JOHNSON HEALTH TECHNOLOGY CO., LTD. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS WITH REPORT OF INDEPENDENT AUDITORS

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1 TECHNOLOGY CO., LTD. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS WITH REPORT OF INDEPENDENT AUDITORS FOR THE YEARS ENDED DECEMBER 31, 212 AND 211 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 consolidated balance sheets of Johnson Health Technology Co., Ltd. and subsidiaries as of December 31, 212 and 211, 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 in 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, 212 and 211, 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 in Taiwan. March 18, 213 Taichung, Taiwan Republic of China in Taiwan 2

3 TECHNOLOGY CO., LTD. AND SUBSIDIARIES Consolidated Balance Sheets December 31, 212 and 211 (Expressed in Thousands of New Taiwan Dollars) Assets Current Assets Cash and cash equivalents (Notes 2 and 4.a) $1,74,947 $1,499,192 Financial assets at fair value through income statement (Notes 2 and 4.b) 454 3,23 Notes receivable, net (Notes 2 and 4.c) 59,564 1,765 Accounts receivable, net (Notes 2 and 4.c) 4,917,753 4,134,434 Inventories, net (Notes 2 and 4.d) 3,161,96 2,996,192 Other current assets (Notes 4.e and 6) 574, ,71 Total Current Assets 1,454,433 9,163,514 Property, Plant and Equipment, net (Notes 2, 4.f and 6) Intangible Assets 2,425,81 2,592,73 Patents 23,327 32,432 Computer sofeware (Note 2) 4,611 4,191 Goodwill (Note 2) 168, ,677 Land rights (Note 2) 24,48 252,588 Other Intagible Assets 31,81 3,76 Total Intangible Assets Other Assets 53, ,648 Refundable deposits 66,291 61,826 Deferred income tax asset-noncurrent (Notes 2 and 4.p) 255,314 22,51 Other assets-other (Notes 2 and 4.c) 416,92 33,42 Total Other Assets 737, ,919 Total Assets $14,121,589 $12,882,154 (The accompanying notes are an integral part of financial statements) (Continued on next page) 3

4 TECHNOLOGY CO., LTD. AND SUBSIDIARIES Consolidated Balance Sheets (continued) December 31, 212 and 211 (Expressed in Thousands of New Taiwan Dollars) Current Liabilities Liabilities and Stockholders' Equity Short-term borrowings (Note 4.g) $2,81,364 $1,411,989 Commercial paper payable (Note 4.h) 99,799 99,775 Financial liabilities at fair value through income statement (Notes 2 and 4.i) 26,831 17,671 Notes payable (Note 4.j) 18,394 16,964 Accounts payable (Note 4.j) 2,498,958 2,546,995 Income tax payable (Note 2) 246, ,188 Accrued expenses (Note 4.k) 1,238,461 1,21,779 Long-term loans payable- current portion(note 4.m) 184, ,85 Other current liabilities (Note 4.l) 5, ,381 Total Current Liabilities 6,985,38 6,33,547 Long-term Liabilities Long-term loans (Note 4.m) 1,45,9 819,628 Reserve Reserve for land value incremental tax (Note 2) 47,428 47,428 Other Liabilities Accrued pension liabilities (Notes 2 and 4.n) 3,876 3,876 Other liabilities 123,537 7,964 Total Other Liabilities 154,413 11,84 Total Liabilities 8,232,239 7,272,443 Stockholders' Equity (Notes 2 and 4.p) Common stock 2,3,815 1,993,19 Capital surplus 39,32 34,863 Legal reserve 697,464 62,395 Special reserve - 26,794 Retained earnings 3,32,17 2,713,692 Capital surplus from assets revalution 64,37 64,37 Cumulative translation adjustments (227,26) (32,817) Minority interest 1,38 9,728 Total Stockholders' Equity 5,889,35 5,69,711 Total Liabilities and Stockholders' Equity $14,121,589 $12,882,154 (The accompanying notes are an integral part of financial statements) 4

