Royal Group Announces First-Quarter 2006 Financial Results26 May 2006
--------------
Custom Profiles and Mouldings sales increased 2.9 percent to $146.6 million from $142.6 million. During the first quarter of 2006, Custom Profiles and Mouldings was able to successfully sustain price increases previously announced in November 2005. These price increases were partially offset by lower volumes and a weaker U.S. dollar.
Building Products revenue, which includes vinyl siding, was $71.5 million, compared to $61.6 million a year earlier, a 16.2 percent increase. Higher sales volume and selling prices more than offset the weakening U.S. dollar. Demand was particularly strong in the Gulf Coast region of the United States where demand rose about 35 percent from a year ago due to the damage caused by Hurricane Katrina. However, the mix of sales favored lower-margin products such as lower-end siding panels.
Construction Products sales, which includes pipe and fittings, and the nondivested operations of the North American Royal Building Systems, decreased 1.6 percent to $58.5 million from $59.4 million in the 2005 first quarter. The decline reflects lower sales volumes and the weakening U.S. dollar, partially offset by higher selling prices. Pipe and fittings sales declined as distributors and contractors adjusted their inventories.
Home Improvement Products sales, which includes decking, fencing, railing and outdoor storage, were $26.7 million, down from $33.3 million in the prior-year quarter. Higher selling prices were offset by volume declines, primarily as the result of the previously noted deferral of shipments until the second quarter pending the completion of customer contract negotiations, as well as the weakening U.S. small volume.
Window Covering Products sales were $28.4 million, down from $33.6 million in the 2005 period, due to lower sales volumes, partially offset by higher selling prices. The reduced volume reflects focusing on reducing the number of smallvolume, low-margin customers and the divestiture of the wood blind business in Mexico in the 2005 first quarter.
Performance, Outlook, and Sale Process
--------------------------------------
"Our first-quarter financial results are not yet reflective of the progress we are making with implementation of the Management Improvement Plan," said Lawrence J. Blanford, the Company's President and Chief Executive Officer. "Royal Group remains a company undergoing a major transition in virtually every aspect of its operations and that is dealing with unusual costs resulting from past practices.
"Examples of the progress that we are making include our recent success in recovering raw materials cost increases through improved pricing, our greater use of corporate economies of scale to reduce purchasing costs, and our margin improvement programs that are just beginning to be implemented, including improved capacity utilization and the introduction of improved manufacturing techniques.
"We also are pleased," Mr. Blanford continued, "with the progress of our divestiture program to shed non-core assets, excess capacity, and unneeded properties. The release of approximately 550,000 square feet that we sold in the first quarter is alone expected to yield a reduction in fixed costs of about $5 million a year. We recently announced a further planned divestiture of another 1.5 million square feet of excess manufacturing space to be sold within the next year."
As previously announced, the Management Improvement Plan comprises four parts:
I. Business unit portfolio restructuring;
II. Cost and margin improvement initiatives;
III. Strategies to unlock the potential of the seven core businesses;
and,
IV. Financing alternatives that capitalize on the strength of Royal
Group's balance sheet.
The Management Improvement Plan aims to enhance shareholder value, whether the company is sold or remains a public entity.
Regarding the previously announced sale process, the process is continuing and should be concluded soon. However, there continues to be no assurance that there will be any transactions.
During the first quarter of 2006, total consideration received on the divestitures and sale of assets held for sale was $106.1 million of which proceeds received on closing were $66.8 million and $39.3 million is included in other receivables on the consolidated balance sheet.
Subsequent Events
-----------------
On May 9, 2006 the Quebec government tabled Bill 15 in the National Assembly, An Act to amend the Taxation Act and other legislative provisions. If Bill 15 is enacted as drafted, it could result in a $43.3 million charge for retroactive taxes, interest, and other amounts. The charge would be recorded in the quarter when the legislation is considered to be substantively enacted under Canadian GAAP. The Company is considering the proposals, the impact to the financial statements as well as investigating alternatives to reduce the potential exposure.
The Company is the subject of a criminal investigation being conducted by the Antitrust Division of the United States Department of Justice. The investigation focuses on alleged price fixing in the window coverings industry. Subsequent to the quarter end, the Company reached an agreement in principle to resolve the matter with the Department of Justice for the amount the Company had previously accrued in its financial statements to settle the matter. The Company has not yet signed an agreement with the Department of Justice (DOJ) as the DOJ has not yet provided Royal Group with a draft of the agreement.
Conference Call
---------------
Royal Group will host a conference call on May 24, 2006 at 10:00 AM Eastern Standard Time to discuss first quarter results. The conference call will be simultaneously web cast in its entirety, with access to this call available through the Company's web site, located at http://www.royalgrouptech.com. A replay of the call will also be posted on the Company's web site for a period of three months. In addition, a replay of the call will be available for a period of a week following the call by dialing 416-640-1917 and entering access code 21189306 followed by the number sign.
