Rakon 2007 Interim Report

I N T E R I M R E P O R T S E P T E M B E R 2 0 0 6

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Contents

Half Year Review 3

Financials

Interim Statement of Financial Performance 7

Interim Statement of Movements in Equity 7

Interim Statement of Financial Position 8

Interim Statement of Cash Flows 9

Notes to the Interim Financial Statements 11

Accountants’ Report 13

Rakon at a Glance 14

Directory 16

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We are pleased to report an unaudited net surplus after tax of $5.6 million for the six months ended 30 September 2006, a 200% improvement on the same six month period in 2005.

Growth in revenue was the major factor driving the growth in earnings. Revenue of $50.5 million was recorded for the fi rst six months, a 48% increase on the same six month period in 2005. Eliminating for the impact of currency movement, underlying revenue growth was up 33% on the corresponding period in 2005. Reductions in manufacturing costs were also a signifi cant contributor to the improved results. Engineering smaller and lower cost products, reducing the unit cost of key components and economies of scale largely from labour costs all contributed to off setting unit sales price reductions as is the norm in this industry.

Markets

An increase in competition between the major GPS manufacturers has driven retail prices for personal navigation devices to new lows. These new price points have had the net eff ect of expanding the overall market and further fuelled already strong consumer demand for navigation products. From Rakon’s perspective the demand for these portable navigation devices has more than off set slower than expected sales of GPS (Global Positioning Systems) enabled phones. Design activity for GPS in mobile

phones is however signifi cant and points to this slower demand being merely a delay in this market development.

In the past six months Rakon has opened our European offi ce and expanded our marketing team in the fast growing Asian market. These changes have us well placed to develop a stronger position in Europe and ensure we service and enhance our position in the rapidly growing Asian region. Our customers move to the contract design and manufacturing model in Asia meant that this region accounted for more than 60% of our sales in the fi rst six months of the 2007 fi nancial year.

New Products

Rakon’s focus on new product development for our already diverse customer base of more than 400 businesses is ongoing. Early in 2006 Rakon announced the successful development of a GPS Receiver Module (GRM). Customer interest in this module is strong, we are currently sampling a number of units and we anticipate solid growth in sales of this product in the next fi nancial year.

The GRM is a tiny radio receiver providing a complete Radio Frequency (RF) solution , which makes it uniquely simple for GPS designers to embed into their devices. The receiver means GPS manufacturers can meet market demand to miniaturise devices, while off ering improved capability.

Half Year Review

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We have continued the evolution of our core product, the integrated Temperature Compensated Crystal Oscillator (TCXO). Whilst sales of the 5.0 x 3.2 mm unit are still the largest contributor to revenue, sales of the 3.2 x 2.5 mm TCXO have increased signifi cantly. Development of a smaller 2.5 x 2.0 mm unit is underway, and will generate revenue in the 2008 fi nancial year.

Rakon remains the leader in the supply of high stability TCXOs for GPS, which enable very weak GPS signals to be received. This is critical in an industry that demands products that will function in urban environments with very high interference. We will continue to build on this market position with products in smaller packages and lower costs, as well as products that off er even higher stability.

Our development of new crystal construction techniques has enabled us to produce a crystal that is several times more resistant to shock and vibration than anything currently available on the world market. Customers in the demanding surveying market have already released products based on this G-tolerant design. We are now focussing on developing aerospace customers who have stringent requirements for shock and vibration performance.

Other product developments are underway which will enable Rakon to better address the expanding telecommunications infrastructure market.

Manufacturing

Rakon operates an international manufacturing model, combining the engineering strength and product development expertise in New Zealand with highly effi cient manufacturing processes and excellent sub-assembly arrangements.

Maintenance of this high quality, secure and cost competitive manufacturing process is imperative to Rakon’s current and future success. The $4.5 million expansion of our crystal manufacturing facility is nearing completion. This will increase our crystal manufacturing capacity by 40%, reduce manufacturing cost and better balance the mix of manufactured and sub-contracted crystals used in the manufacture of our TCXOs.

