http://www.zarlink.com
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 27, 2002
Commission File No. 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 executive offices) (Postal Code)
(613) 592-0200
(Registrant's telephone number, including area code)
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act)
Yes |X| No |_|
As at January 31, 2003 there were 127,265,316 shares of the Common Stock of
Zarlink Semiconductor Inc., no par value, issued and outstanding.
ZARLINK SEMICONDUCTOR INC.
TABLE OF CONTENTS
Item No. Page No.
- -------- --------
PART I - FINANCIAL INFORMATION (Unaudited).....................................2
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)......................2
Consolidated Balance Sheets (unaudited)............................2
Consolidated Statements of Loss (unaudited)........................3
Consolidated Statements of Cash Flows (unaudited)..................4
Notes to the Consolidated Financial Statements (unaudited).........5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.............................13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.......22
ITEM 4. DISCLOSURE CONTROLS AND PROCEDURES................................23
PART II - OTHER INFORMATION...................................................24
ITEM 5. OTHER INFORMATION.................................................24
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..................................24
Signatures....................................................................24
Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002......25
1
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)
December 27, March 29,
2002 2002
------------ ---------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 27.8 $ 75.6
Short-term investments 105.3 78.8
Trade accounts receivable, less allowance
for doubtful accounts of $1.2
(March 29, 2002 - $1.3) 21.0 24.2
Other receivables 5.8 5.5
Inventories 23.1 33.0
Deferred income tax assets - net 1.7 4.1
Prepaid expenses and other 9.6 11.5
------ ------
194.3 232.7
Fixed assets (net) 58.1 60.3
Deferred income tax assets - net 11.1 11.0
Long-term investments 11.2 14.1
Other assets - net of deferred gain of $15.6
(March 29, 2002 - $14.7) 4.3 3.0
------ ------
$279.0 $321.1
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 7.2 $ 14.6
Employee-related payables 13.8 12.8
Income and other taxes payable 8.3 5.9
Provisions for exit activities 12.2 19.8
Other accrued liabilities 11.5 16.6
Deferred credits 12.8 2.2
Current portion of long-term debt 0.8 2.1
------ ------
66.6 74.0
Long-term debt 0.2 0.7
Pension liabilities 20.6 17.4
Deferred income tax liabilities - net 3.7 6.3
------ ------
91.1 98.4
------ ------
Redeemable preferred shares, unlimited
shares authorized; 1,473,900 shares
issued and outstanding
(March 29, 2002 - 1,558,700) 19.3 20.6
------ ------
Shareholders' equity:
Common shares, unlimited shares authorized;
no par value; 127,191,316 shares
issued and outstanding
(March 29, 2002 - 127,082,123) 768.1 767.6
Additional paid-in capital 2.1 4.1
Deferred stock compensation -- (0.8)
Deficit (559.0) (522.9)
Accumulated other comprehensive loss (42.6) (45.9)
------ ------
168.6 202.1
------ ------
$279.0 $321.1
====== ======
(See accompanying notes to the consolidated financial statements)
2
Zarlink Semiconductor Inc.
CONSOLIDATED STATEMENTS OF LOSS
(in millions of U.S. dollars, except per share amounts, U.S. GAAP)
(Unaudited)
Three Months Ended Nine Months Ended
------------------------- -------------------------
Dec. 27, Dec 28, Dec. 27, Dec. 28,
2002 2001 2002 2001
------- ------- ------- -------
Revenue $ 46.8 $ 51.7 $ 141.0 $ 170.0
Cost of revenue 25.6 30.8 77.0 127.4
------- ------- ------- -------
Gross margin 21.2 20.9 64.0 42.6
------- ------- ------- -------
Expenses:
Research and development 23.8 19.9 67.7 62.9
Selling and administrative 11.5 11.8 34.7 37.7
Stock compensation expense (recovery) -- 3.8 (1.4) 10.1
Special charge -- -- -- 34.6
Amortization of acquired intangibles -- 2.2 -- 4.4
------- ------- ------- -------
35.3 37.7 101.0 149.7
------- ------- ------- -------
Loss from operations (14.1) (16.8) (37.0) (107.1)
Other income (expense) - net 1.0 (0.9) 4.5 6.9
Interest expense (0.3) (0.2) (0.7) (0.6)
------- ------- ------- -------
Loss before income taxes (13.4) (17.9) (33.2) (100.8)
Income tax (expense) recovery (0.3) (0.4) (1.2) 2.3
------- ------- ------- -------
Net loss for the period $ (13.7) $ (18.3) $ (34.4) $ (98.5)
======= ======= ======= =======
Net loss attributable to common
shareholders after preferred
share dividends $ (14.2) $ (18.8) $ (35.9) $(100.0)
======= ======= ======= =======
Net loss per common share:
Basic and diluted $ (0.11) $ (0.15) $ (0.28) $ (0.80)
======= ======= ======= =======
Weighted average number of common
shares outstanding (millions):
Basic and diluted 127.2 126.0 127.0 125.4
======= ======= ======= =======
(See accompanying notes to the consolidated financial statements)
3
Zarlink Semiconductor Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions of U.S. dollars, U.S. GAAP)
(Unaudited)
Three Months Ended Nine Months Ended
------------------------- -------------------------
Dec. 27, Dec 28, Dec. 27, Dec. 28,
2002 2001 2002 2001
------- ------- ------- -------
Cash flows from operating activities:
Net loss for the period $ (13.7) $ (18.3) $ (34.4) $ (98.5)
Depreciation and amortization 3.4 7.5 10.5 20.2
Stock compensation expense (recovery) -- 3.8 (1.4) 10.1
Special charges, non-cash -- -- -- 1.1
Loss (gain) on disposal of fixed assets (0.1) (0.1) (0.1) 0.3
Gain on sale of long-term investment (0.7) -- (0.7) --
Inventory write-down -- -- -- 29.1
Deferred income taxes 0.1 (1.2) 0.1 (2.7)
Change in pension liability -- 0.1 -- 0.4
Equity loss in investment -- 0.8 -- 2.2
Decrease (increase) in working capital
Trade accounts and other receivables 3.9 6.7 6.4 24.6
Inventories 5.6 7.6 12.9 11.2
Prepaid expenses and other 1.6 2.7 3.6 (2.6)
Trade accounts payable and other accrued
liabilities (5.8) (4.5) (20.3) (16.8)
Deferred credits 3.7 (0.1) 4.0 --
------- ------- ------- -------
Cash provided by (used in) operating activities (2.0) 5.0 (19.4) (21.4)
------- ------- ------- -------
Cash flows from investing activities:
Purchased short-term investments (105.4) (28.0) (251.9) (28.0)
Matured short-term investments 65.3 -- 227.0 --
Proceeds from disposal of fixed and other assets -- -- 0.4 0.2
Expenditures for fixed and other assets (1.4) (5.6) (5.7) (28.4)
Increase in long-term investments -- -- (0.4) (2.0)
Proceeds from sale of long-term investments 4.2 -- 4.2 --
Proceeds from repayment of note receivable -- -- -- 4.4
Proceeds from sale of discontinued operations - net -- -- -- 1.3
------- ------- ------- -------
Cash used in investing activities (37.3) (33.6) (26.4) (52.5)
------- ------- ------- -------
Cash flows from financing activities:
Repayment of long-term debt -- (0.1) -- (0.9)
Repayment of capital lease liabilities (0.4) (1.5) (1.8) (4.2)
Payment of dividends on preferred shares (0.5) (0.5) (1.5) (1.5)
Issue of common shares -- 1.2 0.5 3.3
Repurchase of preferred shares (0.9) (0.3) (1.3) (0.7)
------- ------- ------- -------
Cash used in financing activities (1.8) (1.2) (4.1) (4.0)
------- ------- ------- -------
Effect of currency translation on cash and cash
equivalents 1.0 (1.1) 2.1 (0.5)
------- ------- ------- -------
Decrease in cash and cash equivalents (40.1) (30.9) (47.8) (78.4)
Cash and cash equivalents, beginning of period 67.9 132.4 75.6 179.9
------- ------- ------- -------
Cash and cash equivalents, end of period $ 27.8 $ 101.5 $ 27.8 $ 101.5
======= ======= ======= =======
(See accompanying notes to the consolidated financial statements)
4
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
These unaudited interim consolidated financial statements have been
prepared by Zarlink Semiconductor Inc. ("Zarlink" or the "Company") in
United States (U.S.) dollars, unless otherwise stated, and in accordance
with accounting principles generally accepted in the U.S. for interim
financial statements and with the instructions to Form 10-Q and Regulation
S-X pertaining to interim financial statements. Accordingly, these interim
consolidated financial statements do not include all information and
footnotes required by generally accepted accounting principles ("GAAP")
for complete financial statements. In the opinion of management of the
Company, the unaudited interim consolidated financial statements reflect
all adjustments, which consist only of normal and recurring adjustments,
necessary to present fairly the financial position at December 27, 2002,
and the results of operations and cash flows of the Company for the three
and nine month periods ended December 27, 2002 and December 28, 2001,
respectively, in accordance with U.S. GAAP, applied on a consistent basis.
