IONICS, INC. and SUBSIDIARIES ANNUAL REPORT December 31, … 17-A 2006.pdf · 2011. 6. 13. ·...

IONICS, INC. and SUBSIDIARIES ANNUAL REPORT December 31, 2006 (SRC Form 17-A)

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SEC Number: 107432

File Number:________

IONICS, INC. AND SUBSIDIARIES ________________________________________

(Company’s Full Name)

Ionics Building Circuit Street,

Light Industry and Science Park of the Philippines, Cabuyao, Laguna ________________________________________

(Company’s Address)

(049) 546 - 0095 _________________________________________

(Telephone Number)

December 31, 2006 _________________________________________

(Fiscal Year Ending) (month & day)

Annual Audited Financial Statements (SRC Form 17-A)

________________________________________________ Form Type

________________________________________________

Amendment Designation (if applicable)

_________________________________________ Period Ended Date

__________________________________________

Secondary License Type and File Number

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IONICS, INC. AND SUBSIDIARIES

TABLE OF CONTENTS SEC FORM 17-A

Page PART I - BUSINESS AND GENERAL INFORMATION

Item 1 Business 5 Item 2 Properties 9 Item 3 Legal Proceedings 10 Item 4 Submission of Matters to a Vote of

Security Holders

10 PART II - OPERATIONAL AND FINANCIAL INFORMATION

Item 5 Market for Issuer’s Common Equity and Related Stockholder Matters

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Item 6 Management’s Discussion and Analysis or Plan of Operation

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Item 7 Financial Statements 22 Item 8 Changes in and Disagreements With Accountants on

Accounting and Financial Disclosure

23 PART III - CONTROL AND COMPENSATION INFORMATION

Item 9 Directors and Executive Officers of the Issuer 24 Item 10 Executive Compensation 28 Item 11 Security Ownership of Certain Beneficial

Owners and Management

29 Item 12 Certain Relationships and Related Transactions 30

PART IV – CORPORATE GOVERNANCE

Item 13 Corporate Governance 31 PART V - EXHIBITS AND SCHEDULES

Item 14 a. Exhibits and Reports on SEC Form 17-C 32 b. Reports on SEC Form 17-C (Current Report) 32

SIGNATURES 34 INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY SCHEDULES 34 INDEX TO EXHIBITS 98

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SECURITIES AND EXCHANGE COMMISSION

SEC FORM 17-A

ANNUAL REPORT PURSUANT TO SECTION 17

OF THE SECURITIES REGULATION CODE AND SECTION 141 OF THE CORPORATION CODE OF THE PHILIPPINES

1. For the fiscal year ended December 31, 2006

2. SEC Identification Number 107432 3. BIR Tax Identification No. 000-124-671-000 4. Exact name of issuer as specified in its charter IONICS, INC. 5. Philippines................................................... 6. (SEC Use Only) Province, Country or other jurisdiction of

incorporation or organization Industry Classification Code:

7. Circuit Street, Light Industry and Science Park of the Philippines, 4025

Bo. Diezmo, Cabuyao, Laguna Address of principal office Postal Code

(049) 546-0095 and Fax Number (049) 546-0073 Issuer's telephone number, including area code 9. In 1996, the Company changed its principal place of business from Makati, Metro Manila to Cabuyao,

Laguna. 10. Securities registered pursuant to Sections 8 and 12 of the SRC, or Sec. 4 and 8 of the SRC

Title of Each Class Number of Shares of Common Stock Outstanding and Amount of Debt Outstanding

Common $0.01 par value, issued and outstanding, 428,287,496 shares (net of 1.4 million shares of treasury stock with cost of $240,008)

11. Are any or all of these securities listed on a Stock Exchange. Yes [ x ] No [ ]

If yes, state the name of such stock exchange and the classes of securities listed therein: Philippine Stock Exchange Common

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12. Check whether the issuer:

(a) has filed all reports required to be filed by Section 17 of the SRC and SRC Rule 17 thereunder or Section 11 of the SRC and SRC Rule 11(a)-1 thereunder, and Sections 26 and 141 of The Corporation Code of the Philippines during the preceding twelve (12) months (or for such shorter period that the registrant was required to file such reports);

Yes [ x ] No [ ]

(b) has been subject to such filing requirements for the past ninety (90) days. Yes [ x ] No [ ] 13. Based on the closing price at the Philippine Stock Exchange on December 31, 2006 at $0.044 per share, the

Company’s common shares held by non affiliates as of December 31, 2006 would have a current market price of $11,482,020.

14. Check whether the issuer has filed all documents and reports required to be filed by Section 17 of the Code

subsequent to the distribution of securities under a plan confirmed by a court or the Commission. Yes [ x ] No [ ]

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PART I - BUSINESS AND GENERAL INFORMATION Item 1. Business

Ionics, Inc. and Subsidiaries (The Group)

Ionics, Inc. (the Parent Company) The Parent Company was incorporated in the Philippines on September 10, 1982 and started commercial operations in July 1987. Since 1987, the Parent Company diversified its operations to include the assembly of printed circuit boards and the assembly and packaging of finished products or box built, otherwise known as Electronic Manufacturing Services. In September 1999, the Parent Company spun off its Electronic Manufacturing Services to a wholly owned subsidiary, Ionics EMS, Inc. (Ionics EMS). Net assets with a book value of P530 million as of April 30, 1999 were transferred to EMS under a tax-free exchange for shares of stock of EMS. Accordingly, the Parent Company ceased to be a manufacturing company and amended its primary purpose from that of a manufacturing entity to that of a holding company. Ionics EMS (The Spin-off Subsidiary) Ionics EMS was incorporated on September 21, 1999 to take over the Electronic Manufacturing Services business of the Parent Company. Certain assets and liabilities of the Parent Company were transferred to Ionics EMS in a restructuring exercise that took effect on May 1, 1999. Its operations include printed circuit board assembly, box build assembly (finished product assembly), disk drive, magnetic head assembly, compact disk read-write assembly, systems and subsystems assembly, as well as design and testing services. On February 25, 2000, Ionics EMS offered its shares of stock to the public and became a public company listed in the Singapore Exchange Securities Trading Limited (Singapore Exchange). In late 2004, Ionics EMS initiated steps to establish a manufacturing facility in People’s Republic of China through its wholly owned subsidiary, Ionics EMS, Limited (IEL), a company registered in the Cayman Islands. Ionics Properties, Inc. (IPI) IPI was incorporated on July 8, 1997 primarily to own the land, buildings, houses, apartments and other structures of whatever kind of the Ionics Group of Companies. IPI started commercial operations in January 1998. Ionics Circuits Limited (ICL) Formerly Rising Moon Limited, ICL was incorporated in the Cayman Islands on July 5, 2000 with limited liability. On February 14, 2001 Rising Moon changed its corporate name to ICL.

Synertronix, Inc. (SI) SI was registered with the Securities and Exchange Commission on May 10, 1990, to manufacture, purchase or otherwise acquire, buy and sell retail and wholesale, assemble, produce, or otherwise dispose of, and generally deal in components, parts and devices of all kinds and types used in connection with electronic and electrical machinery, appliances and equipment including but not limited to capacitors, semi-conductors, condensers, transformers, for export abroad and for constructive exports to local companies. SI started commercial operations in June 1998. On August 15, 2003, the Parent Company decided to discontinue the operations of SI. Accordingly, the accounts of SI are reflected in the consolidated financial statements as a separate line under discontinued operations.

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Line of Business

There are basically two general categories of electronics manufacturers or assemblers in the region, the Original Equipment Manufacturer (OEM) and the Contract Electronics Manufacturer (CEM). OEMs are companies engaged in the manufacture of electronic products and components with patent or design owned by a foreign affiliate or parent company. These firms include the local subsidiaries of multinational companies like Motorola, Philips, Texas Instruments, Intel, and Matsushita. On the other hand, CEMs are firms involved in the production of electronic items similar to those produced by OEMs. These firms are basically independent, third party manufacturers or assemblers, which do not have any corporate affiliations with their respective customers. CEMs therefore undertake subcontracting work only, and generally provide labor and manufacturing overhead as their basic inputs in the assembly of electronic products. The Group is essentially a CEM. Most of the Group’s “end” products, therefore, are components and sub-assembly which are eventually used as inputs for the finished products of its customers. The Group can accommodate most types of electronic manufacturing and assembly projects. Customers provide the specifications and blue print or prototype of a component or product that they want to be manufactured or assembled and the Group delivers the finished item. The Group provides “On Consignment” or “Turnkey” manufacturing arrangements to its clients. Under an “On Consignment” arrangement, the Group furnishes labor and manufacturing overhead inputs, while the product design and raw or input materials are provided by the customer. Under the “Turnkey” arrangement, the Group provides all production inputs for its clients. The product design, however, is still provided and owned by the client. In 2002, one of the Group’s subsidiaries had successfully offered design services to its customer and also added an Original Design Manufacturer (ODM) component to its business line. Products

The following is a brief description of the primary products produced by the Group:

• Printed Circuit Board Assembly (PCBA) - This is the component for Hard Disk Drive Controller Card, Floppy Disk Drive Controller Card, Facsimile Card, Tuners, Industrial Equipment Boards, Medical Equipment, Computer Board, Transreceivers.

• Printed Circuit Boards (PCB) – A multilayered PCB for third party users.

• Phone, Communication Boards - Audio card, Keyboard card and Mother Board for

notebook (laptop) Computer. • Chip-on-board Assembly - This is the component for Watch Modules, Programmable

Boards, Thick Film Hybrids and PCMCIA.

• Head Carriage Assembly - This is the component for Hard and Floppy Disk Drive Heads. • Wire Harness Assembly - This is the component for the Cable and Panel Assembly for

Computers.

• Coil Winding and Level Assembly - This is the component for Voice Coil and Meter Coil. • Component Assembly - This is the component for Bridge Rectifiers, Photo Detectors, and

IR Devices.

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• Flexible Printed Circuit Board Assembly - This is the component for Hard Disk Drive Magnetic Heads (HSA).

• Display Assembly - This is the component for Numeric Clock Display.

• Finished Product Assembly/Box Built - This is the component for Radar Detector,

Facsimile, Remote Control, Floppy and Hard Disk Drive, Notebook Computer, Cellular Phone, Pager, Satellite Receiver, and CD ROM.

• CD-RW - This is a combination of the Printed Circuit Board (PCB) Assembly and Drive

Assembly contained in a single metal package called as CD-RW Assembly.

• M-SystemDisk on Key/Thumb Drive Project – The DiskOnKey is a unique patented solution storage media which offers consumers trusted quality, reliability, extreme security and the industry’s leading product warranty.

• System in Package Solution (SiPS) – A PCBA composed of 0201 components and flip

chips. For Cellular Phone application.

• AV Engine – This component is used for DVDR application.

• RF Tuners and Amplifiers – Modules that deliver high-performance, cost-effective TV, DTV and FM radio to mainstream PC desktop and mobile platforms.

• Electronic Reader/Electronic Book – A portable device specifically for reading

applications.

Information on export sales and the relative contribution of each segment (based on product line) to total sales is fully disclosed in Note 24 to Consolidated Financial Statements.

Significant Customers

The top four customers collectively accounted for 55% and 64% of the Group’s sales in 2006 and 2005, respectively. The Group anticipates that concentration of business in major customers will continue in the foreseeable future, although the Group’s management is starting new relationships with other customers.

Distribution Method

The bulk of the Group’s products are intermediate products which are shipped to the customers’ manufacturing plants in Asia, USA and Europe for incorporation or further assembly into the final finish products.

Competition, Status of New Products and Business Risk

The Group competes with other electronic manufacturers both domestic and foreign. The market for PCBA and the other product lines of the Group are subject to normal price, service, and quality competition. Among the Group’s top competition are from the following:

a) Solectron f) Foxconn b) Flextronics g) Jabil Circuit c) Sanmina-SCI h) Elcoteq Network d) Celestica i) Venture Manufacturing e) Benchmark Elec. j) Viasystems Group

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The year 2006 continued to pose difficulties for the Group. The first part of the year was a time of reckoning, as it reviewed the dismal performance and culminated an unprecedented shake-up at the top level of operational management.

Ionics EMS has also expanded its product lines, customer base and manufacturing location. Its customer base has significantly increased in numbers. The traditional PC peripheral business has driven to build Ionics EMS’ strength in the telecommunications, automotive electronics and medical and consumer product lines. The Group has also shifted its resources and established more flexible and adaptable manufacturing platforms so it can readily shift production into various products and components on the same production floor. The China operations which started in March 2006 has contributed on the revenue front, but its overall performance fell below expected levels. Nevertheless, it continues to be upbeat about its potential as numerous business opportunities are in the pipeline. To enhance its competitiveness in the industry, equal emphasis is given to reinstalling an integrated supply chain management system.

Sources and Availability of Raw Materials

The customers under a consignment arrangement supply the bulk of raw material components needed in the manufacturing of their products. However, in response to global competition, the Group started building up its raw materials inventory for turnkey transactions. Among the principal suppliers of the Group are the following:

• Transtechnology Pte., Ltd.

• Philips GMT

• ECI Telecom, Inc.

• Avnet Asia Pte. Ltd.

• Telrad Networks Ltd.

• Alvarion Ltd.

• Sierra Monolithics

• Samsung Asia, Pte.

• Siix Logistics Phils., Inc.

• Innovia Telecoms Ltd.

The Group has no major purchase commitment to any of its suppliers. Purchases of raw materials and supplies are based on ordinary purchase transactions covered by a purchase order.

Sales

The Group’s revenue is purely from export sales except for IPI and the Parent Company, which derive their revenue from the lease of properties. Amounts of revenue, profitability, and identifiable assets attributable to the Group’s operations for 2006, 2005, and 2004 are as follows:

(In US Dollars) 2006 2005 2004 Export sales 127,338,228 62,575,556 77,073,251 Loss on Operation (4,459,414) (11,508,370) (8,250,642) Total Assets 81,593,710 67,424,450 69,684,281

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See related discussion on Note 25 of the Consolidated Financial Statements.

Transaction with and/or dependence on related parties

The Group has no significant transactions that are dependent on related parties except for the transactions discussed in Item 12 of this report and in Note 19 of the Consolidated Financial Statements.

Patents, trademarks, licenses, franchises, concessions, royalty agreements, or labor contracts, including duration.

Not Applicable to the Group.

Need for any governmental approval of principal products or services.

None Effect of existing or probable governmental regulations on the business. None Estimate of amount spent for research and development activities of the last completed fiscal year.

None

Cost and effects of compliance with Environmental Laws:

Ionics EMS’ plants are located in industrial parks with a centralized water treatment system.

Employees

As of December 31, 2006, the Group has a total of 3,441 employees consisting of fifty seven (57) managers, one thousand twenty two (1,022) administrative personnel and two thousand three hundred sixty two (2,362) factory workers. Aside from basic salaries, employees receive vacation and sick leave credit, transportation allowance, free medical and dental, group insurance benefits and funeral assistance. There is no existing collective bargaining agreement or labor union in the Group.

Debt Issues

Not Applicable to the Group. Investment Company Securities Not Applicable to the Group.

Item 2. Properties

As of December 31, 2006 the Group’s manufacturing operations are conducted in the following plants:

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The EMS-2 Plant is located at the Carmelray Industrial Park II in Calamba, Laguna and has an area of 12,918 square meters. The land and building are owned by IPI. The property is leased to EMS for a period of ten (10) years from June 8, 2005 to June 7, 2015.

The EMS-3 Plant is located at the Light Industry Science Park of the Philippines (LISPP) in Cabuyao, Laguna and has an area of 5,589 square meters. The EMS-4 Plant is also located at the LISPP in Cabuyao, Laguna and has an area of 3,753 square meters. Plants 3 & 4 are leased from Valmora Realty Corp. (formerly, “Crismida Realty Corp.”), a company controlled by one of the Parent Company’s stockholders. On January 1, 2006, the Company entered into a new lease agreement with Valmora Realty, Inc. for the re-opening of Plant 3. The new lease is for a period of five years commencing on January 1, 2006 with annual escalation rate of 10%.

The EMS-5 and EMS-6 Plants are also located at the LISPP in Cabuyao, Laguna and have an aggregate area of 11,557 square meters. The land and the building thereon are owned by the Parent Company. The plants are leased to EMS for a period of five (5) years from May 1, 2004 to April 30, 2009. Monthly rental is $4.35 per square meter in the first year with an annual escalation rate of 5%.

The EMS-7 Plant is located at the LISSP II also in Calamba, Laguna and has an aggregate area of 17,710 square meters. The land and building thereon are owned by IPI. The property is leased to EMS for a period of five (5) years from January 1, 2001 to December 31, 2005. On June 1, 2005, EMS terminated its lease agreement for Plant 7 and the facility was rented out to another PEZA registered company.

Currently, the Company has no plan of acquiring properties in the next twelve (12) months.

Item 3. Legal Proceedings

As of December 31, 2006, there are no material pending legal proceedings to which the Parent Company or any of its subsidiaries is a party or of which any of their property is subject except for the matters discussed in Note 27 to the Consolidated Financial Statements.

Item 4. Submission of Matters to a Vote of Security Holders.

There were no matters submitted to a vote of security holders for the fourth quarter of 2006.

PART II - OPERATIONAL AND FINANCIAL INFORMATION Item 5. Market for Registrant’s Common Equity and Related Stockholder Matter.

Stock Prices (Amounts in US Dollar) (Amounts in PhP) HIGH LOW HIGH LOW Latest price as of April 10, 2007 0.047 0.047 2.30 2.30 2006

First Quarter 0.027 0.027 1.36 1.34 Second Quarter 0.040 0.040 2.14 2.10

Third Quarter 0.039 0.039 1.98 1.96 Fourth Quarter 0.044 0.044 2.18 2.16

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2005 First Quarter 0.027 0.027 1.52 1.48

Second Quarter 0.021 0.021 1.20 1.18 Third Quarter 0.019 0.019 1.06 1.06 Fourth Quarter 0.021 0.021 1.10 1.10

2004 First Quarter 0.022 0.022 1.26 1.26

Second Quarter 0.022 0.022 1.28 1.28 Third Quarter 0.034 0.034 1.96 1.92 Fourth Quarter 0.026 0.026 1.48 1.48

The Company’s common stock is listed in the Philippine Stock Exchange. The number of shareholders of record as of February 28, 2007 is 1,300 holding a total of outstanding common shares of 428,287,496 exclusive of 1.4 million treasury stock with a cost of $240,008. The following were the top 20 stockholders based on the number of shares held and percentage to total shares outstanding as of February 28, 2007:

Name No. of Shares %

Aqua Holdings, Inc. 167,576,550 39.13

Social Security System 45,814,500 10.66

Leonardo Siguion Reyna 37,503,000 8.73

Lu &/or Yang Huang Un-Chyong, Yang Tah

26,884,000 6.28

UNICAPITAL Securities, Inc. 21,669,850 5.04

Abacus Securities Corporation 11,844,325 2.76

Mandarin Securities Corporation 11,476,000 2.67

Guillermo D. Luchangco 10,212,500 2.38

Lawrence C. Qua 10,051,380 2.35

ATR-KIM Eng Securities 7,548,000 1.76

Guild Securities, Inc. 5,780,800 1.35

CITIBANK N.A. - CITIOMNIFOR 5,007,300 1.17

Raymond C. Qua 4,281,175 1.00

BDO Securities Corp. 3,821,000 0.89

BPI Securities Corp. 3,588,550 0.84

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Meliton C. Qua 3,248,681 0.76

Cecilia Q. Chua 2,668,354 0.62

SB Equities, Inc. 2,515,750 0.59

CITISECURITIES, Inc. 2,442,200 0.57

Ma. Asuncion Q. Cedilla 2,320,308 0.54

Dividends per Share

2006 None 2005 None 2004 None

Dividends shall be declared at such time and in such percentage as the Board of Directors may determine, but no dividends shall be declared or paid except from the surplus profits arising from its business nor shall any dividends be declared that will impair the capital of the Parent Company.

Recent Sales of Unregistered or Exempt Sales

Not Applicable to the Group. Description of Registrants Securities

The registrant has an authorized common stock of 1,000,000,000 shares at par value of $0.01. The issued and outstanding shares as of December 31, 2006 is 428,287,496 net of 1.4 million treasury shares. No transfer of stock or interests which will reduce the ownership of Filipino citizens to less than the required percentage of the capital stock as provided by existing laws shall be allowed or permitted to be recorded in the books of the Company.

Debt Securities

Not Applicable to the Group. Stock Options


Securities Subject to Redemption or Call


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Warrants

Not Applicable to the Group. Market information for Securities Other Than Common Equity


Other Securities


Item 6. Management Discussion and Analysis or Plan of Operation. MANAGEMENT PLAN FOR THE YEAR 2007 Ionics EMS As part of its diversification strategy, EMS expanded its product lines, customer base and manufacturing location. Its customer base has significantly increased in number. EMS expects a more stable demand for its services thereby enabling the Company to move forward despite across-the-board soft results for the past years. The effectiveness of its reorganization and reorientation can be ascertained by the improved outcome of the year. The China facility started its operation in March 2006 and contributed on the revenue front but its overall performance fell below expected levels. In the Philippine front, EMS has further streamlined its operations by integrating distributed set ups in its various plants in one central location. This move has allowed the Company to optimize its resources to the fullest. Designing its own or collaborating with customers on their product designs will get increasing attention. The evident shift in the EMS industry towards original design manufacturing is gradually laying the groundwork for this eventual development. These developments attest to EMS’s confidence in the recovery of its business starting this year. IPI IPI expects to continue to generate income in 2007. As of the filing date, the management of the Group is not aware of: a) any significant expenditures for products research and development; b) any expected significant change in number of employees; c) any known trends, events or uncertainties that have or are reasonably likely to have a material impact on the

registrant’s short term or long term liquidity; d) any event that will trigger direct or contingent financial obligation that is material to the company, including

any default or acceleration of an obligation; e) any material off-balance sheet transactions, arrangements, obligations (including contingent obligations),

and other relationships of the company with unconsolidated entities or other persons created during the reporting period;

f) any known trends, events or uncertainties that have or that are reasonably expected to have a material impact on the net sales or revenues or income from continuing operations; and

g) any seasonal aspects that had a material effect on the financial condition or results of operations.

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IPI, a wholly owned subsidiary, acquired the leasehold and land rights over two (2) parcels of land located in an export zone in Carmelray II, Calamba City, Laguna and a factory thereon. In addition, IPI acquired the leasehold improvements of Ionics EMS in Plant 7. Sources of liquidity are expected from the results of the Group’s operation and from the proceeds of any disposal of machinery and equipment. Below are the Consolidated Key Financial Ratios for the years ended December 31, 2006 and December 31, 2005.

December 31 December 31

2006 2005 % %

Revenue Growth 103.49 (18.81) Gross Profit (Loss) Margins 0.31 (8.98) Net Income (Loss) Margins 2.26 (10.42) Return on Equity 5.74 (16.20) Current Ratio 1.87 3.75 Leverage Ratio 0.63 0.19 1. Revenue Growth

The revenue growth is the Group’s increase in revenue for a given period. Revenue growth is computed from current revenue less revenue of the prior year divided by revenue of the prior year. The result is expressed in percentage.

