1st Quarter Report
Three Months Ended
June 30, 2005
Trading: TSX: ROC
TORONTO, July 26 /CNW/ - Rothmans Inc. today announced increased earnings
for the first quarter of fiscal 2006, ended June 30, 2005.
Rothmans' earnings for the first quarter of fiscal 2006 were
$29.7 million or $0.44 basic earnings per share compared with $23.8 million or
$0.35 basic earnings per share in the first quarter of fiscal 2005.
Sales at 60%-owned Rothmans Benson & Hedges Inc., net of excise duty and
taxes, increased to $176.0 million in the first quarter of fiscal 2006
compared with $161.8 million in the first quarter of fiscal 2005. The increase
was primarily due to higher volumes in the cigarette price category and
increased prices across all product categories which more than offset declines
in both premium cigarettes and fine cut volumes.
RBH's EBITDA margin increased to 48.7% in the recent quarter compared
with 45.1% in the same period of prior year. The increase in margin was due to
increased volumes of price category cigarettes, higher prices across all
product categories and reduced materials costs, which more than offset reduced
premium cigarette and fine cut volumes.
RBH's share of the total domestic composite market increased to 31.3% for
the quarter ended June 30, 2005, from 30.6% and 27.9% for the fourth and first
quarters of fiscal 2005. Its premium cigarette share was 15.5%, compared with
15.2% in the previous quarter and 15.5% during the same period last year.
RBH's share of the domestic price cigarette category of 44.8% was up from the
42.9% and 39.8% in the fourth and first quarters of fiscal 2005. RBH's share
of the fine cut market was 60.1%, up from 59.5% and 59.7% in the fourth and
first quarters of fiscal 2005, respectively.
RBH's share of the total price category of 48.2%, increased compared with
47.1% and 45.8% in the fourth and first quarters of fiscal 2005.
In the first quarter the Company paid dividends of $121.6 million, or
$1.80 per share, comprising $0.30 per share regular dividend and $1.50 per
share special dividend, compared with $16.8 million, or $0.25 per share, the
previous year.
"Rothmans Benson & Hedges Inc. has grown its business in the face of
reduced industry volumes," said John Barnett, President and Chief Executive
Officer of Rothmans Inc. "RBH's strategic focus has resulted in the higher
sales, earnings and market share in the first the quarter. This continues to
translate into increased cash flow and value for the Company's shareholders."
Outlook
"We expect continued quarter-to-quarter volatility in the market as a
result of variations in consumer consumption and wholesale buying patterns due
to seasonality influences and other factors, high taxes and the presence of
contraband product in the Canadian tobacco market," said Mr. Barnett. "We also
expect that the contraband market will continue to adversely impact legitimate
industry stakeholders including RBH. Despite this, we have demonstrated our
ability to deliver solid results in a challenging environment and RBH remains
well positioned to capitalize on the shift toward the price category of
cigarettes."
Dividends declared
The Board of Directors of Rothmans Inc. declared a quarterly dividend of
$0.30 per share payable on September 17, 2005 to shareholders of record at the
close of business on September 2, 2005.
Analyst Conference Call and Webcast
Rothmans Inc. management will hold a conference call with analysts to
discuss the first quarter results at 3:00 p.m. Toronto time on July 26, 2005,
following its annual shareholders meeting that morning. In order to listen to
the conference call, shareholders are invited to call 1-866-898-9626.
The call will also be webcast through the Company's investor website,
www.rothmansinc.ca. At the completion of the conference call, a recording will
be available until August 3, 2005 by calling 1-800-408-3053 and entering the
reservation number 3159096. The recording can also be accessed through the
investor website.
Media are invited to listen to the call and to contact John McDonald
(416) 442-3660 for further information.
About Rothmans Inc.
Rothmans Inc. is a widely held, publicly traded Canadian company that
participates in the Canadian tobacco industry through 60%-owned Rothmans,
Benson & Hedges Inc., Canada's second largest tobacco company. RBH currently
employs approximately 790 people at its head office in Toronto, its sales
offices across Canada and its manufacturing facilities in Brampton, Ontario
and Quebec City, Quebec where it has been operating for over 100 years.