The increase in demand over the past 6 months has given Rakon the opportunity to test the scalability of its manufacturing model. Planned installation of further proprietary testing ovens and associated equipment was accelerated enabling TCXO capacity to be increased from 3.5 million to 4.5 million units per month.

Outlook

Rakon has a clear strategy to deliver growth in earnings. We are focussed on developing products that deliver performance and features that add value to any GPS solution. We will continue to leverage our expertise in quartz crystal technology in an eff ort to broaden the market for our products.

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Our continual drive to keep enhancing our proprietary test equipment capability is designed to ensure an industry leading cost and quality platform for the manufacture of high performance quartz crystal products.

Rakon’s product quality and market position leave us well placed to benefi t from the forecast continued growth of GPS particularly in consumer products. This growing exposure to consumer demand brings with it greater potential for seasonal demand variations making the second half of the 2007 fi nancial year more diffi cult to

BJ Robinson

Managing DirectorNovember 8, 2006

Bryan W Mogridge

Chairman November 8, 2006

predict, as we move from the high volume sales months of October and November to a seasonal dip in December and January. Never the less the Directors remain comfortable with the 2007 fi nancial year forecast EBIT of $14.8 million.

Rakon’s team

Demand in the fi rst six months has been much stronger than originally anticipated and the Directors wish to thank the team at Rakon for ensuring that this extra demand was met without compromise to quality of either products or service.

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Operating revenue 4 50,461 34,196 74,309

Operating expenses (41,928) (30,477) (65,738)

Operating surplus 8,533 3,719 8,571

Other income/(expenses)

Other income 6 - -

Interest income 135 6 62

Interest expense (352) (899) (1,386)

Net surplus before income tax 8,322 2,826 7,247

Income tax (2,763) (971) (2,445)

Net surplus after income tax 5,559 1,855 4,802

Basic earnings per share 5.3 2.4 5.5

Diluted earnings per share 5.2 2.4 5.5

The accompanying notes form an integral part of these interim fi nancial statements.

Interim Consolidated Statement of Financial Performance

Equity at beginning of the period 24,045 7,957 7,957

Recognised revenues and expenses

Net surplus after tax 5,559 1,855 4,802

Total recognised revenues and expenses 5,559 1,855 4,802

Other movements

Capitalisation of Shareholders’ loan - - 12,886

Distributions to owners - (1,600) (1,600)

Issue of ordinary shares 10,055 - -

Cost of IPO (1,103) - -

Foreign currency translation reserve - 1 -

8,952 (1,599) 11,286

Equity at end of the period 38,556 8,213 24,045


Interim Consolidated Statement of Movements in Equity

Note

Audited Year Ended 31 March 2006

($000s)

Unaudited 6 Months Ended30 September 2005

($000s)

Unaudited 6 Months Ended30 September 2006

($000s)


($000s)

Unaudited 6 Months Ended 30 September 2005

($000s)


($000s)

Financials

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Assets

Current assets

Cash and bank 5,946 716 853

Accounts receivable and other assets 15,561 14,083 13,614

Inventories 20,858 19,260 19,735

Total current assets 42,365 34,059 34,202

Non-current assets

Property, plant and equipment 17,648 14,734 14,880

Deferred tax 164 - 118

Total non-current assets 17,812 14,734 14,998

Total assets 60,177 48,793 49,200

Liabilities

Current liabilities

Bank overdraft 24 10,587 6,901

Borrowings - 15,279 1,314

Payables and accruals 13,597 6,574 8,940

Total current liabilities 13,621 32,440 17,155

Non-current liabilities

Borrowings 8,000 8,000 8,000

Deferred tax - 140 -

Total non-current liabilities 8,000 8,140 8,000

Total liabilities 21,621 40,580 25,155

Net assets 38,556 8,213 24,045

Equity

Share capital 23,191 250 13,136

Retained earnings 15,365 7,963 10,909

Total equity 38,556 8,213 24,045


Interim Consolidated Statement of Financial PositionAudited as at

31 March 2006($000s)

Unaudited as at30 September 2005

($000s)

