Viceroy Homes Releases Fiscal 2007 Fourth Quarter and Year-End Results



    TSE: VHL.A

    PORT HOPE, ON, June 28 /CNW/ - Viceroy Homes Limited today released its
financial results for the quarter and year ended March 31, 2007. Viceroy was
active in fiscal 2007, as the company directed its focus on potentially
profitable areas while taking appropriate steps to ensure its fiscal health,
in light of ongoing softness in the Japanese market.
    Total sales decreased by 20% to $82.5 million in fiscal 2007, from
$103.0 million the year before. Total sales units decreased by 23%, to 1,456
from 1,886 a year ago. In the fourth quarter of fiscal 2007, total
consolidated sales decreased by 36% to $12.2 million, from $19.0 million for
the same period one year ago. Total sales units decreased by 47% to 199 from
375 in the fourth quarter one year ago.
    Gross profit was $8.6 million, or 10% of total sales, in fiscal 2007,
compared with $16.5 million, or 16% of total sales, in fiscal 2006. Fourth
quarter gross loss was $501,000, or 4% of total sales, versus a gross profit
of $2.4 million, or 13% of total sales, for the same period one year ago. The
decline in gross profit stems primarily from the lower Japanese sales volume,
as well as discounts offered as incentives in that market.
    Additional factors negatively affecting gross profit in fiscal 2007 were
delivery expenses, which were $130,000 higher than the year before, despite
North American sales declining by 5%, because of the ongoing implementation of
fuel surcharges from third-party carriers. Manufacturing salaries and overtime
premiums were lower by $941,000 in fiscal 2007 over the previous year;
however, those costs increased on a percentage basis because of decreased
sales volume.
    Selling costs were higher in fiscal 2007, at $7.0 million, or 8% of
sales, as compared with $6.7 million, or 7% of sales, in fiscal 2006. In the
final quarter of the fiscal year, selling expenses were $1.9 million, or 15%
of total sales, as compared with $1.8 million, or 9% of total sales in the
fourth quarter of the previous fiscal year. Variable selling costs fell by
$361,000 in fiscal 2007 due primarily to the reduced sales volume.
    General and administrative expenses were $4.3 million, or 5% of sales, in
fiscal 2007, compared with $4.2 million, or 4% of sales, in the preceding
fiscal year. In the fourth quarter, general and administrative expenses were
$1.1 million, or 9% of total sales, compared with $916,000 million, or 5% of
total sales, a year ago. The costs of professional services, as well as
communications/computer service contracts, were higher by $168,000 in fiscal
2007 than they were the year before.
    The net loss for fiscal 2007 was $1.3 million, or $0.12 per share, ($0.12
on a diluted basis; that is, after giving effect to the potential exercise of
stock options). This is in contrast to net earnings of $4.1 million, or $0.37
per share ($0.37 on a diluted basis), in fiscal 2006. For the fourth quarter,
the net loss was $2.3 million, or $0.21 per share ($0.21 on a diluted basis),
compared against net earnings of $247,000, or $0.02 per share ($0.03 on a
diluted basis).
    Additional details and information are included in the attached
Management Discussion and Analysis and consolidated financial statements for
March 31, 2007.

    About Viceroy
    -------------
    Founded 52 years ago, Viceroy Homes is a leader in pre-engineered housing
that offers high quality building designs and materials combined with lower
cost and reduced on-site construction time. Viceroy is the largest supplier of
Canadian housing technology to a growing export market providing superior
housing solutions for builders and developers around the world. The Company
has vertically integrated manufacturing facilities located in Ontario and
British Columbia. Viceroy's Class A Subordinate Voting Shares trade on The
Toronto Stock Exchange under the symbol VHL.A.

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    Management's Discussion and Analysis

    VICEROY HOMES LIMITED
    (the "Company")

    June 22, 2007

    
    SELECTED ANNUAL INFORMATION
    (In Thousands of Dollars Except Per Share Amounts)

                                                  Fiscal Year Ended March 31
                                                  --------------------------
                                                  2007       2006       2005
                                                  ----       ----       ----

    Net Sales                                  $82,513   $102,978   $104,199

    Net Earnings (Loss):
      - Total                                   (1,307)     4,102     (2,774)
      - Per Share                                (0.12)      0.37      (0.25)
      - Per Share Diluted                        (0.12)      0.37      (0.25)

    Total Assets                                54,182     58,432     55,254

    Total Long-term Financial Liabilities          NIL        NIL        NIL

    Issued Capital Stock:
      - Class A Subordinate Voting Shares    6,830,819  6,932,364  6,824,676
      - Class B Multiple Voting Shares       4,255,435  4,255,435  4,255,435

    Dividends Per Share:
      - Class A                                   0.20       0.30       0.30
      - Class B                                   0.20       0.30       0.30

    All financial data has been prepared in accordance with Canadian
    Generally Accepted Accounting Principles ("GAAP"). The Canadian dollar is
    the reporting currency.
    


    RESULTS OF OPERATIONS

    SALES

    Total consolidated sales decreased by 20% to $82.5 million in fiscal
2007, from $103.0 million in the year prior. Total sales units decreased by
23% to 1,456 from 1,886. In the fourth quarter of fiscal 2007, total
consolidated sales decreased by 36% to $12.2 million, from $19.0 million for
the same period one year ago (total sales units decreased by 47% to 199 from
375 in the fourth quarter one year ago).

    JAPAN

    For the 2007 fiscal year, sales to Japan decreased by 30% to
$40.8 million (49% of total sales), from $58.5 million (57% of total sales)
one year ago. Sales units decreased by 27% to 959 from 1,308. Sales in the
fourth quarter were $6.8 million (56% of total sales), compared to $12.1
million (64% of total sales) one year ago, a 44% decrease. Sales units in the
fourth quarter decreased by 50% to 147 from 296 units one year ago. A year
ago, the five-week container truckers' job action on the West Coast delayed
shipments by the Company to Japan that had been planned for the second
quarter, spilling over into the third quarter. The considerable effort to get
shipments back on schedule included certain customers sourcing portions of
their projects (i.e. framing components) locally from Japan. This practice
continued, resulting in the reduction of the average dollar value of the
Japanese shipments for the balance of fiscal 2006 and into fiscal 2007.
    The Japanese marketplace continued to experience intense price pressure.
A weak Japanese Yen, versus the North American currencies, combined with high
container/transportation costs, continued to put pressure on Japanese
customers and negatively impact demand. To assist the Japanese customers faced
with a much weaker Yen, Company offered extra discounts amounting to
$1.2 million in fiscal 2007 and $66,000 for the most recent fourth quarter
compared to the same periods a year ago. The Company continues to maintain a
strong relationship with its builder customers in Japan. However, although it
was anticipated that sales to Japan would slow significantly, the actual
shipments were lower than expected due to the weak Japanese currency. This, in
turn, has had a very negative impact on the Company's competitive position in
Japan.

