OncoCyte Annual Report 2004

Plain-text annual report

Onex is a diversiﬁed company. REVENUES ASSETS EMPLOYEES $16 billion $12 billion 83,000 Onex’ objective is to create long-term value by building industry-leading businesses and to have that value reﬂected in our share price. Onex Corporation December 31, 2004 Report ONEX CORPORATION Onex is a diversiﬁed company with 2004 annual revenues of $16 billion, assets of $12 billion and 83,000 employees worldwide. We operate through autonomous subsidiaries in a variety of industries, including electronics manufacturing services, theatre exhibition, healthcare, customer management services, automotive products, personal care products and communications infrastructure. Onex’ objective is to create long-term value by building industry-leading businesses and to have that value reﬂected in our share price. Table of Contents 2 To Our Shareholders 5 2004 Review of Onex Operating Companies 21 Management’s Discussion and Analysis 66 Consolidated Financial Statements 104 Summary Historical Financial Information IBC Shareholder Information Throughout this report, all amounts are in Canadian dollars unless otherwise indicated. Our website is your source for complete, up-to-date information about Onex. We invite you to visit www.onex.com. Get to know our people and the individual strengths they bring to our team. Here is what we look for in businesses we want to own and what we provide. Get our financial results in a simple, comprehensible format, with interactive annual and quarterly financial statements. Learn about our operating See how Onex has principles and values, and why you should own Onex shares. performed against key market indices. Find out about our companies. Learn about our directors and corporate governance practices. To Our Shareholders Onex had excellent performance in 2004. We made four important acquisitions or investments during the year and added two more early in 2005. We completed substantial realizations on the value we created in Loews Cineplex, Armtec and the Commercial Vehicle Group. And, as the discussion and analysis that follows this letter shows, we recorded solid ﬁnancial performance at Onex and most of our operating companies. All of this was reﬂected in our share price, which increased 34 percent during the year to close at $19.75 at year end. The closing of the Onex Partners private equity fund in February 2004 was a key event in the evolution of Onex. This $2 billion Fund, to which Onex has committed $480 mil- lion for a 24 percent interest, provides capital for new Onex-sponsored acquisitions. As the General Partner, Onex earns management fees that help offset Onex’ corporate expenses, as well as a carried interest on the other investors’ capital. Equally important, ready access to a substantial pool of committed capital is enabling us to be highly responsive to attractive investment opportunities. Excellent value realizations We sold Loews Cineplex but retained the Canadian operations, primarily units of Cineplex Galaxy Limited Partnership. That transaction brought Onex’ total value from the theatre exhi- bition segment, including the year-end market value of the CGLP units we hold, to just over $1 billion on an investment of about $540 million. In late July, Armtec Limited, owned by ONCAP, our small cap fund, completed a successful initial public offering of income trust units. ONCAP, in which Onex owns a 28 percent interest and earns a carried interest as General Partner, sold all of its ownership of Armtec for proceeds of $76 million, more than double its original investment. After several years of restructuring, cost reductions, quality improvements and changes in senior management, the companies in our automotive products segment are performing well. Terriﬁc operating performance by Commercial Vehicle Group and a strong resurgence in the heavy truck market enabled CVG to complete an initial public offering of equity, which raised $180 million. We sold some of our holdings in CVG in the offering and retained a 24 per- cent minority interest. Onex’ total value to date with respect to CVG, including the value of shares held at the end of 2004, is close to $200 million on an investment of $69 million. 2 Onex Corporation December 31, 2004 Report T O O U R S H A R E H O L D E R S Six signiﬁcant investments Onex made four important acquisitions or investments during 2004 and two that closed in early 2005, despite very competitive private equity markets. We believe it’s important to note that whether these transactions were acquisitions of controlling interests or minority-interest investments, our objective is to work in partnership with the management teams to build the value of the companies for all shareholders. In early January 2004, Onex Partners invested $131 million in the equity of Magellan Health Services. The company, which is the leading provider of managed behavioural health- care in the United States, has performed beyond our expectations. Our investment was made at US$9.78 per share. Magellan shares at year end were US$34.16. In June, Onex Partners made a $114 million equity investment in Res-Care, Inc. to help fund its business expansion and to provide liquidity to some shareholders. That company delivers a range of valuable social services through two major divisions and is the largest U.S. provider of residential services for persons with developmental disabilities. Through the end of 2004, ResCare had recorded 52 consecutive quarters of revenue growth. In November 2004, Onex Partners completed a $102 million investment in convertible subordinated bonds of Compagnie Générale de Géophysique. CGG is a leading global supplier of products and services to the oil and gas industry. We received and accepted a very attrac- tive offer to sell just over half of our CGG bonds in early 2005 at 138 percent of our cost. We continue to hold the balance of our original position. In December, Onex Partners also acquired Cosmetic Essence in a transaction valued at approximately $300 million; the total investment made by Onex Partners was $138 million for 92 percent of the equity ownership. Cosmetic Essence is a leading provider of outsourced supply chain management services – a business model we understand well – to the personal care products industry. Subsequent to year end, Onex Partners made two important additions to Onex’ growing healthcare segment, completing acquisitions that had been agreed to in 2004. In early January 2005, Onex Partners acquired Center for Diagnostic Imaging, Inc., a leading provider of diagnostic and therapeutic radiology services. The transaction, valued at $225 million, was completed with an $88 million equity investment by Onex Partners for 84 percent of the equity of this company. Onex Corporation December 31, 2004 Report 3 T O O U R S H A R E H O L D E R S In early February, Onex Partners acquired two subsidiaries of Laidlaw International, American Medical Response, Inc. and EmCare Holdings Inc., investing $270 million for 97 per- cent of the equity in a transaction valued at approximately $1 billion. AMR is the largest provider of ambulance transport in the United States; EmCare is the largest supplier of outsourced services for hospital emergency department physician stafﬁng and management. We’re also creating other opportunities to put Onex’ cash to work to achieve superior returns by investing in businesses that meet our benchmarks for entrepreneurial man- agement and value-creation potential. In early 2005, we established Onex Real Estate Partners LP, a $250 million opportunity fund focused on acquiring and adding value to real estate properties in North America. Onex Real Estate Partners is led by a talented team of pro- fessionals who bring a strong track record and share Onex’ investment philosophy of value creation. We are evaluating opportunities in other alternative asset categories where we believe we can earn appropriate returns and also generate attractive acquisition opportunities. Looking ahead We expect the acquisition environment to remain competitive during 2005 as an increasing number of private equity ﬁrms with readily available ﬁnancing seek attractive investments throughout North America. Onex Partners is proving its value by enabling us to commit to acquisitions more efﬁciently and on a more timely basis. While it is too early at this writing to have certainty, the success of the ﬁrst Onex Partners fund may encourage us to create a second fund. If we do so, it is likely that we will use a substantial portion of our current $1.7 billion in cash resources to take a larger equity position in any new fund. Our intention, as always, is to be prudent managers of the cash and companies under our care. Our objective remains to buy for value and build for value and then to have that value reﬂected in our share price. Gerald W. Schwartz Chairman & Chief Executive Ofﬁcer March 2005 4 Onex Corporation December 31, 2004 Report 2 0 0 4 R E V I E W O F O N E X O P E R AT I N G C O M PA N I E S 2004 REVIEW OF ONEX OPERATING COMPANIES This is an introduction to Onex’ signiﬁcant operating companies as at December 31, 2004 and is presented by industry segment. Onex has major operating companies in eight industries, which are reviewed in the pages that follow. As a preface to these discussions, the table below provides a brief description of each operating company, Onex’ ownership and voting interest in that company, and 2004 revenue and asset information. 2004 Ownership/ Voting 2003 Ownership/ Voting Electronics Manufacturing Services Celestica Inc., one of the world’s largest electronics manufacturing 18%/84% 19%/85% services companies for original equipment manufacturers. 2004 Revenues – $11.5 billion 2004 Assets – $5.9 billion Theatre Exhibition Cineplex Galaxy Limited Partnership, Canada’s second-largest ﬁlm ex- 31%/100% 31%/100% hibition company, which operates 86 theatres with a total of 775 screens under the Cineplex Odeon and Galaxy Entertainment brands. 2004 Revenues – $356 million 2004 Assets – $368 million Healthcare Magellan Health Services, Inc., the largest provider of managed behavioural healthcare and insurance services in the United States. 2004 Assets – $1.5 billion 2004 Revenues – $2.2 billion Res-Care, Inc., the largest U.S. provider of residential, therapeutic, job training and educational support services to people with devel- opmental or other disabilities, to youth with special needs and to adults who are experiencing barriers to employment. Center for Diagnostic Imaging, Inc. (acquired in January 2005), a leading provider of diagnostic and therapeutic radiology services in the United States. Emergency Medical Services Corporation (acquired in February 2005), the largest U.S. provider of ambulance transport services, operating as American Medical Response, and EmCare, the largest provider of outsourced services for hospital emergency department physician stafﬁng and management. 6%/50% 24%/50%(a) 7%/34% 28%/34%(a) 20%/100% 84%/100%(a) 37%/100% 97%/100%(a) – – – – Customer Management Services ClientLogic Corporation, a leading business process outsourcer in 68%/88% 71%/89% the contact centre and fulﬁllment industries; the company provides customer care services for telecommunications, consumer goods, retail, technology, transportation, ﬁnance and utility companies. 2004 Assets – $303 million 2004 Revenues – $730 million (a) Represents the ownership and voting percentages of Onex Partners LP, including Onex. Onex Corporation December 31, 2004 Report 5 2 0 0 4 R E V I E W O F O N E X O P E R AT I N G C O M PA N I E S 2004 Ownership/ Voting 2003 Ownership/ Voting Automotive Products J.L. French Automotive Castings, Inc., a leading manufacturer 77%/100% 56%/100% of aluminum die-cast components for North American and European automotive original equipment manufacturers. 2004 Revenues – $691 million 2004 Assets – $452 million Commercial Vehicle Group, Inc., a leading supplier of interior 24%/24% (1) systems, vision safety solutions and other cab-related products to the global commercial vehicle market and other specialized trans- portation markets. Performance Logistics Group, a leading North American provider 26%/26% 50%/100% of automotive transportation and logistics services for light vehicle OEMs. Other Businesses Personal Care Products Cosmetic Essence, Inc., a leading provider of outsourced supply chain management services to the personal care products industry. 21%/100% 92%/100%(a) – Communications Infrastructure Radian Communication Services Corporation, a leading North 89%/100% 71%/80% American wireless communications infrastructure and network services company. 2004 Revenues – $113 million 2004 Assets – $70 million Small-capitalization Opportunities 28%/100% 25%/100% ONCAP LP, a $400 million fund focused on acquiring and building the value of small-capitalization companies based in North America, which actively manages investments in CMC Electronics Inc., Western Inventory Service Ltd., Futuremed Health Care Products L.P. and Canadian Securities Registration Systems Ltd. 2004 Assets – $820 million 2004 Revenues – $431 million (1) In 2003, Onex had ownership and voting in Bostrom (49%/100%) and Trim Systems (79%/100%), which were merged in August 2004 to form Commercial Vehicle Group. The logos in this table are the property of the particular companies listed. Additional information on the industry segments in which the Onex companies operate is provided in the Management’s Discussion and Analysis and in note 27 to the audited annual consolidated financial statements. (a) Represents the ownership and voting percentages of Onex Partners LP, including Onex. 6 Onex Corporation December 31, 2004 Report 2 0 0 4 R E V I E W O F O N E X O P E R AT I N G C O M PA N I E S Onex represents more value than the simple addition of the individual operating companies and investments discussed below. Onex has substantial cash resources for investment in attractive opportunities that can quickly alter the overall valuation of the Company, as the six acquisitions completed or announced in 2004 attest. We are a highly entrepreneurial enterprise, with extensive experience and expertise in acquisitions, strategy, negotiations and ﬁnancing that enable us to identify and acquire attractive companies. Moreover, we have a long history and strong track record of success in partnering with management teams to build acquired businesses into industry leaders, which has enabled signiﬁcant growth in value for Onex shareholders over the long term. The discussion that follows is a brief summary of signiﬁcant activities at Onex and its operating companies during 2004. The 2005 outlook for each operating company begins on page 57 of this report. 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 Celestica Celestica, Inc. (“Celestica”) (NYSE, TSX: CLS, CLS.SV, respectively) is a world leader in the delivery of innovative electronics manufacturing services (“EMS”). The company operates a highly sophisticated global manufacturing net- work with operations in Asia, Europe and the Americas, providing a broad range of integrated services and solutions to leading original equipment manufacturers (“OEMs”) such as Avaya, Inc., Cisco Systems, EMC Corporation, Hewlett- Packard, IBM, Lucent Technologies, Motorola, NEC and Sun Microsystems. The resurgence in business volumes evident at the end of 2003 continued during the ﬁrst half of 2004. While still above prior-year levels, growth during the second half of the year was lower than expectations as some of Celestica’s largest communications and information tech- nology (“IT”) customers reduced their orders in response to lower end-market demand. Given this environment of improved, but unpre- dictable demand, Celestica management continued trans- forming Celestica with a focus on reducing capacity in high-cost geographies, diversifying revenue and expanding its service offerings. The company embarked on a US$175– US$200 million restructuring program that will be com- pleted during the ﬁrst quarter of 2005. Five plants were closed under the program during 2004. In early 2005, the company announced an additional US$225–US$275 mil- lion restructuring initiative that will, during 2005 and early 2006, reduce capacity in its high-cost geographies in North America and Europe and shift greater levels of production to lower-cost regions. Diversifying revenue remained a key initiative during 2004, and annualized revenue from new business increased throughout the year. This, along with the results from acquisitions in 2004, resulted in a more diversiﬁed customer base. Customers outside Celestica’s traditional communications and IT segments – industries such as aerospace and defence, automotive, industrial and con- sumer – represented 19 percent of total revenues in 2004 compared to just 10 percent in 2003. The company also increased its efforts on growing its revenues and capa- bilities in its service offerings, such as design, fulﬁllment and after-market services, as customers look for its EMS providers to offer broader supply chain solutions beyond traditional manufacturing services. Stronger ﬁnancial performance Revenues increased 31 percent to US$8.8 billion in 2004 from US$6.7 billion in 2003. Approximately 17 percent of the rev- enue growth was due to improved base business volumes from some of Celestica’s largest customers and from new business wins. The acquisitions of Manufacturers’ Services Limited (“MSL”) in March 2004 and NEC Corporation’s oper- ations in the Philippines in April 2004 contributed a 14 per- cent increase in revenues. All of the company’s regions – the Americas, Europe and Asia – increased revenues year-over- year. In addition, the Asia region, which increased revenues by 44 percent from 2003 levels, beneﬁtted from the shift of Onex Corporation December 31, 2004 Report 7 2 0 0 4 R E V I E W O F O N E X O P E R AT I N G C O M PA N I E S manufacturing capabilities and volume from Celestica oper- ations in other geographic areas. Celestica reported operating earnings of US$178 mil- lion, before charges relating to the writedowns of receiv- ables and inventory. This compared to the US$1 million of operating earnings reported in 2003. During 2004, Celestica beneﬁtted from higher volumes, the inclusion of operating earnings from acquisitions and improvements resulting from its restructuring initiatives. This was partially offset by ap- proximately US$161 million of writedowns taken in the fourth quarter of 2004 due to uncertainty over the recoverability of certain receivables and inventory of one of the company’s customers whose ﬁnancial condition had deteriorated. Celestica FIGURE 1 (US$ millions) Revenues Operating earnings (1) Acquisition, restructuring and other expenses Writedowns of goodwill and intangible assets Writedowns of long-lived assets Net loss Total assets Total long-term debt 2004 8,840 178 (154) (319) (69) (863) 4,940 6,735 1 (95) (25) (58) (266) 5,135 (including current portion) 624 211 Onex’ ownership/voting Employees 18%/84% 19%/85% 46,800 40,100 The above amounts are based on Onex’ accounting policies (Canadian) and therefore may differ from those presented in Celestica’s ﬁnancial results. (1) Excludes US$178 million of charges related to writedown of receivables and inventory in 2004. 2003 of its CGLP units, is just over $1 billion compared to a total T H E A T R E E X H I B I T I O N In July 2004, Onex completed the sale of Loews Cineplex for approximately $2 billion. Onex received proceeds of about $739 million for its interest and retained Loews Cineplex’ interest in the Canadian operations. Those operations include units of Cineplex Galaxy Limited Partnership (“CGLP”) and Cineplex Odeon Corporation (“Cineplex Odeon Canada”), which owns a small number of theatres and real property not included in CGLP at the time of its initial public offering. These combined operations now represent Onex’ holdings in the theatre exhibition industry. Onex’ total value from the theatre exhibition segment, including the market value at December 31, 2004 investment of approximately $540 million made primarily in 2001. Onex currently owns 31 percent of the outstanding CGLP units and has a 100 percent voting interest. Cineplex Galaxy Income Fund In November 2003, Cineplex Galaxy Income Fund (“CGIF”) completed an initial public offering of trust units and used the proceeds from this offering to purchase an interest in the operating entity CGLP. At December 31, 2004, CGIF had a 42 percent interest in CGLP, while Onex and other shareholders held the other 58 percent ownership interest. CGLP acquired and combined the Canadian oper- ations of Loews Cineplex, known as Cineplex Odeon, and Onex’ Galaxy Entertainment subsidiary. This transaction created one of the leading Canadian cinema companies. Moreover, it brought together two of the most experienced To drive further gains in proﬁtability, Celestica deployed management teams in the business whom we were conﬁdent lean manufacturing techniques and six sigma quality prac- could achieve strong synergies between the two circuits. tices across its facilities. Additionally, management divest- We have not been disappointed. The management ed non-core businesses such as its Power Systems business team at Cineplex Galaxy, energized by industry veteran during the third quarter of 2004 and it signed a supply Ellis Jacob, merged the two organizations quickly and agreement to manufacture certain products for the buyer, C&D Technologies. In order to better align its capabilities to seamlessly, taking the best practices of both and imple- menting them throughout Cineplex Galaxy. The combined the needs of its largest OEM customers, Celestica also dis- organization has improved its purchasing efﬁciencies continued the development of its own 64-bit reference and reduced overheads by more than $2 million. Cineplex designs and exited its channel distribution activities for Galaxy has also pursued multiple re-branding opportuni- these products. 8 Onex Corporation December 31, 2004 Report ties in the past year to ensure that its circuit is exploiting the best of its two strongest brands. 2 0 0 4 R E V I E W O F O N E X O P E R AT I N G C O M PA N I E S The company continued to expand its high-quality circuit during 2004. It opened three new theatres – ten screens in Guelph, Ontario, six screens in Orillia, Ontario and ten screens in Pitt Meadows, B.C. – and expanded and upgraded its Lethbridge, Alberta theatre by four screens. Cineplex Galaxy now has 775 screens in 86 locations. Three-quarters of these screens are in theatres that are less than eight years old, ensuring patrons an outstanding entertainment experience. Box-ofﬁce revenues outpace industry Box-ofﬁce revenues for Cineplex Galaxy advanced 5 per- cent in 2004 compared to a 1 percent increase in box-ofﬁce revenues for the North American theatre exhibition indus- try. Concession revenues grew by more than 7 percent. Ancillary revenues from on-screen advertising, electronic games in theatre lobbies and events in theatres were up 10 percent for the year. While still a relatively small part of overall sales, ancillary revenues will be a key strategic focus of Cineplex Galaxy management in 2005 and beyond. Overall, 2004 revenues reported by Onex’ theatre segment were $356 million, a 6 percent increase compared to the $336 million reported in 2003. As noted, new theatres, higher average admission prices and concession revenues were the major drivers of the revenue increase. Operating earnings advanced 10 percent in 2004 to $43 million from $39 million in the prior year due primarily to higher rev- enues, purchasing efﬁciencies and reduced overhead costs. Cineplex Galaxy H E A L T H C A R E In 2002, we identiﬁed the healthcare industry in the United States as an attractive sector in which to apply our approach to value creation. Not only is the industry as a whole large and multi-disciplinary, it is also highly frag- mented. With an aging population requiring increasing care, and with governments expanding the scope of services they provide to employees and communities, we believe there is a signiﬁcant opportunity to deliver cost-effective services that create value for patients, payors and share- holders. During 2004 and early 2005, Onex made four important acquisitions or investments in the healthcare sector, as described below. Magellan Health Services In early January 2004, Onex completed its investment in Magellan Health Services, Inc. (“Magellan”) (NASDAQ: MGLN) as part of the plan for Magellan’s emergence from bankruptcy. The company is the leading provider of man- aged behavioural healthcare in the United States. Its customers include major health plans, state and local government agen- cies funded under Medicaid, and Fortune 1000 employers. Onex made a $131 million investment in Magellan for a 24 percent equity interest and effective voting control of the company. This was funded by Onex and Onex Partners LP (“Onex Partners”) with Onex’ share of the investment being FIGURE 2 (Cdn$ millions) 2004 2003 $30 million for an approximate 6 percent equity interest. Revenues Operating earnings Earnings before taxes Total assets Total long-term debt (including current portion) 356 43 35 368 129 336 39 147 359 114 Onex’ ownership/voting 31%/100% 31%/100% While Magellan was under bankruptcy protection, Onex worked with the company’s management and was an integral part of the reorganization plan. The reorganization enabled the company to emerge from bankruptcy with a US$500 million reduction in debt and an equity infusion of US$150 million, which includes the investment made by Onex. This strengthened capital structure created a very Employees 3,950 3,860 solid base for strategic growth at Magellan in an industry The above amounts are based on Onex’ consolidated results of Cineplex Galaxy Income Fund and Cineplex Odeon Canada, which has operations not included in Cineplex Galaxy Income Fund. Therefore these results will differ from those ﬁnancial results published by Cineplex Galaxy Income Fund. that we believe offers attractive opportunities for expansion. In its core business, Magellan offers clients an integrated suite of products under three broad categories of care. Behavioural care management provides cost-effec- tive solutions for managed mental health and substance abuse beneﬁts. Condition care management offers inte- grated solutions that address the challenges of co-morbid Onex Corporation December 31, 2004 Report 9 2 0 0 4 R E V I E W O F O N E X O P E R AT I N G C O M PA N I E S behavioural and medical conditions, such as depression Attractive avenues to long-term growth associated with chronic illness. The company’s employee We share management’s view that Magellan has many assistance and life management programs focus on prob- strengths that will enable it to grow proﬁtably in the lem resolution that combines traditional employee assis- coming years. A diversiﬁed base of high-quality customers, tance programs with work/life services. solid ﬁnancial position, very experienced management Strong performance in 2004 team, industry-leading information systems and demon- strated expertise in behavioural healthcare – each of these Under the guidance of an excellent management team led will play a key role in Magellan’s pursuit of growth. In by CEO Steve Shulman, Magellan was quick to deliver on the company’s core business of managed healthcare, an the promise we saw throughout the bankruptcy process. important opportunity is emerging from state and local gov- Contract retention was strong during 2004, with minimal ernments responsible for administering Medicaid services. rate concessions in negotiations with customers. Magellan With medical costs outstripping inﬂation, governments reduced its cost of care expenses during 2004 by more than are increasingly looking to the managed care model as an ﬁve percent through initiatives such as tighter utilization attractive alternative, and Magellan is actively seeking to management, improved claims recovery and lower unit administer more of its customers’ total healthcare spending. costs. Administrative expenses were also driven down by Longer term, Magellan believes it can do more the closure of four call centres, ongoing migration to an to serve the millions of lives it insures by developing new integrated information technology platform and company- products that take advantage of its information systems wide process improvements. and established delivery system. Magellan intends to test These meaningful gains resulted in ﬁnancial predictive modelling of high-cost members of its plans, performance for 2004 that exceeded our expectations. with a focus on depression, and then expand its modelling Revenues were US$1.7 billion and operating income was to a wider base of behavioural conditions that are dramati- US$184 million. Revenues and operating earnings increased cally increasing the total cost of care to health plans. During over 2003 due to cost of care that was not only lower than the ﬁrst half of 2005, Magellan will also launch a pilot pro- anticipated but also lower than the historical trends built gram designed to provide more-effective screening and into contract pricing. Margins were strong as a result care for the seriously obese, who tend to have signiﬁcantly and were further buoyed by lower administrative costs. greater medical costs, drug beneﬁts and time lost than the Importantly, Magellan generated signiﬁcant cash ﬂow in general population. 2004 – more than US$330 million – leaving the company with virtually no net debt and substantial resources with which to pursue new opportunities for growth. Magellan FIGURE 3 (US$ millions) Revenues Operating earnings Acquisition, restructuring and other expenses Net earnings Total assets Total long-term debt (including current portion) Onex’ ownership/voting Employees 2004(a) 1,687 182 (5) 84 1,183 374 6%/50% 4,300 The above amounts are based on Onex’ accounting policies (Canadian) and there- fore may differ from those financial results published by Magellan Health Services. (a) Includes Magellan’s financial results from the date of Onex’ investment, January 5, 2004. 10 Onex Corporation December 31, 2004 Report Res-Care, Inc. Res-Care, Inc. (“ResCare”) (NASDAQ: RSCR) is a human service company providing residential, therapeutic, job training and educational support to people with devel- opmental or other disabilities, to youth with special needs and to adults who are experiencing barriers to employment. In June 2004, Onex completed a $114 mil- lion equity investment in ResCare for an approximate 28 percent ownership interest in the company; this followed overwhelming approval of our participation from ResCare shareholders. This investment was funded through Onex Partners LP; Onex’ portion of the investment was about $27 million. ResCare is using the investment proceeds to fund its growth plans. 2 0 0 4 R E V I E W O F O N E X O P E R AT I N G C O M PA N I E S Largest U.S. provider of residential services during 2004 that will add approximately US$26 million ResCare delivers a range of valuable social services through in annual revenues. Just prior to year end, ResCare’s two major divisions. Disabilities Services, representing education and training unit was awarded a three-year, about 80 percent of revenues and operating earnings, pro- US$90 million contract by New York City to provide a range vides a full array of services from more than 2,500 locations of services to people with disabilities. to people with developmental disabilities such as Down’s syndrome and autism. ResCare is by far the largest provider Growing opportunity in in-home services of these services in the United States, operating in 33 states, The company is also growing organically. The provision of Washington, DC, as well as Ontario, Canada. These services periodic in-home services, in which state governments hire are primarily funded by Medicaid. ResCare to provide services to the elderly and to aging In its Training Services division, ResCare is the parents with developmentally disabled adult children at second-largest provider of Job Corps programs funded home, has been growing at double-digit rates over the by the U.S. Department of Labor. The company operates past three years. That trend is expected to continue, and 16 Job Corps centres in 12 states and Puerto Rico that capturing a growing share of the market for periodic provide training services to nearly 6,000 16 to 24-year-olds in-home services will remain a key initiative for ResCare. each day and 12,000 each year. ResCare also delivers The company is also pursuing revenue and margin training services to more than 6,000 under-skilled persons enhancement at its core ofﬁces by adding new homes. who are experiencing barriers to employment. The division ResCare also purchases operations from competitors that provides services to more than 20,000 Americans annually can be integrated into its existing clusters; in 2004, the under local programs funded by the Department of Health company completed “tuck-ins” representing annualized and Human Services and the Department of Labor. revenues of approximately US$20 million. Quality care, quality performance In making the investment in ResCare, we were particularly Center for Diagnostic Imaging In early January 2005, we completed the previously impressed with the quality and dedication of the manage- announced acquisition of Center for Diagnostic Imaging, ment team led by CEO Ron Geary. His team has created a Inc. (“CDI”) in a transaction valued at approximately caring, mission-driven culture that lives its slogan of “building lives, reaching potential.” That quality of care for clients has also led to an outstanding record of ﬁnancial success for shareholders. At year-end 2004, ResCare had $225 million. The company is the leading provider of diagnostic and therapeutic radiology services in the delivered 52 consecutive quarters of revenue increases. We United States, operating 32 diagnostic imaging centres in believe management has a compelling strategy for further nine major markets and having annual revenues of more growth, and we are pleased to be partners with them to than $125 million. The acquisition was funded through help facilitate their objectives. Onex Partners, which invested $88 million of equity in the ResCare is pursuing expansion on a variety of transaction for an 84 percent ownership interest. Onex’ fronts. After successfully integrating 48 acquisitions made portion of the equity investment was $21 million for an between 1997 and 2000 on a single business platform, the approximate 20 percent ownership interest. company is returning to an active acquisition program that CDI’s imaging services include magnetic resonance will take advantage of the continuing consolidation of this imaging (“MRI”), computed tomography (“CT”), diagnos- highly fragmented industry. Management’s intention is to tic and therapeutic injection procedures and other proce- add to existing clusters of group homes surrounding the dures such as PET/CT, conventional x-ray, mammography company’s core ofﬁces. ResCare completed two acquisitions and ultrasound. Onex Corporation December 31, 2004 Report 11 C U S T O M E R M A N A G E M E N T S E R V I C E S ClientLogic ClientLogic Corporation (“ClientLogic”) is a leading inter- national provider of business process outsourcing (“BPO”) services in the customer care, fulﬁllment, item processing and marketing services industry. The company has 55 facilities in North America, Europe, Africa and Asia, including ﬁve distribution centres, that are staffed by more than 20,000 associates. Customer care – around-the-clock customer service, sales and technical support – represented 88 percent of revenues in 2004, while fulﬁllment – cost-effective “pick, pack and ship” of client products – comprised 10 percent. ClientLogic manages more than 140 million customer transactions each year. The market for outsourced customer contact continued to expand during 2004 as corporations sought customer-care strategies that not only optimize their expenditures but also protect their brand image with consumers. ClientLogic’s solution for clients is known as its “Right Shore Strategy”, which focuses on partnering with clients to determine their core customer care needs and selecting the service offerings and locations that best meet those needs. Under this strategy, ClientLogic typically blends domestic contact centre capabilities with a ‘near-shore’ component where similarities in language skills and time zone ensure a seamless transition to out- sourced services. A low-cost offshore component is added where appropriate to get the best overall cost proﬁle at the lowest risk. 2 0 0 4 R E V I E W O F O N E X O P E R AT I N G C O M PA N I E S We believe the diagnostic imaging industry pro- vides an excellent opportunity for growth. An aging popu- lation is driving increased demand for these services, while technological advances are making diagnostic imaging increasingly important for physicians and their patients. CDI’s industry leadership, strong management team and advanced processes make it a strong foundation for value creation in Onex’ healthcare segment. American Medical Response and EmCare In late 2004, Onex announced an agreement to acquire American Medical Response, Inc. (“AMR”) and EmCare Holdings Inc. in a transaction valued at approximately $1 billion. In February 2005, we completed the purchase directly and through Onex Partners, which together with certain limited partner co-investors provided approximately $270 million in equity for a 97 percent ownership interest; Onex’ share of the total equity was $100 million for an approximate 37 per-cent ownership interest. Senior management of the businesses are also co-investors. Approximately $770 million of debt was raised to provide the balance of the funding for the transaction. AMR, headquartered in Denver, Colorado, is the largest U.S. provider of ambulance transport and emer- gency response services, operating 4,400 vehicles in more than 260 locations in 34 states. EmCare, based in Dallas, Texas, is the leading provider of outsourced services for hospital emergency department physician stafﬁng and management. The company provides its hospital clients with services such as employee recruiting, quality assur- ance, risk management and record-keeping. EmCare has more than 300 contracts with facilities in 38 states. AMR and EmCare give Onex very strong founda- tions for expansion in the emergency medical sector. The companies have industry-leading market positions, excel- lent customer bases and highly experienced management teams led by William Sanger, who is CEO of both compa- nies. We look forward to working with management to take advantage of growth opportunities that will build value not only for shareholders but also for customers. 12 Onex Corporation December 31, 2004 Report 2 0 0 4 R E V I E W O F O N E X O P E R AT I N G C O M PA N I E S Comprehensive right-shore footprint Thanks largely to the sharp focus of CEO Dave After a very active 2004, ClientLogic has substantially Garner and his management team, ClientLogic achieved a completed its right-shore infrastructure. The company signiﬁcant turnaround in its ﬁnancial results in 2004. added more than 1,100 seats at two new facilities in New Revenues increased 30 percent to US$562 million com- Brunswick and 500 seats at contact centres in Bangalore, pared to US$433 million in 2003. Part of that increase was India. The acquisition of Service Zone, Inc., which was attributable to ClientLogic’s acquisition of Service Zone completed in December 2003, and new construction in in late December 2003, which added US$75 million of 2004 added 1,400 seats at contact centres in the Philippines. revenue growth in North America in 2004. In addition, new A call centre in Rabat, Morocco was established to provide business wins with clients such as DirecTV and Bell Canada near-shore support for clients based in France. ClientLogic contributed US$31 million of revenue growth in 2004. is aggressively selling this increasingly comprehensive Higher revenues and the beneﬁts of cost-reduction initia- right-shore footprint to clients requiring scalable, cost- tives that began in 2003 led to a substantial increase in effective solutions for their customer contact. operating earnings, which rose US$50 million to US$34 mil- With the ongoing consolidation of the industry, lion in 2004 from an operating loss of US$16 million in the capable international competitors in offshore markets and prior year. the growing presence of non-traditional BPO providers in the customer care space, competition has remained ClientLogic intense. Client demands for ongoing cost and process im- provements favour large, stable providers, like ClientLogic, FIGURE 4 (US$ millions) 2004 2003 with a reputation for quality delivery and cost-effective Revenues solutions. Improving operational quality and productivity Operating earnings (loss) against clear metrics were key initiatives at ClientLogic. The Acquisition, restructuring and other expenses company achieved best-in-class status on both measures in Writedowns of goodwill and its North American operations in 2004 and will implement intangible assets similar strategies in its European operations in 2005. As one measure of the success of the management team’s focus on quality, ClientLogic was named a “Top 5 Global Provider” in the 2004 Teleservices Agencies Awards, a major recognition by its industry. Net loss Total assets Total long-term debt (including current portion) Onex’ ownership/voting Employees 562 34 (3) (3) (11) 253 198 433 (16) (6) (4) (52) 263 184 68%/88% 71%/89% 20,300 14,400 New business wins and solid performance The above amounts are based on Onex’ accounting policies (Canadian) and ClientLogic’s quality, cost-effectiveness and compelling therefore may differ from those presented in ClientLogic’s financial results. right-shore strategy led to net new business with Fortune 500 companies of about US$65 million during 2004, the majority of it with clients based in North America. ClientLogic’s fulﬁllment business completed a transition year in 2004 as the company refocused the segment on a true “pick, pack and ship” operation. Management imple- mented new information systems and resolved the execu- tion issues that had hampered the fulﬁllment area in 2003, and the operation entered 2005 with a very robust pipeline of new contracts. Onex Corporation December 31, 2004 Report 13 2 0 0 4 R E V I E W O F O N E X O P E R AT I N G C O M PA N I E S A U T O M O T I V E P R O D U C T S With our partner, Hidden Creek Industries (“HCI”), we have pursued a three-part strategy at Onex automotive products companies during the past three years: strengthen the management teams at each company, implement structural cost reductions to enable the companies to better address OEM pricing demands and improve their capital structures so that each company had more ﬁnancial ﬂexibility to grow. These initiatives take perseverance if they are to lead to sustainable value creation. As described below, during 2004 we began to see tangible beneﬁts from the consistent exe- cution of these performance improvement strategies by our operating teams. Partnership with Hidden Creek Industries The exclusive partnership Onex created with Hidden Creek Industries has been very successful in creating value for shareholders by acquiring and building major suppliers to automotive and commercial vehicle OEMs. In the six plat- form company investments since 1989, Onex and HCI have created approximately $700 million in value for Onex in these platforms – a remarkable record of achievement. During the time of our partnership, both Onex and HCI have evolved. The original partners at HCI have moved on. The automotive sector, while still of interest to Onex, has been reduced as a percentage of our total holdings, and our focus is now on large-scale transactions. As a result, we agreed with HCI management to end our formal partner- ship, effective the end of 2004. HCI staff, under a new com- pany, will continue to be involved with our holdings for a period of time, but will also be free to provide advice to other parties. We thank them for the key role they have played in helping us to identify and build value in this sector. Onex ownership interests Onex has ownership interests in three leading companies in the automotive products sector: • J.L. French Automotive Castings, Inc.: One of the world’s largest independent designers and manufacturers of high- pressure aluminum die castings and assemblies for the automotive marketplace; 14 Onex Corporation December 31, 2004 Report • Performance Logistics Group: The second-largest transporter of new automobiles in North America; and • Commercial Vehicle Group, Inc.: The world’s largest supplier of interior systems, vision safety solutions and other cab-related products for the global commercial vehicle market. In April 2004, Onex sold its remaining interest in Dura Automotive Systems, Inc. (“Dura Automotive”) for proceeds of approximately $23 million. The sale is the culmination of a 13-year partnership between Onex and Dura Automotive, during which Onex received total proceeds of $44 million from its $7 million investment in the company. North American car and light truck production declined slightly to 15.8 million units in 2004 from a vol- ume of 15.9 million units in 2003. As has been the case in recent years, retail sales were spurred by domestic OEM offers of purchase incentives such as attractive lease rates and cash bonuses. Overall, retail sales rose by 2 percent, with light trucks – pickups and sport utility vehicles – com- manding the major share of sales. J.L. French Automotive Castings, Inc. J.L. French Automotive Castings, Inc. (“J.L. French Automotive”) is a vertically integrated manufacturer with captive smelting operations, advanced engineering capa- bilities, large-scale, high-pressure die-casting operations, as well as machining and assembly expertise. The company, which operates ﬁve manufacturing loca- tions in North American and three in Europe, is the leading supplier of aluminum parts on two of the highest- volume domestic automotive platforms and provides signiﬁcant content on 12 of the 20 best-selling vehicles in North America. The senior management team that took over the leadership of J.L. French Automotive in the second half of 2003 has done an excellent job on its mandate of generating new business to ﬁll existing capacity. During 2004, the company’s focused sales approach and enhanced ﬁnancial ﬂexibility led to more than US$120 million in new business awards that will beneﬁt 2005 and future years. A portion of this business is with new customers, part of a deliberate initiative to diversify J.L. French Automotive’s customer base in North America by 2007. 