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IMPORTANT INFORMATION (The information in this section is required under the Securities Act 1978.) Investment decisions are very important. They often have long-term consequences. Read all documents carefully. Ask questions. Seek advice before committing yourself.

Choosing an Investment When deciding whether to invest, consider carefully the answers to the following questions that can be found on the pages noted below:

R A K O N

L I M I T E D

S H A R E

O F F E R

R A K O N

• • • • • • • • • •

L I M I T E D

What sort of investment is this? (page 78) Who is involved in providing it for me? (page 80) How much do I pay? (page 80) What are the charges? (page 81) What returns will I get? (page 81) What are my risks? (page 82) Can the investment be altered? (page 88) How do I cash in my investment? (page 89) Who do I contact with enquiries about my investment? (page 89) Is there anyone to whom I can complain if I have problems with the investment? (page 89) What other information can I obtain about this investment? (page 89)

In addition to the information in this document, important information can be found in the current registered prospectus for the investment. You are entitled to a copy of that prospectus on request. 1 Choosing an Investment Adviser You have the right to request from any investment adviser a written disclosure statement stating his or her experience and qualifications to give advice. That document will tell you: • • •

Whether the adviser gives advice only about particular types of investments; Whether the advice is limited to the investments offered by one or more particular financial organisations; and Whether the adviser will receive a commission or other benefit from advising you.

You are strongly encouraged to request that statement. An investment adviser commits an offence if he or she does not provide you with a written disclosure statement within five working days of your request. You must make the request at the time the advice is given or within one month of receiving the advice.

I N V E S T M E N T

In addition: • If an investment adviser has any conviction for dishonesty or has been adjudged bankrupt, he or she must tell you this in writing; and • If an investment adviser receives any money or assets on your behalf, he or she must tell you in writing the methods employed for this purpose. • Tell the adviser what the purpose of your investment is. This is important because different investments are suitable for different purposes.

S T A T E M E N T & P R O S P E C T U S

Lead Manager and Underwriter

Important Notice This Offer Document is for an offer by the Vendor and Rakon of Shares in Rakon. This Offer Document has been prepared as at, and is dated, 13 April 2006. This Offer Document is a combined investment statement and prospectus for the purposes of the Securities Act and the Securities Regulations. The information required to be contained in an investment statement is set out in the sections entitled “Important Information” (see above) and “Answers to Important Questions” (pages 78 to 90). The purpose of those sections of this Offer Document is to provide certain key information that is likely to assist a prudent but nonexpert person to decide whether or not to acquire Shares under the Share Offer. However, investors should note that other important information about the Share Offer, the Shares, and Rakon is available in the other sections of this Offer Document and in the information available for inspection at the registered office of Rakon (described further on page 19).

Registration A copy of this Offer Document, duly signed, and having attached copies of the documents required by section 41 of the Securities Act, has been delivered to the Registrar of Companies for registration in accordance with section 42 of the Securities Act. The documents required by section 41 of the Securities Act to be attached to the copy of this Offer Document delivered to the Registrar of Companies for registration are: (a) the Auditor’s report in respect of certain financial information included in this Offer Document (set out on pages 76 to 77);

(b) the signed consent of the Auditor to the Auditor’s report appearing in this Offer Document; (c) copies of the material contracts referred to on pages 97 to 98; and (d) an acknowledgement from NZX to the effect that Application has been made to NZX for permission to list the Shares and all the requirements of NZX for the listing of the Shares that can be complied with at that time have been duly complied with. New Zealand Exchange Listing Application has been made to NZX for permission to list the Shares under the symbol RAK and all the requirements of NZX relating thereto that can be complied with on or before the date of this Offer Document have been duly complied with. However, NZX accepts no responsibility for any statement in this Offer Document. Initial quotation of the Shares is expected to occur on 16 May 2006. NZX has authorised NZX Firms to act on the Share Offer. Overseas Investors The Share Offer is only being made to members of the public and NZX Firms in New Zealand and to Institutional Investors in New Zealand, Australia and certain other jurisdictions. The Priority Offer is only being made to employees, Directors and business associates of Rakon in New Zealand and may not be accepted by any other person. No person may offer, invite, sell or deliver any Shares or distribute any documents (including this Offer Document) to any person outside New Zealand, except in accordance with all of the legal requirements of the relevant jurisdiction. This Offer Document may not be sent into or distributed in the United States. Unless otherwise agreed with the Vendor and Rakon, any person or entity applying for Shares in the Share Offer will, by virtue of such Application, be deemed to represent that he, she or it is not in a jurisdiction that does not permit the making of the Share Offer or an invitation of the kind contained in this Offer Document and is not acting for the account or benefit of a person within such a jurisdiction. None of the Vendor, Rakon, the Lead Manager nor any of their respective Directors, officers, employees, consultants, agents, partners or advisers accepts any liability or responsibility to determine whether a person is able to participate in the Share Offer. No Guarantee No person or entity guarantees the Shares offered under this Offer Document or undertakes any liability in respect of the Shares. Takeovers Code The Takeovers Code, amongst other things, prohibits any person (together with their associates (as defined in the Takeovers Code) from becoming the holder or controller of 20% or more of the voting rights in the Company other than in compliance with the requirements of the Takeovers Code. Investors are advised to seek legal advice in relation to any act, omission or circumstance which may result in that investor breaching any provision of the Takeovers Code. Notes The Share Offer does not take into account each investor’s investment objectives, financial situation and particular needs. It is important that investors read this Offer Document in its entirety before deciding whether to apply to purchase any Shares. In particular, investors should consider the risk factors that could affect the performance of Rakon (including those set out on pages 82 to 88), particularly with regard to their personal circumstances (including financial and taxation issues). Investors who are in any doubt as to the action they should take, should consult their stockbroker, solicitor, accountant or other professional adviser before deciding to invest. No person is authorised to provide any information or to make any representation other than those contained or made in this Offer Document. Any information or representation not so contained may not be relied upon as having been authorised by Rakon, the Vendor, the Lead Manager or any other person in connection with the Share Offer. Definitions Capitalised terms used in this Offer Document have a special meaning and are defined in the Glossary section of this Offer Document (offer terms - pages 100 to 101, technical terms - page 102) or in the relevant section of this Offer Document in which the term is used. Unless otherwise indicated, $ or NZ$ refers to New Zealand Dollars. All references to time are to time in New Zealand.

Note 1: This is the wording required by Schedule 3D to the Securities Regulations 1983 which contemplates a separate investment statement and prospectus. For this Share Offer, the two documents have been combined and accordingly the prospectus available on request is this Offer Document.


Table of contents

3

Rakon at a Glance

4

Share Offer Summary

7

Important Dates

9

Chairman’s Letter

10

Founder’s Letter

11

Summary Financials

12

Investment Highlights

17

Details of the Share Offer

18

Industry Profile

24

Rakon Business Profile

30

Profile of Directors and Senior Management

41

Overview of the Vendor

49

Financial Information

50

Auditors’ Report

76

Answers to Important Questions

78

Statutory Information

92

Glossary - Offer terms

100

Glossary - Technical terms

102

Application Instructions for Shares

103

Application Form for Shares

105

Directory

IBC


Rakon at a Glance

Rakon is a world leader in the development and production of high performance Quartz Crystal components


Rakon is a world leader in the development and production of high performance Quartz Crystal components used for timing reference and frequency control in demanding applications, such as global position system (GPS) and microwave communications. From its head office and manufacturing facility in Auckland, New Zealand, Rakon produces a range of Crystals and Oscillators for its global customer base. As a leading provider of Crystals and Oscillators for the GPS industry, Rakon believes it is well positioned to benefit from the significant growth which the Company considers is likely to occur should GPS products penetrate the consumer mass market. Rakon’s business was founded in 1967 by Warren Robinson with the incorporation of Rakon’s predecessor company, Rakon Industries Limited (RIL), and Rakon is currently majority owned and managed by the Robinson family. The Company currently has operations in New Zealand and marketing offices in Taiwan and the United States, and employs approximately 500 people. The vast majority of employees are based in New Zealand. Since first developing temperature compensated Crystal Oscillator (TCXO) technology in 1980, RIL, and now Rakon, has focused on staying at the forefront of Crystal and Oscillator technology. Through ongoing investment in new technologies, Rakon has developed the proprietary know-how to mass produce Crystals and Oscillators with a miniature Form Factor suited to consumer mass market electronic devices, while maintaining the highest performance specifications required in recreational, commercial and military/aerospace applications. Central to the Company’s capability and market position is its embedded culture of continual innovation and improvement. This has led to the creation of many proprietary products and processes designed and produced by the Rakon team. Quartz Crystals Quartz Crystals are found in nearly all electronic devices, from high-tech aerospace applications through to TVs and wrist watches. Quartz Crystals are used in electronic devices to act

as a timing or frequency reference device to ensure the functionality of electronic equipment dependent upon accurate timing or frequency control. Quartz possesses the Piezoelectric Effect which enables it to be used as a frequency control device. The Piezoelectric Effect occurs when a Crystal is subjected to an externally applied voltage that results in the Crystal changing shape in an oscillating manner, which then in turn generates a charge or voltage on the Crystal’s surface at a specific frequency. The voltage output of the Crystal Oscillator can then be converted into pulses suitable for use as timing or frequency reference in electronic circuits. The frequency of oscillation can be modified by the shape in which the Crystal is cut and its thickness. Also affecting quartz’s resonating frequency is temperature, with frequency varying widely across a wide temperature range. In order to create stability of a Quartz Crystal’s oscillating frequency across a temperature range, a compensating correction voltage can be applied based upon an output signal received from a temperature sensor, which stabilises the frequency output when temperature changes. Rakon’s key products, which are produced to a range of specifications, are: •

Quartz Crystals, which Rakon manufactures in both round (UM) and strip (RSX) designs in metal and ceramic packages respectively. Rakon currently produces Crystals in the RSX design down to a 3.2x2.5 mm Form Factor and is currently developing a new model with a Form Factor of 2.5x2 mm, which is among the smallest in the world.

Oscillators, Rakon produces both discrete and integrated Oscillators. Rakon is currently capable of producing its integrated TCXOs in a range of sizes down to 3.2x2.5 mm with a 2.5x2 mm size under development. Rakon believes it is also the leading global producer of calibrated dual Crystal Oscillators (CDXO). CDXOs provide a higher degree of performance than TCXOs and are currently used in a number of military/aerospace applications.

5


6

RF module, Rakon has recently developed, and is preparing to manufacture, what it believes to be the world’s smallest GPS front-end receiver (RF module). The RF module will incorporate a range of Rakon Oscillators and significantly reduces the size and cost of incorporating a complete GPS unit into small electronic equipment such as mobile phones and personal digital assistants (PDA).

The major source of Rakon’s growth is expected to be growth in the GPS market, as GPS moves from a niche market to a consumer mass market, driven by increasing GPS adoption in many applications. Further growth is also expected to come from expansion of Rakon’s customer base and product suite in other markets such as non GPS satellite communications, microwave communications, cellular base stations and two-way digital radio.

Rakon also has particular expertise in custom products, where its engineering expertise, flexible production processes, and ability to co-develop, enable the Company to rapidly prototype and put into production Crystals and Oscillators designed to a customer’s particular specifications.

Industry information In a number of sections of this Offer Document, in particular, the section headed “Industry Profile”, there are references to forward-looking information regarding the Crystal and Oscillator industry and trends in high performance applications such as GPS. This industry information has been sourced predominantly from an independent industry report prepared by ABI Research which is publicly available for purchase at www.abiresearch.com. Rakon has purchased this report and uses information from that report with the permission of ABI Research. In addition, industry information is publicly available from other research organisations and broker analysts who cover GPS related stocks.

Future Rakon is positioned to benefit from the significant growth it predicts is likely to occur in the GPS industry over the coming years. The Company has invested in leading edge production technology, new products, and increased production capacity to ensure that it obtains the maximum advantage and growth from its market position and strong customer relationships with world leading customers.


Share Offer Summary Key Offer Statistics1

7

Issuer

Rakon Limited

Vendor

Ahuareka Trustee Limited*

Shares being sold by the Vendor under the Share Offer2

35,000,000

New Shares being issued under the Share Offer

6,250,000

Total Shares being offered under the Share Offer

41,250,000

Offer Price

$1.60

Shares on issue2

106,250,000

Market capitalisation3

$170.0m

Enterprise value (EV)4

$178.0m

* Ahuareka Trustee Limited is the sole trustee of the Ahuareka Trust, which is associated with interests of Warren Robinson and the Robinson family. The following table provides a summary of the shareholdings, which approximates what the register of Rakon may look like after the Share Offer.

Post-listing (assuming the Share Offer is fully subscribed) %

Number

Ahuareka Trustee Limited

22.6

24,060,024

Brent Robinson

9.3

9,914,180

Darren Robinson

9.3

9,914,180

Tahia Investments

15.6

16,523,218

Zeus Zeta Limited

3.1

3,304,830

Marjorie Robinson

0.4

424,431

Rakon ESOP Trustee Limited

0.8

859,137

Members of the Public

38.8

41,250,000

In addition, Rakon PPS Trustee Limited will hold 1.1 million partly paid redeemable Plan Shares under the terms of the Share Growth Plan for the benefit of certain senior managers, including Brent Robinson and Darren Robinson. None of the persons named above guarantees, or undertakes any liability in respect of the Shares.


8

Prospective Financial Performance Year Ending Forecast 31 March 20069 $000

Forecast 31 March 2007 $000

$11,435

$15,521

EBIT6

$8,465

$11,836

NPAT7

$4,395

$7,222

EBITDA5

Share Offer Multiples and Yields Year Ending Forecast 31 March 2006 $000

Forecast 31 March 2007 $000

EV4/EBITDA

15.6x

11.5x

EV/EBIT

21.0x

15.0x

Price/Earnings8

38.7x

23.5x

1 Certain figures in this table are derived from prospective financial information prepared by Rakon and set out on pages 51 to 53 of this Offer Document. This prospective financial information should be read in conjunction with the assumptions set out on pages 54 to 56 and the risk factors set out on pages 82 to 88. The figures do not include the 1.1 million Plan Shares issued under the Share Growth Plan. 2

Assuming the Share Offer is fully subscribed.

3 Value derived by multiplying the Offer Price by the number of paid up Shares on issue. 4 Value derived by adding the forecast net debt as at 31 March 2006 to the market capitalisation. Forecast net debt at 31 March 2006, including bank overdraft and UDC finance lease equates to $18.0m. Forecast net debt after issue of new capital is $8.0 million. 5 Earnings before interest, tax, depreciation and amortisation. 6 Earnings before interest and tax. 7 Net profit after tax. 8 Offer Price divided by Earnings per Share, where Earnings per Share is calculated as NPAT divided by the number of paid up Shares on issue. 9 Although Rakon has a 31 March financial year end, the audited accounts for the 2006 financial year have yet to be finalised.


Important Dates Offer Document registered

13 April 2006

Share Offer opens

18 April 2006

Closing Date of the Priority Offer

5 May 2006

Final date for lodgement of Firm Allocation Applications

11 May 2006

Closing Date of the Share Offer

12 May 2006

Institutional Settlement Date

15 May 2006

Allotment Date

15 May 2006

Refunds sent to unsuccessful Applicants

15 May 2006

FASTER Statements and refund cheques (if applicable) mailed

15 May 2006

Quotation of Shares and trading expected to commence on NZSX

16 May 2006

This timetable is indicative only. Rakon and the Vendor, in consultation with the Underwriter, reserve the right to (a) extend the Closing Date of any part of the Share Offer, including the Priority Offer and the dates referred to above may change accordingly, and to (b) withdraw the Share Offer at any time before Allotment and to accept late Applications, either generally or in particular cases.

9


Chairman’s Letter 10

13 April 2006

Dear Investor On behalf of the Directors of Rakon Limited, I am pleased to be able to present you with the opportunity to invest in one of New Zealand’s leading technology businesses. Almost 40 years ago, Warren Robinson established the business that is now Rakon, which today has become one of the world’s leading providers of Quartz Crystal technology, particularly to the manufacturers of GPS products. The Company has grown significantly over the past decade on the back of GPS expansion in many world markets. This expansion is anticipated to continue as GPS finds its way from discrete devices to wider applications such as motor vehicles, laptop computers and mobile phones.

Bryan Mogridge

Rakon’s senior management, including Warren and his sons Brent (the Company’s Managing Director) and Darren (the Company’s Marketing Director) have a wealth of experience and knowledge about the business. This knowledge has been gained in the relative isolation of New Zealand and as a consequence, they have developed unique systems not used in other parts of the world where Quartz Crystal technology is developed. These unique systems have given Rakon a leading technological edge, in quality, and time to market, over competitors that in some cases may be as long as two years. The Rakon team is well respected by their international customers as being technology leaders, insightful and dependable. The Share Offer comprises $10.0 million of new capital and the sell down by Ahuareka Trustee Limited, the trustee of Warren Robinson’s Family Trust, of 35.0 million Shares. There is a priority pool of 3.75 million Shares available for Directors, employees and business associates of the Company to purchase at the Offer Price. It is anticipated that this pool will be fully subscribed. Full details of the Share Offer are set out in this Offer Document and it should be read carefully in its entirety before making an investment decision. This is an exciting opportunity to participate in a true technology business with real global reach and opportunities. However, it must be cautioned that Rakon can face business risks caused by the changing nature of technology, and the fact that Rakon supplies components (albeit critical) to the manufacturers of GPS products and other devices and is subject to consumer demand for those products. Naturally Directors and management will be using their best endeavours to ensure that all plans are well thought out and targets are realistically set. On behalf of the Directors I commend this Share Offer to you and look forward to welcoming you as a Shareholder of Rakon Limited. Yours sincerely

Bryan Mogridge – Chairman Rakon Limited


Founder’s Letter 13 April 2006

11

Dear Investor When I founded the Rakon business almost 40 years ago to manufacture Quartz Crystals for the communications industry, the advances in technology that have characterised the past two decades were simply beyond contemplation. I knew, or at least I hoped, that Quartz Crystal technology was going to play a major role in the development of the electronics industry. I did not know that through the development and refinement of our own manufacturing processes, we could potentially make available the advantages of military/aerospace-capable technology to every man, woman and child in the world who has access to a cellphone. Today, with an estimated two billion cellphones now in service worldwide, and these numbers expected to grow significantly as consumer demand takes hold in populous China and India, Rakon is strategically placed internationally to deliver the heartbeat of communications technology to the world. Without doubt, the development of our TCXO technology by Rakon in the 1980’s enabled us to leap ahead of even our own imaginations as users of our technology realised their own creative ambitions for GPS technology. Our ability to respond with previously unmatched miniaturisation and frequency stability, made Rakon the leading supplier to most major GPS manufacturers in North America. In 1994 we built a new factory in Auckland to deliver even larger volumes, and followed up with further technological advances in strip Crystal technology. In the late 1990’s ISO accreditation was achieved for both the Company and its products, and our manufacturing capacity had to double again to meet demand. Today, we’re giving you the opportunity to be part of this adventure, as Rakon continues with its quest to innovate and break beyond the boundaries of our imagination, and to be at the centre of what has yet to be created. We have been able to achieve our ambitions because of our people, their unparalleled expertise and the fact that we are a smart little country at the bottom of the world that has to be better than everyone else to be noticed. We’re humbled by our success to date. My family and I are still integrally involved in this business that I founded and grew with my sons and intend to remain at the forefront of Rakon’s future, striving still to show that technology is not the province of the privileged, but gives power to all people, everywhere. We invite you to join us on this journey into the future. Yours sincerely

Warren Robinson – Founder & Director Rakon Limited

Warren Robinson


Summary of Financials and Investment Highlights

Rakon estimates it has over 50% share of the global autonomous GPS market


Set out below is a summary historical statement of financial performance and financial position for Rakon for the five years to 31 March 2005 and eight months to 30 November 2005, a summary prospective statement of financial performance and financial position for the two years to 31 March 2007. The amounts stated in the summary historical statement for the five years to 31 March 2005 and eight months to 30 November 2005, have been taken from audited financial statements. The information in this section is intended as a summary only. Further detailed financial information from which this summary information has been extracted is set out under the heading “Financial Information” on pages 51 to 75 of this Offer Document, which includes the assumptions on which the prospective financial information is based.

Consolidated Financial Performance for 12 months to 31 March 2001

2002

2003

2004

2005

8 mths to 30 Nov 05

2006

2007

$000 Audited

$000 Audited

$000 Audited

$000 Audited

$000 Audited

$000 Audited

$000 Forecast

$000 Forecast

Operating revenue

53,971

35,054

44,092

50,306

71,422

50,083

73,291

90,590

EBITDA

9,252

4,890

1,657

5,787

8,715

8,025

11,435

15,521

Depreciation

3,479

3,687

2,716

2,755

2,412

1,937

2,970

3,685

EBIT

5,773

1,203

(1,059)

3,032

6,303

6,088

8,465

11,836

Interest expense

1,131

968

1,100

1,196

2,009

1,256

1,779

1,000

Net profit before tax

4,642

235

(2,159)

1,836

4,294

4,832

6,685

10,836

Taxation expense (credit)

1,693

331

(24)

(405)

1,384

1,674

2,290

3,614

Net profit after tax

2,950

(97)

(2,135)

2,241

2,910

3,158

4,395

7,222

Surplus or deficit retained by the group

2,950

(97)

(2,135)

2,241

2,910

1,518

2,795

7,222

1,180cps

(38.8)cps

(854)cps

896cps

1,164cps

992cps

1,369cps

6.8cps

Adjusted EPS 1

2.8cps

(0.1)cps

(2.0)cps

2.1cps

2.7cps

3.0cps

4.1cps

6.8cps

Fully diluted adjusted EPS 2

2.7cps

(0.1)cps

(2.0)cps

2.1cps

2.7cps

2.9cps

4.0cps

6.6cps

DPS 3

0.0cps

0.0cps

0.0cps

0.0cps

0.0cps

640cps

640cps

0.0cps

Adjusted DPS 3

0.0cps

0.0cps

0.0cps

0.0cps

0.0cps

1.5cps

1.5cps

0.0cps

Fully diluted adjusted DPS 3

0.0cps

0.0cps

0.0cps

0.0cps

0.0cps

1.5cps

1.5cps

0.0cps

EPS 1

Notes: 1 EPS throughout the 2001 and 2005 period is calculated on the basis of the 250,000 shares on issue. EPS in November 2005 is calculated on the basis of 318,377 shares on issue following the conversion of a shareholder loan which resulted in the issue of 68,377 shares. In March 2006 a further, 2,759 shares were issued to Rakon ESOP Trustee Limited. This resulted in 321,136 shares being on issue as at 31 March 2006. On 12 April 2006 Rakon undertook a share split at a ratio of 311.394549 to one, which increased the number of Shares on issue from 321,136 to 100 million. Adjusted EPS is calculated on the basis of 106.25 million shares being on issue throughout the period, with the extra 6.25 million shares issued as part of the Offer to raise $10 million in new capital. 2 Fully diluted adjusted EPS is calculated on the basis of 109.25 million shares as it also includes the 1.90 million shares attributed to unexercised options as part of the Employee Share Option Scheme and 1.10 million partly-paid Plan Shares issued under the Share Growth Plan . 3 DPS is calculated on the basis of the 250,000 shares on issue at the time the dividend was declared and paid. Adjusted DPS is calculated on the basis of 106.25 million shares being on issue as explained above in Note 1. Fully diluted adjusted DPS is calculated on the basis of 109.25 million shares as explained in Note 2.

13


14

2001 was a continuation of a significant growth trend of the preceding years and coincided with the peak of the “high-tech” boom. Revenue (which was and still is predominantly US Dollar denominated) and EBIT were also favourably impacted by the weak New Zealand Dollar which was at very low levels relative to the US Dollar throughout the year.

2002 sales units and revenue dropped dramatically from 2001 following the “dotcom” crash. Margins also slipped pushing EBIT substantially lower than 2001.

2003 revenue recovered as Rakon benefited from focusing on growing its share of the expanding GPS market. However, EBIT was impacted by an inventory write-off of $4.5 million. The charge was taken against products for the telecommunications market following the “dotcom” crash. Depreciation costs were down on the prior year due to a re-evaluation of the useful lives of plant and equipment employed.

2004 sales units increased 76% on 2003 but revenue growth was restricted to 16% due to strong appreciation of the New Zealand Dollar. EBIT was significantly improved over 2003 due to the nonrecurring nature of the 2003 inventory write-off, but this was partially offset by higher operating costs associated with the increased scale of business. An income tax credit was recognised due to a change in accounting policy from using the taxes payable method to the liability method (Refer to the Accounting Policies disclosed from pages 60 to 64).

2005 sales units and revenue increased substantially over 2004 despite further appreciation in the New Zealand Dollar. The increase was primarily driven by growth of sales of integrated TCXOs. Unit margin was maintained as product mix and factory economies offset the impact of the higher New Zealand Dollar. Operating costs increased to support the scale of business, but depreciation was down on the prior year due to a re-evaluation of the useful lives of plant and equipment employed. Interest expense was higher due to the increased working capital and capital expenditure required to fund the growth of the business.

Consolidated Financial Position as at 31 March 2001

2002

2003

2004

2005

8 mths to 30 Nov 05

2006

2007

$000 Audited

$000 Audited

$000 Audited

$000 Audited

$000 Audited

$000 Audited

$000 Forecast

$000 Forecast

Total assets

41,714

31,758

36,797

45,339

46,901

51,521

49,509

63,358

Total tangible assets

41,714

31,758

36,797

45,339

46,901

51,521

49,509

63,358

Total liabilities

36,530

26,694

33,892

40,281

38,944

29,120

25,347

22,974

5,184

5,064

2,904

5,058

7,957

22,401

24,162

40,384

NTA $/Share

20.74

20.26

11.62

20.23

31.83

70.36

75.24

0.38

Adjusted NTA $/Share4

0.05

0.05

0.03

0.05

0.07

0.21

0.23

0.38

Fully diluted adjusted NTA $/Share5

0.05

0.05

0.03

0.05

0.07

0.21

0.22

0.37

Total equity 4

Notes: 4 NTA throughout the 2001 and 2005 period is calculated on the basis of the 250,000 shares on issue. NTA in November 2005 is calculated on the basis of 318,377 shares on issue following the conversion of a shareholder loan which resulted in the issue of 68,377 shares. In March 2006 a further, 2,759 shares were issued to Rakon ESOP Trustee Limited. This resulted in 321,136 shares being on issue as at 31 March 2006. On 12 April 2006 Rakon undertook a share split at a ratio of 311.394549 to one, which increased the number of Shares on issue from 321,136 to 100 million. Adjusted NTA $/Share is calculated on the basis of 106.25 million shares being on issue throughout the period, with an extra 6.25 million shares issued as part of the Offer to raise $10 million in new capital. 5

Fully diluted adjusted NTA is calculated on the basis of 109.25 million shares as it also includes the 1.90 million shares attributed to unexercised options as part of the Employee Share Option Scheme and 1.10 million partly-paid Plan Shares.


NTA/share as at 30 November 2005 was $70.36/share calculated on the basis of 318,377 shares on issue – NTA/share as at 30 November 2005 assuming a share split ratio of 311.394549 per share and the issue of 6,250,000 shares with net proceeds of $9.0m is $0.30 – NTA/share as at 30 November 2005 assuming a share split ratio of 311.394549 per share, the issue of 6,250,000 shares with net proceeds of $9.0m and including the 1.9 million shares attributed to unexercised options as part of the Employee Share Option Scheme and 1.1 million partly-paid Plan Shares under the Share Growth Plan, which combined equate to associated proceeds of $4.8 million is $0.33.

