Clinical Laserthermia Systems Annual Report 1998

Plain-text annual report

1998 ANNUAL REPORT CELESTICA AT A GLANCE > PARTNER OF CHOICE IN ELECTRONICS MANUFACTURING SERVICES T R O P E R L A U N N A 8 9 9 1 A C I T S E L E C PAGE 1 Corporate Profile PAGE 33 Management’s Responsibility PAGE 55 Share Information PAGE 2 Letter from the President and CEO PAGE 8 Our Growth Strategy PAGE 22 Quarterly Financial Information PAGE 24 Management’s Discussion and Analysis of Financial Condition and Results of Operations PAGE 34 PAGE 37 for Financial Statements, Auditors’ Report Consolidated Financial Statements Notes to Consolidated Financial Statements PAGE 56 Directors PAGE 57 Officers PAGE 58 Corporate Information PAGE 59 Celestica Global Locations 1998 ANNUAL REPORT CELESTICA AT A GLANCE > PARTNER OF CHOICE IN ELECTRONICS MANUFACTURING SERVICES T R O P E R L A U N N A 8 9 9 1 A C I T S E L E C PAGE 1 Corporate Profile PAGE 33 Management’s Responsibility PAGE 55 Share Information PAGE 2 Letter from the President and CEO PAGE 8 Our Growth Strategy PAGE 22 Quarterly Financial Information PAGE 24 Management’s Discussion and Analysis of Financial Condition and Results of Operations PAGE 34 PAGE 37 for Financial Statements, Auditors’ Report Consolidated Financial Statements Notes to Consolidated Financial Statements PAGE 56 Directors PAGE 57 Officers PAGE 58 Corporate Information PAGE 59 Celestica Global Locations C o r p o r a t e P r o f i l e Celestica is a global electronics manufacturing services (EMS) company with recognized leadership in technology, quality and supply chain management. The Company provides manufacturing technology and service solutions to many of the leading original equipment manufacturers (OEMs) in the electronics industry. Celestica was acquired by an investor group led by Onex Corporation and Celestica management from IBM in October 1996. Since that time, Celestica has undergone a dramatic transformation. It has signifi- cantly expanded its global presence, enhanced its customer relationships and broadened its manufac- turing and service capabilities through rapid organic growth and strategic acquisitions. In 1998, Celestica had $3.2 billion in annual revenue, operated 24 facilities throughout North America, Europe and Asia, and was the third largest provider in the high-growth, global EMS industry. L A U N N A 8 9 9 1 T R O P E R 2 A C I T S E L E C Eugene V. Polistuk, President and Chief Executive Officer T O O U R S H A R E H O L D E R S , C U S T O M E R S , S U P P L I E R S A N D E M P L O Y E E S Celestica’s first year as a public company was remarkable for its tremendous growth and profound change. We delivered solid financial results, made eight acquisitions and completed a very successful cross-border initial public offering – all things that we set out to do and did well. This year’s achievements, however, are only the beginning of what is to come as we drive towards our goal of $10 billion in revenue by 2001. Financial Highlights. Revenue increased 62 percent in 1998 to $3.2 billion, driven by both organic growth and strategic acquisitions. Gross profit totalled $230.5 million compared to $139.7 million in 1997, a 65 percent increase. Celestica’s adjusted net earnings, which excludes the tax-effected amortization of intangible assets and other one-time charges, increased by 94 percent. On a fully diluted basis, adjusted net earnings increased to $0.84 per share from $0.65 per share in the previous year. The net loss for 1998 was $48.5 million or $0.94 per share. A D J U S T E D N E T E A R N I N G S (in millions) $45. 3 $2 3. 3 We strengthened Celestica’s balance sheet considerably, reducing long- term debt from $518.9 million in 1997 to $135.8 million at the end of 1998. Our net debt to capitalization for 1998 was 11 percent versus 53 percent the previous year. We also reduced our cash cycle to 24 days in 1998 from 19 9 7 1 9 9 8 32 days in 1997 – generating approximately $75 million in cash. L A U N N A 8 9 9 1 T R O P E R 3 A C I T S E L E C N E T D E B T T O C A P I TA L I Z AT I O N (percentage) 53% 1998 Milestones. Several operating milestones of the last year stand out in our minds. We made eight acquisitions – for a total of 12 since the begin- ning of 1997 – that gave Celestica capabilities in key geographies such as Ireland, Mexico, Northern California and Asia. These acquisitions not only expanded our global reach but also enhanced the Company’s service offer- ings and created or strengthened relationships with customers. The year ended with the strategic merger with International Manufacturing Services (IMS) which provided the Company with a strong foothold in Asia and firmly positions Celestica as a global company. IMS has also provided us with complementary markets, new customers and high-capability skills in a low-cost manufacturing environment. Our initial public offering (IPO) of 23.7 million Subordinate Voting Shares completed in July was a major milestone during 1998. The IPO was the largest in the history of the EMS industry, and the $389 million we raised was used to prepay debt and fund general corporate initiatives related to the continuing growth of Celestica. We launched a Customer Gateway Centre Strategy that included the acquisitions of Analytic Design and Accu-Tronics. This strategy involves having presence near clusters of leading OEM customers to provide them with design, prototype and new product introduction services. Celestica’s engineers at the Gateway Centres work with our customers’ engineers in the front-end of a new product before transferring the product to high- volume production in one of our many global facilities. We also expanded 1 1 % Celestica’s manufacturing facilities to serve customers better. We set up a facility in Nashville, Tennessee, moved to a new facility in Foothill Ranch, 1 9 9 7 1 9 9 8 L A U N N A 8 9 9 1 T R O P E R 4 A C I T S E L E C E M S I N D U S T RY R E V E N U E (in billions) $178 $9 0 California and began construction on a new plant in Fort Collins, Colorado that will double our existing space. During 1999, work will be finished on Celestica’s Monterrey, Mexico campus that will expand the footprint to approximately 500,000 square feet. Our Strategy for Growth. The EMS industry has grown from an aggregate revenue of $10 billion in 1988 to more than $90 billion today, a compound annual growth rate of approximately 25 percent. Industry revenue is projected to reach $178 billion by the year 2001 through a powerful combination of growth in the electronics industry, increased outsourcing of electronics manufacturing services and OEM divesti- tures of vertically integrated manufacturing facilities. OEMs are motivated to move away from traditional vertical industrial models for many different reasons. Outsourcing allows for a reduction in costs and capital investment. More importantly, it allows OEMs to focus on their core competencies while enabling EMS providers to focus on their strengths – technology and supply chain management to help shorten time to market. Today, OEMs are seeking strategic relationships with EMS providers who can act as virtual, global partners. These industry dynamics provide a tremendous opportunity for Celestica. The Company is currently the third largest EMS provider in a highly fragmented but high-growth industry. Our strengths and strategies position us very well to exploit the dramatic growth in EMS by playing a dominant role in the industry’s inevitable consolidation. At its core, Celestica’s strategy for continuing growth is to partner 19 98 2001 with leading OEMs. We seek to enhance our leadership position in the L A U N N A 8 9 9 1 T R O P E R 5 A C I T S E L E C areas that are most fundamentally important to meeting and anticipating the needs of these customers. Specifically, this requires that we leverage Celestica’s industry leadership in technology, quality and supply chain management in order to deliver competitive advantage to our customers. Celestica’s modern plants, leading technological capabilities, sophisti- cated IT network and depth of engineering skills make this possible. The best complement to superior services is to provide them in a timely and cost-effective manner. Our leadership in global supply chain management allows Celestica to ramp up operations rapidly to meet customer needs, balance product demand fluctuations and distribute products worldwide to end customers. In fact, we regularly work closely with suppliers to influence component design and packaging for the benefit of OEM customers. Celestica’s achievements in all these areas have been recognized with many customer and industry awards. Another key component of our strategy is to broaden our service offer- ings. In addition to our production expertise in higher-end and more R E V E N U E (in billions) complex products, Celestica can now manufacture a broader spectrum of products to support the full product lines of leading OEMs, including $ 3 . 2 lower-cost products. We have also acquired additional capabilities in pro- totyping and PCA design, embedded system design and full system assembly and repair services. Celestica will continue to broaden all its $2.0 service offerings in order to keep bringing more competitive value to its customers. Additionally, we will expand our network of Customer Gateway Centres. At the end of 1998, we had six Gateway Centres on-line and plan to double that number during the next two years. 1 9 9 7 1 9 9 8 L A U N N A 8 9 9 1 T R O P E R 6 A C I T S E L E C Our commitment to our customers also involves growing along with them. During the last two years, Celestica has expanded from two facilities in North America to 24 facilities located in the United States, Canada, Mexico, the United Kingdom, Ireland, China, Hong Kong and Thailand. Celestica will continue to build its support for global customers in major international markets. During the rapid expansion of the past two years, we have sought to extend Celestica’s leadership to internal practices. We employ a compre- hensive integration strategy that includes establishing a common culture at all locations with broad-based workforce participation. As well, at all our operations we present a single marketing ’face’ to customers, deploy common information technology platforms, leverage global procurement and transfer best practices. We believe that our highly skilled workforce and unique culture provide us with a distinct competitive advantage. The Company’s work- G R O S S P R O F I T (in millions) force is among the most sophisticated and experienced in the EMS industry, with more than 1,100 engineers and a very seasoned manage- $230.5 ment team. All of our employees work in a value-based and team-oriented culture that is driven by the desire to exceed customer expectations continually. Most employees have a portion of their compensation tied $1 39 .7 directly to the achievement of financial and customer satisfaction targets, and many employees are also shareholders in the Company. Looking forward. We believe that Celestica’s leadership in all facets of its business – technology, quality, supply chain management and human 19 97 1998 resource practices – has positioned the Company for significant growth. We expect that the pace of acquisitions will be continued in 1999, with a focus on expansion into Central Europe and Brazil. We will establish new Customer Gateway Centres in proximity to key OEMs and pursue opportunities to acquire strategic OEM assets. In every case, a potential acquisition must not only complement the Company’s business but also deliver accretive earnings. We will drive Celestica’s organic growth by continually improving our selling proposition to customers. As we grow our revenue, we are also very intent on increasing our return on invested capital and on expanding our operating margins by managing our costs aggressively, improving our worldwide capacity utilization, and leveraging our strengths in supply chain management. All of these initiatives will help us to expand the Company’s margins and propel Celestica to new levels of profitability on the increased revenue we anticipate. Nineteen ninety-eight was a remarkable year for Celestica; 1999 promises to be another year of exciting growth and expansion. We are confident that we have the right people, the right recipe and the right infrastructure in place to make significant progress towards our strategic goal of $10 billion in revenue by 2001. I would like to thank all those stakeholders who made 1998 a success and look forward to sharing future successes with you. Eugene V. Polistuk, /s/ President and Chief Executive Officer T L A U N N A 8 9 9 1 R O P E R 7 A C I T S E L E C M A R K E T C A P I TA L I Z AT I O N (in billions) $1 .8 $ 1 . 2 I P O YEAR-END 19 98 O u r G r o w t h S t r a t e g y C e l e s t i c a ’s f o c u s e d s t r a t e g y f o r p r o f i t a b l e g r o w t h w i l l m a k e t h e C o m p a n y t h e e l e c t r o n i c s m a n u f a c - t u r i n g s e r v i c e s p a r t n e r o f c h o i c e f o r t h e w o r l d ’s p r e - e m i n e n t O E M s . We w i l l d e v e l o p s t r a t e g i c r e l a t i o n - ships with these leading customers. We w i l l l e v e r a g e o u r l e a d e r s h i p i n technology, quality and supply chain m a n a g e m e n t . We w i l l c o n t i n u e t o broaden our service offerings. Our global expansion will take us to new markets and we will selectively make acquisitions that are accretive to our business. We will increase our operating margins while we aggres- s i v e l y g r o w o u r r e v e n u e . A l l t h e s e e l e m e n t s w i l l c a r r y C e l e s t i c a t o i t s g o a l o f $ 1 0 b i l l i o n i n r e v e n u e b y 2 0 0 1 a n d d e l i v e r t h e g r e a t e s t v a l u e for our customers, shareholders and employees. L A U N N A 8 9 9 1 T R O P E R 10 A C I T S E L E C W O R K I N G W I T H L E A D E R S Celestica targets customer relationships that offer profitable growth as well as diversification by customer type and end market. We provide our services to a broad variety of leading OEMs’ end products including: servers, workstations and personal computers, multimedia peripheral devices, photocopiers and printers, mass storage, wireless infrastructure and handsets, optoelectronics, routers, hubs and switches, and medical equipment. Celestica’s customer portfolio, has broadened and diversified continu- ously since our divestiture from IBM in 1996. In that year, our top five customers represented approximately 91 percent of Celestica’s total revenue. IBM alone accounted for 77 percent. Today, we serve more than 50 of the leading electronics OEMs. Our top five customers form 72 percent of our total, with IBM representing 11 percent and Hewlett-Packard and Sun Microsystems each representing more than 10 percent of our total revenue. As Celestica strives towards its target of $10 billion in revenue, we will continue to grow and diversify the customers and end markets we serve. A near-term goal, for example, is to expand Celestica’s partici- pation in the communications industry. This is a marketplace in which outsourcing requirements are growing rapidly and customer require- ments are directly aligned with the Company’s capabilities and offerings. Over the longer term, Celestica’s strong OEM heritage and extensive capabilities will help us strengthen our strategic partnerships with leading OEM customers. As our OEM partners extend their reach to markets globally, Celestica will also be there providing them with competitive advantage. L A U N N A 8 9 9 1 T R O P E R 12 A C I T S E L E C L E V E R A G I N G I N T E L L E C T U A L C A P I TA L We are a knowledge-based company committed to maintaining our leadership position in the key areas of technology, quality, supply chain management and ultimately our human resources. Our skilled and experienced team which includes 1,100 engineers, encompassing 280 designers and 200 test engineers, together with Celestica’s modern plants and leading technological capabilities, enable the Company to produce highly complex and sophisticated products. The Company is recognized worldwide for its leading position in technology. Our commitment to quality in all aspects of our business has been an integral part of Celestica’s culture. The Company’s quality management program focuses on continual process improvement and achieving the highest levels of customer satisfaction. Celestica’s optimization of the global supply chain includes managing a sophisticated supplier base, through component selection and cost- effective procurement, to inventory management, quick manufacturing cycle time and rapid distribution. The Company can rapidly ramp up oper- ations to meet customer needs, flexibly shift capacity in response to product demand fluctuations and effectively distribute products directly to end customers. We deploy numerous progressive techniques and a sophisticated information technology network to create the most flexible, efficient and effective supply chain possible. Celestica’s leadership has been recognized through numerous industry and customer awards as well as through high customer satisfaction survey results. More importantly, our OEM partners have confirmed Celestica’s excellence by expanding their relationships with us. L A U N N A 8 9 9 1 T R O P E R 14 A C I T S E L E C E X T E N D I N G O U R C A PA B I L I T I E S Celestica continuously expands its service offerings and capabilities globally in anticipation of customer requirements. The Company provides its customers with one of the most expansive service offerings in the industry. Design – Celestica’s extensive design capabilities include the development of radio frequency products, full systems, embedded computer products, asics and PCAs. Prototyping – At Celestica’s Customer Gateway Centres, OEM partners work collaboratively with our engineers to pass prod- ucts seamlessly through the prototyping stage in preparation for larger scale manufacturing. Product Assembly and Test – We have made significant investments in new process and test technologies which help customers to improve product quality and per formance, and reduce costs. Full System Assembly – Celestica provides an array of services that include s sophi st ic at e d l ogi st ic s and pr oc urem ent , build-to-order assembly and functional testing. Product Assurance – Our team performs product life testing and full circuit characterization to ensure designs meet or exceed specifications. Failure Analysis – By testing under various environmental extremes such as temperature, humidity and rate of use, potential failures are discovered before prod- ucts are shipped. Global Distribution – Our sophisticated, integrated distribution network allows Celestica to perform global order fulfill- ment, with shipment directly to OEMs’ own customers. After-Sales Support – A wide range of after-sales support services, including field failure analysis, product upgrades, repair and engineering change man- agement are available to our customers. L A U N N A 8 9 9 1 T R O P E R 16 A C I T S E L E C F O C U S E D G L O B A L E X PA N