RC2 Reports Second Quarter Results; Reaffirms 2008 Full Year Outlook; Company on Track to Close Children's Publishing Division Acquisition in Third Quarter

RC2 Corporation (NASDAQ:RCRC), today announced its results for the second quarter and six months ended June 30, 2008. Net sales for the second quarter of 2008 decreased by approximately 4% to $89.2 million compared with $93.0 million for the second quarter a year ago. Net sales for the second quarter of 2008, excluding net sales of discontinued product lines and recall-related returns and allowances, of $89.1 million decreased approximately 2% as compared with net sales for the second quarter of 2007, excluding net sales from discontinued product lines and recall-related returns and allowances, of $90.9 million. The Company reported a net loss of $6.4 million, or $0.37 per diluted share, in the 2008 second quarter as compared with net income of $2.5 million, or $0.11 per diluted share, in the year ago second quarter. The results for the second quarter of 2008 and 2007 were negatively impacted by $10.2 million, net of tax, and $4.0 million, net of tax, respectively, in recall-related costs, or $0.58 per diluted share and $0.19 per diluted share, respectively. As discussed further below, the recall-related costs in the second quarter of 2008 primarily relate to the accrual of a one-time cash payment of $15.0 million made in July 2008 to HIT Entertainment in exchange for a release from indemnification claims. (Refer to the attached supplemental consolidated statements of operations as adjusted for recall-related costs). The 2008 second quarter gross margin, excluding the impact of recall-related costs, increased to 45.9% as compared with 43.9% in the prior year second quarter. Selling, general and administrative expenses increased to $34.9 million in the second quarter of 2008, as compared with $32.7 million in the second quarter of 2007, due to higher fixed sales and marketing costs slightly offset by lower variable sales costs. Lower sales volumes and higher operating costs resulted in a decline in operating income, excluding the impact of recall-related costs, to $5.8 million during the second quarter 2008, from $8.9 million in the year ago second quarter. Net sales for the six months ended June 30, 2008 decreased by approximately 11% to $182.5 million compared with $205.6 million for the six months ended June 30, 2007. Net sales for the six months ended June 30, 2008, excluding net sales of discontinued product lines and recall-related returns and allowances, of $181.2 million decreased approximately 8% as compared with net sales for the six months ended June 30, 2007, excluding net sales from discontinued product lines and recall-related returns and allowances, of $197.6 million. The Company reported a net loss of $4.4 million, or $0.25 per diluted share, in the six months ended June 30, 2008, compared with income from continuing operations of $10.4 million, or $0.48 per diluted share, for the six months ended June 30, 2007. The results for the six months ended June 30, 2008 and 2007 were negatively impacted by $11.1 million, net of tax, and $4.0 million, net of tax, respectively, in recall-related costs, or $0.63 per diluted share and $0.19 per diluted share, respectively. The gross margin for the six months ended June 30, 2008, excluding the impact of recall-related costs, increased to 45.7% as compared with 44.4% in the six months ended June 30, 2007. Selling, general and administrative expenses increased to $71.4 million in the six months ended June 30, 2008, as compared with $70.5 million in the six months ended June 30, 2007, due to higher fixed sales and marketing costs partially offset by lower variable sales costs. Lower sales volumes and higher operating costs resulted in a decline in operating income, excluding the impact of recall-related costs, to $11.7 million during the six months ended June 30, 2008, from $21.4 million in the six months ended June 30, 2007. As of June 30, 2008, the Company’s cash balances were approximately $58.0 million. The Company’s outstanding debt at June 30, 2008 was $103.0 million. During the second quarter of 2008, the Company repurchased 0.3 million shares of its common stock for approximately $4.8 million. Through June 30, 2008, the Company has repurchased 4.1 million shares of its common stock for approximately $112.6 million under its existing $150.0 million stock buyback authorization. As noted in a previous press release, on June 23, 2008, the Company announced that it signed a definitive purchase agreement to acquire the Children’s Publishing Division (CPD) of privately-held Publications International, Ltd., which is one of the world’s top children’s book publishers, selling more than 10 million books annually. CPD’s products, which include electronic books, story books, Story Reader® and Poingo™, are sold at toy, mass merchandising, warehouse clubs and book retailers throughout North America, Europe, Latin America and Asia. This acquisition, which is expected to close during the third quarter, is an asset purchase and is subject to customary closing conditions. The purchase agreement calls for payment of $163.0 million of cash which does not include the effect of post-closing working capital adjustments or transaction fees and expenses. As noted in a recent press release, on July 7, 2008, the Company announced it signed an agreement with HIT Entertainment which modifies existing license agreements and provides a release to RC2 in connection with past indemnification claims related to the recall of certain products and other legal matters in exchange for a one-time cash payment. Commentary Curt Stoelting, CEO of RC2 commented, "Our 2008 second quarter results showed an improvement over our 2008 first quarter comparisons. Overall sales declines slowed as compared with the declines of the first quarter with our preschool, youth and adult products category reporting a slight increase in comparable sales. We saw comparable sales increases in our Learning Curve® Thomas & Friends product lines and in John Deere toy product lines partially offset by declines in Bob the Builder, Johnny Lightning® and ride-on product lines. Declines in our mother, infant and toddler products category were primarily a result of eliminating low margin products in our care and toy product lines while sales increased in The First Years® travel gear and feeding product lines. "Sales declines and higher operating expenses negatively impacted our operating results. We continue to closely monitor product line profitability and cost controls. During the second quarter, gross margins benefited from a positive sales mix and from a portion of our current year price increases, which helped offset increases in our product costs. We expect product cost pressures to continue throughout the second half of 2008 and into 2009. "Although we remain concerned about softness in overall consumer spending, ordering trends and retailers’ point of sale comparisons improved late in the second quarter. While it remains difficult to predict the retail sales environment in the second half of 2008, we remain optimistic about our new product introductions. The First Years True Fit™ convertible car seat and Compass B510™ booster seat are off to a good start with additional chain store distribution planned for the second half. Initial shipments of Learning Curve’s Caring Corners™ interactive doll house are occurring as planned and will be widely distributed and promoted throughout the holiday season. "During the third quarter, we expect to complete the CPD acquisition. The children’s publishing business is a strong strategic fit with our Learning Curve brand and creates an early learning platform which complements both our mother, infant and toddler and preschool products categories. CPD’s children’s book portfolio and its licensing relationships will leverage RC2’s operating infrastructure and enhance the growth opportunities for our Learning Curve brand. "We continue to be guided by our strategic plan which includes accelerated development of new high value products. Our new product pipeline in both product categories is strong for 2009. We are particularly excited about several of our new introductions under The First Years brand which will begin shipping in late 2008. Our recently announced Super WHY! preschool play and learning product line is expected to be available for shipments beginning in Spring 2009. Looking forward, CPD acquisition synergies and new product opportunities are expected to improve our future growth and profitability.” Financial Outlook Continuing sales and profits are dependent on a number of factors including the on-going success and expansion of continuing product lines, successful introductions of new