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Prospectus or Information Memorandum\Draft 15\Rakon Offer Doc v15 marked up.doc Results for announcement to the market Date: 21 May 2015 Rakon Limited (RAK) Reporting period 12 months to 31st March 2015 Previous reporting period 12 months to 31st March 2014 Audited Amount NZ$000 % Change Revenue from ordinary activities 131,417 -12% Underlying EBITDA c (Earnings before interest, tax, depreciation, 15,369a 304% Profit from ordinary activities after tax attributable to security holders 3,190 b 104% Net profit attributable to security holders 3,190 b 104% amortisation, impairment, employee share schemes, non-controlling interests, adjustments for associates and joint ventures share of interest, tax & depreciation and other non-cash items) Note a: includes share of Underlying EBITDA from associates and joint ventures of $6,687,000 (March 2014: $4,487,000). b: includes equity accounted earnings from associates and joint ventures of $3,153,000 (March 2014: $1,647,000). c: Further information regarding the disclosure and use of non-GAAP financial information is disclosed at Note 3 (Notes to the audited Consolidated Financial Statements) in this results announcement. Amount per security Imputed amount per security Nil dividend proposed Nil dividend proposed Record Date Not Applicable Not Applicable Dividend Payment Date Not Applicable Not Applicable Interim / Final Dividend [Simon Bosley] [printed: April 12, 2006 10:49 AM] [saved: April 12, 2006 10:48 AM] S:\Gem IPO\20. Prospectus or Information Memorandum\Draft 15\Rakon Offer Doc v15 marked up.doc COMMENTS 21 MAY 2015 (RAK) RAKON RETURNS TO PROFIT FROM TURNAROUND       Return to net profit after tax (NPAT): FY2015 NZ$3.2 million NPAT vs NZ$83.8 million net loss after tax in FY2014 Significant turnaround in Underlying EBITDA1: profit of NZ$15.4 million in FY2015 vs loss of NZ$7.5 million in FY2014 Favourable effect of growth in Telecommunications resulting in second half revenue increase Growth in margin dollars (and as a % of revenue): FY2015 NZ$41.8 million (32%) vs NZ$28.7 million (19%) in FY2014 Positive impact from Operating expense reduction following completion of the structural change programme Favourable reporting impact to Tax expense from the calculation of Deferred tax NZD Millions, Audited FY2015 FY2014 % Change 131.4 150.0 (12.4) Underlying EBITDA1 15.4 (7.5) >100.0 Net profit after tax 3.2 (83.8) >100.0 Gross Profit 41.8 28.7 45.6 Operating expenses 46.2 56.6 (18.3) Operating cash flow (3.6) 12.5 (>100.0) Net debt 13.4 6.4 (>100.0) Revenue 1 A detailed reconciliation of Underlying EBITDA to net profit/(loss) after tax, is included at Note 3 of the Audited Financial Statements. Rakon Limited (NZX: RAK) (“Rakon” or “the Company”) today reports an audited net profit after tax for the full year ending 31 March 2015 (“FY2015”) of NZ$3.2 million. The turnaround to profit follows the significant strategic efforts and structural changes implemented by the Company, having posting a NZ$83.8 million net loss in the year ending 31 March 2014. The Company also reports a significant increase in ‘Underlying EBITDA’ for FY2015 with a profit of NZ$15.4 million compared to a loss of NZ$7.5 million in FY2014. The Company was particularly pleased with its second half performance: Revenue of NZ$70.0 million, Underlying EBITDA of NZ$11.1 million and NPAT of NZ$6.6 million. Brent Robinson, Rakon CEO, said “today we announce a turnaround in our results with a return to profit. It is pleasing that the impact of our significant structural realignment programme during FY2014-FY2015 has resulted in this improvement in our financial results. Our strategy to focus on higher margin products and markets has resulted in much improved operating margins for the year, supported by a strong second half performance.” The closure of the Company’s Lincoln, UK plant was successfully completed during the year in line with plans and the manufacturing of those products is now fully integrated into New Zealand. Mr Robinson said “the company has benefited as expected from reduced operating expenses in the second half as a result of the Lincoln closure”. Rakon has experienced growth in the Telecommunications market during FY2015. New mobile phone 4G technology is driving new telecommunications infrastructure, with Rakon capturing strong growth from 4G deployments of new Base Station equipment. This growth contributed to an increase in earnings from Rakon’s joint venture, Centum Rakon India, up NZ$1.3 million for the period to NZ$3.3 million. Rakon also captured significant growth in the Small Cell Telecommunications market, as network operators invested to deploy the supporting infrastructure needed to meet the demand on networks coming from growth in data volumes. Rakon reported bank borrowings of NZ$12.0 million and net debt of NZ$13.4 million. Net debt increased over the period in line with expectations as the Company paid for restructuring initiatives provisioned in FY2014, including 2 [Simon Bosley] [printed: April 12, 2006 10:49 AM] [saved: April 12, 2006 10:48 AM] S:\Gem IPO\20. Prospectus or Information Memorandum\Draft 15\Rakon Offer Doc v15 marked up.doc cash outflows related to the Lincoln plant closure. Operating cash flows of -NZ$3.6 million were impacted by the restructuring pay outs and growth in working capital. Revenue decreased over the prior period as the Company clearly signalled following the exit from the Smart Wireless market in FY2014. Space and Defence revenues increased in the second half of FY2015 with the delivery of a number of key projects as planned. Following an increase in demand and the transfer of manufacturing from the UK, the New Zealand manufacturing plant had worked successfully over the second half to increase its throughput in volumes. Gross profit increased over the period due to mix and revenue growth coming from higher margin business. The Company also benefited from a declining NZD:USD exchange rate. The reported result includes a NZ$1.0 million benefit from the gain on the sale of the Lincoln plant and a favourable benefit in tax expense due to timing difference impacts of NZ$2.7 million taken up in the Deferred tax asset. While it is satisfying to return to profitability, the Directors have not declared a dividend for FY2015 but will continue to assess this position in the future based on it being fiscally prudent. “Rakon is optimistic for prospects in FY2016 with the Company now benefiting from the change in strategy. The Company will have a full year impact from the Lincoln plant closure and operating platforms are now stable and capable of accommodating the rates of growth that we have experienced in the Telecommunications market during FY2015. New Zealand has started to invest in resource again during the second half of FY2015 to cater for the additional demand. The Company also expects to benefit from a lower average NZD:USD exchange rate in the coming period”, Mr Robinson said. The Directors confirm that this FY2015 preliminary results announcement is based on audited results. A detailed reconciliation of Underlying EBITDA to net profit after tax, is included at Note 3 of the Audited Financial Statements. -ends- Contact: Brent Robinson Chief Executive Officer Rakon 027 898 7899 www.rakon.com About Rakon Rakon is a global high technology company and a world leader in its field. The company design and manufacture advanced frequency control and timing solutions. Rakon has eight manufacturing plants including four joint ventures plants and five research and development centres. Customer support centres are located in 13 offices worldwide. Rakon is a public company listed on the New Zealand stock exchange, NZSX, ticker code RAK. Directors Declaration (NZX Listing Rules Appendix 1, 3.1 & 3.2) The Directors declare that the selected consolidated financial information on pages 4 to 20 has been prepared in compliance with applicable Financial Reporting Standards and extracted from the audited financial statements. The accounting policies the Directors consider critical to the portrayal of the company’s financial condition and results which require judgements and estimates about matters which are inherently uncertain are disclosed in note 2.17 of the audited financial statements that form part of this announcement. 