Investments Available for Sale
NESS lists investments available for sale of $875K (Q1) and $406K (Q2). These assets did not exist at the end of 1999 Q4, so they must have been purchased sometime during Q1. The assets were purchased for $1MM, but were written down by $125k (12.5%) by the end of Q1 and another $469k (54%) in Q2. This is accounted for in the line on the income statement that reads Unrealized losses on investments -$125,000 (Q1). and -$469,000 (Q2) The account would look as follows:
Investments Available for Resale
Date Description Change Balance Comment
31-Dec-99 Investments Available for Sale - - Reported on 1999 10K
Sometime in Q1 Purchase $1MM investments 1,000,000 1,000,000
31-Mar-00 Unrealized Loss on Investments For Sale (125,000) 875,000 Reported on Q1-10Q
30-Jun-00 Unrealized Loss on Investments For Sale (469,000) 406,000 Reported on Q2 10Q
Discussion
A) First of all, the investments are very volatile - in the first six months that NESS has owned these investments, they have dropped almost 60% in value. At a time when NESS is in need of money, why are they taking what money they have and investing it in risky investments?
B) What exactly are these investments? They aren't t-bills, that's for sure. They must be pretty speculative to have such volatility. Maybe they are shares in one of Ivan Webb's companies, who can be sure? One thing’s for sure, you can’t tell from the filings because NESS does not bother to describe them to us either in [2000Q1], the quarter in which they were bought, or in [2000Q2]. IMO, these assets should have been discussed by NESS's management in [2000Q1] and [2000Q2] for several reasons:
- In [2000Q1] these assets represented 36% of NESS's total assets, and 90% of their current assets.
- The unrealized loss on these investments makes up more than half of NESS's comprehensive loss in [2000Q2], and one third of their comprehensive loss in [2000Q1]. These assets are significant items that require explanation.
C) There is no indication in either [2000Q1] or [2000Q2] cash flow statements of the money used to purchase these investments. Purchasing investments requires the payment of cash or negotiating some promise for future payment. If the shares were purchased with cash, there should be an entry in the cash flow statement indicating $1MM reduction in cash to purchase the shares. If the shares were bought on an IOU, there should be an liability item on the balance sheet indicating the amount owed. The NESS financial statements contain neither.
D) Where did NESS get $1MM to purchase these shares? At [1999Q4] they had Cash of only $414,692. According to [2000Q1] their cash dropped by $280k, and there was no cash flow into the company. So where did they come up with $1MM for the shares?
To summarize: NESS's management invested $1MM of the company's money into securities which have now dropped close to $600,000. NESS has a responsibility to its shareholders to explain what these assets are, and where the money came that was used to purchase these assets. |