S I O N One of Celestica’s key strategic objectives is to provide customers w i t h c o s t - e f f e c t i v e a n d t i m e l y d e l i v e r y o f q u a l i t y p r o d u c t s a n d s e r - vices in major global markets. During the last two years, Celestica has expanded from two facilities in North America to 24 in the United States, Canada, Mexico, the United Kingdom, Ireland, China, Hong Kong and Thailand. Celestica’s global network of facilities enables us to simplify and shorten an OEM’s supply chain; this can significantly reduce the time it takes to simultaneously bring products to key markets. In addition, our facilities in regions such as Mexico and Asia complement our offerings with lower-cost manufacturing solutions that may be appropriate for price-sensitive applications. Although we are a global company today, with coverage in most of the major areas of the world, we will continue to target other strategic areas of the globe. Of particular interest to the Company are selected regions of Central Europe that will provide us with further low-cost manufacturing. Celestica will also target Brazil, which offers new opportunities in the communications market. Additionally, there will be selected expansion in Asia and Europe driven by customer demand. Celestica will continue to add Customer Gateway Centres in targeted locations around the world near clusters of key customers. This will enable closer working ties between the Company and OEMs in the criti- cal stages of a new product’s development. When the product is ready to be launched, Celestica’s Gateway Centres will transfer the produc- tion to one of our larger global manufacturing facilities. L A U N N A 8 9 9 1 T R O P E R 18 A C I T S E L E C A C Q U I R I N G O P P O R T U N I T I E S Celestica has participated aggressively in industry consolidation which has been driven primarily by the continuing trend among leading OEMs to outsource large volume programs to leading EMS providers. The Company has completed 12 acquisitions since the beginning of 1997 and will continue to seek other strategic opportunities. Our acquisitions to date have included EMS providers as well as assets of our OEM partners. Our OEM partners have preferred to provide oppor- tunities to companies such as Celestica because we possess the capital, management expertise, technology and advanced systems required to manage the assets effectively. We continue to manufacture existing OEM product lines in the acquired facilities to enable our partners to seam- lessly support their customers and markets. Our success in managing acquired assets has resulted in ongoing and mutually beneficial relation- ships with all the OEMs who originally owned the assets. To enhance the value of our acquisitions, we have implemented a compre- hensive integration strategy and sought to use any excess capacity. At each of our locations, we have established a common culture with broad-based workforce participation. We present a single marketing face to customers worldwide, deploy common information technology platforms, leverage global procurement and transfer best practices among operations worldwide. Celestica will continue its pace of acquisitions in 1999 in order to expand its global presence, further develop strategic relationships with customers, broaden service offerings, expand capacity and diversify into new market sectors. New opportunities will be evaluated on the basis of these criteria along with the ability to increase shareholder value. L A U N N A 8 9 9 1 T R O P E R 20 A C I T S E L E C E X PA N D I N G M A R G I N S Celestica is not only committed to grow its earnings through revenue growth but also through operating margin expansion. Margin expansion together with Celestica’s excellent performance in asset turnover will ensure strong return on invested capital for the Company. Celestica has implemented a company-wide program to increase margins while maxi- mizing asset turnover. The initiatives in this program have significantly expanded margins at the Company’s Canadian and European facilities and are expected to achieve similar success at Celestica’s other facilities. Under the program, Celestica takes advantage of the significant oper- ating leverage within its network of facilities by increasing capacity utilization at all plants, particularly those recently acquired. To comple- ment this initiative, Celestica leverages its well-developed supply chain management expertise which includes its corporate procurement scale and inventory management capabilities. Manufacturing efficiencies like- wise result from optimizing the allocation of production on a global basis, based on cost and technological complexities. Additionally, the Company deploys a high-performance cost reduction and productivity initiative which has been very successful to date. Our employees are driving much of the change because our culture supports participation. Many of our employees are shareholders of the Company, and a portion of most employees’ compensation is tied to profit improvement – one of the strongest incentives for change and margin enhancement. Celestica’s work environment is team and results oriented, focused on continually exceeding customer expectations and increasing shareholder value. L A U N N A 8 9 9 1 T R O P E R 22 A C I T S E L E C We have accomplished a great deal in the past two years, positioning Celestica as a global EMS provider. Strategic investments have been made to create the platform necessary for industry leadership. Our financial results are commensurate with a company in transformation. Celestica’s infrastructure is now largely in place and our strategies for financial leadership are aggressively being deployed to leverage these investments and exploit market opportunities going forward. Anthony P. Puppi, Chief Financial Officer REVE NUE GROWTH (in millions) $ 9 2 5 $ 8 1 2 $ 7 7 4 $739 $683 $ 4 8 4 $431 $409 1 Q 9 7 2 Q 9 7 3 Q 9 7 4 Q 9 7 1 Q 9 8 2 Q 9 8 3 Q 9 8 4 Q 9 8 L A U N N A 8 9 9 1 T R O P E R 23 A C I T S E L E C UNAUDITED QUARTERLY FINANCIAL INFORMATION 1998 (in millions, except per share amounts) First Quarter Second Quarter Third Quarter Fourth Quarter Total Year Revenue EBIAT* % Net earnings (loss) Adjusted net earnings** Net invested capital Weighted average # of shares outstanding (M) – basic – fully diluted Basic earnings (loss) per share Adjusted EPS – fully diluted ROIC*** 1997 (in millions, except per share amounts) Revenue EBIAT* % Net earnings (loss) Adjusted net earnings** Net invested capital Weighted average # of shares outstanding (M) – basic – fully diluted Basic earnings (loss) per share Adjusted EPS – fully diluted $ $ $ $ $ $ $ $ $ $ $ $ $ $ 738.7 21.3 2.9% (31.8) 5.8 461.8 36.6 39.8 (0.87) 0.15 $ $ $ $ $ $ $ 773.6 21.2 2.7% (19.2) 4.6 495.0 37.1 40.7 (0.52) 0.12 $ $ $ $ $ $ $ 811.6 24.9 3.1% 6.3 16.2 505.8 64.8 68.8 0.10 0.24 $ $ $ $ $ $ $ 925.3 32.6 3.5% (3.8) 18.7 514.1 67.0 71.1 (0.06) 0.27 $ $ $ $ $ $ $ 3,249.2 100.0 3.1% (48.5) 45.3 491.4 51.5 55.2 (0.94) 0.84 18.4% 17.1% 19.7% 25.4% 20.4% First Quarter Second Quarter Third Quarter Fourth Quarter Total Year 483.6 11.6 2.4% (0.5) 2.6 301.3 31.0 31.1 (0.02) 0.09 $ $ $ $ $ $ $ 430.7 11.9 2.8% (9.8) 2.2 329.2 35.8 38.4 (0.27) 0.06 $ $ $ $ $ $ $ 409.1 17.6 4.3% 1.4 6.2 341.2 35.9 38.5 0.04 0.16 $ $ $ $ $ $ $ 683.2 30.3 4.4% 2.0 12.3 391.3 36.3 39.0 0.05 0.32 $ $ $ $ $ $ $ 2,006.6 71.4 3.6% (6.9) 23.3 344.8 34.8 36.8 (0.20) 0.65 ROIC*** 15.4% 14.5% 20.6% 31.0% 20.7% Earnings before interest, amortization of intangible assets and income taxes adjusted for other one-time charges * ** Net earnings (loss) adjusted for amortization of intangible assets and other one-time charges, net of related income taxes *** ROIC equivalent to EBIAT/Average net invested capital L A U N N A 8 9 9 1 T R O P E R 24 A C I T S E L E C MANAGEMENT’S DISCUSSION AND ANALYSIS of financial condition and results of operations The following discussion of the ﬁnancial condition and results of operations of the Company should be read in conjunction with the Consolidated Financial Statements. During 1998, Celestica operated 19 facilities across North America and Europe. The acquisition of IMS in December 1998 provided the Company with an immediate and major presence in Asia, increasing the number of facilities to 24. GENERAL Celestica is a leading provider of electronics manufacturing services to OEMs worldwide and is the third largest EMS provider in the world with 1998 revenue of $3.2 billion. Celestica provides a wide variety of products and services to its customers, including the high-volume manufacture of complex PCAs and the full system assembly of ﬁnal products. In addition, the Company is a leading provider of design, repair and engineering services, supply chain management and power products. Historically, Celestica’s business consisted of three segments – EMS, memory and power. Over the last two years, Celestica has refined its strategy to focus on its EMS busi- ness. Memory and power represented less than 10% of Celestica’s total revenue in 1998. ACQUISITIONS A significant portion of Celestica’s growth has been gener- ated by the strengthening of its customer relationships and increases in the breadth of its service offerings through facil- ity acquisitions completed in 1997 and 1998. In February 1998, Celestica acquired a manufacturing facility in Ireland from Madge Networks, a manufacturer of token ring communication products, asynchronous transfer mode products and related derivative products, for a total purchase price of $23.1 million. The acquisition provided Celestica with a facility in a key geographic area and strengthened its rela- tionship with Madge Networks. In June 1998, Celestica acquired certain assets of Silicon Graphics’ (“SGI”) manufacturing facility in Chippewa Falls, Wisconsin for a total purchase price of $14.9 million. This acquisition strengthened the Company’s relationship with a strategic customer and provided Celestica with additional advanced manufacturing capabilities. In December 1998, Celestica acquired IMS through a merger of IMS with Celestica Asia Inc., a subsidiary of the Company (“Celestica Asia”). The Company issued 7.6 million subordi- nate voting shares with a value of $124.0 million as consideration for the acquisition, and reserved an additional 0.8 million subordinate voting shares with a value of $9.5 mil- lion which are issuable upon the exercise of certain IMS options. IMS was an EMS provider with facilities in China, Thailand, Hong Kong, the United States and Mexico and had approximately 3,600 employees. In addition to providing an important Asian presence, this acquisition expanded Celestica’s customer base, diversified its end-product mar- kets and broadened its advanced manufacturing capabilities/ low-cost offerings. Celestica’s acquisitions of Hewlett-Packard’s PCA-layout design operation in Fort Collins, Colorado in February 1998 and its embedded systems design operation in Chelmsford, Massachusetts in March 1998 have broadened Celestica’s In July 1998, Celestica completed its initial public offering and issued 23.7 million shares for net proceeds of $389 million. The net proceeds were used to prepay a signiﬁcant portion of Celestica’s debt, providing the Company with additional ﬂexi- bility to support its growth strategy and decreasing its total net debt to capitalization ratio from 53% to 11% year over year. Celestica prepares its financial statements in accordance with accounting principles which are generally accepted in Canada and which, in all material respects, conform to accounting principles generally accepted in the United States except as disclosed in Note 24 to the Consolidated Financial Statements. service offerings and strengthened its relationships with Hewlett-Packard. Celestica also acquired “Customer Gateway Centres” in Santa Clara, California and Raleigh, North Carolina through its 1998 acquisitions of Analytic Design and Accu- Tronics. These Customer Gateway Centres are design and prototype centres that are conveniently located relative to the Company’s customers and serve as an entry to Celestica’s full suite of services and large-scale production facilities. In April 1998, the Company acquired a manufacturing facility in Monterrey, Mexico from Lucent Technologies which provided it with a presence in a low-cost geography. The aggregate purchase price paid by Celestica for these acquisitions was $17.9 million. Celestica’s 12 acquisitions completed in 1997 and 1998 had purchase prices ranging from $2.5 million to $133.7 million, totalling $471.3 million. Celestica continues to examine numerous acquisition opportunities in order to: • expand into new geographies to enhance its global presence; • create strategic relationships with new customers and diversify end-product programs with existing customers; • expand its capacity in selected geographic regions to take advantage of existing infrastructure or low-cost manufacturing; • diversify its business by entering new market sectors and increasing penetration in the communications and other non- computer market sectors; and • broaden service offerings. Celestica’s near-term targets for expansion are Central Europe and Brazil, and the Company has identified several acquisition candidates in these regions. Celestica also has identified several possible facility acquisitions that would enhance its operations, increase its penetration in non-com- puter sectors and establish strategic relationships with new customers. Consistent with its past practices, Celestica is engaged in ongoing discussions with respect to several pos- sible acquisitions of widely varying sizes, from small facility acquisitions to signiﬁcant multiple facility acquisitions. There can be no assurance that any of these discussions will result L A U N N A 8 9 9 1 T R O P E R 25 A C I T S E L E C MANAGEMENT’S DISCUSSION AND ANALYSIS of financial condition and results of operations in a deﬁnitive purchase agreement and, if they do, what the terms or timing of any agreement would be. Celestica expects to continue the current discussions and actively pur- sue other opportunities. Celestica expects each acquisition to be accretive to earnings and cash ﬂow after a transition period for the acquisition, gen- erally one year. The initial margins from a newly acquired facility historically have been lower than Celestica’s overall margins for several reasons: frequently, the acquired facility is underutilized; some business at the new facility may be lower margin business (such as full system assembly); some newly acquired facilities may be less efficient initially; and Celestica may accept lower initial margins on large-scale projects with significant new customers. The risks of lower margins fre- quently are mitigated during transition periods by supply arrangements agreed to in connection with a particular acqui- sition. These arrangements may include limited overhead contribution commitments, take or pay arrangements or lim- ited revenue or product volume guarantees to support the ﬁnancial viability of the facility until it reaches self-sufficiency. Celestica expects that the results for the acquired facilities will improve over the transition period as Celestica: (i) increases capacity utilization and reduces cost; (ii) completes integration activities; (iii) implements Celestica’s processes and disci- plines to reduce costs and obtain the cost benefits of its procurement leverage; and (iv) introduces new business from the original customer and others. RESULTS OF OPERATIONS Celestica’s revenue and margins from period to period are affected by the volume of turnkey versus consignment sales and the mix of business between full system assembly and printed circuit assemblies. With turnkey manufacturing, where Celestica purchases the materials and components, revenue is higher and margins are generally lower. With con- signment sales, where the customer purchases all or a portion of the materials and components necessary for pro- duction, revenue is lower, since Celestica records only the value-added portion as revenue, and margins are generally higher. The majority of Celestica’s revenue is generated from turnkey sales. Moreover, full system assembly business typi- cally generates lower margins than printed circuit assemblies because of the high material content in system assembly as a percentage of revenue and the lower value-added content. Celestica’s contracts with its key customers generally provide a framework for its overall relationship with the customer. Actual production volumes are based on purchase orders for delivery of products. These orders typically do not commit to firm production schedules for more than 30 to 90 days in advance. Celestica minimizes risk relative to its inventory by usually ordering materials and components only to the extent necessary to satisfy existing customer orders. Celestica is largely protected from the risk of inventory cost ﬂuctuations as these costs are generally passed through to customers. Celestica’s annual and quarterly results are primarily affected by the level and timing of customer orders, fluctuations in material costs and the mix of materials and labour and manu- facturing overhead costs. The level and timing of a customer’s orders will vary due to the customer’s attempt to balance its inventory, changes in its manufacturing strategy and variation in demand for its products. Celestica’s annual and quarterly operating results are also affected by capacity utilization and other factors, including price competition, experience in manufacturing a particular product, the degree of automation used in the assembly process, the efficiencies achieved by Celestica in managing inventories and capital assets, the timing of expenditures in anticipation of increased sales, the timing of acquisitions and related inte- gration costs, customer product delivery requirements and shortages of components or labour. Historically, Celestica has experienced some seasonal variation in revenue, with rev- enue typically being highest in the fourth quarter and lowest in the ﬁrst quarter. The comparison of results of operations from period to period is significantly affected by the timing of Celestica’s acquisi- tions. There is no certainty that the historical pace of Celestica’s acquisitions will continue in the future. L A U N N A 8 9 9 1 T R O P E R 26 A C I T S E L E C MANAGEMENT’S DISCUSSION AND ANALYSIS of financial condition and results of operations The table below sets forth certain operating data expressed as a percentage of revenue for the periods indicated: Predecessor Company Celestica Inc. Period from January 1, 1996 to Period from September 27, 1996 to October 22, December 31, Year ended December 31, Revenue Cost of sales Gross proﬁt Selling, general and administrative expenses Amortization of intangible assets Integration costs related to acquisitions Other charges Operating income (loss) Interest expense, net Earnings (loss) before income taxes Income taxes (recovery) 1996 100.0% 95.1 4.9 1.7 – – – 3.2 0.5 2.7 1.2 1996 1996 (1) 1997 1998 100.0% 90.3 100.0% 94.4 100.0% 93.0 100.0% 92.9 5.6 2.1 