Royal Group Technologies Limited
--------------------------------
Royal Group Technologies is a leading producer of innovative, attractive, durable, and low-maintenance home improvement and building products, which are primarily utilized in both the renovation and new construction sectors of the North American construction industry. Royal Group is the recipient of several industry awards for product innovation. The Company has manufacturing operations located throughout North America in order to provide industry-leading service to its extensive customer network. Additional investment information is available on Royal Group's web site at http://www.royalgrouptech.com under the "Investor Relations" section.
The information in this document contains certain forward-looking statements with respect to Royal Group Technologies Limited, its subsidiaries, and affiliates. These statements are often, but not always made through the use of words or phrases such as "expect", "should", "continue", "believe", "anticipate", "suggest", "estimate", "contemplate", "target", "plan", "budget", "may", "will", "schedule" and "intend" or similar formulations. By their nature, these forward-looking statements are necessarily based upon a number of estimates and assumptions that, while considered reasonable by management, are inherently subject to significant, known and unknown, business, economic, competitive and other risks, uncertainties and other factors affecting Royal Group specifically or its industry generally that could cause the Company's actual performance, achievements and financial results to differ materially from past results and from those expressed in any forward-looking statements made by or on behalf of the Company. These risks and uncertainties include the ongoing shareholder value maximization process and its outcome; the ongoing internal review and investigations by the Audit Committee of the Board of Directors and its outcome; the outcome of the ongoing investigations by the United States Department of Justice, RCMP, OSC, and SEC; the outcome of the discussions with the SEC on the Company's historical disclosure; the outcome of class action shareholders lawsuits against the Company filed in the United States and Canada; the negative impact that may be caused by the delay in filing of Royal Group's first quarter 2006 financial statements, including, without limitation, a breach by Royal Group of its banking agreement, an adverse effect on Royal Group's business and the market price of its publicly traded securities, and a breach by Royal Group of the continued listing requirements of the New York Stock Exchange and Toronto Stock Exchange; fluctuations in the level of renovation, remodelling and construction activity; changes in product costs and pricing; an inability to achieve or delays in achieving savings related to cost reductions or increases in revenues related to sales price increases; the sufficiency of any restructuring activities, including the potential for higher actual costs to be incurred in connection with any restructuring activities compared to the estimated costs of such actions; the ability to recruit and retain qualified employees; the level of Royal Group's outstanding debt and current debt ratings; Royal Group's ability to maintain adequate liquidity and refinance its debt structure by December 31, 2006, the expiry date of its current bank credit facility; the Company's ability to complete the required processes and provide the internal control report that will be required under U.S. securities law in respect of fiscal 2006; the ability to meet the financial covenants in Royal Group's credit facilities; changes in Royal Group's product mix; the growth rate of the markets into which Royal Group's products are sold; market acceptance and demand for Royal Group's products; changes in availability or prices for raw materials; pricing pressures resulting from competition; difficulty in developing and introducing new products; failure to penetrate new markets effectively; the effect on foreign operations of currency fluctuations, tariffs, nationalization, exchange controls, limitations on foreign investment in local business and other political, economic and regulatory risks; difficulty in preserving proprietary technology; adverse resolution of any litigation, investigations, administrative and regulatory matters, intellectual property disputes, or similar matters; changes in securities, environmental or health and safety laws, rules and regulations; currency risk exposure and other risks described from time to time in publicly filed disclosure documents and securities commission reports of Royal Group Technologies Limited and its subsidiaries and affiliates. In view of these uncertainties we caution readers not to place undue reliance on these forward-looking statements. Statements made in this document are made as of May 23, 2006 and Royal Group disclaims any intention or obligation to update or revise any statements made herein, whether as a result of new information, future events or otherwise.
