Annual Report 2005/06 THE WORLD OF SOUND - Sonova

Annual Report 2005/06Annual Report 2005/06THE WORLD OF SOUND

HIGHLIGHTSSales increase by 31% to CHF 867 millionEBIT margin rises to 24% (prior year 19%)Income after taxes grows by 80% to CHF 172 millionPhonak sales growth significantly exceeds hearinginstrument market growthSavia establishes itself as the benchmark product in thehearing instrument industryMarket share gains in all major marketsIn 2006/07 several new, highly competitive hearingsystems have been launched: microPower, Verve, andIndigoThe Phonak Group expects to outgrow the hearinginstrument market once again in 2006/07

FIVE-YEAR KEY FIGURES(Consolidated)in CHF 1,000 unless otherwise specified 2005/06 2004/05 2003/04 2002/03 2001/02Saleschange compared to previous year (%)Gross profitchange compared to previous year (%)in % of salesResearch and development costsin % of salesSales and marketing costsin % of salesOperating profit before acquisition-related amortization (EBITA) 1)change compared to previous year (%)in % of salesOperating profit/(loss) (EBIT)change compared to previous year (%)in % of salesIncome/(loss) after taxeschange compared to previous year (%)in % of salesNumber of employees (average)change compared to previous year (%)Number of employees (end of period)change compared to previous year (%)Net cash/(net debt) 2)Net working capital 3)in % of salesCapital expenditure (tangible and intangible assets) 4)Capital employed 5)in % of salesTotal assetsEquityEquity financing ratio (%) 6)Free cash flow 7)in % of salesReturn on capital employed (%) 8)Return on equity (%) 9)Information per shareDiluted earnings per share (CHF)Dividend per share (CHF)866,68231.2577,20438.166.663,0397.3206,84623.9212,82869.124.6211,66268.324.4172,46579.919.93,16616.43,42817.2177,934125,86614.526,995449,09951.8931,260627,03367.3101,83411.752.632.02.5680.50 10) 660,3756.4417,81412.163.348,9327.4159,11724.1125,83021.619.1125,79732.519.095,85638.214.52,7197.82,9268.893,78579,49612.023,083355,91953.9743,360449,70460.583,78112.736.124.01.4340.30620,53817.9372,64230.260.158,2039.4129,45720.9103,515115.016.794,961354.215.369,359248.211.22,5235.32,68912.79,50158,3589.421,351340,83754.9683,684349,09051.1118,34919.126.421.61.0500.20526,362(6.6)286,159(4.4)54.448,8799.3120,94523.048,139(34.1)9.1(37,359)(162.5)(7.1)(46,792)(209.5)(8.9)2,3970.82,385(1.3)(87,262)86,63416.521,515377,72171.8606,861289,55147.728,6625.4(8.7)(14.4)(0.721)0.12563,63424.6299,45615.953.131,4535.6126,82822.573,013(26.8)13.059,770(37.3)10.642,746(35.3)7.62,37850.22,41613.9(121,790)78,70414.029,794483,64985.8742,246360,82148.618,4103.312.612.50.6560.12Share of sales 2005/06 – new productsProducts launched in the last 24 months comprise 69% of totalsales.31%24%45%● Launched in 2005/06● Launched in 2004/05● Launched before 2004/05Share of sales by main markets 2005/06Americas and Europe generated 91% of total sales.45%8% 1%46%● Americas● Europe● Asia/Pacific● OthersShare of sales by product groups 2005/06The first class hearing systems increased their share of totalsales due to excellent Savia sales.7%27%13%18%35%● First class hearing systems● Business class hearing systems● Economy class hearing systems● Wireless communication systems● MiscellaneousKey Data

TABLE OF CONTENTSChairman’s Foreword 2CEO’s Comments 3Financial Results 6Markets 9New Technologies and Products 12Operations and Staff 14Outlook 15Corporate Governance 18Sustainability 36Consolidated Financial Statements 45Financial Statements of Phonak Holding AG 91Addresses 1021

CHAIRMAN’S FOREWORDIn 2005/06, the Phonak Group achieved excellent resultsthat clearly exceeded our expectations. Both sales and profit roseto record highs. Our internal sales growth in local currenciesof 23.8% was several times higher than the hearing instrumentmarket growth. We achieved a disproportionately strong risein both our operating profit and net profit. Operating profit (EBIT)as a percentage of sales rose by more than five percentagepoints to 24.4%. In addition to the very favorable share price performance,Phonak shareholders benefit from a new recorddividend of CHF 0.50. This equals a growth rate of 67% after lastyear’s increase of 50% to CHF 0.30.I am especially pleased that we managed to achieve thisrecord result while still making massive investments in ourfuture. We increased our spending on research & developmentby 28.8%, and we expanded our global sales and marketingorganization. Our plan to use our own distribution companies todirectly serve the highly promising growth regions of LatinAmerica and Eastern Europe delivered initial success.Today, the Phonak Group has one of the most competitiveproduct portfolios in the hearing instrument industry. For thefirst time our customers are able to purchase a superior hearingsystem from Phonak in every price segment, as well as in everyconceivable shape and size. We have now completed our transformationfrom a niche supplier of high-end hearing devicesto a provider of comprehensive, innovative hearing solutions inall price segments. With the recently launched product linesVerve and microPower, Phonak has even carved out for itself twocompletely new, unique market segments.I have been particularly impressed by the speed and precisionwith which many new products have been developed andbrought to market. This demonstrates how important it is tohave optimized and expanded our organizational and managementstructures and also shows how the “people value” culturewe have adopted leads to the creation of intellectual capital.This in turn results in continuous progress and increasingly sophisticatedand more user-friendly hearing instruments.As we have evolved over the years from making analoghearing devices to more and more sophisticated hearing systems,we have consistently applied our long-term vision in our plansand strategies, whether in the area of new platforms like PALIO orin the increasingly important field of wireless communication.Our superior hearing systems and our clear commitment todriving innovation forward in the hearing instrument industryhave enabled us to significantly expand our client base. More andmore customers realize that by choosing Phonak they havemade the best choice of business partner. I would like to thankall who contributed to this success, in particular our highlymotivated employees all over the world.Our success to date shows that we are on the right trackand that our strategy is starting to produce results. Our tasknow is to consistently hold this course. As part of our ongoingimprovement in the area of Corporate Governance, the annualreport 2005/06 provides more detailed information of the Boardof Directors’ activities and compensation.I am convinced that the hearing instrument market hasenormous potential. The key factors for exploiting this potentialmore effectively are further improvements in hearing performance,increased customer satisfaction for end users, and a betterpublic image for hearing instruments.Phonak is extremely well positioned to further expand itsmarket position in 2006/07. It has the entrepreneurial flexibilityand financial means to play an active role in shaping the marketand to set new trends and standards in the hearing instrumentindustry. Therefore, I look to the future of the Phonak Groupwith great confidence.Andy RihsAndy RihsChairman of the Board of Directors2Chairman’s Foreword

CEO’S COMMENTSIn 2005/06, we made major progress towards our goal oftransforming the Phonak Group into the most successful companyin the hearing instrument industry. Once again, we managedto significantly expand our market share and set new standardswith our innovative hearing systems. Our excellent businessperformance is to a large extent due to the consistent executionof our strategy to promote product innovation and to expandour global distribution network. In addition, we have deliveredmuch stronger financial results, so that we are already closeto achieving the mid-term targets we set out in 2005.Starting from the record level of last year, we again increasedsales by another 31.2% to CHF 866.7 million. Internalgrowth – measured in local currencies and without takinginto account acquisitions – came to 23.8%. As a result of improvedproduct mix and operational efficiencies, our grossprofit margin climbed by 3.3 percentage points to reach 66.6%.In addition, the operating profit (EBIT) increased by 68.3%.The EBIT margin was increased to 24.4% compared to 19.0% inthe previous financial year, underlining the overproportionalprofit growth. Assisted by a positive financial result anda lower tax rate, earnings per share (on a diluted basis)climbed 79.1% to a record level of CHF 2.57.The importance of product innovation for our commercialsuccess was once again demonstrated by the overwhelmingmarket acceptance of our new Savia product line, which wascomplemented by the launch of microSavia in January 2006.This success had a positive impact on two other product launches:eXtra, the new digital economy product line, and Eleva in themid price segment. These two lines will generate further growthin the coming financial year. In 2006/07, three very promisinghearing instruments have been introduced into the market:Verve, microPower, and Indigo.During 2005/06, we continued to expand our existing salesorganizations and develop new markets. Our purchase of acontrolling interest in CAS Produtos Médicos Ltda., the Brazilianmarket leader in hearing instrument distribution, significantlyboosted our market presence in Latin America. In Eastern Europewe acquired our previously independent distribution partner inPoland. In 2006/07, the Phonak Group has further strengthenedits market position by acquiring Canada’s leading distributor ofhearing devices, Island Hearing Services.In the future, we expect further sales growth, increasedmarket share, improved financial strength, and attractivereturns on investments. The Phonak Group is in excellent shape:we have the strongest product portfolio of the hearing instrumentindustry and can rely on a full product pipeline. In addition,we will continue to work hard to further develop the Group inthe areas of human resources, organization and processes, therebybuilding a strong base for sustained growth. To accomplishthese objectives, we will focus on the continuous improvementof product functionality and increased customer benefits. Otherpriorities include further strengthening of our distributionchannels.The great success of the Phonak Group is mainly the resultof the dedication, commitment, and great team spirit of ouremployees. We have a unique corporate culture that has enabledus to smoothly complete the fast transformation process ofrecent years. Our clear, sustainable strategy is supported by highlyskilled and motivated staff and creates the foundation for avery promising future. I would like to thank each one of our employeesfor their hard work, commitment, and loyalty to thecompany. Without them, such excellent results would have beenimpossible.I also want to express my thanks to all our customers,suppliers, partners, and shareholders for their important contributionto the success of the Phonak Group.Dr. Valentin Chapero RuedaCEOCEO’s Comments3

Move with the melody

FINANCIAL RESULTSThe estimated global hearing instrument market growth in2005/06 was 5%–7%.Phonak sales increased by 31.2% to CHF 866.7 million.Sales growth in local currencies and excluding acquisitionswas 23.8%.The operating profit (EBIT) increased by 68.3% to CHF211.7 million, and the EBIT margin of 24.4% clearlysurpassed the comparable previous year’s figure of 19.0%.Profitability improved due to the favorable product mix,enhanced efficiency, cost savings in materials procurement,and the operating leverage in general and administrationexpenses.Earnings per share on a diluted basis reached CHF 2.57(previous year CHF 1.43), which represents an improvementof 79.1%. This strong increase was supported byan improved net financial income and a lower tax rate.Net cash increased by CHF 84.1 million to CHF 177.9 million(previous year CHF 93.8 million), in spite of the acquisitionof sales companies.Equity reached CHF 627.0 million and the equity financingratio has increased to 67.3% (previous year 60.5%), reflectinga further substantial strengthening of the Group’sfinancial position.Free cash flow rose 21.5% to CHF 101.8 million (previousyear CHF 83.8 million).Outlook: The Phonak Group expects to outgrow the marketonce again in 2006/07.Adjustments to prior year 2004/05 financial figuresThe adoption of the new IFRS 2 standard “Share-based payment”,resulted in a change in the accounting policy for shareand option plans to employees. Prior-year figures have beenadjusted accordingly in order to facilitate comparison. Inaddition, we improved the presentation of the ConsolidatedIncome Statement which led to a reclassification of salesrelatedcosts. For further details, we refer to Note 2 and Note32 to the Consolidated Financial Statements (page 50 and80 of this report).Consolidated Income StatementSalesMeasured in local currencies and excluding acquisitions,sales grew by 23.8%. The weakening of the Swiss Franc, especiallyagainst the US Dollar, led to a positive currency effect of3.4%. In reported currency (CHF), sales increased by 31.2% toCHF 866.7 million, which includes a contribution of 4.0%from acquisitions.Sales growth was driven mainly by the dynamic performanceof our new premium product line Savia, which was complementedin January 2006 by microSavia, a micro hearing systemfor open fitting. Other significant sales drivers included miniValeoin the mid price segment, eXtra in the digital economysegment, the Unitron Hearing brand, and our wireless communicationsystems.The first class hearing systems segment accounted for 35%of total sales (previous year 31%). With Savia, we have succeededin establishing an industry benchmark. We expect Savia tocontinue to perform strongly in 2006/07. Other growth driversin this segment will be the recently launched Verve productline, which is targeted at our most discerning customers, andIndigo, the latest flagship product from Unitron Hearing.Business class hearing systems accounted for 18% of totalsales (previous year 21%). Eleva, our newest product line in thissegment, had a very successful launch at the start of March2006, which meant it only made a positive contribution to salesduring the final month of the financial year 2005/06. The keybusiness class product lines of the Phonak brand – Valeo, mini-Valeo, and Supero – as well as Unitron’s Conversa.NT, performedaccording to expectations. In 2006/07, the most important salesdrivers will be Eleva and the recently launched microPower,the first micro hearing system for people with severe hearing loss.The economy class hearing systems segment accounted for27% of total sales, unchanged from last year’s figure. However,the various strategic measures undertaken to strengthen ourmarket position resulted in a sharp increase in sales in this segment.The main contributor to this success was eXtra, the new6Financial Results

digital entry-level product line, which began generating sales asof October 2005. Sales of eXtra’s predecessor MAXX and ofUnison remained buoyant, and also made a significant contributionto the strong sales performance.Wireless communication systems (FM systems) are importantadditions to the hearing instrument product lines of the PhonakGroup. Sales of these products rose significantly and accountedfor 7% of total sales, nearly unchanged from last year’s figure(8%).Gross profitThe measures taken to further increase margins were verysuccessful. Gross profit increased 38.1% to CHF 577.2 million or66.6% of sales, compared to CHF 417.8 million or 63.3% ofsales in the previous year. This improvement was mainly due toa favorable product mix, enhanced efficiency through higherproduction volumes, and cost savings in materials procurement.Higher global prices for raw materials and energy hadno significant impact on overall production costs, because ofour very low material and energy requirements.Since our production facility in China was still in theearly development stages during the first half of 2004/05, theresult in the first half of 2005/06 benefited from a baselineeffect of higher production volumes in China. This baselineeffect no longer applied in the second half of 2005/06.Operating profit (EBIT)The Phonak Group significantly increased its EBIT by68.3% to CHF 211.7 million or 24.4% of sales, compared withCHF 125.8 million or 19.0% of sales in the previous year.As planned, research and development (R&D) spending rosesubstantially during the financial year. However, R&D spendingas a percentage of sales came to 7.3%, roughly the same as lastyear (7.4%), due to strong sales growth. In 2005/06, our R&Dactivities concentrated mainly on the development of new productsand the further development of our modular hardwareand software platform PALIO. R&D spending for 2006/07 willrange between 7.0% and 7.5% of sales.Spending for sales and marketing increased by 30.0% toCHF 206.8 million or 23.9% of sales. The additional spending isrelated to current sales organizations as well as the developmentof new markets. In 2006/07, we will continue to pursue ourstrategy for expanding our distribution network. Sales and marketingcosts should rise in line with sales growth in the comingfinancial year, and will therefore be roughly on the same level as2005/06 in terms of percentage of sales.General and administration expenses increased to CHF93.4 million or 10.8% of sales (previous year CHF 85.8 million or13.0% of sales). The increase of 8.9% is attributable to theGroup’s growth and the further strengthening of the IT infrastructureand systems.Income after taxesFor the first time, interest earned on investments exceededthe interest payable on financial liabilities in 2005/06. This wasdue to the settlement in full of the outstanding acquisitionfinancing and a further reduction in mortgages, combined withthe effects of an increase in cash and cash equivalents and“financial assets at fair value through profit or loss”.Income taxes decreased to 20.1% (prior year 23.4%) as aresult of a change in the country mix of the taxable profit.Consolidated income after taxes therefore reached CHF172.5 million compared to CHF 95.9 million in the previous year,which represents an increase of 79.9%. On a diluted basis,earnings per share increased 79.1% over the previous year, toCHF 2.57.Financial Results7

Consolidated Balance SheetCapital employedCapital employed has increased by 26.2% to CHF 449.1million. This increase was mainly in working capital due tothe growth of our business activities. Capital employed also increaseddue to the expansion of our global distribution networkand the weakening of the Swiss Franc – especially againstthe US Dollar.The number of “days sales outstanding” remained stableover the previous year. But trade receivables were much higherthan in the previous year as a result of accelerating sales inthe fourth quarter.Inventories did not increase as strongly as sales, even thoughwe built up reserve stocks at the end of the reporting period inorder to avoid supply bottlenecks in the three new product linesVerve, microPower, and Indigo and to ensure a smooth marketlaunch.Capital expenditures in tangible and intangible assetsamounted to CHF 27.0 million and were predominantly relatedto production facilities and technical equipment.Taxes payable increased in line with the higher incomebefore taxes compared with the previous year.Trade payables, other short-term liabilities and provisionsvary over the year due to timing differences, but, taken as awhole, increased roughly in line with the higher business volume.Net CashNet cash increased by CHF 84.1 million to CHF 177.9 million(previous year CHF 93.8 million), in spite of acquisition of salescompanies. Cash and cash equivalents plus “financial assets atfair value through profit or loss” minus “financial liabilities atfair value through profit or loss” amounted to CHF 190.7 millionat the end of 2005/06. To reduce financial debt (CHF 12.7 millionversus CHF 90.4 million in the prior year), we used part of thefree cash flow for accelerated payments on the mortgages andthe full repayment of the acquisition financing raised in 2000/01.EquityThe equity financing ratio (total equity in % of total assets)has increased to 67.3% (prior year 60.5%), reflecting a furthersubstantial strengthening of the Group’s financial position.Cash FlowCash flow before changes in working capital increased toCHF 260.7 million (previous year CHF 159.3 million) given thehigher income before taxes, adding back the non-cash itemssuch as depreciation and amortization.Free cash flow, additionally taking into account the changesin working capital and the investing activities, rose 21.5% toCHF 101.8 million (previous year CHF 83.8 million), mainly as aresult of the increase in working capital due to the businessexpansion on the one hand and increased investing activities onthe other, largely consisting of capital expenditures in tangibleand intangible assets (CHF 27.0 million versus CHF 23.1 millionin the previous year) and cash considerations for acquisitionsof sales companies (CHF 40.8 million versus CHF 3.0 million inthe previous year).Free cash flow was applied mainly to repayments ofborrowings and mortgages (CHF 82.4 million), and dividends toshareholders (CHF 19.8 million).Taking all elements of the consolidated cash flow statementinto consideration, cash and cash equivalents increased toCHF 179.5 million (previous year CHF 173.2 million).8Financial Results

MARKETSGeneral market developmentThe estimated global hearing instrument market growth in2005/06 was 5%–7%, of which 1%–2% stemmed from increasesin average selling prices. Sales prices were increasing due to astrong high-end segment, which is driven by innovation, anda dynamic low-end segment, driven by the replacement of analogproducts by digital products. All key markets grew more or lessin line with the above mentioned average market growth rate.Group sales by product typeBoth brands of hearing instruments, Phonak and UnitronHearing, contributed to the expansion of sales. Behind-the-Ear(BTE) products remained very strong, supported by the newmicro hearing systems for open fitting. In addition, wirelesscommunication systems again delivered consistently highgrowth, demonstrating their solid market position.OutlookThe Phonak Group expects to outgrow the hearing instrumentmarket once again, due to:- having a comprehensive product range, which is continuouslyrejuvenated- providing superior, innovative and easy-to-use products- extending its support and service offering- expanding its distribution channelsIn 2006/07, we intend to further strengthen our salesorganizations and expand our distribution network in EasternEurope, Latin America, India, and Asia especially.Group sales by geographic regionThe Phonak Group continued to increase its global marketshare as sales developed favorably in all key markets. The UnitedStates and the biggest Western European markets made thelargest contribution to our growth. We also made progress inbuilding up our market positions in Japan and China, eventhough our operations in these countries have not been establishedfor very long and business volumes are still comparativelymodest.Latest developmentsThanks to our stronger sales organizations, intensifiedmarketing efforts and excellent product offerings, the PhonakGroup once again managed to attract many new clients andsignificantly expand its customer base. In 2005/06, sales to keyaccounts increased further as a result of closer cooperationwith these industry players. We continued to ramp up our retailpresence in China, a potentially huge market. Our purchase of acontrolling interest in CAS Produtos Médicos Ltda., the Brazilianmarket leader in hearing instrument distribution, as well asa number of smaller acquisitions, significantly extended thegeographic reach of our global sales network, as planned.Markets9

Hit new heights

NEW TECHNOLOGIES AND PRODUCTSPlatforms – a modular approach to developing newproductsOne of the key success factors of the Phonak Group is thestrength of its product portfolio, which combines advancedtechnology with functional design. Phonak continuously setsnew standards for technology in our industry.The success of our Savia product line is evidence of theversatile functionality of our modular hardware and softwareplatform PALIO, which has already been integrated into otherproduct lines. PALIO offers a number of benefits, ranging fromeconomies of scale to more flexibility in design and production,greater product development capacity, and shorter times to marketfor new products.The launch of our Verve product line, which offers completelynew functionalities such as “SmartVoice” (natural language output),has again shown the superior versatility and performanceof PALIO. Thanks to the modular design and the standardizedinterfaces, we can continuously refine our hardware and softwareplatform, giving us a future-proof modular system for developingnew products.At Phonak, innovation means developing solutions for everydayproblems experienced by people with hearing impairment,identifying and satisfying customer’s needs, and – in doing so –creating added value for the user. Along with the best possiblehearing performance, reliability, comfort, and cosmetic aspectsare the key drivers for customer satisfaction. Other aspectsrelated to the product, such as fitting, after-sales support, andservice, are also becoming increasingly important. Our twonewest product lines, Verve and microPower, clearly confirmour strong focus on the customer’s needs.Verve – the world’s most exclusive hearing systemVerve is an exclusive product line designed for the most demandingcustomers who expect personalized and comprehensivesupport over the entire product life cycle. Verve’s superioraudiological performance and its unique functionalities, coupledwith its elegant brand styling and the innovative serviceoffering, set a new standard in the hearing instrument industry.Verve is in a class of its own and has also carved out for itselfa new market segment that is positioned above the currentdigital premium segment.The first edition of the Verve product line boasts manytechnological innovations. “Self Learning” allows the hearinginstrument to automatically adapt itself to the wearer’s changingpersonal requirements. With its natural language output,“SmartVoice”, Verve “speaks” to the users, informs them of thesystem’s operating mode, and also tells them when it isadvisable to have a service consultation with the audiologist, orwhen the battery needs to be changed. The wearer can thereforebe confident of using the full functionality of the hearinginstrument at all times. An exclusive network of speciallytrained and qualified audiologists ensures excellent customersupport and high-quality servicing. The “Verve PriorityPackage” is the key component of the service offering. With apersonalized Verve Card, the customer has access to the international24/7 support line and to the Verve web portal.microPower – the miniature hearing system for peoplewith severe hearing impairmentPhonak’s innovative Canal Receiver Technology (CRT)enables even those with severe hearing impairment to enjoy theadvantages of a micro hearing system. With microPower, theloudspeaker is positioned in the ear canal and provides a clearsound that is as good as with a small and cosmetically attractivein-the-ear (ITE) hearing device. Although its performance iscomparable to that of a powerful behind-the-ear (BTE) hearinginstrument, its miniature size makes it nearly invisible. The majorityof people using a hearing system today suffer from a moderateto severe hearing impairment and could benefit from theunique advantages of microPower.12New Technologies and Products

