MRRM Inc. - DIRECTORS' REPORT And MANAGEMENT DISCUSSION And ANALYSIS Of The FINANCIAL CONDITION And RESULTS Of OPERATIONS - Interim 2011.Q4 February 28, 2011 (4th Quarter)

The following discussion and analysis should be read in conjunction with the Annual Report.  Included in these documents may be forward-looking statements with respect to the Company. These forward-looking statements by their nature necessarily involve risks and uncertainties that could cause actual results to differ materially from those contemplated by such statements.  The Company considers the assumptions on which these forward-looking statements are based to be reasonable at the time they were prepared but cautions the reader that these assumptions regarding future events, many of which are beyond the control of the Company, may ultimately prove to be incorrect.

The unaudited interim consolidated financial statements were prepared by the Company in accordance with Canadian generally accepted accounting principles and have not been reviewed by the Company's auditors. Certain comparative figures have been reclassified to conform with the presentation adopted in the  financial statements.

Additional documents and information are available at the System for Electronic Document Analysis and Retrieval (SEDAR)  and can be assessed through the internet: For MRRM's profile go to www.sedar.com or for documents go to www.sedar.com  Information is also available on the Corporate website at  www.MRRM.ca.

MONTREAL, May 5 /CNW Telbec/ -

Consolidated  Earnings And Comprehensive Income and Retained Earnings

Revenues for the year (last year) were $63,803,000 ($65,808,000) decreasing by $2,005,000 (-3.0%). As shown in the segmented information, sales and income from operating activities amounted to $63,270,000 ($65,024,000) being 99.2% (98.8%) of total revenues. Income from corporate totaled $533,000 ($784,000). Unrealized gains in fair market value of the portfolio amounted to $393,000 ($767,000). Operating Revenues decreased by $1,754,000 (-2.7%) compared to last year. Revenue from Corporate decreased by $251,000; for details refer to Portfolio Income Summary under Corporate Investments.

Costs and expenses for the year (last year) were $61,247,000 ($64,083,000), a decrease of $2,836,000 (-4.4%). Costs related to operating activities, before exchange and interest, decreased by $2,695,000 (-4.2%). Expenses related to corporate decreased by $59,000.  

Operating results are discussed later on in this report.

The impact of the fluctuating Canadian dollar resulted in a total currency exchange loss of $9,000 versus a gain of $316,000 last year all included under cost of sales. As disclosed in the Notes, the net exposures were as follows: at February 28, 2011, US$4,487,000; at February 28, 2010, US($450,000); at November 30, 2010, US$2,033,000; at November 30, 2009, US$(492,000).

The company uses foreign exchange contracts to manage foreign exchange exposure. At February 28, 2011, the Company had foreign exchange contracts outstanding allowing the Company to buy USD$18,200,000 at an average rate of 1.0185. The maturity dates of these contracts range from March 2011 to December 2012. The Company has recorded a current and a long term liability on the balance sheet under the caption "fair value of cash flow hedges". The Company also recorded comprehensive loss in the amount of $659,000 to reflect the fair value of these foreign exchange forward contracts.

Interest expensed on bank indebtedness and the reducing term loan amounted to $113,000 compared to $210,000 last year for a decrease of $97,000. Interest related to the long-term debt was $68,000 compared to $111,000 last year.

Earnings before income taxes for the year (last year) were $2,556,000 ($1,725,000), an increase of $831,000. Earnings from operating activities for the year (last year) were $2,181,000 ($1,158,000), an increase of $1,023,000. Earnings from corporate for the year (last year) were $375,000 ($567,000), a decrease of $192,000.

Income taxes for the year (last year) were $557,000 ($205,000). Details of the income tax components are presented in the Notes to the financial statements.

Net earnings for the year (last year) were $1,999,000 ($1,520,000) or $0.79 ($0.60) per share.

Dividends paid during the year (last year) amounted to $380,000 ($254,000). This represents a special year-end dividend of $0.15 ($0.10) per share. The declaration and payment of dividends is at the discretion of the Board of Directors.

ANNUAL RESULTS
(Expressed in thousands, except for amounts per share - unaudited)
2011
$
2010
$
2009
$
2008
$
2007
$
Revenues 63,803 65,808 61,117 49,224 51,164
Net Earnings (loss) 1,999 1,520 (142) 70 1,093
Net Earnings (loss) per share 0.79 0.60 (0.06) 0.03 0.43
Total Assets 38,113 34,303 37,923 33,449 32,223
Total long-Term Financial Liabilities 759 1,410 2,248 2,868 3,651
Dividends Per share 0.15 0.10 0.00 0.05 0.35

Summary of Quarterly Results

The following financial summary is derived from the Company's financial statements for each of the eight most recently completed fiscal quarters.

Summary of Quarterly Financial Results for the eight most recent fiscal quarters Feb 28,
2011
(2011.Q4)
Nov 30,
2010
(2011.Q3)
Aug 31,
2010
(2011.Q2)
May 31,
2010
(2011.Q1)
Feb 28,
2010
(2010.Q4)
Nov 30,
2009
(2010.Q3)
Aug 31,
2009
(2010.Q2)
May 31,
2009
(2010.Q1)
(Expressed in thousands, except for amounts per share - unaudited) $ $ $ $ $ $ $ $
Revenues 15,864 15,870 16,471 15,598 15,181 17,672 15,466 17,489
Net Earnings 576 654 449 320 562 455 169 334
Earnings per share 0.23 0.26 0.17 0.13 0.22 0.18 0.07 0.13
Dividends per share 0.15 0.00 0.00 0.00 0.10 0.00 0.00 0.00

Revenues for this quarter (last year) were  $15,864,000 ($15,181,000), an increase of $683,000 (4.5%). Revenue from operating activities amounted to $15,635,000 ($15,094,000) being 98.6% (99.4%) of total revenues. Income from corporate totaled $229,000 ($87,000). Operating revenues for this quarter increased  by $541,000 (3.6%) compared to this quarter last year.  Revenue from Corporate increased by $142,000 of which $174,000 was attributable to unrealized fair value of investments held for trading and higher realized losses of $15,000.