9.7 4.1 0.6 – – 5.0 2.3 2.7 1.6 7.0 3.4 0.8 0.6 0.7 1.5 1.7 (0.2) 0.1 (0.3)% 7.1 4.0 1.4 0.3 2.0 (0.6) 1.0 (1.6) (0.1) (1.5)% Net earnings (loss) 1.5% 1.1% (1) For the purposes of comparison, the revenue, cost of sales, gross proﬁt and selling, general and administrative expenses of the Predecessor Company for the period from January 1 to October 22, 1996 have been combined with the revenue, cost of sales, gross proﬁt and selling, general and administrative expenses of Celestica for the period from September 27 to December 31, 1996. The Predecessor Company was Celestica International Inc., a wholly-owned subsidiary of IBM Canada Ltd. Adjusted net earnings As a result of the signiﬁcant number of acquisitions made by Celestica over the past two years, management of Celestica uses adjusted net earnings as a measure of operating perfor- mance on an enterprise-wide basis. Adjusted net earnings excludes the effects of acquisition-related charges (most sig- nificantly, amortization of intangible assets and integration costs related to acquisitions) and other charges (the write down of intellectual property and goodwill, the write-off of deferred financing costs and debt redemption fees and an unusual credit loss) and the related income tax effect of these adjustments. Adjusted net earnings is not a measure of per- formance under Canadian GAAP or U.S. GAAP. Adjusted net earnings should not be considered in isolation or as a substi- tute for net earnings prepared in accordance with Canadian GAAP or U.S. GAAP or as a measure of operating perfor- mance or profitability. The following table reconciles net earnings (loss) to adjusted net earnings: Predecessor Company Celestica Inc. Period from Period from January 1, September 27, 1996 to 1996 to October 22, December 31, Year ended December 31, 1996 1996 1997 1998 (in millions) (in millions) Net earnings (loss) Amortization of intangible assets Integration costs related to acquisitions Other charges Income tax effect of above Adjusted net earnings $ $ 25.9 – – – – 25.9 $ $ 3.2 1.8 – – – 5.0 $ $ (6.9) $ 15.3 13.3 13.9 (12.3) 23.3 $ (48.5) 45.4 8.1 64.7 (24.4) 45.3 L A U N N A 8 9 9 1 T R O P E R 27 A C I T S E L E C MANAGEMENT’S DISCUSSION AND ANALYSIS of financial condition and results of operations Revenue Revenue increased $1,242.6 million, or 61.9%, to $3,249.2 mil- lion in 1998 from $2,006.6 million in 1997. This increase resulted from new program wins with existing customers, principally at Celestica’s U.S. facilities, and growth through strategic acquisitions. Revenue for Celestica’s Canadian oper- ations grew $280.9 million, or 22.0%, to $1,555.6 million in 1998 from $1,274.7 million in 1997. This increase was the result of increased business with Celestica’s existing customers, partially offset by lower revenue for memory/ power resulting from memory price declines in 1998 and the conversion of one IBM memory program from turnkey to con- signment sales (for which Celestica records only the value- added portion as revenue) in April 1997, with a revenue impact of approximately $115.0 million. Revenue at Celestica’s U.S. locations increased $675.1 million, or 250.8%, to $944.3 million in 1998 from $269.2 million in 1997. The U.S. acquisitions completed in 1998 contributed approximately $68.0 million to U.S. revenue. The IMS acquisition contributed no revenue in 1998 since the acquisition did not occur until December 30, 1998. Revenue for Europe increased $286.6 million, or 61.9%, to $749.3 million in 1998 from $462.7 million in 1997, primarily as a result of increased business with existing key customers. The acquisition of the Irish facility contributed approximately $75.0 million in revenue from the date of its acquisition in February 1998. Revenue decreased $10.2 million, or 0.5%, to $2,006.6 million in 1997 from $2,016.8 million in 1996. Several factors con- tributed to this result: 1996 revenue included $248.5 million in revenue for a proprietary data storage system (“RAMAC”) which was re-sourced by IBM in anticipation of the divesti- ture of Celestica by IBM in 1996 and one IBM memory program was converted from turnkey manufacturing to con- signment resulting in revenue reduction of approximately $115.0 million, as described earlier. In addition, memory/ power revenue decreased $636.4 million from $1,120.0 mil- lion in 1996 to $483.6 million in 1997. This decrease was primarily attributable to declining memory prices from 1996 to 1997. These 1997 revenue decreases were offset by a $1,043.6 million increase in non-IBM EMS revenue resulting from Celestica’s diversification of its customer base. This increase included $732.5 million attributable to acquisitions completed in 1997. The following customers represented more than 10% of total revenue for each of the indicated years: 1996 1997 1998 Hewlett-Packard Sun Microsystems IBM Cisco Systems 4 4 4 4 4 4 4 Celestica’s top ﬁve customers represented in the aggregate, 71.8% of total revenue in 1998 compared to 70.4% in 1997 and 90.8% in 1996. Gross profit Gross proﬁt increased $90.8 million, or 65.0%, to $230.5 mil- lion in 1998 from $139.7 million in 1997. Gross margin increased to 7.1% in 1998 from 7.0% in 1997. The improve- ment in gross profit and gross margin was due to improved cost management and facility utilization in Canada and Europe which was partially offset by a larger percentage of lower margin business associated with the Colorado and New England operations and the transitioning of operations in Celestica’s U.S. and Mexico acquisitions. Gross profit increased $26.7 million, or 23.6%, to $139.7 mil- lion in 1997 from $113.0 million in 1996. Gross margin increased to 7.0% in 1997 from 5.6% in 1996. The increase in gross proﬁt and gross margin was primarily the result of an $18.5 million memory inventory write down in 1996 which reduced gross proﬁt and gross margin in 1996, and a shift in the overall mix of 1997 revenue away from memory and power products toward EMS services that generate higher gross margins. During 1998, the net change in the Company’s allowance for doubtful accounts was an increase of $4.9 million to $7.7 million at December 31, 1998 from $2.8 million at December 31, 1997. In addition, the net change in the Company’s reserve for inventory obsolescence was an increase of $15.6 million to $47.5 million at December 31, 1998 from $31.9 million at December 31, 1997. During 1997, the net change in the Company’s allowance for doubtful accounts was an increase of $2.0 million, to $2.8 million at December 31, 1997 from $0.8 million at December 31, 1996. In addition, the net change in the Company’s reserve for inventory obsolescence was an increase of $14.2 million, to $31.9 million at December 31, 1997 from $17.7 million at December 31, 1996. The provision for these reserves had the effect of decreasing gross proﬁt for 1998 and 1997 by approximately $28.3 million and $36.7 million, respectively, increasing selling, general and administrative expenses by $2.8 million and $6.7 million, respectively, and decreasing net earnings for 1998 and 1997 by $31.1 million and $43.4 million, respectively. The increases in these reserves and the provisions charged to earnings are consistent with the increases in accounts receivable and inventory balances during the year. L A U N N A 8 9 9 1 T R O P E R 28 A C I T S E L E C MANAGEMENT’S DISCUSSION AND ANALYSIS of financial condition and results of operations Selling, general and administrative expenses Selling, general and administrative expenses increased $62.3 million, or 91.2%, to $130.6 million (4.0% of revenue) in 1998 from $68.3 million (3.4% of revenue) in 1997. The increase, both in amount and as a percentage of revenue, was a result of higher selling and marketing expenses incurred to support EMS growth as well as expenses incurred by the operations acquired in the last quarter of 1997 and in 1998. Selling, general and administrative expenses increased $26.0 million, or 61.5%, to $68.3 million (3.4% of revenue) in 1997 from $42.3 million (2.1% of revenue) in 1996. The Intangible assets and amortization Amortization of intangible assets increased $30.1 million, or 196.7%, to $45.4 million in 1998 from $15.3 million in 1997 as a result of two factors. Due to rapid technological changes in the market, together with the changes in the volumes and mix of revenue derived from IBM, effective January 1, 1998, Celestica revised the estimated useful life of goodwill and other intangible assets from 20 years to 10 years and revised the estimated useful life of intellectual property from 20 years to 5 years. The revised estimated useful life more closely aligns Celestica’s accounting policies for goodwill, other intan- gible assets and intellectual property with the accounting policies of other participants in the industry. This change increased amortization expense in 1998 from approximately $22.0 million to approximately $41.3 million, based on the net asset values at January 1, 1998. The balance of the increase from 1997 to 1998 was a result of the amortization of good- will and other intangible assets arising from the acquisitions completed in the last quarter of 1997 and in 1998. Amortization of intangible assets increased $13.5 million, or 750.0%, to $15.3 million in 1997 from $1.8 million in 1996. Amortization for 1996 represented only the period from September 27 to December 31, whereas amortization for 1997 included a full year of amortization related to the acqui- sition from IBM in 1996 as well as amortization related to Celestica’s 1997 acquisitions. The excess of the purchase price paid over the fair value of tangible assets acquired in the acquisitions completed in 1998 amounted to $105.5 million and has been allocated to goodwill and other intangible assets. Of this amount, $92.3 million related to the acquisition of IMS. In the IMS acquisition, Celestica acquired $169.7 million of identifiable assets and assumed liabilities of $128.3 million. In 1997, the excess of the purchase price paid over the fair value of tangible assets acquired in facility acquisitions increase, both in amount and as a percentage of revenue, was a result of operating expenses incurred by the facilities acquired in 1997 and amortization of deferred ﬁnancing fees relating to the acquisition of Celestica International Inc. from IBM in the fourth quarter of 1996. Research and development costs increased to $19.8 million in 1998 from $15.1 million in 1997 and $13.9 million in 1996. Research and development costs were less than 1% of rev- enue in 1996, 1997 and 1998. amounted to $126.8 million. In these acquisitions Celestica acquired identifiable assets of $336.9 million and assumed liabilities of $182.0 million. As Celestica was not acquiring ongoing businesses, Celestica considered these acquisitions to be primarily the acquisition of ongoing relationships with significant non-IBM customers. Accordingly, Celestica con- sidered other strategic benefits of each acquisition rather than considering multiples of earnings or other ﬁnancial mea- sures. These strategic beneﬁts included access to increased manufacturing capacity and capabilities, access to particular geographic markets and development of new customer and supplier relationships. In the case of the facilities acquisi- tions from Hewlett-Packard, Celestica believes that a portion of the purchase price paid in these acquisitions related to the long-term relationships with Hewlett-Packard. Accordingly, for accounting purposes Celestica has allocated to intangible assets the excess of the purchase price paid over the fair value of the tangible assets acquired in the Hewlett-Packard acquisitions. Further, Celestica believes that the relationships with Hewlett-Packard will extend beyond the period of the production agreements and, for accounting purposes, has determined that 10 years is a rea- sonable period of time over which to amortize the intangible assets acquired in these acquisitions. At December 31, 1998, intangible assets represented 22.9% of Celestica’s total assets compared to 26.1% at December 31, 1997. In connection with certain acquisitions, Celestica has entered into production agreements with its OEM customers with terms of one to three years in duration. These agreements contain limited overhead contribution provisions or product volume guarantees for only a short period following the pur- chases. Celestica may enter into similar agreements in connection with future facility acquisitions. L A U N N A 8 9 9 1 T R O P E R 29 A C I T S E L E C MANAGEMENT’S DISCUSSION AND ANALYSIS of financial condition and results of operations Integration costs related to acquisitions Integration costs related to acquisitions represent costs incurred within 12 months of the acquisition date, such as the costs of implementing compatible information technol- ogy systems in newly acquired operations, establishing new processes related to marketing and distribution processes to accommodate new customers and salaries of personnel directly involved with integration activities. Integration costs decreased $5.2 million to $8.1 million in 1998 from $13.3 million in 1997. All of the integration costs Other charges Other charges are non-recurring items or items that are unusual in nature. Other charges in 1998 totalled $64.7 mil- lion, comprised of a write down of the carrying value of intellectual property and goodwill amounting to $41.8 million, the write-off of deferred ﬁnancing costs and debt redemption fees of $17.8 million and other charges of $5.1 million. The write down of the carrying value of intellectual property and goodwill of $41.8 million consisted of a ﬁrst quarter charge of $35.0 million relating to certain test and process know-how and non-commercial computer programs and a fourth quarter charge of $6.8 million relating to goodwill. The $17.8 million write-off of deferred financing costs and debt redemption fees related to the prepayment of debt with proceeds from the Company’s initial public offering. At December 31, 1997, Celestica reviewed the carrying value of its intellectual property in the ordinary course of preparing its ﬁnancial statements for the 1997 ﬁscal year. A signiﬁcant portion of this intellectual property was acquired from IBM and is comprised of test and process know-how (a portion of which is used in support of Celestica’s higher complexity product sales to IBM), non-commercial computer programs and confidential information used in the manufacturing of Celestica’s power products. EMS revenue generated from IBM had decreased in 1997 compared to 1996 as a result of lower PCA demand for IBM mainframes and a reduction in memory component prices for PCAs. Celestica expected to maintain the level of higher complexity IBM business in ﬁscal 1998 at levels close to that experienced in ﬁscal 1997. As a result, Celestica concluded that the carrying value of its intel- lectual property would be recoverable in the future and therefore there was no impairment in the value of its intellec- tual property at that time. In the ﬁrst quarter of 1998, the decline in IBM EMS revenue continued and was greater than expected. In addition, the business mix of sales to IBM had shifted significantly from Interest expense Interest expense, net of interest income, decreased $1.4 mil- lion, or 4.2%, to $32.2 million in 1998 from $33.6 million in 1997. Celestica incurred interest charges of approximately $11.6 million on additional borrowings to ﬁnance acquisitions completed in the first half of 1998 and the growth in opera- tions of the Company. Debt levels during the second half of 1998 were lower than in the ﬁrst half of 1998 as the net pro- ceeds from the initial public offering were used to prepay a significant portion of the Company’s debt, yielding interest savings of approximately $13.8 million. incurred related to newly acquired facilities, and not to the Company’s existing operations. No such charges were incurred in 1996 as no acquisitions were made. Celestica expects to incur integration costs in 1999 as it completes the integration of operations acquired in 1998. Celestica expects to continue to incur additional integration costs in the future as acquisitions continue to be an important part of the Company’s growth strategy. higher complexity products to lower complexity products. This shift was also unexpected. After further review, Celestica concluded that the decline in IBM EMS revenue and the shift in the mix of sales to IBM would continue for the remainder of the year. The manufacture of the lower complexity products does not require the use of much of the technology purchased from IBM in 1996. As a result of these specific changes in volumes and mix of products, Celestica updated its forecast of revenue derived from IBM. Celestica carried out a further review of the carrying value of its test and process know-how at the end of the first quarter of 1998. Further, the reduction in business from IBM was offset by an increase in non-IBM business resulting in the development and implementation of more state-of-the-art technologies which replaced some of the test and process know-how purchased from IBM. Based on this review, Celestica wrote down certain of the test and process know- how by $24.5 million. Separately, in late March 1998, Celestica made a decision to replace certain of its non-commercial computer programs with new programs and to discontinue use of the non-com- mercial computer programs acquired from IBM. As a result, Celestica wrote down the carrying value of these programs by $10.5 million. In December 1998, as a result of the merger with IMS, cer- tain goodwill in the amount of $6.8 million became impaired and was written off. Other charges of $13.9 million in 1997 resulted from a credit loss relating to a customer which filed for bankruptcy. Celestica has not experienced any other material credit losses. As part of Celestica’s risk management strategy, Celestica now insures against substantially all its credit risk with external credit insurers. Interest expense, net of interest income, increased $18.7 mil- lion, or 125.5%, to $33.6 million in 1997 from $14.9 million in 1996, which was comprised of $8.4 million for the period from January 1 to October 22, 1996 and $6.5 million for the period from September 27 to December 31, 1996. This increase was primarily due to higher levels of long-term debt as a result of the change in capitalization related to the acqui- sition of Celestica from IBM and long-term debt incurred to ﬁnance the 1997 acquisitions. L A U N N A 8 9 9 1 T R O P E R 30 A C I T S E L E C MANAGEMENT’S DISCUSSION AND ANALYSIS of financial condition and results of operations Income taxes Income tax expense in 1998 is comprised of a current income tax expense of $15.0 million and a recovery of deferred income taxes of $17.0 million, resulting in a net recovery in income taxes of $2.0 million in 1998 compared to a net income tax expense of $2.2 million in 1997. This income tax recovery resulted primarily from the recognition of the tax benefit of net operating losses incurred in 1998 in certain jurisdictions which exceeded the current income tax expense on operating proﬁts generated in