SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
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Amendment No. 1
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: November 30, 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.
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(Exact name of registrant as specified in its charter)
Delaware 13-3754422
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
320 Manville Road, Pleasantville, NY 10570
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code): (914) 632-6730
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by checkmark whether the registrant has filed all documents and reports
required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court. Yes [_] No [_]
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding
of each of the issuer's classes of common stock, at December 7, 2004: 36,088,361
Form 10-Q/A
Amendment No. 1 for the
Quarterly Period Ended
November 30, 2004
This Amendment No. 1 is filed to correctly report the effect of the
accounting change required to be reported pursuant to EITF 03-16 as the
cumulative effect of a change in accounting principle. This requires that the
requisite change from the cost to equity method of accounting for the Company's
investment in Kinetics Advisors, LLC for the quarters prior to February 28,
2004, amounting to $368,925, net of income taxes of $245,000, be reported in the
first quarter of the fiscal year which commenced on March 1, 2004. This
Amendment reports the statements of income (page 4) for the three and nine
months ended November 30, 2003 as reported in the 10-Q reports originally filed
for those periods without including income from the investment in Kinetics
Advisors LLC retroactively on the equity method. The cumulative effect of the
change from the cost to equity method for periods prior to February 28, 2004,
amounting to $368,925 net of income taxes of $245,000 is reported in the first
quarter ending May 31, 2004 and in this amended 10-Q as shown for the nine
months ended November 30, 2004. The effect of this amendment at page 4 is to
increase the net income for the nine months ended November 30, 2004 from the
$464,830 previously reported in the 10-Q report for this period to $833,755 as
shown on page 4 with the separate identification of the cumulative effect and
the pro-forma amounts if the new equity method were to be applied retroactively.
Conforming changes were made in the statements at pages 3 and 5 as well as Notes
1, 2 and 6 and Management's Discussion and Analysis.
FRMO CORP.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED NOVEMBER 30, 2004
Page No.
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PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements......................................................................... 2
Balance Sheets - November 30, 2004 (Unaudited) and February 29, 2004 ........................ 3
Statements of Income (Unaudited) - Three and nine months ended November 30, 2004 and 2003.... 4
Statements of Cash Flows (Unaudited) - Nine months ended November 30, 2004 and 2003.......... 5
Notes to Financial Statements (Unaudited) ................................................... 6
ITEM 2. Management's Discussion and Analysis of Results of Operations and Financial Condition........ 9
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk .................................. 11
ITEM 4. Controls and Procedures ..................................................................... 11
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K ............................................................ 12
SIGNATURES ................................................................................................ 13
CERTIFICATIONS ............................................................................................ 14
FRMO Corp.
Balance Sheets
November 30, February 29,
2004 2004
-----------------------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 560,127 $ 406,110
Accounts receivable 87,799 41,637
Investments 240,936 36,900
-----------------------------
Total current assets 888,862 484,647
-----------------------------
Other assets:
Investment in unconsolidated subsidiary 1,098,532 --
Intangible assets, net of accumulated
Amortization 53,760 56,458
-----------------------------
Total other assets 1,152,292 56,458
-----------------------------
Total assets $ 2,041,154 $ 541,105
=============================
Liabilities and Stockholders' equity
Current liabilities:
Accounts payable, accrued expenses and
other current liabilities $ 24,915 $ 20,187
Income taxes payable 87,884 22,112
Deferred income 17,969 12,031
-----------------------------
Total current liabilities 130,768 54,330
Deferred income taxes payable 439,000 --
-----------------------------
Total Liabilities 569,768 54,330
-----------------------------
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 - 36,088,361 and 36,083,774
shares, respectively 36,088 36,083
Capital in excess of par value 3,346,571 3,334,136
Unrealized gain on other current assets 10,731 --
Unrealized gain (loss) on marketable
securities (14,602) 1,036
Retained earnings 942,502 109,145
-----------------------------
4,321,290 3,480,400
Less: Receivables from shareholders for
common stock issuance 2,849,904 2,993,625
-----------------------------
Total stockholders' equity 1,471,386 486,775
-----------------------------
Total liabilities and stockholders' equity $ 2,041,154 $ 541,105
=============================
See notes to interim financial statements including note 2, "Investments,"
concerning the change in accounting principle mandated by EITF 03-16.
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FRMO Corp.
