Rothmans reports results for first quarter of fiscal 2009



    Trading: TSX: ROC

    TORONTO, Aug. 12 /CNW/ - Rothmans Inc. today announced its results for
the first quarter of fiscal 2009, which ended June 30, 2008.
    Rothmans Inc. (the "Company") incurred a loss of $354.4 million for the
first quarter or ($5.20) basic loss per share, compared to earnings of
$33.8 million or $0.50 basic earnings per share in the same quarter of fiscal
2008. The loss in the period results from the expenses incurred in connection
with the previously announced resolution of the RCMP investigation, the
make-whole premium associated with Rothmans, Benson & Hedges Inc.'s $150
million 5.552% senior unsecured bonds, series A and certain expenses
associated with the offer by a wholly-owned indirect subsidiary of Philip
Morris International Inc. These expenses are described in more detail below
and in the accompanying MD&A for the quarter ended June 30, 2008.
    Adjusted operating earnings and adjusted operating earnings per share
were $35.4 million(1) and $0.52(1) per basic share versus $33.8 million and
$0.50 per basic share in the comparable period in the prior year primarily due
to lower income tax rates in the recent quarter. Adjusted operating earnings
exclude the impact of the expenses described above.
    Sales at the Company's 60%-owned subsidiary, Rothmans, Benson & Hedges
Inc. (RBH), net of excise duty and taxes, decreased to $176.2 million in the
most recent quarter compared with $177.4 million in the first quarter of
fiscal 2008. Continued consumer movement into the cigarette price category and
higher trade program spending were only partially offset by price increases
implemented during the first quarter of fiscal 2009.
    RBH's adjusted EBITDA margin for the first quarter was 55.5%(1) in both
the quarter ended June 30, 2008 and June 30, 2007. Continued consumer movement
to the cigarette price category and higher trade program expenses were offset
by higher prices in the recent quarter. The increase in adjusted EBITDA margin
for the first quarter compared with the 43.4%(1) margin in the quarter ended
March 31, 2008 reflects higher sales volumes and price increases that occurred
in the first quarter.
    RBH shipped a total of 2.8 billion equivalent sticks into the domestic
market during the first quarter of fiscal 2009 consistent with the comparable
period of the prior year with increased sales of price category cigarettes
offsetting continued declines in premium and fine cut products. Based on
market share information provided by the Nielsen Company, RBH's share of total
domestic cigarettes sold by retailers increased to 33.6% for the period ended
June 30, 2008, from 32.1% for the comparable period of the prior year on a
rolling 12 month basis.
    "The settlement of the RCMP investigation had an obvious significant
impact on the results of the current quarter. We are pleased that on an
operating basis RBH continued to maintain sales volumes and grow market share"
said John Barnett, President and Chief Executive Officer of Rothmans Inc. and
RBH.

    
    (1) Adjusted operating earnings, adjusted operating earnings per share
        and adjusted EBITDA margin are non-GAAP financial measures.
        Investors are cautioned that these measures do not have standardized
        meanings prescribed by GAAP. They should not be considered
        alternatives to earnings and comprehensive earnings or loss or loss
        per share as presented in the unaudited consolidated financial
        statements. See the accompanying MD&A for further details and a
        reconciliation of GAAP earnings to adjusted operating earnings.
    

    Resolution of the RCMP Investigation

    As previously announced on July 31, 2008, RBH and the Company reached an
agreement with the Government of Canada and the governments of all ten
provinces that resolved the RCMP's investigation relating to sales of products
exported from Canada by RBH in the period 1989 - 1996. Under the terms of the
settlement reached with the governments, payments expected to total
$550 million are to be made commencing in 2008 and over the next ten years.
The terms of the settlement are set out in the comprehensive agreement and in
an order of the Ontario Court of Justice issued on July 31, 2008. Details are
summarized in a press release issued by the Company on July 31, 2008.
    The Company recorded an expense of $415 million in the unaudited
consolidated financial statements for the period ended June 30, 2008 to
recognize the settlement. The settlement expense and the obligation were
determined using a valuation technique based on the present value of the
estimated future cash payments discounted to June 30, 2008. As a result of
this settlement expense, the Company's 60% owned subsidiary company, RBH, has
a shareholder deficiency of $209 million. Under Canadian Generally Accepted
Accounting Principles (GAAP), the minority interest portion of the loss
recorded in the quarter ended June 30, 2008 cannot be shown as an asset in the
unaudited consolidated financial statements of the Company. Included in the
total loss recorded at RBH is $84 million attributable to the minority
interest. Subsequent earnings of RBH will be allocated entirely to the
Company's interest in RBH until previously absorbed losses are recovered.
    As a consequence of the settlement, RBH expects to repay its currently
outstanding 5.552% senior unsecured bonds, series A in the principal amount of
$150 million. Although the bonds have a scheduled maturity date of December
21, 2011, the terms of the settlement may result in an event of default under
the terms of the trust indentures pursuant to which the bonds were issued. As
a result, RBH has recorded an expense in the quarter ended June 30, 2008 of
$9.7 million for the make-whole premium and accrued interest payments required
under the terms of the trust indentures. RBH has entered into an agreement
with JPMorgan Chase Bank N.A. to provide a $200 million unsecured one-year
revolving loan facility. The proceeds from this facility will be used to fund
the principal repayment, the make-whole premium and accrued interest on the
bonds and for RBH's working capital purposes.

    Offer by Philip Morris International

    On July 31, 2008, the Company entered into a support agreement with
Philip Morris International Inc. (PMI) under which an indirect wholly-owned
subsidiary of PMI has made an offer to all Company shareholders to purchase
all of the outstanding common shares of the Company for $30 per share in cash.
The terms and conditions of the offer contained in the support agreement are
described in the PMI take-over bid circular and the Rothmans Inc. directors'
circular which can be found on www.sedar.com or on the Company's website at
www.rothmansinc.ca.
    The offer has the full support of the Board of Directors of Rothmans Inc.
and the Board believes the offer is fair from a financial point of view to
shareholders and is in the best interests of the Company and recommends that
shareholders accept the offer and tender their shares to the offer.

    Quarterly Dividend

    Under the terms of the support agreement, the Board of Directors of
Rothmans Inc. agreed to suspend the regular quarterly dividend for the second
quarter of fiscal 2009 which has historically been paid in September.

    Analyst Conference Call and Webcast

    Rothmans Inc. management will hold a conference call with analysts to
discuss the first quarter results at 8:30 a.m. Toronto time, Tuesday, August
12, 2008. In order to listen to the conference call, shareholders are invited
to call 1-800-766-6630 or 416-695-6120.
    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 20th by calling 1-800-408-3053 and entering
reservation number 3268375. The recording can also be accessed through the
investor website.
    Media are invited to listen to the call and to contact Barry Joslin at
(416) 442-3634 for further information.

    About Rothmans Inc.

