6,800 basis points. In May 2003, The New 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.
iv. In October 2001, FRMO acquired a 2% interest in the subscription
revenues from The Capital Structure Arbitrage Report that Horizon Research
Group and third party receive in exchange for 50 shares of Series R
preferred stock. While the subscriptions were minimal at the time, they
have advanced and management believes that they will continue to expand in
future years.
v. In February 2002, FRMO 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 FRMO common stock. Kinetics Advisors, LLC
controls and provides investment advice to Kinetics Partners, a hedge
fund, and to The Kinetics Fund, an offshore version of Kinetics Partners.
While these funds were quite small at the time of acquisition, they have
expanded dramatically and management believes that they will grow in
future years. From its first year of operation in 2000, through Calendar
2003, Kinetics Partners returned 95 percentage points more than the S&P
500 Index.
MARKETING
Currently, the marketing of the Company's services and programs is by the
officers of the Company.
COMPETITION
The Company's business activities are founded on the independent research
experience of its personnel who provide in-depth analysis of information-poor,
under-researched or complex companies and securities, and develop related
strategies that can offer an advantage to the investor. This research is
distinct from but competes with the traditional "sell side" research supported
by the trading commissions and corporate finance fees of brokerage firms that
produce the great majority of "Wall Street" research. The Company also competes
with a wide variety of independent entities, which sell periodicals and research
that is paid for by subscription or fees of its readers. The Company is small in
relation to such competitors but its services and programs are designed to reach
a niche market of sophisticated analysts and accredited investors.
3
TRADEMARKS - None.
EMPLOYEES
As of February 29, 2004, the Company had no paid employees.
REGULATORY LAWS
The Company is in compliance with the regulatory laws that relate to its
business activities. Its operations do not fall within the definition of an
investment company so as to require it to register under the Investment Company
Act of 1940.
ITEM 2. PROPERTIES
None.
ITEM 3. LEGAL PROCEEDINGS
FRMO is not a party to any material litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS AND OTHER
INFORMATION
None, other than the election of directors on July 17, 2003.
OTHER INFORMATION
CAUTIONARY STATEMENT
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company is hereby filing cautionary
statements identifying important risk factors that could cause the Company's
actual results to differ materially from those projected in forward looking
statements of the Company made by or on behalf of the Company.
Such statements may relate, but are not limited, to projections of revenues,
earnings, capital expenditures, plans for growth and future operations,
competition as well as assumptions relating to the foregoing. Forward-looking
statements are inherently subject to risks and uncertainties, many of which
cannot be predicted or quantified.
When the Company uses the words "estimates", "expects", "anticipates",
"believes", "plans", "intends", and variations of such words or similar
expressions, they are intended to identify forward-looking statements that
involve risks and uncertainties. Future events and actual results could differ
materially from those underlying the forward-looking statements. The factors
that could cause actual results to differ materially from those suggested by any
such statements include, but are not limited to, those discussed or identified
from time to time in the Company's public filings, including general economic
and market conditions, changes in domestic laws, regulations and taxes, changes
in competition and pricing environments.
Undue reliance should not be placed on these forward-looking statements, which
are applicable only as of the date they are made. The Company undertakes no
obligation to revise or update these forward-looking statements to reflect
events or circumstances that arise after that date or to reflect the occurrence
of anticipated events.
4
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCK HOLDER MATTERS
REGISTRATION AND MARKET PRICES OF COMMON STOCK
The authorized capital stock of the Company consists of 92,000,000 shares, of
which, 90,000,000 are shares of common stock, $.001 par value and 2,000,000
shares are preferred stock, $.001 par value. On February 29, 2004, there were
36,083,774 shares of common stock and 50 shares of series R preferred stock
outstanding. Subject to any prior rights of the Company's preferred
shareholders, FRMO's common shareholders are entitled:
- to receive dividends as are declared by FRMO's Board of Directors
out of funds legally available; and
- to full voting rights, each share being entitled to one vote.
The FRMO Board of Directors may issue additional authorized shares of FRMO
common stock without shareholder approval. FRMO shareholders do not have any
cumulative rights or any preemptive rights to subscribe for additional
securities that FRMO may issue without obtaining shareholder consent. Subject to
any prior rights of the holders of any preferred stock then outstanding, in the
event of liquidation, dissolution, or winding up of the company, common
shareholders would be entitled to receive, on a pro rata basis, any assets
distributable to shareholders in respect of shares by them.
The FRMO certificate of incorporation authorizes the issuance by FRMO of up to
2,000,000 shares of FRMO preferred stock, of which 50 shares are issued and
outstanding. The FRMO Board of Directors may issue its preferred stock without
obtaining shareholder consent in one or more series at a time or times and for
consideration or considerations as its Board of Directors may determine. The
Board of Directors is authorized by the FRMO certificate of incorporation to
provide at any time for the issuance of FRMO preferred stock with the rights,
preferences, and limitations as established by the Board.
The Company's common stock is registered pursuant to Section 12(g) of the
Securities Exchange Act of 1934 and trades on the NASDAQ Bulletin Board under
the symbol FRMO. The following table sets forth the range of high and low bid
quotations of the Company's common stock for the periods set forth below, as
reported by the National Quotation Bureau, Inc. Such quotations represent
inter-dealer quotations, without adjustment for retail markets, markdowns or
commissions, and do not necessarily represent actual transactions.
FISCAL PERIOD COMMON STOCK
------------- HIGH BID LOW BID
-------- -------
2003
----
1st Fiscal Quarter ( 3/1/02 - 5/31/02) $ 0.65 $ 0.40
2nd Fiscal Quarter ( 6/1/02 - 8/31/02) 0.41 0.25
3rd Fiscal Quarter ( 9/1/02 - 11/30/02) 0.25 0.20
4th Fiscal Quarter (12/1/02 - 2/28/03) 0.22 0.20
2004
----
1st Fiscal Quarter ( 3/1/03 - 5/31/03) $ 0.21 $ 0.20
2nd Fiscal Quarter ( 6/1/03 - 8/31/03) 1.01 0.20
3rd Fiscal Quarter ( 9/1/03 - 11/30/03) 0.70 0.45
4th Fiscal Quarter (12/1/03 - 2/29/04) 0.70 0.51
5
The high bid and low asked quote on May 20, 2004 was $.55 bid and $.95 asked.