New products launched in 2005/06In 2005/06, the Phonak Group successfully introducedseveral new products, on a worldwide basis:eXtra, the successor to Phonak’s established entry-level MAXXproduct line, provides noticeably better clarity, comfort, anddesign and offers unrivalled performance features in this class.Unison, the entry-level product line of Unitron Hearing,has further been refined. Unison 6 and 3 are now available in aminiaturized, easily adaptable Moda version as well.Eleva, the newest product line in the business class, deliversa significantly improved hearing experience and maximum easeof use and comfort.microSavia, a tiny and attractive hearing systems for openfitting has all the advantages and winning features of Savia.More new products already launched in 2006/07The Phonak Group recently launched a number of newproducts that will boost sales in 2006/07. The most relevant ofwhich are:microPower, the miniature hearing system for people withsevere hearing impairment.Indigo, the new flagship product in the premium segmentfrom Unitron Hearing.Verve, the world’s most exclusive hearing system.MicroMLxS, MicroBoom and Campus SX, the completelyupdated offering for schools in the wireless communicationsystems segment.Additional product launches are planned during the courseof the 2006/07 financial year.Future product opportunitiesIn the future, we will continue to focus on the successfactors of our business, such as fundamental research in audiology,wireless communication, ultra-low power electronics,and state-of-the-art software technologies. We are confidentthat the results of our more long-term research activities willbe visible over the coming years in products which will set theindustry standard for performance, “device intelligence“, andease of use. Phonak is well prepared to remain one of the mostinnovative companies in the hearing instrument industry.New Technologies and Products13

OPERATIONS AND STAFFOperationsWithin operations – which includes purchasing, logistics,manufacturing, quality, and IT – one of the priorities in 2005/06was to optimize product costs. Furthermore, the focus wason building up production to meet demand for many recentlylaunched products and the associated transfer of productionto the PALIO platform.Production sites and processesDuring 2005/06, the Phonak Group significantly expandedits production capacities and pushed ahead with the division oftasks between the two main manufacturing sites – Stäfa inSwitzerland and Suzhou in China.The establishment of the Chinese production facility was animportant step to reduce product costs on a sustainable basis.During the financial year we also adapted our logistics conceptto the new manufacturing structures and switched to directdistribution. At present, we are continuing to optimize goodsflows and production processes as well as to improve costefficiency in the design stage.StaffThe Phonak Group employed 3,428 people as of March 31,2006 (prior year 2,926). This total was allocated among researchand development 214 (prior year 188), operations 1,624 (prioryear 1,439), and sales, marketing, and general and administration1,590 (prior year 1,299). Major staff increases were made insales, marketing, and general and administration to increasemarket coverage through direct sales representatives and tosupport the many strategically important product launches, andin operations, to create new posts to keep up with the expansionof the Group’s sales volume.14Operations and Staff

OUTLOOKSales – outgrow the market once againWe are confident that Phonak’s sales will continue to developpositively thanks to our ongoing investment of human andfinancial resources in product innovation and the expansion ofthe distribution network. We expect the current growth trend inthe hearing instrument industry to continue during 2006/07. Weanticipate being able to once again outgrow the market, basedon our recent and planned product launches.Further enhance gross profit marginIn 2006/07, we expect a further increase in the gross profitmargin. After years of exceptionally strong growth, however,the rise will be more moderate, i.e. less than in previous financialyears. The most important drivers will be the growing quota ofproducts based on the PALIO platform and economies of scaleachieved through higher production volumes. Continuous measuresto improve productivity and optimize production processeswill also help to increase the gross profit margin. Theseforecasts assume no significant change will occur in the productmix – the percentage of total sales contributed by first class,business class, and economy class hearing systems.Further improve EBIT marginManagement expects a further improvement in the EBITmargin as a result of the expected gross margin increase as wellas a reduction in operating expenses as a percentage of sales.Slightly increase capital expendituresTo provide the additional infrastructure needed to boostour sales, we plan to slightly increase our capital expendituresin 2006/07. Major investment projects will include tooling fornew products, production equipment, and IT infrastructure andsystems.Use of financial resourcesThe financial resources of the Group are used primarily tofinance capital expenditures and for the repayment of debtaccording to existing terms. In addition, the Phonak Group willinvest a portion of its financial resources to further expand itsdistribution channels. We believe these investments will lead tofurther sales growth, increased market share, and an attractivereturn in profits.Increase spending on research and developmentSpending on research and development is expected to increaseagain significantly in 2006/07. Major projects includenew product developments, hardware and software platformdevelopment, and new technology research.Outlook15

Listen to life

CORPORATE GOVERNANCEThe Board of Directors has committed itself to maintainingthe highest standards of integrity and transparency in itsgovernance of the company. In this, it is guided by the SwissCode of Best Practice and the most recent principles ofCorporate Governance. Corporate Governance describes how ourmanagement is organized and how this is put into practice.It ultimately aims to lead us to success by protecting the interestsof our shareholders while at the same time creating valuefor all stakeholders.Good Corporate Governance seeks to balance entrepreneurship,control and transparency, while supporting the companywith efficient decision-making processes. The Board of Directorsconstantly works on improving the quality of CorporateGovernance.In the course of the previous financial year 2004/05, theBoard of Directors focused on optimizing organizationalstructures and improving shareholders’ rights. The committeestructure was simplified and the rules governing the right ofshareholders to put items on the AGM agenda were changed froma minimum requirement of holding around 30% of the sharecapital to just 5%.During the financial year 2005/06, the Board of Directorsintroduced a number of measures to improve transparency.Attendance at Board of Directors and committee meetingsAnother improvement in this year’s Corporate Governancereport is the disclosure of the individual Board members’ attendanceat Board of Directors and committee meetings.More transparent disclosure of compensationand shareholdingsThe most important measure to improve transparencywas in the area of “Compensation and shareholdings”. In thefuture, the names of the members of the Board of Directorsand of the Management Board who receive the highest level ofcompensation will be provided. In addition to the totalremuneration paid to members of the Board of Directors as agroup, this year’s report provides details of the remunerationpaid to individual members. Similarly, information is provided onthe shareholdings in the Phonak Group owned by individualmembers of the Board of Directors.18Corporate Governance

This report describes the principles of Corporate Governancefor the Phonak Group and provides background information onthe Group’s executive officers and bodies, effective March 31,2006. The report complies with the general principles onCorporate Governance set down in the Group’s Articles of Associationand Organizational Regulations, which in turn comply withthe Directive on Information relating to Corporate Governancepublished by the SWX Swiss Exchange.Group Structure and ShareholdersGroup StructureThe Phonak Group is headquartered in Stäfa, Switzerland,and is active in over 70 countries through a combination of 32subsidiaries in 22 countries and a network of independentdistributors. The organization chart on page 20 shows the structureof the Phonak Group. The Phonak Holding AG is the parentcompany and is listed on the SWX Swiss Exchange.Legal StructureFor details of the legal structure of the Phonak Group as ofMarch 31, 2006, we refer to Note 38 to the ConsolidatedFinancial Statements (page 86 of this report). Apart from PhonakHolding AG, there are no other companies belonging to theconsolidated Phonak Group whose equity securities are listed ona stock exchange.ShareholdersAs of March 31, the shareholders of Phonak Holding AGwere the following:The founding shareholders are those who were alreadyshareholders before the Initial Public Offering in November1994. There are no shareholders’ agreements between thesepersons.The Phonak Group does not know of any minority shareholderwho owns more than 5% of the share capital andvoting rights. Investors who had previously exceeded the 5%threshold, FMR Corp., Fidelity International Limited, andChase Nominees Ltd., have since reported the reduction of theirholdings to below the obligatory disclosure limit of 5% inaccordance with Art. 20 of the Swiss Stock Exchange Law “Disclosureof holdings”.As of March 31, 2006, a total of 16,235 (previous year16,381) shareholders were entered in the share register ofPhonak Holding AG. Of these 1,275 (previous year 1,027) werenon-Swiss nationals who held a total of 17.4% (previousyear 18.1%) of the outstanding shares.Key data for sharesKey data for the shares of Phonak Holding AG as ofMarch 31:2006 2005 2004Market capitalization in CHF m 4,924 2,720 1,997in % of equity 785% 605% 572%Share price in CHF 74.20 41.20 30.50P/E ratio 28.9x 28.7x 29.0xListingSWX Swiss ExchangeSecurity No. 1,254,978ISINCH0012549785Outstanding shares 2006 2006 2005Number in % in %Founding shareholdersBeda Diethelm 7,462,000 11.24 12.72Andy Rihs 7,239,100 10.91 12.18Hans-Ueli Rihs 6,057,953 9.13 9.50Public shareholders 45,601,872 68.72 65.60Total share capital 66,360,925 100.00 100.00Corporate Governance19

Phonak Holding AGBoard of DirectorsPhonak GroupCEO, Management BoardPhonak Hearing Systems Unitron Hearing WirelessCommunication SystemsPhonak AGStäfa, SwitzerlandPhonak LLCWarrenville, USAUnitron Hearing GmbHFellbach-Oeffingen, GermanyPhonak Communications AGMurten, SwitzerlandPhonak GmbHFellbach-Oeffingen, GermanyPhonak Canada Ltd.Mississauga, CanadaUnitron Hearing B.V.Nieuwegein, The NetherlandsHansaton AkustischeGeräte-Gesellschaft m.b.H.Wals-Himmelreich, AustriaPhonak France SABron-Lyon, FrancePhonak Italia SrlMilan, ItalyPhonak Ibérica, S.A.Alicante, SpainCAS Produtos Médicos Ltda.Sao Paulo, BrazilPhonak Pty. Ltd.Baulkham Hills, AustraliaPhonak New Zealand Ltd.Auckland, New ZealandJordan Hearing AidsManufacturing Co. Ltd.Amman, JordanUnitron Hearing, Inc.Plymouth (Minnesota), USAUnitron Hearing Ltd.Kitchener, CanadaUnitron Hearing (Suzhou) Co., Ltd.Suzhou, ChinaUnitron Hearing Korea Co., Ltd.Seoul, South KoreaEts. Lapperre BHAC NVGroot-Bijgaarden, BelgiumPhonak Japan Co., Ltd.Tokyo, JapanPhonak Belgium NVDilbeek, BelgiumPhonak (Sichuan) Co., Ltd.Sichuan, ChinaPhonak B.V.Nieuwegein, The NetherlandsTHC Finance Ltd.BermudaPhonak Danmark A/SFrederiksberg, DenmarkRAV Finance Inc.USAPhonak ABStockholm, SwedenMetro Hearing Inc.Wilmington, USAPhonak ASOslo, NorwayHIMSA, A/SCopenhagen, DenmarkPhonak Group Ltd.Warrington, United KingdomCochlear Acoustics Ltd.London, United KingdomPhonak Polska Sp. Z o.o.Warsaw, Poland20Corporate Governance

Capital StructureChanges in capital structure since 2004As of March 31, the capital of Phonak Holding AGcomprised the following:2006 2005 2004Share capital (in CHF) 3,318,046 3,301,120 3,273,110Total shares 66,360,925 66,022,400 65,462,200Conditional capital (in CHF) 412,400 264,270 292,280Conditional shares 8,247,995 5,285,400 5,845,600Authorized capital (in CHF) 165,056 0 0Authorized shares 3,301,120 0 0Phonak Holding AG registered shares have been quotedon the Swiss stock exchange (SWX Swiss Exchange) sinceNovember 1994. The par value of one standard registeredshare amounts to CHF 0.05. The share capital is fully paid up.With the exception of the shares held by the company itself,each ordinary share bears one voting right at the AnnualGeneral Shareholders’ Meeting and is entitled to dividend payments.As of March 31, 2006, the company held 34,633(previous year 7,700) own shares.Ordinary share capitalThe Annual General Shareholders’ Meeting of July 5,2001, approved a capital reduction and repayment of CHF 15on the par value per share. At the same time, shareholdersapproved a 1:100 share split. This reduced the par value ofPhonak registered shares from CHF 20 to CHF 0.05.In the financial year 2005/06, a total of 338,525 employeeoptions were exercised. Each option provides the right to purchaseone registered share out of the conditional share capital.In the financial years 2004/05 and 2003/04, a total of 560,200and 90,000 employee options were exercised. As a result, as ofMarch 31 in each year, the total number of issued shares aswell as the share capital increased correspondingly. At the sametime, the exercising of these options led to a correspondingdecrease in the conditional share capital reserved for key employeesshare option plans (see also table on page 30).Conditional share capitalAs of March 31, 2006, the company had a total conditionalshare capital of 8,247,995 registered shares with a par valueof CHF 0.05 per share.The Annual General Shareholders’ Meeting held on July 7,2005, approved the creation of conditional share capital of3,301,120 registered shares with a par value of CHF 0.05 pershare. The purpose of the extra conditional share capitalcreated is to improve the company’s financial flexibility. Thiscapital may be used for exercising option and conversionrights granted in connection with bonds or similar debt instrumentsissued by the company for the purpose of financingthe acquisition of or investment in companies. The conditionalshare capital of 3,301,120 registered shares created on July 7,2005, has not yet been used.At the Annual General Shareholders’ Meetings in 1994and 2000, conditional share capital was created with the purposeof offering Phonak shares, through an option program,to key employees of the Phonak Group. From a maximum of8,000,000 approved shares with a par value of CHF 0.05,3,053,125 shares have been issued up to March 31, 2006, reducingthe maximum conditional share capital reserved forkey employees share option plans to 4,946,875 (previous year5,285,400) shares.In the financial year 2005/06, a total of 420,818 optionswere granted as part of the Phonak Executive Equity Award Plan(EEAP). In the financial year 2004/05, a total of 712,000 options(as part of the EEAP), and in the financial year 2003/04, a totalof 780,450 options (as part of the Key People Program) weregranted.At March 31, 2006, a total of 1,842,693 (prior year1,852,250) options were outstanding. Each of these optionsentitles the holder to purchase one registered share inPhonak Holding AG with a par value of CHF 0.05.Corporate Governance21

Authorized share capitalAs of March 31, 2006, the company had authorized sharecapital of 3,301,120 registered shares with a par value of CHF0.05 per share.The Annual General Shareholders’ Meeting held on July 7,2005, approved the creation of authorized share capital of3,301,120 registered shares with a par value of CHF 0.05 pershare. The Board of Directors is authorized to exclude subscriptionrights of shareholders and to allocate them to third partiesif the new shares are to be used for the acquisition of companies,parts of companies, equity stakes or the financing of suchtransactions. The authorized share capital of 3,301,120 registeredshares created on July 7, 2005, has not yet been used.The authorization granted to the Board of Directors to augmentthe company’s share capital with the authorized share capitalcreated expires on July 6, 2007.Changes in shareholders’ equityRegarding changes in shareholders’ equity see Note 3.6to the Financial Statements of Phonak Holding AG (for thethird financial year prior to the reporting period, refer to thesame Note in the Annual Report 2004/05).Restrictions on transferabilityFor restrictions on transferability, see the chapter entitled“Voting rights restriction and representation” on page 31 of thisreport.Board of DirectorsThe primary duty of the Board of Directors of PhonakHolding AG is the overall direction of the company and thesupervision and control of the management. To this end, theBoard of Directors works in close collaboration with the ManagementBoard. The Articles of Association of Phonak Holding AGstate that the Board of Directors must consist of a minimum ofthree and a maximum of nine members.During the reporting period, the Board of Directors held sixmeetings, one of which was a two-day strategy workshop.Telephone conferences were organized to discuss time-sensitivebusiness issues. The Board of Directors receives consolidatedfinancial statements (balance sheet, income statement as wellas statement of cash flows) on a monthly, semi-annual, andannual basis. In addition, the Board of Directors receives monthlyconsolidated sales reports, providing data on turnover, averageselling prices, and units for each major product, subsidiary, andmarket.The Board of Directors approves resolutions and holdselections with the majority of its members present at the meeting.In the event of an equal number of votes, the Chairman hasthe casting vote.Elections and term of officeAt the Annual General Shareholders’ Meeting, the shareholderselect the Board of Directors of Phonak Holding AG.In general, each member is elected for a period of three businessyears. The term ends on the day of the ordinary Annual GeneralShareholders’ Meeting for the last business year of the term. If,during a term, a substitute is elected to the Board of Directors,the newly elected member finishes the term of his predecessor.Re-elections for successive terms are possible. A member ofthe Board of Directors who reaches the age of 70 during his orher term must resign at the next ordinary Annual GeneralShareholders’ Meeting.22Corporate Governance

Left to right: Robert F. Spoerry, Dr. h.c. Daniel Borel, Andy Rihs, Dr. Michael Jacobi, Heliane Canepa, William D. DearstyneAudit CommitteeCurrent members of the Audit Committee are Dr. MichaelJacobi (Chairman), Heliane Canepa, and William D. Dearstyne.Within the context of its overall remit, the Audit Committeereviews on behalf of the Board of Directors the work andeffectiveness of the external and internal audit, evaluates thefinancial control, the financial structure and risk managementmechanisms of the company, and reviews the interim and annualfinancial accounts of the Group. The Audit Committee alsosupervises audits to be completed by the internal audit departmentand reviews the results of these audits.The Audit Committee meets at least twice a year, but asoften as required. In the reporting period, the Committee metfour times.Nomination and Compensation CommitteeDuring the reporting period, the Nomination Committeeand the Compensation Committee were merged into a singlecommittee. This merger simplifies and optimizes the organizationalstructure and ensures more efficient deployment ofhuman resources.Current members of the new Nomination and CompensationCommittee are Andy Rihs (Chairman), Dr. h.c. Daniel Borel, andRobert F. Spoerry, all former members of the CompensationCommittee.The primary task of this Committee is to review and proposeto the Board of Directors the compensation structure andamount for the Board of Directors and the members of theManagement Board, and to select and propose to the Boardof Directors suitable candidates for election to the Boardof Directors and for appointment to the Management Board.The Committee submits the relevant proposals and nominationsto the Board of Directors.The Committee meets as often as required. In the reportingperiod, the Committee met three times.Attendance at Board of Directors and committee meetingsThe following overview shows the individual Board members’attendance at Board of Directors and committee meetings.A B CNumber of meetings 2005/06 6 4 3Andy Rihs 6 - 3William D. Dearstyne 6 4 -Dr. h.c. Daniel Borel 5 - 3Heliane Canepa 6 4 -Dr. Michael Jacobi 4 4 -Robert F. Spoerry 6 - 3A Board of DirectorsB Audit CommitteeC Nomination and Compensation CommitteeCorporate Governance23

Members of the Board of DirectorsAndy Rihs1942; SwissPosition:Chairman, non-executiveFirst election to the Board: 1985; Chairman since 1992Current Board term ends: AGM 2006Other activities:Chairman of the Board of ARfinanz Holding AGMember of the Board of Polyusus V AGMember of the Board of Sport und Event Holding AG,LucerneWilliam D. Dearstyne 1940; AmericanPosition:Vice-Chairman, non-executiveFirst election to the Board: 2003; Vice-Chairman since 2004Current Board term ends: AGM 2006Other activities:Member of the Advisory Council of EarlybirdVenture Capital GmbH & Co.Member of the Board of Trustees of Bucknell University,Lewisburg, PAMember of the Board of Bioness, Inc., CaliforniaDr. h.c. Daniel Borel 1950; SwissPosition:Non-executiveFirst election to the Board: 1999Current Board term ends: AGM 2008Other activities:Chairman of the Board of Logitech International Ltd.Member of the Board of Julius Bär Holding AGMember of the Board of Nestlé SAHeliane Canepa1948; SwissPosition:Non-executiveFirst election to the Board: 1999Current Board term ends: AGM 2008Other activities:CEO Nobel Biocare Holding AGDr. Michael Jacobi 1953; GermanPosition:Non-executiveFirst election to the Board: 2003Current Board term ends: AGM 2006Other activities:CFO Ciba Specialty Chemicals AGRobert F. Spoerry1955; SwissPosition:Non-executiveFirst election to the Board: 2003Current Board term ends: AGM 2006Other activities:Chairman, President and CEO of Mettler-ToledoInternational Inc.Member of the Board of Conzetta Holding AGMember of the Board of Schaffner Holding AG24Corporate Governance