3 [Simon Bosley] [printed: April 12, 2006 10:49 AM] [saved: April 12, 2006 10:48 AM] S:\Gem IPO\20. Prospectus or Information Memorandum\Draft 15\Rakon Offer Doc v15 marked up.doc Statement of Comprehensive Income For the year ended 31 March 2015 2015 ($000s) 2014 ($000s) 3 131,417 (89,599) 41,818 149,951 (121,231) 28,720 4 5 6 250 (46,246) 3,841 (337) 4 (1,276) 3,153 1,544 1,646 3,190 266 (56,573) (1,902) (19,920) (49,409) 5 (1,722) 1,700 (49,426) (1,076) (50,502) 3,190 (33,297) (83,799) (1,641) (53) (1,586) 474 - 758 942 4,366 (403) 480 (2,806) 384 6,143 (77,656) 3,190 3,190 (79,429) (4,370) (83,799) 384 384 (73,766) (3,890) (77,656) Cents Cents 1.7 1.7 (26.7) (15.0) (41.7) 1.6 1.6 (26.4) (14.9) (41.3) Note Continuing operations Revenue Cost of sales Gross profit Other operating income Operating expenses Other gains/(losses) - net Impairment Operating (loss)/profit Finance income Finance costs Share of profit of associates and joint venture Profit/(loss) before income tax Income tax credit/(expense) Net profit/(loss) after tax from continuing operations Discontinued operations Loss for the year from discontinued operations Net profit/(loss) for the year Other comprehensive income: Items that may be reclassified subsequently to profit or loss: (Decrease)/increase in fair value cash flow hedges (Decrease)/increase in fair value net investment hedge (Decrease)/increase in fair value currency translation differences Income tax relating to components of other comprehensive income Foreign currency translation reserve related to disposal of ERC (non-controlling interest share) Other comprehensive (losses)/income for the period, net of tax Total comprehensive losses for the period Profit/(loss) attributable to: Equity holders of the company Non-controlling interests Total comprehensive losses attributable to: Equity holders of the company Non-controlling interests Earnings per share for profit/(loss) attributable to the equity holders of the company: Basic earnings/(losses) per share From continuing operations From discontinued operations From profit/(loss) for the year Diluted earnings/(losses) per share From continuing operations From discontinued operations From profit/(loss) for the year 7 The accompanying notes form an integral part of these financial statements. 4 [Simon Bosley] [printed: April 12, 2006 10:49 AM] [saved: April 12, 2006 10:48 AM] S:\Gem IPO\20. Prospectus or Information Memorandum\Draft 15\Rakon Offer Doc v15 marked up.doc Statement of Changes in Equity For the year ended 31 March 2015 Noncontrolling Equity Interests Total Equity ($000s) ($000s) ($000s) 152,796 3,890 156,686 Share Capital ($000s) 173,881 Retained Earnings ($000s) 8,310 Net loss after tax for the year ended 31 March 2014 - (79,429) - (79,429) (4,370) (83,799) Currency translation differences - - 4,366 4,366 480 4,846 Cash flow hedges, net of tax - - 619 619 - 619 Net investment hedge, net of tax - - 678 678 - 678 Total comprehensive (losses)/income for the year - (79,429) 5,663 (73,766) (3,890) (77,656) - value of employee services - - (63) (63) - (63) - other - - - - - 78,967 Balance at 31 March 2013 Other ($000s) (29,395) Employee share schemes Balance at 31 March 2014 173,881 (71,119) (23,795) 78,967 - Net profit after tax for the year ended 31 March 2015 - 3,190 - 3,190 - 3,190 Currency translation differences - - (1,586) (1,586) - (1,586) Cash flow hedges, net of tax - - (1,182) (1,182) - (1,182) Net investment hedge, net of tax - - (38) (38) - (38) Total comprehensive (losses)/income for the year - 3,190 (2,806) 384 - 384 Employee share schemes - value of employee services Balance at 31 March 2015 - - 58 58 - 58 173,881 (67,929) (26,543) 79,409 - 79,409 The accompanying notes form an integral part of these financial statements. 5 [Simon Bosley] [printed: April 12, 2006 10:49 AM] [saved: April 12, 2006 10:48 AM] S:\Gem IPO\20. Prospectus or Information Memorandum\Draft 15\Rakon Offer Doc v15 marked up.doc Balance Sheet As at 31 March 2015 2015 ($000s) 2014 ($000s) Assets Current assets Cash and cash equivalents Trade and other receivables Derivatives – held for trading 4,858 9,211 34,430 34,255 52 - 281 1,056 Inventories 28,716 28,443 Current income tax asset Total current assets 27 68,364 2 72,967 634 - Derivatives – cash flow hedges Non-current assets Derivatives – cash flow hedges Trade and other receivables 1,260 - Property, plant and equipment 16,912 24,374 Intangible assets 14,547 10,819 Investment in associate 8,697 7,666 Interest in joint venture 7,015 6,210 Deferred tax asset Total non-current assets 7,425 56,490 6,349 55,418 124,854 128,385 6,088 4,411 Total assets Liabilities Current liabilities Bank overdraft Borrowings 139 42 21,759 23,258 Derivatives – held for trading 103 - Derivatives – cash flow hedges 911 - Derivatives – interest rate swaps 112 23 1,071 6,108 30,183 456 34,298 Trade and other payables Provisions Current income tax liabilities Total current liabilities Non-current liabilities Derivatives – cash flow hedges 752 - Borrowings 12,013 11,132 Provisions 2,098 1,825 Deferred tax liabilities Total non-current liabilities 399 15,262 2,163 15,120 Total liabilities 45,445 49,418 Net assets 79,409 78,967 Share capital 173,881 173,881 Reserves (26,543) (23,795) Retained earnings/(accumulated losses) (67,929) (71,119) 79,409 78,967 79,409 78,967 Equity Non-controlling interests Total equity The accompanying notes form an integral part of these financial statements. 6 [Simon Bosley] [printed: April 12, 2006 10:49 AM] [saved: April 12, 2006 10:48 AM] S:\Gem IPO\20. Prospectus or Information Memorandum\Draft 15\Rakon Offer Doc v15 marked up.doc Statement of Cash Flows For the year ended 31 March 2015 2015 ($000s) 2014 ($000s) 134,364 160,129 Operating activities Cash provided from Receipts from customers Interest received 7 5 Dividend received from joint venture 1,048 1,162 R&D grants received 1,981 4,699 Other income received 221 365 137,621 166,360 Payment to suppliers and others (91,062) (102,170) Payment to employees (48,216) (49,093) (1,280) (1,720) Cash was applied to Interest paid Income tax paid (636) (890) (141,194) (153,873) (3,573) 12,487 2,146 419 - 22,535 2,146 22,954 Purchase of property, plant and equipment (2,823) (3,979) Purchase of intangibles (2,924) (2,245) (5,747) (6,224) (3,601) 16,730 711 - 711 - - (25,890) - (25,890) 711 (25,890) Net cash flow from operating activities Investing activities Cash was provided from Sale of property, plant and equipment Sale of equity interest in ERC Repayment of advances by subsidiaries Cash was applied to Net cash flow from investing activities Financing activities Cash was provided from Proceeds from borrowings Cash was applied to Repayment of principal on borrowings Net cash flow from financing activities Net (decrease)/increase in cash and cash equivalents Foreign currency translation adjustment Cash and cash equivalents at the beginning of the period Cash and cash equivalents at the end of the period (6,463) 3,327 433 (1,817) 4,800 3,290 (1,230) 4,800 Composition of cash and cash equivalents Cash and cash equivalents Bank overdraft 4,858 9,211 (6,088) (4,411) (1,230) 4,800 The accompanying notes form an integral part of these financial statements. 7 [Simon Bosley] [printed: April 12, 2006 10:49 AM] [saved: April 12, 2006 10:48 AM] S:\Gem IPO\20. Prospectus or Information Memorandum\Draft 15\Rakon Offer Doc v15 marked up.doc Statement of Cash Flows For the year ended 31 March 2015 Note 2015 ($000s) 2014 ($000s) 3,190 (83,799) Reconciliation of net profit/(loss) to net cash flows from operating activities Reported net profit/(loss) after tax Items not involving cash flow Depreciation expense 5 6,103 15,441 Amortisation expense 5 1,835 1,794 Increase in estimated doubtful debts Provision for restructure Employee share based payments 56 82 (334) 5,857 58 (63) Movement in foreign currency (1,323) 69 Share of profit from joint venture and associate (2,106) (515) Impairment - 19,920 Loss on sale of shares in subsidiary (ERC) - 9,339 Impairment of assets in subsidiary (ERC) - 25,137 Deferred tax (2,656) (399) (Gain)/loss on disposal of property, plant and equipment (1,180) 388 (Gain)/loss on disposal of intangibles 288 - 741 77,050 (537) 11,423 Impact of changes in working capital items Trade and other receivables Provision for restructure Inventories Trade and other payables Tax provisions Net cash flow from operating activities (4,676) - (126) 13,683 (1,858) (6,984) (307) 1,114 (7,504) 19,236 (3,573) 12,487 The accompanying notes form an integral part of these financial statements. 