UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended March 29, 2002
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File Number 1-8139
ZARLINK SEMICONDUCTOR INC.
(Exact name of registrant as specified in its charter)
Canada Not Applicable
- --------------------------------------- ------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
400 March Road, Ottawa, Ontario, Canada K2K 3H4
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(Address of principal executive offices) (Zip or Postal Code)
Registrant's telephone number, including area code: (613) 592-0200
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
- --------------------------------------- ------------------------------------
Common shares, no par value New York Stock Exchange
The common shares are also listed on The Toronto Stock Exchange.
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
[Cover page 1 of 2 pages]
Exhibit Index Begins on Page 82
At May 31, 2002, 127,164,078 common shares of Zarlink Semiconductor Inc.
("Zarlink" or the "Company") were issued and outstanding. Non-affiliates of the
registrant held 115,279,881 shares having an aggregate market value of
$858,835,113 based upon the closing price of the common shares on the New York
Stock Exchange (May 31, 2002 being the last trading day) of $7.45.
Common shares held by shareholders holding more than 5% of the outstanding
common shares and by each executive officer and director of Zarlink have been
excluded from the non-affiliated common share total in that such persons may be
deemed to be affiliates of Zarlink. Exclusion of such common shares is not
necessarily a conclusive determination of the affiliate status of any holder
thereof for any other purpose.
Documents incorporated by reference: None
(Financial information and references to "$" or "dollars" are expressed in
millions of United States dollars unless otherwise stated or unless the context
otherwise indicates.)
The following trademark is mentioned in this Annual Report on Form 10-K: ZARLINK
which is a trademark of Zarlink Semiconductor Inc.
[Cover page 2 of 2 pages]
Table of Contents
Page No.
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PART I.........................................................................1
Item 1. Business............................................................1
Overview.................................................................1
Financial Information....................................................2
Business Strategy........................................................2
Recent Significant Events................................................3
Industry.................................................................5
Products and Customers...................................................5
Communications Segment................................................6
Network Access......................................................6
User Access.........................................................7
Medical Segment.......................................................8
Sales, Marketing and Distribution........................................8
Competition..............................................................9
Manufacturing...........................................................10
Research and Development................................................11
Government Regulation...................................................11
Employees...............................................................11
Proprietary Rights......................................................12
Forward-Looking Statements and Risk Factors.............................12
Technological Changes; Necessity to Develop and
Introduce New Products.............................................13
Competition..........................................................13
Dependence on Key Personnel..........................................13
Intellectual Property Protection.....................................14
Intellectual Property Claims.........................................14
Acquisitions.........................................................14
Significant International Operations.................................15
Foreign Exchange and Interest Rate Exposure and Concentration
of Credit Risk.....................................................15
Environmental Regulations............................................15
Regulatory Requirements..............................................16
European Union and the Euro..........................................16
Other Factors........................................................16
Item 2. Properties.........................................................16
Item 3. Legal Proceedings..................................................16
Item 4. Submission of Matters to a Vote of Security Holders................16
PART II.......................................................................17
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters..............................................17
Item 6. Selected Financial Data............................................18
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations..............................19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.......32
Item 8. Financial Statements and Supplementary Data........................33
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure..............................63
PART III......................................................................64
Item 10. Directors and Executive Officers of the Registrant...............64
Directors ...........................................................64
Statement of Corporate Governance Practices..........................65
General..............................................................65
Mandate of the Board...............................................66
Composition of the Board and of its Committees.....................67
Audit Committee....................................................67
Compensation Committee.............................................67
Nominating Committee...............................................68
Executive Committee................................................68
Independence from Management.......................................68
Decisions Requiring Prior Approval by the Board of Directors.......68
Other..............................................................68
Executive Officers......................................................69
Item 11. Executive Compensation...........................................70
Summary Compensation Table...........................................71
Employee Share Ownership Plan........................................71
1991 Stock Option Plan for Key Employees and Non-Employee
Directors..........................................................72
Option Grants During Fiscal 2002.....................................74
Year-End Option Values Table.........................................75
Other Compensation...................................................75
Employment Agreement of the President and CEO......................75
Executive Termination Agreements...................................76
Compensation of Non-Employee Directors...............................76
Option Information For Non-Employee Directors........................77
Directors' and Officers' Liability Insurance.........................77
Indebtedness of Officers, Directors and Employees....................77
Report on Executive Compensation.....................................77
Performance Graph....................................................79
Item 12. Security Ownership of Certain Beneficial Owners and Management...79
Item 13. Certain Relationships and Related Transactions...................81
PART IV.......................................................................82
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...82
Signatures....................................................................85
Power of Attorney.............................................................86
PART I.
Item 1. Business
Unless the context indicates otherwise, "Zarlink" and the "Company" refer
to Zarlink Semiconductor Inc. and its consolidated subsidiaries. The registered
office and the principal executive offices of Zarlink are located at 400 March
Road, Ottawa, Ontario, Canada K2K 3H4 and its telephone number at that address
is (613) 592-0200.
Zarlink was incorporated in Canada in 1971 and continued under the Canada
Business Corporations Act in 1976. On July 25, 2001, the Company formally
changed its name from Mitel Corporation to Zarlink Semiconductor Inc. In
connection with the name change, the Company began trading under the symbol "ZL"
on the New York Stock Exchange and The Toronto Stock Exchange on September 7,
2001. All reports filed by the Company under Section 13 or 15 (d) of the
Securities Exchange Act of 1934, as amended, prior to August 13, 2001 were filed
under the name "Mitel Corporation".
The Company reports its financial accounts in U.S. dollars. All financial
information and references to "$" and "dollars" are expressed in millions of
U.S. dollars unless otherwise stated or unless the context otherwise indicates.
Zarlink has historically prepared and filed its financial statements in
Canadian dollars and in accordance with Canadian Generally Accepted Accounting
Principles ("GAAP") with a reconciliation to United States (U.S.) GAAP. During
the third quarter ended December 28, 2001, the Company adopted the United States
dollar as its reporting currency for presentation of its consolidated financial
statements. In addition, the Company also began preparing and reporting complete
financial statements in accordance with U.S. GAAP. Historical consolidated
financial statements are presented in accordance with U.S. GAAP.
Zarlink made this change to enhance its communication with its
shareholders, customers and suppliers using the currency and accounting rules
that are more familiar to these groups. Management believes this presentation is
also consistent with the presentation of the financial results of its industry
counterparts and competitors.
Overview
Zarlink's mission is to employ its formidable analog, digital and
mixed-signal capabilities to provide the most compelling semiconductor products
for the wired, wireless, and optical connectivity markets and ultra low-power
medical applications, ahead of competition, to earn a superior return to the
Company's shareholders.
Communications
Products for the global communications industry include system reference
designs, the associated software and microelectronic components used for voice,
data and video communications. The principal building blocks of the industry are
software, microelectronics and product innovation in advanced digital switching
and transmission platforms, supported by a competency in, and knowledge of,
telecommunications networking.
In the communications market, Zarlink specializes in microelectronic
solutions for broadband connectivity over wired, wireless and optical media. The
product line enables voice and data convergence for high speed Internet systems,
switching systems, and subscriber access systems in the Network Access and User
Access market segments. Zarlink is a world leader in time division multiplex
("TDM") switching, asynchronous transfer mode ("ATM") convergence, Internet
Protocol ("IP") switching, network timing and synchronization, Very Short Reach
("VSR") Optical Interconnections and Radio Frequency ("RF") interfaces for time
division multiple access ("TDMA") cellular handsets and set-top box tuners for
these markets. The Company's semiconductor products are primarily non-commodity,
specialized products that are proprietary in design and used by multiple
customers. See "Business- Products and Customers."
Since the mid-1980s, the global communications industry has been
characterized by rapid structural change and economic growth caused by
technological innovation, economic factors, and changes in government policies
that encourage competition and increase choice. The evidence for these changes
includes the impact of the Internet,
deregulation, optical networking technology, broadband connectivity, wireless
and mobile communications, and demand by enterprises for cost-effective,
multi-functional networks and applications.
The impact of these factors, particularly customer demand for increasingly
complex networks, resulted in a rapid expansion by networking equipment
companies in the late 1990's and through the first half of calendar 2000. This,
in turn, helped to fuel the growth of component suppliers providing products to
meet the expected growth in demand. By the end of 2000, however, the general
economy began to slow down and capital markets retrenched. With this, network
capital spending plans were reduced across the market resulting in swelled
inventories held by equipment manufacturers, distributors, and component
suppliers, to far exceed the immediate requirements. This trend continued
through calendar 2001 and into calendar 2002 across the communications industry.
Many communications sector companies, including Zarlink, announced inventory
write-downs and restructurings to reduce operating costs during this downturn.
Management believes the downturn will continue through most of calendar 2002 and
until inventories are sufficiently reduced in the channels.
Management believes certain key technology drivers will help to invigorate
demand over the next several years such as the convergence of services over IP
networks. Network platforms will become increasingly multifunctional and
converged, supporting multiple access to combined voice, data and video
communications services, thus reducing the operating costs associated with
separate networks. Management anticipates that significant industry growth areas
will include wired, wireless and optical networks. The capital spending of
recent years has created an installed base of over one trillion dollars in
equipment in which new services will be provided over existing connectivity.
Content rich applications will drive the need for more bandwidth and the
technologies that can provide it. For example, management believes that consumer
demand for entertainment services will fuel the growth of set-top boxes in the
home. In addition, management believes an increasingly mobile population will
also drive demand for new services through wireless applications.
Medical
Zarlink's medical application specific integrated circuits ("ASICs") and
application specific standard products ("ASSPs") provide solutions for
applications such as pacemakers, hearing aids, portable instruments and other
ultra low power applications.
Today's population demands enhanced healthcare solutions for better
living. The drive to better overall health means that people of all ages want
improved methods of detection and more effective therapy for their health
concerns. Management believes that Zarlink is a leader in designing silicon
solutions that meet the rigorous standards and evolving requirements of
equipment makers and customers in the medical field.
Financial Information
Financial information about industry segments and about foreign and
domestic operations and export sales is provided under Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations, and
under Item 8 in Note 24 of the notes to the consolidated financial statements
appearing elsewhere in this Annual Report on Form 10-K. Financial information
about Research and Development is described in Management's Discussion and
Analysis of Financial Condition and Results of Operations.
Business Strategy
Zarlink's strategy is to exploit the following major developments that
management believes are under way in the communications and medical industries:
o Convergence of voice onto packet based data networks requiring superior
Quality of Service ("QoS") voice functionality;
o Emergence of broadband connectivity as a fundamental requirement for high
value multimedia networking;
o Increasing requirement for analog mixed signal integrated circuit ("IC")
technologies in high-speed applications; and
o The increasing use of microelectronics to improve health care and quality
of life and reduce health care costs.
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Zarlink's competencies range from the design of microelectronic components
and software for wired, wireless and optical communications to ultra low power
design competencies for medical applications. Management believes the Company's
competitive advantages include system design knowledge, high frequency, high
performance analog/mixed signal design and optoelectronics design capability for
wired, wireless and optical applications, and ultra low power design techniques
for medical applications.
The key elements of Zarlink's business strategy include the following:
o Provide the most compelling products, ahead of the competition, for the
wired, wireless and optical connectivity markets and ultra low power
medical applications;
o Focus on microelectronic solutions that integrate voice with high QoS on
packet based networks;
o Exploit its ultra low power design capability and analog and mixed signal
design skills in the communications market;
o Exploit its leadership position in implantable (in-vivo) and wearable
medical devices while developing further its line of products for the
instrument market; and
o Remain fabless for complementary metal oxide semiconductor ("CMOS")
processes and maintain fabrication capability specializing in high
performance bipolar and optical technology for strategic advantage in
these areas.
Management believes the Company is well positioned to implement its
business strategy by reason of its strong core technologies for signaling,
transporting and switching voice and data; and its strong position in RF
technology with applications ranging from tuners for set-top-boxes to cellular
telephones, and its advanced optoelectronic devices used in high speed
applications. Its unique ultra low power CMOS process technology enables the
Company to maintain a major position in medical applications. See
"Business-Products and Customers."
Recent Significant Events
Industry Slow Down
Beginning in the third quarter of Fiscal 2001, the communications
semiconductor industry experienced a significant downturn in sales. Management
believes that a variety of factors have combined to create market uncertainties
that extended throughout the 2002 fiscal year. These factors included a large
inventory build-up in the telecommunications and data equipment sectors that was
exacerbated by a reduced demand for infrastructure equipment from the telephone
companies, especially by Competitive Local Exchange Carriers ("CLECs") in the
United States. Further, a slowing of the growth rate of the U.S. and world
economies in general adversely impacted capital spending to send the
communications industry into a slump not seen in many years. Management believes
that these adverse industry trends will continue through calendar 2002.
CMOS Fabrication Facilities Sold in the Fourth Quarter of Fiscal 2002
Plymouth Foundry
On March 28, 2002, Zarlink sold its wafer fabrication facility in
Plymouth, UK, as well as certain intellectual property and related foundry
businesses to companies controlled by X-FAB Semiconductor Foundries AG ("X-FAB")
of Erfurt, Germany for $30.0, represented by $12.0 in cash on closing and an
interest-free note receivable of $18.0 repayable over three years. The Plymouth
facility comprised two CMOS wafer fabrication lines for producing digital and
mixed-signal communications and medical semiconductors.
The gain on sale of the Plymouth business amounted to $14.7 and was
deferred as an offset to the note receivable. The gain will be recognized into
income as the note receivable is collected.
As part of the sale, the two companies signed a five-year agreement to
ensure continuity of supply for Zarlink products manufactured at Plymouth. There
is no minimum unit volume purchase requirement under the agreement.
Approximately 175 Zarlink employees engaged in wafer production were transferred
to X-FAB as part of the sale. Zarlink will continue to employ the remaining
on-site staff of design engineers, product developers, and test engineers.
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Bromont Foundry
On February 22, 2002, Zarlink sold its foundry facility in Bromont,
Quebec, Canada and related business to DALSA Semiconductor Inc. ("DALSA") for
$16.9. Under the agreement, Zarlink received from DALSA $13.0 in cash and
retained a 19.9% investment in the Bromont foundry. The Bromont facility is an
operation featuring CMOS process technology for digital and mixed-signal
(analog/digital) communications products. The plant also has other processes
supporting industrial, scientific and space applications, particularly high-end
imaging applications.
The two companies also signed a three-year agreement to ensure continuity
of supply for Zarlink products manufactured at Bromont. There is no minimum unit
volume purchase requirement under the agreement. Approximately 250 Zarlink
employees affiliated with the Bromont operation were transferred to DALSA as
part of the agreement.
The Company recorded a loss on sale of the Bromont foundry business of
$5.4, before income tax recoveries of $1.2, in the fourth quarter of Fiscal
2002.
Special Charges Recorded in Fiscal 2002
In response to the industry downturn, the Company announced on May 10,
2001 that it had implemented a cost-containment plan in order to preserve cash
resources. The cost-containment plan included a workforce reduction of the
Company's total employee base by 439 employees, globally, which was completed by
the end of Fiscal 2002. Further administrative workforce reductions were
implemented in the fourth quarter of Fiscal 2002 affecting 32 employees around
the world. This extension to the program will be completed in the second quarter
of Fiscal 2003. The total cost of the workforce reduction program was estimated
to be $25.5 in Fiscal 2002.
As a result of the workforce reduction program and consolidating design
activity, the Company took steps to provide for excess leased facilities in
Ottawa, Canada, San Jose, California in the United States, the United Kingdom,
and the Far East. The cost of the lease and contract settlements amounted to
$8.9 in Fiscal 2002.
The Company's enterprise resource planning ("ERP") system was originally
designed for a company heavily engaged in manufacturing with a much larger
workforce. During Fiscal 2002, the Company reviewed its information system
requirements as Zarlink evolved from a significant manufacturing concern to a
mostly fabless semiconductor company. In light of the sale of its two CMOS fabs
and a significant reduction in its workforce in Fiscal 2002, the Company
determined that the number of licenses required going forward would be
significantly lower. Accordingly, the Company recorded an impairment charge for
its ERP system and certain other assets amounting to $1.1 in the fourth quarter
of Fiscal 2002.
Zarlink also reviewed the carrying value of certain long-lived assets,
including an investment held at cost, during Fiscal 2002. Based on an analysis
of estimated future undiscounted cash flows, the Company determined that these
assets were impaired. Accordingly, a charge of $5.6 was recorded in the fourth
quarter of Fiscal 2002 to reduce the carrying value of these assets to their
estimated fair value.
The total of these pre-tax special charges amounted to $41.1, of which
$34.6 was recorded in the first quarter and $6.5 was recorded in the fourth
quarter of Fiscal 2002.
In addition, the Company reviewed its inventory requirements in the first
quarter of Fiscal 2002 for the succeeding 12 months in light of the current
semiconductor industry-wide slowdown and higher channel inventories. As a result
of this review, the Company recorded an excess inventory charge to cost of sales
in the first quarter of Fiscal 2002 amounting to $29.1 for inventories estimated
to be beyond its needs for the following 12 months.
Investment in Optenia, Inc.
In Fiscal 2001, Zarlink made an initial equity investment of approximately
$5.7 in Optenia, Inc. ("Optenia"), a start-up developer of photonic components
and sub-systems for high-capacity optical networks. During the fourth quarter of
Fiscal 2002, Optenia was placed into receivership and liquidated after failing
to raise sufficient additional venture
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capital necessary to continue operations. Accordingly, the Company wrote off its
remaining investment in Optenia, amounting to $3.5, in the fourth quarter of
Fiscal 2002.
Amendment to 1991 Stock Option Plan for Key Employees and Non-employee
Directors
On December 7, 2001, Zarlink's shareholders approved two amendments that
significantly changed the Company's stock option plan for key employees and
non-employee directors. Management believes that these amendments enhance the
plan's flexibility and make it more responsive to the competitive requirements
of the semiconductor industry.
For the first amendment, shareholders voted to increase the option pool
outstanding and available for grant to 20,227,033 common shares, representing
approximately 12% of the then outstanding common shares. Shareholders also
approved a second amendment that brings certain 10-year old plan provisions in
line with current industry practice as well as granting shareholders the right
to approve any future option exchange programs.
Common Share Repurchase Program
On June 6, 2002, the Company announced its Board of Directors had
authorized the continuation of its normal course issuer bid program to
repurchase up to 6,358,203 common shares, representing 5% of the 127,164,078
common shares issued and outstanding as of May 31, 2002. The purchases will take
place on the open market through the stock exchanges of New York and Toronto
over a twelve-month period beginning on June 10, 2002 and ending on June 9,
2003, or on such earlier date as the Company may complete its purchases pursuant
to the notice of intention to make a normal course issuer bid filed with The
Toronto Stock Exchange. The Company, which intends to cancel the repurchased
shares, believes that at present no director, senior officer or insider of the
Company intends to sell any common shares under this program. No common shares
were repurchased under the previous program during the period from June 9, 2001
to June 8, 2002.
Industry
The primary markets for Zarlink's products are the network access and user
access communications markets and the medical devices markets. Each of these
markets is expected to grow economically and evolve technologically over the
next several years, which management believes should provide revenue growth
opportunities to Zarlink. The increased requirements of end users, coupled with
new opportunities should continue to drive the demand for network communications
equipment and infrastructure over the long-term. The deregulation of
telecommunications services in many parts of the world has resulted in increased
competition and demand for new services. In addition, the low penetration of
telephone service in emerging countries is a strong driver for wired and
wireless communications. Management believes that these developments represent
significant new market opportunities for Zarlink over the next several years.
Products and Customers
Zarlink manufactures and sells communications semiconductor products for
the wired, wireless and optical markets. Zarlink also addresses the medical
market with its in-vivo and wearable solutions. Communications segment revenue
accounted for 84%, 93% and 93% of the Company's total revenue from continuing
operations in Fiscal 2002, 2001, and 2000, respectively. Medical segment revenue
accounted for the balance in each respective year.
Zarlink's integrated circuits are microelectronic component parts that
offer the high feature integration, low power consumption and low physical space
required for the design of advanced systems. Such products are designed to
provide advanced features and control functions for a wide variety of electronic
products and systems.
Zarlink's semiconductor products are primarily non-commodity, specialized
products that are proprietary in design and used by multiple customers.
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Full custom semiconductor products rely on an original design and a unique
interface. Such products take longer to design but generally remain as a key
component in the end product for the duration of its life cycle. Semi-custom
products are proprietary products that have been altered to meet the specific
requirements of individual customers. Commodity products are "pin for pin"
replacements that sell primarily on the basis of performance, availability,
quality and price. Zarlink's products are mostly full custom. Accordingly,
management believes that once designed into a customer's product, Zarlink's
products form an integral part of the customer's system and are difficult to
replace, as replacement would require some redesign of the system.
Zarlink has a diverse and established base of some 374 customers in a wide
spectrum of end markets, including leading manufacturers in the
telecommunications, data communications, and medical sectors. In Fiscal 2002,
Zarlink had revenues from one external customer, a major distributor, which
exceeded 10% of total sales. Sales to this distributor in Fiscal 2002 amounted
to $27.1, or 12% of sales from continuing operations (Fiscal 2001 - $64.6, or
14% of sales).
Communications Segment
The microelectronics market for communications is large - comprising local
area networking, wide area networking, optical communications, cellular,
set-top-boxes, and communications processors, among others. Within this diverse
market, the Company focuses on providing a range of solutions that shape,
signal, transport and switch real-time traffic in the wired, wireless, and
optical networks. The Company's communications segment can be grouped in two
groups: (i) Network Access and (ii) User Access.
Network Access
Network Timing and Synchronization
Management believes that Zarlink is the industry leader in digital Phase
Lock Loops ("PLLs") for network timing and synchronization in T1/E1 and
synchronous optical network ("SONET") and synchronous digital hierarchy ("SDH")
applications. These products facilitate high reliability voice and data
communications across the telecommunications network by maintaining and
distributing clocks in a system even when source clocks are interrupted or when
back-up clocks are required. They are extensively used in central offices,
private branch exchanges ("PBXs"), wireless base stations, routers, multi
service provisioning platforms, ATM edge switches, Media Gateways and Integrated
Access Devices ("IADs").
Framers and Line Interface Units ("LIUs")
Zarlink provides single- and multi-port, feature-rich T1/E1/J1
transceiver/framer products that meet the latest recommendations and standards
from Telcordia, American National Standards Institute ("ANSI"), European
Telecommunications Standards Institute ("ETSI") and the International
Telecommunication Union ("ITU").
TDM Switching (timeslot interchange)
Management believes that Zarlink offers the most comprehensive line of
digital (Time Slot Interchange) switches in the industry. Zarlink's extensive
digital switch family extends from basic switches, up to 32,768 channel featured
switches, with a non-blocking capacity of 16,384 x 16,384 channels and low power
consumption. Digital switches are used in a wide variety of applications,
including central offices, PBXs, wireless base stations, routers, multi-service
provisioning platforms, Remote Access Servers and Concentrators, Media Gateways
and IADs.
Voice Echo Cancellation
Zarlink offers a range of Multi-Channel Voice Echo Cancellers for Voice
over IP ("VoIP"), Voice Telephony over ATM ("VToA"), Voice over Frame Relay
("VoFR"), T1/E1, personal communications services ("PCS") wireless base stations
and Gateway applications. Zarlink's voice echo cancellation algorithms have been
qualified by major operators across the world.
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ATM SAR
Zarlink's line of high density ATM segmentation and reassembly ("SARs")
devices are designed to convert TDM traffic to ATM in access- and carrier-class
equipment, such as concentrators, multiplexers and multiservice switches.
Management believes that Zarlink offers the highest density ATM SARs in the
industry.
Network Convergence - IMA
Zarlink's multi-port Inverse Multiplexing for ATM ("IMA") devices were the
industry's first ASSPs to focus on delivering IMA functionality for ATM-based
services over an existing T1/E1 infrastructure, interfacing directly to most
framers on the market.
Multi-port IP Switch
Supported by advanced network management software, Zarlink's multi-port
Ethernet switch devices provide a full suite of features, including enhanced QoS
for packet prioritization, Layer 3 routing, IP multicast, protocol filtering,
port mirroring, port trunking, buffer management and stacking at interface.
Switch applications include routers, VoIP gateways, and wireless base stations.
Telephone and Line Card Devices
Zarlink offers a wide range of exchange and subscriber solutions,
including silicon and hybrid subscriber line integrated circuits ("SLICs"),
Digital Subscriber Interfaces, Data Access Arrangements ("DAAs"), dual tone
multifrequency ("DTMF") Receivers and Transceivers, Central Office Interface
Circuits ("COICs"), Calling Number Identification Circuits ("CNICs"),
Compression/Decompression ("CODECs") and Integrated Digital Phone ICs.
Optical Data Communications
Zarlink offers a range of Parallel Optical Fiber modules for use as local
interconnect in terabit-class switches and routers, and to provide Optical
Interface Forum ("OIF") VSR, Infiniband and 10 Gbit Ethernet optical links.
Throughputs of up to 30 GB/s are supported with a variety of fiber counts and
formats. Zarlink also provides a range of discrete light emitting diodes
("LEDs"), photo intrinsic diodes ("PINs") and Duplex Opto Transceivers in a
variety of wavelengths and speeds for use in a wide range of communication and
industrial applications.
Multi-Sourced Parallel Fiber Modules
Zarlink's modules are designed to exploit their patented Smart OSA(TM)
("Optical Sub-Assembly") self-aligning assembly technology, as already employed
in the existing 623 family of 12, 8 and 4 channel Parallel Fiber Modules.
Zarlink has entered into Multi-Source Agreements (MSA) with Agilent Technologies
Inc. and W.L. Gore & Associates, Inc. for the supply of compatible modules that
meet an agreed to fit, form and function agreement between the parties.
User Access
Digital Television
Zarlink provides tuner and demodulator products for Satellite, Terrestrial
and Cable set-top boxes, Digital TV receivers and, in the future, Home Media
Centers. For many years Zarlink has been one of the world's prime suppliers of
fast PLLs and synthesizers, based on its in-house advanced bipolar processes
that are suitable for use in both analog and digital receivers and set-top
boxes. The latest developments include highly integrated CMOS system-on-a-chip
solutions for the emerging (Terrestrial) integrated Digital Television ("iDTV")
market that enables the convergence of entertainment, information access, voice
and other services.
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Digital Cellular Telephony
Zarlink has built on the success of its earlier analog chipsets by
developing new products to address emerging, multi-mode cellular standards. The
current portfolio for high volume digital cellular applications includes both RF
and mixed signal components for primarily TDMA handsets and the growing 2.5
generation GAIT (GSM ANSI136 interoperability team), general packet radio
service ("GPRS"), enhanced data for GSM evolution ("EDGE") markets. These ICs
are multi-band and multi-mode, offering a high level of integration. Zarlink
devices are found in products from many of the top handset manufacturers in the
world.
Bluetooth
Zarlink is applying its RF and mixed-signal expertise to produce a
low-powered, small footprint, CMOS Radio IC, which because of its "BlueRF"
industry standard interface can be used in a broad range of Bluetooth
applications, especially those requiring battery operation.
Medical Segment
The high cost of medical care is generating opportunities for
microelectronics-based products that reduce health-care costs and improve
quality of life. In-vivo medical devices such as pacemakers and wearable devices
such as hearing aids, portable equipment and communicating devices that monitor
patients in and outside a hospital are examples of emerging markets in which
Zarlink's experience and skills have immediate relevance.
From its developments in hearing aids, management believes that Zarlink
has world-class expertise in ultra low power audio processing and digital signal
processing ("DSP"). Zarlink is moving to leverage that expertise in high growth
applications and markets.
Zarlink is combining its expertise in ultra low power design with its
extensive RF integrated circuit design experience to develop solutions for
short-range communication for in-vivo medical and other high growth
applications.
Management believes that Zarlink is a major supplier of microelectronics
components for medical applications, and has a core competence in ultra low
power integrated circuit design. Zarlink's expertise in ultra low power,
high-reliability integrated circuit design has enabled the Company to make
medical devices with high performance and exceptionally long battery life.
Sales, Marketing and Distribution
The principal customers for Zarlink's semiconductors are customer premise
and network communication equipment manufacturers. Zarlink's products are also
marketed to data communications suppliers as the integration of computing and
telecommunications continues.
Zarlink sells its products through both direct and indirect channels of
distribution. Factors affecting the choice of distribution include, among
others, end-customer type, the level of product complexity and integration
requirements, the stage of product introduction, geographic presence and
location of markets, and volume levels. Zarlink sells its products in over 43
countries, through a network of 45 independent representatives and distributors
and through a direct sales force. Representatives generally have strong
relationships with Zarlink's end customers. These representatives assist with
the design of customer solutions incorporating Zarlink products, which are then
supplied through distributors. Zarlink has implemented a strategic account
program focusing on the development of business with the key network equipment
suppliers in the industry. Direct sales force personnel from each of Zarlink's
sales regions collaborate to manage business with these multinational
enterprises.
