OncoCyte Annual Report 2005

Plain-text annual report

Management’s Discussion and Analysis and Financial Statements December 31, 2005 ONEX CORPORATION Onex is a diversiﬁed company with 2005 annual revenues of $17 billion, assets of $15 billion and 138,000 employees worldwide. We operate through autonomous subsidiaries in a variety of industries, including elec- tronics manufacturing services, aerostructures manufacturing, theatre exhibition, healthcare, customer management services, automotive products, personal care products and commu- nications 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 Management’s Discussion and Analysis 50 Consolidated Financial Statements 88 Summary Historical Financial Information IBC Shareholder Information Throughout this report, all amounts are in Canadian dollars unless otherwise indicated. This report includes Onex Corporation’s Management’s Discussion and Analysis and Financial Statements for the year ended December 31, 2005. We invite you to visit our website, www.onex.com, for your complete and up-to-date source of information about Onex. 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. See how Onex has Find out about our companies. Learn about our operating performed against key principles and values, and what we do. market indices. Learn about our directors and corporate governance practices. MANAGEMENT ’S DISCUSSION AND ANALYSIS The Management’s Discussion and Analysis (“MD&A”) of ﬁnancial condition and results of operations analyzes signiﬁcant changes in the consolidated statements of earnings, con- solidated 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 con- solidated ﬁnancial statements and notes thereto on pages 50 to 87 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 infor- mation to make an investment decision in regard to any particular Onex operating company. The following MD&A is the responsibility of management and is as of February 16, 2006. The Board of Directors carries out its responsibility for review of this disclosure through its Audit and Corporate Governance Committee, comprised exclusively of indepen- dent directors. The Audit and Corporate Governance Committee reviews the disclosure and recommends its approval by the Board of Directors. The MD&A is presented in the following sections: Onex Business Objective and Strategies Industry Segments Key Performance Indicators 3 Overview 3 5 6 7 Financial Review 8 12 30 37 42 Outlook 46 Risk Management Significant Events in 2005 Consolidated Operating Results Consolidated Financial Position Liquidity and Capital Resources 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, including without limitations, those discussed on pages 8 through 12 of this MD&A. 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. 2 Onex Corporation December 31, 2005 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, aerostructures, theatre exhibition, healthcare, customer management services, automotive products, personal care products and communications infrastructure. O N E X B U S I N E S S O B J E C T I V E Onex’ business objective is to create long-term value for shareholders by acquiring and building industry-leading busi- nesses and to have that value reﬂected in the Company’s share price. O N E X S T R A T E G I E S Onex achieves its long-term objective through various strategies, which include: Industry leadership Onex looks to acquire companies that have not only exhibited leadership or the potential for leadership within their own industry but also, in our view, offer a clear opportunity to create value for shareholders. 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. Diversiﬁcation of capital Onex deliberately diversiﬁes its capital across a variety of companies and industries in order to limit its exposure to a single business or industry. This strategy enables Onex to better weather the ebbs and ﬂows of economic and/or industry business cycles. Management ownership Each member of Onex’ management team has a meaningful personal ﬁnancial interest in the Company and its operating companies. Onex believes this personal commitment aligns Onex management’s personal objective with the Company’s overall value creation objective. Onex management’s depth and breadth of experience in acquisitions, integration, strategy, negotiations and ﬁnancing support the management teams of the operating companies in building the value of their businesses. In addition, Onex believes that management of the acquired companies should share in the risk and rewards of ownership. Therefore, we look to partner with a strong and committed management team that is willing to make a sizeable personal ﬁnancial commitment to its business. During 2005, Onex’ management team and board of directors invested $55 million in the investments and acquisi- tions completed by Onex in 2005. Onex Corporation December 31, 2005 3 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 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, to support existing operating companies. At December 31, 2005, Onex had approximately $1.5 billion of cash and near-cash items. In addition, Onex has capital it can call upon through its private equity funds: • Onex Partners LP (“Onex Partners”) is a $2.1 billion (US$1.7 billion) fund in which Onex has committed $480 million (US$400 million). Onex controls the General Partner and Manager of Onex Partners; at December 31, 2005, the uncalled committed capital available through Onex Partners from other limited partners was $478 million. • ONCAP Funds – ONCAP LP (“ONCAP I”) is a $400 million private equity fund, and ONCAP II LP (“ONCAP II”) is a private equity fund targeted at $500 million; the ONCAP funds are committed to acquiring and building value in small- to medium-capitalization companies based in North America; ONCAP I’s investment commitment period expired December 2004. Onex has committed to be approximately half of ONCAP II’s total commitments; Onex controls the General Partner and Manager of ONCAP I and ONCAP II. The above private equity funds are also a source of value creation for Onex through: • Management fees – Onex receives a management fee from third-party investors in its private equity funds, Onex Partners, as well as ONCAP I and ONCAP II; and • Carried interests – Onex, as the General Partner of Onex Partners, ONCAP I and ONCAP II, also receives a carried interest on the realized gains of the third-party limited partners. Active ownership Onex believes that if a business is good enough to buy, it is good enough to be vigorously developed. Onex management works closely with the management teams of its operating companies to set strategies and assist in evaluating acquisitions and in implementing ﬁnancing arrangements. 4 Onex Corporation December 31, 2005 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 I N D U S T R Y S E G M E N T S At December 31, 2005, Onex had signiﬁcant ownership in businesses in the following industry segments: Industry Segments Companies Electronics Manufacturing Services Celestica Inc., one of the world’s largest electronics manufacturing services companies for original equipment manufacturers (“OEMs”). Aerostructures Theatre Exhibition Healthcare Spirit AeroSystems, Inc., the world’s largest Tier 1 aerostructures manufacturer. Cineplex Entertainment Limited Partnership, Canada’s largest ﬁlm exhibition company, oper- ating 130 theatres with a total of 1,275 screens under the Cineplex Odeon, Famous Players, Coliseum, Colossus, Galaxy and Silver City brands. Emergency Medical Services Corporation, a leading provider of emergency medical services, operating through American Medical Response, Inc. (“AMR”), a leading U.S. provider of ambulance transport services, and EmCare Holdings Inc. (“EmCare”), a leading U.S. provider of outsourced services for hospital emergency department physician stafﬁng and management. Center for Diagnostic Imaging, Inc., a leading provider of diagnostic and therapeutic radiology services in the United States. Skilled Healthcare Group, Inc., an organization of leading skilled nursing and assisted living facil- ity operators in the United States, speciﬁcally in California, Texas, Kansas and Nevada, whose skilled nursing and rehabilitation subsidiaries focus on treating patients requiring a high level of skilled nursing care and comprehensive rehabilitation services. Res-Care, Inc., a leading U.S. provider of residential, training, educational and support services for people with disabilities and special needs. Customer Management Services ClientLogic Corporation, a leading business process outsourcer in the contact centre and fulﬁll- ment industries; the company provides customer care services for telecommunications, consumer goods, retail, technology, transportation, ﬁnance and utility companies. Automotive Products J.L. French Automotive Castings, Inc., an independent manufacturer of aluminum die-cast com- ponents for North American and European automotive OEMs. Other Businesses • Mid-Cap Opportunities • Personal Care Products • Communications Infrastructure • Real Estate • Public Market Investments ONCAP, private equity funds focused on acquiring and building the value of small- and mid-cap North American companies, which currently manages investments in CMC Electronics Inc., Western Inventory Service Ltd., Canadian Securities Registration Systems Ltd. and CSI Global Education Inc. (acquired in January 2006). 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; the company’s products include fragrances, crèmes, lotions and colour cosmetics. Radian Communication Services Corporation, a North American wireless communications infra- structure and network services company. Onex Real Estate Partners LP, a partnership dedicated to acquiring and improving real estate assets in North America. Onex Public Markets Group, a limited partnership focused on investing in securities of publicly- traded North American companies in a variety of industries in order to generate long-term capital appreciation and dividends. Onex Corporation December 31, 2005 5 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 K E Y P E R F O R M A N C E I N D I C A T O R S A key strategy in acquiring an operating company is to do so in partnership with that company’s management team. Onex believes that each operating company’s management team is most familiar with its industry and therefore is the best manager of its business. While Onex management provides its support in areas such as strategy, acquisitions and ﬁnancing, Onex does not get involved in the day-to-day activities of its businesses. We believe the best way to monitor the performance of each of our businesses is to assess each company’s growth in revenues and operating earnings (as deﬁned on page 20), as well as to track the progress toward achieving the annual initiatives as developed in the operating budget for each business. Onex believes that operating earnings, while a non-GAAP measure, provides a particularly relevant and consistent basis for assessing each operating company’s performance because it eliminates interest charges, which are a function of the particular ﬁnancing structure, as well as any unusual charges. Revenues and operating earnings are both discussed in further detail in this MD&A on pages 12 and 20, respectively. 6 Onex Corporation December 31, 2005 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 the significant changes in Onex’ consolidated statements of earnings, consolidated balance sheets and consolidated statements of cash flow for the fiscal year ended December 31, 2005 compared to those for the year ended December 31, 2004 and in selected areas to those for the year ended December 31, 2003. Accounting policies and estimates Onex prepares its ﬁnancial statements in accordance revenues, operating expenses, capital expenditures and discount rates. When an impairment test is undertaken, with Canadian generally accepted accounting principles the underlying assumptions are re-evaluated and could (“GAAP”). give rise to future impairment charges. Included in Onex’ The preparation of the ﬁnancial statements in audited annual consolidated ﬁnancial statements for the conformity with Canadian GAAP requires management to year ended December 31, 2005 is a writedown of good- make estimates and assumptions that affect the reported will and intangible assets of $3 million and a $5 million amounts of assets and liabilities, disclosures of contingent writedown of long-lived assets related to Onex’ operating assets and liabilities, and the reported amounts of rev- companies. Notes 18 and 19 to the audited annual consoli- enues and expenses for the period of the consolidated dated ﬁnancial statements also provide information on ﬁnancial statements. Signiﬁcant accounting policies and these charges. methods used in preparation of the ﬁnancial statements are described in note 1 to the audited annual consolidated Income tax valuation allowance ﬁnancial statements. Onex and its operating companies An income tax valuation allowance is recorded against evaluate their estimates and assumptions on a regular future income tax assets when it is more likely than not basis, based on historical experience and other relevant that some portion or all of the future income tax assets factors. Included in Onex’ consolidated ﬁnancial state- recognized will not be realized prior to their expiration. ments are estimates used in determining allowance for The reversal of future income tax liabilities, projected doubtful accounts, inventory valuation, the useful lives future taxable income, the character of income tax assets, of property, plant and equipment and intangible assets, tax planning strategies and changes in tax laws are some revenue recognition under contract accounting, pension of the factors taken into consideration when determining and post-employment beneﬁts, restructuring costs and the valuation allowance. A change to these factors could other matters. Actual results could differ materially from affect the estimated valuation allowance and income those estimates and assumptions. tax expense. Note 20 to the audited annual consolidated The assessment of goodwill, intangible assets and ﬁnancial statements provides additional disclosure on long-lived assets for impairment, the determination of income taxes. income tax valuation allowances and contract accounting require the use of judgments, assumptions and estimates. Contract accounting Due to the material nature of these factors, they are dis- In the aerostructures segment, the contract method of cussed here in greater detail. accounting requires that revenues from each contract be recognized in accordance with the percentage-of-comple- Goodwill, intangible assets and long-lived assets tion method of accounting. As a result, contract accounting impairment tests uses various estimating techniques to project costs to com- The impairment tests of goodwill, intangible assets and pletion and estimates of recoveries asserted against the cus- long-lived assets involve consideration of future cash ﬂows tomer for changes in speciﬁcations. These estimates involve and fair values of individual assets, groups of assets or assumptions of future events, including the quantity and reporting units. The process of determining fair value and timing of deliveries and labour performance and rates, as future cash ﬂows is subjective and requires management well as projections relative to material and overhead costs. of the particular operating companies to exercise judgment Contract estimates are re-evaluated periodically and changes in making assumptions about future results, including in estimates are reﬂected in the current and future periods. Onex Corporation December 31, 2005 7 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 2005, Onex’ operating company Spirit Financial instruments – presentation and disclosure AeroSystems, Inc. (“Spirit AeroSystems”) recognized rev- In December 2004, Onex adopted the amendment to the enues under the contract method of accounting, using Canadian Institute of Chartered Accountants Handbook the units-of-delivery method. The company follows this (“CICA Handbook”) Section 3860, “Financial Instruments – method of accounting as a signiﬁcant portion of its rev- Presentation and Disclosure”. The amendment required enues are under long-term, volume-based pricing con- obligations of a ﬁxed amount that may