MRRM Inc. - Directors' report and management discussion and analysis of the
financial condition and results of operations - Interim 2011.Q1 May 31, 2010
(1st Quarter)
The following discussion and analysis should be read in conjunction with
the Annual Report. Included in these documents may be forward-looking
statements with respect to the Company. These forward-looking statements
by their nature necessarily involve risks and uncertainties that could
cause actual results to differ materially from those contemplated by such
statements. The Company considers the assumptions on which these forward-
looking statements are based to be reasonable at the time they were
prepared but cautions the reader that these assumptions regarding future
events, many of which are beyond the control of the Company, may
ultimately prove to be incorrect.
The unaudited interim consolidated financial statements were prepared by
the Company in accordance with Canadian generally accepted accounting
principles and have not been reviewed by the Company's auditors. Certain
comparative figures have been reclassified to conform with the
presentation adopted in the financial statements.
Additional documents and information are available at the System for
Electronic Document Analysis and Retrieval (SEDAR) and can be assessed
through the internet: For MRRM's profile go to www.sedar.com or for
documents go to www.sedar.com Information is also available on the
Corporate website at www.MRRM.ca.
</pre>
<p/>
<p><span class="xn-location">MONTREAL</span>, <span class="xn-chron">June 23</span> /CNW Telbec/ -</p>
<p/>
<pre>
Consolidated Earnings And Comprehensive Income and Retained Earnings
--------------------------------------------------------------------
</pre>
<p/>
<p>Revenues for the period (last year) were <span class="xn-money">$15,598,000</span> (<span class="xn-money">$17,489,000</span>) decreasing by <span class="xn-money">$1,891,000</span> (-10.8%). As shown in the segmented information, sales and income from operating activities amounted to <span class="xn-money">$15,650,000</span> (<span class="xn-money">$17,148,000</span>) being 100.3% (98.1%) of total revenues. Income from corporate totaled $-52,000 (<span class="xn-money">$341,000</span>). Unrealized gains in fair market value of the portfolio amounted to $-94,000 (<span class="xn-money">$356,000</span>). Operating Revenues decreased by <span class="xn-money">$1,498,000</span> (-8.7%) compared to last year. Revenue from Corporate decreased by <span class="xn-money">$393,000</span> of which <span class="xn-money">$450,000</span> was attributable to a decrease in unrealized fair value of investments held for trading.</p>
<p>Costs and expenses for the period (last year) were <span class="xn-money">$15,137,000</span> (<span class="xn-money">$17,056,000</span>), a decrease of <span class="xn-money">$1,919,000</span> (-11.3%). Costs related to operating activities, before exchange and interest, decreased by <span class="xn-money">$1,880,000</span> (-11.1%). Expenses related to corporate decreased by <span class="xn-money">$7,000</span>.</p>
<p/>
<p>Operating results are discussed later on in this report.</p>
<p/>
<p>The impact of the fluctuating Canadian dollar resulted in a total currency exchange gain of <span class="xn-money">$28,000</span> versus a loss of <span class="xn-money">$90,000</span> last year all included under cost of sales. As disclosed in the Notes, the net exposures were as follows: at <span class="xn-chron">May 31, 2010</span>, US(<span class="xn-money">$897,000</span>); at <span class="xn-chron">May 31, 2009</span>, US$2,560,000; at <span class="xn-chron">February 28, 2010</span>, US(<span class="xn-money">$450,000</span>); at <span class="xn-chron">February 28, 2009</span>, US(<span class="xn-money">$404,000</span>). The above US dollars include the equivalent for euros which is not material.</p>
<p>The company uses foreign exchange contracts to manage foreign exchange exposure. At <span class="xn-chron">May 31, 2010</span>, the Company had foreign exchange contracts outstanding allowing the Company to buy USD$4,400,000 at an average rate of 1.0101. The maturity dates of these contracts range form <span class="xn-chron">June 2010</span> to <span class="xn-chron">March 2012</span>. The Company has recorded a current and a long term asset on the balance sheet under the caption "fair value of cash flow hedges". The Company also recorded comprehensive income in the amount of <span class="xn-money">$167,000</span> to reflect the fair value of these foreign exchange forward contracts.</p>
