http://www.zarlink.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 28, 2002
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-8139
ZARLINK SEMICONDUCTOR INC.
(Exact name of registrant as specified in its charter)
CANADA NONE
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 March Road
Ottawa, Ontario, Canada K2K 3H4
(Address of principal (Postal Code)
executive offices)
Registrant's telephone number, including area code: (613) 592-0200
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 |_|
The number of common shares outstanding as at August 2, 2002 was 127,191,316.
Page 1 of 38
ZARLINK SEMICONDUCTOR INC.
INDEX
PART I. FINANCIAL INFORMATION (Unaudited)
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets (Unaudited) -
June 28, 2002 and March 29, 2002 .............................. 3
Consolidated Statements of Loss (Unaudited) -
Three months ended June 28, 2002 and June 29, 2001 ............ 4
Consolidated Statements of Cash Flows (Unaudited) -
Three months ended June 28, 2002 and June 29, 2001 ............ 5
Notes to the Consolidated Financial Statements (Unaudited) .... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS .............................. 13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK ....................................................... 22
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ............... 22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K .................................. 22
2
PART I - FINANCIAL INFORMATION (Unaudited)
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Zarlink Semiconductor Inc.
CONSOLIDATED BALANCE SHEETS
(in millions of U.S. dollars, U.S. GAAP)
June 28, March 29,
2002 2002
-------- ---------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 30.9 $ 75.6
Short-term investments 122.2 78.8
Accounts receivable 32.3 32.4
Inventories 32.0 32.6
Deferred income tax assets - net 1.3 4.1
Prepaid expenses and other 10.3 11.3
------ ------
229.0 234.8
Fixed assets - net 63.3 60.3
Deferred income tax assets - net 11.3 11.0
Long-term investments 15.3 14.1
Other assets - net of deferred
gain of $14.9 (March 29, 2002 - $14.7) 3.7 3.0
------ ------
$322.6 $323.2
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 67.3 $ 67.9
Income and other taxes payable 4.3 4.1
Deferred revenue 2.0 2.0
Current portion of long-term debt 1.6 2.1
------ ------
75.2 76.1
Long-term debt 0.5 0.7
Pension liability 19.4 17.4
Deferred income tax liabilities - net 3.4 6.3
------ ------
98.5 100.5
------ ------
Redeemable preferred shares, unlimited
shares authorized; 1,558,700 shares
issued and outstanding (March 29, 2002
- 1,558,700
20.4 20.6
------ ------
Shareholders' equity:
Common shares, unlimited shares
authorized; no par value; 127,175,941
shares issued and outstanding
(March 29, 2002 - 127,082,123)
768.1 767.6
Additional paid-in capital 2.0 4.1
Deferred stock compensation (0.3) (0.8)
Deficit (532.1) (522.9)
Accumulated other comprehensive loss (34.0) (45.9)
------ ------
203.7 202.1
------ ------
$322.6 $323.2
====== ======
(See accompanying notes to the consolidated financial statements)
3
Zarlink Semiconductor Inc.
CONSOLIDATED STATEMENTS OF LOSS
(in millions of U.S. dollars, except per share amounts, U.S. GAAP)
(Unaudited)
Three Months Ended
June 28, June 29,
2002 2001
-------- --------
Revenue $ 48.0 $ 67.8
Cost of revenue 25.9 62.7
------- -------
Gross margin 22.1 5.1
------- -------
Expenses:
Research and development 20.7 23.5
Selling and administrative 11.8 13.1
Stock compensation expense (recovery) (1.6) 3.9
Special charge -- 34.6
Amortization of acquired intangibles -- 1.4
------- -------
30.9 76.5
------- -------
Operating loss (8.8) (71.4)
Other income - net 0.5 7.9
Interest expense (0.1) (0.2)
------- -------
Loss before income taxes (8.4) (63.7)
Income tax (expense) recovery (0.3) 3.2
------- -------
Net loss for the period $ (8.7) $ (60.5)
======= =======
Net loss attributable to common
shareholders after preferred
share dividends $ (9.2) $ (61.0)
======= =======
Net loss per common share:
Basic and diluted $ (0.07) $ (0.49)
======= =======
Weighted average number of common
shares outstanding (millions):
Basic and diluted 126.6 124.6
======= =======
(See accompanying notes to the consolidated financial statements)
4
Zarlink Semiconductor Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions of U.S. dollars, U.S. GAAP)
(Unaudited)
Three Months Ended
June 28, June 29,
2002 2001
-------- --------
CASH PROVIDED BY (USED IN)
Operating activities:
Net loss for the period $ (8.7) $(60.5)
Depreciation and amortization
of fixed and other assets 3.4 7.6
Stock compensation expense (recovery) (1.6) 3.9
Special charges, non-cash -- 1.1
Loss on disposal of fixed assets -- 0.4
Inventory write-down -- 29.1
Deferred income taxes -- (5.1)
Change in pension liability -- 0.1
Equity loss in investment -- 0.5
Decrease (increase) in working capital:
