MRRM Inc. - Directors' report and management discussion and analysis of the
financial condition and results of operations - Interim 2010.Q4 February 28,
2010 (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.
Extract of information from the Annual Report which will be circulated
on June 2, 2010 to the shareholders.
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 6 /CNW Telbec/ -
Consolidated Earnings And Comprehensive Income and Retained Earnings
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Revenues for the year (last year) were $65,808,000 ($61,117,000) increasing by $4,691,000 (7.7%). As shown in the segmented information, sales and income from operating activities amounted to $65,024,000 ($61,916,000) being 98.8% (101.3%) of total revenues. Income from corporate totaled $784,000 ($-799,000). Unrealized gains in fair market value of the portfolio amounted to $767,000 ($-926,000). Operating Revenues increased by $3,108,000 (5.0%) compared to last year. Revenue from Corporate increased by $1,583,000 of which $1,693,000 was attributable to an increase in unrealized fair value of investments held for trading.
Costs and expenses for the year (last year) were $64,083,000 ($61,065,000), an increase of $3,018,000 (4.9%). Costs related to operating activities, before exchange and interest, increased by $3,157,000 (5.2%). Expenses related to corporate increased by $37,000.
Operating results are discussed later on in this report.
The impact of the fluctuating Canadian dollar resulted in a total currency exchange gain of $316,000 (all included under cost of sales) versus a gain of $278,000 ($157,000 included under cost of sales) last year. As disclosed in the Notes, the net exposures were as follows: at February 28, 2010, US($450,000); at February 28, 2009, US($404,000); at November 30, 2009, US($492,000); at November 30, 2008, US($550,000). The above US dollars include the equivalents for euros and pounds sterling which are not material.
At the end of this year, there were no forward exchange contracts pending.
Interest expensed on bank indebtedness and the reducing term loan amounted to $210,000 compared to $328,000 last year for a decrease of $118,000. Interest related to the long-term debt was $111,000 compared to $149,000 last year.
Earnings before income taxes for the year (last year) were $1,725,000 ($52,000), an increase of $1,673,000. Earnings from operating activities for the year (last year) were $1,158,000 ($1,031,000), an increase of $127,000. Earnings (loss) from corporate for the year (last year) were $567,000 ($-979,000), an increase of $1,546,000.
Income taxes for the year (last year) were $205,000 ($194,000). Details of the income tax components are presented in the Notes to the financial statements.
Net earnings (loss) for the year (last year) were $1,520,000 (-$142,000) or $0.60 (-$0.06) per share.
Dividends paid during the year amounted to $254,000. This represents a special year-end dividend of $0.10 per share. The declaration and payment of dividends is at the discretion of the Board of Directors. No change is anticipated in the current dividend policy.
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ANNUAL RESULTS 2010 2009 2008 2007 2006
---- ---- ---- ---- ----
(Expressed in thousands,
except for amounts per share $ $ $ $ $
- unaudited) - - - - -
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Revenues 65,808 61,117 49,224 51,164 42,707
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Net Earnings (loss) 1,520 (142) 70 1,093 1,050
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Net Earnings (loss)
per share 0.60 (0.06) 0.03 0.43 0.41
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Total Assets 34,303 37,923 33,449 32,223 28,296
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Total long-Term Financial
Liabilities 1,410 2,248 2,868 3,651 580
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Dividends Per share 0.10 0.00 0.05 0.35 0.35
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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.
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Summary of
Quarterly
Financial
Results
for the Feb 28, Nov 30, Aug 31, May 31, Feb 28, Nov 30, Aug 31, May 31,
eight 2010 2009 2009 2009 2009 2008 2008 2008
most (2010. (2010. (2010. (2010. (2009. (2009. (2009. (2009.