2 0 0 4 R E V I E W O F O N E X O P E R AT I N G C O M PA N I E S Good ﬁnancial and operating performance In August 2004, the company completed a reﬁnancing of Revenues increased 2 percent to US$530 million in its outstanding indebtedness. The new ﬁnancing gives 2004 compared to US$521 million in 2003; approximately J.L. French Automotive improved liquidity, extends the US$10 million of the increase was attributable to new busi- maturity of the debt by nearly six years and provides the ness awards over the past two years. Stronger production ﬁnancial stability and ﬂexibility to pursue business growth. on key platforms for Ford – J.L. French Automotive’s largest As a result of the reﬁnancing, the company’s balance sheet customer – added US$5 million in revenues, though the was signiﬁcantly de-leveraged and interest costs were impact was partially offset by lower production volumes on reduced by US$25 million annually, allowing further debt speciﬁc General Motors models. In addition, J.L. French reduction. Onex invested US$39 million in new equity as Automotive’s European operations increased revenues by part of the reﬁnancing transaction, increasing its ownership US$16 million in 2004 due primarily to the beneﬁt of of J.L. French Automotive to 77 percent from 56 percent. favourable changes in foreign currency rates, partially off- Financial stability and the ﬂexibility to invest in new set by changes in product mix. programs are increasingly conditions of winning – or Operating income at J.L French Automotive, how- keeping – business in the automotive supply industry. ever, declined slightly to US$49 million in 2004 from US$51 million in 2003 due primarily to an additional US$4 million increase in materials costs and a growing reluctance by Commercial Vehicle Group, Inc. Commercial Vehicle Group, Inc. (“CVG”) (NASDAQ: CVGI) OEMs to accept a full pass-through of higher aluminum is a leading supplier of interior systems, vision safety prices. Under a multi-year program initiated by CEO Jack solutions and other cab-related products for the global Falcon, the company achieved more than US$10 million commercial vehicle market, including the heavy-duty in additional cost savings with the implementation of the (Class 8) truck market, the construction market and other ﬁrst phase of a new expense-reduction system based on specialized transportation markets. six sigma practices. Improved productivity and better use of raw scrap in North America added to overall efﬁciency. Despite these initiatives, performance in J.L. French Automotive’s United Kingdom operations that were not as efﬁcient offset a portion of the productivity gains achieved In August 2004, CVG completed a $180 million initial public offering. As part of that offering, Onex sold approximately 45 percent of its CVG shares, in North America. A consolidation plan to right size the receiving $54 million in net proceeds and recording a gain business to an appropriate level of employment in the UK of $60 million after considering previously recorded losses. is in place to improve performance in 2005. In addition, Onex received approximately $27 million on J.L. French Automotive FIGURE 5 (US$ millions) 2004 2003 Revenues Operating earnings Acquisition, restructuring and other expenses Writedown of goodwill Net loss Total assets Total long-term debt (including current portion) 530 49 (5) – (33) 376 638 521 51 (3) (157) (201) 367 656 Onex’ ownership/voting 77%/100% 56%/100% Employees 2,700 2,900 The above amounts are based on Onex’ accounting policies (Canadian) and therefore may differ from those presented in J.L. French Automotive’s financial results. the repayment of debt held by Onex, which resulted in a further gain of $15 million. The total value Onex has received on CVG, including the value of shares still held, totalled $196 million at the end of 2004 compared to an investment of approximately $69 million. Following the offering, Onex retained a 24 percent ownership interest in CVG but ceased to control the company. Resurgence of demand in 2004 During the past several years we have discussed the factors that impeded Class 8 heavy truck production in North America. By late 2003, those factors, which included over- building by OEMs in the late 1990s and a reluctance by trucking companies to purchase new equipment, had given over to more favourable dynamics. Pent-up demand Onex Corporation December 31, 2004 Report 15 2 0 0 4 R E V I E W O F O N E X O P E R AT I N G C O M PA N I E S for new trucks to replace aging vehicle ﬂeets, increased use strong operating synergies as well. PLG’s strength is in the of trucks as a more efﬁcient alternative to rail shipments southern and western United States; Leaseway primarily and overall economic expansion are pushing production serves markets in the eastern and Midwestern areas of the rates up substantially. OEMs built 170,000 units in 2003. country and Canada. Where their operations overlap in the Production increased by more than 50 percent in 2004 to Midwest, there is signiﬁcant opportunity to eliminate 260,000 units. empty miles through improved logistics. By year-end, PLG Two important trends in this expansion favour and HCI had completed about half of their planned inte- CVG’s business model. In the ﬁrst, OEMs are awarding gration of Leaseway, including conversion of all Leaseway business to suppliers like CVG who can provide complete information systems onto the PLG platform. The conver- cab solutions. In the second, large ﬂeet operators, in an sion was accomplished with a very low incremental cost effort to retain drivers, are acquiring vehicles with more and is expected to lead to US$1 million in savings in 2005. comfortable, fully ﬁtted interiors. For CVG, higher content The company believes that the total opportunity for merger- per vehicle not only drives revenues but margins as well. As related savings exceeds US$7 million. a result, revenues soared 32 percent in 2004 to US$380 mil- lion from US$288 million in 2003. Revenues were also driven by substantial growth in European and Asian markets. Three years of sharp focus on reducing ﬁxed costs by CVG enabled the company to record a substantial increase in operating earnings on higher revenues. Performance Logistics Group Performance Logistics Group (“PLG”) is the second-largest transporter of new automobiles in North America. The company delivers more than 3.8 mil- lion vehicles annually from OEM plants to dealers. In March 2004, Onex and HCI negotiated PLG’s acquisition of Leaseway Auto Carrier Group (“Leaseway”) from Penske Truck Leasing Co. (“Penske”) in a share- exchange transaction. Onex’ equity ownership in the new, larger PLG was reduced to 26 percent from 50 percent due to the issuance of additional shares by PLG, and Onex ceased to have voting control of the company on com- pletion of the transaction but retained signiﬁcant board representation. We believe the Leaseway acquisition was a very good strategic ﬁt for PLG. The combination created a company with three well-respected brands that serve all major automotive OEMs. The company became the second largest in the industry, touching more than 25 percent of all new cars and light trucks in North America. There are O T H E R B U S I N E S S E S Communications Infrastructure Radian Communications Services Radian Communications Services Corporation (“Radian”) is a provider of communications infrastructure, including network design, installa- tion and management, as well as tower engineering and construction to the telecommunications, broadcast and government sectors in North America. The company has a broad product offering and the capability to be a single-source provider of network communications, infrastructure technology and life-cycle service. Contrary to expectations at the end of 2003, the rebound in capital expenditures by wireless carriers antici- pated for 2004 by the communications infrastructure industry did not materialize in Canada, and spending increases in the United States during the second half of 2004 were modest. While sales of new towers did not achieve the levels expected for the year, Radian was suc- cessful in winning over $9 million in new broadcast tower contracts, primarily in the U.S. and international markets. 16 Onex Corporation December 31, 2004 Report 2 0 0 4 R E V I E W O F O N E X O P E R AT I N G C O M PA N I E S Further cost reductions in 2004 During the ﬁrst half of 2004, Radian struggled with poor margins in its tower business and uneven execution in its Personal Care Products Cosmetic Essence In early December 2004, Onex completed the acquisition U.S. operations. In June 2004, we appointed a new CEO, of Cosmetic Essence, Inc. (“CEI”), in a transaction valued Jack Pulkinen, an executive with strong ﬁnancial creden- at approximately $300 million. CEI is a leading provider tials and excellent general management experience. Jack has restructured Radian in recent months by simplifying the organizational structure, closing or consolidating branch operations, moving the head ofﬁce to the Oakville plant, reducing administrative and senior management of outsourced supply chain man- agement services to the personal care products industry, including formulating, manufacturing, ﬁlling, packaging and distribution. The staff and improving job execution and margins. These and company manufactures products such as fragrances, other initiatives have resulted in annual cost reductions of crèmes, lotions and colour cosmetics for a diversiﬁed cus- approximately $3.5 million and position Radian to be more tomer base of leading branded manufacturers and major efﬁcient and effective in the future. retailers. Annual revenues exceed $250 million. Onex and Late in 2003, Radian acquired certain assets of Onex Partners made a $138 million investment in the busi- ROHN Industries out of that company’s bankruptcy protec- ness comprised of $66 million of debt and $72 million of tion. By late 2004, all purchased equipment had been equity for a 92 percent ownership interest. Management of installed in the Peoria, IL facility and a single shift was fully CEI have the balance of the ownership. Onex’ share of the manned. ROHN continues to be a well-respected brand investment was $16 million of debt and $17 million in the with both domestic and international customers, and sales equity for a 21 percent ownership interest. are increasing each month. Radian expects the facility to contribute to proﬁtability during 2005. Compelling value proposition for customers Revenues for 2004 increased 5 percent to $113 mil- We believe CEI represents a very attractive opportunity lion. Approximately $12 million of the increase was to build value by helping to accelerate the growth of an attributable to the ROHN business. Radian reported an established market leader. The company’s fully integrated operating loss of $11 million in 2004 compared to an oper- outsourcing model presents a strong value proposition ating loss of $7 million in the prior year. The signiﬁcant to customers, enabling them to increase their speed-to- turnaround plan implemented by the new management market, focus on their own core strengths while reducing team began to show positive results in the fourth quarter. their cost structures. Nine of CEI’s top ten customers rely extensively on CEI to manage key aspects of the supply Radian chain on their behalf. FIGURE 6 (Cdn$ millions) 2004 2003 Revenues Operating loss Acquisition, restructuring and other expenses Writedowns of goodwill Net loss Total assets Total long-term debt (including current portion) 113 (11) (4) – (19) 70 57 108 (7) (2) (8) (23) 76 47 Onex’ ownership/voting 89%/100% 71%/80% Employees 600 600 The above amounts are based on Onex’ accounting policies (Canadian) and therefore may differ from those presented in Radian’s financial results. CEI is run by a highly respected and experienced management team, led by John Croddick, Sr., the compa- ny’s CEO and founder, that has rapidly grown the compa- ny’s market leadership with a strong group of customers. Sales are well diversiﬁed across its supply-chain capabili- ties, distribution channels and products. Moreover, the company enjoys excellent relationships with a loyal, high- quality customer base of leading marketers and retailers of personal care products such as Bath & Body Works, Onex Corporation December 31, 2004 Report 17 2 0 0 4 R E V I E W O F O N E X O P E R AT I N G C O M PA N I E S Elizabeth Arden, Wal-Mart and Target. As a result, CEI’s The ONCAP team, under the direction of its compound annual growth in revenues from 1999–2004 Managing Partner Michael Lay, is doing an excellent job of was more than 22 percent; operating income advanced at delivering on the primary objective for its ﬁrst fund. The a compound rate of more than 35 percent annually over commitment period for initial investments by the ﬁrst fund the same period. Attractive growth potential expired at the end of December 2004, though ONCAP has the ability to make follow-on investments for another two years. ONCAP has made six acquisitions to date and has We ﬁnd the longer-term opportunity in the US$33 billion realized fully on two of those. At the end of 2004, the fund personal care products industry in the United States to be had returned more than 80 percent of investors’ capital and very attractive. Strong stable growth is expected to be at a held four attractive companies with excellent prospects for compound annual rate slightly higher than the 4.5 percent continuing value creation. The two investments on which rate of recent years. Consumer demand for greater multi- ONCAP has realized value – Enerﬂex Systems and Armtec functional and therapeutic beneﬁts from products, Limited (“Armtec”) – generated an internal rate of return of favourable demographics and growth in private-label nearly 28 percent on invested capital. ONCAP manage- brands are expected to drive the need for outsourced ment has initiated discussions with potential investors for services such as research and development, manufacturing a new, slightly larger fund to be raised in 2005, in which and distribution. CEI operates in a large, highly fragmented Onex expects to be a major partner. The investment goals market, where meeting customer demands for speed-to- of the second fund are expected to mirror those of the ﬁrst. market, quality assurance and relationship management The environment for small- and mid-cap acquisi- are the key drivers of success. In our view, CEI has both tions continued to be very competitive during 2004. the management capability and physical infrastructure to Canadian and U.S. private equity ﬁrms, ﬂush with cash and leverage its signiﬁcant competitive advantages into future readily available ﬁnancing, aggressively pursued attractive growth, beginning in 2005. Small-capitalization Opportunities ONCAP ONCAP LP (“ONCAP”) is Onex’ dedicated vehicle for investments; in Canada speciﬁcally, the very strong market for income trusts also increased competitive pressures for quality assets. Nevertheless, during the ﬁrst half of 2004 ONCAP completed two acquisitions, Futuremed Health Care Products L.P. (“Futuremed”) and Canadian Securities pursuing value creation in small- and mid-cap companies. Registration Systems Ltd. (“CSRS”) – both leaders in their The ONCAP fund was estab- industry segments – that it believes have excellent lished with $400 million of prospects for value growth. committed capital from major In July, ONCAP used the income trust market to investors, of which Onex’ commitment was $120 million. complete an initial public offering of trust units of Armtec, ONCAP’s objective is to acquire signiﬁcant equity positions a leading manufacturer and marketer of drainage products in companies with leading positions in their industries or and engineered solutions for infrastructure applications. industry segments, in partnership with those companies’ ONCAP sold its entire interest in the company as part of the management teams. ONCAP typically makes equity invest- offering for gross proceeds of $76 million; Onex’ share of ments of $20 to $80 million in established companies in those proceeds was $25 million. The realization was more North America. These companies usually have enterprise than twice ONCAP’s initial investment, representing a values that range from $50 million to $500 million. Like 33.7 percent internal rate of return over the three years of Onex, ONCAP’s investment objective is to create superior Armtec ownership. value for its partners over the long term. 18 Onex Corporation December 31, 2004 Report 2 0 0 4 R E V I E W O F O N E X O P E R AT I N G C O M PA N I E S The ONCAP companies reported consolidated Western Inventory Service revenues of $431 million in 2004, up from $275 million in Western Inventory Service (“WIS”), acquired early in 2003, 2003. The growth in revenues was due primarily to the is the largest data collection and veriﬁcation company in inclusion of Futuremed from its February 2004 acquisition Canada and the third largest in the United States. WIS pro- date and CSRS from its April 2004 acquisition date. vides services such as inventory counting and consulting, Operating earnings of $41 million in 2004, however, were retail price veriﬁcation and information management. The slightly lower than the $43 million earned in 2003 due pri- company has a strong management group and excellent marily to the impact of the strengthening Canadian dollar relationships with customers that include major depart- on the results of CMC Electronics during 2004. ment, drug and electronics chains. CMC Electronics WIS executed its business plan in Canada efﬁciently and proﬁtably during 2004, also winning attrac- CMC Electronics, Inc. (“CMC Electronics”), acquired in tive new business from a national grocery retailer. While 2001, is a world-class leader in the design, manufacture and the company is continuing to explore opportunities to marketing of electronics and communications products expand beyond its traditional retail clients, the strategic for commercial and military applications. Late in 2004, focus of the business over the past year remained on CMC Electronics sold its CMC Electronics Cincinnati inventory counting. In the United States, WIS pursued and division, a manufacturer of infrared sensors and space won additional business, although not the volume of new electronics, for US$179 million. The sale leaves CMC business anticipated for 2004. The company continues to Electronics with a strategic focus on the aviation elec- pursue rapid growth in the U.S. market and potential new tronics business, with a primary emphasis on commercial service offerings. and military cockpit avionics. In September 2004, CMC Electronics hired Jean-Pierre Mortreux as President and Futuremed Health Care Products CEO to champion CMC Electronic’s next phase of growth. In February 2004, ONCAP invested $25 million in the He brings 25 years of industry experience and extensive equity of Futuremed in partnership with the company’s capabilities in leading the development, marketing, manu- founder and CEO Raymond Stone. Futuremed is Canada’s facture and support of aerospace electronics products and leading supplier of medical supplies, equipment and furni- systems. Mr. Mortreux was formerly CEO of Thales Avionics ture to long-term care facilities. The company is the largest North America. supplier in Ontario and has a strong presence in Alberta CMC Electronic’s commercial aviation business and in British Columbia. had an excellent year in 2004. The division found a very ONCAP is working closely with the company in positive reception to its new enhanced vision systems and evaluating opportunities to expand the company’s geo- electronic ﬂight bag for the business jet market. Its ﬂight graphic coverage and the range of products it provides to management systems sold well, and component manufac- nursing-home customers. The demographics of an aging turing rebounded nicely from lacklustre performance population base and the opportunity to create a national during 2003. CMC Electronic’s NovAtel had an outstanding presence suggest that Futuremed has substantial room to year with sales of its high-end GPS-based avionics safety grow in both size and revenues. system. CMC Electronic’s 50-percent ownership interest in publicly traded NovAtel (NASDAQ: NGPS) was valued at $239 million at December 31, 2004. In early 2005, CMC Electronics sold approximately 73 percent of its ownership in NovAtel for proceeds of about $118 million. Onex Corporation December 31, 2004 Report 19 2 0 0 4 R E V I E W O F O N E X O P E R AT I N G C O M PA N I E S Canadian Securities Registration Systems CGG is a leading global supplier of applied reser- In April 2004, ONCAP invested $29 million in equity in the voir solutions, geophysical services and products to the acquisition of CSRS. CSRS is a leading Canadian provider of worldwide oil and gas industry. We believe our investment registration and search services to ﬁnancial institutions in CGG to be both attractive and timely. CGG is expected to and auto ﬁnance and leasing companies. CSRS specializes experience growing demand for its services as oil produc- in registering Personal Property Security Act (“PPSA”) ers increase their exploration budgets in response to high charges on assets, conducting PPSA searches and register- commodity prices and declining reserve levels. ing security under the Bank Act. The Burnaby, B.C.-based In January 2005, Onex sold approximately $55 mil- company is the only national provider of these services, lion principal amount of its convertible subordinated processing up to 17,000 transactions each business day. bonds of CGG for proceeds of $76 million after receiving an CSRS has performed very well since ONCAP’s acquisition, attractive offer from a third party. The remaining bonds executing on its strategic initiatives and strengthening its would convert into approximately 650,000 ordinary shares reporting capabilities. of CGG having a value of $54 million based on the December 31, 2004 market price. Seismic services and equipment Compagnie Générale de Géophysique In early November 2004, Onex and Onex Partners completed a $102 million investment in the convertible subordinated bonds of Compagnie Générale de Géophysique (“CGG”) (Paris: GA_FP, NYSE: GGY). The eight-year bonds bear interest at the rate of 7.75 percent per annum and are con- vertible by Onex at any time into freely tradeable ordinary shares of CGG at a conversion price of US$60.70 per share. At their conversion price, the bonds would have converted into approximately 1.4 million ordinary shares of CGG, representing approximately 10.5 percent of the diluted ordinary shares. The bonds are not generally callable by CGG prior to maturity. Onex’ portion of this investment was $24 million. 20 Onex Corporation December 31, 2004 Report MANAGEMENT ’S DISCUSSION AND ANALYSIS The Management’s Discussion and Analysis (“MD&A”) analyzes signiﬁcant changes in the consolidated statements of earnings, consolidated balance sheets and consolidated statements of cash ﬂows of Onex Corporation (“Onex” or the “Company”). It should be read in conjunction with the audited annual consolidated ﬁnancial statements and notes thereto on pages 72 to 103 of this report. The MD&A and the Onex consolidated ﬁnancial statements have been prepared to provide information on Onex on a consolidated basis and should not be considered as providing sufﬁcient information to make an investment decision in regard to any particular Onex operating company. The MD&A is presented in the following sections: Onex Business Objective and Strategy Key Performance Indicators 21 Forward-Looking/Safe Harbour Statement and Fair Disclosure Statement 22 Overview 22 23 24 Financial Review 27 29 45 52 57 Outlook 62 Risk Management Significant Events in 2004 Consolidated Operating Results Consolidated Financial Position Liquidity and Capital Resources The MD&A is prepared as of March 3, 2005. FORWARD-LOOKING/SAFE HARBOUR STATEMENT AND FAIR DISCLOSURE STATEMENT This MD&A may contain, without limitation, certain statements that include words such as “believes”, “expects”, “anticipates” and words of similar connotation, which would constitute forward-looking statements. Forward-looking statements are not guarantees of future performance and involve risks and uncertainties that may cause actual performance or results to be materially different from those anticipated in these forward-looking statements. Onex is under no obligation to update any forward-looking statements contained herein should material facts change due to new information, future events or other factors. Onex Corporation December 31, 2004 Report 21 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S OVERVIEW Onex is a diversiﬁed company that operates through autonomous subsidiaries in a variety of industries, including electronics manufacturing services, theatre exhibition, healthcare, customer management services, automotive products, personal care products and commu- nications infrastructure. O N E X B U S I N E S S O B J E C T I V E A N D S T R A T E G Y Onex’ primary objective is to create long-term value by acquiring and building industry-leading businesses, and to have that value reﬂected in the Company’s share price. Onex employs various strategies to achieve this long-term objective, including: Industry leadership We seek to acquire companies that we believe offer a clear opportunity to create value for shareholders. The company must have exhibited leadership or the potential for leadership within its own industry. Opportunities for signiﬁcant growth may be in rapidly growing industries or in mature industries where there is the scope to build a leadership position through consolidation. We look to work in partnership with a strong and committed management team that is willing to make a sizeable personal ﬁnancial commitment to the business. Diversiﬁcation of capital Onex deliberately diversiﬁes its capital across a variety of companies and industries in order to limit its exposure to a single company or industry. This strategy also enables Onex to better weather the ebbs and ﬂows of economic and/or industry business cycles. At December 31, 2004, Onex had signiﬁcant businesses in the following reportable segments: Reportable Segments Companies Electronics Manufacturing Services Celestica Inc., one of the world’s largest electronics manufacturing services companies for original equipment manufacturers (“OEMs”). Theatre Exhibition Healthcare Cineplex Galaxy Limited Partnership, Canada’s second-largest ﬁlm exhibition company, which oper- ates 86 theatres with a total of 775 screens under the Cineplex Odeon and Galaxy Entertainment brands. Magellan Health Services, Inc., a leading provider of managed behavioural healthcare and insurance services in the United States. Res-Care, Inc., a leading U.S. provider of residential, therapeutic, job training and educational support services to people with developmental or other disabilities, to youth with special needs and to adults who are experiencing barriers to employment. Center for Diagnostic Imaging, Inc. (acquired in January 2005), a leading provider of diagnostic and therapeutic radiology services in the United States. Emergency Medical Services Corporation (acquired in February 2005), the largest U.S. provider of ambulance transport services operating under American Medical Response and EmCare, a leading provider of outsourced services for hospital emergency department physician stafﬁng and management. Customer Management Services ClientLogic Corporation, a leading business process outsourcer in the contact centre and fulﬁllment industries; the company provides customer care services for telecommunications, con- sumer goods, retail, technology, transportation, ﬁnance and utility companies. 22 Onex Corporation December 31, 2004 Report M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Automotive Products J.L. French Automotive Castings, Inc., a leading manufacturer of aluminum die-cast components for North American and European automotive OEMs. Other Businesses • Personal Care Products • Communications Infrastructure • Small-capitalization Opportunities Commercial Vehicle Group, Inc., a leading supplier of interior systems, vision safety solutions and other cab-related products to the global commercial vehicle market and other specialized transportation markets. Performance Logistics Group, a leading North American provider of automotive transportation and logistics services for light vehicle OEMs. Cosmetic Essence, Inc., a leading provider of outsourced supply chain management services to the personal care products industry. Radian Communication Services Corporation, a leading North American wireless communica- tions infrastructure and network services company. ONCAP LP, a $400 million fund focused on acquiring and building the value of small-capitalization companies based in North America, which actively manages investments in CMC Electronics Inc., Western Inventory Service Ltd., Futuremed Health Care Products L.P. and Canadian Securities Registration Systems Ltd. Maintain a ﬁnancially strong parent company Onex, the parent company, maintains a strong ﬁnancial position with substantial liquidity in order to be responsive to new opportunities to create long-term value and, if required, support existing operating companies. Onex also has committed capital through its private equity funds, Onex Partners LP (“Onex Partners”) and ONCAP LP (“ONCAP”). Onex has committed $480 million (US$400 million) to the $2 billion (US$1.7 billion) Onex Partners fund and controls the General Partner and Manager. ONCAP is a $400 million fund committed to acquiring and building value in small- to medium-cap companies based in North America. Onex has committed approximately $120 million to ONCAP and controls ONCAP’s General Partner. At December 31, 2004, Onex, the parent company, had approximately $1.7 billion of cash and near-cash items. In addition, the uncalled committed capital available through Onex Partners from other limited partners was $1.1 billion at the end of 2004. Ownership by management Each member of Onex’ management has a meaningful personal ﬁnancial interest in Onex and its operating companies. The Onex management team’s depth and breadth of experience on acquisitions, integration, strategy, negotiations and ﬁnancing supports the management teams of the operating companies in building the value of their businesses. In addition, the senior management teams at each operating company typically have a meaningful personal ownership in that business. During 2004, Onex’ management and Onex’ board of directors invested $32 million in the investments or acquisi- tions completed by Onex in 2004. K E Y P E R F O R M A N C E I N D I C A T O R S Onex operating companies performance Onex uses a number of key performance indicators to monitor the performance of its various operating companies. Some of these performance indicators are speciﬁc to the industry in which each company operates. While Onex considers net earnings to be an important measure of performance, we believe that revenues and operating earnings (as deﬁned on page 36) are more relevant in assessing the performance of Onex’ operating companies because operating earnings, in particular, eliminate interest charges, which are a function of the particular ﬁnancing structure, as well as any unusual charges. The discussion of these factors by industry segment provides an informative analysis of the components of the consolidated ﬁnancial results of Onex. Accordingly, we have used these measures for much of our discussion on performance in this MD&A. Share performance Onex’ success in building its businesses, the completion of signiﬁcant acquisitions and investments during 2004, and signiﬁcant value realizations led a 34 percent increase in Onex’ share price in 2004. At December 31, 2004, the market value of an Onex share had increased to $19.75 per share from $14.69 per share at December 31, 2003. Onex Corporation December 31, 2004 Report 23 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S FINANCIAL REVIEW This section discusses signiﬁcant changes in Onex’ consolidated statements of earnings, consolidated balance sheets and consolidated statements of cash ﬂows for the ﬁscal year ended December 31, 2004 compared to those for the year ended December 31, 2003 and in selected areas to those for the year ended December 31, 2002. Accounting policies and estimates Onex prepares its ﬁnancial statements in accordance and future cash ﬂows is subjective and requires manage- ment of the particular operating companies to exercise with Canadian generally accepted accounting principles judgment in making assumptions about future results, (“GAAP”). including revenues, operating expenses, capital expendi- The preparation of ﬁnancial statements in con- tures and discount rates. When an impairment test is under- formity with Canadian GAAP requires management to taken, the underlying assumptions are re-evaluated and make estimates and assumptions. These estimates and could give rise to future impairment charges. Included in assumptions affect the reported amounts of assets and Onex’ audited annual consolidated ﬁnancial statements liabilities, disclosures of contingent assets and liabilities, for the year ended December 31, 2004 is a writedown of and the reported amounts of revenues and expenses for goodwill and intangible assets of $393 million and a $94 mil- the period of the consolidated ﬁnancial statements. lion writedown of long-lived assets related to Onex’ oper- Signiﬁcant accounting policies and methods used in ating companies. These writedowns are discussed on preparation of the ﬁnancial statements are described in pages 40 and 41 of this MD&A. Notes 18 and 19 to the note 1 to the audited annual consolidated ﬁnancial state- audited annual consolidated ﬁnancial statements also ments. Onex and its operating companies evaluate their provide information on these charges. estimates and assumptions on a regular basis, based on historical experience and other relevant factors. Included Income tax valuation allowance in Onex’ consolidated ﬁnancial statements are estimates The income tax valuation allowance is recorded against used in determining allowance for doubtful accounts, future income tax assets when it is more likely than not inventory valuation, the useful lives of property, plant that some portion or all of the future income tax assets will and equipment and intangible assets, pension and post- not be realized. The reversal of future income tax liabilities, employment beneﬁts, restructuring costs, liability for projected future taxable income, the character of income medical claims incurred but not reported (“IBNR”) and tax assets, tax planning strategies and changes in tax laws other matters. Actual results could differ materially from are some of the factors taken into consideration when those estimates and assumptions. determining the valuation allowance. A change to these The assessment of goodwill and intangible assets factors would affect the estimated valuation allowance for impairment and the determination of income tax and income tax expense. Included in Onex’ audited valuation allowances requires the use of judgments, annual consolidated ﬁnancial statements for the year assumptions and estimates. Due to the material nature of ended December 31, 2004 was a $302 million charge these factors, they are discussed here in greater detail. recorded by Celestica relating to a valuation allowance for most of the company’s remaining deferred tax assets in the Goodwill, intangible assets and long-lived assets United States and Europe. Note 20 to the audited annual impairment tests consolidated ﬁnancial statements provides additional The impairment tests of goodwill, intangible assets and disclosure on income taxes. long-lived assets involve consideration of future cash ﬂows and fair values of individual assets, groups of assets or reporting units. The process of determining fair value 24 Onex Corporation December 31, 2004 Report M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S New accounting policies in 2004 Generally accepted accounting principles on these instruments are deferred until such time as the instruments are settled. As a result of these pronounce- In the ﬁrst quarter of 2004, Onex adopted Canadian ments, Onex recorded income of $29 million in the 2004 Institute of Chartered Accountants (“CICA”) Handbook audited annual consolidated ﬁnancial statements even Section 1100, “Generally Accepted Accounting Principles”. though there was no economic or ﬁnancial impact to This section establishes standards for ﬁnancial reporting Onex. The recorded income reﬂects the decline in value of in accordance with GAAP and provides guidance on sources the debenture liability and an increase in the value of the to consult when selecting accounting policies and deter- forward sales contracts. mining the appropriate disclosure if a matter is not explic- itly dealt with in the primary sources of GAAP. In addition, Asset retirement obligations Onex has adopted CICA Handbook Section 1400, “General Onex adopted the new CICA Handbook Section 3110, “Asset Standards of Financial Statement Presentation”, which Retirement Obligations”, in the ﬁrst quarter of 2004. This provides updated guidance on general concepts associated section establishes standards for the recognition, mea- with ﬁnancial statements. The adoption of these sections surement and disclosure of liabilities for asset retirement did not have a material impact on Onex’ audited annual obligations and the associated retirement costs. It applies consolidated ﬁnancial statements. to all legal obligations associated with the retirement Hedging relationships of a tangible long-lived asset that result from its acquisi- tion, construction, development or normal operation. The Effective January 1, 2004, Onex adopted Accounting adoption of this section did not have a material impact on Standards Board Accounting Guideline 13 (“AcG-13”), Onex’ audited annual consolidated ﬁnancial statements. “Hedging Relationships”, which addresses the identiﬁ- cation, designation, documentation and effectiveness of Stock-based compensation and other hedging relationships for the purpose of applying hedge stock-based payments accounting. This guideline also establishes certain con- Effective January 1, 2004, Onex’ operating companies ditions for applying hedge accounting and deals with adopted the revised CICA Handbook Section 3870, “Stock- the discontinuance of hedge accounting. Onex also based Compensation and Other Stock-based Payments”, adopted Emerging Issues Committee Abstract 128 (“EIC- which requires that a fair-value-based method of account- 128”), “Accounting for Trading, Speculative or Non- ing be applied to all stock-based compensation payments Hedging Derivative Financial Instruments”, which requires to employees. Previously, only non-employee and employee that any derivative ﬁnancial instrument that is not desig- awards that called for settlement with cash or other assets, nated as a compliant hedge under AcG-13 be measured or stock appreciation rights that called for settlement by at fair value, with changes in fair value recorded in current the issuance of equity instruments, were required to be year income. recorded as compensation expense. Onex has been At December 31, 2004, Onex, the parent company, recording the change in value of options on its shares and had two types of derivative instruments in place – investment rights under the Management Investment Plan exchangeable debentures and forward sales contracts as a charge or credit to earnings since January 1, 2002. The related to approximately 11 million shares of Celestica current change affects only the accounting for certain held by Onex – that were affected by these new pro- stock option plans at Onex’ operating companies. The nouncements. These instruments were entered into in operating companies adopted this new requirement on a 2000 and 2001. Onex determined that these instruments retroactive basis for awards made since January 1, 2002 did not qualify for hedge accounting based on the new that had not previously been recognized as compensation guidance, and accordingly Onex is required to mark-to- expense in the consolidated statements of earnings; there market these instruments to the value of the underlying was no restatement of prior periods. Accordingly, as at securities, which are Celestica subordinate voting shares, January 1, 2004, the adoption of this new requirement with the change in value since January 1, 2004 being reduced retained earnings by $5 million and decreased credited to income. Previously deferred gains of $730 million non-controlling interests by $5 million. Onex Corporation December 31, 2004 Report 25 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S The adoption of this revised section resulted issuer’s option, by a variable number of the issuer’s own in Onex’ operating companies recording $69 million of equity instrument to be presented as liabilities. Any expense in Onex’ audited annual consolidated statement securities issued by an enterprise that give the issuer of earnings for the year ended December 31, 2004, which unrestricted rights to settle the principal amount in cash was in addition to the expense recorded by the parent or the equivalent value of its own equity instruments will company. Note 14 to the audited annual consolidated no longer be presented as equity. This standard is appli- ﬁnancial statements provides pro forma net loss and loss cable on a retroactive basis, with restatement of prior per share for the year ended December 31, 2003 adjusted periods. As a result of adopting this standard, Onex re- for the effect of the stock option plans of operating compa- classiﬁed $149 million and $273 million, respectively, of nies not recorded through the statements of earnings. the principal component of convertible debt held by Celestica from non-controlling interests liability to long- Revenue recognition term debt as at December 31, 2004 and 2003. Effective January 1, 2004, Onex adopted the new pro- nouncements under EIC-141, “Revenue Recognition”, EIC- Consolidation of variable interest entities 142, “Revenue Arrangements with Multiple Deliverables” In June 2003, the CICA issued Accounting Guideline 15 and EIC-143, “Accounting for Separately Priced Extended (“AcG-15”), “Consolidation of Variable Interest Entities”. Warranty and Product Maintenance Contracts”. These Variable interest entities (“VIEs”) are entities that have sections provide more speciﬁc guidance on CICA Handbook insufﬁcient equity and/or their equity investors lack one Section 3400, “Revenue”, and improve the harmonization or more speciﬁed essential characteristics of a controlling of revenue standards between Canadian and U.S. GAAP. ﬁnancial interest. This guideline provides speciﬁc guidance The adoption of these EIC standards did not have a for determining when an entity is a VIE, and who, if anyone, material impact on Onex’ audited annual consolidated should consolidate the VIE. This guideline is effective on a ﬁnancial statements. Employee future beneﬁts prospective basis for Onex’ 2005 ﬁscal year. The effect of the adoption of this guideline is currently being evaluated. In the second quarter of 2004, Onex adopted the amended Investment companies CICA Handbook Section 3461, “Employee Future Beneﬁts”, In January 2004, the CICA issued Accounting Guideline 18 which requires additional disclosures about the assets, (“AcG-18”), “Investment Companies”. AcG-18 provides cash ﬂows and net periodic beneﬁt costs of deﬁned beneﬁt guidance regarding an investment company’s measure- pension plans and other post-retirement beneﬁts plans. ment of its investments, determining whether an entity is The new annual disclosures were effective for ﬁscal years an investment company; and when an investor in an ending on or after June 30, 2004, and the new interim dis- investment company should account for the investment closures were effective for quarters ending on or after that company’s investments in the same manner as the invest- date. Note 25 to the audited annual consolidated ﬁnancial ment company accounts for those investments. Generally, statements includes the additional disclosure of pension the guideline is effective for ﬁscal years beginning on or plans and other post-retirement beneﬁts plans. after July 1, 2004, and may be applied prospectively or retroactively. However, certain provisions are not required Financial instruments – presentation and disclosure to be adopted until ﬁscal years beginning on or after July 1, In December 2004, Onex adopted the amendment to 2005. Onex has determined that the adoption of this CICA Handbook Section 3860, “Financial Instruments – guideline will not have a material effect on Onex’ audited Presentation and Disclosure”. This amendment requires annual consolidated ﬁnancial statements. obligations of a ﬁxed amount that may be settled, at the 26 Onex Corporation December 31, 2004 Report M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S S I G N I F I C A N T E V E N T S I N 2 0 0 4 There were a number of signiﬁcant events that occurred during the year that affected Onex’ consolidated results for 2004 and their comparability to results for 2003. These events are provided here in chronological order. Investment in Magellan In January 2004, Onex and Onex Partners completed their investment in Magellan Health Services, Inc. (“Magellan”), a leading provider of managed behavioural healthcare in the United States. The total investment by Onex and Onex Partners was $131 million, of which Onex’ portion was $30 million for a 6 percent equity ownership in the company. Onex has effective voting control of Magellan through Onex Partners. As a result, Magellan’s operations have been consolidated and reported in a new reportable seg- ment – Healthcare – from the date of acquisition. Note 3 to the audited annual consolidated ﬁnancial statements pro- vides additional information on this acquisition. Performance Logistics Group acquired Leaseway Auto Carrier Group In late March 2004, Performance Logistics Group (“PLG”) acquired Leaseway Auto Carrier Group (“Leaseway”) from Penske Truck Leasing Co., L.P. in a share-exchange transac- tion. As part of this acquisition, PLG issued additional shares, which diluted Onex’ ownership in PLG to 26 per- cent from 50 percent, at which time Onex ceased to have voting control of the company. Consequently, PLG’s oper- ating results have been included on an equity accounting basis in 2004, with the presentation of the company’s revenues and operating earnings being collapsed to one line in the audited consolidated statement of earnings – “Equity-accounted investments.” For comparison, included in Onex’ ﬁscal 2003 audited annual consolidated statement of earnings were PLG’s revenues and operating earnings of $260 million and $4 million, respectively. Onex also recorded a $58 million non-cash gain relating to the Leaseway transaction, which has been included in the “Gains on shares of operating companies” line in Onex’ audited annual consolidated statement of earnings for the year ended December 31, 2004. The gain was comprised of a $22 million non-cash accounting dilu- tion gain and $36 million of losses of PLG previously rec- ognized by Onex that were in excess of other shareholders’ equity in PLG. Sale of Dura Automotive In April 2004, Onex sold its remaining interest in Dura Automotive. Onex received net proceeds of approximately $23 million and recorded a pre-tax gain of $4 million. This brings total proceeds from Onex’ ownership in Dura Automotive to $44 million compared to a total investment of $7 million in the company made since 1990. As a result of the sale, Dura Automotive’s operating results up to the date of sale in 2004 and for the full year ended December 31, 2003 have been reclassiﬁed to be presented as earnings from discontinued operations in Onex’ audited annual consolidated statements of earnings. Note 2 to the audited annual consolidated ﬁnancial statements discloses those amounts in the December 31, 2003 balance sheet that have been reclassiﬁed to show the assets and liabilities as discontinued. Investment in ResCare In June 2004, Onex and Onex Partners completed their $114 million equity investment in Res-Care, Inc. (“ResCare”) for an approximate 28 percent ownership interest in the company. Onex’ share of this investment was $27 million for a 7 percent ownership interest. ResCare provides resi- dential, therapeutic, job training and educational support to people with developmental or other disabilities, to youth with special needs and to adults who are experiencing barriers to employment. ResCare’s operating results from the date of acquisition have been included on an equity accounting basis in Onex’ audited annual consolidated ﬁnancial statements. Onex’ share of the net earnings of ResCare is reported in the “Equity-accounted investments” line in Onex’ audited annual consolidated statements of earnings and reported in the Healthcare segment in note 27 to the audited annual consolidated ﬁnancial statements. Sale of Loews Cineplex Entertainment and Cinemex In July 2004, Onex and Oaktree Capital Management, LLC (“Oaktree”), its partner in Loews Cineplex Entertainment Corporation and Grupo Cinemex (collectively “Loews Cineplex”), sold Loews Cineplex for approximately $2 bil- lion. Onex received proceeds of approximately $739 mil- lion for its interest and retained Loews Cineplex’ interest in the Canadian operations – primarily its units of Cineplex Galaxy Limited Partnership (“CGLP”) – which had a value of $112 million at the time of sale, and certain assets of the holding company, Cineplex Odeon Corporation (“Cineplex Odeon Canada”). As a result, Onex recorded a pre-tax gain Onex Corporation December 31, 2004 Report 27 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S of $238 million on this sale, which excluded the value of the Canadian operations. The total value Onex has received from the theatre exhibition segment, including the market value at December 31, 2004 of the CGLP units it holds, is just over $1 billion compared to a total investment of approximately $540 million. As a result of the sale, Onex has presented Loews Cineplex’ results as earnings from discontinued operations in the audited annual consoli- dated ﬁnancial statements; the comparative 2003 full-year results of Loews Cineplex have also been reclassiﬁed to be presented as discontinued. Note 2 to the audited annual consolidated ﬁnancial statements discloses those amounts in the December 31, 2003 balance sheet that have been reclassiﬁed to show the assets and liabilities as discontinued. The Canadian operations of Loews Cineplex that were retained by Onex and Oaktree include CGLP and Cineplex Odeon Canada, which has operations not included in CGLP. Collectively these operations represent the reported results of the theatre exhibition segment for the year ended December 31, 2004 and the comparative results for the same period of 2003. Commercial Vehicle Group initial public offering In August 2004, Commercial Vehicle Group, Inc. (“CVG”) completed a $180 million initial public offering. As part of that offering, Onex sold approximately 45 percent of its CVG shares, which had a cost of $31 million, receiving $54 mil- lion in net proceeds, and recording a gain of $60 million after accounting for previously recorded losses. In addi- tion, Onex received approximately $27 million on the repayment of debt held by Onex, which resulted in a further gain of $15 million. Onex’ equity ownership in CVG was reduced to 24 percent from 55 percent as a result of the offering and sale of shares, and Onex ceased to have voting control of the company at that time. As a result, CVG has been accounted for by the equity method follow- ing the offering. At December 31, 2004, Onex held 4.2 million CVG shares with a market value of $113 million compared to a cost of $38 million. 