Edgar Filing: JAKKS PACIFIC INC

Jakks Pacific, Inc. - August 6, 2004

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

Amendment No. 2 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):
December 13, 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. 2 to Form 8-K/A is an amendment to the registrant’s Amendment No. 1 to Form 8-K/A, filed on September 7, 2004 (relating to the registrant’s asset acquisition of Play Along, Inc., Play Along (Hong Kong) Limited and PA Distribution, Inc. (collectively, “Play Along”)).The information included herein does not change the financial information included in such Amendment No. 1 to Form 8-K/A, but rather seeks to clarify and expound upon the financial information already included therein.

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

Play Along (Hong Kong) Limited

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. 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.

Grant Thornton
Certified Public Accountants
Hong Kong

6 June 2003

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. 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

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.

Grant Thornton
Certified Public Accountants
Hong Kong

19 February 2004

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. 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 (Unaudited)


	March 31, 2003			March 31, 2004
	US$			US$
ASSETS
Current Assets:
Cash	$	29,589		$	214,661
Prepaid Expenses		19,635			11,586
Deferred tax asset		102,113			196,520

Total Current Assets		151,337			422,767

Property and equipment, net		68,249			99,006

Other Assets:
Other Receivable		644			1,756
Due from related parties		237,338			—
Deposits		42,564			39,524

Total other assets		280,546			41,280

Total Assets	$	500,132		$	563,053

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current Liabilities:
Accounts Payable and accrued expenses	$	622,244		$	160,595
Taxes Payable		708			—
Due to related parties		—			492,383

		622,952			652,978

Commitments and Contingencies

Shareholders’ deficit:
Common Stock, $0.01 par value; 20,000 shares authorized; 10,000 and 7,000 shares issued and outstanding, respectively		100			70
Additional Paid In Capital		—			(970	)
Accumulated deficit		(122,920	)		(89,025	)

Total stockholders’ deficit		(122,820	)		(89,925	)

Total liabilities and stockholders’ deficit	$	500,132		$	563,053

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	$	1,349,163		$	855,000
Operating expenses:
Selling expenses		44,316			10,227
Advertising expenses		28,144			20,108
Product development expenses		262,492			27,818
General and administrative expenses		1,090,161			849,674
Depreciation		21,165			8,901

Total operating expenses		1,446,278			916,728

Income (loss) from operations		(97,115	)		(61,728	)

Other expense:
Interest expense		–			–

Income (loss) before income tax expense		(97,115	)		(61,728	)
Income tax expense (benefit)		(33,728	)		(102,793	)

Net income (loss)	$	(63,387	)	$	41,065

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	$	(63,387	)	$	41,065

Adjustments to reconcile net income to net cash provided (used) by operating activities:
Depreciation and amortization		21,165			8,901
Provision (benefit) for income taxes		(33,728	)		(102,793	)
Changes in operating assets and liabilities:
Prepaid expenses and other receivable		(5,636	)		(1,000	)
Deposits		20,563			2,500
Accounts payable and accrued expenses		316,977			(8,497	)
Income taxes payable		708			–

Total adjustments		320,049			(100,889	)

Net Cash provided (used) by operating activities		256,662			(59,824	)

Cash flows from investing activities
Purchase of equipment		(20,312	)		(13,046	)

Net Cash provided (used) by investing activities		(20,312	)		(13,046	)

Cash flows from financing activities
Advances from (repayments to) related parties		(237,338	)		68,880

Net Cash provided (used) by financing activities		(237,338	)		68,880

Net increase (decrease) in cash and cash equivalents		(988	)		(3,990	)
Cash and cash equivalents, beginning of year		30,577			218,651

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

Cash paid during the period for:
Interest	$	–		$	–

Income taxes	$	–		$	–

PLAY ALONG, INC.
NOTES TO FINANCIAL STATEMENTS

NOTE 1 — NATURE OF BUSINESS

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 March 31, 2003 and March 31, 2004.