    Rothmans Inc. is a widely held, publicly traded Canadian company that
participates in the Canadian tobacco industry through 60%-owned Rothmans,
Benson & Hedges Inc., Canada's second largest tobacco company. RBH currently
employs approximately 750 people at its head office in Toronto, its sales
offices across Canada and its manufacturing facilities in Brampton, Ontario
and Québec City, Québec 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, 2008
    ----------------------------------------
    
    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, 2008 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, 2008, the annual MD&A for the year ended March 31, 2008 and the
audited annual consolidated financial statements of the Company for the year
ended March 31, 2008 which are available at www.sedar.com or on the Company's
website at www.rothmansinc.ca. 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 August 11,
2008.

    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 August 11, 2008.
    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;
dependence on the domestic tobacco market; failure to meet conditions of the
Offer (as defined below) and/or the failure to obtain the required approvals
or clearances from regulatory and other agencies and bodies on a timely basis
or at all; the Company's and PMI's abilities to complete a second-step
transaction; the Company's and PMI's abilities to fund the payment of any
required termination fees; RBH and the Company's abilities to fund the
payments required under the terms of the Settlement (defined below); and RBH's
ability to fund the repayment of the Bonds (defined below).
    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., "PMI" refers to Philip Morris International Inc., a subsidiary of which
owns the remaining 40% of RBH.
    The "recent quarter" refers to the three months ended June 30, 2008, and
"prior quarter" refers to the three months ended March 31, 2008. "Fiscal 2009"
or "recent fiscal year" refers to the fiscal year ending March 31, 2009 and
other similar references to a fiscal year (e.g., fiscal 2008) refer to the
fiscal year then ended on March 31 (e.g., March 31, 2008). "EPS" refers to
earnings per share.
    "The three major suppliers of tobacco products" or "three majors" refer
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" and "price category cigarettes" 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. "Dark markets" refer to provincial jurisdictions where the
display of tobacco products by retailers is banned by government regulation.
"Nielsen" refers to the Nielsen Company, a recognized market research company.
"CTMC" refers to the Canadian Tobacco Manufacturers Council.
    "Settlement" refers to the settlement entered into by Rothmans and RBH
effective July 31, 2008 with the Government of Canada and the governments of
all ten provinces that resolved the RCMP's investigation relating to sales of
products exported from Canada by RBH in the period 1989 - 1996. "Comprehensive
Agreement" refers to the comprehensive agreement dated as of July 31, 2008
entered into by RBH and the Company with Her Majesty the Queen in Right of
Canada and Her Majesty the Queen in Right of each of the Provinces of Canada
in connection with the Settlement. "Court" refers to the Ontario Court of
Justice.
    "Bonds" refers to RBH's $150 million - 5.552% senior unsecured bonds,
series A. "Support Agreement" refers to the support agreement dated as of July
31, 2008 pursuant to which an indirect wholly-owned subsidiary of PMI has made
an offer to all Company shareholders to purchase all of the outstanding common
shares of the Company for $30 per share in cash (referred to herein as the
"Offer").

    Non-GAAP Measures

    This MD&A includes reference to certain supplementary non-GAAP financial
measures - adjusted operating earnings, adjusted operating earnings per share
and adjusted EBITDA margin - which are being included to provide information
to investors regarding RBH's operating performance excluding the impact of the
Settlement and certain expenses related to the Support Agreement. These
measures are key metrics used by management in evaluating the performance of
RBH's business on an ongoing basis.
    Adjusted operating earnings and adjusted operating EPS refer to the loss
and comprehensive loss and loss per share adjusted for the Settlement expense,
the tax effected make-whole premium expense associated with the repayment of
the Bonds, certain advisory expenses related to the Support Agreement and the
minority interest for the 40% of RBH not owned by the Company.
    Adjusted EBITDA margin refers to RBH's adjusted operating 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.
    Investors are cautioned that adjusted operating earnings, adjusted
operating EPS and adjusted EBITDA margin do not have any standardized meaning
prescribed by GAAP and are therefore unlikely to be comparable to similar
measures presented by other companies. References to adjusted operating
earnings, adjusted operating EPS and adjusted EBITDA margin should not be
considered alternatives to earnings and comprehensive earnings or loss and
earnings or loss per share as presented in the unaudited consolidated
financial statements.
    The following table provides a reconciliation of adjusted operating
earnings and adjusted operating EPS to the relevant GAAP financial measure as
presented in the unaudited consolidated financial statements.

    
    Adjusted operating earnings and adjusted operating EPS

                                                       Three months ended
                                                         June 30, 2008
                                                 ----------------------------
                                                 (Loss)/earnings   Per Share
                                                 ----------------------------

    (Loss)/earnings and comprehensive (loss)/
     earnings for the period                            (354,360)      (5.20)
    Adjustments to (loss)/earnings and
     comprehensive (loss)/earnings (net of taxes):
      Settlement expense (note 4)                        415,000        6.09
      Make-whole premium expenses (note 9)                 6,123        0.09
      Expenses related to the Support Agreement(*)         1,479        0.02
      Minority interest(xx)                              (32,830)      (0.48)
                                                 ----------------------------
    Adjusted operating earnings and adjusted
     operating EPS                                        35,412        0.52
                                                 ----------------------------

    (*)  Expenses related to the Support Agreement are additional advisory
         fees incurred relating to the Support Agreement with PMI (see note
         18).
    (xx) Minority interest reflects operating earnings attributable to the
         40% interest of RBH not owned by the Company.
    

    Resolution of the RCMP Investigation

    On July 31, 2008 the Company announced that an agreement had been reached
with the Government of Canada and the governments of all ten provinces that
resolved the RCMP's investigation relating to sales of products exported from
Canada by RBH in the period 1989 - 1996. Under the terms of the Settlement,
payments expected to total $550 million are to be made commencing in 2008 and
over the next ten years. As part of the Settlement, RBH entered a plea of
guilty to a single count of violating a provision of the Excise Act (Canada).
    As previously disclosed, the RCMP investigation related to allegations
that some of the tobacco products manufactured and exported by RBH were
illegally smuggled back into Canada without payment of applicable excise and
tobacco taxes and duties. RBH and the Company agreed to this overall
resolution in order to bring closure to this legal matter and put an end to
the uncertainty and burden on the companies arising from the RCMP's
investigation.
    The terms of the Settlement are set out in the Comprehensive Agreement
and in an order of the Court issued on July 31, 2008.

    
    The terms of the Settlement require the following payments to be made:
     -  $100 million fine payable by RBH by no later than October 29, 2008;

     -  $50 million towards a new government Contraband Tobacco Enforcement
        Strategy payable by RBH no later than December 15, 2008;

     -  $200 million payable by the Company over 10 years at a rate of
        $20 million per year with the first payment to be made by December
        31, 2009;

     -  an estimated $200 million payable by RBH, with the first payment of
        $50 million to be made no later than December 31, 2008 and the
        remainder scheduled to be paid over a 10-year period based on a
        formula related to the revenue of RBH set out in the Comprehensive
        Agreement.
    

