MEGA Brands announces 2007 financial results

MONTREAL, March 31 /PRNewswire-FirstCall/ - MEGA Brands Inc. (TSX: MB)
announced today its fourth quarter and full-year 2007 financial results.
After 22 consecutive years of sales growth and profitability, MEGA Brands
reported lower sales and a net loss in 2007.
"2007 was a difficult year for MEGA Brands, for our employees and
shareholders, and for our many loyal fans. We are disappointed with our
overall performance and we promise that no effort is being spared to achieve a
meaningful turnaround as quickly as possible," stated Marc Bertrand, President
and CEO.
"We are solidly on track to achieve the $12 million in annualized savings
targeted under the Value Enhancement Plan announced at the end of the third
quarter. We have exciting new products in the pipeline in all of our product
categories and we are pleased to be working with Intertek, a leading provider
of quality and safety solutions, as we roll out MAGNEXT(R), the new generation
of magnetic construction toys," added Bertrand.
Although 2007 was a challenging year, there were several positive results
in the Company's performance, including record sales of preschool construction
toys and continued solid growth in international sales. In Stationery and
Activities, sales matched 2006 levels, with improved margins.
"We are very focused on executing the many operational and new product
initiatives under way. With the recent amendment to our credit agreement, we
now have the financial flexibility to implement current initiatives that will
strengthen our core toy business while exploring a sale of our Stationery and
Activities business through an orderly process," concluded Bertrand.
Amendment to Credit Agreement
On March 27, 2008, the Corporation executed a fifth amending agreement
(the "Fifth Amendment") to its credit agreement dated July 26, 2005 (the
"Credit Agreement") providing for certain changes to the terms and conditions
of its senior secured credit facilities (the "Credit Facilities") maturing in
2012. The Fifth Amendment waives the funded debt to EBITDA ratio covenant and
the fixed charge coverage ratio covenant as of December 31, 2007 and until
September 30, 2008, inclusively. Furthermore, through this amendment, the
lenders consent to the sale of the Stationery and Activities business and to
the release of the liens on the assets sold provided that the net
consideration received from this sale will be used to make prepayment offers
to the current lenders and, subject to certain conditions in relation to the
timing and proceeds of such sale, this amendment also reduces the maximum
amount available under the revolving Credit Facilities by introducing certain
limitations on aggregate borrowings thereunder and increases certain fees and
the interest payable in respect of the Credit Facilities. Finally, the EBITDA
definition has been amended and a new financial covenant is added whereby the
Corporation will have to maintain a minimum cumulative EBITDA at the end of
each of its second, third and fourth financial quarters of its 2008 financial
year.
Full-year and Fourth Quarter 2007 Results
Net sales in 2007 were $524.5 million compared to $547.3 million in 2006.
Net loss was $97.1 million, or $2.82 per diluted share compared to net
earnings of $25.3 million, or $0.74 per diluted share in 2006. Specified Items
Affecting Operations and Other Charges totalled $113.0 million in 2007 and
$44.6 million 2006.
Net sales in the fourth quarter of 2007 decreased 22% to $128.8 million
compared to $164.8 million in the corresponding period last year. Net loss was
$66.2 million, or $1.81 diluted loss per share compared to net earnings of
$2.8 million, or $0.08 diluted earnings per share in the fourth quarter of
2006. Specified Items Affecting Operations and Other Charges totalled $37.3
million in the fourth quarter of 2007 and $27.2 million in the corresponding
2006 period.
Specified Items Affecting Operations
The Corporation recorded Specified Items Affecting Operations ("Specified
Items") in 2007 and 2006. Depending on their nature the Specified Items were
recorded against net sales, in cost of sales or as operating expenses. This
classification was determined in accordance with GAAP.
The following table summarizes all Specified Items Affecting Operations
for both 2007 and 2006.

