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Net sales for the quarter ended April 30, 2009 increased 2.6% to $6,222,004 from $6,063,409. Net earnings decreased slightly by 2.5% to $845,804 from $867,790 and the basic and diluted earnings per share remained constant at $0.06. The overall growth in net sales for the quarter resulted from the Company expanding its branding campaigns through additional marketing and advertising. This has created more brand awareness and greater volumes. Furthermore, more "value" focused marketing, has attracted customers to purchase quantities of lower priced products during the "softening" of the general economic environment for the quarter ended April 30, 2009.
Overall gross profit margin for the quarter ended April 30, 2009 decreased to 40.6% from 42.6% for the corresponding period of the prior year. 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 quarter of fiscal 2010 versus fiscal 2009. The weakening of the Canadian dollar especially against the U.S. dollar in the first quarter of fiscal 2010 versus fiscal 2009 also increased costs as U.S. denominated raw inputs became more expensive. Furthermore, the "softening" of the general economic environment which started at the end of fiscal 2009 and continues, has resulted in customers shifting to lower priced "value" products which have lower margins.
Selling, administration and other expenses were $826,460 for the three months ended April 30, 2009 compared to $787,415 for the corresponding period of the prior year. The increase is due to the Company expanding its marketing so to increase brand awareness. As a percentage of net sales, selling, administration and other expenses increased slightly to 13.3% for the quarter compared to 13.0% for the quarter of the previous year.
Total overall amortization of property, plant and equipment of which a substantial portion is now included as part of cost of goods sold as per the new CICA Handbook Section 3031 on Inventories, increased in the first quarter ended April 30, 2009 to $292,339 compared to $259,399 for the corresponding period of the prior year. The change resulted from fluctuations in capital asset investments, made over prior years, in the Company's production equipment, vineyards and retail locations, as well as the timing of purchases of depreciable capital asset investments.
Interest expense for the three months ended April 30, 2009 decreased to $144,912 compared to $220,776 for the three month period ended April 30, 2008. The decrease is due to lower long-term debt outstanding and more importantly, lower overall interest rates on the Company's operating line facility and long-term debt compared to the corresponding period of the previous year.
Additional details and information are found in the Management Discussion and Analysis for the quarter ended April 30, 2009 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
Three Months Ended April 30, 2009
MAGNOTTA WINERY CORPORATION
Notice To Reader of the Interim Consolidated Financial Statements
Three months ended April 30, 2009
The consolidated financial statements of Magnotta Winery Corporation and the accompanying interim consolidated balance sheet as at April 30, 2009 and the interim consolidated statement of earnings, comprehensive income and retained earnings and cash flows for the three 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 April 30, 2009, with comparative figures for
January 31, 2009 and April 30, 2008
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April 30 January 31 April 30
2009 2009 2008
(unaudited) (unaudited)
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Assets
Current assets:
Cash and cash equivalents $ - $ - $ 326,933
Accounts receivable 1,456,629 260,800 1,725,888
Inventories 27,529,580 27,847,603 25,380,841
Income taxes receivable 505,622 465,620 -
Future income taxes 5,265 4,453 59,812
Prepaid expenses and
deposits 436,001 247,038 493,365
--------------------------------------------
29,933,097 28,825,514 27,986,839
Property, plant and equipment 20,967,244 21,092,890 21,143,569
Winery licenses 251,516 251,516 251,516
--------------------------------------------
$ 51,151,857 $ 50,169,920 $ 49,381,924
--------------------------------------------
--------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Bank indebtedness $ 5,781,467 $ 5,881,325 $ 6,056,412
Accounts payable and accrued
liabilities 1,373,685 1,137,033 1,303,805
Income taxes payable - - 3,970
Current portion of long-term
debt 795,449 784,920 799,538
--------------------------------------------
7,950,601 7,803,278 8,163,725
Long-term debt 6,454,378 6,616,380 7,098,508
Future income taxes 977,644 826,832 1,088,650
Shareholders' equity:
Share capital 6,961,617 6,961,617 6,961,617
Notes receivable for share
capital (232,500) (232,500) (348,750)
