Magnotta Winery Corporation
TSX : MGN

Magnotta Winery Corporation

December 12, 2008 11:34 ET

Magnotta Winery Corporation Announces October 31, 2008 Results

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

Net sales for the quarter ended October 31, 2008 increased 2.0% to $7,290,507 from $7,150,558 for the corresponding period of the prior year and for the nine month period increased 2.2% to $19,209,561 from $18,792,078 for the corresponding period of the prior year. Net earnings remained relatively constant at $921,713 from $917,671 for the three month period and increased 2.4% to $2,577,463 from $2,516,540 for the nine month period ended October 31, 2008. The basic and diluted earnings per common share have remained constant respectively for the three months ended October 31, 2008 compared to the three months ended October 31, 2007 and for the nine months ended October 31, 2008 increased $0.01 respectively compared to October 31, 2007.

The growth in net sales was from increased volumes through a continued emphasis on branding supported by its marketing campaign through strong media and print. These activities have created more brand awareness. The Company sold more of its Chilean grapes to third parties in fiscal 2009 versus fiscal 2008 as it was able to negotiate higher prices for its grapes.

Overall gross profit margin for the quarter ended October 31, 2008 decreased to 47.9% from 48.1% for the corresponding period of the prior year, and for the nine month period ended October 31, 2008, decreased to 49.0% from 49.6%. The change in the gross margins is due to increased cost pressures from raw and packaging materials, energy costs, as well as higher Ontario grape prices. The recent weakening of the Canadian dollar against the U.S. dollar resulted in increased costs as raw inputs became more expensive.

Selling, administration and other expenses were $1,526,922 for the three months ended October 31, 2008 compared to $1,415,688 for the corresponding period of the prior year. For the nine month period ended October 31, 2008, selling, administration and other expenses were $3,739,702 compared to $3,489,601 for the corresponding period of the prior year. As a percentage of net sales, selling, administration and other expenses increased to 20.9% from 19.8% for the quarter and for the nine month period increased to 19.5% from 18.6% for the corresponding period of the prior year. This increase is due to higher transportation and energy costs, employee benefit costs, and marketing costs.

Interest expense for the three months ended October 31, 2008 decreased to $182,314 compared to $233,812 and for the nine month period ended October 31, 2008 was $610,694 compared to $705,012 for the corresponding period of the prior year. The decrease is due to lower long-term debt outstanding during the respective period, as well as lower interest rates.

Most of the Company's revenues and cash flows are generated from its locations. Given the current economic climate, it is difficult to predict the future purchasing patterns of customers.

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

Nine months ended October 31, 2008


MAGNOTTA WINERY CORPORATION

Notice To Reader of the Interim Consolidated Financial Statements

Nine months ended October 31, 2008

The consolidated financial statements of Magnotta Winery Corporation and the accompanying interim consolidated balance sheet as at October 31, 2008 and the interim consolidated statement of earnings, comprehensive income and retained earnings and cash flows for the nine month period then ended are the responsibility of the Company's management. These consolidated financial statements have not been audited or reviewed on behalf of the shareholders by the independent external auditors of the Company, KPMG LLP.

The 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 October 31, 2008, with comparative figures for
January 31, 2008 and October 31, 2007

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

Current assets:
Cash and cash equivalents $ 341,612 $ 344,231 $ 33,051
Accounts receivable 1,439,618 285,995 1,898,452
Inventories 25,558,432 25,108,695 22,887,380
Income taxes receivable - 1,918 -
Future income taxes 74,172 51,208 80,367
Prepaid expenses and deposits 575,521 240,526 659,271
-----------------------------------------

27,989,355 26,032,573 25,558,521

Capital assets 21,202,832 21,141,229 21,844,530
Winery licenses 251,516 251,516 251,516
-----------------------------------------
$ 49,443,703 $ 47,425,318 $47,654,567
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-----------------------------------------

Liabilities and Shareholders' Equity

Current liabilities:
Bank indebtedness $ 4,346,267 $ 5,536,786 $ 4,617,938
Accounts payable and accrued
liabilities 1,497,145 704,514 1,436,122
Income taxes payable 23,271 - 6,772
Current portion of
long-term debt 790,300 850,027 714,135
-----------------------------------------

6,656,983 7,091,327 6,774,967

Long-term debt 6,695,996 7,238,694 7,510,547
Future income taxes 1,350,010 932,046 1,462,771

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 27,917,847 25,340,384 25,199,665
-----------------------------------------

34,740,714 32,163,251 31,906,282
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-----------------------------------------

$ 49,443,703 $ 47,425,318 $ 47,654,567
-----------------------------------------
-----------------------------------------

Segmented information on
identifiable capital assets
by geographic region
Canada $ 18,416,880 $ 18,341,750 $ 19,040,061
Chile 2,785,952 2,799,479 2,804,469
-----------------------------------------
$ 21,202,832 $ 21,141,229 $ 21,844,530
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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 Nine Months
Ended October 31 Ended October 31
2008 2007 2008 2007
(unaudited) (unaudited) (unaudited) (unaudited)
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Net sales $ 7,290,507 $ 7,150,558 $ 19,209,561 $ 18,792,078

Cost of goods
sold 3,796,381 3,710,022 9,789,727 9,478,814
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Gross profit 3,494,126 3,440,536 9,419,834 9,313,264

Expenses:
Selling,
administration
and other 1,526,922 1,415,688 3,739,702 3,489,601
Depreciation 283,177 318,365 801,975 952,111
Interest 69,292 105,859 251,748 312,572
Interest -
long-term debt 113,022 127,953 358,946 392,440
----------------------------------------------------------

1,992,413 1,967,865 5,152,371 5,146,724
----------------------------------------------------------