2. Gross Profit Margin

The gross profit margin reflects the management’s policies related to pricing and production efficiency. This is computed by dividing gross profit by net sales. The result is expressed in percentage.

3. Net Income Margins

Net income margin is the ratio of the Group’s net income after tax for a given period. This is computed by dividing net income by net sales. The result is expressed in percentage.

4. Return on Equity

The return on equity ratio is the ratio of the Group’s net income to stockholders’ equity. This is computed by dividing net income by total stockholders’ equity. The result is expressed in percentage. This measures the management’s ability to generate returns on their investments.

5. Current Ratio

The current ratio is the ratio of the Group’s current resources and its current obligation. This is computed by dividing current assets by current liabilities. The result is expressed in percentage.

6. Leverage Ratio Leverage ratio shows the balance that the Group’s management has struck between forces of risk versus cost. This is computed by dividing total liabilities by shareholders’ equity.

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FINANCIAL PERFORMANCE 2006 CONSOLIDATED RESULT OF OPERATIONS

The Group’s consolidated sales of $127,338 thousand during the year 2006 surpassed the 2005 sales performance of $62,576 thousand or an increased of $64,762 thousand or 103% brought about by several factors, including the significant increase in the number of customers, capacity expansion, volume ramp up of China plant through Ionics EMS, Limited (a wholly-owned subsidiary of EMS) and the reopened plant in the Philippines. As a result, the consolidated cost of sales increased by $58,748 thousand or 86% from $68,196 thousand to $126,944 thousand in 2005 and 2006, respectively. The Group performance posted a consolidated gross profit of $394 thousand in 2006 from a gross loss of $5,620 thousand in 2005.

Consolidated operating expenses decreased by $1,035 thousand from $5,888 thousand in 2005 to $4,853 thousand in 2006 due to streamlining of administrative expenses.

The Group posted a net non-operating income of $6,783 thousand in 2006 as compared to $2,371 thousand in 2005 due to the following: 1. Net interest income decreased from $437 thousand in 2005 to an interest expense of $163 thousand in 2006

due to the termination of money market placements and the increase in the interest expense from interest bearing advances from affiliates.

2. The Group reported a foreign exchange gain of $62 thousand in 2006 from a foreign exchange loss position of $52 thousand in 2005.

3. Equity in net earnings of affiliates decreased by $617 thousand from an equity income of $342 thousand in 2005 to an equity net loss of $275 thousand in 2006.

4. Non operating income increased by US$5,209 thousand for the three quarters of 2006 due to the gain on sale of investment.

5. Rent Income of the Group increased by $691 thousand from $1,355 thousand in 2005 to $2,046 thousand in 2006.

6. The Group reported Other Charges of $96 thousand in 2006 from Other Income of $289 thousand in 2005. On August 15, 2003, the Parent Company decided to discontinue the operations of SI. Accordingly, the net assets of SI were written down to its net realizable value. Loss from discontinued operations for the periods ended December 31, 2006 and 2005 amounted to $174 thousand and $96 thousand, respectively. With the foregoing, the Group reported a consolidated net income of $2,873 thousand for the period ended December 31, 2006, $9,395 thousand higher than the consolidated net loss of $6,522 thousand during the same period in 2005. The summarized revenues and net income (losses) of the Group for the year ended December 31, 2006 are presented as follows:

(In US Dollars) COMPANY REVENUE NET INCOME (LOSS) Parent 567,041 199,157 EMS 127,338,228 (5,455,332) IPI 2,479,527 1,757,662 Ionics Circuits, Limited - 5,358,567

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Loss from discontinuing operations - (174,472) TOTAL 130,384,796 1,685,582 Reclass/Eliminating entries (3,046,568) 1,187,542 Consolidated 127,338,228 2,873,124

CONSOLIDATED FINANCIAL POSITION As of December 31, 2006, the consolidated assets of the Group amounted to $81,594 thousand which is $14,170 thousand higher than the $67,424 thousand as of December 31, 2005. Major factors attributed to the increase in the Group’s total assets were the increase in receivables and inventories due to higher customer demand.

Current ratio declined from 375% in 2005 to 187% in 2006. Simultaneously, the Group’s liability-to-equity ratio (leverage ratio) increased from 19% in 2005 to 63% in 2006. The declined in current ratio and increase in liability to equity ratio were due to the increase in payables which in turn, were attributable to the production demand of new customers.

At the end of December 31, 2006, the Group has no long-term debt. INDIVIDUAL RESULT OF OPERATIONS The individual performance of the subsidiaries for the year ended December 31, 2006 are as follows: Ionics EMS, Inc.

EMS’s turnover in 2006 increased by $64,762 thousand or 103% from $62,576 thousand in 2005 to $127,338 thousand in 2006. The Company’s performance resulted in a decrease in gross loss by $6,033 thousand or 91% from $6,640 thousand in 2005 to $607 thousand in 2006. Operating expenses decreased from $5,075 thousand in 2005 to $4,003 thousand in the same period of 2006 due to streamlining of administrative expenses. Other income decreased by $1,848 thousand or 175% from Other Income of $1,053 thousand in 2005 to Other Charges of $795 thousand in 2006 due to a decrease in interest income which resulted from the termination of the money market placements and an increase in interest expense from interest-bearing advances from Parent Company, affiliates and bank loans.. With the foregoing, the net loss of the Company continuously decreased to $5,455 thousand in 2006 as compared to a net loss of $10,662 thousand in 2005. Ionics Properties, Inc.

IPI contributed intercompany rental income of $434 thousand and $478 thousand in 2006 and 2005, respectively. The Company also contributed third-party rent income of $2,046 thousand in 2006 and $1,355 thousand in 2005. Operating expenses amounted to $612 thousand in 2006 and $476 thousand in 2005. Net income amounted to $1,758 thousand and $1,298 thousand in 2006 and 2005, respectively. Ionics Circuits, Limited ICL reported a net income amounting to $5,359 thousand in 2006 compared to $749 thousand in the same period 2005, due to gain on sale of available-for-sale investment. Synertronix, Inc.

On August 15, 2003, the Parent Company decided to discontinue the operations of SI. Accordingly, the accounts of SI are reflected in the consolidated financial statements as a separate line under discontinued operations (see related discussion on Note 26 to the Consolidated Financial Statements).

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2005 CONSOLIDATED RESULT OF OPERATIONS

The Group’s consolidated sales of $62,576 thousand during the year 2005 fell behind the 2004 sales performance of $77,073 thousand or a decrease of $14,497 thousand or 19% which was attributed to low customers’ demand. As a result of the decrease in volume, the consolidated cost of sales decreased by $13,235 thousand or 15% from $81,431 thousand to $68,196 thousand in 2004 and 2005, respectively. The consolidated gross loss increased by $1,262 thousand from $4,358 thousand in 2004 to $5,620 thousand in 2005. The consolidated gross loss rate increased by 3% from 6% to 9% in 2004 and 2005, respectively.

Consolidated operating expenses increased by $1,995 thousand from $3,893 thousand in 2004 to $5,888 thousand in 2005 due to expenses incurred in maintaining a manufacturing facility in China and the increase in depreciation of newly acquired facilities.

The Group posted a net non-operating income of $2,371 thousand in 2005 compared to $546 thousand in 2004 due to the following: 7. Net interest income increased from $392 thousand in 2004 to $437 thousand in 2005 due to interest income

earned from dollar savings account and money market placements. 8. The Group reported a foreign exchange loss of $52 thousand in 2005 from $19 thousand in 2004. 9. Equity in net earnings of affiliates increased by $471 thousand from equity loss of $129 thousand in 2004 to

equity net earnings of $342 thousand in 2005. 10. Rent Income of the Group increased by $1,049 thousand from $306 thousand in 2004 to $1,355 thousand in

2005. 11. The Group reported Other Income of $289 thousand in 2005 due to a gain on sale of machineries &

equipment. On August 15, 2003, the Parent Company decided to discontinue the operations of SI. Accordingly, the net assets of SI were written down to its net realizable value. Loss from discontinuing operations for the periods ended December 31, 2005 and 2004 amounted to $96 thousand and $929 thousand, respectively. With the foregoing, the Group reported a consolidated net loss of $6,522 thousand for the period ended December 31, 2005, $10 thousand lower than the consolidated net loss of $6,532 thousand during the same period in 2004. The summarized revenues and net income (losses) of the Group for the year ended December 31, 2005 are presented as follows:

(In US Dollars) COMPANY REVENUE NET INCOME (LOSS) Parent 541,891 415,856 EMS 62,575,556 (10,662,922) IPI 1,833,415 1,297,992 Ionics Circuits, Limited - 749,222 Loss from discontinuing operations - (95,796) TOTAL 64,950,862 (8,295,649) Reclass/Eliminating entries (2,375,306) 1,772,748 Consolidated 62,575,556 (6,522,901)

18

CONSOLIDATED FINANCIAL POSITION As of December 2005, the consolidated assets of the Group amounted to $67,424 thousand which is $2,260 thousand lower than the $69,684 thousand as of December 31, 2004. Major factors attributed to the decrease in the Group’s total assets were the decrease in cash due to the acquisition of properties and equipment and the expenses incurred in the manufacturing facility in China, and the decreased in net book value of machineries and equipment due to depreciation charges for the year.

Current ratio declined from 490% in 2004 to 375% in 2005. Simultaneously, the Group’s liability-to-equity ratio increased from 15% in 2004 to 19% in 2005.

As of December 31, 2005, the Group has no long-term debt. INDIVIDUAL RESULT OF OPERATIONS The individual performance of the subsidiaries for the year ended December 31, 2005 is as follows: Ionics EMS, Inc.

EMS’s turnover in 2005 decreased by $14,497 thousand or 19% from $77,073 thousand in 2004 to $62,576 thousand in 2005, while gross loss increased by $1,238 thousand or 23% from a gross loss of $5,402 thousand in 2004 to $6,641 thousand in 2005, due to low customers’ demand. Operating expenses increased from $3,599 thousand in 2004 to $5,075 thousand in the same period of 2005 due to pre operating expenses incurred by IEL. Other income increased by $653 thousand or 163% from $400 thousand in 2004 to $1,053 thousand in 2005 due to the increase in interest income earned from the Company’s dollar savings account and money market placements and the gain on the sale of a property to an affiliate. With the foregoing, the Company incurred a net loss of $10,662 thousand in 2005 compared to a net loss of $8,601 thousand in 2004. Ionics Properties, Inc.

IPI contributed intercompany rental income of $478 thousand and $707 thousand in 2005 and 2004, respectively. The Company also contributed third-party rent income of $1,355 thousand in 2005. Operating expenses amounted to $476 thousand in 2005 and $218 thousand in 2004. Net income amounted to $1,298 thousand and $764 thousand in 2005 and 2004, respectively. Ionics Circuits, Limited ICL reported a net income amounting to $749 thousand in 2005 compared to $173 thousand in the same period of 2004 due to the equity take-up in the net income of equity investments. Synertronix, Inc.

On August 15, 2003, the Parent Company decided to discontinue the operations of SI. Accordingly, the accounts of SI are reflected in the consolidated financial statements as a separate line under discontinued operations (see related discussion on Note 26 to the Consolidated Financial Statements).

19

2004 CONSOLIDATED RESULT OF OPERATIONS

The Group’s consolidated sales of $77,073 thousand during the year 2004 fell behind the 2003 sales performance of $121,588 thousand or a decrease of $44,515 thousand or 37%. The decrease in volume of sales of the Group was a continuing effect of the change in the relationship with a major customer and the under loading of a subsidiary’s facilities resulting from low customers’ demand. As a result of the decrease in volume, the consolidated cost of sales decreased by $43,317 thousand or 35% from $124,619 thousand to $81,431 thousand in 2003 and 2004, respectively. The consolidated gross loss increased by $1,198 thousand from $3,031 thousand in 2003 to $4,358 thousand in 2004 due to the closure of one of its plants last October 2004 and the under loading of the Group’s plants capacity resulting from lower volumes. The consolidated gross loss rate increased by 3% from 2% to 5% in 2003 and 2004, respectively.

Consolidated operating expenses decreased by $596 thousand from $4,489 thousand in 2003 to $3,893 thousand in 2004 due to expenses of a foreign subsidiary.

The Group posted a net non-operating income of $546 thousand in 2004 compared to a net non-operating expense of $1,043 thousand in 2003 due to the following:

1. Net interest income increased from net interest expense of $49 thousand in 2003 to interest income of $392 thousand in 2004 due to interest income earned from dollar savings account and money market placements and zero debt.

2. The Group reported a foreign exchange loss of $19 thousand in 2004 from a foreign exchange gain of $22 thousand in 2003.

3. Equity in net earnings of affiliates decreased by $780 thousand from equity earnings of $651 thousand in 2003 to equity net loss of $129 thousand in 2004.

4. The Group reported Other Income of $304 thousand in 2004 from Other Charges of $1,666 thousand in 2003 due to a gain on the disposal of property.

On August 15, 2003, the Parent Company decided to discontinue the operations of SI. Accordingly, the net assets of SI were written down to its net realizable value. Loss from discontinuing operations for the periods ended December 31, 2004 and 2003 amounted to $929 thousand and $10,471 thousand, respectively. With the foregoing, the Group reported a consolidated net loss of $6,532 thousand for the period ended December 31, 2004, $10,761 thousand lower than the consolidated net loss of $17,293 thousand during the same period in 2003. The summarized revenues and net income (losses) of the Group for the year ended December 31, 2004 are presented as follows:

(In US Dollars) COMPANY REVENUE NET INCOME (LOSS) Parent 467,194 (5,601,572) EMS 77,073,251 (8,601,231) IPI 1,013,786 763,502 Ionics Circuits, Limited - 172,653 Loss from discontinuing operations - (928,559) TOTAL 78,554,231 (14,195,207) Reclass/Eliminating entries (1,480,980) 7,663,162 Consolidated 77,073,251 (6,532,045)

20

CONSOLIDATED FINANCIAL POSITION As of December 2004, the consolidated assets of the Group amounted to $69,684 thousand which is $18,820 thousand lower than the $88,504 thousand as of December 31, 2003. Major factors attributed to the decrease in the Group’s total assets were the decrease in receivable due to the collection of the sales at year-end, decrease in the net book value of machineries and equipment due to depreciation charges for the year, and the disposal of certain machinery of a subsidiary and decrease in the net assets pertaining to discontinued operations due to write downs of assets as a result of closure of SI.

Current ratio improved from 248% in 2003 to 490% in 2004 due to collection of the 2003 accounts receivable and because collection of sales during the year are within the credit terms. The Group’s liability-to-equity ratio improved from 30% in 2003 to 15% in 2004.

At the end of December 31, 2004, the Group has no long-term debt. INDIVIDUAL RESULT OF OPERATIONS The individual performance of the subsidiaries for the year ended December 31, 2004 are as follows: Ionics EMS, Inc.

EMS’s turnover in 2004 decreased by $44,515 thousand or 37% from $121,588 thousand in 2003 to $77,073 thousand in 2004 as a continuing effect of the change in the relationship with a major customer. Gross loss increased by $1,111 thousand or 27% from a gross loss of $4,068 thousand in 2003 to a gross loss of $5,402 thousand in 2004, due to the closure of one of its plants last October, 2004 and the under loading of the Company’s facilities resulting from low customers’ demand. Operating expenses increased from $3,351 thousand in 2003 to $3,598 thousand in the same period of 2004. The said increase in operating expenses is attributable to the increase in sales commissions due to the increase in sales volumes subject to commission. Other income increased by $270 thousand or 209% from $129 thousand in 2003 to $400 thousand in 2004 due to the net effect of a reduction in foreign exchange gain and increase in net interest income earned from the Company’s dollar savings account and money market placements. With the foregoing, the Company incurred a net loss of $8,601 thousand in 2004 as compared with a net loss of $7,289 thousand in 2003. Ionics Properties, Inc.

IPI contributed intercompany rental income of $707 thousand and $690 thousand in 2004 and 2003, respectively. The Company also contributed third-party rent income of $1,014 thousand in 2004. Operating expenses amounted to $218 thousand in 2004 and $172 thousand in 2003. Net income amounted to $764 thousand in 2004 and $679 thousand in 2003. Ionics Circuits, Limited ICL reported a net income amounting to $173 thousand in 2004 compared to a net loss of $2,065 thousand in the same period of 2003 due to the equity take-up in the net income of equity investments.

21

Synertronix, Inc

On August 15, 2003, the Parent Company decided to discontinue the operations of SI. Accordingly, the accounts of SI are reflected in the consolidated financial statements as a separate line under discontinued operations (see related discussion on Note 26 to the Consolidated Financial Statements). Below is the summary of Balance Sheet Accounts with more than 5% increase (decrease)

December 31 2006 2005

% % ASSETS Cash and cash equivalents (64) (49) Accounts Receivable – net 79 31 Short – term investment (100) 100 Inventories 132 N/A Prepayment and other current assets (78) 25 Investment (including available-for-sale) (50) 39 Property, Plant and Equipment – net 61 (28) Investment Property N/A 45 Deferred Tax Asset (100) 3,200 Deposits and Others 5 25 Assets pertaining to discontinuing operations (49) N/A LIABILITIES Accounts payable and accrued expenses 177 11 Liabilities under trust receipts 100 N/A Pension Obligations 294 23 Refundable Deposit 14 179 Deferred Rent Income (5) 100 Deferred Tax Liabilities 100 N/A Liabilities pertaining to discontinued operations N/A (7)

2006 Cash and cash equivalents decreased mainly due to the acquisition of machineries and equipment as well as payments made to suppliers. The increase in receivables is attributable mainly to the increase in business activity for the year. The decrease in short-term investments was due to the termination of money market placements. Inventory increased due to higher production demand. The decrease in prepayments and other current assets was due to the amortization of prepaid insurance carried over from 2005. Investments decreased due to sale of an investment. Property, plant and equipment increased due to the acquisition of machineries and equipment for the re-opened plant in the Philippines and the plant in China. Deferred tax assets decreased due to the consummation of advance rental. Deposits and other assets increased due to the increase in rental deposit of a subsidiary. Assets pertaining to discontinuing operations decreased due to advances to a subsidiary. Accounts payable increased mainly due to purchases of materials for the production demand of new customers. Pension obligations increased due to high manpower for the year. Refundable deposit increased due to additional deposit of a lessee.

22

2005 Cash and cash equivalents decreased mainly due to the acquisition of properties and equipment and loss from operations. Increase in short-term investments was due to the longer period of money market placements. The increase in receivables represents uncollected sales in the last quarter of the year. Decrease in prepayments and other current assets in 2005 were due to the amortization of prepaid rent carried over from 2004. Investments increased due to the additional investment of a subsidiary and the increase in market value as of December 31, 2005. Property, plant and equipment decreased due to depreciation charges during the period and disposal of some machineries and equipment. Investment properties increased due to the acquisition of property. Deferred tax assets increased due to advance rental of a lessee. Deposit and other assets increased due to the rental deposit of a subsidiary. Increase in accounts payable was due to purchases of materials for the production demand of new customers. Pension obligations decreased due to lower manpower for the year. Refundable deposit increased due to additional deposit of a lessee. Liabilities pertaining to discontinuing operations decreased due to settlement of SI’s liabilities. Item 7. Financial Statements

The Group’s consolidated financial statements and schedules listed in the accompanying Index to Financial Statements and Supplementary Schedules (page 34) are filed as part of this Form 17-A 1. General Notes to Financial Statements:

See Consolidated Financial Statements Assets subject to lien and restriction on sales of assets. Not Applicable to the Group Restriction which limit the availability of Retained Earnings for dividend declaration. None Commitments and Contingent Liabilities. None. Material Related Party Transactions which affect the Financial Statements. The Company has no significant related party transactions with its subsidiaries, affiliates and stockholders that affect the Financial Statements except for the matters discussed in Note 19 to the Consolidated Financial Statements. Bonus, Profit Sharing and Other Similar Plans. The Group has an Employee Car Plan, a Christmas bonus for officers and employees, and profit sharing for its Board of Directors and Management. Interest Cost. Ionics EMS paid interest on bank loans and liabilities under trust receipts.

2. Subsidiaries

As of December 31, 2006, the details of investments and advances to consolidated subsidiaries are as follows:

23

Subsidiaries % owned Investment Advances

EMS 75 $8,419,386 $9,154,014 IPI 100 1,535,578 547,946 ICL 100 425,480 6,228,594

3. Cash and Cash Equivalents

Out of the total cash and cash equivalent of $3,270,705 of December 31 2006, $55,580 is peso-denominated. This represents savings deposit and current accounts in local banks.

4. Accounts Receivable - Others

Receivable from customers other than sales $2,654,720 Claims against SSS and other government agencies 75,094 Advances to Suppliers 659,186 Advances to officers and employees (see page 85) 293,054 Others 1,796,124

5. Inventories

Inventories increased relative to the volume of the business.

6. Property, Plant and Equipment

As of December 31, 2006 the Group has no equipment that is still under installation as discussed in Note 10 to the Consolidated Financial Statements.

7. General and Administrative Expenses - Please see schedule in page 99.

Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

1. External Audit Fees and Services

(a) Audit and Audit - Related Fees The Auditing firm of SGV & Co. has been the external auditor of the Company since 1992. The Auditing partner in charge of the accounts of the Company for the financial year ended December 31, 2005 is Ms. Vicky Lee-Salas. Audit fee for the period ended December 31, 2006 and 2005 remains the same at $0.02 million. The fees are generally based on the complexity of the issues involved and the work to be performed, the special skills required to complete the work, the experience level of the team members and most importantly, to provide the auditors’ report expressing an opinion on the financial statements of the Company. (b) All Other Fees Any additional services that the Company may request will be the subject of a separate written arrangement. (d) The Audit Committee’s approval policies and procedures for the above services The Audit Committee heard the reports of the External Auditor and validated the financial reports prepared by Management.

2. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

24

The Group had no disagreement with accountants on financial disclosure during the two most recent fiscal years.