5 TECHNOLOGY CO., LTD. AND SUBSIDIARIES Consolidated Statements of Income For the Years Ended December 31, 212 and 211 (Expressed in Thousands of New Taiwan Dollars, Except Earnings Per Share Data) Net Sales (Notes 2 and 4.r) $15,32,89 $13,634,144 Cost of Goods Sold (8,145,66) (7,447,572) Net Gross Profit 7,175,284 6,186,572 Operating Expenses (6,248,18) (5,291,549) Operating Income 927, ,23 Non-operating Income Interest income 188, ,221 Gain on disposal of property, plant and equipment 1,599 2,84 Gain on disposal of Investment Gain on valuation of financial asset 5,354 17,698 Other income 98,12 118,542 Subtotal 293,82 262,31 Non-operating Expenses Interest expense (64,811) (64,521) Loss on disposal of property, plant and equipment (9,236) (7,489) Investment loss - (33,31) Foreign exchange loss (73,869) (46,136) Loss on valuation of financial liability (13,419) (7,13) Other expenses (32,147) (67,498) Subtotal (193,482) (225,688) Income before Income Tax 1,27, ,636 Income Tax Expense (Notes 2 and 4.p) (169,829) (161,23) Consolidated Net Income - total 857,757 77,613 Minority Interest (Gain) Loss (Note 2) (4) 76 Consolidated Net Income - attributed to shareholders of parent company $857,357 $77,689 Earnings Per Common Share (Note 2 and 4.q) $4.28 $3.85 Pro Forma Earnings Per Common Share $4.28 $3.85 (The accompanying notes are an integral part of financial statements) 5

6 Description Common Stock Captial Surplus Legal Reserve Special reserve Retained Earnings Cumulative Translation Adjustments Unrealized Revaluation Increments Minority Interest Balance, January 1, 211 $1,943,61 $3,682 $595,327 $ - $2,32,636 $(27,832) $64,37 $9,811 $4,693,271 Distribution of 21 earnings: Legal reserve 25,68 (25,68) - Special reserve 26,794 (26,794) - Cash dividends (97,181) (97,181) Capitalization of retained earnings 48,59 (48,59) - Bonus to employees - stock 819 4,181 5, Cumulative translation adjustments 238,15 238,15 Net Income, ,689 (76) 77,613 Minority interest (7) (7) Balance, December 31, 211 1,993,19 34,863 62,395 26,794 2,713,692 (32,817) 64,37 9,728 5,69,711 Distribution of 211 earnings: TECHNOLOGY CO., LTD. AND SUBSIDIARIES Consolidated Statements of Changes in Stockholders' Equity For the Years Ended December 31, 212 and 211 (Expressed in Thousands of New Taiwan Dollars) Legal reserve 77,69 (77,69) - Special reserve (26,794) 26,794 - Cash dividends (388,639) (388,639) Capitalization of retained earnings 9,965 (9,965) - Bonus to employees - stock 831 4,169 5, Exchange-rate difference of long-term (194,389) (194,389) investments Net Income, , ,757 Minority interest (9) (9) Balance, December 31, 212 $2,3,815 $39,32 $697,464 $ - $3,32,17 $(227,26) $64,37 $1,38 $5,889,35 Total - (The accompanying notes are an integral part of financial statements) 6

7 TECHNOLOGY CO., LTD. AND SUBSIDIARIES Consolidated Statements of Cash Flows For the Years Ended December 31, 212 and 211 (Expressed in Thousands of New Taiwan Dollars) Cash Flows from Operating Activities: Net Income $857,357 $77,689 Adjustments to reconcile net income to net cash provided by operating activities: Minority interest gian (loss) 4 (76) Depreciation 45,23 443,188 Amortization 49,937 33,418 (Reverse) Provision of loss on bad debts (5,677) 15,585 Loss (Gain) on valuation of financial assets and financial liabilities 8,65 (1,685) Loss on disposal of property, plant and equipment, net 7,637 4,649 Increase in notes receivable, net (48,799) (4,635) Increase in accounts receivable, net (783,319) (1,451,289) Decrease in financilal assets and financial liabilities at fair value through income statement (14,441) (14,475) Increase in inventories (159,227) (726,415) Increase in other current assets (73,533) (3,334) Increase in other assets (86,5) (12,918) (Increase) Decrease deferred income tax asset (48,542) 34,358 Increase in notes payable, net 1,43 26,337 (Decrease) Increase in accounts payable, net (48,37) 1,42,234 Increase in accrued expenses 36, ,145 Increase in income tax payable 69,681 8,963 Increase in other current liabilities 54, ,74 Increase in other liabilities 52,573 61,414 Net Cash Provided by Operating Activities 275, ,227 Cash Flows from Investing Activities: Purchase of property, plant and equipment (29,828) (1,697) Proceeds from sales of property, plant and equipment 2,273 9,93 Increase in refundable deposits (4,465) (2,66) Increase in computer sofeware cost (16,52) (36,44) Net Cash Used in Investing Activities (39,522) (129,273) (The accompanying notes are an integral part of financial statements) (Continued on next page) 7