<p>Interest expensed on bank indebtedness and the reducing term loan amounted to <span class="xn-money">$38,000</span> compared to <span class="xn-money">$63,000</span> last year for a decrease of <span class="xn-money">$25,000</span>. Interest related to the long-term debt was <span class="xn-money">$21,000</span> compared to <span class="xn-money">$31,000</span> last year.</p>
<p>Earnings before income taxes for the period (last year) were <span class="xn-money">$461,000</span> (<span class="xn-money">$433,000</span>), an increase of <span class="xn-money">$28,000</span>. Earnings from operating activities for the period (last year) were <span class="xn-money">$586,000</span> (<span class="xn-money">$172,000</span>), an increase of <span class="xn-money">$414,000</span>. Earnings from corporate for the period (last year) were $-125,000 (<span class="xn-money">$261,000</span>), a decrease of <span class="xn-money">$386,000</span>.</p>
<p>Income taxes for the period (last year) were <span class="xn-money">$141,000</span> (<span class="xn-money">$99,000</span>). 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 <span class="xn-money">$320,000</span> (<span class="xn-money">$334,000</span>) or <span class="xn-money">$0.13</span> (<span class="xn-money">$0.13</span>) per share.</p>
<p>As stated in the past, the declaration of the quarterly dividend continues to be suspended in order to support operating cash requirements. The declaration and payment of dividends is at the discretion of the Board of Directors.</p>
<p/>
<pre>
Summary of Quarterly Results
----------------------------
</pre>
<p/>
<p>The following financial summary is derived from the Company's financial statements for each of the eight most recently completed fiscal quarters.</p>
<p/>
<pre>
-------------------------------------------------------------------------
Summary of
Quarterly
Financial
Results
for the May 31, Feb 28, Nov 30, Aug 31, May 31, Feb 28, Nov 30, Aug 31,
eight 2010 2010 2009 2009 2009 2009 2008 2008
most (2011. (2010. (2010. (2010. (2010. (2009. (2009. (2009.
recent ------ ------ ------ ------ ------ ------ ------ ------
fiscal Q1) Q4) Q3) Q2) Q1) Q4) Q3) Q2)
quarters --- --- --- --- --- --- --- ---
unaudited)
-------------------------------------------------------------------------
(Expressed in
thousands,
except for
amounts per
share -
unaudited) $ $ $ $ $ $ $ $
-------------------------------------------------------------------------
Revenues 15,598 15,181 17,672 15,466 17,489 16,502 16,962 14,091
-------------------------------------------------------------------------
Net
Earnings
(loss) 320 562 455 169 334 (200) (343) 287
-------------------------------------------------------------------------
Earnings
(loss)
per share 0.13 0.22 0.18 0.07 0.13 (0.08) (0.14) 0.11
-------------------------------------------------------------------------
Dividends
per share 0.00 0.10 0.00 0.00 0.00 0.00 0.00 0.00
-------------------------------------------------------------------------
Consolidated Cash Flows, Liquidity and Balance Sheets
-----------------------------------------------------
</pre>
<p/>
<p>In investing activities, the Company added <span class="xn-money">$96,000</span> of net property, plant and equipment compared to <span class="xn-money">$103,000</span> 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 <span class="xn-money">$6,750,000</span> CDN (or its US equivalent) and a 5 year reducing term facility initially borrowed at fiscal year-end 2007 for <span class="xn-money">$3,500,000</span>. 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/>
<p>Receivables increased by <span class="xn-money">$998,000</span> 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/>
<p>Inventories increased by <span class="xn-money">$773,000</span> (9.9%) while overall volumes of rice increased by 13.0%.</p>
<p/>
<p>Marketable securities - see table below for financial summary and investment mix.</p>
<p/>
<p>Property, plant and equipment decreased by <span class="xn-money">$193,000</span> comprised of additions of <span class="xn-money">$96,000</span> and amortization of <span class="xn-money">$289,000</span>.</p>
<p/>
<p>Bank indebtedness was <span class="xn-money">$712,000</span> compared to <span class="xn-money">$922,000</span> at last year-end, a decrease of <span class="xn-money">$210,000</span>.</p>
<p/>
<p>Payables increased by <span class="xn-money">$1,443,000</span> mainly arising from increases in amounts due related to the agency business.</p>
<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/>
