Feltex Carpets Limited
IPO Prospectus, Financial Reporting and Continuous Disclosure

The Commission has concluded that:

• the 2004 IPO Prospectus was not misleading in any material particulars;
• FTX failed to disclose certain material information to the market concerning changes to its facility agreement with ANZ in October 2005;
• FTX failed to disclose the breach of its banking covenants in its 31 December 2005 half-year financial statements; and
• FTX did not properly classify its debt in its 31 December 2005 half-year financial statements.

The Commission has concluded that the disclosure breaches show that the FTX Board failed to pay sufficient attention to the continuous disclosure and financial reporting compliance issues arising from changes to the facility agreement and the breach of banking covenants.

Since FTX is in liquidation and liability for continuous disclosure breaches lies only against the issuer concerned, there is no realistic chance of taking enforcement action in these circumstances. The Commission will take no further action in regard to FTX's failure to disclose to the market the changes to the facility agreement.

The Commission refers this report to the Registrar of Companies to consider whether any action should be taken against the FTX directors under FRA.

The Commission has concluded that the work undertaken by Ernst & Young New Zealand and the responsible partner Gordon Fulton in their review of the 31 December 2005 half-year financial statements failed to meet the standards required for such an engagement.

The Commission refers this report to NZICA to consider whether any action should be taken against Ernst & Young New Zealand and the responsible partner Gordon Fulton.

FTX's failure to properly classify the debt in its 31 December 2005 half-year financial statements has highlighted that the classification of debt in interim financial statements may not be expressly addressed by an applicable financial reporting standard. The Commission refers this matter to the ASRB to consider whether any guidance or other action is necessary.

The Commission considers it is unacceptable for the auditor of a New Zealand issuer not to retain control of the full records of its audit or review. We refer this matter to NZICA to consider whether the New Zealand Auditing Standards should be reviewed in this regard.

Since questions of liability under FRA do not arise in regard to the conduct of auditors of a company, the Commission is not able to refer Ernst & Young to the Registrar of Companies in regard to FTX's failure to disclose the breach of its banking covenants in its 31 December 2005 interim financial statements.