be settled, at the tracts that require delivery of products over several years. issuer’s option, by a variable number of the issuer’s own Investment company equity to be presented as liabilities. Therefore, any secu- rities issued by an enterprise that give the issuer unre- During 2005, Onex formed OPMG LP (“OPMG” or “Onex stricted rights to settle the principal amount in cash or Public Markets Group”) to invest in public companies. the equivalent value of its own equity instruments will OPMG acquires non-controlling positions in these invest- no longer be presented as equity. This amendment is ments and thus, under the Canadian Institute of Chartered applicable on a retroactive basis with restatement of prior Accountants (“CICA”) Accounting Guideline 18, “Invest- periods. As a result of adopting this standard, Onex ment Companies”, the investments of OPMG are recorded reclassiﬁed $149 million of the principal component of at fair value and are included in investments and other convertible debt issued by one of its operating companies assets in Onex’ audited annual consolidated balance sheet. from non-controlling interests liability to long-term debt Included in income in Onex’ audited annual consolidated as at December 31, 2004. statement of earnings for the year ended December 31, 2005 is $10 million of net realized gains recorded by OPMG. S I G N I F I C A N T E V E N T S I N 2 0 0 5 Development costs A number of signiﬁcant events occurred during the year Included in the deferred charges on Onex’ audited annual that affected Onex’ consolidated results for 2005 and their consolidated balance sheet are capitalized development comparability to results for 2004. These events are dis- costs of Spirit AeroSystems primarily associated with that cussed below. company’s product development on Boeing’s 787 aircraft. These development costs will be amortized over the life of Acquisition of Center for Diagnostic Imaging, Inc. the contract for the products developed. In early January 2005, Onex completed the acquisition of New accounting policies Consolidation of variable interest entities Center for Diagnostic Imaging, Inc. (“CDI”), a leading provider of diagnostic and therapeutic radiology services in the United States. This transaction was valued at approxi- The CICA issued Accounting Guideline 15, “Consolidation mately $225 million, including $88 million of equity funded of Variable Interest Entities”, which was applicable for by Onex and Onex Partners LP (“Onex Partners”) for an Onex beginning in January 2005. Variable interest entities 84 percent ownership interest. Of the total equity, Onex’ (“VIEs”) are entities that have insufﬁcient equity and/or share was $21 million for a 20 percent ownership interest. their equity investors lack one or more speciﬁed essential CDI operates 35 diagnostic imaging centres in characteristics of a controlling ﬁnancial interest. This nine markets in the United States that provide services guideline provides speciﬁc guidance for determining when such as magnetic resonance imaging (“MRI”), computed an entity is a VIE, and who, if anyone, should consolidate tomography (“CT”), diagnostic and therapeutic injection the VIE. The adoption of this guideline did not have a procedures, as well as other procedures such as PET/CT, material effect on the audited annual consolidated ﬁnan- conventional x-ray, mammography and ultrasound. CDI’s cial statements. 8 Onex Corporation December 31, 2005 operations have been consolidated and reported in the healthcare segment from the date of acquisition. Note 3 to the audited annual consolidated ﬁnancial statements provides additional information on this acquisition. 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 Sale of InsLogic Corporation ﬁnancial statements provides additional information on In early January 2005, Onex sold InsLogic Corporation this acquisition. (“InsLogic”) for net cash proceeds of $22 million. Onex formed InsLogic in 1999 to provide technology-enabled pri- EMSC initial public offering vate-label insurance brokerage services. During the period In mid-December 2005, EMSC completed an initial public of its ownership, Onex invested a total of $52 million in both offering of Class A common shares (NYSE: EMS), repre- equity and debt. Due to the losses Onex recorded from senting a 19.5 percent interest in the company, for net pro- InsLogic in prior years, the business had a negative carrying ceeds of US$102 million. After this offering, Onex, Onex value for accounting purposes at the time of the sale. As Partners and certain of its limited partners continued to a result, Onex recorded an accounting gain of $73 million hold 32.1 million Class A common shares of EMSC, repre- for the year ended December 31, 2005. This gain has been senting a 77 percent ownership interest in the company. reported in earnings from discontinued operations in Onex’ Onex did not sell any of its interest in EMSC in the offering. audited annual consolidated ﬁnancial statements for 2005. A consolidated non-cash accounting dilution gain of $40 mil- Sale of CGG investment lion was recorded, of which Onex’ share was $15 million. This reﬂects Onex’ share of the excess of the proceeds from Onex sold all of its convertible subordinated bonds of the offering over Onex’ carrying value for the portion of Compagnie Générale de Géophysique (“CGG”) in three sep- the business issued in the public offering. arate transactions in the ﬁrst and second quarters of 2005. Onex and Onex Partners received total proceeds of $145 mil- Acquisition of Skilled Healthcare lion, of which Onex’ share was approximately $34 million. In late December 2005, Onex acquired Skilled Healthcare As a result of this sale, a pre-tax gain of $41 million was Group, Inc. (“Skilled Healthcare”) in a transaction valued recorded in 2005, of which Onex’ share was $9 million. These at approximately $745 million. Onex and Onex Partners gains are reported in gains on sales of operating investments invested $243 million for a 93 percent ownership interest. in Onex’ audited annual consolidated statement of earnings Onex’ share of this investment was $57 million for a for the year ended December 31, 2005. The total value Onex 22 percent ownership interest. Skilled Healthcare’s subsid- and Onex Partners received on CGG amounted to $146 mil- iaries, operating a total of 68 skilled nursing and assisted lion, including interest, compared to an investment of living facilities in California, Texas, Kansas and Nevada, approximately $102 million made in November 2004. focus on treating patients who require a high level of skilled nursing care and extensive rehabilitation therapy. Purchase of U.S. healthcare companies The company’s subsidiaries also provide rehabilitation In February 2005, Onex completed the acquisition of therapy services at its afﬁliated facilities and for third par- American Medical Response, Inc. (“AMR”) and EmCare ties. Skilled Healthcare has recently established a growing Holdings Inc. (“EmCare”) in a transaction valued at approx- subsidiary hospice care business. imately $1 billion. Onex, Onex Partners and certain of Skilled Healthcare’s results are reported in the its limited partners invested $266 million of equity for a healthcare segment in Onex’ audited annual consolidated 97 percent ownership interest. Onex’ portion of the equity ﬁnancial statements. The company’s operating results for was $100 million for an ownership interest of 36 percent. the four days from the date of acquisition on December 27, AMR is a leading U.S. provider of ambulance 2005 to December 31, 2005 were not signiﬁcant to Onex’ transport and emergency medical response services. audited annual consolidated results and therefore, were EmCare is a leading provider of outsourced services for not consolidated in the audited annual statement of hospital emergency department physician stafﬁng and earnings for the year ended December 31, 2005. However, management. Onex formed Emergency Medical Services included in Onex’ consolidated balance sheet at Decem- Corporation (“EMSC”) as the parent company of AMR ber 31, 2005 are Skilled Healthcare’s assets of $925 million and EmCare. EMSC’s operations have been consolidated and reported in the healthcare segment from the date of acquisition. Note 3 to the audited annual consolidated and liabilities of $682 million. Note 3 to the audited annual consolidated ﬁnancial statements provides additional information on this acquisition. Onex Corporation December 31, 2005 9 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 Settlement of Celestica exchangeable debentures and forward sales agreements Acquisition of Boeing’s Wichita-Tulsa commercial aerostructures manufacturing operations In February 2005, Onex redeemed its debentures that In mid-June 2005, Onex completed the acquisition of The were exchangeable for Celestica Inc. (“Celestica”) subordi- Boeing Company’s (“Boeing”) commercial aerostructures nate voting shares, recording a non-cash, pre-tax gain of manufacturing operations in Kansas and Oklahoma in $560 million as a result of the redemption. Onex received the a transaction valued at $1.5 billion. Onex, Onex Partners cash for these exchangeable debentures when it entered into and a number of limited partners invested $464 million these arrangements in 2000. The redemption was under- of equity in Spirit AeroSystems, the newly formed com- taken to eliminate Onex’ annual interest expense of $11 mil- pany that acquired the Boeing assets. Onex’ portion of that lion associated with the debentures. The aggregate principal investment was $134 million for a 29 percent ownership amount of the debentures was $729 million and, in accor- interest. Spirit AeroSystems is now the world’s largest dance with the terms of the debentures, Onex satisﬁed this Tier 1 aerostructures manufacturer. The company oper- obligation through the delivery of 9.2 million Celestica sub- ates from 12 million square feet of facilities and offers ordinate voting shares. The number of shares was based industry-leading manufacturing and design expertise in a upon the ﬁxed exchange rates provided for under the terms broad range of products and services for aircraft original of the debentures. Onex converted 9.2 million Celestica multiple voting shares into Celestica subordinate voting equipment manufacturers (“OEMs”) and operators. Spirit AeroSystems operations have been consolidated and reported shares to facilitate the redemption. The exchange was a non- in a new reportable segment – Aerostructures – from the cash transaction except for an early termination premium of date of acquisition. Note 3 to the audited annual consoli- $12 million that was netted against the recorded gain of dated ﬁnancial statements provides additional informa- these exchangeable debentures and accrued interest, both tion on this acquisition. of which were paid in cash. In early June 2005, Onex settled its forward Cineplex Entertainment acquires the sales agreements relating to subordinate voting shares of Famous Players theatre exhibition circuit Celestica and recorded a pre-tax gain of $191 million on In July 2005, Cineplex Galaxy Limited Partnership (“CGLP”) the settlement based on the carrying value at the time of acquired the Famous Players movie exhibition business sale. Onex elected to settle the forward sales agreements in a transaction valued at $473 million. Famous Players by delivering 1.8 million Celestica subordinate voting operated a total of 80 theatres with 785 screens across shares, based upon the forward sale prices provided for Canada. This acquisition was ﬁnanced through: (i) the pub- under the terms of the agreements, which were entered lic offering of $110 million of trust units of Cineplex Galaxy into in 2000. Onex received $222 million in cash on the set- Income Fund (“CGIF”), the entity through which the public tlement of the forward sales agreements. These forward invests in CGLP; (ii) the issuance of $105 million of convert- sales agreements were closed out in order to eliminate the ible debentures by CGIF; and (iii) third-party debt ﬁnancing. annual spread cost of approximately $2 million associated The issuance of additional trust units by CGIF diluted Onex’ with these agreements. Onex converted 214,314 Celestica ownership in CGLP to 27 percent from 31 percent and multiple voting shares into Celestica subordinate voting resulted in a $53 million accounting dilution gain being shares to facilitate the forward sales agreement settlement. recorded, of which Onex’ share was $30 million. Onex continues to hold 27.3 million multiple In early October 2005, CGLP changed its name voting shares of Celestica, excluding shares held in to Cineplex Entertainment Limited Partnership (“Cineplex connection with the Onex Management Investment Plan Entertainment”) in recognition of the larger operations investment rights, which represent equity and voting resulting from the Famous Players acquisition. Now Canada’s interests in Celestica of approximately 12 percent and largest ﬁlm exhibition company, Cineplex Entertainment 78 percent, respectively. 10 Onex Corporation December 31, 2005 owns, operates or has an interest in 130 theatres with 1,275 screens. As part of the regulatory approvals to address competition concerns for the Famous Players acquisition, Cineplex Entertainment agreed to divest and not operate 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 a total of 34 theatres located in Ontario, Quebec and The comparative 2004 results of Magellan have Western Canada. As a result, Cineplex Entertainment been reclassiﬁed to be presented as discontinued. Note 2 reported the operations of all 34 theatres as discontinued to the audited annual consolidated ﬁnancial statements operations in Onex’ audited annual consolidated ﬁnancial discloses the assets and liabilities in the December 31, statements. As of December 31, 2005, Cineplex Entertain- 2004 balance sheet that have been restated to be shown ment had sold 27 of these theatres for gross proceeds of as discontinued. $83 million. The company continues to work toward selling the remaining seven theatres. In addition, the company CMC Electronics’ sale of its NovAtel shares announced its intention to sell its interests in the Alliance During 2005, ONCAP’s subsidiary, CMC Electronics Inc. Atlantis brand theatres and therefore, also reported these (“CMC Electronics”), sold all of its remaining shares of theatres as discontinued in 2005. During 2005, Cineplex NovAtel Inc. (“NovAtel”) for net proceeds of $153 million. Entertainment sold two Alliance Atlantis brand theatres. As a result of this sale, Onex recorded an after-tax gain of The comparative 2004 results of the CGLP theatres $45 million. that have been or are intended to be sold, as well as the The results of NovAtel have been presented as dis- Alliance Atlantis brand theatres, have been reclassiﬁed to continued operations in Onex’ audited annual consoli- be presented as discontinued. Note 2 to the audited annual dated ﬁnancial statements. The comparative 2004 full-year consolidated ﬁnancial statements discloses the assets and results of NovAtel have also been reclassiﬁed and pre- liabilities in the December 31, 2005 and 2004 balance sheets sented as discontinued. Note 2 to the audited annual con- that have been restated to be shown as discontinued. solidated ﬁnancial statements discloses the assets and liabilities in the December 31, 2004 balance sheet that have Sale of remaining Commercial Vehicle Group shares been restated to be shown as discontinued. In July 2005, Onex sold its remaining 4.2 million common shares of Commercial Vehicle Group, Inc. (“CVG”) as Futuremed initial public offering part of that company’s public offering. Onex received In early January 2006, ONCAP I’s subsidiary, Futuremed $81 million in net proceeds and recorded a pre-tax gain of Health Care Products L.P. (“Futuremed”), completed a $79 million. As a result of this sale, CVG’s operations, $120 million initial public offering. In the offering, ONCAP including the gain, have been presented as discontinued I sold all of its Futuremed shares. Including prior distribu- operations in Onex’ audited annual consolidated ﬁnancial tions, ONCAP I has received net proceeds of $99 million statements for the year ended December 31, 2005 and compared to its investment in Futuremed of $25 million prior periods have been restated to report the