Report to Shareholders For the third quarter ended September 30, 2012

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2 Report to Shareholders For the third quarter ended September 30, 2012 MEGA Brands achieved higher sales and earnings, improved gross margin and stronger cash flow in the third quarter ended September 30, After nine months, we are well ahead of 2011 and well-positioned for the fourth quarter. Consolidated net sales increased 5% to $140.1 million compared to $133.4 million in the corresponding period of last year. Year-to-date net sales are up 9%. Toy sales were up 5%, with growth in both the Preschool and Boys construction categories. Going back to the fourth quarter of 2009, we have now achieved year-over-year sales growth in Toys in 11 of the last 12 quarters. Sales of Stationery & Activities products were up 3% in the quarter. This is the sixth consecutive quarter of year-over-year improvement in this business. On a geographical basis, our North American sales were 19% higher for the quarter, largely thanks to a solid performance in construction toys. Our International business has underperformed -- in part due to unfavourable currency exchange rates. The sales growth, combined with margin improvement, translated into higher profitability for the quarter. Earnings before interest, taxes, depreciation and amortization ( EBITDA ) increased to $28.2 million compared to $25 million last year. Year-to-date EBITDA is $35.2 million compared to $28.8 million last year, an increase of 22%. EBITDA is a supplementary financial measure. Net earnings were $19.5 million or $1.19 per share compared to $17.1 million or $1.04 per share in the third quarter last year. Year-to-date net earnings are $12.6 million or 77 cents per share compared to $8.1 million or 40 cents per share in TOTAL NET SALES 5% TOY SALES 5% STATIONERY & ACTIVITIES SALES 3% Looking Ahead Heading into the fourth quarter, we are focused on two key product launches and targeted campaigns to support retail sales of our products through the holiday season. We recently began shipping the MEGA BLOKS Skylanders Giants TM collection and these products will be appearing in stores across the US in the coming days. A few weeks from now we will launch MEGA BLOKS Barbie TM. Both product lines have attracted a lot of attention and positive reviews, and we are excited to bring them to consumers earlier than anticipated. Based on the strength and appeal of the Barbie TM and Skylanders TM franchises, we see a bright future for these two product lines as part of the MEGA BLOKS family into 2013 and beyond. In conclusion, the improvement in our financial performance during the first three quarters has been achieved in an uncertain economic environment. Thanks to a strong product line, we have increased our listings at North American retailers compared to last year, positioning MEGA Brands for a stronger fourth quarter than in The construction category continues to be among the top performers in the toy industry and both our Preschool and Boys offerings are finding favour with retailers and consumers. The common denominators of our good performance to date have been innovation and execution, and we take this opportunity to thank all of our teams for their contribution. MEGA Brands Report to Shareholders Q

3 Management's Discussion and Analysis For the third quarter ended September 30, 2012 The following Management's Discussion and Analysis of Financial Position and Results of Operations ( MD&A ) for MEGA Brands Inc. and its subsidiaries (referred to hereunder as MEGA Brands or the Corporation ) should be read in conjunction with the unaudited condensed interim Consolidated Financial Statements and Notes thereto for the three- and nine-month periods ended September 30, 2012 and 2011, as well as the Audited Consolidated Financial Statements and Notes thereto for the year ended December 31, The financial information in this MD&A and in the Corporation s financial statements has been prepared in accordance with International Financial Reporting Standards ( IFRS ) of the International Accounting Standards Board ( IASB ). The interim financial statements have been reviewed by the Corporation s auditors in accordance with the guidance set forth in the Canadian Institute of Chartered Accountants Handbook Section 7050, Auditor Review of Interim Financial Statements. This MD&A is current as at October 31, All figures in this MD&A are expressed in U.S. dollars, unless otherwise indicated. Forward-Looking Statements The Corporation may make statements in this MD&A that reflect its current expectations regarding future results of operations, performance and achievements. These are forward-looking statements and reflect management s current beliefs. Forward-looking statements generally can be identified by the use of forward-looking terminology such as may, could, should, would, will, expect, intend, estimate, anticipate, plan, foresee, believe or continue or the negatives of these terms or variations of them or other similar terminology. Forward-looking statements in this MD&A include, but are not limited to, statements and references to: access to sufficient liquidity and capital resources to meet the needs of the Corporation over the next twelve months and expectations regarding the performance of the Montreal manufacturing facility. Readers are cautioned, however, not to place undue reliance on forward-looking statements as there can be no assurance that the plans, intentions or expectations upon which they are based will occur. By their nature, forward-looking statements involve numerous assumptions, known and unknown risks and uncertainties, both general and specific, that contribute to the possibility that the predictions, forecasts, projections and other forward-looking statements will not occur. This may cause the Corporation s actual performance and financial results in future periods to differ materially from any estimates or projections of future performance or results expressed or implied by such forward-looking statements. The Corporation disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required pursuant to applicable laws. The following important factors could cause the Corporation s actual performance or financial results to differ materially from historical results and/or those results presently estimated or projected: general economic conditions; success in developing new products; difficulty in predicting consumer preferences and the acceptance of new products; risks associated with litigation; risks associated with product liability claims, product recalls and government regulation; risks inherent in the Corporation s international operations, including product sourcing from Asia; the Corporation s ability to obtain adequate insurance coverage; the Corporation s dependence on a few large customers; risks associated with customer and credit risk; fluctuations in the price of plastic resins and other raw materials used by the Corporation; the seasonality of the Toy and Stationery industries; the Corporation s ability to maintain licensed products; risks associated with the Corporation s tax structure; the Corporation s ability to finance its operations; risks related to the asset-based credit facility; foreign currency fluctuations; and interest rate fluctuations. For more information on the risks, uncertainties and assumptions that could cause the Corporation s actual performance or financial results to differ materially from historical results and/or current expectations, please refer to the Risks and Uncertainties section of the MD&A for the year ended December 31, 2011 ( 2011 Annual MD&A ), which is available under the Corporation s profile on SEDAR at MEGA Brands Report to Shareholders Q