recent ------ ------ ------ ------ ------ ------ ------ ------
fiscal Q4) Q3) Q2) Q1) Q4) Q3) Q2) Q1)
quarters --- --- --- --- --- --- --- ---
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(Expressed
in
thousands,
except
for
amounts
per
share -
unaudited) $ $ $ $ $ $ $ $
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Revenues 15,181 17,672 15,466 17,489 16,502 16,962 14,091 13,562
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Net
Earnings
(loss) 562 455 169 334 (200) (343) 287 114
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Earnings
(loss)
per share 0.22 0.18 0.07 0.13 (0.08) (0.14) 0.11 0.05
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Dividends
per share 0.10 0.00 0.00 0.00 0.00 0.00 0.00 0.00
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Revenues for this quarter (last year) were $15,181,000 ($16,502,000), a decrease of $1,321,000 (-8.0%). Revenue from operating activities amounted to $15,094,000 ($16,752,000) being 99.4% (101.5%) of total revenues. Income from corporate totaled $87,000 ($-250,000). Operating revenues for this quarter decreased by $1,658,000 (-9.9%) compared to this quarter last year. Revenue from Corporate increased by $337,000 of which $225,000 was attributable to unrealized fair value of investments held for trading.
Costs and expenses for this quarter (last year) were $14,718,000 ($16,590,000), a decrease of $1,872,000 (-11.3%). Costs related to operating activities, before exchange and interest, decreased by $1,705,000 (-10.4%).
Included in the financial results for this quarter last year was investment tax credits of $61,000.
Interest expense for this quarter (last year) was $45,000 ($71,000) and was $49,000 in 2010.Q3, $54,000 in 2010.Q2 and $62,000 in 2010.Q1. As well this quarter, the Company recovered $16,000 due to variation in fair value of the interest rate swap which is a component of the long term debt facility.
Earnings (loss) before income taxes for this quarter (last year) were $463,000 (-$88,000), an increase of $551,000. Earnings from operating activities were $408,000 ($201,000), an increase of $207,000 and corporate were $55,000 (-$289,000),an increase of $344,000.
Income taxes for this quarter (last year) were -$99,000 ($112,000). The effective tax rates are presented in the Notes to the financial statements.
Net earnings (loss) for this quarter (last year) was $562,000 (-$200,000) or $0.22 (-$0.08) per share.
Consolidated Cash Flows, Liquidity and Balance Sheets
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In investing activities, the Company added $672,000 of net property, plant and equipment compared to $602,000 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 $6,750,000 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 0.25% for Canadian loans and U.S. base rate plus 0.25% 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.
Receivables decreased by $632,000 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 decreased by $3,060,000 (-28.1%) while overall volumes of rice decreased by 18.4%.
Marketable securities - see table below for financial summary and investment mix.
Property, plant and equipment decreased by $491,000 comprised of additions of $672,000, disposals of $2,000 and amortization of $1,161,000.
Bank indebtedness was $922,000 compared to $4,596,000 at last year-end, a decrease of $3,674,000. This is mainly attributable to the decrease in inventories.
Payables decreased by $502,000, due mainly to lower rice purchases.
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 $124,000 which is mainly attributable to the increase of $103,000 for the unrealized change in fair value of investments held for trading at February 28, 2010.
Shareholders' equity increased by $1,266,000 to $17,924,000 from $16,658,000 and represents $7.07 ($6.57) 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
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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, 2009. An extract of these policies is set out in the notes to the quarterly consolidated financial statements.
Future Accounting Changes:
International Financial Reporting Standards (IFRS)
In 2005, the Accounting Standards Board of Canada (AcSB) announced that accounting standards in Canada are to converge with IFRS. In March 2009, the CICA published an updated version of its "Implementation Plan for Incorporating International Financial Reporting Standards from Canadian GAAP".
This plan includes an outline of the key decisions that the CICA will need to make as it implements the Strategic Plan for publicly accountable enterprises that will converge Canadian generally accepted accounting standards with IFRS. While IFRS uses a conceptual framework similar to Canadian GAAP, there are significant differences in accounting policy which must be addressed. The CICA has confirmed the changeover date from current Canadian GAAP to IFRS for year ends beginning on or after January 1, 2011.
The Company has established an IFRS convergence team that oversees and is actively involved in the transition to IFRS. The Company is devoting the necessary resources to achieve a seamless transition to IFRS by the required date of conversion.
