Edgar Filing: JAKKS PACIFIC INC

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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 8-K/A

Amendment No. 1

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

Date of Report (Date of earliest event reported):
April 26, 2006 (February 14, 2006)

JAKKS PACIFIC, INC.

(Exact name of registrant as specified in its charter)


Delaware	0-28104	95-4527222
(State or other jurisdiction of incorporation or organization)	(Commission File Number)	(I.R.S. Employer 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

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:


¨		Written Communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

¨		Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

¨		Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

¨		Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

This Form 8-K/A is an amendment to the registrant’s current report on Form 8-K filed on February 14, 2006 (relating to the registrant’s asset acquisition of Creative Designs International, Ltd. and Arbor Toys Company Limited (collectively, “CDI”)), to file the financial statements and pro forma financial information omitted from the initial filing of the Current Report, in accordance with Item 9.01.

ITEM 2.01. COMPLETION OF ACQUISITION OR DISPOSITION OF ASSETS.

For a description of the Registrant's asset acquisition of CDI, refer to Item 2.01 of the Registrant's Current Report on Form 8-K, filed on February 14, 2006, which Item 2.01 is incorporated in its entirety herein by reference.

ITEM 9.01. FINANCIAL STATEMENTS AND EXHIBITS.

(a) Financial Statements of Business Acquired

	1.		Creative Designs International, Ltd. audited financial statements as of December 31, 2002, 2003 and 2004 and for the three years in the period ended December 31, 2004.

	2.		Arbor Toys Company Limited audited financial statements as of December 31, 2002, 2003 and 2004 and for the three years in the period ended December 31, 2004.

	3.		Creative Designs International, Ltd. unaudited financial statements as of September 30, 2004 and September 30, 2005 and for the nine months ended September 30, 2004 and 2005.

	4.		Arbor Toys Company Limited unaudited financial statements as of September 30, 2004 and September 30, 2005 and for the nine months ended September 30, 2004 and 2005.

(b) Pro Forma Financial Information

CREATIVE DESIGNS INTERNATIONAL, LTD.
DECEMBER 31, 2003

CONTENTS


	Page
Independent auditors’ report		1

Financial statements:

Balance sheets		2

Statements of income		3

Statements of retained earnings		4

Statements of cash flows		5-6

Notes to financial statements		7-10

Supplemental information:

Independent auditors’ supplemental report		11

Statements of operating expenses		12

INDEPENDENT AUDITORS’ REPORT

To the Board of Directors
Creative Designs International, Ltd.
Feasterville, PA 19053

We have audited the accompanying balance sheets of Creative Designs International, Ltd. (A Pennsylvania S Corporation) as of December 31, 2003 and 2002, and the related statements of income, retained earnings, and cash flows for the years 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 audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require 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 management, as well as evaluating the overall financial statement presentation. We believe our audits provide 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 Creative Designs International, Ltd. as of December 31, 2003 and 2002, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

Gable Peritz Mishkin, LLP

March 30, 2004

CREATIVE DESIGNS INTERNATIONAL, LTD.

BALANCE SHEETS

DECEMBER 31, 2003 AND 2002


	2003		2002
ASSETS
Current assets
Cash	$	2,171,637	$	4,467,977
Accounts receivable — trade		8,307,539		3,206,612
Accounts receivable — affiliate		12,667,771		12,392,780
Miscellaneous receivable		798,946		505,924
Inventory		1,025,520		1,132,240
Prepaid expenses		97,554		90,405


Total current assets		25,068,967		21,795,938


Property and equipment
Fixed assets		3,001,296		3,189,607
Less accumulated depreciation		1,412,712		1,250,104


Net property and equipment		1,588,584		1,939,503


Total assets	$	26,657,551	$	23,735,441


LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities
Loan payable — affiliate	$	2,000,000	$	3,000,000
Accounts payable — trade		268,022		38,988
Accounts payable — affiliate		220,712		4,428,440
Rebates payable		1,077,379		1,343,732
Accrued royalties		1,373,935		826,115
Accrued commissions		894,136		707,477
Accrued state and local taxes		314,486		179,058


Total current liabilities		6,148,670		10,523,810


Stockholders’ equity
Common stock — no par value; 200 shares authorized, issued and outstanding		2,000		2,000
Retained earnings		20,506,881		13,209,631


Total stockholders’ equity		20,508,881		13,211,631


Total liabilities and stockholders’ equity	$	26,657,551	$	23,735,441

See independent auditors’ report and
accompanying notes to financial statements.

CREATIVE DESIGNS INTERNATIONAL, LTD.

STATEMENTS OF INCOME

YEARS ENDED DECEMBER 31, 2003 AND 2002


	2003			2002
Revenues
Commission income	$	24,689,165		$	21,474,092
Sales		18,496,985			10,794,760
Design fee		158,710			158,710


Total revenues		43,344,860			32,427,562


Direct costs
Cost of sales		13,182,663			9,986,791
Direct selling costs		8,320,915			4,942,077
Product development costs		462,581			497,099


		21,966,159			15,425,967


Gross profit		21,378,701			17,001,595

General and administrative expenses		2,373,439			1,842,325


Income before other income and expenses		19,005,262			15,159,270


Other income and expenses
Interest income		89,750			42,254
Other income		18,004			3,176
Depreciation		(665,767	)		(709,038	)
Loss on sale of assets		(6,152	)		—


		(564,165	)		(663,608	)


Net income before officer’s compensation		18,441,097			14,495,662

Officer’s compensation		2,143,847			5,195,545


Net income	$	16,297,250		$	9,300,117

See independent auditors’ report and
accompanying notes to financial statements.

CREATIVE DESIGNS INTERNATIONAL, LTD.

STATEMENTS OF RETAINED EARNINGS

YEARS ENDED DECEMBER 31, 2003 AND 2002


	2003		2002
Balance, January 1	$	13,209,631	$	7,909,514

Net income		16,297,250		9,300,117

		29,506,881		17,209,631

Less distributions		9,000,000		4,000,000


Balance, December 31	$	20,506,881	$	13,209,631

See independent auditors’ report and
accompanying notes to financial statements.

CREATIVE DESIGNS INTERNATIONAL, LTD.

STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2003 AND 2002


	2003			2002
Cash flows from operating activities
Net income	$	16,297,250		$	9,300,117

Adjustment to reconcile net income to net cash provided by operating activities
Depreciation		665,767			709,038
Loss on sale of property and equipment		6,152			—

(Increase) decrease in assets
Accounts receivable — trade		(5,100,927	)		(841,816	)
Accounts receivable — affiliate		(274,991	)		(4,191,043	)
Miscellaneous receivable		(293,022	)		(505,924	)
Inventory		106,720			329,816
Prepaid expenses		(7,149	)		(16,976	)

Increase (decrease) in liabilities
Accounts payable — trade		229,034			(9,652	)
Accounts payable — affiliate		(4,207,728	)		(338,666	)
Rebates payable		(266,353	)		239,848
Accrued royalties		547,820			699,860
Accrued commissions		186,659			285,847
Accrued state and local taxes		135,428			38,712


Net cash provided by operating activities		8,024,660			5,699,161


Cash flows from investing activities		(355,000	)		(1,328,513	)
Acquisition of property and equipment		(355,000	)		(1,328,513	)
Proceeds from sale of property and equipment		34,000			—


Net cash used by investing activities		(321,000	)		(1,328,513	)

See independent auditors’ report and
accompanying notes to financial statements.

CREATIVE DESIGNS INTERNATIONAL, LTD.

STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2003 AND 2002


	2003			2002
Cash flows from financing activities
Net advances and repayments of notes payable — officers	$	(1,000,000	)	$	3,000,000
Distributions paid		(9,000,000	)		(4,000,000	)


Net cash used by financing activities		(10,000,000	)		(1,000,000	)


Net increase (decrease) in cash		(2,296,340	)		3,370,648

Cash, January 1		4,467,977			1,097,329


Cash, December 31	$	2,171,637		$	4,467,977

See independent auditors’ report and
accompanying notes to financial statements.

CREATIVE DESIGNS INTERNATIONAL, LTD.

NOTES TO FINANCIAL STATEMENTS

1.		Summary of Significant Accounting Policies

		This summary of significant accounting policies of Creative Designs International, Ltd. Is presented to assist in understanding the Company’s financial statements. The financial statements and accompanying notes are representations of the Company’s management, who are also responsible for their integrity and objectivity. These accounting policies conform to generally accepted accounting principles and have been consistently applied in the preparation of the financial statements.

		Business Activity and Concentration of Credit Risk

		The Company is engaged in the development and marketing of toys and related products internationally and the sale of those products to specific customers in the United States.

		The Company maintains its checking accounts with one bank. Cash balances with the bank in excess of $100,000 exceed the insurable limits as allowed by FDIC. Total cash balances with the bank at December 31, 2003 exceeded the insurable limits by $2,443,222.

		Use of Estimates

		Management has made estimates and assumptions relating to the reporting of assets and liabilities and related reporting of revenues and expenses to prepare these financial statements in accordance with generally accepted accounting principles. Actual results could differ from those estimates.

		Accounts Receivable — Trade

		Accounts receivable — trade is recorded at the amount the Company expects to collect on balances outstanding at year-end. Management closely monitors outstanding balances and writes off, as of year-end, all balances that they anticipate they will not collect as of the time the financial statements are issued.

		There was no bad debt expense charged to operations for the years ended December 31, 2003 and 2002.

		Inventory

		Inventory, consisting of finished goods, is valued at the lower of cost (first-in, first-out basis) or market.

CREATIVE DESIGNS INTERNATIONAL, LTD.

NOTES TO FINANCIAL STATEMENTS

1.		Summary of Significant Accounting Policies

		Property and Equipment and Depreciation

		Property and equipment are stated at cost. Depreciation is provided under the straight-line and accelerated methods over the estimated useful lives of the related assets.

		Maintenance and repairs are expensed as incurred. Additions, betterments, and renewals, unless of minor amounts, are capitalized and depreciated. When property and equipment are sold or otherwise disposed of, the cost and related accumulated depreciation accounts are relieved, and the resulting gain or loss is included in operations.

		Advertising Expense

		The Company’s policy is to expense advertising costs as incurred. Advertising expense charged to operations for the years ended December 31, 2003 and 2002 was $94,783 and $10,257, respectively.

		Income Taxes

		The Company, with the consent of its shareholders, elected to be taxed as an S corporation for federal and state tax purposes, effective in 1986. Under these provisions, the shareholders are taxed on their proportionate share of the Company’s taxable income on their individual tax returns. The Company still pays franchise and gross receipts taxes to various municipalities.

2.		Property and Equipment

		A summary of property and equipment at December 31, 2003 and 2002 is as follows:


	2003		2002
Molds	$	1,690,892	$	1,969,528
Leasehold improvements		295,971		274,249
Furniture and fixtures		137,863		137,863
Computer equipment		233,247		233,247
Transportation equipment		643,323		574,720

		3,001,296		3,189,607

Less accumulated depreciation		1,412,712		1,250,104


	$	1,588,584	$	1,939,503

Depreciation expense charged to operations for the years ended December 31, 2003 and 2002 was $665,767 and $709,038, respectively.

CREATIVE DESIGNS INTERNATIONAL, LTD.

NOTES TO FINANCIAL STATEMENTS

3.		Major Customers

		The Company had a significant customer which represented 90% and 78% of the total sales for the years ended December 31, 2003 and 2002. This customer represented 93% and 64% of the accounts receivable balance at December 31, 2003 and 2002.

4.		Related Party Transactions

		The Company conducts its primary business operations in a facility leased from its stockholders under a lease which expires in 2010. The rental expense for this property was $74,142 and $59,748 for the years ended December 31, 2003 and 2002, respectively.