8 [Simon Bosley] [printed: April 12, 2006 10:49 AM] [saved: April 12, 2006 10:48 AM] S:\Gem IPO\20. Prospectus or Information Memorandum\Draft 15\Rakon Offer Doc v15 marked up.doc Notes to the Financial Statements 1. General information Rakon Limited [the Company] and its subsidiaries [the Group] is a world leader in the development of frequency control solutions for a wide range of applications. Rakon has leading market positions in the supply of crystal oscillators to the telecommunications, global positioning and space & defence markets. The Company is a limited liability company incorporated and domiciled in New Zealand. It is registered under the Companies Act 1993 with its registered office at 8 Sylvia Park Road, Mt Wellington, Auckland. The Company is an issuer in terms of the Securities Act 1978 and is listed on the New Zealand Stock Exchange [NZX]. These financial statements of the Group have been approved for issue by the Board of Directors on 21 May 2015. 2. Summary of significant accounting policies 2.1. Basis of preparation The Company is registered under the Companies Act 1993 and is an FMC reporting entity under Part 7 of the Financial Markets Conduct Act 2013. The financial statements of the Group have been prepared in accordance with the requirements of Part 7 of the Financial Markets Conduct Act 2013 and the NZX (Main Board/Debt Market) Listing Rules. In accordance with the Financial Markets Conduct Act 2013, group financial statements are prepared and presented for the Company and its subsidiaries; as a result separate financial statements for the Company are no longer required to be prepared and presented. These financial statements of the Group, a profit oriented entity, are for the year ended 31 March 2015. They have been prepared in accordance with the requirements of the Financial Markets Conduct Act 2013 and in accordance with New Zealand Equivalents to International Financial Reporting Standards [NZ IFRS]. The financial statements have been prepared in accordance with NZ GAAP. Accounting policies applied in these financial statements comply with NZ IFRS and New Zealand equivalents to International Financial Reporting Interpretations Committee [NZ IFRIC] interpretations issued and effective or issued and early adopted as at the time of preparing these financial statements as applicable to Rakon Limited as a profit oriented entity. The financial statements are in compliance with International Financial Reporting Standards [IFRS]. The accounting principles recognised as appropriate for the measurement and reporting of profit and loss and financial position on an historical cost basis have been applied, except for derivative financial instruments which have been measured at fair value. The preparation of financial statements in accordance with NZ IFRS requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. Actual results may differ from these estimates, refer to 2.17. Changes in accounting policy and disclosures New standards, amendments and interpretations adopted by the Group as of 1 April 2014 There are no new standards, amendments and interpretations adopted by the Group as of 1 April 2014. New standards, amendments and interpretations not yet adopted The Group has not early adopted any new accounting standard and IFRIC interpretations in the current financial period. A number of new standards and amendments to standards and interpretations are effective for annual periods beginning after 1 January 2014, and have not been applied in preparing these consolidated financial statements. None of these are expected to have a significant effect on the consolidated financial statements of the Group, except the following: NZ IFRS 9, ‘Financial instruments’, addresses the classification, measurement and recognition of financial assets and financial liabilities. The complete version of NZ IFRS 9 was issued in September 2014. It replaces the guidance in NZ IAS 39 that relates to the classification and measurement of financial instruments. NZ IFRS 9 retains but simplifies the mixed measurement model and establishes three primary measurement categories for financial assets: amortised cost, fair value through other comprehensive income and fair value through profit and loss. The basis of classification depends on the entity’s business model and the contractual cash flow characteristics of the financial asset. Investments in equity instruments are required to be measured at fair value through profit or loss with the irrevocable option at inception to present changes in fair value in other comprehensive income not recycling. There is now a new expected credit losses model that replaces the incurred loss impairment model used in NZ IAS 39. For financial liabilities there were no changes to classification and measurement except for the recognition of changes in own credit risk in other comprehensive income, for liabilities designated at fair value through profit or loss. NZ IFRS 9 relaxes the requirements for hedge effectiveness by replacing the bright line hedge effectiveness tests. It requires an economic relationship between the hedged item and hedging instrument and for the ‘hedged ratio’ to be the same as the one management actually use for risk management purposes. Contemporaneous documentation is still required but is different to that currently prepared under NZ IAS 39. The standard is effective for accounting periods beginning on or after 1 January 2018. Early adoption is permitted. The group intends to adopt NZ IFRS 9 on its effective date and has yet to assess its full impact. 9 [Simon Bosley] [printed: April 12, 2006 10:49 AM] [saved: April 12, 2006 10:48 AM] S:\Gem IPO\20. Prospectus or Information Memorandum\Draft 15\Rakon Offer Doc v15 marked up.doc NZ IFRS 15, ‘Revenue from contracts with customers’ deals with revenue recognition and establishes principles for reporting useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. Revenue is recognised when a customer obtains control of a good or service and thus has the ability to direct the use and obtain the benefits from the good or service. The standard replaces NZ IAS 18 ‘Revenue’ and NZ IAS 11 ‘Construction contracts’ and related interpretations. The standard is effective for annual periods beginning on or after 1 January 2017 and earlier application is permitted. The group intends to adopt NZ IFRS 15 on its effective date and is currently assessing its full impact. There are no other IFRSs or IFRIC interpretations that are not yet effective that would be expected to have a material impact on the Group. 2.2. Consolidation Subsidiaries Subsidiaries are all entities over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases. Business combinations are accounted for using the acquisition method. The consideration transferred in a business combination shall be measured at fair value, which shall be calculated as the total of the acquisition date fair values of the assets transferred by the Group, the liabilities incurred by the Group to former owners, the equity issued by the Group and the amount of any non-controlling interest in the acquiree either at fair value or at the proportional share of the acquiree’s identifiable net assets. Acquisition related costs are expensed as incurred. All material transactions between subsidiaries or between the Parent Company and subsidiaries are eliminated on consolidation. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. Disposal of subsidiaries When the Group ceases to have control, any retained interest in the entity is re-measured to its fair value at the date when control is lost, with the change in carrying amount recognised in profit or loss. The fair value is the initial carrying amount for the purposes of subsequently accounting for the retained interest as an associate, joint venture or financial asset. In addition, any amounts previously recognised in other comprehensive income in respect of that entity are accounted for as if the Group had directly disposed of the related assets or liabilities. This may mean that amounts previously recognised in other comprehensive income are reclassified to profit or loss. Associates Associates are entities over which the Group has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates are accounted for using the equity method of accounting and are initially recognised at cost. The Group’s share of its associates’ post-acquisition profits or losses is recognised in the statement of comprehensive income, and its share of post-acquisition movements in reserves is recognised in reserves. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. When the Group’s share of losses in an associate equals or exceed its interest in the associate, including any other unsecured receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate. Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associates. Unrealised losses are also eliminated unless the transaction provides evidence of impairment of the asset transferred. Accounting policies of associates have been changed where necessary to ensure consistency with the policies adopted by the Group. Joint arrangements The Group’s joint arrangements are joint ventures which are accounted for using the equity method. Under the equity method of accounting, interests in joint ventures are initially recognised at cost and adjusted thereafter to recognise the Group’s share of the postacquisition profits or losses and movements in other comprehensive income. When the Group’s share of losses in a joint venture equals or exceeds its interests in the joint ventures (which includes any long-term interests that, in substance, form part of the Group’s net investment in the joint ventures), the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the joint ventures. Unrealised gains on transactions between the Group and its joint ventures are eliminated to the extent of the Group’s interest in the joint ventures. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of the joint ventures have been changed where necessary to ensure consistency with the policies adopted by the Group. 2.3. Foreign currency translation Functional and presentation currency Items included in the financial statements of each entity in the Group are measured using the currency that best reflects the economic substance of the underlying events and circumstances relevant to that entity [the functional currency]. The consolidated financial statements are presented in New Zealand dollars, [the presentation currency], which is the functional currency of the Parent. 10 [Simon Bosley] [printed: April 12, 2006 10:49 AM] [saved: April 12, 2006 10:48 AM] S:\Gem IPO\20. Prospectus or Information Memorandum\Draft 15\Rakon Offer Doc v15 marked up.doc Transactions and balances Transactions in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated to New Zealand dollars at the foreign exchange rate ruling at that date. Foreign exchange differences arising on translation are recognised in the statement of comprehensive income, within other gains/(losses) – net, except when deferred in other comprehensive income as qualifying cash flow hedges and qualifying net investment hedges. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated to New Zealand dollars at foreign exchange rates ruling at the dates the fair value was determined. Group companies The assets and liabilities of all of the Group companies (none of which has a currency of a hyper-inflationary economy) that have a functional currency that differs from the presentation currency, including goodwill and fair value adjustments arising on consolidation, are translated to New Zealand dollars at foreign exchange rates ruling at the balance sheet date. The revenues and expenses of these foreign operations are translated to New Zealand dollars at rates approximating to the foreign exchange rates ruling at the dates of the transactions. Exchange differences arising from the translation of foreign operations are recognised in the foreign currency translation reserve and borrowings and other currency instruments designated as hedges of such investments are taken to shareholders’ equity. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and are translated at the foreign exchange rates ruling at the balance sheet date. 2.4. Share capital Ordinary shares and redeemable ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. Where any Group company purchases the Company’s equity share capital (Rakon Restricted Share Plan), the consideration paid, including any directly attributable incremental costs (net of income taxes) is deducted from equity attributable to the Company’s equity holders until the shares are cancelled or reissued. Where such ordinary shares are subsequently reissued, any consideration received, net of any directly attributable incremental transaction costs and the related income tax effects, and is included in equity attributable to the Company’s equity holders. 2.5. Property, plant and equipment Initial recording and subsequent measurement Items of property, plant and equipment are stated at cost less accumulated depreciation and impairment losses. The cost of purchased property, plant and equipment is the value of the consideration given to acquire the assets and the value of other directly attributable costs, which have been incurred in bringing the assets to the location and condition necessary for their intended service. Where parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items of property, plant or equipment. Subsequent costs The entity recognises in the carrying amount of an item of property, plant or equipment the cost of replacing part of such an item when that cost is incurred only when it is probable that the future economic benefits embodied with the item will flow to the entity and the cost of the item can be measured reliably. All other costs are recognised in the statement of comprehensive income as an expense as incurred. Depreciation Depreciation of property, plant and equipment, other than freehold land, is calculated on a straight line basis so as to expense the cost of the assets to their expected residual values over their useful lives as follows: 2015 2014 Nil Nil 15-20 years 10-20 years Leasehold improvements 4-25 years 3-25 years Computer hardware 1-10 years 2-10 years Plant and equipment 1-20 years 2-20 years Motor vehicles 5-20 years 5-20 years Furniture and fittings 2-20 years 3-20 years Nil Nil Land Buildings Assets under course of construction The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance date. Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognised within “other gains/(losses) – net” in the statement of comprehensive income. 11 [Simon Bosley] [printed: April 12, 2006 10:49 AM] [saved: April 12, 2006 10:48 AM] S:\Gem IPO\20. Prospectus or Information Memorandum\Draft 15\Rakon Offer Doc v15 marked up.doc 2.6. Leases The entity is the lessee. Leases where the lessor retains substantially all the risk and rewards of ownership are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the statement of comprehensive income on a straight-line basis over the period of the lease. Finance leases, which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item, are capitalised at the inception of the lease at the fair value of the leased asset or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are recognised in finance costs in profit or loss. Capitalised leased assets are depreciated over the shorter of the estimated useful life of the asset and the lease term if there is no reasonable certainty that the Group will obtain ownership by the end of the lease term. 2.7. Intangible assets Goodwill Goodwill acquired in a business combination is initially measured at cost of the business combination being the excess of the consideration transferred over the fair value of the Group’s net identifiable assets acquired and liabilities assumed. If this consideration transferred is lower than the fair value of the net identifiable assets of the acquired subsidiary, associate or joint venture, the difference is recognised in profit or loss. Goodwill on acquisitions of subsidiaries is included in intangible assets. Goodwill on acquisition of associates and joint ventures is included in “investment in associates/interest in joint ventures” and is tested for impairment as part of the overall balance. Separately recognised goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. Impairment losses on goodwill are not reversed. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Goodwill is allocated to cash-generating units for the purpose of impairment testing. The allocation is made to those cash-generating units or groups of cash-generating units that are expected to benefit from the business combination in which the goodwill arose. Expenditure on internally generated goodwill and brands is recognised in the statement of comprehensive income as an expense as incurred. Patents and software Identifiable intangible assets that are acquired by the Group are stated at cost less accumulated amortisation and impairment losses. Subsequent expenditure on intangible assets is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure is expensed as incurred. Amortisation is charged to the statement of comprehensive income on a straight-line basis over the estimated useful lives of 1 – 20 years. Software assets and capitalised costs of developing systems are recorded as intangible assets and amortised unless they are directly related to a specific item of hardware and recorded as property, plant and equipment. Research and development Expenditure on research activities, undertaken with the prospect of gaining new scientific or technical knowledge and understanding, is recognised in the statement of comprehensive income as an expense as incurred. Any research and development taxation credits and government grant funding for research and development are recognised when eligibility criteria have been met and treated as a reduction in expenses. Expenditure on development activities, whereby research findings are applied to a plan or design for the production of new or substantially improved products and processes, is capitalised if the product or process is technically and commercially feasible and the entity has sufficient resources to complete development. Other development expenditure is recognised in the statement of comprehensive income as an expense as incurred. 2.8. Inventories Inventories are stated at the lower of cost (weighted average cost) or net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. 2.9. Impairment of non-financial assets The carrying amounts of the Group’s non-financial assets are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the asset’s recoverable amount is estimated being the higher of an asset’s fair value less costs to sell and the asset’s value in use. An impairment loss is recognised whenever the carrying amount of an asset or its cashgenerating unit exceeds its recoverable amount. Impairment losses are recognised in the statement of comprehensive income. For goodwill the recoverable amount is estimated at each balance sheet date. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to cash-generating units (group of units) and then, to reduce the carrying amount of the other assets in the unit (group of units) on a pro rata basis. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. 12 [Simon Bosley] [printed: April 12, 2006 10:49 AM] [saved: April 12, 2006 10:48 AM] S:\Gem IPO\20. Prospectus or Information Memorandum\Draft 15\Rakon Offer Doc v15 marked up.doc 2.10. Financial instruments Financial instruments comprise cash and cash equivalents, trade and other receivables, trade and other payables, borrowings and derivative financial instruments (forward foreign exchange contracts, collar options, interest rate swaps). Financial assets and financial liabilities are recognised on the Group’s balance sheet when the Group becomes a party to the contractual provisions of the instrument. Financial assets are derecognised when the rights to receive cash flows from the investments have expired or have been transferred and the Group has transferred substantially all risks and rewards of ownership. Cash and cash equivalents Cash and cash equivalents comprise cash balances, call deposits, other short term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value, and bank overdrafts. Bank overdrafts are shown separately from borrowings on the balance sheet. Trade and other receivables Trade and other receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. Collectability of trade receivables is reviewed on an ongoing basis. Debts which are known to be uncollectable are written off. A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the effective interest rate. The amount of the provision is recognised in the statement of comprehensive income. Classification of financial assets The Group classifies its financial assets in the following categories: financial assets at fair value through profit or loss, loans and receivables. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition and re-evaluates this designation at each reporting date. Financial assets at fair value through profit or loss This category has two sub-categories: financial assets held for trading, and those designated at fair value through profit or loss on initial recognition. For accounting purposes, derivatives are categorised as held for trading unless they are designated as hedges. Assets in this category are classified as current assets if they are either held for trading or are expected to be realised within 12 months of the balance sheet date. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the Group provides money, goods or services directly to a customer with no intention of selling the receivable. They are included in current assets, except for those with maturities greater than 12 months after the balance sheet date which are classified as non-current assets. The Group’s loans and receivables comprise ‘trade and other receivables’ and ‘cash and cash equivalents’ in the balance sheet. Purchases and sales of financial assets are recognised on trade-date – the date on which the Group commits to purchase or sell the asset. Financial assets at fair value through profit and loss are carried at fair value. Loans and receivables are carried at amortised cost using the effective interest method. Realised and unrealised gains and losses arising from changes in the fair value of the ‘financial assets at fair value through profit or loss’ category are included in the statement of comprehensive income in the period in which they arise. The Group establishes fair value by using valuation techniques. These include reference to the fair values of recent arm’s length transactions, involving the same instruments or other instruments that are substantially the same, and discounted cash flow analysis. The Group assesses at each balance date whether there is objective evidence that a financial asset or Group of financial assets is impaired. Impairment testing of trade receivables is described above. Trade and other payables Trade and other payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method. Interest bearing borrowings Interest bearing borrowings are recognised initially at fair value, net of transaction costs incurred. Subsequent to initial recognition, interest bearing borrowings are measured at amortised cost with any difference between the proceeds (net of transaction costs) and the redemption amount recognised in the statement of comprehensive income over the period of the borrowings using the effective interest method. Arrangement fees are amortised over the term of the loan facility. General and specific borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use, are added to the cost of those assets until such time as the assets are substantially ready for their intended use, other borrowing costs are expensed when incurred. Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date. Derivative financial instruments The Group uses derivative financial instruments to hedge its exposure to foreign exchange and interest rate risks. The Group does not hold or issue derivative financial instruments for trading purposes. However, derivatives that do not qualify for hedge accounting are accounted for as trading instruments. 13 [Simon Bosley] [printed: April 12, 2006 10:49 AM] [saved: April 12, 2006 10:48 AM] S:\Gem IPO\20. Prospectus or Information Memorandum\Draft 15\Rakon Offer Doc v15 marked up.doc Derivative financial instruments are initially recognised at fair value on the date a derivative contract is entered into and are re-measured at their fair value at subsequent reporting dates. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument and, if so, the nature of the item being hedged. The Group designates certain derivatives as hedges of a particular risk associated with a recognised liability or a highly probable forecast transaction (cash flow hedge). The Group documents, at the inception of the transaction, the relationship between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking various hedging transactions. The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of hedged items. The full fair value of a hedging derivative is classified as a non-current asset or liability when the remaining maturity of the hedged item is more than 12 months; it is classified as a current asset or liability when the remaining maturity of the hedged item is less than 12 months. Trading derivatives are classified as a current asset or liability. The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in other comprehensive income. The gain or loss relating to the ineffective portion is recognised immediately in the statement of comprehensive income within other gains/(losses) – net. Amounts accumulated in equity are recycled in the statement of comprehensive income in the periods when the hedged item affects profit or loss (for example, when the forecast sale that is hedged takes place). The gain or loss relating to the effective portion of interest rate swaps hedging variable rate borrowings is recognised in the statement of comprehensive income within finance costs. The gain or loss relating to the effective portion of forward foreign exchange contracts hedging export sales is recognised in the statement of comprehensive income within sales. The gain or loss relating to the effective portion of forward foreign exchange contracts hedging raw materials purchases is recognised in the statement of comprehensive income. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in the statement of comprehensive income. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the statement of comprehensive income within other gains/(losses) – net. Certain derivative instruments do not qualify for hedge accounting. Changes in the fair value of any derivative instrument that does not qualify for hedge accounting are recognised immediately in the statement of comprehensive income within other gains/(losses) – net. 2.11. Fair value estimates The fair value of financial assets and financial liabilities must be estimated for recognition and measurement or for disclosure purposes. The fair value of financial instruments that are not traded in an active market is determined using valuation techniques. The Group uses a variety of methods and makes assumptions that are based on market conditions existing at each balance date. Techniques, such as estimated discounted cash flows, are used to determine fair value for financial instruments. The fair value of forward exchange contracts is determined using forward exchange market rates at the balance sheet date. The nominal value less estimated credit adjustments of trade receivables and payables are assumed to approximate their fair values. The fair value of financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest rate that is available to the Group for similar financial instruments. 2.12. Employee entitlements Long term employee benefits The Group’s net obligation in respect of long service leave and the French retirement indemnity plan is the amount of future benefit that employees have earned in return for their service in the current and prior periods. The obligation is calculated using the projected unit credit method and is discounted to its present value and the fair value of any related assets is deducted. The French retirement indemnity plan entitles permanent French employees to a lump sum on retirement. The payment is dependent on an employee’s final salary and the number of years of service rendered. Short term employee benefits Employee entitlements to salaries and wages and annual leave, to be settled within 12 months of the reporting date represent present obligations resulting from employee’s services provided up to the reporting date, calculated at undiscounted amounts based on remuneration rates that the entity expects to pay. Share based plans The Group’s management awards qualifying employees bonuses in the form of share options and conditional rights to redeemable ordinary shares, from time to time, on a discretionary basis. These are subject to vesting conditions and their fair value is recognised as an employee benefit expense with a corresponding increase in other reserve equity over the vesting period. The fair value determined at grant date excludes the impact of any non-market vesting conditions, such as the requirement to remain in employment with the entity. Non-market vesting conditions are included in the assumptions about the number of options that are expected to vest and the number of redeemable ordinary shares that are expected to transfer. At each balance sheet date the estimate of the number of options expected to vest and the number of redeemable ordinary shares expected to transfer is revised and the impact of any change in this estimate is recognised in the statement of comprehensive income with a corresponding entry to equity. The proceeds received net of any directly attributable transaction costs are credited to share capital when the options are exercised or the conditional rights to redeemable ordinary shares are transferred. 14 [Simon Bosley] [printed: April 12, 2006 10:49 AM] [saved: April 12, 2006 10:48 AM] S:\Gem IPO\20. Prospectus or Information Memorandum\Draft 15\Rakon Offer Doc v15 marked up.doc Superannuation schemes The Group’s NZ and overseas operations participate in their respective government superannuation schemes whereby the Group is required to pay fixed contributions into a separate entity. The Group has no legal or constructive obligations to pay further contributions if the fund does not have sufficient assets to pay all employees the benefits relating to the employee service in the current and prior periods. The Group has no further payment obligations once the contributions have been paid. The contributions are recognised as employee benefit expense when they are due. 2.13. Provisions A provision is recognised in the balance sheet when the Group has a present legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. 2.14. Revenue Goods sold and services rendered Revenue comprises the fair value of amounts received and receivable by the Group for goods and services supplied in the ordinary course of business. Revenue is stated net of Goods and Services Tax collected from customers. Revenue from the sale of goods is recognised in the statement of comprehensive income when the significant risks and rewards of ownership have been transferred to the buyer and the amount can be measured reliably. Revenue from services rendered is recognised in the statement of comprehensive income in proportion to the stage of completion of the transaction at the balance sheet date. Interest income Interest income is recognised in the statement of comprehensive income as it accrues, using the effective interest method. Dividend income Dividend income is recognised when the right to receive payment is established. Royalty income Royalty income is recognised on an accruals basis in accordance with the substance of the relevant agreements. 