Magnotta Winery Corporation
TSX : MGN

Magnotta Winery Corporation

December 14, 2010 10:24 ET

Magnotta Winery Corporation Announces October 31, 2010 Quarterly Results

VAUGHAN, ONTARIO--(Marketwire - Dec. 14, 2010) - Magnotta Winery Corporation (TSX:MGN), is pleased to announce the release of its financial results for the third quarter ended October 31, 2010.

Net sales for the quarter ended October 31, 2010 increased slightly to $7,466,633 from $7,425,729 for the corresponding period of the prior year and for the nine month period increased 1.1% to $19,849,654 from $19,634,118 for the corresponding period of the prior year. The Company experienced a net earnings decrease to $654,171 compared to net earnings of $812,205 for the three month period and net earnings of $2,205,714 compared to $1,472,235 for the nine month period ended October 31, 2009. Adjusted earnings before a non reoccurring item for the nine month period ended October 31, 2009 would have been $2,448,747. The basic and diluted earnings per common share decreased to $0.05 from $0.06 for the quarter and increased to $0.16 from $0.11 for the nine month ended October 31, 2010. The Company is expanding its branding campaigns through targeted marketing and advertising so to help increase volumes.

Overall gross profit margin for the quarter ended October 31, 2010 decreased to 40.1% from 42.3% for the corresponding period of the prior year and for the nine month period ended October 31, 2010, decreased marginally to 41.0% from 41.6%. This change was principally due to the Ontario government's new 10% levy on Cellared in Canada ("CIC") wine products sold in winery retail stores. This legislation came into effect on July 1, 2010. CIC wine products are blended wines that have a current minimum of 40% Ontario wine content.

Selling, administration and other expenses were $1,598,198 for the three months ended October 31, 2010 compared to $1,514,680 for the corresponding period of the prior year. For the nine month period ended October 31, 2010, selling, administration and other expenses were $3,628,462 compared to $3,258,282 for the corresponding period of the prior year. The increase is due to marketing campaigns conducted in the first nine months of fiscal 2011 so to retain market share, and higher transportation, energy and utility costs.

Interest expense for the three months ended October 31, 2010 increased slightly to $167,746 compared to $145,760 and for the nine month period ended October 31, 2010 was $442,985 compared to $438,058 for the corresponding period of the prior year. The change is primarily due to higher variable interest rates (i.e. prime rate) during the period compared to the corresponding period of the previous year.

Additional details and information are found in the Interim Unaudited Consolidated Financial Statements, the Management Discussion and Analysis for October 31, 2010 as well as on www.sedar.com.

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

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

MAGNOTTA WINERY CORPORATION

Interim Consolidated Financial Statements - Unaudited

Nine months ended October 31, 2010

MAGNOTTA WINERY CORPORATION
Notice To Reader of the Consolidated Interim Financial Statements
 
Nine months ended October 31, 2010
 
The consolidated financial statements of Magnotta Winery Corporation and the accompanying consolidated interim balance sheet as at October 31, 2010 and the consolidated interim statements of earnings, comprehensive income and retained earnings and cash flows for the nine month period then ended are the responsibility of the Company's management. These consolidated financial statements have not been audited or reviewed on behalf of the shareholders by the independent external auditors of the Company, KPMG LLP.
 
The consolidated interim financial statements have been prepared by management and include the selection of appropriate accounting principles, judgments and estimates necessary to prepare these financial statements in accordance with Canadian Generally Accepted Accounting Principles.
 
