Magnotta Winery Corporation
TSX : MGN

Magnotta Winery Corporation

December 14, 2009 11:43 ET

Magnotta Winery Corporation Announces October 31, 2009 Results

VAUGHAN, ONTARIO--(Marketwire - Dec. 14, 2009) - Magnotta Winery Corporation (TSX:MGN), is pleased to announce the release of its financial results for the third quarter ended October 31, 2009.

Net sales for the quarter ended October 31, 2009 increased 1.9% to $7,425,729 from $7,290,507 for the corresponding period of the prior year and for the nine month period increased 2.2% to $19,634,118 from $19,209,561 for the corresponding period of the prior year. Net earnings decreased to $812,205 from $921,713 for the three month period and decreased to $1,472,235 from $2,577,463 for the nine month period ended October 31, 2009. The decrease in earnings was attributable to increased marketing and advertising expenses during the quarter ended October 31, 2009 and the retirement allowance which was booked in the second quarter ending July 31, 2009. The basic and diluted earnings per common share have decreased $0.01 to $0.06 for the three months ended October 31, 2009 compared to the three months ended October 31, 2008 and for the nine months ended October 31, 2009 decreased to $0.11 from $0.19 compared to the nine months ended October 31, 2008. The overall growth in net sales resulted from the Company expanding its branding campaign through targeted marketing and advertising. This has created more brand awareness and greater volumes.

Overall gross profit margin for the quarter ended October 31, 2009 decreased to 42.3% from 42.9% for the corresponding period of the prior year, and for the nine month period ended October 31, 2009, decreased to 41.6% from 43.3%. The change in the gross margins is due to increased cost pressures from raw and packaging material costs, and energy costs. The general economic downturn, which started at the latter part of fiscal 2009 continued into the third quarter of fiscal 2010 and resulted in customers shifting to lower priced "value" products. However, the Company saw an increase in its gross profit margin at the October 31, 2009 quarter from July 31, 2009 and April 30, 2009 due to some increased interest on certain higher end products. The Company believes it is difficult to determine how the "softening" of the general economic environment and its effects on people's purchasing habits will impact the Company in the coming quarters.

Selling, administration and other expenses were $1,514,680 for the three months ended October 31, 2009 compared to $1,287,237 for the corresponding period of the prior year. For the nine month period ended October 31, 2009, selling, administration and other expenses were $3,258,282 compared to $3,020,647 for the corresponding period of the prior year. The increase is due to a conscious effort during the period by the Company to expand its marketing and advertising campaigns.

Interest expense for the three months ended October 31, 2009 decreased to $145,760 from $182,314 and for the nine month period ended October 31, 2009 it was $438,058 compared to $610,694 for the corresponding period of the prior year. The decrease is due to lower long-term debt outstanding and most importantly, lower overall interest rates on the Company's operating line facility and long-term debt compared to the corresponding period of the previous year.

Additional details and information are found in the Interim Unaudited Consolidated Financial Statements, the Management Discussion and Analysis for October 31, 2009 as well as on www.sedar.com.

The common shares of Magnotta trade on the TSX under the symbol "MGN".

Readers are cautioned that some of the statements contained in this release may be forward-looking statements, such as expectations, estimates and statements that describe the Company's future plans, objectives or goals, including words to the effect that the Company or management expects a stated condition to exist or occur. Generally, these forward-looking statements can be identified by the use of terminology such as "outlook", "anticipate", "believe", "estimate", "expect", "intend", "should", and similar expressions. Since forward-looking statements address future events and conditions, by their very nature, they involve inherent risks and uncertainties. Actual results in each case could differ from those currently anticipated in such statements by reason of factors such as, but not limited to, changes in general economic and market conditions. Magnotta disclaims any intention or obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or results, or otherwise.



MAGNOTTA WINERY CORPORATION

Interim Consolidated Financial Statements - Unaudited

Nine months ended October 31, 2009


MAGNOTTA WINERY CORPORATION

Notice To Reader of the Consolidated Interim Financial Statements

Nine months ended October 31, 2009

The consolidated financial statements of Magnotta Winery Corporation and the accompanying consolidated interim balance sheets as at October 31, 2009 and the consolidated interim statements of earnings, comprehensive income and retained earnings, and cash flows for the nine month period then ended are the responsibility of the Company's management. These consolidated financial statements have not been audited or reviewed on behalf of the shareholders by the independent external auditors of the Company, KPMG LLP.