The consolidated financial statements include the accounts of Zarlink and
its wholly owned subsidiaries. Intercompany transactions and balances have
been eliminated. Separate Canadian GAAP financial statements are also
prepared and presented to shareholders.
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 or future
periods.
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 or indefinite lived intangibles 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
were 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 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.
5
3. Recently issued accounting pronouncements
a) 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.
b) In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others". FIN 45
requires that a guarantor is required to recognize, at the inception
of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. FIN 45 also requires additional
disclosure by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees. The
initial recognition and measurement provisions of FIN 45 are
applicable for guarantees issued or modified after December 31,
2002. The disclosure requirements of FIN 45 are effective for
financial statements of interim or annual periods ending after
December 15, 2002. The adoption of this interpretation is not
anticipated to have a material effect on the Company's financial
position, results of operations, or cash flows.
4. Inventories
December 27, March 29,
2002 2002
------------ ---------
Raw materials $ 2.5 $ 2.4
Work-in-process 15.9 20.8
Finished goods 4.8 9.8
------- -------
$ 23.1 $ 33.0
======= =======
5. Fixed assets
December 27, March 29,
2002 2002
------------ ---------
Cost $ 165.2 $ 153.1
Accumulated depreciation (107.1) (92.8)
------- -------
$ 58.1 $ 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.
Management periodically reviews the Company's fixed assets to evaluate the
realizability of these assets based upon the fair value as estimated by
reference to discounted expected future net cash flows of the related
assets. When management performs future assessments of these long-lived
assets in the coming quarters, a decline in the realizability of these
assets below the carrying value may require the Company to recognize
impairment on the carrying value of its fixed assets which could be
material.
6
6. Long-term investments
As at December 27, 2002, the Company had a nine percent ownership interest
in Mitel Networks Corporation, a Canadian corporation that files annual
and other reports with the United States Securities and Exchange
Commission under the Securities Exchange Act of 1934, with a carrying
value of $11.2 (March 29, 2002 - $14.1). Management periodically reviews
the Company's 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 its
investments in the coming quarters, a decline in the value of this company
may require the Company to recognize impairment on the remaining value of
its investments which could be material.
The Company sold its investment in DALSA Semiconductor Inc. ("DALSA") on
October 3, 2002 for cash proceeds of $4.2 and recorded a gain of $0.7 in
the third quarter of Fiscal 2003.
7. Provisions for exit activities
December 27, March 29,
2002 2002
------------ ---------
Restructuring provisions $ 4.2 $ 7.9
Provision for disposal of
discontinued operations 3.8 5.8
Provision for disposal of
foundry businesses 4.2 6.1
------- -------
$ 12.2 $ 19.8
======= =======
8. Deferred credits
On December 31, 2002, a tenant of space leased by the Company terminated
its lease. In settlement of the lease, the former tenant paid to the
Company a net amount of $3.3 in cash on December 20, 2002, all of which
was treated as a deferred credit as at December 27, 2002. The entire
amount will be recorded as income in the fourth quarter of Fiscal 2003
when the termination date expires.
The deferred credits at December 27, 2002, included an amount of $6.4
($0.2 - March 29, 2002) representing the fair value of external foreign
exchange contracts held by the Company.
9. Guarantees
Performance guarantees are contracts that contingently require the
guarantor to make payments to the guaranteed party based on another
entity's failure to perform under an obligating agreement. The Company has
an outstanding performance guarantee related to a managed services
agreement ("project agreement") undertaken by the discontinued Systems
business, which was sold to companies controlled by Dr. Terence H.
Matthews on February 16, 2001 and now operated as Mitel Networks
Corporation. This performance guarantee remained with the Company
following the sale of the Systems business to Dr. Matthews. The project
agreement and the Company's performance guarantee extend until July 26,
2012. The terms of the project agreement continue to be fulfilled by Mitel
Networks Corporation. The maximum potential amount of future undiscounted
payments the Company could be required to make under the guarantee, at
December 27, 2002, was $32.0, based upon the Company being unable to
secure the completion of the project. The Company is not aware of any
factors as at December 27, 2002 that would prevent the project's
completion under the terms of the agreement. In the event that Mitel
Networks Corporation was unable to fulfill the commitments of the project
agreement, the Company believes that an alternate third-party contractor
could be secured to complete the agreement requirements. At December 27,
2002, the carrying value of these guarantees is nil.
In connection with the sale of the Systems business described in note 21
(a) to the consolidated financial statements for the year ended March 29,
2002, the Company provided to the purchaser certain income tax indemnities
with an indefinite life and with no maximum liability for the taxation
periods up to February 16, 2001, the closing date of the sale. As at
December 27, 2002, the taxation years 1997 to February 16, 2001, are
subject to audit by taxation authorities.
7
10. Redeemable preferred shares
There were 86,000 preferred shares purchased during the nine months ended
December 27, 2002 for cash consideration of $1.3. The transfer agent
cancelled 84,800 shares in the first nine months of Fiscal 2003. As at
December 27, 2002, there were 6,200 repurchased preferred shares to be
cancelled in the fourth quarter of Fiscal 2003.
During the third quarter, the dividend declared and paid on the redeemable
preferred shares was $0.32 (Cdn $0.50) per share, resulting in a
cumulative dividend of $0.96 (Cdn$1.50) per share for the first nine
months of Fiscal 2003.