    NORTH AMERICA

    Sales in Canada were $27.6 million (33% of total sales) in fiscal 2007,
compared to $27.5 million (27% of total sales) one year ago. Sales out of the
Port Hope, Ontario facility continue to be somewhat hampered by "Bill 124"
building permit legislation (see "Economic and Regulatory" section, below),
which is delaying customers in Ontario from taking delivery of their packages.
Sales to customers in the United States decreased by 16% to $13.4 million (16%
of total sales) for the year, compared to $15.9 million (15% of total sales)
in fiscal 2006. In the seasonably quiet fourth quarter, sales in Canada
increased 11% to $2.1 million (17% of total sales), from $1.9 million (10% of
total sales) in the year prior. Sales to the United States in the fourth
quarter were $2.9 million (24% of total sales) versus $4.7 million (25% of
total sales) in the fourth quarter of fiscal 2006, a 38% decrease. A year ago
in the fourth quarter, deliveries were more brisk due to the timing of a sales
promotion in the U.S. Northwest that matured at the end of the quarter. There
has been a softening of the U.S. housing market, particularly in the U.S.
Northwest. In eastern United States, progress in establishing brand
recognition and a presence in the Detroit, Michigan and Danvers (Boston-area),
Massachusetts markets has been slow. Furthermore, although the Company has
received expressions of interest in connection with builder business,
representing an expansion beyond the Company's traditional North American
retail product offering, these efforts have not yet yielded significant
deliveries.
    Fiscal 2007 revenues included $846,000 of expired North American customer
deposits, versus $732,000 in fiscal 2006. In the most recent fourth quarter,
forfeited deposits of $239,000 were recognized as income, versus $394,000
during the fourth quarter of fiscal 2006.

    OTHER COUNTRIES

    Sales to customers scattered among six other countries, were $749,000 in
fiscal 2007 versus $1.2 million spread among five countries in fiscal 2006. In
the fourth quarter, these sales amounted to $445,000, versus $417,000 during
the fourth quarter of fiscal 2006.

    GROSS PROFIT

    Gross profit was $8.6 million (10% of total sales) in fiscal 2007,
compared to $16.5 million (16% of total sales) in fiscal 2006. The fourth
quarter gross loss was $501,000 (4% of total sales), versus a gross profit of
$2.4 million (13% of total sales) for the same period one year ago.
    The drop in the gross profit resulted primarily from the reduced level of
units shipped and the extra discounts in connection with the Japanese business
referred to above. Material percentages remained relatively stable, but direct
labour percentages were higher than a year ago. Throughout fiscal 2006 and
2007, commodity lumber and plywood prices improved, as ample supply met an
ease in demand, particularly in the U.S. Northwest. However, the prices for
"J Grade", the lumber incorporated into the packages sold to Japan, have not
fallen significantly, as this high grade of lumber remains in short supply,
representing less than 10% of the overall yield of logging operations.
    Delivery expenses were $130,000 higher in fiscal 2007, despite North
American activity being down 5%, due to fuel surcharges that were implemented
by third-party carriers. In the most recent fourth quarter, the Company
incurred a warranty cost of $190,000, related to a product failure caused by a
supplier. The Company has made a claim against the supplier in order to
recover the damages. The full liability of the customer claim was recognized
in the fourth quarter but the claim against the supplier represents a
contingent gain to be recorded in the future when received.
    Manufacturing overheads, although lower by $941,000 in fiscal 2007,
increased on a percentage basis on the lower level of sales. Manufacturing
salaries, benefit costs and overtime premiums were lower by $765,000 in fiscal
2007 ($40,000 lower in the fourth quarter), due to reduced activity at the
factory level and, in particular, lower Workers' Safety and Insurance Board
("W.S.I.B.") premiums. W.S.I.B. rate reductions in B.C. contributed $222,000
to the reduction in premiums. In addition, the Company received an Ontario
W.S.I.B. "NEER" Program refund of $150,000 versus an assessment of $80,000 a
year ago, resulting in a positive swing of $230,000. Outside services were
higher by $142,000 in fiscal 2007 ($116,000 higher in the fourth quarter), due
to higher computer consulting costs. Machine parts and repairs were lower by
$147,000 in fiscal 2007 (lower by $61,000 in the fourth quarter), due to
reduced activity.

    SELLING EXPENSES

    Selling costs were $7.0 million (8% of sales) in fiscal 2007, compared to
$6.7 million (7% of sales) in fiscal 2006. In the most recent quarter, selling
expenses were $1.9 million (15% of total sales), compared to $1.8 million (9%
of total sales) in the fourth quarter one year ago. In fiscal 2007, variable
selling costs related to the Japanese program were lower by $361,000 (lower by
$59,000 in the fourth quarter), compared to a year ago, due to the reduced
sales volume subject to the program. Variable commissions and overrides in
North America, in fiscal 2007, were higher by $54,000, due to the write-off of
certain salespersons' balances but lower by $131,000 in the fourth quarter,
due to lower retail North American deliveries and the change in status of a
former salesperson to a dealer. Salaries and benefits were higher in fiscal
2007 by $402,000 ($118,000 higher in the fourth quarter), as a result of the
payment of salaries to new sales personnel, including those in the new
territories being established in Detroit, Michigan and Danvers (Boston area),
Massachusetts. Furthermore, as a result of these new sales offices, including
the conversion of the Ottawa facility from a dealership to a Company sales
court, rentals, outside services, taxes, insurance and amortization expenses
were higher by $294,000 in fiscal 2007 and lower by $15,000 for the quarter,
versus a year ago. Advertising and promotional expenses relating to decreased
print media expenditures were lower by $86,000 in fiscal 2007, versus one year
ago, but higher by $79,000 in the fourth quarter, due to the earlier timing of
certain promotions for the new season.

    GENERAL AND ADMINISTRATIVE EXPENSES

    General and administrative expenses were $4.3 million (5% of sales) in
fiscal 2007, compared to $4.2 million (4% of sales) in the prior fiscal year.
In the fourth quarter, general and administrative expenses were $1.1 million
(9% of total sales), compared to $916,000 (5% of total sales) one year ago.
The costs of professional services, including accounting, legal, investor
relations and consulting, as well as communications/computer service
contracts, were higher by $168,000 ($86,000 for the most recent three months),
compared to the same period one year ago. Computer and other office supplies
were lower by $73,000 ($19,000 lower for the fourth quarter), compared to a
year ago.

    ASSET IMPAIRMENT

    Last year in fiscal 2006, an additional impairment of $34,000, in
connection with the Philippines investment, was recorded, due to the
deterioration of the Philippine Peso.

    OTHER INCOME/LOSS

    Other income was $714,000 in fiscal 2007 (other income of $176,000 in the
fourth quarter), compared to other income of $557,000 in fiscal 2006 (other
income of $396,000 in the fourth quarter of fiscal 2006). As summarized in
Note 7 to the consolidated financial statements, the other income was
comprised primarily of interest income, gains on the translation of net U.S.
assets and the gains on the sale of capital assets. In fiscal 2007, interest
income was higher than the same period a year ago by $218,000, due to higher
rates on marketable securities, as well as higher average balances in the
earlier part of the year. Interest income was $145,000 in the most recent
fourth quarter compared to $147,000 in the same period a year ago, resulting
from higher rates currently, but lower balances. Other income in the fourth
quarter was $219,000 lower than the fourth quarter a year ago, which contained
$135,000 higher currency gains and $82,000 higher gains on disposal of capital
assets.