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 seven years. The Company reviews the valuation of fixed assets and their remaining economic lives annually and adjusts depreciation accordingly.

Use of 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

Advertising Costs

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

PLAY ALONG, INC.
NOTES TO FINANCIAL STATEMENTS

NOTE 3 — PROPERTY AND EQUIPMENT

Property and equipment consisted of the following:


	March 31			March 31
	2003			2004
Office furniture and fixtures	$	15,190		$	53,613
Computer software and equipment		108,861			131,216
Less: accumulated depreciation		(55,802	)		(85,823	)

Property and equipment, net	$	68,249		$	99,006

Depreciation expense is $21,165 and $8,901 for the three months ended March 31, 2003 and March 31, 2004, respectively.

NOTE 4 — INCOME TAXES


	March 31			March 31
	2003			2004
Current	$	—		$	—
Deferred		(33,728	)		(102,793	)

Total income tax expense (benefit)	$	(33,728	)	$	(102,793	)


	March 31			March 31
	2003			2004
Deferred tax asset
Accrued expenses	$	121,610		$	110,493
Depreciation		(17,223	)		(22,394	)
Other		(2,274	)		108,421

Total deferred tax asset	$	102,113		$	196,520

PLAY ALONG, INC.
NOTES TO FINANCIAL STATEMENTS

NOTE 5 — RELATED PARTY TRANSACTIONS

Activity with related parties are summarized below:


	March 31			March 31
	2003			2004
Receivable from related parties	$	352,727		$	7,250
Payable to related parties, end of year		(115,389	)		(499,633	)

Receivable (Payable) to related parties, end of year	$	237,338		$	(492,383	)

During the three months ended March 31, 2003 and March 31, 2004, the Company received $150,000 and $300,000, respectively, in management and marketing fees from a related company, PA Distribution, Inc., for rent, administrative and other related services provided.

During the three months ended March 31, 2003 and March 31, 2004, the Company received $1,199,163 and $555,000, respectively, 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 March 31, 2003 and March 31, 2004, the balances in each bank account were over this limit by an aggregate of $0 and $114,661, respectively.

Revenues

In the periods ended March 31, 2003 and March 31, 2004, 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.

PLAY ALONG, INC.
NOTES TO FINANCIAL STATEMENTS

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 $11,507 and $9,370 for the three months ended March 31, 2003 and March 31, 2004, respectively.

NOTE 8 — COMMITMENTS

The Company leases its office facilities under long-term operating lease agreements. Rent expense for all operating leases was $52,080 and $72,860 for the three months ended March 31, 2003 and March 31, 2004, respectively.

At March 31, 2004, future minimum lease payments for these leases are as follows:


	Operating
Quarter ending March 31	Leases
2004	$	365,442
2005		540,788
2006		529,660
2007		459,704
2008		28,053
Thereafter		13,446

Total minimum lease payments	$	1,937,093

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 March 31, 2004, 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 March 31, 2004, 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 March 31, 2003 or March 31, 2004.

PA Distribution, Inc.
Balance Sheets (Unaudited)


	March 31, 2003			March 31, 2004
	US$			US$
ASSETS
Current Assets:
Cash	$	107,411		$	1,871,474
Accounts receivable, net		9,590,481			7,667,780
Inventory		6,571,787			10,284,056
Prepaid expenses		—			17,230

Total current assets		16,269,679			19,840,540

Property and equipment, net		46,257			194,762

Other assets:
Other receivable		1,401			301,034
Employee receivable		14,430			35,905
Certificate of deposit		160,000			160,000

Total other assets		175,831			496,939

Total Assets	$	16,491,767		$	20,532,241

LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current Liabilities:
Accounts payable and accrued expenses	$	834,341		$	218,774
Note payable		940,053			—
Taxes payable		150,070			192,863
Due to related parties		15,650,500			20,526,411

