When profit projection is not a forecast

Feltex could be cleared by any investigation into the carpet manufacturer's float prospectus through a "hair-splitting" distinction between profit forecasts and projections.

The Securities Commission has received at least one formal complaint - from the Shareholders' Association - against Feltex.

Among other things, the association wants the commission to investigate whether there was a reasonable basis to believe forecasts for the 2005 year would be met at the time of Feltex's June 2004 float.

However, in interviews with the Herald, Feltex chairman Tim Saunders has emphasised prospectus "projections" rather than "forecasts".

Roger Wallis, a Chapman Tripp partner specialising in securities law, says there is a bit of a legal difference between a forecast and projection. However, he acknowledged this would be lost on "mum and dad" retail investors and probably many professional investors as well.

A "forecast" refers to best-estimate assumptions while a "projection" refers to hypothetical assumptions. A projection, therefore, has greater room for latitude.

"It's a fine-level distinction and it would perhaps make a difference at the margin in arguing the effectiveness of any defence," says Wallis.

Association chairman Bruce Sheppard says the difference between projections and forecasts is "hair-splitting".

It was "academic" whether a prospectus made forecasts or projections.

"The simple reality is those people who do read prospectuses and do read numbers included with them believe those numbers are robustly prepared," says Sheppard.

"They will use them for the purposes of valuing the company and determining whether they want to buy the shares."

The Financial Reporting Standards Board seems to agree with Sheppard. In a public consultation paper, the board has outlined plans to remove the distinction between forecasts and projections.

Emphasis would instead be placed on disclosure around assumptions and their degree of uncertainty.

Meanwhile, the association has also asked the commission to investigate whether Feltex's board breached stock-exchange continuous disclosure obligations by downgrading its profit expectations later than it should have.

Wallis points out that under the Securities Markets Act continuous disclosure obligations apply to Feltex itself not to its directors.

So even if a court found Feltex breached its continuous disclosure obligations, any damages would be payable by Feltex, with shareholders' money, creating "a bit of a Clayton's remedy". Likewise, if the commission sought a penalty for non-compliance with continuous disclosure, which could be up to $300,000, it was paid by the company not by directors or employees.

The Securities Legislation Bill, now before Parliament, should allow shareholders to allege a director or professional adviser has played a role in a listed company's failure to comply with continuous disclosure.

The commission has declined to comment on whether it is investigating Feltex's financial woes.

Feltex stake cut

Feltex's biggest shareholder, Australia's Hunter Hall Investment Management, said yesterday it had sold down its stake from 9.04 per cent to 5.28 per cent. Hunter Hall bought into Feltex at the company's June 2004 IPO. Hunter Hall sold the 3.76 per cent stake between October 26 and Wednesday.

Downgrade history

After two profit downgrades, Feltex expects to make no more than $12 million, half the projected profit in its May 2004 prospectus.

Feltex's shares have slumped from the $1.70 June 4, 2004, float price to 44c yesterday.