- Net sales, adjusted for weakening U.S. dollar, increase about 5%
- Price increases offset higher raw material costs, but volume
declines - Progress continues in implementation of four-part
Management Improvement Plan - Operating expenses reduced, excluding
unusual costs - Net loss reflects continuing unusual charges
related to restructuring, investigations, sale process, and other
factors - Total consideration on divestitures and sales of assets
were $106 million in the quarter. TORONTO, May 24
/PRNewswire-FirstCall/ -- Royal Group Technologies Limited (RYG -
TSX; NYSE) today announced financial results for the first quarter
ended March 31, 2006. During the first quarter of 2006, net sales
rose to $338.1 million from $336.7 million in the same period in
2005. Approximately two-thirds of Royal Group's sales are made to
customers in the United States and are directly affected by the
exchange rate of the U.S. and Canadian dollars. The weaker exchange
value of the U.S. dollar in the 2006 first quarter compared with
the prior year resulted in a reduction of sales of approximately
$15 million; if the exchange rate had remained constant, Royal
Group's sales would have risen almost five percent compared with
the 2005 quarter. The sales increase mainly reflects the benefits
of price increases in late 2005 and in early 2006 to offset higher
raw materials costs and volume decline. Volume declined as certain
customers cut back purchasing to reduce their inventory buildups
that took place in the aftermath of the past U.S. hurricane season
that had disrupted supplies during the fourth quarter of 2005. In
addition, the Company had exited certain low-margin businesses and
accounts in 2005, specifically in the Window Covering Products
segment. Further, an estimated $7 million in shipments were
deferred until the second quarter pending completion of customer
contract negotiations. As these negotiations are now completed,
shipments have resumed. Gross margin declined to 20.2 percent of
sales from 23.6 percent of sales in the 2005 quarter, reflecting a
decline in gross profit to $68.3 million in the 2006 quarter from
$79.3 million in the 2005 quarter. The decline in the gross margin
is mainly attributable to the lower sales volume, higher energy
costs, and the net unfavourable impact of foreign exchange.
Operating expenses were $93.9 million, up from $87.1 million in the
2005 first quarter. However, excluding unusual costs, operating
expenses were $78.7 million in the 2006 period compared with $81.1
million in the 2005 period. The 2006 first-quarter expenses
included unusual costs of $15.2 million compared with $6.0 million
in the 2005 quarter. The unusual charges included those related to
the previously announced process concerning the possible sale of
the Company, ongoing investigations, restructuring activities, and
programs related to realigning the organization to the strategies
of the Management Improvement Plan. In the 2006 first quarter,
Royal Group realized a $7.8 million net gain from the disposal of
approximately 550,000 square feet of real estate, partially offset
by costs incurred in exiting certain businesses. EBITDA (earnings
before interest, taxes, depreciation, amortization, and minority
interest) declined to $1.4 million in the 2006 quarter from $22.7
million in the 2005 period. Excluding unusual expenses, EBITDA was
$16.6 million compared with $28.7 million in the 2005 first
quarter. The decline reflects the previously discussed lower gross
margins. EBITDA or operating margin is not a recognized measure
under Canadian or United States (US) generally accepted accounting
principles (GAAP). Management believes that in addition to net
earnings, EBITDA is a useful supplementary measure as it provides
investors with an indication of cash available for distribution
prior to debt service, capital expenditures, income taxes and
minority interest. Investors should be cautioned, however, that
EBITDA should not be construed as an alternative to (i) net
earnings determined in accordance with GAAP as an indicator of the
Company's performance or (ii) cash flow from operating, investing
and financing activities as a measure of liquidity and cash flow.
