JOHNSON HEALTH TECHNOLOGY CO., LTD. FINANCIAL STATEMENTS WITH REPORT OF INDEPENDENT AUDITORS FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

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1 CO., FINANCIAL STATEMENTS WITH REPORT OF INDEPENDENT AUDITORS FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011 Notice to readers: The reader is advised that these financial statements have been prepared originally in Chinese. In the event of a conflict between these financial statements and the original Chinese version or difference in interpretation between the two versions, the Chinese language financial statements shall prevail. Address: No.26, Qingquan Rd., Daya Dist., Taichung City, Taiwan R.O.C. Telephone:

2 Report of Independent Auditors The Board of Directors and Shareholders Johnson Health Technology Co., Ltd. We have audited the accompanying balance sheets of Johnson Health Technology Co., Ltd. as of December 31, 2012 and 2011, and the related statements of income, changes in shareholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Guidelines for Certified Public Accounts Examination and Reporting on Financial Statements and auditing standards generally accepted in the Republic of China in Taiwan. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statements presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Johnson Health Technology Co., Ltd. at December 31, 2012 and 2011, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the Republic of China in Taiwan. We have also audited the consolidated financial statements of Johnson Health Technology Co., Ltd. and subsidiaries as of and for the years ended December 31, 2012 and 2011 on which we have expressed an unqualified opinion. March 18, 2013 Taichung, Taiwan Republic of China 2

3 CO., Balance Sheets December 31, 2012 and 2011 (Expressed in Thousands of New Taiwan Dollars) Assets Current Assets Cash and cash equivalents (Notes 2 and 4.a) $395,707 $375,401 Notes receivable, net (Notes 2 and 4.b) 54,776 9,300 Accounts receivable, net (Notes 2 and 4.b) 320, ,409 Accounts receivable- related parties (Notes 2, 4.b and 5) 4,314,196 4,127,971 Other accounts receivable- related parties (Note 5) 624, ,891 Inventories, net (Notes 2 and 4.c) 417, ,819 Other current assets (Note 4.d) 137, ,037 Total Current Assets 6,263,456 5,704,828 Long-term Investments under Equity (Notes 2 and 4.e) Property, Plant and Equipment, net (Notes 2, 4.f) Intangible Assets Computer software cost (Note 2) Other Assets 6,634,194 5,685, , ,899 25,942 27,300 Refundable deposits 15,249 14,087 Total Assets $13,347,216 $11,809,634 (The accompanying notes are an integral part of financial statements) (Continued on next page) 3

4 CO., Balance Sheets (coutinued) December 31, 2012 and 2011 (Expressed in Thousands of New Taiwan Dollars) Current Liabilities Liabilities and Stockholders' Equity Short-term borrowings (Note 4.g) $1,945,420 $1,153,624 Commercial paper payable (Note 4.h) 99,799 99,775 Financial liabilities at fair value through income statement (Note 4.i) 6,406 - Notes and accounts payable (Note 4.j) 775, ,170 Accounts payable-related party (Note 4.j and 5) 2,575,156 2,522,674 Income tax payable (Note 2) 165, ,371 Accrued expenses (Note 4.k and 5) 468, ,387 Long-term loans - current portion (Note 4.m) 105, ,600 Other current liabilities (Note 4.l) 150, ,346 Deferred profit- current (Note 2) 311, ,646 Total Current Liabilities 6,602,805 5,655,593 Long-term liabilities Long-term loans (Note 4.m) 660, ,100 Reserve Reserve for land value incremental tax 47,428 47,428 Other Liabilities Accrued pension liabilities (Notes 2 and 4.n) 30,876 30,876 Deferred income tax liabilities- noncurrent (Notes 2 and 4.p) 91, ,820 Deferred profit- noncurrent (Note 2) 753 2,830 Other liabilities 34,869 15,004 Total Other Liabilities 157, ,530 Total Liabilities 7,467,904 6,209,651 Stockholders' Equity (Notes 2 and 4.o) Common stock 2,003,815 1,993,019 Capital surplus 39,032 34,863 Legal reserve 697, ,395 Special reserve - 206,794 Retained earnings 3,302,170 2,713,692 Capital surplus from assets revaluation 64,037 64,037 Cumulative translation adjustments (227,206) (32,817) Total Stockholders' Equity 5,879,312 5,599,983 Total Liabilities and Stockholders' Equity $13,347,216 $11,809,634 (The accompanying notes are an integral part of financial statements) 4

5 CO., Statements of Income For the Years Ended December 31, 2012 and 2011 (Expressed in Thousands of New Taiwan Dollars Except Earnings Per Share Data) Net Sales (Notes 2 and 4.s) $9,494,635 $9,006,965 Cost of Goods Sold (7,337,444) (6,853,582) Gross Profit 2,157,191 2,153,383 Unrealized Intercompany Profit (6,540) (26,068) Net Gross Profit 2,150,651 2,127,315 Operating Expenses (1,677,127) (1,449,162) Operating Income 473, ,153 Non-operating Income Interest income 24,953 24,368 Foreign currency exchange gain - 23,875 Investment income accounted for under the equity method (Note 2 and 4.e) 527, ,790 Gain on disposal of property, plant and equipment, net Gain on disposal of investment (Note 2 and 4.i) 1,120 - Gain on valuation of financial asset - 6,004 Other income 82,352 77,787 Subtotal 635, ,833 Non-operating Expenses Interest expense (33,445) (26,826) Loss on disposal of property, plant and equipment, net (213) (1,360) Loss on disposal of investment (Note 2 and 4.i) - (16,366) Foreign currency exchange loss (81,432) - Loss on valuation of financial liability (6,406) (3,188) Other losses (1,021) (3) Subtotal (122,517) (47,743) Income before Income Tax 986, ,243 Income Tax Expense (Notes 2 and 4.p) (129,396) (132,554) Net Income $857,357 $770,689 Earnings Per Common Share (Note 4.q) $4.28 $3.85 Diluted Earnings Per Common Share (Note 4.q) $4.28 $3.85 (The accompanying notes are an integral part of financial statements) 5

