Magnotta Winery Corporation
TSX : MGN

Magnotta Winery Corporation

September 13, 2010 16:14 ET

CORRECTION: Magnotta Winery Corporation Announces July 31, 2010 Quarterly Results

VAUGHAN, ONTARIO--(Marketwire - Sept. 13, 2010) - The following corrects and replaces the release issued at 14:43 pm ET on Sept. 13, 2010 due to multiple technical revisions. The complete and corrected text follows.

Magnotta Winery Corporation (TSX:MGN), is pleased to announce the release of its financial results for the second quarter ended July 31, 2010.

Net sales for the quarter ended July 31, 2010 increased 2.3% to $6,126,302 from $5,986,385 for the corresponding period of the prior year and for the six month period increased 1.4% to $12,383,021 from $12,208,389 for the corresponding period of the prior year. The Company experienced a net earnings increase to $681,965 compared to a net loss of $185,774 for the three month period and net earnings of $1,551,543 compared to $660,030 for the six month period ended July 31, 2009. The basic and diluted earnings (loss) per common share increased to $0.05 from $(0.01) for the quarter and increased to $0.11 from $0.05 for the six month ended July 31, 2010. The increase in earnings was attributable to a non reoccurring one time retirement allowance which was accounted for during the second quarter of the prior year. The overall growth in net sales resulted from the Company expanding its branding campaign through targeted marketing and advertising which increased volumes.

Overall gross profit margin for the quarter ended July 31, 2010 increased marginally to 41.9% from 41.7% for the corresponding period of the prior year and for the six month period ended July 31, 2010, increased marginally to 41.5% from 41.2%. The gross profit margin has not materially changed during the period versus the same period the prior year.

Selling, administration and other expenses were $1,164,844 for the three months ended July 31, 2010 compared to $917,142 for the corresponding period of the prior year. For the six month period ended July 31, 2010, selling, administration and other expenses were $2,030,264 compared to $1,743,602 for the corresponding period of the prior year. The increase is due to the cost of a marketing campaign conducted during the second quarter of fiscal 2011. A similar campaign did not occur in the prior year.

Total amortization of property, plant and equipment was $278,700 for the three months ended July 31, 2010 compared to $292,339 for the corresponding period of the prior year. For the six month period ended July 31, 2010, amortization of property, plant and equipment was $557,400 compared to $584,678 for the corresponding period of the prior year. The change resulted from fluctuations in capital asset investments, made over prior years, in the Company's production equipment, vineyards and retail locations, as well as the timing of purchases of depreciable capital asset investments.

Interest expense for the three months ended July 31, 2010 decreased to $141,772 compared to $147,386 and for the six month period ended July 31, 2010 was $275,239 compared to $292,298 for the corresponding period of the prior year. The change is due to lower overall borrowing levels 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 July 31, 2010 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

Six months ended July 31, 2010

MAGNOTTA WINERY CORPORATION



Notice To Reader of the Consolidated Interim Financial Statements

Six months ended July 31, 2010
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The consolidated financial statements of Magnotta Winery Corporation and the accompanying consolidated interim balance sheet as at July 31, 2010 and the consolidated interim statements of earnings, comprehensive income and retained earnings and cash flows for the three 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 July 31, 2010, with comparative figures for
January 31, 2010 and July 31, 2009

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July 31 January 31 July 31
2010 2010 2009
(unaudited) (unaudited)
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Assets

Current assets:

Accounts receivable $ 1,589,047 $ 590,322 $ 1,433,057
Inventories 29,339,360 29,878,758 27,783,122
Income taxes receivable 172,443 137,511 537,327
Future income taxes 98,865 83,130 107,736
Prepaid expenses and deposits 620,510 268,306 604,054
------------ -------------- -------------

31,820,225 30,958,027 30,465,296

Property, plant and equipment 20,476,854 20,468,725 21,084,357
Winery licenses 251,516 251,516 251,516
------------ -------------- -------------

$ 52,548,595 $ 51,678,268 $ 51,801,169
------------ -------------- -------------
------------ -------------- -------------

Liabilities and Shareholders' Equity

Current liabilities:
Bank indebtedness $ 4,982,344 $ 5,249,398 $ 6,067,822
Accounts payable and accrued 1,502,414 1,568,495 1,277,082
liabilities
Current portion of long-term debt 1,047,720 1,041,811 807,086
Current portion of retirement 300,000 300,000 300,000
allowance
------------ -------------- -------------

7,832,478 8,159,704 8,451,990


Long-term debt 5,328,189 5,665,914 6,285,604
Long-term retirement allowance 440,000 740,000 740,000
Future income taxes 766,591 482,856 740,115

Shareholders' equity:
Share capital 6,961,617 6,961,617 6,961,617
Notes receivable for share (116,250) (116,250) (232,500)
capital
Other paid-in capital 210,000 210,000 210,000
Retained earnings 31,125,970 29,574,427 28,644,343
------------ -------------- -------------