DIVIDENDS
No cash dividend has been paid by FRMO since its inception. The Company has no
present intention of paying any cash dividends on its common stock.
HOLDERS
As of May 21, 2004, there were approximately 1,000 holders of record of FRMO
common stock representing about 2,500 beneficial owners of its shares. A
director and former director have each been granted options to purchase a total
of 9,000 shares of the Company's common stock. There are no warrants to purchase
common stock of the Company outstanding. The Company does not know of any shares
of common stock of FRMO that are held by any director, officer or holder of as
much as 5% of the outstanding stock for sale pursuant to a filing under Rule 144
of the Securities Act. The Company has not agreed to register any common stock
for sale under the Securities Act by any shareholder or the Company, the
offering of which could have a material effect on the market price of the
Company's common equity.
ITEM 6. SELECTED FINANCIAL DATA
Prior to February 28, 2001, the Company's operations were included in the
financial reports of MFC Development Corp. and subsidiaries, which were spun off
to the shareholders of FRMO on January 23, 2001. This transaction has been
accounted for in a manner similar to a reverse pooling of interests on the
Company's books. The Company had no operations prior to January 23, 2001 and
accordingly, there is no selected financial data to report before that date.
FRMO Corp
Selected Consolidated Financial Data
Fiscal Year Ended
------------------------------------------------------
February 29, February 28, February 28, February 28,
2004 2003 2002 2001
------------ ------------ ------------ ------------
Income Statement Data:
Total Revenue $ 159,955 $ 103,748 $ 68,785 $ 3,600
Costs and expenses 60,335 52,409 59,254 4,151
------------ ------------ ------------ ------------
Net Ordinary Income 99,619 51,339 9,531 (551)
Other income 1,370 1,017 1,304 --
------------ ------------ ------------ ------------
Income (loss) from operations before
provision for income taxes 100,990 52,356 10,835 (551)
Provision for income taxes 37,792 14,248 2,445 --
------------ ------------ ------------ ------------
Net Income $ 63,198 $ 38,108 $ 8,390 $ (551)
============ ============ ============ ============
Earnings per common share:
Basic earnings per common share $ 0.01 $ 0.01 $ -- $ --
Diluted earnings per common share $ 0.01 $ 0.01 $ -- $ --
Number of shares used in computation of
basic and diluted earnings per share:
Basic 4,840,207 3,897,524 3,899,772 1,998,616
============ ============ ============ ============
Diluted 4,890,207 3,947,524 3,910,046 1,998,616
============ ============ ============ ============
6
FRMO Corp
Selected Consolidated Financial Data (continued)
As of As of
February 29, February 28, February 28, February 28,
2004 2003 2002 2001
Balance Sheet Data:
Working Capital $ 430,316 $ 116,561 $ 61,890 $ 43,824
============ ============ ============ ============
Total Assets $ 541,105 $ 224,687 $ 161,068 $ 52,894
============ ============ ============ ============
Long-term Debt $ -- $ -- $ -- $ --
============ ============ ============ ============
Shareholders' Equity $ 486,774 $ 185,745 $ 138,433 $ 48,824
============ ============ ============ ============
Book Value per Share $ 0.08 $ 0.05 $ 0.04 $ 0.02
============ ============ ============ ============
Common Shares Outstanding (1) 6,197,524 3,897,524 3,890,087 1,998,616
(1) Common shares outstanding is recorded net of the shares being held
in escrow (29,936,250 as of 2/29/04, and 32,186,250 as of 2/28/03
and 2/28/02) for shareholders who have not yet purchased their
stock, as described in Note 7 of the financial statements.
ITEM 7. 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 that 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 Financial Statements and related Notes thereto included herein and
incorporated herein by reference.
OVERVIEW
By reason of the reverse pooling spin-off transaction described in Item 1, the
Company had a new start in terms of its continuing business and its financial
statement as of January 23, 2001, and there were no operations prior to that
date. 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. The business engaged in by FRMO thereafter is
described in Item 1.
CRITICAL ACCOUNTING POLICIES
Management's discussion and analysis of its financial position and results of
operations are based upon the Company's financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
management to make estimates and judgments that affect the
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CRITICAL ACCOUNTING POLICIES (CONTINUED)
reported amounts of assets, liabilities, revenues and expenses and related
disclosure of contingent assets and liabilities. Actual results could differ
from those estimates. Management believes that the critical accounting policies
and areas that require the most significant judgments and estimates to be used
in the preparation of the financial statements are revenue recognition and
accounting for investments in subsidiaries.
REVENUE RECOGNITION
The Company primarily generates revenue through consulting, research fees and
subscription revenue.
Revenue relating to consulting agreements is earned primarily on a
month-by-month basis.
Research fees are earned and recorded on a monthly basis based upon FRMO's pro
rata share of The New Paradigm Fund assets.
Subscription revenues are earned and recorded on a monthly basis based upon
FRMO's pro rata share of the subscription revenue generated from a certain
research report provided by a related third party.
The accrual method of accounting is used to record all income.
ACCOUNTING FOR INVESTMENTS IN SUBSIDIARIES
Investments in subsidiaries in which the Company holds a less than 20% voting
interest and does not exert a significant influence over operations or financial
policies are currently accounted for using the cost method.
In March 2004, the FASB ratified Emerging Issues Task Force Issue No. 03-16,
"Accounting for Investments in Limited Liability Companies". Under EITF 03-16,
investments in limited liability companies that have separate ownership accounts
for each investor greater than 3 to 5 percent should be accounted for under the
equity method. The Company is currently accounting for its 8.44% investment in
Kinetics Advisers, LLC ("Kinetics Advisers") under the cost method. Effective
September 1, 2004, the Company will change its method of accounting for this
investment so that it will record its pro rata share of Kinetics Advisers income
(loss) each period. Had EITF 03-16 applied effective March 1, 2003, the
Company's assets and pre-tax income would have been increased by $620,000 and
$530,000, respectively.
RESULTS OF OPERATIONS
YEAR ENDED FEBRUARY 29, 2004 COMPARED TO YEAR ENDED FEBRUARY 28, 2003
The Company's revenues from operations increased by $56,000 for the year ended
February 29, 2004 ("2004") from $104,000 for the year ended February 28, 2003
("2003"). The increases in 2003 were due primarily to income from (i) research
fees and (ii) income from unconsolidated subsidiaries.