The primary markets for Zarlink's products are the technologically driven
industries. The telecommunications equipment, routers and access equipment and
medical device industries represent major end markets for Zarlink. Management
believes Zarlink's revenue growth over the long term will be supported by
various factors that drive demand for telecommunications equipment and
infrastructure [See Business - Overview]. The increasing penetration of
telephone
-8-
service in emerging countries is also a strong driver for both wireless and
wired communications, which management believes increases demand for the
Company's integrated circuits for communications applications.
The Company believes that one of its competitive advantages is the
expertise of its applications groups, which are located in the United Kingdom,
the United States, Canada, Singapore and Japan to serve customers in all parts
of the world. The applications groups assist original equipment manufacturers
("OEMs") in designing their next generation products using Zarlink components.
Zarlink has a strong record of soliciting customers with design ideas and
obtaining design wins. The design win cycle starts when Zarlink and/or its
representatives identify a need for one of its standard communications products
that meet certain specifications in a customer's equipment design. Once
Zarlink's product is selected for a design, the Company generally is assured of
providing the semiconductor for the product until the product is no longer
manufactured.
Americas
Until recently, Zarlink's semiconductor products (other than Medical) were
primarily sold through representatives of manufacturers and distributors.
Zarlink's sales representatives, who dealt directly with the end customer,
assisted with the design of systems incorporating Zarlink products. These
products were then supplied through Zarlink's distributors. Beginning late in
Fiscal 2002, the Company decreased its reliance on representatives and moved to
a mostly direct selling model in order to enhance customer relationships. The
direct sales force includes major account teams that target specific large
customers for standard product deliveries. Distributors also continue to form an
integral part of the Company's sales strategy.
Europe
Sales of Zarlink semiconductor components in Europe have been made
primarily through its direct sales channel. Distributors also play an important
role in the European region and management believes that their share of the
overall business will increase over the next year due to the desire of many
customers to consolidate their logistical demands. The Company maintains
technically qualified sales teams across the entire region and supports them
with a team of highly skilled applications engineers based in the United
Kingdom. The headquarters of the sales operation is in Swindon, United Kingdom.
Asia/Pacific
The Asia/Pacific area is a major geographical market for Zarlink's
semiconductor products, with China, Korea, Japan, Taiwan and Malaysia being the
largest markets. Zarlink's semiconductor products are also sold in Australia,
Hong Kong, Thailand, New Zealand, Singapore and the Philippines. The Company is
expanding into other emerging markets in Asia/Pacific, such as India.
Zarlink maintains regional headquarters in Singapore and offices in Japan,
Taiwan, Korea and China for semiconductor products. Over 64 % of sales in these
areas are achieved through representatives and distributors. The sales offices
provide a service linking customers, local representatives and applications
support groups that assist OEMs in designing products with Zarlink components.
Competition
Competition in the semiconductor market is intense, with new entrants
continually coming into the industry. Rapid technological change,
ever-increasing functionality due to integration, a focus on price performance,
and evolving standards characterize the markets for Zarlink's products.
Competition is based principally on design and system expertise, customer
relationship, service and support. Management believes Zarlink compares
favorably through its focus on proprietary designs, its intellectual property
and large patent portfolio for network access and user access markets and the
medical markets and its sales and support network.
In the communications market, Zarlink focuses on the convergence of real
time traffic with data. Management believes Zarlink has substantial intellectual
property associated with networking real time traffic such as voice.
-9-
Converged voice networking requires competencies in regulatory policies, analog
and mixed signal design, specialty processes, and voice quality.
Zarlink primarily designs and markets proprietary products that are sold
to many customers in the wired, wireless, and optoelectronic segments of the
communications market rather than competing with commodity products. Proprietary
designs provide long product life cycles with customers and present a
significant barrier to entry.
Management believes that Zarlink's sales channels and applications support
compare favorably to those of its competitors by providing worldwide coverage
and extended support to assist customers in getting their products to market
quickly.
Within the Network Access market segment, Conexant Systems, Inc.
("Conexant"), PMC-Sierra, Inc., Agere Systems, Inc., Infineon Technologies AG
("Infineon"), and Motorola, Inc. ("Motorola") are the Company's main global
competitors in one or more product lines. Management believes that Zarlink
competes favorably in Network Access based on Zarlink's extensive intellectual
property rights in converged networks and in QoS while meeting regulatory and
industry standards.
In the optoelectronic area of Network Access, competitors in the LED and
PIN diode business sectors include Agilent Technologies Inc., Honeywell Inc.,
Epitaxx Inc. and Tyco Electronics in North America and Infineon in Germany. In
this segment, management believes that Zarlink competes primarily on product
quality and customization capability. In the single channel vertical cavity
surface emitting laser ("VCSEL") market, Zarlink enjoys a shared leadership
position with Honeywell. In the VCSEL array market, Zarlink was first to market
to establish a leadership position and competes via sales support and price
performance. In respect of the VSR SMART OSA transceiver, Zarlink competes
mainly with Infineon and W.L. Gore & Associates, Inc., Agilent Technologies
Inc., and PicoLight. Management believes that Zarlink's patented technology and
higher performance will provide the Company with a competitive advantage.
Within User Access, Philips International BV, Infineon, Toshiba
Corporation, Motorola, Broadcom Corporation, Conexant, Maxim Integrated
Products, Inc., ST Microelectronics, Inc., RF Micro Devices, Microtune Inc. and
LSI Logic are Zarlink's main global competitors in one or more product lines. In
this market, management believes Zarlink competes favorably using products
designed on its bipolar processes and by using innovative design techniques on
SiGe BiCmos and standard CMOS technologies.
In the Medical segment, Zarlink competes mainly with American
Microsystems, Inc., Medtronic, Inc., Microsemi Inc., system OEMs and smaller
ASIC design houses using "pure play" foundries. With Zarlink's concentration of
application knowledge, world-class ultra low power design skills and a
developing portfolio of key intellectual property, in conjunction with its
comprehensive and certified quality system, management believes that Zarlink
competes favorably against competitors. Zarlink sells to five of the top seven
medical OEMs worldwide.
Manufacturing
The Company sold both of its CMOS fabrication facilities in the fourth
quarter of Fiscal 2002 and entered into agreements to ensure the continuity of
supply for products manufactured at these facilities. Zarlink also continues to
manufacture some of its semiconductor products in its three remaining
manufacturing facilities in the United Kingdom and Sweden.
The selection of manufacturing sites or suppliers for semiconductors
generally is dependent on the type of semiconductor to be manufactured and the
required process and technology. The Company's silicon fab is located in Swindon
in the United Kingdom. The Swindon facility uses bipolar technology for RF
applications. IC probe and finished goods testing is done out of the Company's
facilities in Ottawa, Canada and in Swindon and Plymouth in the United Kingdom.
Zarlink's optical fab is located in Jarfalla, Sweden while optical assembly
takes place in both Jarfalla and in Caldicot, United Kingdom. Optoelectronic
components and modules are produced at the Jarfalla, Sweden facility using
gallium arsenide and indium phosphide processes. Hybrid assembly and testing is
performed in Caldicot.
-10-
Zarlink's foundry operation serves a growing base of customers in the
United States and Europe by performing sub-contract manufacturing of silicon
wafers using its bipolar process. Zarlink views the foundry business as a means
of enhancing its manufacturing facilities to perform at or near full capacity
with a diversified set of applications, and of hedging against market trends in
any one segment.
Zarlink's semiconductor manufacturing facilities and their quality management
systems are certified to the strict standards established by the International
Organization for Standardization.
Research and Development
Zarlink's current research and development ("R&D") programs are primarily
directed at developing intellectual property in the areas of IC process
development, communications ICs, optoelectronic components, and ultra low power
and semiconductors.
Zarlink's process development efforts are focused on mixed signal
processes and yield improvements in bipolar processes. Communications R&D
programs include development of intellectual property in the areas of ATM, line
cards, network timing and synchronization functions, wide area network ("WAN")
chips, switching and voice processing functions, the TDMA, Edge, GPRS 2.5G and
3G wireless standards, set-top box communications chips and high performance
analog ICs. Optoelectronics R&D activity is focused on Zarlink's patented Smart
OSA packaging technology for VSR applications, and on single and array VCSEL
applications. Medical IC development is focused on ultra low power, high
reliability advances for medical applications.
Zarlink maintains product design centers in Ottawa, Canada; Jarfalla,
Sweden; San Diego, and Irvine in California, United States; and Caldicot,
Swindon, Plymouth, Lincoln and Borehamwood in the United Kingdom, and Rotterdam
in the Netherlands.
As at March 29, 2002, Zarlink employed 480 research and development
personnel primarily based in the United Kingdom, Canada, Sweden, and the United
States.
Government Regulation
Current government regulation or policy does not significantly affect
Zarlink, although there can be no assurance that future regulatory changes will
not affect the Company's business, financial condition or results of operation.
Other Corporate Information
Employees
At May 31, 2002, Zarlink employed 1,466 persons. As at March 29, 2002, the
Company employed 1,465 persons compared to 2,558 persons at the end of Fiscal
2001 and 5,688 at the end of Fiscal 2000. The decrease in personnel from the end
of Fiscal 2001 to the end of Fiscal 2002 is principally due to the sale of the
CMOS fabrication facilities in Plymouth (UK) and Bromont (Canada) during the
fourth quarter of Fiscal 2002 and to the restructuring program implemented in
the first quarter of Fiscal 2002. Approximately 23% of the Company's employees
are located in Canada, 51% in the United Kingdom, 7% in the United States, and
19% in the rest of the world. Zarlink considers the relationship with its
employees to be good.
Certain of the Company's employees are covered by collective bargaining
agreements or are members of a labor union.
In the United Kingdom, approximately 30 employees of Zarlink's Swindon
operations are unionized. The unions representing the employees include the
Amalgamated Electrical and Engineering Union, the Manufacturing Science and
Finance Union and the Transport and General Workers Union. Negotiations are held
annually in July. Management considers the Company's relationship with the
unions in the United Kingdom to be satisfactory.
-11-
In Sweden, three unions represent approximately 220 employees. The Metall
Industriarbetarforbundet union represents approximately 60 production employees;
the Svenska Industriarbetarforbundet union represents approximately 135 office
professional employees; and the Civilingenjorsforbundet union represents
approximately 25 other professional employees. It is common practice in Sweden
for the national unions to negotiate minimum standards with the employer
association, supplemented by additional terms negotiated by the local branches.
Each agreement is for a term of three years and expires on March 31, 2004.
Management considers the Company's relationship with the unions in Sweden to be
satisfactory.
Proprietary Rights
The Company owns many patents and has made numerous applications for
patents relating to communications and semiconductor and optoelectronic
technologies. Management believes that the ownership of patents is an important
factor in exploiting associated inventions and for providing protection for its
patentable technology in the areas referred to above.
The "ZARLINK" trademark and the Zarlink corporate logo are registered in
Canada and the United States and have been registered in certain other countries
where Zarlink conducts business. Most of the Company's other trademarks are
registered or applications for registration have been filed in various countries
where management has determined such registration to be advisable. Management
believes that the Company's trademarks are valuable assets and generally
supports applications for registration for marks in countries where the
assessment of potential business related to the sale of products or services
associated with such marks justifies such action.
The Company also owns other intellectual property rights for which
registration has not been pursued. In addition to applying for statutory
protection for certain intellectual property rights, the Company takes various
measures to protect such rights, including maintaining internal security
programs and requiring certain nondisclosure and other provisions in contracts.
As is the case with many companies doing business in the
telecommunications industry, it is necessary or desirable from time to time for
the Company to obtain licenses from third parties relating to technology for
Zarlink's products and processes. No current license is considered by management
to be material to the Company's business, financial condition or results of
operations.
Forward-Looking Statements and Risk Factors
Certain statements in this section and in other sections of this Annual
Report on Form 10-K contain forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 that are based on current
expectations, estimates and projections about the industries in which the
Company operates, management's beliefs and assumptions made by management. Words
such as "expects," "anticipates," "intends," "plans," "believes," "seeks,"
"estimates" and variations of such words and similar expressions are intended to
identify such forward-looking statements. These statements are not guarantees of
future performance and involve certain risks, uncertainties and assumptions,
which are difficult to predict. Therefore, actual outcomes and results may
differ materially from results forecast or suggested in such forward-looking
statements. The Company undertakes no obligation to update publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise.
Such risks, uncertainties and assumptions include, among others, the
following: increasing price and product/service competition by foreign and
domestic competitors, including new entrants; rapid technological developments
and changes; the ability to continue to introduce competitive new products on a
timely, cost-effective basis; delays in product development; the mix of
products/services; changes in environmental and other domestic and foreign
governmental regulations; protection and validity of patent and other
intellectual property rights; import protection and regulation; industry
competition; industry capacity and other industry trends; the ability of the
Company to attract and retain key employees; demographic changes and other
factors referenced in this Form 10-K. The above factors are representative of
the risks, uncertainties and assumptions that could affect the outcome of the
forward-looking statements. In addition, such statements could be affected by
general industry and market conditions and growth rates, general
-12-
domestic and international economic conditions including interest rate and
currency exchange rate fluctuations and other risks, uncertainties and
assumptions, including the following:
Technological Changes; Necessity to Develop and Introduce New Products
The markets for the Company's products are characterized by rapidly
changing technology and evolving and competing industry standards, changes in
customers, emerging competition, frequent new product introductions and evolving
methods used by carriers and business enterprises to manage communications
networks. The Company's future success will depend, in part, on its ability to
use leading technologies effectively, to continue to develop its technical
expertise, to maintain close working relationships with its key customers, to
develop new products that meet changing customer needs, to advertise and market
its products and to influence and respond to changing industry standards and
other technological changes on a timely and cost-effective basis.
There can be no assurance that the Company will be successful in
effectively developing or using new technologies, developing new products or
enhancing its existing products on a timely basis or that such new technologies
or enhancements will achieve market acceptance. The Company's pursuit of
necessary technological advances may require substantial time and expense and
there can be no assurance that the Company will succeed in adapting its products
or business to alternate technologies. Failure of the Company, for technological
or other reasons, to develop and introduce new or enhanced products that are
compatible with industry standards and that satisfy customer price and
performance requirements would have a material adverse effect on the Company's
business, financial condition and results of operations.
In addition, the Company's competitors may offer enhancements to existing
products or offer new products based upon new technologies, industry standards
or customer requirements, that have the potential to replace or provide lower
cost alternatives to the Company's products, which could render the Company's
existing and future products obsolete, unmarketable or inoperable. There can be
no assurance that the Company will be able to develop new products to compete
with new technologies on a timely basis or in a cost-effective manner. See
"Business - Research and Development".
Competition
The markets for the Company's products are also characterized by intense
competition. Competition could further increase if new companies enter the
market or if existing competitors expand their product lines or upgrade existing
products to accommodate new technologies and features. Many of the Company's
current and potential competitors have a longer operating history and greater
technical, manufacturing, financial and marketing resources than the Company
and, as a result, may be able to adapt more quickly or devote greater resources
to changing technological requirements, customer demands and market trends.
Increased competition may result in price reductions, reduced gross margins and
loss of market share, any of which would have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
believes that its ability to compete successfully depends upon elements both
within and outside its control, including successful and timely development of
new products and manufacturing processes, product performance and quality,
manufacturing yields and product availability, customer services, pricing,
industry trends and general economic trends. There can be no assurance that the
Company will continue to compete successfully as to these factors. See "Business
- - Competition".
Dependence on Key Personnel
The Company's future success depends to a significant extent on the
continued service of its key technical and management personnel and on its
ability to continue to attract and retain qualified employees, particularly
those highly skilled design, process and test engineers involved in the
development of mixed signal products and processes. The competition for such
personnel is intense. The loss of the services of the Company's employees or the
Company's failure to attract, retain and motivate qualified personnel could have
a material adverse effect on the Company's business, financial condition or
results of operations. The Company does not have any employment agreements with
its employees, other than Patrick J. Brockett, its President and Chief Executive
Officer.
-13-
Intellectual Property Protection
The Company's success and future revenue growth will depend, in part, on
its ability to protect its intellectual property. The Company relies primarily
on patent, copyright, trademark and trade secret laws, as well as nondisclosure
agreements and other methods to protect its proprietary technologies and
processes. There can be no assurance that such measures will provide meaningful
protection for the Company's proprietary technologies and processes. The Company
has been issued many patents, principally in the United States, Canada and the
United Kingdom, and has filed numerous patent applications in such
jurisdictions. There can be no assurance that any patent will issue from these
applications or future applications or, if issued, that any claims allowed will
be sufficiently broad to protect the Company's technology. In addition, there
can be no assurance that any existing or future patents will not be challenged,
invalidated or circumvented or that any right granted thereunder would provide
meaningful protection or a competitive advantage to the Company. The failure of
any patents to provide protection to the Company's technology would make it
easier for the Company's competitors to offer similar products. The Company also
generally enters into confidentiality agreements with its employees and
strategic partners and generally controls access to and distribution of its
product documentation and other proprietary information. Despite these
precautions, it may be possible for a third party to copy or otherwise obtain
and use the Company's products, services or technology without authorization,
develop similar technology independently or design around the Company's patents.
In addition, effective copyright, trademark and trade secret protection may be
unavailable or limited in certain foreign countries. Certain of the Company's
customers have entered into agreements with the Company pursuant to which such
customers have the right to use the Company's proprietary technology in the
event the Company defaults in its contractual obligations, including product
supply obligations, and fails to cure the default within a specified period of
time. Moreover, the Company often incorporates the intellectual property of its
strategic customers into its design and the Company has certain obligations with
respect to the non-use and non-disclosure of such intellectual property. There
can be no assurance that the steps taken by the Company to prevent
misappropriation or infringement of the intellectual property of the Company or
its customers will be successful. Moreover, litigation may be necessary in the
future to enforce the Company's intellectual property rights, to protect the
Company's trade secrets or to determine the validity and scope of the
proprietary rights of others, including its customers. Such litigation could
result in substantial costs to the Company and diversion of the Company's
resources and could have a material adverse effect on the Company's business,
financial condition and results of operations.
Intellectual Property Claims
The segment of the semiconductor market that includes the Company's
products has been characterized by extensive litigation regarding patents and
other intellectual property rights. As is common in the semiconductor industry,
the Company has been in the past and may in the future be notified of claims
that its products or services are subject to patents or other proprietary rights
of third parties. Although the Company attempts to ensure that its products and
processes do not infringe such third-party patents or proprietary rights, there
can be no assurance that infringement or invalidity claims (or claims for
indemnification resulting from infringement claims) will not be asserted or
prosecuted against the Company. Periodically, the Company negotiates with third
parties to establish patent license or cross-license agreements. There can be no
assurance that current or future negotiations will result in the Company
obtaining a license on satisfactory terms or at all. Moreover, license
agreements with third parties may not include all intellectual property rights
that may be issued to or owned by the licensors and thus future disputes with
these companies are possible. In the event an intellectual property dispute is
not settled through a license, litigation could result. Any litigation or
interference proceedings could result in substantial expense to the Company and
significant diversion of effort by the Company's technical and managerial
personnel. An adverse determination in such litigation or proceeding could
prevent the Company from making, using or selling certain of its products and
subject the Company to damage assessments, all of which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Acquisitions
The Company may make strategic acquisitions and investments or enter into
joint ventures or strategic alliances with other companies. Such transactions
entail many risks, including the following: inability to integrate successfully
such companies' personnel and businesses; inability to realize anticipated
synergies, economies of scale or other value associated with such transactions;
diversion of management's attention and disruption of the Company's ongoing
business; inability to retain key technical and managerial personnel; inability
to establish and maintain uniform standards, controls,
-14-
procedures and policies; and impairment of relationships with employees and
customers as a result of the integration of new personnel. In addition, future
acquisitions or investments by the Company may result in the issuance of
additional equity or debt securities, significant borrowings, significant
one-time write-offs and the creation of goodwill or other intangible assets.
Failure to avoid these or other risks associated with such business
combinations, investments, joint ventures or strategic alliances could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Significant International Operations
Approximately 71% of the Company's sales from continuing operations in
Fiscal 2002 were derived from sales in markets outside the United States and 64%
outside North America. The Company expects sales from foreign markets to
continue to represent a significant portion of total sales. The Company operates
three manufacturing facilities as well as sales and technical support service
centers in Europe and Asia. Certain risks are inherent in international
operations, including exposure to currency exchange rate fluctuations, political
and economic conditions, unexpected changes in regulatory requirements, exposure
to different legal standards, particularly with respect to intellectual
property, future import and export restrictions, difficulties in staffing and
managing operations, difficulties in collecting receivables and potentially
adverse tax consequences. There can be no assurance that the above factors will
not have a material adverse effect on the Company's business, financial
condition and results of operations.
Foreign Exchange and Interest Rate Exposure and Concentration of Credit
Risk
Because substantial portions of the Company's costs of sales and other
expenses are denominated in U.S. dollars, U.K. pounds sterling, and several
other currencies, the Company's results of operations are subject to the effects
of exchange rate fluctuations of those currencies relative to the Canadian
dollar, the parent company's functional currency. Changes in currency exchange
rates may also affect the relative prices at which the Company and its
competitors sell their products in the same markets. The Company uses financial
instruments, principally forward exchange contracts, in its management of
foreign currency exposures on estimated net foreign currency cash requirements
and on certain significant transactions, over the ensuing 12 months. All foreign
exchange contracts are carried at fair value and, to the extent these contracts
qualify as effective hedges, the resulting unrealized gains and losses are
deferred and included in the measurement of the related transactions when they
occur. These contracts primarily require the Company to purchase and sell
certain foreign currencies with or for Canadian dollars at contractual rates.
Several major financial institutions are counterparties to the Company's
financial instruments. It is the Company's practice to monitor the financial
standing of the counterparties and limit the amount of exposure to any one
institution. The Company may be exposed to a credit loss in the event of
nonperformance by the counterparties of these contracts. With respect to
accounts receivable, concentration of credit risk is limited due to the diverse
areas covered by the Company's operations. The Company has credit evaluation,
approval and monitoring processes intended to mitigate potential credit risks.
Anticipated bad debt loss has been provided for in the allowance for doubtful
accounts.
The Company's operations could be adversely affected if it is unable to
guard against currency, interest and credit risks in the future. There can be no
assurance that foreign currency and interest rate fluctuations or credit risk
will not have a material adverse effect on the Company's business, financial
condition and results of operations.
Environmental Regulations
The Company is subject to a variety of federal, state and local laws,
rules and regulations related to the discharge or disposal of toxic, volatile or
other hazardous chemicals used in its manufacturing process. Although the
Company believes that it has complied with these laws, rules and regulations in
all material respects and to date has not been required to take any action to
correct any noncompliance, the failure to comply with present or future
regulations could result in fines being imposed on the Company, suspension of
production or a cessation of operations. Such regulations could require the
Company to acquire significant equipment or to incur substantial other expenses
to comply with environmental regulations. Any failure by the Company to control
the use, disposal or storage of or adequately restrict the discharge of,
hazardous substances could subject the Company to future liabilities and could
have a material adverse effect on the Company's business, financial condition
and results of operations.
-15-
Regulatory Requirements
See "Business--Competition", " - Government Regulation".
European Union and the Euro
See "Management's Discussion and Analysis - European Union and the Euro".
Other Factors
The Company further cautions that the factors referred to above and those
referred to as part of particular forward-looking statements may not be
exhaustive and that new risk factors emerge from time to time in its rapidly
changing business.
Item 2. Properties
The Company owns one facility in Swindon, United Kingdom totaling 167,700
square feet ("sf") used for wafer fabrication, design, sales and administration.
The Company also owns a 333,000 sf facility in Jarfalla, Sweden, that is used
for semiconductor manufacturing, R&D and administration, of which 27,000 sf is
vacant and is to be sub-leased, and 58,000 sf is currently sub-leased through
March 2005.
The Company occupies 209,000 sf of leased space in Ottawa, Canada. The
Ottawa leased space consists of two interconnected buildings used for design,
sales, administration, and integrated circuit design and testing. Approximately
35,000 sf of the space is vacant and available for sub-letting. The Company is
actively marketing this space for rent.
The Company occupies 32,900 sf of leased space in Portskewett, Wales,
United Kingdom, that is used for hybrid modules, manufacturing and
administration.
The Company also leases and operates 25 regional facilities, totaling
175,600 sf, primarily dedicated to design and sales. A geographical breakdown of
these facilities is as follows: 9 locations in the United States totaling 48,400
sf, of which 8,300 sf is vacant and is to be sub-leased and 2,510 sf is
sub-leased; 7 locations in the United Kingdom totaling 106,100 sf, of which
22,000 sf is sub-leased; 3 locations in Europe totaling 6,100 sf (France,
Germany, Holland); and, 6 locations in the Asia/Pacific region (China, Japan,
Korea, Singapore, Taiwan) totaling 15,000 sf.
See "Business-Manufacturing" for additional information concerning the
Company's manufacturing facilities.
Management believes the Company's facilities are adequate for its business
needs for the foreseeable future.
Item 3. Legal Proceedings
Zarlink is a defendant in a number of lawsuits and party to a number of
other proceedings that have arisen in the normal course of its business. In the
opinion of the Company's in-house legal counsel, any monetary liability or
financial impact of such lawsuits and proceedings to which Zarlink might be
subject after final adjudication would not be material to the consolidated
financial position of the Company or the results of its operations.
Item 4. Submission of Matters to a Vote of Security Holders
None.
-16-
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
Common Share Information
Principal Markets
COMMON SHARE INFORMATION
PRINCIPAL MARKETS
The New York Stock Exchange and The Toronto Stock Exchange are the
principal markets on which the Company's shares are traded. The Company's shares
were first listed on the New York Stock Exchange on May 18, 1981 and on The
Toronto Stock Exchange on August 13, 1979. The stock symbol of the Company's
shares is ZL. The following table sets forth the high and low sales prices for
the common shares for each quarter of the last two fiscal years.
New York Stock Exchange
(U.S. Dollars)
2002 2001
------------------- -------------------
High Low High Low
------- ------ ------- -------
1st Quarter 10.1900 6.9900 27.1880 16.2500
2nd Quarter 10.2500 6.3400 25.4375 16.8130
3rd Quarter 12.0500 7.2200 20.6250 7.1250
4th Quarter 12.6000 9.1700 11.3125 7.5500
Toronto Stock Exchange
(Canadian Dollars)
2002 2001
------------------- -------------------
High Low High Low
------- ------ ------- -------
1st Quarter 15.5400 11.0000 40.4000 24.3000
2nd Quarter 15.6900 10.0500 37.6500 24.9000
3rd Quarter 18.8900 11.3000 31.3500 10.9000
4th Quarter 20.0000 14.5500 17.1000 11.7500
SHAREHOLDERS
There were 3,874 common shareholders of record as at May 31, 2002.
DIVIDEND POLICY
The Company has not declared or paid any dividends on its common shares
and the Board of Directors anticipates that, with the exception of preferred
share dividend requirements, all available funds will be applied in the
foreseeable future to finance growth and improve the Company's competitive
position and profitability.
Pursuant to the terms of the Cdn$2.00 Cumulative Redeemable Convertible
Preferred Shares, 1983 R&D Series (Preferred Shares - R&D Series), the Company
will not be permitted to pay any dividends on common shares unless all dividends
accrued on the preferred shares have been declared and paid or set apart for
payment.
-17-
Dividends paid by the Company to common shareholders not resident in
Canada would generally be subject to Canadian withholding tax at the rate of 25%
or such lower rate as may be provided under applicable tax treaties. Under the
Canada - United States tax treaty, the rate of withholding tax applicable to
such dividends paid to residents of the United States would generally be 15%.
Item 6. Selected Financial Data
(in millions of U.S. dollars, except per share amounts)
The following table is derived from the consolidated financial statements
included elsewhere herein, which have been prepared in accordance with
accounting principles generally accepted in the United States (U.S. GAAP) and
the requirements of the U.S. Securities and Exchange Commission ("SEC").
Fiscal Year Ended
(at the end of fiscal year for balance sheet data)
--------------------------------------------------------
U.S. GAAP and SEC Requirements 2002 2001 2000 1999 1998
--------------------------------------------------------
Income Statement Data:
Revenue $ 222.1 $ 450.2 $ 409.9 $ 371.2 $ 224.5
Gross margin percentage 30% 50% 46% 43% 53%
Gross research and development expense 83.5 93.9 70.3 68.7 38.9
Net income (loss) from continuing operations (120.8) (278.4) 34.2 (0.5) 39.5
Net income (loss) (120.8) (270.8) 50.2 (6.4) 64.2
Net income (loss) per common share from continuing
operations
Basic (0.98) (2.32) 0.28 (0.02) 0.35
Diluted (0.98) (2.32) 0.27 (0.02) 0.34
Net income (loss) per common share
Basic (0.98) (2.25) 0.42 (0.07) 0.57
Diluted (0.98) (2.25) 0.41 (0.07) 0.57
Balance Sheet Data:
Working capital $ 158.7 $ 225.9 $ 267.5 $ 217.8 $ 186.6
Total assets 323.2 463.6 835.2 848.8 884.6
Long-term debt 0.7 4.8 149.6 183.5 268.6
Redeemable preferred shares 20.6 21.4 23.5 22.8 24.3
Shareholders' equity
Common shares 767.6 762.7 546.0 552.2 440.9
Additional paid in capital 4.1 1.7 -- 1.8 1.8
Deferred stock compensation (0.8) (6.8) -- -- --
Deficit (522.9) (400.2) (127.4) (161.7) (153.2)
Accumulated other comprehensive loss (45.9) (42.6) (13.7) (6.4) (2.7)
See note 22 to the consolidated financial statements for a discussion on
the effect of the discontinued operations on Fiscal 2002, 2001 and 2000 results.