11. 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 would be cancelled. During the nine months ended
December 27, 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:
Nine Months Ended
----------------------------
December 27, December 28,
2002 2001
------------ ------------
Outstanding Options:
Balance, beginning of period 10,914,962 9,464,693
Granted 400,300 2,125,550
Exercised (109,193) (638,663)
Forfeited (1,896,121) (983,599)
----------- -----------
Balance, end of period 9,309,948 9,967,981
=========== ===========
On August 14, 2002, 1,136,778 unexercised stock options held by
former employees of the discontinued Systems business expired in
accordance with the terms of the sale agreement. The options were
returned to the pool of options available for grant. Available for
grant at December 27, 2002 were 5,306,731 (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 November 2008. The exercise price of stock options was
based on prices in Canadian dollars translated at the U.S. dollar
exchange rate on December 27, 2002.
d) The net loss per common share figures were calculated based on the
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 potentially dilutive common share equivalents have been
excluded from the computation of diluted loss per share because they were
anti-dilutive due to the reported net loss for the periods presented:
Three Months Ended Nine Months Ended
--------------------- ---------------------
Dec. 27, Dec. 28, Dec. 27, Dec. 28,
2002 2001 2002 2001
--------------------- ---------------------
Stock options 30,473 1,720,301 91,921 1,392,736
Restricted shares -- 704,379 -- 704,379
--------------------- ---------------------
Total 30,473 2,424,680 91,921 2,097,115
===================== =====================
8
The following stock options were excluded from the computation of common
share equivalents because the options' exercise price exceeded the average
market price of the common shares, thereby making them anti-dilutive:
Three Months Ended Nine Months Ended
----------------------- ------------------------
Dec. 27, Dec. 28, Dec. 27, Dec. 28,
2002 2001 2002 2001
----------------------- ------------------------
Number of outstanding
options 9,218,448 2,996,080 8,837,767 3,086,580
Average exercise price
per share $ 8.92 $ 11.71 $ 9.21 $ 11.64
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 and nine month fiscal periods ended December 27, 2002 and
December 28, 2001:
Three Months Ended Nine Months Ended
----------------------- ------------------------
Dec. 27, Dec. 28, Dec. 27, Dec. 28,
2002 2001 2002 2001
----------------------- ------------------------
Pro Forma net loss
attributable to common
shareholders after
preferred dividends $(17.5) $(23.0) $(45.9) $(114.7)
Pro Forma net loss per
common share:
Basic and diluted $(0.14) $(0.18) $(0.36) $ (0.91)
Weighted average fair
value price of the options $ 1.19 $ 5.00 $ 1.82 $ 3.63
Risk free interest rate 3.45% 5.19% 3.82% 5.19%
Dividend yield Nil Nil Nil Nil
Volatility factor of the
expected market price of
the Company's common stock 0.673 0.501 0.622 0.501
Weighted-average expected
life of the options 3.1 years 4.0 years 3.1 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.
12. Accumulated other comprehensive loss
The components of other comprehensive loss were as follows:
Three Months Ended Nine Months Ended
----------------------- ------------------------
Dec. 27, Dec. 28, Dec. 27, Dec. 28,
2002 2001 2002 2001
----------------------- ------------------------
Net loss for the period $(13.7) $(18.3) $(34.4) $(98.5)
Other comprehensive
income (loss):
Unrealized net derivative
gains (losses) on cash
flow hedges (2.4) 1.9 (6.0) 1.4
Change in cumulative
translation adjustment 2.8 4.0 9.3 7.9
----------------------- ------------------------
Other comprehensive
loss for the period $(13.3) $(12.4) $(31.1) $(89.2)
======================= ========================
9
The changes to accumulated other comprehensive loss for the nine months
ended December 27, 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)
Change during the three months ended
September 27, 2002 (5.8) -- (3.2) (9.0)
-------------------------------------------------------------
Balance, September 27, 2002 $ (36.5) $ (2.5) $ (4.0) $ (43.0)
Change during the three months ended
December 27, 2002 2.8 -- (2.4) 0.4
-------------------------------------------------------------
Balance, December 27, 2002 $ (33.7) $ (2.5) $ (6.4) $ (42.6)
=============================================================
The Company recorded an increase in other comprehensive loss in the nine
months ended December 27, 2002 of $6.0 (nine months ended December 28,
2001 - $1.4 gain) 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 or a hedge of a
net investment. The Company estimates that $6.4 of net derivative loss
included in other comprehensive loss will be reclassified into earnings
within the next 12 months.
13. Inventory write-down and restructuring
a) Fiscal 2003 Workforce Reduction
During the third quarter and first nine months of Fiscal 2003, the
Company continued to reduce its workforce across all geographic
regions and incurred severance costs of $3.6 ($5.0 year-to-date).
Worldwide headcount was reduced by approximately 200 employees over
the first nine months of the year in a continuing effort to
streamline operations. Severance costs of $0.3 in the quarter ($0.9
year-to-date) were included in cost of revenue. The balance of the
severance costs increased research and development ("R&D") expense
by $2.5 in the quarter ($2.7 year-to-date), and increased selling
and various general administration function ("S&A") expenses by $0.8
in the quarter ($1.4 year-to-date). As a result of the restructuring
activities undertaken in the first nine months of Fiscal 2003,
accrued severance payments of $0.6, included in employee-related
payables, are expected to be paid in the fourth quarter of Fiscal
2003.
b) First Quarter of Fiscal 2002
In the first quarter of Fiscal 2002, the Company reviewed its
inventory requirements for the succeeding 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 related to the March 29, 2002
restructuring liability during the first nine months of Fiscal 2003:
Excess
Workforce Lease
Reduction Costs Total
--------- ------- -----
Provision balance as at March 29, 2002 $2.9 $5.0 $7.9
Cash draw-downs during Q1 2003 (0.5) (0.3) (0.8)
Cash draw-downs during Q2 2003 (0.4) (0.7) (1.1)
Non-cash draw-downs during Q2 2003 -- (0.5) (0.5)
Cash draw-downs during Q3 2003 (0.8) (0.5) (1.3)
---- ---- ----
Provision balance as at December 27, 2002 $1.2 $3.0 $4.2
==== ==== ====
All of the liability relating to the workforce reduction is in
respect of the fourth quarter Fiscal 2002 restructuring program.
14. Other income (expense) (net)
Three Months Ended Nine Months Ended
------------------------------ ------------------------------
Dec. 27, 2002 Dec. 28, 2001 Dec. 27, 2002 Dec. 28, 2001
------------------------------ ------------------------------
Interest income $ 0.7 $ 1.0 $ 2.6 $ 4.6
Foreign exchange gain (loss) (0.4) (1.1) 1.2 4.5
Equity loss in Optenia, Inc. -- (0.8) -- (2.2)
Gain on sale of DALSA investment 0.7 -- 0.7 --
------------------------------- ------------------------------
Other income (expense) (net) $ 1.0 $(0.9) $ 4.5 $ 6.9
=============================== ==============================
15. 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, sell to different customers,
use different production and distribution processes, 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
enterprise and metro segments 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 $27.8 and $85.6 in revenue in the three and nine months
ended December 27, 2002, respectively (three and nine months ended
December 28, 2001 - $25.8 and $88.2, respectively). User access products
accounted for $12.0 and $35.0 in revenue in the three and nine months
ended December 27, 2002, respectively (three and nine months ended
December 28, 2001 - $16.9 and $56.0, respectively).