Unaudited as at30 September 2006

($000s)

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Operating activities

Cash was provided from

Receipts from customers 47,865 32,839 75,639

Interest received 125 7 62

Other income received 2 - -

47,992 32,846 75,701

Cash was applied to

Payments to suppliers and employees (37,179) (28,236) (61,208)

Finance lease charges - (115) (203)

Interest paid (352) (726) (1,444)

Income tax paid (2,103) (1,036) (3,121)

(39,634) (30,113) (65,976)

Net cash fl ow from operating activities 8,358 2,733 9,725

Investing activities

Cash was applied to

Purchase of property, plant and equipment (4,362) (3,648) (5,395)

Net cash fl ow from investing activities (4,362) (3,648) (5,395)

Financing activities

Cash was provided from

Issue of ordinary shares 10,055 - -

Proceeds from borrowings - 10,508 11,264

10,055 10,508 11,264

Cash was applied to

Repayment of principal on borrowings - (14,236) (15,621)

Finance lease principal payments (1,314) (453) (915)

IPO costs paid (611) - (492)

Dividends paid to Shareholders - (1,600) (1,600)

(1,925) (16,289) (18,628)

Net cash fl ow from fi nancing activities 8,130 (5,781) (7,364)

Net increase (decrease) in cash held 12,126 (6,696) (3,034)

Foreign currency translation adjustment (156) (439) (278)

Cash at the beginning of the period (6,048) (2,736) (2,736)

Cash at the end of the period 5,922 (9,871) (6,048)

Composition of cash

Cash and bank balances 5,946 716 853

Bank overdraft (24) (10,587) (6,901)

5,922 (9,871) (6,048)

Interim Consolidated Statement of Cash FlowsAudited Year Ended

31 March 2006($000s)


($000s)


($000s)

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Interim Consolidated Statement of Cash FlowsAudited Year Ended

31 March 2006($000s)


($000s)


($000s)

Reconciliation of net surplus to net

cash fl ows from operating activities

Reported net surplus after tax 5,559 1,885 4,802

Items not involving cash fl ow

Depreciation expense 1,596 1,430 2,958

Increase in estimated doubtful debts - 18 158

Movement in foreign currency 499 214 489

Deferred tax (44) (25) (283)

(Gain) loss on disposal of property, plant

and equipment (2) - 74

2,049 1,637 3,396

Impact of changes in working

capital items

Accounts receivables (2,648) (1,719) 468

Inventory (1,123) 1,857 1,381

Prepayments (227) (219) (141)

Trade creditors and accruals 4,756 (972) 188

GST receivable (717) 279 37

Tax provisions 709 (15) (406)

750 (789) 1,527

Net cash fl ow from operating activities 8,358 2,733 9,725


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Notes to the Interim Consolidated Financial Statements

1. Basis of presentation

The fi nancial statements are for the economic entity comprising Rakon Limited and its subsidiaries (“the Group”).

The accompanying unaudited interim consolidated fi nancial statements have been prepared in accordance with Financial Reporting Standard No 24, “Interim Financial Statements”, issued by the New Zealand Institute of Chartered Accountants, and are presented in New Zealand dollars. These fi nancial statements should be read in conjunction with the fi nancial statements and related notes included in the Group’s Annual Report for the year ended 31 March 2006.

2. Accounting policies

The accounting policies used in the preparation of the unaudited fi nancial statements are consistent with those used in the preparation of the audited fi nancial statements for the year ended 31 March 2006.

3. 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 (NZ IFRS) for fi nancial 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 fi rst fi nancial year for which fully compliant fi nancial statements must be produced will be for the year commencing on 1 April 2007 (and ending 31 March 2008) at which time the comparative fi gures for the previous year will also be restated to comply with NZ IFRS.