<p>Future income taxes, net liability, increased by <span class="xn-money">$39,000</span> which is mainly attributable to the unrealized change in fair value of foreign exchange forward contracts that accounts for <span class="xn-money">$43,000</span> at <span class="xn-chron">May 31, 2010</span>.</p>
<p/>
<p>Shareholders' equity increased by <span class="xn-money">$444,000 to $18,368,000</span> from <span class="xn-money">$17,924,000</span> and represents <span class="xn-money">$7.25</span> (<span class="xn-money">$7.07</span>) per share.</p>
<p/>
<p>Capital stock remained unchanged at <span class="xn-money">$539,000</span> and represents 2,535,000 issued common shares.</p>
<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 <span class="xn-chron">February 28, 2010</span>. An extract of these policies is set out in the notes to the quarterly consolidated financial statements.</p>
<p/>
<p>New accounting policy</p>
<p/>
<p>Effective <span class="xn-chron">March 1, 2010</span>, the Company uses hedge accounting. At the inception of a hedging relationship, the Company designates and formally documents the relationship between the hedging instrument and the hedged item, its risk management objective and its strategy for undertaking the hedge. The documentation identifies the anticipated cash flows being hedged, the risk that is being hedged, the type of hedging instrument used and how effectiveness will be assessed.</p>
<p>The Company also formally assesses, both at inception and at least quarterly thereafter, whether or not the derivatives that are used in hedging transactions are highly effective in offsetting the changes attributable to the hedged risks in cash flows of the hedged items. If a hedge relationship becomes ineffective, it no longer qualifies for hedge accounting and any subsequent change in the fair value of the hedging instrument is recognized in earnings. When hedge accounting is appropriate, the hedging relationship is designated as a cash flow hedge. In a cash flow hedge, the change in fair value of the hedging instrument is recorded, to the extent it is effective, in other comprehensive income until the hedged item affects net earnings. The Company uses cash flow hedges to mitigate the risk from variable cash flows associated with forecasted foreign currency denominated cash flows.</p>
<p>Hedge ineffectiveness is measured and recorded in current period earnings in the consolidated statement of earnings. When cash flow hedge is discontinued, any cumulative adjustment to either the hedged item or other comprehensive income is recognized in earnings as the hedged item affects earnings, or when the hedged item is derecognized. If a designated hedge is no longer effective, the associated derivative instrument is subsequently carried at fair value through earnings without any offset from the hedged item. Changes in the fair value of derivatives that do not qualify for hedge accounting are recorded in the consolidated statement of earnings. The balance of other comprehensive income consists of the accumulated variation in the fair value of foreign exchange forward contracts net of future income tax.</p>
<p/>
<p>Future Accounting Changes:</p>
<p/>
<p>International Financial Reporting Standards (IFRS)</p>
<p/>
<p>In 2005, the Accounting Standards Board of <span class="xn-location">Canada</span> (AcSB) announced that accounting standards in <span class="xn-location">Canada</span> are to converge with IFRS. In <span class="xn-chron">March 2009</span>, 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 <span class="xn-chron">January 1, 2011</span>.</p>
<p>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.</p>
<p>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.</p>
<p/>
<pre>
Discussion of Results:
----------------------
</pre>
<p/>
<p>In Dainty Foods, net sales decreased by <span class="xn-money">$2,008,000</span> (-12.2%) to <span class="xn-money">$14,426,000</span> for the period compared to this quarter last year while rice sales volumes increased by 2.5% for the same period compared to this quarter last year. The net sales reduction is primarily a result of lower selling prices due to reduced cost of rice and the weaker US Dollar. Costs and expenses decreased by <span class="xn-money">$2,251,000</span> (-13.8%) to <span class="xn-money">$13,979,000</span> for the period compared to this quarter last year as commodity prices continue to decline and earnings before income taxes for the period increased by <span class="xn-money">$243,000 to $423,000</span> compared to this quarter last year.</p>
<p>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.</p>
<p>World market cost of rice continues to decline gradually. Dainty Foods continues to manage rice contracts to short term duration.</p>