products and product lines and retention of key licenses. Other key factors include seasonality, overall economic conditions including consumer retail spending and shifts in the timing of that spending and the timing and level of retailer orders. RC2 reaffirms its full year financial outlook for 2008. The Company continues to expect that full year 2008 diluted earnings per share will range from $1.90 to $2.00. This estimate excludes the impact of recall-related costs and the CPD acquisition which is expected to be accretive in 2008 and 2009. Use of Non-GAAP Financial Information In addition to the results reported in accordance with U.S. generally accepted accounting principles ("GAAP") included in this release, the Company has provided certain non-GAAP financial information, including consolidated statements of operations information excluding recall-related costs, net sales by category adjusted to exclude net sales from discontinued product lines and recall-related returns and allowances and EBITDA (as described in more detail in the next section). Management believes that the presentation of these non-GAAP financial measures provides useful information to investors because this information may allow investors to better evaluate ongoing business performance and certain components of the Company's results. In addition, because the recall-related costs were higher in the second quarter of 2008 as compared with the second quarter of 2007 and the net sales related to discontinued product lines have decreased significantly as the Company sells off the remaining inventory, the Company believes that the presentation of these non-GAAP financial measures enhances an investor's ability to make period-to-period comparisons of the Company's operating results. This information should be considered in addition to the results presented in accordance with GAAP, and should not be considered a substitute for the GAAP results. The Company has reconciled the non-GAAP financial information included in this release to the nearest GAAP measure. See the "Consolidated Statements of Operations As Adjusted for Recall-Related Costs, " "Net Sales by Category Excluding Discontinued Product Lines and Recall-related Returns and Allowances" and "Calculation of Adjusted EBITDA" tables below. EBITDA EBITDA is defined as recurring earnings before interest, taxes, depreciation and amortization and represents operating profit plus other charges set forth in the attached Calculation of Adjusted EBITDA. EBITDA is not adjusted for all non-cash expenses or for working capital, capital expenditures or other investment requirements and, accordingly, is not necessarily indicative of amounts that may be available for discretionary uses. Thus, EBITDA should not be considered in isolation or as a substitute for net earnings or cash provided by operating activities, each prepared in accordance with GAAP, when measuring RC2’s profitability or liquidity as more fully discussed in the Company’s financial statements and filings with the Securities and Exchange Commission. Earnings Conference Call Information The Company’s quarterly earnings conference call will be held at 4:45 p.m. EDT on Wednesday, July 30, and is available live and in replay to all analysts/investors through a webcast service. To listen to the live call, go to www.earnings.com or www.vcall.com at least fifteen minutes early to register, download and install any necessary audio software. For those who cannot listen to the live broadcast, replays will be available shortly after the call on CCBN and VCALL. Company Description RC2 Corporation (www.rc2.com) is a leading designer, producer and marketer of innovative, high-quality toys, collectibles, and infant and toddler products. RC2’s infant, toddler and preschool products are marketed under its Learning Curve® (www.learningcurve.com) family of brands which includes The First Years® by Learning Curve and Lamaze brands as well as popular and classic licensed properties such as Thomas & Friends, Bob the Builder, Winnie the Pooh, John Deere, Nickelodeon and Sesame Street. RC2 markets its youth and adult products under the Johnny Lightning® (www.johnnylightning.com) and Ertl® (www.ertl.com) brands. RC2 reaches its target consumers through multiple channels of distribution supporting more than 25,000 retail outlets throughout North America, Europe, Australia, and Asia Pacific. Forward