6 CO., Statements of Changes in Stockholders' Equity For the Years Ended December 31, 2012 and 2011 (Expressed in Thousands of New Taiwan Dollars) Description Common Stock Captial Surplus Legal Reserve Special reserve Retained Earnings Cumulative Translation Adjustments Unrealized Revaluation Increments Balance, January 1, 2011 $1,943,610 $30,682 $595,327 $ - $2,320,636 $(270,832) $64,037 $4,683,460 Distribution of 2010 earnings: Legal reserve 25,068 (25,068) - Special reserve 206,794 (206,794) - Cash dividends (97,181) (97,181) Stock dividends 48,590 (48,590) - Bonus to employees - stock 819 4,181 5,000 Cumulative translation adjustments 238, ,015 The Changes of subsidiaries' equity - Net Income, , ,689 Balance, December 31, ,993,019 34, , ,794 2,713,692 (32,817) 64,037 5,599,983 Distribution of 2011 earnings: Legal reserve 77,069 (77,069) - Special reserve (206,794) 206,794 - Cash dividends (388,639) (388,639) Stock dividends 9,965 (9,965) - Bonus to employees - stock 831 4,169 5,000 Cumulative translation adjustments (194,389) (194,389) Net Income, , ,357 Balance, December 31, 2012 $2,003,815 $39,032 $697,464 $ - $3,302,170 $(227,206) $64,037 $5,879,312 Total (The accompanying notes are an integral part of financial statements) 6

7 CO., Statements of Cash Flows For the Years Ended December 31, 2012 and 2011 (Expressed in Thousands of New Taiwan Dollars) Cash Flows from Operating Activities: Net Income $857,357 $770,689 Adjustments to reconcile net income to net cash provided by (Used in) operating activities: Investment gain (527,197) (140,790) Depreciation 31,487 29,613 Amortization 17,860 11,915 Loss from market price recovery of inventory - 1,117 Loss (Gain) on valuation of financial asset and liability 6,406 (2,816) Loss on disposal of property, plant and equipment 89 1,351 Increase in notes receivable, net (45,476) (3,170) Increase in accounts receivable, net (20,620) (112,678) Increase in accounts receivable-related parties, net (186,225) (1,085,365) Increase in other receivable-related parties, net (837,782) (478,798) Increase in inventories, net (15,327) (65,932) Decrease (Increase) in other current assets 29,838 (11,267) (Increase) Decrease in deferred income tax asset (15,010) 12,671 Increase in notes payable, net 2,212 14,434 Increase in accounts payable, net 59, ,185 Increase in accounts payable-related parties, net 52, ,535 Increase in accrued expenses 75,842 41,191 Increase in income tax payable 19,916 4,989 Increase in other liabilities 19,865 - Increase in other current liabilities 2,528 30,493 Increase (Decrease) in deferred income tax liabilities 354 (13,664) Increase in defferred profit 4,462 22,626 Net Cash (Used in) Provided by Operating Activities (467,372) 81,329 Cash Flows from Investing Activities: Increase in long-term investments accounted for under the equity method (93,587) (66,203) Purchase of property, plant and equipment (63,679) (27,867) Proceeds from sales of property, plant and equipment Increase in refundable deposits (1,162) (1,984) Increase in computer software cost (16,502) (32,262) Net Cash Used in Investing Activities (174,803) (128,259) (The accompanying notes are an integral part of financial statements) (Continued on next page) 7

8 CO., Statements of Cash Flows (Continued) For the Years Ended December 31, 2012 and 2011 (Expressed in Thousands of New Taiwan Dollars) Cash Flows from Financing Activities: Proceeds from short-term loans 791, ,874 Repayments of short-term loans (63,600) (84,300) Proceeds from long-term loans 322,900 - Increase (Decrease) in commercial paper payable 24 (121) Cash dividends (388,639) (97,181) Net Cash Provided by Financing Activities 662, ,272 Net Increase in Cash and Cash Equivalents 20, ,342 Cash and Cash Equivalents, Beginning of Year 375, ,059 Cash and Cash Equivalents, End of Year $395,707 $375,401 Supplementary Disclosure of Cash Flow Information: Interest paid $33,030 $26,401 Income tax paid $117,702 $114,324 Supplemental Schedule of Non-cash Investing and Financing Activities: Current portion of long-term loans payable $105,000 $168,600 Long-term investments under equity converted from account receivable $504,365 $226,806 Capitalization of retained earnings $9,965 $48,590 Bouns to employees - stock $5,000 $5,000 Partial cash flow transaction from investing activities Acquisition of property, plant and equipment $62,179 $34,390 Payable on equipment, Beginning of Year 7, Payable on equipment, End of Year (5,572) (7,072) Cash Paid $63,679 $27,867 (The accompanying notes are an integral part of financial statements) 8