		The following is a schedule of future minimum lease payments as of December 31, 2003:


Year ending December 31, 2004	$	74,340
2005		78,060
2006		81,960
2007		86,064
2008		90,360
Thereafter		194,508

The Company’s affiliate, Arbor Toys, Ltd. (Arbor), is a Hong Kong based company. Significant related party transactions with Arbor are as follows:

			The Company receives a commission from Arbor Toys, Ltd. on all Arbor sales for its marketing and licensing arrangements with customers. In addition, it receives various overrides on products sold. The total amount is recorded as commission income and was $24,689,165 and $21,474,092 for the years ended December 31, 2003 and 2002, respectively.

			The Company receives design fees for the development of product lines. Total fees were $158,710 for both years ended December 31, 2003 and 2002.

			The Company purchases all of its toys from Arbor. Total purchases for the year ended December 31, 2003 and 2002 were $10,720,712 and $7,288,944, respectively.

CREATIVE DESIGNS INTERNATIONAL, LTD.

NOTES TO FINANCIAL STATEMENTS

5.		Commitments and Contingencies

		The Company leases showroom space at an industry toy exhibit under a noncancellable operating lease expiring in April, 2010. Future minimum rental payments under operating leases (excluding operating expenses) are as follows:


Year ending December 31, 2004	$	33,150
2005		33,150
2006		33,150
2007		33,150
2008		33,150
Thereafter		44,202

The total rent expense for this and related party leases (See Note 3) was $113,402 and $97,942 for the years ended December 31, 2003 and 2002, respectively.

SUPPLEMENTAL INFORMATION

INDEPENDENT AUDITORS’ REPORT
ON SUPPLEMENTAL INFORMATION

To the Board of Directors
Creative Designs International, Ltd.
Feasterville, PA 19053

Our report on our audit of the basic financial statements of Creative Designs International, Ltd. for December 31, 2003 and 2002 appears on Page 1. That audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental information is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.

Gable Peritz Mishkin, LLP

March 30, 2004

CREATIVE DESIGNS INTERNATIONAL, LTD.

STATEMENTS OF GENERAL AND ADMINISTRATIVE EXPENSES

YEARS ENDED DECEMBER 31, 2003 AND 2002


	2003		2002
Advertising	$	94,783	$	10,257
Auto expense		19,737		13,902
Computer expenses		98,747		62,162
Contributions		35,707		60,350
Dues and subscriptions		12,439		12,808
Employee benefits		104,058		71,887
Equipment rental		3,754		2,728
Gifts		16,583		8,750
Insurance		146,753		133,706
Interest expense		—		4,765
Meals and entertainment		55,908		26,665
Miscellaneous		59,303		105,709
Professional fees		48,193		65,093
Office expense		111,554		58,661
Payroll		660,269		375,929
Payroll taxes		87,703		136,630
Postage		4,543		3,514
Rent		113,402		97,942
Repairs and maintenance		13,784		15,353
Storage		3,588		2,776
Taxes — other		423,966		344,069
Telephone		37,986		42,419
Travel		191,925		175,693
Utilities		28,754		10,557


	$	2,373,439	$	1,842,325


		See independent auditors’ supplemental report.		12

CREATIVE DESIGNS INTERNATIONAL, LTD.

DECEMBER 31, 2004

CONTENTS


		Page
Independent auditors’ report		1

Financial statements:

Balance sheets		2

Statements of income		3

Statements of retained earnings		4

Statements of cash flows		5-6

Notes to financial statements		7-10

Supplemental information:

Independent auditors’ supplemental report		11

Schedules of general and administrative expenses		12

INDEPENDENT AUDITORS’ REPORT

To the Board of Directors
Creative Designs International, Ltd.
Feasterville, PA 19053

We have audited the accompanying balance sheets of Creative Designs International, Ltd. (A Pennsylvania S Corporation) as of December 31, 2004 and 2003, and the related statements of income, retained earnings, and cash flows for the years 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 audits.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Creative Designs International, Ltd. as of December 31, 2004 and 2003, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

May 6, 2005

CREATIVE DESIGNS INTERNATIONAL, LTD.

BALANCE SHEETS

DECEMBER 31, 2004 AND 2003

ASSETS


	2004		2003
Current assets
Cash	$	7,574,936	$	2,171,637
Accounts receivable — trade		6,019,263		8,307,539
Accounts receivable — affiliate		27,618,821		12,667,771
Miscellaneous receivable		23,091		798,946
Due from affiliates		6,404		—
Inventory		3,077,067		1,025,520
Prepaid expenses		94,524		97,554


Total current assets		44,414,106		25,068,967

Property and equipment, net of accumulated depreciation		1,940,633		1,588,584


Total assets	$	46,354,739	$	26,657,551

LIABILITIES AND STOCKHOLDERS’ EQUITY


Current liabilities
Loan payable — affiliate	$	—	$	2,000,000
Accounts payable — trade		319,165		268,022
Accounts payable — affiliate		15,031,467		220,712
Rebates payable		2,076,841		1,077,379
Accrued royalties		3,272,007		1,373,935
Accrued commissions		484,017		894,136
Accrued state and local taxes		155,000		314,486
Payroll taxes payable		4,775		—


Total current liabilities		21,343,272		6,148,670


Stockholders’ equity
Common stock — no par value; 200 shares authorized, issued and outstanding		2,000		2,000
Retained earnings		25,009,467		20,506,881


Total stockholders’ equity		25,011,467		20,508,881


Total liabilities and stockholders’ equity	$	46,354,739	$	26,657,551

See independent auditors’ report and
accompanying notes to financial statements.

CREATIVE DESIGNS INTERNATIONAL, LTD.

STATEMENTS OF INCOME

YEARS ENDED DECEMBER 31, 2004 AND 2003


	2004			2003
Revenues
Commission income	$	32,692,754		$	24,689,165
Sales		28,360,733			18,496,985
Design fee		164,000			158,710


Total revenues		61,217,487			43,344,860


Direct costs
Cost of sales		19,760,539			13,182,663
Direct selling costs		12,397,351			8,320,915
Product development costs		824,809			462,581


		32,982,699			21,966,159


Gross profit		28,234,788			21,378,701

General and administrative expenses		3,137,328			2,373,439


Income before other income and expenses		25,097,460			19,005,262


Other income and expenses
Interest income		88,591			89,750
Loss on sale of property and equipment		—			(6,152	)
Other income		—			18,004
Depreciation		(534,265	)		(665,767	)


		(445,674	)		(564,165	)


Income before officer’s compensation		24,651,786			18,441,097

Officer’s compensation		3,149,200			2,143,847


Net income	$	21,502,586		$	16,297,250

See independent auditors’ report and
accompanying notes to financial statements.

CREATIVE DESIGNS INTERNATIONAL, LTD.

STATEMENTS OF RETAINED EARNINGS

YEARS ENDED DECEMBER 31, 2004 AND 2003


	2004		2003
Balance, January 1	$	20,506,881	$	13,209,631

Net income		21,502,586		16,297,250


		42,009,467		29,506,881

Less distributions		17,000,000		9,000,000


Balance, December 31	$	25,009,467	$	20,506,881

See independent auditors’ report and
accompanying notes to financial statements.

CREATIVE DESIGNS INTERNATIONAL, LTD.

STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2004 AND 2003


	2004			2003
Cash flows from operating activities
Net income	$	21,502,586		$	16,297,250

Adjustment to reconcile net income to net cash provided by operating activities
Bad debts		80,033			—
Depreciation		534,265			665,767
Loss on sale of property and equipment		—			6,152

(Increase) decrease in assets
Accounts receivable — trade		2,208,243			(5,100,927	)
Accounts receivable — affiliate		(14,951,050	)		(274,991	)
Miscellaneous receivable		775,855			(293,022	)
Inventory		(2,051,547	)		106,720
Prepaid expenses		3,030			(7,149	)

Increase (decrease) in liabilities
Accounts payable — trade		51,143			229,034
Accounts payable — affiliate		14,810,755			(4,207,728	)
Rebates payable		999,462			(266,353	)
Accrued royalties		1,898,072			547,820
Accrued commissions		(410,119	)		186,659
Accrued state and local taxes		(159,486	)		135,428
Payroll taxes payable		4,775			—


Net cash provided by operating activities		25,296,017			8,024,660


Cash flows from investing activities
Acquisition of property and equipment		(965,627	)		(355,000	)
Proceeds from sale of property and equipment		—			34,000


Net cash used by investing activities		(965,627	)		(321,000	)

See independent auditors’ report and
accompanying notes to financial statements.

CREATIVE DESIGNS INTERNATIONAL, LTD.

STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2004 AND 2003


	2004			2003
Cash flows from financing activities
Net advances and repayments of notes payable — officers	$	(2,000,000	)	$	(1,000,000	)
Net advances and repayments of amounts due to/from affiliates		72,909			—
Distributions paid		(17,000,000	)		(9,000,000	)


Net cash used by financing activities		(18,927,091	)		(10,000,000	)


Net increase (decrease) in cash		5,403,299			(2,296,340	)

Cash, January 1		2,171,637			4,467,977


Cash, December 31	$	7,574,936		$	2,171,637

See independent auditors’ report and
accompanying notes to financial statements.

CREATIVE DESIGNS INTERNATIONAL, LTD.

NOTES TO FINANCIAL STATEMENTS

Summary of Significant Accounting Policies

This summary of significant accounting policies of Creative Designs International, Ltd. Is presented to assist in understanding the Company’s financial statements. The financial statements and accompanying notes are representations of the Company’s management, who are also responsible for their integrity and objectivity. These accounting policies conform to generally accepted accounting principles and have been consistently applied in the preparation of the financial statements.

Business Activity and Concentration of Credit Risk

The Company is engaged in the development and marketing of toys and related products internationally and the sale of those products to specific customers in the United States.

The Company maintains its checking accounts with one bank. Cash balances with the bank in excess of $100,000 exceed the insurable limits as allowed by FDIC. Total cash balances with the bank at December 31, 2004 exceeded the insurable limits by $8,572,038.

The Company had a significant customer which represented 83% and 90% of the total sales for the years ended December 31, 2004 and 2003. This customer represented 46% and 93% of the accounts receivable balance at December 31, 2004 and 2003.

Use of Estimates

Management has made estimates and assumptions relating to the reporting of assets and liabilities and related reporting of revenues and expenses to prepare these financial statements in accordance with generally accepted accounting principles. Actual results could differ from those estimates.

Accounts Receivable — Trade

Accounts receivable — trade is recorded at the amount the Company expects to collect on balances outstanding at year-end. Management closely monitors outstanding balances and writes off, as of year-end, all balances that they anticipate they will not collect as of the time the financial statements are issued.

Bad debt expense charged to operations for the years ended December 31, 2004 and 2003 were $80,033 and $-0-, respectively.

Inventory

Inventory, consisting of finished goods, is valued at the lower of cost (first-in, first-out basis) or market.

CREATIVE DESIGNS INTERNATIONAL, LTD.

NOTES TO FINANCIAL STATEMENTS

Summary of Significant Accounting Policies

Property and Equipment and Depreciation

Property and equipment are stated at cost. Depreciation is provided under the straight-line and accelerated methods over the estimated useful lives of the related assets.

Maintenance and repairs are expensed as incurred. Additions, betterments, and renewals, unless of minor amounts, are capitalized and depreciated. When property and equipment are sold or otherwise disposed of, the cost and related accumulated depreciation accounts are relieved, and the resulting gain or loss is included in operations.

Shipping and Handling Costs

The company’s policy is to reflect shipping and handling costs associated with the sale of inventory as a component of cost of goods sold.

