MEGA Brands announces second quarter 2008 results, closing of CA$75 million financing and $9.3 million insurance recovery



    MONTREAL, Aug. 19 /CNW Telbec/ - MEGA Brands Inc. (TSX: MB)
(the "Corporation") today announces its financial results for the second
quarter and six-month periods ended June 30, 2008.
    Concurrently, the Corporation announces the closing of a private
placement offering of senior unsecured convertible debentures for gross
proceeds of CA$75 million. The proceeds of the offering, combined with
amendments to the Corporation's senior secured credit facilities, provide the
Corporation with the financial resources and flexibility to meet working
capital requirements leading up to the peak toy selling season and to continue
the implementation of its Value Enhancement Plan.
    The Corporation also announces that, subsequent to the closing of the
second quarter financial statements, it has reached an agreement in principle
with its insurers for the recovery of an additional $9.3 million related to
the settlement of lawsuits for magnet ingestion. The Corporation expects to
receive payment shortly and to record this amount in its third quarter
results. This insurance payment will bring the total recovery to
$12.9 million, nearly the full amount of the $13.5 million settlement paid by
the Corporation in 2006.
    "Looking ahead, the next two quarters are traditionally the strongest in
our business and our objective is to restore profitability," stated Marc
Bertrand, President and CEO of MEGA Brands. "This year's new product launches
are occurring in the third and fourth quarters and we are well positioned to
build sales momentum through the balance of the year."

    Second Quarter 2008 Results

    Net sales in the second quarter of 2008 decreased 12.4% to $106.4 million
compared to $121.5 million in the corresponding period last year. This
decrease reflects lower sales in the Toys and Stationery and Activities
product lines as well as additional product recall charges.
    Net sales of our Toys product lines declined to $47.3 million compared to
$57.9 million in the second quarter of 2007. This decrease is due mainly to
lower shipments of licensed toys in the Boys 5-plus category, offsetting
increased sales of preschool construction toys. In the second quarter of 2007,
the Corporation experienced strong sales of licensed products based on two
major theatrical releases, Disney's "Pirates of the Caribbean: At World's End"
and Marvel's "Spider-Man 3". The decrease in sales also reflects $2.5 million
of additional product recall charges related to MAGTASTIK and MAGNAMAN.
    Net sales of Stationery and Activities product lines declined to
$59.1 million compared to $63.6 million in the second quarter of 2007. This
decrease is explained mainly by lower shipments of lower-margin children's
activity products which have been discontinued under the Corporation's SKU
rationalization program.
    On a geographical basis, net sales in North America decreased to
$71.1 million compared to $87.1 million in the second quarter of 2007.
International net sales increased to $35.3 million compared to $34.3 million
in the second quarter of 2007. International net sales accounted for 33.1% of
total net sales in the second quarter of 2008 compared to 28.3% in the
corresponding 2007 period.
    Cost of sales was $71.6 million compared to $74.2 million in the second
quarter of 2007. The Corporation continued to experience higher input costs
and cost of sales also reflects the underutilization of its manufacturing
facilities in Montreal and China.
    Gross profit was $34.8 million compared to $47.3 million in the second
quarter of 2007. Gross margin declined to 32.7% compared to 38.9% in the
second quarter of 2007, mainly as a result of higher costs, unfavorable
product mix due to lower sales of construction toys in the Boys 5-plus
category as well as additional product recall charges.
    Marketing and advertising expenses increased to $5.3 million compared to
$4.5 million in the second quarter of 2007. This increase reflects higher
advertising spending in International markets.
    Research and development expenses decreased to $3.9 million compared to
$6.4 million in the second quarter of 2007. This decrease reflects mainly a
reduction in third-party services, the completion of upfront R&D work for the
new MagNext product line and cost savings resulting from the Corporation's SKU
rationalization program.
    Other selling, distribution and administrative expenses decreased to
$26.0 million compared to $28.2 million in the second quarter of 2007. This
decrease reflects mainly a reduction in administrative expenses as well as
lower warehousing costs offset by higher direct distribution costs. The
Corporation recorded integration charges of $0.9 million during the period
relating to the centralization of distribution activities in North America.
    As a result of the above, loss from operations was $2.4 million compared
to earnings from operations of $8.7 million in the second quarter of 2007.
    Total interest expense was $1.3 million compared to $6.7 million in the
second quarter of 2007. Interest on long-term debt and other interest declined
to $6.2 million compared to $6.5 million in the second quarter of 2007,
reflecting lower indebtedness. During the second quarter of 2008, the
Corporation recorded a change in fair value of $5.6 million related to the
interest rate swap on part of its Term B credit facility.
    Income tax recovery was $0.1 million compared to a recovery of
$1.9 million in the second quarter of 2007. The tax rate used to establish the
income tax expense for the quarterly results is the applicable estimated
effective rate of each entity of the group. 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 $3.6 million or $0.10 diluted loss per share compared to net
earnings of $4.0 million or $0.12 diluted earnings per share in the second
quarter of 2007.