Costs and expenses for this quarter (last year) were $15,299,000 ($14,718,000), an increase of $581,000 (3.9%). Costs related to operating activities, before exchange and interest, increased by $620,000 (4.2%). 

Interest expense for this quarter (last year) was $21,000 ($45,000) and was $24,000 in 2011.Q3, $30,000  in 2011.Q2 and $38,000 in 2011.Q1. As well this quarter, the Company recovered $7,000 due to variation in fair value of the interest rate swap which is a component of the long term debt facility.

Earnings before income taxes for this quarter (last year) were $565,000 ($463,000), an increase of $102,000. Earnings from operating activities were $344,000 ($408,000), a decrease of $64,000 and corporate were $221,000 ($55,000), an increase of $166,000.

Income taxes for this quarter (last year) were -$11,000 (-$99,000). The effective tax rates are presented in the Notes to the financial statements.

Net earnings for this quarter (last year) were $576,000 ($562,000) or $0.23 ($0.22) per share.

Consolidated Cash Flows, Liquidity and Balance Sheets

In investing activities, the Company added $557,000 of net property, plant and equipment compared to $672,000 last year.

Available credit facilities

The credit facilities available and reported at last year-end remain substantially unchanged. The facilities are comprised of a revolving line of credit for $7,000,000 CDN {or its US equivalent} and a 5 year reducing term facility initially borrowed at fiscal year-end 2007 for $3,500,000. The revolving line of credit bears interest at the Canadian prime rate plus 0.125% for Canadian loans and U.S. base rate plus 0.125% for U.S. loans and, optionally, the Company may take advantage of Bankers Acceptances. The reducing term facility is at a combined fixed rate for interest and fees of 5.83% for the term of the loan. The financial covenants and arrangements relating to these facilities are detailed in the Notes to the audited consolidated financial statements. These covenants are being respected and have been met. 

Cash and cash equivalents position was $2,742,000 compared to bank indebtedness of $922,000 at last year-end. 

Receivables increased by $1,042,000 compared to last fiscal year-end. Account balances are substantially current, there are no anticipated serious collection issues and any potential write-offs have been provided for in the accounts.

Inventories increased by $109,000 (1.4%) and overall volumes of rice increased by 30.3%. 

Marketable securities - see table below for financial summary and investment mix.

Property, plant and equipment decreased by $599,000 comprised of additions of $557,000 and amortization of $1,156,000. 

Payables increased by $3,513,000 mainly due to timing on rice purchases and increases in amounts due related to the agency business.

Long-term debt is being repaid in accordance with the arrangements of the five year reducing term facility agreement as described under credit facilities.

Future income taxes, net liability, increased by $123,000 which is mainly attributable to the amortization of property, plant and equipment that accounts for $223,000 of the increase at February 28, 2011.

Shareholders' equity increased by $1,130,000 to $19,054,000 from $17,924,000 and represents $7.52 ($7.07) per share.

Capital stock remained unchanged at $539,000 and represents 2,535,000 issued common shares.

The MRRM Inc. shares have a very limited distribution and are infrequently traded on the TSX-Venture Exchange under the symbol MRR. www.TSX-Venture Exchange

Critical Accounting Policies:

The Company's critical accounting policies are those that it believes are the most important in determining its financial condition and results. A summary of the Company's significant accounting policies, including the critical accounting policies, is set out in the notes to the consolidated financial statements in the annual report for the year ended February 28, 2010.  An extract of these policies is set out in the notes to the quarterly consolidated financial statements.

New accounting policy

Effective March 1, 2010, the Company uses hedge accounting.  At the inception of a hedging relationship, the Company designates and formally documents the relationship between the hedging instrument and the hedged item, its risk management objective and its strategy for undertaking the hedge. The documentation identifies the anticipated cash flows being hedged, the risk that is being hedged, the type of hedging instrument used and how effectiveness will be assessed.

The Company also formally assesses, both at inception and at least quarterly thereafter, whether or not the derivatives that are used in hedging transactions are highly effective in offsetting the changes attributable to the hedged risks in cash flows of the hedged items. If a hedge relationship becomes ineffective, it no longer qualifies for hedge accounting and any subsequent change in the fair value of the hedging instrument is recognized in earnings. When hedge accounting is appropriate, the hedging relationship is designated as a cash flow hedge. In a cash flow hedge, the change in fair value of the hedging instrument is recorded, to the extent it is effective, in other comprehensive income until the hedged item affects net earnings. The Company uses cash flow hedges to mitigate the risk from variable cash flows associated with forecasted foreign currency denominated cash flows.

Hedge ineffectiveness is measured and recorded in current year earnings in the consolidated statement of earnings. When cash flow hedge is discontinued, any cumulative adjustment to either the hedged item or other comprehensive income is recognized in earnings as the hedged item affects earnings, or when the hedged item is derecognized. If a designated hedge is no longer effective, the associated derivative instrument is subsequently carried at fair value through earnings without any offset from the hedged item. Changes in the fair value of derivatives that do not qualify for hedge accounting are recorded in the consolidated statement of earnings. The balance of other comprehensive income consists of the accumulated variation in the fair value of foreign exchange forward contracts net of future income tax.