Although early implementation is an option, the Board of Directors has determined that Rakon will adopt NZ IFRS for the fi rst time in its reports to shareholders for the year ending 31 March 2008.

The Board has considered the impact of NZ IFRS as regards to the appropriate functional currency for Rakon and determined that Rakon should continue to report using NZ dollars as its functional and presentation currency when it adopts NZ IFRS. This is based on management’s current interpretation of the standards that have been released to date. There is potential for the signifi cance of the impact to change when Rakon prepares its fi rst set of NZ IFRS fi nancial statements due to changes in the standards, changes in the Company, or changes in management’s interpretation of the standards. At the date the fi nancial statements were issued Rakon had not performed any further analysis of the diff erences between NZ IFRS and current New Zealand Financial Reporting

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Standards and as such cannot determine if there will be a signifi cant impact on the fi nancial statements presented by Rakon. A project has been initiated to identify the full implications of NZ IFRS 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 the start of the 2008 fi nancial year, Rakon will continue to provide users of the fi nancial statements with updated information about the likely impacts of NZ IFRS on Rakon’s earnings, cash fl ows and fi nancial position.


($000s)


($000s)


($000s)

Region

Asia 32,412 17,411 40,217

North America 12,357 10,983 23,270

Europe 4,843 3,897 8,038

Others 849 1,905 2,784

50,461 34,196 74,309

4. Operating revenue

Audited as at31 March 2006

($000s)

Unaudited as at 30 September 2005

($000s)

Unaudited as at 30 September 2006

($000s)

Amounts committed to capital expenditure: 2,465 - 117

There has been no material change in operating lease commitments since 31 March 2006.

5. Commitments

6. Contingent liabilities

At 30 September 2006 there were no contingent liabilities (31 March 2006: nil, 30 September 2005: nil).

7. Subsequent Events

There are no subsequent events after 30 September 2006.

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Accountants Report

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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 GPS (Global Positioning Systems) and microwave communications. From its head offi ce and manufacturing facility in Auckland, New Zealand, Rakon produces a range of Crystals and Oscillators for its global customer base.

Rakon’s business was founded in 1967 by Warren Robinson with the incorporation of Rakon’s predecessor company, Rakon Industries Limited (RIL). The Company currently has operations in New Zealand and marketing offi ces in the United States, Taiwan and the United Kingdom, and employs approximately 500 people. The vast majority of employees and operations are based in New Zealand.

Since fi rst 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 (size) suited to consumer mass market electronic devices, while maintaining the highest performance specifi cations 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.

Aff ecting 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 specifi cations, 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

Rakon at a Glance

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to a 3.2x2.5mm form factor and is currently developing a new model

with a form factor of 2.5x2.0mm, 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 3.2x2.5mm with a 2.5x2mm 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.

• RF module, Rakon has recently developed, and is now manufacturing samples of 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 signifi cantly reduces the size and cost of incorporating a complete GPS unit into small electronic equipment such as mobile phones and personal digital assistants (PDA).

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Registered Offi ce

Rakon LimitedOne Pacifi c RiseMt WellingtonAUCKLANDTelephone: 09 573 5554Facsimile: 09 573 5559Website: www.rakon.co.nz

Mailing Address

Rakon LimitedPrivate Bag 99943NewmarketAUCKLAND

Directors of Rakon Limited

Bryan MogridgeBrent RobinsonBruce IrvinePeter MaireDarren RobinsonWarren Robinson

Principal Lawyers

Bell GullyPO Box 4199AUCKLAND

Auditors

PricewaterhouseCoopersPrivate Bag 92162AUCKLAND

Share Registrar

Computershare Investor Services Limited159 Hurstmere RoadNorth ShorePrivate Bag 92119AUCKLAND 1020Telephone: 09 488 8700Facsimile: 09 488 8787

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Rakon 2007 Interim Report

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