Earnings before
income taxes 1,501,713 1,472,671 4,267,463 4,166,540

Income taxes:
Current 473,000 421,000 1,295,000 1,234,000
Future 107,000 134,000 395,000 416,000
----------------------------------------------------------

580,000 555,000 1,690,000 1,650,000
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Net earnings and
comprehensive
income for
the period 921,713 917,671 2,577,463 2,516,540

Retained
earnings,
beginning
of period 26,996,134 24,281,994 25,340,384 22,683,125
----------------------------------------------------------

Retained
earnings, end
of period $ 27,917,847 $ 25,199,665 $ 27,917,847 $ 25,199,665
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Earnings per
common share :
Basic $ 0.07 $ 0.07 $ 0.19 $ 0.18
Diluted $ 0.07 $ 0.07 $ 0.19 $ 0.18
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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 $ 7,096,876 $ 6,974,253 $ 18,549,410 $ 18,368,517
Chile 72,962 48,602 356,421 106,201
Other 120,669 127,703 303,730 317,360
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$ 7,290,507 $ 7,150,558 $ 19,209,561 $ 18,792,078
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MAGNOTTA WINERY CORPORATION
Consolidated Interim Statements of Cash Flow

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For The Three Months For The Nine Months
Ended October 31 Ended October 31
2008 2007 2008 2007
(unaudited) (unaudited) (unaudited) (unaudited)
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Cash provided by
(used in):

Operating
activities:
Net earnings $ 921,713 $ 917,671 $ 2,577,463 $ 2,516,540
Items not
involving
cash:
Depreciation 283,177 318,365 801,975 952,111
Future income
taxes 107,000 134,000 395,000 416,000
Unrealized
foreign
exchange loss
(gain) 13,367 (14,434) 24,778 (29,704)
Changes in
non-cash
operating
working
capital:
Accounts
receivable 30,590 (354,877) (1,153,623) (1,502,055)
Inventories (259,469) 56,600 (449,737) (126,813)
Prepaid expenses
and deposits 31,680 (73,894) (334,995) (379,129)
Accounts payable
and accrued
liabilities 2,675 228,481 792,631 645,557
Income taxes
receivable/
payable (3,967) (93,900) 25,189 (170,018)
----------------------------------------------------------

1,126,766 1,118,012 2,678,681 2,322,489
Financing
activities:
Decrease in
long-term
debt (203,478) (160,959) (627,203) (479,360)
Decrease in bank
indebtedness (693,985) (678,553) (1,190,519) (992,926)
----------------------------------------------------------

(897,463) (839,512) (1,817,722) (1,472,286)

Investing
activities:
Purchases of
capital
assets (212,978) (325,936) (863,578) (1,027,648)
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Increase
(decrease) in
cash and cash
equivalents 16,325 (47,436) (2,619) (177,445)

Cash and cash
equivalents,
beginning
of period 325,287 80,487 344,231 210,496
----------------------------------------------------------

Cash and cash
equivalents,
end of period 341,612 33,051 341,612 33,051
----------------------------------------------------------

Supplemental
cash flow
information:
Cash paid for
interest $ 152,442 $ 219,686 $ 554,030 $ 661,269
Cash paid for
income taxes 476,967 514,900 1,269,811 1,404,018

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MAGNOTTA WINERY CORPORATION

Notes to Consolidated Interim Financial Statements - Unaudited

Nine months ended October 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 Company prepares its unaudited interim consolidated financial statements in accordance with Canadian generally accepted accounting principles. The disclosures contained in these unaudited interim consolidated financial statements do not include all the requirements of generally accepted accounting principles for annual financial statements. The unaudited interim consolidated financial statements should be read in conjunction with the audited annual consolidated financial statements for the year ended January 31, 2008.

The unaudited interim consolidated 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, 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 disclosure of an entity's objectives, policies and processes for managing capital, quantitative data about what the entity regards as capital and whether the entity has complied with any capital requirements and, if it has not complied, the consequences of such non-compliance.

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. This new section requires inventories to be measured at the lower of cost or market and net realizable value, which is consistent with the Company's current policy for measuring inventories. This policy is that finished goods and work in process are valued at the lower of cost and net realizable value, on a first-in, first-out basis, with cost including attributable direct costs and manufacturing overhead; while, supplies and raw materials are valued at the lower of cost and replacement cost.

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:



October 31, 2008 January 31, 2008 October 31, 2007
Components of Capital:

Shareholders' equity $ 34,740,714 $ 32,163,251 $ 31,906,282
Long-term debt $ 7,486,296 $ 8,088,721 $ 8,224,682
Bank indebtedness $ 4,346,267 $ 5,536,786 $ 4,617,938
Less:
Cash and cash
equivalents $ 341,612 $ 344,231 $ 33,051
----------------------------------------------------

$ 46,231,665 $ 45,444,527 $ 44,715,851
----------------------------------------------------
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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 October 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 regularily 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 October 31, 2008 by approximately $15,000 and the nine months by approximately $53,000.

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 October 31, 2008 by approximately $4,000 and the nine months by approximately $11,000. 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"):

The CICA plans to converge Canadian GAAP with International Financial Reporting Standards (IFRS) over a transition period expected to end in 2011. The impact of the transition to IFRS on the Company's financial statements is not yet determinable. A formal changeover plan will be formulated at a later date.

3 INVENTORIES



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

Supplies and raw materials $ 6,256,693 $ 6,483,992
Work in process $ 14,058,990 $ 12,980,275
Finished goods $ 5,242,749 $ 5,644,428
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$ 25,558,432 $ 25,108,695
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4 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.

5 COMPARATIVE FIGURES

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

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