comparative made in February 2004. Onex’ share of those proceeds was results of CVG on a discontinued basis. The total value $31 million. Onex has received on CVG was $166 million compared to Onex has presented Futuremed’s results as discon- an investment of $69 million. Sale of Magellan Health Services tinued operations in the audited annual consolidated ﬁnan- cial statements for the year ended December 31, 2005, since at the time of ﬁling Futuremed’s registration statement in In three separate transactions in May, June and November December 2005 management of ONCAP had determined of 2005, Onex and Onex Partners sold all of their interests that it would sell the majority of its holdings in Futuremed; in Magellan Health Services, Inc. (“Magellan”) for total the comparative fiscal 2004 results of Futuremed have also proceeds of $302 million; Onex’ portion of the sale was been reclassified to be presented as discontinued. $81 million, including $10 million for Onex’ portion of the Note 2 to the audited annual consolidated ﬁnancial carried interest. As a result of this sale, Onex recorded a net statements discloses the assets and liabilities in the Decem- after-tax gain of $22 million. This gain, as well as the opera- ber 31, 2005 and 2004 balance sheets that have been restated tions up to the date of when Onex ceased to have control of to be shown as discontinued. Magellan in early May 2005, have been reported as discon- tinued operations in Onex’ audited annual consolidated ﬁnancial statements. Onex Corporation December 31, 2005 11 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 Share repurchases under Onex’ Normal Course Issuer Bids the Canadian dollar; the change in market value of stock- based compensation; and activities at Onex’ operating Onex’ shareholders’ equity at December 31, 2005 has been companies. These activities may include the purchase or reduced for the effect of Onex’ repurchases of its Subor- sale of businesses; ﬂuctuations in customer demand and dinate Voting Shares under the Company’s Normal Course materials and employee-related costs; changes in the mix Issuer Bids. During 2005, Onex repurchased 939,200 Sub- of products and services produced or delivered; and ordinate Voting Shares at a total cost $18 million. This com- charges to restructure operations. The discussion that fol- pares to 9,143,100 Subordinate Voting Shares repurchased lows identiﬁes some of the material factors that affected at a total cost of $150 million in 2004. Onex’ operating segments and Onex’ audited annual con- Lower U.S. dollar to Canadian dollar exchange rate Most of Onex’ operating companies are based in the United The statement of earnings for the year ended December 31, 2004 has been restated from that previously States or report in U.S. dollars. As Onex reports its consoli- reported in accordance with required accounting policies dated ﬁnancial results in Canadian dollars, the movement for discontinued operations of those businesses that were of the U.S. dollar to the Canadian dollar exchange rate intended to be or were sold in 2005. These include the solidated results for the year ended December 31, 2005. directly affects Onex’ audited annual consolidated state- operations of: ments of earnings and audited annual consolidated balance • Magellan; sheets. The U.S. dollar’s average value was 1.2114 Canadian • CVG; dollars for the year ended December 31, 2005 compared to 1.3013 Canadian dollars for the year ended December 31, • CMC Electronics’ NovAtel subsidiary; • Cineplex Entertainment’s theatres that are intended to be 2004. The lower U.S. dollar to Canadian dollar exchange sold or have been sold; and rate used to convert Onex’ U.S.-based operating companies’ • Futuremed. results is a factor in the variance of the 2005 full-year con- solidated results compared to 2004. In addition, Onex, the parent company, holds a Consolidated revenues Consolidated revenues were signiﬁcant portion of its cash in U.S. dollars. The revalua- $16.6 billion in 2005, up 21 per- tion of the U.S.-dollar-denominated cash held based on cent from $13.6 billion in 2004 the current exchange rate has resulted in an exchange loss and up 42 percent from $11.6 bil- T O TA L R E V E N U E S ($ millions) 16,559 of $31 million being recorded for the year ended Decem- lion in 2003. A breakdown of the ber 31, 2005. This compares to a loss of $124 million percentage of total revenues by 13,639 11,639 recorded for 2004. industry segment is provided in the charts on the following page 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 for the years ended December 31, 2005, 2004 and 2003. This section should be read in conjunction with Onex’ audited annual consolidated statements of earnings and the corresponding notes thereto. Variability of results Onex’ audited 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 12 Onex Corporation December 31, 2005 05 04 03 U.S. Canada Europe Other(a) 37% 14% 14% 35% 21% 20% 21% 38% 27% 22% 19% 32% (a) Other includes primarily operations in Central and South America, Asia and Australia. 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 Segmented Total Consolidated Revenue Breakdown 20 0 5 20 0 4 2 0 03 a. 62% b. 9% c. 3% d. 13% e. 4% f. 3% x. 6% a. 84% c. 2% e. 6% f. 5% x. 3% a. 81% c. 3% e. 5% f. 8% x. 3% a. Electronics Manufacturing Services b. Aerostructures c. Theatre Exhibition d. Healthcare e. Customer Management Services f. Automotive Products x. Other (1) (1) 2005 other includes CEI, Radian, ONCAP, Onex Real Estate, Onex Public Markets Group and parent company. 2004 and 2003 includes Radian, ONCAP and parent company. In addition, table 1 presents revenues by industry functional currencies is useful in evaluating the perfor- segment in Canadian dollars and in the functional cur- mance of those businesses year-over-year since it eliminates rencies of the companies for 2005, 2004 and 2003 and the impact of foreign currency translation on revenues. the percentage change in revenues for those periods. Onex The discussion that follows will review the factors that believes that reporting revenues in the operating companies’ affected the change in revenues by industry segment. Changes in Revenues by Industry Segment TABLE 1 ($ millions) Canadian Dollars Functional Currency 2005 2004 Change (%) 2005 2004 Change (%) Electronics Manufacturing Services $ 10,257 $ 11,480 Aerostructures Theatre Exhibition Healthcare Customer Management Services Automotive Products Other (a) Total 1,436 491 2,126 715 584 950 – 318 – 730 691 420 $ 16,559 $ 13,639 (11)% – 55 % – (2)% (15)% 126 % 21 % US$ 8,471 US$ 1,206 C$ 491 US$ 1,758 US$ 591 US$ 482 C$ 950 US$ 8,840 – C$ 318 – US$ 562 US$ 530 C$ 420 (4)% – 55 % – 5 % (9)% 126 % 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 CEI, Radian, ONCAP, Onex Real Estate, Onex Public Markets Group and parent company. ($ millions) Canadian Dollars Functional Currency 2004 2003 Change (%) 2004 2003 Change (%) Electronics Manufacturing Services $ 11,480 $ 9,382 Theatre Exhibition Customer Management Services Automotive Products Other (a) Total 318 730 691 420 296 605 992 364 $ 13,639 $ 11,639 22 % 7 % 21 % (30)% 15 % 17 % US$ 8,840 C$ 318 US$ 562 US$ 530 C$ 420 US$ 6,735 C$ 296 US$ 433 US$ 706 C$ 364 31 % 7 % 30 % (25)% 15 % 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 CEI, Radian, ONCAP and parent company. Onex Corporation December 31, 2005 13 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 reported revenues of $10.3 billion in 2005 (62 percent of Onex’ total consolidated rev- E L E C T R O N I C S M A N U FA C T U R I N G S E R V I C E S ($ millions) 11,480 In addition, the Asia region, which increased revenues by 44 percent in 2004, beneﬁtted from its expanded manu- facturing capabilities and the transfer of programs from Celestica’s higher-cost operations. enues in 2005), an 11 percent de- 10,257 9,382 cline from $11.5 billion in 2004 (84 percent of Onex’ total consol- idated revenues in 2004). In the company’s functional currency, Celestica reported revenues of US$8.5 billion in 2005, down 4 percent from US$8.8 billion in 2004. Revenues declined 18 per- cent in the Americas and 17 per- cent in Europe, while revenue in Asia increased 14 percent. The decline in the Americas and Europe was due primarily to lower volumes and the transfer 05 04 03 U.S. Canada Europe Other(a) 13% 13% 18% 56% 17% 18% 21% 44% 21% 20% 19% 40% (a) Other includes primarily operations in Central and South America, Asia and Australia. Aerostructures The aerostructures segment is a new reportable segment in 2005 following Onex’ acquisition of Boeing’s commercial aero- structures manufacturing operations in mid-June 2005; the business now operates as Spirit AeroSystems. Reported 2005 rev- enues for Spirit AeroSystems from the time of its acquisition totalled $1.4 billion in 2005 (9 percent of Onex’ total consolidated revenues in 2005). In the company’s func- tional currency, Spirit AeroSystems reported revenues of US$1.2 billion. The company designs and manufactures a broad range of products and services for aircraft OEMs and A E R O S T R U C T U R E S ($ millions) 1,436 05 U.S. Canada Europe Other 100% – – – of programs to lower-cost geographies. Asia beneﬁtted operators. Spirit AeroSystems currently has from its expanded manufacturing capabilities, improved long-term agreements to supply Boeing demand, new customers and the transfer of programs with a variety of components for its 737, 747, from higher-cost geographies. Approximately one-third of 767, 777 and 787 aircraft platforms. These include fuselage the revenue increase in Asia resulted from the transfer of sections, struts, nacelles, nose sections and wing compo- programs. Revenue from acquisitions was insigniﬁcant nents, as well as after-market spares and repair support. for the year. For the year ended December 31, 2004, Celestica reported revenues of $11.5 billion, a 22 percent increase Theatre Exhibition The theatre exhibition segment includes the operations of from $9.4 billion in 2003 (81 percent of Onex’ total consoli- Cineplex Entertainment and Cineplex Odeon Corporation, dated revenues in 2003). Excluding the impact of foreign which owns a small number of theatres and real estate currency translation, the company reported revenues in properties not included in Cineplex Entertainment. We its functional currency of US$8.8 billion, up 31 percent refer to Cineplex Entertainment and Cineplex Odeon from US$6.7 billion in 2003. Revenues increased due to Corporation collectively as Cineplex. Cineplex generates improved base business volumes from some of Celestica’s revenues primarily from box-ofﬁce and concession sales top customers and new business wins, which collectively that are affected by attendance levels and changes in the accounted for a 17 percent increase in revenue. Revenues average per patron admission and concession revenues. from the acquisitions of Manufacturers’ Services Limited Attendance levels are affected by the commercial appeal of (“MSL”) in March 2004 and NEC Corporation’s operations in the Philippines in April 2004 contributed a further the ﬁlms released and the successful marketing and pro- motion of those ﬁlms by the ﬁlm studios and distributors. 14 percent increase in revenues. All the company’s regions – Theatres opened or closed and acquisitions or dispositions the Americas, Europe and Asia – increased revenues year- of theatres in the year will also affect revenues. over-year as they beneﬁtted from new business wins from existing and new customers and from acquisition revenue. 14 Onex Corporation December 31, 2005 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 Cineplex reported rev- enues of $491 million for 2005 (3 percent of Onex’ total con- solidated revenues in 2005), up 55 percent from revenues of $318 million reported in 2004 (2 percent of Onex’ total con- solidated revenues in 2004). The acquisition of Famous Players in July 2005 accounted for $183 mil- lion of the total revenue growth and new theatre openings in 2005 provided $7 million in box-ofﬁce and concession revenues. Ex- cluding acquisition growth from Famous Players, box-ofﬁce rev- enue decreased $13 million in T H E AT R E E X H I B I T I O N ($ millions) 491 Healthcare The healthcare segment revenues include the operations of Emergency Medical Ser- H E A LT H C A R E ($ millions) vices (“EMSC”), Center for Diagnostic 2,126 318 296 05 04 03 U.S. Canada Europe Other – 100% – – – 100% – – – 100% – – Imaging (“CDI”) and Skilled Healthcare. The healthcare segment reported consoli- dated revenues of $2.1 billion in 2005 (13 percent of Onex’ total consolidated revenues in 2005). There are no compara- tive revenues for 2004 and 2003 since all of the businesses in the healthcare segment were acquired in 2005. Table 2 provides revenues by operating company in the healthcare segment for 2005 in both Cana- dian dollars and the companies’ func- tional currencies. ResCare is accounted for by the equity method and thus the com- 05 U.S. Canada Europe Other 100% – – – 2005 as a result of lower attendance and a decline in aver- pany’s revenues are not consolidated. age box-ofﬁce revenue per patron. The lower average box- ofﬁce revenue per patron was due to a shift in attendance Healthcare Revenues(a) mix to lower-priced admission categories; this resulted primarily from the ﬁlms released in 2005 catering more to TABLE 2 ($ millions) children and young adults at lower average ticket prices, as well as the effect of selected price reductions implemented in late 2004. Emergency Medical Services Center for Diagnostic Imaging During 2004, Cineplex reported revenues of $318 million, up 7 percent from $296 million in 2003 Total Canadian Dollars Functional Currency 2005 2005 $ 2,002 US$ 1,656 124 US$ 102 $ 2,126 US$ 1,758 (3 percent of Onex’ total consolidated revenues in 2003). The revenue growth was due primarily to additional rev- Results are reported in accordance with Canadian generally accepted accounting principles. These results may differ from those reported by the individual enues from the inclusions of new theatres ($19 million), operating companies. an improvement in average admission and concession (a) Skilled Healthcare’s financial results for the four days from the date of revenues per patron, partially offset by decreased atten- dance levels. acquisition on December 27, 2005 to December 31, 2005 were not significant to Onex’ consolidated results. Accordingly, the company’s revenues for those four days were not included in Onex’ consolidated audited statement of earnings for the year ended December 31, 2005. Onex Corporation December 31, 2005 15 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 Emergency Medical Services four days from its December 27, 2005 acquisition date to EMSC, acquired in February 2005, is a leading provider December 31, 2005 were not signiﬁcant to Onex’ consoli- of emergency medical services in the United States. dated results. Accordingly, Skilled Healthcare’s revenues The company operates its business under the AMR and are not included in the healthcare segment of Onex’ con- EmCare brands. AMR is a leading provider of ambulance solidated revenues for the year ended December 31, 2005. transport services in the United States. EmCare is a leading provider of outsourced emergency department stafﬁng and management services in the United States. During the Customer Management Services ClientLogic Corporation (“ClientLogic”) reported revenues period of our ownership, the company reported revenues of $715 million in 2005 (4 percent of Onex’ total consoli- of $2.0 billion, or US$1.7 billion in the company’s func- dated revenues in 2005), down slightly from $730 million tional currency. in 2004 (6 percent of Onex’ total Of the total revenues reported in 2005, AMR gener- consolidated revenues in 2004). ated approximately US$1.1 billion of those revenues from Excluding the impact of for- emergency 911 ambulance transport services, non-emer- eign currency translation, Client- gency ambulance transport services, including critical care Logic’s revenues grew 5 percent transfer, wheelchair transports and other inter-facility to US$591 million in 2005 from transports. Revenues were also from the provision of US$562 million in 2004. Cus- training, dispatch centres and other services to com- tomer contact management rev- munities and public safety agencies. EmCare contributed enue grew US$46 million due