Royal Group announces financial results for second quarter 2006
29 August 2006 ------------------------------
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 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 including, without limitation, the completion of the proposed plan of arrangement with Rome Acquisition Corp., a wholly-owned subsidiary of Georgia Gulf Corporation; 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; 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's outstanding debt and current debt ratings; Royal'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's credit facilities; changes in Royal's product mix; the growth rate of the markets into which Royal's products are sold; market acceptance and demand for Royal'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 August 14, 2006 and Royal 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
UNAUDITED INTERIM CONSOLIDATED BALANCE SHEETS
(In thousands of Canadian dollars, except shares numbers and
per share amounts)
-------------------------------------------------------------------------
As at As at
June 30, December 31,
2006 2005
(unaudited) (audited)
-------------------------------------------------------------------------
ASSETS
Current assets:
Accounts receivable (note 5) 304,442 228,584
Inventories (note 6) 355,985 346,887
Prepaid expenses 21,129 15,461
Current other receivables (note 3 c) 31,341 -
Current assets held for sale (note 3) 21,715 174,593
-------------------------------------------------------------------------
734,612 765,525
Other receivables (note 3 d) 15,177 -
Property, plant and equipment (note 7) 941,173 981,037
Goodwill (note 8) 167,197 194,355
Other assets (note 9) 11,154 11,348
Long-lived assets held for sale (note 3) 23,122 83,988
-------------------------------------------------------------------------
1,892,435 2,036,253
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank indebtedness (note 10) 151,948 158,789
Accounts payable and accrued liabilities
(note 11) 328,683 274,746
Term debt due within one year (note 12) 44,812 46,902
Current liabilities held for sale (note 3) 18,316 119,026
-------------------------------------------------------------------------
543,759 599,463
Term debt (note 12) 244,778 250,721
Future income tax liabilities (note 18) 55,926 74,910
Minority interest 405 856
Shareholders' equity:
Capital stock (note 13) 634,866 634,866
Contributed surplus (note 14) 7,178 8,020
Retained earnings 547,518 599,637
Currency translation adjustment (141,995) (132,220)
-------------------------------------------------------------------------
1,047,567 1,110,303
Investigations (note 2)
Commitments and contingencies (notes 4, 21 and 22)
Plan of Arrangement with Georgia Gulf
Corporation (note 25)
Subsequent events (note 26)
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1,892,435 2,036,253
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
ROYAL GROUP TECHNOLOGIES LIMITED
UNAUDITED INTERIM CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands of Canadian dollars, except share numbers
and per share amounts)
-------------------------------------------------------------------------
3 months 3 months 6 months 6 months
ended ended ended ended
June 30, June 30, June 30, June 30,
2006 2005 2006 2005
(unaudited) (unaudited) (unaudited) (unaudited)
-------------------------------------------------------------------------
Net sales 458,424 486,680 796,508 823,330
Cost of sales 336,976 358,872 606,720 616,201
-------------------------------------------------------------------------
Gross profit 121,448 127,808 189,788 207,129
Operating expenses
(note 16) 103,391 87,714 197,331 174,840
Other items (note 17) 15,605 - 7,794 -
-------------------------------------------------------------------------
Operating earnings
(loss) 2,452 40,094 (15,337) 32,289
Interest and financing
charges (note 18) 16,306 8,543 24,171 14,240
-------------------------------------------------------------------------
Earnings (loss) from
continuing operations
before income taxes
and minority
interest (13,854) 31,551 (39,508) 18,049
Income tax expense
(note 18) 26,523 7,987 19,912 4,537
-------------------------------------------------------------------------
Earnings (loss) from
continuing operations
before minority
interest (40,377) 23,564 (59,420) 13,512
Minority interest 2 (278) 264 (291)
-------------------------------------------------------------------------
Earnings (loss) from
continuing operations (40,375) 23,286 (59,156) 13,221
-------------------------------------------------------------------------
Discontinued operations,
net of income taxes
(note 3):
Loss from operations (5,372) (4,703) (6,254) (6,033)
Gain on sale of
businesses and
component parts 13,244 - 13,291 -
-------------------------------------------------------------------------
Earnings (loss) from
discontinued
operations 7,872 (4,703) 7,037 (6,033)