The consolidated interim financial statements have been prepared by management and include the selection of appropriate accounting principles, judgments and estimates necessary to prepare these financial statements in accordance with Canadian generally accepted accounting principles.



MAGNOTTA WINERY CORPORATION
Consolidated Interim Balance Sheets

As at October 31, 2009, with comparative figures for
January 31, 2009 and October 31, 2008

---------------------------------------------------------------------------
---------------------------------------------------------------------------
October 31 January 31 October 31
2009 2009 2008
(unaudited) (unaudited)
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Assets

Current assets:
Cash and cash equivalents $ - $ - $ 341,612
Accounts receivable 1,536,888 260,800 1,439,618
Inventories 28,080,733 27,847,603 25,558,432
Income taxes receivable 537,213 465,620 -
Future income taxes 108,467 4,453 74,172
Prepaid expenses and
deposits 569,211 247,038 575,521
------------------------------------------

30,832,512 28,825,514 27,989,355

Property, plant and
equipment 21,046,209 21,092,890 21,202,832
Winery licenses 251,516 251,516 251,516
------------------------------------------

$ 52,130,237 $ 50,169,920 $ 49,443,703
------------------------------------------
------------------------------------------

Liabilities and Shareholders'
Equity

Current liabilities:

Bank indebtedness $ 5,313,223 $ 5,881,325 $ 4,346,267
Accounts payable and accrued
liabilities 1,862,466 1,137,033 1,497,145
Income taxes payable - - 23,271
Current portion of
long-term debt 820,840 784,920 790,300
------------------------------------------

7,996,529 7,803,278 6,656,983

Long-term debt 6,122,197 6,616,380 6,695,996
Long-term retirement
allowance 740,000 - -
Future income taxes 875,846 826,832 1,350,010

Shareholders' equity:
Share capital 6,961,617 6,961,617 6,961,617
Notes receivable for share
capital (232,500) (232,500) (348,750)
Other paid-in capital 210,000 210,000 210,000
Retained earnings 29,456,548 27,984,313 27,917,847
------------------------------------------

36,395,665 34,923,430 34,740,714
------------------------------------------

$ 52,130,237 $ 50,169,920 $ 49,443,703
------------------------------------------
------------------------------------------

Segmented information on
identifiable capital assets
by geographic region
Canada $ 17,978,685 $ 18,013,135 $ 18,416,880
Chile 3,067,524 3,079,755 2,785,952
------------------------------------------
$ 21,046,209 $ 21,092,890 $ 21,202,832
---------------------------------------------------------------------------
---------------------------------------------------------------------------

On behalf of the Board:

"Rossana DiZio Magnotta"
----------------------------------------------------
Rossana DiZio Magnotta - CEO/President and Director

"W.H. Bruce Fraser"
----------------------------------------------------
W.H. Bruce Fraser - Director


MAGNOTTA WINERY CORPORATION
Consolidated Interim Statements of Earnings, Comprehensive Income and
Retained Earnings

---------------------------------------------------------------------------
---------------------------------------------------------------------------
For The Three Months For The Nine Months
Ended October 31 Ended October 31
2009 2008 2009 2008
(unaudited) (unaudited) (unaudited) (unaudited)
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Net sales $ 7,425,729 $ 7,290,507 $ 19,634,118 $ 19,209,561

Cost of goods sold,
excluding
amortization of
property, plant
and equipment 4,139,388 4,036,066 11,037,169 10,508,782

Amortization of
property, plant
and equipment
(production) 143,056 127,941 429,168 383,823
-------------------------------------------------------
Total cost of goods
sold 4,282,444 4,164,007 11,466,337 10,892,605
-------------------------------------------------------

Gross profit 3,143,285 3,126,500 8,167,781 8,316,956

Expenses:
Selling,
administration
and other 1,514,680 1,287,237 3,258,282 3,020,647
Amortization of
property, plant
and equipment
(non-production) 160,640 155,236 459,206 418,152
Interest - bank
indebtedness 61,740 69,292 172,722 251,748
Interest -
long-term debt 84,020 113,022 265,336 358,946
Retirement
allowance
(Note 7) - - 1,600,000 -
-------------------------------------------------------

