MRRM Inc. - Directors' report and management discussion and analysis of the
financial condition and results of operations - Interim 2010.Q3 November 30,
2009 (3rd Quarter)
The following discussion and analysis should be read in conjunction with
the preceding year's Annual Report. The Company's interim quarterly
statements for fiscal year 2010 are for the quarter ended as indicated
above. 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 or documents go to
www.sedar.com. Information is also available on the Corporate website at
www.MRRM.ca.
</pre>
<p/>
<p><location>MONTREAL</location>, <chron>Jan. 14</chron> /CNW Telbec/ -</p>
<p/>
<pre>
Consolidated Earnings And Comprehensive Income and Retained Earnings
--------------------------------------------------------------------
</pre>
<p/>
<p>Revenues for the period (last year) were <money>$50,627,000</money> (<money>$44,615,000</money>) increasing by <money>$6,012,000</money> (13.5%). As shown in the segmented information, sales and income from operating activities amounted to <money>$49,930,000</money> (<money>$45,164,000</money>) being 98.6% (101.2%) of total revenues. Income from corporate totaled <money>$697,000</money> (-$549,000). Unrealized gains in fair market value of the portfolio amounted to <money>$713,000</money> (-$754,000). Operating Revenues increased by <money>$4,766,000</money> (10.6%) compared to last year. Revenue from Corporate increased by <money>$1,246,000</money> of which <money>$1,467,000</money> was attributable to an increase in unrealized fair value of investments held for trading.</p>
<p>Costs and expenses for the period (last year) were <money>$49,365,000</money> (<money>$44,475,000</money>), an increase of <money>$4,890,000</money> (11.0%). Costs related to operating activities, before exchange and interest, increased by <money>$4,862,000</money> (11.0%). Expenses related to corporate increased by <money>$44,000</money>.</p>
<p>Operating results are discussed later on in this report.</p>
<p>The impact of the fluctuating Canadian dollar resulted in a total currency exchange gain of <money>$47,000</money> (all included under cost of sales) versus a gain of <money>$172,000</money> (<money>$52,000</money> included under cost of sales) for the period last year. As disclosed in the Notes, the net exposures were as follows: at <chron>November 30, 2009</chron>, US$(492,000); at <chron>November 30, 2008</chron>, US(<money>$550,000</money>); at <chron>February 28, 2009</chron>, US(<money>$404,000</money>); at <chron>February 29, 2008</chron>, US$1,438,000. The above US dollars include the equivalents for euros and pounds sterling which are not material.</p>
<p>At the end of this quarter, there were no forward exchange contracts pending.</p>
<p>Interest expensed on bank indebtedness and the reducing term loan amounted to <money>$165,000</money> compared to <money>$258,000</money> last year for a decrease of <money>$93,000</money>. Interest related to the long-term debt was <money>$86,000</money> compared to <money>$116,000</money> last year.</p>
<p>The Earnings before income taxes for the period (last year) were <money>$1,262,000</money> (<money>$140,000</money>), an increase of <money>$1,122,000</money>. Earnings from operating activities for the period (last year) were <money>$750,000</money> (<money>$830,000</money>), a decrease of <money>$80,000</money>. Earnings from corporate for the period (last year) were <money>$512,000</money> (-$690,000), an increase of <money>$1,202,000</money>.</p>
<p>Income taxes for the period (last year) were <money>$304,000</money> (<money>$82,000</money>). Details of the income tax components are presented in the Notes to the financial statements.</p>
<p>Net Earnings for the period (last year) were <money>$958,000</money> (<money>$58,000</money>) or <money>$0.38</money> (<money>$0.02</money>) per share.</p>
<p>The Board of Directors, in consultation with Management, has declared a special year-end dividend of <money>$0.10</money> per share payable on <chron>February 26, 2010</chron> to Common Shareholders of record on <chron>February 10, 2010</chron>. This special dividend was deemed appropriate in light of current and anticipated year end results to make a special distribution to our shareholders. A quarterly dividend payment continues to be suspended at this time to continue to support operating cash requirements. The declaration and payment of dividends remains at the discretion of the Board of Directors.</p>
<p/>
<pre>
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 Nov 30 Aug 31, May 31, Feb 28, Nov 30, Aug 31, May 31, Feb 29,
eight 2009 2009 2009 2009 2008 2008 2008 2008
most (2010. (2010. (2010. (2009. (2009. (2009. (2009. (2008.
