Corby Distilleries announces quarterly dividend and reports third quarter
financial results

TORONTO, May 13 /CNW/ - Corby Distilleries Limited ("Corby" or the "Company") (TSX: CDL.A, TSX: CDL.B) today reported its dividend and financial results for the three and nine months ended March 31, 2010. The Corby Board of Directors today also declared a dividend of $0.14 per share payable on June 15, 2010 on Voting Class A Common Shares and Non-voting Class B Common Shares of the Company to shareholders of record as at the close of business on May 31, 2010. All financial results are reported in Canadian dollars.

Soft economic conditions continued to apply downward pressure on consumers' spending patterns and Corby's third quarter results are reflective of the negative sales trends experienced on a year-to-date basis. As a result, earnings from operations decreased $0.4 million (6%) this quarter when compared with the same three month period last year, while net earnings decreased $0.6 million (12%).

From a year to date perspective, Corby's financial results for the nine months ended March 31, 2010 reflect a resilient performance in challenging market conditions with an increase in net earnings of 2%, after removing the impact of a non-cash impairment charge of $9.4 million (after-tax) which was applied against the Company's goodwill and intangible assets associated with the Seagram Cooler brand. The positive impact of the appreciating Canadian dollar on input costs and reduced sales and administrative expenses have served to offset the negative impact of a decline in shipment volumes.

"We have continued to face challenging economic and spirit industry conditions, primarily as the result of high unemployment and a slow recovery in consumer confidence", noted Patrick O'Driscoll, President and Chief Executive Officer of Corby. "Nevertheless, we are seeing signs of progress in key areas of our business as a result of our continued investment and focus on the Company's strategic brands."

For further details, please refer to Corby's management's discussion and analysis and consolidated financial statements and accompanying notes for the three and nine months ended March 31, 2010, prepared in accordance with Canadian generally accepted accounting principles.

About Corby

Corby's portfolio of owned-brands includes some of the most renowned brands in Canada, including Wiser's Canadian whiskies, Lamb's rum, Polar Ice vodka, McGuinness liqueurs and Seagram Coolers. Through its affiliation with Pernod Ricard, Corby also represents leading international brands such as ABSOLUT vodka, Chivas Regal, The Glenlivet and Ballantine's scotches, Jameson Irish whiskey, Beefeater gin, Malibu rum, Kahlúa liqueur, Mumm champagne, and Jacob's Creek and Wyndham Estate wines.

The existing Voting Class A Common Shares and Non-voting Class B Common Shares of the Company are traded on the Toronto Stock Exchange under the symbols CDL.A and CDL.B.

This press release contains forward-looking statements, including statements concerning possible or assumed future results of Corby's operations. Forward-looking statements typically are preceded by, followed by or include the words "believes", "expects", "anticipates", "estimates", "intends", "plans" or similar expressions. Forward-looking statements are not guarantees of future performance. They involve risks, uncertainties and assumptions and, as such, the Company's results could differ materially from those anticipated in these forward-looking statements. Accordingly, readers should not place undue reliance on forward-looking statements.

Corby defines "earnings from operations" as earnings before impairment, interest income, foreign exchange, gains or losses on disposal of capital assets, and income taxes. This non-GAAP financial measure has been included in this press release as it is a measure management believes is useful in measuring the company's operating performance. However, "earnings from operations" is not a measure recognized by GAAP and it does not have a standardized meaning prescribed by GAAP. Therefore, "earnings from operations" may not be comparable to similar measures presented by other issuers. Investors are cautioned that "earnings from operations" should not be construed as alternatives to net earnings as determined in accordance with GAAP as indicators of performance.

    
    CORBY DISTILLERIES LIMITED
    Interim Management's Discussion and Analysis
    March 31, 2010
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The following Interim Management's Discussion and Analysis ("MD&A") dated May 13, 2010 should be read in conjunction with the unaudited interim consolidated financial statements and accompanying notes as at and for the three and nine month periods ended March 31, 2010 prepared in accordance with Canadian generally accepted accounting principles ("GAAP").

This MD&A contains forward-looking statements, including statements concerning possible or assumed future results of operations of Corby Distilleries Limited ("Corby" or the "Company"). Forward-looking statements typically are preceded by, followed by or include the words "believes", "expects", "anticipates", "estimates", "intends", "plans" or similar expressions. Forward-looking statements are not guarantees of future performance. They involve risks, uncertainties and assumptions, including, but not limited to: the impact of competition; consumer confidence and spending preferences; regulatory changes; general economic conditions; and the Company's ability to attract and retain qualified employees. There can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Accordingly, readers should not place undue reliance on forward-looking statements. These factors are not intended to represent a complete list of the factors that could affect the Company. Additional factors are noted elsewhere in this MD&A.

This document has been reviewed by the Audit Committee of Corby's Board of Directors and contains certain information that is current as of May 13, 2010. Events occurring after that date could render the information contained herein inaccurate or misleading in a material respect. Corby will provide updates to material forward-looking statements, including in subsequent news releases and its interim management's discussion and analyses filed with regulatory authorities as required under applicable law. Additional information regarding Corby, including the Company's Annual Information Form, is available on SEDAR at www.sedar.com.

The Company's fiscal year end is June 30th. Unless otherwise indicated, all comparisons of results for the third quarter of fiscal 2010 (three months ended March 31, 2010) are against results for the third quarter of fiscal 2009 (three months ended March 31, 2009). All dollar amounts are in Canadian dollars unless otherwise stated.

    
    Business Overview
    -----------------
    

Corby is a leading Canadian manufacturer and marketer of spirits and importer of wines. Corby's national leadership is sustained by a diverse brand portfolio which allows the Company to drive profitable organic growth with strong, consistent cash flows. Corby is a publicly-traded company, with its shares listed on the Toronto Stock Exchange under the symbols "CDL.A" (voting Class A common shares) and "CDL.B" (non-voting Class B common shares). Corby's voting Class A common shares are majority-owned by Hiram Walker & Sons Limited (a private company) located in Windsor, Ontario. Hiram Walker & Sons Limited ("HWSL") is a wholly-owned subsidiary of international spirits and wine company, Pernod Ricard S.A. (a French public limited company) which is headquartered in Paris, France. Therefore, throughout the remainder of this MD&A, Corby refers to HWSL as its parent, and Pernod Ricard S.A. ("PR") as its ultimate parent. Affiliated companies are those that are also subsidiaries of PR.

The Company derives its revenues from the sale of its owned-brands as well as earning commission income from the representation of selected non-owned brands in the Canadian market place. Revenue from Corby's owned-brands are denoted as "Sales" on the consolidated statement of earnings and while it predominantly consists of sales made to each of the provincial liquor boards in Canada, it also includes sales to international markets. Commission income earned from the representation of non-owned brands is denoted as "Commissions" on the consolidated statement of earnings.

Corby's portfolio of owned-brands include some of the most renowned brands in Canada, including Wiser's Canadian whiskies, Lamb's rum, Polar Ice vodka, McGuinness liqueurs and Seagram Coolers. Through its affiliation with PR, Corby also represents leading international brands such as ABSOLUT vodka, Chivas Regal, The Glenlivet and Ballantine's scotches, Jameson Irish whiskey, Beefeater gin, Malibu rum, Kahlúa liqueur, Mumm champagne, and Jacob's Creek and Wyndham Estate wines. In addition to representing PR's brands in Canada, Corby also provides representation for certain selected unrelated third-party brands ("Agency brands") when they fit within the Company's strategic direction and, thus, complement Corby's existing brand portfolio.

The Company sources approximately 73% of its spirits production requirements from HWSL at its production facilities in Windsor, Ontario, with the balance of Corby's spirits production being sourced from the Company's owned-plant in Montreal, Quebec. Essentially all of Corby's cooler production requirements are outsourced to an unrelated third-party located in Woodbridge, Ontario.

In September 2006, PR and Corby agreed upon terms for the continuation of production of Corby's owned brands by PR at HWSL's production facility in Windsor, Ontario for the next ten years, expiring September 2016. Corby and PR further agreed that Corby will manage PR's business interests in Canada, including HWSL's production facility, during that same ten year period.

In most provinces, Corby's route to market in Canada entails shipping its products to government controlled liquor boards ("LBs"). The LBs then sell directly, or control the sale of, beverage alcohol products to end consumers. The exception to this model is in Alberta, where the retail sector has been privatized. In this province, Corby ships products to a bonded warehouse which is managed by a government appointed service provider, who is responsible for warehousing and distribution into the retail channel.

Corby's shipment patterns to the LBs will not always exactly match short-term consumer purchase patterns. However, given the importance of monitoring consumer consumption trends over the long term, the Company stays abreast of consumer purchasing patterns in Canada through its member affiliation with the Association of Canadian Distillers, which tabulates and disseminates consumer purchase information it receives from the LBs to its industry members. Corby refers to this data throughout this MD&A as "retail sales" and it is measured in both volume (measured in nine litre equivalents) and retail value (measured in Canadian dollars).

Corby's route to market for its international business primarily requires direct shipment of its products to international distributors, located primarily in the USA and UK markets. International sales typically account for less than 10% of Corby's total annual sales. Distributors sell to various local wholesalers and retailers who in turn sell directly to the consumer. Reliable consumer purchase data is not readily available for these international markets, and therefore, is not discussed in this MD&A.

Corby's operations are typically subject to seasonal fluctuations in that the retail holiday season generally results in an increase in consumer purchases over the course of October, November and December. Further, the summer months traditionally result in higher consumer purchases of spirits as compared to the winter and spring months. As a result, the Company's first and second quarter of each fiscal year tend to typically reflect the impact of seasonal fluctuations in that more shipments are typically made during those quarters.

    
    Strategies and Outlook
    ----------------------
    

Corby's business strategies are designed to maximize value growth and, thus, deliver exceptional profit, while continuing to produce strong and consistent cash flows from operating activities. The Company's portfolio of owned and represented brands provides an excellent platform to achieve its current and long-term objectives moving forward.

The Company believes that having a focused brand prioritization strategy will permit it to capture value in those segments and markets where consumers continue to demonstrate their willingness to trade up to premium brands. Therefore, the Company's strategy is to focus its investments and leverage the long-term growth potential of its key brands, while emphasizing less on smaller or non-strategic brands. As a result, Corby will continue to invest behind its brands to promote its premium offerings where it makes the most sense and drives the most value for shareholders.

Brand prioritization requires an evaluation of each brand's potential to deliver upon this strategy. Particular focus has been given to evaluate the strategic importance of the Company's representation of third-party brands, and as a result, Corby has permitted certain of its representation contracts to expire, thus allowing Corby's marketing and sales teams to focus on maximizing value creation within the brand prioritization strategy. The Company believes that effective execution of its strategy will result in value creation for shareholders.

The Company is a strong advocate of social responsibility, especially with respect to its sales and promotional activities. Corby will continue to promote responsible consumption of its products in its activities. The Company stresses its core values throughout its organization, including that of value creation, social responsibility, tradition, substance over style and character above all.

    
    Current Market Environment
    --------------------------
    

There has been some positive news recently about the state of the Canadian economy due to a recent return to mild GDP growth rates, an increase in consumer confidence in March as reported by the Conference Board of Canada, and renewed strength in the Canadian dollar.

