Edgar Filing: JAKKS PACIFIC INC

Jakks Pacific, Inc. - September 7, 2004

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

AMENDMENT NO. 1 TO FORM 8-K/A

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported):
September 7, 2004 (June 10, 2004)

JAKKS PACIFIC, INC.
(Exact name of registrant as specified in its charter)


Delaware	0-28104	95-4527222
(State or other jurisdiction of	(Commission	(I.R.S. Employer
incorporation or organization	File Number)	Identification No.)


22619 Pacific Coast Highway, Malibu, California				90265
(Address of principal executive offices)				(Zip Code)

Registrant’s telephone number, including area code:				(310) 456-7799

TABLE OF CONTENTS


	ITEM 2.01. ACQUISITION OR DISPOSITION OF ASSETS.
	ITEM 9.01. FINANCIAL STATEMENTS AND EXHIBITS.
SIGNATURES
EXHIBIT INDEX

This Amendment No. 1 to Form 8-K/A is being filed to amend the auditor’s report covering the financial statements filed as an exhibit to our Current Report on Form 8-K/A filed on August 6, 2004 (the “8-K/A”), as well as certain of the notes to such financial statements. The financial information included in the 8-K/A was filed as a result of our June 10, 2004 asset acquisition (the “Acquisition”) of Play Along, Inc., Play Along (Hong Kong) Limited and PA Distribution, Inc. (collectively, “Play Along”).

We intend to file shortly a registration statement on Form S-3 covering the shares issued at the time of the Acquisition to the principals of Play Along (the “Registration Statement”). Play Along’s Hong Kong auditor has determined that, in order for it to be able to issue its report in connection with the Registration Statement, it is required to perform certain accounting procedures in support of the financial information included in the 8-K/A.

The performance of these additional procedures did not result in any changes to the financial information included in the 8-K/A. Nevertheless, Play Along’s Hong Kong auditor determined that the report it delivered in connection with the financial information included in the 8-K/A, as well as the description of certain applicable accounting policies included in the notes to such financial statements, were required to be amended.

Accordingly, this Amendment No. 1 to Form 8-K/A is being filed to reflect such amendments.

ITEM 2.01. ACQUISITION OR DISPOSITION OF ASSETS.

For a description of the Registrant's asset acquisition of Play Along, refer to Item 2 of the Registrant's Current Report on Form 8-K, filed on June 16, 2004, which Item 2 is incorporated in its entirety herein by reference.

ITEM 9.01. FINANCIAL STATEMENTS AND EXHIBITS.

(a) Financial Statements of Business Acquired

	1.		Play Along, Inc. audited financial statements as of March 31, 2003, March 31, 2002, and December 31, 2003 and for the two years ended March 31, 2003 and 2002 and the nine months ended December 31, 2003.

	2.		PA Distribution, Inc. audited financial statements as of March 31, 2003, March 31, 2002, and December 31, 2003 and for the two years ended March 31, 2003 and 2002 and the nine months ended December 31, 2003.

	3.		Play Along (Hong Kong) Limited audited financial statements as of March 31, 2003, March 31, 2002, and December 31, 2003 and for the two years ended March 31, 2003 and 2002 and the nine months ended December 31, 2003.

	4.		Play Along, Inc. unaudited financial statements as of March 31, 2004 and March 31, 2003 and for the three months ended March 31, 2004 and 2003.

	5.		PA Distribution, Inc. unaudited financial statements as of March 31, 2004 and March 31, 2003 and for the three months ended March 31, 2004 and 2003.

	6.		Play Along (Hong Kong) Limited unaudited financial statements as of March 31, 2004 and March 31, 2003 and for the three months ended March 31, 2004 and 2003.

(b) Pro Forma Financial Information


Michael I. Daszkal, CPA, P.A. Jeffrey A. Bolton, CPA, P.A. Timothy R. Devlin, CPA, P.A. Michael S. Kridel, CPA, P.A. Marjorie A. Horwin, CPA, P.A. Patrick D. Heyn, CPA, P.A.				2401 N.W. Boca Raton Boulevard Boca Raton, FL 33431 t: 561.367.1040 f: 561.750.3236 www.daszkalbolton.com

INDEPENDENT AUDITORS’ REPORT

The Board of Directors
Play Along, Inc.
Fort Lauderdale, Florida

We have audited the accompanying balance sheets of Play Along, Inc. as of March 31, 2003, 2002 and December 31, 2003 and the related statements of operations, changes in stockholders’ equity (deficit) and cash flows for the periods then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by managements, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Play Along, Inc. as of March 31, 2003, 2002 and December 31, 2003, and the results of its operations and its cash flows for the periods then ended in conformity with accounting principles generally accepted in the United States of America.

/s/ Daszkal Bolton LLP

Boca Raton, Florida
February 13, 2004


Member of American Institute of Certified Public Accountants – SEC and Private Companies Practice Sections		Member				Affiliated Offices Worldwide

PLAY ALONG, INC.

FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED
DECEMBER 31, 2003 AND
FOR THE YEARS ENDED
MARCH 31, 2003 AND 2002

TABLE OF CONTENTS


Independent Auditors’ Report			1
Financial Statements:
Balance Sheets as of December 31, 2003, March 31, 2003 and 2002			2
Statement of Operations for the nine months ended December 31, 2003 and for the years ended March 31, 2003 and 2002			3
Statement of Changes in Stockholders’ Equity (Deficit) for the nine months ended December 31, 2003 and the years ended March 31, 2003 and 2002			4
Statement of Cash Flows for the nine months ended December 31, 2003 and for the years ended March 31, 2003 and 2002			5
Notes to Financial Statements			6-9

PLAY ALONG, INC.
BALANCE SHEETS


	December 31,			March 31,			March 31,
	2003			2003			2002
ASSETS
Current assets:
Cash	$	218,651		$	29,589		$	17,698
Prepaid expenses		11,586			19,635
Deferred tax asset		93,727			102,113			4,877

Total current assets		323,964			151,337			22,575

Property and equipment, net		94,862			68,249			62,092

Other assets:
Other receivable		755			644			8,579
Due from related parties		—			237,338			75,000
Deposits		42,024			42,564			23,556

Total other assets		42,779			280,546			107,135

Total assets	$	461,605		$	500,132		$	191,802

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses	$	169,092		$	622,244		$	135,834
Taxes payable		—			708			—
Due to related parties		423,503			—			—

Total current liabilities		592,595			622,952			135,834

Commitments and Contingencies
Stockholders’ equity (deficit):
Common stock, $0.01 par value; 20,000 shares authorized; 7,000, 10,000 and 10,000 shares issued and outstanding, respectively		70			100			100
Additional paid in capital		(970	)		—			—
Retained earnings (Accumulated deficit)		(130,090	)		(122,920	)		55,868

Total stockholders’ equity (deficit)		(130,990	)		(122,820	)		55,968

Total liabilities and stockholders’ equity (deficit)	$	461,605		$	500,132		$	191,802

See accompanying notes to financial statements.

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PLAY ALONG, INC.
STATEMENTS OF OPERATIONS


	Nine months
	ended
	December 31,			March 31,			March 31,
	2003			2003			2002
Revenues	$	2,774,376		$	3,164,663		$	2,370,200
Operating expenses:
Selling expenses		50,086			98,938			1,174
Advertising expenses		114,205			168,730			126,702
Royalty expenses		—			1,194			—
Product development expensees		39,785			270,759			62,838
General and administrative expenses		2,547,575			2,877,561			2,024,409
Depreciation		21,120			21,365			20,206

Total operating expenses		2,772,771			3,438,547			2,235,329

Income (loss) from operations		1,605			(273,884	)		134,871

Other expense:
Interest expense		389			1,432			377

Income (loss) before income tax expense		1,216			(275,316	)		134,494
Income tax expense (benefit)		8,386			(96,528	)		55,233

Net income (loss)	$	(7,170	)	$	(178,788	)	$	79,261

See accompanying notes to financial statements.

-3-

PLAY ALONG, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)


										Retained
	Common Stock						Additional			Earnings
							Paid in			(Accumulated
	Shares			Amount			Capital			Deficit)			Total
Balance, March 31, 2001		10,000		$	100		$	—		$	(23,393	)	$	(23,293	)
Net income		—			—			—			79,261			79,261

Balance, March 31, 2002		10,000			100			—			55,868			55,968
Net loss		—			—			—			(178,788	)		(178,788	)

Balance, March 31, 2003		10,000			100			—			(122,920	)		(122,820	)
Repurchase of shares		(3,000	)		(30	)		(970	)		—			(1,000	)
Net loss		—			—			—			(7,170	)		(7,170	)

Balance, December 31, 2003		7,000		$	70		$	(970	)	$	(130,090	)	$	(130,990	)

See accompanying notes to financial statements.

-4-

PLAY ALONG, INC.
STATEMENTS OF CASH FLOWS


	December 31,			March 31,			March 31,
	2003			2003			2002
Cash flows from operating activities:
Net income (loss)	$	(7,170	)	$	(178,788	)	$	79,261
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation		21,120			21,365			20,206
Provision (benefit) for income taxes		8,386			(96,528	)		55,233
(Increase) decrease in:
Prepaids and other receivables		7,938			(11,700	)		(7,452	)
Deposits		540			(19,008	)		7,383
Increase (decrease) in:
Accounts payable and accrued expenses		(453,152	)		486,410			(7,875	)
Taxes payable		(708	)		—			(14,870	)

Net cash provided by (used in) operating activities		(423,046	)		201,751			131,886

Cash flows from investing activities:
Purchase of equipment		(47,733	)		(27,522	)		(1,633	)

Cash flows from financing activities:
Advances from (repayments to) related parties		660,841			(162,338	)		(147,982	)
Repurchase of shares		(1,000	)		—			—

Net cash provided by (used in) financing activities		659,841			(162,338	)		(147,982	)

Net increase (decrease) in cash		189,062			11,891			(17,729	)
Cash, beginning of period		29,589			17,698			35,427

Cash, end of period	$	218,651		$	29,589		$	17,698

Supplemental disclosures:
Taxes paid	$	—		$	250		$	—

Interest paid	$	—		$	1,422		$	160

See accompanying notes to financial statements.

-5-

PLAY ALONG, INC.
NOTES TO FINANCIAL STATEMENTS

NOTE 1 – NATURE OF BUSINESS

Play Along, Inc. (the “Company”) is located in Deerfield Beach, Florida and was incorporated on May 15, 2000 under the statutes of the state of Delaware. The Company is engaged in providing management and marketing services exclusively to its related companies: Play Along (Hong Kong), Ltd. and PA Distribution, Inc. Play Along (Hong Kong), Ltd. is a toy manufacturer. PA Distribution, Inc. is a wholesale distributor of toys. See Note 5 regarding transactions between these entities and the Company.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Cash Equivalents

The Company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents. There were no cash equivalents at December 31, 2003, March 31, 2003 and 2002.

Property and Equipment

Property and equipment are stated at cost. The Company provides for depreciation and amortization using the straight-line method over the estimated useful lives of the asset, which range from three to five years. The Company reviews the valuation of property and equipment and their remaining economic lives annually and adjusts depreciation accordingly.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates.

Revenue Recognition

The Company recognizes revenue when persuasive evidence of an arrangement exists, service has been provided to the customer, price is fixed or determinable and collectibility is reasonably assured.

Fair Value of Financial Instruments

The Company’s financial instruments are cash and cash equivalents and accounts payable. The recorded values of cash and cash equivalents and accounts payable approximate their fair values based on their short-term nature.

Advertising Costs

The Company expenses advertising production costs as they are incurred and advertising communication costs the first time the advertising event takes place.

-6-

PLAY ALONG, INC.
NOTES TO FINANCIAL STATEMENTS

NOTE 3 – PROPERTY AND EQUIPMENT

Property and equipment consisted of the following:


	December 31			March 31			March 31
	2003			2003			2002
Office furniture and fixtures	$	51,314		$	15,190		$	8,002
Computer software and equipment		120,470			108,861			88,527
Less: accumulated depreciation		(76,922	)		(55,802	)		(34,437	)

Property and equipment, net	$	94,862		$	68,249		$	62,092

Depreciation expense is $21,120, $21,365 and $20,206 for the nine months ended December 31, 2003 and for the years ended March 31, 2003 and 2002, respectively.

NOTE 4 – INCOME TAXES

The non-deductibility of certain expenses and temporary differences in depreciation expense and accrued expenses resulted in an increase in the effective tax rate. Income tax expense consisted of the following:


	December 31		March 31			March 31
	2003		2003			2002
Current	$	—	$	708		$	—
Deferred		8,386		(97,236	)		55,233

Total income tax expense (benefit)	$	8,386	$	(96,528	)	$	55,233

Under FAS No. 109, deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The significant components of deferred tax assets are as follows:


	December 31			March 31			March 31
	2003			2003			2002
Deferred tax asset (liability)
Accrued expenses	$	110,493		$	121,610		$	13,258
Depreciation		(25,609	)		(17,223	)		(7,288	)
Other		8,843			(2,274	)		(1,093	)

Total deferred tax asset (liability)	$	93,727		$	102,113		$	4,877

-7-

PLAY ALONG, INC.
NOTES TO FINANCIAL STATEMENTS

NOTE 5 – RELATED PARTY TRANSACTIONS

Activity with related parties are summarized below:


	December 31			March 31			March 31
	2003			2003			2002
Receivable from related parties	$	141,130		$	352,727		$	75,000
Payable to related parties, end of year		(564,633	)		(115,389	)		—

Receivable (Payable) to related parties, end of year	$	(423,503	)	$	237,338		$	75,000

During the nine-months ended December 31, 2003 and the years ended March 31, 2003 and 2002, the Company received $800,000, $600,000 and $570,200 in management and marketing fees from a related company, PA Distribution, Inc., for rent, administrative and other related services provided.

During the nine-months ended December 31, 2003 and the years ended March 31, 2003 and 2002, the Company received $1,974,376, $2,564,663 and $1,800,000 in management and marketing fees from a related company, Play Along (Hong Kong), Ltd, for administrative and other related services provided.