2.15. Income tax Income tax on the profit or loss for the periods presented comprises current and deferred tax. Income tax is recognised in the statement of comprehensive income except to the extent that it relates to items recognised directly in other comprehensive income, in which case it is recognised in other comprehensive income. Current tax is the expected tax payable on the taxable income for the period, using tax rates enacted or substantially enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary differences are not provided for: goodwill not deductible for tax purposes, the initial recognition of assets or liabilities that affect neither accounting nor taxable profit, and differences relating to investments in subsidiaries, associates and joint ventures to the extent that they will probably not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date. A deferred tax asset shall be recognised for the carry forward of unused tax losses and unused tax credits to the extent that it is probable that future taxable profit will be available against which the unused tax losses and unused tax credits can be utilised. 2.16. Segment reporting Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. The chief operating decision maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Managing Director, Marketing Director and Chief Financial Officer. 2.17. Critical accounting estimates and assumptions The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, rarely equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are outlined below. Estimated impairment of goodwill The Group tests annually whether goodwill has suffered any impairment, in accordance with the accounting policy stated in note 2.9. The recoverable amounts of cash-generating units have been determined based on value-in-use calculations. These calculations require the use of estimates. Impairment The Group, as required by NZ IFRS, has assessed as at 31 March 2015 whether any indicators of impairment exist. In doing so management and the Directors have considered factors including the current profitability of the Group and the market capitalisation value of the Company in comparison to the Group's net asset value. In undertaking such an assessment no indicators of impairment were identified and the Directors consider the net asset value of the Group to be appropriate. 15 [Simon Bosley] [printed: April 12, 2006 10:49 AM] [saved: April 12, 2006 10:48 AM] S:\Gem IPO\20. Prospectus or Information Memorandum\Draft 15\Rakon Offer Doc v15 marked up.doc Income taxes The Group is subject to income taxes in numerous jurisdictions. Significant judgement is required in determining the worldwide provision for income taxes. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. The Group recognises liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made. Interest in joint venture The joint venture product purchase agreement between Centum Rakon India Private Limited [CRI] and the Rakon Group is currently undergoing consultation and renegotiation. The Group continues to trade with CRI based on the previous agreement. 2.18. Comparatives Certain comparative balances have been restated in order to conform with current period presentation. 3. Segment information The chief operating decision maker assesses the performance of the operating segments based on a non-GAAP measure of ‘underlying EBITDA’ defined as: “Earnings before interest, tax, depreciation, amortisation, impairment, employee share schemes, non-controlling interests, adjustments for associates and joint ventures share of interest, tax & depreciation, loss on disposal of assets and other non-cash items (Underlying EBITDA).” Underlying EBITDA is a non-GAAP measure that has not been presented in accordance with GAAP. The Directors present underlying EBITDA as a useful non-GAAP measure to investors, in order to understand the underlying operating performance of the Group and each operating segment, before the adjustment of specific non-cash charges and before cash impacts relating to the capital structure and tax position. Underlying EBITDA is considered by the Directors to be the closest measure of how each operating segment within the Group is performing. Management uses the non-GAAP measure of underlying EBITDA internally, to assess the underlying operating performance of the Group and each operating segment. Underlying EBITDA as non-GAAP financial information has been extracted from the financial statements audited for the full year. Except as noted below, other information provided to the chief operating decision maker is measured in a manner consistent with that in the financial statements. The Directors provide a reconciliation of underlying EBITDA to net profit / loss for the year including additional disclosure by continuing and discontinued operations. 31 March 2015 Sales to external customers Inter-segment sales NZ ($000s) 61,002 UK6 ($000s) 9,759 China - India Centum France T'maker 1 ($000s) ($000s) 60,656 - Rakon 2 ($000s) - Total continued Discontinued Other 3 operations operations ($000s) ($000s) ($000s) 131,417 - Total ($000s) 131,417 448 6,360 9 - - - 6,817 - 6,817 Segment revenue 61,450 16,119 60,665 - - - 138,234 - 138,234 Underlying EBITDA Depreciation and amortisation Income tax credit/(expense) 4,351 5,647 3,646 1,118 560 908 764 - 5,923 - 125 265 15,369 7,938 - 15,369 7,938 2,309 (362) 26 - - (327) 1,646 - 1,646 Total assets4 Investment in associates Investment in joint venture Additions of property, plant, equipment and intangibles 65,560 - 10,307 - 31,207 - 8,697 8,697 7,015 7,015 2,068 - 124,854 8,697 7,015 - 124,854 8,697 7,015 2,786 1,041 1,881 - - - 5,708 - 5,708 Total liabilities5 33,303 608 9,831 - - 1,703 45,445 - 45,445 16 [Simon Bosley] [printed: April 12, 2006 10:49 AM] [saved: April 12, 2006 10:48 AM] S:\Gem IPO\20. Prospectus or Information Memorandum\Draft 15\Rakon Offer Doc v15 marked up.doc 31 March 2014 Sales to external customers Inter-segment sales Segment revenue Underlying EBITDA Depreciation and amortisation Loss on disposal of assets (sale of shares in subsidiary) (note 32) Impairment (note 27) Income tax credit/(expense) China - India Centum Rakon 2 ($000s) - NZ ($000s) 67,734 UK ($000s) 26,413 France T'maker 1 ($000s) ($000s) 56,301 - 2,117 69,851 5 56,306 (11,823)7 13,395 1,210 27,623 5,500 1,546 - Total continued Discontinued Other 3 operations operations ($000s) ($000s) ($000s) (497) 149,951 404 Total ($000s) 150,355 (7,280)7 775 556 - 3,822 - 808 311 (115) (74) 4,140 154,091 (9,340) 15,642 6,401 6,805 1,809 804 10,541 160,896 (7,531) 16,446 - - - - - - 8,467 8,467 19,920 832 578 (29) - - (305) 19,920 1,076 21,467 - 41,387 1,076 Total assets4 Investment in associates Investment in joint venture Additions of property, plant, equipment and intangibles 48,773 - 29,554 - 34,055 - 7,666 7,666 - 6,210 6,210 2,127 - 128,385 7,666 6,210 - 128,385 7,666 6,210 1,625 1,546 2,526 - - - 5,697 223 5,920 Total liabilities5 30,627 11,203 9,174 - - (1,586) 49,418 - 49,418 1 Includes Rakon Limited’s 40% share of investment in Shenzhen Timemaker Crystal Technology Co. Ltd, Chengdu Timemaker Crystal Technology Co. Ltd and Shenzhen Taixaing Wafer Co. Ltd. 2 Includes Rakon Limited’s 49% share of investment in Centum Rakon India Private Limited. 3 Includes investments in subsidiaries, Rakon Financial Services Ltd, Rakon UK Holdings Ltd, Rakon Investment HK Limited and Rakon HK Limited. 4 The measure of assets has been disclosed for each reportable segment as it is regularly provided to the chief operating decision-maker and excludes intercompany balances eliminated on consolidation. 5 The measure of liabilities has been disclosed for each reportable segment as it is regularly provided to the chief operating decision-maker and excludes intercompany balances eliminated on consolidation. 