KEY POINTS:
Feltex Carpets' prospectus for its 2004 initial public offering (IPO) was not misleading in any material particulars, the Securities Commission has found.
But, releasing the findings of an inquiry today, the commission said the collapsed company failed to disclose certain material information to the market concerning changes to its banking facility agreement with ANZ in October 2005.
Feltex also failed to disclose a breach of its banking covenants and did not properly classify its debt in its half-year financial statements at the end of 2005, the commission said.
Work undertaken by Ernst & Young New Zealand in its review of Feltex's half-year financial statements at the end of 2005 were found to have failed to meet the required standards.
The commission looked into Feltex's 2004 IPO prospectus, and into the company's compliance with financial reporting and continuous disclosure obligations in the period between its listing in 2004 and the appointment of liquidators to the company in late-2006.
The commission said that while the issues identified raised questions about the performance of the Feltex board and its auditors, it was not suggesting those issues were the reason Feltex failed.
It had heard from witnesses that the collapse of Feltex was due to a combination of factors.
They included the high fixed costs inherent in the carpet manufacturing industry and those particular to Feltex, the need for restructuring, the decline in the Australian housing market, and the competition from Asian carpet manufacturers.
"It is the commission's view that the FTX (Feltex) collapse was not caused by securities or financial reporting matters, and accordingly, the commission will not comment on the FTX collapse," the commission said.
Its views on the standards of the work done by Ernst & Young had been referred to the New Zealand Institute of Chartered Accountants.
Matters arising from the inquiry's findings had also been referred to the Registrar of Companies, and the Accounting Standards Review Board.
"Careful attention to continuous disclosure and financial reporting is vital to allow investors to make informed decisions about holdings in listed companies," commission chairwoman Jane Diplock said.
"This becomes all the more important when a company is facing difficult circumstances."
During its inquiries, the commission obtained documents and heard evidence at hearings from people including former directors and management of Feltex and representatives of Ernst & Young and ANZ.
As liability for continuous disclosure breaches lay only against the issuer concerned, and with Feltex now in liquidation and its shares no longer trading, there was no realistic chance of taking enforcement action, the commission said.
Under the law in force in 2005 directors and officers of companies could not be held liable for continuous disclosure breaches. Therefore, no question arises of action against any individuals.
In late 2005 it was widely known that Feltex was in difficulty. At that time the company was dependent on the continued support of its bank, ANZ.
"It appears that the FTX directors failed to comprehend the significance of changes made to the debt facility agreement that were designed to protect the position of the bank, and so failed to adequately inform the market of these," the commission said.
The Feltex board's failure to disclose the breach of the company's banking covenants in its December 31, 2005 half-year financial statements raised questions of compliance with the Financial Reporting Act, the commission said.
Certain defences may be available to the directors, including that they "took all reasonable and proper steps to ensure that the applicable requirement of this Act would be complied with".
While the directors did take certain steps, the Feltex board failed to pay sufficient attention to the breach and failed to consider whether there were financial reporting obligations arising from the breach, the commission said.
- NZPA