4 Recent Developments MEGA BLOKS Products Named to Holiday Toy List The MEGA BLOKS Skylanders Giants collection, which is based on the sequel to the number one children s video game Skylanders Spyro s Adventure, has been selected by Time to Play (timetoplaymag.com) for its Holiday 2012 Most Wanted Toys List. The MEGA BLOKS Skylanders Giants collection was launched in stores in late October. Time to Play is a respected US-based source of information for adults on toys and other entertainment products for children and families. New Mobile Application for Families The Corporation launched a free mobile application ( app ) Mega Bloks First Builders Let s Build! which encourages parents and children to build and play together with the Mega Bloks First Builders preschool construction system. The app features block by block animated instructions for a selection of over 20 block models including animals, boats, vehicles and more, and includes visuals and sound effects. It also allows parents to share their creations with family and friends via , Facebook and Twitter. The Mega Bloks First Builders Let s Build! app is available in five languages: English, French, Spanish, Italian and German, and is free to download for iphone, ipod Touch and ipad. Business Overview MEGA Brands designs, manufactures and markets high quality toys and stationery products. Headquartered in Montreal, the Corporation has approximately 1,600 employees with offices, manufacturing facilities or distribution centers in 14 countries. The Corporation's products are sold in over 100 countries. The Corporation manages its operations under two product segments, Toys and Stationery & Activities. The Toys segment is comprised of MEGA BLOKS construction toys, MEGA PUZZLES and MEGA GAMES. The Stationery & Activities segment is comprised of ROSE ART art materials and craft and activity sets, BOARD DUDES presentation boards and accessories, and writing instruments. Strategy and Objectives Product Innovation Product innovation is the key success factor in the toy industry and the main driver of sales growth. The Corporation annually renews approximately 40-50% of the previous year's toy sales with new product lines and extensions, enhancements and replacements of existing lines. This is met by investing 3-4% of annual sales on new product design, engineering, prototyping and development. Strategic Licensing Licensed products complement the Corporation s internal product development initiatives. The Corporation s focus is on evergreen brands with enduring popularity that have the potential to expand its product lines and drive incremental sales growth. The Corporation s product lines feature toys based on licensing agreements with Blizzard Entertainment Inc., Caterpillar Inc., Electronic Arts Inc., John Deere, Mattel, Inc., Microsoft Corporation, Mind Candy Limited, Saban Brands, Sanrio Inc., Viacom Media Networks and other licensors. MEGA Brands Report to Shareholders Q

5 Geographic Diversification North America The Corporation s primary market is North America (U.S. and Canada), which accounted for 64% of consolidated total net sales in 2011 compared to 65% in The MEGA BLOKS brand enjoys strong consumer recognition in North America and the Corporation has a significant market share in the construction toy category. In arts & crafts and presentation boards, the Corporation is a major player through its ROSE ART and BOARD DUDES brands, respectively. International Penetration of international markets has historically been an important growth driver for the MEGA BLOKS brand. The Corporation s toys are sold in over 100 countries, supported by its own sales and marketing organization, partnerships and distributorships providing global market coverage. International net sales accounted for 36% of consolidated total net sales in 2011 compared to 35% in Results of Operations Supplementary Financial Measures The analysis of the Corporation s operating performance and financial condition is based primarily on IFRS financial measures. The Corporation also uses supplementary financial measures that are non- IFRS financial measures to explain its financial results. Readers are cautioned that non-ifrs financial measures, including EBITDA as described below, do not have standardized meaning and are unlikely to be comparable to similar measures used by other issuers. Management uses supplementary financial measures and believes that such measures provide meaningful information for assessing the Corporation s operating performance and financial condition on a basis that is both consistent and comparable between reporting periods. The Corporation believes that the financial community also uses such measures or similar measures, among others, to assess the Corporation s performance and prospects. The Corporation has identified certain write-offs, charges and gains as Specified items since they make it difficult to analyze trends in its operating performance. These are described below under various headings, along with their classification in the financial statements according to IFRS. In this MD&A, the Corporation discusses certain results on both an IFRS basis and as adjusted for relevant Specified items. As supplemental information for readers, the Corporation also presents the impact of Specified items on earnings from operations and on net earnings. The Corporation does not imply that Specified items are non-recurring. Specified items impacting results of operations in the three- and nine-month periods ended September 30, 2012 Specified items had a negative impact on earnings before income taxes of $0.3 million in the nine-month period ended September 30, 2012 ($0.1 million in the third quarter), as follows: Contingent consideration on business acquisition The Corporation recorded a contingent consideration on business acquisition of $0.3 million ($0.1 million in the third quarter) related to the Stationery & Activities segment. This charge is presented as a separate item in the income statement. MEGA Brands Report to Shareholders Q

