Trading: TSE: ROC
TORONTO, May 18 /CNW/ - Rothmans Inc. today announced results for the fourth quarter and fiscal year ended March 31, 2007.
Rothmans' earnings for the year were $C99.8 million or $1.47 per basic share compared with $99.5 million or $1.47 per basic share in fiscal 2006.
Sales(1) at 60%-owned subsidiary Rothmans, Benson & Hedges Inc., net of excise duty and taxes, for the 2007 fiscal year were $618.6 million compared with $607.2 million in fiscal 2006.
Investment income of $9.0 million for fiscal 2007 was $3.7 million higher than fiscal 2006, due to the higher-than-average cash balance held and a higher rate of return experienced during the year.
RBH's EBITDA margin(1) was 47.6% for the year, compared with 48.1% in fiscal 2006. The decrease was principally due to the effect of lower shipment volumes, volume shifts into lower-priced tiers of the cigarette price category and higher general and administrative expenses, including incentive plan accruals, various benefit costs and the impact of foreign exchange. These expenses were partially offset by price increases across all product categories.
RBH shipped a total of 10.7 billion equivalent sticks into the domestic market during fiscal 2007, representing a 4.4% decrease compared to fiscal 2006. Increased shipments of RBH price category cigarettes in fiscal 2007 only partially offset declines in premium cigarette and fine cut shipments, leading to an overall decline in sales volumes compared to fiscal 2006. While RBH has continued to demonstrate strong volumetric and financial performance in the face of a declining market, the reduction in overall industry profitability and the apparent growing presence of contraband product in the Canadian market are expected to continue to present significant challenges for RBH for the foreseeable future.
During fiscal 2007, the Company paid dividends of $81.6 million, versus $182.7 million in fiscal 2006. The fiscal 2007 regular dividend was $1.20 compared to $1.20 in fiscal 2006. In fiscal 2006 a special dividend of $1.50 was also paid.
"RBH has continued to perform very well, having achieved earnings equivalent to fiscal 2006 and, we believe, growth in composite domestic market share," said John Barnett, President and Chief Executive Officer of Rothmans Inc. and RBH. "RBH experienced only a 4.4% decrease in domestic volumes in the face of declining industry volumes which we believe continued to decline at a rate moderately lower than the 8.1% decline experienced in fiscal 2006."
------------------------ 1. Fiscal results reported here reflect the adoption of EIC156 "Accounting By A Vendor For Consideration Given To A Customer" and results for prior periods have been restated accordingly. More information is available in the section "The Adoption of Abstract 156" in the accompanying MD&A. The reclassification has no effect on net earnings.
Fourth Quarter
Rothmans' earnings for the fourth quarter of fiscal 2007 increased to $18.0 million or $0.27 basic earnings per share. This compares with earnings of $16.4 million or $0.24 basic earnings per share in the fourth quarter of fiscal 2006.
Sales(1), net of excise duty and taxes, at Rothmans, Benson & Hedges Inc. were $136.8 million in the fourth quarter compared with $132.6 million in the same period in fiscal 2006.
RBH's EBITDA margin(1) was 39.4% in the quarter compared with 36.9% in the same period of fiscal 2006, and compared to 46.4% in the third quarter of fiscal 2007, after reflecting the adoption of EIC 156. The year-over-year increase in EBITDA margin compared to the fourth quarter of fiscal 2006 is predominantly due to price increases across all product categories. The recent quarter EBITDA margin decrease compared to the third quarter of 2007 was principally due to the effect of lower shipment volumes.
Management believes that RBH's relatively strong volumetric performance in a declining market this quarter and year is partially due to challenges experienced by Imperial Tobacco Canada Limited during the implementation of its direct-to-store distribution system. Warmer than normal weather through the winter months may also have helped to offset the normal effects of seasonality.
Outlook
"The industry continues to be impacted by declining volumes overall and increased competition, particularly in the cigarette price category. In addition illegal and untaxed products continue to have a negative effect on all industry participants," said Mr. Barnett. "With our new entrants into the premium cigarette category and our well established price cigarette category brands, RBH will continue to compete vigorously in this changing market."
Dividend declared
The Board of Directors of Rothmans Inc. declared a quarterly dividend of $0.30 per share payable on June 17, 2007 to shareholders of record at the close of business on June 1, 2007.
Analyst Conference Call and Webcast
Rothmans Inc. management will hold a conference call with analysts to discuss the fourth quarter and full year results at 8:30 a.m. Toronto time on Friday, May 18, 2007. In order to listen to the conference call, shareholders are invited to call 1-866-898-9626 or 416-340-2216.
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 May 25, 2007 by calling 1-800-408-3053 and entering reservation number 3222436. The recording can also be accessed through the investor website.
Media are invited to listen to the call and to contact Karen Bodirsky at (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 751 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.
To Our Shareholders
Fiscal 2007 was one of the most challenging years for our Company in recent memory. Increases in contraband activity, regulation and competition within the price cigarette category continued to put pressure on both tax paid volumes and industry profitability. Despite these challenges, the Company's 60% owned subsidiary Rothmans, Benson & Hedges Inc. (RBH) was able to increase net sales and maintain profit when compared to fiscal 2006. This exceptional performance within the Canadian tobacco industry allowed the Company to pay $1.20 per share in dividends while continuing to build cash reserves.
Contraband activity continues to be a growing concern to industry stakeholders including provincial and federal governments, manufacturers, retailers, wholesalers, tobacco growers and other parties operating in the tax paid industry. During the past fiscal year, one industry participant released a study that concluded contraband represented 16% of the total tobacco volume sold nationally and approximately 23% in the two most populous provinces of Ontario and Quebec. The conclusions of this report are consistent with the views expressed during the year in other media reports from a variety of interested parties. Common sense would indicate that this problem will only worsen if not addressed. As we have stated before, a resolution to this issue is complex, requiring changes in the structure of tobacco regulation and taxation and increased enforcement. The current approach taken by governments is exacerbating the problem and is at odds with governments' revenue and health objectives. Management at RBH has been active this year in proposing a range of possible solutions to a variety of government officials. RBH remains keenly interested in supporting government initiatives that will return us to a Canadian tobacco market solely comprised of regulated tax paid product.
Regulatory restrictions continue to limit the industry and RBH's ability to communicate with adult smokers. Provincial dark markets, where the display of tobacco products at retail is banned, currently exist in Saskatchewan, Manitoba, Nova Scotia, Prince Edward Island, Nunavut and the Northwest Territories. Ontario, Quebec and British Columbia are also scheduled to become dark markets in 2008. In addition, the Federal Government has introduced a proposal that would mandate dark markets nationally. While these regulatory requirements are clearly aimed at reducing tobacco consumption by removing the consumer's ability to see tobacco products at the point of sale, we are concerned that their implementation could further accelerate the sale of contraband products.
As tax-paid industry volumes have declined, competitive activities have increased. During this past fiscal year, Imperial Tobacco Canada Limited (ITL) substantially completed the move of its manufacturing operations to Mexico. Mid-year ITL also withdrew from its long standing support for the wholesale distribution channel and implemented a Direct-to-Store Distribution strategy. RBH management continues to reassess its efficiency targets and sales and distribution strategies in the face of these competitive initiatives.
You will note this year that we have been unable to report market share trends within the industry as has been our custom. For many years, the three major Canadian tobacco companies had provided the Canadian Tobacco Manufacturers Council (CTMC) information on tobacco volumes sold. During this past fiscal year, ITL ceased participating in this arrangement and as a result, we no longer have access to this industry and category volume data. RBH management has a variety of information sources available to manage and evaluate the operation of its business and is continuing to evaluate other sources of volumetric and market share performance data.
Strong results
RBH increased net sales in fiscal 2007 by $11.4 million or 1.9% to $618.6 million, as a result of increased volumes in the cigarette price category and higher prices, which more than offset the impact of volume declines in premium cigarette and fine cut products. Investment income of $9.0 million increased by 70.6% reflecting a higher rate of return during the year and higher average cash balances held.
Operating costs of $327.7 million were $9.2 million higher compared with the prior year as a result of higher general and administrative expenditures including incentive plan accruals, various benefit costs, and the impact of foreign exchange.
Net earnings of $99.8 million were up slightly from the $99.5 million generated in the prior fiscal year. Basic earnings per share of $1.47 in the year was consistent with fiscal 2006. On a fully diluted basis, earnings per share increased to $1.46 from $1.45.
RBH's EBITDA margin was 47.6% in fiscal 2007 compared with 48.1% in fiscal 2006. This decrease was principally due to the effect of lower shipment volumes, volume shifts into lower-priced tiers of the cigarette category and higher general and administrative expenses, partially offset by price increases across all product categories.
Even with a high dividend payout ratio, the Company's financial position is strong with Rothmans Inc. holding cash and short term investments of $120.8 million at March 31, 2007 compared with $85.0 million held at March 31, 2006.
Overall, Rothmans Inc. maintained its level of profitability, which translates to solid cash flow that is ultimately paid out to the Company's shareholders through dividends. As this report was being completed, our regular annualized dividend of $1.20 per share represented a dividend yield of approximately 5.14%.
We continue to be interested in opportunities for growth through an international tobacco acquisition. We are monitoring current and potential mergers and acquisitions activity and will assess whether they could result in opportunities to increase Rothmans Inc. shareholder value.
Activities at RBH
During the year, RBH continued to build and defend its significant position within the price cigarette category. Price competition within the lowest price tier of this category was intense during the year as our competitors executed a variety of tactical merchandising programs aimed at generating increased market share. RBH currently has brands in this category that are well positioned across the pricing spectrum. In fiscal 2007, RBH introduced new updated packaging for the established Number 7 and Canadian Classics brands and repositioned the Accord brand as a new entrant into the lowest price tier of the price cigarette category.
Premium cigarettes represent about 50% of the Canadian tobacco market's tax-paid sales by volume and the dominant portion of the industry margin pool. RBH continues to focus on supporting its existing brand portfolio within this category. Recognizing the importance of this category in driving enhanced profitability, RBH launched the Carreras and ROOFTOP brands into the category during the fiscal year. Subsequent to year-end, RBH launched the Benson & Hedges Superslims and Davidoff brands into the premium category.
The fine cut category continued to experience significant volumetric erosion during the year as both the price cigarette and contraband markets grew. RBH continued to support its participation in this category by updating the packaging of its fine cut offerings and introducing a new "Premium Long Cut" product innovation taking advantage of proprietary technology that produces fine cut products with enhanced tobacco strand length.
Regulation that works
The health risks associated with smoking have been recognized and acknowledged by RBH for a considerable period of time. Governments have an important leadership role to play in continuing to make the public aware of those risks as well as ensuring that youth do not have access to tobacco products. Effective tobacco policy requires rational laws and regulations, sound tax policy and proper enforcement. Policies that fail to recognize consumer demand, political realities, and the mechanics of contraband markets will leave enforcement as the only option and that may be unrealistic in today's society. Current tobacco policies restrict the marketplace, while providing powerful economic incentives to ignore those restrictions. Constructive dialogue among all market participants including governments, manufacturers, distributors, retailers and consumers provides the best chance of identifying and managing policy issues related to tobacco.
RBH has been a long-time proponent of dialogue and continues to seek opportunities to work co-operatively with governments. However, RBH often faces governments that do not want and will not allow the type of dialogue needed to create and maintain effective regulation. The result is regulation which does not meet the legislative mandate, does not respect the rights of those affected, and therefore often has unintended and counterproductive consequences.
Stewardship of your Company
The exceptional results delivered this year could not have been accomplished without a team effort by all involved with Rothmans Inc. and RBH. The RBH TLC values: Teamwork, Leadership and Commitment to Win were established a number of years ago as the key rallying points that were critical to delivering superior results. Employees and management live these values every day and continue to generate strong results in a very difficult and competitive market.
We thank our employees for their efforts and focus over the last year. We'd also like to thank the management team for their leadership in designing and executing competitive strategies that have fuelled RBH's success.
We appreciate the knowledge and guidance of our Board of Directors. Rothmans Inc. shareholders have the benefit of a Board that is focused on good governance practices, shareholder interests and shareholder value.