PART III - CONTROL AND COMPENSATION INFORMATION Item 9. Directors and Executive Officers of the Registrant

The Executive Officers of the Registrant

Position

Name

Term Period Served

Age

Director, Chairman and President

Lawrence C. Qua

1 year

23

60

Director Jan D. Doets1 1 year 3.5 47 Director Meliton C. Qua 1 year 13 63 Director Raymond Ma. C. Qua 1 year 17 55 Director Corazon Dela Paz 1 year 5 66 Director Virginia Judy Q. Dy 1 year 13 67 Director Leonardo Siguion Reyna 1 year 17 84 Director Guillermo D. Luchangco 1 year 13 67 Director Director – Independent Director - Independent Corp. Secretary Asst. Corp. Secretary

Yang Tah Lu Edgardo M. del Fonso Alfredo de Borja Manuel R. Roxas Anna Melissa Lichaytoo

1 year 1 year 1 year

15 13 3

77 66 62 57 41

Vice President Judy C. Qua 57 Vice President Henry S. Malicdem 42 Senior Asst. Vice President Ronan R. Andrade 36

------------------------- 1 Mr. Jan Doets ceased to be connected with the Company beginning July 1, 2006. All of the above-named directors, with the exception of Mr. Edgardo M. del Fonso who has declined for personal reasons, are nominated to the Board of Directors of the Company for the ensuing year upon recommendation to the Nominations Committee by Aqua Holdings, Inc, the Social Security System and Leonardo T. Siguion Reyna, and have been approved for re-election by the Nominations Committee at its meeting last 30 March 2007. In addition, Aqua Holdings, Inc. has also nominated, and the Nominations Committee has approved the nomination of, Mr. Rizalino Navarro and Mrs. Cecilia Q. Chua as directors for the year 2007-08. Messrs. Alfredo R. de Borja and Rizalino Navarro are being nominated as independent directors. Lawrence C. Qua, 60, is the founding Chairman and Chief Executive Officer (CEO) of Ionics EMS Inc., the Chairman, President & CEO of Ionics Inc., the Philippines’ leading electronics manufacturing services group and its executive director since 1985. He is also the President and CEO of Iomni Precision, Inc. and Chairman and Director of Aqua Holdings, Inc. He is further a director and member of the investment committee of ICCP Venture Partners, Inc. and a director of various companies engaged in retailing and property development. He has been a trustee of the Semiconductor & Electronics Industry of the Philippines Inc. since its organization. Mr. Qua graduated from De La Salle University with Bachelor of Science degree in Mechanical Engineering.

Corazon de la Paz, 66, Filipino, was first elected as a member of the Board of Directors on 23 November 2001. A Business Administrative graduate (magna cum laude) from the University of the East in 1960, she then topped the CPA Board Exams in the same year. In 1965, she earned her Masters in Business Administration degree at Cornell University under a Fulbright grant and a UE CPA

25

Topnotcher Scholarship. She is the first female President and Chief Executive Officer of the Social Security System, the state pension fund. She concurrently sits as Vice-Chairman of the Social Security Commission. Also, she is the first woman and first Asian to lead the International Social Security Association (ISSA). Prior to this post, she was the Chairperson and Senior partner of Joaquin Cunanan & Co. for twenty years, ISSA Committee on Management Review, MAP Foundation, Inc., Committee on US_ASEAN Affairs and FINEX Foundation, Inc. She is also a director of San Miguel Corp., PLDT, Equitable PCI Bank, Inc., PCI Capital Corp., PCI Leasing and Finance Inc., Equitable Cardnetwork, Makati Medical Center, Philex Mining Corporation and Republic Glass Holdings. She is also a member of the Board of Directors of Asian Institute of Journalism and Communication, Jaime Ongpin Foundation, Inc., Laura Vicuna Foundation for Street Children, Makati Business Club (Treasurer), Meralco Foundation, Inc. (Treasurer), Cornell University Council, Cornell University Johnson Graduate School of Management Advisory Council, American Chamber of Commerce-Strategic Issues Committee, Miriam College, Philippine Health Insurance Corporation and Philippine Business for the Environment. Other positions held include: Member of the Three-Man Board for Meralco Privatization, Pacific Basin Economic Council (Philippine Chapter), Australian National University- International Advisory Board of the Managing in Asia Program; Bilateral Business Councils of the Philippines with the United States, the U.K., Singapore, Malaysia, Mexico, Japan, Australia, France and Germany; University of Asia and the Pacific School of Management Advisory Council, Tri-Sectoral Dialogue Steering Committee representing Business (Government, Business and Civil Society Dialogue) and member of the Board of Advisors of Ramon V. del Rosario Sr.- AIM Center for Corporate Social Responsibility, National Commission on the role of Filipino Women, Ad Hoc & Independent Citizen’s Committee (Saguisag Committee): An Investigation into the Philippine Centennial Project, SEC-Appointed Interim receiver – Urbancorp Investments, Global Information Infrastructure Commission ( for Asia). Edgardo M. del Fonso, 67, has been a member of the Board of Directors of Ionics, Inc since 1985. He sits in the Boards of the Bank of Commerce and the Philippine National Oil Company and serves as Adviser with the Power Sector Assets and Liabilities Management Corporation after resigning from his position as President in 2003. His previous affiliations include: Philippine Long Distance Telephone Company as Executive Vice President and Chief Financial Officer, Philippine Airlines as CFO, Investment and Capital Corporation of the Philippines as Managing Director, Department of Finance as Undersecretary and Philippine National Oil Company & Affiliates as EVP for Corporate Affairs. His non-corporate affiliations include: the Investment House Association of the Philippines (IHAP) as its former President and Capital Market Development Council as Founding Member. Mr. del Fonso obtained his Bachelor of Science degree in Commerce from the Jose Rizal College in the Philippines and a Masters degree in Business Administration from Harvard Business School in Boston, Massachusetts. Virginia Judy Q. Dy, 67, Filipino, has been a member of the Board of Directors of Ionics since 1991. In the last five years, she is connected with Aqua Holdings, Inc. as Director. Previous corporate affiliations include Philippine Commercial and International Bank as Branch Manager, Insular Bank of Asia & America as Branch Manager, Ladtek Corporation/Interphase Development System as Accounting Manager and the International Corporate Bank as Branch Manager. Ms. Dy received her Bachelor of Science in Commerce degree from the Assumption Convent and is a Certified Public Accountant, having passed the government board exams in 1963. Guillermo D. Luchangco, 67, is a director of Ionics, Inc. since 1991. He is the Chairman and Chief Executive Officer of the Investment & Capital Corporation of the Philippines (“ICCP”), a Philippine investment house whose principal activities are investment banking and venture capital with affiliated companies involved in property development and investments. Before founding ICCP in 1988, he served as Vice Chairman and President of Republic Glass Corporation. Between 1969 and 1980, Mr. Luchangco worked with SGV Group, the Philippines’ leading auditing and consulting firm. He started as Manager in the management services division of the firm and rose to the position of Managing Director and Regional Coordinator for management services. Mr. Luchangco serves on a number of Boards, including those of Planters Development Bank and the following publicly-listed companies in the Philippine Stock Exchange: Bacnotan Consolidated Industries, Inc., Globe Telecom, Inc. and Ionics, Inc. He holds a Master of Business Administration degree from Harvard Business School and a

26

Bachelor of Science degree in Chemical Engineering (magna cum laude) from De La Salle University Philippines. Meliton C. Qua, 63, held key positions in several companies which included the Philippine Bank of Communications as Senior Vice President, Bancnet as Director, Citibank N.A. as Vice President and Aqua Holdings, Inc as Director. Mr. Qua has been a director of Ionics, Inc. since 1985. He received his Bachelor of Science degree in Business Administration from De La Salle University, Philippines. Raymond Ma. C. Qua, 55, is a member of the Board of Directors of Ionics EMS, Inc. and hold the position of Treasurer as Senior Vice President. Previously, he was the Senior Vice President and General Manager of Synertronix Inc. and the Vice President for Administration of Ionics, Inc. Mr. Qua is presently affiliated with various organizations, and 14 associations serving as head, ranking officer or member. Mr. Qua received a Bachelor of Science degree in Commerce from De la Salle University.

Leonardo T. Siguion-Reyna, 84, is a member of the Board of Directors of Ionics Inc. since 1985. He is the Chairman of the Siguion Reyna Montecillo and Ongsiako Law Offices, Asea Brown Boveri (Philippines), Electrolux Philippines, Picop Resources, Inc. and Phimco Industries, and is a member of the Board of Directors of leading Philippine corporations such as Goodyear Philippines, Unilever Philippines, Republic Cement Corporation, Petronas Pilipinas Inc. and Etsi Technologies Inc., among others Atty. Siguion Reyna received his Bachelor of Laws degree from the Ateneo de Manila University and University of Sto. Tomas and his Liberal Arts degree from the University of the Philippines.

Tah Lu Yang, 77, is a member of the Board of Director of Ionics, Inc. from 1985 thru 2000. He was the President of Andes Ionics, Inc. and Vice President for Operations of Ionics, Inc. from 1985 to 1998, when he retired. Previous to that, he had been the PC and Testing Manager for Phico Ford Semiconductor Corp. and Plant Manager for General Investment Corp. (Taiwan), Eurosil Corp (Singapore), and Asionics Corp. (Taiwan). Mr. Yang is also an Air Force Communication and Electronics College graduate. Alfredo R. de Borja, 62, is a member of the Board of Ionics, Inc. since 2004. He is the incumbent President and Director of Makiling Ventures, Inc., a real estate development company, and President and Director of E. Murio, Inc., a furniture manufacturer and importer. He is also a director of ICCP Venture Partners, Inc. (where he is a Chairman of Inv’t Com); ICCP Management Corp; Rustans Supercenters, Inc. (Shopwise); Pueblo de Oro Devt Corp; Regatta Properties, Inc.; Cebu Light Industrial Park, Inc.; Araneta Properties, Inc., a listed company with the Philippine Stock Exchange; and Philippine Coastal Storage & Pipeline Corp. He was the President of Gervel, Inc. from 1973 to 1986; Director and Chairman-Executive Committee of First Metro Investment Co. from 1978 to 1983; Director and Vice President of Ilaan Cement Corp. from 1973 to 1977; Professional Lecturer of the University of the Philippines-Graduate School of Business Administration from 1971 to 1974; Executive Assistant to the Vice President of Philippine Long Distance Telephone Co. from 1970 to 1973; and Executive Assistant to the Vice President of Investment Managers, Inc. from 1966 to 1968. He holds a Master of Business Administration degree from Harvard University and a Bachelor of Science in Economics from the Ateneo de Manila University. Rizalino S. Navarro, 68, is an Executive Committee Member and Senior Adviser of the Rizal Commercial Banking Corporation. He is the Chairman of, among others, Bankard Corporation, Petroenergy Corporation, Seafront Resources Corporation, Clark Development Corporation and Upline Food Corporation. He also serves as a member of the Board of Directors of the Mapua Institute of Technology, Malayan Insurance Company, Great Pacific Life Insurance Corporation, House of Investments, Inc. and YGC Corporate Services. He was a former member of the Monetary Board of the Central Bank of the Philippines and was the Chairman-Managing Partner of SGV & Co from 1982 to 1992. Mr. Navarro graduated from the University of the East and is a Certified Public Accountant. He holds a Masteral Degree from Harvard Business School.

27

Cecilia Q. Chua, 54, was a director of Ionics, Inc. from 1997 to 2000. She is the Treasurer of B-Pack Corporation and has been the Purchasing Manager of Ionics Circuits, Inc. since 1986. Previous corporate affiliations include Complex Electronics Corporation, Interphase Development Corporation, Ladtek Corporation and Pimeco. Judy Qua, 57, is the Company’s Vice President for Corporate Affairs. She is concurrently the representative of the head office to Ionics China at Tangxia. She further functions as the Executive Assistant to the Chairman and CEO on special assignments. Prior to joining Ionics, she was in college teaching, advertising and marketing practice, data management, and a resource for Ionics in people management and corporate communications from 1987 to 1997. Ms. Qua is a motivational psychologist, a professional lecturer, a certified faculty for the American Management Association and the Swedish-based CELEMI management simulation learning systems, and an author of four (4) books on life essays. She holds a Master of Arts degree in Social and Industrial Psychology from Ateneo de Manila University and a Master of Business Administration degree from Kellogg-HKUST Business School of Northwestern University Manuel R. Roxas, 57, Filipino, has been the Company’s Corporate Secretary for the past ten (10) years. His professional experience covers general corporate law practice as counsel to various companies engaged in banking, investments, pharmaceuticals, shipping, and manufacturing. Atty. Roxas received his Bachelor of Science degree in Economics from the University of Pennsylvania in 1970 and Bachelor of Laws degree from the University of the Philippines in 1975. His other professional affiliations include: Roxas de los Reyes Laurel & Rosario as Partner, Tax Management Association of the Philippines as past President, President Manuel A. Roxas Foundation, Inc., Mother Rosa Memorial Foundation, Inc. as Secretary, and Integrated Bar of the Philippines, Philippine Bar Association, the Wharton Club of the Philippines as member. Anna Melissa R. Lichaytoo, 41, Filipino, has been the Assistant Corporate Secretary for the past nine (9) years. Ms. Lichaytoo is a partner in the Roxas de los Reyes Laurel & Rosario Law Offices. Her professional experience covers general corporate practice as counsel to various companies engaged in the manufacturing, banking, investments and trading sector. She also serves as Corporate Secretary of Next Stage, Inc. which is listed with the Philippine Stock Exchange. She received her Bachelor of Laws degree from the Ateneo Law School in 1990. She is a member of the Philippine Bar Association and the Integrated Bar of the Philippines. Henry S. Malicdem, 42, is the Vice President for Finance and IT. He is a Certified Public Accountant. Prior to joining Ionics in June 2005, he worked as the Vice President for Finance of a chemical firm, as a Controller of an electronics manufacturing company and as Accounting Manager for a food firm. He was previously a faculty member of the accounting department of the University of San Carlos. He holds a degree in Bachelor of Science in Accounting and Computer Programming, and a Certificate in Network Administration. Ronan R. Andrade, 36, is the Senior Assistant Vice President for Internal Audit. He graduated from San Beda College in 1991 and passed the CPA Board Examination in the same year. He worked with Sycip Gorres & Velayo Auditing Firm - Audit Division from 1992 to 1998, starting as an audit staff until he became audit supervisor. He joined Ionics, Inc. in 1999 as Senior Manager for Finance and became Assistant Vice President and Acting Finance Head of the Company, prior to his transfer to Internal Audit. The Directors of the Company are elected at the annual stockholders’ meeting to hold office until the next succeeding annual meeting and until their respective successors have been elected. Messrs. Lawrence C. Qua, Meliton C. Qua, Raymond C. Qua, Virginia Judy Q. Dy and Cecilia Q. Chua are all related within the second degree of consanguinity. No director has transacted with the Group in his/her personal capacity.

28

During the past five years, there was no bankruptcy petition filed by or against any business of which a director was a general partner or executive officer either at the time of the bankruptcy or within two years to that time; nor was any director convicted by final judgment in a criminal proceeding, domestic or foreign, or was subject to a criminal proceeding, domestic or foreign, excluding traffic violations and other minor offenses; or was subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court competent jurisdiction, domestic or foreign, permanently or temporarily enjoining, barring, suspending or otherwise liaise limiting involvement in any type of business, securities, commodities or banking services; or was found by a domestic or foreign court of competent jurisdiction (in a civil action), the commission or comparable foreign body, or a domestic or foreign exchange or electronic marketplace or self-regulatory organization, to have violated a securities or commodities law. None of the directors has informed the Group that he/she intends to oppose any action to be taken by the Company at the meeting. While all employees are equally expected to contribute to the business of the Group, none are expected to do so by significant proportions.

Item 10. Executive Compensation.

The following table summarizes the compensation of the five highest paid executive officers of the Group and the aggregate compensation of all officers and directors as a group for the last two completed calendar years, and the estimated aggregate compensation of the said officers and directors for the present calendar year.

SUMMARY COMPENSATION TABLE

Annual Compensation Year Salary Bonus Others * Executive Officer/Five most highly compensated executive officers

2007

$417,010

-

$2,447

2006 2005

489,019 437,697

- -

2,447 905

All officers and directors as a group unnamed

2007

738,118

-

13,457 2006

2005 767,575 811,491

- -

13,457 4,071

*Others – includes per diem of directors

The following are the Group’s CEO and five (5) most highly compensated executive officers: 1. Mr. Lawrence C. Qua. is the Chairman of the Board of Directors, the Chief Executive Officer and

the President of the Company. 2. Mr. Raymond C. Qua is the Treasurer and Senior Vice President – Treasurer of Ionics EMS, Inc. 3. Mr. Jan Doets is the President and the Chief Operating Officer of its subsidiary, Ionics EMS, Inc.

(ceased to be connected with the Company on August 1, 2006). 4. Ms. Judy Qua is the Vice President for Corporate Affairs. 5. Mr. Henry S. Malicdem is the Vice President for Finance of Ionics EMS, Inc. Directors who are not officers of the Company are entitled to a per diem of Fifteen Thousand Pesos (P=15,000.00) per regular meeting attended. The Chairman of the Board who is also the Chief Executive Officer of both Ionics and its subsidiary, EMS, receives compensation on a monthly basis plus a percentage of net profit after tax before bonus. All other executive officers receive monthly compensation without, however, any entitlement to a percentage of the profits.

29

As of December 31, 2006, no executive and officers of the Registrant is under employment contract.

Item 11. Security Ownership of Certain Beneficial Owners and Management.

As of February 28, 2007.

(a) Security Ownership of Certain Record and Beneficial Owner Title of class

Name and address Of owner

Name of Beneficial Owner and

Relationship with Record Owner

Citizenship Number of Shares Held

Percent of

class

Common Aqua Holdings, Inc. c/o Ionics, Inc. 11/F DPC Place Building 2322 Chino Roces Avenue, Makati City Shareholder

Lawrence C. Qua Filipino 167,576,550 (R)

39.13%

Common Social Security System SSS Building, East Avenue Diliman, Quezon Avenue Shareholder

Government (represented by Ms. Corazon dela Paz, President of SSS)

Filipino 45,814,599 (R)

10.66%

Common Leonardo T. Siguion Reyna 7 Tanguile Road, North Forbes Park Makati City Director

N/A Filipino 36,400,000 (R)

8.50%

Common Yang Tah Lu &/or Yang Huang Un-Chyong #2108 Emerald Masion, Emerald Ave., Pasig City Director

N/A Taiwanese 26,884,000 (R)

6.28%

(b) Security Ownership of Management Title of class

Name of Beneficial Owner Amount and nature of beneficial ownership

Citizenship Percent of

class Common Lawrence C. Qua

Chairman/President/CEO 10,051,380

(R) Filipino 2.35%

Common Leonardo Siguion Reyna Director

36,400,000 (R)

Filipino 8.50%

Common Yang Tah Lu Director

26,884,000 (R)

Taiwanese 6.28%

Common Meliton C. Qua Director

3,248,681 (R)

Filipino 0.76%

Common Guillermo D. Luchangco Director

10,212,500 (R)

Filipino 2.38%

Common Edgardo M. del Fonso Director

250 (R)

Filipino nil

Common Alfredo R. de Borja Director

7,000 (R)

Filipino nil

Common Corazon dela Paz 1 Filipino nil

30

Director (R) Common Virginia Judy Q. Dy

Director 568,828

(R) Filipino 0.13%

Common Raymond C. Qua Director/Treasurer

4,281,175 (R)

Filipino 1.00%

Common Judy Qua VP-Corporate Affairs

0

Filipino 0

Common Manuel R. Roxas Corporate Secretary

7,250 (R)

Filipino Nil

Common Anna Melissa R. Lichaytoo Assistant Corporate Secretary

0 Filipino 0

Common Henry S. Malicdem VP – Finance

0 Filipino 0

Common Ronan R. Andrade Senior AVP-Internal Audit

0 Filipino 0

Total 91,661,065 (R)

21.40%

(c) Voting Trust Holders of 5% or More Not Applicable to the Group (d) Changes in control Not Applicable to the Group

Item 12. Certain Relationships and Related Transactions

The Company has no significant related party transactions with its stockholders, directors, officers and affiliated companies except lease arrangements with its subsidiary, Ionics EMS, Inc., for two of its factories, Ionics V and Ionics VI. Said subsidiary, Ionics EMS, Inc. also leases from Valmora Realty, Inc. (formerly, “Crismida Realty Corp.), a firm owned by Director Leonardo Siguion Reyna, two other plants, Ionics III and IV. And finally, Ionics EMS, Inc. also leases from another wholly owned subsidiary of the Company, Ionics Properties, Inc., Plant II. The rent charges are based on prevailing industry standard in the area. The Company retains the law firms of Roxas De Los Reyes Laurel and Rosario Law Offices and Siguion Reyna Montecillo & Ongsiako Law Offices for legal services. During the calendar year, the Company paid the Roxas de los Reyes Laurel and Rosario Law Office from which the Corporate Secretary Manuel R. Roxas and Assistant Corporate Secretary, Anna Melissa R. Lichaytoo, are partners, as well as the Siguion Reyna Montecillo & Ongsiako Law Offices from which Leonardo T. Siguion Reyna is a partner, legal fees which the Company believes to be reasonable for the services rendered.

Investment and Capital Corporation of the Philippines, (“ICCP”) is retained by the Company as its Financial Advisor. Guillermo D. Luchangco, who has been a director of the Company since 1991, is Chairman and Chief Executive Officer of ICCP. Management believes that the retainer fees paid to ICCP are reasonable. Apart from the foregoing, no other director has received or become entitled to receive a benefit by reason of a contract made by the Group or a related corporation with the director or with a firm of which he is a member or with the Group in which he has substantial interest.

31

PART IV – CORPORATE GOVERNANCE REPORT Item 13. Corporate Governance

1. Good Corporate Governance

A. BOARD OF DIRECTORS

• In accordance with the Articles of Incorporation of the Company, a total of 11 directors were elected to the Board.

• The Board of Directors consists of a good balance of executive and non executive directors, all

of whom are sufficiently qualified and well-informed of the business of the Company.

• The Board met quarterly for the purpose of hearing and approving the Company’s quarterly reports. It also met on other dates whenever urgent matters had to be addressed.

• The Board met a total of 5 times in 2006.

• None of the directors have attended less than half the number of regular meetings for the year.

• Independent views were aired during the meetings. Ad Hoc Committee was organized on

March 30, 2006 to review the Company’s performance and financial condition and competence of the Management Team.

B. COMMITTEES

• 3 Committees were created: the Audit Committee, the Nomination Committee and the

Remuneration Committee all of which reports their findings to the Board of Directors.

• The Audit Committee was duly constituted with 2 independent directors as members, one of whom is the Chairman of the Committee (The Manual requires at least 1 independent director as member).

• The Audit Committee met a total of four (4) times to review the quarterly reports.

• The Nomination Committee was duly constituted and is chaired by an independent director.

• The NomCom met once, on 30 March 2006, to approve the nominees to the Board of Directors

for 2006-07 as well as the nominees for independent directors.

• The Remuneration Committee is duly constituted. There has been no reason to convene a meeting of the Remuneration Committee in 2006.

C. THE EXTERNAL AUDITOR

• Board of Directors has engaged the firm of SGV & Co. to provide auditing services to the Company.

• Ms. Vicky Lee-Salas, partner-in charge of the Company’s account, was appointed in 2003. As

such, there is no need at this time to change the partner-in-charge.

• The External Auditor does not provide the services of an internal auditor, which is provided by Mr. Ronan Andrade, Vice President-Internal Audit.

32

D. INTERNAL AUDITOR

• The Internal Auditor reviews the Company’s control mechanisms. He is invited to the regular

meetings of the Audit Committee to report his findings.

