Witness says information can have varied impact, based on expectations, writes Colm Keena

Professor S P Kothari, who gave expert evidence on behalf of DCC, put a lot of emphasis on the issue of expectations.

He said a particular piece of hard information on a company, if given to the market, constituted good or bad news depending on its relationship to the expectations that existed.

The Professor of Management at the Massachusetts Institute of Technology gave evidence about the Fyffes trading statements DCC chief executive and Fyffes non-executive director Jim Flavin had when DCC sold most of its shareholding in Fyffes, for €106 million, in February 2000.

The two trading reports, for November 1999 and December 1999, are the information Fyffes alleges was price sensitive.

Prof Kothari agreed the reports "primarily indicate poor financial performance" over the two months concerned, and also gave a negative forecast for January 2000.

The November report showed losses of €2.6 million, €4.1 million worse than the previous year, and €2.3 million worse than budgeted for by Fyffes.

The December report revealed a loss of €1.3 million, compared to a profit of €3.3 million in 1998, and a budgeted outcome for the month of breakeven.

The January forecast was for a profit of €1.3 million, compared to a breakeven budget and a prior year outcome of €6.3 million.

The financial year for Fyffes began on November 1st, 2000, and the company told the market it expected further growth.

Prof Kothari said it was his opinion that investors had already factored in a poor performance for the November-January period, and the stock price reflected this.

He said this was because the market knew that banana prices were poor, and that the euro-dollar exchange rate was not in Fyffes' favour.

He said a model he had constructed using known banana prices and the then exchange rate, gave a reasonably accurate prediction as to Fyffes results for the quarter.

On March 20th, 2000, Fyffes issued a profit warning and its share price dropped, from €3.23 to €2.70. The warning pointed towards poor performances in November to January as being key to the group's failure to meet the previous year's half-year target.

Prof Kothari said his claim that the market had already anticipated the information in the trading statements was supported by analysts' trading statements in the wake of March 20th.

There was no significant adjustment to analysts' forecasts for Fyffes in the wake of the announcement. He said that if there had been a huge gap between the analysts' expectations for the company, and the information in the March 20th statement, the analysts would have had to significantly adjust their forecasts.

Why then did the share price drop so sharply?

The professor said this may have been due to other information contained in the March 20th statement, information which was not in the documents Mr Flavin had in February.

The March 20th statement revealed the poor trading had continued beyond January 2000; it revealed that management was unsure that the second half of 2000 would be able to compensate for the first half; and it revealed that Fyffes was planning on spending €100 million on its worldoffruit.com internet project, at a time when sentiment towards internet stocks had become less bullish.