Andy Rihs (born in 1942) has been Chairman of the Board ofDirectors of Phonak Holding AG since 1992. He is one of the founders ofthe Phonak Group, together with his partner, Beda Diethelm, and hisbrother Hans-Ueli Rihs.In 1966, Andy Rihs joined Beda Diethelm who came to Phonak ayear earlier as technical manager. Andy Rihs began to build up themarketing and commercial aspect of the company. He first established asales organization for Switzerland, then gradually built up a global distributionnetwork. Andy Rihs led the Phonak Group as CEO until April2000, and as interim CEO, from April to September 2002. Under his leadership,the company grew continuously and succeeded in establishing anoutstanding brand image for Phonak – known for products of the highesttechnological standard and reliability.Andy Rihs completed his education and business training primarilyin Switzerland and France.Dr. h.c. Daniel Borel (born in 1950) has been Chairman of theBoard of Logitech International Ltd. since 1988.He co-founded Logitech in 1981 and served as CEO from 1992 to1998. During this time, Daniel Borel was instrumental in growingLogitech around the world and establishing the company’s high-volumemanufacturing capability in Asia. In 1988, he took the Logitech Grouppublic on the SWX Swiss Exchange and in 1997 on Nasdaq.Daniel Borel holds an engineering degree from the Swiss FederalInstitute of Technology Lausanne, Switzerland, and a master’s degree inComputer Science from Stanford University, California. He was awardedan honorary doctorate from Lausanne’s Federal Institute of Technologyin 1992.Dr. Michael Jacobi (born in 1953) is CFO and member of theExecutive Committee of Ciba Specialty Chemicals AG – a position he hasheld since 1997 and in which he is responsible for Treasury, M&A,Investor Relations, and Controlling.Michael Jacobi joined Ciba-Geigy’s Control & Management Servicesin 1978 when he held positions in finance, accounting, and planningin Brazil and the US. In 1987, he returned as Head of ManagementAccounting at the Finance Department in Basel, Switzerland, where helater became responsible for Ciba-Geigy’s overall corporate financialaccounting and reporting.Michael Jacobi studied at the University of St. Gallen, Switzerland,at the Washington University in Seattle, and at the Harvard BusinessSchool in Boston. In St. Gallen, he earned a doctorate degree with a thesison the International Accounting Standards.William D. Dearstyne (born in 1940) retired in April 2003 from hisposition as Company Group Chairman and member of the MedicalDevices and Diagnostics Group Operating Committee of Johnson &Johnson.During the 34 years of his career managing diversified healthcarecompanies, he gained valuable business experience in Asia, Central andEastern Europe as well as Latin America. He served in many differentfunctions during his 26 years at Johnson & Johnson. Within this period,he also led two major acquisitions for the company – Cordis and DePuy– both of which today occupy leadership positions in interventionalcardiology and orthopedics respectively.William D. Dearstyne studied at Bucknell University in Lewisburg,Pennsylvania, and at Syracuse University in New York where he earnedan MBA in International Business.Heliane Canepa (born in 1948) has been President and CEO ofNobel Biocare AB, Sweden, a company primarily engaged in dentalimplants, since 2001. Since 2002, she has also been CEO of the newlyestablished group parent company, Nobel Biocare Holding AG.Before joining Nobel Biocare, Heliane Canepa acted as CEO of themedical technology company Schneider Worldwide. In 1984, Schneiderwas sold to Pfizer Inc., which resold the entity to Boston Scientific in1998. Because Boston Scientific already had a European production sitein Ireland, the location in Bülach, Switzerland, was closed. HelianeCanepa earned special merit for her work in assisting employees to findnew employment opportunities. She was voted Entrepreneur of the yearin Switzerland in 1995 and 1999.Heliane Canepa completed business school in Dornbirn, Austria,West London College in London, Sorbonne University in Paris, and theForeign Executive Development Program at Princeton University, NewJersey.Robert F. Spoerry (born in 1955) is Chairman, President and CEOof Mettler-Toledo International Inc., a leading global manufacturer ofprecision instruments for use in laboratory, manufacturing and foodretailing applications, quoted on the New York Stock Exchange (NYSE)since 1997.Robert F. Spoerry joined Mettler-Toledo in 1983, served as Head ofthe Industrial and Retail Division in Europe from 1987 until 1993, andwas in charge of the lead in the acquisition and integration of ToledoScale Corporation (USA). In 1989, he was appointed to the company’sExecutive Board, was nominated CEO in 1993 and assigned Chairman in1998.Robert F. Spoerry graduated in mechanical engineering at the FederalInstitute of Technology in Zurich, Switzerland, and received an MBA fromthe University of Chicago.Corporate Governance25

Members of the Management BoardDr. Valentin Chapero Rueda 1956; SpanishPosition:CEOAppointment: October 2002Oliver Walker1969; SwissPosition:CFOAppointment: October 2004Dr. Herbert Bächler 1950; SwissPosition:CTOAppointment: June 2002Paul Thompson1967; CanadianPosition:EVP Corporate DevelopmentAppointment: January 2002Toni Schrofner1963; AustrianPosition:EVP Operations & Supply ChainAppointment: December 200326Corporate Governance

Dr. Valentin Chapero Rueda (born in 1956) joined the PhonakGroup as CEO in October 2002.Before joining Phonak, Valentin Chapero Rueda was CEO of theMobile Networks Division of Siemens. Prior to this, between mid-1996and the end of 1999, he was CEO of the Siemens Audiology Group, theworld’s largest hearing instrument manufacturer. He took the companyinto the digital era, tripling sales and significantly improving profitability.Valentin Chapero Rueda began his career within the R&D departmentof Nixdorf Computer.Valentin Chapero Rueda, whose parents are Spanish, grew up andcompleted his education in Germany. He graduated in Physics at theUniversity of Heidelberg, Germany, and was awarded his doctorate witha thesis in the medicine/physics field.Dr. Herbert Bächler (born in 1950) has been a key member ofPhonak’s management team since 1981. In June 2002, he was appointedto the position of Chief Technology Officer (CTO) and became a memberof the Management Board.Herbert Bächler is responsible, on a groupwide basis, for directingthe various research projects. His duties include the pursuit of new technologiesand their application to hearing instruments and related businessopportunities.Herbert Bächler received his diploma in Electronic Engineering in1973 and his doctorate in 1978 from the Swiss Federal Institute ofTechnology Zurich, Switzerland.Toni Schrofner (born in 1963) joined the Phonak Group asExecutive Vice President Operations & Supply Chain and became amember of the Management Board in December 2003.Before joining Phonak, Toni Schrofner was acting as President ofTecan Instruments and member of Tecan Group’s Executive ManagementTeam. The position included the function of General Manager TecanSchweiz AG. Prior to the appointment at Tecan headquarters, he wasManaging Director of Tecan Austria GmbH between 1996 and 2001.Toni Schrofner earned a diploma in mechanical engineering (focuson mechanical engineering and operation technology) at the HTL inSalzburg, Austria, and completed his MCI Studies of Economics/InternationalManagement at the University of Innsbruck, Austria.Oliver Walker (born in 1969) was appointed CFO of the PhonakGroup in October 2004.Before joining Phonak, he held the position of CFO of StratecMedical Group Oberdorf, Switzerland, since 2000. Stratec is a leadinginternational medical devices company, specializing in the development,manufacture, and marketing of instruments and implants for the surgicaltreatment of bones. Prior to Stratec, Oliver Walker worked for sevenyears with the Von Roll Group, a diversified industrial company. His mostrecent position there was as Head of Finance and Controlling for thedivision Von Roll Infratec.Oliver Walker studied Economics at the University of Berne,Switzerland; he holds a Masters Degree in Business Economics.Paul Thompson (born in 1967) was appointed to the position ofExecutive Vice President Corporate Development in October 2004. In thisposition, he is responsible for the development of the Group Strategyand the implementation of various business development activities.Prior to this appointment, he was CFO of the Phonak Group sincethe beginning of 2002. Between 1998 and 2001, Paul Thompson actedas CFO and later also as COO of the Unitron Hearing Group. Beforejoining Unitron Hearing, between 1987 and 1998, he worked for Ernst &Young in Canada, first in the auditing division and then in the managementconsulting division.Paul Thompson studied Finance and Economics at the University ofWaterloo, Canada. In 1992, Paul Thompson was granted his CharteredAccountant designation and in 1998, he achieved the designation ofCertified Management Consultant.Corporate Governance27

Management BoardThe Management Board is responsible for the operationalmanagement of the company. Furthermore, it prepares for andlater executes decisions made by the Board of Directors. Withthe revision of Phonak’s Organizational Regulations on May 25,2005, a new management body was created: the “ManagementBoard”. This replaces the previous “Group Executive Management”.According to the Organizational Regulations of Phonak, theManagement Board consists of at least four members, with othermembers added to suit strategic requirements. The ManagementBoard is appointed by the Board of Directors, as recommended bythe Chief Executive Officer (CEO).Compensation, Shareholdings, and LoansMembers of the Board of Directors receive a fixed paymentand participation in the company’s option plan as compensation.Members of the Management Board receive a performancerelatedcompensation package, including a fixed basic salary, aperformance-based bonus payment, and options. The compensationof the Board of Directors and the Management Board doesnot provide for the distribution of shares.The remuneration of the members of the Board of Directorsas well as the Management Board is determined and periodicallyreviewed by the Board of Directors as proposed by the Nominationand Compensation Committee.During the reporting period, there were no honorariumspaid for additional services above the ordinary remuneration norwere any loans awarded or guarantees given to members ofthe Board of Directors, members of the Management Board orto any parties closely linked to these governing bodies.Compensation to members of the Board of Directors andthe Management BoardTotal remuneration (incl. employer’s contribution) of theBoard of Directors of Phonak Holding AG in the financial year2005/06 amounted to CHF 0.6 million (previous year CHF 0.6million).The following table shows the remuneration in the form offixed payment and options granted to the individual members ofthe Board of Directors in the financial year 2005/06.Member of the Board of Directors Payment in CHF Options grantedAndy Rihs 152,451 12,000William D. Dearstyne 86,458 12,000Dr. h.c. Daniel Borel 82,265 12,000Heliane Canepa 84,894 12,000Dr. Michael Jacobi 82,765 12,000Robert F. Spoerry 82,830 12,000Total 571,663 72,000Total remuneration (incl. employer’s contribution) of themembers of the Management Board in the financial year2005/06 amounted to CHF 3.9 million (previous year CHF 4.1million).Additional severance payments to former members of theBoard of Directors and the Management BoardIn the financial year 2005/06, an additional severance paymentof CHF 989,000 was made to a former member of theManagement Board who gave up his function during the periodunder review.28Corporate Governance

Share and option ownership of members of the Board ofDirectors and the Management BoardAs of March 31, 2006, the members of the Board of Directorsheld directly and indirectly 7,264,296 shares (10.9% of total sharecapital) and 213,000 options.The following table shows the share and option ownershipof the individual members of the Board of Directors as of March31, 2006.Member of the Board of Directors Number of shares Number of optionsAndy Rihs 7,239,100 36,000William D. Dearstyne 10 36,000Dr. h.c. Daniel Borel 1 36,000Heliane Canepa 15,010 33,000Dr. Michael Jacobi 175 36,000Robert F. Spoerry 10,000 36,000Total 7,264,296 213,000As of March 31, 2006, the members of the ManagementBoard held directly and indirectly 9,389 shares and 607,000options.OptionsAs of March 31, 2006, the members of the Board of Directors(all non-executive) and the Management Board held 820,000options on Phonak stock. Each option has a share subscriptionratio of 1:1 (see table on page 30).The options granted to all employees of the Group (incl.Board of Directors) in 2005/06 (420,818 options) had a value ofapproximately CHF 4.1 million over the term of the options,as calculated using a binomial option pricing model. The valueof options granted is booked to the income statement. Forfurther details, we refer to Note 32 on page 80 of the ConsolidatedFinancial Statements within this report.Corporate Governance29

Options granted to the Board of DirectorsOptions granted/outstandingYear Total of which Strikegranted outstanding price (CHF)2003/04 84,000 84,000 28.002004/05 72,000 69,000 39.002005/06 72,000 72,000 63.25Total 228,000 225,000Blocking and exercise periodsBlocking Exercise Number ofperiod period options01.02.04 – 31.01.07 01.02.07 – 31.01.09 84,00001.02.05 – 31.01.06 01.02.06 – 31.01.10 15,00001.02.05 – 31.01.07 01.02.07 – 31.01.10 18,00001.02.05 – 31.01.08 01.02.08 – 31.01.10 18,00001.02.05 – 31.01.09 01.02.09 – 31.01.10 18,00001.02.06 – 31.01.07 01.02.07 – 31.01.11 18,00001.02.06 – 31.01.08 01.02.08 – 31.01.11 18,00001.02.06 – 31.01.09 01.02.09 – 31.01.11 18,00001.02.06 – 31.01.10 01.02.10 – 31.01.11 18,000225,000Options granted to the Management BoardOptions granted/outstandingYear Total of which Strikegranted outstanding price (CHF)2003/04 87,000 87,000 28.002004/05 500,000 480,000 39.002005/06 80,000 80,000 63.25Total 667,000 647,000Blocking and exercise periodsBlocking Exercise Number ofperiod period options01.02.04 – 31.01.07 01.02.07 – 31.01.09 87,00001.02.05 – 31.01.06 01.02.06 – 31.01.10 5,00001.02.05 – 31.01.07 01.02.07 – 31.01.10 25,00001.02.05 – 31.01.08 01.02.08 – 31.01.10 25,00001.02.05 – 31.01.09 01.02.09 – 31.01.10 25,00001.02.05 – 30.09.06 01.10.06 – 30.09.10 100,00001.02.05 – 30.09.07 01.10.07 – 30.09.10 100,00001.02.05 – 30.09.08 01.10.08 – 30.09.10 100,00001.02.05 – 30.09.09 01.10.09 – 30.09.10 100,00001.02.06 – 31.01.07 01.02.07 – 31.01.11 20,00001.02.06 – 31.01.08 01.02.08 – 31.01.11 20,00001.02.06 – 31.01.09 01.02.09 – 31.01.11 20,00001.02.06 – 31.01.10 01.02.10 – 31.01.11 20,000647,00030 Corporate Governance

Highest total compensationThe highest total compensation paid to a member of theBoard of Directors in the financial year 2005/06 was to AndyRihs, Chairman. This compensation consisted of a fixed paymentof CHF 152,451 (previous year CHF 172,908) and 12,000 options(previous year 12,000 options). These options provide the rightto purchase one Phonak share at a strike price of CHF 63.25between February 1, 2007 and January 31, 2011.The highest total compensation paid to a member of theManagement Board in the financial year 2005/06 was toValentin Chapero Rueda, CEO. This compensation consisted of abasic salary (incl. employer’s contribution) of CHF 1,186,739(previous year CHF 1,158,792) as well as a performance-relatedbonus (incl. employer’s contribution) of CHF 736,755 (previousyear CHF 684,040). In the financial year 2005/06 no options weregranted to Valentin Chapero Rueda (previous year 400,000options in the course of the renewal of the long-term employmentcontract).Shareholders’ Participation RightsVoting rights restriction and representationTo be recognized as a shareholder with comprehensiverights, the acquirer of shares must place an application for entryin the share register. The registration in the share register asa shareholder with voting rights is limited to 5% of the sharecapital (Art. 6 par. 2 of the Articles of Association). Linkedparties are considered as one person. To abolish this regulation,the absolute majority of the votes represented at the AnnualGeneral Shareholders’ Meeting is sufficient.In exercising their voting rights, no shareholder may unite,by a combination of own and represented shares together, morethan 10% of the shares of the company (Art. 12 par. 2 of theArticles of Association).The restrictions on the voting and representation rights donot apply to the founding shareholders. The Board of Directorsmay approve further exceptions with good reason and no specialquorum is required for such decisions. During the reportingperiod, no exceptions to the above listed rules were granted.Right to request items on the Annual GeneralShareholders’ Meeting agendaShareholders entitled to vote who represent at least 5% ofthe share capital may request items to be added to the agendaby indicating the relevant proposals. Such requests must beaddressed in writing to the Chairman of the Board of Directorsno later than 60 days before the meeting.Registering deadlinesThe share register will be closed for about five days beforethe Annual General Shareholders’ Meeting for administrativereasons. During this period, an admission card, with correspondingvoting papers, will be sent to shareholders. In case of apartial sale within this time, the confirming documents must beexchanged on the day of the Annual General Shareholders’Meeting at the information desk. The shares can be traded atany time and are not blocked.Changes of Control and Defense MeasuresPublic purchase offerA purchaser of shares is obliged to make a public purchaseoffer when he has more than 49% of the voting rights at hisdisposal (“opting up”, as per Art. 8 of the Articles of Association).Clauses on changes of controlThere are no agreements in place that, in the event of achange of control, provide members of the Board of Directors orthe Management Board with abnormally high severance paymentsor other lucrative benefits.In 2005, a member of the Management Board, CEO ValentinChapero Rueda, signed a long-term employment contractrunning until 2010. Under a change of control provision, he isentitled to his full salary and part of the bonus payments incase the employment is terminated due to a change of control.Corporate Governance31

AuditorsDuration and term of mandateDuring the ordinary Annual General Shareholders’ Meeting ofJuly 5, 2001 PricewaterhouseCoopers was elected as auditorsof Phonak Holding AG and the Phonak Group. The head auditorresponsible for the existing auditing mandate, Mr. StephenW. Williams, took office as of July 5, 2001. At the Annual GeneralShareholders’ Meeting on July 7, 2005, PricewaterhouseCooperswas re-elected for another term of one year.FeesPricewaterhouseCoopers charged CHF 624,000 for auditingservices and CHF 265,000 for non-audit services during the yearunder review.Supervisory and control instrumentsThe external auditors report their findings semiannuallydirectly to the Audit Committee of the Board of Directors. In2005/06, the external auditors attended two out of four AuditCommittee meetings.The Audit Committee of the Board of Directors reviews theperformance, compensation, and independence of the externalauditors on a regular basis. The Audit Committee reports quarterlyits treated issues to the Board of Directors.Information PolicyAs a publicly listed company, the Phonak Group pursues anopen and active information policy. A governing principle ofthis policy is to treat all stakeholders alike and to inform themat the same time. It is one of our top priorities to inform ourshareholders, employees, and business partners in the most direct,open, and transparent way about our strategy, our globalactivities, and the current state of the company.Important information available on Phonak’s investorswebsiteCapital structure and shareholder rights:Articles of Association of Phonak Holding AGCapital structureRestrictions on shareholder rightsShareholder structurewww.phonak.com/company/investors/governance.htmInternal organization:Organizational regulationsPhonak Group code of conductwww.phonak.com/company/investors/governance.htmFinancial information:Corporate & ad hoc newsAnnual reportsSemi-annual reportsIR presentationswww.phonak.com/company/investors/financial.htmInformation on the AGM:Request to put an item on the AGM agendaInvitation/agendaAGM presentationsAGM minuteswww.phonak.com/company/investors/governance/agm.htmIR online news service:IR News Servicewww.phonak.com/company/investors/ir_news.htmContact and order form:IR Contact FormOrder form for annual reportswww.phonak.com/company/investors/ir_contact.htm32 Corporate Governance

Investor Relations CalendarJuly 6, 2006Annual General Shareholders’ Meeting of Phonak Holding AGat the Kongresshaus ZurichNovember 15, 2006Publication of Semi-annual Report as of September 30, 2006May 2007Publication of Annual Report as of March 31, 2007May 2007Media and Analysts ConferenceJune 2007Annual General Shareholders’ Meeting of Phonak Holding AGContactsPhonak Holding AGInvestor RelationsLaubisrütistrasse 28CH-8712 StäfaSwitzerlandPhone: +41 44 928 01 01Fax: +41 44 928 06 84E-Mail: ir@phonak.comInternet: www.phonak.com/company/investors.htmDirector Investor RelationsStefan BlumAssistant Investor RelationsGina FrancioliShare registerShareCommService AGMargitta ChristeEuropastrasse 29CH-8152 GlattbruggSwitzerlandPhone: +41 44 809 58 53Fax: +41 44 809 58 59Corporate Governance33

Savor the sensations

SUSTAINABILITYPhonak’s management strongly believes that striving fortrue economic success ultimately requires taking intoaccount the needs and expectations of all relevant stakeholders.The Board of Directors is totally independent and consistsof well respected, very senior executives. Their professionalism,integrity, and reputation guarantee that the tasksand responsibilities of the Board of Directors are executedin the interest of the shareholders.Phonak’s unique corporate culture makes it an exceptionallyattractive employer.Knowledge management is a core element of Phonak’smanagement philosophy: there are no barriers, no closeddoors; employees can contact anybody at any time.Over 750 employees already own shares in Phonak throughvarious employee share option programs.Our customers buy a better quality of life. We constantlystrive for technological innovations, which can solve everydayproblems of people suffering from hearing impairment.Over several decades, Phonak has built up an excellent reputationfor its high-quality and high-performance hearinginstruments.The quantity of raw materials going into Phonak’s annualhearing instruments output equals approximately threepassenger cars. The energy consumption of the productionprocesses is also very modest.The Phonak Group specializes in the development, manufacture,and worldwide distribution of technologically advancedhearing systems for adults and children with hearing impairment.Inherent in the Group’s business activities is a fundamentalcommitment to improve individual hearing ability and speechunderstanding, thus contributing significantly to the quality oflife of countless people worldwide.Phonak’s management strongly believes that striving fortrue economic success ultimately requires taking into accountthe needs and expectations of all relevant stakeholders.Phonak’s enduring success story is based on particular respectfor employees, a close relationship with customers, and a veryconstructive partnership with suppliers. Phonak’s unique, innovativeand powerful hearing instruments are the result of thisteamwork. Finally, being economically successful allows Phonakto pass on attractive returns to its owners, i.e. the shareholdersand to help those who are less fortunate.This well-balanced approach, which considers all stakeholders,is observable throughout the company and is reflectedin Phonak’s core values. Working at Phonak is best characterizedby flat hierarchical structures, equal treatment of employees,responsibility for one’s own actions, transparent CorporateGovernance, and open communication with all stakeholders. Tosustain and further develop this strong corporate culture isone of management’s top priorities and a driver for sustainableeconomic success.Phonak’s rapid growth and business expansion have madeit important to set down in writing the core values we upholdand the ethical principles of our corporate culture, so that theyare more readily accessible to our employees. The result is agroupwide Code of Conduct, which came into force on April 1,2006. The purpose of the Code of Conduct is to encourageemployees to act in an ethically correct way in their dealingswith colleagues, business partners, and shareholders, as wellas to help them live out our unique corporate culture in ourworldwide operations. As a globally active company, the PhonakGroup is fully aware of its responsibility for every individualmember of staff. Not only does ethical conduct benefit all stakeholders– it also assures and strengthens our reputation andthereby contributes to our long-term commercial success.Employees – our principal assetThe hearing instrument industry is not a capital-intensivebusiness, but driven by constant product and service innovation.Thus, motivated, dedicated, and creative employees makea big difference and we must support them as best we can.To safeguard our long-term success, we consistently investin the professional training and development of our staff. In2005/06, a total of 881 employees took part in training andprofessional development courses. This is roughly equivalent to36Sustainability

