Exhibit 99.2
KOBRITE CORPORATION AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page | ||
Consolidated balance sheet at December 31, 2007 (unaudited) | 1 | |
Consolidated statement of operations for the year ended December 31, 2007 (unaudited) | 2 | |
Consolidated statement of stockholders’ equity for the year ended December 31, 2007 (unaudited) | 3 | |
Consolidated statement of cash flows for the year ended December 31, 2007 (unaudited) | 4 | |
Notes to consolidated financial statements | 5-13 |
KOBRITE CORPORATION AND SUBSIDIARY
Consolidated Balance Sheet
December 31, 2007
(in US dollars)
2007 (unaudited) | |||||||
Amount | % | ||||||
Assets | |||||||
Current assets: | |||||||
Cash and cash in bank (note 4) | $ | 4,717,496 | 25 | ||||
Accounts receivable, net | 50,998 | — | |||||
Accounts receivable – related parties (note 9) | 1,668,402 | 9 | |||||
Other current financial assets | 57,031 | — | |||||
Inventories, net (note 5) | 1,100,114 | 6 | |||||
Other current assets | 244,308 | 1 | |||||
Total current assets | 7,838,349 | 41 | |||||
Property and equipment: | |||||||
Machinery and equipment | 7,192,799 | 38 | |||||
Leasehold improvements | 1,359,022 | 7 | |||||
Other equipment | 1,015,623 | 5 | |||||
9,567,444 | 50 | ||||||
Accumulated depreciation | (2,614,407 | ) | (13 | ) | |||
Unfinished construction and prepayment for equipment | 2,561,173 | 13 | |||||
9,514,210 | 50 | ||||||
Other assets: | |||||||
Idled assets (note 6) | 1,722,718 | 9 | |||||
Refundable deposits and other assets | 82,408 | — | |||||
1,805,126 | 9 | ||||||
Total assets | $ | 19,157,685 | 100 | ||||
2007 | |||||||
Amount | % | ||||||
Liabilities and Stockholders’ Equity | |||||||
Current liabilities: | |||||||
Accounts payable | $ | 793,649 | 4 | ||||
Accounts payable – related parties (note 9) | 241,300 | 1 | |||||
Other payable – related parties (notes 7 and 9) | 1,806,200 | 9 | |||||
Accrued expenses and other current liabilities | 321,278 | 1 | |||||
Total liabilities | 3,162,427 | 16 | |||||
Stockholders’ equity (note 7): | |||||||
Common stock | 18,000,000 | 94 | |||||
Capital Surplus: | |||||||
Paid-in capital in excess of par value | 1,350,000 | 7 | |||||
Others | 343,800 | 2 | |||||
1,693,800 | 9 | ||||||
Accumulated deficits | (3,698,542 | ) | (19 | ) | |||
Total stockholders’ equity | 15,995,258 | 84 | |||||
Commitments and contingencies (note 10) | |||||||
Total liabilities and stockholders’ equity | $ | 19,157,685 | 100 | ||||
See accompanying notes to financial statements.
1
KOBRITE CORPORATION AND SUBSIDIARY
Consolidated Statement of Operations
Year ended December 31, 2007
(in US dollars)
2007 (unaudited) | |||||||
Amount | % | ||||||
Net sales (note 9) | $ | 4,865,861 | 100 | ||||
Cost of goods sold (note 9 and 11) | 5,559,050 | 114 | |||||
Gross loss | (693,189 | ) | (14 | ) | |||
Operating expenses (note 11) | 628,144 | 13 | |||||
Operating loss | (1,321,333 | ) | (27 | ) | |||
Non-operating income: | |||||||
Interest income | 222,208 | 5 | |||||
Gain on foreign currency exchange net | 71,722 | 1 | |||||
Other income | 56,411 | 1 | |||||
350,341 | 7 | ||||||
Non-operating expenses and losses: | |||||||
Other expenses and losses (note 6) | 358,091 | 7 | |||||
Net loss | $ | (1,329,083 | ) | (27 | ) | ||
See accompanying notes to financial statements.