Costs and expenses increased by $8,000 in 2004, from $52,000 in 2003. The
increase in 2004 was due primarily to increases in shareholder reporting and
accounting expenses, and higher franchise fees.
For the reasons noted above, the Company's net income for the year ended
February 29, 2004, increased by $25,000 to $63,000, as compared to net income of
$38,000 in 2003.
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 fiscal 2003 earnings, yet which has had a very significant economic
8
impact on FRMO. This is the investment in Kinetics Advisors, LLC, ("Kinetics
Advisors"), which was acquired in February 2002 (as discussed in Part I, Item 1,
under the heading Specific Business Activities, of this Form 10-K). This
investment takes the form of a minority interest in Kinetics Advisors, which
controls and provides investment advice to two hedge funds. Kinetics Advisors
has elected to reinvest in these two funds the major portion of the fees to
which it is entitled from them. As a consequence, FRMO does not receive its
proportional interest in those fees until such time that Kinetics Advisors
itself elects to or is required to receive them. Under generally accepted
accounting principles, as they applied in fiscal 2003 and 2004, FRMO must record
this investment on a cost basis, which was $0 as of February 29, 2004. However,
on an economic basis, FRMO's proportional share of Kinetics Advisors' capital
accounts in those funds was approximately $620,000 (pre-tax and unaudited) as of
February 29, 2004. FRMO's proportional share of the increase in the value of
Kinetics Advisors' capital accounts in those funds during the period,
predominantly from fee income and appreciation (also pre-tax and unaudited), was
approximately $530,000 during 2004. As disclosed in the Critical Accounting
Policies section, in accordance with EITF 03-16, "Accounting for Investments in
Limited Liability Companies", the Company will change its accounting policy
regarding this investment effective September 1, 2004 to the equity method.
YEAR ENDED FEBRUARY 28, 2003 COMPARED TO YEAR ENDED FEBRUARY 29, 2002
The Company's revenues from operations increased by $35,000 for the year ended
February 28, 2003 ("2003") from $69,000 for the year ended February 28, 2002
("2002"). The increases in 2003 were due primarily to income from (i) research
fees and (ii) consulting fees.
Costs and expenses decreased by $7,000 in 2003, from $59,000 in 2002. The
decrease in 2003 was due primarily to a decrease in shareholder reporting
expenses and lower administrative fees, partially offset by higher accounting
fees and the recording of non-cash compensation expense. The non-cash
compensation expense represents a notional salary allocation for the Company's
senior officers, as required under generally accepted accounting principles. The
officers of the Company are responsible for all of the Company's operations and
have agreed to not draw any salaries during the period of formation.
For the reasons noted above, the Company's net income for the year ended
February 28, 2003, increased by $30,000 to $38,000, as compared to net income of
$8,000 in 2002.
LIQUIDITY AND CAPITAL RESOURCES
The Company's activities during the year ended February 29, 2004 resulted in an
increase in cash of $271,000. This increase was due to net income (after
adjusting for amortization and non-cash compensation) of $83,000, less $6,000
net increase of receivables over payables and deferrals, which, are normal
fluctuations primarily caused by timing differences. Investing activities,
primarily accounted for by the purchase of marketable securities of $36,000 and
the sale of the Company's investment in an unconsolidated subsidiary, decreased
the cash balance by $31,000; there were no cash flows provided by or used in
investing activities during fiscal 2003. Financing activities during the year
ended in 2004 provided cash flow of $225,000 and is attributable to the payment
of common shares held in escrow, as described in Item 1; there were no such
activities in 2003. The Company expects its business with prospective new
clients to develop without the outlay of cash, since the growth will come from
the services of its officers who will not receive salaries until the Company's
operations and revenues warrant the payment.
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
remaining as of February 29, 2004 of $2,993,625 will be paid to the Company as
set forth in Item 1. The Company believes that its present cash resources will
be sufficient on a short-term basis and over the next 12 months to fund
continued expansion of its business.
9
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK.
See subsections (i) and (ii) at page 2 relating to the obligations of the Stahl
Bregman Group and LPC to pay for the shares of common stock of the Company based
on dividends from Kinetics and the income generated from the management of the
mutual funds for which Horizon is the investment advisor.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Financial Statements and supplementary data required by this Item 8 are set
forth at the pages indicated in Item 15(a) below.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in the Company's Securities Exchange Act
reports is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms, and that such information is accumulated
and communicated to the Company's management, including its Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. In designing and evaluating the disclosure
controls and procedures, management recognized that any controls and procedures,
no matter how well designed and operated, can provide only reasonable assurance
of achieving the desired control objectives, as ours are designed to do, and
management necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
During the 90-day period prior to the date of this report, an evaluation was
performed under the supervision and with the participation of our Company's
management, including the Chief Executive Officer and the Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures. Based upon that evaluation, the Chief Executive Officer
and the Chief Financial Officer concluded that our disclosure controls and
procedures were effective. Subsequent to the date of this evaluation, there have
been no significant changes in the Company's internal controls or in other
factors that could significantly affect these controls, and no corrective
actions taken with regard to significant deficiencies or material weaknesses in
such controls.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is set forth in the Company's definitive
proxy statement, which will be filed with the Securities and Exchange Commission
within 120 days of February 29, 2004. Such information is incorporated herein by
reference and made a part hereof.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is set forth in the Company's definitive
proxy statement, which will be filed with the Securities and Exchange Commission
within 120 days of February 29, 2004. Such information is incorporated herein by
reference and made a part hereof.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item is set forth in the Company's definitive
proxy statement, which will be filed with the Securities and Exchange Commission
within 120 days of February 29, 2004. Such information is incorporated herein by
reference and made a part hereof.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is set forth in the Company's definitive
proxy statement, which will be filed with the Securities and Exchange Commission
within 120 days of February 29, 2004. Such information is incorporated herein by
reference and made a part thereof.
10
PART IV
ITEM 14. PRINCIPAL ACCOUNTANTS FEES AND SERVICES
The information required by this item is set forth in the Company's definitive
proxy statement, which will be filed with the Securities and Exchange Commission
within 120 days of February 29, 2004. Such information is incorporated herein by
reference and made a part hereof.