Accounts receivable 1.9 9.9
Inventories 2.8 (3.4)
Accounts payable and accrued liabilities (4.6) 9.3
Deferred revenue (0.1) 0.2
Other 1.9 (3.7)
------ ------
Total (5.0) (10.6)
------ ------
Investing activities:
Purchased short-term investments (86.0) --
Matured short-term investments 46.8 --
Expenditures for fixed and other assets (2.7) (14.6)
Increase in long-term investments (0.4) (2.0)
Proceeds from sale of discontinued
operations - net -- 1.3
------ ------
Total (42.3) (15.3)
------ ------
Financing activities:
Repayment of long-term debt -- (0.9)
Repayment of capital lease liabilities (0.7) (1.4)
Dividends on preferred shares (0.5) (0.5)
Issue of common shares 0.6 0.4
Repurchase of preferred shares (0.2) (0.3)
------ ------
Total (0.8) (2.7)
------ ------
Effect of currency translation on
cash and cash equivalents 3.4 4.9
------ ------
Decrease in cash and cash equivalents (44.7) (23.7)
Cash and cash equivalents, beginning
of period 75.6 179.9
------ ------
Cash and cash equivalents, end
of period $ 30.9 $156.2
====== ======
(See accompanying notes to the consolidated financial statements)
5
ZARLINK SEMICONDUCTOR INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts, U.S. GAAP)
(Unaudited)
1. Basis of presentation
In the opinion of management of Zarlink Semiconductor Inc. ("Zarlink" or
the "Company"), the unaudited consolidated financial statements reflect
all adjustments, which consist only of normal and recurring adjustments,
necessary to present fairly the financial position at June 28, 2002 and
the results of operations and cash flows of the Company for the three
month periods ended June 28, 2002 and June 29, 2001, in accordance with
U.S. GAAP, applied on a consistent basis.
These financial statements should be read in conjunction with the
financial statements and notes thereto contained in the Company's Annual
Report on Form 10-K for the year ended March 29, 2002. The Company's
fiscal year-end is the last Friday in March.
The results of operations for the periods presented are not necessarily
indicative of the results to be expected for the full year.
All information is presented in U.S. dollars, unless otherwise stated.
2. Change in accounting policies
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". 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".
a) 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.
The Company adopted SFAS 141 on a prospective basis effective March
30, 2002, the beginning of Fiscal 2003. The adoption of SFAS 141 did
not have a material effect on the Company's financial statements,
but will impact the accounting treatment of future acquisitions.
b) 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 Company adopted SFAS 142 on a
prospective basis at the beginning of Fiscal 2003. As at the
beginning of Fiscal 2003, the Company did not have any goodwill or
intangible assets with indefinite lives recorded on the balance
sheet. Accordingly, no transition impairment charge is necessary to
be recognized under SFAS 142, nor was there a material impact on the
Company's financial statements on adoption of the new rules.
As there was no goodwill on the balance sheet at the beginning of
Fiscal 2002, the comparative prior period's financial results would
not have been affected if SFAS 142 was adopted in Fiscal 2002.
c) 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 Accounting Principles Board
("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. SFAS 144 broadens the
6
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
adopted SFAS 144 at the beginning of Fiscal 2003. The adoption of
SFAS 144 did not have a material impact on the Company's financial
statements.
3. Recently issued accounting standards
In July 2002, the FASB issued Statement No. 146 ("SFAS 146"), "Accounting
for Costs Associated with Exit or Disposal Activities", which addresses
financial accounting and reporting for costs associated with exit or
disposal activities and nullifies EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (including Certain Costs Incurred in a Restructuring)."
SFAS 146 requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred. Under
Issue 94-3, a liability for an exit cost was recognized at the date of an
entity's commitment to an exit plan. SFAS 146 concludes that an entity's
commitment to a plan, by itself, does not create a present obligation to
others that meets the definition of a liability. Therefore, SFAS 146
eliminates the definition and requirements for recognition of exit costs
in Issue 94-3. SFAS 146 also establishes that fair value is the objective
for initial measurement of the liability. SFAS 146 will be effective for
exit or disposal activities initiated after December 31, 2002 and had no
impact on the Company's financial statements, but will impact the
accounting treatment of future exit or disposal activities should they
occur.