In order to integrate new accounting and reporting standards and assess the impact that the new policies may have on our activities, the Company has undertaken the development of a changeover plan to ensure that a smooth transition occurs.
Discussion of Results:
----------------------
In Dainty Foods, net sales increased by $2,925,000 (5.0%) for the year and decreased by $1,906,000 (-11.9%) for the quarter compared to last year. Overall rice sales volumes decreased by 12.3% for the year and 5.1% for the quarter compared to last year. The volume reduction is primarily due to lower sales to two major customers, one of which was involved in a labour dispute with its workforce and the other delayed orders for an extended period. Furthermore sales of bulk and bagged rice also contributed to the decrease in volume compared to last year when panic buying erupted due to concerns of possible rice shortages. Costs and expenses increased by $2,872,000 (5.0%) for the year and decreased by $1,978,000 (-12.5%) for the quarter compared to last year and earnings before income taxes for the year increased by $53,000 and $72,000 for the quarter compared to last year.
The increases in revenue and cost of sales for the year were mainly attributable to increased sales of flour and bulk rice compared to last year.
Earnings before income taxes increased by $53,000 for the year and by $72,000 for the quarter compared to last year as cost of sales increased in line with increased sales, while operating, selling, and administrative expenses decreased for the year and the period.
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.
World market cost of rice continues to decline gradually. Dainty Foods continues to manage rice contracts to short term duration.
In February 2010, the Company incorporated Dainty Foods International, Inc. which will be used as a vehicle for further business expansion in the USA.
In Robert Reford, revenue increased by $183,000 (5.8%) for the year and by $248,000 (35.0%) for the quarter compared to last year partially reflecting the addition of Montship Inc. for the last month of the fiscal year as well as Norton Lilly for a full year versus a partial year in FYE 2009.
Earnings before income taxes for the year increased by $74,000 and by $135,000 compared to this quarter last year.
On February 1, 2010 Montship Inc. of Montreal joined the strategic alliance created between Robert Reford and Norton Lilly International Inc. in 2008. This alliance will continue to serve to increase overall revenues, open up marketing opportunities and offer synergies for the three partners. Our customers will continue to receive the best quality and array of services possible in the agency business from coast to coast and throughout the Great Lakes. Montship Inc. was founded in 1925, and remains wholly owned by its directors and officers who are all active in the Company. They have divisions offering services in liner agency, trucking, warehousing and container repair. Montship will bring a strong business base and some very experienced staff to the partnership which is solely focused on vessel and port operations agency business. We happily welcome Montship aboard.
Corporate Investments, portfolio income is summarized as follows:
For the period For the quarter
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2010 2009 2010 2009
---- ---- ---- ----
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Dividend and
interest income $148,000 $184,000 $47,000 $38,000
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Capital (losses) -$131,000 -$57,000 -$14,000 -$117,000
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Unrealized change
in Fair Value $767,000 -$926,000 $54,000 -$171,000
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Totals: $784,000 -$799,000 $87,000 -$250,000
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During this year, global financial markets have improved and as indicated above, our portfolio recovered $767,000 of the $926,000 loss we had experienced last fiscal 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 June 1, 2009 the mandate for management of the portfolio was transferred to MacDougall Investment Counsel Inc.
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Investment Mix Feb 28, Nov 30, Aug 31, May 31, Feb 28,
2010 2009 2009 2009 2009
(2010.Q4) (2010.Q3) (2010.Q2) (2010.Q1) (2009.Q4)
--------- --------- --------- --------- ---------
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Cash & Equivalents 0.2% 0.5% 0.7% 18.9% 21.0%
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Bonds 27.2% 27.9% 30.9% 18.9% 20.3%
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Preferred Shares 17.6% 17.6% 14.7% 13.1% 13.1%
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Canadian Equities 37.7% 37.3% 33.5% 31.1% 27.3%
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U.S. & Foreign Equities 17.3% 16.7% 20.2% 18.0% 18.3%
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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 coupled with the strong increase in flour sales experienced during the last two years.
Microwaveable branded pasta products are expected to add incremental profitability during the last two quarters of Fiscal 2011.