to US$596 million in revenues from its hospital contracts for the expansion of business from emergency department stafﬁng, hospitalist and radiology existing customers of US$34 mil- services and other management services. Revenues for lion, and US$44 million from 2005 exceeded our expectations, in part due to unplanned new customers. Partially offset- revenues stemming from the high level of relief efforts ting this growth was the loss of provided following hurricanes Katrina and Rita. business from two customers Center for Diagnostic Imaging in the fourth quarter of 2004, which provided US$32 million of CDI, acquired in early January 2005, is a leading provider of revenues in 2004. In addition, ful- diagnostic and therapeutic radiology services in the United ﬁllment and marketing services States. Reported revenues for CDI totalled $124 million revenues were lower by US$17 mil- in 2005. Excluding the impact of foreign currency transla- lion in 2005 compared to 2004. C U S T O M E R M A N A G E M E N T S E R V I C E S ($ millions) 715 730 605 05 04 03 U.S. Canada Europe Other(a) 44% 10% 36% 10% 47% 10% 36% 7% 50% 8% 41% 1% (a) Other includes primarily operations in Central and South America, Asia and Australia. tion, CDI reported revenues of US$102 million in 2005. For the year ended December 31, 2004, revenues The company operates 35 diagnostic imaging centres in for ClientLogic grew 21 percent to $730 million from $605 nine markets in the United States. CDI’s imaging services million in 2003 (5 percent of Onex’ total consolidated rev- include MRI, CT, diagnostic and therapeutic injection pro- enues in 2003). In the company’s local currency and cedures and other procedures such as PET/CT, conven- Canadian GAAP, ClientLogic’s revenues grew 30 percent tional x-ray, mammography and ultrasound. to US$562 million in 2004 from US$433 million in Skilled Healthcare 2003. ClientLogic’s acquisition of Service Zone, Inc. in late December 2003 contributed US$75 million of the revenue Skilled Healthcare is a leading operator of skilled nursing growth in North America. In addition, net new business and assisted living facilities in California, Texas, Kansas wins with clients such as DirecTV and Bell Canada pro- and Nevada, focused on treating patients who require vided US$31 million, or 24 percent, of the revenue growth a high level of skilled nursing care and extensive rehabil- in 2004 over 2003. itation therapy. The company’s ﬁnancial results for the 16 Onex Corporation December 31, 2005 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. (“J.L. French Auto- Other Businesses Mid-Cap Opportunities motive”) reported a 15 percent decline in revenues to ONCAP’s companies – CMC Electronics, Western Inventory $584 million in 2005 (3 percent of Onex’ total consolidated Service Ltd. (“Western”) and Canadian Securities Regis- revenues in 2005) from $691 million in 2004 (5 percent tration Systems Ltd. (“CSRS”) – reported combined revenues of Onex’ total consolidated revenues in 2004). In the of $501 million in 2005 (3 percent of Onex’ total consolidated company’s functional currency, J.L. French Automotive’s revenues in 2005), up $196 million from $305 million revenues decreased 9 percent to US$482 million in 2005 from US$530 million in 2004. The com- pany’s revenues were affected by the overall production decline in the North American car and light truck markets by North American automotive compa- nies – General Motors, Ford and DaimlerChrysler. J.L. French Automotive reported revenues of $691 million in 2004, down 6 percent from $732 million in 2003 (6 percent of Onex’ total consolidated rev- enues in 2003). Excluding the impact of foreign currency trans- lation, the company reported a 2 percent increase in revenues to US$530 million in 2004 from US$521 million in 2003. Approx- imately US$5 million of the rev- A U T O M O T I V E P R O D U C T S ($ millions) reported in 2004 (2 percent of Onex’ total consolidated revenues in 2004). Much of the revenue growth for 2005 was due to the April 2005 acquisition by Western of Wash- 992(b) ington Inventory Service Ltd. (“Washington”), a provider of inventory counting services to retailers in the United States, 691 584 05 04 03 U.S. Canada Europe Other(a) 76% – 24% – 76% – 24% – 82% – 17% 1% (a) Other includes primarily operations in Central and South America, Asia and Australia. (b) Includes revenues of Performance Logistics Group of US$185 million. Mexico, South America, Europe and Asia. ONCAP’s companies reported combined revenues of $305 million in 2004, up $69 million from $236 million reported in 2003 (2 percent of Onex’ total consolidated revenues in 2003). Substantially all of the revenue growth for 2004 was due to the inclusion of revenues of CSRS from its April 2004 acquisition date. Personal Care Products During 2005, Cosmetic Essence, Inc. (“CEI”) reported rev- enues of $304 million (2 percent of Onex’ total consolidated revenues in 2005). Excluding foreign currency translation, CEI’s revenues totalled US$253 million in 2005. There are no comparative revenues for 2004 since the company was acquired in December 2004. CEI is a provider of outsourced supply chain man- agement services to the personal care products industry, enue growth was due to stronger production on speciﬁc including formulating, manufacturing, ﬁlling, packaging Ford platforms and US$10 million from new business with and distribution. The company recognized revenues from new and existing customers. Partially offsetting these growth several new customers and achieved increased revenues factors were lower revenues of US$6 million, caused by from many existing customers in 2005; however, partially lower production on speciﬁc platforms. In addition, J.L. offsetting this growth was a reduction in orders from some French Automotive’s European operations increased rev- other existing customers as a result of them entering 2005 enues by US$16 million in 2004 due primarily to the beneﬁt with excess inventory. In addition, CEI’s acquisition of of favourable changes in foreign currency rates, partially Hauer Custom Manufacturing, Inc. (“Hauer”) in April 2005 offset by changes in product mix. contributed US$14 million of the total revenues in 2005. The automotive products segment results for Hauer manufactures, packages and distributes household 2004 and 2003 have been restated from those previously and consumer products. The acquisition brings new cus- reported due to the reclassiﬁcation of CVG’s operations to tomers to CEI and enables the company to beneﬁt from the discontinued following Onex’ sale of its remaining shares application of Hauer’s high-speed equipment and excess of CVG in July 2005. capacity that CEI has adapted for the production of certain of its products. Onex Corporation December 31, 2005 17 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 Communications Infrastructure investments are recorded at fair value and reported in Radian Communication Services Corporation’s (“Radian”) investments and other assets at December 31, 2005. revenues totalled $134 million in 2005 (1 percent of Onex’ total consolidated revenues in 2005), up from $113 million in 2004 (1 percent of Onex’ total consolidated revenues in Consolidated cost of sales Consolidated cost of sales was $14.5 billion in 2005 com- 2004) and from $108 million in 2003 (1 percent of Onex’ pared to $12.4 billion in 2004. A breakdown of the percen- total consolidated revenues in 2003). During 2005, tele- tage of total cost of sales by industry segment is provided communications carriers began to implement a number of in the charts below for the years ended December 31, 2005 capital spending programs, particularly in the U.S. market, and 2004. which contributed to much of the increase in revenues in the year. In addition, Radian’s purchase of the operations Segmented Total Consolidated Cost of Sales Breakdown of ROHN Industries, which commenced production in May 2004, incrementally added $14 million to revenues in 2005 over 2004. Public Market Investments During 2005, Onex formed OPMG LP (“OPMG”), also known as Onex Public Markets Group, to invest in securities of publicly-traded North American companies in a variety of industries with the objective of generating long-term capital appreciation and dividends. Included in the “Other” segment of Onex’ consolidated revenues was $10 million of revenues generated by OPMG during 2005. These rev- enues represent net realized gains of $10 million. OPMG’s 2 0 0 5 2 0 0 4 a. 66% b. 9% c. 3% d. 12% e. 3% f. 3% x. 4% a. 88% c. 2% e. 4% f. 4% x. 2% a. Electronics Manufacturing Services b. Aerostructures c. Theatre Exhibition d. Healthcare e. Customer Management Services f. Automotive Products x. Other (1) (1) 2005 other includes CEI, Radian, ONCAP, Onex Real Estate, Onex Public Markets Group and parent company. 2004 other includes Radian, ONCAP and parent company. Table 3 provides a detailed breakdown of reported cost of sales by industry segment for 2005 and 2004 and the percentage change in cost of sales from those periods in both Canadian dollars and the functional currencies of the companies. Cost of sales is provided in the companies’ functional currencies to eliminate the impact of foreign exchange translation on cost of sales. Table 4 provides additional details on cost of sales as a percentage of revenues by industry segment for 2005 and 2004. Cost of Sales by Industry Segment TABLE 3 ($ millions) Canadian Dollars Functional Currency 2005 2004 Change (%) 2005 2004 Change (%) Electronics Manufacturing Services $ 9,537 $ 10,913 Aerostructures Theatre Exhibition Healthcare Customer Management Services Automotive Products Other (a) Total 1,232 392 1,808 444 484 627 – 241 – 458 551 286 $ 14,524 $ 12,449 (13)% – 63 % – (3)% (12)% 119 % 17 % US$ 7,876 US$ 1,034 C$ 392 US$ 1,495 US$ 367 US$ 400 C$ 627 US$ 8,413 – C$ 241 – US$ 352 US$ 423 C$ 286 (6)% – 63 % – 4 % (5)% 119 % 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 CEI, Radian, ONCAP, Onex Real Estate, Onex Public Markets Group and parent company. 18 Onex Corporation December 31, 2005 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 Cost of Sales as a Percentage of Revenues by Industry Segment Theatre Exhibition Cineplex reported cost of sales of $392 million in 2005, a 63 percent increase from $241 million reported in 2004. TABLE 4 2005 2004 This compares to a 55 percent increase in revenues for the Electronics Manufacturing Services Aerostructures Theatre Exhibition Healthcare Customer Management Services Automotive Products Other(a) Total 93% 86% 80% 85% 62% 83% 66% 88% 95% – 76% – 63% 80% 68% 91% 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 CEI, Radian, ONCAP, Onex Real Estate, Onex Public Markets Group and parent company. Electronics Manufacturing Services Celestica’s cost of sales was $9.5 billion in 2005 compared to $10.9 billion in 2004. In the company’s functional cur- rency, cost of sales declined 6 percent to US$7.9 billion in 2005 from US$8.4 billion in 2004, while revenues were down 4 percent. Cost of sales as a percentage of revenues was 93 percent in 2005 compared to 95 percent in 2004. Celestica reported gross proﬁt in 2005 of US$595 million, a 39 percent increase from US$427 million in 2004 due primarily to cost reductions associated with the company’s restructuring, operating efﬁciencies from lean manufac- turing initiatives and from exiting businesses that had same period. The operations from the Famous Players acquisition added $151 million to cost of sales in 2005. Cost of sales as a percentage of revenues was 80 percent in 2005 compared to 76 percent reported in 2004. Approximately 41 percent and 7 percent of the total cost of sales were attributable to ﬁlm and concession costs, respectively. During 2005, ﬁlm costs increased $51 million. As a percentage of box-ofﬁce revenue, ﬁlm costs were 52 percent in 2005, equal to those of 2004. Cost of conces- sions increased $10 million, due primarily to the $9 million of costs associated with the Famous Players acquisition. As a percentage of concession revenues, cost of concessions was 20 percent in 2005, equal to that of 2004. Healthcare The healthcare segment reported cost of sales of $1.8 billion in 2005. There is no comparative cost of sales for 2004 since the companies in the healthcare segment were acquired in 2005. Table 5 provides cost of sales by operating company in the healthcare segment for 2005 in both Cana- dian dollars and the companies’ functional currencies. Healthcare Cost of Sales(a) TABLE 5 ($ millions) Canadian Dollars Functional Currency 2005 2005 been generating losses in prior years; these improvements Emergency Medical Services $ 1,766 US$ 1,461 were partially offset by the higher costs of transferring Center for Diagnostic Imaging 42 US$ 34 programs between different manufacturing locations. Total $ 1,808 US$ 1,495 Aerostructures During the period of Onex’ ownership in 2005, Spirit AeroSystems reported cost of sales of $1.2 billion, or US$1 billion in the company’s functional currency. Cost of sales as a percentage of revenues was 86 percent, which was better than anticipated despite the strike at Boeing in August and September 2005, which reduced shipments during that period and resulted in higher ﬁxed costs per unit shipped. Results are reported in accordance with Canadian generally accepted accounting principles. These results may differ from those reported by the individual operating companies. (a) Skilled Healthcare’s financial results from the date of acquisition on Decem- ber 27, 2005 were not significant to Onex’ consolidated results. Accordingly, the company’s cost of sales was not included in Onex’ consolidated audited statement of earnings for the year ended December 31, 2005. Onex Corporation December 31, 2005 19 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 Emergency Medical Services EMSC reported cost of sales of $1.8 billion for the period Other Businesses Mid-Cap Opportunities of our ownership from February 2005. In the company’s ONCAP’s companies reported a combined cost of sales functional currency, cost of sales for EMSC was US$1.5 bil- of $286 million in 2005 compared to $186 million in 2004. lion in 2005. Cost of sales of US$927 million was from As was the case with revenues, essentially all of the AMR’s emergency 911 and non-emergency ambulance increase in cost of sales was associated with the inclusion transport services and US$534 million of cost of sales was of Washington, which was acquired in April 2005. from EmCare’s hospital contracts for emergency depart- ment stafﬁng, hospitalist and radiology services and other Personal Care Products management services. Center for Diagnostic Imaging CEI reported cost of sales of $229 million, or US$190 mil- lion in the company’s functional currency in 2005. As a percentage of revenues, cost of sales was 75 percent Cost of sales for CDI was $42 million in 2005 for the in 2005. During 2005, the company’s cost of sales was ﬁrst year of ownership. Excluding the impact of foreign adversely affected by a lower-margin mix of business, currency translation, reported cost of sales for CDI was costing pressures and higher overhead costs due to lower- US$34 million in 2005. Cost of sales as a percentage of than-planned sales volumes. revenue was 33 percent in 2005. Communications Infrastructure Customer Management Services ClientLogic reported cost of sales of $444 million in 2005, Radian’s cost of sales was $113 million in 2005 compared to $99 million in 2004. As a percentage of revenues, the com- down $14 million from the cost of sales in 2004. In Client- pany’s cost of sales was 84 percent in 2005 compared to Logic’s functional currency, the company reported cost of 88 percent in 2004. Radian’s gross margin increased to sales of US$367 million in 2005 compared to US$352 mil- $21 million in 2005 from $14 million in 2004 due primarily lion in 2004, an increase of 4 percent. This compares to an to improved pricing in the U.S. market and the implemen- increase of 5 percent in revenues for the same period. tation of the initiatives identiﬁed in the turnaround plan ClientLogic’s cost of sales as a percentage of revenues developed in the third quarter of 2004; these initiatives decreased to 62 percent in 2005 from 63 percent in 2004. focused on reducing costs, improving job execution, ramp- Automotive Products J.L. French Automotive reported cost of sales of $484 mil- lion in 2005, a 12 percent decrease from $551 million in ing up production in the Oakville, Ontario and Peoria, Illinois manufacturing facilities and improving the U.S. revenue backlog. 