Magnotta Winery Corporation
TSX : MGN

Magnotta Winery Corporation

April 27, 2007 14:11 ET

Magnotta Winery Corporation Announces January 31, 2007 Annual Results

VAUGHAN, ONTARIO--(CCNMatthews - April 27, 2007) - Magnotta Winery Corporation (TSX:MGN), is pleased to announce the release of its financial results for the year ended January 31, 2007.

Net sales for the year increased 3.5% to $22,955,623 from $22,184,354 and for the fourth quarter increased 6.4% to $4,754,178 from $4,468,022. Net earnings increased to $2,835,125 from $2,574,797 for the year and for the fourth quarter increased to $352,975 from $154,261 for the corresponding period of the prior year. The overall growth in net sales for the year resulted from greater volumes due to an expanded customer base from relatively recent new location openings and a winery relocation. The Company also experienced stronger holiday and January sales in the fourth quarter reflecting milder weather in Southern Ontario where its retail locations are located. This steady and gradual increase in sales is consistent with management expectations.

Overall gross profit margin for the year decreased marginally to 47.6% in fiscal 2007 from 48.0% in fiscal 2006. For the fourth quarter, the gross profit margin increased to 38.3% from 36.3% in the previous year. The change in the gross profit margin is due to the product mix favouring higher margin sales, as well as the lessening of some cost pressures from raw materials during the last quarter of the year.

Selling, administration and other expenses including foreign exchange loss were $4,529,282 for the year ended January 31, 2007 compared to $4,606,803 for the year ended January 31, 2006. For the fourth quarter, selling, administration and other expenses including foreign exchange loss were $1,249,513 compared to $1,154,961 in the same period of the prior year.

Amortization increased in fiscal 2007 to $1,335,131 from $1,252,759 in fiscal 2006, and for the fourth quarter it was $365,643 compared to $388,001 in the same period the prior year. The change resulted from capital asset investments, made over prior years, in the Company's production equipment, vineyards and retail locations.

Interest expense for the year ended January 31, 2007 increased to $912,133 from $816,789 in fiscal 2006. During the fourth quarter, interest expense was $177,003 compared to $146,544 for the same quarter last year. The increase is due to higher average variable interest rates in fiscal 2007 compared to fiscal 2006, as well as increased long-term debt from the Vaughan building expansion.

Earnings before interest, income taxes and amortization increased to $6,400,498 from $6,050,347 in fiscal 2006. For the fourth quarter, earnings before interest, income taxes and amortization increased to $571,730 from $467,808 in fiscal 2006.

Additional details and information are included in the attached Management Discussion and Analysis and consolidated financial statements for January 31, 2007.

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.

MANAGEMENT DISCUSSION AND ANALYSIS

The following management discussion and analysis dated April 25, 2007 reviews the financial condition, results of operations and cash flows of Magnotta Winery Corporation ("Magnotta" or the "Company") for the year ended January 31, 2007 in comparison to the year ended January 31, 2006. This discussion should be read in conjunction with the consolidated financial statements and accompanying notes.

Readers are cautioned that some of the statements contained in this discussion 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.

CORPORATE PROFILE:

Magnotta Winery Corporation is Ontario's third largest winery in volume of sales. The Company grows grapes, produces, imports, exports and retails wines, beer, spirits and "must" (juice for making wine) primarily through its locations in Ontario, Canada. Additional sales are obtained through representatives in Canadian provinces, through an e-commerce website and from export markets.

The Company produces wines from grapes grown on its four vineyards totaling 180 acres in Ontario's Niagara Peninsula, on its 351 acre vineyard in Chile's Maipo Valley, and from purchased wines, wine juices and grapes. Grapes grown on its Ontario vineyards are entirely processed and vinified for the Company's own use. The majority of grapes grown on the Chilean vineyard are also used by the Company for its own requirements, with excess being sold to local Chilean wineries. Currently, the Company's own vineyards satisfy approximately 37% of its total wine and grape requirements. Quality grapes, juices and wines are sourced from Ontario's Niagara Peninsula and from other countries and regions around the world.

One of the Company's wholly-owned subsidiaries is a juice company - Festa Juice Co. Ltd. Festa Juice is one of Ontario's largest producers and suppliers of fresh juice to home wine-makers.

Magnotta justifiably brands itself as "The Award Winning Winery". The Company's awards include gold medals from the most prestigious of European wine competitions such as VinExpo (France) and Vinitaly (Italy). Magnotta is also the first and only Canadian winery to have won four Black Diamond Trophies from Intervin International (United States) for Winery Consistency and Quality. The Black Diamond Trophy is awarded to the winery with the most gold medals at the competition each year.

THE YEAR IN REVIEW:

In fiscal 2007, the Company continued its branding efforts through its marketing, advertising and point of sale materials. Through print, television, radio media, as well as in-store newsletters, product exhibits, product placement and contests, the Company is informing and re-enforcing its products and brands to its loyal customer base while as the same time targeting new customers.

During the year, Magnotta strengthened its balance sheet. Long-term debt decreased by $1,430,183 through monthly debt principal repayments. However, bank indebtedness increased by $643,187 during the year as a result of net changes in working capital. The cash flow to decrease the overall debt on the balance sheet was generated from the Company's operations during the year.

The Company continues to win awards for its products and for itself as a Company. Recent awards of significance received by Magnotta include a gold medal from Chardonnay Du Monde in Chaintre, France - a competition which judges some of the finest Chardonnay wines in the world, as well, Magnotta Brewery was honoured as Canada's 2006 brewery of the year for its products. The Company takes great pride in its awards as a reflection of the high quality of its products. During the year, the Company was once again a winner in the "Canada's 50 Best Program". This year, Magnotta was recognized as a Platinum recipient, as it was the seventh consecutive year that the Company was a winner in the program. The award recognizes excellence in products, outstanding customer service and a motivated team of employees.