Finally, we thank you, our shareholders, for your continuing interest and support. We can assure you that we remain focused on continuing to deliver strong financial performance and returns on your investment in Rothmans Inc.
Joe Heffernan
Chairman of the Board
John Barnett
President and Chief Executive Officer
Management's Discussion and Analysis
for the fiscal year and three months ended March 31, 2007
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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 year and fiscal quarter ended March 31, 2007 compared with the prior year. It also discusses factors that could affect future performance. This MD&A should be read in conjunction with the attached unaudited consolidated financial statements for the year ended March 31, 2007. The results reported herein have been prepared in accordance with Canadian Generally Accepted Accounting Principles (GAAP) and are presented in Canadian dollars. This MD&A is current as of May 17, 2007.
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. 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 and approved this MD&A and the accompanying unaudited consolidated financial statements.
Disclosure and Internal Controls
With respect to disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company's disclosure controls and procedures as of March 31, 2007. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that such disclosure controls and procedures were effective as of March 31, 2007 in providing reasonable assurance that material information relating to the Company and its consolidated subsidiaries would be made known to them by others within those entities.
During the Company's most recent interim period, there were no changes in the Company's internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
Forward Looking Statements
Certain statements contained in this MD&A and other sections of this document (in particular the sections entitled "Industry Overview" and "Outlook") constitute "forward-looking statements" and express views as to future events, circumstances and trends relating to RBH's business and the Company. Words such as "plans", "intends", "outlook", "expects", "anticipates", "estimates", "believes", "should" and similar expressions may identify forward-looking statements. Forward-looking statements are based on management's current expectations and assumptions and entail various risks and uncertainties. There is no assurance that any forward-looking statement will materialize. Actual results may differ materially from these expectations and forward-looking statements, if known and unknown risks or uncertainties affect RBH's business or the Company, or if management's expectations or assumptions prove to be inaccurate. Unless otherwise indicated, forward-looking statements describe expectations as of May 17, 2007.
Factors that could cause the Company's actual results to differ materially from the forward-looking statements contained herein include, but are not limited to: government claims and potential claims, including the results of ongoing investigations; product liability claims; increases in the levels of contraband product in the market; increased competition and competitor initiatives; a lower rate of growth in the cigarette price category; continued declines in consumption of tobacco products; RBH's ability to continue to implement price increases; fluctuating wholesaler and consumer purchasing patterns; changes in government taxation policy; changes in government legislation and regulation including legislation banning the display of tobacco products in retail stores; new product standards; and dependence on the domestic tobacco market.
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 concerning risks and uncertainties affecting RBH's business and the Company and other factors that could cause financial results to fluctuate is set forth below under "Risks and Uncertainties" and "Outlook" and is contained in the Company's filings with Canadian securities regulatory authorities, including the Company's Annual Information Form (in particular under "Legal Proceedings" and "Risk Factors") available on SEDAR at www.sedar.com or on the Company's website at 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 RBH's operating performance, refers to RBH's "earnings before interest, taxes, depreciation and amortization" as a percentage of "sales, net of excise 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, interest, taxes and capital spending and does not include income from investments earned by the Company or the expenses related to operating Rothmans Inc. as a public company. 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 March 31, 2007, and "prior quarter" refers to the three months ended December 31, 2006. "Fiscal 2007" or "recent fiscal year" refers to the fiscal year ended March 31, 2007 and other similar references to a fiscal year (e.g., fiscal 2006) refer to the fiscal year then ended on March 31 (e.g., March 31, 2006).
"The three major suppliers of tobacco products" or "three majors" refers to RBH, Imperial Tobacco Canada Limited (ITL) and JTI-MacDonald Corp. (JTI). "BAT" refers to British American Tobacco p.l.c., the parent company of ITL. "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-portioned tobacco sticks). "Domestic composite market" refers to all fully tax-paid cigarettes and fine cut tobacco products sold into the Canadian market. "Direct-to-Store Distribution" or "DSD" refers to a distribution model where a tobacco manufacturer ships directly to retail accounts instead of through a wholesale network. "Dark markets" refer to provincial jurisdictions where the display of tobacco products by retailers is banned by government regulation. "CTMC" refers to the Canadian Tobacco Manufacturers Council.
The Adoption of Abstract 156
Effective April 1, 2006, the Company adopted Abstract 156 "Accounting By A Vendor For Consideration Given To A Customer (Including a Reseller of the Vendor's Products)" issued by the Emerging Issues Committee of the Canadian Institute of Chartered Accountants. The Abstract addresses the issue of whether consideration provided by a vendor to a customer is an adjustment to the selling prices of the products and therefore a reduction of revenue, or is a cost incurred by the vendor and thus classified as a cost or expense. The Company evaluated its selling costs and retroactively reclassified cash consideration given to customers or resellers of products as an adjustment to the selling prices to reduce net sales revenue. Sales, net of excise duty and taxes, were reduced by $12.3 million of reclassified selling costs for the recent quarter and $47.5 million for the recent fiscal year, compared with $11.5 million and $45.1 million in the same periods of the prior fiscal year. For fiscal 2005, sales, net of excise duty and taxes, were reduced by $38.4 million of reclassified selling costs. There was no change in the net earnings for the periods from this reclassification.
Outstanding Shares
As at March 31, 2007, there were 68,038,008 common shares outstanding or 69,346,408 shares on a fully diluted basis when all exercisable options were included. See notes 8 and 9 to the unaudited consolidated financial statements.
Industry Volumes & Market Share Measurement
Historically the three major suppliers of tobacco products shared volumetric shipment information which was compiled through the CTMC. This information, combined with Statistics Canada information and other estimates formed the basis on which overall industry volumes and category market share information was previously reported on a quarterly basis. As of October 2006, ITL discontinued providing sales data information to the CTMC. As a result, total tax paid industry volumes and category market share information are not being reported in the Company's MD&A. For the purpose of managing and evaluating its ongoing business, RBH continues to use various information sources, not all of which are nationally representative, including a proprietary wholesale volumetric reporting system, industry market share information purchased from a market research company, selected retail data, consumer survey data, and information reported by Statistics Canada. RBH is assessing these and other data sources for ongoing reporting purposes.
Company Overview, Core Business and Strategy
Rothmans participates in the Canadian tobacco industry through its 60% ownership interest in RBH. The remaining 40% of RBH is owned by FTR Holding S.A. of Switzerland, an affiliate of Altria Group, Inc. Rothmans is the only widely held Canadian public company with interests exclusively in the tobacco industry. Its shares are listed on the Toronto Stock Exchange under the symbol ROC. Rothmans' financial results reflect those of RBH after minority interest, plus income generated by the Company's cash reserves, less the costs associated with operating Rothmans as a public company.
RBH is the second largest supplier of tobacco products to the Canadian market and competes in all the significant categories of that market including premium cigarettes, price category cigarettes and fine cut. RBH also competes in the cigar, pipe tobacco, duty free and export categories which in aggregate represented approximately 8% of RBH's net sales revenues in the recent fiscal year.
RBH continuously evaluates its brand offerings and positioning within each market category against the opportunities presented by the marketplace. This process allows for adjustments to the tactical execution of its brand strategy in order to best maximize performance. The adjustment in strategy can involve activities including brand launches, brand line extensions, brand repositionings, brand acquisitions and tactical merchandising initiatives. While RBH has continued to demonstrate strong volumetric and financial performance in the face of a declining market, the reduction in overall industry profitability and the apparent growing presence of contraband product in the Canadian market are expected to continue to present significant challenges for RBH for the foreseeable future. Management continues to believe that RBH's culture, strategy, product depth, product positioning and business processes are important strengths that will need to be utilized in responding to the challenges inherent within its business.
Rothmans also continues to be interested in opportunities for growth through an international tobacco acquisition. The Company's acquisition strategy centres on the expectation that the trend of worldwide tobacco industry consolidation will continue. Recent mergers and acquisition activity within the international industry may present opportunities. However, the nature of these opportunities, if any, is highly dependent on a number of factors and may not meet Rothmans' objective of maximizing shareholder value. To date, the Company has not found an opportunity that is an attractive complement to its existing business interest in RBH. Rothmans will continue to assess potential acquisitions and its overall acquisition strategy with the objective of maximizing shareholder value.
Industry Overview
The Canadian tobacco market is composed principally of consumers who choose between tax-paid premium cigarettes, price category cigarettes, fine cut tobacco offerings and untaxed or partially taxed contraband tobacco products. There is also a smaller category of consumers who choose tax-paid pipe tobacco, cigars and specialty products. Premium cigarette consumers are principally served by the three majors, offering products in varying lengths, package formats and tobacco blend characteristics under a variety of trade-marks. The price category includes price category cigarettes and fine cut products. Price category cigarette consumers are offered tax-paid tailor-made cigarette products at less than premium pricing by the three majors and a number of regional manufacturers. Fine cut product offerings include loose tobacco, high-yield tobacco and a variety of pre-portioned tobacco stick products. This category offers a lower-priced, high-quality alternative to the consumer who is willing to assemble the product prior to consumption. In addition to legal tax-paid products sold by the tobacco industry, contraband products appear to be having an increasing impact on the Canadian tobacco marketplace. In fiscal 2007, consumers continued to move away from premium cigarette and fine cut products to either tax-paid price category cigarettes or contraband products principally in search of acceptable tobacco products at a reduced price.
RBH management believes that a number of other factors also affected overall industry shipments in fiscal 2007 including:
- Taxes - High taxes reflected in the selling price to consumers
contribute to probable increases in the presence of contraband
product in the domestic market.
- Seasonal trends in consumer purchasing patterns - in recent years,
the period between April and September has demonstrated stronger
industry shipments than the period between October and March. RBH
management believes that smoking restrictions are causing consumer
consumption variations between the summer and winter seasons, however
warmer than normal weather through the winter months may have helped
to offset the normal effects of seasonality.
- Fluctuations in wholesaler and retailer buying patterns as a result
of ITL's implementation of a DSD system - Late in the second quarter
of fiscal 2007, ITL began their implementation of a Direct-to-Store
Distribution model which resulted in fluctuating buying patterns by
both wholesalers and retailers which appeared to continue through the
recent quarter. Volatility in the market caused by ITL's
implementation of this model appears to have had a positive impact on
RBH's volumes sold during the recent fiscal year. However, the
long-term effects of this change on the Canadian tobacco industry and
RBH's competitive positioning are still uncertain.
- Fluctuations in wholesaler buying patterns as a result of anticipated
tax and manufacturer price increases, manufacturer sales programs and
trade terms - Swings in wholesaler purchasing patterns motivated by
the timing of tax increases, price increases, manufacturer sales
programs, manufacturer trade terms and other factors are anticipated
to have a significant effect on quarter-to-quarter sales volumes.
- Continued declines in consumer consumption of tobacco products.
During fiscal 2007 there were a number of changes in tobacco tax rates. Effective July 1, 2006, the federal excise duty applicable to cigarettes, tobacco sticks and fine cut products was raised by $0.56, $0.50 and $0.38, respectively, on a per carton or equivalent stick basis, in order to offset the effect of the 1% GST reduction. During the third quarter, the Province of Saskatchewan implemented an increase in its provincial tobacco tax ("PTT") rates in order to offset a 2% reduction in its provincial sales tax rate and the Nunavut government implemented a 34.6% increase in PTT on cigarettes and a 62.8% increase on fine cut products. During the fourth quarter, the Province of Nova Scotia raised PTT on cigarettes and fine cut products by $2.00 per carton, or equivalent stick basis.
Subsequent to year end, in April 2007, the Province of Alberta raised PTT on cigarettes and fine cut products by $5.00 per carton, or equivalent stick basis.
Key Performance Drivers
The key performance drivers for RBH are:
- the incidence and consumption trends for tax-paid tobacco products in
the Canadian marketplace;
- the amount of industry sales volume being supplanted by contraband
tobacco products;
- manufacturer pricing by product category;
- market share of the industry; and
- opportunities to reduce costs.
RBH's revenue model and its associated strategies for increasing profitability and shareholder value are driven by the tobacco volume sold and the price charged for that volume. With the loss of reported industry volume information during the year, RBH used a variety of data sources to estimate volume in equivalent sticks by product category and market share by brand. Along with these metrics RBH also uses margin per equivalent stick to track its key drivers.