Total assets reduced substantially in 2002 as receivables and inventories declined, as a result of reduced revenue. These have gradually increased from 2003 forward, consistent with the growth of the business.

Total Revenue 2001 - 2007

15

EBITDA 2001 - 2007

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NZD 2002-07 CAGR= 21% USD 2002-07 CAGR= 34%

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NZD 2002-07 CAGR= 26% USD 2002-07 CAGR= 40%

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Source: Rakon

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16

Rakon’s customer base is made up of more than 400 businesses, including 200 producers of GPS and GPS related products.


Investment Highlights Market Position Rakon is a leading supplier of Crystals and Oscillators used for timing reference and frequency control in demanding applications such as GPS, where Rakon estimates it has over 50% share of the global autonomous GPS market. Its customer base includes many of the world’s leading manufacturers of recreational, commercial and military/aerospace GPS products, mobile phones and other communication products. Plant Technology Rakon’s production facilities and unique testing systems are the result of significant investment by the Company over a number of years. Key elements of the production process, and the testing equipment, have been developed in-house and provide Rakon with competitive advantages over its competitors. Rakon’s plant enables the Company to manufacture high performance Crystals and Oscillators in large volumes. Customer Base Rakon’s customer base is made up of more than 400 businesses, including 200 producers of GPS and GPS related products. These customers represent many of the leading corporates and brand names in their respective industries. Rakon prides itself on having close and long term relationships with its customers, some of whom have been customers of the business for more than 25 years. Financial Performance Since it was established, Rakon has a history of revenue growth and improving financial performance. The Company has funded its growth to date, including significant capital

expenditure, without requiring external equity. From 2002 to 2005 revenue and EBITDA have grown at a compound annual growth rate (CAGR) of 27% per annum and 21% per annum respectively.

17

Sector Growth Rakon’s market position, proprietary technology and customer relationships have positioned the Company as a key participant in the world-wide GPS industry, which is predicted to experience high growth over the coming years. In addition to the GPS market, Rakon also supplies customers in other growth markets such as non GPS satellite communications, microwave communications, cellular base stations and twoway digital radio. Research and Development Rakon is at the forefront of high performance Crystal and Oscillator technology for the GPS market. This position has enabled Rakon to keep or stay ahead of its competitors for the GPS market. Critical to Rakon maintaining this first mover advantage is Rakon’s culture of constant innovation. The continual evolution of Rakon’s products over many years has been achieved through a combination of co-development activities with its customers along with the strength of its engineering team, and the foresight of management to identify global trends. Risks There are risks inherent in Rakon’s business and industry. These are detailed in “What are my risks?” on pages 82 to 88.

Critical to Rakon maintaining its first mover advantage is a culture of constant innovation


Details of the Share Oer


This Offer Document is a combined investment statement and prospectus in respect of an offer of Shares in Rakon as follows: (a) a primary offer by Rakon of 6,250,000 new Shares; and (b) a secondary sale by the Vendor of 35,000,000 existing Shares to members of the public in New Zealand and to Institutional Investors in New Zealand, Australia and certain other jurisdictions. The Shares being offered by the Vendor represent 35% of the issued Shares in Rakon as at the date of this Offer Document. Following completion of the Share Offer, the Vendor will own 24,060,024 Shares in Rakon (22.6%), and those Shares (together with Shares held by certain other existing Shareholders) will be subject to the transfer restrictions described on page 22 under the heading “Transfer Restrictions”. Purpose of the Share Offer The purpose of the Share Offer is to enable the Vendor to realise a portion of its investment in Rakon and for the Company to raise new capital to fund further growth through investment in plant and equipment, acquisitions and working capital. The Share Offer will also provide Rakon

with more direct access to capital markets to pursue further growth opportunities and provide an opportunity for employees, Directors and business associates of Rakon to invest in the Company. The Share Offer is structured in two parts: • Firm Allocations – Up to 37,500,000 shares (90.9% of the Shares under the Share Offer) have been reserved for Firm Allocation to Institutional Investors, the Lead Manager, other NZX Firms and other invited financial intermediaries; and •

Priority Offer – Up to 3,750,000 shares. Open to employees, Directors and business associates of Rakon in New Zealand (described on page 20).

THERE WILL BE NO GENERAL PUBLIC OFFER. MEMBERS OF THE GENERAL PUBLIC WHO WISH TO APPLY FOR SHARES MUST DO SO THROUGH AN NZX FIRM HOLDING A FIRM ALLOCATION. Summary of the Share Offer Structure The table below summarises how each class of Applicant may participate in the Share Offer, the applicable Closing Dates, whether or not their Application may be subject to scaling and the minimum Application amount.

Class of Applicant

Class of Offer

Closing Date

Applications subject to scaling?1

Minimum Application Amount

Retail investors

Application through NZX firms pursuant to Firm Allocation

12 May 2006

No2

3,000 shares

Institutional investors

Firm Allocation

12 May 2006

No

Not applicable

Priority Offer

Employees, Directors and business associates of Rakon in New Zealand

5 May 2006

Applications up to 4,000 shares allocated in full, scaling thereafter is a possibility

1,000 shares

Notes: 1 Scaling means that the Vendor and Rakon, in consultation with the Lead Manager, may allocate to the Applicant a lesser number of Shares than the number of Shares applied for. 2 The allocation of Shares to an Applicant under a Firm Allocation will be at the discretion of the NZX Firm through which the Applicant receives their allocation of Shares.

19


20

The Vendor, Rakon and the Lead Manager reserve the right to progressively allocate Shares from the Priority Offer on a Firm Allocation basis to NZX Firms throughout the period of the Share Offer. Opening and Closing Dates The opening date of the Share Offer will be 18 April 2006. The Closing Date for Priority Applications under the Priority Offer will be 5.00pm on 5 May 2006, and for all other Applications, 5.00pm on 12 May 2006. Rakon and the Vendor may jointly vary any of these dates at their discretion. Pricing The Offer Price for the Shares is $1.60 per Share. All Shares allocated under the Share Offer will be sold at the Offer Price. Firm Allocations An aggregate amount of up to 37,500,00 Shares (90.9% of the total Shares being offered under the Share Offer) has been allocated on a Firm Allocation basis to the Lead Manager, Institutional Investors and other NZX Firms. Shares will only be available to Retail Investors in New Zealand through the Lead Manager and NZX Firms that have received a Firm Allocation. All Shares allocated on the basis of a Firm Allocation will be sold at the Offer Price. Applications pursuant to Firm Allocations will not be subject to scaling by Rakon and the Vendor, although the allocation of Shares to a Retail Investor Applicant will be at the discretion of the NZX Firm through which the Applicant receives their allocation of Shares. If you want to receive an allocation under the Share Offer you must contact the Lead Manager or any other NZX Firm. Your NZX Firm will act as your agent in submitting your Application Form and Application monies to the Share Registrar (which will receive them on behalf of Rakon and the Vendor). It will be the NZX Firm’s responsibility to ensure that they are submitted to the Share Registrar by 5.00pm on 11 May 2006. None of the Vendor, Rakon, the Share Registrar or the Lead Manager take any responsibility for any acts or omissions by your NZX Firm in connection with your Application, Application Form or Application monies.

Priority Offer Up to 3.75 million Shares (9.1% of the Shares being offered under the Share Offer) have been reserved for allocation to employees, Directors and business associates of Rakon (Priority Applicants) in New Zealand. Applications made under the Priority Offer should be made on the Application Form at the back of this Offer Document. If you are a Priority Applicant, indicate this on the Application Form by ticking the appropriate box. Priority Applicants with valid Applications for up to 4,000 Shares will be allocated the number of Shares applied for at the Offer Price. In the event that the Priority Offer is oversubscribed, any Shares applied for in excess of 4,000 Shares may be subject to scaling. Shares forming part of the Priority Offer will be reserved until the earlier of the Closing Date for the Priority Offer or such other time or date as determined by Rakon, the Vendor and the Lead Manager. The Closing Date of the Priority Offer is earlier than the Closing Date of the Share Offer. If Applications for Allotment from the Priority Offer do not exceed 3.75 million Shares, it is intended that each Priority Applicant will be allotted the number of Shares which they apply for. If Applications for Allotment from the Priority Offer exceed 3.75 million Shares, then Rakon and the Vendor will, at their discretion, scale Priority Applications for more than 4,000 Shares. This may necessitate the early closing of the Priority Offer. Scaling may not necessarily be on pro-rata basis. In no case will a Priority Offer Application be scaled below 4,000 Shares. How to Apply Applications for Shares must be on the Application Form contained in or accompanying this Offer Document. Retail Investors who wish to make an Application for Shares should contact an NZX Firm that received a Firm Allocation and then complete the Application Form contained at the back of this Offer Document. Application Forms must be completed in full and submitted in accordance with the instructions set


out below and on the reverse of the form. An Application will constitute an irrevocable offer by the Applicant to purchase the number of Shares specified in the Application Form (or, in the case of the Priority Offer, such lesser number of Shares as Rakon, the Vendor and the Lead Manager may determine) on the terms and conditions set out in this Offer Document and the Application Form. By submitting an Application Form, Applicants agree to be bound by its terms and conditions and the Constitution of Rakon.

was obtained, in sufficient time to reach the Share Registrar no later than 5.00pm on 11 May 2006. The address for the Share Registrar is:

Minimum Applications Applications under the Share Offer must be made for a minimum of 3,000 Shares, except for Applications under the Priority Offer which must be made for a minimum of 1,000 Shares.

Rakon and the Vendor, in consultation with the Lead Manager, may elect to close the Share Offer or any part of it early, or extend the Share Offer or any part of it, or accept late Applications either generally or in particular cases. The Share Offer or any part of it may be closed at any earlier date and time, without further notice. Applicants are therefore encouraged to submit their Applications as early as possible.

Application Monies All Applications must be accompanied by payment in full for the value of Shares applied for based on the Offer Price. Cheques must be drawn on a registered New Zealand bank, must be crossed Not Transferable and should be made payable to Rakon Share Offer. Application monies will be banked upon receipt into a designated bank account and held on trust by Rakon and the Vendor pending allocation of Shares. The banking of such monies does not constitute confirmation of allocation of any Shares. You should ensure that sufficient funds are held in the relevant account to cover the cheque which accompanies your completed Application Form. Allocations of Shares will be made on the assumption that an Applicant’s cheque will clear. If an Applicant fails to make payment for the Shares under the Share Offer or an Applicant’s cheque fails to clear, then the entitlement of that Applicant to receive Shares may be cancelled, or any transfer of Shares to the Applicant may be reversed. Where and When to Lodge Applications All Priority Offer Applications must be delivered to the Share Registrar by 5.00pm on 5 May 2006. Applications through NZX Firms must be lodged with the NZX Firm through which the allocation

Computershare Investor Services Limited 159 Hurstmere Road North Shore Private Bag 92119 Auckland 1020 Telephone: 09 488 8700 Facsimile: 09 488 8787

Allocation Policy The allocation of Shares to a Retail Investor Applicant will be at the discretion of the NZX Firm through which the application is made, subject to Rakon and the Vendor being able to, at their discretion, reject any Application, without giving any reason. If the Priority Offer is over-subscribed, Priority Applications being submitted through the Priority Offer for more than 4,000 Shares may be subject to scaling. Scaling, if any, will be determined by Rakon and the Vendor in consultation with the Lead Manager and may not necessarily be on a pro-rata basis. However, Priority Offer Applications will not be scaled to less than 4,000 Shares. Notification of Allocations Applicants should ascertain their allocation before trading in the Shares. Applicants will be able to do so from 15 May 2006 by calling the Share Registrar on 09 488 8700. Retail Investors will also be able to confirm their allocations through the NZX Firm from which they received their allocation of Shares. Applicants participating in the Share Offer will be sent notices of allocation (together with any refunds for unsuccessful participants in the Share Offer) no later than 15 May 2006. Holding statements will be sent to all successful Applicants no later than 15 May 2006.

21


22

If you sell Shares before receiving an initial holding statement, you do so at your own risk, even if you obtained details of your holding through the Share Registrar or confirmed your allocation through an NZX Firm or otherwise. None of the Vendor, Rakon, the Lead Manager, nor any of their respective Directors, officers, employees, consultants, agents, partners or advisers accepts any liability or responsibility should any person attempt to sell or otherwise deal with Shares before the holding statement showing the number of Shares transferred to the Applicant is received by the Applicant for those Shares. Refunds Money received in respect of Applications that are declined in whole or in part will be refunded in whole or in part (as the case may be). Refunds for unsuccessful Applications will be posted on the same day that holding statements are posted to successful Applicants, which is intended to be 15 May 2006. Interest will not be paid on any Application money refunded to Applicants. New Zealand Exchange Listing Application has been made to NZX for permission to list the Shares and all the requirements of NZX relating thereto that can be complied with on or before the date of this Offer Document have been duly complied with. However, NZX accepts no responsibility for any statement in this Offer Document. Initial quotation of the Shares on the NZSX under the symbol RAK is expected to occur on 16 May 2006. NZX has authorised NZX Firms to act on this Share Offer. Selling Shares on the NZSX Rakon will not issue Share certificates to successful Applicants. Rakon will instead participate in the Fully Automated Screen Trading and Electronic Registration system (FASTER). FASTER is a comprehensive system for recording and completing the transfer of securities listed on the NZSX. FASTER provides for paperless settlement and full electronic transfer of securities. Under FASTER, Shareholders will be sent a statement of their holdings following the transfer of Shares to them under the Share Offer and on any subsequent transfers or issues, detailing the number of Shares transferred or issued to them. If you sell Shares before receiving an initial holding statement, you do so at your own risk.

Companies listed on the NZSX are required to have their share registers connected electronically to FASTER, and accordingly, that system will contain details of all Shareholders. Transfer Restrictions Each of the Vendor, Brent Robinson, Darren Robinson, Marjorie Robinson, Tahia Investments Limited and Zeus Zeta Limited (Existing Shareholders) has entered into a Shareholder Restriction Deed with Rakon and the Lead Manager affecting 64,140,862 Shares (Affected Shares) which, in aggregate, the Existing Shareholders will hold at the close of the Share Offer, on the assumption that the Share Offer is fully subscribed. The terms of the Shareholder Restriction Deed provide that each Existing Shareholder may not, except as described below, dispose of, or agree or offer to create any security interest in, any of the Affected Shares; or do, or omit to do, any act if the act or omission would have the effect of transferring effective ownership or control of any of the Affected Shares. The restrictions described above apply until 30 days after the date on which Rakon makes its preliminary announcement to NZX for the financial year ending 31 March 2007. The restrictions described above do not apply to any proposed disposal, creation of a security interest in, or act or omission which transfers effective ownership or control: (a) where the prior written consent of Rakon and the Lead Manager is obtained; or (b) pursuant to an agreement to accept a takeover offer made in accordance with the Takeovers Code (and the Shareholder is not an Associate (as that term is defined in the Takeovers Code) of the proposed offeror) provided that the transfer of relevant Shares is effected through the takeover offer. None of the persons named above guarantees, or accepts any liability in respect of the Shares. Brokerage and Underwriting UBS New Zealand Limited is the Lead Manager and organising participant to the Share Offer.


No brokerage or commission is payable by Applicants on acquisition of Shares under the Share Offer. Rakon and the Vendor will pay the following brokerage and commission fees: (a) to UBS as Lead Manager, a brokerage fee of 1.5% of the proceeds in respect of Shares allotted pursuant to valid Applications submitted by Institutional Investors; (b) to UBS as Underwriter, an underwriting commission of 1.5% of the aggregate proceeds of the Share Offer; and (c) to UBS for on-payment to NZX Firms and financial intermediaries, a retail brokerage fee of 1.5% of the proceeds in respect of Shares allotted pursuant to valid Applications submitted by NZX Firms and financial intermediaries and bearing their stamp. The Share Offer has been underwritten by UBS New Zealand Limited. The Underwriting Agreement entered into by Rakon, the Vendor and the Underwriter may be terminated by the Underwriter in certain circumstances. Further details of the Underwriting Agreement are set out on page 97 of this Offer Document. Overseas Investors The Share Offer is only being made to members of the public in New Zealand and to Institutional Investors in New Zealand, Australia and certain other jurisdictions. The Priority Offer is only being made to employees, Directors and business associates of Rakon in New Zealand. No person may offer, invite, sell or deliver any Shares or distribute any documents (including this Offer Document) to any person outside New Zealand, except in accordance with all of the legal requirements of the relevant jurisdiction. This Offer Document may not be sent into or distributed in the United States. Unless otherwise agreed with the Vendor and Rakon, any person or entity applying for Shares in the Share Offer will, by virtue of such Application, be deemed to represent that he, she or it is not in a jurisdiction that does not permit

the making of the Share Offer or an invitation of the kind contained in this Offer Document and is not acting for the account or benefit of a person within such a jurisdiction. None of the Vendor, Rakon, the Lead Manager nor any of their respective directors, officers, employees, consultants, agents, partners or advisers accepts any liability or responsibility to determine whether a person is able to participate in the Share Offer. Use of Proceeds Rakon will not receive any proceeds from the sale of the Vendor’s Shares which will be paid to Ahuareka Trustee Limited. Rakon intends to use the $10.0 million of proceeds raised from the issue of new Shares under the Share Offer to fund investment in new product development, design and manufacture of specialised manufacturing plant and equipment and factory expansion. Although it is intended that these proceeds will be used for the above purposes, the proceeds may be applied to any undertaking in which Rakon may lawfully engage. Important Document If you are in any doubt as to how to deal with this Offer Document, please immediately contact an NZX Firm, an accountant, or a financial adviser.

23


Industry Profile

Forecast world-wide GPS unit growth of 28% CAGR 2005-2010* *ABI Research ©2006. All rights reserved. Used by permission


Market Structure Quartz Crystals are an essential part of modern electronics, providing critical functions such as time keeping, synchronisation, frequency control and filtering. Rakon calculates that the world market for Crystals and Oscillators is approximately US$3.2 billion per annum.

25

The Quartz Crystal industry consists of three broad segments based on the end applications the Crystals are incorporated into, and the level of performance required. These segments are summarised below.

Quartz Crystal Industry Crystal specification

Segment

Typical applications

Volume & price point

Comment

Low performance

Consumer goods

Computers, televisions, audio equipment, network television, television decoders

High volume, low price

Crystals used in these applications do not require high performance and usually have a larger Form Factor than higher specification Crystals

High performance

High end communications & commercial

Cell phones, GPS navigation, wireless data, satellite radio

High volume, medium price

Products are manufactured to small Form Factor. Producers in this segment have made significant contributions to industrywide product miniaturisation

Very high performance

High end industrial, military/ aerospace

Microwave communications, telecommunications infrastructure, high performance GPS/ guidance systems

Low volume, high price

Producers in this segment typically manufacture to the highest specifications and to a larger industrial and military/ aerospace Form Factor. In general producers are not equipped for high volume production

Key Trends In High Performance Applications Overall demand for highly specified Quartz Crystal components and TCXOs is driven by the demand for the applications they are incorporated into. Rakon’s focus is on the high

are an essential part of modern

Source: Rakon

Rakon is focused on supplying components for high and very high performance applications. Its business is well positioned in that it straddles the high-end communications and high-end industrial and military/aerospace segments. Rakon achieves this by producing the highest specification components to a consumer market Form Factor, and being capable of manufacturing these products in high volumes. Rakon provides a broad range of products from simple Quartz Crystals to high performance TCXOs.

Quartz Crystals

electronics and very high performance segments of the market, in particular the GPS market which is expected to move from a niche market to a consumer mass market. Other high performance applications on which Rakon focuses are satellite communications, microwave communications, cellular base stations and two-way digital radio. GPS The GPS market has grown from military/ aerospace origins to having an established and rapidly growing commercial and consumer user base across a wide variety of applications. The composition and growth of the GPS market, with estimated sales of US$22 billion in 2005, is shown on page 27.


Rakon at the heart of GPS systems

The GPS market has grown from military/ aerospace origins to commercial and consumer applications


Projected world-wide GPS sales (millions of units)

Composition of GPS market by 2005 unit sales

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Communications

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Military/Aerospace

Military/Aerospace

Recreation

Recreation

Asset Tracking

Asset Tracking

In-Vehicle Navigation

In-Vehicle Navigation

Other Civilian

Other Civilian

Source: ABI Research. © 2006. All rights reserved. Used by permission

Source: ABI Research. © 2006. All rights reserved. Used by permission

The market for Crystals and Oscillators for GPS applications is driven by the unit sales of GPS devices/chipsets, as each GPS unit requires one Crystal and Oscillator.

Mobile Phones Incorporation of GPS into mobile phones enables carriers to provide location-based services (LBS) to subscribers. LBS consist of two categories:

Growth in GPS sales over the coming years is expected to be driven largely by the communication, military/aerospace, recreation, asset tracking and in-vehicle navigation systems segments. Though military/aerospace applications are still a significant growth segment, commercial and recreational applications are rapidly growing in significance as GPS products move from being niche to consumer mass market. The overall GPS market is projected to grow at a CAGR of 28% in terms of number of units sold from 2005 to 20101.

• •

Growth projected in the major market segments are described in more detail below. Communication Communication is the largest GPS segment by the number of units sold and is forecast to grow at a CAGR of 33% from 2005 to 2010.1 The penetration of GPS into communication can be broken down into mobile phones and voice over internet protocol (VoIP) handsets.

emergency services; and value added services.

Emergency Services The major impetus for the incorporation of GPS capability into mobile phones has been the requirement by emergency services for a wireless caller to be located. This has been driven by regulation in the United States, Japan and Europe. The United States Enhanced – 911 (E-911) directive has been the most stringent in requiring location information. In a series of orders since 1996, the United States Federal Communications Commission (FCC) adopted rules to implement E-911 services for wireless callers. Under Phase II of the E-911 directive, the FCC has mandated that 95% of each network’s subscriber base must have location identification enabled handsets by the end of 2005. Although the wireless operators have been granted numerous concessions, it is inevitable that, in time, all new handsets will be enabled for location identification.

27


28

The wireless telecommunications industry has used two types of technology to satisfy the FCC E-911 directive. These technologies include network-based solutions, handset based solutions, and a hybrid of the two. GPS is the only handset based technology and while providing the superior solution, this has been constrained by the speed of implementation of GPS into handsets by manufacturers, and the performance of GPS in difficult reception areas such as buildings. The production of cheaper high performance GPS chip sets for handset manufacturers and the development of revenue earning LBS is overcoming these constraints. Of the major wireless carriers in the US, Verizon Wireless, Sprint/Nextel and ALLTEL have adopted a handset-based location solution while Cingular and T-Mobile have chosen to adopt a network based location solution. Other countries that have implemented similar regulations are Japan – E-110 and Europe – E-112. Japan’s E-110 requires all 3G handsets to have GPS by 2007. Europe’s E-112 mandate has a 2008 goal but is less onerous than the US regulation. VolP The rapidly growing VoIP telephony industry has also been forced to comply with the E-911 directive by the FCC in the US as the location of an internet connection can be hard to determine if over a wireless network or a very large network. In order to comply with the E-911 directive, many VoIP service providers have initially adopted geo database solutions requiring users to provide their physical address to their VoIP service provider. However, such a solution is viewed as only temporary, particularly as the number of nomadic VoIP users increases. Therefore, it is envisioned that a solution using GPS will be required. Value Added Services As telecommunications carriers have begun to incorporate LBS capability into their networks and significant advances in handset technology have been made (colour screen, camera and increased processing capability etc), significant emphasis is being placed on LBS as a potential revenue source rather than just a matter of compliance with government regulations. Examples of such services are personal navigation, location filtering of web content, concierge services, enterprise

services and mobile commerce. In order to operate effectively for consumer LBS (e.g. being able to receive GPS signals when indoors, out of line-of-sight with GPS satellites), the GPS technologies incorporated into the handsets need to be more sophisticated than for emergency services. A major focus of the GPS industry is currently on developing suitable (i.e. miniature, high performance, and cost effective) chipsets for these applications. Recreation The recreational GPS market continues to expand at an estimated CAGR of 16% from 2005 to 20101, as further applications are being developed to appeal to the mass market. Growth is being driven by creativity in application design and a steady decline in the price of GPS devices. Recreational uses of GPS include boating, fishing, hunting, tramping, mountain biking, gaming and Geocaching. Asset Tracking Asset tracking continues to be another growing application of GPS with an estimated CAGR of 29% from 2005 to 20101. Asset tracking consists of the use of GPS receivers to monitor the movements and locations of vehicles, railcars, freight and heavy equipment. Growth is being driven by the realised operational efficiencies provided by GPS asset tracking to firms with mobile assets and also through the benefit of deterring theft and vandalism. In-Vehicle Navigation In-vehicle navigation is one of the more established GPS applications. Rakon understands, based on industry estimates, that approximately 7.1 million in-vehicle navigation units were sold in 2005, representing an approximate 14% penetration rate of new car sales. The market with the greatest penetration is Japan, where the vast majority of new vehicles offer GPS navigation, and there is a take up rate of approximately 50%. In-vehicle navigation is estimated to grow at a CAGR of 12% from 2005 to 20101. Rakon believes that growth in the vehicle navigation market will occur as Telematics systems with GPS capability are increasingly incorporated into mass market vehicles as a standard feature or cost effective


they are a single, flexible communications platform that can be installed quickly and cost effectively to provide telecommunication solutions for a range of commercial and consumer applications.

option. Rakon understands, based on industry estimates, that 21% of new cars registered in 2010 will be equipped with in-vehicle navigation, by which time navigation sales are expected to reach 12.4 million units per annum. Machine Control Systems A further growth market for precision GPS applications is in machine control systems. These systems are increasingly being applied for use in cranes, earthmoving, agricultural and mining machinery, where accurate positioning is essential.

In contrast to VSAT, two-way satellite communication devices transmit as well as receive data. Two-way systems provide an alternative to fixed-wire telecommunication networks and support high-speed data transfer. As they operate independently of land-based cable or telephone networks, growing demand for two-way systems is expected from segments such as mobile emergency services and services by traditional telecommunication carriers due to the remoteness of their location.

Emergency Position Indicating Radio Beacons (EPIRB), when activated, transmit a distress call that is picked up or relayed by satellites and transmitted via land earth stations to rescue services. EPIRBs are mainly used in marine and aviation emergency situations.

