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Murray Stahl's FRMO Corporation - 2013 Annual Meeting of Shareholders (Transcript)
Posted by: Grass Hopper (IP Logged)
Date: December 18, 2013 08:46AM
FRMO Corporation Annual Meeting of Shareholders
Tuesday, August 27, 2013
...Good afternoon everyone. What I’d like to talk about first is the unique structure of FRMO Corp. It’s unique because of the revenue interest that is has in Horizon Kinetics LLC ("Horizon Kinetics"). In a normal corporation—we would call ourselves an abnormal corporation—in a normal corporation there’s revenue, a certain expense structure, taxes and then there are after-tax earnings. The after-tax earnings are what essentially belong to the shareholders. I always thought there was something dysfunctional about that because, to the degree that the expenses are discretionary, the people inside the company, in a certain sense, come before the people who are merely the shareholders, because they can pay themselves more money, they can give themselves bonuses, they can embark upon all sorts of ventures that require expenditures that may never bear fruit, and so on.
Therefore, we created the revenue share as something that, by definition, belongs to and goes to the shareholders. Now, of course, the revenue is not guaranteed, and it can fluctuate upward and downward but, at least we’ve reduced it to the one salient business risk of fluctuation in revenues. In this way, we avoid the multi-tiered level of business risk that exists in most corporations in which the shareholders suffer a period of low revenues and then, when the revenues actually materialize, there are all sorts of people that effectively, because they are inside the corporation, are paid before the shareholders. We wanted to avoid that. So, that’s the genesis of the revenue share.
In terms of that revenue share, we were required by the accounting regulations of GAAP to value it at the end of the quarter, and we did. The question that shareholders really need to ask themselves in determining whether or not that is the appropriate value is the following hypothetical situation. If a third party approached this corporation and this management and said they were willing to pay the precise sum that the outside valuation company valued the revenue share at, and we decided to accept that sum, would our shareholders be pleased or displeased? If the answer is that they would be displeased, then that’s the answer to the valuation. Speaking for ourselves, if someone approached us and offered us that sum of money, we wouldn’t take it.
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