ROYAL GROUP TECHNOLOGIES LIMITED
INTERIM CONSOLIDATED BALANCE SHEETS
(in thousands of Canadian dollars)
-------------------------------------------------------------------------
Mar. 31/06 Dec. 31/05 Mar. 31/05
-------------------------------------------------------------------------
(unaudited) (audited) (unaudited)
ASSETS
Current assets:
Accounts receivable $ 238,089 $ 228,584 $ 300,873
Inventories 381,354 346,887 506,818
Prepaid expenses 15,538 15,461 20,914
Current assets held for sale
(note 3) 46,827 174,593 -
-------------------------------------------------------------------------
681,808 765,525 828,605
Other receivables (note 3) 39,331 - -
Property, plant and equipment 965,162 981,037 1,312,473
Future income tax assets - - 18,965
Goodwill 194,394 194,355 213,898
Other assets 11,597 11,348 44,148
Long-term assets held for sale
(note 3) 53,016 83,988 6,051
-------------------------------------------------------------------------
$ 1,945,308 $ 2,036,253 $ 2,424,140
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank indebtedness $ 193,103 $ 158,789 $ 329,711
Accounts payable and accrued
liabilities 277,947 274,746 254,277
Term debt due within one year 46,950 46,902 18,432
Current liabilities held for
sale (note 3) 9,877 119,026 -
-------------------------------------------------------------------------
527,877 599,463 602,420
Term debt 250,793 250,721 304,466
Future income tax liabilities 72,249 74,910 144,905
Minority interest 501 856 15,367
Shareholders' equity:
Capital stock (note 4) 634,866 634,866 634,866
Contributed surplus 9,343 8,020 3,755
Retained earnings 580,021 599,637 867,384
Currency translation adjustment (130,342) (132,220) (149,023)
-------------------------------------------------------------------------
1,093,888 1,110,303 1,356,982
Investigations (note 2)
Commitments and contingencies
(notes 9 and 10)
Subsequent event (note 12)
-------------------------------------------------------------------------
$ 1,945,308 $ 2,036,253 $ 2,424,140
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
On behalf of the Board:
----------------------- ----------------------
Director, President and Director,
Chief Executive Officer Chairman of the Board
Lawrence Blanford Robert Lamoureux
ROYAL GROUP TECHNOLOGIES LIMITED
INTERIM CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands of Canadian dollars, except per share amounts)
-------------------------------------------------------------------------
3 months 3 months
ended ended
Mar. 31/06 Mar. 31/05
-------------------------------------------------------------------------
(unaudited) (unaudited)
Net sales $ 338,084 $ 336,650
Cost of sales 269,744 257,329
-------------------------------------------------------------------------
Gross profit 68,340 79,321
Operating expenses 93,940 87,126
Other income (7,811) -
-------------------------------------------------------------------------
Operating loss (17,789) (7,805)
Interest and financing charges 7,865 5,697
-------------------------------------------------------------------------
Loss from continuing operations
before income taxes and minority interest (25,654) (13,502)
Income tax recovery (note 6) (6,611) (3,450)
-------------------------------------------------------------------------
Loss from continuing operations
before minority interest (19,043) (10,052)
Minority interest 262 (13)
-------------------------------------------------------------------------
Loss from continuing operations (18,781) (10,065)
-------------------------------------------------------------------------
Discontinued operations, net of income taxes
(note 3):
Loss from operations (882) (1,330)
Gain (loss) on sale of businesses 47 -
-------------------------------------------------------------------------
Loss from discontinued operations (835) (1,330)
-------------------------------------------------------------------------
Net loss $ (19,616) $ (11,395)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Loss per share (note 5):
Basic loss per common share-continuing
operations $ (0.20) $ (0.11)
Basic loss per common share $ (0.21) $ (0.12)
Diluted loss per common share-continuing
operations $ (0.20) $ (0.11)
Diluted loss per common share $ (0.21) $ (0.12)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
ROYAL GROUP TECHNOLOGIES LIMITED
INTERIM CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(in thousands of Canadian dollars)
-------------------------------------------------------------------------
3 months 3 months
ended ended
Mar. 31/06 Mar. 31/05
-------------------------------------------------------------------------
(unaudited) (unaudited)
Retained earnings, beginning of period $ 599,637 $ 878,779
Net loss (19,616) (11,395)
-------------------------------------------------------------------------
Retained earnings, end of period $ 580,021 $ 867,384
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
ROYAL GROUP TECHNOLOGIES LIMITED
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of Canadian dollars)
-------------------------------------------------------------------------
3 months 3 months
ended ended
Mar. 31/06 Mar. 31/05
-------------------------------------------------------------------------
(unaudited) (unaudited)
Cash provided by (used in):
Operating activities:
Net loss $ (19,616) $ (11,395)
Loss from discontinued operations (835) (1,330)
-------------------------------------------------------------------------
Loss from continuing operations (18,781) (10,065)
Items not affecting cash (bank indebtedness)
of continuing operations 10,414 33,564
Change in non-cash working capital (note 8) (52,201) (117,329)
-------------------------------------------------------------------------
(60,568) (93,830)
Financing activities:
Repayment of term bank loan - (324,836)
Repayment of term debt (66) (70)
-------------------------------------------------------------------------
