Discussion Documents: Feltex Carpets Limited IPO Prospectus, Financial Reporting and Continuous Disclosure

Offers of securities to the public must be made in compliance with the Securities Act 1978. The Act requires issuers to register a prospectus which must contain all of the material information in regard to an offer of securities.

The Commission reviewed the prospectus for compliance with the Securities Act and to consider whether the prospectus was misleading in any material particulars.

The Commission assessed prospective financial information in the prospectus to determine whether the prospective financial information was consistent with the assumptions presented and whether the assumptions were consistent with the requirements of FRS 29.

The methodology underlying FTX's preparation of the detailed sales forecasts and projections was similar to the process followed for the preparation of the annual budget.

Financial Reporting Standard No. 29 ("FRS-29"): Prospective Financial Information was the applicable financial reporting standard for the FTX prospectus. FRS-29 states that prospective financial information can be presented either as a forecast or as a projection.

FRS-29 defines the terms as follows:

(a)

"'A forecast' means prospective financial information prepared on the basis of assumptions as to future events that the governing body reasonably expects to occur associated with the actions the governing body reasonably expects to take as at the date that the information is prepared (best-estimate assumptions).

(b)

'A projection' means prospective financial information prepared on the basis of one or more hypothetical but realistic assumptions, (or 'what-if' scenarios), that reflect possible courses of action for the reporting periods concerned as at the date that the information is prepared."

FRS-29 requires that the assumptions used in preparing forecasts "shall be reasonable, supportable, consistent among themselves and with the strategic plans of the entity, and be applied consistently." FRS-29 also states that a forecast is based on assumptions which the governing body reasonably expects to occur while a projection is based on one or more hypothetical but realistic assumptions.

FRS-29, paragraph. 5.21, states:

"To be reasonable, best-estimate assumptions are to be consistent with the strategic plans of the entity. Assumptions are consistent with the plans of the entity if they reflect the expected economic effects of anticipated strategies, programmes and actions, including those being planned in response to expected future economic conditions."

The Commission found that most of FTX's assumptions presented a largely "no change" scenario. Some of the critical assumptions were:

(a)

that the carpet market in Australia and New Zealand would continue to grow by 1% (total market sales), which is stated to be below the average growth rate over the past 10 years; and

(b)

that new products would increase in line with expectations; and

(c)

that FTX would successfully implement the strategies described in the prospectus under "Business Description," which would result "in Feltex's market share increasing by approximately 1% over the projected period."

The Commission notes that the prospectus outlined the risks specifically related to the carpet industry and to the business of FTX, such as competition in the floor coverings industry; changes in the building industry; exchange rate fluctuations; effect of imports on the market; and performance-related risks. The prospectus also specifically outlined the risks associated with forward-looking statements and with choosing an investment advisor.

The prospectus contained summary financial statements and audited financial statements for June 2003 and December 2003. The Commission reviewed the financial statements in the prospectus. This review did not find evidence of any breach of disclosure required under the securities laws and financial reporting standards.

The Commission also notes that the prospectus contained disclosures concerning the risks associated with investing in FTX, the directors' and vendor's interests; shares held by directors and senior managers outside of the offer and the shares they would obtain from the executive share option plans, Peter Thomas's relationship with CSFBAMP, and annual fees.

The Commission concluded that the underlying management process around the preparation of the PFI in the prospectus appears to have been robust, that FTX undertook a rigorous process to decide how the PFI should be labelled, and that FTX made reasonable assumptions upon which it based its projection figures.

The reasonableness of the assumptions and the projection figures were supported by FTX's actual performance for the six month period ended 31 December 2004.

The Commission concluded that there was no information available to the directors at the time of the IPO to suggest that the directors of FTX could or should have foreseen that the projections would not be reasonable.

The Commission concluded that the risk disclosures, historical financial statements, and disclosure of directors' and vendor's interests were adequate in terms of securities law.