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, 2002
/ / 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 incorporation (I.R.S.Employer Identification No.)
or organization)
271 NORTH AVENUE, NEW ROCHELLE, NY 10801
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (914) 636-3432
(Former name, former address and former fiscal year, if changed since last
report)
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 July 10, 2002: 36,083,774
FRMO CORP.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MAY 31, 2002
Page No.
--------
PART I
Item 1. Financial Statements..................................... 2
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................... 11
Item 3. Quantitative and Qualitative Disclosures About
Market Risk....................................................... 13
PART II
Item 6. Exhibits and reports on form 8-K......................... 13
1
FRMO Corp
Index to Financial Statements
PART I
ITEM 1. FINANCIAL STATEMENTS
Balance Sheets -- May 31, 2002 (unaudited) and February 28, 2002..................... 3
Statements of Operations (unaudited) -- Three months ended
May 31, 2002 and 2001............................................................. 5
Statement of Stockholders' Equity (unaudited) --
Three months ended May 31, 2002 .................................................. 6
Statements of Cash Flows (unaudited) --
Three months ended May 31, 2002 and 2001.......................................... 7
Notes to Financial Statements (unaudited)............................................ 8
2
FRMO Corp.
Balance Sheets
May 31, February 28,
2002 2002
-------- --------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 98,015 $ 83,411
Consulting fees receivable 9,747 1,114
-------- --------
Total current assets 107,762 84,525
-------- --------
Other assets:
Intangible assets, net of accumulated
amortization of $7,275 at May 31, 2002 69,978 71,543
and $9,676 at February 28, 2002
Investments in unconsolidated subsidiaries 10,668 5,000
-------- --------
Total other assets 80,646 76,543
-------- --------
Total assets $188,408 $161,068
======== ========
See notes to interim financial statements.
3
FRMO Corp.
Balance Sheets (continued)
MAY 31, FEBRUARY 28,
2002 2002
---------- ----------
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 28,881 $ 19,607
Income taxes payable -- 322
Deferred income 2,917 2,706
---------- ----------
Total current liabilities 31,798 22,635
---------- ----------
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 3,316,136 3,313,136
Retained earnings 23,016 7,839
---------- ----------
3,375,235 3,357,058
Less: Receivables from shareholders for
common stock issuance 3,218,625 3,218,625
---------- ----------
Total stockholders' equity 156,610 138,433
---------- ----------
Total liabilities and stockholders' equity $ 188,408 $ 161,068
========== ==========
See notes to interim financial statements.
4
FRMO Corp.
Statements of Operations
(unaudited)
THREE MONTHS ENDED
MAY 31,
2002 2001
---------- ----------
REVENUES
Consulting $ 18,726 $ 12,749
Research fees 4,048 435
Subscription fees 3,009 --
Income from investments in unconsolidated subsidiaries 5,668 --
---------- ----------
Total income 31,451 13,184
---------- ----------
COSTS AND EXPENSES
Amortization 1,565 1,333
Contributed services 3,000 --
Accounting 1,500 1,000
Shareholder reporting 6,272 6,216
Office expenses 1,500 1,557
Other 48 203
---------- ----------
Total costs and expenses 13,885 10,309
---------- ----------
Income from operations 17,566 2,875
Dividend income 266 371
---------- ----------
Income from operations before provision
for income taxes 17,832 3,246
Provision for income taxes 2,655 --
---------- ----------
Net income $ 15,177 $ 3,246
========== ==========
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 3,867,703
========== ==========
Diluted 3,947,524 3,867,703
========== ==========
See notes to interim financial statements.
5
FRMO Corp.
Statement of Stockholders' Equity
(unaudited)
RECEIVABLES
FROM
SERIES R ADDITIONAL SHAREHOLDERS TOTAL
PREFERRED STOCK COMMON STOCK PAID-IN RETAINED FOR COMMON STOCKHOLDERS' COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS STOCK ISSUANCE EQUITY INCOME
Balance, February 28, 2002 50 $ -- 36,083,774 $36,083 $3,313,136 $ 7,839 $(3,218,625) $ 138,433
Net income -- -- -- -- -- 15,177 -- 15,177 $ 15,177
Contributed services -- -- -- -- 3,000 -- -- 3,000 --
---------
Comprehensive income -- -- -- -- -- -- -- -- $ 15,177
--- ------ ---------- ------- ---------- ------- ----------- --------- =========
Balance, May 31, 2002 50 $ -- 36,083,774 $36,083 $3,316,136 $23,016 $(3,218,625) $ 156,610
=== ====== ========== ======= ========== ======= =========== =========
See notes to interim financial statements.
6
FRMO Corp.
Statements of Cash Flows
(unaudited)
THREE MONTHS ENDED
MAY 31,
2002 2001
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 15,177 $ 3,246
Adjustments to reconcile net income to net cash provided
by operating activities:
Reinvested income (5,668)
Amortization 1,565 1,333
Contributed services 3,000 --
Changes in operating assets and liabilities:
Consulting fees receivable (8,633) (5,549)
Other current assets -- 1,137
Accounts payable and accrued expenses 8,952 5,804
Deferred income 211 --
-------- --------
Net cash provided by operating activities 14,604 5,971
-------- --------
Net increase in cash and cash equivalents 14,604 5,971
Cash and cash equivalents, beginning of period 83,411 44,957
-------- --------
Cash and cash equivalents, end of period $ 98,015 $ 50,928
======== ========
ADDITIONAL CASH FLOW INFORMATION
Interest paid $ -- $ --
======== ========
Income taxes paid $ 2,983 $ 155
======== ========
NONCASH INVESTING AND FINANCING ACTIVITIES
Common stock issued in consideration for the acquisition
of research agreements $ -- $ 83,459
======== ========
Reinvested income from investments in unconsolidated
subsidiaries $ 5,668 $ --
======== ========
See notes to interim financial statements.