-18-
SUPPLEMENTARY FINANCIAL INFORMATION
(in millions of U.S. dollars, except per share amounts)
(Unaudited)
Selected Quarterly Financial Data
(in accordance with U.S. GAAP)
FISCAL 2002 First Second Third Fourth Full
(Unaudited) Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- -------
Revenue $ 67.8 $ 50.5 $ 51.7 $ 52.1 $ 222.1
Gross margin 5.1 16.6 20.9 23.1 65.7
Gross margin percentage 8% 33% 40% 44% 30%
Net loss (60.5) (19.7) (18.3) (22.3) (120.8)
Net loss per common share - basic (0.49) (0.16) (0.15) (0.18) (0.98)
FISCAL 2001 First Second Third Fourth Full
(Unaudited) Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- -------
Revenue from continuing operations $ 124.5 $ 131.2 $ 112.1 $ 82.4 $ 450.2
Gross margin from continuing operations 65.0 67.3 57.9 33.8 224.0
Gross margin percentage 52% 51% 52% 41% 50%
Net income (loss) from continuing operations 21.7 (4.6) (16.3) (279.2) (278.4)
Net income (loss) 18.0 (1.0) (21.9) (265.9) (270.8)
Net income (loss) per common share from continuing
operations - basic 0.19 (0.04) (0.14) (2.25) (2.32)
Net income (loss) per common share - basic 0.15 (0.01) (0.18) (2.14) (2.25)
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
(in millions of U.S. dollars, except per share amounts)
Zarlink is a global provider of microelectronics for voice, data and video
networks and for medical applications. Zarlink's semiconductor Communications
business specializes in broadband connectivity solutions over wired, wireless
and optical media. Zarlink's semiconductor Medical business provides
applications specific integrated circuit solutions for applications such as
pacemakers, hearing aids and portable instruments. At March 29, 2002, the
Company employed 1,465 people worldwide, including 480 designers.
Zarlink has historically prepared and filed its financial statements in
Canadian dollars and in accordance with Canadian Generally Accepted Accounting
Principles ("GAAP") with a reconciliation to United States (U.S.) GAAP. During
the third quarter ended December 28, 2001, the Company adopted the United States
dollar as its reporting currency for presentation of its consolidated financial
statements. In addition, the Company also began preparing and reporting complete
financial statements in accordance with U.S. GAAP. Historical consolidated
financial statements are presented in accordance with U.S. GAAP.
Zarlink made this change to enhance its communication with its
shareholders, customers and suppliers using the currency and accounting rules
that are more familiar to these groups. This presentation is also more
consistent with the presentation of the financial results of its industry
counterparts and competitors.
The following discussion and analysis explains trends in Zarlink's
financial condition and results of operations for the fiscal year ended March
29, 2002, compared with the two previous fiscal years. This discussion is
intended to help shareholders and other readers understand the dynamics of
Zarlink's business and the key factors underlying its financial results. The
consolidated financial statements, notes to the consolidated financial
statements and supplementary
-19-
information constitute an integral part of, and should be read in conjunction
with, this Management's Discussion and Analysis.
Certain statements in this section and in other sections of this Annual
Report on Form 10-K contain forward-looking statements that are based on current
expectations, estimates and projections about the industries in which the
Company operates, management's beliefs and assumptions made by management. These
statements are not guarantees of future performance and involve certain risks,
uncertainties and assumptions, which are difficult to predict. These risks,
uncertainties and other factors include, among others, those identified under
"Forward-Looking Statements and Risk Factors" elsewhere in this Form 10-K.
Accordingly, actual outcomes and results may differ materially from results
forecasted or suggested in such forward-looking statements. The Company
undertakes no obligation to update publicly any forward-looking statements,
whether as a result of new information, future events or otherwise.
Such risks, uncertainties and assumptions include, among others, the
following: increasing price and product/service competition by foreign and
domestic competitors, including new entrants; rapid technological developments
and changes; the ability to continue to introduce competitive new products on a
timely, cost-effective basis; delays in product development; the mix of
products/services; changes in environmental and other domestic and foreign
governmental regulations; protection and validity of patent and other
intellectual property rights; import protection and regulation; industry
competition; industry capacity and other industry trends; the ability of the
Company to attract and retain key employees; demographic changes and other
factors referenced elsewhere in this Form 10-K. The above factors are
representative of the risks, uncertainties and assumptions that could affect the
outcome of the forward-looking statements. In addition, such statements could be
affected by general industry and market conditions and growth rates, general
domestic and international economic conditions including interest rate and
currency exchange rate fluctuations and other risks, uncertainties and
assumptions, as described elsewhere in this Form 10-K, including those
identified under "Forward-Looking Statements and Risk Factors".
RESULTS OF CONTINUING OPERATIONS
- --------------------------------
Summary of Results from Operations
- ----------------------------------
(millions of US$, except per share amounts) 2002 2001 2000
------- ------- ------
Consolidated revenue $ 222.1 $ 450.2 $409.9
Communications segment revenue 187.2 417.4 382.4
Medical segment revenue 34.9 32.8 27.5
Operating income (loss) from continuing operations (128.5) (258.1) 46.9
Communications segment operating income (loss) (78.0) 47.7 49.4
Medical segment operating income 8.8 0.9 7.1
Unallocated costs (59.3) (306.7) (9.6)
Net income (loss) from continuing operations (120.8) (278.4) 34.2
Net income (loss) per common share from
continuing operations - Basic (0.98) (2.32) 0.28
Net income (loss) (120.8) (270.8) 50.2
Net income (loss) per common share - Basic (0.98) (2.25) 0.42
Weighted average common shares outstanding -
millions 125.6 121.1 114.7
Fiscal 2002 revenue decreased by $228.1, or 51%, from Fiscal 2001. The
decrease in revenue was due to lower communication semiconductor sales volumes
caused by a prolonged slump that was widely recognized as the sharpest downturn
in the history of the semiconductor industry. Revenue in Fiscal 2001, however,
increased by $40.3, or 10%, from revenue in Fiscal 2000. The increase in Fiscal
2001 over Fiscal 2000 was principally due to higher demand by telecom and data
networking manufacturers for the Company's network access products in the early
part of Fiscal 2001 and before the industry went into decline.
-20-
In Fiscal 2002, the Company recorded a net loss from continuing operations
of $120.8, or $0.98 per share. The net loss included a special inventory
write-down of $29.1, special charges of $41.1 related to restructuring and asset
impairments, stock compensation expense of $8.4, a $5.4 loss on the sale of the
Bromont foundry, amortization of acquired intangibles of $4.4, and a write-off
of $3.5 related to the Company's investment in Optenia, Inc. which went into
receivership. This compares to a net loss from continuing operations of $278.4,
or $2.32 per share, in Fiscal 2001, after the amortization of acquired
intangibles of $65.3 and a pre-tax charge for the impairment of goodwill and its
fabrication facilities totaling $237.6. In Fiscal 2000, net income from
continuing operations was $34.2, or $0.28 per share, after the amortization of
acquired intangibles of $9.6.
Zarlink's operations are comprised of two reportable business segments -
Communications and Medical. Zarlink targets the communications industry with
offerings that specialize in broadband connectivity solutions over wired,
wireless and optical media. Zarlink's Medical business provides ASIC solutions
for applications such as pacemakers, hearing aids and portable instruments.
Zarlink sells its products through both direct and indirect channels of
distribution. Factors affecting the choice of distribution include, among
others, end-customer type, the level of product complexity, the stage of product
introduction, geographic presence and location of markets, and volume levels.
Communications
% of % of % of
(millions of U.S. dollars) 2002 Total 2001 Total 2000 Total
---- ----- ---- ----- ---- -----
Revenue:
Network Access $114.5 61% $259.9 62% $235.6 62%
User Access 72.7 39 157.5 38 146.8 38
------ --- ------ --- ------ ---
Total Communications $187.2 100% $417.4 100% $382.4 100%
====== === ====== === ====== ===
As a % of total revenue 84% 93% 93%
Communications operating income (loss) $(78.0) $ 47.7 $ 49.4
====== ====== ======
Zarlink's Communications business specializes in broadband connectivity
solutions over wired, wireless and optical media. Network access and user access
products represent the two major growth categories in this business segment.
Network access products include products that provide connectivity to a
network's core backbone such as feeder, aggregation and transmission
applications and products that address the multi-protocol physical and network
layers. In simple terms, network access semiconductor products connect network
equipment together. User access products allow users to connect to the network.
These products include wireless (for example, cellular chipsets) and
infotainment applications (for example, set-top boxes and digital TV).
Revenue for Fiscal 2002 totaled $187.2, down 55% from $417.4 in Fiscal
2001 and down 51% from $382.4 in Fiscal 2000.
Revenue was adversely affected by customer and channel inventory
adjustments in the Company's network access and user access business, a trend
that began during the second half of Fiscal 2001 and continued through Fiscal
2002. Reflecting the semiconductor communications industry in general, the
Company has experienced order push-outs and cancellations, both resulting from
market uncertainties. However, since the fourth quarter of Fiscal 2001, the
Company has experienced a significant decrease in order push-outs and
cancellations, with customers typically placing orders to meet their short-term
needs. As a result, the "turns" business (customers placing orders for shipment
in the same fiscal quarter) has been steadily increasing since the second
quarter of Fiscal 2002 to represent approximately 30% of the orders shipped in a
quarter. Management believes that this industry trend may continue through
calendar 2002.
The results in the Communications segment were also adversely affected by
an excess inventory charge to cost of sales recorded in the first quarter of
Fiscal 2002 amounting to $29.1 for inventories estimated to be beyond its needs
for the following 12 months. This write-down was necessary in light of the
downturn in the communications semiconductor industry.
-21-
In addition to the above market conditions, the Communications group's
results were reduced by the Company's continuing significant investment in
research and development to develop and launch new products supporting broadband
communications. During Fiscal 2002, the Company continued to secure design wins
and introduced 33 new products to the market, up from nine new products
introduced in Fiscal 2001.
Medical
(millions of U.S. dollars) 2002 % of Total 2001 % of Total 2000 % of Total
---- ---------- ---- ---------- ---- ----------
Revenue:
Medical $34.9 100% $32.8 100% $27.5 100%
===== ===== =====
As a % of total revenue 16% 7% 7%
Medical operating income $ 8.8 $ 0.9 $ 7.1
===== ===== =====
Zarlink's Medical business provides ASIC solutions for applications such
as pacemakers, hearing aids and portable instruments.
Medical sales increased in Fiscal 2002 over Fiscal 2001 due to growing
markets and new product introductions. Medical's operating results improved over
last year due to improved manufacturing yields. During Fiscal 2002, the Medical
group introduced eight new products in addition to the seven new products
introduced in Fiscal 2001.
Compared to Fiscal 2000, Fiscal 2001 medical sales increased due to new
product introductions and to favorable conditions in the industry. The operating
results, however, were adversely affected by unfavorable manufacturing yields
and higher research and development expenses.
Geographic Revenue
Revenue from continuing operations, based on the geographic location of
customers, was distributed as follows:
(millions of U.S. dollars) 2002 % of Total 2001 % of Total 2000 % of Total
---- ---------- ---- ---------- ---- ----------
United States $ 63.5 29% $176.5 39% $159.7 39%
Europe 82.5 37 138.9 31 116.3 28
Asia/Pacific 56.7 25 113.1 25 96.2 24
Canada 15.6 7 14.5 3 24.1 6
Other Regions 3.8 2 7.2 2 13.6 3
------ --- ------ --- ------ ---
Total $222.1 100% $450.2 100% $409.9 100%
====== === ====== === ====== ===
For the year ended March 29, 2002, the net movement in exchange rates from
Fiscal 2001 favorably impacted total revenue from continuing operations by 0.4%
($0.8). For the year ended March 30, 2001, the net movement in exchange rates
from Fiscal 2000 negatively impacted total revenue from continuing operations by
3% ($11.9). The negative foreign exchange impact in Fiscal 2001 was primarily a
result of changes in the UK pound sterling exchange rate, partially offset by
changes in the Canadian dollar exchange rate.
United States
Sales from continuing operations into the United States decreased by 64%
in Fiscal 2002 over Fiscal 2001. The decrease was due to lower communication
product sales in both network access and user access. Sales from continuing
operations increased by 11% in the United States in Fiscal 2001 over Fiscal
2000, principally due to higher sales of network access products.
-22-
Europe
European sales decreased by 41% in Fiscal 2002 over Fiscal 2001 due to
lower network access and user access product sales. Fiscal 2001 sales into
Europe increased by 19% over Fiscal 2000 due to higher sales of medical products
and an increase in foundry services provided to outside parties.
Asia/Pacific
Asia/Pacific sales decreased by 50% in Fiscal 2002 compared to Fiscal 2001
due to lower network access and user access product sales. Fiscal 2001 sales in
the Asia/Pacific region increased by 18% over Fiscal 2000, principally due to
higher demand for switching and framing products and to higher sales of IP
switching products resulting from the acquisition of Vertex Networks,
Incorporated ("Vertex") in July 2000.
Canada
Canadian sales increased by 8% in Fiscal 2002 over Fiscal 2001 mostly due
to the inclusion of sales to Mitel Networks Corporation, successor to the
Systems business that was sold on February 16, 2001, which during Fiscal 2002
was no longer affiliated with Zarlink. Sales from continuing operations
decreased in Canada from Fiscal 2000 to Fiscal 2001 by 40% as a result of lower
sales to data networking customers combined with the sector's slow down.
Other Regions
Sales into other regions decreased by $3.4 in Fiscal 2002 compared with
Fiscal 2001, while Fiscal 2001 sales into other regions decreased by $6.4 from
Fiscal 2000.
GROSS MARGIN
(millions of U.S.$) 2002 2001 2000
-----------------------------
Gross margin $65.7 $224.0 $190.0
As a percent of revenue 30% 50% 46%
As a percent of revenue, excluding
excess Q1 Fiscal 2002
inventory charge of $29.1 43% 50% 46%
During the first quarter ended June 29, 2001, the Company reviewed its
inventory requirements for the following 12 months in light of the semiconductor
industry-wide slowdown and higher channel inventories. As a result of this
review, the Company recorded an excess inventory charge to cost of sales in the
first quarter of Fiscal 2002 amounting to $29.1 for inventories estimated to be
beyond its needs for the following 12 months.
Excluding the effect of the excess inventory charge of $29.1, the
Company's gross margin as a percent of revenue was 43% for the year ended March
29, 2002. The lower gross margin in Fiscal 2002 compared to Fiscal 2001 was
principally attributable to lower sales volumes of network access and user
access products and the associated negative manufacturing variances resulting
from lower plant utilization.
Gross margin in Fiscal 2001 improved relative to Fiscal 2000 by 4
percentage points. The improvement was due to a favorable sales mix as a result
of higher sales volumes of network access products and to positive manufacturing
variances resulting from improved manufacturing plant utilization.
-23-
OPERATING EXPENSES
Research and Development ("R&D")
(millions of U.S.$) 2002 2001 2000
-----------------------------
R&D expenses $83.5 $93.9 $70.3
As a percent of revenue 38% 21% 17%
R&D expenses decreased by 11%, or $10.4, in Fiscal 2002 from Fiscal 2001
due to restructuring and the consolidation of R&D activities in the year just
completed. Management expects that R&D spending will increase slightly in Fiscal
2003 while investments continue to be made in expected high growth and high
return product offerings, such as broadband transmission and digital TV.
Fiscal 2001 R&D increased relative to Fiscal 2000 R&D due to incremental
R&D resulting from the acquisition of Vertex, coupled with the increased R&D
activity in the network access and user access product lines.
Investments are being made in high-growth areas such as network access and
user access and in medical devices.
In the Network Access product line, the focus was in the following areas:
o Building network timing and synchronization products for high speed
applications;
o Delivering multi-channel carrier-class convergence solutions,
including time division multiplex ("TDM") switching, asynchronous
transfer mode ("ATM") convergence, or internet protocol ("IP")
switching;
o Supporting high-speed access using digital subscriber line ("DSL")
solutions;
o Providing high quality voice in packet switching applications to
metro and enterprise markets; and
o Very Short Reach ("VSR") parallel optical solutions targeted at
terabit speeds and higher.
In the User Access product line, the focus was in the following areas:
o Providing a single chip solution incorporating multiple tuners (up
to three tuners on a chip) for terrestrial, satellite and cable
digital tuning; and
o Delivering chip-based solutions to integrate set-top box features
for Integrated Digital TV ("iDTV").
In Medical, the focus was on semiconductor solutions and technologies for
a variety of in-vivo and audiological applications, including:
o Implantable pacemakers and defibrillators for cardiac rhythm
control, hearing aids, cochlear implants (auditory nerve
stimulators) for restoring hearing in the profoundly deaf, and
medical instruments for a variety of diagnostic and therapeutic
applications;
o Ultra low power radio frequency ("RF") to support high bandwidth
communication with medical devices that have more and more
diagnostic capability;
o Ultra low power audio processing and DSP to support digital hearing
aids providing improved sound quality that can be better matched to
the patient's hearing loss; and
-24-
o Application-specific standard products ("ASSPs") as opposed to
ASICs.
Selling and Administrative ("S&A")
(millions of U.S.$) 2002 2001 2000
-----------------------------
S&A expenses $51.4 $81.5 $63.2
As a percent of revenue 23% 18% 15%
S&A expenses decreased in Fiscal 2002 by $30.1, or 37 % from Fiscal 2001
as a result of cost reductions implemented during the year in response to the
industry downturn. In Fiscal 2001, S&A expenses increased by $18.3, or 29%, from
Fiscal 2000 as a result of higher depreciation related to the newly implemented
enterprise resource planning system, increased marketing spending, and certain
expenses incurred while the Company transitioned to a focused semiconductor
company. Management expects that S&A expenses will remain flat in Fiscal 2003 as
compared to Fiscal 2002.
Stock Compensation Expense
The Company's stock compensation expense arises from retention conditions
associated with the stock awarded to certain employees of Vertex which was
acquired in July 2000, from certain stock options subjected to an exchange
program, and from certain stock options awarded to former employees.
Special Charge
Special Charge Recorded in Fiscal 2002
During Fiscal 2002, the Company recorded a special charge of $41.1 related
to restructuring and certain asset impairments.
In response to the industry downturn, the Company announced on May 10,
2001 that it had implemented a cost-containment plan in order to preserve cash
resources. The cost-containment plan included a workforce reduction of
approximately 17% of the Company's total employee base or 439 employees
globally. The workforce resizing was in addition to a 5% workforce reduction
that was completed in the fourth quarter of Fiscal 2001. Accordingly, the
Company recorded a pre-tax special charge of $34.6 related to that program in
the quarter ended June 29, 2001. The special charge was comprised of a workforce
reduction charge of approximately $26.7 primarily relating to the cost of
severance and benefits for the termination of 439 employees throughout the world
in Fiscal 2002, and a charge of approximately $7.9 relating to the cost of lease
and contract settlements.
During the fourth quarter of Fiscal 2002, the Company took additional
measures to reduce its operating costs by increasing its workforce reduction
program and providing for excess office space. Prior to March 29, 2002, the
Company incurred additional severance and benefit costs of $1.1 related to the
termination of 32 employees throughout the world. In addition, the special
charge in the fourth quarter included the cost of excess space in Ottawa, Canada
of approximately $1.8.
The Company also reviewed the carrying value for certain manufacturing
assets in the year ended March 29, 2002. Based on an analysis of estimated
future undiscounted cash flows resulting from changes in the expected use of
these fixed assets, the Company determined that the carrying value of these
fixed assets was impaired and recorded a write down of $4.6. The Company also
recorded a write-down of $2.1 in the year ended March 29, 2002 related to the
economic uncertainty of certain long-term investments held at cost.
The fourth quarter special charge was net of a reversal amounting to $3.1
from the first quarter restructuring provision that was no longer required. The
reversal was due to savings on the workforce reduction program and to the
subsequent sub-letting of vacant space in Irvine, California just after the
close of Fiscal 2002.
-25-
Special Charge Recorded in Fiscal 2001
The Company recorded an impairment charge, before taxes, of $237.6 in the
fourth quarter of Fiscal 2001 in respect of certain capital assets. The basis
for the impairment charge is described below.
The recent industry slowdown was one of the key factors that led to a
review of the Company's carrying value of acquired intangible assets related to
Vertex. Management believed the unfavorable market conditions would continue for
the foreseeable future to negatively affect the timing of expected future cash
flows resulting from the acquired technology. Management believes the technology
itself is sound and is a critical element in the Company's focus on IP-based
products.
Accordingly, the Company reviewed the carrying value of the acquired
intangible assets associated with Vertex in the fourth quarter ended March 30,
2001. Based on an analysis of undiscounted estimated future cash flows and
current and expected adverse market conditions, the Company determined that the
carrying value of the acquired intangible assets was impaired. Accordingly, the
Company recorded a charge of $112.9 in the fourth quarter of Fiscal 2001 to
write down the carrying value of the goodwill relating to Vertex. As at March
30, 2001, the carrying value of the acquired intangible assets related to Vertex
amounted to $3.6. The balance was expensed in Fiscal 2002.
The Company also reviewed the carrying value of its fabrication facilities
in the fourth quarter of Fiscal 2001. Factors leading to the review for
impairment included management's expectation that fab utilization would fall to
less than 50% and hence lower cash flows to recover the investment in the fabs.
The lowered expectation resulted from recent partnerships that were developed
with outside fabs for new Zarlink designs based on future technologies that are
beyond existing capabilities at the Company's fabs. This review also considered
the adverse market conditions, which resulted in a low operating rate for these
facilities as well as the Company's manufacturing strategy, described above,
that is expected to incorporate higher degrees of outsourcing. Based on an
analysis of undiscounted expected future cash flows reflecting these conditions,
the Company determined that the fabrication buildings and equipment were
impaired and recorded a charge of $124.7, before income tax recoveries of $9.3,
to write down these carrying values. The tax recovery was separately included in
the Company's total income tax expense.
Loss on Sale of Business
The Company recorded a loss on sale of the Bromont foundry business of
$5.4, before income tax recoveries of $1.2, in the fourth quarter of Fiscal
2002.
On February 22, 2002, Zarlink sold its foundry facility in Bromont,
Quebec, and related business to DALSA Semiconductor Inc. ("DALSA") for $16.9.
Under the agreement, Zarlink received from DALSA $13.0 in cash and retained a
19.9% investment in the Bromont foundry. The Bromont facility is an operation
featuring complementary metal oxide semiconductor ("CMOS") process technology
for digital and mixed-signal (analog/digital) communications products. The plant
also has other processes supporting industrial, scientific and space
applications, particularly high-end imaging applications.
The two companies also signed a three-year agreement to ensure continuity
of supply for Zarlink products manufactured at Bromont. There is no minimum unit
volume purchase requirement under the agreement. Approximately 250 Zarlink
employees affiliated with the Bromont operation were transferred to DALSA as
part of the agreement.
Amortization of Acquired Intangibles
Amortization of acquired intangibles decreased in Fiscal 2002 to $4.4 from
$65.3 in Fiscal 2001. The remaining acquired intangibles, including goodwill,
resulting from the acquisition of Vertex on July 28, 2000 were expensed in
Fiscal 2002. The expense of $4.4 was comprised of regular amortization of $2.8
and an accelerated write-down of $1.6 associated with the impairment of other
acquired intangibles to reduce the carrying value to nil as at March 29, 2002.
The Fiscal 2000 amount of $9.6 related to a previous acquisition that was
fully written off by the end of the prior year.
-26-
OTHER INCOME (EXPENSE)
Other income (expense) was comprised of interest income, foreign exchange
gains, and equity losses from the investment in Optenia.
Interest income was $5.5 for the year ended March 29, 2002 as compared to
$9.0 in Fiscal 2001 and $5.8 in Fiscal 2000. The decrease from Fiscal 2001 was
due to lower average cash balances on hand and to low interest rates. The
increase in Fiscal 2001 over Fiscal 2000 was due to higher average cash balances
on hand.
Foreign exchange gains in Fiscal 2002 amounted to $7.3 (2001 - loss of
$10.6; 2000 - gain of $6.0). During Fiscal 2002, the Company recorded a $0.3 net
increase in earnings, representing a gain on hedge ineffectiveness. Also
impacting other income was a $7.0 net increase in earnings due to the marking to
market of certain forward contracts prior to their designation as cash flow
hedges in Fiscal 2002.
During Fiscal 2002, the Company recorded an equity loss from its
investment in Optenia amounting to $2.2. The equity loss in Fiscal 2001 was
$0.6, representing only one quarter of activity since the original investment in
January 2001. In the fourth quarter of Fiscal 2002, the investment in Optenia
was written off after it went into bankruptcy.
INTEREST EXPENSE
Interest expense was $0.8 for Fiscal 2002, compared with $10.7 and $14.7
for Fiscal 2001 and Fiscal 2000, respectively. Interest expense decreased due to
the repayment of long-term debt.
INCOME TAXES
Income tax recovery from continuing operations for Fiscal 2002 was $1.4,
compared with an expense of $3.6 for Fiscal 2001 and $9.5 for Fiscal 2000. The
recovery in Fiscal 2002 was principally due to the loss on sale of the CMOS
foundry in Bromont, Canada. The tax expense in Fiscal 2001 and Fiscal 2000 was
mostly attributable to taxable income in Canada.
The Company's effective tax rate was a recovery of 1% for Fiscal 2002.
This tax rate is lower than the 35% domestic tax rate primarily due to
unrecorded temporary differences and losses incurred during the year. In Fiscal
2001, Zarlink's effective tax rate from continuing operations was an expense of
1%. This tax rate is lower than the 40% domestic tax rate primarily due to the
write-down of non-deductible goodwill and purchased in-process research and
development, and unrecorded losses and temporary differences in the Company's
foreign operations. In Fiscal 2000, Zarlink's effective tax rate from continuing
operations was 21%. This tax rate is lower than the 40% domestic tax rate
primarily due to the utilization of investment tax credits in the Company's
domestic operations and the realization of previously unrecorded loss
carryforwards in the Company's foreign operations.
The Company has a valuation allowance at the end of Fiscal 2002 of $75.8
(Fiscal 2001 - $54.1). The increase relates mainly to losses incurred in the
Company's foreign jurisdictions and temporary differences in the Company's
domestic operations. Management has determined that sufficient uncertainties
exist regarding the realization of certain of its deferred tax assets.
BACKLOG
(millions of U.S.$) 2002 2001 2000
-----------------------------
90-Day Backlog $33.5 $89.3 $96.4
Generally, manufacturing lead times for semiconductor products are longer
because of the nature of the production process. However, as orders are
sometimes booked and shipped within the same fiscal quarter (often referred to
as "turns"), order backlog is not necessarily indicative of a sales outlook for
the quarter or year.
-27-
The backlog decrease from last year was attributable to the recent
downturn in the communications semiconductor industry, described elsewhere in
this Management's Discussion and Analysis, which caused cancellations and
re-scheduling of orders, principally in the areas of broadband networking.
DISCONTINUED OPERATIONS
Communications Systems Business
There were no discontinued operations included in the results of
operations in the year ended March 29, 2002.
On February 16, 2001, the Company concluded the sale of the Systems
business to Dr. Terence H. Matthews for net proceeds of $196.7, after
adjustments. As a result of this sale, the Company recorded a net gain of $13.3,
after transaction costs and income taxes in the year ended March 30, 2001.
Systems recorded revenue of $343.5 during the period from April 1, 2000 to
February 16, 2001, down from $539.3 for the full year in Fiscal 2000. The
revenue decrease from the prior year was principally due to industry-wide market
softness while end customers delayed capital spending on systems and
applications. Management believes industry announcements regarding new voice
communications systems moving to an IP platform resulted in certain customers
deferring capital spending in order to acquire the advanced functionality
afforded by the new IP platforms in the future.
During the period up to the measurement date of November 3, 2000 (the date
the Company adopted formal plans to pursue divestiture opportunities related to
the Systems business), the Systems business had an operating loss, net of tax
recoveries of $3.0, of $5.7 (2000 - $21.4, net of taxes of $14.8).
NET INCOME (LOSS)
The Company recorded a net loss of $120.8, or $0.98 per share in Fiscal
2002. This compares to a net loss of $270.8, or $2.25 per share, in Fiscal 2001.
In Fiscal 2000, net income was $50.2, or $0.42 per share.
The net loss in Fiscal 2002 resulted primarily from lower revenue due to
the communications industry downturn which in turn led to a charge for excess
inventory of $29.1 and special charges of $41.1. The loss also included the $5.4
loss on sale of the Bromont foundry business, stock compensation expense of
$8.4, and the impairment of the Company's equity investment in Optenia amounting
to $3.5.