The Company's method of calculating EBITDA may differ from other
companies and, accordingly, the Company's EBITDA may not be
comparable to measures used by other companies. Royal Group's net
loss, including discontinued operations for the 2006 first quarter
was $19.6 million or $0.21 per basic and fully diluted common
share, compared with a loss of $11.4 million or $0.12 per basic and
fully diluted common share in the 2005 period. Segmented Sales
---------------- 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 2,539,828 $ 26.66
---------------------------------------------------------------------
---------------------------------------------------------------------
Exercisable, March 31, 2006 1,915,828 $ 28.76
---------------------------------------------------------------------
---------------------------------------------------------------------
For the three months ended March 31, 2006 and March 31, 2005, the
Company recorded a compensation expense for stock options of $111
and $11, respectively. (b) Senior Management Incentive Plan
("SMIP"): The table below is a summary of the status of the
Company's SMIP. Number of RSUs
---------------------------------------------------------------------
Outstanding, January 1, 2006 1,215,000 Granted 20,000 Exercised -
Cancelled (70,000)
---------------------------------------------------------------------
Outstanding, March 31, 2006 1,165,000
---------------------------------------------------------------------
---------------------------------------------------------------------
For the three months ended March 31, 2006 and March 31, 2005, the
Company recorded a compensation expense for restricted share units
("RSUs") of $1,212 and $1,164, respectively. (c) Directors Deferred
Stock Unit Plan ("DSUP"): The Company maintains a DSUP for the
benefit of the members of the Board of Directors. There were
107,988 deferred stock units outstanding at March 31, 2006 with a
total recorded value of $1,147. At March 31, 2005, there were
29,408 deferred stock units outstanding with a total value of $347.
5. Loss per Share Basic and diluted loss per share have been
calculated using the weighted average method. The maximum dilutive
number of shares has been calculated using the treasury stock
method: 3 months ended March 31, 2006 3 months ended March 31, 2005
------------------------------ ----------------------------- Basic
and Diluted Contin- Discon- Contin- Discon- earnings uing tinued
uing tinued (loss) per Oper- Oper- Oper- Oper- share ations ations
Total ations ations Total ------------------------------
----------------------------- Net loss $(18,781) $ (835) $(19,616)
$(10,065) $ (1,330) $(11,395) Basic loss per share($) $ (0.20) $
(0.01) $ (0.21) $ (0.11) $ (0.01) $ (0.12) Diluted loss per
share($) $ (0.20) $ (0.01) $ (0.21) $ (0.11) $ (0.01) $ (0.12)
------------------------------ -----------------------------
Weighted average shares outstanding (in thousands) Basic 93,445
93,445 93,445 93,422 93,422 93,422 Effect of dilutive securities(x)
1,165 1,165 1,165 1,017 1,017 1,017 ------------------------------
----------------------------- Diluted 94,610 94,610 94,610 94,439
94,439 94,439 ------------------------------
----------------------------- Excluded as anti- dilutive(xx) 2,520
2,520 2,520 3,115 3,115 3,115 ------------------------------
----------------------------- (x) Due to the net loss for both the
three months ended March 31, 2006 and 2005, diluted net loss per
share has been calculated using the basic weighted average number
of Common Shares outstanding, as the inclusion of any potential
dilutive securities would be anti-dilutive. (xx) Excluded from the
calculation of diluted net loss per share because the exercise
price of the stock options was greater than or equal to the average
price of the Common Shares, and therefore their inclusion would
have been anti-dilutive. 6. Income Taxes During the three month
period ended March 31, 2006, the Company recorded an income tax
recovery on its pre-tax loss reported under GAAP. The effective tax
rate for the quarter was 25.7% as compared to 29.4% in the
comparative quarter ended March 31, 2005. The decrease in the
income tax rate was due to a change in the accounting treatment of
US tax losses, the impact of various capital dispositions and the
change in the mix of earnings and losses. 7. Segment Reporting Data
Operating segments are defined as components of an enterprise about
which separate financial information is available and which, are
evaluated regularly by senior financial decision-makers in
allocating resources and assessing performance. The following table
summarizes the segments on which the Company reports.
