**UNITED
STATES SECURITIES AND EXCHANGE**
 **COMMISSION**
 **Washington,
DC 20549**
 
 **FORM
10-KSB**
 ****
 **(Mark
One)**
 
 **x**
    
    **ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF 1934****For
      the fiscal year ended December 31, 2004****o**
    
    **TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF
      1934****For
      the transition period from
                     
      to**
 
 **Commission
file number 333-68532**
 
 **SMALL
WORLD KIDS, INC.**
 
 **Nevada**
    
    **86-06738911**(State
      or other jurisdiction of
      incorporation
      or organization)
    
    (I.R.S.
      Employer
      Identification
      No.)
 
 **5711
Buckingham Parkway, Culver City, California 90230**
 (Address
of principal executive offices)
 
 **(310)
645-9680**
 (Issuer’s
telephone number:)
 
 **SavOn
Team Sports, Inc.; 5039 South 1075 East, Ogden, Utah, 84403; June
30**
 (Former
Name or Former Address and Former Fiscal Year, if changed since last
year)
 
  **Securities
registered pursuant to Section 12(b) of the Exchange
Act:**
 **None**
 
 **Securities
registered pursuant to Section 12(g) of the Exchange
Act:**
 **None**
 Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period as the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.  Yes x No o
  Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-KSB. x
  Indicate
by a check mark whether the registrant is an accelerated filer (as defined in
Rule 12b-2 of the Exchange
Act).     Yes o No x
 
 
 
  The
aggregate market value of the voting and non-voting common equity (the only such
common equity being Common Stock, $.001 par value) held by non-affiliates of the
registrant (computed by reference to the closing sale price of the Common Stock
on March 21, 2005) is $.62
  The
number of shares outstanding of the registrant’s Common Stock, $.001 par value
(being the only class of its common stock) is 53,120,750 (as of March 21,
2005).
  **Documents
Incorporated by Reference**
  None.
 
 2
 
  **Table
of Contents**
 
 PART
      I
    
    4ITEM
      1. Description of Business
    
    4ITEM
      2. Description of Property
    
    20ITEM
      3. Legal Proceedings
    
    20ITEM
      4. Submission of Matters to a Vote of Security Holders
    
    20PART
      II
    
    20ITEM
      5. Market for Common Equity and Related Stockholder
Matters
    
    20ITEM
      6. Management’s Discussion and Analysis
    
    21ITEM
      7. Consolidated Financial Statements
    
    35ITEM
      8. Changes in and Disagreements with Accountants on Accounting and
      Financial Disclosure
    
    35ITEM
      8A. Controls and Procedures
    
    36ITEM
      8B. Other Information
    
    36PART
      III
    
    36ITEM
      9. Directors, Executive Officers, Promoters and Control Persons;
      Compliance with Section 16(a) of the Exchange Act
    
    36ITEM
      10. Executive Compensation
    
    41ITEM
      11. Security Ownership of Certain Beneficial Owners and Management and
      Related Stockholder Matters
    
    44ITEM
      12. Certain Relationships and Related Transactions
    
    45ITEM
      13. Exhibits and Reports on Form 8-K
    
    46ITEM
      14. Principal Accountant Fees and Services
    
    48SIGNATURES
    
    49Index
      to Consolidated Financial Statements
    
    F-1
 
 
 
 3
  ****
 **Part
I**
  **Forward-Looking
Statements**
  The
following discussion should be read in conjunction with the Company’s
consolidated financial statements and the notes thereto appearing elsewhere in
this prospectus. This annual report on Form 10-KSB, including the “Management’s
Discussion and Analysis” section in Part II, Item 6 of this report, and other
materials accompanying this annual report on Form 10-KSB contain forward looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Act of 1934, as amended. For example,
statements included in this prospectus regarding our financial position,
business strategy and other plans and objectives for future operations, and
assumptions and predictions about future product demand, supply, manufacturing,
costs, marketing and pricing factors are all forward-looking statements. When we
use words like “intend,” “anticipate,” “believe,” “estimate,” “plan,” “will” or
“expect,” we are making forward-looking statements. We believe that the
assumptions and expectations reflected in such forward-looking statements are
reasonable, based on information available to us on the date hereof, but we
cannot assure you that these assumptions and expectations will prove to have
been correct or that we will take any action that we may presently be planning.
However, these forward-looking statements are inherently subject to known and
unknown risks and uncertainties. Actual results or experience may differ
materially from those expected or anticipated in the forward-looking statements.
Factors that could cause or contribute to such differences include, but are not
limited to, regulatory policies, competition from other similar businesses, and
market and general economic factors.
  **ITEM
1. DESCRIPTION OF BUSINESS**
  Small
World Kids, Inc. was organized on July 28, 2001 under the name SavOn Team
Sports, Inc. in the State of Utah to sell sporting goods over the internet. As
used in this Form 10-KSB, the terms “we,” the “Company” and “Small World Kids”
refer to Small World Kids, Inc. Our business operations generated limited
revenues and we have operated at a loss since inception. As such, our Board of
Directors determined that it would be in the best interest of the shareholders
to consider alternative business operations. As described below, on May 20,
2004, we acquired Fine Ventures, LLC, a Nevada limited liability company, and
Small World Toys, a California corporation. As a result of these acquisitions,
we have had a change of our management, our controlling shareholders, our
financial position and our business plan. Small World Kids is now a holding
company and has no significant business operations or assets other than its
interest in Small World Toys. Since the acquisition of Small World Toys, the
Company has been engaged in the development, manufacturing, marketing and
distribution of educational and developmental toys. To more accurately reflect
our operations after the acquisitions, we changed our name from SavOn Team
Sports, Inc. to Small World Kids, Inc. and changed our place of incorporation
from the state of Utah to the state of Nevada.
   4
  **Overview
of Small World Toys**
  Small
World Toys, our platform company, has been distributing high-quality toys for
almost 40 years. Our Small World Toy’s proprietary product lines features toys
for children ages zero to ten with a focus of promoting early learning,
education, discovery and imagination. The Company develops, manufactures,
markets and distributes toys to promote healthy minds and bodies in infant,
pre-school, early learning, imaginative play and active play categories. The
company distributes its products in specialty, mass, chain, education, catalog,
online and international channels through sales representative firms as well as
in-house sales executives. The company’s proprietary brands include IQ Baby®, IQ
Preschool®, Ryan’s Room®, Gertie Ball®, Small World LivingTM, Puzzibilities®, All
About Baby® and Neurosmith®. We also exclusively distribute product for several
well-known brands such as TOLO®, BAO, Little Tikes® and Baby Culture to the
specialty toy market in the United States through our SW ExpressTM distribution
arm. Small World Toys has also acquired licenses for its products including
“Clifford the Big Red Dog” from Scholastic and the works of Eric Carle,
including “The Very Hungry Caterpillar”.
  **Recent
Developments**
  ***Acquisition
of Fine Ventures LLC and Small World Toys***
  Pursuant
to an Exchange Agreement dated as of May 20, 2004, by and among the Company and
a group of investors (the “Investors’), the Company issued 45,313,750 shares of
its common stock, par value $0.001 per share, in exchange for all of the equity
interests of Fine Ventures, LLC (“FVL”). Prior to May 20, 2004, FVL had no
operating activities. As a condition to the closing of this transaction, Michael
Rubin, the then-majority shareholder of the Company, sold 5,530,000 shares of
his 6,180,000 shares of the Company common stock for $10,000 to the
Investors.
  Simultaneously,
pursuant to the terms of a Stock Purchase Agreement dated as of May 20, 2004, by
and among the Company, Debra Fine, Small World Toys, Eddy Goldwasser and Gail S.
Goldwasser, Trustee of the Gail S. Goldwasser and Mark Chatinsky Family Trust
(“Gail Goldwasser”; collectively with Eddy Goldwasser, (“Goldwassers”), Small
World Kids acquired from the Goldwassers all of the issued and outstanding
equity interests of Small World Toys (the “SWT Shares”). As consideration for
the SWT Shares, Small World Kids paid an aggregate sum of $7,200,000, delivered
as follows; (i) $5,000,000 in cash; and (ii) $2,200,000 in the form of a
$500,000 six month promissory note, a $1,000,000 seven month promissory note,
and a $700,000 two year promissory note payable in quarterly installments
commencing April 2005. The $5,000,000 in cash was from the proceeds of a bridge
loan from SWT, LLC, a Delaware limited liability company, whose members are some
of the Investors. Pursuant to the terms of the bridge loan agreement, Small
World Kids executed a five-year note with interest payable at 10% per annum (the
“Bridge Note”).
   5
  ***Acquisition
of Certain Assets of Neurosmith, LLC***
  On
September 17, 2004, Small World Toys acquired certain assets of Neurosmith, LLC
pursuant to the terms of an asset purchase agreement. For a purchase price of
$875,562 we purchased the electronic learning and related intellectual property,
prototypes, models, chips and miscellaneous assets. In connection with this
purchase, we entered into a license agreement with Tinkers & Chance, a
California partnership for a non-exclusive world-wide license under certain
patent and patent applications applicable to the Neurosmith
products.
  ***Name
Change / Change of Domicile***
  On August
1, 2004 we changed our name to Small World Kids, Inc. and changed our domicile
from the State of Utah to the State of Nevada.
  **Strategic
Plan**
  Our
strategic plan is market expansion through both organic company growth of
product lines, introducing new play categories and licensing, as well as the
acquisition of product lines and profitable companies that are accretive. We
have increased penetration into key, existing accounts such as Specialty Toy,
Gift, Juvenile, Department Stores, Education, Catalogs and E-commerce through
the creation of product and catalogs that target these channels. We have
expanded the number of retail doors from approximately 2,200 to 2,600 in the
past six months through promotional programs that introduce our products and
create a first time incentive to purchase. We have recently licensed “Clifford
the big Red Dog” from Scholastic and the works of Eric Carle, including “The
Very Hungry Caterpillar”, to expand into book stores and other chains that carry
those licensed products. We are also expanding into the International
marketplace by hiring distributors in Asia, Western Europe, South America,
Canada and Australia.
  We are
acquiring product lines and companies that create synergies in operations,
production and distribution without cannibalizing sales. We have strengthened
Small World Toys, our platform company, to provide the infrastructure for the
expansion which has allowed us to integrate our latest acquisition, Neurosmith
into the company within two quarters. Within the $25 Billion toy industry, we
believe there are numerous small to mid-market companies in the $10 Million to
$75 million range that are profitable and provide an attractive acquisition
opportunity. We believe we will be able to acquire companies and product lines
at 5-7 times cash flow. The public P/E’s ratios for the Toy Industry are
currently at approximately 15-20X.
  The
anticipated benefits of the proposed strategy include:
  ·
    Enhanced
      channels of distribution for products through the combination of the
      potential target’s alternative distribution channels with the Company’s
      specialty retail distribution channels.
   6
   ·
    Diversified
      product lines within high growth categories to create additional in-store
      placement in multiple sections of the store, which we believe will
      increase per store orders and a greater percentage of shelf
      space.
  ·
    Greater
      number of unit sales for a product which will decrease manufacturing
      costs, therefore increasing margins and allowing us to benefit from price
      breaks that vendors offer for larger quantity
orders.
  ·
    Fuller
      utilization of operations as a percentage of sales which will increase
      operating margins as we combine operating
departments.
  ·
    Cost
      improvements in production and distribution coupled with expanded and
      improved product lines leading to increased profitability and growth.
  ·
    Expansion
      into international markets through multi-country
    distributors.
  We regard
economies of scale, product line extensions, new customer relationships, and
opportunities for increased cost reductions as particularly important in our
analysis of a potential acquisition’s strategic value. However, acquisitions
involve many uncertainties, and our attempts to identify appropriate
acquisitions, and finance and complete any particular acquisition, may not be
successful. In addition, growth by acquisition involves risks that could
adversely affect the Company’s results of operations, including difficulties in
integrating the operations, the potential loss of key employees of acquired
companies and potential increase of indebtedness to finance the
acquisition.
  **Industry
Overview**
  According
to the Toy Industry Association, Inc., TIA, one of the leading toy industry
trade groups, the United States is the world’s largest toy market, followed by
Japan and Western Europe. According to Packaged Facts, the U.S. toy market had
estimated annual revenues of $25 billion in 2003 with historic growth rates in
the toy industry (which includes educational and early learning products)
averaging 5% to 7% annually. However, recent declines in overall toy industry
revenues due in part to a lackluster economy, the bankruptcy of key customers
such as K-Mart, eToys, and FAO Schwarz and lost sales due to the closure of the
Port of Long Beach in 2002, have led to lower growth rates over the last three
years. Despite this recent decline and the relative maturity of the toy
industry, NPD Group reported that same store sales grew 5% at the end of
December 2003. In addition, both Packaged Facts and the Toy Industry Association
have estimated that growth rates will return to 5% to 7% annually from
2004-2007.
  Management
believes that the toy industry growth will be primarily driven by the following
trends:
   7
   ·
    According
      to Packaged Facts, the U.S. population of children under the age of 12 is
      at an all-time high at close to 38% of the population, or 64 million
      children.
  ·
    According
      to Packaged Facts, the U.S. birthrate is higher than it has been in 30
      years due to an increase in fertility and the trend of mothers giving
      birth later in life.
  ·
    The
      last census revealed that there are over 70 million people in the United
      States over the age of 55. That number is expected to grow 60% by 2007,
      which is six times faster than the rest of the population. A vast majority
      of persons in this demographic are grandparents and according to Packaged
      Facts, grandparents currently spend more than $2 billion annually in toys
      for their grandchildren.
  **·**
    Packaged
      Facts projects a 35% increase in the U.S. Hispanic population from
      2000-2010 versus a 1% growth rate for the non-Hispanic population.
      According to the NDP Group, the Hispanic population is 27% more
      predisposed to buy infant and preschool toys than the average
      population.
  **·**
    According
      to the International Council of Toy Industries, the International toy
      markets currently account for $6 billion in sales for U.S. toy companies.
      The NDP Group predicts that international sales for U.S. toy companies
      will increase to 30% of sales in 2004 and are expected to increase to 51%
      of sales in 2005.
  **Product
Overview**
  We
develop and manufacture, market and distribute high-quality toys that we
distribute through Specialty, Chain, Education, Catalog, Online and
International Channels. Our Small World Toy’s proprietary product lines features
toys for children ages zero to ten with a focus of promoting, early learning,
education, discovery and imagination. Our product lines include over 800
products. Most of our products have long life cycles (5-7 years on average) and
our brands are commonly referred to in the toy industry as “evergreen.” We
believe that evergreen brands are less subject to market fads and trends.
   8


**SMALL
WORLD TOYS BRANDS**
  Small
World Toys’ proprietary brands feature toys for children ages 0 - 10 years with
a focus on early learning, discovery, imagination and active play. The company
positioning reflects our “whole child” philosophy by providing high-quality
products that nurture the whole child - mind, body and spirit - through vibrant,
engaging toys that promote early learning, reward social interaction and
encourage physical fitness.
  **LEARNING
BRANDS:**
  
  **IQ
Baby®** - Infant
toys that invite exploration, encourage discovery and reward development in the
critical years from birth through toddlerhood.
  ****
 ****
 **IQ
Preschool®** -
Preschool toys that inspire discovery and imagination, fostering valuable
developmental skills kids will use for a lifetime.
  **Neurosmith®** -
Innovative, open-ended, electronic learning toys that combine the latest child
development research with fun, interactive play patterns. These musical toys
utilize the highest available sound quality to stimulate key areas of the brain
and actually help teach your child how to learn.
  **Puzzibilities®** -
Innovative, high quality, wooden puzzles designed in four progressive levels to
stimulate “piece by piece” fun learning across a range of ages and developmental
skills.
   9
  **IMAGINATIVE
PLAY BRANDS** :
 **Ryan's
Room®** -
Classic wooden play sets and accessories that allow children to imagine, create
and bring to life their very own worlds.
  **All
About Baby®** - Sweet,
huggable dolls to love and nurture complete with popular and imaginative
accessories.
  **Small World LivingTM** - The
ultimate in realistic role play toys and environments to encourage your child to
play out his dreams of “what I want to be when I grow up!”
 
 ****
 **ACTIVE
PLAY BRANDS:**
 **Gertie Ball®** - “The
world’s most catchable ball!” - an award-winning line of balls for all ages,
designed with a wide variety of unique textures, designs and
features.
 
  10
  **Active
Edge®** - Sports
and activity toys designed to give a child a sense of mastery and empowerment
and build a foundation for an active, fit lifestyle. Encourages your child to
get out and play.
  **Distribution**
  Small
World Toys has been distributing its products to a broad spectrum of retail and
other accounts for almost 40 years. Some of these accounts include toy
specialty, chain, gift, education, catalog and e-commerce. The company has over
80 sales representatives, within 11 representative firms that sell to these
accounts by geographic locations. The representative firms are managed in house.
In addition, a 5 member sales team handles in house accounts as well as develops
new channels of distribution. The company has utilized its distribution strength
to represent other, high quality companies that did not have distribution into
the specialty market in the United States such as Tolo®, Little Tikes®, Baby
Culture and BAO.
 
  SW
Express is our arm that distributes high-quality products produced by partner
companies, including Tolo®, Little Tikes®, BAO and Baby Culture. Distribution
allows us to increase category presence, expand market share, limit
manufacturing (tooling) risk and sell into new channels. At this point, most of
our distributed products are plastic toys produced in China.
   Bright,
whimsical infant and preschool toys made of quality plastic and plush, which are
produced in China by British founders with a strong European market presence.
Small World has distributed Tolo products in the USA for over ten
years.
   11
   Known for
quality and durability, Little Tikes produces a line of wood and plastic
preschool toys that Small World has distributed since 2003.
  **BAO** and **Baby
Culture** : High
quality plastic infant and preschool toys with an emphasis on value - more
lights, sounds and activities for the price point than your typical
toy.
  Outside
of the United States, our primary markets are Canada, Western Europe, and Asia.
Sales of our products abroad accounted for approximately $670,000 or 2.3% and
$485,000 or 1.9% of our net sales in 2004 and 2003, respectively. We believe
that foreign markets present an attractive opportunity, and we plan to intensify
our marketing efforts and further expand our distribution channels
abroad.
  **Marketing**
  Generally,
our products and brands are promoted through local market promotions,
merchandising displays and advertising print. Our product launches include
in-store merchandising displays, trade advertising and newspaper ads that are
co-oped with our retail customers. We participate in the New York Toy Fairs in
October and February. We also attend gift and juvenile shows including JPMA
(Juvenile Products Manufacturers Assoc.), NSSEA (National School Supply &
Education Assoc., and ABC (All Baby’s and Children Expo). Going forward, we will
maintain our trade and local marketing efforts while expanding programs to reach
the consumer on a more national level, including an increased focus on public
relations outreach, strengthening partnerships with key influencers in the
fields of early learning and child development, participation in relevant event
marketing and sponsorships, utilization of direct-to-consumer media and the
establishment of consumer loyalty programs.
  **Manufacturing**
  We
outsource the manufacturing of our proprietary products to vendors in Asia. We
believe our outsourcing strategy enhances the scalability of our manufacturing
efforts. We use numerous manufacturers to source components and build finished
products to our specifications. During the year ended December 31, 2004, the top
ten vendors accounted for 58% of the total product purchases. The top two of
these vendors accounted for 10% and 8% of total purchases, respectively.
Manufacturers are selected based on their technical and production capabilities
and are matched to particular products to achieve cost and quality efficiencies.
We have long standing relationships with our manufacturers and have been
manufacturing in Asia for more than 15 years. The majority of our products are
shipped directly to our warehouse in Carson, California and are later shipped to
meet the demands of our retailers and distributors.
   12
  **Customers
and Customer Service**
  Our two
largest customers, TJX Companies and Ross Stores, Inc. collectively represented 21.7 %
and 20.2% o f 2004
and 2003 sales, respectively. No other customer represents greater than 5% of
our sales in 2004 or 2003. Although we do not have long term contracts with any
of our customers, we believe that our ability to establish and maintain
long-term relationships with our customers depends, in part, on the strength of
our customer support and service operations. We encourage and utilize frequent
communication with and feedback from our customers and retailers to continually
improve our products and service. We offer toll-free telephone support for
customers who prefer to talk directly with a customer service representative. We
also respond to e-mail inquiries received through our website.
  **Product
Development**
  While
many of our products are evergreen brands or long life cycle products, we are
continually developing new products and the refreshing of existing products. We
expensed approximately $1,173,000 and $1,032,000 in 2004 and 2003, respectively
on activities relating to the development and design of new products. Our
product offerings are a combination of proprietary products that we design,
sourced product that we find in other countries, purchase and package in our
packaging for exclusive distribution in the United Sates specialty market and a
small amount of open market product that we put through our distribution chain
for retailers.
  We have
the capability to create and develop products from inception to finished goods.
Additionally, we use third-parties to provide a portion of the sculpting, sample
making, illustration and package design required for our products. Typically,
the development process takes from nine to eighteen months from concept to
production and shipment to our customers.
  We have
launched an electronic learning line through our recent acquisition of
Neurosmith.
  We employ
a staff of designers. We occasionally acquire other product concepts from
unaffiliated third parties. If we accept and develop a third party’s concept for
new toys, we generally pay a royalty on the toys developed from this concept
that are sold, and may, on an individual basis, guarantee a minimum royalty.
Royalties payable to inventors and developers generally range from 5% to 10% of
the wholesale sales prices for each unit of a product sold by us. We believe
that utilizing experienced third-party inventors gives us access to a wide range
of development talent.
  We also
have license agreements with third parties that permit us to utilize the
trademark, characters or inventions of the licensor in products that we
sell.
   13
  ****
 **Competition**
  Competition
in the toy industry is intense. We compete with several medium and small toy
companies in our product categories that distribute products into the specialty
toy market such as Alex, International Playthings Inc., Melissa and Doug,
Playmobil U.S.A., RC2 Corporation, and Toysmith Group. We also compete with
several large toy companies such as Mattel, Hasbro and Jakks Pacific. These
competitors have greater financial resources, larger sales and marketing and
product development departments, stronger name recognition, longer operating
histories and benefit from greater economies of scale. These factors, among
others, may enable our competitors to market their products at lower prices or
on terms more advantageous to customers than those we could offer for our
competitive products. These competitors may have a greater ability to procure
product licenses, as well as to market and distribute products and obtain shelf
space. Competition may result in price reductions, reduced gross margins and
loss of market share, any of which could have a material adverse effect on our
business, financial condition and results of operations. We compete primarily in
the infant and pre-school category and the educational toy category of the U.S.
toy industry and, to some degree, in the International toy industry. Our
platform company, Small World Toys, has been distributing our products into the
specialty retail, catalog, education and chains for over 40 years and we believe
that our relationships and quality of our product brand awareness have been
critical to our penetration.
  **Distribution
Arrangements**
  We
utilize our distribution of our products into over 3,000 outlets by marketing
and distributing certain products for TOLO Toys Ltd. Tolo® toys are specifically
designed to stimulate a child’s interest and curiosity and encouraging early
developmental skills. Small World Toys has the exclusive U.S. distribution to
the specialty toy market for these infant and toddler toys. We also provide
limited marketing support for TOLO Toys. Small World Toys also has the exclusive
U.S. distribution to the specialty toy market for Little Tikes®, BAO and Baby
Culture
  **Seasonality**
  Our
business is subject to seasonal fluctuations. In 2004 and 2003, approximately
59% and 60%, respectively of net sales were generated in the third and fourth
calendar quarters. We have traditionally introduced new product catalogs in
January and in July 2004. Generally, the first quarter is the period of lowest
shipments and sales and therefore the least profitable due to fixed costs.
Seasonality factors may cause our operating results to fluctuate from quarter to
quarter. However, we employ customer programs for retailers or “early buy”
programs to lesson the seasonality. These programs provide an opportunity for
our customers to purchase our products in the first and second quarters and
stock through the year by offering dating programs, where they pay in their
highest sales quarters, typically in the third and fourth quarters.
  **Employees**
 ****
  14
 
