JOHNSON HEALTH TECHNOLOGY CO., LTD. AND SUBSIDIARIES Consolidated Balance Sheets December 31, 2005 and 2004

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1 JOHNSON HEALTH TECHNOLOGY CO., LTD. AND SUBSIDIARIES Consolidated Balance Sheets December 31, 2005 and 2004 (Expressed in Thousands of New Taiwan Dollars) Assets Current Assets Cash and cash equivalents (Notes 2 and 4.a) $1,751,897 $1,128,432 Notes receivable, net (Notes 2 and 4.b) 13,404 5,524 Accounts receivable, net (Notes 2 and 4.b) 1,673,228 1,379,769 Inventories, net (Notes 2 and 4.c) 1,328,272 1,244,099 Other current assets (Note 4.d) 363, ,518 Total Current Assets 5,130,743 4,009,342 Property, Plant and Equipment, net (Notes 2, 4.e and 6) Intangible Assets 1,400,034 1,040,583 Patents (Note 2) 102, ,788 Deferred pension costs (Note 2 and 4.k) Total Intangible Assets Other Assets - 10, , ,186 Refundable deposits 34,181 14,105 Deferred charges (Note 2) 79, ,907 Deferred income tax asset-noncurrent(notes 2 and 4.m) 191, ,688 Other assets-other 19,761 9,340 Consolidated Debits 77,747 97,274 Total Other Assets 403, ,314 Total Assets $7,036,155 $5,587,425 (The accompanying notes are an integral part of financial statements) (Continued on next page) 3

2 JOHNSON HEALTH TECHNOLOGY CO., LTD. AND SUBSIDIARIES Consolidated Balance Sheets (continued) December 31, 2005 and 2004 (Expressed in Thousands of New Taiwan Dollars) Current Liabilities Liabilities and Stockholders' Equity Short-term borrowings (Note 4.f) $676,362 $868,505 Notes payable (Note 4.g) 95, ,664 Accounts payable (Note 4.g) 1,013,043 1,062,515 Income tax payable (Note 2) 84,935 92,766 Accrued expenses (Note 4.h) 443, ,275 Long-term loans payable- current portion(note 4.j) 17,272 17,796 Other current liabilities (Note 4.i) 367, ,636 Total Current Liabilities 2,697,331 2,888,157 Long-term Liabilities Long-term loans (Note 4.j) 500,076 95,059 Reserve Reserve for land value incremental tax (Note 2 and 4.e) 36,212 36,212 Other Liabilities Accrued pension liabilities (Notes 2 and 4.k) 18,770 36,174 Deposits received 3,235 4,077 Deffer incom tax liabilities (Note 4.m) 76,198 10,571 Minority interest 108, ,451 Total Other Liabilities 206, ,273 Total Liabilities 3,440,338 3,172,701 Stockholders' Equity (Notes 2 and 4.l) Common stock 1,264,500 1,050,000 Capital surplus 26,204 26,204 Legal reserve 245, ,829 Other special reserve 106,058 8,220 Retained earnings 1,945,815 1,267,530 Unrecognized pension cost - (10,979) Cumulative translation adjustments 8,211 (95,080) Total Stockholders' Equity 3,595,817 2,414,724 Total Liabilities and Stockholders' Equity $7,036,155 $5,587,425 (The accompanying notes are an integral part of financial statements) 4

3 JOHNSON HEALTH TECHNOLOGY CO., LTD. AND SUBSIDIARIES Consolidated Statements of Income For the Years Ended December 31, 2005 and 2004 (Expressed in Thousands of New Taiwan Dollars Except Earnings Per Share Data) Net Sales (Note 2 and 4.o) $8,541,120 $6,701,138 Cost of Goods Sold (4,460,760) (3,830,659) Net Gross Profit 4,080,360 2,870,479 Operating Expenses (2,599,914) (2,018,954) Operating Income 1,480, ,525 Non-operating Income Interest income 19,402 10,797 Other income 15,780 42,862 Subtotal 35,182 53,659 Non-operating Expenses Interest expense (39,108) (31,727) Loss on disposal of property, plant and equipment, net (Note 2) (2,093) (4,771) Loss on physical inventory (1,347) (1,774) Foreign exchange loss (7,019) (85,689) Loss from market decline of inventory (1,156) (3,618) Other expenses (27,931) (14,404) Subtotal (78,654) (141,983) Income Before Income Tax 1,436, ,201 Income Tax Benefit(Expense) (Notes 2 and 4.m) (183,636) 845 Combined Net Income 1,253, ,046 Less: Minority interest loss (Note 2) (19,515) (6,539) Add:Purchased Preacquisition Earnings - 4,496 Consolidated Net Income $1,233,823 $762,003 Earnings Per Common Share (Note 2 and 4.n) $9.76 $6.03 (The accompanying notes are an integral part of financial statements) 5