8 TECHNOLOGY CO., LTD. AND SUBSIDIARIES Consolidated Statements of Cash Flows (continued) For the Years Ended December 31, 212 and 211 (Expressed in Thousands of New Taiwan Dollars) Cash Flows from Financing Activities: Increase in short-term borrowings 564, ,564 Increase in long-term borrowings 225,463 - Increase (Decrease) in commercial paper payable 24 (121) Cash dividend to stockholders (388,639) (97,181) Net Cash Provided by Financing Activities 41,797 37,262 Translation effects (126,235) (88,366) Net Increase in Cash and Cash Equivalents 241, ,85 Cash and Cash Equivalents, Beginning of Year 1,499,192 1,266,342 Cash and Cash Equivalents, End of Year (Note 4.a) $1,74,947 $1,499,192 Supplementary Disclosure of Cash Flow Information: Interest paid $68,962 $57,663 Income tax paid $157,161 $143,686 Supplemental Schedule of Non-cash Investing and Financing Activities: Long-term current portion loans payable $184,379 $288,85 Transfer of retained earnings to common stock $9,965 $48,59 Bonus to employees - stock $5, $5, Partial cash flow transaction from investing activities Acquisition of property, plant and equipment $289,325 $16,929 Payable on equipment, Beginning of Year 7, Payable on equipment, End of Year (5,677) (7,18) Net Paid $29,828 $1,697 (The accompanying notes are an integral part of financial statements) 8

9 TECHNOLOGY CO., LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 212 and 211 (Expressed in Thousands of New Taiwan Dollars, unless Otherwise Stated) 1. ORGANIZATION AND OPERATIONS (1) Parent Company: TECHNOLOGY CO., LTD. ( the Company ) was incorporated in The main activities of the Company are manufacturing and selling sports equipment, cardiovascular equipment, weight training equipment,, and related electronic components. The shares of the Company were listed on Taiwan Stock Exchange Corporation on January 9, 23. The Company and subsidiaries had 5,82 and 5,119 employees as of December 31, 212 and 211, respectively. (2) Consolidated Subsidiaries: Name of Investor Name of Investee Principal activities TECHNOLOGY CORP., LTD. JOHNSON INTERNATIONAL HOLDING CORP., LTD. JOHNSON INTERNATIONAL HOLDING CORP., LTD. JOHNSON INTERNATIONAL HOLDING CORP., LTD. JOHNSON INTERNATIONAL HOLDING CORP., LTD. JOHNSON INTERNATIONAL HOLDING CORP., LTD. JOHNSON INTERNATIONAL HOLDING CORP., LTD. JOHNSON INTERNATIONAL HOLDING CORP., LTD. JOHNSON INTERNATIONAL HOLDING CORP., LTD. JOHNSON INTERNATIONAL HOLDING CORP., LTD. JOHNSON INTERNATIONAL HOLDING CORP., LTD. J&S TRADING CO., LTD. TECH. UK LTD. TECHNOLOGY (SHANGHAI) CO., LTD. TECHNOLOGY GMBH TECH. IBERICA. S.L. TECH. FRANCE SAS TECH. DEUTSCHLAND GMBH TECH. JAPAN K.K. TECH. (THAILAND) CO., LTD. 9 Combined Holding Percentage by the Company and Subsidiaries December Holding company 1.% 1.% Selling cardiovascular and weight training equipment, etc. Selling cardiovascular and weight training equipment, etc. Manufacturing and selling weight training equipment Selling cardiovascular and weight training equipment, etc. Selling cardiovascular and weight training equipment, etc. Selling cardiovascular and weight training equipment, etc. Selling cardiovascular and weight training equipment, etc. Selling cardiovascular and weight training equipment, etc. Selling cardiovascular and weight training equipment, etc. 1.% 1.% 1.% 1.% 1.% 1.% 94.18% 94.18% (Note 1) 99.98% 99.96% 1.% 1.% 98.7% 98.7% 99.8% 99.8% 95.% 95.%