However, it seems that the recovery is fragile, as the increase in consumer confidence came after a decline in February and the unemployment rate in Canada remains relatively high. Furthermore, while a strong Canadian dollar may benefit some parts of the economy, it tends to negatively affect the export driven manufacturing sector, which is a key pillar of Ontario's economy, and is one of Corby's largest markets. Given these facts, the Company is expecting the difficult economic conditions to continue for the foreseeable future.

Prior to the recession, the Company had strengthened its operations and financial position, which has allowed it to better face the economic downturn. Of particular consideration are the following factors:

    
    -   Corby has no long-term debt and, therefore, no financial or other
        covenants;
    -   The Company has significant sources of liquidity via its $73.1
        million currently on deposit in a cash management pool with PR's
        other Canadian affiliates;
    -   Corby's largest customers are government-controlled liquor boards in
        each province, thus, greatly reducing risk associated with collection
        of accounts receivable;
    -   The Company has an exceptionally diverse and strong brand portfolio,
        which is well positioned to meet consumer tastes across spirit
        categories at a wide range of price points; and
    -   Corby is a leader in the Canadian spirits market and has a long
        history of profitability and uninterrupted dividends.
    

Moreover, the spirits business in Canada has historically been less affected by economic slowdowns than other consumer and manufacturing businesses. However, no business is completely immune to a slowdown in the economy. As a result, Corby closely monitors its exposure to the following potential risks, which could impact future profitability and cash flows, so it can be in a position to proactively respond should any of the following materialize:

    
    -   Long term decline in the level of spirits consumption by consumers;
    -   Deteriorating financial health of key suppliers;
    -   Valuation of goodwill and intangible assets; and
    -   Higher pension funding requirements.
    

To date, Corby's financial results have been unfavourably impacted by what is believed to be only a short-term decline in consumer demand, and by an impairment charge recorded during the second quarter ended December 31, 2009 against its goodwill and intangible asset values related specifically to the Seagram Coolers brand. Further information related to the impairment charge can be found in the "Significant Event" section of this MD&A.

The other factors noted in the list above have not had a measurable impact on the Company. Management will continue to monitor closely the ongoing economic environment and take proactive measures, as necessary.

    
    Brand Performance Review
    ------------------------
    

Corby's portfolio of owned-brands typically accounts for more than 80% of the Company's total operating revenue. Included in this portfolio are its key brands: Wiser's Canadian whisky, Lamb's rum, Polar Ice vodka, and Corby's mixable liqueur brands. The sales performance of these key brands significantly impacts Corby's earnings and, therefore, understanding each key brand is essential to understand the Company's overall performance.

Shipment Volume and Sales Value Performance

The following chart summarizes the performance of Corby's key brands in terms of both shipment volume (as measured by shipments to customers in equivalent nine litre cases) and sales value (as measured by the change in sales revenue). The chart below includes results for sales in both Canada and international markets. Specifically, the Wiser's, Lamb's and Polar Ice brands are also sold to international markets, particularly in the US and UK. International sales typically account for less than 10% of Corby's total annual sales.

    
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    BRAND PERFORMANCE CHART - INCLUDES BOTH CANADIAN AND INTERNATIONAL
     SHIPMENTS

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                         Three Months Ended            Nine Months Ended
                     ---------------------------  ---------------------------
                                   Ship-  Ship-                 Ship-  Ship-
                                    ment   ment                  ment   ment
                      Mar.   Mar.      %      %    Mar.   Mar.      %      %
    Volumes (in 000's  31,    31, Volume  Value     31,    31, Volume  Value
     of 9L cases)     2010   2009 Change Change    2010   2009 Change Change
    -------------------------------------------------------------------------
    Brand
    Wiser's Canadian
     whisky            153    151     1%    (3%)    572    577    (1%)    0%
    Lamb's rum         108    117    (8%)   (5%)    461    488    (6%)   (4%)
    Polar Ice vodka     78     77     1%    (2%)    267    303   (12%)  (11%)
    Mixable liqueurs    41     38     8%     9%     160    177   (10%)   (9%)
    -------------------------------------------------------------------------

    Total Key Brands   380    383    (1%)   (2%)  1,460  1,545    (6%)   (4%)
    All other Corby-
     owned brands      145    168   (14%)  (13%)    551    625   (12%)  (12%)
    -------------------------------------------------------------------------
    Total              525    551    (5%)   (4%)  2,011  2,170    (7%)   (6%)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

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As previously discussed in the "Strategies and Outlook" section of this MD&A, the Company has implemented a premiumization strategy which requires focused investments on key brands and in key markets, with the long-term objective of maximizing value growth. This strategy is designed to leverage the long-term growth potential of Corby's key brands, while emphasizing less on smaller and less profitable brands.

The above chart demonstrates that Corby experienced significant challenges so far this year, with year-to-date shipment volumes decreasing 7%, when compared to the same nine month period last year. The Canadian economy has recently demonstrated mild GDP growth rates, however, a strong recovery in consumer demand continues to be hampered by relatively high rates of unemployment. In addition to the overall market conditions, competition for market share has seen key competitors become increasingly aggressive, particularly as it relates to pricing strategies and discounting.

Certain markets within Canada have experienced softer than expected market conditions, specifically the provinces of Alberta and British Columbia. In addition, destocking in the private channels in Western Canada was also a contributing factor to the reduced shipments. Year-to-date results in Ontario have been negatively impacted by a challenging economic landscape, and further amplified by the impact of a threatened labour disruption occurring in June 2009. The threatened labour disruption had the effect of advancing shipments into Corby's fourth quarter of fiscal 2009, which would otherwise have been expected to occur in the first quarter of fiscal 2010, thus negatively impacting Corby's year-to-date results.

International market conditions have remained difficult, with shipment value decreasing 14% on a year-to-date comparative basis. The decreased performance in international markets is mainly due to competitive challenges for Polar Ice vodka in the US market, coupled with higher comparatives in the previous year, as Corby's first quarter of fiscal 2009 included volumes associated with the launch of Polar Ice vodka flavours in the US market. Volumes for Wiser's Deluxe and Lamb's rum, however, have demonstrated resiliency despite challenging market conditions in the US and UK, respectively.

Retail Volume and Retail Value Performance

As Corby does not ship its products directly to consumers, it is also of critical importance to understand the performance of Corby's brands at the retail level in Canada. Analysis of performance at the retail level provides insight with regards to consumers' current purchasing patterns and trends, which may differ from trends seen in Corby's shipment patterns to the various retail outlets in Canada. Retail sales data, as provided by the Association of Canadian Distillers, has been provided in the following chart. It should be noted that the retail sales information depicted does not include international retail sales of Corby owned-brands, as this information is not readily available. International sales typically account for less than 10% of Corby's total annual sales.

    
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    RETAIL SALES FOR THE CANADIAN MARKET ONLY(1)

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                         Three Months Ended            Nine Months Ended
                     ---------------------------  ---------------------------
                                       %      %                     %      %
                      Mar.   Mar. Retail Retail    Mar.   Mar. Retail Retail
    Volumes (in 000's  31,    31, Volume  Value     31,    31, Volume  Value
     of 9L cases)     2010   2009 Change Change    2010   2009 Change Change
    -------------------------------------------------------------------------
    Brand
    Wiser's Canadian
     whisky            145    143     2%     1%     537    532     1%     1%
    Lamb's rum          90     94    (4%)   (4%)    362    374    (3%)   (2%)
    Polar Ice vodka     67     67     0%     0%     238    251    (5%)   (4%)
    Mixable liqueurs    38     40    (5%)   (4%)    164    176    (7%)   (7%)
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    Total Key Brands   340    344    (1%)   (1%)  1,301  1,333    (2%)   (2%)
    All other Corby-
     owned brands      142    153    (7%)   (9%)    582    633    (8%)   (7%)
    -------------------------------------------------------------------------

    Total              482    497    (3%)   (3%)  1,883  1,966    (4%)   (3%)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (1) Refers to sales at the retail store level in Canada, as provided by
        the Association of Canadian Distillers.

    -------------------------------------------------------------------------
    

As noted in the chart above, retail volumes have declined 3% this quarter, when compared against the same quarter last year with the decline mainly being due to negative market conditions in British Columbia and Alberta.

Trends over the past year have shown a shift in consumption patterns `as consumers are purchasing fewer products from certain discretionary spirit categories, such as liqueurs, when compared to the spirit staples such as vodka, whisky, and rum. Furthermore, the overall decline in consumer spending has resulted in more at-home consumption, as consumers are trending away from consumption at licensed establishments, such as bars and restaurants.

Corby's own portfolio of brands mostly reflects this shift in consumer consumption pattern, as evidenced by the performance of its mixable liqueurs brands, while the Company's whisky, and rum brands continue to demonstrate resilience from both a retail volume and value perspective. The vodka category as a whole continues to fare well, albeit growth in recent months has slowed markedly. The Company's Polar Ice vodka brand has experienced challenges on a year-to-date basis, however, third quarter volumes have rebounded slightly, and is discussed further below in the "Summary of Corby's Key Brands" section of this MD&A.

Summary of Corby's Key Brands

Wiser's Canadian Whisky

Corby's flagship brand, Wiser's Canadian whisky, has continued to perform exceptionally well despite a challenging economy, and continues to gain market share at the expense of its direct competitors in Canada from both a volume and value perspective. Specifically, the brand increased its retail volumes 2% during the quarter just ended. On a year-to-date basis, the brand grew by 1% in both retail volume and value, while the Canadian whisky segment as a whole declined 3%.

The Company continued to invest strongly behind the brand, especially during the holiday season, which is a key selling period for whisky and specifically, maintained its investment behind the brand's highly successful media and television campaign entitled "Welcome to the Wiserhood". This campaign has proven to be highly impactful from a consumer perspective and has also received critical acclaim, having previously been awarded two gold medals at the prestigious Canadian Marketing Awards ("Best Promotion for Consumer Products" and "Best Integrated Campaign for Consumer Products"). The company intends on continuing to build upon the success of this campaign to expand Wiser's market leading position.

Lamb's Rum

Lamb's rum, one of the top selling rum families in Canada, saw its retail volumes on a year-to-date basis decrease by 3%, when compared to the same nine month period last year. Retail volumes for the rum segment in Canada remained flat on a year-to-date basis, however, the segment has been entirely driven by growth in the spiced and dark rum categories. The white rum category continued to underperform and adversely impact the rum segment as a whole. The Lamb's rum family has a significant amount of its volume weighted in the white category, and thus is reflective of its performance relative to the rum segment as a whole.

In response the Company launched a Lamb's spiced rum variant in select Canadian provinces and the UK market (entitled "Lamb's Black Sheep" and "Lamb's Spiced", respectively), as the Company looks to capitalize on the growing consumer demand in the spiced rum segment. While the product is still in the very early stage of its life cycle, early results and indicators continued to be very positive.

The Company has also taken other actions to improve brand performance, such as introducing updated packaging and increasing the level of investments in core markets.

