Magnotta Winery Corporation
TSX : MGN

Magnotta Winery Corporation

September 12, 2008 11:33 ET

Magnotta Winery Corporation Announces July 31, 2008 Results

VAUGHAN, ONTARIO--(Marketwire - Sept. 12, 2008) - Magnotta Winery Corporation (TSX:MGN), is pleased to announce the release of its financial results for the second quarter ended July 31, 2008.

Net sales for the quarter ended July 31, 2008 increased 2.9% to $5,855,645 from $5,692,474 for the corresponding period of the prior year and for the six month period increased 2.4% to $11,919,054 from $11,641,520 for the corresponding period of the prior year. Net earnings increased 4.3% to $787,960 from $755,574 for the three month period and increased 3.6% to $1,655,750 from $1,598,869 for the six month period ended July 31, 2007. The basic and diluted earnings per common share have increased $0.01 respectively for the three months ended July 31, 2008 compared to the three months ended July 31, 2007 and for the six months ended July 31, 2008 compared to July 31, 2007. The overall growth in net sales was from greater volumes due to an expanded customer base and a continued emphasis on branding through its marketing campaign supported by a strong media and print campaign. These activities have created more brand awareness. The Company also decided to sell more of its Chilean grapes to third parties as it was able to negotiate higher prices for its grapes.

Overall gross profit margin for the quarter ended July 31, 2008 decreased to 50.8% from 51.0% for the corresponding period of the prior year and for the six month period ended July 31, 2008, decreased to 49.7% from 50.4%. The change in the gross profit margin is due to increased cost pressures for raw and packaging materials, energy costs, as well as higher Ontario grape prices in the first half of fiscal 2009 versus fiscal 2008. These cost pressures were mitigated somewhat by the strength of the Canadian dollar.

Selling, administration and other expenses were $1,185,680 for the three months ended July 31, 2008 compared to $1,061,477 for the corresponding period of the prior year. For the six month period ended July 31, 2008, selling, administration and other expenses were $2,212,780 compared to $2,073,913 for the corresponding period of the prior year. As a percentage of net sales, selling, administration and other expenses increased to 20.2% for the quarter compared to 18.6% for the quarter and increased for the six month period to 18.6% from 17.8% for the corresponding period of the prior year. This increase is due to higher transportation and energy costs, as well as employee benefit costs.

Interest expense for the three months ended July 31, 2008 decreased to $207,604 compared to $238,278 and for the six month period ended July 31, 2008 was $428,380 compared to $471,200 for the corresponding period of the prior year. The decrease is due to lower long-term debt outstanding during the respective period.

Earnings before interest, income taxes and depreciation decreased to $1,790,963 from $1,843,725 for the three months ended July 31, 2008 and for the six month period ended July 31, 2008 was $3,712,928 compared to $3,798,815 for the corresponding period of the prior year. These changes were principally impacted by an increase in selling, administration and other expenses and by a reduction in gross margin.

Additional details and information are found in the Interim Unaudited Consolidated Financial Statements, the Management Discussion and Analysis for July 31, 2008 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, 2008

MAGNOTTA WINERY CORPORATION

Notice To Reader of the Interim Consolidated Financial Statements

Six months ended July 31, 2008

The consolidated financial statements of Magnotta Winery Corporation and the accompanying interim consolidated balance sheet as at July 31, 2008 and the interim consolidated statement of earnings, comprehensive income and retained earnings and cash flows for the six 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 interim consolidated 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, 2008, with comparative figures for
January 31, 2008 and July 31, 2007

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July 31 January 31 July 31
2008 2008 2007
(unaudited) (unaudited)
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Assets

Current assets:
Cash and cash equivalents $ 325,287 $ 344,231 $ 80,487
Accounts receivable 1,470,208 285,995 1,543,575
Inventories 25,298,963 25,108,695 22,943,980
Income taxes receivable - 1,918 -
Future income taxes 67,951 51,208 72,577
Prepaid expenses and deposits 607,201 240,526 585,377
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27,769,610 26,032,573 25,225,996

Capital assets 21,273,031 21,141,229 21,836,959
Winery licenses 251,516 251,516 251,516
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$ 49,294,157 $ 47,425,318 $ 47,314,471
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Liabilities and
Shareholders' Equity