4. Inventories
June 28, March 29,
2002 2002
-------- --------
Raw materials $ 2.6 $ 2.4
Work-in-process 21.6 20.8
Finished goods 7.8 9.4
------- -------
$ 32.0 $ 32.6
======= =======
5. Fixed Assets
June 28, March 29,
2002 2002
-------- --------
Cost $ 166.3 $ 153.1
Accumulated depreciation (103.0) (92.8)
------- -------
$ 63.3 $ 60.3
======= =======
The comparative gross amounts of cost and accumulated depreciation have
each been adjusted by $57.9 to properly reflect the disposition of certain
fixed assets. There was no impact to the previously reported net fixed
assets.
6. Long-term investments
As at June 28, 2002, the Company had investments in private companies with
a carrying value of $15.3 (March 29, 2002 - $14.1). Management
periodically reviews these investments to determine if there has been
other than a temporary decline in the market value of these investments
below the carrying value. When management performs future assessments of
these investments in the coming quarters, a decline in the value of these
companies may require the Company to recognize impairment on the remaining
value of its investments which could be material.
7
7. Accounts payable and accrued liabilities
June 28, March 29,
2002 2002
------- ---------
Trade payables $ 10.4 $ 11.5
Employee-related payables 10.7 10.5
Restructuring provisions 7.1 7.9
Provision for disposal of discontinued operations 5.5 5.8
Provision for disposal of foundry businesses 5.7 6.1
Goods received not invoiced 4.9 3.1
Other accrued liabilities 23.0 23.0
------ ------
$ 67.3 $ 67.9
====== ======
8. Redeemable preferred shares
There were 15,900 preferred shares purchased during the three months ended
June 28, 2002 for cash consideration of $0.2. The shares will be cancelled
by the transfer agent in the second quarter of Fiscal 2003.
During the first quarter, a $0.32 (Cdn$0.50) per share dividend was
declared and paid on the redeemable preferred shares.
9. Capital stock
a) The Company has not declared or paid any dividends on its common
shares.
b) On June 6, 2002, the Company announced its intention to continue its
normal course issuer bid program for up to 6,358,203 common shares
(5 percent of 127,164,078 common shares issued and outstanding at
May 31, 2002) between June 10, 2002 and June 9, 2003. All
repurchased shares will be cancelled. In the quarter ended June 28,
2002, no shares were repurchased under the normal course issuer bid
program.
c) A summary of the Company's stock option activity is as follows:
Three Months Ended
June 28, June 29,
2002 2001
---------- ----------
Outstanding options:
Balance, beginning of period 10,914,962 9,464,693
Granted 63,300 1,382,000
Exercised (93,818) (90,477)
Forfeited (37,287) (449,142)
---------- ----------
Balance, end of period 10,847,157 10,307,074
========== ==========
Available for grant at June 28, 2002 were 3,784,897 (March 29, 2002
- 3,810,910) common shares. The exercise price on outstanding stock
options ranges from $1.77 to $24.95 per share with exercise periods
extending to June 2008. The exercise price of stock options was
based on prices in Canadian dollars translated at the U.S. dollar
exchange rate on June 28, 2002.
d) The net loss per common share figures were calculated based on net
loss 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 based on the average
number of common shares and dilutive common share equivalents.
The following common share equivalents have been excluded in the
computation for diluted earnings per share because they were anti-dilutive
due to the reported net loss for the periods presented.
8
i) 774,049 weighted average common shares on conversion of stock
options for the three months ended June 28, 2002 (three months ended
June 29, 2001 - 1,476,485 weighted average common shares).
ii) 570,897 weighted average common shares subject to restrictions for
the three months ended June 28, 2002 (three months ended June 29,
2001 - 1,634,947 weighted average common shares).
The following options were excluded in the computation of common share
equivalents because the options' exercise price exceeded the average
market price of the common shares, thus they are anti-dilutive:
i) Options outstanding for the three months ended June 28, 2002 to
purchase 7,789,298 shares of common stock at an average price of
$10.69 per share;
ii) Options outstanding for the three months ended June 29, 2001 to
purchase 6,177,630 shares of common stock at an average price of
$10.67 per share.
Pro Forma financial information 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 the three month fiscal periods ended June 28, 2002 and June 29, 2001:
Three Months Ended
--------------------
June 28, June 29,
2002 2001
-------- --------
Pro Forma net loss attributable to
common shareholders after
preferred dividends $ (12.5) $ (64.0)
Pro Forma net loss per common share:
Basic and diluted $ (0.10) $ (0.51)
Weighted average fair value price
of the options $ 3.43 $ 3.51
Risk-free interest rate 4.68% 5.55%
Dividend yield Nil Nil
Volatility factor of the expected
market price of the Company's
common stock 0.561 0.556
Weighted-average expected life
of the options 3.5 years 4.0 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.