 
 
MAGNOTTA WINERY CORPORATION  
Consolidated Interim Balance Sheets  
As at October 31, 2010, with comparative figures for  
January 31, 2010 and October 31, 2009  
                   
    October 31     January 31     October 31  
    2010     2010     2009  
    (unaudited)           (unaudited)  
   
Assets                  
   
Current assets:                  
    Accounts receivable $ 1,888,552   $ 590,322   $ 1,536,888  
    Inventories   29,260,949     29,878,758     28,080,733  
    Income taxes receivable   120,150     137,511     537,213  
    Future income taxes   115,448     83,130     108,467  
    Prepaid expenses and deposits   673,458     268,306     569,211  
   
    32,058,557     30,958,027     30,832,512  
   
Property, plant and equipment   20,604,062     20,468,725     21,046,209  
Winery licenses   251,516     251,516     251,516  
   
  $ 52,914,135   $ 51,678,268   $ 52,130,237  
   
   
Liabilities and Shareholders' Equity                  
   
Current liabilities:                  
    Bank indebtedness $ 4,516,632   $ 5,249,398   $ 5,313,223  
    Accounts payable and accrued liabilities   1,701,799     1,568,495     1,562,466  
    Current portion of long-term debt   1,057,065     1,041,811     820,840  
    Current portion of retirement allowance   300,000     300,000     300,000  
   
    7,575,496     8,159,704     7,996,529  
   
Long-term debt   5,167,957     5,665,914     6,122,197  
Long-term retirement allowance   440,000     740,000     740,000  
Future income taxes   895,174     482,856     875,846  
   
Shareholders' equity:                  
    Share capital   6,961,617     6,961,617     6,961,617  
    Notes receivable for share capital   (116,250 )   (116,250 )   (232,500 )
    Other paid-in capital   210,000     210,000     210,000  
    Retained earnings   31,780,141     29,574,427     29,456,548  
   
    38,835,508     36,629,794     36,395,665  
   
  $ 52,914,135   $ 51,678,268   $ 52,130,237  
   
Segmented information on identifiable capital assets                  
  by geographic region                  
      Canada $ 17,597,013   $ 17,443,050   $ 17,978,685  
      Chile   3,007,049     3,025,675     3,067,524  
  $ 20,604,062   $ 20,468,725   $ 21,046,209  
On behalf of the Board:
 
"Rossana DiZio Magnotta"  
Rossana DiZio Magnotta - CEO/President and Director  
 
"Owen Mcmanamon"  
Owen McManamon - Director  
 
 
 
MAGNOTTA WINERY CORPORATION  
Consolidated Interim Statements of Earnings, Comprehensive Income and Retained Earnings  
   
    For The Three Months   For The Nine Months  
    Ended October 31   Ended October 31  
    2010   2009   2010   2009  
    (unaudited)   (unaudited)   (unaudited)   (unaudited)  
   
Net sales $ 7,466,633 $ 7,425,729 $ 19,849,654 $ 19,634,118  
   
Cost of goods sold, excluding amortization of                  
  property, plant and equipment   4,336,843   4,139,388   11,310,418   11,037,169  
   
Amortization of property, plant and equipment (production)   133,529   143,056   400,505   429,168  
   
Total cost of goods sold   4,470,372   4,282,444   11,710,923   11,466,337  
   
Gross profit   2,996,261   3,143,285   8,138,731   8,167,781  
   
Expenses:                  
    Selling, administration and other   1,598,198   1,514,680   3,628,462   3,258,282  
    Amortization of property, plant and                  
      equipment (non-production)   157,146   160,640   447,570   459,206  
    Interest - bank indebtedness   74,537   61,740   184,820   172,722  
    Interest - long-term debt   93,209   84,020   258,165   265,336  
    Retirement allowance (Note 7)   -   -   -   1,600,000  
   
    1,923,090   1,821,080   4,519,017   5,755,546  
   
Earnings before income taxes   1,073,171   1,322,205   3,619,714   2,412,235  
   
Income taxes (recovery):                  
    Current   307,000   375,000   1,034,000   995,000  
    Future   112,000   135,000   380,000   (55,000 )
   
    419,000   510,000   1,414,000   940,000  
   
Net earnings and comprehensive income for the period   654,171   812,205   2,205,714   1,472,235  
   
Retained earnings, beginning of period   31,125,970   28,644,343   29,574,427   27,984,313  
   