Looking Statements Certain statements contained in this release are considered "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements may be identified by the use of forward-looking words or phrases such as "anticipate,'' "believe,'' "could,'' "expect,'' "intend,'' "may,'' "planned,'' "potential,'' "should,'' "will,'' "would'' or the negative of those terms or other words of similar meaning. Such forward-looking statements are inherently subject to known and unknown risks and uncertainties. The Company's actual results and future developments could differ materially from the results or developments expressed in, or implied by, these forward-looking statements. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, but are not limited to, the following: the risk that the charges and expenses the Company expects relating to its recalls may increase based on the amount of inventory of affected products at retailers, the amount of affected products that may be returned by consumers and the cost of providing replacement products to consumers and retailers; the effect of the recalls on the Company's relationship with the licensors and the resolution of any claims or determinations made by such licensors including renewal and retention of licenses; the outcome of the class action lawsuits that have been filed against the Company related to the recalls and the possibility of potential new claims or litigation; risks relating to the completion, timing and terms of a new credit facility to finance the CPD acquisition and the Company’s future capital needs to replace the Company’s existing credit facility which matures on September 14, 2008; the expected accretion of the CPD acquisition to earnings per share is dependent on estimated future earnings, the timing of integration cost savings, financing costs and the impact of preliminary purchase price allocations and estimated intangible amortization, and due to the seasonal nature of sales, the timing of closing the transaction and the timing of achieving cost savings, there could be some earnings per share dilution in individual quarters; the Company may not be able to manufacture, source and ship new and continuing products on a timely basis; the Company is dependent upon timely shipping of product and unloading of product through West Coast ports as well as timely rail/truck delivery to the Company’s warehouse and/or customers’ warehouses; increases in the cost of raw materials used to manufacture the Company’s products and increases in freight costs could increase the Company’s cost of sales and reduce the Company’s gross margins; currency exchange rate fluctuations, particularly in the Chinese Renminbi or the Hong Kong dollar, could increase the Company’s expenses; customers and consumers may not accept the Company’s products at prices sufficient for the Company to profitably recover development, manufacturing, marketing, royalty and other costs; the inventory policies of retailers, together with increased reliance by retailers on quick response inventory management techniques, may increase the risk of underproduction of popular items, overproduction of less popular items and failure to achieve tight shipping schedules; competition in the markets for the Company's products may increase significantly; the Company is dependent upon continuing licensing arrangements with owners of popular and classic licensed properties such as Thomas & Friends, Bob the Builder, Winnie the Pooh, John Deere, Nickelodeon and Sesame Street, vehicle manufacturers, agricultural equipment manufacturers and other licensors; the Company may experience unanticipated negative results of litigation; the Company relies upon a limited number of independently owned factories located in China to manufacture a significant portion of its products; the Company is dependent upon the continuing willingness of leading retailers to purchase and provide shelf space for the Company's products; and general economic conditions in the Company's markets. Such uncertainties and other operational matters are discussed further in the Company's quarterly and annual filings with the Securities and Exchange Commission. The Company undertakes no obligation to make any revisions to the forward-looking statements contained in this release or to update them to reflect events or circumstances occurring after the date of this release. - Tables to