Three month
(in thousands of US Years ended periods ended
dollars, except per December 31, December 31,
share data) 2007 2006 2007 2006
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(Unaudited) $ $ $ $

Voluntary product recall and
other charges 60,248 16,029 25,048 13,758
Litigation expenses and reserve
for contingencies 8,945 4,769 4,332 3,678
Inventory provisions and sales
below cost 36,896 8,303 1,505 8,303
Product liability settlement (3,600) 15,490 - 1,463
-------------------------------------------------------------------------
102,489 44,591 30,885 27,202
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Specified Items 2007

Voluntary product recall and other charges

- The Corporation recorded charges and incremental costs of $60.2 million
($25.0 million in the fourth quarter) primarily related to the Corporation's
product recalls during 2007. Of this annual cost, $21.2 million related to
reversal of sales and credits associated with recalled products, $23.9 million
related to write-offs of finished goods, components and fixed assets, and
$15.1 million related to impairment of intangibles and incremental
advertising, logistics and administrative costs.
Litigation expenses and reserve for contingencies
- The Corporation recorded litigation expenses of $5.4 million ($0.8
million in the fourth quarter), mainly for the Rosen litigation. This amount
is recorded as a separate line item in operating expenses. In addition, the
Corporation recorded a reserve of $3.5 million ($3.5 million in the fourth
quarter) for various potential claims. The Corporation is not able to assess
with any certainty the outcome of these claims but has decided to accrue a
reserve. This amount is recorded in other selling, distribution and
administrative expenses.
Inventory provisions and sales below cost
- The Corporation recorded a charge of $20.0 million during the third
quarter of 2007. This charge was primarily set-up as a result of Management's
decision to minimize any future financial impact related to the completion of
MEGA Brands America integration plan, full integration of Board Dudes'
operations scheduled in 2008 and the transition of MAGNETIX to MAGNEXT. The
total amount is recorded in cost of sales.
- The Corporation sold approximately $26.3 million of excess inventory
which resulted in a negative gross profit of approximately $14.8 million.
After freight charges of $0.6 million, this action impacted earnings from
operations by approximately $15.4 million (nil in the fourth quarter). Of this
amount, $14.8 million is recorded as a reduction of gross profit, while $0.6
million is recorded in other selling, distribution and administrative
expenses.
- The Corporation recorded a charge of $1.5 million ($1.5 million in the
fourth quarter) for inventory writedowns as part of the integration of its
Chinese factories. This amount is recorded in cost of sales.
Product liability settlement
- The Corporation recovered $3.6 million (nil in the fourth quarter) from
its insurers in connection with the $13.5 million settlement in October 2006
of four lawsuits and ten claims related to magnet ingestion. The amount
recovered, net of claims settlement in 2007, is recorded as a separate line
item in operating expenses.
Other Charges 2007
The Corporation also incurred other charges (the ''Other Charges'') of
$10.5 million in 2007 ($6.4 million in the fourth quarter) which are not
classified as Specified Items.
- The Corporation recorded integration charges of $4.2 million ($4.2 in
the fourth quarter) related to the completion of the integration of MEGA
Brands America. Of this amount, $2.7 million is mainly related to plant
closure costs of its New Jersey facility and other miscellaneous charges. This
amount is recorded in cost of sales. The remaining $1.5 million is mainly
related to the disposal of equipment and the cost of moving the inventory to
its distribution facility in Washington. This amount is recorded in other
selling, distribution and administrative expenses.
- The Corporation recorded a charge of $3.0 million ($1.5 million in the
fourth quarter), related to the termination of licensing agreements as part of
its SKU rationalization program. The total amount is recorded in cost of
sales.
- The Corporation recorded charges of $2.6 million (nil in the fourth
quarter) related to the sub-lease of excess warehouse space in Montreal at
unfavorable terms and the set-up of a second-lien credit facility. This amount
is recorded in other selling, distribution and administrative expenses.
Results of Operations