Future Accounting Changes: 

International Financial Reporting Standards (IFRS)

The Company's IFRS conversion project plan is comprised of three main phases: initial diagnostic assessment, design, and implementation. The Company has completed the initial assessment and design phases of the plan and has identified and documented the key accounting and disclosure differences between Canadian GAAP and IFRS. The implementation phase of the project is ongoing and will continue until the Company issues its first IFRS financial statements for the quarter ended May 31, 2011.

The IFRS conversion project is on schedule and Management expects that the project will be completed in time to enable the Company to issue IFRS-compliant financial statements for the first quarter of 2012 as required.

During the third quarter of fiscal 2011, the Company completed draft IFRS-compliant financial statements and notes for the quarter ended May 31, 2010. The Company also completed changes to its information systems and accounting procedures to facilitate the transition to IFRS and identified any related impacts to internal controls over financial reporting and disclosure controls and procedures. The information system changes were not significant and primarily relate to the gathering of data necessary for disclosure under IFRS and the controls necessary to ensure the integrity and accuracy of that data.

We have identified all impacts on our future financial position and results of operations on transition to IFRS that are reasonably determinable or estimable at this time. The only material impact will be on property plant and equipment cost and accumulated depreciation restatement and resulting tax implications. Based on our preliminary findings, we expect to recognize an increase in the net book value of our assets and an increase in future annual depreciation expense.

The net after tax increase to opening equity for all transition adjustments identified to date is $0.2 million.

Discussion of Results:

In Dainty Foods, net sales decreased by $3,569,000 (-5.8%) to $58,090,000 for the year and increased by $331,000 (2.3%) for the quarter compared to last year while rice sales volumes increased by 9.0% for the year and  by 17.7% for the quarter compared to last year. The net sales reduction is primarily a result of lower selling prices due to reduced cost of rice and the weaker US Dollar.  The volume increase for the quarter is primarily driven by increased sales in the food service segment. Costs and expenses decreased by $4,324,000 (-7.1%) to $56,526,000 for the year; increased by $364,000 (2.6%) for the quarter compared to last year as commodity prices continue to fluctuate.  Earnings before income taxes for the year increased by $755,000 to $1,564,000 and decreased by $33,000 for the quarter compared to last year.

The Company continues to pursue new value-added retail products some of which will be outsourced. This outsourcing will minimize capital investment while enhancing Dainty Foods' offerings in the retail marketplace for both branded and private label items. New selling relationships continue to be developed and are intended to add strength to our retail sales efforts.

The 2010 rice harvest volume in the United States is the largest on record. Notwithstanding, industry milling yield for the new crop has been extremely low in North America, leading to higher prices for long grain and parboiled rice and lower prices for broken rice due to its increased availability. American rice prices remain higher than the cost in foreign markets at this time.

Dainty also experienced dramatically lower milling yields as the company commenced the milling of new crop rice in mid-January. Price negotiations with customers and suppliers to offset the higher costs continue.

The low yield issue will remain with the industry in North America until new crop becomes available during the fall of 2011.

Dainty Foods endeavours to manage these conflicting variables and to purchase rice at opportune times.

In Robert Reford, revenue increased by $1,815,000 (53.9%) to $5,180,000 for the year and by $210,000 (22.0%) for the quarter compared to last year reflecting  the addition of Montship Inc. as well as increased growth in both Robert Reford and Norton Lilly.

Earnings before income taxes for the year increased by $268,000 to $617,000 and decreased by $31,000 compared to this quarter last year which is in accordance with the terms of our partnership agreement. 

Corporate Investments, portfolio income is summarized as follows:

                                                                                                          

  For the year    For the quarter
  2011 2010 2011 2010
Dividend and interest income $150,000 $148,000 $38,000 $47,000
Capital gains (losses) -$10,000 -$131,000 -$37,000 -$14,000
Unrealized change in Fair Value $393,000 $767,000 $228,000 $54,000
Totals: $533,000 $784,000 $229,000 $87,000

During this quarter, global financial markets continued to improve, contributing to a gain in Fair Market Value of $393,000 for the year compared to $767,000 last year. The portfolio remains conservatively invested and no significant policy changes are foreseen. The Corporate Investments continue to be held with a long term view.

Effective October 1, 2010 the portfolio was transferred from MacDougall Investment Counsel Inc. to Rempart Asset Management. However, this did not involve any changes in the management as all eight members of MacDougall Investment Counsel Inc. moved to Rempart Asset Management. In addition, the custody of the portfolio remains with MacDougall MacDougall MacTier.   

Investment Mix Feb 28,
2011
(2011.Q4)
Nov 30,
2010
(2011.Q3)
Aug 31,
2010
(2011.Q2)
May 31,
2010
(2011.Q1)
Feb 28,
2010
(2010.Q4)
Cash & Equivalents 5.6% 5.7% 3.7% 1.1% 0.2%
Bonds 24.6% 26.5% 28.4% 27.2% 27.2%
Preferred Shares 13.0% 13.7% 15.8% 17.5% 17.6%
Canadian Equities 40.8% 38.2% 36.5% 37.9% 37.7%
U.S. & Foreign Equities 16.0% 15.9% 15.6% 16.3% 17.3%

Certification 

The Company's management, under the direction and supervision of the Chief Executive Officer and Chief Financial Officer, continually evaluates the effectiveness of the Company's disclosure controls and procedures and has concluded that such disclosure controls and procedures are effective.

The Company's management is also responsible for establishing and maintaining internal controls over financial reporting.  These controls were designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Canadian GAAP. 

