MEGA Brands announces 2007 financial results



    MONTREAL, March 31 /CNW Telbec/ - 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
    -------------------------------------------------------------------------
                                    (60,890)   (20,044)    24,422     14,260
    -------------------------------------------------------------------------

    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)
    -------------------------------------------------------------------------
                                     (4,134)    (4,032)   (19,952)   (36,042)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    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
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    





For further information:

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


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