WELLS EASTERN ASIA DISPLAYS (M) SDN. BHD. (Incorporated in Malaysia) Company No: 501396-U Financial Statements and Supplementary Data for the financial year ended 31 December 2006 Table of Contents Page Report of Independent Registered Public Accounting Firm 1 Balance Sheets as of 31 December 2006 and 2005 2 Income Statements for the Years Ended 31 December 2006, 2005 and 2004 3 Statements of Changes in Equity for the Years Ended 31 December 2006, 2005 and 2004 4 Cash Flows Statements for the Years Ended 31 December 2006, 2005 and 2004 5 Notes to Financial Statements. 6-15

(Incorporated in Malaysia)

Company No: 501396-U

	Page
Report of Independent Registered Public Accounting Firm	1
Balance Sheets as of 31 December 2006 and 2005	2
Income Statements for the Years Ended 31 December 2006, 2005 and 2004	3
Statements of Changes in Equity for the Years Ended 31 December 2006, 2005 and 2004	4
Cash Flows Statements for the Years Ended 31 December 2006, 2005 and 2004	5
Notes to Financial Statements.	6-15

 

Report Of Independent Registered Public Accounting Firm

(Incorporated in Malaysia)

We have audited the accompanying balance sheets of Wells Eastern Asia Displays (M) Sdn. Bhd. as of December 31, 2006 and 2005 and the related income statements, statements of changes in equity and cash flows statement for each of two years ended December 31, 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statements presentation. We believe that our audit provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Wells Eastern Asia Displays (M) Sdn. Bhd. as of December 31, 2006 and 2005 and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2006 in conformity with accounting principles generally accepted in the United States of America.

Without qualifying our opinion, we draw attention to Note 12 to the financial statements pertaining to the ongoing discussions on the future plan and direction of the Company.

Horwath
Penang, Malaysia

Dated: March 6, 2007

 

    

 

 

Income Statements
			For the Years Ended December 31,
			2006		2005		2004
			USD		USD		USD
REVENUE
	Net related party revenue		6,278,848		16,549,707		19,319,539
	Net third party revenue		4,210		38,697		503,134
	Net revenue		6,283,058		16,588,404		19,822,673
COST OF REVENUE
	Related party cost of revenue		1,184,812		8,523,179		9,408,104
	Third party cost of revenue		4,555,820		6,698,545		8,939,091
	Cost of revenue		5,740,632		15,221,724		18,347,195
	Gross profit		542,426		1,366,680		1,475,478
OPERATING EXPENSE
	Selling, general and administrative		295,556		566,814		476,353
	Research and development		0		165,401		120,848
	Total operating expense		295,556		732,215		597,201
	Profit from operations		246,870		634,465		878,277
	Interest income		7,699		6,481		3,044
	Interest expense		(105,338)		(183,644)		(95,511)
	Other income		49,427		77,774		21,348
	Loss on foreign exchange		(254,755)		0		0
	(Loss)/Profit before income taxes		(56,097)		535,076		807,158
	Tax expense		(15,881)		(71,978)		(90,837)
	Net (loss)/profit		(71,978)		463,098		716,321

 

 

Statements Of Changes in Equity
		Common Stock				Exchange
						translation		Retained
		Shares		Amount		reserve		earnings		Total
				USD		USD		USD		USD
Balance at December 31, 2003		2,508,000		660,000		0		957,574		1,617,574
Net profit for the year		0		0		0		716,321		716,321
Issuance of bonus stock		2,492,000		655,789		0		(655,789)		0
Balance at December 31, 2004		5,000,000		1,315,789		0		1,018,106		2,333,895
Net profit for the year		0		0		0		463,098		463,098
Balance at December 31, 2005		5,000,000		1,315,789		0		1,481,204		2,796,993
Exchange translation differences recognised directly in equity		0		0		185,927		0		185,927
Net loss for the year		0		0		0		(71,978)		(71,978)
Total recognised income and expenses		0		0		185,927		(71,978)		113,949
Balance at December 31, 2006		5,000,000		1,315,789		185,927		1,409,226		2,910,942

 

 

