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
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On behalf of the Board:
"Rossana DiZio Magnotta"
------------------------------------------------------------
Rossana DiZio Magnotta - CEO/President and Director
"Owen Mcmanamon"
------------------------------------------------------------
Owen McManamon - Director
MAGNOTTA WINERY CORPORATION
Consolidated Interim Statements of Earnings, Comprehensive Income and
Retained Earnings
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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