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Net sales for the quarter ended July 31, 2009 increased 2.2% to $5,986,385 from $5,855,645 for the corresponding period of the prior year and for the six month period increased 2.4% to $12,208,389 from $11,919,054 for the corresponding period of the prior year. The Company experienced a net loss of $185,774 compared to net earnings of $787,960 for the three month period and net earnings of $660,030 compared to $1,655,750 for the six month period ended July 31, 2008. The basic and diluted earnings (loss) per common share decreased to $(0.01) from $0.06 for the quarter and decreased to $0.05 from $0.12 for the six month ended July 31, 2009. The decrease in earnings was attributable to a retirement allowance of $1.6 million which will be paid over five years. The overall growth in net sales resulted from the Company expanding its branding campaign through targeted marketing and advertising. This has created more brand awareness and greater volumes.
During the second quarter ended July 31, 2009, Gabe Magnotta, the executive chairman advised the Board of his desire to retire from the Company effective June 30, 2009. In recognition of his exceptional contribution as co-founder of the Corporation and its predecessor Festa Juice, and his extraordinary service over a period of almost 25 years, the Board retained the services of Mercer to determine the fair market compensation. Based on the recommendation, the Board awarded Mr. Magnotta a special retirement allowance to be paid over a five year period. This award was $560,000 in the first year plus $300,000 in each of the subsequent four years and has a present value of approximately $1.6 million. The impact of this retirement allowance was recorded as an expense in the quarter ended July 31, 2009. As a result of Gabe Magnotta's retirement, Rossana Magnotta, co-founder of the Corporation, with almost 25 years experience in the industry and at the company, has assumed his responsibilities.
Overall gross profit margin for the quarter ended July 31, 2009 decreased to 41.7% from 44.6% for the corresponding period of the prior year and for the six month period ended July 31, 2009, decreased to 41.2% from 43.5%. The change in the gross profit margin is due to increased cost pressures for raw and packaging material costs, and energy costs. The "softening" of the general economic environment which started at the end of fiscal 2009 continued into the second quarter of fiscal 2010 and resulted in customers shifting to lower priced "value" products. However, the Company saw an increase in its gross profit margin at July 31, 2009 from April 30, 2009 due to some increased interest on some higher end products. The Company believes it is difficult to determine how the "softening" of the general economic environment and its effects on people's purchasing habits will impact the Company in the coming quarters.
Selling, administration and other expenses were $917,142 for the three months ended July 31, 2009 compared to $945,995 for the corresponding period of the prior year. For the six month period ended July 31, 2009, selling, administration and other expenses were $1,743,602 compared to $1,733,410 for the corresponding period of the prior year. The decrease is mainly due to the Company being more conscious of its expenses and using more targeted marketing and advertising.
Interest expense for the three months ended July 31, 2009 decreased to $147,386 compared to $207,604 and for the six month period ended July 31, 2009 was $292,298 compared to $428,380 for the corresponding period of the prior year. 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 Interim Unaudited Consolidated Financial Statements, the Management Discussion and Analysis for July 31, 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
Six months ended July 31, 2009
MAGNOTTA WINERY CORPORATION
Notice To Reader of the Interim Consolidated Financial Statements
Six months ended July 31, 2009
The consolidated financial statements of Magnotta Winery Corporation and the accompanying interim consolidated balance sheet as at July 31, 2009 and the interim consolidated statement of earnings, comprehensive income and retained earnings and cash flows for the six month period then ended are the responsibility of the Company's management. These consolidated financial statements have not been audited or reviewed on behalf of the shareholders by the independent external auditors of the Company, KPMG LLP.
The interim consolidated financial statements have been prepared by management and include the selection of appropriate accounting principles, judgments and estimates necessary to prepare these financial statements in accordance with Canadian generally accepted accounting principles.