Cash Flows Statements
			For the Years Ended December 31,
			2006		2005		2004
			USD		USD		USD
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss)/profit			(71,978)		463,098		716,321
Adjustments for:-
Depreciation			63,628		78,793		78,955
Loss on sale of property, plant and equipment			0		1,667		0
Property, plant and equipment written-off			1,274		0		0
Changes in net assets and liabilities
	Trade accounts receivable		22,801		91,791		(114,592)
	Trade accounts receivable - related party		1,940,093		3,005,322		(2,813,946)
	Inventories		922,324		361,038		(537,331)
	Prepaid and other current assets		24,547		(21,673)		(7,019)
	Income tax receivable		(37,859)		0		0
	Deferred tax assets		25,618		(25,618)		30,789
	Trade accounts payable		(82,396)		(1,000,515)		661,612
	Trade accounts payable - related party		(675,653)		(1,596,866)		167,471
	Accrued expenses and others		(467,432)		674,449		178,554
	Income taxes payable		(49,495)		37,899		1,201
Net cash from/(used in) operating activities			1,615,472		2,069,385		(1,637,985)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of property, plant and equipment			30,835		5,789		0
Purchase of property, plant and equipment			(1,644)		(15,070)		(18,952)
Net cash from/(used in) investing activities			29,191		(9,281)		(18,952)
CASH FLOW S FROM FINANCING ACTIVITIES
Increase/(Decrease) in bank borrowings			15,697		(2,042,864)		1,531,085
Net cash from/(used in) financing activities			15,697		(2,042,864)		1,531,085
Net increase/(decrease) in cash and cash equivalents			1,660,360		17,240		(125,852)
Effect of exchange rate changes			169,337		0		0
Cash and cash equivalents brought forward			285,467		268,227		394,079
Cash and cash equivalents carried forward			2,115,164		285,467		268,227
Supplemental cash flow information
Cash paid for interest			105,338		183,644		95,511
Cash paid for income tax			77,492		59,697		58,847

1. General Information

The Company was incorporated in year 2000, principally engaged in the manufacture of colour video monitors. There are two major stockholders, Wells-Gardner Electronics Corporation and Eastech Electronics (M) Sdn. Bhd., each holding 50% of the paid up capital of the Company.

The registered office of the Company is located at 57-2, Persiaran Bayan Indah, Bayan Bay, Sungai Nibong, 11900 Penang, Malaysia and the principal place of business of the Company is located at Lot 316 & 317, Jalan PKNK 3/2, Kawasan Perindustrian Sungai Petani, 08000 Sungai Petani, Kedah, Malaysia.

2. Summary of Significant Accounting Policies

2.1 Basis of Preparation of Financial Statements

The financial statements of the Company are prepared under the historical cost convention, modified to include other bases of measurement as disclosed in other sections of the significant accounting policies, and in compliance with the accounting principles generally accepted in the United States of America.

Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses, if any.

Property, plant and equipment are depreciated on a straight-line method over the estimated useful lives of the assets using the following annual rates:

Plant and machinery	10-20%
Electrical installation and renovation	10%
Motor vehicles	20%
Office equipment	20%
Furniture and fittings	10%
Computer	10-20%
Factory tools and equipment	20%
Mould	10%

2. Significant Accounting Policies (cont’d)

2.3 Impairment of Assets

The carrying amounts of assets, other than deferred tax assets, inventories and financial assets, are reviewed at each balance sheet date to determine whether there is any indication that an item of asset may be impaired. If any such indication exists, the recoverable amount of the asset is estimated. Any excess of the carrying amount of the asset over its recoverable amount represents an impairment loss and is recognised as an expense in the income statement.

An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount and it is reversed only to the extent that the increased carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, had no impairment loss been recognised. The reversal is recognised in the income statement.

There were no impairment loss recognized in the income statements for the year ended December 31 2006, 2005 and 2004.

2.4 Inventories

Inventories are valued at the lower of cost (determined on the first-in, first-out basis) and net realisable value after making due allowance for any obsolete or slow-moving items. Cost consists of all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition.

2.5 Receivables

Receivables are carried at anticipated realisable values. Bad debts are written off when identified. An estimate is made for doubtful debts based on a review of all outstanding amounts as at the balance sheet date.

2.6 Payables

Payables are recognised at cost which is the fair value of the consideration to be paid in the future for goods and services received.

2.7 Loans and Borrowings

All loans and borrowings are initially recognised at cost which is the fair value of the proceeds received. The loans and borrowings are subsequently stated at amortised cost using the effective yield method. The effective interest rate is the historical rate for a fixed rate instrument and the current market rate for a floating rate instrument.

All borrowing costs are recognised as an expense in the period in which they are incurred.

2. Significant Accounting Policies (cont’d)

2.8 Provisions

A provision is recognised when it is probable that an outflow of resources embodying economic benefits will be required to settle a present obligation (legal or constructive) as a result of a past event and a reliable estimate can be made of the amount.

2.9 Foreign Currency Transactions and Translation

Transactions in foreign currencies are converted into the functional currency at the rates of exchange ruling at the transaction dates. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated into the functional currency at the rates of exchange ruling at that date. Non-monetary assets and liabilities which are stated at cost denominated in foreign currencies are translated into the functional currency at the rates of exchange ruling at the transaction dates. Exchange gains and losses arising on foreign currency transactions and translation are recognised in the income statement.