other jurisdictions. Income taxes decreased $22.6 million, or 91.1%, to $2.2 million in 1997 from $24.8 million in 1996, comprised of $20.3 million for the period from January 1 to October 22, 1996 and $4.5 mil- lion for the period from September 27 to December 31, 1996. During the fourth quarter of 1997, with an effective date of January 1, 1997, Celestica adopted a new Canadian GAAP standard whereby future income taxes are recognized based on assets and liabilities carried on the balance sheet. The adoption of the new standard resulted in a reduction of income tax expense of $4.5 million in 1997. Celestica has recognized a net deferred tax asset at December 31, 1998 of $40.6 million which relates to the recognition of net operating losses and future income tax deductions available to reduce future years’ income for income tax purposes. Celestica’s current projections demon- strate that it will generate sufficient taxable income (in excess of $115.0 million) in the future to realize the beneﬁt of these deferred income tax assets in the carry-forward peri- ods, not exceeding 15 years. LIQUIDITY AND CAPITAL RESOURCES For the year ended December 31, 1998, Celestica generated cash from operating activities of $81.6 million. Earnings gener- ated $84.9 million in cash which was used to partially fund the operations and acquisition activities of the Company. Average non-cash working capital as a percentage of revenue decreased to 8.0% in 1998 from 11.0% in 1997. Investing activities in 1998 included the acquisitions of Analytic Design, Accu-Tronics (Celestica North Carolina), Celestica Mexico, the SGI facility (Celestica Wisconsin) and the Madge Networks facility (Celestica Ireland) which used cash, net of cash acquired, of $48.7 million. The acquisition of IMS was completed by issuing subordinate voting shares with a value of $124.0 million and reserving addi- tional subordinate voting shares with a value of $9.5 million which are issuable upon the exercise of certain IMS options. In July 1998, Celestica replaced its then outstanding credit facilities with a global, unsecured, revolving credit facility of $250 million provided by a syndicate of lenders. The new credit facility permits Celestica and certain designated sub- sidiaries to borrow funds directly for general corporate purposes (including acquisitions) at ﬂoating rates. The credit facility is available for a period of ﬁve years. Under the credit facility, Celestica is required to maintain certain ﬁnancial ratios; its ability and that of certain of its subsidiaries to grant security interests, dispose of assets, change the nature of its business or enter into business combinations is restricted; and a change in control is an event of default. No borrowings were outstanding under the credit facility at December 31, 1998. The only other ﬁnancial covenant in effect is a debt incurrence covenant contained in Celestica’s Senior Subordinated Notes due 2006. This covenant is based on Celestica’s ﬁxed charge coverage ratio, as defined in the indenture governing the Senior Subordinated Notes. Celestica believes that cash flow from operating activities, together with borrowings available under its global, unse- cured, revolving credit facility, and its share issuance on March 4, 1999 will be sufficient to fund currently anticipated working capital, planned capital spending and debt service requirements for the next 12 months. The Company’s planned capital spending for 1999 is approximately $125 mil- lion of which approximately $46 million is committed as of January 31, 1999. In addition, Celestica regularly reviews acquisition opportunities, and may therefore require addi- tional debt or equity financing. Celestica also intends to increase the availability of committed revolving credit by $150 million to provide additional liquidity and financing flexibility in 1999. Celestica prices the majority of its products in U.S. dollars, and the majority of its material costs are also denominated in U.S. dollars. However, a signiﬁcant portion of its non-material costs (including payroll, facilities costs and costs of locally sourced supplies and inventory) are denominated in Canadian dollars and British pounds sterling (approximately Cdn$320 million and £84.0 million on an annualized basis, respectively). As a result, Celestica may experience transaction and transla- tion gains or losses because of currency fluctuations. At December 31, 1998, Celestica had forward foreign exchange contracts covering various currencies with expiry dates up to January 2000 in a notional amount of $163.9 million. The fair value of these contracts at December 31, 1998 was an unre- alized loss of $10.2 million. Celestica may, from time to time, enter into hedging transactions to minimize its exposure to foreign currency and interest rate risks. Celestica’s current hedging activity is designed to reduce the variability of its foreign currency costs and involves entering into contracts to sell U.S. dollars to purchase Canadian dollars and British pounds sterling at future dates. In general, these contracts extend for periods of less than 18 months. There can be no assurance that such hedging transactions, if entered into, will be successful. A portion of the costs of the operations Celestica acquired through the IMS acquisition are denominated in other curren- cies, such as the Thai baht, the Hong Kong dollar and the Chinese renminbi. The recent economic problems in Hong Kong and Thailand, including the devaluation of the Thai baht, did not adversely impact IMS. Celestica does not expect the impact of future exchange rate changes in these currencies to have a material effect on Celestica’s operations. MANAGEMENT’S DISCUSSION AND ANALYSIS of financial condition and results of operations YEAR 2000 General The year 2000 issue concerns the potential exposures related to the automated generation of business and ﬁnancial misin- formation resulting from the fact that certain computer systems, embedded systems and hardware use two digits, rather than four, to deﬁne the applicable year. On January 1, 2000, these systems and programs may recognize the date as January 1, 1900 and may process data incorrectly or stop pro- cessing data altogether. Celestica relies upon vendor-supplied technology and recognizes the potential business risk to its assets and systems associated with the arrival of the year 2000. L A U N N A 8 9 9 1 T R O P E R 31 A C I T S E L E C Status of remediation Celestica has identiﬁed three phases in its year 2000 project: identify, test and validate. The identification phase involves the collection and validation of an inventory of computer related devices and an evaluation and assessment of each inventoried item. The testing phase includes remediation (repair, replace or retire) and various levels of testing for com- pliance. The validation phase includes the veriﬁcation that the system or process will continue to function in the year 2000 and beyond. As of January 31, 1999, Celestica had identified approxi- mately 700 year 2000 projects that were considered mission critical – that is, projects where the failure to complete the year 2000 remediation on a timely basis would cause a substantial disruption in, or cessation of, a significant por- tion of Celestica’s business. Mission critical projects include remediation of all hardware and software for all information technology (“IT”) applications and systems, all manufacturing processes and all production facility pro- cesses. As of January 31, 1999, Celestica had completed assessment on approximately 98% of mission-critical pro- jects, testing on approximately 73% and validation on approximately 60%. Non-mission critical projects include non-IT systems such as those which may be used in the operation of certain non- production machinery and equipment. As of January 31, 1999, Celestica had completed assessment on approximately 97% of such non-mission critical projects, testing on approxi- mately 88% and validation on approximately 71%. Celestica expects to complete all year 2000 remediation for these projects by the end of June 1999. The failure to com- plete the remedial actions on a timely basis could have a material adverse effect on Celestica’s business, results of operations and ﬁnancial condition. Third party compliance Celestica’s year 2000 project scope extends to assessing issues affecting suppliers’ and customers’ products, services, systems and operations. In early 1998, Celestica sent ques- tionnaires to substantially all of its vendors and suppliers requesting information regarding their year 2000 compliance, and Celestica is following up on all unsatisfactory responses. Based on information available to it at December 31, 1998, Celestica believes that approximately 67% of its suppliers are year 2000 compliant. Celestica will undertake on-site supplier reviews to confirm compliance where it considers it appropriate. In addition to these formal inquiries, Celestica has been work- ing closely on year 2000 issues with those third parties with which Celestica has signiﬁcant relationships, including, in par- ticular, signiﬁcant customers and suppliers. Mutual testing of electronic data interfaces between Celestica and its signifi- cant customers and suppliers is being performed in an effort to ensure their year 2000 compliance. Contingency plans Celestica is developing contingency plans for potential year 2000 failures. Celestica intends to develop, where practica- ble, contingency plans for all mission critical processes. Celestica plans to complete these contingency plans by June 1999. Estimated costs Celestica currently estimates that the total costs for its year 2000 remediation projects, including remediation at IMS, will be approximately $10.0 million. As of December 31, 1998, Celestica and IMS had each incurred $3.0 million for year 2000 projects. Year 2000 expenditures are financed through funds generated from operations, and are capitalized to the extent they enhance the capabilities and useful life of the underlying systems. Celestica has not deferred any major information technology projects as a result of its year 2000 remediation efforts. Part of Celestica’s overall acquisition strategy is to imple- ment common technology platforms across all of its major locations. In addition, Celestica has been refreshing many of its existing systems (supply chain systems, engineering sys- tems and office systems) in support of its corporate growth L A U N N A 8 9 9 1 T R O P E R 32 A C I T S E L E C MANAGEMENT’S DISCUSSION AND ANALYSIS of financial condition and results of operations strategies. Since the migration to common technology plat- forms is part of Celestica’s overall acquisition and integration strategies and no significant systems implementation was accelerated as a result of year 2000 issues, none of these costs have been included in Celestica’s estimate of year 2000 remediation costs noted above. Celestica has not assessed the ﬁnancial impact of not being year 2000 compliant. Failure to be year 2000 compliant could have a material adverse effect on Celestica’s business, results of operations and ﬁnancial condition. BACKLOG Although Celestica obtains ﬁrm purchase orders from its cus- tomers, OEM customers typically do not make firm orders for delivery of products more than 30 to 90 days in advance. Celestica does not believe that the backlog of expected product sales covered by ﬁrm purchase orders is a meaning- ful measure of future sales since orders may be rescheduled or cancelled. RECENT ACCOUNTING DEVELOPMENTS During 1997, the Canadian Institute of Chartered Accountants (“CICA”) issued a new accounting standard for income taxes which is substantially consistent with the existing accounting standard under U.S. GAAP. This new standard has been adopted by Celestica effective January 1, 1997. The change would not have had a signiﬁcant effect on the accounting for income taxes of Celestica for the period from September 27, 1996 to December 31, 1996. The new accounting standard was not applied to the accounting for income taxes of the Predecessor Company. See Note 24 to the Celestica Consolidated Financial Statements for details of the differ- ences between the accounting for income taxes under Canadian and U.S. GAAP. The CICA also issued a new standard for the reporting of segmented information in ﬁnancial statements, effective for fiscal years beginning on or after January 1, 1998 (quarterly ﬁnancial information beginning after January 1, 1999). Celestica has adopted the new standard for its fiscal year ended December 31, 1998. See Note 22 to the Celestica Consoli- dated Financial Statements for segmented information. As of January 1, 1998, Celestica implemented SFAS No. 130 “Reporting Comprehensive Income.” Comprehensive earn- ings (loss) for the year ended December 31, 1998 were consistent with net earnings (loss) for the year for purposes of presentation of financial information in accordance with U.S. GAAP. In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS No. 133 estab- lishes methods of accounting for derivative financial instruments and hedging activities related to those instru- ments as well as other hedging activities. The Company will be required to implement SFAS No. 133 for its fiscal year ended December 31, 2000. The Company expects the adop- tion of SFAS No. 133 will have no material impact on its ﬁnancial position, results of operations or cash ﬂows. In March 1998, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 98-1, “Accounting for the Cost of Computer Software Developed or Obtained for Internal Use.” SOP 98-1 requires that entities capitalize certain costs related to internal-use software once certain criteria have been met. The Company will be required to implement SOP 98-1 for its fiscal year ended December 31, 1999. The Company has not yet deter- mined the impact of SOP 98-1 on its ﬁnancial position, results of operations and cash ﬂows. In April 1998, the AICPA issued SOP 98-5, “Reporting on the Costs of Start-Up Activities.” SOP 98-5 requires that all start- up costs related to new operations must be expensed as incurred. In addition, all start-up costs that were capitalized in the past must be written off when SOP 98-5 is adopted. The Company will be required to implement SOP 98-5 for its ﬁscal year ended December 31, 1999. The Company expects that the adoption of SOP 98-5 will have no material impact on its ﬁnancial position, results of operations or cash ﬂows. L A U N N A 8 9 9 1 R O P E R 33 A C I T S E L E C MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL STATEMENTS T and financial reporting with management and with the external auditors. The Audit Committee reports to the Directors prior to the approval of the audited Consolidated Financial Statements for publication. KPMG LLP, the Company’s external auditors, who are appointed by the shareholders, audited the Consolidated Financial Statements in accordance with generally accepted auditing standards to enable them to express to the share- holders the Consolidated Financial Statements. Their report is set out below. their opinion on The accompanying Consolidated Financial Statements have been prepared by management and approved by the Board of Directors of the Company. Management is responsible for the information and representations contained in these ﬁnan- cial statements and in other sections of this Annual Report. The Company maintains appropriate processes to ensure that relevant and reliable financial information is produced. The Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in Canada. The signiﬁcant accounting policies which manage- ment believes are appropriate for the Company are described in note 2 to the Consolidated Financial Statements. The Board of Directors is responsible for reviewing and approving the Consolidated Financial Statements and over- seeing management’s performance of its financial reporting responsibilities. An Audit Committee of three non-manage- ment Directors is appointed by the Board. The Audit Committee reviews the Consolidated Financial Statements, adequacy of internal controls, audit process Anthony P. Puppi /s/ Chief Financial Officer January 29, 1999 AUDITORS’ REPORT TO THE SHAREHOLDERS OF CELESTICA INC. We have audited the consolidated balance sheets of Celestica Inc. as at December 31, 1997 and 1998 and the con- solidated statements of earnings (loss), shareholders’ equity and cash flows for each of the years in the two year period ended December 31, 1998. These ﬁnancial statements are the responsibility of the Company’s management. Our responsibil- ity is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material mis- statement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and signiﬁcant estimates made by management, as well as evaluating the overall ﬁnancial state- ment presentation. of its operations and its cash ﬂows for each of the years in the two year period ended December 31, 1998 in accordance with generally accepted accounting principles in Canada, which, except as described in note 24, also conform, in all material respects, with generally accepted accounting princi- ples in the United States. The consolidated financial statements for the Predecessor Company for the period from January 1, 1996 to October 22, 1996 and for the Company for the period from incorporation on September 27, 1996 to December 31, 1996 were audited by other auditors who expressed opinions without reservations on those statements in their report dated January 29, 1997. In our opinion, these consolidated ﬁnancial statements pre- sent fairly, in all material respects, the ﬁnancial position of the Company as at December 31, 1997 and 1998 and the results KPMG LLP /s/, Chartered Accountants Toronto, Canada January 29, 1999 (February 19, 1999 as to note 23) T L A U N N A 8 9 9 1 R O P E R 34 A C I T S E L E C As at December 31, 1997 1998 $ 106,052 $ 372,146 312,926 22,333 18,245 831,702 124,242 352,264 39,099 31,721 462,995 430,932 38,923 18,354 982,925 214,926 374,508 64,066 $ 1,347,307 $ 1,636,425 $ 890 $ 271,419 174,200 4,515 2,455 14,961 468,440 4,245 503,964 316 7,116 984,081 363,226 – 428,486 174,858 18,602 2,482 2,321 626,749 6,347 133,483 1,908 8,672 777,159 859,266 $ 1,347,307 $ 1,636,425 CONSOLIDATED BALANCE SHEETS (in thousands of U.S. dollars) Assets Current assets: Cash and short-term investments Accounts receivable (note 4) Inventories (note 5) Prepaid and other assets Deferred income taxes Capital assets (note 6) Intangible assets (note 7) Other assets (note 8) Liabilities and Shareholders’ Equity Current liabilities: Bank indebtedness Accounts payable Accrued liabilities Income taxes payable Deferred income taxes Current portion of long-term debt (note 9) Accrued post-retirement beneﬁts Long-term debt (note 9) Other long-term liabilities Deferred income taxes Shareholders’ equity Commitments and contingencies (notes 19 and 20) Subsequent event (note 23) Canadian and United States accounting policy differences (note 24) On behalf of the Board: Eugene V. Polistuk /s/ Anthony P. Puppi /s/ Director Director See accompanying notes to consolidated ﬁnancial statements. L A