NOTE 6 – CONCENTRATION OF CREDIT RISK

Cash

The Company maintains its cash bank deposits at one financial institution. Accounts at this institution are insured by the Federal Deposit Insurance Corporation up to $100,000 and the balances, at times, may exceed federally insured limits. At December 31, 2003, March 31, 2003 and 2002 the balances in each bank account were over this limit by an aggregate of $166,035, $0, and $0, respectively.

Revenues

In the periods ended December 31, 2003, March 31, 2003 and March 31, 2002, 100% of all revenues were earned from related companies as noted in Note 5. One of these two customers is Play Along (Hong Kong), Ltd which is located in the People’s Republic of China (“PRC”). The loss of this customer could have a material adverse effect on the Company. The customer’s operations in the PRC are subject to special consideration and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environments and foreign currency exchange. The customer’s production and therefore, the Company’s results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.

NOTE 7 – DEFINED CONTRIBUTION PENSION PLAN

The Company sponsors a simplified employers’ pension plan covering all eligible employees. The Company funds the plan at its discretion. Pension expense for the Company was $30,759, $23,078 and $13,436 for the nine months ended December 31, 2003 and for the years ended March 31, 2003 and 2002, respectively.

-8-

PLAY ALONG, INC.
NOTES TO FINANCIAL STATEMENTS

NOTE 8 — COMMITMENTS

The Company leases its office facilities under long-term operating lease agreements. Rent expense for all operating leases was $195,973, $275,336 and $187,938 for the nine-months ended December 31, 2003 and the years ended March 31, 2003 and 2002, respectively.

At December 31, 2003, future minimum lease payments for these leases are as follows:


	Operating
Year ending December 31	Leases
2004	$	192,288
2005		124,671
2006		114,934
2007		43,587
2008		11,391
Thereafter		949

Total minimum lease payments	$	487,820

NOTE 9 — LITIGATION

The Company is a defendant in a lawsuit with respect to a claim of infringement of patent on certain products sold by its related companies: Play Along (Hong Kong), Ltd. (“PAHK”) and PA Distribution, Inc. (“PAD”). The plaintiff in the suit is seeking unspecified damages. PAHK has accrued $1,844,626 as a liability under this lawsuit as of December 31, 2003, based on legal counsel’s assessment of the estimated damages that could be awarded and the fees that may be incurred if a Court were to find in favor of the plaintiff. As of December 31, 2003, the Company has been fully indemnified for all costs and expenses in this claim by its related company, PAHK. Therefore, no additional liability is reflected in these financial statements of the Company as of December 31, 2003, March 31, 2003 or March 31, 2002.

-9-


Michael I. Daszkal, CPA, P.A. Jeffrey A. Bolton, CPA, P.A. Timothy R. Devlin, CPA, P.A. Michael S. Kridel, CPA, P.A. Marjorie A. Horwin, CPA, P.A. Patrick D. Heyn, CPA, P.A.				2401 N.W. Boca Raton Boulevard Boca Raton, FL 33431 t: 561.367.1040 f: 561.750.3236 www.daszkalbolton.com

INDEPENDENT AUDITORS’ REPORT

The Board of Directors
PA Distribution, Inc.
Fort Lauderdale, Florida

We have audited the accompanying balance sheets of PA Distribution, Inc. as of March 31, 2003, 2002 and December 31, 2003 and the related statements of operations, changes in stockholders’ deficit and cash flows for the periods then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of PA Distribution, Inc. as of March 31, 2003, 2002 and December 31, 2003, and the results of its operations and its cash flows for the periods then ended in conformity with accounting principles generally accepted in the United States of America.

/s/ Daszkal Bolton LLP

Boca Raton, Florida
February 13, 2004


Member of American Institute of Certified Public Accountants – SEC and Private Companies Practice Sections		Member				Affiliated Offices Worldwide

PA DISTRIBUTION, INC.

FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED
DECEMBER 31, 2003 AND
FOR THE YEARS ENDED
MARCH 31, 2003 AND 2002

TABLE OF CONTENTS


Independent Auditors’ Report			1
Financial Statements:
Balance Sheets as of December 31, 2003, March 31, 2003 and 2002			2
Statement of Operations for the nine months ended December 31, 2003 and for the years ended March 31, 2003 and 2002			3
Statement of Changes in Stockholders’ Deficit for the nine months ended December 31, 2003 and for the years ended March 31, 2003 and 2002			4
Statement of Cash Flows for the nine months ended December 31, 2003 and for the years ended March 31, 2003 and 2002			5
Notes to Financial Statements			6-10

PA DISTRIBUTION, INC.
BALANCE SHEETS


	December 31, 2003			March 31, 2003			March 31, 2002
ASSETS
Current assets:
Cash	$	3,927,375		$	107,411		$	15,540
Accounts receivable, net		6,701,152			9,590,481			658,764
Inventory		11,158,415			6,571,787			1,127,524
Prepaid expenses		31,648			—			—

Total current assets		21,818,590			16,269,679			1,801,828

Property and equipment, net		156,168			46,257			31,054

Other assets:
Other receivable		11,803			1,401			5,001
Employee receivable		25,000			14,430			—
Certificate of deposit		160,000			160,000			—

Total other assets		196,803			175,831			5,001

Total assets	$	22,171,561		$	16,491,767		$	1,837,883

LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable and accrued expenses	$	451,510		$	834,341		$	201,772
Note payable		—			940,053			191,907
Taxes payable		—			150,070			—
Due to related parties		22,815,866			15,650,500			3,644,922

Total current liabilities		23,267,376			17,574,964			4,038,601

Commitments and Contingencies
Stockholders’ deficit:
Common stock, $0.01 par value; 20,000 shares authorized; 7,000, 10,000 and 10,000 shares issued and outstanding, respectively		70			100			100
Additional paid in capital		(970	)		—			—
Accumulated deficit		(1,094,915	)		(1,083,297	)		(2,200,818	)

Total stockholders’ deficit		(1,095,815	)		(1,083,197	)		(2,200,718	)

Total liabilities and stockholders’ deficit	$	22,171,561		$	16,491,767		$	1,837,883

See accompanying notes to financial statements.

-2-

PA DISTRIBUTION, INC.
STATEMENTS OF OPERATIONS


	Nine Months
	ended
	December 31, 2003			March 31, 2003			March 31, 2002
Sales	$	37,345,315		$	31,814,828		$	5,591,420
Cost of goods sold		32,050,589			26,703,568			5,946,788

Gross profit (loss)		5,294,726			5,111,260			(355,368	)

Operating expenses:
Selling expenses		77,958			31,739			28,489
Advertising expenses		800,790			794,565			570,700
General and administrative expenses		4,178,221			2,839,789			1,413,465
Depreciation		18,866			11,248			5,377

Total operating expenses		5,075,835			3,677,341			2,018,031

Income (loss) from operations		218,891			1,433,919			(2,373,399	)

Other income (expense):
Other income		104,027			145,740			64,664
Interest income		7,108			130			76
Interest and factoring expense		(304,267	)		(312,198	)		(80,148	)

Total other income (expense)		(193,132	)		(166,328	)		(15,408	)

Income (loss) before income tax expense		25,759			1,267,591			(2,388,807	)
Income tax expense		37,377			150,070			160

Net income (loss)	$	(11,618	)	$	1,117,521		$	(2,388,967	)

See accompanying notes to financial statements.

-3-

PA DISTRIBUTION, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT


	Common Stock
							Additional			Accumulated
	Shares			Amount			Paid in Capital			Deficit			Total
Balance, March 31, 2001		10,000		$	100		$	—		$	188,149		$	188,249
Net loss		—			—			—			(2,388,967	)		(2,388,967	)

Balance, March 31, 2002		10,000			100			—			(2,200,818	)		(2,200,718	)
Net income		—			—			—			1,117,521			1,117,521

Balance, March 31, 2003		10,000			100						(1,083,297	)		(1,083,197	)
Repurchase of common stock		(3,000	)		(30	)		(970	)					(1,000	)
Net loss		—			—			—			(11,618	)		(11,618	)

Balance, December 31, 2003		7,000		$	70		$	(970	)	$	(1,094,915	)	$	(1,095,815	)

See accompanying notes to financial statements.

-4-

PA DISTRIBUTION, INC.
STATEMENTS OF CASH FLOWS


	Nine Months
	ended
	December 31, 2003			March 31, 2003			March 31, 2002
Cash flows from operating activities:
Net income (loss)	$	(11,618	)	$	1,117,521		$	(2,388,967	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation		18,866			11,248			5,377
Sales returns and allowance for chargebacks		1,476,704			689,250			—
(Increase) decrease in:
Accounts receivable		1,412,625			(9,620,967	)		689,125
Inventory		(4,586,628	)		(5,444,263	)		2,291,657
Prepaid expense and other current assets		(52,620	)		(110,771	)		—
Increase (decrease) in:
Accounts payable and accrued expenses		(111,090	)		633,098			(63,746	)
Taxes payable		(150,070	)		150,070			—

Net cash provided by (used in) operating activities		(2,003,831	)		(12,574,814	)		533,446

Cash flows from investing activities:
Purchase of certificate of deposit		—			(160,000	)		—
Purchase of equipment		(128,777	)		(27,040	)		(26,697	)

Net cash used in operating activities		(128,777	)		(187,040	)		(26,697	)

Cash flows from financing activities:
Advances from factor		34,040,000			24,755,000			5,275,000
Repayments to factor		(35,251,794	)		(24,006,854	)		(5,083,093	)
Advances from related parties		7,165,366			12,105,579			(907,495	)
Repurchase of common stock		(1,000	)		—			—

Net cash provided by (used in) financing activities		5,952,572			12,853,725			(715,588	)

Net increase (decrease) in cash		3,819,964			91,871			(208,839	)
Cash, beginning of year		107,411			15,540			224,379

Cash, end of year	$	3,927,375		$	107,411		$	15,540

Supplemental disclosures:
Income taxes paid	$	37,377		$	166,000		$	312,198

Interest paid	$	304,267		$	312,198		$	71,178

See accompanying notes to financial statements.

-5-

PA DISTRIBUTION, INC.
NOTES TO FINANCIAL STATEMENTS

NOTE 1 – NATURE OF BUSINESS

PA Distribution, Inc. (the “Company”) is engaged in the wholesale distribution of toys. The Company is located in Deerfield Beach, Florida. The Company was incorporated on May 15, 2000 under the statutes of the state of Delaware. The Company does business with two related entities which are under common ownership, Play Along (Hong Kong), Ltd. and Play Along, Inc. Play Along (Hong Kong), Ltd. is a toy manufacturer and primary supplier for the Company. Play Along, Inc. is a management and marketing company. The Company also does business with Art Asylum LLC, a toy product design company. Art Asylum LLC is majority owned by stockholders of the Company. See Note 6 regarding transactions between these entities and the Company.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Cash Equivalents

Property and Equipment

Inventories

Inventories consist of twelve product toy lines. The inventory has been valued at the lower of cost or market using the first-in, first-out (FIFO) method.

Use of Estimates

Revenue Recognition

The Company recognizes revenue when persuasive evidence of an arrangement exists, shipment has occurred, price is fixed or determinable and collectibility is reasonably assured. Provision is made for an estimate of product returns, chargeback allowances and doubtful accounts and is based on historical experience.

Fair Value of Financial Instruments

The Company’s financial instruments are cash and cash equivalents, accounts receivable, certificate of deposit, accounts payable and note payable. The recorded values of cash and cash equivalents, accounts receivable and accounts payable approximate their fair values based on their short-term nature. The recorded values of the certificate of deposit and note payable approximate their fair values, as interest approximates market rates.

-6-

PA DISTRIBUTION, INC.
NOTES TO FINANCIAL STATEMENTS

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

Advertising Costs

The Company expenses advertising production costs as they are incurred and advertising communication costs the first time the advertising event takes place.

Shipping and Handling Fees

The Company follows the provisions of Emerging Issues Task Force Issue No. 00-10, “Accounting for Shipping and Handling Fees and Costs.” Any amounts billed to third-party customers for shipping and handling is included as a component of revenue. Shipping and handling costs incurred are included as a component of cost of sales. Shipping and handling costs is $2,752,714, $2,027,811 and $347,263 for the nine months ended December 31, 2003 and the years ended March 31, 2003 and 2002, respectively.

NOTE 3 –FACTORING AGREEMENT

Accounts receivable consisted of the following at December 31, 2003, March 31, 2003 and 2002:


	December 31, 2003			March 31, 2003			March 31, 2002
Accounts receivable	$	8,215,356		$	10,317,231		$	696,264
Less: allowance for doubtful accounts		(37,500	)		(37,500	)		(37,500	)
Less: allowance for sales returns and chargebacks		(1,476,704	)		(689,250	)		—

Accounts receivable, net	$	6,701,152		$	9,590,481		$	658,764

There is $388,562, $48,272 and $33,389 in bad debt expense for the nine months ended December 31, 2003 and for the years ended March 31, 2003 and 2002, respectively.

Pursuant to a factoring agreement with HSBC Business Credit, the Company is allowed to borrow up to 70% of the outstanding accounts receivable balance at a rate of prime rate (4.0%, 4.25% and 4.75% at December 31, 2003, March 31, 2003 and 2002, respectively) plus 1.25%. The Company’s obligations to the factor are collateralized by all the Company’s accounts receivable, inventories, and equipment. The balance due at December 31, 2003, March 31, 2003 and 2002 are $0, $940,053, $191,907, respectively. Interest and factoring expense for the nine months ended December 31, 2003 and the years ended March 31, 2003 and 2002 are $304,267, $312,198 and $80,148, respectively.