-------------------------------------------------------------------------
Net earnings (loss) (32,503) 18,583 (52,119) 7,188
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings (loss) per
share (note 15)
Basic earnings
(loss) per common
share from
continuing
operations (0.43) 0.25 (0.63) 0.14
Basic earnings (loss)
per common share (0.35) 0.20 (0.56) 0.08
Diluted earnings
(loss) per common
share from
continuing
operations (0.43) 0.25 (0.63) 0.14
Diluted earnings
(loss) per
common share (0.35) 0.20 (0.56) 0.08
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
ROYAL GROUP TECHNOLOGIES LIMITED
UNAUDITED INTERIM CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(In thousands of Canadian dollars, except share numbers
and per share amounts)
-------------------------------------------------------------------------
3 months 3 months 6 months 6 months
ended ended ended ended
June 30, June 30, June 30, June 30,
2006 2005 2006 2005
(unaudited) (unaudited) (unaudited) (unaudited)
-------------------------------------------------------------------------
Retained earnings,
beginning of period 580,021 867,384 599,637 878,779
Net earnings (loss) (32,503) 18,583 (52,119) 7,188
Premium on conversion
of multiple voting
shares (note 13 c) - (8,700) - (8,700)
-------------------------------------------------------------------------
Retained earnings,
end of period 547,518 877,267 547,518 877,267
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
ROYAL GROUP TECHNOLOGIES LIMITED
UNAUDITED INTERIM CONSOLIDATED STATEMENTS OF CASHFLOW
(In thousands of Canadian dollars, except share numbers
and per share amounts)
-------------------------------------------------------------------------
3 months 3 months 6 months 6 months
ended ended ended ended
June 30, June 30, June 30, June 30,
2006 2005 2006 2005
(unaudited) (unaudited) (unaudited) (unaudited)
-------------------------------------------------------------------------
Cash provided by
(used in):
Operating activities:
Net earnings
(loss) (32,503) 18,583 (52,119) 7,188
Earnings (loss)
from discontinued
operations 7,872 (4,703) 7,037 (6,033)
-------------------------------------------------------------------------
Earnings (loss) from
continuing
operations (40,375) 23,286 (59,156) 13,221
Items not affecting
cash (bank
indebtedness) of
continuing
operations
(note 20) 37,729 34,194 47,788 63,917
Change in non-cash
working capital
(note 20) (2,651) (2,798) (54,852) (120,127)
-------------------------------------------------------------------------
(5,297) 54,682 (66,220) (42,989)
Financing activities:
Repayment of term
bank loan - - - (324,836)
Repayment of term
debt (64) (71) (130) (141)
--------------------------------------------------------------------------
(64) (71) (130) (324,977)
Investing activities:
Acquisition of
property, plant
and equipment (21,054) (17,101) (33,465) (36,818)
Proceeds from the
sale of non-strategic
assets 45,387 - 88,751 161
Change in investments 192 (229) (161) (145)
Change in other assets (358) (357) (658) (518)
Change in minority
interest - (1,600) - (1,700)
-------------------------------------------------------------------------
24,167 (19,287) 54,467 (39,020)
Discontinued operations:
Operating activities (751) (1,057) 2,970 1,150
Investing activities 24,692 (1,678) 48,190 (3,325)
-------------------------------------------------------------------------
23,941 (2,735) 51,160 (2,175)
-------------------------------------------------------------------------
Effect of foreign
exchange rate on
cash (bank
indebtedness) (1,503) 276 (1,444) 227
-------------------------------------------------------------------------
Increase (decrease)
in cash 41,244 32,865 37,833 (408,934)
Cash (bank indebtedness),
beginning of period (192,230) (329,711) (188,819) 112,088
-------------------------------------------------------------------------
Cash (bank indebtedness),
end of period (150,986) (296,846) (150,986) (296,846)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consists of:
Cash (bank
indebtedness) of
continuing
operations (151,948) (296,846) (151,948) (296,846)
Cash (bank
indebtedness) of
discontinued
operations 962 - 962 -
-------------------------------------------------------------------------
Cash (bank indebtedness),
end of period (150,986) (296,846) (150,986) (296,846)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Supplemental cash
flow information:
Interest and financing
charges paid: 8,458 5,365 11,918 9,317
Income taxes paid 1,879 2,287 3,646 4,573
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
ROYAL GROUP TECHNOLOGIES LIMITED
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Canadian dollars, except share numbers and per share
amounts)
The six months ended June 30, 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 have been 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 and six months ended June 30, 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.