U N N A 8 9 9 1 T R O P E R 35 A C I T S E L E C CONSOLIDATED STATEMENTS OF EARNINGS (LOSS) (in thousands of U.S. dollars, except per share amounts) Predecessor Company Celestica Inc. Period from Period from January 1, September 27, 1996 to 1996 to October 22, December 31, Year ended December 31, 1996 1996 1997 1998 $ 1,728,677 1,643,634 $ 288,151 260,232 $ 2,006,634 1,866,967 $ 3,249,200 3,018,665 85,043 30,478 – – – – 30,478 54,565 2,385 5,983 46,197 19,965 366 20,331 25,866 25,866 1 25,855 25,855 $ $ $ $ 27,919 11,869 1,836 – – – 13,705 14,214 6,567 – 7,647 2,125 2,350 4,475 3,172 0.16 20,000 3,145 0.16 139,667 68,315 15,260 13,292 – 13,900 110,767 28,900 41,180 (7,547) (4,733) 6,664 (4,478) 2,186 230,535 130,565 45,372 8,123 41,813 22,930 248,803 (18,268) 38,959 (6,710) (50,517) 15,047 (17,093) (2,046) $ $ $ $ (6,919) $ (48,471) (0.20) $ (0.94) 34,789 51,496 (6,919) $ (54,717) (0.20) $ (1.06) $ $ $ $ Revenue Cost of sales Gross proﬁt Selling, general and administrative expenses (note 11) Amortization of intangible assets Integration costs related to acquisitions (note 12) Write down of intangible assets (note 13) Other charges (note 13) Operating income (loss) Interest on long-term debt Other interest, net Earnings (loss) before income taxes Income taxes (note 14): Current Deferred (recovery) Net earnings (loss) Basic earnings (loss) per share Weighted average number of shares outstanding (in thousands) Net earnings (loss) in accordance with U.S. GAAP (note 24) Basic earnings (loss) per share, in accordance with U.S. GAAP (note 24) Fully diluted loss per share has not been disclosed as the effect of the potential conversion of dilutive securities is anti-dilutive. See accompanying notes to consolidated ﬁnancial statements. CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (in thousands of U.S. dollars) Balance – September 27, 1996 Shares issued, net Net earnings for the period Balance – December 31, 1996 Shares issued, net (note 10) Currency translation Net loss for the year Balance – December 31, 1997 Shares issued, net (note 10) Shares to be issued (note 10) Currency translation Net loss for the year Balance – December 31, 1998 See accompanying notes to consolidated ﬁnancial statements. Capital Stock Retained Earnings Foreign Currency Total Translation Shareholders’ (note 10) (Deficit) Adjustment Equity $ $ – 200,011 – 200,011 167,406 – – 367,417 535,197 9,460 – – – – 3,172 3,172 – – (6,919) (3,747) – – – (48,471) $ $ – – – – – (444) – (444) – – (146) – – 200,011 3,172 203,183 167,406 (444) (6,919) 363,226 535,197 9,460 (146) (48,471) $ 912,074 $ (52,218) $ (590) $ 859,266 CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands of U.S. dollars) L A U N N A 8 9 9 1 T R O P E R 36 A C I T S E L E C Predecessor Company Celestica Inc. Period from Period from January 1, September 27, 1996 to 1996 to October 22, December 31, Year ended December 31, 1996 1996 1997 1998 $ 25,866 $ 3,172 $ (6,919) $ (48,471) 8,778 366 – (1,857) 33,153 (7,633) 43,526 15,660 (41,868) (8,401) 116,579 117,863 151,016 – (23,242) 901 – (22,341) – – – 148,467 (120,000) – – – – (148,300) – (119,833) 8,842 9,230 18,072 8,906 31,115 4,259 2,350 – (185) 9,596 25,651 46,481 (11,187) (23,131) (2,711) – 35,103 44,699 37,087 (4,478) – (3,227) 22,463 (142,889) (2,302) 12,869 153,024 (9,681) – 11,021 33,484 (533,596) (3,169) 6,619 397 (275,718) (32,089) – 1,369 86,935 (17,093) 64,743 (1,255) 84,859 (13,256) (50,732) (6,783) 53,643 13,847 – (3,281) 81,578 (48,678) (65,770) – (5,241) (529,749) (306,438) (119,689) 368 350,000 (25,000) 210,000 (210,000) (17,202) – 200,011 – – – 508,177 23,127 – 522 229,663 (35,738) – – (780) – 163,124 – – (912) 355,879 82,925 23,127 (890) – (423,226) – – (2,179) (8,596) 423,715 (26,906) – 1,862 (36,220) (74,331) 106,052 23,127 $ 106,052 $ 31,721 4,999 4,544 $ $ 42,575 15,504 $ $ 38,959 5,024 $ $ $ Cash provided by (used in): Operations: Net earnings (loss) Items not affecting cash: Depreciation and amortization Deferred income taxes Other charges Other Cash from earnings Changes in non-cash working capital items: Accounts receivable Inventories Other assets Accounts payable and accrued liabilities Income taxes payable Due to/from related parties Non-cash working capital changes Cash provided by operations Investing: Acquisitions, net of cash acquired Purchase of capital assets Proceeds from sale of capital assets Other Cash used in investing activities Financing: Bank indebtedness Increase in long-term debt Repayments of long-term debt Issuance of short-term debt Repayments of short-term debt Deferred ﬁnancing costs Debt redemption fees Issuance of share capital Share issue costs Dividends paid Other Cash provided by (used in) ﬁnancing activities Increase (decrease) in cash Cash, beginning of period Cash, end of period Supplemental information Paid during the period: Interest Taxes Cash is comprised of cash and short-term investments. See accompanying notes to consolidated ﬁnancial statements. $ $ $ L A U N N A 8 9 9 1 T R O P E R 37 A C I T S E L E C NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands of U.S. dollars, except per share amounts) 1. NATURE OF BUSINESS: These consolidated ﬁnancial statements present the ﬁnancial position and results of operations of Celestica Inc. (“Celestica Inc.” or “Celestica” or “the Company”), as at December 31, 1997 and 1998 and for the period from the date of incorporation on September 27, 1996 to December 31, 1996 and for the years ended December 31, 1997 and 1998. Celestica was incorporated under the laws of Ontario and was inactive from September 27, 1996 until October 22, 1996. Celestica, through a wholly-owned subsidiary, acquired the shares of Celestica International Inc. (the “Predecessor Company”) and certain related assets on October 22, 1996. The primary operations of the Company are providing a full range of electronics manufacturing services including design, prototyping, assembly, testing, product assurance, supply chain management, worldwide distribution and after- sales service to its customers primarily in the computer and communications industries. The Company’s accounting policies are in accordance with accounting principles generally accepted in Canada and, except as outlined in note 24, are, in all material respects, in accordance with accounting principles generally accepted in the United States. 2. SIGNIFICANT ACCOUNTING POLICIES: (a) Principles of consolidation: These consolidated ﬁnancial statements include the accounts of the Company and its wholly-owned subsidiaries. (b) Revenue: Revenue is comprised of product sales and service revenue earned from engineering and design services. Revenue from product sales is recognized upon shipment of the goods recorded net of estimated product return and warranty costs. Service revenue is recognized as services are performed. (c) Inventories: Inventories are valued on a ﬁrst-in, ﬁrst-out basis at the lower of cost and replacement cost for production parts and at the lower of cost and net realizable value for work in progress and ﬁnished goods. Cost includes materials, direct labour and an application of relevant overhead. (d) Capital assets: Capital assets are carried at cost and amortized over their estimated useful lives on a straight-line basis. Estimated use- ful lives for the principal asset categories are as follows: Buildings Office equipment Machinery and equipment Buildings/leasehold improvements 25 to 40 years 5 to 10 years 5 to 10 years up to 25 years or term of lease (e) Intangible assets: Intangible assets are comprised of goodwill, other intangible assets representing the excess of cost over the fair value of tangible assets acquired in facility acquisitions and intellectual property, including process know-how. Prior to 1998, goodwill and other intangible assets were amortized on a straight-line basis over 20 years and intellectual property was amortized on a straight-line basis over 8 to 20 years. Effective January 1, 1998, due to rapid technological changes in the market together with changes in revenue mix and volume with cer- tain customers, the Company reassessed the useful lives of goodwill, other intangible assets and intellectual property. Based on this reassessment, the Company determined more appropriate amortization periods would be 10 years for good- will and other intangible assets and ﬁve years for intellectual property. The Company began amortizing using the revised useful lives from January 1, 1998. (f) Impairment of long-lived assets: The Company reviews long-lived assets for impairment on a regular basis or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of capital assets is measured by comparison of the carrying amount, including the unamor- tized portion of goodwill allocated to long-lived assets, to the projected future net cash flows the long-lived assets are expected to generate. The Company assesses the recoverability of enterprise level goodwill by determining whether the unamortized goodwill balance can be recovered through undiscounted projected future net cash ﬂows of the acquired operation. The amount of enterprise level goodwill impairment, if any, is measured based on projected future net cash flows. An impairment in the value of intellectual property is measured based on pro- jected future net cash flows or if the Company no longer beneﬁts from its use. (g) Retirement plan and non-pension, post-retirement beneﬁts: Current service costs of the retirement plans and post- retirement health care and life insurance beneﬁts are accrued in the period incurred. Prior service costs, resulting from improvements in the plans, are amortized over the remaining service period of employees expected to receive benefits under the plans. (h) Deferred financing costs: Costs incurred relating to the issuance of debt are deferred and amortized over the term of the related debt. (i) Income taxes: The Company uses the asset and liability method of account- ing for income taxes. Deferred tax assets and liabilities are recognized for future consequences attributable to differ- ences between the financial statement carrying amounts of L A U N N A 8 9 9 1 T R O P E R 38 A C I T S E L E C NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands of U.S. dollars, except per share amounts) existing assets and liabilities and their respective tax bases. When necessary a valuation allowance is recorded to reduce tax assets to an amount for which realization is more likely than not. The effect of changes in tax rates is recognized in the period in which the rate change occurs. The Company enters into forward exchange contracts to hedge certain foreign currency transactions. The Company’s forward exchange contracts do not subject the Company to risk from exchange rate movements because gains and losses on such contracts offset losses and gains on transac- tions being hedged. (j) Foreign currency translation: The accounts of the Company’s self-sustaining foreign oper- ations are translated into U.S. dollars using the current rate method. Assets and liabilities are translated at the year-end exchange rate and revenues and expenses are translated at average exchange rates. Gains and losses arising from the translation of financial statements of foreign operations are deferred in the “Foreign currency translation adjust- ment” account included as a separate component of shareholders’ equity. Monetary assets and liabilities denominated in foreign curren- cies are translated into U.S. dollars at the year-end rate of exchange. Non-monetary assets and liabilities denominated in foreign currencies are translated at historic rates and revenue and expenses are translated at average exchange rates prevailing during the month of the transaction. Exchange gains or losses arising from the translation of long-term monetary assets and liabilities are deferred and amortized on a straight-line basis over the remaining life of the asset or liability. All other exchange gains or losses are reﬂected in the consolidated statements of earnings (loss). (k) Financial instruments: Financial instruments are initially recorded at historical cost. If subsequent circumstances indicate that a decline in the fair value of a financial asset or liability is other than temporary, the ﬁnancial asset or liability is written down to its fair value. (l) Research and development: The Company annually incurs costs on activities that relate to research and development which are expensed as incurred unless development costs meet certain criteria for capitalization. (m) Use of estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires manage- ment to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results may differ from those estimates. 3. ACQUISITIONS: During 1997 and 1998 the Company completed certain acqui- sitions which were accounted for as purchases. The results of operations of the net assets acquired are included in these ﬁnancial statements from their respective dates of acquisition: 1997 Acquisitions: (a) Celestica Limited (“Celestica U.K.”) (formerly Design to Distribution Limited): Effective January 1, 1997, the Company acquired certain assets and assumed certain liabilities of Celestica U.K. from International Computers Limited Plc (“ICL”). Celestica U.K. was among the largest European-based participants in the electronics manufacturing services industry. The total pur- chase price of $61,164 was financed with a $20,283 (£12,500) unsecured loan note payable to ICL, $22,105 in cash and $18,776 in other debt ﬁnancing. (b) Celestica Colorado, Inc. (“CCI”) and Celestica New England, Inc. (“CNE”): In July and August 1997, the Company acquired the assets of Hewlett-Packard’s printed circuit assembly facility in Fort Collins, Colorado and its full system assembly facility in Exeter, New Hampshire. In October 1997, the Company completed the purchase of related inventory. The total purchase price of $189,568 was ﬁnanced with $44,300 in cash, $76,931 from the credit facilities of the Company, $28,181 in other debt ﬁnancing and $40,156 in debt ﬁnancing from the vendor. (c) Ascent Power Technology Inc. (“Ascent”): In October 1997, the Company acquired 100% of the issued and outstanding common shares of Ascent, a manufacturer of power systems with operations in Canada, the United States, and the United Kingdom. The total purchase price of $30,983 was financed with $7,208 in cash, the issue of $4,282 in shares of the Company and $19,493 in other debt ﬁnancing. The value ascribed to the shares was based on the fair market value of those shares, as determined through negotiation with the vendors. Under the provisions of the purchase agreement, the sellers could have earned additional consideration under earn-out pro- visions. In May 1998, the earn-out provisions were cancelled and a ﬁnal payment of approximately $2,046 of additional con- sideration, including $260 of subordinate voting shares with an ascribed value based on the initial public offering price and $1,786 in cash, was negotiated with the vendors. This amount is payable over the period from June 30, 1998 to December 2000 and has been recorded as goodwill. L A U N N A 8 9 9 1 T R O P E R 39 A C I T S E L E C NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands of U.S. dollars, except per share amounts) Details of the net assets acquired in these acquisitions, at fair value, were as follows: Current assets Capital assets Other long-term assets Goodwill Other intangible assets Liabilities assumed Net assets acquired Financed by: Cash Debt Issue of shares $ Celestica U.K. 157,376 24,481 10,282 34,765 – (165,740) CCI/CNE Ascent $ 107,712 14,229 – – 71,260 (3,633) 17,604 5,205 – 20,780 – (12,606) 61,164 $ 189,568 $ 30,983 $ 22,105 39,059 – $ 44,300 145,268 – 61,164 $ 189,568 $ 7,208 19,493 4,282 30,983 $ $ $ $ Other intangible assets represent the excess of purchase price over the fair value of tangible assets acquired in facility acquisitions. 1998 Acquisitions: (a) Celestica Ireland (“Ireland”): In February 1998, the Company acquired 100% of the issued and outstanding shares of Madge Networks International B.V. The total purchase price of $23,112 was ﬁnanced with $9,000 in cash and $14,112 from credit facilities of the Company. (b) Celestica Wisconsin (“Wisconsin”): In June 1998, the Company acquired certain assets of a man- ufacturing facility in Wisconsin from Silicon Graphics Inc. The total purchase price of $14,875 was ﬁnanced with cash. (c) Celestica Asia: Effective December 30, 1998, the Company acquired by merger International Manufacturing Services, Inc. (“IMS”), a contract manufacturer with a signiﬁcant presence in Asia. The former shareholders of IMS were entitled to receive 0.40 subordinate voting shares of Celestica or $7.00 in cash for each share of IMS. The total purchase price of $133,664 was ﬁnanced with $213 in cash, the issue of $123,991 in subordi- nate voting shares of the Company with an ascribed value of $16.35 per share and the reservation of $9,460 in subordinate voting shares of the Company relating to the vested options of IMS with an exercise price less than fair value. The following unaudited pro forma consolidated financial information reflects the impact of the acquisition on the Company assuming the acquisition had occurred at the begin- ning of the periods presented. This unaudited pro forma consolidated ﬁnancial information has been provided for infor- mation purposes only and is not necessarily indicative of the results of operations or ﬁnancial condition that actually would have been achieved if the acquisition had been completed on the date indicated or that may be reported in the future. (unaudited) Revenue Net loss Basic loss per share Net loss in accordance with U.S. GAAP Basic loss per share, in accordance with U.S. GAAP Weighted average number of shares outstanding (in thousands) Year ended December 31, 1997 1998 $ 2,277,662 $ $ $ $ (8,536) $ (0.20) $ (8,536) $ (0.20) $ $ 3,640,269 (51,827) (0.87) (58,073) (0.98) 59,080 43,127 L A U N N A 8 9 9 1 T R O P E R 40 A C I T S E L E C NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands of U.S. dollars, except per share amounts) (d) Other acquisitions: In April 1998, the Company acquired certain assets and assumed certain liabilities of Celestica Mexico from Lucent Technologies Inc. In May 1998, the Company acquired the issued and outstanding shares of Analytic Design, Inc., a design and prototype facility located in Santa Clara, California. In September 1998, the Company acquired 100% of the issued and outstanding shares of Accu-Tronics Inc. (subse- quently renamed Celestica North Carolina Inc.), a design and prototype facility located in Raleigh, North Carolina. The total purchase price for these acquisitions of $17,924 was ﬁnanced with $7,046 in cash, $2,400 in subordinate voting shares of the Company and $8,478 from the credit facilities of the Company. Details of the net assets acquired in these acquisitions, at fair value, are as follows: Current assets Capital assets Other long-term assets Goodwill Intellectual property Other intangible assets Liabilities assumed Net assets acquired Financed by: Cash Debt Issue of shares Ireland Wisconsin IMS Acquisitions Other $ 15,490 13,663 – 1,300 – – (7,341) $ 7,517 7,102 – 256 – – – $ 133,826 34,697 1,128 70,518 21,800 – (128,305) 2,984 9,084 16 9,853 – 1,750 (5,763) 23,112 $ 14,875 $ 133,664 $ 17,924 $ 9,000 14,112 – $ 14,875 – – $ 213 – 133,451 7,046 8,478 2,400 23,112 $ 14,875 $ 133,664 $ 17,924 $ $ $ $ Other intangible assets represent the excess of purchase price over the fair value of tangible assets acquired in facility acquisitions. 