There have been no changes in the Company's internal controls over financial reporting during this quarter that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

Outlook

Dainty Foods expects to gradually increase retail volumes of value-added products in Canada and the USA. Private Label launches are expected to yield increased revenues going forward. Additional product launches are planned for the next two quarters.

Profit for the year is anticipated to be lower than last year primarily due to higher costs associated with the low milling yields of the North American rice crop. A portion of the higher costs will be recovered through price increases. Flour margins are expected to be lower due to aggressive competition from American rice and flour mills.

The ship agency business has completed a very successful year. We expect continued growth in the next fiscal year in our base  business coupled with additional incremental opportunities. Our joint venture with Norton Lilly and Montship continues to be beneficial.

While the Company is anticipating continued growth in food processing and selling and maintaining a strong position within the ship agency services business, growth will be impacted by several factors including (i) the ability of the Company to secure rice at competitive prices (ii) the rate of acceptance of new private label products (iii) the ability within the marketplace to manage price increases to cover increased costs (iv) the yield and quality of rice supply and (v) general economic conditions. 

Risks and Uncertainties

Overview

Management of risk includes properly identifying, communicating and controlling the risks which may cause a serious impact to the business.  Management is confident that the Company employs effective procedures to address all material risks.

The impact on profit for the coming year due to higher costs associated with the low milling yields of the North American rice crop is uncertain at this time.

Detroit River International Crossing Construction Impact:

Significant construction activities will commence on the Transport Canada property site adjacent to the Dainty Foods facility approximately twelve months from now. Dainty Foods is proceeding with infrastructure changes to the facility to protect our food products from the possibility of airborne contamination. These changes primarily include fine particle filtration units and enclosing dock loading areas.

The capital cost of the protective measures is approximately 3.2 million dollars and the ongoing costs of the operation and maintenance of the new equipment are approximately $350,000 per year.

The company is continuing a negotiation process with Transport Canada to recover these costs but the outcome of these negotiations is uncertain at this time. Capital costs will be funded from the company's line of credit until a resolution with Transport Canada is reached through negotiations or if necessary, through appropriate legal action.

With the exception of the above, the following items were discussed in the MD&A in the last Annual Report and remain principally unchanged.  Please refer to these documents for  this information.

  Ability to Sustain Revenue
Ability to Address Cost and Expense Concerns
Economic Conditions
Environment              

For further information regarding financial risk management, please refer to the Notes to the interim financial statements.

On behalf of the Board  
   
(signed)

Nikola M. Reford 
Chairman 
(signed)

Terry Henderson
President & Chief Executive Officer
   
Dated at Montreal (Westmount), Quebec,  May 5, 2011.

MRRM  Inc.                
CONSOLIDATED  EARNINGS                
                   
(unaudited) For the TWELVE Months Ending       For the Quarter Ending
      February 28,   February 28,   February 28,   February 28,
      2011   2010   2011   2010
      '000   '000   '000   '000
Revenues                
    Sales   $63,270   $65,024   $15,635   $15,094
    Increase in fair value of marketable securities held for trading   533   784   229   87
                   
      63,803   65,808   15,864   15,181
Costs and expenses                
    Cost of sales, selling and administrative   60,023   62,773   14,996   14,400
    Amortization   1,156   1,161   289   289
    Interest on long-term debt     68   111   13   25
    Other interest    45   99   8   20
    Change in fair value of interest rate swap   (45)   (61)   (7)   (16)
      61,247   64,083   15,299   14,718
                   
Earnings before income taxes   2,556   1,725   565   463
                     
Income taxes                 
    Current   264   81   (163)   (109)
    Future   293   124   152   10
      557   205   (11)   (99)
                   
Net earnings   $1,999   $1,520   $576   $562
                   
                   
Basic earnings per share   $0.79   $0.60   $0.23   $0.22
                 

MRRM  Inc.            
CONSOLIDATED COMPREHENSIVE INCOME            
                   
(unaudited) For the TWELVE Months Ending   For the Quarter Ending
      February 28,   February 28,   February 28,   February 28,
      2011   2010   2011   2010
      '000   '000   '000   '000
                   
Net earnings   $1,999   $1,520   $576   $562
Other comprehensive income                
    Changes in fair value of foreign exchange forward contracts designated as cash flow hedges (597)   0   (812)   0
    Future income taxes on changes in fair value of foreign exchange forward contracts designated as cash flow hedges 154   0   209   0
    Settlements of foreign exchange forward contracts, recorded in consolidated earnings (62)   0   2   0
    Current income taxes on settlements of foreign exchange forward contracts, recorded in consolidated earnings 16   0   (1)   0
Other comprehensive loss for the year   (489)   0   (602)   0
                   
Comprehensive income for the year   $1,510   $1,520   ($26)   $562
           

MRRM  Inc.                
CONSOLIDATED  RETAINED EARNINGS                
                 
(unaudited) For the TWELVE Months Ending   For the Quarter Ending
    February 28,   February 28,   February 28,   February 28,
    2011   2010   2011   2010
    '000   '000   '000   '000
                 
  Balance, beginning of period $17,385   $16,119   $18,808   $17,077
  Net earnings 1,999   1,520   576   562
    19,384   17,639   19,384   17,639
                 
  Dividends 380   254   380   254
                 
  Balance, end of period $19,004   $17,385   $19,004   $17,385
                 
                 
CONSOLIDATED ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)                
                 
(unaudited) For the TWELVE Months Ending   For the Quarter Ending
    February 28,   February 28,   February 28,   February 28,
    2011   2010   2011   2010
    '000   '000   '000   '000
                 
Balance, beginning of year   $0   $0   $0   $0
  Other comprehensive loss (489)   0   (602)   0
                 