(66) (324,906)
Investing activities:
Acquisition of property, plant and equipment (12,411) (19,717)
Proceeds from the sale of non-strategic assets 43,364 161
Change in investments (353) 84
Change in other assets (300) (161)
Change in minority interest (355) (404)
-------------------------------------------------------------------------
29,945 (20,037)
Discontinued operations:
Operating activities 3,673 (1,330)
Investing activities 23,546 (1,647)
-------------------------------------------------------------------------
27,219 (2,977)
Effect of foreign exchange rate changes on cash 59 (49)
-------------------------------------------------------------------------
Decrease in cash (3,411) (441,799)
Cash (bank indebtedness), beginning of period (188,819) 112,088
-------------------------------------------------------------------------
Cash (bank indebtedness), end of period $ (192,230) $ (329,711)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consists of:
Cash (bank indebtedness) of
continuing operations (193,103) (329,711)
Cash (bank indebtedness) of
discontinued operations 873 -
-------------------------------------------------------------------------
Cash (bank indebtedness), end of period $ (192,230) $ (329,711)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
ROYAL GROUP TECHNOLOGIES LIMITED
Additional Financial Information (unaudited)
(in thousands of Canadian dollars, except percentages)
-------------------------------------------------------------------------
3 months 3 months
ended ended
Mar. 31/06 Mar. 31/05(i)
-------------------------------------------------------------------------
Net Sales by Segment
Custom Profiles & Mouldings $ 146,632 $ 142,556
Building Products 71,528 61,557
Construction Products 58,467 59,430
Home Improvement Products 26,656 33,332
Window Covering Products 28,395 33,625
Materials 5,784 5,073
Support 622 1,077
---------------------------
Consolidated Net Sales $ 338,084 $ 336,650
---------------------------
---------------------------
Net Sales by Geographic Region
Canada 31% 31%
US 67% 67%
Foreign 2% 2%
---------------------------
Consolidated Net Sales 100% 100%
---------------------------
---------------------------
Percentage of Sales Analysis
Gross profit 20.2% 23.6%
EBITDA 0.4% 6.7%
Cost of sales 79.8% 76.4%
Selling and delivery expenses 15.6% 16.4%
G&A expenses 12.2% 9.5%
Other
Net Funded Debt as a percentage of Total
Capitalization 31.0% 32.2%
(i) Certain percentages for the three month period ended March 31, 2005
have been reclassified to reflect the current presentation adopted in
fiscal 2006.
ROYAL GROUP TECHNOLOGIES LIMITED
Notes to Unaudited Interim Consolidated Financial Statements
(In thousands of Canadian dollars, except per share amounts)
The three months ended March 31, 2006 and 2005
-------------------------------------------------------------------------
1. Basis of Presentation
These interim unaudited consolidated financial statements include the
accounts of Royal Group Technologies Limited, its subsidiaries and its
proportionate share of its joint ventures (collectively "Royal Group" or
"the Company"). All significant inter-company balances and transactions
have been eliminated.
These interim unaudited consolidated financial statements are expressed
in Canadian dollars and are prepared in accordance with Canadian
generally accepted accounting principles ("GAAP") for interim financial
statements. These financial statements are based upon accounting policies
applied consistently with those used and described in the Company's
annual consolidated financial statements. These interim financial
statements do not include all of the disclosures included in the annual
financial statements, and therefore should be read in conjunction with
the audited consolidated financial statements of the Company, including
the notes thereto, for the year ended December 31, 2005 (the "2005
audited financial statements").
The information furnished reflects all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the
results of continuing operations for the interim periods presented. The
Company's operating results of continuing operations are subject to
fluctuations due to the seasonality of the North American renovation,
remodeling and new construction markets. As such, the operating results
of continuing operations for the three months ended March 31, 2006 are
not necessarily indicative of the results expected for any succeeding
quarter or for the fiscal year ending December 31, 2006. Historically,
the Company's highest revenue generating quarters have been the
three months ended June 30 and September 30.
Certain prior period comparative figures have been reclassified to
conform to current period presentation.
2. Investigations
(a) Background:
The Board of Directors of the Company established a Special Committee
in late December 2003 as a result of the Company being advised that
the Ontario Securities Commission (the "Commission") was conducting a
regulatory investigation of the Company. The Special Committee was
asked by the Board of Directors to conduct an independent inquiry
into the principal subject matter of the investigation - being the
transactions between the Company and Royal St. Kitts Beach Resort
Limited (the "Resort"). The Resort ownership included the following
directors or former directors or executive officers or former
executive officers and their approximate percentage ownership:
Vic De Zen, former Chairman, President, Chief Executive Officer and
the controlling shareholder (59.9%), Douglas Dunsmuir, former
President and Chief Executive Officer (5%), Ron Goegan, former Chief
Financial Officer (0.02%) and Angelo Bitondo, President Custom
Profiles, Outdoor Products and Royal Building Systems (0.01%). The
latter two individuals divested of their ownership in December 2004.