-------------------------------------------------------------------------
Reportable segments Core product divisions
-------------------------------------------------------------------------
Custom profiles & mouldings Custom Window Profiles and Interior
& Exterior Mouldings Building products Exterior Cladding
Construction products Pipe and Fittings and Building Systems Home
improvement products Deck, Fence and Railing and Outdoor Storage
Window covering products Window Coverings Materials Materials
(Resins, Additives, PVC and Recycling) Support Real Estate
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Performance is evaluated based on pre-tax earnings before
amortization and interest. Net sales by geographic region for the
three months ended March 31, 2006 were 67% (2005 - 67%) to the US,
31% (2005 - 31%) to Canada and 2% (2005 - 2%) to other markets. The
accounting policies for each of the segments are described in Note
1 of the audited consolidated financial statements for the year
ended December 31, 2005. Inter-segment transactions are negotiated
as if the transactions were to third parties, at market prices. The
following table presents financial information from continuing
operations:
-------------------------------------------------------------------------
Custom Home profiles & Building Construction improvement 2006
mouldings products products products
-------------------------------------------------------------------------
Gross sales $ 158,824 $ 71,766 $ 59,883 $ 26,945 Eliminations
12,192 238 1,416 289
-------------------------------------------------------------------------
Net sales $ 146,632 $ 71,528 $ 58,467 $ 26,656
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Gross profit $ 29,600 $ 15,270 $ 12,150 $ 694 Amortization charges
9,999 1,422 3,972 3,008 Acquisition of property, plant and
equipment and goodwill 9,226 1,138 1,384 792 Goodwill 109,358
20,248 20,342 13,891 Total assets 561,027 205,629 254,539 131,516
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Window covering 2006 products Materials Support Total
-------------------------------------------------------------------------
Gross sales $ 29,102 $ 89,299 $ 20,765 $ 456,584 Eliminations 707
83,515 20,143 118,500
-------------------------------------------------------------------------
Net sales $ 28,395 $ 5,784 $ 622 $ 338,084
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Gross profit $ 2,935 $ 3,149 $ 4,542 $ 68,340 Amortization charges
1,732 2,634 4,213 26,980 Acquisition of property, plant and
equipment and goodwill 264 942 (1,335) 12,411 Goodwill 11,829 9,400
9,326 194,394 Total assets 120,228 196,751 375,775 1,845,465
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Custom Home profiles & Building Construction improvement 2005
mouldings products products products
-------------------------------------------------------------------------
Gross sales $ 152,674 $ 61,557 $ 62,208 $ 34,695 Eliminations
10,118 - 2,778 1,363
-------------------------------------------------------------------------
Net sales $ 142,556 $ 61,557 $ 59,430 $ 33,332
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Gross profit $ 30,733 $ 14,103 $ 9,389 $ 2,987 Amortization charges
12,409 1,325 3,390 2,711 Acquisition of property, plant and
equipment and goodwill 9,297 1,901 2,103 3,322 Goodwill 114,905
21,404 25,342 19,448 Total assets 600,109 202,698 428,025 255,016
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Window covering 2005 products Materials Support Total
-------------------------------------------------------------------------
Gross sales $ 41,614 $ 89,314 $ 24,504 $ 466,566 Eliminations 7,989
84,241 23,427 129,916
-------------------------------------------------------------------------
Net sales $ 33,625 $ 5,073 $ 1,077 $ 336,650
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Gross profit $ 6,521 $ 9,089 $ 6,499 $ 79,321 Amortization charges
1,625 2,788 6,216 30,464 Acquisition of property, plant and
equipment and goodwill 331 843 1,920 19,717 Goodwill 12,540 10,193
10,066 213,898 Total assets 142,901 216,402 578,989 2,424,140
-------------------------------------------------------------------------
-------------------------------------------------------------------------
8. Supplemental Cash Flow Information (a) Items not affecting cash
(bank indebtedness) of continuing operations:
---------------------------------------------------------------------
2006 2005
---------------------------------------------------------------------
Gain on sale of businesses $ (10,377) $ - Amortization charges
26,980 34,001 Amortization of deferred financing costs 58 66 Future