Profit for the quarter was in line with expectations and earnings for the next quarter are expected to match last year. Margins on our U.S. sales will decline in relation to the devaluation of the U.S. Dollar.
The ship agency results were in line with expectations and the addition of Montship Inc. is expected to improve profitability over last year.
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 co-packed products (iii) the ability within the marketplace to manage price increases to cover increased costs, and (iv) 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.
Ability to Achieve Revenue Results
The Company has two operating divisions which are engaged in the food industry and ship agency services. Les Aliments Dainty Foods relies on continued demand for our brands and products. Robert Reford relies on its ability to offer on a competitive basis a full range of ship agency services to its international clients. To achieve our business results, we must develop and sell products and services that appeal to our consumers and customers. Our success also depends on effective sales, promotion and marketing programs in an increasingly competitive environment. We must build mutually beneficial sustainable relationships with our customers. Our ability to execute in these areas will determine how successful we are in growing and sustaining superior sales and profitability. Our performance will be dependent on our ability to sell quality services and products at the most competitive prices. The continued success is partly driven by leading edge innovation as evidenced by the new value added product lines and the Ship Agency partnerships.
Ability to Address Cost and Expense Concerns
The Company's costs are subject to fluctuations, particularly due to changes in bulk rice prices and grain yields, raw materials, cost of labor, foreign exchange and interest rates. The Company's success is partly dependent on management's ability to address and manage these fluctuations through pricing strategies, cost reductions, effective procurement and adoption of IT solutions to improve efficiencies.
Economic Conditions
Economic conditions, natural disasters and political unrest may result in business interruption, inflation or deflation with a resulting impact on the demand for our products and services. Our success will depend in part on our ability to manage our business through any disruptions which may arise.
Environment
The environment we do business in may be altered by changes in laws and regulations in Canada, the United States and internationally. Changes may include product-related laws and regulations, accounting and taxation requirements, environmental policy, and shifts and alterations by our competitors in our markets. The Company is pro-actively engaged in achieving the highest quality control certifications to ensure safe quality food is delivered to the end user. Les Aliments Dainty Foods faces similar dangers and risks of liability as may be encountered by all food processors. There are stringent quality control procedures in place to reduce these risks. The occurrence of a contamination problem could result in a costly product recall and damage to our reputation for superior product quality and value. We maintain adequate product liability and other insurance coverage to mitigate losses as a result of contamination issues that may arise. Robert Reford minimizes liability risk by establishing that all purchases ordered in its capacity as agent for goods and services delivered to the ships are "on behalf of" the principals (ship owners or operators) as authorized by them. The vendors are instructed accordingly. Our ability to manage regulatory, tax and legal matters and to be able to resolve pending matters within current estimates may impact our results.
MRRM Inc. continually strives to be environmentally responsible and includes energy and waste reduction efforts throughout the operations.
On behalf of the Board
(signed) (signed)
Nikola M. Reford Terry Henderson
Chairman President & Chief Executive Officer
Dated at Montreal (Westmount), Quebec, May 6, 2010.
MRRM Inc.
CONSOLIDATED EARNINGS
And COMPREHENSIVE INCOME
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(unaudited) For the TWELVE Months Ending For the Quarter Ending
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February 28, February 28, February 28, February 28,
------------ ------------ ------------ ------------
2010 2009 2010 2009
---- ---- ---- ----
'000 '000 '000 '000
Revenues
Sales $65,024 $61,916 $15,094 $16,752
Increase
(decrease) in
fair value of
marketable
securities held
for trading 784 (799) 87 (250)
------------ ------------ ------------ ------------
65,808 61,117 15,181 16,502
------------ ------------ ------------ ------------
Costs and expenses
Cost of sales,
selling and
administrative 62,773 59,544 14,400 16,102
Amortization 1,161 1,195 289 298
Exchange (gain) 0 (121) 0 0
Interest on
long-term debt 111 149 25 33
Other interest 99 179 20 38
Change in fair
value of
interest rate
swap (61) 119 (16) 119
------------ ------------ ------------ ------------
64,083 61,065 14,718 16,590
------------ ------------ ------------ ------------
Earnings (loss)
before income
taxes 1,725 52 463 (88)
------------ ------------ ------------ ------------
Income taxes
(recovery)
Current 81 (21) (109) (71)
Future 124 215 10 183
------------ ------------ ------------ ------------
205 194 (99) 112
------------ ------------ ------------ ------------
Net earnings and
comprehensive
income (loss) $1,520 ($142) $562 ($200)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Basic earnings
(loss) per share $0.60 ($0.06) $0.22 ($0.08)
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MRRM Inc.