Rothmans is Canada's only publicly traded company with interests exclusively
in the tobacco industry and is listed on the Toronto Stock Exchange under the
symbol ROC.
Management's Discussion and Analysis
of Financial Results for June 30, 2005
--------------------------------------
Management's Discussion and Analysis of Financial Condition and Results
of Operations, or MD&A, provides shareholders with a review of significant
developments in the Company's financial performance in the fiscal quarter
ended June 30, 2005 compared with the same period in the prior year. It also
discusses factors that could affect future performance. This MD&A should be
read in conjunction with the attached unaudited financial statements for the
period ended June 30, 2005, the annual MD&A contained in the 2005 Annual
Report and the audited annual consolidated financial statements of the Company
for the year ended March 31, 2005.
Responsibility of Management and the Board of Directors
Management is responsible for the information disclosed in this MD&A and
has in place the appropriate information systems, procedures and controls to
ensure that information used internally by management and disclosed externally
is materially complete and reliable. Based on their knowledge, the Chief
Executive Officer and Chief Financial Officer have concluded that the design
and operation of the Company's disclosure controls and procedures were
effective as of June 30, 2005 to provide reasonable assurance that material
information relating to the Company and its consolidated subsidiaries would be
made known to them by others within those entities. In addition, the Company's
Audit Committee and Board of Directors provide an oversight role with respect
to all public financial disclosures by the Company, and have reviewed this
MD&A and the accompanying financial statements.
Forward Looking Statements
Certain statements contained herein, including MD&A, constitute
"forward-looking statements". Words such as "plans" "intends", "outlook"
"expects", "anticipates", "estimates", "believes", "should" and similar
expressions are intended to identify forward-looking statements.
Forward-looking statements are based on current expectations and entail
various risks and uncertainties as more fully described in the "Risks and
Uncertainties" and the "Outlook" sections of this MD&A when read in
conjunction with the annual MD&A. These risks and uncertainties could cause or
contribute to actual results that are materially different from those
expressed or implied. The Company disclaims any obligation or intention to
update or revise any forward-looking statement, whether the result of new
information, future events or otherwise.
Additional information regarding the Company and RBH is contained in the
Company's filings with securities regulatory authorities including the
Company's 2005 Annual Report and 2005 Annual Information Form, which can be
accessed at www.sedar.com or on the Company's website www.rothmansinc.ca.
Terminology used in this MD&A
Throughout this MD&A, "GAAP" refers to Canadian Generally Accepted
Accounting Principles, "Rothmans" and "the Company" refer to Rothmans Inc.,
"RBH" refers to Rothmans, Benson & Hedges Inc., which is 60%-owned by Rothmans
Inc., and "EBITDA margin", a key measure of the Company's operating
performance, refers to "earnings before interest, taxes, depreciation and
amortization" as a percentage of "sales, net of duty and taxes". EBITDA margin
provides a metric allowing period-to-period comparisons of the core RBH
operating performance before the impact of changes in capital structure, taxes
and capital spending. EBITDA margin is a non-GAAP financial measure that does
not have any standardized meaning prescribed by GAAP. It is therefore unlikely
to be comparable to similar measures presented by other companies. The "recent
quarter" refers to the three months ended June 30, 2005, and "prior quarter"
refers to the three months ended March 31, 2005. "Fiscal 2006" refers to the
fiscal year ending March 31, 2006 and other similar references to a fiscal
year (e.g., fiscal 2005) refers to the fiscal year then ended on March 31
(e.g., March 31, 2005).
"The three major manufacturers" or "three majors" refers to RBH, Imperial
Tobacco Canada Limited (ITL) and JTI-MacDonald Corp. (JTI). "Premium
cigarettes" refers to tailor-made cigarettes sold at premium retail prices,
"cigarette price category" refers to cigarettes sold at less-than-premium
prices and "price category" refers to the combination of the cigarette price
category and the fine cut category (loose tobacco and pre-proportioned tobacco
sticks). "Reported industry" is based on information reported by Statistics
Canada and RBH estimates and includes, in addition to the information reported
by the three major manufacturers, information reported by smaller regional
manufacturers.