The Medical business provides ultra low power ASIC solutions for
applications such as pacemakers, hearing aids and portable instruments.
The Chief Executive Officer ("CEO") is the chief operating decision maker
in assessing the performance of the segments and the allocation of
resources to the segments. The CEO evaluates the financial 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 Dec. 27, 2002 Communications Medical Costs Total
-------------- ------- ----------- -----
Revenue $ 39.8 $ 7.0 $ -- $ 46.8
Depreciation of fixed assets 3.1 -- -- 3.1
Segment's operating loss (12.9) (1.2) -- (14.1)
Unallocated
Three Months Ended Dec. 28, 2001 Communications Medical Costs Total
-------------- ------- ----------- -----
Revenue $ 42.7 $ 9.0 $ -- $ 51.7
Depreciation of fixed assets 5.2 0.1 -- 5.3
Amortization of acquired intangibles 2.2 -- -- 2.2
Stock compensation expense -- -- 3.8 3.8
Segment's operating income (loss) (14.2) 1.2 (3.8) (16.8)
Unallocated
Nine Months Ended Dec. 27, 2002 Communications Medical Costs Total
-------------- ------- ----------- -----
Revenue $120.6 $20.4 $ -- $141.0
Depreciation of fixed assets 9.5 0.1 -- 9.6
Stock compensation recovery -- -- (1.4) (1.4)
Segment's operating loss (35.8) (2.6) 1.4 (37.0)
Unallocated
Nine Months Ended Dec. 28, 2001 Communications Medical Costs Total
-------------- ------- ----------- -----
Revenue $144.2 $25.8 $ -- $170.0
Depreciation of fixed assets 15.6 0.3 -- 15.9
Amortization of acquired intangibles 4.4 -- -- 4.4
Stock compensation expense -- -- 10.1 10.1
Special charge -- -- 34.6 34.6
Segment's operating income (loss) (68.7) 6.3 (44.7) (107.1)
16. Subsequent events
a) On January 28, 2003, and subsequent to the third quarter of Fiscal
2003, cash and cash equivalents totaling $6.1 were hypothecated
under the Company's revolving global credit facility to cover
outstanding letters of credit.
b) During Fiscal 2002, the Company took steps to wind up its defined
benefit pension plan in the United Kingdom and replaced it with a
defined contribution plan. The cash settlement of the pension plan
is expected to cost approximately $10.5. On January 28, 2003, and
subsequent to the third quarter of Fiscal 2003, the Company paid
$8.0 as partial consideration of the pension obligation settlement
to a large, AAA-rated insurance company in the U.K. under a wind-up
agreement. In addition, the Company will transfer its pension plan
assets of approximately $15.5 in February 2003. The Company expects
to make a final payment of approximately $2.5 to the insurance
company later in Fiscal 2004 after the final adjustments are
calculated.
As a result of the settlement, the pension liabilities will be
reduced by $6.6, representing the accrued U.K. pension plan balance.
The Company expects to record an expense of approximately $6.6 in
the fourth quarter of Fiscal 2003 related to this settlement.
17. 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)
Overview
Zarlink is a global provider of microelectronics for voice, data and video
networks and for medical applications. Zarlink's Communications business
specializes in broadband connectivity solutions over wired, wireless and optical
media. Zarlink's Medical business provides applications specific integrated
circuit solutions (ASIC) for applications such as pacemakers, hearing aids and
portable instruments. At December 27, 2002, the Company employed approximately
1,322 people worldwide, including approximately 450 designers.
The following discussion and analysis explains trends in Zarlink's financial
condition and results of operations for the three and nine months ended December
27, 2002, respectively, compared with the corresponding periods 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.
Forward-Looking Statements
Certain statements in this Quarterly Report on Form 10-Q contain forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995 (the "Reform Act") 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". In making these
forward-looking statements, which are identified by words such as "will",
"expects", "intends", "anticipates" and similar expressions, the Company claims
the protection of the safe-harbor for forward-looking statements contained in
the Reform Act. 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 FOR THE THREE AND NINE MONTHS ENDED DECEMBER 27, 2002
Summary of Results from Operations Three Months Ended Nine Months Ended
------------------------------- --------------------------------
(millions of U.S. dollars, except per share amounts) Dec. 27, 2002 Dec. 28, 2001 Dec. 27, 2002 Dec. 28, 2001
------------- ------------- ------------- -------------
Consolidated revenue $ 46.8 $ 51.7 $ 141.0 $ 170.0
Communications segment revenue 39.8 42.7 120.6 144.2
Medical segment revenue 7.0 9.0 20.4 25.8
Operating loss (14.1) (16.8) (37.0) (107.1)
Communications segment operating loss (12.9) (14.2) (35.8) (68.7)
Medical segment operating income (loss) (1.2) 1.2 (2.6) 6.3
Unallocated recoveries (costs) -- (3.8) 1.4 (44.7)
Net loss for the period (13.7) (18.3) (34.4) (98.5)
Net loss per common share - basic and diluted (0.11) (0.15) (0.28) (0.80)
Weighted average common shares outstanding - millions 127.2 126.0 127.0 125.4
Revenue in the third quarter of Fiscal 2003 was $46.8, a decrease of 9%, or
$4.9, from the third quarter of Fiscal 2002. Revenue in the first nine months of
Fiscal 2003 was $141.0, a decrease of 17%, or $29.0, from the first nine months
of Fiscal 2002. Semiconductor sales volumes continue to be affected by the
prolonged downturn impacting the entire semiconductor industry. Higher channel
inventory levels and lower end-customer demand continue to keep sales levels
suppressed, however recent increased customer bookings are beginning to show an
indication of improved inventory positions with customers.
In the third quarter of Fiscal 2003, the Company recorded a net loss, after
preferred share dividends, of $14.2, or $0.11 per share. This compares to a net
loss, after preferred share dividends, of $18.8, or $0.15 per share, in the
third quarter of Fiscal 2002, after amortization of acquired intangibles of $2.2
and stock compensation expense of $3.8.
During the third quarter and first nine months of Fiscal 2003, the Company
continued to reduce its workforce across all geographic regions and incurred
severance costs of $3.6 ($5.0 year-to-date). Worldwide headcount has been
reduced by approximately 200 employees over the first nine months of the year in
a continuing effort to streamline operations. Severance costs of $0.3 in the
quarter ($0.9 year-to-date) were included in cost of revenue, negatively
impacting gross margins by one percentage point during the third quarter and
first nine months of Fiscal 2003, respectively. The balance of the severance
costs increased research and development ("R&D") expense by $2.5 in the quarter
($2.7 year-to-date), and negatively impacted selling and various general
administration function ("S&A") expenses by $0.8 in the quarter ($1.4
year-to-date).