Polar Ice Vodka

Polar Ice vodka, which is among the top three largest vodka brands in Canada, has experienced a very challenging fiscal year thus far, as year-to-date retail sales volumes decreased 5%, when compared to the same nine month period last year. However, the brand has recently demonstrated improvement as its third quarter retail sales volumes remained consistent with that of the same three-month period last year. The performance on a year-to-date basis is reflective of challenging market conditions as the brand faced increased pressure from its key competitors across most major markets, mainly in the form of aggressive price discounting. Also contributing to the negative performance this year is the downturn in the on-premise sector where the brand is well represented. The vodka category in Canada experienced a slight increase in retail volumes of only 1%, which is demonstrative of a marked slowdown in this dynamic and competitive category.

Performance in the US market is also suffering due to a saturated competitive environment and the negative impact of the depreciation of the US dollar on the brand's gross margins. It should be noted that the comparative period also included additional volumes associated with the launch of Polar Ice flavours in both the US and Canadian markets.

Mixable Liqueurs

Corby's portfolio of mixable liqueur brands consist of McGuinness liqueurs (which is Canada's largest mixable liqueur brand family), Meaghers liqueurs, and De Kuyper liqueurs. The Company's mixable liqueur portfolio experienced a 7% decrease in retail sales volumes, while shipment volumes decreased 10% on a year-to-date comparison basis. The decline in shipment volumes is partially attributable to the impact of the aforementioned threat of a labour disruption at the LCBO in June 2009. However, the performance of Corby's liqueur brands is relatively consistent with the challenges experienced by the overall liqueur category in the Canadian market, in which retail volumes decreased 4% on a year-to-date comparison basis. The liqueur segment as a whole is most effected by the decline in consumer spending, particularly as it relates to consumption at licensed establishments, such as bars and restaurants.

All Other Corby-owned Brands

This category includes various Corby brands, some of which are smaller or less strategic in nature than Corby's key brands. The Company's strategy is to focus its investments and leverage the long-term growth potential of its key brands, while emphasizing less on smaller and non-strategic brands. The decreased performance of this category can largely be attributed to the the Seagram Coolers brand, which makes up approximately 35% of this category's total retail volumes, as it experienced a year-to-date decrease of 12%. Management recently completed a comprehensive brand rejuvenation plan for this brand, including label and packaging redesign, new flavour innovation, and advertising and promotional activities, and the new refreshed product has just begun shipping at the start of the fourth quarter. Excluding the Seagram Coolers brand, the category as a whole experienced a decline in retail volumes of 6%, and is reflective of the challenging economic conditions, in addition to the overall brand priortization strategy.

    
    Significant Event
    -----------------
    

Corby Reports a Non-Cash Impairment Charge

In accordance with Canadian accounting principles, the Company recorded a non-cash impairment charge of $11.5 million (after-tax impact of $9.4 million) against its goodwill and intangible assets balances related to its Seagram Coolers brand during the quarter ended December 31, 2009. The Seagram Coolers business in Canada was acquired by Corby on September 29, 2006. The brand had initially been quite successful and achieved the internal goals and objectives management had set for it. However, over the past two years, the brand underperformed relative to its competitive set due to aggressive competition from both category leaders as well as new entrants in adjacent categories.

As a result, the Company revised its long-term outlook to reflect changes in expectations for the brand and accordingly has estimated that the fair value of the associated goodwill and intangible assets has fallen below its recorded carrying amounts. As such, net earnings in the nine month period ended March 31, 2010, include the after-tax impact of the non-cash impairment charge of $9.4 million, or $0.33 per share. Management remains committed to the Seagram Coolers brand and has recently completed a comprehensive brand rejuvenation plan, including label and packaging redesign, new flavour innovation, and increased advertising and promotional activities.

    
    Non-GAAP Financial Measure
    --------------------------
    

Corby defines "Earnings from Operations" as earnings before impairment, interest income, foreign exchange, gains or losses on disposal of capital assets, and income taxes. This non-GAAP financial measure has been included in this MD&A as it is a measure management believes is useful in measuring the company's operating performance.

However, Earnings from Operations is not a measure recognized by GAAP and it does not have a standardized meaning prescribed by GAAP. Therefore Earnings from Operations may not be comparable to similar measures presented by other issuers. Investors are cautioned that Earnings from Operations should not be construed as alternatives to net earnings as determined in accordance with GAAP as indicators of performance. A reconciliation of Earnings from Operations to net earnings can be found below, in the "Financial and Operating Results" section of this MD&A.

    
    Financial and Operating Results
    -------------------------------
    

The following table presents a summary of certain selected consolidated financial information of the Company for the three and nine month periods ended March 31, 2010 and 2009.

    
    -------------------------------------------------------------------------
    (in millions         Three Months Ended            Nine Months Ended
     of Canadian     ---------------------------  ---------------------------
     dollars,         Mar.   Mar.                  Mar.   Mar.
     except per        31,    31,      $      %     31,    31,      $      %
     share amounts)   2010   2009 Change Change    2010   2009 Change Change
    -------------------------------------------------------------------------

    Sales           $ 29.3 $ 31.1 $ (1.8)   (6%) $108.8 $115.7 $ (6.9)   (6%)
    Commissions(1)     2.9    2.9      -     0%    11.4   12.1   (0.7)   (6%)
    -------------------------------------------------------------------------
    Operating revenue 32.2   34.0   (1.8)   (5%)  120.2  127.8   (7.6)   (6%)
    Cost of sales     15.3   16.4   (1.1)   (7%)   53.8   59.6   (5.8)  (10%)
    Marketing, sales
     and admin-
     istration         9.7   10.0   (0.3)   (3%)   31.5   33.9   (2.4)   (7%)
    Amortization       0.4    0.4      -     0%     1.3    1.0    0.3    30%
    -------------------------------------------------------------------------
    Earnings from
     operations        6.8    7.2   (0.4)   (6%)   33.6   33.3    0.3     1%
    Impairment charge    -      -      -    n/a   (11.5)     -  (11.5)   n/a
    Interest income    0.1    0.4   (0.3)  (75%)    0.4    1.4   (1.0)  (71%)
    Foreign exchange
     (loss) gain      (0.4)   0.1   (0.5) (500%)   (0.9)  (0.7)  (0.2)   29%
    Gain on disposal
     of capital
     assets              -      -      -    n/a       -    0.2   (0.2) (100%)
    -------------------------------------------------------------------------
    Earnings before
     income taxes      6.5    7.7   (1.2)  (16%)   21.6   34.2  (12.6)  (37%)
    Income taxes       2.0    2.6   (0.6)  (23%)    7.5   11.2   (3.7)  (33%)
    -------------------------------------------------------------------------
    Net earnings    $  4.5 $  5.1 $ (0.6)  (12%) $ 14.1 $ 23.0 $ (8.9)  (39%)
    -------------------------------------------------------------------------
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    Per common share
      - Basic net
       earnings     $ 0.16 $ 0.18 $ (0.02) (11%) $ 0.49 $ 0.81 $(0.32)  (40%)
      - Diluted net
       earnings     $ 0.16 $ 0.18 $ (0.02) (11%) $ 0.49 $ 0.81 $(0.32)  (40%)
    -------------------------------------------------------------------------
    (1) Amounts are presented net of representation rights amortization of
        $1.2 and $3.5 (2009 - $1.2 and $3.5).

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Overall Financial Results

Corby's third quarter results are reflective of the negative sales trends experienced on a year-to-date basis, as soft economic conditions continue to apply downward pressure on consumers' spending patterns. As a result, earnings from operations decreased $0.4 million (6%) this quarter when compared with the same three month period last year, while net earnings decreased $0.6 million (12%).

In addition to experiencing soft consumer demand, Corby's year-to-date financial results were also significantly impacted by a non-cash impairment charge of $11.5 million (or $9.4 million on an after-tax basis) applied against the Company's goodwill and intangible assets associated with the Seagram Cooler brand (for more information regarding the impairment charge, please refer to the "Significant Event" section of this MD&A).

After removing the effect of the aforementioned impairment charge, Corby's year-to-date financial results were modestly positive when compared with the results achieved during the same nine month period last year. Specifically, net earnings and earnings per share increased $0.4 million (or 2%) and $0.02, respectively, after removing the impact of the non-cash impairment charge. The impact of having reduced operating revenues was offset by favourable foreign exchange rates, experiencing reduced sales and administrative expenses, and having recognized the effect of lower future income tax rates. These cost reductions were partially mitigated by having earned lower interest income from the Company's significant cash deposits on account of lower market interest rates.

Operating revenue

Operating revenue, consisting of sales and commissions, declined 5% on a quarter over quarter basis, and decreased 6% on a year-to-date comparison basis. Sales revenue represents revenue earned from the sale of Corby owned-brands, while commissions are earned from the representation of PR brands in the Canadian market, and to a lesser extent, through the representation of a select number of Agency brands.

Sales for the three month period ended March 31, 2010 experienced a decrease of $1.8 million (or 6%), when compared with the same period last year. The decrease in sales is largely explained by a 5% decrease in shipment volumes. In addition, the Company is now subject to higher rates of excise tax (which began July 1, 2009) on certain of its Canadian whisky brands, which had the effect of reducing sales by $0.3 million this quarter when compared with the same three month period last year.

Sales for the nine month period ended March 31, 2010 decreased $6.9 million when compared with the same period last year. The decrease in sales was primarily volume driven, with shipments being 7% lower than the same period last year, and as a secondary factor, the negative impact associated with the aforementioned increase in excise tax the Company is now subject to on certain of its Canadian whisky products (year-to-date impact of $0.8 million). This has been partially offset by a 1% increase in average selling prices.

The decreased volume was primarily driven by difficult market conditions, particularly in the provinces of Alberta and British Columbia. These markets are being impacted by a combination of reduced consumer demand, de-stocking in the private retail channel, and aggressive competition. As a secondary factor, shipments to the Ontario market have also been negatively impacted by the effect of a threatened labour disruption in June 2009, which served to accelerate some orders and shipments into the fourth quarter of fiscal 2009, which typically would have been made in the first half of fiscal 2010. Lastly, the nine months ended March 31, 2010 are being compared against a relatively high base in the comparative period, as Canada only entered into a consumer based recession during the second quarter of the prior year.

The following table highlights the change in commissions:

    
    -------------------------------------------------------------------------
                         Three Months Ended            Nine Months Ended
                     ---------------------------  ---------------------------
    (in millions      Mar.   Mar.                  Mar.   Mar.
     of Canadian       31,    31,      $      %     31,    31,      $      %
     dollars)         2010   2009 Change Change    2010   2009 Change Change
    -------------------------------------------------------------------------
    Commission from
     PR brands      $  3.3 $  3.2 $  0.1     3%  $ 12.2 $ 12.1 $  0.1     1%
    Commission from
     Agency brands     0.8    0.9   (0.1)  (11%)    2.7    3.5   (0.8)  (23%)
    Less amortization
     of rep. rights   (1.2)  (1.2)     -     0%    (3.5)  (3.5)     -     0%
    -------------------------------------------------------------------------

    Commissions     $  2.9 $  2.9 $    -     0%  $ 11.4 $ 12.1 $ (0.7)   (6%)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

Commissions earned from the representation of PR brands in Canada were relatively consistent on both a quarter over quarter and year-to-date comparison basis. However, results for the nine months ended March 31, 2010 include an extra three months of commissions from the ABSOLUT vodka brand (which Corby began representing on October 1, 2008), which has served to offset a decline in commissions on other PR brands. This decline is primarily the result of the same factors which have affected shipment volumes on Corby's owned brands (difficult market conditions in Western Canada, destocking in the private retail channel, combined with the effect the aforementioned threatened labour disruption in Ontario). As a secondary factor, Corby ceased to represent three brands (i.e., Wild Turkey, Tia Maria, and Lemon Hart) as a result of PR's decision to dispose of these brands. It is estimated these disposals reduced commission from PR brands by $0.4 million on a year-to-date basis.