 
 At
December 31, 2004, we had a total of 61 employees, with
18 employees at our warehouse in Carson, California, 21 employees in
sales and marketing,  8 employees in research and development and 14
employees in general and administration. None of our employees are covered by a
collective bargaining agreement. We consider our relations with our employees to
be good.
  **Risk
Factors**
  Set forth
below and elsewhere in this annual report on Form 10-KSB, and in other documents
we file with the SEC, are risks and uncertainties that could cause actual
results to differ materially from the results contemplated by the
forward-looking statements contained in this annual report. Because of the
following factors, as well as other variables affecting our operating results,
past financial performance should not be considered a reliable indicator of
future performance, and investors should not use historical trends to anticipate
results or trends in future periods.
 
 ***We
are subject to changing consumer preferences.***
 
 Our
business and operating results depend largely upon the appeal of our products.
Our continued success in the toy industry will depend on our ability to
redesign, restyle and extend our existing core products and product lines as
consumer preferences evolve, and to develop, introduce and gain customer
acceptance of new products
and product lines. Several trends in recent years have presented challenges for
the toy industry, including:
  ·
    a
      slow economic recovery;
  ·
    the
      phenomenon of children outgrowing toys at younger ages, particularly in
      favor of interactive and high technology products;
  ·
    increasing
      use of technology;
  ·
    our
      customers going out of business;
  ·
    bad
      debts (uncollectible receivables);
  ·
    rising
      costs of raw materials;
  ·
    competition;
      and
  ·
    higher
      consumer expectations for product quality, functionality and
      value.
 
 We cannot
assure you that:
  ·
    our
      current products will continue to be popular with
    consumers;
   15
   ·
    the
      product lines or products that we introduce will achieve any significant
      degree of market acceptance;
  ·
    we
      will be able to expand into new channels;
or
  ·
    the
      life cycles of our products will be sufficient to permit us to recover
      design, manufacturing, marketing and other costs associated with those
      products.
  ***The
toy industry is highly competitive.***
 
 The toy
industry is highly competitive. Certain of our competitors have financial and
strategic advantages over us, including:
  ·
    greater
      financial resources;
  ·
    larger
      sales, marketing and product development
departments;
  ·
    stronger
      name recognition;
  ·
    longer
      operating histories; and
  ·
    greater
      economies of scale.
 
 In
addition, the toy industry has no significant barriers to entry. Competition is
based primarily on the ability to design and develop new toys, to sell the
products into retail and sell through to consumers through successful marketing.
Many of our competitors offer similar products or alternatives to our products.
We cannot assure you that we will be able to obtain adequate shelf space in
retail stores to support our existing products or to expand our products and
product lines or that we will be able to continue to compete effectively against
current and future competitors.
  ***We
need to be able to acquire and integrate companies and new product lines
successfully.***
  Our
growth strategy depends in part upon our ability to acquire companies and new
product lines. Future acquisitions will succeed only if we can effectively
assess characteristics of potential target companies and product lines, such
as:
  ·
    salability
      of products;
  ·
    suitability
      of distribution channels;
  ·
    management
      ability;
  ·
    financial
      condition and results of operations; and
   16
   ·
    the
      degree to which acquired operations can be integrated with our
      operations.
 
 We cannot
assure you that we can identify strategic acquisition candidates or negotiate
acceptable acquisition terms, and our failure to do so may adversely affect our
results of operations and our ability to sustain
growth. Our acquisition strategy involves a number of risks, each of which could
adversely affect our operating results, including:
  ·
    difficulties
      in integrating acquired businesses or product lines, assimilating new
      facilities and personnel and harmonizing diverse business strategies and
      methods of operation;
  ·
    diversion
      of management attention from operation of our existing
      business;
  ·
    loss
      of key personnel from acquired companies;
and
  ·
    failure
      of an acquired business to achieve targeted financial
    results.
 
 ***A
substantial reduction in or termination of orders from any of our largest
customers could adversely affect our business, financial condition and results
of operations.***
  Our two
largest customers accounted for 21.7 % and 20.2% of our net sales in 2004 and
2003, respectively. Except for outstanding purchase orders for specific
products, we do not have written contracts with or commitments from any of our
customers. A substantial reduction in or termination of orders from any of our
largest customers could adversely affect our business, financial condition and
results of operations. In addition, pressure by large customers seeking price
reductions, financial incentives, changes in other terms of sale or for us to
bear the risks and the cost of carrying inventory also could adversely affect
our business, financial condition and results of operations. If one or more of
our major customers were to experience difficulties in fulfilling their
obligations to us, cease doing business with us, significantly reduce the amount
of their purchases from us, it could have a material adverse effect on our
business, financial condition and results of operations. In addition, the
bankruptcy or other lack of success of one or more of our significant retailers
could negatively impact our revenues and bad debt expense.
  ***We
depend on third-party manufacturers who develop, provide and use the tools and
dies that we own to manufacture our products and we have limited control over
the manufacturing processes.***
  Any
difficulties encountered by the third-party manufacturers that result in product
defects, production delays, cost overruns or the inability to fulfill orders on
a timely basis could adversely affect our business, financial condition and
results of operations.
   17
  ******
 ***We
do not have long-term contracts with our third-party
manufacturers.***
  Although
we believe we could secure other third-party manufacturers to produce our
products, our operations would be adversely affected if we lost our relationship
with any of our current suppliers or if our current suppliers’ operations or sea
or air transportation with our overseas manufacturers were disrupted or
terminated even for a relatively short period of time. During the year ended
December 31, 2004, the top ten vendors accounted for 58% of the total product
purchases. The top two of these vendors accounted for 10% and 8% of total
purchases, respectively. Our tools and dies are located at the facilities of our
third-party manufacturers. Although we do not purchase the raw materials used to
manufacture our products, we are potentially subject to variations in the prices
we pay our third-party manufacturers for products, depending on what they pay
for their raw materials.
 
 ***We
have manufacturing operations outside of the United States, subjecting us to
risks associated with international operations.***
 
 We
utilize third-party manufacturers located principally in The People’s Republic
of China, or the PRC. Our PRC sales and manufacturing operations are subject to
the risks normally associated with international operations,
including:
  ·
    currency
      conversion risks and currency fluctuations;
  ·
    limitations,
      including taxes, on the repatriation of
earnings;
  ·
    political
      instability, civil unrest and economic
instability;
  ·
    complications
      in complying with laws in varying jurisdictions and changes in
      governmental policies;
  ·
    greater
      difficulty and expenses associated with recovering from natural
      disasters;
  ·
    rising
      cost of raw material;
  ·
    rising
      cost of gas;
  ·
    testing;
  ·
    black
      outs due to energy shortages;
  ·
    transportation
      delays, interruptions and strikes; and
  ·
    the
      potential imposition of tariffs.
 
 Our
reliance on external sources of manufacturing can be shifted, over a period of
time, to alternative sources of supply, should such changes be necessary.
However, if we were prevented from obtaining our products due to medical,
political, labor or other factors beyond our control, our operations would be
disrupted while alternative sources of products were secured. Also, the
imposition of trade sanctions by the United States against a class of products
imported by us from, or the loss of “normal trade relations” status by China,
could significantly increase our cost of products imported from that nation.
   18
 ****
 ***Our
business is subject to government regulation and to potential product liability
claims.***
  Our
products sold in the United States are subject to various laws, including the
Federal Hazardous Substances Act, the Consumer Product Safety Act, the Federal
Hazardous Substances Act, the Flammable Fabrics Act and the rules and
regulations promulgated under these acts. These statutes are administered by the
Consumer Product Safety Commission (“CPSC”), which has the authority to remove
from the market products that are found to be defective and present a
substantial hazard or risk of serious injury or death. The CPSC can require a
manufacturer to recall, repair or replace these products under certain
circumstances. We cannot assure you that defects in our products will not be
alleged or found. Any such allegations or findings could result in:
  ·
    product
      liability claims;
  ·
    loss
      of sales;
  ·
    diversion
      of resources;
  ·
    damage
      to our reputation;
  ·
    increased
      warranty costs; and
  ·
    removal
      of our products from the market.
 
 Any of
these results may adversely affect our business, financial condition and results
of operations. There can be no assurance that our product liability insurance
will be sufficient to avoid or limit our loss in the event of an adverse outcome
of any product liability claim.
  **Risks
Associated with an Investment in our Common Stock**
  ***The
so-called “penny stock rule” could make it cumbersome for brokers and dealers to
trade in our common stock, making the market for our common stock less liquid
which could cause the price of our stock to decline.***
  Trading
of our common stock on the OTCBB may be subject to certain provisions of the
Securities Exchange Act of 1934, as amended commonly referred to as the “penny
stock” rule. A penny stock is generally defined to be any equity security that
has a market price less than $5.00 per share, subject to certain exceptions. If
our stock is deemed to be a penny stock, trading in our stock will be subject to
additional sales practice requirements on broker-dealers. These may require a
broker-dealer to:
   19
  ·
    make
      a special suitability determination for purchasers of our shares;
 
 ·
    receive
      the purchaser’s written consent to the transaction prior to the purchase;
      and
 
 ·
    deliver
      to a prospective purchaser of our stock, prior to the first transaction, a
      risk disclosure document relating to the penny stock market.
 
 Consequently,
penny stock rules may restrict the ability of broker-dealers to trade and/or
maintain a market in our common stock.
 
 **ITEM
2. DESCRIPTION OF PROPERTIES**
  Our
corporate headquarters are located at 5711 Buckingham Parkway, Culver City,
California 90230, where we lease approximately 28,000 square feet and sublease
approximately 17,000. This lease expires on February 28, 2006.  We
also lease approximately 62,000 square feet of warehouse space in Carson,
California. This lease expires on December 31, 2005. We lease approximately
3,000 square feet of showroom space in New York City, however, we do not intend
to renew this lease or lease new showroom space in New York City when this lease
expires on April 30, 2005. We believe these facilities and additional or
alternative space available to us will be adequate to meet our needs in the near
term.
  **ITEM
3. LEGAL PROCEEDINGS**
  The
Company is periodically involved in legal actions and claims that arise as a
result of events that occur in the normal course of operations. The Company is
not currently aware of any formal legal proceedings or claims that the Company
believes will have, individually or in the aggregate, a material adverse effect
on the Company's financial position or results of operations.
  **ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**
  No
matters were submitted to a vote of security holders during the fourth quarter
of the fiscal year covered by this report.
  **PART
II**
  **ITEM
5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED**
 **STOCKHOLDER
MATTERS**
   20
 
 Our
common stock is quoted on the OTC Bulletin Board of the National Association of
Securities Dealers, Inc. (the “NASD”) under the symbol “SWKD”. Our stock was not
actively traded until May 20, 2004, and the following table sets forth, for the
periods indicated, the high and low bid prices for the period from May 20, 2004
through December 31, 2004 as reported by Yahoo Finance. These quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission, and may
not represent actual transactions.
 
 **Fiscal
      2004**
    
    
    **Low**
    
    
    **High**May
      20 - June 30, 2004
    
    $
    .25
    
    $
    .75Quarter
      ended September 30, 2004
    
    
    .50
    
    
    .75Quarter
      ended December 31, 2004
    
    
    .43
    
    
    .62
 Holders
  As of
March 21, 2005, we currently have outstanding 53,120,750 shares of our common
stock outstanding. As of March 8, 2005, our shares of common stock are held by
approximately 110 stockholders of record. This does not include an indeterminate
number of beneficial
owners of securities whose shares are held in the names of various dealers and
clearing agencies.
  Dividends
  We have
never paid cash dividends. Our future dividend policy will be determined by our
Board of Directors and will depend upon a number of factors, including our
financial condition and performance, our cash needs and expansion plans, income
tax consequences, and the restrictions that applicable laws and our credit
arrangements then impose.
 Securities
Authorized for Issuance under Equity Compensation Plans
 
 The
following table summarizes the securities authorized for issuance as of December
31, 2004 under our 2004 Stock Compensation Plan, the number of shares of our
common stock issuable upon the exercise of outstanding options, the weighted
average exercise price of such options and the number of additional shares of
our common stock still authorized for issuance under such plan. The 2004 Stock
Compensation Plan has not been approved by our security holders, a description
of which is set forth in Note 2 of the Notes to Consolidated Financial
Statements.
 
 **Plan
      category**
    
    **Number
      of securities to****be issued upon exercise****of outstanding options,****warrants and
      rights**
    
    **Weighted-average**
      **exercise
      price of**
      **outstanding
      options,**
      **warrants
      and rights**
    
    **Number
      of securities****remaining available or****future issuance under****equity
      compensation****plans**Equity compensation plans approved by security holders
    
    
    —
    
    $
    —
    
    
    —Equity compensation plans not approved by security
    holders
    
    
    6,570,000
    
    $
    .38
    
    
    1,230,000Total
    
    
    6,570,000
    
    $
    .38
    
    
    1,230,000
 **ITEM 6.**
    **MANAGEMENT’S
      DISCUSSION AND ANALYSIS OR PLAN OF OPERATION**
 
 The
following table presents the pro forma results of operations of Small
World Toys (the accounting predecessor company) for the period from January 1,
2004 to May 20, 2004 and the consolidated results of Small World Kids, Inc. (the
accounting successor company) from May 21, 2004 (inception) to December 31, 2004
and the results of operations of Small World Toys (the accounting predecessor
company) for the years ended December 31, 2003 and 2002 (short year) and fiscal
years ended January 31, 2001 and 2000. The discussion following the table is
based on the pro forma results of operations of Small World Toys (the accounting
predecessor company) for the period from January 1, 2004 to May 20, 2004 and the
consolidated results of Small World Kids, Inc. (the accounting successor
company) from May 21, 2004 (inception) to December 31, 2004 and the results of
operations of Small World Toys (the accounting predecessor company) for the year
ended December 31, 2003.
   21
  **January
      1, 2004 - May 20, 2004(Predecessor)**
    
    
    **May
      21, 2004 - December 31, 2004(Successor)**
    
    
    **Year
      endedDecember 31,2004(Pro forma)**
    
    
    **Year
      endedDecember 31,2003(Predecessor)**
    
    
    **Elevenmonths
      (shortyear) endedDecember
      31,2002(Predecessor)**
    
    
    **Year
      endedJanuary
    31,2002(Predecessor)**
    
    
    **Year
      endedJanuary
    31,2001(Predecessor)**Statement
      of Earnings Data:Net
      revenues
    
    $
    10,336,500
    
    $
    19,156,388
    
    $
    29,493,888
    
    $
    25,970,397
    
    $
    24,344,159
    
    $
    25,171,634
    
    $
    27,832,306Net
      income (loss)
    
    $
    (134,861
    )
    $
    (1,082,986
    )
    $
    (1,209,818
    )
    $
    740,311
    
    $
    1,051,535
    
    $
    726,568
    
    $
    624,936Per
      Common Share Data:Earnings
      (loss)Basic
      & Diluted
    
    
    
    
    
    
    
    $
    (.04
    )
    $
    74.03
    
    $
    105.15
    
    $
    72.66
    
    $
    62.49Balance
      Sheet Data:Total
      assets
    
    
    
    
    
    
    
    $
    19,477,582
    
    $
    10,798,314
    
    $
    9,482,260
    
    $
    9,174,482
    
    $
    10,802,606Long-term
      debt
    
    
    
    
    
    
    
    $
    13,666,762
    
    $
    171,329
    
    $
    1,327,255
    
    $
    605,278
    
    $
    1,078,366Weighted
      Average Number of Common Shares:Basic
    
    
    
    
    
    
    
    
    32,545,531
    
    
    10,000
    
    
    10,000
    
    
    10,000
    
    
    10,000Diluted
    
    
    
    
    
    
    
    
    32,545,531
    
    
    10,000
    
    
    10,000
    
    
    10,000
    
    
    10,000
 
 Overview
  Small
World Kids was organized on July 28, 2001 in the state of Utah under the name
Savon Team Sports, Inc. (“Savon”) to sell sporting goods over the Internet. The
business operations generated limited revenues and operated at a loss since
inception. On August 1, 2004, as a result of the May 20, 2004 transactions
discussed below, we changed our name from Savon Team Sports, Inc. to Small World
Kids, Inc. We also changed our domicile from Utah to Nevada.
  May 20,
2004 Transactions
   22
 
 
 Pursuant
to an Exchange Agreement dated as of May 20, 2004, by and among the Company and
a group of investors (“the Investors’), the Company issued 45,313,750 shares of
its common stock, par value $0.001 per share, in exchange for all of the equity
interests of Fine Ventures, LLC (“FVL”). Prior to May 20, 2004, FVL had no
operating activities. As a condition to the closing of this transaction, Michael
Rubin, the then-majority shareholder of the Company, sold 5,530,000 shares of
his 6,180,000 shares of Small World Kids common stock for $10,000 to the
Investors.
  Simultaneously,
pursuant to the terms of a Stock Purchase Agreement dated as of May 20, 2004, by
and among Small World Kids, Debra Fine, Small World Toys, Eddy Goldwasser and
Gail S. Goldwasser, Trustee of the Gail S. Goldwasser and Mark Chatinsky Family
Trust (“Gail Goldwasser”; collectively with Eddy Goldwasser, (“Goldwassers”),
Small World Kids acquired from the Goldwassers all of the issued and outstanding
equity interests of Small World Toys (the “SWT Shares”). As consideration for
the SWT Shares, Small World Kids paid an aggregate sum of $7,200,000, delivered
as follows; (i) $5,000,000 in cash; and (ii) $2,200,000 in the form of a
$500,000 six month promissory note, a $1,000,000 seven month promissory note,
and a $700,000 two year promissory note  payable
in quarterly installments commencing April 2005. The $5,000,000 in cash was from
the proceeds of a bridge loan from SWT, LLC, a Delaware limited liability
company whose members are some of the Investors. Pursuant to the terms of the
bridge loan agreement, Small World Kids executed a five-year note with interest
payable at 10% per annum (the “Bridge Note”).
  As a
result of the May 20, 2004 transactions, we have had a change of our management,
our controlling shareholders, our financial position and our business plan.
Small World Kids (formerly SavOn Team Sports, Inc.) (“Small World” or “the
Company”) became a holding company and has no significant business operations or
assets other than its interest in Small World Toys, the accounting predecessor
company. Since Small World Kids, the accounting successor company, had no
significant business operations or assets prior to the May 20, 2004 transactions
described above, presenting comparative periods would not be meaningful. As
such, the results of operations presented below for the predecessor are those of
Small World Toys.
  Small
World Toys
  Through
Small World Toys, we develop, manufacture, market and distribute toys that
promote healthy minds and bodies in infant, pre-school, early learning,
imaginative play and active play categories. We also distribute our products in
more than 2,600 outlets in the specialty, mass, chain, education, catalog,
online and international channels through sales representatives firms as well as
in-house sales personnel. Our proprietary brands include IQ Baby®, IQ
Preschool®, Ryan’s Room®, Gertie Ball®, Small World LivingTM, Puzzibilities®, All
About Baby® and Neurosmith®. We also exclusively distribute product for several
well-known brands such as TOLO®, BAO, Little Tikes® and Baby Culture to the
specialty toy market in the United States through our SW ExpressTM distribution
arm. Small World Toys has also acquired licenses for its products including
“Clifford the Big Red Dog” from Scholastic and the works of Eric Carle,
including “The Very Hungry Caterpillar”. We have been successful in limiting the
impact of the toy industry seasonality and fads by focusing on evergreen brands
with enduring themes and play patterns resulting in long life cycle products of
4-7 years. The Company has been distributing its products into many of these
channels for 40 years.
   23
 