Current liabilities:
Bank indebtedness $ 5,040,252 $ 5,536,786 $ 5,296,491
Accounts payable and accrued
liabilities 1,494,470 704,514 1,207,641
Income taxes payable 27,238 - 100,672
Current portion of
long-term debt 802,955 850,027 707,335
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7,364,915 7,091,327 7,312,139

Long-term debt 6,873,452 7,238,694 7,692,740
Future income taxes 1,236,789 932,046 1,320,981

Shareholders' equity:
Share capital 6,961,617 6,961,617 6,961,617
Notes receivable for
share capital (348,750) (348,750) (465,000)
Other paid-in capital 210,000 210,000 210,000
Retained earnings 26,996,134 25,340,384 24,281,994
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33,819,001 32,163,251 30,988,611
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$ 49,294,157 $ 47,425,318 $ 47,314,471
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Segmented information on
identifiable capital assets
by geographic region
Canada $ 18,482,570 $ 18,341,750 $ 19,027,499
Chile 2,790,461 2,799,479 2,809,460
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$ 21,273,031 $ 21,141,229 $ 21,836,959
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On behalf of the Board:

Gabe Magnotta, Executive Chairman and Director

Rossana DiZio Magnotta, CEO/President and 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
2008 2007 2008 2007
(unaudited) (unaudited) (unaudited) (unaudited)
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Net sales $ 5,855,645 $ 5,692,474 $ 11,919,054 $ 11,641,520

Cost of goods sold 2,879,002 2,787,272 5,993,346 5,768,792
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Gross profit 2,976,643 2,905,202 5,925,708 5,872,728

Expenses:
Selling,
administration
and other 1,185,680 1,061,477 2,212,780 2,073,913
Depreciation 259,399 316,873 518,798 633,746
Interest 86,209 109,952 182,456 206,713
Interest -
long-term debt 121,395 128,326 245,924 264,487
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1,652,683 1,616,628 3,159,958 3,178,859
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Earnings before
income taxes 1,323,960 1,288,574 2,765,750 2,693,869

Income taxes:
Current 396,000 396,000 822,000 813,000
Future 140,000 137,000 288,000 282,000
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536,000 533,000 1,110,000 1,095,000
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Net earnings and
comprehensive
income for
the period 787,960 755,574 1,655,750 1,598,869

Retained earnings,
beginning
of period 26,208,174 23,526,420 25,340,384 22,683,125
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Retained earnings,
end of period $ 26,996,134 $ 24,281,994 $ 26,996,134 $ 24,281,994
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Earnings per
common share :
Basic $ 0.06 $ 0.05 $ 0.12 $ 0.11
Diluted $ 0.06 $ 0.05 $ 0.12 $ 0.11
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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 $ 5,698,897 $ 5,631,604 $ 11,452,534 $ 11,394,264
Chile 65,377 - 283,459 57,599
Other 91,371 60,870 183,061 189,657
$ 5,855,645 $ 5,692,474 $ 11,919,054 $ 11,641,520
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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
2008 2007 2008 2007
(unaudited) (unaudited) (unaudited) (unaudited)
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Cash provided by
(used in):

Operating activities:
Net earnings $ 787,960 $ 755,574 $ 1,655,750 $ 1,598,869
Items not
involving cash:
Depreciation 259,399 316,873 518,798 633,746
Future income taxes 140,000 137,000 288,000 282,000
Unrealized foreign
exchange loss (gain) 5,921 (6,421) 11,411 (15,270)
Changes in non-cash
operating working
capital:
Accounts receivable 255,680 (75,850) (1,184,213) (1,147,178)
Inventories 81,878 (84,820) (190,268) (183,413)
Prepaid expenses
and deposits (113,836) (157,623) (366,675) (305,235)
Accounts payable
and accrued
liabilities 190,665 178,160 789,956 417,076
Income taxes
receivable/payable 23,268 (29,225) 29,156 (76,118)
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1,630,935 1,033,668 1,551,915 1,204,477

Financing activities:
Decrease in long-term
debt (227,560) (161,676) (423,725) (318,401)
Decrease in bank
indebtedness (1,016,160) (445,493) (496,534) (314,373)
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(1,243,720) (607,169) (920,259) (632,774)

Investing activities:
Purchases of capital
assets (388,861) (416,266) (650,600) (701,712)
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Increase (decrease) in
cash and cash
equivalents (1,646) 10,233 (18,944) (130,009)

