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|year||size||%age change from two years earlier|
Well it can be seen from this table that 4 of the 8 most recent years had experienced a fall in size relative to the size two years earlier. The big such fall was of 9.2% was in 2002, two years after the largest size was recorded. It also can be observed that the last known year 2003, was a big year. It is 1.6% less than 2000 but it is 5.6% greater than any other of these sizes. We say a 7% fall from 2003 was very much on the cards for the year 2005. As we have previously said a drop of almost 3% from 2003 was needed to assume the long run (10 year trend average) for 2005 but as there is fluctuation above and below this line a 7% drop was very likely. But Feltex adopted an assumption of a 2% (1% p.a.) increase which has been endorsed at the Welling High Court by Mr G P Meredith an Australian forensic accountant called by the Feltex shareholders who are trying to recover their lost funds. We say the assumed size of Feltex’s 2005 market has been overstated by close to 10% over what was reasonable and that is what Mr Meredith should have been telling the court. 10% less revenue can make a huge difference to the profits of such a company and trying to pay a dividend on the basis of an extra 10% of non existent revenue is likely to result in a company’s collapse as has happened with Feltex.
We append below a copy of a complaint we have filed with the Australian Accountants Institute and of an email received from Mr Tony Gavigan in response to this complaint. We say that the shareholders that Mr Gavigan has encouraged to join this action at their expense were entitled to have the court told of the 10% overstatement of 2005 market size and not have the court told that the adopted 1% p.a. increase in market size was reasonable.
We now realize that we have understated our size overstatement complaint. While a 3% drop puts the 2005 size at the long run (10 year trend) average there was good reason to think 2005 would fall much beyond that. While in a way 2005 was projected as an example of the long term future there would be no long term future if the company could not get past year 2005 and in reality it was mortally crippled in that year.
We say there is nothing very technical about the market size overstatement claim. We say any numbskull can see from the above table that a 7% fall from 2003 to 2005 was very likely.
We say the court should consider reason rather the number of documents submitted.
The Senior Advisor Professional Conduct
Institute of Chartered Accountants Australia
I wish to complain about the behaviour of Greg Pollard Meredith, I believe of the firm Ferrier Hodgson Forensics, who I also believe to be an accountant member of your organisation.
Mr Meredith had a report presented in evidence in the high court hearing of Horton V Saunders in Wellington NZ. He was cross-examined on that report starting on Monday 31 March 2014. I was in court on that day. Mr Horton represents a few thousand of the eight thousand odd Feltex IPO subscribers who lost their funds.
The matter of concern was the fairness of the May 2004 prospectus for an Initial Public Offer in New Zealand of shares in Feltex Carpets Limited.
Mr Meredith’s report considered page 91 of the Feltex prospectus. Under the heading “Industry Conditions” it says it has assumed the market will grow by “approximately 1% which is below the average growth rate over the past ten years”. Mr Meredith confirmed that overall he though the 1% increase was reasonable and it is this statement of his about which I complain.
Feltex’s Total Operating Revenue for its year to 30 June 2003, the last known year at the time of the prospectus was $314m (on page 96 of the prospectus). Its projection of Total Operating Revenue for the year to 30 June 2005 is shown on page 85 as being $348m. Growing the $314m for 2 years at 5% compounding gives $346m. The prospectus explains that this assumed 5% growth is made up of 3% inflation, 1% due to increasing market share and 1% due to increasing market size. It is Mr Merediths endorsement of the latter assumption which I complain about. I claim a decrease of 3% (1.4% p.a.) should have been made to adjust for the likely change in market size if the assumed size was to be no more than what the trend of the sizes of the previous 10 years indicated, as was implied on page 91.
In saying the 1% (p.a.) increase due to increasing market size was reasonable Mr Meredith considered data on page 37 of the prospectus which could be presumed to be what Feltex would have used in deciding what assumption to make.
On page 37 is a graph of the then last 11 years of sizes of the Australian carpet market. In the paragraph above the graph Feltex say that between 1993 a 2003 the market grew by an average of 1.7% p.a. compounding. Feltex only used the sizes of the 1993 and 2003 in making this “calculation”. This can be verified by growing the 1993 size by 1.7% p.a. for 10 years. You get the 2003 size. Mr Meredith observed that what growth one calculated depended a lot on ones starting point but he too must have only been using the size of two individual years in his alternative calculations. He asserted that nevertheless he considered that the 1% adopted was reasonable.
The correct method to objectively forecast a future result based upon the last 10 years of known sizes, as any accountant should know, is to use regression analysis using the sizes of all ten of the last ten known years, and only those sizes, in this case of 1994 to 2003. Using 10 years does not necessarily give the best result but it is the number of years decided upon by Feltex, and using a round figure as standard reduces the ability to pick on a time span that tends to give the result one wants. However by using all the sizes in the chosen time span, and not just two sizes as Feltex did, the result will be less sensitive to the length of time span used. Using the forecast function of Microsoft Excel on the ten latest sizes one gets a forecast for year 2005 which is almost 3% below the 2003 size not 3.4% above it as Feltex has calculated, nor 2% above it as it has adopted.
To explain it without calculations, if you look at the graphs on page 37 they show higglety pigglety sizes. If there is a big year it is almost invariably followed by smaller years or year. 2003 was a big year so the probability is that 2005. will be smaller, if past figures is the only relevant information available. Feltex’s false logic is that based on raw size figures 2005 will probably be more than 2% greater than 2003 because 2003 was greater than 1993 by more than 1% p.a.
As a professional Mr Meredith should be expected to use the recognized best tools for the job. The almost 5% greater revenue which Feltex has assumed over the degree to which it said it did on page 91 makes a huge difference to the company’s profit and justified paying a dividend which the company could not afford and it crashed.
As to why this improper endorsement by Mr Meredith should not come to light via the normal court processes I state the following . This is a very perverse case whereby the robbers who have organized the IPO have also covertly organized a purported recovery action for the generally naive but irate subscribers following the crash, and this eventual hearing is supposed to be the “unfortunate” unsuccessful end to it all, but not if I can help it.
I am not a participant in the proceedings other than as a some time court attendee and I have never owned Feltex shares or been related to the company other than as an observer and protester. The prospectus is to be found at justaccounting.co.nz/feltexpros.pdf. A small segment of page 37 of it is to be found at justaccounting.co.nz/ausmarketgrowth.jpg
Please withdraw your complaint against Greg Meredith and Ferrier Hodgson, Melbourne. The point you make is very technical, and while I can see it is of keen interest to yourself, it is possibly the matter of least concern to the Court which has over 12,000 documents in front of it regarding the IPO.
There is nothing to be gained by involving the Institute. We are very happy with the fully independent and professional job Mr Meredith did.
You are not a party to the Houghton litigation, you have no commercial interest in it, you have to date sent interfering, and in many cases, defamatory, emails to our QC, other lawyers involved and our funders. You have previously made defamatory statements on your website that your ISP provider made you take down on my request.
None of this is any of your business.
While you are entitled to your own observations and opinions in our free country, you are now interfering in my company's contract on behalf of the claimants and you may cause them expense and cost for which I may seek reimbursement from you if you persist.
yours sincerelyTony Gavigan
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