Statements of Income
(Unaudited)
Three months ended Nine months ended
November 30, November 30,
2004 2003 2004 2003
---------------------- ----------------------
Revenues
Sub-advisory fees $ -- $ -- $ 930 $ --
Consulting 23,195 27,907 98,648 63,586
Research fees 25,621 9,496 75,549 20,833
Subscription fees 1,909 3,111 5,728 5,778
Income from investments in
unconsolidated subsidiaries 368,238 -- 613,420 --
---------------------- ----------------------
Total Income 418,963 40,514 794,275 90,197
---------------------- ----------------------
Costs and expenses
Amortization 2,275 1,931 6,138 5,794
Contributed services 3,000 3,000 9,000 9,000
Accounting 2,500 2,250 12,805 6,750
Shareholder reporting 7,578 5,000 21,673 20,363
Office expenses 457 234 782 480
Other 23 371 41 606
---------------------- ----------------------
Total costs and expenses 15,833 12,786 50,439 42,993
---------------------- ----------------------
Income from operations 403,130 27,728 743,836 47,204
Dividend income 1,815 273 13,937 747
---------------------- ----------------------
Income from operations before provision
for income taxes 404,945 28,001 757,773 47,951
Provision for income taxes 159,859 6,954 292,943 12,762
---------------------- ----------------------
Income before cumulative effect of a change in accounting
principle $245,086 $ 21,047 $464,830 $ 35,189
---------------------- ----------------------
Cumulative effect on prior quarters (to February 28, 2004) of changing
from cost to equity method net of income taxes of $245,000 -- -- 368,925 --
Net income $245,086 $ 21,047 $833,755 $ 35,189
====================== ======================
Basic and diluted earnings per common share:
Income before cumulative effect of a change in accounting principle $ 0.03 $ 0.00 $ 0.07 $ 0.01
Cumulative effect on prior quarters (to February 28, 2004) of change
from cost to equity method -- -- 0.06 --
Net income $ 0.03 $ 0.00 $ 0.13 $ 0.01
====================== ======================
Pro-forma amounts assuming the new equity method is applied retroactively:
Net income $245,086 $ 60,946 $464,830 $235,471
Net income per basic and diluted share $ 0.03 $ 0.01 $ 0.07 $ 0.06
See notes to interim financial statements, including note 2, "Investments" which
reviews the change in accounting principle for investments in unconsolidated
subsidiaries from the cost method to the equity method.
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FRMO Corp.
Statements of Cash Flows
(Unaudited)
Nine Months Ended
November 30,
2004 2003
-------------------------
Cash flows from operating activities
Net income $ 833,755 $ 35,189
Adjustments to reconcile net income to net cash
provided by operating activities
Cumulative effect of change in accounting principle (368,925) --
Income from investment in unconsolidated subsidiary (613,420) --
Deferred income taxes 194,000 --
Amortization of research agreements 6,138 5,794
Non-cash compensation 9,000 9,000
Changes in operating assets and liabilities:
Accounts receivable (46,162) 7,449
Accounts payable and accrued expenses 70,102 (11,350)
Deferred income 5,938 (5,453)
-------------------------
Net cash provided by operating activities 90,426 40,949
-------------------------
Cash flows from investing activities
Distributions from investment in unconsolidated subsidiary 128,813 --
Investment in limited partnership (200,000) --
Purchase of marketable equity securities (8,943) --
-------------------------
Net cash used in investing activities (80,130) --
-------------------------
Cash flows from financing activities
Payment for release of stock held in escrow 143,721 178,520
-------------------------
Net cash provided by financing activities 143,721 178,520
-------------------------
Net increase in cash and cash equivalents 154,017 219,469
Cash and cash equivalents, beginning of period 406,110 135,003
-------------------------
Cash and cash equivalents, end of period $ 560,127 $ 354,472
=========================
Additional cash flow information
Interest paid $ -- $ --
=========================
Income taxes paid $ 31,050 $ 3,590
=========================
In June 2004, the Company issued common stock, valued at $3,440, to acquire an
interest in future advisory fee revenues.
See notes to interim financial statements.
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1. Basis of Presentation
The accompanying unaudited financial statements have been prepared in accordance
with accounting principles generally accepted in the United States for interim
financial information in response to the requirements of Article 10 of
Regulation S-X. Accordingly they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements. In the opinion of management, the
accompanying unaudited financial statements contain all adjustments (consisting
only of normal recurring items) necessary to present fairly the financial
position as of November 30, 2004; results of operations for the three months and
nine months ended November 30, 2004 and 2003; and cash flows for the nine months
ended November 30, 2004 and 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 29, 2004.