recent ------- ------- ------- ------- ------- ------- ------- -------
fiscal Q3) Q2) Q1) Q4) Q3) Q2) Q1) Q4)
quarters ------- ------- ------- ------- ------- ------- ------- -------
-------------------------------------------------------------------------
(Expressed
in
thousands,
except
for
amounts
per
share -
unaudited) $ $ $ $ $ $ $ $
-------------------------------------------------------------------------
Revenues 17,672 15,466 17,489 16,502 16,962 14,091 13,562 10,682
-------------------------------------------------------------------------
Net
Earnings
(loss) 455 169 334 (200) (343) 287 114 (134)
-------------------------------------------------------------------------
Earnings
(loss)
per share 0.18 0.07 0.13 (0.08) (0.14) 0.11 0.05 (0.05)
-------------------------------------------------------------------------
Dividends
per share 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
-------------------------------------------------------------------------
</pre>
<p/>
<p>Revenues for this quarter (last year) were <money>$17,672,000</money> (<money>$16,962,000</money>), an increase of <money>$710,000</money> (4.2%). Revenue from operating activities amounted to <money>$17,518,000</money> (<money>$17,667,000</money>) being 99.1% (104.2%) of total revenues. Income from corporate totaled <money>$154,000</money> (-$705,000). Operating revenues for this quarter decreased by <money>$149,000</money> (-0.8%) compared to this quarter last year. Revenue from Corporate increased by <money>$859,000</money> of which <money>$805,000</money> was attributable to unrealized fair value of investments held for trading.</p>
<p>Costs and expenses for this quarter (last year) were <money>$17,040,000</money> (<money>$17,395,000</money>), a decrease of <money>$355,000</money> (-2.0%). Costs related to operating activities, before exchange and interest, decreased by <money>$400,000</money> (-2.3%).</p>
<p>Included in the financial results for this quarter are investment tax credits of <money>$24,000</money> representing an adjustment to 100% of the total amount claimed for fiscal year 2009. The comparative amount for this quarter last year was <money>$21,000</money>.</p>
<p>Interest expense for this quarter (last year) was <money>$49,000</money> (<money>$86,000</money>) and was <money>$54,000</money> in 2010.Q2 and <money>$62,000</money> in 2010.Q1. As well this quarter, the company recovered <money>$12,000</money> due to variation in fair value of the interest rate swap which is a component of the long term debt facility.</p>
<p>Earnings before income taxes for this quarter (last year) were <money>$632,000</money> (-$433,000), an increase of <money>$1,065,000</money>. Earnings from operating activities were <money>$526,000</money> (<money>$304,000</money>), an increase of <money>$222,000</money> and corporate were <money>$106,000</money> (-$737,000), an increase of <money>$843,000</money>.</p>
<p>Income taxes for this quarter (last year) were <money>$177,000</money> (-$90,000). The effective tax rates are presented in the Notes to the financial statements.</p>
<p>Net earnings for this quarter (last year) were <money>$455,000</money> (-$343,000) or <money>$0.18</money> (-$0.14) per share.</p>
<p/>
<pre>
Consolidated Cash Flows, Liquidity and Balance Sheets
-----------------------------------------------------
</pre>
<p/>
<p>In investing activities, the Company added <money>$617,000</money> of net property, plant and equipment compared to <money>$342,000</money> for this period last year.</p>
<p/>
<p>Available credit facilities</p>
<p/>
<p>The credit facilities available and reported at last year-end remain substantially unchanged. The facilities are comprised of a revolving line of credit for <money>$6,750,000</money> CDN (or its US equivalent) and a 5 year reducing term facility initially borrowed at fiscal year-end 2007 for <money>$3,500,000</money>. 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.</p>
<p>Receivables increased by <money>$917,000</money> 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.</p>
<p>Inventories decreased by <money>$3,071,000</money> (-28.2%) while overall volumes of rice decreased by 24.5%.</p>
<p>Marketable securities - see table below for financial summary and investment mix.</p>
<p>Property, plant and equipment decreased by <money>$255,000</money> comprised of additions of <money>$617,000</money> and amortization of <money>$872,000</money>.</p>
<p>Bank indebtedness was <money>$3,351,000</money> compared to <money>$4,596,000</money> at last year-end, a decrease of <money>$1,245,000</money>. This is mainly attributable to the decrease in inventories.</p>
<p>Payables decreased by <money>$1,201,000</money>, due mainly to lower rice purchases.</p>
<p>Long-term debt is being repaid in accordance with the arrangements of the five year reducing term facility agreement as described under credit facilities.</p>