11
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K
(A) FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS
(1) FINANCIAL STATEMENTS:
Index to Financial Statements and Schedules................................. F-1
Report of Holtz Rubenstein & Co., LLP....................................... F-2
Balance Sheets - February 29, 2004 and February 28, 2003 ................... F-3
Statements of Operations -
Years ended February 29, 2004, February 28, 2003 and February 28, 2002 ... F-4
Statement of Stockholders' Equity -
Years ended February 29, 2004, February 28, 2003 and February 28, 2002 ... F-5
Statements of Cash Flows -
Years ended February 29, 2004, February 28, 2003 and February 28, 2002 ... F-6
Notes to Financial Statements .............................................. F-7
(2) FINANCIAL STATEMENT SCHEDULES:
All schedules are omitted because they are not applicable, not required, or
because the required information is included in the financial statements or
notes thereto.
(3) EXHIBITS:
Exhibits 3.01 and 21.01 are incorporated herein by reference to Form 8-K dated
January 25, 2001 with which said exhibits were previously filed. Exhibits 3.01
and 5.01 are incorporated herein by reference to Form 10 dated June 27, 1997
with which said exhibits were previously filed.
Exhibit
Number Description
- ------ -----------
3.01 Amended Certificate of Incorporation of the Company*.
3.03 Amended By-Laws of the Company*.
5.01 Opinion of Tanner Propp, LLP*
21.01 The Company has no subsidiaries. The spin-off on January 23, 2001 of
MFC Development Corp, a former subsidiary ("MFC"), is described in Form
10, the General Form for Registration of Common Stock of MFC pursuant
to Section 12(g) of The Securities Exchange Act of 1934, as amended,
which was incorporated by reference as an exhibit in the Company's Form
8-K Current Report filed on January 25, 2001.*
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.
- -----------------
* Previously filed
(B) REPORTS ON FORMS 8-K
None.
12
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d)2 of the Securities Exchange
Act of 1934 as amended, the Registrant has duly cause this Report to be signed
on its behalf by the undersigned, thereunto duly authorized, on May 28, 2004.
FRMO CORP.
By:
-------------------------------
Steven Bregman
President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on May 28, 2004.
Signature Title
- --------- -----
Chairman of the Board
- ------------------------------ (Principal Executive Officer)
Murray Stahl
President, Director
- ------------------------------
Steven Bregman
Secretary, Director
- ------------------------------
Lester Tanner
Director
- ------------------------------
Allan Kornfeld
Director
- ------------------------------
Peter Doyle
13
FRMO Corp.
Index to Financial Statements
This Index.............................................................. F-1
Report of Independent Auditors F-2
Balance Sheets --
As of February 29, 2004 and February 28, 2003........................ F-3
Statements of Operations --
Years Ended February 29, 2004, February 28, 2003
and February 28, 2002 ............................................... F-4
Statement of Stockholders' Equity --
Years Ended February 29, 2004, February 28, 2003
and February 28, 2002 ............................................... F-5
Statements of Cash Flows --
Years Ended February 29, 2004, February 28, 2003
and February 28, 2002 ............................................... F-6
Notes to Financial Statements .......................................... F-7
The data required by all other schedules is either included in the financial
statements or is not required.
F-1
Report of Independent Auditors
The Board of Directors and Shareholders
FRMO Corp.
We have audited the accompanying balance sheets of FRMO Corp. as of February 29,
2004 and February 28, 2003 and the related statements of income, stockholders'
equity and cash flows for the three years ended February 29, 2004. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit also includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of FRMO Corp. at February 29, 2004
and February 28, 2003, and the results of its operations and its cash flows for
the three years ended February 29, 2004 in conformity with accounting principles
generally accepted in the United States of America.
/s/ HOLTZ RUBENSTEIN & CO., LLP
-------------------------------
Melville, New York
May 17, 2004
F-2
FRMO Corp.
Balance Sheets
FEBRUARY 29, FEBRUARY 28,
2004 2003
--------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 406,110 $ 135,003
Accounts receivable 41,637 20,500
Investment in marketable securities 36,900 --
--------------------------
Total current assets 484,647 155,503
--------------------------
Other assets:
Intangible assets, net 56,458 64,184
Investments in unconsolidated subsidiaries -- 5,000
--------------------------
Total other assets 56,458 69,184
--------------------------
Total assets $ 541,105 $ 224,687
==========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 20,187 $ 20,551
Income taxes payable 22,112 11,587
Deferred income 12,031 7,008
--------------------------
Total current liabilities 54,330 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 3,334,136 3,322,136
Unrealized gain on marketable securities 1,036 --
Retained earnings 109,145 45,947
--------------------------
3,480,400 3,404,166
Less: Receivables from shareholders for
common stock issuance 2,993,625 3,218,625
--------------------------
Total stockholders' equity 486,775 185,541
--------------------------
Total liabilities and stockholders' equity $ 541,105 $ 224,687
==========================
See accompanying notes.
F-3
FRMO CORP.
STATEMENTS OF INCOME
YEAR ENDED YEAR ENDED YEAR ENDED
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
2004 2003 2002
----------------- ----------------- -----------------
REVENUES
Consulting $ 84,022 $87,839 $56,763
Research Fees 33,130 12,438 8,041
Subscriptions 8,606 3,676 3,018
Investments 34,197 (205) 963
-----------------------------------------------------------
Total Income 159,955 103,748 68,786
-----------------------------------------------------------
COSTS AND EXPENSES
Amortization 7,725 7,359 9,676
Accounting 9,250 7,030 6,100
Shareholder reporting 26,363 23,775 36,588
Office expenses 12,586 13,500 6,178
Other 4,411 744 712
-----------------------------------------------------------
60,335 52,409 59,254
-----------------------------------------------------------
Income from operations 99,620 51,339 9,531
Dividend income 1,370 1,017 1,304
-----------------------------------------------------------
Income from operations before provision
for income taxes 100,990 52,356 10,835
Provision for income taxes 37,792 14,248 2,445
-----------------------------------------------------------
Net income $63,198 $ 38,108 $8,390
===========================================================
Basic earnings per common share $0.01 $ 0.01 $0.00
Diluted earnings per common share $0.01 $0.01 $0.00
Average shares of common stock outstanding:
Basic 4,840,207 3,897,524 3,889,772
===========================================================
Diluted 4,890,207 3,947,524 3,910,046
===========================================================
See accompanying notes
F-4
FRMO CORP.