Balance, end of year   ($489)   $0   ($602)   $0
                 

MRRM  Inc.                
CONSOLIDATED  CASH  FLOWS                
                   
(unaudited) For the TWELVE Months Ending    For the Quarter Ending
      February 28,   February 28,   February 28,   February 28,
      2011   2010   2011   2010
      '000   '000   '000   '000
OPERATING ACTIVITIES                
Net earnings   $1,999   $1,520   $576   $562
Defined benefit plan payments   (55)   (59)   (14)   (15)
      1,944   1,461   562   547
Non-cash items                
    Change in fair value of marketable securities held for trading (383)   (636)   (191)   (40)
    Change in fair value of interest rate swap contract (45)   (61)   (7)   (16)
    Loss on disposal of equipment 0   2   0   2
    Unrealized foreign exchange gain 0   0   3   0
    Amortization 1,156   1,161   289   289
    Pension benefit (income) cost (32)   6   (54)   8
    Future income taxes  293   124   151   10
      989   596   191   253
    Changes in non-cash working capital items 2,562   3,308   (1,573)   2,153
    Non-cash operating items generated (used) 3,551   3,904   (1,382)   2,406
Cash flows from operating activities     5,495   5,365   (820)   2,953
                   
INVESTING ACTIVITIES                
                   
Marketable securities   (1,563)   (2,569)   (750)   (294)
Disposals of marketable securities   1,446   2,500   720   255
Property, plant and equipment   (557)   (672)   (194)   (55)
Cash surrender value of life insurance policies   (38)   3   (38)   3
                   
Cash flows from investing activities   (712)   (738)   (262)   (91)
                   
FINANCING ACTIVITIES                
Bank indebtedness   (922)   (3,674)   0   (2,429)
Long-term debt   (739)   (699)   (189)   (179)
Dividends   (380)   (254)   (380)   (254)
Cash flows from financing activities   (2,041)   (4,627)   (569)   (2,862)
                   
Net change in cash and cash equivalents   2,742   0   (1,651)   0
                 
Cash and cash equivalents, beginning of period   0   0   4,393   0
Cash and cash equivalents, end of period   $2,742   $0   $2,742   $0
                   
Dividends per share   $0.15   $0.10   $0.15   $0.10
                 

MRRM Inc.        
CONSOLIDATED  BALANCE  SHEETS        
           
(unaudited)   As at   As at
      February 28,   February 28,
      2011   2010
      '000   '000
ASSETS        
Current        
  Cash and cash equivalents $2,742   $0
  Accounts receivable 7,235   6,193
  Inventories 7,940   7,831
  Income taxes receivable 0   35
  Tax credits receivable 100   94
  Prepaids 117   111
  Future income taxes 113   15
      18,247   14,279
           
Tax credits receivable   771   868
Marketable securities, at fair value     4,925   4,425
Property, plant and equipment, net   14,130   14,729
Cash surrender value of life insurance policies   40   2
           
      $38,113   $34,303
           
LIABILITIES        
Current        
  Bank indebtedness $0   $922
  Accounts payable and accrued liabilities 14,637   11,124
  Fair value of cash flow hedges 382   0
  Income taxes payable 80   0
  Current portion of accrued benefit liability 55   56
  Current portion of long-term debt 784   739
  Fair value of interest rate swap contract 13   0
    15,951   12,841
         
Long-term debt, reducing term loan maturing in 2012   0   784
Fair value of interest rate swap contract   0   58
Fair value of cash flow hedges   277   0
Accrued benefit liability   482   568
Future income taxes   2,349   2,128
    19,059   16,379
SHAREHOLDERS' EQUITY        
         
Capital stock        
  Common shares, without nominal or par value authorized in an unlimited number      
  Issued and paid                   2,535,000 shares 539   539
         
Retained earnings   19,004   17,385
Accumulated other comprehensive loss   (489)   0
    18,515   17,385
    19,054   17,924
         
    $38,113   $34,303
         

  MRRM  Inc.              
  NOTES To CONSOLIDATED  FINANCIAL  STATEMENTS              
  February 28, 2011              
                 
  (unaudited)                                
 
1- Accounting Policies, Financial Risk management and Supplementary Information              
   
    The unaudited interim consolidated financial statements were prepared by the Company in accordance with Canadian generally accepted accounting principles and have not been reviewed by the Company's auditors.
   
    The accounting policies and procedures used in preparing these unaudited interim consolidated financial statements are the same as those used in preparing the audited annual consolidated financial statements for the year ended February 28, 2010 except for the adoption of a new accounting policy described below. These unaudited interim statements should be read along with the audited annual statements and notes included in the Company's last Annual Report.  Certain comparative figures have been reclassified to conform with the presentation adopted at last fiscal year-end.
   
    Future accounting standards            
               
    International Financial Reporting Standards ("IFRS")            
               
    In February 2008, the Canadian Accounting Standards Board confirmed that Canadian generally accepted accounting principles for publically accountable enterprises will be converged with IFRS effective for fiscal years beginning on or after January 1, 2011. IFRS uses a conceptual framework similar to Canadian generally accepted accounting principles., but there are significant differences in recognition, measurement and disclosures. The Company will change over to IFRS for its interim and annual financial statements beginning on March 1, 2011.
   
2- Financial Instruments and Financial Risk factors              
               
    Hierarchy of Financial Instruments            
                 
    The Company categorizes its financial assets and liabilities, measured at fair value into one of three levels depending on the observability of the inputs used in the measurement as follows:
   
    - Level 1: This level includes assets and liabilities measured at fair value based on unadjusted quoted prices in active markets that are accessible at the measurement date. The financial assets included in this level are cash and marketable securities.
   