<p>Future income taxes, net liability, increased by <money>$114,000</money> which is mainly attributable to the increase of <money>$96,000</money> for the unrealized change in fair value of investments held for trading at <chron>November 30, 2009</chron>.</p>
<p>Shareholders' equity increased by <money>$958,000 to $17,616,000</money> from <money>$16,658,000</money> and represents <money>$6.95</money> (<money>$6.57</money>) per share.</p>
<p>Capital stock remained unchanged at <money>$539,000</money> and represents 2,535,000 issued common shares.</p>
<p>The MRRM Inc. shares have a very limited distribution and are infrequently traded on the TSX-Venture Exchange under the symbol MRR.</p>
<p/>
<pre>
www.TSX-Venture Exchange
------------------------
Critical Accounting Policies:
-----------------------------
</pre>
<p/>
<p>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 <chron>February 28, 2009</chron>. An extract of these policies is set out in the notes to the quarterly consolidated financial statements.</p>
<p/>
<pre>
Future Accounting Changes:
International Financial Reporting Standards (IFRS)
</pre>
<p/>
<p>In 2005, the Accounting Standards Board of <location>Canada</location> (AcSB) announced that accounting standards in <location>Canada</location> are to converge with IFRS. In <chron>March 2009</chron>, the CICA published an updated version of its "Implementation Plan for Incorporating International Financial Reporting Standards from Canadian GAAP".</p>
<p>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 <chron>January 1, 2011</chron>.</p>
<p>The Company has formed a committee which is currently assessing the future impact of these new standards on its consolidated financial statements.</p>
<p/>
<pre>
Discussion of Results:
----------------------
</pre>
<p/>
<p>In Dainty Foods, net sales increased by <money>$4,831,000</money> (11.3%) for the period and decreased by <money>$134,000</money> (-0.8%) for the quarter compared to last year. Overall rice sales volumes decreased by 14.6% for the period and 13.6% 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 this period last year when panic buying erupted due to concerns of possible rice shortages. Costs and expenses increased by <money>$4,850,000</money> (11.5%) for the period and decreased by <money>$286,000</money> (-1.7%) for the quarter compared to last year and earnings before income taxes for the period decreased by <money>$19,000</money> and increased by <money>$152,000</money> for the quarter compared to last year.</p>
<p>The increase in revenue and cost of sales for the period were mainly attributable to increased sales of flour and bulk rice compared to this period last year.</p>
<p>Although cost of sales increased in line with increased sales, and operating, selling, and administrative expenses decreased for the period, earnings before income taxes decreased by <money>$19,000</money>. The profit increase for the quarter is attributable to an increase in flour sales over last year.</p>
<p>The company continues to pursue new value-added retail type 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.</p>
<p>The high cost of rice prevalent through last year has moderated although the potential for a surge in volatility remains based on a number of world factors, including the impact of large import tenders issued by the <location>Philippines</location> due to typhoon damage through the fall of this year. The conclusion from the world picture at this time is that prices will remain firm for several months followed by continued softening of prices. Dainty will continue to keep major rice purchases to short duration until stronger signals emerge leading us to make decisions in one direction or another.</p>
<p>In Robert Reford, revenue decreased by <money>$65,000</money> (-2.6%) for the period and by <money>$15,000</money> (-1.6%) for the quarter compared to last year reflecting a weakened economy.</p>
<p>Earnings before income taxes for the period decreased by <money>$61,000</money> and increased by <money>$70,000</money> compared to this quarter last year.</p>
<p>Robert Reford is pleased to announce that effective <chron>February 1, 2010</chron> Montship Inc. of <location>Montreal</location> will be joining the strategic alliance created between Robert Reford and Norton Lilly International Inc. in 2008. The alliance has and 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.</p>
<p>Corporate Investments, portfolio income is summarized as follows:</p>
<p/>
<pre>
For the period For the quarter
-------------- ---------------
-------------------------------------------------------------------------
2010 2009 2010 2009
---- ---- ---- ----
-------------------------------------------------------------------------
Dividend and interest
income $101,000 $145,000 $37,000 $46,000
-------------------------------------------------------------------------