MAGNOTTA WINERY CORPORATION
Consolidated Interim Balance Sheets
As at July 31, 2009, with comparative figures for
January 31, 2009 and July 31, 2008
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July 31 January 31 July 31
2009 2009 2008
(unaudited) (unaudited)
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Assets
Current assets:
Cash and cash equivalents $ - $ - $ 325,287
Accounts receivable 1,433,057 260,800 1,470,208
Inventories 27,783,122 27,847,603 25,298,963
Income taxes receivable 537,327 465,620 -
Future income taxes 107,736 4,453 67,951
Prepaid expenses and deposits 604,054 247,038 607,201
-----------------------------------------
30,465,296 28,825,514 27,769,610
Property, plant and equipment 21,084,357 21,092,890 21,273,031
Winery licenses 251,516 251,516 251,516
-----------------------------------------
$ 51,801,169 $ 50,169,920 $49,294,157
-----------------------------------------
-----------------------------------------
Liabilities and Shareholders'
Equity
Current liabilities:
Bank indebtedness $ 6,067,822 $ 5,881,325 $ 5,040,252
Accounts payable and accrued
liabilities 1,577,082 1,137,033 1,494,470
Income taxes payable - - 27,238
Current portion of long-term debt 807,086 784,920 802,955
-----------------------------------------
8,451,990 7,803,278 7,364,915
Long-term debt 6,285,604 6,616,380 6,873,452
Long-term retirement allowance 740,000 - -
Future income taxes 740,115 826,832 1,236,789
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 28,644,343 27,984,313 26,996,134
-----------------------------------------
-----------------------------------------
35,583,460 34,923,430 33,819,001
-----------------------------------------
-----------------------------------------
$ 51,801,169 $ 50,169,920 $49,294,157
-----------------------------------------
-----------------------------------------
Segmented information on
identifiable capital assets
by geographic region
Canada $ 18,012,756 $ 18,013,135 $18,482,570
Chile 3,071,601 3,079,755 2,790,461
-----------------------------------------
$ 21,084,357 $ 21,092,890 $21,273,031
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On behalf of the Board:
"Rossana DiZio Magnotta"
-----------------------------------------------------
Rossana DiZio Magnotta - CEO/President and Director
"W.H. Bruce Fraser"
-----------------------------------------------------
W.H. Bruce Fraser - Director
MAGNOTTA WINERY CORPORATION
Consolidated Interim Statements of Earnings,
Comprehensive Income and Retained Earnings
----------------------------------------------------------------------------
For The Three Months For The Six Months
Ended July 31 Ended July 31
2009 2008 2009 2008
(unaudited) (unaudited) (unaudited) (unaudited)
----------------------------------------------------------------------------
Net sales $ 5,986,385 $ 5,855,645 $ 12,208,389 $ 11,919,054
Cost of goods sold,
excluding amortization
of property, plant
and equipment 3,345,292 3,118,687 6,897,781 6,472,716
Amortization of property,
plant and equipment
(production) 143,056 127,941 286,112 255,882
----------------------------------------------------
Total cost of goods sold 3,488,348 3,246,628 7,183,893 6,728,598
----------------------------------------------------
Gross profit 2,498,037 2,609,017 5,024,496 5,190,456
Expenses:
Selling, administration
and other 917,142 945,995 1,743,602 1,733,410
Amortization of property,
plant and equipment
(non-production) 149,283 131,458 298,566 262,916
Interest - bank
indebtedness 56,839 86,209 110,982 182,456
Interest - long-term
debt 90,547 121,395 181,316 245,924
Retirement allowance
(Note 7) 1,600,000 - 1,600,000 -
----------------------------------------------------
2,813,811 1,285,057 3,934,466 2,424,706
----------------------------------------------------
Earnings (loss) before
income taxes (315,774) 1,323,960 1,090,030 2,765,750
Income taxes:
Current 210,000 396,000 620,000 822,000
Future (340,000) 140,000 (190,000) 288,000
----------------------------------------------------
(130,000) 536,000 430,000 1,110,000
----------------------------------------------------
Net earnings (loss) and
comprehensive income
(loss) for the period (185,774) 787,960 660,030 1,655,750
Retained earnings,
beginning of
period 28,830,117 26,208,174 27,984,313 25,340,384
----------------------------------------------------
Retained earnings,
end of period $ 28,644,343 $ 26,996,134 $28,644,343 $ 26,996,134
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Earnings (loss)
per common share:
Basic $ (0.01) $ 0.06 $ 0.05 $ 0.12
Diluted $ (0.01) $ 0.06 $ 0.05 $ 0.12
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Weighted average
number of
common shares
outstanding 13,932,005 13,932,005 13,932,005 13,932,005
Weighted average number
of diluted
shares outstanding 13,932,005 13,932,005 13,932,005 13,932,005
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Segmented information
on net sales by
geographic region
Canada $ 5,863,334 $ 5,698,897 $11,737,575 $ 11,452,534
Chile 107,652 65,377 393,627 283,459
Other 15,399 91,371 77,187 183,061
---------------------------------------------------------
$ 5,986,385 $ 5,855,645 12,208,389 $ 11,919,054
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MAGNOTTA WINERY CORPORATION
Consolidated Interim Statements of Cash Flow
----------------------------------------------------------------------------
For The Three Months For The Six Months
Ended July 31 Ended July 31
