Jakks Pacific, Inc. - August 6, 2004
Table of Contents

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


Table of Contents

          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.

1


Table of Contents

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


Table of Contents

         
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.
  (DASZKALBOLTON LLP LOGO)   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


Table of Contents

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

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  

 


Table of Contents

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.

-2-


Table of Contents

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-


Table of Contents

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-


Table of Contents

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-


Table of Contents

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-


Table of Contents

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-


Table of Contents

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-


Table of Contents

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-


Table of Contents

         
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.
  (DASZKALFBOLTON LLP LOGO)   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.

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 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


Table of Contents

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

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  

 


Table of Contents

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.

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Table of Contents

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.

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Table of Contents

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.

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Table of Contents

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.

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Table of Contents

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

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.

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

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, 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.

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Table of Contents

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  
 
   
 
     
 
     
 
 

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Table of Contents

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  
 
   
 
     
 
     
 
 

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 as of:

                         
    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.

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Table of Contents

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

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 $3,894,938, $101,506, $0, respectively.

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-


Table of Contents

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-


Table of Contents

Play Along (Hong Kong) Limited

Reports and Financial Statements

For the year ended 31 March 2003

 


Table of Contents

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$”)
       

 


Table of Contents

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.

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Table of Contents

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

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Table of Contents

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

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Table of Contents

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 )
 
           
 
     
 
 

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Play Along (Hong Kong) Limited

Balance sheet
as at 31 March 2003

                         
            2003   2002
    Notes   HK$   HK$
ASSETS AND LIABILITIES
                       
Non-current assets
                       
Property, plant and equipment
    6       1,048,211       1,169,405  
Investment securities
    7, 9       3,875,000        
 
           
 
     
 
 
 
            4,923,211       1,169,405  
Current assets
                       
Inventories
    8       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
    9       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)
    9             693,396  
Trade and other payables
            66,051,473       32,217,964  
Bills payable (secured)
    9       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
    11       20,000       20,000  
Retained profits
            90,563,559       2,939,933  
 
           
 
     
 
 
Shareholders’ funds
            90,583,559       2,959,933  
 
           
 
     
 
 
         

 
     
 
Director
      Director

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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  
 
           
 
     
 
 

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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  
 
   
 
     
 
     
 
 

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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.

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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.

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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.

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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.

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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.

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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  

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Play Along (Hong Kong) Limited

5.   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   equipment   Total
    HK$   HK$   HK$   HK$   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  
 
   
 
     
 
     
 
     
 
     
 
 

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7.   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).

8.   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.

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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.

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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  
 
   
 
     
 
 

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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.

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Play Along (Hong Kong) Limited

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

 


Table of Contents

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$”)

 


Table of Contents

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.

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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.

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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

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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

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 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

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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        
 
           
 
     
 
 

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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

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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  
 
           
 
     
 
 

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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  
 
   
 
     
 
     
 
     
 
 

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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.

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Play Along (Hong Kong) Limited

2.   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.

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Play Along (Hong Kong) Limited

2.   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.

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Play Along (Hong Kong) Limited

2.   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.

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Play Along (Hong Kong) Limited

2.   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.

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Play Along (Hong Kong) Limited

2.   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.

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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.

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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  
 
   
 
     
 
 

5.   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.

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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.

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Play Along (Hong Kong) Limited

6.   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        
 
   
 
     
 
 

7.   PROPERTY, PLANT AND EQUIPMENT
                                                 
    Leasehold   Furniture   Office   Computer   Computer    
    improvements   and fixtures   equipment   equipment   software   Total
    HK$   HK$   HK$   HK$   HK$   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  
 
   
 
     
 
     
 
     
 
     
 
     
 
 

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Play Along (Hong Kong) Limited

8.   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).

9.   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  
 
   
 
     
 
 

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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$   HK$   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.

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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  
 
   
 
     
 
 

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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.

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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  
 
   
 
     
 
 

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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.

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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  
 
   
 
     
 
 

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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  
 
   
 
     
 
 

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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
  $     $  
 
   
 
     
 
 

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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 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

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.

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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

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:

                   
      March 31   March 31
      2003
  2004
Current
    $     $  
Deferred
      (33,728 )     (102,793
 
     
 
     
 
 
Total income tax expense (benefit)
    $ (33,728 )   $ (102,793
 
     
 
     
 
 

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:

                   
      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  
 
     
 
     
 
 

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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.

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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.

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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  
 
   
 
     
 
 

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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  
 
   
 
     
 
 

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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     $  
 
   
 
     
 
 

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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

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, 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.

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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  
 
   
 
     
 
 

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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

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:

                 
    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  
 
   
 
     
 
 

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 as of:

                 
    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.

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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.

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Table of Contents

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

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 $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.

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Table of Contents

PA DISTRIBUTION, INC.
NOTES TO FINANCIAL STATEMENTS

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.

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Table of Contents

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  
 
       
 
     
 
 

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Table of Contents

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
                 
 
         
 
     
 
 

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Table of Contents

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$   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       2  
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 )     (2 )
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  
 
           
 
     
 
 

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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.

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2.   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.

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2.   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.

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2.   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.

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2.   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.

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2.   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.

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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
           

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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  
 
   
 
     
 
 

5.   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        
 
   
 
     
 
 

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6.   PROPERTY, PLANT AND EQUIPMENT
                                                 
    Leasehold   Furniture   Office   Computer   Computer    
    improvements
  and fixtures
  equipment
  equipment
  software
  Total
    US$   US$   US$   US$   US$   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  
 
   
 
     
 
     
 
     
 
     
 
     
 
 

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7.   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  
 
   
 
     
 
 

9.   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  
 
   
 
     
 
 

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10.   PROVISIONS
                         
    Provision for        
    infringement of        
    patent on certain   Provision for    
    products   royalties    
    (note 11(a))   (note 11(b))   Total
    US$
  US$
  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.

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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        
 
   
 
     
 
 

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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  
 
   
 
     
 
 

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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.

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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.

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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.

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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  
 
   
 
     
 
     
 
 

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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  
 
           
 
     
 
 

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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  
 
           
 
     
 
 
     

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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   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.
               

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     (c)  Exhibits.

     
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.

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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

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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.

66