    INCOME TAXES

    In fiscal 2007, the income tax recovery was $662,000 as compared to an
income tax expense of $2.0 million in fiscal 2006. For the fourth quarter, the
income tax recovery was $954,000 as compared to an income tax recoverable of
$261,000 for the same period in 2006.
    Note 5 to the consolidated financial statements illustrates how the
actual income tax expenses/recovery varied from the effective income tax rates
in fiscal 2007 and 2006. In fiscal 2007, the income tax exposure on currency
exchange in the Company's U.S. subsidiary (i.e., holding Canadian funds on the
U.S. company's balance sheet) has increased income tax expense by
approximately $36,000 for the year (an increase of $28,000 for the most recent
fourth quarter), and for fiscal 2006, increased income tax expenses by
approximately $77,000 for the year (a $9,000 reduction for the fourth quarter
a year ago). Even though this currency exchange in the U.S. Company creates an
income tax exposure (and therefore income tax recoverable or expense), it does
not represent pre-tax income or expense for the consolidated results.

    NET INCOME

    The net loss for fiscal 2007 was $1.3 million or $0.12 per share ($0.12
on a diluted basis, that is, after giving effect to the potential exercise of
stock options), compared to net earnings of $4.1 million, or $0.37 per share
($0.37 on a diluted basis), in fiscal 2006. For the fourth quarter, the net
loss was $2.3 million, or $0.21 per share ($0.21 on a diluted basis), compared
to net earnings of $247,000 or $0.02 per share ($0.03 on a diluted basis).

    
    SUMMARY OF QUARTERLY RESULTS

                                                      2007
                                    -----------------------------------------
                                       Q4         Q3         Q2         Q1
                                            (in thousands of dollars,
                                            except per share amounts)

    Net Sales                       $12,205    $17,920    $30,289    $22,099

    Net Earnings (Loss):
      Total                          (2,310)      (549)     1,461         91
      Per Share                       (0.21)     (0.05)      0.13       0.01
      Per Share Diluted               (0.21)     (0.05)      0.13       0.01


                                                      2006
                                    -----------------------------------------
                                       Q4         Q3         Q2         Q1
                                            (in thousands of dollars,
                                            except per share amounts)

    Net Sales                       $19,037    $27,701    $29,858    $26,382

    Net Earnings (Loss):
      Total                             247        866      1,980      1,009
      Per Share                        0.02       0.08       0.18       0.09
      Per Share Diluted                0.03       0.07       0.18       0.09
    

    The lower sales in the fourth quarter typically results from the low
North American activity during the January-to-March winter period. The
significant drop in sales, from the third quarter onward, was caused by the
disappointing Japanese activity, as discussed previously.