4 Cumulative Translation Unrecognized Pension Description Common Stock Captial Surplus Legal Reserve Other Special Reserve Retained Earnings Total Adjustments Cost Balance, January 1, 2004 $840,000 $37,968 $111,374 $1,776 $882,782 $(1,641) $(6,579) $1,865,680 Distribution of 2003 earnings: Legal reserve 57,455 (57,455) - Special reserve 6,444 (6,444) - Bonus to directors and supervisors (9,500) (9,500) Bonus to employees-cash (4,000) (4,000) Cash dividends (84,000) (84,000) Stock dividends 210,000 (210,000) - Disproportionately acquire subsidiaries' number of newly issued shares (11,764) (5,856) (17,620) Cumulative translation adjustments (93,439) (93,439) Unrecognized pension cost (4,400) (4,400) Net income, , ,003 Balance, December 31, ,050,000 26, ,829 8,220 1,267,530 (95,080) (10,979) 2,414,724 Distribution of 2004 earnings: JOHNSON HEALTH TECHNOLOGY CO., LTD. AND SUBSIDIARIES Consolidated Statements of Changes in Stockholders' Equity For the Years Ended December 31, 2005 and 2004 (Expressed in Thousands of New Taiwan Dollars) Legal reserve 76,200 (76,200) - Special reserve 97,838 (97,838) - Bonus to employees-cash 4,500 (4,500) - Bonus to directors and supervisors (9,500) (9,500) Cash dividends (157,500) (157,500) Stock dividends 210,000 (210,000) - Cumulative translation adjustments 103, ,291 Unrecognized pension cost 10,979 10,979 Net income, ,233,823 1,233,823 Balance, December 31, 2005 $1,264,500 $26,204 $245,029 $106,058 $1,945,815 $8,211 $ - $3,595,817 (The accompanying notes are an integral part of financial statements) 6

5 JOHNSON HEALTH TECHNOLOGY CO., LTD. AND SUBSIDIARIES Consolidated Statements of Cash Flows For the Years Ended December 31, 2005 and 2004 (Expressed in Thousands of New Taiwan Dollars) Cash Flows from Operating Activities: Net Income $1,233,823 $762,003 Adjustments to reconcile net income to net cash provided by Minority interest income 19,515 6,539 Bad debts expense 4,581 20,917 Depreciation 172, ,460 Amortization 161,113 77,395 Loss from market decline of inventory 1,156 3,618 Loss on disposal of property, plant and equipment, net 2,093 4,771 Increase in notes receivable, net (7,880) (2,195) Increase in accounts receivable, net (298,040) (497,586) Decrease(Increase) in inventories, net (85,329) 58,378 Decrease(Increase) in other current assets (142,179) 101,756 Decrease (Increase) deferred income tax asset 25,812 (99,775) Increase in accurred pension liabilities 7,632 8,683 Increase (Decrease) in notes payable, net (106,660) 82,581 Increase (Decrease) in accounts payable, net (49,472) 283,940 Increase in accrued expenses 52, ,419 Increase (Decrease) in income tax payable (7,831) 22,812 Increased in deferred income tax liabilities 65,641 - Increase in other current liabilities 103,384 44,501 Net Cash Provided by Operating Activities 1,151,911 1,143,217 Cash Flows from Investing Activities: Decrease in consolidated debits 19,527 22,696 Decrease in minority interest (13,450) (2,621) Purchase of property, plant and equipment (526,325) (254,156) Proceeds from sales of property, plant and equipment 2,635 3,854 Increase in refundable deposits (20,076) (7,741) Increase (Decrease) in refundable received (842) 4,077 Increase in deferred charges (127,750) (39,159) Increase in patents (385) (145,571) Increase in other assets (10,421) (901) Net Cash Used in Investing Activities (677,087) (419,522) (The accompanying notes are an integral part of financial statements) (Continued on next page) 7

6 JOHNSON HEALTH TECHNOLOGY CO., LTD. AND SUBSIDIARIES Consolidated Statements of Cash Flows (continued) For the Years Ended December 31, 2005 and 2004 (Expressed in Thousands of New Taiwan Dollars) Cash Flows from Financing Activities: Increase (Decrease) in short-term borrowings (192,143) 44,668 Increase (Decrease) in long-term loans 404,493 (24,451) Cash dividend to stockholders (157,500) (84,000) Bonus to employees directors and superrisors (9,500) (13,500) Decrese in short-term bills payable - (74,815) Net Cash Provided by (Used in) Financing Activities 45,350 (152,098) Translation effects 103,291 (109,595) Net Increase in Cash and Cash Equivalents 623, ,002 Cash and Cash Equivalents, Beginning of Year 1,128, ,430 Cash and Cash Equivalents, End of Year $1,751,897 $1,128,432 Supplementary Disclosure of Cash Flow Information: Interest paid (net amount of capitalized) $45,703 $30,106 Income tax paid $167,891 $76,824 Supplemental Schedule of Non-cash Investing and Financing Activities: Transfer of retained earnings to common stock Transfer of other assets to property, plant, and equipment $210,000 $210,000 $ - $35,673 Partial cash flow transaction from investing activities Acquisition of property, plant and equipment $536,395 $249,045 Payable on equipment, Beginning of Year 2,801 7,912 Payable on equipment, End of Year (12,871) (2,801) Net Paid $526,325 $254,156 (The accompanying notes are an integral part of financial statements) 8

7 JOHNSON HEALTH TECHNOLOGY CO., LTD. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS WITH REPORT OF INDEPENDENT AUDITORS FOR THE YEARS ENDED DECEMBER 31, 2005 AND

8 Report of Independent Auditors The Board of Directors and Shareholders Johnson Health Technology Co., Ltd. We have audited the accompanying consolidated balance sheets of Johnson Health Technology Co., Ltd. and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated 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 on Taiwan. Those standards require that we 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 consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statements presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Johnson Health Technology Co., Ltd. and subsidiaries at December 31, 2005 and 2004, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the Republic of China on Taiwan. As stated in Note 3 to the Financial Statements, Johnson Health Technology Co., Ltd. and subsidiaries adopted the Statement of Financial Accounting Standards (SFAS) No.5 of Tainwan Accounting for Long-term Investments, and No.35 of Taiwan Accounting for Asset Impairment in March 11, 2006 Taichung, Taiwan Republic of China on Taiwan 2