In addition, the following former non-executive employees of the
Company and their approximate percentage ownership in the Resort were
as follows: Fortunato Bordin (20%) and Domenic D'Amico (15%).
The Special Committee consisted of three independent directors, at
that time, who retained independent legal counsel who, in turn,
retained forensic accountants to assist in the investigation. At the
conclusion of the investigation based on information available to
them, the Special Committee recommended that no further investigative
actions were to be taken as of April 21, 2004.
On October 15, 2004, the Company announced that the Commission
provided the Company with a copy of a Production Order on October 12,
2004 that was issued on October 5, 2004 by a Justice in Ontario
addressed to the Company's lead bank. The Order, which related to the
time period January 1, 1996 to July 30, 2004, required that certain
documents be provided by such bank to the Royal Canadian Mounted
Police ("RCMP") in relation to four companies, Royal Building
Systems, a subsidiary of the Company, the Resort and two other
affiliates of the Resort.
On October 18, 2004, the Company received a letter from the RCMP
advising that the Company was a target of the RCMP's investigation.
On October 21, 2004, the Company announced that it expanded the
Special Committee of its Board of Directors that was established in
December 2003. The Special Committee was expanded to comprise all
five of the independent directors of the Company at that time. The
mandate of the Special Committee was also broadened to include all
aspects of the investigations and inquiries by securities regulatory
authorities and the RCMP and any similar or related investigations
and inquiries that were commenced by these or other authorities, all
news releases and other communications with the public and to make a
determination with respect to the role within the Company of any
individuals who were involved in the regulatory or law enforcement
investigations and/or proceedings.
On October 28, 2004, the Company announced that on October 27, 2004,
it was provided with a copy of a second Production Order issued on
October 25, 2004 by a Justice in Ontario addressed to the Company's
lead bank. The second Order, which related to the time period
January 1, 1996 to October 25, 2004, required that certain documents
were to be provided by the bank to the RCMP in relation to certain
individuals and a number of entities, including the Company.
Both Orders included allegations of actions contrary to the Criminal
Code and included allegations of intent to defraud the shareholders
and creditors of the Company and deceive the shareholders and others
by circulating or publishing in a prospectus or statement or account,
which, was known to be false and theft. The Orders collectively named
the controlling shareholder and non-executive chairman of the
Company, the president and chief executive officer and the chief
financial officer at that time, and certain non-executive employees
of the Company at that time and a former director of the Company.
On November 8, 2004, the Company announced that the Special
Committee of independent directors retained independent legal counsel
and independent forensic accountants to assist it in the broadened
mandate.
On November 29, 2004, the Company announced that the Special
Committee terminated for cause the president and chief executive
officer and the chief financial officer. In addition, the chairman of
the board, who was also the controlling shareholder, was dismissed.
The Board of Directors appointed an interim president and chief
executive officer and an interim chief financial officer, who were
directors of the Company.
In November 2004, the Special Committee notified the Securities and
Exchange Commission (the "SEC") regarding the Special Committee's
investigation.
In March 2005, the Special Committee recommended an overall
settlement with the controlling shareholder involving (i) the
repayment to the Company by the controlling shareholder personally of
the full amount of the gain earned by all interested parties
($6,500 plus interest of $2,200) on the sale of the Vaughan West
Lands to the Company. In lieu of a cash repayment, the Company agreed
to the conversion of multiple voting shares in the Company owned,
directly or indirectly, by the controlling shareholder to common
shares on a one-for-one basis which will be structured so that his
shares will receive an increase in their adjusted cost base for tax
purposes (at no cost to the Company or any of the shareholders) which
will reduce his gain for tax purposes when he disposes of his shares,
(ii) the repayment to the Company by the controlling shareholder of
bonuses received in 2002 of $1,130, (iii) a non-compete covenant of
the controlling shareholder that extends to December 18, 2006, (iv) a
release by the controlling shareholder of all known claims against
the Company and (v) the resignation of the controlling shareholder as
a director of the Company (at the time of the shareholders' approval
of the conversion of his shares from multiple voting to single voting
shares). In consideration of such settlement arrangements, the
Company agreed to release the controlling shareholder from all known
claims that the Company may have against him.
On May 13, 2005, the Company announced its Board of Directors
appointed a new president and chief executive officer to replace the
interim president and chief executive officer.
The conversion transaction and the settlement with the controlling
shareholder received shareholder approval at the Annual and Special
General Meeting that took place on May 25, 2005. On June 23, 2005,
the Company filed the articles of amendment as approved by the
shareholders on May 25, 2005 and the Company now has one class of
voting common shares.
On July 27, 2005, the Board of Directors appointed a new chief
financial officer to replace the interim chief financial officer.