    LIQUIDITY AND CAPITAL RE

SOURCES WORKING CAPITAL Working capital was $14.6 million at the end of fiscal 2007, compared to $16.6 million at the end of fiscal 2006. CASH FLOW FROM OPERATIONS The cash flow from operations, before changes in non-cash working capital, was $2.7 million in fiscal 2007, compared to $7.8 million in fiscal 2006. For the fourth quarter, there was a negative cash flow from operations of $1.1 million, before changes in non-cash working capital, compared to a cash flow of $954,000 in the same period one year ago. In fiscal 2007, the change in non-cash working capital utilized funds of $1.1 million due to: the increase in prepaid and other assets of $256,000; the increase in income taxes recoverable of $2.9 million, the reduction of income taxes payable of $1.5 million; and the reduction of trade and other payables of $329,000, net of the reduction of accounts receivable of $1.5 million; the reduction of inventory of $938,000; and the increase in customer deposits of $1.5 million. Accounts receivable, including GST (Goods and Services Tax) receivable, were lower, due to the lower level of Japanese business. Inventory was lower, due to the reduced overall sales activity. Customer deposits increased, however, as the North American order book continued to grow. Prepaid expenses and deposits were higher as at March 31, 2007, compared to a year ago, due primarily to the timing of insurance premiums and the increase of engineering fees for U.S. customer projects. In the first quarter of 2007, the Company remitted final income tax installments for fiscal 2006, which amounted to $2.5 million on a consolidated basis. Furthermore, for the current tax year, $1.5 million has been remitted which is now recoverable together with a recovery of a portion of the income taxes paid in the prior year. Thus, with the net loss in fiscal 2007, income taxes have gone from a payable to a receivable position. Last year, in fiscal 2006, the change in non-cash working capital provided funds of $4.3 million due to: the reduction in inventory of $717,000; the reduction in prepaid and other assets of $278,000; the reduction in income taxes recoverable of $1.8 million; the increase in trade and other payables of $374,000; the increase in customer deposits of $377,000; and the increase in income taxes payable of $1.5 million, net of the increase in accounts receivable of $737,000. In the fourth quarter of fiscal 2007, the change in non-cash working capital utilized funds of $1.2 million due to: the increase in accounts receivable of $851,000; the increase in income taxes recoverable of $1.1 million; and the reduction in trade and other payables of $277,000, net of the reduction in inventory of $562,000; the reduction in prepaid and other assets of $56,000; and the increase in customer deposits of $406,000. In the fourth quarter of 2006, the change in non-cash working capital utilized funds of $2.4 million due to: the increase in accounts receivable of $751,000; the increase in inventory of $119,000; the reduction in trade and other payables of $259,000; the reduction in income taxes payable of $463,000; and the reduction in customer deposits of $926,000, net of the reduction of prepaid and other assets of $150,000. FINANCING In the first two quarters of fiscal 2007, dividends were paid at the rate of $0.075 per share per quarter, and in the third quarter, at the rate of $0.05 per share, amounting to $2.2 million for the year. Dividends were suspended in the most recent fourth quarter. In fiscal 2006, dividends were paid at the rate of $0.075 per share per quarter, amounting to $3.3 million ($839,000 in the fourth quarter a year ago). In light of the uncertainty in the near-term prospects, the Company's Board of Directors has taken the prudent step of suspending the quarterly dividend until results improve, effective March 1, 2007. In conjunction with the Dividend Reinvestment Plan ("DRIP"), share capital was issued in the amount of $28,000 in fiscal 2007 (Nil in the fourth quarter) and $34,000 in fiscal 2006 ($7,000 in the fourth quarter). In fiscal 2007, share capital was issued in the amount of $25,000 upon the exercise of employee stock options (nil in the most recent fourth quarter). In fiscal 2006, $270,000 was issued upon the exercise of employee stock options (nil in the fourth quarter). The Company granted 25,000 employee stock options on February 10, 2006, and 20,000 employee stock options on April 27, 2005. In conjunction with these grants, the Company recorded compensation expenses of $58,000 in fiscal 2007 ($9,000 in the most recent fourth quarter) and $27,000 in fiscal 2006 ($8,000 for the fourth quarter) one year ago. Effective October 13, 2006, The Toronto Stock Exchange approved the Company's Normal Course Issuer Bid, authorizing the repurchase of up to 602,001 Class A Shares within the twelve months ended October 17, 2007. Under this Bid, in fiscal 2007, the Company repurchased for cancellation 117,400 of its Class A Subordinate Voting Shares (47,200 in the most recent fourth quarter) at a cost of $427,000 ($145,000 in the fourth quarter), representing an average cost of $3.64 per share (average cost of $3.06 per share in the fourth quarter). A year ago, the Company had a Normal Course Issuer Bid, which expired on June 20, 2006. In fiscal 2006, no shares were repurchased. Refer to Note 4(e) to the consolidated interim financial statements. INVESTING In fiscal 2007, proceeds of $219,000 were realized on the disposal of equipment and $2,000 on the disposal of vehicles. In fiscal 2006, proceeds of $268,000 were realized upon the disposal of land in Portland, Oregon (in the fourth quarter), $7,000 on the disposal of equipment and $12,000 on the disposal of vehicles. The Company's investment in the long-term lease in the Philippines has been listed for sale and management expects that an existing offer will culminate in a sale, in fiscal 2008, for an amount, net of selling commissions, approximating the Company's carrying value of $869,000. In fiscal 2007, $126,000 was expended on land and building improvements ($85,000 in the fourth quarter), $505,000 on display courts ($56,000 in the fourth quarter), $1.8 million on machinery and equipment ($584,000 in the fourth quarter) and $58,000 on vehicles ($21,000 in the fourth quarter). In fiscal 2006, $294,000 was expended on land and building improvements ($91,000 in the fourth quarter), $1.2 million on display courts ($251,000 in the fourth quarter), $1.3 million on machinery and equipment ($303,000 in the fourth quarter) and $75,000 on vehicles ($55,000 in the fourth quarter). Last year, in fiscal 2006, other assets increased by $215,000, primarily due to the mortgage receivable arising from the sale of the Portland land. In fiscal 2007, other assets decreased by $99,000 due to the transfer of certain lease deposits to current assets. The short-term investments consist of money market instruments ("bankers' acceptances") with original maturities varying between 133 and 181 days (between 121 and 174 days a year ago). CONTRACTUAL OBLIGATIONS The Company has entered into commitments to lease manufacturing facilities, sales offices, vehicles and office equipment. To further expand the Company's marketing infrastructure in the U.S., a 1,665-square-foot lease was signed in the Boston, Massachusetts area, effective June 2, 2006. As of April 30, 2007, at the expiration of the lease for the smallest of the three facilities in Richmond, B.C. (the former "window plant"), the Company consolidated those operations into the other two leased plants. The yearly savings in rent and other overhead expenses will be approximately $350,000. The Company's lease commitments are as follows: (In thousands of dollars) ------------------------- 2008 $1,290 2009 685 2010 592 2011 279 2012 20 Thereafter 0 ------- $2,866 ------- In addition to the Company's lease commitments, as at March 31, 2007, the Company has entered into commitments to purchase machinery and equipment with prices totaling $242,000 with delivery expected during fiscal 2008. As routine capital upgrades are identified and opportunities to adopt and develop new processes are put forward, these requirements will be assessed accordingly in the future. The Company's primary source of liquidity is cash on hand and short-term investments. The Company has more cash resources than it requires in order to finance its working capital and projected growth. When dividends are paid, they are paid out of surplus funds. The Company does not presently carry any short- or long-term debt, and is not subject to significant contractual commitments to purchase raw materials or finished goods that specify any minimum quantities or set prices. The Company's needs for goods and services are fulfilled by its suppliers on relatively short timetables. Management believes that the current cash and cash equivalents, short-term investments and cash generated from operations will be sufficient to satisfy the Company's operating requirements, including capital expenditures, for the next twelve months. RISK FACTORS AND OUTLOOK ECONOMIC AND REGULATORY FACTORS During fiscal 2002, the U. S. Government introduced "countervailing and anti-dumping" duties applicable to the importation of softwood lumber into the United States. The U.S. authorities issued explanatory guidelines clarifying that the house package product the Company sells to its retail customers was exempt from these duties. Representatives from Canada and the United States negotiated a new set of rules involving lumber products entering the U.S. market. On October 12, 2006, the new Softwood Lumber Agreement ("SLA 2006") came into force. Under the new Agreement, the Company's "single family home packages or kits" are excluded from the scope of the orders of the SLA 2006. For the convenience of its U.S. customers, the Company publishes its prices in U.S. dollars for sales to that market. As a result, swings in the U.S./Canadian exchange rate can have a direct impact on the sales value of shipments to the United States. In the spring of 2005, the Ontario Government enacted new legislation, Bill 124, which sets out enhanced requirements for obtaining residential building permits. Under Bill 124, licensed