Other paid-in capital 210,000 210,000 210,000
Retained earnings 28,830,117 27,984,313 26,208,174
--------------------------------------------
35,769,234 34,923,430 33,031,041
--------------------------------------------
$ 51,151,857 $ 50,169,920 $ 49,381,924
--------------------------------------------
--------------------------------------------
Segmented information on
identifiable capital assets
by geographic region
Canada $ 17,891,566 $ 18,013,135 $ 18,348,599
Chile 3,075,678 3,079,755 2,794,970
--------------------------------------------
$ 20,967,244 $ 21,092,890 $ 21,143,569
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On behalf of the Board:
"Gabe Magnotta"
----------------------------------------------------
Gabe Magnotta - Executive Chairman and Director
"Rossana DiZio Magnotta"
----------------------------------------------------
Rossana DiZio Magnotta - CEO/President and Director
MAGNOTTA WINERY CORPORATION
Consolidated Interim Statements of Earnings, Comprehensive Income and
Retained Earnings
Three months ended April 30, 2009 and April 30, 2008
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April 30 April 30
2009 2008
(unaudited) (unaudited)
----------------------------------------------------------------------------
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Net sales $ 6,222,004 $ 6,063,409
Cost of goods sold, excluding amortization of
property, plant and equipment 3,552,489 3,354,029
Amortization of property, plant and equipment
(production) 143,056 127,941
-----------------------------
Total cost of goods sold 3,695,545 3,481,970
-----------------------------
Gross profit 2,526,459 2,581,439
Expenses:
Selling, administration and other 826,460 787,415
Amortization of property, plant and
equipment (non-production) 149,283 131,458
Interest - bank indebtedness 54,143 96,247
Interest - long-term debt 90,769 124,529
-----------------------------
1,120,655 1,139,649
-----------------------------
Earnings before income taxes 1,405,804 1,441,790
Income taxes:
Current 410,000 426,000
Future 150,000 148,000
-----------------------------
560,000 574,000
-----------------------------
Net earnings and comprehensive income for the
period 845,804 867,790
Retained earnings, beginning of period 27,984,313 25,340,384
-----------------------------
Retained earnings, end of period $ 28,830,117 $ 26,208,174
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Earnings per common share :
Basic $ 0.06 $ 0.06
Diluted $ 0.06 $ 0.06
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Weighted average number of common shares
outstanding 13,932,005 13,932,005
Weighted average number of diluted shares
outstanding 13,932,005 13,932,005
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Segmented information on net sales by geographic
region
Canada $ 5,874,241 $ 5,753,637
Chile 285,975 218,082
Other 61,788 91,690
$ 6,222,004 $ 6,063,409
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MAGNOTTA WINERY CORPORATION
Consolidated Interim Statements of Cash Flows
Three months ended April 30, 2009 and April 30, 2008
----------------------------------------------------------------------------
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April 30 April 30
2009 2008
(unaudited) (unaudited)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cash provided by (used in):
Operations:
Net earnings $ 845,804 $ 867,790
Items not involving cash:
Amortization of property, plant and
equipment 292,339 259,399
Future income taxes 150,000 148,000
Unrealized foreign exchange loss 17,981 5,490
Changes in non-cash operating working
capital:
Accounts receivable (1,195,829) (1,439,893)
Inventories 318,023 (272,146)
Prepaid expenses and deposits (188,963) (252,839)
Accounts payable and accrued liabilities 236,652 599,291
Income taxes receivable/payable (40,002) 5,888
-----------------------------
436,005 (79,020)
Financing:
Decrease in long-term debt (169,454) (196,165)
Increase (decrease) in bank indebtedness (99,858) 519,626
-----------------------------
(269,312) 323,461
Investments:
Purchases of property, plant and equipment (166,693) (261,739)
-----------------------------
Increase (decrease) in cash and cash
equivalents - (17,298)
Cash and cash equivalents, beginning of
period - 344,231
-----------------------------
Cash and cash equivalents, end of period $ - $ 326,933
-----------------------------
-----------------------------
Supplemental cash flow information:
Cash paid for interest $ 127,684 $ 210,205
Cash paid for income taxes 450,002 420,112
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MAGNOTTA WINERY CORPORATION
Notes to Consolidated Interim Financial Statements - Unaudited
Three months ended April 30, 2009
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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
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, 2009.