The 2006 Ontario harvest produced high yields and good quality products. This was significantly better than the prior year ( 2005 Ontario harvest ) when harsh weather conditions in the winter of 2004-2005 decreased yields and quality. As a result, the Ontario content in blended wines returned back to 30% for the 2006 Ontario harvest.

On February 6, 2007 the Company announced that Gabriel Magnotta and Rossana Magnotta, the principal shareholders of the Company, proposed a going-private transaction to acquire all of the outstanding common shares of the Company other than shares held by the Magnottas at a price of $2.37 per share. The Magnottas currently hold approximately 60.5% of the common shares of the Company. The $2.37 per share offer price represented a premium of approximately 14.5% to the closing price of the common shares of the Company of $2.07 on the Toronto Stock Exchange on February 5, 2007, the last day on which the shares traded prior to the announcement. The transaction was to have been effected through the amalgamation of the Company with Magnotta Family (2003) Corporation ("MFH"), a wholly-owned subsidiary of the Magnottas' holding company, Magnotta Family Holdings Ltd.

The Board of Directors of the Company had established an Independent Committee of the Board comprised of Dino Bottero, W.H. Bruce Fraser and Owen McManamon. In accordance with provincial securities regulations and policies concerning going private transactions, a formal valuation of the common shares of the Company was required to be prepared by a qualified independent valuator. A formal valuation was prepared by Deloitte and Touche LLP ("Deloitte") under the supervision of the Independent Committee. Deloitte has also provided an opinion to the Independent Committee that the proposed going private transaction was fair, from a financial view, to minority shareholders of the Company. The Independent Committee concluded that the transaction was fair, from a financial point of view, to the shareholders. In light of the Independent Committee's conclusions and recommendations, the Board unanimously approved the transaction and recommended that shareholders vote in favour of the transaction.

On March 27, 2007, the company announced that since dissent rights pursuant to votes cast by shareholders voting by proxy were exercised in respect of more that 5% of the issued and outstanding common shares of the Company, the proposed going-private transaction would not proceed. Accordingly the special meeting of shareholders of the Company which was to be held on March 29, 2007 to consider the transaction was canceled. This resulted in Magnotta remaining a public company listed on the Toronto Stock Exchange.

SELECTED ANNUAL INFORMATION FOR THE PAST THREE FISCAL YEARS:

The following financial information is derived from Magnotta's financial statements for the years ended January 31, 2007, 2006, and 2005 which have been prepared in Canadian dollars using Canadian generally accepted accounting principles.



2007 2006 2005

Net sales $22,955,623 $22,184,354 $21,161,369
Net earnings $ 2,835,125 $ 2,574,797 $ 2,426,220
Earnings per common share:
Basic $0.21 $0.20 $0.19
Diluted $0.20 $0.19 $0.18
Total assets $45,457,615 $43,607,815 $41,370,692
Long-term debt $ 8,733,746 $10,158,732 $ 9,633,908
Bank indebtedness $ 5,400,368 $ 4,757,181 $ 5,707,024
Retained earnings $22,683,125 $19,848,000 $17,273,203


Over the past three fiscal years described above, net sales have increased by approximately 8.5%, and net earnings have increased by approximately 16.9%. This overall growth in net sales and net earnings over the past three fiscal years resulted primarily from increased volumes from the addition of two new retail locations that opened in late fiscal 2002 as well as the relocation of one of these locations in early fiscal 2006 (which added approximately $362,000 in sales), a relocation of a winery in late fiscal 2002 (which added approximately $242,000 in sales), as well as successful marketing and advertising campaigns and better point of sale materials. During the past three fiscal years, total debt has collectively decreased approximately $1,206,818 or 7.9%. Basic earnings per common share over the past three fiscal years have increased by $0.02 to $0.21 from $0.19 and diluted earnings per common share increased by $0.02 to $0.20 from $0.18.

QUARTERLY RESULTS:



Summary information by quarter is as follows:

Net Gross Net Earnings Per Share
Fiscal 2007 Sales Profit Margin Earnings Basic Diluted

First quarter $ 5,738,027 $ 2,927,995 $ 824,840 $0.06 $0.06
Second quarter $ 5,469,553 $ 2,829,874 $ 748,870 $0.05 $0.05
Third quarter $ 6,993,865 $ 3,350,668 $ 908,440 $0.07 $0.07
Fourth quarter $ 4,754,178 $ 1,821,243 $ 352,975 $0.03 $0.02
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$22,955,623 $10,929,780 $2,835,125 $0.21 $0.20
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Net Gross Net Earnings Per Share
Fiscal 2006 Sales Profit Margin Earnings Basic Diluted

First quarter $ 5,576,319 $ 2,858,966 $ 802,309 $0.06 $0.06
Second quarter $ 5,319,764 $ 2,783,250 $ 735,159 $0.05 $0.05
Third quarter $ 6,820,249 $ 3,392,165 $ 883,068 $0.07 $0.06
Fourth quarter $ 4,468,022 $ 1,622,769 $ 154,261 $0.02 $0.02
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$22,184,354 $10,657,150 $2,574,797 $0.20 $0.19
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During the last eight most recently completed quarters, the Company has experienced variations in its quarterly results that are consistent with its historical trends and gradual net sale, net earnings and earnings per common share increases. Gross profit margins have been consistent in the last eight most recently completed quarters. For the fourth quarter of fiscal 2007 (the most recent quarter), the gross profit margin increased to 38.3% from 36.3% for the same period of the prior year. The increase in the quarter was due to the product mix in the quarter favouring higher margin product sales, as well as the lessening of some cost pressures from raw and packaging materials in the quarter.