Capital (losses) gains -$117,000 $60,000 $120,000 $57,000
-------------------------------------------------------------------------
Unrealized change in Fair
Value $713,000 -$754,000 -$3,000 -$808,000
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
-------------------------------------------------------------------------
Totals: $697,000 -$549,000 $154,000 -$705,000
---------- ---------- ---------- ----------
-------------------------------------------------------------------------
</pre>
<p/>
<p>During this period, global financial markets have improved and as indicated above, our portfolio recovered $713,0000 out of the <money>$926,000</money> 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.</p>
<p>Effective <chron>June 1, 2009</chron> the mandate for management of the portfolio was transferred to MacDougall Investment Counsel Inc.</p>
<p/>
<pre>
-------------------------------------------------------------------------
Investment Mix Nov 30, Aug 31, May 31, Feb 28, Nov 30,
2009 2009 2009 2009 2008
(2010.Q3) (2010.Q2) (2010.Q1) (2009.Q4) (2009.Q3)
--------- --------- --------- --------- ---------
-------------------------------------------------------------------------
Cash & Equivalents 0.5% 0.7% 18.9% 21.0% 15.6%
-------------------------------------------------------------------------
Bonds 27.9% 30.9% 18.9% 20.3% 20.5%
-------------------------------------------------------------------------
Preferred Shares 17.6% 14.7% 13.1% 13.1% 13.1%
-------------------------------------------------------------------------
Canadian Equities 37.3% 33.5% 31.1% 27.3% 30.8%
-------------------------------------------------------------------------
U.S. & Foreign Equities 16.7% 20.2% 18.0% 18.3% 20.0%
-------------------------------------------------------------------------
</pre>
<p/>
<p>Certification</p>
<p/>
<p>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.</p>
<p>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.</p>
<p>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.</p>
<p/>
<p>Outlook</p>
<p/>
<p>Time-Wise products will continue to grow in tonnage versus last year as we realize the full year benefit of industrial processing volume.</p>
<p>Rice flour sales will remain strong and incremental sales revenue is expected in the next quarter from the launches of new and innovative co-packed products such as 90 second retort flavoured rices and 60 second retort pasta products.</p>
<p>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.</p>
<p>The ship agency results were in line with expectations and profit for the next quarter is expected to match last year.</p>
<p>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.</p>
<p/>
<p>Risks and Uncertainties</p>
<p/>
<p>Overview</p>
<p/>
<p>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.</p>
<p>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.</p>
<p/>
<pre>
Ability to Achieve Revenue Results
Ability to Address Cost and Expense Concerns
Economic Conditions
Environment
</pre>
<p/>
<p>For further information regarding financial risk management, please refer to the Notes to the interim financial statements.</p>
<p/>
<pre>
On behalf of the Board
(signed) (signed)
Nikola M. Reford Terry Henderson
Chairman President & Chief Executive Officer
Dated at Montreal (Westmount), Quebec, January 14, 2010.
MRRM Inc.
CONSOLIDATED EARNINGS
And COMPREHENSIVE INCOME
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(unaudited) For the NINE Months Ending For the Quarter Ending
--------------------------- --------------------------
November 30, November 30, November 30, November 30,
------------ ------------ ------------ ------------
2009 2008 2009 2008
---- ---- ---- ----
'000 '000 '000 '000
Revenues
Sales $49,930 $45,164 $17,518 $17,667
Increase in fair
value of
marketable
securities held
for trading 697 (549) 154 (705)
------------ ------------ ------------ ------------
50,627 44,615 17,672 16,962
------------ ------------ ------------ ------------
Costs and expenses
Cost of sales,
selling and
administrative 48,373 43,441 16,714 17,087
Amortization 872 897 289 300
Exchange (gain)
loss 0 (121) 0 (78)
Interest on
long-term debt 86 116 26 36
Other interest 79 142 23 50
Change in fair
value of
interest rate
swap (45) 0 (12) 0
------------ ------------ ------------ ------------
49,365 44,475 17,040 17,395
------------ ------------ ------------ ------------
Earnings (loss)
before income
taxes 1,262 140 632 (433)
Income taxes
(recovery)
Current 190 50 133 (122)
Future 114 32 44 32
------------ ------------ ------------ ------------
304 82 177 (90)
------------ ------------ ------------ ------------
Net earnings (loss)
and comprehensive
income $958 $58 $455 ($343)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Basic earnings
(loss) per share $0.38 $0.02 $0.18 ($0.14)
----- ----- ----- -------
----- ----- ----- -------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
MRRM Inc.