9 JOHNSON HEALTH TECHNOLOGY CO., LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2005 and 2004 (Expressed in Thousand of New Taiwan Dollars, unless Noted Otherwise Stated) 1.ORGANIZATION AND OPERATIONS (1) Parent Company : JOHNSON HEALTH TECHNOLOGY CO., LTD. was incorporated in The main activities of the Company are manufacturing and selling sports equipments cardiovascular, strength training machinery, and some related electronic parts. (2) Consolidated Subsidiaries: a. JOHNSON INTERNATIONAL HOLDING CO., LTD. (J.I.H.) was incorporated in British Virgin Island, to hold EPIX, INC., D/B/A VISION FITNESS, JOHNSON HEALTH TECH. U.K. LTD., J&E TRADING CO., LTD., J&S TRADING CO., LTD., JOHNSON HEALTH TECHNOLOGY (SHANGHAI) CO., LTD., STYLE FITNESS EQUIPMENT CO., LTD., HORIZON FITNESS INC., MATRIX FITNESS SYSTEMS INC., STYLE FITNESS GMBH, JOHNSON HEALTH TECH. FRANCE SAS, STYLE FITNESS SPAIN, S.L, JOHNSON HEALTH TECH. JAPAN K.K., JOHNSON HEALTH TECH. DEUTSCHLAND GMBH, JOHNSON HEALTH TECH. (THAILAND) CO., LTD., JOHNSON HEALTH TECH. ITALIA SPA, JOHNSON FITNESS (MALAYSIA) SDN. BHD., JOHNSON HEALTH TECH. USA HOLDING CO., LTD., and JOHNSON HEALTH TECH. (SCHWEIZ) GMBH etc. b. EPIX, INC., D/B/A VISION FITNESS(EPIX, INC.) was incorporated in U.S.A.. The main activities are selling cardiovascular and strength training machinery etc. c. JOHNSON HEALTH TECH. U.K. LTD. was incorporated in British. The main activities are selling cardiovascular and strength training machinery etc. d. J&E TRADING CO., LTD. (J&E)was incorporated in British Virgin Island. The main activities are selling cardiovascular and strength training machinery etc. e. J&S TRADING CO., LTD. (J&S)was incorporated in British Virgin Island. 9

10 The main activities are selling cardiovascular and strength training machinery etc. f. JOHNSON HEALTH TECHNOLOGY (SHANGHAI) CO., LTD. was incorporated in Shanghai, Mainland China. The main activities are manufacturing and selling strength equipments. g. STYLE FITNESS EQUIPMENT CO., LTD. was incorporate in Mainland China. It is a wholesale distributor of fitness equipment, primarily selling exercise bike, elliptical trainer and treadmills. h. HORIZON FITNESS INC. was incorporated in U.S.A. It is a wholesale distributor of fitness equipment, primarily selling exercise bike, elliptical trainer and treadmills. i. MATRIX FITNESS SYSTEMS INC. was incorporated in U.S.A. It is a wholesale distributor of fitness equipment, primarily selling exercise bike, elliptical trainer and treadmills. j. STYLE FITNESS GMBH was incorporated in Germany. It is a wholesale distributor of fitness equipment, primarily selling exercise bike, elliptical trainer and treadmills. k. JOHNSON HEALTH TECH. FRANCE SAS was incorporates in France. It is a wholesale distributor of fitness equipment, primarily selling exercise bike, elliptical trainer and treadmills. l. STYLE FITNESS SPAIN, S.L. was incorporated in Spain. It is a wholesale distributor of fitness equipment, primarily selling exercise bike, elliptical trainer and treadmills. m. JOHNSON HEALTH TECH. JAPAN K.K. was incorporated in Germany. It is a wholesale distributor of fitness equipment, primarily selling exercise bike, elliptical trainer and treadmills. n. JOHNSON HEALTH TECH. DEUTSCHLAND GMBH was incorporated in Germany. It is a wholesale distributor of fitness equipment, primarily selling exercise bike, elliptical trainer and treadmills. o. JOHNSON HEALTH TECH. (THAILAND) CO. was incorporated in Germany. It is a wholesale distributor of fitness equipment, primarily selling exercise bike, elliptical trainer and treadmills. p. JOHNSON HEALTH TECH. ITALIA SPA was incorporated in Germany. It 10

11 is a wholesale distributor of fitness equipment, primarily selling exercise bike, elliptical trainer and treadmills. q. JOHNSON FITNESS (MALAYSIA) SDN. BHD. was incorporated in Germany. It is a wholesale distributor of fitness equipment, primarily selling exercise bike, elliptical trainer and treadmills. r. JOHNSON HEALTH TECH. USA HOLDING CO., LTD. was incorporated in Germany. It is a wholesale distributor of fitness equipment, primarily selling exercise bike, elliptical trainer and treadmills. s. JOHNSON HEALTH TECH. (SCHWEIZ) GMBH was incorporated in Germany. It is a wholesale distributor of fitness equipment, primarily selling exercise bike, elliptical trainer and treadmills. As of December 31, 2005 and 2004 the Company had 3,788 and 3,077 employees, respectively. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (1) Basis of Consolidation. The accounts of the Company and its majority - owned subsidiaries are included in the consolidated financial statements. The difference between the cost of the investment and the Company s underlying equity in net assets of the investee at the acquisition date is recorded as consolidated debits or credits and amortized over ten years. All significant intercompany accounts and transactions have been eliminated. (2) Cash and Cash Equivalents Cash and cash equivalents include cash on hand; cash in banks and all highly liquid investments purchased with an original maturity of three months or less. (3) 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: (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 11