		17,574,964			20,938,048

Shareholders’ deficit:
Common Stock, $0.01 par value; 20,000 shares authorized; 10,000 and 7,000 shares issued and outstanding, respectively		100			70
Additional paid in capital		—			(970	)
Accumulated deficit		(1,083,297	)		(404,907	)

Total stockholders’ deficit		(1,083,197	)		(405,807	)

Total Liabilities and stockholders’ deficit	$	16,491,767		$	20,532,241

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$
Sales	$	12,235,919		$	11,640,542
Cost of goods sold		10,107,534			9,435,523

Gross profit (loss)		2,128,385			2,205,019

Operating expenses:
Selling expenses		16,884			9,145
Advertising expenses		344,876			305,000
General and administrative expenses		1,625,470			956,302
Depreciation		11,248			17,042

Total operating expenses		1,998,478			1,287,489

Income (loss) from operations		129,907			917,530

Other income (expense):
Other income		66,182			12,627
Interest income		130			364
Interest and factoring expense		(160,058	)		(47,747	)

Total other income (expense)		(93,746	)		(34,756	)

Income (loss) before income tax expense		36,161			882,774
Income tax expense		15,139			192,863

Net income (loss)	$	21,022		$	689,911

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	$	21,022		$	689,911

Adjustments to reconcile net income to net cash provided (used) by operating activities:
Depreciation and amortization		11,248			17,042
Sales returns and allowance for chargebacks		689,250			–
Accounts receivable		(523,310	)		(966,628	)
Inventory		(307,010	)		874,358
Prepaid expenses and other current assets		50,570			(285,718	)
Accounts payable and accrued expenses		(12,641,466	)		(232,638	)
Taxes payable		150,070			192,863

Total adjustments		(12,570,648	)		(400,721	)

Net Cash provided (used) by operating activities		(12,549,626	)		289,189

Cash flows from investing activities
Purchase of equipment		(8,646	)		(55,635	)

Net Cash used by investing activities		(8,646	)		(55,635	)

Cash flows from financing activities
Advances from factor		15,783,782			–
Repayments to factor		(14,866,103	)		–
Advances from related parties		11,617,447			(2,289,455	)

Net Cash provided (used) by financing activities		12,535,126			(2,289,455	)

Net decrease in cash and cash equivalents		(23,146	)		(2,055,901	)
Cash and cash equivalents, beginning of year 1st January		130,557			3,927,375

Cash and cash equivalents, end of quarter	$	107,411		$	1,871,474

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

Income taxes	$	150,070		$	–

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 that 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

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 March 31, 2003 and March 31, 2004.

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 fixed assets and their remaining economic lives annually and adjusts depreciation accordingly.

Inventories

Inventories consist of eight 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

Fair Value of Financial Instruments

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 $458,430 and $672,948, for the three months ended March 31, 2003 and March 31, 2004, respectively.

NOTE 3 – FACTORING AGREEMENT

Accounts receivable consisted of the following at March 31, 2003 and March 31, 2004:


	March 31, 2003			March 31, 2004
Accounts receivable	$	10,317,231		$	7,705,280
Less: allowance for doubtful accounts		(37,500	)		(37,500	)
Less: allowance for sales returns and chargebacks		(689,250	)		—

Accounts receivable, net	$	9,590,481		$	7,667,780

There is $46,373 and $0 in bad debt expense for the three months ended March 31, 2003 and March 31, 2004, 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 (4.75% and 4.0% at March 31, 2003 and March 31, 2004, 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 March 31, 2003 and March 31, 2004 are $948,053 and $0, respectively. Interest and factoring expense for the three months ended March 31, 2003 and March 31, 2004 are $160,058 and $47,747, respectively.

NOTE 4 – PROPERTY AND EQUIPMENT

Property and equipment consisted of the following:


	March 31, 2003			March 31, 2004
Office equipment, computers and software	$	60,415		$	244,827
Less: accumulated depreciation and amortization		(14,158	)		(50,065	)

Property and equipment, net	$	46,257		$	194,762

PA DISTRIBUTION, INC.
NOTES TO FINANCIAL STATEMENTS

NOTE 4 – PROPERTY AND EQUIPMEN, continued

Depreciation expense is $11,248 and $17,042 for the three months ended March 31, 2003 and March 31, 2004, respectively.