38,181,337 36,629,794 35,583,460
------------ -------------- -------------


$ 52,548,595 $ 51,678,268 $ 51,801,169
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------------ -------------- -------------

Segmented information on
identifiable capital assets
by geographic region
Canada $ 17,476,207 $ 17,443,050 $ 18,012,756
Chile 3,000,647 3,025,675 3,071,601
------------ -------------- -------------

$ 20,476,854 $ 20,468,725 $ 21,084,357
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On behalf of the Board:

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

"Owen McManamon"
----------------------------------
Owen McManamon - Director





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


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For The Three Months For The Six Months
Ended July 31 Ended July 31

2010 2009 2010 2009
(unaudited) (unaudited) (unaudited) (unaudited)
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Net sales $ 6,126,302 $ 5,986,385 $ 12,383,021 $ 12,208,389

Cost of goods sold,
excluding
amortization of
property, plant
and equipment 3,429,021 3,345,292 6,973,575 6,897,781

Amortization of
property, plant
and equipment
(production) 133,488 143,056 266,976 286,112
---------------------------------------------------------

Total cost of goods
sold 3,562,509 3,488,348 7,240,551 7,183,893
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Gross profit 2,563,793 2,498,037 5,142,470 5,024,496

Expenses:
Selling,
administration
and other 1,164,844 917,142 2,030,264 1,743,602
Amortization of
property, plant
and equipment
(non-production) 145,212 149,283 290,424 298,566
Interest - bank
indebtedness 53,822 56,839 110,283 110,982
Interest - long-
term debt 87,950 90,547 164,956 181,316
Retirement
allowance - 1,600,000 - 1,600,000
---------------------------------------------------------

1,451,828 2,813,811 2,595,927 3,934,466
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Earnings (loss)
before income
taxes 1,111,965 (315,774) 2,546,543 1,090,030

Income taxes
(recovery):
Current 314,000 210,000 727,000 620,000
Future 116,000 (340,000) 268,000 (190,000)
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430,000 (130,000) 995,000 430,000
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Net earnings (loss)
and comprehensive
income (loss) for
the period 681,965 (185,774) 1,551,543 660,030

Retained earnings,
beginning of
period 30,444,005 28,830,117 29,574,427 27,984,313
---------------------------------------------------------

Retained earnings,
end of period $ 31,125,970 $ 28,644,343 $ 31,125,970 $ 28,644,343
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Earnings (loss) per
common share :
Basic $ 0.05 $ (0.01) $ 0.11 $ 0.05
Diluted $ 0.05 $ (0.01) $ 0.11 $ 0.05
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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
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Segmented
information on net
sales by
geographic region
Canada $ 5,909,369 $ 5,863,334 $ 11,786,969 $ 11,737,575
Chile 165,658 107,652 469,461 393,627
Other 51,275 15,399 126,591 77,187
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$ 6,126,302 $ 5,986,385 $ 12,383,021 $ 12,208,389
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MAGNOTTA WINERY CORPORATION
Consolidated Interim Statements of Cash Flow

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For The Three Months For The Six Months
Ended July 31 Ended July 31
2010 2009 2010 2009
(unaudited) (unaudited) (unaudited) (unaudited)
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Cash provided by (used
in):

Operations:
Net earnings (loss) $ 681,965 $ (185,774) $ 1,551,543 $ 660,030
Items not involving
cash:
Amortization of
property, plant and
equipment 278,700 292,339 557,400 584,678
Future income taxes 116,000 (340,000) 268,000 (190,000)
Unrealized foreign
exchange loss/(gain) (6,128) 3,911 (11,228) 21,892
Changes in non-cash
operating working
capital:
Accounts receivable (272,761) 23,572 (998,725) (1,172,257)
Inventories 100,160 (253,542) 539,398 64,481
Prepaid expenses and
deposits (160,891) (168,053) (352,204) (357,016)
Accounts payable and
accrued liabilities 224,828 (96,603) (66,081) 140,049
Retirement allowance (300,000) 1,040,000 (300,000) 1,040,000
Income taxes
receivable/payable (87,231) (31,705) (34,932) (71,707)
----------------------------------------------------

574,642 284,145 1,153,171 720,150

Financing:
Decrease in long-term
debt (153,523) (161,048) (320,588) (330,502)
Increase (decrease) in
bank indebtedness (7,430) 286,355 (267,054) 186,497
----------------------------------------------------

(160,953) 125,307 (587,642) (144,005)

Investments:
Purchases of property,
plant and equipment (413,689) (409,452) (565,529) (576,145)
----------------------------------------------------

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

Supplemental cash flow
information:
Cash paid for interest $ 118,099 $ 119,393 $ 235,738 $ 247,077
Cash paid for income
taxes 401,231 241,705 761,932 691,707

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MAGNOTTA WINERY CORPORATION
Notes to Consolidated Interim Financial Statements - Unaudited

Six months ended July 31, 2010
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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, and through export markets.