6 Specified items impacting results of operations in the three- and nine-month periods ended September 30, 2011 Specified items had a negative impact on earnings before income taxes of $3.9 million in the nine-month period ended September 30, 2011 ($0.1 million in the third quarter), as follows: Settlement of debt The Corporation recorded a loss on settlement of debt of $3.0 million (nil in the third quarter). Of this amount, $1.2 million is associated with the repurchase of debentures and the balance is explained by the write-off of related deferred financing costs. Loss on settlement of debt is presented as a separate item on the income statement. Contingent consideration on business acquisition The Corporation recorded a contingent consideration on business acquisition of $0.9 million ($0.1 million in the third quarter) related to the Stationery & Activities segment. This charge is presented as a separate item in the income statement. Three- and nine-month periods ended September 30, 2012 compared to three- and ninemonth periods ended September 30, 2011 Selected Financial Information The following table presents a summary of selected data for the three- and nine-month periods ended September 30, 2012 and 2011: (in thousands of US dollars) Three-month periods ended September 30, 2012 $ 2011 $ Nine-month periods ended September 30, $ $ Total net sales 140, , , ,332 Toys 111, , , ,872 Stationery and Activities 28,375 27,440 86,723 78,460 North America 94,183 79, , ,015 International 45,874 54,314 91,563 99,317 Cost of sales 84,076 80, , ,074 Gross profit 55,981 52, , ,258 Earnings from operations 24,667 21,950 25,594 19,626 Net earnings 19,523 17,050 12,576 8,096 Net Sales Net sales in the third quarter of 2012 increased 5% to $140.1 million compared to $133.4 million in the corresponding period of Net sales of Toys product lines increased 5% to $111.7 million compared to $105.9 million in the third quarter of This growth reflects higher sales of construction toys in both the Preschool and Boys categories. Toys sales have increased year-over-year in 11 of the last 12 quarters. Net sales of Stationery & Activities product lines increased 3% to $28.4 million compared to $27.4 million in the third quarter last year. This marked the sixth consecutive quarter of year-overyear sales improvement for this segment. MEGA Brands Report to Shareholders Q

7 On a geographic segment basis, net sales in North America increased 19% to $94.2 million compared to $79.0 million in the third quarter of 2011, reflecting a contribution from both of the Corporation s product segments. International net sales decreased to $45.9 million compared to $54.3 million in the third quarter of 2011, reflecting mainly a difficult economic environment in Europe as well as unfavourable currency movements. International net sales accounted for 33% of consolidated total net sales compared to 41% of sales in the third quarter of last year. For the nine-month period ended September 30, 2012, net sales increased 9% to $292.7 million compared to $268.3 million in the same period last year. Net sales of Toys were up 8% to $206.0 million compared to $189.9 million in the corresponding 2011 period. This increase reflects higher sales of construction toys in both the Preschool and Boys categories. Sales of Stationery & Activities products increased 11% to $86.7 million compared to $78.5 million in the corresponding 2011 period, due mainly to higher sales in the children s activities and writing instruments categories. On a geographic segment basis, North American sales increased 19% to $201.2 million compared to $169.0 million in the same period last year. International sales declined to $91.6 million or 31% of total net sales compared to $99.3 million or 37% of total net sales in the corresponding 2011 period. Cost of Sales and Gross Profit Cost of sales increased to $84.1 million compared to $81.0 million in the third quarter of This increase reflects mainly sales growth and higher input costs, including depreciation of new production equipment in the Corporation s Montreal facility. Gross profit increased to $56.0 million compared to $52.4 million in the third quarter of 2011, while gross margin improved to 40.0% of net sales, compared to 39.2% in the third quarter of The improvement in gross margin reflects mainly favourable product mix and higher efficiency in the Montreal facility as a result of investments in new equipment in 2011 and For the nine-month period ended September 30, 2012, cost of sales increased to $183.1 million compared to $167.1 million in the corresponding period of This increase is due mainly to the factors mentioned above. Gross profit was $109.7 million compared to $101.3 million in the same 2011 period. Gross margin was 37.5% compared to 37.7% in the same nine-month period of Operating Expenses and Other Marketing and advertising expenses were $3.4 million compared to $3.7 million in the third quarter of 2011, reflecting mainly the timing of new product introductions. For the nine-month periods ended September 30, 2012 and 2011, marketing and advertising expenses were $9.2 million. Research and development expenses increased to $3.8 million compared to $3.2 million in the third quarter of This increase is in line with sales growth and the Corporation s expanding new product pipeline. For the nine-month period ended September 30, 2012, such expenses were $11.8 million compared to $10.0 million in the same period last year. Other selling, distribution and administrative expenses were $23.5 million compared to $22.3 million in the third quarter of For the nine-month period ended September 30, 2012, other selling, distribution and administrative expenses were $62.6 million compared to $60.9 million in the corresponding period of The increase in both periods is consistent with the growth in the Corporation s net sales. MEGA Brands Report to Shareholders Q