28% of the Phonak Group’s headcount as of March 31, 2006.These data were collected for the first time during the financialyear 2005/06. In 2006/07, we shall use the experiences to dateto define standards for the whole Group.During 2005/06, we launched a groupwide High PerformanceProgram, designed to strengthen and develop our middlemanagement, so that we are in a better position to fill keypositions internally in the future. With this in mind, a steeringcommittee comprising members of the Management Boardidentifies, assesses, and finally selects potential candidates fromthe entire Phonak Group. The training program is very practical,user-oriented, and tailored to the needs of the Phonak Group.The central goal is to promote specialist know-how, developpersonal, social and management skills, and encourage entrepreneurialthinking beyond the individual’s own area of responsibility.One important component of the High PerformanceProgram is the mentor program sponsored by the members ofthe Management Board and top management. This aims toexploit the synergy potential arising from the combination oftheory and practice. In February 2006, a total of 30 talentedyoung managers from 16 Group companies took part in a oneweekintroductory event organized in conjunction with adistinguished management school. The feedback from thoseattending was extremely positive. Participants were particularlyimpressed by the quality and practical nature of the coursecontent and the opportunity to exchange experiences beyondareas of responsibility and national borders. The program willcarry on next year.Interdisciplinary know-how in the “Science of Hearing” isparamount in order to develop and build superior hearing systems.Knowledge management is consequently a core element ofPhonak’s management philosophy: there are no barriers, no closeddoors; employees can contact anybody at any time. This philosophyis also reflected in the open and light architecture ofPhonak headquarters in Stäfa and of many other Groupcompany offices worldwide. A groupwide, centralized projectplatform supports the integration of interdisciplinary andbroadly based project teams. Dedicated and carefully plannedprofessional development as well as systematic internalizationof external know-how are also important knowledge managementdrivers.The production setup for manufacturing a hearing instrumentis similar to the watch industry. Very small components haveto be manually positioned and soldered with the aid of microscopes,in very clean, climate-controlled, and light rooms. Employeesat the different production sites share the same qualitystandards, identical production processes and standard workprocedures.In the current financial year, a groupwide survey of accidentrates in the workplace was undertaken for the first time. Thisrecorded 36 accidents that resulted in employees being unableto continue working. As expected, this rate is very low in relationto the total workforce of 3,428 (headcount as of March 31,2006) and is a reflection of the low risk profile enjoyed by thehearing instrument industry. Those accidents reported were investigated;suggestions for improvements will be circulatedto all Group companies. Viewed as a whole, the level of workaccidents as a percentage of total reported accidents that ledto work incapacity is almost negligible. Most of the accidentsthat happened to staff occurred during their free time or ontheir way to work, not actually at work. For the next financialyear the Phonak Group plans to introduce accident preventionmeasures that exceed those for security at the workplace.Phonak’s unique corporate culture makes it an exceptionallyattractive employer. We are able to attract skilled employeesfrom very diverse backgrounds thanks to a dynamic work environment,challenging tasks, performance-based management style,flat hierarchical structures, and open communication, relaxedbut courteous staff relations, and the fact that the hearinginstrument business plays an important social role and hasa secure future. To ensure that our staff participate in thecompany’s long-term financial success, we have set up variousemployee share option programs. Over 750 employees alreadyown shares in Phonak through these schemes.Sustainability37

Our customers buy a better quality of lifeOur approach is not technology for its own sake. Instead,we constantly strive for technological innovations, which cansolve everyday problems of people suffering from hearingimpairment. For over 40 years now, Phonak has been committedto providing high-tech solutions for hearing-impaired people,thereby restoring some of their quality of life. In the case ofchildren, Phonak’s products give them access to the wealth ofsounds, thereby helping them to develop the auditory skills theyneed to build their future. Furthermore, Phonak is a pioneer inthe field of high-power amplification for people with severehearing impairment.Phonak drives innovation and has set the standards withinthe hearing instrument industry for many decades. Savia,Phonak’s revolutionary hearing system in the digital premiumsegment, has established itself as the benchmark product inthe hearing instrument industry. Savia incorporates many “worldfirsts”like Real Ear Sound or EchoBlock, advanced functionswhich deliver unmatched hearing performance and provide aneffortless and natural hearing experience. In the other pricesegments, Phonak now also offers eXtra and Eleva (both launchedduring 2005/06), two hearing systems that boast the excellentsound quality and basic functionality provided by the PALIO platform.Another milestone in 2006/07 was the market launch ofmicroPower and Verve. With microPower, the advantages ofmicro hearing systems – comfort and cosmetic appeal – are forthe first time available to people with severe hearing impairment.Verve is in a class of its own – both in terms of technology andits comprehensive service package – and has carved out its ownsegment that is positioned above the digital premium segment.Investment in training and continuing educationLast year, Phonak continued to invest heavily in the educationof hearing care professionals and presented the latest scientificresearch and product innovations to a broad audience. As wellas holding conferences, the company also created a uniqueweb-based interactive learning platform. With innovation cyclesbecoming increasingly shorter and the number of hearing systemfunctions steadily growing, our employees and distributionpartners worldwide need to spend more time on training andcontinuing education. To ensure that users are able to fully benefitfrom the exceptional performance offered by our products,we need to ensure a high standard of education and trainingacross the entire value chain. With the help of the new interactivelearning platform, we can train our global workforce quicklyand efficiently while at the same time addressing our clientsdirectly. Leading scientists are already giving presentations onthis platform and recorded product presentations can be downloadedfrom anywhere in the world. One positive consequenceof this platform is that it reduces the amount of travel, therebybenefiting the environment.During the last financial year, Phonak once again organizedseveral highly regarded conferences on different topics inaudiology. Over 350 experts from 34 different countries attendedour Second European Conference for Pediatric Audiology inAmsterdam, the Netherlands, in October 2005. Here, internationallyrenowned specialists were able to share their knowledgewith audiologists and pediatric experts. Topics included otitismedia, causes of hearing impairment, environmental considerations,and current issues concerning the provision of hearinginstruments for infants.For November 2006 Phonak is planning an internationalconference in Chicago on the topic “Challenges associated withhearing care for the adult population”. An international teamof around 30 leading international experts will present the latestresearch findings. The scientific presentations are backed up bypractical information that is useful for everyday work.Recognizing that today’s hearing instruments may still beimproved to rival the hearing abilities of the human ear in allhearing situations, Phonak continuously pursues the development38 Sustainability

of new, innovative technologies that further improve the benefitsfor end users. Therefore, Phonak will invest significant R&Dresources to further enhance the quality of life of many hearingimpairedchildren and adults. Phonak will continue its closecollaboration with researchers and scientists worldwide in orderto drive innovation in these respective fields even further.kit and is based on a modular approach that allows a high degreeof reuse, resulting in further improvements in productquality. Every future product line will benefit from the learningcurve and improvements of its predecessor. Consequently, theinherent risk of introducing a new product decreases significantlyover time.The importance of product qualityOver several decades, Phonak has built up an excellentreputation for its high-quality and high-performance hearinginstruments. In the process, it has transformed itself from aniche provider of high-end hearing systems to a complete solutionsprovider. The current product portfolio covers all pricesegments and caters for a wide variety of user requirements.Common to all products are the high quality standards typicallyassociated with the name Phonak.Hearing instruments are subject to standards imposed bythe Medical Device Directive of the European Community, MDD93/42/EEC, and by ISO standards 9001:2000 and 13485:2003,respectively. In order to comply with these rules, Phonak has toensure biocompatibility of its products and must not usehazardous raw materials or operating supplies in its productionprocess.Unlike other medical devices, regulations allow a continuousproduct improvement process for previously introduced hearinginstruments. Based on customer feedback and inputs fromPhonak’s quality assurance team, all hearing instruments aresubject to continuous improvements during their product lifecycle.Ever shorter innovation cycles have fuelled a dramaticincrease in the number of new products launched. In the financialyear 2005/06 alone, the Phonak Group launched six new productfamilies. In addition to the responsible product teams, a specialquality assurance team has been set up to assure the qualityof every individual product line across its entire life cycle.The proprietary PALIO platform has been extended furtherduring the financial year and provides the foundation for manyother product lines, such as Indigo, the new Unitron Hearinginstrument in the premium segment. The PALIO platform is a toolClose partnership with our suppliersWe have built close relationships with our suppliers overmany years. Suppliers make a vital contribution to the developmentof new products: they provide the manufacturing equipment,raw materials, components, and operating supplies neededto make hearing systems. Innovation is based on effectivecollaboration between internal departments and several hightechcompanies delivering specific building blocks incorporatingtheir areas of expertise e.g. micro-electronics or electromechanics.Hearing instruments are miniaturized high-performancemedical devices and Phonak’s suppliers share the same challengesand quality requirements and, like Phonak, are also subjectto standards imposed by the Medical Device Directive of theEuropean Community and by ISO norms.In 2006/07, Phonak will continue to broaden and strengthenits cooperation with suppliers, which is key to keepinginnovation at the current high level and to further improve competitiveness.Sustainability39

Corporate GovernancePhonak’s Board of Directors is totally independent. TheBoard of Directors consists of well respected, very seniorexecutives with a broad collective experience in many functionsand in-depth knowledge of several industries. Their level ofprofessionalism, integrity, and reputation guarantee that thetasks and responsibilities of the Board of Directors are executedin the interest of the shareholders.As described in the “Corporate Governance” section of theAnnual Report, the Board of Directors once again significantlyimproved the transparency of the compensation paid tothe Board of Directors and the Management Board in 2005/06.It continuously monitors Corporate Governance principlesand their observance, and will make further improvements ifnecessary.Environmental impact is remarkably lowThe quantity of raw materials going into Phonak’s annualproduction of hearing instruments is equivalent to three midclasspassenger cars (see adjacent table). Due to the wide rangeof different product lines, this analysis is based on the newPALIO BTE platform which is currently used for Savia, Eleva, eXtra,microPower, Verve, and Indigo and in the future will be usedas a basis for other product lines.Hearing instruments are subject to standards imposed bythe Medical Device Directive of the European Community, MDD93/42/EEC, and by ISO standards 9001:2000 and 13485:2003.In order to comply with these rules, Phonak must not use hazardousraw materials or operating supplies in its productionprocess. Unfortunately, these regulations also limit the use ofrecycled material or used components. Due to the premiumquality of the input materials used, waste materials are still veryvaluable and are redirected into the recycling loop, which includesthe recovery of plastic remnants from molding processes,cut-offs from printed circuit boards, and metals.Waste water from cleaning processes is filtered, filters are disposedof and the processed water redirected into the normal watercycle. The energy consumption of the production processes is verymodest. Climate control accounts for most of the energy consumed.In 2005/06, the Phonak Group extended its recycling measuresacross the entire life cycle of the products and implementedthe EU Directive WEEE (Waste Electrical and ElectronicEquipment) worldwide. This directive requires that consumers nolonger simply dispose of old electrical devices in their householdrubbish, but in an environmentally responsible way throughindividual collection and recycling systems. This directive alsoaffects owners of hearing instruments. Phonak has affiliated itselfto country-specific disposal systems. If these do not exist,Phonak takes back used devices and disposes of them correctlyat its headquarters in Stäfa, Switzerland.In 2005/06, the ongoing miniaturization of hearing systems– especially the micro devices for open fitting such as microSaviaand microEleva – led to lower consumption of raw materialsand operating supplies per unit, while the acoustic performanceof the hearing systems was substantially improved.As more product lines are built on the PALIO platform,today’s very low level of raw materials and operating suppliesusage per unit will decrease further in 2006/07. Additionalimprovements in production processes will boost yields and supportthis trend.Analysis based on the PALIO BTE platformPlasticsRubberMetalsNon-ferrous metalPrinted Circuit Boards (PCB)ChipsetLacquerTotal2,142 kg111 kg787 kg25 kg268 kg37 kg36 kg3,406 kg40 Sustainability

A high level of social commitmentThrough its Phonak and Unitron Hearing Group companies,the Phonak Group is involved in numerous projects to raisegeneral awareness about better hearing and the benefits ofhearing instruments. It also supports a number of social projectsto improve the quality of life for people with hearing impairment,especially children.In 2005/06 Phonak increased the level of financing for theEduplex project. The Eduplex School is a unique educationalprogram, opened by Dr. Nelson Mandela in Pretoria, South Africa,in 2002, providing equipment to ensure that deaf children arefully included in the regular school program. The Eduplex programproves that today’s technology, in combination with an inclusive,language-enabling environment, makes it possible for deafand hearing-impaired children to acquire fluent spoken languageand good academic results. The success of this program can beseen in the lives of talking deaf adults who have achieved theirfull academic potential.Unitron Hearing supports children attending courses at theKidsAbility Centre for Child Development in Cambridge, Ontario(Canada). These courses include therapy sessions attended bythe whole family in which students learn to improve their languageand speech skills through listening.Unitron Hearing is also involved in the Ontario InfantHearing Program. This program conducts hearing tests on over1,000 babies and infants every year, and the families receiveassistance with the difficult task of bringing up small childrenwho suffer from hearing loss.Unitron Hearing also helps fund the China aid campaignrun by the University of Iowa, whose purpose is to supply hearinginstruments to orphans and disadvantaged Chinese childrensuffering from hearing loss and to train medical personnel to fithearing systems.Phonak New Zealand has a project that cares for hearingimpairedchildren in Lautoka School, Fiji. In a five-year programnamed “HearAid project”, Phonak New Zealand is contributingfunds, staff resources, and hearing instruments to the school.Last year, a teacher also received additional training in how toteach deaf pupils. Phonak staff regularly visit the Lautoka Schoolto test children’s hearing and adjust hearing systems.Phonak New Zealand also supports the Federation for DeafChildren and each year awards academic prizes to deaf childrenwho excel at their studies.Phonak Denmark supports the Danish Auditory ProcessingDisorders (APD) Group, providing not only funding but alsoorganizational and administrative assistance. The APD Groupholds seminars and conferences on the topic “Auditory processingand perception disorders”, thus contributing to researchand the exchange of know-how.Phonak Denmark also subsidizes research projects withautistic children. The focus here is on whether the use of sensoryenhancers can effectively improve the exceptionally poorconcentration of these children.We will continue our projects and intensify our contributionto the community in 2006/07 onwards.Sustainability41

Push your performance

CONSOLIDATED FINANCIAL STATEMENTSConsolidated Income Statement 46Consolidated Balance Sheet 47Consolidated Statement of Cash Flows 48Consolidated Changes in Equity 49Notes to the Consolidated Financial Statements 50Report of the Group Auditors 87Consolidated Financial Statements45

Consolidated Income Statement1,000 CHFSalesCost of salesGross profitResearch and developmentSales and marketingGeneral and administrationOther (expenses)/income, netOperating profit (EBIT)Financial incomeFinancial expensesShare of (loss)/gain in associates/joint venturesIncome before taxesIncome taxesIncome after taxesNotes589919102005/06866,682(289,478)577,204(63,039)(206,846)(93,433)(2,224)211,6625,553(1,285)(134)215,796(43,331)172,4652004/05 1)660,375(242,561)417,814(48,932)(159,117)(85,766)1,798125,7973,568(4,393)152125,124(29,268)95,856Attributable toEquity holders of the parentMinority interest171,4471,01895,024832Basic earnings per share (CHF)Diluted earnings per share (CHF)11112.5912.5681.4501.4341)Including adjustments in accordance with new IFRS accounting standards (see Notes)The Notes are an integral part of the consolidated financial statements46 Consolidated Financial Statements

Consolidated Balance SheetAssets1,000 CHFCash and cash equivalentsFinancial assets at fair value through profit or lossTrade receivablesOther receivables and prepaid expensesInventoriesTotal current assetsTangible assetsIntangible assetsInvestments in associates/joint venturesOther investments and long-term loansDeferred tax assetsRetirement benefit assetsTotal non-current assetsTotal assetsNotes137, 1415161718211920103131.3.2006179,54912,762194,33045,54294,244526,427117,255208,3794,06412,85459,1463,135404,833931,26031.3.2005 1)173,24312,401139,19719,97286,550431,363115,391139,1411,5967,81144,9233,135311,997743,360Liabilities and equity1,000 CHFShort-term debtsTrade payablesTaxes payableFinancial liabilities at fair value through profit or lossOther short-term liabilitiesShort-term provisionsTotal current liabilitiesMortgagesOther long-term debtsLong-term provisionsOther long-term liabilitiesDeferred tax liabilitiesTotal non-current liabilitiesTotal liabilitiesShare capitalShare premiumTreasury sharesRetained earningsEquity attributable to equity holders of parentMinority interestEquityTotal liabilities and equityNotes2372422252622271031.3.200612,25337,56240,9451,64991,94837,795222,1523779840,8418,71032,04982,075304,2273,318154,042(2,183)469,625624,8022,231627,033931,26031.3.2005 1)30,78930,98822,9601,42185,93626,339198,43312,57147,07812,8815,13717,55695,223293,6563,301146,578(319)298,231447,7911,913449,704743,3601)Including adjustments in accordance with new IFRS accounting standards (see Notes)The Notes are an integral part of the consolidated financial statementsConsolidated Financial Statements47

Consolidated Statement of Cash Flows1,000 CHFIncome before taxesDepreciation of tangible assetsAmortization of intangible assetsLoss/(gain) on sale of tangible and intangible assets, netShare of loss/(gain) in associates/joint venturesIncrease in other long-term provisionsFinancial (income)/expenses, netUnrealized exchange differencesReduction of payment to pension fundOther non-cash itemsCash flow before changes in working capitalIncrease in trade receivablesIncrease in other receivables and prepaid expensesDecrease/(increase) in inventoriesIncrease/(decrease) in trade payablesIncrease in other payables, accruals and short-term provisionsIncome taxes paidCash flow from operating activitiesPurchase of tangible assetsProceeds from sale of tangible assetsCash consideration for acquisitions, net of cash acquiredPurchase of intangible assetsPurchase of financial assets at fair value through profit or lossSale of financial assets at fair value through profit or loss(Increase)/decrease in other investments and long-term loansInterest received and realized gain from financial assetsat fair value through profit or lossCash flow from investing activitiesFree cash flowRepayments of borrowings and mortgagesProceeds from capital increasesSale of treasury sharesPurchase of treasury sharesDividend paid by Phonak Holding AGDividend paid to minoritiesInterest paidProceeds from foreign exchange contractsCash flow from financing activitiesCurrency translation differencesIncrease in cash and cash equivalentsCash and cash equivalents at April 1Cash and cash equivalents at the end of the financial yearNotes182119918292122,3534,64984313416,864(4,268)(2,078)6,412(40,277)(24,347)1,8292676,537(38,164)(22,491)2,899(40,773)(4,504)(133)(5,247)5,533(82,391)6,4475,770(8,176)(19,840)(133)(1,011)2005/06215,79644,909260,705(94,155)166,550(64,716)101,834(99,334)3,8066,306173,243179,54921,7613,546(27)(152)3,1238258819803,202(25,331)(3,548)(9,888)(3,277)12,285(24,450)(19,576)934(3,001)(3,507)(1,715)1,3481,0303,214(52,548)7,5605,600(319)(13,074)(136)(3,183)1,3602004/05 1)125,12434,139159,263(54,209)105,054(21,273)83,781(54,740)(926)28,115145,128173,2431)Including adjustments in accordance with new IFRS accounting standards (see Notes)The Notes are an integral part of the consolidated financial statements48 Consolidated Financial Statements

Consolidated Changes in EquityAttributable to equity holders of Phonak Holding AGSharecapitalSharepremiumRetainedearningsCumulativetranslationadjustmentTreasurysharesMinorityinterestTotalequity1,000 CHFBalance April 1, 2004 (as reported)3,273135,164238,190(23,577)(3,960)1,248350,338Effect of adopting IFRS 2 1)Balance April 1, 2004 (restated)Changes in accounting principles (IFRS 3)Tax on items taken directlyto the equityCurrency translation differencesTotal income and expense recognizeddirectly in equityConsolidated income after taxesTotal recognized income and expensefor the year3,273364135,528(364)237,8261074214995,02495,173(23,577)1,8831,8831,883(3,960)1,248(31)(31)832801350,338107421,8522,00195,85697,857Capital increase of Phonak Holding AGfrom conditional capital287,5327,560Share-based payments (IFRS 2) 1)Sale of treasury sharesPurchase of treasury sharesDividend paid by Phonak Holding AGBalance March 31, 20053,3011,8781,640146,578(13,074)319,925(21,694)3,960(319)(319)(136)1,9131,8785,600(319)(13,210)449,704Changes in minoritiesCurrency translation differencesTotal income and expense recognizeddirectly in equityConsolidated income after taxesTotal recognized income and expensefor the year171,447171,44719,78719,78719,787(567)(567)1,018451(567)19,78719,220172,465191,685Capital increase of Phonak Holding AGfrom conditional capitalShare-based payments (IFRS 2)Sale of treasury sharesPurchase of treasury sharesDividend paid by Phonak Holding AGBalance March 31, 2006173,3186,4301,275(241)154,042(19,840)471,532(1,907)6,312(8,176)(2,183)(133)2,2316,4471,2756,071(8,176)(19,973)627,0331)Adjustments in accordance with new IFRS accounting standards (see Note 32)The Notes are an integral part of the consolidated financial statementsConsolidated Financial Statements49

Notes to the ConsolidatedFinancial Statements1. Corporate informationThe Phonak Group (the “Group”) specializes in the development,manufacture, and distribution of technologically advancedhearing systems for adults and children with hearing impairment.The Group operates worldwide and distributes its products in over70 countries through its own distribution network and throughindependent distributors. The ultimate parent company is PhonakHolding AG, a limited liability company incorporated inSwitzerland. Phonak Holding AG’s registered office is locatedat Laubisrütistrasse 28, CH-8712 Stäfa, Switzerland.2. Changes in accounting policiesThe International Accounting Standards Board (IASB) issueda revised version of IAS 32 “Financial Instruments: Disclosure andPresentation”, a revised version of IAS 39 “Financial Instruments:Recognition and Measurement” and a general revision of itsInternational Accounting Standards (IAS) which included revisionsof 14 existing standards published in 2003. In 2004, the IASBpublished the standards IFRS 2 “Share-based payment”, IFRS 3“Business Combinations”, IFRS 4 “Insurance Contracts”,IFRS 5 “Non-Current Assets Held for Sale and DiscontinuedOperations”, IAS 36 “Impairment of Assets” and IAS 38“Intangible Assets” as well as further additions to IAS 39.The Phonak Group has applied these standards from April 1,2005, with the exception of IFRS 3, IAS 36 (revised) andIAS 38 (revised) which had already been applied in financialyear 2004/05.IAS 1 (revised) Presentation of Financial Statements.As well as introducing other changes, this revised standardrequires minority interests in consolidated entities to bepresented as a component of consolidated equity, rather thanas a separate category on the face of the balance sheet, andminority interests in the net income of consolidated entities tobe presented as a component of consolidated net income.In the course of the changes of IAS 1 (revised), sales-relatedcosts are no longer shown as a separate line in the consolidatedincome statement. Sales-related costs in the total amount ofCHF 28.1 million (previous year 26.7 million) have been nettedwith sales in the amount of CHF 19.4 million (previous year18.4 million), and reclassified to cost of sales CHF 2.0 million(previous year 1.9 million), sales and marketing CHF 4.8 million(previous year 4.5 million) and to general and administrationCHF 1.9 million (previous year 1.9 million).IFRS 2 Share-based Payment. This new standard requiresthat the fair value of all equity compensation plan awardsgranted to employees be estimated at grant date and recordedas an expense over the vesting period. The expense is chargedagainst the appropriate income statement heading. The standardrequires retrospective application, to all awards granted afterNovember 7, 2002 which had not vested prior to April 1, 2005,within certain transitional requirements. The impact of IFRS 2is detailed in Note 32.In addition, the Group decided to early adopt the amendmentto IAS 21 “The effects of Changes in Foreign Exchange Rates:Net investment in a Foreign Operation” which is effective sinceJanuary 1, 2006 and requires to record exchange differencesthat arise on all monetary items that form part of an entity’s netinvestment in a foreign operation in a separate component ofequity in the consolidated financial statement. In the last financialyear, only monetary items that were denominated in thefunctional currency of the borrower or lender were recognizeddirectly in equity.Changes in accounting policies that arise from the applicationof new or revised standards and interpretations areapplied retrospectively, unless otherwise specified in the transitionalrequirements of the particular standard or interpretation.Retrospective application requires that the results of thecomparative period and the opening balances of that period arerestated as if the new accounting policy had always been applied.The Phonak Group has assessed the impact of the otherrevised and newly applicable standards, and has concluded thatthey have no significant effect on the consolidated financialstatements, apart from additional disclosures.The following new or revised IFRS standards will becomeeffective for financial periods starting on or after January 1,2006 or 2007:50Consolidated Financial Statements