Industry Overview
Total reported industry domestic sales volumes for all tobacco products
decreased 4.7% in the three months ended June 30, 2005 versus the comparable
period in the prior fiscal year. In large part due to the continued growth of
the cigarette price category, total reported domestic premium cigarette
volumes declined by 16.2% in the quarter ended June 30, 2005 versus the same
period of the prior year. RBH estimates that premium cigarettes represented
51.9% of total domestic industry shipments in the recent quarter which is
stable with the prior quarter while decreasing from 59.0% in the quarter ended
June 30, 2004.
The total price category is estimated to have represented 48.1% of the
Canadian domestic tobacco market in the recent quarter which is also stable
with the prior quarter while increased from 41.0% in the quarter ended June
30, 2004. Fine cut products are estimated to have represented 10.6% of the
total domestic tobacco market in the recent quarter versus 12.1% in the prior
quarter and 12.3% in the first quarter of last year. Price category cigarettes
are estimated to have represented 37.5% of the total domestic tobacco market
in the recent quarter versus 36.0% in the prior quarter and 28.7% in the first
quarter of last year. The growth of the cigarette price category in the recent
quarter over the first quarter of last year is attributable to products
launched into the cigarette price category by the three major manufacturers.
In the recent quarter JTI MacDonald launched additional brands into the
price category at prices lower than those charged by RBH for its price
category cigarettes. The potential impact of this initiative on future
performance is, at this time, uncertain.
Shown below is a comparative summary of domestic shipments of tobacco
products for the three months ended June 30, 2005.
<<
Canadian Domestic Tobacco Shipments
(in billions of sticks and equivalents)
-------------------------------------------------------------------------
For the three months Ended June 30
-------------------------------------------------------------------------
2005 2004
Three Reported Three Reported
RBH Majors Industry RBH Majors Industry
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Premium cigarettes 0.8 5.1 5.1 0.9 6.0 6.0
Price category
Cigarettes 1.6 3.1 3.6 1.2 2.3 2.9
Fine cut 0.6 1.0 1.0 0.7 1.3 1.3
---------------------------------------------------
Total Price Category 2.2 4.1 4.6 1.9 3.6 4.2
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Total 3.0 9.2 9.7 2.8 9.6 10.2
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RBH Market Share
Premium cigarettes 15.5% 15.5% 15.5% 15.5%
Price category 54.5% 48.2% 53.8% 45.8%
Composite markets 33.1% 31.3% 29.7% 27.9%
Notes:
1. This table includes information relating to domestic shipments only
(i.e., excluding duty-free and export sales). Reported industry export
and duty free shipments for the three month period were: premium
cigarettes - 0.1 billion sticks in fiscal 2006, and 0.1 billion sticks
in fiscal 2005; price category cigarettes - 0.6 billion sticks in
fiscal 2006 and 0.6 billion sticks in fiscal 2005.
Reported industry volumes continue to be influenced by the evolution of
the cigarette price category which is affecting the relative contributions of
premium versus price category cigarettes and fine cut products. Other factors
affecting industry shipments include:
- continued declines in consumer incidence and consumption of tobacco
products;
- the presence of contraband and counterfeit products. High taxes and
the potential for future taxation increases contribute to probable
increases in the presence of contraband product in the domestic
market;
- seasonal trends in consumer purchasing patterns. Over the past two
fiscal years, the period between April and September has
demonstrated significantly stronger industry shipments than the
period between October and March. RBH management believes that
smoking restrictions are causing consumer consumption variations
between summer and winter seasons;
- fluctuations in wholesaler buying patterns as a result of
anticipated tax and wholesale price increases. Swings in wholesaler
purchasing patterns motivated by the timing of tax and price
increases, and other factors are anticipated to continue to have a
significant effect on quarter-to-quarter comparisons in the future;
and
- continuing changes in the cigarette price category particularly as a
result of changes in brands and pricing within the category.
Results at Rothmans, Benson & Hedges Inc.
In the quarter ended June 30, 2005, RBH shipped a total of 3.0 billion
equivalent sticks into the domestic market, a 6.7% increase from the
comparable period of the prior year. RBH's share of the domestic composite
tobacco market increased to 31.3% for the quarter ended June 30, 2005 versus
30.6% for the three months ended March 31, 2005 and 27.9% for the three months
ended June 30, 2004. This increase is attributable to increased shipments of
RBH price category cigarettes, which more than offset declines in premium
cigarette and fine cut shipments.
