Promotion of Accounting Reform as the most effective Pathway to a Fairer Safer and more Prosperous Society. Comment and Support from all quarters is Sought to straighten out NZ's problem To Contact Us to page back through Previous Editions click here Index is in right hand column >November 2008 Edition ---- We would like to devote this edition to Feltex Carpets Ltd directors at the time of its 2004 IPO and in particular Ms Joan Withers and to the Securities Commission's involvement in the Feltex affair. The first thing to say is that directors of a company are equally responsible. However that does not oblige us to give them equal attention. Ms Withers distinguished herself from the rest by resigning soon after the company downgraded its profit forecast in early 2005. She is also different in that she holds a Chief Executive position in one of the few news media organisations in the country. It can well be argued that people who hold such positions in the news media should not be involved in any other position or matter of national relevance. A copy of the 2004 Feltex carpets prospectus is available here. but we have an extract of most of that which refers to Ms Withers which we present forthwith: Incidentally we do not think that it is acceptable to resign after such a short tenure which included a complete change of shareholders. Subscribers to the IPO had reason to believe that she was there for some time. According to the Securities Commission's version of events the board was reputable up until the time she left and then went to pieces by implying things were back to normal after the overdraft was re-negotiated. Not that we believe that version at all but we think Ms Withers will claim to do so. It would be OK to resign to assist the shareholders to take legal action against the other directors but that she seems not to be doing.

JOAN WITHERS MBA
Non-Executive Director

Ms Withers retired as Chief Executive of the
Radio Network of New Zealand Limited in 1997 after
previously holding a number of senior management
positions in the New Zealand radio industry, including
Chief of Operations of Radio New Zealand Commercial
and General Manager of New Zealand Radio Sales.
At present, Ms Withers is a director of Auckland
International Airport Limited, The Warehouse Group
Limited, Meridian Energy Limited and Tourism Holdings
Limited. She has also recently been appointed to the
advisory council for Fairfax New Zealand Limited. In
addition, Ms Withers is chair of the Clinical Research
and Effective Practice Foundation, an organisation
which manages and facilitates research at
Middlemore Hospital.
Ms Withers is a trustee of both the Royal New Zealand
Ballet and the Counties Manukau Pacific Trust. She is
also involved in an advisory capacity with the Tindall
Foundation and sits on the advisory board of the
University of Auckland MBA Programme.
Ms Withers received her Master of Business
Administration from the University of Auckland in 1990.
She has only recently joined the Board of Feltex, and is
a member of the Occupational Health and Safety Board
Committee and the Audit Risk Management Committee. 

Well it would seem from the above that Ms Withers had quite a full plate. Arguably she dropped the Feltex job when because she was appointed to the Fairfax CEO job. Or perhaps she was offered and/or accepted the Fairfax CEO job as an excuse to get out of the Feltex directorship. Either way if she was any good it was wrong to jump ship when it was in a period of trouble.

We have a theory that Feltex have approached the Securities Commission about an intended Initial Public Offer with all male directors and was told by the Commission that such a company should have at least one female director. It might even have unofficially been made a condition for them receiving the exemption from certain requirements such as telling about their existing shareholder consortium which they were granted. Perhaps Ms Withers was suggested to them. This theory comes close to explaining the complete lack of criticism of the most disgusting IPO by the Commission in that they would have felt somewhat responsible for putting Ms Withers on the spot.

However a women director would have been,and no doubt was, great for luring the Mum and Dad subscribers to the "offer" so the (male) directors might have thought of and implemented idea themselves. They ran risk however of this new director being half awake and detecting the true state of Feltex and scuttling their plans. That risk might not have been so high given the gender of the new director, a matter that we would rather not discuss further.

An extension to this theory is that following the profit downgrade Ms Withers has realised that the IPO was a "have" and has gone to the Securities Commission complaining about being hoodwinked into taking the directorship. The Commission has then unofficially suggested that she resign and they would only look for misdeeds of the directors occuring after she resigned and say the IPO was OK.