12 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. d Forward exchange contracts entered into for hedging purposes are recorded using the spot rate on the contract date. Discounts or premiums on forward contracts are amortized over the periods of the contract. Gains or losses on forward contracts are determined by the difference between the spot rate at the balance sheet date and the spot rate at the date of inception of the contract. Exchange gains or losses are included in current net income. e. Functional currencies of the respective subsidiaries are presented below: Subsidiaries JOHNSON INTERNATIONAL HOLDING CO., LTD. EPIX, INC. J&E TRADING CO., LTD. J&S TRADING CO., LTD. JOHNSON HEALTH TECH. U.K. LTD. JOHNSON HEALTH TECHNOLOGY (SHANGHAI) CO., LTD. HOIRZON FITNESS INC. MATRIX FITNESS SYSTEMS INC. STYLE FITNESS EQUIPMENT CO., LTD. STYLE FITNESS SPAIN, S.L. JOHNSON HEALTH TECH. FRANCE SAS STYLE FITNESS GMBH JOHNSON HEALTH TECH. JAPAN K.K. JOHNSON HEALTH TECH. DEUTSCHLAND GMBH JOHNSON HEALTH TECH. (THAILAND) CO., LTD. JOHNSON HEALTH TECH. ITALIA SPA JOHNSON FITNESS (MALAYSIA) SDN. BHD. JOHNSON HEALTH TECH. USA HOLDING CO., LTD. JOHNSON HEALTH TECH. (SCHWEIZ) GMBH (4) Allowance for Doubtful Accounts Functional Currency USD USD USD USD GBP RMB USD USD RMB EUR EUR EUR JPY EUR THB EUR MYR USD EUR 12

13 Allowance for doubtful accounts represents estimates of the uncollectable amount out of the outstanding notes receivable and accounts receivable at the balance sheet date. (5) Inventories a. Inventory cost determined method of the respective subsidiaries are presented below: Subsidiaries JOHNSON INTERNATIONAL HOLDING CO., LTD. EPIX, INC. J&E TRADING CO., LTD. J&S TRADING CO., LTD. JOHNSON HEALTH TECH. U.K. LTD. JOHNSON HEALTH TECHNOLOGY (SHANGHAI) CO., LTD. HORIZON FITNESS INC. MATRIX FITNESS SYSTEMS INC. STYLE FITNESS EQUIPMENT CO., LTD. STYLE FITNESS SPAIN, S.L. JOHNSON HEALTH TECH. FRANCE SAS JOHNSON HEALTH TECH. DEUTSCHLAND GMBH JOHNSON HEALTH TECH. JAPAN K.K. STYLE FITNESS GMBH JOHNSON HEALTH TECH. (THAILAND) CO., LTD. JOHNSON HEALTH TECH. ITALIA SPA JOHNSON FITNESS (MALAYSIA) SDN. BHD. JOHNSON HEALTH TECH. USA HOLDING CO., LTD. JOHNSON HEALTH TECH. (SCHWEIZ) GMBH Inventory Cost Determined Method weighted-average First-in, first-out weighted-average weighted-average First-in, first-out weighted-average First-in, first-out First-in, first-out weighted-average First-in, first-out First-in, first-out First-in, first-out weighted-average First-in, first-out weighted-average First-in, first-out Specific Identification Method First-in, first-out b. Inventories are stated at the lower of cost or market value. The value is net realizable value for finished goods and merchandise, and replacement cost for raw materials, supplies and work in process. (6) Property, Plant and Equipment 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. 13

14 The useful lives are summarized as follows: Items Buildings Machinery and equipment Transportation equipment Furniture, fixtures and equipment Tooling Leasehold improvement Other equipment Useful Lives 3 ~ 40 years 4 ~ 12 years 5 years 3 ~ 8 years 2 ~ 5 years 3 years 2 ~ 20 years Major replacements, renewals and betterments are capitalized, while maintenance and repairs are expensed currently. Interest incurred in connection with the construction or acquisition of property, plant and equipment is capitalized as part of the cost of the assets. 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. (7) Deferred Charges Deferred charges such as electricity installation fees, software cost and right of trademark fees are record at cost and amortized using the straight-line method over three years or legal life. (8) Patents The patents are being amortized on the straight-line method over it estimated useful life of three years. (9) Pensions According to the Labor Standards Law of the Republic of China ( the Law ), the Company established an Employee Retirement Fund ("the Fund"); its contributions to the Fund are both appropriated at 5% of the total salaries and wages in 2005 and The Fund has been administered by the Employee Retirement Fund Committee of the Company as prescribed by the Law, 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. Effective from 1999, 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, 1999, 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, 2000, and the unrecognized net asset or obligation at transition is amortized equally at the straight-line method. 14