STATEMENT OF STOCKHOLDERS' EQUITY
RECEIVABLES
FROM SHARE- UNREALIZED
SERIES R ADDITIONAL RETAINED HOLDERS FOR GAIN ON TOTAL
PREFERRED STOCK COMMON STOCK PAID-IN EARNINGS COMMON STOCK MARKETABLE STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) ISSUANCE SECURITIES EQUITY
-----------------------------------------------------------------------------------------------------
Balance, February 28, 2001 - $- 36,000,000 $36,000 $3,232,000 $ (551) $(3,218,625) $ - $ 48,824
-----------------------------------------------------------------------------------------------------
Issuance of new stock
for the assignment
of research agreements - - 83,459 83 54,886 - - - 54,969
Issuance of new stock
for the assignment of
subscription revenue 50 - - - 26,250 - - - 26,250
Issuance of new stock
for the acquisition
of 7.71% of Kinetics
Advisors, LLC and 50%
of Finder's Fee Share
Interest - - 315 - - - - - -
Net income (loss) - - - - - 8,390 - - 8,390
-----------------------------------------------------------------------------------------------------
Balance, February 28, 2002 50 - 36,083,774 36,083 3,313,136 7,839 (3,218,625) - 138,433
Non-cash compensation
expense - - - - 9,000 - - - 9,000
Net income (loss) - - - - - 38,108 38,108
-----------------------------------------------------------------------------------------------------
Balance, February 28, 2003 50 - 36,083,774 36,083 3,322,136 45,947 (3,218,625) - 185,541
-----------------------------------------------------------------------------------------------------
SUBSCRIPTION PAYMENT FOR
STOCK HELD IN ESCROW - - - - - - 225,000 - 225,000
UNREALIZED GAIN ON
MARKETABLE - - - - - - - - -
SECURITIES - - - - - - - 1,036 1,036
NON-CASH COMPENSATION
EXPENSE - - - - 12,000 - - - 12,000
NET INCOME (LOSS) - - - - - 63,198 - - 63,198
-----------------------------------------------------------------------------------------------------
BALANCE, FEBRUARY 29, 2004 50 $- 36,083,774 $36,083 $3,334,136 $109,145 $(2,993,625) $1,036 $486,775
=====================================================================================================
See accompanying notes
F-5
FRMO CORP.
STATEMENTS OF CASH FLOWS
YEAR ENDED YEAR ENDED YEAR ENDED
FEBRUARY 29, FEBRUARY 29, FEBRUARY 29,
2004 2004 2004
------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 63,198 $ 38,108 $ 8,390
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of research agreements 7,725 7,359
9,676
Non-cash loss from unconsolidated subsidiary -- 205 --
Non-cash compensation 12,000 9,000
------------------------------------------
Changes in operating assets and liabilities:
Other currentassets (21,137) (19,386) 1,823
Accounts payable and accrued expenses 10,162 12,004
15,859
Deferred income 5,023 4,302
2,706
------------------------------------------
Net cash provided by operating activities 76,971 51,592 38,454
------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of marketable securities (35,864) -- --
Proceeds from sale of FRM NY Capital, LLC 5,000 -- --
------------------------------------------
Net cash used in investing activities (30,864) -- --
------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment for release of stock held in escrow 225,000 -- --
------------------------------------------
Net cash provided by financing activities 225,000 -- --
------------------------------------------
Net increase in cash and cash equivalents 271,107 51,592 38,454
Cash and cash equivalents, beginning of year 135,003 83,411 44,957
------------------------------------------
Cash and cash equivalents, end of year $ 406,110 $ 135,003 $ 83,411
==========================================
ADDITIONAL CASH FLOW INFORMATION
Interest paid $ -- $ -- $ --
==========================================
Income taxes paid $ 12,926 $ -- $ 155
==========================================
NON-CASH INVESTING AND FINANCING ACTIVITIES
Preferred stock issued in consideration for the acquisition
of research agreements $ -- $ -- $ 26,250
==========================================
Common stock issued in consideration for the assignment
of subscription revenues $ -- $ -- $ 54,886
==========================================
See accompanying notes
F-6
FRMO Corp.
Notes to Financial Statements
1. ORGANIZATION OF THE COMPANY
FRMO CORP. (the "Company or "FRMO") was incorporated in November 1993
under the laws of the State of Delaware under the name of PSI Settlement
Corp, (initially changed to FRM Nexus, Inc. and then to FRMO Corp on
November 29, 2001). One of the Company's former subsidiaries was MFC
Development Corp.("MFC"). On August 31, 2000, FRMO transferred to MFC all
of its assets (except for $10,000), including all the shares of its wholly
owned subsidiaries subject to all of its liabilities which were assumed by
MFC. This transfer was made in contemplation of a spin-off of MFC.
On August 31, 2000, FRMO filed Form 8-K with the Securities and Exchange
Commission, which disclosed that FRMO contemplated distributing to its
shareholders one share of MFC common stock for each share of FRMO's
1,800,000 shares of outstanding common stock at the close of business on
November 1, 2000 (the record date). In fiscal 2001, MFC filed a Form 10 to
register its common stock and on January 23, 2001, 1,800,000 shares of MFC
were distributed to FRMO's shareholders.
Because FRMO and MFC were under common control, the spin-off transaction
has been accounted for on FRMO's books in a manner similar to a reverse
pooling of interests with FRMO having a new start on January 23, 2001 with
$10,000 in assets, no liabilities and 1,800,000 shares of common stock
outstanding. The Statements of Shareholders' Equity reflect the spin-off
as of the beginning of the periods presented, with no operations until
January 23, 2001.
On November 29, 2000, the Company increased authorized capital stock from
2,000,000 shares common stock, par value $.10 per share to 2,000,000
shares preferred stock, par value $.001 per share and 90,000,000 shares
common stock, par value $.001 per share. Stockholders' equity for prior
periods was restated to reflect this change.
On January 23, 2001, 34,200,000 shares of common stock were issued to the
FRM Control Group. Murray Stahl and Steven Bregman, Chairman and President
of the Company, respectively, are the principal persons in the FRM Control
Group, which includes the other persons who purchased the shares for the
consideration set forth in Note 6.