9
10. Accumulated other comprehensive income (loss)
The components of other comprehensive income (loss) were as follows:
Three Months Ended
June 28, June 29,
2002 2001
-------- --------
Net loss for the period $ (8.7) $ (60.5)
Other comprehensive income (loss):
Unrealized net derivative losses on
cash flow hedges (0.4) (1.2)
Change in cumulative translation adjustment 12.3 3.4
------- -------
Other comprehensive income (loss) for the period $ 3.2 $ (58.3)
======= =======
The changes to accumulated other comprehensive income (loss) for the three
months ended June 28, 2002 were as follows:
Cumulative Minimum Unrealized Net
Translation Pension Loss on
Account Liability Derivatives Total
----------- --------- -------------- -------
Balance, March 29, 2002 $(43.0) $(2.5) $(0.4) $(45.9)
Change during the three
months ended June 28, 2002 12.3 -- (0.4) 11.9
------ ----- ----- ------
Balance, June 28, 2002 $(30.7) $(2.5) $(0.8) $(34.0)
====== ===== ===== ======
The Company recorded a loss to other comprehensive income (loss) in the
three months ended June 28, 2002 of $0.4 (three months ended June 29, 2001
- $1.2) 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. The Company estimates
that $0.8 of net derivative loss included in other comprehensive income
(loss) will be reclassified into earnings within the next 12 months.
11. Inventory write-down and special charge
First Quarter of Fiscal 2002
----------------------------
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.
In the first quarter of Fiscal 2002 and in response to the industry
downturn, the Company 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.
The total cost of the first quarter Fiscal 2002 workforce reduction
program was estimated to be $26.7.
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 $7.9 in the first
quarter of Fiscal 2002.
The total of these pre-tax special charges amounted to $34.6 in the first
quarter of Fiscal 2002. In the fourth quarter of Fiscal 2002, $3.1 of the
first quarter special charge was reversed due to savings on the workforce
reduction program and to the subsequent sub-letting of vacant space in
Irvine, California.
10
The following summarizes the activity in the March 29, 2002 restructuring
liability during the first quarter of Fiscal 2003:
Provision Provision
balance balance
as at Cash as at
March 29, 2002 Reversals Drawdowns June 28, 2002
-------------- --------- --------- -------------
Restructuring activities:
Workforce reduction $ 2.9 $ -- $ (0.5) $ 2.4
Excess lease costs 5.0 -- (0.3) 4.7
------ ----- ------ ------
Total restructuring $ 7.9 $ -- $ (0.8) $ 7.1
====== ===== ====== ======
All of the liability relating to the workforce reduction is in respect of
the fourth quarter Fiscal 2002 restructuring program.
12. Other income - net
Three Months Ended
------------------
June 28, June 29,
2002 2001
-------- --------
Interest income $ 0.9 $ 2.1
Foreign exchange gain (loss) (0.4) 6.3
Equity loss in Optenia, Inc. -- (0.5)
------ --------
Other income - net $ 0.5 $ 7.9
====== ========
13. Information on 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 $28.4 in revenue in the three months ended June 28, 2002
(three months ended June 29, 2001 - $35.8). User access products accounted
for $12.6 in revenue in the three months ended June 28, 2002 (three months
ended June 29, 2001 - $22.7).
The Medical business provides ultra low power 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, which excludes any
intersegment sales of products and services. The Company does not allocate
stock compensation expense, 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
fixed assets is allocated to the segments based on the asset usage. The
accounting policies of the reportable segments are the same as those of
the Company as reflected in the consolidated financial statements.
11
Unallocated
Three Months Ended June 28, 2002 Communications Medical Costs Total
-------------- ------- ----------- -------
Revenue $ 41.0 $ 7.0 $ -- $ 48.0
Depreciation of buildings and equipment 3.2 -- -- 3.2
Stock compensation recovery -- -- (1.6) (1.6)
Segment's operating income (loss) (10.4) -- 1.6 (8.8)
Unallocated
Three Months Ended June 29, 2001 Communications Medical Costs Total
-------------- ------- ----------- -------
Revenue $ 58.5 $ 9.3 $ -- $ 67.8
Depreciation of buildings and equipment 6.0 0.1 -- 6.1
Amortization of acquired intangibles 1.4 -- -- 1.4
Stock compensation expense -- -- 3.9 3.9
Special charge -- -- 34.6 34.6
Segment's operating income (loss) (35.3) 2.4 (38.5) (71.4)
14. Comparative figures
Certain of the Fiscal 2002 comparative figures have been reclassified to
conform to the presentation adopted in Fiscal 2003.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(in millions of U.S. dollars, except per share amounts, and in accordance with
U.S. GAAP)
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 June 28, 2002, the Company
employed approximately 1,500 people worldwide, including approximately 500
designers.