    - Level 2: This level includes valuations determined using directly or indirectly observable inputs other than quoted prices included within Level 1. Financial instruments in this category are valued using models or other industry standard valuation techniques derived from observable market inputs. This level includes the Company's derivative financial instruments composed of its interest rate swap agreement and the foreign exchange forward contracts.
   
    - Level 3: This level includes valuations based on inputs which are less observable, unavailable or where the observable data does not support a significant portion of the instruments' fair value. As at February 28, 2011, the Company does not have any financial assets, financial liabilities or derivative financial instruments, which should be included in this level.
               
    Derivative Financial Instruments            
               
    The Company uses derivative financial instruments to manage its currency and interest rate risks as necessary.
   
    At February 28, 2011, the Company had foreign exchange contracts outstanding that allowed the Company to buy USD$18,200,000 at an average rate of 1.0185. The maturity dates of these contracts range form March 2011 to December 2012. The Company has recorded current and long term liabilities on the balance sheet under the captions "fair value of cash flow hedges" and comprehensive income in the amount of $659,000 to reflect the fair value of these foreign exchange forward contracts.
   
    Derivative financial instruments are primarily used by the Company to reduce interest rate risk on its long-term debt and foreign exchange risk on certain of its inventory purchases. The Company uses derivative financial instruments to ensure unfavourable fluctuations in cash flows are offset by changes in cash flows from derivative financial instruments. The Company does not enter into derivative financial instruments for trading or speculative purposes.
   
    The Company uses hedge accounting for its foreign exchange contracts.  At the inception of a hedging relationship, the Company designates and formally documents the relationship between the hedging instrument and the hedged item, its risk management objective and its strategy for undertaking the hedge. The documentation identifies the anticipated cash flows being hedged, the risk that is being hedged, the type of hedging instrument used and how effectiveness will be assessed.
   
    The Company also formally assesses, both at inception and at least quarterly thereafter, whether or not the derivatives that are used in hedging transactions are highly effective in offsetting the changes attributable to the hedged risks in cash flows of the hedged items. If a hedge relationship becomes ineffective, it no longer qualifies for hedge accounting and any subsequent change in the fair value of the hedging instrument is recognized in earnings. When hedge accounting is appropriate, the hedging relationship is designated as a cash flow hedge. In a cash flow hedge, the change in fair value of the hedging instrument is recorded, to the extent it is effective, in other comprehensive income until the hedged item affects net earnings. The Company uses cash flow hedges to mitigate the risk from variable cash flows associated with forecasted foreign currency denominated cash flows.
   
    The Company concluded that its foreign exchange forward contracts are effective as cash flow hedges, both at inception and over the term of the instrument, since all critical terms of these derivative financial instrument match the terms of the inventory purchases, including the related settlement thereof, being hedged. The interest rate swap contract was not designated as a hedging instrument.
                 
    Comprehensive income            
                 
    Comprehensive income is the change in equity or net assets of the Company during the year from transactions and other instrument and circumstances from non-owner sources and comprises the Company's net earnings and other comprehensive income. Other comprehensive income comprises items that are recognized in comprehensive income, but excluded from the determination of net earnings, including changes in the fair value of financial instruments designated as cash flow hedges. The components of comprehensive income are presented in consolidated comprehensive income (loss).
                 
    Fair Value and Classification of Financial Instruments            
               
    The following methods and assumptions were used to determine the estimated fair value of each class of financial instruments:
                 
   

- The fair values of cash and cash equivalents, bank indebtedness, trade accounts receivable and accounts payable and accrued liabilities are comparable to their carrying amounts, given their short maturity periods;

   

- The fair value of marketable securities has been determined based on the current bid price at the balance sheet date;

   

- The fair value of the long-term debt which bears interest at a variable rate approximates its carrying amount;

   

- The fair values of the interest rate swap agreement and the foreign exchange forward contracts are estimated using a valuation technique that maximizes the use of observable market inputs including exchange rates and interest rates as  a listed market price is not available;

               
    As at February 28, 2011, the financial instruments presented at fair value on the Company's consolidated balance sheet by level of the fair value hierarchy are as follows:
                 
    (amounts are in thousands of dollars)     Level 1   Level 2   Level 3
    Financial Assets              
    Cash and cash equivalents     2,742   -   -
    Marketable securities     4,925   -   -
    Financial Liabilities              
    Foreign exchange forward contracts     -   (659)   -
    Interest rate swap     -   (13)   -
                   
    The Company is exposed to a number of different financial risks arising from normal course business exposure, as well as the Company's use of financial instruments. These risks include credit risk, interest rate risk, liquidity risk, currency risk, price risk and other price risk. The Company's management is responsible for setting acceptable levels of risk and reviewing management activities as necessary.
                 
    Currency risk            
                 
    The Company is exposed to foreign currency risks due to its import of  bulk rice from the USA and overseas. These risks are partially offset by sales in U.S. funds and by the purchase of forward exchange contracts. As at February 28, 2011, there were USD$18,200,000 of foreign exchange forward contracts pending. The Company uses hedge accounting for such instruments. Under this method any changes in the fair value of the contracts caused by fluctuations in the spot foreign exchange rates are recorded in comprehensive income. 
                 
    The Company has recorded a fair value of $659,000 on foreign exchange forward contracts at February 28, 2011. Based on the foreign currency exposure as at February 28, 2011 and assuming all other variables remain constant, a 10% depreciation or appreciation of the Canadian dollar against the U.S. dollar would result in an increase/decrease of $66,000 in comprehensive income.
                 