RBH's premium cigarette volumes declined 16.0% in the recent quarter
compared to the same period in the prior year, reasonably in keeping with
reported industry decline rates. RBH's domestic market share of premium
cigarettes was 15.5% in the recent quarter ended June 30, 2005, compared with
15.2% in the quarter ended March 31, 2005, and 15.5% in the quarter ended
June 30, 2004.
RBH sold 1.6 billion price category cigarettes in the recent quarter
representing an increase of 40.5% compared with the same period in fiscal
2005. This resulted in a market share within the domestic cigarette price
category of 44.8% in the recent quarter versus 42.9% in the quarter ended
March 31, 2005 and 39.8% in the quarter ended June 30, 2004. RBH continues to
experience solid performance from its Number 7, Canadian Classics and Mark Ten
trade-marks. During the recent quarter RBH launched 20's format line
extensions in certain provinces under the Canadian Classics trade-mark. These
launches continue RBH's strategy of offering the price category cigarette
consumer a wide variety of choice in brand attributes. A number of factors
continue to influence the overall growth of this product category including
the brands being offered to consumers, their availability and changes in
pricing within the category.
Shipments of RBH fine cut products declined 17.3% in the recent quarter
compared to the same period in the prior year. This decline primarily resulted
from consumers switching from Presto Pak pre-portioned stick and high yield
products to price category cigarettes. RBH's share of the domestic fine cut
market was 60.1% in the recent quarter versus 59.5% in the quarter ended
March 31, 2005 and 59.7% in the quarter ended June 30, 2004. During the recent
quarter, in certain provinces, RBH launched "Rolls 100% More" high yield
products in a variety of formats under the Number 7 and Belvedere trade-marks.
Combining the cigarette price category with the fine cut segment, RBH's share
of the total price category was 48.2% in the recent quarter representing an
increase from 47.1% in the quarter ended March 31, 2005 and 45.8% in the
quarter ended June 30, 2004.
RBH's recent quarter EBITDA margin was 48.7% compared with 37.4% in the
prior quarter and 45.1% in the quarter ended June 30, 2004. The EBITDA margin
increase over the prior quarter was principally due to higher shipments and
prices across all categories of tobacco products, lower leaf and material
input costs and lower sales and marketing expenditures. The EBITDA margin
increase in the recent quarter versus the comparable period of the prior year
was principally due to increased volumes of cigarette price category
shipments, higher prices on all categories of tobacco products and lower
materials costs.
Effective April 11, 2005, RBH increased the price charged to wholesalers
for its premium cigarettes and Number 7 cigarettes by $0.80 per carton. Prices
on Canadian Classics and Mark Ten were increased by $0.40 per carton. The
prices on fine cut products were increased by varying amounts depending on
format.
Rothmans Inc. Financial Results
Basic earnings per share were $0.44 in the recent quarter compared with
$0.35 in the comparable period of the prior year. Sales, net of excise duty
and taxes, were $14.2 million higher for the quarter ended June 30, 2005
versus the comparable period in the prior year. Increased prices across all
product categories and increased volumes of price category cigarette shipments
in the recent quarter versus the comparable period of the prior year more than
offset decreases in sales resulting from declines in both premium cigarette
and fine cut volumes.
Investment income was $1.1 million in the recent quarter versus
$0.9 million in the comparable period of the prior year reflecting the higher
average cash balance during the quarter.
Operating costs were $0.7 million higher in the recent quarter versus the
comparable period of the prior year. Product variable costs were higher than
the comparable period of the prior year due to higher shipment volumes. These
were partially offset by reduced materials costs.
Income tax expense was $32.5 million in the recent quarter resulting in
an effective tax rate for the fiscal year to date of 39.7%. The Company
expects its effective tax rate for the fiscal year to approximate 39.7%.
Liquidity and Capital Resources
Cash flow
RBH's operations generate significant cash resources. These are
sufficient to fund interest payments on RBH's long-term debt, capital
expenditures and dividends to shareholders. The dividends received by Rothmans
Inc. are sufficient to fund its operations, pay dividends to its public
shareholders and continue to accumulate cash reserves.