We would like now to present a letter we have received from the said Ms Withers. We trust that those who read it will read on to absorb our reaction to it. Our August edition remains unaltered and is available here.

LEVEL 10, TOWER ONE                                                                            CHRISTOPHER ROBERT DARLOW 
51-53 SHORTLAND STREET                                                                 CHRISTOPHER CALDER HAMILTON ALLAN 

AUCKLAND 1                                                                                   TIMOTHY JOHN GEOFFREY ALLAN 

NEW ZEALAND                                                                                        HOWARD DAVID MORRISON 

 P.O. BOX 2882 

 DX CP24049 
 AUCKLAND 1

TELEPHONE (09) 309-9875 
FACSIMILE (09) 309-9877

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Well let us now address these criticisms. You will have heard much of it before but our arguments are being refined and perfected all the time.

Firstly with regard to the first of the quotes from our August edition it is not defamatory because it is true. It is true because that is what we say (and we are the ones who know what we say) and because we can give substantial evidence to prove what we say is true which we now do.

Our concern is first with allegations of defamation of Ms Withers. This no doubt arises because we have called Feltex IPO a swindle and Ms Withers was a director at the time the offer with its declarations was made. She is thus probably responsible and liable with respect to any such swindle. But the most common reason for liability which we and most people would think would be the one to apply to her is neglect and not the more sinister possibilities which she chooses to list. We all tend to be guilty of a little neglect from time to time, especially if we have become overloaded with responsibilities.

These more sinister allegations must of course apply to some Feltex personnel who have perpetuated the swindle. The only thing that makes us suspect that Ms Withers may have been involved at the perpetuation level is her continued involvement with Credit Suisse and the lead brokers of the IPO in her business life.

For our evidence of a swindle and her neglect we refer you to page 37 of the prospectus where the following statement is made

"In the period from 1993 to 2003, the size of the Australian carpet market has averaged approximately 50 million square metres per annum and the compound average growth rate of the carpet market has been 1.7% per annum."

We say that at fair indication of the average market growth can be obtained by the use of least squares regression analysis of the previous 10 years of market size figures which we calculate in the table to the right of here. It shows the growth to be 0.31% p.a.from a start of 496.2 in 1993, but more importantly the size for 2003 is more than 2% above the average line. Instead of a 1% increase on 2003 there should have been a 2% fall. Arguably only a 2% fall is optimistic since size must fall below the average as often as it is above it. As the table shows if this more realistic adjustment for market size had been used Feltex's revenue forecast for 2004 would have been $12m lower and its revenue projection for 2005 would have been $15m lower.

We similarly condemn Feltex's adoption of an increase in market share equivalent to a 1% increase in sales for its forecasted 2004 year and projected 2005 year. As our calculations show its market share had been falling at the rate of 5% p.a. considering the differences in sales between its 3 latest completed years. Feltex claimed they had a special marketing program but all companies have them as best they can do. No exceptional program became evident and we say there was none. As the table shows the difference between +1% and -5% means $19.8m overestimated for the 2004 year and $38.8m for the 2005 year.

As the table shows the combined effect of the two overestimations is $32.1m in 2004 and $53.2m in 2005. As their sales and profit predictions show profit is very sensitive to changes in sales so that the profit overestimations would be not much less than these sales overestimations in dollar terms. It thus reflects quite accurately the profit drop below projection whitch actually happened and given that a dividend was paid out the complete failure of the company was unsurprising. Other defects in the prospectus are we believe a failure to list support from the Credit Suisse Group by way of sales or any other help and a failure to disclose any agreement for Shaw Industries to stay out of the Australian carpet market which one would have expected would have been negotiated when Feltex bought Shaw's Melbourne plant in the year 2000. We think any such agreement might well have expired around 2004.

The failure of the Securities Commission to detect these faults is pathetic as is almost everything about this politically appointed organisation. The fact that an auditor who failed to insist that Yield to Maturity be applied to massive zero coupon bonds in 1990 has now been appointed for a record fourth time to the Commission along with the reappointment of two other females prior to the election magnifies this.