The net loss in Fiscal 2001 resulted primarily from the charge for
impairment of capital assets of $237.6, the amortization of acquired intangibles
of $65.3 and the expense of $3.8 associated with early repayment of long-term
debt, partially offset by income, net of taxes, from discontinued operations
amounting to $7.6. In Fiscal 2000, net income was impacted by the amortization
of acquired intangibles of $9.6 but offset by income, net of taxes, from
discontinued operations of $16.0.
LIQUIDITY AND CAPITAL RESOURCES
At March 29, 2002, cash, cash equivalents and short-term investment
balances totaled $154.4, down from $179.9 at March 30, 2001. Cash and cash
equivalents at March 29, 2002, included in the amount above, amounted to $75.6.
Cash flow used in operations before working capital changes amounted to
$35.0 during Fiscal 2002 compared to cash flow from operations of $50.9 in
Fiscal 2001 as a result of the lower operating earnings. Since March 30, 2001,
the Company's working capital, as reflected in the consolidated statements of
cash flows, decreased by $11.1 mostly due to reductions in inventories and
improved cash collections against trade receivables. Management expects to
further draw down inventory levels in Fiscal 2003 by reducing cycle times and
managing inventories on a build-to-order basis.
-28-
Fixed and other asset additions were $30.8 during Fiscal 2002 (2001 -
$66.8; 2000 - $39.2). The additions were primarily related to the construction
of and leasehold improvements to the Company's new head office in Ottawa,
Canada, continuing improvements to information technology resources, and design
tools.
During the fourth quarter of Fiscal 2002, the Company sold both of its
CMOS fabrication facilities in separate transactions for total proceeds
amounting to $44.8 of which $25.0 was received in cash. The rest of the
consideration included a discounted note receivable of $14.8 related to the sale
of the Plymouth facility and a 19.9% interest in DALSA Semiconductor Inc.,
amounting to $3.4, related to the sale of the Bromont facility. Additonal
consideration of $1.6 was received for certain inventories and the assumption of
certain employee-payables. The first payment against the note receivable is
expected to be received in June 2004 with the final payment due in March 2005.
The Company also sold its recently completed corporate headquarters in the
fourth quarter of Fiscal 2002 for cash proceeds of $7.4 and entered into a 10
year operating lease. The excess of the building cost and fair value over the
sales proceeds amounted to $2.8 and was capitalized as leasehold improvements to
be amortized over the life of the operating lease.
Long-term debt decreased due to scheduled repayments against capital lease
liabilities and the full repayment of the Canada-Quebec non-interest-bearing
loan amounting to $2.6. In total, capital lease liabilities were reduced by $5.2
in Fiscal 2002.
During Fiscal 2002, the Company took steps to wind up the defined benefit
pension plan in the United Kingdom and replaced it with a defined contribution
plan. The cost to settle the pension plan is expected to approximate $6.0. The
payment is expected to be made in calendar 2002 when the plan is ultimately
settled after the appropriate approvals are received.
The Company purchases pension insurance for all unfunded pension rights
earned in the Swedish pension plan. In addition, the Company provided the
Swedish pension authorities with a limited surety bond in the amount of $6.7 and
a letter of credit of $1.6 with respect to the Swedish pension liability of
$8.6.
During Fiscal 2002, the Company declared and paid dividends amounting to
$1.9 on its redeemable preferred shares based on a Cdn$2.00 per share dividend.
In addition, the Company purchased and cancelled 35,200 preferred shares under
its purchase obligation. The cost to repurchase the preferred shares amounted to
$0.7.
On June 6, 2002, the Company announced its Board of Directors had
authorized the continuation of its normal course issuer bid program to
repurchase up to 6,358,203 common shares, representing 5% of the 127,164,078
common shares issued and outstanding at May 31, 2002. The purchases will take
place on the open market through the stock exchanges of New York and Toronto
over a twelve-month period beginning on June 10, 2002 and ending on June 9,
2003, or on such earlier date as the Company may complete its purchases pursuant
to the notice of intention to make a normal course issuer bid filed with The
Toronto Stock Exchange. The Company, which intends to cancel the repurchased
shares, believes that at present no director, senior officer or insider of the
Company intends to sell any common shares under this program. No common shares
were repurchased under the previous program during the period from June 9, 2001
to June 8, 2002.
In addition to cash, cash equivalent and short-term investment balances of
$154.4 as at March 29, 2002, the Company had a revolving global credit facility
of approximately $15.7 (Cdn$25.0), of which $2.9 in letters of credit were
outstanding. Accordingly, the Company had unused and available demand bank lines
of credit amounting to $12.8 as at March 29, 2002. Management believes the
Company is in a position to meet all foreseeable business cash requirements and
capital lease and preferred share payments from its cash balances on hand,
existing financing facilities and cash flow from operations.
-29-
OTHER
Critical Accounting Policies and Significant Estimates
The Company's consolidated financial statements are based on the selection
and application of significant accounting policies, which require management to
make significant estimates and assumptions. Management believes that the
following are some of the more critical judgment areas in the application of
accounting policies that currently affect Zarlink's financial condition and
results of operations.
Revenue Recognition
The Company recognizes revenue when persuasive evidence of an arrangement
exists, delivery has occurred, the price is fixed or determinable, risk of loss
has passed to the customer and collection of the resulting receivable is
probable. The Company's semiconductor products are primarily non-commodity,
specialized products that are proprietary in design and used by multiple
customers. Customer acceptance provisions for performance requirements are
generally based on seller-specified criteria, which we demonstrate prior to
shipment. Should management determine that these customer acceptance provisions
are not met for certain future transactions, revenue recognized for any
reporting period could be affected.
Inventory
The Company periodically compares its inventory levels to revenue
forecasts for the future twelve months on a part by part basis and records a
charge for inventory on hand in excess of the estimated twelve month demand.
During the first quarter of Fiscal 2002, the Company's inventory of network
access and user access products exceeded the estimated 12-month demand by $29.1
as a result of the industry downturn to result in a charge of the same amount.
If future demand for the Company's products continues to decline, an additional
write-down of inventory may be necessary.
Restructuring
During Fiscal 2002, the Company recorded significant reserves in
connection with the restructuring program. These reserves include estimates
pertaining to employee separation costs and the settlements of contractual
obligations resulting from our actions. Although management does not anticipate
significant changes, the actual costs may differ from these estimates.
Income Taxes
Zarlink has incurred losses and other costs that can be applied against
future taxable earnings to reduce the tax liability on those earnings. As
management is uncertain of realizing the future benefit of those losses and
expenditures, the Company has taken a valuation allowance against certain
deferred tax assets and recorded only deferred tax assets that can be applied
against income in currently taxable jurisdictions or applied against deferred
tax liabilities which will reverse in the future. In establishing the
appropriate valuation allowance for tax loss carry-forwards and temporary
differences, it is necessary to consider all available evidence, both positive
and negative. Historical information of profitability is supplemented by current
information which is available about future years. Based on the current
environment and current information, there is a greater degree of uncertainty
that the level of future profitability used to determine the appropriate
valuation allowance in the past will be achieved. As a result, the Company has
adjusted the valuation allowance to account for these uncertainties.
Investment in Private Companies
The Company has investments in private companies, which management reviews
periodically to determine if there has been other than a temporary decline in
the market value of those investments below the carrying value. Management's
assessment of impairment in carrying value is based on the market value trends
of similar public companies and the current business performance of those
investments. During the fourth quarter of Fiscal 2002, the Company recorded an
impairment of its investment in one private company amounting to $2.0. When
management
-30-
performs future assessments of these investments, a further decline in the value
of these companies may require the Company to recognize additional impairment on
the remaining $14.1 related to these investments.
Foreign Currency Translation
Management periodically evaluates the financial and operational
independence of its foreign operations. Should a foreign subsidiary's local
currency cease to be its functional currency, then translation gains or losses
on consolidating the foreign subsidiary's financial statements subsequent to the
change in functional currency would be charged to operating income instead of a
separate component of accumulated other comprehensive income.
Recently Issued Accounting Standards
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard No. 141 (SFAS 141), "Business
Combinations" and Statement of Financial Accounting Standard No. 142 (SFAS 142),
"Goodwill and Other Intangible Assets". SFAS 141 requires that business
combinations be accounted for under the purchase method of accounting and
addresses the initial recognition and measurement of assets acquired, including
goodwill and intangibles, and liabilities assumed in a business combination.
SFAS 142 requires goodwill to be allocated to, and assessed as part of, a
reporting unit. Further, SFAS 142 specifies that goodwill will no longer be
amortized but instead will be subject to impairment tests at least annually. The
impairment test is a two-step process. First, the fair value of a reporting unit
is compared to its carrying value to identify possible impairment and then, if
necessary, the impairment is measured through a deemed purchase price
allocation. Under this standard, the Company will also be required to review the
useful lives of acquired goodwill and intangible assets at least annually.
The Company is required to adopt SFAS 141 and 142 on a prospective basis
as of March 30, 2002. The adoption of SFAS 141 and 142 is not expected to have a
material effect on the Company's financial position, results of operations and
cash flows unless the Company acquires significant additional companies.
In October 2001, the FASB issued Statement of Financial Accounting
Standard No. 144 (SFAS 144), "Accounting for the Impairment or Disposal of
Long-Lived Assets". SFAS 144 supersedes Statement of Financial Accounting
Standard No. 121 (SFAS 121), "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of" and the accounting and reporting
provisions of APB Opinion No. 30 for the disposal of a business segment. SFAS
144 establishes a single accounting model, based on the framework established in
SFAS 121, for long-lived assets to be disposed of by sale. The Statement also
broadens the presentation of discontinued operations to include disposals of a
component of an entity and provides additional implementation guidance with
respect to the classification of assets as held-for-sale and the calculation of
an impairment loss. The Company is required to adopt SFAS 144 effective March
30, 2002. The adoption of SFAS 144 is not expected to have a material impact on
the Company's financial statements.
European Union and the Euro
On January 1, 1999, 11 of 15 member countries of the European Union
established fixed conversion rates between their existing currencies ("legacy
currencies") and one common currency - the Euro. The Euro trades on currency
exchanges and may be used in business transactions. The conversion to the Euro
eliminates currency exchange rate risk between the member countries. The
Company's operating subsidiaries that were affected by the Euro conversion
established plans to address the issues raised by the Euro currency conversion.
These issues included the need to adapt computer and financial systems,
competitive impacts of cross-border price transparency, and recalculating
currency risk. The required system conversion costs were not material due to
Zarlink's existing ability to transact in multiple currencies. Due to
significant uncertainties, the Company cannot reasonably estimate the effects
one common currency will have on pricing and the resulting impact, if any, on
the Company's financial condition or its results of operations.
Forward-Looking Statements
Certain statements in this Management's Discussion and Analysis constitute
forward-looking statements. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors that may cause the actual
-31-
results, performance or achievements of Zarlink, or industry results, to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such risks,
uncertainties and assumptions include the following: general economic and
business conditions; demographic changes; import protection and regulation;
rapid technology development and changes; timing of product introductions; the
mix of products/services; industry competition, industry capacity and other
industry trends; and the ability of Zarlink to attract and retain key employees.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market Risk
Market risk represents the risk of loss that may impact the financial
statements of the Company due to adverse changes in financial markets. Zarlink
is exposed to market risk from changes in interest rates and foreign exchange
rates. To manage these risks, the Company uses certain derivative financial
instruments including interest rate swaps, foreign exchange forward contracts
and other derivative instruments from time to time, that have been authorized
pursuant to board-approved policies and procedures. Zarlink does not hold or
issue financial instruments for trading or speculative purposes.
The Company currently uses forward contracts, and to a lesser extent
foreign currency options, to reduce the exposure to foreign exchange risk. The
most significant foreign exchange exposures for the Company relate to the
Canadian dollar and the U.K. pound sterling. At March 29, 2002, there were
unrealized losses of $0.4 on the forward contracts relating to Fiscal 2003. The
unrealized loss is calculated as the difference between the actual contract
rates and the applicable current market rates that would be used to terminate
the forward contracts on March 29, 2002, if it became necessary to unwind these
contracts. Additional potential losses in the net fair value of these contracts,
assuming a 5% appreciation in the U.S. dollar against all currencies, at March
29, 2002, would have been approximately $0.9. Conversely, a 5% depreciation in
the U.S. dollar against all currencies would have produced a gain of $1.0.
Management believes that the established hedges are effective against its known
and anticipated cash flows, and that potential future losses from these hedges
being marked to market would be largely offset by gains on the underlying hedged
transactions.
For Fiscal 2002, the Company's primary exposure to interest rates is
expected to be in the rollover of its short-term investment portfolio. In
accordance with Company policy, cash equivalent and short-term investment
balances are primarily comprised of high-grade money market instruments with
original maturity dates of less than one year. The Company does not hedge the
re-investment risk on its short-term investments.
Based on a sensitivity analysis performed on the financial instruments
held at March 29, 2002 that are sensitive to changes in interest rates, the
impact to the fair value of our cash equivalents and short-term investments
portfolio by an immediate hypothetical parallel shift in the yield curve of plus
or minus 50, 100 or 150 basis points would result in a decline or increase in
portfolio value of approximately $0.1, $0.2 and $0.3 respectively.
The estimated potential losses discussed previously assume the occurrence
of certain adverse market conditions. They do not consider the potential effect
of favorable changes in market factors and do not represent projected losses in
fair value that the Company expects to incur. Any future financial impact would
be based on actual developments in global financial markets. Management does not
foresee any significant changes in the strategies used to manage interest and
foreign exchange rate risks in the near future.
-32-
Item 8. Financial Statements and Supplementary Data
The following financial statements and supplementary data are filed as
part of this Annual Report on Form 10-K.
Auditors' Report to the Shareholders
Consolidated Balance Sheets as at March 29, 2002 and March 30, 2001
Consolidated Statements of Shareholders' Equity for the years ended
March 29, 2002, March 30, 2001, and March 31, 2000 Consolidated
Statements of Income (Loss) for the years ended March 29, 2002,
March 30, 2001, and March 31, 2000
Consolidated Statements of Cash Flows for the years ended
March 29, 2002, March 30, 2001, and March 31, 2000
Notes to the Consolidated Financial Statements
-33-
AUDITORS' REPORT
To the Shareholders of Zarlink Semiconductor Inc.:
We have audited the consolidated balance sheets of Zarlink Semiconductor
Inc. (formerly Mitel Corporation) as at March 29, 2002 and March 30, 2001 and
the consolidated statements of shareholders' equity, income (loss), and cash
flows for each of the years in the three-year period ended March 29, 2002. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with United States and Canadian
generally accepted auditing standards. Those standards require that we plan and
perform an audit to obtain reasonable assurance whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the Company as at March 29,
2002 and March 30, 2001 and the results of its operations and its cash flows for
each of the years in the three-year period ended March 29, 2002, in accordance
with United States generally accepted accounting principles.
On May 3, 2002, we reported separately to the shareholders of Zarlink
Semiconductor Inc. on financial statements for the same periods, prepared in
accordance with Canadian generally accepted accounting principles.
Ottawa, Canada Ernst & Young LLP
May 3, 2002 Chartered Accountants
-34-
Zarlink Semiconductor Inc.
(Incorporated under the laws of Canada)
CONSOLIDATED BALANCE SHEETS
(In millions of U.S. dollars, U.S. GAAP)
March 29, March 30,
2002 2001
------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 75.6 $179.9
Short-term investments 78.8 --
Accounts receivable 32.4 54.2
Inventories 32.6 84.9
Deferred income tax assets - net 4.1 7.4
Prepaid expenses 11.3 8.1
------ ------
234.8 334.5
------ ------
Fixed assets
Cost 211.0 361.9
Accumulated depreciation (150.7) (264.1)
------ ------
60.3 97.8
------ ------
Deferred income tax assets - net 11.0 3.0
Long-term investments 14.1 15.7
Acquired intangible assets -- 3.9
Other assets - net of deferred gain
of $14.7 (2001 - nil) 3.0 8.7
------ ------
$323.2 $463.6
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 67.9 $ 93.2
Income and other taxes payable 4.1 5.1
Deferred income tax liabilities - net -- 0.8
Deferred revenue 2.0 3.7
Current portion of long-term debt 2.1 5.8
------ ------
76.1 108.6
Long-term debt 0.7 4.8
Pension liability 17.4 10.9
Deferred income tax liabilities - net 6.3 3.1
------ ------
100.5 127.4
------ ------
Redeemable preferred shares, unlimited
shares authorized; 1,558,700 shares
issued and outstanding (2001 - 1,593,900) 20.6 21.4
------ ------
Commitments and contingencies (notes 12 and 13)
Shareholders' equity:
Common shares, unlimited shares authorized;
no par value; 127,082,123 shares issued
and outstanding (2001 - 126,136,799) 767.6 762.7
Additional paid in capital 4.1 1.7
Deferred stock compensation (0.8) (6.8)
Deficit (522.9) (400.2)
Accumulated other comprehensive loss (45.9) (42.6)
------ ------
202.1 314.8
------ ------
$323.2 $463.6
====== ======
On behalf of the Board:
Dr. Henry Simon, Director Patrick J. Brockett, Director
(See accompanying notes to the consolidated financial statements)
-35-
Zarlink Semiconductor Inc.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In millions of U.S. dollars, U.S. GAAP)
Common Shares
Accumulated
Other Additional Total
Number Deferred Stock Comprehensive Paid in Shareholders'
(millions) Amount Compensation Deficit Loss Capital Equity
---------------------------------------------------------------------------------------------------
Balance, March 26, 1999 116.7 $552.2 $ -- $(161.7) $ (6.4) $ 1.8 $385.9
------
Net income 50.2 50.2
Translation adjustment (7.3) (7.3)
------
Comprehensive income 42.9
------
Repurchase of common stock (3.4) (8.9) (13.8) (1.8) (24.5)
Issuance of common stock
under stock benefit plans 0.7 2.7 2.7
Preferred share dividend (2.1) (2.1)
----- ------ ------ ------- ------ ------ ------
Balance, March 31, 2000 114.0 546.0 -- (127.4) (13.7) -- 404.9
------
Net loss (270.8) (270.8)
Translation adjustment (28.9) (28.9)
------
Comprehensive loss (299.7)
------
Issuance of common stock
related to acquisitions 11.0 210.8 (10.2) 200.6
Issuance of common stock
under stock benefit plans 1.1 5.9 5.9
Stock compensation expense 3.4 1.7 5.1
Preferred share dividend (2.0) (2.0)
----- ------ ------ ------- ------ ------ ------
Balance, March 30, 2001 126.1 762.7 (6.8) (400.2) (42.6) 1.7 314.8
------
Net loss (120.8) (120.8)
Unrealized net derivative
loss on cash flow hedges (0.4) (0.4)
Minimum pension liability (2.5) (2.5)
Translation adjustment (0.4) (0.4)
------
Comprehensive loss (124.1)
------
Issuance of common stock
under stock benefit plans 1.0 4.9 4.9
Stock compensation expense 6.0 2.4 8.4
Preferred share dividend (1.9) (1.9)
----- ------ ------ ------- ------ ------ ------
Balance, March 29, 2002 127.1 $767.6 $ (0.8) $(522.9) $(45.9) $ 4.1 $202.1
===== ====== ====== ======= ====== ====== ======
(See accompanying notes to the consolidated financial statements)
-36-
Zarlink Semiconductor Inc.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(In millions of U.S. dollars, except per share amounts, U.S. GAAP)
Years Ended
March 29, March 30, March 31,
2002 2001 2000
----------------------------------
Revenue $ 222.1 $ 450.2 $ 409.9
Cost of revenue 156.4 226.2 219.9
------- ------- -------
Gross margin 65.7 224.0 190.0
------- ------- -------
Expenses:
Research and development 83.5 93.9 70.3
Selling and administrative 51.4 81.5 63.2
Stock compensation 8.4 3.8 --
Special charges 41.1 237.6 --
Loss on sale of business 5.4 -- --
Amortization of acquired intangibles 4.4 65.3 9.6
------- ------- -------
194.2 482.1 143.1
------- ------- -------
Operating income (loss) from continuing
operations (128.5) (258.1) 46.9
Other income (expense) - net 10.6 (2.2) 11.8
Impairment of equity investment (3.5) -- --
Interest expense (0.8) (10.7) (14.7)
Debt issue costs -- (3.8) (0.3)
------- ------- -------
Income (loss) from continuing operations
before income taxes (122.2) (274.8) 43.7
Income tax expense (recovery) (1.4) 3.6 9.5
------- ------- -------
Net income (loss) from continuing operations (120.8) (278.4) 34.2
Discontinued operations, net of tax -- 7.6 16.0
------- ------- -------
Net income (loss) $(120.8) $(270.8) $ 50.2
======= ======= =======
Net income (loss) attributable to common
shareholders after preferred share
dividends $(122.7) $(272.8) $ 48.1
======= ======= =======
Net income (loss) per common share:
Net income (loss) per common share from
continuing operations:
Basic $ (0.98) $ (2.32) $ 0.28
======= ======= =======
Diluted $ (0.98) $ (2.32) $ 0.27
======= ======= =======
Net income (loss) per common share:
Basic $ (0.98) $ (2.25) $ 0.42
======= ======= =======
Diluted $ (0.98) $ (2.25) $ 0.41
======= ======= =======
Weighted average number of common shares
outstanding (millions)
Basic 125.6 121.1 114.7
------- ------- -------
Diluted 127.6 122.2 117.1
------- ------- -------
(See accompanying notes to the consolidated financial statements)
-37-
Zarlink Semiconductor Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions of U.S. dollars, U.S. GAAP)
Years Ended
March 29, March 30, March 31,
2002 2001 2000
----------------------------------
CASH PROVIDED BY (USED IN)
Operating activities:
Net income (loss) $(120.8) $(270.8) $ 50.2
Depreciation and amortization of
fixed and other assets 24.3 139.6 103.8
Stock compensation expense 8.4 3.8 --
Special charges, non-cash 7.8 237.6 --
Loss (gain) on sale of fixed assets 0.5 1.8 (0.7)
Loss on sale of business 5.4 -- --
Loss (gain) on disposal of discontinued
operations -- (65.0) 5.4
Inventory write-down 29.1 -- --
Deferred income taxes (2.0) (5.8) (0.5)
Change in pension liability 6.6 1.8 3.6
Impairment of equity investment 3.5 -- --
Equity loss in investment 2.2 0.6 --
Other -- 7.3 --
Decrease (increase) in working capital
Accounts receivable 22.6 58.2 15.3
Inventories 19.6 (16.9) 0.7
Accounts payable and accrued liabilities (22.9) (22.6) (13.6)
Deferred revenue (1.3) (2.6) 6.3
Other (6.9) 13.8 (2.9)
------- ------- ------
Total (23.9) 80.8 167.6
------- ------- ------
Investing activities:
Change in short-term investments (80.3) 27.6 (22.8)
Expenditures for fixed and other assets (30.8) (66.8) (39.2)
Proceeds from disposal of fixed and
other assets 33.4 1.1 3.3
Proceeds from repayment of note receivable 4.4 -- --
Acquisitions, net of cash acquired -- 6.9 --
Increase in long-term investments (2.0) (5.1) --
Proceeds from sale of discontinued
operations - net 1.3 192.8 6.5
------- ------- ------
Total (74.0) 156.5 (52.2)
------- ------- ------
Financing activities:
Repayment of long-term debt (2.7) (133.5) (19.7)
Repayment of capital lease liabilities (5.2) (49.0) (22.4)
Dividends on preferred shares (1.9) (2.0) (2.1)
Issue of common shares 4.8 5.8 0.2
Share issue costs -- -- (8.2)
Repurchase of common and preferred shares (0.7) (0.3) (13.9)
------- ------- ------
Total (5.7) (179.0) (66.1)
------- ------- ------
Effect of currency translation on cash (0.7) (12.9) 2.0
------- ------- ------
Increase (decrease) in cash and cash
equivalents (104.3) 45.4 51.3
Cash and cash equivalents, beginning
of year 179.9 134.5 83.2
------- ------- ------
Cash and cash equivalents, end of year $ 75.6 $ 179.9 $134.5
======= ======= ======
(See accompanying notes to the consolidated financial statements)
-38-
ZARLINK SEMICONDUCTOR INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In millions of U.S. dollars, except per share amounts, U.S. GAAP)
1. NAME CHANGE
On July 25, 2001, the Company formally changed its name to Zarlink
Semiconductor Inc. ("Zarlink") from Mitel Corporation after receiving
shareholder approval at its annual general shareholders' meeting on that
date. In connection with the name change, the Company began trading under
the symbol "ZL" on the New York Stock Exchange and The Toronto Stock
Exchange on September 7, 2001. All reports filed by the Company under
Section 13 or 15 (d) of the Securities Exchange Act, as amended, prior to
August 13, 2001 were filed under the name "Mitel Corporation".
2. NATURE OF OPERATIONS
Zarlink is an international semiconductor product supplier. The Company's
principal business segments comprise the manufacture and distribution of
microelectronic components for the communications and medical industries.
The principal markets for the Company's products are the United States,
Europe, the Asia/Pacific region, and Canada.
As at March 29, 2002, the Company employed 1,465 people, of whom
approximately 83% were non-unionized personnel and approximately 17% were
represented by trade unions. The Company is a party to separate collective
bargaining agreements with terms ranging to March 31, 2004 with the
Amalgamated Electrical and Engineering Union, the Manufacturing Science
and Finance Union and the Transport and General Workers Union which
represent unionized employees in the United Kingdom and the Metall
Industriarbetarforbundet Union, the Svenska Industriarbetarforbundet Union
and the Civilingenjorsforbundet Union which represent employees in Sweden.
3. CHANGE IN REPORTING CURRENCY
Zarlink has historically prepared and filed its financial statements in
Canadian dollars and in accordance with Canadian Generally Accepted
Accounting Principles ("GAAP") with a reconciliation to United States
(U.S.) GAAP. During the quarter ended December 28, 2001, the Company
adopted the United States dollar as its reporting currency for
presentation of its consolidated financial statements. Historical
consolidated financial statements were translated in accordance with the
guidance provided under U.S. GAAP. In addition, the Company also began
preparing and reporting complete financial statements in accordance with
U.S. GAAP. However, separate Canadian GAAP financial statements are
prepared and presented to shareholders.
The Company made this change to enhance its communication with its
shareholders, customers, and suppliers using the currency and accounting
rules that are more familiar to these groups. This presentation is also
more consistent with the presentation of the financial results of its
industry counterparts and competitors.
There has been no change in the functional currencies used in preparing
these consolidated financial statements.
4. ACCOUNTING POLICIES
These consolidated financial statements have been prepared by management
in accordance with United States generally accepted accounting principles.
The preparation of financial statements in conformity with United States
accounting principles requires management to make estimates and
assumptions that affect the reported assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting periods. Actual results could differ from those estimates.
-39-
(A) FISCAL YEAR END
The Company's fiscal year end is the last Friday in March. Normally this
results in a fifty-two week year with four thirteen week quarters. For
Fiscal 2000, the year-end of the Company was March 31, 2000 resulting in a
fifty-three week year.
(B) BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and of its wholly owned subsidiary companies. Investments in associated
companies in which the Company has significant influence are accounted for
by the equity method. Investments in companies the Company does not
control or over which it does not exercise significant influence are
accounted for using the cost method.
(C) CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
All highly liquid investments with original maturities of three months or
less are classified as cash and cash equivalents. The fair value of cash
equivalents approximates the amounts shown in the financial statements.
Short-term investments comprise highly liquid low risk debt instruments
that are held to maturity with terms of not greater than one year.
Short-term investments are carried at cost, which approximates their fair
value.
(D) INVENTORIES
Inventories are valued at the lower of average cost and net realizable
value for work-in-process and finished goods, and lower of average cost
and current replacement cost for raw materials. The cost of inventories
includes material, labor and manufacturing overhead.
(E) FIXED AND ACQUIRED INTANGIBLE ASSETS
Fixed assets are initially recorded at cost, net of related research and
development and other government assistance. Goodwill is initially
recorded at the excess of the Company's cost over the amount of the fair
value of the net identifiable assets acquired in a business combination.
The Company evaluates the realizability of these assets based upon the
fair value as estimated by reference to undiscounted expected future net
cash flows of the related assets. Measurement of an impairment loss for
long-lived assets or certain identifiable intangible assets held for use
is based on the fair value of the asset by discounting expected future net
cash flows of the related assets.
Depreciation is provided on the bases and at the rates set out below:
Assets Basis Rate
- --------------------------------------------------------------------------------
Buildings Straight-line 4%
Equipment Declining balance 20 - 30%
Straight-line 10 - 33.3%
Leasehold improvements Straight-line 10%
Goodwill and other acquired intangibles Straight-line 50%
Patents and trademarks Straight-line 10 - 33.3%
(F) INVESTMENTS IN PRIVATE COMPANIES
Investments in non-publicly traded companies in which the Company has less
than 20% of the voting rights and in which it does not exercise
significant influence are evaluated on a periodic basis for possible
impairment. Appropriate reductions in carrying values are made when
necessary. These investments are included in long-term investments on the
Company's balance sheet and are carried at cost, net of write-downs for
impairment.