Retained earnings, end of period $ 31,780,141 $ 29,456,548 $ 31,780,141 $ 29,456,548  
   
   
Earnings per common share :                  
    Basic $ 0.05 $ 0.06 $ 0.16 $ 0.11  
    Diluted $ 0.05 $ 0.06 $ 0.16 $ 0.11  
   
Weighted average number of common shares outstanding   13,932,005   13,932,005   13,932,005   13,932,005  
Weighted average number of diluted shares outstanding   13,932,005   13,932,005   13,932,005   13,932,005  
   
   
Segmented information on net sales by geographic region                  
      Canada $ 7,177,855 $ 7,235,344 $ 18,964,824 $ 18,972,919  
      Chile   160,704   168,808   630,165   562,435  
      Other   128,074   21,577   254,665   98,764  
  $ 7,466,633 $ 7,425,729 $ 19,849,654 $ 19,634,118  
                   
                   
                   
MAGNOTTA WINERY CORPORATION  
Consolidated Interim Statements of Cash Flow  
   
    For The Three Months     For The Nine Months  
    Ended October 31     Ended October 31  
    2010     2009     2010     2009  
    (unaudited)     (unaudited)     (unaudited)     (unaudited)  
   
Cash provided by (used in):                        
   
Operations:                        
  Net earnings $ 654,171   $ 812,205   $ 2,205,714   $ 1,472,235  
  Items not involving cash:                        
    Amortization of property, plant and equipment   290,675     303,696     848,075     888,374  
    Future income taxes   112,000     135,000     380,000     (55,000 )
    Unrealized foreign exchange loss   38,191     29,540     26,963     51,432  
  Changes in non-cash operating working capital:                        
    Accounts receivable   (299,505 )   (103,831 )   (1,298,230 )   (1,276,088 )
    Inventories   78,411     (297,611 )   617,809     (233,130 )
    Prepaid expenses and deposits   (52,948 )   34,843     (405,152 )   (322,173 )
    Accounts payable and accrued liabilities   199,385     285,384     133,304     425,433  
    Retirement allowance   -     -     (300,000 )   1,040,000  
    Income taxes receivable/payable   52,293     114     17,361     (71,593 )
   
    1,072,673     1,199,340     2,225,844     1,919,490  
   
Financing:                        
  Decrease in long-term debt   (189,078 )   (179,193 )   (509,666 )   (509,695 )
  Decrease in bank indebtedness   (465,712 )   (754,599 )   (732,766 )   (568,102 )
   
    (654,790 )   (933,792 )   (1,242,432 )   (1,077,797 )
   
Investments:                        
  Purchases of property, plant and equipment   (417,883 )   (265,548 )   (983,412 )   (841,693 )
   
Cash and cash equivalents, end of period   -     -     -     -  
   
Supplemental cash flow information:                        
  Cash paid for interest $ 123,357   $ 126,241   $ 359,095   $ 373,318  
  Cash paid for income taxes   254,707     374,886     1,016,639     1,066,593  

MAGNOTTA WINERY CORPORATION

Notes to Consolidated Interim Financial Statements - Unaudited

Nine months ended October 31, 2010

1. DESCRIPTION OF BUSINESS

The Company grows, produces, imports, markets, distributes and retails wines, beer, spirits and "must" (juice for making wine) through its seven locations in Ontario. Products are also sold through representatives, an e-commerce site, and through export markets. Furthermore, the Company and the industry is subject to many licensing and regulatory rules.

2. SIGNIFICANT ACCOUNTING POLICIES

The Company prepares its unaudited consolidated interim financial statements in accordance with Canadian Generally Accepted Accounting Principles. The disclosures contained in these unaudited consolidated interim financial statements do not include all the requirements of Generally Accepted Accounting Principles for annual financial statements. The unaudited consolidated interim financial statements should be read in conjunction with the audited annual consolidated financial statements for the year ended January 31, 2010.

The unaudited consolidated interim financial statements are based on accounting principles consistent with those used and described in the audited consolidated financial statements for the year ended January 31, 2010.

