Former Feltex chief financial officer Des Tolan today admitted the company should have disclosed a breach of banking covenants in its December 2005 interim financial statements but he blamed auditor Ernst & Young for the oversight.Mr Tolan also admitt
Former Feltex chief financial officer Des Tolan today admitted the company should have disclosed a breach of banking covenants in its December 2005 interim financial statements but he blamed auditor Ernst & Young for the oversight.
Mr Tolan also admitted that Feltex’s debt to ANZ should have been classified as a current liability in the accounts but that at the time he regarded the debt as non-current.
Five Feltex directors are accused of failing to make proper disclosures about the company, which went into liquidation in September 2006 with debts of $40 million.
The charges concern Feltex’s interim financial statements for the six-month period ended December 31 2005, the first set of accounts prepared by Feltex under the new international financial reporting standards (NZ IFRS).
Peter Thomas, John Feeney, John Hagen, Peter Hunter and Tim Saunders face two charges of failing to disclose an ANZ Bank debt facility as a “current” liability and did not disclose a breach of financial covenants during that period.
If convicted, each director is liable to a fine not exceeding $100,000.
Mr Tolan was called as the first witness in the defence case, which began in the Auckland District Court today. The prosecution case finished last week.
‘Inaccurate’ disclosure
Mr Tolan joined Feltex in August 2000 and was appointed chief financial officer in July 2003. Before arriving in New Zealand in 1995 he had worked as an audit manager for Deloitte in South Africa.
“I accept now that classification of the ANZ debt was inaccurate and it should have been current,” he said of the December 2005 Feltex accounts, adding that a breach of banking covenants should also have been disclosed.
But at the time he regarded the debt as current and believed the bank to be strongly supportive of the company so there was no prospect of it calling in the loans.
As at December 2005, Feltex owed about $A120 million to the ANZ, including a fresh short-term $A10 million facility to enable the company to absorb restructuring costs.
Mr Tolan said he did not “turn his mind” to the relevant accounting standards because Ernst & Young had advised there were “no significant impacts” arising from Feltex’s transition to NZ IFRS.
Ernst & Young had been engaged to assess the likely impacts of the transition and to conduct a review of the financial statements.
“Any errors I expected Ernst & Young to pick up,” Mr Tolan said.
“The impression left by Ernst & Young in its review was that the directors could be completely confident they complied with the obligations required.”
No waiver granted
The court heard how the ANZ had discussed with Feltex the prospect of reviewing the company’s interest and debt covenants after providing the additional $A10 million.
There had been a discussion about “flexing” or relaxing the covenants due to the costs of restructuring.
However, ANZ didn’t conduct its review until March 2006 because it was waiting for an independent report to be finished.
No official waiver was granted before Feltex released its accounts on February 20, 2006.
In his cross-examination, prosecutor Brian Dickey said Feltex knew that ANZ had not provided a waiver and therefore had an obligation to disclose the breach.
“Yes, there was an obligation,” Mr Tolan said. “I accept we got it wrong.”
Mr Tolan said there was a lot going on at the time, with the restructure, including the closure of a yarn plant in Melbourne and that the company’s new chief financial officer, Peter Thomas, was ill after picking up a disease while on holiday.
“Come year end there was no doubt we were in breach,” Mr Tolan said.
Mr Dickey asked whether the board knew it.
“It was well known,” Mr Tolan said.
Asked who was responsible for writing the accounts, Mr Tolan said he was, and “ultimately the directors.”
He said it was unfortunate that Ernst & Young did not draw out in its advisory paper on the transition to IFRS the compliance issues.
Director’s “impressive”
Mr Dickey had earlier questioned Mr Tolan on the calibre of the Feltex board, in particular the October 2005 appointment of former Deloitte chairman Mr Hagan.
Asked whether he took comfort from Mr Hagen’s appointment, Mr Tolan said:
“I took comfort from the board as a whole. They were extremely competent.”
He said Mr Hagen was a “very impressive individual”.
CSFB mentioned
Feltex listed on the New Zealand stock exchange in May 2004 when Credit Suisse First Boston Asian Merchant Partners sold Feltex to mainly local investors for $254 million.
Receivership and sale to rival Godfrey Hirst came 27 months later.
CSFB paid just $19.5 million when it bought Feltex from UK-based BTR Nylex, which had acquired the firm from the ashes of Allan Hawkin’s Equiticorp in 1989.
The court heard how Mr Tolan engaged in email correspondence with Credit Suisse during the IPO process.
He said he dealt with CSFB’s New York office.
The principals of Credit Suisse First Boston Asian Merchant Partners remain anonymous after the Securities Commission granted an exemption before the Feltex float.