The rapid growth in GPS machine control systems has been driven primarily through technological advancement and the desire to improve productivity levels. Military/Aerospace GPS was originally designed and implemented by the United States military with the intention to provide a navigational aid. However, as technology advances were made, further applications were developed to assist in intelligence gathering, logistics, search and rescue, mine clearing, defence systems, and avionics. The military/aerospace GPS market is expected to accelerate in the coming years, growing at an estimated 48% per annum over the next five years1. Driving this growth is the predicted increased utilisation of GPS within robotic vehicles and unmanned aircraft, and the adoption of GPS enabled PDAs by US military personnel. The adoption of GPS enabled PDAs by military personnel is predicted to improve troop movement and assist search and rescue operations in the field. Non GPS Applications Other significant applications for high performance Quartz Crystal components and TXCOs are: Satellite Communications • Very small aperture terminal (VSAT) refers to any fixed satellite terminal that is used to provide interactive or receive-only communications. VSATs are used for a wide variety of telecommunications applications, including corporate networks, rural telecommunication, distance learning, remote medicine, disaster recovery and shipboard communications. VSATs are becoming increasingly popular, because

Microwave Communications and Cellular Base Stations Telecommunication network infrastructure is another key market for high performance Quartz Crystal and Oscillator components, particularly for use in cellular base stations and microwave communications. The proliferation of cellular networks continues to drive demand for these products. Additionally, microwave communications are increasingly being used as an alternative to fixed line networks, particularly in mountainous regions or where a quick and cost effective network rollout is required. For example, microwave-based communications have recently been popular for the rollout of telephone services in China. Two-way Digital Radio High performance Quartz Crystal and Oscillator components are also increasingly used in two-way radio, with growth in this market expected to remain strong as it transitions from an analogue to digital technology platform. Notes: 1 Source: ABI Research

29


Rakon Business ProďŹ le

The business was founded in 1967 by Warren Robinson to produce Quartz Crystal components


History Year

Event

Comment

1967

Business founded in Howick garage

Rakon Industries Limited incorporated by Warren Robinson

1972

Established Singapore subsidiary

Subsidiary established in Singapore to supply the Asian market. This reduced operating costs and enabled Rakon to competitively export to other SE Asian countries, Europe and USA

1975

Joint production established between New Zealand and Singapore

New Zealand and Singapore operations combined to provide low cost Crystals to New Zealand Colour TV manufacturers

1977

Melbourne factory

Manufacturing commenced in Melbourne, Australia

1980

Upgraded Crystal manufacturing process and developed TCXO technology

Evaluation of global communication technology identified demand for high performance frequency control devices

1989

NEC relationship

Started supplying NEC Australia with TCXOs for early mobile phone applications. Manufacturing facilities in Australia closed

1990

TCXO technology breakthrough

Technology breakthrough leads to manufacturing of Oscillators with previously unmatched miniaturisation and 1 ppm frequency stability

1990

Rakon Limited incorporated

1991

Contracts with major US GPS manufacturer

Magellan and Rockwell began ordering large volumes of Rakon’s 1ppm TCXOs for GPS applications

1993

1 ppm TCXO market acceptance

Achieved market acceptance with most major GPS manufacturers in North America

1994

Recognition for excellence and new manufacturing facility

New factory built in Auckland to deliver larger volumes with higher standards. Recognised by Rockwell as a Top Supplier for commitment to excellence, as well as winning a New Zealand Export Award

1995

New technology development

Developed new strip Crystal technology and RSX line. Manufacturing facilities in Singapore closed

1996

ISO9002 accreditation achieved

Achieved ISO9002 accreditation – a major step in meeting customers’ quality expectations

1997

Developed IC TCXO

Developed TCXO integrated circuit (IC) technology. ISO9001 accreditation achieved

2000

Manufacturing facility expansion

Factory expanded to increase production capacity of new IC type TCXO and strip Crystals

2001

Won Motorola’s automotive business

Established as supplier to Motorola’s automotive GPS business

2002

Sole supply contract with Motorola iDEN

Secured sole supply position for Motorola’s first GPS/mobile phone and established United States office

2002

Chicago marketing office opened

Opened marketing office in Chicago to service North American and European customers

2003

TCXO technology breakthrough

Introduction of the world’s smallest 0.5 ppm stability TCXO

2004

Further TCXO technology breakthrough

Reduced the size of world’s smallest 0.5 ppm stability TCXO to 3 x 2.5mm

2004

Established Taiwanese marketing office

Taiwanese marketing office opened to service South East Asian customers

2005

Supreme Exporter of the Year

Won 2005 DHL Supreme Exporter of the Year award

2005

New investor

A Peter Maire led consortium purchased a 20% stake in Rakon

2006

RF module developed

World’s smallest GPS radio frequency receiver module developed

31


Supplying to a global market

ERICSSON QUALCOMM

Thrane & Thrane

Disclaimer: The logos and trademarks shown here are owned by their respective companies and are reproduced with permission. Their use in this document is on the basis that these companies are purchasers of Rakon products, and in no way implies that there is any endorsement of this Share Oer, nor that there is any ďŹ nancial interest in Rakon Limited by these companies. None of the above guarantees, or accepts any liablility in respect of the Shares.


Customers Rakon has a diverse customer base of more than 400 businesses from a range of industries and geographies. The vast majority of Rakon’s customers are electronics manufacturing companies producing consumer electronic products such as mobile phones and GPS devices. Rakon’s supply of Crystals and Oscillators to leading GPS device manufacturers reflects the Company’s position in that market. Rakon deals with all key customers directly on an account management/sales level and an engineering level. Engineering level relationships enable the Company to better serve customers and participate in the product design process which can lead to Rakon’s products being designed into the core product specification.

Examples of end products incorporating Rakon products Automatic landing system of Boeing 747 jets use Rakon TCXOs Garmin recreational GPS units use Rakon Crystals and TCXOs Mobile phones manufactured for Nextel for emergency location use Rakon TCXOs Qualcomm’s omni-satellite tracking & communications for trucking uses Rakon TCXOs GM Onstar (Motorola) motor vehicle assistance uses Rakon TCXOs

Sample of key customers Customer

End products

Customer since

Ericsson

Telecommunications, mobile phones

1998

Flextronics (u-Blox)

Car Navigation GPS chipsets/modules

1997

Garmin

Land, Marine & aviation GPS receivers

1993

Mitac Computer

GPS receivers, mobile phones

2003

Motorola Automotive

Car Navigation (On Star by GM)

1999

Motorola PCS

Mobile phones

2002

Motorola iDEN

Mobile phones

2001

Navman

GPS receivers

1997

Qualcomm

Mobile phone GPS capable chipsets

1995

Research In Motion

PDAs

1996

Rockwell International

Military/aerospace applications

1991

Samsung

Mobile phones

2003

Tait Electronics

Telecommunications

1968

Thales Navigation

Car Navigation GPS receivers

1991

Trimble Navigation

Survey & Car navigation GPS receivers

1992

Source: Rakon Note: None of the above guarantees, or accepts any liability in respect of, the Shares.

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Product Range UM Crystals

Product type

Description

Key Markets

2005 revenue

UM crystals

High performance Crystal, packaged in metal with formed legs for surface mounting

Satellite navigation, particularly automotive and military/aerospace

$7.1m

RSX crystals

Low profile Form Factor Crystal in ceramic packaging

Used in Rakon’s TCXOs, consumer oriented GPS and local wireless data connections

$2.6m

Custom TCXOs

Traditional printed circuit Board based Oscillator incorporating passive components and Crystal resonator for temperature control compensation

Telecommunications

$9.9m

Integrated TCXOs

Integrated circuit for temperature control / compensation joined with RSX Crystal in a ceramic package

Predominantly GPS applications including E-911 mobile phones and Telematics

$40.5m

Precision Products

Products designed to customer’s particular specifications. Precision products are customer products with especially high performance

Wide range of applications / customers. Precision products primarily for military/aerospace applications

$7.5m

SMD Discrete TCXOs

Smaller Form Factor voltage controlled-temperature controlled Oscillators and voltage controlled Oscillators

Telecommunications

$3.8m

RF module

Small Form Factor GPS RF Front-end receivers

Consumer oriented. GPS applications

n/a

RSX Crystals

Custom TCXOs

Integrated TCXOs

Precision Products

RF Module

SMD Discrete TCXOs

Rakon’s Quartz Crystal products range from Crystals to high performance TCXOs


The composition of Rakon’s sales by end market/application and geography is illustrated in the graphs below. Reflecting the location of its customers, approximately 95% of Rakon’s revenue is denominated in US Dollars. Sales by geography FY2005

Sales by end market FY2005 21%

4% 2%

21%

10% 47%

3% 15% 11%

14% Mobile Phone / PDA

37%

15% Telecom

Asia

Recreational

North America

Automotive

Europe

Module

New Zealand

Millitary

Other

Other Source: Rakon

Source: Rakon

Product Range Rakon provides a broad range of Quartz Crystal based products from Crystals to high performance TCXOs. In order to meet customer requirements, Rakon seeks to maintain a broad range of products and accordingly, its range includes certain lower-end products sourced on an original equipment manufacture (OEM) basis from third party producers. All products sold by Rakon to its customers, including OEM products, are put through the Company’s test and screening process to ensure that they meet the Company’s quality and performance standards. Rakon’s product lines may be divided into the groups outlined on the previous page:

Market Position Rakon is a leading supplier of Crystals and Oscillators used for timing reference and frequency control in demanding applications such as GPS, where Rakon estimates it has over 50 percent of the global autonomous GPS market. Its customer base includes many of the world leading manufacturers of recreational, commercial and military GPS products, mobile phones and other communications products.

Rakon’s TCXOs are approved for most of the world’s GPS chipsets, including: • • • • • • • • • • • •

Analog Devices ATMEL Infineon Motorola Nemerix Qualcomm RF Micro Devices SiRF ST Microelectronics Texas Instruments uNav Zarlink

As the GPS market has expanded, Rakon’s products have increased their performance attributes while also being competitive in price and size, which are key success factors as GPS increasingly becomes integrated into consumer mass market electronics. Competitive Advantage Rakon considers the following elements give it a competitive advantage in the design and production of high performance Crystals and Oscillators. Proprietary Technology and Process Rakon believes it is the only Crystal/Oscillator manufacturer in the world that has the technology to provide 100 percent temperature screening of high volume production to ensure

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36

that non-performing Crystals and Oscillators are eliminated. This capability is the result of specialised test equipment, first developed in-house, which performs High Resolution temperature tests as part of the production process. Depth and Breadth of Experience As a result of Rakon’s long history in providing products for high performance applications, the Company has extensive intellectual property in the specification, design and production of Crystals and Oscillators for high performance applications. Rakon’s superior understanding of the requirements of high performance applications means that it is able to apply its experience to provide better solutions to customers in shorter timeframes than industry standards. Strong Customer Relationships Rakon deals with most of its customers directly (rather than through third party representatives/ distributors) and is focused on building strong relationships with customers at a technical engineering level to ensure it anticipates and understands market trends and requirements. This collaborative approach, and the longevity of Rakon’s relationships with its customers (some have been customers of the business up to 25 years), means that Rakon has strong customer relationships. Rakon is often the first choice for companies developing new products and is generally introduced early in the new product design process. Highly Skilled Engineering Team Rakon’s management has engendered a culture of continual innovation and improvement throughout the Company, with a focus on proactive product development. A strong research and development team has been established to support this process. Due to New Zealand’s relative isolation, Rakon has had to train engineers in-house and secure employees either from other industries or direct from university. Although resulting in the need to undertake significant training, it fosters an approach to product development that is often different from the approach taken overseas. Additionally, the absence of a supporting industry structure has forced Rakon to be innovative in the way it has developed its

manufacturing processes and technology. Brand and Reputation for Quality The Rakon brand has become well known amongst manufacturers of high performance electronics as a source of the highest performance Crystals and Oscillators. This reputation for excellence has been built on Rakon’s long history of delivering fault-free products to customers’ specifications. Proprietary Test Equipment Rakon’s proprietary test equipment is a key competitive advantage. The test equipment, which is developed and manufactured by Rakon in-house, enables the Company to perform High Resolution tests as an integral part of the production process, whereas Rakon believes that its competitors are only able to perform relatively low resolution tests in the production process. Manufacturing Process and Equipment Standard manufacturing equipment is able to be used for parts of the process, however, at significant steps in the process, proprietary equipment has needed to be developed. Rakon’s internal engineering team has made significant advances in technologies and processes designed specifically for Crystal and Oscillator manufacturing. Core development areas have been the construction of specialised robotic equipment and critical clean room processes, such as thin film deposition. In the 2001 financial year, Rakon completed an $11.5 million expansion of its manufacturing facilities at its Mt. Wellington premises. This involved increasing factory capacity through expansion of the clean room and the addition of further robotics. Since then Rakon has spent on average $3.0 million per year on capital expenditure and increased capacity from 700,000 units per month in 2001 to 3,000,000 units per month today. Test Equipment Rakon has been developing and refining its proprietary test equipment over many years. The first test ovens were developed by RIL in 1985 and Rakon has continued that development. The test equipment is designed and manufactured in-house by Rakon and is an integral step in the production process, with all products being put through the High Resolution testing process. This allows Rakon to deliver Crystals and Oscillators to


customers that have zero tolerance to frequency perturbations and are therefore capable of being incorporated into applications demanding the highest performance, such as GPS. Rakon’s test equipment is highly automated, with features such as pass/fail and sorting capability. Rakon has invested considerable resources in further developing the testing ovens, with a primary focus on improving throughput capacity. There are currently three generations of test equipment employed in the business, with the fourth generation under development. The different capacities of the four generations of test ovens are illustrated in the diagram on the next page. The first and second generation ovens are now primarily used for testing low volume custom products, with the third generation ovens employed for testing high volume production.

The fourth generation test ovens represent a major advancement in technology, providing: •

the ability to simultaneously perform temperature and micro-jump testing

fully automated feed, calibrate, test, mark and pack, providing significantly higher throughput

Quality assurance Rakon has in place robust quality assurance practices. The Company first achieved ISO 9001 in 1996, with the standard being upgraded in 2003, and was last externally audited by BVQI in 2006. Rakon is also committed to ISO16949 and is aiming to achieve certification by the end of 2007.

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38

Evolving high level testing equipment 1985 Capacity: 100 units per test

1st Generation

1997 Capacity: 1,600 units per test

2nd Generation

1999 Capacity: 12,000 units per test

3rd Generation

2006 Capacity: 23,000 per hour continuous test 4th Generation

Competing Technology to Quartz Crystals There are several technologies that endeavour to challenge Quartz Crystals but none are considered by Rakon to be a serious threat to the market for high performance, miniature form, mass produced timing and frequency reference devices produced by Rakon. Rubidium Rubidium is an alternative to quartz for use in frequency control applications. In Rakon’s view, rubidium’s primary advantage is that it provides a higher degree of accuracy than quartz-based solutions. However, rubidium-based products are also large and expensive and therefore are primarily found in applications that require a significant degree of accuracy such as satellites for use in their atomic clocks. As a result rubidium based products only compete with Rakon’s Oven Controlled Crystal Oscillators (OCXO) on a limited basis and provide no competition for Rakon’s TCXOs. Langasite Langasite is a newly developed synthetically

grown piezoelectric material. In Rakon’s view, the primary advantages of Langasite Crystal over Quartz Crystal are Langasite’s ability to maintain its piezoelectric property above 570 ºC and its 2.7 times higher pullability than that of quartz. These advantages lead to Langasite being used as a sensor material in high temperature applications and filter Crystals for lower Q filters which do not compete with Rakon’s products. The disadvantages of Langasite are material cost and availability, temperature stability, higher electromechanical coupling and lower Q. MEMS Micro-Electro-Mechanical Systems (MEMS) technology enables silicon chips to be used as frequency and timing reference devices. However, MEMS technology currently is only capable of competing with low specification Crystals and Oscillators and therefore does not compete with Rakon’s products.


Requirement for high performance Crystals and Oscillators Certain applications, such as GPS, require higher performance timing and frequency control components in order to operate effectively. A poor quality and, therefore, low performance Oscillator directly affects the performance of the end product and can cause, for example, a GPS unit to temporarily lose its signal lock on GPS satellites. This arises due to the fundamental properties of the Crystals themselves, in particular the impact on frequency stability of external conditions, such as temperature and shock, or from the presence of impurities in the Crystal. At high levels of performance, TCXOs must maintain their frequency stability to changes in temperature to within a minimum of 0.2 - 2.5 parts per million. Due to the nature of the production process, Crystals have unpredictable faults, meaning that some Crystals (on average 2-3% of Crystals produced) have random frequency perturbations at a particular temperature, making them unsuitable for high performance applications. Crystals are also susceptible to micro jumps in frequency as a result of minuscule impurities on the Crystals, which make them similarly unsuitable. Such high performance applications demand that faulty Crystals and Oscillators be detected and not incorporated into products. The figure below illustrates the importance of a High Resolution temperature test to properly capture the frequency characteristics of a Crystal.

Comparison of High Resolution Test to Low Resolution Test

��������������������������

���������������������������

Source: Rakon

������������������� ����������������� ���������������������� ��������������


Corporate Strategy and Dividend Policy 40

Corporate Strategy Rakon’s primary business strategy is to maintain its leading market position as a world class manufacturer of frequency control products in the GPS industry to deliver growth in sales and earnings. The Company intends to achieve this through the following business strategies: •

continuing to develop industry leading Quartz Crystal based products, that deliver performance, and features that add value to the GPS solution;

continuing to develop new production and test equipment providing Rakon a competitive advantage;

expanding its leading edge Crystal and TCXO production facility to ensure flexibility, low production cost and continuity of supply;

establishing Rakon’s GPS RF modules in the market and developing next generation GPS receivers in partnership with leading GPS chipset companies;

expanding marketing and technical support in the major European and Asian markets; and

achieving and maintaining the highest quality and environmental standards to exceed customer expectations.

It is intended that the new capital raised by the Share Offer will be used to fund investment in new product development, manufacture of equipment to produce new products and to increase production capacity. Dividend Policy The Directors have adopted a policy that there will not be any dividend payments made for the foreseeable future and surplus funds will be retained in order to capitalise on immediate and future growth opportunities. The Directors continuously monitor Rakon’s projected cash flows and capital requirements and will review this position on an annual basis.


Profile of Directors & Senior Management Directors Bryan Mogridge BSc ONZM Independent Chairman

Bryan Mogridge was appointed Chairman in November 2005. Bryan is currently Chairman of Enterprise Waitakere, Waitakere City Holdings Limited, Designworks Enterprise IG Limited, Guardian Healthcare Group Limited, Momentum Energy Limited and The Starship Foundation. Additionally, Bryan sits on the Board of Mainfreight Limited and Pyne Gould Corporation Limited.

Bryan Mogridge

He graduated from Massey University with a BSc in Bio-chemistry. Bryan worked in various sales and marketing positions with ICI before becoming General Manager of Kempthorne Medical Supplies Limited and subsequently entering the wine industry. He was General Manager at Corban Wines Limited and the CEO and Managing Director of Montana Wines Limited. In 1992 he became CEO and Managing Director of Montana’s parent company, Corporate Investments Limited. He has been a public company director since 1984. Bryan has also chaired the Wine Institute, the New Zealand Food and Beverage Exporters Council, the Tourism Board and most recently, the business led initiative The Committee for Auckland. Bryan lives in Auckland. Bruce Irvine BCom LLB Independent non-executive Director

Bruce Irvine was appointed as a Director of Rakon in November 2005. Bruce is the managing partner of Deloitte’s Christchurch office and is also a member of the Deloitte National Board. Bruce is currently the Chairman of Jade Stadium Limited and is a Director of Pyne Gould Corporation Limited, Marac Limited, Godfrey Hirst Limited, Market Gardeners Co-operative Limited, House of Travel Limited, Christchurch City Holdings Limited and Canterprise Limited. Bruce was educated at Canterbury University, graduating with a

Bruce Irvine

BCom LLB. He initially worked for predecessor firms of Deloitte since 1980 including extended periods overseas. In 1988 Bruce was admitted into the partnership of Deloitte. In a voluntary capacity, he serves as a trustee of the Christchurch Symphony Trust, the Christchurch Art Gallery Trust and the Central Plains Water Trust. Bruce lives in Christchurch. Peter Maire Non-executive Director

Peter Maire was appointed as a Director of Rakon in October 2005. Peter is the co-founder and former President of Navman New Zealand Limited and is a Director of Cadmus Technologies Limited. Peter founded Navman in 1988 and recently sold his shareholding to Brunswick. He still maintains an active role within Navman in a consulting capacity. He is also a foundation member of the Foundation for Research, Science and Technology’s NERF Advisory Panel and the Government’s Information Communication Technology (ICT) Taskforce. Peter Maire

Peter lives in Auckland.

41


Brent Robinson

42

Executive Director

Brent Robinson was first appointed Managing Director at Rakon Industries Limited in 1986 and continues in that role at Rakon. Brent has over 25 years experience in the design and manufacture of Crystals and Oscillators. Since his appointment Brent has led and driven the development of Rakon’s core TCXO business, which is the basis of the Company’s success today, supplying over 50% of the world GPS market for TCXOs. Since assuming leadership in 1986, Rakon has grown from sales of approximately $1.7m to a forecast of $73.3m in FY2006. Brent is the co-author of various white papers pertinent to the GPS industry. Brent has completed an electronics apprenticeship. Brent Robinson

Brent lives in Auckland. Darren Robinson Executive Director

Darren has over 25 years sales and marketing experience and was appointed Sales and Marketing Director for Rakon in 1990. Darren has driven sales for Rakon through exploring new markets, applications and establishing arrangements with many top Fortune 500 companies. Since his appointment sales revenue has grown on average by 25% per annum. During the 1980s Darren sold UNIX based computer solutions to businesses in Australia. Darren completed his Diploma in Export Marketing at Melbourne Technical Institute in 1981. Darren lives in Auckland. Darren Robinson

Warren Robinson Non-executive Director

Warren Robinson founded the Rakon business in the basement of his Howick home in 1967. He successfully grew and operated the business until 1986 when Brent Robinson became the Managing Director. In subsequent years, Warren has continued to maintain an active role within Rakon as Chairman until November 2005. Warren received a First Class Certificate in Radio Technology and is a member of the Institute of Electrical and Electronics Engineers, a senior member of the New Zealand Electronics Institute and is a member of both the New Zealand Business Roundtable and The Royal Society of New Zealand. Warren Robinson

Warren lives in Auckland.


Role of the Board The Board has ultimate responsibility for the strategic direction of Rakon and oversight of the management of Rakon for the benefit of Shareholders. Specifically, the responsibilities of the Board include: • • • • •

working with management to establish the strategic direction of Rakon; monitoring management and financial performance; monitoring compliance and risk management; establishing and monitoring the health and safety policies of Rakon; establishing and ensuring implementation of succession plans for senior management; and ensuring effective disclosure policies and procedures.

In discharging their duties, Directors will have direct access to and may rely upon Rakon’s senior management and external advisers. Directors will have the right, with the approval of the Chairman or by resolution of the Board, to seek independent legal or financial advice at the expense of Rakon for the proper performance of their duties. The Board comprises six Directors: a nonexecutive Chairman, two executive Directors and three non-executive Directors. Under the Constitution, the Independent Chairman holds a casting vote at Board meetings. Board members have an appropriate range of proficiencies, experience and skills to ensure that all governance responsibilities are fulfilled and to achieve the best possible management of resources. The Board will meet not less than nine times during the financial year including sessions to consider the strategic direction of Rakon and Rakon’s forward-looking business plans. Video and/or phone conferences will also be used as required. The Board intends to develop a Board code of conduct and a process for measuring Board performance.

Board Committees The Board has two formally constituted committees of Directors. Committees established by the Board review and analyse policies and strategies, usually developed by management, which are within their terms of reference. They examine proposals and, where appropriate, make recommendations to the full Board. Committees do not take action or make decisions on behalf of the Board unless specifically mandated by prior Board authority to do so. The Committees are as follows: Remuneration Committee The Remuneration Committee is responsible for overseeing management succession planning, establishing employee incentive schemes, reviewing and approving the compensation arrangements for the executive Directors and senior management, and recommending to the full Board the compensation of Directors. The members of the Remuneration Committee are Bryan Mogridge (Chairman), Peter Maire and Warren Robinson. Audit and Risk Management Committee The Audit and Risk Management Committee will be responsible for overseeing the risk management (including treasury and financing policies), treasury, insurance, accounting and audit activities of Rakon, and reviewing the adequacy and effectiveness of internal controls, meeting with and reviewing the performance of external auditors, reviewing the consolidated financial statements, and making recommendations on financial and accounting policies. The members of the Audit and Risk Management Committee are Bruce Irvine (Chairman), Bryan Mogridge and Warren Robinson. Directors’ Interests Directors’ Remuneration Except for Brent Robinson and Darren Robinson, none of the Directors of Rakon are entitled to any remuneration from Rakon other than by way of Directors’ fees and reasonable travelling, accommodation and other expenses incurred in the course of performing duties or exercising powers as Directors.

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44

Brent Robinson and Darren Robinson are employed by Rakon as Managing Director and Marketing Director respectively and receive salary and other remuneration and benefits in respect of their employment. Directors’ Shareholdings On listing (and assuming the Share Offer is fully subscribed), Directors will hold or control the following Shares in Rakon:

Further information on these leases is set out under the heading “Material Contracts” at page 98 •

Peter Maire provides consultancy services to Navman New Zealand Limited, which is a Rakon customer

Senior Management Brent Robinson

• • • • • • •

1 2

3

4

Peter Maire Brent Robinson2 Darren Robinson2 Warren Robinson3 Bryan Mogridge Bruce Irvine Bryan Mogridge and Bruce Irvine (jointly)4 1

16,523,218 (15.6%) 9,914,180 (9.3%) 9,914,180 (9.3%) 24,060,024 (22.6%) 400,000 (0.4%) 40,000 (0.04%) 859,137 (0.8%)

The Shares are held by Tahia Investments Limited, a company controlled by Peter Maire Brent Robinson and Darren Robinson also each have a beneficial interest in 573,656 Plan Shares granted under the Share Growth Plan as described on pages 46 to 49 The Shares are held by Ahuareka Trustee Limited, the Vendor, a company controlled by Warren Robinson and which is sole trustee of the Ahuareka Trust These 859,137 of these Shares are held by Rakon ESOP Trustee Limited which holds these Shares on trust for various managers who have participated in the Rakon Share Purchase Plan. Bryan Mogridge and Bruce Irvine are the directors and shareholders of Rakon ESOP Trustee Limited. In addition, they are the Shareholders and directors of Rakon PPS Trustee Limited which will hold 1.1 million Plan Shares under the terms of the Share Growth Plan

Tahia Investments Limited, Brent Robinson, Darren Robinson and Ahuareka Trustee Limited have each agreed with Rakon and the Lead Manager that Shares held by each of them cannot be transferred (except in limited circumstances) until 30 days after the date Rakon makes its preliminary announcement to NZX for the financial year ending 31 March 2007. In Addition: • Trident Investments Limited, a Company associated with Warren Robinson, Brent Robinson and Darren Robinson have leased premises to Rakon on arms-length, commercial terms under Deeds of Lease dated 23 August 2005 between Rakon and Trident Investments Limited and will receive rental payments from Rakon.

Managing Director

A biography of Brent Robinson is included in the Directors Profiles section of this Offer Document Darren Robinson Marketing Director

A biography of Darren Robinson is included in the Directors Profiles section of this Offer Document David Grant General Manager – Operations

David joined Rakon in 1999. David has more than 30 years experience in technical and general management roles. David was previously with Fisher & Paykel for 14 years serving ultimately as Chief Engineer and was instrumental in introducing electronic controls into the whole range of Fisher & Paykel’s appliances. He also oversaw the development and production of a range of television and audio products under the Panasonic and Technics brand names. Prior to this David was employed as Electronics Engineer with Philips in both New Zealand and Holland. David has served on the Board of Directors of the Electro-technology Industry Training Organisation (ETITO) for 13 years, currently as Deputy Chairman and Chair of the Audit Committee. David holds a BE (Electrical Engineering – Honours) from The University of Auckland, is a Fellow of the Institution of Engineers New Zealand and is a member of the Institute of Directors in New Zealand. Graham Leaming Chief Financial Officer

Graham joined Rakon in November 2005 after 10 years with NYSE listed Rayonier Inc. Graham has experience in a range of positions and business units in the US, Australia and New Zealand. He was most recently Finance Director for the Asia


Pacific region. Graham was previously employed by Ernst & Young, holds a Bachelor of Commerce from The University of Auckland and is a Chartered Accountant. Michael McIlroy Engineering Manager – Crystal Products

Michael has been with Rakon for over 14 years after joining the Company from university as a junior engineer. Michael’s expertise is in Crystal engineering but he has a wide perspective of the business as a result of holding a range of positions in the Company covering Production Management, Prototype Engineering Management and Software Systems Development. Michael holds a BSc from The University of Auckland. Oleg Sheynin Oscillator Engineering Manager

Oleg joined Rakon in February 2000, initially as Engineering Projects Manager. Prior to joining Rakon, Oleg worked for Fisher & Paykel for eight years as Senior Electronics Design Engineer. Before moving to New Zealand in 1991, Oleg worked for Vesopribor (Belarus), initially as Design Engineer and ultimately as Engineering R&D Manager and prior to that for St. Petersburg Television Research Institute (Russia) as a R&D Engineer. Oleg holds a BE (Electrical and Electronic Engineering) from Belarusian State University of Informatics and Radio Electronics. Phil Brownlie Engineering Manager – Equipment

Phil joined Rakon in 1993, and has played a key role in the development of Rakon’s Oscillator products. In addition he has played a major part in the development of Rakon Oscillator manufacturing technology and in design and build projects for related test and manufacturing equipment. Prior to joining Rakon in 1993, Phil worked for eight years in a number of electronics development roles at Fisher & Paykel, including work on various models of dishwasher. Phil also worked in contract electronics where he designed the original Rakon 500 series Oscillator still in production today. Phil holds a Bachelor of Electrical and Electronic Engineering from The University of Auckland.