During a typical year, the Company experiences seasonality in its sales. In fiscal 2007 and fiscal 2006, the Company experienced higher demand during September to December when approximately 41.8% and 41.4% respectively of annual sales were generated.

FOURTH QUARTER RESULTS

During the Company's most recent quarter ended January 31, 2007, it experienced net sales and net earnings increases. Net sales in the fourth quarter increased approximately 6.4% over the same period in fiscal 2006, net earnings increased 128.8%, while basic earnings per share increased $0.01 and diluted earnings per share remained constant. This increase is due to stronger holiday and January sales over the previous period resulting from milder weather in Southern Ontario during this period where the Company's retail operations are located.



RESULTS OF OPERATIONS:

Three Months Ended Year Ended
January 31, January 31,
2007 2006 2007 2006

Net sales $4,754,178 $4,468,022 $22,955,623 $22,184,354
Gross profit margin $1,821,243 $1,622,769 $10,929,780 $10,657,150
Net earnings $ 352,975 $ 154,261 $ 2,835,125 $ 2,574,797
Earnings per common
share:
Basic $ 0.03 $ 0.02 $ 0.21 $ 0.20
Diluted $ 0.02 $ 0.02 $ 0.20 $ 0.19
Number of common
shares 13,932,005 13,670,005 13,932,005 13,670,005


Net sales for the year increased 3.5% to $22,955,623 from $22,184,354 and for the fourth quarter increased 6.4% to $4,754,178 from $4,468,022. Net earnings increased to $2,835,125 from $2,574,797 for the year and for the fourth quarter increased to $352,975 from $154,261 for the corresponding period of the prior year. The overall growth in net sales for the year resulted from greater volumes due to an expanded customer base from relatively recent new location openings and a winery relocation. The Company also experienced stronger holiday and January sales in the fourth quarter reflecting milder weather in Southern Ontario where its retail locations are located. This steady and gradual increase in sales is consistent with management expectations.

Overall gross profit margin for the year decreased marginally to 47.6% in fiscal 2007 from 48.0% in fiscal 2006. For the fourth quarter, the gross profit margin increased to 38.3% from 36.3% in the previous year. The change in the gross profit margin is due to the product mix favouring higher margin product sales, as well as the lessening of some cost pressures from raw materials during the last quarter of the year.

Selling, administration and other expenses including foreign exchange loss were $4,529,282 for the year ended January 31, 2007 compared to $4,606,803 for the year ended January 31, 2006. For the fourth quarter, selling, administration and other expenses including foreign exchange loss were $1,249,513 compared to $1,154,961 in the same period of the prior year. As a percentage of net sales, selling, administration and other expenses including foreign exchange loss decreased to 19.7% from 20.8% for the year, and for the fourth quarter increased marginally to 26.3% from 25.9% for the corresponding period of the prior year.

Amortization increased in fiscal 2007 to $1,335,131 from $1,252,759 in fiscal 2006, and for the fourth quarter it was $365,643 compared to $388,001 in the same period the prior year. The change resulted from capital asset investments, made over prior years, in the Company's production equipment, vineyards and retail locations.

Interest expense for the year ended January 31, 2007 increased to $912,133 from $816,789 in fiscal 2006. During the fourth quarter, interest expense was $177,003 compared to $146,544 for the same quarter last year. The increase is due to higher average variable interest rates in fiscal 2007 compared to fiscal 2006, as well as increased long-term debt from the Vaughan building expansion.

Earnings before interest, income taxes and amortization increased to $6,400,498 from $6,050,347 in fiscal 2006. For the fourth quarter, earnings before interest, income taxes and amortization increased to $571,730 from $467,808 in fiscal 2006. These changes were principally driven by expense changes as outlined in selling, administration and other expenses.

The combined basic federal and provincial income tax rates for the Company is 36.1%. However, due to the manufacturing and processing profits deduction as well as lower effective tax rates in a foreign country, the effective income tax rate for fiscal 2007 was 31.7% versus 35.3% in fiscal 2006.



LIQUIDITY AND CAPITAL RESOURCES:

Year ended January 31 2007 2006

Current assets $23,437,106 $21,525,299
Current liabilities $ 7,151,609 $ 7,655,153
Shareholders' equity $29,389,742 $26,223,817
Total assets $45,457,615 $43,607,815

Contractual Less than One to three Four to five After five
Obligations Total one year - years - Fiscal years - Fiscal years Fiscal
Fiscal 2008 2009 to 2010 2011 to 2012 2013 onward

Long-term
debt $8,733,746 $ 783,886 $4,682,461 $3,257,012 $ 10,387
Long-term
interest $1,243,111 $ 510,392 $ 611,461 $ 120,630 $ 628
Operating
leases $ 715,963 $ 154,635 $ 178,060 $ 161,376 $ 221,892
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Total
contrac-
tual
obliga-
tions $10,692,820 $ 1,448,913 $5,471,982 $3,539,018 $ 232,907


During the year, the Company generated $1,729,320 from operations after changes in non-cash operating working capital, compared to $3,724,882 generated in fiscal 2006. Net working capital increased to $16,285,497 from $13,870,146 at January 31, 2006 primarily from cash flow from operations.

Capital asset purchases were $1,273,124 in fiscal 2007 compared to $3,337,088 in fiscal 2006. Capital asset purchases in fiscal 2007 and 2006 were attributable to normal capital asset requirements with regards to the Company's production equipment, vineyards and retail locations. The fiscal 2006 capital asset expenditures included construction costs to expand the head-office production and warehouse facility in Vaughan.