On July 2, 2001, the Company authorized the establishment of Series R
preferred stock. The number of authorized shares is 5,000 with a par value
of $.001 per share. These shares are each convertible to 1,000 shares of
the Company's common stock at the option of the Company at any time and at
the option of the holder after March 1, 2006. The Company may redeem the
shares at $1,000 per share at any time after March 1, 2011 and shall be
required to redeem them at $1,000 per share upon the request of a holder
after March 1, 2012. These shares have one vote per share on all matters
that common stock can vote upon. Upon liquidation, there is preference to
the extent of $1,000 per share. No dividends may be paid on common stock
unless a dividend per share of 1,000% of common stock dividends are paid
on the preferred stock.
F-7
2. BASIS OF PRESENTATION
BUSINESS ACTIVITIES OF THE COMPANY
FRMO Corp. is an intellectual capital firm. The experience of its
management has been in the analysis of public companies within a framework
of identifying investment strategies and techniques that reduce risk. The
business will include identification of assets, particularly in the early
stages of the expression of their ultimate value, and the participation
with them in ways that are calculated to increase the value of the
shareholders' interest in FRMO. Such assets are expected to include, but
are not limited to, those whose values and earnings are based on
intellectual capital. Of the many varieties of capital upon which
investors have earned returns, ranging from real estate to silicon,
perhaps the highest returns on capital have been earned on intellectual
capital. It is the goal of FRMO to maximize its return on this form of
asset. The identification of any business opportunities will follow the
process employed by Horizon Research Group to select and evaluate
investment opportunities and strategies.
Horizon Research Group was co-founded by Murray Stahl and Steven Bregman
in 1994. It is an independent research firm serving primarily mutual fund
managers and the hedge fund community. It provides in-depth analysis of
information-poor, under-researched companies and strategies to identify
the complex or overlooked situations that can offer an advantage to the
investor.
Since its new start on January 23, 2001, FRMO completed the following
transactions by February 29, 2004, the close of its fiscal year:
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
FRMO will have a carried interest based on leveraging the creative
services of its personnel (its intellectual capital). This interest
was inactive and the investment was sold at cost during the fiscal
2004 year.
ii. A consulting agreement was signed effective January 1, 2001
whereby FRMO is currently receiving approximately $27,000 a year
from the manager of Santa Monica Partners, LP, a director and
shareholder of FRMO, 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 FRMO.
iii. In March 2001, FRMO acquired the research service fees that
Horizon Research Group had received from The New Paradigm Fund in
exchange for 80,003 shares of FRMO 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.
iv. In October 2001, FRMO acquired a 2% interest in the subscription
revenues from subscribers to The Convertible/High Yield Arbitrage
Report that Horizon Research Group and another third party receive
in exchange for 50 shares of Series R preferred stock. While these
funds were quite small at the time of acquisition, they have
advanced and management believes that they will continue to expand
in future years.
v. In February 2002, FRMO acquired a 7.71% interest in Kinetics
Advisors, LLC and the Finder's Fee Share Interest (0.73%) from the
Stahl Bregman Group, in exchange for 315 shares of FRMO common
stock. Kinetics Advisors, LLC controls and provides investment
advice to Kinetics Partners and Kinetics Fund, both of which are
hedge funds. While the funds were quite
F-8
2. BASIS OF PRESENTATION (CONTINUED)
BUSINESS ACTIVITIES OF THE COMPANY (CONTINUED)
small at the time of acquisition, they have expanded dramatically
and management believes that they will grow in future years.
3. SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
The Company primarily generates revenue through consulting, research fees
and subscription revenue.
Revenue relating to consulting agreements is earned primarily on a
month-by-month basis.
Research fees are earned and recorded on a monthly basis based upon FRMO's
pro rata share of The New Paradigm Fund assets.
Subscription revenues are earned and recorded on a monthly basis based
upon FRMO's pro rata share of the subscription revenue generated from a
certain research report provided by a related third party.
The accrual method of accounting is used to record all income.
RECEIVABLES
Receivables consist of monthly consulting fees. All receivables are
current and management believes they are fully collectible.
INVESTMENT IN FRM NY CAPITAL, LLC
The investment in FRM NY CAPITAL, LLC represents a 7% Class B membership
interest. This investment is accounted for under the cost method of
accounting. This investment was liquidated in 2004, and the Company
received a return of its $5,000 investment.
INVESTMENT IN KINETICS ADVISERS, LLC
The Company accounts for its 8.44% investment in Kinetics Advisers, LLC
using the cost method of accounting at February 29, 2004. In March 2004,
the FASB ratified Emerging Issues Task Force Issue No. 03-16, "Accounting
for Investments in Limited Liability Companies". Under EITF 03-16,
investments in limited liability companies that have separate ownership
accounts for each investor greater than 3 to 5 percent should be accounted
for under the equity method. Effective September 1, 2004, the Company will
change its method of accounting for this investment so that it will record
its pro rata share of Kinetics Advisers income (loss) each period. Had
EITF 03-16 applied effective March 1, 2004, the Company's assets and
pre-tax income would have been increased by $620,000 and $530,000,
respectively.
F-9
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTMENT IN MARKETABLE SECURITIES
Investments in debt and equity securities are designated as trading,
held-to-maturity or available-for-sale. Available-for-sale securities are
reported at amounts that approximate fair value. Temporary declines in the
market value of any available-for-sale security below cost are charged
against stockholders' equity; meanwhile, declines deemed other than
temporary are charged to earnings, resulting in the establishment of a new
cost basis for the security.
INCOME TAXES
Deferred income taxes are recognized for all temporary differences between
the tax and financial reporting bases of the Company's assets and
liabilities based on enacted tax laws and statutory tax rates applicable
to the periods in which the differences are expected to affect taxable
income.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all
highly liquid, short-term investments with an original maturity of three
months or less to be cash equivalents.
INTANGIBLE ASSETS
Intangible assets are amortized over their estimated lives, ten years,
using the straight line method.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash, money market
mutual funds, and trade receivables. The Company maintains cash and cash
equivalents with major financial institutions, and at times such amounts
may exceed the FDIC limits.
Trade receivables arise from consulting fees in the New York City area.
For the year ended February 29, 2004, fees earned from one client, which
is a related party, represented 40% of all income, and fees earned from
another client represented 21% of all income. For the year ended February
28, 2003, fees earned from one client represented 40% of all income, and
fees earned from another client, which is a related party, represented 24%
of all income. As of February 29, 2004, trade receivables from one client
comprised 83% of total trade receivables. As of February 28, 2003, trade
receivables from one client comprised 51% of total trade receivables.