The SEC has commented on the Company's Form 40-F in respect of fiscal
2004, fiscal 2005 and its quarterly filings in 2005. The SEC has
raised some comments related to the Company's goodwill valuation and
the full valuation allowance of the Company's U.S future tax losses.
The process of responding to SEC's comments is ongoing but not yet
complete and may require adjustments to the financial statements in
respect of these matters.
(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. Assets Held for Sale including Discontinued Operations
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).
The following table summarizes the assets held for sale and related
liabilities as at June 30, 2006:
---------------------------------------------------------------------
Constr- Window
uction covering
Reporting segments products products Support Support Total
---------------------------------------------------------------------
Discon- Discon- Discon-
tinued tinued tinued
Opera- Opera- Opera-
tions tions tions
---------------------------------------------------------------------
Cash 962 - - - 962
Accounts receivable 9,610 530 75 - 10,215
Inventories 9,182 570 140 - 9,892
Prepaid expenses 560 49 37 - 646
---------------------------------------------------------------------
Current assets held for
sale 20,314 1,149 252 - 21,715
---------------------------------------------------------------------
Property, plant and
equipment 13,560 467 1,634 7,152 22,813
Investments 117 - - - 117
Goodwill - - - 137 137
Other assets 55 - - - 55
---------------------------------------------------------------------
Long-lived assets held
for sale(1) 13,732 467 1,634 7,289 23,122
---------------------------------------------------------------------
Accounts payable and
accrued liabilities 17,150 81 371 - 17,602
Future income tax
liabilities (assets) (446) - (561) 1,028 21
Minority interest 693 - - - 693
---------------------------------------------------------------------
Current liabilities held
for sale 17,397 81 (190) 1,028 18,316
---------------------------------------------------------------------
Net assets (liabilities)
held for sale 16,649 1,535 2,076 6,261 26,521
---------------------------------------------------------------------
---------------------------------------------------------------------
The following table summarizes the assets held for sale and related
liabilities as at December 31, 2005:
---------------------------------------------------------------------
Home
Constr- Window improve-
uction covering ment
Reporting segments products products products Support
---------------------------------------------------------------------
Discon- Discon- Discon- Discon-
tinued tinued tinued tinued
Opera- Opera- Opera- Opera-
tions tions tions tions
---------------------------------------------------------------------
Cash 2,160 - - 5,506
Accounts receivable 12,329 26 13,784 6,643
Inventories 12,990 745 16,057 10,361
Prepaid expenses 390 35 86 249
Property, plant and equipment - - - 6,417
Investments - - - 1
Other Assets - - - 881
---------------------------------------------------------------------
Current assets held for sale 27,869 806 29,927 30,058
---------------------------------------------------------------------
Property, plant and equipment 19,734 405 30,172 2,561
Investments 153 - (68) -
Goodwill 3,838 - - -
Other assets 169 - - -
---------------------------------------------------------------------
Long-lived assets held for
sale(1) 23,894 405 30,104 2,561
---------------------------------------------------------------------
Bank indebtedness - - 30,383 7,313
Accounts payable and accrued
liabilities 12,946 195 26,154 16,490
Term debt - - - 1,110
Future income tax
liabilities (assets) (323) - 6,392 (4,512)
Minority interest 694 - 394 4,190
---------------------------------------------------------------------
Current liabilities held for
sale 13,317 195 63,323 24,591
---------------------------------------------------------------------
Net assets (liabilities)
held for sale 38,446 1,016 (3,292) 8,028
---------------------------------------------------------------------
---------------------------------------------------------------------
-----------------------------------------------------------
Construction
Reporting segments products Support Total
-----------------------------------------------------------
-----------------------------------------------------------
Cash 13,558 - 21,224
Accounts receivable 9,268 - 42,050
Inventories 172 81 40,406
Prepaid expenses - 11 771
Property, plant and equipment - 62,843 69,260
Investments - - 1
Other Assets - - 881
-----------------------------------------------------------
Current assets held for sale 22,998 62,935 174,593
-----------------------------------------------------------
Property, plant and equipment 1,170 20,753 74,795
Investments 135 - 220
Goodwill 3,528 1,433 8,799
Other assets 5 - 174
-----------------------------------------------------------
Long-lived assets held for
sale(1) 4,838 22,186 83,988
-----------------------------------------------------------
Bank indebtedness 8,960 - 46,656
Accounts payable and accrued
liabilities 6 21 55,812
Term debt (5) - 1,105
Future income tax
liabilities (assets) 525 1,679 3,761
Minority interest - 6,414 11,692
-----------------------------------------------------------
Current liabilities held for
sale 9,486 8,114 119,026
-----------------------------------------------------------
Net assets (liabilities)
held for sale 18,350 77,007 139,555
-----------------------------------------------------------
-----------------------------------------------------------
(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.