CONSOLIDATED RETAINED EARNINGS
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(unaudited) For the TWELVE Months Ending For the Quarter Ending
---------------------------- ----------------------
February 28, February 28, February 28, February 28,
------------ ------------ ------------ ------------
2010 2009 2010 2009
---- ---- ---- ----
'000 '000 '000 '000
Balance, beginning
of period $16,119 $16,261 $17,077 $16,319
Net earnings (loss) 1,520 (142) 562 (200)
------------ ------------ ------------ ------------
17,639 16,119 17,639 16,119
Dividends 254 0 254 0
------------ ------------ ------------ ------------
Balance, end of
period $17,385 $16,119 $17,385 $16,119
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MRRM Inc.
CONSOLIDATED CASH FLOWS
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(unaudited) For the TWELVE Months Ending For the Quarter Ending
---------------------------- ----------------------
February 28, February 28, February 28, February 28,
------------ ------------ ------------ ------------
2010 2009 2010 2009
---- ---- ---- ----
'000 '000 '000 '000
OPERATING
ACTIVITIES
Net earnings (loss) $1,520 ($142) $562 ($200)
Defined benefit
plan payments (59) (70) (15) (19)
---- ---- ---- ----
1,461 (212) 547 (219)
----- ----- --- -----
Non-cash items
Change in fair
value of
marketable
securities held
for trading (636) 983 (40) 288
Change in fair
value of
interest rate
swap (61) 119 (16) 119
Loss on disposal
of equipment 2 7 2 0
Amortization 1,161 1,195 289 298
Pension benefit
cost 30 30 8 8
Pension benefit
income (24) 0 0 0
Future income
taxes 124 215 10 183
------------ ------------ ------------ ------------
------------ ------------
596 2,549 253 896
Changes in
non-cash working
capital items 3,308 (2,549) 2,153 (13)
------------ ------------ ------------ ------------
Non-cash
operating items
generated (used) 3,904 0 2,406 883
------------ ------------ ------------ ------------
Cash flows from
operating
activities 5,365 (212) 2,953 664
------------ ------------ ------------ ------------
INVESTING
ACTIVITIES
Marketable
securities (2,569) (382) (294) (162)
Disposals of
marketable
securities 2,500 560 255 152
Property, plant
and equipment (672) (603) (55) (260)
Disposal of
equipment 0 1 0 0
Cash surrender
value of life
insurance policy 3 (5) 3 (5)
------------ ------------ ------------ ------------
Cash flows from
investing
activities (738) (429) (91) (275)
------------ ------------ ------------ ------------
FINANCING
ACTIVITIES
Bank indebtedness (3,674) 1,298 (2,429) (222)
Long-term debt (699) (657) (179) (167)
Dividends (254) 0 (254) 0
------------ ------------ ------------ ------------
Cash flows from
financing
activities (4,627) 641 (2,862) (389)
------------ ------------ ------------ ------------
Net change in cash
and cash, end of
period $0 $0 $0 $0
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Dividends per share $0.10 $0.00 $0.10 $0.00
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MRRM Inc.