15 EPIX, INC. has a simple IRA pension plan for the benefit of all employees meeting certain minimum requirements. Annual matching contributions of 1 to 3 percent in accordance with plan requirements are made at the Board of Director s discretion. HORIZON FITNESS INC. has a simple IRA pension plan for the benefit of all employees meeting certain minimum requirements. Annual matching contributions of 3 percent are made in accordance with the simple plan requirements. JOHNSON HEALTH TECH. U.K. LTD. contributes to the personal pension plan of certain directors. The amount charged against profits represents the contributions payable to the scheme in respect of the accounting period. J.I.H., J&S, J&E, JOHNSON HEALTH TECHNOLOGY (SHANGHAI) CO., LTD., MATRIX FITNESS SYSTEMS INC., STYLE FITNESS EQUIPMENT CO., LTD., STYLE FITNESS SPAIN, S.L., JOHNSON HEALTH TECH. FRANCE SAS, STYLE FITNESS GMBH, JOHNSON HEALTH TECH. JAPAN K.K., JOHNSON HEALTH TECH. DEUTSCHLAND GMBH, JOHNSON HEALTH TECH. (THAILAND) CO., LTD., JOHNSON HEALTH TECH. USA HOLDING CO., LTD. and JOHNSON HEALTH TECH. (SCHWEIZ) GMBH didn t maintain any pension plan for the benefit of their employees. (10) Legal Reserve Legal reserve is appropriated at 10% of the Company s net income (11) Special Reserve Special reserve is created to account for deficit balances in other components of shareholders equity. The special reserve will be subsequently adjusted once the other balances are no longer in a deficit position. (12) Income Tax The Company adopted the Statement of Financial Accounting Standard No.22 of Taiwan (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 or liability is recognized for the estimated future tax effects attributable to temporary differences, tax credits, and loss carry forwards. 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. The Company adopted R.O.C Statement of Financial Accounting Standards No.22 Accounting for Income Taxes. This Statement recommends interperiod as well as intraperiod income tax allocation. The Company s additional 10% income tax, which arose undistributed retained earnings, is expensed as the date of the shareholders meeting where an appropriation of earnings is resolved. 15

16 (13) Recognition of Revenue The Company adopted the statement of Financial Accounting Standard (SFAS) NO.32 of Taiwan, Accounting for Recognition of Revenue. (14) Earnings Per Common Share Computation of earnings per share 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. (15) Asset Impairment Pursuant to SFAS No. 35, the Company assesses indicators for impairment for all its assets within the scope of SFAS No. 35 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 ) and write down the carrying amount to the recoverable amonut where applicable. Recoverable amount is defined as the higher of fair values less costs to sell and the values in use. For previously recognized losses, the Company shall assess, at each balance sheet date, whether there is any indication that the impairment loss may no longer exist or may have decreased. If there is any such indication, the Company has to recalculate 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 shall reverse the impairment loss to the extent that the carrying amount after the reversal would not exceed the carrying amount that would have been determined (net of amortization or depreciation) had no impairment loss been recognized for the assets in prior years. The provision or reversal of impairment losses is classified as non-operating losses or gains. 3. EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE Pursuant to the amendments of the R.O.C. SFAS No.5, Accounting for Long-term Investments under Equity Method, certain investees were recognized based on the gains or losses incurred in the current period, instead of the prior period. There is no effect over the Company s income before income taxes and earnings-per-share for Effective from January 1, 2005, the Company adopted SFAS No.35, Accounting for Asset Impairment to account for the impairment of its assets on financial statements. No retroactive adjustment is required under SFAS No. 35. Such a change in accounting principles has resulted in a loss of $8,781 in the Company s income before income tax and $0.07 (in NT Dollars) in earnings-per-share for the year ended December 31, SUMMARY OF SIGNIFICANT ACCOUNTS 16

17 a. Cash and Cash Equivalents Cash and cash equivalents as of December 31, 2005 and 2004 consisted of the following: Cash on hand $37,052 $8,650 Cash in banks 1,695,211 1,122,757 Total 1,732,263 1,131,407 Add (Less): Allowance for foreign 19,634 (2,975) exchange gain (loss) Net $1,751,897 $1,128,432 b. Note and Accounts Receivable, Net Accounts receivables as of December 31, 2005 and 2004 consisted of the following: Note receivables $13,404 $5,524 Accounts receivables 1,726,937 1,434,901 Less: Allowance for foreign exchange loss (1,181) (7,185) Less: Allowance for doubtful accounts (52,528) (47,947) Account receivables net 1,673,228 1,379,769 Note and accounts receivable, net $1,686,632 $1,385,293 c. Inventories, Net Inventories as of December 31, 2005 and 2004 are categorized as follows: Raw materials $213,960 $159,232 Work in process 98,233 98,455 Finished goods 1,055,405 1,024,582 Less: Allowance for decline in (39,326) (38,170) market and value obsolence Net $1,328,272 $1,244,099 Inventories were insured for possible fire losses in the sum of $1,084,639 and $802,884 as of December 31, 2005 and 2004, respectively. 17

18 d. Other Current Assets Deferred income tax assets $100,050 $129,805 Prepaid expenses 148,647 61,679 Value added tax refundable 63,630 21,557 Others 51,615 38,477 Total $363,942 $251,518 e. Property, Plant, and Equipment, Net (1) The Company revaluated 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 credit to capital surplus $25,162. Based on the resolution adopted at the shareholders extraordinary meeting on November 16, 1998, the Company capitalized capital surplus resulting from increment land revaluation. (2) As of December 31, 2005 and 2004, insurance coverage for property, plant, and equipment amounted to $1,113,796 and $938,948, respectively. f. Short-term Borrowings Short-term borrowings as of December 31, 2005 and 2004 are summarized as follows: Interest Rate Balance Interest Rate Balance Credit loan 1.50% $311, %-3.4% $805,844 Secured loan 4.97%-5.10% 1, %-3.4% 60,000 Usance L/C loan 6.83% 363, %-3.91% 2,817 Total 676, ,661 Less: Allowance for - (156) foreign exchange gain Net $676,362 $868,505 g. Notes and Accounts Payable, Net Notes payable $95,004 $201,664 Accounts payable 1,013,138 1,063,203 Less: Allowanced for foreign exchange gain (95) (688) Accounts payable, net 1,013,043 1,062,515 Notes and accounts payable, net $1,108,047 $1,264,179 18