NOTE 5 – INCOME TAXES


	March 31, 2003		March 31, 2004
Current	$	15,139	$	192,863
Deferred		—		—

Total income tax expense	$	15,139	$	192,863

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


	March 31, 2003			March 31, 2004
Taxes computed at combined federal and state tax rate	$	410,195		$	300,143
Non-deductible expenses		3,015			6,372
State income taxes, net of federal income tax benefit		60,158			44,013
Increase (decrease) in deferred tax asset valuation allowance		(323,298	)		(157,665	)

Provision for income taxes	$	150,070		$	192,863


	March 31, 2003			March 31, 2004
Deferred tax asset:
Accrued expenses	$	4,895		$	—
Allowance for sales returns		275,011			—
Depreciation		7,283			(13,633	)
Allowance for uncollectible accounts		14,963			14,963
Net operating loss carryforward		224,133			—

Total deferred tax asset		526,285			1,330
Valuation allowance		(526,285	)		(1,330	)

Net deferred tax asset	$	—		$	—

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

PA DISTRIBUTION, INC.
NOTES TO FINANCIAL STATEMENTS

NOTE 6 – RELATED PARTY TRANSACTIONS

Activity with related parties are summarized below:


	March 31, 2003			March 31, 2004
Payable to related parties	$	(15,765,889	)	$	(20,841,044	)
Receivable from related party		115,389			314,633

Payable to related party, end of year	$	(15,650,500	)	$	(20,526,411	)

As of March 31, 2003 and March 31, 2004 the payable to related parties included $15,209,018 and $20,660,328, respectively, 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 $115,389 and $314,633 due from the Company’s marketing supplier, Play Along, Inc. as of March 31, 2003 and March 31, 2004, respectively. During the three-months ended March 31, 2003 and March 31, 2004, the Company paid $150,000 and $300,000, respectively, in management and marketing fees to a related party, Play Along, Inc., for rent, administrative and other related services.

As of March 31, 2003 and March 31, 2004, the payable to related parties included $556,871 and $180,716, respectively, due for commissions on sales of goods on behalf of, Art Asylum LLC, an entity majority owned by stockholders of the Company. Other income for the three-months ended March 31, 2003 and March 31, 2004, includes commissions received from Art Asylum, LLC of $66,182 and $12,627, respectively.

NOTE 7 – CONCENTRATIONS

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 March 31, 2003 and March 31, 2004, the balances in each bank account were over this limit by an aggregate of $101,506 and $1,770,316, respectively.

Sales

Sales to two customers for the three months ended March 31, 2003 represented approximately 72% and 9% 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 three months ended March 31, 2004 represented approximately 55% and 22% of total sales. Approximately 52% and 15% of total accounts receivable at March 31, 2004 is due from these two customers, respectively.

PA DISTRIBUTION, INC.
NOTES TO FINANCIAL STATEMENTS

NOTE 7 – CONCENTRATIONS, continued

In the three months ended March 31, 2003 and March 31, 2004, approximately 91% and 86% of sales were from one product.

Accounts Receivable

The Company performs on-going credit evaluations of its customer base including those included in accounts receivable at March 31, 2003 and March 31, 2004 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

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 $7,422 and $8,397 for the three months ended March 31, 2003 and March 31, 2004, 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 March 31, 2004, 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 March 31, 2004, 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 March 31, 2003 and March 31, 2004.