contractors who have registered with the new program must sign-off for all of the various construction phases of a residential project. In addition to adding complexities and costs, the new administrative process has the potential to delay Ontario customers in obtaining building permits and taking delivery of their house packages. The Company also continues to do a significant amount of business in countries outside of North America, particularly in Japan. As a result, the Company is subject to certain risks, including currency fluctuations and possible political or economic instability in such countries. Business activities in foreign countries, and specifically Japan, may be affected to varying degrees by political stability and government regulations, including any applicable price controls, import/export restrictions, foreign exchange controls, customs, taxes and other legislation. Any changes in regulations or shifts in policies are beyond the Company's control and may adversely affect the Company. Although the Company contracts in Canadian dollars with respect to this international business, fluctuations in currency values in the countries in which the Company sells its products could make the Company's products more or less expensive, relative to domestic alternatives in those markets, or competing products manufactured in other countries. In addition, economic recession in another country can reduce demand and the customer's ability to obtain project financing. The Company has been successful in establishing its business in Japan despite difficult economic times in that country. The "2-by-4" frame construction method of building a house in Japan remains an economical alternative to other traditional methods. COMMODITIES The Company manufactures housing components using substantial amounts of Canadian lumber and plywood. External factors such as supply and demand (which can be affected by natural disasters), currency exchange rates (the underlying pricing formulas are based on U.S.-dollar-denominated publications) and government intervention (from various countries) can impact the costs of these commodities and therefore profitability. COMPETITION Although competition to serve regions such as the Pacific Rim has generally not come from strong North American companies, significant competition comes from within Japan, particularly at times when the Japanese Yen is weak. The cost of transporting the product to Japan is impacted by the availability and cost of ocean containers and fuel costs, which affects the relative competitiveness of the North American product. The Company has established strong customer relationships over the last dozen years and continually differentiates itself from competitors by demonstrating continuous product and process improvement and innovation. LABOUR ORGANIZATION Effective October 1, 2006, the Company signed a three-year agreement with the "National Automobile, Aerospace, Transportation and General Workers Union of Canada" (formerly the "Retail and Wholesale Union") covering the hourly production workers in the Company's Port Hope, Ontario manufacturing facility. The five-year agreement covering the hourly production workers in the Company's Richmond, B.C. manufacturing facilities expired, as of March 31, 2007. Negotiations for a new multi-year agreement with the "Retail and Wholesale Union" are ongoing. OUTLOOK A very weak Japanese Yen coupled with a strong Canadian dollar is still causing great damage to the level of sales to Japan. The sharp decline in sales is still not complete. Looking ahead to the next full year, management predicts that the $41 million Japanese sales level, achieved in fiscal 2007, could drop further by as much as 25%. An even worse comparison is expected for the first quarter of fiscal 2008. The significant deterioration in the level of shipments to Japan did not really commence until fall 2006. The level of sales to Japan in the first quarter of fiscal 2007 was comparatively strong at $14.1 million. Management expects that the sales to Japan and to other export markets in the first quarter of fiscal 2008 could be lower by 40%, compared to the first quarter of fiscal 2007. Helping to counter this drop, management expects first quarter sales (fiscal 2008) in North America to be approximately 30% higher than the level for the same period a year ago. Due to the timing of certain sales programs last spring, the first quarter of fiscal 2007 got off to a slow start in North America. As a result, although activity in North America and other export markets is predicted to demonstrate good year-over-year growth, the percentage increase for the full year will be lower than the first quarter number. The Company's current initiatives are geared to expand North American markets and to develop other export markets: - Retail - Broaden the product and services offerings: - New model designs. - Interior package. - Architectural post and beam. - Modified "turnkey" services. - Builder/Developer Business: - Manufactured component systems (panels, trusses). - Design services. - "Floor-to-lock-up" services (craning/stitching/sheathing manufactured components). Viceroy is aggressively targeting home building contractors, offering them an advanced system using modern technology which should result in substantial savings in time at the job sites. - Export Markets - Beyond Japan, the Company is shipping to: - The United Kingdom. - The Caribbean. - The Russian Federation and other European countries. - South Korea. CRITICAL ACCOUNTING ESTIMATES The Company's "Significant Accounting Policies" are described in Note 1 to the consolidated financial statements. The Company's discussion and analysis of its financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with Canadian Generally Accepted Accounting Principles ("GAAP"). The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. The Company bases its estimates on, among other things, historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Some of the Company's significant accounting policies involve a higher degree of judgment than its other accounting policies. The following are considered to be critical accounting estimates, as they require significant estimations or judgment. Inventory Valuation Raw materials are carried at the lower of cost and replacement cost, and work in progress is carried at the lower of cost and net realizable value. The Company produces its housing products to specific orders and, as a result, purchases many materials and components just-in-time, on an as-needed basis. A determination must be made to ensure that the material is not out of specification or obsolete. The accounting estimates used in the determination of inventory have not changed over the past two years. Inventory and cost of sales are very significant components of the balance sheet and statement of earnings, respectively. Changes in market conditions can thus have a material impact on both inventory and cost of sales. Revenue Recognition - Forfeited Deposits For almost five decades, the Company has sold house packages to retail customers, requiring deposits and progress payments at various stages of the contracts. At those stages, the Company has performed differing amounts of work, administering the contract, drafting and engineering the plans and manufacturing components of the house package. Some customers never complete the purchase of a house package after this work has been performed. The deposits and progress payments are not refundable as clearly defined in the signed contracts with customers. Based on history, the Company has established a time period after which a customer is unlikely to reactivate the contract and, therefore, the related deposits are deemed forfeited and are reported as income. Property, Plant and Equipment The Company has a substantial investment in manufacturing equipment, sales courts, manufacturing facilities in Richmond, B.C. and Port Hope, Ontario and land held for sale in the Philippines. Management must ensure that major pieces of equipment have not become physically or technologically obsolete, thus warranting a write-down of the carrying value. In addition, these "long-lived" assets are reviewed for possible impairment of value. CHANGES IN ACCOUNTING POLICIES Financial Instruments In 2005, the Canadian Institute of Chartered Accountants ("CICA") issued three new standards relating to financial instruments. They are described in Handbook Sections 3855, Financial Instruments Recognition and Measurement, 1530, Comprehensive Income and 3865, Hedges. These new standards will become effective for the Company beginning April 1, 2007, and will increase harmonization with U.S. and International accounting standards. Section 3855 expands on Section 3860, "Financial Instruments - Disclosure and Presentation", by providing guidance on when all financial instruments must be recognized on the balance sheet and how it must be measured. It also provides guidance on the presentation of gains and losses on financial instruments. The initial adoption of this new section will result in the Company (i) measuring financial assets classified as loans and receivables, held to maturity, if any, at their amortized costs; (ii) measuring financial assets and financial liabilities classified as held for trading, if any, at fair value with related gains and losses on measurement recognized in net income; (iii) measuring financial assets classified as available-for-sales at fair value, with the related gains and losses on measurement recognized in "other comprehensive income", a new account introduced with the application of Handbook Section 1530 as discussed below; (iv) recognizing all derivative financial instruments on the balance sheet at fair value including those derivatives that are embedded in a financial instrument or other contract, with the gains and losses on instruments designated as cash flow hedges recognized in other comprehensive income, except for the ineffective portion of the hedges which will be recognized in net income. Section 1530 requires an entity to recognize certain unrealized gains and losses in "other comprehensive income", the accumulated amount of which is included in shareholders' equity, until such