-40-
(G) FOREIGN CURRENCY TRANSLATION
The financial statements have been translated into U.S. dollars in
accordance with the Financial Accounting Standards Board's (FASB)
Statement No. 52, Foreign Currency Translation. The financial statements
of the foreign subsidiaries are measured using local currency as the
functional currency. All balance sheet amounts have been translated using
the exchange rates in effect at the applicable year-end. Income statement
amounts have been translated using the weighted average exchange rate for
the applicable year. The gains and losses resulting from the changes in
exchange rates from year to year have been reported as a separate
component of other comprehensive income included in Shareholders' Equity.
(H) DERIVATIVE FINANCIAL INSTRUMENTS
The Company adopted FASB Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133"), as amended by FASB
Statement No. 137, Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133 and
FASB Statement No. 138, Accounting for Certain Derivative Instruments and
Certain Hedging Activities - an Amendment of FASB Statement No. 133, on
April 1, 2001. The standards required that all derivative financial
instruments be recorded on the Company's consolidated balance sheets at
fair value and established criteria for designation and effectiveness of
hedging relationships. The adoption of SFAS 133 did not have a material
impact on the Company's financial position, results of operations and cash
flows.
The Company utilizes certain derivative financial instruments to enhance
its ability to manage foreign currency exchange rate risk which exists as
part of its ongoing operations. If the derivative is designated as a fair
value hedge, changes in the fair value of the derivative and of the hedged
item attributable to the hedged risk are recognized in net income (loss).
If the derivative is designated as a cash flow hedge, the effective
portions of changes in fair value of the derivative are recorded in Other
Comprehensive Income ("OCI") and are recognized in net income (loss) when
the hedged item affects net income (loss). If the derivative is designated
as a hedge of a net investment in foreign operations, the changes in fair
value are recorded in OCI to the extent that it is effective. If the
derivative used in a hedging relationship is not designated, changes in
the fair value of the derivative are recognized in net income (loss)
immediately.
(I) COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income", established standards for the reporting and
disclosure of comprehensive income and its components in the financial
statements. The Statement requires the impact of foreign currency
translation, unrealized net derivative gains or losses on cash flow
hedges, and changes in minimum pension liabilities, to be included in
other comprehensive income.
(J) REVENUE RECOGNITION
Continuing operations
Revenue from the sale of products is recognized at the time goods are
shipped to customers. Estimated warranty costs associated with product
revenues are accrued for at the time of the sale based on the Company's
experience. The Company also accrues for distributor stock rotations and
other allowances as a reduction of revenue at the time of shipment based
on the Company's experience. The Company's accounting policies for revenue
recognition comply with the provisions of the Securities and Exchange
Commission's Staff Accounting Bulletin No. 101 (SAB 101).
-41-
Discontinued operations
Revenue from the sale of products was recognized at the time goods were
shipped to customers. Revenue from the sale of communications systems
including integration and installation services was recognized on a
percentage of completion basis. Revenue from service was recognized at the
time services were rendered. Billings in advance of services were included
in deferred revenue. Estimated warranty costs associated with these
revenues were provided for at the time of the sale.
(K) INCOME TAXES
Income taxes are accounted for using the liability method of accounting
for income taxes. Under this method, deferred income tax assets and
liabilities are determined based on differences between the tax and
accounting bases of assets and liabilities as well as for the benefit of
losses available to be carried forward to future years for tax purposes
that are likely to be realized. Deferred income tax assets and liabilities
are measured using enacted tax rates to apply to taxable income in the
years in which temporary differences are expected to be recovered or
settled. Deferred income tax assets are recognized only to the extent, in
the opinion of management, it is more likely than not that the deferred
income tax assets will be realized.
(L) RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to earnings in the periods in
which they are incurred. Purchased in-process research and development is
expensed at the time of acquisition. Related investment tax credits are
deducted from income tax expense.
(M) STOCK-BASED COMPENSATION PLAN
The Company has a stock-based compensation plan described in note 15.
As allowed under SFAS 123, Accounting for Stock-Based Compensation,
management has determined that it will continue to apply Accounting
Principles Board Opinion No. 25 (APB 25), in accounting for its employee
stock options because the alternative fair value accounting provided for
under SFAS 123 requires the use of option valuation models that were not
developed for use in valuing employee stock options. In accordance with
Company policy, the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant.
Accordingly under the rules of APB 25, no related compensation expense was
recorded in the Company's results of operations at the grant date of the
Company's options. However, stock compensation expense is recorded in
circumstances where the terms of a previously fixed stock option are
modified or when shares are contingently issuable to employees in
connection with an acquisition.
(N) EMPLOYEE FUTURE BENEFITS
Defined benefit pension expense, based on management's assumptions,
consist of actuarially computed costs of pension benefits in respect of
the current year's service; imputed interest on plan assets and pension
obligation; and straight-line amortization of experience gains and losses,
assumption changes and plan amendments over the expected average remaining
service life of the employee group.
The costs of retirement benefits, other than pensions, and certain
post-employment benefits are recognized over the period in which the
employees render services in return for those benefits. Other
post-employment benefits are recognized when the event triggering the
obligation occurs.
-42-
(O) RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard No. 141 (SFAS 141), "Business
Combinations" and Statement of Financial Accounting Standard No. 142 (SFAS
142), "Goodwill and Other Intangible Assets". SFAS 141 requires that
business combinations be accounted for under the purchase method of
accounting and addresses the initial recognition and measurement of assets
acquired, including goodwill and intangibles, and liabilities assumed in a
business combination. SFAS 142 requires goodwill to be allocated to, and
assessed as part of, a reporting unit. Further, SFAS 142 specifies that
goodwill and intangibles with an identifiable life will no longer be
amortized but instead will be subject to impairment tests at least
annually. The impairment test is a two-step process. First, the fair value
of a reporting unit is compared to its carrying value to identify possible
impairment and then, if necessary, the impairment is measured through a
deemed purchase price allocation. Under this standard, the Company will
also be required to review the useful lives of acquired goodwill and
intangible assets at least annually.
The Company is required to adopt SFAS 141 and 142 on a prospective basis
as of March 30, 2002. The adoption of SFAS 141 and 142 is not expected to
have a material effect on the Company's financial position, results of
operations and cash flows unless the Company acquires significant
additional companies.
In October 2001, the FASB issued Statement of Financial Accounting
Standard No. 144 (SFAS 144), "Accounting for the Impairment or Disposal of
Long-Lived Assets". SFAS 144 supersedes Statement of Financial Accounting
Standard No. 121 (SFAS 121), "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" and the accounting and
reporting provisions of APB Opinion No. 30 for the disposal of a business
segment. SFAS 144 establishes a single accounting model, based on the
framework established in SFAS 121, for long-lived assets to be disposed of
by sale. The Statement also broadens the presentation of discontinued
operations to include disposals of a component of an entity and provides
additional implementation guidance with respect to the classification of
assets as held-for-sale and the calculation of an impairment loss. The
Company is required to adopt SFAS 144 effective March 30, 2002. The
adoption of SFAS 144 is not expected to have a material impact on the
Company's financial statements.
5. ACCOUNTS RECEIVABLE
Included in accounts receivable was an allowance for doubtful accounts of
$1.3 (2001 - $0.3).
6. INVENTORIES
2002 2001
---------------------
Raw materials $ 2.4 $12.5
Work-in-process 20.8 46.3
Finished goods 9.4 26.1
----- -----
$32.6 $84.9
===== =====
In the first quarter of Fiscal 2002, the Company reviewed its inventory
requirements for the future 12 months in light of the semiconductor
industry-wide slowdown and higher channel inventories. As a result of this
review, the Company recorded an excess inventory charge to cost of sales
amounting to $29.1 for inventories estimated to be beyond its needs for
the following 12 months.
-43-
7. FIXED ASSETS
2002 2001
---------------------
Cost:
Land $ 3.4 $ 4.7
Buildings 28.8 41.9
Leasehold improvements 3.5 --
Equipment 146.2 252.0
Assets under capital leases 29.1 60.8
Assets under construction -- 2.5
------- -------
211.0 361.9
------- -------
Less accumulated depreciation:
Buildings 19.8 34.9
Leasehold improvements 0.1 --
Equipment 119.0 203.6
Assets under capital leases 11.8 25.6
------- -------
(150.7) (264.1)
------- -------
$ 60.3 $ 97.8
======= =======
During Fiscal 2002, the Company completed the construction of its
headquarters in Ottawa, Canada. In the fourth quarter, the Company sold
the building to Mitel Research Park Corporation for $7.4 and subsequently
leased back the building under an operating lease for a period of ten
years. The excess of the cost to construct the building over the proceeds
received on sale was capitalized as leasehold improvements. The leasehold
improvements will be amortized over the life of the operating lease.
8. LONG-TERM INVESTMENTS
2002 2001
---------------
Investment in Mitel Networks Corporation, at cost $10.7 $10.9
Investment in DALSA Semiconductor Inc., at cost 3.4 --
Equity investment in Optenia, Inc. -- 4.8
----- -----
$14.1 $15.7
===== =====
The Company's equity investment in Optenia, Inc. was written-off in the
fourth quarter of Fiscal 2002 as a result of it becoming bankrupt.
During Fiscal 2002, the Company made an investment of $2.0 in a privately
held technology company that was recorded on the cost basis. Later in
Fiscal 2002, the Company determined that the investment was impaired and
wrote off the entire amount. (See also Note 17).
-44-
9. OTHER ASSETS
2002 2001
-----------------
Note receivable, non-interest bearing
(see also Note 20) $ 14.8 $ --
Less: Deferred gain (see also Note 20) (14.7) --
------ ------
0.1 --
Promissory note, bearing interest at 8%
(2001 - 8%) payable annually, due in
June 2004 and against which a first
deed on real property was pledged as
security -- 4.5
Other long-term receivables 0.2 0.6
Patents, trademarks, and other 2.7 3.6
------ ------
$ 3.0 $ 8.7
====== ======
The promissory note was repaid in Fiscal 2002.
10. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
2002 2001
---------------
Trade payables $11.5 $20.5
Employee-related payables 10.5 11.1
Restructuring provisions 7.9 6.7
Provision for disposal of discontinued
operations 5.8 12.8
Provisions for disposal of foundry businesses 6.1 --
Goods received not invoiced 3.1 8.7
Other accrued liabilities 23.0 33.4
----- -----
$67.9 $93.2
===== =====
11. LONG-TERM DEBT
2002 2001
---------------
Capital leases and other, at rates
varying from 3.9% to 11.87% with
payment terms ranging from 1 to 6
years (2001 - 3.9% to 11.87% with
payment terms ranging from 1 to 7 years) $ 2.8 $ 8.0
Non-interest bearing 1996 Canada-Quebec
government loan, repayable in Canadian
Dollars in three equal annual installments
commencing July, 2001 -- 2.6
----- -----
2.8 10.6
Less current portion 2.1 5.8
----- -----
$ 0.7 $ 4.8
===== =====
The non-interest bearing 1996 Canada-Quebec government loan was fully
repaid in Fiscal 2002 in connection with the sale of the Company's Bromont
foundry.
Future minimum lease payments of the obligations under capital leases
total $2.9 of which $2.2, $0.6, $0.1, $nil, and $nil relate to fiscal
years 2003 to 2007 and beyond respectively. Interest costs of $0.1 are
included in the total future lease payments.
Total interest expense from continuing and discontinued operations related
to long-term debt was $0.8 in Fiscal 2002 (2001 - $10.1; 2000 - $17.6).
-45-
12. COMMITMENTS
(A) OPERATING LEASES
The future minimum lease payments for operating leases for which the
Company was committed as at March 29, 2002 amounted to $34.0 and were as
follows: 2003 - $5.9; 2004 - $5.3; 2005 - $4.8; 2006 - $4.5; 2007 - $2.8;
2008 and beyond - $10.7.
Rental expense on operating leases for the year ended March 29, 2002
amounted to $5.8 (2001 - $3.0; 2000 - $3.5).
(B) LETTERS OF CREDIT
The Company had letters of credit outstanding as at March 29, 2002 of
approximately $2.9.
(C) CAPITAL EXPENDITURES
Capital expenditure commitments under purchase orders outstanding at the
end of Fiscal 2002 amounted to approximately $1.3.
(D) SUPPLY AGREEMENTS
The Company has wafer supply agreements with 3 independent foundries,
which expire from 2005 to 2007. Under these agreements, the suppliers are
obligated to provide certain quantities of wafers per year. None of the
agreements have minimum unit volume purchase requirements.
13. CONTINGENCIES
The Company is a defendant in a number of lawsuits and party to a number
of other claims or potential claims that have arisen in the normal course
of its business. In the opinion of the Company's internal legal counsel,
any monetary liability or financial impact of such lawsuits and claims or
potential claims to which the Company might be subject after final
adjudication would not be material to the consolidated financial position
of the Company or the consolidated results of its operations.
14. REDEEMABLE PREFERRED SHARES
Dividends - Fixed cumulative cash dividends are payable quarterly at a
rate of $1.26 (Cdn$2.00) per share per annum. During the year ended March
29, 2002, a $1.26 (Cdn$2.00) per share dividend was declared and paid on
the redeemable preferred shares.
Redemption - The shares are currently redeemable, at the option of the
Company, at $15.69 (Cdn$25.00) per share plus accrued dividends.
Purchase Obligation - The Company is required to make reasonable efforts
to purchase 22,400 shares in each calendar quarter at a price not
exceeding $15.69 (Cdn$25.00) per share plus costs of purchase. The
difference between the stated capital of the repurchased shares over the
consideration paid for such shares is recorded against additional paid in
capital. During the year ended March 29, 2002, the Company purchased and
cancelled 35,200 preferred shares for cash consideration of $0.7.
-46-
15. CAPITAL STOCK
(A) COMMON SHARES
On June 7, 2001, the Company announced its intention to continue its
normal course issuer bid program for up to 6,308,907 common shares (5 % of
126,178,148 common shares issued and outstanding at May 28, 2001) between
June 9, 2001 and June 8, 2002. All repurchased shares will be cancelled.
In the year ended March 29, 2002, no shares were repurchased under this
program.
(B) NET INCOME PER COMMON SHARE
The net income per common share figures were calculated based on net
income after the deduction of preferred share dividends and using the
weighted monthly average number of shares outstanding during the
respective periods. Diluted earnings per share is computed in accordance
with the treasury stock method and based on the average number of common
shares and dilutive common share equivalents.
2002 2001 2000
---------------------
Weighted average shares for basic EPS (millions): 125.6 121.1 114.7
Weighted average shares on conversion of stock options
(millions) 1.4 -- 2.4
Weighted average issued shares subject to restrictions
(millions) 0.6 1.1 --
----- ----- -----
Adjusted weighted average shares and share equivalents
(millions) 127.6 122.2 117.1
===== ===== =====
The following options were excluded in the computation of diluted earnings
per share because the options' exercise price exceeded the average market
price of the common shares and, therefore, the effect would be
antidilutive: options outstanding for the year ended March 29, 2002 to
purchase 4,396,145 (2001 - nil; 2000 - 3,424,622) shares of common stock
at an average exercise price of $11.31 (2001 - nil; 2000 - $13.20) per
share. The exercise price of stock options was based on prices in Canadian
dollars translated at the year-end rate as at the end of each fiscal year.
(C) DIVIDEND RESTRICTIONS ON COMMON SHARES
The Company may not declare cash dividends on its common shares unless
dividends on the preferred shares have been declared and paid, or set
aside for payment. No common share dividend is currently being paid out.
(D) STOCK OPTION PLANS
At the Company's 1991 Annual General Meeting, the shareholders approved
resolutions authorizing stock options for key employees and non-employee
directors (the "plan"). Certain amendments to the plan were approved by
the shareholders at the 1993, 1995 and 1998 Annual and Special Meetings of
shareholders allowing for 1,000,000, 2,000,000, and 10,200,000 additional
shares, respectively, to be made available for grant. At a Special Meeting
of the shareholders on December 7, 2001, the Company's shareholders
approved an amendment to increase the maximum number of common shares in
respect of which options may be granted under the plan to 20,227,033
common shares.
Available for grant at March 29, 2002 were 3,810,910 (2001 - 1,979,470;
2000 - 3,567,998) shares. All options granted prior to January 29, 1998
have ten-year terms and options granted thereafter have six-year terms.
All options become fully exercisable at the end of four years of
continuous employment.
-47-
In connection with the sale by the Company of its Plymouth and Bromont
foundry businesses in the fourth quarter of Fiscal 2002 (see also note
20), all employees of the former foundry businesses who held options to
purchase common shares of the Company which were vested as at the date of
the sale were provided with a period until 180 days after the anniversary
date of the respective sales to exercise such options if they remained
employed with the buyer until at least one year after the respective sale
dates. In addition, of the remaining unvested options held by such
employees as at the sale date, 50% were accelerated to vest on the first
anniversary (provided that such employees remain employed by the buyer as
of such date) and the remaining 50% were cancelled as of the respective
sale dates. All such employees have a further 180-day period following
such accelerated vesting to exercise such options and any options
remaining unexercised as at August 19, 2003, in respect of the former
Bromont employees, and as at September 23, 2003, in respect of the former
Plymouth employees, expire on that date. During Fiscal 2002, the Company
recorded stock compensation expense of $0.1 related to these transactions.
On February 21, 2001, the Company offered an option exchange program to
option holders (with the exception of directors, officers and certain
executives) who received stock option grants after November 1, 1999 at
Cdn$14.31 and higher. Under the terms of the program, and with the consent
of The Toronto Stock Exchange, 2,691,350 options were cancelled and an
equal number of new options were granted at an exercise price of Cdn$14.06
per share. The new grants have a term of six years. During Fiscal 2002,
the Company recorded stock compensation expense of $1.0 (2001 - $nil)
related to this option exchange program.
In connection with the sale by the Company of its worldwide Systems
business on February 16, 2001 and further to negotiations with the buyer
to provide the buyer with assistance in retaining employees during the
first year following the closing, all employees of the former Systems
business who held options to purchase common shares of the Company which
were vested as at February 16, 2001 were provided with a period until
August 14, 2002 to exercise such options if they remained employed with
the buyer until at least February 15, 2002. In addition, of the remaining
unvested options held by such employees as at February 16, 2001, 50% were
accelerated to vest on February 15, 2002 (provided that such employees
remain employed by the buyer as of such date) and the remaining 50% were
cancelled as of February 16, 2001. All such employees have a further
180-day period following such accelerated vesting to exercise such options
and any options remaining unexercised as at August 14, 2002 expire on that
date. As at March 29, 2002, there were 1,209,433 outstanding vested stock
options held by Systems employees, which will expire on August 14, 2002,
unless exercised before that date. During Fiscal 2002, the Company
recorded stock compensation expense of $0.7 (2001 - $1.3) related to this
transaction.
On July 12, 1999, the Company offered an option exchange program to option
holders (with the exception of directors, officers and certain executives)
who received stock option grants in calendar 1998 at Cdn$17.78 and higher.
Under the terms of the program, and with the consent of The Toronto Stock
Exchange, 1,750,000 options were cancelled and 1,000,657 new options were
granted at an exercise price of Cdn$9.92 per share. The reduction in
number of options was directly proportional to the decrease in the
exercise price. The new grants have a term of six years. During Fiscal
2002, the Company recorded stock compensation expense of $0.6 (2001 -
$0.4) related to this option exchange program.
-48-
A summary of the Company's stock option activity and related information
for the three years ended March 29, 2002 is as follows:
2002 2001 2000
------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------------------------------------------------------------------------------------
Outstanding options:
Balance, beginning of year 9,464,693 $ 8.18 9,017,262 $ 8.51 5,918,988 $ 8.87
Granted 3,600,462 $10.00 6,098,025 $11.80 6,439,957 $ 8.85
Exercised (945,324) $ 5.17 (1,141,097) $ 5.15 (676,003) $ 3.97
Forfeited (1,153,908) $ 8.80 (841,897) $10.66 (633,180) $ 8.93
Cancelled (50,961) $10.77 (3,667,600) $13.66 (2,032,500) $12.13
----------- ------ ----------- ------ ----------- ------
Balance, end of year 10,914,962 $ 8.84 9,464,693 $ 8.18 9,017,262 $ 8.51
=========== ====== =========== ====== =========== ======
Exercisable, end of year 4,417,633 $ 8.20 2,542,251 $ 7.51 1,863,584 $ 6.45
=========== ====== =========== ====== =========== ======
Weighted average fair value
price of options granted
during the year using the
Black-Scholes fair value
option pricing model $ 3.02 $ 6.02 $ 4.98
====== ====== ======
The weighted average exercise price of stock options was based on prices
in Canadian dollars translated at the year-end exchange rate as at the end
of each fiscal year and at the year's average exchange rate for changes in
outstanding options during the year.
A summary of options outstanding at March 29, 2002 is as follows:
Total Outstanding Total Exercisable
- -----------------------------------------------------------------------------------------------------------------
Weighted Average
Weighted Average Remaining Weighted Average
Exercise Price Options Exercise Price Contractual Life Options Exercise Price
- -----------------------------------------------------------------------------------------------------------------
$0.69-$5.77 1,669,769 $ 4.59 3 years 1,255,812 $ 4.51
$5.85-$8.77 2,239,137 $ 7.13 4 years 879,241 $ 6.28
$8.82 2,518,589 $ 8.82 5 years 738,806 $ 8.82
$8.87-$11.08 2,266,509 $10.16 6 years 173,380 $10.25
$11.16-$23.69 2,220,958 $12.41 4 years 1,370,394 $12.19
---------- ---------
10,914,962 4,417,633
========== =========
The exercise price of stock options was based on prices in Canadian
dollars translated at the year-end exchange rate.
-49-
Pro Forma financial information required by SFAS 123 has been determined
as if the Company had accounted for its employee stock options using the
Black-Scholes fair value option pricing model with the following
weighted-average assumptions for fiscal years 2002, 2001, and 2000:
2002 2001 2000
-------------------------------
U.S. GAAP Pro Forma net income
(loss) attributable to common $(143.5) $(292.5) $ 33.0
shareholders after preferred dividends
U.S. GAAP Pro Forma net income (loss)
per common share:
Basic $ (1.14) $ (2.42) $ 0.29
Diluted $ (1.14) $ (2.42) $ 0.28
2002 2001 2000
-------------------------------
Risk-free interest rate 5.19% 5.08% 6.02%
Dividend yield Nil Nil Nil
Volatility factor of the expected
market price of the Company's
common stock 0.501 0.583 0.509
Weighted-average expected life of
the options 4 years 6 years 6 years
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of
the fair value of its employee stock options.
For purposes of Pro Forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period on a
straight-line basis.
16. ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of accumulated other comprehensive loss were as follows:
March 29, March 30, March 31,
2002 2001 2000
--------------------------------------
Net income (loss) for the period $(120.8) $(270.8) $ 50.2
Other comprehensive loss:
Minimum pension liability (2.5) -- --
Unrealized net derivative loss
on cash flow hedges (0.4) -- --
Change in cumulative
translation adjustment (0.4) (28.9) (7.3)
------- ------- -------
Comprehensive income (loss)
for the period $(124.1) $(299.7) $ 42.9
======= ======= =======
-50-
The changes to accumulated other comprehensive loss for three years ended
March 29, 2002 were as follows:
Cumulative Minimum Unrealized
Translation Pension Net Loss on
Account Liability Derivatives Total
-------------------------------------------------
Balance, March 26, 1999 $ (6.4) $ -- $ -- $ (6.4)
Change during the year (7.3) -- -- (7.3)
------ ------ ------ ------
Balance, March 31, 2000 (13.7) -- -- (13.7)
Change during the year (28.9) -- -- (28.9)
------ ------ ------ ------
Balance, March 30, 2001 (42.6) -- -- (42.6)
Change during the year (0.4) (2.5) (0.4) (3.3)
------ ------ ------ ------
Balance, March 29, 2002 $(43.0) $ (2.5) $ (0.4) $(45.9)
====== ====== ====== ======
As at March 29, 2002, the accumulated pension benefit obligation was in
excess of the fair value of the pension plan assets by $2.5, resulting in
an additional minimum pension liability recorded in other comprehensive
loss.
The Company also recorded a loss to other comprehensive loss in Fiscal
2002 of $0.4 which was attributable to the change in the value of
outstanding foreign currency forward contracts related to the Company's
hedging program that were designated as cash flow hedges for Fiscal 2003.
The Company estimates that $0.4 of net derivative loss included in other
comprehensive loss will be reclassified into earnings within the next 12
months.
17. SPECIAL CHARGES
(A) FISCAL 2002
Cumulative drawdowns
--------------------
Provision Provision
balance as Special balance as
at March Special Charges - at March 29,
30, 2001 Charges Reversals net Cash Non-cash 2002
---------------------------------------------------------------------------------------
Restructuring activities:
Workforce reduction $ 6.7 $ 27.8 $ (2.3) $ 25.5 $(29.3) $ -- $ 2.9
Lease and contract
settlements -- 9.7 (0.8) 8.9 (2.8) (1.1) 5.0
------ ------ ------ ------ ------ ------ ------
Total restructuring 6.7 37.5 (3.1) 34.4 (32.1) (1.1) 7.9
Impairment of long-term
assets -- 6.7 -- 6.7 -- (6.7) --
------ ------ ------ ------ ------ ------ ------
Total $ 6.7 $ 44.2 $ (3.1) $ 41.1 $(32.1) $ (7.8) $ 7.9
====== ====== ====== ====== ====== ====== ======
In response to the industry downturn, the Company announced on May 10,
2001 that it had implemented a cost-containment plan in order to preserve
cash resources. The cost-containment plan included a workforce reduction
of the company's total employee base by 439 employees, globally across all
job categories, which was completed by the end of Fiscal 2002. Further
reductions in the administrative workforce were implemented in the fourth
quarter of Fiscal 2002 affecting 32 employees around the world. This
extension to the program will be completed in the second quarter of Fiscal
2003. The total cost of the workforce reduction program was estimated to
be $25.5 in Fiscal 2002.
-51-
As a result of the workforce reduction program and consolidating design
activity, the Company took steps to provide for excess leased facilities
in Canada, the United States, the United Kingdom, and the Far East. The
cost of the lease and contract settlements amounted to $8.9 in Fiscal
2002.
The Company's enterprise resource planning ("ERP") system was originally
designed for a company heavily engaged in manufacturing with a much larger
workforce. During Fiscal 2002, the Company reviewed its information system
requirements as it evolved from a significant manufacturing concern to a
mostly fabless semiconductor company. In light of the sale of its two CMOS
fabs and a significant reduction in its workforce in Fiscal 2002, the
Company determined that the number of licenses required going forward
would be significantly lower. Accordingly, the Company recorded an
impairment charge for its ERP system and certain other assets mounting to
$1.1 in the fourth quarter of Fiscal 2002.
The Company also reviewed the carrying value of certain long-lived assets
in the communications segment, including an investment in a privately held
company that was made during Fiscal 2002. Based on an analysis of
estimated future undiscounted cash flows, the Company determined that
these assets were impaired. Accordingly, a charge of $5.6 was recorded in
the fourth quarter of Fiscal 2002 to reduce the carrying value of these
assets to their estimated fair value.
The total of these pre-tax special charges amounted to $41.1, of which
$34.6 was recorded in the first quarter and $6.5 was recorded in the
fourth quarter of Fiscal 2002. The fourth quarter special charge was net
of a reversal amounting to $3.1 from the first quarter restructuring
provision that will no longer be required. The reversal was due to savings
on the workforce reduction program and to the subsequent sub-letting of
vacant space in Irvine, California just after the close of Fiscal 2002.
(B) FISCAL 2001
In the year ended March 30, 2001, the Company recorded a write-down of its
capital assets relating to the carrying values of the acquired intangible
assets associated with Vertex and to the carrying values of the buildings
and equipment associated with the fabrication facilities in Canada and in
the United Kingdom.
Cumulative drawdowns
Provision --------------------
balance as Provision
at March Operating Special balance as at
31, 2000 Expenses Charges Cash Non-cash March 30, 2001
---------------------------------------------------------------------------------
Restructuring $ -- $ 11.2 $ -- $ (4.5) $ -- $ 6.7
Impairment of long-term assets:
Goodwill -- -- 112.9 -- (112.9) --
Fabrication facilities -- -- 124.7 -- (124.7) --
------ ------ ------ ------ -------- ------
Total $ -- $ 11.2 $237.6 $ (4.5) $ (237.6) $ 6.7
====== ====== ====== ====== ======== ======
The Company reviewed the carrying value for the acquired intangible assets
of Vertex. Based on an analysis of estimated future undiscounted cash
flows and current and expected adverse market conditions, the Company
determined that the carrying value of the acquired intangible assets was
impaired. The Company recorded a charge of $112.9 to write down the
goodwill relating to Vertex to its fair value, based on discounted cash
flows.