7
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, 2002; results of operations for the three months ended
May 31, 2002 and 2001; cash flows for the three months ended May 31, 2002 and
2001; and changes in stockholders' equity for the three months ended May 31,
2002. For further information, refer to the Company's financial statements and
notes thereto included in the Company's Form 10-K for the year ended February
28, 2002. The balance sheet at February 28, 2002 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 New Paradigm Fund in exchange for 80,003 shares
of common stock. In May 2001, the Company acquired the research service fees
that Horizon Research Group receives from The Middle East Growth Fund in
exchange for 3,456 shares of common stock. The value of the shares issued in
both of these transactions aggregated $54,969. The Company is amortizing the
cost of these research agreements 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 Convertible/High Yield 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
will amortize 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.
8
FRMO Corp.
Notes to Financial Statements (continued)
(unaudited)
2. INTANGIBLE ASSETS (CONTINUED)
Intangible assets consist of the following:
MAY 31, FEBRUARY 28,
2002 2002
------- -------
Research agreements $51,003 $54,969
Subscription revenue 26,250 26,250
------- -------
77,253 81,219
Less accumulated amortization 7,275 9,676
------- -------
Intangible assets, net $69,978 $71,543
======= =======
For the three months ended May 31 2002 and 2001, amortization of intangible
assets was $1,565 and $1,333.
3. NET INCOME PER COMMON SHARE AND PER COMMON SHARE EQUIVALENT
Basic earnings per common share for the three months ended May 31, 2002 and
2001, 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, 2002 and 2001, 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,
2002 2001
--------- ---------
Weighted average common shares 3,897,524 3,867,703
Effect of dilutive securities:
Conversion of preferred stock 50,000 --
--------- ---------
Dilutive potential common shares 3,947,524 3,867,703
========= =========
4. COMPENSATION FOR CONTRIBUTED SERVICES
Two officers/shareholders performed services for the Company during the three
months ended May 31,2002 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.
9
FRMO Corp.
Notes to Financial Statements (continued)
(unaudited)
5. INCOME TAXES
The provision for income taxes consist of the following:
THREE MONTHS ENDED
MAY 31,
2002 2001
------ ----
Current:
Federal $2,364 $ --
State 291 --
------ ----
Total current 2,655 --
------ ----
Deferred:
Federal -- --
State -- --
------ ----
Total deferred -- --
------ ----
Total $2,655 $ --
====== ====
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
All statements contained herein that are not historical facts, including but not
limited to, statements regarding future operations, financial condition and
liquidity, capital requirements and the Company's future business plans are
based on current expectations. These statements are forward looking in nature
and involve a number of risks and uncertainties. Actual results may differ
materially. Among the factors that could cause actual results to differ
materially are changes in the financial markets, which affect investment
managers, investors, mutual funds and the Company's consulting clients, and
other risk factors described herein and in the Company's reports filed and to be
filed from time to time with the Commission. The discussion and analysis below
is based on the Company's unaudited Financial Statements for the three months
ended May 31, 2002 and 2001. 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, 2002.
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, 2002:
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 has been signed effective January 1, 2001
whereby FRM is currently receiving $22,860 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 New 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 New Paradigm Fund outperformed the S & P 500 Index by
approximately 13 percentage points in its
11
first fiscal year of operation, Calendar 2000. During 2001, it
outperformed the S&P 500 Index by 14 percentage points and, during
2002, by 13 percentage points through June 30.
iv. In October 2001, FRM acquired a 2% interest in the subscription
revenues from 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 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 New Economy
Partners, a hedge fund and to Kinetics New Economy Fund, an off-shore
version of New Economy Partners. While the fees are minimal at the
present time, management believes that they will grow in future years.
During its first year of operation in 2000, and in 2001, New Economy
Partners returned 23.7 and 21.6 percentage points more than the S&P
500 Index. During 2002, through June 30, it outperformed the S&P 500
Index by 16 percentage points.
RESULTS OF OPERATIONS
2002 PERIOD COMPARED TO THE 2001 PERIOD
The Company's revenues from operations increased by $18,000 for the three months
ended May 31, 2002 ("2002") from $13,000 for the three months ended May 31, 2001
("2001"). The increase in 2002 was due to additional income being generated from
consulting fees, research fees, subscription fees and income from its
investments in unconsolidated subsidiaries.
Costs and expenses increased by $4,000 in 2002, from $10,000 in 2001. The
increase in 2002 was primarily due to the Company recording non-cash
compensation of $3,000 for contributed services from two of its executives. In
2001 those executives, who are responsible for all of the Company's operations
had agreed not to draw any salaries during the period of formation. The $3,000
increase in the provision for income taxes in 2002 was due to the increase in
income from operations.
For the reasons noted above, the Company's net income for the three months ended
May 31, 2002 increased by $12,000 to $15,000, as compared to $3,000 in 2001.
12
LIQUIDITY AND CAPITAL RESOURCES
The Company's activities during the three months ended May 31, 2002, resulted in
an increase in cash of $15,000. The $15,000 increase in cash in 2002 was due to
an increase in net income (after adjusting for amortization and contributed
services) of $15,000. 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.
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, 2002. 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.
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.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBITS.
None
b) REPORTS ON FORM 8K.
None
13
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/ VICTOR BRODSKY
---------------------------
Victor Brodsky
Treasurer and
Chief Financial Officer
(Principal Financial and Accounting
Officer)
Date: July 10, 2002
14