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: May 31, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
--------- ---------
Commission File Number: 0-29346
FRMO CORP.
(Exact name of registrant as specified in its charter)
Delaware 13-3754422
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation
or organization)
271 North Avenue, New Rochelle, NY 10801
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code): (914) 636-3432
--------------------------------------------------
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 June 2, 2003: 36,083,774
FRMO CORP.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MAY 31, 2003
Page No.
-------
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements........................................ 2
Balance Sheets - May 31, 2003 (Unaudited) and
February 28, 2003........................................... 2
Statements of Operations (Unaudited) -
Three months ended May 31, 2003 and 2002.................... 3
Statements of Cash Flows (Unaudited) -
Three months ended May 31, 2003 and 2002.................... 4
Notes to Financial Statements (Unaudited)................... 5
ITEM 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition....................... 7
ITEM 3. Quantitative and Qualitative Disclosures
about Market Risk....................................... 9
ITEM 4. Controls and Procedures .................................. 9
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K........................... 10
SIGNATURES.......................................................... 10
CERTIFICATIONS...................................................... 11
-1-
FRMO Corp.
Balance Sheets
(Unaudited)
May 31, February 28,
2003 2003
-------------------------------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 148,525 $ 135,003
Accounts receivable 12,000 20,500
-------------------------------------
Total current assets 160,525 155,503
-------------------------------------
Other assets:
Intangible assets, net of accumulated
amortization of $11,138 at
November 30, 2002 and $9,676
at February 28, 2002
62,252 64,184
Investments in unconsolidated subsidiaries 5,000 5,000
-------------------------------------
Total other assets 67,252 69,184
-------------------------------------
Total assets $ 227,777 $ 224,687
=====================================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses $ 22,973 $ 20,551
Income taxes payable 1,856 11,587
Deferred income 6,333 7,008
-------------------------------------
Total current liabilities 31,162 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 3,325,136 3,322,136
Retained earnings 54,021 45,947
-------------------------------------
3,415,240 3,404,166
Less: Receivables from shareholders for
common stock issuance 3,218,625 3,218,625
-------------------------------------
Total stockholders' equity 196,615 185,541
-------------------------------------
Total liabilities and stockholders' equity $ 227,777 $ 224,687
=====================================
See notes to interim financial statements.
-2-
FRMO Corp.
Statements of Operations
(Unaudited)
Three months ended
May 31,
2003 2002
-----------------------------
Revenues
Consulting $ 18,526 $ 18,726
Research fees 3,730 4,048
Subscription fees 1,000 3,009
Income from investments in
unconsolidated subsidiaries - 5,668
-----------------------------
Total income 23,256 31,451
-----------------------------
Costs and expenses
Amortization 1,931 1,565
Contributed services 3,000 3,000
Accounting 2,250 1,500
Shareholder reporting 5,000 6,272
Office expenses - 1,500
Other 82 48
-----------------------------
Total costs and expenses 12,263 13,885
-----------------------------
Income from operations
10,993 17,566
Dividend income 276 266
-----------------------------
Income from operations before provision
for income taxes
11,269 17,832
Provision for income taxes 3,194 2,655
-----------------------------
Net income $ 8,075 $ 15,177
===========================
Basic earnings per common share $ 0.00 $ 0.00
=============================
Diluted earnings per common share $ 0.00 $ 0.00
==============================
Average shares of common stock outstanding:
Basic 3,897,524 3,897,524
==============================
Diluted 3,947,524 3,947,524
=============================
See notes to interim financial statements.
-3-
FRMO Corp.
Statements of Cash Flows
(Unaudited)
Three Months Ended
May 31,
2003 2002
-----------------------------
Cash flows from operating activities
Net income $ 8,074 $ 15,177
Adjustments to reconcile net income to net cash
provided by operating activities
Reinvested income - (5,668)
Amortization 1,932 1,565
Contributed services 3,000 3,000
Changes in operating assets and liabilities:
Accounts receivable 8,500 (8,633)
Other current assets - -
Accounts payable and accrued expenses (7,309) 8,952
Deferred income (675) 211
-----------------------------
Net cash provided by operating activities 13,522 14,604
Net increase in cash and cash equivalents 13,522 14,604
-----------------------------
Cash and cash equivalents, beginning of period $ 135,003 $ 83,411
-----------------------------
Cash and cash equivalents, end of period 148,525 98,015
============================
Additional cash flow information
Interest paid $ - $ -
Income taxes paid $ 12,926 $ 2,983
============================
Non-cash investing and financing activities
Reinvested income from investments in unconsolidated
subsidiaries $ - $ 5,668
============================
See notes to interim financial statements.