Commission income from Agency brands has declined by $0.1 million and $0.8 million on a three and nine month comparison basis, respectively. The decrease is the result of the comparative period including commissions from brands which are no longer represented by Corby.

Cost of sales

Cost of sales for the quarter was $15.3 million compared to $16.4 million for the same period last year, representing a 7% decrease. The decrease in cost of sales was largely commensurate with the decrease in sales. Gross margin for the quarter was relatively consistent, with the current quarter being 47.8%, compared with 47.3% for the same three month period last year.

Cost of sales for the nine month period ended March 31, 2010 was $53.8 million, representing a decrease of 10% when compared with the same nine month period last year. The decrease was largely the result of the Company experiencing a 6% decrease in shipment volumes in addition to an appreciating Canadian dollar (which serves to reduce input costs), better product mix (lower sales in the US and of Seagram Coolers, both of which earn lower gross margins than the domestic spirits business), and increased average selling prices on key brands in certain markets. The impact of these items was partially offset by increased rates of excise tax being applied to certain of the Company's Canadian whisky brands.

Marketing, sales and administration

Marketing, sales and administration expenses were fairly consistent at $9.7 million this quarter, as compared to $10.0 million during the same quarter last year.

On a year-to-date basis, marketing, sales and administration expenses declined $2.4 million or 7%, when compared to the same nine month period last year. The decrease reflects reduced spending on both marketing and administrative costs this period versus last. The reduced marketing expenditure reflects the inclusion of production costs associated with the Wiser's media campaign in the prior period while the reduction in administrative expenses is due to a combination of management's increased focus on cost control and the inclusion of some non-recurring expenses in the comparative period (e.g., the relocation of the Company's head office and costs associated with obtaining the right to represent the ABSOLUT brand in Canada).

Income taxes

Corby's effective tax rates are comprised of the following:

    
    -------------------------------------------------------------------------
                                  Three Months Ended       Nine Months Ended
                               ----------------------  ----------------------
                                 Mar. 31,    Mar. 31,    Mar. 31,    Mar. 31,
                                    2010        2009        2010        2009
    -------------------------------------------------------------------------
    Combined basic Federal and
     Provincial tax rates            31%         32%         31%         32%
    Impact of non-cash impairment
     charge                           0%          0%          7%          0%
    Impact of substantively
     enacted rate decreases in
     Ontario                          0%          0%         (3%)         0%
    Other                             0%          1%          0%          1%
    -------------------------------------------------------------------------

    Effective tax rates              31%         33%         35%         33%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    

Corby's effective tax rate during the nine month period ended March 31, 2010, was substantially impacted by the effect of a non-cash impairment charge and the impact of the Ontario government's decision to substantively enact decreases in its future income tax rates.

The impairment charge was recorded during the Company's second quarter and relates specifically to the Company's Seagram Coolers brand and its associated goodwill and intangible asset balances (readers are encouraged to refer to the "Significant Event" section of this MD&A for further information). The Ontario government's decision to substantively enact future rate decreases required the Company to revalue its future income tax assets and liabilities at the new lower rates. As a result, Corby recognized a one-time reduction of its future income tax expense of $0.7 million during the Company's second quarter of its fiscal year.

    
    Liquidity and Capital Resources
    -------------------------------
    

Corby's sources of liquidity come from its deposits in cash management pools balance of $73.1 million as at March 31, 2010, along with cash generated by operating activities. The Company does not have any liabilities under short or long-term debt facilities.

Cash flows

    
    -------------------------------------------------------------------------
                           Three Months Ended           Nine Months Ended
                       --------------------------  --------------------------
    (in millions of    Mar. 31, Mar. 31,       $   Mar. 31, Mar. 31,       $
     Canadian dollars)    2010     2009   Change      2010     2009   Change
    -------------------------------------------------------------------------
    Operating
     activities
      Net earnings,
       adjusted for
       non-cash items   $  6.2   $  7.0   $ (0.8)   $ 28.4   $ 27.3   $  1.1
      Net change in
       non-cash working
       capital            (3.1)   (10.1)     7.0      (6.8)   (12.6)     5.8
    -------------------------------------------------------------------------
                           3.1     (3.1)     6.2      21.6     14.7      6.9
    -------------------------------------------------------------------------

    Investing activities
      Additions to
       capital assets     (0.3)    (1.1)     0.8      (1.0)    (3.4)     2.4
      Proceeds from
       disposition of
       capital assets        -      0.1     (0.1)        -      0.6     (0.6)
      Proceeds on account
       of PR brand
       disposals           1.7        -      1.7       1.7        -      1.7
      Draws from
       (deposits in)
       cash management
       pools              (0.5)     8.1     (8.6)    (10.3)     0.1    (10.4)
    -------------------------------------------------------------------------
                           0.9      7.1     (6.2)     (9.6)    (2.7)    (6.9)
    -------------------------------------------------------------------------

    Financing activities
      Dividends paid      (4.0)    (4.0)       -     (12.0)   (12.0)       -
    -------------------------------------------------------------------------

    Net change in cash  $    -   $    -   $    -    $    -   $    -   $    -
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    

Operating activities

Cash flows from operating activities increased $6.2 million this quarter when compared with the same quarter last year. The increased cash from operating activities was primarily the result of favourable changes in accounts payable and accounts receivable balances being partially offset by increased investment in maturing inventories. Specifically, accounts payable was impacted by a change in timing of advertising and promotional spend this quarter versus the same period last year.

Year-to-date cash flows from operating activities increased $6.9 million when compared with the same nine month period last year. The growth in net earnings, adjusted for non-cash items, provided $1.1 million and was further complimented by favourable changes in non-cash working capital. The increase in net earnings, adjusted for non-cash items, was primarily due to the Company having reduced pension contributions. The favourable changes in non-cash working capital are mostly attributable to accounts receivable, having been positively impacted this period by a slight shift in the timing of customer receipts, partially offset by the Company's continued increased investment in maturing inventories.

Investing activities

Cash used for investing activities decreased $6.2 million this quarter when compared with the same quarter last year. This was primarily due to Corby withdrawing $8.1 million from its cash management pools in the comparative period, while depositing $0.5 million in the current quarter ended. In addition, Corby received $1.7 million from PR on account of its decision to dispose of certain brands during the year, thus early terminating its representation agreement. The amount of the termination fees were calculated in accordance with the formula stipulated in the original representation agreement signed with PR in September 2006. It should also be noted that the termination fees are accounted for as a reduction to the original cost of the intangible asset on the balance sheet and therefore have no impact on net earnings or earnings per share.

On a year-to-date basis, the Company used $9.6 million of its cash for investing activities, representing an increase of $6.9 million when compared to the same nine month period last year. The increase is largely due to the Company having increased its deposits in cash management pools, partially offset by decreased investment in capital assets and the aforementioned receipt of termination fees from PR. The decreased investment in capital asset reflects the fact that last year's results included capital asset additions related to the relocation of the Company's head office building.

Financing activities

Cash used for financing activities was $4.0 million this quarter, consistent with the amount used during the same quarter last year. The $4.0 million reflects regular quarterly dividends being paid to shareholders.

On a year-to-date basis, cash used for financing activities was $12.0 million, and is equal to the amount used during the same period last year. The $12.0 million reflects regular quarterly dividends being paid to shareholders.

    
    Outstanding Share Data
    ----------------------
    

There have been no changes in Corby's share data since June 30, 2009. As at May 13, 2010, Corby had 24,274,320 Voting Class A common shares and 4,194,536 Non-Voting Class B common shares outstanding. There are no options outstanding.

    
    Related Party Transactions
    --------------------------
    

Transactions in the Normal Course of Operations

Corby engages in a significant number of transactions with its parent company, its ultimate parent and various affiliates. Specifically, Corby renders services to its parent company, its ultimate parent, and affiliates for the marketing and sale of beverage alcohol products in Canada. Furthermore, Corby sub-contracts the large majority of its distilling, maturing, storing, blending, bottling and related production activities to its parent company. A significant portion of Corby's bookkeeping, record keeping services, data processing and other administrative services are also outsourced to its parent company.

The companies operate under the terms of agreements which became effective on September 29, 2006. These agreements provide the Company with the exclusive right to represent PR's brands in the Canadian market for 15 years, as well as providing for the continuing production of certain Corby brands by PR at its production facility in Windsor, Ontario for 10 years. Corby also manages PR's business interests in Canada, including the Windsor production facility. Certain officers of Corby have been appointed as directors and officers of PR's Canadian entities, as approved by Corby's Board of Directors.

In addition to the aforementioned agreements, Corby signed an agreement on September 26, 2008 with its ultimate parent to be the exclusive Canadian representative for the ABSOLUT vodka, Level vodka, and Plymouth gin brands, for a five year term expiring October 1, 2013. These brands were acquired by PR subsequent to the original representation rights agreement dated September 29, 2006.

All of the above-noted transactions are in the normal course of operations and are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties. For further details regarding the above agreements, readers are encouraged to refer to the most recently prepared annual MD&A and annual financial statements for the year ended June 30, 2009.

Deposits in Cash Management Pools

Corby participates in a cash pooling arrangement under a Mirror Netting Service Agreement ("Mirror Agreement") together with PR's other Canadian affiliates, the terms of which are administered by The Bank of Nova Scotia. The Mirror Agreement acts to aggregate each participant's net cash balance for purposes of having a centralized cash management function for all of PR's Canadian affiliates, including Corby.

Corby accesses these funds on a daily basis and has the contractual right to withdraw these funds or terminate these cash management arrangements upon providing five days written notice.

Other Contractual Obligations

As part of the agreement with PR signed on September 29, 2008, Corby agreed to parameters governing certain of its obligations and continuing business practices. Specifically, Corby agreed that it would continue to participate in the existing cash pooling arrangement (i.e., the Mirror Agreement) for a three-year period ending October 1, 2011. Corby further agreed that, barring any unanticipated developments, regular dividends will be paid quarterly, on the basis of an annual amount equal to the greater of 50% of net earnings per share in the preceding fiscal year ended June 30, and $0.56 per share. In addition, it was agreed that Corby would not declare any special dividends, repurchase shares or make acquisitions or capital investments outside the normal course of business without PR's prior approval.

    
    Accounting Standards - Implemented in Fiscal 2010
    -------------------------------------------------
    

Financial Statement Concepts

Effective July 1, 2009, the Company applied the amendments to Section 1000 "Financial Statement Concepts", which clarify the criteria for recognition of an asset and the timing of expense recognition, specifically deleting the guidance permitting the deferral of costs. The new requirements are effective for interim and annual financial statements for fiscal years beginning on or after October 1, 2008. The Company applied the amendments to Section 1000 in conjunction with Section 3064 "Goodwill and Intangible Assets" which is further described below. The adoption of this standard had no impact on the Company's financial statements or note disclosures.