Volume trends provide key strategic information on market developments leading to decisions on product launches, line extensions, and price increases that have driven volume growth, market share growth and increasing profitability over the past several years.
Tobacco consumption continues to be a significant socio-political issue, giving rise to significant pressures on manufacturers, tobacco product consumers, tobacco growers, retailers, wholesalers and the hospitality industry. The high tax load imposed on tobacco products is causing an apparent diversion of some consumers away from tax-paid products and has led to the growth of a significant contraband market of non-tax paid and partially tax-paid products.
Industry participants are also subject to other factors affecting the volume of tobacco sold and consumed including: the legal and regulatory environment related to tobacco, federal and provincial tobacco taxation policies and escalating restrictions on where tobacco can be consumed. Suppliers of contraband product are not subject to the same legal, regulatory, and taxation constraints. RBH sells only legal tax-paid product, markets only to adults who choose to smoke, does not market to youth, does not encourage youth to smoke or non-smokers to take up smoking and does not discourage smokers from quitting.
RBH regularly monitors its pricing position against industry participants, by category. This position, along with product category margin, provides profitability information used to drive strategic pricing decisions as well as to support sales and marketing directions. Due to contraband's covert nature, RBH is unable to effectively monitor its position versus suppliers of non-tax paid or partially tax-paid product.
Results at Rothmans Benson & Hedges Inc.
RBH shipped a total of 10.7 billion and 2.4 billion equivalent sticks into the domestic market during fiscal 2007 and the quarter ended March 31, 2007, representing a 4.4% and 0.1% decrease compared to the same periods of the prior year. Increased shipments of RBH price category cigarettes in fiscal 2007 only partially offset declines in premium cigarette and fine cut shipments leading to an overall decline in sales volumes compared to fiscal 2006. Based on information sources available, RBH management believes that total tax-paid industry domestic sales volumes for all tobacco products continued to decline in fiscal 2007 at a rate moderately lower than the 8.1% decline experienced for the fiscal year ended March 31, 2006.
Success in the premium category, which is a significant driver of profitability for RBH, remains dependent on the strength of RBH's portfolio of brands. Consumers buy premium cigarettes based on a number of factors including brand attributes and the consistent product quality that the manufacturer provides to the consumer. Brands within the tobacco industry have a long product cycle. In recognition of this, RBH continues to focus its marketing and sales efforts on the top six premium brands that account for approximately 92% of its premium cigarette sales. Over the last year, RBH continued to leverage its retail and wholesaler programs in support of the Benson & Hedges, Craven A, Rothmans, Belvedere, Belmont and Viscount brands, which are central to the targeted premium brand strategy. To supplement its premium brand strategy, RBH launched the Carreras and ROOFTOP brands into the category in fiscal 2007. Subsequent to the fiscal year end, RBH launched the Davidoff and Benson & Hedges Superslims brands into the premium category.
Regulatory constraints continue to limit RBH's ability to communicate with adult smokers. With dark markets already in place in Saskatchewan, Manitoba, Prince Edward Island, Nova Scotia, Nunavut and the Northwest Territories and scheduled for implementation over the next year in British Columbia, Ontario and Quebec, RBH's strategy for long-term success in the premium cigarette category is to focus on growing brands by investing in retail availability programs.
The growth in the cigarette price category continued in fiscal 2007 as some premium cigarette consumers continued to switch to lower-priced alternatives. In the fourth quarter, RBH launched its Accord brand nationally into the cigarette price category. The brand competes at a retail price below RBH's two existing price tiers within the cigarette price category.
RBH believes that its products are well positioned in all price tiers in the cigarette price category. The Accord brand has been positioned at the lowest price tier nationally. At the new mid-price tier, depending on the region, RBH has positioned its Canadian Classics and Mark Ten brands. At the highest tier, the Number 7 brand continues to be offered nationally. In order to further strengthen its Number 7 and Canadian Classics trade-marks, RBH introduced new updated packaging during the fiscal year. The cigarette price category continues to evolve and RBH is committed to strategies that defend its significant market position. A number of factors continue to influence the overall growth of this product category including the brands being offered to consumers, their availability, price and the availability of contraband products.
The fine cut portion of the price category continues to be driven by a combination of price, innovative product offerings, price category cigarette offerings and the impact of contraband product. The emergence of price category cigarettes and contraband product has led to the erosion of overall fine cut volumes, however RBH continues to believe that fine cut remains a viable part of the price category by providing lower priced alternatives to tobacco consumers. RBH's leadership position in fine cut has been driven by innovation resulting in product offerings that are either easier to assemble or offer better value. During fiscal 2007, RBH completed the program initiated in fiscal 2006 of rationalizing stock keeping units within the fine cut category. RBH also updated the packaging of its fine cut products and introduced a new "Premium Long Cut" product innovation taking advantage of proprietary technology that produces fine cut products with enhanced tobacco strand length.
RBH's EBITDA margin was 47.6% and 39.4% in the fiscal year and quarter ended March 31, 2007 compared with 48.1% and 36.9% in the same periods of the prior fiscal year after reflecting the adoption of Abstract 156. The fiscal 2007 EBITDA margin decrease compared to the prior year was principally due to the effect of lower shipment volumes, volume shifts into lower-priced tiers of the cigarette price category and higher general and administrative expenses, including incentive plan accruals, various benefit costs and the impact of foreign exchange, partially offset by price increases across all product categories. The recent quarter EBITDA margin decrease from the 46.4% in the prior quarter was principally due to the effect of lower shipment volumes. The increase in EBITDA margin from the fourth quarter of the prior year is predominantly due to price increases across all product categories.
In November 2006, RBH increased the prices charged to wholesalers for its premium and price category cigarettes by $1.00 per carton. Prices on fine cut products, cigars and pipe tobacco were increased by varying amounts depending on format. Subsequent to year end, RBH increased the prices charged to wholesalers by $1.00 per carton for the Carreras, Davidoff and ROOFTOP premium brands, $1.50 per carton for all other premium cigarette brands and $1.00 per carton for all price category cigarettes other than the Accord brand. Prices on fine cut products, cigars and pipe tobacco were increased by varying amounts depending on format.
Rothmans Inc. Financial Results
Basic earnings per share were $1.47 and $0.27 in the fiscal year and quarter ended March 31, 2007 versus $1.47 and $0.24 in the comparable periods of the prior year. RBH's sales, net of excise duty and taxes, of $618.6 million and $136.8 million for fiscal 2007 and the recent quarter were $11.4 million higher than fiscal year 2006 and $4.2 million higher than the quarter ended March 31, 2006. Increased volumes of RBH price category cigarettes, together with price increases across all product categories, more than compensated for volume declines in premium cigarettes and fine cut products in both periods.
Investment income of $9.0 million for fiscal 2007 was $3.7 million higher than fiscal 2006 due to the higher than average cash balance held and a higher rate of return experienced during the year.
Operating costs, which totaled $327.7 million and $83.6 million for the fiscal year and quarter ended March 31, 2007, were $9.2 million higher and $0.6 million lower than in the same periods of the prior fiscal year. Higher general and administrative expenditures including incentive plan accruals, various benefit costs, and the impact of foreign exchange contributed to the higher operating costs in the fiscal year. Recent quarter operating costs were stable compared with the same period in the prior year.
RBH's amortization expense of $12.3 million for fiscal 2007 was $1.6 million higher than in the prior year. Capital spending by RBH decreased during fiscal 2007 to $6.8 million from $17.6 million in fiscal 2006. In prior years, RBH undertook capital improvement programs at both its Quebec and Brampton plants to update equipment, meet market demands and install machinery with enhanced capabilities. Recent fiscal year expenditures were lower due to the completion of these programs and the timing of certain planned capital improvements being later than originally anticipated. Capital expenditures in fiscal 2008 are anticipated to approximate fiscal 2006 levels as these improvement programs proceed.
Income tax expense was $113.4 million and $20.3 million in the fiscal year and recent quarter ended March 31, 2007 resulting in an effective tax rate for the fiscal year to date of 40.6%. The Company expects its effective tax rate for fiscal 2008 to be at 40.2%.
Rothmans Inc. Consolidated Financial Summary (Unaudited)
(in millions of dollars, except per share data)
Year ended March 31 2007 2006 2005
-------------------------------------------------------------------------
Operations
Sales, net of excise duty and taxes(xx) 618.6 607.2 598.4
Cash flows from operations 204.1 183.4 162.7
Earnings before minority interest 165.8 165.7 155.6
Earnings for the year 99.8 99.5 93.0
Dividends paid 81.6 182.7 70.9
Financial position
Net working capital 248.6 213.0 286.8
Total assets 485.9 447.6 526.5
Total long-term liabilities 212.3 197.9 186.3
Shareholders' equity 134.2 113.9 193.7
Per common share(x)
Earnings - basic 1.47 1.47 1.38
Earnings - diluted 1.46 1.45 1.37
Dividends paid 1.20 2.70(1) 1.05
Shareholders' equity 1.97 1.68 2.87
-------------------------------------------------------------------------
(1) 2006 dividends paid includes special dividend of $1.50 per share.
(x) Prior years have been adjusted for the two-for-one stock split
effective March 4, 2005.
(xx) Sales, net of excise duty and taxes have been restated to reflect
EIC 156. See note 2 to the unaudited consolidated financial
statements for more information.
Capability to Deliver Results
Cash Flow
RBH's operations generate significant cash resources. These are currently sufficient to fund interest payments on RBH's long-term debt, capital expenditures and dividends to its shareholders. Based on RBH's historical earnings levels, the dividends received by Rothmans from RBH are expected to be sufficient to fund its operations, pay dividends to its public shareholders and continue to accumulate cash reserves.
RBH's cash flow from operations before changes in working capital was $182.0 million in the fiscal year ended March 31, 2007 compared with $181.7 million in the prior year. RBH's ability to generate cash from operations is generally sufficient to fund the day-to-day financing needs of RBH's business. It is anticipated that additional funds, should they be required, would be obtained through short-term bank borrowings.
During fiscal 2007, the Company paid dividends of $81.6 million, versus $182.7 million in fiscal 2006. The fiscal 2007 regular dividend was $1.20 per share compared to $2.70 per share in fiscal 2006 which included a $1.50 special dividend.
Cash Resources
Cash and short-term investments of $172.2 million at March 31, 2007 represented the consolidated cash resources of the Company versus $130.2 million at March 31, 2006. The increase in cash and short-term investments is predominantly due to the payment by the Company of a $1.50 per share special dividend during fiscal 2006, and normal quarterly fluctuations in RBH's working capital requirements and investing activities. On a non-consolidated basis, Rothmans held cash and short-term investments of $120.8 million at March 31, 2007, an increase from $85.0 million at March 31, 2006. This increase results from the payment of dividends by the Company and the timing of dividends paid by RBH.
RBH currently has outstanding $150.0 million of senior unsecured bonds maturing on December 21, 2011 carrying a coupon rate of 5.552%. It is RBH's present intention to maintain this level of debt within its capital structure for the foreseeable future and not to enter into fixed or floating interest rate swaps (see note 7 to the unaudited consolidated financial statements for the fiscal year).
Contractual Obligations
The table below summarizes RBH's obligation to make future payments on long-term debt, lease obligations and other obligations as at March 31, 2007.
------------------------------------------------------------------------- Contractual Fiscal Fiscal Fiscal Obligations ($000's) 2008 2009 2010-2012 Total ------------------------------------------------------------------------- Long term debt - - 150,000 150,000 Operating leases 3,853 2,981 8,117 14,951 Purchase obligations 1,117 - - 1,117 ------------------------------------------------------------------------- Total contractual obligations 4,970 2,981 158,117 166,068 -------------------------------------------------------------------------
Non-Capital Resources
RBH's critical non-capital resources are its trade-marks, and the culture and values that characterize the organization. The continuing quality of product that RBH delivers to its consumers is a key factor in the strength of RBH's brands. RBH's culture and values are built upon a number of competencies that reflect teamwork, leadership and a commitment to win. RBH believes that its culture and values, which drive how the organization functions, are critical to its success.
Manufacturing Facilities
RBH's capital expenditure programs are focused on maintaining manufacturing flexibility and capacity at both the Quebec and Brampton plants.