gains and losses are realized and then recognized in net income, and requires introduction of a statement of comprehensive income. Section 3865 provides alternate treatments to Handbook Section 3855 for entities which choose to designate qualifying transactions as hedges for accounting purposes. It replaces and expands on Accounting Guideline AcG-13, "Hedging Relationships", and the hedging guidance in Handbook Section 1650 "Foreign Currency Translation", by specifying how hedge accounting is applied and what disclosures are necessary when it is applied. The impact of these new standards has been evaluated by the Company and is not expected to be material to the Company's financial position. Inventories At its March 2007 meeting, the Accounting Standards Board ("AcSB") approved new Section 3031, Inventories, which will replace existing Section 3030, Inventories, in light of the fact that international and U.S. generally accepted accounting principles ("GAAP") provide more extensive guidance than the current Section. With the new Section 3031, the AcSB plans to introduce the Canadian equivalent of the International Financial Reporting Standard IAS 2, Inventories, issued in December 2003 by the International Accounting Standards Board ("IASB"). The proposals are consistent with the AcSB's recently adopted Strategic Plan to converge Canadian GAAP with international standards for publicly accountable enterprises over a transitional period currently expected to be about five years. The new standard will give greater guidance for the measurement of inventories at the lower of cost and net realizable value, with assistance in the determination of cost, including allocation of overheads and other costs to inventory. Among other details, the new standard will propose the allocation of fixed production overhead based on normal capacity levels, with unallocated overhead expensed as incurred. The new standard is expected to be issued by mid 2007 and will be effective for the Company's fiscal year beginning April 1, 2008. The Company is evaluating the impact of the proposed new standard on its financial position and results of operation. OUTSTANDING SHARE DATA As at June 21, 2007, there are issued and outstanding 6,830,819 Class A Subordinate Voting Shares of the Company and 4,255,435 issued and outstanding Class B Multiple Voting Shares. There are 307,000 outstanding options to acquire Class A Subordinate Voting Shares. DISCLOSURE CONTROLS AND PROCEDURES, AND INTERNAL CONTROL OVER FINANCIAL REPORTING The Chief Executive Officer ("CEO") and the Chief Financial Officer ("CFO") of the Company have evaluated the effectiveness of the Company's disclosure controls and procedures and assessed the design of the Company's internal control over financial reporting as of March 31, 2007, pursuant to the requirements of Multilateral Instrument 52-109. Based on their evaluation, the CEO and CFO have concluded that such disclosure controls and procedures are adequate and effective. ADDITIONAL INFORMATION Information relating to the Company, including the Company's Annual Information Form ("AIF"), is available on SEDAR at www.sedar.com. Management's Discussion and Analysis contains forward-looking statements regarding Viceroy Homes' expectations and beliefs, with respect to future events and/or financial performance. These forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause the actual events or results to differ materially from those expressed or implied in such forward-looking statements. The reader is referred to the documents that Viceroy Homes files from time to time with applicable Canadian securities and regulatory authorities for a discussion on certain risks and uncertainties that could cause actual results to differ from those projected, anticipated or implied. Viceroy Homes does not undertake to update forward-looking statements. MANAGEMENT'S RESPONSIBILITIES FOR CONSOLIDATED FINANCIAL STATEMENTS The consolidated financial statements of Viceroy Homes Limited have been prepared by management of the Company in accordance with generally accepted accounting principles in Canada. The financial data included elsewhere in this annual report is consistent with information included in the consolidated financial statements. Management maintains a system of internal controls which is designed to provide reasonable assurance that the Company's assets are safeguarded and to facilitate the preparation of relevant, reliable and timely financial information. Where necessary, management uses judgment to make estimates required to ensure fair and consistent presentation of this information. The external auditors, appointed by the shareholders, have conducted an examination of the Company's consolidated financial statements and have expressed an unqualified opinion thereon. During the course of their examination and review of internal controls, the auditors have had full and free access to the Audit Committee of the Board of Directors. The Audit Committee, consisting of independent members of the Board, has met with the external auditors and with management to review the statements and has reported to the Board. Assisted by the recommendations of the Audit Committee, the Board of Directors has approved the consolidated financial statements. Management recognizes its responsibility for conducting the Company's affairs in compliance with established financial standards and applicable laws and the maintenance of proper standards of conduct in its activities. (signed) GAYLORD G. LINDAL Chairman, President & CEO (signed) WILLIAM R. SIMPSON Vice-President, Finance, Secretary-Treasurer & CFO Toronto, Canada, June 22, 2007 Consolidated Financial Statements of VICEROY HOMES LIMITED Years ended March 31, 2007 and 2006 AUDITORS' REPORT TO THE SHAREHOLDERS We have audited the consolidated balance sheets of Viceroy Homes Limited as at March 31, 2007 and 2006 and the consolidated statements of earnings, retained earnings and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at March 31, 2007 and 2006 and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles. /s/ KPMG LLP Chartered Accountants, Licensed Public Accountants Toronto, Canada June 22, 2007 VICEROY HOMES LIMITED Consolidated Balance Sheets (In thousands of dollars) March 31, 2007 and 2006 ------------------------------------------------------------------------- 2007 2006 ------------------------------------------------------------------------- Assets Current assets: Cash and cash equivalents $ 4,425 $ 5,403 Short-term investments 7,509 9,626 Accounts receivable 3,238 4,720 Inventories 7,274 8,212 Prepaid expenses and deposits 1,323 1,067 Income taxes recoverable 2,865 - ----------------------------------------------------------------------- 26,634 29,028 Property, plant and equipment (note 2) 25,926 28,552 Asset held for sale (note 3) 869 - Other assets 753 852 ------------------------------------------------------------------------- $ 54,182 $ 58,432 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Liabilities and Shareholders' Equity Current liabilities: Accounts payable and accrued liabilities $ 4,287 $ 4,616 Customer deposits 7,782 6,287 Income taxes payable - 1,516 ----------------------------------------------------------------------- 12,069 12,419 Future income taxes (note 5) 3,262 3,301 Shareholders' equity: Capital stock (note 4) 34,284 34,810 Contributed surplus (note 4(e)) 3,364 3,154 Retained earnings 1,203 4,748 ----------------------------------------------------------------------- 38,851 42,712 Commitments (note 9) ------------------------------------------------------------------------- $ 54,182 $ 58,432 ------------------------------------------------------------------------- ------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. On behalf of the Board: (signed) Gaylord G Lindal, Director -------------- (signed) William R. Simpson, Director -------------- VICEROY HOMES LIMITED Consolidated Statements of Earnings (In thousands of dollars, except share and per share amounts) Years ended March 31, 2007 and 2006 ------------------------------------------------------------------------- 2007 2006 ------------------------------------------------------------------------- Sales $ 82,513 $ 102,978 Cost of sales 73,890 86,499 ------------------------------------------------------------------------- 8,623 16,479 Expenses: Selling 7,044 6,673 General and administrative 4,262 4,221 Impairment of property, plant and equipment - 34 ----------------------------------------------------------------------- 11,306 10,928 ------------------------------------------------------------------------- Earnings (loss) before undernoted (2,683) 5,551 Other income (note 7) 714 557 ------------------------------------------------------------------------- Earnings (loss) before income taxes (1,969) 6,108 Income tax (recovery) (note 5): Current (623) 2,180 Future (39) (174) ----------------------------------------------------------------------- (662) 2,006 ------------------------------------------------------------------------- Net earnings (loss) $ (1,307) $ 4,102 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Earnings (loss) per share (note 4(f)): Basic $ (0.12) $ 0.37 Diluted (0.12) 0.37 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Weighted average number of common shares outstanding 11,174,527 11,159,955 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Consolidated Statements of Retained Earnings (In thousands of dollars) Years ended March 31, 2007 and 2006 ------------------------------------------------------------------------- 2007 2006 ------------------------------------------------------------------------- Retained earnings, beginning of year $ 4,748 $ 3,994 Net earnings (loss) (1,307) 4,102 Dividends: Class A subordinate voting shares (1,387) (2,071) Class B multiple voting shares (851) (1,277) ----------------------------------------------------------------------- (2,238) (3,348) ------------------------------------------------------------------------- Retained earnings, end of year $ 1,203 $ 4,748 ------------------------------------------------------------------------- ------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. VICEROY HOMES LIMITED Consolidated Statements