8 Earnings from operations As a result of the above, earnings from operations increased to $24.7 million compared to $22.0 million in the third quarter of For the nine-month period ended September 30, 2012, earnings from operations were $25.6 million compared to $19.6 million in the same period last year, a year-to-date improvement of 30%. On a product segment basis, earnings from operations for Toys were $23.5 million compared to $20.9 million in the third quarter of Earnings from operations for Stationery &Activities were $1.1 million compared to $1.0 million in the third quarter of For the nine-month period ended September 30, 2012, earnings from operations for Toys were $25.4 million compared to $20.9 million in the same period last year. For Stationery & Activities, earnings from operations were $0.1 million compared to a loss of $1.3 million in the corresponding period of On a geographic segment basis, earnings from operations were $18.2 million for North America and $6.4 million for International compared to $10.6 million and $11.4 million, respectively, in the third quarter of For the nine-month period ended September 30, 2012, earnings from operations for North America were $20.9 million compared to $10.5 million in the same period last year. Earnings from operations for International were $4.7 million compared to $9.2 million in the corresponding period of Financial Expenses Financial expenses decreased to $4.4 million compared to $4.6 million in the third quarter of 2011, reflecting lower debt following the scheduled repayment of debentures at the end of the first quarter of For the nine-month period ended September 30, 2012, financial expenses declined to $13.1 million compared to $14.1 million in the corresponding period of This decrease is explained by lower debt reflecting the repurchase of CA$20.0 million of debentures in the second quarter of 2011 and the repayment mentioned above. Loss on Settlement of Debt The Corporation recorded a loss on settlement of debt of $3.0 million in the second quarter of last year. Of this amount, $1.2 million was related to the repurchase of debentures and the balance reflects the write-off of related deferred financing costs. Income Taxes Income tax expense was $0.7 million compared to $0.3 million in the third quarter of For the ninemonth period ended September 30, 2012, income tax recovery was $0.1 million compared to a recovery of $5.5 million in the corresponding period last year. The tax rate used to establish the income tax expense is the applicable estimated effective rate of each entity of the Corporation. Net Earnings Net earnings were $19.5 million or $1.19 per share compared to $17.1 million or $1.04 per share in the third quarter of Basic earnings per share were calculated on the basis of 16,368,301 weighted average common shares outstanding for the 2012 quarter and 16,363,570 shares in the 2011 period. On a diluted basis, earnings per share were $0.65 compared to $0.51 in the third quarter of For the nine-month period ended September 30, 2012, net earnings were $12.6 million or $0.77 per share compared to $8.1 million or $0.49 per share in the corresponding period of Basic earnings per share were calculated on the basis of 16,365,159 weighted average common shares outstanding in the 2012 period compared to 16,363,570 shares in the 2011 period. On a diluted basis, earnings per share were $0.60 compared to $0.40 in the 2011 period. Note 5 to the financial statements provides detailed information on the calculation of basic and diluted earnings per share. MEGA Brands Report to Shareholders Q

9 EBITDA EBITDA is defined as earnings before interest, taxes, depreciation and amortization and Specified items. EBITDA is a supplementary financial measure. EBITDA increased 13% to $28.2 million compared to $24.9 million in the third quarter of For the nine-month period ended September 30, 2012, EBITDA was $35.0 million compared to $24.9 million in the same period in 2011, a year-to-date improvement of 22%. The following table presents a reconciliation of EBITDA and net earnings for the three- and nine-month periods ended September 30, 2012 and Specified items for both periods are described on pages 5 and 6 of this MD&A. Three-month periods ended September 30, $ Nine-month periods ended September 30, $ $ (in thousands of US dollars) Net earnings 19,523 $ 17,050 12,576 8,096 Financial expenses 4,419 4,552 13,131 14,062 Amortization 3,411 2,931 9,361 8,276 Income taxes (113) (5,516) EBITDA - Before specified items 28,078 24,881 34,955 24,918 Specified items Loss on settlement of debt ,984 Contingent consideration on business acquisition EBITDA 28,173 24,991 35,242 28,786 Financial Position Total assets increased to $313.4 million as at September 30, 2012 compared to $302.9 million as at December 31, This increase is due mainly to higher trade and other receivables, inventories, as well as property, plant and equipment. Current assets increased to $222.4 million compared to $217.3 million as at December 31, 2011, reflecting mainly an increase in trade and other receivables as well as inventories, offset partially by lower prepaid expenses. Trade and other receivables increased to $133.2 million compared to $126.4 million as at December 31, This increase is consistent with the seasonality of the Toys segment, which typically records peak sales for the year in the third quarter. Inventories increased to $75.7 million compared to $69.6 million as at December 31, 2011 and $70.8 million as at September 30, This increase, mainly in finished products, is consistent with the seasonal pattern of the Corporation s business and its sales expectations for the 2012 holiday season. Cash and equivalents were $3.7 million compared to $6.7 million as at December 31, Non-current assets increased to $91.0 million compared to $85.6 million as at December 31, This is due mainly to higher property, plant and equipment, which rose to $38.1 million compared to $32.2 million as at December 31, 2011, reflecting additional investment to improve manufacturing efficiency at the Corporation s Montreal facility, net of depreciation and amortization. MEGA Brands Report to Shareholders Q