-4-
FRMO Corp.
Notes to Financial Statements
(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 May 31, 2003; results of operations for the three months ended
May 31, 2003 and 2002; cash flows for the three months ended May 31, 2003 and
2002; and changes in stockholders' equity for the three months ended May 31,
2003. 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:
May 31, February 28,
2003 2003
----------------------------
Research agreements $ 51,003 $ 51,003
Subscription revenue 26,250 26,250
----------------------------
77,253 77,253
Less accumulated amortization 15,001 13,069
----------------------------
Intangible assets, net $ 62,252 $ 64,184
============================
For the three months ended May 31, 2003 and 2002, amortization of intangible
assets was $1,932 and $1,565.
-5-
3. Net Income Per Common Share And Per Common Share Equivalent
Basic earnings per common share for the three ended May 31, 2003 and 2002 are
calculated by dividing net income by weighted average common shares outstanding
during the period. Diluted earnings per common share for the three months ended
May 31, 2003 and 2002, are calculated by dividing net income by weighted average
common shares outstanding during the period plus dilutive potential common
shares, which are determined as follows:
Three months ended
May 31,
2003 2002
-----------------------------
Weighted average common shares 3,897,524 3,897,524
Effect of dilutive securities:
Conversion of preferred stock 50,000 50,000
-----------------------------
Dilutive potential common shares 3,947,524 3,947,524
=============================
4. Compensation For Contributed Services
Two officers/shareholders performed services for the Company during the three
months ended May 31, 2003 and 2002 for which no compensation was paid. The
Company recorded a charge to operations for these contributed services of $3,000
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
May 31,
2003 2002
---------------------------------
Current:
Federal $ 1,954 $ 2,364
State 1,240 291
--------------------------------
Total current 3,194 2,655
---------------------------------
Deferred:
Federal - -
State - -
---------------------------------
Total deferred - -
---------------------------------
Total $ 3,194 $ 2,655
==================================
-6-
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
months ended May 31, 2003 and 2002. The following should be read in conjunction
with the Management's Discussion and Analysis of results of operations and
financial condition included in Form 10-K for the year ended February 28, 2003.
OVERVIEW
By reason of the spin-off transaction described in Form 10-K for the year ended
February 28, 2002, the Company had a new start in terms of its continuing
business and its financial statements. After the spin-off, its balance sheet
consisted of $10,000 in assets, no liabilities and 1,800,000 shares of common
stock. On January 23, 2001 the Company issued an additional 34,200,000 shares
of common stock for $3,258,000 to be paid as set forth in Item 1 of Form 10-K
for the year ended February 28, 2001.
Since its new start on January 23, 2001, FRM completed the following
transactions through May 31, 2003:
i. The Company invested $5,000 in FRM NY Capital, LLC, a limited liability
venture capital company whereby the substantial investment of financial
capital will be made by unrelated parties but where FRM will have a
carried interest based on leveraging the creative services of its
personnel (its intellectual capital).
ii. A consulting agreement was signed effective January 1, 2001, whereby
FRM is currently receiving approximately $20,000 a year from the
manager of Santa Monica Partners, LP, a director and shareholder of
FRM, for access to consultations with the Company's personnel
designated by Murray Stahl and Steven Bregman. Santa Monica Partners,
L.P. is a private fund, which owns 218,000 shares of common stock of
FRM.
iii. In March 2001 FRM acquired the research service fees that Horizon
Research Group had received from The Kinetics Paradigm Fund in
exchange for 80,003 shares of FRM common stock. Management believes
that the growth of that Fund in the current fiscal year and future
years will increase the current level of research fees for which the
stock consideration was paid. The Kinetics Paradigm Fund outperformed
the S&P 500 Index by approximately 13 percentage points in its first
fiscal year of operation, Calendar 2000. During 2001, it outperformed
the S&P 500 Index by 14 percentage points and, during 2002, by 17
percentage points. In May 2003, The Kinetics Paradigm Fund was
assigned a five-star rating by Morningstar, Inc., the fund rating
service. This is Morningstar's highest rating and is often the basis
on which mutual fund investors seek to select funds. During calendar
2003, through June 30th, the Fund outperformed the S&P 500 by a
further 9 percentage points.