2004; this compares to a 15 percent decline in revenues in 2005. In the company’s functional currency, cost of sales Operating earnings Operating earnings is deﬁned as EBIAT, or earnings before decreased by US$23 million to US$400 million in 2005 interest expense, amortization of intangibles and deferred from US$423 million in 2004. Cost of sales as a percentage of revenues increased to 83 percent in 2005 from 80 percent charges, acquisition and restructuring expenses, other non-recurring items, income taxes, non-controlling inter- in 2004 due primarily to higher aluminum and natural gas ests and discontinued operations. Table 6 provides a rec- prices in 2005 that could not be fully recovered in pricing onciliation of the audited annual consolidated statements to customers. of earnings to operating earnings for the years ended December 31, 2005 and 2004. 20 Onex Corporation December 31, 2005 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 Operating Earnings (Loss) Reconciliation Consolidated operating earnings of $602 million TABLE 6 ($ millions) 2005 2004 were up $624 million in 2005 from an operating loss of $22 million in 2004. Table 7 provides a breakdown and Earnings before the undernoted items $ 946 $ 425 change in operating earnings by industry segment for the Amortization of property, plant and equipment Interest and other income Equity-accounted investments Foreign exchange loss Stock-based compensation (409) 145 1 (31) (50) (370) 102 (8) (116) (55) Operating earnings (loss) $ 602 $ (22) Amortization of intangible assets and deferred charges Interest expense of operating companies Derivative instruments Gains on sales of operating investments, net (96) (332) 4 921 Acquisition, restructuring and other expenses (266) Debt prepayment Writedown of goodwill and intangible assets Writedown of long-lived assets (6) (3) (5) (72) (195) 29 107 (204) (8) (393) (94) Earnings (loss) before income taxes, non-controlling interests and discontinued operations $ 819 $ (852) 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. years ended December 31, 2005 and 2004. Operating Earnings (Loss) by Industry Segment TABLE 7 ($ millions) 2005 2004 Change ($) Electronics Manufacturing Services Aerostructures Theatre Exhibition Healthcare Customer Management Services Automotive Products Other (a) Total $ 258 $ 7 $ 251 71 25 136 31 23 58 – 36 – 44 66 (175) 71 (11) 136 (13) (43) 233 $ 602 $ (22) $ 624 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) Includes CEI, Radian, ONCAP, Onex Real Estate, Onex Public Markets Group and parent company. During 2005, operating earnings growth was driven by sev- eral factors: • Acquisitions – CEI ($19 million), acquired in early Decem- ber 2004; CDI ($17 million), EMSC ($118 million) and Spirit AeroSystems ($71 million), which were all acquired in 2005; • Higher operating earnings at Celestica ($251 million) resulting from improved operating efﬁciencies from lean manufacturing, reduced costs from restructuring activi- ties and exited businesses; • An increase in interest and other income of $43 mil- lion, primarily from income realized on non-strategic assets; and • Lower foreign exchange losses of $85 million. Partially offsetting these factors was a $43 million decline in operating earnings at J.L. French Automotive as a result of lower production volumes from North American OEMs. Onex Corporation December 31, 2005 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 Stock-based compensation During 2005, there was a $50 million stock-based compen- statements provides a breakdown of foreign exchange gains (loss) by industry segment. sation expense due primarily to: • a $28 million charge recorded by Celestica, which included the cost associated with that company’s settle- Interest expense of operating companies Onex has a policy to structure each of its operating com- ment of approximately seven million out-of-money panies with sufﬁcient equity in the company to enable it to options for US$1 in cash per option; self-ﬁnance a signiﬁcant portion of its acquisition cost • an $11 million charge for stock-based compensation with a prudent level of debt. The level of debt assumed is recorded by Spirit AeroSystems; commensurate with the operating company’s available • an $8 million stock-based compensation charge recorded cash ﬂow, including consideration of funds required to by Cineplex Entertainment; pursue growth opportunities. It is the responsibility of the • a $2 million charge booked in the healthcare segment; and acquired operating company to service its own debt obli- • a $6 million expense reported by CMC Electronics. gations. The debt of each operating company is without recourse to Onex or to any other Onex operating company. This increase was partially offset by a decrease in the value Consolidated interest expense increased $137 mil- of Onex’ stock options and investment rights from their lion to $332 million in 2005 from $195 million in 2004. The value at December 31, 2004, which accounted for $5 mil- acquisitions of CEI, CDI, EMSC and Spirit AeroSystems col- lion. Note 27 to the audited annual consolidated ﬁnancial lectively added $117 million in interest expense in 2005. In statements provides a breakdown of stock-based compen- addition, Celestica accounted for a $12 million increase in sation by industry segment. interest expense in 2005 over 2004 due primarily to the In 2004, stock-based compensation was an issuance in late June 2005 of US$250 million of senior expense of $55 million. The 2004 expense for stock-based subordinated notes due in 2013. Cineplex Entertainment compensation was contributed primarily by the overall also added $10 million in interest expense in 2005 over increase in value of Onex’ stock options and investment 2004 due to the additional debt resulting from the acquisi- rights of $35 million from their value at December 31, 2003 tion of Famous Players, which included that company’s and a $20 million expense recorded by Celestica. issuance of $105 million of convertible debentures and Foreign exchange loss The foreign exchange loss reﬂects the impact of changes in foreign currency exchange rates, primarily on the U.S.- third-party ﬁnancing. Table 8 details the change in consolidated interest expense from 2004 to 2005. dollar-denominated cash held at Onex, the parent company. Change in Interest Expense While changes in foreign currency exchange rates may apply to multiple currencies, the primary impact of foreign cur- TABLE 8 ($ millions) rency translation on Onex’ consolidated results is due to the Reported interest expense for 2004 $ 195 conversion of the U.S. dollar to the Canadian dollar. Additional interest expense in 2005 due to: During 2005, the value of the U.S. dollar declined Celestica’s senior subordinated debt due in 2013 to 1.163 Canadian dollars from 1.202 Canadian dollars in Cineplex Entertainment’s additional debt 2004. A net foreign exchange loss of $31 million was re- Acquisitions completed in 2005 corded in 2005 compared to a loss of $116 million in 2004 and a loss of $122 million reported in 2003. Onex, the parent company, recorded $31 million of the foreign exchange loss in 2005 as it holds a signiﬁcant portion of its cash in U.S. dollars. This compares to a foreign exchange loss at the parent company of $124 million in 2004 and $139 million in 2003. Note 27 to the audited annual consolidated ﬁnancial CEI EMSC CDI Spirit AeroSystems Other Interest expense reduction due to: Other Reported interest expense for 2005 12 10 23 58 8 28 10 (12) $ 332 22 Onex Corporation December 31, 2005 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 increased 42 percent to $145 mil- Gains on sales of operating investments Onex recorded gains on sales of operating investments of lion in 2005 from $102 million reported in 2004. Included $921 million in 2005 compared to $107 million of such gains in the 2005 other income was $35 million of income real- in 2004. Table 9 details the nature of the gains recorded in ized on the sale of non-strategic assets by Onex, the parent 2005 compared to 2004. company, and $20 million of other income recorded by Spirit AeroSystems. Gains on Sales of Operating Investments Equity-accounted investments Onex reported earnings on equity-accounted investments TABLE 9 ($ millions) 2005 2004 Gains on: of $1 million in 2005 compared to a loss of $8 million Close of Celestica exchangeable debentures $ 560 $ – in 2004. The 2005 earnings from equity-accounted invest- Close of Celestica forward sales agreements 191 ments represents Onex’ share in the net earnings of Sale of CGG convertible bonds Res-Care, Inc. (“ResCare”) and Cypress Property & Casualty Issue of units by Cineplex Entertainment Insurance Company (“Cypress”). Gain on initial public offering of EMSC The loss on equity-accounted investments reported in 2004 reﬂects Onex’ share in the net earnings (loss) of ResCare and Cypress. Cypress, a Florida homeowners insurance company, accounted for $9 million of the loss Performance Logistics Group Issue of shares by Celestica Sale of Tower Automotive Other, net 41 53 40 – – – 36 – – – – 58 9 6 34 on equity-accounted investments due to an unprece- Total dented number of hurricanes in Florida during 2004. $ 921 $ 107 Partially offsetting this loss was Onex’ share of ResCare’s net earnings, which contributed $1 million of earnings in equity-accounted investments. Derivative instruments Onex, the parent company, had two derivative instruments in place at December 31, 2004 – exchangeable debentures and forward sales agreements related to shares of Celes- tica held by Onex. Since these instruments did not qualify for hedge accounting they were required to be marked-to- market under Emerging Issues Committee Abstract 128, “Accounting for Trading, Speculative or Non-Hedging Derivative Financial Instruments”. In February and June 2005, Onex settled its Celestica exchangeable debentures and forward sales agreements, respectively, with the total delivery of approximately 11 million Celestica shares. Onex recorded a $1 million beneﬁt to earnings in 2005 for the short time in 2005 that it held these derivative instru- ments. This compares to the $29 million beneﬁt recorded to earnings in 2004 resulting from a decrease in the exchangeable debentures liability and an increase in value of the forward sales agreements as a result of the decrease in market value of the underlying Celestica shares since December 31, 2003. Onex, the parent company, recorded a $560 million pre- tax, non-cash gain on the early redemption of its Celestica exchangeable debentures in February 2005 and a $191 mil- lion pre-tax gain on the settlement of all of its outstanding forward sales agreements in June 2005. For both of these transactions, Onex closed out its obligation with the deliv- ery of Celestica subordinate voting shares. In the ﬁrst half of 2005, the Company recorded a $41 million pre-tax gain on the sale of the CGG convertible bonds, of which Onex’ portion was $9 million. A $53 million accounting dilution gain was recorded, of which Onex’ por- tion was $30 million, following the issuance of $110 million of trust units by Cineplex Entertainment for the purchase of the Famous Players movie business. In December 2005, EMSC completed a US$113 mil- lion initial public offering of common shares. While Onex did not sell any of its shares in this offering, the Company recorded a $40 million accounting dilution gain on the issuance of shares by EMSC; Onex’ portion of that gain was $15 million. Included in the “Other” line of gains on sales of operating investments was $32 million of gains realized from Onex’ interest in Ripplewood, a U.S-based acqui- sition fund; this compares to $23 million of such gains recorded in 2004. Onex Corporation December 31, 2005 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 The 2004 gains on sales of operating investments Celestica accounted for $193 million of these expenses due include a $58 million non-cash gain that resulted from primarily to costs associated with the company’s previously Performance Logistics Group, Inc’s (“PLG”) issuance of announced restructuring programs. Many of the costs to shares for its purchase of Leaseway Auto Carrier Group; implement these restructuring plans can only be recorded as this gain comprised a $22 million non-cash accounting they are incurred and thus the costs may be spread over sev- dilution gain and the reversal of $36 million of losses of eral reporting periods. These plans, which include reducing PLG previously recognized by Onex that were in excess workforce, consolidating facilities and repositioning the of other shareholders’ equity in PLG. Also included was a number and location of production facilities, are primarily $9 million accounting dilution gain recorded by Onex fol- intended to align Celestica’s capacity with anticipated cus- lowing the issuance of shares by Celestica for the purchase tomer requirements for more production in lower-cost of Manufacturers’ Services Limited in March 2004. geographies, as well as to rationalize its manufacturing net- Note 15 to the audited annual consolidated ﬁnan- work to lower overall demand levels. Note 16 to the audited cial statements provides additional details on the gains on annual consolidated ﬁnancial statements details the nature sales of operating investments. of the acquisition, restructuring and other expenses, such as employee termination costs, facility and exit costs and other Acquisition, restructuring and other expenses Acquisition, restructuring and other expenses are consid- charges, by the year in which the activity was initiated. During 2004, Celestica recorded $184 million of acquisition, ered costs incurred to realign organizational structures or restructuring and other expenses associated primarily with restructure manufacturing capacity to obtain operational these restructuring plans. synergies critical to building the long-term value of Onex’ In addition, Spirit AeroSystems reported acqui- operating companies. During 2005, acquisition, restruc- sition, restructuring and other expenses of $42 million turing and other expenses totalled $266 million, a 30 percent related to the initial set-up of the business following the increase from the $204 million reported in 2004. Table 10 purchase of the company’s operations from Boeing. details acquisition, restructuring and other expenses by Included in the “Other” line in table 10 was operating company. $4 million in acquisition, restructuring and other expenses recorded by Radian associated with the company’s planned Acquisition, Restructuring and Other Expenses transfer of its Oakville, Ontario manufacturing operations TABLE 10 ($ millions) Celestica Spirit AeroSystems Emergency Medical Services ClientLogic J.L. French Automotive Other Total 2005 $ 193 2004 $ 184 42 2 9 8 12 – – 5 7 8 $ 266 $ 204 to its Peoria, Illinois facility, and the associated relocation and workforce reduction costs. Debt prepayment Certain of Onex’ operating companies repurchase debt to enhance ﬁnancial ﬂexibility or reduce future interest costs. Debt prepayment costs totalled $6 million in 2005 compared to $8 million in 2004. Cineplex Entertainment represented $4 million of these costs incurred resulting from the issuance of units as part of its acquisition of Famous Players. 24 Onex Corporation December 31, 2005 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 Writedown of goodwill and intangible assets The management of each operating company undertakes Included in the 2004 writedown of goodwill and intangible assets was $388 million recorded by Celestica. an annual review of the value of its recorded goodwill and During the fourth quarter of 2004, Celestica performed its intangible assets to assess the recoverability of these annual goodwill impairment test and identiﬁed reporting assets. An impairment in the value of goodwill and indeﬁ- units, speciﬁcally in the Americas and Europe regions, nite-lived intangibles is tested at the operating company for which it determined the values to be impaired. These by comparing the operating company’s carrying amount reporting units were recorded on the company’s balance of assets and intangible assets to their estimated fair value. sheet at carrying values that were higher than their fair These reviews may be required to be made down to a busi- values based on current estimated industry conditions ness unit or plant level. The fair values of the operating and customer demands for production in lower-cost geog- companies are estimated using a combination of a market raphies. As a result of this analysis, Celestica wrote down approach and discounted cash ﬂows. The process of deter- the goodwill and intangible assets associated with these mining fair values is necessarily subjective and requires regions in 2004. 