10 Current liabilities decreased to $110.4 million compared to $121.9 million as at December 31, This is due primarily to lower trade and other payables. The amount drawn under the Corporation s assetbased credit facility was reduced to $33.3 million compared to $37.3 million as at December 31, Current portion of long-term debt was $7.2 million, representing mainly a principal repayment on the Corporation s debentures due March 31, 2013, and denominated in Canadian dollars, compared to $7.0 million at the end of last year, which was repaid on March 31, Long-term debt increased to $112.5 million compared to $105.3 million as at December 31, This increase reflects a $4.7 million loan from Investissement Québec, capitalized interest on the Corporation s debentures and the impact of the stronger Canadian dollar on the debentures. As at September 30, 2012, the Corporation recorded an unrealized gain on derivative financial instruments of $0.7 million related to unrealized foreign exchange contracts, due mainly to the strengthening of the US dollar against the Euro at the balance sheet date. As at December 31, 2011, the Corporation recorded an unrealized gain of $1.1 million on derivative financial instruments for the same reason as above. The following table presents selected data relating to the Corporation s financial position for the indicated periods: (in thousands of US dollars) September 30, December 31, September 30, $ $ $ Working capital 1) 119, ,455 96,063 Credit availability for working capital purposes under ABL 2) 21,739 17,721 14,846 Property, plant and equipment 38,134 32,172 30,587 Total assets 313, , ,247 Total debt (excl. asset-based credit facility) 119, , ,067 1) Defined as current assets minus current liabilities, excluding current portion of long-term debt. 2) The Corporation has additional borrowing capacity for working capital purposes under an international factoring agreement of up to 10 million euros. As at September 30, 2012, an amount of 4.0 million euros (nil in 2011) was drawn under this agreement. Cash Flows Operating Activities Operating activities provided cash flows of $17.3 million for the nine-month period ended September 30, 2012, compared to cash used of $8.1 million for the same 2011 period. In both periods, changes in noncash operating working capital items were unfavorable ($13.6 million in the 2012 period and $27.9 million in the 2011 period) due mainly to higher trade and other receivables and inventories. Financing Activities Financing activities used cash flows of $4.6 million for the nine-month period ended September 30, 2012, compared to cash flows provided of $23.7 million in the same 2011 period. In the latest nine-month period, the Corporation made a scheduled principal repayment of $7.4 million on its debentures, reduced the amount drawn on its asset-based credit facility by $4.0 million and received a government loan in the amount of $6.6 million. In the corresponding 2011 period, the Corporation repurchased debentures in the amount of $20.6 million, increased the amount drawn under its asset-based credit facility by $40.2 million and received a government loan in the amount of $4.2 million. MEGA Brands Report to Shareholders Q

11 Investing Activities Investing activities used cash flows of $15.8 million for the nine-month period ended September 30, 2012, compared to $18.1 million in the same 2011 period. In the latest period, the Corporation continued to invest under a three-year program to improve manufacturing efficiency at its Montreal facility but at a lower rate than in the first nine months of The balance of investing activities in both periods represents capital spending mainly for production molds. Foreign exchange Fluctuations in foreign exchange rates did not have a material impact on cash and cash equivalents in the nine-month periods ended September 30, 2012 and The Corporation holds the majority of its cash and cash equivalents in US dollars, its reporting currency. Liquidity and Capital Resources Historically, the Corporation s primary sources of liquidity have been cash flows from operations and short-term borrowings under a revolving credit facility. Cash flows from operations could be negatively impacted by decreased demand for the Corporation s products, which could result from factors such as adverse economic conditions and changes in public and consumer preferences, the continued confidence of the Corporation s principal customers in the Corporation and its product lines, or by increased costs associated with manufacturing and distribution of products. The Corporation s primary capital needs are related to inventory financing, accounts receivable funding, debt servicing and capital expenditures for new product line initiatives. As a result of the seasonal nature of the toy and stationery industries, working capital requirements are variable throughout the year. Working capital needs typically grow through the first three quarters as inventories are built-up for the peak sales periods for retailers, being the July- September quarter for the Stationery & Activities product lines and the October-December quarter for the Toys product lines. The Corporation s cash flows from operating activities are typically at their highest levels of the year in the fourth quarter. As at September 30, 2012, the Corporation had drawn $33.3 million under its asset-based credit facility for working capital purposes. Cash and cash equivalents totaled $3.7 million and availability under the credit facility amounted to $21.7 million. As at this date, the Corporation had also drawn 4.0 million euros for working capital purposes under an international factoring agreement of up to 10 million euros. Based on its current business plan, the Corporation believes it will have access to sufficient liquidity and capital resources to repay CA$7.1 million of principal amount of its debentures due on March 31, 2013 and to fund anticipated working capital needs, interest payments on its debentures, investments in property, plant and equipment, as well as capital lease obligations for the next twelve months. MEGA Brands Report to Shareholders Q