Hugh Tucker Global Sales Manager

Hugh joined Rakon in December 2005 after 23 years with NASDAQ listed Dataram Corporation in the USA, which is engaged in the semiconductor business. Hugh worked in a range of positions, most recently as VP Worldwide Sales. Hugh holds a Bachelor of Technology in Engineering from Massey University. Brian Karl Product Manager – IT and Crystal Products

Brian joined Rakon in 2000. His current role is Product Manager, a newly developed role aimed at implementing a holistic approach to the product life cycle. Brian is an internationally experienced manager with more than 20 years in technical and sales roles. Brian worked for Raychem Corporation as a Sales Engineer for their Telecom Division ultimately with responsibility for the ASEAN region. Prior to this Brian worked for New Zealand Steel as a Software Engineer and Alfa-Laval with responsibility for their early computerised automation systems. Brian holds a BSc (Electro-physics & Mathematics) from The University of Auckland. Graham Ockleston Product Manager – New Products

Graham joined Rakon in 2004 to design and introduce a range of miniature GPS receiver modules and has now taken on responsibility for Product Management of new technology products. Prior to joining Rakon, Graham was with Telecom New Zealand for 14 years. In a number of engineering management roles he helped Telecom prepare for the transition of a business based on voice traffic to one based on data traffic. Graham previously led teams designing land mobile radio equipment in New Zealand and in the United Kingdom and became Manager, Engineering for GPT (New Zealand) Limited, introducing radio and telecommunications products to New Zealand. Graham holds a BE (Electrical Engineering) from The University of Auckland. Justin Maloney Marketing Manager

Justin joined Rakon in August 2000 and has worked in the electronics and electronic components industries within New Zealand

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and overseas for over 10 years. Before joining Rakon, Justin was the National Sales Manager (New Zealand) for Powerbox, an international Power Supply distribution company. Prior to this Justin worked for Position Technology Inc, a world leading Access Control manufacturer. Justin worked on the initial development of the flagship products and then became responsible for the management of the product release and development of the international distribution base. Position Technology is now part of Paradox Security Systems, one of the world’s leading security companies.

included four years as an Electronics Technician and six years in a Purchasing Management role that included setting up purchasing, stores, inwards goods and dispatch functions and he also participated in obtaining ISO 9002/9001 accreditation. Previously, Dinesh worked in a number of technical electronics roles, with Dimocks Limited (Auckland), Philips (Wellington) and Marconi Radar Systems (UK). Dinesh holds a HND in Electronics Engineering from Leicestershire Polytechnic (UK). Phil Kemble Quality Manager

Malcolm Leuchars Human Resources Manager

Malcolm joined Rakon in December 2005 after spending the previous seven years contracting primarily for national and multinational manufacturing companies. Prior to this Malcolm was General Manager Human Resources for Auckland Healthcare for five years preceded by heading the Human Resources for Farmers Trading Company, also for a five year period. Malcolm holds a Bachelor of Arts from Victoria University of Wellington and a Post Graduate Diploma in Business Studies from Massey University. Ravi Ramalingam Manufacturing Manager

Ravi joined Rakon in 1995 having previously worked in the crystal industry in South Korea and Sri Lanka. Ravi has primarily worked in production management throughout his time at Rakon and was promoted to overall Manufacturing Manager in 2005. Ravi has a first class Bachelor of Engineering degree from one of the leading Indian Institutes and has a Post Graduate Diploma in Operations Management from University of Auckland. Ravi is a member of New Zealand Institute of Management and a certified Quality Manager from the New Zealand Organisation for Quality. Dinesh Hira Materials Manager

Dinesh joined Rakon as Materials Manager in 1998, bringing considerable experience in management of local and overseas suppliers within the electronics industry. Prior to his current role, Dinesh worked for Oscmar International (Auckland) for 10 years. This

Phil joined Rakon in 1998. He has directed the quality assurance operation at Rakon since 1998 and is currently leading the project for the new international automotive quality standard. Phil spent 26 years in the British Army working mainly in defence electronics and command positions. Phil has an HNC in Electronics and Professional Certificates in Management and Quality. He is a Fellow of the Institute of Incorporated Electronic Engineers (UK) and a Member of the Institute of Quality Assurance (UK). Phil was previously Chairman of the New Zealand Organisation for Quality (Northern Group). He is a registered Lead Auditor of Quality Management Systems. Phil speaks fluent German and can converse to a basic level in Chinese.

Employee Share Plans Management Share Ownership Plan Rakon has established a share purchase plan to enable selected managers of Rakon to acquire Shares in the Company through the Plan Trustee, Rakon ESOP Trustee Limited. Under the Share Purchase Plan, Rakon offered selected managers the opportunity to acquire Shares and has loaned participating managers the purchase price of the Shares offered on an interest-free limited resource basis. Under the terms of the Share Purchase Plan, 2,759 Shares were issued to Rakon ESOP Trustee Limited to hold on behalf of the participating managers on 17 March 2006 (now 859,137 Shares following the share split of 311.394549 to one), and the total aggregate amount loaned by Rakon to participating managers is $520,000.


Shares issued under the Share Purchase Plan are held on trust by Rakon ESOP Trustee Limited. The Shares cannot be sold or otherwise dealt with by the participating managers for a period of 18 months from the date of issue. At any time after the end of this period the participating manager may request the Trustee to transfer the relevant Shares to him or her. The Trustee will not transfer the Shares to a participating manager until the loan owed by that manager has been repaid in full. The directors and shareholders of Rakon ESOP Trustee Limited are Bryan Mogridge and Bruce Irvine. Employee Share Option Scheme Rakon has established an Employee Share Option Scheme for selected employees of Rakon. The Options will be granted free of charge to Eligible Employees, as part of their remuneration, but will only be exercisable if specified share price performance benchmarks are met. Each Option entitles the holder to purchase one Share in Rakon pursuant to the terms of the Employee Share Option Scheme. As at the Allotment Date, Rakon will have granted to Eligible Employees a total of 1.9 million Options. There is no application fee or other sum payable by Eligible Employees for Options, but Option Holders wishing to exercise their Options will be required to pay an Exercise Price, which, in the case of the Options granted by the Allotment Date, is $1.60 per Share. Provided certain conditions are met, Options become exercisable at the following times: a) one third of the Options granted on any date of grant become exercisable on the 1st anniversary of that date of grant; b) a further one third of the Options granted on any date of grant become exercisable on the 2nd anniversary of that date of grant; c) a further one third of the Options granted on any date of grant become exercisable on the 3rd anniversary of that date of grant, provided that all Options become

exercisable where there is a change of control of Rakon whereby a person (excluding Rakon and the Robinson family and interests associated with the Robinson family) and that person’s Associates hold or control more than 50% of the total voting rights of Rakon. Exercisable Options may only be exercised if, at the time of exercise, the volume weighted average selling price per Share for all the Shares in Rakon traded on the NZSX during the 10 NZSX trading days prior to the exercise date is at least equal to the last calculated benchmark price. In relation to Options granted by the Allotment Date, the initial benchmark price will be the Offer Price. A new benchmark price will subsequently be calculated at 6 monthly intervals by increasing the last calculated benchmark price by 14% per annum compounded. All Options which have not been exercised by the 4th anniversary of the date of grant will lapse and will automatically cancel. As an alternative to excercising Options, employees may enter into an agreement with the Company under which exercisable Options are cancelled in return for Shares with a value equal to the gain the employee would have obtained through excercising the Options. Options do not carry voting rights or rights to participate in any dividends or future Share issues. Shares issued upon the exercise of Options or on cancellation of Options will carry the same rights and will be issued on the same terms as existing Shares then on issue and will rank equally in all respects with existing Shares. Unexercised Options held by Eligible Employees who cease to be employed by Rakon (other than by reason of death or total and permanent disability) will automatically cancel. Rakon has prepared a registered prospectus for the purpose of the Securities Act and the Securities Regulations in relation to the Employee Share Option Scheme, a copy of which has been delivered to the Registrar of Companies for registration in accordance with section 42 of the Securities Act.

47


and that person’s Associates hold or control more than 50% of the total voting rights of Rakon.

48

Share Growth Plan Rakon has established a Share Growth Plan to enable selected senior executives of Rakon to acquire Shares through a Trustee, Rakon PPS Trustee Limited. Rakon intends to issue up to 1.1 million Plan Shares, prior to the Allotment Date, to the Trustee to hold on behalf of the participating executives, which will include Brent Robinson and Darren Robinson. The Plan Shares will have an issue price of $1.60, which will be partly paid. On the issue date, the participating executives will be required to make an initial payment of 5c per Plan Share. While the Plan Shares remain held by the Trustee, an annual payment of 5c per Plan Share will also be required. Provided certain conditions are met, an executive may request the Trustee to transfer the Plan Shares held by the Trustee on behalf of that executive as follows: a) no request may be made prior to the 1st anniversary of the issue date; b) a request may be made in respect of one third of the Plan Shares issued on any issue date from the 1st anniversary of that issue date; c) a request may be made in respect of a further one third of the Plan Shares issued on any issue date from the 2nd anniversary of that issue date; d) a request may be made in respect of a further one third of the Plan Shares issued on any issue date from the 3rd anniversary of that issue date, provided that a request may be made in respect of all of those Plan Shares that remain held by the Trustee from the date when there is a change of control of Rakon, meaning that a person (excluding Rakon and the Robinson family and interests associated with the Robinson family)

Subject to the above restrictions, an executive may request that his or her Plan Shares held by the Trustee be transferred to him or her so long as each of the following conditions is met: a) the transfer request is received by the Trustee at a time when the volume weighted average selling price per Share for all the Shares in Rakon traded on the NZSX during the 10 NZSX trading days prior to the date of the request is at least equal to the benchmark price (as described under the Employee Share Option Scheme) applicable at that date; b) at the time of making that request, the executive is employed by Rakon (unless the executive has ceased to be employed by Rakon by reason of death or total and permanent disability); c) the request is made before the 4th anniversary of the issue date; and d) the executive has provided the Trustee with cleared funds sufficient to pay the unpaid issue price in respect of those Plan Shares. The Trustee will apply the funds provided by the executive to pay up the Plan Shares. The redemption rights associated with the Plan Shares will fall away once the Plan Shares are transferred to the executive. An executive ceases to be entitled to require the Trustee to transfer any relevant Plan Shares to the executive if the executive does not request that such a transfer be made before the 4th anniversary of the issue date or if the executive ceases to be employed by Rakon other than by reasons of death or total and permanent disablement. In such circumstances the Trustee will redeem the Plan Shares held on behalf of that executive. It is anticipated that the redemption will occur in conjunction with a call from Rakon for the unpaid balance of the issue price of those Plan Shares and that the redemption amount and the unpaid balance will be set off. On redemption the Plan Shares will


be cancelled. The amounts paid up on the Plan Shares will be returned to the executive out of the redemption proceeds.

49

The Plan Shares will carry proportionate dividends and rights to share in the surplus assets of the Company on a liquidation to the extent of the proportion of the issue price paid up on the Plan Shares. The Plan Shares will carry no voting rights until such time as the holder elects for the relevant Plan Shares to carry voting rights to the extent of the proportion of the issue price paid up on the Plan Shares. Subject to the voting position described above, Plan Shares transferred to the executive will be fully paid ordinary shares ranking equally with all other ordinary shares in Rakon.

The directors and shareholders of Rakon PPS Limited Trustee Limited are Bryan Mogridge and Bruce Irvine.

The Vendor, Ahuareka Trustee Limited, is the sole trustee of the Ahuareka Trust established under a Deed of Trust dated 29 May 1990 and which is associated with Robinson family interests. Warren Robinson is the sole director and Shareholder of the Vendor.

The Vendor, Rakon and every person acting on behalf of them are exempt, subject to certain conditions, from Regulations 3(1) and 7A(1) of the Securities Regulations insofar as those provisions would require this Offer Document to contain information about the Vendor as an Issuer of the Shares pursuant to the terms of the Securities Act (Rakon Limited) Exemption Notice 2006.

The Plan Shares held for the benefit of Brent and Darren Robinson will remain non-voting until an election is made by either of them in respect of their Plan Shares or until the Plan Shares are transferred to a third party. No such election will be made if to do so would make such Plan Shares voting securities under the Takeovers Code and therefore cause a breach of Rule 6 of the Takeovers Code.

Overview of the Vendor

The beneficiaries under the terms of the Ahuareka Trust are Robinson family members, including Warren Robinson, Brent Robinson and Darren Robinson.


Financial Information


This section of the Offer Document sets out the financial information applicable to Rakon.

51

Prospective Financial Information This prospective financial information for Rakon includes: •

a forecast statement of financial performance;

a forecast statement of movements in equity;

a forecast statement of financial position;

a forecast statement of cash flows; and

general and Company specific assumptions on which all of the prospective financial information is based.

The prospective financial information, including the assumptions on which they are based, is the responsibility of and has been prepared by the Directors. The Directors approved the prospective financial information on page 95. They have given due care and attention to the preparation of the prospective financial information, including the underlying assumptions. However, forecasts by their nature involve risks and uncertainties, many of which are beyond the control of the Company. These risks and uncertainties include, but are not limited to, those discussed under What are My Risks? on pages 82 to 88 of this Offer Document. Accordingly, actual results are likely to vary from the prospective financial information, and variations may be material. Therefore, the Directors cannot and do not guarantee the achievement of their financial forecasts.

Consolidated Statements of Financial Performance

12 mths

12 mths

31 Mar 2006

31 Mar 2007

($000s)

($000s)

Operating Revenue

73,291

90,590

Earnings before Interest, Tax, Depreciation and Amortisation (EBITDA)

11,435

15,521

Depreciation

2,970

3,685

Earnings before Interest and Tax (EBIT)

8,465

11,836

Interest Expense

1,779

1,000

Net Profit before Tax

6,685

10,836

Taxation Expense

2,290

3,614

Net Profit after Tax

4,395

7,222


Consolidated Statement of Movements in Equity 12 mths

12 mths

31 Mar 2006

31 Mar 2007

($000s)

($000s)

Equity at Beginning of period Net ProďŹ t after Tax FX Translation Reserve Dividends prior to listing on NZX Issue of Ordinary Shares prior to listing on NZX Issue of Ordinary Shares on listing on NZX Issue costs arising on issue of ordinary shares

7,957 4,395 4 (1,600) 13,406 -

24,162 7,222 10,000 (1,000)

Movements in equity for the period

16,205

16,222

Equity at End of the period

24,162

40,384

52

Consolidated Statement of Financial Position As at

As at

31 Mar 2006

31 Mar 2007

($000s)

($000s)

Current Assets Accounts Receivable & Prepayments Inventories

13,177 20,201

18,237 22,242

Total Current Assets

33,378

40,479

Plant Property & Equipment Other

15,609 522

22,357 522

Total Non-Current Assets

16,131

22,879

Total Assets

49,509

63,358

8,717 8,128

5,410 8,892

Total Current Liabilities

16,845

14,302

Non-Current Liabilities Term Loan Deferred Tax

8,000 502

8,000 672

Total Non-Current Liabilities

8,502

8,672

Total Liabilities

25,347

22,974

Net Assets

24,162

40,384

Equity Share Capital Retained Earnings

13,660 10,502

22,660 17,724

Total Equity

24,162

40,384

Non-Current Assets

Current Liabilities Bank Overdraft Payables, accruals and provisions


Consolidated Statement of Cash Flows 12 mths

12 mths

31 Mar 2006

31 Mar 2007

($000s)

($000s)

Cash Flows from Operating Activities Receipts from customers

71,819

85,030

(58,222)

(76,346)

Interest and ďŹ nance costs paid

(1,724)

(1,000)

Income tax paid

(3,115)

(3,444)

8,758

4,240

(6,065)

(10,433)

-

-

(6,065)

(10,433)

Payments to suppliers and employees

Net Cash Flow from Operating Activities Cash Flows from Investing Activities Payments for property, plant & equipment Payments for investments Net Cash Flow used in Investing Activities Cash Flows from Financing Activities Dividends on ordinary shares prior to NZX listing

(1,600)

-

Repayment of bank borrowings

(7,000)

-

Repayment of Shareholder loans

(12,460)

-

12,886

-

Issue of ordinary shares prior to NZX listing Issue of ordinary shares on NZX listing

-

10,000

(500)

(500)

Net Cash Flow from Financing Activities

(8,674)

9,500

Net Increase (Decrease) in Cash Held

(5,981)

3,307

Cash at Beginning of period

(2,736)

(8,717)

Cash at End of period

(8,717)

(5,410)

Costs of share issue

53


54

Principal Assumptions Underlying the Prospective Financial Information The principal assumptions upon which the prospective financial information is based are summarised below and should be read in conjunction with the “What are my Risks?” section on pages 82 to 88. The prospective financial information for the year ending 31 March 2006 and the year ending 31 March 2007 are forecasts as defined by the New Zealand Financial Reporting Standard No.29, “Prospective Financial Information” and have been prepared on the basis of assumptions as to future events that the Directors reasonably expect to occur associated with the actions the Directors reasonably expect to take as at the date the information was prepared. The prospective financial information for the year ending 31 March 2006 includes actual results to the end of February 2006. A forecast is not a projection. A projection is prospective financial information prepared using hypothetical assumptions which are possible outcomes, but not necessarily the most probable outcome. The prospective financial information has been prepared under New Zealand GAAP. International Financial Reporting Standards are required to be implemented for accounting periods commencing on or after 1 January 2007. It is assumed that Rakon will not be an early adopter of the New Zealand equivalents to International Financial Reporting Standards (NZIFRS) and therefore any potential impact has not been incorporated into the prospective financial information. Rakon has not assessed the likely impact of the adoption of the New Zealand equivalents to International Financial Reporting Standards except for considering whether the NZ Dollar should continue as its functional currency when it adopts NZIFRS. A summary of this assessment is given on pages 63 to 64. In preparing the prospective financial information, the accounting policies set out on pages 60 to 64 as part of Rakon financial information have been consistently applied for the financial periods presented. The prospective financial information has been prepared for the purposes of this Offer Document and may not be suitable for any other purpose. There is no present intention to update this

prospective financial information or to publish the prospective financial information in the future. Investors must consider the assumptions described below in order to fully understand the prospective financial information. Assumptions to the Prospective Financial Information A) General Assumptions Economic Environment There will be no material change in the general economic environments that Rakon operates in and into which it sells its products. Interest rates and inflation rates in New Zealand will not change materially from current levels. Legislative and Regulatory Environment There will be no material change to the legislative and regulatory environment in which Rakon operates and sells its products into throughout the periods covered by the prospective financial information. Market Growth Market growth is assumed to be materially consistent with industry projections described in the “Industry profile” section. Competitive Environment There will be no material changes to the competitive markets in which Rakon operates and no significant technological change or new entrants that will materially change the competitive environment. Customer & Supplier Relationships Existing contractual, business and operational relationships with key customers and suppliers are assumed to continue throughout the periods covered by the prospective financial information. Taxation There will be no material change to the tax regime in New Zealand, the US or any other country where Rakon trades, including no change to the company tax rates in any of these countries. Outstanding imputation credits as at the Offer date will not be able to be utilised by Rakon.


Management of Rakon Rakon’s senior management and other key people will continue in their current roles.

financial information, actual rates to February 2006 have been used plus the following exchange rates for the balance of the period:

B) Company Specific Assumptions

• •

Revenue Revenue for the FY2006 period includes audited revenue for the 8 months to 30 November 2005. Revenue assumed for the balance of FY2006 comprises unaudited actual sales since that date up to the end of February 2006 and the value of orders received and expected to be delivered from that date through to the end of March 2006. Revenue is forecast to increase by 24% in FY2007 due to an increase in sales units partially offset by decreasing revenue per unit for more mature products. Despite the strengthening of the New Zealand Dollar, Rakon has achieved annual growth rates of between 3% and 42% since a 38% contraction in revenue during FY2002 following the Dotcom crash. Continued strong growth in the GPS market is assumed to drive the increase in Rakon sales. In particular, sales unit growth is expected to follow from increased uptake of GPS units into motor vehicles and mobile phones together with sales of $6.0 million of new products to be launched by Rakon in FY2007. Average price per unit is forecast to reduce by up to 8% as the favourable impact of mix of products sold partially offsets price erosion of more mature products. Rakon has a concentration of credit with its major customers. For FY2006 and FY2007 it is assumed that more than 65% of its revenue will come from its top 15 customers. It is assumed there will be no material insolvencies or debt collection issues experienced during the periods covered by the prospective financial information. Rakon sells predominantly ex works but for some key customers sales are from consignment inventory held on their customer premises, which can cause some uncertainty with the exact timing of sales. Foreign Exchange Rakon’s foreign exchange exposures arise through the purchase of components, capital and consumables in Japanese Yen (JPY) and US Dollars (USD), and by the sale of products predominantly in US Dollars. For the prospective

USD 0.6700 JPY 75.000

Rakon’s US Dollar receipts exceed US Dollar payments. Rakon hedges 20% to 100% of its forecast JPY requirements 6 months forward using a proportion of USD receipts. Rakon hedges 25% to 75% of its forecast residual US Dollar receipts for conversion into NZ Dollars 6 months forward. Cover beyond 6 months is at the discretion of the Board. FY2006 is 100% hedged at average rates of USD 1= JPY 112 and NZD 1 = USD 0.682. As at the end of March 2006 the Company had 53% and 21% of FY2007 forecast JPY requirements and residual US Dollar receipts at average rates of USD 1= JPY 115 and NZD 1= USD 0.658 respectively. Direct Costs & Gross Margin The prospective financial information assumes that direct costs and gross margins continue broadly at the same rate as for the first 8 months in FY2006. As achieved in prior years reductions in sales prices are assumed to be offset by changes in product mix, factory efficiencies and raw material cost savings. Indirect Costs Indirect costs are assumed to increase as additional engineering and sales personnel are employed gradually throughout FY2007 to support the development and sale of new products. Other indirect costs are either fixed or based on planned activities, usage and expected market rates for the periods covered by the prospective financial information. Public Company Costs It is assumed that the annual costs associated with being an Issuer including Directors’ fees, NZX fees, share registry costs, Shareholder communications and incremental audit fees will be $0.5 million. Dividends Rakon will not make dividend payments in the foreseeable future. Surplus cash is required to reinvest in growth. The Directors will review this position on an annual basis.

55


56

A fully imputed dividend of $1.6 million was paid in April 2005 as part of a restructuring of Rakon’s balance sheet. Capital Expenditure Capital expenditure included in the periods covered by the prospective financial information is assumed to be $16.5 million including an expansion of the Crystal manufacturing capacity, proprietary equipment development, which will substantially increase the productive capacity of Rakon, and manufacture of equipment to produce new products to drive revenue and profit growth. Finance Facilities & Interest Cost It is assumed that there are adequate finance facilities in place and available to the Company to cover its anticipated funding requirements for the periods covered by the prospective financial information. Current finance facilities in place with the Company’s bankers include a five year loan facility expiring in June 2010 and an annually renewable overdraft facility. Interest expense for the remainder of FY2006 and for FY2007 has been based on an average interest rate of 7.18% for the term debt and 8.25% for the overdraft. These rates include the impact of a fixed rate swap agreement and all margins and other costs of borrowing paid to lenders. Working Capital Working capital (inventory, accounts payable, and accounts receivable) are assumed to vary based on the pattern of sales and purchases assumed throughout the periods covered by the prospective financial information. This is consistent with working capital patterns relative to sales revenue growth historically experienced by Rakon.

Share Offer Costs Rakon will pay its share of the costs (estimated to be $1.0 million) directly attributable to the Share Offer which will be accounted for as a reduction in equity. Listing Proceeds & Capital Structure It is assumed that $10.0 million will be received from the issue of new Shares on listing. Significant outflows from the proceeds are assumed to include the payment of IPO costs of $1.0 million and capital expenditure/new product development of $9.0 million. It is assumed that there will be no changes in capital structure of Rakon following the issue of Shares under this Share Offer other than the impact of any Options exercised under the Employee Share Option Scheme and the issue of any Plan Shares under the Share Growth Plan. Options, Plan Shares, Costs & Accounting It is assumed that the Options and Plan Shares offered to employees under the Employee Share Option Scheme and Share Growth Plan will have no impact on the reported financial position and financial performance of Rakon throughout the periods covered by the prospective financial information. Accounting Policies Rakon’s accounting policies will remain consistent throughout the periods covered by the prospective financial information. It is also assumed there will be no material change in New Zealand GAAP during this period and that Rakon will not be an early adopter of the New Zealand equivalents to International Financial Reporting Standards.


Historical Financial Information

Consolidated Statements of Financial Performance Note

57

For 8 mths ended For 12 mths ended For 12 mths ended 30 Nov 2005 31 Mar 2005 31 Mar 2004 ($000s) ($000s) ($000s)

Operating revenue

2

50,083

71,422

50,306

Operating expenses

3

(45,251)

(67,128)

(48,470)

4,832

4,294

1,836

(1,674)

(1,384)

405

3,158

2,910

2,241

-

-

(19)

3,158

2,910

2,222

3,158

2,899

2,246

-

11

(5)

3,158

2,910

2,241

Operating surplus before income tax Income tax

11

Operating surplus after income tax Net surplus attributable to minority interests

8

Net surplus attributable to parent Shareholders Operating surplus comprises: Operating surplus from continuing activities Operating surplus (deficit) from discontinued activities

The accompanying notes form an integral part of these financial statements.

Consolidated Statements of Movements in Equity Note

Equity at beginning of the period

For 8 mths ended For 12 mths ended For 12 mths ended 30 Nov 2005 31 Mar 2005 31 Mar 2004 ($000s) ($000s) ($000s)

7,957

5,058

2,904

3,158

2,910

2,222

Recognised revenues and expenses Net surplus after tax and minority interests

5

Movements in foreign currency translation reserve

(87)

Total recognised revenues and expenses

3,158

2,910

2,135

4

12,886

-

-

Distributions to owners

6

(1,600)

-

-

Movements in minority interests

8

-

(11)

19

11,286

(11)

19

22,401

7,957

5,058

Other movements Capitalisation of Shareholders’ loan

Equity at end of the period

The accompanying notes form an integral part of these financial statements.