CONSOLIDATED RETAINED EARNINGS
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(unaudited) For the NINE Months Ending For the Quarter Ending
--------------------------- --------------------------
November 30, November 30, November 30, November 30,
------------ ------------ ------------ ------------
2009 2008 2009 2008
---- ---- ---- ----
'000 '000 '000 '000
Balance, beginning
of period $16,119 $16,261 $16,622 $16,662
Net earnings (loss) 958 58 455 (343)
------------ ------------ ------------ ------------
Balance, end of
period $17,077 $16,319 $17,077 $16,319
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
MRRM Inc.
CONSOLIDATED CASH FLOWS
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(unaudited) For the NINE Months Ending For the Quarter Ending
--------------------------- --------------------------
November 30, November 30, November 30, November 30,
------------ ------------ ------------ ------------
2009 2008 2009 2008
---- ---- ---- ----
'000 '000 '000 '000
OPERATING
ACTIVITIES
Net earnings (loss) $958 $58 $455 ($343)
Defined benefit
plan payments (44) (51) (13) (16)
----- ----- ----- -----
914 7 442 (359)
----- ----- ----- -----
Non-cash items
Change in fair
value of
marketable
securities held
for trading (596) 695 (117) 751
Change in fair
value of
interest rate
swap (45) 0 (12) 0
Loss on disposal
of equipment 0 7 0 0
Amortization 872 897 289 300
Pension benefit
cost 22 22 7 7
Pension benefit
income (25) 0 (25) 0
Future income
taxes 114 32 44 31
------------ ------------ ------------ ------------
342 1,653 186 1,089
Changes in
non-cash working
capital items 1,155 (2,536) (625) (979)
------------ ------------ ------------ ------------
Non-cash
operating items
generated (used) 1,497 (883) (439) 110
------------ ------------ ------------ ------------
Cash flows from
operating
activities 2,411 (876) 3 (249)
------------ ------------ ------------ ------------
INVESTING
ACTIVITIES
Marketable
securities (2,275) (220) (1,445) (143)
Disposals of
marketable
securities 2,246 408 1,415 131
Property, plant
and equipment (617) (343) (372) (131)
Disposal of
equipment 0 1 0 0
------------ ------------ ------------ ------------
Cash flows from
investing
activities (646) (154) (402) (143)
------------ ------------ ------------ ------------
FINANCING
ACTIVITIES
Bank indebtedness (1,245) 1,520 574 557
Long-term debt (520) (490) (175) (165)
------------ ------------ ------------ ------------
Cash flows from
financing
activities (1,765) 1,030 399 392
------------ ------------ ------------ ------------
Net change in cash
and cash, end of
period $0 $0 $0 $0
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Dividends per share $0.00 $0.00 $0.00 $0.00
------ ------ ------ ------
------ ------ ------ ------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
MRRM Inc.
(Formerly: Mount Royal Rice Mills Limited)
CONSOLIDATED BALANCE SHEETS
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(unaudited) As at As at
November 30, February 28,
------------ ------------
2009 2009
---- ----
'000 '000
ASSETS
Current
Accounts receivable $7,742 $6,825
Inventories 7,820 10,891
Tax credits receivable 104 1,106
Prepaids 150 141
Future income taxes 15 15
------------ ------------
15,831 18,978
Tax credits receivable, long-term 950 0
Marketable securities, at fair value 4,345 3,720
Property, plant and equipment, net 14,965 15,220
Cash surrender value of life insurance policy 5 5
------------ ------------
$36,096 $37,923
------------ ------------
------------ ------------
LIABILITIES
Current
Bank indebtedness $3,351 4,596
Accounts payable 10,425 11,626
Income taxes payable 180 21
Current portion of acrued benefit liability 55 71
Current portion of long-term debt 729 699
------------ ------------
14,740 17,013
------------ ------------
Long-term debt, reducing term loan maturing
in 2012 973 1,523
Fair value of interest rate swap 74 119
Accrued benefit liability 575 606
Future income taxes 2,118 2,004
------------ ------------
18,480 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 17,077 16,119
------------ ------------
17,616 16,658
------------ ------------
$36,096 $37,923
------------ ------------
------------ ------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
MRRM Inc.