    As required under the terms of the Comprehensive Agreement, these
payments are not deductible for income tax purposes.
    The Comprehensive Agreement also requires RBH to comply with and
implement the terms of a Tobacco Compliance Measures Protocol which forms part
of the Comprehensive Agreement.
    The Company has recorded an expense of $415 million in the unaudited
consolidated financial statements for the period ended June 30, 2008 to
recognize the Settlement. The Settlement expense and the obligation has been
determined using a valuation technique based on the present value of the
estimated future cash payments discounted at an average rate of 7.8%, which
represents a credit risk adjusted rate for debt instruments of a similar
duration to the future cash payments required under the Settlement.

    Offer by Philip Morris International

    Subsequent to June 30, 2008, the Company entered into the Support
Agreement with PMI. Pursuant to the agreement, an indirect wholly-owned
subsidiary of PMI has made the Offer to all Company shareholders to purchase
all of the outstanding common shares of the Company for $30 per share in cash.
Under the terms of the agreement, the Company has agreed to co-operate and
support the offer. PMI's obligation to acquire shares is subject to certain
conditions including the receipt of certain regulatory approvals. In the event
that the transaction is not completed, PMI will pay a termination fee of 
$81.7 million to the Company. In certain circumstances where the agreement is
terminated, including in the event of a superior offer received from a third
party which the Company accepts, the Company will be required to pay PMI 
$40.9 million. If the agreement is terminated as a result of a breach or
failure to perform obligations by either the Company or PMI, the other party
is entitled to an expense reimbursement payment of $20.4 million. Under the
terms of the Support Agreement, the Board of Directors of the Company has
agreed to suspend the regular quarterly dividend historically paid in
September.

    New Accounting Pronouncements

    As required by the Canadian Institute of Chartered Accountants ("CICA"),
on April 1, 2008, the Company adopted CICA Handbook Section 3031
"Inventories". Section 3031 replaces Section 3030 "Inventories". The objective
of this new section is to prescribe the accounting treatment for inventories.
This section requires inventories to be measured at the lower of cost or net
realizable value and also provides guidance on the appropriate methods of
determining cost and net realizable value. Under this new accounting standard,
the cost of inventories includes the cost of purchase along with other costs
incurred in bringing the inventories to their present location and condition.
    The Company implemented this new accounting standard at the beginning of
its current fiscal year, on a prospective basis without the restatement of
prior periods. The prospective adoption of this new standard resulted in
changes in the accounting and presentation for inventories as well as the
recognition of certain transitional adjustments that have been recorded in
opening retained earnings as described in note 2. As permitted by the
implementation of the new standard, the comparative unaudited interim
consolidated financial statements have not been restated.
    The implementation of this Handbook requirement did not have a material
impact on the financial results of the Company.

    Industry Volumes & Market Share Measurement

    The market share data reported in this MD&A was obtained from Nielsen and
measures sales of RBH cigarettes sold by selected retailers in the domestic
market. RBH continues to evaluate the quality of fine cut market share
information available for the purposes of external reporting. Nielsen uses a
sampling approach to determine product market share for tobacco products sold
at retail. This information, by its nature, is subject to sampling error and
variability over a range that is not determinable. Management believes that
market share information provided under this approach may be useful in
reflecting market trends rather than providing an accurate absolute measure of
market share at any particular point in time. Nielsen market share of retail
sales cannot be meaningfully compared with market share of volumetric
shipments sold to wholesalers which had been previously reported by 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:

    
    -   Contraband - During the second quarter of fiscal 2008, the CTMC
        released a study on the illicit usage of cigarettes in the Canadian
        marketplace. This study indicated that 22% of the national cigarette
        volume being purchased was contraband product; up from 16.5% found in
        a similar study conducted a year earlier. 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 - 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 - Swings in wholesaler
        purchasing patterns motivated by the timing of tax increases, price
        increases, manufacturer trade 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 recent quarter, dark market legislation came into effect in
Ontario and Quebec, the two most populous provinces in Canada.
    Also, during the recent quarter the Province of Prince Edward Island
raised its Provincial Tobacco Tax on cigarette and tobacco stick products by
$5.00 per carton or equivalent stick basis. The corresponding increase on fine
cut products was $4.02 on a carton equivalent stick basis.
    Effective July 1, 2008, the federal government changed the application of
federal excise duty on fine cut and pipe tobacco products to a "per 50 gram or
fraction thereof contained in a package" basis. This change effectively
introduces a "tax penalty" on fine cut products and pipe tobacco not packaged
in multiples of 50 grams. Also effective July 1, 2008, the Yukon government
raised its tobacco tax on cigarettes by $15.60 per carton. The corresponding
increase on fine cut products was $32.64 on a carton equivalent stick basis.

    Results at Rothmans, Benson & Hedges Inc.

    In the quarter ended June 30, 2008, RBH shipped a total of 2.8 billion
equivalent sticks into the domestic market consistent with the comparable
period of the prior year with increased sales of price category cigarettes
offsetting continued declines in premium and fine cut products. Based on
market share information provided by Nielsen, RBH's share of total domestic
cigarettes sold by retailers increased to 33.6% for the period ended June 30,
2008, from 32.1% for the comparable period of the prior year on a rolling 12
month basis. Given RBH's volume performance in fiscal 2008 this trend is
indicative of continued domestic industry, tax-paid cigarette volume erosion.
Compared to the prior quarter, RBH shipment volumes increased 18.7% reflecting
normal seasonality.
    RBH's sales, net of excise duty and taxes, of $176.2 million in the
recent quarter were $1.2 million lower than in the comparable period of the
prior year. Continued consumer movement into the cigarette price category, in
particular the lowest tier of that category, and higher trade program spending
were only partially offset by price increases implemented during the recent
quarter.
    RBH's adjusted EBITDA margin was 55.5% in both the recent quarter and the
quarter ended June 30, 2007 compared to 43.4% in the quarter ended March 31,
2008. The recent quarter performance being consistent with the same period of
the prior year is primarily due to continued consumer movement to the
cigarette price category and higher trade program expenses offset by higher
prices in the recent quarter. The increase in adjusted EBITDA margin for the
first quarter compared with the quarter ended March 31, 2008 is primarily due
to higher sales volumes and price increases implemented during the recent
quarter.
    During the first quarter, RBH implemented a number of price changes for
its products. The wholesale price for the Dunhill brand was increased by $5.20
per carton. Wholesale prices for all cigarette categories were increased by
$1.00 per carton nationally, except for the Accord and Canadian Classics
brands in the Atlantic region. The price for Quebec Classique was reduced by
$5.97 per carton. Prices on fine cut products, tobacco sticks, cigars and pipe
tobacco were increased by varying amounts depending on format.
    Subsequent to the quarter, on July 2, 2008, RBH launched 100 gram and 150
gram formats into the fine cut category.