Compensation Programs
RBH's compensation bonus programs are tiered by level of responsibility and involve all non-union employees. Bonuses are generated from these programs based on the achievement of pre-determined corporate market share, profitability and shareholder return targets, aligning the programs with the drivers of shareholder value. Annual option grants as a part of executive compensation programs were discontinued effective fiscal 2006.
Critical Accounting Estimates
The preparation of financial statements in conformity with GAAP 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
RBH provides defined benefit pension plans, defined contribution pension plans and post-employment benefits to its employees. For the defined benefit pension plans and the post employment benefits, determination of the benefit obligation and associated expense is subject to significant actuarial assumptions including the discount rate, the expected return on plan assets, the projected rate of compensation increase, health care cost trend rates, and the demographic characteristics of RBH's employee base.
The discount rate is used in determining the present value of the benefit obligation at the fiscal year end. The discount rate is prescribed as the market rate of high quality fixed income investments with a term equivalent to the projected benefits to be paid under the plans. A lower discount rate increases the present value of the benefit obligation. A 25 basis point change in the discount rate applied to the plans would result in a change in the obligation liability of $5.5 million and maintain the expected benefit cost for fiscal 2007.
The expected return on plan assets assumption is based on plan asset allocations and the associated future estimates of the long-term investment returns. A 25 basis point change in the expected return on plan assets assumption would change the expected pension cost in fiscal 2007 by approximately $0.4 million.
Litigation Contingent Liabilities
As discussed more fully in the Risks and Uncertainties section of this MD&A, the Company and RBH have been the subjects of various legal actions, proceedings, investigations and claims. Based on the stage of those proceedings, management is unable to meaningfully estimate the loss, if any, that might result from claims or investigations and neither the Company nor RBH has accrued for potential losses. However, the outcome of any contingency is uncertain. If successful, these claims, potential claims or outcome of investigations either individually or in the aggregate, could involve significant damages which would have a significant adverse effect on the financial condition of the Company, and the Company and RBH may not have the resources to satisfy such claims.
New Accounting Pronouncements
A new accounting standard, CICA Handbook Section 3855 "Financial Instruments - Recognition and Measurement" was recently issued. This standard prescribes when a financial asset, financial liability, or non-financial derivative is to be recognized on the balance sheet, and at what amount. It also specifies how financial instrument gains and losses are to be presented. Section 3855 applies to interim and annual financial statements relating to a fiscal year beginning on or after October 1, 2006. The Company plans to adopt this standard for its fiscal year ending March 2008. Management is evaluating the standard and its impact on the Company's financial statements.
CICA Handbook Section 1530, "Comprehensive Income," introduces a new requirement to temporarily present certain gains and losses outside net income. This standard applies to interim and annual financial statements relating to fiscal years beginning on or after October 1, 2006. The Company will adopt this standard for its 2008 fiscal year. Financial statements of prior periods are required to be restated for certain comprehensive income items. Management is evaluating this standard and the impact of this new accounting pronouncement on the Company's financial statements.
The Accounting Standards Board has issued an Exposure Draft of proposed amendments to the Canadian Institute of Chartered Accountants Handbook Section 3461 "Employee Future Benefits". Amongst other changes, the proposed amendments require the Company to recognize the funded status of pension, post-retirement and post-employment benefit plans on the balance sheet starting with fiscal year 2008. The exposure draft is presently out for public comments and may be changed prior to it being adopted as GAAP. Management is evaluating the Exposure Draft and its impact on the Company's financial statements.
Risks and Uncertainties
Regulatory Environment
Canada is one of the most regulated environments in the world for the marketing and sale of tobacco products. Restrictive legislation governing virtually all aspects of tobacco product sales and promotion has been imposed by federal, provincial and municipal governmental authorities in Canada.
The Tobacco Act (Canada) prohibits the direct or indirect promotion of tobacco products and bans sponsorships by tobacco product manufacturers. It also mandates the display of health warnings and information concerning constituents of the product on tobacco product packaging and requires prescribed information concerning tobacco products and their ingredients and emissions to be reported to Health Canada. In December 2002, the Quebec Superior Court dismissed the constitutional challenge of this legislation by the three majors. The appeal of this decision was heard by the Quebec Court of Appeal in December 2004 and in August 2005 the Quebec Court of Appeal essentially upheld the decision of the lower court. The federal government obtained leave to appeal to the Supreme Court of Canada with respect to those sections of the legislation which had been struck down by the Court of Appeal, and the Supreme Court of Canada heard the appeal, as well as the cross appeal of the three majors, in February 2007. No decision has been rendered yet.
Legislation enacted in Saskatchewan, Manitoba, Prince Edward Island, Nova Scotia, Nunavut and the Northwest Territories prohibits the display of tobacco products and any advertising or promotion of tobacco products in any location, including retail stores, to which persons under legal age have access. The display of tobacco products in Quebec and Ontario will be prohibited effective May 31, 2008. British Columbia has also enacted legislation to ban the display of tobacco products. Health Canada is considering issuing federal regulations banning the display of tobacco products at retail outlets where they are sold. Regulations restricting or prohibiting smoking in the workplace and other environments are in place in many jurisdictions. Legislation enacted in Quebec as of May 31, 2006 prohibits the sale of tobacco products in such places as the grounds and buildings of colleges and universities, buildings intended mainly for the presentation of sports, recreational, cultural or artistic activities and pubs, taverns and bars.
Legislation enacted in British Columbia, Newfoundland and Labrador, Nova Scotia, Manitoba and New Brunswick allows the provincial government in its own right to bring an action against tobacco product manufacturers for the recovery of health care costs that allegedly have been, or will be, incurred by the province in respect of alleged smoking-related illnesses. Saskatchewan has introduced similar legislation which has not yet been proclaimed into force. RBH and other tobacco manufacturers challenged the validity of the British Columbia legislation on constitutional grounds. In May 2004, the B.C. Court of Appeal, overturning a lower court decision, ruled that the legislation was constitutionally valid. RBH and other tobacco product manufacturers appealed this decision to the Supreme Court of Canada which dismissed the appeal in September 2005. The action in British Columbia is now proceeding. At this time, no action has been commenced against the tobacco manufacturers in any of the provinces other than British Columbia. However, the New Brunswick government announced in December 2006 that it had begun the process to hire a qualified law firm or consortium of law firms to represent the Province.
Regulations enacted under the Tobacco Act require all cigarettes manufactured in or imported into Canada as of October 1, 2005 to meet new reduced ignition propensity performance standards and reports on testing of cigarette brands against these new standards to be submitted to Health Canada on an annual basis.
Health Canada published a consultation document in 2004 soliciting comments on a proposal for new health-related information on tobacco product labels. It proposed, among other things, 48 new health warnings for tobacco packaging as well as new health information messages. Health Canada is also considering implementing regulations which would require the current toxic emissions statement on tobacco product packaging to be replaced by other information. A survey with respect to the costs of these proposed regulations was circulated to industry stakeholders in March 2006.
Health Canada is working on proposed regulations which would prohibit the use of "light" and "mild" descriptors, or variations of those terms, in connection with tobacco products and accessories. In November 2006, at the request of the Competition Bureau, RBH agreed to discontinue manufacturing and packaging tobacco products using "light" and "mild" descriptors in advance of Health Canada's anticipated regulations. This change in packaging has now been completed. Similar agreements were made with the other two major suppliers of tobacco products.
Restrictive legislation and regulations enacted by all levels of government have proliferated in recent years. This legislation limits RBH's ability to compete for market share as well as adds significant costs to RBH's operations in terms of both increased expenses and reduced operating efficiencies. If RBH is unable to effectively market its products and compete for market share, or if the costs of compliance with government legislation and regulation cannot be offset through increased selling prices for its products, RBH's sales and operating results will be adversely affected.
Legal Proceedings
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. Since 1995, there has been an increase in the number of these claims, which include government actions for recovery of health care costs allegedly incurred in respect of smoking-related illnesses. Two of these legal actions have been authorized by the court to proceed as class actions and punitive damages are specifically pleaded in a number of cases in addition to compensatory and other damages.
These claims remain at an early stage and involve complicated and novel questions of law that may take several years to resolve. Based on the stage of these proceedings, the Company is unable to meaningfully estimate the amount or range of loss, if any, that might result from these claims. Although the precise scope of the class actions remains unclear, such actions will involve a large number of people, possibly ranging in the millions. If successful, these claims, either individually or in the aggregate, could involve significant damages, which would have a significant adverse effect on the financial condition of the Company, and the Company and RBH may not have the resources to satisfy such claims. RBH is currently the subject of an ongoing investigation by the RCMP relating to its sales of products exported from Canada in the period 1989-1996. Although no action has been commenced against the Company or RBH and the Company believes that RBH's operations were properly conducted at all times, the Company and RBH believe that the RCMP and federal and provincial governments are contemplating laying charges or commencing other legal proceedings involving the Company or RBH related to allegations that tobacco products manufactured by RBH were illegally smuggled back into Canada during this period without payment of applicable excise and tobacco taxes and duties. The Company cannot predict the outcome of the investigation or whether additional investigations may be commenced. RBH's business and the Company could be materially adversely affected by an unfavorable outcome of current or future investigations or in the event charges or other legal proceedings are brought against RBH or the Company.
The Company and RBH believe that they have good defences to these claims and proceedings and intend to vigorously defend themselves. The outcome of litigation is however uncertain and these claims could be decided unfavorably against the Company and RBH. The Company and RBH may also decide to enter into settlement discussions if they believe it is in their best interests.
Further information concerning the claims and proceedings affecting the Company and RBH is contained in Note 14 which accompanies this MD&A.
In addition to these claims and investigations, the Company monitors other legal proceedings and claims affecting the industry in Canada and which are ongoing or have occurred in other jurisdictions. In Canada, these proceedings include an action against another Canadian tobacco product manufacturer for damages alleging that a tobacco product caused a fire resulting in injury and/or death of the plaintiffs and that the defendant was negligent in failing to sell a fire-safe cigarette and class action suits alleging that the use of the terms "light" and "mild" and other similar descriptors constitute deceptive and misleading representations and unfair trade practices. In other jurisdictions, including the United States and the European Union, these proceedings include product liability claims relating to smoking and health, personal injury claims caused by environmental tobacco smoke, class action suits alleging that the use of descriptors such as "lights" and "ultra lights" constitutes deceptive and unfair trade practices, claims and investigations relating to allegations of illegal exports and imports of tobacco products and of unlawful pricing activities, a co-operation agreement relating to anti-contraband and anti-counterfeit efforts and settlements of health care recovery litigation. Settlement agreements reached in the other jurisdictions on these types of issues have involved significant monetary payments being made by tobacco product suppliers in those jurisdictions over an extended period of up to 20 years. To date, no such settlement agreements have been entered into in Canada. Should tobacco product manufacturers in Canada enter into arrangements or agreements of a similar nature in respect of any claims, proceedings or investigations currently outstanding or those that may be brought in the future, significant monetary payments to third parties including government authorities in Canada may be required which could adversely affect the financial condition and earnings of such companies, including RBH and the Company should they be a party to such arrangements.
It is not possible to predict the outcome of legal claims, pending and future, against the Company or RBH. Legal proceedings are subject to many uncertainties, and it is possible that there will be adverse developments in the claims and investigations pending against the Company and RBH and that these cases and any potential future cases could be decided unfavourably or settled. In certain circumstances, defendants in litigation proceedings may be required to post a bond while an unfavourable trial decision is under appeal. The amount of such a bond may be significant and beyond the financial resources of the defendant. An unfavourable outcome or settlement of pending legal proceedings or investigations against RBH or other tobacco product manufacturers could encourage the commencement of additional litigation, claims or investigations involving RBH or the Company. There has also been a number of adverse legislative, regulatory, political and other developments concerning cigarette smoking and the tobacco industry that have received widespread media attention. These circumstances may negatively affect the outcome of pending proceedings and investigations and may prompt the commencement of additional similar proceedings and investigations.