10 Name of Investor Name of Investee Principal activities JOHNSON INTERNATIONAL TECH. Selling cardiovascular and HOLDING CORP., LTD. ITALIA SPA weight training equipment, etc. JOHNSON INTERNATIONAL JOHNSON FITNESS Selling cardiovascular and HOLDING CORP., LTD. (MALAYSIA) SDN. BHD. weight training equipment, etc. JOHNSON INTERNATIONAL TECH. Selling cardiovascular and HOLDING CORP., LTD. (SCHWEIZ) GMBH weight training equipment, etc. JOHNSON INTERNATIONAL TECH. Selling cardiovascular and HOLDING CORP., LTD. NETHERLAND B.V. weight training equipment, etc. JOHNSON INTERNATIONAL JOHNSON INDUSTORIES Manufacturing and selling HOLDING CORP., LTD. strength equipments JOHNSON INTERNATIONAL TECH Selling cardiovascular and HOLDING CORP., LTD. (HONG KONG) CO., LTD. weight training equipment, etc. JOHNSON INTERNATIONAL Selling cardiovascular and HOLDING CORP., LTD. TECHNOLOGIES - BRAZIL weight training equipment, etc. EQUIPMENTOS ESTORTIVOS LTDA. JOHNSON INTERNATIONAL CARE Selling cardiovascular and HOLDING CORP., LTD. CO., LTD. weight training equipment, etc. Combined Holding Percentage by the Company and Subsidiaries December % 99.49% 98.86% 98.86% 1.% 1.% 1.% 1.% 1.% 1.% 1.% 1.% -% (Note 2) 99.99% 1.% 1.% JOHNSON INTERNATIONAL HOLDING CORP., LTD. JOHNSON INTERNATIONAL HOLDING CORP., LTD. JOHNSON INTERNATIONAL HOLDING CORP., LTD. JOHNSON INTERNATIONAL HOLDING CORP., LTD. JOHNSON INDUSTRIAL DO BRASIL LTDA. WOLRD OF LEASING GMBH TECH. NORTH AMERICA, INC. TECH. AUSTRALIA PTD. LTD. Manufacturing and selling strength equipments Selling cardiovascular and weight training equipment, etc. Selling cardiovascular and weight training equipment, etc. Selling cardiovascular and weight training equipment, etc % 99.95% (Note 2) 1.% 1.% 1.% 1.% 1.% 1.% (Note 1) STYLE FITNESS GMBH changed its company name to TECH.GMBH in 211. (Note 2) For the purpose of integrating subsidiaries' resources, JOHNSON INDUSTRIAL DO BRASIL merged with TECHNOLOGIES-BRAZIL EQUIPMENTOS ESTORTIVOS LTDA. in 212. (3) As of December 31, 212 and 211, the Company and its subsidiaries had 5,82 and 5,119 employees, respectively. 1

11 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The financial statements are prepared in conformity with the 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)Basis of Consolidation a. General descriptions of reporting entities Investees in which the Company, directly or indirectly, holds more than 5% of voting rights or de facto control, are consolidated into the company s financial statements in accordance with the amendments to the R.O.C. Statement of Financial Accounting Standards (SFAS) No.7 Consolidation of Financial statements (the Company and the consolidated entities are hereinafter referred to as the Group ). b. Changes in consolidated entities (a) J&E COMPANY LIMITED cancelled its registration on July 14, 211. (b) J&H COMPANY LIMITED cancelled its registration on July 14, 211. (c) For the purpose of integrating subsidiaries' resources, JOHNSON INDUSTRIAL DO BRASIL merged with TECHNOLOGIES-BRAZIL EQUIPMENTOS ESTORTIVOS LTDA. in 212. c. Principles of consolidation (a) The consolidated financial statements include the accounts of the Company and the consolidated financial statements after eliminating all significant inter-company accounts and transactions. (b) 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 investment at the acquisition date is recorded as consolidated debits. However, effective from January 1, 26, such a difference is no longer amortized. Arising difference from new acquisitions are analyzed and accounted for in the R.O.C SFAS No. 25, Business Combinations-Accounting Treatment under Purchase Method, where goodwill is not subject to amortization. 11