 We
outsource the manufacturing of our proprietary products to vendors in Asia. We
believe our outsourcing strategy enhances the scalability of our manufacturing
efforts. We use numerous manufacturers to source components and build finished
products to our specifications. Manufacturers are selected based on their
technical and production capabilities and are matched to particular products to
achieve cost and quality efficiencies. We have long-standing relationships with
many of our manufacturers. The majority of our products are shipped directly to
our warehouse in Carson, California and are later shipped to meet the demands of
our retailers and distributors.
  Our
products are sold domestically and internationally to a broad spectrum of
customers including traditional retailers, large and small, specialty toy
stores, gift stores, wholesalers, distributors, national chain stores, mail
order houses, catalog stores, department stores, as well as internet-based
“e-tailers.” Our own sales force manages a wide group of sales representatives
across the country and also sells directly to key accounts.
  While
many of our products are evergreen brands or long life cycle products, we are
continually developing new products and redesigning existing products. Our
product offerings are a combination of proprietary products that we design,
sourced product that we find in other countries, purchase and package in our
packaging for distribution and open market products, or products that we do not
have exclusivity, which we put through our distribution chain for
retailers.
  Although
we do have the capability to create and develop products from inception to
production, we also use third-parties to provide a portion of the sculpting,
sample making, illustration and package design required for our products.
Typically, the development process takes from nine to eighteen months from
concept to production and shipment to our customers.
  We employ
a staff of designers. We occasionally acquire other product concepts from
unaffiliated third parties. If we accept and develop a third party’s concept for
new toys, we generally pay a royalty on the toys developed from this concept
that are sold. Royalties payable to inventors and developers generally range
from 5% to 10% of the wholesale sales prices for each unit of a product sold by
us. We believe that utilizing experienced third-party inventors gives us access
to a wide range of development talent.
  Our
business is subject to seasonal fluctuations. We traditionally introduce new
product catalogs twice a year, in January and in July. Generally, the second
quarter is the period of lowest shipments and sales and, therefore, the least
profitable due to fixed costs. Seasonality factors may cause our operating
results to fluctuate from quarter to quarter. We reduce our seasonality with
retailer “early buy” programs that encourage them to stock our products in the
first and second calendar quarters and pay during the third and fourth quarters.
This allows us to occupy greater shelf space throughout the year.
   24
  Our short
to mid-term strategic plan is to focus on both domestic and international market
expansion. To achieve this goal, we will focus on brand recognition, quality
control, decreasing costs, research and development and strategic
acquisitions.
  We will
use Small World Toys as the platform company that will provide well-known and
respected brands, long-standing retail relationships and strong operating
experience. Management expects that this base will provide the infrastructure
from which to acquire additional companies, products and brands. Acquisition
targets will be chosen to create synergies in operations, production and
distribution without cannibalizing sales.
  **2004
Compared to 2003**
  The
following table presents the pro forma statement of operations for the periods
of January 1, 2004 to May 20, 2004 (for the predecessor company) and May 21,
2004 to December 31, 2004 (for the successor company) as compared to the
comparable period of the year ended December 31, 2003 (for the predecessor). The
discussion following the table is based on the pro forma results.
 
 ****
    
    **January
      1, 2004 - May 20, 2004**
      **(Predecessor)**
    
    **May
      21, 2004 -December 30, 2004**
      **(Successor)**
    
    **Pro
      formafor the
      YearendedDecember 31,2004**
    
    **Year
      Ended December 31,2003**
      **(Predecessor)**NET
      SALES
    
    $
    10,336,500
    
    $
    19,156,388
    
    $
    29,492,888
    
    $
    25,970,397COST
      OF SALES
    
    
    5,780,780
    
    
    11,610,502
    
    
    17,391,282
    
    
    14,988,070GROSS
      PROFIT
    
    
    4,555,720
    
    
    7,545,886
    
    
    12,101,606
    
    
    10,982,327OPERATING
      EXPENSES:Selling,
      general and administrative
    
    
    4,341,565
    
    
    7,821,961
    
    
    12,163,526
    
    
    9,606,118Research
      and development
    
    
    373,034
    
    
    800,331
    
    
    1,173,365
    
    
    1,032,174Amortization
      of intangibles
    
    
    —
    
    
    190,372
    
    
    190,372
    
    
    —Total
      operating expenses
    
    
    4,714,599
    
    
    8,812,664
    
    
    13,527,263
    
    
    10,638,292Operating
      income (loss)
    
    
    (158,879
    )
    
    (1,266,778
    )
    
    (1,425,657
    )
    
    344,035OTHER
      INCOME
    
    
    85,493
    
    
    487,596
    
    
    573,089
    
    
    697,710INTEREST
      EXPENSE
    
    
    (61,475
    )
    
    (927,499
    )
    
    (988,974
    )
    
    (301,434
    )Income
      (loss) before benefit for income taxes
    
    
    (134,861
    )
    
    (1,706,681
    )
    
    (1,841,542
    )
    
    740,311BENEFIT
      (PROVISION) FOR INCOME TAXES
    
    
    —
    
    
    623,695
    
    
    623,695
    
    
    —NET
      INCOME (LOSS)
    
    $
    (134,861
    )
    $
    (1,082,986
    )
    $
    (1,217,847
    )
    $
    740,311
 
 
 25
 
 Net
sales
  Net sales
for the year ended December 31, 2004 increased $3,522,491 or 13.6 % to
$29,492,888 from $25,970,397 for the year ended December 31, 2003. Revenues were
positively impacted by increased shipments of products related to certain core
brands, such as Ryan’s Room®, Small World Kids (product line), Tolo®, IQ
Preschool®, Gertie Balls® and All About Baby® contributing a 34.4% increase over
their respective sales for the year ended December 31, 2004 versus the
comparable prior year period. Somewhat offsetting this increase were decreased
shipments of products relating to Café Play®, IQ Baby®, Puzzibilities® and
products relating to the following item classes; Arts and Crafts, Science and
Nature, and Vehicles.
  Gross
Profit
  Gross
profit for the year ended December 31, 2004 increased $1,119,279 or 10.2% to
$12,101,606 from $10,982,327 for the year ended December 31, 2003. Gross profit
margin of 41.0% declined for the year ended December 31, 2004 as compared to
42.3% for the year ended December 31, 2003. The decrease in gross margin
resulted from a greater mix of sales to national chains of 24.6% of net sales
for the year ended December 31, 2004 versus the 21.2% of net sales for the year
ended December 31, 2003. Sales to national chains have lower gross margins than
to the specialty stores, but do not incur commissions, freight out or
warehousing expenses.
  Operating
Expenses
  Operating
expenses increased $2,888,971 or 27.2% to $13,527,263 for the year ended
December 31, 2004 from $10,638,292 for the year ended December 31, 2003.
Operating expenses as a percent of net sales increased to 45.9% for the year
ended December 31, 2004 from 41.0% for the year ended December 31, 2003.
Operations and selling expenses increased by $1,131,542 in support of the
increased sales volume as net sales increased by 13.6% in 2004 over 2003 and as
we strengthened our branding and packaging efforts. Research and development
increased by $141,191 as we also strengthened our development efforts. General
and administrative expenses also increased $1,250,478 for the year ended
December 31, 2004 as compared to the prior year period principally as a result
of the cost of becoming a public company including increased legal, auditing,
insurance and investor relation expenses, along with the cost of the Section
404, Management Assessment of Internal Controls, of the Sarbanes-Oxley Act
implementation that we began in the fourth quarter, 2004. Amortization of
intangibles was $190,372 for the year ended December 31, 2004.
   26
 
 **
 *Other
Income and Expense*
  Other
income includes sublease rental income and commission income and decreased
$124,621 to $573,089 for the year ended December 31, 2004 from $697,710 for the
year ended December 31, 2003. The agreements with St.Cloud and Strome (Note 10
of the accompanying financial statements) obligate the Company to include the
warrant shares and note shares and the common shares issued with those
agreements with a registration statement filed in connection with the Put
Agreements (Note 14 of the accompanying financial statements). As of the date of
this filing, the Company has not filed a registration statement. Accordingly,
pursuant to EITF 00-19, “Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Company’s Own Stock”, the relative net value
of the warrants at the date of issuance of $851,399 was recorded as a warrant
liability on the balance sheet. Any change in fair value from the date of
issuance to the date the underlying shares are registered will be included in
other (expense) income. The change in fair value of the warrant liability from
the date of issuance to December 31, 2004 was $114,916. Lower commission income
accounted primarily for the balance of the change.
  Interest
expense increased $687,541 to $988,975 for the year ended December 31, 2004 from
the year ended December 31, 2003 due principally to the $5 million Bridge Note
that was entered into in May 2004 with SWT, LLC (Note 9 of the accompanying
financial statements) and the $3.2 million Notes payable, bridge that was
entered into in September 2004 with St. Cloud and Strome (Note 10 of the
accompanying financial statements). Cash interest paid for the year ended
December 31, 2004 increased by $209,503 over the prior fiscal year primarily due
to the $5 million Bridge Note.
  *Provision
for Income Tax*
  Income
tax benefit for the year ended December 31, 2004 was $623,695 due to the
decrease in the deferred tax liability. Small World Toys (predecessor) was a
Subchapter S corporation.
  Liquidity
and Capital Resources
  Small
World Kids, Inc., as the successor company, had no significant business
operations or assets prior to the acquisition on May 20, 2004 of Small World
Toys (predecessor). As such, the liquidity and capital resources described below
of Small World Toys are the same for Small World Kids, Inc.
  Cash has
historically been generated from operations. Operations and liquidity needs are
funded primarily through cash flows from operations, as well as utilizing, when
needed, borrowings under our secured credit facilities. Working capital needs
generally reach peak levels from August through November of each year. To gain
shelf space and address the seasonality of the toy industry, we offer early buy
programs that are volume related with extended payment terms. Our historical
revenue pattern is one in which the second half of the year is more significant
to our overall business than the first half and, with the second half of the
year, the fourth quarter is the most prominent. The trend of retailers over the
past few years has been to make a higher percentage of their purchases of toy
and game products within or close to the fourth quarter holiday consumer buying
season, which includes Christmas. We expect that this trend will continue. As
such, historically, the majority of cash collections for Small World Toys occur
late in the fourth quarter as the extended payment terms become due from our
early buy programs. As receivables are collected, the proceeds are used to repay
borrowings under our secured credit facilities.
   27
 
 On
December 15, 2004, Small World Kids, Inc.’s subsidiary, Small World Toys entered
into a Revolving Credit and Security Agreement (the “Credit Agreement”) with PNC
Bank, National Association (“PNC”) pursuant to which PNC will make revolving
advances and issue or cause the issuance of letters of credit (the “Credit
Facility”).  This replaced the $11,500,000 credit facility with
Manufacturers Bank. The term of the Credit Agreement is three years. The maximum
amount available under the Credit Facility is $16,500,000 including a seasonal
advance of $1,500,000. The Company’s ability to utilize the Credit Facility is
based on a percentage of eligible receivables and eligible inventory as provided
in the Credit Agreement.  Interest is payable monthly at either PNC’s prime
rate plus 0.50% or one, two or three month fully absorbed PNC Eurodollar Rate
plus 3.25% as requested in accordance with the terms of the Credit
Agreement.  The Credit Agreement contains a number of covenants including a
fixed charge financial covenant. As of December 31, 2004, the Company was in
compliance with all the covenants under its Credit Facility with PNC. Small
World Toys’ obligation under the Credit Facility is collateralized by a security
interest in the assets of Small World Toys, a guaranty by Small World Kids, Inc.
which is secured by certain shares of Small World Toys and a limited guaranty of
Debra Fine, the Chief Executive Officer and President of Small World Kids, Inc.
and Small World Toys.
  As of
December 31, 2004, we had $1,806,922 of availability on our credit facility that
includes $1,500,000 available under the seasonal advance.
  We
believe that the funds available to us, including cash expected to be generated
from operations and funds available through the committed lines of credit, are
adequate to meet our operating needs for 2005. However, unforeseen
circumstances, such as softness in the retail environment or unanticipated
changes in consumer preferences could result in a significant decline in
revenues and operating results, which could result in non-compliance with debt
covenants under the Credit Agreement. Non-compliance with the debt covenants
could result in our being unable to utilize borrowings under our revolving
credit facility, a circumstance that would not allow us to fund our operating
shortfalls, or accelerate the repayment of the credit facility.
 
 We
believe we will need additional financing to fund our acquisition strategy, the
amount of which will depend on the price and structure of potential
acquisitions.
   28
 
 On
December 31, 2004, cash and cash equivalents were approximately $1,785,084,
which compares to $24,202 at December 31, 2003.
  For the
year ended December 31, 2004, we used cash from operating activities of
$3,516,561 as compared to the year ended December 31, 2003, where cash from
operating activities generated $803,839. For the year ended December 31, 2004,
accounts receivable increased $2,282,400 driven partially by the increase of net
sales of $1,293,311 in the fourth quarter ended December 31, 2004 as compared to
the fourth quarter of 2003. This compares to the year ended December 31, 2003
where accounts receivables increased by $263,358. Somewhat offsetting this
increase in receivables was the decrease in inventory of $1,799,558 for the year
ended December 31, 2004 again partly driven by the increase in sales for the
fourth quarter ended December 31, 2004. This compares to year ended December 31,
2003 where inventories increased by $1,172,181. Accounts payable decreased by
$1,039,353 for the year ended December 31, 2004. This compares to year ended
December 31, 2003 where accounts payable increased by $1,151,505.
  Since we
outsource the manufacturing of our products to Asia, we have historically low
requirements for additions to property and equipment. For the year ended
December 31, 2004, we expended $215,377 in additions to property and equipment
as compared to the year ended December 31, 2003, where we expended $132,499 for
additions to property and equipment.
  For the
year ended December 31, 2004, we increased the borrowing under our revolver line
of credit by $5,329,870 to fund the cash used by operating activities, as
previously described, as compared to the year ended December 31, 2003, where we
increased the borrowing under our revolver line of credit by
$700,000.
  The
$5,000,000 paid in cash for the SWT Shares as part of the Stock Purchase
Agreement dated as of May 20, 2004 came from the proceeds of a bridge loan from
SWT, LLC, a Delaware limited liability company and related party. Pursuant to
the terms of the bridge loan agreement, Small World Kids executed a five-year
Bridge note with interest payable at 10% per annum.
  On
September 15, 2004, we entered into a Note Purchase Agreement with St. Cloud
Capital Partners L.P. ("St. Cloud"), pursuant to which we issued to St. Cloud a
10% Convertible Promissory Note in the aggregate amount of $2,000,000, due
September 15, 2005 as
discussed in Note 10 of the accompanying financial statements .  Interest
shall be due and payable in full on September 16, 2005. However, if the note has
not been paid in full by February 2005, commencing on the last day of the next
month and on the last day of each month thereafter, interest payments will be
due until the note is paid in full. In connection with the issuance of the Note
we issued St. Cloud 650,000 shares of common stock and warrants to purchase an
additional 350,000 shares of common stock.
   29
 
 On
September 16, 2004, we entered into a Note Purchase Agreement with Strome
Hedgecap Ltd. ("Strome"), pursuant to which we issued to Strome a 10%
Convertible Promissory Note in the aggregate amount of $1,200,000, due September
16, 2005 as
discussed in Note 10 of the accompanying financial statements .
Interest shall be due and payable in full on September 16, 2005. However, if the
note has not been paid in full by February 2005, commencing on the last day of
the next month and on the last day of each month thereafter, interest payments
will be due until the note is paid in full. In connection with the issuance of
the Note we issued Strome warrants to purchase an additional 1,344,000 shares of
common stock.
  Proceeds
from the notes with St. Cloud and Strome were partially used to purchase the
assets from Neurosmith for $875,562 and to retire $500,000 in notes from the
former shareholder of Small World Toys that was due in November
2004.
  Cash
increased for the year ended December 31, 2004 by $1,834,499 as compared to
decreasing for the year ended December 31, 2003 by $147,004 due to the factors
previously described.
  On July
28, 2004, we entered into a stock purchase agreement (“Put Agreements”) with
each of Wire Mill Partners III LLC, LLC and Pewter Hill Partners LLC
(“Purchasers”) that obligated each of them to purchase, upon our election, up to
8,000,000 shares of our common stock for an aggregate purchase price of $5
million (representing a total commitment from both purchasers of $10 million) as
discussed in Note 14 of the accompanying financial statements . The
obligation of the Purchaser is subject to the following limitations: (i) the
tranches must be sold in order; and (ii) the shares must be registered for
resale. If we sell all the shares to the Purchasers, the first tranche of
8,000,000 shares will be sold at a purchase price of $.50 per share and the
second tranche of 8,000,000 shares will be sold at $.75 per share. The Company
shall pay a five percent (5%) placement fee on the gross proceeds payable to
First Securities USA, Inc in connection with the Put Agreements.
  On
September 23, 2004, we revised the Put Agreements with the Purchasers that
obligated each of them to purchase, upon our election, up to 10,100,000 shares
of our common stock for an aggregate purchase price of $6.3 million
(representing a total commitment of $12.6 million) as
discussed in Note 14 of the accompanying financial statements . If we
sell all the shares to the Purchasers, the first tranche of 10,100,000 shares
will be sold at a purchase price of $.50 per share and the second tranche of
10,100,000 shares will be sold at $.75 per share. In order to exercise our
rights under the Put Agreements, the Company is required to file and have an
effective registration statement covering the shares issuable under the Put
Agreements. As of the date of this filing, the Company has not filed a
registration statement and may consider alternative financing alternatives. The
Company may not elect to exercise our rights under the Put
Agreements.
  Off
Balance Sheet Arrangements
   30
 
 
 
 As part
of the purchase for SWT Shares on May 20, 2004, we entered into a contingent
earnout with the former shareholder of Small World Toys (Note 4). We agreed to a
two year promissory note, payable in quarterly installments commencing April
2005 with a minimum payment of $700,000 and a maximum payment of $1,500,000, if
certain sales targets are achieved in 2005 and 2006.
  **Critical
Accounting Policies and Significant Estimates**
  Management’s
discussion and analysis of our financial condition and results of operations are
based upon the consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United
States.  The preparation of these financial statements requires management
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosures of contingent assets
and liabilities.  On an on-going basis, management evaluates estimates,
including those related to the valuation of inventory and the allowance for
uncollectible accounts receivable. We base our estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources.  Actual results may differ from these
estimates under different assumptions or conditions. A summary of the
significant accounting policies can be found in Note 2 of the Notes to
Consolidated Financial Statements . The
significant accounting policies which management believes are the most critical
to aid in fully understanding and evaluating our reported financial results
include revenue recognition, sales allowances, inventory, accounts receivable
and bad debt allowances and intangibles.
 
 Revenue
Recognition
 
 The
Company recognizes revenue in accordance with Staff Accounting Bulletin (SAB)
101 “Revenue Recognition in Financial Statements” and SAB 104 “Revenue
Recognition”.  Revenue from product sales is recognized upon passing of
title to the customer. We ship product to our customers usually based on FOB
shipping point. On drop shipments, or direct shipments from our vendors to the
customer, revenue is recognized FOB origin or destination, depending on sales
terms. On shipments through a consolidator, usually export shipments, revenue is
recognized FOB shipment or consolidator, depending on sales terms. Sales
allowances for customer promotions, discounts and returns are recorded as a
reduction of revenue when the related revenue is recognized. We routinely commit
to promotional sales allowance programs with customers. These allowances
primarily relate to fixed programs, which the customer earns based on purchases
of our products during the year. Discounts are recorded as a reduction of
related revenue at the time of sale. While many of the allowances are based on
fixed amounts, certain of the allowances, such as the returns allowance, are
based on market data, historical trends and information from customers and are
therefore subject to estimation.
 