<p>In <span class="xn-chron">February 2010</span>, the Company incorporated Dainty Foods International, Inc. which will be used as a vehicle for further business expansion in the USA.</p>
<p>In Robert Reford, revenue increased by <span class="xn-money">$510,000</span> (71.4%) to <span class="xn-money">$1,224,000</span> for the period compared to this quarter last year reflecting the addition of Montship Inc. as well as increased growth in both Robert Reford and Norton Lilly.</p>
<p>Earnings before income taxes for the period increased by <span class="xn-money">$171,000 to $163,000</span> compared to this quarter last year.</p>
<p>On <span class="xn-chron">February 1, 2010</span> Montship Inc. of <span class="xn-location">Montreal</span> 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.</p>
<p/>
<p>Corporate Investments, portfolio income is summarized as follows:</p>
<p/>
<pre>
For the period
--------------
-------------------------------------------------------------------------
2011 2010
---- ----
-------------------------------------------------------------------------
Dividend and interest income $37,000 $34,000
-------------------------------------------------------------------------
Capital gains (losses) $5,000 $-49,000
-------------------------------------------------------------------------
Unrealized change in Fair Value $-94,000 $356,000
--------- ---------
-------------------------------------------------------------------------
Totals: $-52,000 $341,000
--------- ---------
-------------------------------------------------------------------------
</pre>
<p/>
<p>During this period, global financial markets weakened slightly contributing to a loss in Fair Market Value of <span class="xn-money">$94,000</span> for the period compared to a gain of <span class="xn-money">$356,000</span> that 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/>
<pre>
-------------------------------------------------------------------------
Investment Mix May 31, Feb 28, Nov 30, Aug 31, May 31,
2010 2010 2009 2009 2009
(2011.Q1) (2010.Q4) (2010.Q3) (2010.Q2) (2010.Q1)
--------- --------- --------- --------- ---------
-------------------------------------------------------------------------
Cash & Equivalents 1.1% 0.2% 0.5% 0.7% 18.9%
-------------------------------------------------------------------------
Bonds 27.2% 27.2% 27.9% 30.9% 18.9%
-------------------------------------------------------------------------
Preferred Shares 17.5% 17.6% 17.6% 14.7% 13.1%
-------------------------------------------------------------------------
Canadian Equities 37.9% 37.7% 37.3% 33.5% 31.1%
-------------------------------------------------------------------------
U.S. & Foreign
Equities 16.3% 17.3% 16.7% 20.2% 18.0%
-------------------------------------------------------------------------
</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>Dainty Foods expects to gradually increase retail volumes of value-added products in <span class="xn-location">Canada</span> and the USA. Microwaveable branded pasta products are expected to add incremental profitability during the last two quarters of Fiscal 2011.</p>
<p>Profit for the quarter exceeded expectations and earnings for the next quarter are expected to surpass the second quarter 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 exceeded expectations and the addition of Montship Inc. is expected to improve profitability going forward.</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, June 23, 2010.
MRRM Inc.
CONSOLIDATED EARNINGS
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the
(unaudited) THREE Months Ending
---------------------
May 31, May 31,
------- -------
2010 2009
---- ----
'000 '000
Revenues
Sales $15,650 $17,148
(Decrease) increase in fair value of marketable
securities held for trading (52) 341
---------- ----------
15,598 17,489
---------- ----------
Costs and expenses
Cost of sales, selling and administrative 14,829 16,713
Amortization 289 292
Interest on long-term debt 21 31
Other interest 17 32
Change in fair value of interest rate swap (19) (12)
---------- ----------
15,137 17,056
---------- ----------
Earnings before income taxes 461 433
---------- ----------
Income taxes
Current 145 103
Future (4) (4)
---------- ----------
141 99
---------- ----------
Net earnings $320 $334
---------- ----------
---------- ----------
Basic earnings per share $0.13 $0.13
----- -----
----- -----
-------------------------------------------------------------------------
-------------------------------------------------------------------------
MRRM Inc.
