TORONTO, July 24 /CNW/ - Rothmans Inc. today announced record results for the first quarter of fiscal 2008, which ended June 30, 2007.
Rothmans' earnings for the first quarter were $33.8 million, or $0.50 basic earnings per share, compared with $29.3 million or $0.43 basic earnings per share in the same quarter of fiscal 2007.
Sales at 60%-owned subsidiary Rothmans, Benson & Hedges Inc., net of excise duty and taxes, increased to $177.4 million in the most recent quarter compared with $162.9 million in the first quarter of fiscal 2007.
RBH's EBITDA margin for the first quarter was 55.5% compared with 52.6% in the first quarter a year ago, primarily as a result of price increases across all product categories, partially offset by volume shifts from the mid-tier to the lower priced tier of the cigarette price category and higher general and administrative costs. In the quarter ended March 31, 2007, RBH's EBITDA margin was 39.4%.
RBH shipped a total of 2.8 billion equivalent sticks into the domestic market during the first quarter of fiscal 2008, representing a 1.2% increase compared to fiscal 2007. The increase was driven by higher price category cigarette volumes offsetting declines in premium cigarette and fine cut volumes.
"Rothmans shareholders benefited from the improvement in all significant measures of financial performance at RBH including sales, earnings and cash flow" said John Barnett, President and Chief Executive Officer of Rothmans Inc. and RBH.
Outlook
"Even with these good results, we need to recognize that factors such as illegal and untaxed products and competition have not disappeared" said Mr. Barnett. "With our strong product offerings we feel RBH is well positioned to compete within the tax paid industry, but remain highly concerned about the continuing impact of contraband product."
Dividend Declared
The Board of Directors of Rothmans Inc. declared a quarterly dividend of $0.30 per share payable on September 17, 2007 to shareholders of record at the close of business on September 3, 2007.
Analyst Conference Call and Webcast
Because the Company's annual meeting of shareholders is being held this morning, Rothmans Inc. management will hold a conference call with analysts to discuss the first quarter results at 3:00 p.m. Toronto time today, Tuesday, July 24, 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 via the Company's investor website, www.rothmansinc.ca. At the completion of the conference call, a recording will be available until August 1st by calling 1-800-408-3053 and entering reservation number 3230065. 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 761 people at its head office in Toronto, its sales offices across Canada and its manufacturing facilities in Brampton, Ontario and Quebec City, Quebec where it has been operating for over 100 years. Rothmans is Canada's only publicly traded company with interests exclusively in the tobacco industry and is listed on the Toronto Stock Exchange under the symbol ROC.
Management's Discussion and Analysis
for the three months ended June 30, 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 quarter ended June 30, 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 period ended June 30, 2007, the annual MD&A contained in the 2007 Annual Report and the audited annual consolidated financial statements of the Company 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 July 23, 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 Controls and Procedures and Internal Controls over Financial
Reporting
The Chief Executive Officer and Chief Financial Officer have designed disclosure controls and procedures, or caused them to be designed under their supervision, to provide reasonable assurance that material information relating to the Company and its consolidated subsidiaries would be made known to them by others within those entities.
With respect to internal controls over financial reporting, the Chief Executive Officer and Chief Financial Officer have designed them, or caused them to be designed under their supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with Generally Accepted Accounting Principles.
During the Company's most recent interim period, there were no changes in the Company's internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company's internal controls 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 July 23, 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 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 June 30, 2007, and "prior quarter" refers to the three months ended March 31, 2007. "Fiscal 2008" or "recent fiscal year" refers to the fiscal year ending March 31, 2008 and other similar references to a fiscal year (e.g., fiscal 2007) refer to the fiscal year then ended on March 31 (e.g., March 31, 2007).
"The three major suppliers of tobacco products" or "three majors" refers to RBH, Imperial Tobacco Canada Limited (ITL) and JTI-MacDonald Corp. (JTI). "Premium cigarettes" refers to tailor-made cigarettes sold at premium retail prices, "cigarette price category" refers to cigarettes sold at less-than-premium prices and "price category" refers to the combination of the cigarette price category and the fine cut category (loose tobacco and pre-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 supplier ships directly to retail accounts instead of through a wholesale network.
New Accounting Pronouncements
As required by the Canadian Institute of Chartered Accountants ("CICA"), on April 1, 2007, the Company adopted CICA Handbook Section 3855 "Financial Instruments - Recognition and Measurement", Section 3861 "Financial Instruments - Disclosure and Presentation" and Section 1530" Comprehensive Income."