(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 quarter ending March 31, 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
(pretax). The total consideration was $34,991 of which, $24,000 was
received on closing. The balance of the consideration of $10,991 was
reduced in the quarter ending June 30, 2006 by repayments of $239.
The outstanding balance of $10,752 is included in other receivables
on the consolidated balance sheet.
During the quarter ending June 30, 2006, the Company completed the
sale of Baron Metal Industries, which was previously part of the
Construction products segment and the sale of certain component
parts, including equipment and excess inventory, of Royal Ecoproducts
Co. which is part of the Support segment. In addition, the Company
adjusted its valuation provision with respect to the investment in
Royal Building Systems Mexcio which is part of the Construction
products segment. As a result, the Company recognized an aggregate
gain of $16,977 (pre-tax). The total consideration was $29,347 of
which $25,347 was received on closing. The balance of the
consideration of $4,000 remains outstanding and is included in other
receivables on the consolidated balance sheet.
At June 30, 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
(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 June 30, 2006 and
June 30, 2005:
-------------------------------------------------------------------------
Gain (loss)
on sale of
Earnings businesses
(loss) from or Income tax
Three months ended operating components recovery Earnings
June 30, 2006 Revenue activities parts (expense) (loss)
-------------------------------------------------------------------------
Reporting segment:
Construction
products 9,394 (2,573) 16,285 (3,780) 9,932
Home improvement
products - - - - -
Window covering
products 1,835 91 - (32) 59
Support 2,119 (2,442) 692 (369) (2,119)
Intercompany
eliminations (3,023) - - - -
-------------------------------------------------------------------------
10,325 (4,924) 16,977 (4,181) 7,872
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Gain (loss)
on sale of
Earnings businesses
(loss) from or Income tax
Three months ended operating components recovery Earnings
June 30, 2005 Revenue activities parts (expense) (loss)
-------------------------------------------------------------------------
Reporting segment:
Construction
products 23,486 (1,823) - (597) (2,420)
Home improvement
products 24,078 (1,077) - 574 (503)
Window covering
products 2,003 118 - (39) 79
Support 18,090 (2,419) - 560 (1,859)
Intercompany
eliminations (5,169) - - - -
-------------------------------------------------------------------------
62,488 (5,201) - 497 (4,703)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The following tables show revenue and net after-tax results from
discontinued operations for the six months ended June 30, 2006 and
June 30, 2005:
-------------------------------------------------------------------------
Gain (loss)
on sale of
Earnings businesses
(loss) from or Income tax
Six months ended operating components recovery Earnings
June 30, 2006 Revenue activities parts (expense) (loss)
-------------------------------------------------------------------------
Reporting segment:
Construction
products 27,616 (2,293) 16,285 (4,467) 9,525
Home improvement
products 2,004 (2) (6,364) 6,352 (14)
Window covering
products 3,855 140 - (46) 94
Support 5,445 (4,655) 1,029 1,058 (2,568)
Intercompany
eliminations (5,956) - - - -
-------------------------------------------------------------------------
32,964 (6,810) 10,950 2,897 7,037
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Gain (loss)
on sale of
Earnings businesses
(loss) from or Income tax
Six months ended operating components recovery Earnings
June 30, 2005 Revenue activities parts (expense) (loss)
-------------------------------------------------------------------------
Reporting segment:
Construction
products 41,696 (113) - (1,081) (1,194)
Home improvement
products 52,636 (592) - 350 (242)
Window covering
products 3,844 232 - (66) 166
Support 26,793 (7,272) - 2,509 (4,763)
Intercompany
eliminations (11,436) - - - -
-------------------------------------------------------------------------
113,533 (7,745) - 1,712 (6,033)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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
Vinyltech Inc. together with a portion of the excess manufacturing
real estate. The Company recognized an aggregate gain of $9,405,
which is recorded in other items. The total consideration was
$71,067, of which $42,727 was received on closing. The balance of the
consideration of $28,341 remains outstanding and is included in
current other receivables on the cons
Source: prnewswire
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