For the nine months ended December 27, 2002, the Company recorded a net loss,
after preferred share dividends, of $35.9, or $0.28 per share, including a stock
compensation recovery of $1.4. This compares to a net loss, after preferred
share dividends, of $100.0, or $0.80 per share, for the nine months ended
December 28, 2001, after a special inventory write-down of $29.1, special
charges of $34.6 related to workforce restructuring, amortization of acquired
intangibles of $4.4, and stock compensation expense of $10.1.
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.
14
Communications
Three Months Ended Nine Months Ended
------------------------------------------ -------------------------------------------
Dec. 27, % of Dec. 28, % of Dec. 27, % of Dec. 28, % of
(millions of U.S. dollars) 2002 Total 2001 Total 2002 Total 2001 Total
-------- ----- -------- ----- -------- ----- -------- -----
Revenue:
Network Access $ 27.8 70% $ 25.8 60% $ 85.6 71% $ 88.2 61%
User Access 12.0 30% 16.9 40% 35.0 29% 56.0 39%
------ --- ------ --- ------ --- ------- ---
Total Communications $ 39.8 100% $ 42.7 100% $120.6 100% $ 144.2 100%
====== === ====== === ====== === ======= ===
As a % of total revenue 85% 83% 86% 85%
Communications
Operating loss $(12.9) $(14.2) $(35.8) $(68.7)
====== ====== ====== ======
Network access and user access products represent the two major product
categories in the Company's Communications business segment. Network access
products include products that provide connectivity to the enterprise and metro
segments 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 three months ended December 27, 2002 totaled $39.8, down 7% from
$42.7 for the same period in Fiscal 2002. Although relatively flat from last
quarter, the Communication revenues included a larger percentage of user access
product revenues as against the total for the segment.
Revenue for the first nine months of Fiscal 2003 totaled $120.6, down 16% from
$144.2 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) had been steadily increasing since the second quarter of Fiscal 2002 to
peak at 40% of orders shipped in the second quarter of Fiscal 2003. The "turns"
business dropped to approximately 35% of the orders shipped in the three months
ended December 27, 2002.
The segment's operating loss declined to $12.9 in the third quarter of Fiscal
2003 from an operating loss of $14.2 in the same period of Fiscal 2002. Included
in the current quarter's operating loss were severance costs of approximately
$3.2, mostly related to the termination of the VDSL (Very high rate Digital
Subscriber Line) product development, discussed elsewhere in this Management's
Discussion and Analysis.
The segment's operating loss declined to $35.8 in the first nine months of
Fiscal 2003 from an operating loss of $68.7 in the same period of Fiscal 2002.
The nine month Fiscal 2002 operating loss included an inventory write-down of
$29.1 in the first quarter of that year. The balance of the improvement is due
to the effects of cost reduction programs implemented since the first quarter of
Fiscal 2002.
Medical
Three Months Ended Nine Months Ended
------------------------------------------ -------------------------------------------
Dec. 27, % of Dec. 28, % of Dec. 27, % of Dec. 28, % of
(millions of U.S. dollars) 2002 Total 2001 Total 2002 Total 2001 Total
-------- ----- -------- ----- -------- ----- -------- -----
Revenue:
Medical $ 7.0 100% $ 9.0 100% $ 20.4 100% $25.8 100%
===== === ===== === ====== === ===== ===
As a % of total revenue 15% 17% 14% 15%
Medical Operating
Income (loss) $(1.2) $ 1.2 $ (2.6) $ 6.3
===== ===== ====== =====
Zarlink's Medical business provides ultra low power ASIC solutions for
applications such as pacemakers, hearing aids and portable instruments.
15
Revenue decreased during the third quarter of Fiscal 2003 to $7.0 from $9.0 in
the third quarter of Fiscal 2002. During the first nine months of Fiscal 2003,
revenue decreased to $20.4 from $25.8 in the first nine months of Fiscal 2002
due to higher customer inventories and reduced demand by customers in the analog
audiologic business.
The "turns" business in the third quarter also decreased within the Medical
Segment from last quarter, to represent approximately 17% of the orders shipped
in the three months ended December 27, 2002.
The segment's operating results for the third quarter and nine months ended
December 27, 2002, declined from the corresponding periods in Fiscal 2002 as a
result of lower revenues combined with reduced margins on the medical segment
products.
GEOGRAPHIC REVENUE
Revenue, based on the geographic location of customers, was distributed as
follows:
Three Months Ended Nine Months Ended
------------------------------------------ -------------------------------------------
Dec. 27, % of Dec. 28, % of Dec. 27, % of Dec. 28, % of
(millions of U.S. dollars) 2002 Total 2001 Total 2002 Total 2001 Total
-------- ----- -------- ----- -------- ----- -------- -----
Revenue:
Asia/Pacific $17.6 37% $15.5 30% $ 52.3 37% $ 42.7 25%
Europe 15.4 33% 18.2 35% 46.4 33% 60.1 35%
United States 9.7 21% 14.1 27% 29.4 21% 51.8 30%
Canada 2.4 5% 3.4 7% 8.9 6% 12.0 8%
Other Regions 1.7 4% 0.5 1% 4.0 3% 3.4 2%
----- --- ----- --- ------ --- ------ ---
Total $46.8 100% $51.7 100% $141.0 100% $170.0 100%
===== === ===== === ====== === ====== ===
For the three months ended December 27, 2002, the net movement in exchange rates
from the corresponding period in Fiscal 2002 favorably impacted total revenue by
5% ($2.3). During the first nine months of Fiscal 2003, the net movement in
exchange rates from the corresponding period in Fiscal 2002 favorably impacted
total revenue by 3% ($4.6). The favorable foreign exchange impact in the third
quarter and first nine months of Fiscal 2003 was primarily a result of increases
in the U.K. pound sterling and Swedish Krona against the U.S. dollar exchange
rate.
Asia/Pacific
Asia/Pacific sales increased by 14% during the third quarter of Fiscal 2003
compared to the third quarter of Fiscal 2002, and continue to represent the
largest geographic segment of customer revenues. During the first nine months of
Fiscal 2003, sales increased by 22% compared to the same period in Fiscal 2002,
due to higher communications product sales in both of the network and user
access product categories, partially offset by reduced medical sales.
Europe
European sales decreased by 15% in the third quarter of Fiscal 2003 compared to
the third quarter of Fiscal 2002. For the first nine months of Fiscal 2003,
sales decreased by 23% compared to the first nine months of Fiscal 2002 due to
lower communications segment sales of both network access and user access
products, offset by moderate increases in medical product sales.
United States
Sales to customers in the United States decreased by 31% during the third
quarter of Fiscal 2003 compared to the third quarter of Fiscal 2002. For the
first nine months of Fiscal 2003, United States sales decreased by 43% compared
to the same period in Fiscal 2002. The decrease was due primarily to lower
medical and user access product sales.
Canada
Canadian sales decreased by 29% in the third quarter of Fiscal 2003 over the
same period in Fiscal 2002. During the first nine months of Fiscal 2003, sales
to Canadian customers decreased by 26% compared to the same period in Fiscal
2002 due to lower communications segment sales.