NOTE 4 – PROPERTY AND EQUIPMENT

Property and equipment consisted of the following:


	December 31, 2003			March 31, 2003			March 31, 2002
Office equipment, computers and software	$	189,192		$	60,415		$	37,886
Less: accumulated depreciation and amortization		(33,024	)		(14,158	)		(6,832	)

Property and equipment, net	$	156,168		$	46,257		$	31,054

-7-

PA DISTRIBUTION, INC.
NOTES TO FINANCIAL STATEMENTS

NOTE 4 – PROPERTY AND EQUIPMENT, continued

Depreciation expense is $18,866, $11,248 and $5,377 for the nine months ended December 31, 2003 and for the years ended March 31, 2003 and 2002, respectively.

NOTE 5 – INCOME TAXES

The non-deductibility of certain expenses and temporary differences in depreciation expense and inventory costs capitalized for tax purposes resulted in an increase in the effective tax rate. Income tax expense consisted of the following:


	December 31, 2003		March 31, 2003		March 31, 2002
Current	$	—	$	150,070	$	—
Deferred		—		—		—

Total income tax expense	$	—	$	150,070	$	—

Reconciliation of the federal statutory income tax rate to the Company’s effective tax rate is as follows:


	December 31, 2003			March 31, 2003			March 31, 2002
Taxes computed at combined federal and state tax rate	$	(3,950	)	$	410,195		$	(812,249	)
Non-deductible expenses		9,734			3,015			2,922
State income taxes, net of federal income tax benefit		843			60,158			(117,828	)
Increase (decrease) in deferred tax asset valuation allowance		30,750			(323,298	)		927,315

Provision for income taxes	$	37,377		$	150,070		$	160


	December 31, 2003			March 31, 2003			March 31, 2002
Deferred tax asset:
Accrued expenses	$	—		$	4,895		$	99,046
Allowance for sales returns		—			275,011			—
Depreciation		(7,588	)		7,283			(1,591	)
Allowance for uncollectible accounts		14,963			14,963			14,963
Net operating loss carryforward		151,620			224,133			933,102

Total deferred tax asset		158,995			526,285			1,045,520
Valuation allowance		(158,995	)		(526,285	)		(1,045,520	)

Net deferred tax asset	$	—		$	—		$	—

The Company has a net operating loss of approximately $380,000 as of December 31, 2003 that expires in 2022.

-8-

PA DISTRIBUTION, INC.
NOTES TO FINANCIAL STATEMENTS

NOTE 6 – RELATED PARTY TRANSACTIONS

Activity with related parties are summarized below:


	December 31, 2003			March 31, 2003			March 31, 2002
Payable to related parties	$	(23,380,499	)	$	(15,765,889	)	$	(3,644,922	)
Receivable from related party		564,633			115,389			—

Payable to related party, end of year	$	(22,815,866	)	$	(15,650,500	)	$	(3,644,922	)

As of December 31, 2003, March 31, 2003 and 2002 the payable to related parties included $23,270,385, $15,209,018 and $3,514,228, payable to the Company’s primary supplier, Play Along (Hong Kong), Ltd., respectively. The payable to the Company’s primary supplier is subordinated to a maximum of $3,500,000 to the indebtedness to HSBC Business Credit.

Receivables from related party consisted of $564,633, $115,389 and no amounts due from Company’s marketing supplier, Play Along, Inc. as of December 31, 2003, March 31, 2003 and 2002, respectively. During the nine-months ended December 31, 2003, the Company paid $800,000 in management and marketing fees to a related party, Play Along, Inc., for rent, administrative and other related services. During the years ended March 31, 2003 and 2002, the Company paid $600,000 and $570,200 in management and marketing fees to Play Along, Inc.

As of December 31, 2003, March 31, 2003 and 2002, the payable to related parties included $110,114, $556,871 and $130,694, respectively, due for commissions on sales of goods on behalf of, Art Asylum LLC, an entitiy majority owned by stockholders of the Company. Other income for the nine-months ended December 31, 2003 and for the years ended March 31, 2003 and 2002 includes commissions received from Art Asylum, LLC of $104,027, $145,740 and $43,993, respectively.

NOTE 7 – CONCENTRATIONS

Cash

Sales

Sales to two customers for the nine months ended December 31, 2003 represented approximately 43% and 15% of total sales. Approximately 35% and 20% of total accounts receivable at December 31, 2003 is due from these two customers, respectively.

Sales to two customers for the year ended March 31, 2003 represented approximately 60% and 20% of total sales. Approximately 64% and 15% of total accounts receivable at March 31, 2003 is due from these two customers, respectively.

Sales to two customers for the year ended March 31, 2002 represented approximately 66% and 7% of total sales. Approximately 69% and 5% of total accounts receivable at March 31, 2002 is due from these two customers, respectively.

In the nine-months ended December 31, 2003 and the years ended March 31, 2003 and 2002, approximately 67%, 81% and 56% of sales were from one product.

-9-

PA DISTRIBUTION, INC.
NOTES TO FINANCIAL STATEMENTS

NOTE 7 – CONCENTRATIONS, continued

Accounts Receivable

The Company performs on-going credit evaluations of its customer base including those included in accounts receivable at December 31, 2003, March 31, 2003 and 2002 and generally does not require collateral. The Company maintains reserves for potential credit losses and such losses have been both immaterial and within management’s expectations.

Supplier

The Company is dependent on one supplier (a related party) for all of its inventory merchandise (See Note 6). This supplier is located in Hong Kong within the People’s Republic of China (“PRC”). The loss of this supplier or a significant reduction in product availability from this supplier could have a material adverse effect on the Company. The supplier’s operations in the PRC are subject to special consideration and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environments and foreign currency exchange. The supplier’s production and therefore, the Company’s results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things. The Company believes that its relationship with its supplier is satisfactory.

NOTE 8 – DEFINED CONTRIBUTION PENSION PLAN

The Company sponsors a simplified employers’ pension plan covering all eligible employees. The Company funds the plan at its discretion. Pension expense for the Company was $19,909, $12,165 and $12,629 for the nine months ended December 31, 2003 and for the years ended March 31, 2003 and 2002, respectively.

NOTE 9 – LITIGATION

The Company’s related company, Play Along, Inc. (“PAI”) is a defendant in a lawsuit with respect to a claim of infringement of patent on certain products sold by the Company and its related company, Play Along (Hong Kong) Ltd (“PAHK”). The plaintiff in the suit is seeking unspecified damages. PAHK has accrued $1,844,626 as a liability under this lawsuit as of December 31, 2003, based on legal counsel’s assessment of the estimated damages that could be awarded and the fees that may be incurred if a court were to find in favor of the plaintiff. As of December 31, 2003, the Company has not been named in the lawsuit and is fully indemnified for all costs and expenses in this claim by PAHK. Therefore, no additional liability is reflected in these financial statements as of December 31, 2003, March 31, 2003 and 2002.

NOTE 10 – RECLASSIFICATIONS

Certain reclassifications have been made to the prior years’ financial statements to conform to the current year presentation. These reclassifications had no effect on previously reported results of operations or accumulated deficit.

-10-

Play Along (Hong Kong) Limited

Reports and Financial Statements

For the year ended 31 March 2003

Play Along (Hong Kong) Limited

Contents


Directors’ Report			1
Auditors’ Report			3
Income Statement			4
Balance Sheet			5
Cash Flow Statement			6
Statement of Changes in Equity			7
Notes to the Financial Statements			8
Expressed in Hong Kong dollars (“HK$”)

Play Along (Hong Kong) Limited

Directors’ report
for the year ended 31 March 2003

The directors present their report and the audited financial statements for the year ended 31 March 2003.

PRINCIPAL ACTIVITY

The principal activity of the company is the trading of toys.

RESULTS AND APPROPRIATIONS

The results of the company for the year ended 31 March 2003 and the state of its affairs at that date are set out in the financial statements on pages 4 to 18.

The directors do not recommend the payment of a dividend.

DIRECTORS

The directors of the company during the year were as follows:

Mr. Steven Edward Geller
Ms. Tam Sui Ying
Mr. Jay Bruce Foreman
Mr. Charles Edward Emby
Mr. Chow Pui Mau, William

In accordance with the company’s articles of association, all directors remain in office for the ensuing year.

DIRECTORS’ INTERESTS

During the year, the directors of the company had interests in the following transactions :

(i)		During the year, the company made purchases of HK$32,507,606 and HK$4,123,251 from Wealthwise Industrial Limited and Root Land Limited respectively. Mr. Chow Pui Mau, William has equity interests in these companies.

(ii)		During the year, the company paid marketing fees of HK$18,638,750 to Play Along Inc. Mr. Jay Bruce Foreman, Mr. Charles Edward Emby and Mr. Chow Pui Mau, William have equity interests in this company.

(iii)		During the year, the company earned sales revenue of HK$226,046,140 from PA Distribution, Inc. Mr. Jay Bruce Foreman and Mr. Charles Edward Emby have equity interests in this company.

Play Along (Hong Kong) Limited

DIRECTORS’ INTERESTS (Continued)

(iv)

During the year, the company earned commission and agency income of HK$5,256,708 from Art Asylum LLC. Mr. Jay Bruce Foreman and Mr. Charles Edward Emby have equity interests in this company. In connection with the rendering of such agency services, the company made purchases and sales of approximately HK$16 million and HK$40 million on behalf of Art Asylum LLC during the year ended 31 March 2003. These purchases and sales were not regarded or included as part of the company’s own purchases and sales.

Save as aforesaid, no other contract of significance to which the company or its holding company was a party and in which a director of the company had a material interest, whether directly or indirectly, subsisted at the end of the year or at any time during the year.

At no time during the year was the company or its holding company a party to any arrangements to enable the directors of the company to acquire benefits by means of acquisition of shares in or debentures of the company or any other body corporate.

AUDITORS

The company’s auditors, Grant Thornton retire and, being eligible, offer themselves for re-appointment.

For and on behalf of the Board

Chairman

6 June 2003


Certified Public Accountants

Auditors’ report

To the members of Play Along (Hong Kong) Limited
(incorporated in Hong Kong with limited liability)

We have audited the financial statements on pages 4 to 18 which have been prepared in accordance with accounting principles generally accepted in Hong Kong.

Respective responsibilities of directors and auditors

The Companies Ordinance requires the directors to prepare financial statements which give a true and fair view. In preparing financial statements which give a true and fair view it is fundamental that appropriate accounting policies are selected and applied consistently.

It is our responsibility to form an independent opinion, based on our audit, on those statements and to report our opinion to you.

Basis of opinion

We conducted our audit in accordance with Statements of Auditing Standards issued by the Hong Kong Society of Accountants and standards of the Public Company Accounting Oversight Board (United States). An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the company’s circumstances, consistently applied and adequately disclosed.

We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance as to whether the financial statements are free from material misstatement. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements. We believe that our audit provides a reasonable basis for our opinion.

Opinion

In our opinion the financial statements give a true and fair view of the state of the company’s affairs as at 31 March 2003 and of its profit and cash flows for the year then ended and have been properly prepared in accordance with the Companies Ordinance.

-s- Grant Thornton

Grant Thornton
Certified Public Accountants
Hong Kong

6 June 2003


Member of Grant Thornton International

Play Along (Hong Kong) Limited

Income statement
for the year ended 31 March 2003


				2003			2002
	Notes			HK$			HK$
Turnover		3			440,379,441			105,210,916
Cost of sales					(204,364,180	)		(62,288,576	)

Gross profit					236,015,261			42,922,340
Other revenue					11,207,609			10,077,473
Selling and distribution costs					(125,019,609	)		(49,909,460	)
Administrative expenses					(20,323,755	)		(14,742,200	)

Profit/(Loss) from operations					101,879,506			(11,651,847	)
Finance costs		4	(b)		(767,633	)		(850,884	)

Profit/(Loss) before taxation		4	(a)		101,111,873			(12,502,731	)
Taxation		5			(13,488,247	)		—

Profit/(Loss) for the year					87,623,626			(12,502,731	)

Play Along (Hong Kong) Limited

Balance sheet
as at 31 March 2003

2003

2002

Notes

HK$

ASSETS AND LIABILITIES

Non-current assets

Property, plant and equipment

1,048,211

1,169,405

Investment securities

7, 9

3,875,000

—

4,923,211

1,169,405

Current assets

Inventories

170,807

869,599

Trade and other receivables

10,186,812

5,948,577

Amounts due from related companies

117,310,934

27,290,474

Pledged bank deposits

3,908,017

7,750,000

Tax recoverable

—

401,494

Cash at banks and in hand

60,708,387

2,091,597

192,284,957

44,351,741

Current liabilities

Bank overdrafts (secured)

—

693,396

Trade and other payables

66,051,473

32,217,964

Bills payable (secured)

20,805,433

6,162,008

Amounts due to related companies

6,857,684

2,647,301

Bank loan (secured)

9, 10

31,514

840,544

Provision for tax

12,878,505

—

106,624,609

42,561,213

Net current assets

85,660,348

1,790,528

Net assets

90,583,559

2,959,933

CAPITAL AND RESERVES

Share capital

20,000

20,000

Retained profits

90,563,559

2,939,933

Shareholders’ funds

90,583,559

2,959,933



Director				Director

Play Along (Hong Kong) Limited

Cash flow statement
for the year ended 31 March 2003


			2003			2002
	Note		HK$			HK$
Cash flow from operating activities
Profit/(Loss) before taxation				101,111,873			(12,502,731	)
Adjustments for :
Depreciation				699,772			680,244
Interest expense				767,633			850,884
Interest income				(41,216	)		(257,985	)
Gain on disposal of property, plant and equipment				—			(44,521	)
Provision for obsolete stocks				—			510,832
Stock written off				789,899			—
Write-back of provision for bad and doubtful debts				(4,000,000	)		—
Provision for bad and doubtful debts				733,597			216,672
Bad debts written off				346,460			—

Operating profit/(loss) before working capital changes				100,408,018			(10,546,605	)
Increase in inventories				(91,107	)		(109,424	)
Increase in trade and other receivables				(5,318,292	)		(199,161	)
(Increase)/Decrease in amounts due from related companies				(86,020,460	)		8,556,368
Increase in trade and other payables				33,833,509			8,234,161
Increase/(Decrease) in bills payable				14,643,425			(7,469,014	)
Increase in amounts due to related companies				4,210,383			2,647,301

Cash generated from operations				61,665,476			1,113,626
Interest received				41,216			257,985
Interest paid				(767,633	)		(850,884	)
Profits tax paid				(208,248	)		(1,008,653	)

Net cash from/(used in) operating activities				60,730,811			(487,926	)

Cash flow from investing activities
Payments to acquire property, plant and equipment				(578,578	)		(668,725	)
Receipts from disposal of property, plant and equipment				—			363,312
Payments to acquire investment securities				(3,875,000	)		—
Decrease in pledged bank deposits				3,841,983			—

Net cash used in investing activities				(611,595	)		(305,413	)

Cash flow from financing activities		15
New bank loan				—			1,008,653
Repayment of bank loan				(809,030	)		(168,109	)

Net cash (used in)/from financing activities				(809,030	)		840,544

Net increase in cash and cash equivalents				59,310,186			47,205
Cash and cash equivalents at 1 April 2002				1,398,201			1,350,996

Cash and cash equivalents at 31 March 2003				60,708,387			1,398,201

Analysis of balances of cash and cash equivalents
Cash at banks and in hand				60,708,387			2,091,597
Bank overdrafts				—			(693,396	)

				60,708,387			1,398,201

Play Along (Hong Kong) Limited

Statement of changes in equity
for the year ended 31 March 2003


	Share capital		Retained profits			Total
	HK$		HK$			HK$
Balance at 1 April 2001		20,000		15,442,664			15,462,664
Net loss for the year		—		(12,502,731	)		(12,502,731	)

Balance at 31 March 2002 and 1 April 2002		20,000		2,939,933			2,959,933
Net profit for the year		—		87,623,626			87,623,626

Balance at 31 March 2003		20,000		90,563,559			90,583,559

Play Along (Hong Kong) Limited

Notes to the financial statements
for the year ended 31 March 2003

1.		GENERAL INFORMATION

		The principal activity of the company is the trading of toys. The directors consider the ultimate holding company as at 31 March 2003 to be Bright Wealth Enterprises Limited, incorporated in the British Virgin Islands.