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, 2009.
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:
April 30, 2009 January 31, 2009 April 30, 2008
------------------------------------------------
Components of Capital:
Shareholders' equity $ 35,769,234 $ 34,923,430 $ 33,031,041
Long-term debt $ 7,249,827 $ 7,401,300 $ 7,898,046
Bank indebtedness $ 5,781,467 $ 5,881,325 $ 6,056,412
Less:
Cash and cash equivalents $ - $ - $ 326,933
------------------------------------------------
$ 48,800,528 $ 48,206,055 $ 46,658,566
------------------------------------------------
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 April 30, 2009, 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.
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 payment is 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 bears interest at a variable rate linked to Canadian prime, as well as approximately 34.4% of the total long-term debt bears interest at variable rates 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 $20,685 on the Company's consolidated earnings for the three months ended April 30, 2009.
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 April 30, 2009 by approximately $2,056. 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 2006, the Canadian Accounting Standards Board ("AcSB") published a new strategic plan that significantly affects financial reporting requirements for Canadian public companies. The AcSB strategic plan outlines the convergence of Canadian GAAP with IFRS over an expected five-year transitional period.
In February 2008, the 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.
The Company is completing a preliminary assessment of the accounting and reporting differences under IFRS as compared to Canadian GAAP, however, management has not yet finalized its determination of the impact of these differences on the consolidated financial statements. As this assessment is finalized, the Company intends to disclose such impacts in its future consolidated financial statements.
In the period leading up to the changeover, the AcSB will continue to issue accounting standards that are converged with IFRS, thus mitigating the impact of adopting IFRS at the changeover date. The International Accounting Standards Board will also continue to issue new accounting standards during the conversion period and, as a result, the final impact of IFRS on the Company's consolidated financial statements will only be measured once all the IFRS applicable standards at the conversion date are known.
6 INVENTORIES
April 30, 2009 January 31, 2009
--------------------------------------
Supplies and raw materials $ 7,390,209 $ 7,468,080
Work in process $ 14,364,801 $ 14,263,574
Finished goods $ 5,774,570 $ 6,115,949
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$ 27,529,580 $ 27,847,603
--------------------------------------
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7 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 each of the remaining calendar years 2009 and 2010. The notes receivable have been included as a reduction of shareholders' equity for presentation purposes.
8 SUBSEQUENT EVENT
Subsequent to the end of the quarter, Mr. Gabe Magnotta announced that he will be retiring from the Corporation effective June 30, 2009. In recognition of Mr. Magnotta's exceptional contribution as Co-Founder of the Corporation and its predecessor Festa Juice, and his extraordinary service over a period of almost 25 years, a special retirement allowance will be awarded by the Board of Directors to Mr. Magnotta upon his retirement date. This retirement allowance is to be paid over a five year period with $560,000 payable in the first year plus $300,000 in each of the subsequent four years, for an approximate present value of $1.6 million. The impact of the retiring allowance will be recorded in the quarter ended July 31, 2009.
9 COMPARATIVE FIGURES
Certain fiscal 2009 figures have been reclassified to conform with the financial statement presentation adopted in fiscal 2010.
SOURCE: Magnotta Winery Corporation
Magnotta Winery Corporation Rossana Magnotta Chief Executive Officer and President 905-738-9463 or Toll Free: 1-800-461-9463 905-738-5551 (FAX) mailbox@magnotta.com www.magnotta.com or E-commerce site: www.magnottadelivery.ca
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