• The Internal Auditor recommends and monitors the corrective actions taken relative to his findings.

E. COMMUNICATION PROCESS

The Company makes available the Manual of Corporate Governance for inspection by any stockholder.

F. DISCLOSURE SYSTEM AND REPORTS

• The Company has timely and adequately disclosed all material events relative to it.

• The Company has timely filed all reports required. Said reports adequately disclose all required information.

G. SHAREHOLDERS’ BENEFIT

• All requests for information received in 2006 from shareholders were entertained and

responded to.

H. MONITORING AND ASSESSMENT

• In order to comply with its reportorial obligations, the Board authorized the amendment of the Manual in 2005 to extend the period within which the Internal Auditor shall submit a report to the Board regarding compliance with the Manual.

• The Company filed its certification regarding compliance with the Manual within the period prescribed therein.

PART V - EXHIBITS AND SCHEDULES Item 14. Exhibits and Reports on SEC Form 17-C

(a) Exhibits - See accompanying Index to Exhibits (Page 95) (b) Reports to SEC via Form 17-C 1. January 3, 2006 – Submit the schedule of attendance of the directors at its Board Meeting for the year

2005 pursuant to the Corporate Governance Manual. 2. March 30, 2006 – Announced the postponement of the annual shareholders’ meeting and the

amendment on the filing date on the Corporation’s Manual of Corporate Governance. In addition, the Nominating Committee of the Company approved the list of candidates for election as members of the Board of Directors for 2006-07.

3. June 6, 2006 - Announced the elected officers and directors of the Corporation held at the annual stockholders’ meeting on June 2, 2006.

4. August 14, 2006 – Announced the resignation of Mr. Jan D. Doets as Directors as a result of the pre-termination of his contract as President/COO of the Company’s subsidiary, Ionics EMS, Inc.

5. November 13, 2006 – Announced the resignation of Mr. Chyson Tan Chiew Kien, the Managing Director of the Ying Li Electronics Factory of the Corporation’s subsidiary Ionics EMS, Inc. It was also announced that in the Extraordinary General Meeting of its subsidiary, Ionics EMS, Inc. the

33

proposal to dispose the leasehold improvements in favor of another subsidiary, Ionics Properties, Inc. was approved by affirmative vote of the shareholders.

6. December 21, 2006 - Submit the schedule of attendance of the directors at its Board Meeting for the year 2006 pursuant to the Corporate Governance Manual.

34

INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY SCH EDULES

FORM 17-1, Item 7

Page Consolidated Financial Statements

Statement of Management’s Responsibility for Financial Statements 35 Report of Independent Public Accountants 36 Consolidated Balance Sheets as of December 31, 2006 and 2005 38 Consolidated Statements of Income and Retained Earnings for the years ended December 31, 2006 and 2005 40 Consolidated Statements of Recognized Income (Loss) and Expense for the years ended December 31, 2006 and 2005 41 Consolidated Statements of Cash Flows for the years ended December 31, 2006 and 2005 42 Notes to Consolidated Financial Statements 44

Supplementary Schedules

Report of Independent Public Accountants on Supplementary Schedules 92 A. Marketable Securities - (Current Marketable Equity Securities

and Other Short-Term Cash Investments) 93 B. Amount Receivable from Directors, Officers, Employees, Related

Parties and Principal Stockholders (Other than Affiliates) 94 C-1. Non-Current Marketable Equity Securities, Other Long-Term

Investments, and Other Investments 95 C-2. Investments Available for Sale 96 D. Indebtedness of Unconsolidated Subsidiaries and Related Parties * E. Intangible Assets - Other Assets * F. Long-Term Debt * G. Indebtedness to Related Parties * H. Guarantees of Securities of Other Issuers * I. Capital Stock 97

_____ * These schedules, which are required by Part IV (e) of SRC Rule 48, have been omitted because they are either not required, not applicable or the information required to be presented is included in the Companies consolidated financial statements or the notes to consolidated financial statements.

35

36

37

38

IONICS, INC. AND SUBSIDIARIES BALANCE SHEETS (Amounts in Thousands) Consolidated Parent Company December 31

2006

2005 (As Restated -

Note 2) 2006

2005 ASSETS Current Assets Cash and cash equivalents (Notes 4 and 5) US$3,271 US$9,159 US$1,433 US$1,254 Short-term investments (Note 4) – 1,072 – 910 Receivables (Notes 4 and 6) 23,176 12,954 139 17 Inventories (Note 7) 23,612 10,195 – – Due from subsidiaries (Note 19) – – 626 585 Prepayments and other current assets 61 276 32 122 Total Current Assets 50,120 33,656 2,230 2,888 Noncurrent Assets Due from subsidiaries (Note 19) – – 9,083 – Available-for-sale investments (Notes 4 and 8) 5,533 11,837 937 927 Equity investments (Note 9) 702 926 33,882 33,882 Property, plant and equipment (Note 10) 16,007 9,947 1,309 1,347 Investment properties (Note 11) 7,164 7,083 – – Deferred tax assets (Note 22) – 132 – 123 Deposits and others (Notes 4 and 12) 219 208 – – Total Noncurrent Assets 29,625 30,133 45,211 36,279 Assets classified as held for discontinued

operations (Note 26) 1,849 3,635 1,849 3,635 US$81,594 US$67,424 US$49,290 US$42,802

LIABILITIES AND EQUITY Current Liabilities Accounts payable and accrued expenses

(Notes 4, 13 and 19) US$24,774 US$8,944 US$201 US$176 Liabilities under trust receipts (Notes 7 and 14) 1,982 – – – Income tax payable 21 28 – – Total Current Liabilities 26,777 8,972 201 176 Noncurrent Liabilities Due to subsidiaries (Note 19) – – 6,234 – Pension obligations (Note 24) 3,657 928 – – Refundable deposits (Notes 4 and 20) 572 502 – – Deferred rent income (Note 20) 220 231 – – Deferred tax liabilities (Note 22) 210 – 196 – Total Noncurrent Liabilities 4,659 1,661 6,430 – Liabilities classified as held for discontinued

operations (Note 26) 74 76 74 76 Total Liabilities 31,510 10,709 6,705 252 Equity Capital stock (Note 15) 7,730 7,730 7,730 7,730 Additional paid-in capital 9,125 9,125 9,125 9,125 Retained earnings (Notes 2 and 15) 29,908 27,035 26,007 25,982

(Forward)

39

- 2 - Consolidated Parent Company December 31

2006

2005 (As Restated -

Note 2) 2006

2005 Unrealized gain (loss) on available-for-sale investments (Note 8) (US$661) US$5,112 (US$37) (US$47) Share in unrealized loss on available-for-sale

investments of associates (Note 9) – (97) – – Other reserve (2,035) 537 – – Exchange differences 561 453 – – Treasury shares (Note 15) (240) (240) (240) (240) 44,388 49,655 42,585 42,550 Minority interest 5,696 7,060 – – 50,084 56,715 42,585 42,550 US$81,594 US$67,424 US$49,290 US$42,802

See accompanying Notes to Financial Statements.

40

IONICS, INC. AND SUBSIDIARIES STATEMENTS OF INCOME (Amounts in Thousands, Except Earnings (Loss) per Share) Consolidated Parent Company Years Ended December 31

2006

2005 (As Restated -

Note 2)

2004 (As Restated -

Note 2) 2006 2005

2004 SALES (Note 25) US$127,338 US$62,576 US$77,073 US$– US$– US$– COST OF SALES (Note 16) 126,944 68,196 81,431 – – – GROSS INCOME (LOSS) 394 (5,620) (4,358) – – – General and administrative (Note 17) (3,719) (5,081) (3,005) (206) (431) (249) Commissions (Note 18) (1,134) (807) (888) – – – Gain on sale of available-for-sale investment (Note 8) 5,209 – – – – – Rent (Notes 11, 19 and 20) 2,046 1,355 306 567 542 467 Interest income 115 437 392 152 67 46 Interest expense (278) – – – – – Equity in net earnings (losses) of associates (Note 9) (275) 342 (129) – – – Foreign exchange gain (loss) - net 62 (52) (19) 162 121 (50) Miscellaneous - net (Note 10) (96) 289 (4) – 4 17 INCOME (LOSS) BEFORE INCOME TAX 2,324 (9,137) (7,705) 675 303 231 PROVISION FOR (BENEFIT FROM) INCOME TAX (Note 22) 641 (45) 48 476 (113) 8 INCOME (LOSS) FROM CONTINUING OPERATIONS 1,683 (9,092) (7,753) 199 416 223 Loss from discontinued operations before income tax (172) (96) (923) (172) (96) (923) Provision for income tax (2) – (6) (2) – (6) LOSS FROM DISCONTINUED OPERATIONS (Note 26) (174) (96) (929) (174) (96) (929) NET INCOME (LOSS) US$1,509 (US$9,188) (US$8,682) US$25 US$320 (US$706)

Consolidated Years Ended December 31 2006 2005 2004 Attributable to: Equity holders of the Parent Company (Note 23) US$2,873 (US$6,522) (US$6,532) Minority interest (1,364) (2,666) (2,150) US$1,509 (US$9,188) (US$8,682)

BASIC/DILUTED EARNINGS (LOSS) PER SHARE (Note 23)

For income (loss) for the year attributable to ordinary equity holders of the parent company US$0.007 (US$0.015) (US$0.015)

For income (loss) from continuing operations attributable to ordinary equity holders of the parent company US$0.007 (US$0.015) (US$0.013)


44 *SGVMC108934*

IONICS, INC. AND SUBSIDIARIES STATEMENTS OF RECOGNIZED INCOME (LOSS) AND EXPENSE (Amounts in Thousands) Consolidated Years Ended December 31

2006 2005 2004

Actuarial gains (losses) on defined benefit pension plans recognized directly in equity (Notes 2 and 24) (US$2,572) US$29 US$144

Unrealized gains (losses) on available-for-sale investments (Note 8) (661) 5,112 –

Share in unrealized gains (losses) on available- for-sale investments of associates (Note 9) – (97) 243

Exchange differences 561 453 (60)

NET INCOME (LOSS) RECOGNIZED DIRECTLY IN EQUITY (2,672) 5,497 327

NET INCOME (LOSS) FOR THE YEAR , as restated (Note 2) 1,509 (9,188) (8,682)

TOTAL RECOGNIZED LOSS AND EXPENSE FOR THE YEAR (US$1,163) (US$3,691) (US$8,355)

Attributable to: Equity holders of the parent company US$2,873 (US$6,522) (US$6,532) Minority interest (1,364) (2,666) (2,150)

US$1,509 (US$9,188) (US$8,682)

Parent Company Years Ended December 31

2006 2005 2004

UNREALIZED LOSSES ON AVAILABLE-FOR-SALE INVESTMENTS RECOGNIZED DIRECTLY IN EQUITY (Note 8) (US$37) (US$47) US$–

NET INCOME (LOSS) FOR THE YEAR 25 320 (706)

TOTAL RECOGNIZED INCOME (LOSS) AND EXPENSE FOR THE YEAR (US$12) US$273 (US$706)


IONICS, INC. AND SUBSIDIARIES

STATEMENTS OF CASH FLOWS (Amounts in Thousands) Consolidated Parent Company

Years Ended December 31

2006

2005 (As Restated -

Note 2)

2004 (As Restated -

Note 2) 2006 2005 2004 CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) before income tax after loss from discontinued operations US$2,152 (US$9,233) (US$8,628) US$503 US$207 (US$692) Adjustments for: Gain on sale of available-for-sale investment (Note 8) (5,209) – – – – – Depreciation and amortization (Notes 10 and 11) 2,871 7,642 8,632 38 39 63 Equity in net losses (earnings) of associates (Note 9) 275 (342) 129 – – – Loss from discontinued operations (Note 26) 172 96 923 172 96 923 Interest expense 278 – – – – – Interest income (115) (437) (392) (152) (67) (46) Gain on sale of property, plant and equipment (Note 10) (21) (328) (52) – – – Operating income (loss) before working capital changes 403 (2,602) 612 561 275 248 Changes in operating assets and liabilities: Decrease (increase) in: Receivables (10,232) (3,032) 20,451 (46) – – Inventories (13,417) (310) (4,547) – – – Prepayments and other current assets 58 (60) 15 (67) 44 (15) Increase (decrease) in: Accounts payable and accrued expenses 15,770 885 (9,714) 25 (39) 75 Pension obligations 157 198 (46) – – – Refundable deposits 46 228 180 – – – Deferred rent income (11) 322 – – – – Net cash generated from (used in) operations (7,226) (4,371) 6,951 473 280 308 Interest received 125 434 375 76 52 46 Interest paid (194) – – – – – Income taxes paid (149) (66) (45) – – (8) Net cash provided by (used in) operating activities (7,444) (4,003) 7,281 549 332 346 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from the sale of: Available-for-sale investment 6,234 – – – – – Property, plant and equipment 24 496 1,531 – – – Acquisitions of: – Property, plant and equipment (Note 10) (8,629) (5,594) (429) – – – Available-for-sale investments (700) (7,065) – – (927) – Investment properties (Notes 11) (381) – – – – –

(Forward)

- 2 - Consolidated Parent Company

Years Ended December 31

2006

2005 (As Restated -

Note 2)

2004 (As Restated -

Note 2) 2006 2005 2004 Decrease (increase) in: Short-term investments US$1,072 (US$1,072) US$– US$910 (US$910) US$– Due from subsidiaries – – – – (84) 293 Equity investments – 7,782 (585) – 1,234 (1) Net assets pertaining to discontinued operations (Note 26) 1,610 (18) 219 1,610 (24) 254 Deposits and others (11) (42) (2) – – – Return of capital (Notes 8 and 9) 355 874 384 – – – Net cash provided by (used in) investing activities (426) (4,639) 1,118 2,520 (711) 546 CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from liabilities under trust receipts 1,982 – – – – – Increase in due from subsidiaries – – – (2,890) – (419) Net cash provided (used) in financing activities 1,982 – – (2,890) – (419) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (5,888) (8,642) 8,399 179 (379) 473 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 9,159 17,801 9,402 1,254 1,633 1,160 CASH AND CASH EQUIVALENTS AT END OF YEAR (Note 5) US$3,271 US$9,159 US$17,801 US$1,433 US$1,254 US$1,633


44 *SGVMC108934*

IONICS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (Amounts in Thousands, Except Par Value per Share and Earnings (Loss) per Share) 1. Corporate Information Ionics, Inc. (the Parent Company) was incorporated in the Philippines in September 1982 and

started commercial operations in July 1987 to engage in electronic manufacturing services business. In September 1999, the Parent Company transferred its business to a majority owned subsidiary. Consequently, the Parent Company’s primary purpose was amended from a manufacturing company to a holding company.

The Parent Company and its subsidiaries (the Group) are engaged in the manufacture of printed

circuit board (PCB) assembly, box built (finished product) assembly, disk drive magnetic head assembly, systems and subsystems assembly, as well as design and testing services.

The Group’s customers are original equipment manufacturers in the computer peripherals,

telecommunications, automotive, consumer electronics, industrial equipment and medical equipment industries (Note 25). The top four customers collectively accounted for 55%, 64% and 73% of the Group’s sales in 2006, 2005 and 2004, respectively. The Group anticipates that concentration of business in major customers will continue in the foreseeable future although the Group’s management is starting new relationships with other customers.

The registered office address of the Parent Company is Circuit Street, Light Industry and Science Park of the Philippines, Barrio Diezmo, Cabuyao, Laguna.

The accompanying consolidated and parent company financial statements were authorized for

issue by the board of directors (BOD) on March 30, 2007. 2. Summary of Significant Accounting Policies

Basis of Preparation The accompanying financial statements have been prepared on a historical basis except for

available-for-sale (AFS) investments that have been measured at fair value.

The consolidated financial statements are presented in US Dollar and all values are rounded to the nearest thousand (US$000) except when otherwise indicated. The Group’s functional currency is US Dollar.

Beginning in 2005, the Group changed its presentation currency from Philippine Peso to

US Dollar, except for Ionics Properties, Inc., after notifying the Philippine Securities and Exchange Commission (SEC) of its new functional currency on February 22, 2006.

- 45 -

Effective January 1, 2006, Ionics Properties, Inc. has changed its functional currency from

Philippine Peso to US Dollar due to change in circumstances affecting the operations of the Company. Balances as of January 1, 2006 were translated using the exchange rate at the date of the change of functional currency and the resulting translated amounts for nonmonetary items are treated as their historical cost. On February 6, 2007, Ionics Properties, Inc. notified the SEC that it will change its presentation currency.

Statement of Compliance

The financial statements of the Group and of the Parent Company have been prepared in compliance with Philippine Financial Reporting Standards (PFRS).

Basis of Consolidation The consolidated financial statements comprise the financial statements of the Parent Company

and the following wholly and majority-owned subsidiaries as at December 31 each year:

Effective Percentage of

Ownership

Subsidiaries Country of

Incorporation 2006 2005 Ionics EMS, Inc. (EMS) Philippines 75% 75% Ionics EMS, Limited (IEL)* Cayman Islands 75 75 Ionics Circuits, Limited (ICL) Cayman Islands 100 100 Ionics Properties, Inc. (IPI) Philippines 100 100 Synertronix, Inc. (SI) Philippines 100 100

* A wholly owned subsidiary of EMS. The financial statements of the subsidiaries are prepared for the same reporting year as the Parent

Company, using consistent accounting policies. On August 15, 2002, the Parent Company discontinued the operations of SI. Accordingly, the

accounts of SI are reflected in the consolidated financial statements under discontinued operations (Note 26).

In late 2004, EMS established a manufacturing facility in the People’s Republic of China which is

managed by IEL, a wholly owned subsidiary registered in the Cayman Islands.

All significant intra-group balances, transactions, income and expenses and profits and losses resulting from intra-group transactions are eliminated in full in the consolidation.

Subsidiaries are fully consolidated from the date on which control is transferred to the Group.

Control is achieved where the Group has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. Consolidation of subsidiaries ceases when control is transferred out of the Group or Parent Company.

Minority Interest

Minority interest represents the portion of profit or loss and net assets not held by the Group and is presented separately in the statement of income and within equity in the consolidated balance sheet, separately from the Parent Company’s equity.

- 46 -

Changes in Accounting Policies

The accounting policies adopted are consistent with those of the previous financial year except as follows:

Amendments to PFRSs and Philippine Interpretation effective in 2006 The Group has adopted the following amendments to PFRS and Philippine Interpretation during the period. Adoption of these revised standards and interpretation did not have any effect on the financial statements of the Group. They did, however, give rise to additional disclosures in the financial statements. • PAS 19 Amendment - Employee Benefits • PAS 21 Amendment - The Effects of Changes in Foreign Exchange Rates • PAS 39 Amendments - Financial Instruments: Recognition and Measurement • Philippine Interpretation IFRIC - 4 Determining Whether an Arrangement Contains a Lease The principal effects of these changes, if any, are as follows: PAS 19, Employee Benefits Amendment for actuarial gains and losses, group plans and disclosures. As of January 1, 2006, the Group adopted the amendments to PAS 19 which introduces the option of an alternative recognition approach for actuarial gains and losses. The amendment to PAS 19 allows an entity to recognize actuarial gains and losses outside of the profit or loss, in addition to previous options of recognizing such gains and losses directly in profit or loss or using the corridor approach. When an entity adopts this new option, it must prepare a statement of recognized income and expense (SORIE) instead of a statement of changes in equity. Changes in equity resulting from transactions with owners in their capacity as owners, all other movements in equity reserves and a reconciliation of retained earnings from the beginning of the period to the end of the period may only be presented in the notes to the financial statements. In prior years, the Group presented separate statements of changes in equity. Starting 2006 and in compliance with its adoption of the Amendments to PAS 19, the Group now presents comparative SORIE, which shows changes in equity attributable to total income and expense, including gains and losses, whether recognized in the statement of income or directly as changes in equity, generated by the Group’s activities for the years ended December 31, 2006 and 2005. Other changes in equity are disclosed in Note 15. The Group elected to adopt the option to recognize gains and losses outside of the profit or loss. The effect of adopting this option resulted to the restatement of prior year financial statements. The restatement resulted to an increase in the net loss of the Group amounting to US$0.68 million in 2005. Retained earnings of the Group decreased by US$0.54 million and increased by US$0.14 million as of January 1, 2006 and 2005, respectively. Actuarial gains and losses recognized amounted to a loss of US$2.57 million in 2006, and a gain of US$0.03 million and US$0.14 million in 2005 and 2004, respectively, and are reflected in the Net income (loss) recognized directly in equity in the SORIE. Additional disclosures required by the amendment were included in the Group’s financial statements, where applicable.

- 47 -

PAS 21, The Effects of Changes in Foreign Exchange Rates Amendment for net investment in a foreign operation. As of January 1, 2006, the Group adopted the amendments to PAS 21. As a result, all exchange differences arising from a monetary item that forms part of the Group’s net investment in a foreign operation are recognized in a separate component of equity in the consolidated financial statements regardless of the currency in which the monetary item is denominated. This change has no significant impact on the financial statements. PAS 39, Financial Instruments: Recognition and Measurement Amendment for financial guarantee contracts. This amended the scope of PAS 39 to require financial guarantee contracts that are not considered to be insurance contracts to be recognized initially at fair value and to be remeasured at the higher of the amount determined in accordance with PAS 37, Provisions, Contingent Liabilities and Contingent Assets and the amount initially recognized less, when appropriate, cumulative amortization recognized in accordance with PAS 18, Revenue. This amendment did not have an effect on the financial statements. Amendment for cash flow hedge accounting of forecast intra-group transactions. This amended PAS 39 to permit the foreign currency risk of a highly probable intra-group forecast transaction to qualify as the hedged item in a cash flow hedge, provided that the transaction is denominated in a currency other than the functional currency of the entity entering into that transaction and that the foreign currency risk will affect the consolidated statement of income. As the Group currently has no such transactions, the amendment did not have an effect the financial statements. Amendment for the fair value option. This amended PAS 39 to restrict the use of the option to designate any financial asset or any financial liability to be measured at fair value through the statement of income. This amendment has no significant impact on the Group's financial statements.

Philippine Interpretation IFRIC - 4, Determining Whether an Arrangement Contains a Lease This Interpretation provides guidance in determining whether arrangements contain a lease to which lease accounting must be applied. This Interpretation has no impact on the financial statements.

Cash and Cash Equivalents Cash includes cash on hand and in banks. Cash equivalents are short-term, highly liquid

investments that are readily convertible to known amounts of cash with original maturities of three months or less from the dates of placements and that are subject to insignificant risk of changes in value.

Financial Instruments Date of recognition The Group recognizes a financial asset or a financial liability on the balance sheet when it becomes a party to the contractual provisions of the instrument. Purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the marketplace are recognized on the settlement date.