Goodwill and Intangible Assets

Effective July 1, 2009, the Company implemented new accounting standard, Section 3064 "Goodwill and Intangible Assets", which is effective for fiscal years beginning on or after October 1, 2008. This standard replaces the existing Section 3062 "Goodwill and Other Intangible Assets" and Section 3450, "Research and Development Costs". The new standard prescribes new methods for recognizing, measuring, presenting and disclosing goodwill and intangible assets, with the objective of eliminating the practice of deferring costs that do not meet the definition and recognition criteria of assets. The new standard is equivalent to the corresponding provisions of International Financial Reporting Standards ("IFRS") IAS 38, "Intangible Assets". The adoption of this standard had no impact on the Company's financial statements or note disclosures.

    
    Future Accounting Standards
    ---------------------------
    

International Financial Reporting Standards

In February 2008, the Canadian Accounting Standards Board ("AcSB") confirmed that Canadian generally accepted accounting principles ("GAAP") for publicly accountable enterprises will be replaced by International Financial Reporting Standards ("IFRS") for fiscal years beginning on or after January 1, 2011. IFRS uses a conceptual framework similar to Canadian GAAP, however there are significant differences on recognition, measurement, and disclosures. Accordingly, the conversion from Canadian GAAP to IFRS will be applicable to the Company's reporting for the first quarter of fiscal 2012 for which current and comparative information will be prepared under IFRS.

In response, the Company created a transition plan and established a timeline for the execution and completion of the conversion project to guide Corby toward its reporting deadlines. The transition plan included a high-level assessment of the key areas where conversion to IFRS may have a significant impact or present a significant challenge. Six key areas were identified and include IFRS 1 choices, employee benefits, impairment of assets, capital assets, income taxes, and financial statement presentation and disclosure.

The IFRS changeover is a significant undertaking for the Company. As such, the Company has engaged an external advisor and established a working team, held multiple IFRS training sessions tailored specifically to Corby for finance employees, members of management and the Audit Committee. The IFRS team has performed detailed assessments on five of the six key areas identified, and continues to report its progress and results to the Audit Committee on a quarterly basis.

A qualitative summary of expected impacts is provided below. Note that identified differences are not yet able to be accurately quantified as the IFRS opening balance sheet date for Corby is still several months away (i.e., July 1, 2010).

First time adoption of IFRS (IFRS 1): This standard sets out the protocol for converting a set of financial statements from another basis of preparation (e.g., Canadian GAAP) to IFRS. IFRS 1 generally requires that a first-time adopter apply IFRS accounting principles retrospectively to all periods presented in its first IFRS financial statements. IFRS 1 also provides certain mandatory and optional exemptions to the full retrospective application.

As Corby's ultimate parent company (i.e., PR) currently reports in accordance with IFRS, the Company is provided the option of using the carrying amount of assets and liabilities that would be included in PR's consolidated financial statements, if no adjustments were made for consolidation procedures and for the effects of the business combination in which PR acquired Corby. Choosing this option simplifies Corby's conversion process and reduces the need for Corby to maintain two parallel sets of records in addition to providing other benefits. Therefore, Corby has decided to choose this option under IFRS 1. This decision impacts the optional exemptions for business combinations, employee benefits, and capital assets. The individual accounting policy impacts are described further below.

Employee benefits (IAS 19): Corby has elected to adopt the measurement basis of its ultimate parent company, which is an option available under IFRS 1. Under IFRS, Corby will continue to utilize the "corridor" approach currently followed under Canadian GAAP.

    
    -   It is anticipated that as at Corby's opening balance sheet date,
        conversion to IFRS will result in a decrease in accrued benefit
        asset, an increase in accrued benefit liability, and a decrease in
        equity.

    -   Subsequent to transition, it is anticipated that pension cost will be
        lower given the reduced amount of unrecognized net actuarial losses,
        which are a direct result of Corby adopting its ultimate parent
        company's measurement basis as permitted under IFRS 1.
    

Impairment of assets (IAS 36): IFRS requires a one-step impairment test for identifying and measuring impairment, comparing an asset's carrying value to the higher of its value in use and fair value less cost to sell. Under Canadian GAAP, impairment is based on discounted cash flows only if an asset's undiscounted cash flows are below its carrying value. In addition, IFRS requires the reversal of previously recognized impairment losses when a change in circumstances indicates that the impairment has been reduced, other than for goodwill and indefinite-lived intangibles, while Canadian GAAP does not allow a reversal under any circumstances.

    
    -   The impact on the opening balance sheet is not yet known as the test
        must be completed using facts and circumstances in existence as at
        the opening balance sheet date, which has yet to occur.

    -   Subsequent to transition, the one-step impairment test under IFRS may
        result in more frequent write-downs of assets and reversals of
        previous write-downs may be required in future periods.
    

Capital assets (IAS 16): Corby has elected to adopt the measurement basis of its ultimate parent company, which is an option available under IFRS 1, and currently this measurement basis is essentially equivalent to that reported under Canadian GAAP. The Company has also opted to use the cost model to measure its assets subsequent to transition, which is consistent with current practice under Canadian GAAP. In addition, IFRS requires that major components of an asset be separately amortized, whereas Canadian GAAP is less explicit. The Company's assessment has not identified any significant differences in this area.

    
    -   It is not expected that there will be a substantial impact on the
        opening balance sheet, nor is it expected that amortization expense
        will differ substantially subsequent to the transition date.
    

Income taxes (IAS 12): The differences that exist between IFRS and Canadian GAAP for Corby relate primarily to changes as a result of adopting IFRS accounting policies in other areas, where such changes impact the timing and amount of temporary basis differences between accounting and taxation.

    
    -   The opening balance sheet will be impacted as future income tax
        assets and liabilities will be re-measured upon completion of the
        IFRS opening balance sheet, which has yet to be completed as the
        opening balance sheet date is still several months away.

    -   Subsequent to transition, the impact of adopting IAS12 will depend on
        the net amount of all differences in accounting policies.
    

Financial statement presentation and disclosure: The Company has not yet completed its assessment of this area. However, based on information gathered to date, it is anticipated that disclosures will increase significantly when compared to those currently required by Canadian GAAP.

Overall, the transition plan remains on-track and the Company believes it is well positioned to transition to IFRS in accordance with the timelines mandated by the AcSB. The work completed to date suggests that there will be a minimal impact on the Company's business activities, IT systems, disclosure controls and procedures, and internal controls over financial reporting. However, these preliminary conclusions may change as Corby continues to progress through its transition plan and considers any new IFRS developments leading up to the Company's changeover date.

The company will continue to execute the transition in accordance with its plan, and also continue to monitor standards development as issued by the International Accounting Standards Board and the AcSB as well as regulatory developments as issued by the Canadian Securities Administrators, which may affect the timing, nature or disclosure of its adoption of IFRS.

    
    Selected Quarterly Information
    ------------------------------
    

Summary of Quarterly Financial Results

    
    -------------------------------------------------------------------------
    (in millions of
     Canadian dollars,
     except per share    Q3     Q2     Q1     Q4     Q3     Q2     Q1     Q4
     amounts)          2010   2010   2010   2009   2009   2009   2009   2008
    -------------------------------------------------------------------------
    Operating
     revenue - net   $ 32.2 $ 46.9 $ 41.1 $ 41.4 $ 34.0 $ 47.8 $ 46.1 $ 39.6
    Earnings from
     operations         6.8   14.7   12.2   10.1    7.2   11.9   14.2    8.4
    Net earnings        4.5    1.1    8.4    7.4    5.1    8.1    9.8    6.0
    Basic EPS          0.16   0.04   0.30   0.26   0.18   0.28   0.35   0.21
    Diluted EPS        0.16   0.04   0.30   0.26   0.18   0.28   0.35   0.21
    -------------------------------------------------------------------------
    

The above chart demonstrates the seasonality of Corby's business, as sales are typically higher in the first and second quarter, while third quarter sales (i.e., January, February and March) typically decline after the end of the retail holiday season. Fourth quarter sales typically increase again with the onset of warmer weather, as consumers tend to increase their consumption levels during the summer season.

The above chart also highlights the aforementioned effect an impairment charge had upon the Company's Q2 2010 financial results. Specifically, the impairment charge had the effect of reducing net earnings $9.4 million, and reduced both basic and diluted earnings per share by $0.33. For more information related to the non-cash impairment charge, please refer to the "Significant Event" section of this MD&A.

    
    Internal Controls Over Financial Reporting
    ------------------------------------------
    

The Company maintains a system of disclosure controls and procedures to provide reasonable assurance that all material information relating to the Company is gathered and reported to senior management on a timely basis so that appropriate decisions can be made regarding public disclosure.

In addition, the CEO and CFO have designed, or caused to be designed under their supervision, internal controls over financial reporting to provide reasonable assurance regarding the reliability of financial reporting, and the preparation of financial statements for external purposes in accordance with Canadian GAAP. Internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be designed effectively can provide only reasonable assurance with respect to financial reporting and financial statement preparation.

There were no changes in internal control over financial reporting during the Company's most recent interim period that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

    
    Risks & Risk Management
    -----------------------
    

The Company is exposed to a number of risks in the normal course of its business that have the potential to affect its operating and financial performance.

Industry and Regulatory

The beverage alcohol industry in Canada is subject to government policy, extensive regulatory requirements and significant rates of taxation at both the federal and provincial levels. As a result, changes in the government policy, regulatory and/or taxation environments within the beverage alcohol industry may affect Corby's business operations, including changes in market dynamics or changes in consumer consumption patterns.

Two recent examples include being subjected to a higher rate of excise tax and the new Harmonized Sales Tax ("HST") applicable in Ontario and British Columbia beginning July 1, 2010. With respect to excise, certain Canadian whiskies are subject to an increased rate of excise duty effective July 1, 2009. This increase is the result of legislation passed by the federal government on May 2, 2006, which served to increase the rate of excise duty on spirits by 5.7%. It is estimated that the application of these higher excise duty rates will reduce Corby's annual sales by approximately $1.3 million, and translate to a reduction of net earnings of $0.9 million. It is not anticipated that these higher excise rates can be passed on to consumers through higher prices in the near term.

The HST becomes effective July 1, 2010 in Ontario and British Columbia. The Company has provided training to employees and is in process of testing accounting system changes in order to ensure a smooth transition to this new sales tax regime. The financial impact is not anticipated to be significant to Corby.

The Company continuously monitors the potential risk associated with any proposed changes in its government policy, regulatory and taxation environments and, as an industry leader, actively participates in trade association discussions relating to new developments.

Consumer Consumption Patterns

Beverage alcohol companies are susceptible to risks relating to changes in consumer consumption patterns. Consumer consumption patterns are affected by many external influences, not the least of which is the current economic outlook and overall consumer confidence in the stability of the economy as a whole. The overall decline in consumer spending has resulted in more at home consumption, as consumers are trending away from consumption at licensed establishments, such as bars and restaurants. As a result, the industry is experiencing declines in product categories which tend to have a higher consumption rate at these establishments, such as liqueurs. Corby offers a diverse portfolio of products across all major spirit categories and various price points, which complements consumer desires and offers exciting innovation.