The Company's consolidated cash flow from operations before changes in
working capital was $49.4 million in the recent quarter versus $42.3 million
in the comparable period of the prior year.
During the quarter, the Company paid dividends of $121.6 million,
representing a regular quarterly dividend of $0.30 per share and a special
dividend of $1.50 per share.
Cash resources
Cash and short-term investments of $99.1 million represented the balances
at Rothmans Inc. compared with $192.0 million held at March 31, 2005. This
reduction was a result of the special dividend paid in the quarter by Rothmans
Inc.
At June 30, 2005, RBH had notes payable of $13.5 million issued through
its commercial paper program to cover short term cash requirements primarily
related to the timing of the payment of federal excise taxes.
RBH's working capital requirements were higher in the recent quarter
versus the comparable period of the prior year. Increasing sales have resulted
in higher accounts receivable and inventory balances and increased capital
spending. RBH continues to actively manage its inventory levels and has
sufficient resources through its existing commercial paper program and bank
lines to fund its working capital requirements.
Critical Accounting Estimates
The preparation of financial statements in conformity with Canadian
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Although these estimates are based on
management's best knowledge of current events and actions that the Company and
RBH may undertake in the future, actual results could differ from these
estimates. Other than as discussed below, there are no critical accounting
estimates that require disclosure or discussion in this report.
Employee Future Benefits
The actuarial assumptions used to determine the benefit obligation and
associated expense of RBH's various defined benefit pension plans and post
employment benefits were not adjusted in the recent quarter. Therefore, the
impact of changes in either the discount rate, or the expected return on plan
assets continue as described in the annual MD&A for the year ended March 31,
2005.
Litigation Contingent Liabilities
As discussed in the annual MD&A for the year ended March 31, 2005, based
on management's best estimates, neither the Company nor RBH has accrued for
potential losses regarding the various legal actions, proceedings and claims
to which they are subject. If successful, these claims, either individually or
in aggregate, could involve significant damages which could exceed the
resources of the Company and RBH.
Risks and Uncertainties
Various legal actions, proceedings and claims arising out of the sale,
distribution, manufacture, development, advertising and marketing of tobacco
products are pending, have been threatened or may be instituted against the
Company and RBH. These actions, claims and proceedings, both pending and
threatened, are described in Note 13 to the audited annual consolidated
financial statements of the Company for the year ended March 31, 2005. Except
as described below, there have been no developments of a material nature
during the fiscal year to date concerning these matters.
In June 2005, the Supreme Court of Canada heard the appeal by RBH and
other tobacco product manufacturers of the decision of the British Columbia
Court of Appeal which, in May 2004, upheld the constitutional validity of the
Tobacco Damages and Health Care Costs Recovery Act (British Columbia). The
Province of British Columbia initiated a lawsuit pursuant to this legislation
in January 2001 against RBH, Rothmans Inc. and numerous other Canadian and
international tobacco companies seeking unspecified damages to cover costs
allegedly incurred in connection with smoking related illnesses. The action
has been stayed pending the outcome of the appeal. The decision of the Supreme
Court of Canada on the appeal is expected later this year.
The RCMP is continuing its investigation, initiated in early 2002, into
RBH's business records and its sales of products exported from Canada in the
period 1989-1996. RBH believes it conducted its business lawfully at all times
and continues to cooperate with the investigating authorities. Further details
are contained in Note 13 to the audited annual consolidated financial
statements.
Additional information concerning legal matters affecting the Company and
RBH are contained in the Company's filings with securities regulatory
authorities including the Company's 2005 Annual Report and 2005 Annual
Information Form, which can be accessed at www.sedar.com or on the Company's
website at www.rothmansinc.ca.