4. ACCOUNTS RECEIVABLE: Accounts receivable are net of an allowance for doubtful accounts of $7,684 at December 31, 1998 (1997 – $2,849). 5. INVENTORIES: Raw materials Work in progress Finished goods 1997 1998 $ $ 221,695 52,381 38,850 315,185 79,234 36,513 $ 312,926 $ 430,932 L A U N N A 8 9 9 1 T R O P E R 41 A C I T S E L E C NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands of U.S. dollars, except per share amounts) 6. CAPITAL ASSETS: Land Buildings Office equipment Machinery and equipment Building improvements Land Buildings Office equipment Machinery and equipment Building improvements Accumulated Net Book Cost Amortization Value 1997 $ $ 3,388 28,145 10,411 93,049 10,491 $ – 1,075 2,032 16,897 1,238 3,388 27,070 8,379 76,152 9,253 $ 145,484 $ 21,242 $ 124,242 Accumulated Net Book Cost Amortization Value 1998 $ $ 5,647 40,486 24,219 184,179 17,698 $ – 2,440 8,211 44,251 2,401 5,647 38,046 16,008 139,928 15,297 $ 272,229 $ 57,303 $ 214,926 The above amounts include $5,800 (1997 – $2,690) of assets under capital lease and accumulated amortization of $1,377 (1997 – $395) related thereto. Rental expense for the year ended December 31, 1998 was $13,338 (December 31, 1997 – $7,850; September 27 to December 31, 1996 – $Nil). Rental expense, including operat- ing costs, paid to IBM was $8,790 for the period from January 1, 1996 to October 22, 1996. 7. INTANGIBLE ASSETS: Goodwill Other intangible assets Intellectual property Goodwill Other intangible assets Intellectual property Accumulated Net Book Cost Amortization Value 1997 $ $ 208,107 71,260 89,993 $ 10,583 1,485 5,028 197,524 69,775 84,965 $ 369,360 $ 17,096 $ 352,264 Accumulated Net Book Cost Amortization Value 1998 $ $ 287,619 72,263 77,094 $ 33,427 9,221 19,820 254,192 63,042 57,274 $ 436,976 $ 62,468 $ 374,508 Other intangible assets represents the excess of cost over the fair value of tangible assets acquired in facility acquisitions. The intellectual property primarily represents the cost of certain non-patented intellectual property and process know-how. L A U N N A 8 9 9 1 T R O P E R 42 A C I T S E L E C NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands of U.S. dollars, except per share amounts) 8. OTHER ASSETS: Deferred ﬁnancing costs net of accumulated amortization of $1,931 (1997 – $2,604) Deferred pension Deferred income taxes Other 9. LONG-TERM DEBT: Global, unsecured, revolving credit facility due 2003 (a) Revolving loans (b) Senior Subordinated Notes due 2006 (c) Term loans (d) Inventory and accounts receivable ﬁnancing facilities (e) Other Less current portion 1997 1998 $ $ 15,650 17,289 5,027 1,133 $ 39,099 $ 7,170 20,452 33,383 3,061 64,066 $ 1997 1998 $ – 100,762 200,000 154,625 57,259 6,279 518,925 14,961 – – 130,000 957 – 4,847 135,804 2,321 $ 503,964 $ 133,483 (a) Concurrent with the initial public offering on July 7, 1998, the Company entered into a global, unsecured, revolving credit facility providing up to $250,000 of borrowings. The credit facility permits the Company and certain designated subsidiaries to borrow funds directly for general corporate purposes (including acquisitions). The facility bears interest at LIBOR plus a margin and is repayable in July 2003. The weighted average interest rate on this facility during the period was 6.1%. There were no outstanding borrowings on this facility at December 31, 1998. (b) During 1997 and for the period from January 1, 1998 to July 7, 1998 (“the period”), the Company had the following revolving credit facilities outstanding, which were repaid and cancelled on July 7, 1998 with proceeds from the initial public offering: (i) A wholly-owned subsidiary had a credit agreement with a consortium of lenders to provide up to $200,000 of revolving loans. Amounts outstanding under this facility bore interest at LIBOR plus a margin. Outstanding borrowings as at December 31, 1997 were $76,000. The weighted average interest rate on this loan during the period was 8.3% (1997 – 8.7%) and the rate at December 31, 1997 was 8.7%. (ii) A wholly-owned subsidiary had a credit agreement provid- ing for $103,523 (£64,500) of revolving loans. Outstanding borrowings as at December 31, 1997 were $24,762 (£15,000). Amounts outstanding under this facility bore inter- est at LIBOR plus a margin. The weighted average interest rate on the facility during the period was 9.6% (1997 – 10.1%) and the rate at December 31, 1997 was 10.1%. (c) The Senior Subordinated Notes bear interest at 10.5%, are unsecured and are subordinated to the payment of all senior debt of the Company. The Senior Subordinated Notes may be redeemed beginning in 2002 at various premiums above face value. Concurrent with the initial public offering on July 7, 1998, the Company assumed all of the Senior Subordinated Notes in connection with the amalgamation with and subse- quent dissolution of a wholly-owned subsidiary. In August 1998, the Company redeemed 35% of the aggregate principal amount of the Senior Subordinated Notes originally issued with proceeds from the initial public offering, at 110.5% of the principal amount. (d) During 1997 and for the period from January 1, 1998 to July 7, 1998 (“the period”), the Company had the following term facilities outstanding, which were repaid and cancelled on July 7, 1998 with proceeds from the initial public offering: (i) A wholly-owned subsidiary had a credit agreement with a consortium of lenders to provide up to $125,000 of term loans. Amounts outstanding under this facility bore interest at LIBOR plus a margin. Outstanding borrowings as at December 31, 1997 were $119,833. The weighted average interest rate on the facility during the period was 8.6% (1997 – 8.7%) and the rate at December 31, 1997 was 8.5%. (ii) A wholly-owned subsidiary had unsecured loan notes due 2003 which bore interest at 6% per annum and were subordi- nated to the payment of specified senior debt. Outstanding borrowings as at December 31, 1997 were $20,635 (£12,500). The weighted average interest rate on these notes during the period was 6.0% (1997 – 6.0%) and the rate at December 31, 1997 was 6.0%. (iii) A wholly-owned subsidiary had a credit agreement provid- ing for up to $14,300 (Cdn$20,000) in term loans. Out- standing borrowings as at December 31, 1997 were $14,157 (Cdn$20,300). Amounts outstanding under this facility bore interest at LIBOR plus a margin. The weighted average interest L A U N N A 8 9 9 1 T R O P E R 43 A C I T S E L E C NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands of U.S. dollars, except per share amounts) rate on this loan during the period was 7.5% (1997 – 5.3%) and the rate at December 31, 1997 was 9.7%. present value of the advances, discounted at 8.5%, was $40,750. (e) During 1997 and for the period from January 1, 1998 to July 7, 1998 (“the period”), the Company had the following inventory and accounts receivable financing facilities out- standing which were repaid and cancelled from proceeds of the initial public offering: (i) A wholly-owned subsidiary had a five year facility with a financial institution to purchase up to $125,000 of notes secured by accounts receivable and inventories. As at December 31, 1997, $16,509 was outstanding. The notes bore interest at the ﬁnancial institution’s cost of funds plus a margin. The weighted average interest rate during the period was 6.3% (1997 – 6.3%) and the rate at December 31, 1997 was 6.3%. (ii) A wholly-owned subsidiary had an agreement with a major customer to provide financing for certain inventories. Under an agreement where certain costs were borne by the customer, no interest was payable on advances under this agreement, except for advances in excess of certain limits which bore interest at LIBOR. As at December 31, 1997 the 10. CAPITAL STOCK: (a) Authorized: An unlimited number of subordinate voting shares, which entitle the holder to one vote per share, and an unlimited number of multiple voting shares, which entitle the holder to twenty-ﬁve votes per share. Except as otherwise required by law, the subordinate voting shares and multiple voting shares vote together as a single class on all matters submitted to a vote of shareholders, including the election of directors. The holders of the subordinate voting shares and multiple voting shares are entitled to share rateably, as a single class, in any dividends declared subject to any preferential rights of any outstanding preferred shares in respect of the payment of dividends. Each multiple voting share is convertible at any time at the option of the holder thereof into one subordinate voting share. The Company completed a capital reorganization in July 1998 (the “Reorganization”) in connection with its initial public offering. The Company’s authorized capital stock prior to the Reorganization was: (i) An unlimited number of Class A voting shares, which were entitled to elect 40% of Celestica’s directors and to receive dividends as and when declared. These shares were con- verted into subordinate voting shares and multiple voting shares in the Reorganization; As at December 31, 1998, principal repayments due within each of the next five years on all long-term debt are as follows: 1999 2000 2001 2002 2003 Thereafter $ 2,321 2,101 671 232 176 130,303 The global, unsecured, revolving credit facility established in July 1998 has restrictive covenants relating to debt incur- rence and sale of assets and also contains financial covenants that indirectly restrict the Company’s ability to pay dividends. The Company’s Senior Subordinated Notes due 2006 include a covenant restricting the Company’s ability to pay dividends. (ii) 100 Class B voting shares, which were entitled to elect 60% of Celestica’s directors and were not entitled to receive any dividends. These shares were converted into multiple voting shares in the Reorganization; (iii) An unlimited number of Class C non-voting shares, issuable in series, each series to be limited to a maximum of 10,000,000 shares. At the option of the holder, Class C shares were convertible into Class A shares based on a prescribed formula. These shares were not entitled to receive dividends. These shares were converted into subordinate and multiple voting shares in the Reorganization; and (iv) An unlimited number of non-voting Preferred shares, Series 1, issuable in series. The Preferred shares were con- vertible into Class A shares based on a prescribed formula contingent upon the occurrence of certain future events. The Preferred shares were entitled to receive dividends as and when declared. These shares were repurchased by Celestica in July 1998 for $2,046, of which $260 was satisfied by the issuance of subordinate voting shares at an ascribed value based on the initial public offering price of the subordinate voting shares, with the remainder being settled in cash. L A U N N A 8 9 9 1 T R O P E R 44 A C I T S E L E C NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands of U.S. dollars, except per share amounts) (b) Issued and outstanding: Subordinate Multiple Number of Shares Voting Shares Voting Shares to Shares be issued Class A Shares Class B Shares Class C Shares Preferred Shares Balance December 31, 1996 Issued for cash in January 1997 (i) Issued as consideration for acquisitions (ii) Net issuances under employee share purchase and option plans (iii) Balance December 31, 1997 Reorganization (iv) Initial public offering, net of issue costs (v) Issued as consideration for acquisitions (vi) Net issuances under employee share purchase and option plans (vii) Other share issuances (viii) – – – – – – – – – 23,734,550 19,532,975 – 23,690,000 7,583,574 (1,480) – – – – – – 20,000,000 – 14,363,200 100 10,000,000 – – – – – – 287,331 1,949,200 – 36,599,731 – (37,346,195) – – 753,674 137,142 – – 606,420 2,902 – – – – 1,000,000 – 100 10,000,000 (100) (10,000,000) 1,000,000 (1,000,000) – – – – – – – – – – – – – – – Balance December 31, 1998 55,006,644 19,532,975 753,674 – Amount Voting Shares Voting Shares to Shares be issued Class A Shares Class B Shares Class C Shares Preferred Total Shares Amount Subordinate Multiple – $ – $ – $ 200,000 $ 1 $ 10 $ – $ 200,011 Balance December 31, 1996 $ Issued for cash in January 1997 (i) Issued as consideration for acquisitions (ii) Net issuances under employee share purchase and option plans (iii) Balance December 31, 1997 Reorganization (iv) Initial public offering, net of issue costs (v) Issued as consideration – – – – – – – 240,421 – 138,811 399,406 for acquisitions (vi) 123,991 Net issuances under employee share purchase and option plans(vii) Other share issuances (viii) (15) – – – – – – – – – – – 143,632 4,281 19,492 367,405 (378,960) – 9,460 2,400 – – 9,111 44 – – – 1 (1) – – – – – – – 10 (10) – – – – – 1 – 1 (1) – – – – 143,632 4,282 19,492 367,417 260 399,406 135,851 9,096 44 Balance December 31, 1998 $ 763,803 $ 138,811 $ 9,460 $ – $ – $ – $ – $ 912,074 1997 Capital transactions: (i) In January 1997, the Company issued 14,363,200 Class A shares from treasury for cash of $143,632. a maximum of 194,389 Class A shares depending upon the occurrence of certain events and were redeemable at $0.0001 per share. (ii) In October 1997, the Company issued 287,331 Class A shares from treasury in connection with the purchase of Ascent at an ascribed value of $4,281. A further 1,000,000 Preferred shares, Series I, were issued at an ascribed value of $1. These Preferred shares, Series I, were convertible into (iii) During 1997, pursuant to Employee Share Purchase and Option Plans, the Company issued 1,956,320 Class A shares from treasury for cash of $19,563 and redeemed 7,120 Class A shares for cash of $71. L A U N N A 8 9 9 1 T R O P E R 45 A C I T S E L E C NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands of U.S. dollars, except per share amounts) 1998 Capital transactions: (iv) Prior to the completion of its initial public offering, the Company effected the following share exchanges as part of the Reorganization: • 23,631,299 Class A Shares were exchanged for 23,631,299 subordinate voting shares. • 13,714,896 Class A Shares were exchanged for 13,714,896 multiple voting shares. • 100 Class B Shares were exchanged for 100 multiple vot- ing shares. • 9,850,000 Class C Shares were exchanged for 5,817,979 multiple voting shares. • 150,000 Class C Shares were exchanged for 88,600 subor- dinate voting shares. • 1,000,000 Preferred shares, Series I, were repurchased by Celestica for $2,046, of which $260 was satisfied by the issuance of 14,651 subordinate voting shares based on the initial public offering price of the subordinate voting shares. (v) In July 1998, the Company issued 23,690,000 subordinate voting shares in its initial public offering for gross cash pro- ceeds of $414,575 and incurred $15,169 in share issue costs, net of tax. (vi) In May 1998, the Company issued 137,142 Class A shares (which were subsequently exchanged for subordinate voting shares) as partial consideration for the acquisition of Analytic Design, Inc. at an ascribed value of $2,400 (see note 3). In December 1998, the Company issued 7,583,574 subordi- nate voting shares to former stockholders of IMS in connection with the merger with IMS at an ascribed value of $123,991 (see note 3). The Company has reserved 753,674 shares at an ascribed value of $9,460 for IMS options with an exercise price below fair value at the date of the merger. (vii) During 1998, pursuant to employee share purchase and option plans, the Company issued 609,420 Class A shares (which were subsequently exchanged for subordinate vot- ing shares) from treasury for cash of $9,141, issued 6,270 Number of options Outstanding at January 1, 1997 Granted Exercised Cancelled Outstanding at December 31, 1997 Granted Exercised Cancelled Assumed Outstanding at December 31, 1998 subordinate voting shares as a result of the exercise of options for cash of $63, redeemed 3,000 Class A shares for cash of $30 and redeemed 7,750 subordinate voting shares for cash of $78. (viii) In February 1998, the Company issued 2,902 Class A Shares (which were subsequently exchanged for subordinate voting shares) from treasury for cash of $44. (c) Stock option plans (i) Long-Term Incentive Plan (“LTIP”) The Company established the LTIP prior to the closing of its initial public offering. Under this plan, the Company may grant stock options, performance shares, performance share units and stock appreciation rights to directors, permanent employees and consultants (“eligible participants”) of the Company, its subsidiaries and other companies or partner- ships in which the Company has a significant investment. Under the LTIP, up to 7,500,000 subordinate voting shares may be issued from treasury. Options are granted at prices equal to the market value at the date of the grant and are exer- cisable during a period not to exceed ten years from such date. (ii) Employee Share Purchase and Option Plans (“ESPO”) The Company has ESPO plans that were available to certain of its employees and executives. As a result of the establish- ment of the LTIP, no further options or shares may be issued under the ESPO plans. Pursuant to the ESPO plans, employ- ees and executives of the Company were offered the opportunity to purchase, at prices equal to market value, sub- ordinate voting shares and, in connection with such purchase, receive options to acquire an additional number of subordinate voting shares based on the number of subordi- nate voting shares acquired by them under the ESPO plans. The exercise price for the options is equal to the price per share paid for the corresponding subordinate voting shares acquired under the ESPO plans. Stock option transactions were as follows: Weighted Average Shares Exercise Price – 3,134,416 – $ (11,408) $ 3,123,008 991,373 $ $ (6,270) $ (17,224) $ $ 1,673,040 5,763,927 $ $ 12,821,033 – 10.00 – 10.00 10.00 16.12 10.00 10.00 9.21 10.82 63 Cash consideration received on options exercised Shares reserved for issuance upon exercise of stock options or awards L A U N N A 8 9 9 1 T R O P E R 46 A C I T S E L E C NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands of U.S. dollars, except per share amounts) The following options were outstanding as at December 31, 1998: Plan ESPO ESPO LTIP LTIP Other Outstanding Options 3,099,514 548,478 432,895 10,000 1,673,040 5,763,927 $ $ $ $ $ Price 10.00 15.00 17.50 18.19 9.21 Exercisable Options 828,210 54,848 19,130 – 937,940 $ $ $ $ 1,840,128 Remaining Life (years) 4 4 5 5 8 Price 10.00 15.00 17.50 – 9.21 11. RESEARCH AND DEVELOPMENT COSTS: Total research and development costs for 1998 were $19,790 (1997 – $15,076; September 27, 1996 to December 31, 1996 – $2,757; January 1, 1996 to October 22, 1996 – $11,093). 