2
KOBRITE CORPORATION AND SUBSIDIARY
Consolidated Statement of Changes in Stockholders’ Equity
Year ended December 31, 2007
(in US dollars)
Common stock | Additional paid-in capital | Accumulated deficits | Total | |||||||||
Balance on December 31, 2006 | $ | 20,000,000 | 1,500,000 | (2,369,459 | ) | 19,130,541 | ||||||
Purchase and cancellation of treasury stock | (2,000,000 | ) | 193,800 | — | (1,806,200 | ) | ||||||
Net loss for 2007 | — | — | (1,329,083 | ) | (1,329,083 | ) | ||||||
Balance on December 31, 2007 | $ | 18,000,000 | 1,693,800 | (3,698,542 | ) | 15,995,258 | ||||||
See accompanying notes to financial statements.
3
KOBRITE CORPORATION AND SUBSIDIARY
Consolidated Statement of Cash Flows
Year ended December 31, 2007
(in US dollars)
2007 (unaudited) | ||||
Cash flows from operating activities: | ||||
Net loss | $ | (1,329,083 | ) | |
Adjustments to reconcile net loss to net cash used in operating activities: | ||||
Depreciation and amortization | 1,828,304 | |||
Increase in accounts receivable | (579,381 | ) | ||
Increase in other current assets | (120,991 | ) | ||
Increase in inventories, net | (59,652 | ) | ||
Increase (decrease) in accounts payable | (770,656 | ) | ||
Decrease in other current liabilities | (82,429 | ) | ||
Other | (2,921 | ) | ||
Cash used in operating activities | (1,116,809 | ) | ||
Cash flows from investing activities: | ||||
Additions to property and equipment | (3,303,516 | ) | ||
Other | (2,754 | ) | ||
Cash used in investing activities | (3,306,270 | ) | ||
Cash flows from financing activities: | ||||
Capital injection through cash | — | |||
Net cash provided by financing activities | — | |||
Net increase (decrease) in cash and cash in bank | (4,423,079 | ) | ||
Cash and cash in bank at beginning of period | 9,140,575 | |||
Cash and cash in bank at end of period | $ | 4,717,496 | ||
Supplementary disclosures regarding purchase of treasury stock: | ||||
Amount of treasury stock purchased | $ | 1,806,200 | ||
Increase in other cash payable | (1,806,200 | ) | ||
$ | — | |||
See accompanying notes to financial statements.
4
KOBRITE CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2007
(in US dollars)
(1) | Organization |
KoBrite Corporation (“the Company”) was incorporated under the International Business Company Act (“IBC Act”) in Mauritius on November 30, 2004. The main activities of the Company is investment.
KoBrite China Corp. (“KBC”) was incorporated in April 2005 in the PRC. The main activities of KBC are the manufacture and sale of chips for Light Emitting Diode (LED) products. As of December 31, 2006, the Company owned 100% of KBC’s capital, amounting to $12,492,859.
The Company and KBC are consolidated in the accompanying consolidated financials statements and are jointly called “the Consolidated Company”.
As of December 31, 2007, the number of employees hired by the Consolidated Company was 172.
(2) | Summary of Significant Accounting Policies |
The accounting and reporting policies adopted by the Consolidated Company conform to the related financial accounting standards of “Business Entity Accounting Act: and of the “Regulation on Business Entity Accounting Handling” and accounting principles generally accepted in the Republic of China. The significant accounting policies applied in the preparation of the consolidated financial statements are as follows:
(a) | Principles of consolidation |
Investees over which the Company has control power are consolidated into the Company’s financial statements at the end of every fiscal year. All significant inter-company accounts and transactions have been eliminated.