Advertising Expense

The Company’s policy is to expense advertising costs as incurred. Advertising expense charged to operations for the years ended December 31, 2004 and 2003 was $24,183 and $94,783, respectively.

Income Taxes

The Company, with the consent of its shareholders, elected to be taxed as an S corporation for federal and state tax purposes, effective in 1986. Under these provisions, the shareholders are taxed on their proportionate share of the Company’s taxable income on their individual tax returns. The Company still pays franchise and gross receipts taxes to various municipalities.

Property and Equipment

A summary of property and equipment at December 31, 2004 and 2003 is as follows:


	2004		2003
Molds	$	2,249,497	$	1,690,892
Leasehold improvements		308,186		295,971
Furniture and fixtures		163,001		137,863
Computer equipment		233,247		233,247
Transportation equipment		532,393		643,323

		3,486,324		3,001,296

Less accumulated depreciation		1,545,691		1,412,712


	$	1,940,633	$	1,588,584

CREATIVE DESIGNS INTERNATIONAL, LTD.

NOTES TO FINANCIAL STATEMENTS

Property and Equipment (Cont’d.)

Depreciation expense charged to operations for the years ended December 31, 2004 and 2003 was $534,265 and $665,767, respectively.

Royalties

The Company has entered into various license agreements whereby the Company may use certain characters and properties in conjunction with its products. Such license agreements call for royalties to be paid at 6% to 15% of net sales with minimum guarantees and advance payments. The agreements expire at various intervals through December 31, 2007. Royalties expense was $9,191,707 and $5,395,227 for the years ended December 31, 2004 and 2003, respectively, and is included in direct selling costs.

Related Party Transactions and Commitments and Contingencies

The Company conducts its primary business operations in a facility leased from its stockholders under a lease which expires in 2010. The rental expense for this property was $70,800 for both years ended December 31, 2004 and 2003.

The following is a schedule of future minimum lease payments as of December 31, 2004:


Year ending December 31, 2005	$	81,960
2006		86,064
2007		90,360
2008		94,878
2009		99,622

The Company’s affiliate, Arbor Toys, Ltd. (Arbor), is a Hong Kong based company. Significant related party transactions with Arbor are as follows:

The Company receives a commission from Arbor Toys, Ltd. on all Arbor sales for its marketing and licensing arrangements with customers. In addition, it receives various overrides on products sold. The total amount is recorded as commission income and was $32,692,754 and $24,689,165 for the years ended December 31, 2004 and 2003, respectively.

The Company receives design fees for the development of product lines. Total fees received were $164,000 and $158,710 for the years ended December 31, 2004 and 2003, respectively.

CREATIVE DESIGNS INTERNATIONAL, LTD.

NOTES TO FINANCIAL STATEMENTS

Related Party Transactions and Commitments and Contingencies (Cont’d.)

The Company purchases all of its toys from Arbor. Total purchases for the year ended December 31, 2004 and 2003 were $18,096,759 and $10,720,712, respectively.

The Company leases showroom space at an industry toy exhibit under a noncancellable operating lease expiring in April, 2010. Future minimum rental payments under operating leases (excluding operating expenses) are as follows:


Year ending December 31, 2005	$	33,150
2006		33,150
2007		33,150
2008		33,150
2009		33,130
Thereafter		11,052

The total rent expense for all operating leases was $114,373 and $113,402 for the years ended December 31, 2004 and 2003, respectively.

SUPPLEMENTAL INFORMATION

INDEPENDENT AUDITORS’ REPORT
ON SUPPLEMENTAL INFORMATION

To the Board of Directors
Creative Designs International, Ltd.
Feasterville, PA 19053

Our report on our audit of the basic financial statements of Creative Designs International, Ltd. for December 31, 2004 and 2003 appears on Page 1. That audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental information is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.

May 6, 2005

CREATIVE DESIGNS INTERNATIONAL, LTD.

STATEMENTS OF GENERAL AND ADMINISTRATIVE EXPENSES

YEARS ENDED DECEMBER 31, 2004 AND 2003


	2004		2003
Advertising	$	24,183	$	94,783
Auto expense		21,590		19,737
Bad debts		80,033		—
Computer expenses		48,744		98,747
Contributions		12,884		35,707
Dues and subscriptions		26,195		12,439
Employee benefits		121,176		104,058
Equipment rental		14,632		3,754
Gifts		46,965		16,583
Insurance		213,589		146,753
Meals and entertainment		39,355		55,908
Miscellaneous		28,150		59,303
Professional fees		161,277		48,193
Office expense		71,689		111,554
Payroll		976,277		660,269
Payroll taxes		127,260		87,703
Postage		4,019		4,543
Rent		114,373		113,402
Repairs and maintenance		13,147		13,784
Storage		3,731		3,588
Taxes — other		640,204		423,966
Telephone		31,074		37,986
Travel		285,991		191,925
Utilities		30,790		28,754


	$	3,137,328	$	2,373,439

See independent auditors’ supplemental report.

ARBOR TOYS COMPANY LIMITED

FINANCIAL STATEMENTS

DECEMBER 31, 2002

MICHAEL YAM & COMPANY
Certified Public Accountants
HONG KONG

ARBOR TOYS COMPANY LIMITED

CONTENTS


	Page
Company Information		2

Report of the Directors	3-4

Report of the Auditors	5-6

Balance Sheet		7

Profit and Loss Statement		8

Statement of Changes in Equity		9

Notes to Financial Statements	10-15

Cash Flow Statement		16

Detailed Profit and Loss Statement	17-18

MICHAEL YAM & CO.

ARBOR TOYS COMPANY LIMITED

COMPANY INFORMATION

DIRECTORS

Mr. Geoffrey Robert Greenberg
Mr. Ho Chiu Ming
Mr. Ho Wai Kam Jimmy
M. Y. Director No. 1 Limited

SECRETARY

M. Y. Secretaries Limited
23rd Floor
Wing Hang Finance Centre
60 Gloucester Road
Wanchai
HONG KONG

REGISTERED OFFICE

Suite 816
Chinachem Golden Plaza
77 Mody Road
Tsimshatsui East
Kowloon
HONG KONG

COMPANY NUMBER

265154

AUDITORS

Michael Yam & Company
23rd Floor
Wing Hang Finance Centre
60 Gloucester Road
Wanchai
HONG KONG

MICHAEL YAM & CO.

- 2 -

ARBOR TOYS COMPANY LIMITED

REPORT OF THE DIRECTORS

The Directors present their annual report and the audited financial statements for the year ended December 31, 2004.

1.		PRINCIPAL ACTIVITY

		The Company’s principal activity is trading in toys and related products.

2.		FINANCIAL STATEMENTS

		The profit of the Company for the year ended December 31, 2004 and the state of the Company’s affairs at that date are set out in the financial statements on pages 7 to 17.

3.		DIVIDEND AND RESERVE .

		The Director recommend the declaration of a final dividend of HK$333 per ordinary share, totalling HK$33,300,000.

		The Directors do not recommend the transfer of any amount to reserve for the year ended December 31,2004.

4.		FIXED ASSETS

		Movements in fixed assets during the year are set out in note 7 to the financial statements.

5.		DIRECTORS

		During the year and up to the date of this report, the following Directors held office :-

Mr. Geoffrey Robert Greenberg
Mr. Ho Chiu Ming
Mr. Ho Wai Kara Jimmy
M. Y. Director No. 1 Limited

In accordance with the Company’s Articles of Association, all the Directors retire from the Board and, being eligible, offer themselves for re-election.

MICHAEL YAM & CO.

- 3 -

ARBOR TOYS COMPANY LIMITED

REPORT OF THE DIRECTORS

(CONTINUED)

6.		DIRECTORS’ INTERESTS IN CONTRACTS

		No contracts of significance to which the Company was a party, and in which a Director had a material interest, subsisted at the end of the year or at any time during the year.

7.		DIRECTORS’ RIGHTS TO ACQUIRE SHARES OR DEBENTURES

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

8.		AUDITORS

		Michael Yam & Company have expressed their willingness to continue as Auditors of the Company.

9.		OTHER MATTERS

		At the date of this report, the Directors are not aware of any circumstances not otherwise dealt with in this report or the financial statements which would render any amount stated in the financial statements misleading.


		FOR AND ON BEHALF OF THE BOARD

		/s/ Ho Chiu Ming
		CHAIRMAN/SECRETARY

DATE: 30 JUN 2005

MICHAEL YAM & CO.

- 4 -

MICHAEL YAM & COMPANY

CERTIFIED PUBLIC ACCOUNTANTS
23RD FLOOR, WING HANG FINANCE CENTRE
60 GLOUCESTER ROAD, WANCHAI, HONG KONG
TEL: (852) 2529 9301 FAX: (852) 2529 7920 EMAIL: mychk@myc.com.hk

AUDITORS’ REPORT TO THE SHAREHOLDERS OF

ARBOR TOYS COMPANY LIMITED

(Incorporated in Hong Kong with limited liability)

We have audited the financial statements on pages 7 to 17 which have been prepared in accordance with accounting principles generally accepted in Hong Kong.

Respective responsibilities of directors and auditors

It is our responsibility to form an independent opinion, based on our audit, on those financial statements and to report our opinion solely to you, as a body, in accordance with Section 141 of the Companies Ordinance, and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report.

Basis of opinion

We conducted our audit in accordance with Statements of Auditing Standards issued by the Hong Kong Institute of Certified Public 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.

- 5 -

MICHAEL YAM & COMPANY
CERTIFIED PUBLIC ACCOUNTANTS
23RD FLOOR, WING HANG FINANCE CENTRE
60 GLOUCESTER ROAD, WANCHAI, HONG KONG
TEL: (852) 2529 9301 FAX: (852) 2529 7920 EMAIL: mychk@myc.com.hk

AUDITORS’ REPORT TO THE SHAREHOLDERS OF

ARBOR TOYS COMPANY LIMITED
(Incorporated in Hong Kong with limited liability)

(CONTINUED)

Opinion

In our opinion, the financial statements give a true and fair view of the state of the Company’s affairs as at December 31, 2004 and of its profit and cash flows for the year then ended and have been properly prepared in accordance with the Companies Ordinance.


		MICHAEL YAM & COMPANY

		/s/ Michael Yam & Company

		CERTIFIED PUBLIC ACCOUNTANTS

HONG KONG : 30 JUN 2005

- 6 -

ARBOR TOYS COMPANY LIMITED

BALANCE SHEET AS AT DECEMBER 31, 2004
(Amounts Expressed In Hong Kong Dollars)


	12/31/2003

		CURRENT ASSETS

$	106,823,615	Cash	$	120,644,769
	11,275,307	Time deposits		-0-
	40,058,322	Bills receivable		43,428,700
	15,862,320	Accounts receivable		35,591,175
	6,920,049	Prepayments, rental and utility deposits		8,171,302
	26,832	Trade deposits		-0-


	180,966,445				$	207,835,946

	1,368,217	FIXED ASSETS (Note 7)				965,387


$	182,334,662				$	208,801,333


		CURRENT LIABILITIES

$	112,518,632	Accounts payable and accrued charges	$	124,626,989
	7,086,124	Provision for taxation		8,790,052


	119,604,756				$	133,417,041


		SHAREHOLDERS’ EQUITY

	1,000,000	Share capital (Note 8)		1,000,000
	33,303,906	Retained profits		41,084,292
	28,426,000	Proposed final dividend		33,300,000


	62,729,906					75,384,292
		THE FINANCIAL STATEMENTS ON PAGES 7 TO 17 WERE APPROVED AND AUTHORISED FOR ISSUE BY THE BOARD OF DIRECTORS ON 30 JUN 2005

$	182,334,662				$	208,801,333

MICHAEL YAM & CO.