12 (c) When an investee, directly or indirectly, over 5% of whose voting rights or de facto control (meets any one of the conditions listed below) with less than 5% of voting rights are being held by the Company, the investee is included in the combined financial statement with its affiliates. i. Through signed proxy statement, the combined investor class represented over 5% of the voting rights. ii. By law or signed contract, ability to influence the financial, operational and human resources decision iii. Ability to appoint or dismiss majority of the members of the board of directors or equivalent governing body. iv. Ability to predominate the casting of votes at the meeting of the board of directors or an equivalent governing body, where the company is being controlled by the board or equivalent governing body. v. Other abilities to influence. (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: (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. 12

13 c. The financial statements of all foreign subsidiaries are 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 subsidiaries are recorded as cumulative translation adjustments in shareholders equity. (3) Classification of Current and Noncurrent By Operating Cycle The operating cycles of some business of the Company and subsidiaries are longer than one year, so the balance sheet classification of current and noncurrent items are accounted for by operating cycles. Current assets are assets held for trading purposes and assets expected to be converted to cash, sold or consumed within one year from the balance sheet date. Current liabilities are obligations incurred for trading purposes and obligations expected to be settled within one year from the balance sheet date. Assets and liabilities that are not classified as current are noncurrent assets and liabilities, respectively. (4) Cash and Cash Equivalents 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. (5) 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 to 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. 13

14 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. (6) Derivatives The Company entered into currency forward contracts to hedge its risk arising from long-term liabilities denominated in a foreign currency. These derivatives are initially recognized, and 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. The variances from the fluctuation of the fair market value of the derivatives are recorded in the profit or loss where the hedge accounting is not applicable. (7) 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. (8) 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: 14

15 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. (9) Property, Plant and Equipment a. In December 21, the Company re-evaluated 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 improvement Other equipment Useful Lives 3 ~ 5 years 3 ~ 12 years 5 years 3 ~ 1 years 2 ~ 3 years 3 ~ 1 years 2 ~ 2 years c. Major replacements, renewals and improvements are capitalized, while maintenance and repairs are expensed. d. Interest incurred from financing for construction or acquisition of property, plant and equipment is capitalized into 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. 15

16 (1) 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. The payments to acquire computer software are capitalized and amortized using the straight-line method over two to seven years. c. Goodwill which represents the excess of purchase price over the fair value of identifiable net assets acquired is amortized on a straight-line basis over 5 to 1 years. Effective January 1, 26, pursuant to the newly revised Statement of Financial Accounting Standards No. 25, Business Combinations Accounting Treatment under Purchase Method, goodwill is not amortized. d. The payments to acquire land rights are capitalized and amortized using the straight-line method over fifty years. (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. 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. 16

17 The Labor Pension Act of R.O.C. ( the LPA ), which adopts a defined contribution scheme, takes effect from July 1, 25. 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. TECH. NORTH AMERICA, INC. has a simple Individual Retirement Account pension plan for the benefit of all employees meeting certain minimum requirements. Annual matching contributions of 1 to 3 percent in accordance with the plan requirements are made at the board of director s discretion. TECH. UK 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. Besides the company described above, the remaining subsidiaries didn t maintain any pension plan for the benefit of their employees. (12) 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. (13) 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. 17

18 (14) 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 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. b. The Company s undistributed retaining earnings are subjected to an additional 1% 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, 26. The alternative minimum tax ( AMT ) imposed under the AMT Act is a supplemental tax levied at a rate of 1% 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. (15) 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. 18

19 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. (16) 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. (17) 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. 19