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Initial recognition of financial instruments All financial assets, including trading and investment securities and loans and receivables, are initially measured at fair value. Except for securities valued at fair value through profit or loss (FVPL), the initial measurement of financial assets includes transaction costs. The Group classifies its financial assets in the following categories: securities at FVPL, held-to-maturity (HTM) investments, AFS investments, and loans and receivables. The classification depends on the purpose for which the investments were acquired and whether they are quoted in an active market. Management determines the classification of its investments at initial recognition and, where allowed and appropriate, re-evaluates such designation at every reporting date. The financial assets of the Group consist of loans and receivables and AFS investments. Loans and Receivables Loans and receivables are financial assets with fixed or determinable payments and fixed maturities that are not quoted in an active market. Loans and receivables are carried at cost less allowance for impairment losses. The Group’s loans and receivables include trade and other receivables. Trade and other receivables, which generally have 30-90 days’ terms, are recognized and carried at original invoice amount less an allowance for any uncollectible amounts. An allowance for impairment losses is provided when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. The allowance for impairment losses is maintained at a level considered adequate to cover any probable loss from uncollectible receivables. The level of allowance is evaluated by management on the basis of factors that affect the collectibility of the accounts. A review of the age and status of receivables, designed to identify the accounts to be provided with allowance, is made on a continuous basis (Note 3). Bad debts are written off when identified. AFS investments AFS investments are those which are designated as such or do not qualify to be classified as designated as FVPL, HTM or loans and receivables. They are purchased and held indefinitely, and may be sold in response to liquidity requirements or changes in market conditions. AFS investments also include investments in unquoted equity instruments, where the Group’s ownership interest is less than 20% or where control is likely to be temporary, which are initially recorded at cost being the fair value of the investment at the time of acquisition, inclusive of direct acquisition charges associated with the investment. After initial measurement, AFS investments are subsequently measured at fair value. The unrealized gains and losses arising from the fair valuation of AFS investments are excluded, net of tax, from reported earnings and are reported as ‘Unrealized gain on AFS investments’ in the equity section of the balance sheet. Investments in unquoted equity instruments are subsequently carried at cost due to the unpredictable nature of future cash flows and the lack of other suitable methods for arriving at a reliable fair value.

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When the security is disposed of, the cumulative gain or loss previously recognized in equity is recognized as ‘Gain on sale of AFS investment’ in the statement of income. The losses arising from impairment of such investments are recognized as ‘Provision for impairment losses’ in the statement of income. Accounts payable and other financial liabilities Issued financial instruments or their components, which are not designated at FVPL, are classified as liabilities under ‘Accounts payable” or other appropriate financial liability accounts, where the substance of the contractual arrangement results in the Group having an obligation either to deliver cash or another financial asset to the holder, or to satisfy the obligation other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of own equity shares. The components of issued financial instruments that contain both liability and equity elements are accounted for separately, with the equity component being assigned the residual amount after deducting from the instrument as a whole the amount separately determined as the fair value of the liability component on the date of issue. After initial measurement, accounts payable and similar financial liabilities not qualified as and not designated as FVPL, are subsequently measured at amortized cost using the effective interest rate method. Amortized cost is calculated by taking into account any discount or premium on the issue and fees that are an integral part of the effective interest rate. Determination of Fair Value The fair value for financial instruments traded in active markets at the balance sheet date is based on their quoted market price or dealer price quotations (bid price for long positions and ask price for short positions), without any deduction for transaction costs. When current bid and asking prices are not available, the price of the most recent transaction is used since it provides evidence of the current fair value as long as there has not been a significant change in economic circumstances since the time of the transaction. Derecognition of Financial Assets and Liabilities Financial asset A financial asset (or, where applicable a part of a financial asset or part of a group of financial assets) is derecognized where: 1. the rights to receive cash flows from the asset have expired; or 2. the Group retains the right to receive cash flows from the asset, but has assumed an obligation

to pay them in full without material delay to a third party under a “pass-through” arrangement; or

3. the Group has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained the risk and rewards of the asset but has transferred control over the asset.

Where the Group has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognized to the extent of the Group’s continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of original carrying amount of the asset and the maximum amount of consideration that the Group could be required to repay.

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Financial liability A financial liability is derecognized when the obligation under the liability is discharged or cancelled or expires. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognized in profit or loss. Impairment of Financial Assets The Group assess at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the customer or a group of customers is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganization and when observable data indicate that there is measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlated with defaults. Loans and receivables For loans and receivables carried at amortized cost, which include trade and other receivables, the Group first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, or collectively for financial assets that are not individually significant. If the Group determines that no objective evidence of impairment exists for individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses for impairment. Those characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative of the debtors’ ability to pay all amounts due according to the contractual terms of the assets being evaluated. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be, recognized are not included in a collective assessment for impairment. If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the amount that the Group reasonably believes will be collected, for specific customer balances. The carrying amount of the asset is reduced through the use of an allowance account and the amount of loss is charged to the statement of income. If, in a subsequent year, the amount of the estimated impairment loss decreases because of an event occurring after the impairment was recognized, the previously recognized impairment loss is reduced by adjusting the allowance account. If a future write-off is later recovered, any amounts formerly charged are credited to the ‘Provision for impairment losses’ account in the statement of income. For the purpose of a collective evaluation of impairment, financial assets are grouped on the basis of such credit risk characteristics as industry, collateral type, past-due status and term.

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Future cash flows in a group of financial assets that are collectively evaluated for impairment are estimated on the basis of historical loss experience for assets with credit risk characteristics similar to those in the group. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently. Estimates of changes in future cash flows reflect, and are directionally consistent with changes in related observable data from period to period (such changes in unemployment rates, property prices, commodity prices, payment status, or other factors that are indicative of incurred losses in the group and their magnitude). The methodology and assumptions used for estimating future cash flows are reviewed regularly by the Group to reduce any differences between loss estimates and actual loss experience. AFS investments For AFS investments, the Group assesses at each balance sheet date whether there is objective evidence that a financial asset or group of financial assets is impaired. In case of equity investments classified as AFS, this would include a significant or prolonged decline in the fair value of the investments below its cost. Where there is evidence of impairment, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognized in the statement of income – is removed from equity and recognized in the statement of income. Impairment losses on equity investments are not reversed through the statement of income. Increases and decreases in fair value subsequent to impairment are recognized directly in equity. Offsetting Financial Instruments Financial assets and financial liabilities are offset and the net amount reported in the balance sheet if, and only if, there is a currently enforceable legal right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the asset and settle the liability simultaneously. Inventories Inventories are valued at the lower of cost or net realizable value (NRV). Cost of finished goods and work-in-process inventories include actual labor, overhead costs and purchased materials, where applicable, and is determined using the first-in, first-out (FIFO) method. Cost of purchased raw materials, spare parts and supplies are stated at invoice value determined using the FIFO method. NRV is the estimated selling price in the ordinary course of business, less estimated costs of completion and marketing costs. In determining the NRV, the Group considers factors such as the aging and future demand of the inventory, contractual arrangements with customers and the Group’s ability to redistribute inventory to other programs or return inventory to suppliers. Investments in Subsidiaries and Associates Investments in subsidiaries Subsidiaries are all entities over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity.

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Investments in associates Associates are all entities over which the Group has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. In the consolidated financial statements, investments in associates are accounted for under the equity method of accounting. Under the equity method, an investment in an associate is carried in the balance sheet at cost plus post-acquisition changes in the Group’s share of the net assets of the associate. The Group’s share in an associate’s post-acquisition profits or losses is recognized in the statement of income, and its share of post-acquisition movements in the associate’s equity reserves is recognized directly in equity. When the Group’s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Group does not recognize further losses, unless it has incurred obligations or made payments on behalf of the associate. Profits and losses resulting from transactions between the Group and an associate are eliminated to the extent of the interest in the associate. In the Parent Company financial statements, investments in subsidiaries and associates are carried at cost, less any impairment in value.

Property, Plant and Equipment Property, plant and equipment, except for land, are carried at cost less accumulated depreciation

and amortization and any impairment in value. Land is carried at cost less any impairment in value. The initial cost of property, plant and equipment comprises its purchase price including import duties, nonrefundable taxes and any directly attributable costs of bringing the assets to its working condition and location for its intended use.

Depreciation and amortization is computed using the straight-line method over the following

estimated useful life (EUL) of each type of asset:

Years Machinery and equipment 5-7 Building, building improvements and leasehold improvements 5-30 Tools and other equipment 5 Plant water and airconditioning systems 5-15 Furniture, fixtures and equipment 5 Transportation equipment 5

The cost of the leasehold improvements is amortized over the shorter of the covering lease term or

EUL of the improvements of 7 years. The useful lives and the depreciation and amortization methods are reviewed periodically to

ensure that the period and the methods of depreciation and amortization are consistent with the expected pattern of economic benefits from items of property, plant and equipment.

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Costs of repairs and maintenance are charged as expense when incurred; significant renewals and

improvements are capitalized when it can be clearly demonstrated that the expenditures have resulted in an increase in future economic benefits expected to be obtained from the use of an item of property, plant and equipment beyond the originally assessed standard of performance. When assets are retired or otherwise disposed of, the cost and the related accumulated depreciation and amortization, and any impairment in value, are removed from the accounts and any resulting gain or loss is credited to or charged against current operations. The carrying values of property, plant and equipment are reviewed for impairment when events or changes in circumstances indicate the carrying values may not be recoverable. If any such indication exists and where the carrying values exceed the estimated recoverable amounts, the assets or cash generating units are written down to their recoverable amounts (see Policy on Impairment of Assets). An item of property, plant and equipment is derecognized upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the statement of income in the year the asset is derecognized.

Investment Properties Investment properties are measured initially at cost, including transaction costs. The carrying amount includes the cost of replacing part of an existing investment property at the time that cost is incurred if the recognition criteria are met; and excludes the costs of day-to-day servicing of an investment property. Subsequent to initial recognition, depreciable investment properties are carried at cost less accumulated depreciation and any impairment in value. Investment properties are derecognized when either they have been disposed of, or when the investment property is permanently withdrawn from use and no future economic benefit is expected from its disposal. Any gains or losses on the retirement or disposal of an investment property are recognized in the statement of income in the year of retirement or disposal. Expenditures incurred after the investment properties have been put into operations, such as repairs and maintenance costs, are normally charged to operations in the period in which the costs are incurred.

Depreciation is calculated on a straight-line basis using the remaining useful lives from the time of acquisition of the investment properties but not to exceed:

Years Building 30 Building improvements 7

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Transfers are made to investment properties when, and only when, there is a change in use

evidenced by ending of owner-occupation, commencement of an operating lease to another party or ending of construction or development. Transfers are made from investment properties when, and only when, there is a change in use evidenced by commencement of owner-occupation or commencement of development with a view to sale.

Impairment of Non-Financial Assets At each reporting date, the Group assesses whether there is any indication that its non-financial

assets may be impaired. When an indicator of impairment exists or when an annual impairment testing for an asset is required, the Group makes a formal estimate of recoverable amount. Recoverable amount is the higher of an asset’s (or cash-generating unit’s) fair value less costs to sell and its value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets, in which case the recoverable amount is assessed as part of the cash generating unit to which it belongs. Where the carrying amount of an asset (or cash generating unit) exceeds its recoverable amount, the asset (or cash generating unit) is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset (or cash generating unit).

An impairment loss is charged to operations in the year in which it arises, unless the asset is

carried at a revalued amount, in which case the impairment loss is charged to the revaluation increment of the said asset.

For non-financial assets, an assessment is made at each reporting date as to whether there is any indication that previously recognized impairment losses may no longer exist or may have decreased. If such indication exists, the recoverable amount is estimated. A previously recognized impairment loss is reversed only if there has been a change in the estimates used to determine the asset’s recoverable amount since the last impairment loss was recognized. If that is the case, the carrying amount of the asset is increased to its recoverable amount. That increased amount cannot exceed the carrying amount that would have been determined, net of depreciation and amortization, had no impairment loss been recognized for the asset in prior years. Such reversal is recognized in the statement of income unless the asset is carried at a revalued amount, in which case the reversal is treated as a revaluation increase. After such a reversal, the depreciation and amortization expense is adjusted in future years to allocate the asset’s revised carrying amount, less any residual value, on a systematic basis over its remaining life.

Provisions Provisions are recognized when the Group has a present obligation (legal or constructive) as a

result of a past event and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Where the Group expects some or all of a provision to be reimbursed, for example, under an insurance contract, the reimbursement is recognized as a separate asset but only when the

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reimbursement is virtually certain. The expense relating to any provision is presented in the statement of income, net of any reimbursement. If the effect of the time value of money is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognized as an interest expense. Provisions are reviewed at each balance sheet date and adjusted to reflect the current best estimate.

Contingent Liabilities and Contingent Assets Contingent liabilities are not recognized in the financial statements but are disclosed unless the

possibility of an outflow of resources embodying economic benefits is remote. Contingent assets are not recognized but are disclosed in the financial statements when an inflow of economic benefits is probable.

Revenue Recognition Revenue is recognized to the extent that it is probable that economic benefits will flow to the

Group and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognized:

Sale of goods Revenue from sale of goods is recognized upon shipment of packaged electronic products to and

acceptance by customers. Service income Service income is recognized when service is rendered. Interest income Interest income is recognized as interest accrues (using the effective interest rate method that is the

rate that exactly discounts estimated future cash receipts through the expected life of the financial instrument to the net carrying amount of the financial asset).

Dividend income Dividend income is recognized when the Group’s right to receive the payment is established. Rental income

Rental income arising on investment properties is accounted for on a straight-line basis over the lease terms on ongoing leases. The Group recognizes revenues at gross amount of sales and records the related costs, except when circumstances indicate that revenues should be reported at net amounts. Generally, when the Group is primarily obligated in a transaction, is subject to general and physical inventory risk, has latitude in establishing prices, has discretion in selecting suppliers, changes the product or performs the service, is involved in the determination of product or service specifications, and has credit risk, or has many but not all of these indicators, revenue is recorded gross. If several of these indicators are not present, or if a customer retains ownership of the materials utilized in their products, the Group generally only recognizes the revenues on a net basis.

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The Group has contractual arrangements with certain customers that require the customer to

purchase either excess inventory that the Group has purchased to fulfill that customer’ forecasted manufacturing demand, or unused inventory due to customers who reschedule, amend or cancel purchase orders. The Group accounts for the raw materials returns as reductions in inventory and does not recognize revenue on these transactions.

Foreign Currency Transactions and Translation

Transactions in foreign currencies are recorded using the exchange rate at the date of transactions. Foreign exchange gains or losses arising from foreign currency transactions and revaluation adjustments of foreign currency assets and liabilities are credited to or charged against current operations. Monetary assets and liabilities denominated in foreign currencies are translated using the foreign exchange rate prevailing at balance sheet dates. All differences are taken to profit and loss. Nonmonetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates at the dates of the initial transactions. Nonmonetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined.

Pension Expense EMS is covered by a noncontributory defined benefit retirement plan.

The pension expense of EMS is determined using the projected unit credit method. Under this method, the current service cost is the present value of retirement benefits payable in the future with respect to services rendered in the current period. The pension obligation recognized in the balance sheet in respect of defined benefit pension plans is the present value of the defined benefit obligation at the balance sheet date less the fair value of plan assets, together with adjustments for unrecognized actuarial gains or losses and past-service costs. The defined benefit obligation is calculated annually by an independent actuary using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using the interest rate on government bonds that have terms to maturity approximating the terms of the related retirement liability. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are credited to or charged against current operations in the period in which they arise. These gains or losses are recognized immediately in the SORIE.

Past-service costs, if any, are recognized immediately in income, unless the changes to the pension

plan are conditional on the employees remaining in service for a specified period of time (the vesting period). In this case, the past-service costs are amortized on a straight-line basis over the vesting period.

Leases The determination of whether an arrangement is, or contains a lease is based on the substance of the arrangement and requires an assessment of whether the fulfillment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset. A reassessment is made only after inception of the lease if one of the following applies: (a) there is a change in contractual terms, other than a renewal or extension of the arrangement; (b) a renewal option is exercised or extension granted, unless that term or renewal or extension

was initially included in the lease term;

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(c) there is a change in the determination of whether fulfillment is dependent on a specified asset;

or (d) there is a substantial change to the asset.

Where a reassessment is made, lease accounting shall commence or cease from the date when the change in circumstances gave rise to the reassessment for scenarios (a), (c) or (d) above, and at the date of renewal or extension period for scenario (b). For arrangements entered into prior to January 1, 2005, the date of inception is deemed to be January 1, 2005 in accordance with the transitional requirements of Philippine Interpretation IFRIC - 4. Leases where the lessor retains substantially all the risks and benefits of ownership of the asset are classified as operating leases. Operating lease payments are recognized as an expense in the statement of income on a straight-line basis over the lease term. Leases where the Group does not transfer substantially all the risk and benefits of ownership of the assets are classified as operating leases. Initial direct costs incurred in negotiating operating leases are added to the carrying amount of the leased asset and recognized over the lease term on the same basis as the rental income. Contingent rents are recognized as revenue in the period in which they are earned.

Income Taxes Current tax Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to taxation authorities. Tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted at the balance sheet date. Deferred tax Deferred tax is provided, using the balance sheet liability method, on all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax liabilities are recognized for all taxable temporary differences. Deferred tax assets are recognized for all deductible temporary differences, carryforward of unused tax credits from the excess of minimum corporate income tax (MCIT) over the regular corporate income tax (RCIT), and unused net operating loss carryover (NOLCO), to the extent that it is probable that sufficient taxable profit will be available against which the deductible temporary differences and carryforward of unused tax credits from MCIT and unused NOLCO can be utilized. Deferred income tax, however, is not recognized on temporary differences that arise from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting income nor taxable income or loss. Deferred tax liabilities are not provided on non-taxable temporary differences associated with investments in domestic subsidiaries and associates. With respect to investments in foreign subsidiaries and associates, deferred tax liabilities are recognized except where the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future.

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The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilized. Unrecognized deferred tax assets are reassessed at each balance sheet date and are recognized to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered. Deferred tax assets and liabilities are measured at the tax rates that are applicable to the period when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date. Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to offset current tax assets against current tax liabilities and deferred taxes related to the same taxable entity and the same taxation authority.

Treasury Shares Own equity instruments which are reacquired (treasury shares) are deducted from the equity. No

gain or loss is recognized in the statement of income on the purchase, sale, issue or cancellation of the Parent Company’s own equity instruments.

Earnings (Loss) Per Share Basic earnings (loss) per share is computed by dividing net income (loss) for the year attributable

to ordinary equity holders of the parent by the weighted average number of common shares issued and outstanding during the year, after giving retroactive adjustment to any stock dividend declared or stock split made during the year. Diluted EPS is calculated by dividing the net income attributable to common shareholders by the weighted average number of common shares outstanding during the year adjusted for the effects of any dilutive convertible preferred shares. Segment

A segment is a distinguishable component of the Group that is engaged in providing product or services (business segment) which is subject to risks and rewards that are different from other segments.

Subsequent Events Post-year-end events that provide additional information about the Group’s position at the balance sheet date (adjusting events) are reflected in the financial statements. Post-year-end events that are not adjusting events are disclosed in the notes when material to the financial statements. Future Changes in Accounting Policies The Group has not applied the following PFRS and Philippine interpretations which are not yet effective for the year ended December 31, 2006:

PFRS 7, Financial Instruments: Disclosures, and the complementary amendment to PAS 1, Presentation of Financial Statements: Capital Disclosures (effective for annual periods beginning on or after January 1, 2007) PFRS 7 introduces new disclosures to improve the information about financial instruments. It requires the disclosure of qualitative information about exposure to risks arising from financial instruments, including specified minimum disclosures about credit risk, liquidity risk and market

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risk, as well as sensitivity analysis to market risk. It replaces disclosure requirements in PAS 32, Financial Instruments: Disclosure and Presentation. It is applicable to all entities that report under PFRS. The amendment to PAS 1 introduces disclosures about the level of an entity’s capital and how it manages capital. The Group is currently assessing the impact of PFRS 7 and the amendment to PAS 1 and expects that the main additional disclosures will be the sensitivity analysis to market risk and the capital disclosures required by PFRS 7 and the amendment to PAS 1. The Group will apply PFRS 7 and the amendment to PAS 1 in 2007. PFRS 8, Operating Segments (effective for annual periods beginning on or after January 1, 2009) PFRS 8 will replace PAS 14, Segment Reporting, and adopts a management approach to reporting segment information. The information reported would be that which management uses internally for evaluating the performance of operating segments and allocating resources to those segments. Such information may be different from that reported in the balance sheet and statement of income and companies will need to provide explanations and reconciliations of the differences. The Group will apply PFRS 8 in 2009 and expects that the adoption of this standard would not significantly modify the Group’s segment reporting disclosures. Philippine Interpretation IFRIC - 8, Scope PFRS 2 (effective for annual periods beginning on or after May 1, 2006) This Interpretation requires PFRS 2 to be applied to any arrangements where equity instruments are issued for consideration which appears to be less than fair value. This Interpretation has no significant impact on the financial statements of the Group. Philippine Interpretation IFRIC - 9, Reassessment of Embedded Derivatives (effective for annual periods beginning on or after June 1, 2006) This Interpretation establishes that the date to assess the existence of an embedded derivative is the date an entity first becomes a party to the contract, with reassessment only if there is a change to the contract that significantly modifies the cash flows. The Group assessed that adoption of this Interpretation will have no significant impact on the financial statements. Philippine Interpretation IFRIC - 10, Interim Financial Reporting and Impairment (effective for annual periods beginning on or after November 1, 2006) This Interpretation restricts reversal of an impairment loss previously recognized in the interim period in respect of goodwill or an investment in either an equity instrument or a financial asset carried at cost. This Interpretation has no significant impact on the financial statements of the Group.

Philippine Interpretation IFRIC - 11, PFRS 2 Group and Treasury Share Transactions (effective for annual periods beginning on or after March 1, 2007) This Interpretation requires arrangements whereby an employee is granted rights to an entity’s equity instruments to be accounted for as an equity-settled scheme by the entity even if (a) the entity chooses or is required to buy those equity instruments (e.g., treasury shares) from another party, or (b) the shareholder(s) of the entity provide the equity instruments needed. It also provides guidance on how subsidiaries, in their separate financial statements, account for such schemes when their employees receive rights to the equity instruments of the parent. The Group currently does not have any stock option plan and therefore, does not expect this Interpretation to have a significant impact on its financial statements.

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Philippine Interpretation IFRIC - 12, Service Concession Arrangements, (effective for annual periods beginning on or after January 1, 2008) This Interpretation, which covers contractual arrangements arising from entities providing public services, is not relevant to the Group’s current operations.

3. Significant Accounting Judgments and Estimates

The preparation of the financial statements in compliance with PFRS requires the Group to make estimates and assumptions that affect the reported amounts of assets, liabilities, income and expenses and disclosure of contingent assets and contingent liabilities. Future events may occur which will cause the judgments and assumptions used in arriving at the estimates to change. The effects of any change in judgments and estimates are reflected in the financial statements as they become reasonably determinable.

Judgments and estimates are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Judgments Operating lease commitments - group as lessor The Group has entered into commercial property leases on its investment property portfolio. The Group has determined that it retains all the significant risks and rewards of ownership of these properties which are leased out on operating leases (Note 20).