Year ended December 31, 2007 compared to year ended December 31, 2006

Net sales in 2007 were $524.5 million compared to $547.3 million in 2006.
This decline is mainly explained by the reversal of sales and credits
associated with recalled products and lower shipments of MAGNETIX products.
Sales of Toys declined 7% to $310.9 million compared to $333.7 million in
2006, mainly reflecting the reversal of sales and credits associated with
recalled products and lower shipments of MAGNETIX products, offset by a strong
performance in preschool product lines and increased sales of games and
puzzles. The impact of Specified Items on Toys sales in 2007 amounted to $21.0
million.
Sales of Stationery and Activities products were stable at $213.6 million
compared to $213.7 million in 2006. Improved sales of presentation boards, art
supplies and activities products were offset by lower shipments of writing
instruments.
North American sales were $352.7 million compared to $397.8 million in the
corresponding 2006 period. This decrease is due mainly to lower Toys sales.
International sales increased to $171.8 million or 15% of total net sales
compared to $149.6 million. International net sales accounted for 33% of
consolidated net sales in 2007 compared to 27% in 2006. This reflects
continued strong growth in construction toy sales in the preschool category as
well as sales of Stationery and Activities products. The impact of Specified
Items on North American and International sales in 2007 amounted to $7.5
million and $7.7 million, respectively.
Cost of sales increased to $403.4 million compared to $328.8 million in
2006. This increase mainly reflects Specified Items and Other Charges in 2007
from the voluntary product recall, inventory revaluation, integration charges
and termination of licensing agreements, as well as higher input costs.
Gross profit was $121.2 million compared to $218.5 million in 2006. Gross
margin declined to 23.1% compared to 39.9% in 2006.
Gross profit was impacted by the following factors in 2007:
- $65.9 million of Specified Items resulting mainly from voluntary product
recall, inventory provisions, sales below cost and termination of licensing
agreements.
- Lower gross profit generated by the MAGNETIX product line of $21.0
million due to lower unit sales and prices.
- Lower manufacturing efficiencies resulting primarily from the inventory
reduction plan initiated by the Corporation and the downsizing of the
Woodridge, New Jersey facility which was fully closed in December 2007. The
impact of lower manufacturing efficiencies on gross profit amounted to
approximately $6 million.
- $5.7 million of Other Charges.
Marketing and advertising expenses were slightly lower at $26.2 million
compared to $26.8 million in 2006.
Research and development expenses increased to $22.0 million compared to
$18.3 million in 2006. This planned increase reflects strong investment in new
product initiatives across all product categories, including MagNext.
Other selling, distribution and administrative expenses increased to
$132.0 million compared to $112.6 million in 2006. This increase is mainly
explained by $9.5 million of Specified Items and $4.9 million of Other
Charges. Approximately $7.0 million of additional charges resulted from higher
distribution costs, reflecting the significant growth in International sales,
as well as incremental distribution costs incurred while operating several
distribution centers in parallel in anticipation of the closure of the
facilities in New Jersey and in California.
Mainly as a result of Specified Items and Other Charges, the Corporation
reported a loss from operations of $66.7 million compared to earnings from
operations of $39.7 million in 2006. Other factors contributing to the loss
from operations were lower gross profit due to product mix and higher
operating expenses.
Interest and other expenses amounted to $26.5 million compared to $23.4
million in 2006, reflecting higher average long-term debt through the first
three quarters of 2007 and, to a lesser extent, higher interest rates.
Income tax expense was $4.0 million compared to an income tax recovery of
$9.1 million in 2006. For 2007, the Corporation recorded a valuation allowance
of $28.0 million on future income tax assets resulting from losses carried
forward originating mainly from Specified Items. The tax rate used to
establish the income tax expense is the applicable estimated effective rate of
each entity of the Corporation. The effective tax rate reflects the
Corporation's structure for tax purposes as well as the financing structure
put in place following the acquisition of MEGA Brands America.
Net loss was $97.1 million, or $2.82 per diluted share compared to net
earnings of $25.3 million, or $0.74 per diluted share in 2006.
Three-month period ended December 31, 2007 compared to three-month period
ended December 31, 2006
Net sales in the fourth quarter of 2007 decreased 22% to $128.8 million
compared to $164.8 million in the corresponding period last year. The decline
in net sales is explained mainly by Specified Items recorded in 2007 and lower
MAGNETIX and Boys 5-plus shipments during the quarter.