1,821,080 1,624,787 5,755,546 4,049,493
-------------------------------------------------------

Earnings before
income taxes 1,322,205 1,501,713 2,412,235 4,267,463

Income taxes:
Current 375,000 473,000 995,000 1,295,000
Future 135,000 107,000 (55,000) 395,000
-------------------------------------------------------

510,000 580,000 940,000 1,690,000
-------------------------------------------------------

Net earnings and
comprehensive
income for the
period 812,205 921,713 1,472,235 2,577,463

Retained earnings,
beginning
of period 28,644,343 26,996,134 27,984,313 25,340,384
-------------------------------------------------------

Retained earnings,
end of period $ 29,456,548 $ 27,917,847 $ 29,456,548 $ 27,917,847
---------------------------------------------------------------------------
---------------------------------------------------------------------------


---------------------------------------------------------------------------
---------------------------------------------------------------------------
Earnings per common
share :
Basic $ 0.06 $ 0.07 $ 0.11 $ 0.19
Diluted $ 0.06 $ 0.07 $ 0.11 $ 0.19
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Weighted average
number of
common shares
outstanding 13,932,005 13,932,005 13,932,005 13,932,005
Weighted average
number of
diluted shares
outstanding 13,932,005 13,932,005 13,932,005 13,932,005

---------------------------------------------------------------------------
---------------------------------------------------------------------------

Segmented
information
on net sales by
geographic region
Canada $ 7,235,344 $ 7,096,876 $ 18,972,919 $ 18,549,410
Chile 168,808 72,962 562,435 356,421
Other 21,577 120,669 98,764 303,730
-------------------------------------------------------
$ 7,425,729 $ 7,290,507 $ 19,634,118 $ 19,209,561
---------------------------------------------------------------------------
---------------------------------------------------------------------------



MAGNOTTA WINERY CORPORATION
Consolidated Interim Statements of Cash Flow

---------------------------------------------------------------------------
---------------------------------------------------------------------------
For The Three Months For The Nine Months
Ended October 31 Ended October 31
2009 2008 2009 2008
(unaudited) (unaudited) (unaudited) (unaudited)
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Cash provided by
(used in):

Operating activities:
Net earnings $ 812,205 $ 921,713 $ 1,472,235 $ 2,577,463
Items not involving
cash:
Amortization of
property,
plant and
equipment 303,696 283,177 888,374 801,975
Future income
taxes 135,000 107,000 (55,000) 395,000
Unrealized foreign
exchange loss 29,540 13,367 51,432 24,778
Changes in non-cash
operating working
capital:
Accounts receivable (103,831) 30,590 (1,276,088) (1,153,623)
Inventories (297,611) (259,469) (233,130) (449,737)
Prepaid expenses
and deposits 34,843 31,680 (322,173) (334,995)
Accounts payable
and accrued
liabilities 285,384 2,675 725,433 792,631
Retirement
allowance - - 740,000 -
Income taxes
receivable/payable 114 (3,967) (71,593) 25,189
-----------------------------------------------------

1,199,340 1,126,766 1,919,490 2,678,681

Financing
activities:
Decrease in
long-term debt (179,193) (203,478) (509,695) (627,203)
Decrease in bank
indebtedness (754,599) (693,985) (568,102) (1,190,519)
-----------------------------------------------------

(933,792) (897,463) (1,077,797) (1,817,722)

Investing
activities:
Purchases of
capital assets (265,548) (212,978) (841,693) (863,578)
-----------------------------------------------------

Increase (decrease)
in cash and cash
equivalents - 16,325 - (2,619)

Cash and cash
equivalents,
beginning of period - 325,287 - 344,231
-----------------------------------------------------

Cash and cash
equivalents, end
of period - 341,612 - 341,612
-----------------------------------------------------
-----------------------------------------------------

Supplemental cash
flow information:
Cash paid for
interest $ 126,241 $ 152,442 $ 373,318 $ 554,030
Cash paid for
income taxes 374,886 476,967 1,066,593 1,269,811

---------------------------------------------------------------------------
---------------------------------------------------------------------------



MAGNOTTA WINERY CORPORATION

Notes to Consolidated Interim Financial Statements - Unaudited

Nine months ended October 31, 2009

1 DESCRIPTION OF BUSINESS

The Company grows, produces, imports, markets, distributes and retails wines, beer, spirits and "must" (juice for making wine) through its seven locations in Ontario. Products are also sold through representatives, an e-commerce site, in other Canadian provinces, and through export markets.