    Recent Developments

    On August 18, 2008, the Corporation executed a sixth amending agreement
(the "Sixth Amendment") to its Credit Agreement dated July 26, 2005 providing
for certain changes to the terms and conditions of its senior secured Credit
Facilities maturing in 2012, including a waiver of the cumulative minimum
EBIDTA ratio covenant for the period ended June 30, 2008. Additionally, the
Sixth Amendment introduces the concept of a new definition of the calculation
of EBIDTA allowing for the add-back of certain non-recurring and non-cash
items. The covenant includes a minimum EBITDA at the end of each quarter up to
and including June 30, 2010, at which point more stringent covenants
previously in place under the Credit Agreement become effective. The revolving
credit facility has been reduced to $100 million.
    On August 18, 2008, the Corporation announced the closing of a private
placement offering of senior unsecured convertible debentures for gross
proceeds of CA$75 million. The proceeds of the Offering will be used as
working capital and for general corporate purposes. The debentures, maturing
on August 31, 2013, will bear interest at a rate of 8% payable semi-annually
in arrears and will be convertible at the option of the holder at any time
prior to the maturity date based on a conversion price equal to approximately
CA$3.19 per common share, subject to customary anti-dilution adjustments. The
debentures will be convertible into 23,512,500 common shares, representing
39% of the common shares of the Corporation on an as converted basis. The
debentures were issued to Fairfax Financial Holdings Ltd., Chiefswood Holdings
Limited, The Owners Fund and Victor J. Bertrand Sr., the founder and chairman
of the board of directors of the Corporation, with Fairfax investing
CA$64 million and Mr. Bertrand investing $7 million in the offering. This
financing was undertaken by the Corporation in connection with its
consideration of its strategic alternatives, including the sale of its
Stationery and Activities business. The financing was approved by the Toronto
Stock Exchange and required certain amendments to the Corporation's credit
facilities which were agreed to by the lenders.

    MD&A Filing

    The Corporation's Management's Discussion and Analysis for the second
quarter ended June 30, 2008 was filed with SEDAR on August 18, 2008 and will
be available on the Corporation's Web site as of 7:00 a.m. August 19, 2008.

    Conference Call

    An analyst conference call will be held at 9:00 a.m. on August 19, 2008
to discuss the results. Participants may listen to the call by dialing
1 (800) 814-4862. For those unable to participate, a replay will be available
until August 26, 2008. The replay phone number is 1 (416) 640-1917, access
code 21278141#.

    About MEGA Brands

    MEGA Brands is a trusted family of leading global brands in construction
toys, games & puzzles, arts & crafts and stationery. They 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. Visit http://www.megabrands.com for more
information.
    The MEGA logo, Creativity to the Rescue, Mega Bloks, Rose Art, MagNext
and Board Dudes are trademarks of MEGA Brands Inc. or its affiliates.

    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. 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 2007 annual MD&A as well as Q1 and Q2 2008
MD&A.

    
    Consolidated statements of earnings
    (in thousands of US dollars, except per share data)
    (Unaudited)

                                  Three-month periods      Six-month periods
                                     ended June 30,          ended June 30,
                                    2008        2007        2008        2007
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
                                       $           $           $           $

    Net sales                    106,385     121,486     185,777     211,592
    -------------------------------------------------------------------------

    Cost of sales                 71,630      74,196     123,219     154,951
    -------------------------------------------------------------------------