28 Onex Corporation December 31, 2004 Report Acquisition of Cosmetic Essence, Inc. In early December 2004, Onex acquired Cosmetic Essence, Inc. (“CEI”) in a transaction valued at approximately $300 million. The investment made through Onex Partners was approximately $138 million for a 92 percent ownership interest. Onex’ share of this investment was approximately $33 million for a 21 percent ownership interest. CEI is a leading provider of outsourced supply chain management services to the personal care products industry, which includes formulating, manufacturing, ﬁlling, packaging and distribution services. The company manufactures products such as fragrances, crèmes, lotions and colour cosmetics for a diversiﬁed customer base of leading branded manufacturers and major retailers. CEI’s ﬁnancial results from the date of acquisition in December 2004 are not signiﬁcant to Onex’ consolidated results, and there- fore, are not consolidated in the audited annual statement of earnings for the year ended December 31, 2004. As at December 31, 2004, CEI’s balance sheet has been included in the audited balance sheet. Sale of Cincinnati Electronics business In December 2004, ONCAP’s subsidiary, CMC Electronics, Inc. (“CMC Electronics”), sold its Cincinnati Electronics business (“Cincinnati Electronics”) for net proceeds of $226 million, which the company used to repay its senior debt. As a result of this sale, Onex recorded an after-tax gain of $49 million. In January 2005, CMC Electronics paid a dividend to all its shareholders. ONCAP received approximately $136 million of that dividend, of which Onex’ portion was approximately $40 million. Onex received an addi- tional dividend of $77 million due to its direct ownership interest in CMC Electronics not held through ONCAP. The results of Cincinnati Electronics have been presented as earnings from discontinued operations in Onex’ audited annual consolidated ﬁnancial statements. The comparative 2003 full-year results of Cincinnati Electronics have also been reclassiﬁed and presented as discontinued. Note 2 to the audited annual consoli- dated ﬁnancial statements discloses those amounts in the December 31, 2003 balance sheet that have been restated to show the assets and liabilities as discontinued. Sale of InsLogic In late December 2004, Onex signed an agreement to sell InsLogic Corporation (“InsLogic”) for approximately $22 million. This compares to a total investment of equity and debt in InsLogic of $52 million. The sale was com- pleted in mid-January 2005. As a result of the agreement to sell InsLogic as at December 31, 2004, Onex has presented InsLogic’s results as earnings from discontinued opera- tions on the audited annual consolidated ﬁnancial state- ments; the comparative ﬁscal 2003 results of InsLogic have also been reclassiﬁed to be presented as discontinued. Note 2 to the audited annual consolidated ﬁnancial state- ments discloses those amounts in the December 31, 2003 balance sheet that have been restated to show the assets and liabilities as discontinued. Weakening of the U.S. dollar relative to the Canadian dollar Most of Onex’ operating companies are based in the United States or report in U.S. dollars. As Onex reports its consolidated ﬁnancial results in Canadian dollars, the movement of the U.S. dollar to Canadian dollar exchange rate directly affects Onex’ audited annual consolidated statements of earnings and audited consolidated balance sheets. The U.S. dollar’s average value was 1.3015 Canadian dollars for the year ended December 31, 2004 compared to 1.4015 Canadian dollars for the prior year. The lower U.S. dollar to Canadian dollar exchange rate used to convert Onex’ U.S.-based operating companies’ results was a con- tributing factor in the variance of the 2004 full-year results compared to last year. In addition, Onex, the parent company, holds a signiﬁcant portion of its cash in U.S. dollars. The revalua- tion of U.S.-dollar-denominated cash based on the current exchange rate has resulted in an exchange loss of $124 mil- lion being recorded for the year ended December 31, 2004. This compares to a loss of $139 million recorded for the year ended December 31, 2003. Share repurchases under Onex’ Normal Course Issuer Bids Onex’ consolidated balance sheet as at December 31, 2004 reﬂects the impact of Onex’ repurchases of its Subordinate Voting Shares under the Company’s Normal Course Issuer M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Bids. During 2004, the Company repurchased 9,143,100 Subordinate Voting Shares at a total cost of $150 million. This compares to 11,586,100 Subordinate Voting Shares repurchased at a total cost of $166 million in the prior year. C O N S O L I D A T E D O P E R A T I N G R E S U L T S This section should be read in conjunction with the audited annual consolidated statements of earnings, found on page 69 of this report, and the corresponding notes thereto. Variability of results Onex’ annual consolidated operating results may vary substantially from year to year for a number of reasons, including some of the following: acquisitions or disposi- tions of businesses by Onex, the parent company; the volatility of the exchange rate between the U.S. dollar and the Canadian dollar; the change in market value of stock- based compensation and derivative instruments; and activities at Onex’ operating companies. These activities may include the purchase or sale of businesses; ﬂuctua- tions in customer demand, materials and employee- related costs; changes in the mix of products and services produced and charges to restructure operations. The dis- cussion that follows identiﬁes some of the material factors that affected each of Onex’ operating segments and Onex’ audited annual consolidated ﬁnancial results. Consolidated revenues Consolidated revenues were $16.2 billion in 2004 compared to $12.1 billion in 2003 and $15.9 billion in 2002. Chart 1 shows consolidated revenues in Canadian dollars by industry and geographic segments for 2004, 2003 and 2002. Table 1 provides a breakdown of revenues by industry segment in the functional currencies of the companies for 2004, 2003 and 2002 and the change in revenues from those periods. We provide revenues in the operating companies’ func- tional currencies to show the impact of foreign exchange translation on revenues. Onex Corporation December 31, 2004 Report 29 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Revenue Diversiﬁcation by Industry and Geographic Segments CHART 1 ($ millions) E L E C T R O N I C S M A N U FA C T U R I N G S E R V I C E S T H E AT R E E X H I B I T I O N H E A LT H - C A R E C U S T O M E R M A N A G E M E N T S E R V I C E S A U T O M O T I V E P R O D U C T S O T H E R (a) T O TA L 12,984 356 2,199 730 1,669 547 16,244 15,911 11,480 336 627 605 1,394 402 375 12,119 9,382 256 932 04 03 02 04 03 02 04 04 03 02 04 03 02 04 03 02 04 03 02 U.S. Canada Europe Other(b) 17% 18% 21% 44% 21% 20% 19% 40% 37% 15% 17% 31% – 100% – – – 100% – – – 100% – – 100% – – – 47% 10% 36% 7% 50% 8% 41% 1% 52% 7% 41% – 81% – 19% – 78% 1% 20% 1% 83% – 16% 1% 17% 82% – 1% 20% 80% – – 19% 80% – 1% 33% 18% 17% 32% 28% 22% 19% 31% 41% 16% 18% 25% (a) Includes Radian, ONCAP and parent company. (b) Other includes primarily operations in Central and South America, Asia and Australia. Revenues by Industry Segment in the Functional Currency TABLE 1 ($ millions) Functional Currency Electronics Manufacturing Services Theatre Exhibition Healthcare Customer Management Services Automotive Products Other(a) 2004 2003 US8,840 C356 US1,687 US562 US710 C547 US6,735 C336 – US433 US994 C402 Revenue Increase/ (Decrease) 2004–2003 US2,105 C20 US1,687 US129 US(284) C145 Revenue Increase/ (Decrease) 2003–2002 2002 US8,272 US(1,537) C256 – US399 US1,064 C375 C80 – US34 US(70) C27 Results are reported in accordance with Canadian generally accepted accounting principles. These results may differ from those reported by the individual operating companies. (a) Other includes Radian, ONCAP and parent company. Electronics Manufacturing Services (“EMS”) Celestica reported revenues of $11.5 billion in 2004, a volumes from some of Celestica’s top customers and new business wins, which collectively accounted for a 17 percent 22 percent increase from $9.4 billion in 2003. In the com- increase in revenue. Revenue from the acquisitions of pany’s functional currency, Celestica reported revenues Manufacturers’ Services Limited (“MSL”) in March 2004 and of US$8.8 billion, up 31 percent from US$6.7 billion in NEC Corporation’s operations in the Philippines in April 2003. Revenues increased due to improved base business 2004 contributed a further 14 percent increase in revenues. 30 Onex Corporation December 31, 2004 Report M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S All of the company’s regions – the Americas, Europe and primarily to additional revenues from the inclusions of Asia – increased revenues year-over-year as they beneﬁtted new theatres ($19 million), an improvement in average from new business wins from existing and new customers admission and concession revenues per patron ($5 million), and from acquisition revenue. In addition, the Asia region, partially offset by decreased attendance levels ($7 million). which increased revenues by 44 percent in 2004, beneﬁtted That revenue increase was split between box-ofﬁce rev- from its expanded manufacturing capabilities and volume enue of $11 million and concession revenue of $6 million. from Celestica operations in other geographic areas. The 2003 combined operations of CGLP and For the year ended December 31, 2003, Celestica Cineplex Odeon Canada reported revenues of $336 mil- reported revenues of $9.4 billion, a 28 percent decline from lion, up $80 million from $256 million in 2002. Much of the $13 billion in 2002. Excluding the impact of foreign cur- revenue growth in 2003 was due to the inclusion of a full rency translation, the company reported revenues in its year of revenues for CGLP and Cineplex Odeon Canada, functional currency of US$6.7 billion, down 19 percent which Onex acquired in March 2002. from US$8.3 billion in 2002. Lower volumes due to pro- longed weakness in end-markets in the communications and computing sectors and reduced prices on compo- Healthcare The healthcare segment is a new reportable segment in nents and services related to excess capacity in the EMS 2004 following Onex’ investment in Magellan in early industry were the signiﬁcant factors in the decline of rev- January 2004. Reported revenues for Magellan totalled enues. Most of the revenue decrease was from Celestica’s $2.2 billion in 2004. In the company’s functional currency, Americas and Europe regions, which collectively reported Magellan reported revenues of US$1.7 billion in Canadian revenues of US$4.5 billion in 2003, down from US$6.4 bil- GAAP. The company is a leading provider of managed lion in 2002, due to reduced customer orders resulting behavioural healthcare and insurance services in the from the downturn in end-market demand and from United States. The company reports ﬁnancial results in product transfers to some of the company’s lower cost four segments – Health Plan Solutions, Employer Solutions, operations in Asia. Partially offsetting the lower revenues Public Sector Solutions and Corporate and Other. Health in the Americas and Europe regions were higher revenues Plan Solutions accounted for US$923 million of revenues in Asia, up 17 percent, due to new business wins, the from contracts with managed care companies, health transfer of production from Celestica operations located in insurers and other health plans. Employee Solutions, higher-cost geographic areas and the inclusion of full-year which accounted for US$136 million of revenues, provides revenues from acquisitions completed in 2002. employee assistance program services, managed behav- Theatre Exhibition The theatre exhibition segment includes the operations ioural healthcare services and integrated products under contracts with employers, including corporations, govern- ment agencies and labour unions. Public Sector Solutions, of CGLP and Cineplex Odeon Canada, which operates a which generated US$628 million in revenues, provides small number of theatres in Canada not included in CGLP. managed behavioural healthcare services to Medicaid CGLP and Cineplex Odeon Canada generate revenues pri- recipients under contracts with state and local govern- marily from box-ofﬁce and concession sales, which are mental agencies. The Corporate and Other clients segment affected by attendance levels and by changes in the aver- comprises operational support functions such as infor- age per patron admission and concession revenues, as mation technology and sales and marketing as well as well as by the commercial appeal of the ﬁlms released and corporate support functions such as executive, ﬁnance, the successful marketing and promotion of those ﬁlms by human resources and legal. the ﬁlm studios and distributors. Theatres opened or closed in the year will also affect revenues. During 2004, CGLP and Cineplex Odeon Canada reported combined revenues of $356 million, up 6 percent from $336 million in 2003. The revenue growth was due Onex Corporation December 31, 2004 Report 31 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Customer Management Services ClientLogic Corporation (“ClientLogic”) reported revenues Automotive Products Onex’ automotive products segment includes the opera- of $730 million in 2004, up 21 percent from $605 million in tions of J.L. French Automotive Castings, Inc. (“J.L. French 2003. In the company’s local currency and Canadian GAAP, Automotive”), PLG and CVG. In 2004, there were signiﬁ- ClientLogic’s revenues grew 30 percent to US$562 million in cant events affecting the accounting for PLG and CVG in 2004 from US$433 million in 2003. ClientLogic’s acquisition the automotive products segment. The issuance of shares of Service Zone, Inc. (“Service Zone”) in late December by PLG for its acquisition of Leaseway in March 2004 and 2003 contributed US$75 million of the revenue growth the initial public offering (“IPO”) of CVG and corresponding in North America. In addition, net new business wins sale of CVG shares by Onex as part of that IPO in August with clients such as DirecTV and Bell Canada provided 2004, resulted in Onex ceasing to have voting control of US$31 million, or 24 percent, of the revenue growth in 2004 both companies. As a result, the revenues for each of PLG over last year. and CVG have been consolidated up to the time that Onex In 2003, revenues for ClientLogic reported in ceased to have voting control. Thereafter, Onex began Canadian dollars declined to $605 million from $627 mil- to report the operations of PLG and CVG on an equity lion in 2002. In the company’s functional currency, accounting basis, which is reported in the “Equity- however, ClientLogic reported an 8 percent increase in accounted investments” line in the audited annual consol- revenues to US$433 million in 2003 from US$399 million idated statement of earnings in 2004. in 2002. The revenue increase was due primarily to a The automotive products segment reported con- 6 percent increase in North American warehouse man- solidated revenues of $932 million in 2004 compared agement services associated with a new client, SBC to $1.4 billion in 2003 and $1.7 billion in 2002. Table 2 Communications; a US$4 million increase in revenues provides comparative revenues by operating company in from the inclusion of a new joint-venture call centre in the automotive segment for 2004, 2003 and 2002 in both India that commenced operations in the second quarter of Canadian dollars and the companies’ functional currencies. 2003; and the strengthening of the euro and the British pound against the U.S. dollar in 2003. These increases were partially offset by customer disengagements and lower North American and European customer contact management revenues caused by pricing pressures. Automotive Products Revenues TABLE 2 ($ millions) Canadian Dollars Functional Currency J.L. French Automotive Commercial Vehicle Group (1) Performance Logistics Group(2) Total 2004 691 241 – 932 2003 732 402 260 2002 865 490 314 1,394 1,669 2004 US530 US180 – US710 2003 US521 US288 US185 US994 2002 US550 US313 US201 US1,064 (1) Includes CVG’s revenues up to the time of the company’s initial public offering in August 2004 when Onex ceased to have voting control of the company and thereafter began to account for CVG’s operations on an equity basis. (2) PLG’s operating results were accounted for on an equity basis in 2004 and therefore the company’s revenues were not included in Onex’ consolidated audited annual financial statements. 32 Onex Corporation December 31, 2004 Report M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S J.L. French Automotive (US$180 million) represent that company’s revenues up to North American car and light truck production declined the time of the August initial public offering, after which slightly to 15.8 million units in 2004 from 15.9 million units Onex’ ownership in CVG was accounted for on an equity in 2003 and 16.4 million units in 2002 as non-domestic basis with the company’s revenues and operating earnings automotive companies gained market share and the Big being collapsed to one line in the statement of earnings. Three North American automotive companies – General A comparative discussion of 2004 revenues to those of Motors, Ford and DaimlerChrysler – experienced lower 2003 is not relevant as the 2003 revenues represent sales in 2004. J.L. French Automotive, a leading independ- 12 months of operations. ent supplier of complex die-cast aluminum components CVG reported revenues of $402 million in 2003, for automotive original equipment manufacturers (“OEMs”), an $88 million decline from $490 million in 2002. reported revenues of $691 million, down 6 percent from Excluding the foreign currency translation impact, the $732 million in 2003. Excluding the impact of foreign company reported revenues of US$288 million, down exchange translation, the company reported a 2 percent US$25 million from US$313 million in 2002. Approximately increase in revenues to US$530 million in 2004 from US$17 million of the revenue decline was due primarily to US$521 million in 2003. Approximately US$5 million of the overall lower production volumes in the heavy truck and revenue growth was due to stronger production on speciﬁc bus markets. In addition, approximately US$15 million of Ford platforms and US$10 million from new business with the decline was due to the completion of projects with new and existing customers. Partially offsetting these some of CVG’s existing customers and customer-driven growth factors were lower revenues of US$6 million, caused change in product mix to fewer value-added components. by lower production on speciﬁc platforms. In addition, Partially offsetting these unfavourable factors was approx- J.L. French Automotive’s European operations increased imately US$16 million in revenues from stronger OEM revenues by US$16 million in 2004 due primarily to the revenues in the Asian construction seating market and beneﬁt of favourable changes in foreign currency rates, new business wins. partially offset by changes in product mix. In 2003, J.L. French Automotive’s revenues declined Performance Logistics Group to $732 million from $865 million in 2002. In its functional The acquisition of Leaseway by PLG in late March 2004 in currency, J.L. French Automotive reported revenues of a share-exchange transaction resulted in PLG issuing addi- US$521 million in 2003, a 5 percent decline from 2002 rev- tional shares. This issuance of shares by PLG diluted Onex’ enues of US$550 million. Much of that year-over-year ownership in PLG to 26 percent from 50 percent, at which decline was due to lower automotive production volumes time Onex ceased to have voting control of the company. at one of its primary customers, Ford. Partially offsetting Therefore, PLG’s operating results have been included on this decline were favourable changes in European curren- an equity accounting basis in 2004 with the presentation cies relative to the U.S. dollar, which improved revenues of the company’s revenues and operating earnings being from J.L. French Automotive’s European operations by collapsed to one line in the audited annual consolidated $19 million. statement of earnings – “Equity-accounted investments.” PLG’s revenues in 2003 declined 17 percent to Commercial Vehicle Group $260 million from $314 million in 2002, due primarily to In early August 2004, CVG, a supplier of interior systems, lower new vehicle deliveries associated with lower auto- vision safety solutions and other cab-related products motive production volumes from PLG’s major customer. to the global commercial vehicle market, completed a The company reported revenues in its functional currency $180 million initial public offering. As part of that offering, of US$185 million, down 8 percent from US$201 million Onex sold some its CVG shares, which reduced its equity in 2002. ownership to 24 percent from 55 percent, and Onex ceased to have voting control of the company at the time of the offering. CVG’s reported revenues of $241 million Onex Corporation December 31, 2004 Report 33 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Other Businesses Communications Infrastructure Radian’s revenues were up slightly to $113 million in 2004 from $108 million reported in 2003 and down from $120 million in 2002. Radian’s revenue growth in 2004 was due primarily to the purchase of ROHN Industries’ opera- tions in December 2003, which contributed $12 million of revenues in 2004. Much of this revenue growth was offset by the effect of the consolidation of major carriers in the United States and Canada, which created strong competi- tion and price pressures in 2004. Similarly, strong competi- tion and pricing pressures drove the revenue decline in 2003 from 2002. Small-capitalization Opportunities ONCAP’s companies – CMC Electronics, Western Inventory Service Ltd. (“WIS”), Futuremed Health Care Products L.P. (“Futuremed”) and Canadian Securities Registration Systems Ltd. (“CSRS”) – reported combined revenues of $431 million in 2004, up $156 million from $275 million reported in 2003. Substantially all of the revenue growth for 2004 was due to the inclusion of revenues of Futuremed and CSRS from their respective February and April 2004 acquisition dates. ONCAP’s companies reported combined revenues of $275 million in 2003, up $22 million from those reported in 2002. The revenue growth was due primarily to the Cost of Sales by Industry Segment TABLE 3 ($ millions) Canadian Dollars Cost of Sales Increase/ (Decrease) 2004 2003 Electronics Manufacturing Services 10,913 8,831 2,082 Theatre Exhibition Healthcare Customer Management Services Automotive Products Other (a) Total 271 1,762 458 743 363 259 – 399 1,077 293 12 1,762 59 (334) 70 14,510 10,859 3,651 Functional Currency Cost of Sales Increase/ (Decrease) 2004 2003 Electronics Manufacturing Services US8,413 US6,342 US2,071 Theatre Exhibition Healthcare Customer Management Services Automotive Products Other(a) C271 C259 C12 US1,354 – US1,354 US352 US567 C363 US285 US67 US768 US(201) C293 C70 Results are reported in accordance with Canadian generally accepted accounting inclusion of WIS from its March 2003 acquisition date. principles. These results may differ from those reported by the individual Consolidated cost of sales Consolidated cost of sales was $14.5 billion in 2004 com- pared to $10.9 billion in 2003. Table 3 provides a detailed breakdown of reported cost of sales by industry segment operating companies. (a) Other includes Radian, ONCAP and parent company. Cost of Sales as a Percentage of Revenues by Industry Segment for 2004 and 2003 and the change in cost of sales from those periods in both Canadian dollars and the functional TABLE 4 currencies of the companies. We provide the cost of sales Electronics Manufacturing Services in the companies’ functional currencies to show the impact Theatre Exhibition of foreign exchange translation on cost of sales. Table 4 Healthcare provides additional details on cost of sales as a percentage Customer Management Services of revenues by industry segment for 2004 and 2003. Automotive Products Other(a) Total 2004 2003 95% 76% 80% 63% 80% 66% 89% 94% 77% – 66% 77% 73% 90% Results are reported in Canadian dollars and in accordance with Canadian generally accepted accounting principles. These results may differ from those reported by the individual operating companies. (a) Other includes Radian, ONCAP and parent company. 34 Onex Corporation December 31, 2004 Report M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Electronics Manufacturing Services Celestica’s cost of sales was $10.9 billion in 2004 compared Healthcare Magellan’s reported cost of sales was $1.8 billion in 2004, to $8.8 billion in 2003. In the company’s functional cur- or 80 percent as a percentage of revenues. Under Canadian rency, cost of sales increased 33 percent to US$8.4 billion GAAP and in the company’s functional currency, cost of from US$6.3 billion, while revenues were up 31 percent. sales was US$1.4 billion. Approximately US$667 million of Cost of sales as a percentage of revenues was 95 percent the total cost of sales was associated with Health Plan in 2004 compared to 94 percent in 2003. Included in the Solutions; approximately US$103 million with Employer cost of sales for 2004 were $217 million (US$178 million) of Solutions; and US$584 million with Public Sector Solutions. charges associated with the writedown of receivables and inventory. Of that amount approximately US$161 million was taken in the fourth quarter of 2004 due to uncertainty Customer Management Services ClientLogic reported cost of sales of $458 million in 2004, over the recoverability of certain receivables and inventory up $59 million from the cost of sales last year. In related to the deterioration in the ﬁnancial condition of ClientLogic’s functional currency, the company reported one of the company’s customers. Despite these unfavour- cost of sales of US$352 million in 2004 compared to able charges, Celestica reported gross proﬁt in 2004 of US$285 million in 2003, an increase of 24 percent. This US$427 million, a US$34 million increase over 2003 due compares to an increase of 30 percent in revenues for the primarily to increased base business volumes, reduced same period. ClientLogic’s cost of sales as a percentage of pricing pressures, improved operating efﬁciency and the revenues declined to 63 percent in 2004 from 66 percent in beneﬁts derived from the company’s restructuring activ- 2003. This improvement was due primarily to tighter cost ities and acquisitions. Celestica’s Americas operations management, cost-reduction initiatives implemented in the improved margins over last year as a result of the factors fourth quarter of 2003 and the beneﬁt of a US$8 million discussed above and the exiting of the reference design settlement on previously reserved contingent liabilities. activities. The company’s European operations had signiﬁ- cantly better margins compared to last year as a result of improved utilization, restructuring beneﬁts and cost reduc- Automotive Products Consolidated cost of sales in the automotive products tions. In addition, Celestica’s Asia operations beneﬁtted segment was $743 million in 2004 compared to $1.1 billion from higher production volumes. in 2003. A breakdown of cost of sales in the automotive products segment by company is shown below in Table 5. Theatre Exhibition The theatre exhibition segment reported cost of sales of $271 million in 2004, a 5 percent increase from $259 million Automotive Products Cost of Sales reported in 2003. This compares to a 6 percent increase in TABLE 5 ($ millions) revenues for the same period. Cost of sales as a percentage of revenues of 76 percent in 2004 was slightly lower than the 77 percent reported in 2003. Approximately 45 percent and 7 percent of the total cost of sales was attributable to ﬁlm and concession costs, respectively. During 2004, ﬁlm costs increased $5 million, or 4 percent. As a percentage of box-ofﬁce revenue, ﬁlm cost decreased slightly to 51 percent in 2004 from 52 percent in 2003. Cost of concessions also increased 6 percent, or $1 million, due primarily to $1 mil- lion in incremental costs associated with new theatres that were opened in 2004. As a percentage of concession rev- enues, cost of concessions of 20 percent in 2004 was equal to that of 2003. J.L. French Automotive Commercial Vehicle Group Performance Logistics Group Total 2004 2003 551 192 – 743 572 321 184 1,077 J.L. French Automotive J.L. French Automotive reported cost of sales of $551 mil- lion in 2004, a 4 percent decrease from $572 million in 2003. In the company’s functional currency, cost of sales increased by US$16 million to US$423 million in 2004 from US$407 million in 2003. Cost of sales as a percentage of revenues increased to 80 percent in 2004 from 78 percent Onex Corporation December 31, 2004 Report 35 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S in 2003 due primarily to higher aluminum prices in 2004 that could not be fully recovered in pricing to customers. Operating earnings We deﬁne operating earnings as EBIAT, or earnings before Partially offsetting this increase were improved labour interest expense, amortization of intangibles and deferred productivity and tighter control of a variety of manufac- charges, acquisition and restructuring expenses, other turing expenses. Commercial Vehicle Group non-recurring items and income taxes. Table 6 provides a reconciliation of the audited annual consolidated state- ments of earnings to operating earnings for the years Included in Onex’ audited annual consolidated ﬁnan- ended December 31, 2004 and 2003. cial statements is CVG’s cost of sales of $192 million, or US$144 million in the company’s functional currency. This Operating Earnings Reconciliation amount represents the cost of sales up to the time of CVG’s initial public offering in August 2004, when Onex ceased to TABLE 6 ($ millions) 2004 2003 Earnings before the undernoted items 781 494 consolidate the operations of CVG. This compares to full- year cost of sales of $321 million reported for 2003. The operations of CVG from August 2004 were included on an equity accounting basis. Performance Logistics Group There was no cost of sales reported for PLG in 2004 as the company was accounted for on an equity basis following its acquisition of Leaseway as previously discussed. PLG Amortization of property, plant and equipment Interest and other income Equity-accounted investments Foreign exchange loss Stock-based compensation Operating earnings reported cost of sales of $184 million, or US$132 million in Amortization of intangible assets its functional currency, in 2003. Other Businesses Communications Infrastructure and deferred charges Interest expense of operating companies Derivative instruments Radian’s cost of sales was $100 million in 2004, up from Gains on shares of operating companies, net $88 million in 2003. As a percentage of revenues, the Acquisition, restructuring and other expenses company’s cost of sales was 88 percent in 2004 compared to Debt prepayment costs 82 percent in 2003. The decline in Radian’s gross margin to Writedown of goodwill and intangible assets $13 million in 2004 from $20 million in 2003 was due prima- Writedown of long-lived assets (416) 111 (8) (116) (104) 248 (407) 81 – (122) 14 60 (94) (91) (253) (191) 29 182 (211) (8) (393) (94) – 129 (151) (11) (402) (88) rily to price competition, which reduced margins. In late 2004, the company, led by a new Chief Executive Ofﬁcer, began to implement a detailed turnaround plan, which is focused on reducing costs, improving project execution and restructuring its U.S. operations to improve efﬁciencies. Small-capitalization Opportunities ONCAP’s companies reported a combined cost of sales of $263 million in 2004 compared to $204 million reported in 2003. As was the case with revenues, essentially all of the increase in cost of sales was associated with the acqui- sitions of Futuremed and CSRS in February and April 2004, respectively. 36 Onex Corporation December 31, 2004 Report Loss before income taxes, non-controlling interests and discontinued operations (594) (745) Onex uses EBIAT to evaluate each operating company’s performance because it eliminates interest charges, which are a function of the operating company’s particular ﬁnancing structure, as well as any unusual or non-recur- ring charges. Onex’ method of determining operating earnings may differ from other companies’ methods and, accordingly, EBIAT may not be comparable to measures used by other companies. EBIAT is not a performance measure under Canadian GAAP and should not be consid- ered either in isolation or as a substitute for net earnings (loss) prepared in accordance with Canadian GAAP. M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Consolidated operating earnings were $248 mil- Included in the 2004 operating earnings were a lion in 2004, up $188 million from $60 million in 2003. Table 7 provides a breakdown and change in operat- $104 million expense from stock-based compensation compared to a $14 million beneﬁt in 2003, and a $116 million ing earnings by industry segment for the years ended foreign exchange loss compared to a loss of $122 million December 31, 2004 and 2003. in the prior year. A discussion of the changes in both stock- based compensation and foreign exchange in 2004 com- Operating Earnings (Loss) by Industry Segment pared to 2003 is provided below. TABLE 7 ($ millions) 2004 2003 Electronics Manufacturing Services Theatre Exhibition Healthcare Customer Management Services Automotive Products Other(a) Total operating earnings 7 43 236 44 75 (157) 248 31 39 – (23) 112 (99) 60 Operating Earnings Increase/ (Decrease) (24) 4 236 67 (37) (58) 188 Automotive Products Operating Earnings (Loss) TABLE 8 ($ millions) 2004 2003 J.L. French Automotive Commercial Vehicle Group Performance Logistics Group Other Total 66 11 – (2) 75 71 35 4 2 112 Operating Earnings Increase/ (Decrease) (5) (24) (4) (4) (37) Results are reported in Canadian dollars and in accordance with Canadian generally accepted accounting principles. These results may differ from those reported by the individual operating companies. (a) Other includes Radian, ONCAP and parent company. The $188 million improvement in operating earnings in 2004 over last year was due primarily to the inclusion of Magellan, which contributed $236 million and a $67 mil- lion increase in ClientLogic’s operating earnings, which was driven primarily by cost-reduction initiatives imple- mented in late 2003. Celestica’s reported operating earn- ings were $24 million lower than in the prior year due mainly to $217 million in charges related to the writedown of receivables and inventory associated with one cus- tomer. The writedowns offset the substantial beneﬁts achieved at Celestica from the inclusion of operating earnings from acquisitions, higher volumes, operational efﬁciencies and improvements resulting from its restruc- turing initiatives. The automotive products segment also reported $37 million in lower operating earnings. As shown in Table 8, the decline was due to accounting for PLG and CVG on an equity basis from the ﬁrst and third quarters of 2004, respectively. Stock-based compensation Since January 2002, the change in the value of stock-based compensation at the parent company has been recorded through the statements of earnings. As a result, operating earnings may increase or decrease depending upon changes in the market value of the shares underlying the stock-based compensation. Effective January 1, 2004, Onex’ operating compa- nies adopted new accounting rules for stock-based compensation, which require a fair-value-based method to be applied to all stock-based compensation payments to employees. Previously, only those non-employee and employee awards that called for settlement with cash or other assets, or stock appreciation rights that called for settlement by the issuance of equity instruments, were required to be recorded as compensation expense. While Onex’ operating companies have adopted this policy change on a retroactive basis, prior year earnings have not been restated. Instead, retained earnings and non-control- ling interests have each been reduced by $5 million. As a result of this new policy, Onex’ operating companies, excluding the parent company, recorded stock compensa- tion charges of $69 million, all relating to 2004. There were no such charges in 2003. Note 14 to the audited annual consolidated ﬁnancial statements provides additional disclosure on stock-based compensation in 2003. Onex Corporation December 31, 2004 Report 37 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S In 2004, stock-based compensation was an expense of $104 million compared to a beneﬁt of $14 mil- Interest expense of operating companies Onex has a policy to structure each of its operating com- lion in 2003. The 2004 expense for stock-based compen- panies with sufﬁcient equity in the company to enable it to sation was contributed primarily by the overall increase self-ﬁnance a signiﬁcant portion of its acquisition cost in value of Onex’ stock options and investment rights with a prudent level of debt. The level of debt assumed is of $35 million from their value at December 31, 2003; a commensurate with the operating company’s available $14 million expense recorded by CVG; a $35 million cash ﬂow, including consideration of funds required to expense recorded by Magellan; and a $20 million expense pursue growth opportunities. It is the responsibility of the recorded by Celestica. acquired operating company to service its own debt obli- During 2003, stock-based compensation added gations. The debt of each operating company is without $14 million to earnings. This was due primarily to the recourse to Onex or to any other Onex operating company. decline in the market value of the stock-based compen- Consolidated interest expense increased 32 per- sation liability from December 31, 2002. The decline in cent to $253 million in 2004 from $191 million in 2003. market value was primarily due to the revaluation of the Celestica accounted for $56 million of interest expense in Onex stock options and the investment rights associated 2004 compared to $36 million in 2003 due primarily to its with Celestica. issuance in June 2004 of US$500 million of senior subordi- nated notes. In addition, the inclusion of Magellan in 2004 Foreign exchange loss The foreign exchange loss reﬂects the impact of changes added $48 million in interest expense in 2004. Partially off- setting these factors was lower interest expense in the in foreign currency exchange rates, primarily on the U.S.- automotive segment due primarily to lower borrowing dollar-denominated cash held at Onex, the parent com- rates at J.L. French Automotive associated with that com- pany. While changes in foreign currency exchange rates pany’s reﬁnancing and debt repayment in 2004, and lower may apply to multiple currencies, the primary impact interest expense consolidated for CVG in 2004 due to of foreign currency translation on Onex’ consolidated Onex’ sale of CVG shares that resulted in Onex ceasing to results is due to the conversion of the U.S. dollar to the control that company in August 2004. Table 9 details the Canadian dollar. change in consolidated interest expense from 2003 to 2004. A net foreign exchange loss of $116 million was recorded in 2004 compared to a loss of $122 million in Change in Interest Expense 2003 and a foreign exchange gain of $18 million reported in 2002. Onex, the parent company, recorded $124 million TABLE 9 ($ millions) of the foreign exchange loss in 2004, as it holds a sig- niﬁcant portion of its cash in U.S. dollars. During 2004, the U.S. dollar declined by approximately C$0.0945 relative to the Canadian dollar, or from 1.2965 Canadian dollars Reported interest expense for 2003 Additional interest expense in 2004 due to: Celestica’s senior subordinated debt Acquisitions completed in 2004 to 1.2020 Canadian dollars. This compares to a foreign Other exchange loss at the parent company of $139 million in Interest expense reduction due to: 2003 and a foreign exchange gain of $17 million in 2002. Non-controlled entities in 2004 Note 27 to the audited annual consolidated ﬁnancial state- Commercial Vehicle Group and ments provides a breakdown of foreign exchange gains Performance Logistics Group (loss) by industry segment. Reported interest expense for 2004 191 20 56 4 (18) 253 38 Onex Corporation December 31, 2004 Report M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Interest and other income Interest and other income totalled $111 million in 2004, up Onex determined that these instruments did not qualify for hedge accounting based on the new accounting guid- 37 percent from $81 million reported in 2003. Included in ance and accordingly Onex is required to mark-to-market the 2004 interest and other income was $30 million of these instruments to the value of the underlying securities, income realized on the sale of public securities by Onex, which are Celestica subordinate voting shares. the parent company, and $8 million from the inclusion of During 2004, Onex recorded a $29 million beneﬁt Magellan in 2004. Partially offsetting these factors was to earnings for the decrease in the exchangeable deben- lower interest income earned on cash balances primarily tures liability and an increase in value of the forward sales at Onex, the parent company, and at Celestica due mainly contracts as a result of the decrease in market value of the to lower average cash balances and lower rates of return underlying Celestica shares since December 31, 2003. on those balances in 2004. Onex used $150 million in cash While these accounting adjustments were required to be to repurchase 9,143,100 of its Subordinate Voting Shares made in accordance with the new accounting guideline, during 2004. Equity-accounted investments Onex reported a loss from equity accounted investments of $8 million in 2004. This amount represents Onex’ share they do not have a cash impact on Onex. In February 2005, Onex settled the exchangeable debentures with the deliv- ery of Celestica shares that it held and that were pledged as security. in the net earnings (loss) of four businesses – ResCare, CVG, PLG and Cypress Property & Casualty Insurance Gains on shares of operating companies Onex recorded gains on shares of operating companies of Company (“Cypress”). Onex’ share of ResCare’s earnings $182 million in 2004 compared to $129 million of such contributed approximately $1 million of the total equity- gains in 2003. Table 10 details the nature of the gains accounted investments following Onex Partners’ invest- recorded in 2004 compared to 2003. ment in that company in late June 2004. Cypress, a Florida homeowners insurance company, contributed a $9 million Gains on Shares of Operating Companies loss to equity-accounted investments due to an unprece- dented number of hurricanes in Florida during 2004. TABLE 10 ($ millions) 2004 2003 There were no earnings recognized in 2004 for PLG and Gains (loss) on: CVG as the losses booked by Onex on these investments in Issue of shares of Commercial Vehicle Group prior years have exceeded the earnings to date. Derivative instruments Effective January 1, 2004, Onex adopted the new guideline Performance Logistics Group Issue of shares by Celestica Sale of Tower Automotive Gain on initial public offering AcG-13, “Hedging Relationships”, which addresses the of Cineplex Galaxy Income Fund identiﬁcation, designation, documentation and effective- Vencap sale of operating company ness of hedging relationships for the purpose of applying Other, net hedge accounting. This guideline also establishes certain conditions for applying hedge accounting and deals with Total 75 58 9 6 – – 34 182 – – – – 118 16 (5) 129 the discontinuation of hedge accounting. Onex also adopted EIC-128, “Accounting for Trading, Speculative or Non- Hedging Derivative Financial Instruments”, which requires those derivative instruments that do not qualify for hedge accounting to be marked-to-market values. At December 31, 2003, Onex, the parent company, had two derivative instruments in place – exchangeable debentures and for- ward sales contracts related to shares of Celestica held by Onex – that were affected by these new pronouncements. In August 2004, CVG completed a $180 million initial public offering. As part of that offering, Onex sold approxi- mately 45 percent of its CVG shares, receiving $54 million in net proceeds. The gain on the sale of shares, the dilution gain from the initial public offering and the recovery of previously recorded losses resulted in a gain of $60 mil- lion. In addition, Onex received approximately $27 million on the repayment of debt held, which resulted in a further gain of $15 million. Onex Corporation December 31, 2004 Report 39 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Onex also recorded a $58 million non-cash gain repositioning the number and location of production facil- on PLG relating to its purchase of Leaseway in 2004 ities, are primarily intended to align Celestica’s capacity through a share exchange. The gain was comprised of a with anticipated customer requirements for more produc- $22 million non-cash accounting dilution gain and the tion in lower-cost geographies, as well as to rationalize its accounting recovery of $36 million of losses of PLG previ- manufacturing network to lower overall demand levels. ously recognized by Onex that were in excess of other Note 16 to the audited annual consolidated ﬁnancial shareholders’ equity in PLG. statements details the nature of the acquisition, restruc- Onex recorded a $9 million accounting dilution turing and other expenses, such as employee termination gain following the issuance of shares by Celestica for the costs, facility and exit costs and other charges, by the purchase of MSL in March 2004 and a $6 million gain on year in which the activity was initiated. During 2003, the sale of its remaining Tower Automotive shares in the Celestica recorded $128 million of acquisition, restruc- second quarter of 2004. Onex also recorded $34 million in turing and other expenses associated primarily with these gains on strategic investments in 2004, which are included restructuring plans. in the “Other” line in Table 10 on the previous page. Included in the 2003 gains on shares of operating Acquisition, Restructuring and Other Expenses companies was a $118 million gain from the initial public offering of CGIF associated with the cash proceeds on the TABLE 11 ($ millions) offering. Also included in the 2003 accounting gains on shares of operating companies was a $16 million gain recorded by Vencap from the company’s sale of its remaining Celestica Magellan ClientLogic operating company. J.L. French Automotive Note 15 to the audited annual consolidated ﬁnan- cial statements provides additional details on the gains on shares of Onex’ operating companies. Other Total 2004 2003 184 128 7 5 7 8 – 8 4 11 211 151 Acquisition, restructuring and other expenses Acquisition, restructuring and other expenses are consid- ered costs incurred to realign organizational structures or restructure manufacturing capacity to obtain opera- tional synergies critical to building the long-term value of Onex’ operating companies. During 2004, acquisition, restructuring and other expenses totalled $211 million, a 40 percent increase from the $151 million reported in 2003. Table 11 details acquisition, restructuring and other expenses by operating company. Celestica accounted for $184 million of these expenses due primarily to costs associated with the com- pany’s previously announced restructuring, partially offset by a $15 million gain recorded on the sale of its Power Systems business for proceeds of $68 million. Many of the costs to implement these restructuring plans can only be recorded as they are incurred and thus the costs may be spread over several reporting periods. These plans, which include reducing workforce, consolidating facilities and Writedown of goodwill and intangible assets The management of each operating company undertakes an annual review of the value of its recorded goodwill and intangible assets to assess the recoverability of these assets. An impairment in the value of goodwill and indeﬁnite- lived intangibles is tested at the operating company by comparing the operating company’s carrying amount of assets and intangible assets to their estimated fair value. These reviews may be required to be made down to a busi- ness unit or plant level. The fair values of the operating companies are estimated using a combination of a market approach and discounted cash ﬂows. The process of deter- mining fair values is necessarily subjective and requires each operating company’s management to exercise judg- ment in making assumptions about future results, including revenue and cash ﬂow projections at the operating com- pany as well as appropriate discount rates. 