The Company also reviewed the carrying value of its fabrication
facilities. Based on an analysis of estimated future undiscounted cash
flows, current and expected adverse market conditions which result in a
low operating rate for these facilities, and the Company's manufacturing
strategy that is expected to incorporate higher degrees of outsourcing,
the Company determined that the carrying values of the fabrication
buildings and equipment were
-52-
impaired and recorded a charge of $115.4, net of income tax recoveries of
$9.3, to write down these carrying values.
During Fiscal 2001, the Company undertook workforce reductions across all
functions throughout the company. As at March 29, 2002, the provision
balance related to the Fiscal 2001 restructuring activities was $0.1,
after additional cash drawdowns of $6.6 through Fiscal 2002.
18. OTHER INCOME (EXPENSE) - NET
2002 2001 2000
----------------------------
Interest income $ 5.5 $ 9.0 $ 5.8
Foreign exchange gain (loss) 7.3 (10.6) 6.0
Equity loss in Optenia, Inc. (2.2) (0.6) --
----- ----- -----
Other income (expense) - net $10.6 $(2.2) $11.8
===== ===== =====
19. INCOME TAXES
The components of income (loss) before provision (benefit) of income taxes
consists of the following:
2002 2001 2000
-----------------------------
Income (loss) from continuing
operations before income taxes:
Canadian $ (23.0) $(155.0) $ 48.6
Foreign (99.2) (119.8) (4.9)
------- ------- -------
$(122.2) $(274.8) $ 43.7
======= ======= =======
The provision (recovery) for
income taxes consists of 2002 2001 2000
the following: -----------------------------
Current:
Canadian $ 1.0 $ 6.9 $ 10.5
Foreign -- 2.1 0.3
------- ------- -------
1.0 9.0 10.8
------- ------- -------
Deferred:
Canadian (1.7) (1.0) 3.1
Foreign (0.7) (4.4) (4.4)
------- ------- -------
(2.4) (5.4) (1.3)
------- ------- -------
$ (1.4) $ 3.6 $ 9.5
======= ======= =======
-53-
A reconciliation between the statutory Canadian income tax rate and the
actual effective rate is as follows:
2002 2001 2000
----------------------------
Expected Canadian statutory
income tax rate 35% 40% 40%
------- ------- -------
Provision (recovery) at Canadian
statutory income tax rate $ (42.5) $(111.4) $ 17.6
Differences between Canadian and
foreign taxes (0.3) 5.3 (1.8)
Investment tax credits -- (3.7) (2.7)
Tax effect of losses not recognized 26.1 32.4 0.1
Tax effect of temporary differences
not recognized 9.1 14.1 --
Tax effect of amortization of acquired
intangibles 2.6 70.8 2.9
Tax effect of realizing benefit of prior
years' loss carryforwards and timing
differences (2.0) (8.5) (3.2)
Corporate minimum taxes 1.0 2.3 0.3
Other 4.6 2.3 (3.7)
------- ------- -------
Income tax expense (recovery) $ (1.4) $ 3.6 $ 9.5
======= ======= =======
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The
significant components of deferred income tax assets and liabilities were
as follows:
2002 2001
--------------------
Deferred tax assets:
Provisions $ 13.9 $ 6.3
Impairment of fabrication facilities -- 8.9
Income tax loss carryforwards 56.0 39.1
Investment tax credits 34.1 26.9
Other - net 1.8 2.4
------ ------
105.8 83.6
Less: valuation allowance (75.8) (54.1)
------ ------
Deferred tax assets 30.0 29.5
------ ------
Deferred tax liabilities:
Book and tax differences on fixed assets 19.0 21.9
Investment tax credits -- --
Other - net 2.2 1.1
------ ------
Deferred tax liabilities 21.2 23.0
------ ------
Net deferred tax assets $ 8.8 $ 6.5
====== ======
The increase of $21.7 in the valuation allowance from the previous year
principally relates to losses in the Company's foreign operations and
temporary deductible differences in the Company's domestic operations.
Unremitted earnings of subsidiaries subject to withholding taxes will be
indefinitely reinvested with no provision necessary for potential
withholding taxes on repatriation of subsidiary earnings. The loss before
income taxes attributable to all foreign operations, including
discontinued operations, was $101.0 (2001 - loss of $68.8; 2000 - income
of $10.7).
As at March 29, 2002, the Company had income tax loss carryforwards in
Sweden and the United Kingdom of approximately $103.6 which may be carried
forward indefinitely to reduce future years' income for tax purposes. An
accounting benefit of approximately $50.5 has been recognized for these
losses. The Company has $57.4 of U.S. federal net operating loss
carryforward balances available which expire between 2012 and 2022. The
Company also has $31.3 of U.S. state net operating loss carryforward
balances available which expire between 2003 and 2007. The Company has
taken a full valuation allowance on the U.S. loss carryforward balances.
As at March 29, 2002, the Company had Canadian investment tax credit
carryforward balances of approximately $38.6 which may offset federal
income taxes payable. An accounting benefit of approximately $14.7 has
been recognized for these investment tax credits. The investment tax
credits expire between 2008 and 2011.
-54-
20. SALE OF FOUNDRY BUSINESSES
Plymouth Foundry
On March 28, 2002, Zarlink sold its wafer fabrication facility in
Plymouth, UK, as well as certain intellectual property and related foundry
businesses to companies controlled by X-FAB Semiconductor Foundries AG
("X-FAB") of Erfurt, Germany for $30.0, represented by $12.0 in cash on
closing and a note of $18.0 repayable over three years. The Plymouth
foundry facility comprised two CMOS wafer fabrication lines for producing
digital and mixed-signal communications and medical semiconductors.
The note receivable was discounted at 8% to a carrying value of $14.8. In
accordance with SEC Staff Accounting Bulletin No. 81 (SAB 81), "Gain
Recognition on the sale of a Business or Operating Assets to a Highly
Leveraged Entity", the gain on sale of $14.7 was deferred and netted
against the carrying value of the note receivable. The net note receivable
of $0.1 is included in Other Assets. The Company will recognize the gain
as payments are made on the note receivable. The first payment of $10.0
against the note receivable is expected to be received in June 2004 with
the final payment of $8.0 due in March 2005.
As part of the sale, the two companies signed a five-year agreement to
ensure continuity of supply for Zarlink products manufactured at Plymouth.
Approximately 175 Zarlink employees engaged in wafer production were
transferred to X-FAB as part of the sale.
Bromont Foundry
On February 22, 2002, Zarlink sold its foundry facility in Bromont,
Quebec, and related business to DALSA Semiconductor Inc. ("DALSA") for
$16.9. Under the agreement, Zarlink received from DALSA $13.0 in cash and
retained a 19.9% investment in the Bromont foundry. DALSA also assumed
certain employee-related payables amounting to approximately $0.5. The
Bromont facility is an operation featuring CMOS process technology for
digital and mixed-signal (analog/digital) communications products. The
plant also has other processes supporting industrial, scientific and space
applications, particularly high-end imaging applications.
The Company recorded a loss on sale of the Bromont foundry business of
$5.4, before income tax recoveries of $1.2.
The two companies also signed a three-year agreement to ensure continuity
of supply for Zarlink products manufactured at Bromont. Approximately 250
Zarlink employees affiliated with the Bromont operation were transferred
to DALSA as part of the agreement.
21. DISCONTINUED OPERATIONS
(A) COMMUNICATIONS SYSTEMS BUSINESS
On November 3, 2000, the Company adopted formal plans to pursue
divestiture opportunities related to the distinct operations of the
Systems business. Accordingly, the operations related to this business
were accounted for as discontinued operations with November 3, 2000 being
the effective measurement date.
On February 16, 2001, the Company sold its worldwide Systems business,
including the name "Mitel", to a company controlled by Dr. Terence H.
Matthews. As part of the transaction, Zarlink transferred most of its
Ottawa, Canada real estate to Dr. Matthews. The Company received $196.7 in
cash proceeds, after adjustments, in exchange for selling a 90 % ownership
interest in the Company's communications systems business and most of its
real property in Ottawa, Canada.
-55-
The results of the Systems business operations were as follows:
2002 2001 2000
---------------------------
Sales for the period ended February 16, 2001 $ -- $343.5 $539.3
Results of operations to the measurement date of
November 3, 2000:
Income (loss) before income taxes $ -- $ (8.7) $ 36.2
Income tax (expense ) recovery -- 3.0 (14.8)
------ ------ ------
Income (loss) from discontinued operations to the
measurement date of November 3, 2000 $ -- $ (5.7) $ 21.4
====== ====== ======
The Company recorded a gain of $13.3, net of transaction costs and other
provisions to separate the Systems business totaling $21.5, as well as
post-measurement date operating losses of $34.3 and income taxes of $7.4.
(B) LINCOLN POWER AND AUTOMOTIVE
On March 26, 1999, the Company adopted formal plans to pursue divestiture
opportunities related to the distinct operations of the Lincoln Power and
Automotive business segment ("Lincoln") which was part of the Plessey
Semiconductors Group acquired in Fiscal 1998. Accordingly, the operations
related to this business were accounted for as discontinued operations.
On January 19, 2000, the Company completed the sale of Lincoln for total
consideration of $8.3, including cash of $6.5 and a note receivable of
$1.8. The financial results of the discontinued operations were as
follows:
2002 2001 2000
------------------------
Sales $ -- $ -- $ 21.9
====== ====== ======
Income from discontinued operations,
net of income tax recoveries
of $nil (2001 - $nil; 2000 - $nil) $ -- $ -- $ --
====== ====== ======
Estimated loss on disposal of
discontinued operations, net of
income tax recoveries of $nil
(2001 - $nil; 2000 - $2.3) $ -- $ -- $ 5.4
====== ====== ======
Basic loss per common share from
discontinued operations $ -- $ -- $ 0.5
====== ====== ======
Fully diluted loss per common share
from discontinued operations $ -- $ -- $ 0.5
====== ====== ======
The Lincoln operating loss of $6.7 for the ten months ended January 19,
2000 was charged to the provision for discontinued operations.
22. ACQUISITIONS
On July 28, 2000, the Company acquired privately held Vertex, a
California-based fabless semiconductor company providing silicon solutions
for the enterprise switching and wide area network access markets. Zarlink
acquired Vertex in a share transaction for approximately 11 million newly
issued common shares valued at $210.8. Approximately 1.1 million shares or
10% of the issued shares were placed in escrow for a two-year period to
indemnify the Company for representations made by Vertex. In addition,
approximately 535,000 issued shares valued at $10.2 are subject to certain
restrictions over a two-year period. Under GAAP these amounts are
accounted for as compensation rather than a component of purchase price.
The fair value of the consideration was based on the average closing price
of the Company's common shares on The Toronto Stock Exchange shortly
before and after the proposed acquisition was announced on June 5, 2000.
-56-
The acquisition was accounted for by the purchase accounting method. The
purchase price allocation was based on fair values assigned to net assets
as determined and finalized by an independent valuation firm using
standard valuation techniques. An amount of $185.4 was allocated to
intangible assets that include completed research and development and
other intangible assets. The difference between the purchase price and the
fair value of the identifiable net assets amounted to $155.5, which was
recorded as goodwill. The identifiable intangible assets and the goodwill
were to be amortized over a two-year period (see below). The allocation to
net assets included $1.1 in respect of acquisition costs and costs to
integrate the operations of the acquired company.
The purchase transaction is summarized as follows:
Net assets acquired, at approximate fair value:
Current assets $ 20.1
Fixed assets 1.6
Goodwill and acquired intangible assets 185.4
------
Total assets 207.1
Current liabilities 6.5
------
Total net assets $200.6
======
Common share consideration $200.6
======
In the year ended March 30, 2001, the Company recorded an asset impairment
charge to reduce the carrying value of goodwill by $112.9 to $3.9. (See
also Note 17). In the year ended March 29, 2002, the Company recorded an
additional asset impairment charge of $1.6 to reduce the carrying value of
the acquired intangible assets to nil.
23. RELATED PARTY TRANSACTIONS
During the year ended March 29, 2002, the Company sold to and purchased
from jointly controlled and significantly influenced enterprises products
and services valued at approximately $1.3 (2001 - $nil; 2000 - $1.8) and
$0.7 (2001 - $0.7; 2000 - $0.6) respectively. These transactions for
products and services were under usual trade terms and trade prices.
As at March 29, 2002, the Company had no investments in jointly controlled
or significantly influenced enterprises. Included in accounts receivable
as at March 30, 2001, were amounts due from significantly influenced
enterprises of $0.2.
24. INFORMATION ON BUSINESS SEGMENTS
Business Segments
The Company's reportable business segments are comprised of the
Communications and Medical groups. Reportable segments are business units
that offer different products and services and are managed separately
because of these differences.
The Communications business specializes in broadband connectivity
solutions over wired, wireless and optical media. The Communications
business includes network access products that provide connectivity to the
network's core backbone, such as feeder, aggregation and transmission
applications, and those that address the multi-protocol physical and
network layers. In addition, the Communications business includes user
access products that allow users to connect to the network. These products
include wireless and infotainment applications. Network access products
accounted for $114.5 in revenue in Fiscal 2002 (2001 - $ 259.9; 2000 -
$235.6). User access products accounted for $72.7 in revenue in Fiscal
2002 (2001 - $157.5; 2000 - $146.8).
-57-
The Medical business provides ASIC solutions for applications such as
pacemakers, hearing aids and portable instruments.
The Company evaluates the performance of each business segment and
allocates resources based on operating income from continuing operations,
which excludes any intersegment sales of products and services. Zarlink
does not allocate amortization of intangibles, special charges or gains,
interest income or interest expense or income taxes to its reportable
segments. In addition, total assets are not allocated to each segment;
however, depreciation of capital assets is allocated to the segments based
on the asset usage. The accounting policies of the reportable segments are
the same as those described in the summary of significant accounting
policies.
Unallocated
Year Ended March 29, 2002 Communications Medical Costs Total
---------------------------------------------------------
Total external sales revenue $ 187.2 $ 34.9 $ -- $ 222.1
Depreciation of buildings and equipment 19.5 0.3 -- 19.8
Amortization of acquired intangibles -- -- 4.4 4.4
Loss on sale of foundry business -- -- 5.4 5.4
Special charge -- -- 41.1 41.1
Stock compensation expense -- -- 8.4 8.4
Segment's operating income (loss) from continuing
operations (78.0) 8.8 (59.3) (128.5)
Unallocated
Year Ended March 30, 2001 Communications Medical Costs Total
---------------------------------------------------------
Total external sales revenue $ 417.4 $ 32.8 $ -- $ 450.2
Depreciation of buildings and equipment 65.0 0.7 -- 65.7
Amortization of acquired intangibles -- -- 65.3 65.3
Special charge -- -- 237.6 237.6
Stock compensation expense -- -- 3.8 3.8
Segment's operating income (loss) from continuing
operations 47.7 0.9 (306.7) (258.1)
Unallocated
Year Ended March 31, 2000 Communications Medical Costs Total
---------------------------------------------------------
Total external sales revenue $ 382.4 $ 27.5 $ -- $ 409.9
Depreciation of buildings and equipment 53.8 0.5 -- 54.3
Amortization of acquired intangibles -- -- 9.6 9.6
Segment's operating income from continuing
operations 49.4 7.1 (9.6) 46.9
Geographic Segments
Revenues from continuing operations from external customers are attributed
to countries based on location of the selling organization.
-58-
Geographic information is as follows:
2002 2001 2000
----------------------------------------------------------------------------------------
Acquired
Fixed Fixed Intangible
Revenue Assets Revenue Assets Assets Revenue
----------------------------------------------------------------------------------------
Canada $ 43.1 $ 12.6 $ 78.7 $ 28.7 $ 3.9 $ 89.0
United States 62.8 3.0 173.0 3.6 -- 154.8
United Kingdom 83.7 34.7 155.5 52.6 -- 132.7
Sweden 22.9 9.9 25.4 12.1 -- 17.7
Other foreign
countries 9.6 0.1 17.6 0.8 -- 15.7
------ ------ ------ ------ ------ ------
Total $222.1 60.3 $450.2 $ 97.8 $ 3.9 $409.9
====== ====== ====== ====== ====== ======
Major Customers
For the year ended March 29, 2002, the Company had revenues from one
external customer, a major distributor, which exceeded 10% of total net
revenues (2001 - one; 2000 - nil). Sales to this distributor in Fiscal
2002 amounted to $27.1 (2001 - $64.6) and related to the Communications
segment.
25. PENSION PLANS
The Company maintains several defined contribution and three defined
benefit pension plans for its employees. The components of the pension
expense were as follows:
2002 2001 2000
-------------------------
Continuing operations:
Defined contribution plans $1.2 $1.3 $1.0
Defined benefit plans (see table below) 2.9 2.2 3.8
---- ---- ----
Pension expense from continuing operations 4.1 3.5 4.8
---- ---- ----
Discontinued operations:
Defined contribution plans -- 3.0 3.1
Defined benefit plans (see table below) -- 3.0 1.0
---- ---- ----
Pension expense from discontinued operations -- 6.0 4.1
---- ---- ----
Pension expense $4.1 $9.5 $8.9
==== ==== ====
2002 2001 2000
-------------------------
Defined benefit pension expense:
Employer service cost $1.8 $5.2 $4.8
Interest cost 1.3 4.7 4.0
Expected asset return (0.6) (4.7) (4.0)
Net amortization and deferral 0.4 -- --
---- ---- ----
Net periodic pension expense 2.9 5.2 4.8
Less: discontinued operations -- (3.0) (1.0)
---- ---- ----
Defined benefit pension expense from
continuing operations $2.9 $2.2 $3.8
==== ==== ====
(A) DEFINED CONTRIBUTION PENSION PLANS
Both the Company and the employees contribute to these plans based on the
employees' earnings.
-59-
(B) DEFINED BENEFIT PENSION PLANS
There is one contributory defined benefit plan (the "Plan") that covers
substantially all employees of Zarlink Semiconductor Limited ("ZSL"), a
wholly owned subsidiary of the Company. On November 30, 2001, ZSL
suspended contributions to the Plan and ceased members pension accruals.
The Plan was replaced with a defined contribution pension plan. The
pension obligations of the Plan are expected to be settled in Fiscal 2003.
The Company's policy was to fund defined benefit pension plans in
accordance with independent actuarial valuations and as permitted by
pension regulatory authorities.
This Plan provided pension benefits based on length of service and final
pensionable earnings. Employee contributions were based on pensionable
earnings. The actuarial report in connection with this defined benefit
plan, updated to March 29, 2002, was based on short-term rates given the
Company's intention to terminate the plan.
For purposes of an actuarial valuation, pension fund assets were valued
using the discounted income method. Under this approach, the value of the
assets is obtained by estimating the receipts which will arise in the
future from the plan's investments and then discounting the amounts to the
valuation date, at the valuation rate of return on assets.
As at March 29, 2002, the actuarial present value of ZSL accrued pension
benefits was $17.8 (2001 - $7.9). The accumulated benefit obligation was
$17.8 resulting in an additional minimum pension liability of $2.5
recorded as at March 29, 2002.
The second defined benefit plan covers all employees over the age of
twenty-eight in Sweden and provides pension benefits based on length of
service and final pensionable earnings. There are no pension fund assets
under the plan, therefore the Company purchases pension insurance for the
unfunded pension rights. The associated pension liability is calculated
each year by the Pension Registration Institute. With respect to the
pension liability of $8.6 (2001 - $8.0), the Company has provided, as
collateral, a limited surety bond in the amount of $6.7 and a letter of
credit of $1.6. This pension liability was actuarially determined based on
the present value of the accrued future pension benefits and in accordance
with applicable laws and regulations in Sweden.
The third defined benefit plan covers all employees in Germany with over
ten years of active service and provides benefits based on length of
service and final pensionable earnings. There are no segregated pension
fund assets under the plan. The pension liability is actuarially
determined each year and is insured in its entirety by the Swiss Life
Insurance Company. The pension liability of $3.4 (2001 - $3.1) was
actuarially determined based on the present value of the accrued future
pension benefits and in accordance with applicable laws and regulations in
Germany.
The following table shows the plans' funded status reconciled with amounts
reported in the consolidated balance sheets, and the assumptions used in
determining the actuarial present value of the benefit obligations:
2002 2001
------------------
Change in accrued pension benefits:
Benefit obligation at beginning of year $ 21.4 $ 79.4
Service cost 1.9 7.8
Interest cost 1.2 4.8
Plan participants' contributions -- 1.2
Actuarial (gain) loss 5.5 (1.5)
Benefits paid (0.7) (0.7)
Foreign exchange (0.1) (9.8)
Divestiture of Systems business -- (59.8)
------------------
Benefit obligation at end of year 29.2 21.4
------------------
-60-
2002 2001
------------------
Change in plan assets:
Fair value of plan assets at beginning of year $ 8.7 $ 65.0
Actual return on plan assets (0.3) (2.5)
Employer contributions 3.2 4.9
Employee contributions 0.9 2.5
Benefits paid (0.6) (0.7)
Foreign exchange (0.1) (7.3)
Divestiture of Systems business -- (53.2)
------------------
Fair value of plan assets at end of year 11.8 8.7
------------------
Unfunded status (17.4) (12.7)
Unrecognized net actuarial loss -- 2.4
------------------
Net pension benefit liability $(17.4) $(10.3)
==================
The net pension benefit liability is reflected in the consolidated balance
sheet as follows:
2002 2001
------------------
Other assets $ -- $ 0.6
Pension liability (17.4) (10.9)
------------------
Net pension benefit liability $(17.4) $(10.3)
==================
Assumptions: 2002 2001 2000
------------------------------
Discount rate 5% 6% 6%
Compensation increase rate Nil 3-4.5% 3%-5%
Investment return assumption 5% 9% 8%
26. FINANCIAL INSTRUMENTS
(A) FAIR VALUE
The Company's financial instruments include cash and cash equivalents,
short-term investments, accounts receivable, long-term receivables,
accounts payable, long-term debt, interest rate swaps and foreign exchange
forward and option contracts. Due to the short-term maturity of cash and
cash equivalents, short-term investments and accounts payable, the
carrying values of these instruments are reasonable estimates of their
fair value. The fair value of long-term debt was determined by discounting
future payments of interest and principal at estimated interest rates that
would be available to the Company at year-end. The fair value of interest
rate swaps was determined by discounting, at market rates, the future net
cash payments. The fair value of the foreign exchange forward and option
contracts reflects the estimated amount that the Company would have been
required to pay if forced to settle all outstanding contracts at year-end.
This fair value represents a point-in-time estimate that may not be
relevant in predicting the Company's future earnings or cash flows. The
fair value of financial instruments approximate their carrying value with
the following exceptions:
2002 2001
----------------------------------------------
Carrying Fair Carrying Fair
Amount Value amount Value
----------------------------------------------
Long-term debt:
Non-interest bearing 1996
Canada-Quebec government loan $ -- $ -- $ 2.6 $ 2.5
-61-
(B) DERIVATIVE FINANCIAL INSTRUMENTS
The Company operates globally, and therefore is subject to the risk that
earnings and cash flows may be adversely impacted by fluctuations in
foreign exchange. The Company uses forward and option contracts to manage
foreign exchange risk. Forward and option contracts are designated for
firmly committed or forecasted sales and purchases that are expected to
occur in less than one year.
The notional amounts for forward contracts represent the U.S. dollar
equivalent of an amount exchanged. Most of the forward contracts mature
within six months with the longest maturity extending to February 6, 2003.
At March 29, 2002, unrealized gains totaled $0.1 (2001 - $2.6) and
unrealized losses totaled $0.5 (2001 - $7.7). The following table presents
the net notional amounts of the forward contracts in U.S. dollars:
Buy (Sell): (U.S. dollars) 2002 2001
---------------------
Forward contracts:
British pounds $(14.2) $ 19.0
Canadian dollars 33.0 147.6
Swedish krona 0.7 4.5
Euro 0.3 2.1
Other -- 0.1
------ ------
Total $ 19.8 $173.3
====== ======
(C) CREDIT RISK
The Company's financial assets that are exposed to credit risk consist
primarily of cash and cash equivalents, short-term investments, accounts
receivable and derivative contracts. Cash and cash equivalents and
short-term investments are invested in government and commercial paper
with investment grade credit rating.
The Company is exposed to normal credit risk from customers. However, the
Company's orientation is global with a large number of diverse customers
to minimize concentrations of credit risk (see also note 24).
Zarlink is exposed to credit risk in the event of non-performance by its
counterparties on its foreign exchange contracts. The Company does not
anticipate non-performance by any of the counterparties, as it deals with
counterparties that are major financial institutions. The Company
anticipates the counterparties will satisfy their obligations under the
contracts.
(D) INTEREST RATE RISK
The Company is not exposed to significant interest rate risk due to the
short-term maturity of its monetary assets and current liabilities.
(E) UNUSED BANK LINES OF CREDIT
The Company has a line of credit for $15.7, of which up to $6.9 is
available for letters of credit. At March 29, 2002, $2.9 (2001 - $3.1) in
letters of credit were outstanding against this credit facility, thus the
Company had unused and available demand bank lines of credit amounting to
approximately $12.8 (2001 - $12.7) at a rate of interest based on the
prime lending rate plus 0.25%.
-62-
27. SUPPLEMENTARY CASH FLOW INFORMATION
The following table summarizes the Company's cash flows used in investing
activities from acquisitions:
2002 2001 2000
----------------------------
Cash interest paid $ 0.5 $10.1 $17.7
============================
Cash taxes paid $ 2.3 $15.8 $ 2.0
============================
The following table summarizes the Company's cash flows from (used in)
investing activities from acquisitions:
2002 2001 2000
-----------------------------
Cash acquired $ -- $ (7.4) $ --
Net assets acquired other than cash -- (193.2) --
-----------------------------
Total purchase price -- (200.6) --
Less: cash acquired -- 7.4 --
Less: non-cash consideration paid -- 200.6 --
Less: cash paid for other investments -- (0.5) --
-----------------------------
Acquisitions, net of cash acquired $ -- $ 6.9 $ --
=============================
28. COMPARATIVE FIGURES
Certain of the 2001 and 2000 comparative figures have been reclassified so
as to conform to the presentation adopted in 2002.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
-63-
PART III
Item 10. Directors and Executive Officers of the Registrant
Directors
The following table sets forth the name, age and position with the Company
of each director and nominee for director of the Company.
Name Age Director Since Positions
Andre Borrel 66 July 23, 1998 Director
Patrick J. Brockett(3,4) 54 April 9, 2001 Director, President and
Chief Executive Officer
Jean-Jacques Carrier(4) 51 October 28, 1998 Director, Senior Vice
President of Finance and
Chief Financial Officer
Hubert T. Lacroix(1,3,4) 46 July 21, 1992 Director
Kirk K. Mandy(2,3,4) 46 July 23, 1998 Director and Vice Chairman
Donald G. McIntyre 54 July 23, 1998 Director, Senior Vice
President of Human
Resources, General Counsel
and Secretary
Kent H.E. Plumley(1,2,3) 65 August 22, 2000 Director
Dr. Henry Simon(3,4) 72 July 21, 1992 Director and Chairman
Dr. Semir D. Sirazi(1) 47 September 27, 1999 Director
(1) Member of the Audit Committee (established in accordance with the Canada
Business Corporations Act)
(2) Member of the Compensation and Human Resources Development Committee
(3) Member of the Nominating Committee
(4) Member of the Executive Committee
Mr. Borrel has been an independent consultant to the semiconductor
industry since 1995. From 1967 to 1994, he served in senior management positions
with Motorola, Inc. in Europe and the United States. Mr. Borrel is a director of
Chartered Semiconductors Manufacturing in Singapore and Microchemical Systems SA
in Switzerland.
Mr. Brockett joined the Company in April 2001 as President and Chief
Executive Officer. Prior to that he held a variety of executive management
positions at National Semiconductor Corporation.
Mr. Carrier joined the Company in 1993 as Vice President of Finance and
Chief Financial Officer and became Senior Vice President of Finance and Chief
Financial Officer in October 1998.
Mr. Lacroix has been Executive Chairman of Telemedia Corporation, a media
and telecommunications company, since February 2000. Prior to his appointment,
he was a partner with McCarthy Tetrault (law firm) since 1984. He is also a
director of G.T.C. Transcontinental Group Ltd., ITS Investments Limited
Partnership and Secor Inc.
-64-
Mr. Mandy joined the Company in 1984 serving in executive management
positions until his appointment as President and Chief Executive Officer on July
23, 1998. Mr. Mandy retired from the Company and was appointed Vice-Chairman of
the Board of Directors on April 6, 2001. He also serves on the board of
directors of several privately held companies.
Mr. McIntyre joined the Company in 1987 as Vice President, General Counsel
and Secretary and became Vice President, Human Resources, General Counsel and
Secretary in 1991. In October 1998 he was appointed Senior Vice President of
Human Resources, General Counsel and Secretary. Mr. McIntyre also served as a
director of the Company from 1993 to 1996.
Mr. Plumley has been a partner in Osler, Hoskin & Harcourt since May 1990.
He also serves on the board of directors of several privately held companies.
Dr. Simon is a Special Partner of Schroder Ventures Life Sciences
Advisers, a venture capital company advising on investments in the life
sciences. Dr. Simon has been Chairman of the Company's Board of Directors since
July 21, 1994.