Outlook
Looking ahead, Rothmans expects that a number of factors could affect its
financial performance including:
- the success of efforts by RBH and the industry to defend themselves
against product liability and other claims, and to operate within
the regulatory environment;
- a lower rate of growth of the cigarette price category and RBH's
ability to successfully compete in that segment;
- the impact of continued high levels of taxation on consumer
purchasing patterns;
- increased levels of counterfeit and other contraband product that
may occur due to the increasingly onerous tax environment;
- continued declines in the consumption of tobacco products;
- the continued volatility in the cigarette market as a result of a
number of factors including changes in brands and pricing in the
Canadian cigarette price category, varying wholesaler purchasing
patterns and seasonal trends in adult smoking consumption;
- the impact of RBH's efforts to stabilize its cigarette market share
in the declining premium cigarette category;
- RBH's ability to maintain its leading position in the fine cut
segment;
- RBH's ability to continue to implement price increases for its
products;
- government tax policy regarding the differentiation in tax rates
applicable to fine cut products in comparison to tailor-made
cigarettes; and
- RBH's continued success at maintaining or reducing costs, especially
in view of the potential for regulated changes to product
specifications.
It is believed that, in fiscal 2005, the increasing presence of
contraband was a key factor in the increased decline rate in total reported
industry sales volumes which exceeded historical levels by more than 2%.
Continued growth in the availability of contraband products in the domestic
market as a result of high tobacco tax rates across the country may increase
the decline rate in reported industry volumes further in fiscal 2006 which
would have a negative impact on RBH's sales volumes.
RBH domestic price cigarette category volumes grew by 109.0% in fiscal
2005 and 40.5% in the recent quarter compared to the comparable periods in the
prior fiscal year. Price category cigarettes are estimated to have represented
38.0% of total reported industry domestic cigarette sales volumes in fiscal
2005, an increase from 7.2% of those volumes in fiscal 2003 and 18.3% in
fiscal 2004. While it is expected that the cigarette price category will
continue to grow, it is expected that the rate of growth will be less than
seen in recent years as the category approaches maturity.
Effective October 1, 2005, federal regulations will require that all
cigarettes manufactured or imported into Canada comply with standards designed
for reduced ignition propensity. RBH has contracted for the supply of
cigarette paper designed to meet the standard and now expects that this new
paper, together with testing, will increase costs by approximately $7 million
in the current fiscal year ending March 31, 2006. On an annualized basis,
costs are estimated to increase by $10 million per year. These more current
estimates of cost increases, are less than those estimated in the annual MD&A.
It is also anticipated that seasonal fluctuations in adult smoker
consumption patterns may become more pronounced as indoor and workplace
smoking bans and restrictions become more widespread, leading to seasonal
variations in wholesale purchases.
Rothmans has a strong balance sheet with more than sufficient cash flow
and resources to service its long-term debt and meet its capital expenditure
requirements. The Company has demonstrated its commitment to increasing
shareholder returns, and is committed to exploring other potential investment
opportunities, in conjunction with RBH's continuing attention to its core
brand strategy.
Interim Consolidated Statements of Earnings and Retained Earnings
Three months ended June 30
(In thousands of dollars,
except per share amounts) 2005 2004
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EARNINGS
Revenues:
Sales, net of excise duty and taxes $ 175,991 $ 161,805
Investment income 1,124 884
---------------------
Total revenues 177,115 162,689
Costs:
Operating costs excluding amortization 91,278 90,613
---------------------
Earnings before interest, taxes and amortization 85,837 72,076
Amortization 2,186 2,127
Interest expense (income)
- Long-term debt 2,082 1,937
- Other (337) (334)
---------------------
Earnings before income taxes and minority interest 81,906 68,346
Income taxes
- Current 31,914 27,480
- Future 602 476
---------------------
Total income taxes 32,516 27,956
---------------------
Earnings before minority interest 49,390 40,390
Minority interest 19,737 16,548
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Earnings for the period $ 29,653 $ 23,842
---------------------
---------------------
Earnings per common share (note 2)
- Basic $ 0.44 $ 0.35
---------------------
---------------------
- Diluted $ 0.43 $ 0.35
---------------------
---------------------
RETAINED EARNINGS
Balance at beginning of period $ 151,734 $ 129,628
Earnings for the period 29,653 23,842
---------------------
181,387 153,470
Dividends paid:
Common Shares(x) - (121,630) (16,848)
(2005 - $1.80 per share;
2004 - $0.25 per share)
---------------------
Balance at end of period $ 59,757 $ 136,622
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---------------------
(x) Includes special dividend of $1.50 per share paid on June 17, 2005.