During the year, the Company decreased its long-term debt by $1,430,183 to $8,733,746 from $10,158,732 at January 31, 2006 excluding any foreign exchange changes. The Company increased its bank indebtedness by $643,187 to $5,400,368 from $4,757,181 at January 31, 2006. These changes resulted from improved cash flows from net earnings for fiscal 2007, and monthly debt principal repayments, as well as net changes in working capital. Bank indebtedness bears interest at floating interest rates, and approximately 38.8% of the total long-term debt bears interest at floating interest rates. The balance, or 61.2% of the long-term debt, bears interest at a fixed interest rate. The Company has available approximately $6,100,000 in unutilized approved lines of credit from a major Canadian chartered bank subject to bank covenant restrictions. Management expects its current cash flow from operations will continue to meet the Company's current debt and principal repayment obligations.

Shareholders' equity at January 31, 2007 was $2.11 per common share compared to $1.92 per common share at January 31, 2006. Shareholders' equity increased to $29,389,742 at January 31, 2007 from $26,223,817 at January 31, 2006. The change is primarily due to an increase in retained net earnings as well as some options being exercised during the year. The basic earnings per common share have increased $0.01 to $0.21 for the year and diluted earnings per share have increased $0.01 to $0.20 for the year.

RISKS AND UNCERTAINTIES:

The following section outlines risks that may or may not affect the Company. While it is difficult to determine if any risk will occur and its effect on the Company, the actual impact on the Company could differ materially from what the Company is currently anticipating. Furthermore, the following risks outlined are not exhaustive and there could be other risks of which the Company is not currently aware.

Government Regulation

The Company is uncertain as to when or what changes could occur to implement and design legislation to privatize liquor sales and distribution in Ontario. However, the Company believes no changes will occur with regard to the possibility of privatization of liquor in Ontario until after the next provincial election, which is slated for the Fall of 2007.

In 2006, the Company received administrative notices from the Alcohol and Gaming Commission of Ontario (the "AGCO") alleging that certain Magnotta locations are not in compliance with AGCO policies and that, as a result, these locations may have their retail licenses temporarily suspended. The Company intends to contest these notices and is of the view that the allegations are without merit. Further, the Company is of the view that the potential suspensions, even if upheld, would not have a material adverse result on the business of the Company. However, the ultimate outcome or potential impact of this event can not be determined at present.

International

The alcoholic beverage industry internationally, and more particularly in Canada is intensely competitive. There are several larger and more established national and international corporations, some of which possess extensive experience and financial resources. This industry has experienced and is expected to experience, increased levels of price-based competition. The Company believes this is a result of grape surpluses in various regions of the world, and many lower-priced imported wines entering the Ontario market from various regions of the world of which much is subsidized.

Competitive Factors

The wine beverage industry in Ontario is heavily regulated with many financial and regulatory barriers. Some existing Ontario wineries including Magnotta, have grandfathered licenses that were issued prior to the NAFTA agreement in the late 1980s, while others have licenses issued post NAFTA which may restrict the winery's ability to expand. The Ontario government is issuing manufacturing licenses on a very limited basis. As a result, a winery's ability to expand the number of physical retail locations in Ontario is dependent on acquiring appropriate winery licenses. In the event of the privatization of the LCBO, the Company might be subject to greater competition.

Exchange Rate

The Company purchases bulk wine, wine juice, concentrates and some of its production equipment in U.S. dollars. A change in the Canadian dollar versus the U.S. dollar will change the cost of these purchases. Continued strength of the Canadian dollar versus the U.S. dollar will have positive results on these purchases, however, this may have some negative impact on export sales.

Supply

Magnotta relies upon a consistent high-quality supply of reasonably priced wines, juices and grapes both through domestic and foreign production. Cost and supply may be affected by factors such as weather, regional wine supplies, the general economic climate, as well as other conditions. The Company owns various vineyards which it relies upon to supply products to the market. Adverse weather conditions could affect crop yields and quality. The Company has taken steps to ensure that its required supplies are available to meet its requirements. Strategic acquisitions of vineyards in Ontario's Niagara Peninsula and Chile's Maipo Valley, as well as strong relationships with domestic and foreign growers and suppliers have aided the Company in these goals.

Reliance on its Manufacturing Facility

Magnotta recognizes that its head-office facility is critical to its operations as a whole. The significant stock, production capabilities and storage facilities would require some time to replace. Magnotta has comprehensive insurance to cover profit loss and building replacement at all its locations.

Product Development

Magnotta remains committed to developing new products and adjusting to the ever-changing markets within which it operates and competes. Failure to successfully develop new products in the future could have a material impact on the business.

Key Personnel

The Company's Chairman/Chief Executive Officer and the President (the co-founders) are collectively involved in all significant aspects of the Company's operations. While the Company has a strong and experienced management team, the operations could be negatively impacted in the short term by the absence of both of the co-founders.

OUTLOOK:

The Company's future success is linked to the Canadian, and more specifically, the Ontario wine markets. These markets are expected to grow as the demographic landscape changes and consumer preference shifts to table wines, and more specifically, premium table wines. The Company through its new product developments as well as its changes in its branding and marketing initiatives in the last few years, is determined to capitalize on this trend.

The Company brands itself as "The Award Winning Winery". Marketing initiatives and capital asset investments are made to support the Company's commitment to producing high quality wines. The Company believes these investments made will lead to increased sales and improved profitability.

