Rothmans Inc. reported its fiscal 2000 operating results for its March 31 corporate year-end. Earnings per share of $1.92 were slightly less than earnings in 1999, which could be attributed to nonrecurring costs due to a workforce reduction. More recently, Rothmans reported its first quarter 2001 results, which were also in line with expectations. Earnings per share for the quarter ended June 30 were $0.54 versus $0.52 for the comparable period in 1999. A decline in total sales was offset by price increases and investment income from Rothmans’ $74 million of cash and short-term investments.

At year-end, Rothmans’ book value had increased to just over $5.00 per share. The Company’s over-funded pension, which we consider to be a hidden asset, is now worth just over $34 million or approximately $1 per share. Rothmans’ financial position remains highly stable, with no long-term debt and little capital expenditure requirements.

Since becoming a widely held, public company, Rothmans’ management has shown real motivation and commitment to maximizing shareholder value. In fiscal year 2000, the trend of market share contraction was reversed and Rothmans’ composite (fine cut and cigarette) market share grew to 22 percent. Strategically, Rothmans’ has shifted brand priorities, implemented significant cost cutting initiatives and approved a share buyback program.

Tobacco stocks generally trade on cash flow multiples and market sentiment. In recent months we have seen improved performance from several U.S. tobacco companies, including Phillip Morris. The share price recovery is probably due to optimism that the worst has been seen with various lawsuits. North of the border, investors have begun to return to Rothmans due to its defensive nature, its 5˝% dividend yield and easing concerns with regard to litigation.

November 3, 2000

On June 28, 2000 tobacco regulations that require graphic health warning messages to cover 50% of product packaging became law. Health Canada has designed 16 different layouts that meet the criteria set out by the new guidelines. The labels contain both text and graphics and some depict the physical effects of long-term tobacco use. The regulations will require tobacco brands with more than 2% market share to be compliant by late December and brands with less than 2% market share to be compliant by June 2001. As these dates approach, we are concerned with the potential fallout on Rothmans and other tobacco companies.

We are also concerned about the British Columbia provincial government's determination to pursue legal action against the tobacco industry. Though the province's most recent suit was thrown out of court because it was based on a law determined to be unconstitutional, it is believed that the government is undeterred. In fact, provincial legislation may be reworked to allow future legal challenges to proceed.

In the meantime, Rothmans reported its Q2 results for fiscal 2001 on October 26. Earnings for the quarter were $0.54 per common share, an increase of 13% from the $0.48 earned in the comparable period the previous year. The Company also announced that the Board of Directors had increased the annual dividend from $1.00 to $1.20 per share. However, the Board did not declare a special dividend with the release of the quarterly financial results, though they acknowledged that the potential to do so still exists.

In light of a regulatory environment that is becoming more hostile toward tobacco manufacturers and the continual threat of litigation, we have completely divested our position in Rothmans. We were able to take advantage of buying interest after the good financial results to sell our relatively illiquid holding for a reasonable gain.