Tobacco Taxation
Federal and provincial tobacco tax increases during the years 2001 through 2004 raised the price of cigarettes to unprecedented levels. In several jurisdictions cigarette prices more than doubled during this short period of time. This policy has raised the demand for illicit product and increased the incentive for those that choose to violate Canadian law. In particular, the illegal sale of non tax-paid or partially taxed cigarettes emanating from Native reserves located in Ontario, Quebec and New York State has been reported as a substantial source of the contraband product distributed in Canada. Illicit product was estimated in a study released by ITL in 2006 as being in excess of twenty percent of cigarettes consumed in Ontario and Quebec. Government tax revenues are severely impacted and the extent and source of the growing contraband problem is now being publicly recognized by government officials and anti-smoking advocates.
RBH operates within the legal tax-paid tobacco market in Canada and therefore must compete with contraband products offered for sale at less than a third of legal prices. Tobacco tax increases have moderated in the past few years. However, the contraband problem has been allowed to grow and production and distribution networks are in place, and expanding, to satisfy and entice consumer demand for low or no tax products.
RBH management believes that governments need to invest sufficient energy and resources to address the problem. However, we have reservations that initiatives such as enhanced product markings or tracking and tracing leaf and other product components, alone, will resolve the problem. The profit potential for those that choose to violate Canadian law is too large, and the demand for contraband tobacco products will not abate. Unless enforcement is specifically and decisively addressed, short of significantly reducing tobacco taxes, a significant percentage of the cigarette market in Canada will continue to be supplied through illegal channels.
RBH is the market leader in the fine cut segment and these products play an important role in providing a fully taxed alternative to price-sensitive smokers who might otherwise switch to contraband products. However, both tobacco stick and high-yield roll-your-own products have been targeted by anti-smoking groups for increased taxes. One province, Newfoundland and Labrador, has revised its tax policy to tax roll-your-own fine cut products on an approximate cigarette yield basis. Other jurisdictions may also be considering a similar policy. Fine cut products, including tobacco sticks, provide a controlled alternative to contraband. Fine cut tobacco sales volumes are not growing at the expense of higher-taxed cigarette products. In fact, sales volumes are decreasing in this market segment at a higher rate than cigarette volume declines. The Company firmly believes that fine cut products can contribute to the control of contraband and it is important that governments recognize this and maintain differentiated taxing structures.
RBH's sales volumes are negatively affected by the existence of illicit trade in tobacco products within Canada, and unreasonable future tax increases will exacerbate the problem. As well, any shift in government policy to tax fine cut products at cigarette equivalents may make RBH's products less attractive to consumers. All of these factors could result in an adverse effect on sales volumes and on RBH's profitability, cash flows and financial condition.
New Product Standards
Government regulations, which became effective in October 2005, establish fire safety standards for tobacco products and require tobacco products sold in Canada to meet specified reduced ignition propensity standards.
New product technologies continue to be of importance due to the political, social and legal focus on the health effects of tobacco products. Tobacco product manufacturers continue to seek ways to develop and commercialize new product technologies, which continue to offer adult smokers products that meet their taste expectations. While RBH will endeavour, where possible, to ensure that new product developments and new technologies for tobacco products will be available to it, there can be no guarantee that RBH will be successful in these efforts. Should one or more of its competitors acquire such technologies which are not available to RBH, it may be at a competitive disadvantage and its sales and results of operations may be adversely affected.
Competition
The tobacco industry is highly competitive. Certain of RBH's competitors in the tobacco industry have substantially greater financial resources than RBH or may have an inherently greater ability to operate on a lower-cost basis or implement production efficiencies. As a result, those competitors may be able to compete more aggressively than RBH, particularly in respect of retail merchandising arrangements and product selling margins. During the third quarter of fiscal 2006, ITL announced the move of their Canadian production to Mexico resulting in the planned closure of their Canadian production facilities. This move appears consistent with BAT's stated strategy of rationalizing its worldwide production facilities to improve efficiencies. ITL has now moved most of its production operations to Mexico. In September 2006, ITL began implementing its Direct-to-Store Distribution model, which permits direct sales and distribution of its products to retail outlets. Although it is currently too early to determine the long term impact of these initiatives, should these initiatives provide ITL with even greater financial resources than RBH to aggressively compete in the market, RBH's competitive position may be adversely affected.
The combined effect of significant tax increases implemented by federal and provincial governments together with manufacturers' price increases have resulted in substantial increases in the retail prices of tobacco products, particularly premium cigarettes. Over the past five years, RBH's premium brands have encountered significant increased competition from lower-priced cigarette products. Additional competition has also resulted from diversion into the domestic market of cigarettes intended for sale outside of Canada, the sale of counterfeit cigarettes by third parties and the sale of nonor partially tax paid contraband product. As a result, the market share of premium cigarettes has decreased significantly, putting pressure on overall selling margins of the three major suppliers of tobacco products. If these competitive factors continue, sales of premium cigarettes, the most profitable category, may continue to shift to both the cigarette price category and contraband product. The impact on the sales and earnings of RBH will be dependent upon consumer buying patterns with respect to products offered through the contraband distribution network and in the cigarette price category by RBH and competing suppliers. Steps that RBH has taken or may take with respect to the cigarette price category may not continue to be successful. All of these factors could result in lower overall sales and margins for RBH and could have a significant adverse effect on the operations, cash flow and financial condition of RBH.
Risk Management
Corporate risks are managed by RBH at the functional level with the oversight of a Risk Management Committee employing an enterprise-wide risk management methodology. Risk management is a continuous process and RBH refines its crisis management and contingency plans from time to time. RBH adheres to certain standards, principles and operational practices in an effort to reduce risk exposure throughout the organization, and emphasizes risk management as a guiding objective for its operations.
Outlook
In fiscal 2007 it is believed that the increasing presence of contraband was a key factor in reducing both RBH and total tax-paid industry volumes. Continued availability of contraband product in the domestic market as a result of high tobacco tax rates across the country may increase the decline rate in tax paid industry volumes further in the future resulting in a negative impact on RBH's sales volumes.
Continued launches into the cigarette price category and price competition by each of the three major suppliers of tobacco products have led to significant growth of that category in recent years, and there continues to be a significant degree of variability in the underlying business trends, making it difficult to accurately estimate the impact on consumer purchasing patterns.
Looking ahead, Rothmans expects that a number of factors could affect its financial performance including:
- the success of efforts by the Company, RBH and the industry to defend
themselves against product liability, government and other claims;
- increased levels of counterfeit and other contraband product that may
occur due to the high tax environment;
- the impact of ITL's direct-to-store distribution program and RBH's
ability to compete in the new environment;
- a lower rate of growth in 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;
- continued declines in the consumption of tobacco products;
- RBH's ability to continue to implement price increases for its
products;
- the impact of RBH's efforts to stabilize its cigarette market share
in the declining premium cigarette category;
- the continued volatility in the cigarette market as a result of the
evolution of the Canadian cigarette price category, varying
wholesaler purchasing patterns and seasonal fluctuations in smoker
consumption;
- the impact of continued restrictive legislation and regulations over
the sale of tobacco products including legislation banning the
display of tobacco products in retail stores;
- RBH's ability to maintain its leading position in the fine cut
segment;
- 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.
Quarterly Unaudited Consolidated Financial Information
FISCAL 2007
Period ended (in
thousands of
dollars, except Total
per share data) Jun 30 Sep 30 Dec 31 Mar 31 Year
-------------------------------------------------------------------------
EARNINGS
Revenues:
Sales, net of excise
duty and taxes 162,886 165,237 153,606 136,830 618,559
Investment income 1,953 2,320 2,570 2,186 9,029
-------------------------------------------------
Total revenues 164,839 167,557 156,176 139,016 627,588
Costs:
Operating costs
excluding amortization 78,121 82,643 83,283 83,606 327,653
-------------------------------------------------
Earnings before
interest, taxes and
amortization 86,718 84,914 72,893 55,410 299,935
Amortization 2,865 2,967 3,292 3,215 12,339
Interest expense
- Long-term debt 2,080 2,095 2,094 2,059 8,328
- Other 3 (30) 22 66 61
-------------------------------------------------
Earnings before income
taxes and minority
interest 81,770 79,882 67,485 50,070 279,207
Income taxes
- Current 32,192 32,422 27,083 30,181 121,878
- Future 775 343 321 (9,895) (8,456)
-------------------------------------------------
Total income taxes 32,967 32,765 27,404 20,286 113,422
-------------------------------------------------
Earnings before
minority interest 48,803 47,117 40,081 29,784 165,785
Minority interest 19,532 18,800 15,954 11,737 66,023
-------------------------------------------------
Earnings for the
period 29,271 28,317 24,127 18,047 99,762
-------------------------------------------------
-------------------------------------------------
Earnings per common
share
- Basic 0.43 0.42 0.35 0.27 1.47
-------------------------------------------------
-------------------------------------------------
- Diluted 0.43 0.41 0.35 0.26 1.46
-------------------------------------------------
-------------------------------------------------
RETAINED EARNINGS
Balance at beginning of
period 68,513 77,379 85,292 89,009 68,513
Earnings for the
period 29,271 28,317 24,127 18,047 99,762
-------------------------------------------------
97,784 105,696 109,419 107,056 168,275
Dividends paid:
Common Shares -
(2007 - $1.20 per
share) (20,405) (20,404) (20,410) (20,411) (81,630)
-------------------------------------------------
Balance at end of
period 77,379 85,292 89,009 86,645 86,645
-------------------------------------------------
-------------------------------------------------
Rothmans Inc. and subsidiary companies (unaudited)
Quarterly Unaudited Consolidated Financial Information
FISCAL 2006
Period ended (in
thousands of
dollars, except Total
per share data) Jun 30 Sep 30 Dec 31 Mar 31 Year
-------------------------------------------------------------------------
EARNINGS
Revenues:
Sales, net of excise
duty and taxes 164,615 164,903 145,005 132,642 607,165
Investment income 1,466 1,046 1,253 1,526 5,291
-------------------------------------------------
Total revenues 166,081 165,949 146,258 134,168 612,456
Costs:
Operating costs
excluding amortization 79,571 77,959 76,746 84,163 318,439
-------------------------------------------------
Earnings before
interest, taxes and
amortization 86,510 87,990 69,512 50,005 294,017
Amortization 2,517 2,646 2,599 2,901 10,663
Interest expense
- Long-term debt 2,082 2,093 2,094 2,059 8,328
- Other 5 11 144 37 197
-------------------------------------------------
Earnings before income
taxes and minority
interest 81,906 83,240 64,675 45,008 274,829
Income taxes
- Current 31,914 32,536 25,348 16,786 106,584
- Future 602 512 336 1,080 2,530
-------------------------------------------------
Total income taxes 32,516 33,048 25,684 17,866 109,114
-------------------------------------------------
Earnings before
minority interest 49,390 50,192 38,991 27,142 165,715
Minority interest 19,737 20,087 15,665 10,762 66,251
-------------------------------------------------
Earnings for the
period 29,653 30,105 23,326 16,380 99,464
-------------------------------------------------
-------------------------------------------------
Earnings per common
share
- Basic 0.44 0.44 0.34 0.24 1.47
-------------------------------------------------
-------------------------------------------------
- Diluted 0.43 0.44 0.34 0.23 1.45
-------------------------------------------------
-------------------------------------------------
RETAINED EARNINGS
Balance at beginning of
period 151,734 59,757 69,518 72,490 151,734
Earnings for the period 29,653 30,105 23,326 16,380 99,464
-------------------------------------------------
181,387 89,862 92,844 88,870 251,198
Dividends paid:
Common Shares -
(2006 - $2.70 per
share)(x) (121,630) (20,344) (20,354) (20,357) (182,685)
-------------------------------------------------
Balance at end of
period 59,757 69,518 72,490 68,513 68,513
-------------------------------------------------