The Company experiences seasonal variations in sales with sales typically being highest in the third and fourth quarters and lowest in the first quarter of the fiscal year.

2 SIGNIFICANT ACCOUNTING POLICIES

The Company prepares its unaudited consolidated interim financial statements in accordance with Canadian generally accepted accounting principles. The disclosures contained in these unaudited consolidated interim financial statements do not include all the requirements of generally accepted accounting principles for annual financial statements. The unaudited consolidated interim financial statements should be read in conjunction with the audited annual consolidated financial statements for the year ended January 31, 2009.

The unaudited consolidated interim financial statements are based on accounting principles consistent with those used and described in the audited consolidated financial statements for the year ended January 31, 2009.

3 CAPITAL DISCLOSURE:

The capital structure of the Company consists of shareholders' equity, long-term debt, bank indebtedness and cash and cash equivalents as noted below:



October 31, 2009 January 31, 2009 October 31, 2008
---------------- ---------------- ----------------

Components of Capital:

Shareholders' equity $ 36,395,665 $ 34,923,430 $ 34,740,714
Long-term debt $ 6,943,037 $ 7,401,300 $ 7,486,296
Bank indebtedness $ 5,313,223 $ 5,881,325 $ 4,346,267
Less:
Cash and cash
equivalents $ - $ - $ 341,612
----------------------------------------------------
$ 48,651,925 $ 48,206,055 $ 46,231,665
----------------------------------------------------
----------------------------------------------------


The Company's objectives are to manage capital in a manner which balances equity and debt, maintaining compliance with its financial covenants and maintaining a capital base so as to sustain future growth.

The Company manages its capital structure as determined by management and approved by the board of directors. The Company's practice is to make adjustments to its capital structure based on changes in economic conditions and planned requirements. The Company has the ability to adjust its capital structure by issuing new equity or debt, selling assets to reduce debt or balance equity, and making adjustments to its capital expenditures program.

The Company monitors capital using a Debt Service Coverage Ratio that has been externally imposed as part of its loan agreements. As at October 31, 2009, the Company is in compliance with the terms of its credit facilities.

There have been no changes to the Company's capital structure, objectives, policies and processes over the prior year.

4 FINANCIAL INSTRUMENTS:

The Company has exposure to the following risks from its use of financial instruments and manages these risk exposures as follows:

Credit risk - Credit risk refers to the risk of losses due to failure of the Company's customers to meet their payment obligations. The Company primarily sells through its retail winery locations, and is not dependent on any one single customer for a significant portion of its revenue. Furthermore, most payment is received through debit card, credit card or cash. Most wholesale sales are provided on credit to its customers in the normal course of business, however, the Company is exposed to limited credit risk with respect to its accounts receivable. Exposure to credit risk varies due to the composition of individual balances. Monitoring of customers and balances is performed regularly and allowances are provided for any potentially uncollectible accounts receivable.

Liquidity risk - Liquidity risk is the risk that the Company will not be able to meet its financial obligations when they come due. The Company manages liquidity risk by monitoring sales volumes and cash receipts to ensure sufficient cash flows are generated from operations to meet the liabilities when they become due. Management monitors consolidated cash flows on a weekly basis, quarterly through forecasting and annually through the budget process. The Company believes its current cash flow from operations will continue to meet current and foreseeable financial requirements.

Interest rate risk - Interest rate risk refers to the risk that the value of the financial instruments or cash flows associated with the instruments will fluctuate due to changes in market interest rates. The Company is exposed to interest rate risk as the Company's net bank indebtedness bears interest at a variable rate linked to Canadian prime, as well as approximately 34.6% of the total long-term debt bears interest at variable rates linked to Canadian prime. All other long-term debt bears interest at fixed rates. A change of 1.0% in all variable interest rate debt, including net bank indebtedness, would have an effect of approximately $19,287 on the Company's consolidated earnings for the three months ended October 31, 2009 and $61,259 for the nine months ended October 31, 2009.

