Jperry: Thanks for you post. I do appreciate your willingness to discuss the issues relative to DHMG. That means you deserve a public apology for my sarcasm in previous notes, which I am now doing.
Before discussing Frama, let's talk about some bigger issues. First, my beefs with DHMG's accounting are not just with the company's accountants, although both firms have done a bad job, in my opinion. The first two quarters of 1997 were unaudited, which is normal, and they were completely disgraceful, which isn't. There were entries that weren't added correctly, and numerous items that violated all known rules of accounting. The auditors had little to do with them; all blame resides with DHMG's management.
Second, we are not talking about a legitimate company being a trifle liberal in the application of an established accounting principle, such as is the case in the Forbes article you cited. Instead, DHMG appears to be perpetrating a massive fraud, in which most of its sales and all of its earnings are not real sales or real earnings in the way that honest companies and normal investors conceive of them. I've gone over numerous examples in my posts and won't repeat them here.
Third, I don't agree with the concept that an outsider, with a modest knowledge of accounting, should have to chat with a public company's management or accountants to make some sense of the financial statements submitted to the SEC. It is up to the company to publish documents in which the numbers are added correctly, in which parts of the documents don't contradict other parts, or contradict other documents. What is the point of the SEC's rule requiring companies to submit financial statements at regular intervals if they are total garbage, and one must call the company for the real story?
For example, while I certainly enjoyed your story of Monsieur Frama, the important French artist, giving some stock to DHMG to hold as collateral, the story doesn't bear any resemblance whatsoever to what we know about the relationship between DHMG and Frama, Inc., as depicted in DHMG's financial statements.
Here is what we know:
1. In the March 1997 10-Q there is no mention of Frama, Inc. There is, however, on the balance sheet, an asset listed as "Mortgage Option" which wasn't there on the 12/31/96 10-K. It is valued at $700,000 and is described in Note 5 as being an "option to acquire a mortgage on property in the city of Wilton, CT. The mortgage is for $1,250,000 at a rate of 16%...Monthly payments of $8,867 must be made to maintain the option."
That is certainly one bizarre option, since it is worth a huge percentage of the value of the mortgage itself, and the cost to maintain the option is more than half of the expected monthly mortgage payments. It makes so little sense as a financial instrument that I wonder whether the asset in question is something else entirely, and someone stupid just made up this description out of thin air, figuring that no one would notice it or think about it. Whatever.
The asset disappears off the books in the June quarter. In any event, we discover in the September quarter that a large shareholder of DHMG, later revealed to be Frama, purchased this mortgage option for $200,000 in cash and shares of Universal and shares of DHMG. The sales price must have been $775,000 because in the June quarter we see a $75,000 gain on the sale of an investment. So there we have Monsieur Frama, sitting in a Parisian cafe in his beret, eating his escargot and cheese, thinking about his nubile young models, deciding to buy an option on a mortgage on property in Wilton CT. OK, if you say so.
2. According to Item 2 in the June 1997 10-Q, on 5/5/97 DHMG traded 50,000 shares of its stock, valued then at $9 per share, for 450,000 common shares of Frama, Inc., making them worth, for balance sheet purposes, $450,000. Frama might have been "buying" a lot of artwork or something from DHMG in that quarter, but there was no way to tell from the June 10-Q, which, like the March 10-Q, made no mention of any transactions with insiders, even though they constituted the overwhelming majority of all of DHMG's business. Since the first two quarters were unaudited, DHMG can't blame the accountants for neglecting to mention that extremely significant bit of information.
3. The September numbers were audited, in a vain effort to get the NASD to confer some legitimacy on the company by allowing it onto NASDAQ. For the first time we discover that a large shareholder (Frama, but we don't know that until the 10-K is released in April 1998) has "purchased" so far in the year $1,631,550 worth of collectibles from DHMG, for which it paid zero in cash, handing over some stock in DHMG and stock in itself supposedly worth $1,000,000.
How do we know it is worth $1,000,000? Because DHMG says so, even though it is not traded anywhere and may in fact be worth nothing, or something similar. There is no indication that DHMG or its board of directors made any effort to ascertain the value of these shares by having them appraised by an independent outsider. There wasn't much incentive to do so, since if they were in fact worth only a fraction of the $1,000,000 then DHMG's reported earnings would be reduced by the differential. That would make it tough to keep up the charade that DHMG is a real company with real earnings, being unfairly attacked in an evil bear raid.
How does what the financial statements say about Frama, Inc., fit in with the story about Frama stock being held as collateral for something (in which case it shouldn't have been on the 9/97 balance sheet), or whatever cockamamie story they gave you? It doesn't fit in at all, that I can see.
It is possible that the asset disappeared between September and December because the current auditors figured out that the stock was worthless, and counted it as zero. Yet the figure in the supplemental section of the cash flow statement, listing the value of investments acquired in satisfaction of accounts receivable remained the same between September and December--it should have gone down by $1,000,000 if the 12/31 accountants were treating it differently than the 9/97 accountants did.
In any event, Monsieur Frama the artist turns out not to be a supplier to the company as much as its biggest customer, outside of Universal Network, which DHMG now owns. Why is a French artist buying collectibles from DHMG at huge markups to the latter? Can't he get art wholesale from his fellow artists? Or did he figure that his stock in DHMG would be worth more if he helped it cook its books by "buying" things for which he only had to pay his supposedly valuable stock?
Maybe I'm missing something here, but the story you were given and the story the accountants are telling the SEC are two different things. Are we supposed to ignore the financial statements? |