    Gross profit                  34,755      47,290      62,558      56,641

    Marketing and advertising
     expenses                      5,294       4,464       9,245      10,771
    Research and development
     expenses                      3,856       6,428       8,406      11,685
    Other selling,
     distribution and
     administrative expenses      26,008      28,246      53,566      56,298
    Voluntary product recall
     and replacement                   -           -           -       4,700
    Litigation expenses            2,311       1,501       3,453       2,313
    Product liability
     settlement and related
     expenses                          -      (1,000)          -      (1,000)
    Loss (gain) on foreign
     currency translation           (336)     (1,027)      1,019      (1,458)
    -------------------------------------------------------------------------

    Earnings (loss) from
     operations                   (2,378)      8,678     (13,131)    (26,668)
    -------------------------------------------------------------------------

    Interest expense
      Interest on long-term
       debt                        6,158       6,502      11,429      12,549
      Change in fair value
       of interest rate swap      (5,578)          -      (5,578)          -
      Amortization of deferred
       financing costs               874         122       1,814         292
      Other interest                (172)         40          18         (54)
    -------------------------------------------------------------------------
                                   1,282       6,664       7,683      12,787
    -------------------------------------------------------------------------

    Earnings (loss) before
     income taxes                 (3,660)      2,014     (20,814)    (39,455)
    -------------------------------------------------------------------------

    Income taxes
      Current                        393        (342)      1,314      (1,768)
      Future                        (481)     (1,606)     (8,908)    (17,739)
    -------------------------------------------------------------------------
                                     (88)     (1,948)     (7,594)    (19,507)
    -------------------------------------------------------------------------

    Net earnings (loss)           (3,572)      3,962     (13,220)    (19,948)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Earnings (loss) per share
      Basic                        (0.10)       0.12       (0.36)      (0.61)
      Diluted(1)                   (0.10)       0.12       (0.36)      (0.61)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (1) The dilutive effect of outstanding options under the treasury stock
        method for the three-month period ended June 30, 2008 and for the
        six-month periods ended June 30, 2007 and June 30, 2008 is nil as it
        is anti-dilutive.


    Consolidated statements of deficit
    (in thousands of US dollars)
    (Unaudited)

                                  Three-month periods      Six-month periods
                                     ended June 30,          ended June 30,
                                    2008        2007        2008        2007
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
                                       $           $           $           $

    Balance, beginning of
     period                      (94,148)    (11,274)    (84,500)     12,636

    Net earnings (loss)           (3,572)      3,962     (13,220)    (19,948)
    -------------------------------------------------------------------------

    Balance, end of period       (97,720)     (7,312)    (97,720)     (7,312)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


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

                                  Three-month periods      Six-month periods
                                     ended June 30,          ended June 30,
                                    2008        2007        2008        2007
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
                                       $           $           $           $

    Net earnings (loss) for
     the period                   (3,572)      3,962     (13,220)    (19,948)
    -------------------------------------------------------------------------

    Other comprehensive income
     (loss), net of income taxes
      Gain (loss) on derivatives
       designated as cash flow
       hedges                        356       1,915      (3,552)      1,399
    -------------------------------------------------------------------------
    Comprehensive income (loss)
     for the period               (3,216)      5,877     (16,772)    (18,549)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Accumulated other
     comprehensive income (loss)
    Balance, beginning of period  (6,173)      1,235      (2,265)          -
    Impact of adopting the new
     accounting policy regarding
     financial instruments, net of
     income taxes                      -           -           -       1,751
    Other comprehensive income
     (loss), net of income taxes     356       1,915      (3,552)      1,399
    -------------------------------------------------------------------------
    Balance, end of period        (5,817)      3,150      (5,817)      3,150
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    Consolidated balance sheets
    (in thousands of US dollars)

                                                June    December        June
                                                  30,         31,         30,
                                                2008        2007        2007
                                          (Unaudited)   (Audited) (Unaudited)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
                                                   $           $           $
    Assets
    Current assets
      Cash and cash equivalents                7,728       8,505       4,603
      Accounts receivable                    122,760     125,784     131,092
      Inventories                            112,236      91,681     162,566
      Income taxes                             9,902       8,219       9,234
      Future income taxes                      3,986       4,286       8,064
      Derivative financial instruments             -         306           -
      Prepaid expenses                        21,991      19,650      11,506
    -------------------------------------------------------------------------
                                             278,603     258,431     327,065