6 The UK manufacturing facility (in Lincoln) relocated in the 2014 calendar year with the transfer of production and sales to NZ. 7 Includes one off restructure costs in NZ $3,368,000 and in France $3,816,000. A reconciliation of underlying EBITDA to net profit/(loss) for the year is provided as follows: 31 March 2015 Underlying EBITDA Depreciation and amortisation Employee share schemes Continuing operations ($000s) 15,369 Discontinued operations ($000s) - Total ($000s) 15,369 (7,938) - (7,938) (58) - (58) Finance costs - net (1,272) - (1,272) Adjustment for associates and joint venture share of interest, tax & depreciation (3,600) - (3,600) Loss on asset sales/disposal (596) - (596) Other non-cash items (361) - (361) Profit before income tax 1,544 - 1,544 Income tax credit/(expense) 1,646 - 1,646 Net profit for the year 3,190 - 3,190 17 [Simon Bosley] [printed: April 12, 2006 10:49 AM] [saved: April 12, 2006 10:48 AM] S:\Gem IPO\20. Prospectus or Information Memorandum\Draft 15\Rakon Offer Doc v15 marked up.doc 31 March 2014 Underlying EBITDA Continuing operations ($000s) (9,340) Discontinued operations ($000s) 1,809 Total ($000s) (7,531) Depreciation and amortisation (15,642) (804) (16,446) Impairment (19,920) (21,467) (41,387) (8,467) Loss on disposal of assets (sale of shares in subsidiary) - (8,467) (20) - (20) Finance costs - net (1,717) 2 (1,715) Adjustment for associates and joint venture share of interest, tax & depreciation (2,787) - (2,787) Employee share schemes Non controlling interest Loss before income tax Income tax credit/(expense) Net loss for the year - (4,370) (4,370) (49,426) (33,297) (82,723) (1,076) - (1,076) (50,502) (33,297) (83,799) Breakdown of the revenue from all sources is as follows: Sales of goods Revenue from services 2015 ($000s) 130,977 2014 ($000s) 149,000 440 1,355 131,417 150,355 The Group’s trading revenue is derived in the following regions. Revenue is allocated above based on the country in which the customer is located. 2015 ($000s) 2014 ($000s) Asia 65,252 78,537 North America 17,793 18,485 Europe 45,576 50,720 Total revenues by destination Region Others 2,796 2,613 131,417 150,355 Total revenues by market 2015 ($000s) 2014 ($000s) Telecommunications 71,318 61,598 Global Positioning 30,351 30,779 3,583 24,399 23,051 25,330 The Group’s trading revenue is made up of the following segments. Smart Wireless Space and Defence Other 4. 3,114 8,249 131,417 150,355 2015 ($000s) 2014 ($000s) Other operating income Dividend income 1 1 Rental income 16 26 Other income 233 325 250 352 250 86 266 Discontinued operations 18 [Simon Bosley] [printed: April 12, 2006 10:49 AM] [saved: April 12, 2006 10:48 AM] S:\Gem IPO\20. Prospectus or Information Memorandum\Draft 15\Rakon Offer Doc v15 marked up.doc 5. Operating expenses 2015 ($000s) 2014 ($000s) 8,482 11,149 26,615 46,246 46,246 10,697 10,777 35,968 57,442 869 56,573 6,103 1,835 13,285 (2,136) (334) 2,261 15,441 1,794 13,567 (2,790) 7,184 2,576 Costs of offering credit Impairment loss on trade receivables Bad debt write-offs (79) 107 (25) Governance expenses Directors' fees 360 400 Auditors' fees Principal auditors Audit fees for current year Share registrar audit Treasury advisory services 369 3 25 510 3 30 18 19 3 11 2015 ($000s) 2014 ($000s) 892 388 892 388 Operating expense by function: Selling and marketing costs Research and development General and administration Discontinued operations Operating expenses include: Depreciation - inclusive of depreciation included in cost of sales Amortisation Research and development expense Research and development tax credit & government grant Restructure cost Rental expense on operating leases Audit services other auditors Sundry expenses Donations 6. Other gains/(losses) – net Gain on disposal of property, plant, equipment and intangibles 1 Foreign exchange gains/(losses) – net Forward foreign exchange contracts - held for trading Gains/(losses) on revaluation of foreign denominated monetary assets and liabilities 2 Discontinued operations (51) - 3,000 2,949 (423) (423) 3,841 (35) - 1,867 3,841 (1,902) 1 Includes £593,000 gain from the sale of land and buildings at Sadler Road, Lincoln, UK completed subsequent to the relocation of Rakon’s manufacturing facility. 2 Includes realised and unrealised gains/(losses) arising from accounts receivable and accounts payable. Hedge accounting is sought on the initial sale of goods and purchase of inventory, subsequent movements are recognised in trading foreign exchange. 19 [Simon Bosley] [printed: April 12, 2006 10:49 AM] [saved: April 12, 2006 10:48 AM] S:\Gem IPO\20. Prospectus or Information Memorandum\Draft 15\Rakon Offer Doc v15 marked up.doc 7. Income tax expense 2015 2014 ($000s) ($000s) Current tax (1,010) (1,475) Deferred tax 2,656 399 1,646 (1,076) The tax on the Group's result before tax differs from the theoritical amount that would arise using the weighted average tax rate applicable to the results of the consolidated entities as follows: Profit/(loss) before tax Tax calculated at domestic tax rates applicable to profits in the respective countries Foreign exchange difference in income tax calculation Expenses not deductible Non-taxable income Expenses deductible for tax purposes Prior year adjustment Associate and Joint Venture results reported net of tax Deferred tax expense (income) resulting from reduction in tax rate Forfeited NRWT and branch foreign tax Controlled foreign company income Tax losses for which no deferred income tax asset was recognised Income tax credit/(expense) Discontinued operations 1,544 304 14 45 90 2,312 306 (94) (1,331) 1,646 1,646 (82,723) 22,316 (52) (14,851) 211 4 407 145 49 (160) (9,145) (1,076) (1,076) 20 [Simon Bosley] [printed: April 12, 2006 10:49 AM] [saved: April 12, 2006 10:48 AM] S:\Gem IPO\20. Prospectus or Information Memorandum\Draft 15\Rakon Offer Doc v15 marked up.doc 21 [Simon Bosley] [printed: April 12, 2006 10:49 AM] [saved: April 12, 2006 10:48 AM] S:\Gem IPO\20. Prospectus or Information Memorandum\Draft 15\Rakon Offer Doc v15 marked up.doc 22 [Simon Bosley] [printed: April 12, 2006 10:49 AM] [saved: April 12, 2006 10:48 AM] S:\Gem IPO\20. Prospectus or Information Memorandum\Draft 15\Rakon Offer Doc v15 marked up.doc Other Information A. Dividends (NZX Listing Rules Appendix 1: 1.3(d)) The Board of Directors has declared that no dividend is to be paid for FY2015. Rakon maintains a dividend policy such that it will pay a dividend of up to 50% of the after tax profit, if considered fiscally appropriate. The payment of dividends is subject to the approval of Rakon’s bank, ASB Bank, under its facility arrangement. B. Net Tangible Assets per Security (NZX Listing Rules Appendix 1: 1.3(g)) 31 March 2015 31 March 2014 Net tangible assets $000 64,862 68,148 Number of ordinary securities 000 191,039 191,039 0.34 0.36 Net tangible asset backing per ordinary security $ C. Control gained and lost over Entities (NZX Listing Rules Appendix 1: 1.3(h)) Rakon Limited has gained or lost control over the following entities during the period: During the period there was no change in control through new entities gained or existing entities lost. D. Associates & Joint Ventures (NZX Listing Rules Appendix 1: 1.3(i)) Rakon Limited has the following associate entities and joint venture arrangements. Shareholding Centum Rakon India Private Limited 49% Shenzhen Timemaker Crystal Technology Co, Limited 40% Chengdu Timemaker Crystal Technology Co, Limited 40% Shenzhen Taixiang Wafer Co, Limited 40% The contribution of Centum Rakon to Rakon Limited’s net results from ordinary activities is a net profit after tax of $3,293,000 (31 March 2014: $1,995,000). The contribution of Shenzhen Timemaker, Chengdu Timemaker and Shenzhen Taixiang to Rakon Limited’s net results from ordinary activities is a net loss after tax of $140,000 (31 March 2014: $295,000). E. Audit (NZX Listing Rules Appendix 1: 1.3(l)) The financial statements have been audited and are not be subject to any qualification. F. Business Changes (NZX Listing Rules Appendix 1: 1.3(m)) During the period the company implemented a previously announced plan to close its Lincoln, UK manufacturing plant. The plant has been closed effective October 2014. As the plan to close the plant had been confirmed and announced in the previous financial year (FY2014), all restructure costs associated with the closure were reported in FY2014. There have been no other major changes or trends in Rakon Limited’s business, either during the period or subsequent to the financial year end. 23