    As at February 28, 2011, assets denominated in foreign currencies consisting of cash and cash equivalents, trade accounts receivable and marketable securities totaled US$7,054,562 or its Canadian equivalent of $6,870,438 (US$3,331,520 or its Canadian equivalent of $3,506,758 as at February 28, 2010). Bank indebtedness and accounts payable and accrued liabilities denominated in U.S. dollars totaled US$2,567,568 or its Canadian equivalent of $2,500,554 (US$3,781,970 or its Canadian equivalent of $3,980,902 as at February 28, 2010).
                 
    Based on the net U.S. dollar exposure as of February 28, 2011, a 1 percent increase/(decrease) in the U.S. exchange rate will increase/(decrease) equity by approximately $44,000 ($5,000 in 2010).
                 
    Credit risk            
                 
    Credit risk relates to the risk that a party to a financial instrument will not fulfill some or all of its obligations, thereby, causing the Company to sustain a financial loss. In the normal course of business, the Company is exposed to credit risk from its customers, substantially all of which are in the retail and processing markets. Generally, the carrying amount reported on the Company's consolidated balance sheet for its financial assets exposed to credit risk, net of applicable provisions for losses, represents the maximum amount exposed to credit risk. The Company performs ongoing credit evaluations of new and existing customers' financial conditions and reviews the collectibility of its trade and other accounts receivable in order to mitigate any possible credit losses. The Company maintains an allowance for doubtful accounts that represents its estimate of uncollectible amounts. This allowance is related to specific losses estimated on individually significant exposures.
    The Company is also exposed to credit risk associated with its cash deposits and its derivative financial instruments. Credit risk associated with cash is mitigated by ensuring that cash is deposited with a major financial institution that has been accorded an investment grade rating by rating agencies. Credit risk associated with derivative financial instrument is mitigated as the Company enters into these agreements with the same major financial institution.
                 
    Interest rate risk            
    The Company is exposed to interest rate risk with respect to its bank indebtedness which bears interest at the Canadian prime rate plus 0.125% for Canadian loans and U.S. base rates plus 0.125% for U.S.  loans. The interest rate risk relating to the reducing term loan is as described under Fair value above. The Company's investments in bonds bear interest at fixed rates and the Company is, therefore, exposed to the risk of changes in fair value resulting from interest rate fluctuations.
                 
    The Company uses an interest rate swap arrangement, for a notional amount of $3,500,000 through its bankers to effectively fix the variable rate pertaining to the Reducing term loan which matures in February 2012. This arrangement has fixed the interest rate at 5.83% to maturity.  The swap contract had a negative fair value of $13,000 at February 28, 2011 and as such, has been recorded in liabilities under fair value of interest rate swap and recognized in consolidated earnings under change in fair value of interest rate swap.
                 
    Liquidity risk            
                 
    Liquidity risk is the risk that the Company will not be able to meet its financial liabilities and obligations as they become due. The Company is exposed to this risk mainly through its accounts payable and accrued liabilities, its long term debt and its contractual commitments. The Company finances its operations through a combination of cash flows from operations and its line of credit.
                 
    The Company believes that future cash flows from operations and availability under existing credit facilities from banking institutions will be sufficient to meet its obligations.  Under senior management's supervision, the Company manages its liquidity according to financial forecast and expected cash flows.
                   
    Price risk            
                 
    The Company's price risk arises from changes in raw material prices, which are significantly influenced by the fluctuating markets. The Company's objectives in managing its price risk are three fold: i) to protect its financial results for the year from significant fluctuations in raw material costs, ii) to anticipate, to the extent possible, and plan for significant changes in the raw material markets and iii) to ensure sufficient availability of raw materials required to meet the Company's manufacturing requirements. To manage its exposure to price risks, the Company closely monitors current and anticipated changes in market prices and develops pre-buying strategies and patterns, and seeks to adjust its selling prices when market conditions permit. Historical results indicate management's ability to rapidly identify fluctuations in raw material prices and, to the extent possible, incorporate such fluctuations in the Company's selling prices and as such, any impact to consolidated earnings is not significant.
                 
    Other price risk 
                 
    The Company is exposed to fluctuations in the market prices of its marketable securities that are classified as held-for-trading. Changes in the fair value of marketable securities are recorded in consolidated earnings. The risk is managed by ensuring a relatively conservative and diversified asset mix. For this quarter, the effect before income taxes represents an increase in income of $228,000 and an increase of $54,000 for the same period last year. As at February 28, 2011, a 10% increase/(decrease) in the bid prices of the marketable securities would increase/(decrease) equity by approximately $492,000 ($442,000 in February 2010).
                 
3- Information included in the Statement Of Earnings
      For the TWELVE Months Ending   For the Quarter Ending
      February 28,   February 28,   February 28,   February 28,
      2011   2010   2011   2010
      '000   '000   '000   '000
                   
      Income taxes paid $150   $137   $184   $168
    Investment tax credits $155   $115   $0   $0
During the year, the Company recorded investment tax credits on qualifying research and development costs in the amount of $155,000 ($115,000 in 2010). The amount recorded in 2011 is related to the 2010 income tax filings while amount recorded in 2010 is related to the 2009 income tax filings.    
                   