2.		PRINCIPAL ACCOUNTING POLICIES

	(a)		Basis of preparation

			The financial statements on pages 4 to 18 are prepared in accordance with and comply with all applicable Statements of Standard Accounting Practice (“SSAP”) and Interpretations issued by the Hong Kong Society of Accountants which does not differ significantly from accounting principles generally accepted in the United States of America (“US GAAP”) except that certain disclosures as required under US GAAP have not been included in these financial statements. The financial statements are prepared under the historical cost convention.

			Adoption of new and revised SSAPs


SSAP 1 (Revised)		Presentation of financial statements
SSAP 15 (Revised)		Cash flow statements
SSAP 34		Employee benefits

Adoption of these new and revised SSAPs has led to additional and revised disclosure in these financial statements, as explained below.

	(i)		SSAP 1 (Revised) — Presentation of financial statements

			In adopting SSAP 1 (Revised) the company is required to present a statement of changes in equity instead of a statement of recognised gains and losses. Comparative amounts have been restated to achieve a consistent presentation.

	(ii)		SSAP 15 (Revised) — Cash flow statement

			In adopting SSAP 15 (Revised) the company is required to present a cash flow statement to report cash flows during the year classified by operating, investing and financing activities only. For the purposes of the cash flow statement, cash and cash equivalents comprise cash on hand, demand deposits, short-term highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value, and bank overdrafts. Comparative amounts have been restated to achieve a consistent presentation.

Play Along (Hong Kong) Limited

2.		PRINCIPAL ACCOUNTING POLICIES (Continued)

		(a) Basis of preparation (Continued)

(iii) SSAP 34 - Employee benefits

		Employee entitlements

		In adopting SSAP 34, employee entitlements to annual leave and long service payments are recognised when they accrue to employees. A provision is made for the estimated liability for annual leave and long service payments as a result of services rendered by employees up to the balance sheet date.

		Non-accumulating compensated absences, such as sick leave and maternity leave are not recognised until the time of leave.

		In prior year, no provision was made for employee annual leave and long service payment entitlements. The adoption of SSAP 34 has not resulted in any significant changes to the prior years’ net assets and results and accordingly, no prior year adjustment is required.

(b) Property, plant and equipment

(i) Depreciation and amortisation

Depreciation is provided to write off the cost of property, plant and equipment over their estimated useful lives, using the straight line method, at the following rates per annum :


Leasehold improvements	50	%
Furniture and fixtures	20	%
Office equipment	20	%
Computer equipment	30	%

(ii) Measurement bases

Property, plant and equipment are stated at cost less accumulated depreciation and impairment losses. The cost of an asset comprises its purchase price and any directly attributable costs of bringing the asset to the working condition and location for its intended use. Subsequent expenditure relating to property, plant and equipment is added to the carrying amount of the assets if it can be demonstrated that such expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of the assets.

Play Along (Hong Kong) Limited

2.		PRINCIPAL ACCOUNTING POLICIES (Continued)

		(b) Property, plant and equipment (Continued)

(ii) Measurement bases (Continued)

When assets are sold or retired, any gain or loss resulting from their disposal, being the difference between the net disposal proceeds and the carrying amount of the assets, is included in the income statement.

(c) Investment securities

Investment securities are securities which are intended to be held on a continuing basis for an identified long-term purpose. Investment securities are stated in the balance sheet at cost less any provisions for impairment losses. Provisions are made when the fair value of such securities has declined below the carrying amounts, unless there is evidence that the decline is temporary. The amount of the reduction is recognised as an expense in the income statement.

(d) Inventories

Inventories are stated at the lower of cost and net realisable value. Cost comprises the cost of purchased goods calculated using the first-in first-out method. Net realisable value is calculated as the actual or estimated selling price less all further costs of marketing, selling and distribution.

(e) Impairment

		The carrying amounts of the company’s assets are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the asset’s recoverable amount is estimated. An impairment loss is recognised whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment losses are recognised in the income statement.

		(i) Calculation of recoverable amount

The recoverable amount of an asset is the greater of its net selling price and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs.

Play Along (Hong Kong) Limited

2.		PRINCIPAL ACCOUNTING POLICIES (Continued)

		(e) Impairment (Continued)

(ii)

Reversals of impairment

An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount and only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised.

(f) Foreign currencies

Transactions in foreign currencies are translated into Hong Kong dollars at the rates of exchange ruling at the dates of transactions. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated into Hong Kong dollars at the rates of exchange ruling at that date. Gains and losses arising on exchange are dealt with in the income statement.

(g) Operating leases

Leases where substantially all the risks and rewards of ownership of assets remain with the lessor are accounted for as operating leases. Annual rentals applicable to such operating leases are charged to the income statement on a straight line basis over the lease term.

(h) Deferred tax/ Future tax benefits

		Deferred tax is provided, using the liability method, on all significant timing differences, other than those which are not expected to crystallise in the foreseeable future.

		Future tax benefit is not carried forward as an asset unless the benefit can be regarded as being virtually certain of realisation.

(i) Related parties

Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control or common significant influence.

Play Along (Hong Kong) Limited

2.		PRINCIPAL ACCOUNTING POLICIES (Continued)

		(j) Cash and cash equivalents

		Cash comprises cash on hand and demand deposits repayable on demand with any bank or other financial institution. Cash includes deposits denominated in foreign currencies.

		Cash equivalents represent short-term, highly liquid investments which are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value. Bank overdrafts that are repayable on demand and form an integral part of the company’s cash management are also included as a component of cash and cash equivalents for the purpose of the cash flow statement.

(k) Recognition of revenue

		Revenue from the sale of goods are recognised when they are delivered to customers.

		Interest income is recognised on a time proportion basis.

(l) Employee benefits

(i) Employee entitlements

		Employee entitlements to annual leave and long service payments are recognised when they accrue to employees. A provision is made for the estimated liability for annual leave and long service payments as a result of services rendered by employees up to the balance sheet date.

		Non-accumulating compensated absences such as sick leave and maternity leave are not recognised until the time of leave.

(ii) Retirement benefit costs

		The company contributes to a Mandatory Provident Fund Scheme which is a defined contribution retirement benefit scheme, and is available to all employees. Contributions to the scheme by the company and its employees are calculated as a percentage of employees’ basic salaries. The retirement benefit scheme cost charged to the income statement represents contributions payable by the company to the scheme.

		The assets of the scheme are held separately from those of the company in an independently administered fund.

Play Along (Hong Kong) Limited

3.		TURNOVER

		Turnover represents the total invoiced value of goods supplied less returns and discounts.

4(a). PROFIT/(LOSS) BEFORE TAXATION


	2003		2002
	HK$		HK$
Profit/(Loss) before taxation is arrived at after charging :
Auditors’ remuneration		80,600		75,000
Cost of inventories recognised as expenses (including provision/write-off of HK$789,899 (2002 : HK$510,832)		205,154,079		62,799,408
Depreciation		699,772		680,244
Impairment on advanced payment of royalty fee		11,237,500		3,975,936
Licence and royalty fees		47,286,717		17,479,625
Operating lease charges in respect of office premises		499,554		419,368
Product development and sampling		4,737,082		3,441,866
Provision for bad and doubtful debts		733,597		216,672
Marketing, promotion and advertising		39,650,980		17,368,785
Contributions to retirement benefit scheme		265,137		220,790
Staff costs (including directors’ remuneration and contributions to retirement benefit scheme)		11,591,497		7,669,666
and crediting :-
Commission and agency income		5,256,708		7,230,558
Write-back of provision for bad and doubtful debts		4,000,000		—
Exchange gain		205,418		75,767
Gain on disposal of property, plant and equipment		—		44,521
Bank interest income		41,216		257,985

4(b). FINANCE COSTS


	2003		2002
	HK$		HK$
Interest charges on bank loan and other borrowings repayable within five years		767,633		850,884

Play Along (Hong Kong) Limited

TAXATION


	2003			2002
	HK$			HK$
The charge comprises:
Hong Kong profits tax
Current year		13,711,497			—
Overprovision in prior years		(223,250	)		—

		13,488,247			—

		Hong Kong profits tax is provided at the rate of 16% on the estimated assessable profit of the year after setting off available tax losses brought forward from the prior year amounting to approximately HK$12.5 million. No Hong Kong profits tax was provided in the previous year as the company did not derive any assessable profit for that year.

		No deferred tax has been provided in the financial statements as there are no material timing differences.

6.		PROPERTY, PLANT AND EQUIPMENT

Leasehold

Furniture

Office

Computer

improvements

and fixtures

equipment

Total

HK$

Cost

At 1 April 2002

796,843

326,310

117,661

1,479,366

2,720,180

Additions

—

82,508

17,776

478,294

578,578

At 31 March 2003

796,843

408,818

135,437

1,957,660

3,298,758

Accumulated depreciation

At 1 April 2002

707,435

149,931

48,399

645,010

1,550,775

Charge for the year

85,658

72,767

24,474

516,873

699,772

At 31 March 2003

793,093

222,698

72,873

1,161,883

2,250,547

Net book value

At 31 March 2003

3,750

186,120

62,564

795,777

1,048,211

At 31 March 2002

89,408

176,379

69,262

834,356

1,169,405

Play Along (Hong Kong) Limited

INVESTMENT SECURITIES


	2003		2002
	HK$		HK$
HSBC Asia Select Guaranteed Fund, at cost		3,875,000		—

Market value		3,891,523		—

The investment is pledged as a security against the company’s banking facilities (note 9).

INVENTORIES


	2003		2002
	HK$		HK$
Packing material		170,807		—
Goods purchased for resale, at cost		—		1,380,431
Less : Provision for slow-moving inventories		—		(510,832	)

		170,807		869,599

During the year the company reversed inventory provisions of HK$510,832 made in 2002 as the related inventory items were subsequently scrapped in the current year.

9.		BANKING FACILITIES

		At 31 March 2003, general banking facilities granted to the company to the extent of approximately HK$29,800,000 were secured by:

(a)		a charge over the company’s investment securities of HK$3,875,000 (note 7).

(b)		a charge over the company’s bank deposits amounting to HK$3,908,017 as at 31 March 2003;

(c)		undertaking to maintain a minimum net worth of not less than HK$10,000,000;

(d)		guarantee of HK$36,500,000 in aggregate from a third party; and

(f)		assignment of certain documentary credit loan proceeds amounting to US$150,000 (approximately HK$1,170,000) from the company to a bank.

Play Along (Hong Kong) Limited

10.

BANK LOAN (SECURED)


	2003		2002
	HK$		HK$
Bank loan, secured
- repayable within one year		31,514		840,544

11.

SHARE CAPITAL


	2003		2002
	HK$		HK$
Authorised, issued and fully paid :
20,000 ordinary shares of HK$1 each		20,000		20,000

12.		OPERATING LEASE COMMITMENTS

		At 31 March 2003, the total future minimum lease payments under non-cancellable operating leases are payable as follows :


	2003		2002
	HK$		HK$
Within one year		503,959		77,875
In the second to fifth years		625,998		—

		1,129,957		77,875

The company leases office premises under operating leases. The leases run for a period of one to three years without an option for renewal. None of the leases includes contingent rentals.