    Rothmans Inc. Financial Results

    The Company incurred a loss of $5.20 per share in the recent quarter
versus earnings per share of $0.50 in the comparable period of the prior year
primarily as a result of entering into the Settlement. The loss and
comprehensive loss in the recent quarter was $354.4 million versus earnings
and comprehensive earnings of $33.8 million in the comparable period of the
prior year.
    Adjusted operating earnings and adjusted operating EPS were $35.4 million
and $0.52 per basic share versus $33.8 million and $0.50 per basic share in
the comparable period in the prior year primarily due to lower income tax
rates in the recent quarter.
    Investment income decreased to $2.5 million in the recent quarter from
$2.7 million in the comparable period of the prior year mainly due to lower
interest rates during the recent quarter.
    Operating costs increased slightly to $81.9 million in the recent quarter
versus $80.1 million in the comparable period of the prior year, primarily as
a result of advisory fees associated with the Company's entry into the Support
Agreement.
    Interest expense on long term debt increased to $11.8 million in the
recent quarter versus $2.1 million in the comparable period of the prior year
due to the adjustment to long-term debt to reflect the make-whole premium
expenses incurred in anticipation of the repayment of RBH's Bonds. (See
"Capability to Deliver Results - Cash Resources" below)
    Income tax expense was $30.3 million in the recent quarter compared with
$37.5 million in the comparable period of the prior year. This decrease in
income tax expense on higher operating earnings generated in the quarter is
primarily a result of the make-whole premium expensed and income tax rate
reductions. The effective tax rate for the recent quarter based on the loss
and comprehensive loss for the period was materially affected by the
non-deductibility of the $415 million Settlement expense recorded during the
recent quarter.
    As a result of the Settlement expense, the Company's 60% owned subsidiary
company, RBH, has a shareholder deficiency of $209 million. Under GAAP, the
minority interest portion of the loss recorded in the quarter ended June 30,
2008 cannot be shown as an asset in the unaudited consolidated financial
statements of the Company. Included in the total loss recorded at RBH is
$84 million attributable to the minority interest. Subsequent earnings of RBH
will be allocated entirely to the Company's interest in RBH until the
previously absorbed losses are recovered.

    Capability to Deliver Results

    Cash Flow

    RBH's operations generate significant cash resources. These are currently
expected to be sufficient to fund interest payments on RBH's debt, capital
expenditures and payments required under the Settlement. In the near term, RBH
has suspended its dividend to shareholders to ensure sufficient cash resources
are available to make required payments and to ensure sufficient working
capital for on-going business operations. RBH's dividend policy will be
re-examined in the future giving consideration to working capital requirements
and the requirement to refinance the JPMorgan Chase Bank, N.A. one year
revolving loan facility (see "Cash Resources" below).
    Under the terms of the Support Agreement, the Board of Directors of the
Company agreed to suspend the regular quarterly dividend for the second
quarter of fiscal 2009, which has historically been paid in September. The
Company's cash resources are expected to be sufficient to fund its operations
and the future payments required by the Comprehensive Agreement. The Company's
dividend policy will be re-evaluated by the Board of Directors of the Company
following the outcome of PMI's Offer.
    RBH's cash flow from operations before changes in working capital was
$64.5 million in the recent quarter compared with $55.5 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 from the shareholders of RBH.
    During the recent quarter, the Company paid dividends of $23.8 million,
representing a dividend of $0.35 per share.

    Cash Resources

    Cash, cash equivalents and short-term investments of $204.7 million at
June 30, 2008 represented the consolidated cash resources of the Company
versus $234.9 million at March 31, 2008. The decrease in cash, cash
equivalents and short-term investments is predominantly due to the first
quarter dividend paid by the Company, earnings from RBH's operations,
reduction in accounts payable and normal quarterly fluctuations in RBH's
working capital requirements. On a non-consolidated basis, Rothmans held cash,
cash equivalents and short-term investments of $129.9 million at June 30,
2008, a decrease from $154.4 million at March 31, 2008 reflecting the
suspension of the RBH dividend and dividends paid by the Company during the
quarter.
    As a consequence of the Settlement, RBH expects to repay the Bonds.
Although the Bonds have a scheduled maturity date of December 21, 2011, the
terms of the Settlement may result in an event of default under the terms of
the trust indentures pursuant to which the Bonds were issued.
    RBH obtained a credit facility as described below in order to fund any
required repayment of the $150 million principal amount of the Bonds plus a
make-whole premium of approximately $9.7 million relating to the loss of
interest between the estimated repayment date and the original maturity date
of December 21, 2011. As a result, RBH revised its estimate of future cash
flow payments under the Bonds to include the make-whole premium and adjusted
the carrying amount of the Bonds by recognizing a charge of $9.7 million.
    On July 31, 2008, RBH entered into an agreement with JPMorgan Chase Bank,
N.A. to provide a $200 million unsecured one-year revolving loan facility (the
"JPMorgan Facility") bearing interest at the Canadian Deposit Offering Rate
plus 2%. The proceeds from this facility will be used to fund the principal
repayment, the make-whole premium and accrued interest on the Bonds and for
working capital purposes. After the facility is outstanding for more than 75
days, additional fees relating to the bank's syndication of the loan may be
payable.
    The Company and PMI have also entered into a financing support letter
with RBH pursuant to which they have agreed to provide appropriate credit
enhancement, guarantees, credit facilities, debt or other financing to RBH at
such time as the JPMorgan Facility expires, up to an amount of 60% in the case
of the Company, and 40% in the case of PMI, of the then principal amount of
the JPMorgan Facility, provided, however, that the Company and PMI shall not
be obligated to provide any such credit support unless, despite RBH's
commercially reasonable efforts, it has not been able to secure, on
commercially reasonable terms, replacement financing to repay the JPMorgan
Facility before its expiry. PMI shall not be obliged to provide any credit
support in the event of a change in control of the Company otherwise than as a
result of an acquisition of common shares of the Company by any affiliate of
PMI.

    Contractual Obligations

    The table below summarizes the Company's obligation to make future
payments on long-term debt, operating lease and other obligations and purchase
of tobacco as at June 30, 2008.

    
    -------------------------------------------------------------------------
                                                      Subsequent
    Contractual Obligations       Fiscal      Fiscal   To Fiscal
     ($000's)                       2009        2010        2010       Total
    -------------------------------------------------------------------------
    Long term debt                     -     158,759           -     158,759
    Settlement expenses          200,000      20,000     330,000     550,000
    Operating leases               2,847       3,153       6,777      12,777
    Purchase obligations          19,479           -           -      19,479
    -------------------------------------------------------------------------
    Total contractual
     obligations                 222,326     181,912     336,777     741,015
    -------------------------------------------------------------------------
    

    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.

    Settlement Obligations

    The Settlement payment obligations of $550 million and the resulting
Settlement expense of $415 million recorded in the June 30, 2008 unaudited
consolidated financial statements are based in part on management estimates of
future revenues to be generated by RBH and discount rate assumptions applied
to the estimated future cash payments associated with the Settlement. Changes
in these estimates and assumptions may arise as a result of changes in market
conditions or new information and such changes could have a material effect on
the Company's unaudited consolidated financial statements.
    Assuming all other variables remain constant, a 1% decrease in the
discount rate applied to the estimated future cash payments associated with
the Settlement obligation would increase the settlement expense and obligation
by $13 million. A 1% increase in the discount rate would decrease the
Settlement expense and obligation by $12 million. Since $150 million of the
future cash payments associated with the Settlement obligation is dependent
upon future revenues generated by RBH, the estimated fair value of the
Settlement obligation could change in subsequent periods based on actual
results and changes in estimates of future revenues. Assuming all other
variables remain constant, a 1% increase or decrease in the estimated future
revenues of RBH would increase or decrease the Settlement expense and
obligation by $1 million.