/s/ Geoffrey Robert Greenberg

/s/ Ho Chiu Ming

DIRECTOR

- 7 -

ARBOR TOYS COMPANY LIMITED

PROFIT AND LOSS STATEMENT

FOR THE YEAR ENDED DECEMBER 31, 2004
(Amounts Expressed In Hong Kong Dollars)


01/01/2003
to
12/31/2003
$	748,476,591		TURNOVER (Note 2)	$	994,199,406

	298,668		OTHER REVENUE		107,707

	(526,001,772	)	PURCHASES AND DIRECT COSTS		(703,180,885	)

	(168,220,674	)	SELLING EXPENSES		(224,813,387	)

	(9,950,722	)	STAFF COSTS		(11,367,306	)

	(708,359	)	DEPRECIATION AND AMORTISATION		(784,737	)

	(3,687,484	)	OTHER OPERATING EXPENSES		(4,290,360	)


	40,206,248		PROFIT BEFORE TAXATION (Note 3)		49,870,438

	(7,087,385	)	TAXATION (Note 5)		(8,790,052	)


$	33,118,863		PROFIT AFTER TAXATION	$	41,080,386


$	28,426,000		DIVIDENDS (Note 6)	$	33,300,000

MICHAEL YAM & CO.

- 8 -

ARBOR TOYS COMPANY LIMITED

STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED DECEMBER 31, 2004
(Amounts Expressed In Hong Kong Dollars)


	SHARE		RETAINED			PROPOSED
	CAPITAL		PROFITS			DIVIDENDS			TOTAL
AT JANUARY 1, 2003	$	1,000,000	$	28,611,043		$	-0-		$	29,611,043

PROFIT FOR THE YEAR		-0-		33,118,863			-0-			33,118,863

2003 FINAL DIVIDEND PROPOSED		-0-		(28,426,000	)		28,426,000			-0-


AT DECEMBER 31, 2003	$	1,000,000	$	33,303,906		$	28,426,000		$	62,729,906


AT JANUARY 1, 2004	$	1,000,000	$	33,303,906		$	28,426,000		$	62,729,906

2003 FINAL DIVIDEND PAID		-0-		-0-			(28,426,000	)		(28,426,000	)

PROFIT FOR THE YEAR		-0-		41,080,386			-0-			41,080,386

2004 FINAL DIVIDEND PROPOSED		-0-		(33,300,000	)		33,300,000			-0-


AT DECEMBER 31, 2004	$	1,000,000	$	41,084,292		$	33,300,000		$	75,384,292

MICHAEL YAM & CO.

- 9 -

ARBOR TOYS COMPANY LIMITED

NOTES TO FINANCIAL STATEMENTS — DECEMBER 31, 2004

PRINCIPAL ACCOUNTING POLICIES

	(a)		Basis of Accounting

			The financial statements on pages 7 to 17 are prepared in accordance with and comply with all applicable Statements of Standard Accounting Practice (“SSAP”) and Interpretations issued by the Hong Kong Institute of Certified Public Accountants which does not differ significantly from accounting principles generally accepted in the United States of America (“US GAAP”) except that certain disclosures as required under US GAAP have not been included in these financial statements. The financial statements are prepared under the historical cost convention.

	(b)		Fixed Assets

			Fixed assets are stated at cost less accumulated deprecation.

			Depreciation is provided to write off the cost of fixed assets over their estimated useful lives on a straight line basis at the following annual rates :-


Furniture and fixtures			10%
Office machinery and equipment			20%
Leasehold improvements			Over the term of lease

	(c)		Translation of Foreign Currencies

			Monetary assets and liabilities denominated in foreign currencies are translated into Hong Kong Dollars at the rates of exchange ruling at the balance sheet date.

			Transactions in foreign currencies are translated into Hong Kong Dollars at the rates of exchange ruling at the dates of the transactions.

			All exchange differences arising from the above are included in the profit and loss statement.

	(d)		Cash and Cash Equivalents

			For the purposes of the cash flow statement, cash and cash equivalents comprise cash on hand, deposit held at call with banks, cash investments with a maturity of three months or less from the date of investment and bank overdrafts.

MICHAEL YAM & CO.

- 10 -

ARBOR TOYS COMPANY LIMITED

NOTES TO FINANCIAL STATEMENTS — DECEMBER 31, 2004

(CONTINUED)

PRINCIPAL ACCOUNTING POLICIES (CONT’D)

	(e)		Deferred Taxation

			Deferred taxation is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Deferred tax assets and liabilities are measured at the tax rates that have been enacted or substantively enacted by the balance sheet date.

			Deferred tax assets are recognised to the extent it is probable that future taxable profit will be available against which the temporary differences can be utilised.

	(f)		Employee Benefits

	(i)		Long Service Payments

			The Company’s net obligation in respect of long service payment under the Employment Ordinance is the amount of future benefit that employees have earned in return for their service in the current and prior periods. The obligation is calculated according to the provision of the above Ordinance.

	(ii)		Retirement Benefits

			The Company operates a defined contribution Mandatory Provident Fund retirement benefit scheme (“the Scheme”) under the Mandatory Provident Fund Schemes Ordinance, for all its employees. Contributions to the Scheme are based on a percentage of the employees’ basic salaries and are recognised as an expense in the profit and loss statement.

	(g)		Operating Leases

			Payments under operating leases are charged to the profit and loss statement on a straight line basis over the period of the respective leases.

	(h)		Revenue Recognition

			Sales are recognised as revenue when the risks and rewards of ownership of the goods have passed to customers. Bank interest earned is recognised on an accrual basis.

MICHAEL YAM & CO.

- 11 -

ARBOR TOYS COMPANY LIMITED

NOTES TO FINANCIAL STATEMENTS — DECEMBER 31, 2004

(CONTINUED)

2.		TURNOVER

		Turnover represents gross sales less returns.

3.		PROFIT BEFORE TAXATION

		Profit before taxation is arrived at


	2004		2003
after charging :-

Auditors’ remuneration	$	52,000	$	52,000
Depreciation		784,738		708,359
Fixed assets written off		41,053		2,403
Rental payable on land and buildings under operating leases		1,987,565		1,744,025
Retirement benefit costs		337,186		278,230


and crediting :-

Bank interest earned	$	51,818	$	71,883
Exchange gain		36,874		22,984

4.		DIRECTORS’ EMOLUMENTS

		The aggregate amounts of the Directors’ emoluments disclosed pursuant to Section 161 of the Companies Ordinance are as follows :-


	2004		2003
As director	$	-0-	$	-0-
As executive		1,419,000		1,396,500


	$	1,419,000	$	1,396,500

MICHAEL YAM & CO.

- 12 -

ARBOR TOYS COMPANY LIMITED

NOTES TO FINANCIAL STATEMENTS — DECEMBER 31, 2004

(CONTINUED)

TAXATION


	2004		2003
Hong Kong profits tax
Provision for current year	$	8,790,052	$	7,086,124
Under/(Over)-provision in prior year		-0-		1,261


	$	8,790,052	$	7,087,385

		The provision for Hong Kong profits tax has been calculated by applying the statutory rate of taxation of 17.5% (2003 — 17.5%) to the estimated assessable profits of the Company which were derived from Hong Kong during the reporting year.

		No provision for deferred taxation has been made in the financial statements as the effect of temporary differences is insignificant.

		Reconciliation between taxation expense and accounting profit at applicable taxation rates :-


	2004			2003
Profit before taxation	$	49,870,438		$	40,206,248


Tax at taxation tax rate of 17.5%	$	8,727,326		$	7,036,093
Tax effect of expenses that are not deductible in determining taxable profits		155,013			134,768
Tax effect on income that is not assessable in determining taxable profits		(9,068	)		(30,974	)
Tax effect on allowances claimed		(83,219	)		(53,763	)
Under-provision in prior years		-0-			1,261


Taxation expense for the year	$	8,790,052		$	7,087,385

MICHAEL YAM & CO.

- 13 -

ARBOR TOYS COMPANY LIMITED

NOTES TO FINANCIAL STATEMENTS — DECEMBER 31, 2004

(CONTINUED)

DIVIDENDS


	2004		2003
Proposed final dividend of HK$333.00 (2003 – HK$284.26) per ordinary share	$	33,300,000	$	28,426,000

FIXED ASSETS


				Office
	Furniture			Machinery			Leasehold
	and Fixtures			and Equipment			Improvements		Total
Cost

At January 1, 2004	$	400,831		$	1,474,031		$	1,236,076	$	3,110,938
Additions during the year		26,358			367,545			29,058		422,961
Disposals during the year		(5,310	)		(250,171	)		-0-		(255,481	)


At December 31, 2004		421,879			1,591,405			1,265,134		3,278,418


Accumulated Depreciation

At January 1, 2004		222,659			872,974			647,088		1,742,721
Charge for the year		30,576			321,455			432,707		784,738
Written back on disposals		(5,309	)		(209,119	)		-0-		(214,428	)


At December 31, 2004		247,926			985,310			1,079,795		2,313,031


Net Book Value

At December 31, 2004	$	173,953		$	606,095		$	185,339	$	965,387


At December 31, 2003	$	178,172		$	601,057		$	588,988	$	1,368,217

MICHAEL YAM & CO.

- 14 -

ARBOR TOYS COMPANY LIMITED

NOTES TO FINANCIAL STATEMENTS — DECEMBER 31, 2004

(CONTINUED)

SHARE CAPITAL


	2004		2003
Authorised capital 100,000 shares of HK$10.00 each	$	1,000,000	$	1,000,000


Issued and fully paid capital 100,000 shares of HK$10.00 each	$	1,000,000	$	1,000,000

9.		COMMITMENTS UNDER OPERATING LEASES

		At December 31, 2004, the Company had future aggregate minimum lease payments on land and buildings under non-cancellable leases as follows :-


	2004		2003
Not later than one year	$	695,020	$	1,987,565
Later than one year and not later than five years		- 0 -		695,020


	$	695,020	$	2,682,585

10.		MATERIAL COMMITMENTS

		At December 31, 2004, the Company had committed to purchase merchandise for an amount of approximately $244,969 (2003 — nil).

MICHAEL YAM & CO.

- 15 -

ARBOR TOYS COMPANY LIMITED

NOTES TO FINANCIAL STATEMENTS — DECEMBER 31, 2004

(CONTINUED)

11.

RECONCILIATION OF PROFIT BEFORE TAXATION TO NET CASH INFLOW FROM OPERATING ACTIVITIES


	2004			2003
Profit before taxation	$	49,870,438		$	40,206,248

Adjustments for :-

Bank interest earned		(51,818	)		(71,883	)
Depreciation		784,738			708,359
Fixed assets written off		41,053			2,403


Operating profit before working capital changes		50,644,411			40,845,127

Change in bills receivable		(3,370,378	)		(6,219,856	)
Change in accounts receivable		(19,728,855	)		(5,878,248	)
Change in prepayments, rental and utility deposits		(1,665	)		(276,648	)
Change in trade deposits		26,832			204,157
Change in accounts payable and accrued charges		12,108,357			33,260,635


Cash generated from operations		39,678,702			61,935,167

Hong Kong profits tax paid		(8,335,712	)		(6,737,618	)


Net cash inflow from operating activities	$	31,342,990		$	55,197,549

MICHAEL YAM & CO.