2.10 Share Capital

The Company has only one class of share capital, i.e. ordinary shares of RM1.00 (equivalent to USD0.2632) each, which is classified as equity. External costs directly attributable to the issue of new shares are written-off to the share premium account or, where there is no such account, charged to the income statement.

2.11 Income Recognition

Income from the sale of goods is recognised upon delivery of goods and customer’s acceptance. Interest income is recognised on an accrual basis.

2.12 Income Taxes

Income taxes for the year comprise current tax and deferred tax.

Current tax represents the expected amount of income taxes payable in respect of the taxable profit for the year and is measured using the tax rates that have been enacted or substantially enacted by the balance sheet date.

Deferred tax is provided for under the balance sheet liability method in respect of all temporary differences between the carrying amount of an asset or liability in the balance sheet and its tax base except for those temporary differences associated with goodwill, negative goodwill or the initial recognition of an asset or liability in a transaction which is not a business combination and affects neither accounting nor taxable results at the time of the transaction.

2. Significant Accounting Policies (cont’d)

2.12 Income Taxes (cont’d)

A deferred tax liability is recognised for all taxable temporary differences whereas a deferred tax asset is recognised for all deductible temporary differences, unused tax losses and unused tax credits to the extent that it is probable that future taxable profit will be available against which the deductible temporary differences, unused tax losses and unused tax credits can be utilised. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on the tax rates that have been enacted or substantially enacted by the balance sheet date.

2.13 Research and Development Expenditure

Research and development expenditure is recognised as an expense in the period in which the expenditure is incurred unless the development expenditure meets the asset recognition criteria in which case the expenditure will be capitalised.

2.14 Employee Benefits

Short-term employee benefits such as wages, salaries, bonuses and social security contributions are recognised as an expense in the period in which the associated services are rendered by the employees.

As required by law, employers in Malaysia make contributions to the state pension scheme, Employees Provident Fund (“EPF”). Such contributions are recognised as an expense in the period in which the associated services are rendered by the employees.

2.15 Cash and Cash Equivalents

Cash and cash equivalents comprise cash in hand, bank balances, demand deposits, deposits pledged with financial institutions, bank overdrafts and short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.

2. Significant Accounting Policies (cont’d)

2.16 Financial Instruments

The accounting policies for recognised financial instruments are disclosed in the individual policies associated with each item. The Company does not have any unrecognised financial instruments.

The carrying amounts of financial assets and liabilities with short maturity periods are assumed to approximate their fair values due to the short term nature of the instruments. The fair value of related party accounts receivable and payable are not practical to estimate based upon the related party nature of the underlying transactions.

2.17 Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

3. Financial Risk Management

The activities of the Company expose it to certain financial risks, including currency risk, interest rate risk, credit risk, liquidity risk and cash flow risk. The overall financial risk management objective of the Company is to maximise shareholders’ value by minimising the potential adverse impacts of these risks on its financial position, performance and cash flows.

The Board of Directors explicitly assumes the responsibilities of financial risk management which is carried out mainly through risk reviews and internal control systems.

The Company’s exposure to currency risk arises mainly from normal trading transactions denominated in foreign currencies.

The Company does not use any derivative financial instruments to manage its exposure to currency risk as the directors are of the opinion that the net exposure is not significant.

3. Financial Risk Management (cont’d)

The Company’s exposure to interest rate risk arises mainly from borrowings.

The Company manages its exposure to interest rate risk by seeking to obtain the most favourable interest rates available without increasing its other financial risk exposures.

The Company’s exposure to credit risk arises mainly from receivables. The maximum credit risk exposure is best represented by the total carrying amount of these financial assets in the balance sheet.

The Company manages its exposure to credit risk by assessing counter parties’ financial standings on an ongoing basis, setting and monitoring counter parties’ limits and credit terms. The Company does not have any major concentration of credit risk other than the significant amount owing by a related party as disclosed in the financial statements.

The Company’s exposure to liquidity and cash flow risks arises mainly from general funding and business activities.

The Company practises prudent liquidity risk management by maintaining sufficient cash and the availability of funding through certain committed credit facilities.

4. Property and Equipment

Property and equipment consist of the following as of December 31, 2006 and 2005 :-

	2006		2005
	USD		USD
Plant and machinery, factory tools and equipment	572,565		570,837
Electrical installation and renovation	15,013		13,952
Motor vehicles	14,974		13,916
Office equipment, furniture and fittings and computers	34,553		44,776
Total	637,105		643,481
Less : Accumulated depreciation	(452,185)		(381,058)
Property and equipment, net	184,920		262,423

5. Inventories

 

Inventories consist of the following as of December 31, 2006 and 2005:

	2006		2005
	USD		USD
Raw materials	586,548		1,417,906
Work-in-progress	163,548		157,848
Finished goods	22,661		124,734
Goods-in-transit	1,133		0
Total	773,890		1,700,488
Inventory obsolescence reserve	(46,148)		(50,422)
	727,742		1,650,066