    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, 2008.

    Litigation Contingent Liabilities

    As discussed in the annual MD&A for the year ended March 31, 2008, 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 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 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 16 to the audited annual consolidated
financial statements of the Company for the year ended March 31, 2008. Other
than the Settlement (as described herein and in note 4 to the interim
unaudited consolidated financial statements for the three months ended June
30, 2008) and as set out below, there have been no developments of a material
nature during the fiscal year to date concerning these matters.
    As previously disclosed, 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, brought pursuant to the Tobacco Damages and Health Care Costs Recovery
Act (British Columbia), is proceeding and the trial is currently scheduled for
the fall of 2010. In March 2008, the federal government brought a motion
seeking to strike out a third party notice which would make it a party to the
lawsuit. The motion was allowed in April 2008. The Canadian tobacco companies
are appealing this decision, and the appeal should be heard in early 2009.
    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 2008 Management's Discussion and Analysis
and Notes to Consolidated Financial Statements, the 2008 Annual Information
Form (in particular under "Legal Proceedings"), Material Change Report dated
July 31, 2008 and the Comprehensive Agreement 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 and RBH to defend themselves
        against legal claims and the outcome or settlement of such claims
        that are ongoing or may arise in the future;

    -   increased levels of contraband product that may occur due to the high
        tax 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 increase 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
        regarding the sale of tobacco products including legislation banning
        the display of tobacco products in retail stores;

    -   the impact related to compliance with the Tobacco Compliance Measures
        Protocol which forms part of the Comprehensive Agreement;

    -   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;

    -   RBH's continued success at maintaining or reducing costs, especially
        in view of the potential for regulated changes to product and
        packaging specifications;

    -   RBH and the Company's abilities to fund the payments required under
        the terms of the Settlement;

    -   RBH's ability to fund the repayment of the Bonds;

    -   The ability of the Company and PMI to satisfy or complete the
        conditions of the Offer as required by the Support Agreement;

    -   The availability of regulatory approvals required for the completion
        of the Offer;

    -   The ability of the Company and PMI to complete a second-step
        transaction; and

    -   The ability of the Company and PMI to fund the payment of any
        required termination fees.


    Unaudited Interim Consolidated Statements of Operations, Comprehensive
    (Loss) Earnings and Retained Earnings (Deficit)

    Three months ended June 30
    (in thousands of dollars,
    except per share data)                                  2008        2007
    -------------------------------------------------------------------------

    OPERATIONS
    Revenues:
    Sales, net of excise duty and taxes                  176,243     177,431
    Investment income                                      2,483       2,677
                                                      -----------------------
    Total revenues                                       178,726     180,108

    Costs:
    Operating costs excluding amortization (note 2)       81,925      80,079
                                                      -----------------------
    Earnings before interest, income taxes,
     Settlement expense, amortization and minority
     interest                                             96,801     100,029
    Amortization                                           2,741       3,929
    Settlement expense (note 4)                          415,000           -
    Interest expense and adjustment to carrying
     amount (note 9)
      - Long-term debt                                    11,791       2,080
      - Other                                                561         242
                                                      -----------------------
    (Loss)/earnings before income taxes and minority
     interest                                           (333,292)     93,778
    Income taxes (note 10)
      - Current                                           30,824      36,996
      - Future                                              (528)        498
                                                      -----------------------
    Total income taxes                                    30,296      37,494
                                                      -----------------------

    (Loss)/earnings before minority interest            (363,588)     56,284
    Minority interest (note 15)                           (9,228)     22,456
                                                      -----------------------
    (Loss)/earnings and comprehensive (loss)/earnings
     for the period                                     (354,360)     33,828
                                                      -----------------------
    (Loss)/earnings per common share (note 7)
      - Basic                                              (5.20)       0.50
                                                      -----------------------
      - Diluted                                            (5.20)       0.49
                                                      -----------------------

    RETAINED EARNINGS (DEFICIT)
    Balance at beginning of period                       116,115      86,645
    Transitional adjustment on adoption of
     new accounting policy (note 2)                          756         344
                                                      -----------------------
    Balance at beginning of period as restated           116,871      86,989
    (Loss)/earnings and comprehensive (loss)/
     earnings for the period                            (354,360)     33,828
                                                      -----------------------
                                                        (237,489)    120,817
    Dividends paid:
    Common Shares                                        (23,833)    (20,419)
    (Q1 2009 - $0.35 per share)
    (Q1 2008 - $0.30 per share)
                                                      -----------------------
    Balance at end of period                            (261,322)    100,398
                                                      -----------------------



    Rothmans Inc. and subsidiary companies (unaudited)

    Unaudited Interim Consolidated Balance Sheets
                                                           As at       As at
                                                         June 30    March 31
    (in thousands of dollars)                               2008        2008
    -------------------------------------------------------------------------

    ASSETS
    Current Assets
    Cash and cash equivalents                            204,678     110,127
    Short-term investments                                     -     124,766
    Accounts receivable                                    4,847       3,561
    Inventories (note 2)                                 222,059     193,693
    Prepaid expenses                                       3,352       1,765
    Future income taxes                                    2,706      11,616
                                                      -----------------------
    Total current assets                                 437,642     445,528

    Property, plant and equipment                         71,316      72,475
    Future income taxes                                   15,765       6,327
    Prepaid pension benefit cost                          19,449      17,251
    Other assets                                           1,079       1,263
                                                      -----------------------
                                                         545,251     542,844
                                                      -----------------------
    LIABILITIES
    Current Liabilities
    Accounts payable and accrued liabilities              43,409      64,902
    Excise and other taxes payable                        90,806      74,228
    Income taxes payable                                   5,899      33,405
    Settlement expense (note 4)                          196,000           -
                                                      -----------------------
    Total current liabilities                            336,114     172,535

    Other long-term liabilities                            7,054      10,996
    Other employee future benefits                        37,556      37,418
    Long-term debt (note 9)                              158,759     148,966
    Settlement expense (note 4)                          219,000           -
    Minority interest in subsidiary company (note 15)          -       8,724
                                                      -----------------------
                                                         758,483     378,639
                                                      -----------------------
    Contingencies (note 17)

    SHAREHOLDERS' EQUITY (DEFICIENCY)
    Capital stock (note 11)                               48,090      48,090
    Retained earnings (deficit) (note 2 and 15)         (261,322)    116,115
                                                      -----------------------
    Total shareholders' equity (deficiency)             (213,232)    164,205
                                                      -----------------------
                                                         545,251     542,844
                                                      -----------------------

    Rothmans Inc. and subsidiary companies (unaudited)