- 16 -

ARBOR TOYS COMPANY LIMITED

CASH FLOW STATEMENT

FOR THE YEAR ENDED DECEMBER 31, 2004
(Amounts Expressed In Hong Kong Dollars)


	2004			2003
NET CASH INFLOW FROM OPERATING ACTIVITIES (Note 11)	$	31,342,990		$	55,197,549

INVESTMENTS ACTIVITIES
purchase of fixed assets	$	(422,961	)	$	(226,950	)
Sales proceeds of fixed assets		- 0 -			3,800
Bank interest earned		51,818			71,883


NET CASH OUTFLOW FROM INVESTING ACTIVITIES		(371,143	)		(151,267	)


NET CASH INFLOW BEFORE FINANCING		30,971,847			55,046,282

FINANCING ACTIVITIES
Final dividend paid		(28,426,000	)		- 0 -


NET CASH OUTFLOW FROM FINANCING		(28,426,000	)		- 0 -


INCREASE IN CASH AND CASH EQUIVALENTS		2,545,847			55,046,282

CASH AND CASH EQUIVALENTS AT BEGINNING OF THE YEAR		118,098,922			63,052,640


CASH AND CASH EQUIVALENTS AT END OF THE YEAR	$	120,644,769		$	118,098,922


ANALYSIS OF THE BALANCES OF CASH AND CASH EQUIVALENTS
Cash at bank and in hand	$	120,644,769		$	106,823,615
Time deposits		- 0 -			11,275,307


	$	120,644,769		$	118,098,922

MICHAEL YAM & CO.

- 17 -

(FOR MANAGEMENT PURPOSES ONLY)

ARBOR TOYS COMPANY LIMITED

DETAILED PROFIT AND LOSS STATEMENT

FOR THE YEAR ENDED DECEMBER 31, 2004

(Amounts Expressed In Hong Kong Dollars)


01/01/2003
to
12/31/2003
$748,476,591	SALES			$	994,199,406


	LESS : COST OF SALES

510,079,989	Purchases				684,312,480


238,396,602					309,886,926


	LESS : DIRECT COSTS

12,994	Packaging charges	$	14,479
15,908,789	Transportation		18,853,926


15,921,783					18,868,405


222,474,819	GROSS PROFIT				291,018,521


	ADD : OTHER INCOME

71, 883	Bank interest earned		51,818
22,984	Exchange gain		36,874
98,690	Miscellaneous income		19,015
105,111	Provision for pension funds written back		- 0 -


298,668					107,707


222,773,487					291,126,228


	LESS : SELLING EXPENSES

1,653,804	Bank charges		2,654, 892
165,155,690	Commission paid		220,702,290
181,180	Customs declaration charges		226,205
1,230,000	Design fees		1,230,000


168,220,674					224,813,387


54,552,813					66,312,841
	LESS : GENERAL AND ADMINISTRATIVE
14,346,565	EXPENSES (Page 19)				16,442,403


$ 40,206,248	PROFIT BEFORE TAXATION			$	49,870,438

MICHAEL YAM & CO.

- 18 -

(FOR MANAGEMENT PURPOSES ONLY)

ARBOR TOYS COMPANY LIMITED

GENERAL AND ADMINISTRATIVE EXPENSES

FOR THE YEAR ENDED DECEMBER 31, 2004

(Amounts Expressed In Hong Kong Dollars)


01/01/2003
to
12/31/2003
$ 52,000	Auditors’ remuneration	$	52,000
5,625	Claims paid		3,918
30,300	Cleaning expenses		31,200
708,359	Depreciation		784,738
1,372,500	Directors’ emoluments		1,395,000
107,832	Electricity		118,688
40,369	Entertainment		116,765
2,403	Fixed assets written off		41,053
145,138	Insurance		134,584
19,433	Legal and professional fees		14,500
187,499	Local travelling		219,322
128,126	Miscellaneous expenses		123,632
109,109	Overseas travelling		90,017
455,710	Printing and stationery		654,286
278,230	Provident funds		377,186
- 0 -	Provision for pension funds		60,000
2,237,035	Rent and rates		2,515,275
64,823	Repairs and maintenance		68,849
8,299,992	Salaries		9,535,120
102,082	Telecommunication and postage		106,270


$ 14,346,565		$	16,442,403

MICHAEL YAM & CO.

- 19 -

CREATIVE DESIGNS INTERNATIONAL, LTD.

SEPTEMBER 30, 2005

(Unaudited)

CONTENTS


	Page
Financial statements:

Balance sheets		1

Statements of income		2

Statements of retained earnings		3

Statements of cash flows		4-5

Notes to financial statements		6-9

Supplementary information:

Schedules of general and administrative expenses		10

CREATIVE DESIGNS INTERNATIONAL, LTD.

BALANCE SHEETS

SEPTEMBER 30, 2005 AND 2004

ASSETS


	2005 (Unaudited)		2004 (Unaudited)
Current assets
Cash	$	4,196,327	$	1,526,042
Accounts receivable — trade		10,527,086		12,038,230
Accounts receivable — affiliate		34,546,940		18,724,890
Miscellaneous receivable		1,258		283,081
Due from affiliates		6,404		—
Inventory		5,532,816		4,695,841
Prepaid expenses		123,555		38,140


Total current assets		54,934,386		37,306,224

Property and equipment, net of accumulated depreciation		2,386,194		2,258,629


Total assets	$	57,320,580	$	39,564,853

LIABILITIES AND STOCKHOLDERS’ EQUITY


	2005		2004
Current liabilities
Loans payable — officers	$	5,543,000	$	2,500,000
Accounts payable — trade		680,341		173,703
Accounts payable — affiliate		16,451,923		12,190,640
Rebates payable		948,755		1,147,500
Accrued royalties		6,087,413		3,625,953
Accrued commissions		1,477,856		1,294,711
Accrued state and local taxes		1,052,203		109,476
Advertising advances		1,171,519		—


Total current liabilities		33,413,010		21,041,983


Stockholders’ equity
Common stock — no par value; 200 shares authorized, issued and outstanding		2,000		2,000
Retained earnings		23,905,570		18,520,870


Total stockholders’ equity		23,907,570		18,522,870


Total liabilities and stockholders’ equity	$	57,320,580	$	39,564,853

See accompanying notes to financial statements.

CREATIVE DESIGNS INTERNATIONAL, LTD.

STATEMENTS OF INCOME

NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004


	2005 (Unaudited)			2004 (Unaudited)
Revenues
Commission income	$	32,426,886		$	20,276,949
Sales		18,636,966			16,591,845
Design fee		123,000			123,000


		51,186,852			36,991,794


Direct costs
Cost of sales		14,966,397			10,902,119
Direct selling costs		12,100,166			7,776,546
Product development costs		895,482			619,168


		27,962,045			19,297,833


Gross profit		23,224,807			17,693,961

General and administrative expenses		3,677,413			2,319,810


Income before other income and expenses		19,547,394			15,374,151


Other income and expenses
Interest income		96,497			34,260
Depreciation		(652,177	)		(394,422	)


		(555,680	)		(360,162	)


Net income	$	18,991,714		$	15,013,989

See accompanying notes to financial statements.

CREATIVE DESIGNS INTERNATIONAL, LTD.

STATEMENTS OF RETAINED EARNINGS

NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004


	2005 (Unaudited)		2004 (Unaudited)
Balance, January 1	$	25,009,466	$	20,506,881

Net income		18,991,714		15,013,989


		44,001,180		35,520,870

Less distributions		20,095,610		17,000,000


Balance, September 30	$	23,905,570	$	18,520,870

See accompanying notes to financial statements.

CREATIVE DESIGNS INTERNATIONAL, LTD.

STATEMENTS OF CASH FLOWS

NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004


	2005 (Unaudited)			2004 (Unaudited)
Cash flows from operating activities
Net income	$	18,991,714		$	15,013,989

Adjustment to reconcile net income to net cash provided by operating activities
Depreciation		652,177			394,422

(Increase) decrease in assets
Accounts receivable — trade		(4,507,823	)		(3,730,691	)
Accounts receivable — affiliate		(6,928,119	)		(6,057,119	)
Miscellaneous receivable		21,833			515,865
Inventory		(2,455,749	)		(3,670,321	)
Prepaid expenses		(29,032	)		59,414

Increase (decrease) in liabilities
Accounts payable — trade		361,176			(94,319	)
Accounts payable — affiliate		1,420,456			11,969,928
Rebates payable		(1,128,086	)		70,121
Accrued royalties		2,815,406			2,252,018
Accrued commissions		993,839			400,575
Accrued state and local taxes		892,428			(205,010	)
Advertising advances		1,171,519			—


Net cash provided by operating activities		12,271,739			16,918,872


Cash flows from investing activities
Acquisition of property and equipment		(1,097,738	)		(1,064,467	)

See accompanying notes to financial statements.

CREATIVE DESIGNS INTERNATIONAL, LTD.

STATEMENTS OF CASH FLOWS

NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004


	2005 (Unaudited)			2004 (Unaudited)
Cash flows from financing activities
Net advances and repayments of loans payable — officers	$	5,543,000		$	500,000
Distributions paid		(20,095,610	)		(17,000,000	)


Net cash used by financing activities		(14,552,610	)		(16,500,000	)


Net decrease in cash		(3,378,609	)		(645,595	)

Cash, January 1		7,574,936			2,171,637


Cash, September 30	$	4,196,327		$	1,526,042

See accompanying notes to financial statements.

CREATIVE DESIGNS INTERNATIONAL, LTD.

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

Summary of Significant Accounting Policies

This summary of significant accounting policies of Creative Designs International, Ltd. (“the Company) is presented to assist in understanding the Company’s financial statements. The financial statements and accompanying notes are representations of the Company’s management, who are also responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America and have been consistently applied in the preparation of the financial statements.

Business Activity and Concentration of Credit Risk

The Company is engaged in the development and marketing of toys and related products internationally and the sale of those products to specific customers in the United States.

The Company maintains its checking accounts with one bank. Cash balances with the bank in excess of $100,000 exceed the insurable limits as allowed by FDIC. Total cash balances with the bank at September 30, 2005 exceeded the insurable limits by $4,388,483.

The Company had a significant customer which represented 74% and 93% of the total sales for the nine months ended September 30, 2005 and 2004. Receivables from this customer represented 72% and 92% of the accounts receivable — trade balance at September 30, 2005 and 2004.

Use of Estimates

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

Accounts Receivable — Trade

Accounts receivable — trade is recorded at the amount the Company expects to collect on balances outstanding at the balance sheet date. Management closely monitors outstanding balances and writes off, as of the balance sheet date, all balances that they anticipate they will not collect as of the time the financial statements are issued.

There were no bad debts charged to operations for the periods ended September 30, 2005 and 2004.

Inventory

Inventory, consisting of finished goods, is valued at the lower of cost (first-in, first-out basis) or market.

CREATIVE DESIGNS INTERNATIONAL, LTD.

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

Summary of Significant Accounting Policies

Depreciation

Depreciation is provided under the straight-line and accelerated methods over the estimated useful lives of the related assets.

Shipping and Handling Costs

The Company’s policy is to reflect shipping and handling costs associated with the sale of inventory as a component of cost of goods sold.

Advertising Expense

The Company’s policy is to expense advertising costs as they are incurred. Advertising expenses charged to operations for the nine months ended September 30, 2005 and 2004 were $78,380 and $15,516, respectively.

Income Taxes

The Company, an S corporation, is not a taxpaying entity for federal and state income tax purposes, and thus, no income tax expense has been recorded in the financial statements. Income from the Company is taxed to the stockholders on their individual tax returns. The Company still pays capital stock and gross receipts taxes to various municipalities.

Property and Equipment

A summary of property and equipment at September 30, 2005 and 2004 is as follows:


		2005		2004

Molds	$	3,344,410	$	2,395,007
Leasehold improvements		308,186		308,186
Furniture and fixtures		165,826		142,113
Computer equipment		233,247		233,247
Transportation equipment		532,393		643,323

		4,584,062		3,721,876

Less accumulated depreciation		2,197,868		1,463,247


	$	2,386,194	$	2,258,629

CREATIVE DESIGNS INTERNATIONAL, LTD.