20 (18) 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; 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 PRINCIPLE (1) Effective January 1, 211, the Company adopted the third revised R.O.C. SFAS 34, Financial Instruments: Recognition and Measurement. This change in accounting principles had no significant effect on net income for the year ended December 31, 211. (2) Effective January 1, 211, 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. 2, 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, 212 and 211 consisted of the following: Cash on hand $28,325 $33,5 Checking and savings accounts 1,713,535 1,472,515 Total 1,741,86 1,55,565 Less: Allowance for exchange loss (913) (6,373) Net $1,74,947 $1,499,192 2

21 b. Financial Assets at Fair Value Through Income Statement (1) Financial assets at fair value through income statement as of December 31, 212 and 211 consisted of the followings: Item Amount Amount Forward exchange contract $454 $3,23 For information of Financial Assets mentioned above, please refer to note 4. i. of Financial statement. c. Note and Accounts Receivable, Net Accounts receivables as of December 31, 212 and 211 consisted of the following: Sub total Total Sub total Total Notes receivable, net $59,564 $1,765 Accounts receivable Accounts receivable $3,373,67 $3,491,183 Less: Allowance for foreign exchange loss (59,951) (79,652) Less: Allowance for doubtful accounts (88,682) (95,98) Accounts receivable, net 3,225,37 3,316,433 Installment accounts receivable 1,758, ,38 Less: Unrealized gain on installment sales revenue (181,37) (147,94) Installment accounts receivable, net 1,577,386 7,944 Leased accounts receivable 128,537 14,468 Less: Unrealized gain on leased accounts receivable (13,27) (23,411) Leased accounts receivable, net 115,33 117,57 Accounts receivable, net 4,917,753 4,134,434 Notes and accounts receivable, net $4,977,317 $4,145,199 21

22 Installment accounts receivables are expected to be recovered in the following periods: ~ $- $317, ~ , , ~ , , ~ ,758 16, ~ ,289 29, ~ ,31 - Total $1,758,693 $848, Current Non-current Current Non-current Installment Accounts receivable $128,537 $29,354 $14,468 $215,531 Less:Unrealized Interest Income (13,27) (61,916) (23,411) (35,922) Installment Accounts receivable, net $115,33 $228,438 $117,57 $179,69 Long term installment accounts receivables are expected to be recovered in the following periods: ~ $- $94, ~ ,242 65, ~ ,62 42, ~ ,142 12, ~ ,35 - Total $29,354 $215,531 d. Inventories, Net (1) Inventories as of December 31, 212 and 211 are categorized as follows: Raw materials $4,856 $326,661 Work in process 278, ,928 Finished goods 2,561,573 2,41,886 Total 3,241,316 3,85,475 Less: Allowance for decline in market value and obsolescence (8,22) (89,283) Net $3,161,96 $2,996,192 22

23 (2) Recognition as expense or income for the years ended December 31, 212 and 211 are as follows: Revenue from sale of scraps $12,723 $14,373 Gain (Loss) for market price decline 5,677 (15,585) and obsolete and slow-moving inventories Loss on disposal of inventory (1,696) (1,826) (Loss) Gain on physical inventory (599) 174 Total $16,15 $(2,864) e. Other Current Assets December Prepaid expenses $214,76 $173,521 Deferred income tax assets-current 196, ,476 Restricted Deposits 27,694 43,34 Others 135,543 13,4 Total $574,619 $519,71 f. Property, Plant, and Equipment, Net Property, plant and equipment as of December 31, 212 and 211 consisted of the following: Land $189,84 $191,912 Land revaluation increments 135, ,465 Buildings 1,932,323 1,982,594 Machinery and equipment 1,173,875 1,129,417 Transportation equipment 177, ,45 Furniture, fixtures and equipment 316,65 299,254 Tooling 915,741 86,812 Leasehold improvement 49,367 48,434 Other equipment 18,18 18,685 Construction in progress 41,1 19,596 Prepayments for equipment 1,278 14,447 Total 5,121,711 4,998,66 Less: Accumulated depreciation (2,695,91) (2,45,993) Net $2,425,81 $2,592,73 23