The following discussion and analysis explains trends in Zarlink's
financial condition and results of operations for the three months ended June
28, 2002, compared with the corresponding period in the previous fiscal year.
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. This discussion should be read in conjunction with the consolidated
financial statements and notes thereto included elsewhere in this Form 10-Q, and
with the Company's audited consolidated financial statements and notes thereto
for the fiscal year ended March 29, 2002.
Certain statements in this Quarterly Report on Form 10-Q 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. Accordingly, actual outcomes and results may
differ materially from results forecasted or suggested in such forward-looking
statements.
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 the Company's Annual Report on Form 10-K for the fiscal
year ended March 29, 2002.
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 in the Company's Annual
Report on Form 10-K for the fiscal year ended March 29, 2002, including those
identified under "Forward-Looking Statements and Risk Factors". The Company
undertakes no obligation to update publicly any forward-looking statements
whether as a result of new information, future events or otherwise.
13
RESULTS OF OPERATIONS
Summary of Results from Operations
- ----------------------------------
(millions of U.S. dollars, Three Months Ended
except per share amounts) June 28, 2002 June 29, 2001
------------- -------------
Consolidated revenue $ 48.0 $ 67.8
Communications segment revenue 41.0 58.5
Medical segment revenue 7.0 9.3
Operating loss (8.8) (71.4)
Communications segment operating loss (10.4) (35.3)
Medical segment operating income -- 2.4
Unallocated recoveries (costs) 1.6 (38.5)
Net loss (8.7) (60.5)
Net loss per common share - basic
and diluted (0.07) (0.49)
Weighted average common shares
outstanding - millions 126.6 124.6
Revenue in the first quarter of Fiscal 2003 was $48.0, a decrease of 29%,
or $19.8, from the first quarter of Fiscal 2002. Semiconductor sales volumes
continue to be affected by the prolonged slump impacting the entire
semiconductor industry. Higher channel inventory levels and lower end-customer
demand continue to keep sales levels suppressed.
In the first quarter of Fiscal 2003, the Company recorded a net loss of
$8.7, or $0.07 per share, including a stock compensation recovery of $1.6. This
compares to a net loss of $60.5, or $0.49 per share, in the first quarter of
Fiscal 2002, after a special inventory write-down of $29.1, special charges of
$34.6 related to workforce restructuring, amortization of acquired intangibles
of $1.4, and a stock compensation expense of $3.9.
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 ultra low power
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 Three Months Ended
----------------------------------------
June 28, % of June 29, % of
(millions of U.S. dollars) 2002 Total 2001 Total
-------- ------- -------- -------
Revenue:
Network Access $ 28.4 69% $ 35.8 61%
User Access 12.6 31% 22.7 39%
------- --- ------- ---
Total Communications $ 41.0 100% $ 58.5 100%
======= === ======= ===
As a % of total revenue 85% 86%
Communications operating loss $ (10.4) $ (35.3)
======= =======
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
14
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 the first quarter of Fiscal 2003 totaled $41.0, down 30% from
$58.5 for the same period in Fiscal 2002. 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 is continuing into Fiscal 2003. Revenue also decreased in Fiscal 2003 due to
the loss of foundry revenue resulting from the disposal of two complementary
metal oxide semiconductor ("CMOS") fabrication facilities in the fourth quarter
of Fiscal 2002.
With customers currently placing orders to meet their short-term needs,
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 the first quarter of Fiscal
2003.
The segment's operating loss decreased to $10.4 in the first quarter of
Fiscal 2003 from an operating loss of $35.3 in the first quarter of Fiscal 2002.
The results from the first quarter of Fiscal 2002 included an excess inventory
charge to cost of sales amounting to $29.1 for inventories estimated to be
beyond the Company's needs, as well as amortization of intangibles amounting to
$1.4. Excluding these items, the operating loss was greater in the first quarter
of Fiscal 2003 by $5.6. The lower results were due to the reduced sales volume
in the first quarter of Fiscal 2003 due in part to lower User Access sales and
the loss of foundry revenue following the disposal of the Company's two CMOS
fabrication facilities in the fourth quarter of Fiscal 2002.
Medical Three Months Ended
----------------------------------------
June 28, % of June 29, % of
(millions of U.S. dollars) 2002 Total 2001 Total
-------- ------- -------- -------
Revenue:
Medical $ 7.0 100% $ 9.3 100%
===== =====
As a % of total revenue 15% 14%
Medical operating income $ -- $ 2.4
===== =====
Zarlink's Medical business provides ultra low power ASIC solutions for
applications such as pacemakers, hearing aids and portable instruments.
Revenue decreased in the first quarter of Fiscal 2003 to $7.0 from $9.3 in
the first quarter of Fiscal 2002 due to higher customer inventories and reduced
demand by customers in the analog audiologic business.