Fair values of financial instruments Where the fair values of financial assets and financial liabilities recorded on the balance sheet date cannot be derived from active markets, they are determined using a variety of valuation techniques that include the use of mathematical models. The input to these models is taken from observable markets where possible, but where this is not feasible, a degree of judgment is required in establishing fair values. The judgments include considerations of liquidity and model inputs (Note 4). Estimates Impairment of receivables The Group reviews its receivable portfolio to assess impairment annually based on the factors that affect the collectibility of the account. The Group reviews the age and status of receivables and identifies accounts that are to be provided with allowance on a continuous basis. Judgment by management is required in the estimation of the amount and timing of future cash flows when determining the level of allowance required. Such estimates are based on assumptions about a number of factors and actual results may differ, resulting in future changes to the allowance.

In addition to specific allowance against individually significant loans and receivables, the Group also makes a collective impairment allowance against exposures which, although not specifically identified as requiring a specific allowance, have a greater risk of default than when originally granted.

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Provision for impairment losses of the Group amounted to US$0.28 million in 2006 and US$0.02 million in 2005. Receivables of the Group, net of allowance for impairment losses amounted to US$23.18 million and US$12.95 million as of December 31, 2006 and 2005, respectively (Note 6). Receivables of the Parent Company, net of allowance for impairment losses amounted to US$0.14 million and US$0.02 million as of December 31, 2006 and 2005, respectively (Note 6).

Impairment of inventory The Group reviews its perpetual inventory levels to assess impairment at least on a quarterly basis. The amount and timing of recorded expenses for any period would differ if different judgments were made or different estimates were utilized. An increase in reserves for inventory writedown would increase recorded operating expenses and decrease current assets. Provision for inventory writedown of the Group amounted to US$1.11 million in 2006 and US$1.49 million in 2005 (Note 16). Inventories of the Group, net of allowance for inventory writedown, amounted to US$23.61 million and US$10.20 million as of December 31, 2006 and 2005, respectively (Note 7).

EUL of property, plant and equipment and investment properties The Group estimates the useful lives of its property, plant and equipment and investment properties based on the period over which the assets are expected to be available for use. The Group reviews annually the EUL of property and equipment based on factors that include asset utilization, internal technical evaluation, technological changes, environmental and anticipated use of the assets tempered by related industry benchmark information. It is possible that future results of operations could be materially affected by changes in these estimates brought about by changes in the factors mentioned. A reduction in the EUL of property and equipment would increase the recorded depreciation and amortization expense and decrease noncurrent assets.

Beginning January 1, 2006, EMS changed its accounting estimates required of the EUL of certain machineries and equipment and leasehold improvements, from an EUL of 5 years to 7 years. Based on the results of the latest review conducted, management voluntarily decided to change the accounting estimates required of EUL to reflect the actual utilization of machineries and equipment based on historical experience. This change in accounting estimate is applied prospectively and resulted to a decrease in depreciation expense in the amount of US$0.38 million in 2006.

The carrying value of property, plant and equipment of the Group amounted to US$16.01 million and US$9.95 million as of December 31, 2006 and 2005, respectively (Note 10). The carrying value of property, plant and equipment of the Parent Company amounted to US$1.31 million and US$1.35 million as of December 31, 2006 and 2005, respectively (Note 10). The carrying value of investment properties of the Group amounted to US$7.16 million and US$7.08 million as of December 31, 2006 and 2005, respectively (Note 11).

Pension and other benefits The determination of the obligation and cost of pension and other benefits is dependent on the selection of certain assumptions used by actuaries in calculating such amounts. Those assumptions include, among others, discount rates, expected returns on plan assets and salary increase rates. In compliance with PFRS, actual results that differ from the Group’s assumptions are recognized immediately outside of profit or loss.

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While the Group believes that the assumptions are reasonable and appropriate, significant differences between actual experiences and assumptions may materially affect the cost of employee benefits and related obligations.

The Group has recognized directly in equity net actuarial loss of US$2.57 million, net actuarial gain of US$0.03 million and US$0.14 million in 2006, 2005 and 2004, respectively. Net pension liability in the balance sheets of the Group amounted to US$3.66 million and US$0.93 million as of December 31, 2006 and 2005, respectively (Note 24).

The Group also estimates other employee benefit obligations and expenses, including costs of paid leaves based on historical leave availments of employees, subject to the Group’s policy. These estimates may vary depending on the future changes in salaries and actual experiences during the year.

The Group’s accrued balance of other employee benefits as of December 31, 2006 and 2005 amounted to US$0.31 million and US$0.24 million, respectively.

Impairment of investment in subsidiaries and property, plant and equipment The Group reviews investment in subsidiary and property, plant and equipment. This includes considering certain indicators of impairment such as the following: • significant underperformance relative to expected historical or projected future operating

results; • significant changes in the manner of use of the acquired assets or the strategy for overall

business; and • significant negative industry or economic trends.

An impairment loss is recognized whenever the carrying amount of an asset exceeds its recoverable amount. The recoverable amount is the higher of an asset’s net selling price and value in use. The net selling price is the amount obtainable from the sale of an asset in an arm’s length transaction while value in use is the present value of estimated future cash flows expected to arise from the continuing use of an asset and from its disposal at the end of its useful life. Recoverable amounts are estimated for individual assets or, if it is not possible, for the cash-generating unit to which the asset belongs. For impairment loss on specific assets, the recoverable amount represents the net selling price.

The carrying value of property, plant and equipment of the Group amounted to US$16.01 million

and US$9.95 million as of December 31, 2006 and 2005, respectively (Note 10). The carrying value of property, plant and equipment of the Parent Company amounted to US$1.31 million and US$1.35 million as of December 31, 2006 and 2005, respectively (Note 10). The carrying value of investment properties of the Group amounted to US$7.16 million and US$7.08 million as of December 31, 2006 and 2005, respectively (Note 11).

In determining the present value of the estimated future cash flows expected to be generated from the continued use of the assets, the Group is required to make estimates and assumptions that can materially affect the accompanying financial statements.

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The equity investments of the Group, net of allowance for impairment losses of US$0.84 million, amounted to US$0.70 million and US$0.93 million as of December 31, 2006 and 2005, respectively (Note 9). The equity investments of the Parent Company, net of allowance for impairment losses of US$0.84 million, amounted to US$33.88 million in December 31, 2006 and 2005 (Note 9). The AFS investments of the Group, net of allowance for impairment losses of US$0.02 million, amounted to US$5.53 million and US$11.84 million as of December 31, 2006 and 2005, respectively (Note 8). The AFS investments of the Parent Company, net of allowance of US$0.02 million, amounted to US$0.94 million and US$0.93 million as of December 31, 2006 and 2005, respectively (Note 8).

Deferred tax assets The Group assesses the deferred tax assets at each balance sheet date to the extent that there is probability that sufficient profit will be available to allow all or part of the deferred tax assets to be utilized. The Group recognized net deferred tax liability and deferred tax assets on the temporary differences amounting to US$0.21 million and US$0.13 million as of December 31, 2006 and 2005, respectively. The Parent Company recognized net deferred tax liability and deferred tax assets on the temporary differences amounting to US$0.20 million and US$0.12 million as of December 31, 2006 and 2005, respectively (Note 22).

Contingencies The Group is currently involved in a legal proceeding. The estimate of the probable cost for the resolution of a claim has been developed in consultation with the aid of the outside legal counsel handling the Group’s defense in this matter and is based upon an analysis of potential results. Management does not believe that the outcome of this matter will affect the results of operations of the Parent Company as its investment in ICI-USA has been fully provided for. It is probable, however, that future results of operations could be materially affected by changes in the estimates or in the effectiveness of the strategies relating to this proceeding (Note 27).

4. Financial Risk Management Objectives and Policies

The Group’s principal financial instruments consist of cash and cash equivalents, trade and other receivables, AFS investments, accounts payable and accrued expenses and refundable deposits. The Group’s policy on managing the risk arising from the Group’s financial instruments follows:

Interest Rate Risk The Group’s income and operating cash flows are substantially independent of changes in market interest rates. The Group follows a prudent policy in managing its assets and liabilities so as to ensure that exposure to fluctuation in interest rates are kept within acceptable limits.

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The following tables set out the carrying amount, by maturity, of the Group’s and Parent Company’s financial instruments that are exposed to interest rate risk:

Consolidated 2006 2005

Below 1 year

Over 1 year

Total

Below 1 year

Over 1 year

Total

Financial assets Cash and cash equivalents US$3,271 US$– US$3,271 US$9,159 US$ US$9,159

Interest rate 2.8% – 2.8% 1.2%-5.3% 1.2%-5.3% Short-term investments – – – 1,072 1,072 Interest rate – – – 4.0%-4.3% 4.0%-4.3% Financial liabilities Liabilities under trust

receipts – 1,982

1,982 – Interest rate 8.0% 8.0%

Parent Company 2006 2005

Below 1 year

Over 1 year

Total

Below 1 year

Over 1 year

Total

Financial assets Cash and cash equivalents US$1,433 US$– US$1,433 US$1,254 US$US$1,254 Interest rate – – – 4.0%-4.6% – 4.0%-4.6% Short-term investments – – – 910 – 910 Interest rate – – – 4.0%-4.3% – 4.0%-4.3% Due from subsidiaries – 9,083 9,083 – – –

Interest rate – 7.3%-12% 7.3%-12% – – – Financial liabilities Due to subsidiaries – 6,234 6,234 – – – Interest rate 7.3%-12% 7.3%-12% – –

Liquidity Risk

Short-term funding is obtained to finance cash requirements for capital expenditures and operations. Credit lines are obtained from BOD-designated banks at amounts based on financial forecasts approved by BOD. Surplus funds are placed with reputable banks based on approved investment limits.

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The following tables show an analysis of financial assets and liabilities analyzed according to whether they are expected to be recovered or settled within one year or beyond one year from balance sheet date:


Below 1 year

Over 1 year

Total

Below 1 year

Over 1 year

Total

Financial assets Cash and cash equivalent (Note 5) US$3,271 US$–

US$3,271 US$9,159 US$– US$9,159

Short-term investments – – – 1,072 – 1,072 Receivables - gross (Note 6) 23,521 – 23,521 13,095 – 13,095 AFS investments - gross

(Note 8) – 5,552

5,552 – 11,856 11,856 26,792 5,552 32,344 23,326 11,856 35,182 Less allowance for

impairment losses 345 19

364 141 19 160 US$26,447 US$5,533 US$31,980 US$23,185 US$11,837 US$35,022

Financial liabilities Accounts payable and

accrued expenses (Note 13) US$24,774 US$–

US$24,774 US$8,944 US$– US$8,944 Liabilities under trust

receipts (Note 14) 1,982 –

1,982 – – – Income tax payable 21 – 21 28 – 28 Refundable deposits (Note 20) – 572

572 – 502 502

US$26,777 US$572 US$27,349 US$8,972 US$502 US$9,474


Below 1 year

Over 1 year

Total

Below 1 year

Over 1 year

Total

Financial assets Cash and cash equivalents (Note 5) US$1,433 US$– US$1,433 US$1,254 US$– US$1,254 Short-term investments – – – 910 – 910 Receivables - gross (Note 6) 153 – 153 31 – 31 Due from subsidiaries (Note 19) 626 9,083 9,709 585 – 585 AFS investments - gross

(Note 8) – 956 – 946 946 2,212 10,039 12,251 2,780 946 3,726 Less allowance for

impairment losses 14 19 14 19 33 US$2,198 US$10,020 US$12,218 US$2,766 US$927 US$3,693

Financial liabilities Accounts payable and

accrued expenses (Note 13) US$201 US$–

US$201 US$176 US$– US$176 Due to subsidiaries ( Note 19) – 6,234

6,234 – – –

US$201 US$6,234 US$6,435 US$176 US$– US$176

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Foreign Exchange Risk The Group has transactional currency exposures. Such exposure arises from purchases in currencies other than the Group’s functional currency. It is the Group’s policy not to trade in derivative contracts. In addition, the Group believes that its profile of foreign currency exposure on its assets and liabilities is within conservative limits in the type of business in which the Group is engaged.

The table summarizes the Group’s exposure to foreign currency exchange risk categorized by currency.


In Philippine

Peso Others In Philippine

Peso Others (In US Dollar Equivalent) Cash and cash equivalents US$55 US$111 US$140 US$73 Other receivables 488 17 18 12 Other assets 178 42 168 40 Assets from discontinued operations 15 – 28 – 736 170 354 125 Accounts payable and accrued expenses 1,154 2,453 484 490 Liabilities from discontinued operations 30 – 27 – 1,184 2,453 511 490 Net exposure (US$448) (US$2,283) (US$157) (US$365)


In Philippine

Peso In Philippine

Peso (In US Dollar Equivalent) Cash and cash equivalents US$28 US$107 Other receivables 6 1 Other assets – – Assets from discontinued operations 15 28 49 136 Accounts payable and accrued expenses 179 176 Liabilities from discontinued operations 30 27 209 203 Net exposure (US$160) (US$67)

Other currencies include Japanese Yen, Euro Dollar and Renminbi.

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Credit Risk The carrying amounts of cash and cash equivalents and accounts receivable represent the Group’s maximum exposure to credit risk in relation to the financial assets. No other financial assets carry a significant exposure to credit risk. The Group monitors credit exposures, and continually assesses the creditworthiness of the customers. See Note 25 for the distribution of the Group’s sales and assets per geographical market.

Fair Values

The following table presents a comparison by category of carrying amounts and estimated fair values of all of the Group’s and Parent Company’s financial instruments as of December 31:

2006 Consolidated Parent Company Carrying Value Fair Value Carrying Value Fair Value Financial Assets Cash and cash equivalents US$3,271 US$3,271 US$1,433 US$1,433 Receivables 23,176 23,176 139 139 Due from subsidiaries – – 9,709 10,707 AFS investments 5,533 5,533 937 937 Deposits and others 219 219 – – Financial Liabilities Accounts payable and accrued expenses 24,774 24,774 201 201 Liabilities under trust receipts 1,982 1,982 – – Due to subsidiaries – – 6,234 6,481 Refundable deposits 572 572 – –

2005 Consolidated Parent Company Carrying Value Fair Value Carrying Value Fair Value Financial Assets Cash and cash equivalents US$9,159 US$9,159 US$1,254 US$1,254 Short-term investments 1,072 1,072 910 910 Receivables 12,954 12,954 17 17 AFS investments 11,837 11,837 927 927 Deposits and others 208 208 – – Financial Liabilities Accounts payable and accrued expenses 8,944 8,944 176 176 Refundable deposits 502 502 – –

The carrying amounts of financial instruments such as cash and cash equivalents, receivables,

current portion of due from subsidiaries, deposits and others, and accounts payable and accrued expenses approximate their respective fair values due to their short-term nature.

The fair value of AFS investments is determined by using the market prices of the listed shares.

Where the fair value of unquoted equity securities could not be reliably determined, the asset is carried at cost subject to impairment.

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The estimated fair value of the noncurrent portion of due from subsidiaries and due to subsidiaries

represents the present value of the amount of estimated future cash flows expected to be paid. Expected cash flows are discounted at current market rates to determine fair value over the term of the intercompany advances (Note 19).

The estimated fair value of refundable deposits represents the discounted amount of estimated

future cash flows expected to be paid. Expected cash flows are discounted at current market rates to determine fair value over the life of the lease term.

5. Cash and Cash Equivalents

Consolidated Parent Company 2006 2005 2006 2005 Cash on hand and in banks US$3,247 US$2,930 US$1,433 US$20 Cash equivalents 24 6,229 – 1,234 US$3,271 US$9,159 US$1,433 US$1,254

Cash in bank earns interest at the respective bank deposit rates. Cash equivalents which pertain to

money market placements are made for varying periods of up to three months depending on the immediate cash requirements of the Group and of the Parent Company. Cash equivalents represent US dollar and Euro-denominated money market placements with annual interest of 2.75% in 2006 and ranging from 1.2% to 5.3% in 2005 and 0.9% and 3.6% in 2004.

6. Receivables

Consolidated Parent Company 2006 2005 2006 2005 Trade US$17,445 US$11,277 US$– US$– Others 6,076 1,818 153 31 23,521 13,095 153 31 Less allowance for impairment losses 345 141 14 14 US$23,176 US$12,954 US$139 US$17

The changes in the allowance for impairment losses follow:

Consolidated Parent Company 2006 2005 2006 2005 Balance at January 1 US$141 US$126 US$14 US$14 Add provision (Note 17) 278 20 – – 419 146 14 14 Less write-off 74 5 – – Balance at December 31 US$345 US$141 US$14 US$14

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7. Inventories

The Group’s inventories are composed of the following:

2006 2005 At NRV: Finished goods (Note 16) US$2,379 US$326 Work-in-process (Note 16) 898 224 Raw materials 19,361 9,316 22,638 9,866 Spare parts and supplies - at cost 974 329 US$23,612 US$10,195

The cost of finished goods of the Group amounted to US$2.42 million and US$0.36 million as of December 31, 2006 and 2005, respectively. The cost of work-in-process of the Group amounted to US$1.03 million and US$0.34 million as of December 31, 2006 and 2005, respectively. The amount of writedown of finished goods and work-in-process of the Group recognized as an expense amounted to US$0.17 million and US$0.15 million in 2006 and 2005, respectively, which is recognized in cost of goods sold.

The cost of raw materials of the Group amounted to US$20.47 million and US$10.39 million as of

December 31, 2006 and 2005, respectively. Allowance for inventory writedown of the Group amounted to US$1.11 million and US$1.49 million as of December 31, 2006 and 2005, respectively (Note 16).

Under the terms of agreements covering liabilities under trust receipts amounting to US$1.98 million as of December 31, 2006, EMS is accountable to a commercial bank for the trusteed merchandise amounting to US$1.98 million or its sales proceeds (Note 14).

8. Available-for-Sale Investments

Consolidated Parent Company 2006 2005 2006 2005 Quoted: CSI Wireless, Inc. (CSI) US$1,656 US$1,290 US$– US$– Cirrus Logic, Inc. (Cirrus) 883 1,182 – – Gemstar International Group Ltd.

(Gemstar)

48

31

–

– SiRF Technology, Inc. (SiRF) – 6,892 – – Others 56 46 56 46 2,643 9,441 56 46

(Forward)

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Consolidated Parent Company 2006 2005 2006 2005 Unquoted: Beacon Property Venture, Inc. (Beacon) US$900 US$900 US$900 US$900 C2 Microsystems, Inc. 400 200 – – Tech Venture II Ltd. (TV II) 109 315 – – Tech Venture III Ltd. (TV III) 1,500 1,000 – – 2,909 2,415 900 900 5,552 11,856 956 946 Less allowance for impairment losses 19 19 19 19 US$5,533 US$11,837 US$937 US$927

Cirrus, CSI, Gemstar and SiRF are listed in the US NASDAQ stock market. In addition, CSI is

also listed in the Toronto Stock Exchange. In 2006, ICL sold all of its shares of SiRF for a total proceeds of US$6.23 million. Unrealized gain

on market revaluation amounting to US$5.87 million as of December 31, 2005, pertaining to the investment in SiRF, was accordingly removed from equity and recognized in the statement of income under ‘Gain on sale of AFS investment’ account.

The Group recognized directly in equity a net unrealized loss on market revaluation in the amount of US$0.66 million in 2006 and net unrealized gain on market revaluation in the amount of US$5.11 million in 2005. Net unrealized loss on market revaluation of the Parent Company amounted to US$0.04 million and US$0.05 million as of December 31, 2006 and 2005, respectively, is shown as a separate component of equity in the balance sheets.

In 2006, the Group had an additional investment in unquoted stocks of TV III and C2

Microsystems, Inc. with the total amount of US$0.70 million. Also during the year, the Company received return of capital amounting to US$0.21 million from TV II.

9. Equity Investments

Consolidated Parent Company 2006 2005 2006 2005 Noncurrent marketable equity securities At equity: Acquisition cost: IPI (100%) US$– US$– US$1,536 US$1,536 ICL (100%) – – 6,508 6,508 EMS (75%) – – 24,467 24,467 Iomni Precision, Inc. (Iomni)

(30%) 1,080 1,080 1,080 1,080 ICCP Venture Partners, Inc.

(IVPI) (30%) 54 54 54 54 ICCP Ventures, Inc. (IVI) (24%) 1,076 1,076 1,076 1,076 Tech Venture I (24%) 264 264 – – 2,474 2,474 34,721 34,721

(Forward)

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Consolidated Parent Company 2006 2005 2006 2005 Accumulated equity in net losses: Beginning balance (US$677) (US$364) US$– US$– Equity in net earnings (losses) (275) 342 – – Return of capital (149) (655) – – Balance at end of year (1,101) (677) – – Share in unrealized loss on

AFS investments of associates – (97) – – Exchange differences 168 65 – – 1,541 1,765 34,721 34,721 Less allowance for impairment losses 839 839 839 839 US$702 US$926 US$33,882 US$33,882

10. Property, Plant and Equipment The composition of and movements in this account follow:

Consolidated 2006

Land

Machinery and

Equipment

Building, Building

Improvements and

Leasehold Improvements

Tools and Other

Equipment

Plant Water and

Airconditioning Systems

Furniture, Fixtures and

Equipment Transportation

Equipment Total Cost Balance at January 1 US$1,110 US$48,109 US$4,649 US$1,971 US$335 US$215 US$87 US$56,476 Additions – 7,426 420 700 14 69 – 8,629 Disposal/retirement – (561) (166) (34) – – (16) (777) Balance at December 31 1,110 54,974 4,903 2,637 349 284 71 64,328 Accumulated depreciation

and amortization

Balance at January 1 – 41,958 2,641 1,494 203 159 74 46,529 Depreciation and amortization – 1,900 161 279 32 19 9 2,400 Disposal/retirement – (561) – (31) – – (16) (608) Balance at December 31 – 43,297 2,802 1,742 235 178 67 48,321 Net book value US$1,110 US$11,677 US$2,101 US$895 US$114 US$106 US$4 US$16,007

Consolidated 2005

Land

Machinery and

Equipment

Building, Building

Improvements and

Leasehold Improvements

Tools and Other

Equipment

Plant Water and

Airconditioning Systems

Furniture, Fixtures and

Equipment Transportation

Equipment Total Cost Balance at January 1 US$489 US$46,211 US$7,180 US$1,796 US$601 US$154 US$81 US$56,512 Additions 607 3,411 1,061 306 142 61 6 5,594 Disposal/retirement – (1,513) (3,610) (131) (408) – – (5,662) Exchange differences 14 – 18 – – – – 32 Balance at December 31 1,110 48,109 4,649 1,971 335 215 87 56,476 Accumulated depreciation

and amortization Balance at January 1 – 36,708 3,888 1,382 444 122 62 US$42,606 Depreciation and amortization – 6,633 326 226 80 37 12 7,314 Disposal/retirement – (1,383) (1,573) (114) (321) – – (3,391) Balance at December 31 – 41,958 2,641 1,494 203 159 74 46,529 Net book value US$1,110 US$6,151 US$2,008 US$477 US$132 US$56 US$13 US$9,947

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Parent Company 2006

Land

Building and Building

Improvements

Plant Water and

Airconditioning Systems Total

Cost Balance at January 1 and

December 31 US$489 US$1,515 US$100 US$2,104 Accumulated depreciation

and amortization Balance at January 1 – 657 100 757 Depreciation and amortization – 38 – 38 Balance at December 31 – 695 100 795 Net book value US$489 US$820 US$– US$1,309

Parent Company 2005

Land

Building and Building

Improvements

Plant Water and

Airconditioning Systems Total

Cost Balance at January 1 and

December 31 US$489 US$1,515 US$100 US$2,104 Accumulated depreciation

and amortization Balance at January 1 – 618 100 718 Depreciation and amortization – 39 – 39 Balance at December 31 – 657 100 757 Net book value US$489 US$858 US$– US$ 1,347

EMS sold certain property, plant and equipment. The gain related to such sales totaling US$0.02 million, US$0.33 million and US$0.05 million in 2006, 2005 and 2004, respectively, are included under Miscellaneous income in the statement of income.