(b) | Use of estimates |
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the Republic of China requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
(Continued)
5
KOBRITE CORPORATION AND SUBSIDIARY
Notes to Financial Statements
(c) | Foreign currency transactions |
The Consolidated Company’s functional currency is the US dollar. The Company and its subsidiary record transactions in their respective local currencies. The translation from the applicable foreign currency assets and liabilities to the US dollar is performed using exchange rates in effect at the balance sheet date except for non-monetary assets and stockholders’ equity, which are translated at historical exchange rates, and revenue and expense accounts, which are translated using average exchange rates during the year. Gains and losses resulting from such translations are recognized as non-operating income or losses.
Foreign currency transactions are translated at the rates prevailing on the transaction dates. Foreign currency receivables and payables are translated at the approximate market rate of exchange prevailing on the balance sheet date. Gains or losses resulting from settlement or translation are recognized as non-operating income or losses.
(d) | Distinction between current and non-current assets and liabilities |
Current assets are unrestricted cash, cash equivalents and other assets to be realized in cash, sold, or consumed (prepaid items) within 12 months of the balance sheet date. Current liabilities are obligations to be paid or settled within 12 months of the balance sheet date. All other assets or liabilities are classified as non-current.
(e) | Impairment of assets |
The Consolidated Company assesses at each balance sheet date whether there is any indication that an asset (individual asset or cash-generating unit) other than goodwill may have been impaired. If any such indication exists, the Consolidated Company estimates the recoverable amount of the asset and recognizes impairment loss for an asset whose carrying value is higher than the recoverable amount.
(f) | Inventories |
Inventories are stated at the lower of cost or market value. Cost is determined using the weighted-average method. Market value for raw material is based on replacement cost. Market value for work in process and finished goods is based on net realizable value.
(g) | Property and equipment |
Property and equipment are stated at acquisition cost. Depreciation of property and equipment is provided using the straight-line method over the estimated useful lives of the respective assets. If the property and equipment have reached the end of their estimated useful lives but are still in use, the Company will estimate the remaining useful lives and residual values, and depreciate the remaining costs using the same method. Depreciation on leasehold improvements is provided
(Continued)
6
KOBRITE CORPORATION AND SUBSIDIARY
Notes to Financial Statements
using the straight-line method over the shorter of contract periods or estimated useful lives of the respective assets. Gains (loss) on the disposal of property and equipment are included in non-operating income (loss).
The useful lives of assets are summarized as follows:
1. Leasehold improvements: 10 years
2. Machinery and equipment: 5 years
3. Other equipment: 3~5 years
Property, plant and equipment not currently used in operations are transferred to idle assets. According to SFAS No. 1, property, plant and equipment not currently used in operations are no longer stated at the lower of carrying value or net realizable value. The cost, accumulated depreciation, and accumulated impairment of the original assets not currently used in operations are all transferred to idle assets and depreciated. Depreciation expenses of idle assets are included in non-operating expenses and losses.
(h) | Intangible assets |
Effective from January 1, 2007, the Company adopted SFAS No. 37 “Intangible Assets”. In accordance with SFAS No. 37, other than an intangible asset acquired by way of a government grant, which should be measured at its fair value, an intangible asset shall be measured initially at cost. After initial recognition, an intangible asset shall be measured at its cost plus revaluation increment revalued in accordance with the laws, less any accumulated amortization and any accumulated impairment losses.
The depreciable amount of an intangible asset is determined by the original cost less its residual value. Amortization is provided for by using the straight-line method over the estimated useful lives of intangible assets from the date that they are available for use. The cost of computer software for internal use is amortized by using the straight-line method over five years.
(i) | Revenue recognition |
Revenue derived from product sales is recognized when products are shipped and the significant risks and rewards are transferred to the buyer.