2009 2008 2009 2008
(unaudited) (unaudited) (unaudited) (unaudited)
----------------------------------------------------------------------------
Cash provided by
(used in):
Operating
activities:
Net earnings
(loss) $ (185,774) $ 787,960 $ 660,030 $ 1,655,750
Items not
involving cash:
Depreciation 292,339 259,399 584,678 518,798
Future income taxes (340,000) 140,000 (190,000) 288,000
Unrealized foreign
exchange loss 3,911 5,921 21,892 11,411
Changes in non-cash
operating
working capital:
Accounts receivable 23,572 255,680 (1,172,257) (1,184,213)
Inventories (253,542) 81,878 64,481 (190,268)
Prepaid expenses and
deposits (168,053) (113,836) (357,016) (366,675)
Accounts payable
and accrued
liabilities 203,397 190,665 440,049 789,956
Retirement
allowance 740,000 - 740,000 -
Income taxes
receivable/payable (31,705) 23,268 (71,707) 29,156
------------------------------------------------------
284,145 1,630,935 720,150 1,551,915
Financing activities:
Decrease in
long-term debt (161,048) (227,560) (330,502) (423,725)
Increase (decrease)
in bank indebtedness 286,355 (1,016,160) 186,497 (496,534)
------------------------------------------------------
125,307 (1,243,720) (144,005) (920,259)
Investing activities:
Purchases of capital
assets (409,452) (388,861) (576,145) (650,600)
------------------------------------------------------
Increase (decrease) in
cash and cash
equivalents - (1,646) - (18,944)
Cash and cash
equivalents,
beginning of period - 326,933 - 344,231
------------------------------------------------------
Cash and cash
equivalents, end of
period - 325,287 - 325,287
------------------------------------------------------
------------------------------------------------------
Supplemental cash flow
information:
Cash paid for
interest $ 119,393 $ 191,383 $ 247,077 $ 401,588
Cash paid for income
taxes 241,705 372,732 691,707 792,844
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MAGNOTTA WINERY CORPORATION
Notes to Consolidated Interim Financial Statements - Unaudited
Six months ended July 31, 2009
----------------------------------------------------------------------------
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:
July 31, 2009 January 31, 2009 July 31, 2008
--------------------------------------------------
Components of Capital:
Shareholders' equity $ 35,583,460 $ 34,923,430 $ 33,819,001
Long-term debt $ 7,092,690 $ 7,401,300 $ 7,676,407
Bank indebtedness $ 6,067,822 $ 5,881,325 $ 5,040,252
Less:
Cash and cash equivalents $ - $ - $ 325,287
--------------------------------------------------
$ 48,743,972 $ 48,206,055 $ 46,210,373
--------------------------------------------------
--------------------------------------------------
The Company's objectives are to manage capital in a manner which balances equity and debt, maintaining compliance with its financial covenants and maintaining a capital base so as to sustain future growth.
The Company manages its capital structure as determined by management and approved by the board of directors. The Company's practice is to make adjustments to its capital structure based on changes in economic conditions and planned requirements. The Company has the ability to adjust its capital structure by issuing new equity or debt, selling assets to reduce debt or balance equity, and making adjustments to its capital expenditures program.
The Company monitors capital using a Debt Service Coverage Ratio that has been externally imposed as part of its loan agreements. As at July 31, 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 34.5% 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 $21,287 on the Company's consolidated earnings for the three months ended July 31, 2009 and $41,972 for the six months ended July 31, 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 July 31, 2009 by approximately $1,057 and $3,113 for the six months ended July 31, 2009. 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
July 31, 2009 January 31, 2009
-------------------------------------
Supplies and raw materials $ 7,649,041 $ 7,468,080
Work in process $ 14,202,708 $ 14,263,574
Finished goods $ 5,931,373 $ 6,115,949
-------------------------------------
$ 27,783,122 $ 27,847,603
-------------------------------------
-------------------------------------
7 RETIREMENT ALLOWANCE
During the second quarter ended July 31, 2009, the executive chairman advised the Board of his desire to retire from the Company effective June 30, 2009. In recognition of his exceptional contribution as co-founder of the Corporation and its predecessor Festa Juice, and his extraordinary service over a period of almost 25 years, the Board retained the services of Mercer to determine the fair market compensation. Based on the recommendation, the Board awarded Mr. Magnotta a special retirement allowance to be paid over a five year period. This award was $560,000 in the first year plus $300,000 in each of the subsequent four years and has a present value of approximately $1.6 million. The impact of this retirement allowance was recorded as an expense in the quarter ended July 31, 2009.
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 each of the remaining calendar years 2009 and 2010. The notes receivable have been included as a reduction of shareholders' equity for presentation purposes.
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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