of Cash Flows (In thousands of dollars) Years ended March 31, 2007 and 2006 ------------------------------------------------------------------------- 2007 2006 ------------------------------------------------------------------------- Cash provided by (used in): Operating activities: Net earnings (loss) $ (1,307) $ 4,102 Items not affecting cash: Amortization 4,023 3,903 Future income taxes (39) (174) Gain on disposal of property, plant and equipment (21) (84) Stock option compensation cost 58 27 Impairment of property, plant and equipment - 34 Change in non-cash operating working capital (1,051) 4,319 ----------------------------------------------------------------------- 1,663 12,127 Financing activities: Dividends paid (2,210) (3,314) Issue of capital stock 25 270 Repurchase of capital stock (427) - ----------------------------------------------------------------------- (2,612) (3,044) Investing activities: Proceeds on disposal of property, plant and equipment 221 287 Purchase of property, plant and equipment (2,466) (2,877) Other assets 99 (215) Decrease (increase) in short-term investments 2,117 (5,476) ----------------------------------------------------------------------- (29) (8,281) ------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents (978) 802 Cash and cash equivalents, beginning of year 5,403 4,601 ------------------------------------------------------------------------- Cash and cash equivalents, end of year $ 4,425 $ 5,403 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Supplemental cash flow information: Interest received $ 680 $ 373 Income taxes paid 3,988 - Income taxes received 164 971 ------------------------------------------------------------------------- ------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. VICEROY HOMES LIMITED Notes to Consolidated Financial Statements (Tabular amounts in thousands of dollars, except per share amounts) Years ended March 31, 2007 and 2006 ------------------------------------------------------------------------- The principal business of the Company is the design, manufacture and distribution of pre-engineered packaged homes. 1. Significant accounting policies: (a) Consolidation: The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary. Intercompany balances and transactions are eliminated upon consolidation. (b) Revenue recognition: Revenue is recognized at the time the product is shipped. When inactive customer contracts expire, the related deposits are deemed to be forfeited after a practical grace period and are reported as revenue. (c) Cash and cash equivalents and short-term investments: Cash and cash equivalents consist of short-term deposits with maturities of less than three months at date of acquisition. Short-term deposits with maturities of three months or more at date of acquisition are included in short-term investments. Short-term investments are recorded at cost, which approximates market value. (d) Inventories: Inventories consist of raw materials and work in progress. Raw materials are carried at the lower of cost, based on first in, first out, and replacement cost. Work in progress is carried at the lower of cost, based on first in, first out, and net realizable value. (e) Property, Plant and Equipment: Property, plant and equipment are recorded at cost less accumulated amortization. Amortization is provided on an annual basis based on estimated useful lives using the following methods and rates: ----------------------------------------------------------------- Asset Basis Rate ----------------------------------------------------------------- Machinery and equipment Diminishing balance 20% Straight line 10% Buildings and paved areas Diminishing balance 5%, 10% and 20% Display courts Diminishing balance 20% Straight line 10% and 20% Vehicles Diminishing balance 30% ----------------------------------------------------------------- ----------------------------------------------------------------- Long-lived assets are reviewed for impairment when events or changes in circumstances indicate that their carrying value exceeds the sum of the undiscounted cash flows expected from their use and eventual disposal. An impairment loss is measured as the amount by which the long-lived asset's carrying value exceeds the fair value. (f) Foreign currency translation: The Company's foreign subsidiary is an integrated operation and, accordingly, its accounts are translated into Canadian dollars using the temporal method as follows: (i) Monetary assets and liabilities at the exchange rate prevailing at the end of the fiscal year. (ii) Non-monetary assets and liabilities at the exchange rate prevailing at the date the transaction occurred. (iii) Income and expenses at the average exchange rate for the fiscal year. All exchange gains and losses are included in earnings in the year incurred. (g) Income taxes: The Company accounts for income taxes using the asset and liability method. Future tax assets are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Future tax assets and liabilities are recognized using enacted or substantively enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on future tax assets and liabilities of a change in tax rates is recognized in earnings in the year that includes the enactment or substantive enactment date. (h) Measurement uncertainty: The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the years. Actual results could differ from those estimates. (i) Stock option plan: The Company has a stock option plan for directors, officers and employees as described in note 4. Stock options are measured on the grant date using a fair value model and expensed over the vesting period. The Company recognizes a compensation cost related to employee stock option grants that will be settled by issuing its common shares. The compensation cost is the fair value of the stock option on grant date using an option pricing model. On the exercise of this type of stock option, the consideration paid by the employee and the related fair value accrual is credited to common share capital. Each stock option granted before April 1, 2004 that will be settled by issuing common shares will be accounted for as a capital transaction and no compensation cost is recognized. Consideration paid by employees on the exercise of this type of stock option is credited to common share capital. (j) Earnings (loss) per share: Basic earnings (loss) per share is calculated based on the weighted average number of shares outstanding for the year. Diluted earnings (loss) per share is calculated using the treasury stock method, which assumes all outstanding stock options with an exercise price below the average market price are exercised and the assumed proceeds are used to purchase the Company's common shares at the average market price during the year. 2. Property, plant and equipment: --------------------------------------------------------------------- Accumulated Net book 2007 Cost amortization value --------------------------------------------------------------------- Land $ 2,746 $ - $ 2,746 Machinery and equipment 43,469 26,453 17,016 Buildings and paved areas 7,364 4,174 3,190 Display courts 4,070 1,889 2,181 Vehicles 1,317 1,119 198 Assets under development 595 - 595 --------------------------------------------------------------------- $ 59,561 $ 33,635 $ 25,926 --------------------------------------------------------------------- --------------------------------------------------------------------- --------------------------------------------------------------------- Accumulated Net book 2006 Cost amortization value --------------------------------------------------------------------- Land $ 3,609 $ - $ 3,609 Machinery and equipment 42,460 23,344 19,116 Buildings and paved areas 7,244 3,909 3,335 Display courts 3,565 1,547 2,018 Vehicles 1,336 1,109 227 Assets under development 247 - 247 --------------------------------------------------------------------- $ 58,461 $ 29,909 $ 28,552 --------------------------------------------------------------------- --------------------------------------------------------------------- Assets under development will be amortized commencing in the year the assets are put into production and includes predominantly deposits on machinery and equipment. 3. Asset held for sale: The asset held for sale is a lease for land in the Philippines for 50 years commencing June 10, 1997, after which the lease is renewable at the Company's option for an additional 25 years under the same terms and conditions subject to certain undertakings as specified in the lease. The Company's investment in the long-term lease in the Philippines has been listed for sale and management expects that an existing offer will culminate in a sale, in fiscal 2008, for an amount, net of selling commissions, approximating the Company's carrying value of $869,000. Therefore, the Philippines property has been reclassified as asset held for sale from land. The Philippines asset is disclosed separately in Segmented Information Note 6. 