CONSOLIDATED COMPREHENSIVE INCOME
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the
(unaudited) THREE Months Ending
---------------------
May 31, May 31,
------- -------
2010 2009
---- ----
'000 '000
Net earnings $320 $334
---------- ----------
Other comprehensive income
Changes in fair value of foreign exchange forward
contracts designated as cash flow hedges 167 0
Future income taxes on changes in fair value of
foreign exchange forward contracts designated as
cash flow hedges (43) 0
---------- ----------
Other comprehensive income for the period 124 0
---------- ----------
Comprehensive income $444 $334
---------- ----------
---------- ----------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
MRRM Inc.
CONSOLIDATED RETAINED EARNINGS
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the
(unaudited) THREE Months Ending
---------------------
May 31, May 31,
------- -------
2010 2009
---- ----
'000 '000
Balance, beginning of period $17,385 $16,119
Net earnings 320 334
---------- ----------
17,705 16,453
Dividends 0 0
---------- ----------
Balance, end of period $17,705 $16,453
---------- ----------
---------- ----------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
MRRM Inc.
CONSOLIDATED CASH FLOWS
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the
(unaudited) THREE Months Ending
---------------------
May 31, May 31,
------- -------
2010 2009
---- ----
'000 '000
OPERATING ACTIVITIES
Net earnings $320 $334
Defined benefit plan payments (13) (16)
---- ----
307 318
--- ---
Non-cash items
Change in fair value of marketable securities
held for trading 89 (308)
Change in fair value of interest rate swap contract (19) (12)
Amortization 289 292
Pension benefit cost 7 6
Future income taxes (5) (4)
---------- ----------
361 (26)
Changes in non-cash working capital items (153) (635)
---------- ----------
Non-cash operating items generated (used) 208 (661)
---------- ----------
Cash flows from operating activities 515 (343)
---------- ----------
INVESTING ACTIVITIES
Marketable securities (127) (3)
Disposals of marketable securities 99 0
Property, plant and equipment (96) (103)
---------- ----------
Cash flows from investing activities (124) (106)
---------- ----------
FINANCING ACTIVITIES
Bank indebtedness (210) 621
Long-term debt (181) (172)
---------- ----------
Cash flows from financing activities (391) 449
---------- ----------
Net change in cash and cash, end of period $0 $0
---------- ----------
---------- ----------
Dividends per share $0.00 $0.00
----- -----
----- -----
-------------------------------------------------------------------------
-------------------------------------------------------------------------
MRRM Inc.
CONSOLIDATED BALANCE SHEETS
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(unaudited) As at As at
May 31, February
------- --------
2010 28, 2010
---- --------
'000 '000
ASSETS
Current
Accounts receivable $7,191 $6,193
Fair value of cash flow hedges 94 0
Inventories 8,604 7,831
Income taxes receivable 0 35
Tax credits receivable 94 94
Prepaids 70 111
Future income taxes 15 15
---------- ----------
16,068 14,279
Fair value of cash flow hedges 73 0
Tax credits receivable 868 868
Marketable securities, at fair value 4,365 4,425
Property, plant and equipment, net 14,536 14,729
Cash surrender value of life insurance policy 2 2
---------- ----------
$35,912 $34,303
---------- ----------
---------- ----------
LIABILITIES
Current
Bank indebtedness $712 $922
Accounts payable and accrued liabilities 12,567 11,124
Income taxes payable 99 0
Current portion of accrued benefit liability 56 56
Current portion of long-term debt 750 739
Future income taxes 24 0
---------- ----------
14,208 12,841
---------- ----------
Long-term debt, reducing term loan maturing in 2012 592 784
Fair value of interest rate swap contract 39 58
Accrued benefit liability 562 568
Future income taxes 2,143 2,128
---------- ----------
17,544 16,379
---------- ----------
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 17,705 17,385
Accumulated other comprehensive income 124 0
---------- ----------
18,368 17,924
---------- ----------
$35,912 $34,303
---------- ----------
---------- ----------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
MRRM Inc.