The cost of fully depreciated machinery and equipment still in use by EMS amounted to US$24.66 million and US$17.78 million as of December 31, 2006 and 2005, respectively.

Consolidated depreciation and amortization of property, plant and equipment (included under

various accounts in the statement of income) amounted to US$2.40 million in 2006, US$7.31 million in 2005 and US$8.49 million in 2004.

Beginning January 1, 2006, EMS changed its accounting estimates required of the EUL of certain machineries and equipment and leasehold improvements, from an EUL of 5 years to 7 years. Based on the results of the latest review conducted, management voluntarily decided to change the accounting estimates required of EUL to reflect the actual utilization of machineries and equipment based on historical experience. This change in accounting estimate is applied prospectively and resulted to a decrease in depreciation expense in the amount of US$0.38 million in 2006.

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11. Investment Properties

2006 2005 Cost Balance at January 1 US$8,104 US$5,536 Additions (Note 28) 547 2,103 Exchange differences – 465 Balance at December 31 8,651 8,104 Accumulated depreciation Balance at January 1 US$1,021 US$642 Depreciation 471 328 Exchange differences (5) 51 Balance at December 31 1,487 1,021 Net book value US$7,164 US$7,083

The aggregate fair value of the investment properties amounted to US$12.43 million and

US$10.91 million as of December 31, 2006 and 2005, respectively. The fair values of the investment properties have been determined as the discounted cash flow projections based on reliable estimates of future cash flows, supported by the terms of the existing lease, and by using weighted average cost of capital as the discount rate which reflect current market assessments of the uncertainty in the amount and timing of cash flows.

Rent income received from the investment properties, included as part of Rent in the statement of

income, amounted to US$2.05 million, US$1.36 million and US$0.31 million for 2006, 2005 and 2004, respectively.

Direct operating expenses pertaining to investment properties, included under General and

administrative expenses, amounted to US$0.01 million, US$0.07 million and US$0.01 million for 2006, 2005 and 2004.

12. Deposits and Others

2006 2005 Deposits to utility companies US$156 US$162 Others 63 46 US$219 US$208

13. Accounts Payable and Accrued Expenses

Consolidated Parent Company 2006 2005 2006 2005 Trade payables US$21,470 US$6,367 US$46 US$40 Accrued expenses 2,378 1,652 149 131 Others 926 925 6 5 US$24,774 US$8,944 US$201 US$176

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14. Liabilities under Trust Receipts

This account consists of various short-term trust receipts agreements with a commercial bank amounting to US$1.98 million as of December 31, 2006, with fixed interest rate of 8%.

15. Other Changes in Equity

Consolidated

Capital

Stock

Additional Paid-in Capital

Retained Earnings

Exchange Differences

Treasury Shares

Minority Interest

Balance at January 1, 2006 US$7,730 US$9,125 US$27,035 US$453 (US$240)

US$7,060 US$51,16

Foreign currency translation – – – 108 – –

Net income (loss) for the year – – 2,873 – –

(1,364)

Balance at December 31, 2006 US$7,730 US$9,125 US$29,908 US$561 (US$240) US$5,696 US$52,780 Balance at January 1, 2005, as

previously reported US$7,730 US$9,125 US$33,450 (US$60) (US$240)

US$9,689 US$59,694 Cumulative effect of

change in accounting policy for employee benefits – – 107 – – 37 144

Balance at January 1, 2005, As restated 7,730 9,125 33,557 (60) (US$240) 9,726 59,838 Foreign currency

translation – – – 513 –

– 513 Net loss for the year, as

restated – – (6,522) – –

(2,666) (9,188)

Balance at December 31, 2005 US$7,730 US$9,125 US$27,035 US$453 (US$240)

US$7,060 US$51,163

Balance at January 1, 2004, as

previously reported US$7,730 US$9,125 US$40,089 US$– (US$240)

US$11,876 US$68,580 Foreign currency

translation – – – (60) –

– (60) Net loss for the year – – (6,532) – – (2,150) (8,682)

Balance at December 31, 2004 US$7,730 US$9,125 US$33,557 (US$60) (US$240) US$9,726 US$59,838

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Parent Company

Capital

Stock

Additional Paid-in Capital

Retained Earnings

Treasury Shares Total

Balance at January 1, 2006 US$7,730 US$9,125 US$25,982 (US$240) US$42,597 Net income for the year – – 25 – 25

Balance at December 31, 2006 US$7,730 US$9,125 US$26,007 (US$240) US$42,622

Balance at January 1, 2005 US$7,730 US$9,125 US$25,662 (US$240) US$42,277 Net income for the year – – 320 – 320

Balance at December 31, 2005 US$7,730 US$9,125 US$25,982 (US$240) US$42,597 Balance at January 1, 2004 US$7,730 US$9,125 US$26,368 (US$240) US$42,983 Net income for the year – – (706) – (706)

Balance at December 31, 2004 US$7,730 US$9,125 US$25,662 (US$240) US$42,277

The Parent Company’s capital stock consists of 1,000,000 authorized capital stock at of P=1.00

(US$0.01) par value with 429,688 outstanding shares and 1,400 treasury shares as at December 31, 2006, 2005 and 2004. 16. Cost of Sales

2006

2005 (As Restated -

Note 2)

2004 (As Restated -

Note 2) Materials and supplies used (Note 19) US$108,607 US$50,684 US$61,133 Direct labor, salaries and benefits (Note 24) 11,269 7,171 7,791 Occupancy cost and utilities (Notes 19 and 20) 4,044 2,032 1,962 Depreciation and amortization (Notes 10 and 28) 2,173 5,742 8,153 Other expenses 3,578 2,960 2,253 Total Manufacturing Cost 129,671 68,589 81,292 Work-in-process - at NRV: Beginning 224 74 112 Ending (Note 7) (898) (224) (74) Cost of Goods Manufactured 128,997 68,439 81,330 Finished goods - at NRV: Beginning 326 83 184 Ending (Note 7) (2,379) (326) (83) US$126,944 US$68,196 US$81,431

Other expenses account includes provision for inventory writedown amounting to US$1.11 million, net of US$0.29 million reversal, US$1.49 million and US$0.23 million in 2006, 2005 and 2004, respectively, and handling and freight charges amounting to US$2.02 million, US$1.12 million and US$1.74 million in 2006, 2005 and 2004, respectively.

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17. General and Administrative Expenses

Group Parent Company

2006

2005 (As Restated -

Note 2)

2004 (As Restated -

Note 2) 2006 2005

2004 Salaries and benefits (Note 24) US$1,298 US$1,107 US$1,019 US$– US$– US$– Depreciation and amortization (Notes 10, 11 and 28) 698 1,900

479 38 39

63

Occupancy cost and utilities (Notes 19 and 20) 636 852

648 1 4

1

Provision for impairment losses 278 274 – – 254 – Other expenses 809 948 859 167 134 185 US$3,719 US$5,081 US$3,005 US$206 US$431 US$249

18. Selling Expenses The Group’s selling expenses consist solely of sales commissions payable to an agent, amounting

to US$1.13 million, US$0.81 million and US$0.89 million for the periods ended December 31, 2006, 2005 and 2004, respectively.

19. Related Party Transactions In the normal course of business, EMS has transactions with related parties which include

purchases, rent and fees charged for information technology services. The summary of the related party balances and transactions of EMS follows:

Due to (from)

Related Parties

Intercompany

Advances

Interest expense

Purchase of Goods/Property And Equipment Rent Expense

Miscellaneous Expense

Iomni 2006 US$516 US$– US$– US$2,249 US$– US$18 2005 179 394 18 II 2006 71 1,087 128 567 2005 60 – – 540 IPI 2006 (421) 1,113 31 434 2005 (1,688) – – 478 Valmora Realty Corp. (VRC) 2006 194 SI 2006 1,762 94 IEL 2006 2,589 2005 ICL 2006 6,984 264

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Due from IPI carries fixed interest rate of 4.0% per annum in 2005. The term is for two years which will end in June 2007.

In 2006, intercompany advances carry a fixed interest rate of 7.3% and 12.0% per annum for dollar and peso advances, respectively. These intercompany advances are payable on December 31, 2008.

EMS entered into a lease agreement with Ionics, Inc. for the lease of Plants 5 and 6 located within the PEZA economic zone. The terms of the lease agreement follow:

(a) Monthly rental shall be at the rate of US$2.97 per square meter based on the floor area of the

leased premises;

(b) The lease shall be for a period of five years commencing on May 1, 1999 for Plant 5 and on January 1, 2000 for Plant 6; and

(c) Rental rates increase at 10.0% annually.

The lease of Plants 5 and 6 was extended for another 5 years beginning May 1, 2004 and January 1, 2005, respectively, with a monthly rental at the rate of US$4.35 per square meter in the first year and with an annual escalation rate of 5.0%.

EMS also leases two buildings from VRC (formerly Crismida Realty Corp.), a company controlled by one of EMS’s stockholders, for use as Plants 3 and 4. The lease is for five years commencing on April 1, 1998 with annual rental increase of 10.0%. In 2003, the lease agreement was renewed under the same terms and condition. Any termination of lease is subject to six months advance notice. On November 30, 2004, the EMS terminated its lease agreement for Plants 3 and 4 at no penalty to the Parent Company. On January 1, 2006, the EMS entered into a new lease agreement with VRC for the re-opening of Plant 3. The new lease is for a period of five years commencing on January 1, 2006 with annual escalation rate of 10.0%. On August 25, 2000, EMS entered into an agreement with IPI for the lease of a three-story factory building with a total floor area of 14,528 square meters located at Ring Road Street, Light Industry & Science Park of the Philippines, Calamba, Laguna for use as Plant 7 starting January 1, 2001 and shall continue for the duration of the Parent Company’s entire operations. Among others, the lease agreement provides that in the event of an early termination of the contract manufacturing agreement with a major customer and when the EMS decides to vacate the leased property, the leasehold improvements shall accrue to the benefit of IPI. However, in 2004, IPI agreed that in case of termination of its contract of lease prior to its expiration, EMS will retain title to the leasehold improvements. In 2005, the EMS vacated the leased property and sold the leasehold improvements to IPI since the existing lessee desired to rent the factory building and leasehold improvements with a single party. The gain on sale of leasehold improvements amounted to US$33,852 in 2005 and is reported under gain on sale of property and equipment in the statement of income of the Group.

On April 1, 2005, EMS entered into an asset purchase agreement with IEL, to transfer certain manufacturing equipment to establish manufacturing operations in the People’s Republic of China.

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On June 8, 2005, EMS entered into a lease agreement with IPI for the lease of a factory building with a floor area of 6,305 square meters located at Lot B2-2 to B2-3 Carmelray Industrial Park II, Calamba, Laguna for use as Plant 2. The contract is for a period of 10 years commencing on June 8, 2005 with a monthly rental rate of US$5.00 per square meter based on the floor area with an annual escalation rate of 3.0%.

On June 28, 2005, the EMS entered into a purchase agreement with Iomni, an associate of Ionics, Inc., whereas Iomni agrees to sell products to EMS on the terms and conditions set out in this agreement. The prices quoted to or paid by EMS shall not exceed current prices charged by Iomni to its other customers for the same or similar products, the excess prices shall be refunded to EMS. In case of end-of-life (EOL), EMS shall inform Iomni about two months before the actual EOL date in order for Iomni to immediately adjust ordering of raw materials.

The compensation of the key management personnel of the Group follows:

2006 2005 2004 Short-term employee benefits US$794 US$584 US$527 Executive officers’ compensation 695 556 502 Directors’ remuneration 411 221 218 Post-employment benefits 49 46 37 US$1,949 US$1,407 US$1,284

20. Leases The Group leases their office spaces, factory premises and warehouses for periods ranging from

one to five years, renewable under certain terms and conditions stipulated in the operating lease agreements. At the end of the terms of certain leases, all lease improvements (Note 11) shall be surrendered and become the property of the lessor. All leases include an escalation clause ranging from 3.0% to 10.0% on an annual basis. Total rent expense on these leases amounted to US$0.24 million, US$0.30 million and US$0.33 million in 2006, 2005 and 2004, respectively.

IEL leases its plant facility in Dongguan, China. The lease is for a period of five years

commencing on January 1, 2005 with fixed monthly payments and no escalation.

The Group also leases its plant facilities from related parties as discussed in Note 19. As of December 31, 2006 and 2005, the future minimum rental payments on non cancellable

leases are as follow:

2006 2005 Within one year US$345 US$194 After one year but not more than five years 991 486 US$1,336 US$680

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In 2004, IPI entered into a 10-year non-cancellable lease with a third party for the rent of its land

and building. The lease agreement also provides for the payment of three-month advance rental and three-month security deposit which corresponds to the current rate for the month.

In 2003, IPI leased its two-storey building with a total floor area of 4,639 square meters to a

third party. The lease begins on December 18, 2003 and shall continue for three years until December 17, 2006. Monthly rental shall be US$16,795. In 2004, the Company agreed to a reduction of monthly rental from US$16,795 to US$16,285 from April 1 to September 30, 2004. The revised rental rates will be valid only for a six-month period.

In 2006, the Company has completed the construction of a warehouse building with a total floor area of 3,140 square meters and subsequently leased out to a third party. The term of the lease agreement is 5 years which commence on April 18, 2006 and will terminate on April 18, 2011. Monthly rental fee for the warehouse is US$4.0 per square meter, with an annual escalation rate of 5%. The lease agreement also provides for three-month security deposit which is based on the current month’s rental rate.

Future minimum lease receivables under non-cancellable operating leases as of December 31, 2006 and 2005 follow:

2006 2005 Within one year US$1,705 US$1,687 After one year but not more than five years 6,593 8,245 After more than five years 6,061 5,171 US$14,359 US$15,103

21. Registrations with the Philippine Economic Zone Authority (PEZA)

EMS’s registrations with PEZA are as follows:

Product Line Date of Registration Type of Registration Income Tax Holiday (ITH)

1. Design and Development July 28, 2003 New project Four-year ITH starting July 2003

2. Electronic Car Dashboard Assembly June 12, 2003 New project Four-year ITH starting June 2003

3. Power Over LAN Assembly September 30, 2003 New project Three-year ITH starting October 2003

4. Wireless Broadband Access Unit May 11, 2004 New project Four-year ITH starting May 2004

5. OptiSwitch-F Sub-Assembly May 11, 2004 New project Four-year ITH starting May 2004

6. Global Positioning System Module October 27, 2004 New project Four-year ITH starting October 2004

7. Power Controller of Beard Trimmer with Saft NiCD and Sanyo NiMH Re-chargeable Battery

December 09, 2004 New project Four-year ITH starting December 2004

(Forward)

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Product Line Date of Registration Type of Registration Income Tax Holiday (ITH)

8. Giga Vu Pro Multimedia Device February 04, 2005 New project Four-year ITH starting February 2005

9. RF Tuners and Amplifiers May 23, 2005 New project Four-year ITH starting June 2005

10. Sub Deck Assembly June 06, 2005 New project Four-year ITH starting June 2005

11. AV Engine September 13, 2005 New project Four-year ITH starting August 2005

12. Radio Remote Control September 29, 2005 New project Four-year ITH starting October 2005

13. ROHS Flex Cable Assembly October 13, 2005 New project Four-year ITH starting October 2005

14. Engine Starter October 26, 2005 New project Four-year ITH starting September 2005

15. Spoke Sensor November 28, 2005 New project Four-year ITH starting November 2005

16. System in Package Solution November 28, 2005 New project Four-year ITH starting November 2005

17. M-System Disk on Key/ Thumb Drive Project

November 28, 2005 New project Four-year ITH starting January 2006

18. Optics Telecommunication November 28, 2005 New project Four-year ITH starting January 2006

19. Electronic Reader/ Electronic Book December 22, 2005 New project Four-year ITH starting January 2006

20. Lowcost /SkyEdge Satellite VSAT Products

March 28, 2006 New project Four-year ITH starting January 2006

21. Digital Board (Expansion project of AV Engine)

May 11, 2006 New project Four-year ITH starting August 2005

22. Hi-Focus Asymmetrical Digital Subscriber Line Broadband Access System

September 21, 2000 New project Four-year ITH starting October 2000

The above registrations also entitle EMS to other incentives which include, among others, the

duty-free importation of raw materials and capital equipment. EMS is negotiating with PEZA for additional bonus years for product lines with expired ITH.

22. Income Taxes Provision for (benefit from) income tax consists of:

Consolidated Parent Company 2006 2005 2004 2006 2005 2004 Current US$299 US$83 US$52 US$157 US$10 US$8 Deferred 342 (128) (4) 319 (123) – US$641 (US$45) US$48 US$476 (US$113) US$8

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Republic Act (RA) No. 9337 was enacted into law amending various provisions in the existing

1997 National Internal Revenue Code. On October 18, 2005, the Supreme Court has rendered its final decision declaring the validity of the RA. Among the reforms introduced by the said RA, which became effective on November 1, 2005, are as follows:

• Increase in the corporate income tax rate from 32% to 35% with a reduction thereof to 30%

beginning January 1, 2009; • Grant authority to the Philippine President to increase VAT rate from 10% to 12% effective

February 1, 2006; • Revised invoicing and reporting requirements for VAT; • Expanded scope of transactions subject to VAT; and • Provide thresholds and limitations on the amounts of VAT credits that can be claimed. Components of the Group’s and the Parent Company’s net deferred tax assets and liabilities follow:

Consolidated Parent Company 2006 2005 2006 2005 Deferred tax assets on: Excess of MCIT over RCIT US$– US$25 US$– US$25 Advance rental 20 17 – – Unrealized foreign exchange loss - net – 8 – 9 Provision for impairment losses 89 89 89 89 NOLCO – 711 – 326 109 850 89 449 Deferred tax liabilities on: Straight-line recognition of rental income (US$24) (US$7) US$– US$– Unrealized foreign exchange gain - net (38) – (38) – Exchange differences on nonmonetary assets (257) (711) (247) (326) (US$210) US$132 (US$196) US$123

The carryforward benefit of the Parent Company’s MCIT can be claimed against normal tax as follows:

Year of Inception Amount Used Balance Expiry Year 2003 US$5,932 US$5,932 US$– 2006 2004 8,514 8,514 – 2007 2005 10,090 10,090 – 2008 US$24,536 US$24,536 US$–

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The components of the temporary differences where deferred tax assets were not recognized follows:

Subsidiaries Parent Company 2006 2005 2006 2005 NOLCO US$5,788 US$5,166 US$– US$9,582 Unfunded retirement expense 3,657 928 – – Allowance for inventory writedown 924 1,065 – – Unamortized funded past service costs 167 123 – – Allowance for impairment losses 269 118 13 13 US$10,805 US$7,400 US$13 US$9,595

The Group did not recognize certain deferred tax assets since management believes that it is reasonably probable that sufficient taxable profit will not be available against which the deductible temporary differences and NOLCO can be utilized.

The NOLCO can be carried forward as a deduction against taxable income as follows:

Year of Inception Amount Used/Expired Balance Expiry Year Parent Company 2003 US$10,293 US$10,293 US$– 2006 EMS 2006 401 – 401 2009 2005 1,682 – 1,682 2008 2004 2,397 – 2,397 2007 SI 2006 221 – 221 2009 2005 222 – 222 2008 2004 865 – 865 2007 US$16,081 US$10,293 US$5,788

Reconciliation of the statutory income tax rate to the effective income tax rate follows:

Consolidated Parent Company 2006 2005 2004 2006 2005 2004 Statutory income tax rate 35.00% 32.50% 32.00% 35.00% 32.50% 32.00% Tax effect of: ITH (25.14) 14.00 (14.17) – – – Timing differences of subsidiaries and registered activities under ITH (19.41) (8.72) (4.36) – – 0.76 Others 37.05 (38.29) (14.10) 35.52 (32.70) (32.97) Effective income tax rate 27.50% (0.51%) (0.63%) 70.52% (0.20%) (0.21%)

Under RA No. 7916 on Special Zones and PEZA, a PEZA-registered enterprise is exempt from national and local taxes. In lieu of the said national and local taxes, 5% of the gross income earned by all businesses and enterprises within the ECOZONE shall be remitted to the local and national government.

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23. Earnings (Loss) Per Share Earnings (loss) per share amounts attributed to ordinary equity holders of the parent company

from continuing operations were computed as follows:

2006

2005 (As Restated -

Note 2)

2004 (As Restated -

Note 2) a. Net income (loss) US$2,873 (US$6,522) (US$6,532) b. Weighted average number of outstanding common shares 428,288 428,288 428,288 c. Basic earnings (loss) per share (a/b) US$0.007 (US$0.015) (US$0.015)

As of December 31, 2006, 2005 and 2004, there were no stocks that have dilutive effect on the

basic earnings per share of the Group.

The following reflects the income (loss) and share data used in the basic earnings (loss) per share computations:

Consolidated 2006 2005 2004 Income (loss) attributable to ordinary equity holders of the parent company from continuing operations US$3,047 (US$6,426) (US$5,603) Loss attributable to ordinary equity holders of the parent from a discontinued operation (Note 26) (174) (96) (929) Net income (loss) attributable to ordinary equity holders of the parent company US$2,873 (US$6,522) (US$6,532)

2006 2005 2004 Weighted average number of outstanding

common shares 429,688 429,688 429,688 Less treasury shares 1,400 1,400 1,400 428,288 428,288 428,288 Basic/diluted earnings loss per share US$0.007 (US$0.015) (US$0.013)

There have been no other transactions involving ordinary shares between the reporting date and

the date of completion of these financial statements. 24. Pension Obligations EMS provides defined benefit pension plans for all employees. Provisions for pension obligations

are established for benefits payable in the form of pensions. Benefits are dependent on years of service and the respective employee’s final compensation.