-------------------------------------------------
(x) Includes special dividend of $1.50 per share paid on June 17, 2005
Rothmans Inc. and subsidiary companies (unaudited)
Unaudited Consolidated Statements of Earnings and Retained Earnings
Year ended March 31 (in thousands
of dollars, except per share data) 2007 2006(x) 2005(x)
-------------------------------------------------------------------------
EARNINGS
Revenues:
Sales, net of excise duty and taxes 618,559 607,165 598,396
Investment income 9,029 5,291 5,906
---------------------------------
Total revenues 627,588 612,456 604,302
Costs:
Operating costs excluding amortization 327,653 318,439 324,266
---------------------------------
Earnings before interest, taxes and
amortization 299,935 294,017 280,036
Amortization 12,339 10,663 9,574
Interest expense
- Long-term debt (note 7) 8,328 8,328 8,958
- Other 61 197 159
---------------------------------
Earnings before income taxes and
minority interest 279,207 274,829 261,345
Income taxes (note 11)
- Current 121,878 106,584 106,589
- Future (8,456) 2,530 (838)
---------------------------------
Total income taxes 113,422 109,114 105,751
---------------------------------
Earnings before minority interest 165,785 165,715 155,594
Minority interest 66,023 66,251 62,597
---------------------------------
Earnings for the year 99,762 99,464 92,997
---------------------------------
---------------------------------
Earnings per common share (notes 3
and 8)
- Basic 1.47 1.47 1.38
---------------------------------
---------------------------------
- Diluted 1.46 1.45 1.37
---------------------------------
---------------------------------
RETAINED EARNINGS
Balance at beginning of year 68,513 151,734 129,628
Earnings for the year 99,762 99,464 92,997
---------------------------------
168,275 251,198 222,625
Dividends paid:
Common Shares
(2007 - $1.20 per share, 2006 -
$2.70(xx), 2005 - $1.05) (81,630) (182,685) (70,891)
---------------------------------
Balance at end of year 86,645 68,513 151,734
---------------------------------
---------------------------------
(x) Restated - See note 2
(xx) Includes special dividend of $1.50 per share paid on June 17, 2005
Rothmans Inc. and subsidiary companies (unaudited)
Unaudited Consolidated Balance Sheets
March 31 (in thousands of dollars) 2007 2006 2005
-------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents 75,228 48,364 23,255
Short-term investments 96,987 81,867 168,740
Accounts receivable 8,851 10,319 30,052
Inventories (note 5) 201,637 206,433 209,819
Prepaid expenses 1,969 1,835 1,322
Future income taxes (note 11) 3,418 - -
---------------------------------
Total current assets 388,090 348,818 433,188
Property, plant and equipment (note 6) 71,023 76,298 69,149
Future income taxes (note 11) 11,339 6,301 8,831
Prepaid pension benefit cost (note 10) 12,958 13,295 12,003
Other assets 2,517 2,887 3,290
---------------------------------
485,927 447,599 526,461
---------------------------------
---------------------------------
LIABILITIES
Current Liabilities
Accounts payable and accrued
liabilities 38,067 38,402 47,445
Excise and other taxes payable 69,471 66,204 77,511
Dividend payable to minority
shareholder of subsidiary company - 10,761 -
Income taxes payable 31,939 20,437 21,475
---------------------------------
---------------------------------
Total current liabilities 139,477 135,804 146,431
Other long-term liabilities 17,735 6,615 2,167
Other employee future benefits
(note 10) 35,915 33,444 33,497
Long-term debt (note 7) 149,794 149,751 149,708
Minority interest in subsidiary
company 8,828 8,125 950
---------------------------------
351,749 333,739 332,753
---------------------------------
SHAREHOLDERS' EQUITY
Capital stock (notes 8 and 9) 47,533 45,347 41,974
Retained earnings 86,645 68,513 151,734
---------------------------------
Total shareholders' equity 134,178 113,860 193,708
---------------------------------
485,927 447,599 526,461
---------------------------------
---------------------------------
Rothmans Inc. and subsidiary companies (unaudited)
Unaudited Consolidated Statements of Cash Flows
Year Ended March 31 (in
thousands of dollars) 2007 2006 2005
-------------------------------------------------------------------------
Cash provided by (used in):
OPERATING ACTIVITIES
Earnings for the year 99,762 99,464 92,997
Adjusted for non-cash items
Amortization of property, plant and
equipment 12,066 10,390 8,659
Amortization of financing charges and
bond discount 273 273 915
Minority interest 66,023 66,251 62,597
Future income taxes (8,456) 2,530 (838)
Loss (gain) on disposal of property,
plant & equipment (217) 44 150
Defined & other employee future
benefits expense 8,756 5,014 7,681
Defined & other employee future
benefits funding (5,948) (6,359) (4,888)
Share option compensation cost - - 1,030
Long-term incentive plan 11,120 4,448 699
---------------------------------
183,379 182,055 169,002
Changes in non-cash operating working
capital (note 4) 20,704 1,391 (6,281)
---------------------------------
204,083 183,446 162,721
---------------------------------
INVESTING ACTIVITIES
Additions to property, plant &
equipment, net (6,574) (17,583) (21,666)
Proceeds on disposal (purchase) of
short-term investments (15,120) 86,873 (30,811)
---------------------------------
---------------------------------
(21,694) 69,290 (52,477)
---------------------------------
FINANCING ACTIVITIES
Dividends paid
By the Company (81,630) (182,685) (70,891)
By a subsidiary company to minority
shareholder (76,081) (48,315) (63,214)
Proceeds on issuance of bond - - 149,697
Repayment of long-term debt - - (150,000)
Payment of financing charges on
issuance of bond - - (1,634)
Proceeds on issuance of common shares 2,186 3,373 2,075
---------------------------------
(155,525) (227,627) (133,967)
---------------------------------
Increase (decrease) in cash and cash
equivalents 26,864 25,109 (23,723)
Cash and cash equivalents at beginning
of year 48,364 23,255 46,978
---------------------------------
Cash and cash equivalents at end of
year 75,228 48,364 23,255
---------------------------------
---------------------------------
Supplemental cash flow disclosures (note 4)
Rothmans Inc. and subsidiary companies (unaudited)
Notes to Unaudited Consolidated Financial Statements
(Tabular amounts are in thousands of dollars, except for share and per
share data or as otherwise indicated)
1. Summary of significant accounting policies
The consolidated financial statements of Rothmans Inc. (the Company) are
prepared on the historical cost basis in accordance with Canadian
generally accepted accounting principles.
a) Principles of consolidation
The consolidated financial statements include the accounts of the Company
and all subsidiaries including its 60% owned subsidiary, Rothmans, Benson
& Hedges Inc. (RBH).
b) Use of estimates
The preparation of consolidated 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 may undertake in the future, actual results
could differ from those estimates.
c) Revenue recognition
Sales of products are recognized upon the transfer of risks and rewards
of ownership to the customer, which occurs upon delivery and when
ultimate collection is reasonably assured. Sales are reported net of
excise duty and taxes, discounts, allowances and returns. The Company
also deducts from sales consideration provided to customers and
retailers. The Company does not have any unusual credit terms or rights
of return or refunds that would affect revenue recognition.
d) Inventories
Inventories are stated at the lower of cost and net realizable value.
Cost is determined by the first-in, first-out (FIFO) method for all
inventories.
e) Property, plant and equipment
Property, plant and equipment are recorded at cost and adjusted to fair
market value when the carrying amount is higher than the sum of
undiscounted future cash flows. Amortization is provided on a
straight-line basis over the estimated service lives of the assets, which
are as follows for the principal asset categories:
Land improvements ............................................. 10 years
Buildings ..................................................... 30 years
Machinery and equipment ....................................... 10 years
Computer equipment ............................................. 3 years
Motor vehicles ................................................. 5 years
Leasehold improvements ........... term of lease, not to exceed 10 years
f) Employee future benefits
The cost of pension benefits earned by employees covered under defined
benefit plans is determined using the projected benefit method pro-rated
on service, and is charged to expense as services are rendered.
Adjustments arising from plan amendments, changes in assumptions,
experience gains and losses are amortized on a straight-line basis over
the estimated average remaining service lives of the employee groups,
using the corridor approach. Defined benefit pension plan assets are
valued at fair market value. The cost of post-employment benefits other
than pensions is recognized on an accrual basis over the working lives of
employees.
g) Future income taxes
Future income tax assets and liabilities are recorded on the difference
between the accounting carrying values of assets and liabilities and the
tax cost basis of these assets and liabilities based on substantively
enacted tax laws and rates.
The Company reviews the value of its future income tax assets and
liabilities quarterly and records adjustments, as necessary, to reflect
the estimated realizable amounts of its future income tax assets and
liabilities. The Company expects that it will realize its future income
tax assets and liabilities in the normal course of operations.
h) Marketing
Marketing costs, including those related to the introduction of new
brands, are charged against earnings during the year in which they are
incurred.
i) Earnings per common share (EPS)
Basic EPS is calculated by dividing the earnings by the weighted average
of the common shares outstanding during the year. Diluted EPS is
calculated using the treasury stock method of calculating earnings per
share amounts whereby any proceeds from the exercise of stock options or
other dilutive instruments are assumed to be used to purchase common
shares at the average market price during the year.
j) Stock-based compensation plans
The Company has stock-based compensation plans as described in note 9.
The Company expenses the fair value of stock options over the vesting
period. The amount paid by employees on exercising stock options is
credited to share capital. The Company's contributions under the employee
share purchase plan are charged to earnings as purchases are made.
k) Cash and cash equivalents
Cash and cash equivalents are comprised of cash and short-term deposits
with original maturities of three months or less.
l) Financial instruments
The fair values of short-term investments, accounts receivable, other
receivables, deposits, accounts payable and accrued liabilities as
recorded in the consolidated balance sheets approximate their carrying
amounts due to the short-term maturities of these instruments.
2. Change in accounting policy
Effective April 1, 2006, the Company adopted Abstract 156 "Accounting By
A Vendor For Consideration Given To A Customer (Including a Reseller of
the Vendor's Products)" issued by the Emerging Issues Committee of the
Canadian Institute of Chartered Accountants. The Abstract addresses the
issue of whether consideration provided by a vendor to a customer is an
adjustment to the selling prices of the products and therefore a
reduction of revenue, or is a cost incurred by the vendor and thus
classified as a cost or expense. The Company evaluated its selling costs
and retroactively reclassified cash consideration given to customers or
resellers of products as an adjustment to the selling prices to reduce
net sales revenue. Sales, net of excise duty and taxes, were reduced by
$47.5 million of reclassified selling costs for the current fiscal year
(2006 -$45.1 million, 2005 - $38.4 million). There was no change in net
earnings from this reclassification.
3. Earnings per share
Earnings per common share is calculated based on a weighted average
number of 68,001,480 (2006 - 67,745,422, 2005 - 67,491,827) shares
outstanding. Diluted earnings per common share is calculated based on
68,399,635 (2006 - 68,385,047, 2005 - 67,871,711) common shares
outstanding, the dilution being due to the issuance of common share
options.
4. Supplemental cash flow disclosures
a) Change in non-cash operating working capital:
2007 2006 2005
---------------------------------
Accounts receivable 1,468 19,733 (126)
Prepaid expenses (134) (513) 801
Inventories 4,796 3,386 (10,878)
Other assets 140 173 210
Accounts payable and accrued
liabilities (335) (9,043) 10,424
Excise and other taxes payable 3,267 (11,307) 1,991
Income taxes payable 11,502 (1,038) (8,703)
---------------------------------
20,704 1,391 (6,281)
---------------------------------
---------------------------------
b) Other:
2007 2006 2005
---------------------------------
Income taxes paid 110,517 106,953 115,185
Interest Paid:
- Long-term debt 8,328 8,328 5,480
- Other 188 347 232
5. Inventories
2007 2006 2005
---------------------------------
Leaf tobacco 86,267 95,542 88,249
Finished goods 93,698 88,839 99,995
Packaging material and other 21,672 22,052 21,575
---------------------------------
201,637 206,433 209,819
---------------------------------
---------------------------------
6. Property, plant and equipment
2007 2006 2005
---------------------------------
Cost
Land and land improvements 1,499 1,499 1,499
Buildings 25,120 24,155 24,269
Machinery and equipment 176,602 170,938 157,869
Computer equipment 11,782 12,008 10,640
Motor vehicles 1,014 1,014 1,007
Leasehold improvements 2,879 2,860 2,752
---------------------------------
218,896 212,474 198,036
Less: Accumulated amortization 147,873 136,176 128,887
---------------------------------
71,023 76,298 69,149
---------------------------------
---------------------------------
Accumulated amortization
Land improvements 145 141 137
Buildings 14,758 14,043 13,383
Machinery and equipment 120,309 110,777 105,852
Computer equipment 9,475 8,188 6,658
Motor vehicles 1,003 992 982
Leasehold improvements 2,183 2,035 1,875
---------------------------------
147,873 136,176 128,887
---------------------------------
---------------------------------
As at March 31, 2007 the cost of property, plant and equipment included
capital projects in progress of $2.1 million (2006 - $12.6 million, 2005 -
$15.5 million) for which no amortization was recorded.