Section 3855 and 3861 prescribe 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. The prospective adoption of this new standard resulted in changes in the accounting and presentation for financial instruments as well as the recognition of certain transitional adjustments that have been recorded in opening retained earnings as described in note 2. As required by the implementation of the new standard, the comparative Interim Consolidated Financial Statements have not been restated.
CICA Handbook Section 1530, "Comprehensive Income," introduces a new requirement to temporarily present certain gains and losses outside net income in other comprehensive income or loss. Refer to note 2 for more details.
The implementation of these Handbook requirements did not have a material impact on the financial results of the Company.
Industry Overview
Although it is not possible to provide a meaningful estimate of the recent quarter tax paid industry volumes, RBH management believes that a number of factors continue to affect overall industry shipments, including:
- Taxes - High taxes reflected in the selling price to the consumer
contribute to probable increases in the presence of contraband
product in the domestic market.
- Seasonal trends in consumer purchasing patterns - Over the past two
fiscal years, the period between April and September has demonstrated
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.
- 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 the first quarter, in April 2007, the Province of Alberta raised its Provincial Tobacco Tax on cigarettes and fine cut products by $5.00 per carton, or equivalent stick basis.
Results at Rothmans, Benson & Hedges Inc.
In the quarter ended June 30, 2007, RBH shipped a total of 2.8 billion equivalent sticks into the domestic market, a 1.2% increase over the comparable period of the prior year. The increase was driven by higher price category cigarette volumes offsetting declines in premium cigarettes and fine cut volumes. Compared to the prior quarter, shipment volumes increased 17.8%. In addition to normal seasonality within the domestic industry, volumes in the recent quarter were also likely positively affected by wholesaler purchasing patterns prior to manufacturer price increases which occurred during the recent quarter. As previously disclosed, the industry no longer shares industry volumetric data through the Canadian Tobacco Manufacturers Council. Therefore, RBH no longer has access to information on total tax paid industry volumes, and is unable to determine the impact of the volume increase experienced in the recent quarter on RBH's market share.
RBH's recent quarter EBITDA margin was 55.5% compared with 52.6% in the quarter ended June 30, 2006 and 39.4% in the quarter ended March 31, 2007. The recent quarter increase in EBITDA margin over the comparable period of the prior year is predominantly due to price increases across all product categories, partially offset by volume shifts from the mid-tier to the lower priced tier of the cigarette price category and higher general and administrative costs.
During the recent quarter, RBH launched the Davidoff and Benson & Hedges Superslims brands into the premium category. RBH also 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.
During the recent quarter RBH announced changes to its wholesale distribution terms, moving from a 2% prompt payment discount to a fee-for-service model. These changes are effective July 30, 2007 except in Newfoundland and Labrador where terms have not changed.
Subsequent to quarter-end, there was an additional price increase of $1.00 per carton on Mark Ten and Canadian Classics price category brands in Quebec and Ontario respectively.
Rothmans Inc. Financial Results
Basic earnings per share were $0.50 in the recent quarter versus $0.43 in the comparable period of the prior year. RBH's sales, net of excise duty and taxes, of $177.4 million in the recent quarter were $14.5 million higher than in the comparable period of the prior year. Increased volumes of RBH price category cigarettes, together with price increases, compensated for volume declines in premium cigarettes and fine cut products during the quarter.
Investment income increased to $2.7 million in the recent quarter from $2.0 million in the comparable period of the prior year mainly due to the higher average cash and cash equivalents balances held during the quarter ended June 30, 2007.
Operating costs increased to $80.1 million in the recent quarter versus $78.1 million in the comparable period of the prior year, mainly due to higher general and administrative costs.
Income tax expense was $37.5 million in the recent quarter, resulting in an effective tax rate for the fiscal year to date of 40.0%. The Company expects its effective tax rate for fiscal 2008 to be 40.0%.
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 $55.5 million in the recent quarter compared with $50.5 million in the comparable quarter of 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 the recent quarter, the Company paid dividends of $20.4 million, representing a dividend of $0.30 per share.
Cash Resources
Cash and short-term investments of $169.5 million at June 30, 2007 represented the consolidated cash resources of the Company versus $172.2 million at March 31, 2007. The decrease in cash and short-term investments is predominantly due to earnings from RBH's operations and normal quarterly fluctuations in RBH's working capital requirements. On a non-consolidated basis, Rothmans held cash and cash equivalents of $135.1 million at June 30, 2007, an increase from $120.8 million at March 31, 2007. This increase results from dividends paid by the Company which are more than offset by dividends received by the Company from RBH.