3. CAPITAL DISCLOSURE:

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

  October 31, 2010   January 31, 2010   October 31, 2009
Components of Capital:            
 
Shareholders' equity $ 38,835,508 $ 36,629,794 $ 36,395,665
Long-term debt $ 6,225,022 $ 6,707,725 $ 6,943,037
Bank indebtedness $ 4,516,632 $ 5,249,398 $ 5,313,223
 
 
  $ 49,577,162 $ 48,586,917 $ 48,651,925

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, 2010, the Company is in compliance with the terms of its credit facilities.

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

4. FINANCIAL INSTRUMENTS:

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

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

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

Interest rate risk - Interest rate risk refers to the risk that the value of the financial instruments or cash flows associated with the instruments will fluctuate due to changes in market interest rates. The Company is exposed to interest rate risk as the Company's net bank indebtedness and approximately 4.2% of the total long-term debt bear interest at a variable rate linked to Canadian prime. All other long-term debt bears interest at fixed rates. A change of 1.0% in all variable interest rate debt, including net bank indebtedness would have an effect of approximately $11,937 on the Company's consolidated earnings for the three months ended October 31, 2010 and $38,230 for the nine months ended October 31, 2010.

Foreign exchange risk - Foreign exchange risk refers to the risk that value of the financial instruments or cash flows associated with the instruments will fluctuate due to changes in the foreign exchange rates. The Company purchases some bulk wine, wine juice, concentrates and some production equipment in U.S. dollars. It receives its revenue in Canadian dollars. As a result, it is impacted by fluctuations in foreign exchange rates. A $0.01 change in the Canadian/U.S. exchange rate would have impacted the cash flow of the Company for the three months ended October 31, 2010 by approximately $3,616 and $8,510 for the nine months ended October 31, 2010. The Company considers this risk to be limited and does not hedge its foreign exchange exposure.

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

5. INTERNATIONAL FINANCIAL REPORTING STANDARDS ("IFRS"):

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

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

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

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

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

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

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

Agriculture - IFRS requires vines and grapes on a vine (i.e. biological assets) to be presented separately from property, plant and equipment. As a result, there will be a new balance for biological assets with a reduction in property, plant and equipment. Furthermore, the fluctuations in the fair values of grape vines will impact the net earnings of the Company. The Company is currently evaluating the impact of this change on its financial statements.

Impairment of Assets - IFRS requires property, plant and equipment and intangible assets with finite lives to be assigned to cash generating units, where an impairment charge is recorded when the carrying value of the cash generating unit exceeds its fair value and its value in use using discounted cash flows. Intangible assets with infinite lives are allocated to cash generating units for impairment testing, and an impairment charge is recorded when the carrying value of the cash generating unit exceeds it recoverable amount. The Company is currently evaluating the impact of this change.

Income Taxes - With IFRS, the Company's future income tax balance will change due to adjustments required to transition from Canadian GAAP to IFRS. As a result, the Company is currently evaluating the impact of this change.

These above differences may have a material impact on the Company's financial statements. The above is not an exhaustive list as there are other less significant areas which might affect the Company's financial statements and disclosures. Furthermore, as the Company transitions to IFRS other changes may be identified. A detained review of the impact of IFRS on the Company's consolidated financial statements is in progress and is expected to be completed during fiscal 2011. The Company expects to be fully IFRS compliant starting in the first quarter of fiscal 2012.

6. INVENTORIES
       
  October 31, 2010   January 31, 2010
 
Supplies and raw materials $ 6,486,130   $ 7,735,020
Work in process $ 16,367,049   $ 15,462,538
Finished goods $ 6,407,770   $ 6,681,200
 
  $ 29,260,949   $ 29,878,758

7. RETIREMENT ALLOWANCE

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

8. NOTES RECEIVABLE INCLUDED IN SHARE CAPITAL

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

9. COMPARATIVE FIGURES

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

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