16
GROSS MARGIN
Three Months Ended Nine Months Ended
------------------------------ -------------------------------
(millions of U.S. dollars) Dec. 27, 2002 Dec. 28, 2001 Dec. 27, 2002 Dec. 28, 2001
------------- ------------- ------------- -------------
Gross Margin $21.2 $20.9 $64.0 $42.6
As a percentage of revenue 45% 40% 45% 25%
As a percentage of revenue, excluding Q1
Fiscal 2002 excess inventory charge of $29.1 45% 40% 45% 42%
Gross margin improved by 5 percentage points in the third quarter of Fiscal 2003
compared to the same period in Fiscal 2002. Lower overall manufacturing costs,
and a favorable product mix in the communications segment has benefited the
margin percentages in the quarter relative to last year. Gross margin for the
quarter was flat as compared to the second quarter of Fiscal 2003.
Gross margin improved by 3 percentage points in the first nine months of Fiscal
2003 compared to the same period in Fiscal 2002, excluding the excess inventory
charge recorded in the first quarter of Fiscal 2002, as a result of reduced
manufacturing costs and an improved product mix. However, gross margin continues
to be impacted by low sales volumes.
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 42% for the nine months ended December 28, 2001.
OPERATING EXPENSES
Research and Development ("R&D")
Three Months Ended Nine Months Ended
------------------------------ -------------------------------
(millions of U.S. dollars) Dec. 27, 2002 Dec. 28, 2001 Dec. 27, 2002 Dec. 28, 2001
------------- ------------- ------------- -------------
R&D Expenses $ 23.8 $ 19.9 $ 67.7 $ 62.9
As a percentage of revenue 51% 38% 48% 37%
R&D expenses increased by 20%, or $3.9, in the third quarter of Fiscal 2003 from
the same period in Fiscal 2002. During the first nine months of Fiscal 2003, R&D
expenses increased by 8%, or $4.8, compared to the same period in Fiscal 2002,
primarily due to new product development, increased headcount in certain R&D
projects to accelerate time to market initiatives and certain severance costs
associated with project cancellations. Third quarter R&D expenses included $2.5
of severance costs, principally related to the Company's decision to cease
product development in the VDSL (Very high rate Digital Subscriber Line) market
in order to concentrate its R&D resources on higher and more immediate growth
opportunities. Management decided to cease its VDSL product development due to
revised expectations of unacceptably long time-to-revenue and volume deployment.
The Company continues to refocus its R&D resources on programs and products that
demonstrate superior potential for near- and medium-term revenue. Management
expects that R&D spending will decrease over the balance of Fiscal 2003 as a
result of this exercise.
During the third quarter of Fiscal 2003, the Company released 26 new products,
putting the total for the first nine months of Fiscal 2003 at 54 new product
releases. New communications circuits released during Fiscal 2003 target high
performance in network access processing and data switching, and also include
industry leading tuner chips for cable set top boxes. The Company's medical
segment has also released various pacemaker protection circuits, in addition to
analog and digital hearing aid circuits, during the first nine months of Fiscal
2003.
17
In the Network Access product line, R&D activities focused on the following
areas:
o Time Division Multiplex ("TDM") switch development to set new industry
standards in terms of channel density, levels of integration, feature sets
and power density;
o Development of Voice Processing products for today's emerging Carrier
Class Gateways and Voice over IP (Internet Protocol) Networks for mobile
telephony, addressing the problem of voice echo cancellation in the
system. New products will include Zarlink technology to improve
convergence time, voice quality and allow the product to consume even less
power and also enable better power consumption for voice transmitted
through the mobile network;
o Planned development of higher speed Phase Lock Loops ("PLL") for Network
Timing & Synchronization. These high speed PLLs will be used to provide
the timing for transporting information over SONET/SDH links that operate
up to 622 Mbits/s;
o Meeting convergence with TDM/IP Processing in Packet Processing, and
Ethernet Switching for backplanes, linecard, edge/metro and Virtual
Private Network ("VPN") switches in Packet Switching;
o Utilization of its Radio Frequency ("RF") expertise for Timing,
Synthesizers, Interface drivers, and Amplifiers for its High Performance
Analog product development; and
o Very Short Reach ("VSR") parallel optical solutions targeted at terabit
speeds and higher.
In the User Access product line, R&D activities focused on the following areas:
o Providing a multi-mode cell phone radio transceiver chip, compliant with
2/2.5G standards for Time Division Multiple Access ("TDMA")/Global System
for Mobile communications ("GSM")/Enhanced Data rates for GSM Evolution
("EDGE")/General Packet Radio Service ("GPRS")/Advanced Mobile Phone
Service/System ("AMPS"), and developing a 2-chip radio solution for 3rd
generation GSM/Wide and Code Division Multiple Access ("WCDMA") cell
phones;
o Providing Tuner, demodulator and peripheral chips for Satellite, Cable and
Terrestrial Digital Set Top boxes, integrated Digital TV's and adapter
boxes; and
o Development of the most highly integrated system-on-a-chip solution for
integrated Digital Terrestrial Televisions, Digital Terrestrial Set Top
Boxes, adapter boxes and media centers, compliant with the Digital Video
Broadcasting - Terrestrial ("DVB-T") standard.
In the Medical business segment, R&D activities focused 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 communication with medical devices that
have increasing diagnostic capability;
o Ultra low power audio processing and customized digital signal processing
("DSP") and Coder/Decoders ("CODECs") 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.
Selling and Administrative ("S&A")
Three Months Ended Nine Months Ended
------------------------------ -------------------------------
(millions of U.S. dollars) Dec. 27, 2002 Dec. 28, 2001 Dec. 27, 2002 Dec. 28, 2001
------------- ------------- ------------- -------------
S&A Expenses $ 11.5 $ 11.8 $ 34.7 $ 37.7
As a percentage of revenue 25% 23% 25% 22%
Third quarter S&A expenses, inclusive of $0.8 in severance costs, decreased by
$0.3, or 3% compared to the third quarter of Fiscal 2002. During the nine months
ended December 27, 2002, S&A expenses, inclusive of $1.4 in severance costs,
decreased by $3.0, or 8%, as compared to the first nine months of Fiscal 2002,
principally as a result of cost reductions implemented in Fiscal 2002 in
response to the industry downturn. Cost reduction strategies were applied within
the sales and marketing organizations and various general administration
functions across all geographic regions. Management expects that S&A expenses
will continue to show moderate cost savings in the fourth quarter of Fiscal 2003
in absolute dollar amounts.
18
Stock Compensation
The Company records 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 December 27, 2002, the Company recorded no stock
compensation expense due to the vesting of restricted stock awarded to certain
employees of Vertex (December 28, 2001 - $3.8, related to the vesting of
restricted stock and the amortization of intrinsic value of unexercised stock
options modified by the option exchange programs). No further stock compensation
expense will be recorded against these formerly restricted shares.
For the nine months ended December 27, 2002, the Company recorded a net stock
compensation recovery of $1.4, as compared to a stock compensation expense of
$10.1 for the nine months ended December 28, 2001. The compensation recovery in
the first nine months of Fiscal 2003 is a result of the decrease in market price
of the underlying common stock in Fiscal 2003. The reduced market price resulted
in a reduction of the intrinsic value being amortized over the term of the stock
option and a recovery of previously recorded stock compensation expense on
outstanding unvested 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 and nine months
ended December 27, 2002 to nil in each period from $2.2 and $4.4 in the third
quarter and first nine months of Fiscal 2002, respectively. 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.