Dr. Sirazi has been a consultant to the semiconductor, networking and
telecommunications industries since July 1997. He has held a variety of
executive management positions at U.S. Robotics/3COM and Zenith Electronics
Corporation. He is an active advisor and investor to several private companies
in the high-technology field and serves on the board of directors of these
companies.
There are no family relationships among directors, nominees for director
or executive officers of the Company. Under the terms of the Company's By-Laws a
majority of the directors must be resident Canadians. At the upcoming Annual and
Special Meeting of Shareholders, to be held July 31, 2002, the Company is asking
its Shareholders to consider and, if deemed appropriate, to approve amendments
to By-Law No. 16 of the Company. The amendments are proposed so as to harmonize
the Company's By-Law No. 16 with the recent amendments to the Canada Business
Corporations Act (the "CBCA") and the Canada Business Corporations Regulations
(the "Regulation") that came into force in November 2001. The Board of Directors
decided that it would be appropriate and beneficial to amend By-Law No. 16 of
the Company in order to take advantage of the greater flexibility now provided
by the amended CBCA and Regulation.
STATEMENT OF CORPORATE GOVERNANCE PRACTICES
General
In February 1995, The Toronto Stock Exchange Committee on Corporate
Governance in Canada issued its final report containing a series of guidelines
for effective corporate governance (these guidelines, as amended from time to
time, are herein referred to as the "Governance Guidelines"). The Governance
Guidelines, which are not mandatory, deal with the constitution of boards of
directors and board committees, their functions, the effectiveness and education
of board members, their independence from management, their relationship with
management and shareholders and other means of ensuring sound corporate
governance. The Toronto Stock Exchange has, in accordance with the
recommendations contained in such report, adopted as a listing requirement that
disclosure be made by each listed company of its corporate governance system
with reference to the Governance Guidelines.
In 1999, The Toronto Stock Exchange amended the Governance Guidelines and
companies are now required to disclose their corporate governance practices with
specific reference to each of the 14 Governance Guidelines.
The Board of Directors and the members of the Company's management are
committed to the highest standard of corporate governance. The Company's
principal objective in directing and managing its business and affairs is to
enhance shareholder value. The Company believes that effective corporate
governance improves corporate performance and benefits all shareholders.
The Board of Directors of the Company has always endorsed the concept,
principles and practices of sound corporate governance and believes that the
Company is in substantial compliance with the Governance Guidelines.
-65-
The following is a summary of the particulars of the system of corporate
governance of the Company.
Mandate of the Board
The Board of Directors establishes the overall policies for the Company,
monitors and evaluates the Company's strategic direction and retains plenary
power for those functions not specifically delegated by it to management.
Accordingly, the mandate of the Board of Directors is to supervise the
management of the business and affairs of the Company with a view to evaluate,
on an ongoing basis, whether the Company's resources are being managed in a
manner consistent with enhancing shareholder value, ethical considerations and
corporate social responsibility. In order to better fulfill its mandate, the
Board of Directors has formally acknowledged its responsibility for, among other
matters:
(i) reviewing and approving, at the beginning of each fiscal year, the
business plan, capital budget and financial goals of the Company as
well as longer term strategic plans prepared and elaborated by
management and, throughout the year, monitoring the achievement of
the objectives set;
(ii) ensuring that it is properly informed, on a timely basis, of all
important issues (including environmental, cash management and
business development issues) and developments involving the Company
and its business environment;
(iii) identifying, with management, the principal risks of the Company's
business and the systems put in place to manage these risks as well
as monitoring, on a regular basis, the adequacy of such systems;
(iv) ensuring proper succession planning, including appointing, training
and monitoring senior executives;
(v) assessing performance of senior executives;
(vi) ensuring proper communication with shareholders, customers and
governments; and
(vii) monitoring the efficiency of internal control and management
information systems, and has taken, when necessary, specific
measures in respect of these items.
Long-term goals and strategies for the Company are developed as part of
management's annual strategic planning process with the Board of Directors,
which also includes the preparation of a detailed one-year operating plan.
Through this process, led by the President and Chief Executive Officer and
senior management of the Company, the Board of Directors adopts the operating
plan for the coming financial year and monitors senior management's relative
progress through a regular reporting and review process. The Board of Directors
reviews on a quarterly basis the extent to which the Company has met the current
year's operating plan.
To comply with the Governance Guidelines which recommend that a board of
directors should assume responsibility for succession planning, including
appointing, training and monitoring senior management, the Board of Directors
reviews all appointments of officers.
The Board of Directors has put policies in place to ensure effective,
timely and non-selective communications between the Company, its stakeholders
and the public. The Board of Directors, or the appropriate committee thereof,
reviews the content of the Company's major communications to shareholders and
the investing public, including the quarterly and annual reports, and approves
the proxy circular, the annual information form and any prospectuses that may be
issued. The disclosed information is released through mailings to shareholders,
news wire services, the general media and a home page on the internet.
The Company has an investor relations group which responds to analyst,
institutional and individual shareholder inquiries and maintains a toll-free
telephone line for ease of contact. Individual queries, comments or suggestions
can be made at any time by calling or writing directly to the Company's
registered office in Ottawa, Ontario, Canada. In addition, the Company has a
communications group to respond to inquiries from media, government and the
public. Together, these groups deal with stakeholder concerns and ensure that
all inquiries receive a timely response.
-66-
Composition of the Board and of its Committees
The Governance Guidelines recommend that a board of directors be
constituted of a majority of individuals who qualify as "unrelated directors".
The Governance Guidelines define an "unrelated director" as a director who is
independent of management and is free from any interest and any business or
other relationship which could, or could reasonably be perceived to, materially
interfere with the director's ability to act with a view to the best interests
of the Company, other than interests and relationships arising from
shareholding. The Governance Guidelines also make an informal distinction
between "inside" and "outside" directors. The Governance Guidelines and related
rules consider an inside director of a corporation to be a director who is an
officer or employee of the corporation or any of its subsidiaries.
The directors of the Company have examined the relevant definitions of the
Governance Guidelines and have individually considered their respective
interests in and relationships with the Company. As a consequence, the Board of
Directors has determined that on a rigorous application of these definitions, it
would be composed of six unrelated directors out of nine board members. The
Board of Directors continues to seek two additional unrelated directors with
semiconductor industry and customer perspectives. This will further strengthen
the Company's commitment to good corporate governance practices.
The Governance Guidelines also recommend that a board of directors should
examine its size. The Board of Directors believes that the number of nine
directors will be sufficient and appropriate to effectively conduct business.
The Board of Directors, as presently constituted, brings together a mix of
skills, backgrounds and individual attributes that the Board of Directors
considers appropriate to the stewardship of the Company.
The Governance Guidelines also recommend that, in circumstances where a
corporation has a "significant shareholder" (that is, a shareholder with the
ability to exercise the majority of the votes for the election of the directors
of a corporation), the Board of Directors should include a number of directors
who do not have interests in or relationships with either the corporation or the
significant shareholder and should fairly reflect the investment in the
corporation by shareholders other than the significant shareholder. The Company
does not presently have a significant shareholder.
A further Governance Guideline recommends that the Audit Committee be made
up of outside and unrelated directors only. This guideline also states that
other board committees should be comprised of outside directors, a majority of
whom should be unrelated directors. The Company currently has four committees,
being the Audit Committee, the Compensation Committee, the Nominating Committee
and the Executive Committee. All of these committees, as presently constituted,
comply with the Governance Guideline recommendations. It is the intention of the
Board of Directors to reevaluate from time to time the composition of the
various committees.
The four committees of the Board of Directors have been established with
specific mandates and defined authorities with a view to assist the Board of
Directors in efficiently carrying out its responsibilities. The Committee
members are reviewed and appointed yearly after the election of Directors at the
Meeting. Set out below is a general description of the committees of the Board
of Directors and their respective mandates.
Audit Committee
The Company has a standing Audit Committee, required to be composed of
three outside directors who are financially literate and at least one of whom
has accounting or related financial management expertise. Information regarding
the functions performed by the Audit Committee, its membership, and the number
of meetings held during the fiscal year, is set forth in the "Report of the
Audit Committee," included in this Circular.
The Audit Committee is presently composed of three outside and unrelated
directors who are current members of the Board of Directors: Hubert T. Lacroix,
Kent H.E. Plumley and Dr. Semir Sirazi.
Compensation Committee
The mandate of the Compensation Committee is outlined above under "Report
on Executive Compensation". This mandate further includes a review of the
compensation of directors to ensure the compensation realistically reflects
-67-
the responsibilities and risk involved in being an effective director. The
Compensation Committee is presently composed of three outside and unrelated
directors who are current members of the Board of Directors: Andre Borrel, Kirk
K. Mandy and Kent H.E. Plumley.
Nominating Committee
The mandate of the Nominating Committee is to seek out and review
potential additional Board of Director candidates as submitted by search
consultants retained by the Company, to evaluate the structure, responsibility
and composition of committees of the Board of Directors and to make
recommendations to the Board of Directors with respect thereto. The Nominating
Committee is presently composed of four outside and unrelated directors who are
current members of the Board of Directors: Dr. Henry Simon, Hubert T. Lacroix,
Kirk K. Mandy and Kent H.E. Plumley and one inside and related director who is a
current member of the Board of Directors: Patrick J. Brockett. In view of the
contribution to the Company of the President and Chief Executive Officer,
Patrick J. Brockett, the Board of Directors considered the participation of Mr.
Brockett on the Nominating Committee to be essential and concluded that he
should serve on such committee.
Executive Committee
The mandate of the Executive Committee is to supervise, control and manage
the business and affairs of the Company when the Board of Directors is not in
session in order to execute in a timely fashion corporate plans and programs.
The Executive Committee is presently composed of three outside and unrelated
directors who are current members of the Board of Directors: Hubert T. Lacroix,
Kirk K. Mandy, and Dr. Henry Simon and two inside and related directors who are
current members of the Board of Directors: Patrick J. Brockett and Jean-Jacques
Carrier. In view of the contribution to the Company of the President and Chief
Executive Officer, Patrick J. Brockett, and the focus on financial performance
provided by the Senior Vice President of Finance and Chief Financial Officer,
Jean-Jacques Carrier, the Board of Directors considered the participation of
Messrs. Brockett and Carrier on the Executive Committee to be essential and
concluded that they should continue to serve on such committee.
Independence from Management
The Governance Guidelines state that the independence of a Board of
Directors is most simply achieved by appointing a chair who is not a member of
management. The Chairman of the Board of Directors is separate from management
and ensures that the Board of Directors can function independently of
management. In addition, the Board of Directors, from time to time, holds
sessions at Board of Directors meetings without management present.
Decisions Requiring Prior Approval by the Board of Directors
The Board of Directors has delegated to the President and Chief Executive
Officer and senior management the responsibility for the day-to-day management
of the business of the Company, subject to compliance with the plans approved
from time to time by the Board of Directors. In addition to those matters which
must by law or by the articles of the Company be approved by the Board of
Directors, the Board of Directors has specified limits to management's
responsibility as recommended in the Governance Guidelines, and retains
responsibility for significant changes in the Company's affairs, such as
approval of major capital expenditures, debt and equity financing arrangements
and significant acquisitions and divestitures.
Other
The Board of Directors considers that orienting and educating new
directors is an important element of ensuring responsible corporate governance
and the Governance Guidelines recommend that a corporation should provide an
orientation and education program for new directors. Therefore, in addition to
having extensive discussions with the Chairman of the Board of Directors and the
President and Chief Executive Officer with respect to the business and
operations of the Company, a new director receives a record of public and other
information concerning the Company and prior minutes of recent meetings of the
Board of Directors and applicable committees. The details of the orientation of
each new director will be tailored to that director's individual needs and areas
of interest. By taking measures to ensure
-68-
that members of the Board of Directors are properly informed of the business of
the Company, the Board of Directors considers that it complies with the
Governance Guidelines.
A uniform position description has been adopted for each non-executive
member of the Board of Directors.
The Board of Directors has determined to retain general responsibility for
dealing with corporate governance issues, while maintaining the flexibility of
asking certain committees of the Board of Directors to address specific issues
as they may arise from time to time. Therefore, a corporate governance committee
will not be created at this time.
In certain circumstances, it may be appropriate for an individual director
to engage an outside advisor at the expense of the Company. The Chairman of the
Board of Directors will determine if the circumstances warrant the engagement of
an outside advisor.
Executive Officers
The names, ages and positions with the Company of the executive officers
of the Company, other than Messrs. Brockett, Carrier, and McIntyre who are
listed in the table of directors, are as follows:
Name Age Positions
---- --- ---------
Roland Andersson 50 Senior Vice President, Worldwide Sales
Pradeep Singh Arora 38 Vice-President, Sales - Asia Pacific
Kevin Beadle 44 Vice President, Sales - Americas
Michael Bereziuk 49 Senior Vice President and General Manager,
User Access
Peter Burke 51 Vice President, Chief Technology Officer
J. Desmond Byrne 50 Vice President, Legal and Assistant Secretary
Robert Fogliani 45 Vice President, Sales and Marketing, EMEA
Anthony P. Gallagher 48 Senior Vice President, Worldwide Operations
Mark Levi 64 Vice President, Corporate Marketing
Shirley J. Mears 45 Vice President, Treasurer
David Pipkins 50 Vice President and General Manager, Network Access
Division
Timothy R. Saunders 40 Vice President and Corporate Controller
Stephen J. Swift 49 Vice President and General Manager, Medical
Products Division
Jitesh B. Vadhia 43 Vice President and General Manager, Optical Systems
Division
Mr. Andersson was appointed Senior Vice President, Worldwide Sales on June
15, 2001. From 1983 until his appointment, Mr. Andersson served in several
senior management positions with National Semiconductor Corporation.
Mr. Arora was appointed Vice President, Sales in June 2001. From 1995
until his appointment, Mr. Arora served in senior management positions with
National Semiconductor Corporation.
-69-
Mr. Beadle was appointed Vice President, Sales - Americas on July 9, 2001.
From June 1992 until his appointment, Mr. Beadle served as Vice President, Sales
at National Semiconductor Corporation.
Mr. Bereziuk was appointed Senior Vice President and General Manager -
User Access Division on November 5, 2001. From 1984 until his appointment, Mr.
Bereziuk served in several senior management positions with National
Semiconductor Corporation.
Mr. Burke was appointed Vice President and Chief Technology Officer on
June 12, 2001. Mr. Burke served as Vice President, Network Access from January
2001 to June 2001, Vice President Strategic Marketing from December 1999 to
January 2001, Vice President Product Marketing from February 1998 to December
1999. Mr. Burke joined the company in 1995.
Mr. Byrne was appointed Vice President, Legal on January 30, 2001. Mr.
Byrne served as Assistant General Counsel and Assistant Secretary from June 1987
to January 2001. Mr. Byrne joined the Company in 1983.
Mr. Fogliani was appointed Vice President, Sales and marketing, EMEA on
May 1, 2000. Mr. Fogliani served as Head of Regional Business Development EMEA
from December 1998 to April 2000 and as Southern Europe Sales Manager from June
1996 to November 1998. Mr. Fogliani joined the Company in 1996.
Mr. Gallagher was appointed Senior Vice President, Worldwide Operations on
April 1, 2002. Mr. Gallagher served as Vice President Worldwide Operations from
October 2000 to March 2002, Vice President, Europe from April 1999 until
September 2000 and as Finance Director from October 1992 to March 1999. Mr.
Gallagher joined the Company in 1992.
Mr. Levi was appointed Vice President, Marketing Communications on May 7,
2001. From April 1990 until his appointment, Mr. Levi served as Vice President,
Analog Marketing at National Semiconductor Corporation.
Ms. Mears was appointed Vice President, Treasurer in April 1992. Ms. Mears
served as Vice President, Corporate Taxation and Canadian Human Resources from
April 1991 to March 1992 and Vice President, Corporate Taxation from February
1990 to March 1991. Ms. Mears joined the Company in 1983.
Mr. Pipkins was appointed Vice President and General Manager, Network
Access Division in June 2001. Mr. Pipkins served as Vice President, Engineering,
Network Access Division from January 2001 to June 2001, Director, Access
Business Unit from August 1999 to January 2001 and Director, Product Line
Management from April 1996 to August 1999. Mr. Pipkins joined the Company in
1986.
Mr. Saunders was appointed Vice President and Corporate Controller in July
1998. Mr. Saunders served as Director, Corporate Finance from July 1992 to June
1997 and as Corporate Controller from June 1997 to July 1998. Mr. Saunders
joined the Company in 1992.
Mr. Swift was appointed Vice President and General manager, Medical
Products Division in April 2001. Mr. Swift served as General Manager, Medical
from April 1998 to April 2001 and Manager, ASIC Engineering from September 1997
to April 1998. Mr. Swift joined the Company in 1997.
Mr. Vadhia was appointed Vice President and General Manager, Optical
Systems in October 2001. Mr. Vadhia served as Vice President and General
Manager, Network Access from June 2001 to October 2001. From 1987 until his
appointment, Mr. Vadhia served in several senior management positions with
National Semiconductor Corporation.
Item 11. Executive Compensation
The aggregate compensation paid by the Company to its directors and
executive officers for services rendered during Fiscal 2002 was $5,827,052. This
amount includes salary, bonuses, severance payments, car allowances and other
perquisites and excludes the amount set out below for pension, retirement and
similar benefits paid to executive officers.
-70-
The aggregate amount set aside or accrued by the Company and its
subsidiaries during Fiscal 2002 for the provision of pension, retirement and
similar benefits to the directors and executive officers the Company as a group
was $99,162, excluding adjustments for market value fluctuations related to the
current year and previous year accruals which totaled $16,163 for the above
executive officers.
Summary Compensation Table
The following table sets forth compensation information for the three
fiscal years ended March 29, 2002, March 30, 2001, and March 31, 2000,
respectively, for the Chief Executive Officer and the four other most highly
compensated executive officers of the Company who were serving as executive
officers of the Company on March 29, 2002 (collectively, the "Named Executive
Officers").
===================================================================================================================
Long-Term
Annual Compensation Compensation
-------------------------------------- ----------------
Bonus Other Securities
Name and (Annual Annual Under All Other
Principal Fiscal Incentive Compen- Options Compen-
Position Year Salary Awards) sation(1,2) Granted sation(3)
(US$)(4) (US$)(4) (US$)(4) (#) (US$)(4)
- -------------------------------------------------------------------------------------------------------------------
Patrick J. Brockett (5) 2002 495,657 297,391 142,124 -- 2,128
President and Chief 2001 -- -- -- -- --
Executive Officer 2000 -- -- -- -- --
Roland Andersson 2002 241,666 100,000 78,901 -- 150,000
Senior Vice President, 2001 -- -- -- -- --
Worldwide Sales 2000 -- -- -- -- --
Mark Levi 2002 240,655 95,933 57,445 -- 3,031
Vice President, 2001 -- -- -- -- --
Corporate Marketing 2000 -- -- -- -- --
Jean-Jacques Carrier 2002 205,191 121,515 -- -- 52,376
Senior Vice President of 2001 189,511 200,081 -- 33,347 965,140
Finance and Chief Financial 2000 190,956 186,863 -- 74,745 30,000
Officer
Kevin Beadle 2002 198,795 85,000 -- -- 225,000
Vice President, Sales 2001 -- -- -- -- --
Americas 2002 -- -- -- -- --
Kirk K. Mandy 2002 Note 6 Note 6 -- Note 6 Note 6
Former President and 2001 399,171 722,227 -- 100,041 3,443,302
Chief Executive Officer 2000 352,802 540,203 -- 166,478 55,136
===================================================================================================================
(1) The value of benefits not exceeding the lesser of $32,000 and 10% of the
sum of salary and bonuses has been omitted for each of the Named Executive
Officers.
(2) "Other Annual Compensation" includes relocation and living expenses for
three Named Executive Officers.
(3) "All Other Compensation" includes contributions made and accrued by the
Company to a defined contribution pension plan, excluding adjustments for
market value fluctuations related to the current year and previous year
accruals which totaled $10,677 for one Named Executive Officer. It also
includes signing bonuses and amounts for the exercise of stock options
based on the excess of the market price of the common shares on the date
of exercise over the exercise price thereof.
(4) Canadian dollar amounts have been converted to United States dollars using
the year's average exchange rate.
(5) Mr. Brockett became the Company's President and Chief Executive Officer on
April 9, 2001.
(6) Mr. Mandy retired as the Company's President and Chief Executive Officer
effective April 6, 2001 (Fiscal 2002). All salary and termination-related
payments were included in the 2001 compensation disclosure in the table
above. After retirement and during Fiscal 2002, Mr. Mandy exercised
108,750 options to purchase common shares and realized an aggregate value
of $478,443. As at March 29, 2002, Mr. Mandy held 375,000 unexercised
options to purchase common shares which were exercisable and which had an
aggregate in-the-money value of $417,634. Mr. Mandy further held 120,000
unexercisable options to purchase common shares. On February 6, 2002, Mr.
Mandy, as a Director of the Company, received a grant of 20,000 options to
purchase common shares.
Employee Share Ownership Plan
The Employee Share Ownership Plan was approved by the Board of Directors
in May 1997. The purpose of this plan is to enable employees to invest in equity
shares of the Company through employee savings. Employees make
-71-
contributions by means of payroll deductions and common shares of the Company
are purchased twice per month through normal market facilities by Computershare
Trust Company of Canada who assumed the administration role for Montreal Trust
Company of Canada (the trustee appointed to administer the plan). The Company
pays all brokerage commissions, transfer taxes, and other charges and expenses
of the purchase and sale of the common shares except for the issuance of a
certificate of fewer than 100 shares, in which case the employee is responsible
for such costs.
During April 2001, the Company implemented a matching contribution in
connection with the Employee Share Ownership Plan which provides for a
contribution by the Company equal to 15% of each employee's contribution under
the plan, subject to a maximum of $320 per employee per year. A total
contribution by the Company of approximately $130,000 is estimated under this
plan for the next year.
1991 Stock Option Plan for Key Employees and Non-Employee Directors
The 1991 Stock Option Plan for Key Employees and Non-Employee Directors
(the "Option Plan") provides for the granting of non-transferable options to
purchase common shares to certain key employees and non-employee directors of
the Company and its subsidiaries as determined from time to time by the
Compensation and Human Resources Development Committee (the "Compensation
Committee") administering the Option Plan. The Option Plan was approved by the
Shareholders at the 1991 Annual and Special Meeting of Shareholders and certain
amendments were approved by the Shareholders at the 1993, 1995, and 1998 Annual
and Special Meetings of Shareholders. Further amendments were made to the Option
Plan by the directors on May 9, 2001 and approved by the Shareholders at the
December 7, 2001 Special Meeting of Shareholders.
On May 9, 2001 the Board of Directors amended the Option Plan, as later
approved by the Shareholders on December 7, 2001, to provide that all future
options granted under the Option Plan must be exercised within a maximum of six
years (as opposed to the 10-year period prior to such amendment) following the
date of grant or within such other shorter time or times as may be determined by
the Compensation Committee at the time of grant. Since 1998, all options granted
have had a six-year term. In the case of options granted to employees of the
Company, other than executive officers and non-employee directors and first-time
option grants to new employees, the terms of the Option Plan provide for
staggered equal monthly vesting at a rate of 2.08% per month over a period of
four years commencing on the date of grant of the options, or at such other time
or times as may be determined by the Compensation Committee at the time of
grant. In the case of first-time option grants to new employees, up to
twenty-five percent of the common shares in respect of each option may be
purchased after one year from the date of grant and 2.08% per month for each
month thereafter during a three-year period, or at such other time or times as
may be determined by the Compensation Committee at the time of grant. In the
case of executive officers and non-employee directors, up to twenty-five percent
of the common shares in respect of each option may be purchased after one year
from the date of grant, up to fifty percent after two years from the date of
grant, up to seventy-five percent after three years from the date of grant and
up to one hundred percent after four years from the date of grant or at such
other time or times as may be determined by the Compensation Committee at the
time of grant.
In addition, on May 9, 2001 the Board of Directors amended the Option
Plan, as later approved by the Shareholders on December 7, 2001, to increase the
maximum number of common shares that may be issued under the Option Plan from
16,000,000 common shares to 20,227,033 common shares. As 5,037,033 common shares
had been issued upon exercise of options up to May 9, 2001, this amendment
increased the number of common shares issuable under outstanding options and
options available for grant, each as of May 9, 2001, to 15,190,000 which
represented 12% of the then outstanding common shares. The Option Plan was also
amended to provide that the maximum number of common shares in respect of which
options may be granted under the Option Plan to non-employee directors during
any fiscal year of the Company would be 20,000 common shares per director.
The price at which common shares may be purchased upon exercise of an
option is the average of the market price (as defined in the Option Plan) of the
common shares on The Toronto Stock Exchange for the five trading day period
immediately preceding the date of grant.
The Option Plan provides that, in the event of the death or permanent
disability of an option holder, the exercise period of any options unexercised
at the date of death or permanent disability will be accelerated so that the
option
-72-
holder's legal personal representative will be permitted to purchase and take
delivery of, (i) in the case where the option holder shall have been in the
employment of the Company or any subsidiary for at least five years prior to the
date of such employee's death or permanent disability, 50% of all common shares
under option and not purchased or delivered at the date of death or permanent
disability and (ii) in the case where the option holder shall have been in the
employment of the Company or any subsidiary for at least ten years prior to the
date of such employee's death or permanent disability, all common shares under
option and not purchased or delivered at the date of death or permanent
disability, in each such case during the one year period following such option
holder's death or permanent disability (but in no event after the expiration
date of such option).
The Option Plan also provides that, in the event of the termination of an
employee's employment for any reason other than cause or death, the employee's
options may be exercised, to the extent the options are exercisable as of the
termination date, within 90 days following the date the employee's employment is
terminated; provided, however, that the Board of Directors of the Company may,
in its discretion, amend the terms of any option to permit the employee to
exercise such options as if such employee's employment had not been terminated,
for up to a maximum of three years following the date of termination of the
employee's employment (but in no event after the expiration date of such
option). In the event the employee's employment has been terminated for cause,
the employee's options shall be immediately cancelled.
The Option Plan further provides that, in the event of a change of control
(whether in fact or in law) of the Company which results in a non-employee
director being replaced, the vesting period shall be waived with respect to the
options then held by such non-employee director in order to permit the full
exercise of all outstanding options then held by such person. In the event that
the non-employee director ceases to act as a director of the Company, all
options held by such director, which are then exercisable, may be exercised
within 180 days following the announcement of the quarterly results next
following the date of resignation of such person (but in no event after the
expiration date of such option). The Option Plan also provides that the
Compensation Committee may determine that any option granted under the Option
Plan shall include provisions which accelerate the date on which an option shall
become exercisable upon the happening of such events as the Compensation
Committee may determine and as permitted in the Option Plan.
On January 11, 2000, the Board of Directors of the Company decided that
all unvested stock options held by each director, the President and Chief
Executive Officer, the then five Senior Vice Presidents and any other executives
of the Company as may be designated by the Board of Directors from time to time
would be accelerated and become fully vested and immediately exercisable in the
event of (i) the making by any person of a take-over bid (as defined in the
Securities Act (Ontario)) for the common shares of the Company, or (ii) a change
of control (whether in fact or in law and as more fully defined in such Board
resolution) of the Company.
In connection with the sale by the Company of its foundry located in
Bromont, Quebec and further to negotiations with the buyer to provide the buyer
with assistance in retaining employees during the first year following the
closing (February 22, 2002), all employees of the former foundry who held
options to purchase common shares of the Company which were vested as at
February 22, 2002 were provided with a period until August 19, 2003 to exercise
such options if they remained employed with the buyer until at least February
21, 2003. Such employees held vested options to purchase 39,977 common shares in
the aggregate. In addition, of the remaining unvested options to purchase 97,931
held by such employees as at February 22, 2002, 50% were accelerated to vest on
February 21, 2003 (provided that such employees remain employed by the buyer as
of such date) and the remaining 50% were cancelled as of February 22, 2002. All
such employees have a further 180-day period following such accelerated vesting
to exercise such options and any options remaining unexercised as at August 19,
2003 expire on that date.
In connection with the sale by the Company of its foundry located in
Plymouth, United Kingdom and further to negotiations with the buyer to provide
the buyer with assistance in retaining employees during the first year following
the closing (March 28, 2002), all employees of the former foundry who held
options to purchase common shares of the Company which were vested as at March
28, 2002 were provided with a period until September 23, 2003 to exercise such
options if they remained employed with the buyer until at least March 28, 2003.
Such employees held vested options to purchase 15,683 common shares in the
aggregate. In addition, of the remaining unvested options to purchase 20,901
held by such employees as at March 28, 2002, 50% were accelerated to vest on
March 28, 2003 (provided that such employees remain employed by the buyer as of
such date) and the remaining 50% were cancelled as of March 28, 2002. All such
-73-
employees have a further 180-day period following such accelerated vesting to
exercise such options and any options remaining unexercised as at September 23,
2003 expire on that date.