12 Financial Obligations The following table presents a schedule of the Corporation s principal repayments for the indicated periods. Capital Leases Government Secured Total Minimum loans debentures principal 12-month periods ending payment Interest Principal repayment (in thousands of US dollars) $ $ $ $ $ $ September 30, ,204 7,241 September 30, ,010 14,407 15,451 September 30, ,010 94,925 95,963 September 30, ,010-1,039 September 30, ,233-1,242 More than five years ,496-7, , , ,432 Selected Quarterly Financial Information The Corporation has historically experienced significant quarterly fluctuations in operating results and anticipates these fluctuations in the future. Retailers require the Corporation to ship products closer to the time they expect to sell the products to consumers creating shorter lead times for production and increased pressure to fill orders promptly. Operating results for any quarter are not necessarily indicative of results for any future period and are comparable only with corresponding periods of prior years. The Corporation s profitability is typically higher for the last two quarters of the year as a result of fairly constant fixed operating expenses while net sales are at their highest levels of the year. This seasonality is consistent with the results of other companies in the industry. The following table presents selected quarterly financial information for each of the eight most recently completed quarters. (in thousands of US dollars, except per share data) Q Q Q Q Q Q Q Q (Unaudited) Net sales 140,057 94,489 58, , ,354 83,942 51, ,809 Gross profit 55,981 34,265 19,431 39,920 52,396 31,050 17,812 44,867 Earnings (loss) from operations 24,667 6,049 (5,122) 5,114 21,950 4,203 (6,527) 11,289 Net earnings (loss) 19,523 1,586 (8,533) , (9,264) 11,292 Earnings (loss) per share basic (0.52) (0.57) 0.69 Earnings (loss) per share diluted 0.65 (0.07) (0.52) (0.14) 0.51 (0.18) (0.57) 0.17 Cash flows from operating activities - 17,329-10,616-19,939-11,970 (17,361) (10,694) 19,917 16,094 Earnings (loss) per share adjusted basic* (0.52) (0.56) 0.70 Earnings (loss) per share adjusted diluted* 0.65 (0.06) (0.52) (0.13) 0.51 (0.05) (0.56) 0.17 EBITDA* 28,173 9,225 (2,156) 10,444 24,991 7,643 (3,848) 14,321 Net debt** 149, , , , , , , ,265 *Adjusted earnings (loss) per share reflects Specified items and is a supplementary financial measure ** Defined as long-term debt and asset-based credit facility, less cash and cash equivalents MEGA Brands Report to Shareholders Q

13 Shares Outstanding As at October 31, 2012, the number of common shares issued and outstanding was 16,395,120. There are 243,844,000 warrants outstanding, with holders entitled to purchase one common share for every 20 warrants at an exercise price of CA$9.94, at any time until March 30, Outstanding stock options total 1,044,083. Financial Risk Management The Corporation is exposed to risks of varying degrees of significance which could affect its ability to achieve its strategic objectives for growth. The main objectives of the Corporation's risk management process are to ensure that risks are properly identified and that the capital base is adequate in relation to these risks. The principal financial risks to which the Corporation is exposed are described below. Liquidity risk Liquidity risk is the risk that the Corporation is not able to meet its financial obligations as they fall due or can only do so at excessive cost. The Corporation manages this risk by maintaining detailed cash forecasts and long-term operating and strategic plans. The management of consolidated liquidity requires a constant monitoring of expected cash inflows and outflows which is achieved through a detailed forecast of the Corporation's consolidated liquidity position to ensure adequacy and efficient use of cash resources. The adequacy of liquidity is assessed in view of seasonal needs and the maturity profile of indebtedness. The Corporation monitors potential financing opportunities on an ongoing basis to maintain adequate financial flexibility. The following are the contractual commitments of the financial liabilities as at September 30, 2012: Between Between Carrying Contractual Less than one and four and More than amount cash flows one year three years five years five years (in thousands of US dollars) $ $ $ $ $ $ Asset-based credit facility 33,261 33,261 33, Trade and other payables 64,725 64,725 64, Government loans 8,779 11,759-2,020 2,243 7,496 Secured debentures 111, ,701 18, , Finance lease obligations , , , ,101 2,277 7,496 Market risk i) Foreign exchange risk The Corporation is exposed to market risks attributable to fluctuations in foreign exchange rates, primarily changes in the value of the US dollar versus the euro and British pound sterling for its international operations and the variation of the Canadian dollar to the US dollar for its Canadian operations. The Corporation's policy is to stabilize earnings by limiting foreign currency exposure mainly through foreign currency forward contracts. The Corporation s risk management approach is to have hedging mechanisms in place for a maximum period of 24 months. The Corporation's hedging policy strictly prohibits speculative foreign exchange transactions. The Corporation only enters into forward contracts with acceptable credit profile financial counterparties. Exchange rate fluctuations have a limited impact on cash and cash equivalents denominated in foreign currencies. The Corporation s functional currencies are the US and Canadian dollars and the Corporation converts non-us dollar cash and cash equivalents to US dollars on a regular basis to minimize the impact of foreign exchange fluctuations. MEGA Brands Report to Shareholders Q