IAS 19 (Amendment), Employee Benefits(effective from January 1, 2006).IAS 39 (Amendment), Cash Flow Hedge Accounting of ForecastIntragroup Transactions (effective from January 1, 2006).IAS 39 (Amendment), The Fair Value Option(effective from January 1, 2006).IAS 39 and IFRS 4 (Amendment), Financial Guarantee Contracts(effective from January 1, 2006).IFRS 1 (Amendment), First-time Adoption of InternationalFinancial Reporting Standards (effective from January 1, 2006).IFRS 6, Exploration for and Evaluation of Mineral Resources(effective from January 1,2006).IFRS 7, Financial Instruments: Disclosures, and a complementaryAmendment to IAS 1, Presentation of Financial Statements –Capital Disclosures (effective from January 1, 2007).IFRIC 4, Determining whether an Arrangement contains a Lease(effective from January 1, 2006).IFRIC 5, Rights to Interests arising from Decommissioning,Restoration and Environmental Rehabilitation Funds(effective from January 1, 2006).IFRIC 6, Liabilities arising from Participating in a SpecificMarket – Waste Electrical and Electronic Equipment(effective from December 1, 2005).The Group has assessed the effect of the changes of thesestandards and has concluded that there will be no significanteffect on the Group’s result and financial position, although thedisclosure requirements will be expanded in certain areas,notably IFRS 7 “Financial Instruments: Disclosures” which willbe effective from January 1, 2007.3. Basis of the consolidated financialstatementsThe consolidated financial statements of the Group arebased on the financial statements of the individual Group companiesat March 31 prepared in accordance with uniformaccounting policies. The consolidated financial statements havebeen prepared under the historical cost convention exceptfor the revaluation of certain financial assets at market value, inaccordance with International Financial Reporting Standards(IFRS), including International Accounting Standards and Interpretationsissued by the International Accounting StandardsBoard (IASB). The consolidated financial statements were approvedby the Board of Directors of Phonak Holding AG onMay 12, 2006.The consolidated financial statements include the financialstatements of Phonak Holding AG as well as the domestic andforeign subsidiaries over which Phonak Holding AG exercises control.A list of the significant companies which are consolidatedis given in Note 38.The preparation of financial statements requires managementto make estimates and assumptions that affect the amountsreported for assets and liabilities and contingent assetsand liabilities at the date of the financial statements as well asrevenue and expenses reported for the financial year. Actualresults could differ from these estimates.3.1 Principles of consolidationInvestments in subsidiariesInvestments in subsidiaries are fully consolidated. These areentities over which Phonak Holding AG directly or indirectlyexercises control. Control is the power to govern the financialand operating policies of an entity so as to obtain benefitsfrom its activities. Control is presumed to exist when the parentowns, directly or indirectly through subsidiaries, more thanhalf of the voting power of an entity unless, in exceptionalcircumstances, it can be clearly demonstrated that suchownership does not constitute control. Under the full consolidationmethod, 100% of assets, liabilities, income and expensesare included. The interests of minority shareholders inequity and net income or loss are shown separately in thebalance sheet and income statement. Changes in minority interestsare accounted for using the “modified parent companymodel”, with any excess of purchase consideration over thecarrying values of the attributable net assets acquired beingrecorded as goodwill.Group companies acquired during the year are included in theconsolidation from the date on which control over the companyis transferred to the Group, and are excluded from the consolidationas of the date the Group ceases to have control over thecompany. Intercompany balances and transactions (incl. unrealizedprofit on inter-company inventories), are eliminatedin full.Investments in associatesInvestments in associates are accounted for using theequity method of accounting. These are entities in which Phonakhas significant influence and which are neither subsidiariesnor joint ventures of Phonak. Significant influence is the powerto participate in the financial and operating policy decisionsof the acquired company but is not control or joint control overthose policies (usually 20–50% of voting rights). Under theConsolidated Financial Statements51

equity method, the investment in an associate is initially recognizedat cost and the carrying amount is increased or decreasedto recognize Phonak’s share of profit or loss of the acquired companyafter the acquisition date.The Group’s share of equity in associated companies, consolidatedusing the equity method, is shown in the balancesheet as “Investments in associates/joint ventures”, and its shareof the results of operations for the year is shown in the incomestatement as “Share of (loss)/gain in associates/joint ventures”.Associates acquired during the year are accounted for as“Investments in associates/joint ventures” from the date onwhich significant influence over the acquired company is transferredto the Group, and derecognized from that position asof the date Phonak ceases to have significant influence over anassociate.Investments in joint venturesInvestments in joint ventures are accounted for using theequity method of accounting. These are contractual arrangementswhereby two or more parties undertake an economic activitythat is subject to joint control. Joint control is the contractuallyagreed sharing of control over an economic activity, and existsonly when the strategic financial and operating decisions relatingto the activity require the unanimous consent of the partiessharing control. Under the equity method, the investment in ajoint venture is initially recognized at cost and the carryingamount is increased or decreased to recognize Phonak’s share ofprofit or loss of the jointly controlled entity after the acquisitiondate.The Group’s share of equity in joint ventures consolidatedusing the equity method is shown in the balance sheet as“Investments in associates/joint ventures,” and its share of theresults of operations for the year is shown in the income statementas “Share of (loss)/gain in associates/joint ventures”.Joint ventures established during the year are accounted foras “Investments in associates/joint ventures” from the date onwhich joint control of the joint venture is transferred to the Groupand derecognized from that position as of the date Phonakceases to have joint control.3.2 Currency translationThe consolidated financial statements are expressed in SwissFrancs (“CHF”), which is the company’s functional and presentationcurrency. The functional currency of each Group companyis based on the local economic environment to which an entityis exposed, which is normally the local currency.Transactions in foreign currencies are accounted for atthe rates prevailing at the dates of the transactions. The resultingexchange differences are recorded in the local incomestatements of the Group companies and included in net income.Monetary assets and liabilities of Group companies whichare denominated in foreign currencies are translated using yearendexchange rates. Exchange differences are recorded as anincome or expense. Non-monetary assets and liabilities are translatedat historical exchange rates. Exchange differences arisingon inter-company loans that are considered part of the net investmentin a foreign entity are recorded in equity.When translating foreign currency financial statements intoSwiss Francs, year-end exchange rates are applied to assetsand liabilities, while average annual rates are applied to incomestatement accounts. Translation differences arising from thisprocess are recorded as a separate component of equity. On disposalof a subsidiary, the related cumulative translation adjustmentis transferred from equity and included in the profit or losson disposal in the income statement.3.3 Accounting and valuation principlesCash and cash equivalentsThis item includes cash in hand and at banks, time depositsand other short-term highly liquid investments with originalmaturities of 3 months or less, as well as bank overdrafts. Thecash flow statement summarizes the movements on cash andcash equivalents. Free cash flow is the net amount of the cashflow from operating and from investing activities.Trade receivablesTrade receivables are recorded at original invoice amount lessprovision made for impairment of these receivables. A provisionfor impairment of trade receivables is established when there isobjective evidence that the Group will not be able to collect allamounts due according to the original terms of the invoice. Theamount of the provision is the difference between the carryingamount and the recoverable amount, being the present value ofexpected cash flows.InventoriesPurchased raw materials, components and finished goodsare valued at the lower of cost or net realizable value. To evaluatecost, the standard cost method is applied, which approximateshistorical cost determined on a first-in first-out basis. Standardcosts take into account normal levels of materials, supplies,labor, efficiency and capacity utilization. Standard costs areregularly reviewed and, if necessary, revised in the light ofcurrent conditions. At each period end, any production or purchase52Consolidated Financial Statements

price variances are analyzed and credited or charged to inventoryif not related to abnormal amounts of wasted materials,labor or other production costs. Net realizable value is theestimated selling price in the ordinary course of business less theestimated costs of completion and selling expenses.Manufactured finished goods and work-in-process are valuedat the lower of production cost or net realizable value. Provisionsare established for slow-moving, obsolete and phase-outinventory.Tangible assetsTangible assets (land, buildings, plant and equipment) arevalued at purchase or manufacturing cost less accumulateddepreciation and any impairment in value. Depreciation is calculatedon a straight-line basis over the expected useful livesof the individual assets or asset categories. Where an assetcomprises several parts with different useful lives, each partof the asset is depreciated separately over its applicable usefullife. The applicable useful lives are 25–40 years for buildings,and 3–10 years for production facilities, machinery, equipmentand vehicles. Land is not depreciated. Leasehold improvementsare depreciated over the shorter of useful life or lease term.Borrowing costs incurred for the construction of any qualifyingasset are capitalized during the period of time that is requiredto complete and prepare the asset for its intended use. Subsequentexpenditure on an item of tangible assets is capitalizedat cost only when it is probable that future economic benefitsassociated with the item will flow to the Group and the cost ofthe item can be measured reliably. Expenditures for repair andmaintenance which do not increase the estimated useful lives ofthe related assets are recognized as an expense in the periodin which they are incurred.Research and developmentThe majority of research and development costs are expensedas incurred. In addition to the internal costs (directpersonnel and other operating costs, depreciation on researchand development equipment and allocated occupancy costs),total costs also include externally contracted research anddevelopment work. Development of tooling and equipmentis recognized as an asset to the extent that it is expected thatthe corresponding project is determined to be technicallyand commercially feasible, thereby yielding probable futureeconomic benefits.LeasingAssets that are held under leases which effectively transferto the Group, the risk and rewards of ownership (finance leases)are capitalized at the inception of the lease at the fair value ofthe leased property or, if lower, at the present value of theminimum lease payments. Minimum lease payments are the paymentsover the lease term that Phonak is or can be requiredto make, excluding contingent rent, costs for services and taxesto be paid by and reimbursed to the lessor, together with anyamounts guaranteed by Phonak or by a party related to Phonak.Assets under financial leasing are depreciated over the shorterof their estimated useful life or the lease term. The correspondingfinancial obligations are classified as “short-term debts” or“other long-term debts”, depending on whether they are payablewithin or after 12 months.Leases of assets under which all the risks and rewards ofownership are effectively retained by the lessor are classified asoperating leases, and payments are recognized as an expenseon a straight-line basis over the lease term unless another systematicbasis is more representative of the time pattern ofthe Group’s benefit.Intangible assetsPurchased intangible assets such as software, licences andpatents, are measured at cost less accumulated amortization andany impairment in value. Software is amortized over a usefullife of 3 years, whereas other intangible assets are amortized overa period of 3 to 5 years or over their expected useful livesapplying the straight-line method. Except for the goodwill Phonakhas no intangible asset with an indefinite useful life.Business combinations and goodwillBusiness combinations are accounted for using the purchasemethod of accounting. The cost of a business combination isequal to the fair values, at the date of exchange, of assets given,liabilities incurred or assumed, and equity instruments issuedby Phonak, in exchange for control of the acquired company plusany costs directly attributable to the business combination.Any difference between the cost of the business combination andPhonak’s interest in the net fair value of the identifiable assets,liabilities and contingent liabilities so recognized is treated asgoodwill. Goodwill is not amortized, but is assessed for impairmentannually in the first half of each financial year, or morefrequently if events or changes in circumstances indicate thatits value might be impaired.Consolidated Financial Statements53

Short-term debtsShort-term debts consist of short-term bank debts andall other interest bearing debts with a maturity of 12 months orless.ProvisionsProvisions are recognized when the Group has a presentobligation (legal or constructive) as a result of a past event, whereit is probable that an outflow of resources will be required tosettle the obligation, and where a reliable estimate can be madeof the amount of the obligation. If the effect of the time valueof money is material, provisions are determined by discountingthe expected future cash flows. The Group recognizes provisionsfor warranty costs to cover any costs arising from the warrantygiven on the sale of its products. The provision is calculatedusing historical and projected data on warranty rates, servicecosts, remaining warranty period and number of hearing aidson which the warranty is still active. Short-term portions ofwarranty provisions are reclassified to short-term provisionsat each reporting date.Income taxesIncome taxes include current and deferred income taxes.Phonak is subject to income taxes in numerous jurisdictions andsignificant judgement is required in determining the worldwideprovision for income taxes. The multitude of transactions andcalculations imply estimates and assumptions. The Group recognizesliabilities based on estimates of whether additional taxeswill be due.Where the final tax outcome is different from the amountsthat were initially recorded, such differences will impact theincome tax and deferred tax provisions in the period in whichsuch determination is made.Deferred tax is recorded on the valuation differences(temporary differences) between the tax bases of assets andliabilities and their carrying values in the consolidated balancesheet. Deferred tax assets relating to tax loss carry-forwardsare recognized only to the extent that it is probable thattaxable income will be available against which the tax lossescan be offset.Provision is made for non-recoverable withholding taxesonly on anticipated dividend distributions from subsidiaries.No provision is made in respect of possible future dividend distributionsfrom undistributed earnings, as the parent is ableto control the timing of the reversal of the temporary differenceand such amounts are considered to be permanently reinvested.Revenue recognitionSales are recognized net of sales taxes and discounts upondelivery of products and reasonably assured collectibility ofthe related receivables. Probable returns of products are estimatedand the related revenue is deferred. Intercompany salesare eliminated.Sales of services are recognized in the accounting period inwhich the services are rendered.Segment reportingA business segment is a group of assets and operationsengaged in providing products or services that are subject to risksand returns that are different from those of other businesssegments. A geographical segment is engaged in providing productsor services within a particular economic environmentthat are subject to risks and returns that are different from thoseof segments operating in other economic environments.ImpairmentPhonak assesses at each reporting date whether there is anyindication that an asset may be impaired. If any such indicationexists, the recoverable amount of the asset is estimated.The recoverable amount of an asset or a cash-generating unitis the higher of its fair value less selling costs and its value in use.Value in use is the present value of the future cash flowsexpected to be derived from an asset or cash-generating unit.If the recoverable amount is lower than the carrying amount,an impairment loss is recognized. Impairment of financial assetsis described under the section on financial instruments.For goodwill, an annual impairment test is performed inthe first half of each financial year, even if there is no indicationof impairment (see “business combinations and goodwill” onpage 53).Related partiesA party is related to an entity if the party directly or indirectlycontrols, is controlled by, or is under common controlwith the entity, has an interest in the entity that gives it significantinfluence over the entity, has joint control over the entityor is an associate or a joint venture of the entity. In addition,members of the key management personnel of the entity or closemembers of their family are also considered related parties asare post-employment benefit plans for the benefit of employeesof the entity. No related party exercises control over the Group.54Consolidated Financial Statements

Employee benefits (IAS 19)Pension obligationsMost employees are covered by post-employment planssponsored by Group companies. Such plans in Phonak Group aremainly defined contribution plans (future benefits are determinedby reference to the amount of contributions paid) andare generally administered by autonomous pension funds orindependent insurance companies. These pension plans are financedthrough employer and employee contributions. TheGroup’s contributions to defined contribution plans are chargedto the income statement in the year to which they relate.Phonak Group also has a number of defined benefit pensionplans, both funded and unfunded. Accounting and reportingof these plans are based on annual actuarial valuations. Definedbenefit obligations and service costs are assessed using theprojected unit credit method: the cost of providing pensions ischarged to the income statement so as to spread the regularcost over the service lives of employees participating in theseplans. The pension obligation is measured as the presentvalue of the estimated future outflows using interest rates ofgovernment securities which have terms to maturity approximatingthe terms of the related liability. Actuarial gains andlosses are recognized over the average remaining serviceperiods of employees participating in these plans as income orexpense when the cumulative unrecognized actuarial gainsor losses for each individual plan exceed 10% of the higher ofthe defined benefit obligation and the fair value of planassets. Expenses from defined benefit plans are charged to theappropriate income statement heading within the operatingresults.Other long-term benefitsOther long-term benefits comprise mainly length of servicecompensation benefits which certain subsidiary companies arerequired to provide in accordance with legal requirements in therespective countries. These benefits are accrued, and the correspondingliabilities are included under “Other provisions”.Equity compensation benefitsThe Board of Directors of Phonak Holding AG, the ManagementBoard, as well as management and senior employeesof Group companies participate in equity compensation plans.In addition a share purchase plan offering three shares for everytwo purchased is offered to all Phonak employees. The fairvalue of all equity compensation awards granted to employeesis estimated, using a binomial option pricing model, at thegrant date and recorded as an expense over the vesting period.The expense is charged to the appropriate income statementheading within the operating results and an equivalent increasein equity is recorded.3.4 Significant accounting judgements and estimatesKey management judgements made in applyingaccounting policiesIn the process of applying the Group’s accounting policies,management may be required to make judgements, apart fromthose involving estimates, which have an effect on the amountsrecognized in the financial statements.Key accounting estimates and assumptionsPreparation of financial statements in conformity with IFRSrequires management to make estimates and assumptionsthat affect the reported amounts of assets, liabilities, revenue,expenses and related disclosures. The estimates and assumptionsare continually evaluated and are based on experience andother factors, including expectations of future events that arebelieved to be reasonable. Actual results may differ from theseestimates and assumptions.The main estimates and assumptions, with the potential ofcausing an adjustment, are discussed below.Cost of business combinationsA business combination agreement may provide for anadjustment to the cost of the combination contingent onfuture events. If the future events do not occur or the estimateneeds to be revised, the cost of a business combination isrevised accordingly, with a resultant change in the carrying valueof goodwill. As at the end of the financial year 2005/06 suchcosts contingent on future events (earn-out and holdback ofpurchase prices) of CHF 16.5 million have been included inthe cost of business combinations.Property, plant and equipment and intangible assets,including goodwillThe Group has property, plant and equipment with a carryingvalue of CHF 117.3 million as disclosed in Note 18 and intangibleassets, including goodwill with a carrying value ofCHF 208.4 million as disclosed in Note 21.The Group determines annually, in accordance with theaccounting policy stated in Note 3.3, whether any of the assetsare impaired. For the impairment tests, estimates are made ofthe expected future cash flows from the use of the asset. Theactual cash flows could vary significantly from these estimates.Deferred tax assetsThe consolidated balance sheet includes deferred tax assetsof CHF 59.1 million related to deductible differences and, incertain cases, tax loss carryforwards provided that their utilizationappears probable. The recoverable value is based on forecastsof the corresponding taxable Group company over a periodof several years. As actual results may differ from these forecasts,the deferred tax assets may be impaired accordingly.Consolidated Financial Statements55

Employee benefit plansPhonak has various employee benefit plans. Most of itssalaried employees are covered by these plans, many of whichare defined benefit plans. The present value of the definedbenefit obligations at the end of the financial period 2005/06amounts to CHF 98.0 million as disclosed in Note 31. Withsuch plans, actuarial assumptions are made for the purpose ofestimating future developments, including estimates andassumptions relating to discount rates, the expected return onplan assets in individual countries and future wage trends.Actuaries also use statistical data such as mortality tables andstaff turnover rates with a view to determining employeebenefit obligations. If these factors change due to a change ineconomic or market conditions, the subsequent results coulddeviate considerably from the actuarial reports and calculations.Over the medium term such deviations could have a significanteffect on income and expenses arising from employee benefitplans. The carrying amounts of the plan assets and liabilitiesin the balance sheet are set out in Note 31.Provision for warranty and returnsThe Group recorded provisions for warranty and returnsof CHF 33.2 million as of March 31, 2006 as disclosed in Note 22.The calculation of these provisions is based on turnoverand past experience of warranty claims and returns. The actualcosts for warranty and returns may differ from the estimates.3.5 Financial risk managementThe Group is exposed to the following financial risks:Interest rate riskInterest rate risk relates primarily to long-term interestbearing liabilities. The Group’s mortgages as well as a portion ofthe other long-term debts represent long-term fixed-rate contracts,which minimize the risk of changing interest rates.The remainder of the long-term debts are currently subject tomoney market rates. The interest situation and hedgingpossibilities are continuously monitored. Derivative instrumentsare currently not being used to hedge against changes ininterest rates.Exchange rate riskThe Group buys and sells products in foreign currenciesand is therefore exposed to exchange rate risks. To minimizeforeign currency exchange risks, relating in particular tointer-company sales and the settlement of inter-company loans,forward currency contracts are entered into. Generally, thesecontracts do not qualify for hedge accounting treatment underIAS 39, and accordingly exchange losses and gains on forwardcurrency contracts are recognized in the income statement. However,if a forward contract qualifies as a hedge, under IAS 39,such exchange gains and losses on the contract are recordedin equity and are reclassified to the income statementwhen the gains or losses on the underlying transaction arerecorded.Credit riskFinancial assets which could expose the Group to a potentialconcentration risk are principally cash and bank balances andtrade receivables. Banking relations are maintained only with firstclassfinancial institutions. The Group performs continuouscredit checks on its customers and is not exposed to any significantconcentration risks.3.6 InvestmentsPhonak classifies its investments in the following categories:financial assets at fair value through profit or loss, loans andreceivables, held-to-maturity investments, and available-for-salefinancial assets. The classification depends on the purpose forwhich the investments were acquired. Management determinesthe classification of its investments at initial recognition andreclassifies them whenever their intention or ability changes. Allpurchases and sales are recognized on the settlement date.Financial assets at fair value through profit or lossFinancial assets at fair value through profit or loss are assetsheld for trading, acquired for the purpose of generating a profitfrom short-term fluctuations in price or dealer’s margin.Derivative financial assets and derivative financial liabilities arealways deemed as held for trading unless they are designatedand effective hedging instruments. Financial assets held for tradingare measured at their fair value plus initial transactioncosts. Fair value changes on a financial asset held for trading areincluded in net profit or loss for the period in which they arise.Assets in this category are classified as current assets if they areeither held for trading or are expected to be realized within 12months of the balance sheet date.Loans and receivablesLoans and receivables are non-derivative financial assetswith fixed or determinable payments that are not quoted inan active market. They arise when the Group provides money,goods or services directly to a debtor with no intention oftrading the receivable. They are included in current assets, exceptfor maturities more than 12 months after the balance-sheetdate. These are classified as non-current assets. Loans and receivablesare included in trade and other receivables in the balance56Consolidated Financial Statements

sheet. Loans are measured at amortized cost. Amortized cost isthe amount at which the financial asset is measured at initialrecognition minus principal repayments, plus or minus the cumulativeamortization using the effective interest method of anydifference between that initial amount and the maturity amount,minus any reduction for impairment or uncollectibility. Theeffective interest method is a method of calculating the amortizedcost of a financial asset and of allocating the interestincome over the relevant period. The effective interest rate is therate that exactly discounts estimated future cash paymentsor receipts through the expected life of the financial instrumentor, when appropriate, a shorter period to the net carrying amountof the financial asset.Held-to-maturity investmentsHeld-to-maturity investments are non-derivative financialassets with fixed or determinable payments and fixed maturitiesthat the Group’s Management has the intention and abilityto hold to maturity. Assets under this category that have a fixedmaturity are valued at amortised cost using the effective interestrate method.Available-for-sale financial assetsAvailable-for-sale financial assets are non-derivativefinancial assets that are designated in this category or notclassified in any of the other categories. They are includedin non-current assets unless Management intends to dispose ofthe investment within 12 months of the balance sheet date.Available-for-sale financial assets are initially measured attheir fair value. After initial recognition available-for-sale financialassets are measured at fair value with gains and losses beingrecognized as a separate component of equity until the investmentis derecognized or until the investment is determined to beimpaired at which time the cumulative gain or loss previouslyreported in equity is included in the income statement.The fair values of investments that are actively traded arebased on current bid prices. If the market for a financial asset isnot active fair value is determined using valuation techniques.Impairment of financial assetsA financial asset is impaired if its carrying amount is greaterthan its estimated recoverable amount. The Group assesses,at each balance sheet date, whether there is any objective evidencethat a financial asset may be impaired. If any suchevidence exists, the Group estimates the recoverable amount ofthat asset and recognizes any impairment loss in the incomestatement. If, in a subsequent period, the amount of the impairmentloss decreases and the decrease can be objectively relatedto an event occurring after the write-down, the write-down ofthe financial asset is reversed. The reversal generally will notresult in a carrying amount of the financial asset that exceedswhat amortized cost would have been, had the impairmentnot been recognized, at the date the write-down of the financialasset is reversed. The amount of the reversal is included in netprofit or loss for the financial year.3.7 Derivative financial instruments and hedgingThe Group regularly hedges its net exposure from expectedfuture cash in- and outflows in foreign currencies with forwardcontracts. Such contracts are not qualifying hedges and aretherefore not accounted for using hedge accounting. Gainsand losses on these transactions are taken directly to the incomestatement; the corresponding positive and negative replacementvalues are recognized on the balance sheet as financialassets/financial liabilities at fair value through profit or loss.Until November 2004, the Group entered into derivative contractsin order to hedge investments in foreign entities. Suchderivative contracts were designated as hedges, with changes intheir fair value recognized in equity. However, no net investmenthedge has been made since November 2004.4. Changes in Group StructureThe following changes in the Group structure (fullyconsolidated companies) have occurred in the last 2 financialyears:Financial year 2005/06:Acquisition of CAS Produtos Médicos Ltda., Brazil, as ofOctober 4, 2005Acquisition of Metro Hearing Inc., USA, as of November 1, 2005In addition to the two main acquisitions mentioned above,4 smaller entities have been acquired during the financial year2005/06.For more detailed information regarding the acquisitionsplease refer to Note 29.Financial year 2004/05:Unitron (Sichuan) Co., Ltd, China, founded in June 2004Consolidated Financial Statements57