iv. In October 2001, FRM acquired a 2% interest in the subscription
revenues from The Capital Structure Arbitrage Report that Horizon
Research Group and another third party receive, in exchange for 50
shares of Series R preferred stock. While the subscriptions are
minimal at the present time, management believes that they will grow
in future years.
v. In February 2002, FRM acquired a 7.71% interest in Kinetics Advisors,
LLC and the Finder's Fee Share Interest from the Stahl Bregman Group,
in exchange for 315 shares of FRM common stock. Kinetics Advisors, LLC
controls and provides investment advice to Kinetics Partners, LP, a
hedge fund and to Kinetics Fund, Inc., an offshore version of Kinetics
Partners. While these funds were quite small at the time
-7-
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.
In 2002, it outperformed the S&P 500 Index by 33 percentage points.
Through June 30, 2003, it has outperformed the S&P 500 Index by a
further 12 percentage points.
RESULTS OF OPERATIONS
2003 Period Compared to the 2002 Period
The Company's revenues from operations for the three months ended May 31, 2003
("2003") was $23,000, a decrease of $8,100 or 26% as compared to the three
months ended May 31, 2002 ("2002"). The net decrease in the three-month period
was due primarily to the inclusion in 2002 of $6,000 of income from investments
in unconsolidated subsidiaries. However, for comparative purposes, the $6,000
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 quarter revenues by approximately $6,000. The balance of the decrease in
2003 revenues reflects a decrease of $2,000 in subscription fees versus the
2002 period. However, this was due to the timing of revenue recognition of the
subscription fees; management of the Company expect that subscription fees over
the course of fiscal 2003 will be higher than in 2002.
Costs and expenses from operations decreased by $2,000 (14%) to $12,000 for the
three months ended in 2003. The decrease for the three month period was due to
decreases in shareholder reporting and office expenses, partially offset by an
increase in accounting expense.
For the reasons noted above, the Company's net income for the three months
ended May 31, 2003 decreased by $7,000 to $8,000, as compared to net income of
$15,000 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 three months ended May 31,
2003, yet which could have 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 $333,000 (pre-tax and unaudited) as
of May 31, 2003. FRMO's proportional share of the increase in the value of
Kinetics Advisers' capital accounts in those funds during three months ended
May 31, 2003, predominantly from fee income and appreciation (also pre-tax and
unaudited), was approximately $242,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company's activities during the three months ended May 31, 2003 resulted in
an increase in cash of $14,000. The $14,000 increase in cash in 2003 was due to
an increase in net income (after adjusting for amortization and contributed
services) of $5,000, offset by fluctuations in operating assets and liabilities
primarily caused by timing differences. In 2002, the Company started recording
non-cash compensation for contributed services from two of its executives. In
2001, those executives, who are responsible for all of the company's
operations, agreed not to draw any salaries during the period of formation.
There were no cash flows provided by or used in investing or financing
activities during both of the three-month periods ended in 2002 and 2001. 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 cash salaries until the Company's operations and
revenues warrant the payment.
-8-
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
None.
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: June 9, 2003
CERTIFICATION
Each of the undersigned hereby certifies in his capacity as an officer of FRMO
Corp. (the "Company") that the Quarterly Report of the Company on Form 10-Q for
the period ended May 31, 2003 fully complies with the requirements of Section
13(a) of the Securities Exchange Act of 1934 and that the information contained
in such report fairly presents, in all material respects, the financial
condition of the Company at the end of such period and the results of
operations of the Company for such period.
Dated: June 9, 2003
By: /S/ MURRAY STAHL
---------------------
Murray Stahl
Chairman of the Board and Chief Executive Officer
By: /S/ STEVEN BREGMAN
-----------------------
Steven Bregman
President and Chief Financial Officer
-10-
CERTIFICATIONS
I, Murray Stahl, certify that:
1. I have reviewed this quarterly report on Form 10-Q of FRMO Corp;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a. designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation
of internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b. any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Dated: June 9, 2003
By: /S/ MURRAY STAHL
---------------------
Murray Stahl
Chairman of the Board and Chief Executive Officer
-11-
CERTIFICATIONS
I, Steven Bregman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of FRMO Corp;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
d. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
e. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated
in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Dated: June 9, 2003
By: /S/ STEVEN BREGMAN
--------------------
Steven Bregman
President and Chief Operating Officer
-12-