Play Along (Hong Kong) Limited

13.		OTHER COMMITMENTS

		During the year, the company had entered into royalty agreements with certain licensors, under which the company was granted the rights to use certain materials and trademarks which are owned by these licensors in a number of merchandising activities and endeavours. Total royalty commitments are as follows :


	2003
	HK$
Non-refundable royalty guaranteed payments contracted but not provided for in the financial statements :
Payable within one year		10,288,125
Payable in the second to fifth years		6,781,250

		17,069,375

14.		DIRECTORS’ REMUNERATION

		Remuneration of the directors disclosed pursuant to section 161 of the Companies Ordinance is as follows:-


	2003		2002
	HK$		HK$
Fees		—		—
Other emoluments		728,000		560,000

15.		NOTE TO THE CASH FLOW STATEMENT

		Analysis of changes in financing during the year are as follows:


	Bank loan
	2003			2002
	HK$			HK$
Balance at 1 April 2002		840,544			—
New bank loan raised		—			1,008,653
Repayment of bank loan		(809,030	)		(168,109	)

Balance at 31 March 2003		31,514			840,544

Play Along (Hong Kong) Limited

16.		RELATED PARTY TRANSACTIONS

		The following transactions were carried out with related parties :


	2003		2002
	HK$		HK$
Related companies with common directors and shareholders
- Purchases		36,630,857		—
- Marketing fees expense		18,638,750		13,950,000
- Sales		226,046,140		22,896,325
- Commission and agency income		5,256,708		2,760,045

During the year, the company provided agency services to a related company and earned commission and agency income of HK$5,256,708 per above. In connection with the rendering of such agency services, the company made purchases and sales of approximately HK$16 million and HK$40 million on behalf of the related company during the year ended 31 March 2003. These purchases and sales were not regarded or included as part of the company’s own purchases and sales.

17.		POST BALANCE SHEET EVENT

		Pursuant to the resolutions of all directors and all members and an agreement entered into by the company dated 14 April 2003, the company agreed to purchase 11,600 of its own fully paid-up ordinary shares from one of its shareholders, Bright Wealth Enterprises Limited (being the ultimate holding company as at 31 March 2003) for a consideration of US$8,650,000 (approximately HK$67 million).

The consideration will be paid by the company out of its distributable profits as follows:

(a)		US$5,000,000, on or before 15 April 2003;

(b)		US$1,650,000, on or before 10 October 2003; and

(c)		US$2,000,000, on or before 10 December 2003.

18.		APPROVAL OF THE FINANCIAL STATEMENTS

		The financial statements on pages 4 to 18 were approved by the board of directors on 6 June 2003.

Play Along (Hong Kong) Limited

Reports and Financial Statements
For the period from 1 April 2003 to 31 December 2003

Play Along (Hong Kong) Limited

Contents


Directors’ Report			1
Auditors’ Report			4
Income Statement			5
Balance Sheet			6
Cash Flow Statement			7
Statement of Changes in Equity			8
Notes to the Financial Statements			9

Expressed in Hong Kong dollars (“HK$”)

Play Along (Hong Kong) Limited

Directors’ report
for the period from 1 April 2003 to 31 December 2003

The directors present their report and the audited financial statements for the period from 1 April 2003 to 31 December 2003.

PRINCIPAL ACTIVITY

The principal activity of the company is the trading of toys.

CHANGE OF NAME

Pursuant to a directors’ resolution passed on 23 January 2004, the company will change its name from Play Along (Hong Kong) Limited to Play Along (Hong Kong) Limited with effect from 4 February 2004.

CHANGE OF FINANCIAL YEAR END

Pursuant to a directors’ resolution passed on 30 May 2003, the company changed its financial year end from 31 March to 31 December in order to facilitate the overseas tax reporting requirements of its shareholders.

RESULTS AND APPROPRIATIONS

The results of the company for the period ended 31 December 2003 and the state of its affairs at that date are set out in the financial statements on pages 5 to 24.

The directors have declared an interim dividend of HK$5,535.71 per share, totalling HK$46,500,000 which was paid on 21 November 2003.

The directors do not recommend the payment of a final dividend.

DIRECTORS

The directors of the company during the period were as follows:


Mr. Steven Edward Geller
Ms. Tam Sui Ying		(resigned on 10 October 2003)
Mr. Jay Bruce Foreman
Mr. Charles Edward Emby
Mr. Chow Pui Mau, William		(resigned on 10 December 2003)

In accordance with the company’s articles of association, all the present directors remain in office for the ensuing year.

Play Along (Hong Kong) Limited

DIRECTORS’ INTERESTS

During the period, the directors of the company had interests in the following transactions :

(i)		During the period ended 31 December 2003, the company made purchases of HK$21,030,784 and HK$23,416,352 from Wealthwise Industrial Limited and Root Land Limited respectively. Mr. Chow Pui Mau, William has equity interests in these companies.

(ii)		During the period ended 31 December 2003, the company paid marketing fees of HK$15,301,413 to Play Along Inc. Mr. Jay Bruce Foreman, Mr. Charles Edward Emby and Mr. Chow Pui Mau, William have equity interests in this company.

(iii)		During the period ended 31 December 2003, the company earned sales revenue of HK$263,505,020 from PA Distribution, Inc. Mr. Jay Bruce Foreman and Mr. Charles Edward Emby have equity interests in this company.

(iv)		During the period ended 31 December 2003, the company earned commission and agency income of HK$2,366,182 from Art Asylum LLC. Mr. Jay Bruce Foreman and Mr. Charles Edward Emby have equity interests in this company. In connection with the rendering of such agency services, the company made purchases and sales of approximately HK$10 million and HK$12 million respectively on behalf of Art Asylum LLC during the period ended 31 December 2003. These purchases and sales were not regarded or included as part of the company’s own purchases and sales.

Save as aforesaid, no other contract of significance to which the company was a party and in which a director of the company had a material interest, whether directly or indirectly, subsisted at the end of the period or at any time during the period.

At no time during the period was the company a party to any arrangements to enable the directors of the company to acquire benefits by means of acquisition of shares in or debentures of the company or any other body corporate.

Play Along (Hong Kong) Limited

AUDITORS

The company’s auditors, Grant Thornton retire and, being eligible, offer themselves for re-appointment.

For and on behalf of the Board

Chairman

19 February 2004


Certified Public Accountants

Auditors’ report

To the members of Play Along (Hong Kong) Limited
(incorporated in Hong Kong with limited liability)

We have audited the financial statements on pages 5 to 24 which have been prepared in accordance with accounting principles generally accepted in Hong Kong.

Respective responsibilities of directors and auditors

It is our responsibility to form an independent opinion, based on our audit, on those statements and to report our opinion to you.

Basis of opinion

Opinion

In our opinion the financial statements give a true and fair view of the state of the company’s affairs as at 31 December 2003 and of its profit and cash flows for the period from 1 April 2003 to 31 December 2003 and have been properly prepared in accordance with the Companies Ordinance.

-s- Grant Thornton

Grant Thornton
Certified Public Accountants
Hong Kong

19 February 2004


Member of Grant Thornton International

Play Along (Hong Kong) Limited

Income statement
for the period from 1 April 2003 to 31 December 2003


				Period from
				1 April 2003
				to			Year ended
	Notes			31 December 2003			31 March 2003
				HK$			HK$
Turnover		3			1,023,688,809			440,379,441
Cost of sales					(458,730,013	)		(204,364,180	)

Gross profit					564,958,796			236,015,261
Other revenue					3,466,328			11,207,609
Selling and distribution costs					(274,320,691	)		(125,019,609	)
Administrative expenses					(36,723,328	)		(20,323,755	)

Profit from operations					257,381,105			101,879,506
Finance costs		4	(b)		(253,302	)		(767,633	)

Profit before taxation		4	(a)		257,127,803			101,111,873
Taxation		5			(45,144,125	)		(13,488,247	)

Profit for the period/year					211,983,678			87,623,626

Dividends		6			46,500,000			—

Play Along (Hong Kong) Limited

Balance sheet
as at 31 December 2003


	Notes		31 December 2003		31 March 2003
			HK$		HK$
ASSETS AND LIABILITIES
Non-current assets
Property, plant and equipment		7		1,449,679		1,048,211
Investment securities		8, 12		3,875,000		3,875,000

				5,324,679		4,923,211
Current assets
Inventories		9		157,632		170,807
Trade and other receivables				40,660,311		10,186,812
Amount due from related company				180,345,252		117,310,934
Pledged bank deposits		12		3,926,287		3,908,017
Cash and cash equivalents		10		210,365,140		60,708,387

				435,454,622		192,284,957
Current liabilities
Trade and other payables				166,477,846		66,051,473
Provisions		11		23,605,756		—
Bills payable (secured)		12		—		20,805,433
Amounts due to related companies				2,810,340		6,857,684
Bank loan (secured)		12,13		—		31,514
Provision for tax				58,855,622		12,878,505

				251,749,564		106,624,609

Net current assets				183,705,058		85,660,348

Net assets				189,029,737		90,583,559

CAPITAL AND RESERVES
Share capital		14		8,400		20,000
Reserves		15		189,021,337		90,563,559

Shareholders’ funds				189,029,737		90,583,559



Director		Director

Play Along (Hong Kong) Limited

Cash flow statement
for the period from 1 April 2003 to 31 December 2003


		Period from
		1 April 2003
		to			Year ended
	Notes	31 December 2003			31 March 2003
		HK$			HK$
Cash flow from operating activities
Profit before taxation			257,127,803			101,111,873
Adjustments for :
Depreciation			561,337			699,772
Interest expense			253,302			767,633
Interest income			(322,305	)		(41,216	)
Stock written off			—			789,899
Write-back of provision for bad and doubtful debts			(524,288	)		(4,000,000	)
Provision for bad and doubtful debts			—			733,597
Bad debts written off			—			346,460

Operating profit before working capital changes			257,095,849			100,408,018
Decrease/(Increase) in inventories			13,175			(91,107	)
Increase in trade and other receivables			(29,949,211	)		(5,318,292	)
Increase in amount due from a related company			(63,034,318	)		(86,020,460	)
Increase in trade and other payables			100,426,373			33,833,509
Increase in provisions			23,605,756			—
(Decrease)/Increase in bills payable			(20,805,433	)		14,643,425
(Decrease)/Increase in amounts due to related companies			(4,047,344	)		4,210,383

Cash generated from operations			263,304,847			61,665,476
Interest received			322,305			41,216
Interest paid			(253,302	)		(767,633	)
Profits tax refunded/(paid)			832,992			(208,248	)

Net cash from operating activities			264,206,842			60,730,811

Cash flows from investing activities
Payments to acquire property, plant and equipment			(962,805	)		(578,578	)
Payments to acquire investment securities			—			(3,875,000	)
(Increase)/Decrease in pledged bank deposits			(18,270	)		3,841,983

Net cash used in investing activities			(981,075	)		(611,595	)

Cash flows from financing activities
Payment for repurchase of shares			(67,037,500	)		—
Repayment of bank loan			(31,514	)		(809,030	)
Dividends paid			(46,500,000	)		—

Net cash used in financing activities			(113,569,014	)		(809,030	)

Net increase in cash and cash equivalents			149,656,753			59,310,186
Cash and cash equivalents at beginning of the period/year			60,708,387			1,398,201

Cash and cash equivalents at end of the period/year			210,365,140			60,708,387

Analysis of balances of cash and cash equivalents
Cash at banks and in hand			93,848,716			60,708,387
Short-term investments			116,516,424			—

			210,365,140			60,708,387

Play Along (Hong Kong) Limited

Statement of changes in equity
for the period from 1 April 2003 to 31 December 2003


				Capital
	Share			redemption		Retained
	capital			reserve		profits			Total
	HK$			HK$		HK$			HK$
Balance at 1 April 2002		20,000			—		2,939,933			2,959,933
Net profit for the year		—			—		87,623,626			87,623,626

Balance at 31 March 2003 and 1 April 2003		20,000			—		90,563,559			90,583,559
Repurchase of shares (Note 14)		(11,600	)		11,600		(67,037,500	)		(67,037,500	)
Dividends (Note 6)							(46,500,000	)		(46,500,000	)
Net profit for the period		—			—		211,983,678			211,983,678

Balance at 31 December 2003		8,400			11,600		189,009,737			189,029,737

Play Along (Hong Kong) Limited

Notes to the financial statements
for the period from 1 April 2003 to 31 December 2003

1.		GENERAL INFORMATION

		The principal activity of the company is the trading of toys.

		Pursuant to a directors’ resolution passed on 23 January 2004, the company will change its name from Play Along (Hong Kong) Limited to Play Along (Hong Kong) Limited with effect from 4 February 2004.

2.		PRINCIPAL ACCOUNTING POLICIES

	(a)		Basis of preparation

			The financial statements on pages 5 to 24 are prepared in accordance with and comply with all applicable Statements of Standard Accounting Practice (“SSAPs”) and Interpretations issued by the Hong Kong Society of Accountants which does not differ significantly from accounting principles generally accepted in the United States of America (“US GAAP”) except that certain disclosures as required under US GAAP have not been included in these financial statements. The financial statements are prepared under the historical cost convention, except for the remeasurement of investments in securities as further explained in (c) below.

			Adoption of revised SSAP

			In the current period, the company has adopted SSAP 12 (Revised) Income Taxes. The principal effect of the implementation of SSAP 12 (Revised) is in relation to deferred tax. In previous years, partial provision was made for deferred tax using the income statement liability method, i.e. a liability was recognised in respect of timing differences arising, except where timing differences were not expected to reverse in the foreseeable future. Deferred tax assets were not recognised unless their realisation was assured beyond reasonable doubt. SSAP 12 (Revised) requires the adoption of a balance sheet liability method, whereby deferred tax is recognised in respect of all temporary differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, with limited exceptions.

			In the absence of any specific transitional requirements in SSAP 12 (Revised), the new accounting policy has been applied retrospectively. As a result the company has changed its accounting policies for deferred taxation as detailed in note 2(i) below. The adoption of SSAP 12 (Revised) has not resulted in any significant changes to the current and prior year’s net assets and results and accordingly, no prior year adjustment is required.

Play Along (Hong Kong) Limited

PRINCIPAL ACCOUNTING POLICIES (Continued)

(b)

Property, plant and equipment

(i)		Depreciation and amortisation

		Depreciation is provided to write off the cost of property, plant and equipment over their estimated useful lives, using the straight line method, at the following rates per annum :


Leasehold improvements	50	%
Furniture and fixtures	20	%
Office equipment	20	%
Computer equipment	30	%
Computer software	50	%

(ii)		Measurement bases

		Property, plant and equipment are stated at cost less accumulated depreciation and impairment losses. The cost of an asset comprises its purchase price and any directly attributable costs of bringing the asset to the working condition and location for its intended use. Subsequent expenditure relating to property, plant and equipment is added to the carrying amount of the assets if it can be demonstrated that such expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of the assets.

