In this ever changing world, it is reassuring to know that some things are eternal--the beauty of Paris, the majesty of the Grand Canyon, the brilliance of Shakespeare, and the bogosity of DHMG's financial statements. You would think that, being under investigation, they and their new accountants would try to come up with numbers that are internally consistent, consistent with the previous quarter (which was actually audited by DHMG's previous accountants), and consistent with the basic rules of accounting and plain old common sense. Evidently DHMG has some other strategy in mind.
Even though the numbers are screwed up, one thing is clear: DHMG's primary business appears to be creating rigged transactions to make it look like it has a real business. The company acknowledges that 88% of its business last year was with insiders and large shareholders, who had an incentive to create "profits" in the public company. For all we know, the other 12% may have been with insiders too, but DHMG might have figured it could slip that past its new accountants, a small firm located in Salt Lake City, far away from DHMG's headquarters in Hawley, PA and Universal Network's operations in Florida.
By acquiring Universal to avoid paying taxes on its imaginary profits, DHMG lost the biggest partner in the transactions that created those profits. The income statement says that DHMG made $216,000 ($0.05 per share) for the year, but that is misleading because it counts revenues and consulting fees from Universal prior to DHMG acquired it at the end of December, on the grounds that DHMG hadn't yet bought it. Note 5 to the financial statement shows what the numbers would have been had DHMG owned it all year, and that number is a loss of $471,000.
With revenues from its now wholly owned subsidiary removed, you get to see what a two bit outfit DHMG is. In the September quarter, revenue for the year to date was listed at $9,555,044. Forced to eliminate its transactions with Universal, the total for the 12 months only reached $4,959,312. Slightly more than half of that figure came from Qualtronics, a contract electronics assembly outfit that was sold back to the previous owner early in 1998. Of the $2,455,628 in sales that DHMG did in 1997 other than Qualtronics and Universal, $3,830,000 of it came from transactions with large shareholders, listed in Note 6.
That is right: I did say $3,830,000 out of $2,455,628. The latter number comes from Note 10, which covers the company's business segments. Note 6 and Note 10 contradict each other, and Note 10 by itself contradicts the income statement, since the total sales figures on the two of them are off by about $101,530. That may not seem like a lot of money, but they shouldn't be off by even a penny. It makes you wonder whether accountants are still required to be familiar with arithmetic.
No DHMG financial statement would be complete without an absurd cash flow statement, and once again the company rises to the challenge. I haven't had the time to try to reconcile the numbers, or even add them up, which I probably should do because in most of the previous 10-Q's they were added incorrectly. Just as a quick example of the usual nonsense: Accounts Receivable are listed as increasing by $1,137, 461 in the year, yet they finished up the year at $245,877. That means that they must have started out the year at minus $891,584. Negative accounts receivable, hmmmmm, now there is a concept for philosophers. Has DHMG been doing business in an anti-matter universe?
The supplemental disclosure section of the cash flow statement is good for a few laughs too, when compared with the September numbers, which were audited by the previous accounting firm. Several of the numbers in this statement are supposed to be cumulative numbers, which start out at zero and go up all year; they can't go down until the first day of the next fiscal year, when they revert to zero. In September, cash interest paid year to date totaled $40,324. Somehow, three months later, the figure had dropped to a mere $366. Likewise, in September, the purchase of inventory through issuance of company stock totaled $4,425,000. In the December 10-K, however, the figure had dropped to $3,192,000.
This shouldn't happen. At least one of these two audited statements is wrong, maybe both of them. Another interesting contradiction comes from the segment information. In September the Collectibles division was listed as having sales of $7,624,049 year to date. Three months later segment was listed as having a total of $2,035,611. That it went down was to be expected, because with the acquisition of Universal, its biggest customer, DHMG could no longer count sales to what is now itself.
According to the 10-K, sales of collectibles to Universal for the year totaled $4,986,554. Yet the decline in the segment figures from September to December was $5,588,438. That implies that DHMG's sales of collectibles in the December quarter, to customers other than Universal, were minus $601,884. I've heard of business being slow, but that is real bad. Obviously, at least one set of numbers is phony, or they both are. And both these statements are supposedly audited. Makes you wonder.
Then there is my favorite part of DHMG's financial statements, what I call the "Houdini" effect, where major items from the previous balance sheet disappear into thin air with no explanation and no evidence that they were ever on the books. Vanished into space this time is the investment in Frama, Inc., which was listed in the September balance sheet as an asset worth $1,450,000. It purportedly represented 11% of the stock of that private company which--how did you guess?--bought a bunch of collectibles from DHMG. Now that item is nowhere to be seen on the balance sheet, nor is there any evidence that it was sold; had that happened, it would have been listed in the "Cash Flow from Investing Activity" part of the cash flow statement. Was it a mirage? Did the accountants who audited the September 10-Q just imagine that it was there?
Even though the financial statements are terribly flawed, there are numerous hints from them that DHMG may be in serious financial trouble, and may not survive for too much longer. I don't have any more time to write about this, but if I get a chance I'll try to post something on that later in the week. |