  31
 
 
 Trade
Accounts Receivable and Allowance for Doubtful Accounts
  The
Company’s receivables are recorded when billed and represent claims against
third parties that will be settled in cash. The carrying value of the Company’s
receivables, net of the allowance for doubtful accounts, represents their
estimated net realizable value. The Company evaluates the collectibility of
accounts receivable on a customer-by-customer basis. Additionally, the Company
records a monthly reserve for bad debts against amounts due to reduce the net
recognized receivable to an amount the Company believes will be reasonably
collected. The reserve is a discretionary amount determined from the analysis of
the aging of the accounts receivables, historical experience and knowledge of
specific customers.
  Inventory
  Inventory
is valued at the lower of cost or market. Inventory costs consist of the
purchases of finished goods primarily from our vendors in Asia, freight costs in
to our warehouse, duty, marine insurance, Broker’s and Bank fees. Based upon a
consideration of quantities on hand, actual and projected sales volume,
anticipated product selling prices and product lines planned to be discontinued,
slow-moving and obsolete inventory is written down to its net realizable value.
Failure to accurately predict and respond to consumer demand could result in the
under production of popular items or overproduction of less popular items.
Management estimates are monitored on a quarterly basis and a further adjustment
to reduce inventory valuation to its net realizable value is recorded, as an
increase to cost of sales, when deemed necessary under the lower of cost or
market standard.
  Intangible
Assets
  The total
purchase price of our acquisitions are allocated to the fair value of the assets
acquired and liabilities assumed in accordance with the provisions of Statements
of Financial Accounting Standards (“SFAS”) No. 141, *Business
Combinations* and **** No. 142, *Goodwill
and Other Intangible Assets.* In
accordance with Statement of Financial Accounting Standards No. 141, we
estimated the fair value of the assets acquired for purpose of allocating the
purchase price. We retained an independent financial advisory firm to conduct
investigations and analyses of the assets acquired to assist us with the
purchase price allocation, and the valuation firm has provided us with the fair
value of these assets upon which the related allocations are based and the
useful life over which they will be amortized. Intangible
assets are being amortized over their useful lives with the
customer list to be amortized over 10 years, tradenames to be amortized over 10
years, technologies to be amortized over 5 years and non-compete agreement to be
amortized over the length of the agreement or 3 years. We continually review the
recoverability of the carrying value of long-lived and intangible assets using
the methodology prescribed in SFAS 144 , *Accounting
for the Impairment and Disposal of Long-Lived Assets* . We also
review long-lived assets and the related intangible assets for impairment
whenever events or changes in circumstances indicate that the carrying value of
such assets may not be recoverable .
  32
 ****
 **Recently
issued accounting pronouncements**
  In
December 2004, the FASB issued FASB Statement No. 123 (revised 2004),
“ *Shared-Based
Payment* ”
Statement 123(R) addresses the accounting for share-based payment transactions
in which an enterprise receives employee services in exchange for (a) equity
instruments of the enterprise or (b) liabilities that are based on the fair
value of the enterprise’s equity instruments or that may be settled by the
issuance of such equity instruments. Statement 123(R) requires an entity to
recognize the grant-date fair-value of stock options and other equity-based
compensation issued to employees in the income statement. The revised Statement
generally requires that an entity account for those transactions using the
fair-value-based method, and eliminates the intrinsic value method of accounting
in APB Opinion No. 25, “ *Accounting
for Stock Issued to Employees* ”, which
was permitted under Statement 123, as originally issued. The revised Statement
requires entities to disclose information about the nature of the share-based
payment transactions and the effects of those transactions on the financial
statements. Statement 123(R) is effective for public companies that do not file
as small business issuers as of the beginning of the first interim or annual
reporting period that begins after June 15, 2005 (i.e., second quarter 2005 for
the Company). All public companies must use either the modified prospective or
the modified retrospective transition method. Early adoption of this Statement
for interim or annual periods for which financial statements or interim reports
have not been issued is encouraged. The Company has not yet evaluated the impact
of adoption of this pronouncement which must be adopted in the fourth quarter of
our fiscal year 2005.
  As part
of its short-term international convergence project with the IASB, on December
16, 2004, the FASB issued Statement 153 to address the accounting for
non-monetary exchanges of productive assets. Statement 153 amends APB No. 29,
“ *Accounting
for Non-monetary Exchanges* ”, which
established a narrow exception for non-monetary exchanges of similar productive
assets from fair value measurement. This Statement eliminates that exception and
replaces it with an exception for exchanges that do not have commercial
substance. Under Statement 153 non-monetary exchanges are required to be
accounted for at fair value, recognizing any gains or losses, if their fair
value is determinable within reasonable limits and the transaction has
commercial substance. The Statement specifies that a non-monetary exchange has
commercial substance if future cash flows of the entity are expected to change
significantly as a result of the exchange. An entity should apply the provisions
of Statement 153 prospectively for non-monetary asset exchange transactions in
fiscal periods beginning after June 15, 2005. The Company will adopt this
Statement in fiscal 2005 and adoption is not expected to have a material impact
on our financial position or results of operations.
   
 33
  On
October 22, 2004, the American Jobs Creation Act of 2004 (the “AJCA”) became law
in the United States. In December 2004, the FASB issued FASB Staff Position
(“FSP”) No. FAS 109-1,
“Application of FASB Statement No. 109,*Accounting
for Income Taxes*, to the
Tax Deduction on Qualified Production Activities Provided by the American Jobs
Creation Act of 2004.” The AJCA introduced a tax deduction of up to 9 percent
(when fully phased-in) of the lesser of (a) “qualified production activities
income,” as defined in the AJCA, or (b) taxable income (after the deduction for
the utilization of any net operating loss carryforwards). FSP No.FAS 109-1clarifies
that the qualified production activities deduction provided for under the AJCA
should be accounted for as a special deduction in accordance with Statement 109.
We believe that the adoption of FSP No.FAS 109-1will not
have a material effect on our results of operations, financial position or cash
flows.
 
 In
December 2004, the FASB issued Staff Position No. FAS 109-2, “Accounting and
Disclosure Guidance for the Foreign Earnings Repatriation Provision within the
American Jobs Creation Act of 2004.” The AJCA provides for a special one-time
dividends received deduction on the repatriation of certain foreign earnings to
a U.S. taxpayer (repatriation provision). This Staff Position provides
accounting and disclosure guidance for the repatriation provision and is
effective immediately. The Company is currently assessing the provisions related
to the one-time repatriation of accumulated foreign earnings. We
believe that the adoption of FSP No. FAS 109-2 will not
have a material effect on our results of operations, financial position or cash
flows.
 
 In
November 2004, the FASB issued Statement No. 151, “ *Inventory
Costs* ”, to
amend the guidance in Chapter 4, “ *Inventory
Pricing* ”, of
FASB Accounting Research Bulletin No. 43, “ *Restatement
and Revision of Accounting Research Bulletins* .”
Statement No. 151 clarifies the accounting for abnormal amounts of idle facility
expense, freight, handling costs, and wasted material (spoilage). The Statement
requires that those items be recognized as current-period charges. Additionally,
Statement 151 requires that allocation of fixed production overheads to the
costs of conversion be based on the normal capacity of the production
facilities. Statement No. 151 is effective for fiscal years beginning after June
15, 2005. The Company is currently evaluating the impact of the adoption of this
Statement which is required to be adopted in our fiscal year 2006.
   34


**ITEM
7. CONSOLIDATED FINANCIAL STATEMENTS**
 
 Our
audited Consolidated Financial Statements, including the notes thereto, appear
beginning on page F-2 of this report.
  **ITEM
8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCOSURES**
  Effective
October 13, 2004, BDO Seidman, LLP (“BDO”) resigned as the principal independent
accountant of Small World Kids, Inc. (the “Company”). Effective October 15,
2004, the Company engaged Stonefield Josephson, Inc. (“Stonefield”) as the
Company’s new principal independent accountant. The engagement of Stonefield was
approved by the Audit Committee of the Company’s Board of
Directors.
  Prior to
Stonefield becoming the principal independent accountant for the Company,
neither the Company, nor anyone on its behalf, consulted with Stonefield
regarding either the application of accounting principles to a specific
completed or contemplated transaction, or the type of audit opinion that might
be rendered on the Company’s financial statements; or any matter that was the
subject of an event as defined at Item 304 (a)(1)(iv)B of Regulation S-B.
However, prior to the engagement of BDO, Stonefield was the principal
independent accountant for Small World Toys, the Company’s operating subsidiary
and predecessor company, and was consulted in connection with the preparation of
the Company's Form 8-K filed June 4, 2004 with respect to the acquisition of
Small World Toys.
 
 The
Company had engaged BDO as its principal independent accountant effective July
20, 2004 until October 13, 2004 when they resigned as the principal independent
accountant of the Company as previously discussed. However, BDO has not issued
any report on the Company’s financial statements. Accordingly, the disclosures
otherwise required under Item 304(a)(1)(ii) and Item 304(a)(iv)A do not apply.
There were no such events as described under Item 304(a)(1)(IV)(B) of Regulation
S-B during the interim period from July 20, 2004 through October 13,
2004.
  The
Company had engaged HJ &
Associates, LLC (“HJA”) as the Company’s principal independent accountant
p rior to
the acquisition of Fine Ventures, LLC and Small World Toys on May 20, 2004 as
previously discussed. Effective
July 19, 2004, the Company dismissed HJA as the Company’s independent
registered public accounting firm. There were no such events as described under
Item 304(a)(1)(IV)(B) of Regulation S-B during the interim period through July
19, 2004.
   35
  **ITEM
8A. CONTROLS AND PROCEDURES**
 
 As a
result of the May 20, 2004 transactions, the internal control structure in place
for Small World Toys, Inc. has succeeded to Small World Kids, Inc. Since the
acquisition of Small World Toys, our system of internal controls has evolved
consistently with the development of our company.
 
 (a)
Evaluation of disclosure controls and procedures: As of December 31, 2004, the
end of the period covered by this report, our chief executive and our chief
financial officer reviewed and evaluated the effectiveness of our disclosure
controls and procedures (as defined in Exchange Act Rule 13a-15 and
Rule 15d-15(e)), which are designed to ensure that material information we
must disclose in our report filed or submitted under the Securities Exchange Act
of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized, and
reported on a timely basis, and have concluded, based on that evaluation, that
as of such date, the disclosure controls and procedures were effective to ensure
that information required to be disclosed in reports filed or submitted under
the Exchange Act is accumulated and communicated to our chief executive officer
and chief financial officer as appropriate to allow timely decisions regarding
required disclosure.
  (b)
Changes in internal control over financial reporting: For the three months ended
December 31, 2004, there has been no change in our internal control over
financial reporting that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
  On
October 15, 2004, the Board of Directors adopted a Code of Ethics pursuant to
Section 406 of the Sarbanes-Oxley Act, a true and correct copy of which is
attached hereto as
Exhibit 14.1 .
 
 **ITEM
8B. OTHER INFORMATION**
  None
  **PART
III**
 
 **ITEM
9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS**
  The
following table and text set forth the names of all directors and executive
officers of our Company as of March 21, 2005. The Board of Directors is
comprised of only one class. All of the directors will serve until the next
annual meeting of shareholders and until their successors are elected and
qualified, or until their earlier death, retirement, resignation or removal.
There are no family relationships between or among the directors, executive
officers or persons nominated or charged by our Company to become directors or
executive officers. Executive officers serve at the discretion of the Board of
Directors, and are appointed to serve until the first Board of Directors meeting
following the annual meeting of shareholders. Also provided herein are brief
descriptions of the business experience of each director and executive officer
and an indication of directorships held by each director in other companies
subject to the reporting requirements under the Federal securities
laws.
 
 36
 
 The
directors and executive officers of the Company are as follows:
 
 Name
    Date
      First Elected As an Officer Or Director
    Age
    Position
      Held with the RegistrantDebra
      Fine
    May
      20, 2004
    42
    Chairman,
      CEO, President and DirectorJohn
      Nelson
    May
      20, 2004
    62
    Chief
      Operating OfficerBob
      Rankin
    May
      24, 2004
    52
    Chief
      Financial Officer and SecretaryAlex
      Gerstenzang
    October
      14, 2004
    52
    DirectorDavid
      Swartz
    October
      14, 2004
    61
    DirectorCary
      Fitchey
    October
      14, 2004
    52
    DirectorGary
      Adelsen
    October
      14, 2004
    51
    DirectorLane
      Nemeth
    October
      14, 2004
    57
    DirectorShelly
      Singhal
    October
      14, 2004
    37
    DirectorJohn
      Matise
    October
      14, 2004
    33
    Director
 
 **Biographies
of Directors and Executive Officers:**
  *Debra
Fine, Chief Executive Officer, Chairman and President*
 
 Debra
Fine has served as the Chief Executive Officer, Chairman and President since
May 20, 2004. Prior to joining the Company, Fine served as a principal at
EM Ventures (Venture Capital Fund) and the President and Chief Executive Officer
of three consumer product companies, Fandom Media, a “tween” products company
from 2000 to 2002, President of New Media for Digital Domain, an academy award
winning movie production company from 1998 to 2000 and Cloud 9 Children’s
products. With over 15 years of experience in consumer products, entertainment
and media, Fine has developed expertise in operations, marketing, licensing and
creating growth in start-up ventures. Other highlights of her career include
Vice President of Marketing for Disney Interactive Products, VP Strategy for
Kraft, Quaker, and American Express while at Marketing Corporation of America.
She holds a Bachelor of Arts in Journalism and Advertising from the University
of Southern California and a MBA from the Anderson School, Executive Program at
University of California, Los Angeles.
  
 37
 *John
J. Nelson Jr., Chief Operating Officer*
 
 John
Nelson began serving as Chief Operating Officer in May 2004. Prior to serving in
his current position, he served as President and Chief Operating Officer for
Small World Toys from February 2001 to May 2004. From 1985 until joining Small
World Toys, he has been a consultant along with having President, Chief
Executive and Financial Officer responsibilities for several manufacturing
companies with revenues over $25 million, including Stainless Steel Products
(Burbank, CA), and Softub, Inc. (Chatsworth, CA). From 1974 to 1985, he held
senior executive positions with Ford Aerospace. Nelson has been a member of
advisory Boards of Directors for five companies, including a $200 million
Japanese company with manufacturing facilities in California. He currently sits
on the Board of Directors for the Mortgage Oil Corporation. Further, he serves
as a resource speaker on “Corporate Growth and Improving Performance” and has
spoken to over 50 management groups including over 600 CEOs. After graduating
from Villanova University with a B.S. degree in Electrical Engineering, Nelson
was commissioned as an officer in the United States Marine Corps, of which he
spent 24 years, retiring as a Colonel. He received his M.B.A. from Pepperdine
University.
 
 *Robert
Rankin, Chief Financial Officer and Secretary*
 
 Robert
Rankin has served as the Chief Financial Officer and Secretary since May 24,
2004. From 2002, Rankin served as a consultant including serving as an interim
CFO for a semiconductor start-up company from 2003 until joining the Company.
From 1992 through 2002, Rankin held positions as Chief Financial Officer of
public and private, mid-cap and start-up companies in the high technology and
aerospace industries. In 2000, Rankin co-founded an application service provider
software company that was first to market in 2000. In 2000, while serving as the
CFO of webcasts.com, Rankin directed the sale of this software start-up for a
valuation over $100 million. From 1992 through 1998 under his leadership as CFO,
DeCrane Aircraft Holdings grew from a highly leveraged, VC funded, private
aerospace company with sales of $13 million in 1991 to a multinational
public company with sales of almost $200 million in 1998. Rankin's background
also includes senior financial management positions with B.F. Goodrich and
Coltec Industries. Rankin has a Bachelor of Science in Mechanical Engineering
and a Master of Science in Business, both from Carnegie-Mellon University.
 
 *Gary
Adelsen, Director*
 
 Gary
Adelsen has been a managing director of Houlihan Lokey Howard & Zukin and
co-head of the firm’s Media & Entertainment Investment Banking Group since
2003. Prior to joining the firm, he was a principal of Media Connect Partners, a
provider of financial and operating advisory services to media, entertainment,
sports and communications companies that he co-founded in 2003 and that was
acquired by Houlihan. In 1996, Adelsen co-founded EastWest Venture Group, which
is a private venture capital, company managing a fund of over $250 million and
served until 2002. From 1990 to 1995, He co-founded and served as Chairman and
CEO of ICS, a telephony and cable company that was acquired by MCI in 1995. His
career experience includes producing several hundred hours of television
programming and more than 20 feature films, including his first feature film
production for Universal Studios, The Last Starfighter. He earned a Bachelor of
Arts degree in Economics from the University of California, Los Angeles and has
served as the chairman of UCLA’s Venture Fund. Adelson serves on the board of
the Pediatric Aids Foundation and was executive director of Israel’s 50th
anniversary jubilee.
  **
 38
 **
 *Cary
Fitchey, Director*
  Cary
Fitchey has been a Senior Managing Director of St. Cloud Capital Partners since
January 2002. He served as a managing partner of FG II Ventures, a private
venture capital company where he was responsible for all West Coast operations
from June 1998 to January 2002. Previously, he was a partner with Dartford
Partners, LP from June 1993 to June 1998. He has served as an executive for
PepsiCo and a partner with A.T. Kearney and Strategic Planning Associates. He
serves on several corporate boards, including Prolong International Corporation
(AMEX: PRL), Sweet Candy, LLC, Advanced H2O Inc, CinnaWorkS LLC, and Club
Holdings LLC. He also serves as the non-executive chairman of European Capital
Ventures, plc. Fitchey earned a Master of Business Administration degree from
the University of Michigan and a Bachelor of Science in Industrial Management
degree from Purdue University.
  *Alex
Gerstenzang, Director*
  Alex
Gerstenzang has been a senior executive with a big box retailer, overseeing a
diverse product sales mix of approximately $10 billion since 1997. He has
managed the East Coast region for Paris Boutique Corporation and subsequently
founded a consulting business serving clients as diverse as prisons to the City
of Portland and Georgia Pacific Corporation. He attended Dalton School, Columbia
University, Pace University and New York University. He earned a Bachelor of
Specialized Studies degree in finance and a Master of Business Administration.
Gerstenzang serves on community boards and two other corporate
boards.
  *John
Matise, Director*
  John
Matise is a private equity investor. He most recently served as  Vice
President of Wedbush, Inc., a private equity investment and holding company
(2001-2004). Prior to his tenure with Wedbush Inc., he served as a Vice
President with Encore Venture Partners (1999-2001). In addition, he has served
as an executive with Accenture (1997-1999 and 1992-1994) and Deloitte Consulting
(1994-1997) advising clients on improving manufacturing operations, the
integration of acquisitions, launching new business lines and business growth
planning and analysis. He currently serves as a co-chairman of the UCLA
Venture Capital and Private Equity Alumni Association (2001-present) and as a
director of UCLA Anderson School Alumni Board. In addition, he is currently on
the Board of Directors of Cargo Technology, Inc. (2002-present). He received a
Master of Business Administration degree from the UCLA Anderson School and a
Bachelor of Arts degree with high honors from the University of California,
Davis.
  *Lane
Nemeth, Director*
  Lane
Nemeth has been the founder and chief executive officer of Pet Lane, a direct
sales enterprise since 2003. Prior to founding Pet Lane, she was an author,
speaker and consultant. She is the founder of Discovery Toys, an educational toy
company based in Livermore, California, that was acquired by Avon (NYSE:AVP) in
1997 and was with Discovery from 1978 to 1998. Lane has received numerous
entrepreneurial awards and is a regularly featured speaker at national child
development, business leadership seminars, including the Stanford Leadership
Academy and the National Association of Women Business Owners. Lane is a member
of the Women’s Executive Leadership Council. Her recent book, *Discovering
Another Way, Raising Brighter Children, While Having a Meaningful
Career* , has
received national recognition. She earned a Bachelor of Arts degree from the
University of Pittsburgh and a Master of Arts degree in education from Seton
Hall University.
  **
 39
 **
 *Shelly
Singhal, Director*
  Shelly
Singhal currently serves as the Chairman and Chief Executive Officer of the SBI
Group, a position he has held since 2001. Prior to SBI, Singhal was managing
director of corporate finance at a brokerage firm in Orange County, California,
joining the firm in 1995. He was responsible for several areas, including its
E-Commerce Group from 1995 to 2000 and serving as manager of the Firm’s Bridge
Fund. He was formerly associated with firms with a focus on high yield
securities and transactions involving out of court and Chapter 11
restructurings. Prior to investment banking, Singhal served the commercial
lending market with Foothill Capital, Inc. His career experience also includes
Heller Financial and highly leveraged transactions. He earned a Bachelor of
Science degree from Seaver College at Pepperdine University.
  *David
Swartz, Director*
 
 David
Swartz has been a Managing Partner of Good Swartz Brown & Berns, which is a
regional accounting and business advisory firm from 1990. Prior to joining Good
Swartz Brown & Berns, he served as the chief financial officer of Westfield,
Inc., a publicly held shopping center development company, from 1988-1990. From
1968 to 1988, Swartz was a managing partner and on the national board of BDO
Seidman, a 50-office, international accounting firm. Swartz has more than
thirty-five years of experience providing business advisory services to clients
in several industries, including manufacturing, wholesale, retail,
entertainment, real estate and professional services, and his professional
experience also includes acquisitions, merger transactions, business valuations,
and ESOPs. He has lectured extensively at several Southern California
universities, and is a frequent speaker to trade and professional organizations.
Swartz is past president of the Jewish Big Brothers of Los Angeles and serves on
the boards of several other charitable foundations. Swartz earned his Bachelor
of Science degree in Accounting from California State University, Northridge and
is a member of the California Society of Certified Public Accountants and the
American Institute of Certified Public Accountants. He also served as treasurer
of the Los Angeles chapter of the California Society of Certified Public
Accountants. He recently commenced a four-year term as an appointee to the
California Board of Accountancy, a division of the California Department of
Consumer Affairs.
 
 **Family
Relationships** .
 
 To our
knowledge, there are no family relationships between any of our directors or
executive officers.
 