Under the terms of the Option Plan, the maximum number of common shares as
to which options have been or may be granted (including options that have been
exercised to date) is 20,227,033 (representing approximately 15.9% of the common
shares outstanding as of May 31, 2002). As of May 31, 2002, the closing price of
the common shares of the Company on the New York Stock Exchange was $7.45 and
therefore the total market value as of such date of the 10,828,800 common shares
(excluding 5,583,116 common shares as to which options have been previously
exercised and 3,815,117 common shares still available for option grant) that
were subject to outstanding options pursuant to the Option Plan as of May 31,
2002 was $80,674,560.
During Fiscal 2002, the Company granted options to purchase up to
3,600,462 common shares to 673 employees and six non-employee directors of the
Company at an average exercise price of $10.00 per share, of which options for
2,040,000 common shares were granted to 17 executive officers at an average
exercise price of $9.60 per share. During Fiscal 2002, one former executive
officer of the Company exercised options to purchase 108,750 common shares
having an aggregate net value (being the market value less the exercise price on
the date of the exercise) of $478,443 as of such date.
As at May 31, 2002, there were outstanding under the Option Plan options
for an aggregate of 10,828,800 common shares at prices ranging from $1.47 to
$24.44 per share and expiring at various dates through 2008. Of such options,
options for an aggregate of 2,926,095 common shares were held by seventeen
executive officers, three of whom are directors of the Company.
The following table summarizes, for each of the Named Executive Officers,
the aggregated options exercised during Fiscal 2002 and option values at March
29, 2002.
Option Grants During Fiscal 2002
=================================================================================================================
Market Value
% of Total of Securities
Securities Options Underlying
Under Granted to Exercise Options
Options Employees or on the Date
Granted in Fiscal Base Price(1) of Grant Expiration
Name (#) 2002 ($/Security) ($/Security) Date
- ----------------------------------------------------------------------------------------------------------------
Patrick J. Brockett 250,000(3) 7.18 7.29 7.61 April 9, 2007
250,000(3) 7.18 8.74 7.61 April 9, 2007
250,000(3) 7.18 10.49 7.61 April 9, 2007
250,000(3) 7.18 12.61 7.61 April 9, 2007
110,000 3.16 10.19 9.83 February 6, 2008
Roland Andersson 75,000(3) 2.15 8.88 8.79 May 14, 2007
30,000 (2) 10.19 9.83 February 6, 2008
Mark Levi 60,000(3) 1.72 8.78 9.13 May 7, 2007
30,000 (2) 10.19 9.83 February 6, 2008
Jean-Jacques Carrier 40,000 1.15 10.19 9.83 February 6, 2008
Kevin Beadle 50,000(3) 1.44 8.49 9.35 June 21, 2007
25,000 (2) 10.19 9.83 February 6, 2008
=================================================================================================================
-74-
(1) Exercise price is determined by the five day averaging formula as defined
in the Option Plan and market value is the market price on The Toronto
Stock Exchange on the date of grant converting Canadian dollar amounts to
United States dollars using the same five day averaging formula of Bank of
Canada foreign exchange rates for each grant.
(2) The percentage of total options granted was less than 1%.
(3) Options granted upon initial hire.
Year-End Option Values Table
The following table summarizes, for each of the Named Executive Officers,
the aggregated options exercised during Fiscal 2002 and option values at March
29, 2002.
Aggregated Options Exercised During Fiscal 2002
and Fiscal Year-End Option Values
=====================================================================================================================
Securities Aggregate Value of Unexercised
Acquired Value Unexercised Options at In-the-Money Options
Name On Exercise Realized March 29, 2002 at March 29, 2002(1)
(#) ($) (#) ($)
----------------------------------------------------------------
Exercisable Unexercisable Exercisable Unexercisable
=====================================================================================================================
Patrick J. Brockett nil nil -- 1,110,000 -- 836,209
Roland Andersson nil nil -- 105,000 -- 73,894
Mark Levi nil nil -- 90,000 -- 68,152
Jean-Jacques Carrier nil nil 177,500 132,500 513,461 177,439
Kevin Beadle nil nil -- 75,000 -- 115,000
=====================================================================================================================
(1) Canadian dollar amounts have been converted to United States dollars using
an exchange rate as of the end of Fiscal 2002.
OTHER COMPENSATION
Employment Agreement of the President and CEO
On March 20, 2001, the Company entered into an employment agreement with
Mr. Patrick J. Brockett with respect to his employment as President and Chief
Executive Officer.
Pursuant to the agreement, Mr. Brockett is entitled to receive an annual
base salary in the amount of $495,652, plus an annual bonus, conditional upon
the successful achievement by Mr. Brockett of specific target objectives in each
fiscal year, as follows: (i) if a minimum of 85% of the objectives are achieved,
the annual bonus will be equal to 30% of the annual base salary, (ii) if the
objectives are achieved in full, the annual bonus will be equal to 60% of the
annual base salary, and (iii) if all objectives are exceeded by at least 25%,
the annual bonus will be equal to 120% of the annual base salary. The bonus
objectives for each fiscal year are reviewed and finalized with the Board of
Directors of the Company within 45 days following the commencement of each
fiscal year. In the first year of employment, Mr. Brockett was entitled to
receive a guaranteed minimum bonus amounting to $297,391.
Mr. Brockett is also entitled to customary benefits and options to
purchase one million common shares priced as follows: (i) 25% of such options
were priced at the market price (as defined in the Option Plan) in effect on
April 9, 2001
-75-
(being the start date by Mr. Brockett of his employment with the Company) (the
"Initial Market Price"), (ii) 25% of such options were priced at 120% of the
Initial Market Price, (iii) 25% of such options were priced at 144% of the
Initial Market Price, and (iv) the remaining 25% of such options were priced at
173% of the Initial Market Price. The options provide for staggered equal
vesting over a period of four years commencing one year following their date of
grant, and are otherwise governed by the terms and conditions of the Option
Plan.
Mr. Brockett's employment agreement provides further that, in the event
that the Company terminates his employment without legal grounds for which an
employer is entitled to dismiss an employee without notice or compensation in
lieu of notice, he will be entitled to the following termination package: (i) a
lump sum payment equal to two times his annual base salary and average earned
annual bonus over the previous three fiscal years (or such shorter period during
which Mr. Brockett will then have been employed by the Company), (ii) a payment
of two years' regular annual contributions to an executive pension plan (or a
contribution equal to 30% of the then current base salary, to the extent Mr.
Brockett is not then participating in an executive pension plan) and (iii)
continuous group life and health benefits coverage during such two-year period.
In addition, Mr. Brockett will have a period of six months following the date of
termination to exercise all stock options that are vested up to the end of such
exercise period.
Executive Termination Agreements
In addition to the termination package provided to the Company's President
and CEO, Patrick J. Brockett, under the terms of his employment agreement
described above, the Company, in January 2000, entered into executive
termination arrangements with five senior executives (the "Executives"), to
provide for certain entitlements in the event of the involuntary termination of
the Executives' employment with the Company in any circumstances considered to
constitute a "termination without good legal cause", as such term is interpreted
by the Courts of the Province of Ontario from time to time.
The agreements generally provide that, in the event of such an involuntary
termination of employment without good legal cause, the Executive would receive
as compensation: (i) for three Executives - two times the Executive's annual
base salary and annual target bonus, and (ii) for two Executives - one and one
half times the Executive's annual base salary and average annual bonus, based on
the actual bonus payments made to such Executive for the previous two fiscal
years.
In addition to such compensation, the agreements provide for continued
contributions to an executive pension plan and continuous group life and health
benefits coverage during the two or one and one half year period, as applicable.
In all cases, the Executives have a period of six months following the date of
termination to exercise all stock options that are vested up to the end of the
exercise period.
These agreements replaced the former VP Termination Policy of the Company
as well as all previous compensation arrangements entered into with the
Executives and were developed under the direction of the Compensation Committee
in consultation with outside compensation and independent legal advisors in
order to reflect current North American competitive market practices.
COMPENSATION OF NON-EMPLOYEE DIRECTORS
During the fiscal year ended March 29, 2002, each director who was not a
salaried officer of the Company or its subsidiaries received an annual stipend
of $6,400 and a director's fee of $1,280 for each meeting of the Board of
Directors or any Committee thereof attended in person and for each day spent on
the affairs of the Company or $800 for each telephone meeting of the Board of
Directors and was reimbursed for his expenses. In addition, the Chairman of each
Committee of the Board of Directors received an additional annual fee of $3,800.
The Company pays the Chairman of the Board of Directors, when such person is not
an employee of the Company, an annual stipend of $64,000 (inclusive of Board and
Committee meeting fees) and a per diem of $1,600 for attendance to Company
business to an annual maximum of $32,000.
The following table summarizes the aggregate number of unexercised options
held by non-employee directors at May 31, 2002.
-76-
Option Information For Non-Employee Directors
======================================================================
Date of Grant Unexercised Options at May 31, 2002
Exercisable / Unexercisable
----------------------------------------------------------------------
May 12, 1994 24,000 / --
----------------------------------------------------------------------
May 17, 1995 40,000 / --
----------------------------------------------------------------------
May 16, 1996 75,000 / --
----------------------------------------------------------------------
July 24, 1996 20,000 / --
----------------------------------------------------------------------
May 22, 1997 90,000 / --
----------------------------------------------------------------------
March 12, 1998 70,000 / --
----------------------------------------------------------------------
July 17, 1998 100,000 / --
----------------------------------------------------------------------
July 23, 1998 18,750 / 6,250
----------------------------------------------------------------------
May 20, 1999 41,250 / 13,750
----------------------------------------------------------------------
August 27, 1999 10,000 / 10,000
----------------------------------------------------------------------
January 12, 2000 90,000 / 90,000
----------------------------------------------------------------------
May 4, 2000 25,000 / 25,000
----------------------------------------------------------------------
August 22, 2000 5,000 / 15,000
----------------------------------------------------------------------
February 21, 2001 50,000 / 150,000
----------------------------------------------------------------------
February 6, 2002 -- / 120,000
======================================================================
DIRECTORS' AND OFFICERS' LIABILITY INSURANCE
As at May 31, 2002, the Company had in force Directors' and Officers'
Liability Insurance policies in the amount of $30,000,000 for the benefit of the
directors and officers of the Company and its subsidiaries. The total amount of
the premiums paid by the Company for the policies in effect for the fiscal year
ended March 29, 2002 was $175,000. No portion of these premiums was paid by the
directors and officers of the Company. The policies do not provide for a
deductible for any loss in connection with a claim against a director or an
officer. For claims brought against the Company relating to violations of United
States securities laws ("SEC violations") a deductible applies of $500,000. For
other claims brought against the Company in Canada, a deductible applies of
$65,000. For claims brought against the Company in the United States (excluding
SEC violations) and the rest of the world, a deductible applies of $250,000.
INDEBTEDNESS OF OFFICERS, DIRECTORS AND EMPLOYEES
As at May 31, 2002, no officer, director, employee, or former officer,
director or employee of the Company or its subsidiaries was indebted to the
Company or its subsidiaries in connection with the purchase of securities of the
Company or its subsidiaries.
As at May 31, 2002, the aggregate amount of indebtedness to the Company
and its subsidiaries incurred, other than in connection with the purchase of
securities of the Company or its subsidiaries and other than routine
indebtedness, by all officers, directors, employees and former officers,
directors and employees of the Company or its subsidiaries, amounted to $50,917.
REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee is comprised of three current members of the
Board of Directors: Kirk K. Mandy, the Chairman of the Committee, Andre Borrel
and Kent H.E. Plumley.
It is the responsibility of the Compensation Committee to recommend to the
Board of Directors compensation policies and levels, compensation plans, stock
option/purchase plans and benefit plans. The Compensation Committee is also
responsible for developing and reviewing succession plans that sustain the
long-term viability of the Company.
-77-
General Principles of Executive Compensation
Compensation of executive officers, including the Named Executive
Officers, is determined by the Board of Directors upon recommendations made by
the Compensation Committee.
The Company's executive compensation programs are designed to attract and
retain competent individuals who can ensure the current and long-term success of
the Company. Each component of the Company's executive compensation program is
designed to be competitive with leading Canadian and U.S. high technology
companies of similar size.
Executive positions are benchmarked against those of applicable external
comparator groups through the use of international compensation services. Using
the benchmark results, a market rate for each executive position is established
based on information furnished through independent survey data.
The total compensation program for executive officers is comprised of
three components: base salary, an annual incentive and a long-term incentive.
Base Salary
Base salary recommendations are determined based on market data for
positions of similar responsibilities and complexity in the comparator group,
internal equity comparisons and the individual's ability and experience. The
Company's base salaries are competitive with those of the comparator group.
Annual Incentive Compensation Arrangements
The Company's annual incentive plans are intended to incent individuals to
focus on achievement of current year financial targets and key strategic
performance objectives within each of the business units. Individual target
awards and performance weightings within the plans are dependent on the
individual's ability to influence results. Financial targets are set by the
Board of Directors at the commencement of the fiscal year and awards for
business unit and individual performance are payable if the required financial
targets are met.
Long-Term Incentive
Options to purchase common shares are granted to the Named Executive
Officers and other key employees to sustain commitment to long-term
profitability and maximize shareholder value over the long term. Under the terms
and conditions of the Option Plan, participants are granted options which are
exercisable for periods of time determined by the Compensation Committee to a
maximum of six years following the date of grant at an exercise price equal to
the average market price of the Company's common shares on The Toronto Stock
Exchange during the five trading day period immediately preceding the date of
grant. See "Executive Compensation - 1991 Stock Option Plan for Key Employees
and Non-Employee Directors".
Compensation of the President and Chief Executive Officer
In April 2001, Patrick J. Brockett was appointed President and Chief
Executive Officer of the Company. Mr. Brockett's compensation was approved by
the Compensation Committee and the Board of Directors.
The base salary and long-term incentive components of Mr. Brockett's
compensation are determined in accordance with the policies applying to all
executive officers of the Company. Mr. Brockett's current base salary is
$495,652.
Mr. Brockett's annual discretionary bonus is determined, at each fiscal
year end, based on the Compensation Committee's assessment of Mr. Brockett's
performance, particularly in improving the Company's long-term profitability and
financial condition. See "Other Compensation - Employment Agreement of the
President and CEO".
-78-
The Compensation Committee of the Board of Directors, whose names are set
out below, has approved the issue of this Report on Executive Compensation and
its inclusion in this Circular.
Mr. Andre Borrel
Mr. Kirk K. Mandy
Mr. Kent H.E. Plumley
Performance Graph
The following graph compares the cumulative total Shareholder return on
CAD$100 invested in common shares of the Company with the cumulative total
return of The Toronto Stock Exchange 300 Stock Index for the five most recently
completed fiscal years, assuming reinvestment of all dividends.
[The following information was depicted as a line chart in the printed material]
March 28, 1997 March 27, 1998 March 26, 1999 March 31, 2000 March 30, 2001 March 29, 2002
-------------- -------------- -------------- -------------- -------------- --------------
ZL 100 265 154 512 181 221
TSE 300 100 129 113 162 130 134
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information as at May 31, 2002 with respect
to (1) all shareholders known by the Company to be beneficial owners (which
includes shares over which control or direction is exercised) of more than 5% of
its outstanding common shares; and (2) ownership of common shares and $2.00
Cumulative Redeemable Convertible Preferred Shares, 1983 R&D Series ("R&D
Preferred Shares") by each director and nominee for director, each of the Named
Executive Officers and all executive officers and directors as a group.
-79-
Amount
Beneficially Percent of
Name and Address Class of Shares Owned Class(1)
Massachusetts Financial Services Company common 11,710,995 9.3
500 Boylston Street
Boston, Massachusetts
U.S.A. 02116-3741
*Roland Andersson common 18,803 (4)
*Pradeep Arora common 13,791 (4)
*Kevin Beadle common 12,538 (4)
*Michael Bereziuk common -- (4)
Andre Borrel common 50,000 (4)
Chemin du bois de Seyme, 1
1253 Vandoeuvres-GE- Suisse
*Patrick J. Brockett common 255,622 (4)
*Peter Burke common 57,741 (4)
*J. Desmond Byrne common 24,572 (4)
*Jean-Jacques Carrier common 222,639 (4)
*Robert Fogliani common 14,761 (4)
*Anthony P. Gallagher common 23,325 (4)
Hubert T. Lacroix common 147,528 (4)
1 Place Ville Marie, Suite 3333
Montreal, QC H3B 3N2
*Mark Levi common 15,140 (4)
Kirk K. Mandy common 378,000 (4)
400 March Road
Kanata, ON K2K 3H4
*Donald G. McIntyre common 152,640 (4)
*Shirley Mears common 48,800 (4)
*David Pipkins 19,424 (4)
Kent H. E. Plumley common 10,000 (4)
1500 - 50 O'Connor Street
Ottawa, ON K1P 6L2
*Timothy Saunders common 44,225 (4)
Dr. Henry Simon common 240,000 (4)
1 Telegraph Hill
London, England NW3 7NU
Dr. Semir D. Sirazi common 25,000 (4)
500 Elmwood Ave
Wilmette, IL 60091
*Stephen Swift common 20,867 (4)
*Jitesh Vadhia common 18,750 (4)
23 directors and executive officers as a common 1,814,166 (4)
group(2,3) R&D Preferred nil
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* These executive officers are located c/o Zarlink Semiconductor Inc., 400
March Road, Ottawa, Ontario, Canada K2K 3H4.
The persons named hold the sole investment and voting power except as set
forth below:
(1) Percentage ownership is calculated based upon total shares in the
class outstanding plus shares in the class subject to options currently
exercisable or exercisable within sixty days by the entity or group indicated.
(2) These holdings include stock options currently exercisable or
exercisable within 60 days by: Mr. Andersson - 18,750; Mr. Arora - 13,750; Mr.
Beadle - 12,500; Mr. Bereziuk - nil; Mr. Borrel - 50,000; Mr. Brockett -
250,000; Mr. Burke - 57,619; Mr. Byrne - 24,572; Mr. Carrier - 192,500; Mr.
Fogliani - 14,761; Mr. Gallagher - 22,759; Mr. Lacroix - 139,000; Mr. Levi -
15,000; Mr. Mandy - 375,000; Mr. McIntyre - 152,500; Ms. Mears - 48,800; Mr.
Pipkins - 18,786; Mr. Plumley - 10,000; Mr. Saunders - 44,225; Dr. Simon -
115,000; Dr. Sirazi - 25,000; Mr. Swift - 20,736, and Mr. Vadhia - 18,750.
(3) Does not include stock options granted to non-employee directors which
are not currently exercisable, as follows: Mr. Borrel - 50,000; Mr. Lacroix -
50,000; Mr. Mandy - 120,000; Mr. Plumley - 50,000; Dr. Simon - 50,000; Dr.
Sirazi - 55,000;.
(4) Represents less than 1% of the class.
Statements contained in the table as to securities beneficially owned by
persons referred to therein or over which they exercise control or direction
are, in each instance, based upon information provided by such persons.
Item 13. Certain Relationships and Related Transactions
None.
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PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
a) The following financial statements and supplementary data are filed as
part of this report under Item 8:
1. Consolidated Financial Statements. Page Number
(within the 10-K)
Auditor's Report to the Shareholders 34
Consolidated Balance Sheets at March 29, 2002, March 30, 2001,
and March 31, 2000 35
Consolidated Statements of Shareholders' Equity for the
fiscal years ended March 29, 2002, March 30, 2001, and
March 31, 2000 36
Consolidated Statements of Income (Loss) for the fiscal years
ended March 29, 2002, March 30, 2001, and March 31, 2000 37
Consolidated Statements of Cash Flows for the fiscal years
ended March 29, 2002, March 30, 2001, and March 31, 2000 38
Notes to the Consolidated Financial Statements 39
2. Financial Statement Schedules. The Schedules supporting the
consolidated financial statements which are filed as part of this report are as
follows:
Schedule II - Valuation and qualifying accounts
Note: Schedules other than that listed above are omitted as they are not
applicable or not required, or the information is included in the consolidated
financial statements or notes thereto.
3. Exhibits
Exhibit Description
Number
3.1 Conformed Composite Copy of the Company's Articles, as amended to
date (incorporated by reference to Exhibit 4.3 to Registration
Statement No.333-83556 on Form S-8)
10.1 Share Sale and Purchase Agreement, dated February 12, 1998, between
The General Electric Company p.l.c., London, England and Zarlink
Telecom Limited, Portskewett, Gwent, Wales and the Company, Kanata,
Ontario, Canada (incorporated by reference to Exhibit 2.1 to Form 8-K
filed on February 27, 1998)
10.2 Deed of Tax Covenant, dated February 12, 1998, between The General
Electric Company p.l.c. and Zarlink Telecom Limited (incorporated by
reference to Exhibit 2.2 to Form 8-K filed on February 27, 1998)
10.3 Environmental Deed, dated February 12, 1998, between The General
Electric Company p.l.c. and Zarlink Telecom Limited (incorporated by
reference to Exhibit 2.3 to Form 8-K filed on February 27, 1998)
10.4 Agreement and Plan of Reorganization and Merger by and among the
Company, U.S.
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Acquisition Corp. and Vertex Networks, Incorporated ("Vertex"),
dated as of June 6, 2000 (the "Merger Agreement") (incorporated by
reference to Exhibit 2.1 to Form 10-K for the fiscal year ended
March 31, 2000 filed on June 22, 2000). Except for the Escrow
Agreement and Restricted Stock Agreement listed below as Exhibits
10.5 and 10.6, respectively, the following exhibits to the Merger
Agreement were omitted. The Company will furnish supplementally a
copy of any omitted exhibit to the Securities and Exchange
Commission upon request.
Omitted exhibits:
Exhibit A Form of Merger Agreement
Exhibit C 2000 Financial Statements
Exhibit D Form of Written Consent and Agreement
Exhibit E Form of Purchaser/Acquisition Corp. Tax Representation
Letter
Exhibit F-1 Form of Employment Agreement (Founders)
Exhibit F-2 Form of Employment Agreement (Non Founders)
Exhibit G-1 Form of Non-competition Agreement (Founders)
Exhibit G-2 Form of Non-competition Agreement (Non Founders)
Exhibit H-1 Form of Lock Up Agreement
Exhibit H-2 Form of Lock Up Agreement (Designated Employees)
Exhibit I Form of Voting Agreement
Exhibit J Form of Affiliate Agreement
Exhibit L Form of Opinion of Counsel to the Company
Exhibit M Form of Shareholder Letter
Exhibit N Form of FIRPTA Notification Letter
Exhibit O Form of Opinion of Counsel to Purchaser
10.5 Form of Escrow Agreement to be executed and delivered by the
Company, the Shareholder Representatives (as defined in the Merger
Agreement) and the Escrow Agent named therein (incorporated by
reference to Exhibit 2.2 to Form 10-K for the fiscal year ended March
31, 2000 filed on June 22, 2000).
10.6 Form of Restricted Stock Agreement to be executed and delivered
by the Company and certain holders of capital stock of Vertex
(incorporated by reference to Exhibit 2.3 to Form 10-K for the fiscal
year ended March 31, 2000 filed on June 22, 2000).
10.7 Acquisition Agreement by and among the Company, 3755461 Canada
Inc. and Dr. Terence H. Matthews, dated as of January 2, 2001 (the
"Acquisition Agreement") (incorporated by reference to Exhibit 2.1 to
Form 8-K filed on March 2, 2001). The following exhibits to the
Acquisition Agreement were omitted. The Company will furnish
supplementally a copy of any omitted exhibit to the Securities and
Exchange Commission upon request.
Omitted exhibits:
Schedule 1.1(nn) Financial Statements Schedule
Schedule 1.1(nnn) Permitted Encumbrances
Schedule 2.2 Purchase Price Allocation Schedule
Schedule 2.3 Audit Report Schedule
Schedule 3.4 Authorized and Issued Capital - Vendor Group
Schedule 3.6 Loan Agreement Particulars
Schedule 3.7 Vendor Group Subsidiaries
Schedule 3.8 Violations
Schedule 3.9 Locations
Schedule 3.11 Real and Leased Property
Schedule 3.13 Real Property Leases
Schedule 3.16(a)-(g) Business Intellectual Property
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Schedule 3.19 Material Contracts
Schedule 3.20 Licenses and Permits
Schedule 3.21 Consents
Schedule 3.25 Tax Matters
Schedule 3.26 Legal and Regulatory Proceedings
Schedule 3.28 Environmental Matters
Schedule 3.29 Employee Plans Excluding United States
Schedule 3.30 Employee Benefit Plans - United States
Schedule 3.31 Collective Agreements
Schedule 3.32 Employees and Contractors
Schedule 3.34 Customers and Suppliers
Schedule 3.35 Product Warranties
Schedule 3.36 Grants
Schedule 6.1(a) Restructuring
Schedule 6.2(a) Current Corporate Structure
Schedule 6.2(b) Reorganization
Schedule 6.2(d)(i) Lease Agreement
Schedule 6.2(d)(ii) Phase V Lease
Schedule 6.2(e) License Agreement
Schedule 6.3(a) Transition Plan Agreement
Schedule 6.11 Non-Competition Agreement
Schedule 6.22 Employees
Schedule 6.23 Tangible Personal Property
Schedule 7.1(i) Form of Opinion of Vendor's Counsel (Canada, UK and
US)
Schedule 7.1(m) Supply Agreement
Schedule 7.1(n) Shareholders Agreement
Schedule 7.1(p) Form of Release
Schedule 7.3(f) Form of Opinion of Purchaser's Counsel
21 Subsidiaries of the Company
23 Consent of Ernst & Young LLP
24 Power of Attorney (included on the signature page to this Form 10-K)
99.0 Consolidated Financial Information in accordance with Canadian
Generally Accepted Accounting Principles
99.1 Management's Discussion and Analysis of the Company's Financial
Condition and Results of Operations- Canadian Supplement
99.2 Consolidated Financial Statements in accordance with Canadian
Generally Accepted Accounting Principles
b) Reports on Form 8-K. The Company filed two Current Reports on Form 8-K
in the fourth quarter of the fiscal year ended March 29, 2002. The Reports were
dated February 4, 2002 and February 7, 2002. The Report dated February 4, 2002
was in respect of the Company signing a definitive agreement to sell the
Bromont, Quebec, Canada foundry business to DALSA Semiconductor Inc. which
closed on February 22, 2002. The Report dated February 7, 2002 related to the
Company's adoption of the U.S. dollar as its reporting currency effective with
the quarter ended December 29, 2001.
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Signatures
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ZARLINK SEMICONDUCTOR INC.
By: /s/ Patrick J. Brockett
--------------------------------------
(Patrick J. Brockett)
Dated: June 20, 2002 President and Chief Executive Officer
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Power of Attorney
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Jean-Jacques Carrier and Donald G.
McIntyre, jointly and severally, his attorneys-in-fact, each with full power of
substitution, for him in any and all capacities, to sign any amendments to this
report on Form 10-K, and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and confirming all that each said attorney-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Henry Simon Chairman of the Board June 20, 2002
- --------------------------
(Henry Simon)
/s/ Kirk K. Mandy Vice Chairman of the Board June 20, 2002
- --------------------------
(Kirk K. Mandy
/s/ Patrick J. Brockett President and Chief June 20, 2002
- -------------------------- Executive Officer
(Patrick J. Brockett)
/s/ Andre Borrel Director June 20, 2002
- --------------------------
(Andre Borrel)
/s/ Jean-Jacques Carrier Senior Vice President of June 20, 2002
- -------------------------- Finance and Chief
(Jean-Jacques Carrier) Financial Officer
/s/ Hubert T. Lacroix Director June 20, 2002
- --------------------------
(Hubert T. Lacroix
/s/ Donald G. McIntyre Director June 20, 2002
- --------------------------
(Donald G. McIntyre)
/s/ Kent H.E. Plumley Director June 20, 2002
- --------------------------
(Kent H.E. Plumley)
/s/ Semir D. Sirazi Director June 20, 2002
- --------------------------
(Semir D. Sirazi
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SCHEDULE II
ZARLINK SEMICONDUCTOR INC.
VALUATION AND QUALIFYING ACCOUNTS
March 29, 2002
(in millions of U.S. dollars)
Additions
Balance,
Beginning Charged to Charged to Balance, End
Description of Period expense other accounts Deductions of Period
Allowance for doubtful accounts:
Fiscal 2002 $ 0.3 $ 1.6 -- $(0.6) $ 1.3
Fiscal 2001 5.1 2.0 -- (6.8) 0.3
Fiscal 2000 5.8 1.8 -- (2.5) 5.1
Allowance for excess and
obsolete inventories:
Fiscal 2002 $12.0 $29.1 -- $(6.5) $34.6
Fiscal 2001 16.7 9.9 -- (14.5) 12.0
Fiscal 2000 24.2 6.3 -- (13.8) 16.7
Restructuring and other
provisions:
Fiscal 2002 $ 6.7 $41.1 -- $(39.9) $ 7.9
Fiscal 2001 -- 11.2 -- (4.5) 6.7
Fiscal 2000 21.4 -- -- (21.4) --
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SECURITIES AND EXCHANGE COMMISSION
ZARLINK SEMICONDUCTOR INC.
ANNUAL REPORT ON FORM 10-K
FOR THE PERIOD ENDING MARCH 29, 2002
EXHIBITS
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