The segment's operating results declined from the same period last year
chiefly as a result of lower revenues.
15
Geographic Revenue
Revenue, based on the geographic location of customers, was distributed as
follows:
Three Months Ended
----------------------------------------
June 28, % of June 29, % of
(millions of U.S. dollars) 2002 Total 2001 Total
-------- ------- -------- -------
Asia/Pacific $ 16.7 35% $ 14.9 22%
Europe 16.3 34 24.5 36
United States 9.8 20 21.7 32
Canada 4.2 9 4.8 7
Other Regions 1.0 2 1.9 3
------ --- ------ ---
Total $ 48.0 100% $ 67.8 100%
====== === ====== ===
For the quarter ended June 28, 2002, the net movement in exchange rates
from the corresponding period in Fiscal 2002 favorably impacted total revenue by
1% ($0.5). The favorable foreign exchange impact in the first quarter of Fiscal
2003 was primarily a result of changes in the U.K. pound sterling against the
U.S. dollar exchange rate.
Asia/Pacific
Asia/Pacific sales increased by 12% in the first quarter of Fiscal 2003
compared to the first quarter of Fiscal 2002, due to higher user access product
sales, partially offset by reduced medical sales.
Europe
European sales decreased by 33% in the first quarter of Fiscal 2003 from
the same period in Fiscal 2002 due to lower communications segment sales of both
network access and user access products.
United States
Sales into the United States decreased by 55% from the first quarter of
Fiscal 2002 to the first quarter of Fiscal 2003. The decrease was due primarily
to lower medical and user access product sales.
Canada
Canadian sales decreased by $0.6 in the first quarter of Fiscal 2003 over
the same period in Fiscal 2002 due to lower communications segment sales.
GROSS MARGIN
Three Months Ended
-------------------
(millions of U.S. dollars) June 28, June 29,
2002 2001
-------- --------
Gross margin $ 22.1 $ 5.1
As a percent of revenue 46% 8%
As a percent of revenue, excluding excess Q1
Fiscal 2002 inventory charge of $29.1 46% 50%
Gross margin decreased by four percentage points in the first quarter of
Fiscal 2003 compared to the same period in Fiscal 2002, excluding the excess
inventory charge recorded in the first quarter of Fiscal 2002. The lower margin,
as adjusted, was due to lower sales volumes and an unfavorable product mix in
the communications segment.
16
Fiscal 2002 Inventory Charge
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 50% for the quarter ended June 29, 2001.
OPERATING EXPENSES
Research and Development ("R&D")
Three Months Ended
---------------------
(millions of U.S. dollars) June 28, June 29,
2002 2001
-------- --------
R&D expenses $ 20.7 $ 23.5
As a percent of revenue 43% 35%
R&D expenses decreased by 12%, or $2.8, in the first quarter of Fiscal
2003 from a year ago due to the consolidation of R&D activities in mid-Fiscal
2002. Management expects that R&D spending will increase gradually in Fiscal
2003 while investments continue to be made in expected high growth product
offerings.
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 multi-mode cell phone chip with 3.5 generation
standards, general packet radio service ("GPRS") and enhanced data
for GSM evolution ("EDGE").
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, cochlea 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 digital signal processing
("DSP") to support digital hearing aids providing improved sound
quality that can be better matched to the patient's hearing loss;
and
o Application-specific standard products ("ASSPs") as opposed to
ASICs.
17
Selling and Administrative ("S&A")
Three Months Ended
-----------------------------
(millions of U.S. dollars) June 28, 2002 June 29, 2001
------------- -------------
S&A expenses $ 11.8 $ 13.1
As a percent of revenue 25% 19%
S&A expenses decreased in the first quarter of Fiscal 2003 by $1.3, or 10%
from the first quarter in Fiscal 2002 as a result of cost reductions implemented
in Fiscal 2002 in response to the industry downturn. Management expects that S&A
expenses will remain relatively flat throughout Fiscal 2003 in absolute dollar
amounts.
Stock Compensation
The Company recorded stock compensation expense or recovery arising from
retention conditions associated with the stock awarded to certain employees of
Vertex Networks, Incorporated ("Vertex") which was acquired in July 2000, and
from certain stock options subjected to option exchange programs.
During the three months ended June 28, 2002, the Company recorded a stock
compensation expense of $0.3 (June 29, 2001 - $2.3), related to the vesting of
restricted stock awarded to certain employees of Vertex.
Also recorded during the quarter was a recovery of $1.9 (June 29, 2001 -
$1.6 expense), related to the amortization of the intrinsic value of unexercised
stock options modified by the option exchange programs. The compensation
recovery in the quarter is a result of the decrease in market price of the
underlying common stock at June 28, 2002. The reduced market price resulted in a
reduction to the intrinsic value being amortized over the term of the stock
option, and a recovery of previously recorded stock compensation expense on
outstanding options.