 **Audit
Committee** .
 
 The
Company has an audit committee consisting of David Swartz, Cary Fitchey and John
Matise. Our Board of Directors has determined that Mr. Swartz is an “audit
committee financial expert” as that term is defined in Item 401(e) of Regulation
S-B under the Exchange Act of 1934. The qualifications of Mr. Swartz are noted
in Part III, Item
9 of this
report. All three individuals are deemed to be independent members of the audit
committee.
   40
  ITEM
10:   EXECUTIVE COMPENSATION
 The
following table sets forth aggregate amounts of compensation paid or accrued by
us to our Chief Executive Officer and the other four most highly compensated
executive officers (the “Named Executive Officers”) whose annual expected
compensation exceeded $100,000 as of December 31, 2004. Compensation information
concerning Michael Rubin, our president and sole director prior to the
acquisitions of Fine Ventures and Small World Toys, is not presented because the
changes resulting from the acquisition of Small World Toys render such
information meaningless. Further, we have only included annualized 2004 figures
as each of the following executive officers did not commence employment with the
company until on or after May 20, 2004.
 
 **Annualized Long Term
      Compensation****Annual
      Compensation**
    
    
    
    
    
    **Awards**
    
    
    **Payouts****Name and Principal
      Position**
    
    
    **Year**
    
    
    **Salary**
    
    
    **Bonus ($)**
    
    
    **Other Annual
      Compensation**
    
    
    **Restricted Stock
      Awards**
    
    
    **Securities Underlying
      Options/SARs**
    
    
    **LTIP
    Payout**
    
    
    **All Other
      Compensation**Debra
      Fine, Chairman, Chief Executive Officer, and President
    
    
    2004
    
    $
    250,000
    
    $
    20,000
    
    
    —
    
    
    —
    
    
    2,600,000
    
    
    —
    
    
    —John
      J. Nelson Chief Operating Officer
    
    
    2004
    
    $
    175,000
    
    $
    45,000
    
    
    —
    
    
    —
    
    
    700,000
    
    
    —
    
    
    —Robert
      Rankin, Chief Financial Officer
    
    
    2004
    
    $
    175,000
    
    $
    20,000
    
    
    —
    
    
    —
    
    
    520,000
    
    
    —
    
    
    —Jenna
      Buckner, Vice President, Marketing
    
    
    2004
    
    $
    130,000
    
    $
    10,000
    
    
    —
    
    
    —
    
    
    350,000
    
    
    —
    
    
    —Howard
      Bennett, Vice President, Sales
    
    
    2004
    
    $
    120,120
    
    $
    60,000
    
    
    —
    
    
    —
    
    
    550,000
    
    
    —
    
    
    —
 ****
****
41
****
**Option
Grants in Last Fiscal Year**

The
following table sets forth information regarding each stock option granted
during the fiscal year ended December 31, 2004 to each of the Named Executive
Officers
****
 **Potential
      Realizable Value at Assumed Annual Rates of Stock Price Appreciation for
      Option Term (2)****Name**
    
    **Number of Shares Underlying Options
      Granted (1)**
    
    **Percent of Total Options Granted to
      Employees in Fiscal Year**
    
    
    **Exercise Price (per
      share)**
    
    **Expiration Date**
    
    **5%**
    
    **10%**Debra
      Fine
    
    2,600,000(3)
    
    39.6%
    
    $
    .25
    
    5/20/14
    
    $
    408,782
    
    $
    1,035,933John
      Nelson
    
    700,000(4)
    
    10.6%
    
    $
    .28–.41
    
    5/20–9/22/14
    
    $
    196,844
    
    $
    498,842Bob
      Rankin
    
    520,000(5)
    
    7.9%
    
    $
    .38
    
    5/24/14
    
    $
    124,270
    
    $
    314,924Jenna
      Buckner
    
    350,000(6)
    
    5.3%
    
    $
    .48
    
    9/22/14
    
    $
    105,654
    
    $
    267,749Howard
      Bennett
    
    550,000(7)
    
    7.9%
    
    $
    .48
    
    9/22/14
    
    $
    166,028
    
    $
    420,748
  ****
  (1)
    Options
      to purchase shares of our common stock under the 2004 Stock Compensation
      Plan.
 (2)
    The
      potential realizable value is calculated based on the original option term
      and the assumption that the market value of the underlying stock increases
      at the stated values, compounded annually over the term of the option. The
      gains shown are net of the option exercise price, but do not include
      deductions for taxes or other expenses associated with the exercise. These
      amounts are for illustration purposes only and are not intended to
      forecast possible future appreciation, if any, of our stock price. Actual
      gains, if any, on stock option exercises will depend on the future
      performance of our common stock, the option holder’s continued employment
      with us through the option exercise period and the date on which the
      option is exercised.
 (3)
    650,000
      options are fully vested on the date of the award and the balance vest
      quarterly over three years.
 (4)
    287,000
      options are fully vested on the date of the award and the balance vest
      quarterly over two years.
 (5)
    130,000
      options are fully vested on the date of the award and the balance vest
      quarterly over two years.
 (6)
    The
      options vest quarterly over three years.
 (7)
    50,000
      options are fully vested on the date of the award and the balance vest
      quarterly over three years.
 ****
 ****
 42
 ****
 **Aggregated
Option Exercises and Fiscal Year End Option Values**
 The
following table provides information regarding the number of shares covered by
both exercisable and unexercisable stock options as of March 16, 2005 and the
values of “in-the-money” options, which values represent the positive spread
between the exercise price of any such option and either the actual or estimated
fair market value of the underlying security, as applicable. None of the options
were exercised during the fiscal year ended December 31, 2004
 **Name**
    
    **Shares****Acquired
      on****Exercise(#)**
    
    **Value****Realized
      (9)**
    
    **No.
      of Shares Underlying**
      **Unexercised
      Options at**
      **Fiscal
      Year-End**
      **Exercisable/Unexercisable**
    
    **Value
      of Unexercised****In-the
      Money Options****At
      Fiscal Year-End****Exercisable/Unexercisable**Debra
      Fine
    
    
    
    
    
    975,000/1,625,000
    
    $
    204,750/341,250John
      Nelson
    
    
    
    
    
    339,062/360,938
    
    $
    25,000/0Bob
      Rankin
    
    
    
    
    
    227,500/292,500
    
    $
    18,200/23,400Jenna
      Buckner
    
    
    
    
    
    29,166/320,834
    
    $
    0/0Howard
      Bennett
    
    
    
    
    
    95,833/454,167
    
    $
    0/0
  **Employments
and Severance Agreements**
  The
Company entered into an employment agreement with Debra Fine, our Chairman, CEO
and President on May 20, 2004 for a three-year term, which may continue upon the
mutual agreement of the parties thereto except the employment relationship will
be on an “at will” basis. The employment agreement provides compensation of a
base salary of $250,000 per annum, an annual bonus, as determined and awarded by
the Board from time to time in its sole discretion, but not less than an amount
equal to 5% of EBIT, meaning earnings before interest and taxes, if such amount
for any year is in excess of $1,000,000; 4% if such amount for any year is in
excess of $2,000,000; and 3% if such amount is over $3,000,000, and 2,600,000
stock options at the exercise price of $.25 per share of which 650,000 vested
immediately and the balance vesting on a quarterly basis in equal amounts of
162,500 shares each over the course of her agreement. The employment agreement
provides that in the event that Ms. Fine is terminated prior to the end of the
initial three (3) year term, other than for cause, we will pay her salary for
the remainder of the three (3) year term without any deduction or offset for any
compensation earned or received from any other sources. In addition, the Company
will pay any earned, but unpaid, bonus for the prior year, any unused vacation
or other time-off benefits and any unpaid reimbursable business expenses
incurred through the last day of her services. For an additional one (1) year
after the termination, the Company shall continue benefits, at our expense. All
unvested portion(s) of the options granted to her by the Company pursuant to her
employment agreement shall vest and immediately become exercisable upon the
effective date of such termination.
  The
Company entered into an employment agreement with John Nelson, our Chief
Operating Officer on September 22, 2004 for a two-year term, which may continue
upon the mutual agreement of the parties thereto except the employment
relationship will be on an “at will” basis. The employment agreement provides
compensation of a base salary  of $175,000 per annum increasing to $200,000
on January 1, 2005, an annual bonus, as determined and awarded by the Board from
time to time in its sole discretion and 550,000 stock options at the exercise
price of $.48 per share of which 137,500 vested immediately and the balance
vested on a quarterly
basis in equal amounts of 51,562 shares each over the course of his agreement,
except for the final quarterly vest of 51,566. The employment agreement provides
that in the event that Mr. Nelson is terminated priorto the end of the
initial two (2) year term, other than for cause, we will pay his salary for an
additional six months without any deduction or offset for any compensation
earned or received from any other sources. In addition, the Company will pay any
earned, but unpaid, bonus for the prior year, any unused vacation or other
time-off benefits and any unpaid reimbursable business expenses incurred through
the last day of his services. For an additional six months, the Company shall
continue benefits, at our expense. All unvested portion(s) of the options
granted to him by the Company pursuant to his employment agreement shall expire
and be null and void.
  The
Company entered into an employment agreement with Robert Rankin, our Chief
Financial Officer on May 24, 2004 for a two-year term, which may continue upon
the mutual agreement of the parties thereto except the employment relationship
will be on an “at will” basis. The employment agreement provides compensation of
a base salary  of $175,000 per annum, an annual bonus, as determined
and awarded by the Board from time to time in its sole discretion and 520,000
stock options at the exercise price of $.38 per share of which 130,000 vested
immediately and the balance vested on a quarterly basis in equal amounts
of 48,750 shares each over the course of his agreement. The employment
agreement provides that in the event that Mr. Rankin is terminated prior to the
end of the initial two (2) year term, other than for cause, we will pay his
salary for an additional six months without any deduction or offset for any
compensation earned or received from any other sources. In addition, the Company
will pay any earned, but unpaid, bonus for the prior year, any unused vacation
or other time-off benefits and any unpaid reimbursable business expenses
incurred through the last day of his services. For an additional six months, the
Company shall continue benefits, at our expense. All unvested portion(s) of the
options granted to him by the Company pursuant to his employment agreement shall
expire and be null and void.
  **Director
Compensation**
  The
Directors who are not employees of the Company receive $1,500 for each meeting
attended, $1,000 for each committee meeting attended and 40,000 stock options
per year. Further, the chairman of the audit committee will receive an
additional $5,000 annually.
 43
  ITEM
11.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
 **Security
Ownership of Certain Beneficial Owners**
 
 The
following table sets forth, as of March 16, 2005, certain information regarding
beneficial ownership of our common stock by (i) each person or entity who is
known by us to own beneficially more than 5% of the outstanding shares of common
stock, (ii) each of our directors, (iii) each of the Named Executive Officers,
and (iv) all directors and executive officers as a group. As of March 21, 2005,
there were 53,120,750 shares of our common stock issued and outstanding. In
computing the number and percentage of shares beneficially owned by a person,
shares of common stock that a person has a right to acquire within sixty (60)
days of March 21, 2005, pursuant to options, warrants or other rights are
counted as outstanding, while these shares are not counted as outstanding for
computing the percentage ownership of any other person. Unless otherwise
indicated, the address for each shareholder listed in the following table is c/o
Small World Kids, Inc., 5711 Buckingham Parkway, Culver City, California 90230.
This table is based upon information supplied by directors, officers and
principal shareholders and reports filed with the Securities and Exchange
Commission.
  **Name and Address of Beneficial
      Owner**
    
    **Shares of Common Stock Beneficially
      Owned**
    
    **Percentage of Total Common Stock
      (1)****5%
      Beneficial Owners**David
      Marshall, Inc.
    
    10,785,992
    
    20.3%Phoenix
      Capital Opportunity, LLC
    
    7,545,212
    
    14.2%**Directors
      and Officers**Debra
      L. Fine (2)
    
    18,296,057
    
    34.4%John
      J. Nelson (3)
    
    339,063
    
    (12)Robert
      Rankin (4)
    
    276,250
    
    (12)Gary
      Adelsen (5)
    
    40,000
    
    (12)Cary
      Fitchey (6)
    
    40,000
    
    (12)Alex
      Gerstenzang (7)
    
    40,000
    
    (12)John
      Matise (8)
    
    40,000
    
    (12)Lane
      Nemeth (9)
    
    40,000
    
    (12)Shelly
      Singhal (10)
    
    13,016,728
    
    24.5%David
      Swartz (11)
    
    40,000
    
    (12)Total
      Directors and Officers as a Group
    
    32,168,098
    
    60.6%
 44
  (1)
    Based
      on 53,120,750 shares outstanding as of March 21,
2005.
 (2)
    Debra
      Fine is the Chief Executive Officer, and President of the Company. Her
      shares are held indirectly in the Fine Family Trust of which she is the
      Co-Trustee. Includes 1,137,500 shares underlying stock options that may be
      exercisable or will be exercisable within 60 days of the date of March 21,
      2005.
 (3)
    John
      Nelson is the Chief Operating Officer of the Company. Includes 390,625
      shares underlying stock options that may be exercisable or will be
      exercisable within 60 days of the date of March 21,
  2005.
 (4)
    Robert
      Rankin is the Chief Financial Officer and Secretary. Includes 276,250
      shares underlying stock options that may be exercisable or will be
      exercisable within 60 days of the date of March 21,
  2005.
 (5)
    Gary
      Adelsen is a director of the Company. Includes 40,000 shares underlying
      stock options which are exercisable or will be exercisable within 60 days
      of the date of March 21, 2005.
 (6)
    Cary
      Fitchey is a director of the Company. Includes 40,000 shares underlying
      stock options which are exercisable or will be exercisable within 60 days
      of the date of March 21, 2005.
 (7)
    Alex
      Gerstenzang is a director of the Company. Includes 40,000 shares
      underlying stock options which are exercisable or will be exercisable
      within 60 days of the date of March 21,
2005.
 (8)
    John
      Matise is a director of the Company. Includes 40,000 shares underlying
      stock options which are exercisable or will be exercisable within 60 days
      of the date of March 21, 2005.
 (9)
    Lane
      Nemeth is a director of the Company. Includes 40,000 shares underlying
      stock options which are exercisable or will be exercisable within 60 days
      of the date of March 21, 2005.
 (10)
    Shelly
      Singhal is a director of the Company. Of the shares beneficially owned by
      Mr. Singhal, 12,976,728 shares are owned by SWT Investments, LLC, a
      Delaware limited liability company of which Mr. Singhal owns 100% and also
      includes 40,000 shares underlying stock options which are exercisable or
      will be exercisable within 60 days of the date of March 21, 2005.
 (11)
    David
      Swartz is a director of the Company. Includes 40,000 shares underlying
      stock options which are exercisable or will be exercisable within 60 days
      of the date of March 21, 2005.
 (12)
    Less
      than one percent.
 **ITEM
12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**
   This
section describes the transactions we have engaged in with persons who were
directors, officers or affiliates at the time of the transaction, and persons
known by us to be the beneficial owners of 5% or more of our common stock since
January 1, 2004.
  As of
December 31, 2004, we owed approximately $5,000,000 of principal
indebtedness to SWT, LLC. The members of SWT, LLC include, among others, Russell
Fine and Debra Fine, our Chief Executive Officer, as Co-Trustees of the Fine
Family Trust, SWT Investments, LLC, whose sole member is Shelly Singhal, a
director of the Company; Phoenix Capital Opportunity Fund, LP, a shareholder
that owns 14.2% of the Company, and David Marshall, Inc. a shareholder that owns
20.3% of the Company. The loan, evidenced by the Bridge Note, was made on
May 20, 2004.
   45
   As of
December 31, 2004, we owed approximately $2,000,000 of principal
indebtedness to St. Cloud Capital Partners L.P. Mr. Cary Fitchey, a director of
the Company, is a Senior Managing Director of St. Cloud. The loan was made on
September 15, 2004. Pursuant to the terms of the Loan Agreement , until
the loan is paid in full, Cary Fitchey will remain on the Company’s Board of
Directors.  In addition, so long as St. Cloud owns in excess of 500,000
shares of the Company, a designee of St. Cloud shall be entitled to an observer
seat on the Board.
  
 **ITEM
13.** **EXHIBITS
AND REPORTS ON FORM 8-K**
 
 (a)
Exhibits
  2.1
    Exchange
      Agreement, dated as of May 20, 2004 (1)2.2
    Stock
      Purchase Agreement, dated as of May 20, 2004 (1)3.1
    Articles
      of Incorporation*3.2
    Bylaws*4.1
    Pledge
      Agreement, dated as of May 20, 2004 (1)4.2
    Pledge
      Agreement, dated as of May 20, 2004 (1)4.3
    Registration
      Rights Agreement, dated as of May 20, 2004 (1)4.4
    Note
      Purchase Agreement, dated September 15, 2004 (St. Cloud)
    (2)4.5
    Note
      Purchase Agreement, dated September 16, 2004 (Strome)
  (2)4.6
    Asset
      Purchase Agreement, dated as of September 17, 2004 (2)4.7
    Stock
      Purchase Agreement, dated July __, 2004 (Wire Mill Partners)
      (3)4.8
    Stock
      Purchase Agreement, dated July __, 2004 (Pewter Hill Partners)
      (3)10.1
    Loan
      Agreement, dated as of May 20, 2004 (1)10.2
    $5,000,000
      Term Note (1)10.3
    $700,000
      Promissory Note (1)10.4
    $500,000
      Promissory Note (1)10.5
    $1,000,000
      Promissory Note (1)10.6
    2004
      Stock Option Plan (1)10.7
    Revolving
      Credit and Security Agreement dated December 15, 2004 (PNC Bank)
      (4)10.8
    $15,000,000
      Revolving Credit Note (4)10.9
    $1,500,000
      Seasonal Advance Note (4)10.10
    Pledge
      Agreement (4)10.11
    Subordination
      Agreement (4)10.12
    Continuing
      Guaranty (Fine)(4)10.13
    Continuing
      Guaranty (Small World Toys)(4)10.14
    Security
      Agreement (4)
   46
 (1)
    Incorporated
      by reference from the Form 8-K filed with the SEC on June 4, 2004. File
      No. 333-68532.(2)
    Incorporated
      by reference from the Form 8-K filed with the SEC on September 23, 2004.
      File No. 333-68532.(3)
    Incorporated
      by reference from the Form 8-K filed with the SEC on October 4, 2004. File
      No. 333-68532.(4)
    Incorporated
      by reference from the Form 8-K filed with the SEC on December 20, 2004.
      File No. 333-68532.
 
 Set forth
below is a list of the Exhibits to this Annual Report on Form 10-KSB.
 
 10.15
    Employment
      Agreement of Debra Fine10.16
    Employment
      Agreement of John Nelson10.17
    Employment
      Agreement of Robert Rankin14.1
    Code
      of Ethics31.1
    Certification
      of the Chief Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200231.2
    Certification
      of the Chief Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200232.1
    Certification
      of the Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act
      of 200232.2
    Certification
      of the Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act
      of 2002
 
 (b)
Reports on Form 8-K
 Form 8-K
dated October 13, 2004 was filed on October 19, 2004 setting forth the changes
in Registrant’s certifying accountant.
  Form
8-K/A dated October 13, 2004 was filed on October 20, 2004 setting forth the
letter from BDO Seidman, LLP addressed to the United States Securities and
Exchange Commission.
  Form
8-K/A dated October 14, 2004 was filed on October 25, 2004 setting forth the
departure of Directors or Principal Officers, election of Directors, and
appointment of Principal Officers.
   47
  Form 8-K
dated December 15, 2004 was filed on December 20, 2004 setting forth the
Company’s entry into material agreements.
  Form 8-K
dated February 7, 2005 was filed on February 8, 2005 setting forth the Company’s
results of operations and financial condition.
 
 **ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES**
 
  Audit
Fees: The aggregate fees billed for the year ended December 31, 2004 for
professional services rendered by the Stonefield Josephson, Inc. (“Stonefield”)
for the audit of our annual financial statements and the review of financial
statements for the Quarter ended September 30, 2004, along with the review of
financial statements for Small World Toys, our predecessor for the Quarter ended
March 31, 2004 was $140,000 as compared
to $51,754 for the audit fees for Small World Toys, our predecessor, for the
year ended December 31, 2003. The aggregate fees billed by BDO Seidman, LLP
(“BDO”) for the review of financial statements included in our filed Form 10QSB
for the Quarter ended June 30, 2004 was $48,792. The aggregate fees billed by HJ
Associates, LLC (“HJA”) for the review of the financial statements for SavOn
Team Sports for the Quarter ended March 31, 2004 was $5,054.
   Tax Fees:
The aggregate fees billed for the year ended December 31, 2004 for professional
services rendered by the Stonefield for tax compliance and tax planning was
approximately $1,700 as compared to $10,000 for Small World Toys, our
predecessor, for the year ended December 31, 2003. The aggregate fees billed for
the year ended December 31, 2004 for professional services rendered by the BDO
for tax compliance and tax planning was approximately $2,090. The aggregate fees
billed for the year ended December 31, 2004 for professional services rendered
by the HJA for tax compliance and tax planning for SavOn Team Sports prior to
May 20, 2004 was approximately $366.
   All Other
Fees: The aggregate fees billed for the year ended December 31, 2004 for
products and services provided by Stonefield other than the services reported
above was approximately $17,820 as compared to $7,148 for Small World Toys, our
predecessor for the year ended December 31, 2003. The aggregate fees billed for
the year ended December 31, 2004 for products and services provided by BDO other
than the services reported above was $23,000.
  **Audit
Committee Pre-Approval Policies and Procedures**

Our Audit
Committee’s policy is to pre-approve all audit and permissible non-audit
services provided by our independent auditors. These services may include audit
services, audit-related services, tax services and other services. Pre-approval
is generally provided for up to one year and any pre-approval is detailed as to
the particular service or category of services. The independent auditor and
management are required to periodically report to the Audit Committee regarding
the extent of services provided by the independent auditor in accordance with
this pre-approval



48
 **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.
 