NOTES To CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2010
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(unaudited)
</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 <span class="xn-chron">February 28, 2010</span> except for the adoption of a new accounting policy described below. These unaudited interim statements should be read along with the audited annual statements and notes included in the Company's last Annual Report. Certain comparative figures have been reclassified to conform with the presentation adopted at last fiscal year-end.</p>
<p/>
<p>New accounting policy</p>
<p/>
<p>Effective <span class="xn-chron">March 1, 2010</span>, the Company uses hedge accounting. At the inception of a hedging relationship, the Company designates and formally documents the relationship between the hedging instrument and the hedged item, its risk management objective and its strategy for undertaking the hedge. The documentation identifies the anticipated cash flows being hedged, the risk that is being hedged, the type of hedging instrument used and how effectiveness will be assessed.</p>
<p>The Company also formally assesses, both at inception and at least quarterly thereafter, whether or not the derivatives that are used in hedging transactions are highly effective in offsetting the changes attributable to the hedged risks in cash flows of the hedged items. If a hedge relationship becomes ineffective, it no longer qualifies for hedge accounting and any subsequent change in the fair value of the hedging instrument is recognized in earnings. When hedge accounting is appropriate, the hedging relationship is designated as a cash flow hedge. In a cash flow hedge, the change in fair value of the hedging instrument is recorded, to the extent it is effective, in other comprehensive income until the hedged item affects net earnings. The Company uses cash flow hedges to mitigate the risk from variable cash flows associated with forecasted foreign currency denominated cash flows.</p>
<p>Hedge ineffectiveness is measured and recorded in current period earnings in the consolidated statement of earnings. When a cash flow hedge is discontinued, any cumulative adjustment to other comprehensive income is recognized in earnings. If a designated hedge is no longer effective, the associated derivative instrument is subsequently carried at fair value through earnings. Changes in the fair value of derivatives that do not qualify for hedge accounting are recorded in the consolidated statement of earnings. The balance of other comprehensive income consists of the accumulated variation in the fair value of foreign exchange forward contracts net of future income tax.</p>
<p/>
<p>2- Financial Instruments and Financial Risk factors</p>
<p/>
<p>Hierarchy of Financial Instruments</p>
<p/>
<p>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:</p>
<p/>
<pre>
- 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 and the
foreign exchange forward contracts.
- Level 3: This level includes valuations based on inputs which are less
observable, unavailable or where the observable data does not support a
significant portion of the instruments' fair value. As at May 31, 2010,
the Company does not have any financial assets, financial liabilities
or derivative financial instruments, which should be included in this
level.
</pre>
<p/>
<p>Derivative Financial Instruments</p>
<p/>
<p>The Company uses derivative financial instruments to manage its currency risk and interest rate risk as necessary.</p>
<p>At <span class="xn-chron">May 31, 2010</span>, the Company had foreign exchange contracts outstanding that allowed the Company to buy USD$4,400,000 at an average rate of 1.0101. The maturity dates of these contracts range form <span class="xn-chron">June 2010</span> to <span class="xn-chron">March 2012</span>. The Company has recorded current and long term assets on the balance sheet under the captions "fair value of cash flow hedges" and comprehensive income in the amount of <span class="xn-money">$167,000</span> to reflect the fair value of these foreign exchange forward contracts.</p>
<p>The Company uses an interest rate swap arrangement, for a notional amount of <span class="xn-money">$3,500,000</span> through its bankers to effectively fix the variable rate pertaining to the Reducing term loan which matures in <span class="xn-chron">February 2012</span>. This arrangement has fixed the interest rate at 5.83% to maturity. The swap contract had a negative fair value of <span class="xn-money">$39,000</span> at <span class="xn-chron">May 31, 2010</span> and as such, has been recorded in long-term liabilities under fair value of interest rate swap and recognized in Consolidated Earnings under other expenses for the year. The Company does not enter into derivative financial instruments for trading or speculative purposes.</p>
<p/>
<p>Fair Value and Classification of Financial Instruments</p>
<p/>
<p>The following methods and assumptions were used to determine the estimated fair value of each class of financial instruments:</p>
<p/>
<pre>
- The fair values of bank indebtedness, trade accounts receivable and
accounts payable and accrued liabilities are comparable to their
carrying amounts, given their short maturity periods;
- The fair value of marketable securities has been determined based on
the current bid price at the balance sheet date;
- The fair value of the long-term debt which bears interest at a variable
rate approximates its carrying amount;
- The fair values of the interest rate swap agreement and the foreign
exchange forward contracts were determined by the Company's bank and
represent the amounts required to realize favorable contracts or settle
unfavorable ones.