Distribution / Supply Chain Interruption

The Company is susceptible to risks relating to distributor and supply chain interruptions. Distribution in Canada is largely accomplished through the government-owned provincial liquor boards and, therefore, an interruption (e.g., labour strike) for any length of time may have a significant impact on the Company's ability to sell its products in a particular province and or market.

Supply chain interruptions could impact product quality and availability, including manufacturing or inventory disruption. The Company adheres to a comprehensive suite of quality programs and proactively manages production and supply chains to mitigate any potential risk to consumer safety or Corby's reputation and profitability.

Environmental Compliance

Environmental liabilities may potentially arise when companies are in the business of manufacturing products and, thus, are required to handle potentially hazardous materials. As Corby outsources the majority of its production, including all of its storage and handling of maturing alcohol, the risk of environmental liabilities has been reduced to an acceptably low level. In addition, Corby's owned-production facility follows strict industry guidelines for proper use and / or disposal of hazardous materials to further reduce environmental risks. Corby currently has no significant recorded or unrecorded environmental liabilities.

Industry Consolidation

In recent years, the global beverage alcohol industry has experienced a significant amount of consolidation. Industry consolidation can have varying degrees of impact, and in some cases may even create exceptional opportunities. Either way, management believes that the Company is well positioned to deal with this or other changes to the competitive landscape in Canada.

Competition

The Canadian beverage alcohol industry is also extremely competitive. Competitors may take actions to establish and sustain competitive advantage. They may also affect Corby's ability to attract and retain high quality employees. The Company's long heritage attests to Corby's strong foundation and successful execution of its strategies. Being a leading Canadian beverage alcohol company helps facilitate recruitment efforts. Corby appreciates and invests in its employees to partner with them in achieving corporate objectives and creating value.

Credit Risk

Credit risk arises from deposits in cash management pools held with PR via Corby's participation in the Mirror Agreement (as previously described in the "Related Party Transactions" section of this MD&A), as well as credit exposure to customers, including outstanding accounts receivable. The maximum exposure to credit risk is equal to the carrying value of the Company's financial assets. The objective of managing counter party credit risk is to prevent losses in financial assets. The Company assesses the credit quality of its counter-parties, taking into account their financial position, past experience and other factors. As the large majority of Corby's accounts receivable balances are collectable from government-controlled liquor boards, management believes the Company's credit risk relating to accounts receivable is at an acceptably low level.

Exposure to Interest Rate Fluctuations

The Company does not have any short or long-term debt facilities. Interest rate risk exists as Corby earns market rates of interest on its deposits in cash management pools. An active risk management program does not exist, as management believes that changes in interest rates would not have a material impact to Corby's financial position over the long-term.

Exposure to Commodity Price Fluctuations

Commodity risk exists, as the manufacture of Corby's products requires the procurement of several known commodities such as grains, sugar and natural gas. The Company strives to partially mitigate this risk through the use of longer term procurement contracts where possible. In addition, subject to competitive conditions, the Company may pass on commodity price changes to consumers via pricing over the long-term.

Foreign Currency Exchange Risk

Foreign currency risk exists, as the Company sources a proportion of its production requirements in foreign currencies, specifically the United States dollar. Partially mitigating this risk is the fact that the Company also sells certain of its goods in the same foreign currencies. As purchases from US-based suppliers typically exceed revenues from US-based customers, a decline in the Canadian dollar versus the US dollar can have a negative impact on the Company's financial results. In addition, and subject to competitive conditions, changes in foreign currency rates may be passed on to consumers through pricing over the long-term.

Third Party Service Providers

The Company is reliant upon-third party service providers in respect of certain of its operations. It is possible that negative events affecting these third-party service providers could, in turn, negatively impact the Company. While the Company has no direct influence over how such third-parties are managed, it has entered into contractual arrangements to formalize these relationships. In order to minimize operating risks, the Company actively monitors and manages its relationship with its third-party service providers.

Brand Reputations

The Company promotes nationally branded, non-proprietary products, as well as proprietary products. Damage to the reputation of any of these brands, or to the reputation of any supplier or manufacturer of these brands, could negatively impact consumer opinion of the Company or the related products, which could have an adverse impact on the financial performance of the Company.

Valuation of Goodwill and Intangible Assets

Goodwill and intangible assets account for a significant amount of the Company's total assets. Goodwill and intangible assets are subject to impairment tests which involve the determination of fair value. Inherent in such fair value determinations are certain judgments and estimates, including but not limited to, projected future sales, earnings and capital investment, discount rates, and terminal growth rates. These judgments and estimates may change in the future due to uncertain competitive market and general economic conditions, or as the Company makes changes in its business strategies. Given the current state of the economy, certain of the aforementioned factors affecting the determination of fair value may be impacted, and as a result the Company's financial results may be adversely affected.

During the second quarter ended December 31, 2009, Corby recognized an $11.5 million non-cash impairment charge against its goodwill and intangible asset balances related to the Seagram Coolers brand. For more information regarding the impairment charge, please refer to the "Significant Event" section of this MD&A.

The following chart summarizes Corby's goodwill and intangible assets and details the amounts associated with each brand (or basket of brands) and market:

    
    -------------------------------------------------------------------------
                                                             Carrying Values
                                                        as at March 31, 2010
                                              -------------------------------
    Associated Brand      Associated Market   Goodwill  Intangibles    Total
    --------------------  ------------------  -------------------------------
    Various PR brands     Canada              $      -   $   52.2   $   52.2
    Seagram Coolers       Canada                   1.0        7.7        8.7
    Lamb's rum            United Kingdom           1.4       11.8       13.2
    Meaghers and De
     Kuyper liqueurs      Canada                   4.5          -        4.5
    -------------------------------------------------------------------------

                                              $    6.9   $   71.7   $   78.6
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    

Therefore, economic factors (such as consumer consumption patterns) specific to these brands and markets, are primary drivers of the risk associated with their respective goodwill and intangible asset valuations.

Employee Future Benefits

The Company has certain obligations under its registered and non-registered defined benefit pension plans and other post-retirement benefit plan. There is no assurance that the Company's benefit plans will be able to earn the assumed rate of return. New regulations and market-driven changes may result in changes in the discount rates and other variables, which would result in the Company being required to make contributions in the future that differ significantly from estimates. An extended period of depressed capital markets and low interest rates could require the Company to make contributions to these plans in excess of those currently contemplated which, in turn, could have an adverse impact on the financial performance of the Company. For further details related to Corby's defined benefit pension plans, readers are encouraged to refer to the most recently prepared annual MD&A and annual financial statements for the year ended June 30, 2009.

    
    CORBY DISTILLERIES LIMITED
    INTERIM CONSOLIDATED BALANCE SHEETS

    (Unaudited)
    (in thousands of Canadian dollars)
    -------------------------------------------------------------------------

                                            March 31,   March 31,    June 30,
                                                2010        2009        2009
                                          -----------------------------------

    ASSETS
    Current
      Deposits in cash management pools   $   73,061  $   58,427  $   62,726
      Accounts receivable                     25,489      25,600      28,640
      Income and other taxes recoverable       1,349           -       1,478
      Inventories                             60,402      55,971      53,987
      Prepaid expenses                           644         695       1,582
      Future income taxes                        260         464         551
    -------------------------------------------------------------------------
                                             161,205     141,157     148,964
    Capital assets                            14,308      14,053      14,553
    Employee future benefits                  11,618       9,494      11,382
    Goodwill (Note 6)                          6,857       9,856       9,856
    Intangible assets (Note 7)                71,708      86,590      85,420
    -------------------------------------------------------------------------
                                          $  265,696  $  261,150  $  270,175
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    LIABILITIES
    Current
      Accounts payable and accrued
       liabilities                        $   15,807  $   14,981  $   20,416
      Income and other taxes payable               -         256           -
    -------------------------------------------------------------------------
                                              15,807      15,237      20,416
    Employee future benefits                   6,684       5,931       5,923
    Future income taxes                        4,875       7,133       7,605
    -------------------------------------------------------------------------
                                              27,366      28,301      33,944
    -------------------------------------------------------------------------

    SHAREHOLDERS' EQUITY
    Share capital                             14,304      14,304      14,304
    Retained earnings                        224,026     218,545     221,927
    -------------------------------------------------------------------------
                                             238,330     232,849     236,231
    -------------------------------------------------------------------------
                                          $  265,696  $  261,150  $  270,175
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    See accompanying notes to interim consolidated financial statements



    CORBY DISTILLERIES LIMITED
    INTERIM CONSOLIDATED STATEMENTS OF EARNINGS

    (Unaudited)
    (in thousands of Canadian dollars, except per share amounts)
    -------------------------------------------------------------------------

                               For the Three Months     For the Nine Months
                                       Ended                   Ended
                              ----------------------- -----------------------
                                March 31,   March 31,   March 31,   March 31,
                                    2010        2009        2010        2009
                              ----------------------- -----------------------

    OPERATING REVENUE
      Sales                   $   29,242  $   31,078  $  108,797  $  115,705
      Commissions (Note 8)         2,912       2,914      11,407      12,140
    -------------------------------------------------------------------------
                                  32,154      33,992     120,204     127,845
    -------------------------------------------------------------------------

    OPERATING COSTS
      Cost of sales               15,257      16,377      53,779      59,655
      Marketing, sales and
       administration              9,719      10,011      31,506      33,881
      Amortization                   417         383       1,291       1,042
    -------------------------------------------------------------------------
                                  25,393      26,771      86,576      94,578
    -------------------------------------------------------------------------

    EARNINGS FROM OPERATIONS       6,761       7,221      33,628      33,267
    -------------------------------------------------------------------------

    OTHER INCOME AND EXPENSES
      Impairment charge (Note 4)       -           -     (11,510)          -
      Interest income                131         363         371       1,445
      Foreign exchange (loss) gain  (415)        113        (874)       (671)
      (Loss) gain on disposal
       of capital assets               -         (12)          3         183
    -------------------------------------------------------------------------
                                    (284)        464     (12,010)        957
    -------------------------------------------------------------------------

    EARNINGS BEFORE INCOME TAXES   6,477       7,685      21,618      34,224
    -------------------------------------------------------------------------

    INCOME TAXES (Note 10)
      Current                      1,901       2,370      10,000      10,803
      Future                          81         179      (2,439)        408
    -------------------------------------------------------------------------
                                   1,982       2,549       7,561      11,211
    -------------------------------------------------------------------------

    NET EARNINGS              $    4,495  $    5,136  $   14,057  $   23,013
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    BASIC EARNINGS PER SHARE  $     0.16  $     0.18  $     0.49  $     0.81
    DILUTED EARNINGS PER
     SHARE                    $     0.16  $     0.18  $     0.49  $     0.81
    -------------------------------------------------------------------------

    WEIGHTED AVERAGE COMMON
     SHARES OUTSTANDING
      Basic                   28,468,856  28,468,856  28,468,856  28,468,856
      Diluted                 28,468,856  28,468,856  28,468,856  28,468,856
    -------------------------------------------------------------------------