Follow -     RC2 Corporation and Subsidiaries Consolidated Statements of Operations (In thousands, except per share data)             Quarter ended June 30, Six months ended June 30, % of Net % of Net % of Net % of Net 2008 Sales 2007 Sales 2008 Sales 2007 Sales Net sales (1) $ 89,193 100.0 % $ 92,990 100.0 % $ 182,483 100.0 % $ 205,583 100.0 % Cost of sales (2) 48,300 54.2 % 53,544 57.6 % 99,048 54.3 % 115,675 56.3 % Recall-related costs   401     0.4 %     1,703     1.8 %     421     0.2 %     1,703     0.8 % Gross profit 40,492 45.4 % 37,743 40.6 % 83,014 45.5 % 88,205 42.9 % Selling, general and administrative expenses (2) 34,909 39.1 % 32,722 35.2 % 71,362 39.1 % 70,490 34.3 % Recall-related costs 15,229 17.1 % 2,233 2.4 % 16,649 9.1 % 2,233 1.1 % Amortization of intangible assets   226     0.3 %     213     0.2 %     451     0.3 %     426     0.2 % Operating (loss) income (9,872 ) -11.1 % 2,575 2.8 % (5,448 ) -3.0 % 15,056 7.3 % Interest expense (income), net 740 0.8 % (150 ) -0.1 % 1,815 1.0 % 152 0.1 % Other expense (income)   390     0.4 %     (110 )   -0.1 %     (58 )   -0.1 %     (576 )   -0.3 % (Loss) income before income taxes (11,002 ) -12.3 % 2,835 3.0 % (7,205 ) -3.9 % 15,480 7.5 % Income tax expense   (4,589 )   -5.1 %     485     0.5 %     (2,793 )   -1.5 %     5,071     2.4 % (Loss) income from continuing operations (6,413 ) -7.2 % 2,350 2.5 % (4,412 ) -2.4 % 10,409 5.1 % Income from discontinued operations, net of tax   -           110     0.1 %     -           110       Net (loss) income $ (6,413 )   -7.2 %   $ 2,460     2.6 %   $ (4,412 )   -2.4 %   $ 10,519     5.1 %   (1) Net sales includes $33 thousand and $2.4 million of recall-related returns and allowances for the quarters ended June 30, 2008 and 2007, respectively. Net sales includes $0.1 million and $2.4 million of recall-related returns and allowance for the six months ended June 30, 2008 and 2007, respectively. (2) Depreciation expense was $3.1 million and $3.6 million for the quarters ended June 30, 2008 and 2007, respectively. Depreciation expense was $6.2 million and $7.2 million for the six months ended June 30, 2008 and 2007, respectively.   Quarter ended June 30, Six months ended June 30, 2008 2007 2008 2007   EPS: Basic earnings per common share: (Loss) income from continuing operations $ (0.37 ) $ 0.11 $ (0.25 ) $ 0.49 Income from discontinued operations   -     0.01     -     0.01   Net (loss) income $ (0.37 ) $ 0.12   $ (0.25 ) $ 0.50   Diluted earnings per common share: (Loss) income from continuing operations $ (0.37 ) $ 0.11 $ (0.25 ) $ 0.48 Income from discontinued operations   -     -     -     0.01   Net (loss) income $ (0.37 ) $ 0.11   $ (0.25 ) $ 0.49   Weighted average shares outstanding: Basic 17,260 21,225 17,586 21,170 Diluted 17,260 21,611 17,586 21,565   Selected Consolidated Balance Sheet Data June 30, 2008 December 31, 2007 June 30, 2007 (Unaudited) (Unaudited) Cash and cash equivalents $ 58,038 $ 57,809 $ 32,256 Trade accounts receivable, net 75,992 110,317 76,609 Inventory 97,161 77,034 91,956 Accounts payable and accrued expenses 101,435 99,076 70,882 Line of credit 103,000 95,000 - Stockholders' equity $ 374,908 $ 397,378 $ 469,608   RC2 Corporation Reconciliation of Non-GAAP Financial Information Consolidated Statements of Operations As Adjusted for Recall-related Costs (In thousands, except per share data)             Quarter ended Quarter ended June 30, 2008 June 30, 2007 Recall- As adjusted Recall- As adjusted related for Recall- related for Recall- Actual   Costs   related Costs Actual   Costs   related Costs Net sales (1) $ 89,193 $ (33 ) $ 89,226 $ 92,990 $ (2,427 ) $ 95,417 Cost of sales 48,300 48,300 53,544 53,544 Recall-related costs (2)   401       401       -   1,703       1,703       -   Gross profit 40,492 (434 ) 40,926 37,743 (4,130 ) 41,873 Selling, general and administrative expenses 34,909 34,909 32,722 32,722 Recall-related costs (3) 15,229 15,229 - 2,233 2,233 - Amortization of intangible assets   226             226   213             213   Operating (loss) income (9,872 ) (15,663 ) 5,791 2,575 (6,363 ) 8,938 Interest expense (income), net 740 740 (150 ) (150 ) Other expense (income)   390             390   (110 )           (110 ) (Loss) income from continuing operations before income taxes (11,002 ) (15,663 ) 4,661 2,835 (6,363 ) 9,198 Income tax expense   (4,589 )     (5,482 )     893   485       (2,322 )     