    Interest on long-term debt $68   $111   $12   $26
    Interest on bank indebtedness and other 45   99   3   17
    Interest paid $113   $210   $15   $43
                 
4 - Income Taxes
    Tax at combined basic federal and provincial income tax rate $748   $531   $164   $137
    Non-taxable portion of capital losses  1   20   5   2
    Tax-free income (24)   (25)   (24)   (3)
    Non-taxable portion of increase in fair value of investments (58)   (118)   (34)   (8)
    Non-deductible expenses 21   32   (2)   10
    Recovery of prior year income taxes (76)   0   (76)   0
    Reduction in future income tax due to decrease in rates (48)   (216)   (48)   (216)
    Other (8)   (19)   4   (21)
    Canadian entities 556   205   (11)   (99)
    U.S.A entity 1   0   0   0
      $557   $205   ($11)   ($99)
                   
    Effective tax rate [Canadian entities] 21.8%   11.9%        
                   
    The Company's future income tax liabilities (assets) are as follows:              
    Employee future benefits ($169)   ($187)   $17   $15
    Research and development tax credits 268   270   0   (18)
    Property, plant and equipment 2,191   1,968   125   (86)
    Loss carry forwards 0   (8)   0   39
    Derivative Financial Instruments (169)   0   (207)   0
    Other 115   70   8   60
      $2,236   $2,113   ($57)   $10
                 
    Comprising              
       Asset: Current ($113)   ($15)   ($98)   $0
       Liability: Current 0   0   (22)   0
    Non-current 2,349   2,128   63   10
      $2,236   $2,113   ($57)   $10
5- Supplemental Cash Flow Information: 
    Changes in non-cash working capital items              
       Accounts receivable ($1,042)   $632   ($190)   $1,549
       Inventories (109)   3,060   (1,671)   (11)
       Income Tax receivable 35   (35)   0   (35)
       Tax credits receivable 91   144   174   92
       Prepaids (6)   30   (10)   39
       Accounts payable and accrued liabilities 3,513   (502)   469   699
       Income taxes payable 80   (21)   (345)   (180)
      $2,562   $3,308   ($1,573)   $2,153
                   
6- Segmented Information 
    Revenue              
    Food processing and selling $58,090   $61,659   $14,469   $14,138
    Ship agency services 5,180   3,365   1,166   956
    Operating 63,270   65,024   15,635   15,094
    Corporate 533   784   229   87
      $63,803   $65,808   $15,864   $15,181
  Earnings                
    Food processing and selling $1,564   $809   $292   $325
    Ship agency services 617   349   52   83
    Operating 2,181   1,158   344   408
    Corporate 375   567   221   55
    Earnings before income taxes 2,556   1,725   565   463
    Income Taxes 557   205   (11)   (99)
    Net earnings $1,999   $1,520   $576   $562
                 
    Assets              
    Food processing and selling $29,123   $28,345   $934   ($1,345)
    Ship agency services 5,804   1,475   (617)   (598)
    Operating 34,927   29,820   317   (1,943)
    Corporate 3,186   4,483   (163)   150
      $38,113   $34,303   $154   ($1,793)
    Capital expenditures              
    Food processing and selling $557   $660   $194   $55
    Ship agency services 0   12   0   0
    Operating 557   672   194   55
    Corporate 0   0   0   0
      $557   $672   $194   $55
    Amortization              
    Food processing and selling $1,130   $1,129   $283   $281
    Ship agency services 26   32   6   8
      $1,156   $1,161   $289   $289
                   
7- Capital disclosures 
    The Company defines its capital as bank indebtedness (net of cash and cash equivalents), long-term debt (including the current portion) and shareholders' equity. The Company monitors capital using the ratio of debt to capitalization. Capital is calculated as follows:
                   
    Bank indebtedness,  net of cash and cash equivalents $0   $922        
    Long-term debt and fair value of interest rate swap contract including current portions 797   1,581        
    Total debt 797   2,503        
    Shareholders' equity 19,054   17,924        
    Total capitalization $19,851   $20,427        
                 
    Debt as % of capitalization 4%   12%        
                 
    The Company's objectives for managing its capital structure are to ensure financial capacity, liquidity and flexibility to maintain a strong capital base to sustain ongoing development and operations. To maintain or adjust the capital structure, the Company may adjust the dividend payment to shareholders.
                 
    The Company's credit facilities are subject to a number of covenants and these have been met as indicated under "Liquidity risk". These covenants are as follows: i) A revolving line of credit secured by accounts receivable and marketable securities; and ii) Maintain a Debt Service Coverage ratio of not less than 1.25 on a pre-dividend basis and 1.0 on a post-dividend basis.
                 
    The primary source of capital is shareholders' equity. The credit facilities available and reported at last year-end remain substantially unchanged. The facilities are comprised of a revolving line of credit for $7,000,000 CDN {or its US equivalent} and a 5 year reducing term facility initially borrowed at fiscal year-end 2007 for $3,500,000. The revolving line of credit bears interest at the Canadian prime rate plus 0.125% for Canadian loans and U.S. base rate plus 0.125% for U.S. loans and, optionally, the Company may take advantage of Bankers Acceptances. The reducing term facility is at a combined fixed rate for interest and fees of 5.83% for the term of the loan. The financial covenants and arrangements relating to these facilities are detailed in the Notes to the audited consolidated financial statements filed for last year-end.  These covenants are being respected and have been met. The Corporation is not subject to any external capital restrictions and has no commitments to sell common shares.
                   
8- Geographic Information 
    External customer revenues (1)              
    Canada $53,748   $52,294   $13,260   $12,290
    U.S.A. 10,055   13,514   2,604   2,891
      $63,803   $65,808   $15,864   $15,181
                   
(1) Revenues from external customers are attributed to countries based on the location where goods or services were provided.

 

 

 

SOURCE MRRM Inc.

For further information:

Lou Younan, Vice-President Finance & CFO, MRRM Inc., (514) 908-7777, Fax: (514) 906-0220, mr@mrrm.ca

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MRRM Inc.

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