12. INTEGRATION COSTS RELATED TO ACQUISITIONS: The Company incurred costs of $8,123 in 1998 (1997 – $13,292) relating to the establishment of business processes, infrastructure and information systems for operations acquired in 1998 and 1997. None of the integration costs incurred related to existing operations. 13. OTHER CHARGES: Write down of intellectual property and goodwill (a) Deferred ﬁnancing costs and debt redemption fees (b) Credit loss (c) Other Year ended December 31, 1997 1998 $ $ – – 13,900 – $ 13,900 $ 41,813 17,830 – 5,100 64,743 (a) During 1998, the Company completed a review of the recoverability of the carrying value of its intellectual property. As a result of this review, the Company concluded that cer- tain processes and technologies acquired from IBM in 1996 were no longer in use and the future benefit of other tech- nologies was less certain than was previously the case. Accordingly, the Company’s results of operations for 1998 included a non-cash charge of $35,000 to reflect a write down of the carrying value of this intellectual property. As a result of the merger with IMS, certain goodwill in the amount of $6,813 became impaired and was written off in 1998. (b) In 1998, the Company incurred $17,830 in charges relating to the write-off of deferred ﬁnancing costs and debt redemp- tion fees associated with the prepayment of debt from the proceeds of the initial public offering. These charges would be recorded as an extraordinary loss under United States gen- erally accepted accounting principles. (c) In 1997, the Company incurred a credit loss totalling $13,900 relating to a customer which ﬁled for bankruptcy. L A U N N A 8 9 9 1 T R O P E R 47 A C I T S E L E C NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands of U.S. dollars, except per share amounts) 14. INCOME TAXES: Income (loss) before tax: Canadian operations Foreign operations Current income tax expense: Canadian operations Foreign operations Deferred income tax expense (recovery): Canadian operations Foreign operations Predecessor Company Celestica Inc. Period from Period from January 1, September 27, 1996 to 1996 to October 22, December 31, Year ended December 31, 1996 1996 1997 1998 $ $ $ $ $ $ 46,197 – 46,197 19,965 – 19,965 366 – 366 $ $ $ $ $ $ 7,647 – 7,647 2,125 – 2,125 2,350 – 2,350 $ $ $ $ $ $ 23,334 (28,067) $ 209 (50,726) (4,733) $ (50,517) 5,903 761 6,664 $ $ 9,969 5,078 15,047 (3,237) $ (1,241) (10,490) (6,603) (4,478) $ (17,093) The overall income tax provision differs from the provision computed at the statutory rate as follows: Predecessor Company Celestica Inc. Period from Period from January 1, September 27, 1996 to 1996 to October 22, December 31, Year ended December 31, 1996 1996 1997 1998 44.6% 44.6% 44.6% 44.6% $ 20,604 $ 3,411 $ (2,111) $ (22,530) (4,112) – 3,095 – – – – 744 (650) – 1,064 543 – – – 107 204 – 5,137 1,694 (4,638) 1,622 3,171 11,930 341 (5,146) 664 (74) 5,106 – 408 4,362 $ 20,331 $ 4,475 $ 2,186 $ (2,046) Combined Canadian federal and provincial income tax rate Income taxes (recovery) based on earnings (loss) before income taxes at statutory rates Increase (decrease) resulting from: Manufacturing and processing deduction Foreign income taxed at lower rates Tax arising on foreign exchange translation Amortization of non-deductible costs related to acquisitions Amortization of non-deductible portion of intangible assets Non-taxable income Large corporations tax Other Income tax expense L A U N N A 8 9 9 1 T R O P E R 48 A C I T S E L E C NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands of U.S. dollars, except per share amounts) Deferred income taxes are provided for temporary differences between income tax and financial statement recognition of revenues and expenses. Deferred tax assets and liabilities are comprised of the following: Deferred tax assets: Income tax effect of net operating losses carried forward Accounting provisions not currently deductible Capital, intangible and other assets Share issue costs Other Total deferred tax assets Deferred tax liabilities: Capital, intangible and other assets Deferred pension asset Other Total deferred tax liabilities Deferred income tax asset, net 15. RELATED PARTY TRANSACTIONS: In 1998, the Company expensed acquisition and management related fees of $2,020 (1997 – $2,000; September 27 to December 31, 1996 – $Nil) and capitalized acquisition related fees of $2,000 (1997 – $3,781; September 27, 1996 to December 31, 1996 – $10,389; January 1, 1996 to October 22, 1996 – $Nil) charged by its parent company. Management believes that the fees charged were reasonable in relation to the services provided. 1997 1998 $ $ 12,874 8,133 – – 2,265 23,272 9,266 11,274 15,825 9,450 5,922 51,737 (689) (6,063) (2,819) (9,571) – (6,894) (4,260) (11,154) $ 13,701 $ 40,583 For the period January 1 to October 22, 1996 over 80% of the Predecessor Company’s revenue was to IBM affiliates at nego- tiated prices. The Predecessor Company also made royalty payments to IBM affiliates based on revenue to third parties. 16. PENSION PLANS: The Company provides various pension plans for its employ- ees. Certain employees participate in defined benefit plans; all other employees participate in deﬁned contribution plans. The following information is provided with respect to the deﬁned contribution plans: Predecessor Company Celestica Inc. Period from Period from January 1, September 27, 1996 to 1996 to October 22, December 31, Year ended December 31, 1996 1996 1997 1998 Period cost $ 779 $ 242 $ 4,367 $ 5,685 For the defined benefit plans, actuarial estimates are based on projections of employees’ compensation levels at the time of retirement. Maximum retirement beneﬁts are based upon the employees’ best three consecutive years’ earnings. The Company has funded the plans over the past three years based on actuarial calculations to maintain the plans on a fully funded basis. The most recent actuarial valuations were com- pleted as at April 1997 and August 1997. The estimated present value of accrued pension beneﬁts and the estimated market value of the net assets available to provide for these beneﬁts at December 31, 1997 and 1998 are as follows: Pension fund assets, at fair value Projected beneﬁt obligations Excess of plan assets over projected beneﬁt obligations Unrecognized net (gain) loss from past experience and effects of changes in assumptions Foreign currency exchange rate changes Prepaid pension amount 1997 1998 $ $ 128,784 104,453 24,331 $ $ 151,300 125,695 25,605 (6,748) (294) (2,782) (2,371) $ 17,289 $ 20,452 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands of U.S. dollars, except per share amounts) The Company has made contributions in excess of the required contributions; these excess contributions have been included in the deferred pension amount on the consolidated balance sheets. Pension fund assets consist primarily of fixed income and equity securities, valued at market value. The following infor- mation is provided on pension fund assets: L A U N N A 8 9 9 1 T R O P E R 49 A C I T S E L E C Opening pension fund assets Actual return on plan assets Foreign currency exchange rate changes Contributions by employees Contributions by employer Beneﬁts paid Vested beneﬁt obligations Accumulated beneﬁt obligations Projected benefit obligations are outlined below: Opening projected beneﬁt obligations Service cost Interest cost Beneﬁts paid Contributions by employees Changes in assumptions Foreign currency exchange rate changes Net pension cost is outlined below: Pension cost: Service cost – beneﬁts earned Interest cost on projected beneﬁt obligations Actual return on plan assets Net amortization and deferral Actuarial assumptions: Weighted average discount rate for projected beneﬁt obligations Weighted average rate of compensation increase Weighted average expected long- term rate of return on plan assets $ $ $ $ $ 1997 1998 110,362 13,715 (2,623) 1,271 6,622 (563) 128,784 87,531 90,575 $ $ $ $ 128,784 14,194 485 1,676 6,923 (762) 151,300 108,197 111,286 1997 1998 $ 90,300 4,829 6,518 (645) 1,271 – 2,180 104,453 5,659 7,467 (1,343) 1,676 10,871 (3,088) $ 104,453 $ 125,695 Predecessor Company Celestica Inc. Period from Period from January 1, September 27, 1996 to 1996 to October 22, December 31, Year ended December 31, 1996 1996 1997 1998 $ 1,020 $ 332 $ 4,829 $ 5,659 2,018 (6,526) 3,169 563 (895) – 6,518 (13,715) 5,316 7,467 (14,194) 3,994 $ (319) $ – $ 2,948 $ 2,926 8.25% 4.25% 9.00% 8.25% 7.25% 6.50% 4.25% 4.00% 4.00% 9.00% 7.75% 7.50% L A U N N A 8 9 9 1 T R O P E R 50 A C I T S E L E C NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands of U.S. dollars, except per share amounts) 17. NON-PENSION, POST-RETIREMENT BENEFITS: The Company accrues the expected costs of providing non-pen- sion, post-retirement beneﬁts during the periods in which the employees render service. Long-term inﬂation was assumed to be a blended rate of 5.1% (1997 – 5.25%) and the discount rate used to calculate the obligation was 6.75% (1997 – 8.5%). Non-pension, post-retirement benefits are funded as paid. The net post-retirement beneﬁt expense was $2,030 for the year ended December 31, 1998 (year ended December 31, 1997 – $600; September 27 to December 31, 1996 – $77; January 1, 1996 – October 22, 1996 – $339). The accumu- lated non-pension, post-retirement benefit obligations as at December 31, 1998 were approximately $6,347 (1997 – $4,245; 1996 – $3,797). 18. FINANCIAL INSTRUMENTS: Fair values: The following methods and assumptions were used to esti- mate the fair value of each class of ﬁnancial instruments: (a) The carrying amounts of cash, short-term investments, accounts receivable, accounts payable and accrued liabilities approximate fair value due to the short-term nature of these instruments. (b) The fair value of the Company’s long-term debt, including the current portion thereof, is estimated based on the current trading value, where available, or with reference to similarly traded instruments with similar terms. (c) The fair values of foreign currency contract obligations are estimated by obtaining quotes from brokers. (d) The fair values of letters of credit are based on fees cur- rently charged for similar agreements. The carrying amounts and fair values of the Company’s ﬁnan- cial instruments, where there are differences at December 31, 1997 and 1998, are as follows: 1997 Carrying Amount As at December 31, 1997 Fair Value 1998 Carrying Amount 1998 Fair Value Senior Subordinated Notes and other long-term debt Foreign currency contracts $ 220,635 – $ 230,735 (6,309) $ 130,000 – $ 140,660 (10,159) Other disclosures: (a) The Company has entered into foreign currency contracts to hedge foreign currency risk. These financial instruments include, to varying degrees, elements of market, credit and exchange risk in excess of amounts recognized in the balance sheets. The Company does not require collateral or other security to support ﬁnancial instruments with credit risk. As at December 31, 1998, the Company had outstanding foreign exchange contracts to sell $163,875 in exchange for Canadian dollars over a period of 13 months at a weighted average exchange rate of U.S. $0.70 and British pounds sterling over a period of 3 months at a weighted average exchange rate of U.S. $1.67. At December 31, 1998, these contracts had a fair value liability of $10,159 (1997 – $6,309). (b) The Company is a turnkey manufacturer of sophisticated electronics for original equipment manufacturers engaged in the electronics manufacturing industry. Financial instruments that potentially subject the Company to concentrations of credit risk are primarily accounts receivable and cash equiva- lents. The Company performs ongoing credit evaluations of its customers’ ﬁnancial conditions and, generally, requires no collateral from its customers. The Company carries third party credit insurance with respect to accounts receivable related to certain of its business operations. The Company maintains cash and cash equivalents in high quality short-term invest- ments or on deposit with major ﬁnancial institutions. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands of U.S. dollars, except per share amounts) 19. COMMITMENTS: The Company has operating leases and licence commitments that require future payments as follows: L A U N N A 8 9 9 1 T R O P E R 51 A C I T S E L E C 1999 2000 2001 2002 2003 and thereafter 20. CONTINGENCIES: Contingent liabilities in the form of letters of credit and guaran- tees, including guarantees of employee share purchase loans, amounted to $19,668 at December 31, 1998 (1997 – $39,087). The Year 2000 issue arises because many computerized sys- tems use two digits rather than four to identify a year. Date-sensitive systems may recognize the year 2000 as 1900 or some other date, resulting in errors when information using year 2000 dates is processed. In addition, similar prob- lems may arise in some systems, which use certain dates in 21. SIGNIFICANT CUSTOMERS: During 1998, three customers individually comprised 27%, 19% and 11% of total revenue. At December 31, 1998, these customers represented 16%, 14% and 12%, respectively, of the Company’s accounts receivable. During 1997, three customers individually comprised 27%, 13% and 11% of total revenue. At December 31, 1997, these customers represented 17%, 3% and 5%, respectively, of the Company’s accounts receivable. 22. SEGMENTED INFORMATION: The Company’s operations fall into one dominant industry segment, the electronics manufacturing services industry. The Company manages its operations, and accordingly deter- mines its operating segments, on a geographic basis. The performance of geographic operating segments is monitored based on EBIAT (earnings before interest, amortization of intangible assets, income taxes, integration costs related Operating Licence Leases Commitments Total $ $ 20,123 9,143 5,803 3,640 3,678 12,037 $ 6,000 7,200 7,200 – – – 26,123 16,343 13,003 3,640 3,678 12,037 1999 to represent something other than a date. The effects of the Year 2000 issue may be experienced before, on or after January 1, 2000, and, if not addressed, the impact on opera- tions and ﬁnancial reporting may range from minor errors to signiﬁcant systems failure, which could affect Celestica’s abil- ity to conduct normal business operations. It is not possible to be certain that all aspects of the Year 2000 issue affecting Celestica, including those related to the efforts of customers, suppliers or other third parties, will be fully resolved. During the period from September 27, 1996 to December 31, 1996, a single customer represented 62% of total revenue; no other customer represented 10% or more of total revenue during this period. At December 31, 1996, this customer rep- resented 48% of the Company’s accounts receivable. to acquisitions and other charges). The Company monitors enterprise-wide performance based on adjusted net earnings, which is calculated as net earnings (loss) before amortization of intangible assets, integration costs related to acquisitions and other charges, net of related taxes. Intercompany transac- tions are reﬂected at market value. L A U N N A 8 9 9 1 T R O P E R 52 A C I T S E L E C NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands of U.S. dollars, except per share amounts) The following is a breakdown of: revenue; EBIAT, adjusted net earnings (which is after income taxes); total assets; intangible assets; capital assets; and capital expenditures by operating segment: Revenue Canada United States Europe EBIAT North America Europe Interest, net Amortization of intangible assets Integration costs related to acquisitions Other charges Loss before income taxes Adjusted net earnings Capital expenditures North America Europe Total assets North America Europe Asia Intangible assets North America Europe Asia Capital assets North America Europe Asia Year ended December 31, 1997 1998 $ 1,274,694 269,197 462,743 $ 1,555,592 944,324 749,284 $ 2,006,634 $ 3,249,200 $ $ $ $ $ 60,377 10,975 $ 71,352 (33,633) (15,260) (13,292) (13,900) 75,058 24,912 99,970 (32,249) (45,372) (8,123) (64,743) (4,733) $ (50,517) 23,265 $ 45,372 23,888 8,201 $ 32,089 $ 39,118 26,652 65,770 As at December 31, 1997 1998 $ $ 1,151,010 196,297 – 909,705 554,625 172,095 $ 1,347,307 $ 1,636,425 $ $ 318,855 33,409 – 249,766 32,424 92,318 $ 352,264 $ 374,508 $ $ 95,497 28,745 – 126,256 53,973 34,697 $ 124,242 $ 214,926 In 1996 all of the Company’s operations operated in one geographic segment, being Canada. 23. SUBSEQUENT EVENT: The Company has ﬁled a registration statement on Form F-1 with the U.S. Securities and Exchange Commission and a prospectus with the securities commission or similar regula- tory authority in each of the Canadian provinces in connection with an offering of subordinate voting shares. The net proceeds of this offering of approximately $218,200 will be used by the Company for capital expenditures, work- ing capital and general corporate purposes, which may include acquisitions. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands of U.S. dollars, except per share amounts) 24. CANADIAN AND UNITED STATES ACCOUNTING POLICY DIFFERENCES: The consolidated financial statements of the Company have been prepared in accordance with generally accepted account- ing principles (“GAAP”) as applied in Canada. The signiﬁcant differences between Canadian and United States GAAP and their effect on the consolidated financial statements of the Company are described below: Consolidated statements of earnings (loss): The following table reconciles net earnings (loss) for the period as reported in the accompanying consolidated state- ments of earnings (loss) to net earnings (loss) that would have been reported had the consolidated ﬁnancial statements been prepared in accordance with United States GAAP: L A U N N A 8 9 9 1 T R O P E R 53 A C I T S E L E C Predecessor Company Celestica Inc. Period from Period from January 1, September 27, 1996 to 1996 to October 22, December 31, Year ended December 31, 1996 1996 1997 1998 $ $ $ $ $ $ 25,866 (11) – 25,855 25,855 25,855 – 25,855 25,855 $ $ $ $ $ $ 3,172 (27) – 3,145 0.16 $ $ $ (6,919) $ – – (48,471) – (6,246) (6,919) $ (54,717) (0.20) $ (1.06) 3,145 $ (6,919) $ (54,717) – 3,145 0.16 $ $ – 14,367 (6,919) $ (40,350) (0.20) $ (0.78) Net earnings (loss) for the period in accordance with Canadian GAAP Deferred income taxes Compensation expense (a) (b) Net earnings (loss) for the period in accordance with United States GAAP Basic earnings (loss) per share Net earnings (loss) for the period is comprised of the following: Net earnings (loss) for the period Extraordinary loss on debt redemption, net of income taxes (note 13) Net earnings (loss) before extraordinary loss Basic earnings (loss) per share before extraordinary loss (a) In 1998, the Company amended the vesting provisions of 3,117,945 employee stock options issued in 1997 and 1998. Under the previous vesting provisions, such options vested based on the achievement of earnings targets. A portion of these options now vest over a speciﬁed time period and the balance vested on completion of the initial public offering in 1998. Under United States GAAP, this amendment required a new measurement date for purposes of accounting for com- pensation expense, resulting in a charge equal to the aggregate difference between the fair value of the underlying subordinate voting shares at the date of the amendment and the exercise price for such options. As a result, under United States GAAP, the Company will record a $15,600 non-cash stock compensation charge to be reflected in earnings over the vesting period as follows: 1998 – $4,200; 1999 – $1,900; 2000 – $2,500; 2001 – $3,200; 2002 – $3,800. No similar charge is required to be recorded by the Company under Canadian GAAP. (b) Under United States GAAP, the contingent consideration of $2,046 associated with the ﬁnal settlement of the earn-out provision related to the Ascent acquisition was recorded as compensation expense. Under Canadian GAAP, this contin- gent consideration has been recorded as goodwill. L A U N N A 8 9 9 1 T R O P E R 54 A C I T S E L E C NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands of U.S. dollars, except per share amounts) Consolidated statements of changes in financial position: (a) Supplemental disclosure of depreciation and amortization expense is as follows: Depreciation of capital assets Amortization of goodwill Amortization of intellectual property Amortization of other intangible assets Amortization of deferred ﬁnancing costs Predecessor Company Celestica Inc. Period from Period from January 1, September 27, 1996 to 1996 to October 22, December 31, Year ended December 31, 1996 8,778 – – – – 8,778 $ $ 1996 1997 1998 $ $ 2,019 1,211 625 – 404 $ 19,223 9,947 4,403 910 2,604 $ 4,259 $ 37,087 $ 39,631 22,844 14,792 7,736 1,932 86,935 Other disclosures: (a) Stock based compensation: Beginning in 1996, United States GAAP encourages, but does not require, companies to record compensation costs for stock option plans at fair value. The Company has chosen to continue to account for stock options using the intrinsic value method prescribed by existing accounting pronouncements in effect in the United States. However, the new United States accounting pronouncement does require the disclosure of pro forma net loss and loss per share information as if the Company had accounted for its employee stock options issued in 1998 and 1997 under the fair value method. Accordingly, the fair value of the options issued was deter- mined using the Black-Scholes option pricing model with the following assumptions for 1998 and 1997: risk-free rate of 5% (1997 – 4%), dividend yield of 0%, a volatility factor of the expected market price of the Company’s shares of 50% (1997 – 0%), and a weighted-average expected life of the options in 1998 and 1997 of ﬁve years. The weighted-average grant date fair values of options issued in 1998 was $8.60 per share (1997 – $11.78 per share). For purposes of pro forma disclosures, the estimated fair value of the options is amor- tized to income over the vesting period. For the year ended December 31, 1998, the Company’s United States GAAP pro forma net loss is $61,699 and basic loss per share is $1.20 (1997 – $9,316 and $0.27 per share). (b) Foreign currencies: United States GAAP requires the disclosure of the functional currency of each significant operating subsidiary while no such disclosure is required under Canadian GAAP. The func- tional currency of all the Company’s signiﬁcant subsidiaries is the United States dollar with the exception of Celestica U.K. whose functional currency is the British pound sterling. At December 31, 1997 and 1998, no foreign exchange gains or losses associated with long-term monetary assets and liabili- ties were deferred. (c) Comprehensive income: As of January 1, 1998, the Company implemented SFAS No. 130 “Reporting Comprehensive Income.” This pronouncement, which is solely a financial statement pre- sentation standard, requires the Company to disclose non- owner charges included in equity but not included in net earnings. These charges include the fair value adjustment to certain cost-based investments, the foreign currency translation adjustments, and the minimum pension liability adjustment. Comprehensive earnings (losses) for the years ended December 31, 1997 and 1998 were consistent with net earnings (losses) for these periods. (d) Other recent accounting pronouncements: In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS No. 133 estab- lishes methods of accounting for derivative financial instruments and hedging activities related to those instru- ments as well as other hedging activities. The Company will be required to implement SFAS No. 133 for its fiscal year ended December 31, 2000. The Company expects the adop- tion of SFAS No. 133 will have no material impact on its ﬁnancial position, results of operations or cash ﬂows. In March 1998, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 98-1, “Accounting for the Cost of Computer Software Developed or Obtained for Internal Use.” SOP 98-1 requires that entities capitalize certain costs related to internal-use software once certain criteria have been met. The Company will be required to implement SOP 98-1 for its fiscal year ended December 31, 1999. The Company has not yet deter- mined the impact of SOP 98-1 on its ﬁnancial position, results of operations and cash ﬂows. In April 1998, the AICPA issued SOP 98-5, “Reporting on the Costs of Start-Up Activities.” SOP 98-5 requires that all start- up costs related to new operations must be expensed as incurred. In addition, all start-up costs that were capitalized in the past must be written off when SOP 98-5 is adopted. The Company will be required to implement SOP 98-5 for its ﬁscal year ended December 31, 1999. The Company expects that the adoption of SOP 98-5 will have no material impact on its ﬁnancial position, results of operations or cash ﬂows. SHARE INFORMATION MARKET LISTINGS (SYMBOL: CLS) SHARES OUTSTANDING As at December 31, Toronto Stock Exchange (TSE) Montreal Exchange (ME) New York Stock Exchange (NYSE) Basic Fully Diluted 1998 74,539,619* 80,325,147 * Composed of 55,006,644 Subordinate Voting Shares and 19,532,975 Multiple Voting Shares L A U N N A 8 9 9 1 T R O P E R 55 A C I T S E L E C CLOSING PRICE OF SHARES Toronto Stock Exchange Montreal Exchange New York Stock Exchange SHARE TRADING INFORMATION (IPO price: Cdn$25.73, U.S.$17.50) High Low Closing Share Price $ $ $ $ $ $ 35.00 41.80 34.90 42.00 23.50 27.00 $ $ $ $ $ $ 19.20 16.50 19.50 16.50 12.69 10.63 $ $ $ $ $ $ TSE (Cdn$) 1998 Third Quarter 1998 Fourth Quarter ME (Cdn$) 1998 Third Quarter 1998 Fourth Quarter NYSE (U.S.$) 1998 Third Quarter 1998 Fourth Quarter VOLUME OF SHARES TRADED (Trading Period: June 30, 1998 – December 31, 1998) Toronto Stock Exchange Montreal Exchange New York Stock Exchange End of Quarter 19.20 37.80 19.50 37.80 12.69 24.69 As at December 31, 1998 $ 37.80 (Cdn) $ 37.80 (Cdn) $ 24.69 (U.S.) Volume 15,672,615 11,374,042 1,032,417 662,766 9,899,800 9,055,800 32,071,259 1,761,871 22,165,800 RELATIVE CLS SHARE PRICE P E RFORM ANCE VE RSUS T SE A N D S&P IND EX ES 200 150 100 5 0 JUN E 29, 1998 (IPO) D E C E M B E R 3 1 , 1 9 9 8 C E L E S T I C A S & P 5 0 0 T S E 3 0 0 L A U N N A 8 9 9 1 T R O P E R 56 A C I T S E L E C DIRECTORS EUGENE V. POLISTUK ROBERT L. CRANDALL RICHARD S. LOVE Eugene V. Polistuk has been the President, Chief Executive Officer and a director of Celestica since October 1996. He has been President and Chief Executive Officer of Celestica since its establishment in 1994. From the time he was appointed Plant Manager of IBM Toronto Manufacturing in 1986, Mr. Polistuk has been instrumental in charting Celestica’s transformation and restructuring strategy and ensuring its successful execution. Mr. Polistuk joined IBM Canada in 1969 and, over the course of his career, has managed all key functional areas of the business. Mr. Polistuk holds a Bachelor of Applied Science degree in Electrical Engineering from the University of Toronto. ANTHONY P. PUPPI Anthony P. Puppi has been the Senior Vice-President, Chief Financial Officer and a director of Celestica since October 1996. He has been the Chief Financial Officer of Celestica since its establishment. He is responsi- ble for all of Celestica’s ﬁnancial activities. From 1990 to 1992, he served as Controller of IBM’s Bromont, Quebec facility. Mr. Puppi joined IBM Canada in 1980 and, over the course of his career, has held a number of ﬁnan- cial management roles in a variety of functions. Mr. Puppi holds a Bachelor of Business Administration in Finance degree and a Master of Business Administration from York University in Ontario. Richard S. Love is a former Vice- President of Hewlett-Packard and a former general manager of the Computer Order Fulﬁlment and Manufacturing Group for Hewlett- Packard’s Computer Systems Organization. Mr. Love has been a director of Celestica since July 1998. From 1962 until 1997, he held posi- tions of increasing responsibility with Hewlett-Packard, becoming Vice- President in 1992. He is a director of HMT Technology Corporation (electron- ics manufacturing) and a former director of The Vendo Company (elec- tronics) and the Information Technology Industry Council. Mr. Love holds a Bachelor of Science degree in Business Administration and Technology from Oregon State University and a Master of Business Administration from Fairleigh Dickenson University. ROGER L. MARTIN Roger L. Martin is Dean of the University of Toronto’s Joseph L. Rotman School of Management and has been a director of Celestica since July 1998. Mr. Martin is a director of Monitor Company, a Cambridge, Massachusetts-based consulting ﬁrm with 1,000 employees. He joined Monitor Company in 1985, founded the ﬁrm’s Toronto office in 1987 and became a member of the ﬁrm’s global executive committee in 1991. Mr. Martin holds a Bachelor of Arts degree (cum laude) from Harvard College and a Master of Business Administration from Harvard University. Robert L. Crandall is the former Chairman of the Board, President and Chief Executive Officer of AMR Corporation and former Chairman of the Board and Chief Executive Officer of American Airlines Inc. Mr. Crandall has been a director of Celestica since July 1998 and Chairman of the Board since February 1999. Mr. Crandall was elected a director of American Airlines Inc. in 1976, and from 1985 until May 1998 he served as Chairman of the Board, President and Chief Executive Officer of AMR Corporation. He is also a director of Halliburton Company (energy and engineering services), American Express Company and MediaOne Group (cable and wireless communications) and a former director of The SABRE Group Holdings Inc. (reservation systems). Mr. Crandall holds a Bachelor of Science degree from the University of Rhode Island and a Master of Business Administration from The Wharton School of the University of Pennsylvania. MARK L. HILSON Mark L. Hilson is a Vice-President of Onex and has acted as a director of Celestica since 1996. Mr. Hilson joined Onex in 1988 and was appointed Vice- President in 1993. Prior to 1988, he was an associate in the Mergers & Acquisitions Group at Merrill Lynch, Pierce, Fenner & Smith Incorporated. Mr. Hilson is also a director of Lantic Sugar Limited and Rogers Sugar Ltd. (sugar processing), Vencap Inc. (venture capital fund) and Vincor International Inc. (vintner). Mr. Hilson holds an Honours Bachelor of Business Administration (gold medallist) from Sir Wilfrid Laurier University and a Master of Business Administration (George F. Baker Scholar) from Harvard University. L A U N N A 8 9 9 1 T R O P E R 57 A C I T S E L E C DIRECTORS OFFICERS ANTHONY R. MELMAN DON TAPSCOTT EUGENE V. POLISTUK Anthony R. Melman is a Vice- President of Onex and has been a director of Celestica since 1996. Mr. Melman joined Onex as a share- holder and Vice-President in 1984. From 1977 to 1984, he was Senior Vice-President of the Canadian Imperial Bank of Commerce responsible for worldwide merchant banking, project ﬁnancing, acquisitions and other spe- cialized ﬁnancing activities. Prior to emigrating to Canada in 1977, Mr. Melman had extensive merchant banking experience in South Africa and the United Kingdom. He is a director of BT Bank of Canada (banking) and a number of Onex-controlled companies. Mr. Melman holds a Bachelor of Science degree in Chemical Engineering from the University of The Witwatersrand, a Master of Business Administration (gold medallist) from Cape Town University and a Ph.D. in Finance from the University of The Witwatersrand. GERALD W. SCHWARTZ Gerald W. Schwartz is the Chairman of the Board, President and Chief Executive Officer of Onex and has been a director of Celestica since July 1998. Prior to founding Onex in 1983, Mr. Schwartz was a co-founder and President (in 1977) of CanWest Capital Corp., now CanWest Global Communications Corp. He is a director of Onex, SC International Services, Inc. (airline catering), Phoenix Pictures, Inc. and Alliance Atlantis Inc. (entertain- ment). Mr. Schwartz holds a Bachelor of Commerce degree and a Bachelor of Laws degree from the University of Manitoba, a Master of Business Administration from Harvard University and a Doctor of Laws (Hon.) from St. Francis Xavier University. Don Tapscott is Chairman of the Alliance for Converging Technologies, a think tank investigating the impact of the information highway and the new media on business, government and society. He is also President of New Paradigm Learning Corporation and has been a director of Celestica since September 1998. He has authored numerous books on the application of technology in business. Mr. Tapscott is a Forum Fellow of the World Economic Forum and in Canada in 1992 he chaired the Ontario Advisory Committee for a Telecommunications Strategy. Mr. Tapscott holds a Bachelor of Science degree in Psychology and Statistics and a Master of Education degree specializing in Research Methodology. JOHN R. WALTER John R. Walter is the former President and Chief Operating Officer of AT&T Corp. and has been a director of Celestica since July 1998. Mr. Walter joined AT&T Corp. in 1996. From 1969 to 1996, he held positions of increasing responsibility with R.R. Donnelley & Sons Company, becoming President in 1987 and Chief Executive Officer and Chairman of the Board in 1989. He is a director of Abbott Laboratories (pharmaceuticals), Deere & Company (equipment and ﬁnancial services), Manpower, Inc. (staffing and employment services) and LaSalle Partners Incorporated (real estate services) and is a trustee of the Chicago Symphony Orchestra and Northwestern University. Mr. Walter holds a Bachelor of Science degree in business administra- tion from Miami University of Ohio. President, Chief Executive Officer ANTHONY P. PUPPI Senior Vice-President, Chief Financial Officer ROBERT G. BEHLMAN Executive Vice-President, Celestica Asia PAUL M. COHEN Senior Vice-President, Power Systems and Celestica South America LISA J. COLNETT Senior Vice-President, Global Process Management and Chief Information Officer ANDREW G. GORT Senior Vice-President, Global Supply Chain Management ALASTAIR F. KELLY Senior Vice-President, Celestica Europe IAIN S. KENNEDY Senior Vice-President, Corporate Mergers, Acquisitions, and Integration J. MARVIN MAGEE Senior Vice-President, Celestica Canada DOUGLAS C. MCDOUGALL Senior Vice-President, Celestica U.S./Mexico DANIEL P. SHEA Senior Vice-President, Chief Technology Officer R. THOMAS TROPEA Senior Vice-President, Marketing and Business Development PETER J. BAR Vice-President, Corporate Controller ELIZABETH L. DELBIANCO Vice-President, General Counsel and Secretary F. GRAHAM THOURET Vice-President, Corporate Treasurer L A U N N A 8 9 9 1 T R O P E R 58 A C I T S E L E C CORPORATE INFORMATION ANNUAL MEETING AUDITORS INVESTOR RELATIONS Celestica Investor Relations 844 Don Mills Road Toronto, Ontario, Canada M3C 1V7 Telephone: Facsimile: E-mail: clsir@celestica.com 416-448-2211 416-448-2280 The 1999 annual meeting of Celestica shareholders will be held at 10:00 a.m. Eastern Standard Time on April 27, 1999 at: TSE Auditorium 2 First Canadian Place The Exchange Tower Toronto, Ontario, Canada M5X 1J2 HEAD OFFICE Celestica Inc. 844 Don Mills Road Toronto, Ontario, Canada M3C 1V7 WEB SITE http://www.celestica.com KPMG LLP Suite 500 Yonge Corporate Centre 4120 Yonge Street Toronto, Ontario, Canada M2P 2B8 TRANSFER AGENTS AND REGISTRAR Subordinate Voting Shares Canada: Montreal Trust Company of Canada 151 Front Street West, 8th ﬂoor Toronto, Ontario, Canada M5J 2N1 U.S.: Bank of Nova Scotia Trust Company One Liberty Plaza 165 Broadway, 23rd ﬂoor New York, New York, U.S.A. 48232 . C N I S E T A I C O S S A E P O H D U T : S T N A T L U S N O C N G I S E D C I G E T A R T S CELESTICA GLOBAL LOCATIONS CORPORATE HEAD OFFICE Celestica Inc. 844 Don Mills Road Toronto, Ontario, Canada M3C 1V7 OPERATIONS NORTH AMERICA Canada 844 Don Mills Road Toronto, Ontario, Canada M3C 1V7 146 Adesso Drive Concord, Ontario, Canada L4K 3C3 U.S.A. 25902 Town Center Drive Foothill Ranch, California, U.S.A. 92610 2222 Qume Drive San Jose, California, U.S.A. 95131 2320 Owen Street Santa Clara, California, U.S.A. 95054 3450 East Harmony Road Fort Collins, Colorado, U.S.A. 80528 760 South Kentucky 15 Campton, Kentucky, U.S.A. 41301 300 Apollo Drive Chelmsford, Massachusetts, U.S.A. 01824 100 Domain Drive Exeter, New Hampshire, U.S.A. 03833 530 Columbia Drive Johnson City, New York, U.S.A. 13790 3600 Tarheel Drive Raleigh, North Carolina, U.S.A. 27609 Mid-South Logistics Center 455 Industrial Boulevard, Suite E La Vergne, Tennessee, U.S.A. 37086 925 First Avenue P.O. Box 5000 Chippewa Falls, Wisconsin, U.S.A. 54729 Mexico Blvd. Parque Industrial Monterrey 208 Apodaca, N.L., México C.P. 66600 Ave Stiva #500 Parque Industrial Stiva Aeropuerto Apodaca, N.L., México C.P. 66600 2 FA C I L I T I E S 5 FACILITIES EUROPE United Kingdom Manchester Road Ashton-under-Lyne Lancashire, U.K. OL7 0ES Chemical Lane Bradwell Wood, Longbridge, Hayes Longport, Stoke-on-Trent, Staffordshire, U.K. ST6 4P8 Middlewich Road, Byley Nr. Middlewich, Cheshire, U.K. CW10 9NT Westﬁelds House West Avenue Kidsgrove, Stoke-on-Trent Staffordshire, U.K. ST7 1TL Salt Union Bradford Road Winsford, Cheshire, U.K. CW7 2PE Ireland Balheary Industrial Estate Balheary Road, Swords Dublin, Ireland ASIA China S/F, 19 Sze Shan Street Yau Tong, Kowloon, Hong Kong, P.R.C. Mai Yuen Guan Li Qu, Changping Dongguan, Guangdong, P.R.C. 511737 Thailand 49/12 Laem Chabang Industrial Estate Moo. 5 Thungsukla, Siracha, Chon Buri, Thailand 20230 1998 ANNUAL REPORT CELESTICA AT A GLANCE > PARTNER OF CHOICE IN ELECTRONICS MANUFACTURING SERVICES T R O P E R L A U N N A 8 9 9 1 A C I T S E L E C PAGE 1 Corporate Profile PAGE 33 Management’s Responsibility PAGE 55 Share Information PAGE 2 Letter from the President and CEO PAGE 8 Our Growth Strategy PAGE 22 Quarterly Financial Information PAGE 24 Management’s Discussion and Analysis of Financial Condition and Results of Operations PAGE 34 PAGE 37 for Financial Statements, Auditors’ Report Consolidated Financial Statements Notes to Consolidated Financial Statements PAGE 56 Directors PAGE 57 Officers PAGE 58 Corporate Information PAGE 59 Celestica Global Locations

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