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Report on aspects of the initial public offering of Vertex Group Holdings Limited in 2002

SUMMARY OF CONCLUSIONS

1. The Securities Commission's inquiry into aspects of the initial public offering (IPO) of Vertex Group Holdings Limited (Vertex) considered three broad questions:
   
   
   1. whether the offer document for Vertex's IPO adequately described the risks associated with the share offer;
   
   
   
   2. whether the prospective financial information in the offer document properly identified and set out the principal assumptions on which it was based; and
   
   
   
   3. whether the process followed by the directors of Vertex in preparing for the IPO was appropriate.
   
   
2. The Commission is of the opinion that the offer document was likely to mislead investors because it did not adequately disclose the risks associated with the offer. The offer document emphasised certain business units of Vertex as being the most significant source of potential growth, but did not give sufficient information about risks associated with those business units. When particular emphasis is given to part of a business as a selling point for the investment, equal emphasis should be placed on material risks associated with that part of the business. In this case, the difference in emphasis given to the potential growth of certain business units of Vertex and to the risks associated with those business units, was such that the document was likely to mislead investors.



3. The Commission considers that although not misleading, certain assumptions underlying the prospective financial information for the Technical Injection and Securefresh business units were not sufficiently supportable for the information relating to those two business units to be presented as forecasts.



4. The Commission is of the view that the assumptions for the other business units were sufficiently supportable to produce forecasts. In such circumstances, the Commission believes that businesses should distinguish between those business units for which they can forecast, and those for which only projections can be given. The Commission recognises that the Financial Reporting Standards do not provide clear guidance on this point and refers this matter to the Institute of Chartered Accountants of New Zealand (ICANZ).



5. Several corporate governance issues arose during the inquiry, which warrant comment by the Commission:



1. The evidence suggests that there was some confusion as to the role of PricewaterhouseCoopers (PwC) as financial adviser to Vertex, concerning PwC's responsibilities in relation to the prospective financial information. Clear lines of communication at the appropriate levels were not apparent on this issue.



2. There was also a lack of understanding by several Vertex directors about the options for presenting the prospective financial information required in offer documents. In particular, some directors did not appear to know that prospective financial information in a prospectus can be presented as either a forecast or a projection.



3. In addition, there were deficiencies in communication of information about the performance of the individual business units from management to the Vertex Board.


6. The Commission notes that there is currently no professional guidance for auditors concerning their role in engagements that involve an examination of prospective financial information. The Commission refers to ICANZ the question of whether such guidance is desirable.



7. The Commission has not found evidence to suggest that the directors of Vertex believed the offer document was misleading. Nor has it found evidence to suggest that at the date of allotment the directors knew the offer document was misleading.