Special Charge Recorded in the First Quarter of Fiscal 2002
In the first quarter of Fiscal 2002 and in response to the industry
downturn, the Company 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. The total cost of the
first quarter Fiscal 2002 workforce reduction program was estimated to be $26.7.
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 estimated
cost of the lease and contract settlements amounted to $7.9 in the first quarter
of Fiscal 2002.
The total of these pre-tax special charges amounted to $34.6 in the first
quarter of Fiscal 2002. In the fourth quarter of Fiscal 2002, $3.1 of the first
quarter special charge was reversed due to savings of $2.3 on the workforce
reduction program and $0.8 related to the subsequent sub-letting of vacant space
in Irvine, California.
Amortization of Acquired Intangibles
Amortization of acquired intangibles decreased in the three months ended
June 28, 2002 to nil from $1.4 in the first quarter of Fiscal 2002. The
remaining acquired intangibles, including goodwill, resulting from the
acquisition of Vertex on July 28, 2000 were expensed in the third quarter of
Fiscal 2002 to reduce the carrying value to nil. With the adoption of SFAS 142
in Fiscal 2003, intangible assets with indefinite lives will no longer be
amortized, but will be subject to periodic impairment tests.
18
OTHER INCOME
Other income was comprised of interest income, foreign exchange gains or
losses, and, in Fiscal 2002, equity losses from the investment in Optenia, Inc.
Interest income was $0.9 for the three months ended June 28, 2002 as
compared to $2.1 in the first three months of Fiscal 2002. The decrease from the
first quarter of Fiscal 2002 was mainly due to lower interest rates.
Foreign exchange losses in the first quarter of Fiscal 2003 amounted to
$0.4 compared to a gain of $6.3 for the same period in Fiscal 2002. Included in
the gain in the first quarter of Fiscal 2002 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 the three months ended June 29, 2001, the Company recorded an
equity loss amounting to $0.5 from its investment in Optenia, Inc. In the fourth
quarter of Fiscal 2002, the investment in Optenia, Inc. was written off to nil
after it went into bankruptcy.
INTEREST EXPENSE
Interest expense was $0.1 for the three months ended June 28, 2002,
compared with $0.2 for the corresponding quarter in Fiscal 2002. Interest
expense decreased due to the repayment of long-term debt, principally capital
leases.
INCOME TAXES
Income tax expense for the first quarter of Fiscal 2003 was $0.3,
principally capital taxes, compared with a recovery of $3.2 for the
corresponding period in Fiscal 2002. The income tax recovery in the first
quarter of Fiscal 2002 was due principally to tax allowances on the special
inventory charge recorded at June 29, 2001.
The Company has a valuation allowance at June 28, 2002 of $92.3 (March 29,
2002 - $75.8). 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. dollars) June 28, 2002 March 29, 2002
------------- --------------
90-Day Backlog $ 28.0 $ 33.5
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.
The backlog decrease from last year was attributable to the continued
downturn in the communications semiconductor industry, described elsewhere in
this Management's Discussion and Analysis.
NET LOSS
The Company recorded a net loss of $8.7, or $0.07 per share in the first
quarter of Fiscal 2003. This compares to a net loss of $60.5, or $0.49 per
share, in the same period in Fiscal 2002.
The net loss for the three months ended June 28, 2002, was primarily a
result of lower revenues across the communications and medical segments. The
loss in the quarter also included a stock compensation recovery of $1.6.
19
The comparative net loss for the three months ended June 29, 2001 included
a charge to cost of revenue for excess inventory of $29.1 and special
restructuring charges of $34.6. The loss also included a stock compensation
expense of $3.9 and amortization of intangibles of $1.4.
LIQUIDITY AND CAPITAL RESOURCES
At June 28, 2002, cash, cash equivalents and short-term investment
balances totaled $153.1, down from $154.4 at March 29, 2002. Cash and cash
equivalents at June 28, 2002, included in the amount above, amounted to $30.9
(March 29, 2002 - $75.6).
Cash flow used in operations before working capital changes amounted to
$6.9 during the first quarter of Fiscal 2003 as compared to $22.9 in the first
quarter of Fiscal 2002 when the Company began to carry out significant
restructuring activities. Since March 29, 2002, the Company's working capital,
as reflected in the consolidated statements of cash flows, decreased by $1.9
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.
Fixed and other asset additions were $2.7 during the first quarter of
Fiscal 2003, down from $14.6 in the first three months of Fiscal 2002. The
additions were primarily related to design tools and continuing improvements to
information technology resources. Fiscal 2002 additions principally related to
the construction of the Company's new headquarters in Ottawa, Canada. The
building was subsequently sold in the fourth quarter of Fiscal 2002. Management
expects quarterly capital spending in Fiscal 2003 to remain stable compared to
the first quarter of this year.
