FRMO was recommended by us at 2.10 in February of 2005. It is today $8, it is still recommended by us a s a unique co with unique metrics wherein pre tax margins should continue to exceed 90%, assets consist of primarily cash and investments in extremely profitable businesses, the major one being an interest in the 1 & 20% fees of a now $2billion plus H F. Because of issues unrelated to its operations it has been unable to report since Q-3 2004 (Nov). However it is clear it has grown very substantially. How do we know this? By reviewing FROMEX CAPITAL CORP Form 10 which is about to be spun off by FRMO and is herewith being recommended as well.

Fromex has entered into a contract with FRMO to perform consulting and management services to FRMO for which FRMO has agreed to pay Fromex ten (10%) percent of the cash receipts which FRMO receives from its customers during the term of the agreement.

Fromex’s services include the administrative aspect of FRMO’s business activities such as operations, bookkeeping, personnel responsibilities and periodic consulting with the FRMO’s chief financial officer, but do not include the research, business development activities or the services rendered by FRMO itself to its customers, which produce FRMO’s cash receipts. FRMO shall pay to Fromex as its compensation an amount equal to 10% of total cash receipts that FRMO receives from its customers during the term of the Consulting Agreement

In the latest reported quarter Fromex enjoyed  cash receipts which exceeded the prior Q reeips by 38.5%. But this does not tell the whole story or reflect the real growth of either FRMO or Fromex receipts as neither accrue the net fees earned by the H F in which FROM has an 8,4% net interest. The accrued, revenues go unreported, as FRMO must report on a cash basis (which is not allowed by audit regulations) are clearly far more substantial than what is shown for the last two reported quarters

 

The principal asset base from which FRMo and hence FROMEX  cash revenues flow is the following which have been growing extremely rapidly:

 
WE understand the H F performance is about30% +/-

Consider this: an 8.4% interest in !5 Mgt fee and 20% of profits on a $2 billion  asset base would approximate $20 million in mgt fee and $120 million in incentive fee allocation. At 8% this $140 million total would mean toatl gross accrued revenues to FRMO of  $11.2 million Add to this the allocation of fees on another $2 billion at May (and these at let us assume cat a combined fee rate of  0.5%) are virtually certain to be well below present assets as of year end 2006 would contribute an additional $10 million. After pretax margins in excess of  90%of just the above revenues and taxes at 34% net would be close to $9nmillion. However, since most of these earnings are not paid out and are in fact are reinvested in the case of the H F, (and the H F capital account also grows 30%+ the fees which or course the managers do not pay, the additional accrued, but not allowed to be reported revenues, are quite a substantial sum in excess of the aforementioned amounts. Consider too the run rates which we will not go into here or now, The tables above give strong indications of rapid growth however. Incidentally the cash flowing to the H F management account is mostly from the off shore H F and so is actually untaxed and for that reason not repatriated and left to grow in the capital account as your and my IRA do (only most likely faster).

The balance sheet while appearing tiny reflects not the real i.e. the  “accrued” capital account balances of course.
Now recal at outset we pointed out FROMEX receives only 19% of the cash receipts of FRMO.  Hence the iceberg has a small tip and a very substantial under the surface floating  growing mountain of cash and  marketable investments.

FROMEX is being spun off to allow for an SEC filing entity which FRMO probably will not be allowed to be after the spin off. At such future times as management deems appropriate we might speculate a greater and greater percentage of FROM cash receipts might be  paid FROMEX in return for services or some asset. FROMEX also has announced it intention to create fee paying interests in other pots of cash  and we anticipate more  and more of this type of activity for both entities. We should explain FRMO and FROEX typical neither raise capital  nor manage infrastructures such as marketing activities or internal administration – they merely advise the funds and in return are paid according to their ownership of a share of management net fees i.e. cash or in the case of H Fs cash fees as well as credit to capital accounts.

The spin-off of FREX may also one day result not only in an increased interest in FRMO cash receipts but conceivably the house that Murray and Steven have built could be put back together if accounting conventions change as they do from time to time or they could operate separately in cooperation with each other or not, a Pink Sheet traded FRMO and a Nasdaq traded FROMEX could provide  a variety of benefits to shareholders in time

The major drawback ( which could be a benefit to some is the lack of liquidity and the substantial number of common shares outstanding (37 million). However w e have purposely left per share earnings unmentioned and earnings and FCF are BTW virtually identical, because it is our view that if you focus on a high P/E of today you will miss in this case  the Berkshire of tomorrow. If you think this silly or even ridiculous answer this question. How many investors do you know who purchased BRK when it was one digit in price? How many do you know who did that at two digits in share price? Three?