OTHER INCOME (EXPENSE)
Other income (expense) was comprised of interest income, foreign exchange gains
or losses, and gains or losses from equity investments.
On October 3, 2002, the Company sold its investment in DALSA Semiconductor Inc.
("DALSA") for cash proceeds of $4.1 resulting in a gain of $0.7 being recorded
in Other Income during the third quarter and first nine months of Fiscal 2003.
Interest income was $0.7 for the three months ended December 27, 2002 as
compared to $1.0 in the same period of Fiscal 2002. The decrease compared to the
third quarter of Fiscal 2002 was mainly due to lower interest rates. During the
first nine months of Fiscal 2003, interest income was $2.6 as compared to $4.6
in the first nine months of Fiscal 2002. The decrease compared to the first nine
months of Fiscal 2002 was due to reduced average cash balances and lower
interest rates.
Foreign exchange losses in the third quarter of Fiscal 2003 amounted to $0.4 as
compared to losses of $1.1 for the same period in Fiscal 2002. During the nine
months ended December 27, 2002, foreign exchange gains amounted to $1.2 as
compared to gains of $4.5 for the nine months ended December 28, 2001. Gains
(losses) relating to external foreign exchange contracts are recognized in
income as they mature, or to the extent they are ineffective hedges. Gains
(losses) were also realized on short-term investments held in currencies other
than the functional currency of the parent company, and according to month-end
market rates.
19
There were no further equity losses recorded during the three and nine months
ended December 27, 2002, as the investment in Optenia, Inc. was written off to
nil in the fourth quarter of Fiscal 2002 following its bankruptcy. Equity losses
of $0.8 on the investment in Optenia, Inc. were recognized in the third quarter
of Fiscal 2002. During the first nine months of Fiscal 2002, equity losses on
the investment in Optenia, Inc. amounted to $2.2.
INTEREST EXPENSE
Interest expense was $0.3 for the three months ended December 27, 2002, compared
with $0.2 for the third quarter of Fiscal 2002. During the first nine months of
Fiscal 2003, interest expense of $0.7 was recognized, compared with $0.6 for the
first nine months of Fiscal 2002. The interest expense relates principally to
capital leases and the pension liability in Sweden.
INCOME TAXES
Income tax expense for the third quarter of Fiscal 2003 was $0.3, comprised of
domestic income and capital taxes, compared with an expense of $0.4 for the
corresponding period in Fiscal 2002.
Income tax expense for the first nine months of Fiscal 2003 was $1.2, comprised
of domestic income and capital taxes, compared with a recovery of $2.3 for the
corresponding period in Fiscal 2002. The income tax recovery in the first nine
months 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 against its deferred tax assets at
December 27, 2002 of $104.4 (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 foreign and domestic operations. Management has
determined that sufficient uncertainties exist regarding the realization of
certain of its deferred tax assets.
BACKLOG
As at
-----------------------------------------------------------------------
(millions of U.S. dollars) Dec. 27, 2002 Sept. 27, 2002 June 28, 2002 Mar. 29, 2002
------------- -------------- ------------- -------------
90 Day Backlog $ 36.0 $ 31.5 $ 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.
As a result of improved bookings during the quarter in both the communication
and medical segments, the backlog has increased as compared against recent
quarters. However, bookings continue to be affected by 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, after preferred share dividends, of $14.2, or
$0.11 per share, in the third quarter of Fiscal 2003. This compares to a net
loss, after preferred share dividends, of $18.8, or $0.15 per share, in the same
period in Fiscal 2002. For the nine months ended December 27, 2002, the Company
recorded a net loss, after preferred share dividends, of $35.9, or $0.28 per
share, as compared to $100.0, or $0.80 per share, in the first nine months of
Fiscal 2002.
The net losses for the three and nine months ended December 27, 2002, were
primarily a result of lower revenues across the communications and medical
segments. There was no stock compensation expense included in the quarterly
results, while the year-to-date net loss included a stock compensation recovery
of $1.4.
The comparative net loss for the nine months ended December 28, 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 stock compensation
expense of $10.1 and amortization of intangibles of $4.4.
LIQUIDITY AND CAPITAL RESOURCES
At December 27, 2002, cash, cash equivalents and short-term investment balances
totaled $133.1, down from $154.4 at March 29, 2002. Cash and cash equivalents at
December 27, 2002, included in the amount above, totaled $27.8 (March 29, 2002 -
$75.6).
20
Cash used in operations before working capital changes amounted to $26.0 during
the first nine months of Fiscal 2003, as compared to $37.8 used in the first
nine months 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 $6.6,
mainly as a result of reductions of inventories, accounts receivable, and
prepaid expenses totaling $22.9. Deferred credits increased by $4.0, which
included the receipt of a $3.3 net cash favorable settlement from a former
tenant for lease obligations at the Swedish plant at the end of the third
quarter. This was offset by the reduction of trade accounts payable and other
accrued liabilities in the amount of $20.3. Management expects to further draw
down inventory levels through the remainder of Fiscal 2003 by reducing cycle
times and managing inventories on a build-to-order basis. In comparison, the
Company's working capital decreased by $16.4 during the first nine months of
Fiscal 2002, mainly as a result of reductions in accounts receivable and
inventories totaling $24.6 and $11.2, respectively. This was offset by a $2.6
increase in prepaid expenses and other assets and reductions of trade accounts
payable and other accrued liabilities in the amount of $16.8.
Cash used in investing activities was $26.4 for the nine months ended December
27, 2002, primarily from purchases of short-term investments totaling $251.9,
offset by matured short-term investments of $227.0. Cash balances were reduced
by fixed asset purchases of $5.7 during the first nine months of the year,
offset by proceeds from disposal of fixed assets of $0.4. The fixed asset
additions were primarily related to design tools and continuing improvements to
information technology resources. Management expects capital spending to
decrease in the last quarter of Fiscal 2003. A net reduction in long-term
investments of $3.8 in the first nine months of Fiscal 2003 resulted from cash
proceeds of $4.2 received during the third quarter from the sale of the
Company's minority investment in DALSA Semiconductor Inc. on October 3, 2002,
offset by a small investment earlier in the year. Cash used in investing
activities was $52.5 for the nine months ended December 28, 2001, primarily as a
result of cash payments of $28.4 for fixed asset additions, offset by proceeds
from the repayment of a note receivable in the amount of $4.4. Additions to
fixed assets during the first nine months of Fiscal 2002 mainly consisted of
construction of the Company's new headquarters in Ottawa, Canada. The building
was subsequently sold in the fourth quarter of Fiscal 2002. Net purchases of
short-term investments in the amount of $28.0 also contributed to the net cash
outflow from investing activities during the first nine months of Fiscal 2002.
Cash used in financing activities during the first nine months of Fiscal 2003
was $4.1. The use of cash was primarily the result of repayment of $1.8 of
capital leases, the repurchase of $1.3 of the Company's redeemable preferred
shares, and the payment of $1.5 for dividends on the preferred shares, offset by
$0.5 of new common shares issued from exercised stock options. Cash used in
financing activities in the first nine months of Fiscal 2002 was $4.0. The use
of cash was primarily the result of the repayment of $5.1 of long-term debt and
capital lease liabilities, the repurchase of $0.7 of preferred shares, and the
payment of $1.5 for dividends on the preferred shares, offset by $3.3 of new
common shares issued from exercised stock options.