Due to the inclement weather conditions in the winter of 2004 - 2005, the 2005 harvest yields were significantly less than in the prior year. As a result, a decrease in the required level of Ontario content in blended wines, from 30% to as low as 1%, was approved by the Provincial Government. This allowed wineries to conserve their 100% VQA products and continue to provide quality VQA wines. The 2006 Ontario harvest had high yield and good quality; thereby the Ontario content in blended wines returned to 30% for the 2006 Ontario harvest. It is expected that the return to a 30% Ontario content will cause some gross margin pressures as Ontario product is generally more expensive than imported product.

Lastly, due to the industry's financial and regulatory barriers which restrict a winery's ability to expand the number of physical retail locations in Ontario, the Company is continuing to look for investment opportunities through obtaining appropriate winery licenses that support its strategic direction. If the Company cannot obtain additional appropriate winery licenses, it will continue its current strategy of maximizing its sales through its current licensing avenues and retail store expansions.

RELATED PARTY TRANSACTIONS:

Included in the accounts payable of the fiscal 2007 and fiscal 2006 consolidated financial statements are amounts collectively due to the Chairman and Chief Executive Officer as well as the President in the amount of $73,995 for fiscal 2007 and $126,009 for fiscal 2006. These amounts are non-interest bearing and are unsecured.

Five year notes receivable were received from two senior officers of the Company (the Chairman and Chief Executive Officer, and the President) who were provided with the financing to exercise their options on 500,000 common shares of the Company at a price of $0.93 per share. These notes are secured by the acquired common shares, bear monthly interest at the rate charged to the Company on its operating line of credit, and provide for principal repayments of $116,250 in each of the years 2007, 2008, 2009 and 2010. These have been included as a component of shareholders' equity for presentation purposes.

ACCOUNTING POLICIES:

The Company has not adopted any new accounting standards nor made changes to its existing accounting policies.

INTERNAL CONTROLS AND PROCEDURES

The Company has evaluated its internal controls and procedures for the year ended January 31, 2007. This evaluation was performed by the Chief Executive Officer (CEO), President and Chief Financial Officer (CFO) with the assistance of other Company employees. Based on this evaluation, the CEO, President and CFO have concluded that the design of these internal controls and procedures were effective.

DISCLOSURE CONTROLS AND PROCEDURES

Disclosure controls and procedures are designed to provide reasonable assurance that all relevant information is gathered and reported to senior management, including the Chief Executive Officer (CEO), President and Chief Financial Officer (CFO), on a timely basis so that appropriate decisions can be made regarding public disclosure. As at January 31, 2007, Magnotta's management, with the participation of the CEO, President and CFO, has evaluated the effectiveness of Magnotta's disclosure controls and procedures as defined in Multilateral Instrument 52-109 of the Canadian Securities Administration and has concluded that such controls and procedures are effective.

CRITICAL ACCOUNTING ESTIMATES:

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the years. Due to the inherent uncertainty involved with making such estimates, actual results could differ from those reported; however, the Company believes that the assumptions and/or estimates used should not result in a material impact on the Company if actual results differ.

FINANCIAL INSTRUMENTS:

The fair values of accounts receivable, bank indebtedness and accounts payable and accrued liabilities approximate their carrying amounts because of the short-term to maturity of these financial instruments. The fair value of long-term debt which has variable interest rates based on market rates approximates the carrying amount of those financial instruments. The fair value of Magnotta's other long-term debt with fixed interest rates approximates the carrying value since the interest rates approximate market rates. The Company has not recorded the impact in its financial statements of any unrecognized gains and/or losses on these financial instruments.

The Company does not use derivative instruments for hedging or for other purposes.

OUTSTANDING SHARE DATA

As of January 31, 2007 and as of the date hereof, there are issued and outstanding 13,932,005 common shares of the Company.

OTHER:

Aside from this Management Discussion and Analysis, the Company files a yearly Annual Information Form (AIF), and this information as well as other documents filed with securities regulators in Canada can be found on SEDAR at www.sedar.com.

MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS:

The accompanying consolidated financial statements of Magnotta Winery Corporation have been prepared by management and approved by the Board of Directors. Management is responsible for the integrity of the information contained in the financial statements as well as other sections of the annual report. The financial statements have been prepared by management. To assist management in discharging their responsibilities, Magnotta maintains a system of internal controls. Management believes this system of internal control provides reasonable assurance that the financial records are reliable and form a proper basis for the preparation of financial statements as well as the safeguarding of assets.

The Board of Directors carries out its responsibilities for financial statements primarily through the Audit Committee. KPMG LLP (the Shareholders' auditors) have full access to the Audit Committee, both in the presence and the absence of management.

The consolidated financial statements have been audited by KPMG LLP - the independent auditors, in accordance with generally accepted auditing standards on behalf of the shareholders. Their Report is presented as part of the consolidated financial statements.



Consolidated Financial Statements of

MAGNOTTA WINERY
CORPORATION

Years ended January 31, 2007 and 2006


KPMG LLP
Chartered Accountants Telephone (416) 228-7000
Yonge Corporate Centre Fax (416) 228-7123
4100 Yonge Street Suite 200 Internet www.kpmg.ca
Toronto ON M2P 2H3


AUDITORS' REPORT TO THE SHAREHOLDERS

We have audited the consolidated balance sheets of Magnotta Winery Corporation as at January 31, 2007 and 2006 and the consolidated statements of earnings and retained earnings and cash flows for the years then ended. These financial statements are the responsibility of Magnotta's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.

In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of Magnotta as at January 31, 2007 and 2006 and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles.