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, 2010.

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, 2010.

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:




July 31, 2010 January 31, 2010 July 31, 2009
------------------------------------------------
Components of Capital:

Shareholders' equity $ 38,181,337 $ 36,629,794 $ 35,583,460
Long-term debt $ 6,375,909 $ 6,707,725 $ 7,092,690
Bank indebtedness $ 4,982,344 $ 5,249,398 $ 6,067,822

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$ 49,539,590 $ 48,586,917 $ 48,743,972
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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 July 31, 2010, 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 payments are 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 and approximately 4.2% of the total long-term debt bear interest at a variable rate 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 $13,125 on the Company's consolidated earnings for the three months ended July 31, 2010 and $26,293 for the six months ended July 31, 2010.

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 July 31, 2010 by approximately $2,247 and $4,894 for the six months ended July 31, 2010. 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 February 2008, the Canadian Accounting Standards Board ("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.

To transition to IFRS, the Company must apply IFRS 1 - First Time Adoption of IFRS ("IFRS 1") that sets out the rules for first time adoption. In general, IFRS 1 required an entity to comply with each IFRS effective at the reporting date for the entity's first IFRS financial statements. This requires that an entity apply IFRS to its opening IFRS balance sheet as at February 1, 2010 (i.e. the balance sheet prepared at the beginning of the earliest comparative period presented in the entity's first IFRS financial statements). In the period leading up to the transition to IFRS, the AcSB has issued accounting standards that are converged with IFRS thus mitigating the impact of adopting IFRS at the mandatory transition date.

The adoption of IFRS will make it possible for the Company to re-assess the fair values of assets and liabilities on its balance sheet under IFRS 1, which could impact the balance sheet significantly. Within IFRS 1 there are exemptions, some of which are mandatory and some of which are elective. The exemptions provide relief for companies from certain requirements in specified areas when the cost of complying with the requirements is likely to exceed the resulting benefit to users of financial statements. IFRS 1 generally required retrospective application of IFRS on first-time adoption, but prohibits such application in some areas, particularly when retrospective application would require judgments by management about past conditions after the outcome of a particular transaction is already known.

The Company is closely monitoring changes arising from this convergence and has identified that the majority of the Company's accounting policies are substantially compliant, and is currently establishing the changes required to the remaining accounting policies and determining the required adjustments to its consolidated financial statements (including additional disclosures) with its external financial advisors.

The following is a summary of the key accounting policy differences that have been identified to date. The Company has not yet quantified the impact of these differences on its consolidated financial statements:

Property, Plant and Equipment - IFRS requires that the Company identify the different components of its fixed assets and record amortization based on the useful lives of each component. The Company has reviewed the amortization of its existing property, plant and equipment and does not expect any material differences between IFRS and the Company's current depreciation policies.

Business Combinations - IFRS 1 provides an exemption that allows companies transitioning to IFRS not to restate business combinations entered into prior to the date of transition. The Company expects that it will use this exemption and accordingly will not be restating the accounting for any of its business combinations.

A number of other differences between Canadian GAAP and IFRS have been identified, but not yet assessed by the Company, including the following areas: IAS41 Agriculture, IAS36 Impairment of Assets, IAS12 Income Taxes and disclosure requirements. These differences may have a material impact on the Company's financial statements. A more detailed review of the impact of IFRS on the Company's consolidated financial statements is in progress and is expected to be completed during fiscal 2011.




6 INVENTORIES
July 31, 2010 January 31, 2010
----------------------------------

Supplies and raw materials $ 6,926,147 $ 7,735,020
Work in process $ 15,887,212 $ 15,462,538
Finished goods $ 6,526,001 $ 6,681,200
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$ 29,339,360 $ 29,878,758
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7 RETIREMENT ALLOWANCE

During the second quarter ended July 31, 2009, the Executive Chairman of the Company advised the Board of Directors of his desire to retire from the Company effective June 30, 2009. In recognition of his exceptional contribution as co-founder of the Company and his extraordinary service over a period of almost 25 years, the Board awarded the Executive Chairman a special retirement allowance. In determining the amount of the special retirement allowance, the Board retained the services of Mercer (Canada) Limited, an independent third party consultant, to provide market based commentary on retirement compensation strategies for the Executive Chairman. Based on Mercer's report, the special retirement allowance was set at a net present value of $1,600,000. The special retirement allowance will be paid over the course of five years with $560,000 paid in fiscal 2010 and $300,000 scheduled to be repaid in each of the next four years.

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 the remaining calendar year of 2010. The notes receivable have been included as a reduction of shareholders' equity for presentation purposes.

9 COMPARATIVE FIGURES

Certain fiscal 2010 figures have been reclassified to conform with the financial statement presentation adopted in fiscal 2011.

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