5. Segment informationProfit or loss based on location of assetsEurope1,000 CHFSalesThird partiesIntersegment salesTotal salesOperating profit (EBIT)Financial income/(expenses), netShare of (loss)/gain in associates/joint venturesIncome before taxesTaxesIncome after taxes2005/06416,812275,930692,742207,628(134)2004/05345,997264,339610,336142,0761522005/06399,69733,321433,01824,334Americas 2) 2004/05280,82422,460303,28425,196Total assets 1)979,962731,173533,958382,111Total liabilities 1)391,045336,167331,361206,468Capital expenditure in tangible and intangible assetsDepreciation and amortization on tangible and intangible assets17,99918,82717,42119,94710,0666,5783,6684,618Third party sales based on location of customersGrowth in local currencies391,15620.4%322,920400,36034.7%284,1441)“Others” include only unallocated corporate assets and liabilities2)The segment Americas includes North and South America (previous year North America only)Prior-year figures have been adjusted accordinglyThe Group is active in one business segment; the development, manufacture, production, distribution and service of hearing systemsand related products.The primary segment information is presented according to geographical regions based on location of assets. This corresponds to theorganizational structure. Transactions between segments are generally conducted at market rates.58 Consolidated Financial Statements

59Consolidated Financial StatementsAsia/Pacific2004/0533,55430,03663,590(4,185)50,53550,5321,99492848,061Eliminations2004/05(316,835)(316,835)(37,290)(573,374)(377,989)(186)Total2004/05660,375660,375125,797(825)152125,124(29,268)95,856743,360293,65623,08325,307660,3752005/0650,17369,475119,6485,32662,69555,4413,7571,59769,68037.9%2005/06(378,726)(378,726)(25,626)(747,584)(503,669)2005/06866,682866,682211,6624,268(134)215,796(43,331)172,465931,260304,22731,82227,002866,68227.8%Others2004/05152,91578,4785,2502005/06102,22930,0495,4862.6%

6. Consolidated Income Statement by type of expenditureThe income statement has been prepared using the operational format. In order to provide additional information, the incomestatement by nature of expenditure is presented below.1,000 CHFSalesChanges in finished goods and work in processOther operating incomeOperating incomeDirect material costsOwn work capitalizedPersonnel expensesOther operating expensesDepreciation and amortizationExchange differencesOperating profit (EBIT)Financial income/(expenses), netShare of (loss)/gain in associates/joint venturesIncome before taxesIncome taxesIncome after taxesNotes518,21919102005/06866,682(1,009)1,641867,314(195,202)2,554(263,421)(169,674)(27,002)(2,907)211,6624,268(134)215,796(43,331)172,4652004/05 1)660,3751,879661662,915(141,451)1,967(226,576)(147,738)(25,307)1,987125,797(825)152125,124(29,268)95,856Attributable toEquity holders of the parentMinority interest171,4471,01895,0248321)Including adjustments in accordance with new IFRS accounting standards (see Notes)60 Consolidated Financial Statements

7. Financial instrumentsOptions/Forward foreign exchange contracts1,000 CHFUnderlying principal amount31.3.2006163,13331.3.2005177,459Positive replacement valueNegative replacement valueTotal707(1,649)(942)990(1,421)(431)Positive replacement values are recorded as financial assets at fair value through profit or loss (Note 14) whereas negative replacementvalues are recorded as financial liabilities at fair value through profit or loss.The Group hedges its net foreign currency exposure based on future expected cash inflows and outflows. The hedges have a durationbetween 1 and 12 months. No hedge accounting has been applied to these hedges, since they do not qualify for such treatment underIAS 39.8. Other (expenses)/income, net1,000 CHFOther operating expensesOther operating incomeExchange differencesTotal2005/06(243)927(2,908)(2,224)2004/05(1,842)1,6531,9871,798Consolidated Financial Statements61

9. Financial income/(expenses), net1,000 CHFGain on financial assets at fair value through profit or lossInterest incomeOther financial incomeTotal financial incomeMortgage interestOther interest expensesOther financial expensesChange in fair value of financial assets available for saleTotal financial expensesTotal financial income/(expenses), net2005/061,1664,368195,553(409)(604)(272)(1,285)4,2682004/054301,1901,9483,568(1,214)(1,968)(2)(1,209)(4,393)(825)Mortgage interest is mainly related to the mortgages on Phonak’s building in Stäfa, Switzerland. The interest rate on mortgages was between2.8% and 5.3% in 2005/06 (see Note 25). Other interest expenses are mainly related to bank loans (see Notes 23 and 26).The change in fair value of financial assets available for sale in the financial year 2004/05 is related to an adjustment of the fair value ofthree investments in third party companies (less than 20% of voting rights). These adjustments have been determined based on an analysis ofthe financial statements of the corresponding unquoted companies.In the financial year 2005/06, these investments have been designated as financial assets at fair value through profit or loss (in accordancewith revised IAS 39).10. Taxes1,000 CHFIncome taxesChange in deferred taxesTotal tax expenseReconciliation of tax expenseIncome before taxesWeighted average expected tax rateTax at weighted average rate+/- effects ofnon tax deductible expenses (income)utilization of previously unrecognized loss carryforwardschange in tax rates on deferred tax balancesprior-year expense and other itemsTotal tax expenseas a % of income before taxes2005/0643,06127043,331215,79620.0%43,2491,310228(920)(536)43,33120.1%2004/05 1)31,529(2,261)29,268125,12425.0%31,331(1,174)(1,345)(1,059)1,51529,26823.4%1)Including adjustments in accordance with new IFRS accounting standards (see Notes)62 Consolidated Financial Statements

The expected Group tax rate is the aggregate obtained by applying the currently effective rate for each individual jurisdiction to itsrespective result before taxes.Due to a change in the country mix of the taxable profit the Group tax rate was reduced to 20.1%.Composition of deferred tax assets and liabilitiesAssetsLiabilitiesAssetsLiabilities1,000 CHFTax loss carry forwardTrade receivablesOther receivables and prepaid expensesInventories incl. allowancesTangible fixed assetsIntangible assetsProvisionsOther liabilitiesDeferred taxes18,244996122,0711361,60112,9273,17059,14631.3.20061,92422,1607,6467,0113,21710,08932,04913,8651,13713,874308157,1688,03444,92331.3.20051,1851012,2818,5592,8432,39419317,556Deferred tax assets have been capitalized based on the projected future performance of the Group companies, supplemented with taxplanning opportunities.In financial year 2004/05, CHF 42,000 have been credited to equity arising from the deferred tax impact on the currency translationdifference related to the associate company Cochlear Ltd.The gross values of unused tax loss carryforwards, which have not been capitalized as deferred tax assets, with their expiry dates are asfollows:1,000 CHFWithin 1 yearWithin 2 yearsWithin 3 yearsWithin 4 yearsWithin 5 yearsMore than 5 yearsTotal2005/0684842004/0559580675Consolidated Financial Statements63

11. Earnings per shareBasic earnings per shareBasic earnings per share are calculated by dividing the income after taxes attributable to the ordinary equity holders of the parentcompany by the weighted average number of shares outstanding during the year.Income after taxes (in 1,000 CHF)Weighted average number of outstanding sharesBasic earnings per share (in CHF)2005/06171,44766,162,2372.5912004/05 1)95,02465,548,3171.4501)Including adjustments in accordance with new IFRS accounting standards (see Note 32)Diluted earnings per shareIn the case of diluted earnings per share, the weighted average number of shares outstanding is adjusted assuming all outstandingdilutive options will be exercised. The weighted average number of shares is adjusted for all dilutive options issued under the stockoption plans which have been granted in 2003, 2004, 2005, and 2006 and which have not yet been exercised. Anti-dilutive optionshave not been considered. The calculation of diluted earnings per share is based on the same income after taxes for the period as isused in calculating basic earnings per share.Income after taxes (in 1,000 CHF)Adjusted weighted average number of outstanding sharesDiluted earnings per share (in CHF)2005/06171,44766,755,9592.5682004/05 1)95,02466,263,4231.4341)Including adjustments in accordance with new IFRS accounting standards (see Note 32)12. Dividend per shareThe Board of Directors of Phonak Holding AG proposes to the Annual General Shareholders’ Meeting to be held on July 6, 2006, that adividend of CHF 0.50 (previous year CHF 0.30) per share shall be distributed.13. Cash and cash equivalents1,000 CHFCash on handPostal checking and current bank accountsTime depositsTotal31.3.2006384132,81846,347179,54931.3.20055,02983,72784,487173,243The time deposits and bank accounts are mainly denominated in CHF, EUR and USD.For details of the movements in cash and cash equivalents refer to the consolidated statement of cash flows (page 48).64 Consolidated Financial Statements

14. Financial assets at fair value through profit or loss1,000 CHFMarketable securitiesPositive replacement value of forward foreign exchange contractsFinancial assets at fair value through profit or loss31.3.200612,05570712,76231.3.200511,41199012,401For details of forward foreign exchange contracts refer to Note 7.15. Trade receivables1,000 CHFAccounts receivableProvision for doubtful accountsTotal31.3.2006202,959(8,629)194,33031.3.2005147,495(8,298)139,197As usual in this industry, the Phonak Group has a large number of customers and there is no significant concentration of credit risk.During the financial year 2005/06 the Group has recognized a provision of CHF 1.1 million (previous year CHF 2.1 million) for theimpairment of accounts receivable. During 2005/06 the Group has used provision for impaired receivables of CHF 0.8 million(previous year CHF 0.9 million). The recognition and usage of provision have been included in “other (expenses)/income, net” in theincome statement.16. Other receivables and prepaid expenses1,000 CHFOther receivablesPrepaid expensesTotal31.3.200626,22619,31645,54231.3.200511,8328,14019,972The largest individual items included in other receivables are recoverable value added taxes and advances to suppliers.Consolidated Financial Statements65

17. Inventories1,000 CHFRaw materials and componentsWork-in-processFinished products (incl. purchased goods)AllowancesTotal31.3.200616,57638,60765,780(26,719)94,24431.3.200541,10330,15135,689(20,393)86,550Allowances include write downs for slow moving, phase out and obsolete stock.The amount of inventories recognized as an expense included in cost of sales amounted to CHF 228.2 million during the financial year2005/06 (previous year CHF 196.9 million).18. Tangible assetsLandBuildingsTotalLand &BuildingsPlant &EquipmentTotaltangibleassets1,000 CHFCostBalance April 1Changes through business combinationsAdditionsDisposalsExchange differencesBalance March 31Accumulated DepreciationBalance April 1Changes through business combinationsAdditionsDisposalsExchange differencesBalance March 31Net book valueBalance April 1Balance March 3110,166(1,033)1279,26019431979,9729,06380,461312419(1,847)(590)78,75525,8732,850(1,440)(492)26,79154,58851,96490,627312419(2,880)(463)88,01526,0672,850(1,440)(489)26,98864,56061,027153,3702,36822,072(15,689)4,448166,569102,53919,503(13,558)1,857110,34150,83156,22831.3.2006243,9972,68022,491(18,569)3,985254,584128,60622,353(14,998)1,368137,329115,391117,25566 Consolidated Financial Statements

LandBuildingsTotalLand &BuildingsPlant &EquipmentTotaltangibleassets1,000 CHFCostBalance April 1Changes through business combinationsAdditionsDisposalsExchange differencesBalance March 31Accumulated DepreciationBalance April 1Changes through business combinationsAdditionsDisposalsExchange differencesBalance March 31Net book valueBalance April 1Balance March 3110,16610,166195(1)1949,9719,97280,200349(10)(78)80,46123,6962,225(4)(44)25,87356,50454,58890,366349(10)(78)90,62723,8912,225(4)(45)26,06766,47564,560139,72235519,227(4,680)(1,254)153,37087,3397319,536(3,779)(630)102,53952,38350,83131.3.2005230,08835519,576(4,690)(1,332)243,997111,2307321,761(3,783)(675)128,606118,858115,391The tangible assets (buildings, plant and equipment) are insured against fire for a value of CHF 232.9 million (previous yearCHF 235.1 million).Pledged assets amounted to CHF 42.3 million (previous year CHF 52.7 million) and were all related to mortgages.Expenditures incurred in construction of plant and equipment, and included in the carrying amount thereof, amounted to CHF 5.5 millionfor financial year 2005/06 (CHF 3.5 million for financial year 2004/05).Consolidated Financial Statements67

19. Investments in associates and joint venturesThe Group’s share of the results of its principal associates and joint ventures and its share of the assets (including goodwill andliabilities) are as follows:Investments in associates and joint ventures1,000 CHFCurrent assetsNon-current assetsTotal assetsCurrent liabilitiesLong-term liabilitiesTotal liabilitiesNet assets2005/061,5731,5483,121(914)(74)(988)2,1332004/051,4481,1722,620(1,021)(1,021)1,599Income for the yearExpenses for the yearLoss for the year3,332(5,757)(2,425)2,665(3,624)(959)Net book value as at year endShare of (loss)/gain recognized by Phonak4,064(134)1,596152The significant investments consist of an associated company with a 25% equity share in Cochlear Accoustics Ltd. and of a 25% equity sharein a joint venture with other leading hearing instrument manufacturers, HIMSA A/S, active in software development in Copenhagen.In the financial year 2005/06 several acquisitions of investments in associates have been made for a total acquisition value of CHF 2.6 million.For two investments with a net book value of CHF 2.8 million, the financial statements with a business year ending on December 31 wereincluded accordingly.68 Consolidated Financial Statements

20. Other investments and long-term loans1,000 CHFOther investmentsLong-term loansTotal31.3.20066,0056,84912,85431.3.20053,4774,3347,811The other investments consist of minority interests in the Danish patent holding company HIMPP A/S, the Danish software developmentcompanies HIMSA II A/S (Hearing Instruments Manufacturers Software Association II A/S), HIMSA II K/S, in which Phonak has invested,together with other leading hearing instrument manufacturers, as well as three further minority interests in third party companies,of which two of them were purchased in the financial year 2005/06. Other investments have been classified in the last financial yearas available-for-sale financial assets.With the revision of IAS 39 (effective for annual periods beginning on or after January 1, 2005), the Group has in accordance withIAS 39 designated these other investments as “financial assets at fair value through profit or loss”. These investments are measured at fairvalue, with changes in fair value recognized in profit or loss.21. Intangible assetsGoodwillSoftwareIntangiblesrelating toacquisitionsOtherintangiblesTotalintangibleassets1,000 CHFCostBalance April 1Changes through business combinationsAdditionsDisposalsExchange differencesBalance March 31Accumulated amortizationBalance April 1AdditionsDisposalsExchange differencesBalance March 31Net book valueBalance April 1Balance March 31131,17538,1904,8279,089183,281131,175183,28117,2534,114(1,747)(630)18,99010,6303,513(1,664)(340)12,1396,6236,8511,22417,47125318,948331,166(16)1,1831,19117,7652,410390(1,776)(361)6632,258(30)(1,688)(359)18115248231.3.2006152,06255,6619,331(3,523)8,351221,88212,9214,649(3,352)(715)13,503139,141208,379Consolidated Financial Statements69

GoodwillSoftwareIntangiblesrelating toacquisitionsOtherintangiblesTotalintangibleassets1,000 CHFCostBalance April 1Change in accounting principles (IFRS 3)Changes through business combinationsAdditionsDisposalsExchange differencesBalance March 31Accumulated amortizationBalance April 1Change in accounting principles (IFRS 3)Changes through business combinationsAdditionsDisposalsExchange differencesBalance March 31Net book valueBalance April 1Balance March 31247,791(117,189)573131,175117,296(117,296)130,495131,17515,6733,472(1,711)(181)17,2539,1303,520(1,711)(309)10,6306,5436,6231,2241,22433331,1912,36035152,4102,2282642,25813215231.3.2005265,824(117,189)1,2243,507(1,711)407152,062128,654(117,296)333,546(1,711)(305)12,921137,170139,141No internally generated intangible assets have been capitalized during financial years 2005/06 and 2004/05. Goodwill has an indefinitelife. Other intangibles and software have finite lives.In accordance with the requirements of IFRS 3, the Group has eliminated the accumulated amortization of goodwill at March 31, 2004,with a corresponding decrease in cost of goodwill. Negative goodwill of CHF 107,000 has been derecognized with a correspondingadjustment of the opening balance of retained earnings.The Group has performed an impairment test on goodwill in the first half of the financial year 2005/06. For the purpose of impairmenttesting, goodwill is allocated to a cash-generating unit or to a group of cash-generating units, which are expected to benefit fromthe synergies of the corresponding business combination. For the impairment test, the recoverable amount of a cash-generating unit(higher of the cash-generating unit’s fair value less selling costs and its value in use) is compared to the carrying amount of thecorresponding cash-generating unit. Future cash flows are discounted with the Weighted Average Cost of Capital (WACC) includingthe use of the Capital Asset Pricing Model (CAPM). Value in use is normally assumed to be higher than the fair value less sellingcosts, therefore, fair value less selling costs is only investigated when value in use is lower than the carrying amount of the cashgenerating unit.The cash flow projections are based on a five-year period. Cash flows beyond the five-year period are extrapolated using estimatedlong-term growth rates. The growth rates do not exceed the long-term average growth rate for the hearing instruments industry inwhich the cash-generating units operate.70 Consolidated Financial Statements

Key assumptions used for value-in-use calculations of material goodwill amounts:Cash-generating unitCarryingamount ofgoodwillCurrencyBasis forrecoverableamountDiscountrateProjectionperiodLong-termgrowthrate1,000 CHFUnitron GroupHansaton Akustische Geräte-Gesellschaft m.b.H.Lapperre BHAC NVPhonak Ibérica S.A.CAS Produtos Médicos Ltda.Metro Hearing Inc.68,54533,27115,7248,03814,99519,234MultipleEUREUREURBRLUSDValue in useValue in useValue in useValue in useValue in useValue in use9%8%8%8%18%9%5 years5 years5 years5 years5 years5 years1.00%1.00%0.50%1.00%1.00%1.00%The discount rates applied are pre-tax.Based on the impairment tests, there was no need for the recognition of any impairment in financial years 2005/06 and 2004/05.22. ProvisionsProvision forwarranty andreturnsOtherprovisionsTotalTotal1,000 CHFBalance April 1Changes through business combinationsAmounts usedReversalsIncreasesExchange differencesBalance March 31thereof short-termthereof long-term30,224364(13,698)(1,220)15,6961,86333,22925,4347,7958,9961,810(2,225)(3,665)39,81467745,40712,36133,04631.3.200639,2202,174(15,923)(4,885)55,5102,54078,63637,79540,84131.3.200532,870(15,915)(1,320)24,768(1,183)39,22026,33912,881Up to financial year 2004/05 accrued liabilities for vacation pay and for bonus and incentive compensation have been classifiedunder provisions. These liabilities in the amount of CHF 28.0 million have been reclassified to accrued expenses (refer to Note 24).Prior-year figures in the amount of CHF 24.3 million have been adjusted to reflect this reclassification.On average, Phonak grants a 15-month warranty period for its products. During this period, products will be repaired or replacedfree of charge. The provision is based on turnover and past experience of warranty claims. In some countries, extended warranty issold against a corresponding fee. The timing of cash outflows of this provision is expected within the next one to three years.Other provisions include liabilities for the present value of estimated earn-out payments resulting from the variable purchase pricefrom companies bought in the amount of CHF 16.5 million. The timing of the cash outflows is expected within the next one tofive years. In addition, other provisions include a provision for reimbursement to customers in the amount of CHF 14.3 million. Thetiming of cash outflows is expected within the next one to two years.Consolidated Financial Statements71