ADVERTISING COSTS
The Company's policy is to expense the cost of advertising as incurred.
There were no advertising expenses for the years ended February 29, 2004
and February 28, 2003 and 2002.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of Statement of
Financial Accounting Standards No. 107, "Disclosures about Fair Value of
Financial Instruments". The estimated fair values of financial instruments
have been determined by the Company using available market information and
appropriate valuation methodologies.Considerable judgment is required in
interpreting market data to develop the estimates
F-10
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts that the Company could realize in a
sale. The carrying amount of financial instruments at the Balance Sheet
dates, except for the investment in unconsolidated subsidiaries,
approximated their estimated fair value at those dates.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
COMPREHENSIVE INCOME (LOSS)
Other comprehensive income refers to revenues, expenses, gains and losses
that under generally accepted accounting principles are included in
comprehensive income but are excluded from net income, as these amounts
are recorded directly as an adjustment to stockholders' equity.
Comprehensive income was $64,234 for the year ended February 29, 2004.
Comprehensive income (loss) was equivalent to net income (loss) for the
years ended February 28, 2003 and 2004.
EFFECTS OF NEW ACCOUNTING PRONOUNCEMENTS
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2002, the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Standard No. 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" was issued. This statement provides guidance on the
classification of gains and losses from the extinguishment of debt and on
the accounting for certain specified lease transactions. Certain
provisions of this statement related to the classification of gains and
losses from extinguishment of debt were adopted by the Company beginning
March 1, 2003. All other provisions were adopted after May 15, 2002. In
June 2002, SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities" was issued. This statement provides guidance on the
recognition and measurement of liabilities associated with disposal
activities and became effective for the Company on January 1, 2003. The
adoption of these statements did not have a material impact on the
financial position, results of operations or liquidity of the Company.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure, an amendment of FASB
Statement No. 123," which amends SFAS No, 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for
stock-based employee compensation. The transition and annual disclosure
provisions of SFAS No. 148 are effective for fiscal years ending after
December 15, 2002. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of
F-11
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
the method used on reported results. The Company will continue to account
for stock-based compensation to employees under APB Opinion No. 25 and
related interpretations.
STOCK BASED COMPENSATION
The Company applies APB Opinion No. 25 and related interpretations in
accounting for stock based compensation to employees and directors. Stock
compensation to non-employees is accounted for at fair value in accordance
with Statement of Financial Accounting Standard No. 123, Accounting for
Stock-Based Compensation ("SFAS 123").
During the year ended February 29, 2004, the Company granted a director
and former director options to acquire a total of 6,000 shares of common
stock, at an exercise price of $0.40 per share, through July 17, 2008.
During the year ended February 28, 2003, the Company granted an officer
and two directors options to acquire a total of 36,000 shares of common
stock, at an exercise price of $0.40 per share, through July 18, 2007. All
options are exercisable upon issuance. The Company has elected the
disclosure-only provisions of SFAS 123 in accounting for its employee
stock options. Accordingly, no compensation expense has been recognized
for these options. Had the Company recorded compensation expense for the
stock options based on the fair value at the date for awards, consistent
with the provisions of SFAS 123, the Company's net income for the years
ended February 29, 2004 and February 28, 2003 would have been reduced by
approximately $2,000 ($0.00 per share) and $11,000 ($0.00 per share),
respectively.
4. INVESTMENT IN MARKETABLE SECURITIES
During the year ended February 29, 2004, the Company acquired marketable
equity securities with a cost of $35,864. The securities are classified as
an available for sale investment. The carrying value at February 29, 2004
of $36,900 includes an unrealized gain of $1,036.
5. INTANGIBLE ASSETS
Intangible assets consist of the following:
FEBRUARY 29, FEBRUARY 28,
2004 2003
------------ ------------
Research agreements $ 51,003 $ 51,003
Subscription revenue 26,250 26,250
------------ ------------
77,253 77,253
Less accumulated amortization 20,795 13,069
------------ ------------
Intangible assets, net $ 56,458 $ 64,184
============ ============
Amortization of intangible assets was $7,725, $7,359, and $9,676 for the years
ended February 29, 2004, and February 28, 2003, and 2002, respectively. Annual
amortization expense for the next five years is estimated to approximate $7,700.
F-12
6. COMMITMENTS AND CONTINGENCIES
As of February 29, 2004, the Company did not enter into any commitments
and management believes that there were no contingencies.
7. RECEIVABLES FROM SHAREHOLDERS FOR ISSUANCE OF COMMON STOCK
The 34,200,000 shares of common stock of FRMO sold after the spin-off
distribution date were issued to the FRM Control Group as follows:
i. 28,800,000 shares of common stock of FRMO Corp. were issued to Peter
Doyle, as Voting Trustee of 8.1% of the issued and outstanding shares of
Kinetics Asset Management Inc. ("Kinetics") and Murray Stahl (the "Stahl
Bregman Group") for $2,880,000, payable as set forth below. The Stahl
Bregman Group includes Murray Stahl, Steven Bregman, John Meditz, Peter
Doyle, Catherine Bradford, Thomas C. Ewing and Katherine Ewing. That group
is in control of FRMO Corp. and together with the persons named below are
the "FRM Control Group". The 28,800,000 shares were issued to the Stahl
Bregman Group on January 23, 2001 but are held in escrow and delivered as
paid at the rate of ten cents ($.10) per share. The Stahl Bregman Group is
obligated to pay to FRMO the after tax amount (fixed at 54% of the
dividend) of all dividends they receive from Kinetics until the total
$2,880,000 has been paid. The Stahl Bregman Group expects the $2,880,000
to be paid to FRMO in about five years. The installment payments depend on
actual future dividends received from Kinetics. The Stahl Bregman Group
may make additional payments at its discretion but the payment based on
the Kinetics dividend is obligatory until the fixed purchase price is
paid. The members of the Stahl Bregman Group have no obligation other than
to pay the net dividends from Kinetics until the fixed purchase price is
paid. The Stahl Bregman Group has agreed that it will not divest itself of
any part of its Kinetics shares or change the character of its ownership
so as to reduce the pro-rata share of the dividends it currently receives
from Kinetics without, as a condition thereof, paying toward the fixed
purchase price of its FRMO shares the after-tax proceeds of that part
divested, as if the divestiture had not occurred. During the year ended
February 29, 2004, the Stahl Bregman Group paid $200,000 of this
receivable balance.