9 CO., Notes to Financial Statements December 31, 2012 and 2011 (Expressed in Thousands of New Taiwan Dollars, unless Otherwise Stated) 1. ORGANIZATION AND OPERATIONS Johnson Health Technology Co., Ltd. (the Company) was incorporated in The main activities of the Company are manufacturing and selling sports equipment, cardio equipment, weight training equipment, and related electronic components. The shares of the Company were listed on Taiwan Stock Exchange Corporation on January 9, As of December 31, 2012 and 2011, the Company had 840 and 768 employees, respectively. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The financial statements are prepared in conformity with the Business Entity Accounting Act, Regulation on Business Entity Accounting Handling with respect to financial accounting standards, Guidelines Governing the Preparation of Financial Reports by Securities Issuers and accounting principles generally accepted in the Republic of China (R.O.C). A summary of significant accounting policies is as follows: (1) Cash and Cash Equivalents Cash and cash equivalents shall mean cash in treasury, bank deposits, petty cash, revolving funds paid in small amounts for incidental expenses, and highly liquid short-term investments convertible into fixed cash amounts at any time, due in the near future, where fluctuations in the investments interest rates have little or no effect to investment value. (2) Foreign-currency Transactions a. The accounts of the Company are maintained in New Taiwan Dollars Transactions denominated in foreign currencies are translated into New Taiwan Dollars at the rates of exchange in effect when the transactions occur. b. Foreign exchange gains or losses resulted from the exchange rate fluctuations between the transaction date and the actual settlement date are recognized as follows: 9

10 (a) When the transaction date and the actual settlement date fall in the same accounting period, the differences between the recorded amount and the settled amount are credited to or charged against current income. (b) When the transaction date and the actual settlement date fall in different accounting periods, receivables and payables denominated in foreign currencies are restated using the spot rates prevailing on the balance sheet date. Any resulted gains or losses are reflected in current income. c. The financial statements of all foreign subsidiaries were prepared in their respective local currencies and translated into New Taiwan Dollars Assets and liabilities are translated from the foreign subsidiary's functional currency using the current exchange rate at the balance sheet date. Equity accounts are translated at their historical exchange rates. Profit and loss accounts are translated using the weighted average exchange rate for the period. Gains or losses from translation of foreign currency financial statements are recorded as translation adjustment and are reported as a separate component of stockholders' equity. (3) Financial Assets and Financial Liabilities Financial assets in the scope of R.O.C SFAS No. 34, Accounting for Financial Instruments are classified as financial assets measured at fair value, where changes in value are recognized through profit or loss, bond portfolios without active market, derivatives for hedging purpose, held-to-maturity investments, and available-for-sale investments. Financial assets are valued under fair value method at time of recognition. For assets not valued under fair value and changes in asset values are recognized as profit or loss, the asset value would include the cost for acquisition or distribution of the asset. Financial liabilities are classified as financial liabilities at fair value through profit and loss. Under the dealing practices adopted by the Company, the purchase or disposal of financial instruments is recognized on the trading day, i.e. the date when the Company commits the purchase or sales transaction. The dealing practice is the transaction of a financial instrument, the actual delivery of the asset is within the period of common practice of the market or regulation. 10

11 a. Financial Assets at Fair Value Through Income Statement Derivatives that do not meet the criteria for hedge accounting are initially recognized at fair value, with transaction costs expensed as incurred. The derivatives are remeasured at fair value subsequently with the changes in fair value recognized in earnings. Fair value is determined by using valuation techniques consistent with prevailing market conditions in the industry. (4) Derivative Financial Instruments The Company takes derivative financial instrument transactions such as forward currency contracts and interest rate exchange contracts to hedge its risk associated with foreign currency and interests on long-term liabilities. These derivative financial instruments are initially recognized at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at fair value. Derivatives are carried as assets when the fair value is positive and as liabilities when the fair value is negative. Any gains or losses arising from changes in fair value on derivatives that do not qualify for hedge accounting are taken directly to net profit or loss for the period. (5) Allowance for Doubtful Accounts The Company first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant. If there is objective evidence that an impairment loss on individual financial asset has been incurred, the amount of impairment loss should be assessed individually. If there is objective evidence that an impairment loss on financial assets that are not individually significant has been incurred, the Company shall include those assets in a group of financial assets with similar credit risk characteristics and collectively assess them for impairment. Similarly, for receivables with no objective evidence that an impairment loss has been incurred, those receivables shall be collectively assessed for impairment. 11

12 (6) Inventories Inventories are valued at the lower of cost and net realizable value. Cost incurred in bringing each product to its present location and condition is accounted for as follows: a. Raw materials: purchase cost on a weighted average cost formula. b. Work in progress and finished goods: Cost of direct materials and labor and a proportion of manufacturing overheads based on normal operating capacity on a weighted average cost formula. c. Net realizable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated costs necessary to make the sale. (7) Long-term Investments under Equity a. Long-term investments under equity method are initially stated at acquisition cost. b. Investment income or loss is accounted for provided that the Company owns at least 20% of the outstanding voting rights of the investees or has significant influence over the operating decisions of the investees. c. Investments in which the Company has ownership of at least 20% or exercises significant influence on operating decisions are accounted for under the equity method. Prior to January 1, 2006, the difference of the acquisition cost and the underlying equity in the investee s net assets as of acquisition date was amortized over 5 years; however, effective January 1, 2006, goodwill arising from new acquisitions is analyzed and accounted for under the ROC SFAS No. 25, Business Combination-Accounting Treatment under Purchase Method, where goodwill is not subject to amortization. 12