Among various other items, other provisions also include a provision for the expected costs for settling pending disputes andclaims, which have arisen in the normal course of Phonak’s business. The main claim relates to a patent dispute. The timing of cashoutflows is uncertain since it will largely depend upon the outcome of administrative and legal proceedings.23. Short-term debts1,000 CHFCurrent maturities of mortgagesCurrent maturities of long-term debtsTotalNotes2531.3.200612,25312,25331.3.20057,18623,60330,789Unused borrowing facilities69,11850,288The book value of short-term debts approximates to fair value.At March 31, 2005, current maturities of long-term debts mainly related to bank loans with an average interest rate of 1.1%. Duringthe financial year 2005/06 these bank loans have been repaid (refer to Note 26).24. Other short-term liabilities1,000 CHFOther payablesAccrued expensesDeferred incomeTotal31.3.200617,97667,8246,14891,94831.3.200512,11367,5756,24885,936Other payables include amounts to be remitted in respect of sales taxes, value added taxes, social security payments, employees’income taxes deducted at source and customer prepayments. Accrued expenses include, among other items, salaries, social expenses,vacation pay, bonus and incentive compensation and accruals for outstanding invoices. Accrued expenses for vacation pay relate toboth unconsumed holiday days as well as to payments for holidays required by law in certain countries.Prior-year figures are adjusted to reflect the reclassification of vacation pay and bonus and incentive compensation from provisionsto accrued expenses (refer to Note 22).72 Consolidated Financial Statements

25. MortgagesShort-termLong-termTotalMortgagesShort-termLong-termTotalMortgages1,000 CHFAnalysis by currencySwiss FrancsEuroDanish CrownsTotalOf which maturing beyond 5 years12,1001312212,25337737731.3.200612,10013139912,6302626,900247397,18612,10010436712,57131.3.200519,00035140619,7577,984The above-mentioned mortgages are all secured by liens on the related real estate. Principal amounts bear interest at the followingrates per annum: CHF 12.1 million at 2.8% and the remainder at 3.4% to 5.3%. Of the CHF mortgage, CHF 5.8 million were prematurelyrepaid in April 2005 and a further CHF 1.1 million were repaid in August 2005. The remaining amount of CHF 12.1 millionwill be repaid in August 2006.The fair value of the mortgages approximates to book value.26. Other long-term debts1,000 CHFBank loansOther long-term debtsTotal31.3.2006989831.3.200547,0007847,078Analysis by currencySwiss FrancsEuroOther currenciesTotalOf which maturing beyond 5 years2969847,000542447,078284At March 31, 2005, the long-term debts denominated in Swiss Francs related to bank loans obtained to finance the purchase of theUnitron and Hansaton subsidiaries. These loans were repaid in June and December 2005.The carrying amounts of bank loans and other long-term debts approximate to fair value.Consolidated Financial Statements73

27. Other long-term liabilities1,000 CHFLong-term deferred incomeRetirement benefit obligationsTotal31.3.20067,4651,2458,71031.3.20053,8641,2735,137Long-term deferred income relates to long-term service contracts with customers. Deferred income is recognized as a sale over theperiod of the service contract.The retirement benefit obligation relates to defined benefit plans. For details refer to Note 31.28. Movements in share capitalIssued sharesIssued sharesTreasury shares 2)Outstandingshares(each share has a nominal value of CHF 0.05)Balance April 1, 2003Issue of new shares from conditional capital 1)Sale of treasury sharesBalance March 31, 2004Issue of new shares from conditional capital 1)Purchase of treasury sharesSale of treasury sharesBalance March 31, 2005Issue of new shares from conditional capital 1)Purchase of treasury sharesSale of treasury sharesBalance March 31, 200665,372,20090,00065,462,200560,20066,022,400338,52566,360,925(330,610)188,898(141,712)(7,700)141,712(7,700)(282,813)255,880(34,633)65,041,59090,000188,89865,320,488560,200(7,700)141,71266,014,700338,525(282,813)255,88066,326,2921)Created for purpose of the employee share option plan2)Treasury shares are purchased on the open market and are not entitled to dividends. As per March 31, 2006, all treasury shares were at the company’s disposal74 Consolidated Financial Statements

Nominal value of share capitalShare capitalTreasury shares 2)Outstandingshare capital1,000 CHFBalance April 1, 2003Issue of new shares from conditional capital 1)Sale of treasury sharesBalance March 31, 2004Issue of new shares from conditional capital 1)Purchase of treasury sharesSale of treasury sharesBalance March 31, 2005Issue of new shares from conditional capital 1)Purchase of treasury sharesSale of treasury sharesBalance March 31, 20063,26943,273283,301173,318(17)10(7)70(14)12(2)3,2524103,2662873,30117(14)123,3161)Created for purpose of the employee share option plan2)Treasury shares are purchased on the open market and are not entitled to dividends. As per March 31, 2006, all treasury shares were at the company’s disposalAt the Annual General Shareholders’ Meetings on November 18, 1994, July 13, 2000, and July 7, 2005 a conditional share capital ofa maximum of 11,301,120 shares was agreed. As of March 31, 2006, 8,247,995 (previous year 5,285,400) shares thereof have not yetbeen issued.For additional information on the Shareholders and the Capital structure of the Group, refer to the Corporate Governance section(pages 19 to 22).The Annual General Shareholders’ Meeting held on July 7, 2005, approved the creation of authorized share capital of 3,301,120registered shares with a par value of CHF 0.05 per share. The Board of Directors is authorized to exclude subscription rights ofshareholders and to allocate them to third parties if the new shares are to be used for the acquisition of companies, parts of companies,equity stakes or the financing of such transactions. The authorized share capital of 3,301,120 registered shares createdon July 7, 2005, has not yet been used. The authorization granted to the Board of Directors to augment the company’s share capitalwith the authorized share capital created expires on July 6, 2007.Consolidated Financial Statements75

29. Acquisition of subsidiariesDuring financial year 2005/06, the Group entered into the following business combinations:NameCAS Produtos Médicos Ltda.PlaceBrazilDate4.10.2005StructureShare dealPurposeSale of hearingBusiness acquiredHearing instrumentsMetro Hearing Inc.USA1.11.2005(100%)Share dealinstrumentsSale of hearingbusinessHearing instruments(100%)instrumentsbusinessIn addition to the above, further four smaller companies were acquired during the financial year 2005/06 in Europe and NorthAmerica.During financial year 2004/05, the Group entered into the following business combinations:NameKam Hearing Technology(Guangzhou) Co., Ltd.Unitron (Sichuan) HearingPlaceChinaChinaDate8.6.20048.6.2004StructureNet assets dealShare dealPurposeSale of hearinginstrumentsSale of hearingBusiness acquiredHearing instrumentsbusinessHearing instrumentsTechnology Co., Ltd. 1)Scancare OYFinland1.9.2004(100%)Net assets dealinstrumentsSale of hearingbusinessHearing instrumentsinstrumentsbusiness1)Unitron (Sichuan) Hearing Technology Co., Ltd. has been renamed Phonak (Sichuan) Co. LtdAll acquisitions have been accounted for using the purchase method of accounting.The acquired companies contributed sales and income after taxes to the Group from date of acquisition to March 31, 2006 as follows:Name1,000 CHFCAS Produtos Médicos Ltda.Metro Hearing Inc.OthersSales sinceacquisition to31.3.200614,8285,7696,517Net income sinceacquisition to31.3.2006712254(231)Sales and income after taxes of the acquired companies for the full financial year April 1, 2005 to March 31, 2006were as follows:Name1,000 CHFCAS Produtos Médicos Ltda.Metro Hearing Inc.OthersSales forfinancial year2005/0630,09412,09312,019Net income forfinancial year2005/061,44560324376 Consolidated Financial Statements

The assets and liabilities arising from the above mentioned acquisitions are as follows:Fair value ofacquiredcompaniesTotalBook value ofacquiredcompaniesTotalFair value ofacquiredcompaniesTotal1,000 CHFAssetsCash and cash equivalentsTrade accounts receivableOther receivables and prepaid expensesInventoriesTangible assetsFinancial assetsDeferred tax assetsIntangible assetsTotal AssetsNotes1821CAS2,1127,8291662,90795099126,45221,337Metro1,79549844861,4137778,24512,858Others5086081061,0963172,7745,4092005/064,4158,9353164,0892,68091,68917,47139,6042005/064,41510,3481,3035,0122,826672,12926,1002004/0535811681,0002821,1912,757LiabilitiesTrade accounts payableIncome tax payableOther payables and accrued expensesShort-term provisionsLong-term debts/provisionsDeferred tax liabilitiesTotal Liabilities(2,551)(1,071)(1,964)(961)(1,456)(2,254)(10,257)(2,340)(1,511)(263)(4,672)(3,175)(11,961)(438)(612)(67)(32)(345)(1,494)(5,329)(1,071)(4,087)(1,291)(6,160)(5,774)(23,712)(5,800)(557)(1,934)(1,108)(4,672)(14,071)(182)(447)(34)(663)Net AssetsMinority interestNet Assets net of minority interest11,08011,0808978973,915(380)3,53515,892(380)15,51212,02912,0292,0942,094Goodwill21Purchase Price incl. acquisition-related costsFor which Phonak recorded a long-term provisionfor the earn-out or holdbackCash considerationCash and cash equivalents acquiredCash consideration, net of cash acquiredEarn-out payment in respect of prior-year acquisitionsCash flow for acquisitions14,73625,816(12,999)12,817(2,112)10,70510,70518,86519,762(1,826)17,936(1,795)16,14116,1414,5898,124(1,602)6,522(508)6,0146,01438,19053,702(16,427)37,275(4,415)32,86032,8602,094(336)1,758(35)1,7231,2783,001Cash outflow for investments in associatesand minority shareholdings7,913Total Cash outflow from acquisitions40,7733,001Consolidated Financial Statements77

30. Related-party transactionsManagementBoardBoard ofDirectorsTotal1,000 CHFShort-term employee benefitsTermination benefitsShare-based paymentsTotal2005/063,9339891,5376,4592004/054,0674184,4852005/065724611,0332004/056392368752005/064,5059891,9987,4922004/054,7066545,360The total compensation to the Management Board, as shown above, relates to six members, including one member who terminatedthe employment during the financial year 2005/06.Phonak AG has a sponsorship agreement with ARcycling Ltd. effective until December 31, 2006. The corresponding expenses includedin the consolidated income statement amount to CHF 3.8 million (previous year CHF 6.2 million).78 Consolidated Financial Statements

31. Employee benefitsPhonak Group’s retirement plans include defined-benefit pension plans in Switzerland, Austria, Canada, Germany and Norway. Theseplans are both funded and unfunded and are accounted for as defined benefit plans according to IAS 19, with recent actuarial valuations.The plans of Norway and Canada are not material. The results of the material plans are summarized below:1,000 CHFAmounts recognized in the balance sheetPresent value of funded obligationsFair value of plan assetsNet present value of funded plansPresent value of unfunded obligationsUnrecognized actuarial lossesTotal assets, netAmounts unrecognized in line with IAS 19.58b(ii)Assets in the balance sheet, net31.3.2006(96,947)102,7805,833(1,067)3,1357,901(5,833)2,06831.3.2005(82,031)84,7552,724(1,087)3,1354,772(2,724)2,048Amounts in the balance sheetLiabilitiesAssetsNet assets in the balance sheet(1,067)3,1352,068(1,087)3,1352,048Amounts recognized in the income statementCurrent service costInterest costExpected return on plan assetsActuarial losses recognized in line with IAS 19.58AWaiver of the employer contribution reserveTotal employee benefit expenses5,4513,132(4,238)1,0345,3794,1002,714(3,611)3,3656,568Movements in the assets, netAt beginning of the yearTotal employee benefit expensesContributions paidAt end of year2,048(5,379)5,3992,0682,912(6,568)5,7042,048Principal actuarial assumptionsDiscount rateFuture salary increasesFuture pension increasesExpected return on plan assetsFluctuation rate3.25%1.75%0%4%10%3.75%2.50%0%5%10%Consolidated Financial Statements79

The amount recognized in the consolidated income statement has been charged to cost of sales (CHF 1.8 million), research anddevelopment (CHF 1.4 million), sales and marketing (CHF 0.8 million) and general and administration (CHF 1.4 million) in theincome statement by type of function and to the position personnel expenses in the income statement by type of expenditure(CHF 5.4 million).The actual return on plan assets was a gain of CHF 8.7 million (previous year gain of CHF 2.4 million).Defined contribution plansSeveral of the Group’s entities have a defined contribution plan. The employer’s contributions are recognized directly in the incomestatement, amounting to CHF 3.1 million in the year ended March 31, 2006 (previous year CHF 1.7 million).Termination benefitsDuring financial year 2005/06, termination benefits of CHF 1.1 million have been expensed (previous year CHF 1.7 million).32. Employee share option and share purchase planThe adoption of IFRS 2 “Share-based payment” resulted in a change in the accounting policy for share and option plans to employees.Until March 31, 2005, no cost related to the fair value of the options of the employee option plans was charged to income. Inaddition to other requirements, the new standard requires that the fair value of the options granted be calculated on the date ofissue and be charged over the vesting period to the respective income statement position. The effects of the introduction ofIFRS 2 for the year ended March 31, 2006 are summarized below. Prior-year income after taxes, earnings per share and equity havebeen restated accordingly.1,000 CHFCost of salesResearch and developmentSales and marketingGeneral and administrationDecrease in operating profit (EBIT)2005/061813494722,8323,8342004/051592213641,1341,878Key People Program (granted between 2000 and 2004)Up to financial year 2003/04, members of the Board of Directors of Phonak Holding AG, the Management Board, as well as managementand senior employees of Group companies annually received a certain number of options on the shares of Phonak Holding AGin accordance with the “Key People Program” established in 1997. This was basically on the condition that the respective employeeshad been employed by the Phonak Group for a period of generally at least two years. The options were granted for no considerationand each option entitled the holder to one Phonak Holding AG share after a lock-up period of generally two or three yearsat a predefined exercise price. The exercise price corresponds to the average market price over the last one or three months immediatelyprior to the month of the grant. Also, in accordance with special agreements, key people within the Phonak Group were grantedoptions, partially with and partially without consideration. The shares required for the share option plan were issued from the conditionalshare capital which was created by resolutions of the 2000 Annual General Shareholders’ Meeting in accordance with Article3a of Phonak Holding AG’s articles of incorporation.In February 2005, and again in February 2006, the Group launched an Executive Equity Award Program (EEAP) for the Board ofDirectors, for the Management Board, as well as for the management and senior employees of other Group companies and a SharePurchase Plan for all employees of the Group.80 Consolidated Financial Statements

Executive Equity Award Plan (EEAP) (granted 2005 and 2006)The Executive Equity Award Plan is offered annually to the Board of Directors, to the Management Board, as well as to managementand senior employees of Group companies, which entitles them to receive options and/or shares free of charge.The amount of options and/or shares granted varies depending on the degree of management responsibility held. Both options andshares granted as part of the EEAP are split into four equal tranches. For the options, one tranche vests each year over four years,starting one year after the grant date. The shares are blocked over four years, one tranche being released each year, starting one yearafter the grant date.Options – Executive Equity Award Plan (granted 2005 and 2006)The exercise price of the options is generally equal to the market price of the Phonak share at the SWX Swiss Stock Exchange (closingprice) on the date the options are granted. The fair value of the options granted is estimated at the grant date and recorded as anexpense over the vesting period. The options may be exercised after expiration of the vesting period during the term of the options,which is 5 years from the date the options are granted. When the options are exercised, shares are issued from the conditional sharecapital.The following table shows the assumptions on which the valuation of share options granted during the period was based:Executive Equity Award PlanValuation dateExpiration dateShare price on grant dateExercise priceVolatilityExpected dividend yieldWeighted risk free interest rateFluctuation rateWeighted average fair value of options issued200601.02.200631.01.2011CHF 63.25CHF 63.2520.6%0.751.9%4.3%CHF 10.22200501.02.200531.01.2010/30.09.2010CHF 39.00CHF 39.0022.2%0.801.1%1.9%CHF 6.55Outstanding Options – Key People Program and Executive Equity Award PlanChanges in outstanding optionsOutstanding options at April 1GrantedExercised 1)Expired/forfeitedOutstanding options at March 31Exercisable at March 31Number ofoptions1,852,250420,818(338,525)(91,850)1,842,69337,0002005/06Weightedaverageexercise priceCHF29.9463.2519.0431.5339.9039.20Number ofoptions2,060,950712,000(560,200)(360,500)1,852,250217,3002004/05Weightedaverageexercise priceCHF26.1539.0013.5051.5029.9413.881)Total consideration from exercise of options amounted to CHF 6.4 million (previous year CHF 7.5 million)Consolidated Financial Statements81

Summary of outstanding and exercisable options at March 31, 2006Outstanding optionsExercisable optionsExerciseprice rangeNumberAverageremaining lifeWeightedaverageexercise priceNumberWeightedaverageexercise priceCHFyearsCHFCHF13.0028.0039.0040.5056.0063.2513.00 – 63.2543,500686,450679,4255,0007,500420,8181,842,6931.82.82.60.41.42.32.613.0028.0039.0040.5056.0063.2539.9032,0005,00037,00013.0028.0039.0040.5056.0063.2539.20Shares – Executive Equity Award Plan (granted 2005 and 2006)The shares are subject to a blocking period, which starts on the date the shares are granted. The shares delivered under this plan areshares repurchased by Phonak on the open stock market. The cost of the shares granted as part of the EEAP program is expensed prorata temporis over the vesting period of 1 to 4 years.Share Purchase Plan (granted 2005 and 2006)The Share Purchase Plan is offered annually to all permanent employees of the Group, having completed their probationary period.A participant may purchase up to a maximum number of shares. For every two shares purchased, the participant receives one additionalshare free of charge. The purchase price of the shares will generally be equal to the market price on the SWX Swiss Stock Exchangeon the date the shares are purchased and the free shares are accepted. The shares under this plan are subject to a blocking periodcommencing on the expiry date of the offer. The duration of the blocking period may be up to 24 months. All shares under thisplan (the shares purchased by the participant and the share offered for free) are repurchased by Phonak on the open stock market. Thecost of the shares offered as part of the SPP program is charged pro rata temporis over the blocking period to the income statement.33. Contingent liabilitiesAt March 31, 2006 and 2005, there were no pledges given to third parties other than in relation to mortgages of CHF 12.6 million(previous year CHF 19.8 million) secured by properties (Note 25). The net book value of these properties amounts to CHF 42.3 millionat March 31, 2006 (previous year CHF 52.7 million).Guarantees given to third parties amounted to CHF 10.4 million (previous year CHF 0.3 million). There were no recourse liabilitiesin respect of discounted bills of exchange at March 31, 2006 and 2005. Open purchase orders as of March 31, 2006 and 2005 wererelated to recurring business activities.82 Consolidated Financial Statements

34. Leasing liabilitiesMinimum obligations under non-cancellable leases:1,000 CHFBusiness year2006/072007/082008/092009/102010/11thereafterTotalLess interest componentTotal (excl. interest)Operating leases10,3237,7606,7945,4545,2613,51339,10539,105Finance leasesPrevious yearLess interest componentPrevious year (excl. interest)41,02741,027315(9)306The operating lease commitments relate primarily to long-term rental agreements for office premises which are, in general, renewable.In financial year 2005/06, CHF 12.8 million have been recognized as expenses for leases in the consolidated income statement (previousyear CHF 11.6 million).Consolidated Financial Statements83

35. Number of employeesAt March 31, 2006, the Phonak Group employed 3,428 people (previous year 2,926). They were engaged in the following regions andactivities:By regionSwitzerlandEurope (excl. Switzerland)AmericasAsia/PacificTotal31.3.20068188571,2015523,42831.3.20057298329564092,926By activityResearch and developmentOperationsSales and marketing, general and administrationTotal2141,6241,5903,4281881,4391,2992,926The average number of employees of the Phonak Group for the year was 3,166 (previous year 2,719).84 Consolidated Financial Statements

36. Events after the balance sheet dateOn April 1, 2006 the Group acquired 100% of National Hearing Services Inc., Canada. The company acquired is engaged in the businessof providing hearing health solutions to retail customers.The expected cash outflow for this transaction amounts to CHF 33.7 million and is made up of a fixed (CHF 26.4 million) andvariable purchase price (CHF 7.3 million). In the financial year 2005/06, the company acquired reported sales of approximatelyCHF 19.7 million.In addition, at the beginning of May 2006, the Group acquired two smaller companies engaged in the business of selling hearinginstruments. The expected cash outflow for these two transactions amounts to CHF 26.2 million (CHF 14.1 million fixed purchaseprice and CHF 12.1 million variable purchase price). In the calendar year 2005, the companies acquired reported sales of approximatelyCHF 18.3 million.37. Exchange ratesThe following are the exchange rates used for currency translation:Year-end ratesBalance sheetAverage rates for the yearIncome statementAUD 1BRL 1CAD 1CNY 1DKK 100EUR 1GBP 1JOD 1JPY 100NOK 100NZD 1PLN 1SEK 100USD 131.3.20060.930.591.120.1621.121.582.271.851.1119.690.800.4016.721.3131.3.20050.93n/a0.990.1420.851.552.251.631.1218.950.85n/a17.001.202005/060.960.591.070.1620.791.552.271.801.1319.480.880.4016.581.272004/050.91n/a0.960.1520.701.542.261.721.1418.600.82n/a16.911.23Consolidated Financial Statements85