PA DISTRIBUTION, INC.
NOTES TO FINANCIAL STATEMENTS

NOTE 10 – RECLASSIFICATIONS

Play Along (Hong Kong) Limited
Balance sheet
as at March 31, 2004


	Notes	March 31, 2003		March 31, 2004
		US $		US$
ASSETS AND LIABILITIES
Non-current assets
Property, plant and equipment	6		135,253		161,398
Investment securities	7, 11		500,000		500,000

			635,253		661,398
Current assets
Inventories	8		22,040		20,340
Trade and other receivables			1,314,427		3,977,487
Amount due from related company			15,136,895		20,660,328
Pledged bank deposits	11		504,260		507,166
Cash and cash equivalents	9		7,833,340		22,264,354

			24,810,962		47,429,675
Current liabilities
Trade and other payables			8,522,771		11,296,380
Provisions	10		—		2,479,817
Bills payable (secured)	11		2,684,572		—
Amounts due to related companies			884,862		97,782
Bank loan (secured)	11, 12		4,066		—
Provision for tax			1,661,743		4,171,401

			13,758,014		18,045,380

Net current assets			11,052,948		29,384,295

Net assets			11,688,201		30,045,693

CAPITAL AND RESERVES
Share capital	13		2,581		1,084
Reserves	14		11,685,620		30,044,609

Shareholders’ funds			11,688,201		30,045,693

Play Along (Hong Kong) Limited
Income statement
for the three months ended March 31, 2004


			Three months ended
	Notes		March 31, 2003			March 31, 2004
			US$			US$
Turnover	3			18,011,030			23,025,438
Cost of sales				(9,267,433	)		(10,342,232	)

Gross profit				8,743,597			12,683,206
Other revenue				43,831			88,859
Selling and distribution costs				(6,260,424	)		(5,706,807	)
Administrative expenses				(590,846	)		(1,410,497	)

Profit from operations				1,936,158			5,654,761
Finance costs	4	(b)		(20,970	)		(2	)

Profit before taxation	4	(a)		1,915,188			5,654,759
Taxation	5			(1,740,419	)		—

Profit for the period/year				174,769			5,654,759

Dividends				—			—

Play Along (Hong Kong) Limited
Cash flow statement
for the three months ended March 31, 2004

Three months ended

Notes

March 31, 2003

March 31, 2004

US$

Cash flow from operating activities

Profit before taxation

1,915,188

5,654,759

Adjustments for :

Depreciation

19,245

30,435

Interest expense

20,970

Interest income

(1,080

)

(2,204

)

Stock written off

101,922

—

Write-back of provision for bad and doubtful debts

(432,349

)

—

Provision for bad and doubtful debts

10,878

—

Bad debts written off

—

Operating profit before working capital changes

1,634,774

5,682,992

Decrease/(Increase) in inventories

16,746

—

Decrease in trade and other receivables

1,462,215

1,269,005

Decrease in amount due from a related company

2,045,994

2,610,027

Increase/(Decrease) in trade and other payables

232,530

(10,184,633

)

Increase/(Decrease) in provisions

1,083,303

(566,087

)

(Decrease)/Increase in bills payable

—

(Decrease)/Increase in amounts due to related companies

362,065

(264,842

)

Cash generated from operations

6,837,627

(1,453,538

)

Interest received

1,080

2,204

Interest paid

(20,970

)

Profits tax refunded/(paid)

—

(3,422,873

)

Net cash from operating activities

6,817,737

(4,874,209

)

Cash flows from investing activities

Payments to acquire property, plant and equipment

(24,924

)

(4,778

)

Payments to acquire investment securities

(746

)

—

(Increase)/Decrease in pledged bank deposits

—

(548

)

Net cash used in investing activities

(25,670

)

(5,326

)

Cash flows from financing activities

Payment for repurchase of shares

—

Repayment of bank loan

(17,920

)

—

Dividends paid

—

Net cash used in financing activities

(17,920

)

—

Net increase in cash and cash equivalents

6,774,147

(4,879,535

)

Cash and cash equivalents at beginning of the period/year

1,059,193

27,143,889

Cash and cash equivalents at end of the period/year

7,833,340

22,264,354

Analysis of balances of cash and cash equivalents

Cash at banks and in hand

7,833,340

7,229,976

Short-term investments

—

15,034,378

7,833,340

22,264,354

Play Along (Hong Kong) Limited
Notes to the financial statements
for the period from 1 January 2004 to 31 March 2004

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 昇龍(香港)有限公司 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. 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.