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 unaudited consolidated financial statements and accompanying notes. Although these estimates are based on management's best knowledge of current events and actions that the Company and RBH may undertake in the future, actual results could differ from these estimates. Other than as discussed below, there are no critical accounting estimates that require disclosure or discussion in this report.
Employee Future Benefits
The actuarial assumptions used to determine the benefit obligation and associated expense of RBH's various defined benefit pension plans were not adjusted in the recent quarter. Therefore, the discount rate, or the expected return on plan assets remain as described in the annual MD&A for the year ended March 31, 2007.
Litigation Contingent Liabilities
As discussed in the annual MD&A for the year ended March 31, 2007, 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 liability, if any, that might result from claims or investigations and neither the Company nor RBH has accrued for potential liabilities. 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.
Risks and Uncertainties
Various legal actions, proceedings and claims arising out of the sale, distribution, manufacture, development, advertising and marketing of tobacco products are pending, have been threatened or may be instituted against the Company and RBH. These actions, claims and proceedings, both pending and threatened, are described in note 14 to the audited annual consolidated financial statements of the Company for the year ended March 31, 2007 and in note 9 to the interim unaudited consolidated financial statements for the three months ended June 30, 2007.
As previously disclosed, the three majors challenged the constitutionality of the Tobacco Act (Canada) which was enacted by the federal government in 1997. Last month, the Supreme Court of Canada issued its decision on the constitutionality of the Tobacco Act (Canada), allowing the appeals of the federal government and dismissing the cross appeals of the three major suppliers of tobacco products. Essentially, the Supreme Court of Canada ruled that the legislative and regulatory provisions at issue, when properly interpreted, were constitutionally valid.
Additional information concerning legal matters affecting the Company and RBH are contained in the Company's filings with securities regulatory authorities including the Company's 2007 Annual Report and 2007 Annual Information Form (in particular under "Legal Proceedings") which can be accessed at www.sedar.com or on the Company's website at www.rothmansinc.ca.
Outlook
It is believed that the presence of contraband remains a key factor in affecting 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 cause further declines in tax paid industry volumes in the future resulting in a negative impact on RBH's sales volumes.
Competition by each of the three major suppliers of tobacco products in the cigarette price category has 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 litigation, government and other
claims and charges;
- 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 based on changes which RBH has made in its
wholesale distribution arrangements;
- 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.
Interim Consolidated Statements of Earnings and Retained Earnings
Three months ended June 30
(In thousands of dollars,
except per share amounts) 2007 2006
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EARNINGS
Revenues:
Sales, net of excise duty and taxes 177,431 162,886
Investment income 2,677 1,953
-------------------
Total revenues 180,108 164,839
Costs:
Operating costs excluding amortization 80,079 78,121
-------------------
Earnings before interest, income taxes,
amortization and minority interest 100,029 86,718
Amortization 3,929 2,865
Interest expense
- Long-term debt 2,080 2,080
- Other 242 3
-------------------
Earnings before income taxes and minority interest 93,778 81,770
Income taxes
- Current 36,996 32,192
- Future 498 775
-------------------
Total income taxes 37,494 32,967
-------------------
Earnings before minority interest 56,284 48,803
Minority interest 22,456 19,532
-------------------
Earnings for the period 33,828 29,271
-------------------
Earnings per common share (note 3)
- Basic 0.50 0.43
-------------------
- Diluted 0.49 0.43
-------------------
RETAINED EARNINGS
Balance at beginning of period 86,645 68,513
Transitional adjustment on adoption of
new accounting policies (note 2) 344 -
-------------------
Balance at beginning of period as restated 86,989 68,513
Earnings for the period 33,828 29,271
-------------------
120,817 97,784
Dividends paid:
Common Shares - (20,419) (20,405)
(Q1 2007 - $0.30 per share)
(Q1 2008 - $0.30 per share)
-------------------
Balance at end of period 100,398 77,379
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-------------------
Rothmans Inc. and subsidiary companies (unaudited)
Interim Consolidated Balance Sheets
As at As at
June 30 March 31
(In thousands of dollars) 2007 2007
-------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents 169,314 75,228
Short-term investments 168 96,987
Accounts receivable 6,275 8,851
Inventories 217,733 201,637
Prepaid expenses 3,343 1,969
Future income taxes 6,109 3,418
-------------------
Total current assets 402,942 388,090
