Clinical Laserthermia Systems Annual Report 1998

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1998 ANNUAL REPORT

CELESTICA AT A GLANCE >

PARTNER OF CHOICE IN ELECTRONICS MANUFACTURING SERVICES

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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

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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.

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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.

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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,

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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

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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.

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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

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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

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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

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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

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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.

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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

January 1,

September 27,

1996 to

October 22,

December 31,

Year ended December 31,

1996

1997

1998

(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

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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

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.

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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.

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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.

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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.

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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

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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.

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MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL STATEMENTS

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)

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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.

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CONSOLIDATED STATEMENTS OF EARNINGS (LOSS) (in thousands of U.S. dollars, except per share amounts)

Predecessor Company

Celestica Inc.

Period from

January 1,

September 27,

1996 to

October 22,

December 31,

Year ended December 31,

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

25,855

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)

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Predecessor Company

Celestica Inc.

Period from

January 1,

September 27,

1996 to

October 22,

December 31,

Year ended December 31,

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.

$
$

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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

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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.

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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

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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

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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

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

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.

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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

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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.

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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 to

be issued

Class A

Class B

Class C

Preferred

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 to

be issued

Class A

Class B

Class C

Preferred

Total

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)

–

–
–

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.

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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

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

Cash consideration received on options exercised

Shares reserved for issuance upon exercise of stock options or awards

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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.

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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

January 1,

September 27,

1996 to

October 22,

December 31,

Year ended December 31,

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

January 1,

September 27,

1996 to

October 22,

December 31,

Year ended December 31,

1996

1997

1998

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

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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

January 1,

September 27,

1996 to

October 22,

December 31,

Year ended December 31,

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:

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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

January 1,

September 27,

1996 to

October 22,

December 31,

Year ended December 31,

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%

9.00%

7.75%

7.50%

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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.

(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:

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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.

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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:

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Predecessor Company

Celestica Inc.

Period from

January 1,

September 27,

1996 to

October 22,

December 31,

Year ended December 31,

1996

1997

1998

25,866
(11)
–

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.

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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

January 1,

September 27,

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.

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

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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

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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.

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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

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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

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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

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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