2,807   (Loss) income from continuing operations (6,413 ) (10,181 ) 3,768 2,350 (4,041 ) 6,391 Income from discontinued operations, net of tax   -       -       -   110       -       110   Net (loss) income $ (6,413 )   $ (10,181 )   $ 3,768 $ 2,460     $ (4,041 )   $ 6,501     EPS: Basic earnings per common share: (Loss) income from continuing operations $ (0.37 ) $ (0.59 ) $ 0.22 $ 0.11 $ (0.19 ) $ 0.30 Income from discontinued operations -     -   - 0.01   -   0.01   Net (loss) income $ (0.37 ) $ (0.59 ) $ 0.22 $ 0.12   $ (0.19 ) $ 0.31     Diluted earnings per common share: (Loss) income from continuing operations $ (0.37 ) $ (0.58 ) $ 0.21 $ 0.11 $ (0.19 ) $ 0.30 Income from discontinued operations -     -   - -   -   -   Net (loss) income $ (0.37 ) $ (0.58 ) $ 0.21 $ 0.11   $ (0.19 ) $ 0.30     Weighted average shares outstanding: Basic 17,260 17,260 17,260 21,225 21,225 21,225 Diluted (4) 17,260 17,518 17,518 21,611 21,611 21,611   Notes: (1) Recall-related costs included in net sales include costs associated with returns and allowances. (2) Recall-related costs included in cost of sales primarily include costs associated with inventory reserves. (3) Recall-related costs included in selling, general and administrative expenses primarily include freight costs and professional fees. (4) Because actual results generated a loss from continuing operations, any potential common shares would be antidilutive, and accordingly were excluded from the diluted EPS calculation. As adjusting for recall-related costs results in income from continuing operations, these potential common shares would be dilutive and accordingly affected the as adjusted diluted EPS calculation.   RC2 Corporation Reconciliation of Non-GAAP Financial Information Consolidated Statements of Operations As Adjusted for Recall-related Costs (In thousands, except per share data)           Six months ended Six months ended June 30, 2008 June 30, 2007 Actual   Recall-relatedCosts   As adjustedfor Recall-related Costs Actual   Recall-relatedCosts   As adjustedfor Recall-related Costs Net sales (1) $ 182,483 $ (65 ) $ 182,548 $ 205,583 $ (2,427 ) $ 208,010 Cost of sales 99,048 99,048 115,675 115,675 Recall-related costs (2)   421       421       -     1,703       1,703       -   Gross profit 83,014 (486 ) 83,500 88,205 (4,130 ) 92,335 Selling, general and administrative expenses 71,362 71,362 70,490 70,490 Recall-related costs (3) 16,649 16,649 - 2,233 2,233 - Amortization of intangible assets   451             451     426             426   Operating (loss) income (5,448 ) (17,135 ) 11,687 15,056 (6,363 ) 21,419 Interest expense, net 1,815 1,815 152 152 Other income   (58 )           (58 )   (576 )           (576 ) (Loss) income from continuing operations before income taxes (7,205 ) (17,135 ) 9,930 15,480 (6,363 ) 21,843 Income tax expense   (2,793 )     (5,997 )     3,204     5,071       (2,322 )     7,393   (Loss) income from continuing operations (4,412 ) (11,138 ) 6,726 10,409 (4,041 ) 14,450 Income from discontinued operations, net of tax   -             -     110             110   Net (loss) income $ (4,412 )   $ (11,138 )   $ 6,726   $ 10,519     $ (4,041 )   $ 14,560     EPS: Basic earnings per common share: (Loss) income from continuing operations $ (0.25 ) $ (0.63 ) $ 0.38 $ 0.49 $ (0.19 ) $ 0.68 Income from discontinued operations   -       -       -     0.01       -       0.01   Net (loss) income $ (0.25 )   $ (0.63 )   $ 0.38   $ 0.50     $ (0.19 )   $ 0.69     Diluted earnings per common share: (Loss) income from continuing operations $ (0.25 ) $ (0.63 ) $ 0.38 $ 0.48 $ (0.19 ) $ 0.67 Income from discontinued operations   -       -       -     0.01       -       0.01   Net (loss) income $ (0.25 )   $ (0.63 )   $ 0.38   $ 0.49     $ (0.19 )   $ 0.68     Weighted average shares outstanding: Basic 17,586 17,586 17,586 21,170 21,170 21,170 Diluted (4) 17,586 17,849 17,849 21,565 21,565 21,565   Notes: (1) Recall-related costs included in net sales include costs associated with returns and allowances. (2) Recall-related costs included in cost of sales primarily include costs associated with inventory reserves. (3) Recall-related costs included in selling, general and administrative expenses primarily include freight costs and professional fees. (4) Because actual results generated a loss from continuing operations, any potential common shares would be antidilutive, and accordingly were excluded from the diluted EPS calculation. As adjusting for recall-related costs results in income from continuing operations, these potential common shares would be dilutive and accordingly affected the as adjusted diluted EPS calculation.   