13 d. Unrealized intercompany gains and losses arising from sales from the Company to equity method investees are eliminated in proportion to the Company s ownership percentage until realized through transactions with third parties. Intercompany gains and losses arising from transactions between the Company and majority-owned (above 50%) subsidiaries are eliminated entirely until realized through transactions with third parties. e. Cash dividends received during the year of change would be applied as a reduction of the carrying amount of the investment. (8) Property, Plant and Equipment a. In December 2010, the Company reevaluated its land values based on government announced values. The Company assumed the land value increment tax as a long-term liability. b. With the exception of land, which is carried at appraised value, property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives allowed by local income tax laws and regulations. The useful lives are summarized as follows: Items Buildings Machinery and equipment Transportation equipment Furniture, fixtures and equipment Tooling Leasehold improvements Other equipment Useful Lives 3 ~ 50 years 3 ~ 12 years 5 years 3 ~ 10 years 2 ~ 3 years 3 ~ 10 years 2 ~ 20 years c. Major replacements, renewals and betterments are capitalized, while maintenance and repairs are expensed currently. d. Interest incurred in connection with the construction or acquisition of property, plant and equipment is capitalized as part of the cost of the assets. e. The cost and accumulated depreciation of property, plant and equipment are removed from account at the time of abandonment or disposal and the resulting gains or losses are categorized as non-operating income or expenses. 13

14 (9) Intangible Assets a. Intangible assets are the non-monetary assets that can be identified, controlled and create future economic benefit to the company. It is stated at cost and amortized using the straight-line method over the estimated life year. b. Intangible assets including software cost is recorded at cost and amortized on the straight-line basis over two to three years. (10) Asset Impairment Pursuant to the R.O.C SFAS No.35, Impairment of Assets the Company assesses indicators for impairment for all its assets at each balance sheet date. If impairment indicators exist, the Company shall then compare the carrying amount with the recoverable amount of the assets or the cash-generating unit ( CGU ) associated with the assets and write down the carrying amount to the recoverable amount where applicable. Recoverable amount is defined as the higher of fair values less cots to sell and the values in use. For previously recognized losses, the Company shall asses, at each balance sheet date, whether the impairment loss may no longer exist or may have decreased. If such indication arises, the Company recalculates the recoverable amount of the asset. If the recoverable amount increases as a result of the increase in the estimated service potential of the assets, the Company reverses the impairment loss to the extent that the carrying amount after the reversal does not exceed the carrying amount that would otherwise result (net of amortization or depreciation) had no impairment loss been recognized for the assets in prior years. The impairment loss and reversals are recorded as non-operating losses or gain. (11) Pensions According to the Labor Standards Act of the Republic of China ( the Act ), the Company established an Employee Retirement Fund ("the Fund"). The Fund has been administered by the Employee Retirement Fund Committee of the Company as prescribed by the Act, and is maintained under the Committee s name with a government-approved financial institution. The Fund is totally independent from the Company, and is hence excluded from the financial statements. 14

15 Effective from 1997, the Company adopted, on a prospective basis, Statement of Financial Accounting Standards (SFAS) No.18 of Taiwan Accounting for Pensions. Based on the actuarial report with measuring date of December 31, 1997, the excess of accumulated benefit obligation over plan assets is recognized as the minimum pension liability in the balance sheets. Net pension costs based on the actuarial report are recognized from January 1, 1998, and the unrecognized net asset or obligation at transition is amortized equally at the straight-line method. The Labor Pension Act of R.O.C. ( the LPA ), which adopts a defined contribution scheme, takes effect from July 1, In accordance with the LPA, employees of the Company may elect to be subject to either the LPA, and maintain their seniority before the enforcement of the LPA, or the pension mechanism of the Labor Standards Act. For employees subject to the LPA, the Company shall make monthly contributions to the employees individual pension accounts on a basis of no less than 6% of the employees monthly wages. (12) Deferred Profit The Company estimated the deferred profit using actual gross profit in the year ended according to the amount of the inventory purchased from the Company, which was held by the investee company under equity method. (13) Legal Reserve Company Act provides that a company, when allocating its surplus profits after having paid all taxes and dues, shall first set aside ten percent of said profits as legal reserve until such retention equals the amount of paid-in capital. This retention is accounted for as the legal reserve. The reserve may be used to compensate for the loss. Where a company incurs no loss, it may, distribute only the portion of its legal reserve which exceeds 25 percent of the paid-in capital, by issuing new shares which shall be distributable as dividend shares to its original shareholders in proportion to the number of shares being held by each of them or by cash. (14) Special reserve Pursuant to Article 41 of the Securities and Exchange Act of the R.O.C., a special reserve is set aside from the current net income and prior undistributed earnings for items that are accounted for as deductions to stockholders equity such as unrealized loss on long-term investments and cumulative translation adjustments. 15

16 (15) Income Tax a. The Company adopted SFAS No. 22, "Accounting for Income Taxes." Under SFAS No.22, a current income tax liability or asset is recognized for the estimated taxes payable or refundable for the current year, and a deferred tax asset or liability is recognized for the estimated future tax effects attributable to temporary differences, tax credits, and loss carryforwards. A valuation allowance is recognized if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax asset will not be realized. b. The Company s undistributed retaining earnings are subjected to an additional 10% income tax which is expensed as of the date of the shareholders meeting when the appropriation of earnings is resolved. c. The Company adopted SFAS NO.12, Income Tax Credit. Under SFAS No.12 income tax credit resulted from acquisition of equipment, expenditures on technique research and development, and personnel training are recognized in the current period. d. The R.O.C. government enacted the Alternative Minimum Tax Act ( AMT Act ), which became effective on January 1, The alternative minimum tax ( AMT ) imposed under the AMT Act is a supplemental tax levied at a rate of 10% which is payable if the income tax payable determined pursuant to the Income Tax Act is below the minimum amount prescribed under the AMT Act. The taxable income for calculating the AMT includes most of the income that is exempted from income tax under various laws and statutes. The Company has considered the impact of the AMT Act in the determination of its tax liabilities. (16) Recognition of Revenue The company adopted the statement of Financial Accounting Standard (SFAS) NO.32 of Taiwan, Accounting for Recognition of Revenue. Revenues are recognized when persuasive evidence of an arrangement exists, the product or service has been delivered, the seller s price to the buyer is fixed or determinable and collectability is reasonably assured. Most of the Company s sales transactions have shipping terms of Free on Board, or FOB, shipment in which title and the risk of loss or damage is transferred to the customer upon delivery of the product to a carrier approved by the customer. 16