    Unaudited Interim Consolidated Statements of Cash Flows
    Three months ended June 30
     (in thousands of dollars)                              2008        2007
    -------------------------------------------------------------------------
    Cash provided by (used in):

    OPERATING ACTIVITIES
    (Loss)/earnings for the period                      (354,360)     33,828
    Adjusted for non-cash items:
    Amortization of property, plant and equipment          2,741       3,929
    Non-cash interest expense and adjustment to
     carrying amount                                      10,309         237
    Minority interest                                     (9,228)     22,456
    Future income taxes                                     (528)        498
    Loss on disposal of property, plant & equipment            8          17
    Defined & other employee future benefits expense       1,881       1,691
    Defined & other employee future benefits funding      (3,941)     (9,896)
    Long-term incentive plan expense                       1,541       2,703
    Settlement expense (note 4)                          415,000           -
                                                      -----------------------
                                                          63,423      55,463

    Changes in non-cash operating working capital
     (note 8)                                            (68,215)    (16,875)
                                                      -----------------------
                                                          (4,792)     38,588
                                                      -----------------------
    INVESTING ACTIVITIES
    Additions to property, plant & equipment, net         (1,590)       (917)
    Proceeds on disposal (purchases) of short-term
     investments, net                                    124,766      98,614
                                                      -----------------------
                                                         123,176      97,697
                                                      -----------------------
    FINANCING ACTIVITIES
    Dividends paid -
      By the Company                                     (23,833)    (20,419)
      By a subsidiary company to minority shareholder          -     (22,200)
    Proceeds on issuance of common shares                      -         195
                                                      -----------------------
                                                         (23,833)    (42,424)
                                                      -----------------------

    Increase in cash and cash equivalents                 94,551      93,861
    Cash and cash equivalents at beginning of period     110,127      75,453
                                                      -----------------------
    Cash and cash equivalents at end of period           204,678     169,314
                                                      -----------------------

    Supplementary disclosures (note 8)

    Rothmans Inc. and subsidiary companies (unaudited)


    Notes to the Unaudited Interim 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 unaudited 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 unaudited interim consolidated financial statements includes
        only material changes from the disclosure found in the Company's
        audited annual consolidated financial statements for the year ended
        March 31, 2008. Therefore, these unaudited interim consolidated
        financial statements and notes should be read in conjunction with
        those statements. These unaudited 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, 2008, the Company adopted The Canadian Institute
        of Chartered Accountants (CICA) Handbook Section 3031, "Inventories".
        Section 3031 replaces Section 3030, "Inventories" and introduces
        changes to the measurement and disclosure of inventories. The new
        standard requires inventories to be measured at the lower of cost or
        net realizable value and also provides guidance on the appropriate
        methods of determining cost and net realizable value. Under this new
        accounting standard, the cost of inventories includes the cost of
        purchase and/or subsequent manufacturing and other costs incurred in
        bringing the inventories to their present location and condition.

        The Company's inventories, comprised of leaf and other tobacco stock,
        packaging materials and finished tobacco products for resale, are
        valued at the lower of cost and net realizable value with cost being
        determined on a first-in, first-out (FIFO) basis. The cost of
        inventory includes all costs incurred in acquiring or manufacturing
        the products along with the costs incurred in bringing the inventory
        to its present location and condition. The Company records valuation
        adjustments to its inventory and to cost of goods sold based on
        estimates to reserve for product obsolescence and saleability.

        The prospective adoption of this new standard resulted in changes in
        the accounting for inventories and the recognition of a transitional
        adjustment from the difference in the measurement of the opening
        inventory. The transitional adjustment was recorded in opening
        retained earnings as described below. Included in operating costs
        excluding amortization for the three months ended June 30, 2008 is
        $52.6 million of inventory recognized as an expense including
        $0.4 million as a provision to adjust certain finished products to
        net realizable value.

        As permitted by the implementation of the new standard, the
        comparative unaudited interim consolidated financial statements have
        not been restated.

        Transitional adjustment
        -----------------------
        The impact of adopting this standard as at April 1, 2008 is as
        follows:

                                             As at                     As at
                                          March 31,                  April 1,
                                              2008   Adjustment         2008
                                        -----------  -----------  -----------
        Assets
        Inventories                        193,693        2,000      195,693

        Liabilities
        Income taxes payable                33,405          740       34,145
        Minority interest                    8,724          504        9,228

        Shareholders' Equity
        Retained earnings                  116,115          756      116,871

        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
        standards resulted in changes in the measurement, recognition and
        presentation for financial instruments. As a result of adopting these
        standards, transitional adjustments of $0.3 million have been
        recorded in opening retained earnings as of April 1, 2007. 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 in more
        detail in the Company's audited annual consolidated financial
        statements.

    3.  Recently Issued Accounting Pronouncements Not Yet Effective

        Goodwill and Intangible Assets: Section 3064, which replaces,
        "Goodwill and intangible assets" section 3062, and "Research and
        development costs", Section 3450, establishes standards for
        recognition, measurement and disclosure of goodwill and intangible
        assets. This section applies to interim and annual financial
        statements relating to fiscal years beginning on or after October 1,
        2008. The Company is currently evaluating the potential impact that
        the adoption of this new standard will have on the consolidated
        financial statements.

        International Financial Reporting Standards: The CICA Accounting
        Standards Board has confirmed that International Financial Reporting
        Standards ("IFRS") will be mandatory in Canada for financial
        statements of profit oriented publicly accountable entities beginning
        on or after January 1, 2011. The Company is evaluating the changes
        arising from this convergence and is in the process of preparing a
        plan to address accounting and reporting changes that may be
        necessary to convert the Company's consolidated financial statements
        to IFRS.

    4.  Settlement Expense

        On July 31, 2008 the Company announced that an agreement had been
        reached with the Government of Canada and the governments of all ten
        provinces that resolved the RCMP's investigation relating to sales of
        products exported from Canada by Rothmans, Benson & Hedges Inc.
        ("RBH") in the period 1989 - 1996 ("Settlement"). Under the terms of
        the Settlement, payments expected to total $550 million are to be
        made commencing in 2008 and over the next ten years. As part of the
        Settlement, RBH entered a plea of guilty to a single count of
        violating a provision of the Excise Act (Canada). The terms of the
        Settlement are set out in the comprehensive agreement dated as of
        July 31, 2008 entered into by RBH and the Company with Her Majesty
        the Queen in Right of Canada and Her Majesty the Queen in Right of
        each of the Provinces of Canada (the "Comprehensive Agreement") and
        in the order of the Ontario Court of Justice issued on July 31, 2008.

        The terms of the Settlement require the following payments to be
        made:

        -  $100 million fine payable by RBH by no later than October 29,
           2008;
        -  $50 million towards a new government Contraband Tobacco
           Enforcement Strategy payable by RBH no later than December 15,
           2008;
        -  $200 million payable by the Company over 10 years at a rate of
           $20 million per year with the first payment to be made by December
           31, 2009;
        -  an estimated $200 million payable by RBH, with the first payment
           of $50 million to be made no later than December 31, 2008 and the
           remainder scheduled to be paid over a 10-year period based on a
           formula related to the revenue of RBH set out in the Comprehensive
           Agreement.