NOTES To CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(unaudited) For the NINE Months Ending
---------------------------
November 30, 2009
------------ -----
</pre>
<p/>
<p>1 - Accounting Policies, Financial Risk management and Supplementary Information</p>
<p/>
<p>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.</p>
<p>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 <chron>February 28, 2009</chron> except for new accounting policies that have been adopted effective <chron>March 1, 2009</chron>. 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.</p>
<p/>
<p>Accounting changes</p>
<p/>
<p>Goodwill and Intangible Assets</p>
<p/>
<p>In <chron>February 2008</chron>, the CICA issued Section 3064, "Goodwill And Intangible Assets", which supersedes Section 3062, "Goodwill and other intangible assets" and Section 3450, "Research and Development Costs". The Section 3064 sets out standards for recognition, measurement, presentation and disclosure of goodwill and intangible assets. This accounting standard is effective for fiscal years beginning on or after <chron>October 1, 2008</chron>. The Company has adopted this Section as of <chron>March 1, 2009</chron>. The implementation of this new standard had no impact on the Company's financial results and position.</p>
<p/>
<p>Credit risk and the fair value of financial assets and financial liabilities</p>
<p/>
<p>Emerging Issues Committee of the CICA Abstract No. 173 "Credit Risk and the Fair Value of Financial Assets and Financial Liabilities" ("EIC-173") clarifies that an entity's own credit risk and the credit risk of its counterparty should be taken into account in determining the fair value of financial assets and liabilities. The adoption of EIC-173 did not have a material impact on the Company's financial statements or on the fair value determination of its financial assets and liabilities, including derivative financial instruments.</p>
<p/>
<p>Recent accounting pronouncements</p>
<p/>
<p>In <chron>June 2009</chron>, the CICA amended Section 3862, "Financial Instruments - Disclosures", to include additional disclosure requirements about fair value measurement for financial instruments and liquidity risk disclosures. 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 <chron>September 30, 2009</chron>. The Company has not yet adopted the disclosure requirements of this standard and does not expect them to have a material impact on its financial statements.</p>
<p/>
<p>Future accounting standards</p>
<p/>
<p>International Financial Reporting Standards (IFRS)</p>
<p/>
<p>In <chron>February 2008</chron>, Canada's Accounting Standards Board (AcSB) confirmed that Canadian GAAP, as used by publicly accountable enterprises, will be superseded by International Financial Reporting Standards (IFRS) for fiscal years beginning on or after <chron>January 1, 2011</chron>. The Corporation will be required to report under IFRS for its interim and annual financial statements for the fiscal year ending <chron>February 29, 2012</chron>. The Corporation is currently preparing its IFRS conversion plan. This plan will be aimed in particular at identifying the differences between IFRS and the Canadian GAAP, assessing their impact and analyzing the various policies that the Corporation will elect to adopt. Early indication is that we will have no significant issues in adopting the new standards within the required time frame.</p>
<p/>
<p>Also as at <chron>January 1, 2011</chron>, the Company will be required to adopt the CICA handbook:</p>
<p/>
<p>Section 1582, "Business Combinations", which replaced CICA Section 1581 of the same name. Section 1582 establishes principles and requirements of the acquisition method for business combinations and related disclosures, and</p>
<p>Section 1601, "Consolidated Financial Statements" and Section 1602, "Non-Controlling Interests" together replace Section 1600, "Consolidated Financial Statements". Section 1601 establishes standards for the preparation of consolidated financial statements. Section 1602 establishes standards for accounting for a non-controlling interest in a subsidiary in the consolidated financial statements subsequent to a business combination. These Sections constitute the GAAP equivalent to the corresponding IFRS. These Sections apply to interim and annual consolidated financial statements relating to fiscal years beginning on or after <chron>January 1, 2011</chron> and the Corporation will adopt these new Sections as of such date as part of its conversion to IFRS. Earlier adoption is permitted as of the beginning of a fiscal year. The Corporation is currently evaluating the impact of the adoption of these new Sections on the consolidated financial statements.</p>