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

Property and Equipment (Cont’d.)

Depreciation expense charged to operations for the nine months ended September 30, 2005 and 2004 was $652,177 and $394,422, respectively.

Loans Payable — Officers

The Company had loans payable to officers of $5,543,000 and $2,500,000 at September 30, 2005 and 2004, respectively. The loans do not bear interest and are expected to be repaid within the year.

Advertising Advances

The Company received an advance from a customer to produce a commercial for the Christmas retail season. The costs were not expended as of September 30, 2005. In addition, the Company received a reimbursement from a licensor for goods to be used in a promotion at a customer’s retail location. The goods had not been acquired as of September 30, 2005.

The total amount of advertising advances was $1,171,519 at September 30, 2005.

Royalties

The Company has entered into various license agreements whereby the Company may use certain characters and properties in conjunction with its products. Such license agreements call for royalties to be paid at 6% to 15% of net sales with minimum guarantees and advance payments. The agreements expire at various intervals through December 31, 2007. Royalties expense was $9,591,332 and $5,775,428 for the nine months ended September 30, 2005 and 2004, respectively, and is included in direct selling costs. Accrued royalties were $6,087,413 and $3,625,953 as of September 30, 2005 and 2004, respectively.

Related Party Transactions

The Company conducts its primary business operations in a facility leased from its stockholders under a lease which expires in 2010. The rental expense for this property was $53,100 for both nine month periods ended September 30, 2005 and 2004.

The following is a schedule of future minimum lease payments as of September 30, 2005:


Year ending September 30, 2006	$	79,170
2007		85,038
2008		89,268
2009		93,680
2010		98,413

	$	445,569

CREATIVE DESIGNS INTERNATIONAL, LTD.

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

Related Party Transactions (Cont’d.)

The Company’s affiliate, Arbor Toys, Ltd. (Arbor), is a Hong Kong based company. Significant related party transactions with Arbor are as follows:

The Company receives a commission from Arbor on all Arbor sales for its marketing and licensing arrangements with customers. In addition, it receives various overrides on products sold. The total amount is recorded as commission income and was $32,426,886 and $20,276,949 for the nine months ended September 30, 2005 and 2004, respectively.

The Company receives design fees for the development of product lines from Arbor. Total fees received were $123,000 each for the nine months ended September 30, 2005 and 2004.

The Company purchases all of its toys from Arbor. Total purchases for the nine months ended September 30, 2005 and 2004 were $16,451,923 and $14,962,571, respectively.

The Company leases showroom space at an industry toy exhibit under a noncancelable operating lease expiring in April 2010. Future minimum rental payments under operating leases (excluding operating expenses) are as follows:


Year ending September 30, 2006	$	33,150
2007		33,150
2008		33,150
2009		33,150
2010		19,326

	$	151,926

The total rent expense for all operating leases was $87,916 and $90,694 for the nine months ended September 30, 2005 and 2004, respectively.

SUPPLEMENTARY INFORMATION

CREATIVE DESIGNS INTERNATIONAL, LTD.

SCHEDULES OF GENERAL AND ADMINISTRATIVE EXPENSES

NINE MONTHS ENDED SEPTEMBER 30, 2005


	2005 Unaudited		2004 Unaudited
Advertising	$	78,380	$	15,516
Auto expense		13,478		17,707
Computer expenses		65,361		47,324
Contributions		1,000		4,384
Dues and subscriptions		8,665		15,722
Employee benefits		102,004		93,837
Equipment rental		—		8,866
Gifts		5,216		39,200
Insurance		122,530		108,939
Meals and entertainment		35,477		28,676
Miscellaneous		42,357		22,075
Professional fees		53,120		72,894
Office expense		73,887		42,106
Payroll		1,180,259		882,131
Payroll taxes		87,292		75,260
Postage		3,500		2,519
Rent		87,916		90,694
Repairs and maintenance		7,223		6,797
Storage		2,771		2,718
Taxes — other		1,505,590		477,080
Telephone		26,613		20,905
Travel		149,968		219,732
Utilities		24,806		24,728

	$	3,677,413	$	2,319,810

ARBOR TOYS COMPANY LIMITED

Contents


		Page

Balance Sheet (Unaudited)		1

Profit and Loss Statement (Unaudited)		2

Notes to the Financial Statements (Unaudited)		3-11

ARBOR TOYS COMPANY LIMITED
Balance Sheet as at September 30, 2005
(Amounts Expressed in Hong Kong Dollars)


	9/30/04 (Unaudited)			9/30/05 (Unaudited)

		FIXED ASSETS

$	425,359	Furniture & Fixture	$	465,611
	245,424	Less: Provision for Depreciation		273,257

	179,935			192,354
	1,690,935	Office Equipment		2,135,332
	1,078,650	Less: Provision for Depreciation		1,247,092

	612,285			888,240
	1,265,134	Leasehold Improvement		1,330,133
	968,591	Less: Provision for Depreciation		1,303,815

	296,543			26,318

	1,088,763			1,106,912
		CURRENT ASSETS

	10,000	Cash in Hand		10,000
	8,483,999	Hong Kong Bank – HKD C/A		1,997,920
	7,955,727	Hong Kong Bank – HKD Savings		7,969,873
	21,583,240	Hong Kong Bank – USD Savings		37,646,660
	599,875	Hong Kong Bank – USD Statement Savings		1,090,200
	32,550,769	Hong Kong Bank – Call Deposits		52,040,654
	—	Fixed Deposits		20,000,000
	245,035,287	Trade Debtors		358,514,326
	18,988	Accounts Receivable – Others		(3,912	)
	143,034	Advance to Supplier		300,441
	366,399	Prepayment		7,644,975
	681,595	Rental & Utility Deposits		695,140

	317,428,913			487,906,277
		LESS: CURRENT LIABILITIES

	92,814,433	Trade Creditors		118,308,698
	2,097,186	Accounts Payable – Others		3,428,144
	1,077,908	Advance from Customers		1,001,990
	145,117,901	Commission Payable		267,738,790
	—	Dividend Payable		—
	41,250	Provision for Audit Fees		41,250
	1,085,326	Provision for Staff Bonus		1,709,176
	871,900	Provision for Pension		931,900
	8,229,931	Provision for Taxation		16,552,716

	251,335,835			409,712,664
	66,093,078	NET CURRENT ASSETS / (LIABILITIES)		78,193,613

	67,181,841	TOTAL NET ASSETS	$	79,300,525


		FINANCED BY:
		SHARE CAPITAL

		Authorized Capital 100,000 shares of HKD10.00 each HKD1,000,000,00

$	1,000,000	Issued and fully paid capital 100,000 shares of HKD10.00 each	$	1,000,000
	33,303,906	Retained Profit / (Loss)		41,084,292
	32,877,935	Current Year Profit / (Loss)		37,216,233

$	67,181,841	SHAREHOLDERS’ EQUITY	$	79,300,525

- 1 -

ARBOR TOYS COMPANY LIMITED
Profit & Loss Statement
For the Nine Months ended September 30, 2005
(Amounts Expressed in Hong Kong Dollars)


01/01/04 to		01/01/05 to
9/30/04 (Unaudited)		9/30/05 (Unaudited)

$723,718,946	Gross Sales	$922,648,525
157,146,354	Less: Commission	251,308,372

566,572,592	Net Sales	671,340,153
512,051,255	Cost of Goods Sold	608,416,843

54,521,337	Gross Profit	62,923,310

	Add: Other Income

15,600	Interest income	665,815
23,510	Exchange Difference	46,921

39,110		712,736

54,560,447	Operation Income /(Loss)	63,636,046

	Operating Expenses
2,668,626	Selling Expenses	4,629,559
12,033,543	General & Administrative Expenses	14,027,590

14,702,169		18,657,149

39,858,278	Profit/(Loss ) from Operation	44,978,897
6,980,343	Taxation	7,762,664

32,877,935	Profit After Taxation	37,216,233

33,303,906	Retained Profit/(Loss) Brought Forward	41,084,292

66,181,841		78,300,525

	Appropriation

—	Interim Dividend	—
—	Final Dividend	—

$66,181,841	Retained Profits/(Loss) Carried Forward	$78,300,525

- 2 -

ARBOR TOYS COMPANY LIMITED

NOTES TO FINANCIAL STATEMENTS — SEPTEMBER 30, 2005

(Unaudited)

PRINCIPAL ACCOUNTING POLICIES

	(a)		Basis of Accounting

			The financial statements have been prepared in accordance with generally accepted accounting principles in Hong Kong and with accounting standards issued by the Hong Kong Society of Accountants.

	(b)		Fixed Assets

			Fixed assets are stated at cost less accumulated deprecation.

			Depreciation is provided to write off the cost of fixed assets over their estimated useful lives on a straight line basis at the following annual rates :-


Furniture and fixtures			10%
Office machinery and equipment			20%
Leasehold improvements			Over the term of lease

	(c)		Translation of Foreign Currencies

			Monetary assets and liabilities denominated in foreign currencies are translated into Hong Kong Dollars at the rates of exchange ruling at the balance sheet date.

			Transactions in foreign currencies are translated into Hong Kong Dollars at the rates of exchange ruling at the dates of the transactions.

			All exchange differences arising from the above are included in the profit and loss statement.

	(d)		Cash and Cash Equivalents

			For the purposes of the cash flow statement, cash and cash equivalents comprise cash on hand, deposit held at call with banks, cash investments with a maturity of three months or less from the date of investment and bank overdrafts.

- 3 -

ARBOR TOYS COMPANY LIMITED

NOTES TO FINANCIAL STATEMENTS — SEPTEMBER 30, 2005

(Unaudited)

(CONTINUED)

PRINCIPAL ACCOUNTING POLICIES (CONT’D)

	(e)		Deferred Taxation

			Deferred taxation is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Deferred tax assets and liabilities are measured at the tax rates that have been enacted or substantively enacted by the balance sheet date.

			Deferred tax assets are recognised to the extent it is probable that future taxable profit will be available against which the temporary differences can be utilised.

	(f)		Employee Benefits

	(i)		Long Service Payments

			The Company’s net obligation in respect of long service payment under the Employment Ordinance is the amount of future benefit that employees have earned in return for their service in the current and prior periods. The obligation is calculated according to the provision of the above Ordinance.

	(ii)		Retirement Benefits

			The Company operates a defined contribution Mandatory Provident Fund retirement benefit scheme (“the Scheme”) under the Mandatory Provident Fund Schemes Ordinance, for all its employees. Contributions to the Scheme are based on a percentage of the employees’ basic salaries and are recognised as an expense in the profit and loss statement.

	(g)		Operating Leases

			Payments under operating leases are charged to the profit and loss statement on a straight line basis over the period of the respective leases.

	(h)		Revenue Recognition

			Sales are recognised as revenue when the risks and rewards of ownership of the goods have passed to customers. Bank interest earned is recognised on an accrual basis.

- 4 -

ARBOR TOYS COMPANY LIMITED

NOTES TO FINANCIAL STATEMENTS — SEPTEMBER 30, 2005

(Unaudited)

(CONTINUED)

2.		PROFIT BEFORE TAXATION

		Profit before taxation is arrived at


	2005		2004
after charging :-

Auditors’ remuneration	$	39,000	$	39,000
Depreciation		514,416		574,964
Fixed assets written off		1		12,510
Rental payable on land and buildings under operating leases		1,076,160		1,466,300
Retirement benefit costs		352,442		278,914


and crediting :-

Bank interest earned	$	665,815	$	15,600
Exchange gain		46,921		23,510

3.		DIRECTORS’ EMOLUMENTS

		The aggregate amounts of the Directors’ emoluments disclosed pursuant to Section 161 of the Companies Ordinance are as follows :-


	2005		2004
As director	$	—	$	—
As executive		794,500		771,000


	$	794,500	$	771,000

- 5 -

ARBOR TOYS COMPANY LIMITED

NOTES TO FINANCIAL STATEMENTS — SEPTEMBER 30, 2005

(Unaudited)

(CONTINUED)

TAXATION


	2005		2004
Hong Kong profits tax
Provision for current year	$	7,737,816	$	7,015,940

		The provision for Hong Kong profits tax has been calculated by applying the statutory rate of taxation of 17.5% to the estimated assessable profits of the Company which were derived from Hong Kong during the reporting period.