24 (1) 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,. In 26, the Company reclassified the capital surplus resulted from increment land revaluation into unrealized revaluation increments of stockholder s equity. (2) The Company revaluated the land in accordance with government s regulations in 21. 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 $64,37 shall be recognized as unrealized revaluation increments of stockholder s equity. g. Short-term Borrowings Short-term borrowings as of December 31, 212 and 211 are summarized as follows: Interest Rate Balance Interest Rate Balance Credit Line.97%~5.5% $2,81, %~6.78% $1,412,635 Less:Allowance for foreign exchange loss (595) (646) Credit Line, net $(2,81,364) $1,411,989 h. Commercial Paper Payable December Commercial paper payable $1, $1, Less:Discount on commercial paper payable (21) (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, 212 and 211 consisted of the following: Items Book Value Book Value Interest rate swap $15,761 $15,225 Option contract 9,961 - Forward contract 1,19 2,446 Total $26,831 $17,671 24

25 (2) Forward contracts, option contract and interest rate swap as of December 31, 212 were as follows: a. Forward contracts and option contract: Contact Price Company Name Item Transaction (Thousand Dollars) Strike price Date Fair Value Johnson Health Option contract Sell EUR 5, /1-213/9 $(6,46) Tech Co., Ltd. (EUR / USD) Johnson Health Option contract Sell USD 6, /1-213/12 GBP (76) Tech. UK Ltd. (GBP / USD) Johnson Health Forward contract Buy USD 3, /1-213/4 GBP (24) Tech. UK Ltd. (GBP / USD) J&S Trading Co., Ltd. Forward contract Sell USD 5, (RMB / USD) 213/8-213/12 USD 16 b. Interest rate swap: Company Name Date Transaction Johnson Health Tech. 22/3 Option Deutschland GMBH contract Contact Price Contractual Interest (Thousand Dollar) Rate Payment rate Fair Value EUR 2,397.74%-EURIBOR 3M 5.5% EUR (41) (3) Forward contracts, option contract and interest rate swap as of December 31, 211 were as of follows: a. Forward contracts and option contract: Contact Price Company Name Item Transaction (Thousand Dollars) Strike price Date Fair Value J&S Trading Co., Forward Sell USD 4, /7-212/1 USD 3 Ltd. contract (USD / RMB) J&S Trading Co., Forward Buy USD 3, /1-212/2 USD (44) Ltd. contract (USD / RMB) Johnson Health Tech Forward Sell USD 2, /1-212/2 USD 53 (Shanghai) Co., Ltd. contract (USD / RMB) Johnson Industries Forward Sell USD 1, /1-212/2 USD 23 (Shanghai) Co., Ltd. contract (USD / RMB) Johnson Health Tech. Forward Sell GBP 1, /1-212/2 GBP 18 UK Ltd. contract (GBP / USD) Johnson Health Tech. Australia Pty. Ltd. Forward contract Buy USD 5.94 (AUD / USD) 212/1 AUD(36) 25

26 b. Interest rate swap: Company Name Date Transaction Contact Price (Thousand Dollars) Contractual Interest Rate Payment rate Fair Value Johnson Health Tech. 22/3 Option EUR 2, %-EURIBOR 5.5% EUR (388) Deutschland GMBH contract 3M j. Notes and Accounts Payable, Net December Notes payable $18,394 $16,964 Accounts payable 2,51,2 2,552,95 Less: Allowanced for currency exchange gain (2,62) (5,91) Accounts payable, net 2,498,958 2,546,995 Notes and accounts payable, net $2,67,352 $2,653,959 k. Accrued Expenses Accrued expenses as of December 31, 212 and 211 are summarized as follows: Warranty expense $292,291 28,962 Payroll 263,16 298,815 Advertising expense 132,1 6,264 Assembly expense 8,926 5,621 Supply expense 8,579 7,976 Professional service fees 4,155 4,139 Other expense 529, ,293 Total 1,238,757 1,21,7 (Less) Add: Allowance for foreign exchange (gain) loss (296) 79 Net $1,238,461 $1,21,779 26