<p/>
<p>2 - Financial Instruments and Financial Risk factors</p>
<p/>
<p>The Company's financial instruments recognized in the balance sheet consist of bank indebtedness, marketable securities, accounts receivable, accounts payable, the interest rate swap and long-term debt. The carrying value of these balance sheet items approximates their fair market value. 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 risk factors include credit risk, interest rate risk, liquidity risk, currency risk, price risk and market risk.</p>
<p/>
<p>Derivative Financial Instruments</p>
<p/>
<p>The Company uses derivative financial instruments to manage its exchange risk and interest rate risk as necessary. The Company does not use hedge accounting; accordingly, 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.</p>
<p/>
<p>Fair value</p>
<p/>
<p>Accounts receivable, bank indebtedness and accounts payable are financial instruments whose fair values approximate their carrying values due to their short-term maturity. The portfolio of marketable securities has been designated as a financial asset held for trading. These investments are recorded at fair value based on the current bid price at the balance sheet date with fair value changes recorded and disclosed in the Statement of Earnings. The Company uses an interest rate swap arrangement through its bankers to effectively fix the variable rate pertaining to the Reducing term loan which matures in <chron>February 2012</chron>. This arrangement has fixed the interest rate at 5.83% to maturity. The swap had a negative fair value of <money>$74,000</money> at <chron>November 30, 2009</chron> and 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 fair value was determined based on the prices obtained from the Company's lender for similar instruments.</p>
<p/>
<p>Currency risk</p>
<p/>
<p>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. At the end of this quarter, 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 to be recorded in income for the period.</p>
<p>As at <chron>November 30, 2009</chron>, assets denominated in foreign currencies consisting of cash, accounts receivable and marketable securities totalled US$4,330,067 (US$4,331,721 and (euro)25,677 respectively as at <chron>February 28</chron>, 2009). Bank indebtedness and accounts payable denominated in U.S. dollars totalled US$4,822,436 (US$4,735,904 as at <chron>February 28</chron>, 2009).</p>
<p/>
<p>Credit risk</p>
<p/>
<p>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. 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.</p>
<p/>
<p>Interest rate risk</p>
<p/>
<p>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 <money>$3,000</money>. A 0.5% decrease in the prime rate would have had a reverse effect. The Company's marketable securities bear interest at fixed rates and the Company is, therefore, exposed to the risk of changes in fair value resulting from interest rate fluctuations.</p>
<p/>
<p>Liquidity risk</p>
<p/>
<p>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.</p>
<p/>
<p>Price risk</p>
<p/>
<p>The Company's price risk arises from changes in raw material prices, which are significantly influenced by the fluctuating 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.</p>
<p/>
<p>Market risk</p>
<p/>
<p>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 asset mix. For this quarter, the effect before income taxes represents a decrease in income of <money>$3,000</money> and <money>$808,000</money> for the same period last year.</p>
<p/>
<pre>
For the NINE Months Ending For the Quarter Ending
--------------------------- --------------------------
November 30, November 30, November 30, November 30,
------------ ------------ ------------ ------------
2009 2008 2009 2008
---- ---- ---- ----
'000 '000 '000 '000
3 - Information
included in
the Statement
Of Earnings
Income taxes
paid
(received) ($31) $173 $25 ($8)
----- ---- --- ----
----- ---- --- ----
Investment
tax credits $115 $98 $24 $21
---- --- --- ----
---- --- --- ----
Interest on
long-term
debt $86 $116 $26 $36
Interest on