Rothmans Inc. and subsidiary companies (unaudited)
Interim Consolidated Balance Sheets
As at As at
June 30 March 31
(In thousands of dollars) 2005 2005
-------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents $ 99,118 $ 23,255
Short-term investments - 168,740
Accounts receivable 44,677 32,119
Inventories 209,997 209,819
Prepaid expenses 2,793 1,322
---------------------
Total current assets 356,585 435,255
Property, plant and equipment 71,003 69,149
Future income taxes 8,229 8,831
Prepaid pension benefit cost 15,798 12,003
Other assets 3,201 3,290
---------------------
$ 454,816 $ 528,528
---------------------
---------------------
LIABILITIES
Current Liabilities
Commercial Paper $ 13,500 $ -
Accounts payable and accrued liabilities 31,651 47,445
Excise and other taxes payable 105,590 79,578
Income taxes payable 14,365 21,475
---------------------
Total current liabilities 165,106 148,498
Other long-term liabilities 2,383 2,167
Other employee future benefits 34,151 33,497
Long-term debt 149,718 149,708
Minority interest in subsidiary company 1,727 950
---------------------
353,085 334,820
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SHAREHOLDERS' EQUITY
Capital stock (note 3) 41,974 41,974
Retained earnings 59,757 151,734
---------------------
Total shareholders' equity 101,731 193,708
---------------------
$ 454,816 $ 528,528
---------------------
---------------------
Rothmans Inc. and subsidiary companies (unaudited)
Interim Consolidated Statements of Cash Flows
Three months ended June 30 (In thousands of dollars) 2005 2004
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Cash provided by (used in):
OPERATING ACTIVITIES
Earnings for the period $ 29,653 $ 23,842
Adjusted for non-cash items:
Amortization 2,186 2,127
Minority interest 19,737 16,548
Future income taxes 602 476
Loss on sale of property, plant & equipment 331 2
Defined & other employee future benefits expense 1,753 1,651
Defined & other employee future benefits funding (4,894) (3,398)
Share option compensation cost - 1,030
---------------------
49,368 42,278
Changes in non-cash operating working capital (11,068) (15,051)
---------------------
38,300 27,227
---------------------
INVESTING ACTIVITIES
Proceeds on sale of property, plant & equipment 1 -
Additions to property, plant & equipment (4,304) (3,988)
Sale of short-term investments 168,740 132,955
---------------------
164,437 128,967
---------------------
FINANCING ACTIVITIES
Dividends paid -
By the Company (121,630) (16,848)
By a subsidiary company to minority shareholder (18,960) (16,875)
Proceeds on issuance of common shares - 859
Proceeds on commercial paper 13,500 -
Other long-term liabilities 216 52
---------------------
(126,874) (32,812)
---------------------
Increase in cash and cash equivalents 75,863 123,382
Cash and cash equivalents at beginning of period 23,255 46,978
---------------------
Cash and cash equivalents at end of period $ 99,118 $ 170,360
---------------------
---------------------
SUPPLEMENTARY DISCLOSURES
Income taxes paid $ 39,024 $ 48,823
Interest paid
- Long-term debt 4,164 1,919
- Other 28 23
Rothmans Inc. and subsidiary companies (unaudited)
Notes to the Interim Consolidated Financial Statements (unaudited)
1. Summary of Significant Accounting Policies
The interim consolidated financial statements of Rothmans Inc. (the
"Company") have been prepared in accordance with Canadian generally
accepted accounting principles. The note disclosure in these interim
consolidated financial statements includes only material changes from
the disclosure found in the Company's annual consolidated financial
statements for the year ended March 31, 2005. Therefore, these
interim consolidated financial statements and notes should be read in
conjunction with those statements. These interim consolidated
financial statements follow the same accounting policies as the
Company's audited annual consolidated financial statements.
2. Earnings per Share
Earnings per common share is calculated based on the weighted average
number of common shares outstanding, the dilution being due to issued
common share options.