Long-term debt decreased due to scheduled repayments against capital lease
liabilities. In total, capital lease liabilities were reduced by $0.7 in the
first quarter of Fiscal 2003.
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 Fiscal 2003 when the plan is ultimately
settled after the appropriate approvals are received.
During the first quarter of Fiscal 2003, the Company declared and paid
dividends amounting to $0.5 on its redeemable preferred shares based on a
Cdn$0.50 per share dividend. In addition, the Company purchased 15,900 preferred
shares under its purchase obligation during the quarter ended June 28, 2002. The
transfer agent will cancel the repurchased preferred shares in the second
quarter of Fiscal 2003. The cost to repurchase the preferred shares amounted to
$0.2.
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 program during the period from March 30, 2002 to June
8, 2002, nor under the renewed program for the period ended June 28, 2002.
In addition to cash, cash equivalents and short-term investment balances
of $153.1 as at June 28, 2002, the Company had a revolving global credit
facility of approximately $16.5 (Cdn$25.0), of which $3.2 in letters of credit
were outstanding. Accordingly, the Company had unused and available demand bank
lines of credit amounting to $13.3 as at June 28, 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.
20
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. There is no change in the Company's
critical accounting policies included in Item 7, Management's Discussion and
Analysis of Financial Condition and Results of Operations, of the Company's
Annual Report on Form 10-K for the year ended March 29, 2002.
As at June 28, 2002, the Company had investments in private companies with
a carrying value of $15.3 (March 29, 2002 - $14.1). Management periodically
reviews these investments to determine if there has been other than a temporary
decline in the market value of these investments below the carrying value. When
management performs future assessments of these investments in the coming
quarters, a decline in the value of these companies may require the Company to
recognize impairment on the remaining value of its investments which could be
material.
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 2002, the Financial Accounting Standards Board ("FASB") issued
Statement No. 146 ("SFAS 146"), "Accounting for Costs Associated with Exit or
Disposal Activities", which addresses financial accounting and reporting for
costs associated with exit or disposal activities and nullifies EITF Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." Statement 146 requires that a liability for a cost associated
with an exit or disposal activity be recognized when the liability is incurred.
Under Issue 94-3, a liability for an exit cost was recognized at the date of an
entity's commitment to an exit plan. Statement 146 concludes that an entity's
commitment to a plan, by itself, does not create a present obligation to others
that meets the definition of a liability. Therefore, SFAS 146 eliminates the
definition and requirements for recognition of exit costs in Issue 94-3. SFAS
146 also establishes that fair value is the objective for initial measurement of
the liability. SFAS 146 will be effective for exit or disposal activities
initiated after December 31, 2002 and had no impact on the Company's financial
statements, but will impact the accounting treatment of future exit or disposal
activities should they occur.
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
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.
21
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Market risk represents the risk of loss that may impact Zarlink's
financial statements 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, Zarlink uses certain derivative financial
instruments, including interest rate swaps, 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 June 28, 2002, there were
unrealized losses of $0.8 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 June 28, 2002, if it became necessary to unwind these
contracts. 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.
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 equivalents 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.
Management does not foresee any significant changes in the strategies used
to manage interest and foreign exchange rate risks in the near future.
As at June 28, 2002, there were no material changes in information about
market risks as disclosed in the Company's Annual Report on Form 10-K for the
fiscal year ended March 29, 2002.
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders in the three
months ended June 28, 2002.
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K
a) Exhibits
99.1 President and Chief Executive Officer certificate pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
99.2 Senior Vice President of Finance and Chief Financial Officer certificate
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
99.3 Selected Consolidated Financial Statements in U.S. Dollars and in
accordance with Canadian Generally Accepted Accounting Principles
99.4 Management's Discussion and Analysis of Financial Condition and Results of
Operations - Canadian Supplement
22
b) Reports on Form 8-K
There were no reports on Form 8-K filed during the three months ended June 28,
2002.
SIGNATURE
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.
August 12, 2002 JEAN-JACQUES CARRIER
- --------------- --------------------------------
Date Jean-Jacques Carrier
Senior Vice President of Finance
and Chief Financial Officer
23
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION PAGE
99.1 President and Chief Executive Officer certificate
pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 25
99.2 Senior Vice President of Finance and Chief Financial
Officer certificate pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 26
99.3 Selected Consolidated Financial Statements in U.S. Dollars
and in accordance with Canadian Generally Accepted
Accounting Principles 27-36
99.4 Management's Discussion and Analysis of Financial Condition
and Results of Operations - Canadian Supplement 37-38
24