The Company understands that the RCMP continues its previously
announced investigation. The Commission is also continuing its
investigation of the Company with respect to disclosure records,
financial affairs and trading in the shares of the Company.
On June 24, 2005, the SEC staff notified the Special Committee that
the SEC staff is conducting a formal investigation related to the
Company's past accounting practices and disclosures, and that a
subpoena would be forthcoming. On July 8, 2005, the Special Committee
received written notification that the SEC had issued a Formal Order
of Investigation styled, In the Matter of Royal Group Technologies
(HO-09896). On July 27, 2005, the SEC served the Company with a
subpoena requiring the production of documents relating to related
party transactions (the "July Subpoena"). The Special Committee has
produced to the SEC staff documents responsive to the July Subpoena.
In October 2005, the Special Committee advised Commission staff,
the RCMP and SEC staff of emails and documents authored by a former
financial employee of the Company that relate to certain financial
accounting and disclosure matters. The Company understands that the
SEC staff made a referral to the U.S. Department of Justice, Criminal
Division, in connection with those documents. Also in October 2005,
the Audit Committee assumed responsibility for the Special
Committee's mandate and the Special Committee was dissolved.
Independent forensic accountants were retained to investigate issues
raised by these documents (the "Investigation"). The Investigation
focuses on the period from 2000 to 2003.
The Investigation to date has included a review of certain of the
Company's historical accounting records, available supporting
documentation at the Company's head office and email communications
of various individuals during the period under review, as well as
interviews with numerous current and former employees.
The Investigation identified certain monthly and quarterly accounting
and reporting issues of concern for the period under review, such as
support for monthly sales growth announcements for certain months in
2001, whether month end closes were extended for a few days for
certain months in 2000 and 2001, and certain quarterly journal
entries for the period under review.
The quarterly statements were not reviewed by the external auditors
during this time period. Based on the Investigation to date, the
Audit Committee has determined that further investigation should be
made of these issues.
The Investigation also identified entries of concern relating to the
year end financial statements for the fiscal years 2000 to 2003. The
Company has concluded that no restatement is required of year end
financial statements for fiscal years 2000 to 2003. The auditors have
not withdrawn their reports for the fiscal years 2000 to 2003. The
Audit Committee has determined that no further action be taken in
respect of these year end financial statements.
The Investigation and the ongoing investigations by the Commission,
RCMP and SEC could produce results that have a material impact on the
Company and could result in further information being discovered that
could require adjustments to the financial statements.
(b) Historical related party transactions:
In the course of the Special Committee's broadened investigation, the
following historical related party transactions shown at the exchange
amount were identified that were not previously disclosed in the
financial statements prior to December 31, 2004:
(i) The Company purchased what has been called the "Vaughan West
Lands" in 1998 for approximately $27,400. The Company
purchased the Vaughan West Lands,approximately 185 acres in
Woodbridge, Ontario, by acquiring a numbered company owned
by the controlling shareholder and other individuals who
were officers, employees of or associated with the Company.
This numbered company had acquired the Vaughan West Lands
for $20,900 shortly before they were sold to the Company.
(ii) The Company received a warrant for 200,000 shares of another
public company, Premdor Inc. (now known as Masonite
International Corporation) ("Masonite"). The Company
obtained the warrant as partial consideration for the sale
of a subsidiary to Masonite in early 2000. In early 2002,
the Company exercised the warrant when Masonite's shares
were trading at approximately $21.75, which was $8.50 more
than the exercise price (resulting in a gain of
approximately $1,700). The Company's exercise of the warrant
was funded by the then five senior executives of the Company
and one other individual who was then an employee of the
Company. The employees deposited a total of $2,650 with the
Company which funded the Company's payment to Masonite to
exercise the warrant. The shares obtained were then
distributed by the Company to the six individuals. The
warrant and the transfer of the shares to the individuals
were not recorded in the accounting records of the Company.
If the transaction had been recorded in the financial
statements in fiscal 2002, a gain would have been realized
as other income with an equal and offsetting amount recorded
as an operating expense in the income statement.
(iii) The Company sold products and services to a company related
to the controlling shareholder, as follows:
------------------------------------------------------------
1998 $ 150
1999 3,750
2000 9,620
2001 7,560
2002 11,460
------------------------------------------------------------
(iv) During 1998 to 2003, the Company facilitated foreign
currency exchange transactions at exchange rates available
to the Company, and utilized Company bank accounts to
transfer funds internationally on behalf of the controlling
shareholder, a significant shareholder and certain
executives in the amount of $95,000 at no cost to the
Company.
(v) During 1997 to 2002, the Company managed the construction of
four real estate developments for the controlling
shareholder and family members. The Company paid invoices
associated with these projects aggregating $21,100 and was
reimbursed by these individuals.