19 h. Accrued Expenses Accrued expenses as of December 31, 2005 and 2004 are summarized as follows: Payroll $125,740 $92,120 Warranty expense 95,452 88,980 Advertisement expense 66,727 50,959 Accrued assembly expense 19,298 32,604 Others 136, ,391 Total 443, ,054 Less: Allowance for foreign exchange (165) (5,779) gain Accrued Expenses, net $443,611 $391,275 i. Other Current Liabilities Other payable $200,212 $158,656 Advance from customers 32,088 11,465 Accrued minority interest income 26,280 - Receipts under custody 18,694 19,705 Payables on equipment 12,871 2,801 Other payable-related parties - 42,860 Others 76,959 24,866 Total 367, ,552 Less : Allowance for foreign - (3,916) exchange gain Net $367,104 $253,636 j. Long - term Loans Long-term loans as of December 31, 2005 and 2004 are summarized as follows: Creditors Type Amount Interest Rate Amount Interest Rate Collateral Cooperative Bank Syndicated $262, %-2.40% $ Loan Hua Nan Commercial Bank Credit loan 170, %-2.40% 23, % Land, Building Associated Bank Secured loan 83,805 88, % Land, Building CC-Bank Credit loan - - 1, % Other Total 517, ,855 Less:Current portion (17,272) (17,796) Net $500,076 $95,059 19

20 k. 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 2005 and 2004 consisted of the following: Service cost $9,722 $15,863 Interest cost 3,731 3,808 Expected returns on plan assets (2,348) (2,356) Amortization of transitional net 1,040 1,040 obligations Amortization of pension loss 1,095 1,485 Net pension cost $13,240 $19,840 (2) The reconciliation between the funding status of pension plan and accrued pension liabilities as of December 31, 2005 and 2004 were as follows: Benefit obligations: Vested benefits Non-vested benefits $(23,849) (68,857) $(51,985) (60,147) Accumulated benefit obligations (92,706) (112,132) Effect of projected future salary increase (26,993) (22,960) Projected benefit obligations (119,699) (135,092) Fair value of plan assets 81,451 76,217 Status of pension plan (38,248) (58,875) Unrecognized transitional net 9,358 10,398 obligations Unrecognized pension losses 9,800 37,598 Recognition of a minimum liability - (25,812) Accrued pension liabilities $(19,090) $(36,691) As of December 31, 2005 and 2004, accrued pension liabilities were recorded as accrued expenses in the amount of $320 and $517 and as accrued pension liabilities in the amount of $18,770 and $36,174, respectively. (3) As of December 31, 2005 and 2004, vested benefits of the Company s pension plan were $23,849 and $51,985, respectively. (4) The balance of the pension fund of the Company, which is deposited with the Central Trust of China, was $81,451 and $76,217 as of December 31, 2005 and 2004, respectively. (5) The underlying assumptions for determining the actuarial present value are as follows: Discount rate 3.50% 3.50% Rate of increase in future compensation level 2.00% 2.00% Expected long-term rate of return on plan assets 2.50% 3.50% 20

21 l. Stockholders Equity (1) Capital stock As of January 1, 2004, the Company s capital stock authorized and outstanding was $840,000, divided into 84,000,000 shares with par value of $10 (in dollar) each. Based on the resolution adopted at the annual shareholders meeting on June 30, 2004, the Company declared stock dividends paid out of retained earnings in the amount of $210,000. The Ministry of Economic Affairs approved the change in registered capital stock on September 14, As of December 31, 2004, the company s capital stock authorized and outstanding was $1,050,000 divided into 105,000,000 shares with par value of $10 (in NTD) each. Based on the resolution adopted at the annual shareholders meeting on June 24, 2005, the Company declared stock dividends paid out of retained earnings in the amount of $210,000 and capitalized bonus to employees in the amount of $4,500. The Ministry of Economic Affairs approved the change in registered capital stock on September 12, As of December 31, 2005, the Company s capital stock authorized and outstanding was $1,264,500 divided into 126,450,000 shares with par value of $10 (in NTD) each. (2) Capital surplus Capital surplus as of December 31, 2005 and 2004 consisted of the following: Paid-in capital in excess of par value $25,000 $25,000 Increment in assets revaluation 1,162 1,162 Gain on sale of property, plant and equipment Total $26,204 $26,204 As prescribed by the Company Law 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. (3) Legal reserve The Company Law stipulates that companies must retain at least 10% of their annual earnings, as defined in the Law, until such retention equals the amount of paid-in capital. This retention is accounted for as a legal reserve account. Once the balance of legal reserve equals or exceeds one-half of the amounts of paid-in capital, 50% of the reserve may be transferred to common stock. The legal reserve cannot be distributed as cash dividends to stockholders. However, it can be used at any time to cover deficit. 21