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- Writedown of long-lived assets During 2005, there were $5 million of writedowns of long- pany as well as appropriate discount rates. lived assets compared to $94 million in 2004. Included in During 2005, writedowns of goodwill and intangi- the 2004 writedown of long-lived assets was $84 million ble assets totalled $3 million compared to $393 million recorded by Celestica relating to the company’s Americas reported in the prior year. Table 11 presents these charges and Europe operations. In addition, J.L. French Automo- recorded by operating company, and note 18 to the tive recorded $8 million of writedowns of long-lived assets audited annual consolidated ﬁnancial statements provides in 2004 associated with the restructuring of its United additional disclosure on these writedowns of goodwill and Kingdom operations. Note 19 to the audited annual con- intangible assets. Writedown of Goodwill and Intangible Assets TABLE 11 ($ millions) Celestica ClientLogic Total 2005 $ 1 2 $ 3 2004 $ 388 5 $ 393 ClientLogic wrote down intangible assets by $2 million in 2005 as a result of the early termination of its agreement with one of its clients that purchased technology infra- structure services. This compares to $5 million written off by ClientLogic in 2004 associated with impaired customer contracts. Values had been assigned to certain customer contracts associated with businesses that have been acquired by ClientLogic. solidated ﬁnancial statements provides additional disclo- sure on these writedowns of long-lived assets. Income taxes During 2005, the provision for income taxes was $72 mil- lion compared to a provision of $278 million in 2004. Included in the 2005 income tax provision was a $158 mil- lion current income tax expense recorded by Onex, the parent company, relating to the gain on the early settle- ment of its Celestica exchangeable debentures and the Celestica forward sales agreements. Offsetting this was a recovery of income taxes resulting from the application of previous years’ loss carryforwards for which a full valua- tion allowance had previously been provided. Note 20 to the audited annual consolidated ﬁnancial statements pro- vides a reconciliation of the statutory income tax rates to the Company’s effective tax rate and also provides an analysis of the future income tax assets and liabilities. Onex Corporation December 31, 2005 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 Non-controlling interests in losses (earnings) of operating companies In the audited annual consolidated statements of earnings, necessary as the prior losses at these companies elimi- nated the value contributed by other shareholders in these companies. This compares to Onex recording income of the non-controlling interests amounts represent the inter- $38 million in 2004 relating to the recovery of prior year ests of shareholders other than Onex in the net earnings or losses absorbed on behalf of non-controlling shareholders losses of Onex’ operating companies. During 2005, the of J.L. French Automotive, ClientLogic and Radian. non-controlling interests amount in Onex’ operating com- panies’ losses was $5 million compared to an $891 million interest in net losses in 2004. Table 12 details the losses Earnings (loss) from continuing operations Onex’ consolidated earnings from continuing operations, (earnings) by industry segment attributable to non-con- including gains on sales of operating investments, was trolling shareholders in our operating companies. $752 million ($5.41 per share) in 2005 compared to a loss Non-controlling Interests in Losses (Earnings) share) reported in 2004 and a loss of $563 million ($3.67 from continuing operations of $239 million ($1.69 per of Operating Companies TABLE 12 ($ millions) Electronics Manufacturing Services Aerostructures Theatre Exhibition Healthcare Customer Management Services Automotive Products Other(a) Total 2005 $ 53 15 (16) (44) (1) – (2) 2004 $ 857 – (31) – 2 47 16 $ 5 $ 891 (a) Includes CEI, Radian, ONCAP, Onex Real Estate, Onex Public Markets Group and parent company. The change in the non-controlling interests amount was due primarily to the lower losses at Celestica, which resulted in a year-over-year change of $804 million. In addition, the inclusion of EMSC’s earnings from the date of its acquisition and the portion of those earnings that were attributable to shareholders other than Onex and $32 million related pri- marily to the interest of the other limited partners of Onex Partners in the gain on CGG also contributed to the change in non-controlling interests. per share) reported in 2003. Table 13 details the earnings (loss) from continuing operations by industry segment before income taxes and non-controlling interests. Earnings (Loss) from Continuing Operations TABLE 13 ($ millions) 2005 2004 2003 Earnings (loss) before income taxes and non-controlling interests: Electronics Manufacturing Services $ (39) $ (752) $ (311) Aerostructures Theatre Exhibition Healthcare (1) (11) 47 Customer Management Services (14) Automotive Products Other(a) Provision for income taxes Non-controlling interests of (68) 905(b) 819 (72) – 28 – (2) (49) (77) (852) (278) – 141 – (71) (419) (112) (772) (57) operating companies 5 891 266 Earnings (loss) from continuing operations $ 752 $ (239) $ (563) Partially offsetting these was the portion of Spirit (a) Includes CEI, Radian, ONCAP, Onex Real Estate, Onex Public Markets Group and AeroSystems’ loss attributed to shareholders other than parent company. Onex and the pick-up for accounting purposes of losses by Onex, the parent company, of other shareholders in ClientLogic, J.L. French Automotive and Radian. Those additional losses totalled $23 million in 2005. This was (b) Includes a $560 million pre-tax gain on the close out of the Celestica exchange- able debentures and a $191 million pre-tax gain on the close out of the Celestica forward sales agreements. 26 Onex Corporation December 31, 2005 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 from discontinued operations Earnings from discontinued operations were $213 million operations, also included in the 2004 earnings from discon- tinued operations were the operations of Loews Cineplex, ($1.54 per share) in 2005 compared to earnings from dis- Dura Automotive Systems, Inc. (“Dura Automotive”), Armtec continued operations of $274 million ($1.94 per share) in Limited (“Armtec”), CMC Electronics’ subsidiary, Cincinnati 2004. During 2005, the operations of CMC Electronics Inc.’s Electronics, and InsLogic that were discontinued in 2004. (“CMC Electronics”) NovAtel subsidiary, Magellan, CVG, Table 14 provides a breakdown of earnings (loss) by com- the operations of Cineplex Entertainment’s theatres that pany, including the net after-tax gains on sales of operating have been or are intended to be sold and Futuremed were investments as well as Onex’ share of earnings (loss) of reclassiﬁed as discontinued operations. In addition to these those businesses that were discontinued in 2005 and 2004. Earnings (Loss) from Discontinued Operations TABLE 14 ($ millions) 2005 Onex’ share of earnings (loss) Gain, net of tax CMC Electronics’ sale of NovAtel $ 45 $ – Sale of InsLogic Sale of Magellan Sale of CVG Cineplex Entertainment’s theatre divestitures Sale of Futuremed Sale of Dura Automotive Sale of Loews Cineplex Group CMC Electronics’ sale of Cincinnati Electronics Sale of Armtec Total Total $ 45 73 24 70 2 (1) – – – – Gain, net of tax $ – – – 69 – – 1 135 49 9 2004 Onex’ share of earnings (loss) $ (1) (9) 6 3 2 – 1 5 4 – Total $ (1) (9) 6 72 2 – 2 140 53 9 73 22 68 2 – – – – – – 2 2 – (1) – – – – $ 210 $ 3 $ 213 $ 263 $ 11 $ 274 Included in the 2005 earnings from discontinued oper- The 2004 earnings (loss) from discontinued oper- ations were: a $45 million net after-tax gain recorded ations primarily include: a $135 million net after-tax gain on CMC Electronics’ sale of its NovAtel shares in 2005; a from the sale of Loews Cineplex in July 2004; a $69 million $73 million gain recorded by Onex on the sale of InsLogic net after-tax gain on Onex’ partial sale of its CVG shares in in January 2005, which comprised net cash proceeds of August 2004; a $9 million net after-tax gain from the sale of $22 million and the reversal of losses of InsLogic previ- Armtec in August 2004 by ONCAP; and a $1 million net ously recognized by Onex; a $22 million net after-tax gain after-tax gain from the sale of Dura Automotive. on the sale of Magellan; a $68 million net after-tax gain on Onex’ sale of its remaining CVG shares in July 2005; and a $2 million gain on Cineplex Entertainment’s theatre Consolidated net earnings Consolidated net earnings in 2005 were $965 million com- divestitures. Note 2 to the audited annual consolidated pared to $35 million in 2004 and a consolidated net loss of ﬁnancial statements provides additional disclosure on $332 million in 2003. Table 15 identiﬁes the net earnings earnings from discontinued operations. (loss) by industry segment as well as the contribution from net after-tax gains on sales of operating investments and discontinued operations. Onex Corporation December 31, 2005 27 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Consolidated Net Earnings (Loss) Table 16 presents the earnings (loss) per share from continuing operations, discontinued operations and net TABLE 15 ($ millions) 2005 2004 2003 earnings (loss). Earnings (Loss) per Subordinate Voting Share TABLE 16 ($ per share) 2005 2004 2003 Basic and Diluted: Continuing operations Discontinued operations Net earnings (loss) $ 5.41 $ 1.54 $ 6.95 $ (1.69) $ 1.94 $ 0.25 $ (3.67) $ 1.51 $ (2.16) Onex’ share of net earnings (loss): Electronics Manufacturing Services $ (13) $ (202) $ (73) Aerostructures Theatre Exhibition Healthcare (6) (3) 10 Customer Management Services (17) Automotive Products Other(a) (69) (71) Net after-tax gains on sales – 7 – (6) 9 (154) – 54 – (72) (373) (109) of operating investments 921 107 10 Earnings (loss) from continuing operations Earnings from discontinued operations 752 213 (239) (563) 274 231 Consolidated net earnings (loss) $ 965 $ 35 $ (332) (a) Includes CEI, Radian, ONCAP, Onex Real Estate, Onex Public Markets Group and parent company. 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 17 summarizes Onex’ key consolidated ﬁnancial information for the last eight quarters. The summarized results presented in this table may differ from those results previously reported in 2005 and 2004 as a result of operations that have been discontinued and reclassiﬁed as discussed above. TABLE 17 ($ millions except per share amounts) 2005 2004 Dec. Sept. June Mar. Dec. Sept. June Mar. Revenues $ 4,406 $ 4,360 $ 4,159 $ 3,634 $ 3,366 $ 3,373 $ 3,680 $ 3,220 Earnings (loss) from continuing operations $ (8) $ (71) $ 222 $ 609 $ (263) $ 69 $ (84) $ 39 Net earnings (loss) $ (8) $ 13 $ 239 $ 721 $ (214) $ 281 $ (69) $ 37 Earnings (loss) per Subordinate Voting Share Basic and Diluted: Continuing operations Net earnings (loss) $ (0.06) $ (0.51) $ 1.60 $ 4.38 $ (1.89) $ 0.50 $ (0.59) $ 0.27 $ (0.06) $ 0.09 $ 1.72 $ 5.19 $ (1.54) $ 2.02 $ (0.49) $ 0.25 Onex’ quarterly consolidated ﬁnancial results do not fol- of the exchange rate between the U.S. dollar and the low any speciﬁc trends due to acquisitions or dispositions Canadian dollar; and varying business cycles at Onex’ of businesses by Onex, the parent company; the volatility operating companies. 28 Onex Corporation December 31, 2005 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 Fourth quarter 2005 results Table 18 below presents the statements of earnings for the Consolidated revenues were $4.4 billion for the fourth quarter of 2005, up 31 percent, or $1 billion from the fourth quarters ended December 31, 2005 and 2004. same quarter of 2004. Operating earnings also increased Fourth Quarter Statements of Earnings TABLE 18 ($ millions) 2005 2004 $323 million to $198 million in the fourth quarter of 2005 from an operating loss of $125 million for the fourth quar- ter of 2004. The acquisitions of CEI, CDI, EMSC and Spirit AeroSystems collectively added $1.3 billion to revenues $ 4,406 $ 3,366 and $110 million to operating earnings in the fourth Revenues Cost of sales Selling, general and administrative expenses (286) (3,838) (3,214) (197) Earnings (loss) before the undernoted items $ 282 $ (45) Amortization of property, plant and equipment Interest and other income Equity-accounted investments Foreign exchange loss Stock-based compensation (107) 29 – (7) 1 (88) 88 (4) (53) (23) quarter of 2005. During the fourth quarter of 2005, EMSC com- pleted an initial public offering of Class A common shares (NYSE: EMS), representing a 19.5 percent interest in the company, for net proceeds of US$102 million. As a result of this offering, a consolidated non-cash accounting dilution gain of $40 million was recorded, of which Onex’ share was $15 million. Onex, Onex Partners and certain of its limited partners continued to hold 32.1 million Class A common shares of EMSC, representing an approximate 77 percent Operating earnings (loss) $ 198 $ (125) ownership interest in the company. Amortization of intangible assets and deferred charges Interest expense of operating companies Derivative instruments Gains on sales of operating investments, net (28) (95) 1 51 Acquisition, restructuring and other expenses (112) Debt prepayment Writedown of goodwill and intangible assets Writedown of long-lived assets (2) (1) (1) Earnings (loss) before income taxes, non-controlling interests and (18) (78) (9) 5 (59) (2) (388) (92) Partially offsetting the revenue and operating growth were acquisition, restructuring and other expenses of $65 million (2004 – $55 million) recorded by Celestica and $30 million by Spirit AeroSystems. In November 2005, Onex and Onex Partners sold their remaining investment in Magellan for proceeds of $126 million, of which Onex’ share was $34 million (including $4 million for Onex’ portion of the carried interest). Onex recorded a pre-tax gain of $52 million, of which Onex’ share was $10 million; this gain was recorded in the earnings from discontinued operations for the discontinued operations $ 11 $ (766) fourth quarter of 2005. Provision for income taxes Non-controlling interests (22) 3 (299) 802 Loss from continuing operations $ (8) $ (263) Earnings from discontinued operations – 49 Loss for the Period $ (8) $ (214) Included in the 2004 fourth-quarter earnings was a $388 million writedown of goodwill and intangible assets recorded by Celestica. This 2004 charge is discussed in detail on page 25 of this report under the full-year discus- sion of writedowns of goodwill and intangible assets. Onex Corporation December 31, 2005 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 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 Consolidated assets Consolidated assets increased to $14.8 billion at Decem- This section should be read in conjunction with the ber 31, 2005 from $11.8 billion at December 31, 2004. The audited annual consolidated balance sheets and the corre- charts below show the percentage breakdown of total con- sponding notes thereto. solidated assets by industry segment as at December 31, 2005, 2004 and 2003. Segmented Total Consolidated Assets Breakdown 20 0 5 20 0 4 2 0 03 a. 38% b. 13% c. 6% d. 18% e. 2% f. 3% x. 20% a. 50% c. 3% e. 3% f. 4% x. 40% a. 46% c. 2% e. 2% f. 4% x. 46% a. Electronics Manufacturing Services b. Aerostructures c. Theatre Exhibition d. Healthcare e. Customer Management Services f. Automotive Products x. Other (1) (1) 2005 other includes CEI, Radian, ONCAP, Onex Real Estate, Onex Public Markets Group, parent company and discontinued operations. 2004 other includes CEI, Radian, ONCAP, parent company and discontinued operations. 