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.

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.

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.

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.

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.

4(a).

PROFIT BEFORE TAXATION


	Three months		Three months
	Ending		Ending
	March 31, 2003		March 31, 2004
	US$		US$
Profit before taxation is arrived at after charging :
Cost of inventories recognised as expenses		9,369,355		10,342,232
Administrative expenses:
Auditors’ remuneration		10,400		—
Depreciation		19,245		30,435
Operating lease charges in respect of office premises		16,622		34,338
Provision for bad and doubtful debts		10,878		—
Staff costs (including directors’ remuneration and contributions to retirement benefit scheme)		625,326		950,294
Contributions to retirement benefit scheme		9,161		17,235
Selling and distribution costs:
Provision for impairment on advanced payment of royalty fee *		150,000		—
Licence and royalty fees		2,777,498		2,485,059
Provision for infringement of patent (note 11)		—		—
Product development and sampling		764,724		245,067
Marketing, promotion and advertising		2,203,167		2,386,466
and crediting :
Commission and agency income		42,751		86,655
Write-back of provision for bad and doubtful debts		432,349		—
Exchange gain		9,330		7,312
Bank interest income		1,080		2,204
Interest income from short-term investments		—		—

4(b).

FINANCE COSTS


	Three months		Three months
	Ending		Ending
	March 31, 2003		March 31, 2004
	US$		US$
Interest charges on bank loan and other borrowings repayable within five years		20,970		2

TAXATION


	Three months			Three months
	Ending			Ending
	March 31, 2003			March 31, 2004
	US$			US$
The charge comprises :
Hong Kong profits tax
Current year		1,769,225			—
Over-provision in prior years		(28,806	)		—

		1,740,419			—

PROPERTY, PLANT AND EQUIPMENT

Leasehold

Furniture

Office

Computer

improvements

and fixtures

equipment

software

Total

US$

Cost

At 1 January 2004

134,817

73,229

39,543

280,440

21,850

549,879

Additions

—

797

248

3,559

174

4,778

At 31 March 2004

134,817

74,026

39,791

283,999

22,024

554,657

Accumulated depreciation

At 1 January 2004

107,366

38,037

14,814

200,973

1,634

362,824

Charge for the period

4,242

3,675

1,990

17,790

2,738

30,435

At 31 March 2004

111,608

41,712

16,804

218,763

4,372

393,259

Net book value

At 31 March 2004

23,209

32,314

22,987

65,236

17,652

161,398

At 31 March 2003

484

24,015

8,073

102,681

—

135,253

INVESTMENT SECURITIES


	March 31, 2003		March 31, 2004
	US$		US$
HSBC Asia Select Guaranteed Fund, at cost		500,000		500,000

Market value		502,132		510,000

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

8.		INVENTORIES


	March 31, 2003		March 31, 2004
	US$		US$
Packing material		22,040		20,340

CASH AND CASH EQUIVALENTS


	March 31, 2003		March 31, 2004
	US$		US$
Cash at banks and in hand		7,833,340		7,229,976
Short-term investments
- investment in money market fund, at fair value		—		15,034,378

		7,833,340		22,264,354

10.

PROVISIONS

Provision for

infringement of

patent on certain

Provision for

products

royalties

(note 11(a))

(note 11(b))

Total

US$

Balance at 1 January 2004

1,844,626

1,201,278

3,045,904

Payment made during the period

—

(566,087

)

(566,087

)

Balance at 31 March 2004

1,844,626

635,191

2,479,816

	(a)		The company has made a provision of US$1,844,626 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.

	(b)		The provision of US$635,191 was for the estimated additional royalties payable on sales made by the company on certain products during the period.