Consolidated Statements of Financial Position 58 Note

As at 30 Nov 2005 ($000s)

As at 31 Mar 2005 ($000s)

As at 31 Mar 2004 ($000s)

Assets Current assets Cash and bank

2,395

704

1,331

Accounts receivable

17

14,684

12,567

12,739

Inventories

16

19,717

21,117

18,766

36,796

34,388

32,836

Total current assets Non-current assets Property, plant and equipment

14,725

12,513

12,092

Future Income Tax Benefit

14

-

-

411

Total non-current assets

14,725

12,513

12,503

Total assets

51,521

46,901

45,339

9

9,267

3,440

2,864

Borrowings

9

1,917

497

1,292

Payables and accruals

12

9,547

8,091

8,799

20,731

12,028

12,955

Liabilities Current liabilities Bank overdraft

Total current liabilities Non-current liabilities Borrowings

9

8,000

26,751

27,319

Deferred tax

10

389

165

7

8,389

26,916

27,326

Total liabilities

29,120

38,944

40,281

Net assets

22,401

7,957

5,058

Total non-current liabilities

Equity Share capital

4

13,136

250

250

Retained earnings

5

9,265

7,707

4,797

22,401

7,957

5,047

-

-

11

22,401

7,957

5,058

Parent Shareholders’ equity Minority interests Total equity

The accompanying notes form an integral part of these financial statements.


Consolidated Statement of Cash Flows Note

For 8 mths ended For 12 mths ended For 12 mths ended 30 Nov 2005 31 Mar 2005 31 Mar 2004 ($000s) ($000s) ($000s)

Operating activities Cash was provided from Receipts from customers Interest received

48,425

67,750

48,565

13

36

131

Dividends received

-

1

1

Income tax refunds

-

819

-

Grants and other receipts

-

-

179

48,438

68,606

48,876

Payments to suppliers and others

(26,503)

(42,366)

(30,584)

Payments to employees

(11,881)

(20,326)

(14,335)

Cash was applied to

(149)

-

-

Interest paid

Finance lease charges

(1,094)

(2,065)

(1,096)

Income tax paid

(2,607)

-

(4)

(42,234)

(64,757)

(46,019)

6,204

3,849

2,857

Purchase of property, plant and equipment

(1,822)

(2,853)

(4,501)

Net cash flow from investing activities

(1,822)

(2,853)

(4,501)

9,037

-

159

9,037

-

159

(15,455)

(1,363)

(1,738)

Net cash flow from operating activities Investing activities Cash was applied to

Financing activities Cash was provided from Proceeds from borrowings

Cash was applied to Repayment of principal on borrowings Finance lease principal payments

(604)

-

-

(1,600)

-

-

(17,659)

(1,363)

(1,738)

Net cash flow from financing activities

(8,622)

(1,363)

(1,579)

Net decrease in cash held

(4,240)

(367)

(3,223)

Dividends paid to Shareholders

Foreign currency translation adjustment

104

(836)

384

Cash at the beginning of the period

(2,736)

(1,533)

1,306

Cash at the end of the period

(6,872)

(2,736)

(1,533)

Composition of cash Cash and bank balances Bank overdraft

2,395

704

1,331

(9,267)

(3,440)

(2,864)

(6,872)

(2,736)

(1,533)

The accompanying notes form an integral part of these financial statements.

59


Consolidated Statement of Cash Flows 60 Note

For 8 mths ended For 12 mths ended For 12 mths ended 30 Nov 2005 31 Mar 2005 31 Mar 2004 ($000s) ($000s) ($000s)

Reconciliation of operating surplus to net cash flows from operating activities Reported surplus after tax

3,158

2,910

2,222

Minority interest share of surpluses

19 3,158

2,910

2,241

1,937

2,412

2,755

-

(11)

-

-

-

23

65

-

Items not involving cash flow Depreciation expense Gain in liquidation of Australian subsidiary Loss on disposal of property, plant and equipment Increase in estimated doubtful debts Movement in foreign currency

326

836

(470)

Deferred tax

224

570

(404)

2,552

3,807

1,904

(1,656)

(1,988)

(1,430)

1,400

(2,351)

(3,493)

Impact of changes in working capital items Accounts receivables Inventory Prepayments

(155)

426

5,122

Trade creditors and accruals

2,057

(1,502)

(399)

GST receivable

7

914

(1,084)

Tax provisions

(1,159)

1,633

(4)

494

(2,868)

(1,288)

6,204

3,849

2,857

Net cash flow from operating activities

Accounting Policies Reporting Entity The financial statements are for the economic entity comprising Rakon Limited and its subsidiaries. Rakon Limited is a company registered under the Companies Act 1993. Basis of Preparation The financial statements have been prepared in accordance with the requirements of the Financial Reporting Act 1993 and the Companies Act 1993. The reporting currency used in the preparation of these financial statements is New Zealand dollars. The financial statements have been prepared on the historical cost basis. The following specific accounting policies have been applied. Accounting Policies The financial statements are prepared in accordance with New Zealand Generally Accepted Accounting Practice. Basis of Consolidation The consolidated financial statements and the financial statements of subsidiaries have been prepared using the purchase method. All material Inter company transactions between Group companies have been


eliminated. The accounting policies for the subsidiaries are consistent with the policies adopted by the Parent company. A list of subsidiaries is shown in note 15. Subsidiaries Subsidiaries are companies that are controlled, either directly or indirectly by the Parent. Revenue Goods and Services Sales revenue comprises the amounts received and receivable for goods and services supplied to customers in the ordinary course of business. Sales are made on ex-works basis and recognised on dispatch with the exception of consignment stock sales that are recognised on a drawdown basis. Grants Grants received are recognised in the statement of financial performance when the requirements under the grant have been met. Any grants for which the requirement under the grant agreement have not been completed are carried as liabilities until all the conditions have been fulfilled. Investment Income Dividend income is recognised in the period the dividend is declared. Interest and rental income are accounted for as earned. Foreign Currency Translation Transactions Transactions denominated in a foreign currency are converted to New Zealand dollars at the exchange rates in effect at the date of the transaction. Where short term forward currency contracts have been taken out, the contract is valued on a mark to market basis and the corresponding asset or liability recognised in the statement of financial position. Gains and losses on the valuation of forward currency contracts are recognised in the statement of financial performance. Monetary assets and liabilities arising from trading transactions are translated at closing rates. Gains and losses due to currency fluctuations on these items are included in the statement of financial performance. Foreign Operations Integrated overseas subsidiaries are translated to New Zealand dollars in the same manner as if all transactions of the foreign operation had been entered into by Rakon Limited itself. Goods and Services Tax (GST) All items in the statement of financial performance are net of GST with the exception of receivables and payables, which include GST. All items in the statement of financial position are stated net of GST, with the exception of receivables and payables, which include GST invoiced. Inventories Finished goods, raw materials, stores and work in progress are stated at the lower of cost and net realisable value. Costs have been assigned to inventory quantities on hand at balance date using the first in first out basis. Costs comprise of direct materials and direct labour together with an appropriate portion of fixed and variable production overheads. Accounts Receivable Accounts receivable are carried at estimated realisable value after providing against debts where collection is doubtful.

61


62

Property, Plant and Equipment Property, plant and equipment are recorded at historical cost, being the value of the consideration given to acquire the assets. Depreciation is calculated on a straight line basis using the rates detailed below Property Improvements

3.6 - 16.9%

Computer Hardware

36.0%

Computer Software

36.0%

Plant and Equipment

5.0 - 8.3%

Motor Vehicles

21.6%

Fixtures and Fittings

7.4 - 48.0%

Capital Work in Progress

Nil

Asset lives are reviewed annually. All major spare parts held for specific machinery are capitalised and depreciated on the same basis as the specific machinery for which they are held. Impairment Annually, the Directors assess the carrying value of each asset. Where the estimated recoverable amount of the asset is less than its carrying amount, the asset is written down. The impairment loss is recognised in the statement of financial performance. Distinction Between Capital and Revenue Expenditure Capital expenditure is defined as all expenditure on the creation of a new asset and any expenditure which increases the economic benefits over the total life of an existing asset. Revenue expenditure is defined as expenditure which restores an asset to its original condition and all expenditure incurred in maintaining and operating Rakon Limited’s activities. Statement of Cash Flows The following are the definitions of the terms used in the statement of cash flows: a) Operating activities include all transactions and other events that are not investing or financing activities. b) Investing activities are those that are related to holding and disposal of assets and investments. c) Financing activities are those that result in changes in the size and composition of the capital structure. This includes both debt and equity not falling within the definition of cash. d) Cash is considered to be cash on hand and current accounts in bank, net of bank overdraft. Leased Assets Finance Leases Assets under finance leases are recognised as non-current assets in the statement of financial position. Leased assets are recognised initially at the lower of the present value of the minimum lease payments or their fair value. A corresponding liability is established and each lease payment allocated between the liability and interest expense. Leased assets are depreciated on the same basis as equivalent property, plant and equipment.


Operating Leases Leases that are not finance leases are classified as operating leases. Operating lease payments are recognised as an expense in the periods the amounts are payable. Income Tax Income tax expense recognised for the period is based on the accounting surplus, adjusted for permanent differences between accounting and tax rules. The impact of timing difference between accounting and taxable income is recognised as a deferred tax liability or asset. This is the comprehensive basis for the calculation of deferred tax under the liability method. A deferred tax asset, or the effect of the losses carried forward that exceed the deferred tax liability, is recognised in the financial statements only where there is a virtual certainty that the benefit of the timing differences, or losses, will be utilised. Research and Development All research costs are recognised as an expense when incurred. When a project reaches the stage where it is reasonably certain that future expenditure can be recovered through the process or products produced, development expenditure is recognised as a development asset. The asset is amortised from the commencement of commercial production or use of the product to which it relates on a straight line basis over the period of expected benefit. Employee Entitlements Employee entitlements to salaries and wages, annual leave, long service leave and other benefits are recognised when they accrue to employees. The liability for employee entitlements is carried at the present value of the estimated future cash outflows. Financial Instruments Recognised Financial instruments carried on the statement of financial position include bank balances, trade receivables, trade creditors and borrowings. The particular recognition methods adopted are disclosed in the individual policy statements associated with each item. Financial instruments that are designated as hedges of specific items are recognised on the same basis as the underlying hedged items. Where short term forward currency contracts have been taken out, the contract is valued on a mark to market basis and the corresponding asset or liability recognised in the statement of financial position. Gains and losses on the valuation of forward currency contracts are recognised in the statement of financial performance. Unrecognised The net differential paid or received on interest swap is recognised as a component of interest expense or revenue over the period of the agreement. Adoption of International Financial Reporting Standards In December 2002 the New Zealand Accounting Standards Review Board announced that reporting entities would be required to comply with New Zealand equivalents of International Financial Reporting Standards (NZIFRS) for financial statements covering annual reporting periods starting on or after 1 January 2007, with earlier adoption for periods starting on or after 1 January 2005 permitted. In the case of Rakon Limited and subsidiaries (Rakon), the first financial year for which fully compliant financial statements must be produced will be for the year commencing on 1 April 2007 (and ending 31 March 2008) at which time the comparative figures for the previous year will also be restated to comply with NZIFRS.

63


64

Although early implementation is an option, the Board of Directors has determined that the Rakon will adopt NZIFRS for the first time in its reports to Shareholders for the year ending 31 March 2008. The Board has considered the impact of NZIFRS as regards the appropriate functional currency for Rakon and determined that Rakon should continue to report using NZ$ as its functional currency when it adopts NZIFRS. This is based on management’s current interpretation of the standards that have been released to date. There is potential for the significance of the impact to change when Rakon prepares its first set of NZIFRS financial statements due to changes in the standards, changes in the Company’s, or changes in management’s interpretation of the standards. At the date the financial statements were issued Rakon had not performed any further analysis of the differences between NZIFRS and current New Zealand Financial Reporting Standards and as such cannot determine if there will be a significant impact on the financial statements presented by Rakon. A project will be initiated within the coming months to identify the full implications of NZIFRS on Rakon and to prepare for the implementation of systems to capture the necessary information to comply with the new standards. As the Company progresses toward 1 April 2007 Rakon will continue to provide users of the financial statements with updated information about the likely impacts of NZIFRS on Rakon’s earnings, cash flows and financial position. Comparatives Certain prior year comparative figures have been reclassified to conform to the current period’s presentation. Changes to Accounting Policies In 2004, Rakon Limited changed its tax policy from using the taxes payable method to the liability method. Deferred tax has been accounted for on all timing differences. The total impact of the change was recognition of a deferred tax asset of $330,000 and a future income tax benefit of $673,000. There have been no other changes to accounting policies during the periods. Accounting Period Current reporting period is for eight months ended 30 November 2005, while comparatives are full year ended 31 March 2005 and 31 March 2004. Notes to the Financial Statements

1. Segment information The Company operates in one industry, namely the manufacture of electronic components for the telecommunications sector. The Company operates from one geographic segment being New Zealand. For sales by geographic regions refer to note 2.


2. Operating revenue

Trading Revenue by Region

Asia North America Europe Others

Operating Revenue

For 8 mths ended For 12 mths ended For 12 mths ended 30 Nov 2005 31 Mar 2005 31 Mar 2004 ($000s) ($000s) ($000s)

27,747 15,249 5,261 1,813

33,944 26,071 6,994 4,365

24,867 16,618 5,809 2,701

50,070

71,374

49,995

For 8 mths ended For 12 mths ended For 12 mths ended 30 Nov 2005 31 Mar 2005 31 Mar 2004 ($000s) ($000s) ($000s)

Continuing activities Trading revenue

50,070

71,374

49,995

Investment revenue Dividends Interest

-

1

1

13

36

131

-

-

178

50,083

71,411

50,305

Other revenue Other Income Total revenue from continuing activities

For 8 mths ended For 12 mths ended For 12 mths ended 30 Nov 2005 31 Mar 2005 31 Mar 2004 ($000s) ($000s) ($000s)

Discontinued activities Gain on liquidation of Australian subsidiary

-

Total revenue from discontinued activities Total operating revenue

3. Operating expenses

11

-

1

Other income -

11

1

50,083

71,422

50,306

For 8 mths ended For 12 mths ended For 12 mths ended 30 Nov 2005 31 Mar 2005 31 Mar 2004 ($000s) ($000s) ($000s)

Operating expenses include : Continuing activities Depreciation of property, plant and equipment Leasehold improvement Plant and equipment Motor vehicles

129

201

201

1,268

1,568

2,065

3

5

5

Furniture and ďŹ ttings

38

57

40

Computer hardware

203

336

242

Computer software

296

245

202

1,937

2,412

2,755

Total depreciation

65


3. Operating expenses (continued)

For 8 mths ended For 12 mths ended For 12 mths ended 30 Nov 2005 31 Mar 2005 31 Mar 2004 ($000s) ($000s) ($000s)

66

Rental costs

636

Research and development expense

1,894

2,253

74

261

394

326

836

(470)

-

39

40

65

(25)

-

Interest

963

2,009

1,196

Financing charge related to finance leases

149

-

-

Interest and break fee charge on change of bank

144

-

-

48

70

56

-

4

4

Net foreign currency gain (loss) Costs of offering credit Bad debts written off Increase/(decrease) in estimated doubtful debts Cost of borrowings

Auditor’s fees Auditors fee paid to principal auditors Audit fee paid to other auditors

Research and development expense includes the cost of materials used but excludes the cost of external labour.

4. Share capital

30 Nov 2005 ($000s)

31 Mar 2005 ($000s)

31 Mar 2004 ($000s)

Issued and paid up capital Ordinary shares Balance at beginning of period

250

250

250

Shares issued for capitalised Shareholders’ loan

12,886

-

-

Balance at end of period

13,136

250

250

On 19 October 2005, Shareholder loans were capitalised and 68,377 ordinary shares were issued at $188 per share. At 30 November 2005 there were 318,377 ordinary shares issued and fully paid (31 March 2005: 250,000). All ordinary shares rank equally with one vote attached to each fully paid ordinary share.

5. Retained earnings Note

For 8 mths ended For 12 mths ended For 12 mths ended 30 Nov 2005 31 Mar 2005 31 Mar 2004 ($000s) ($000s) ($000s)

Analysis Balance at beginning of period

7,707

4,797

2,575

Net surplus for the period

3,158

2,910

2,222

(1,600)

-

-

9,265

7,707

4,797

Dividends paid and provided Balance at end of period


6. Dividends

For 8 mths ended For 12 mths ended For 12 mths ended 30 Nov 2005 31 Mar 2005 31 Mar 2004 ($000s) ($000s) ($000s)

Ordinary dividends Declared ďŹ nal On ordinary shares: Cash

1,600

-

-

Total dividends

1,600

-

-

The dividends are fully imputed.

7. Imputation balances

For 8 mths ended For 12 mths ended For 12 mths ended 30 Nov 2005 31 Mar 2005 31 Mar 2004 ($000s) ($000s) ($000s)

Imputation credit account Balance at beginning of period Tax payments, net of refunds

3,051 1,600

2,874 177

2,874 -

Imputation credits attached to dividends paid

(788)

-

-

Balance at end of period

3,863

3,051

2,874

8. Minority interests

For 8 mths ended For 12 mths ended For 12 mths ended 30 Nov 2005 31 Mar 2005 31 Mar 2004 ($000s) ($000s) ($000s)

Balance at beginning of period Movement in minority interest

-

11 (11)

(8) 19

Balance at the end of the period

-

-

11

9. Borrowings and bank overdraft

Borrowings due within 12 months Capitalised lease obligations Owing to Directors Owing to related parties Borrowings

30 Nov 2005 ($000s)

31 Mar 2005 ($000s)

31 Mar 2004 ($000s)

1,718 6 193 -

57 440 -

1,133 159

1,917

497

1,292

8,000

15,000

15,000

-

11,751

12,319

8,000

26,751

27,319

9,267

3,440

2,864

Non-current borrowings Borrowings Owing to related parties

Bank overdraft due within 12 months

67


68

Security Bank loans and overdraft The bank overdraft is secured by first mortgage over all the undertakings of Rakon and any other wholly owned present and future subsidiaries. Capitalised lease obligation Capitalised lease obligations are secured over the property under lease. Directors’ loans Loans from Directors and related parties are unsecured.

Interest rates

For 8 mths ended For 12 mths ended For 12 mths ended 30 Nov 2005 31 Mar 2005 31 Mar 2004 ($000s) ($000s) ($000s)

Weighted average effective interest rates on borrowings Borrowings and bank overdraft

8.51%

8.90%

7.66%

Owing to related parties

9.53%

8.78%

7.62%

10. Deferred tax liability

For 8 mths ended For 12 mths ended For 12 mths ended 30 Nov 2005 31 Mar 2005 31 Mar 2004 ($000s) ($000s) ($000s)

Balance at beginning of period Deferred tax recognised On surplus for the period

(165) (224)

(7) (158)

330 (337)

Balance at end of period

(389)

(165)

(7)

Unrecognised tax losses available Balance at beginning of period Losses recognised Losses utilised

-

411 (411)

673 (262)

Balance at end of period

-

-

411

11. Income tax

Operating surplus before tax

For 8 mths ended For 12 mths ended For 12 mths ended 30 Nov 2005 31 Mar 2005 31 Mar 2004 ($000s) ($000s) ($000s)

4,832

4,294

1,836

240

88

35

Surplus subject to tax

5,072

4,382

1,871

Tax at 33%

1,674

1,446

617

Foreign tax credit

-

(62)

(19)

Timing difference due to change in tax policy

-

-

(1,003)

Permanent differences


11. Income tax

For 8 mths ended For 12 mths ended For 12 mths ended 30 Nov 2005 31 Mar 2005 31 Mar 2004 ($000s) ($000s) ($000s)

Income tax recognised in statement of financial performance

1,674

1,384

(405)

Attributable to continuing activities Attributable to discontinued activities

1,674 -

1,384 -

(405) -

Total tax expense recognised for the period

1,674

1,384

(405)

1,450

1,226

261

224

158

337

-

-

(1,003)

1,674

1,384

(405)

30 Nov 2005 ($000s)

31 Mar 2005 ($000s)

31 Mar 2004 ($000s)

7,211

Comprising: Estimated current period tax assessment Deferred tax asset Timing difference due to change in tax policy

12. Payables and accruals

Trade creditors

5,813

4,940

Employee entitlements

1,416

1,161

943

Accrued expenses

2,318

954

645

Payable to related parties

-

223

-

Income tax payable

-

813

-

9,547

8,091

8,799

13. Commitments The following amounts have been committed by Rakon Limited or Parent, but not recognised in the financial statements: 30 Nov 2005 ($000s)

31 Mar 2005 ($000s)

31 Mar 2004 ($000s)

Operating leases Non-cancellable operating lease commitments: Within one year Later than one, not later than two years Later than two, not later than five years

930 682 1,837

354 125 15

392 275 126

More than five years

2,560

-

-

6,009

494

793

Rakon Limited leases premises, and plant and equipment. Operating leases held over properties give Rakon Limited the right to renew the lease subject to a redetermination of the lease rental by the lessor. There are no renewal options or options to purchase in respect of premises, plant and equipment held under operating leases.

69


13. Commitments (continued)

30 Nov 2005 ($000s)

70 Finance leases Non-cancellable finance lease commitments: Within one year Later than one, not later than two years Later than two, not later than five years More than five years

31 Mar 2005 ($000s)

31 Mar 2004 ($000s)

1,718 -

-

-

1,718

-

-

260

-

-

Capital expenditure Amounts committed to capital expenditure

14. Property, plant and equipment Cost ($000s)

Plant and equipment

Cost ($000s)

31 Mar 05 Depreciation ($000s)

Book value ($000s)

27,133

17,612

9,521

25,611

16,498

9,113

2,229

154

2,075

-

-

-

Capital finance lease assets Total plant & equipment

30 Nov 05 Depreciation Book value ($000s) ($000s)

29,362

17,766

11,596

25,611

16,498

9,113

Leasehold improvements

2,730

1,697

1,033

2,689

1,568

1,121

Motor vehicles

32

25

7

32

22

10

Furniture and fittings

795

586

209

766

546

220

Computer hardware

1,971

1,594

377

1,844

1,391

453

Computer software

2,586

1,838

748

2,424

1,542

882

755

-

755

714

-

714

38,231

23,506

14,725

34,080

21,567

12,513

Cost ($000s)

31 Mar 04 Depreciation ($000s)

Book value ($000s)

23,437

14,917

1,249

Capital finance lease assets

-

-

-

Total plant and equipment

23,437

14,917

8,520

Leasehold improvements

2,616

1,367

1,249

Capital work in progress

Plant and equipment

Motor vehicles

30

17

13

748

505

243

Computer hardware

1,546

1,089

457

Computer software

1,563

1,306

257

Capital work in progress

1,353

-

1,353

31,293

19,201

12,092

Furniture and fittings


15. Investment in subsidiaries

71

Significant subsidiaries comprise: Name of entity

Principal Act

30 Nov 05

Interest held (%) 31 Mar 05

31 Mar 04

Rakon Australia (Pty) Limited

Marketing Support

-

-

90

Rakon America LLC

Marketing Support

100

100

100

Rakon Singapore (Pte) Limited

Marketing Support

100

100

100

All subsidiaries have a balance date of 31 March. In the previous financial year, the Australian subsidiary, Rakon Australia (Pty) Limited was liquidated. The liquidation resulted in a gain to Rakon Limited of $11,000. Rakon Singapore (Pte) Limited is incorporated in Singapore. Rakon America LLC is incorporated in America.

16. Inventories

30 Nov 2005 ($000s)

31 Mar 2005 ($000s)

31 Mar 2004 ($000s)

Inventories comprise: Raw materials and stores

9,191

9,040

8,670

Work in progress

8,653

10,772

9,624

Finished goods

1,873

1,305

472

19,717

21,117

18,766

30 Nov 2005 ($000s)

31 Mar 2005 ($000s)

31 Mar 2004 ($000s)

13,719 (65) 357 32 295 346

12,052 364 11 140 -

8,428 1,278 1,647 566 820

14,684

12,567

12,739

17. Accounts receivable Current Trade receivables Provision for doubtful debts GST receivable Receivable from related parties Receivable from Directors Prepayments Income tax receivable

18. Financial instruments Rakon Limited is subject to a number of financial risks which arise as a result of its activities. To manage and limit the effects of those financial risks, the Board of Directors has approved policy guidelines and authorised the use of various financial instruments. The policies approved, and financial instruments being utilised at balance date, are outlined below. Currency risk Policies During the normal course of the business Rakon Limited exports products, and imports raw material and inventory. As a result of these transactions exposures to fluctuations in foreign currency exchange rates arise. The currencies in which Rakon Limited primarily deals are the United States Dollar and Japanese Yen. It is Rakon Limited’s policy to enter into foreign currency forward contracts to manage the exposure to fluctuations in currency rates.


72

Unrecognised balances The notional or principal contract amounts of foreign exchange instruments outstanding at balance date are:

Forward foreign exchange contracts

30 Nov 2005 ($000s)

31 Mar 2005 ($000s)

31 Mar 2004 ($000s)

20,171

1,404

12,496

The cash settlement requirements of the forward exchange contracts approximates the notional amounts shown above. Interest rate risks Policies To manage interest expense appropriately, Rakon Limited engages fixed and variable loan facilities. Rakon Limited uses interest rate swaps to manage its interest rate risk. These are entered for periods up to five years, with the level and maturity of core debt determining the proportion of fixed cover required to be maintained. The interest rate on borrowings is either converted from floating to fixed or vice-versa through entering into an interest rate swap for periods up to five years. The interest rate on borrowings is either converted from floating to fixed or vice-versa through entering into an interest rate swap. Unrecognised balances The notional principal or contract amounts of interest rate contracts outstanding at balance date is:

Interest rate swaps

30 Nov 2005 ($000s)

31 Mar 2005 ($000s)

31 Mar 2004 ($000s)

5,000

5,000

5,000

The cash settlement requirement for interest rate swaps as at 30 November 2005 is the net interest receivable of $14,997 (31 March 2005: $14,667). The maturity date of the interest rate swap is 16 May 2008. Repricing analysis Trade receivables, trade creditors, sundry receivables and sundry payables have not been included in the following repricing analysis as they are not interest rate sensitive.

Effective interest rates

Current ($000s)

1-2 years ($000s)

3.00%

2,395

-

8.51%

(9,267)

30 Nov 05 2-5 years ($000s)

>5 years ($000s)

Total ($000s)

-

-

2,395

-

-

-

(9,267)

(9,267)

-

-

-

(9,267)

5,000

5,000

5,000

-

15,000

(1,872)

5,000

5,000

-

8,128

Asset Bank Liabilities Bank overdraft Total liabilities Unrecognised Interest rate swap Repricing gap

6.54%


Effective interest rates

Current ($000s)

31 Mar 05 1-2 years ($000s)

2-5 years ($000s)

>5 years ($000s)

Total ($000s)

Asset Bank

3.75%

704

-

-

-

704

8.90%

(3,440)

-

-

-

(3,440)

(3,440)

-

-

-

(3,440)

5,000

5,000

10,000

-

20,000

2,264

5,000

10,000

-

17,264

Liabilities Bank overdraft Total liabilities Unrecognised Interest rate swap

6.54%

Repricing gap

31 Mar 04 1-2 years ($000s)

Effective interest rates

Current ($000s)

2-5 years ($000s)

>5 years ($000s)

Total ($000s)

3.40%

1,331

-

-

-

1,331

7.66%

(2,864)

-

-

-

(2,864)

(2,864)

-

-

-

(2,864)

5,000

5,000

15,000

-

25,000

3,467

5,000

15,000

-

23,467

Asset Bank Liabilities Bank overdraft Total liabilities Unrecognised Interest rate swap Repricing gap

6.54%

There are no repayment terms for the advances from related parties and the loan from the bank is a flexible facility and continues to rollover each year, therefore are not included in the repricing table. Credit risk Rakon Limited incurs credit risk from transactions with trade receivables in the normal course of its business. Rakon Limited has a credit policy which restricts exposure to individual trade receivables and the Board of Directors reviews exposure to trade receivables on a regular basis. Rakon Limited does not have any significant concentrations of credit risk. Amounts owed by trade receivables are unsecured. Fair values Method and assumptions The following methods and assumptions are used to estimate the fair value of each class of financial instruments: Cash at bank, bank overdraft, term deposits, loans issued, receivables and trade creditors. The carrying value of these items is equivalent to their fair value. As such, they have been excluded from the table below. Borrowings Fair value of borrowings are estimated, based on current market interest rates available to Rakon Limited for debt of similar maturity at balance date. Interest rate swap and foreign currency forward exchange contracts The above derivatives are based on valuations provided by Rakon Limited’s bankers at balance date.