27 l. Other Current Liabilities December Other payable $19,743 $11,28 Advance from customers 19, ,643 Receipts under custody 6,94 1,186 Payables on equipment 5,677 7,18 Other 268,646 22,164 Total $5,253 $452,381 m. Long - term Loans (1) Long-term loans as of December 31, 212: Creditors Type Period Amount Interest Rate Collateral Cooperative Bank Syndicated Loan $525, % Land, Building Chinatrust Commercial Bank Credit Loan , % - Sparkasse Holstein Bank Secured Loan , %-5.35% Building Ta Chong Commercial Bank Credit Loan , % - Taiwan Bank Credit Loan ,363 3.% - HSBC France Bank Secured Loan , % Building Commerz Bank Secured Loan , % Land, Building VR-Diskontbank Secured Loan , % Building Total 1,229,469 Less: Current portion (184,379) Net $1,45,9 In October 212, 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 1%; (Note 1) (II)The Liability Ratio shall not be higher than 15%; (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 27

28 (2) Long-term loans as of December 31, 211: Creditors Type Period Amount Interest Rate Collateral Cooperative Bank Syndicated Loan $684, % % Land, Building Sparkasse Holstein Bank Secured Loan , %-5.35% Building Dresdner Bank Secured loan , % Building HSBC France Bank Secured Loan , % Building Total 1,18,433 Less: Current portion (288,85) Net $819,628 In December 29, the Company has entered into a syndicated loan agreement with Taiwan Cooperative Bank and six lending institutions of syndicated credits The agreement offered the Company a line of credit of NT$.7 billion and USD 3 million, which contains the following restrictive covenants: (I)The Current Ratio shall not be lower than 1%; (Note 1) (II)The Liability Ratio shall not be higher than 15%; (Note 2) (III)The Interest Coverage Ratio shall not be lower than 3; (Note 3) (IV)The Tangible Net Worth 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: Interest Coverage Ratio = (Income before income tax + Interest expense + Amortization expense) / Interest expense Note 4: Tangible Net Worth= Owners equity - Intangible assets 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 212 and 211 consisted of the following: Service cost $1,966 $1,919 Interest cost 1,738 2,318 Expected returns on plan assets (1,65) (1,478) Amortization of transitional net 1,4 1,39 obligations Net pension cost $3,679 $3,798 28

29 (2) The reconciliation between the funding status of pension plan and accrued pension liabilities as of December 31, 212 and 211 were as follows: Benefit obligations: Vested benefits $(22,216) $(19,772) Non-vested benefits (77,641) (7,248) Accumulated benefit obligations (99,857) (9,2) Effect of projected future salary increase (24,17) (22,41) Projected benefit obligations (124,27) (112,421) Fair value of plan assets 7,545 68,713 Status of pension plan (53,482) (43,78) Unrecognized pension losses 2,8 3,119 Recognition of a minimum liability 19,83 9,371 Other Accrued pension liabilities $(31,151) $(31,151) As of December 31, 212 and 211, accrued pension liabilities were recorded as accrued expenses in the amount of $ 275 and $ 275, and as accrued pension liabilities in the amount of $3,876 and $3,876, respectively. (3) As of December 31, 212 and 211, vested benefits of the Company s pension plan were $ 24,124 and $ 21,888, respectively. (4) As of December 31, 212 and 211, the balances of the pension fund of the Company, which is deposited with the Bank of Taiwan, were $69,87 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.% 2.% Expected long-term rate of return on plan assets 1.3% 1.6% 29

30 o. Capital stock As of January 1, 211, the Company s capital stock outstanding was $1,943,61, divided into 194,361, shares with par value of $1 (in NTD) each. Based on the resolution adopted at the annual shareholders meeting held on June 28, 211, the Company declared stock dividends paid out of capitalization of retained earnings in the amount of $48,59 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, 211. As of December 31, 211, the Company s capital stock authorized was $2,5, and outstanding was $1,993,19 divided into 199,31,898 shares with par value of $1 (in NTD) each. As of January 1, 212, the Company s capital stock outstanding was $1,993,19, divided into 199,31,898 shares with par value of $1 (in NTD) each. Based on the resolution adopted at the annual shareholders meeting held on June 28, 212, 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, 212. As of December 31, 212, the Company s capital stock authorized was $2,5, and outstanding was $2,3,815 divided into 2,381,533 shares with par value of $1 (in NTD) each. p. Capital surplus Capital surplus as of December 31, 212 and 211 consisted of the following: December Paid-in capital in excess of par value $33,35 $29,181 Gain on sale of property, plant and equipment Long-term Investment 5,64 5,64 Total $39,32 $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. 3