22 (4) Distribution of earning (a) According to the applicable Company s Articles of Incorporation in 2005 and 2004, after paying income tax and offsetting the accumulated deficit, the Company in prescribed to appropriate 10% of legal reserve, and then declare minimum 1% of employee bonuses and maximum 5% of directors and supervisors bonuses in sequence. (b) The appropriation of 2004 earnings resolved by Board of Directors on April 7, 2005 and adopted by the annual meeting of shareholders on June 24, 2005 is as follows: Item As Adopted at the Shareholders Meeting As Resolved by the Board of Directors Differences Bonus to directors and supervisors $9,500 $9,500 $ - Employees bonus $ - $4,500 $(4,500) Employees bonus by issurance of new shares. a. Amount $4,500 $ - $4,500 b. Number of shares ($10 par value per 450,000(shares) - 450,000(shares) share) c. Percentage on total number of outstanding shares at end of year 0.43% -% 0.43% Cash dividends $157,500 $157,500 $ - Stock dividends ($10 in NTD each) 21,000,000 (shares) 21,000,000 (shares) - Earning per share taking into $7.12 $7.12 $ - consideration of the employees bonus and bonus to directors and supervisors. (Note) Note: Net Income (2004) - Employees bonus Directors and supervisors bonus Weighted average common shares outstanding (2004) (c) Information on board of directors recommendation and shareholders approvals can be obtain from the Market Observation Post System on the website of Taiwan Stock Exchange Corporation. m. Income Tax Expense The Company s income tax returns through 2002 have been assessed by the Tax Authority. The Company adopt SFAS No. 22 of Taiwan, Accounting for Income Taxes. The enacted tax rate for the current year of JOHNSON HEALTH TECHNOLOGY CO., LTD. is 25% and the additional tax on undistributed earnings of prior year is 10%. The enacted tax rate for the current year of EPIX, INC., HORIZON FITNESS INC. AND MATRIX FITNESS SYSTEMS INC. ARE 40%. THE ENACTED TAX RATE FOR CURRENT YEAR OF STYLE FITNESS U.K. LTD. is 30%. Disclosures required under the statement are summarized as follows: 22

23 (1) Total deferred income tax assets $76,212 $10,571 Total deferred income tax liabilities $292,022 $321,493 Valuation allowance for deferred income tax $ - $ - assets Temporary differences attributing to the deferred income tax assets/liabilities: Unrealized foreign currency exchange gain $25,166 $(57,914) (loss) Unrealized product warranty expense $(31,239) $(47,300) Provision for allowance to doubtful accounts $(29,336) $(6,742) Unrealized investment income $784,774 $ - Unrealized intercompany profits $(137,755) $(208,567) Accrued pension cost $(67,513) $(9,069) Cumulative translation adjustments $10,948 $(126,774) Allowance for reduce inventory to market value $(67,148) $(17,399) Deferred charges $(13,250) $(4,836) Depreciation Difference $12,179 $111,387 Start-up costs $ - $(2,435) Net operating loss carry forwards $(479,930) $(160,115) Unrealized miscellaneous income $(20,296) $(21,592) Unrecognized pension cost $ - $(14,638) Others $(4,275) $ - (2) Deferred income tax assets-current $100,050 $129,805 Valuation allowance - - Deferred income tax assets-current $100,050 $129,805 Deferred income tax liabilities-current $14 $ - (3) Deferred income tax assets-noncurrent $191,972 $191,688 Valuation allowance - - Deferred income tax assets-noncurrent $191,972 $191,688 Deferred income tax liabilities-noncurrent $76,198 $10,571 23

24 (4) Income tax provision for the years ended December 31, 2005 and 2004 are as follows: Income tax-current $119,352 $98,930 Deferred income tax expense (benefit): Unrealized foreign currency exchange gain 20,153 (14,215) (loss) Unrealized product warranty expense 2,000 (5,229) Employee welfare - 48 Reversal of intercompany profits 17, Provision for allowance to reduce inventory to market value 5,580 (18,928) Allowance for doubtful accounts (5,550) (3,569) Accrued pension cost (7,064) 484 Depreciation Difference - 6,525 Start-up Lost (5,062) - Net operating loss carry forwards (36,382) (61,365) Unrealized miscellaneous income 324 2,599 Amortization of patents - (6,832) Unrealized investment income 78,478 - Other (5,896) - Deferred income tax benefit 64,284 (99,775) Income tax expense $183,636 $(845) (5) As of December 31, 2005 and 2004, the information related to tax credits available to stockholders under imputation system of taxation are as follows: Balance of tax credit available to stockholders $80,594 $91,741 Projected/actual percentage of tax credit available 7.37% 11.32% The projected percentage of tax credit available is computed including current income tax provision and additional 10% income tax arisen from 2004 s undistributed retained earnings. 24

25 (6) As of December 31, 2005 and 2004, the Company s undistributed earnings are summarized as follows: Undistributed earnings resulted in year 1997 $853 $853 and before Undistributed earnings resulted in year ,944,962 1,266,677 and after Total $1,945,815 $1,267,530 n. Earnings Per Common Share Consolidated Net Income $1,253,338 $764,046 Minority interest in combined net loss (19,515) (6,539) Purchased preacquisition earning - 4,496 Controlling interest in combined net income $1,233,823 $762,003 Weighted average shares outstanding for basic EPS 126,450, ,450,000 Basic earnings per common share-in NT dollars Consolidated net income Minority interest in combined net loss (0.15) (0.05) Purchased preacquisition earning Controlling interest in combined net income *Weighted average shares outstanding for year 2004 has been retroactive adjustment. o. Operating Revenues Operating revenues for year ended December 31, 2005 and 2004 are summarized as follows: Product sales $8,816,400 $6,818,609 Less: Sales returns and allowances (275,280) (117,471) Total $8,541,120 $6,701,138 p. Operating Revenues Nature Operating costs for year ended December 31, 2005 and 2004 are summarized as follows: Function Operating Costs Operating Expenses Subtotal Operating Costs Operating Expenses Subtotal Personal expenses Salary $356,102 $587,570 $943,672 $281,740 $331,825 $613,565 Insurance 25,471 55,249 80,720 19,829 18,505 38,334 Pension 10,340 16,292 26,632 7,973 8,695 16,668 Other 11,927 99, ,444 12,751 13,271 26,022 Depreciation 58, , ,216 44,008 94, ,460 Amortization 65,802 95, ,113 26,119 51,276 77,395 25