    See accompanying notes to interim consolidated financial statements



    CORBY DISTILLERIES LIMITED
    INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

    (Unaudited)
    (in thousands of Canadian dollars)
    -------------------------------------------------------------------------

                               For the Three Months    For the Nine Months
                                       Ended                   Ended
                              ----------------------- -----------------------
                                March 31,   March 31,   March 31,   March 31,
                                    2010        2009        2010        2009
                              ----------------------- -----------------------

    NET EARNINGS              $    4,495  $    5,136  $   14,057  $   23,013
    OTHER COMPREHENSIVE INCOME         -           -           -           -
    -------------------------------------------------------------------------
    COMPREHENSIVE INCOME      $    4,495  $    5,136  $   14,057  $   23,013
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    See accompanying notes to interim consolidated financial statements



    CORBY DISTILLERIES LIMITED
    INTERIM CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

    (Unaudited)
    (in thousands of Canadian dollars)
    -------------------------------------------------------------------------

                                                        For the Nine Months
                                                               Ended
                                                      -----------------------
                                                        March 31,   March 31,
                                                            2010        2009
                                                      -----------------------

    SHARE CAPITAL
      Balance, beginning of period                    $   14,304  $   14,304
      Transactions, net                                        -           -
    -------------------------------------------------------------------------
      Balance, end of period                          $   14,304  $   14,304
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    RETAINED EARNINGS
      Retained earnings, beginning of period          $  221,927  $  207,490
      Net earnings                                        14,057      23,013
      Dividends                                          (11,958)    (11,958)
    -------------------------------------------------------------------------
      Balance, end of period                          $  224,026  $  218,545
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    ACCUMULATED OTHER COMPREHENSIVE INCOME
      Balance, beginning of period                    $        -  $        -
      Other comprehensive income for the period                -           -
    -------------------------------------------------------------------------
      Balance, end of period                          $        -  $        -
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    See accompanying notes to interim consolidated financial statements



    CORBY DISTILLERIES LIMITED
    INTERIM CONSOLIDATED STATEMENTS OF CASH FLOW

    (Unaudited)
    (in thousands of Canadian dollars)
    -------------------------------------------------------------------------

                               For the Three Months     For the Nine Months
                                       Ended                   Ended
                              ----------------------- -----------------------
                                March 31,   March 31,   March 31,   March 31,
                                    2010        2009        2010        2009
                              ----------------------- -----------------------

    OPERATING ACTIVITIES
    Net earnings              $     4,495    $ 5,136  $   14,057  $   23,013
    Items not affecting cash
      Amortization                  1,572      1,554       4,762       4,555
      Impairment charge (Note 4)        -          -      11,510           -
      Loss (gain) on disposal
       of capital assets                -         12          (3)       (183)
      Future income taxes              81        179      (2,439)        408
    Employee future benefits           94        121         525        (451)
    -------------------------------------------------------------------------
                                    6,242      7,002      28,412      27,342
    Net change in non-cash
     working capital balances      (3,107)   (10,098)     (6,806)    (12,608)
    -------------------------------------------------------------------------
    Cash flows provided by (used
     in) operating activities       3,135     (3,096)     21,606      14,734
    -------------------------------------------------------------------------

    INVESTING ACTIVITIES
    Additions to capital assets      (397)    (1,087)     (1,046)     (3,471)
    Proceeds from disposition
     of capital assets                  -         48           3         569
    Proceeds on account of PR
     brand disposals (Note 7)       1,730          -       1,730           -
    (Deposits in) draws from
     cash management pools           (482)     8,121     (10,335)        126
    -------------------------------------------------------------------------
    Cash flows provided by (used
     in) investing activities         851      7,082      (9,648)     (2,776)
    -------------------------------------------------------------------------

    FINANCING ACTIVITY
    Dividends paid                 (3,986)    (3,986)    (11,958)    (11,958)
    -------------------------------------------------------------------------
    Cash flows used in
     financing activity            (3,986)    (3,986)    (11,958)    (11,958)
    -------------------------------------------------------------------------

    NET CHANGE IN CASH                  -          -           -           -
    CASH, BEGINNING OF PERIOD           -          -           -           -
    -------------------------------------------------------------------------
    CASH, END OF PERIOD       $         -  $       -  $        -  $        -
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    SUPPLEMENTAL CASH FLOW
     INFORMATION
    Interest received         $       131  $     363  $      371  $    1,445
    Income taxes paid         $     2,195  $   2,531  $    9,884  $   11,603
    -------------------------------------------------------------------------

    See accompanying notes to interim consolidated financial statements

    CORBY DISTILLERIES LIMITED
    NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

    FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2010 AND MARCH 31, 2009
    (in thousands of Canadian dollars, except per share amounts)
    

1. BASIS OF PRESENTATION

These unaudited interim consolidated financial statements (the "financial statements") have been prepared by management in accordance with Canadian generally accepted accounting principles ("GAAP") and include the accounts of Corby Distilleries Limited and its subsidiaries ("Corby" or the "Company"). These financial statements do not include all disclosures required by Canadian GAAP for annual financial statements and therefore should be read in conjunction with the most recently prepared annual financial statements for the year ended June 30, 2009.

The interim financial statements should not be taken as indicative of the performance to be expected for the full year due to the seasonal nature of the spirits business. Corby's operations are typically subject to seasonal fluctuations in that the retail holiday season generally results in an increase in consumer purchases over the course of October, November and December. Further, the summer months traditionally result in higher consumer purchases of spirits as compared to the winter and spring months. As a result, the Company's first and second quarter of each fiscal year tend to reflect the impact of seasonal fluctuations in that more shipments are typically made during those quarters.

2. CHANGE IN ACCOUNTING POLICIES

These financial statements follow the same accounting policies and methods of their application as the most recent annual financial statements for the year ended June 30, 2009, except as noted below.

Financial Statement Concepts

Effective July 1, 2009, the Company applied the amendments to Section 1000 "Financial Statement Concepts", which clarify the criteria for recognition of an asset and the timing of expense recognition, specifically deleting the guidance permitting the deferral of costs. The new requirements are effective for interim and annual financial statements for fiscal years beginning on or after October 1, 2008. The Company applied the amendments to Section 1000 in conjunction with Section 3064 "Goodwill and Intangible Assets" which is further described below. The adoption of this standard had no impact on the Company's financial statements or note disclosures.

Goodwill and Intangible Assets

Effective July 1, 2009, the Company implemented new accounting standard, Section 3064 "Goodwill and Intangible Assets", which is effective for fiscal years beginning on or after October 1, 2008. This standard replaces the existing Section 3062 "Goodwill and Other Intangible Assets" and Section 3450, "Research and Development Costs". The new standard prescribes new methods for recognizing, measuring, presenting and disclosing goodwill and intangible assets, with the objective of eliminating the practice of deferring costs that do not meet the definition and recognition criteria of assets. The new standard is equivalent to the corresponding provisions of International Financial Reporting Standards ("IFRS") IAS 38, "Intangible Assets". The adoption of this standard had no impact on the Company's financial statements or note disclosures.

3. FUTURE ACCOUNTING STANDARDS

International Financial Reporting Standards

In February 2008, the Canadian Accounting Standards Board ("AcSB") confirmed that Canadian generally accepted accounting principles ("GAAP") for publicly accountable enterprises will be replaced by International Financial Reporting Standards ("IFRS") for fiscal years beginning on or after January 1, 2011. IFRS uses a conceptual framework similar to Canadian GAAP, however there are significant differences on recognition, measurement, and disclosures. Accordingly, the conversion from Canadian GAAP to IFRS will be applicable to the Company's reporting for the first quarter of fiscal 2012 for which current and comparative information will be prepared under IFRS.

In response, the Company created a transition plan and established a timeline for the execution and completion of the conversion project to guide Corby toward its reporting deadlines. The transition plan included a high-level assessment of the key areas where conversion to IFRS may have a significant impact or present a significant challenge. Six key areas were identified and include IFRS 1 choices, employee benefits, impairment of assets, capital assets, income taxes, and financial statement presentation and disclosure.

The IFRS changeover is a significant undertaking for the Company. As such, the Company has engaged an external advisor and established a working team, held multiple IFRS training sessions tailored specifically to Corby for finance employees, members of management and the Audit Committee. The IFRS team has performed detailed assessments on five of the six key areas identified, and continues to report its progress and results to the Audit Committee on a quarterly basis.

A qualitative summary of expected impacts is provided below. Note that identified differences are not yet able to be accurately quantified as the IFRS opening balance sheet date for Corby is still several months away (i.e., July 1, 2010).

First time adoption of IFRS (IFRS 1): This standard sets out the protocol for converting a set of financial statements from another basis of preparation (e.g., Canadian GAAP) to IFRS. IFRS 1 generally requires that a first-time adopter apply IFRS accounting principles retrospectively to all periods presented in its first IFRS financial statements. IFRS 1 also provides certain mandatory and optional exemptions to the full retrospective application.

As Corby's ultimate parent company (i.e., PR) currently reports in accordance with IFRS, the Company is provided the option of using the carrying amount of assets and liabilities that would be included in PR's consolidated financial statements, if no adjustments were made for consolidation procedures and for the effects of the business combination in which PR acquired Corby. Choosing this option simplifies Corby's conversion process and reduces the need for Corby to maintain two parallel sets of records in addition to providing other benefits. Therefore, Corby has decided to choose this option under IFRS 1. This decision impacts the optional exemptions for business combinations, employee benefits, and capital assets. The individual accounting policy impacts are described further below.

Employee benefits (IAS 19): Corby has elected to adopt the measurement basis of its ultimate parent company, which is an option available under IFRS 1. Under IFRS, Corby will continue to utilize the "corridor" approach currently followed under Canadian GAAP.

    
    -   It is anticipated that as at Corby's opening balance sheet date,
        conversion to IFRS will result in a decrease in accrued benefit
        asset, an increase in accrued benefit liability, and a decrease in
        equity.

    -   Subsequent to transition, it is anticipated that pension cost will be
        lower given the reduced amount of unrecognized net actuarial losses,
        which are a direct result of Corby adopting its ultimate parent
        company's measurement basis as permitted under IFRS 1.
    

Impairment of assets (IAS 36): IFRS requires a one-step impairment test for identifying and measuring impairment, comparing an asset's carrying value to the higher of its value in use and fair value less cost to sell. Under Canadian GAAP, impairment is based on discounted cash flows only if an asset's undiscounted cash flows are below its carrying value. In addition, IFRS requires the reversal of previously recognized impairment losses when a change in circumstances indicates that the impairment has been reduced, other than for goodwill and indefinite-lived intangibles, while Canadian GAAP does not allow a reversal under any circumstances.

    
    -   The impact on the opening balance sheet is not yet known as the test
        must be completed using facts and circumstances in existence as at
        the opening balance sheet date, which has yet to occur.

    -   Subsequent to transition, the one-step impairment test under IFRS may
        result in more frequent write-downs of assets and reversals of
        previous write-downs may be required in future periods.
    