Property, plant and equipment 67,994 71,023
Future income taxes 7,798 11,339
Prepaid pension benefit cost 21,462 12,958
Long-term debt deferred financing charges - 1,102
Other assets 1,403 1,415
-------------------
501,599 485,927
-------------------
-------------------
LIABILITIES
Current Liabilities
Accounts payable and accrued liabilities 39,799 38,067
Excise and other taxes payable 98,124 69,471
Income taxes payable 15,983 31,939
-------------------
Total current liabilities 153,906 139,477
Other long-term liabilities 5,278 17,735
Other employee future benefits 36,214 35,915
Long-term debt 148,76 149,794
Minority interest in subsidiary company 9,314 8,828
-------------------
353,473 351,749
-------------------
SHAREHOLDERS' EQUITY
Capital stock (note 5) 47,728 47,533
Retained earnings 100,398 86,645
-------------------
Total shareholders' equity 148,126 134,178
-------------------
501,599 485,927
-------------------
-------------------
Rothmans Inc. and subsidiary companies (unaudited)
Interim Consolidated Statements of Cash Flows
Three months ended June 30 (In thousands of dollars) 2007 2006
-------------------------------------------------------------------------
Cash provided by (used in):
OPERATING ACTIVITIES
Earnings for the period 33,828 29,271
Adjusted for non-cash items:
Amortization of property, plant and equipment 3,929 2,796
Amortization of financing charges and bond discount 69 69
Non-cash interest 168 -
Minority interest 22,456 19,532
Future income taxes 498 775
Loss on disposal of property, plant & equipment 17 2
Defined & other employee future benefits expense 1,691 1,272
Defined & other employee future benefits funding (9,896) (4,220)
Long-term incentive plan 2,703 1,121
-------------------
55,463 50,618
Changes in non-cash operating working capital (note 4) (16,875) 3,552
-------------------
38,588 54,170
-------------------
INVESTING ACTIVITIES
Additions to property, plant & equipment, net (917) (1,328)
Proceeds on disposal of short-term investments 98,614 81,867
-------------------
97,697 80,539
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FINANCING ACTIVITIES
Dividends paid -
By the Company (20,419) (20,405)
By a subsidiary company to minority shareholder (22,200) (29,641)
Proceeds on issuance of common shares 195 1,955
-------------------
(42,424) (48,091)
-------------------
Increase in cash and cash equivalents 93,861 86,618
Cash and cash equivalents at beginning of period,
after adjustment (note 2) 75,453 48,364
-------------------
Cash and cash equivalents at end of period 169,314 134,982
-------------------
Supplementary Disclosures (note 4)
Rothmans Inc. and subsidiary companies (unaudited)
Notes to the Interim Consolidated Financial Statements (unaudited)
(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 interim consolidated financial statements of Rothmans Inc. (the
"Company") have been prepared in accordance with Canadian generally
accepted accounting principles. The note disclosure in these interim
consolidated financial statements includes only material changes from
the disclosure found in the Company's annual consolidated financial
statements for the year ended March 31, 2007. Therefore, these
interim consolidated financial statements and notes should be read in
conjunction with those statements. These interim consolidated
financial statements follow the same accounting policies as the
Company's audited annual consolidated financial statements, except as
described in note 2.
2. Change in Accounting Policies
Effective April 1, 2007, the Company adopted The Canadian Institute
of Chartered Accountants (CICA) Handbook Section 1530, "Comprehensive
Income"; Section 3855 "Financial Instruments - Recognition and
Measurement" and Section 3861 "Financial Instruments - Disclosure and
Presentation". The prospective adoption of these new standards
resulted in changes in the accounting and presentation for financial
instruments and the recognition of certain transitional adjustments
that have been recorded in opening retained earnings as described
below. There was no change resulting from the adoption of these
standards that required the Company to record other comprehensive
income. The principal changes in the accounting for financial
instruments due to the adoption of these accounting standards are
described below. As required by the standards the comparative Interim
Consolidated Financial Statements (unaudited) have not been restated.
(a) Section 3855 "Financial Instruments - Recognition and
Measurement"
Section 3861 "Financial Instruments - Disclosure and
Presentation"
Under the new standards, financial assets and financial liabilities
are initially recognized at fair value and their subsequent
measurements are dependent on their classification as described
below. Their classification depends on the purpose, for which the
financial instruments were acquired or issued, their characteristics
and the Company's designation of such instruments. The standards
require that all financial assets be classified either as held-for-
trading (HFT), available-for-sale (AFS), held-to-maturity (HTM) or as
loans and receivables. The standards require that all financial
assets, including all derivatives, be measured at fair value with the
exception of loans and receivables, assets classified as HTM and AFS
financial assets that do not have quoted market prices in an active
market.