income taxes (10,543) (6,547) Other 4,296 6,044
---------------------------------------------------------------------
Cash provided $ 10,414 $ 33,564
---------------------------------------------------------------------
---------------------------------------------------------------------
(b) Change in non-cash working capital:
---------------------------------------------------------------------
2006 2005
---------------------------------------------------------------------
Accounts receivable $ (17,670) $ (43,531) Inventories (33,742)
(50,697) Prepaid expenses (66) (7,035) Accounts payable and accrued
liabilities (723) (16,066)
---------------------------------------------------------------------
Cash used $ (52,201) $(117,329)
---------------------------------------------------------------------
---------------------------------------------------------------------
The changes noted above are exclusive of non-cash working capital
acquired through acquisitions. 9. Commitments As noted in Note 21
of the 2005 audited consolidated financial statements, the Company
has a longterm agreement with Westlake Vinyls Inc. ("Westlake") for
the annual purchase of up to 460 million pounds of vinyl chloride
monomer. The agreement with Westlake had a pricing mechanism that
was linked to data published in two industry trade magazines. On
January 1, 2006, one of the trade magazines ceased publishing the
pricing information. On April 7, 2006, the Company filed a Notice
of Application seeking a court order declaring that this long-term
agreement with Westlake is void and unenforceable. Subsequently,
Westlake filed its own application seeking a determination that the
supply agreement is valid. In efforts to resolve this dispute, the
Company and Westlake have entered into discussions aimed at
arriving at a new mutually agreed pricing mechanism. 10.
Contingencies The Company and certain of its former officers and
directors have been named as defendants in two shareholder lawsuits
filed in the United States District Court for the Southern District
of New York that seek class action status. The first complaint was
filed on February 2, 2006. The second complaint was filed on
February 3, 2006. Both of these actions purport to be brought on
behalf of: (a) All United States citizens and entities that
purchased or otherwise acquired the common stock of Royal Group on
the New York Stock Exchange or the Toronto Stock Exchange; and (b)
All foreign persons and entities that purchased or otherwise
acquired the common stock of Royal Group on the New York Stock
Exchange between February 24, 2000 and October 18, 2004. Plaintiffs
in both actions allege that defendants violated Sections 10(b) and
20(a) of the Securities Exchange Act of 1934 by, among other
things, failing to disclose certain related-party transactions. The
complaints each seek certification of the putative class,
unspecified damages, reasonable costs and attorneys' fees, and
other relief the court may deem appropriate. On April 3, 2006,
three putative class members moved to consolidate these two related
actions, to be appointed joint Lead Plaintiffs and for approval of
their counsel as Lead Counsel. The U.S. court has not yet
consolidated these actions or appointed a Lead Plaintiff to
prosecute them. The Company, certain of its former officers and
certain of its former and current directors also have been named as
defendants in a proposed shareholder class action lawsuit filed on
February 24, 2006 in the Ontario Superior Court of Justice (the
"Ontario Action"). The Ontario Action seeks to bring a class action
on behalf of all persons who acquired securities of the Company
from February 26, 1998 to October 18, 2004. It claims damages for
oppression and negligent misrepresentation of $700,000, punitive
damages of $300,000 as well as interest and costs. The Ontario
Action alleges, among other things, that the Company failed to
disclose certain related party transactions. The Company is
presently unable to determine whether this action will have a
material adverse effect on the business, results of operations,
financial condition and liquidity of the Company and intends to
defend itself vigorously in these actions. As noted in Note 22 of
the 2005 audited consolidated financial statements, the Company has
received a demand letter from U.S. counsel for an individual
shareholder. It threatens a court application for leave to bring a
derivative action on behalf of the Company against certain former
officers of the Company in respect of related party transactions,
as well as senior officers and directors of the Company since
January 1998, if the Company itself does not commence the demanded