As indicated in Note 2, below, a new accounting rule for an investment in
limited liability companies (EITF 03-16) became effective for reporting periods
beginning after June 15, 2004, which, for the Company, is its three month period
ended November 30, 2004. This rule requires that the effect of its adoption be
reported as the cumulative effect of a change in accounting principle.
Accordingly, this has been so reported for the three and nine month periods
ended November 30, 2004 in the statements of income and in the balance sheet at
November 30, 2004. However, as Note 2 states (i) the net income for the prior
periods in the statements of income, namely the three and nine month periods
ended November 30, 2003, has not been restated but pro forma amounts for those
two periods are shown assuming the new accounting rule is applied retroactively
and (ii) the balance sheet at February 28, 2004 has not been restated.
2. Investments
In February 2002, FRMO acquired an interest in Kinetics Advisors, LLC, now 8.4%.
Pursuant to a new accounting rule (EITF 03-16), and as noted on page 10 of the
Company's 10-Q Report for the Quarterly Period Ended August 31, 2004, effective
September 1, 2004 the Company has changed its accounting policy regarding its
investment in Kinetics Advisors, LLC to the equity method. Under the cost method
used in periods prior to September 1, 2004, the Company included in revenue only
the cash distributions that it received on this investment. Effective September
1, 2004, under the equity method, the Company also includes in revenue its
proportionate share of the income earned in the period by Kinetics Advisors,
LLC. As a result, the financial statements for the three and nine months ended
November 30, 2004 include revenue from this investment of $368,238 and $613,420,
respectively. Kinetics Advisors, LLC has a December 31 fiscal year, so that
results for the nine months ended November 30, 2004 for the Company include the
Company's share of the income of Kinetics Advisors, LLC for the nine months
ended September 30, 2004. The effect of the change on the three and nine months
ended November 30, 2004 was to increase income before the cumulative effect of a
change in accounting principle by $202,312 ($0.03 per diluted share) and
$290,764 ($0.05 per diluted share), respectively. The cumulative effect on prior
quarters (to February 28, 2004) was to increase net income for the nine months
ended November 30, 2004 by $368,925 ($0.06 per diluted share). The pro-forma
amounts shown in the statements of income reflect the retroactive application of
the change in accounting principle as if the equity method been in effect for
those periods.
The investment in unconsolidated subsidiary on the balance sheet at November 30,
2004 of $1,098,532 consists of the Company's proportionate share of the net
assets of Kinetics Advisors, LLC. The balance sheet at February 28, 2004 has not
been restated.
Following is a summary of the unaudited financial position and results of
operations of Kinetics Advisers, LLC:
September 30,
2004 2003
-------------------------------
Investments $ 16,347,526 $ 5,016,733
Other assets 614,843 1,376
Liabilities (3,925,536) (276,547)
Members' equity $ 13,036,833 $ 4,741,562
-6-
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
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Net income $4,001,379 $ 829,640 $5,751,085 $3,966,119
In August 2004, FRMO made a $200,000 limited partner investment (100%) in a
hedge fund known as Jordan Partners, LP. This is a value oriented fund that
presently focuses on income-oriented securities and strategies, with an
objective of providing double-digit returns in a relatively steady-state
fashion. These are publicly traded securities, and the investment capital may be
withdrawn on a quarterly basis. Horizon Asset Management, Inc. is a member of
both the General Partner and the Manager of Jordan Partners, LP.
3. 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.
Sub-advisory Revenues
In June 2004, acquired a one-third interest in the advisory fee revenue that
Horizon Asset Management, Inc. receives from the Lehman Brothers Manager Access
Program, in exchange for 4,587 shares of FRMO Corp. common stock. The value of
the shares issued in this transaction was $3,440. The Company is amortizing the
cost of the Sub-Advisory Revenue interest over five years using the
straight-line method.
Intangible assets consist of the following:
November 30, February 29,
2004 2004
-------------------------
Research agreements $ 51,003 $ 51,003
Subscription revenue 26,250 26,250
Sub-advisory revenue 3,440 --
-------------------------
80,693 77,253
Less accumulated amortization 26,933 20,795
-------------------------
Intangible assets, net $ 53,760 $ 56,458
=========================
For the nine months ended November 30, 2004 and 2003, amortization of intangible
assets was $6,138 and $5,794, respectively.