17 Installment sales revenue is based on general sales method, the difference of the cash price and the price of installment sales is unrealized gain on sales. After the period, recognizing interest revenue is by interest method. Installment accounts receivable is as the current assets. (17) Bonus to Employees, Directors and Supervisors The Company adopted Interpretation , Accounting for Bonuses to Employees, Directors and Supervisors issued in March 2007 by the Accounting Research and Development Foundation of the R.O.C.(ARDF), which requires companies to record bonuses paid to employees, directors and supervisors as an expense rather than as an appropriation of earnings. (18) Earnings Per Common Share Computation of earnings per share (EPS) is based on the weighted average number of common shares outstanding during the period. Shares issued for cash are weighted for the portion of the period they were outstanding, whereas shares issued as a result of a stock dividends, capitalization of employee dividends or capitalization of capital surplus are weighted given retroactive recognition to the appropriate equivalent change in capital structure for the entire period. Diluted EPS reflects the potential dilution that could occur if diluted securities and other contracts to issue common stock are exercised or converted into common stock, or resulted in the issuance of common stock that then shared in the earnings of the Company. (19) Operating Segment Information An operating segment is a component of an entity that has the following characteristics: a. Engaging in business activities from which it may earn revenues and incur expenses, 17

18 b. Whose operating results are regularly reviewed by the entity s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance, and c. For which discrete financial information is available. The Company discloses its operating segment information in the Johnson Health Technology Co., Ltd. and subsidiaries consolidated financial statements. 3. REASON AND EFFECT OF CHANGE IN ACCOUNTING PRINCIPLES (1) Effective January 1, 2011, the Company adopted the third revised Statement of Financial Accounting Standards (SFAS) No. 34, Accounting for Financial instrument. Such changes in accounting principle did not have significant effect on the Company s financial statement for the year ended December 31, (2) Effective January 1, 2011, the Company adopted R.O.C. SFAS No. 41, Operating Segments (R.O.C. SFAS 41), to present operating segment information. The newly issued R.O.C. SFAS 41 replaced R.O.C. SFAS No. 20, Segment Reporting, the comparative operating segment information has been presented accordingly. 4. SUMMARY OF SIGNIFICANT ACCOUNTS a. Cash and Cash Equivalents Cash and cash equivalents as of December 31, 2012 and 2011 consisted of the following: Cash on hand $1,229 $1,135 Cash in banks 395, ,348 Total 397, ,483 Less: Allowance for foreign (1,392) (82) exchange loss Net $395,707 $375,401 18

19 b. Notes and Accounts Receivable, Net Accounts receivables as of December 31, 2012 and 2011 consisted of the following: Sub total Total Sub total Total Notes receivable, net $54,776 $9,300 Accounts receivable Accounts receivable $199,940 $176,078 Add (Less): Allowance for foreign exchange gain (loss) (532) 290 Less: Allowance for doubtful accounts (1,002) (1,002) Accounts receivable, net 198, ,366 Installment accounts receivable 141, ,781 Less: Unrealized gain on installment sales revenue (17,540) (12,543) Add(Less): Allowance for foreign exchange gain (loss) (2,492) 3,805 Installment accounts receivable, net 121, ,043 Accounts receivable, net 320, ,409 Accounts receivable-related parties 4,348,197 4,157,494 Less: Allowance for foreign exchange loss (34,001) (29,523) Accounts receivable-related parties, net 4,314,196 4,127,971 Notes and accounts receivable, net $4,689,001 $4,436,680 c. Inventories, Net (1) Inventories as of December 31, 2012 and 2011 are categorized as follows: Finished goods $155,767 $112,905 Raw materials 60,737 71,613 Work in process 91, ,160 Merchandises 112, ,012 Subtotal 421, ,690 Less: allowance for decline in market value and obsolescence (3,871) (3,871) Total $417,146 $401,819 19

20 (2) Recognition as expense or income for the years ended December 31, 2012 and 2011 are as follows: Revenue from sale of scraps $3,744 $3,397 Gain on physical inventory 1 20 Loss on disposal of inventory (1,179) - Loss for market price decline and obsolete and slow-moving inventories - (1,117) Total $2,566 $2,300 d. Other Current Assets December 31 Deferred income tax assets-current $70,113 $59,978 Prepaid expenses 37,292 37,536 Restricted Deposits 14,083 44,058 Others 15,301 12,370 Subtotal 136, ,942 Add(Less): Allowance for foreign exchange gain (loss) 420 (1,905) Total $137,209 $152,037 e. Long-term Investments (1) Long-term investment as of December 31, 2012 and 2011 consisted of the following: Investee Stock share% Amount Stock share% Amount INTERNATIONAL 100% $6,634, % $5,685,520 HOLDING CO., 20