(vi) During 2000 and 2002, the Company sold assets for $240 and
$300, respectively, to companies related to the controlling
shareholder.
(vii) From 1998 to 2002, the Company sold to family members of the
controlling shareholder, parts and services for $290.
(viii) In 1997, the Company acquired Baron Metals Industries Inc.,
a company in which the controlling shareholder held a
17.7% interest, for $11,500.
(ix) In 1996, the Company acquired three businesses, Jovien
Associates Limited, Royal King Electric Limited and
La Pineta Limited, in which the controlling shareholder held
a minority interest, for $2,900.
(x) In 1999, the Company acquired 75% of Top Gun Electrical
Supply Ltd., a company in which the controlling shareholder
held a 40% interest, for $1,870.
(xi) In 1995, the Company purchased from the controlling
shareholder and others their 50% interest in Hanmar
Mechanical Services Inc. for $180.
(xii) In 1998, the Company purchased two parcels of real estate
from the controlling shareholder for $2,900.
(xiii) In 1997, the Company purchased two parcels of real estate
for $2,550 from a company in which a director of the Company
was a shareholder through his holding company.
(xiv) The Company sold real estate to the controlling
shareholders, as follows:
------------------------------------------------------------
1994 $ 220
1995 810
1996 90
2000 200
------------------------------------------------------------
(xv) In 2003, the Company sold real estate for $350 to family
members of the controlling shareholder, employees and a
former employee.
(xvi) The Company sold real estate to a significant shareholder,
as follows:
------------------------------------------------------------
1995 $ 110
1997 80
------------------------------------------------------------
(xvii) During 1999 to 2001, the Company entered into 9 joint land
service agreements with companies related to the controlling
shareholder and another company in which a director of the
Company was a shareholder.
3. Discontinued Operations and Assets Held for Sale
The assets held for sale presented on the consolidated balance sheet are
comprised of amounts with respect to operations which are discontinued
(Note 3a)) and amounts with respect to assets held for sale (Note 3b)).
a) Discontinued operations:
In July 2005, the Company announced that the Board of Directors had
approved initiatives to divest certain non-core business units and
non-performing operations as part of the Management Improvement Plan
aimed at improving financial performance and refinancing the Company.
Accordingly, the results of operations and financial position of
certain non-core business units have been segregated and presented
separately as discontinued operations and assets held for sale in the
accompanying consolidated financial statements and related note
disclosures.
During the first quarter of 2006, the Company completed the sale of
both Royal Alliance Inc. and Amut S.p.A., which were previously part
of the Home improvement and Support segments, respectively. The
Company recognized an aggregate loss of $6,027 (pre-tax). The total
consideration was $34,991 of which, $24,000 was received on closing.
The balance of the consideration of $10,991 is included in other
receivables on the consolidated balance sheet.
At March 31, 2006, the following non-core businesses continue to be
classified as discontinued operations:
(i) Construction products:
Royal Building Systems Argentina, Royal Building Systems
Colombia, Royal Building Systems Mexico, Royal Building
Systems Poland and Baron Metals Industries Inc. (see note
12)
(ii) Window covering products:
Royal Window Coverings LTDA (Brasil) and Novo Europe B.V.
(iii) Support:
Royal Ecoproducts Co.