(Formerly: Mount Royal Rice Mills Limited)
CONSOLIDATED BALANCE SHEETS
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(unaudited) As at As at
February 28, February 28,
------------ ------------
2010 2009
---- ----
'000 '000
ASSETS
Current
Accounts receivable $6,193 $6,825
Inventories 7,831 10,891
Income taxes receivable 35 0
Tax credits receivable 94 1,106
Prepaids 111 141
Future income taxes 15 15
------------ ------------
14,279 18,978
Tax credits receivable 868 0
Marketable securities, at fair value 4,425 3,720
Property, plant and equipment, net 14,729 15,220
Cash surrender value of life insurance policy 2 5
------------ ------------
$34,303 $37,923
------------ ------------
------------ ------------
LIABILITIES
Current
Bank indebtedness $922 $4,596
Accounts payable and accrued liabilities 11,124 11,626
Income taxes payable 0 21
Current portion of accrued benefit liability 56 71
Current portion of long-term debt 739 699
------------ ------------
12,841 17,013
------------ ------------
Long-term debt, reducing term loan maturing
in 2012 784 1,523
Fair value of interest rate swap contract 58 119
Accrued benefit liability 568 606
Future income taxes 2,128 2,004
------------ ------------
16,379 21,265
------------ ------------
SHAREHOLDERS' EQUITY
Capital stock
Common shares, without nominal or par value
authorized in an unlimited number
Issued 2,535,000 shares 539 539
Retained earnings 17,385 16,119
------------ ------------
17,924 16,658
------------ ------------
$34,303 $37,923
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MRRM Inc.
NOTES To CONSOLIDATED FINANCIAL STATEMENTS
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(unaudited) For the TWELVE Months Ending
----------------------------
February 28, 2010
------------ ----
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, 2009 except for new accounting policies that have been adopted effective March 1, 2009. 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.
Accounting changes
On March 1, 2009, in accordance with the applicable transitional provisions, the Company adopted the new recommendations of the Canadian Institute of Chartered Accountants, ("CICA") Handbook Section 3064, "Goodwill And Intangible Assets" and the amendments to CICA Handbook Section 3862 "Financial Instruments- Disclosures".
Goodwill and Intangible Assets
In February 2008, the CICA issued Section 3064, "Goodwill And Intangible Assets", which superseded Section 3062, "Goodwill and Other Intangible Assets" and Section 3450, "Research and Development Costs". Section 3064 sets out standards for the recognition, measurement, presentation and disclosure of goodwill and intangible assets. This accounting standard is effective for fiscal years beginning on or after October 1, 2008. The Company has adopted this Section as of March 1, 2009. Section 1000, "Financial Statement Concepts" was also amended to provide consistency with this new Section. The implementation of this new standard had no impact on the Company's consolidated financial results and position.
Financial Instruments disclosures and presentation
In June 2009, the CICA amended Section 3862, "Financial Instruments - Disclosures", to include additional disclosure requirements about fair value measurement for financial instruments and liquidity risk. These amendments require a three-level hierarchy that reflects the significance of the inputs used in making the fair value measurements. The amendments to Section 3862 apply for annual financial statements relating to fiscal years ending after September 30, 2009. The implementation of this new standard had no impact on the Company's consolidated financial results and position.
Future accounting standards
As at April 16, 2010, new primary sources of GAAP ("standards") have been published but are not yet in effect. These standards are not expected to have a significant impact on the Company consolidated financial statements.
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 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.
- 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,
2010, 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 exchange risk and interest rate risk as necessary. The derivative financial instruments are recognized at their fair value on the balance sheet and changes in fair value are recognized in earnings for the year.
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 $58,000 at February 28, 2010 and as such, has been recorded in long-term liabilities under fair value of interest rate swap and recognized in Consolidated Earnings and Comprehensive Income under other expenses. The Company does not enter into derivative financial instruments for trading or speculative purposes.
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 value of bank indebtedness, trade accounts receivable and
accounts payable and accrued liabilities is comparable to their
carrying amount, 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 value of the interest rate swap agreement was determined by
the bank and represents the amounts required to realize favorable
contracts or settle unfavorable ones.
As at February 28, 2010, 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
Marketable securities 4,425 - -
Financial Liabilities
Interest rate swap - (58) -
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 imports 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 futures. As at February 28, 2010, there were no forward exchange future contracts pending. The Company uses the fair value accounting method for such instruments. Under this method any unrealized gains or losses caused by fluctuation to the market value are recorded in income for the year.