 **SMALL
      WORLD KIDS, INC.**Date: March
      24, 2005
    By:
    /s/ Debra
      FineName:
      Debra Fine
      Title: Chief Executive Officer
      (Principal Executive Officer)
  In
accordance with the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of registrant in the capacities and on
the dates indicated.
  **Signature**
    
    **Title**
    
    **Date**/s/
      Debra Fine
    
    Chairman,
      Chief Executive Officer and Director (Principal Executive
      Officer)
    
    March
      24, 2005Debra
      Fine/s/
      Robert Rankin
    
    Chief
      Financial Officer (Principal Financial and Accounting
    Officer)
    
    March
      24, 2005Robert
      Rankin/s/
      Cary Fitchey
    
    Director
    
    March
      24, 2005Cary
      Fitchey/s/
      John Matise
    
    Director
    
    March
      24, 2005John
      Matise/s/
      Shelly Singhal
    
    Director
    
    March
      24, 2005Shelly
      Singhal/s/
      David Swartz
    
    Director
    
    March
      24, 2005David
      Swartz
    49


**SMALL
WORLD KIDS, INC.**
 **INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Page**Report
      of Independent Registered Public Accounting Firm
    
    F-2Consolidated
      Balance Sheets as of December 31, 2004 (Successor) and 2003(Predecessor)
    
    F-3Consolidated
      Statement of Operations for the Periods of January 1, 2004 to May 20, 2004
      (Predecessor), May 21, 2004 to December 31, 2004 (Successor) and the Year
      Ended December 31, 2003(Predecessor)
    
    F-4Consolidated
      Statements of Stockholders’ Equity (Deficit) for the Year Ended December
      31, 2004
    
    F-5Consolidated
      Statement of Cash Flows for the Periods of January 1, 2004 to May 20, 2004
      (Predecessor), May 21, 2004 to December 31, 2004 (Successor) and the Year
      Ended December 31,
      2003 (Predecessor)
    
    F-7Notes
      to Consolidated Financial Statements
    
    F-9
 
   
  **SMALL
WORLD KIDS, INC.**
 **(formerly
SAVON TEAM SPORTS, INC.)**
 
 
 **REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 
 **To
The Board Of Directors And Stockholders Of Small World Kids, Inc.**
 Culver
City, Ca
 
 We have
audited the accompanying consolidated balance sheets of Small World Kids, Inc
and Subsidiary (Successor Company) as of December 31, 2004 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the period from May 21, 2004 to December 31, 2004 and the year ended December
31, 2004, respectively (Successor Company Period) and the balance sheet and
statements of operations, stockholders equity and cash flows of Small World
Toys, Inc. for the year ended December 31, 2003 and for the period from
January 1, 2004 to May 20, 2004 (Predecessor Company Period). 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 standards of the Public Company
Accounting Oversight Board (United States). Those standards require that the
Company plan and perform the audit to obtain reasonable assurance about whether
the consolidated 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 that our
audits provide a reasonable basis for our opinion.
 
 In our
opinion, the aforementioned Successor consolidated financial statements referred
to above present fairly, in all material respects, the financial position of
Small World Kids, Inc. and Subsidiary as of December 31, 2004 and the results of
their operations and their cash flows for the Successor Company Period, in
conformity with accounting principles generally accepted in the United States of
America. Further, in our opinion, the aforementioned Predecessor Company
financial statements present fairly, in all material respects, the results of
their operations and their cash flows for the Predecessor Company Period in
conformity with accounting principles generally accepted in the United States of
America.
 
 */s/
Stonefield Josephson, Inc.*
 Stonefield
Josephson, Inc.
 Certified
Public Accountants
 March 24,
2005
 
 
 F-2
  **SMALL
WORLD KIDS, INC.**
 **(formerly
SAVON TEAM SPORTS, INC.)**
 ****
 **CONSOLIDATED
BALANCE SHEETS**
 
 **December
      31,**
      **2004**
    
    **December 31,**
      **2003
      (PREDECESSOR)****ASSETS**CURRENT
      ASSETS:Cash
    
    $
    1,785,084
    
    $
    24,202Receivables,
      net
    
    
    7,005,764
    
    
    4,723,364Inventory
    
    
    2,471,556
    
    
    4,220,244Prepaid
      expenses and other assets
    
    
    1,625,695
    
    
    1,110,469TOTAL
      CURRENT ASSETS
    
    
    12,888,099
    
    
    10,078,279PROPERTY
      AND EQUIPMENT, net
    
    
    505,059
    
    
    369,006INTANGIBLE
      ASSETS:Goodwill
    
    
    2,308,145
    
    
    —Tradenames
    
    
    1,890,883
    
    
    —Technology
    
    
    302,250
    
    
    —Customer
      List
    
    
    788,667
    
    
    —Non-Compete
      Agreement
    
    
    131,442
    
    
    —OTHER
      ASSETS
    
    
    401,592
    
    
    351,029DEFERRED
      TAX ASSETS
    
    
    623,695$
    19,839,832
    
    $
    10,798,314**LIABILITIES
      AND SHAREHOLDERS’ EQUITY (DEFICIT)**CURRENT
      LIABILITIES:Accounts
      payable
    
    $
    1,808,637
    
    $
    2,859,229Accrued
      liabilities
    
    
    814,201
    
    
    892,886Notes
      payable, bank
    
    
    —
    
    
    2,900,000Notes
      payable to former shareholder, Small World Toys
    
    
    262,500
    
    
    512,394Notes
      payable, bridge less debt discount of $637,652
    
    
    2,562,348
    
    
    —Warrant
      liability
    
    
    736,483
    
    
    —Other
      current liabilities
    
    
    —
    
    
    49,349TOTAL
      CURRENT LIABILITIES
    
    
    6,184,169
    
    
    7,213,858LONG
      TERM DEBT:Notes
      payable, bank
    
    
    8,229,262
    
    
    —Bridge
      Note, SWT, LLC (related party)
    
    
    5,000,000
    
    
    —Notes
      payable to former shareholder, Small World Toys
    
    
    437,500
    
    
    171,329TOTAL
      LONG TERM DEBT
    
    
    13,666,762
    
    
    171,329DEFERRED
      TAX LIABILITIES
    
    
    1,060,000
    
    
    —TOTAL
      LIABILITIES
    
    
    20,910,931
    
    
    7,385,187
 SHAREHOLDERS’
      EQUITY (DEFICIT):Common
      shares, $.001 par value; 100,000,000 shares authorized and issued;
      53,120,750 shares outstanding as of December 31, 2004 and 10,000 as of
      December 31, 2003 (predecessor)
    
    
    11,887
    
    
    10,000Additional
      paid-in capital
    
    
    —
    
    
    —(Accumulated
      deficit) retained earnings
    
    
    (1,082,986
    )
    
    3,403,127TOTAL
      SHAREHOLDERS’ EQUITY (DEFICIT)
    
    
    (1,071,099
    )
    
    3,413,127$
    19,839,832
    
    $
    10,798,314
 
 **See
Notes to Consolidated Financial Statements.**
  F-3
  **SMALL
WORLD KIDS, INC.**
 **(formerly
SAVON TEAM SPORTS, INC.)**
 
 **CONSOLIDATED
STATEMENTS OF OPERATIONS**
  **January 1, 2004 - May 20, 2004**
      **(Predecessor)**
    
    
    **May 21, 2004(inception) -
      December 31,2004**
      **(Successor)**
    
    
    **Year Ended December 31, 2003**
      **(Predecessor)**NET
      SALES
    
    $
    10,336,500
    
    $
    19,156,388
    
    $
    25,970,397COST
      OF SALES
    
    
    5,780,780
    
    
    11,610,502
    
    
    14,988,070GROSS
      PROFIT
    
    
    4,555,720
    
    
    7,545,886
    
    
    10,982,327OPERATING
      EXPENSES:Selling,
      general and administrative
    
    
    4,341,565
    
    
    7,821,961
    
    
    9,606,118Research
      and development
    
    
    373,034
    
    
    800,331
    
    
    1,032,174Amortization
      of intangibles
    
    
    —
    
    
    190,372
    
    
    —Total
      operating expenses
    
    
    4,714,599
    
    
    8,812,664
    
    
    10,638,292Operating
      income (loss)
    
    
    (158,879
    )
    
    (1,266,778
    )
    
    344,035OTHER
      INCOME
    
    
    85,493
    
    
    487,596
    
    
    697,710INTEREST
      EXPENSE
    
    
    (61,475
    )
    
    (927,499
    )
    
    (301,434
    )Income
      (loss) before benefit for income taxes
    
    
    (134,861
    )
    
    (1,706,681
    )
    
    740,311BENEFIT
      FOR INCOME TAXES
    
    
    —
    
    
    623,695
    
    
    —NET
      INCOME (LOSS)
    
    $
    (134,861
    )
    $
    (1,082,986
    )
    $
    740,311EARNINGS
      (LOSS) PER COMMON SHARE (Note 6):Basic
      & diluted
    
    $
    (13.49
    )
    $
    (0.02
    )
    $
    74.03WEIGHTED
      AVERAGE NUMBER OF SHARES OUTSTANDINGBasic
      & diluted
    
    
    10,000
    
    
    52,779,861
    
    
    10,000
 
 
 **See
Notes to Consolidated Financial Statements.**
 
 
  F-4
  
 **SMALL
WORLD KIDS, INC.**
 **(formerly
SAVON TEAM SPORTS, INC.)**
  **CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)**
  **CommonShares**
    
    **CommonSharesAmount**
    
    **AdditionalPaid-InCapital**
    
    **AccumulatedDeficit**BALANCE,
      January 1, 2004
    
    
    —
    
    $
    —
    
    $
    —
    
    $
    —Contributed
      capital
    
    
    —
    
    
    —
    
    
    11,237Issuance
      of common shares in recapitalization transaction (Note 7)
    
    
    52,470,750
    
    
    52,471
    
    
    (52,471
    )
    
    —Reclassification
      of paid-in-capital
    
    
    —
    
    
    (41,234
    )
    
    41,234Issuance
      of common shares in debt transaction (Note 10)
    
    
    650,000
    
    
    650
    
    
    —
    
    
    —Net
      loss, May 21, 2004 to December 31, 2004
    
    
    —
    
    
    —
    
    
    —
    
    
    (1,082,986
    )BALANCE,
      December 31, 2004
    
    
    53,120,750
    
    $
    11,887
    
    $
    0
    
    $
    (1,082,986
    )
 
 **See
Notes to Consolidated Financial Statements.**
  F-5
  **SMALL
WORLD KIDS, INC.**
 **(formerly
SAVON TEAM SPORTS, INC.)**
 
 **CONSOLIDATED
STATEMENTS OF CASH FLOWS**
 
 **Increase
(Decrease) in Cash**
 
 January
      1, 2004 - May 20, 2004
      (Predecessor)
    
    May
      21, 2004
      (
      Inception) - December 31, 2004
      (Successor)
    
    Year
      Ended December 31, 2003
      (Predecessor)OPERATING
      ACTIVITIES:Net
      income (loss)
    
    $
    (134,861
    )
    $
    (1,082,986
    )
    $
    740,311Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
    
    
    62,325
    
    
    111,685
    
    
    182,556Amortization
      of intangibles
    
    
    —
    
    
    190,372
    
    
    —Non-cash
      interest expense
    
    
    —
    
    
    214,397
    
    
    —Change
      in fair value of warrant liability
    
    
    —
    
    
    (114,916
    )
    
    —Increase
      (decrease) in cash from changes in:Receivables
    
    
    (3,507,170
    )
    
    1,224,770
    
    
    (263,358
    )Inventories
    
    
    1,445,781
    
    
    353,777
    
    
    (1,172,181
    )Prepaid
      expenses and other assets
    
    
    182,695
    
    
    (651,144
    )
    
    (140,518
    )Accounts
      payable
    
    
    (2,052,019
    )
    
    1,012,666
    
    
    1,151,505Accrued
      liabilities
    
    
    (56,155
    )
    
    (22,530
    )
    
    243,815Other
    
    
    66,584
    
    
    (759,832
    )
    
    61,709Net
      cash provided (used) in operating activities
    
    
    (3,992,820
    )
    
    476,259
    
    
    803,839INVESTING
      ACTIVITIES:Purchases
      of property and equipment
    
    
    (81,372
    )
    
    (134,005
    )
    
    (132,499
    )Cash
      for stock in Small World Toys, less cash acquired
    
    
    —
    
    
    (5,510,870
    )
    
    —Cash
      for assets of Neurosmith
    
    
    —
    
    
    (875,562
    )
    
    —Net
      cash used in investing activities
    
    
    (81,372
    )
    
    (6,520,437
    )
    
    (132,499
    )
 FINANCING
      ACTIVITIES:Net
      borrowings against line of credit
    
    
    4,200,000
    
    
    1,129,262
    
    
    700,000Proceeds
      from Bridge loan, SWT, LLC
    
    
    —
    
    
    5,000,000
    
    
    —Proceeds
      from Bridge loan, related parties
    
    
    —
    
    
    3,200,000
    
    
    —Payments
      to former shareholders, Small World Toys
    
    
    (76,393
    )
    
    (1,500,000
    )
    
    (653,837
    )Dividends
      Paid
    
    
    —
    
    
    —
    
    
    (864,507
    )
 Net
      cash provided (used) by financing activities
    
    
    4,123,607
    
    
    7,829,262
    
    
    (818,344
    )NET
      INCREASE (DECREASE) IN CASH
    
    
    49,415
    
    
    1,785,084
    
    
    (147,004
    )
 Cash,
      beginning of period
    
    
    24,202
    
    
    —
    
    
    171,206Cash,
      end of period
    
    $
    73,617
    
    $
    1,785,084
    
    $
    24,202
 Non
      cash investing activitiesDetails
      of the Small World Toys acquisition:Fair
      value of assets acquired
    
    $
    —
    
    $
    17,594,798
    
    $
    —Liabilities
      assumed
    
    
    —
    
    
    (9,810,311
    )
    
    —Notes
      payable to former shareholder of SWT as part of acquisition price
    
    
    —
    
    
    (2,200,000
    )
    
    —Cash
      paid
    
    
    —
    
    
    5,584,487
    
    
    —Less
      cash acquired
    
    
    —
    
    
    (73,617
    )
    
    —Net
      cash paid for Small World Toys
    
    
    
    
    $
    5,510,870
    
    
    —Details
      of the Neurosmith acquisition:Fair
      value of assets acquired
    
    $
    —
    
    $
    875,562Liabilities
      assumed
    
    
    —
    
    
    0Net
      cash paid for Neurosmith
    
    
    —
    
    
    875,562Cash
      payments for interest
    
    $
    70,462
    
    $
    488,323
    
    $
    349,282Cash
      payments for taxes
    
    
    —
    
    
    2,900
    
    
    31,500
 
 **See
Notes to Consolidated Financial Statements.**
  F-6
 
 **SMALL
WORLD KIDS, INC.**
 **(formerly
SAVON TEAM SPORTS, INC.)**
 
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
31, 2004**
 
 **Note
1.** Basis
of Consolidation
 
 As a
result of the May 20, 2004 transactions described in the following paragraphs,
we have had a change of our management, our controlling shareholders, our
financial position and our business plan. Small World Kids, Inc. (formerly SavOn
Team Sports, Inc.) (“Small World” or the “Company”) became a holding company and
has no significant business operations or assets other than its interest in
Small World Toys, Inc. (“Small World Toys” or “SWT”).
 
 On May
20, 2004, Small World completed an Exchange Agreement whereby Small World issued
45,313,750 shares of its common stock, par value $.001 per share, in exchange
for all of the equity interests of Fine Ventures, LLC (“FVL”). Prior to the
Agreement, Small World was considered a shell company because it had minimal net
assets and operations. The agreement was accounted for as a recapitalization of
FVL because the shareholders of FVL control the Company after the transaction.
Therefore, for accounting purposes, the financial statements presented for Small
World are a continuation of FVL. Prior to May 20, 2004, FVL had no operating
activities and incurred start up expenditures of $83,560. For financial
statement presentation purposes, May 21, 2004 is considered the inception of
Small World and all expenditures prior to that date are included in the results
of operations for the period ended June 30, 2004, due to
immateriality.
 
 On May
20, 2004, Small World acquired all of the issued shares of Small World Toys
(Note 4) in a transaction accounted for as a purchase. As a result of the
acquisition, SWT is considered to be the predecessor
business.
 
 **Note
2.** Summary
of Significant Accounting Policies
 
 **Use
of Estimates**
  The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
 
 The
reserve for bad debt is an estimate determined from the analysis of the aging of
the accounts receivables, historical experience and knowledge of specific
customers.
 
 Based
upon a consideration of quantities on hand, actual and projected sales volume,
anticipated product selling prices and product lines planned to be discontinued,
slow-moving and obsolete inventory is written down to its net realizable
value.
 
 Management
makes estimates that affect reserves for impairment loss, discontinued
operations, deferred income tax assets and reserves for any other commitments or
contingencies. Any adjustments applied to estimates are recognized in the year
in which such adjustments are determined.
 
 F-7
 **Segments
of an Enterprise and Related Information**
  The
Company follows SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information.” SFAS No. 131 requires that a public business enterprise
report financial and descriptive information about its reportable operating
segments on the basis that is used internally for evaluating segment performance
and deciding how to allocate resources to segments. We sell developmental toys
to the specialty toy market. We have no other segment which meets the
quantitative thresholds for reportable segments. Our international sales
accounted for 2.3% and 1.9% of our net sales in 2004 and 2003, respectively.
  **Revenue
Recognition**
  The
Company recognizes revenue in accordance with Staff Accounting Bulletin (SAB)
101 “Revenue Recognition in Financial Statements” and SAB 104 “Revenue
Recognition”.  Revenue from product sales is recognized upon passing of
title to the customer. We ship product to our customers usually based on FOB
shipping point. On drop shipments, or direct shipments from our vendors to the
customer, revenue is recognized FOB origin or destination, depending on sales
terms. On shipments through a consolidator, usually export shipments, revenue is
recognized FOB shipment or consolidator, depending on sales terms. Sales
allowances for customer promotions, discounts and returns are recorded as a
reduction of revenue when the related revenue is recognized. We routinely commit
to promotional sales allowance programs with customers. These allowances
primarily relate to fixed programs, which the customer earns based on purchases
of our products during the year. Discounts are recorded as a reduction of
related revenue at the time of sale. While many of the allowances are based on
fixed amounts, certain of the allowances, such as the returns allowance, are
based on market data, historical trends and information from customers and are
therefore subject to estimation.
  **Barter
Transaction**
  In fiscal
year 2004, the Company exchanged $351,154 of excess inventory for advertising,
travel and other barter credits valued by the barter provider at the cost of
inventory. The Company recorded the barter credits as a prepaid expense at the
$351,154 market value of the inventory exchanged. Additionally, in accordance
with Emerging Issues Task Force No. 99-17, “Accounting for Advertising Barter
Transactions,” the Company accounted for this transaction as a sale, recording
revenue and cost of sales of $351,154 leaving no net impact to income (loss).
The Company used only $3,101 of barter credits for travel in 2004.
  **Advertising
Costs**
  All
advertising costs are expensed as incurred. Advertising costs charged to
operations were $2,500 and $2,088 for the years ended December 31, 2004 and the
December 31, 2003, respectively. Advertising costs under co-op arrangements were
$126,138 and $108,828 for the years ended December 31, 2004 and December 31,
2003, respectively.
  **Foreign
Currency and International Operations**
  The
Company has no significant foreign assets. Almost all of our purchases are in US
dollar denominations. Our nominal foreign currency transaction exposures include
gains and losses realized on unhedged inventory purchases that are denominated
in a currency other than the applicable functional currency.
  F-8
 **Cash
and Cash Equivalents, Short and Long-Term Investments**
  For
purposes of cash flows, the Company considers all highly liquid investments
purchased with a maturity of three months or less to be cash equivalents, those
with original maturities not greater than three months and current maturities
less than twelve months from the balance sheet date are considered short-term
investments, and those with maturities greater than twelve months from the
balance sheet date are considered long-term investments. The Company maintains
bank accounts with balances which, at times, may exceed federally insured
limits. The Company has not experienced any losses on such accounts. The Company
believes it is not exposed to any significant risk on bank deposit accounts. As
of December 31, 2004, the Company had cash balances of $1,785,084, of which
individual bank accounts over $100,000 were not insured by the
FDIC.
  **Trade
Accounts Receivable and Allowance for Doubtful Accounts**
  The
Company’s receivables are recorded when billed and represent claims against
third parties that will be settled in cash. The carrying value of the Company’s
receivables, net of the allowance for doubtful accounts, represents their
estimated net realizable value. The Company evaluates the collectibility of
accounts receivable on a customer-by-customer basis. The Company records a
reserve for bad debts against amounts due to reduce the net recognized
receivable to an amount the Company believes will be reasonably collected. The
reserve is a discretionary amount determined from the analysis of the aging of
the accounts receivables, historical experience and knowledge of specific
customers.
 