		No provision for deferred taxation has been made in the financial statements as the effect of temporary differences is insignificant.

		Reconciliation between taxation expense and accounting profit at applicable taxation rates :-


	2005			2004
Profit before taxation	$	44,978,896		$	39,858,278


Tax at taxation tax rate of 17.5%	$	7,871,307		$	6,975,198
Tax effect of expenses that are not deductible in determining taxable profits		97,898			110,683
Tax effect on income that is not assessable in determining taxable profits		(116,518	)		(2,730	)
Tax effect on allowances claimed		(114,871	)		(67,211	)


Taxation expense for the period	$	7,737,816		$	7,015,940

- 6 -

ARBOR TOYS COMPANY LIMITED

NOTES TO FINANCIAL STATEMENTS — SEPTEMBER 30, 2005

(Unaudited)

(CONTINUED)

FIXED ASSETS


	Furniture		Machinery			Leasehold
	and Fixtures		and Equipment			Improvement		Total
Cost

At January 1, 2005	$	421,879	$	1,591,405		$	1,265,134	$	3,278,418
Additions during the year		43,732		547,210			64,999		655,941
disposals during the year		—		(3,284	)		—		(3,284	)


At September 30, 2005		465,611		2,135,331			1,330,133		3,931,075


Accumulated Depreciation

At January 1, 2005		247,926		985,310			1,079,795		2,313,031
Charge for the year		25,330		265,065			224,021		514,416
Written back on disposals		—		(3,283	)		—		(3,283	)


At September 30, 2005		273,256		1,247,092			1,303,816		2,824,164


Net Book value

At September 30, 2005	$	192,355	$	888,239		$	26,317	$	1,106,911


At September 30, 2004	$	179,936	$	612,285		$	296,542	$	1,088,763

- 7 -

ARBOR TOYS COMPANY LIMITED

NOTES TO FINANCIAL STATEMENTS — SEPTEMBER 30, 2005

(Unaudited)

(CONTINUED)

SHARE CAPITAL


	2005		2004
Authorised capital 100,000 shares of HK$10.00 each	$	1,000,000	$	1,000,000


Issued and fully paid capital 100,000 shares of HK$10.00 each	$	1,000,000	$	1,000,000

7.		COMMITMENTS UNDER OPERATING LEASES

		At September 30, 2005, the Company had future aggregate minimum lease payments on land and buildings under non-cancellable leases as follows :-


	2005		2004
Not later than one year	$	2,325,070	$	1,216,285
Later than one year and not later than five years		1,705,790		—


	$	4,030,860	$	1,216,285

- 8 -

ARBOR TOYS CO., LTD

NOTES TO FINANCIAL STATEMENTS — SEPTEMBER 30, 2005

(Unaudited)

RECONCILIATION OF PROFIT BEFORE TAXATION TO NEW CASH INFLOW FROM OPERATING ACTIVITIES


	09/30/2005			09/30/2004
	HK$			HK$
Profit before taxation	$	44,978,897		$	39,858,278

Adjustments for;-

Bank Interest earned		(665,815	)		(15,600	)
Depreciation		514,416			574,964
Fixed Assets Written off		1			12,510


Operating profit before working capital changes		44,827,499			40,430,152

Change in bills receivable		(118,121,483	)		(67,542,704	)
Change in accounts receivable		(37,979,637	)		(30,161,126	)
Change in prepayments, rental and utility deposits		(168,813	)		35,519
Change in trade deposits		(300,441	)		(116,202	)
Change in accounts payable and accrued charges		145,143,539			39,157,470


Cash generated from operations		33,400,664			(18,196,891	)

Hong Kong profits tax paid		0			0


Net cash inflow from operating activities	$	33,400,664		$	(18,196,891	)

- 9 -

ARBOR TOYS COMPANY LIMITED

STATEMENT OF CASH FLOW

NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004

(AMOUNTS EXPRESSED IN HONG KONG DOLLARS)


	2005 (Unaudited)			2004 (Unaudited)
NET CASH INFLOW FROM OPERATING ACTIVITIES (Notes)	$	33,400,664		$	(18,196,891	)

INVESTMENTS ACTIVITIES
Purchase of fixed assets		(655,942	)		(308,020	)
Sales proceeds of fixed assets		0			0
Bank interest earned		665,815			15,600


NET CASH OUTFLOW FROM INVESTING ACTIVITIES		9,873			(292,420	)


NET CASH INFLOW BEFORE FINANCING		33,410,537			(18,489,311	)

FINANCING ACTIVITIES
Final dividend paid		(33,300,000	)		(28,426,000	)
Interim dividend paid		0			0


NET CASH OUTFLOW FROM FINANCING		(33,300,000	)		(28,426,000	)


INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS		110,537			(46,915,311	)

CASH AND CASH EQUIVALENTS AT BEGINNING OF THE YEAR		120,644,769			118,098,922


CASH AND CASH EQUIVALENTS AT END OF THE YEAR	$	120,755,306		$	71,183,611


ANALYSIS OF THE BALANCES OF CASH AND CASH EQUIVALENTS
Cash at bank and in hand	$	100,755,306		$	71,183,611
Time Deposits		20,000,000			0

	$	120,755,306		$	71,183,611

- 10 -

ARBOR TOYS COMPANY LIMITED
GENERAL AND ADMINISTRATIVE EXPENSES
For the Nine Months Ended September 30, 2005
(Amounts Expressed in Hong Kong Dollars)

(For Management Purposes only)



01/01/04		01/01/05
to 9/30/04 (Unaudited)		to 9/30/05 (Unaudited)

$11,432	Advertising	$720
27,000	Recruitment Fees	58,838
39,000	Audit Fees	39,000
10,875	Legal & Professional Fees	10,875
0	Business Registration Fees	0
8,933	Licence & Subscription Fees	8,141
21,600	Cleaning Expenses	23,400
22,765	Depn – Furniture & Fixture	25,330
230,696	Depn – Office Equipment	265,065
321,504	Depn – Leasehold Improvement	224,021
0	Donation	5,000
76,168	Entertainment	51,487
32,697	Fax & Cable Charges	33,193
7,579	Postage	7,838
41,213	Telephone Expenses	59,708
17,237	Office Supplies	20,976
450,882	Printing & Stationary	640,781
1,859,270	Rent & Rates	1,532,080
87,066	Electricity	104,851
6,348,446	Staff Salary	7,968,658
1,360,000	Staff Bonus	1,800,000
45,000	Pension	45,000
278,914	Mandatory Provident Fund	352,442
306,000	Directors’ Housing Allowance	306,000
74,356	Staff Welfare	70,827
25,964	Insurance	30,262
22,405	Sundry Expenses	24,838
44,625	Repairs & Maintenance	47,796
166,317	Local Travelling	245,280
83,089	Overseas Travelling	25,382
12,510	Fixed Assets Written Off	1
0	F. Assets Disposal (Gain) / Loss	(200	)

$12,033,543		$14,027,590

- 11 -

UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENT

The following unaudited pro forma consolidated financial statements as of September 30, 2005 and for the year ended December 31, 2004 and the nine months ended September 30, 2005 give effect to the asset acquisition of CDI. The pro forma consolidated balance sheet presents our financial position as if the asset acquisition of CDI had occurred on September 30, 2005. The pro forma consolidated statement of operations presents our results as if the acquisition of CDI had occurred on January 1, 2004. Our fiscal year end is December 31 and CDI’s fiscal year end is December 31. The pro forma consolidated balance sheet as of September 30, 2005 is based upon our historical consolidated balance sheet as of September 30, 2005 which has been adjusted for the effects of the CDI asset acquisition. The pro forma consolidated statements of operations for the year ended December 31, 2004 and nine months ended September 30, 2005 are based on our historical consolidated statements of operations and the statements of operations of CDI for the year ended December 31, 2004 and the nine months ended September 30, 2005.

The pro forma consolidated financial statements include, in our opinion, all material adjustments necessary to reflect the asset acquisition of CDI. 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 CDI’s financial statements and the related notes thereto included herein.

JAKKS PACIFIC, INC. AND SUBSIDIARIES
Unaudited Pro Forma Consolidated Balance Sheet
(In thousands)


	SEPTEMBER 30, 2005
	HISTORICAL			PRO FORMA			PRO FORMA
	JAKKS			ADJUSTMENTS			BALANCE SHEET
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	228,053		($	105,253	)(1)	$	122,800
Accounts receivable, net		144,334			16,720	(2)		161,054
Inventory		73,876			1,394	(2)		75,270
Prepaid expenses and other current assets		30,830			944	(2)		31,774

Total current assets		477,093			(86,195	)		390,898

Property and equipment, at cost		41,896			1,235	(2)		43,131
Less accumulated depreciation and amortization		30,095			—			30,095

Property and equipment, net		11,801			1,235			13,036

Intangibles and Other, net		20,835			17,170	(3)		38,005
Investment in video game joint venture		3,609			—			3,609
Goodwill, net		262,880			75,750	(3)		338,630
Trademarks, net		17,768			1,400	(3)		19,168

Total assets	$	793,986		$	9,360		$	803,346

LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses	$	126,357		$	5,919	(4)	$	132,276
Reserve for sales returns and allowances		27,400			—			27,400
Income taxes payable		30,162			—	(4)		30,162

Total current liabilities		183,919			5,919			189,838

Long term debt		98,000			—			98,000
Deferred income taxes		4,237			—			4,237

Total Liabilities		286,156			5,919			292,075

STOCKHOLDERS EQUITY
Common stock		27			—	(1)		27
Additional paid-in capital		281,229			3,441	(1)		284,670
Retained earnings		231,043			—			231,043
Deferred compensation from restricted stock		(2,434	)		—			(2,434	)
Accumulated comprehensive loss		(2,035	)		—			(2,035	)

Total stockholders equity		507,830			3,441			511,271

Total liabilities and stockholders equity	$	793,986		$	9,360		$	803,346

JAKKS PACIFIC, INC. AND SUBSIDIARIES
Unaudited Pro Forma Consolidated Statements Of Operations
(In thousands, except per share amounts)


	YEAR ENDED DECEMBER 31, 2004
	ACTUAL

	ARBOR		CREATIVE					CDI
	TOYS		DESIGNS		CONSOLIDATING			CONSOLIDATED		JAKKS
Net Sales	$	128,284	$	61,217		(50,954	)	$	138,547	$	574,266
Cost of sales		119,211		29,420		(50,790	)		97,841		348,259

Gross Profit		9,073		31,797		(164	)		40,706		226,007
Selling, general and administrative expenses		2,652		10,383		(164	)		12,871		172,282

Income from operations		6,421		21,414		—			27,835		53,725
Interest, net		—		89		—			89		(2,498	)
Other income (expense)		14		—		—			14		7,865

Income before provision for income taxes		6,435		21,503		—			27,938		59,092
Provision for income taxes		1,134		—		—			1,134		15,533

Net income (loss)	$	5,301	$	21,503	$	—		$	26,804	$	43,559

Basic earnings per share										$	1.69

Weighted average shares outstanding											25,797

Diluted earnings per share										$	1.49

Weighted average shares and equivalents outstanding											31,406

[Additional columns below]