2003 other includes Radian, ONCAP, parent company and discontinued operations. Much of the growth in consolidated assets resulted from: Table 19 outlines the more signiﬁcant acquisitions • the inclusion of $237 million of assets from CDI, acquired completed by Onex and its operating companies in 2005, in January 2005; 2004 and 2003. Note 3 to the audited annual consolidated • $1.5 billion of assets from EMSC, acquired in Febru- ﬁnancial statements provides additional disclosure on the ary 2005; acquisitions completed in 2005 and 2004. • the June 2005 acquisition of Spirit AeroSystems, which added $2.0 billion of assets; and • $925 million of assets from the December 2005 acquisi- tion of Skilled Healthcare. 30 Onex Corporation December 31, 2005 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 2005 Acquisitions CDI – $251 million EMSC – $1,516 million Onex’ acquisition of Center for Diagnostic Imaging, Inc., a leading provider of diagnostic and therapeutic radiology services in the United States headquartered in Minnesota, United States Onex’ acquisition of American Medical Response, Inc., the leading U.S. provider of ambulance transport services, and EmCare Holdings Inc., the leading provider of outsourced services for hospital emergency department physician staffing and management headquartered in Colorado, United States; these two acquired businesses formed Emergency Medical Services Corporation Spirit AeroSystems – $1,591 million Onex’ acquisition of Spirit AeroSystems, Inc., the world’s largest Tier 1 aerostructures manufac- turer headquartered in Kansas, United States Skilled Healthcare – $932 million Onex’ acquisition of Skilled Healthcare Group, Inc., a leading operator of skilled nursing and assisted living facilities in California, Texas, Kansas and Nevada, focused on treating patients who require a high level of skilled nursing care and extensive rehabilitation therapy headquar- tered in California, United States Cineplex Entertainment – $622 million Cineplex Entertainment’s purchase of the Famous Players movie business, a film exhibition company operating 80 theatres with 785 screens across Canada CEI – $25 million ONCAP – $198 million CEI’s acquisition of Hauer Custom Manufacturing, Inc., a leading manufacturer, packager and distributor of household and consumer products headquartered in Pennsylvania, United States ONCAP’s operating company, Western Inventory Service Ltd.’s acquisition of Washington Inventory Service Ltd., a leading provider of inventory counting services in the United States headquartered in California, United States ONCAP’s operating company, Canadian Securities Registration Systems Ltd.’s purchase of Corporate Research and Analysis Centre Ltd., a provider of corporate and legal searches in Canada headquartered in Quebec, Canada Onex Corporation December 31, 2005 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 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(1) 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.(1) – 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 CEI – $383 million Onex’ acquisition of Cosmetic Essence, Inc., a leading provider of outsourced supply chain man- agement services to the personal care products industry including formulating, manufacturing, filling, packaging and distribution services headquartered in New Jersey, United States (1) Magellan and Futuremed were recorded as discontinued operations as at December 31, 2005. Operating company and total assets of acquisitions 2003 Acquisitions ClientLogic – $90 million Radian – $10 million ONCAP – $92 million ClientLogic’s purchase of Service Zone Holdings, Inc., a provider of high-quality call centre operations headquartered in Florida, United States with facilities in the United States and the Philippines Radian’s acquisition of certain assets related to the tower and tower accessory manufacturing operations of ROHN Industries, Inc. located in Indiana and Illinois, United States ONCAP’s acquisition of Western Inventory Service Ltd., a leading North American provider of data collection and inventory counting services headquartered in Ontario, Canada 32 Onex Corporation December 31, 2005 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Chart 1 shows Onex’ consolidated assets by industry and geographic segments. Asset Diversiﬁcation by Industry and Geographic Segments CHART 1 ($ millions) E L E C T R O N I C S A E R O - M A N U FA C T U R I N G S T R U C - S E R V I C E S T U R E S T H E AT R E E X H I B I T I O N H E A LT H - C U S T O M E R C A R E M A N A G E M E N T A U T O M O T I V E P R O D U C T S S E R V I C E S O T H E R (a) T O TA L 6,645 1,966 860 2,753 338 521 6,758 14,845 14,621 5,925 5,637 303 260 452 410 11,809 368 359 4,761 2,959 05 04 03 05 05 04 03 05 05 04 03 05 04 03 05 04 03 05 04 03 U.S. Canada Europe Other(b) 7% 13% 16% 64% 12% 10% 24% 54% 13% 18% 21% 48% 100% – – – – 100% – – – 100% – – – 100% – – 100% – – – 54% 5% 29% 12% 36% 6% 44% 14% 46% 3% 44% 7% 62% – 37% 1% 55% – 45% – 56% 2% 41% 1% 20% 80% – – 40% 60% – – 45% 29% 19% 7% 41% 27% 8% 24% 25% 33% 15% 27% 30% 24% 21% 25% (a) Includes Radian, ONCAP, CEI, Onex Public Markets Group, Onex Real Estate and parent company. Includes discontinued operations of $1,566 million and $5,058 million for 2004 and 2003, respectively. (b) Other includes primarily operations in Central and South America, Asia and Australia. Included in the December 31, 2005 consolidated assets in • the C$0.039 decline in the value of the U.S. dollar relative the “Other” segment are $140 million of investments made to the Canadian dollar during 2005, as most of the opera- by Onex Public Markets Group, an Onex company estab- tions of Onex’ companies report in U.S. dollars. lished in 2005 to invest in North American public securi- ties, and Onex and Onex Partners’ $114 million investment The December 31, 2004 assets have been restated from those in ResCare (Onex’ portion was $27 million, representing a originally presented to show the assets of Magellan, CMC 6 percent ownership interest). ResCare provides residen- Electronics’ NovAtel subsidiary, the theatres of Cineplex tial, therapeutic, job training and educational support Entertainment that were or are to be sold and Futuremed services to people with developmental or other disabili- as discontinued. ties, to youth with special needs and to adults who are At December 31, 2004, total consolidated assets experiencing barriers to employment. declined by $2.8 billion to $11.8 billion from $14.6 billion at December 31, 2003 due to the sales of Dura Automotive, The asset growth from acquisitions and investments was Loews Cineplex, Cincinnati Electronics and Armtec, which partially offset by: represented $4.8 billion of the total consolidated assets at • the elimination of the assets of Magellan, which was no December 31, 2003. Partially offsetting these declines in longer consolidated at December 31, 2005 due to the consolidated total assets were the inclusion of assets of sale of Onex and Onex Partners’ interest in that business Magellan, which added $1.5 billion of assets, Celestica’s during 2005; Magellan represented $1.4 billion of the purchase of MSL in mid-March 2004 and certain assets of total consolidated assets at December 31, 2004; and NEC Corporation, which added $0.7 billion in assets, and $0.2 billion in assets from the acquisition of CEI in early December 2004. Onex Corporation December 31, 2005 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 Consolidated long-term debt, without recourse to Onex Onex, the parent company, has no debt. It has been Onex’ and Skilled Healthcare ($539 million), as well as Celes- tica’s issuance of subordinated notes in June 2005 as dis- cussed below. policy to preserve a ﬁnancially strong parent company that In March 2005, ClientLogic completed the reﬁ- has funds available for new acquisitions and to support the nancing of its outstanding credit facilities. The new ﬁ- growth of its operating companies. This policy means that nancing facility, which totals US$157 million, provides all debt ﬁnancing is within our operating companies and ClientLogic with improved liquidity, extends the maturity of each company is required to support its own debt. its debt to 2012 and enhances the ﬁnancial stability and Total long-term debt (consisting of the current ﬂexibility needed for the continued growth of the business. portion of long-term debt and long-term debt) was $4.7 bil- lion at December 31, 2005, $2.2 billion at December 31, 2004 and $1.6 billion at December 31, 2003. Table 20 sum- In June 2005, Celestica issued senior subordinated notes for US$250 million aggregate principal amount with a ﬁxed interest rate of 7.625% due in 2013. The company marizes consolidated long-term debt by industry segment. used the net proceeds from this offering to repurchase its outstanding LYONs in early August 2005. Consolidated Long-term Debt, Without Recourse to Onex J.L. French Automotive’s long-term debt of $ 872 $ 750 $ 273 ments and projected that it would be out of compliance TABLE 20 ($ millions) 2005 2004 2003 Electronics Manufacturing Services Aerostructures Theatre Exhibition Healthcare Customer Management Services Automotive Products Other(a) 839 346 1,196 206 783 446 – 129 – 192 721 382 – 114 – 206 876 130 4,688 2,174 1,599 Long-term debt of J.L. French Automotive, reclassified as current (783) Long-term debt of ClientLogic and PLG, reclassified as current – Current portion of long-term debt – – – (256) $783 million was classiﬁed as current debt on the audited consolidated balance sheet as the company was not in compliance with various covenants of certain debt agree- during 2006. This classiﬁcation is consistent with that at September 30, 2005 as management of J.L. French Auto- motive at that time believed that there was a signiﬁcant likelihood the company would not be able to achieve com- pliance with all of its debt covenant requirements over the next 12 months. This situation arose due to the difﬁcult and unprecedented conditions affecting the automotive supply sector during 2005. The debt of J.L. French Automotive is without recourse to Onex. In February 2006, J.L. French Automotive’s U.S. entities ﬁled for protection under Chap- ter 11 of the U.S. Bankruptcy Code and its U.K. entity ﬁled under Administration in the U.K. Due to the prior years’ losses that have been recorded for J.L. French Automotive, of operating companies (42)(b) (206) (22)(c) the net carrying value of Onex’ investment in this company Total $ 3,863 $ 1,968 $ 1,321 (a) Includes CEI, Radian and ONCAP. (b) 2005 current portion of long-term debt excludes J.L. French Automotive. (c) 2003 current portion of long-term debt excludes ClientLogic and PLG. in Onex’ audited annual consolidated ﬁnancial statements is negative $607 million. Other liabilities Other liabilities increased to $1,115 million at Decem- ber 31, 2005 from $1,093 million at December 31, 2004. The The increase in long-term debt at December 31, 2005 from increase in other liabilities in 2005 was due primarily to 2004 resulted primarily from acquisitions in which debt other liabilities associated with the acquisitions of EMSC, was included in the transaction: CDI ($91 million), EMSC Spirit AeroSystems and Skilled Healthcare. Additionally, ($771 million), Spirit AeroSystems ($866 million), Cineplex during 2005, Spirit AeroSystems increased its other liabili- Entertainment’s purchase of Famous Players ($353 million) ties by $233 million as a result of a cash advance received 34 Onex Corporation December 31, 2005 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 from Boeing relating to the 787 program development costs. Cineplex Entertainment also added to other liabilities with Shareholders’ equity Shareholders’ equity increased to $1.2 billion at Decem- its issuance of $105 million of convertible debentures used ber 31, 2005 from $227 million at December 31, 2004 due to fund the purchase of Famous Players. primarily to $965 million of net earnings reported for the Partially offsetting this increase was a reduction year ended December 31, 2005. Table 22 provides a recon- in other liabilities from Onex’ early close out of the ciliation of the change in shareholders’ equity from Decem- Celestica exchangeable debentures and settlement of the ber 31, 2004 to December 31, 2005. Celestica forward sales agreements in the ﬁrst and second quarters of 2005, respectively. At December 31, 2004, other Change in Shareholders’ Equity liabilities included $730 million of deferred gains with respect to these Celestica exchangeable debentures and TABLE 22 ($ millions) forward sales agreements. Shareholders’ equity as at December 31, 2004 $ 227 Non-controlling interests The non-controlling interests liability on Onex’ audited Shares repurchased and cancelled Currency translation adjustment on consolidated balance sheet as at December 31, 2005 pri- self-sustaining foreign operations marily represents the ownership interests of shareholders Net earnings for 2005 Regular dividends declared (15) (18) (7) 965 other than Onex in Onex’ consolidated operating compa- nies. At December 31, 2005, the non-controlling interests balance amounted to $3.6 billion compared to $3.4 billion Shareholders’ equity as at December 31, 2005 $ 1,152 at December 31, 2004. Table 21 details the change in the Onex’ audited consolidated statements of shareholders’ non-controlling interests balance from December 31, 2004 equity also show the changes to the components of to December 31, 2005. shareholders’ equity for the years ended December 31, 2005 Change in Non-controlling Interests and 2004. Shares outstanding TABLE 21 ($ millions) At January 31, 2006, Onex had 137,629,696 Subordinate Non-controlling interests as at December 31, 2004 $ 3,388 Voting Shares issued and outstanding. Dividends are paid Non-controlling interests in net earnings of operating companies in 2005 on the Subordinate Voting Shares. Table 23 shows the 5 change in the number of Subordinate Voting Shares out- Investments by shareholders other than Onex in: standing from December 31, 2004 to January 31, 2006. Onex Partners Acquisitions completed in 2005 Other, net Distributions by operating companies Repurchase of share capital by operating companies Initial public offering of EMSC Settlement of Celestica exchangeable debentures and forward sales agreements Foreign currency translation 707 155 49 (506) (273) 118 155 (155) Change in Subordinate Voting Shares Outstanding TABLE 23 Subordinate Voting Shares outstanding at December 31, 2004 Issue of shares – Dividend Reinvestment Plan Shares repurchased and cancelled under 139,015,366 4,030 Onex’ Normal Course Issuer Bid (1,389,700) Non-controlling interests as at December 31, 2005 $ 3,643 Subordinate Voting Shares outstanding at January 31, 2006 137,629,696 Onex Corporation December 31, 2005 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 Onex also has 100,000 Multiple Voting Shares outstanding, The options vest equally over ﬁve years. The exercise price which have a nominal paid-in value, and 176,078 Series 1 of the options is not less than the market value of the Senior Preferred Shares, which have no paid-in amount Subordinate Voting Shares on the business day preceding reﬂected in Onex’ audited annual consolidated ﬁnancial the day of the grant. The options are not exercisable unless statements. Note 13 to the audited annual consolidated the average ﬁve-day market price of Onex Subordinate ﬁnancial statements provides additional information on Voting Shares is 25 percent greater than the exercise price. Onex’ share capital. There was no change in the Multiple At December 31, 2005, Onex had 13,434,600 options out- Voting Shares and Series 1 Preferred Shares outstanding standing to acquire Subordinate Voting Shares, of which during 2005. Cash dividends 4,967,600 options were vested and 1,989,600 of those vested options were exercisable. Table 24 provides a detailed reconciliation of the options outstanding at During 2005, Onex declared dividends of $0.11 per Sub- December 31, 2005. ordinate Voting Share to its shareholders, which were paid quarterly at a rate of $0.0275 per Subordinate Voting Share. Change in Stock Options Outstanding 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 2004 and 2003. The total TABLE 24 payments for dividends have decreased with the repur- chase of Subordinate Voting Shares under the Normal Course Issuer Bids as discussed on the