26 5. RELATED PARTY TRANSACTIONS a. Names and Relationships of Related Parties Lo, Kun-Chuan Lo, Kuang-Ting Related Parties Relationships The Company s chairman The Company s CEO (1) Financing transactions (a) The Company entered into the following financing transactions with related parties as of December 31, Name of Related Party Lo, Kuang-Ting Maximum Year-end Interest Interest Date Balance Balance Expense Rate 6/30 $42,860 $ - $458 6% (b) The Company entered into the following financing transactions with related parties as of December 31, Name of Related Party Lo, Kuang-Ting Maximum Year-end Interest Interest Date Balance Balance Expense Rate 12/31 $42,860 $42,860 $2,494 6% (2) Others In 2005 and 2004 the Company s chairman gratuitously provided his own agricultural land, registered under the name of Zen-Jin Lo who is a farmer, for the use of warehouse, container entrepot. 6. ASSETS PLEDGED As of December 31,2005 and 2004, the following assets were pledged to banks as collateral for borrowings and hiring foreign labors: Land (including land appraised incremental $63,364 $68,221 value, net) Buildings, net 179, ,111 Machinery Certificated of deposit-restricted 8,251 7,500 Inventory 397,341 - Total $649,652 $277,832 26

27 7. SIGNIFICANT COMMITMENTS AND CONTINGENT LIABILITY The significant commitments and contingent liabilities of the company as of December 31, 2005 and 2004 were as follows: a. As of December 31, 2004, the Company had an amount of USD5,024.7 issued but unused letter of credits. There is no such transaction in b. The Company issued guaranty notes as security for borrowings in the sum of $253,125 and $364,625 as of December 31, 2005 and 2004, respectively. 8. SIGNIFICANT CASUALTY LOSS None. 9. SIGNIFICANT SUBSEQUENT EVENTS None. 10. OTHERS (1) The information related to derivative instruments are as follows: a. The purposes and strategies of using derivative financial instruments: The Company uses the above derivatives to manage risks related to exchange rate fluctuations. Forward contract was designated as exchange rate hedge purposes. The company s exchange rate risk management strategy is to stabilize the exchange gains on losses incurred from the market. By entering into reverse transactions, the risk exposure is minimized. b. Credit risk: Credit risk means the possible loss that may be incurred in the event that the counter parties default. As the counterparties of the Company are all financial institutions with good credit ratings, credit risk is considered to be remote. c. Market risk: Forward contract is used to hedge fluctuations in currency rates. The gains or losses on the effective portion of the hedge are reclassified into earning when amount on the related debtor credit is paid or received. 27

28 d. Outstanding forward exchange contracts as of December 31, 2004 were as follows: Contract amount Type Currency Maturity Date (in Thousands) Sell US$/NT$ January 2005 to March 2005 USD 2,500 As of December 31, 2004, assets and liabilities related to the aforementioned contracts were recorded as receivables from forward exchange contracts (included in the other current assets account) and details were listed below. Amount Receivables from forward exchange contracts $80,903 Payables on forward exchange contracts-foreign currency (81,300) Payables on forward exchange contracts-foreign currency 313 discount Allowance for foreign exchange gain - Payables on forward 1,737 exchange contracts-foreign currency Receivables from forward exchange contracts $1,653 There is no such transaction in (2) Fair value of non-derivative financial instruments: The carrying value of cash and cash equivalents approximates fair value. The carrying values of short-term borrowings, notes receivable, accounts receivable, notes and accounts payable also approximate their fair values because of the relatively short period of time between their origination and expected realization. The fair value of long-term loans approximates discounted future cash flows based on the interest rates currently available to the Company. Non-derivative Financial Instrument Carrying Amount Fair Value Carrying Amount Fair Value Financial Assets: Cash and cash equivalents $1,751,897 $1,751,897 $1,128,432 $1,128,432 Notes and accounts receivable 1,686,632 1,686,632 1,385,293 1,385,293 Financial Liabilities: Short-term borrowings 676, , , ,505 Notes and accounts payable 1,108,047 1,108,047 1,264,179 1,264,179 Long-term loans 517, , , ,855 Financial Instrument Assets: Forward Contract - - 1,653 1,435 28

29 11. SEGMENT INFORMATION a. The Company operates in a single industry segment by manufacturing and selling of Sports equipments, cardiovascular, strength training machinery and some related electronic control parts. b. Geographical Information The Company and subsidiaries did not engage in any overseas operations. c. Export Information As of December 31, 2005 and 2004, the area made 10% or more of its net sales was as follows: Area America $5,737,302 $4,238,870 Europe 1,494,380 1,365,265 Asia 917, ,417 Other 274, ,963 Total $8,424,647 $6,570,515 d. Major Customers The Company s sales to a single customer are not in excess 10% of net consolidated sales in 2005 and