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The net pension obligations recognized in the balance sheets follow:

2006 2005 Present value of defined benefit obligations US$3,669 US$969 Fair value of plan assets (12) (41) Net pension obligations US$3,657 US$928

There are no reimbursement rights recognized as a separate asset as of December 31, 2006 and

2005.

Pension expense (included in various accounts in the statement of income) is comprised of the following:

2006

2005 (As Restated -

Note 2)

2004 (As Restated -

Note 2) Current service cost US$112 US$96 US$231 Interest expense on obligations 110 114 170 Expected return on plan assets (4) (1) (5) Curtailment gain – – (426) Total pension expense (income) US$218 US$209 (US$30) Actual return on plan assets US$7 US$3 US$3

The movements in the pension obligations recognized in the balance sheets follow:

2006 2005 Net pension obligations at beginning of year US$928 US$805 Net pension expense 218 209 Amount recognized in SORIE 2,572 (29) Contributions (61) (57) Net pension obligations at end of year US$3,657 US$928

Changes in the present value of the defined benefit obligation are as follows:

2006 2005 Balance at January 1 US$969 US$812 Current service cost 112 96 Interest expense on obligations 110 114 Actuarial losses (gains) 2,575 (26) Benefits paid (97) (27) Balance at December 31 US$3,669 US$969

The actuarial gains and losses in the present value of the defined benefit obligations include the

result of foreign currency changes amounting to US$0.07 million in 2006 and US$0.05 million in 2005.

- 85 -

Changes in the fair value of plan assets are as follows:

2006 2005 Balance at January 1 US$41 US$8 Actual return on plan assets 7 3 Actual contributions 61 57 Benefits paid (97) (27) Balance at December 31 US$12 US$41

The Group expects to contribute US$0.25 million to its defined benefit pension plan in 2007.

The major categories of plan assets as a percentage of the fair value of the total plan assets are as

follows:

2006 2005 Government securities 50.90% 91.85% Equity securities 39.39 5.71 Others 9.71 2.44

The overall expected rate of return on assets is determined based on the market prices prevailing on that date, applicable to the period over which the obligation is to be settled.

Principal actuarial assumptions used in determine pension obligations as of January 1, 2006 and

2005 follow:

2006 2005 Retirement age 65 65 Average remaining working life 12 13 Discount rate 11% 14% Expected return on plan assets 9% 9% Salary increases 8% 8%

As of December 31, 2006 and 2005, the discount rate used in determining the benefit obligation is

7% and 11%, respectively.

Amounts for the current and the previous periods are as follows:

2006 2005 2004 Defined benefit obligation US$3,669 US$969 812 Plan assets 12 41 7 Deficit US$3,657 US$928 US$805

Experience adjustments on plan obligations US$753 (US$368) (US$511) Experience adjustments on plan assets 3 2 2

- 86 -

25. Segment Information

A segment is a distinguishable component of the Group that is engaged in providing product or services (business segment) which is subject to risk and rewards that are different from other segments.

Financial information on business segments and analysis of the Group’s segments by products line

are as follows:

2006

Computer

Peripherals Telecom-

munications Automotive Consumer

Electronics

Others Total (Amounts in US$) Sales 44,468 47,311 20,708 14,851 – 127,338 Income (loss) from operations (1,522) (106) (1,592) (1,390) 151 (4,459) Gain on sale of available- for-sale investment – – – – 5,209 5,209 Rent – – – – 2,046 2,046 Interest - net (280) (162) (81) (85) 444 (164) Foreign exchange gain (loss) - net (146) 112 (101) 44 153 62 Gain on sale of property and equipment 7 10 2 2 – 21 Miscellaneous - net (33) (46) (12) (26) 1 (116) Equity in net losses – – – – (275) (275) Income tax – (50) – – (591) (641) Minority interest – – – – 1,364 1,364 Discontinued operations – – – – (174) (174) Net income (loss) (1,974) (242) (1,784) (1,455) 8,328 2,873 Identifiable assets 25,941 11,117 10,097 10,447 14,270 71,872 Unallocated assets – – – – – 9,722 Total assets 25,941 11,117 10,097 10,447 14,270 81,594 Identifiable liabilities 3,972 814 125 198 – 5,109 Unallocated liabilities – – – – – 26,401 Total liabilities 3,972 814 125 198 – 31,510 Capital expenditures 3,702 2,322 598 2,007 381 9,010 Depreciation and amortization (Notes 10 and 11) 1,298 418 244 386 525 2,871 Provision for inventory obsolescence (Note 16) 668 54 98 287 – 1,107 Provision for impairment losses (Note 17) 219 7 – 52 – 278

- 87 -

2005

Computer



Electronics

Others Total (Amounts in US$) Sales 14,484 32,634 12,555 2,903 – 62,576

Income (loss) from operations (4,783) (1,017) (2,834) (3,081) 207 (11,508) Rent – – – – 1,355 1,355 Interest - net 107 96 83 63 88 437 Foreign exchange gain (loss) - net (69) (17) (77) (8) 119 (52) Gain on sale of property and equipment 82 128 46 72 – 328 Miscellaneous - net 49 (22) (7) (5) (54) (39) Equity in net earnings – – – – 342 342 Income tax – – – – 45 45 Minority interest – – – – 2,666 2,666 Discontinued operations – – – – (96) (96) Net income (loss) (4,614) (832) (2,789) (2,959) 4,672 (6,522)

Identifiable assets 12,455 5,764 6,471 6,963 – 31,653 Unallocated assets – – – – – 35,771 Total assets 12,455 5,764 6,471 6,963 – 67,424

Identifiable liabilities 1,582 294 393 153 – 2,422 Unallocated liabilities – – – – – 8,287 Total liabilities 1,582 294 393 153 – 10,709

Capital expenditures 1,001 245 923 2,196 3,332 7,697

Depreciation and amortization (Notes 10 and 11) 3,199 818 1,242 2,007 376 7,642

Provision for inventory obsolescence (Note 16) 978 – 465 46 – 1,489

Provision for impairment losses (Note 17) 3 2 4 3 262 274

2004

Computer



Electronics

Others Total (Amounts in US$) Sales 16,882 39,439 19,330 1,422 – 77,073

Income (loss) from operations (5,366) 177 (3,340) (474) 752 (8,251) Interest - net 150 54 97 38 53 392 Foreign exchange gain (loss) - net (46) 11 61 2 (47) (19) Gain on sale of property and equipment 52 – – – – 52 Rent – – – – 306 306 Miscellaneous - net (42) (10) 30 4 (38) (56) Equity in losses – – – – (129) (129) Income tax – – – – (48) (48) Minority interests – – – – 2,150 2,150 Discontinued operations – – – – (929) (929) Net income (loss) (5,252) 232 (3,152) (430) 2,070 (6,532)

(Forward)

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2004

Computer



Electronics

Others Total (Amounts in US$) Identifiable assets 13,357 10,948 3,222 2,266 – 29,793 Unallocated assets – – – – – 39,891 Total assets 13,357 10,948 3,222 2,266 – 69,684

Identifiable liabilities 643 1,634 – 66 – 2,343 Unallocated liabilities – – – – – 7,259 Total liabilities 643 1,634 – 66 – 9,602

Capital expenditures 285 125 – 19 – 429

Depreciation and amortization 5,700 891 1,576 256 209 8,632

Provision for inventory obsolescence (Note 16) – – 229 – – 229

The Group’s geographical markets refer only to the initial destination of the products. The Group’s products are intermediate products which are shipped to the customers’ plants for incorporation or further assembly into the final finished products. All assets of the Group, except for equity investments on ICL and IEL, are located in the Philippines. The Group’s sales per geographical market are as follows:

Asia US$74,489 US$45,941 US$41,668Europe 40,984 15,331 20,411 North America 11,865 1,304 14,994

The Group’s assets per geographical market are as follows:

2006 2005 2004 Asia US$72,374 US$64,657 US$37,673 Europe 6,557 326 18,454 North America 2,663 2,441 13,557 US$81,594 US$67,424 US$69,684

The Group’s geographical segments are based on the location of the Group’s assets. Sales to external customers disclosed in the geographical segments are based on the geographical location of its customers.

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26. Discontinued Operations SI is engaged in the production of multi-layered printed circuits boards. SI started commercial

operations in June 1998 and its accumulated losses as of December 31, 2002 amounted to US$5.96 million. On October 18, 2002, SI entered into a Business Management and Consultation Agreement with Taiwan PCB Techvest Co., Ltd. (TPT) to manage the business and improve its profitability. However, the agreement did not push through. In addition, another investor declined to acquire the Company but opted to purchase its equipment. In view of the foregoing, the management committee studying the viability of SI recommended for the discontinuance of its operations effective August 15, 2003. The management of SI intends to convert the nature of the business of SI from a manufacturing concern to leasing.

The results of discontinued operations for the period until disposal have been included as Loss

from discontinued operations in the statement of income of the Group and of the Parent Company.

2006 2005 2004 Sales US$– US$– US$– Costs and expenses: Operating expenses 152 143 735 Other expenses 20 41 405 172 184 1,140 Loss before income tax 172 184 1,140 Provision for income tax 2 – 6 Loss before minority interest 174 184 1,146 Gain on sale of PPE – 88 217 US$174 US$96 US$929

Operating expenses include provision for impairment loss amounting to US$0.03 million, US$0.02 million and US$0.32 million in 2006, 2005 and 2004, respectively.

The Group did not recognize certain deferred tax assets pertaining to discontinued operations since

management believes that it is probable that sufficient taxable profit will not be available against which the deductible temporary differences, MCIT and NOLCO can be realized. The components of the temporary differences where deferred tax assets were not recognized follow:

2006 2005 2004 Accumulated impairment losses US$1,631 US$1,479 US$1,385 NOLCO 1,308 1,087 865 Allowance for impairment losses 53 49 48 US$2,992 US$2,615 US$2,298

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The Group’s NOLCO pertaining to discontinued operations of US$0.02 million, US$0.02 million

and US$0.09 million will expire in 2009, 2008 and 2007, respectively. As of December 31, 2006, the Group has accumulated MCIT pertaining to discontinued operations

amounting to US$0.01 million which will expire in 2007 through 2009. Deferred tax assets were not recognized on the excess MCIT since management believes that it is possible that taxable profit will not be available against which benefit from MCIT can be deducted. As of December 31, 2006 and 2005, the assets and liabilities pertaining to discontinued operations of SI follow:

2006 2005 Current assets Cash US$2 US$681 Short term investments – 1,083 Receivables - net 94 17 96 1,781 Noncurrent assets Investment properties - net 1,706 1,807 Other assets 47 47 1,753 1,854 US$1,849 US$3,635 Current liabilities Accounts payable and accrued expenses US$74 US$76

Property, plant and equipment is presented net of accumulated depreciation, amortization and

impairment. Impairment losses of US$0.03 million, US$0.02 million and US$0.32 million in 2006, 2005 and 2004 represent the write-down of building and improvements. The recoverable amount was based on the net selling price determined by an independent appraiser.

27. Contingencies Several creditors filed a petition for involuntary bankruptcy against ICI-USA before the U.S.

Bankruptcy Court. Management does not believe that the outcome of this matter will affect the results of operations of the Parent Company as its investment in ICI-USA has been fully provided for.

28. Notes to Cash Flow Statements

The principal noncash activities of the Group in 2006 and 2005 are as follows: a. EMS has advances to IPI for sale of leasehold improvements amounting to US$1.69 million in

2005 with a remaining balance of US$0.42 million and US$1.69 million in 2006 and 2005, respectively. The leasehold improvement that was subject to intercompany sale amounted to US$2.10 million.

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b. In addition, investment in IEL includes a non-cash investment by the Parent Company

representing the book value of property and equipment transferred to IEL amounting to US$2.11 million in 2005 (Note 19).

c. In 2006, IEL transferred back to the Parent Company equipment with a book value of

US$0.53 million.

d. Also in 2006, IPI reclassified its construction-in-progress from property, plant and equipment to investment property in the amount of US$0.17 million.

- 92 -

- 93 -

SCHEDULE A – MARKETABLE SECURITIES

(CURRENT MARKETABLE EQUITY SECURITIES AND OTHER SHORT-TERM CASH INVESTMENTS)

AS OF DECEMBER 31, 2006

Name of Issuing Entity and Description of Each Issue

Number of Shares of Principal

Amount of Bonds and

Notes

Amount Shown in the Balance Sheet

Value Based on Market

Quotation at Balance

Sheet Date

Income Received and

Accrued

Time Deposits Money Market Placements

Union Bank Corporation Security Bank and Trust Company Banco de Oro Chinatrust Bank Corporation Hongkong Shanghai Bank Corporation Rizal Commercial Bank Corporation

N/A

N/A N/A N/A N/A N/A N/A

-

$- - - -

24,063 -

__________ $24,063

=========

N/A

N/A N/A N/A N/A N/A N/A

-

$36,487 29,906 10,371 6,870

371 35

________ 84,040

=======

- 94 -

SCHEDULE B – AMOUNTS RECEIVABLE FROM DIRECTORS, OFF ICERS, EMPLOYEES, RELATED PARTIES AND PRINCIPAL STOCKHOLDERS


Name of Debtor Designa-tion

Balance at beginning of period Dec.

31, 2005

Additions/ Adjustments

Amounts collected

Amounts written

off

Current Not Current

Balance at end of

period Dec. 31, 2006

Tuana, John Rey Andrade, Ronan Dare, Richard Lopez, Lucy Sarmiento, Senen Chavez, Jay Vicente, Rosalina Eugenio, Marvin Lopez, Ernie Bibal, Jonathan Jardiniano, Cherry Arambulo, Arnulfo Other Employees

Manager Manager Manager Manager Manager Manager Manager Manager Manager Manager Manager Manager Rank and

File

$1,472

85 207 226 403 949

1,084 3,075 3,075 3,614 3,562

16,286 $34,038

=======

$120

- - - - - - - -

296 292

4,078

278,531 $283,317 ======

$- 85

207 226 403 867 840

3,075 501 705 710 396

16,286

$24,301 =======

$- - - - - - - - - -

______ -

=====

$- 85

207 226 403 867 840

3,075 501 705 710 396

16,286

$24,301 ======

- - - - - - - - - -

_____ -

=====

$1,592

- - - -

82 244

- 2,574 3,205 3,144 3,682

278,531

$293,054 =======

- 95 -

SCHEDULE C-1 – NON-CURRENT MARKETABLE EQUITY SECURI TIES OTHER LONG-TERM INVESTMENTS IN STOCK AND OTHER INVE STMENTS


BEGINNING BALANCE December 31, 2005

ADDITIONS

Name of Issuing Entity and Description of Investments

Number of Shares or Principal

Amount of Bonds and Notes

Amount in US$

Equity in Earnings/

(Losses) of Investees for the Period

Others

Ending Balance ICCP Ventures, Inc. ICCP Ventures Partners, Inc. Tech Ventures Partners Ltd. Tech Venture I Ltd. I-OMNI Precision, Inc.

605,758 shares 30,000 shares

30 shares 812,115 shares

59,999,995 shares

$740,804 60,785

207,225 166,802 588,817

($53,096) 4,081

100,012 (122,042) (203,131)

58,391 5,285

97,311 39,015

$746,099 70,151

307,237 142,071 424,701

Sub-total Allowance for Probable Losses

$1,764,433 (838,496)

($274,176)

200,002 -

$1,690,259 (838,496)

Grand Total

$925,937 ==========

($274,176) =========

200,002 =========

$851,763 ==========

Continuation:

DEDUCTIONS

ENDING BALANCE December 31, 2006


BALANCE FORWARDE

D

Distribution of Earnings by Investee

Reclass/ Others



Amount in US$

Dividends Received/ Accrued

from Investments

Not Accounted for by the

Equity Method

ICCP Ventures, Inc. ICCP Ventures Partners, Inc. Tech Ventures Partners Ltd. Tech Venture I Ltd. I-OMNI Precision, Inc.

$746,099 70,151

307,237 142,071 424,701

- -

(90,000) (59,464)

-

- - - -

605,758 shares 30,000 shares

30 shares 812,115 shares

59,999,995 shares

$746,099 70,151

217,237 82,607

424,701 Sub-total Allowance for Probable Losses

$1,690,259 (838,496)

($149,464) -

- -

$1,540,795 (838,496)

Grand Total

$851,763 ==========

($149,464) =========

- =========

$702,299 =========

- - - - -

- 96 -

SCHEDULE C-2 – NON-CURRENT MARKETABLE EQUITY SECURI TIES INVESTMENTS AVAILABLE FOR SALE


BEGINNING BALANCE December 31, 2005

ADDITIONS




Amount in US$

Equity in Earnings/

(Losses) of Investees for the Period

Reclass/ Additional

Ending Balance CSI Wireless, Inc. Stream Machine SiRF Technology, Inc. Gemstar International Group Ltd. Tech Venture II Tech Venture III C2 Microsystems Beacon Realty Corporation ICCP Venture II, Inc. Fil Estate Realty Corporation Export and Industry Bank Sta. Elena Golf Course Others

1,015,871 shares 147,020 shares 231,250 shares 11,880 shares 190,000 shares

- -

50,000,000 shares P=4,000,000

1 16,000

1 P=81,000

$1,182,052 1,290,157 6,891,250

31,007 314,915

1,000,000 200,000 899,507 18,835 5,648

196 20,730 1,473

473,817 (406,585)

- 16,632

- 500,000 200,001

673 (43)

9,854 (552)

$1,655,869 883,572

6,891,250 47,639

314,915 1,500,000

400,001 899,507 18,835 6,321

153 30,584

921 Sub-total Allowance for Probable Losses

$11,855,770 (18,835)

793,797 -

-

$12,649,567 (18,835)

Grand Total

$11,836,935 ==========

793,797 =========

$- =========

$12,630,732 ==========

- 97 -

SCHEDULE C-2 – NON-CURRENT MARKETABLE EQUITY SECURI TIES INVESTMENTS AVAILABLE FOR SALE


Continuation:

DEDUCTIONS

ENDING BALANCE December 31, 2006


BALANCE FORWARDE

D

Distribution of Earnings by Investee

Adjustment

Others



Amount in US$

Dividends Received/Accrued

from Investmen

ts Not Accounted for by

the Equity Method

CSI Wireless, Inc. Stream Machine SiRF Technology, Inc. Gemstar International Group Ltd. Tech Venture II Tech Venture III C2 Microsystems Beacon Realty Corporation ICCP Venture II, Inc. Fil Estate Realty Corporation Export and Industry Bank Sta. Elena Golf Course Others

$1,655,869 883,572

6,891,250 47,639

314,915 1,500,000

400,001 899,507 18,835 6,321

153 30,584

921

- - - - - - - - - - - -

- -

(6,891,250) -

(206,260) - - - - - - - -

1,015,871 shares 147,020 shares 231,250 shares 11,880 shares 190,000 shares

- -

50,000,000 shares 40,000 shares

1 16,000

1 P=81,000

$1,655,869 883,572

- 47,639

108,655 1,500,000

400,001 899,507 18,835 6,321

153 30,584

921 Sub-total Allowance for Probable Losses

$12,649,567 (18,835)

- -

($7,097,510) -

$5,552,057 (18,835)

Grand Total

$12,630,732 ==========

$- =========

($7,097,510) =========

$5,533,222 =========

=

SCHEDULE L – CAPITAL STOCK AS OF DECEMBER 31, 2006

Number of Shares Held By Title of Issue Number of Shares

Authorized

Number of Shares Issued

and Outstanding

Number of Shares Reserved for

Options, Warrants, Conversions, and

Other Rights

Affiliates Directors, Officers and Employees

Others

Common Stock

1,000,000,000

428,287,500

-

167,576,550

91,661,065

169,049,885

NOTE: Net of 1.4 million Treasury shares with cost of $240,008

- 98 -

INDEX TO EXHIBITS

FORM 17-A No. Page (3) Plan of Acquisition, Reorganization, Arrangement,

Liquidation or Succession * (5) Instruments Defining the Rights of Security Holders,

Including Indentures * (8) Voting Trust Agreement * (10) Annual Report to Security Holders, Form 11-Q or Quarterly Report to

Security Holders * (13) Letter re: Change in Certifying Accountant * (15) Letter re: Change in Accounting Principles * (16) Report Furnished to Security Holders * (18) Subsidiaries of the Registrant 96 (19) Published Report Regarding Matters Submitted to Vote of Security Holders * (20) Consent of Experts and Independent Counsel * (21) Power of Attorney * (29) Additional Exhibits

Summary of General and Administrative Expenses 96

Aging of Accounts Receivable 97

Earnings per Share 97

Form 17-L

_____ * These Exhibits are either not applicable to the Company or require no answer.

- 99 -

SUBSIDIARIES OF THE REGISTRANT


NAME JURISDICTION OWNERSHIP Ionics Properties, Inc. Ionics Circuits, Limited Synertronix, Inc. Ionics EMS, Inc.

Philippines

Cayman Islands

Philippines

Philippines

100%

100%

100%

75%

SCHEDULE OF GENERAL AND ADMINISTRATIVE EXPENSES AS OF DECEMBER 31, 2006

(Amounts in Thousands)

PARTICULAR AMOUNT Salaries and Benefits Depreciation and Amortization Occupancy cost and utilities Provision for impairment losses Other expenses

$1,298

699 636 278 808

TOTAL $3,719

- 100 -

AGING OF ACCOUNTS RECEIVABLE AS OF DECEMBER 31, 2006


TYPE OF ACCOUNTS

RECEIVABLE

TOTAL

CURRENT

1 TO 30 DAYS

31 TO 60

DAYS

61 TO 90

DAYS

OVER 91

DAYS A. TRADE RECEIVABLES Less: Allowance for doubtful accounts

$17,966

268

$12,535

-

$4,231

-

$634

-

$174

-

$392

268

NET TRADE RECEIVABLES

17,698

12,535

4,231

634

174

124

B. NON-TRADE RECEIVABLES Less: Allowance for doubtful accounts

5,555

77

1,937

-

461

-

1,225

-

1,855

-

77

77

NET NON-TRADE RECEIVABLES

5,478

1,937

461

1,225

1,855

-

NET RECEIVABLES

$23,176

$14,472

$4,692

$1,859

$2,029

$124

SCHEDULE OF EARNINGS PER SHARE AS OF DECEMBER 31, 2006


Y2006 Amount

Per Share

Y2005 Amount

Per Share

Y2004 Amount

Per Share

Income (Loss) from continuing operations Loss from discontinuing operations

$1,683

(174)

$0.004

-

($9,092)

(96)

($0.021)

-

($7,753)

(929)

($0.018)

(0.002) Income (Loss) before net earnings applicable to minority interest Net losses applicable to minority interest

1,509

1,364

0.004

0.003

(9,188)

2,666

(0.021)

0.006

(8,682)

2,150

(0.020)

0.005 Net Income (Loss) $2,873 $0.007 ($6,522) $0.015 ($6,532) ($0.015) Weighted average number of outstanding common shares

428,288

428,288

428,288

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IONICS, INC. and SUBSIDIARIES ANNUAL REPORT December 31, … 17-A 2006.pdf · 2011. 6. 13. ·...

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