38. List of significant consolidated companiesCompany nameActivityDomicileShare capitalLocal curr. 1,000Shares held byPhonak HoldingSwitzerlandPhonak Holding AGPhonak AGPhonak Communications AGEurope (excluding Switzerland)Phonak GmbHUnitron Hearing GmbHPhonak France SAPhonak Italia SrlPhonak Ibérica S.A.Ets. Lapperre BHAC NVPhonak Belgium NVPhonak B.V.Unitron Hearing B.V.Phonak Danmark A/SPhonak ABPhonak ASPhonak Group Ltd.Hansaton Akustische Geräte-Gesellschaft m.b.H.Phonak Polska Sp. Z o.o.HIMSA A/SCochlear Acoustics Ltd.AmericasPhonak LLCPhonak Canada Ltd.Unitron Hearing Ltd.Unitron Hearing, Inc.THC Finance Ltd.RAV Finance Inc.CAS Produtos Médicos Ltda.Metro Hearing Inc.Asia/PacificPhonak Pty. Ltd.Phonak New Zealand Ltd.Jordan Hearing Aids Manufacturing Co. Ltd.Phonak Japan Co. Ltd.Unitron Hearing (Suzhou) Co. Ltd.Phonak (Sichuan) Co. Ltd.Unitron Hearing Korea Co. Ltd.AB,C,DB,C,DBBBBBBA,BBBBBBBBBDDBA,BB,C,DBAABBBBBBCBBStäfa (CH)Stäfa (CH)Murten (CH)Stuttgart (D)Stuttgart (D)Bron-Lyon (F)Milan (I)Alicante (E)Groot-Bijgaarden (B)Brussels (B)Nieuwegein (NL)Nieuwegein (NL)Frederiksberg (DK)Stockholm (S)Oslo (N)Warrington (GB)Wals-Himmelreich (AUT)Warsaw (POL)Copenhagen (DK)London (GB)Warrenville (USA)Mississauga (CDN)Kitchener (CDN)Plymouth (USA)BermudaUSASao Paulo (BRA)Wilmington (USA)Baulkham Hills (AUS)Auckland (NZ)Amman (JOR)Tokyo (JPN)Suzhou (CHN)Sichuan (CHN)Seoul (KOR)CHFCHFCHFEUREUREUREUREUREUREUREUREURDKKSEKNOKGBPEURPLNDKKGBPUSDCADCADUSDCHFUSDBRLUSDAUDNZDJODJPYCNYCNYKRW3,3182,500500153413051,0407,00012415,311227189,0002009001504501001,0000 2)1,25088,69417,43646,608165,0210 3)5700 4)7502508010,00032,59419,119200,00099.3%100%100%100%100%100%100%100%100%100%100%100%100%100%100%100%100%25% 1)25% 1)100%100%100%100%100%100%100%100%100%100%100%100%100%100%37.5% 1)Activities:A Holding/Finance: The entity is a holding or finance companyB Sales: The entity performs sales and marketing activities for the GroupC Production: This entity performs manufacturing for the GroupD Research: This entity performs research and development activities for the Group1)Consolidated using the equity method2)GBP 1003)USD 14)USD 1086 Consolidated Financial Statements

Report of the Group AuditorsReport of the Group Auditorsto the Annual General Shareholders’ Meeting ofPhonak Holding AGStäfaAs auditors of the Group, we have audited the consolidated financial statements (consolidated income statement, consolidatedbalance sheet, consolidated statement of cash flows, consolidated changes in equity and notes – pages 46 to 86) of Phonak HoldingAG for the year ended March 31, 2006.These consolidated financial statements are the responsibility of the board of directors. Our responsibility is to express an opinionon these consolidated financial statements based on our audit. We confirm that we meet the legal requirements concerningprofessional qualification and independence.Our audit was conducted in accordance with Swiss Auditing Standards and with the International Standards on Auditing, whichrequire that an audit be planned and performed to obtain reasonable assurance about whether the consolidated financial statementsare free from material misstatement. We have examined on a test basis evidence supporting the amounts and disclosures in theconsolidated financial statements. We have also assessed the accounting principles used, significant estimates made and the overallconsolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.In our opinion, the consolidated financial statements give a true and fair view of the financial position, the results of operationsand the cash flows in accordance with the International Financial Reporting Standards (IFRS) and comply with Swiss law.We recommend that the consolidated financial statements submitted to you be approved.PricewaterhouseCoopers AGStephen W. WilliamsPatrick BalkanyiZurich, May 12, 2006Consolidated Financial Statements87

Cherish the cheers

FINANCIAL STATEMENTS OF PHONAK HOLDING AGIncome Statement 92Balance Sheet 93Notes to the Financial Statements 94Appropriation of Available Earnings 98Report of the Statutory Auditors 99Financial Statements of Phonak Holding AG91

Income Statement1,000 CHFIncomeManagement and license feesInvestment incomeGains on marketable securitiesOther incomeInterest incomeExchange gains, netTotal incomeNotes4.12005/0613,81830,26199449211,46217957,2062004/058,02928,6982,03611,64250,405ExpensesOffice and professional expensesAdvertising and PR expensesDepreciationInterest expensesOther operating expensesOther expensesOne-time write-down of investmentExchange losses, netTaxesTotal expensesNet profit for the year4.25,492447433,5697592001,42211,93245,2743,302392453,8191,19935037095429010,72139,68492 Financial Statements of Phonak Holding AG

Balance SheetAssets1,000 CHFCurrent assetsCash and cash equivalentsMarketable securitiesAmounts due from Group companiesOther receivablesPrepaymentsTotal current assetsNon-current assetsInvestments and loansLoans to Group companiesLoan to third partyInvestmentsTangible assetsTotal non-current assetsTotal assetsNotes3.13.23.33.431.3.200625,90714,2381,62021915542,139388,100131,72943519,872562,01131.3.200517,14811,1642,4721,02015031,954335,410800122,29586458,591490,545Liabilities and shareholders’ equity1,000 CHFLiabilitiesTrade payablesTo third partiesOther payablesThird partiesGroup companiesLoans from Group companiesAccrualsTotal liabilitiesShareholders’ equityShare capitalLegal reservesGeneral legal reserveReserve for treasury sharesFree reservesRetained earningsTotal shareholders’ equityTotal liabilities and shareholders’ equityNotes3.531.3.20061191,82528,708204,1463,336238,1343,318149,2482,18398,00071,128323,877562,01131.3.200515723113,663183,1171,381198,5493,301142,81831998,00047,558291,996490,545Financial Statements of Phonak Holding AG93

Notes to the Financial Statements1. GeneralThe financial statements of Phonak Holding AG are prepared in accordance with the principles of Swiss corporate law.2. Disclosures required by Swiss corporate law2.1 Sureties, guarantees and pledges given on behalf of third parties1,000 CHFGuarantees given to banks in respect of credit arrangementsof foreign subsidiary companiesGuarantees given in respect of rental obligationsand bank debts of Group companies31.3.20062,13421,54031.3.20051,925127,6502.2 Conditional and authorized capital1,000 CHFConditional capital at year-endAuthorized capital at year-end31.3.200641216531.3.2005264During the Annual General Shareholder’s Meeting on July 7, 2005 the conditional share capital of CHF 264,270 (5,285,400 shares)has been increased by CHF 165,056 (3,301,120 shares) to CHF 429,326 (8,586,520 shares). As of March 31, 2006, 8,247,995 (previousyear 5,285,400) shares thereof have not yet been issued. These shares are reserved for use in the key employees share option plans(Key People Program and Executive Equity Award Plan).The Annual General Shareholders’ Meeting held on July 7, 2005, approved the creation of authorized share capital of 3,301,120registered shares with a par value of CHF 0.05 per share. The Board of Directors is authorized to exclude subscription rights of shareholdersand to allocate them to third parties if the new shares are to be used for the acquisition of companies, parts of companies,equity stakes or the financing of such transactions. The authorized share capital of 3,301,120 registered shares created on July 7, 2005,has not yet been used. The authorization granted to the Board of Directors to augment the company’s share capital with the authorizedshare capital created expires on July 6, 2007.94 Financial Statements of Phonak Holding AG

2.3 Significant shareholdersAt year-end, the following significant shareholders were listed in the share register (with shareholdings in excess of 5% of the issuedshare capital):Beda DiethelmAndy RihsHans-Ueli Rihs31.3.200611.2%10.9%9.1%31.3.200512.7%12.2%9.5%3. Notes to the balance sheet3.1 Marketable securitiesMarketable securities include, among other items, 34,633 treasury shares (previous year 7,700) purchased for a total considerationof CHF 2,182,937 (previous year CHF 319,368). At March 31, 2006, these shares had a market value of CHF 2,569,769 (previousyear CHF 317,240).During the financial year 2005/06, 161,657 treasury shares at an average price of CHF 50.57 have been purchased, while134,742 treasury shares at an average price of CHF 46.85 have been disposed of.3.2 Other receivablesIncluded are, in particular, amounts due from the Swiss Federal Tax Authority in respect of recoverable withholding taxes on dividendand interest income.3.3 Loans to Group companiesOf total loans, 55% are denominated in Swiss Francs, 37% in Canadian Dollars, 3% in Euros, 4% in US Dollars and 1% in Japanese Yen.Financial Statements of Phonak Holding AG95

3.4 List of significant investmentsCompany nameActivityDomicileShare capitalLocal curr. 1,000Shares held byPhonak HoldingSwitzerlandPhonak AGPhonak Communications AGIndomed AGB,C,DB,C,DAStäfa (CH)Murten (CH)Zug (CH)CHFCHFCHF2,5005001,00099.3%100%100%Europe (excluding Switzerland)Phonak GmbHPhonak France SAPhonak Italia SrlPhonak Ibérica S.A.Phonak Belgium NVPhonak B.V.Phonak Danmark A/SPhonak ABPhonak ASPhonak Group Ltd.Hansaton Akustische Geräte-Gesellschaft m.b.H.Phonak Polska Sp. Z o.o.BBBBA,BBBBBBBBStuttgart (D)Bron-Lyon (F)Milan (I)Alicante (E)Brussels (B)Nieuwegein (NL)Frederiksberg (DK)Stockholm (S)Oslo (N)Warrington (GB)Wals-Himmelreich (AUT)Warsaw (POL)EUREUREUREUREUREURDKKSEKNOKGBPEURPLN1533051,0407,00015,3112279,000200900150450100100%100%100%100%100%100%100%100%100%100%100%100%AmericasPhonak Canada Ltd.RAV Finance Inc.A,BAMississauga (CDN)USACADUSD88,6940 1)100%100%Asia/PacificPhonak Pty. Ltd.Phonak New Zealand Ltd.Jordan Hearing Aids Manufacturing Co. Ltd.Phonak Japan Co. Ltd.Unitron Hearing (Suzhou) Co. Ltd.Phonak (Sichuan) Co. Ltd.BBBBCBBaulkham Hills (AUS)Auckland (NZ)Amman (JOR)Tokyo (JPN)Suzhou (CHN)Sichuan (CHN)AUDNZDJODJPYCNYCNY7502508010,00032,59419,119100%100%100%100%100%100%Activities:A Holding/Finance: The entity is a holding or finance companyB Sales: The entity performs sales and marketing activities for the GroupC Production: This entity performs manufacturing for the GroupD Research: This entity performs research and development activities for the Group1)USD 196 Financial Statements of Phonak Holding AG

3.5 Reserve for treasury sharesA reserve for treasury shares in the amount of CHF 2,182,937 (previous year CHF 319,368) was established which is equal to the costprice (see Note 3.1). The increase in the amount of CHF 1,863,569 was debited to retained earnings.3.6 Summary of changes in shareholders’ equitySharecapitalGenerallegalreserveFreereserveTreasury sharereserveRetainedearningsTotalshareholders’equity1,000 CHFBalance April 1, 2005Dividend paidCapital increases (incl. share premium)from conditional capitalIncrease in reserve for treasury sharesNet profit for the yearBalance March 31, 20063,301173,318142,8186,430149,24898,00098,0003191,8642,18347,558(19,840)(1,864)45,27471,128291,996(19,840)6,44745,274323,877During the financial year 2005/06, an additional 338,525 registered shares with a par value of CHF 0.05 each, or a total par value ofCHF 16,926 were issued from the conditional capital (which was created for the purpose of an equity participation for key employeesof the Phonak Group) for a total net consideration of CHF 6,447,175. In the financial year 2005/06, the conditional share capitalwith a par value of CHF 429,326 (8,586,520 shares) decreased by CHF 16,926 or 338,525 shares (previous year CHF 28,010 or 560,200shares), thereby leaving CHF 412,400 (8,247,995 shares) for distribution. Based on the remaining conditional capital, a total of1,842,693 (previous year 1,852,250) employee stock options were outstanding as of March 31, 2006, which can be exercised untilJanuary 2011.4. Notes to the income statement4.1 Investment incomeThis comprises dividends received from Group companies and other investments.4.2 TaxesThe tax expense consists of Swiss federal taxes on non-investment income (the company is exempt from income taxes in the cantonof Zurich).Financial Statements of Phonak Holding AG97

Appropriation of Available EarningsAs proposed by the Board of Directors to the Annual General Shareholders’ Meeting of July 6, 20061,000 CHFCarried forward from previous yearRelease from/(allocation to) reserve for treasury sharesNet profit for the yearAvailable earningsDividend distributionBalance to be carried forward31.3.200627,718(1,864)45,27471,128(33,163) 1)37,96531.3.2005 2)4,2333,64139,68447,558(19,840)27,7181)If the Annual General Shareholders’ Meeting approves the proposed appropriation of available earnings, a gross dividend of CHF 0.50 per registered share of CHF 0.05 will be paid out2)Approved by the Annual General Shareholders’ Meeting of July 7, 200598 Financial Statements of Phonak Holding AG

Report of the Statutory AuditorsReport of the Statutory Auditorsto the Annual General Shareholders’ Meeting ofPhonak Holding AGStäfaAs statutory auditors, we have audited the accounting records and the financial statements (balance sheet, income statement andnotes – pages 92 to 97) of Phonak Holding AG for the year ended March 31, 2006.These financial statements are the responsibility of the board of directors. Our responsibility is to express an opinion on these financialstatements based on our audit. We confirm that we meet the legal requirements concerning professional qualification and independence.Our audit was conducted in accordance with Swiss Auditing Standards, which require that an audit be planned and performed toobtain reasonable assurance about whether the financial statements are free from material misstatement. We have examined on atest basis evidence supporting the amounts and disclosures in the financial statements. We have also assessed the accountingprinciples used, significant estimates made and the overall financial statement presentation. We believe that our audit provides areasonable basis for our opinion.In our opinion, the accounting records, the financial statements and the proposed appropriation of available earnings comply with Swisslaw and the company’s articles of incorporation.We recommend that the financial statements submitted to you be approved.PricewaterhouseCoopers AGStephen W. WilliamsPatrick BalkanyiZurich, May 12, 2006Financial Statements of Phonak Holding AG99

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ADDRESSESSwitzerlandPhonak Holding AG (Headquarters)Laubisrütistrasse 28CH-8712 StäfaPhone +41 44 928 01 01Fax +41 44 928 03 90E-Mail: contact@phonak.comwww.phonak.comPhonak AGLaubisrütistrasse 28CH-8712 StäfaPhone +41 44 928 01 01Fax +41 44 928 07 07E-Mail: info@phonak.chwww.phonak.chPhonak Communications AGLänggasse 17CH-3280 MurtenPhone +41 26 672 96 72Fax +41 26 672 96 77E-Mail: info@phonakcom.chwww.phonakcom.chEuropePhonak GmbHMax-Eyth-Strasse 20DE-70736 Fellbach-OeffingenPhone +49 711 51 07 00Fax +49 711 51 070 70E-Mail: info@phonak.dewww.phonak.deUnitron Hearing GmbHDaimlerstrasse 22DE-70736 Fellbach-OeffingenPhone +49 711 658 538 0Fax +49 711 658 538 99E-Mail: info@unitronhearing.dewww.unitronhearing.deHansaton AkustischeGeräte-Gesellschaft m.b.H.Josef-Lindner-Strasse 4Postfach 11AT–5073 Wals-HimmelreichPhone +43 662 451 26 20Fax +43 662 451 262 99E-Mail: office@hansaton.atwww.hansaton.atPhonak France SA5, rue Maryse BastiéFR-69500 BronPhone +33 8 21 02 70 00Fax +33 4 78 26 98 97E-Mail: info@phonak.frwww.phonak.frUnitron Hearing France2, rue Maryse BastiéFR-69500 BronPhone +33 4 26 23 22 00Fax +33 4 26 23 22 01E-Mail: paulmichel.vahanian@unitron.comwww.unitronhearing.frPhonak Italia SrlVia Jacopo dal Verme, 7IT-20159 MailandPhone +39 02 69 00 81 82Fax +39 02 69 00 87 84E-Mail: info@phonak.itwww.phonak.itPhonak Ibérica S.A.Urbanización El PalmeralBloque 9, no. 17-27ES-03008 AlicantePhone +34 902 33 11 22Fax +34 965 11 16 72E-Mail: info@phonak.eswww.phonak.esEts. Lapperre BHAC NVStationsstraat 22BE-1702 Groot-BijgaardenPhone +32 2 700 77 77Fax +32 2 700 77 70E-Mail: info@lapperre.bewww.lapperre.bePhonak Belgium NVResidentie “Permeke”Baron de Vironlaan, 60BE-1700 DilbeekPhone +32 2 468 19 81Fax +32 2 468 19 82E-Mail: infomail@phonak.bewww.phonak.bePhonak B.V.Archimedesbaan 19NL-3439 ME NieuwegeinPhone +31 30 600 88 55Fax +31 30 600 88 51E-Mail: info@phonak.nlwww.phonak.nlUnitron Hearing B.V.Archimedesbaan 19Postbus 1214NL-3430 ME NieuwegeinPhone +31 30 604 93 25Fax +31 30 604 45 89E-Mail: info@unitronhearing.nlwww.unitronhearing.nlPhonak Danmark A/SNitivej 10DK-2000 FrederiksbergPhone +45 6441 7887Fax +45 3810 4686E-Mail:info.frederiksberg@phonak.dkwww.phonak.dk102 Addresses

Phonak ABHornsbruksgatan 28SE-117 34 StockholmPhone +46 8 442 46 60Fax +46 8 429 89 80E-Mail: info@phonak.sewww.phonak.sePhonak ASAkersgaten 8Postboks 525 SentrumNO-0105 OsloPhone +47 23 00 32 60Fax +47 22 41 66 44E-Mail: info@phonak.nowww.phonak.noPhonak Group Ltd.Cygnet CourtLakeside DriveGB-Warrington, Cheshire, WA1 1PPPhone +44 1925 62 36 00Fax +44 1925 24 57 75E-Mail: info@phonak.co.ukwww.phonak.co.ukUnitron Hearing UKSt. George HouseCygnet CourtCentre ParkGB-Warrington, Cheshire, WA1 1PDPhone +44 1925 24 78 10Fax +44 1925 24 78 18E-Mail: info@unitronhearing.co.ukwww. unitronhearing.co.ukPhonak Polska Sp. Z o.o.Al. Ujazdowskie 13OO-567 WarszawaPhone +48 22 523 67 00Fax +48 22 745 04 95E-Mail: info@phonak.plwww.phonak.plNorth AmericaPhonak LLC4520 Weaver ParkwayUS-Warrenville, IL 60555-3927Phone +1 630 821 5000Fax +1 630 393 7400E-Mail: info@phonak.comwww.phonak-us.comUnitron Hearing, Inc.2300 Berkshire Lane NorthUS-Plymouth, MN 55441Phone +1 763 744 3300Fax +1 763 557 8828E-Mail: info@unitronhearing.comwww.unitronhearing.usPhonak Canada Ltd.7895 Tranmere Drive, Suite 207CA-Mississauga, ON L5S 1V9Phone +1 905 677 1167Fax +1 905 677 8425E-Mail: info@phonak.on.cawww. phonak-canada.comUnitron Hearing Ltd.20 Beasley Drive,P.O. Box 9017CA-Kitchener, ON N2G 4X1Phone +1 519 895 0100Fax +1 519 895 0108E-Mail: info@unitron.comwww.unitronhearing.comUnitron Hearing Canada5 Cherry Blossom Road, Unit 2CA-Cambridge, ON N3H 4R7Phone +1 519 650 9111Fax +1 800 949 6663E-Mail: info@unitronhearing.cawww.unitronhearing.caSouth AmericaCAS Produtos Médicos Ltda.Rua Tianguá 136Vila MascoteBR-04363-100 São PauloPhone +55 11 5563 2680Fax +55 11 5563 8747E-Mail: imprensa@cas.com.brwww.cas.com.brAsia/Pacific andMiddle EastPhonak Pty. Ltd.Level 2, Norwest Quay21 Solent CircuitNorwest Business ParkAU-Baulkham Hills NSW 2153Phone +61 2 8858 1800Fax +61 2 9634 8373E-Mail: info@phonak.com.auwww.phonak.com.auUnitron Hearing AustraliaLevel 2, Norwest Quay21 Solent CircuitNorwest Business ParkAU-Baulkham Hills NSW 2153Phone +61 2 9659 8012Fax +61 2 9659 5932E-Mail: info@unitron.comwww.unitronhearing.com.auPhonak New Zealand Ltd.Level 1, Peoplesoft Building159 Hurstmere Road,P.O. Box 33-349NZ-Takapuna, Auckland 9Phone +64 9 486 1849Fax +64 9 486 1895E-Mail: info@phonak.co.nzwww.phonak.co.nzAddresses 103

Unitron Hearing New Zealand10/215 Rosedale RoadM277 Private Bag, 300987NZ-Albany, AucklandPhone: +64 9 488 9841Fax: +64 9 488 9842E-Mail: info@unitron.co.nzwww.unitronhearing.co.nzJordan Hearing AidsManufacturing Co. Ltd.Jabel AmmanAcross Showman Est.P.O. Box 2208JO-11181 AmmanPhone +962 64 611 331Fax +962 64 611 332E-Mail: info@phonak.com.jowww.phonak.comPhonak Japan Co., Ltd.Kanda Park Plaza Building 9th Fl.2-2-2 Kajicho, Chiyoda-kuJP-Tokyo 101-0044Phone +81 3 52 94 40 79Fax +81 3 52 94 40 80E-Mail: info@phonak.jpwww.phonak.jpPhonak (Sichuan) Co., Ltd.4/F Building 1699 TianZhou RoadXu Hui DistrictCN-200233 ShanghaiPhone +86 21 6120 5533Fax +86 21 5445 0752www.phonak.com.cnUnitron Hearing Korea Co., Ltd.5th Floor, Geoyoung Bldg, 301–283 Dong, SeongSu 2 KaSeongdong-KuKR-Seoul 133-385Telefon +82 2 466 9450Fax +82 2 466 9456www.unitron-hearing.co.krPhonak AG (India)155 & 156, Maruthi TowersT.T.K. Road, AlwarpetIN-Chennai 600 018Phone: +91 44 520 759 94Fax: +91 44 520 759 94E-Mail: info@phonak.inUnitron Hearing (Suzhou) Co., Ltd.No. 200 Suhong RoadExport Processing Zone 4DSuzhou Industrial ParkCN-215021 SuzhouPhone +86 512 6258 2258Fax +86 512 6258 5258E-Mail: info@unitron.cn104 Addresses

ImpressumConceptLithographyPrintingAlthaus & Weil AG, BaselERC AG, MaurNZZ Fretz AG, Schlieren

Phonak Holding AGLaubisrütistrasse 28CH-8712 StäfaPhone: +41 44 928 01 01Fax: +41 44 928 03 90Internet: www.phonak.comE-Mail: ir@phonak.com028-0925-02/A&W Printed in Switzerland ©Phonak AG All rights reservedThe Annual Report is also available in German.The English version is the governing text.