-7-
4. Net Income Per Common Share And Per Common Share Equivalent
Basic earnings per common share for the nine and three months ended November 30,
2004 and 2003 are calculated by dividing net income by weighted average common
shares outstanding during the period. Diluted earnings per common share for the
nine and three months ended November 30, 2004 and 2003, 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 Nine months ended
November 30, November 30,
2004 2003 2004 2003
------------------------ ------------------------
Weighted average common shares 7,589,321 4,485,902 6,576,087 4,093,650
Effect of dilutive securities:
Conversion of preferred stock 50,000 50,000 50,000 50,000
Exercise of stock options 39,382 16,154 31,964 7,015
------------------------ ------------------------
Dilutive potential common shares 7,678,703 4,552,056 6,658,051 4,150,665
======================== ========================
5. Compensation For Contributed Services
Two officers/shareholders performed services for the Company during the nine
months ended November 30, 2004 and 2003 for which no compensation was paid. The
Company recorded a charge to operations for these contributed services of $9,000
and a corresponding credit to paid-in-capital for each period.
6. Income Taxes
The provision for income taxes consists of the following:
Three months ended Nine months ended
November 30, November 30,
2004 2003 2004 2003
---------------------- ----------------------
Current:
Federal $ 20,000 $ 4,245 $ 84,000 $ 7,800
State 5,859 2,709 14,943 4,962
---------------------- ----------------------
Total current 25,859 6,954 98,943 12,762
---------------------- ----------------------
Deferred:
Federal 114,000 -- 165,000 --
State 20,000 -- 29,000 --
---------------------- ----------------------
Total deferred 134,000 -- 194,000 --
---------------------- ----------------------
Total $159,859 $ 6,954 $292,943 $ 12,762
====================== ======================
Deferred taxes have been provided on the undistributed income of an
unconsolidated subsidiary at 40% as if such income had been received in the
current period.
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7. Comprehensive Income
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 approximated net
income for all periods presented.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
All statements contained herein that are not historical facts, including but not
limited to, statements regarding future operations, financial condition and
liquidity, capital requirements and the Company's future business plans are
based on current expectations. These statements are forward looking in nature
and involve a number of risks and uncertainties. Actual results may differ
materially. Among the factors that could cause actual results to differ
materially are changes in the financial markets, which affect investment
managers, investors, mutual funds and the Company's consulting clients, and
other risk factors described herein and in the Company's reports filed and to be
filed from time to time with the Commission. The discussion and analysis below
is based on the Company's unaudited Financial Statements for the three and nine
months ended November 30, 2004 and 2003. 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 29, 2004.
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, FRMO completed the following
transactions through November 30, 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 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
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 FRMO.
iii. In March 2001 FRMO acquired the research service fees that Horizon
Research Group had received from The Kinetics 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, and returned 21% during Calendar
2004. From inception through Calendar 2004, it outperformed the S&P
500 Index by 78 percentage points, or in the parlance of investment
professionals, by 7,800 basis points. In August 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.
-9-
iv. In October 2001, FRMO 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 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 an interest in Kinetics Advisors,
LLC, now 8.4%, 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, LP, a hedge fund and to Kinetics Fund, Inc., an
offshore version of Kinetics Partners. While these funds were quite
small at the time of acquisition, they have expanded significantly
and management believes that they will continue to grow in future
years. During its first year of operation in 2000, and in 2001,
Kinetics Partners returned 23.7 and 21.6 percentage points more than
the S&P 500 Index, net of management and incentive fees. In 2002, it
outperformed the S&P 500 Index by 33 percentage points. In Calendar
2003 and 2004, it outperformed the S&P 500 Index by a further 23
percentage points and, according to preliminary figures, 6
percentage points, respectively. On a cumulative basis, over the
4-year 4-month period from inception through year-end 2004, the
Kinetics Partners Fund has returned 124%, whereas the S&P 500 Index
has lost (15%).
vi. On June 1, 2004, FRMO acquired a one-third interest in the advisory
fee revenue that Horizon Asset Management, Inc. receives from the
Lehman Brothers Manager Access Program, in exchange for 4,587 shares
of FRMO Corp. common stock. Under this program, Horizon Asset
Management provides investment advisory services to certain Lehman
Brothers clients, the fees being calculated on the basis of assets
under management. While assets under management were quite modest at
the time of acquisition, they have expanded significantly and
exceeded $100 million as of December 31, 2004. Management believes
that they will continue to expand in future years. The five-year
investment returns of the strategy utilized by this program, through
December 2004, amount to about 14% per year versus the approximately
2% annualized loss for the S&P 500 Index over the same period.