</pre>
<p/>
<p>As at <span class="xn-chron">May 31, 2010</span>, the financial instruments presented at fair value on the Company's consolidated balance sheet by level of the fair value hierarchy are as follows:</p>
<p/>
<pre>
(amounts are in thousands of dollars) Level 1 Level 2 Level 3
---------- ---------- ----------
Financial Assets
Foreign exchange forward contracts - 167 -
Marketable securities 4,365 - -
Financial Liabilities
Interest rate swap - (39) -
</pre>
<p/>
<p>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 and other price risk. The Company's management is responsible for setting acceptable levels of risk and reviewing management activities as necessary.</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 contracts. As at <span class="xn-chron">May 31, 2010</span>, there were USD$4,400,000 of forward exchange forward contracts pending. The Company uses hedge accounting for such instruments. Under this method any changes in the fair value of the contracts caused by fluctuations in the spot foreign exchange rates are recorded in comprehensive income.</p>
<p>The Company has recorded a fair value of <span class="xn-money">$167,000</span> on cash flow hedges at <span class="xn-chron">May 31, 2010</span>. Based on the foreign currency exposure as at <span class="xn-chron">May 31, 2010</span> and assuming all other variables remain constant, a 10% depreciation or appreciation of the Canadian dollar against the U.S. dollar would result in an increase/decrease of <span class="xn-money">$17,000</span> in comprehensive income.</p>
<p>As at <span class="xn-chron">May 31, 2010</span>, assets denominated in foreign currencies consisting of cash, trade accounts receivable and marketable securities totaled US$2,597,573 or its Canadian equivalent of <span class="xn-money">$2,717,581</span> (US$3,331,520 or its Canadian equivalent of <span class="xn-money">$3,506,758</span> as at <span class="xn-chron">February 28</span>, 2010). Bank indebtedness and accounts payable and accrued liabilities denominated in U.S. dollars totaled US$3,494,162 or its Canadian equivalent of <span class="xn-money">$3,655,592</span> (US$3,781,970 or its Canadian equivalent of <span class="xn-money">$3,980,902</span> as at <span class="xn-chron">February 28</span>, 2010).</p>
<p>Based on the net U.S. dollar exposure as of <span class="xn-chron">May 31, 2010</span>, a 1 percent increase/(decrease) in the U.S. exchange rate will increase/(decrease) equity by approximately <span class="xn-money">$9,000</span> (<span class="xn-money">$26,000</span> in May 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. 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.</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 plus 0.25% for Canadian loans and U.S. base rates plus 0.25% 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 <span class="xn-money">$1,000</span>. A 0.5% decrease in the prime rate would have a reverse effect. The Company's investments in bonds bear interest at fixed rates and the Company is, therefore, exposed to the risk of changes in fair value resulting from interest rate fluctuations.</p>
<p/>
<p>Liquidity risk</p>
<p/>
<p>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.</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 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.</p>
<p/>
<p>Other price 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 and diversified asset mix. For this quarter, the effect before income taxes represents a decrease in income of <span class="xn-money">$94,000</span> and an increase of <span class="xn-money">$357,000</span> for the same period last year. As at <span class="xn-chron">May 31, 2010</span>, a 10% increase/(decrease) in the bid prices of the marketable securities would increase/(decrease) equity by approximately <span class="xn-money">$436,000</span> (<span class="xn-money">$403,000</span> in May 2009).</p>