7. Long-term debt
On September 27, 2001, RBH reorganized its capital structure by reducing
its share capital by $150 million and distributed that amount to its
shareholders. This distribution was funded through a $150 million,
five-year, unsecured, floating rate, term loan entered into with a
Canadian bank syndicate, which can be prepaid in whole or in part at any
time at the option of RBH with the principal coming due on
September 28, 2006. During fiscal 2005, RBH fully repaid the floating
rate credit facility by issuing a total of $150 million of senior
unsecured bonds, with a discount of $303,000 to their face value and
carrying a coupon rate of 5.552% payable semi-annually, through a private
placement.
These bonds mature on December 21, 2011 and the principal is repayable in
full at maturity. The bonds are direct senior unsecured and
unsubordinated obligations of RBH ranking pari passu with all other
present and future senior unsecured and unsubordinated indebtedness of
RBH. Under this debt obligation, RBH is subject to certain covenants,
including a maximum debt to EBITDA ratio of 3.0 times on a consolidated
basis. RBH has the right to repay the bonds at any time in whole or in
part, subject to certain "make-whole" provisions.
Financing costs related to this debt issue are being amortized over the
term of the bonds. A total of $0.2 million (2006 - $0.2 million, 2005 -
$0.8 million) was expensed during fiscal 2007, ending the year with
approximately $1.1 million of unamortized financing costs remaining. The
discount of $303,000 on the bonds is also being amortized over the term
of the bonds and a total of $43,000 (2006 - $43,000, 2005 - $11,000) was
expensed for fiscal 2007.
The fair value of RBH's bonds is lower than their carrying value by
$1.1 million, reflecting current market terms and conditions for similar
loans. Fair value has been calculated using the future cash flows
(principal and interest) of the actual outstanding debt instrument,
discounted at the current market rate available to RBH for similar
instruments.
8. Capital stock
Authorized - An unlimited number of common shares
Issued - 68,038,008 (2006 - 67,855,608, 2005 - 67,572,008) common shares
2007 2006 2005
---------------------------------
Balance - April 1 45,347 41,974 38,869
Issuance of shares 2,186 3,373 2,075
Contributed surplus (note 9) - - 1,030
---------------------------------
Balance - March 31 47,533 45,347 41,974
---------------------------------
---------------------------------
During fiscal year 2007, a total of 182,400 (2006 - 283,600, 2005 -
220,800) shares were issued due to the exercise of stock options.
The issuance of shares reflects net proceeds after the special dividend
payment upon the exercise of share options of $0.4 million (2006 -
$0.7 million, 2005 - $0.5 million).
On February 4, 2005, the Company declared a two-for-one stock split to be
effective by way of a stock dividend. The number of common shares
outstanding and all share related data were adjusted retroactively for
the stock split.
9. Stock-based compensation plans
The details of the Company's share option plan and employee share
purchase plan are as follows:
a) Share option plan
In March of 2000, the Board of Directors of the Company approved a share
option plan for the purpose of advancing the interests of the Company
through the attraction, motivation and retention of employees and
officers of the Company and RBH. This plan was subsequently approved by
the Company's shareholders at the annual general meeting in July 2000.
Under this plan, the Company could grant options to its employees for up
to 3.4 million common shares. The exercise price of each option equals
the market price of the Company's common shares as at the date of the
grant. Granted options vest in three equal amounts as the twenty-day
average trading price of the Company's shares exceeds thresholds of 10%,
20% and 30% above the option exercise price. Generally, vested options
may be exercised over a ten-year period from the date of grant. In
certain circumstances, upon exercise, optionees are also entitled to
receive an amount equal to the aggregate of all special dividends paid
since the date of the option grant.
The fair value of each option grant was estimated on the date of grant
using the Binomial option pricing model with the following assumptions:
2007 2006 2005
---------------------------------
Risk-free interest rate (%) N/A N/A 4.25(x)
Dividend yield (%) N/A N/A 5.20
Expected lives (years) N/A N/A 6
Volatility (%) N/A N/A 22.00
(x) The risk-free interest rate is the yield for a six-year Government of
Canada bond on the date of grant.
Under the share option plan, as at March 31, 2007, 181,800 (2006 -
181,800, 2005 - 181,800) common shares were issuable. Given the limited
number of common shares available for issuance under the share option
plan, the annual grant of options was discontinued effective fiscal year
2006.
A summary of the status of the Company's employee share option plan as at
March 31, 2007, 2006 and 2005, and changes during the years ending on
those dates is presented below:
2007 2006 2005
------------------------------------------------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Options Shares price Shares price Shares price
-------------------------------------------------------------------------
Outstanding
- Beginning
of year 1,490,800 14.301 1,774,400 14.325 1,556,800 13.281
Granted - - - - 438,400 16.620
Exercised (182,400) 14.378 (283,600) 14.448 (220,800) 11.518
------------------------------------------------------------
Outstanding
- End of
year 1,308,400 14.291 1,490,800 14.301 1,774,400 14.325
------------------------------------------------------------
------------------------------------------------------------
Options
exercisable
at year end 1,308,400 14.291 1,490,800 14.301 1,774,400 14.325
------------------------------------------------------------
------------------------------------------------------------
Weighted
average
fair value
of options
granted
during the
year N/A N/A 2.35
-------- -------- --------
-------- -------- --------
The following table summarizes information about share options
outstanding as at March 31, 2007:
Weighted
average
remaining
Exercise Number contractual Number
price outstanding life exercisable
$
-------------------------------------------------------------------------
8.825(1) 18,000 3.3 18,000
11.500(1) 143,000 4.1 143,000
12.320(2) 322,400 6.1 322,400
14.080(1) 261,400 4.6 261,400
16.125(1) 252,000 5.2 252,000
16.620(2) 311,600 7.1 311,600
----------- -----------
1,308,400 1,308,400
----------- -----------
----------- -----------
(1) Entitled upon exercise to a payment of $4.00 per share (amount equal
to special dividends paid since date of option grant).
(2) Entitled upon exercise to a payment of $1.50 per share (amount equal
to special dividends paid since date of option grant).
b) Employee share purchase plan
The Company has an employee share purchase plan in place to assist
employees in taking an ownership position in the Company. This plan
promotes employee participation in the business, and thus better aligns
their interests with the interests of shareholders. The plan allows every
employee to contribute between 1% to 5% of their base salary toward the
purchase of shares. The Company contributes 35% of each employee's
contributions up to $1,500 per annum. Contributed funds are utilized to
purchase the Company's shares on the open market. The Company also pays
for all fees and transaction costs associated with the purchases.
During fiscal year 2007, a total of 74,210 (2006 - 101,626, 2005 -
88,291) shares of the Company were purchased under the provisions of this
plan.
10. Employee future benefits
The Company provides pension (including both defined benefit and
contribution plans), post-employment, and post-retirement benefits, which
in aggregate are considered employee future benefits. Defined benefit
pension obligations are funded with independent trustees in accordance
with legal requirements.
The defined benefit plan assets were determined using the market value of
plan assets as at March 31, 2007. The most recent actuarial valuations
for the various defined benefit plans were at April 1, 2006 and
December 31, 2006 and valuations are carried out both annually and
biannually depending on the plan. The last actuarial valuation for other
benefits was at April 1, 2005.
The table below provides plan information on the actuarially determined
benefit obligation, the status of plan assets and the net benefit plan
expense for the year:
2007 2006 2005
------------------------------------------------------------
Defined Defined Defined
benefit Other benefit Other benefit Other
pensions benefits pensions benefits pensions benefits
------------------------------------------------------------
Change in
benefit
obligation
Benefit
obligation
- Beginning
of year 151,359 41,675 137,641 42,656 134,464 41,060
Current
service cost 5,087 873 4,717 681 4,222 1,717
Interest cost 7,850 2,112 8,105 2,130 7,914 2,406
Cost for
retirement
window
adjustment 1,300 - - - - -
Actuarial
(gain) loss 10,535 1,004 9,383 (1,608) (693) (341)
Benefits paid (9,918) (2,313) (8,487) (2,184) (8,266) (2,186)
------------------------------------------------------------
Benefit
obligation
- End of
year 166,213 43,351 151,359 41,675 137,641 42,656
------------------------------------------------------------
------------------------------------------------------------
Change in plan
assets
Fair value of
plan assets
- Beginning
of year 161,335 - 153,199 - 145,514 -
Return on plan
assets 12,749 - 12,448 - 13,249 -
Net employer
contributions 3,635 2,313 4,175 2,184 2,702 2,186
Benefits paid (9,918) (2,313) (8,487) (2,184) (8,266) (2,186)
------------------------------------------------------------
Fair value of
plan assets
- End of
year 167,801 - 161,335 - 153,199 -
------------------------------------------------------------
------------------------------------------------------------
Plan status
Funded surplus
(deficit) 1,588 (43,351) 9,976 (41,675) 15,558 (42,656)
Unrecognized
loss 18,867 5,882 11,530 6,453 5,371 7,159
Unrecognized
transition
(asset)
liability (8,450) 1,554 (9,276) 1,778 (10,103) 2,000
Unrecognized
past service 953 - 1,065 - 1,177 -
------------------------------------------------------------
Prepaid
(accrued)
benefit cost 12,958 (35,915) 13,295 (33,444) 12,003 (33,497)
------------------------------------------------------------
------------------------------------------------------------
Included in the above prepaid defined benefit obligation and fair value
of plan assets are the following amounts in respect of one plan that is
not fully funded:
2007 2006 2005
---------------------------------
Defined benefit pensions
Benefit obligation - End of year 42,800 36,168 33,330
Fair value of plan assets - End of year 33,226 30,339 27,177
---------------------------------
Funded deficit 9,574 5,829 6,153
---------------------------------
---------------------------------
As at March 31, 2007 approximately 50% (2006 - 50%, 2005 - 49%) of the
defined benefit pension plan assets were invested in equities, 37%
(2006 - 38%, 2005 - 38%) in fixed income securities, and 13% (2006 - 12%,
2005 - 13%) in cash and cash equivalents. The plan assets for the current
fiscal year included investments in the Company's shares of $0.5 million
or 0.3% of defined benefit plan assets (2006 - $0.3 million or 0.2%,
2005 - $0.4 million or 0.3%).
The defined contribution plan assets as at March 31, 2007 were
$103.4 million (2006 - $95.2 million, 2005 - $82.1 million).
The significant actuarial assumptions used to arrive at the net defined
benefit obligations are shown below:
2007 2006 2005
------------------------------------------------------------
Defined Defined Defined
benefit Other benefit Other benefit Other
pensions benefits pensions benefits pensions benefits
-------------------------------------------------------------------------
Weighted
average
assumptions
(%)
Discount
rate (%) 5.25 5.25 5.25 5.25 6.00 6.00
Expected
return on
plan
assets (%) 7.00 - 7.00 - 7.00 -
Rate of
compensation
increase (%) 4.50 4.00 4.50 4.00 4.50 5.00
Beginning in 2006 the health care cost trend rate, mainly of prescription
drugs, was 9.5%, which is graded down by 0.5% each year until it reaches
4.5% in 2016.