40 Onex Corporation December 31, 2004 Report M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S During 2004, writedowns of goodwill and intangi- associated with those facilities was not certain, and there- ble assets totalled $393 million compared to $402 million fore in the third quarter of 2003 wrote off $214 million in reported in the prior year. Table 12 presents these charges goodwill associated with those operations. In December recorded by operating company, and note 18 to the audited 2003, PLG also recorded a $142 million writedown of good- annual consolidated ﬁnancial statements provides addi- will and intangible assets due to lower fair values resulting tional disclosure on these writedowns of goodwill and from reduced business volumes. intangible assets. Radian recorded a goodwill impairment charge of $8 million during 2003 due to the adverse impact of the Writedown of Goodwill and Intangible Assets slowdown in the telecommunications sector arising from tightened capital markets and reductions in capital spend- TABLE 12 ($ millions) 2004 2003 ing by wireless service providers. Celestica ClientLogic J.L. French Automotive Performance Logistics Group Radian Total 388 5 – – – 393 33 5 214 142 8 402 During the fourth quarter of 2004, Celestica performed its annual goodwill impairment test and identiﬁed reporting units, speciﬁcally the Americas and Europe regions, which it determined to be impaired. These reporting units were recorded on the company’s balance sheet at carrying values that were higher than their fair values based on cur- rent estimated industry conditions and customer demands for production in lower-cost geographies. As a result of this analysis, Celestica wrote down $388 million of good- will and intangible assets associated with these regions in 2004. Included in the 2003 writedown of goodwill and intangible assets was $33 million recorded by Celestica related to changes in the electronics industry, customer demand and other market conditions. ClientLogic assessed that the recorded value of several of its customer contracts was impaired in 2004 and 2003, and therefore wrote off the intangible assets associ- ated with those contracts, which totalled $5 million in both 2004 and 2003. Writedown of long-lived assets During 2004, there were $94 million of writedowns of long- lived assets. Celestica recorded approximately $84 million of the writedowns in long-lived assets, which affected the company’s Americas and European operations. In addition, J.L. French Automotive recorded $8 million of writedowns of long-lived assets associated with the restructuring of its United Kingdom operations. Note 19 to the audited annual consolidated ﬁnancial statements provides additional disclosure on these writedowns of long-lived assets. During 2003, writedowns of long-lived assets totalled $88 million taken primarily by Celestica and J.L. French Automotive. Celestica recorded $75 million in capital asset writedowns, which included an impairment of $18 million related to the purchase of a leased facility. When J.L. French Automotive completed its 2003 annual assessment of its long-lived assets, management of the company concluded that its Mexican facility was achieving lower than acceptable proﬁt margins on its operations and that the business would be outsourced to another supplier. As a result, J.L. French Automotive recorded a $7 million writedown of long-lived assets associated with that facil- ity. J.L. French Automotive also wrote off $3 million in long-lived assets related to the restructuring of various operations in the United Kingdom. During 2003, J.L. French Automotive’s manage- Income taxes ment assessed the goodwill and intangible assets of its Sheboygan and Ansola facilities in light of lower produc- tion volumes from the company’s largest customers, Ford and General Motors; some production was also trans- ferred from these plants to J.L. French Automotive’s Nelson facility. Management of J.L. French Automotive concluded from its assessment that the recoverability of goodwill During 2004, the provision for income taxes was $347 mil- lion compared to a provision of $67 million in 2003. Included in the 2004 provision for income taxes is a $302 mil- lion charge recorded by Celestica relating to a valuation allowance for most of the company’s remaining deferred tax assets in the United States and Europe. Celestica determined that a valuation reserve was necessary as it evaluated further Onex Corporation December 31, 2004 Report 41 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S restructuring actions to attain proﬁtability and the con- other shareholders in ClientLogic, J.L. French Automotive tinued transfer of customer programs from higher cost and Radian. During 2004, Onex recorded income of to lower cost geographies. As a result of this charge, $38 million relating to the recovery of prior year losses the future income tax asset included in the investments absorbed on behalf of non-controlling shareholders of and other assets on the consolidated balance sheet for the J.L. French Automotive, ClientLogic and Radian. This year ended December 31, 2004 has been reduced. compares to a $175 million pick-up of losses from non- Non-controlling interests of operating companies In the audited annual consolidated statements of earn- controlling shareholders in 2003. J.L. French Automotive represented $153 million of the change, which was from the absorption of losses related to the goodwill write-off in 2003 and a recovery from the reﬁnancing in the third ings, the non-controlling interest amounts of $781 million quarter of 2004. in 2004 and $256 million in 2003 represent the interests of shareholders other than Onex in the net losses of Onex’ operating companies. Table 13 details the losses (earnings) Loss from continuing operations Onex’ consolidated loss from continuing operations, by industry segment attributable to non-controlling share- including gains on sales of shares, was $160 million ($1.12 holders in our operating companies. per share) in 2004 compared to a loss from continuing Non-controlling Interests in Losses (Earnings) of Operating Companies operations of $556 million ($3.62 per share) reported in 2003 and a loss of $63 million ($0.39 per share) reported in 2002. Table 14 details the loss from continuing opera- tions by industry segment before income taxes and non- TABLE 13 ($ millions) 2004 2003 controlling interests. Electronics Manufacturing Services Theatre Exhibition Healthcare Customer Management Services Automotive Products Other (a) Total 857 (36) (100) 2 47 11 281 (57) – – 36 (4) Earnings (Loss) from Continuing Operations TABLE 14 ($ millions) 2004 2003 2002 Earnings (loss) before income taxes and non-controlling interests: 781 256 Electronics Manufacturing Services (752) (311) (838) (a) Other includes Radian, ONCAP and parent company. Theatre Exhibition Healthcare Customer Management Services The change in the non-controlling interests amount was Automotive Products due primarily to Celestica’s signiﬁcant writedowns of good- Other (a) 35 163 (2) (46) 8 147 – (71) (401) (109) 26 – (31) 14 141 (594) (745) (688) Recovery of (provision for) income taxes (347) (67) 65 Non-controlling interests of operating companies 781 256 560 Loss from continuing operations (160) (556) (63) (a) Other includes Radian, ONCAP and parent company. will, intangible assets and long-lived assets, restructuring and accounts receivable provisions; these writedowns and provisions totalled approximately $798 million and share- holders other than Onex have an 82 percent interest in Celestica. Partially offsetting these were the inclusion of Magellan’s earnings from the date of Onex’ investment in January 2004, and the pick-up for accounting purposes by Onex, the parent company, of lower amounts of losses of 42 Onex Corporation December 31, 2004 Report M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Earnings (loss) from discontinued operations Earnings from discontinued operations were $195 million ($1.37 per share) in 2004 compared to $224 million ($1.46 per share) in 2003. During 2004, the operations of in the 2003 earnings from discontinued operations were the operations of Rogers Sugar and Lantic Sugar and m ag n at r ax that were discontinued in 2003. Table 15 provides a breakdown of earnings (loss) by company, Loews Cineplex, Dura Automotive, Armtec, Cincinnati including the net after-tax gains on sales as well as Onex’ Electronics and InsLogic were reclassiﬁed as discontinued share of earnings (loss) of those businesses that have been operations. In addition to these operations, also included discontinued in 2004 and 2003. Earnings from Discontinued Operations TABLE 15 ($ millions) 2004 2003 Dura Automotive Loews Cineplex Group Cincinnati Electronics Armtec InsLogic M AG N AT R A X Lantic Sugar/Rogers Sugar Total Gain, net of tax Onex’ share of earnings (loss) 1 135 49 9 – – – 194 1 5 4 – (9) – – 1 Total 2 140 53 9 (9) – – 195 Gain, net of tax Onex’ share of earnings (loss) – – – – – 274 53 327 4 – 3 2 (15) (110) 13 (103) Total 4 – 3 2 (15) 164 66 224 Included in the 2004 earnings (loss) from discontinued earnings (loss) by industry segment as well as the con- operations were: a $140 million net after-tax gain from tribution from net after-tax gains on sales of shares of the sale of Loews Cineplex in July 2004, including the operating companies and discontinued operations. operations up to the date of sale; a $9 million net after-tax gain from the sale of Armtec in August 2004 by ONCAP; Consolidated Net Earnings (Loss) $53 million from the sale of CMC Electronics’ Cincinnati Electronics division, including the operations up to the date of sale, and a $1 million net after-tax gain from the sale of Dura Automotive. TABLE 16 ($ millions) 2004 2003 2002 Onex’ share of net earnings (loss): Electronics Manufacturing Services (202) Included in the 2003 earnings from discontinued Theatre Exhibition operations was a $66 million net after-tax gain from the Healthcare sale of Rogers Sugar Income Fund and the operations of Customer Management Services Rogers Sugar and Lantic Sugar businesses up to the time of sale; and a $164 million net gain from magnatrax, which represented the negative book value of Onex’ investment in magnatrax of $274 million at the time of disposition, less the company’s loss on operations of $110 million recorded in 2003. Consolidated net earnings (loss) Consolidated net earnings in 2004 were $35 million com- pared to a consolidated net loss of $332 million in 2003 and a loss of $145 million in 2002. Table 16 identiﬁes the net 9 6 (6) 11 (160) (73) 56 – (72) (368) (109) (119) 10 – (35) (72) 134 19 (63) Automotive Products Other(a) Net after-tax gains on shares of operating companies 182 10 Loss from continuing operations (160) (556) Earnings (loss) from discontinued operations Consolidated net earnings (loss) 195 35 224 (82) (332) (145) (a) Other includes Radian, ONCAP and parent company. Onex Corporation December 31, 2004 Report 43 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Table 17 presents the earnings (loss) per share from Earnings (Loss) per Subordinate Voting Share continuing operations, discontinued operations and net earnings (loss). TABLE 17 ($ per share) 2004 2003 2002 Basic and Diluted: Continuing operations $ (1.12) $ (3.62) $ (0.39) Discontinued operations $ 1.37 $ 1.46 $ (0.51) Net earnings (loss) $ 0.25 $ (2.16) $ (0.90) S U M M A R Y Q U A R T E R L Y I N F O R M A T I O N Table 18 summarizes Onex’ key consolidated ﬁnancial information for the last eight quarters. The summarized results pre- sented in this table may differ from those results previously reported in 2004 and 2003 as a result of operations that have been discontinued and reclassiﬁed as discussed above. TABLE 18 ($ millions except per share amounts) 2004 2003 Dec. Sept. June Mar. Dec. Sept. June Mar. Revenues $ 3,925 $ 4,004 $ 4,421 $ 3,894 $ 3,230 $ 2,889 $ 2,886 $ 3,114 Earnings (loss) from continuing operations (264) 138 (78) Net earnings (loss) $ (214) $ 281 $ (69) $ 44 37 (124) (282) (137) (13) $ 152 $ (287) $ (162) $ (35) Earnings (loss) per Subordinate Voting Share Basic and Diluted: Continuing operations Net earnings (loss) $ (1.90) $ 0.97 $ (0.55) $ 0.30 $ (0.82) $ (1.85) $ (0.90) $ (0.08) $ (1.54) $ 2.02 $ (0.49) $ 0.25 $ 1.01 $ (1.88) $ (1.06) $ (0.23) Onex’ quarterly consolidated ﬁnancial results do not fol- detail on pages 40 and 41 of this report under the full-year low any speciﬁc trends due to acquisitions or dispositions discussion of writedowns of goodwill and intangible assets of businesses by Onex, the parent company; the volatility and writedowns of long-lived assets. In addition, Celestica of the exchange rate between the U.S. dollar and the established a provision in the amount of $142 million Canadian dollar; and varying business cycles at Onex’ for a loss on a receivable from a speciﬁc customer and a operating companies. valuation allowance on deferred income tax assets, which totalled $302 million. Fourth quarter 2004 results There were a number of signiﬁcant items that took place Onex, the parent company, recorded a $59 million foreign exchange loss due to the decrease in value of the during the fourth quarter that affected 2004 results. In the U.S. dollar during the last three months of 2004. In addi- fourth quarter, Celestica wrote down $388 million of good- tion, Onex, the parent company, recorded stock-based will and intangible assets and $84 million of long-lived compensation expense of $21 million in the fourth quarter assets as a result of its annual goodwill and long-lived of 2004 due primarily to the increase in value of Onex’ asset impairment reviews. These charges are discussed in stock options and investment rights from their value at September 30, 2004. 44 Onex Corporation December 31, 2004 Report M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S C O N S O L I D A T E D F I N A N C I A L P O S I T I O N This section should be read in conjunction with the audited annual consolidated balance sheets on page 68 of this report, and the corresponding notes thereto. Consolidated assets Consolidated assets were $11.8 billion at December 31, 2004, down by $2.8 billion from $14.6 billion at December 31, 2003. Chart 2 shows Onex’ consolidated assets by industry and geographic segments. Asset Diversiﬁcation by Industry and Geographic Segments CHART 2 ($ millions) E L E C T R O N I C S M A N U FA C T U R I N G S E R V I C E S T H E AT R E E X H I B I T I O N H E A LT H - C A R E C U S T O M E R M A N A G E M E N T S E R V I C E S A U T O M O T I V E P R O D U C T S O T H E R (a) T O TA L 9,161 368 359 1,537 303 336 338 338 6,645 5,925 1,381 8,674 19,890 779 6,500 14,621 11,809 452 3,224 04 03 02 04 03 02 04 04 03 02 04 03 02 04 03 02 04 03 02 U.S. Canada Europe Other(b) 12% 10% 24% 54% 13% 18% 21% 48% 30% 17% 14% 39% – 100% – – – 100% – – – 100% – – 100% – – – 36% 6% 44% 14% 46% 3% 44% 7% 48% 3% 49% – 55% – 45% – 63% 1% 35% 1% 75% 2% 22% 1% 14% 85% – 1% 44% 30% 18% 8% 41% 37% 13% 9% 26% 32% 15% 27% 30% 24% 21% 25% 38% 25% 15% 22% (a) Includes Radian, ONCAP, CEI and parent company. Includes discontinued operations of $4,762 million and $6,795 million for 2003 and 2002, respectively. (b) Other includes primarily operations in Central and South America, Asia and Australia. The consolidated asset decline in 2004 was due to the sales Partially offsetting these declines in consolidated of Dura Automotive, Loews Cineplex, Cincinnati Electronics total assets were the inclusion of assets of Magellan, which and Armtec, which represented $4.8 billion of the total added $1.5 billion of assets, Celestica’s purchase of MSL consolidated assets at December 31, 2003. In addition, the in mid-March 2004 and certain assets of NEC Corporation, change in accounting for PLG and CVG to equity basis at which added $0.7 billion in assets, and $0.2 billion in December 31, 2004 from consolidation at December 31, assets from the acquisition of CEI in early December 2004. 2003 provided a further decrease in consolidated assets Table 19 outlines the more signiﬁcant acquisitions com- of $0.3 billion. pleted by Onex and its operating companies in 2004, 2003 The value of consolidated assets on Onex’ consol- and 2002. Note 3 to the audited annual consolidated ﬁnan- idated balance sheets was also affected by changes in the cial statements also provides additional disclosure on the U.S. dollar to Canadian dollar exchange rate, as most of acquisitions completed in 2004. the operations of Onex’ companies report in U.S. dollars. During 2004, the value of the U.S. dollar relative to the Canadian dollar declined by approximately C$0.0945. As a result, the total value of Onex’ consolidated assets declined from year-end 2003. Onex Corporation December 31, 2004 Report 45 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Included in the consolidated assets for the year barriers to employment. In addition, in November 2004, ended December 31, 2004 were Onex’ investments in Onex completed a $102 million investment in convertible ResCare and Compagnie Générale de Géophysique subordinated bonds of CGG. This investment was made (“CGG”) completed in 2004. In June 2004, Onex, through through Onex Partners, which includes Onex’ share of Onex Partners, invested $114 million in equity in ResCare $24 million. CGG is a publicly traded French company that for an approximate 28 percent ownership interest. Onex’ operates in the land and marine seismic services industry portion of that investment was $27 million, representing a and is a global leader in the manufacture of geophysical 7 percent ownership interest. ResCare provides residential, equipment. Note 6 to the audited annual consolidated therapeutic, job training and educational support services ﬁnancial statements provides additional disclosure on the to people with developmental or other disabilities, to youth breakdown of investments and other assets. with special needs and to adults who are experiencing TABLE 19 Operating company and total assets of acquisitions Celestica – $832 million Two acquisitions in 2004: 2004 Acquisitions • Manufacturers’ Services Limited – a full-service global electronics manufacturing and supply chain services company headquartered in the United States • NEC Corporation assets – acquired certain assets located in the Philippines Magellan – $1,629 million Onex’ investment in Magellan Health Services, Inc., a leading U.S. provider of managed behavioural healthcare and insurance services headquartered in Connecticut, United States ONCAP – $248 million Two acquisitions in 2004: • Futuremed Health Care Products L.P. – the leading Canadian supplier of medical supplies and equipment to long-term care facilities headquartered in Ontario, Canada • Canadian Securities Registration Systems Ltd. – a leading Canadian provider of registration and search services to financial institutions and auto acceptance and leasing companies headquartered in British Columbia, Canada Cosmetic Essence – $383 million Onex’ acquisition of Cosmetic Essence, Inc., a leading provider of outsourced supply chain management services to the personal care products industry including formulating, manufacturing, filling, packaging and distribution services headquartered in New Jersey, United States Operating company and total assets of acquisitions 2003 Acquisitions ClientLogic – $90 million Radian – $10 million ONCAP – $92 million ClientLogic’s purchase of Service Zone Holdings, Inc., a provider of high-quality call centre operations headquartered in Florida, United States with facilities in the United States and the Philippines Radian’s acquisition of certain assets related to the tower and tower accessory manufacturing operations of ROHN Industries, Inc. located in Indiana and Illinois, United States ONCAP’s acquisition of Western Inventory Service Ltd. – a leading North American provider of data collection and inventory counting services headquartered in Ontario, Canada 46 Onex Corporation December 31, 2004 Report M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S TABLE 19 Operating company and total assets of acquisitions Celestica – $269 million Two acquisitions in 2002: 2002 Acquisitions • NEC Corporation facilities – acquired certain assets in Japan and signed a five-year supply agreement to provide a range of electronics manufacturing services for NEC • Corvis Corporation assets – acquired certain assets and signed a multi-year supply agreement to exclusively manufacture Corvis’ terrestrial optical networking products and sub-sea terminating equipment ONCAP – $51 million CMC Electronics Inc.’s acquisition of Flight Visions, Inc., a U.S.-based aviation company that manufactures heads-up displays and mission computers Total consolidated assets declined by $5.3 billion to company is required to support its own debt. There are no $14.6 billion at December 31, 2003 from $19.9 billion at guarantees by Onex or cross-guarantees between the December 31, 2002. The weakening of the U.S. dollar to operating companies. As a result, there can be no calls on Canadian dollar exchange rate by C$0.28 accounted for Onex or on an operating company for the debt of another part of the decline in consolidated assets. In addition, the operating company. use of $166 million of cash for the repurchase of shares by Total consolidated long-term debt (consisting of Onex, the parent company, under its Normal Course Issuer the current portion of long-term debt and long-term debt) Bid, as well as Celestica’s repurchase of some of its shares was $2.7 billion at December 31, 2004, $1.7 billion at and outstanding Liquid Yield Option Notes (“LYONs”) for December 31, 2003 and $2.0 billion at December 31, 2002. $691 million, accounted for a portion of the decline in the Table 20 summarizes consolidated long-term debt by total consolidated assets. Furthermore, the dispositions of Lantic Sugar, Rogers Sugar and m ag n at r ax decreased assets by $1.1 billion compared to December 31, 2002. Partially offsetting these declines in consolidated total assets was the inclusion of assets from acquisitions completed by ClientLogic, Radian and ONCAP, which col- lectively added $125 million, net of cash used, to total con- solidated assets and that are outlined in more signiﬁcant detail in table 19 on page 46. Consolidated long-term debt, without recourse to Onex Onex, the parent company, has no debt, with the exception of the debentures that are exchangeable into shares of Celestica; these are discussed in greater detail under the heading “Exchangeable debentures” on page 49. It has been Onex’ policy to preserve a ﬁnancially strong parent company that has funds available for new acquisitions and to support the growth of its operating companies. We industry segment. Consolidated Long-term Debt, Without Recourse to Onex TABLE 20 ($ millions) 2004 2003 2002 Electronics Manufacturing Services Theatre Exhibition Healthcare Customer Management Services Automotive Products Other (a) Long-term debt of ClientLogic and Performance Logistics Group, 750 129 450 192 721 416 273 114 – 206 1,026 130 413 36 – 237 1,201 161 2,658 1,749 2,048 reclassified as current – (256) (25) Current portion of long-term debt of operating companies(b) (295) (22) (70) adhere strictly to this policy, which means that all debt Total 2,363 1,471 1,953 ﬁnancing is within our operating companies and each (a) Other includes CEI, Radian, ONCAP and parent company. (b) 2003 current portion of long-term debt excludes ClientLogic and PLG. Onex Corporation December 31, 2004 Report 47 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S At December 31, 2004, long-term debt increased by approx- Partially offsetting these increases in debt was the imately $1 billion from December 31, 2003 due primarily to reﬁnancing by J.L. French Automotive in August 2004, a new debt issue at Celestica and the inclusion of debt from which included the repurchase and retirement of a signi- acquisitions and investments completed in 2004, which ﬁcant portion of that company’s 11.5 percent senior subor- include Magellan, CEI and ONCAP acquisitions – Futuremed dinated notes at a discount. The company also arranged and CSRS. The inclusions of debt of Magellan, CEI as well as new credit facilities with total borrowings of US$465 million ONCAP increased long-term debt in 2004 by approximately that mature in 2011 and 2012. These new facilities replaced $450 million, $158 million and $118 million, respectively. the company’s previous senior secured credit facilities. In Celestica issued US$500 million of senior subor- addition, the exclusion of long-term debt of CVG and PLG, dinated notes in June 2004 with a 7.875 percent ﬁxed inter- which had $239 million of long-term debt in 2003, partially est rate that are due in 2011. Approximately US$300 million offset the increase in long-term debt in 2004. of the proceeds from this issue were used to repurchase Subsequent to year-end, ClientLogic completed a portion of Celestica’s LYONs having a principal amount a US$157 million debt reﬁnancing of its credit facilities, at maturity of approximately US$540 million. In addi- which matured in early 2005. The new credit facilities tion, effective December 31, 2004, Celestica adopted mature in 2012. Accordingly, the company’s debt was early the revised CICA Handbook Section 3860, “Financial classiﬁed as long term in the audited annual consolidated Instruments – Presentation and Disclosure”, which ﬁnancial statements at December 31, 2004. becomes effective January 1, 2005. This revised standard Long-term debt decreased to $1.7 billion at requires obligations of a ﬁxed amount that may be December 31, 2003 from $2.0 billion at December 31, 2002 settled, at the issuer’s option, by a variable number of the due primarily to the decline in value of the U.S. dollar issuer’s own equity instruments to be presented as liabilities. relative to the Canadian dollar in 2003 with the currency Celestica had LYONs at December 31, 2004 that were translation of the U.S.-dollar-denominated debt and affected by early adoption of this standard. As a result, Celestica’s redemption of a portion of its LYONs in 2003. Onex reclassiﬁed the principal component of $149 million of the LYONs as debt, which in prior years had been Contractual obligations recorded as non-controlling interests. The option compo- Table 21 provides a breakdown of consolidated contrac- nent of the LYONs continues to be accounted for as equity. tual obligations and the required future payments on The revised standard also requires retroactive restatement those obligations at December 31, 2004 for the Onex of prior periods, which resulted in Onex reclassifying operating companies. $273 million from non-controlling interests to debt in 2003. Contractual Obligations TABLE 21 ($ millions) Total Less than 1 year 1–3 years 4–5 years After 5 years Payments Due by Period Long-term debt, without recourse to Onex Capital and operating leases Total contractual obligations 2,658 1,038 3,696 295 209 504 349 281 630 393 171 564 1,621 377 1,998 Additional disclosure on long-term debt is provided ﬁnancial statements provides further additional disclosure in note 8 to the audited annual consolidated ﬁnancial on capital and operating leases. statements. Note 9 to the audited annual consolidated 48 Onex Corporation December 31, 2004 Report M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Exchangeable debentures At December 31, 2004, four series of debentures issued by As a result of these pronouncements, Onex recorded income of $24 million for the year ended Onex and exchangeable into shares of Celestica remained December 31, 2004 even though there was no economic or outstanding, which the Company issued in 2000 for an ﬁnancial impact to Onex. This represents the decline in aggregate carrying amount of $729 million. At the time market value of Celestica shares pledged under the deben- Onex entered into these transactions in 2000, Celestica’s tures, which reduced the value of the debenture obliga- market value had signiﬁcantly increased, resulting in tion. As at December 31, 2004, there was an unrealized Onex’ ownership interest in Celestica representing, in accounting pre-tax gain with respect to the exchangeable Onex’ view, too large a portion of the Company’s aggregate debentures of approximately $550 million. value. The exchangeable debentures provided Onex with In February 2005, Onex redeemed the out- additional liquidity and reduced the risk associated with standing debentures and settled the obligation through the holding too large a portion of Onex’ total value in one delivery of approximately 9.2 million Celestica subordi- operating company. The debentures are exchangeable into nate voting shares. The deferred gain will be taken into approximately 9.2 million Celestica subordinate voting income in 2005. shares, at ﬁxed exchange rates, or at Onex’ option, into the cash equivalent based on the market price of Celestica shares at the time of exchange. The debentures by their Off-balance sheet arrangements In 2000, Onex entered into four series of forward sales terms mature in 2025. Onex has the option to repay the contracts relating to the subordinate voting shares of debentures at any time by delivering the cash equivalent Celestica, of which there were two series outstanding at based on the market price of Celestica shares at the time of December 31, 2004. The forward contracts mature in 2025 exchange, the exchange number of Celestica shares or a but may be closed out earlier by Onex. Approximately combination of shares and cash. Onex’ obligation upon 1.8 million Celestica shares have been pledged as collateral the exercise of the holders’ exchange right is secured by a for these forward sales contracts and it is contemplated pledge of approximately 9.2 million Celestica shares. that they will be used to satisfy the agreements. These At December 31, 2004, the market value of the contracts are off-balance sheet arrangements. exchangeable debentures was $156 million, down from a Effective January 1, 2004, Onex adopted the new market value of $180 million at December 31, 2003 and AcG-13, “Hedging Relationships” and EIC-128, “Accounting $203 million at December 31, 2002. The market value of for Trading, Speculative or Non-Hedging Derivative the exchangeable debentures is directly tied to the market Financial Instruments”, which affected the accounting for price of Celestica shares, which declined to $16.90 per share the forward sales contracts at Onex. Onex determined that at December 31, 2004 from $19.56 per share and $22.05 per this instrument did not qualify for hedge accounting based share at December 31, 2003 and 2002, respectively. on the new guidance, and accordingly Onex was required Effective January 1, 2004, Onex adopted the new to mark-to-market this instrument. AcG-13, “Hedging Relationships” and EIC-128, “Accounting As a result of these pronouncements, Onex for Trading, Speculative or Non-Hedging Derivative recorded income of $5 million for the year ended Financial Instruments”, which affected the accounting for December 31, 2004 even though there was no economic or the exchangeable debentures at Onex. Onex determined ﬁnancial impact to Onex. As at December 31, 2004, there that the debentures did not qualify for hedge accounting was an unrealized accounting pre-tax gain with respect to based on the new guidance, and accordingly Onex was the forward sales contracts of $181 million. This gain will required to mark-to-market this instrument. continue to be deferred until such time as these instru- ments are settled. Onex Corporation December 31, 2004 Report 49 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Non-controlling interests The non-controlling interests liability on Onex’ consoli- dated balance sheets represents the ownership interests Change in Shareholders’ Equity TABLE 23 ($ millions) of shareholders, other than Onex, in Onex’ operating Shareholders’ equity as at December 31, 2003 companies. As at December 31, 2004, the non-controlling Change in stock-based compensation interests balance amounted to $3.9 billion compared to accounting policy(a) $4 billion in 2003. Table 22 details the change in the Regular dividends declared non-controlling interests balance from December 31, 2003 Issue of shares – Dividend Reinvestment Plan to December 31, 2004. Change in Non-controlling Interests TABLE 22 ($ millions) and stock options exercised Shares repurchased and cancelled Currency translation adjustment on self-sustaining foreign operations Net earnings for 2004 Non-controlling interests as at December 31, 2003 4,002 Shareholders’ equity as at December 31, 2004 293 (5) (15) 1 (150) 68 35 227 Non-controlling interests in net earnings (loss) of operating companies in 2004 Investments by shareholders other than Onex in: Onex Partners Acquisitions completed in 2004 Other, net Foreign currency translation (781) 386 758 (238) (253) Non-controlling interests as at December 31, 2004 3,874 Shareholders’ equity Shareholders’ equity decreased to $227 million at Decem- ber 31, 2004 from $293 million at December 31, 2003. The decrease in shareholders’ equity was due primarily to the $150 million spent on share repurchases under Onex’ Normal Course Issuer Bids. Partially offsetting these factors were reported net earnings of $35 million for the year ended December 31, 2004 and a $68 million increase in equity relating to ﬂuctuations in foreign currency transla- (a) Adoption of the revised CICA Handbook Section 3870, “Stock-based Compensation and Other Stock-based Payments”. Further information on the components of shareholders’ equity as at December 31, 2004 and 2003 is found in the audited annual consolidated statements of shareholders’ equity on page 70 of this report. Shares outstanding At February 28, 2005, Onex had 139,015,924 Subordinate Voting Shares issued and outstanding. Dividends are paid on the Subordinate Voting Shares. In mid-October 2004, The Toronto Stock Exchange changed Onex’ trading sym- bol from OCX to OCX.SV. Table 24 shows the change in the number of Subordinate Voting Shares outstanding from December 31, 2003 to February 28, 2005. Change in Subordinate Voting Shares Outstanding tion, primarily associated with the effect of the change in TABLE 24 value of the U.S. dollar on Onex’ net equity in U.S.-based consolidated operating companies. Table 23 provides a reconciliation of the change in shareholders’ equity from December 31, 2003 to December 31, 2004. Subordinate Voting Shares outstanding at December 31, 2003 Issue of shares – Dividend Reinvestment Plan Issue of shares – Stock options exercised Shares repurchased and cancelled under 148,015,300 72,724 71,000 Onex’ Normal Course Issuer Bids (9,143,100) Subordinate Voting Shares outstanding at February 28, 2005 139,015,924 50 Onex Corporation December 31, 2004 Report M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Onex also has 100,000 Multiple Voting Shares outstanding, which have a nominal paid-in value, and 176,078 Series 1 Senior Preferred Shares, which have no paid-in amount reﬂected in Onex’ audited annual consolidated ﬁnancial statements. Note 12 to the audited annual consolidated ﬁnancial statements provides additional information on Onex’ share capital. There was no change in the Multiple Voting Shares and Series 1 Preferred Shares outstanding during 2004. Cash dividends During 2004, Onex declared dividends of $0.11 per Subordinate Voting Share to its shareholders, which were paid quarterly at a rate of $0.0275 per Subordinate Voting Share. The dividends are payable on or about January 31, April 30, July 31 and October 31 of each year. The dividend rate remained unchanged from that of 2003 and 2002. The total payments for dividends have decreased with the repurchase of Subordinate Voting Shares under the Normal Course Issuer Bids as discussed below. Stock Option Plan Onex, the parent company, has a Stock Option Plan in place that provides for options and/or share appreciation rights to be granted to Onex directors, ofﬁcers and employees for the acquisition of Subordinate Voting Shares of the Company for a term not exceeding 10 years. The options vest equally over ﬁve years. The exercise price of the options is not less than the market value of the Subordinate Voting Shares on the business day preceding the day of the grant. The options are not exercisable unless the average ﬁve-day, market price of Onex Subordinate Voting Shares is 25 percent greater than the exercise price. At December 31, 2004, Onex had 13,961,700 options out- standing to acquire Subordinate Voting Shares, of which 2,743,000 were vested and 1,975,200 of those vested options were exercisable. Table 25 provides a detailed reconciliation of the options outstanding at December 31, 2004. Change in Stock Options Outstanding Dividend Reinvestment Plan Onex’ Dividend Reinvestment Plan (the “Plan”) enables TABLE 25 Outstanding at Number of Options Weighted Average Exercise Price Canadian shareholders to reinvest cash dividends to December 31, 2002 12,250,600 acquire new Subordinate Voting Shares of Onex at a Granted market-related price at the time of reinvestment. In early Exercised or surrendered March 2004, the Plan was amended to remove the dis- Expired count to market so that future Subordinate Voting Shares acquired would be priced according to their market value. Eliminating the discount brought the terms of the Plan in line with most of the dividend reinvestment plans of The Toronto Stock Exchange-listed issuers. During 2004, Onex issued 72,166 Subordinate Voting Shares under the Plan at an average cost of $15.08 per Subordinate Voting Share, creating cash savings of $1 million for investors. During 2003, 317,599 Subordinate Voting Shares were issued under the Plan at an average cost of $14.343 per Subordinate Voting Share, creating cash savings of approximately $5 million. During 2002, Onex issued 189,281 Subordinate Voting Shares under the Plan at an average cost of $19.49 710,000 (596,600) (105,000) 12,259,000 10,205,000 (8,345,800) (156,500) $ 9.34 $ 14.90 $ 7.78 $ 18.45 $ 9.66 $ 16.54 $ 7.78 $ 18.56 Outstanding at December 31, 2003 Granted Exercised or surrendered Expired Outstanding at December 31, 2004 13,961,700 $ 15.71 In February 2004, Onex issued 7,260,000 options to acquire Subordinate Voting Shares at an exercise price of $15.87, which was the market price of Onex Subordinate Voting Shares at the time of issuance of the options. Similarly, Onex issued 2,945,000 options in November 2004 at an per Subordinate Voting Share, creating cash savings of exercise price of $18.18. approximately $4 million. In January 2005, Onex issued an additional 558 Subordinate Voting Shares under the Plan at an average cost of $19.067 per Subordinate Voting Share. During 2004, 8,345,800 options were exercised or surrendered at an average exercise price of $7.78. Of those options exercised, 8,274,800 options were surrendered for cash consideration of $71 million and 71,000 options were exercised for Subordinate Voting Shares of Onex at a total Onex Corporation December 31, 2004 Report 51 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S value of approximately $1 million. This compares to cost of $166 million during 2003 and 1,587,100 Subordinate 596,960 options exercised or surrendered in 2003 and Voting Shares at a total cost of $26 million in 2002. 1,300,600 options in 2002. Of the total options exercised, approximately 55,000 options were exercised for Subor- Currency translation adjustment dinate Voting Shares in 2003 and 50,000 in 2002 at a total The currency translation component increased sharehold- value of $1 million and $1 million, respectively. ers’ equity by $68 million in 2004 compared to a decrease Deferred Share Unit Plan of $242 million in 2003. Changes in the currency transla- tion adjustment primarily represent the cumulative effect In November 2004, Onex, the parent company, established of changes in foreign currency rates on the value of Onex’ a Deferred Share Unit Plan (“DSU Plan”), which allows ownership in U.S.