 **December
      31, 2004**
    
    
    **December
      31, 2003**
      **(Predecessor)**Trade
      Receivables
    
    $
    7,257,976
    
    $
    4,851,544Less
      Allowance for doubtful accounts
    
    
    (252,212
    )
    
    (128,180
    )Receivables,
      net
    
    $
    7,005,764
    
    $
    4,723,364
 
 **Inventory**
  Inventory
is valued at the lower of cost or market. Inventory costs consist of the
purchases of finished goods primarily from our vendors in Asia, freight costs
into our warehouse, duty, marine insurance, Broker’s and Bank fees. As such, the
Company does not have any raw or in-process inventory. Based upon a
consideration of quantities on hand, actual and projected sales volume,
anticipated product selling prices and product lines planned to be discontinued,
slow-moving and obsolete inventory is written down to its net realizable value.
Failure to accurately predict and respond to consumer demand could result in the
under production of popular items or overproduction of less popular items.
Management estimates are monitored on a quarterly basis and a further adjustment
to reduce inventory valuation to its net realizable value is recorded, as an
increase to cost of sales, when deemed necessary under the lower of cost or
market standard. As discussed in Footnotes 4 & 5, an independent valuation
of the inventory was performed as part of the acquisition of Small World Toys
and Neurosmith. As of December 31, 2004, the Company believed that an
obsolescence reserve was not necessary since the inventory valuation
approximated its net realizable value.
  F-9
 **Property
and Equipment**
  Property
and equipment are recorded at cost and are depreciated over the estimated useful
lives of the assets using the straight-line method. Estimated useful lives for
financial reporting purposes are as follows: furniture and fixtures, five to
seven years; computer hardware and software, three years; leasehold
improvements, over the shorter of five years or the lease term. The cost and
related accumulated depreciation of all property and equipment retired or
otherwise disposed of are removed from the accounts. Any gain or loss is
recognized in the current period. Various accelerated methods are used for tax
purposes.
  Maintenance
and repair costs are charged to expense as incurred, and renewals and
improvements that extend the useful lives of the assets are capitalized and
added to the property and equipment.
  Property
and equipment consisted of the following as of:
  **December
      31,2004**
    
    
    **December
      31, 2003****(Predecessor)**Computer
      hardware
    
    $
    151,753
    
    $
    513,299Computer
      software
    
    
    22,547
    
    
    349,417Warehouse
      equipment
    
    
    65,744
    
    
    257,322Vehicles
    
    
    0
    
    
    132,174Mold
      cost
    
    
    228,332
    
    
    60,300Furniture
      and fixtures
    
    
    56,353
    
    
    204,447Leasehold
      improvements
    
    
    92,015
    
    
    346,587616,744
    
    
    1,863,546Less:
      accumulated depreciation andamortization
    
    
    (111,685
    )
    
    (1,494,540
    )Property
      and equipment, net
    
    $
    505,059
    
    $
    369,006
 
 Depreciation
expense for the years ended 2004 and 2003 was $174,010 and $182,556,
respectively .
  **Intangible
Assets**
  The total
purchase price of our acquisitions are allocated to the fair value of the assets
acquired and liabilities assumed in accordance with the provisions of Statements
of Financial Accounting Standards (“SFAS”) No. 141, *Business
Combinations* and **** No. 142, *Goodwill
and Other Intangible Assets.* In
accordance with Statement of Financial Accounting Standards No. 141, we
determined the fair value of the assets acquired for purpose of allocating the
purchase price. We retained an independent financial advisory firm to conduct
investigations and analyses of the assets acquired to assist us with the
purchase price allocation, and the valuation firm has provided us with the fair
value of these assets upon which the related allocations are based and the
useful life over which they will be amortized. We continually review the
recoverability of the carrying value of long-lived and intangible assets using
the methodology prescribed in SFAS
144 , *Accounting
for the Impairment and Disposal of Long-Lived Assets* . We also
review long-lived assets and the related intangible assets for impairment
whenever events or changes in circumstances indicate that the carrying value of
such assets may not be recoverable .
  F-10
  The net
book value of intangible assets totaled $5,421,387 and $0 at December 31, 2004
and 2003, respectively.  The gross value of the intangible assets and their
respective accumulated amortization are as follows:
  **Original
      Cost**
    
    **AccumulatedAmortization
      as ofDecember 31, 2004**Intangible
      Assets:Goodwill
    
    $
    2,308,145
    
    $
    —Tradenames
    
    
    2,002,643
    
    
    111,760Technology
    
    
    320,971
    
    
    18,721Customer
      List
    
    
    840,000
    
    
    51,333Non-Compete
      Agreement
    
    
    140,000
    
    
    8,558Total
      Intangibles
    
    
    5,611,759
    
    
    190,372
  Intangible
assets are being amortized over their useful lives with the
customer list to be amortized over 10 years, tradenames to be amortized over 10
years, technologies to be amortized over 5 years and non-compete agreement to be
amortized over the length of the agreement or 3 years.
  The
Company recorded amortization expense for intangible assets of $190,372 for the
year ended December 31, 2004.  The estimated amortization expense on these
intangible assets is as follows for December 31:
  2005
    
    $
    395,1292006
    
    
    395,1292007
    
    
    386,5702008
    
    
    348,4622009
    
    
    329,742Total
    
    $
    1,855,032
 
 **Prepaid
expenses and other assets**
  Short and
long term prepaid expenses and other assets include deferred design and
packaging expenses that are amortized over the life of the applicable product in
the aggregate of $568,698 including the long term portion of $167,492, a barter
contract totaling $348,053 including the long term portion of $187,426, short
term prepaid expenses of $926,483 and deposits of $46,674 as of December 31,
2004. Other assets and long-term prepaid expenses are amortized over the period
benefited.
  **Major
Vendors**
  During
the year ended December 31, 2004, the top ten vendors accounted for 58% of the
total product purchases. The top two of these vendors accounted for 10% and 8%
of total purchases, respectively. The Company did not have any open accounts
payable at December 31, 2004 to either of these two vendors.
  During
the year ended December 31, 2003, the ten vendors accounted for 60% of total
product purchases. The top two of these vendors accounted for 9% and 9% of total
purchases, respectively. These two vendors accounted for approximately $0 and
$107,500 of the Company's accounts payable at December 31, 2003,
respectively.
  F-11
 **Stock
Options**
  As
permitted by SFAS No. 123, “Accounting for Stock-Based Compensation,” the stock
options granted are accounted for under the intrinsic value recognition and
measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to
Employees,” and related interpretations.
  The FASB
revised Statement No.123 in December of 2004 (See Recently issued accounting
pronouncements below) and this new statement is effective commencing the
4 th quarter
of 2005. The company has used stock and options as compensation in the past and
expects to do so in the future. This revised pronouncement, once effective, will
affect the companies recording of stock based compensation. The affect of these
changes cannot be determined at this time.
  The
Company’s 2004 Stock Compensation Plan provides for grants of options up to
7,800,000 shares of common stock, and was amended on January 25, 2005 to provide
grants of options up to 13,800,000. Pursuant to the Plan, the Company may grant
options to any directors, officers, employees and independent contractors of the
Company or of any subsidiary of the Company. As of March 21, 2005, there were
3,450,000 options available for grant.
  Stock
options are granted at, or above, the fair market value of our stock, and,
accordingly, no compensation expense is recognized for these grants in the
consolidated statements of operations. Total options granted to employees from
May 20, 2004 to December 31, 2004 were 6,570,000 at a weighted average exercise
price per share of $.38, a portion vesting immediately and the balance over
three years with expiration dates through October 2014. No options were
exercised in 2004. No options were granted in 2003 or prior to May 20 in
2004.
  The
following pro forma net loss and loss per share information is presented as if
the Company accounted for stock-based compensation awarded using the fair value
method. Under the fair value method, the estimated fair value of stock-based
incentive awards is charged against income over the vesting period.
  **Year
Ended December 31, 2004**
  **January
      1,2004 -May 20, 2004**
      **(Predecessor)**
    
    
    **May
      21, 2004**
      **(Inception)-December 31,2004**
      **(Successor)**
    
    
    **Year**
      **Ended**
      **December31,
      2003**
      **(Predecessor)**Net
      income (loss) as reported
    
    $
    (134,861
    )
    $
    (1,082,986
    )
    $
    740,311Deduct:
      Stock-based employee compensation expense determined under the fair value
      method for all awards, net of related tax effects
    
    
    —
    
    
    (420,475
    )
    
    —Pro
      forma net income (loss)
    
    $
    (134,861
    )
    $
    (1,503,461
    )
    $
    740,311Basic
      and diluted net earnings (loss) per share:As
      reported
    
    $
    (13.49
    )
    $
    (0.02
    )
    $
    74.03Pro
      forma
    
    $
    (13.49
    )
    $
    (0.03
    )
    $
    74.03
 
 F-12
 
 SFAS No.
123 requires the use of option pricing models that were not developed for use in
valuing employee stock options. The Black-Scholes option pricing model was
developed for use in estimating the fair value of short-lived exchange-traded
options that have no vesting restrictions and are fully transferable. In
addition, option pricing models require the input of highly subjective
assumptions, including the option’s expected life and the price volatility of
the underlying stock. Because the Company’s employee stock options have
characteristics significantly different from those of traded shares, and because
changes in the subjective input assumptions can materially affect the fair value
estimate, in the opinion of management, the existing models do not necessarily
provide a reliable single measure of the fair value of employee stock options.
The fair values of options granted in 2004 were estimated at the date of grant
using a Black-Scholes option-pricing model with the following weighted average
assumptions:
 ****
    ****
    **2004**
    ****Expected
      life (in years)
    1
    10Risk-free
      interest rate
    
    4.00
    %Volatility
    
    111.77
    %Dividend
      yield
    
    0.00
    %
 **Reclassifications**
  Certain
reclassifications were made to the 2003 financial statements' presentation in order to conform to the 2004 financial statements' preparation.
  **Recently
issued accounting pronouncements**
  In
December 2004, the FASB issued FASB Statement No. 123 (revised 2004),
“ *Shared-Based
Payment* ”
Statement 123(R) addresses the accounting for share-based payment transactions
in which an enterprise receives employee services in exchange for (a) equity
instruments of the enterprise or (b) liabilities that are based on the fair
value of the enterprise’s equity instruments or that may be settled by the
issuance of such equity instruments. Statement 123(R) requires an entity to
recognize the grant-date fair-value of stock options and other equity-based
compensation issued to employees in the income statement. The revised Statement
generally requires that an entity account for those transactions using the
fair-value-based method, and eliminates the intrinsic value method of accounting
in APB Opinion No. 25, “ *Accounting
for Stock Issued to Employees* ”, which
was permitted under Statement 123, as originally issued. The revised Statement
requires entities to disclose information about the nature of the share-based
payment transactions and the effects of those transactions on the financial
statements. Statement 123(R) is effective for public companies that do not file
as small business issuers as of the beginning of the first interim or annual
reporting period that begins after June 15, 2005 (i.e., second quarter 2005 for
the Company). All public companies must use either the modified prospective or
the modified retrospective transition method. Early adoption of this Statement
for interim or annual periods for which financial statements or interim reports
have not been issued is encouraged. The Company has not yet evaluated the impact
of adoption of this pronouncement which must be adopted in the fourth quarter of
our fiscal year 2005.
  As part
of its short-term international convergence project with the IASB, on December
16, 2004, the FASB issued Statement 153 to address the accounting for
non-monetary exchanges of productive assets. Statement 153 amends APB No. 29,
“ *Accounting
for Non-monetary Exchanges* ”, which
established a narrow exception for non-monetary exchanges of similar productive
assets from fair value measurement. This Statement eliminates that exception and
replaces it with an exception for exchanges that do not have commercial
substance. Under Statement 153 non-monetary exchanges are required to be
accounted for at fair value, recognizing any gains or losses, if their fair
value is determinable within reasonable limits and the transaction has
commercial substance. The Statement specifies that a non-monetary exchange has
commercial substance if future cash flows of the entity are expected to change
significantly as a result of the exchange. An entity should apply the provisions
of Statement 153 prospectively for non-monetary asset exchange transactions in
fiscal periods beginning after June 15, 2005. The Company will adopt this
Statement in fiscal 2005 and adoption is not expected to have a material impact
on our financial position or results of operations.
 
 F-13
 On
October 22, 2004, the American Jobs Creation Act of 2004 (the “AJCA”) became law
in the United States. In December 2004, the FASB issued FASB Staff Position
(“FSP”) No. FAS 109-1 ,
“Application of FASB Statement No. 109, *Accounting
for Income Taxes* , to the
Tax Deduction on Qualified Production Activities Provided by the American Jobs
Creation Act of 2004.” The AJCA introduced a tax deduction of up to 9 percent
(when fully phased-in) of the lesser of (a) “qualified production activities
income,” as defined in the AJCA, or (b) taxable income (after the deduction for
the utilization of any net operating loss carryforwards). FSP No. FAS 109-1 clarifies
that the qualified production activities deduction provided for under the AJCA
should be accounted for as a special deduction in accordance with Statement 109.
We believe that the adoption of FSP No. FAS 109-1 will not
have a material effect on our results of operations, financial position or cash
flows.
  In
December 2004, the FASB issued Staff Position No. FAS 109-2, “Accounting and
Disclosure Guidance for the Foreign Earnings Repatriation Provision within the
American Jobs Creation Act of 2004.” The AJCA provides for a special one-time
dividends received deduction on the repatriation of certain foreign earnings to
a U.S. taxpayer (repatriation provision). This Staff Position provides
accounting and disclosure guidance for the repatriation provision and is
effective immediately. The Company is currently assessing the provisions related
to the one-time repatriation of accumulated foreign earnings. We
believe that the adoption of FSP No. FAS 109-2 will not
have a material effect on our results of operations, financial position or cash
flows.
  In
November 2004, the FASB issued Statement No. 151, “ *Inventory
Costs* ”, to
amend the guidance in Chapter 4, “ *Inventory
Pricing* ”, of
FASB Accounting Research Bulletin No. 43, “ *Restatement
and Revision of Accounting Research Bulletins* .”
Statement No. 151 clarifies the accounting for abnormal amounts of idle facility
expense, freight, handling costs, and wasted material (spoilage). The Statement
requires that those items be recognized as current-period charges. Additionally,
Statement 151 requires that allocation of fixed production overheads to the
costs of conversion be based on the normal capacity of the production
facilities. Statement No. 151 is effective for fiscal years beginning after June
15, 2005. The Company is currently evaluating the impact of the adoption of this
Statement which is required to be adopted in our fiscal year 2006.
 
 **Note
3.** **Income
Taxes**
 
 The
Company accounts for its income taxes using the Financial Accounting Standards
Board Statements of Financial Accounting Standards No. 109, "Accounting for
Income Taxes," which requires the establishment of a deferred tax asset or
liability for the recognition of future deductible or taxable amounts and
operating loss and tax credit carryforwards. Deferred tax expense or benefit is
recognized as a result of timing differences between the recognition of assets
and liabilities for book and tax purposes during the year.
 
 F-14
 Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. Deferred tax assets are recognized for
deductible temporary differences and operating loss, and tax credit
carryforwards. A valuation allowance is established to reduce that deferred tax
asset if it is "more likely than not" that the related tax benefits will not be
realized.
 
 No
provision for federal taxes in the United States has been recorded for the year
ended December 31, 2004. The Company incurred net operating losses for these
periods. Small World Toys (predecessor) is a Subchapter S corporation and
therefore no federal or state provisions were recorded in 2003.
 **2004****(Successor)**Income
      Tax Provision
    
    $
    623,695Current:Federal
    
    
    —State
    
    
    —Deferred:Federal
    
    
    (485,285
    )State
    
    
    (138,410
    )Income
      tax (benefit) expense
    
    $
    (623,695
    )
 
  **2004**U.S.
      statutory income benefit (tax) rate
    
    
    (.34
    )%Gain
      allocated to Subchapter S shareholder
    
    
    .06Non-deductible
      interest
    
    
    (.02
    )State
      taxes, net of federal tax benefit
    
    
    (.04
    )(.34
    )%
 
 
 The
following table summarizes the deferred tax assets and liabilities for the year
ended December 31, 2004 :
 
 F-15
 
 **Federal**
    
    **State**Deferred
      tax assets:Net
      operating loss carryforwards
    
    $
    423,253
    
    $
    124,684Property,
      plant and equipment
    
    
    13,304
    
    
    3,443Other
      reserves
    
    
    39,730
    
    
    10,281Total
      deferred tax assets
    
    
    485,287
    
    
    138,408Deferred
      tax liabilities
    
    
    (848,000
    )
    
    (212,000
    )Net
      deferred tax liabilities
    
    $
    (362,713
    )
    $
    (73,592
    )
 
 
 The
Company has loss carryforwards of approximately $1,565,719 from continuing
operations, which may be used to offset future United States federal and state
income taxes and which begin to expire in 2019.
 
 
 **Note
4.** Acquisition
of Small World Toys
  On May
20, 2004, Small World Kids acquired all of the issued and outstanding equity
interests of Small World Toys. The Company acquired Small World Toys to be the
platform company that will provide well-known and respected brands,
long-standing retail relationships and strong operating experience. Management
expects that this base will provide the infrastructure from which to acquire
additional companies, products and brands. Acquisition targets will be chosen to
create synergies in operations, production and distribution without
cannibalizing sales. The results of Small World Toys are included in the
Statement of Operations for the period of May 21, 2004 to December 31, 2004.
  As
consideration for the SWT Shares, Small World Kids paid an aggregate sum of
$7,200,000, delivered as follows; (i) $5,000,000 in cash; and (ii) $2,200,000 in
the form of a $500,000 six month promissory note, a $1,000,000 seven month
promissory note, and a two year promissory note, payable in quarterly
installments commencing April 2005 with a minimum payment of $700,000 and a
maximum of $1,500,000, if certain sales targets are achieved. The contingent
payout of $800,000 will be recorded as goodwill, if the certain sales targets
are achieved. The total purchase price allocated to assets and liabilities was
based upon estimated fair market values obtained through an independent
valuation.  This allocation included the recording of approximately
$2,650,000 to identifiable intangible assets (including $840,000 to customer
list to be amortized over 10 years, $1,670,000 to tradenames to be amortized
over 10 years, and $140,000 to non-compete agreement to be amortized over the
length of the agreement or 3 years) and $2,316,176 to goodwill.
  A
condensed, unaudited balance sheet reflecting the acquired assets and
liabilities assumed as of the date of acquisition of Small World Toys was as
follows:
 
 Cash
    
    $
    73,617Accounts
      receivable and other receivables
    
    
    8,321,137Inventory,
      prepaids and other current assets
    
    
    3,864,882Property
      and equipment, net
    
    
    311,660Other
      long term assets
    
    
    57,326Intangible
      assets
    
    
    4,966,176Total
      assets
    
    
    17,594,798Accounts
      payable and accrued expenses
    
    
    1,650,311Revolving
      line of credit
    
    
    7,100,000Deferred
      tax liability
    
    
    1,060,000Total
      liabilities
    
    
    9,810,311Net
      - purchase price
    
    $
    7,784,487
 
 
 F-16
 
 The
following table shows the results of operations for the year ended December 31,
2004 as if the business combination had been completed as of January 1, 2004 as
compared to the results of operations of the predecessor company for the
year ended December 31, 2003 as if the predecessor was a
C-corporation.
 
