Feltex Carpets Limited
IPO Prospectus, Financial Reporting and Continuous Disclosure

FTX had a loan facility agreement with the ANZ bank which reflected the terms and conditions of FTX's obligations to ANZ arising from FTX's debt.

There were four relevant changes to this agreement which were finalised on 27 October 2005.

• ANZ loaned FTX A$10 million to support FTX's plans for corporate restructuring;
• ANZ and FTX agreed to amendments which, in relevant part, widened the scope of the annual facility reviews to include a review of all facilities;
• ANZ increased the facility margin interest rates; and
• ANZ gained the ability to declare all sums owed by FTX immediately due and payable with at least 30 days notice, upon a review of the facilities.

The amendment regarding the annual review process specifically articulated that ANZ would conduct a review of each facility on or about 30 November 2005 and thereafter on or about 1 September of each year. If ANZ did not conduct the review on or about 30 November, ANZ could conduct the review at any time thereafter.

Previously, the loan agreement allowed for ANZ to call the debt immediately due and payable only if an event of default occurred. The amendments gave ANZ the enhanced power to call the debt immediately due and payable without the previous requirement that FTX default upon its loan. The ANZ was able to call the debt, upon review and with at least thirty (30) days notice.

The annual margin interest rates for the various loans increased as follows:

The Commission saw a report prepared by Feltex management at the time of the changes to the facility agreement reflecting a projected annual cost of the increase in the margin interest rates of $1,746,890. The Commission also heard that the FTX directors believed that correct calculation of the costs of the inquiries in the margin interest rate was $1,155,105. The directors believed that the figure of $1,746,890 included increases in interest margin that occured prior to the changes to the facility agreement and is based on the assumption that all of the facilities were fully drawn, which they were not. The Commission also heard that the directors expected FTX's actual interest costs to decrease because the anticipated restructuring would result in asset sales and repayments of debt.

The Commission is of the view that to appropriately fulfil its continuous disclosure obligation FTX should have disclosed the increase in the margin interest rates, the projected costs of this increase, and the board's broader expectations in relation to these costs and any anticipated savings.

No disclosure was made to the market at the time the facility agreement was renegotiated.

Section 19 of the Securities Markets Act 1988 and the NZX Listing Rules govern the question of what information must be disclosed to the public by a public issuer. Specifically, Section 19B requires a public issuer, such as FTX to disclose material information to the public that is not generally available to the market. Also a public issuer must disclose such information in accordance with the listing rules of the exchange on which it is registered.

Material information is information that a reasonable person would expect to affect the price or value of listed securities if the information were generally available to the market and relates to particular securities or a particular public issuer(s) rather than to securities generally or public issuers generally. Information would have a material effect on the price or value of listed securities of a public issuer if the information would, or would be likely to, influence investors in their decision to buy or sell those securities.

In the Commission's view, both the projected increased interest costs and the changes to ANZ's review and cancellation rights under the facility agreement were likely to have been material to the market in terms of the Securities Markets Act and section 10 of the NZSX Listing Rules.

The Commission considered the information available to the market about FTX's financial condition at the time of these changes in the Fourth Restatement. The April and June 2005 earnings downgrades would have created uncertainty for FTX's potential earnings. The projected increased interest costs were material to FTX's expected earnings. While some savings might have been expected from the restructuring that could occur as a result of the increase to the facility, it seems unlikely that any such cost savings would have been apparent in the short term. The interest cost increases, by contrast, were effective immediately. In the Commission's view these increased costs would have been expected to have a material and negative effect on the company's profit forecasts, and should have been disclosed to the market.

The other material effect of the Fourth Restatement was to tighten the review requirements under the facility agreement. The renegotiated agreement gave ANZ the right to review all facilities on 30 November 2005, or at any time thereafter if not done at that time, and to call all amounts due and payable on 30 days notice following such a review. The bank could take this step even if FTX was not in breach of any of its loan covenants. These additional rights were added to the agreement by ANZ in order to provide extra protection for its own position.

In the Commission's view these changes to the facility materially changed the terms of FTX's debt funding arrangements. They reduced the company's expectation concerning the longer-term outlook for its debt facility. This would, in the Commission's view, have been likely to be viewed by the market as a sign of significant concern on the part of the bank about the company's prospects, and would have been likely to affect market confidence in the company, leading to a fall in the share price.

The FTX directors, as reflected in the opinion of their retained expert, stated that the amendments to the facility agreement would not have materially impacted the FTX share price because at the time:

• the market already understood that FTX's restructuring costs would be funded by further borrowing, the increased debt would make a covenant breach more likely, the bank was supporting the restructuring despite the upcoming breach, and the debt interest margins would increase;
• the market was discounting the FTX share price to reflect risks; and
• disclosure of the changes would not have materially impacted the share price.

Further, the directors' expert stated that ANZ's right to call the facilities due and payable after the review date of 30 November only advanced the bank's right to call the facilities by one month, because the bank would have been able to call the facilities at the covenant breach on 31 December 2005.

The Commission has considered the expert's opinion. Notwithstanding that there may have been market discounting, the Commission considers that the facility amendment which allowed ANZ to call the debt immediately due and payable with 30 days notice was a significant change in the relationship between FTX and its banker. Since FTX's financial stability depended upon the continued support of ANZ, the information about the change in that relationship was material and should have been disclosed to the market.

The Commission finds that these changes were material information that a reasonable person would expect to affect the price or value of listed securities, if the information were generally available to the market, and would have been likely to influence investors in their decision to buy or sell FTX shares.

Therefore, FTX should have disclosed the changes to the market on 27 October 2005. Under the Securities Markets Act any failure to comply with the continuous disclosure provisions of the NZX Listing Rules incurs civil liability for a company. The changes had not been disclosed to the market at 22 September 2006, the date that FTX was placed into receivership. The company's business assets were subsequently sold, and the company was placed in liquidation by order of the High Court. FTX shares are not trading on the NZX, and the company currently has no material assets. Since there is essentially no company against which to take an action, the Commission will not pursue an action against FTX for its failure to disclose the changes to the facility agreement.

The Commission makes no criticism of ANZ for its actions. As a significant creditor, ANZ was concerned about the position of FTX and was taking steps to protect ANZ's position.

At the time of the FTX directors' conduct in failing to disclose the changes to the facility agreement, the securities laws did not attach liability to directors for continuous disclosure violations. Since the time of this conduct, the securities laws have been changed to include liability against the directors of a company for failing to disclose material information. In the near future, these changes will take effect. However, the Commission must deal with the state of the securities laws as they were at the time of this conduct. Therefore, no further action will be taken as to this matter.