21 (2) Since 2000, the Company has established INTERNATIONAL HOLDING CORP., (JIH). A British Virgin Island company, to hold the following companies: Year Name of Investee 2000 INTERNATIONAL HOLDING CORP., 2000 J&E TRADING CO., (Note 1) 2000 J&S TRADING CO., 2000 TECH. UK 2000 TECH. (SHANGHAI) CO., 2000 STYLE FITNESS EQUPMENT CO., 2002 TECH. GMBH (Note 3) 2003 TECH. IBERICA. S.L TECH. FRANCE SAS 2004 TECH. DEUTSCHLAND GMBH 2004 TECH. JAPAN K.K TECH. (THAILAND) CO., 2005 TECH. ITALIA SPA 2005 FITNESS (MALAYSIA) SDN. BHD TECH. (SCHWEIZ) GMBH 2006 TECH. NETHERLAND B.V INDUSTRIES (SHANGHAI) CO., LTD 2006 J&H COMPANY LIMITED (Note 2) 2006 TECH. (HK) CO., 2006 TECHNOLOGIES-BRAZIL EQUIPMENTOS ESTORTIVOS LTDA. (Note 4) 2007 TECH. CARE CO., 2007 INDUSTRIAL DO BRASIL (Note 4) 2008 WORLD OF LEASING GMBH TECH. NORTH AMERICA, INC TECH. AUSTRALIA PTY.LTD Note 1: J&E COMPANY LIMITED. cancelled its company registration in Note 2: J&H COMPANY LIMITED. cancelled its company registration in Note 3: STYLE FITNESS GMBH changed its company name to TECH.GMBH in Note 4: For the purpose of integrating subsidiaries' resources, INDUSTRIAL DO BRASIL merged with TECHNOLOGIES-BRAZIL EQUIPMENTOS ESTORTIVOS LTDA. in

22 (3) Long-term investment income (loss) and cumulative translation adjustments recognized under the equity method in 2012 and 2011 are as follows: Investee Investment Income (Loss) Cumulative Translation Adjustment Investment Income (Loss) Cumulative Translation Adjustment INTERNATIONAL HOLDING CO., $527,197 $(224,390) $140,790 $303,835 f. Property, Plant, and Equipment, Net (1) Property, plant and equipment as of December 31, 2012 and 2011 consisted of the following: December 31 Land $70,189 $70,189 Buildings 252, ,141 Machinery and equipment 71,547 63,283 Transportation equipment 26,978 17,773 Furniture, fixtures and equipment 42,711 39,560 Tooling 93,235 82,752 Leasehold improvement 40,542 39,939 Other equipment 10,204 8,557 Revaluation increment of land 135, ,465 Construction in progress 21,122 - Prepayments for equipment 4,784 1,449 Total 768, ,108 Less: Accumulated depreciation (360,543) (333,209) Net $408,375 $377,899 (2) The Company revaluated its land in accordance with government s regulations. The net revaluation increment of $61,374, after deducting the reserve for land value incremental tax of $36,212, was credited to capital surplus in the amount of $25,162. Based on the resolution adopted at the special shareholders meeting held on November 16, 1998, the Company capitalized the capital surplus resulting from increment land revaluation to common stock of $24,000. In 2006, the Company reclassified the capital surplus resulted from increment land revaluation into unrealized revaluation increments of stockholder s equity. 22

23 The Company revaluated the land in accordance with government s regulations in The revaluation amounted to $135,465, of which the reserve for land value incremental tax of $47,428, was accrued and recorded as long-term liability. The remaining revaluation amount of $64,037 shall be recognized as unrealized revaluation increments of stockholder s equity. g. Short-term Borrowings Short-term borrowings as of December 31, 2012 and 2011 are summarized as follows: December 31 Interest Rate Balance Interest Rate Balance Credit loan 0.97%-1.67% $1,946, %-1.44% $1,152,909 Add(Less): Allowance for foreign exchange loss(gain) (595) 715 Net $1,945,420 $1,153,624 h. Commercial Paper Payable December 31 Commercial paper payable $100,000 $100,000 Less: Discount on commercial paper payable (201) (225) Net $99,799 $99,775 i. Financial Liabilities at Fair Value Through Income Statement (1) Financial liabilities at fair value through income statement as of December 31, 2012 and 2011 consisted of the following: Item Amount Amount Financial liabilities held for trading purpose - option contract $6,406 $- 23

24 (2)The related information of the Company s derivative financial instruments used for trading purposes as of December 31, 2012 and 2011 were summarized below: a. As of December 31, 2012 : Notional Principal Transaction Item (Thousand Dollar) Administration of price Date Fair Value Sell Option EUR 5,600 EUR /1 $(6,406) contract (EUR exchange USD) -2013/09 b. As of December 31, 2011 : None j. Notes and Accounts Payable, Net Notes and Accounts Payable as of December 31, 2012 and 2011 consisted of the following: Notes payable $95,255 $93,043 Accounts payable $680,711 $621,941 Less : Allowanced for foreign exchange gain (17) (814) Accounts payable, net 680, ,127 Accounts payable-related parties 2,581,475 2,510,169 Add (Less): Allowance for foreign exchange loss (gain) (6,319) 12,505 Accounts payable-related parties, net 2,575,156 2,522,674 Notes and accounts payable, net $3,351,105 $3,236,844 24

25 k. Accrued Expenses Accrued expenses as of December 31, 2012 and 2011 are summarized as follows: December 31 Warranty expense $102,721 $73,349 Advertising expense 85,465 30,144 Payroll 81, ,230 Rework 71,233 29,602 Professional service fees 39,229 41,164 Assembly expense 8,926 5,621 Supply expense 8,579 7,976 Other expense 70,598 83,592 Total 468, ,678 Add: Allowance for foreign exchange loss Net $468,229 $392,387 l. Other Current Liabilities Other current Liabilities as of December 31, 2012 and 2011 are summarized as follows: Advance from customers $50,124 $51,252 Other payables 48,847 52,969 Other payables-related parties 29,839 22,367 Payables on equipment 5,572 7,072 Others 16,118 20,417 Total 150, ,077 Add(Less): Allowance for foreign exchange loss (gain) (126) 269 Net $150,374 $154,346 25