-based operating companies from their Onex directors to apply directors’ fees to acquire Deferred respective acquisition dates. Share Units (“DSUs”) based on the market value of Onex shares at the time. Grants of DSUs may also be made to L I Q U I D I T Y A N D C A P I T A L R E S O U R C E S Onex directors from time to time. Holders of DSUs are entitled to receive, for each DSU upon redemption, a cash This section should be read in conjunction with the payment equivalent to the market value of a Subordinate audited annual consolidated statements of cash ﬂows on Voting Share at the redemption date. The DSUs vest imme- page 71 and the corresponding notes thereto. diately, are only redeemable once the holder retires from Onex believes that maintaining a strong ﬁnancial the board of directors and must be redeemed by the end of position at the parent company with substantial liquidity the year following the year of retirement. Additional units enables the Company to pursue new opportunities to are issued equivalent to the value of any cash dividends create long-term value and support Onex’ existing oper- that would have been paid on the Subordinate Voting ating companies. Shares. The Company has recorded a liability for the future settlement of DSUs at the balance sheet date by reference Major Cash Flow Components to the value of underlying shares at that date. On a quar- terly basis, the liability is adjusted up or down for the change in the market value of the underlying Subordinate TABLE 26 ($ millions) 2004 2003 Cash from operating activities, excluding Voting Shares, with the corresponding amount reﬂected changes in non-cash in the consolidated statements of earnings. At Decem- net working capital and other liabilities 415 107 ber 31, 2004, Onex had 40,000 DSUs outstanding with a Increase in non-cash net cost of $1 million being recorded as stock-based compen- working capital and other liabilities sation expense. Normal Course Issuer Bids Onex had Normal Course Issuer Bids (the “Bids”) in place during 2004 that enabled it to repurchase up to 10 percent of its public ﬂoat of Subordinate Voting Shares. Onex believes that it is advantageous to Onex and its sharehold- ers to continue to repurchase Onex’ Subordinate Voting Shares from time to time when the Subordinate Voting Shares are trading at prices that reﬂect a signiﬁcant dis- count to their intrinsic value. During 2004, Onex repur- Cash from (used in) ﬁnancing activities Cash used in investing activities Cash from discontinued operations (279) 608 (609) 572 (313) (879) (147) 53 Consolidated cash(a) 3,310 2,800 (a) Includes cash from discontinued operations. Cash from operating activities Cash from operations, excluding changes in working capital and other liabilities, totalled $415 million in 2004 compared to $107 million in 2003. Table 27 provides a breakdown of chased 9,143,100 Subordinate Voting Shares under the Bids cash from (used in) operating activities, excluding changes at a total cost of $150 million. Under similar Bids, Onex in non-cash net working capital and other liabilities, by repurchased 11,586,100 Subordinate Voting Shares at a total industry segment. The increase in cash generated from operations compared to the same period last year was 52 Onex Corporation December 31, 2004 Report M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S related primarily to the inclusion of Magellan, which added activities was due primarily to acquisitions completed in $180 million. In addition, improved operating results, 2004, which used cash of $216 million, compared to primarily at Celestica and ClientLogic, also contributed $99 million of cash used for acquisitions in 2003. Note 3 to the growth in cash generated from operating activities. to the consolidated ﬁnancial statements discloses the A detailed discussion of the consolidated operating results by industry segment can be found under the heading amount of cash invested in each acquisition completed during 2004 and 2003. Table 19 on page 46 provides details “Consolidated Operating Results” beginning on page 29. on the acquisitions completed in 2004, 2003 and 2002. Cash from (used in) Operating Activities $216 million investment in ResCare and CGG completed in TABLE 27 ($ millions) 2004 2003 June and November 2004, respectively. Included in the 2004 cash from investing activities In addition, cash used in investing activities includes the Electronics Manufacturing Services Theatre Exhibition Healthcare Customer Management Services Automotive Products Other (a) Total 200 48 180 54 18 128 50 – (1) 37 were cash proceeds of $81 million received by Onex from CVG’s initial public offering of shares and debt repayment in August 2004 as well as $68 million in proceeds recorded by Celestica on the sale of its Power Systems business in the third quarter of 2004. This compares to $256 million in (85) (107) proceeds from sales of shares in 2003 due primarily to the 415 107 initial public offering of the Cineplex Galaxy Income Fund in November 2003. (a) Other includes Radian, ONCAP and parent company. Cash from (used in) ﬁnancing activities Cash from ﬁnancing activities was $608 million in 2004 compared to cash used of $879 million in 2003. Included in the 2004 cash provided from ﬁnancing activities was $386 million of cash received from limited partners of Onex Partners LP for the investments in Magellan, Onex’ operating companies spent $348 million on property, plant and equipment in 2004 compared to $387 million of such expenditures in 2003. Table 28 details property, plant and equipment expenditures by industry segment. Property, Plant and Equipment Expenditures ResCare, CGG, CEI and CDI. In addition, Celestica’s 7.875 per- TABLE 28 ($ millions) 2004 2003 cent senior notes offering completed in the second quarter of 2004 contributed US$500 million of cash from ﬁnancing activities. Partially offsetting these amounts were cash used by Onex for the repurchase of Subordinate Voting Shares of $150 million and Celestica’s repurchase of LYONs, which used cash of $405 million in 2004. Included in the 2003 cash used in ﬁnancing activities was $166 million of cash used for Onex’ repur- chase of its Subordinate Voting Shares and $691 million of cash used by Celestica for the repurchase of some of its Subordinate Voting Shares under that company’s normal course issuer bid and the repurchase of a portion of its LYONs. Cash used in investing activities Cash used in investing activities totalled $609 million in 2004, an increase from $147 million of cash used in investing activities in 2003. The increase in cash used in investing Electronics Manufacturing Services 180 234 Theatre Exhibition Healthcare Customer Management Services Automotive Products Other (a) Total 23 39 43 52 11 47 – 26 72 8 348 387 (a) Other includes Radian, ONCAP and parent company. Celestica recorded $180 million in property, plant and equipment expenditures relating primarily to the expansion of manufacturing capabilities in lower-cost geographies including Mexico, Malaysia, Romania, Thailand and the Czech Republic. Cineplex Galaxy spent $23 million in capital expenditures in 2004 compared to $47 million in 2003 primarily for new theatre construction. Magellan utilized approximately $39 million of cash on capital Onex Corporation December 31, 2004 Report 53 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S expenditures in 2004 related to management information systems and related equipment. ClientLogic spent $43 mil- lion on property, plant and equipment mainly for call centre capacity expansions in 2004. J.L. French Automotive used US$30 million in cash on capital expenditures in 2004 pri- marily for equipment purchases related to new programs and replacement programs. Commitments As at December 31, 2004, Onex and its operating companies had total commitments as follows: Commitments TABLE 29 ($ millions) Corporate investments Capital expenditures Letters of credit, letters of guarantee and surety and performance bonds Total commitments 161 58 95 314 The corporate investment commitments of $161 million noted in table 29 include primarily Onex’ share of commit- ments ($121 million) in acquisitions completed by Onex Partners in early 2005. In early January 2005, Onex com- pleted the acquisition of Center for Diagnostic Imaging, Inc. (“CDI”), investing $88 million for an 84 percent equity ownership. Onex provided approximately $21 million of that equity investment and the balance of $67 million was funded through Onex Partners. In addition, in February 2005, Onex acquired American Medical Response, Inc. (“AMR”) and EmCare Holdings Inc. (“EmCare”) in a purchase valued at approximately $1 billion. The total equity investment was approximately $270 million with Onex initially investing $100 million and the balance through Onex Partners and certain of its limited partners. These corporate investments are discussed in further detail below under the heading “Pending Transactions at December 31, 2004”. Capital expenditures commitments are essen- tially those of Onex’ operating companies. Celestica had US$20 million in capital commitments, principally for machinery, equipment and facilities in Asia. In total, Celestica expects capital spending for 2005 to be in the range of 1.5–2.5 percent of the company’s revenues, which will be funded from cash on hand. The theatre exhibition segment had capital commitments of $23 million associ- ated with the construction of ﬁve new theatre properties that will comprise 51 screens. These theatres are expected to be completed and opened at various times during 2005 and 2006. Contingent liabilities in the form of letters of credit, letters of guarantee, and surety and performance bonds are provided by certain operating companies to various third parties and include certain bank guarantees. In addition, certain operating companies have also made guarantees with respect to employee share purchase loans. As at December 31, 2004, the commitments with respect to these guarantees collectively totalled $95 million. These guarantees are without recourse to Onex. Cash from discontinued operations Cash from discontinued operations represents the cash received on the sale of businesses adjusted for the opening cash positions of those businesses that have been discon- tinued. The companies that have been reported as dis- continued in 2004 are Loews Cineplex, Armtec, Cincinnati Electronics, Dura Automotive and InsLogic. Cash from discontinued operations was $572 million in 2004 com- pared to cash provided of $53 million in 2003. Included in the cash from discontinued operations for the year ended December 31, 2004 were proceeds of $739 million on the sale of Loews Cineplex; $226 million on the sale of Cincinnati Electronics; $22 million on the sale of Armtec; and $23 million on the sale of Dura Automotive less cash of $438 million, which was held by these businesses at the beginning of 2004. Note 2 to the audited annual consoli- dated ﬁnancial statements provides additional informa- tion on cash ﬂows from discontinued operations. Included in the 2003 cash from discontinued operations were the cash positions of those businesses that were discontinued in 2004, as well as those of magnatrax, Rogers Sugar and Lantic Sugar, which were discontinued in 2003. 54 Onex Corporation December 31, 2004 Report M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Additional sources of cash In early February 2004, Onex completed the ﬁnal closing Related party transactions Related party transactions are primarily investments by of Onex Partners, a fund with total commitments of $2 bil- the management of Onex and of the operating companies lion (US$1.7 billion). Onex Partners provides capital to in the equity of the operating companies acquired. Onex-sponsored acquisitions not related to Onex’ operating Onex has a Management Incentive Plan (the companies that existed prior to the formation of Onex “MIP”) in place that requires its management members to Partners or ONCAP. Onex controls the General Partner and invest in each of the operating companies acquired the Manager of Onex Partners and has pledged $480 mil- by Onex. The funds required for investments under lion (US$400 million) to Onex Partners. Onex Partners has the MIP are neither loaned to the management members a diverse group of limited partner investors, including pub- nor guaranteed by Onex or the operating companies. lic and private pension funds, banks, insurance companies During 2004, there were investments of $2 million under and endowment funds from the United States, Canada, the MIP compared to less than $1 million in 2003. Europe and Asia. This substantial pool of committed funds Management members of the MIP participated in the real- enables Onex to be more ﬂexible and timely in responding izations the Company achieved on Loews Cineplex and to investment opportunities. At December 31, 2004, Onex Armtec, receiving $35 million in 2004. This compares to Partners, including Onex, had invested $485 million in $6 million in realizations under the MIP in 2003. Notes 1 investments or acquisitions completed in 2004. The avail- and 24 to the audited annual consolidated ﬁnancial state- able committed capital from Onex Partners, excluding ments provide additional details on the MIP. Onex, totalled $1.1 billion at December 31, 2004. Acqui- Members of management and the Board of sitions completed in 2004 are disclosed in detail in note 3 to Directors of Onex can invest limited amounts in partner- the audited annual consolidated ﬁnancial statements. Onex ship with Onex in all acquisitions outside of Onex Partners Partners had equity investment commitments outstanding, at the same cost as Onex and other outside investors. which included Onex’ share of those commitments, of During 2004, approximately $9 million in investments approximately $358 million at December 31, 2004 for the were made by Onex management and Onex board mem- acquisitions of CDI ($88 million), completed in January bers; this compares to less than $1 million in investments 2005, and of AMR and EmCare ($270 million), completed made in 2003 by management and the Onex board, which in February 2005; Onex’ share of those commitments was were related primarily to ONCAP’s acquisition of Western $21 million and $93 million, respectively. Inventory Service. In addition, Onex Partners requires Onex man- Consolidated cash At December 31, 2004, consolidated cash from continuing agement to invest 1 percent (US$16.5 million) in all future acquisitions and Onex management and directors have operations was $3.3 billion compared to $2.4 billion in committed to invest an additional 3 percent of the total cap- 2003. Onex, the parent company, had approximately ital invested by Onex Partners. This structure will apply to $1.4 billion of cash, Celestica had more than $1.1 billion of those acquisitions completed through Onex Partners. The cash on hand and Magellan had approximately $0.4 billion total amount invested in 2004 by Onex management and of cash at December 31, 2004. In addition, Onex, the par- directors on acquisitions and investments completed ent company, had approximately $0.3 billion of near-cash through Onex Partners was $21 million. items at December 31, 2004. The Company has a conserva- During the investment period of Onex Partners tive cash management policy that limits investment to (up to six years), Onex will receive a management fee of short-term low-risk money-market products. No amounts 2 percent on the US$1.25 billion of committed capital of cash from the limited partners of Onex Partners are provided by third-party investors. Thereafter, a 1 percent included in consolidated cash. management fee is payable to Onex on invested capital. Onex Partners’ General Partner will also receive a carried Onex Corporation December 31, 2004 Report 55 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S interest of 20 percent on the realized gains of the third- $76 million, recognized an increase in the bonds’ market party limited partners, subject to an 8 percent compound value. Onex’ share of those proceeds was $18 million, annual preferred return to such limited partners on all excluding any carried interest amount that Onex is enti- amounts contributed to Onex Partners. This carried interest tled to. In January 2005, Onex also established Onex Real will be based on the overall performance of Onex Partners Estate Partners LP (“Onex Real Estate Partners”), a fund and includes typical catch-up and clawback provisions. dedicated to acquiring and improving real estate assets in Consistent with market practice, Onex, as sponsor of Onex North America. Onex’ initial commitment is $250 million, Partners, will be allocated 40 percent of the carried interest which will be funded as acquisitions are completed. Onex with 60 percent allocated to the Onex principals. intends to increase the size of the fund over time with the Onex does not guarantee the debt on behalf of participation of institutional investors. any of its operating companies, nor are there any cross- In February 2005, Onex acquired AMR and guarantees between operating companies. Onex will invest EmCare in a transaction valued at approximately $1 bil- in debt of its operating companies, which amounted to lion. The investment was made through Onex Partners and $204 million at December 31, 2004 compared to $134 mil- certain of its limited partners, which invested approxi- lion at December 31, 2003. Note 8 to the audited annual mately $270 million in equity for a 97 percent ownership consolidated ﬁnancial statements provides information on interest. Onex’ investment was approximately $100 million the debt of operating companies held by Onex. for a 37 percent ownership interest. Senior management of Note 24 to the audited annual consolidated ﬁnan- the businesses are also investors and owners along with cial statements describes related party transactions. Onex. AMR is the largest U.S. provider of ambulance trans- Pending Transactions at December 31, 2004 In January 2005, Onex, through Onex Partners, acquired port services. The company provides emergency response services on behalf of communities, municipalities and other local government agencies as well as non-emer- CDI in a transaction valued at approximately $225 million. gency transports between healthcare facilities or from Onex Partners invested approximately $88 million in a healthcare facility to a patient’s home. EmCare is the equity for an approximate 84 percent ownership interest. leading provider of outsourced services for hospital Onex’ portion of that investment was approximately emergency department physician stafﬁng and manage- $21 million, representing an approximate 20 percent own- ment. The company assists its clients in the operation of ership interest. CDI is a leading provider of diagnostic and their emergency departments, providing recruiting ser- therapeutic radiology services. The company operates vices, staff coordination, quality assurance, departmental 32 diagnostic imaging centres in nine markets in the accreditation, risk management, billing, record keeping, United States. CDI’s imaging services include magnetic third-party payment, and other administrative services. resonance imaging (“MRI”), computed tomography (“CT”), diagnostic and therapeutic-injection procedures, as well as other procedures such as conventional x-ray, mammography and ultrasound. Other matters Onex Corporation’s ﬁnancial ﬁlings, including its 2004 Annual Report and interim quarterly reports, Annual In addition, in January 2005, Onex Partners sold Information Form and Management Circular, are available more than half of its CGG convertible subordinated bonds on the Company’s website at www.onex.com or on the after receiving an attractive purchase offer from a third Canadian System for Electronic Document Analysis and party. The transaction, which generated proceeds of Retrieval (“SEDAR”) at www.sedar.com. 56 Onex Corporation December 31, 2004 Report M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S OUTLOOK P A R E N T C O M P A N Y Onex ended 2004 with substantial cash resources for the acquisitions of businesses and to support new initiatives to invest in other asset categories. The participants in Onex Partners LP (“Onex Partners”) also have remaining commitments to provide $1.1 billion of funding for future Onex-sponsored acquisitions. At the end of 2004, Onex had outstanding agree- ments to acquire three businesses. These transactions were completed in January and February 2005 with funding provided by Onex and Onex Partners. In early January 2005, Onex completed the acquisi- tion of Center for Diagnostic Imaging, Inc. (“CDI”), investing $88 million for an 84 percent equity ownership. Approx- imately $21 million of the amount was provided by Onex with $67 million through Onex Partners. CDI is expected to have annual revenues of approximately $125 million. In February 2005, Onex acquired American Medical Response, Inc. (“AMR”) and EmCare Holdings Inc. (“EmCare”) in a purchase valued at approximately $1 billion. AMR is the largest U.S. provider of ambulance transport services on behalf of communities, municipalities, government agencies and healthcare facilities. EmCare is the largest provider of outsourced services for hospital emergency department physician stafﬁng and management. The total equity invest- ment was approximately $270 million with Onex investing $100 million and the balance through Onex Partners and certain of its limited partners. Annual revenues of AMR and EmCare are estimated at $2 billion. In late February 2005, Onex announced that it had signed an agreement to acquire the Wichita/Tulsa Division of Boeing Commercial Airplanes in a transaction valued at approximately $1.5 billion, consisting of $1.1 bil- lion in cash and the assumption of certain liabilities. The purchase will include Boeing’s commercial airplane man- ufacturing facilities in Wichita, Kansas and Tulsa and McAlester, Oklahoma. The operations will be under a new company that will enter into long-term agreements with Boeing to supply components such as fuselage sections, struts and nacelles, and wing elements on all of Boeing’s existing 737, 747, 767, and 777 platforms, as well as the new 787 platform. The division currently employs approx- imately 9,000 people and represented approximately $2.5 billion in annual costs in 2004. The new company will also seek new business from other customers. Onex, through Onex Partners and certain of its limited partners, intends to invest approximately $465 million. Onex’ share is expected to be at least $116 million. Closing of the transaction is subject to the satisfactory completion of a number of conditions and is expected to be completed late in the second quarter or during the third quarter of 2005. Onex is also pursuing other opportunities to put substantial cash resources to work by investing in initia- tives that meet our benchmarks for entrepreneurial management and value-creation potential. Early in 2005, Onex established Onex Real Estate Partners LP (“Onex Real Estate Partners), a fund dedicated to acquiring and improving real estate assets in North America. Onex’ part- ners in Onex Real Estate Partners are highly experienced real estate professionals who share our philosophy of long-term value growth. Onex’ initial commitment of $250 million will be funded as acquisitions are completed. Onex intends to increase the size of the real estate fund over time with the participation of institutional investors. In early February 2005, Onex redeemed all four series of its outstanding 25-year debentures exchangeable for Celestica subordinate voting shares. The aggregate principal amount of the debentures redeemed was approxi- mately $729 million. Onex elected to satisfy the principal amount by providing Celestica subordinate voting shares based upon the ﬁxed exchange rates under the terms of the debentures. In aggregate, 9,214,320 Celestica subordi- nate voting shares were delivered to the debenture holders on redemption. In addition, an early termination premium of approximately $12.2 million and accrued interest was paid in cash on redemption. Onex will record an accounting gain in the ﬁrst quarter of 2005 on the redemption on the debentures. An estimate of that gain is approximately $550 million before tax based on the December 31, 2004 carrying values. After these transactions and excluding shares for MIP investment rights and shares pledged under the forward contracts, Onex would continue to hold 27.3 million multi- ple voting shares of Celestica. The shares Onex will continue to hold represent an equity and voting interest in Celestica of approximately 13 percent and 78 percent, respectively. At the end of 2004, the commitment period for initial investments by the ﬁrst ONCAP fund expired. As a result of the success of ONCAP’s ﬁrst fund, ONCAP is intending to raise a second fund with a size of approxi- mately $500 million. It is currently Onex’ intention to have a greater participation in the second ONCAP fund than its approximate 28 percent participation in the ﬁrst fund. Onex Corporation December 31, 2004 Report 57 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Onex, the parent company, has approximately $1.4 billion in cash to meet its commitments to Onex Partners, ONCAP and Onex Real Estate Partners and to support the growth plans of our operating companies. More importantly, the creation of Onex Partners has made available a substantial amount of time and resources previously dedicated to ﬁnding investment partners for major transactions. It has enabled us to more efﬁciently evaluate and act on new opportunities to create value for Onex shareholders and investors in Onex Partners, as the four important acquisitions or investments made during 2004 demonstrate. Certiﬁcation of disclosures and internal controls In early 2004, the Canadian Securities Association (“CSA”) issued proposed Multilateral Instrument 52-109, “Certiﬁ- cation of Disclosure in Issuers’ Annual and Interim Filings” related to the certiﬁcation of disclosures and other matters in issuers’ annual and interim ﬁlings. This instrument requires CEOs and CFOs of all reporting issuers to person- ally certify the accuracy and completeness of the annual and interim ﬁlings of the issuer. Onex, the parent com- pany, implemented this requirement in early 2004 and has ﬁled the necessary certiﬁcations for 2004. In February 2005, the CSA issued proposed Multilateral Instrument 52-111, “Reporting on Internal Control over Financial Reporting”. This instrument as pro- posed will require an evaluation by management of the effectiveness of internal controls over ﬁnancial reporting against a suitable controls framework; maintenance of evi- dence providing reasonable support for the evaluation of the effectiveness of internal controls over ﬁnancial report- ing; reporting of material weaknesses in internal controls over ﬁnancial reporting; and an external audit of internal controls over ﬁnancial reporting. In addition, in February 2005 the CSA announced the proposed repeal and replacement of Multilateral Instrument 52-109. Multilateral Instrument 52-111 does not change issuers’ certiﬁcation requirements for disclosure controls and processes, that were effective for years ending on or after March 31, 2005, but rather will require issuers to certify that they have disclosed signiﬁcant deﬁciencies and material weaknesses in the design or operation of internal controls over ﬁnancial reporting and fraud, if any, to their audit committee and auditors when the issuer is required to comply with Multilateral Instrument 52-111. The implementation of proposed instrument 52-111 for companies with market capitalization in excess of $500 million is expected to be effective for the year end- ing on or after June 30, 2006. At December 31, 2004, Onex had a market value of $2.7 billion and therefore would have to implement this new instrument for the year ended December 31, 2006. Onex, the parent company, has been addressing the requirements under this proposed instru- ment and anticipates that it will have implemented all necessary procedures to meet this new requirement as it becomes effective. O P E R A T I N G C O M P A N I E S Electronics Manufacturing Services (“EMS”) Based on the very moderate growth environment antici- pated in 2005, Celestica’s priorities will be similar to those in 2004. Celestica will continue to focus on restructuring its excess capacity in higher cost geographies, resulting in pre-tax charges of US$225–US$275 million. This initia- tive will align its manufacturing capacity and workforce with the current demand environment. Upon completing this restructuring, the company expects its capacity uti- lization to increase to approximately 70 percent for its EMS manufacturing capacity, which will be primarily located in lower-cost regions, such as Asia, Mexico, Central and Eastern Europe. Expanding and diversifying the cus- tomer base beyond communications and information technology OEMs will remain an important priority, par- ticularly in areas such as industrial, defence and aero- space, automotive and consumer end markets. Celestica also intends to further its deployment of lean manufacturing and six sigma efﬁciency initiatives, and to continue to broaden its offering outside its core manufacturing busi- ness, particularly in areas such as design, fulﬁllment and after-market services, in an effort to capture more of OEM customers’ outsourced business. 58 Onex Corporation December 31, 2004 Report M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Theatre Exhibition Cineplex Galaxy Limited Partnership (“CGLP”) expects to annual revenue. However, minimal impact is anticipated in 2005 due to the long lead time in being awarded bids on open new theatres during 2005 in Aurora, Barrhaven gaining customer acceptance and in the event of any such and Brockville, all in Ontario, with a total of 23 screens. successes, the long lead time for contract start-up. Management will also promote a variety of new programs intended to build attendance at its theatres: Jump, CGLP’s Res-Care, Inc. (“ResCare”) proprietary internet ticketing product, a new loyalty The growing demand for services to individuals with de- program and an innovative marketing and promotions velopmental disabilities, which represents approximately strategy will differentiate Cineplex Odeon and Galaxy 80 percent of ResCare’s revenues and operating earnings, theatres from its competitors. is underpinned by a variety of long-term social and demo- An important long-term growth initiative for graphic factors: aging family caregivers; pressure to reduce CGLP, and an ongoing beneﬁt of combining the two busi- state-compiled waiting lists; legislation and litigation nesses, is to build the level of its ancillary revenues. With arising from the Americans with Disabilities Act; and the 32 million patrons annually, a signiﬁcant portion of whom trend to privatization of services. These factors, combined are in the 18 to 25-year-old category, CGLP theatres repre- with the lengthy average stay of residents and ResCare’s sent an attractive opportunity for advertisers to reach this ability to meet their needs with services that are both important demographic group. During the ﬁrst half of 2005, efﬁcient and caring, have led to 52 consecutive quarters of CGLP will install a digital delivery system in all its Greater revenue growth at the company. Toronto theatres – 215 screens in total. Fifteen-minute digi- Given these social and demographic factors, and tal pre-shows will feature a combination of advertising, ResCare’s industry leadership and strong reputation, we sponsored entertainment and movie previews that will are conﬁdent the company’s trend of increasing revenue generate additional revenues at each theatre. will continue during 2005. ResCare intends to accelerate Healthcare Magellan Health Services Inc. (“Magellan”) its acquisition program and expects that the provision of periodic in-home services will continue to grow. A key strategic priority for 2005 across ResCare’s businesses Contract pricing will be lower in 2005 as Magellan passes will be to achieve a more normal pattern of reimburse- on much of the beneﬁt of the lower cost of care it has ment increases from state governments after two years of achieved in order to provide more value to customers. essentially unchanged rates for the services provided by As a result, margins will return to historical norms. In the company. February 2005, Aetna, Inc. (“Aetna”), a major health plan customer, informed Magellan that, effective December 31, 2005, it will not renew its agreement with Magellan and Customer Management Services During 2005, ClientLogic Corporation (“ClientLogic”) will exercise its option to purchase the Magellan opera- intends to concentrate on achieving organic growth in its tions that manage behavioural healthcare for its members. core customer contact business. In addition to its strategy Under the terms of the option, which was negotiated to build a high-quality, cost-effective right-shore offering, during Magellan’s bankruptcy, the purchase price is the company has established an excellent sales and expected to be US$50 million to US$55 million; Magellan marketing infrastructure. It intends to add scale to that will repay its US$49 million note to Aetna at the time the infrastructure in an effort to further penetrate Fortune transaction closes. Net revenue from the Aetna contract 1000 companies in key international markets. ClientLogic was US$228 million in 2004. Aetna’s decision to exercise entered 2005 with a very good new business pipeline and its option is not expected to have a material impact on expects a minimal amount of business will be lost due to Magellan’s ﬁnancial performance during 2005. repricing issues. Margin improvement will be a key oper- As noted, Magellan is pursuing growth on a ating initiative in the coming year, as will incremental variety of fronts. The company has stated that it has improvements in operational quality and productivity in opportunities in its pipeline that exceed US$300 million in the company’s European operations. Onex Corporation December 31, 2004 Report 59 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Longer term, we continue to believe with combination of PLG and Leaseway operations. Management ClientLogic management that the business process out- intends to pursue new revenue opportunities from sourcing industry represents a major growth opportunity as improved logistics, particularly where the two transporta- companies seek to outsource non-core business functions. tion systems overlap in the Midwest. The company will Over the past two years, ClientLogic has transformed itself also explore entry into new geographic and service markets into one of the top-tier providers in the world. We expect to that builds on PLG’s reputation for industry-leading service see substantial value growth in the years ahead as the com- levels. PLG management will aggressively pursue cost- pany continues its efforts to diversify its client base, expand reduction initiatives by eliminating redundant expenses its global offering and improve its overall proﬁtability. wherever possible. They also intend to take advantage of Automotive Products J.L. French Automotive Castings, Inc. (“J.L. French Automotive”) While the use of lighter-weight aluminum parts on the substantial buying power of Penske – a 40 percent owner of PLG – to reduce costs for fuel, tires and shop and maintenance supplies. PLG will continue to be accounted for on an equity basis in 2005. cars has been slow to gain momentum in North America, Commercial Vehicle Group, Inc. (“CVG”) we continue to believe there is potential for this segment CVG expects increased production volumes and content in in the automotive products industry. The company heavy truck cabs in 2005. OEMs are being challenged to remains dependent upon the success of its major cus- meet pent-up demand for new trucks by suppliers that are tomers, which include Ford and General Motors (repre- not yet capable of manufacturing enough components to senting approximately 80 percent of 2004 revenues), and meet anticipated manufacturing levels after years of the platforms upon which they provide parts. below-average production; this is likely to extend the cur- J.L. French Automotive is the leading producer of rent cycle of new builds. CVG, which has sharply reduced domestic aluminum transmission cases and is making its costs over the past few years, expects to be a major inroads on the next high-potential product – aluminum beneﬁciary of this extended cycle through increased engine blocks. During 2004, J.L. French Automotive was revenues and earnings. awarded the contract for the DaimlerChrysler World CVG also intends to broaden its revenue opportu- Engine Block and will be the sole supplier of four-cylinder nities in the coming year. Its capabilities in Class 8 seating blocks to two new DaimlerChrysler plants in southern will be introduced to European customers, while its Michigan. J.L. French Automotive is also aggressively mar- European expertise in construction and agricultural mar- keting its capability to produce six-cylinder engine blocks kets will be marketed to OEMs in North America. During to major domestic OEMs. High-pressure aluminum parts 2005, CVG will ramp up a wholly owned assembly facility like those produced by J.L. French Automotive are attrac- in China to meet rapidly growing demand in that country tive not only for their lower weight but also for their for safer, more comfortable heavy truck cabs. CVG will lower cost. continue to be accounted for on an equity basis in 2005. During 2005, management will continue its efforts In early February 2005, CVG announced that it to broaden J.L. French Automotive’s customer base with has acquired substantially all of the assets and liabilities of domestic and foreign transplant OEMs, as well as with Mayﬂower Vehicle Systems North American Commercial selected Tier One suppliers. The company will also make Vehicle Operations (“MVS”) for cash consideration of further improvements in waste reduction throughout US$108 million. MVS is the only non-captive producer of the business. complete truck cabs for the commercial vehicle sector that offers full-service engineering and development capa- Performance Logistics Group (“PLG”) bilities. The company’s products include cab frames and While revenues at PLG are largely dependent on the assemblies, sleeper boxes and other structural compo- success of the OEMs it serves, in 2005 the company will nents. MVS has operations in Norwalk and Shadyside, focus on realizing further synergy opportunities from the Ohio and Kings Mountain, North Carolina and has a tech- 60 Onex Corporation December 31, 2004 Report M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S nical facility in the Detroit, Michigan area. Its major cus- ONCAP intends to focus its investments primarily on tomers include International, Volvo/Mack and Freightliner. businesses with strong cash ﬂows and low exposure to Other Businesses Communications Infrastructure currency ﬂuctuations. As the commitment period for initial investments by the ﬁrst ONCAP fund expired at the end of 2004, Onex continues to believe that Radian Communication ONCAP initiated plans for a second fund. ONCAP expects Services Corporation (“Radian”) has a good foundation on the second fund to total approximately $500 million, with which to grow. The company enjoys strong brand recogni- Onex making a commitment of up to half of the total. tion for its towers and has a solid customer base. With the Year-end order backlogs suggest that CMC organizational changes implemented under new leadership Electronics, Inc. (“CMC Electronics”) will continue to have in the second half of 2004, Radian will be a more efﬁcient success with its suite of new products in ﬂight management organization with more effective sales and marketing. systems and components for the commercial aviation The major challenge for Radian in recent years segment. The company’s NovAtel division, whose Global has been declining capital spending by its customers. Positioning System has made it the supplier of choice for There is reason to believe that the environment is improv- aviation enroute and precision-approach applications, is ing, as wireless carriers begin to invest in technology also expected to have a very good year. A major strategic upgrades to their networks and U.S. broadcasters invest to focus for CMC Electronics management during 2005 will enhance their transmission to digital formats by July 2006. be to improve its execution in the Military Aviation divi- During 2005, the company will also focus on capturing the sion, particularly on new program opportunities. In early remaining cost-reduction opportunities in the business, January 2005, CMC Electronics sold a portion of its owner- improve its execution in manufacturing and bidding and ship in NovAtel for proceeds of approximately $118 million. seek ways to reduce working capital. Western Inventory Service Ltd. (“WIS”) intends to continue to develop new opportunities in its primary inventory counting business during 2005. The company’s focus in 2005 is to continue to gain market share and expand geographically in the United States. During 2005, ONCAP and Futuremed Health Care Products L.P. (“Futuremed”) intend to pursue growth on two fronts. The companies will explore acquisition growth that can quickly broaden Futuremed’s geographic market coverage and broaden its product offering. It will also pur- sue organic growth of its business through new customer relationships. Canadian Securities Registration Systems Ltd. (“CSRS”) has identiﬁed a number of strategic priorities for 2005. The company will focus on diversifying its service offering, securing new customers, exploring new end markets and examining selective strategic acquisitions. Personal Care Products Management believes that while the personal care prod- ucts industry will continue to grow at more than 4.5 per- cent annually, Cosmetic Essence, Inc. (“CEI”) speciﬁc cate- gories – cosmetics, skincare and perfumes – will grow at a faster rate. The company also expects to drive organic growth through stronger sales to existing customers, pene- tration of new customers and distribution channels, and ongoing growth in the trend to outsourcing. The industry is large and highly fragmented, providing further opportu- nities for growth through consolidation where potential acquisitions are both accretive and strategic. Small-capitalization Opportunities ONCAP added two new members to its investment team during 2004, including a seasoned professional with 12 years of acquisition experience in the United States. While ONCAP’s primary focus has been in Canada, the company intends to be more active, and successful, in pursuing potential stand-alone and add-on acquisitions in the U.S. during the coming year. Overall, Canadian private equity markets are expected to remain very competitive. Onex Corporation December 31, 2004 Report 61 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S RISK MANAGEMENT As managers, it is our responsibility to identify and manage business risk. As shareholders, we require an appropriate return for the risk we accept. Managing risk Onex’ general approach to the management of risk is to We encourage operating companies to reduce risk and/or expand opportunities by diversifying their customer apply common-sense business principles to the manage- bases, broadening their geographic reach or product and ment of the Company and the ownership of its operating service offerings, and improving productivity. In certain companies as well as to the acquisition of new businesses. instances, we may also encourage an operating company Each year we conduct detailed reviews of many oppor- to seek additional equity in the public markets in order to tunities to purchase either new businesses or add-on continue its growth without eroding its balance sheet. One acquisitions for existing businesses. Our primary interest element of this approach may be to use new equity invest- is in acquiring well-managed companies with a strong ment, when ﬁnancial markets are favourable, to prepay position in growing industries. In addition, we maintain existing debt and absorb related penalties. diversiﬁcation among Onex’ operating companies, which Speciﬁc strategies and policies to manage busi- enables us to participate in the growth of a number of ness risk at Onex and its operating companies are high-potential industries with varying business cycles. discussed below. As a general rule, we attempt to arrange as many factors as possible to minimize risk without hampering our opportunity to maximize returns. When a purchase Business cycles Diversiﬁcation by industry and geography is a deliberate candidate meets Onex’ criteria, for example, we typically strategy at Onex to reduce the risk inherent in business pay a fair price, though not necessarily the lowest price, cycles. Our practice of owning companies in various indus- for a high-quality business. We do not commit all of our tries with differing business cycles reduces the risk of holding capital to a single acquisition and will have equity partners a major portion of Onex’ assets in just one or two indus- with whom we can share the risk of ownership, especially tries. Similarly, the Company’s focus on building industry on large-scale transactions. The creation of Onex Partners leaders with extensive international operations reduces LP streamlined Onex’ process of sourcing and ﬁnalizing the ﬁnancial impact of downturns in speciﬁc regions. commitments from major equity partners. We do not burden an acquired company with more debt than it can likely sustain, but seek to structure Operating liquidity It is our view that one of the most important things Onex an acquisition so that it has the ﬁnancial and operating can do to control risk is to maintain a strong parent com- leeway to create as much long-term growth in value as pany with an appropriate level of liquidity. Onex needs to possible. Finally, we buy in ﬁnancial partnership with be in a position to support its operating companies when management. This strategy not only gives Onex the beneﬁt and if appropriate. Maintaining liquidity is important of experienced managers but also ensures that an oper- because Onex, as a holding company, generally does not ating company is run entrepreneurially for the beneﬁt have guaranteed sources of meaningful cash ﬂow. of all shareholders. In completing acquisitions, it is generally Onex’ Onex maintains an active involvement with its policy to ﬁnance a large portion of the purchase price with operating companies in the areas of strategic planning, debt provided by third-party lenders. This debt is assumed ﬁnancial structures and negotiations, and acquisitions. In by the company acquired and is without recourse to Onex, the early stages of ownership, we may provide resources the parent company, or its operating companies or part- for business and strategic planning, and ﬁnancial reporting, nerships. The foremost consideration, however, in devel- while an operating company builds these capabilities in- oping a ﬁnancing structure for an acquisition is identifying house. In all cases, we ensure there is oversight of Onex’ the appropriate amount of equity to invest. In Onex’ investment through representation on the acquired com- view, that is the amount of equity which maximizes the pany’s board of directors. risk/reward equation for both shareholders and the 62 Onex Corporation December 31, 2004 Report M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S acquired company. In other words, it allows the acquired company not only to manage its debt but also to have Financial and commodity risks In the normal course of business, Onex and its operating signiﬁcant ﬁnancial latitude for the business to vigorously companies may face a variety of risks related to ﬁnancial pursue its growth objectives. management. Individual operating companies may also While we seek to maximize the risk/reward equa- use ﬁnancial instruments to offset the impact of antici- tion in all acquisitions, there is the risk that the acquired pated changes in commodity prices related to the conduct company will not generate sufﬁcient proﬁtability or cash of their businesses. In all cases, it is a matter of Company ﬂow to service its debt requirements or to provide ade- policy that neither Onex nor its operating companies quate ﬁnancial ﬂexibility for growth. In such circum- engages in derivatives trading or other speculative activities. stances, additional investment by the equity partners, Interest rate risk As noted above, Onex gener- including Onex, may be required. In severe circumstances, ally ﬁnances a signiﬁcant portion of its acquisitions with the recovery of Onex’ equity and any other investment in debt taken on by the acquired operating company. An that operating company is at risk. Timeliness of investment commitments Onex’ ability to create value for shareholders is dependent important element in controlling risk is to manage, to the extent possible, the impact of ﬂuctuations in interest rates on the debt of the operating company. It has generally been Onex’ policy to have its in part on our ability to be the successful party on large operating companies either ﬁx the interest on some or all acquisitions, which may be handled through an auction or of the term debt at the time it is entered into or otherwise bidding process with multiple potential purchasers. minimize the effect of interest rate increases on a substan- Bidding is often very competitive for the large-scale acqui- tial portion of the debt. This is achieved by taking on debt sitions that are Onex’ primary interest, and the ability to at ﬁxed interest rates and entering into interest rate swap make knowledgeable, timely investment commitments is a agreements or ﬁnancial contracts to control the level of key component of successful purchases. Our preferred interest rate ﬂuctuation. course is to complete acquisitions on an exclusive basis. In The risk inherent in such a strategy is that, should such instances, the vendor often establishes a relatively interest rates decline, the beneﬁt of such declines may not short time frame for Onex to respond deﬁnitely. In order to be obtainable or may only be achieved at the cost of penal- improve the efﬁciency of Onex’ internal processes on both ties to terminate existing arrangements. There is also auction and exclusive acquisition processes, and so reduce the risk that the counterparty on an interest rate swap the risk of missing out on high-quality acquisition oppor- agreement may not be able to meet its commitments. tunities, during 2003 we created Onex Partners LP (“Onex Guidelines are in place that specify the nature of the ﬁnan- Partners”), a $2 billion pool of capital raised from Onex cial institutions that operating companies can deal with and major institutional co-investors in North America, on interest rate contracts. Europe and Asia. Onex has committed $480 million to the At the end of 2004, approximately 38 percent of Fund and controls the General Partner and Manager. At the consolidated long-term debt was at ﬁxed rates. In addi- December 31, 2004, $485 million had been invested in tion, approximately 12 percent had contracts in place to ﬁx acquisitions or investments completed through Onex interest rates. Partners with Onex’ share of that being approximately Currency ﬂuctuations The majority of the activ- $107 million. Onex Partners’ committed capital available ities of Onex’ operating companies were conducted out- for acquisitions at December 31, 2004 totalled $1.5 billion, side Canada during 2004. As discussed, approximately of which Onex’ share was approximately $350 million. 