Feltex Carpets Limited
IPO Prospectus, Financial Reporting and Continuous Disclosure

FTX had been operating in Australia and New Zealand since the 1920's. FTX produced a full range of woven and tufted carpets and wool and man-made fibre carpets, under a range of well recognised name brands.

Originally manufacturing footwear, FTX expanded into manufacturing industrial felts, floor coverings, and then carpets in the 1940's. Since that time FTX had acquired several entities including rubber companies and other carpet manufacturers and in 1988 was ultimately sold to an Australian company named BTR Nylex.

In 1996, Credit Suisse First Boston Asian Merchant Partners, L.P. "CSFBAMP", purchased FTX from BTR Nylex. CSFBAMP was a member of a group of companies which operated the private equity business of Credit Suisse Group, a Switzerland-based international financial institution.

In May 2000, FTX acquired Shaw to become one of the two largest Australasian carpet manufacturers. As a result of the Shaw acquisition, FTX significantly increased in size and gained a stronger position in Australia.

In 2003, FTX issued $60 million of bonds.

In 2004 FTX offered $50 million of new shares to members of the public in New Zealand and institutions in New Zealand and Australia. FTX intended to use the proceeds from the issue of the $50 million in new shares along with additional drawings under the bank facility to redeem the bonds issued in 2003. There was a secondary sale by CSFBAMP of 113,523,100 shares ($193 million) to members of the public in New Zealand, bondholders with New Zealand addresses, and institutional investors in New Zealand and Australia. First NZ Capital and Forsyth Barr Limited were the joint-lead managers in the IPO. The offer closed on 21 May 2004 and on 4 June 2004, FTX shares began trading on the NZSX at $1.70 per share, which was the subscription price for members of the public in the IPO.

The offer of shares to the public was made by FTX in a combined investment statement and registered prospectus dated 5 May 2004. In the same offer document FTX presented the company's prospective financial information consisting of forecast financial information for the year ending June 2004 and projected financial information for the year ending June 2005.

In October 2004, FTX engaged Ernst & Young to conduct an impact assessment of the NZ IFRS requirements on FTX to assist FTX in its conversion of financial reporting to NZ IFRS.

For the six months ending 31 December 2004 the company's interim report made reference to the fact that "EBITDA was $24.6 million, up 6.9%, supported by an increased EBITDA margin, which improved to 15.4% from 13.4%. Revenue of $160 million was down 7.4% as the company maintained its focus on the higher margin segments of the market."

The company also mentioned that "despite the Group not meeting the projected sales and the likelihood of a continuing strong New Zealand dollar, EBITDA and net profit projections for the year remain achievable."

Up until late February 2005 the company had maintained the above position saying that it was on track to meet prospectus earning projections. The projected net profit after tax for the full year was $23.9 million.

However, on 1 April 2005, FTX announced to the market that it expected its net profit after tax for the financial year ending 30 June 2005 to fall significantly below the previous projections. FTX downgraded its earnings projection to $15 - 16 million. FTX announced that its sales for the full year were projected to be $295 million to $305 million which was below the previous guidance provided in the interim report of between $310 million to $315 million. Net profit after tax was projected to be between $15 to $16 million for the year ending 30 June 2005 which was between $8 million and $9 million less than the previous projection.

FTX announced that the key reasons for their revised projections were that the market environment in Australia and New Zealand was more difficult than expected in the first quarter of the calendar year; their commercial retailers and contractors experienced a delay in projects due to a shortage of laying contractors; there was continued low store traffic in the first quarter of the calendar year, which reduced the retailers' confidence for the remainder of the financial year; increased price competition in the market primarily due to synthetic imports being higher than projected; and the decline in the Australian residential market. FTX also announced that the price competition had impacted FTX's ability to fully pass on additional first quarter synthetic raw material cost increases; the declining Australian market was frustrating FTX's ability to reach its projected market share increases; and the ongoing strength of the New Zealand dollar continued to adversely affect FTX's performance.

NZX Regulation investigated whether the 1 April 2005 announcement was made in a timely manner in compliance with NZX Listing Rules.

NZX Regulation considered that FTX management had material information that should have been disclosed to the market prior to the actual announcement of 1 April 2005.

FTX disputed this view, but settled this matter with NZX and paid a sum of $150,000 consisting of $85,000 for NZX Regulation's and NZX Discipline's costs arising from the inquiry and a $65,000 contribution to the NZX Discipline Fund.

On 20 June 2005, FTX further revised its earnings guidance to announce that the net profit after tax for the 2005 financial year would be between $11.5 million and $12 million (as compared with the projection of between $15 million to $16 million announced on 1 April), prior to restructuring costs associated with the review of management and operations. FTX also projected the fourth quarter earnings to be between $200,000 and $700,000 prior to restructuring costs, compared to the third quarter loss of $880,000, noting that this was a small turnaround which fell below expectations in April. FTX also announced that in response to unsatisfactory financial performance, the FTX Board of Directors was making senior management changes, undertaking a review of FTX's operations, and Chief Executive Sam Magill was to step down. Further, FTX explained that there were external factors impeding its ability to maintain and improve average selling prices and margins, such as the increasing competitive conditions in Australia, less favourable market conditions in New Zealand, and the increasing competition by imported carpet against locally manufactured carpet.

During the period from prior to the 1 April 2005 announcement to after the 20 June 2005 announcement, the FTX share price fell approximately 68%.

Also, in June 2005, Godfrey Hirst, a rival carpet manufacturer, acquired a 5.83% shareholding in FTX.

In July 2005, Godfrey Hirst made a proposal to FTX to merge the two businesses.

In October 2005, FTX rejected Godfrey Hirst's offer to combine their businesses.

FTX had a number of loans from ANZ bank dating back to the early 1990's. In October 2005, ANZ reduced one of FTX's loans by A$5,000,000 and loaned FTX A$10,000,000 as a short-term facility. FTX and ANZ also amended the terms of their loan facility agreement. The revised agreement was reflected in the Fourth Deed of Amendment and Restatement of Facility Agreement ("Fourth Restatement").

In December 2005, FTX engaged Ernst & Young to conduct a review of FTX's 31 December 2005 half-year financial statements.

As at the 31 December 2005 calculation date, FTX had breached certain of its banking covenants. In August or September 2005, the FTX directors apprised ANZ that FTX anticipated breaching certain of its banking covenants.

In February 2006, the FTX Board approved the 31 December 2005 interim half-year financial statements in which FTX classified most of its debt with ANZ bank as "non-current."

In March 2006, FTX notified ANZ that FTX had breached certain of its banking covenants.

In May 2006, ANZ formally notified FTX that ANZ had waived its rights in regard to FTX's breach and ANZ imposed certain reporting obligations upon FTX.

In June 2006, ANZ formally notified FTX that ANZ had withdrawn its waiver of rights in regard to FTX's breach.

In June 2006, FTX announced to the market that it was seeking a cornerstone stakeholder.

FTX considered offers to purchase from several companies prior to the ANZ placing FTX in receivership on 22 Sept 2006. ANZ appointed the firm of McGrath Nicol as receiver.