        As a consequence of the Settlement, RBH expects to repay its
        currently outstanding 5.552% Senior Unsecured Bonds, series A in the
        principal amount of $150 million (the "Bonds"). Although the Bonds
        have a scheduled maturity date of December 21, 2011, the terms of the
        Settlement may result in an event of default under the terms of the
        trust indentures pursuant to which the Bonds were issued.

        The Company recorded a Settlement expense of $415 million to
        recognize the resolution of this contingency. The Settlement expense
        and the obligation has been determined using a valuation technique
        based on the present value of the estimated future cash payments
        discounted at an average rate of 7.8% which represents a credit risk
        adjusted rate for debt instruments of a similar duration to the
        future cash payments required under the Settlement.

    5.  Financial Instruments

        Effective January 1, 2008 the Company early adopted the new
        accounting standards for Financial Instruments - Disclosure and
        Presentation (CICA Handbook Sections 3862 and 3863). The following
        summary is an update to the financial instrument disclosures made in
        the Company's audited annual consolidated financial statements.

        Financial Instruments designated as Other Liabilities

        The Settlement obligation has been initially recognized at estimated
        fair value (see note 4) and is designated as an other liability and
        accounted for at amortized cost.

        Liquidity Risk

        As a result of the Comprehensive Agreement, RBH will prepay its long-
        term debt and financing has been arranged to facilitate the repayment
        (see note 9). The Company and RBH have significant cash resources and
        generate cash flow from operations to meet their financial
        liabilities and commitments. Based on historical earnings, cash flow
        and the financing arranged, the Company and RBH expect to have
        sufficient cash resources to fund their operations.

        The table below summarizes the payment schedule for the Company's
        liabilities as at June 30, 2008:
                                                               There-
                        2009    2010    2011    2012    2013   after   Total
                    ---------------------------------------------------------
        Accounts
         payable &
         accrued
         liabilities  43,409       -       -       -       -       -  43,409
        Long-term
         debt(*)           - 158,759       -       -       -       - 158,759
        Settlement
         expense(xx) 200,000  20,000  30,000  31,000  32,000 237,000 550,000
                    ---------------------------------------------------------

                     243,409 178,759  30,000  31,000  32,000 237,000 752,168
                    ---------------------------------------------------------

        (*)  Arrangements have been made to fund the repayment of the long-
             term debt from the proceeds of a new revolving loan facility.
        (xx) Represents actual and estimated cash payments.

        Interest Rate Risk

        On July 31, 2008 RBH entered into a $200 million floating rate credit
        facility that is exposed to fluctuations in interest rates
        (see note 9).

        Sensitivity Analysis

        Assuming all other variables remain constant, a 1% decrease in the
        discount rate applied to the estimated future cash payments
        associated with the Settlement obligation would increase the
        Settlement expense and obligation by $13 million. A 1% increase in
        the discount rate would decrease the Settlement expense and
        obligation by $12 million.

        Since $150 million of the future cash payments associated with the
        Settlement obligation is dependant upon future revenues generated by
        RBH, the estimated fair value of the Settlement obligation could
        change in subsequent periods based on actual results and changes in
        estimates of future revenues. Assuming all other variables remain
        constant, a 1% increase or decrease in the estimated future revenues
        of RBH would increase or decrease the Settlement expense and
        obligation by $1 million.

    6.  Management of Capital

        Effective January 1, 2008, the Company early adopted the new
        accounting standards for Capital Disclosures (CICA Handbook section
        1535).

        As a result of recording the expense for the Settlement reached as
        described in note 4, the Company has incurred a substantial loss for
        the quarter that has resulted in a shareholder deficiency as at June
        30, 2008. Management believes the Company's existing cash resources,
        cash flows from operating activities and the financing arranged to
        repay the senior unsecured long-term debt are sufficient to meet the
        Company's objectives in managing capital.

    7.  Earnings per Share

        Earnings per common share is calculated based on the weighted average
        number of common shares outstanding, the dilution being due to issued
        common share options.

                                                           Basic     Diluted
        ---------------------------------------------------------------------
        Three months ended:
          June 30, 2008                               68,095,608  68,095,608
          June 30, 2007                               68,048,241  68,474,564

        Since the impact of the dilutive options would be to decrease the
        loss per share, they are excluded for purposes of calculating diluted
        loss per share for the period ended June 30, 2008.

    8.  Supplementary Cash Flow Disclosures

        a) Change in non-cash operating working capital:

                                                         June 30     June 30
                                                            2008        2007
                                                       ----------------------
           Accounts receivable                            (1,286)        556
           Prepaid expenses                               (1,587)     (1,374)
           Inventories                                   (27,106)    (16,096)
           Other assets                                      184          12
           Accounts payable and accrued liabilities      (27,492)    (12,670)
           Excise and other taxes payable                 16,578      28,653
           Income taxes payable                          (27,506)    (15,956)
                                                       ----------------------
                                                         (68,215)    (16,875)
                                                       ----------------------
                                                       ----------------------
        b) Other:
                                                            2008        2007
                                                       ----------------------
           Income taxes paid                              59,070      52,951
           Interest paid:
             - Long-term debt                              4,164       4,164
             - Other                                          24          21

    9.  Long Term Debt

        As a consequence of the Settlement as described in note 4, RBH
        obtained a credit facility as described below in order to fund any
        required repayment of its currently outstanding 5.552 % Senior
        Unsecured Bonds, Series A (the "Bonds") plus a make-whole premium of
        approximately $9.7 million relating to the loss of interest between
        the estimated repayment date and the original maturity date of
        December 21, 2011. As a result, RBH revised its estimate of future
        cash flow payments under the Bonds to include the make-whole premium
        and adjusted the carrying amount of the Bonds by recognizing a charge
        of $9.7 million.

        On July 31, 2008, RBH entered into an agreement with JPMorgan Chase
        Bank, N.A. to provide a $200 million unsecured one-year revolving
        loan facility bearing interest at the Canadian Deposit Offering Rate
        plus 2%. The proceeds from this facility will be used to fund the
        principal repayment, the make-whole premium and accrued interest on
        the Bonds and for working capital purposes. After the facility is
        outstanding for more than 75 days, additional fees relating to the
        bank's syndication of the loan may be payable.

        Given that financing arrangements that mature more than one year from
        June 30, 2008 have been made to repay the Bonds and the make-whole
        premium, these amounts have been classified as long-term debt at June
        30, 2008.

        Additionally, a $30 million credit facility with another financial
        institution has been reduced to $5 million until October 31, 2008 at
        which point it will be terminated.

    10. Income Taxes

        The following table reconciles income taxes calculated at corporate
        income tax rates (including surtaxes and manufacturing and processing
        credits) with the income tax provision:

                                                         June 30,    June 30,
                                                            2008        2007
                                                       ----------------------
        (Loss)/earnings before income taxes and
         minority interest                              (333,292)     93,778

        Income tax provision based on corporate
         income tax rates                               (118,574)     37,494
        Non-deductible settlement expense                148,870           -
                                                       ----------------------
                                                          30,296      37,494
                                                       ----------------------

        Under the terms of the Comprehensive Agreement as described in note
        4, neither the Company nor RBH are permitted to deduct any of the
        Settlement expense payments from income in determining their
        respective income tax liability to government authorities.