RC2 Corporation and Subsidiaries Consolidated Statements of Operations As Adjusted for Recall-related Costs (Unaudited and in thousands, except per share data)   Quarter ended June 30,   Six months ended June 30, 2008   2007 2008   2007 As Adjustedto ExcludeRecall-relatedCosts   % of NetSales As Adjustedto ExcludeRecall-relatedCosts   % of NetSales As Adjusted to Exclude Recall- related Costs   % of Net Sales As Adjusted to Exclude Recall- related Costs   % of Net Sales Net sales $ 89,226   100.0 % $ 95,417   100.0 % $ 182,548   100.0 % $ 208,010   100.0 % Cost of sales   48,300     54.1 %   53,544     56.1 %   99,048     54.3 %   115,675     55.6 % Gross profit 40,926 45.9 % 41,873 43.9 % 83,500 45.7 % 92,335 44.4 % Selling, general and administrative expenses 34,909 39.1 % 32,722 34.3 % 71,362 39.1 % 70,490 33.9 % Amortization of intangible assets   226     0.3 %   213     0.2 %   451     0.2 %   426     0.2 % Operating income 5,791 6.5 % 8,938 9.4 % 11,687 6.4 % 21,419 10.3 % Interest expense (income), net 740 0.8 % (150 ) -0.1 % 1,815 1.0 % 152 0.1 % Other expense (income)   390     0.5 %   (110 )   -0.1 %   (58 )   -     (576 )   -0.3 % Income before income taxes 4,661 5.2 % 9,198 9.6 % 9,930 5.4 % 21,843 10.5 % Income tax expense   893     1.0 %   2,807     2.9 %   3,204     1.7 %   7,393     3.6 % Income from continuing operations 3,768 4.2 % 6,391 6.7 % 6,726 3.7 % 14,450 6.9 % Income from discontinued operations, net of tax   -         110     0.1 %   -         110     0.1 % Net income $ 3,768     4.2 % $ 6,501     6.8 % $ 6,726     3.7 % $ 14,560     7.0 %     Reconciliation of Diluted Earnings Per Common Share from Continuing Operations Quarter ended June 30, Six months ended June 30, 2008 2007 2008 2007 As reported $ (0.37 ) $ 0.11 $ (0.25 ) $ 0.48 Recall-related costs   0.58     0.19     0.63     0.19   As adjusted $ 0.21   $ 0.30   $ 0.38   $ 0.67     RC2 Corporation and Subsidiaries Supplemental Reporting (unaudited and in thousands)       Quarter ended June 30, Six months ended June 30, 2008 2007 2008 2007 Net sales by category: Mother, infant and toddler products $ 41,545 $ 44,080 $ 87,766 $ 95,480 Preschool, youth and adult products 47,648     48,910     94,717     110,103   Net sales $ 89,193   $ 92,990   $ 182,483   $ 205,583     Net sales by channel: Chain retailers $ 60,858 $ 62,820 $ 129,972 $ 143,163 Specialty retailers, wholesalers, OEM dealers and other   28,335     30,170     52,511     62,420   Net sales $ 89,193   $ 92,990   $ 182,483   $ 205,583     Net sales by geographic location: North America $ 62,300 $ 71,560 $ 135,266 $ 162,150 International (1) 27,069 21,601 47,655 43,769 Sales and transfers between segments   (176 )   (171 )   (438 )   (336 ) Net sales $ 89,193   $ 92,990   $ 182,483   $ 205,583     Note: (1) International sales benefited from foreign currency exchange rates by approximately 8% in the quarter ended June 30, 2008, and 7% for the six months ended June 30, 2008, respectively.     Net Sales by Category Excluding Discontinued Product Lines and Recall-related Returns and Allowances   Quarter ended June 30, Six months ended June 30, 2008 2007 2008 2007 Net sales by category: Mother, infant and toddler products $ 41,545 $ 44,052 $ 87,766 $ 95,395 Preschool, youth and adult products 47,529     46,893     93,462     102,176   Net sales, as adjusted 89,074 90,945 181,228 197,571 Discontinued product lines   152     4,472     1,320     10,439   Net sales excluding recall-related returns and allowances $ 89,226   $ 95,417   $ 182,548   $ 208,010     Calculation of Adjusted EBITDA (Earnings before interest, taxes, depreciation, amortization, compensation expense for equity awards, and recall-related costs)       Quarter ended June 30, Six months ended June 30, 2008 2007 2008 2007 (Loss) income before income taxes $ (11,002 ) $ 2,835 $ (7,205 ) $ 15,480 Interest expense (income), net 740 (150 ) 1,815 152 Depreciation 3,109 3,635 6,212 7,239 Amortization 226 213 451 426 Compensation expense for equity awards 1,315 1,303 2,673 2,349 Recall-related costs   15,663     6,363     17,135     6,363 Adjusted EBITDA $ 10,051   $ 14,199   $ 21,081   $ 32,009