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September 2006 Edition ---- to page back through Previous Editions click here

We will spend some time on the Feltex Carpets issue because it could be a way forward to straightening out accountants and related professionals. The Shareholders Assn called a meeting on it on 4 September. The meeting was not for "disgruntled shareholders" as the Dominion Post put it, but. we understood, for fair minded people everywhere who would seek to bring justice to the matter. Fear of being labelled a disgruntled sucker possibly stopped more people turning up.

There seemed to be unanimous agreement at the meeting that the winding up of the company be opposed by shareholders, that the shareholders take action replace all the Feltex directors with possibly one exception, and that a cent or two of any remaining share value be put towards a fighting fund to investigate recovering lost share value from those whose improper action has contributed to the price slump. Under some scenarios at least (for what will happen to the company) the fighting fund would be available.

The association is taking action to get 5% of the shareholders to petition the company to call an extraordinary meeting to consider these actions. This site recommends that Feltex shareholders give the shareholders their support in this. People without shares who are keen to see such a fight-back should consider buying some shares and then doing likewise. There could even be substantial financial rewards from doing so.

The meeting was a little more reticent on what the improper actions were but the existing directors (less 1) were clearly in its sights followed by the promoters of the May 2004 Initial Public Offer, certain brokers and perhaps the auditors.

Our commentary concentrates on accountants known to be in the mix. Obviously that includes the Auditors, but also the newest director of Feltex, appointed in October 2005, John "141 cents per Kg of milk" Hagen. It was a majority view at the above meeting that Mr Hagen should be invited to continue as a director because he is a very able litigation accountant. We think accountants should have one sound set of accounting opinions and will state the same when required regardless of the situation. We are unsure whether this would apply to a litigation accountant, a concept which we are unfamiliar with.

We have given Mr Hagen the "141 cents per kg of milk" name because that is what he is reported to have said Ernst and Young analysis showed that Tui Milk Products shareholders would gain from their company merging with Kiwi Co-operative Dairies in 1996. The assertion comes from Paragraph 226 of the December 2001 High Court judgement in Hedley v Kiwi and related to the situation were Tui shareholders not subject to a retention regime as the actual merger agreement required.

Well actually the 141 cents in the E&Y analysis referred to kg of milk solids which would need about 10kg of milk to obtain.

Then, although the relevant E&Y report referred to cents per kg milk solids for the seasons 1996 to 2015, the Tui shareholders did not have to just supply one kg of milk solids during that time to gain 141 cents from the merger, they had to supply one kg of milk solids in each and every year for 19 years to get the equivalent of one 141 cent benefit, paid up front, from the merger. Mr Hagen would be aware of this inadequately explained situation.

Then, these E&Y calculations overstated the amount gained by about 25% because the Net Present Value of each of the first four years were calculated independently while that for the remaining 15 years were calculated in block based upon a projection of 16 cents being gained on an actual kg of milk solids in each of those years, but unfortunately or "unfortunately" the calculation was for the period year 3 to year 17 and not year 5 to year 19. As an expert Mr Hagen might have been expected to have checked the calculations.

We wonder whether this sort of advocacy will continue to get results.

Now to the performance of Ernst and Young as auditors of the May 2004 Feltex IPO prospectus. As far as the 2005 year projections and the assumptions on which they were based, contained in the prospectus was concerned, E&Y were only required to state that in their opinion the assumptions, if they happened to be born out, would give rise to the given projections. While they did this, they also for some reason voluntarily addressed the question of whether each of the assumptions and the projections would in fact materialise. Well it is obvious to everyone that because of the vagrancies of life there is no certainty of such materialisation, and this no doubt they would claim is all that they said. Well firstly given that it is so obvious why say it? Secondly what they said suggests that in their opinion the only reasons for the projections turning out to be an overstatement would be as the result of unexpected happenings. This precludes the possibility of the assumptions not being consistent with reasonable expectations ruling at the time. They are thus warranting the assumptions.

But we suggest a 1% increase in market size was not realistic considering indications of a downturn in house building. And a 1% increase in market share was unrealistic given that competitors would likely to striving for a greater share in similar vain. One percent of the whole market is a much bigger percent increase in the sales of any participant. All participants were no doubt striving to introduce more popular designs and improved production methods to increase their sales as Feltex claimed they were doing. Ernst and Young would be aware of this and should not have given the obvious unforeseen events possibility reason as the reason they would not express an opinion on the projections being achieved. The implication was that that would be their only reason.

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