Foreign exchange risk - Foreign exchange risk refers to the risk that value of the financial instruments or cash flows associated with the instruments will fluctuate due to changes in the foreign exchange rates. The Company purchases some bulk wine, wine juice, concentrates and some production equipment in U.S. dollars. It receives its revenue in Canadian dollars. As a result, it is impacted by fluctuations in foreign exchange rates. A $0.01 change in the Canadian/U.S. exchange rate would have impacted the cash flow of the Company for the three months ended October 31, 2009 by approximately $4,354 and $7,467 for the nine months ended October 31, 2009. The Company considers this risk to be limited and does not hedge its foreign exchange exposure.

Fair value - The fair values of cash and cash equivalents, accounts receivable, bank indebtedness, accounts payable and accrued liabilities approximate their carrying amounts due to the short-term maturities of these financial instruments. The estimated fair value of the long-term debt approximates its carrying value since the long-term debt is subject to terms and conditions similar to those available to the Company for instruments with comparable terms and the interest rates are market based.

5 INTERNATIONAL FINANCIAL REPORTING STANDARDS ("IFRS"):

In 2006, the Canadian Accounting Standards Board ("AcSB") published a new strategic plan that significantly affects financial reporting requirements for Canadian public companies. The AcSB strategic plan outlines the convergence of Canadian GAAP with IFRS over an expected five-year transitional period.

In February 2008, the AcSB confirmed that IFRS will be mandatory in Canada for profit-oriented publicly accountable entities for fiscal periods beginning on or after January 1, 2011. The Company's first annual IFRS financial statements will be for the year ending January 31, 2012 and will include the comparative period of fiscal 2011. Starting in the first quarter of 2012, the Company will provide unaudited consolidated financial information in accordance with IFRS including comparative figures for 2011.

The Company is completing an assessment of the accounting and reporting differences under IFRS as compared to Canadian GAAP, however, management has not yet finalized its determination of the impact of these differences on the consolidated financial statements. As this assessment is finalized, the Company intends to disclose such impacts in its future consolidated financial statements.

In the period leading up to the changeover, the AcSB will continue to issue accounting standards that are converged with IFRS, thus mitigating the impact of adopting IFRS at the changeover date. The International Accounting Standards Board will also continue to issue new accounting standards during the converstion period and, as a result, the final impact of IFRS on the Company's consolidated financial statements will only be measured once all the IFRS applicable standards at the converstion date are known.

6 INVENTORIES



October 31, 2009 January 31, 2009
---------------- ----------------

Supplies and raw materials $ 7,137,066 $ 7,468,080
Work in process $ 15,072,815 $ 14,263,574
Finished goods $ 5,870,852 $ 6,115,949
------------------------------------
$ 28,080,733 $ 27,847,603
------------------------------------
------------------------------------


7 RETIREMENT ALLOWANCE

During the second quarter ended July 31, 2009, the executive chairman advised the Board of his desire to retire from the Company effective June 30, 2009. In recognition of his exceptional contribution as co-founder of the Corporation and its predecessor Festa Juice, and his extraordinary service over a period of almost 25 years, the Board retained the services of Mercer (Canada) Limited to determine the fair market compensation. Based on the recommendation, the Board awarded Mr. Magnotta a special retirement allowance to be paid over a five year period. This award was $560,000 in the first year plus $300,000 in each of the subsequent four years and has a present value of approximately $1.6 million. The impact of this retirement allowance was entirely recorded as an expense in the quarter ended July 31, 2009.

8 NOTES RECEIVABLE INCLUDED IN SHARE CAPITAL

Notes receivable were taken back from two senior officers who were provided with the financing in prior years to exercise their options to purchase 500,000 common shares of the Company. These notes are secured by the acquired common shares, bear interest that is paid monthly at the rate charged to Magnotta on its operating line of credit, and provide for principal repayments of $116,250 in each of the remaining calendar years 2009 and 2010. The notes receivable have been included as a reduction of shareholders' equity for presentation purposes.

9 COMPARATIVE FIGURES

Certain fiscal 2009 figures have been reclassified to conform with the financial statement presentation adopted in fiscal 2010.

Contact Information

  • Magnotta Winery Corporation
    Rossana Magnotta
    Chief Executive Officer and President
    905-738-9463 or Toll Free: 1-800-461-9463
    905-738-5551 (FAX)
    mailbox@magnotta
    www.magnotta.com or E-commerce site: www.magnottadelivery.ca