Capital assets (IAS 16): Corby has elected to adopt the measurement basis of its ultimate parent company, which is an option available under IFRS 1, and currently this measurement basis is essentially equivalent to that reported under Canadian GAAP. The Company has also opted to use the cost model to measure its assets subsequent to transition, which is consistent with current practice under Canadian GAAP. In addition, IFRS requires that major components of an asset be separately amortized, whereas Canadian GAAP is less explicit. The Company's assessment has not identified any significant differences in this area.

    
    -   It is not expected that there will be a substantial impact on the
        opening balance sheet, nor is it expected that amortization expense
        will differ substantially subsequent to the transition date.
    

Income taxes (IAS 12): The differences that exist between IFRS and Canadian GAAP for Corby relate primarily to changes as a result of adopting IFRS accounting policies in other areas, where such changes impact the timing and amount of temporary basis differences between accounting and taxation.

    
    -   The opening balance sheet will be impacted as future income tax
        assets and liabilities will be re-measured upon completion of the
        IFRS opening balance sheet, which has yet to be completed as the
        opening balance sheet date is still several months away.

    -   Subsequent to transition, the impact of adopting IAS12 will depend on
        the net amount of all differences in accounting policies.
    

Financial statement presentation and disclosure: The Company has not yet completed its assessment of this area. However, based on information gathered to date, it is anticipated that disclosures will increase significantly when compared to those currently required by Canadian GAAP.

Overall, the transition plan remains on-track and the Company believes it is well positioned to transition to IFRS in accordance with the timelines mandated by the AcSB. The work completed to date suggests that there will be a minimal impact on the Company's business activities, IT systems, disclosure controls and procedures, and internal controls over financial reporting. However, these preliminary conclusions may change as Corby continues to progress through its transition plan and considers any new IFRS developments leading up to the Company's changeover date.

The company will continue to execute the transition in accordance with its plan, and also continue to monitor standards development as issued by the International Accounting Standards Board and the AcSB as well as regulatory developments as issued by the Canadian Securities Administrators, which may affect the timing, nature or disclosure of its adoption of IFRS.

4. IMPAIRMENT CHARGE

During the quarter ended December 31, 2009, the Company recorded a non-cash impairment charge against its goodwill and intangible assets balances related to its Seagram Coolers brand as outlined in the following chart:

    
    -------------------------------------------------------------------------
    Intangible assets                                               $  8,511
    Goodwill                                                           2,999
    -------------------------------------------------------------------------
    Impairment charged against goodwill and intangible assets         11,510
    Income tax effect                                                 (2,128)
    -------------------------------------------------------------------------
    Net earnings impact of impairment charge                        $  9,382
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Basic and diluted earnings per share impact of impairment
     charge                                                         $   0.33
    -------------------------------------------------------------------------
    

The Seagram Coolers business in Canada was acquired by Corby on September 29, 2006. The brand had initially been quite successful and achieved the internal goals and objectives management had set for it. However, over the past two years, the brand underperformed relative to its competitive set due to aggressive competition from both category leaders as well as new entrants in adjacent categories.

As a result, the Company revised its long-term outlook to reflect changes in expectations for the brand and accordingly has estimated that the fair value of the associated goodwill and intangible assets has fallen below its recorded carrying amounts. As such, an impairment charge of $11,510 was recorded during the quarter ended December 31, 2009. Management remains committed to the Seagram Coolers brand and has recently completed a comprehensive brand rejuvenation plan, including label and packaging redesign, new flavour innovation, and advertising and promotional activities.

5. DEPOSITS IN CASH MANAGEMENT POOLS

Corby participates in a cash pooling arrangement under a Mirror Netting Service Agreement ("Mirror Agreement") together with PR's other Canadian affiliates, the terms of which are administered by The Bank of Nova Scotia. The Mirror Agreement acts to aggregate each participant's net cash balance for purposes of having a centralized cash management function for all of PR's Canadian affiliates, including Corby.

Corby accesses these funds on a daily basis and has the contractual right to withdraw these funds or terminate these cash management arrangements upon providing five days written notice. For further information on these balances, readers are encouraged to read the Company's most recently prepared annual financial statements for the year-ended June 30, 2009.

6. GOODWILL

    
    -------------------------------------------------------------------------
                                               Jun. 30,              Mar. 31,
                                                  2009  Impairments     2010
    -------------------------------------------------------------------------
    Associated brand:
    Seagram Coolers                           $  3,970   $ (2,999)  $    971
    Lamb's rum International                     1,410          -      1,410
    Meaghers and De Kuyper liqueurs              4,476          -      4,476
    -------------------------------------------------------------------------
                                              $  9,856   $ (2,999)  $  6,857
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
                                               Jun. 30,              Mar. 31,
                                                  2008  Impairments     2009
    -------------------------------------------------------------------------
    Associated brand:
    Seagram Coolers                           $  3,970   $      -   $  3,970
    Lamb's rum International                     1,410          -      1,410
    Meaghers and De Kuyper liqueurs              4,476          -      4,476
    -------------------------------------------------------------------------
                                              $  9,856   $      -   $  9,856
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

Please refer to Note 4 for more information regarding the Seagram Cooler's goodwill impairment recognized in the second quarter of fiscal 2010 (i.e., three month period ended December 31, 2009). There were no impairments recognized during the three month period ended March 31, 2010.

7. INTANGIBLE ASSETS

    
    -------------------------------------------------------------------------

                                     Movements in the period
                               ----------------------------------
                     Jun. 30,    Amorti-     Impair-    PR Brand     Mar. 31,
                        2009      zation       ments   Disposals        2010
    -------------------------------------------------------------------------
    Long-term
     representation
     rights         $ 57,370    $ (3,471)   $      -    $ (1,730)   $ 52,169
    Trademarks and
     licenses         28,050           -      (8,511)          -      19,539
    -------------------------------------------------------------------------
                    $ 85,420    $ (3,471)   $ (8,511)   $ (1,730)   $ 71,708
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------

                                     Movements in the period
                               ----------------------------------
                     Jun. 30,    Amorti-     Impair-    PR Brand     Mar. 31,
                        2008      zation       ments   Disposals        2009
    -------------------------------------------------------------------------
    Long-term
     representation
     rights         $ 62,053    $ (3,513)   $      -    $      -    $ 58,540
    Trademarks and
     licenses         28,050           -           -           -      28,050
    -------------------------------------------------------------------------
                    $ 90,103    $ (3,513)   $      -    $      -    $ 86,590
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

As depicted in the above chart, intangible assets are comprised of long-term representation rights, and trademarks and licenses. Trademarks and licenses represent the value of trademarks and licenses of businesses acquired. These intangible assets are deemed to have an indefinite life and therefore are not amortized. Trademarks and licenses are tested for impairment on an annual basis or more frequently if events or changes in circumstances indicate that the assets might be impaired. Please refer to Note 4 for more information regarding the impairment recognized during the quarter ended December 31, 2009.

Long-term representation rights represent the cost of the Company's exclusive right to represent PR's brands in Canada. These representation rights are carried at cost, less accumulated amortization. Amortization is provided for on a straight-line basis over the 15 year term of the agreement which began October 1, 2006, and is scheduled to expire on September 30, 2021.

During the period, PR provided cash compensation to Corby as a result of PR's decision to dispose of the Wild Turkey bourbon, Tia Maria coffee liqueur, and Lemon Hart rum brands, and thus early terminate Corby's representation of these brands in Canada. The compensation received is depicted in the above chart under the heading "PR Brand Disposals". The amount of compensation was calculated in accordance with a prescribed formula contained in the representation agreement and was accounted for as a reduction of Corby's original cost. Corby ceased representation of the Wild Turkey brand in May 2009, the Tia Maria brand in October 2009, and the Lemon Hart rum brand in February 2010. The resulting impact of lost commissions on Corby's fiscal 2010 net earnings is estimated to be less than $275.

8. COMMISSIONS

Commissions for the three and nine month periods ended March 31, 2010 are reported net of long-term representation rights amortization in the amount of $1,155 and $3,471, respectively (2009 - $1,171 and $3,513, respectively).

9. EMPLOYEE FUTURE BENEFITS

The Company has recorded a charge to earnings in the three and nine month periods ended March 31, 2010 of $806 and $2,508, respectively (2009 - $842 and $2,525, respectively) to reflect the expense associated with its employee future benefit plans. Actual cash payments for the three and nine month periods ended March 31, 2010 totaled $514 and $1,549, respectively (2009 - $557, and $2,494, respectively).

10. INCOME TAXES

Corby's effective tax rates are comprised of the following:

    
    -------------------------------------------------------------------------
                                  Three Months Ended       Nine Months Ended
                               ----------------------  ----------------------
                                 Mar. 31,    Mar. 31,    Mar. 31,    Mar. 31,
                                    2010        2009        2010        2009
    -------------------------------------------------------------------------

    Combined basic Federal and
     Provincial tax rates            31%         32%         31%         32%
    Impact of non-cash
     impairment charge                0%          0%          7%          0%
    Impact of substantively
     enacted rate decreases in
     Ontario                          0%          0%         (3%)         0%
    Other                             0%          1%          0%          1%
    -------------------------------------------------------------------------

    Effective tax rates              31%         33%         35%         33%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

As denoted in the above chart, Corby's effective tax rate during the nine month period ended March 31, 2010, was substantially impacted by the effect of a non-cash impairment charge and the impact of the Ontario government's decision to substantively enact decreases in its future income tax rates.

The impairment charge was recorded during the Company's quarter ended December 31, 2009 and relates specifically to the Company's Seagram Coolers brand and its associated goodwill and intangible asset balances (please refer to Note 4 for more information regarding the impairment). The Ontario government's decision to substantively enact future rate decreases required the Company to revalue its future income tax assets and liabilities at the new lower rates. As a result, Corby recognized a one-time reduction of its future income tax expense of $700 during the quarter ended December 31, 2009.

11. SEGMENT INFORMATION

Corby has two reportable segments: "Case Goods" and "Commissions". Corby's Case Goods segment derives its revenue from the production and distribution of its owned beverage alcohol brands. Corby's portfolio of owned brands include some of the most renowned and respected brands in Canada, including Wiser's rye whiskies, Lamb's rum, Polar Ice vodka, McGuinness liqueurs and Seagram Coolers. Corby's Commissions segment earns commission income from the representation of non-owned beverage alcohol brands in Canada. Corby represents leading international brands such as ABSOLUT vodka, Chivas Regal, The Glenlivet and Ballantine's scotches, Jameson Irish whiskey, Beefeater gin, Malibu rum, Kahlua liqueur, Mumm champagne, and Jacob's Creek and Wyndham Estate wines.

The Commissions segment has no assets or liabilities. Its financial results are fully reported as "commissions" on the interim consolidated statement of earnings and there are no intersegment revenues. Therefore, a chart detailing operational results by segment has not been provided as no additional meaningful information would result.

%SEDAR: 00001138E

SOURCE Corby Spirit and Wine Limited

For further information: For further information: CORBY DISTILLERIES LIMITED: Ali Mahdavi, Spinnaker Capital Markets Inc., Tel.: (416) 962-3300; Thierry Pourchet, Vice President and Chief Financial Officer, Tel.: (416) 479-2400, investors@corby.ca, www.Corby.ca


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