ii. 3,600,000 shares of common stock of FRMO were issued to Lestar
Partners, LLC, ("LPC") a New York Limited Liability Company owned by
Lester Tanner, Secretary and a director of FRMO, together with members of
his family, for $360,000 payable as set forth below. The 3,600,000 shares
were issued to LPC on January 23, 2001 but are held in escrow and
delivered as paid at the rate of ten cents ($.10) per share. LPC is
obligated to pay to FRMO in cash an amount equal to 12.5% of each payment
made by the Stahl Bregman Group until the purchase price of $360,000 is
paid. During the year ended February 29, 2004, LPC paid $25,000 of this
receivable balance.
iii. 1,800,000 shares of common stock of FRMO were issued to Lawrence J.
Goldstein for $18,000 paid on January 23, 2001. Mr. Goldstein is a
director of FRMO and the General Partner of Santa Monica Partners, LP, a
private fund, which owns 218,000 shares of common stock of FRMO.
iv. There now remain a total of 29,936,250 shares held in escrow.
F-13
8. NET INCOME PER COMMON SHARE AND PER COMMON SHARE EQUIVALENT
Basic earnings per common share for each of the three years ended February
29, 2004 are calculated by dividing net income by the weighted average
common shares outstanding during the period. Diluted earnings per common
share for each of the three years ended February 29, 2004 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:
YEAR ENDED YEAR ENDED YEAR ENDED
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
2004 2003 2002
------------ ------------ ------------
Weighted average common shares 4,840,207 3,897,524 3,889,772
Effect of dilutive securities:
Conversion of preferred stock 50,000 50,000 20,274
------------ ------------ ------------
Dilutive potential shares 4,890,207 3,947,524 3,910,046
============ ============ ============
9. INCOME TAXES
The provision for income taxes consist of the following:
YEAR ENDED YEAR ENDED YEAR ENDED
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
2004 2003 2002
------------ ------------ ------------
Current:
Federal $ 27,130 $ 8,952 $ 1,497
State 10,662 5,296 948
------------ ------------ ------------
Total current 37,792 14,248 2,445
============ ============ ============
Deferred:
Federal - - -
State - - -
------------ ------------ ------------
Total deferred - - -
------------ ------------ ------------
Total $ 37,792 $ 14,248 $ 2,445
============ ============ ============
FRMO and its former subsidiaries filed consolidated tax returns through
January 23, 2001. There was no federal tax liability due to current and
prior year net operating losses. After January 23, 2001, FRMO began filing
individual tax returns. FRMO and its former subsidiaries filed individual
state tax returns. The Company has net operating loss carry forwards for
Federal purposes of approximately $1,091,000 arising from FRMO's share of
losses from the consolidated tax returns that were filed through January
23, 2001. The use of these NOLs is restricted, subject to the provisions
of Internal Revenue Code section 382 and accordingly, the Company has
taken a 100% reserve against the deferred tax asset resulting from these
NOLs.
F-14
10. INCOME TAXES (CONTINUED)
The following is a reconciliation of the statutory federal and effective
income tax rates for the years ended:
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
2004 2003 2002
------------ ------------ ------------
Statutory federal income tax
expense rate 34.0 % 34.0 % 34.0 %
Adjustment for utilization of
lower tax brackets (12.5) (19.2) (19.0)
State taxes, less federal tax effect 6.1 2.3 7.6
Permanent differences 5.8 5.8 -
Other 4.0 4.3 -
------------ ------------ ------------
37.4 % 27.2 % 22.6 %
============ ============ ============
F-15
11. SUPPLEMENTAL FINANCIAL INFORMATION SELECTED QUARTERLY FINANCIAL DATA
(UNAUDITED)
Quarter
------------------------------------------
First Second Third Fourth Total
--------- --------- --------- --------- ----------
YEAR ENDED FEBRUARY 29, 2004
Total revenue $ 23,257 $ 26,427 $ 40,514 $ 69,757 $ 159,955
========= ========= ========= ========= ==========
Income from operations $ 10,993 $ 8,482 $ 27,707 $ 52,438 $ 99,620
========= ========= ========= ========= ==========
Net income $ 8,075 $ 6,067 $ 21,026 $ 28,030 $ 63,198
========= ========= ========= ========= ==========
Earnings per common share:
Basic $ -- $ -- $ -- $ -- $ 0.01
========= ========= ========= ========= ==========
Diluted $ -- $ -- $ -- $ -- $ 0.01
========= ========= ========= ========= ==========
Number of shares used in computation of
earnings per share:
Basic 3,897,524 3,897,524 4,485,902 6,137,195 4,840,207
========= ========= ========= ========= ==========
Diluted 3,947,524 3,947,524 4,535,902 6,187,195 4,890,207
========= ========= ========= ========= ==========
YEAR ENDED FEBRUARY 28, 2003
Total revenue $ 31,451 $ 35,054 $ 34,965 $ 2,278 $ 103,748
========= ========= ========= ========= ==========
Income (loss) from operations $ 17,566 $ 17,440 $ 20,876 $ (4,543) $ 51,339
========= ========= ========= ========= ==========
Net income (loss) $ 15,177 $ 11,343 $ 10,390 $ 1,198 $ 38,108
========= ========= ========= ========= ==========
Earnings (loss) per common share:
Basic $ -- $ -- $ -- $ -- $ 0.01
========= ========= ========= ========= ==========
Diluted $ -- $ -- $ -- $ -- $ 0.01
========= ========= ========= ========= ==========
Number of shares used in computation of
earnings per share:
Basic 3,897,524 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 3,947,524
========= ========= ========= ========= ==========
During the fourth quarter of the fiscal year ended February 28, 2003, the
Company reevaluated its accounting for its investment in Kinetics Advisers, LLC.
As a result of this reevaluation, the Company recorded an adjustment that
reduced revenues by $22,000. Of this amount, approximately $6,000, $8,000 and
$8,000 are allocable to the first, second, and third quarters, respectively. The
adjustment also reduced net incomes by the same amount.
F-16