73


Fair value summary For the 8 months ended 30 Nov 05

74

For the 12 months ended 31 Mar 05

For the 12 months ended 31 Mar 04

Carrying value

Fair value

Carrying value

Fair value

Carrying value value

Fair value

($000s)

($000s)

($000s)

($000s)

($000s)

($000s)

Current borrowings

(1,917)

(1,917)

(497)

(497)

(1,292)

(1,292)

Non-current borrowings

(8,000)

(8,000)

(26,751)

(26,751)

(27,319)

(27,319)

(449)

(449)

(16)

(16)

295

295

-

347

-

363

-

161

Liabilities

Foreign exchange contracts Unrecognised Interest rate swaps

19. Currency The following currency conversion rates have been applied at balance date: 30 Nov 05 ($000s)

31 Mar 05 ($000s)

31 Mar 04 ($000s)

USD

0.7015

0.7091

0.6507

JPY

83.8000

76.2300

69.0900

AUD

0.9491

0.9196

0.8686

GBP

0.4077

0.3773

0.3582

SGD

1.1876

1.1706

1.1012

EUR

0.5952

0.5482

0.5376

NZ$1.00 =

Unhedged foreign currency monetary assets and liabilities At balance date, the Company had the following unhedged foreign currency monetary assets and liabilities: 30 Nov 05 ($000s)

31 Mar 05 ($000s)

31 Mar 04 ($000s)

Asset Euro British Pounds Australian Dollars US Dollars

28

14

92

3

8

55

23

147

-

-

7,503

-

Liabilities Japanese Yen

-

1,288

-

Australian Dollars

-

-

6

US Dollars

-

-

31

20. Contingent liabilities At 30 November 2005 there were no contingent liabilities. (31 March 2005: nil).


21. Related party information General In October 2005, Shareholders’ loans amounting to $12,886,009 were capitalised and an additional 68,377 ordinary shares were issued to the Ahuareka Trust, BJ Robinson & DP Robinson. Rakon Holdings Limited, the major Shareholder, was liquidated in November 2005 and the shares in Rakon Limited were transferred to Ahuareka Trust. Ahuareka Trust has since sold 63,675 shares to Tahia Investments Limited (53,062 shares) and Zeus Zeta Limited (10,613 shares). At 30 November 2005, Ahuareka Trust owns 60% (31 March 2005: indirectly 80%) of the ordinary shares of Rakon Limited. The balance is owned by Tahia Investments Limited 17% (31 March 2005: nil), BJ Robinson 10% (31 March 2005: 10%), DP Robinson 10% (31 March 2005: 10%) and Zeus Zeta Limited 3% (31 March 2005: nil). Related party transactions and balances Advances Ahuareka Trust advanced monies to Rakon Limited on an interest free basis. The outstanding advance at 30 November 2005 is $117,407 (31 March 2005: $11,794,992). There are no repayment terms on this advance. Sigma Electronics Limited, a wholly owned subsidiary of Ahuareka Trust, advanced monies to Rakon Limited. The outstanding advance at 30 November 2005 is $75,787 (31 March 2005: $75,787). There are no repayment terms on these advances. Interest is charged at 90 day bank bill rate plus an additional 2.25% on an interest only basis. Interest charged to 30 November 2005 is $4,758 (31 March 2005: $6,647). Directors’ advances Certain advances from and to Directors attract interest at 90 day bill rate plus an additional 2.25% and the majority is repayable on flexible terms that extends to a period over twelve months. Following are advance balances at 30 November 2005 and interest charges. BJ Robinson advance balance is $6,109 payable (31 March 2005: $47,114) with interest charge of $9,992 (31 March 2005: $10,940), and DP Robinson advance balance is $32,523 receivable (31 March 2005: $10,269) with interest charge of $6,995 (31 March 2005: $10,493). Other related advances Rakon Limited provides accounting and administrative services to Rakon America LLC and Rakon Singapore (Pte) Limited free of charge. Rakon Limited leases premises from Trident Investments Limited, a Robinson family company. Normal commercial lease agreements are in place for the premises. The lease costs charged by Trident Investments Limited to Rakon Limited in the year to date is $374,000 (31 March 2005: $570,000).

22. Events occurring after 31 March 2005 balance date Financial statement reporting error Subsequent to the issue of the financial statements and auditors’ report for the year ended 31 March 2005, an error in the valuation of labour and overhead in work in progress was found. This error resulted in an overvaluation of work in progress of $1,072,000 at 31 March 2005. As a result of this error, the previously issued financial statements and auditors’ report dated 16 June 2005 were withdrawn. The financial statements have been reissued to reflect the correct valuation of work in progress valuation at 31 March 2005. Finance Lease In April 2005, Rakon Limited purchased plant and equipment that was formerly leased from Trident Investments Limited. Rakon Limited funded then on sold these assets to UDC Finance and leased them back under a finance lease. The total value of the plant and equipment is $2,229,175. Bank In June 2005, Rakon Limited appointed ASB Bank Limited as their new bankers.

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Auditors’ Report The Directors Rakon Limited Private Bag 99943 Newmarket AUCKLAND 13 April 2006 Auditors’ report for inclusion in the Prospectus Dear Directors As auditors of Rakon Limited (the Company) we have prepared this report pursuant to clause 42 of the First Schedule of the Securities Regulations 1983 for inclusion in a Prospectus to be dated 13 April 2006. Directors’ responsibilities The Company’s Directors are responsible for the preparation and presentation of: (a) the financial statements which give a true and fair view of the state of affairs of Rakon Limited and its subsidiaries (“the Group”) as at 31 March 2005 and 30 November 2005 and its financial performance and cash flows for the periods ended on those dates, as required by clauses 23 to 38 of the First Schedule of the Securities Regulations 1983; (b) the summary of financial statements of the Group for the years ended 31 March 2001, 2002, 2003, 2004 and 2005 and for the eight months ended 30 November 2005 as required by clauses 8(2) and 8(3) of the First Schedule of the Securities Regulations 1983; and (c) the prospective financial information of the Group for the years ending 31 March 2006 and 31 March 2007 and the prospective statement of cash flows for the year commencing on the specified date, including the assumptions on which they are based. Auditors’ responsibilities We are responsible for expressing an independent opinion on the financial statements of the Group for the periods ended 31 March 2005 and 30 November 2005 presented by the Directors and reporting our opinion in accordance with clause 42(1) of the First Schedule of the Securities Regulations 1983. We are also responsible for reporting, in accordance with clauses 42(1)(g) and 42(2) of the First Schedule of the Securities Regulations 1983, on the following matters which have been prepared and presented by the Directors: (a) the amounts included in the summary of financial statements of the Group for the years ended 31 March 2001, 2002, 2003, 2004 and 2005 and for the eight months ended 30 November 2005; and (b) the prospective financial information of the Group for the years ending 31 March 2006 and 31 March 2007 and the prospective statement of cash flows for the year commencing on the specified date. We have no relationship with or interests in the Company or any of its subsidiaries other than in our capacity as providers of assurance (including audit) services and as tax advisers. Basis of opinion on the financial statements An audit of the financial statements includes examining, on a test basis, evidence relevant to the amounts and disclosures in the financial statements. It also includes assessing:


(a) the significant estimates and judgements made by the Directors in the preparation of the financial statements; and (b) whether the accounting policies used and described on pages 60 to 64 are appropriate to the circumstances of the Group and Company, consistently applied and adequately disclosed. 77 We have conducted our audit in accordance with generally accepted auditing standards in New Zealand. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatements, whether caused by fraud or error. In forming our opinion we also evaluated the overall adequacy of the presentation of the information in the financial statements. Basis of opinion on the summary of financial statements We have undertaken procedures to provide reasonable assurance that the amounts set out in the summary of financial statements of the Group on pages 13 to 15, pursuant to clauses 8(2) and 8(3) of the First Schedule of the Securities Regulations 1983, have been correctly taken from the audited financial statements of the Group for the years ended 31 March 2001, 2002, 2003, 2004 and 2005 and for the eight months ended 30 November 2005. Basis of opinion on the prospective financial information To meet our reporting responsibilities we have examined the prospective financial information of the Group for the years ending 31 March 2006 and 31 March 2007 and the prospective statement of cash flows for the year commencing on the specified date to confirm that, so far as the accounting policies and calculations are concerned, the prospective financial information has been properly compiled on the footing of the assumptions made or adopted by the Directors as set out on pages 54 to 56 of this prospectus and are presented on a basis consistent with the accounting policies normally adopted by the Group. Unqualified opinion on the financial statements and the summary of financial statements We have obtained all the information and explanations we have required. In our opinion: (a) proper accounting records have been kept by the Group as far as appears from our examination of those records; (b) the financial statements of the Group, on pages 57 to 75 of this prospectus, as required by clauses 23 to 38 of the First Schedule of the Securities Regulations 1983, and that are required to be audited, have been drawn up to: (i) comply with the Regulations; (ii) subject to those Regulations, comply with generally accepted accounting practice in New Zealand; and (iii) give a true and fair view of the state of affairs of the Group as at 31 March 2005 and 30 November 2005 and its financial performance and cash flows for the periods ended on those dates; (c) the amounts or details set out in the summary of financial statements, on pages 13 to 15 of this prospectus, as required by clauses 8(2) and 8(3) of the First Schedule of the Securities Regulations 1983, have been correctly taken from the audited financial statements of the Group from which they were extracted. Unqualified opinion on the prospective financial information In our opinion, the prospective financial information of the Group for the years ending 31 March 2006 and 31 March 2007 and the prospective statement of cash flows for the year commencing on the specified date so far as the accounting policies and calculations are concerned, have been properly compiled in the footing of the assumptions made or adopted by the Directors of the Company as set out on pages 54 to 56 of this prospectus and are presented on a basis consistent with the accounting policies normally adopted by the Group. Actual results are likely to be different from the prospective financial information since anticipated events frequently do not occur as expected and the variation could be material. Accordingly, we express no opinion as to whether the prospective financial information will be achieved. Yours faithfully

PricewaterhouseCoopers Chartered Accountants Auckland


Answers to Important Questions 78

What sort of investment is this? The Share Offer The Vendor is offering 35,000,000 existing Shares and Rakon is offering 6,250,000 new Shares. The Share Offer comprises Firm Allocations of Shares to the Lead Manager and other NZX Firms in New Zealand for sale and Allotment to Retail Investors in New Zealand and Institutional Investors in New Zealand, Australia and certain other jurisdictions, and a Priority Offer of Shares to employees, Directors and business associates of Rakon in New Zealand. Full details of the Share Offer are set out on pages 19 to 23. Following completion of the Share Offer (assuming it is fully subscribed), the Vendor will own 24,060,024 Shares in Rakon and those Shares (together with the Shares held by certain other Existing Shareholders) will be subject to the transfer restrictions described on page 22 under the heading “Transfer Restrictions”. The Offer Price per Share is $1.60. The terms of the new Shares will be identical to the terms of the existing Shares and the new Shares will rank equally in all respects with the existing Shares. Share Split On 12 April 2006 Rakon undertook a 311.394549 for one Share split resulting in the number of fully paid ordinary Shares increasing from 321,136 Shares to 100,000,000 Shares. Shares Each Share gives the holder the right to: (a) attend and vote at a meeting of Rakon including the right to cast one vote per Share on a poll on any resolution, including but not limited to, a resolution to: • appoint or remove a director or auditor; • adopt, revoke or alter Rakon’s Constitution; • approve a major transaction; • approve the amalgamation of Rakon under section 221 of the Companies Act 1993; and

• place Rakon in liquidation; (b) receive an equal share in any distribution, including dividends, if any, authorised by the Board and declared and paid by Rakon in respect of that Share; (c) receive an equal share with other Shares in the distribution of surplus assets in any liquidation of Rakon; (d) be sent certain Company information; and (e) exercise the other rights conferred upon a Shareholder by the Companies Act 1993 and the Constitution. Plan Shares In addition to the Shares, Rakon will be issuing 1.1 million partly-paid Plan Shares under the terms of the Rakon Share Growth Plan. The Plan Shares issued are held by Rakon PPS Trustee Limited for the benefit of certain senior managers. Details of the Share Growth Plan are set out under the heading “Rakon Share Growth Plan”. Plan Shares will give the holder the same rights as Shares in direct proportion to the amount paid up on each Plan Share, except that any Plan Shares held for the benefit of Brent Robinson and Darren Robinson will not carry any voting rights. Dividends Rakon’s dividend policy is to not pay dividends. Details of Rakon’s dividend policy are set out under the heading “What Returns Will I Get?” on pages 81 and 82 of this Offer Document. Listing on NZX Application has been made to NZX for permission to list the Shares and all the requirements of NZX relating thereto that can be complied with on or before the date of this Offer Document have been duly complied with. However, NZX accepts no responsibility for any statement in this Offer Document. Initial quotation of the Shares on the NZSX under the symbol “RAK” is anticipated to occur on May 16 2006. NZX has authorised NZX Firms to act in the Share Offer. The Plan Shares will not be listed unless and until they are fully paid.


Constitution The list below sets out some of the more material features of the Constitution. It is not an exhaustive list of such features. The Constitution is available for inspection by prospective investors on the Companies Office website at www.companies.govt.nz. In addition the Constitution incorporates by reference the requirements of NZX as set out in the NZSX Listing Rules and on NZX’s website at www.nzx. com. Restrictions on Directors’ powers to issue Shares or Options which are convertible or exchangeable into Shares The Directors may issue equity securities with Shareholder approval by ordinary resolution and without Shareholder approval if made prorata to existing Shareholders or under certain permitted procedures. Board has limited power to authorise Directors’ remuneration The Board’s power to authorise payment of remuneration by Rakon to a Director (in his or her capacity as a Director) is subject to the prior approval of Shareholders by ordinary resolution. Rakon acquiring, or providing financial assistance to purchase, its own Shares Rakon may acquire its own Shares, or provide financial assistance in connection with the purchase of its own Shares, provided that prior approval is obtained from Shareholders by ordinary resolution of each separate group of each class of Shares having rights and entitlements that are materially affected in a similar way by the acquisition or provision of financial assistance or that the acquisition or provision of financial assistance is effected on a pro-rata basis to existing holders or that certain other circumstances exist. Before the acquisition or provision of financial assistance, Rakon must also satisfy the solvency test under the Companies Act 1993, and the Board must resolve that the assistance is in the best interests of Rakon and that the terms and conditions under which the acquisition or assistance is given are fair and reasonable to Rakon.

Restricted transactions The NZSX Listing Rules require the approval of Rakon’s Shareholders by ordinary resolution for the following: (a) any transaction or series of linked or related transactions to acquire, sell, lease, exchange or otherwise dispose of (otherwise than by way of charge) assets of Rakon or assets to be held by Rakon in respect of which the gross value is in excess of 50% of the average market capitalisation of Rakon; (b) any transaction that will change the essential nature of Rakon’s business; or (c) certain material transactions (generally those having a net value in excess of 5% of the average market capitalisation of Rakon) entered into by any member of Rakon with, or for the benefit of, the Directors of any company in the Rakon Group, substantial Shareholders or their associates. In addition, section 129 of the Companies Act 1993 requires Shareholder approval by special resolution prior to Rakon entering into any transaction (whether by way of an acquisition, disposition or otherwise) involving more than 50% of the value of Rakon’s assets before the acquisition, disposition or otherwise. The NZSX Listing Rules also require the approval of Shareholders, by ordinary resolution, for any issue of Shares that would materially increase the ability of any person or group of associated persons to exercise effective control of Rakon. Minority buy out rights If, by special resolution, Rakon resolves to: (a) alter or revoke its Constitution in a way which imposes or removes a restriction on the activities of Rakon; (b) approve a major transaction; or (c) approve a statutory amalgamation, any Shareholder voting against the resolution is entitled to require Rakon to purchase, or to arrange for another person to purchase, the Shares of that Shareholder

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for a fair and reasonable price nominated by Rakon or, if the Shareholder objects to such a price, a price determined by arbitration. Takeovers Code The Takeovers Code prohibits any person (together with their Associates (as defined in the Takeovers Code)) from becoming the holder or controller of 20% or more of the voting rights in Rakon other than in compliance with the requirements of the Takeovers Code. Investors are advised to seek legal advice in relation to any act, omission or circumstance which may result in that investor breaching any provision of the Takeovers Code. Overseas Investment Act 2005 Any person who is an Overseas Person for the purposes of the Overseas Investment Act 2005 and who intends to acquire more than 25% of the Shares of Rakon will be required to obtain the consent of the relevant Minister of the Crown before acquiring those Shares, in accordance with the Overseas Investment Act 2005. Other Terms of the Share Offer The above is a simplified and general description of some of the rights and obligations of Shareholders. All terms of the Share Offer and the Shares, except those rights and obligations implied by law, are set out in this Offer Document or in the Constitution. The Constitution is available for public inspection at the registered office of Rakon at One Pacific Rise, Mt Wellington, Auckland or on the Companies Office website at www.companies.govt.nz. Who is involved in providing it for me? Rakon Limited is the Issuer of the Shares, and has obligations as an Issuer, within the terms of the Securities Act and the Securities Regulations. Rakon can be contacted at its registered office, which is located at One Pacific Rise, Mt Wellington, Auckland. The Vendor is also an Issuer of the Shares, and has obligations as an Issuer, within the terms of the Securities Act and the Securities Regulations. The Vendor can be contacted through Rakon at One Pacific Rise, Mt Wellington, Auckland. The effect of the Securities Act exemption from regulations 3(1) and 7A(1) of the Securities

Regulations (described on page 90) is that this Offer Document is not required to contain information about the Vendor as an Issuer of the Shares. There is no Promoter of this Offer. The principal activities of Rakon are the development, production and distribution of high performance Quartz Crystal components. Further information in respect of the business activities of Rakon is contained in the section of this Offer Document entitled “Rakon Business Profile” on pages 31 to 39. How much do I pay? Share Offer All Shares allocated under the Share Offer will be sold at the Offer Price of $1.60 per Share. Applications to subscribe for Shares under the Share Offer must be made on the Application Form in accordance with the instructions set out on the reverse of the form. Applications under the Share Offer must be made for a minimum of 4,000 Shares, except for Applications under the Priority Offer which must be made for a minimum of 1,000 Shares. Applications must be accompanied by payment in full for the number of Shares applied for based on the Offer Price per Share. Cheques must be drawn on a registered New Zealand bank, must be crossed Not transferable and should be made payable to Rakon Share Offer. Completed Application Forms must be forwarded either to: Computershare Investor Services Limited Level 2 159 Hurstmere Road Takapuna Private Bag 92119 Auckland 1020 or to their NZX Firm, in sufficient time for the Application Form to reach the Share Registrar no later than, in the case of the Priority Offer, 5.00pm on 5 May 2006 and otherwise no later than 5.00pm on 11 May 2006. Further information on how to apply for Shares is set out in the section of this Offer Document entitled “Application Instructions for Shares” on pages 103 to 104.


What are the charges? Applicants are not required to pay any charges to the Vendor or Rakon in relation to the Share Offer, other than the Offer Price of each Share allocated to them. Shares purchased or sold on the NZSX are likely to attract normal brokerage fees and charges. Issue expenses (including brokerage and lead management fees, share registry expenses, legal fees, investment advisory fees, accounting fees, advertising costs, printing costs and postage and courier costs relating to the Share Offer) are estimated to amount to an aggregate of $2.3 to $4.1 million. This amount assumes that the Share Offer is fully subscribed. Rakon will pay $1.0 million of the issue expenses and the Vendor will pay the balance of all costs associated with the Share Offer. Rakon and the Vendor will pay the following brokerage and commission fees: (a) to UBS as Lead Manager, a brokerage fee of 1.5% of the proceeds in respect of Shares allotted pursuant to valid Applications submitted by Institutional Investors; (b) to UBS as Underwriter, an underwriting commission of 1.5% of the aggregate proceeds of the Share Offer; and (c) to UBS for on-payment to NZX Firms and financial intermediaries, a retail brokerage fee of 1.5% of the proceeds in respect of Shares allotted pursuant to valid Applications submitted by NZX Firms and financial intermediaries and bearing their stamp. What returns will I get? Shares Returns on the Shares may be by way of capital appreciation (although the market price of Shares may also decline) and any dividends paid and other distributions made in respect of the Shares. The key factors that determine the returns are: • market prices for Shares;

the Board’s decisions in relation to distributions;

applicable taxes; and

reserves and retentions.

Nothing contained in this Offer Document should be construed as a promise of profitability, and neither Rakon nor the Vendor gives any guarantee or promise as to the return of capital or the amount of any returns in relation to the Share Offer or the Shares. The amount of any returns will depend on a number of factors, including those discussed under the heading “What are my risks?” on pages 82 to 88 of this Offer Document. The factors described in that section could reduce or eliminate the distributions or other returns intended to be derived from holding the Shares. Dividends Rakon’s dividend policy is to not declare dividends. Accordingly, and until that policy changes, return on Shares will be limited to the proceeds of sale or other disposition of Shares. Rakon is the entity legally liable to pay any dividends declared or other distributions on the Shares. Sale of Shares Shareholders may benefit from any increase in the market price of their Shares. The price of the Shares on the NZSX may rise or fall due to numerous factors which may affect the performance of Rakon, including: (a) general economic conditions, including inflation rates and interest rates; (b) variations in the local and global market for listed stocks, in general, or for stocks in the industry in which Rakon operates; (c) changes to government policy, legislation or regulation; (d) inclusion or removal from major market indices; (e) the nature of competition in the industries in which Rakon operates; and

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(f) general operational and business risks. No assurances can be made that Rakon’s market performance will not be adversely affected by any such market fluctuations or factors. None of the Vendor, Rakon, its Directors nor any other person guarantees Rakon’s market performance. There can be no guarantee that an active market in the Shares will develop or that the price of the Shares will increase. There may be relatively few or many potential buyers or sellers of the Shares on the NZSX at any time. This may increase the volatility of the market price of the Shares. It may also affect the prevailing market price at which Shareholders are able to sell their Shares. This may result in Shareholders receiving a market price for their Shares that is less or more than the price that Shareholders paid. If you sell any of your Shares, the purchaser of those Shares will be legally liable to pay you the sale price of those Shares. Taxation Implications on Returns New Zealand taxes may affect the return to investors. The following taxation summary addresses the tax implications for investors who are New Zealand residents for New Zealand tax purposes and who will hold Shares acquired through the Share Offer on capital account. This summary is not intended to be an authoritative or complete statement of the laws applicable. Prospective investors are advised to obtain independent professional advice relevant to their own particular circumstances before investing. Acquisition of Shares: No stamp duty is payable in New Zealand on Share transfers and no notice of such transfers needs to be given by a Shareholder to New Zealand revenue authorities. Disposal of Shares: The New Zealand tax system does not include a capital gains tax. Consequently, where the disposal of Shares does not form part of a person’s business (it may, for example, in the case of Institutional Investors), amounts derived from the disposal of Shares will generally not be subject to New Zealand income tax. However, there are exceptions to this where

the Shares were purchased for the purpose of sale or if the Shares were acquired as part of a profit making undertaking or scheme. Where one of these exceptions applies, the gain (or loss) for the Shareholder will be the difference between the cost of acquiring the Shares and the market value of the consideration received for their disposal. Gifts of Shares made by a Shareholder domiciled in New Zealand may be subject to New Zealand gift duty. Gift duty applies at 5% on the excess of gifts over $27,000 in any 12 month period and rises on a graduated scale to a maximum rate of 25% of the excess amount of gifts over $72,000. Dividends: In general, any distribution, including a cash dividend, by Rakon in respect of Shares, other than a non-taxable bonus issue of Shares or a return of capital in certain circumstances, will be considered a dividend for New Zealand tax purposes. To the extent that dividends paid by Rakon to New Zealand resident Shareholders have less than the maximum allowable imputation credits attached, those dividends will be subject to resident withholding tax at 33%. Any unutilised imputation credits can be credited against tax on other income or converted to losses to carry forward. However, resident withholding tax on dividends does not need to be accounted for if the New Zealand resident Shareholder produces to Rakon a current certificate of exemption and the certificate continues to be current at the time the dividend is paid. To the extent that Rakon pays dividends to a New Zealand resident Shareholder without imputation credits attached, Rakon will account for resident withholding tax unless it is satisfied by the Shareholder that this is not required by law. Any resident withholding tax accounted for in respect of a dividend paid to a New Zealand resident Shareholder is able to be credited against the income tax liability of that Shareholder. What are my risks? Factors that may lead to a material difference between the prospective financial information and the actual results presented in historical financial statements in future reporting periods include the following risks.


Principal Risks Shares The principal risk to investors under the Share Offer is that they may not be able to recoup their original investment or they may not receive the returns they expect. This could happen for a number of reasons including that: (a)

the price at which the Shares trade may be lower than the price paid for them;

world markets, inflation rates and interest rates; 2. variations in the general market for listed stocks, in general, or for New Zealand stocks, in particular; 3. changes to government policy, legislation or regulation; and 4. general operational and business risks.

(b) there is no ready market for the Shares; (c)

Rakon does not have funds available to pay dividends;

(d) the operational and financial performance of Rakon falls below expectation; (e) Rakon becomes insolvent or does not have sufficient assets to pay returns to Shareholders; and/or (f)

Rakon is placed in receivership or liquidation.