33 percent of consolidated revenues and 26 percent of These funds will be drawn as required for acquisitions. consolidated assets was in the United States. Approximately Onex Corporation December 31, 2004 Report 63 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S 49 percent of consolidated revenues was from outside North America; however, a substantial portion of that Integration of acquired companies An important aspect of Onex’ strategy for value creation is business is actually based on U.S. dollars. This makes the to acquire what we consider to be “platform” companies. value of the Canadian dollar relative to the U.S. dollar the Such companies typically have distinct competitive primary currency relationship affecting Onex’ operating advantages in products or services in their industry that results. Onex’ operating companies may use currency we believe provide a solid foundation for growth in scale derivatives in the normal course of their business to hedge and value. In these instances, Onex works with company against adverse ﬂuctuations in key operating currencies but, management to identify and purchase attractive add-on as previously noted, speculative activity is not permitted. acquisitions that would enable the platform company to Onex’ results are reported in Canadian dollars, achieve its planned goals more quickly than by focusing and ﬂuctuations in the value of the Canadian dollar solely on the development and/or diversiﬁcation of its relative to other currencies can have an impact on Onex’ customer base, which is known as organic growth. Growth reported results and consolidated ﬁnancial position. by acquisition, however, carries more risk than organic During 2004, $68 million of the net increase in sharehold- growth. While as many of these risks as possible are con- ers’ equity reﬂected the increase in the value of Onex’ sidered in the acquisition planning, in Onex’ experience net equity in those operating companies that operate in our operating companies also face risks such as unknown U.S. dollars. expenses related to the cost-effective amalgamation of Onex holds a substantial amount of cash and operations, the retention of key personnel and customers, marketable securities in U.S.-dollar-denominated securi- the future value of goodwill paid as part of the acquisition ties. The portion of securities held in U.S. dollars is based price, and the future value of the acquired assets and upon Onex’ view of funds it will require for future invest- intellectual property. Onex works with company manage- ments in the United States. Onex does not speculate on the ment to understand and potentially mitigate such risks as direction of exchange rates between the Canadian dollar much as possible. and the U.S. dollar when determining the balance of cash and marketable securities to hold in each currency, nor does it use foreign exchange contracts to protect itself against translation loss. Risk-related contracts With the acquisition of an equity interest in Magellan Health Services, Inc. (“Magellan”) in January 2004, Onex Commodity prices Certain of Onex’ operating entered an industry that poses substantially different risks companies are vulnerable to price ﬂuctuations in major than those of the manufacturing industries that are the commodities. The most signiﬁcant of these is Celestica, major portion of the Company’s assets. Magellan faces a which purchases a substantial volume of electronic com- variety of risks in the normal course of its business, includ- ponents that could be viewed as a commodity in nature ing responsibility for risk-related products, reliance on and subject to ﬂuctuations in price. Celestica substantially major contracts with a limited number of customers, manages its exposure in this area by purchasing compo- evolving state and federal regulations, claims for profes- nents only for speciﬁc customer contracts, and by having sional liability and dependence on government spending those sale contracts include terms or pricing provisions for managed healthcare. Of these, Magellan’s management that pass any product cost ﬂuctuations on to the customer. believes Magellan’s responsibility for risk-related products, J.L. French Automotive is also impacted by the fluctua- which account for more than 88 percent of the company’s tions in the pricing of aluminum and its ability to pass revenues, is the most signiﬁcant risk factor. those cost changes to customers. 64 Onex Corporation December 31, 2004 Report M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S In general terms, the major portion of Magellan’s revenues is derived primarily from contracts under which Environmental considerations Onex has an environmental protection policy that has it assumes all or some of the responsibility for providing been adopted by its operating companies. Senior ofﬁcers behavioural healthcare treatment services in exchange of each of these companies are ultimately responsible for for a ﬁxed, per-member monthly fee. In order for these ensuring compliance with this policy. They are required to contracts to be proﬁtable, the company must accurately report annually to their company’s board of directors and estimate the rate of service utilization by beneﬁciaries and to Onex regarding compliance with this policy. control the costs of treatment services in relation to con- Environmental management by the operating tract pricing. Increases in behavioural healthcare costs companies is accomplished through the education of or higher-than-anticipated utilization rates – signiﬁcant employees about environmental regulations and appro- aspects of which are outside Magellan’s control – may priate operating policies and procedures; site inspections cause expenses to exceed revenues on certain contracts. by environmental consultants; the addition of proper Onex’ due diligence prior to its investment in the company equipment or modiﬁcation of existing equipment to suggests that Magellan’s management has the skill and the reduce or eliminate environmental hazards; remediation procedures in place to deal effectively with the aspects of activities as required; and ongoing waste reduction its risk contracts that are under its control. It should also and recycling programs. Environmental consultants are be noted that, as a provider of managed behavioural engaged to advise on current and upcoming environmen- healthcare services, Magellan is not burdened by the tal regulations that may be applicable. “catastrophic” claim risk that characterizes the business of Most of the operating companies are involved healthcare for physical conditions. in the remediation of particular environmental issues such as soil contamination. In almost all cases, these issues Signiﬁcant customers Onex has acquired major operating companies and divi- have occurred prior to Onex’ acquisition of those compa- nies. The estimated costs of remedial work and related sions of large companies. As part of these purchases, the activities are to be provided for either under agreement by acquired company has often continued to supply its for- the vendor of the company or through provisions estab- mer owner through long-term supply arrangements. It has lished at the time of acquisition. Manufacturing activities been Onex’ policy to encourage its operating companies to carry the inherent risk that changing environmental regu- quickly diversify their customer bases to the extent practi- lations may identify additional situations requiring capital cable in order to manage the risk associated with serving a expenditures or remedial work, and associated costs to single major customer. Celestica primarily relied on one meet those regulations. major customer at the time of its acquisition by Onex; the company now has a broadly diversiﬁed and global base of signiﬁcant customers. Certain Onex operating companies have major customers that represent more than 10 percent of annual revenues. The table in note 23 to the consolidated ﬁnan- cial statements provides information on the concentration of business the operating companies have with major customers. Onex Corporation December 31, 2004 Report 65 MANAGEMENT ’S RESPONSIBILITY FOR FINANCIAL STATEMENTS The accompanying consolidated ﬁnancial statements have been prepared by management, reviewed by the Audit and Corporate Governance Committee and approved by the Board of Directors of the Company. Management is responsible for the information and representations contained in these ﬁnancial 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 Canadian generally accepted accounting principles. The signiﬁcant accounting policies which management believes are appropriate for the Company are described in note 1 to the consolidated ﬁnancial statements. The Board of Directors is responsible for reviewing and approving the consolidated ﬁnancial statements and overseeing management’s performance of its ﬁnancial reporting responsibilities. An Audit and Corporate Governance Committee of three non-management independent Directors is appointed by the Board. The Audit and Corporate Governance Committee reviews the consolidated ﬁnancial statements, adequacy of internal controls, audit process and ﬁnancial reporting with management and with the external auditors. The Audit and Corporate Governance Committee reports to the Directors prior to the approval of the audited consolidated ﬁnancial statements for publication. PricewaterhouseCoopers llp, the Company’s external auditors, who are appointed by the holders of Subordinate Voting Shares, audited the consolidated ﬁnancial statements in accordance with Canadian generally accepted auditing standards to enable them to express to the shareholders their opinion on the consolidated ﬁnancial statements. Their report is set out on the following page. Ewout R. Heersink Chief Financial Oﬃcer March 3, 2005 Donald W. Lewtas Managing Director 66 Onex Corporation December 31, 2004 Report AUDITORS’ REPORT To the Shareholders of Onex Corporation: We have audited the consolidated balance sheets of Onex Corporation as at December 31, 2004 and 2003 and the consoli- dated statements of earnings, shareholders’ equity and cash ﬂows for the years then ended. These consolidated ﬁnancial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated ﬁnancial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the ﬁnancial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the ﬁnancial statements. An audit also includes assessing the accounting principles used and signiﬁcant estimates made by management, as well as evaluating the overall ﬁnancial statement presentation. In our opinion, these consolidated ﬁnancial statements present fairly, in all material respects, the ﬁnancial position of the Company as at December 31, 2004 and 2003 and the results of its operations and its cash ﬂows for the years then ended in accordance with Canadian generally accepted accounting principles. PricewaterhouseCoopers LLP Chartered Accountants Toronto, Canada March 3, 2005 Onex Corporation December 31, 2004 Report 67 CONSOLIDATED BALANCE SHEETS As at December 31 (in millions of dollars) 2004 2003 Assets Current assets Cash and short-term investments $ 3,310 $ 2,362 1,666 1,447 604 2 7,029 1,709 762 369 1,938 2 1,378 1,492 477 1,205 6,914 1,762 613 302 1,473 3,557 $ 11,809 $ 14,621 $ 13 2,986 $ 1 2,547 321 5 3,325 2,363 25 156 1,096 691 52 7,708 3,874 227 298 945 3,791 1,471 28 180 925 637 3,294 10,326 4,002 293 $ 11,809 $ 14,621 Accounts receivable Inventories (note 4) Other current assets Current assets held by discontinued operations (note 2) Property, plant and equipment (note 5) Investments and other assets (note 6) Intangible assets (note 7) Goodwill Long-lived assets held by discontinued operations (note 2) Liabilities and Shareholders’ Equity Current liabilities Bank indebtedness, without recourse to Onex Accounts payable and accrued liabilities Current portion of long-term debt and obligations under capital leases of operating companies, without recourse to Onex Current liabilities held by discontinued operations (note 2) Long-term debt of operating companies, without recourse to Onex (note 8) Obligations under capital leases, without recourse to Onex (note 9) Exchangeable debentures (note 10) Other liabilities (note 11) Future income taxes (note 20) Long-term liabilities held by discontinued operations (note 2) Non-controlling interests Shareholders’ equity Commitments and contingencies are reported in notes 9 and 24. Signed on behalf of the Board of Directors Director Director 68 Onex Corporation December 31, 2004 Report CONSOLIDATED STATEMENTS OF EARNINGS Year ended December 31 (in millions of dollars except per share data) Revenues Cost of sales Selling, general and administrative expenses Earnings Before the Undernoted Items Amortization of property, plant and equipment Amortization of intangible assets and deferred charges Interest expense of operating companies (note 13) Interest and other income Equity-accounted investments Foreign exchange loss Stock-based compensation Derivative instruments Gains on shares of operating companies, net (note 15) Acquisition, restructuring and other expenses (note 16) Debt prepayment costs (note 17) Writedown of goodwill and intangible assets (note 18) Writedown of long-lived assets (note 19) Loss before income taxes, non-controlling interests and discontinued operations Provision for income taxes (note 20) Non-controlling interests of operating companies Loss from continuing operations Earnings from discontinued operations (note 2) 2004 $ 16,244 (14,510) (953) $ 781 2003 $ 12,119 (10,859) (766) $ 494 (416) (94) (253) 111 (8) (116) (104) 29 182 (211) (8) (393) (94) (594) (347) 781 (160) 195 (407) (91) (191) 81 – (122) 14 – 129 (151) (11) (402) (88) (745) (67) 256 (556) 224 Net Earnings (Loss) for the Year $ 35 $ (332) Net Earnings (Loss) per Subordinate Voting Share (note 21) Basic and Diluted: Continuing operations Discontinued operations Net earnings (loss) $ (1.12) $ $ 1.37 0.25 $ $ $ (3.62) 1.46 (2.16) Onex Corporation December 31, 2004 Report 69 CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (in millions of dollars except per share data) Balance – December 31, 2002 Dividends declared(a) Issue of shares – dividend reinvestment plan and exercise of options Purchase and cancellation of shares Currency translation adjustment Net loss for the year Balance – December 31, 2003 Change in stock-based compensation accounting policy(b) Dividends declared(a) Issue of shares – dividend reinvestment plan and exercise of options Purchase and cancellation of shares Currency translation adjustment Net earnings for the year Share Capital (note 12) $ 658 – 6 (46) – – Retained Earnings (Deficit) (note 12) $ 279 (17) – (120) – (332) Cumulative Translation Adjustment $ 107 – – – (242) – Total Shareholders’ Equity $ 1,044 (17) 6 (166) (242) (332) $ 618 $ (190) $ (135) $ 293 – – 1 (37) – – (5) (15) – (113) – 35 – – – – 68 – (5) (15) 1 (150) 68 35 Balance – December 31, 2004 $ 582 $ (288) $ (67) $ 227 (a) Dividends declared per Subordinate Voting Share during 2004 totalled $0.11 (2003 – $0.11). (b) Adoption of the revised CICA Handbook Section 3870, “Stock-based Compensation and Other Stock-based Payments” (see note 1). 70 Onex Corporation December 31, 2004 Report CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended December 31 (in millions of dollars) Operating Activities Net loss for the year from continuing operations Items not affecting cash: Amortization of property, plant and equipment Amortization of intangible assets and deferred charges Writedown of goodwill and intangible assets Writedown of long-lived assets Non-controlling interests in results of operating companies Future income taxes (note 20) Stock-based compensation Derivative instruments Gains on shares of operating companies, net (note 15) Other Increase in other liabilities Changes in non-cash working capital items: Accounts receivable Inventories Other current assets Accounts payable and accrued liabilities Increase in non-cash net working capital related to operations Financing Activities Issuance of long-term debt Repayment of long-term debt Cash dividends paid Repurchase of share capital Issuance of share capital by operating companies Repurchase of share capital by operating companies Decrease in other ﬁnancing activities Investing Activities Acquisition of operating companies, net of cash in acquired companies of $319 (2003 – $11) (note 3) Purchase of property, plant and equipment Proceeds from sales of shares of operating companies Net decrease (increase) in investments and other investing activities Cash from discontinued operations (note 2) Increase (Decrease) in Cash and Short-term Investments for the Year Decrease in cash and short-term investments due to changes in foreign exchange rates Cash and short-term investments – beginning of the year* Cash and Short-term Investments – End of the Year *Includes cash from discontinued operations of $438 at December 31, 2003 (note 2). 2004 2003 $ (160) $ (556) 416 94 393 94 (781) 252 104 (29) (182) 214 415 50 (294) 68 36 (139) (329) 136 2,543 (1,797) (14) (150) 464 (405) (33) 608 (216) (348) 114 (159) (609) 572 707 (197) 2,800 $ 3,310 407 91 402 88 (256) 8 (14) – (129) 66 107 3 25 (332) (60) 51 (316) (206) 496 (547) (12) (166) 116 (691) (75) (879) (99) (387) 256 83 (147) 53 (1,179) (663) 4,642 $ 2,800 Onex Corporation December 31, 2004 Report 71 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in millions of dollars except per share data) Onex Corporation (“Onex” or the “Company”) is a diversified company whose subsidiaries operate as autonomous busi- nesses. The consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles (“Canadian GAAP” or “GAAP”). In addition to the above, investments over which Onex exercises signiﬁcant inﬂuence but does not control at December 31, 2004, are accounted for by the equity method and include Commercial Vehicle Group, Inc. (“CVG”), Performance Logistics Group (“PLG”), Res-Care, Inc. (“ResCare”) and Cypress 1. B A S I S O F P R E PA R AT I O N A N D S I G N I F I C A N T A C C O U N T I N G P O L I C I E S B A S I S O F P R E PA R AT I O N The consolidated ﬁnancial statements include the accounts of the Company and its subsidiaries. The principal operating companies and the Company’s ownership and voting interests in these entities are as follows: Property & Casualty Insurance Company. Joint ventures are accounted for using the proportionate consolidation method. The consolidated ﬁnancial statements include revenues of $199 (2003 – nil), net assets of $17 (2003 – nil) and net earnings before income taxes of $7 (2003 – nil) with respect to joint ventures. Other long-term investments are accounted for at cost unless it is determined by management that a diminution in value that is other than temporary has occurred, at which point December 31, 2004 December 31, 2003 a provision is recorded. Celestica Cineplex Galaxy Magellan ClientLogic J.L. French Automotive Bostrom Trim Systems Performance Logistics Group Radian Cosmetic Essence ONCAP Loews Cineplex Group Dura Automotive InsLogic Ownership Voting Ownership Voting 18% 31% 6% 68% 77% (b) (b) (c) 89% 21% 28% – – 84% 100%(a) 50% 88% 100% (b) (b) (c) 100% 100% 100% – – 52% 57% 19% 31% – 71% 56% 49% 79% 50% 71% – 25% 51% 8% 52% 85% 100%(a) – 89% 100% 100% 100% 100% 80% – 100% 96% 51% 57% (a) Voting is with respect to Cineplex Galaxy Limited Partnership. (b) Entities combined in August 2004. See note 15 for details. (c) Entity merged in March 2004. See note 15 for details. The ownership percentages are before the eﬀect of any potential dilution relating to the Management Investment Plans as described in note 24(e). The above percentages for Celestica Inc. (“Celestica”) exclude the dilutive eﬀect of the exchangeable debentures and forward agreements on shares of Celestica as described in notes 10 and 22(b). The dilutive eﬀect of these instruments, if exercised or closed out, as well as the eﬀect of the Management Investment Plans as described in note 24(e), would be to reduce the above S I G N I F I C A N T A C C O U N T I N G P O L I C I E S Generally accepted accounting principles In the ﬁrst quarter of 2004, the Company adopted Section 1100 of the Canadian Institute of Chartered Accountants (“CICA”) Handbook, “Generally Accepted Accounting Principles”, and Section 1400, “General Standards of Financial Statement Presentation”. Section 1100 establishes standards for ﬁnancial reporting in accordance with GAAP and provides guidance on sources to consult when selecting accounting policies and determining the appropriate disclosures when a matter is not explicitly dealt with in the primary sources of GAAP. Section 1400 provides updated guidance on general concepts associated with ﬁnancial statements. Adoption did not have a material effect on these audited annual consolidated ﬁnancial statements. Cash and short-term investments Cash and short-term investments consist of liquid investments such as term deposits, money market instruments and commer- cial paper carried at cost plus accrued interest, which approximates market value. Other current assets Included in other current assets is $137 of restricted cash and investments that represent amounts held primarily for payment of claims under managed care contracts, for regulatory purposes and in regard to the maintenance of minimum tangible net equity restrictions associated with companies included in the healthcare segment. ownership and voting percentages to 12% (2003 – 13%) and 78% Restricted cash and investments consist of liquid invest- (2003 – 80%), respectively. ments such as term deposits, money market instruments and The voting interest includes shares that Onex has commercial paper carried at cost plus accrued interest, which the right to vote through contractual arrangements or through approximates market value. Other current assets also include $88 multiple voting rights attached to particular shares. In certain of funds held for the acquisition of Center for Diagnostic Imaging, circumstances, the voting arrangements give Onex the right to Inc. (“CDI”) in January 2005 (note 26). elect the majority of the boards of directors. 72 Onex Corporation December 31, 2004 Report N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S Inventories Inventories are recorded at the lower of cost and replacement Foreign currency translation The Company’s operations conducted in foreign currencies, other cost for raw materials, and at the lower of cost and net realizable than those operations that are associated with investment-holding value for work in process and ﬁnished goods. For substantially all subsidiaries, are considered to be self-sustaining operations. inventories, cost is determined on a ﬁrst-in, ﬁrst-out basis. Assets and liabilities of self-sustaining operations conducted in Property, plant and equipment Property, plant and equipment are recorded at cost less accu- mulated amortization and provision for impairments, if any. For substantially all property, plant and equipment, amortization is provided for on a straight-line basis over the estimated useful lives of the assets: 10 to 40 years for buildings, and up to 35 years for machinery and equipment. The cost of plant and equipment is reduced by applicable investment tax credits more likely than not to be realized. Leasehold improvements are amortized over the terms of the leases. Leases that transfer substantially all the risks and bene- foreign currencies are translated into Canadian dollars at the exchange rate in effect at the balance sheet date. Revenues and expenses are translated at average exchange rates for the year. Unrealized gains or losses on translation of self-sustaining opera- tions conducted in foreign currencies are shown as a separate component of shareholders’ equity. The Company, including investment-holding subsid- iaries, translates monetary assets and liabilities denominated in foreign currencies at exchange rates in effect at the balance sheet date and non-monetary items at historical rates. Revenues and expenses are translated at average exchange rates for the year. Gains and losses on translation are included in the income statement. ﬁts of ownership are recorded as capital leases. Buildings and equipment under capital leases are amortized over the shorter Income taxes Income taxes are recorded using the asset and liability method of of the term of the lease and the estimated useful life of the asset. income tax allocation. Under this method, assets and liabilities Amortization of assets under capital leases is on a straight- are recorded for the future income tax consequences attributable line basis. Impairment of long-lived assets Property, plant and equipment and intangible assets with limited life are reviewed for impairment whenever events or changes in circumstances suggest that the carrying amount of an asset may not be recoverable. An impairment is recognized when the carrying amount of an asset to be held and used exceeds the undiscounted projected future net cash ﬂows expected from its use and disposal, and is measured as the amount by which the carrying amount of the asset exceeds its fair value. to differences between the ﬁnancial statement carrying values of assets and liabilities and their respective income tax bases. These future income tax assets and liabilities are recorded using substantively enacted income tax rates. The effect of a change in income tax rates on these future income tax assets or liabilities is included in income in the period in which the rate change occurs. Certain of these differences are estimated based on the current tax legislation and the Company’s interpretation thereof. Pension and non-pension post-retirement beneﬁts The operating companies accrue their obligations under employee Assets must be classiﬁed as either held for use or beneﬁt plans and related costs, net of plan assets. The costs of available for sale. Impairment losses for assets held for use are deﬁned beneﬁt pensions and other retirement beneﬁts earned by measured based on fair value, which is measured by discounted employees are accrued in the period incurred and are actuarially cash ﬂows. Available-for-sale assets are measured based on the lower determined using the projected beneﬁt method pro-rated on ser- of carrying value and expected proceeds less direct costs to sell. vice, based on management’s best estimates of items, including Asset retirement obligations In the ﬁrst quarter of 2004, the Company adopted CICA Handbook Section 3110, “Asset Retirement Obligations”, which establishes standards for the recognition, measurement and disclosure of liabilities for asset retirement obligations and the associated retirement costs. This section applies to all legal obligations associated with the retirement of tangible long-lived assets that result from their acquisition, construction, development or normal operation. Adoption did not have a material impact on these audited annual consolidated ﬁnancial statements. expected plan investment performance, salary escalation, retire- ment ages of employees and expected healthcare costs. Plan assets are valued at fair value for the purposes of calculating expected return on those assets. Past service costs from plan amendments are deferred and amortized on a straight-line basis over the average remaining service period of employees active at the date of amendment. Actuarial gains (losses) arise from the difference between the actual long-term rate of return on plan assets and the expected long-term rate of return on plan assets for a period or from changes in actuarial assumptions used to determine the beneﬁt obligation. Actuarial gains (losses) exceeding 10% of the greater of Onex Corporation December 31, 2004 Report 73 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S the beneﬁt obligation and the fair value of plan assets are amor- earnings under “Derivative Instruments”. Previously deferred tized over the average remaining service period of active employees. gains on these instruments, which at January 1, 2004 amounted to The average remaining service period of active employees $549 for the exchangeable debentures and $181 for the forward covered by the signiﬁcant pension plans is 11 years (2003 – sales contracts, will continue to be deferred until such items 11 years) and for those active employees covered by the other sig- mature or are otherwise closed out. At the date of adoption, the niﬁcant post-retirement beneﬁt plans is 19 years (2003 – 21 years). fair value of the exchangeable debentures was a liability of $180 Goodwill and intangible assets Goodwill represents the cost of investments in operating compa- nies in excess of the fair value of the net identiﬁable assets and for the forward sales contracts an asset of $181. Exchangeable debentures The carrying amount of the Company’s exchangeable debentures acquired. Essentially all of the goodwill and intangible asset is based on the market price, at the balance sheet date, of the amounts that appear on the consolidated balance sheets were underlying Celestica shares that would have satisﬁed the deben- recorded by the operating companies. The recoverability of good- ture liability if the debentures had been exchanged or Onex had will and intangible assets with indeﬁnite lives is assessed annually elected to settle with Celestica shares on December 31, 2004. or whenever events or changes in circumstances indicate that the Each issue of exchangeable debentures is exchangeable carrying amount may not be recoverable. Impairment of goodwill for Celestica shares based on a ﬁxed conversion factor deter- is tested at the reporting unit level by comparing the carrying mined at the date the debentures were issued or, at the option of value of the reporting unit to its fair value. When the carrying the Company, it may deliver the cash equivalent based on the value exceeds the fair value, an impairment exists and is mea- market price of the shares at the time of exchange, or a combina- sured by comparing the carrying amount of goodwill to its fair tion of shares and cash. value determined in a manner similar to a purchase price alloca- Effective January 1, 2004, the Company adopted AcG-13. tion. Impairment of indeﬁnite-life intangible assets is tested by Accordingly, previously deferred gains, which at January 1, 2004 comparing their carrying value to their fair value. amounted to $549, will continue to be deferred until such time as Intangible assets, including intellectual property, are there is a redemption or maturity of the exchangeable debentures, recorded at their allocated cost at the date of acquisition of the when a realized gain on the exchange will be recorded. Changes related operating company. Amortization is provided for intangi- in market value of the exchangeable debentures since the date ble assets with limited life, including intellectual property, on a of adoption are recorded in the statement of earnings under straight-line basis over their estimated useful lives, which range “Derivative Instruments”. from ﬁve to 25 years. The weighted average period of amortization at December 31, 2004 was approximately 10 years (2003 – 10 years). Hedging relationships Effective January 1, 2004, the Company adopted Accounting Derivative financial instruments The Company’s operating companies use foreign currency con- tracts and interest rate swap agreements as derivative ﬁnancial instruments to manage risks from ﬂuctuations in exchange rates Standards Board Accounting Guideline 13 (“AcG-13”), “Hedging and interest rates. When determined to be compliant hedges Relationships”, which addresses the identiﬁcation, designation, under AcG-13, the carrying value of the ﬁnancial instruments are documentation and effectiveness of hedging relationships for the not adjusted to reﬂect their current market value. The current purpose of applying hedge accounting. AcG-13 also establishes market values of these instruments are disclosed in note 22. certain conditions for applying hedge accounting and deals with The Company and its operating companies formally discontinuance of hedge accounting. The Company also adopted document relationships between hedging instruments and hedged Emerging Issues Committee Abstract 128 (“EIC-128”), “Accounting items, as well as the risk management objective and strategy for for Trading, Speculative or Non-Hedging Derivative Financial undertaking various hedge transactions. This process includes Instruments”. This EIC abstract requires that any derivative ﬁnan- linking all derivatives to speciﬁc assets and liabilities on the cial instrument that is not designated as a compliant hedge under balance sheet or to speciﬁc ﬁrm commitments or forecasted AcG-13 be measured at fair value, with changes in fair value transactions. The Company also formally assesses, both at the recorded in current year income. hedge’s inception and at the end of each quarter, whether the Under this pronouncement, the Company’s hedge rela- derivatives that are used in hedged transactions are highly effec- tionships for its exchangeable debentures and forward sales con- tive in offsetting changes in cash ﬂows of hedged items. tracts no longer qualify for hedge accounting and thus, on a Gains and losses on hedges of ﬁrm commitments prospective basis, the changes in fair values of these instruments are included in the cost of the hedged transaction when they from January 1, 2004 have been reﬂected in the statements of occur. Gains and losses on hedges of forecasted transactions are 74 Onex Corporation December 31, 2004 Report N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S recognized in earnings in the same period and on the same line recognized at the time that the loss is probable and reasonably item as the underlying hedged transaction. Foreign exchange estimable and are recorded at the minimum amount necessary to translation gains and losses on forward contracts used to hedge fulﬁll the company’s obligation to the customer. foreign currency-denominated amounts are accrued on the Depending on the terms under which the operating balance sheet as current assets or current liabilities and are recog- companies supply product, the operating companies may also be nized currently in the income statement, offsetting the respective responsible for some or all of the repair or replacement costs of translation gains or losses on the foreign currency-denominated defective products. The companies establish reserves for issues amounts. The forward premium or discount is amortized over the that are probable and estimable in amounts management believes term of the forward contract. Gains and losses on hedged fore- are adequate to cover ultimate projected claim costs. The ﬁnal casted transactions are recognized in earnings immediately when amounts determined to be due related to these matters could the hedge is no longer effective or the forecasted transactions are differ signiﬁcantly from recorded estimates. no longer expected. Deferred charges Costs incurred by the operating companies relating to the issuance of debt are deferred and amortized over the term of the related debt or as the debt is retired. Deferred charges also include net pension assets. Earnings per share Basic earnings per share is based on the weighted average number of Subordinate Voting Shares outstanding during the year. Diluted earnings per share is calculated using the treasury stock method. Revenue recognition Effective January 1, 2004, the Company and its operating subsid- iaries adopted EIC-141, “Revenue Recognition”, EIC-142, “Revenue Arrangements with Multiple Deliverables” and EIC-143, “Accounting for Separately Priced Extended Warranty and Product Maintenance Contracts”. These sections provide more detailed guidance on CICA Handbook Section 3400, “Revenue”, and improve the harmo- nization of revenue standards between Canadian and U.S. GAAP. Adoption did not have a material impact on these audited annual consolidated ﬁnancial statements. Revenues are principally comprised of product sales and service revenues. Revenue from product sales is primarily in the electronics manufacturing services and automotive products segments. Product sales revenue is recognized upon shipment, when title passes to the customer. Certain operating companies in the auto- motive segment enter into agreements to produce products for their customers at the beginning of a given vehicle’s production cycle. Once such agreements are entered into by the company, fulﬁllment of the customers’ purchasing requirements is often the obligation of the company for the entire production life of the vehicle, with terms over several years and no provisions to terminate such contracts. In certain instances, the operating company is committed under existing agreements to supply products to its customers at selling prices that are not sufﬁcient to cover all of the costs to produce such products. In such situations, the operating company records a liabil- ity for the estimated future amount of the losses. Such losses are In the electronics manufacturing services segment, Celestica has contractual arrangements with certain customers that require the customer to purchase certain inventory that Celestica has purchased to fulﬁll forecasted manufacturing demand provided by that customer. Celestica accounts for raw material returns as reductions in inventory and does not record revenue on these transactions. Revenue from services is primarily in the customer management services, theatre exhibition and healthcare segments. Service revenue is recognized primarily as services are performed and, for the theatre exhibition segment, when admission and concession sales occur at the theatres. Research and development Costs incurred on activities that relate to research and develop- ment are expensed as incurred unless development costs meet certain criteria for capitalization. Total research and development costs expensed for 2004 were $46 (2003 – $36). No amounts have been capitalized. Stock-based compensation Effective January 1, 2004, the Company adopted revised CICA Handbook Section 3870, “Stock-based Compensation and Other Stock-based Payments”, which requires that a fair-value-based method of accounting be applied to all stock-based compensation payments to employees. Previously, only non-employee awards and employee awards that called for settlement in cash or other assets, or stock appreciation rights that called for settlement by the issuance of equity instruments, were required to be recorded as compensation expense. Onex has been recording the change in value of options on its shares and investment rights under the Management Investment Plan (the “MIP”) as a charge or credit to earnings since January 1, 2002. This change will affect the accounting for certain stock option plans at the operating com- panies. The adoption of this section by the operating companies will be on a retroactive basis for awards made since January 1, 2002 that have not been previously recognized as compensation expense in the consolidated statements of earnings, with no restatement of prior periods. Retained earnings as at January 1, 2004 was reduced by $5 and non-controlling interests was reduced by $5. Onex Corporation December 31, 2004 Report 75 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S There are four types of stock-based compensation plans. The ﬁrst is the Company’s Stock Option Plan (the “Plan”) described Financial instruments – presentation and disclosure In December 2004, the Company adopted the amendment to in note 12(e), which provides that in certain situations the Company CICA Handbook Section 3860, “Financial Instruments – Presentation has the right, but not the obligation, to settle any exercisable and Disclosure”. The amendment requires obligations of a ﬁxed option under the Plan by the payment of cash to the option holder. amount that may be settled, at the issuer’s option, by a variable The Company has recorded a liability for the potential future number of the issuer’s own equity to be presented as liabilities. Any settlement of the value of vested options at the balance sheet date securities issued by an enterprise that give the issuer unrestricted by reference to the value of Onex shares at that date. On a quar- rights to settle the principal amount in cash or the equivalent terly basis, the liability is adjusted up or down for the change in value of its own equity instruments will no longer be presented as the market value of the underlying shares, with the corresponding equity. This standard is applicable on a retroactive basis with amount reﬂected in the consolidated statements of earnings. restatement of prior periods. As a result of adopting this standard, The second type of plan is the MIP, which is described in as at December 31, 2004 and 2003 the Company reclassiﬁed $149 note 24(e). The MIP provides that exercisable investment rights and $273, respectively, of the principal component of convertible may be settled by issuance of the underlying shares or, in certain debt held by one of its operating companies from non-controlling situations, by a cash payment for the value of the investment interests liability to long-term debt. Consolidation of variable interest entities In June 2003, the CICA issued Accounting Guideline AcG-15, “Consolidation of Variable Interest Entities”. Variable interest enti- ties (“VIEs”) are entities that have insufﬁcient equity and/or their equity investors lack one or more speciﬁed essential characteris- tics of a controlling ﬁnancial interest. The guideline provides speciﬁc guidance for determining when an entity is a VIE and who, if anyone, should consolidate the VIE. The guideline is effec- tive on a prospective basis for the Company’s 2005 ﬁscal year. The adoption of this standard is currently being evaluated. Use of estimates The preparation of consolidated ﬁnancial statements in con- formity with Canadian generally accepted accounting principles requires management of Onex and its operating companies to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated ﬁnancial statements, and the reported amounts of revenues and expenses during the reporting period. This includes the liability for healthcare claims incurred but not yet reported for the Company’s healthcare segment. Actual results could differ from such estimates. Comparative amounts Certain amounts presented in the prior year have been reclassi- ﬁed to conform to the presentation adopted in the current year. rights. Under the MIP, once the targets have been achieved for the exercise of investment rights, a liability is recorded for the value of the investment rights under the MIP by reference to the value of underlying investments, with a corresponding compensation expense recorded in the consolidated statements of earnings. The third type of plan, which began in 2004, is the Deferred Share Unit Plan. A Deferred Share Unit (“DSU”) entitles the holder to receive, upon redemption, a cash payment equiva- lent to the market value of a subordinate voting share at the redemption date. The DSU Plan enables Onex directors to apply directors’ fees to acquire DSUs based on the market value of Onex shares at the time. Grants of DSUs may also be made to Onex directors from time to time. The DSUs vest immediately, are only redeemable once the holder retires and must be redeemed within one year following the year of retirement. Additional units are issued for any cash dividends paid on the subordinate voting shares. The Company has recorded a liability for the future settle- ment of the DSUs at December 31, 2004 by reference to the value of underlying subordinate voting shares at that date. On a quar- terly basis, the liability is adjusted up or down for the change in the market value of the underlying shares, with the corresponding amount reﬂected in the consolidated statement of earnings. The fourth type of plan is an employee stock option plan in place for employees at various operating companies under which, on payment of the exercise price, stock of the particular operating company is issued. Prior to 2004, this type of plan was not required to be accounted for by the fair-value-based method; however, these plans did require disclosure in the notes to these statements of pro forma net earnings and earnings per share information as if these plans had been accounted for under the fair-value-based method. This information for 2003 is included in note 14. 