KPMG LLP

Chartered Accountants, Licensed Public Accountants

Toronto, Canada April 25, 2007



MAGNOTTA WINERY CORPORATION
Consolidated Balance Sheets

January 31, 2007 and 2006

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2007 2006
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Assets

Current assets:
Accounts receivable $ 396,397 $ 347,669
Inventories (note 2) 22,760,567 20,505,669
Prepaid expenses and deposits 280,142 671,961
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23,437,106 21,525,299

Capital assets (note 3) 21,768,993 21,831,000

Winery licenses 251,516 251,516

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$ 45,457,615 $ 43,607,815
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Liabilities and Shareholders' Equity

Current liabilities:
Bank indebtedness (note 4) $ 5,400,368 $ 4,757,181
Accounts payable and accrued liabilities 790,565 1,289,814
Income taxes payable 176,790 130,754
Current portion of long-term debt (note 5) 783,886 1,477,404
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7,151,609 7,655,153

Long-term debt (note 5) 7,949,860 8,681,328

Future income taxes (note 8) 966,404 1,047,517

Shareholders' equity:
Share capital (note 6) 6,961,617 6,630,817
Notes receivable for share capital
(note 9(b)) (465,000) (465,000)
Other paid-in capital 210,000 210,000
Retained earnings 22,683,125 19,848,000
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29,389,742 26,223,817

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$ 45,457,615 $ 43,607,815
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See accompanying notes to consolidated financial statements.

On behalf of the Board:

Gabe Magnotta, Director

Rossana Di Zio Magnotta, Director


MAGNOTTA WINERY CORPORATION
Consolidated Statements of Earnings and Retained Earnings

Years ended January 31, 2007 and 2006

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2007 2006
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Net sales $ 22,955,623 $ 22,184,354

Cost of goods sold 12,025,843 11,527,204
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Gross profit 10,929,780 10,657,150

Expenses:
Selling, administration and other 4,524,084 4,577,368
Amortization 1,335,131 1,252,759
Interest:
Long-term debt 595,654 553,097
Other 316,479 263,692
Foreign exchange loss 5,198 29,435
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6,776,546 6,676,351
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Earnings before income taxes 4,153,234 3,980,799

Income taxes (note 8):
Current 1,399,222 1,436,800
Future (recovery) (81,113) (30,798)
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1,318,109 1,406,002
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Net earnings 2,835,125 2,574,797

Retained earnings, beginning of year 19,848,000 17,273,203

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Retained earnings, end of year $ 22,683,125 $ 19,848,000
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Earnings per common share (note 7):
Basic $ 0.21 $ 0.20
Diluted 0.20 0.19

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See accompanying notes to consolidated financial statements.


MAGNOTTA WINERY CORPORATION
Consolidated Statements of Cash Flows

Years ended January 31, 2007 and 2006

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2007 2006
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Cash provided by (used in):

Operations:
Net earnings $ 2,835,125 $ 2,574,797
Items not involving cash:
Amortization 1,335,131 1,252,759
Future income taxes (81,113) (30,798)
Unrealized foreign exchange loss 5,198 29,435
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4,094,341 3,826,193
Change in non-cash operating working
capital:
Accounts receivable (48,728) 287,314
Inventories (2,254,898) (390,668)
Prepaid expenses and deposits 391,819 (49,440)
Accounts payable and accrued liabilities (499,250) (7,521)
Income taxes payable 46,036 59,004
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1,729,320 3,724,882

Financing:
Decrease in long-term debt (1,430,183) (1,504,611)
Increase in long-term debt - 2,000,000
Issuance of share capital 330,800 66,660
Change in bank indebtedness 643,187 (949,843)
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(456,196) (387,794)

Investments:
Purchase of capital assets (1,273,124) (3,337,088)

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Cash, beginning and end of year $ - $ -
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Supplemental cash flow information:
Interest paid $ 897,767 $ 854,494
Income taxes paid 1,556,864 1,586,230

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See accompanying notes to consolidated financial statements.


MAGNOTTA WINERY CORPORATION
Notes to Consolidated Financial Statements

Years ended January 31, 2007 and 2006

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Magnotta Winery Corporation ("Magnotta" or the "Company") is incorporated under the laws of Ontario. The Company grows grapes, produces wines, beer and spirits primarily through its locations in Ontario, Canada. The Company also produces juice for wine making and retails it through its locations. Additional sales are obtained through representatives in Canadian provinces and from export markets.

1. Significant accounting policies:

(a) Principles of consolidation:

These consolidated financial statements include the accounts of Magnotta and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

(b) Inventories:

Finished goods and work-in-process are valued at the lower of cost and market value, less normal profit margin, on a first-in, first-out basis. Cost includes attributable direct costs and manufacturing overhead. Supplies are valued at the lower of cost and replacement cost. Interest is capitalized on vintage products held for aging.

(c) Capital assets:

Capital assets are recorded at cost less accumulated amortization. Amortization is provided at rates intended to write-off the assets over their estimated useful lives as follows:



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Asset Basis Rate

Buildings Declining balance 4%
Leasehold improvements Straight line Over the lease term
Equipment Declining balance 10% to 30%
Vineyards Straight line 5%

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Cost of planting new vines and ongoing cultivation costs for non-producing vines, including interest, are capitalized. Vineyard development costs are amortized over 25 years commencing 5 years from the initial capitalization of the vines.

Capital assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset.

(d) Winery licenses:

Winery licenses, which have been assessed as having an indefinite life, are not amortized but are tested annually for impairment, with any impairment recognized in earnings. The carrying value of the winery licenses is compared to its fair value on an annual basis. Management has determined that there is no impairment in the value of the winery licenses as at January 31, 2007.