Classification of financial instruments
The following is a summary of the assets and liabilities the Company
evaluated and elected to apply to its significant categories of
financial instruments outstanding as of April 1, 2007:
Cash Designated as held-for-trading
Cash equivalents and short-term Designated as held-to-maturity
investments or held-for-trading
Accounts receivable Loans and receivables
Accounts payables and accrued Other Liabilities
liabilities
Excise tax and other taxes payable Other Liabilities
Other Long-term liabilities Designated as held-to-maturity
Long-term debt Designated as held-to-maturity
Held-for-trading
HFT financial assets are financial assets typically acquired for
resale prior to maturity. They are measured at fair value at the
balance sheet date. Interest earned and accrued is included in
investment income. The Company designated cash as HFT and it is
measured at fair value as at the balance sheet date. Short term
investments are classified as held-to-maturity or held-for-trading
depending on their nature and the Company's intent. Portfolio equity
investments that are quoted in an active market are designated as
held-for-trading and are accounted for at fair value. There was no
adjustment resulting from this designation.
Held-to-maturity
HTM financial assets are non-derivative financial assets with fixed
or determinable payments and a fixed maturity when the Company has
the intention and the ability to hold these financial assets to
maturity. These financial assets are measured at amortized cost.
Short term investments are classified as held-to-maturity or held-
for-trading depending on their nature and the Company's intent. Short
term investments in debt securities are designated as held-to-
maturity and are accounted for at amortized cost. As at the balance
sheet date, interest income receivable of $0.6 million was included
in cash equivalents.
Other long-term liabilities are designated as held-to-maturity and
accounted for at amortized cost. These liabilities are initially
recognized at fair value and subsequently accounted for at amortized
cost. The transitional adjustment reducing other long-term
liabilities amounted to $0.9 million at the date of adoption and this
was reduced by $0.1 million during the quarter ended June 30, 2007.
Available-for-sale
AFS financial assets are those non-derivative financial assets that
are designated as AFS financial assets, or that are not classified as
loans and receivables, HTM investments or HFT financial assets. AFS
financial assets are carried at fair value with unrealized gains and
losses to be included in other comprehensive income until realized
when the cumulative gain or loss is recognized in earnings. The
Company has not designated any financial assets as AFS.
Loans and receivables
Loans and receivables are accounted for at amortized cost.
Other liabilities
Other liabilities are recorded at amortized cost.
Transaction costs
Transaction costs related to HTM financial liabilities are netted
against the carrying value of the liability and then amortized over
the expected life of the instrument using the effective interest
method. The deferred financing charges relating to the Company's
long-term debt issue were reclassified to the carrying value of the
long term debt at the date of adoption.
Embedded derivatives
Derivatives embedded in other financial instruments or contracts are
separated from their host contracts and accounted for as derivatives
when their economic characteristics and risks are not closely related
to those of the host contract. Embedded derivatives are measured at
fair value with changes in fair value recognized in earnings. The
Company does not currently have any outstanding contracts with
embedded derivatives.
(b) Section 1530 "Comprehensive Income"
The Company determined that as at the date of adoption and for the
quarter ended June 30, 2007 there were no material gains or losses
that would be recorded in other comprehensive income or loss.
Transitional adjustments
The impact of adopting these standards as at April 1, 2007 is as
follows:
As at As at
March 31, April 1,
2007 Adjustment 2007
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Assets
Cash and cash equivalents 75,228 225 75,453
Short-term investments 96,987 1,795 98,782
Accounts receivable 8,851 (2,020) 6,831
Long-term debt deferred
financing charges 1,102 (1,102) -
Future income taxes - long-term 11,339 (352) 10,987
Liabilities
Other long-term liabilities 17,735 (926) 16,809
Long-term debt 149,794 (1,102) 148,692
Minority interest 8,828 230 9,058
Shareholders' Equity
Retained earnings 86,645 344 86,989
3. Earnings per Common Share
Earnings per common share is calculated based on the weighted average
number of common shares outstanding, the dilution being due to issued
common share options.