Basic Diluted
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Three months ended:
June 30, 2005 67,572,008 68,306,279
June 30, 2004 67,370,690 67,655,176
3. Capital Stock
Authorized: An unlimited number of common shares
Issued: 67,572,008 (March 31, 2005 - 67,572,008) common shares
June 30 March 31
(in thousands of dollars) 2005 2005
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Balance at beginning of period, April 1 $ 41,974 $ 38,869
Issuance of shares - 2,075
Contributed surplus - 1,030
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Balance at end of period $ 41,974 $ 41,974
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In the fourth quarter of fiscal 2005, the Company announced and paid
a stock dividend which effectively constituted a two-for-one stock
split. All stock-based plans, share and per share data have been
adjusted to reflect the stock split.
4. Stock Based Compensation Plan
The details of the Company's share option plan are as follows:
Share Option Plan
The annual grant of options was discontinued effective fiscal year
2006. In the first three months of fiscal year 2005, the Company
recognized $1.0 million of stock-based compensation costs for options
granted based on the fair value method. The fair value of each option
grant was estimated on the date of grant using the Binomial option
pricing model with the following assumptions:
June 30 June 30
2005 2004
---------------------------------------------------------------------
Risk-free interest rate (%)(x) N/A 4.25
Expected dividend yield N/A 5.20
Option term (years) N/A 6
Expected volatility (%) N/A 22.0
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(x) The Risk-free interest rate is the yield for a 6-year Government
of Canada bond on the date of grant.
A summary of the status of the Company's employee stock option plan
as at the periods ended June 30, 2005 and June 30, 2004 and changes
during the periods ending on those dates are presented below:
June 2005 June 2004(x)
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Weighted Weighted
average average
exercise exercise
price price
Options Shares ($) Shares ($)
---------------------------------------------------------------------
Outstanding at
beginning of
period 1,774,400 $ 14.325 1,556,800 $ 13.281
Granted - - 438,400 16.620
Exercised - - 73,800 12.995
Forfeited - - - -
Outstanding at
end of period 1,774,400 $ 14.325 1,921,400 14.054
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Options exercisable
at period end 1,774,400 $ 14.325 1,354,668 13.027
---------------------------------------------------------------------
Weighted average
fair value of
options granted
during the
period N/A 2.35
---------------------------------------------------------------------
(x) Adjusted for the two-for-one stock split effective March 4, 2005.
Under the current share option plan as at June 30, 2005, a total of
181,800 (2004 - 181,800) common shares were issuable. Given the
limited number of common shares available for issuance under the
Option Plan, the annual grant of options was discontinued effective
fiscal 2006. No options were exercised or forfeited during the
period.
The following table summarizes information about stock options
outstanding as at June 30, 2005:
Weighted
average
Range of remaining
exercise Number contractual Number
price outstanding life exercisable
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$7.250 7,000 5.0 7,000
$8.825 18,000 5.3 18,000
$11.500 188,000 6.1 188,000
$12.320 476,600 8.1 476,600
$14.080 261,400 6.5 261,400
$16.125 385,000 7.1 385,000
$16.620 438,400 9.1 438,400
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1,774,400 1,774,400
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5. Litigation, Claims and Contingencies
Various legal actions, proceedings and claims arising out of the
sale, distribution, manufacture, development, advertising and
marketing of tobacco products are pending, have been threatened or
may be instituted against the Company and RBH. These actions, claims
and proceedings, both pending and threatened, are described in Note
13 to the audited annual consolidated financial statements of the
Company for the year ended March 31, 2005. Except as described below,
there have been no developments of a material nature during the
fiscal year to date concerning these matters.
In June 2005, the Supreme Court of Canada heard the appeal by RBH and
other tobacco product manufacturers of the decision of the British
Columbia Court of Appeal which, in May 2004, upheld the
constitutional validity of the Tobacco Damages and Health Care Costs
Recovery Act (British Columbia). The Province of British Columbia
initiated a lawsuit pursuant to this legislation in January 2001
against RBH, Rothmans Inc. and numerous other Canadian and
international tobacco companies seeking unspecified damages to cover
costs allegedly incurred in connection with smoking related
illnesses. The action has been stayed pending the outcome of the
appeal. The decision of the Supreme Court of Canada on the appeal is
expected later this year.
Additional information concerning legal matters affecting the Company
and RBH are contained in the Company's filings with securities
regulatory authorities including the Company's 2005 Annual Report and
2005 Annual Information Form.
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