		When assets are sold or retired, any gain or loss resulting from their disposal, being the difference between the net disposal proceeds and the carrying amount of the assets, is included in the income statement.

(c)		Investments in securities

		Investment securities are securities which are intended to be held on a continuing basis for an identified long-term purpose. Investment securities are stated in the balance sheet at cost less any provisions for impairment losses. Provisions are made when the fair value of such securities has declined below the carrying amounts, unless there is evidence that the decline is temporary. The amount of the reduction is recognised as an expense in the income statement.

Play Along (Hong Kong) Limited

PRINCIPAL ACCOUNTING POLICIES (Continued)

(c)		Investments in securities (Continued)

		All other securities, whether held for trading or otherwise, are stated in the balance sheet at fair value. Changes in value are recognised as an expense in the income statement.

		Provisions against the carrying value of investment securities are written back to income when the circumstances and events that led to the write-downs or write-offs cease to exist and there is persuasive evidence that the new circumstances and events will persist for the foreseeable future.

(d)		Inventories

		Inventories are stated at the lower of cost and net realisable value. Cost comprises the cost of purchased goods calculated using the first-in first-out method. Net realisable value is calculated as the actual or estimated selling price less all further costs of marketing, selling and distribution.

(e)		Impairment

		The carrying amounts of the company’s assets are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the asset’s recoverable amount is estimated. An impairment loss is recognised whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment losses are recognised in the income statement.

(i)		Calculation of recoverable amount

		The recoverable amount of an asset is the greater of its net selling price and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs.

(ii)		Reversals of impairment

		An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount and only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised.

Play Along (Hong Kong) Limited

PRINCIPAL ACCOUNTING POLICIES (Continued)

(f)		Foreign currencies

		Transactions in foreign currencies are translated into Hong Kong dollars at the rates of exchange ruling at the dates of transactions. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated into Hong Kong dollars at the rates of exchange ruling at that date. Gains and losses arising on exchange are dealt with in the income statement.

(g)		Operating leases

		Leases where substantially all the risks and rewards of ownership of assets remain with the lessor are accounted for as operating leases. Annual rentals applicable to such operating leases are charged to the income statement on a straight line basis over the lease term.

(h)		Provisions

		A provision is recognised in the balance sheet when the company has a legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation, and a reliable estimate of the amount can be made. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. Where the company expects a provision to be reimbursed, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain.

(i)		Income tax

		Income tax for the period comprises current and deferred tax.

		Current tax is the expected tax payable on the taxable income for the period using tax rates enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years.

Play Along (Hong Kong) Limited

PRINCIPAL ACCOUNTING POLICIES (Continued)

(i)		Income tax (Continued)

		Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences, and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from the initial recognition of other assets and liabilities in a transaction that affects neither the tax profit nor the accounting profit.

		The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Any such reduction is reversed to the extent that it becomes probable that sufficient taxable profit will be available.

		Deferred tax assets and liabilities are not discounted. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset realised. Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity.

(j)		Related parties

		Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control or common significant influence.

(k)		Cash and cash equivalents

		Cash comprises cash on hand and demand deposits repayable on demand with any bank or other financial institution. Cash includes deposits denominated in foreign currencies.

		Cash equivalents represent short-term, highly liquid investments which are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value. Bank overdrafts that are repayable on demand and form an integral part of the company’s cash management are also included as a component of cash and cash equivalents for the purpose of the cash flow statement.

Play Along (Hong Kong) Limited

PRINCIPAL ACCOUNTING POLICIES (Continued)

(l)		Recognition of revenue

		Revenue from the sale of goods are recognised when they are delivered to customers.

		Interest income is recognised on a time proportion basis.

(m)		Employee benefits

(i)		Employee entitlements

		Employee entitlements to annual leave and long service payments are recognised when they accrue to employees. A provision is made for the estimated liability for annual leave and long service payments as a result of services rendered by employees up to the balance sheet date.

		Non-accumulating compensated absences such as sick leave and maternity leave are not recognised until the time of leave.

(ii)		Retirement benefit costs

		The company contributes to a Mandatory Provident Fund Scheme which is a defined contribution retirement benefit scheme, and is available to all eligible employees. Contributions to the scheme by the company and its employees are calculated as a percentage of employees’ basic salaries. The retirement benefit scheme cost charged to the income statement represents contributions payable by the company to the scheme.

		The assets of the scheme are held separately from those of the company in an independently administered fund.

3.		TURNOVER

		Turnover represents the total invoiced value of goods supplied less returns and discounts.

Play Along (Hong Kong) Limited

4(a). PROFIT BEFORE TAXATION


	Period from
	1 April 2003
	to		Year ended
	31 December 2003		31 March 2003
	HK$		HK$
Profit before taxation is arrived at after charging :
Cost of inventories recognised as expenses		458,730,013		205,154,079
Administrative expenses:
Auditors’ remuneration		150,000		80,600
Depreciation		561,337		699,772
Operating lease charges in respect of office premises		347,427		499,554
Provision for bad and doubtful debts		—		733,597
Staff costs (including directors’ remuneration and contributions to retirement benefit scheme)		23,489,542		11,591,497
Contributions to retirement benefit scheme		344,159		265,137
Selling and distribution costs:
Provision for impairment on advanced payment of royalty fee *		17,437,500		11,237,500
Licence and royalty fees		109,639,573		47,286,717
Provision for infringement of patent (note 11)		14,295,851		—
Product development and sampling		7,904,167		4,737,082
Marketing, promotion and advertising		94,598,620		39,650,980
and crediting :
Commission and agency income		2,366,182		5,256,708
Write-back of provision for bad and doubtful debts		524,288		4,000,000
Exchange gain		139,223		205,418
Bank interest income		55,880		41,216
Interest income from short-term investments		266,425		—

The directors considered that there are uncertainties about the recoverable amount of the advanced payments of royalty fee of HK$17,437,500 as at 31 December 2003 (31 March 2003 : HK$11,237,500) which would depend on the future sales demand of the related licensed products and therefore, a full provision was made against the advanced payments in the financial statements.

Play Along (Hong Kong) Limited

4(b). FINANCE COSTS


	Period from
	1 April 2003
	to		Year ended
	31 December 2003		31 March 2003
	HK$		HK$
Interest charges on bank loan and other borrowings repayable within five years		253,302		767,633

TAXATION


	Period from
	1 April 2003
	to			Year ended
	31 December 2003			31 March 2003
	HK$			HK$
The charge comprises :
Hong Kong profits tax
Current year		45,183,402			13,711,497
Over-provision in prior years		(39,277	)		(223,250	)

		45,144,125			13,488,247

Hong Kong profits tax is provided at the rate of 17.5% (31 March 2003 : 16%) on the estimated assessable profit of the period/year.

Play Along (Hong Kong) Limited

5.		TAXATION (Continued)

		The income tax expenses for the period/year can be reconciled to the profit before taxation per the income statement as follows :


	Period from
	1 April 2003
	to			Year ended
	31 December 2003			31 March 2003
	HK$			HK$
Profit before taxation		257,127,803			101,111,873

Tax at applicable tax rate		44,997,365			16,177,900
Tax effect of non-deductible expenses		361,952			134,363
Tax effect of non-taxable revenue		(53,662	)		(621,259	)
Tax effect on temporary differences not recognised		(122,253	)		19,190
Tax effect of prior year’s tax losses utilised in current period		—			(1,998,697	)
Over-provision in prior year		(39,277	)		(223,250	)

Actual tax expense		45,144,125			13,488,247

No deferred tax has been provided in the financial statements as there are no material temporary differences.

Play Along (Hong Kong) Limited

DIVIDENDS


	Period from
	1 April 2003
	to		Year ended
	31 December 2003		31 March 2003
	HK$		HK$
Interim dividend of HK$5,535.71 (31 March 2003: NIL) per share		46,500,000		—

PROPERTY, PLANT AND EQUIPMENT

Leasehold

Furniture

Office

Computer

improvements

and fixtures

equipment

software

Total

HK$

Cost

At 1 April 2003

796,843

408,818

135,437

1,957,660

—

3,298,758

Additions

247,990

158,705

171,020

215,750

169,340

962,805

At 31 December 2003

1,044,833

567,523

306,457

2,173,410

169,340

4,261,563

Accumulated depreciation

At 1 April 2003

793,093

222,698

72,873

1,161,883

—

2,250,547

Charge for the period

38,997

72,090

41,937

395,651

12,662

561,337

At 31 December 2003

832,090

294,788

114,810

1,557,534

12,662

2,811,884

Net book value

At 31 December 2003

212,743

272,735

191,647

615,876

156,678

1,449,679

At 31 March 2003

3,750

186,120

62,564

795,777

—

1,048,211

Play Along (Hong Kong) Limited

INVESTMENT SECURITIES


	31 December 2003		31 March 2003
	HK$		HK$
HSBC Asia Select Guaranteed Fund, at cost		3,875,000		3,875,000

Market value		3,894,375		3,891,523

The investment is pledged as a security against the company’s banking facilities (note 12).

INVENTORIES


	31 December 2003		31 March 2003
	HK$		HK$
Packing material		157,632		170,807

10.

CASH AND CASH EQUIVALENTS


	31 December 2003		31 March 2003
	HK$		HK$
Cash at banks and in hand		93,848,716		60,708,387
Short-term investments - investment in money market fund, at fair value		116,516,424		—

		210,365,140		60,708,387

Play Along (Hong Kong) Limited

11.

PROVISIONS

Provision for

infringement of

patent on certain

Provision for

products

royalties

(note 11(a))

(note 11(b))

Total

HK$

Balance at 1 April 2003

—

Provision made during the period

14,295,851

9,309,905

23,605,756

Balance at 31 December 2003

14,295,851

9,309,905

23,605,756

(a)

The company has made a provision of HK$14,295,851 in respect of a claim of infringement of patent on certain products sold by the company. Pursuant to the complaint filed by the plaintiff against Play Along Inc., a related company, the plaintiff is seeking unspecified damages. Based on the directors’ best estimate, the provision was calculated at by estimating the damages that could be awarded and the fees that may be incurred if a Court were to find in favor of the plaintiff. Although the company was not the named defendant in the court order, the company manufactured and distributed the products in question and has agreed to indemnify the related company for all the costs and expenses in this claim. Up to the date of the approval of these financial statements, the case has not been finalised and the outcome was uncertain.

(b)

The provision of HK$9,309,905 was for the estimated royalties payable on sales made by the company on certain products during the period. Up to the date of approval of these financial statements, the company has not yet arrived at an agreement with the licensor for the royalties payable on these sales.

Play Along (Hong Kong) Limited

12.

BANKING FACILITIES

At 31 December 2003, general banking facilities granted to the company to the extent of approximately HK$29,920,000 were secured by:

(a)		a charge over the company’s investment securities of HK$3,875,000 (note 8).

(b)		a charge over the company’s bank deposits amounting to HK$3,926,287 as at 31 December 2003;

(c)		undertaking to maintain a minimum net worth of not less than HK$10,000,000; and

(d)		guarantee of HK$36,500,000 in aggregate from a third party.

13.

BANK LOAN (SECURED)


	31 December 2003		31 March 2003
	HK$		HK$
Bank loan, secured - repayable within one year		—		31,514

14.

SHARE CAPITAL


	31 December 2003		31 March 2003
	HK$		HK$
Authorised :
20,000 ordinary shares of HK$1 each		20,000		20,000


	Number of ordinary
	shares of HK$1 each			HK$
Issued and fully paid :
At 1 April 2003		20,000			20,000
Repurchase of ordinary shares **		(11,600	)		(11,600	)

At 31 December 2003		8,400			8,400

At 31 March 2003		20,000			20,000

Play Along (Hong Kong) Limited

14.

SHARE CAPITAL (Continued)

Pursuant to the resolutions by all directors and all members and an agreement entered into by the company dated 14 April 2003, the company agreed to purchase 11,600 of its own fully paid-up ordinary shares from one of its shareholders, Bright Wealth Enterprises Limited (being the then ultimate holding company as at 31 March 2003) for a consideration of HK$67,037,500 (equivalent to US$8,650,000). The consideration was paid by the company out of its distributable profits.

15.

RESERVES


	31 December 2003		31 March 2003
	HK$		HK$
Capital redemption reserve		11,600		—
Retained profits		189,009,737		90,563,559

		189,021,337		90,563,559

Details of the movements in the above reserves are set out in the statement of changes in equity on page 8.

16.		OPERATING LEASE COMMITMENTS

		At 31 December 2003, the total future minimum lease payments under non-cancellable operating leases are payable as follows :


	31 December 2003		31 March 2003
	HK$		HK$
Within one year		1,064,484		503,959
In the second to fifth years		337,824		625,998

		1,402,308		1,129,957

The company leases office premises under operating leases. The leases run for a period of one year to two years without an option for renewal. None of the leases includes contingent rentals.

Play Along (Hong Kong) Limited

17.		OTHER COMMITMENTS

		During the period, the company had entered into royalty agreements with certain licensors, under which the company was granted the rights to use certain materials and trademarks which are owned by these licensors in a number of merchandising activities and endeavours. Total royalty commitments are as follows:


	31 December 2003		31 March 2003
	HK$		HK$
Non-refundable royalty guaranteed payments contracted but not provided for in the financial statements :
Payable within one year		6,975,000		10,288,125
Payable in the second to fifth years		3,681,250		6,781,250

		10,656,250		17,069,375

18.		DIRECTORS’ REMUNERATION

		Remuneration of the directors disclosed pursuant to section 161 of the Companies Ordinance is as follows:


	Period from
	1 April 2003
	to		Year ended
	31 December 2003		31 March 2003
	HK$		HK$
Fees		—		—
Other emoluments		4,072,097		728,000

		4,072,097		728,000

Play Along (Hong Kong) Limited

19.		RELATED PARTY TRANSACTIONS

		The following transactions were carried out with related parties :


	Period from
	1 April 2003
	to		Year ended
	31 December 2003		31 March 2003
	HK$		HK$
Related companies with common directors and shareholders
- Marketing fees expense		15,301,413		18,638,750
- Sales		263,505,020		226,046,140
- Commission and agency income #		2,366,182		5,256,708
- Salary paid to a shareholder		939,216		—
Related companies in which a director of the company has equity interest
- Purchases		44,447,136		36,630,857

During the period, the company provided agency services to a related company and earned commission and agency income of HK$2,366,182 per above. In connection with the rendering of such agency services, the company made purchases and sales of approximately HK$10 million and HK$12 million respectively on behalf of the related company during the period ended 31 December 2003. These purchases and sales were not regarded or included as part of the company’s own purchases and sales.