Net sales of Toys decreased by 29% to $87.3 million compared to $123.1
million in the fourth quarter of 2006. Sales of construction toys in the
preschool category were very strong, offset by lower shipments n the Boys
5-plus product lines and MAGNETIX. The impact of Specified Items on Toys sales
in the fourth quarter of 2007 amounted to $26.7 million.
Net sales of Stationery and Activities were stable at $41.5 million
compared to $41.7 million in fourth quarter 2006. Sales of activities products
and presentation boards increased while sales of writing instruments were
lower than in the fourth quarter of 2006.
On a geographical basis, net sales in North America decreased 30% to $81.6
million compared to $116.9 million in fourth quarter 2006, mainly as a result
of lower Toys shipments. International net sales were stable at $47.2 million
compared to $47.9 million in the corresponding 2006 period, mainly due to the
impact of Specified Items. International net sales accounted for 37% of
consolidated net sales in the fourth quarter of 2007 compared to 29% in the
corresponding 2006 period. The impact of Specified Items on North American and
International sales in the fourth quarter of 2007 amounted to $16.0 million
and $10.7 million, respectively.
Cost of sales decreased to $100.1 million compared to $113.3 million in
the fourth quarter of 2006, a decrease of $13.2 million. The decrease is
mainly explained by the reclassification of Specified Items which, for the
most part were charged against cost of sales in the first quarter of 2007 and
from additional charges resulting from the voluntary product recall.
Gross profit decreased to $28.7 million compared to $51.5 million in the
fourth quarter of 2006. Gross margin was 22% compared to 31% in the fourth
quarter of 2006.
Gross profit in the fourth quarter of 2007 was impacted by the following
factors:
- $1.2 million of additional Specified Items compared to the fourth
quarter of 2006.
- Lower gross profit generated by the MAGNETIX and the Boys 5-plus product
lines of $15.0 million due to lower unit sales and prices.
- Lower manufacturing efficiencies resulting primarily from the inventory
reduction plan initiated by the Corporation and the downsizing of the
Woodridge, New Jersey facility which was fully closed in December 2007. The
impact of lower manufacturing efficiencies on gross profit amounted to
approximately $2.7 million.
- $4.1 million of Other Charges.
Marketing and advertising expenses were to $10.7 million compared to $10.6
million in the fourth quarter of 2006.
Research and development expenses decreased to $4.9 million compared to
$5.9 million in the fourth quarter of 2006 due to the timing of product
development initiatives.
Other selling, distribution and administrative expenses amounted to $41.1
million compared to $27.9 million in the fourth quarter of 2006. This increase
is mainly explained by $6.3 million of Specified Items and approximately $7.3
million of additional charges resulting from higher distribution costs,
reflecting the significant growth in International sales as well as
incremental distribution costs incurred while operating several distribution
centers in parallel in anticipation of the closure of the facilities in New
Jersey and in California.
Mainly as a result of lower gross profit and Specified Items incurred
during the quarter, loss from operations was $34.9 million compared to a loss
from operations of $1.0 million in the fourth quarter of 2006.
Interest and other expenses decreased to $6.7 million compared to $7.0
million in the fourth quarter of 2006, reflecting lower debt levels.
In the fourth quarter of 2007, the Corporation recorded a valuation
allowance of $28.0 million on future income tax assets resulting from losses
carried forward originating mainly from Specified Items. Consequently, income
tax expense was $24.5 million compared to an income tax recovery of $10.8
million in the fourth quarter of 2006. The tax rate used to establish the
income tax expense is the applicable estimated effective rate of each entity
of the Corporation. The effective tax rate reflects the Corporation's
structure for tax purposes as well as the financing structure put in place
following the acquisition of MEGA Brands America.
Net loss was $66.2 million, or $1.81 diluted loss per share compared to
net earnings of $2.8 million, or $0.08 diluted earnings per share in the
fourth quarter of 2006.
Cash flows used in operating activities before changes in non-cash
operating working capital amounted to $26.3 million compared to cash flows
generated of $1.8 million in the fourth quarter of 2006. This change resulted
mainly from the higher net loss in the 2007 period. After favourable changes
in non-cash operating working capital in both periods, cash flows from
operating activities were $64.6 million in the fourth quarter of 2007 compared
to $28.0 million in the corresponding 2006 period.
Impact of Specified Items
The following table presents the impact of Specified Items on the 2007
statement of earnings. Management believes that an analysis of full-year and
fourth quarter 2007 operating performance before Specified Items is
appropriate because such items are not typical of ongoing operations.