(e) Revenue recognition:

Revenue is recognized when title passes to the customer. The Company deals primarily with retail customers. Product taxes which are collected on behalf of the government are deducted from gross sales to arrive at net sales.

(f) Foreign currency translation:

The assets and liabilities of the Company's foreign subsidiary are considered financially and operationally dependent on the Company and are, therefore, classified as integrated operations. The temporal method is used to translate the financial statements of its integrated foreign subsidiary. Monetary items are translated at the rate of exchange in effect at the balance sheet date. Non-monetary items are translated at historical exchange rates. Items in the consolidated statements of earnings and retained earnings are translated at the average exchange rate for the year. Exchange gains or losses are included in the determination of net earnings.

Foreign currency transactions of the Company are recorded at the rate in effect at the transaction date. Foreign currency monetary balances are translated to Canadian dollars at the rate in effect at the end of the year, with any gains or losses taken to income.

(g) Future income taxes:

Income taxes are accounted for using the asset and liability method of accounting for income taxes. Under the asset and liability method, future tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Future tax assets and liabilities are measured using enacted or substantively enacted tax rates expected to apply when the asset is realized or the liability settled. The effect on future tax assets and liabilities of a change in tax rates is recognized in earnings in the year that substantive enactment or enactment occurs.

(h) Earnings per common share:

Magnotta uses the treasury stock method for calculating diluted earnings per share. Basic earnings per common share are calculated using the weighted average number of common shares outstanding in the year. The dilutive effect of outstanding stock options is reflected in diluted earnings per share by application of the treasury stock method, which assumes proceeds received from the exercise of stock options are used to purchase common shares at the average market price during the year. Diluted earnings per share are calculated only for those stock options, both vested and unvested, that have option prices below the average market price in the reporting year. The resulting incremental shares are included in the denominator of the diluted earnings per share calculation.

(i) Stock-based compensation:

The Company uses the fair value-based method to account for employee and non-employee stock options beginning January 1, 2004 for stock options granted on or after February 1, 2002. Under the fair value method, compensation cost is measured at the fair value at the date of grant and is expensed over the award's vesting period. No adjustment was required to reflect the adoption of this new standard since no options have been issued since February 1, 2002.

For stock options issued before February 1, 2002 the Company applied the settlement method of accounting, which permitted the Company to not record compensation costs on the granting of stock options.

(j) Use of estimates:

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the years. Due to the inherent uncertainty involved with making such estimates, actual results could differ from those reported.



2. Inventories:

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2007 2006
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Supplies and raw materials $ 5,324,274 $ 4,438,456
Work-in-process 12,343,659 10,723,024
Finished goods 5,092,634 5,344,189

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$ 22,760,567 $ 20,505,669
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During the year, interest in the amount of $55,300 (2006 - $79,600) was capitalized into inventories.



3. Capital assets:

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Accumulated Net book
2007 Cost amortization value
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Land $ 1,675,182 $ - $ 1,675,182
Land and vineyards 6,993,824 71,200 6,922,624
Buildings 7,546,730 1,892,463 5,654,267
Leasehold improvements 1,946,936 1,424,487 522,449
Equipment 16,261,663 9,267,192 6,994,471

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$ 34,424,335 $ 12,655,342 $ 21,768,993
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Accumulated Net book
2007 Cost amortization value
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Land $ 1,675,182 $ - $ 1,675,182
Land and vineyards 6,947,762 44,800 6,902,962
Buildings 7,438,690 1,632,303 5,806,387
Leasehold improvements 1,866,852 1,238,981 627,871
Equipment 15,200,599 8,382,001 6,818,598

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$ 33,129,085 $ 11,298,085 $ 21,831,000
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4. Bank indebtedness:

Under its credit agreement the Company has an operating line of credit of $11,500,000. The operating line of credit is due on demand and bears interest at bank prime plus 0.50% and is secured by a general security agreement registered against all of the Company's assets. The Company is in compliance with all financial and operating covenants.



5. Long-term debt:

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2007 2006
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Term loan, bearing interest at prime plus 1%,
secured by a general security agreement covering
all assets except real property, maturing
September 2006. $ - $ 744,380
Term loan, bearing interest at prime plus 1%,
secured by a general security agreement covering
all assets except real property, maturing January
2009, and the Company is required to comply with
certain financial covenants 177,741 249,825
First mortgage, at a blended rate of 6.25%,
secured by certain land, buildings and vineyards,
maturing September 2008 4,253,431 4,562,915
Second mortgage, bearing interest at the bank's
prime plus a blended rate of 0.5%, secured by
certain land, buildings and vineyards, maturing
June 2010 746,561 822,479
Third mortgages, at a blended rate of 6.50%,
secured by certain land, buildings and vineyards,
maturing September 2011. 1,004,652 1,056,167
Third mortgages, bearing interest at the bank's
prime plus a blended rate of 1.0%, secured by
certain land, buildings and vineyards, maturing
January 2011 373,166 396,954
Third mortgage, bearing interest at the bank's
prime plus a blended rate of 1.0%, secured by
certain land, buildings and vineyards, maturing
July 2010 1,850,000 1,950,000
Mortgage, bearing interest at the bank's prime
plus 2.5%, secured by land, vineyard and buildings
in Melipilla, Chile, repayable in Chilean UF
6,358 (2006 - UF 9,536), maturing January 2009 252,677 374,356
Other loans 75,518 1,656
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8,733,746 10,158,732

Less current portion 783,886 1,477,404

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$ 7,949,860 $ 8,681,328
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The aggregate maturities of long-term debt for each of the five years
subsequent to January 31, 2007 are as follows:

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2008 $ 783,886
2009 4,414,831
2010 267,630
2011 3,251,613
2012 15,786

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$ 8,733,746
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The Company has provided its lenders with additional collateral in the form of cross guarantees in order to collateralize the loans. The terms of the guarantees stipulate that all subsidiaries share in the debt obligations of the Company.