The following tables show revenue and net after-tax results from
discontinued operations for the three months ended March 31, 2006 and
March 31, 2005:
---------------------------------------------------------------------
Earnings Gain Income Earnings
(loss) from (loss) on tax (loss)
operating sale of recovery for the
2006 Revenue activities businesses (expense) quarter
---------------------------------------------------------------------
Reporting segment:
Construction
products $ 18,222 $ 280 $ - $ (687) $ (407)
Home
improvement
products 2,004 (2) (6,364) 6,352 (14)
Window
covering
products 2,020 49 - (14) 35
Support 3,326 (2,213) 337 1,427 (449)
Eliminations (2,933) - - - -
---------------------------------------------------------------------
$ 22,639 $ (1,886) $ (6,027) $ 7,078 $ (835)
---------------------------------------------------------------------
---------------------------------------------------------------------
---------------------------------------------------------------------
Earnings Gain Income Earnings
(loss) from (loss) on tax (loss)
operating sale of recovery for the
2005 Revenue activities businesses (expense) quarter
---------------------------------------------------------------------
Reporting segment:
Construction
products $ 18,210 $ 1,710 $ - $ (484) $ 1,226
Home
improvement
products 28,558 485 - (224) 261
Window
covering
products 1,841 114 - (26) 88
Support 8,703 (4,854) - 1,949 (2,905)
Eliminations (6,267) - - - -
---------------------------------------------------------------------
$ 51,045 $ (2,545) $ - $ 1,215 $ (1,330)
---------------------------------------------------------------------
---------------------------------------------------------------------
The following table summarizes the assets held for sale and related
liabilities as at March 31, 2006:
---------------------------------------------------------------------
Window
Construction covering
Reporting segments products products Support Total
---------------------------------------------------------------------
Cash $ 873 $ - $ - $ 873
Accounts receivable 11,404 21 49 11,474
Inventories 14,381 542 344 15,267
Prepaid expenses 598 28 30 656
---------------------------------------------------------------------
Current assets held by
discontinued operations 27,256 591 423 28,270
---------------------------------------------------------------------
Property, plant and
equipment 20,651 381 2,223 23,255
Investments 113 - - 113
Goodwill 3,838 - - 3,838
Other assets 43 - - 43
---------------------------------------------------------------------
Long-lived assets held by
discontinued operations(1) 24,645 381 2,223 27,249
---------------------------------------------------------------------
Accounts payable and
accrued liabilities 18,229 151 501 18,881
Future income tax
liabilities (assets) (11,106) - (5,909) (17,015)
Minority interest 693 - - 693
---------------------------------------------------------------------
Current liabilities held by
discontinued operations 7,816 151 (5,408) 2,559
---------------------------------------------------------------------
---------------------------------------------------------------------
Net assets (liabilities)
held by discontinued
operations $ 44,085 $ 821 $ 8,054 $ 52,960
---------------------------------------------------------------------
---------------------------------------------------------------------
(1) There were several companies whose long-lived assets were not
reclassified as current assets held for sale because, either
(a) the proceeds of the sale will not be realized within a year
of the date of the balance sheet or (b) the sale of the assets
was not complete as of the date of the balance sheet.
(b) Assets held for sale:
As part of the Company's plan to divest certain non-core business
units and non-performing operations at December 31, 2005, the Company
had identified excess manufacturing real estate. The net assets
related to these real estate properties have been identified,
reclassified as assets held for sale and measured at the lower of
cost or net realizable value.
In addition at December 31, 2005, the Company had identified certain
other business units, which it intended to divest, but which did not
qualify for reclassification as discontinued operations under the
relevant accounting guidelines. Accordingly, the Company identified
and reclassified their net assets as held for sale which were
measured at the lower of cost or net realizable value.
During the first quarter of 2006, the Company completed the sale of a
portion of the excess manufacturing real estate and Vinyltech Inc.
The Company recognized an aggregate gain of $9,405, which is recorded
in other income. The total consideration was $71,067, of which
$42,727 was received on closing. The balance of the consideration of
$28,340 is included in other receivables on the consolidated balance
sheet.
The following table summarizes the assets held for sale and related
liabilities as at March 31, 2006:
---------------------------------------------------------------------
Construction
Reporting segments Support products
------------------ ----------------------- ------------
Various Roadex Distri-
real estate Transport bution
holdings Inc. Company Total
---------------------------------------------------------------------
Accounts receivable $ - $ - $ 7,764 $ 7,764
Inventories - - 10,559 10,559
Prepaid expenses - - 234 234
---------------------------------------------------------------------
Current assets held
for sale - - 18,557 18,557
---------------------------------------------------------------------
Property, plant and
equipment 17,515 3,241 1,211 21,967
Investments - - 135 135
Goodwill - 137 3,528 3,665
---------------------------------------------------------------------
Long-lived assets held
for sale(1) 17,515 3,378 4,874 25,767
---------------------------------------------------------------------
Accounts payable and
accrued liabilities - - 5,615 5,615
Future income tax
liabilities (assets) - 1,028 (5) 1,023
Minority interest - - 680 680
---------------------------------------------------------------------
Current liabilities held
for sale - 1,028 6,290 7,318
---------------------------------------------------------------------
---------------------------------------------------------------------
Net assets held for sale $ 17,515 $ 2,350 $ 17,141 $ 37,006
---------------------------------------------------------------------
---------------------------------------------------------------------
(1) There were several companies whose long-lived assets were not
reclassified as current assets held for sale because either
(a) the proceeds of the sale will not be realized within a year
of the date of the balance sheet or (b) the sale of the assets
was not complete as of the date of the balance sheet.
4. Stock-Based Compensation Plans
(a) Stock option plan:
The table below is a summary of the status of the Company's stock
option program.
Weighted
average
Number of exercise
options price
---------------------------------------------------------------------
Outstanding, January 1, 2006 3,192,828 $ 26.50
Granted - -
Exercised - -
Cancelled/expired (653,000) $ 25.87
---------------------------------------------------------------------
Outstanding, March 31, 2006
Source: prnewswire
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