<p/>
<p>3- Information included in the Statement Of Earnings</p>
<p/>
<pre>
For the
THREE Months Ending
---------------------
May 31, May 31,
------- -------
2010 2009
---- ----
'000 '000
Income taxes paid $12 $2
--- --
--- --
Interest on long-term debt $20 $29
Interest on bank indebtedness and other 19 33
-- --
Interest paid $39 $62
--- ---
--- ---
4 - Income Taxes
Tax at combined basic federal and provincial
income tax rate $135 $135
Non-taxable portion of capital (gains) losses (1) 8
Tax-free income 0 (7)
Non-taxable portion of decrease (increase) in fair
value of investments 15 (55)
Non-deductible expenses 8 7
Other (16) 11
---- --
$141 $99
---- ---
---- ---
Effective tax rate 30.5% 22.8%
----- -----
----- -----
The Company's future income tax liabilities
(assets) are as follows:
Employee future benefits ($190) ($212)
Research and development tax credits 247 280
Property, plant and equipment 1,980 2,002
Loss carry forwards 0 (47)
Derivatives 43 0
Other 72 (38)
-- ----
$2,152 $1,985
------ ------
------ ------
Comprising
Asset: Current ($15) ($15)
Liability: Current 24 0
Non-current 2,143 2,000
----- -----
$2,152 $1,985
------ ------
------ ------
5- Supplemental Cash Flow Information:
Changes in non-cash working capital items
Accounts receivable ($998) $343
Inventories (773) 1,332
Income Tax receivable 35 0
Tax credits receivable 0 81
Prepaids 41 18
Accounts payable and accrued liabilities 1,443 (2,514)
Income taxes payable 99 105
-- ---
($153) ($635)
------ ------
------ ------
6- Segmented Information
Revenue
Food processing and selling $14,426 $16,434
Ship agency services 1,224 714
----- ---
Operating 15,650 17,148
Corporate (52) 341
---- ---
$15,598 $17,489
------- -------
------- -------
Earnings (loss)
Food processing and selling $423 $180
Ship agency services 163 (8)
--- ---
Operating 586 172
Corporate (125) 261
----- ---
Earnings before income taxes 461 433
Income Taxes 141 99
--- --
Net earnings $320 $334
---- ----
---- ----
Assets
Food processing and selling $29,743 $31,157
Ship agency services 1,815 1,087
----- -----
Operating 31,558 32,244
Corporate 4,354 4,028
----- -----
$35,912 $36,272
------- -------
------- -------
Capital expenditures
Food processing and selling $96 $92
Ship agency services 0 11
- --
Operating 96 103
Corporate 0 0
- -
$96 $103
--- ----
--- ----
Amortization
Food processing and selling $282 $284
Ship agency services 7 8
- -
$289 $292
---- ----
---- ----
</pre>
<p/>
<p>7- Capital disclosures</p>
<p/>
<p>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:</p>
<p/>
<pre>
Bank indebtedness and current portion of long-term
debt $1,462 $5,925
Long-term debt and fair value of interest rate
swap contract 631 1,449
--- -----
Total debts 2,093 7,374
Shareholders' equity 18,368 16,992
------ ------
Total capitalization $20,461 $24,366
------- -------
------- -------
Debt as % of capitalization 10% 30%
--- ---
--- ---
</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 <span class="xn-chron">May 31, 2010</span> 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 <span class="xn-money">$6,750,000</span> CDN (or its US equivalent) and a 5 year reducing term facility initially borrowed at fiscal year-end 2007 for <span class="xn-money">$3,500,000</span>. 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/>
<p>8- Geographic Information</p>
<p/>
<pre>
External customer revenues(1)
Canada $12,879 $13,802
U.S.A. 2,719 3,687
----- -----
$15,598 $17,489
------- -------
------- -------
(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.
For further information: Lou Younan, Vice-President Finance & CFO, MRRM Inc., (514) 908-7777, Fax: (514) 906-0220, [email protected]
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