11.		BANKING FACILITIES

		At 31 March 2004, general banking facilities granted to the company to the extent of approximately US$12,000,000 were secured by:

	(a)		a charge over the company’s investment securities of US$500,000 (note 7).

	(b)		An unlimited joint and several guarantee from the shareholders;

	(c)		undertaking to maintain a minimum net worth of not less than US$12,903,226; and

	(d)		Maintain average unencumbered deposits of minimum US$5,000,000 at all times.

At 31 March 2003, general banking facilities granted to the company to the extent of approximately US$3,845,161 were secured by:

	(a)		a charge over the company’s investment securities of US$500,000 (note 7).

	(b)		a charge over the company’s bank deposits amounting to US$504,260 as at 31 March 2003;

	(c)		undertaking to maintain a minimum net worth of not less than US$1,290,323;

	(d)		guarantee of US$4,709,677 in aggregate from a third party; and

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

12.

BANK LOAN (SECURED)


	March 31, 2003		March 31, 2004
	US$		US$
Bank loan, secured
- repayable within one year		4,066		—

13.

SHARE CAPITAL


	March 31, 2003			March 31, 2004
	US$			US$
Authorised :
20,000 ordinary shares of HK$1 each		2,581			2,581

	Number of ordinary
	shares of HK$1 each
Issued and fully paid :
At 1 Jan 2004		20,000			1,084
Repurchase of ordinary shares **		(11,600	)		—

At 31 March 2004		8,400			1,084

At 31 March 2003		20,000			2,581

14.

RESERVES


	March 31, 2003		March 31, 2004
	US$		US$
Capital redemption reserve		—		1,497
Retained profits		11,685,620		30,043,112

		11,685,620		30,044,609

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

15.		OPERATING LEASE COMMITMENTS

		At 31 March 2004, the total future minimum lease payments under non-cancellable operating leases are payable as follows :


	March 31, 2003		March 31, 2004
	US$		US$
Within one year		65,027		137,353
In the second to fifth years		80,774		9,252

		145,801		146,605

		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.

16.		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:


	March 31, 2003		March 31, 2004
	US$		US$
Non-refundable royalty guaranteed payments contracted but not provided for in the financial statements :
Payable within one year		1,327,500		690,000
Payable in the second to fifth years		875,000		475,000

		2,202,500		1,165,000

17.		DIRECTORS’ REMUNERATION

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


	Three months		Three months
	Ending		Ending
	March 31, 2003		March 31, 2004
	US$		US$
Fees		—		—
Other emoluments		23,484		352,736

		23,484		352,736

18.		RELATED PARTY TRANSACTIONS

		The following transactions were carried out with related parties :


	Three months		Three months
	Ending		Ending
	March 31, 2003		March 31, 2004
	US$		US$
Related companies with common directors and shareholders
- Marketing fees expense		1,055,000		555,000
- Sales		9,375,406		7,697,565
- Commission and agency income #		42,751		77,618
- Salary paid to a shareholder		—		—
Related companies in which a director of the company has equity interest
- Purchases		1,833,832		—

During the period, the company provided agency services to a related company and earned commission and agency income of US$77,618 per above. In connection with the rendering of such agency services, the company made purchases and sales of approximately US$275,000 and US$564,000 respectively on behalf of the related company during the period ended 31 March 2004. These purchases and sales were not regarded or included as part of the company’s own purchases and sales.

19.		COMPARATIVE FIGURES

		The financial statements in the current period cover a period of 3 months from 1 January 2004 to 31 March 2004 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.