14 The following table presents a summary of the Corporation s foreign currency commitments as at September 30, 2012: Notional amount Average exchange rate Notional equivalent Fair market value Foreign currency contracts Maturing up to (in thousands of US dollars) $ $ $ Sell - US$ to CA$ 6, September ,886 (343) - Euro to US$ 11, September ,200 (442) - GBP to US$ 7, September , The following table details the Corporation's sensitivity to a 10% strengthening of the Canadian dollar, Euro, British pound sterling and Mexican peso, which management believes is reasonably possible, on net earnings and equity against the US dollar. This sensitivity analysis relates to foreign currencydenominated financial instruments and adjusts their translation at quarter-end for a 10% change in foreign exchange rates. Nine-month periods ended September 30, 2012 Currency Earnings Equity (in thousands of US dollars) $ $ CA$ - (8,110) Euro 1,742 - GBP 1,058 - MXN - 2,240 ii) Interest rate risk Interest rate risk is the risk that the future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Corporation is exposed to interest rate risk resulting from fluctuations in interest rates on cash equivalents and short-term investments that earn interest at market rates, as well as on the assetbased credit facility (ABL) that fluctuates according to interest rates. As at September 30, 2012, the Corporation was exposed to interest rate risk on $33.3 million drawn under the ABL. For the ninemonth period ended September 30, 2012, a 1% change in the Libor and prime rates, with all other variables remaining constant, would have had an unfavorable impact of $0.3 million ($0.1 million on September 30, 2011). The Corporation does not use derivative instruments to reduce its exposure to interest rate risk. The Corporation manages its interest rate risk by maximizing the interest income earned on excess funds while maintaining the necessary liquidity to conduct its day-to-day operations. MEGA Brands Report to Shareholders Q

15 Price of raw materials The Corporation s principal raw material is plastic resin, which is subject mainly to the volatility of crude oil prices. The Corporation purchases resin directly to meet the production needs of its Montreal factory. Contracts for products manufactured by qualified third-party suppliers in Asia include specific provisions with respect to resin prices which typically trigger a renegotiation by either party if resin prices and exchange rates fluctuate beyond certain parameters. Decreases in supplier production capacity and/or strong demand could exert upward pressure on prices. While in the past the Corporation has succeeded in passing on a portion of the increase in resin prices to its customers, there is no assurance it will be able to continue to do so in the future, particularly if there are substantial price increases or if such increases are sustained over an extended period of time. There is no assurance the Corporation will be successful in limiting price increases or benefiting from price decreases of the resin it purchases indirectly as part of its manufacturing contracts with third-party suppliers. Prices of other raw materials used by the Corporation are also subject to fluctuations. Unfavorable swings in commodity prices could have a material adverse effect on the financial condition and results of operations. An increase of 10% in the price of plastic resin purchased directly by the Corporation for its Montreal factory would have had an unfavorable impact of $1.7 million on gross margin for the nine-month period ended September 30, 2012 and $2.1 million in the corresponding period in Credit risk Credit risk is the risk of an unexpected loss if a customer or third party to a financial instrument fails to meet its contractual obligations. The Corporation reduces its credit risks arising from cash and cash equivalents, derivative financial instruments and deposits with banks and financial institutions by dealing with creditworthy financial institutions. The Corporation's receivables consist of invoices to customers net of provisions for chargebacks for customer-related programs. This risk is reduced through the analysis of the financial position of its customers and the regular review of their credit limits, and by taking steps to mitigate the risk of loss by obtaining credit insurance. Because of the geographic diversity of its customers and its procedures for the management of commercial risks, however, the Corporation believes there is no particular concentration of credit risk. Significant Accounting Policies and Use of Estimates The Corporation prepares its financial statements in accordance with International Financial Reporting Standards ( IFRS ), using the US dollar as the reporting currency. The consolidated financial statements include the accounts of the Corporation and its wholly-owned subsidiaries since their date of acquisition. All intercompany balances and transactions have been eliminated on consolidation. The Corporation s significant accounting policies are described in Note 2 to its 2011 audited annual consolidated financial statements, its 2011 Annual MD&A and Note 2 to the unaudited consolidated financial statements for the three- and nine-month periods ended September 30, The preparation of financial statements in compliance with IFRS requires estimates and assumptions that affect the Corporation s results of operations and financial position. By their nature, these judgments are subject to an inherent degree of uncertainty and are based on historical experience, trends in the industry and information available from outside sources. Management reviews its estimates on an ongoing basis. MEGA Brands Report to Shareholders Q

16 Disclosure Controls and Procedures and Internal Controls over Financial Reporting In the third quarter ended September 30, 2012, the Corporation did not make any significant changes in, nor take any significant corrective actions regarding its internal controls or other factors that could significantly affect such internal controls. The Corporation s CEO and CFO periodically review the Corporation s disclosure controls and procedures for effectiveness and conduct an evaluation each quarter. As at the end of the first quarter, the Corporation s CEO and CFO were satisfied with the effectiveness of the Corporation s disclosure controls and procedures. Risks and Uncertainties The Corporation is subject to a variety of business risks and uncertainties. Risks and uncertainties that could materially affect the Corporation s business, financial condition and results of operations are disclosed in the "Risks and Uncertainties" section of the 2011 Annual MD&A, which are hereby incorporated by reference. There have been no changes to risks and uncertainties since December 31, Additional Information This MD&A is dated October 31, Additional information about the Corporation, including the Annual Information Form, is available on SEDAR at MEGA Brands Report to Shareholders Q