RESULTS OF OPERATIONS
2004 Period Compared to the 2003 Period
The Company's revenues from operations for the three months ended November 30,
2004 ("2004") were $418,963, an increase of $378,449, as compared to $40,514 for
the three months ended November 30, 2003 ("2003"). The increase in the
three-month period was due principally to an increase in revenue from
investments in unconsolidated subsidiaries (Kinetics Advisors, LLC); see Note 2,
"Investments", above and, to a lesser extent, the increase in research fees. The
Company's revenues from operations for the nine months ended November 30, 2004
("2004") were $794,275, as compared to $90,197 for the nine months ended
November 30, 2003 ("2003"). The increase of $704,078 in the nine-month period
was principally attributable to the increase in income from investments in
unconsolidated subsidiaries (Kinetics Advisors, LLC) and, to a lesser extent,
the increase in research fees.
Costs and expenses from operations were $15,833 during the three months ended in
November 2004, an increase of $3,047 (or 24%) from the comparable 2003 period.
During the nine-month period ended in 2004, costs and expenses increased by
$7,446 (17%) to $50,439. The result for the three-month period was primarily due
to an increase in accounting expenses. The increase for the nine months ended in
2004 was primarily due to increases in accounting expenses and shareholder
reporting expenses.
For the reasons noted above as well as an adjustment for income tax expense, the
Company's income before cumulative effect of a change in accounting principle
for the three months ended November 30, 2004 increased by $224,039 to $245,086,
as compared $21,047 in 2003. For the same reasons, income before cumulative
effect of a change in accounting principle for the nine months ended November
30, 2004 was $464,830, as compared to $35,189 for the same period in 2003, an
increase of $429,641.
Some discussion is required with respect to an asset which, by reason of a
change in the method of accounting, as discussed in Note 2 above, has had a
large impact on the FRMO financial statements. This is the minority interest in
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Kinetics Advisors, LLC, acquired by the Company in February 2002, which controls
and provides investment advice to several mutual and hedge funds. Kinetics
Advisors has elected to reinvest in two of the 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 recorded
this investment on a cost basis. As of September 1, 2004, the Company has
applied the equity method and reports the effect of the new accounting rule as
the cumulative effect of a change in accounting principle. See Note 1, "Basis of
Presentation", above. This is in accordance with the new accounting rule EITF
03-16, "Accounting for Investments in Limited Liability Companies."
Another asset whose impact on the Company's earnings was negligible during the
three and nine months ended November 2004, yet which will have a more
significant impact in future periods, is the sub-advisory fee revenue interest
in the Lehman Brothers program. Based upon the amount of assets in this program
as of January 2005, the level of annual revenues that would be due to the
Company exceeds $150,000, although this is received and recognized quarterly and
with a lag since fees are paid in arrears.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating activities during the nine months ended November 30,
2004 resulted in an increase in cash of $154,017. This increase was due to
$90,426 of net cash provided by operations plus the $143,721 provided by
financing activities, less the $80,130 used in investing activities. Net cash
used in investing activities for the nine months ended November 30, 2004 was
$80,130, representing the Company's investment in a limited partnership interest
in a hedge fund known as Jordan Partners, LP and in marketable equity
securities, less distributions received from Kinetics Advisors, LLC. Cash
provided by financing activities was $143,721, representing payments from
shareholders for common shares held in escrow. The Company expects its business
to develop without the outlay of cash, since growth is expected to be a function
of its intellectual property as presently represented by consulting, research,
subscription and sub-advisory fees as well as its asset-based general partner
interest.
Effects of New Accounting Pronouncements
The Company previously accounted for its 8.4% 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 has changed its method of
accounting for this investment so that it now records its pro rata share of
Kinetics Advisers income (loss) each period. See Notes 1 and 2 above.
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
remaining as of November 30, 2004 of $2,849,904 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
the mutual and hedge funds. The carrying value of the investment in Kinetics
Advisors is affected by the markets in which the hedge funds it manages invests.
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
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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.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
31.1- Certification by the Chief Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2- Certification by the Chief Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1- Certification of the Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350 Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
b) Reports on Form 8-K None.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FRMO CORP.
By: /S/ STEVEN BREGMAN
--------------------------------------------
Steven Bregman
President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Dated: May 4, 2005
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