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, Inc. , Play Along (Hong Kong) Limited and PA Distribution, Inc. (collectively “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			($60,676,058	)(1),(2)	$	82,207,550
Marketable Securities		13,746,135			15,034,377	(2)		28,780,512
Accounts receivable, net		76,462,489			11,262,887	(2)		87,725,376
Inventory, net		44,768,062			4,699,063	(2)		49,467,125
Prepaid expenses and other current assets		20,321,392			422,717	(2)		20,744,109

Total current assets		298,181,686			(29,257,014	)		268,924,672

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			1,737,185	(2)		14,982,944
Investment in joint venture		3,942,425			—			3,942,425
Goodwill, net		207,468,716			85,733,793	(3)		293,202,509
Trademarks, net		11,795,154			—			11,795,154

Total assets	$	545,673,693		$	58,669,130		$	604,342,823

LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses	$	46,166,488		$	39,437,117	(4)	$	85,603,605
Current portion of long term debt		19,353			—			19,353
Income taxes payable		3,076,790			4,364,264			7,441,054

Total current liabilities		49,262,631			43,801,381			93,064,012

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

Total Liabilities		148,464,179			43,801,381			192,265,560

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		$	58,669,130		$	604,342,823

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


	YEAR ENDED DECEMBER 31, 2003
	ACTUAL

													PA
	PA			PLAY			PA			CONSOLIDATING(8),(9)			CONSOLIDATED(8)
	HONG KONG(8),(11)			ALONG INC.(8)			DISTRIBUTION(8)			ADJUSTMENTS			RESULTS			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
	COMBINED			PRO FORMA			PRO FORMA
	RESULTS			ADJUSTMENTS			RESULTS(10)

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
	PA			PLAY			PA			CONSOLIDATING(1),(9)			CONSOLIDATED
	HONG KONG(11)			ALONG INC.			DISTRIBUTION			ADJUSTMENTS			RESULTS			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)		—			9,435,523	(7)		(8,267,317	)		14,088,506			43,519,897

Gross Profit		10,105,138			855,000			2,205,019			(285,248	)		12,879,909			30,466,430
Selling, general and administrative expenses		4,539,236			916,728			1,287,489			(855,000	)		5,888,453			24,700,031

Income (loss) from operations		5,565,902			(61,728	)		917,530			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			(61,728	)		882,774			569,752			7,045,557			5,645,689
Provision for income taxes		—			(102,793	)		192,863			—			90,070			1,298,508

Net income (loss)	$	5,654,759		$	41,065		$	689,911		$	569,752		$	6,955,487		$	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
	COMBINED			PRO FORMA			PRO FORMA
	RESULTS			ADJUSTMENTS			RESULTS(10)

Net Sales	$	100,954,742		$	—		$	100,954,742
Cost of sales		57,608,403			—			57,608,403

Gross Profit		43,346,339			—			43,346,339
Selling, general and administrative expenses		30,588,484			—			30,588,484

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		1,388,578			1,378,651	(6)		2,767,229

Net income	$	11,302,668			($2,038,463	)	$	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	$	43,434,673

(3)	Excess of consideration paid over fair market value of Play Along net assets acquired (Goodwill)	$	85,733,793

(4)	Liabilities assumed in the Play Along acquisition:
	Accounts payable and accrued expenses	$	14,155,565
	Accrued for license concession payment		12,000,000
	Accrual for bonuses		4,026,552
	Accrual for dividend payment		9,255,000

	Adjusted liabilities assumed	$	39,437,117

STATEMENT OF OPERATIONS

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

1,378,651

(7)

For consistency purposes, royalty expense of $18,241,669 and $2,485,059 for the periods ended December 31, 2003 and March 31, 2004, respectively, 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.

(9)

Consolidating entries represent the elimination of the PA (Hong Kong) Limited and Play Along Distribution, Inc. inter-company sales and marketing fee income received by Play Along, Inc.

(10)

The Pro Forma Results column totals the sum of the Consolidated PA Results and JAKKS columns (Combined Results column) and the Pro Forma Adjustments.

(11)

The PA Hong Kong financials were prepared in accordance with accounting principles generally accepted in Hong Kong. This PA Hong Kong financial information was converted from Hong Kong dollars to U.S. dollars using an exchange rate of HK$7.75 to US$1.00.


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: December 13, 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.