4. Capital stock: (a) Authorized capital stock of the Company consists of an unlimited number of first preference shares, non-voting, issuable in series; Class A subordinate voting shares (the "Class A shares"); and Class B multiple voting shares (the "Class B shares"). The significant features attached to the Class A and the Class B shares are as follows: (i) The Class A shares carry one vote per share and the Class B shares carry 10 votes per share. (ii) Each Class B share is convertible into one Class A share at any time at the option of the holder. (b) Issued capital stock of the Company is as follows: ----------------------------------------------------------------- 2007 2006 ----------------------------------------------------------------- 6,830,819 Class A shares (2006 - 6,932,364) $ 33,661 $ 34,187 4,255,435 Class B shares 623 623 ----------------------------------------------------------------- $ 34,284 $ 34,810 ----------------------------------------------------------------- ----------------------------------------------------------------- (c) The Company has an employee share option plan to purchase Class A shares. At March 31, 2007, 736,276 (2006 - 746,276) of these options have been reserved for future issuance, of which 307,000 (2006 - 617,000) options have been issued and are outstanding. Under the terms of the share option plan, each option vests as to 20% of the optioned shares one year after the date of grant and 20% in each 12-month period thereafter. The options will expire on the tenth anniversary of the date of grant unless exercised before such anniversary. The latest date for the expiry of the options outstanding at March 31, 2007 is February 10, 2016. The options granted in fiscal 2006 were valued using the Black- Scholes option pricing model with the following weighted average assumptions: ----------------------------------------------------------------- Risk-free interest rate 3.5% Expected volatility 46.1 Expected life 5 years Expected dividends 6% ----------------------------------------------------------------- ----------------------------------------------------------------- Option pricing models require estimates which are highly subjective, including expected volatility of the underlying stock. The Company bases estimates of volatility on historical rates trended into future years. Changes in assumptions can materially affect estimates of fair values. In 2007, the Company issued 10,000 shares in the amount of $25,000 upon the exercise of options under the plan (2006 - 100,000 shares in the amount of $270,000). Changes in the share option plan are as follows: ----------------------------------------------------------------- 2007 2006 ----------------------------------------------------------------- Weighted Weighted average average exercise exercise Options price Options price ----------------------------------------------------------------- (000's) (000's) Outstanding, beginning of year 617 $ 5.00 672 $ 4.69 Granted - - 45 5.25 Exercised (10) 2.46 (100) 2.70 Expired (300) 6.28 - - ----------------------------------------------------------------- Outstanding, end of year 307 3.84 617 5.00 ----------------------------------------------------------------- ----------------------------------------------------------------- The following summarizes information about stock options outstanding at March 31, 2007: ----------------------------------------------------------------- Options outstanding Options exercisable -------------------------------- --------------------- Weighted average remaining Weighted Weighted Range of Number contractual average Number average exercise out- life in exercise exercis- exercise prices standing years price able price ----------------------------------------------------------------- (000's) (000's) $2.00-$3.70 81 2.64 $ 2.95 69 $ 2.82 $3.90-$5.25 226 3.91 4.15 211 4.07 ----------------------------------------------------------------- 307 3.46 3.84 280 3.77 ----------------------------------------------------------------- ----------------------------------------------------------------- (d) The Company has established a Dividend Reinvestment Plan. The plan enables eligible holders of shares of the Company who are residents of Canada to purchase additional Class A shares. Eligible shareholders have the choice of either receiving cash dividends or automatically reinvesting all of their cash dividends in Class A shares of the Company. At the option of the Company, the additional Class A shares will either be treasury shares purchased directly from the Company or will be purchased on The Toronto Stock Exchange. In 2007, the Company issued 5,855 (2006 - 7,688) shares under the Dividend Reinvestment Plan with a value of $28,000 (2006 - $34,000). (e) Contributed surplus: ----------------------------------------------------------------- 2007 2006 ----------------------------------------------------------------- Balance, beginning of year $ 3,154 $ 3,127 Stock option compensation cost 58 27 Cancellation of shares 152 - ----------------------------------------------------------------- $ 3,364 $ 3,154 ----------------------------------------------------------------- ----------------------------------------------------------------- Effective October 13, 2006, The Toronto Stock Exchange approved the Company's Normal Course Issuer Bid, authorizing the repurchase of up to 602,001 Class A shares within the twelve months ended October 17, 2007. Under this Bid, in fiscal 2007, the Company repurchased for cancellation 117,400 of its Class A Subordinate Voting Shares at a cost of $427,000, representing an average cost of $3.64 per share. A year ago, the Company had a Normal Course Issuer Bid, which expired on June 20, 2006. In fiscal 2006, no shares were repurchased. (f) Basic and diluted earnings (loss) per share were calculated as follows: ----------------------------------------------------------------- 2007 2006 ----------------------------------------------------------------- Earnings (loss) per share computation: Numerator: Net earnings (loss) $ (1,307) $ 4,102 ----------------------------------------------------------------- ----------------------------------------------------------------- Denominator (in thousands): Weighted average number of common shares outstanding 11,175 11,160 Effect of employee stock options - 54 ----------------------------------------------------------------- 11,175 11,214 ----------------------------------------------------------------- ----------------------------------------------------------------- Basic earnings (loss) per share $ (0.12) $ 0.37 Diluted earnings (loss) per share (0.12) 0.37 ----------------------------------------------------------------- ----------------------------------------------------------------- In determining the average common shares outstanding for purposes of the diluted earnings (loss) per share calculations, 307,000 (2006 - 312,500) options have been excluded in the calculation since they are not dilutive. 5. Income taxes: Total income tax (recovery) varies from the amounts that would be computed by applying the effective income tax rate to the earnings (loss) before income taxes as follows: --------------------------------------------------------------------- 2007 2006 --------------------------------------------------------------------- Effective income tax rate 34.5% 35.3% --------------------------------------------------------------------- --------------------------------------------------------------------- Expected income tax (recovery) based upon earnings (loss) before income taxes $ (679) $ 2,153 Manufacturing and processing credit - (56) Non-deductible charges 45 46 Foreign currency gain taxable in foreign jurisdiction 48 86 Tax rate change on temporary differences (55) (57) Other (21) (166) --------------------------------------------------------------------- Actual income tax (recovery) $ (662) $ 2,006 --------------------------------------------------------------------- --------------------------------------------------------------------- The future tax liability arises predominantly from net book value on property, plant and equipment higher than the tax values. The Company has claimed a valuation allowance of $289,000 in respect of a future tax asset arising on the write down of certain capital assets. 6. Segmented information: The design, manufacture and distribution of pre-engineered packaged homes are considered to be a single industry segment. These products are manufactured in Canada and sold primarily in Canada, the United States and Japan. Sales to one large consortium of Japanese builders represent $40,582,000 (2006 - $58,267,000) of the Company's total sales. Sales, based on the location of the customer, are as follows: --------------------------------------------------------------------- 2007 2006 --------------------------------------------------------------------- Canada $ 27,562 $ 27,468 United States 13,440 15,903 Japan 40,762 58,451 Other 749 1,156 --------------------------------------------------------------------- Total sales $ 82,513 $ 102,978 --------------------------------------------------------------------- --------------------------------------------------------------------- The Company's property, plant and equipment are located in the following countries: --------------------------------------------------------------------- 2007 2006 --------------------------------------------------------------------- Canada $ 24,952 $ 26,773 United States 974 910 Philippines 869 869 --------------------------------------------------------------------- $ 26,795 $ 28,552 --------------------------------------------------------------------- --------------------------------------------------------------------- 7. Other income: --------------------------------------------------------------------- 2007 2006 --------------------------------------------------------------------- Interest income $ 647 $ 429 Foreign currency exchange gain 51 44 Gain on sale of property, plant and equipment 16 84 --------------------------------------------------------------------- $ 714 $ 557 --------------------------------------------------------------------- --------------------------------------------------------------------- 8. Fair values of financial instruments: The carrying values of cash and cash equivalents, short-term investments, accounts receivable and accounts payable and accrued liabilities approximate their fair values due to the short-term maturity of these financial instruments. 9. Commitments: (a) The Company has entered into commitments to lease premises in British Columbia and certain office equipment. The lease commitments are as follows: --------------------------------------------------------------------- 2008 $ 1,290 2009 685 2010 592 2011 279 2012 20 Thereafter - --------------------------------------------------------------------- $ 2,866 --------------------------------------------------------------------- --------------------------------------------------------------------- (b) As at March 31, 2007, the Company had outstanding commitments in connection with the purchase of machinery and equipment totalling $ 242,000.

For further information:

For further information: William R. Simpson, Vice-President, Finance and
Secretary-Treasurer, (905) 885-8600 - Ext. 220, www.viceroy.com

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VICEROY HOMES LIMITED

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