The Shares will be fully paid ordinary shares and Shareholders will have no liability to Rakon for any further payment in respect of the Shares. Risk factors exist that are both specific to Rakon’s business activities and of a general nature. These factors may, individually or in combination, affect the future operating performance of Rakon and the value of a Shareholder’s investment in Rakon. Many factors will affect the price of the Shares, including economic conditions in New Zealand and elsewhere, the operational and financial performance of Rakon, changes in government policies and regulations in countries where Rakon operates and movements in interest rates or currency exchange rates. An investor in Shares will also face the business risks arising from the assets and undertakings of Rakon. Stock Market Investment The price of the Shares on the NZSX may rise or fall due to numerous factors which may affect the market price of the Shares, including: 1. general economic conditions, including performance of the New Zealand dollar on

In particular, the share prices for many companies have in recent times been subject to wide fluctuations which in many cases may reflect a diverse range of non-Company specific influences such as global hostilities, acts of terrorism and the general state of the world economy. Such market fluctuations may adversely affect the market price of the Shares. No assurances can be made that Rakon’s market performance will not be adversely affected by any such market fluctuations or factors. Liquidity and Realisation Risk There can be no guarantee that an active market in the Shares will develop or that the price of the Shares will increase. There may be relatively few or many potential buyers or sellers of the Shares on the NZSX at any time. This may increase the volatility of the market price of the Shares. It may also affect the prevailing market price at which Shareholders are able to sell their Shares. This may result in Shareholders receiving a market price for their Shares that is less or more than the price that Shareholders paid. Investors should also seek professional guidance from their stockbrokers, solicitors, accountants and other professional advisers before deciding whether to invest. Consequences of Insolvency and/or Winding Up Shares In the event of insolvency of Rakon, Shareholders will not be liable to anyone for payment of any money. In these circumstances, Shareholders would not receive any return of money in respect of Shares until Rakon had paid all its other creditors, both secured and unsecured, including the costs of liquidation or receivership. Any assets remaining after

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the payments of debt would be distributed to Shareholders in proportion to their respective shareholdings and may not be sufficient to repay Shareholders in full. Industry Risks Emerging Technology Market The market for GPS based location awareness capabilities in high-volume consumer and commercial applications is emerging. If this market does not develop as quickly as expected, the growth and success of Rakon’s business will be limited accordingly. Many of these GPS based applications have not been commercially introduced or have not achieved widespread acceptance. The development of this market depends on several factors, including the development of location awareness, infrastructure by wireless network operators and the availability of location-aware content and services. The failure of the market for highvolume consumer and commercial GPS based applications to develop in a timely manner would limit the growth and success of Rakon’s business. GPS Regulation The GPS market could be subject to governmental and other regulations that may increase Rakon’s cost of doing business or decrease demand for their products. The United States government may restrict specific uses of GPS technology in some applications for privacy or other reasons. The United States government may also block the civilian GPS signal at any time or in hostile areas. In addition, the policies or the United States government for the use of GPS without charge may change. Radio Frequency Allocation GPS technology uses radio frequency bands that are globally allocated for radio navigation satellite services. International allocations of radio frequency bands are made by International Telecommunications Union, a specialised technical agency of the United Nations. These allocations are further governed by radio regulations which have treaty status and which are subject to modification every two to three years by the World Radio Communication Conference. Any reallocation of radio frequency bands, including frequency band segmentation or spectrum sharing, may negatively affect the

utility and reliability of GPS based products. The US Federal Communications Commission continually receives proposals for new technologies and services which may seek to operate in, or across, the radio frequency bands currently used by GPS and other public services. Any decision made by the Federal Communications Commission that results in harmful interference to the delivery of the GPS signals may harm the utility and reliability of GPS based products. GPS Satellite Network The satellites and ground support systems that provide GPS signals are complex electronic systems subject to electronic and mechanical failures and possible sabotage. The satellites were originally designed to have lives of six to seven years and are subject to damage by the hostile environment in which they operate. However, some of the satellites currently deployed have already been in place for 14 years. Repairing damaged or malfunctioning satellites is currently not economically feasible. If a significant number of satellites were to become inoperable, there could be a substantial delay before they are replaced with new satellites, or they may not be replaced at all. A reduction in the number of operating satellites would impair the operations or utility of GPS, which would have a material negative effect on Rakon’s business. The United States government may not remain committed to the maintenance of GPS satellites over a long period. Privacy Personal privacy concerns may limit the growth of the high-volume consumer and commercial GPS based applications and demand for its products. GPS based consumer and commercial applications rely on the ability to receive, analyse and store location information. Consumers may not accept some GPS applications because of the fact that their location can be tracked by others and that this information could be collected and stored. Also, governments may disallow specific uses of GPS technology for privacy or other reasons or could subject this industry to regulation. If customers view GPS based applications as a threat to their privacy,


demand for some GPS based products could decline.

failure by Rakon or their customers to gain regulatory approval for use of Rakon’s products; and

political and economic instability, including wars, acts of terrorism, political unrest, a recurrence of the SARS outbreak, the possibility of an outbreak of avian flu, boycotts, curtailments of trade and other business restrictions.

Company Specific Risks Economic Environment and Exposure to International Economies Rakon derives a substantial portion of its revenue from international sales and conducts most of its business internationally. Economic, political and other risks may harm Rakon’s international operations and cause the Company’s revenue to decline. Rakon derived approximately 95% of its net revenue on export sales in FY2005. Rakon maintains marketing offices in Taiwan and the United States region and will establish a marketing office in Europe in the second quarter of FY2007. Risks Rakon faces in conducting business internationally include: •

multiple, conflicting and changing laws and regulations, export and import restrictions, employment laws, regulatory requirements and other governmental approvals, permits and licences;

difficulties and costs in staffing and managing foreign operations as well as cultural differences;

international terrorism, particularly in emerging markets;

trade restrictions or high tariffs that favour local competition in some countries;

laws and business practices favouring local companies;

potentially reduced protection for intellectual property rights, for example, in China;

inadequate local infrastructure and transportation delays;

financial risks, such as longer sales and payment cycles, greater difficulty collecting accounts receivable and exposure to foreign currency exchange and rate fluctuations;

General economic factors such as economic activity, inflation, currency fluctuations, industrial disruption (e.g. a strike in the transport industry), interest rate fluctuations, commodity prices, consumer confidence, stock market prices and changes in government policy, regulations or legislation may have a material adverse effect on Rakon’s results and/or financial position. Exposure to Currency Fluctuations and Interest Rate Movements Rakon is exposed to foreign exchange movements, particularly between the New Zealand Dollar, the United States Dollar and the Japanese Yen. •

approximately 95% of Rakon’s earnings and 26% of expenses are denominated in United States Dollars, and

approximately 27% of expenses are denominated in Japanese yen

Adverse foreign exchange rate movements will impact upon the financial performance, capital expenditure and financial position of Rakon to the extent foreign exchange rates are not hedged. Rakon maintains an active hedging policy to limit the effect of these exchange rate movements on financial performance. Excluding the impact of hedging arrangements, for a 12 month period a one cent movement in the NZD/ USD exchange rate equates to approximately a NZ $1.0 miliion change in EBIT and a one Yen movement in the NZD/JPY exchange rate equates to approximately a NZ $0.3 million change in EBIT. Rakon is also subject to the effects of interest rate movements on outstanding debt and bank overdraft balances.

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Competition and Technological Change The market for Rakon’s products is competitive and rapidly evolving. Rakon expects competition to intensify, which may result in price reductions, reduced margins or loss of market share. Rakon may be unable to compete successfully against current or future competitors. In the wireless market, Rakon also competes against products based on alternative location based technologies that do not rely on GPS, such as wireless infrastructure based systems. These systems are based on technologies that determine a caller’s location by measuring the timing differences of signals between individual base stations. If these technologies become more widely adopted, market acceptance of Rakon’s products may decline. Key Customers and Suppliers Rakon is highly dependent on ongoing positive relationships with key suppliers and customers. Rakon has few formal long term trading agreements and trading is typically conducted on a purchase order basis for a maximum of 90 day periods. Rakon has one sole supplier of die chips for TCXOs and there is no alternative or secondary supplier currently available to Rakon. TCXO sales are forecast to account for approximately 65% of FY2006 revenue. Additionally some of Rakon’s suppliers are also competitors. The loss of key suppliers or customers would have a negative adverse effect on Rakon’s business. To mitigate this risk, Rakon actively maintains close working relationships with these customers and suppliers, and is evaluating possible alternative suppliers of die chips and other key components. Dependency on Key Personnel Competition for qualified personnel is intense in Rakon’s industry and is amplified by Rakon’s geographic isolation. As a result Rakon may not be able to recruit and retain necessary personnel, which could impact the development or sales of Rakon products. Rakon’s success will depend on their ability to attract and retain senior management, engineering, sales, marketing and other key personnel. If Rakon is unable to retain their existing personnel, or attract and train additional qualified personnel, Rakon’s growth may be limited due to its lack of capacity to develop and market their products. Rakon’s continued success is also dependent

upon both Brent and Darren Robinson due to their established relationships with suppliers and customers coupled with their technical expertise. This dependence will be mitigated through the development of a formal succession plan to be implemented by the Board . New Product Development & Sales If Rakon is unable to develop and deliver new products or adapt existing products to keep pace with technological change, Rakon will be unable to expand its business. The market for high-volume consumer and commercial GPS based applications is characterised by rapidly changing technology, such as low power or smaller Form Factors. This requires Rakon to continuously develop new products and enhancements for existing products to keep pace with evolving industry standards and rapidly changing customer requirements. Development and delivery schedules for technology products are difficult to predict, and if Rakon does not achieve timely initial customer shipment of new products their reputation may suffer and net revenue may decline. Rakon’s ability to mitigate these risks depends on their ability to: •

accurately predict market requirements and evolving industry standards for the highvolume GPS based applications industry;

anticipate changes in technology standards, such as wireless technologies;

develop and introduce new products that meet needs in a timely manner; and

attract and retain engineering and marketing personnel.

If Rakon is unable to successfully develop and deliver competitive new products and enhance existing products or if Rakon’s customers do not successfully market and sell new products, Rakon’s financial results may be negatively impacted. Lengthy Sales Cycle Rakon has a lengthy sales cycle ranging from six months to two years, which makes it difficult for the Company to forecast revenue and increases the variability of earnings.


Rakon typically needs to obtain a design win, where their product is incorporated into a customer’s initial product design. In some cases, due to the rapid growth of new GPS applications and products and their prospective customers’ inexperience with GPS technology, this process can be time consuming and requires substantial investment of Rakon’s time and resources. After Rakon has developed and delivered a product to a customer, the customer often tests and evaluates Rakon’s product before designing their own product to incorporate Rakon’s technology. Rakon’s customers then need three to six months or longer to test and evaluate Rakon’s technology and an additional 12 months or more to begin volume production of products that incorporate Rakon’s technology. Because of this lengthy sales cycle, Rakon may experience delays from the time they increase their operating expenses and their investment in committing capacity, until the time that they generate revenue from these products. Also, a design win may never result in volume shipments. It is possible that Rakon may not generate sufficient, if any, revenue from these products to offset the cost of selling and completing the design work. Application Product Success Rakon’s success depends on their customers’ abilities to successfully sell their products incorporating its technology. Even if a customer selects Rakon’s technology to incorporate into its product, the customer may not ultimately market and sell its product successfully. A cancellation or change in plans by a customer, whether from lack of market acceptance of its products or otherwise, could cause Rakon to lose sales that it had anticipated. Also, business and operating results could suffer if a significant customer reduces or delays orders during the sales cycle or chooses not to release products that contain Rakon’s technology. Price Pressure The average selling prices of products in Rakon’s market have historically decreased rapidly and will likely do so in the future, which could impact upon revenue and profits. As is typical in the technology sector, the average selling price of a product historically

declines significantly over the life of the product. In addition, a larger proportion of the products Rakon develops and sells are used for high volume applications. In the past, Rakon has reduced the average selling price of its products in anticipation of future competitive pricing pressures, new product introductions by the Company and competitors and other factors. Rakon anticipates that it will have to similarly reduce prices in the future for mature products but aims to offset the average price decline through increased sales volumes, reducing costs, improving existing products and developing new or enhanced products on a timely basis with higher selling prices or gross margins. Head Office and Manufacturing Facility Rakon outsources the assembly of significant parts of its manufacturing process. However, its main manufacturing facility and head office is essentially located on one site in Auckland. Rakon has in place procedures to ensure disruption to the business is minimised in the event of a disaster and holds insurance cover for the facility and for business interruption. However, a major disaster may adversely affect Rakon’s business, financial performance, position and cash flow. Credit Risk Rakon is exposed to a concentration of credit risk with more than 65% of FY2006 and FY2007 revenue expected to come from 15 customers. A material default by one or more of Rakon’s key customers could adversely affect Rakon’s business, financial performance, position and cash flow. Intellectual Property A key competitive advantage of Rakon is its accumulated intellectual property in its product designs and proprietary testing systems and equipment. Rakon has not sought patent protection for most of its intellectual property as the patent process is seen as having a higher risk of revealing Rakon’s intellectual property to its competitors. As with any company which utilises intellectual property, there is a risk that third parties will seek to challenge Rakon’s ownership of, and right to use, intellectual property in certain manufacturing processes and product design, which could impact on Rakon’s ability to use the intellectual property until resolution is reached. To mitigate this

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risk, Rakon is implementing, to the extent commercially practicable, contractual safeguards with employees, suppliers and customers to protect its intellectual property ownership and usage rights and constantly evaluates the feasibility of seeking formal patent protection of its intellectual property. Adverse Changes in Accounting Standards Significant changes in accounting reporting standards could impact on the reported financial results of Rakon. Taxation Any change in tax legislation or the current rate of company income tax in each jurisdiction in which Rakon is subject to tax will impact on Rakon’s returns. Any new tax which is introduced may also impact on Rakon’s results or financial position. Any change to the current rates of income tax applying to individuals, companies and/or trusts similarly will impact on Shareholders’ after tax returns. Any reassessment of Rakon’s historic tax liabilities could have a material adverse effect on Rakon’s results or financial position. However, Rakon considers the likelihood of such reassessment to be low. Commercial and Compliance Rakon faces commercials risks such as competition, litigation, industrial disputes, operations risks, supply risks, and occupational health and safety issues and liabilities. Rakon seeks to manage these risks by implementing a range of formal and informal compliance programmes, procedures, training initiatives and audit processes. Other Risks Forward-Looking Statements Certain statements in this Offer Document constitute forward-looking statements, including the assumptions related to the prospective financial information set out on pages 54 to 56. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Rakon, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include but are not limited to, among other

things, exchange rates, reliance on equipment, general economic and business conditions, consumer preferences or sentiment, adverse product publicity, distribution arrangements, termination of key strategic relationships, failure of new initiatives, competition, the continued input of key personnel, regulatory risk, changes to tax legislation, sound labour relations and other factors referred to in this Offer Document. Given these uncertainties, investors are cautioned not to place undue reliance on such forward-looking statements in this Offer Document. In addition, under no circumstances should the inclusion of such forward-looking statements in this Offer Document be regarded as a representation or warranty by the Vendor, Rakon or any other person with respect to the achievement of the results set out in such statements or that the assumptions underlying such forward-looking statements will in fact be true. Rakon disclaims any responsibility to update any such risk factors or publicly announce the result of any revisions to the forward-looking statements contained in this Offer Document to reflect future developments or events, other than where it is required to do so by the Securities Act 1978, the Securities Regulations 1982 or the NZSX Listing Rules. Can the investment be altered? The full terms of the Share Offer, including the amounts payable on Application, are described on pages 19 to 23 of this Offer Document. Those terms may be altered by the Vendor and Rakon by filing an amendment to this Offer Document with the Registrar of Companies. However, those terms cannot be altered without investor consent after an Application has been accepted. The rights attaching to Shares are governed by the Constitution and the Companies Act. The Constitution may only be altered by a special resolution of Shareholders, subject to the rights of interest groups under the Companies Act, or in certain circumstances by court order. Section 117 of the Companies Act restricts Rakon from taking any action which affects the rights attached to the Shares unless that action has been approved by a


special resolution of Shareholders whose rights are affected by the action. A special resolution must be approved by a majority of at least 75% of the relevant Shareholders entitled to vote and voting on that resolution. Under certain circumstances, a Shareholder whose rights are affected under an action approved by a special resolution may require Rakon to purchase its Shares. How do I cash in my investment? Under certain provisions in the Companies Act 1993, the Shares could be cancelled by Rakon by a reduction of capital, share buy-back or other form of capital reconstruction. Subject to this, neither the Shareholders, Rakon, nor any other person has any right to terminate, cancel, surrender, or otherwise make or obtain payment from the Shares, other than as referred to in this Offer Document under the section titled “What Returns Will I Get?” Application has been made to NZX for permission to list the Shares and all the requirements of NZX relating thereto that can be complied with on or before the date of this Offer Document have been duly complied with. However, NZX accepts no responsibility for any statement in this Offer Document. Shares will be tradeable subject only to compliance with the Constitution, the NZSX Listing Rules, applicable laws (including the Takeovers Code, the Securities Act 1978 and the Overseas Investment Act 2005) and the continuation of an active trading market. At the date of registration of this Offer Document, there is no established market for Shares. However, in Rakon’s opinion, a market for the Shares is likely to develop. No charges are payable to Rakon in respect of any sale of Shares. Any sale of Shares on the NZSX will attract normal brokerage fees. Shares allocated in the Share Offer are expected to be quoted and tradeable on the NZSX under the symbol “RAK” from 16 May 2005. Applicants should not attempt to sell Shares until they know whether, and how many, Shares have been allocated to them. None of the Vendor, Rakon nor any person associated with the Share Offer, nor any of their respective Directors, officers, employees, consultants, agents, partners or advisers, accepts any liability or responsibility should any person attempt to sell or otherwise deal with Shares

before a statement of their initial holding is received by the Applicant for those Shares. Who do I contact with enquiries about my investment? Any enquiries about the Shares should be directed to any NZX Firm or: Computershare Investor Services Limited Level 2, 159 Hurstmere Road Private Bag 92 119 Auckland, New Zealand Phone: 09 488 8777 Facsimile: 09 488 8787 Is there anyone to whom I can complain if I have problems with the investment? Complaints about the Shares can be directed to Computershare Investor Services Limited at the address shown under the heading “Who Do I Contact With Enquiries About My Investment?” There is no ombudsman to whom complaints can be made about this investment. What other information can I obtain about this investment? Offer Document and Financial Statements This Offer Document comprises both a prospectus and an investment statement in respect of the Share Offer. Other information about the Shares, and Rakon is contained or referred to in the other sections of this Offer Document and in Rakon’s financial statements. This Offer Document, Rakon’s most recent financial statements, the Constitution and the material contracts referred to on pages 97 to 98 of this Offer Document may be inspected, free of charge, during normal business hours at Rakon’s registered office at One Pacific Rise, Mt Wellington, Auckland. These documents, and other documents of, or relating to, Rakon are also filed on a public register which can be accessed on the Companies Office website at www.companies.govt.nz. Where relevant documents are not available on the website a request for the documents can be made by contacting Searchlink at info@searchlink.co.nz. Searchlink may charge a fee for this service. Ongoing Reports to Shareholders Shareholders will receive periodic statutory reports, including an annual report (including

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annual audited financial statements), and all other Shareholder communications. The Company is also required to make halfyearly and annual announcements to NZX, and such other announcements as are required by the NZSX Listing Rules from time to time.

Rakon and every person acting on behalf of them are exempted from Securities Regulations 3(1) and 7A(1) of the Regulations insofar as those provisions would require this Offer Document to contain information about the Vendor as an Issuer of the Shares. This exemption is subject to the conditions that:

On Request Information Shareholders are also entitled to request copies of the following documents under section 54B of the Securities Act 1978:

this Offer Document contains a description of the effect of the exemption;

this Offer Document contains a statement to the effect that the Vendor:

(a) the most recent financial statements and all documents that are required to be incorporated in, attached to, or accompany, those financial statements;

– is an Issuer of the Shares; and – has obligations as an Issuer under the Securities Act 1978 and the Securities Regulations 1983; and

(b) the most recent registered prospectus and investment statement in respect of the Shares; • (c) a comparison of actual results against the prospective financial information set out in this Offer Document, once available; and (d) any other information that may be requested under regulation 23A of the Securities Regulations 1983. This information will be made available to Shareholders, free of charge, upon a request in writing being made to Rakon at its registered office at One Pacific Rise, Mt Wellington, Auckland. Exemptions from the Securities Act and Securities Regulations Regulations 3(1) and 7A(1) of the Regulations Under the terms of the Securities Act (Rakon Limited) Exemption Notice 2006, the Vendor,

Rakon holds all monies received from the public in connection with an Application for Shares on trust until those Shares have been allotted.

Waivers from the NZSX Listing Rules NZX has granted a waiver from the requirements of NZSX Listing Rule 8.1.5 in relation to the Plan Shares held for the benefit of Brent Robinson and Darren Robinson as each of them will hold Partly Paid Plan Shares under the Share Growth Plan which are non-voting. NZSX Listing Rule 8.1.5 provides for partly paid Shares to have voting rights in proportion to the amount paid up.


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Statutory Information 92

The information in this section is included in accordance with the requirements of the First Schedule to the Securities Regulations. Each of Rakon and the Vendor is an Issuer of the Shares, and has obligations as an Issuer, within the terms of the Securities Regulations. However, under the Securities Act (Rakon Limited) Exemption Notice 2006, Rakon, the Vendor and every person acting on behalf of either of them, are exempted, subject to certain conditions, from compliance with Regulations 3(1) and 7A(1) of the Securities Regulations insofar as that provision would require this Offer Document to contain information about the Vendor, as an Issuer of the Shares within the terms of the Securities Act. 1. Main Terms of Offer The Issuer of the Shares is Rakon Limited, which has its registered office at One Pacific Rise, Mt Wellington, Auckland. The Shares being offered are ordinary shares in Rakon. A summary of the Shares being offered is set out on pages 78 to 80 under the heading “What sort of investment is this?”. The maximum number of Shares being offered under this Offer Document is 41,250,000. The Offer Price for the Shares is $1.60 per Share. 2. Name and Address of Offeror The Vendor is the offeror of the Shares and its registered office is at 203 Manukau Road, Epsom, Auckland. The net amount of the consideration received by Rakon in respect of the original allotment of the Shares offered by the Vendor under the Share Offer (being 112,398 Shares prior to the share split) was $112,398 at $1 per Share. 3. Details of Incorporation of Issuer Rakon was incorporated in New Zealand on 9 August 1990 under the Companies Act 1955 and re-registered under the Companies Act 1993 on 26 July 1996. The Company’s registration number is 480247. The public register relating to Rakon is available for public inspection on the New Zealand Companies Office electronic register at

www.companies.govt.nz. Where relevant documents are not available on the website, they may be requested by contacting Searchlink at info@searchlink.co.nz. 4. Principal Subsidiaries of Issuer As at the date of this Offer Document Rakon has no subsidiary which has total tangible assets exceeding 5% of the amount of the total tangible assets of Rakon. 5. Directorate and Advisers The name, technical or professional qualifications and city of residence of each Director of Rakon are set out on pages 41 to 42: The Directors can be contacted at the registered office of Rakon at One Pacific Rise, Mt Wellington, Auckland. Brent Robinson and Darren Robinson are the only Directors who are also employees of Rakon. Brent Robinson is Managing Director and Darren Robinson is Marketing Director. No Director of Rakon has been adjudged bankrupt during the five years preceding the date of this Offer Document. The name and address of each of Rakon’s auditor and securities registrar, and the NZX Firms and solicitors who have been involved in the preparation of this Offer Document are set out in the Directory. Rakon does not have a company secretary. There are no experts named in this Offer Document. The Share Offer is underwritten and the name and address of the Underwriter is set out in the Directory. 5A. Restrictions on Directors’ Powers The Constitution incorporates by reference the requirements of the NZSX Listing Rules. The principal modifications, exceptions or limitations on the powers of the Board imposed by the Constitution (including the requirements incorporated into the Constitution) are that the Board may not: (a) issue or acquire any equity securities


except in accordance with the provisions of the Constitution and the NZSX Listing Rules; (b) give financial assistance for the purpose of, or in connection with, the acquisition of equity securities issued or to be issued, except in limited circumstances and in accordance with the provisions of the Constitution and the NZSX Listing Rules; (c) cause Rakon to issue, acquire or redeem securities in relation to a person or group of associated persons entitled before the issue, acquisition or redemption to exercise or direct the exercise of not less than 1% of the total votes attaching to Rakon’s securities, where there is a significant likelihood that it will result in that person or group of persons materially increasing their ability to exercise or direct the exercise of effective control of Rakon, without the prior approval of an ordinary resolution of Shareholders; (d) cause Rakon to enter into any transaction or series of linked or related transactions to acquire, sell, lease, exchange or otherwise dispose of (otherwise than by way of charge) assets of Rakon which would change the essential nature of the business of Rakon in respect of which the gross value is in excess of 50% of the average market capitalisation of Rakon, without the prior approval of an ordinary resolution of Shareholders; and (e) enter into certain material transactions with related parties if that related party is, or is likely to become, a direct or indirect party to the material transaction or at least without the prior approval of an ordinary resolution of Shareholders. In addition, individual Directors may not vote on any matter in which he or she is interested unless permitted by the Companies Act where he or she has complied with the relevant provisions and signed a certificate in respect of the matter. The Companies Act contains a number of other provisions that could have the effect, in certain circumstances, of imposing modifications, exceptions or limitations on the powers of the Board. For example, Directors cannot allow the

Company to enter into any major transaction (as that term is defined in the Companies Act) without the prior approval of a special resolution of Shareholders. These provisions apply to any company registered under the Companies Act. 6. Substantial Equity Security Holders of Issuer The following table sets out the names of all registered holders of Shares as at the date of this Offer Document:

Shareholder

Number of shares

%

Ahuareka Trustee Limited

37,767,799

37.8

Simon Palmer (as nominee for Ahuareka Trustee Limited)

21,292,225

21.3

Tahia Investments Limited

16,523,218

16.5

Brent Robinson

9,914,180

9.9

Darren Robinson

9,914,180

9.9

Zeus Zeta Limited

3,304,830

3.3

Marjorie Robinson

424,431

0.4

Rakon ESOP Trustee Limited

859,137

0.9

None of the persons named above guarantees, or undertakes any liability in respect of, the Shares.

As required by Listing Rule 7.1.15 on 3 April 2006, Rakon requested all registered holders of 5% or more of the voting securities of Rakon to disclose any relevant interest and the nature of that relevant interest held by them and the consideration and other terms and conditions or any transaction under which they acquired their shares. On 3 April 2006 the holders provided the following disclosures:

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Relevant Interest Holder

No. of Shares

Nature of Relevant Interest

Consideration and other Terms

Ahuareka Trustee Limited (as trustee of the Ahuareka Trust)

254,702

Legal and registered title in 121,286 shares, held as trustee of the Ahuareka Trust for the benefit of the Ahuareka Trust (being present and future members and relatives of the Robinson family, including Warren Robinson, Brent Robinson and Darren Robinson) in favour of whom the trustee may exercise its discretion from time to time. 68,377 shares are held by Simon Palmer as nominee of Ahuareka Trustee Limited (see below). Title to these shares will transfer to Ahuareka Trustee Limited upon the closing of the Share Offer. 65,039 shares are held by associated persons.

121,286 shares acquired on 11 November 2005 by way of liquidator’s distribution of the assets of R ise Holdings Limited (in liquidation).

Simon Palmer (as nominee of the Ahuareka Trust)

191,026

Legal and registered title in 68,377 shares, held as nominee of Ahuareka Trustee Limited. Legal title to these shares will transfer to Ahuareka Trustee Limited upon the closing of the Share Offer. 122,349 shares will be held by associated persons.

68,377 shares acquired as nominee for Ahuareka Trustee Limited on 19 October 2005 for consideration (paid by way of loan capitalisation) of $12,886,009

Warren Robinson

254,702

189,663 shares are held by Ahuareka Trustee Limited and its nominee, Simon Palmer (see above). Warren Robinson is the controlling Shareholder and director of Ahuareka Trustee Limited. 65,039 shares are held by associated persons.

See details relating to Ahuareka Trustee Limited above

Brent Robinson

254,702

Legal and registered title in 31,838 shares. 222,864 shares held by associated persons.

25,000 shares acquired over time for (in aggregate) consideration of $25,000. 6,838 shares acquired on 24 January 2006 by way of distribution by the trustee of the Ahuareka Trust

Darren Robinson

254,702

Legal and registered title in 31,838 shares. 222,864 shares held by associated persons.

25,000 shares acquired over time for (in aggregate) consideration of $25,000. 6,838 shares acquired on 24 January 2006 by way of distribution by the trustee of the Ahuareka Trust

Tahia Investments Limited

63,675

Legal and registered title in 53,062 shares. Tahia Investment Limited is controlled by interests associated with Peter Maire. 10,613 shares held by an associated person.

53,062 shares acquired from Rise Holdings Limited (now in liquidation) for consideration of $10 million.

Notes: 1 To comply with legal requirements, some interests are counted more than once 2 The above information is stated as at 3 April 2006 and therefore pre-dates and does not take into account the share split of 311.394549 for one undertaken by Rakon on 12 April 2006 and the intended issue of the Options and Plan Shares

None of the persons named above guarantees, or undertakes any liability in respect of, the Shares.