Twelve-month
period ended
(in thousands US dollars) December 31, 2007
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Unaudited
Unaudited Before
Audited Specified Specified
2007 Items 2007 Items(1)
-------------------------------------------------------------------------

Net sales 524,516 15,182 539,698

Cost of sales 403,358 (65,809) 337,549
-------------------------------------------------------------------------
Gross profit 121,158 80,991 202,149
Gross margin 23.1% 37.5%

Marketing and advertising expenses 26,226 - 26,226
Research and development expenses 21,950 - 21,950
Other selling, distribution and
administrative expenses 131,960 (7,428) 124,532
Gain on foreign currency translation (6,394) - (6,394)
Product liability settlement and
related expenses (2,800) 2,800 -
Voluntary product recall and
replacement 11,425 (11,425) -
Litigation expenses 5,445 (5,445) -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings (loss) from operations before
financial expenses and income taxes (66,654) 102,489 35,835
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Three-month
period ended
(in thousands US dollars) December 31, 2007
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Unaudited
Unaudited Before
Unaudited Specified Specified
2007 Items 2007 Items(1)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net sales 128,819 26,667 155,486

Cost of sales 100,128 10,978 111,106
-------------------------------------------------------------------------
Gross profit 28,691 15,689 44,380
Gross margin 22.3% 28.5%

Marketing and advertising expenses 10,661 - 10,661
Research and development expenses 4,886 - 4,886
Other selling, distribution and
administrative expenses 41,058 (6,839) 34,219
Gain on foreign currency translation (1,354) - (1,354)
Product liability settlement and
related expenses 800 (800) -
Voluntary product recall and
replacement 6,725 (6,725) -
Litigation expenses 832 (832) -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings (loss) from operations before
financial expenses and income taxes (34,917) 30,885 (4,032)
-------------------------------------------------------------------------
-------------------------------------------------------------------------

(1) The terms ''net sales before Specified Items'', ''cost of sales
before Specified Items'', ''gross profit before Specified Items'',
''gross margin before Specified Items'', ''earnings (loss) from
operations before Specified Items'' and ''earnings (loss) before
financial expenses, income taxes and Specified Items'' do not have
any standardized meaning under GAAP and are therefore unlikely to be
comparable to similar measures presented by other companies. We
present them as a measure of operating performance of our ongoing
business without the effects of Specified Items. We exclude such
items because they affect the comparability of our financial results
between periods and could potentially distort the analysis of trends
in business performance.

MD&A Filing

MEGA Brands will file its full-year and fourth quarter 2007 Management's
Discussion and Analysis, as well as its audited consolidated financial
statements and notes for the year ended December 31, 2007 via SEDAR on March
31, 2008. The MD&A, financial statements and notes will be available on the
Corporation's Web site on March 31, 2008.
Conference Call
An analyst conference call will be held at 8:30 a.m. on March 31, 2008 to
discuss the fourth quarter results. Participants may listen to the call by
dialling 1 (800) 732-9303. For those unable to participate, a replay will be
available until April 8, 2008. The replay phone number is (416) 640-1917,
access code 21265367#. A webcast is also available at www.megabrands.com under
the investor relations section.
Forward-looking Statements
All statements in this press release that do not directly and exclusively
relate to historical facts constitute "forward-looking statements". These
statements represent the Corporation's intentions, plans, expectations and
beliefs. In certain instances, these statements require us to make assumptions
and there is significant risk that these assumptions may not be correct.
Furthermore, these statements are subject to risks, uncertainties and other
factors, many of which are beyond the Corporation's control. These factors
include and are not restricted to: financing and interest rate matters,
difficulty in predicting consumer preferences and development and acceptance
of new products, risks related with product recalls, litigation and its
inherent uncertainty, including the recovery of the full product liability
settlement amount, realization of synergies, international operations,
insurance coverage, growth or profitability, dependence on a few large
customers, fluctuations in the price of plastic resins and other raw materials
as well as currency rates, seasonality of toy and stationery industries, risks
related to licensed products, retail environment, and construction toy
litigation. The words "believe", "estimate", "expect", "intend", "anticipate",
"foresee", "plan", and similar expressions and variations thereof, identify
certain of such forward-looking statements, which speak only as of the date on
which they are made. The Corporation disclaims any intention or obligation to
publicly update or revise any forward-looking statements, whether as a result
of new information, future events or otherwise, other than as required by
applicable legislation. Readers are cautioned not to place undue reliance on
these forward-looking statements. More information about the risks that could
cause our actual results to significantly differ from our current expectations
can be found in the "Risks and Uncertainties" section of our annual 2007 MD&A.
About MEGA Brands
MEGA Brands is a trusted family of leading global brands in construction
toys, games & puzzles, arts & crafts and stationery. We offer engaging
creative experiences for children and families through innovative,
well-designed, affordable and high-quality products that deliver on our
Creativity to the Rescue promise. For more information, please visit
http://www.megabrands.com.
The MEGA logo, Creativity to the Rescue, MEGA BLOKS, ROSE ART, MAGNETIX,
BOARD DUDES and MAGNEXT are trademarks of MEGA Brands Inc. or its affiliates.