As at February 28, 2010, assets denominated in foreign currencies consisting of cash, trade accounts receivable and marketable securities totaled US$3,331,520 or its Canadian equivalent of $3,506,758 (US$4,331,721 and (euro)25,677 respectively or its Canadian equivalent of $5,545,757 as at February 28, 2009). Bank indebtedness and accounts payable and accrued liabilities denominated in U.S. dollars totaled US$3,781,970 or its Canadian equivalent of $3,980,902 (US$4,735,904 or its Canadian equivalent of $6,017,913 as at February 28, 2009).
Based on the net U.S. dollar exposure as of February 28, 2010, a 1 percent increase/(decrease) in the U.S. exchange rate will increase/(decrease) equity by approximately $5,000 ($5,000).
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.
Interest rate risk
Receivables and payables are non-interest bearing. Bank indebtedness bears interest at the Canadian prime rate for Canadian loans and U.S. base rates for U.S. loans and, optionally, the Company may take advantage of Bankers Acceptances. The interest rate risk relating to the reducing term loan is as described under Fair value above. For this quarter, a 0.5% hypothetical increase in the prime rate on bank indebtedness would increase interest expense by approximately $2,000. A 0.5% decrease in the prime rate would have had a reverse effect. The Company's investment 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.
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 underlying markets. The Company's objectives in managing its price risk are three fold: i) to protect its financial results for the period 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 $54,000 and a decrease of $171,000 for the same period last year. As at February 28, 2010, a 10% increase/(decrease) in the bid prices of the marketable securities would increase/(decrease) equity by approximately $442,000 ($372,000 in 2009).
For the TWELVE Months Ending For the Quarter Ending
---------------------------- ----------------------
February 28, February 28, February 28, February 28,
------------ ------------ ------------ ------------
2010 2009 2010 2009
---- ---- ---- ----
'000 '000 '000 '000
3 - Information
included in
the Statement
Of Earnings
Income taxes
paid
(received) $137 $19 $168 ($154)
---- --- ---- ------
---- --- ---- ------
Investment
tax credits $115 $160 $0 $62
---- ---- -- ---
---- ---- -- ---
During the year, the Company recorded investment tax credits on qualifying research and development costs in the amount of $115,000 ($160,000 in 2009). The amount recorded in 2010 is related to the 2009 income tax filings. In 2009, $49,000 related to 2009 filings and $111,000 related to 2008 filings.
Interest on
long-term
debt $111 $149 $25 $33
Interest on
bank
indebtedness
and other 99 179 20 38
-- --- -- --
-- --- -- --
Interest paid
and expensed $210 $328 $45 $71
---- ---- --- ---
---- ---- --- ---
4 - Income Taxes
Tax at combined
basic federal
and provincial
income tax
rate $531 $16 $137 ($41)
Non-taxable
portion of
capital losses 20 9 2 18
Tax-free income (25) (30) (3) 3
Non-taxable
portion of
(Increase)
decrease in
fair value of
investments (118) 143 (8) 23
Non-deductible
expenses 32 32 10 10
Reduction in
future income
tax due to
decrease in
rates (216) (11) (216) (11)
Other (19) 35 (21) 110
---- -- ---- ---
$205 $194 ($99) $112
---- ---- ----- ----
---- ---- ----- ----
Effective tax
rate 11.9% -%(X) (12.3)% -%(X)
(X) The effective tax rate for this period is not meaningful and
has been omitted.