    Property, plant and equipment             43,239      42,620      48,199
    Intangible assets                         74,274      74,606      79,149
    Goodwill                                 298,938     298,938     301,988
    Derivative financial instruments               -           -       5,089
    Future income taxes                       49,086      35,119      47,210
    -------------------------------------------------------------------------
                                             744,140     709,714     808,700
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    Liabilities
    Current liabilities
      Accounts payable and accrued
       liabilities                           112,289     136,592     112,229
      Additional consideration accrued
       on business combination                54,775      54,775      58,642
      Derivative financial instruments         1,682           -         535
      Current portion of long-term debt        5,521       8,303       8,861
    -------------------------------------------------------------------------
                                             174,267     199,670     180,267

    Long-term debt                           325,328     252,441     364,279
    Derivative financial instruments           4,260       3,659           -
    Future income taxes                       34,587      31,550      30,693
    -------------------------------------------------------------------------
                                             538,442     487,320     575,239
    -------------------------------------------------------------------------

    Shareholders' equity
      Capital stock                          308,677     308,601     237,071
      Contributed surplus                        558         558         552
      Deficit                                (97,720)    (84,500)     (7,312)
      Accumulated other comprehensive
       income (loss) net of income taxes      (5,817)     (2,265)      3,150
    -------------------------------------------------------------------------
                                             205,698     222,394     233,461
    -------------------------------------------------------------------------
                                             744,140     709,714     808,700
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    Consolidated statements of cash flows
    (in thousands of US dollars)
    (Unaudited)
                                  Three-month periods      Six-month periods
                                     ended June 30,          ended June 30,
                                    2008        2007        2008        2007
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
                                       $           $           $           $

    Cash flows from operating
     activities
      Net earnings (loss)         (3,572)      3,962     (13,220)    (19,948)
      Items not affecting cash
       and cash equivalents
        Amortization of property,
         plant and equipment       3,853       3,389       7,460       6,409
        Amortization of
         intangible assets           166         183         332         368
        Stock-based compensation
         plans                      (203)         25        (632)       (100)
        Future income taxes         (481)     (1,606)     (8,908)    (17,739)
        Gain on disposal of
         property, plant and
         equipment                     -         (20)          -        (240)
        Loss on foreign currency     245         246         890         383
    -------------------------------------------------------------------------
                                       8       6,179     (14,078)    (30,867)

    Changes in non-cash
     operating working capital
     items                       (13,075)    (45,740)    (43,244)    (32,215)
    -------------------------------------------------------------------------
                                 (13,067)    (39,561)    (57,322)    (63,082)
    -------------------------------------------------------------------------

    Cash flows from financing
     activities
      Repayment of long-term
       debt                       (2,312)     (2,330)     (4,665)     (4,719)
      Change in revolving
       credit facility            26,500      45,800      75,000      69,000
      Amortization of deferred
       financing costs               875         122       1,815         292
      Amortization of
       comprehensive loss on
       interest rate swap            575           -         575           -
      Unrealized gain on
       derivative financial
       instruments related to
       interest rate swap         (6,153)          -      (6,153)          -
      Addition to deferred
       financing costs                 -           -      (2,666)          -
      Issuance of capital stock        -          72          76         774
    -------------------------------------------------------------------------
                                  19,485      43,664      63,982      65,347
    -------------------------------------------------------------------------

    Cash flows from investing
     activities
      Acquisition of property,
       plant and equipment        (2,763)     (5,540)     (7,437)    (11,776)
      Proceeds from disposal of
       property, plant and
       equipment                       -           -           -         798
      Business combinations            -           -           -        (342)
    -------------------------------------------------------------------------
                                  (2,763)     (5,540)     (7,437)    (11,320)
    -------------------------------------------------------------------------

    Increase (decrease) in cash
     and cash equivalents          3,655      (1,437)       (777)     (9,055)
    Cash and cash equivalents,
     beginning of period           4,073       6,040       8,505      13,658
    -------------------------------------------------------------------------
    Cash and cash equivalents,
     end of period                 7,728       4,603       7,728       4,603
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Supplementary disclosure of
     cash flow information
      Interest paid                2,538       6,143       8,231      12,531
      Income taxes paid
       (recovered)                 2,863       1,908       2,553      (2,094)

    Non cash item
      Property, plant and
      equipment acquired by
      means of capital leases          -           -         622           -
    
    %SEDAR: 00017602EF




For further information:

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


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