Mega Brands Inc. shares fell sharply Thursday despite improved first-quarter results, down eight per cent a day after securities regulators in Quebec made insider trading allegations against the toy maker's top executives.
Shares of the Montreal-based company fell four cents, or 7.69 per cent, to 48 cents in morning trading after allegations against four current and former executives were announced.
Chief executive officer Marc Bertrand, one of those named by Quebec's securities regulator, denied any wrongdoing.
"We are very confident in the outcome based on the facts and we will vigorously defend against these allegations," he said during a conference call.
L'Autorite des marches financiers is claiming nearly $6.5-million from Bertrand, his brother Vic and two former executives for allegedly trading company stock based on non-disclosed information about a boy who died after swallowing a magnetic part that became detached from one of its toys.
Mega Brands chief legal officer Mark Girgis said the company is not subject to the proceedings, which are only seeking the reimbursement of option proceeds and fines.
He noted that a law firm that reviewed the allegations concluded that no action was required by the board.
The Montreal-based toy maker reported a net loss Thursday of $9.3-million (U.S.) or 3 cents per share, compared with earnings of $103-million or $2.39 per share in the same 2010 quarter.
However, the prior-year quarter included a non-recurring accounting gain of $144.3-million resulting from the settlement of debt. Excluding the non-recurring gain, the 2010 net loss would have been $27.7-million.
Meanwhile, net sales in the most recent quarter were up almost $2-million at US$51-million compared with $49.1-million in the same 2010 period, in line with forecasts by analysts polled by Thomson Reuters.
"Operating results are much improved, international sales are up double digits and the construction toy category continues to outperform the toy industry," Mr. Bertrand told analysts.
"We are on track for higher sales and profitability this year."
Toy sales increased by 17 per cent, while international sales grew 23 per cent in the quarter.
Overall sales were hurt by continuing declines in the stationery and activities business, which is expected to improve later in the year.
"Our aim is to stabilize this business through the first three quarters of this year and to show modest growth by year-end through an emphasis on product innovation and strong retail programs."
Gerrick Johnson of BMO Nesbitt Burns said the company is on track for a good year after the results in the seasonally weak first quarter were in line with expectations.
He said the weakness in the stationery business is masking overall improvements in its core toy business.
"They would be rocking and rolling a while lot better if they did not have this stationery albatross hanging around their neck," he said from New York.
Mr. Johnson said the insider allegations come at a bad time and may give some investors pause. "It's something that people are sensitive to right now so it could have a negative effect on investor perceptions in the near term but if that happens it looks like it would be an opportunity to buy more shares at a lower price."
Mega Brands has had some good product and financial results to crow about after several recalls of its magnetic toys reduced sales and nearly forced the company into bankruptcy.
It rewarded senior executives with big pay increases last year as its profits surged to $125.9-million from $10.7-million in 2009 and sales grew 9 per cent.
The sons of company founder Victor Bertrand saw their total remuneration more than triple from 2009 just before Mega Brands completed a recapitalization that reduced its debt by $290-million.
Mega Brands designs, manufactures and markets toys and stationery products in more than 100 countries.
The company has some 1,300 employees with offices, manufacturing facilities and distribution centres in 14 countries.