The Company's
future income
tax
liabilities
(assets) are
as follows:
Employee
future
benefits (187) ($210) $15 ($22)
Research and
development
tax credits 270 315 (18) (10)
Property,
plant and
equipment 1,968 2,018 (86) 152
Loss carry
forwards (8) (47) 39 37
Other 70 (87) 60 26
-- ---- -- --
$2,113 $1,989 $10 $183
------ ------ --- ----
------ ------ --- ----
Comprising
Current ($15) ($15) $0 $0
Non-current 2,128 2,004 10 183
----- ----- -- ---
$2,113 $1,989 $10 $183
------ ------ --- ----
------ ------ --- ----
5 - Supplemental
Cash Flow
Information:
Changes in
non-cash
working
capital
items
Accounts
receivable $632 ($2,630) $1,549 $2,166
Inventories 3,060 (3,420) (11) (415)
Income Tax
receivable (35) 0 (35) 0
Tax credits
receivable 144 (211) 92 83
Prepaids 30 32 39 16
Accounts
payable
and accrued
liabilities (502) 3,682 699 (1,638)
Income taxes
payable (21) (2) (180) (225)
---- --- ----- -----
$3,308 ($2,549) $2,153 ($13)
------ -------- ------ -----
------ -------- ------ -----
6 - Segmented
Information
Revenue
Food
processing
and selling $61,659 $58,734 $14,138 $16,044
Ship agency
services 3,365 3,182 956 708
----- ----- --- ---
Operating 65,024 61,916 15,094 16,752
Corporate 784 (799) 87 (250)
--- ----- -- -----
$65,808 $61,117 $15,181 $16,502
------- ------- ------- -------
------- ------- ------- -------
Earnings (loss)
Food
processing
and selling $809 $756 $325 $253
Ship agency
services 349 275 83 (52)
--- --- -- ----
Operating 1,158 1,031 408 201
Corporate 567 (979) 55 (289)
--- ----- -- -----
Earnings
(loss)
before
income taxes 1,725 52 463 (88)
Income Taxes 205 194 (99) 112
--- --- ---- ---
Net earnings
(loss) $1,520 ($142) $562 ($200)
------ ------ ---- ------
------ ------ ---- ------
Assets
Food
processing
and selling $28,345 $33,273 ($1,345) ($872)
Ship agency
services 1,475 934 (598) (999)
----- --- ----- -----
Operating 29,820 34,207 (1,943) (1,871)
Corporate 4,483 3,716 150 (289)
----- ----- --- -----
$34,303 $37,923 ($1,793) ($2,160)
------- ------- -------- --------
------- ------- -------- --------
Capital
expenditures
Food
processing
and selling $660 $597 $55 $260
Ship agency
services 12 6 0 0
-- - - -
Operating 672 603 55 260
Corporate 0 0 0 0
- - - -
$672 $603 $55 $260
---- ---- --- ----
---- ---- --- ----
Amortization
Food
processing
and selling $1,129 $1,144 $281 $287
Ship agency
services 32 51 8 11
-- -- - --
$1,161 $1,195 $289 $298
------ ------ ---- ----
------ ------ ---- ----
7 - Capital disclosures
The Company defines its capital as long-term debt (including the
current portion), shareholders' equity, minus cash and cash
equivalents. Capital is calculated as follows:
Bank
indebtedness
and current
portion of
long-term
debt $1,661 $5,295 ($2,419) ($210)
Long-term
debt and
fair value
of interest
rate swap
contract 842 1,642 (205) (60)
--- ----- ----- ----
Total debts 2,503 6,937 (2,624) (270)
Shareholders'
equity 17,924 16,658 308 (200)
------ ------ --- -----
Total
capitaliza-
tion $20,427 $23,595 ($2,316) ($470)
------- ------- -------- ------
------- ------- -------- ------
Debt as % of
capitaliza-
tion 12% 29% 113% 57%
--- --- ---- ---
--- --- ---- ---
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.
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 1.00 on a pre and post-dividend basis to May 31, 2010 and revert thereafter to 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 $6,750,000 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 0.25% for Canadian loans and U.S. base rate plus 0.25% 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 $52,294 $50,351 $12,290 $12,100
U.S.A. 13,514 10,766 2,891 4,402
------ ------ ----- -----
$65,808 $61,117 $15,181 $16,502
------- ------- ------- -------
------- ------- ------- -------
(1) Revenues from external customers are attributed to countries based on
the location where goods or services were provided.
All of the Company' s assets are located in Canada.
%SEDAR: 00009058EF
For further information: Lou Younan, Vice-President Finance & CFO, MRRM Inc., (514) 908-7777, Fax: (514) 906-0220, [email protected]
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