action. The Company's Audit Committee is in the process of
reviewing the demand and will make a recommendation to the Board on
how to proceed. The Company is the subject of a criminal
investigation being conducted by the Antitrust Division of the
United States Department of Justice ("Department of Justice"). The
investigation focuses on alleged price fixing in the window
coverings industry. The Company recently reached an agreement in
principal to resolve the matter with the Department of Justice for
an 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, as the Department of
Justice has not yet provided the Company with a draft of the
agreement. The Company has also been contacted by counsel for a
group of potential civil plaintiffs (direct purchasers) that have
indicated their intention to commence litigation against the
Company pertaining to the conduct that is the subject of the
Department of Justice investigation. As of this report, no civil
lawsuits have been filed. The Company is also involved in various
claims, legal proceedings, investigations and complaints arising in
the course of business. Where the Company expects to incur a loss
as a result of a claim, an estimate of the loss has been recorded
as an expense. In all other cases, the Company cannot determine
whether these claims, legal proceedings, investigations and
complaints will, individually or collectively, have a material
adverse effect on the business, results of operations and financial
condition and liquidity of the Company. 11. Related Party
Transactions During the three months ended March 31, 2006, related
party transactions with companies related to the former controlling
shareholder totalled $58 (2005 - $63). Related party transactions
principally between a non-wholly owned subsidiary and minority
shareholders of this subsidiary totalled $820 (2005 - $1,418). At
March 31, 2006, there are accounts receivable from companies
related to the former controlling shareholder of $15 (2005 - $30)
and an account receivable from the former controlling shareholder
of nil (2004 - $1,130). At March 31, 2006, there are accounts
receivable of $30 (2005 - $353) and accounts payable of $97 (2005 -
$1,364) relating to other related parties. These related party
transactions were in the normal course of the Company's business,
and involved either the sale of products manufactured by the
Company and sold at prices and terms consistent with those
available to third parties, the recovery of costs incurred in
respect of certain shared services or the purchase of other goods
and services such as rent for premises. 12. Subsequent Events On
April 6, 2006, the Company completed the sale of Baron Metal
Industries Inc. The assets and liabilities of the business was
reclassified as held for sale at March 31, 2006 and December 31,
2005 and its financial results were segregated and presented
separately as discontinued operations for the three-month periods
ended March 31, 2006 and March 31, 2005. On April 27, 2006, the
Company entered into a letter of intent to acquire Tech-Wood USA,
LLC ("Tech-Wood"), a U.S. start-up company, which is located in
Greenwood, South Carolina. Tech-Wood has a patented polymer and
wood-fiber technology for manufacturing wood-polymer composite
products such as decking, fencing, railing and other building
materials. Tech-Wood holds the exclusive North American rights to
this technology and the Company may invest up to $35,000 over the
next 18 to 24 months in this strategic venture. In addition, the
Company has announced further plant consolidations, with another
1.5 million square feet of excess manufacturing space, which the
Company has identified to be sold over the next twelve months. 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 ("Department of Justice").
The investigation focuses on alleged price fixing in the window
coverings industry. The Company recently reached an agreement in
principal to resolve the matter with the Department of Justice for
an 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, as the Department of
Justice has not yet provided the Company with a draft of the
agreement. The Company has also been contacted by counsel for a
group of potential civil plaintiffs (direct purchasers) that have
indicated their intention to commence litigation against the
Company pertaining to the conduct that is the subject of the
Department of Justice investigation. As of this report, no civil
lawsuits have been filed. DATASOURCE: Royal Group Technologies
Limited CONTACT: Mark Badger, Vice President of Marketing and
Corporate Communications, Royal Group Technologies Limited, Phone:
(905) 264-0701
Copyright