6. Share capital:

(a) The authorized capital consists of an unlimited number of common shares issued as follows:



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Number Amount
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Balance, January 31, 2005 13,098,005 $ 6,099,157
Exercise of options 572,000 531,660
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Balance, January 31, 2006 13,670,005 6,630,817
Exercise of options:
Director options 12,000 10,800
Non-employee options (note 6 (d)) 250,000 320,000

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Balance, January 31, 2007 13,932,005 $ 6,961,617
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(b) Options:

Magnotta had reserved 262,000 common shares pursuant to an Employee Stock Option Plan (the "Plan"). Options to purchase common shares of Magnotta under the Plan may be granted by the Board of Directors to certain full-time employees and directors of Magnotta. All employee stock options outstanding vest at a rate of 20% per annum cumulatively on the anniversary of the date granted. These options were exercised during the year.

(c) A summary of the status of the Plan and the changes during the years are presented below:



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2007 2006
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Weighted Weighted
average average
exercise exercise
Shares price Shares price
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Options outstanding,
beginning of year 262,000 $ 1.26 913,000 $ 1.02
Exercised (262,000) 1.26 (572,000) 0.93
Expired - - (79,000) 0.93

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Options outstanding,
end of year - - 262,000 1.26
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Options exercisable,
at January 31, 2007 - - - -

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(d) On June 5, 2001, Magnotta issued 250,000 stock options to a non-employee for services rendered. These stock options have an exercise price of $1.28 per share, expiring on June 5, 2006, and vested immediately upon being granted. These options were exercised during the year.



7. Earnings per common share:

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2007 2006
------------------------------- --------------------------------
Weighted Weighted
average Per average Per
number of common number of common
Net common share Net common share
earnings shares amount earnings shares amount
(millions) (millions) (millions) (millions)

Basic net
earnings
per
common
share $ 2.84 13.42 $ 0.21 $ 2.57 13.14 $ 0.20
Dilutive
effect
of stock
options - 0.5 (0.01) - 0.50 (0.01)

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Diluted net
earnings
per
common
share $ 2.84 13.92 $ 0.20 $ 2.57 13.64 $ 0.19

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8. Income taxes:

Income tax expense varies from the amounts that would be computed by applying the basic federal and provincial income tax rates aggregating 36.1% (2006 - 36.1%) to income before taxes, as shown in the following table:



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2007 2006
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Tax applied to income before income taxes $ 1,499,317 $ 1,437,068

Increase (decrease) in taxes resulting from:
Permanent differences 22,686 36,352
Manufacturing and processing profits deduction (35,356) (22,075)
Impact of operating in a foreign country with
a lower effective tax rate (73,288) (156,698)
Other (95,250) 111,355

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Income taxes $ 1,318,109 $ 1,406,002
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Effective income tax rate 31.7% 35.3%

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The tax effects of temporary differences that give rise to significant portions of the future tax assets and future tax liabilities at January 31, 2007 and 2006 are presented below:



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2007 2006
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Future income tax assets:
Non-capital losses carried forward $ 168,895 $ 146,548

Future income tax liabilities:
Capital assets 1,135,299 1,194,065

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Net future income tax liability $ (966,404) $ (1,047,517)
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Unutilized non-capital losses expire as follows:

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2008 $ 32,528
2009 153,043
2010 38,122
2011 93,015
2015 19,269
2027 131,875

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$ 467,852
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9. Related party transactions:

(a) Included in accounts payable are amounts due to senior officers in the amount of $73,995 (2006 - $126,009) which are non-interest bearing and unsecured.

(b) The five-year notes receivable were taken back from two senior officers who were provided with the financing to exercise their options on 500,000 common shares of the Company at a price of $0.93 per share. These notes are secured by the acquired common shares, bear interest that is paid monthly at the rate charged to the Company on its operating line of credit, and provide for principal repayments of $116,250 in each of the years 2007, 2008, 2009 and 2010. These have been included as a component of shareholders' equity for presentation purposes.

10. Segmented information:

Magnotta's sole significant business segment is the production and sale of wine and wine juice products. Magnotta operates primarily in Canada and has a vineyard in Chile.

Information on net sales and identifiable capital assets by geographic region is as follows:



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2007 2006
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Net sales:
Canada $ 22,303,646 $ 21,116,909
Chile 197,509 598,910
Other 454,468 468,535

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$ 22,955,623 $ 22,184,354
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Capital assets:
Canada $ 18,974,272 $ 18,989,432
Chile 2,819,442 2,841,568
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$ 21,793,714 $ 21,831,000
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11. Financial instruments:

(a) The fair values of accounts receivable, deposits, bank indebtedness and accounts payable and accrued liabilities approximate their carrying amounts because of the short-term to maturity of these financial instruments. The fair value of long-term debt, which has variable and fixed interest rates based on market rates, approximates the carrying amount of those financial instruments.

(b) Magnotta operates internationally, giving rise to exposure to market risks from changes in interest rates, foreign exchange rates and commodity prices.

12. Commitments:

Magnotta leases facilities under long-term operating leases. The approximate aggregate minimum future annual lease payments are as follows:



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2008 $ 154,635
2009 97,372
2010 80,688
2011 80,688
2012 80,688
Thereafter 221,892

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The annual rental payments are exclusive of property taxes, maintenance and other common costs which are subject to escalation clauses.

Contact Information