 ****
    
    **Year
      EndedDecember 31, 2004**
    
    **Year
      EndedDecember 31, 2003**Net
      sales
    
    $
    29,492,888
    
    $
    25,970,397Net
      income (loss)
    
    
    (1,217,847
    )
    
    572,143Earnings
      (loss) per share
    
    
    (.02
    )
    
    57.21
 
 **Note
5.** Purchase
of the Neurosmith Product Line
 
 On
September 17, 2004, the Company a cquired
the electronic learning product line and related intellectual property from
Neurosmith, a California-based developer of electronic educational toys for
infants and preschoolers, for $875,562. The total
purchase price allocated to the acquired assets was based upon fair market
values obtained through an independent valuation.  This allocation included
the recording of $653,614 to identifiable intangible assets (including $320,971
to technology to be amortized over 5 years and $332,643 to tradenames to be
amortized over 10 years).
  A
condensed, unaudited balance sheet reflecting the acquired assets assumed as of
the date of acquisition of Neurosmith was as follows:
 
 Inventory
    
    $
    50,870Property
      and equipment, net
    
    
    171,078Intangible
      assets
    
    
    653,614Total
      assets
    
    
    875,562Total
      Liabilities
    
    
    0
 
  **Note
6.** Computation
of Earnings (Loss) per Share
 
 The
Company accounts for our earnings per share in accordance with SFAS No. 128,
which requires presentation of basic and diluted earnings per share.  Basic
earnings per share are computed by dividing income or loss available to common
shareholders by the weighted average number of common shares outstanding for the
reporting period.  Diluted earnings per share reflect the potential
dilution that could occur if securities or other contracts, such as stock
options, to issue common stock were exercised or converted into common
stock.
  F-17
 Earnings
per share have been computed as follows:
 **January
      1,2004 -May 20, 2004**
      **(Predecessor)**
    
    
    **May
      21, 2004**
      **(Inception)-December
      31,2004**
      **(Successor)**
    
    
    **Year**
      **Ended**
      **December30,
      2003**
      **(Predecessor)**Net
      income (loss)
    
    $
    (134,861
    )
    $
    (1,082,986
    )
    $
    740,311Basic
      weighted average number of common shares outstanding
    
    
    10,000
    
    
    52,779,861
    
    
    10,000Dilutive
      effect of stock options
    
    
    —
    
    
    —
    
    
    —Diluted
      weighted average number of common shares outstanding
    
    
    10,000
    
    
    52,779,861
    
    
    10,000Basic
      earnings (loss) per share
    
    $
    (13.49
    )
    $
    (0.02
    )
    $
    74.03Diluted
      earnings (loss) per share
    
    $
    (13.49
    )
    $
    (0.02
    )
    $
    74.03
 
 The
difference between Basic and Diluted EPS would be due to the effect of dilutive
stock options and warrants. However, the Company had no dilutive securities for
the year ended December 31, 2004 due to the Company having a net loss and
therefore none of the outstanding stock options and warrants aggregating
8,264,000 potential common shares were included in the calculations of earnings
per share. For the year ended December 31, 2003, the predecessor had no dilutive
securities since there were no outstanding options or warrants.
 ****
 **Note
7.** Related
Party Transactions
  Pursuant
to an Exchange Agreement dated as of May 20, 2004, by and among Small World Kids
and a group of investors (“the Investors”), Small World Kids issued 45,313,750
shares of its common stock, par value $0.001 per share, in exchange for all of
the equity interests of Fine Ventures, LLC (“FVL”). As a condition to the
closing of this transaction, Michael Rubin, the then-majority shareholder of
Small World Kids, sold 5,530,000 shares of his 6,180,000 shares of Small World
Kids common stock for $10,000 to the Investors.
  As
consideration for the SWT Shares, Small World Kids paid an aggregate sum of
$7,200,000, delivered as follows; (i) $5,000,000 in cash; and (ii) $2,200,000 in
Notes payable to the former shareholder of Small World Toys in the form of a
$500,000 six month promissory note, a $1,000,000 seven month promissory note,
and a two year promissory note, payable in quarterly installments commencing
April 2005 with a minimum payment of $700,000 and a maximum of $1,500,000, if
certain sales targets are achieved. As of December 31, 2004, only the two year
promissory note was unpaid.
  The
$5,000,000 paid in cash for the SWT Shares as part of the acquisition of Small
World Toys (Note 4) on May 20, 2004 came from the proceeds of a bridge loan from
SWT, LLC, a Delaware limited liability company and related party. Pursuant to
the terms of the bridge loan agreement, Small World Kids executed a five-year
note with interest payable quarterly in arrears at a rate equal to 10% per annum
(the “Bridge Note”).
  F-18
  Small
World Toys, a wholly owned subsidiary entered into a three year consulting
agreement with the former shareholder of Small World Toys on May 20, 2004. He
will provide consulting and advisory services to Small World Toys regarding the
management, operation and business of Small World Toys. Small World Toys will
pay to the former shareholder monthly on an annualized basis of $210,000 for the
first twelve months, $100,000 for the second twelve months and $50,000 for the
third twelve months. During this period, the former shareholder will be
available on a full time basis for the first twelve months, on a half-time basis
for the second twelve months and a quarter-time basis for the third twelve
months. This agreement has subsequently been modified to the following payment
schedule to the former shareholder along with a pro rated reduction of available
service time of $17,500 monthly payment from May 20, 2004 through March 2005,
$10,000 from April 2005 through August 2005 and $4,167 through May
2007.
  Small
World Kids entered into a three-year consulting agreement on May 20, 2004 with
David Marshall, Inc., a shareholder to pay monthly at a rate of $72,000 per
annum. On each anniversary date, the fee shall be increased by the increase in
the consumer index for the Los Angeles metropolitan statistical area. During the
term, David Marshall, Inc. will provide consulting services relating to business
plan development, strategic planning, public relations, investor relations,
acquisitions and financing activities.
  Small
World Kids entered into a six-month consulting agreement on May 20, 2004 with
SWT Investments, LLC, a shareholder for $100,000. During the term, SWT
Investments, LLC will provide consulting services relating to the acquisition of
Small World Toys, along with advising on customer research and development,
product distribution and marketing efforts, business plan development,
commercial or private loan and other debt financing efforts, commercial
financing and other business matters. The $100,000 payment was made June 18,
2004.
  On
September 15, 2004, the Company entered into a Note Purchase Agreement with St.
Cloud Capital Partners L.P. ("St. Cloud"), pursuant to which we issued to St.
Cloud a 10% Convertible Promissory Note in the aggregate amount of $2,000,000,
due September 15, 2005. In connection with the issuance of the note, we issued
St. Cloud 650,000 shares of common stock and warrants to purchase an additional
350,000 shares of common stock. The warrants are exercisable at an exercise
price per share equal to the lesser of $.50 per share or the average price of
the Put Agreements (Note 14). The warrants expire in September 2008.
  On
September 16, 2004, the Company entered into a Note Purchase Agreement with
Strome Hedgecap Ltd. ("Strome"), pursuant to which we issued to Strome a 10%
Convertible Promissory Note in the aggregate amount of $1,200,000, due September
16, 2005. In connection with the issuance of the Note the Company issued Strome
warrants to purchase 1,344,000 shares of common stock. The warrants are
exercisable at an exercise price per share equal to the lesser of $.50 per share
or the average price of the Put Agreements (Note 14).
  **Note
8.** Revolving
Line of Credit
 
 On
December 15, 2004, Small World Kids, Inc.’s subsidiary, Small World Toys entered
into a Revolving Credit and Security Agreement (the “Credit Agreement”) with PNC
Bank, National Association (“PNC”) pursuant to which PNC will make revolving
advances and issue or cause the issuance of letters of credit (the “Credit
Facility”).  This replaced the $11,500,000 credit facility with
Manufacturers Bank. The term of the Credit Agreement is three years. The maximum
amount available under the Credit Facility is $16,500,000 including a seasonal
advance of $1,500,000. The Company’s ability to utilize the Credit Facility is
based on a percentage of eligible receivables and eligible inventory is provided
in the Credit Agreement.  Interest is payable monthly at either PNC’s prime
rate plus 0.50% or one, two or three month fully absorbed PNC Eurodollar Rate
plus 3.25% as requested in accordance with the terms of the Credit
Agreement.  The Credit Agreement contains a number of covenants including a
fixed charge financial covenant. As of December 31, 2004, the Company was in
compliance with all the covenants under its Credit Facility with PNC. Small
World Toys’ obligation under the Credit Facility is collateralized by a security
interest the assets of Small World Toys, a guaranty by Small World Kids, Inc.
which is secured by certain shares of Small World Toys and a limited guaranty of
Debra Fine, the Chief Executive Officer and President of Small World Kids, Inc.
and Small World Toys.
 
 F-19
 As of
December 31, 2004, we had $1,806,922 of availability on our credit facility that
includes $1,500,000 available under the seasonal advance.
 
 **Note
9.** Bridge
Note, SWT LLC
 
 The
$5,000,000 paid in cash for the SWT Shares as part of the acquisition of Small
World Toys (Note 4) on May 20, 2004 came from the proceeds of a bridge loan from
SWT, LLC, a Delaware limited liability company and related party. Pursuant to
the terms of the bridge loan agreement, Small World Kids executed a five-year
note with interest payable quarterly in arrears at a rate equal to 10% per annum
(the “Bridge Note”). The Company shall pay to SWT, LLC seventy-five percent
(75%) of the net proceeds received by the Company from the Put Agreements (Note
14), after the notes from the Note Purchase Agreements with St. Cloud and Strome
(Note 10) have been repaid in full, to be applied to the repayment of the Bridge
Note until the Bridge Note is repaid in full.
 
  **Note
10.** Notes
payable, bridge
 
 On
September 15, 2004, we entered into a Note Purchase Agreement with St. Cloud
Capital Partners L.P. ("St. Cloud"), pursuant to which we issued to St. Cloud a
10% Convertible Promissory Note in the aggregate amount of $2,000,000, due
September 15, 2005. Interest shall be due and payable in full on September 15,
2005. However, if the note has not been paid in full by February 2005,
commencing on the last day of the next month and on the last day of each month
thereafter, interest payments will be due until the note is paid in full. The
Company shall pay to St. Cloud seventy-five percent (75%) of the net proceeds
received by the Company from the Put Agreements (Note 14) pari passu with the
Note Purchase Agreement with Strome (see below) to be applied to the repayment
of the note until the note is repaid in full. The Company also was required to
pay a closing fee of $80,000 and a management fee of $80,000 to St.Cloud. In
connection with the issuance of the note, we issued St. Cloud 650,000 shares of
common stock and warrants to purchase an additional 350,000 shares of common
stock. The warrants are exercisable at an exercise price per share equal to the
lesser of $.50 per share or the average price of the Put Agreements (Note 14).
The warrants expire in September 2008. St.Cloud can elect at its option, but
limited to one time, to convert any unpaid principal portion and accrued
interest on this note into shares of the Company common stock at the conversion
price equal to the average price per share of the Put Agreements (Note 14) for
all tranches. T he
Company has granted certain registration rights whereby the Company agreed to
include the common stock and warrants in the registration statement which will
be filed by the Company with the Securities and Exchange Commission (the “SEC”)
in connection with the Put
Agreements (Note
14).
  F-20
 On
September 16, 2004, we entered into a Note Purchase Agreement with Strome
Hedgecap Ltd. ("Strome"), pursuant to which we issued to Strome a 10%
Convertible Promissory Note in the aggregate amount of $1,200,000, due September
16, 2005. Interest shall be due and payable in full on September 16, 2005.
However, if the note has not been paid in full by February 2005, commencing on
the last day of the next month and on the last day of each month thereafter,
interest payments will be due until the note is paid in full. The Company shall
pay to Strome seventy-five percent (75%) of the net proceeds received by the
Company from the Put Agreements (Note 14) pari passu with the Note Purchase
Agreement with St.Cloud to be applied to the repayment of the Note until the
Note is repaid in full. The Company also was required to pay a closing fee of
$96,000 to Strome. In connection with the issuance of the Note we issued Strome
warrants to purchase 1,344,000 shares of common stock. The warrants are
exercisable at an exercise price per share equal to the lesser of $.50 per share
or the average price of the Put Agreements (Note 14). The warrants expire in
September 2008. Strome can elect at its option, but limited to one time, to
convert any unpaid principal portion and accrued interest on this note into
shares of the Company common stock at the conversion price equal to the average
price per share of the Put Agreements (Note 14) for all tranches. T he
Company has granted certain registration rights whereby the Company agreed to
include the common stock and warrants in the registration statement which may be
filed by the Company with the SEC in connection with the Put
Agreements (Note
14).
  The value
of the warrants associated with the Note Purchase Agreements with St. Cloud and
Strome were $138,982 and $388,067, respectively and were estimated at the date
of grant using a Black-Scholes pricing model with the following weighted average
assumptions:
 **2004**Expected
      life (in years)
    
    
    4Risk-free
      interest rate
    
    
    4.00
    %Volatility
    
    
    111.77
    %Dividend
      yield
    
    
    0.00
    %
 Upon the
payment of the notes, any unamortized debt issue costs will be charged to
expense.
  The value
attributed to the warrants and stock was recorded as Warrant Liability (Note 11)
and amortized using the effective interest rate method over the term or one year
resulting in an effective interest rate of 36.6%.
 
 **Note
11.** Warrant
Liability
 
 The
agreements with St.Cloud and Strome obligate the Company to include the warrant
shares and note shares and the common shares issued with those agreements with a
registration statement filed in connection with the Put Agreements (Note 14). As
of the date of this filing, the Company has not filed a registration statement.
Accordingly, pursuant to EITF 00-19, “Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock”, the
relative net value of the warrants at the date of issuance of $851,399 was
recorded as a warrant liability on the balance sheet. Any change in fair value
from the date of issuance to the date the underlying shares are registered will
be included in other (expense) income. T he change
in fair value from the date of issuance to December 31, 2004 of $114,916 has
been included in other (expense) income.
 
 F-21
 **Note
12.** Long-Term
Debt
 
 Long-term
notes payable at December
31, 200 4
consisted of the following:
 December
      31, 2004Three
      year, Revolving Credit and Security Agreement (the “Credit Agreement”)
      with PNC Bank, National Association (“PNC”) pursuant to which PNC will
      make revolving advances and issue or cause the issuance of letters of
      credit (the “Credit Facility”) due December 2007.  The term of the
      Credit Agreement is three years. The maximum amount available under the
      Credit Facility is $16,500,000 including a seasonal advance of $1,500,000.
      Interest is payable monthly at either PNC’s prime rate plus 0.50% or one,
      two or three month fully absorbed PNC Eurodollar Rate plus 3.25% (Note
      8).
    
    $
    8,229,262Five-year,
      10% note due May 2009 from SWT, LLC, a Delaware limited liability company
      and related party with interest paid quarterly (Note 9).
    
    
    5,000,000Two
      year, 5% promissory note payable to the former shareholder of Small World
      Toys, payable in quarterly installments commencing April 2005 with a
      minimum payment of $700,000 and a maximum of $1,500,000, if certain sales
      targets are achieved (Note 4).
    
    
    700,00013,929,262Less
      current maturities
    
    
    262,500Total
      long-term debt
    
    
    13,666,762
 Minimum
payments under these notes are as follows:
 
 Years
      ending December 31,
    
    Amount2005
    
    $
    262,5002006
    
    
    350,0002007
    
    
    8,316,7622008
    
    
    02009
    
    
    5,000,000Total
    
    
    13,929,262
 
 
 Long-term
notes payable at December
31, 200 3
(predecessor) consisted of the following:
  December
      31, 2003Revolving
      line of credit agreement with Manufacturers Bank expiring July 1,
      2005.  The term of the Credit Agreement is three years. The maximum
      amount available under the facility is $11,500,000. Interest is payable
      monthly at either the bank’s prime rate or at 1.75% above the LIBOR rate
      as requested in accordance with the terms of the
agreement.
    
    $
    2,900,000Unsecured
      related party notes, due at various dates through January 31, 2006,
      bearing interest between 10% and 11% per annum, payable annually and
      monthly.
    
    
    683,7233,583,723Less
      current maturities
    
    
    3,412,394Total
      long-term debt
    
    
    171,329
 ****
 F-22
 **Note
13.** Issuance
of Common Shares
 
 
 Pursuant
to an Exchange Agreement dated as of May 20, 2004, by and among Small World Kids
and a group of investors (“the Investors”), Small World Kids issued 45,313,750
shares of its common stock, par value $0.001 per share, in exchange for all of
the equity interests of Fine Ventures, LLC (“FVL”). As a condition to the
closing of this transaction, Michael Rubin, the then-majority shareholder of
Small World Kids, sold 5,530,000 shares of his 6,180,000 shares of Small World
Kids common stock for $10,000 to the Investors.
  On
September 15, 2004, in connection with the execution of the Note Purchase
Agreement with St. Cloud Capital Partners L.P. ("St. Cloud") (Note 10), we
issued St. Cloud 650,000 shares of common stock. The stock has been accounted
for in a manner similar to a debt discount.
 
 **Note
14.** Put
Agreement
  On July
28, 2004, the Company entered into a stock purchase agreement (“Put Agreements”)
with each of Wire Mill Partners III LLC, and Pewter Hill Partners LLC
(“Purchasers’) that obligated each of them to purchase, upon the Company’s
election, up to 8,000,000 shares of our common stock for an aggregate purchase
price of $5 million (representing a total commitment from both purchasers of $10
million). The obligation of the Purchaser is subject to the following
limitations: (i) the tranches must be sold in order; and (ii) the shares must be
registered for resale. If the Company sells all the shares to the Purchasers,
the first tranche of 8,000,000 shares will be sold at a purchase price of $.50
per share and the second tranche of 8,000,000 shares will be sold at $.75 per
share. The Company shall pay a five percent (5%) placement fee on the gross
proceeds payable to First Securities USA, Inc in connection with the Put
Agreements.
  On
September 23, 2004, the Company revised the Put Agreements with the Purchasers
that obligated each of them to purchase, upon the Company’s election, up to
10,100,000 shares of our common stock for an aggregate purchase price of $6.3
million (representing a total commitment of $12.6 million). If the Company sells
all the shares to the Purchasers, the first tranche of 10,100,000 shares will be
sold at a purchase price of $.50 per share and the second tranche of 10,100,000
shares will be sold at $.75 per share.
  In order
to exercise our rights under the Put Agreements, the Company is required to file
and have an effective registration statement covering the shares issuable under
the Put Agreements. As of the date of this filing, the Company has not filed a
registration statement. The Company may not elect to exercise our rights under
the Put Agreements.
  **Note
15.** Commitment
and Contingencies
  **Employment
Agreements**
  The
Company entered into an employment agreement with Debra Fine, our Chairman, CEO
and President on May 20, 2004 for a three-year term, which may continue upon the
mutual agreement of the parties thereto except the employment relationship will
be on an “at will” basis. The employment agreement provides that in the event
that Ms. Fine is terminated prior to the end of the initial three (3) year term,
other than for cause, we will pay her salary for the remainder of the three (3)
year term without any deduction or offset for any compensation earned or
received from any other sources. In addition, the Company will pay any earned,
but unpaid, bonus for the prior year, any unused vacation or other time-off
benefits and any unpaid reimbursable business expenses incurred through the last
day of her services. For an additional one (1) year after the termination, the
Company shall continue benefits, at our expense. All unvested portion(s) of the
options granted to her by the Company pursuant to her employment agreement shall
vest and immediately become exercisable upon the effective date of such
termination.
  The
Company entered into an employment agreement with John Nelson, our Chief
Operating Officer on September 22, 2004 for a two-year term, which may continue
upon the mutual agreement of the parties thereto except the employment
relationship will be on an “at will” basis. The employment agreement provides
that in the event that Mr. Nelson is terminated prior to the end of the initial
two (2) year term, other than for cause, we will pay his salary for an
additional six months without any deduction or offset for any compensation
earned or received from any other sources. In addition, the Company will pay any
earned, but unpaid, bonus for the prior year, any unused vacation or other
time-off benefits and any unpaid reimbursable business expenses incurred through
the last day of his services. For an additional six months, the Company shall
continue benefits, at our expense. All unvested portion(s) of the options
granted to him by the Company pursuant to his employment agreement shall expire
and be null and void.
  The
Company entered into an employment agreement with Robert Rankin, our Chief
Financial Officer on May 24, 2004 for a two-year term, which may continue upon
the mutual agreement of the parties thereto except the employment relationship
will be on an “at will” basis. The employment agreement provides that in the
event that Mr. Rankin is terminated prior to the end of the initial two (2) year
term, other than for cause, we will pay his salary for an additional six months
without any deduction or offset for any compensation earned or received from any
other sources. In addition, the Company will pay any earned, but unpaid, bonus
for the prior year, any unused vacation or other time-off benefits and any
unpaid reimbursable business expenses incurred through the last day of his
services. For an additional six months, the Company shall continue benefits, at
our expense. All unvested portion(s) of the options granted to him by the
Company pursuant to his employment agreement shall expire and be null and
void.
 
 
 F-23
 Contingent
Earnout
  As part
of the purchase for SWT Shares on May 20, 2004, we entered into a contingent
earnout with the former shareholder of Small World Toys (Note 4). We agreed to a
two year promissory note, payable in quarterly installments commencing April
2005 with a minimum payment of $700,000 and a maximum payment of $1,500,000, if
certain sales targets are achieved in 2005 and 2006.
  Legal
  The
Company is periodically involved in legal actions and claims that arise as a
result of events that occur in the normal course of operations. The Company is
not currently aware of any formal legal proceedings or claims that the Company
believes will have, individually or in the aggregate, a material adverse effect
on the Company's financial position or results of operations.
 
 Our
corporate headquarters are located at 5711 Buckingham Parkway, Culver City,
California 90230, where we lease approximately 28,000 square feet and sublease
approximately 17,000. This lease expires on February 28, 2006.  We
also lease approximately 62,000 square feet of warehouse space in Carson,
California. This lease expires on December 31, 2005. We lease approximately
3,000 square feet of showroom space in New York City, however, we do not intend
to renew this lease or lease new showroom space in New York City when this lease
expires on April 30, 2005. We believe these facilities and additional or
alternative space available to us will be adequate to meet our needs in the near
term. The aggregate future rental rates are:
  Year
      Ending December 312005
    
    $
    649,0722006
    
    
    44,574
 **License
Agreements**
  The
Company is party to several license agreements for the acquisition and
development of certain toys and related manufacturing, licensing and
distribution rights. Royalties range from 3% to 10% of various categories of
sales. The agreements remain in effect for as long as the Company manufactures
and sells the toys.
 
 **Note
16.** Profit
Sharing Plan
 
 The
Company has a qualified 401(k) profit sharing plan in effect for eligible
employees. The plan provides for pre-tax employee contributions. A portion of
the pre-tax employee contributions will be matched by the Company on a
discretionary basis. The plan also provides for annual contributions at the
discretion of the Company. Total contributions are not to exceed annual amounts
deductible under Internal Revenue Service regulations. No contributions were
made for the years ended December 31, 2004 and December 31, 2003.
 
 F-24