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


	YEAR ENDED DECEMBER 31, 2004
	PRO FORMA			PRO FORMA
	COMBINED			ADJUSTMENTS			RESULTS

Net Sales	$	712,813		$	—		$	712,813
Cost of sales		446,100			—			446,100

Gross Profit		266,713			—			266,713
Selling, general and administrative expenses		185,153			6,768	(5)		191,921

Income from operations		81,560			(6,768	)		74,792
Interest, net		(2,409	)		(4,899)	(6)		(7,308	)
Other income (expense)		7,879			—			7,879

Income before provision for income taxes		87,030			(11,667	)		75,363
Provision for income taxes		16,667			3,143	(7)		19,810

Net income	$	70,363		$	(14,810	)	$	55,553

Basic earnings per share							$	2.14

Weighted average shares outstanding					150			25,947

Diluted earnings per share							$	1.87

Weighted average shares and equivalents outstanding					150			31,556

JAKKS PACIFIC, INC. AND SUBSIDIARIES
Unaudited Pro Forma Consolidated Statements Of Operations
(In thousands, except per share amounts)


	NINE MONTHS ENDED SEPTEMBER 30, 2005
	ACTUAL

	ARBOR		CREATIVE
	TOYS		DESIGNS		CONSOLIDATING			CONSOLIDATED CDI		JAKKS
Net Sales	$	119,051	$	51,187	$	(49,002	)	$	121,236	$	495,266
Cost of sales		110,932		25,189		(48,879	)		87,242		299,529

Gross Profit		8,119		25,998		(123	)		33,994		195,737
Selling, general and administrative expenses		2,407		7,103		(123	)		9,387		120,229

Income from operations		5,712		18,895		—			24,607		75,508
Interest, net		86		96		—			182		17
Other income (expense)		6		—		—			6		140

Income before provision for income taxes		5,804		18,991		—			24,795		75,665
Provision for income taxes		1,002		—		—			1,002		21,186

Net income	$	4,802	$	18,991	$	—		$	23,793	$	54,479

Basic earnings per share										$	2.04

Weighted average shares outstanding											26,673

Diluted earnings per share										$	1.77

Weighted average shares and equivalents outstanding											32,182

[Additional columns below]

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


	NINE MONTHS ENDED SEPTEMBER 30, 2005
			PRO FORMA			PRO FORMA
	COMBINED		ADJUSTMENTS			RESULTS

Net Sales	$	616,502	$	—		$	616,502
Cost of sales		386,771		—			386,771

Gross Profit		229,731		—			229,731
Selling, general and administrative expenses		129,616		3,008	(5)		132,624

Income from operations		100,115		(3,008	)		97,107
Interest, net		199		(3,790	)(6)		(3,591)
Other income (expense)		146		—			146

Income before provision for income taxes		100,460		(6,798	)		93,662
Provision for income taxes		22,188		4,038	(7)		26,226

Net income	$	78,272	$	(10,836	)	$	67,436

Basic earnings per share						$	2.51

Weighted average shares outstanding				150			26,823

Diluted earnings per share						$	2.16

Weighted average shares and equivalents outstanding				150			32,332

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 CDI as set forth below (in thousands):

BALANCE SHEET


(1)	Consideration paid on or about the closing:
	Cash paid to or on behalf of stockholders	$	104,489
	Other acquisition costs		764

		$	105,253

	150,000 shares of JAKKS common stock issued	$	3,441

(2)	Assets acquired	$	20,293

(3)	Other assets acquired (see Note A below):
	Intangible assets	$	17,170
	Trademarks		1,400
	Excess of consideration paid over fair market value of net assets acquired (Goodwill)		75,750

		$	94,320

(4)	Liabilities assumed in the acquisition:
	Accounts payable and accrued expenses	$	5,919

STATEMENT OF OPERATIONS


		Pro Forma		Pro Forma
		Year Ended		Nine Months Ended
		Dec 31, 2004		Sep 30, 2005
(5)	Selling, general and administrative expenses are adjusted to reflect:
	Elimination of Hong Kong director fees	$	180	$	39
	Amortization of intangible assets		6,588		2,968

		$	6,768	$	3,008

(6)	Interest, net is adjusted to reflect:
	The Elimination of interest income related to CDI cash balance as if they had no cash balance as of January 1, 2004 and September 1, 2005, respectively	$	89	$	182
	The Elimination of interest income related to lower cash balances held by JAKKS		4,810		3,608

		$	4,899	$	3,790

(7)	Provision for income taxes is adjusted to reflect the tax effect of pro forma adjustments	$	3,143	$	4,038


Note A:		In accordance with FASB Statement of Financial Accounting Standard No. 141 “Business Combinations”, the allocation of the purchase price is based on studies and valuations that are currently being performed and is expected to be completed by the second quarter of 2006.

(d) Exhibits.


Number		Description


10.1		January 18, 2006 Asset Purchase and Sale Agreement(1)

99		February 10, 2006 Press Release(2)

(1) Filed as an exhibit to the Registrant’s January 24, 2006 Current Report on Form 8-K and incorporated herein by reference.

(2) Filed as an exhibit to the Registrant’s February 14, 2006 Current Report on Form 8-K and incorporated herein by reference.

SIGNATURES

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

Dated: April 26, 2006


	JAKKS PACIFIC, INC.

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

EXHIBIT INDEX


Number		Description


10.1		January 18, 2006 Asset Purchase and Sale Agreement(1)

99		February 10, 2006 Press Release(2)

(1) Filed as an exhibit to the Registrant’s January 24, 2006 Current Report on Form 8-K and incorporated herein by reference.

(2) Filed as an exhibit to the Registrant’s February 14, 2006 Current Report on Form 8-K and incorporated herein by reference.


	12/31/2001
		CURRENT ASSETS

$	36,610,576	Cash	$	63,052,640
	31,200,000	Time deposits		-0-
	14,046,551	Bills receivable		33,838,466
	8,742,749	Accounts receivable		9,984,072
	6,021,121	Prepayments, rental and utility deposits		5,242,044
	3,000,000	Trade deposits		230,989
	10,079	Inventories		-0-


	99,631,076				$	112,348,211

	706,490	FIXED ASSETS (Note 6)				1,855,829


$	100,337,566				$	114,204,040


		CURRENT LIABILITIES

$	37,119,661	Accounts payable and accrued charges	$	79,257,997
	28,988,250	Dividend payable		-0-
	4,440,000	Provision for taxation		5,335,000


	70,547,911				$	84,592,997

		SHAREHOLDERS’ EQUITY

	1,000,000	Share capital (Note 7)		1,000,000
	28,789,655	Retained profits		28,611,043

	29,789,655					29,611,043

		THE FINANCIAL STATEMENTS ON PAGES 7 TO 16 WERE APPROVED AND AUTHORISED FOR ISSUE BY THE BOARD OF DIRECTORS ON 30 JUN 2003

		/s/ Marvin Greenberg /s/ Ho Chiu Ming

		DIRECTOR DIRECTOR


$	100,337,566				$	114,204,040


01/01/2001
to
12/31/2001
$	504,594,262		TURNOVER (Note 2)	$	661,475,210
	2,023,553		OTHER REVENUE		3,486,715
	(4,078,227	)	CHANGES IN INVENTORIES		(10,079	)
	(359,436,166	)	PURCHASES AND DIRECT COSTS		(475,406,385	)
	(102,876,312	)	SELLING EXPENSES		(142,949,384	)
	(7,719,866	)	STAFF COSTS		(8,784,421	)
	(334,190	)	DEPRECIATION AND AMORTISATION		(521,132	)
	(2,468,691	)	OTHER OPERATING EXPENSES		(3,438,957	)

	29,704,363		PROFIT BEFORE TAXATION (Note 3)		33,851,567
	(4,438,775	)	TAXATION (Note 5)		(5,330,179	)

$	25,265,588		PROFIT AFTER TAXATION	$	28,521,388

$	-0-		INTERIM DIVIDEND	$	28,700,000


	SHARE		RETAINED
	CAPITAL		PROFITS			TOTAL
AT JANUARY 1, 2001	$	1,000,000	$	49,724,067		$	50,724,067
FINAL DIVIDEND PAID		-0-		(46,200,000	)		(46,200,000	)
PROFIT FOR THE YEAR		-0-		25,265,588			25,265,588

AT DECEMBER 31, 2001	$	1,000,000	$	28,789,655		$	29,789,655

AT JANUARY 1, 2002	$	1,000,000	$	28,789,655		$	29,789,655
PROFIT FOR THE YEAR		-0-		28,521,388			28,521,388
INTERIM DIVIDEND PAID		-0-		(28,700,000	)		(28,700,000	)

AT DECEMBER 31, 2002	$	1,000,000	$	28,611,043		$	29,611,043


	2002		2001
after charging :-

Auditors’ remuneration	$	52,000	$	52,000
Depreciation		521,132		334,190
Fixed assets written off		40,478		17,621
Rental payable on land and buildings under operating leases		1,670,385		926,040
Retirement benefit costs		300,431		266,264


and crediting :-

Bank interest earned	$	492,384	$	1,665,138
Exchange gain		37,720		114,021


	2002			2001
Hong Kong profits tax
Provision for the year	$	5,335,000		$	4,440,000
Over-provision in prior year		(4,821	)		(1,225	)


	$	5,330,179		$	4,438,775


		23RD FLOOR, CHEKIANG FIRST BANK BUILDING 58-63, GLOUCESTER ROAD, WANCHAI, HONG KONG TEL.: (852) 2529 9301 FAX: (852) 2529 7920 E-MAIL: mychk@myc.com.hk

	(d)		Inventories

			Inventories are stated at the lower of cost and net realisable value. Cost is determined on actual basis.

	(e)		Deferred Taxation

			Deferred taxation is provided, using the liability method, on all significant timing differences to the extent that it is probable that the liability will crystallise in the foreseeable future.


	2002		2001
Authorised capital 100,000 shares of HK$10.00 each	$	1,000,000	$	1,000,000


Issued and fully paid capital 100,000 shares of HK$10.00 each	$	1,000,000	$	1,000,000

8.		COMMITMENTS UNDER OPERATING LEASES

		At December 31, 2002, the Company had future aggregate minimum lease payments on land and buildings under non-cancellable leases as follows :-

10.		COMPARATIVE FIGURES

		Certain comparative figures have been re-classified to conform with the current year’s presentation. This had no effect on the profit reported in the 2001 profit and loss statement.


01/01/2001
to
12/31/2001
$ 504,594,262	SALES			$	661,475,210

	LESS : COST OF SALES

4,088,306	Opening inventories	$	10,079
348,910,298	Purchases		460,202,725


352,998,604			460,212,804

10,079	Less : Closing inventories		-0-


352,988,525					460,212,804


151,605,737					201,262,406
	LESS : DIRECT COSTS

19,340	Packaging charges		17,099
10,506,528	Transportation		15,186,561


10,525,868					15,203,660


141,079,869	GROSS PROFIT				186,058,746

	ADD : OTHER INCOME

1,665,138	Bank interest earned		492,384
114,021	Exchange gain		37,720
189,727	Miscellaneous income		2,956,611
54,667	Provision for pension funds written back		-0-


2,023,553					3,486,715


143,103,422					189,545,461
	LESS : SELLING EXPENSES

1,518,467	Bank charges		1,622,428
100,003,971	Commission paid		139,878,221
123,874	Customs declaration charges		211,443
1,230,000	Design fees		1,230,000
-0-	Sample charges		7,292


102,876,312					142,949,384


40,227,110					46,596,077
10,522,747	LESS: GENERAL AND ADMINISTRATIVE EXPENSES (Page 18)				12,744,510


$ 29,704,363	PROFIT BEFORE TAXATION			$	33,851,567