    11. Capital Stock

        Authorized: An unlimited number of common shares
        Issued:     68,095,608 (March 31, 2008 - 68,095,608) common shares

                                                         June 30    March 31
                                                            2008        2008
                                                       ----------------------
        Balance at beginning of period, April 1           48,090      47,533
        Issuance of shares                                     -         557
                                                       ----------------------
        Balance at end of period                          48,090      48,090
                                                       ----------------------

        In the first quarter of fiscal 2009, no shares (2008 - 25,800) were
        issued due to the exercise of stock options.

    12. Share Option Plan

        A summary of the status of the Company's employee stock option plan
        as at the periods ended June 30, 2008 and June 30, 2007 and changes
        during the periods ending on those dates are presented below:

                                       June 30, 2008           June 30, 2007
        ---------------------------------------------------------------------
                                            Weighted                Weighted
                                             average                 average
                                            exercise                exercise
        Options                   Shares   price ($)      Shares    price ($)
        ---------------------------------------------------------------------
        Outstanding -
         Beginning
         of period             1,250,800      14.360   1,308,400      14.291
        Exercised                      -           -     (25,800)     10.878
        ---------------------------------------------------------------------
        Outstanding -
           End of period       1,250,800      14.360   1,282,600      14.359
        ---------------------------------------------------------------------
        Options exercisable
        at period end          1,250,800      14.360   1,282,600      14.359
        ---------------------------------------------------------------------

        Under the current share option plan as at June 30, 2008, a total of
        181,800 (2008 - 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.

        Under the terms of the support agreement outlined in note 18, the
        Company will amend the current plan to permit holders of options to
        either conditionally surrender their options in exchange for a cash
        payment from the Company equal to the amount by which the offer price
        of $30.00 per share exceeds the exercise price or roll their
        entitlements over into a similar plan offered by PMI.

        The following table summarizes information about stock options
        outstanding as at June 30, 2008:

                                                      Weighted
                                                       average
                                                     remaining
                                         Number    contractual        Number
        Range of exercise price     outstanding           life   exercisable
        ---------------------------------------------------------------------

        $8.825(1)                         3,000            2.1         3,000
        $11.500(1)                      136,000            2.9       136,000
        $12.320(2)                      308,200            4.9       308,200
        $14.080(1)                      261,400            3.3       261,400
        $16.125(1)                      237,000            3.9       237,000
        $16.620(2)                      305,200            5.9       305,200
        --------------------------------------------------------------------
                                      1,250,800                    1,250,800
        --------------------------------------------------------------------
        (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).

    13. Employee Future Benefit Expenses

        The Company's defined benefit pension plan and other benefits
        expenses are as follows:

                                                  Three months ended June 30
                                                          2008          2007
        ---------------------------------------------------------------------
        Defined benefit plan expenses
          Pension benefit plans                          1,030           811
          Other benefits                                   851           880
        ---------------------------------------------------------------------
                                                         1,881         1,691
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        The Company's defined contribution pension plan expenses in the
        quarter ended June 30, 2008 were $1.0 million (2007 - $1.0 million).

    14. 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.

    15. Minority Interest

        As a result of the Settlement expense described in note 4, the
        Company's 60% owned subsidiary company, RBH, has a shareholder
        deficiency of $209 million. When a subsidiary in which there is a
        minority interest has a shareholder deficiency, none of the losses
        are charged against the consolidated financial statements of the
        parent company under generally accepted accounting principles unless
        there is an irrevocable commitment to fund those losses. Included in
        the loss at RBH is $84 million attributable to the minority interest
        that has not been recognized as an asset in the unaudited
        consolidated financial statements. Subsequent earnings of RBH will be
        allocated entirely to the Company's interest in RBH until the
        previously absorbed losses are recovered.

    16. Commitments

        In the normal course of business, the Company and RBH have
        commitments in respect of capital expenditures, operating lease and
        other obligations and purchases of tobacco.

        In addition, the Company and RBH have obligations as a result of the
        Comprehensive Agreement as described in note 4, in which payments
        expected to total $550 million are to be made commencing in 2008 and
        over the next ten years.

        The following table summarizes the payments due after June 30, 2008
        for the Company's commitments:


        2009                                                         222,326
        2010                                                          23,153
        2011                                                          33,019
        2012                                                          33,645
        2013 and thereafter                                          270,113
                                                                     --------
                                                                     582,256
                                                                     --------
                                                                     --------

    17. 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 16 of the audited annual
        consolidated financial statements of the Company for the year ended
        March 31, 2008. Other than as described in note 4 and below, there
        have been no developments of a material nature during the fiscal year
        to date concerning these matters.

        As previously disclosed, 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, brought pursuant to the Tobacco
        Damages and Health Care Costs Recovery Act (British Columbia), is
        proceeding and the trial is currently scheduled for the fall of 2010.
        In March 2008, the federal government brought a motion seeking to
        strike out a third party notice which would make it a party to the
        lawsuit. The motion was allowed in April 2008. The Canadian tobacco
        companies are appealing this decision, and the appeal should be heard
        in early 2009.

        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 2008 Management's
        Discussion and Analysis and Notes to Consolidated Financial
        Statements, the 2008 Annual Information Form (in particular under
        "Legal Proceedings"), Material Change Report dated July 31, 2008 and
        the Comprehensive Agreement which can be accessed at www.sedar.com or
        on the Company's website at www.rothmansinc.ca.

    18. Subsequent Event

        Subsequent to June 30, 2008, the Company entered into a definitive
        support agreement with Philip Morris International Inc. (PMI).
        Pursuant to the agreement, an indirect wholly-owned subsidiary of PMI
        has made the Offer to all Rothmans Inc. shareholders to purchase all
        of the outstanding common shares of the Company for $30.00 per share
        in cash. Under the terms of the agreement, the Company has agreed to
        co-operate and support the offer. PMI's obligation to acquire shares
        is subject to certain conditions including the receipt of certain
        regulatory approvals. In the event that the transaction is not
        completed, PMI will pay the Company a termination fee of $81.7
        million. In certain circumstances where the agreement is terminated,
        including in the event of a superior offer received from a third
        party which the Company accepts, the Company will be required to pay
        PMI $40.9 million. If the agreement is terminated as a result of a
        breach or failure to perform obligations by either the Company or
        PMI, the other party is entitled to an expense reimbursement payment
        of $20.4 million. Under the terms of the support agreement, the Board
        of Directors of the Company has agreed to suspend the regular
        quarterly dividend historically paid in September.
    





For further information:

For further information: Investor contact: Mike Frater, Vice President
Finance & CFO, (416) 442-3659; Media contact: Barry Joslin, (416) 442-3634

Organization Profile

ROTHMANS INC.

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