76 Onex Corporation December 31, 2004 Report N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S 2 . E A R N I N G S F R O M D I S C O N T I N U E D O P E R AT I O N S The following table shows the revenue and the net after-tax results from discontinued operations. Dura Automotive(a) Loews Cineplex Group(b) Cincinnati Electronics(c) Armtec(d) InsLogic(e) M AG N AT R A X Lantic Sugar/Rogers Sugar Revenue 2004 2003 2004 Onex’ Share of Earnings (Loss) Gain, Net of Assets $ 635 702 $ 3,329 1,436 $ 80 50 13 – – 95 117 12 677 200 $ 1 135 49 9 – – – $ 1,480 $ 5,866 $ 194 $ 1 5 4 – (9) – – 1 Total 2 140 $ 53 9 (9) – – Gain, Net of Assets $ – – – – – 274 53 2003 Onex’ Share of Earnings (Loss) $ 4 – 3 2 (15) (110) 13 $ Total 4 – 3 2 (15) 164 66 $ 195 $ 327 $ (103) $ 224 a) In April 2004, the Company sold its remaining interest in Dura Automotive Systems, Inc. (“Dura Automotive”) for net proceeds securities and assets of Armtec from ONCAP LP (“ONCAP”) and other shareholders and to repay certain existing indebtedness of of $23. The accounting gain on the disposition amounted to $4 Armtec. ONCAP sold all of its shares in Armtec in this offering before a tax provision of $3. b) In July 2004, the Company sold its interest in the Loews Cineplex Group, excluding the Canadian operations, for net proceeds of $739. The accounting gain on the disposition amounted to $238 before a tax provision of $103. The results of Loews Cineplex Group, excluding the Canadian operations, have been reclassiﬁed in the audited annual consolidated ﬁnancial statements as discontinued operations. The Canadian operations retained are comprised of Loews Cineplex Group’s interest in Cineplex Galaxy Limited Partnership (“CGLP”) and Cineplex Odeon Corporation (“Cineplex Odeon”). for net proceeds of $76, of which Onex’ share was $25. Onex’ accounting gain on the disposition amounted to $12 before a tax provision of $3. Under the terms of the MIP, management members, including ONCAP management, participated in the realization the Company achieved on Armtec. Amounts related to the MIP paid on account of the sale amounted to $3 and have been deducted in determining the accounting gain on discontinued operations for Armtec. e) In November 2004, the Company entered into an agreement to sell InsLogic Corporation (“InsLogic”). The sale was completed Under the terms of the MIP as described in note 24(e), in January 2005 and did not result in Onex recovering the full management members participated in the realizations the amount of its investment. However, an accounting gain will Company achieved on the Loews Cineplex Group. Amounts paid be recorded in 2005 due to a negative carrying value for on account of the sale related to the MIP amounted to $32 (7.5% InsLogic prior to disposition. There will be no MIP distribution of the cash and the unit value gain) and have been deducted in for InsLogic. determining the accounting gain on discontinued operations for the Loews Cineplex Group noted above. The results of operations for the businesses described above have been reclassiﬁed in the audited consolidated statements of c) In December 2004, CMC Electronics Inc. (“CMC Electronics”) sold its interest in its Cincinnati Electronics business unit earnings and audited consolidated statements of cash ﬂows for the years ended December 31, 2004 and 2003 as discontinued (“Cincinnati Electronics”) for net proceeds of $226, of which operations. The amounts for operations now discontinued that Onex’ share was $95. Onex’ accounting gain on disposition were included in the December 31, 2004 and December 31, 2003 amounted to $49, after a tax provision of nil. The MIP component consolidated balance sheets are as follows: will be determined in 2005 once a distribution has been made to Onex. As at December 31, 2004 InsLogic d) In July 2004, ONCAP’s operating company, Armtec Limited (“Armtec”), completed an initial public offering in Canada of Long-lived assets held by discontinued operations Current liabilities held by discontinued operations units of Armtec Infrastructure Income Fund (“Armtec Fund”). Long-term liabilities held by discontinued operations Current assets held by discontinued operations $ 2 2 5 52 The proceeds from the Armtec Fund were used to acquire all the Net liabilities of discontinued operations $ (53) Onex Corporation December 31, 2004 Report 77 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S As at December 31, 2003 Dura Automotive Loews Cineplex Group CMC Electronics Armtec InsLogic Total Cash and short-term investments $ 236 $ 196 $ Accounts receivable Inventories Other current assets Current assets held by discontinued operations Property, plant and equipment Other assets Intangible assets Goodwill Long-lived assets held by discontinued operations Accounts payable and accrued liabilities Current portion of long-term debt, without recourse to Onex Current liabilities held by discontinued operations Long-term debt, without recourse to Onex Obligations under capital leases, without recourse to Onex Other liabilities Future income taxes Non-controlling interests and cumulative translation adjustment Long-term liabilities held by discontinued operations 356 165 123 880 633 158 17 1,114 1,922 560 7 567 1,544 3 156 85 428 2,216 44 6 23 269 964 61 152 278 $ 4 13 2 5 24 27 11 29 45 1,455 112 271 45 316 545 29 47 – 285 906 37 – 37 64 – – 13 – 77 – 15 12 1 28 37 – 2 27 66 12 10 22 19 – 3 4 10 36 $ 2 1 – 1 4 2 – – – 2 3 – 3 54 – 5 – – 59 $ 438 429 185 153 1,205 1,663 230 200 1,464 3,557 883 62 945 2,226 32 211 102 723 3,294 Net assets (liabilities) of discontinued operations $ 19 $ 502 $ 22 $ 36 $ (56) $ 523 3 . C O R P O R AT E I N V E S T M E N T S During 2004 and 2003 several acquisitions, which were accounted for as purchases, were completed either directly by Onex or through subsidiaries of Onex. Any third-party borrowings in respect of acquisitions are without recourse to Onex. 2 0 0 4 A C Q U I S I T I O N S During 2004 the following acquisitions, which were accounted for as purchases, were completed through subsidiaries of Onex. The signiﬁcant acquisitions were: a) In January 2004, the Company completed an investment in Magellan Health Services, Inc. (“Magellan”). Magellan, b) In March 2004, Celestica acquired Manufacturers’ Services Limited (“MSL”), a full-service global electronics manufacturing and supply chain services company headquartered in the United States. The purchase was ﬁnanced with the issuance of 14.1 mil- lion subordinate voting shares of Celestica, the issuance of options to purchase 2.1 million subordinate voting shares of Celestica, the issuance of warrants to purchase 1.1 million subor- dinate voting shares of Celestica and $69 of cash provided by Celestica. The value of the shares was determined based on the average market price of the shares for a reasonable period before and after the date on which the terms of the acquisition were agreed to and announced. In April 2004, Celestica paid approxi- mately $10 in cash to acquire certain assets located in the headquartered in Connecticut, United States, is a behavioural Philippines from NEC Corporation. managed healthcare organization in the United States. The total equity investment was $131 for an approximate 24% ownership interest. This was provided through Onex and Onex Partners LP (“Onex Partners”). Onex’ net investment was $30 for a 6% equity ownership. Onex has effective voting control of Magellan through Onex Partners. c) During 2004, ONCAP completed the acquisition of Futuremed Health Care Products L.P. (“Futuremed”) and Canadian Securities Registration Systems Ltd. (“CSRS”). Futuremed, headquartered in Ontario, Canada, is a supplier of medical supplies and equipment to long-term care facilities. CSRS, headquartered in British Columbia, Canada, is a national provider of Personal Property Security Act registration and search services in Canada. The total 78 Onex Corporation December 31, 2004 Report N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S purchase price of the acquisitions of $208 was ﬁnanced with $133 of borrowings, which are without recourse to Onex or ONCAP, and e) The purchase prices of the acquisitions were allocated to the net assets acquired based on their relative fair values at the date $75 of equity. Onex’ net investment in these acquisitions was $17. of acquisition. In certain circumstances where estimates have Onex has indirect voting control of Futuremed and CSRS. been made, the companies are obtaining third-party valuations of d) In December 2004, the Company completed the acquisition of Cosmetic Essence, Inc. (“CEI”). CEI, headquartered in New Jersey, United States, is a provider of outsourced supply chain management services to the personal care industry. The invest- ment of $66 in debt and $72 in equity for a 92% equity ownership at the time of acquisition was provided through Onex and Onex Partners. Onex’ net investment in this acquisition was $16 in debt and $17 in equity for a 21% equity ownership. Onex has effective voting control of CEI through Onex Partners. certain assets, which could result in further reﬁnement of the fair- value allocation of certain purchase prices. The results of operations for all acquired operations are included in the consolidated state- ments of earnings of the Company from their respective dates of acquisition. The cost of acquisitions made during the year includes restructuring and integration costs of $25. As at December 31, 2004, accounts payable and accrued liabilities and other long- term liabilities include $99 and $2, respectively, for these and earlier acquisitions. Details of the 2004 acquisitions, which are all accounted for as purchases, are as follows: 2004 Acquisitions Cash Current assets Intangible assets with limited life Goodwill Property, plant and equipment and other long-term assets Current liabilities Acquisition financing Long-term liabilities Non-controlling interests in net assets Interest in net assets acquired Magellan(a) Celestica(b) ONCAP(c) CEI(d) $ 282 510 74 576 187 1,629 (508) (617) (7) 497 (366) $ 27 373 46 298 88 832 (296) – (99) 437 (358) $ 4 29 32 123 60 248 (40) (133) – 75 (21) $ 6 89 26 205 57 383 (61) (66) (171) 85 (13) $ 131 $ 79 $ 54 $ 72 Onex Corporation December 31, 2004 Report 79 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S 2 0 0 3 A C Q U I S I T I O N S a) ONCAP In March 2003 ONCAP completed the acquisition of Western net purchase price of $27 was ﬁnanced with cash on hand at ClientLogic. Onex invested approximately $24 in the equity of ClientLogic to provide a signiﬁcant portion of the funds required Inventory Service Ltd. (“WIS”). WIS is a leading North American for the acquisition. c) Radian In December 2003 Radian Communication Services Corporation (“Radian”) acquired certain assets from ROHN Industries, Inc. located in the United States. The total purchase price of $10 was funded with cash borrowed by Radian from Onex. Details of the 2003 acquisitions, which are all accounted for as purchases, are as follows: ONCAP(a) ClientLogic(b) Radian(c) $ $ 6 8 50 20 8 92 (12) (61) (7) 12 (9) 3 $ $ 5 20 8 10 47 90 (24) – (39) 27 – 27 $ $ – 4 – – 6 10 – – – 10 – 10 provider of data collection and inventory counting services, headquartered in Ontario, Canada. The total purchase price was $73. ONCAP invested $18 in the debt and $12 in the equity of WIS, of which Onex’ share was $4 and $3, respectively. Onex has indi- rect voting control of WIS. b) ClientLogic In December 2003 ClientLogic Corporation (“ClientLogic”) com- pleted the acquisition of Service Zone Holdings, Inc. (“Service Zone”), headquartered in Florida, United States. Service Zone is a low-cost provider of high-quality call centre operations. The 2003 Acquisitions Cash Current assets Goodwill Intangible assets with limited life Property, plant and equipment and other long-term assets Current liabilities Acquisition financing Long-term liabilities Non-controlling interests in net assets Interest in net assets acquired 4 . I N V E N T O R I E S Inventories comprised the following: Year ended December 31 Raw materials Work in progress Finished goods $ 2004 941 238 268 2003 $ 1,034 181 277 $ 1,447 $ 1,492 80 Onex Corporation December 31, 2004 Report N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S 5 . P R O P E R T Y , P L A N T A N D E Q U I P M E N T Property, plant and equipment comprised the following: As at December 31 Land Buildings Machinery and equipment Construction in progress 2004 Accumulated Amortization $ – 239 1,372 – $ Cost 105 834 2,346 35 $ Net 105 595 974 35 $ Cost 120 893 2,272 55 2003 Accumulated Amortization $ – 251 1,327 – $ Net 120 642 945 55 $ 3,320 $ 1,611 $ 1,709 $ 3,340 $ 1,578 $ 1,762 The above amounts include property, plant and equipment under capital leases of $148 (2003 – $125) and related accumulated amortization of $83 (2003 – $64). As at December 31, 2004, property, plant and equipment included $43 (2003 – $53) representing assets available for sale. 6 . I N V E S T M E N T S A N D O T H E R A S S E T S Investments and other assets comprised the following: As at December 31 Investments: Private entities – at cost(a) Public entities – at cost(b) Marketable securities – at market values Equity-accounted investments(c) Deferred charges Derivative instruments (note 22(b)) Future income taxes (note 20) Other 2004 2003 $ 43 110 63 135 119 186 68 38 $ 42 36 34 38 87 – 343 33 c) Included in equity-accounted investments is the June 2004 investment in ResCare. The company and Onex Partners completed a $114 equity investment in ResCare for an approximate 28% effective ownership interest. Onex’ portion of the investment was approximately $27, representing a 7% ownership interest in ResCare. ResCare provides residential, therapeutic, job training and educational support to people with developmental or other disabilities, to youth with special needs and to adults who are experiencing barriers to employment. 7. I N TA N G I B L E A S S E T S Intangible assets comprised the following: As at December 31 2004 2003 $ 762 $ 613 Intellectual property with limited life, net of accumulated amortization a) The market value of the private entities is not readily determin- able with a suﬃcient degree of precision. b) The market value of the public entities as at December 31, 2004 was $148 (2003 – $69), which includes $128 for an investment in Compagnie Générale de Géophysique (“CGG”) that was pur- chased at a cost of $102 in November 2004. Approximately half of the investment in CGG was sold in January 2005. of $156 (2003 – $146) $ 53 $ 81 Intangible assets with limited life, net of accumulated amortization of $214 (2003 – $175) Intangible assets with indefinite life 292 24 216 5 $ 369 $ 302 Intellectual property primarily represents the costs of certain intel- lectual property and process know-how obtained in acquisitions. Intangible assets include trademarks, non-competition agreements and contract rights acquired in the acquisition of certain facilities. Onex Corporation December 31, 2004 Report 81 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S 8 . L O N G - T E R M D E B T O F O P E R AT I N G C O M PA N I E S , W I T H O U T R E C O U R S E T O O N E X Long-term debt of operating companies, without recourse to Onex, is as follows: As at December 31 Celestica(a) Cineplex Galaxy(b) Magellan(c) ClientLogic(d) J.L. French Automotive(e) 7.875% subordinated notes due 2011 Liquid Yield Option Notes, due 2020 $ Revolving credit facility and term loans due 2006 Other Credit facility due 2008 Senior, unsecured notes due 2008 Note payable, due 2005 Revolving credit facility due 2005 Other, including debt denominated in foreign currencies Revolving credit facility and term loans due 2011 and 2012 Mandatorily redeemable preferred shares Revolving credit facility and term loans due 2006 and 2007 11.5% subordinated notes due 2009 8% redeemable shares Other Performance Logistics Group (f) Revolving credit facility due 2006 Term loan due 2006 Bostrom (g) Trim Systems(h) Radian(i) Cosmetic Essence(j) ONCAP companies (k) Revolving credit facility and term loans due 2006 Other Revolving credit facility and term loans due 2006 Other Revolving credit facility and term loan due 2006 Subordinated secured notes due 2007 Other Revolving credit facility and term loan due 2010 Subordinated secured notes due 2014 Term loans due 2008 to 2010 Subordinated notes due 2009 and 2010 Other Other Less: long-term debt held by the Company Current portion of long-term debt of operating companies 2004 2003 601 149 750 126 3 129 102 289 59 450 142 96 238 490 209 – 35 – 33 767 – – – – – – – – – 31 16 10 57 152 72 224 187 57 3 247 – (204) 2,658 (295) $ – 273 273 110 4 114 – – – – 139 100 239 – – 507 227 78 39 851 16 58 74 86 16 102 53 10 63 32 15 – 47 – – – 94 21 4 119 1 (134) 1,749 (278) Consolidated long-term debt of operating companies, without recourse to Onex $ 2,363 $ 1,471 82 Onex Corporation December 31, 2004 Report N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S Onex does not guarantee the debt of any of its operating companies, No interest is payable on the LYONs and the issue price nor are there any cross-guarantees between operating companies. of the LYONs represented a yield to maturity of 3.75%. The princi- The ﬁnancing arrangements for each operating company pal component is accreted over the 20-year term through periodic typically contain certain restrictive covenants, which may include charges to interest expense. The LYONs are subordinated in right limitations or prohibitions on additional indebtedness, payment of payment to all existing and future senior indebtedness of the of cash dividends, redemption of capital, capital spending, making company and are convertible at any time, at the option of the of investments and acquisitions, and sale of assets. In addition, holder, unless previously redeemed or repurchased, into 5.6748 certain ﬁnancial covenants must be met by the operating compa- subordinate voting shares for each one thousand dollars principal nies which have outstanding indebtedness. amount at maturity. The holders may require the company to Future changes in business conditions of an operating repurchase all or a portion of their LYONs on August 2, 2005, company may result in non-compliance with certain covenants August 1, 2010, and August 1, 2015; the company may also redeem by the company. No adjustments to the carrying amount or classi- the LYONs at any time on or after August 1, 2005 (and, under ﬁcation of assets or liabilities of any operating company has been certain circumstances, before that date). As a result of the August 2, made in the consolidated ﬁnancial statements with respect to any 2005 holders option, the principal portion of the LYONs has been possible non-compliance. a) Celestica In June 2004, Celestica amended its existing 364-day revolving term credit facility from US$250 to US$600 and extended the maturity from October 2004 to June 2007. Concurrent with this classiﬁed as a current liability at the end of 2004. The company is required to offer to repurchase the LYONs if there is a change in control or a delisting event. The company may elect to settle its repurchase obligation in cash or subordinate voting shares, or any combination thereof. amendment and extension, Celestica elected to terminate its US$500 four-year revolving facility, which would have otherwise b) Cineplex Galaxy In November 2003, Cineplex Galaxy entered into credit facilities, matured in June 2005. There were no borrowings under its comprised of a $110 senior secured term facility that matures in revolving term credit facility at December 31, 2004. November 2006 as well as two senior secured revolving credit In June 2004, Celestica also issued senior subordinated facilities, one in the principal amount of $20 (the working capital notes with an aggregate principal amount of US$500 and a ﬁxed facility) and the other in the principal amount of $40 (the devel- interest rate of 7.875% that are due in 2011. In connection with the opment facility). As of December 31, 2004, $126 (2003 – $110) was notes offering, Celestica entered into interest rate swap agree- outstanding on the facilities. Both senior secured revolving credit ments that swap the ﬁxed interest rate on the notes with a facilities are three-year revolving term loans and are payable at variable interest rate based on LIBOR plus a margin. The average maturity. The senior secured term facility requires that the princi- interest rate on the notes was 4.92% for the year. The notes may be pal be paid at maturity. The facilities bear interest at the prime redeemed by Celestica on July 1, 2008 or later at various premiums business rate plus a margin, depending on certain ﬁnancial ratios. above face value. The average interest rate on the senior secured facilities was 5.7% As discussed in note 1, the Company has adopted in 2004 (2003 – 5.4%). amendments to CICA Handbook Section 3860, “Financial In December 2003 Cineplex Galaxy entered into an Instruments – Presentation and Disclosure” which have resulted interest rate swap to pay a ﬁxed interest rate of 4.29%. The swap is in the reclassiﬁcation of the Liquid Yield Option Notes (LYONs) for a term of three years and the initial principal outstanding was issued by Celestica. The principal component is now included in $44. The principal outstanding under the swap increased to $77 long-term debt. Previously, the principal and the option compo- on August 26, 2004 and increases to $110 on May 26, 2005. nents were included in non-controlling interests. At December 31, Borrowings under the credit facilities are collateralized 2004, US$124 (2003 – US$211) was reclassiﬁed from non-controlling by Cineplex Galaxy’s assets and are without recourse to Onex. interests to long-term debt. The option component still included in non-controlling interests is US$210. At December 31, 2004, the principal amount due at maturity for the outstanding notes is US$614. During 2004, the company paid US$300 (2003 – US$224) to repurchase LYONs with a principal amount at maturity of US$540 (2003 – US$436). The gain/loss on the repurchase of LYONs is apportioned between the principal and non-controlling interests components, based on their relative fair values com- pared to their carrying values. c) Magellan Magellan has a credit agreement that provides for a term loan facility in an original aggregate principal amount of US$100, a revolving loan facility providing up to US$50 and a credit-linked facility for the issuance of letters of credit to Magellan in an aggregate principal amount of up to US$50. Borrowings under the credit agreement will mature on August 15, 2008 and certain quarterly principal payments on the term loan facility are also required. As of December 31, 2004, Magellan had US$85 outstanding Onex Corporation December 31, 2004 Report 83 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S under the term loan facility, had not drawn on the revolving loan due 2012, with quarterly payments required beginning in 2005. facility and had issued letters of credit in the amount of US$45. The second lien facility is due 2012, with no principal payments Magellan also has US$233 outstanding of Series A notes, due until maturity. The facilities also become due six months which mature on November 15, 2008, and are general senior unse- prior to the maturity date of certain notes held by a separate cured obligations of that company. Interest on the Series A notes party, currently due 2008. The facilities also require prepayment is payable semi-annually at a rate of 9.375% per year. based on 75% of the excess cash ﬂow of ClientLogic. Borrowings The company has issued US$7 of Series B notes, which under the credit facility are collateralized by substantially all of mature on November 15, 2008. The Series B notes were issued to ClientLogic’s assets. the holders of the general unsecured claims and to others for At December 31, 2004 ClientLogic had US$52 (2003 – services rendered during the ﬁnancial restructuring of Magellan. US$54) in other debt instruments with varying terms. Included in Interest on the Series B notes is payable semi-annually at a rate of this amount is a demand note of US$38 (2003 – US$25) to Onex. 9.375% per year. ClientLogic has US$27 (2003 – US$23) of loan notes The Series A and Series B notes may be redeemed by the outstanding denominated in pounds sterling which bear interest company on November 15, 2005 or later at various premiums at 6.5% and are repayable in June 2008. Interest compounds and is above face value. added to the notes. The amount of accrued interest at December 31, Magellan also has outstanding an interest-bearing 2004 was US$5 (2003 – US$3). note for US$49 to Aetna, Inc. (“Aetna”), which will mature on ClientLogic has entered into an interest rate swap December 31, 2005 as part of a behavioural health services agreement that effectively ﬁxes the interest rate at 4.6% on US$70 contract. Under this agreement, the company will manage the of borrowings under the revolving credit facility. The interest rate behavioural healthcare of members of Aetna’s healthcare pro- swap agreement expires in 2006. grams through December 31, 2005. Aetna, having given notice under the terms of the contract, will at that time purchase certain assets of the company used solely in the management of the behavioural healthcare of Aetna members (the “Aetna-dedicated assets”). The purchase price of the dedicated assets may be offset against any amounts owing under the Aetna note. The Aetna note is secured by a second lien on substantially all of the assets of Magellan. e) J.L. French Automotive In August 2004, J.L. French Automotive Castings, Inc. (“J.L. French Automotive”) completed a series of reﬁnancing transactions, which included issuing 75,871,089 shares of New Class A voting common stock and 4,881,369 shares of New Class A non-voting common stock to existing shareholders for total consideration of US$1. Concurrently, the company’s former Class Q-1 and Class Q-2 common shares were exchanged for 65,118 New Class A d) ClientLogic At December 31, 2004, ClientLogic had US$118 (2003 – US$107) voting and 11,594 New Class A non-voting common shares. Also issued was US$164 of preferred stock, US$49 of which was pur- outstanding under the terms of a revolving credit facility, due in chased by the company’s existing common shareholders. The March 2005. The credit facility bore interest at the lender’s base preferred stock is mandatorily redeemable in 2016 and accrues rate or LIBOR plus a margin, depending on certain ﬁnancial dividends at a rate of 17% per year increasing to 18.5% in 2007 and ratios. For the year ended December 31, 2004, the borrowings beyond. The stock is redeemable at the option of the company outstanding had a weighted average interest rate of 4.4% (2003 – prior to 2016 at a premium of 12% decreasing to 8% in 2009. 3.8%). Borrowings under the credit facility were collateralized by Detachable warrants were also issued with the preferred stock to substantially all of ClientLogic’s assets. As described below, acquire 11,686,157 shares of New Class A voting common stock. ClientLogic entered into a new credit facility in March 2005, and The warrants are exercisable at $0.01 per share at pre-determined accordingly, this debt has been recorded as long-term in the con- allotments on each anniversary date up through the fourth solidated ﬁnancial statements. anniversary, but only in the event that all of the preferred In March 2005, ClientLogic entered into a new credit stock has not been redeemed in full. Total warrants issued and agreement which provides up to US$157, consisting of a revolving outstanding at December 31, 2004 were 16,555,389. In addition, the facility of up to US$30, due 2010, a ﬁrst lien term facility of up company entered into new senior secured credit facilities, which to US$77 and a second lien term facility of up to US$50, both due provide for total borrowings of US$465 maturing in 2011 and 2012. in 2012. The proceeds from this facility were used to repay all The proceeds from these new sources of ﬁnancing were amounts owing under the former credit facility. The facilities bear used to repurchase substantially all of the company’s 11.5% senior interest at a rate of either LIBOR or the federal funds rate, plus subordinated notes. Notes with a face value of US$146 were an applicable margin. As a term of this facility, the demand note repurchased for US$124, resulting in a gain on early extinguish- of US$38 held by Onex, as described below, was converted to ment of debt. At December 31, 2004, US$29 of the subordinate mandatorily redeemable preferred shares. The ﬁrst lien facility is notes remain outstanding. Also repaid was US$313 outstanding 84 Onex Corporation December 31, 2004 Report N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S under the old senior credit facility, US$106 outstanding of second credit facility and the term loan bear interest at LIBOR plus a lien term loan, US$22 related to tender/call premiums and accrued margin. The outstanding borrowings on the revolving credit facil- interest. The company also paid US$15 of ﬁnancing and other ity at December 31, 2003 were US$12 and on the term loan were transaction costs. After considering the write-offs of previously US$45. The weighted average interest rate on borrowings under deferred ﬁnancing costs, these transactions resulted in a net loss the credit agreement for 2003 was 4.9%. Quarterly repayments are on the extinguishment of debt of US$5. required on borrowings under the term loan. Borrowings under The company’s former Class P shareholders surren- the credit agreement are collateralized by substantially all of the dered their outstanding shares in exchange for 80 New Class A assets of PLG. non-voting shares. The Class P shares were previously shown as liability in these consolidated ﬁnancial statements. This contribu- tion to the equity of the company by the non-controlling interests has been reﬂected as an income item representing the funding of the non-controlling interest of past losses. The recovery of losses of other shareholders of J.L. French Automotive recorded in the third quarter of 2004 totalled $43 and is included in non-controlling interests in the consolidated ﬁnancial statements. The company’s new senior secured credit facilities consist of a US$70 revolving credit facility, a US$225 ﬁrst lien term loan and a US$170 second lien term loan. The revolving credit facility is due in 2011. The ﬁrst lien term loan matures in 2011 with principal payments of US$2 annually until 2010. US$106 is due in 2010 with the balance due in 2011. The second lien term loan matures in 2012 with no principal payments until maturity. Interest on the new senior secured credit facilities, depending on the type and amount of the borrowings under these facilities, can range from prime rate plus 3.5% to 6.0% per annum, or the LIBOR rate plus 4.5%, or the Eurocurrency rate plus 7.0% per annum. Interest payments are due quarterly. At December 31, 2004, US$13 was drawn on the revolving facility and the term loans were drawn in full. Borrowings under the new senior secured credit facili- ties are secured and guaranteed by a ﬁrst priority lien on substan- tially all of J.L. French Automotive’s assets, including a pledge of all of the capital stock of each of the company’s directly-owned domestic subsidiaries and 65% of the capital stock of directly- owned foreign subsidiaries. An element of the credit facilities is secured and guaranteed by a second priority lien on substantially all of J.L. French Automotive’s assets. The new senior secured credit facilities require the company to maintain certain ﬁnancial ratios including mini- mum interest coverage ratios and maximum leverage ratios, and also limits capital expenditures and cash dividends, among other restrictions. f) Performance Logistics Group PLG is no longer consolidated but is accounted for by the equity method as a result of a merger transaction in March 2004 that reduced Onex’ ownership interest (note 15(b)). In 2003, PLG, under the terms of a credit agreement, had available a revolving credit facility of US$30 and a term loan of US$85. Both the revolving g) Bostrom Bostrom Holdings, Inc. (“Bostrom”) is no longer consolidated but is accounted for using the equity method following a public offer- ing and the sale of some shares by Onex (note 15(a)). At December 31, 2003, the company had a credit agree- ment that provides Bostrom with the ability to denominate a por- tion of its borrowings in currencies other than the U.S. dollar. At December 31, 2003, total borrowings outstanding on the revolving credit facility were US$23, of which US$8 were denominated in pounds sterling. At December 31, 2003, the company had bor- rowings outstanding on the term loan of US$43, of which US$10 were denominated in pounds sterling. The weighted average interest rates on the revolving credit facility and term loans ranged from 4.9% to 7.8% during 2003. Quarterly repayments are required on borrowings under the term loans. The assets of Bostrom collateralize borrowings under the credit agreement. h) Trim Systems Trim Systems, LLC (“Trim Systems”) was merged with Bostrom in May 2004 and following the public offering described above, is no longer consolidated but is accounted for using the equity method (note 15). At December 31, 2003, Trim Systems had available a revolving credit facility of US$16 and US$50 of term loans. There were US$4 and US$37, respectively, in outstanding borrowings on the revolving credit facility and term loans. Borrowings under both the revolving credit facility and the term loans bear interest at prime plus a margin. The weighted average interest rate on the revolving credit facility and term loans in 2003 was 5.5%. Borrowings under the credit agreements are due in June 2006. Principal repayments are based on excess cash ﬂow and began in April 2003; additional quarterly principal payments began in the second quarter of 2004. Borrowings under the credit agreements are collateralized by substantially all of Trim Systems’ assets. The company has a US$7 ﬁve-year promissory note owed to Onex. Interest is at prime plus 1.25%. The note is collateralized by all of the assets of Trim Systems and is eliminated upon consol- idation. At December 31, 2003, principal and interest amounted to US$8. Onex Corporation December 31, 2004 Report 85 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S i) Radian Radian’s credit agreement has a revolving credit facility of $20 and available. The available facilities bear interest at various rates based on prime, U.S. base or LIBOR plus a margin. During 2004 a term loan of $15. Borrowings under the credit agreement are due interest rates ranged from 3.9% to 8.2% (2003 – 3.7% to 7.5%) on in June 2006. Both the revolving credit facility and term loan bear borrowings under the revolving credit and term facilities. Quar- interest at short-term borrowing rates plus a margin. The out- terly repayments of a portion of the term loans commenced standing borrowings at December 31, 2004 on the revolving credit in June 2002, while the remainder of the credit facilities are facility and term loan were $16 and $15 (2003 – $17 and $15), repayable between 2008 and 2010. Borrowings under these credit respectively. The weighted average interest rate for borrowings facilities at December 31, 2004 were $187 (2003 – $94). The under the credit agreement was 6.9% in 2004 (2003 – 7.1%). companies also have subordinated notes of $57 (2003 – $21), due Borrowings under the credit agreement are collateralized by in 2009 and 2010, that bear interest ranging from 10% to 18% substantially all of the assets of Radian. (2003 – 14.25%), of which the Company owns approximately $22 In October 2003 Radian issued $15 in subordinated (2003 – $21). secured convertible debentures to Onex. The debentures are One of the companies has entered into an interest rate convertible at any time, at the option of the holder or at Radian’s swap agreement that effectively ﬁxes the ﬂoating rate on $23 option, under certain circumstances, into Class A multiple voting (2003 – $21) of variable rate loans at 2.31% to 3.71% until 2008. shares of Radian. In December 2001 Radian entered into an interest rate swap agreement that effectively converts $15 of variable rate loans into ﬁxed rate obligations at 4.0%, plus applicable credit spread. The agreement expired in December 2004. j) Cosmetic Essence In December 2004, CEI entered into credit agreements with certain ﬁnancial institutions, which provide for a revolving line of credit with maximum borrowings of US$25, maturing in 2010; l) The annual minimum repayment requirements for the next ﬁve years on consolidated long-term debt are as follows: 2005 2006 2007 2008 2009 $ $ $ $ $ 295 233 116 508 23 a ﬁrst lien term loan with borrowings of US$97; and a second lien 9. L E A S E C O M M I T M E N T S term loan with borrowings of US$29. The ﬁrst lien term loan is repayable through quarterly instalments of principal and interest to be made through December 2010. The second lien term loan pays interest only until its maturity in December 2011. At Decem- ber 31, 2004, CEI had US$129 outstanding under the agreements. For the year: The future minimum lease payments are as follows: $ 2005 2006 2007 2008 2009 Thereafter Total future minimum lease payments $ Less: imputed interest Balance of obligations under capital leases, without recourse to Onex Less: current portion Long-term obligations under capital Capital Leases Operating Leases $ 181 147 113 90 74 377 $ 982 28 12 9 5 2 – 56 (5) 51 (26) leases, without recourse to Onex $ 25 Essentially all of the lease commitments relate to the operating Interest on the borrowings is based, at the option of CEI, upon either a LIBOR rate or a base rate, plus an interest rate margin. Substantially all of CEI’s assets are pledged as collateral for the borrowings. CEI also has a promissory note outstanding in the amount of US$60, of which US$55 is owned by the Company. The note is due in 2014, with interest of 9.55% per year, payable in additional notes due in 2014. k) ONCAP Companies ONCAP’s investee companies include CMC Electronics, WIS, Futuremed and CSRS. Each has debt that is included in Onex’ consolidated ﬁnancial statements. There are separate arrange- ments for each of the investee companies with no cross-guarantees between the companies or by Onex. Under the terms of credit agreements, combined companies. revolving credit facilities of $11 and term borrowings of $200 are 86 Onex Corporation December 31, 2004 Report N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S 10 . E X C H A N G E A B L E D E B E N T U R E S In 2000 Onex issued the following series of 25-year debentures exchangeable for subordinate voting shares of Celestica: Maturity Date March 15, 2025 July 15, 2025 September 15, 2025 October 30, 2025 Aggregate Principal Amount $ $ $ $ 366 113 176 74 Average Interest Rate 1.45% 1.72% 1.65% 1.60% Exchange Rate on Principal Amount (number of shares per $000) 15.133 13.333 8.515 9.042 The debentures are exchangeable, at the request of the holder, The market value and deferred amount of the exchangeable deben- into a ﬁxed number of subordinate voting shares of Celestica or, at tures were as follows: the option of the Company, it may deliver the cash equivalent based on the market price of the shares at the time of exchange, or As at December 31 2004 2003 a combination of shares and cash. Onex has pledged shares of Carrying amount (cost) $ 729 $ 729 Celestica to secure its obligations upon any exercise of the hold- ers’ exchange right. The debentures are redeemable at any time by the Company. Upon redemption Onex may, at its option, repay Deferred amount, included in other liabilities (note 11) Change in fair value the principal amount by delivering Celestica subordinate voting Market value shares based on the ﬁxed exchange rate or pay the cash equiva- (549) (24) (549) – $ 156 $ 180 lent, or a combination of shares and cash. The total number of Interest expense related to the exchangeable debentures amounted Celestica subordinate voting shares pledged under the debentures to $11 (2003 – $12) and was netted against interest and other income. is 9,214,320. Onex is required to pay interest at a ﬁxed rate for the 11. O T H E R L I A B I L I T I E S ﬁrst interest period of each debenture issue, which is approxi- mately six months, and at a ﬂoating rate semi-annually thereafter. Other liabilities comprised the following: The calculated interest rate varies in relation to ordinary Celestica As at December 31 2004 2003 dividends paid, if any, during the preceding interest period and, in the case of the March 2025 debentures, the average closing Pension and non-pension post-retirement benefits (note 25) $ price of Celestica subordinate voting shares on The Toronto Stock Exchangeable debentures (note 10) Exchange for all trading days over the preceding interest period. Stock-based compensation The market value of the exchangeable debentures is based on the market price, as at the balance sheet date, of the underlying subordinate voting shares of Celestica. The deferred amount represents previously deferred gains, prior to adoption of AcG-13, as described in note 1. In February 2005 the Company redeemed all of the out- standing exchangeable debentures and satisﬁed the debenture obligation through the delivery of 9,214,320 Celestica subordinate voting shares. 117 549 58 181 191 $ 122 549 94 – 160 Derivative instruments (note 22(b)) Other(1) (1) Other includes acquisition and restructuring accruals as well as amounts for anticipated liabilities arising from indemnifications. $ 1,096 $ 925 Onex Corporation December 31, 2004 Report 87 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S 12 . S H A R E C A P I TA L a) The authorized share capital of the Company consists of: i) 100,000 Multiple Voting Shares, which entitle their holders to elect 60% of the Company’s Directors and carry such number of votes in the aggregate as represents 60% of the aggregate votes attached to all shares of the Company carrying voting rights. The Multiple Voting Shares have no entitlement to a distribution on winding-up or dissolution other than the payment of their nomi- nal paid-up value. ii) An unlimited number of Subordinate Voting Shares, which carry one vote per share and as a class are entitled: to 40% of the aggregate votes attached to all shares of the Company carrying voting rights; to elect 40% of the Directors; and to appoint the auditors. These shares are entitled, subject to the prior rights of other classes, to distributions of the residual assets on winding-up and to any declared but unpaid cash dividends. The shares are entitled to receive cash dividends, dividends in kind and stock dividends as and when declared by the Board of Directors. Onex renewed its Normal Course Issuer Bid in April 2004 for one year, permitting the Company to purchase on the Toronto Stock Exchange up to 10% of the public ﬂoat of its Subordinate Voting Shares. The 10% limit represents approximately 11 million shares. At December 31, 2004, 5,415,700 shares had been repurchased and cancelled under this bid. c) At December 31, 2004 the issued and outstanding share capital consisted of 100,000 (2003 – 100,000) Multiple Voting Shares, 139,015,366 (2003 – 148,015,300) Subordinate Voting Shares and 176,078 (2003 – 176,078) Series 1 Senior Preferred Shares. The Series 1 Senior Preferred Shares have no paid-in amount reﬂected in these consolidated ﬁnancial statements and the Multiple Voting Shares have nominal paid-in value. d) The Company has a Deferred Share Unit Plan as described in note 1. At December 31, 2004, there were 40,000 units outstanding for which $1 has been recorded as compensation expense. e) The Company has a Stock Option Plan (the “Plan”) under which options and/or share appreciation rights for a term not exceeding The Multiple Voting Shares and Subordinate Voting 10 years may be granted to Directors, ofﬁcers and employees for Shares are subject to provisions whereby, if an event of change the acquisition of Subordinate Voting Shares of the Company at a occurs (such as Mr. Schwartz, Chairman and CEO, ceasing to price not less than the market value of the shares on the business hold, directly or indirectly, more than 5,000,000 Subordinate day preceding the day of the grant. Under the Plan, no options or Voting Shares or related events), the Multiple Voting Shares will share appreciation rights may be exercised unless the average thereupon be entitled to elect only 20% of the Directors and market price of the Subordinate Voting Shares for the ﬁve prior otherwise will cease to have any general voting rights. The Subor- business days exceeds the exercise price of the options or the dinate Voting Shares would then carry 100% of the general voting share appreciation rights by at least 25% (the “exercisable price”). rights and be entitled to elect 80% of the Directors. iii) An unlimited number of Senior and Junior Preferred Shares issuable in series. The Directors are empowered to ﬁx the rights to be attached to each series. There is no consolidated paid-in value for these shares. b) During 2004, under the Dividend Reinvestment Plan, the Company issued 72,166 (2003 – 317,599) Subordinate Voting Shares at a total value of $1 (2003 – $5). As well, 71,000 (2003 – 55,000) Subordinate Voting Shares were issued upon the exercise of stock options of the Company at a value of less than $1 (2003 – $1). The Company repurchased and cancelled under Normal Course Issuer Bids 9,143,100 (2003 – 11,586,100) of its Subordinate Voting Shares at a cash cost of $150 (2003 – $166) during 2004. The excess of the purchase cost of these shares over the average paid-in amount was $113 (2003 – $120), which was charged to retained earnings. At December 31, 2004, 15,632,000 (2003 – 15,703,000) Subordinate Voting Shares were reserved for issuance under the Plan, against which options representing 13,961,700 (2003 – 12,259,000) shares were outstanding. The Plan provides that the number of options issued may not exceed 10% of the shares outstanding at the time the options are issued. All options vest at a rate of 20% per year from the date of grant. When an option is exercised, the employee has the right to request that the Company repurchase the option for an amount equal to the difference between the fair value of the stock under the option and its exercise price. Upon receipt of such request, the Company has the right to settle its obligation to the employee by the payment of cash, the issuance of shares or a combination of cash and shares. 88 Onex Corporation December 31, 2004 Report N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S Details of options outstanding are as follows: Outstanding at December 31, 2002 Granted Exercised or surrendered Expired Outstanding at December 31, 2003 Granted Exercised or surrendered Expired Outstanding at December 31, 2004 Number of Options Weighted Average Exercise Price 12,250,600 710,000 (596,600) (105,000) 12,259,000 10,205,000 (8,345,800) (156,500) 13,961,700 $ 9.34 $ 14.90 $ 7.78 $ 18.45 $ 9.66 $ 16.54 $ 7.78 $ 18.56 $ 15.71 During 2004 the total cash consideration paid on options surrendered was $71 (2003 – $4). This amount represents the diﬀerence between the market value of the Subordinate Voting Shares at the time of surrender and the exercise price, both as determined under the Plan. Options outstanding at December 31, 2004 consisted of the following: Number of Options Outstanding Exercise Price Number of Options Exercisable Exercisable Price Remaining Life (years) 611,600 1,238,600 624,000 657,500 625,000 7,260,000 2,945,000 13,961,700 $ $ 7.30 8.62 $ 20.23 $ 20.50 $ 14.90 $ 15.87 $ 18.18 611,600 1,238,600 – – 125,000 – – 1,975,200 $ 9.13 $ 10.78 $ 25.29 $ 25.63 $ 18.63 $ 19.84 $ 22.73 3.1 3.3 5.0 7.5 8.1 9.1 9.9 13 . I N T E R E S T E X P E N S E O F O P E R AT I N G C O M PA N I E S 14 . S T O C K - B A S E D C O M P E N S AT I O N Year ended December 31 2004 2003 Interest on long-term debt of operating companies Interest on obligations under capital leases of operating companies Other interest of operating companies Effective January 1, 2004, the Company adopted revised CICA Handbook Section 3870, “Stock-based Compensation and Other Stock-based Payments”, as described in note 1. $ 221 $ 164 For the operating companies that did not record the 3 29 5 22 effect of stock options through the consolidated statements of earnings in 2003, the table below shows pro forma net loss and loss per share adjusted for the effect of stock option plans at Interest expense of operating companies $ 253 $ 191 those operating companies. Cash interest paid during the year amounted to $180 (2003 – $306). Pro forma after the effect of operating companies’ stock option plans Pro forma net loss for continuing operations Basic loss per share for continuing operations Diluted loss per share for continuing operations 2003 $ (558) $ (3.64) $ (3.64) Onex Corporation December 31, 2004 Report 89 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S 15 . G A I N S O N S H A R E S O F O P E R AT I N G are now accounted for under the equity method. This gain is C O M PA N I E S , N E T During 2004 and 2003 Onex completed a number of unrelated transactions by selling all or a portion of its ownership interests in certain companies. The major transactions and the resulting pre-tax gains are summarized and described as follows: Year ended December 31 2004 2003 Gains (loss) on: Issue of shares of Commercial Vehicle Group(a) $ Performance Logistics Group(b) Issue of shares by Celestica(c) Sale of Tower Automotive(d) Gain on initial public offering of Cineplex Galaxy Income Fund(e) Sale of investment by Vencap(f) Other, net(g) 75 58 9 6 – – 34 $ – – – – 118 16 (5) comprised of a non-cash dilution gain of $22 and includes the reversal of $36 of losses of PLG previously recognized by Onex that were in excess of the other shareholders’ equity in PLG. c) In March 2004, Celestica acquired MSL and issued approxi- mately 14.1 million Celestica subordinate voting shares as part of the consideration paid. Onex recorded a dilution gain of $9 as a result of the reduction in Onex’ ownership through the share issuance. Onex’ ownership after the dilution was approximately 18% and it retained voting control of Celestica. d) In February 2004, Onex completed the sale of its remaining interest in Tower Automotive, Inc. for net cash proceeds of $8. e) In November 2003, an initial public offering was made of Cineplex Galaxy Income Fund (“CGIF”) of 19.4 million units priced at $10 per unit. The proceeds of this offering were used by CGIF to invest in 41% of the limited partnership units of Cineplex $ 182 $ 129 Galaxy Limited Partnership (the “Partnership”), which in turn a) In August 2004, Commercial Vehicle Group, Inc. (“CVG”) formed from the combination of Bostrom and Trim Systems, ﬁled a registration statement with the U.S. Securities and Exchange Commission for an initial public offering of common stock. A $180 offering of shares (NASDAQ:CVGI) was completed in early August. The offering included both a primary and a secondary component. The primary sale of shares by CVG resulted in that company receiving net proceeds of approximately $66, which it used to reduce outstanding indebtedness and for general corpo- rate purposes. The secondary sale of shares was by Onex and certain other shareholders, with Onex receiving approximately $54 in net proceeds, resulting in a gain of $60 after considering previously recorded losses. In addition, Onex received approximately $27 on acquired substantially all of the assets of Cineplex Odeon from Loews Cineplex and all of the shares of Galaxy Entertainment Inc. (“Galaxy”), another Canadian exhibitor controlled by Onex. Following the closing, the Company retained a 54% interest in the Partnership. The gain includes both a realized gain arising from the cash received and a dilution component. f) During 2003, Vencap received proceeds of $20 on the disposition of its remaining investments. g) Included in 2004 was a gain of $23 from the interest in Ripplewood. 