6. Prepaid and Other Current Assets

 

Prepaid and other current assets consists of the following as of December 31, 2006 and 2005:

	2006		2005
	USD		USD
Sundry deposits	953		361
Advance to suppliers	974		34,624
Prepaid expenses	15,481		7,629
Other	1,057		398
Total	18,465		43,012

7. Accrued Expenses and Other

 

Accrued expenses and other consists of the following as of December 31, 2006 and 2005:

	2006		2005
	USD		USD
Accrued expenses	47,981		4,762
Employee payables	0		73,824
Other payables	52,346		139,466
Provisions	88,377		74,563
Total	188,704		292,615

8. Bank Borrowings - Secured

	2006		2005
	USD		USD
Banker acceptance I	434,376		239,683
Banker acceptance II	0		352,381
Banker acceptance III	0		401,852
Banker acceptance IV	81,269		47,355
Export credit refinancing I	379,442		160,317
Export credit refinancing II	482,515		160,317
	1,377,602		1,361,905

The details of bank borrowings are as follows:

Facility	Bank	Maturity	Interest
Banker acceptance I	Affin Bank Berhad	January - April 2007	3.75% - 3.80%
Banker acceptance IV	Malayan Banking Berhad	January 2007	3.47%
Export Credit Refinancing I	Malayan Banking Berhad	January - April 2007	4.25%
Export Credit Refinancing II	Southern Bank Berhad	February - March 2007	4.25%

Banker acceptance I is secured by one of the fixed deposits of the Company and guaranteed by Eastern Asia Technology Limited, which is the holding corporation of a substantial shareholder of the Company. All other bank borrowing are secured by the fixed deposits of the Company. The bank borrowings have been settled when payments are due.

9. Tax Expense

	2006		2005		2004
	USD		USD		USD
Tax based on results for the year:
Malaysian income tax	1,379		97,596		60,281
Deferred tax	0		(25,367)		30,789
	1,379		72,229		91,070
Tax (over)/underprovided in prior year:-
Malaysian income tax	(12,132)		0		(233)
Deferred tax	26,634		(251)		0
	15,881		71,978		90,837

9. Tax Expense (cont’d)

 

The numerical reconciliation between the applicable tax rate, which is the statutory income tax rate, and the average effective tax rate is as follows:

			2006		2005		2004
			%		%		%
Applicable tax rate			(28.00)		28.00		28.00
Non-deductible expenses			8.77		1.75		0.46
Tax exempt income from pioneer status			0.00		(15.88)		(17.18)
Unrecognised in deferred tax assets			21.57		0.00		0.00
Average effective tax rate			2.34		13.87		11.28

As at 31 December 2006, the Company has sufficient tax credits and tax exempt accounts to frank its retained profits in full if paid out as dividends.

10. Deferred Tax Assets

	2006		2005
	USD		USD
Balance at 1 January	25,618		0
Deferred tax relating to origination and reversal of temporary differences	0		25,367
Deferred tax - prior year	(25,618)		251
Balance at 31 December	0		25,618
The deferred tax assets are in respect of the deductible/(taxable) temporary differences at December 31, 2006 and 2005 as follows:
	2006		2005
	USD		USD
Basis difference in property and equipment	0		(35,710)
Inventory obsolescence reserve	0		14,193
Accrued expenses and other	0		47,135
	0		25,618

11. Significant Transactions With Related Parties

 

The following represent related party transactions for each of the financial years ended December 31 :-

	2006 USD		2005 USD		2004 USD
Sale of goods to Wells-Gardner Electronics Corporation *	6,278,848		16,549,707		19,319,539
Purchase of goods from Wells-Gardner Electronics Corporation *	765,240		4,481,625		4,365,523
Management fee charged by Eastech Electronics (M) Sdn. Bhd. **	63,468		132,740		149,114
Purchase of goods from Eastech Electronics (M) Sdn. Bhd. **	419,572		4,041,554		5,042,581
Rental of premises charged by Eastech Electronics (M) Sdn. Bhd. **	53,337		51,340		51,340

* A substantial shareholder which holds 50% of the equity interest in the Company.

** A substantial shareholder which holds 50% of the equity interest in the Company.

12. Significant Development

 

The shareholders of the Company are in the midst of discussions on the future plan and direction of the Company. A possible outcome of the final decision is to transfer the operations of the Company to Eastech Electronics (M) Sdn. Bhd., a substantial shareholder. The shareholders expect the ultimate outcome of the plan to be determined by the second half of 2007 or early 2008. The associated costs for the possible transfer of operations cannot be presently determined and are not expected to have a material effect on the Company’s financial position and operations.