Basic Diluted
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Three months ended:
June 30, 2007 68,048,241 68,474,564
June 30, 2006 67,927,283 68,335,926
4. Supplementary Cash Flow Disclosure
June 30 June 30
2007 2006
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(a) Changes in non-cash operating
working capital:
Accounts receivable 2,576 (606)
Prepaid expenses (1,374) (1,860)
Inventories (16,096) (4,105)
Other assets 12 46
Accounts payable and
accrued liabilities (12,670) (12,862)
Excise and other taxes payable 28,653 30,841
Income taxes payable (15,956) (7,902)
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(16,875) 3,552
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(b) Other:
Income taxes paid 52,951 40,095
Interest paid:
- Long-term debt 4,164 4,164
- Other 21 20
5. Capital Stock
Authorized: An unlimited number of common shares
Issued: 68,063,808 (March 31, 2007 - 68,038,008) common shares
June 30 March 31
2007 2007
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Balance at beginning of period, April 1 47,533 45,347
Issuance of shares 195 2,186
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Balance at end of period 47,728 47,533
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In the first quarter of fiscal 2008, a total of 25,800 (2007 -
160,000) shares were issued due to the exercise of stock options.
Issuance of shares in the period reflects net proceeds after the
special dividend payment upon the exercise of share options of
$0.1 million. Issuance of shares in fiscal year 2007 reflects net
proceeds after the special dividend payment upon the exercise of
share options of $0.4 million.
6. Share Option Plan
A summary of the status of the Company's employee stock option plan
as at the periods ended June 30, 2007 and June 30, 2006 and changes
during the periods ending on those dates are presented below:
June 30 June 30
2007 2006
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Weighted Weighted
average average
exercise exercise
price price
Options Shares ($) Shares ($)
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Outstanding - Beginning
of period 1,308,400 14.291 1,490,800 14.325
Exercised (25,800) 10.878 (160,000) 14.561
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Outstanding
- End of period 1,282,600 14.359 1,330,800 14.270
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Options exercisable at
period end 1,282,600 14.359 1,330,800 14.270
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Under the current share option plan as at June 30, 2007, a total of
181,800 (2007 - 181,800) common shares were issuable. Given the
limited number of common shares available for issuance under the
Option Plan, the annual grant of options was discontinued effective
fiscal 2006. No options were forfeited during the period.
The following table summarizes information about stock options
outstanding as at June 30, 2007
Weighted average
Number remaining Number
Range of exercise price outstanding contractual life exercisable
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$8.825(1) 3,000 3.3 3,000
$11.500(1) 143,000 4.1 143,000
$12.320(2) 315,600 6.1 315,600
$14.080(1) 261,400 4.6 261,400
$16.125(1) 248,000 5.2 248,000
$16.620(2) 311,600 7.1 311,600
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1,282,600 1,282,600
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(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).
7. Employee Future Benefit Expenses
The Company's defined benefit pension plan and other benefits
expenses are as follows:
Three months
ended
June 30
2007 2006
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Defined benefit plan expenses
Pension benefit plans 811 433
Other benefits 880 839
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1,691 1,272
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The Company's defined contribution pension plan expenses in the
quarter ended June 30, 2007 were $1.0 million (2006 - $1.0 million).
8. Seasonality
Over the past several fiscal years, the period between April and
September has demonstrated stronger industry shipments than the
period between October and March. This seasonality is likely due to
smoking restrictions that are causing consumption variations between
summer and winter seasons.
9. Litigation, Claims and Contingencies
The Company and RBH are subject to a number of claims and potential
claims, investigations and legislation, the nature and extent of
which has been described in Note 14 of the annual consolidated
financial statements of the Company for the year ended March 31,
2007. Other than as described below, there have been no developments
of a material nature during the fiscal year to date concerning these
matters.
As previously disclosed, 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 and exported by RBH were illegally
smuggled back into Canada during this period without payment of
applicable excise and tobacco taxes and duties. In February 2003, the
RCMP filed criminal charges against another Canadian tobacco products
supplier and its related parties alleging violations of the Criminal
Code (Canada) in connection with the sale and export of tobacco
products during the early 1990s. The preliminary hearing concluded in
2006. In May 2007, the Ontario Court of Justice ordered that company
and its former chief executive officer to stand trial. Charges
against six other executives were dismissed. All parties are seeking
judicial review of the judge's decision. 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.
Additional information concerning legal matters affecting the Company
and RBH are contained in the Company's filings with securities
regulatory authorities including the Company's 2007 Annual Report and
2007 Annual Information Form (in particular under "Legal
Proceedings") which can be accessed at www.sedar.com or on the
Company's website at www.rothmansinc.ca.
10. Comparative Figures
Certain comparative figures have been reclassified to conform to the
presentation adopted in the current period.