7. Description of Activities of the Issuing Group Rakon Limited and its Subsidiaries (Rakon Group) are the issuing group for the purposes of the Securities Regulations. During the five years preceding the date of this Offer Document, the principal activities of the Rakon Group have been the development, production and distribution of high performance Quartz Crystal components. Information about the current activities of the Company is set out in the section of this Offer Document entitled Rakon Business Profile on pages 31 to 39. The principal fixed assets held by the Rakon Group are leasehold improvements, plant and equipment which are owned or held under lease. Those assets are all used by members of the Rakon Group in carrying on their business activities. 8. Summary of Financial Statements Financial statements, in summary form, for the Rakon Group in respect of each of the five consecutive accounting periods ended 31 March 2005 and for the eight months ended 30 November 2005, are set out under the heading “Historical Five-Year Summary Financial Information” on pages 13 to 15 of this Offer Document. The information contained in the summary of financial statements for the five consecutive accounting periods ended 31 March 2005 is derived from the audited financial statements for the Rakon Group for each accounting period. The information contained in the summary of financial statements for the eight months ended 30 November 2005 has been taken from the audited interim financial statements of the Rakon Group for that accounting period. 9. Prospects and Forecasts A statement as to the trading prospects of the Rakon Group, together with any material information that may be relevant to those prospects, is set out in the section of this Offer Document entitled “Rakon Business Profile” on pages 31 to 39 and, more particularly, in the section entitled “Prospective Financial Information” on pages 54 to 56. Any special trade factors and risks which could materially affect the prospects of Rakon and which

are not likely to be known or anticipated by the general public are set out under the heading “What are my risks?” on pages 82 to 88. It is not the purpose of the Share Offer to provide finance for any particular capital project. 10. Provisions Relating to Initial Floatation The plans of the Directors in respect of Rakon during the 12-month period commencing on the date of this Offer Document are to continue the business and trading activity of Rakon as described under the heading Rakon Business Profile on pages 31 to 39. The source of finance required for these plans will be funds received from the issue of new Shares pursuant to the Share Offer operating cash flows, working capital and borrowings and other financial accommodation considered appropriate by the Company during that year. Notwithstanding the plans of Directors, the proceeds of the Share Offer may be applied towards any other undertaking in which Rakon may lawfully engage. A prospective statement of cash flows of the Rakon Group which the Directors expect to occur in the year commencing on the specified date as set out below: Forecast Statement of Cash Flows of the Rakon Group for 12 month period from 13 April 2006 $000 Net Cash Flow from Operating Activities Payments for Property, Plant & Equipment

5,216 10,178

Net Cash Flow from Investing Activities Issue of Ordinary Shares Cost of Share Issue

$000

(10,178) 10,000 (500)

Net Cash Flow from Financing Activities

9,500

Net Increase (Decrease) in Cash Held

4,538

Opening Cash Balance at 13 April 2006

(9,714)

Closing Cash Balance at 12 April 2007

(5,176)

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This prospective statement of cash flows should be read in conjunction with the general and company-specific assumptions underlying the prospective financial information set out on pages 54 to 56 of this Offer Document. Additionally the opening cash balance has been determined on the assumption that cash receipts are received and payments made evenly over each month. It is intended that the new capital raised by the Share Offer will be used to fund investment in new product development, manufacture of equipment to produce new products and to increase production capacity. The minimum amount that, in the opinion of the Directors, must be raised in order to provide sums required to be provided in respect of: (a) the purchase price of any property to be purchased which is to be defrayed in whole or in part out of the proceeds of the Share Offer; (b) any preliminary expenses or commission;

On 19 October 2005 Rakon issued 68,377 new fully-paid ordinary Shares to Simon Palmer as nominee of the then trustees of the Ahuareka Trust as repayment of consolidated shareholder loans of $12,886,009. Upon the closing of the Share Offer, the Shares held by Simon Palmer will transfer to and will be held by Ahuareka Trustee Limited as trustee of the Ahuareka Trust. 13. Options to Subscribe for Securities of the Company Rakon will be granting 1.9 million Options to certain Eligible Employees to acquire Shares upon the terms and conditions set out in the Employee Share Option Scheme, as described on pages 47 to 49. Subject to those terms and conditions, each Option will entitle the Option Holder to acquire one Share ranking equally in all respects with all other Shares on issue at the date on which the Option is exercised, except for any dividend in respect of which the record date occurred prior to that date. There is no Application fee or other sum payable for the Options, but an Exercise Price of $1.60 will be payable before the Options can be exercised and converted to Shares.

(c) working capital; and (d) the repayment of any money borrowed by the Company in respect of any of the foregoing matters, is $10.0 million. 11. Acquisition of Business or Subsidiary No business or subsidiary has been acquired by Rakon in the two years prior to the date of this Offer Document. 12. Securities Paid up Otherwise than in Cash No member of the Rakon Group has, within the five years preceding the date of this Offer Document, allotted to any person who is not a member of the Rakon Group any securities paid up otherwise than in cash. On 12 April 2006 Rakon undertook a 311.394549 for 1 share subdivision in respect of every share then on issue, which increased the number of fully paid Shares on issue from 321,136 to 100,000,000 Shares.

The Options will lapse if not exercised during the Exercise Period. The total number of Shares under Option will be 3 million on the basis that all Options approved under the Employee Share Option Scheme will be granted and exercised. All of the Options to be granted will be granted to persons who are employees of Rakon. No Options will be granted to Directors. 14. Appointment and Retirement of Directors None of the existing Directors of Rakon has been appointed to the Board in a manner that is materially different from that specified in sections 153 and 155 of the Companies Act. Rakon’s Constitution contains no provision concerning the retirement age of Directors. No person (other than the Shareholders of Rakon in general meeting or the Directors acting as a Board to fill a casual vacancy) has the right to appoint any Director.


Each Director has the power to appoint any person an alternate Director, who may be any person not disqualified by the Companies Act and who is approved by a majority of the other Directors. 15. Directors’ Interests Except for Brent Robinson and Darren Robinson, no Director of Rakon is entitled to any remuneration from Rakon or any of its subsidiaries other than by way of Directors’ fees and reasonable travelling, accommodation and other expenses incurred in the course of performing duties or exercising powers as a Director. Brent Robinson is Managing Director and Darren Robinson is Marketing Director, each providing management and executive services to Rakon. Brent will receive a salary of $520,000 per annum and Darren will receive $450,000 per annum. Both are eligible to receive a performance bonus of up to an additional 30% based upon a number of key performance indicators established by the Remuneration Committee and a motor vehicle allowance. Brent and Darren will also receive Plan Shares under the Share Growth Plan, described on pages 48 to 49 of this Offer Document. The salary and benefits packages for Brent and Darren Robinson have been approved by the Remuneration Committee of the Board. Rakon has granted its Directors and former Directors from time to time an indemnity to the maximum extent permitted by the Companies Act and the Constitution. Rakon also maintains insurance for its Directors to the maximum extent permitted by the Companies Act. The following material transactions (within the meaning of the Securities Regulations) have been entered into by Rakon or any of its subsidiaries during the five years preceding the date of this Offer Document: (a) certain advances between Rakon and Brent Robinson made during the course of the past five years. Funds advanced attracted interest at the 90 day bill rate plus 2.25%. On 31 March 2006 the outstanding aggregate net balance of the advances of $109,955.43 was repaid in full; (b) various Shareholder advances between

Rakon and the trustees of the Ahuareka Trust made during the course of the past five years, under which the Ahuareka Trust advanced Rakon funds on an interest free basis. On 19 October 2005 the outstanding aggregate balance of the advances of $12,886,009 was repaid in full by way of the issue by Rakon of 68,377 new Shares; (c) certain advances between Rakon and Darren Robinson made during the course of the past five years. Funds advanced attracted interest at the 90 day bill rate plus 2.25%. On 31 March 2006 the outstanding aggregate net balance of the advances of $160,251.45 was repaid in full; (d) certain advances between Rakon and Sigma Electronics Limited (a company controlled by Robinson family interests) made during the course of the past five years under which Sigma Electronics Limited advanced Rakon funds attracting interest at the 90 day bill rate plus 2.25%. On 31 March 2006 the outstanding aggregate balance of the advances of $80,630.85 was repaid in full; (e) On 23 August 2005, Rakon entered into two Deeds of Lease with Trident Investments Limited (a company controlled by Robinson family interests) under which Rakon leases its head office and manufacturing premises. Aggregate annual rent payable by Rakon to Trident Investments under these leases, based on independent valuations, is $548,485. Further details of these leases are set out below under the heading “Material Contracts” 16. Promoter’s Interests There is no Promoter of the Shares offered by this Offer Document. 17. Material Contracts The following material contracts (not being contracts entered into in the ordinary course of business) have been entered into by a member of the Rakon Group during the two years preceding the date of this Offer Document: Underwriting Agreement Rakon and the Vendor have entered into an underwriting agreement with the Lead

97


98

Manager dated 12 April 2006 pursuant to which the Lead Manager has agreed to underwrite the Offer. Rakon and the Vendor have given certain warranties and undertakings to the Lead Manager who has rights to terminate the underwriting agreement in certain circumstances generally involving a material adverse event affecting the Company or the Offer. Shareholder Restriction Deed The Vendor, Tahia Investments Limited, Zeus Zeta Limited and certain members of the Robinson family (including Brent and Darren Robinson) have entered into a shareholder restriction deed dated 12 April 2006 with Rakon and the Lead Manager in which those shareholders have agreed that until 30 days after the Company’s preliminary announcement to NZX for the year ending 31 March 2007 they will not dispose of, or agree or offer to dispose of, Shares they hold, or create any security interest in such Shares, without first obtaining the consent of the Company and the Lead Manager, or in connection with a takeover offer under the Takeovers Code.

pending as at the date of this Offer Document that may have a material adverse effect on the Rakon Group. 19. Preliminary and Issue Expenses Issue expenses (including brokerage and lead management fees, share registry expenses, legal fees, investment advisory fees, accounting fees, advertising costs, printing costs and postage and courier costs relating to the Share Offer) are estimated to amount to an aggregate of $4.3 million. This assumes that the Share Offer is fully subscribed. Rakon will pay $1.0 million of the issue expenses and the Vendor will pay the balance of all costs associated with the Share Offer. Rakon and the Vendor will pay the following brokerage and commission fees: (a) to UBS as Lead Manager, a brokerage fee of 1.5% of the proceeds in respect of Shares allotted pursuant to valid Applications submitted by Institutional Investors;

Deeds of Leases On 23 August 2005, Rakon entered into two Deeds of Lease with Trident Investments Limited (a company controlled by Robinson family interest) under which Rakon leases its head office and manufacturing premises at 1a and 1b, and 3, Pacific Rise, Mt Wellington, Auckland. Each of the leases are on standard fourth edition Auckland District Law Society terms and have an initial term of 10 years commencing 1 July 2005, with two rights of renewal in five years.

(b) to UBS as Underwriter, an underwriting commission of 1.5% of the aggregate proceeds of the Share Offer; and

Ahuareka Trust Shareholder Advance Over a period of time Rakon’s majority Shareholder, the Ahuareka Trust (of which the Vendor is the current trustee), has advanced Rakon funds on an interest free basis. On 19 October 2005 the outstanding aggregate balance of the advances of $12,886,009 was repaid in full by way of the issue by Rakon of 68,377 new Shares to Simon Palmer as nominee if Ahuareka Trustee Limited. No formal documentation was entered into by Rakon with the Ahuareka Trust in relation to these advances.

20. Restrictions on Issuing Group Other than the restrictions contained in the banking facilities Rakon has with ASB Bank Limited, there are no restrictions on the ability of the Rakon Group to make a distribution or to borrow, being restrictions which result from any undertaking given or any contract or debt entered into by any member of the Rakon Group.

18. Pending Proceedings There are no legal proceedings or arbitrations

(c) to UBS for on-payment to NZX Firms and financial intermediaries, a retail brokerage fee of 1.5% of the proceeds in respect of Shares allotted pursuant to valid Applications submitted by NZX Firms and financial intermediaries and bearing their stamp.

Under the terms of the ASB Bank facilities Rakon is subject to the usual financial covenants as to debt/equity levels and restrictions on declaring dividends, additional borrowings and on pledging assets as security for additional borrowings without ASB approval.


21. Other Terms of Offer and Securities All of the terms of the Share Offer, and all the terms of the Shares, are set out in this Offer Document, other than those implied by law or which are set out in a document that has been registered with a public official, are available for public inspection and is referred to in this Offer Document. 22-38. Financial Statements Consolidated audited interim financial statements of Rakon required by clauses 22 to 37 of the First Schedule to the Securities Regulations for the year ended 31 March 2005 and for the eight months ended 31 November 2005 are set out in the section of this Offer Document entitled “Financial Information” on pages 51 to 75. Clause 38 does not apply to Rakon. 39. Places of Inspection of Documents The Constitution of Rakon and, subject to the following paragraph, copies of the material contracts referred to above under the heading “Material Contracts” may be inspected (without charge) during the period of the Share Offer during normal business hours at the registered office of Rakon at One Pacific Rise, Mt Wellington, Auckland. Copies of those documents are also available for public inspection on the Companies Office electronic register at www.companies.govt.nz. Where relevant documents are not available on the website, they may be requested by contacting Searchlink at info@searchlink.co.nz.

40. Other Material Matters There are no other material matters relating to the Share Offer, other than those set out in this Offer Document and in contracts entered into in the ordinary course of business of the Rakon Group. 41. Directors’ Statement The Directors of Rakon, after due inquiry by them in relation to the period between 30 November 2005 and the date of this Offer Document, are of the opinion that no circumstances have arisen that materially adversely affect the trading or profitability of the Rakon Group, the value of the Rakon Group’s assets or the ability of the Rakon Group to pay its liabilities due within the next 12 months. 42. Auditors’ Report The Auditors’ report required by clause 42 of the First Schedule to the Securities Regulations is set out in the sections of this Offer Document entitled “Auditors’ Report” on pages 76 to 77. Signed by or on behalf of the sole director of Ahuareka Trustee Limited: Warren Robinson Signed by or on behalf of each Director of Rakon Limited: Bryan Mogridge, Bruce Irvine, Warren Robinson, Peter Maire, Brent Robinson, Darren Robinson.

99


Glossary - Offer terms 100

Allotment

The issue of Shares by Rakon to successful Applicants

Allotment Date

The first date upon which Shares under the Share Offer are issued to Shareholders, estimated to be 15 May 2006

Applicant

An Applicant for Shares under the Share Offer

Application

An Application to subscribe for Shares under this Offer Document

Application Forms

The Application Form at page 105 to subscribe for Shares under the Share Offer

Board

The board of Directors of Rakon

Business Day

Day on which NZX is open for trading

CAGR

Cumulative Average Growth Rate

Closing Date

12 May 2006 for Firm Allocations, 5 May 2006 for the Prioity Offer and 12 May 2006 for any other Applications, unless brought forward or extended by Rakon

Company

Rakon Limited

Computershare

The Share Registrar, Computershare Investor Services Limited

Constitution

Rakon’s Constitution

Directors

The directors of Rakon

EBIT

Earnings before interest and tax

EBITA

Earnings before interest, tax and goodwill amortisation

EBITDA

Earnings before interest, tax, depreciation and goodwill amortisation

Eligible Employee

An employee of Rakon Limited that has been offered Options under the ESOP

Employee Share Option Scheme

The Rakon Employee Share Option Scheme, details of which are set out on pages 47 to 49 of this Offer Document

EV

Enterprise Value

Exercise Price

The Exercise Price for the Options issued pursuant to the Option Offer, being $1.60

Existing Shareholders

Ahuareka Trustees Limited, Brent Robinson, Darren Robinson, Marjorie Robinson, Tahia Investments Limited and Zeus Zeta Limited

FASTER Statements

Firm Allocation

FASTER is the trading system used on the NZX. FASTER – Fully Automated Screen Trading and Electronic Registration. The FASTER statement will confirm settlement and registration of an Applicant’s Shareholding of Shares A binding commitment pursuant to which the entity accepting a Firm Allocation is bound to submit a valid Application or Applications which in aggregate equals the amount of the Firm Allocation, or if the entity is an NZX Firm to submit valid Applications by clients bearing the stamp of the NZX Firm or intermediary for their amount of the Firm Allocation, or failing that, submit a valid Application for any shortfall as principal.

FY

Financial year, e.g. FY2006 is the financial year ending 31 March 2006

Institutional Investor

An entity whose principal business is the investment of money or who habitually invest money, or whose Application is more than $1 million


Issuer

Rakon Limited and the Vendor

Lead Manager

UBS New Zealand Limited

New Zealand GAAP

Generally accepted accounting practice in New Zealand

NPAT

Net profit after tax

NZSX

The NZX premier equities market on which the Shares will be quoted

NZX

New Zealand Exchange Limited

NZX Firms

Sharebroking firms authorised to trade shares on NZX

Offer Document

This combined prospectus and investment statement dated 13 April 2006 for the purposes of the Securities Act and the Securities Regulations

Offer Price

The price for each Share under the Share Offer

Option

An Option to acquire one Share in accordance with the Employee Share Option Scheme

Option Holder

The person that holds Options granted pursuant to the Employee Share Option Scheme

Organising Participant

UBS New Zealand Limited

Plan Shares

The partly-paid redeemable Ordinary Shares being issued under the terms of the Share Growth Plan

Priority Applicant

An Applicant for Shares under the Priority Offer

Priority Application

An Application to subscribe for Shares under the Priority Offer

Priority Offer

The offer of Shares to employees, Directors and business associates of Rakon, as set out under the heading “Priority Offer”

Rakon

Rakon Limited

Rakon Group

Rakon and its wholly-owned subsidiaries, Rakon America LLC, Rakon Singapore (Pte) Limited and Rakon International Limited

Retail Investors

Applicants who are not Institutional Investors

RIL

Rakon Industries Limited, the original company incorporated by Warren Robinson when he founded the Rakon business in 1967

Securities Act

Securities Act 1978

Securities Regulations

The Securities Regulations 1983

Share

An ordinary share in Rakon

Shareholder

A holder of shares

Share Growth Plan

The Rakon Share Growth Plan, details of which are set out on pages 48 to 49 of this Offer Document

Share Offer

The offer of Shares under this Offer Document

Share Registrar

Computershare Investor Services Limited

Takeovers Code

The Takeovers Code set out in the Schedule to the Takeovers Code Approval Order 2000

Underwriter

UBS New Zealand Limited

Vendor

Ahuareka Trustee Limited

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Glossary - Technical terms 102

BVQI

Bureau Veritas Quality International

CDXO

Calibrated dual Crystal Oscillator

Crystal

A solid formed by the solidification of a chemical and having a highly regular atomic structure

E-911

Enhanced-911, an US Federal Communications Commissioned mandate

EPIRB

Emergency position indicating radio beacon

Form Factor

The physical size of a device as measured by outside dimensions

Geocaching

A sport or hobby involving hiding and finding objects, using GPS data to find the location of the cache

GPS

Global position system

High Resolution

Multiple frequency measurements over the full temperature range detecting randomly occuring micro-jumps due to temperature changes

LBS

Location based services offered by mobile phone operators

MEMS

Microelectromechanical systems

Oscillator

An electronic circuit that generates a specific tone or frequency

OCXO

Oven controlled Crystal Oscillator

OEM

Original equipment manufactures

PDA

Personal digital assistant

Piezoelectric Effect

A physical phenomenon exhibited by Quartz Crystals which change their dimensions when subjected to an electrical charge. Conversely, when subjected to mechanical stress it creates an electrical charge

Quartz Crystal

A hexagonal Crystal of silicon dioxide

RSX Crystal

An AT-cut Quartz Crystal encased in ceramic packaging

SMD

Surface mount device

TCXO

Temperature compensated Crystal Oscillator

Telematics

The integration of wireless communications, vehicle monitoring systems and location devices

VCXO

Voltage controlled Crystal Oscillator

VoIP

Voice over internet protocol

VSAT

Very small aperture terminal

UM Crystal

A high performance AT-cut Crystal that is packaged in metal, with formed legs for a surface mounting


Application Instructions for Shares INSTRUCTIONS You should read this Offer Document carefully before completing the Application Form included with and forming part of this Offer Document. Applications for Shares must be made on the Application Form accompanying this Offer Document. GENERAL Applications must be for a minimum of 3,000 Shares except for Applications under the Priority Offer which must be for a minimum of 1,000 Shares.

THE APPLICATION FORM Please complete all relevant sections of the Application Form using CAPITAL BLOCK LETTERS. 1. INSERT YOUR DETAILS (a) Enter your FULL NAME. Up to three Applicants may apply jointly. You should refer to the table on the back of the Application Form under the heading “Correct Form of Registrable Names” for the correct form of name that can be registered. Applications using the wrong form of name may be rejected for that reason.

Applications for Shares may be lodged from the opening date of the Share Offer on 18 April 2006. The Share Offer will remain open until, in the case of the Priority Offer, 5.00pm on 5 May 2006, and otherwise until 5.00pm on 12 May 2006; or such other date as Rakon and the Vendor may determine. An Application must be completed in full and may be rejected if any details are not entered. Rakon and the Vendor reserves the right to decline any Application, in whole or in part, without giving any reason. The Vendor’s and Rakon’s decision as to whether to reject the Application, or to treat it as valid (and then how to construe, amend or complete the Application Form) will be final.

(b) Enter your POSTAL ADDRESS for all correspondence. All communications to you from Rakon Limited (statements, distribution cheques, periodic reports, correspondence etc) will be mailed to you at the address as shown. For joint Applicants, only one address is to be entered. Please let us know your TELEPHONE NUMBER(S) in case we need to contact you in relation to your Application.

An Application will constitute an irrevocable offer by the Applicant to subscribe for and acquire the number of Shares specified on the Application Form (or such lesser number which Rakon, the Vendor and the Lead Manager may determine) on the terms and conditions set out in this Offer Document and on the Application Form. By submitting an Application Form, Applicants agree to be bound by these terms and conditions and Rakon’s Constitution. Rakon’s, the Vendor’s and the Lead Manager’s decision on the number of Shares to be allotted to any Applicant will be final.

(d) If you wish any distributions to be credited directly to an account with your bank, ensure that the appropriate details are entered.

None of the Vendor, Rakon, the Lead Manager nor any of their respective officers, employees or advisers accept any liability or responsibility should any person attempt to sell or otherwise deal with the Shares before the statements confirming Allotments are received by the Applicants for the Shares.

(c) Insert the NUMBER OF SHARES and corresponding DOLLAR AMOUNT (at the price of $1.60 per Share) you wish to apply for.

(e) If you currently have a Computershare Investor Services Shareholder number or a Common Shareholder Number, please enter it in the box provided. (f) If the Application Form is for Shares under the Priority Offer you should indicate this by ticking the appropriate box on the Application Form. (g) Read the declaration carefully and SIGN the Application Form. It must be signed by Applicants personally. Companies or other bodies corporate must sign in the same way as they would sign a formal deed or other formal legal document. Applications may, in either case, be executed by an attorney. If your Application Form is

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104

signed by an attorney, the power of attorney document is not required to be lodged, but the attorney must complete the certificate on the reverse of the Application Form. Joint Applicants must all sign the Application Form. 2. PAYMENT Full payment for the Shares applied for in the Application Form based on the Price must accompany each Application Form. Payment must be made by a cheque drawn on a New Zealand bank, for New Zealand dollars, for value immediately. Post-dated cheques will not be accepted. Please ensure that the total of the cheque equals the amount payable. If the acCompanying payment is for the wrong amount, your Application (at Rakon’s and the Vendor’s discretion) may or may not be treated as valid. Make the cheque payable to Rakon Share Offer and cross it Not Transferable. Sufficient cleared funds should be held in your account as cheques returned unpaid are likely to result in your Application being rejected or your Allotment being cancelled. Staple your cheque to the Application Form. Institutional Investors must pay in immediately cleared funds. Until the issue of Shares, Application money will be held in a separate account for your and Rakon’s benefit, according to the respective entitlements. Interest earned on Application money will be retained by the Vendor and Rakon. Money received in respect of Applications which are declined in whole or part will be refunded in whole or part (as the case may be) by 15 May 2006. Interest will not be paid on any Application money refunded.

3. DELIVERY Applications cannot be revoked or withdrawn. Application Forms must be mailed or delivered with payment to arrive before 5.00pm on 11 May 2006; to: Rakon Share Offer C/- Computershare Investor Services Limited Level 2 159 Hurstmere Road Private Bag 92119 Auckland New Zealand You may deliver your Application to any NZX Firm or the Organising Participant, or in accordance with any other channel approved by NZX, but must deliver it in time to enable the Application Form to be forwarded to the Share Registrar before the relevant closing time referred to above. Please lodge your Application Form AS SOON AS POSSIBLE. 4. PERSONAL INFORMATION Personal information provided by you in completing the Application Form will be held by the Share Registrar. The information will be used by the Share Registrar and Rakon for administration purposes relating to your Application and, where applicable, issue and holding of Shares. If you do not provide all information required by the Application Form, Rakon may decline to accept your offer to subscribe for Shares. Pursuant to the Privacy Act 1993, you have a right of access to, and correction of, the personal information held about you. The addresses of each of the Share Registrar and Rakon are set out in the directory on the inside back cover.


Directory

Rakon Limited – worldwide leaders in crystal & oscillator technology Facing supply issues obtaining channel crystals for his

Rakon grows with a reputation for flexibility and service.

The advent of synthesisation causes a rapid shrink in

With mobile phone manufacturing moving back to

marine radio business Warren Robinson sells his business

Operations are started in Singapore to service the South East

the channel crystal market. The business, under Brent

the Japanese market, Rakon began looking for new

and starts a new company, Rakon Industries Limited.

Asian market.

Robinson, develops new TCXO technology and starts

applications, and found the emerging GPS technology to

exploring new application markets.

be a perfect fit.

1960s

1970s

1980s

communications

Two way radios of this time were required to

i

Early mobile phones required a stable

defence

i

Auditors to the Share Offer PricewaterhouseCoopers PricewaterhouseCoopers Tower 188 Quay Street Private Bag 92162 AUCKLAND Telephone: 09 355 8000 Facsimile: 09 355 8001 Lead Manager and Underwriter UBS New Zealand Limited Level 17, PricewaterhouseCoopers Tower 188 Quay Street PO Box 45 AUCKLAND Telephone: 09 913 4800 Facsimile: 09 913 4877

GPS required an ultra-stable, but small mobile

operate on several channels. Each radio channel

temperature compensated crystal oscillator,

phone like TCXO. Rakon developed the world’s

would require a pair of crystals, one for transmit

Rakon developed products that out performed

smallest 1ppm oscillator and soon became

and one for receive.

their competitors and supplied these into NEC

standard for GPS references.1

1

Directors of Rakon Limited Bryan Mogridge Brent Robinson Bruce Irvine Peter Maire Darren Robinson Warren Robinson

1990s

consumer

Registered Office of Issuer Rakon Limited One Pacific Rise Mt Wellington Private Bag 99943 Newmarket AUCKLAND Telephone: 09 573 5554 Facsimile: 09 573 5559

i

Share Registrar Computershare Investor Services Limited 159 Hurstmere Road North Shore Private Bag 92119 AUCKLAND 1020 Telephone: 09 488 8700 Facsimile: 09 488 8787

Australia.

After initially developing a crystal making process

Average annual production and income by decade.2

in his garage, Warren expands the process into a

Units

full manufacturing environment.

Revenue

120 thousand

$1.2 million

Average annual production and income by decade.2

Units Revenue

36 thousand

$1.2 million

Average annual production and income by decade.2

Units Revenue

3.5 million

$24 million

Solicitors to the Share Offer Bell Gully Level 21, Vero Centre 48 Shortland Street AUCKLAND Telephone: 09 916 8800 Facsimile: 09 916 8801


Rakon Limited IPO Prospectus