26 m. Long-term Liabilities Long-term loans as of December 31, 2012 are summarized as follows: Creditors Type Amount Interest Rate Collateral Chinatrust Commercial Syndicated $240, % - Bank Loan Taiwan Cooperative Bank Secured 239, % Land & Building Loan Mega International Bank Secured 119, % Land & Building Loan Taishin International Bank Secured 42, % Land & Building Loan E.Sun Commercial Bank Secured 42, % Land & Building Loan Shin Kong Bank Secured 42, % Land & Building Loan Hua Nan Commercial Bank Secured 37, % Land & Building Loan Subtotal 765,000 Less: current portion (105,000) Net $660,000 (1) In October 2012, the Company has entered into a syndicated loan agreement with Taiwan Cooperative Bank and six lending institutions of syndicated credits. The agreement offered the Company a line of credit of NT$2.455 billion, which contains the following restrictive covenants: (I) The Current Ratio shall not be lower than 100%; (Note 1) (II)The Liability Ratio shall not be higher than 150%; (Note 2) (III)The Interest Coverage Ratio shall not be lower than 3 ; (Note 3) Note 1: Current Ratio= Current assets/ Current liabilities Note 2: Liability Ratio = Total liabilities / Owners equity Note 3: Interest Coverage Ratio = (Income before income tax + Interest expense + Amortization expense) / Interest expense 26

27 Long-term loans as of December 31, 2011 are summarized as follows: Creditors Type Amount Interest Rate Collateral Taiwan Cooperative Bank Secured $115, % Land & Building Loan Chinatrust Commercial Secured 101, % Land & Building Bank Loan Hua Nan commercial Bank Secured 101, % Land & Building Loan Shin Kong Bank Secured 50, % Land & Building Loan Taiwan Business Bank Secured 50, % Land & Building Loan Ta Chong Bank Secured 50, % Land & Building Loan Land Bank Secured 36, % Land & Building Loan Subtotal 505,700 Less: current portion (168,600) Net $337,100 (2) In December 2009, the Company has entered into a syndicated loan agreement with Taiwan Cooperative Bank and six lending institutions of syndicated credits The agreement offered the Company a line of credit of NT$0.7 billion and USD 30 million, which contain the following restrictive covenants: (I)The Current Ratio shall not be lower than 100%; (Note 1) (II)The Liability Ratio shall not be higher than 150%; (Note 2) (III)The Interest Coverage Ratio shall not be lower than 3; (Note 3) (IV)The Tangible Net Value shall not be less than NT$45 billion. (Note 4) Note 1: Current Ratio= Current assets/ Current liabilities Note 2: Liability Ratio = Total liabilities / Owners equity Note 3: Times of Interest Coverage = (Income before income tax + Interest expense + Amortization expense) / Interest expense Note 4: Tangible Net Worth= Owners equity - Intangible assets 27

28 n. Accrued Pension Liabilities (1) The Company has adopted Statement of Financial Accounting Standard (SFAS) NO.18 of Taiwan Accounting for Pensions and recognized net pension costs. The net pension costs for 2012 and 2011 consisted of the following: Service cost $1,966 $1,919 Interest cost 1,738 2,318 Expected returns on plan assets (1,065) (1,478) Amortization of transitional net obligations 1,040 1,039 Net pension cost $3,679 $3,798 (2) The reconciliation between the funding status of pension plan and accrued pension liabilities as of December 31, 2012 and 2011 were as follows: Benefit obligations: Vested benefits $(22,216) $(19,772) Non-vested benefits (77,641) (70,248) Accumulated benefit obligations (99,857) (90,020) Effect of projected future salary increase (24,170) (22,401) Projected benefit obligations (124,027) (112,421) Fair value of plan assets 70,545 68,713 Status of pension plan (53,472) (43,708) Unrecognized transitional net obligations 2,080 3,119 Unrecognized pension losses 19,803 9,371 Other Accrued pension liabilities $(31,151) $(31,151) As of December 31, 2012 and 2011, accrued pension liabilities were recorded as accrued expenses in the amount of $ 275 and $ 275, and as accrued pension liabilities in the amount of $30,876 and $30,876, respectively. 28

29 (3) As of December 31, 2012 and 2011, vested benefits of the Company s pension plan were $ 24,124 and $ 21,888, respectively. (4) As of December 31, 2012 and 2011, the balance of the pension fund of the Company, which is deposited with the Bank of Taiwan, were $69,870 and $ 68,113, respectively. (5) The underlying assumptions for determining the actuarial present value are as follows: Discount rate 1.3% 1.6% Rate of increase in future compensation level 2.0% 2.0% Expected long-term rate of return on plan assets 1.3% 1.6% o. Capital stock As of January 1, 2011, the Company s capital stock outstanding was $1,943,610, divided into 194,361,000 shares with par value of $10 (in NTD) each. Based on the resolution adopted at the annual shareholders meeting held on June 28, 2011, the Company declared stock dividends paid out of capitalization of retained earnings in the amount of $48,590 and capitalized bonus to employees in the amount of $819. The Ministry of Economic Affairs approved the change in registered capital stock on October 11, As of December 31, 2011, the Company s capital stock authorized was $2,500,000 and outstanding was $1,993,019 divided into 199,301,898 shares with par value of $10 (in NTD) each. As of January 1, 2012, the Company s capital stock outstanding was $1,993,019, divided into 199,301,898 shares with par value of $10 (in NTD) each. Based on the resolution adopted at the annual shareholders meeting held on June 28, 2012, the Company declared stock dividends paid out of capitalization of retained earnings in the amount of $9,965 and capitalized bonus to employees in the amount of $831. The Ministry of Economic Affairs approved the change in registered capital stock on October 2, As of December 31, 2012, the Company s capital stock authorized was $2,500,000 and outstanding was $2,003,815 divided into 200,381,533 shares with par value of $10 (in NTD) each. 29