16 . A C Q U I S I T I O N , R E S T R U C T U R I N G A N D O T H E R E X P E N S E S the repayment of debt held by Onex, which resulted in a gain of Year ended December 31 $15. As a result of this offering and the sale of shares, Onex held approximately 4.2 million shares of CVG. Onex, the largest share- holder in CVG with an approximate 24% ownership interest, ceased Celestica Magellan ClientLogic to have a controlling ownership interest following this offering. J.L. French Automotive Other 2004 2003 $ 184 $ 128 7 5 7 8 – 8 4 11 $ 211 $ 151 b) In March 2004, PLG acquired Leaseway Auto Carrier Group, a subsidiary of Penske Truck Leasing Co., L.P. Onex did not sell or purchase any shares of PLG in this offering, and Onex’ ownership interest in PLG was diluted from a controlling 50% interest to a non-controlling 26% interest as a result of the additional shares issued. Since Onex ceased to control PLG after the issuance of the additional PLG shares, the investment was no longer consolidated but was accounted for using the equity method. As a result of the dilution of Onex’ investment in PLG, Onex has recorded a non-cash gain of $58, reﬂecting the net liabilities of PLG, which 90 Onex Corporation December 31, 2004 Report Costs incurred relate to the restructuring activities, implementa- tion of business processes, infrastructure and information systems for operations acquired. The Company records restructuring charges relating to employee terminations, contractual lease obligations and other exit costs in accordance with CICA abstracts EIC-134 and EIC-135, which the Company adopted for restructuring activities initiated N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S after March 31, 2003. These standards require the Company to In January and April 2004, Celestica recorded a restruc- prospectively record restructuring charges only when the liability turing charge in respect of facility consolidations and a reduction is incurred. Prior to this, the Company recorded restructuring in its workforce to better align capacity with customers’ require- charges based on detailed plans approved and committed to by ments. The charge includes employee termination costs, lease management. The recognition of these charges requires manage- and other contractual obligations, non-cash asset impairments ment to make certain judgments regarding the nature, timing and and facility exit costs. The Company expects to complete these amounts associated with the planned restructuring activities, actions by early 2005. including estimating sublease income and the net recovery In September 2004, Celestica sold certain assets relating from equipment to be disposed of. At the end of each reporting to its power operations for proceeds of $68 and recorded a gain period, the Company evaluates the appropriateness of the of $15. Included in the 2004 restructuring costs is $10 related to remaining accrued balances. Restructuring activities relate to the the disposition. operating companies. In January 2005, Celestica announced that it will incur In January 2003, Celestica recorded a restructuring a pre-tax restructuring charge of between US$225 and US$275 to charge in respect of facility consolidations and a reduction in its be recorded over the next 15 months, of which approximately 80% workforce as a result of the broad slowdown in technology will be cash costs. end-markets experienced by its customers. Also included were charges in respect of restructuring activities initiated in prior The tables below provide a summary of restructuring activities years. The charge includes employee termination costs, lease and undertaken by the operating companies detailing the compo- other contractual obligations, non-cash asset impairments and nents of the charges and movement in accrued liabilities. This facility exit and other costs. summary is presented by the year in which the restructuring activities were ﬁrst initiated. Years prior to 2003 Employee Termination Costs Lease and Other Contractual Obligations Facility Exit Cost and Other Total estimated expected costs $ Cumulative costs expensed to date Expense for the year ended December 31, 2004 Reconciliation of accrued liability Closing balance – December 31, 2003 Cash payments Charges Closing balance – December 31, 2004 $ 293 293 1 15 (16) 1 – $ $ 163 163 3 78 (35) 3 46 $ $ 52 52 1 5 (6) 1 – (a) (b) Includes Celestica $833, J.L. French Automotive $9, ClientLogic $1 and Radian $3. Includes Celestica $833, J.L. French Automotive $9, ClientLogic $1 and Radian $3. Initiated in 2003 Employee Termination Costs Lease and Other Contractual Obligations Facility Exit Cost and Other Total estimated expected costs $ Cumulative costs expensed to date Expense for the year ended December 31, 2004 Reconciliation of accrued liability Closing balance – December 31, 2003 Cash payments Charges Closing balance – December 31, 2004 $ 92 92 9 53 (40) 9 22 $ $ 7 7 6 1 (3) 6 4 (a) (b) Includes Celestica $95, J.L. French Automotive $7, ClientLogic $9 and Magellan $6. Includes Celestica $95, J.L. French Automotive $6, ClientLogic $9 and Magellan $6. $ $ 8 7 1 4 (3) 1 2 Non-cash Charge $ 338 338 2 Non-cash Charge $ 10 10 (1) Total 846(a) 846(b) 7 98 (57) 5 46 Total 117(a) 116(b) 15 58 (46) 16 28 $ $ $ $ Onex Corporation December 31, 2004 Report 91 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S Initiated in 2004 Employee Termination Costs Lease and Other Contractual Obligations Facility Exit Cost and Other Total estimated expected costs $ Cumulative costs expensed to date Expense for the year ended December 31, 2004 Reconciliation of accrued liability Cash payments Charges 149 117 117 (107) 117 Closing balance – December 31, 2004 $ 10 $ $ 12 12 12 (6) 12 6 (a) (b) Includes Celestica $207, ClientLogic $3, Radian $4 and CMC Electronics $2. Includes Celestica $176, ClientLogic $3, Radian $4 and CMC Electronics $2. $ $ 16 16 16 (5) 16 11 Total Employee Termination Costs Lease and Other Contractual Obligations Facility Exit Cost and Other Total estimated expected costs $ Cumulative costs expensed to date Expense for the year ended December 31, 2004 Reconciliation of accrued liability Closing balance – December 31, 2003 Cash payments Charges 534 502 127 68 (163) 127 Closing balance – December 31, 2004 $ 32 $ $ 182 182 21 79 (44) 21 56 $ $ 76 75 18 9 (14) 18 13 Non-cash Charge $ 44 44 44 Non-cash Charge $ 392 392 45 $ Total 221(a) 189(b) 189 (118) 145 $ 27 Total $ 1,184 1,151 211 156 (221) 166 $ 101 92 Onex Corporation December 31, 2004 Report N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S 17. D E B T P R E PAY M E N T C O S T S c) In 2003, the impairment tests at PLG resulted in a writedown of $142 in goodwill as a result of the competitive nature of Year ended December 31 J.L. French Automotive Celestica Other 2004 2003 the industry. $ $ 5 2 1 8 $ 9 2 – $ 11 18 . W R I T E D O W N O F G O O D W I L L A N D I N TA N G I B L E A S S E T S Year ended December 31 2004 2003 Celestica(a) J.L. French Automotive(b) Performance Logistics Group(c) Radian(d) ClientLogic(e) $ 388 $ – – – 5 33 214 142 8 5 d) In 2003, Radian performed impairment tests that resulted in a writedown of $8 in goodwill due to the slowdown in the telecommunications sector arising from tighter capital markets and capital-spending restrictions by wireless service providers. During 2004, Radian did not have any recorded goodwill or intangible assets. e) During 2004, ClientLogic performed its annual impairment tests of goodwill and intangible assets and determined that a writedown of $5 in intangible assets was required due to the loss of certain client contracts. In 2003, the impairment tests resulted in a writedown of $5 in intangible assets due to a component of the existing client contracts being impaired. $ 393 $ 402 19. W R I T E D O W N O F L O N G - L I V E D A S S E T S Year ended December 31 2004 2003 a) During the fourth quarter of 2004, Celestica performed its annual impairment tests of goodwill and intangible assets and determined that writedowns of $351 in goodwill and $37 in other Celestica(a) J.L. French Automotive(b) intangibles was required. The majority of the writedowns were Other $ $ 84 8 2 94 $ $ 75 10 3 88 due to restructuring plans and the continued transfer of major customer programs from higher cost to lower cost geographies whereby these actions reduced the forecasted revenue and net cash ﬂows for many sites. In 2003, the impairment tests resulted in writedowns of $24 in intellectual property and $9 in other intangibles due to prolonged declines in the computing and communications end-markets that affected the fair value of the reporting units. b) During the third quarter of 2004, J.L. French Automotive performed its annual impairment tests of goodwill and intangi- ble assets and determined that no writedowns were required. In 2003, the impairment tests resulted in a writedown of $214 in goodwill due to lower than anticipated production volumes and a relocation of certain assets within the reporting units. a) In 2004, Celestica recorded an impairment of $84 (2003 – $75) against property, plant and equipment. In 2003, $18 of the impair- ment related to the buyout of a leased facility. b) In 2004, J.L. French Automotive implemented restructuring plans for its U.K. operations which resulted in an impairment of $8 against property, plant and equipment. In 2003, J.L. French Automotive recorded an impairment of $10 against property, plant and equipment, of which $7 related to a Mexican facility that was not producing an acceptable proﬁt margin, and it was decided that the business would be resourced to another supplier. Onex Corporation December 31, 2004 Report 93 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S 2 0 . I N C O M E TA X E S The reconciliation of statutory income tax rates to the Company’s eﬀective tax rate is as follows: Year ended December 31 Income tax recovery at statutory rates Increase (decrease) related to: Increase in valuation allowance(1) Amortization of non-deductible items Income tax rate differential of operating companies Non-taxable accounting gains Other, including permanent differences Provision for income taxes Classified as: Current Future Provision for income taxes 2004 $ 214 (434) (126) (58) 46 11 2003 $ 273 (261) (59) 5 1 (26) $ (347) $ (67) $ (95) (252) $ (347) $ $ (59) (8) (67) (1) During the fourth quarter of 2004, the valuation allowance increased, in large part due to Celestica establishing a valuation allowance of $302 related to future income tax assets previously recorded in respect of net operating loss carryforwards and certain other deductible temporary differences from its U.S. and European operations. The Company’s future income tax assets and liabilities comprised the following: As at December 31 Future income tax assets: Net operating losses carried forward Net capital losses carried forward Accounting provisions not currently deductible Scientific research deductions and credits Property, plant and equipment, intangible and other assets Share issue costs of operating companies Acquisition and integration costs Pension and non-pension post-retirement benefits Other Less: valuation allowance Future income tax liabilities: Property, plant and equipment, intangible and other assets Pension and non-pension post-retirement benefits Gains on shares of operating companies Other 2004 2003 $ 1,031 $ 661 45 172 9 117 16 91 11 4 (1,411) 85 (52) (20) (617) (2) (691) – 207 55 338 10 53 12 (95) (835) 406 (144) (9) (505) 21 (637) Future income tax liabilities, net $ (606) $ (231) Classified as: Current asset Long-term asset Long-term liability Future income tax liabilities, net 94 Onex Corporation December 31, 2004 Report $ 17 68 (691) $ (606) $ 63 343 (637) $ (231) N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S The Company and its investment-holding operating companies have tax-loss carryforwards of approximately $695 available to reduce future income taxes to the year 2014. At December 31, 2004, certain operating companies in Canada and the United States had tax-loss carryforwards available to reduce future income taxes of those companies in the amount of $2,983, of which $528 had no expiry, $594 were available to reduce future taxes between 2005 and 2009, inclusive, and $1,861 were available to reduce future taxes over a 15-year period beginning in 2010. Cash taxes paid during the year amounted to $30 (2003 – $62). 21. N E T E A R N I N G S ( L O S S ) P E R S U B O R D I N AT E V O T I N G S H A R E The weighted average number of Subordinate Voting Shares for the purpose of the earnings (loss) per share calculations is as follows: Year ended December 31 Weighted average number of shares (in millions): Basic Diluted 2 2 . F I N A N C I A L I N S T R U M E N T S 2004 2003 $ 142 142 $ 154 154 a) Fair values of ﬁnancial instruments The estimated fair values of ﬁnancial instruments as at December 31, 2004 and 2003 are based on relevant market prices and information available at those dates. The carrying values of cash and short-term investments, accounts receivable, accounts payable and accrued liabili- ties approximate the fair values of these ﬁnancial instruments. Financial instruments with carrying values different from their fair values that have not been disclosed elsewhere in these consolidated ﬁnancial statements include the following: As at December 31 2004 2003 Financial liabilities: Long-term debt (i) Foreign currency contracts Interest rate swap agreements Carrying Amount $ 2,512 $ $ – – Fair Value/ (Unwind Costs) Carrying Amount Fair Value/ (Unwind Costs) $ 2,536 $ $ (44) (25) $ 1,198 $ $ – – $ 1,152 $ $ (51) (6) (i) The fair value of long-term debt is based on quoted market prices for the financial instruments and for others of similar rating and risk. Certain components of long-term debt primarily comprise term loans and other credit facilities with interest and repayment terms that are not significantly different from current market rates. Accordingly, the carrying values approximate estimated fair values. b) Forward sale agreements The Company entered into the following forward sale agreements relating to subordinate voting shares of Celestica. Shares of Celestica have been pledged as collateral for these forward sale agreements and it is contemplated that they will be used to satisfy the agreements. Effective January 1, 2004, the Company adopted AcG-13. Accordingly, previously deferred gains, which are included in other liabilities (note 11), and which at January 1, 2004 amounted to $181, will continue to be deferred until such time as the contracts are closed. The fair value of the forward agreements is included in investments and other assets (note 6). Changes in market value of the forward contracts since the date of adoption are recorded in the statement of earnings under “Derivative Instruments”. Inception Date August 2000 November 2000 Maturity Date August 2025 November 2025 Number of Celestica Shares Reference Price per Share 472,840 1,284,627 $ 111.24 $ 128.47 2004 Fair Value $ $ 44 142 2003 Fair Value $ $ 43 138 The reference price approximated the market value of a Celestica subordinate voting share at the time the forward sale agreement was entered into. The reference prices under the contracts increase over time. The fair value represents the difference between the reference price under the contract and the market price of a Celestica share as at December 31, 2004 and 2003 for the number of shares under the contract. Onex Corporation December 31, 2004 Report 95 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S 2 3 . S I G N I F I CA N T C U S TO M E R S O F O P E R AT I N G C O M PA N I E S A N D C O N C E N T R AT I O N O F C R E D I T R I S K A number of operating companies, by the nature of their businesses, individually serve major customers that account for a large portion of their revenues. For each of these operating companies, the table below shows the number of signiﬁcant customers and the percentage of revenues they represent. Year ended December 31 Celestica Magellan ClientLogic J.L. French Automotive Performance Logistics Group Bostrom Trim Systems Radian Cosmetic Essence 2004 Number of Significant Customers Percentage of Revenues 2003 Number of Significant Customers Percentage of Revenues 2 3 1 2 – – – 1 3 26% 35% 22% 83% – – – 13% 59% 4 – 1 2 2 1 2 1 – 44% – 24% 81% 83% 11% 88% 14% – Accounts receivable from the above signiﬁcant customers at December 31, 2004 and 2003 totalled $244 and $337, respectively. 2 4 . C O M M I T M E N T S , C O N T I N G E N C I E S A N D R E L AT E D PA R T Y T R A N S A C T I O N S a) Contingent liabilities in the form of letters of credit, letters of guarantee, and surety and performance bonds are provided by certain operating companies to various third parties and include certain bank guarantees. At December 31, 2004, the amounts payable in respect of these guarantees totalled $95. Certain oper- ating companies have guarantees with respect to employee share purchase loans that amounted to $3 at December 31, 2004. These guarantees are without recourse to Onex. The Company has commitments in the total amount of approximately $161 in respect of corporate investments, including those discussed in note 26. b) The Company and its operating companies may become par- ties to legal claims, product liability and warranty claims arising in the ordinary course of business. Certain operating companies, as conditions of acquisition agreements, have agreed to accept certain pre-acquisition liability claims against the acquired com- panies. The operating companies have recorded liability provi- sions for the estimated amounts that may become payable for such claims to the extent that they are not covered by insurance or recoverable from other parties. It is management’s opinion that the resolution of known claims should not have a material adverse impact on the consolidated ﬁnancial position of Onex. However, there can be no assurance that unforeseen circum- stances will not result in signiﬁcant costs. The Company and its operating companies have also provided certain indemniﬁcations, including those related to c) The operating companies are subject to laws and regulations concerning the environment and to the risk of environmental businesses that have been sold. The maximum amounts from liability inherent in activities relating to their past and present many of these indemniﬁcations cannot be reasonably estimated operations. As conditions of acquisition agreements, certain oper- at this time. However, in certain circumstances, the Company and ating companies have agreed to accept certain pre-acquisition its operating companies have recourse against other parties to liability claims on the acquired companies after obtaining indem- mitigate the risk of loss from these indemniﬁcations. niﬁcation from prior owners. The Company and its operating companies have The Company and its operating companies also have commitments in respect of real estate operating leases, which insurance to cover costs incurred for certain environmental mat- are disclosed in note 9. Onex and its operating companies have ters. Although the effect on operating results and liquidity, if any, aggregate capital commitments of $58 as at December 31, 2004. cannot be reasonably estimated, management of Onex and the operating companies believe, based on current information, that these environmental matters should not have a material adverse effect on the Company’s consolidated ﬁnancial condition. 96 Onex Corporation December 31, 2004 Report N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S d) In February 2004, Onex completed the closing of Onex Partners LP (the “Fund”), with funding commitments totalling US$1.7 bil- e) Under the terms of the MIP approved in June 1996, manage- ment members of the Company invest in all of the operating lion. The Fund is to provide committed capital for future entities acquired by the Company. Onex-sponsored acquisitions not related to Onex’ operating The aggregate investment by management members companies at December 31, 2003, or to ONCAP. Onex has provided a commitment of US$400 million of the total US$1.7 billion of capital committed to the Fund. Onex controls the General Partner and Manager of the Fund. Onex management has committed, as a group, to invest a minimum of 1% of the Fund, which may be adjusted annually up to a maximum of 4%. As at December 31, under the MIP is limited to 9% of Onex’ interest in each acquisi- tion. The form of the investment is a cash purchase for 1⁄₆th (1.5%) of the MIP’s share of the aggregate investment, and investment rights for the remaining ⁵⁄₆th (7.5%) of the MIP’s share at the same price. The investment rights to acquire the remaining ⁵⁄₆th vest equally over four years. If the Company disposes of 90% or more 2004, management had committed 4%. The total amount invested of an investment before the ﬁfth year, the investment rights vest in Fund investments by Onex management for the year ended in full. The investment rights related to a particular acquisition December 31, 2004 was $21. are exercisable only if the Company earns a minimum 15% per Onex receives annual management fees based upon 2% of annum compound rate of return for that acquisition after giving the capital committed to the Fund by investors other than Onex effect to the investment rights. and Onex management. The annual management fee is reduced Under the terms of the MIP, the total amount paid for to 1% of the net funded capital at the earlier of the end of the the interest in the investments in 2004 was $2 (2003 – less commitment period, when the funds are fully invested, or if Onex than $1). Investment rights exercisable at the same price for 7.5% establishes a successor fund. Onex is entitled to receive a carried (2003 – 7.5%) of the Company’s interest in acquisitions were interest on the overall gains achieved by Fund investors, other issued at the same time. Realizations under the MIP including the than Onex, to the extent of 20% of the gains, provided that the value of units distributed were $35 in 2004 and $6 in 2003. Fund investors have achieved a minimum 8% return on their investment in the Fund. The investment by Fund investors for this purpose takes into consideration management fees and other amounts paid in by the Fund investors. The returns to the Fund investors, other than Onex and Onex management, are based upon all investments made through the Fund, with the result that initial carried interests achieved by Onex on gains could be recovered from Onex if subsequent Fund investments do not exceed the overall target return level of 8%. Consistent with market practice, Onex, as sponsor of the Fund, will be allocated 40% of the carried interest with 60% allocated to the management. Onex defers all gains associated with the carried interest until such time as the Fund is closed. As at December 31, 2004, no amount had been received as carried interest. f) Members of management and the Board of Directors of the Company invested $9 in 2004 (2003 – less than $1) in Onex’ acqui- sitions at the same cost as Onex and other outside investors. Those investments by management and the Board are subject to voting control by Onex. g) Certain operating companies have made loans to certain direc- tors or ofﬁcers of the individual operating companies primarily for the purpose of acquiring shares in those operating companies. The total value of the loans outstanding as at December 31, 2004 was $13. None of these loans is to directors or ofﬁcers of the Company. Onex Corporation December 31, 2004 Report 97 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S 2 5 . P E N S I O N A N D N O N - P E N S I O N P O S T - R E T I R E M E N T B E N E F I T S The operating companies have a number of deﬁned beneﬁt and deﬁned contribution plans providing pension, other retirement and post-employment beneﬁts to certain of their employees. The non-pension post-retirement beneﬁts include retirement and termination beneﬁts, health, dental and group life. The total costs during 2004 for deﬁned contribution pension plans were $35 (2003 – $33). The Company measures its accrued beneﬁt obligations and the fair value of the plan assets for accounting purposes as at December 31 of each year for the largest plans. The most recent actuarial valuation of these pension plans for funding purposes was as of April and December 2002, and the next required valuation will be as of April and December 2005. Total cash payments for employee future beneﬁts for 2004, consisting of cash contributed by the operating companies to their funded pension plans, cash payments directly to beneﬁciaries for their unfunded other beneﬁt plans, and cash contributed to their deﬁned contribution plans, were $68 (2003 – $86). For the deﬁned beneﬁt pension plans and non-pension post-retirement plans, the estimated present value of accrued beneﬁt obligations and the estimated market value of the net assets available to provide these beneﬁts were as follows: As at December 31 Accrued benefit obligations: Opening benefit obligations Current service cost Interest cost Contributions by plan participants Benefits paid Actuarial losses in year Foreign currency exchange rate changes Acquisitions during the year Discontinued operations in 2003 Discontinued operations in 2004 (note 2) Non-controlled entities (note 15) Plan amendments Settlements/curtailments Reclassification of plans Other changes Closing benefit obligations Plan assets: Opening plan assets Actual return on plan assets Contributions by employer Contributions by plan participants Benefits paid Foreign currency exchange rate changes Acquisitions during the year Discontinued operations in 2003 Discontinued operations in 2004 (note 2) Non-controlled entities (note 15) Settlement/termination payments Reclassification of plans Pension Plans in which Assets Exceed Accumulated Benefits Pension Plans in which Accumulated Benefits Exceed Assets Non-Pension Post-Retirement Benefits 2004 2003 2004 2003 2004 2003 $ 144 $ 235 $ 637 $ 744 $ 164 $ 191 1 8 – (9) 10 (2) – – (3) – – 2 (20) – 1 9 – (9) 5 – – (112) (1) – – – 16 – 13 25 2 (18) 24 (3) 1 – (174) (41) – (12) 20 2 15 24 3 (16) 17 (34) – (72) (10) – (9) (9) (16) – 15 5 – (18) 5 (2) – – (48) – – (17) – 1 14 6 – (20) 8 (4) – (14) (2) – (2) (13) – – $ 131 $ 144 $ 476 $ 637 $ 105 $ 164 $ 152 $ 238 $ 459 $ 452 $ 14 4 – (9) (3) – – (8) – – (3) 14 4 – (9) – – (94) (1) – – – 28 31 2 (18) – 1 – (113) (31) (12) 3 36 54 3 (16) (21) – (40) (3) – (6) – – – 18 – $ – – 20 – (18) (20) – – – – – – – – – – – – – – – – $ Closing plan assets $ 147 $ 152 $ 350 $ 459 $ 98 Onex Corporation December 31, 2004 Report N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S Asset category Equity securities Debt securities Real estate Other Percentage of Plan Assets 2004 50% 45% 2% 3% 100% 2003 50% 42% 2% 6% 100% Equity securities do not include direct investments in the shares of the Company and its subsidiaries but may be invested indirectly as a result of the inclusion of the Company’s and its subsidiaries’ shares in certain market investment funds. The funded status of the plans of the operating subsidiary companies was as follows: As at December 31 Deferred benefit amount: Plan assets, at fair value Accrued benefit obligation Plan surplus (deficit): Unamortized past service costs Unamortized net gain or loss Reclassification of plans Discontinued operations in 2004 (note 2) Pension Plans in which Assets Exceed Accumulated Benefits Pension Plans in which Accumulated Benefits Exceed Assets Non-Pension Post-Retirement Benefits 2004 2003(1) 2004 2003(2) 2004 2003(3) $ 147 (131) $ 152 (144) $ 350 (476) $ 459 (637) $ – (105) $ – (164) $ 16 – 31 22 – $ 8 – 37 – – $ (126) $ (178) $ (105) $ (164) (5) 125 (22) – (9) 101 – 46 – 16 – – 1 18 – 8 Deferred benefit amount – asset (liability) $ 69 $ 45 $ (28) $ (40) $ (89) $ (137) (1) The ending balance includes discontinued operations of $5. (2) The ending balance includes discontinued operations of ($15). (3) The ending balance includes discontinued operations of ($40). The deferred beneﬁt asset is included in the Company’s balance sheet under “Investments and other assets”. The deferred beneﬁt liabili- ties are included in the Company’s balance sheet under “Other liabilities”. Onex Corporation December 31, 2004 Report 99 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S The net expense for the plans, excluding discontinued operations, is outlined below: Year ended December 31 Net periodic costs: Current service cost Interest cost Actual return on plan assets Pension Plans in which Assets Exceed Accumulated Benefits Pension Plans in which Accumulated Benefits Exceed Assets Non-Pension Post-Retirement Benefits 2004 2003 2004 2003 2004 2003 $ 1 8 (14) $ 1 9 (14) $ 13 25 (28) $ 15 24 (36) 16 17 (12) (18) 18 – 1 $ 15 $ 14 5 – – 5 (5) (17) 8 – – 6 – – 8 (8) (15) 5 – – $ 23 $ 25 $ 11 $ 10 Difference between expected return and actual return on plan assets for period Actuarial loss Difference between actuarial loss recognized for period and actual actuarial loss on the accrued benefit 4 10 4 5 obligation for period (9) (2) Plan amendments (curtailment/settlement (gain) loss) Difference between amortization of past service costs for period and actual plan amendments for period Settlement benefits Other Net periodic costs 2 – – – 2 $ – – – – 3 $ 5 24 (18) (12) 8 6 – The following assumptions were used to account for the plans: Year ended December 31 Pension Benefits Non-Pension Post-Retirement Benefits Accrued benefit obligation Weighted average discount rate 5.20%–6.50% 5.00%–6.50% 5.75%–6.10% 6.00%–6.75% 2004 2003 2004 2003 Weighted average rate of compensation increase Benefit cost Weighted average discount rate Weighted average expected long-term 0.00%–3.75% 0.00%–4.00% 5.20%–6.50% 5.50%–6.75% rate of return on plan assets 6.40%–8.00% 7.00%–8.00% Weighted average rate of compensation increase 0.00%–4.80% 0.00%–4.80% 4.00% 6.40% n/a 4.00% 4.00% 6.90% n/a 5.00% Assumed healthcare cost trend rates Initial healthcare cost rate Cost trend rate declines to Year that the rate reaches the rate it is assumed to remain at 2004 2003 6.60%–10.00% 3.25%–5.00% 5.75%–13.00% 3.59%–5.00% Between 2008 and 2011 Between 2008 and 2011 100 Onex Corporation December 31, 2004 Report N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S Assumed healthcare cost trend rates have a signiﬁcant eﬀect on the amounts reported for post-retirement medical beneﬁt plans. A 1% change in the assumed healthcare cost trend rate would have the following eﬀects: Year ended December 31 Effect on total of service and interest cost components Effect on the post-retirement benefit obligation 2004 $ 3 $ 14 1% Increase 2003 $ $ 2 10 1% Decrease 2004 2003 $ (2) $ (11) $ (2) $ (11) In 2004 curtailments and plan settlement gains and losses were incurred by Celestica due to facilities rationalization. These gains and losses are included in restructuring charges in note 16. 2 6 . S U B S E Q U E N T E V E N T S Onex and certain operating companies have entered into agree- ments to acquire or make investments in other businesses. These transactions are subject to a number of conditions, many of which are beyond the control of Onex or the operating companies. The effect of these planned transactions, in addition to those described below, if completed, may be signiﬁcant to the consolidated ﬁnan- cial position of Onex. In January 2005, the Company completed the acquisi- tion of CDI in a transaction valued at $225. CDI owns and oper- ates diagnostic imaging centres in nine markets in the United States. The total equity investment was $88 for an 84% equity ownership interest. This was provided by Onex and Onex Partners. Onex’ net investment in this acquisition was $21 for a 20% equity ownership at the time of acquisition. Onex has effective voting control of CDI through Onex Partners. In January 2005, Onex established Onex Real Estate Partners LP, a fund dedicated to acquiring and improving real estate assets in North America. Onex has initially committed US$200 million to the fund, which is expected to increase in size over time with the involvement of institutional investors. Onex’ commitment will be funded as acquisitions are completed. In February 2005, the Company redeemed all of the outstanding exchangeable debentures and satisﬁed the debenture obligation through the delivery of 9,214,320 Celestica subordinate voting shares. In February 2005, the Company completed the acquisi- tion of American Medical Response (“AMR”) and EmCare Holdings Inc. (“EmCare”) in a transaction valued at approximately $1,000. AMR is the largest provider of ambulance transport services in the United States. EmCare is the leading provider of outsourced hos- pital emergency department physician stafﬁng and management services in the United States. The total equity investment was approximately $270 for a 97% equity ownership interest. This was provided by Onex and Onex Partners. Onex’ net investment in this acquisition was $100 for a 37% equity ownership at the time of acquisition. Onex has effective voting control of AMR and EmCare through Onex Partners. In February 2005, the Company entered into an agree- ment to acquire the Wichita/Tulsa Division of Boeing Commercial Airplanes in a transaction valued at approximately $1,500. The purchase will include Boeing’s commercial airplane manufactur- ing facilities in Wichita, Kansas and Tulsa and McAlester, Oklahoma. The business will operate under a new company that will enter into long-term agreements with Boeing to supply com- ponents on all of Boeing’s existing 737, 767, 747, and 777 platforms, as well as the new 787 platform. The Division currently employs approximately 9,000 people and represented approximately $2,500 in annual costs for 2004. The new company will also seek new business from other customers. The equity investment is expected to be $465 made through Onex Partners LP and certain of its limited partners, including Onex. Onex’ share is expected to be at least $116. Closing of the transaction is subject to the satis- factory completion of a number of conditions and is expected to be completed in the second quarter. Onex Corporation December 31, 2004 Report 101 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S 2 7. I N F O R M AT I O N B Y I N D U S T R Y A N D healthcare and insurance services in the United States; and the G E O G R A P H I C S E G M E N T Onex’ reportable segments operate through autonomous com- panies and strategic partnerships. Each reportable segment offers different products and services and is managed separately. The Company had six reportable segments in 2004 and ﬁve in 2003: electronics manufacturing services; theatre exhibition; healthcare; customer management services; automo- tive products; and other. The electronics manufacturing services segment consists of Celestica, which provides manufacturing services for electronics OEMs. The theatre exhibition segment consists of Cineplex Odeon, CGIF and CGLP. The healthcare seg- ment consists of Magellan, a provider of managed behavioural equity accounted investment in ResCare, a provider of support services to people with special needs. The customer management services segment consists of ClientLogic, which provides services for telecommunications, consumer goods, retail, technology, transportation, ﬁnance and utility companies. The automotive products segment consists of J.L. French Automotive, a leading manufacturer of high-pressure aluminum die-cast parts in both 2004 and 2003; Bostrom, a manufacturer of seats for the heavy truck, construction and agricultural vehicle markets; and Trim Systems, which produces heavy truck interior trim systems in 2003. Bostrom and Trim Systems were equity accounted for 2004. 2004 Industry segments Revenues Cost of sales Selling, general and administrative expenses (10,913) (358) Earnings (loss) before the undernoted items $ 209 $ Amortization of property, plant and equipment Amortization of intangible assets and deferred charges Interest expense of operating companies Interest and other income Equity accounted investments Foreign exchange gains (loss) Stock-based compensation Derivative instruments Gains on shares of operating companies, net Acquisition, restructuring and other expenses Debt prepayment costs Writedown of goodwill and intangible assets Writedown of long-lived assets Earnings (loss) before income taxes, non-controlling (223) (45) (56) 49 – (8) (20) – – (184) (2) (388) (84) Provision for income taxes Non-controlling interests in operating companies Loss from continuing operations Earnings from discontinued operations Net earnings Total assets(b) Long-term debt (c) Property, plant and equipment additions Goodwill additions (a) Includes Radian, CEI, ONCAP and parent company. (b) Other includes discontinued operations described in note 2. (c) Long-term debt includes current portion and excludes capital leases. 102 Onex Corporation December 31, 2004 Report Electronics Manufacturing Services Theatre Exhibition Healthcare Customer Management Services Automotive Products Other (a) Consolidated Total $ 11,480 $ 356 $ 2,199 $ 730 $ 932 $ 547 $ 16,244 (271) (18) 67 (25) – (8) 1 – – – – – – – – – (1,762) (137) $ 300 $ (38) (18) (48) 8 1 – (35) – – (7) – – – $ (458) (196) 76 (41) (15) (19) 7 – 3 (1) – – (5) – (5) (2) $ (743) (39) 150 (65) – (101) 1 – 3 (14) – – (7) (5) – (8) (363) (205) (21) (24) (16) (21) 45 (9) (114) (34) 29 182 (8) (1) – – 8 (14,510) (953) 781 (416) (94) (253) 111 (8) (116) (104) 29 182 (211) (8) (393) (94) $ (594) (347) 781 (160) 195 35 $ $ $ 5,925 $ $ $ 750 180 298 $ $ $ $ 368 $ 1,537 129 23 – $ $ $ 450 39 576 $ $ $ $ 303 192 43 – $ $ $ $ 452 $ 3,224 $ 11,809 721 52 – $ $ $ 416 11 328 $ $ $ 2,658 348 1,202 interests and discontinued operations $ (752) $ 35 $ 163 $ (2) $ (46) $ N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S 2003 Industry segments Revenues Cost of sales Selling, general and administrative expenses Earnings before the undernoted items Amortization of property, plant and equipment Amortization of intangible assets and deferred charges Interest expense of operating companies Interest and other income Foreign exchange gains (loss) Stock-based compensation Gains on shares of operating companies, net Acquisition, restructuring and other expenses Debt prepayment costs Writedown of goodwill and intangible assets Writedown of long-lived assets Earnings (loss) before income taxes, non-controlling Electronics Manufacturing Services Customer Theatre Management Services Exhibition Automotive Products Other (a) Consolidated Total $ 9,382 $ (8,831) (332) $ $ 219 (240) (68) (36) 42 10 – – (128) (2) (33) (75) 336 (259) (19) 58 (23) – (3) – 4 – 113 (2) – – – $ $ 605 (399) (187) 19 (44) (16) (16) – 4 (2) – (8) – (5) (3) $ 1,394 $ $ $ (1,077) (126) 191 (80) – (128) – 1 – – (10) (9) (356) (10) 402 (293) (102) 7 (20) (7) (8) 39 (141) 16 16 (3) – (8) – $ 12,119 (10,859) $ (766) 494 (407) (91) (191) 81 (122) 14 129 (151) (11) (402) (88) interests and discontinued operations $ (311) $ 147 $ (71) $ (401) $ (109) $ (745) Provision for income taxes Non-controlling interests in operating companies Loss from continuing operations Earnings from discontinued operations Net loss Total assets(b) Long-term debt (c) Property, plant and equipment additions Goodwill additions (a) Includes Radian, ONCAP and parent company. (b) Other includes discontinued operations described in note 2. (c) Long-term debt includes current portion and excludes capital leases. Geographic segments (67) 256 (556) 224 (332) $ $ $ $ $ $ 6,645 273 234 – $ $ $ $ 359 114 47 – $ $ $ $ 338 206 26 8 $ $ $ $ 779 1,026 72 – $ $ $ $ 6,500 $ 14,621 130 8 50 $ $ $ 1,749 387 58 2004 2003 Canada U.S. Europe Other Total Canada U.S. Europe Other Total Revenue $ 2,909 $ 5,344 $ 2,838 $ 5,153 $ 16,244 $ 2,635 $ 3,412 $ 2,311 $ 3,761 $ 12,119 Property, plant and equipment Intangible assets Goodwill $ $ $ 514 113 201 $ $ $ 497 196 700 $ $ $ 343 24 $ $ 355 $ 1,709 36 $ 369 – $ 1,037 $ 1,938 $ $ $ 534 81 248 $ $ $ 465 139 130 $ $ $ 394 25 28 $ $ $ 369 57 1,067 $ $ $ 1,762 302 1,473 Revenues are attributed to geographic areas based on the locations of manufacturing facilities for the electronics manufacturing services and automotive products segments; and of operating facilities for the customer management services and theatre exhibition segments. Other includes primarily operations in Mexico, Central and South America, as well as Asia and Australia. Signiﬁcant customers of operating companies are discussed in note 23. Onex Corporation December 31, 2004 Report 103 SUMMARY HISTORICAL FINANCIAL INFORMATION The following is a summary of key consolidated ﬁnancial information of the Company for the past ﬁve ﬁscal years: Year ended December 31 (in millions of dollars except per share data) 2004 2003 2002 2001 2000 Revenues Cost of sales Selling, general and administrative expenses Earnings before the undernoted items Amortization of property, plant and equipment Amortization of goodwill, intangible assets and deferred charges Interest expense of operating companies Interest and other income Equity accounted investments Foreign exchange gains (loss) Stock-based compensation Derivative instruments Gains on shares of operating companies, net Acquisition, restructuring and other expenses Debt prepayment costs Writedown of goodwill and intangible assets Writedown of long-lived assets Earnings (loss) before income taxes, non-controlling interests and discontinued operations Recovery (provision) for income taxes Non-controlling interests of operating companies Earnings (loss) from continuing operations Earnings (loss) from discontinued operations (a) $ 16,244 $ 12,119 $ 15,911 $ 18,352 $ 16,376 (14,510) (10,859) $ (953) 781 (416) (94) (253) 111 (8) (116) (104) 29 182 (211) (8) (393) (94) (594) (347) 781 (160) 195 $ (766) 494 (407) (91) (191) 81 – (122) 14 – 129 (151) (11) (402) (88) (745) (67) 256 (556) 224 (14,004) (889) (16,200) (1,030) $ 1,018 $ 1,122 $ (510) (172) (151) 69 – 18 142 – 21 (673) (25) (425) – (688) 65 560 (63) (82) (454) (293) (194) 121 – 16 – – 164 (434) – (427) – (379) 9 230 (140) 938 (14,664) (861) 851 (275) (227) (161) 115 – 10 – – 209 (36) (3) (22) – 461 (109) (201) 151 37 Net earnings (loss) for the year $ 35 $ (332) $ (145) $ 798 $ 188 Total assets Shareholders’ equity Dividends declared per Subordinate Voting Share Earnings (loss) per Subordinate Voting Share: Continuing operations Net earnings (loss) Fully diluted $ 11,809 $ 14,621 $ 19,890 $ 20,870 $ 19,719 $ $ $ $ $ 227 0.11 (1.12) 0.25 0.25 $ $ $ $ $ 293 0.11 (3.62) (2.16) (2.16) $ $ $ $ $ 1,044 0.11 (0.39) (0.90) (0.90) $ $ $ $ $ 2,219 0.11 (0.87) 4.95 4.95 $ $ $ $ $ 1,431 0.11 0.93 1.15 1.07 (a) The earnings from discontinued operations from 2000 to 2001 include the sale of Sky Chefs. The earnings from discontinued operations from 2000 to 2003 include the sale of Lantic Sugar/Rogers Sugar and MAGNATRAX. The earnings from discontinued operations from 2000 to 2004 include the sale of Dura Automotive, Loews Cineplex Group, Cincinnati Electronics, Armtec and InsLogic. Previously reported consolidated revenues and earnings figures for the years 2000 to 2003 have been restated to classify the results of the above entities as discontinued operations. Year-end closing share price As at December 31 The Toronto Stock Exchange 2004 2003 2002 2001 2000 $ 19.75 $ 14.69 $ 16.00 $ 22.45 $ 21.90 104 Onex Corporation December 31, 2004 Report SHAREHOLDER INFORMATION Shares The Subordinate Voting Shares of the Registrar and Transfer Agent CIBC Mellon Trust Company Company are listed and traded on P.O. Box 7010 The Toronto Stock Exchange. Share symbol OCX.SV Adelaide Street Postal Station Toronto, Ontario M5C 2W9 (416) 643-5500 or call toll-free throughout Duplicate communication Registered holders of Onex Corporation shares may receive more than one copy of shareholder mailings. Every eﬀort is made to avoid duplication, but when shares are registered under diﬀerent names and/or addresses, multiple Dividends Dividends on the Subordinate Voting Shares are payable quarterly on or about January 31, April 30, July 31 and October 31 of each year. At December 31, 2004 the indicated dividend rate for each Subordinate Voting Share was $0.11 per annum. Shareholder Dividend Reinvestment Plan The Dividend Reinvestment Plan provides shareholders of record who are resident in Canada a means to reinvest cash divi- dends in new Subordinate Voting Shares of Onex Corporation at a market-related price and without payment of brokerage commissions. To participate, registered shareholders should contact Onex’ share registrar, CIBC Mellon Trust Company. Non-registered shareholders who wish to participate should contact their invest- ment dealer or broker. Corporate governance policies A presentation of Onex’ corporate governance policies is included in the Management Information Circular that is mailed to all shareholders and is available on Onex’ website. Canada and the United States mailings result. Shareholders who 1-800-387-0825 www.cibcmellon.ca or inquiries@cibcmellon.ca (e-mail) All questions about accounts, stock certiﬁcates or dividend cheques should be directed to the Registrar and Transfer Agent. Investor information Requests for copies of this report, quarterly reports and other corporate communications should be directed to: Investor Relations Onex Corporation 161 Bay Street P.O. Box 700 Toronto, Ontario M5J 2S1 E-mail: info@onex.com Website: www.onex.com Auditors PricewaterhouseCoopers llp, Toronto, Canada Chartered Accountants receive but do not require more than one mailing for the same ownership are requested to write to the Registrar and Transfer Agent and arrangements will be made to combine the accounts for mailing purposes. Shares held in nominee name To ensure that shareholders whose shares are not held in their name receive all Company reports and releases on a timely basis, a direct mailing list is maintained by the Company. If you would like your name added to this list, please forward your request to Investor Relations at Onex. Annual meeting of shareholders Onex Corporation’s Annual Meeting of Shareholders will be held on Thursday, May 12, 2005 at 10:00 a.m. (Eastern Daylight Time) at Cineplex Odeon Queensway Cinemas, 1025 The Queensway, Etobicoke, Ontario. Production by Ove Design & Communications Ltd. www.ovedesign.com Typesetting and copyediting by Moveable Inc. www.moveable.com Printed in Canada

Continue reading text version or see original annual report in PDF format above