17 Unaudited Interim Consolidated Income Statements (in thousands of US dollars, exc ept per share amounts) Three-month periods ended September 30, $ $ Nine-month periods ended September 30, $ $ Net sales 140, , , ,332 Cost of sales 84,076 80, , ,074 Gross profit 55,981 52, , ,258 Marketing and advertising expenses 3,358 3,721 9,234 9,219 Research and development expenses 3,754 3,172 11,813 9,965 Other selling, distribution and administrative expenses 23,533 22,281 62,646 60,944 Contingent consideration on business acquisition Loss on foreign currency translation 574 1, Earnings from operations 24,667 21,950 25,594 19,626 Financial expenses 4,419 4,552 13,131 14,062 Loss on settlement of debt ,984 4,419 4,552 13,131 17,046 Earnings before income taxes 20,248 17,398 12,463 2,580 Income taxes Current (113) (4,968) Deferred - (139) - (548) (113) (5,516) Net earnings 19,523 17,050 12,576 8,096 Earnings per share Basic Diluted MEGA Brands Report to Shareholders Q

18 Unaudited Interim Consolidated Statements of Comprehensive Income (in thousands of US dollars, exc ept per share amounts) Three-month periods ended September 30, $ $ Nine-month periods ended September 30, $ $ Net earnings 19,523 17,050 12,576 8,096 Other comprehensive income (loss): Cumulative translation adjustment (925) (1,182) 1,357 (2,063) Other comprehensive income (loss): (925) (1,182) 1,357 (2,063) Comprehensive income 18,598 15,868 13,933 6,033 MEGA Brands Report to Shareholders Q

19 Consolidated Statements of Financial Position (in thousands of US dollars) September December 31, 2011 (Unaudited) (Audited) $ $ Assets Current assets Cash and cash equivalents 3,654 6,745 Trade and other receivables 133, ,359 Inventories 75,683 69,560 Derivative financial instruments Prepaid expenses 9,171 13,760 Total current assets 222, ,328 Non-current assets Property, plant and equipment 38,134 32,172 Intangible assets 22,877 23,193 Goodwill 30,000 30,000 Derivative financial instruments Total assets 313, ,924 Liabilities Current liabilities Asset-based credit facility 33,261 37,279 Trade and other payables 64,725 71,762 Income taxes 5,122 5,832 Current portion of long-term debt 7,244 7, , ,886 Non-current liabilities Long-term debt 112, , , ,275 Equity Share capital 429, ,007 Warrants 24,430 24,430 Contributed surplus 4,084 3,492 Deficit (361,746) (374,322) Accumulated other comprehensive loss (5,487) (6,844) Total equity 90,604 75,763 Total liabilities and equity 313, ,924 MEGA Brands Report to Shareholders Q

20 Unaudited Consolidated Statement of Changes in Equity (in thousands of US dollars) Accumulated other Share capital Warrants Contributed surplus Deficit comprehensive loss Total equity $ $ $ $ $ $ Balance December 31, ,007 24,430 1,982 (382,652) (5,260) 67,507 Net earnings ,096-8,096 Other comprehensive loss (2,063) (2,063) Stock-based compensation - - 1, ,263 Balance September 30, ,007 24,430 3,245 (374,556) (7,323) 74,803 Balance December 31, ,007 24,430 3,492 (374,322) (6,844) 75,763 Net earnings ,576-12,576 Options exercised 316 (100) 216 Other comprehensive income ,357 1,357 Stock-based compensation Balance September 30, ,323 24,430 4,084 (361,746) (5,487) 90,604 Accumulated other comprehensive loss is comprised solely of Cumulative translation adjustment. MEGA Brands Report to Shareholders Q

21 Unaudited Consolidated Statements of Cash Flows (in thousands of US dollars) Nine-month periods ended September 30, $ $ Operating activities Net earnings 12,576 8,096 Adjustments for: Depreciation of property, plant and equipment 9,045 7,960 Amortization of intangible assets Loss on settlement of debt - 1,236 Stock-based compensation 692 1,263 Writeoff deferred financing costs - 1,748 Financial expenses 13,131 14,062 Income taxes (113) (5,516) Loss (gain) on foreign currency 2,849 (3,331) 38,496 25,834 Net change in non-cash working capital balances (13,640) (27,851) Income taxes recovered (paid) (472) 706 Interest paid (7,055) (6,827) Cash flows provided by (used in) operating activities 17,329 (8,138) Financing activities Repayment of debentures (7,411) (20,644) Change in asset-based credit facility (4,018) 40,154 Government loan 6,591 4,152 Issurance of capital stock Repayment of long-term debt Cash flows provided by (used in) financing activities (4,597) 23,694 Investing activities Acquisition of property, plant and equipment (15,765) (18,145) Cash flows used in investing activities (15,765) (18,145) Effect of changes in foreign exchange rates on cash and cash equivalents (58) 113 Decrease in cash and cash equivalents (3,091) (2,476) Cash and cash equivalents Beginning of period 6,745 5,277 Cash and cash equivalents End of period 3,654 2,801 MEGA Brands Report to Shareholders Q