Total cash payments by the Company for all employee future benefits for
2007 was $9.3 million (2006 - $9.5 million and 2005 - $8.1 million)
The Company's defined benefit pension plan and other benefits expense is
as follows:
2007 2006 2005
------------------------------------------------------------
Defined Defined Defined
benefit Other benefit Other benefit Other
pensions benefits pensions benefits pensions benefits
------------------------------------------------------------
Current
service cost 5,087 873 4,717 681 4,222 1,717
Interest cost 7,850 2,112 8,105 2,130 7,914 2,406
Actual return
on plan
assets (12,749) - (12,448) - (13,249) -
Actuarial
(gains)
losses 10,535 1,004 9,383 (1,608) (693) (341)
------------------------------------------------------------
Cost arising
in the year 10,723 3,989 9,757 1,203 (1,806) 3,782
Difference
between
costs
arising and
costs
recognized
in respect of
Return on plan
assets 2,930 - 3,023 - 4,249 -
Actuarial loss
(gain) (10,267) 571 (9,182) 706 701 667
Transitional
obligation (826) 224 (827) 222 (819) 795
Past service
cost 112 - 112 - 112 -
Adjustment for
retirement
window 1,300 - - - - -
------------------------------------------------------------
Net expense
recognized 3,972 4,784 2,883 2,131 2,437 5,244
------------------------------------------------------------
------------------------------------------------------------
RBH's defined contribution pension plan expense for fiscal year 2007 was
$3.4 million (2006 - $3.1 million, 2005 - $3.2 million).
The following table shows the effect of a one-percentage point change in
assumed health costs:
1% 1%
increase decrease
----------------------
Effect on other benefits - total service and
interest cost 526 (361)
Effect on other benefits - accrued benefit
obligation 5,867 (3,792)
11. Income taxes
The consolidated effective income tax rate is as follows:
2007 2006 2005
---------------------------------
Combined federal and provincial basic
rates 33.3 33.0 33.2
Manufacturing and processing tax credits (0.5) (0.5) (0.5)
Surtaxes and other 7.8 7.2 7.8
---------------------------------
Effective income tax rate 40.6 39.7 40.5
---------------------------------
---------------------------------
Future income tax assets and liabilities are recognized on temporary
differences between the financial and tax bases of existing assets and
liabilities as follows:
2007 2006 2005
---------------------------------
Future income tax assets
Deferred Compensation 8,987 - -
Other employee future benefits 14,897 14,492 14,425
Other 551 247 270
---------------------------------
24,435 14,739 14,695
---------------------------------
Future income tax liabilities
Property, plant and equipment 4,515 2,896 844
Pension asset 5,163 5,542 5,020
---------------------------------
9,678 8,438 5,864
---------------------------------
Net future income tax asset 14,757 6,301 8,831
Less: Future income tax assets - current 3,418 - -
---------------------------------
11,339 6,301 8,831
---------------------------------
---------------------------------
12. Commitments
In the normal course of business, the Company and its subsidiaries have
commitments in respect of capital expenditures, purchase of tobacco and
other obligations.
Commitments under operating lease obligations relate to fleet
automobiles, warehouses and offices. The following table summarizes the
payments due after March 31, 2007 for lease and other obligations:
2008 4,970
2009 2,981
2010 2,911
2011 2,701
2012 2,505
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16,068
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---------
13. Related party transactions
RBH entered into various related party transactions during the year with
subsidiaries and affiliates of Altria Group, Inc.
In the ordinary course of business, RBH purchased various management
advisory services in the amount of $1.2 million (2006 - $1.3 million,
2005 - $1.3 million), tobacco blends, raw materials and marketing
materials totalling $1.7 million (2006 - nil, 2005 - nil) and had sales
of $3.1 million (2006 - $5.1 million, 2005 - $4.3 million) to related
parties. In fiscal 2007, RBH entered into a trademark license agreement
relating to the manufacture, distribution and sale of the ROOFTOP brand
in Canada. Total royalty expense for the year amounted to $0.7 million
(2006 - nil, 2005 - nil). The net receivable as at March 31, 2007, owing
to RBH was $0.5 million (2006 - $0.7 million, 2005 - $0.8 million).
14. Litigation, claims and contingencies
The Company and RBH are subject to a number of claims and potential
claims, investigations and legislation as described below:
- In February 2005, the Quebec Superior Court authorized two claims
brought by plaintiffs resident in the Province of Quebec to proceed
as class actions against RBH, Imperial Tobacco Limited and
JTI-Macdonald Corp. The court consolidated the two actions; one
representing a class consisting of certain persons residing in Quebec
who allegedly are or have been addicted to the nicotine contained in
cigarettes manufactured by the respondents which is seeking
$17.8 billion in damages, the other representing certain persons who
have allegedly suffered certain diseases as a result of smoking
cigarettes manufactured by the respondents, as well as the legal
heirs of deceased persons included in the group, which is seeking
$5 billion in damages. The claims include allegations of failure to
warn, addiction, nicotine manipulation, advertising directed at young
people, false advertising and inadequate warnings. The claimants are
seeking on behalf of themselves and each class member general and
exemplary damages to be assessed and the establishment of a fund with
the object of limiting cigarette consumption, supporting medical
research into tobacco linked illnesses and reimbursing the Province
of Quebec for certain health care costs incurred by it in treating
these illnesses. Statements of claim were filed by the plaintiffs and
oral examinations of the plaintiffs have commenced.
- Illegal smuggling of tobacco products into Canada occurred during the
late 1980s and early 1990s coincident with the imposition by the
federal and provincial governments of significant new taxes and
duties on tobacco products. Such taxes and duties were, however, not
imposed on tobacco products exported out of Canada. In February 1994,
in an effort to curb the high level of smuggling of tobacco products
into Canada, the federal and certain provincial governments reduced
taxes to earlier levels. Exports of tobacco products by the major
Canadian tobacco manufacturers increased significantly from 1991 to
1994.
In February 2003, the RCMP filed criminal charges against another
Canadian tobacco products supplier and related parties alleging
violations of the Criminal Code (Canada) in connection with the sale
and export of tobacco products during the early 1990s. In January
2006, a former executive of that company pled guilty to charges of
defrauding the federal government of tax revenue and was sentenced to
eight months house arrest in return for providing evidence against
that company and certain of its executives. A preliminary hearing
with respect to the other defendants concluded in 2006 and the
court's decision is expected at the end of May 2007. In August 2003,
the Government of Canada initiated a civil lawsuit and in August 2004
the Minister of Revenue for the Province of Quebec initiated tax
reassessment proceedings against this supplier and related parties
seeking to recover taxes allegedly owing in connection with the sale
of such exported products. In September 2004, this manufacturer was
granted protection from creditors under the Companies Creditors'
Arrangement Act (Canada) and a stay of the civil proceedings brought
by the Government of Canada and the Minister of Revenue for the
Province of Quebec. In November 2004, representatives of the RCMP
conducted a search of the largest Canadian tobacco products supplier
as part of its investigations into sales of tobacco products exported
from Canada.
RBH is currently the subject of an ongoing investigation by the RCMP
relating to RBH's sales of products exported from Canada in the
period 1989-1996. This investigation, of which RBH was notified in
January 2002, is related to allegations that tobacco products
manufactured by RBH were illegally smuggled back into Canada during
this period without payment of applicable excise and tobacco taxes
and duties. Although no action has been commenced and no charges laid
against the Company or RBH or any of its present or former employees,
officers or directors, the Company and RBH believe that the RCMP and
federal and provincial governments are contemplating laying charges
or commencing other legal proceedings involving the Company or RBH
relating to these allegations. The former federal Minister of Justice
previously stated that if the Government of Canada believes that it
has sufficient evidence to move against any company, it will do so.
- In January 2001, the Province of British Columbia initiated a lawsuit
in the Supreme Court of British Columbia against RBH, the Company and
numerous other Canadian and international tobacco companies and
various tobacco trade associations seeking unspecified damages in an
amount to cover the costs that allegedly have been, or will be,
incurred by the Government of British Columbia in providing health
care benefits to British Columbia residents who have allegedly
suffered smoking-related illnesses. The action was brought pursuant
to the Tobacco Damages and Health Care Costs Recovery Act (British
Columbia), which purports to facilitate individuals and the
provincial government in suing tobacco manufacturers. This
legislation was enacted in January 2001, following a successful
challenge (decided in March 2000 by the Supreme Court of British
Columbia) by a number of tobacco manufacturers of similar predecessor
legislation enacted in 1998. RBH and other tobacco product
manufacturers challenged the constitutional validity of the new
legislation. However, in May 2004, the British Columbia Court of
Appeal, overturning a lower court decision, ruled that the
legislation was constitutionally valid. RBH and other tobacco product
manufacturers appealed this decision to the Supreme Court of Canada,
which dismissed the appeal in September 2005. The action is now
proceeding.
- In May 1997, a statement of claim was issued against RBH and Imperial
Tobacco Limited by a single plaintiff, Mirjana Spasic, in the Ontario
Superior Court of Justice claiming damages in the amount of
$1,000,000, reimbursement for moneys expended on the purchase of the
defendants' cigarette products and aggravated, punitive and exemplary
damages. The claim is based upon allegations of negligent and
intentional acts, spoliation, negligent misrepresentation, deceit,
conspiracy, product liability and breaches of express and implied
warranty. The action is proceeding. RBH has filed its Statement of
Defence and will continue to defend the case.
- In September 2006, RBH received a complaint from ITL and one of its
affiliates alleging that RBH's ROOFTOP product packaging infringed
their rights in respect of the MARLBORO trade-mark registration in
Canada. RBH and Philip Morris Products S.A. ("PMPSA"), the owner of
the ROOFTOP design in Canada, commenced an action in the Federal
Court seeking a declaration that the use of the ROOFTOP design in
association with RBH's cigarette products does not infringe upon any
rights which ITL or its affiliate may have in respect of the MARLBORO
trade-mark registration in Canada. In their statement of defence, ITL
and its affiliate have counterclaimed against RBH and PMPSA seeking,
among other things, a declaration that the ROOFTOP packaging
infringes their trade-mark rights, a permanent injunction restraining
the sale and distribution of cigarettes in association with the
ROOFTOP packaging in Canada as well as unspecified damages or an
accounting of profits, at their election. RBH and PMPSA deny the
allegations contained in ITL's counterclaim, and are vigorously
defending the counterclaim.
- In 2002, the Province of Newfoundland and Labrador enacted the
Tobacco Health Care Costs Recovery Act. This legislation allows the
provincial government to bring an action against tobacco product
manufacturers for recovery of health care costs that allegedly have
been or will be incurred by the Province in respect of alleged
smoking-related illnesses. The Province also announced that it had
retained a U.S. law firm to assist the Province in bringing a claim
against tobacco product manufacturers for recovery of these health
care costs. At this time, no action has been commenced.
- In December 2005, Nova Scotia passed the Tobacco Damages and Health-
care Costs Recovery Act. The legislation, which is modeled on the
British Columbia legislation, allows the provincial government to
bring an action against tobacco product manufacturers for the
recovery of health care costs that allegedly have been or will be
incurred by the Province in respect of alleged tobacco related
diseases. No action has been commenced under this legislation.
- In June 2006, the New Brunswick government passed the Tobacco Damages
and Health Care Costs Recovery Act. The Act, which is also modeled on
the British Columbia legislation, allows the Province to bring an
action against tobacco product manufacturers for the recovery of
health care costs that allegedly have been or will be incurred by the
Province in respect of alleged tobacco related diseases. No action
has been commenced under this legislation, however the New Brunswick
government announced in December 2006 that it had begun the process
to hire a qualified law firm or consortium of law firms to represent
the Province.
- In June 2006, the Manitoba government passed the Tobacco Damages and
Health Care Costs Recovery Act. The legislation is also similar to
that of British Columbia. No action has been commenced under this
legislation.
- In November 2006, the Saskatchewan government announced that it was
introducing The Tobacco Damages and Health Care Costs Recovery Act.
The legislation, which is similar to that of British Columbia, has
been passed and will come into force upon proclamation.
The Company and RBH deny the allegations in the claims, pending and
threatened, described above and intend to vigorously defend the actions.
All of the claims, potential claims and contingencies described above
remain at an early stage and an estimate of the loss which might be
incurred, if any, cannot be determined. The outcome of the claims,
potential claims and contingencies described above is uncertain. The
Company and RBH cannot predict the outcome of the possible effects of
continuing investigations. If any of the claims, potential claims and
contingencies described above are resolved detrimentally to the Company
or RBH they could involve significant damages, which either individually
or in aggregate would have a significant adverse effect on the financial
condition of the Company, and the Company and RBH may not have the
resources to satisfy the resolution of such claims, potential claims or
contingencies.
15. Comparative figures
Certain comparative figures have been reclassified to conform to the
presentation adopted in the current fiscal year.