Consolidated statements of earnings
(in thousands of US dollars, except per share data)
(Unaudited)
Three-month Twelve-month
periods ended periods ended
December 31, December 31,
2007 2006 2007 2006
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(Unaudited)(Unaudited) (Audited) (Audited)
$ $ $ $

Net sales 128,819 164,805 524,516 547,347
-------------------------------------------------------------------------
Cost of sales 100,128 113,272 403,358 328,822
-------------------------------------------------------------------------
Gross profit 28,691 51,533 121,158 218,525

Marketing and advertising
expenses 10,661 10,562 26,226 26,808
Research and development
expenses 4,886 5,858 21,950 18,334
Other selling, distribution
and administrative expenses 41,058 27,861 131,960 112,649
Voluntary product recall
and replacement 6,725 3,995 11,425 5,612
Litigation expenses 832 3,678 5,445 4,769
Product liability settlement
(reimbursement) and
related expenses 800 1,463 (2,800) 15,490
Gain on foreign currency
translation (1,354) (858) (6,394) (4,846)
-------------------------------------------------------------------------
Earnings (loss) from
operations (34,917) (1,026) (66,654) 39,709
-------------------------------------------------------------------------
Interest expenses
Interest on long-term debt 6,119 6,419 25,395 22,526
Amortization of deferred
financing costs 148 252 700 739
Other interest 450 371 417 177
-------------------------------------------------------------------------
6,717 7,042 26,512 23,442
-------------------------------------------------------------------------
Earnings (loss) before
income taxes (41,634) (8,068) (93,166) 16,267
-------------------------------------------------------------------------
Income taxes
Current (1,510) (5,126) (34) (1,217)
Future 26,036 (5,703) 4,004 (7,864)
-------------------------------------------------------------------------
24,526 (10,829) 3,970 (9,081)
-------------------------------------------------------------------------
Net earnings (loss) (66,160) 2,761 (97,136) 25,348
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings (loss) per share
Basic (1.81) 0.09 (2.82) 0.79
Diluted(1) (1.81) 0.08 (2.82) 0.74
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) The dilutive effect of outstanding options under the treasury stock
method for the three-month and the year-end periods ended
December 31, 2007 is nil as it is anti-dilutive.

Consolidated statements of retained earnings (deficit)
(in thousands of US dollars)

Three-month Twelve-month
periods ended periods ended
December 31, December 31,
2007 2006 2007 2006
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(Unaudited)(Unaudited) (Audited) (Audited)
$ $ $ $

Balance, beginning of
period (18,340) 9,875 12,636 (12,712)

Net earnings (loss) (66,160) 2,761 (97,136) 25,348
-------------------------------------------------------------------------
Balance, end of period (84,500) 12,636 (84,500) 12,636
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Consolidated statements of comprehensive loss and
Accumulated other comprehensive loss
(in thousands of US dollars)

Three-month Twelve-month
periods ended periods ended
December 31, December 31,
2007 2006 2007 2006
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(Unaudited)(Unaudited) (Audited) (Audited)
$ $ $ $

Net earnings (loss) for
the period (66,160) 2,761 (97,136) 25,348
-------------------------------------------------------------------------
Other comprehensive loss,
net of income taxes
Loss on derivatives
designated as cash
flow hedges (2,832) - (4,016) -
-------------------------------------------------------------------------
Comprehensive income (loss)
for the period (68,992) 2,761 (101,152) 25,348
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Accumulated other comprehensive
loss
Balance, beginning of period 567 - - -
Impact of adopting the new
accounting policy regarding
financial instruments, net of
income taxes - - 1,751 -
Other comprehensive loss,
net of income taxes (2,832) - (4,016) -
-------------------------------------------------------------------------
Balance, end of period (2,265) - (2,265) -
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Consolidated balance sheets
(in thousands of US dollars)