30 p. Capital surplus Capital surplus as of December 31, 2012 and 2011 consisted of the following: December 31 Paid-in capital in excess of par value $33,350 $29,181 Gain on sale of property, plant and equipment Long-term Investment 5,640 5,640 Total $39,032 $34,863 As prescribed by the Company Act of Taiwan, capital surplus can only be applied to offset accumulated deficits, except that paid-in capital in excess of par value and donated capital can be applied to increase capital. q. Retained earnings (a) According to the Company s Articles of Incorporation, after paying income tax and offsetting the accumulated deficit, the Company shall appropriate 10% of legal reserve, and then declare a minimum of 1% of employee bonuses and maximum of 5% of directors and supervisors bonuses in sequence. As the Company s industry is undergoing a development stage to reach higher growth rate, additional funding may be required in the near future. In the event that the Company receives sufficient funds for current year s capital expenditure, the Company may distribute cash dividends between 5% to 70% of total dividend. (b) The board of directors estimated the amount of employee bonus and remunerations by taking into consideration of the Company s Articles of Incorporation, government regulations and industry average. Upon stockholders approval of the employee stock bonus, the distribution amount is determined by dividing the total approved bonus amount with the closing market price of the Company s stock one day prior to the approved date. Estimated amount of employee bonus and remunerations paid to directors are charged to current income. Moreover, if the amounts were modified at the stockholders meeting in the following year, the adjustment will be regarded as a change in accounting estimate and will be reflected in the statement of income in the following year. 30

31 Amount of employee bonus and remunerations estimated are as follows: Bonus to employees -stock $5,000 $5,000 Directors compensation $6,000 $6,000 During the years ended December 31, 2012 and 2011, the amounts of the employee bonus and remunerations to directors were estimated. The board of directors estimated the amount by taking into consideration of the Company s Articles of Incorporation, government regulations and industry average. Estimated amount of employee bonus and remunerations paid to directors are charged to current income. If the board modified the estimates significantly in the subsequent periods, the Company will recognize the change as an adjustment to current income. Upon stockholders approval of the employee stock bonus, the distribution amount is determined by dividing the total approved bonus amount by the closing market price of the Company s stock one day prior to the approved date. Employee bonus $5,000 and directors remuneration $6,000 for 2011 which were approved at the stockholders meeting, were consistent with the resolutions of financial report recorded in (c) The appropriation of 2011 earnings resolved by the Board and approved at the annual meeting of shareholders on June 28, 2012 and the appropriation of 2010 earnings resolved by the Board and approved at the annual meeting of shareholders on June 30, 2011 are as follows: Cash dividends $1.95 per share $ 0.5 per share Stock dividends $0.05 per share $ 0.25 per share Bonus to employees -stock $5,000 $5,000 Directors compensation $6,000 $6,000 (d) The appropriations of earnings, profit sharing to employees and bonus to directors for 2012 are to be resolved in the shareholders meeting held on June 21, 2013 (expected).the information can be obtained from the Market Observation Post System on the Website of Taiwan Stock Exchange Corporation. 31

32 r. Income Tax (1) The Company s income tax returns through 2010 have been assessed by the tax authority. (2) The applicable income tax rate for the Company is 17%. All the required impacts are disclosed as follows accordingly to SFAS No. 22 Accounting for Income Taxes. Disclosures required under the statement are summarized as follows: (a) Deferred income tax liabilities and assets as of December 31, 2012 and 2011 are as follows: December 31 Total deferred income tax liabilities $124,338 $127,028 Total deferred income tax assets $103,278 $66,186 Valuation allowance for deferred income tax $- $- assets Temporary differences attributing to the deferred income tax assets/liabilities: Unrealized foreign currency exchange gain (35,365) (40,870) Unrealized product warranty expense (55,602) (6,239) Unrealized intercompany profits (311,185) (304,645) Unrealized miscellaneous income (752) (2,830) Accrued pension cost (30,876) (30,876) Unrealized Gain (Loss) on valuation of financial asset / liability (6,406) 2,817 Allowance for reduce inventory to market value (3,871) (3,871) Unrealized Investment Income 731, ,399 Cumulative translation adjustments (163,462) 13,013 (b) Deferred income tax assets-current $70,113 $60,456 Valuation allowance - - Net deferred income tax assets-current 70,113 60,456 Deferred income tax liabilities-current - (478) Net deferred income tax assets-current $70,113 $59,978 32

33 December 31 (c) Deferred income tax assets-noncurrent $33,165 $5,730 Valuation allowance - - Net deferred income tax assets-noncurrent 33,165 5,730 Deferred income tax liabilities-noncurrent (124,338) (126,550) Net deferred income tax liabilities -noncurrent $(91,173) $(120,820) (d) A reconciliation of income tax based on the statutory rate and income tax expense for the years ended December 31, 2012 and 2011 are as follows: Tax on loss before income tax at statutory rates $167,748 $153,551 Add (deduct) tax effects of: Permanent differences (89,603) (23,893) Temporary differences 10,852 (13,175) Other - 2,896 Income tax currently payable $88,997 $119,379 (e) Income tax provision for the years ended December 31, 2012 and 2011 are as follows: Income tax-current $88,997 $119,379 Deferred Income tax expenses Unrealized foreign currency exchange gain(loss) ,814 Unrealized intercompany profits (1,112) (4,432) Unrealized miscellaneous income Allowance for reduce inventory to market value - (190) Accrued pension cost - (81) Unrealized provision for warranty (8,391) - Unrealized gain (loss) on valuation of financial asset / liability (1,568) 479 Total deferred income tax (9,782) 13,175 10% surtax on unappropriated earnings 50,181 - Income tax expense $129,396 $132,554 33