During Fiscal 2002, the Company took steps to wind up its defined benefit
pension plan in the United Kingdom and replaced it with a defined contribution
plan. The cash settlement of the pension plan is expected to cost approximately
$10.5. The increase in the cost from that reported in previous SEC filings was
due to subsequent unfavorable movements in the yield on U.K. government bonds.
On January 28, 2003, the Company paid $8.0 as partial consideration of the
pension obligation settlement to a large, AAA-rated insurance company in the
U.K. under a wind-up agreement. In addition, the Company will transfer its
pension plan assets of approximately $15.5 in February 2003. The Company expects
to make a final payment of approximately $2.5 later in Fiscal 2004 after the
final adjustments are calculated.
Cash is expected to further decline in the fourth quarter by approximately $7.9
on settlement of a foreign currency hedge contract on the Company's net
investment in a subsidiary in the United Kingdom. This transaction will result
in a corresponding adjustment to the translation account in other comprehensive
loss relating to the Company's net investment in that subsidiary.
During the first nine months of Fiscal 2003, the Company declared and paid
dividends of $1.5 on its redeemable preferred shares based on a $0.96 (Cdn$1.50)
per share dividend. In addition, the Company purchased 86,000 preferred shares
under its purchase obligation during this period. As at December 27, 2002,
84,800 repurchased preferred shares were cancelled by the transfer agent, with
an additional 6,200 shares to be cancelled in the fourth quarter of Fiscal 2003.
The cost to repurchase the preferred shares totaled $1.3 in the first nine
months of Fiscal 2003.
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 would 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
21
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 December 27, 2002.
In addition to cash, cash equivalents and short-term investment balances of
$133.1 as at December 27, 2002, the Company had a revolving global credit
facility of approximately $15.9 (Cdn$25.0), of which $6.0 in letters of credit
were outstanding. Accordingly, the Company had unused and available demand bank
lines of credit totaling $9.9 as at December 27, 2002. In January 2003, cash and
cash equivalents totaling $6.1 were hypothecated under the credit facility to
cover outstanding letters of credit. 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.
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 December 27, 2002, the Company had investments in Mitel Networks
Corporation, a Canadian corporation that files annual and other reports with the
United States Securities and Exchange Commission under the Securities Exchange
Act of 1934, with a carrying value of $11.2 (March 29, 2002 - $14.1). Management
periodically reviews the Company's investment to determine if there has been
other than a temporary decline in the market value of this investment below the
carrying value. When management performs future assessments of this investment
in the coming quarters, a decline in the value of Mitel Networks Corporation may
require the Company to recognize impairment on the remaining value of its
investment 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.
In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"), "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others". FIN 45 requires that a guarantor is
required to recognize, at the inception of a guarantee, a liability for the fair
value of the obligation undertaken in issuing the guarantee. FIN 45 also
requires additional disclosure by a guarantor in its interim and annual
financial statements about its obligations under certain guarantees. The initial
recognition and measurement provisions of FIN 45 are applicable for guarantees
issued or modified after December 31, 2002. The disclosure requirements of FIN
45 are effective for financial statements of interim or annual periods ending
after December 15, 2002. The adoption of this interpretation is not anticipated
to have a material effect on the Company's financial position, results of
operations, or cash flows.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Market Risk. Market risk represents the risk of loss that may impact Zarlink's
financial statements due to adverse changes
22
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.
Foreign Exchange Risk. 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 U.S. dollar and the U.K. pound sterling. At December 27, 2002,
there were unrealized losses of $6.4 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 December 27, 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.
Interest Rate Risk. 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 December 27, 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.
ITEM 4. DISCLOSURE CONTROLS AND PROCEDURES
As of January 24, 2003, an evaluation was performed under the supervision and
with the participation of the management of the Company, including its Chief
Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness
of the design and operation of the Company's disclosure controls and procedures.
Based on that evaluation, the Company's management, including the CEO and CFO,
concluded that the Company's disclosure controls and procedures were effective
as of December 27, 2002. There have been no significant changes in the Company's
internal controls or in other factors that could significantly affect internal
controls subsequent to December 27, 2002.
23
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
As part of the Company's continuing efforts to optimize good corporate
governance practices, executive directors Jean-Jacques Carrier and Donald
McIntyre resigned from the Company's Board of Directors, effective November 6,
2002. Messrs. Carrier and McIntyre continue in their daily management roles
relating to Finance and Legal / Human Resources, respectively. As a result of
these resignations, the Company's Board was reduced by two and is now comprised
of eight individuals. With this change, Patrick Brockett, President and Chief
Executive Officer of the Company, is the only member of the Board of Directors
of Zarlink who is also an employee.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
99.1 Selected Consolidated Financial Statements in U.S. Dollars and in
accordance with Canadian Generally Accepted Accounting Principles
99.2 Management's Discussion and Analysis of Financial Condition and Results of
Operations - Canadian Supplement
b) Reports on Form 8-K
Date of Filing Description
- -------------- -------------------------------------------------------------
November 8, 2002 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant To Section 906 of The Sarbanes-Oxley Act of 2002,
President and Chief Executive Officer
Certification Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant To Section 906 of The Sarbanes-Oxley Act of 2002,
Senior Vice President of Finance and Chief Financial Officer
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant, Zarlink Semiconductor Inc., has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
Zarlink Semiconductor Inc.
(Registrant)
Name Title Date
- ---------------------------- -------------------------------- ----------------
/s/ JEAN-JACQUES CARRIER
- ---------------------------
Jean-Jacques Carrier Senior Vice President of Finance January 31, 2003
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
24
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 (a) OF THE SARBANES-OXLEY ACT OF 2002
I, Patrick J. Brockett, President and Chief Executive Officer of Zarlink
Semiconductor Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Zarlink
Semiconductor Inc. (the "registrant");
2. Based on my knowledge, this quarterly report on Form 10-Q does not
contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: January 31, 2003
--------------------------
/s/ PATRICK J. BROCKETT
----------------------------------------
Patrick J. Brockett
President and Chief Executive Officer
25
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 (a) OF THE SARBANES-OXLEY ACT OF 2002
I, Jean-Jacques Carrier, Senior Vice-President of Finance and Chief Financial
Officer of Zarlink Semiconductor Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Zarlink
Semiconductor Inc. (the "registrant");
2. Based on my knowledge, this quarterly report on Form 10-Q does not
contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: January 31, 2003
-------------------------
/s/ JEAN-JACQUES CARRIER
----------------------------------------
Jean-Jacques Carrier
Senior Vice-President of Finance and
Chief Financial Officer
26
EXHIBIT INDEX
Exhibit
Number Description Page
- ------- ---------------------------------------------------------- ----
99.1 Selected Consolidated Financial Statements in U.S. 28
Dollars and in accordance with Canadian Generally
Accepted Accounting Principles
99.2 Management's Discussion and Analysis of Financial 39
Condition and Results of Operations - Canadian Supplement
27