(j) | Retirement plan |
The major business of the Company is investment. No official employees were hired by it. In accordance with local regulations in the PRC, KBC has made a monthly cash contribution of a
(Continued)
7
KOBRITE CORPORATION AND SUBSIDIARY
Notes to Financial Statements
statutory percentage of salaries and wages to local government and recognized it as current expenses.
(k) | Income tax |
According to the Mauritius tax law, corporations registered under the IBC Act are exempted from Mauritius income tax.
Entities of the Consolidated Company file their income tax returns separately. The income tax expense of the Consolidated Company is the summation of the income tax expense of the Company and Subsidiary.
The Consolidated Company uses the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax basis, and net operating loss and tax credit carryforwards. A valuation allowance is recorded to reduce deferred tax assets to an amount more likely than not to be recovered.
(l) | Treasury stock |
The Company accounts for the cost of purchasing its outstanding stock as “treasury stock”. A gain on the sale of treasury stock is credited to capital surplus – treasury stock. Losses are charged to capital surplus, but only to the extent of available net gains from previous sales or retirements of the same class of stock; otherwise, losses are charged to retained earnings. The cost of treasury stock is computed using the weighted-average method.
When treasury stock is retired, the weighted-average cost of the retired treasury stock is written off against the par value of the shares and the paid-in capital derived from the issuance of shares in excess of par value. If the weighted-average cost written off exceeds the sum of the par value and the paid-in capital in excess of par value, the difference is debited to capital surplus-treasury stock arising from the same class of stock or to retained earnings, and if vice versa, the difference is credited to capital surplus-treasury stock.
(3) | Change in Accounting Policies and Its Effect |
Effective from January 1, 2007, the Company adopted SFAS No. 37 “Intangible Assets”. In accordance with SFAS No. 37, the Company reevaluates the useful lives and the amortization method used for recognized intangible assets at the beginning of the financial year. There was no need to changed the useful lives or the amortization method.
(4) | Cash and Cash in Bank |
(Continued)
8
KOBRITE CORPORATION AND SUBSIDIARY
Notes to Financial Statements
December 31, 2007 (unaudited) | |||
Cash on hand | $ | 15,155 | |
Demand deposits | 2,596,682 | ||
Time deposits | 2,105,659 | ||
$ | 4,717,496 | ||
(5) | Inventories |
December 31, 2007 (unaudited) | ||||
Raw materials | $ | 255,200 | ||
Work in process | 666,594 | |||
Finished Goods | 335,755 | |||
1,257,549 | ||||
Less: allowance for inventory obsolescence | (157,435 | ) | ||
$ | 1,100,114 | |||
(6) | Idled assets |
Parts of machinery and equipment of the Consolidated Company were idled. As of December 31, 2007, the idle assets were as follows:
December 31, 2007 (unaudited) | ||||
Machinery and equipment | $ | 2,391,047 | ||
Less: accumulated depreciation | (668,329 | ) | ||
$ | 1,722,718 | |||
The depreciation expense of the idled assets is recorded as other expenses and losses.
(Continued)
9
KOBRITE CORPORATION AND SUBSIDIARY
Notes to Financial Statements
(7) | Stockholders’ Equity |
(a) | Common stock and capital increase |
Based on a resolution of the board of directors on May 10, 2006, the Company increased its authorized common stock to $20,000,000 and issued 700,000 thousand new shares at $0.01 per share. The registration procedures related to these issuances have been completed.
As of December 31, 2007, the total authorized common stock of the Company was $18,000,000 at a par value of USD$0.01 (dollars) per share.
(b) | Treasury stock |
In December 2007 the Company purchased 200,000 thousand shares of treasury stock at a total cost of $1,806,200 for the purpose of operation financing. All of treasury stock mentioned above was retired immediately and the registration procedures have been completed. The sum of the amount by which the purchasing price was lower than par value and paid-in capital in excess of par value amounted to $343,800, recorded as capital surplus-treasury stock according to the percentage of ownership of stock. Please refer to note 9(3).