December 31, December 31,
2007 2006
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(Audited) (Audited)
$ $
Assets
Current assets
Cash and cash equivalents 8,505 13,658
Accounts receivable 125,784 161,612
Inventories 91,681 140,630
Income taxes 8,219 9,317
Future income taxes 4,286 8,354
Derivative financial instruments 306 -
Prepaid expenses 19,650 12,025
-------------------------------------------------------------------------
258,431 345,596

Property, plant and equipment 42,620 43,213
Intangible assets 74,606 79,517
Goodwill 298,938 300,829
Future income taxes 35,119 28,006
Deferred charges - 3,281
-------------------------------------------------------------------------
709,714 800,442
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Liabilities
Current liabilities
Accounts payable and accrued liabilities 136,592 153,437
Additional consideration accrued on
business combination 54,775 57,825
Current portion of long-term debt 8,303 9,609
-------------------------------------------------------------------------
199,670 220,871

Long-term debt 252,441 302,345
Derivative financial instruments 3,659 -
Future income taxes 31,550 27,782
-------------------------------------------------------------------------
487,320 550,998
-------------------------------------------------------------------------

Shareholders' equity
Capital stock 308,601 236,088
Contributed surplus 558 720
Retained earnings (deficit) (84,500) 12,636
Accumulated other comprehensive loss
net of income taxes (2,265) -
-------------------------------------------------------------------------
222,394 249,444
-------------------------------------------------------------------------
709,714 800,442
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Consolidated statements of cash flows
(in thousands of US dollars)

Three-month Twelve-month
periods ended periods ended
December 31, December 31,
2007 2006 2007 2006
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(Unaudited)(Unaudited) (Audited) (Audited)
$ $ $ $
Cash flows from operating
activities
Net earnings (loss) (66,160) 2,761 (97,136) 25,348
Items not affecting cash
and cash equivalents
Amortization of property,
plant and equipment 5,776 3,238 15,753 12,462
Amortization of intangible
assets 190 313 740 667
Amortization of deferred
charges - 364 - 1,044
Impairment intangible
assets 4,171 - 4,171 -
Writeoff property, plant
and equipment 3,167 - 3,167 -
Stock-based compensation
plans (1,261) 798 (1,205) 2,126
Future income taxes 26,036 (5,703) 4,004 (7,864)
Loss on disposal of
property, plant
and equipment 867 - 607 -
Loss (gain) on foreign
currency 909 21 614 (2,610)
-------------------------------------------------------------------------
(26,305) 1,792 (69,285) 31,173

Changes in non-cash operating
working capital items 90,906 26,246 59,662 (15,300)
-------------------------------------------------------------------------
64,601 28,038 (9,623) 15,873
-------------------------------------------------------------------------

Cash flows from financing
activities
Repayment of long-term debt (2,441) (2,404) (9,574) (28,998)
Change in revolving credit
facility (58,600) (20,000) (38,000) 40,000
Repayment of subsidiary
indebtedness upon
acquisition - - - (624)
Amortization of deferred
financing costs 148 - 700 -
Issuance of capital stock 3 2,360 71,296 3,882
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(60,890) (20,044) 24,422 14,260
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Cash flows from investing
activities
Acquisition of property,
plant and equipment (4,134) (4,812) (19,591) (17,456)
Proceeds from disposal
of property, plant
and equipment - 250 798 304
Business combinations - 530 (1,159) (18,890)
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(4,134) (4,032) (19,952) (36,042)
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Increase (decrease) in cash
and cash equivalents (423) 3,962 (5,153) (5,909)
Cash and cash equivalents,
beginning of period 8,928 9,696 13,658 19,567
Cash and cash equivalents,
end of period 8,505 13,658 8,505 13,658
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SOURCE MEGA Brands Inc.

Analysts and investors: Eric Phaneuf, (514) 333-5555 ext. 2538,
ephaneuf@megabrands.com; Media: Harold Chizick, (514) 333-5555 ext. 2338,
hchizick@megabrands.com