20.		COMPARATIVE FIGURES

		The company changed its financial year end from 31 March to 31 December in order to facilitate the overseas tax reporting requirements of its shareholders. The financial statements in the current period therefore cover a period of 9 months from 1 April 2003 to 31 December 2003 and may not be comparable with the figures presented in the income statement, cash flow statement, statement of changes in equity and the notes thereon for the prior year.

21.		APPROVAL OF THE FINANCIAL STATEMENTS

		The financial statements on pages 5 to 24 were approved by the board of directors on 19 February 2004.

Play Along, Inc.
Balance Sheets


	March 31, 2003			March 31, 2004
	(Unaudited) US$			US$
Current Assets
Petty Cash		750			—
Cash In Banks		28,839			214,661
Security Deposit		42,565			39,524
Accounts Receivable, net		—			1,755
Amount due from related companies		237,338			—
Other Receivable		644			93,727
Prepayment & Deposits		19,635			11,586
Deferred tax asset		102,113			—

		431,884			361,253

Non Current Assets
Fixed Assets
Furniture & Fixtures		15,191			53,613
Computers		98,443			120,265
Computer Software		10,417			10,951
Accumulated Depreciation		(55,802	)		(85,823	)

		68,249			99,006

Total Assets		500,133			460,259

Current Liabilities
Accounts Payable		78,677			45,343
Accrual		543,568			115,250
Taxes Payable		708			—
Amount due to related companies		—			492,383

		622,953			652,976

Shareholders’ Equity
Common Stock		100			70
Additional Paid In Capital		—			(970	)
Retained Earnings		55,868			(130,090	)
Profit and Loss (Current Year)		(178,788	)		(61,727	)

		(122,820	)		(192,717	)

Total Liabilities & Equity		500,133			460,259

Play Along, Inc.
Statements of Operations
Three months ended March 31, 2004 and 2003 (Unaudited)


	Three Months Ended
	March 31, 2003			March 31, 2004
	US$			US$
Revenues
Marketing fee		1,349,163			855,000

Selling Expenses
Promotion & Advertising		13,140			25,790
Shipping, Freight & Transportation		28,609			37

Total Selling Expenses		41,749			25,827

Marketing Expenses
Show Room		29,931			–
Others		16,351			3,688

Total Marketing Expenses		46,282			3,688

Product Development Expenses
Design & Development		259,124			27,818
Others		3,368			–

Total Product Development Expenses		262,492			27,818

General & Admin. Expenses
Bank Charges		1,736			140
Communication Expenses		10,087			11,084
Depreciation		21,165			8,901
Insurance		–			24,883
Meals & Entertainment		4,884			3,757
Office Expenses		6,615			21,601
Payroll Expenses		886,034			472,843
Professional Fee		46,036			110,585
Rents & Rates		32,932			74,303
Repair & Maintenance		27,943			11,737
Staff Benefits		51,891			20,726
Travelling		45,939			44,614
Utilities		3,955			(2,840	)
Sundry Expenses		13,318			6,535
Postage		1,580			42,844
Other Expense		41,014			7,681

Total General & Admin. Expenses		1,195,129			859,394

Operating Income (Loss)		(196,489	)		(61,727	)
Other Income

		–			–

Total Profits before Tax		(196,489	)		(61,727	)
Provision For Income Tax		99,358			–

Net Profits (Loss)		(97,131	)		(61,727	)

Play Along, Inc.
Statements of Cash Flows
Three months ended March 31, 2004 and 2003 (Unaudited)


	Three Months Ended
	March 31,			March 31,
	2003			2004
	US$			US$
Cash flows from operating activities
Net Income		(97,131	)		(61,727	)

Adjustments to reconcile net income to net cash provided (used) by operating activities
Depreciation and amortization		21,165			8,901
Changes in operating assets and liabilities:
Accounts receivable		500			–
Amount due from related company		(352,727	)		318,880
Other receivable		–			(1,000	)
Prepaid expenses and deposit		14,428			2,500
Deferred tax asset		(102,113	)		–
Accounts payable		1,972			22,935
Accrued Expenses		543,568			(31,433	)
Income taxes payable		708			–
Amount due to related companies		(9,611	)		(250,000	)
Deferred income taxes		–			–

Total adjustments		117,890			70,783

Net Cash provided (used) by operating activities		20,759			9,056

Cash flows from investing activities
Purchase of Property and equipment		(21,502	)		(13,046	)

Net Cash provided (used) by investing activities		(21,502	)		(13,046	)

Cash flows from financing activities

Net Cash provided (used) by financing activities		–			–

Net increase (decrease) in cash and cash equivalents		(743	)		(3,990	)
Cash and cash equivalents, beginning of year		30,332			218,651

Cash and cash equivalents, end of quarter		29,589			214,661

Cash paid during the period for:
Interest		–			–

Income taxes		–			–

PA Distribution, Inc.
Balance Sheets


	March 31, 2003			March 31, 2004
	(Unaudited) US$			US$
Current Assets
Cash In Banks		107,411			1,871,474
Certificate of deposit		160,000			160,000
Accounts Receivable, net		9,590,481			7,667,780
Amount due from related companies		—			314,633
Other Receivable		15,831			38,905
Prepayment & Deposits		—			17,230
Inventory		6,571,787			10,284,056

		16,445,510			20,354,078

Non Current Assets
Fixed Assets
Furniture & Fixtures		—			35,119
Office Equipment		46,257			15,975
Leasehold Improvement		—			1,800
Computer Software		—			141,868

		46,257			194,762

Total Assets		16,491,767			20,548,840

Current Liabilities
Accounts Payable		834,341			114,359
Accrual		—			102,245
Other Payable		—			2,268
Taxes Payable		150,070			—
Note Payable		940,053			—
Amount due to related companies		15,650,500			20,543,010

		17,574,964			20,761,882

Shareholders’ Equity
Common Stock		100			70
Additional Paid In Capital		—			(970	)
Retained Earnings		(2,200,818	)		(1,094,915	)
Profit and Loss (Current Year)		1,117,521			882,773

		(1,083,197	)		(213,042	)

Total Liabilities & Equity		16,491,767			20,548,840

PA Distribution, Inc.
Statements of Operations
Three months ended March 31, 2004 and 2003 (Unaudited)


	Three Months Ended
	March 31, 2003			March 31, 2004
	US$			US$
Revenues
Commercial Sales		13,260,814			11,767,806
Sales Allowance & Discount		(1,024,895	)		(127,264	)

Total Net Sales		12,235,919			11,640,542
Cost of Goods Sold		10,107,534			9,437,773

Gross Profit		2,128,385			2,202,769
Selling Expenses
Promotion & Advertising		211,760			10,146
Sales Samples		–			403
Others		(955	)		–

Total Selling Expenses		210,805			10,549

Marketing Expenses
Marketing Fee		150,000			300,000
Show Room		17,170			–

Total Marketing Expenses		167,170			300,000

Product Development Expenses

Total Product Development Expenses		–			–

General & Admin. Expenses
Written back on Bad and Doubtful Debts		46,373			–
Bank Charges		855			1,092
Communication Expenses		3,369			7,647
Depreciation		11,248			17,042
Insurance		3,000			14,417
Meals & Entertainment		6,166			14,900
Payroll Expenses		874,797			390,931
Professional Fee		14,191			37,403
Rents & Rates		–			1,749
Repair & Maintenance		18,293			1,994
Staff Benefits		81,141			33,600
Travelling		34,873			97,796
Sundry Expenses		6,225			10,013
Warehouse Expense		354,602			344,458
Postage		3,777			1,650
Other expense		11,363			–

Total General & Admin. Expenses		1,470,273			974,692

Operating Income (Loss)		280,137			917,528
Other Income
Interest Expense		(160,058	)		(47,746	)
Bank Interest Income		137			364
Commission Income		66,182			12,627

		(93,739	)		(34,755	)

Total Profits before Tax		186,398			882,773
Provision For Income Tax		(150,230	)		–

Net Profits (Loss)		36,168			882,773

PA Distribution, Inc.
Statements of Cash Flows
Three months ended March 31, 2004 and 2003 (Unaudited)


	Three Months Ended
	March 31,			March 31,
	2003			2004
Cash flows from operating activities
Net Income		36,168			882,773

Adjustments to reconcile net income to net cash provided (used) by operating activities
Depreciation and amortization		11,248			17,042
Bad & doubtful debt		46,373			–
Accounts receivable		120,138			510,077
HSBC factoring receivable		–			3,783,546
Amount due from related company		–			250,000
Other receivable		–			(2,102	)
Inventory		(288,819	)		874,359
Prepaid expenses and other		50,000			14,417
Accounts payable		721,415			91,973
Accrued Expenses		–			(324,611	)
Reserve for sales returns and allowances		–			(1,476,704	)
Income taxes payable		150,070			–
Bills payable		917,679			–
Amount due to related companies		(1,756,129	)		(2,837,489	)
Deferred income taxes		–			–

Total adjustments		(28,025	)		900,508

Net Cash provided (used) by operating activities		8,143			1,783,281

Cash flows from investing activities
Purchase of Property and equipment		(31,289	)		(55,636	)

Net Cash provided (used) by investing activities		(31,289	)		(55,636	)

Cash flows from financing activities
		–			–

Net Cash provided (used) by financing activities		–			–

Net increase (decrease) in cash and cash equivalents		(23,146	)		1,727,645
Cash and cash equivalents, beginning of year 1st January		290,557			303,829

Cash and cash equivalents, end of quarter		267,411			2,031,474

Cash paid during the period for:
Interest		160,058			47,746

Income taxes		–			–

Play Along (Hong Kong) Limited
Balance Sheets


	March 31, 2003		March 31, 2004
	(Unaudited) US$		US$
Current Assets
Petty Cash		1,290		2,581
Cash In Banks		7,832,050		7,227,396
Cash Deposits in Goldman Sachs		–		15,034,377
Pledged Deposits		504,260		507,166
Accounts Receivable, net		1,058,791		3,564,011
Amount due from related companies		15,136,895		20,660,328
Other Receivable		21,999		31,095
Prepayment & Deposits		233,637		382,381
Inventory		22,040		20,340

		24,810,962		47,429,675

Non Current Assets
Fixed Assets
Furniture & Fixtures		24,015		32,314
Office Equipment		8,073		22,987
Computers		102,681		65,236
Leasehold Improvement		484		23,209
Computer Software		–		17,652

		135,253		161,398

Unit Trusts Investment in HSBC		500,000		500,000
Total Assets		25,446,215		48,091,073

Current Liabilities
Accounts Payable		1,824,956		3,381,965
Accrual and Provisions		6,630,442		10,164,294
Other Payable		67,373		229,938
Taxes Payable		1,661,743		4,171,401
Bills Payable		2,684,572		—
Bank Loan secured		4,066		—
Amount due to related companies		884,862		97,782

		13,758,014		18,045,380

Shareholders’ Equity
Paid Up Capital		2,581		1,084
Capital Redemption Reserve		–		1,497
Retained Earnings		379,346		24,388,353
Profit and Loss (Current Year)		11,306,274		5,654,759

		11,688,201		30,045,693

Total Liabilities & Equity		25,446,215		48,091,073

Play Along (Hong Kong) Limited
Statements of Operations
Three months ended March 31, 2004 and 2003 (Unaudited)


	Three Months Ended
	March 31, 2003			March 31, 2004
	US$			US$
Revenues
Commercial Sales		9,513,876			15,428,187
Sales to PAD		9,375,406			7,697,565
Sales Allowance & Discount		(878,252	)		(100,314	)

Total Net Sales		18,011,030			23,025,438
Cost of Goods Sold		9,267,433			10,342,232

Gross Profit		8,743,597			12,683,206
Selling Expenses
Customs & Declaration		16,786			3,278
Inspection Charges		—			4,671
Packing Charges		7,324			7,184
Printing Charges		10,487			28,560
Promotion & Advertising		1,025,808			1,722,328
Sales Commission		270,532			347,656
Sales Samples		47,903			12,676
Shipping, Freight & Transportation		27,942			93,009
Testing Charges		30,851			19,618
Others		1,114			2,751

Total Selling Expenses		1,438,747			2,241,731

Marketing Expenses
License & Royalty		2,927,498			2,485,059
Marketing Fee		1,148,640			555,000
Show Room		28,719			96,640
Others		—			12,498

Total Marketing Expenses		4,104,857			3,149,197

Product Development Expenses
Design & Development		249,093			243,472
Development Samples		68			1,595
Packaging		5,945			92
Tooling Charges		359,061			70,343
Others		102,654			377

Total Product Development Expenses		716,821			315,879

General & Admin. Expenses
Stock Write Off		101,922			—
Written back on Bad and Doubtful Debts		(421,471	)		—
Bank Charges		30,678			72,992
Communication Expenses		6,926			13,308
Courier		42,704			53,932
Depreciation		19,245			30,435
Exchange Difference		(9,330	)		(7,312	)
Insurance		60,837			67,366
Interest Expenses		20,970			2
Management Fee		5,539			11,134
Meals & Entertainment		4,720			9,366
Office Expenses		12,463			16,664
Payroll Expenses		625,326			922,368
Bonus Provision		—			45,161
Professional Fee		15,670			37,411
Rents & Rates		18,678			36,837
Repair & Maintenance		9,281			38,994
Staff Benefits		2,008			6,792
Travelling		60,117			48,820
Utilities		2,871			5,332
Sundry Expenses		2,661			897