Cash and cash
equivalents,
beginning
of period 326,933 70,254 344,231 210,496
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Cash and cash
equivalents,
end of period 325,287 80,487 325,287 80,487
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Supplemental cash flow
information:
Cash paid for
interest $ 191,383 $ 221,965 $ 401,588 $ 441,583
Cash paid for
income taxes 372,732 425,225 792,844 889,118

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MAGNOTTA WINERY CORPORATION

Notes to Consolidated Interim Financial Statements - Unaudited

Six months ended July 31, 2008

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 AND CHANGES IN ACCOUNTING POLICIES

The disclosures contained in the unaudited interim consolidated financial statements do not include all the requirements of generally accepted accounting principles for annual financial statements, and accordingly, the unaudited interim consolidated financial statements should be read in conjunction with the annual consolidated financial statements for the year ended January 31, 2008.

The unaudited interim consolidated financial statements are based upon accounting principles consistent with those used and described in the annual consolidated financial statements for the year ended January 31, 2008 except for the following:

The CICA has issued the following accounting standards effective for fiscal years beginning on or after January 1, 2008: Section 1535 "Capital Disclosures", Section 3862 "Financial Instruments - Disclosures", Section 3863 "Financial Instruments - Presentation", and Section 3031 "Inventories".

Section 1535 "Capital Disclosures" requires the Company to provide disclosures about the capital of the Company and how it is managed.

Section 3862 "Financial Instruments - Disclosures" and Section 3863 "Financial Instruments - Presentation" replace Section 3861 "Financial Instruments - Disclosure and Presentation" revising disclosures related to financial instruments, including hedging instruments, and carrying forward unchanged presentation requirements.

Section 3031, "Inventories" replaced the existing Section 3030 "Inventories" and the standard introduced changes to the measurement and disclosure of inventory and converges with international accounting standards.

The adoption of these new accounting standards did not impact the consolidated interim financial statements of the Company; however, it did result in expanded note disclosure outlined below.

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, 2008 January 31, 2008 July 31, 2007
-------------- ---------------- -------------
Components of Capital:
Shareholders' equity $ 33,819,001 $ 32,163,251 $ 30,988,611
Long-term debt $ 7,676,407 $ 8,088,721 $ 8,400,075
Bank indebtedness $ 5,040,252 $ 5,536,786 $ 5,216,004
Less:
Cash and cash equivalents $ 325,287 $ 344,231 $ 80,487
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$ 46,210,373 $ 45,444,527 $ 44,524,203
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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, 2008, the Company is in compliance with the terms of the credit facilities.

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

Financial Instruments:

Credit Risk - 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.

Interest Rate Risk - The Company is exposed to interest rate risk on its operating line of credit as well as on some long-term debt based on fluctuations in prime rates. The Company does not use any hedges or contracts to manage the exposure to interest rate fluctuations. A 1% change in interest rates would have impacted the cash flow of the Company during the quarter ended July 31, 2008 by approximately $17,000 and the six months by approximately $39,000.

Foreign Exchange Risk - The Company purchases some bulk wine, wine juice, concentrates and some production equipment in U.S. dollars. It receives most of its revenues in Canadian dollars. As a result, it is impacted by fluctuations in foreign exchange rates. A $0.01 variance in the Canadian/U.S. exchange rate would have impacted the cash flow of the Company for the three months ended July 31, 2008 by approximately $4,000 and the six months by approximately $7,000. The Company considers this risk to be limited and does not hedge its foreign exchange risk.

Fair Value - The fair values of cash and cash equivalents, 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 and fixed interest rates based on market rates, approximates the carrying amount of those financial instruments.

International Financial Reporting Standards ("IFRS"):

In January 2006, the CICA Accounting Standards Board ("AcSB") adopted a strategic plan for the direction of accounting standards in Canada. As part of that plan, accounting standards in Canada for public companies are expected to converge with International Financial Reporting Standards ("IFRS") by 2011. The Company continues to monitor and assess the impact of convergence of Canadian GAAP and IFRS.

3 NOTES RECEIVABLE INCLUDED IN SHARE CAPITAL

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 Magnotta 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 Magnotta on its operating line of credit, and provide for principal repayments of $116,250 in each of the remaining calendar years 2008, 2009 and 2010. The notes receivable have been included as a reduction of shareholders' equity for presentation purposes.

4 COMPARATIVE FIGURES

Certain fiscal 2008 figures have been reclassified to conform with the financial statement presentation adopted in fiscal 2009.

Contact Information