bank
indebtedness
and other $79 $142 $23 $50
-- --- -- ---
Interest paid
and expensed $165 $258 $49 $86
---- ---- --- ----
---- ---- --- ----
4 - Income Taxes
Tax at combined
basic federal
and provincial
income tax
rate $394 $57 $197 ($134)
Non-taxable
portion of
capital losses
(gains) 18 (9) (18) (8)
Tax-free income (22) (33) (8) (10)
(Increase)
decrease in
fair value of
investments (110) 120 1 128
Non-deductible
expenses 22 22 7 8
Other 2 (75) (2) (74)
- ---- --- ----
$304 $82 $177 ($90)
---- --- ---- -----
---- --- ---- -----
Effective tax
rate 24.2% -%* 4.0% 28.5%
----- -- ---- -----
----- -- ---- -----
* 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 ($202) ($188) $8 $2
Research and
development
tax credits 288 325 (9) 6
Property,
plant and
equipment 2,054 1,866 46 204
Loss carry
forwards (47) (84) 0 0
Other 10 (118) (1) (181)
-- ----- --- -----
$2,103 $1,801 $44 $31
------ ------ --- ----
------ ------ --- ----
Comprising
Current ($15) ($15) $0 $0
Non-current 2,118 1,816 44 31
----- ----- -- ---
$2,103 $1,801 $44 $31
------ ------ --- ----
------ ------ --- ----
5 - Supplemental
Cash Flow
Information:
Changes in
non-cash
working
capital items
Accounts
receivable ($917) ($4,796) ($908) ($2,538)
Inventories 3,071 (3,005) 1,142 (1,715)
Tax credits
receivable 52 (294) 36 (21)
Prepaids (9) 16 (99) (100)
Accounts
payable (1,201) 5,320 (954) 3,524
Income taxes
payable 159 223 158 (129)
--- --- --- -----
$1,155 ($2,536) ($625) ($979)
------ -------- ------ ------
------ -------- ------ ------
6 - Segmented
Information
Revenue
Food
processing
and selling $47,521 $42,690 $16,590 $16,724
Ship agency
services 2,409 2,474 928 943
----- ----- --- ----
Operating 49,930 45,164 17,518 17,667
Corporate 697 (549) 154 (705)
--- ----- --- -----
$50,627 $44,615 $17,672 $16,962
------- ------- ------- --------
------- ------- ------- --------
Earnings (loss)
Food
processing
and selling $484 $503 $304 $152
Ship agency
services 266 327 222 152
--- --- --- ----
Operating 750 830 526 304
Corporate 512 (690) 106 (737)
--- ----- --- -----
Earnings (loss)
before income
taxes 1,262 140 632 (433)
Income Taxes 304 82 177 (90)
--- -- --- ----
Net Earnings
(loss) $958 $58 $455 ($343)
---- --- ---- ------
---- --- ---- ------
Assets
Food
processing
and selling $29,690 $34,145 ($1,110) $3,226
Ship agency
services 2,073 1,933 1,022 978
----- ----- ----- ----
Operating 31,763 36,078 (88) 4,204
Corporate 4,333 4,005 148 (738)
----- ----- --- -----
$36,096 $40,083 $60 $3,466
------- ------- --- -------
------- ------- --- -------
Capital
expenditures
Food
processing
and selling $605 $337 $371 $128
Ship agency
services 12 6 1 3
-- - - --
Operating 617 343 372 131
Corporate 0 0 0 0
- - - --
$617 $343 $372 $131
---- ---- ---- -----
---- ---- ---- -----
Amortization
Food
processing
and selling $848 $857 $281 $287
Ship agency
services 24 40 8 13
-- -- - ---
$872 $897 $289 $300
---- ---- ---- -----
---- ---- ---- -----
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:
Short-term
and current
portion of
long-term
debt $4,080 $5,505 $585 $566
Long-term
debt 1,047 1,702 (198) (175)
Shareholders'
equity 17,616 16,859 455 (342)
------ ------ --- -----
$22,743 $24,066 $842 $49
------- ------- ---- ----
------- ------- ---- ----
</pre>
<p/>
<p>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.</p>
<p>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 <chron>May 31, 2010</chron> and revert thereafter to not less than 1.25 on a pre-dividend basis and 1.0 on a post-dividend basis.</p>
<p>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 <money>$6,750,000</money> CDN (or its US equivalent) and a 5 year reducing term facility initially borrowed at fiscal year-end 2007 for <money>$3,500,000</money>. 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.</p>
<p/>
<pre>
8 - Geographic
Information
External
customer
revenues(1)
Canada $40,004 $38,251 $13,846 $13,893
U.S.A. 10,623 6,364 3,826 3,069
------ ----- ----- ------
$50,627 $44,615 $17,672 $16,962
------- ------- ------- --------
------- ------- ------- --------
(1) Revenues from external customers, attributed to countries based on
the location where goods or services were provided.
All of the Company's assets are located in Canada.
For further information: Lou Younan, Vice-President Finance & CFO, MRRM Inc., (514) 908-7777, Fax: (514) 906-0220, [email protected]
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