(c) | Distribution of earnings |
According to the Company’s articles of incorporation, earnings, if any, after offsetting prior years’ deficits, can be distributed as dividends to stockholders.
(8) | Income Taxes |
(a) | According to Mauritius tax law, the Company registered under the IBC Act are exempted from Mauritius income tax. |
(b) | According to the PRC Tax Law, KBC are subject to income tax at the rate of 15% and can, from the year in which they begin to make profits, be exempted from income tax in the first and second years and allowed a 50% reduction in the third to fifth years, with a minimum operating period over 10 years. However, KBC must pay back the amount of tax exemption and tax reduction if the actual operating period is less then 10 years. KBC had not made any profits yet and accrued no income tax payable in 2007 and 2006. According to amended Regulation on Enterprise Income Tax of the PRC and related policy, companies that originally used the preferential income tax rate should apply the legal income tax rate (25%) in steps within five years beginning January 1, 2008. |
(9) | Related-party Transactions |
(Continued)
10
KOBRITE CORPORATION AND SUBSIDIARY
Notes to Financial Statements
(a) | Names of the related parties and relationships |
Related party | Relationship with the Company | |
Kopin Corporation | The Company is its investee company accounted for under equity method | |
Mainbright Enterprises Ltd. (MB) | The Company is its parent company’s (Bright LED Electronics Corp) investee company accounted for under equity method | |
Kopin Taiwan Corporation (KTC) | Before December 2006, KTC was a member of the Company’s board of directors |
(b) | Summary of significant transactions with related parties |
1) | Sales |
2007 (unaudited) | |||||
Amount | Percentage of net sales | ||||
MB | $ | 4,535,934 | 93 | ||
Sales prices were similar to those for third-party customers. The collection period was 90 to 120 days after the sales date.
Accounts receivables resulting from the above transactions were as follows:
2007 (unaudited) | |||||
Amount | % | ||||
MB | $ | 1,668,402 | 97 | ||
2) | Purchases |
2007 (unaudited) | |||||
Amount | Percentage of net purchases | ||||
KTC | $ | 1,539,170 | 28 | ||
Purchase prices for raw materials were similar to those for third-party suppliers. The payment period was 90 to 120 days after the purchases date.
(Continued)
11
KOBRITE CORPORATION AND SUBSIDIARY
Notes to Financial Statements
Accounts payables resulting from the above transactions were as follows:
2007 (unaudited) | |||||
Amount | % | ||||
KTC | $ | 241,300 | 23 | ||
3) | Stock transaction |
In 2007, the Consolidated Company bought 200,000,000 shares of common stock held by KTC. As of December 31, the payable amounting to $1,806,200 was not yet paid.
(Continued)
12
KOBRITE CORPORATION AND SUBSIDIARY
Notes to Financial Statements
(10) | Commitments and Contingencies |
In January 2005, KBC entered into a five years lease with the government authority of Dong Guan City, Gaubo Town for the KBC’s plant. The expected rental expense to be paid in future years is summarized as follows:
Period | Amount | ||
2008.1.1~2008.12.31 | $ | 180,708 | |
2009.1.1~2009.12.31 | 180,708 | ||
After 2009.12.31 | 15,059 | ||
$ | 376,475 | ||
(11) | Other |
Employee expenses, depreciation expenses, and amortization expenses for the years ended December 31, 2007 were as follows:
The year ended December 31, 2007 (unaudited) | |||||||
Cost of sales | Operating expense | Total | |||||
Employee expenses | |||||||
Salaries and wages | $ | 280,513 | 235,912 | 516,425 | |||
Labor and health insurance | — | 9,553 | 9,553 | ||||
Pension expense | — | 11,259 | 11,259 | ||||
Other | 54 | 3,167 | 3,221 | ||||
Depreciation expenses | 1,394,124 | 421,447 | 1,815,571 | ||||
Amortization expenses | — | 12,733 | 12,733 |
13