Total General & Admin. Expenses		611,815			1,410,499

Operating Income		1,871,357			5,565,900
Other Income
Bank Interest Income		1,080			2,204
Commission Income		17,879			45,108
Others		24,872			41,547

		43,831			88,859

Total Profits before Tax		1,915,188			5,654,759
Provision For Income Tax		(335,158	)		—

Net Profits		1,580,030			5,654,759

Play Along (Hong Kong) Limited
Statements of Cash Flows
Three months ended March 31, 2004 and 2003 (Unaudited)


	Three Months Ended
	March 31,			March 31,
	2003			2004
	US$			US$
Cash flows from operating activities
Net Income		1,580,030			5,654,759

Adjustments to reconcile net income to net cash provided (used) by operating activities
Depreciation and amortization		19,245			30,435
Written back on bad & doubtful debt		(421,471	)		–
Changes in operating assets and liabilities:
Accounts receivable		1,596,630			1,258,372
Amount due from related companies		2,024,003			2,610,027
Other receivable		(13,580	)		164,678
Inventory		118,668			–
Prepaid expenses and other		(98,843	)		(206,637	)
Accounts payable		666,106			(664,895	)
Accrued Expenses and Provisions		(999,546	)		(8,425,715	)
Other payable		(253,742	)		(56,482	)
Reserve for sales returns and allowances		816,727			(1,551,036	)
Income taxes payable		335,158			(3,422,873	)
Bills payable		1,083,303			–
Amount due to related companies		365,050			(264,842	)

Total adjustments		5,237,708			(10,528,968	)

Net Cash provided (used) by operating activities		6,817,738			(4,874,209	)

Cash flows from investing activities
Purchase of Property and equipment		(24,924	)		(4,778	)

Net Cash provided (used) by investing activities		(24,924	)		(4,778	)

Cash flows from financing activities
Repayment of long term debt		(17,920	)		–

Net Cash provided (used) by financing activities		(17,920	)		–

Net increase (decrease) in cash and cash equivalents		6,774,894			(4,878,987	)
Cash and cash equivalents as at 1 January		1,562,706			27,650,507

Cash and cash equivalents, end of quarter		8,337,600			22,771,520

Cash paid during the period for:
Interest		(78,079	)		(2	)

Income taxes		–			(3,422,873	)

UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENT

The following unaudited pro forma consolidated financial statements as of March 31, 2004 and for the year ended December 31, 2003 and the three months ended March 31, 2004 give effect to the asset acquisition of Play Along. The pro forma consolidated balance sheet presents our financial position as if the asset acquisition of Play Along had occurred on March 31, 2004. The pro forma consolidated statement of operations presents our results as if the acquisition of Play Along had occurred on January 1, 2003. Our fiscal year end is December 31 and Play Along’s fiscal year end is December 31. Effective April 1, 2003, Play Along changed its fiscal year end from March 31 to December 31. The pro forma consolidated balance sheet as of March 31, 2004 is based upon our historical consolidated balance sheet as of March 31, 2004 which has been adjusted for the effects of the Play Along asset acquisition. The pro forma consolidated statement of operations for the year ended December 31, 2003 and three months ended March 31, 2004 is based on our historical consolidated statement of operations and the statement of operations of Play Along for the nine months ended December 31, 2003 and the three months ended March 31, 2004.

The pro forma consolidated financial statements include, in our opinion, all material adjustments necessary to reflect the asset acquisition of Play Along. The pro forma consolidated financial statements do not represent the Company’s actual results of operations, including the acquisitions, nor do they purport to predict or indicate our financial position or results of operations at any future date or for any future period. The pro forma consolidated financial statements should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our consolidated financial statements and the related notes thereto and Play Along’s financial statements and the related notes thereto included herein.

JAKKS PACIFIC, INC. AND SUBSIDIARIES
Pro Forma Consolidated Balance Sheet


	MARCH 31, 2004
	HISTORICAL			PRO FORMA			PRO FORMA
	JAKKS			ADJUSTMENTS			BALANCE SHEET
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	142,883,608			($60,676,057	)(1),(2)	$	82,207,551
Marketable Securities		13,746,135			15,034,377	(2)		28,780,512
Accounts receivable, net		76,462,489			11,303,547	(2)		87,766,036
Inventory, net		44,768,062			4,699,063	(2)		49,467,125
Prepaid expenses and other current assets		20,321,392			1,185,972	(2)		21,507,364

Total current assets		298,181,686			(28,453,098	)		269,728,588

Property and equipment, at cost		44,561,733			455,166	(2)		45,016,899
Less accumulated depreciation and amortization		33,521,780						33,521,780

Property and equipment, net		11,039,953			455,166			11,495,119

Other		13,245,759			699,524	(2)		13,945,283
Investment in joint venture		3,942,425			—			3,942,425
Goodwill, net		207,468,716			83,983,526	(3)		291,452,242
Trademarks, net		11,795,154			—			11,795,154

Total assets	$	545,673,693		$	56,685,118		$	602,358,811

LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses	$	46,166,488		$	37,645,968	(4)	$	83,812,456
Current portion of long term debt		19,353			—			19,353
Income taxes payable		3,076,790			4,171,401	(4)		7,248,191

Total current liabilities		49,262,631			41,817,369			91,080,000

Long term debt		98,037,150			—			98,037,150
Deferred income taxes		1,164,398			—			1,164,398

Total Liabilities		148,464,179			41,817,369			190,281,548

STOCKHOLDERS EQUITY
Common stock		25,313			749	(1)		26,062
Additional paid-in capital		252,373,748			14,867,000	(1)		267,240,748
Retained earnings		145,402,452			—			145,402,452
Accumulated other comprehensive income (loss)		(591,999	)		—			(591,999	)

Total stockholders equity		397,209,514			14,867,749			412,077,263

Total liabilities and stockholders equity	$	545,673,693		$	56,685,118		$	602,358,811

JAKKS PACIFIC, INC. AND SUBSIDIARIES
Unaudited Pro Forma Consolidated Statements Of Operations


	YEAR ENDED DECEMBER 31, 2003
	ACTUAL

	PA			PLAY			PA						PA
	HONG KONG(8)			ALONG INC.(8)			DISTRIBUTION(8)			CONSOLIDATING(8)			CONSOLIDATED(8)			JAKKS
Net Sales	$	132,088,879		$	2,774,376		$	37,345,315			($36,775,024	)	$	135,433,546		$	315,776,407
Cost of sales		77,432,638	(7)		—			32,050,589	(7)		(28,691,611	)		80,791,616			189,141,782

Gross Profit		54,656,241			2,774,376			5,294,726			(8,083,413	)		54,641,930			126,634,625
Selling, general and administrative expenses		21,893,044			2,772,771			5,075,835			(2,774,376	)		26,967,274			105,771,590
Recall Costs		—			—			—			—			—			2,000,000

Income from operations		32,763,197			1,605			218,891			(5,309,037	)		27,674,656			18,863,035
Interest, net		(8,904	)		389			297,159			—			288,644			1,405,472
Other (income) expense		(405,680	)		—			(104,027	)		—			(509,707	)		(7,351,324	)

Income before provision for income taxes		33,177,781			1,216			25,759			(5,309,037	)		27,895,719			24,808,887
Provision for income taxes		5,825,048			8,386			37,377			—			5,870,811			4,204,815

Net income (loss)	$	27,352,733			($7,170	)		($11,618	)		($5,309,037	)	$	22,024,908		$	20,604,072

Basic earnings per share																$	0.85

Weighted average shares outstanding																	24,262,405

Diluted earnings per share																$	0.83

Weighted average shares and equivalents outstanding																	24,677,333

[Additional columns below]

[Continued from above table, first column(s) repeated]


	YEAR ENDED DECEMBER 31, 2003
	PRO FORMA			PRO FORMA
	COMBINED			ADJUSTMENTS			RESULTS

Net Sales	$	451,209,953		$	—		$	451,209,953
Cost of sales		269,933,398			—			269,933,398

Gross Profit		181,276,555			—			181,276,555
Selling, general and administrative expenses		132,738,864			—			132,738,864
Recall Costs		2,000,000			—			2,000,000

Income from operations		46,537,691			—			46,537,691
Interest, net		1,694,116			2,531,329	(5)		4,225,445
Other (income) expense		(7,861,031	)		—			(7,861,031	)

Income before provision for income taxes		52,704,606			(2,531,329	)		50,173,277
Provision for income taxes		10,075,626			1,464,228	(6)		11,539,854

Net income	$	42,628,980			($3,995,557	)	$	38,633,423

Basic earnings per share							$	1.54

Weighted average shares outstanding					749,005			25,011,410

Diluted earnings per share							$	1.52

Weighted average shares and equivalents outstanding					749,005			25,426,338

JAKKS PACIFIC, INC. AND SUBSIDIARIES
Unaudited Pro Forma Consolidated Statements Of Operations


	THREE MONTHS ENDED MARCH 31, 2004
	ACTUAL

	PA			PLAY			PA
	HONG KONG			ALONG INC.			DISTRIBUTION			CONSOLIDATING			CONSOLIDATED PA			JAKKS
Net Sales	$	23,025,438		$	855,000		$	11,640,542			($8,552,565	)	$	26,968,415		$	73,986,327
Cost of sales		12,920,300	(7)		—			9,437,773	(7)		(8,267,317	)		14,090,756			43,519,897

Gross Profit		10,105,138			855,000			2,202,769			(285,248	)		12,877,659			30,466,430
Selling, general and administrative expenses		4,539,236			916,727			1,285,240			(855,000	)		5,886,203			24,700,031

Income (loss) from operations		5,565,902			(61,727	)		917,529			569,752			6,991,456			5,766,399
Interest, net		(2,202	)		—			47,383			—			45,181			480,852
Other (income) expense		(86,655	)		—			(12,627	)		—			(99,282	)		(360,142	)

Income (loss) before provision for income taxes		5,654,759			(61,727	)		882,773			569,752			7,045,557			5,645,689
Provision for income taxes		—			—			—			—			—			1,298,508

Net income (loss)	$	5,654,759			($61,727	)	$	882,773		$	569,752		$	7,045,557		$	4,347,181

Basic earnings per share																$	0.17

Weighted average shares outstanding																	25,275,498

Diluted earnings per share																$	0.17

Weighted average shares and equivalents outstanding																	25,775,875

[Additional columns below]

[Continued from above table, first column(s) repeated]


	THREE MONTHS ENDED MARCH 31, 2004
				PRO FORMA			PRO FORMA
	COMBINED			ADJUSTMENTS			RESULTS

Net Sales	$	100,954,742		$	—		$	100,954,742
Cost of sales		57,610,653			—			57,610,653

Gross Profit		43,344,089			—			43,344,089
Selling, general and administrative expenses		30,586,234			—			30,586,234

Income from operations		12,757,855			—			12,757,855
Interest, net		526,033			659,812	(5)		1,185,845
Other (income) expense		(459,424	)		—			(459,424	)

Income before provision for income taxes		12,691,246			(659,812	)		12,031,434
Provision for income taxes		1,298,508			1,468,721	(6)		2,767,229

Net income	$	11,392,738			($2,128,533	)	$	9,264,205

Basic earnings per share							$	0.36

Weighted average shares outstanding					749,005			26,024,503

Diluted earnings per share							$	0.35

Weighted average shares and equivalents outstanding					749,005			26,524,880

NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

The unaudited pro forma consolidated financial statements have been adjusted for items relating to the acquisition of Play Along as set forth below:

BALANCE SHEET


(1)	Consideration paid on or about the closing of the Play Along acquisition:
	Cash paid to stockholders	$	70,202,000
	Other acquisition costs		297,337

		$	70,499,337

	749,005 Shares of JAKKS common stock issued to Play Along in the acquisition	$	14,867,749

(2)	Assets acquired in Play Along acquisition	$	43,200,928

(3)	Excess of consideration paid over fair market value of Play Along net assets acquired (Goodwill)	$	83,983,526

(4)	Liabilities assumed in the Play Along acquisition:
	Accounts payable and accrued expenses	$	16,535,817
	Accrued for license concession payment		12,000,000
	Accrual for bonuses		4,026,552
	Accrual for dividend payment		9,255,000

	Adjusted liabilities assumed	$	41,817,369

STATEMENT OF OPERATIONS


		Pro Forma			Pro Forma
		Year Ended			Three Months Ended
		Dec 31, 2003			Mar 31, 2004
(5)	Interest, net is adjusted to reflect:
	The elimination of interest expense related to borrowings made by Play Along as if they had been repaid by January 1, 2003		($288,644	)		($45,181	)
	The elimination of interest income related to lower cash balances held by JAKKS		2,819,973			704,993

		$	2,531,329		$	659,812

(6)	Provision for income taxes is adjusted to reflect the tax effect of pro forma adjustments	$	1,464,228		$	1,468,721

(7)	For consistency purposes, royalty expense was reclassified to cost of sales on Play Along (Hong Kong) Limited and PA Distribution, Inc. Statements of Operations.

(8)	Play Along (Hong Kong) Limited, Play Along, Inc. and PA Distribution, Inc. Statements of Operations only include activity for the nine months ended December 31, 2003.


Number		Description


10.1		June 10, 2004 Asset Purchase and Sale Agreement(1)

99		June 14, 2004 Press Release(1)

(1) Filed as an exhibit to the Registrant’s June 16, 2004 Current Report on Form 8-K and incorporated herein by reference.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

Dated: September 7, 2004


	JAKKS PACIFIC, INC.

	By:		/s/ JOEL M. BENNETT Joel M. Bennett Executive Vice President

EXHIBIT INDEX


Number		Description


10.1		June 10, 2004 Asset Purchase and Sale Agreements(1)

99		June 14, 2004 Press Release(1)

(1) Filed as an exhibit to the Registrant’s June 16, 2004 Current Report on Form 8-K and incorporated herein by reference.