following page. Outstanding at December 31, 2003 Granted Exercised or surrendered Expired Number of Options 12,259,000 10,205,000 (8,345,800) (156,500) Dividend Reinvestment Plan Onex’ Dividend Reinvestment Plan (the “Plan”) enables Outstanding at December 31, 2004 13,961,700 Canadian shareholders to reinvest cash dividends to Granted – Weighted Average Exercise Price $ 9.66 $ 16.54 $ 7.78 $ 18.56 $ 15.71 $ – acquire new Subordinate Voting Shares of Onex at a mar- ket-related price at the time of reinvestment. During 2005, Onex issued 2,865 Subordinate Voting Shares under the Plan at an average cost of $19.692 per Subordinate Voting Share, creating cash savings of less than $1 million. During Exercised or surrendered Expired (110,600) $ 8.10 (416,500) $ 18.19 Outstanding at December 31, 2005 13,434,600 $ 15.69 2004, 72,166 Subordinate Voting Shares were issued under During 2005, 110,600 options were exercised or surrendered the Plan at an average cost of $15.08 per Subordinate at an average exercise price of $8.10. All options were surren- Voting Share, creating cash savings of approximately $1 million. During 2003, Onex issued 317,599 Subordinate dered for cash consideration aggregating $1 million and no options were exercised for Subordinate Voting Shares of Onex. Voting Shares under the Plan at an average cost of $14.343 This compares to 8,345,800 options exercised or surrendered per Subordinate Voting Share, creating cash savings of in 2004 and 596,600 options in 2003. Of the total options approximately $5 million. In January 2006, Onex issued an exercised, approximately 71,000 options were exercised for additional 1,165 Subordinate Voting Shares under the Plan Subordinate Voting Shares in 2004 and 55,000 in 2003 at a at an average cost of $19.186 per Subordinate Voting Share. total value of $1 million and $1 million, respectively. Stock Option Plan Deferred Share Unit Plan Onex, the parent company, has a Stock Option Plan in Onex, the parent company, established a Deferred Share place that provides for options and/or share appreciation Unit Plan (“DSU Plan”) in 2004, which allows Onex direc- rights to be granted to Onex directors, ofﬁcers and tors to apply directors’ fees to acquire Deferred Share employees for the acquisition of Subordinate Voting Units (“DSUs”) based on the market value of Onex shares Shares of the Company for a term not exceeding 10 years. at the time. Grants of DSUs may also be made to Onex 36 Onex Corporation December 31, 2005 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S directors from time to time. Holders of DSUs are entitled L I Q U I D I T Y A N D C A P I T A L R E S O U R C E S to receive, for each DSU upon redemption, a cash pay- ment equivalent to the market value of a Subordinate This section should be read in conjunction with the Voting Share at the redemption date. The DSUs vest imme- audited annual consolidated statements of cash ﬂows and diately, are only redeemable once the holder retires from the corresponding notes thereto. the board of directors and must be redeemed by the end of Onex believes that maintaining a strong ﬁnancial the year following the year of retirement. Additional units position at the parent company with substantial liquidity are issued equivalent to the value of any cash dividends enables the Company to pursue new opportunities to cre- that would have been paid on the Subordinate Voting ate long-term value and support Onex’ existing operating Shares. The Company has recorded a liability for the future companies. settlement of DSUs at the balance sheet date by reference to the value of underlying shares at that date. On a quar- Major Cash Flow Components terly basis, the liability is adjusted up or down for the change in the market value of the underlying Subordinate TABLE 25 ($ millions) 2005 2004 Voting Shares, with the corresponding amount reﬂected in Cash from operating activities, excluding the consolidated statements of earnings. During 2005, Onex changes in non-cash net working issued 76,301 DSUs to its directors (2004 – 40,000 DSUs capital and other liabilities $ 361 $ 196 were issued) with a cost of $1 million (2004 – $1 million) Increase (decrease) in non-cash net being recorded as stock-based compensation expense. working capital, other liabilities At December 31, 2005, Onex had 116,301 DSUs outstanding. Normal Course Issuer Bids Onex had Normal Course Issuer Bids (the “Bids”) in place during 2005 that enables 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 share- holders 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 discount to their intrinsic value. During 2005, Onex repur- chased 939,200 Subordinate Voting Shares under the Bids at a total cost of $18 million. Under similar Bids, Onex repurchased 9,143,100 Subordinate Voting Shares at a total cost of $150 million during 2004 and 11,586,100 Subor- dinate Voting Shares at a total cost of $166 million in 2003. During January 2006, Onex repurchased 450,500 Subordinate Voting Shares under the Bid at a total cost of $9 million. Currency translation adjustment The currency translation component decreased share- holders’ equity by $7 million in 2005 compared to an increase of $68 million in 2004. Changes in the currency translation adjustment primarily represent the cumulative effect of changes in foreign currency rates on the value of Onex’ ownership in U.S.-based operating companies from their respective acquisition dates. and discontinued operations Cash from financing activities Cash used in investing activities 450 563 (1,507) (60) 608 (37) Consolidated cash $ 3,115 $ 3,310 Cash from operating activities Cash from operating activities, excluding changes in non-cash net working capital and other liabilities, totalled $361 million in 2005 compared to cash from operations of $196 million in 2004. The increase in cash generated from operations for the year ended December 31, 2005 compared to 2004 related primarily to the inclusion of EMSC and Spirit Aero- Systems. A detailed discussion of the consolidated oper- ating results can be found under the heading “Consolidated Operating Results” beginning on page 12 of this MD&A. The increase in other liabilities in 2005 was due primarily to a $233 million cash advance received by Spirit AeroSystems from Boeing relating to the funding of development costs for the 787 program. The increase in non-cash net working capital was primarily related to improved working capital at Celestica in 2005 compared to 2004, as well as the inclusion of Spirit AeroSystems. The 2004 discontinued operations of cash from operating activities was primarily the operations of Magellan. Onex Corporation December 31, 2005 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 Cash from ﬁnancing activities Cash from ﬁnancing activities was $563 million compared investments in 2005. These proceeds primarily related to the sale of the CGG convertible bonds for $145 million and to cash from ﬁnancing activities of $608 million for 2004. $222 million of cash received on the settlement of the Included in 2005 cash from ﬁnancing activities were: Celestica forward sales agreements. • US$250 million of gross proceeds received by Celestica During 2005, Onex’ operating companies spent on its 7.625% senior subordinated notes offering that $550 million on property, plant and equipment compared was completed in June 2005; to $308 million in 2004. Table 26 details property, plant • cash received by Cineplex Entertainment on its issuance of and equipment expenditures by industry segment. convertible debentures of $105 million and the $110 mil- lion unit issuance for its Famous Players acquisition in Property, Plant and Equipment Expenditures July 2005; and • cash received of $707 million from the limited part- TABLE 26 ($ millions) 2005 2004 ners of Onex Partners primarily for the acquisition of Electronics Manufacturing Services EMSC, completed in February 2005; Spirit AeroSystems, Aerostructures acquired in mid-June 2005; and Skilled Healthcare, Theatre Exhibition acquired in late December 2005. Healthcare Partially offsetting these were: • $273 million spent by Celestica to repurchase the equity component of its LYONs; • $332 million of cash paid by Onex Partners to limited Customer Management Services Automotive Products Other(a) Total $ 185 169 33 82 18 43 20 $ 180 – 23 – 43 52 10 $ 550 $ 308 partners, other than Onex, on the sale of its CGG con- (a) Includes CEI, Radian, ONCAP, Onex Real Estate, Onex Public Markets Group and vertible bonds and Magellan shares in 2005; and parent company. • $164 million of distributions primarily by CMC Elec- tronics relating to the sales of its Cincinnati Electronics division in 2004 and its NovAtel shares in 2005. Included in the 2004 cash from ﬁnancing activities was $150 million of cash used to repurchase shares by Onex, the parent company; this compares to $18 million spent in 2005. Cash used in investing activities Cash used in investing activities totalled $1,507 million in 2005, an increase of $1,470 million from cash used of $37 million in 2004. The increase in cash used in investing activities was due primarily to acquisitions completed in 2005, which used cash of $1.5 billion compared to $301 mil- lion of cash used for acquisitions in 2004. Note 3 to the audited annual consolidated ﬁnancial statements discloses the amount of cash invested in each acquisition completed during 2005 and 2004. Table 19 also provides more details of acquisitions completed in 2005, 2004 and 2003. Partially offsetting the cash spent on acquisitions was $405 million of cash received from proceeds on sales of operating 38 Onex Corporation December 31, 2005 Celestica recorded $185 million in property, plant and equipment expenditures related primarily to the expansion of manufacturing capabilities in lower-cost geographies such as China, Romania, Thailand and Mexico. Spirit Aero- Systems recorded $169 million in property, plant and equip- ment expenditures primarily for purchases on its 787 program, computer hardware and software, as well as tooling enhancements for its current programs. Cineplex Entertainment recorded $33 million in capital expen- ditures primarily for new theatre construction. EMSC recorded $60 million in property, plant and equipment expenditures relating primarily to the purchase of new ambulances and medical equipment. CDI spent $22 million in property, plant and equipment expenditures relating primarily to MRI upgrades and operating lease buyouts. ClientLogic recorded $18 million in capital expenditures mainly for its near-shore and offshore call centre capacity expansions in 2005, as well as technology and telephony upgrades to improve call centre and fulﬁllment efﬁciencies. 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 discontinued operations in cash from invest- The corporate investment commitments of $440 million ing activities for 2005 were: noted in table 27 primarily include Onex’ commitments to its • $81 million of proceeds received by Onex on the sale of real estate partnership, Onex Real Estate Partners LP (“Onex its remaining shares of CVG; Real Estate”), of US$200 million, as well as its commitment • $86 million of proceeds received by Cineplex Enter- to ONCAP II, a private equity fund focused on building tainment on the sale of 29 theatres, 27 of which were value with North American small and mid-sized companies. sold in connection with the Famous Players acquisition Cash for the investment commitments will be funded by as described above; and Onex as the investments are made. • $153 million in proceeds received by CMC Electronics Capital expenditure commitments are essentially on the sale of its remaining NovAtel shares. those of Onex’ operating companies. Those capital expen- diture commitments were principally attributable to: This compares to $644 million of cash from discontinued • Spirit AeroSystems, which had $155 million of capital operations, which related primarily to the proceeds received commitments, principally for property, plant and equip- on the sale of Loews Cineplex and CMC Electronics’ sale of ment and tooling expenditures to support its contracts its Cincinnati Electronics division. with Boeing and other aircraft manufacturers; • Cineplex Entertainment, which had capital commitments Consolidated cash resources At December 31, 2005, consolidated cash with continuing of $35 million associated with the construction of new theatre properties that will be completed and opened at operations was $3.1 billion compared to $2.9 billion at various times during the periods 2006–2007; and December 31, 2004. Onex, the parent company, repre- • Celestica, which had $26 million of capital commit- sented approximately $1.5 billion of consolidated cash and ments associated primarily with machinery and equip- Celestica had approximately $1.1 billion of cash at Decem- ment and facilities in our lower-cost geographies. ber 31, 2005. At December 31, 2005, limited partners in Onex Partners, other than Onex, had remaining commit- Contingent liabilities in the form of letters of credit, letters ments to provide $478 million of funding for future Onex- of guarantee, and surety and performance bonds are pro- sponsored acquisitions. The Company has a conservative vided by certain operating companies to various third cash management policy that limits investments to short- parties and include certain bank guarantees. As at Decem- term low-risk money-market products. No amounts of cash ber 31, 2005, the commitments with respect to these guar- from the limited partners of Onex Partners are included in antees collectively totalled $153 million. These guarantees are without recourse to Onex. In addition, certain oper- ating companies have also made guarantees with respect to employee share purchase loans. consolidated cash. Additional uses of cash Commitments As at December 31, 2005, Onex and its operating compa- nies had total commitments as follows: Commitments TABLE 27 ($ millions) Corporate investments Capital expenditures of operating companies Operating companies letters of credit, letters of guarantee and surety and performance bonds Total commitments $ 440 246 153 $ 839 Onex Corporation December 31, 2005 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 Contractual obligations Table 28 provides a breakdown of consolidated contractual obligations and the required future payments on those obliga- tions at December 31, 2005 for the Onex operating companies. Contractual Obligations TABLE 28 ($ 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 $ 4,688 2,303 $ 825 284 Total contractual obligations $ 6,991 $ 1,109 $ 344 451 $ 795 $ 622 347 $ 969 $ 2,897 1,221 $ 4,118 A breakdown of long-term debt by industry segment is pro- ONCAP is a private equity vehicle dedicated to vided in table 20. Note 9 to the audited annual consolidated investing and building value in small- to mid-sized North ﬁnancial statements also provides detailed long-term debt American companies. ONCAP raised its ﬁrst $400 million disclosure by operating company. In addition, note 10 to the fund, ONCAP I, in 1999, to which Onex committed $120 mil- audited annual consolidated ﬁnancial statements provides lion. This ﬁrst fund’s commitment period was completed in further disclosure on capital and operating leases. early 2005. In late 2005, ONCAP completed a ﬁrst close on a Additional sources of cash Private equity funds second fund, ONCAP II, with $500 million of targeted capital commitments, of which Onex has committed to be approxi- mately half. Onex is the General Partner of ONCAP. ONCAP’s Onex had additional sources of cash from two funds – Onex investors, other than Onex, include a number of prominent Partners and ONCAP II. Onex Partners is a $2.1 billion Canadian institutions. During 2006, ONCAP will fund its (US$1.7 billion) fund that provides capital to Onex-spon- acquisitions through ONCAP II. sored acquisitions not related to Onex’ operating com- panies that existed prior to the formation of Onex Partners or ONCAP I. Onex controls the General Partner and the Related party transactions Related party transactions are primarily investments by Manager of Onex Partners and has pledged $480 million the management of Onex and of the operating companies (US$400 million) to Onex Partners. Onex Partners has a in the equity of the operating companies acquired. Onex diverse group of investors, including public and private has a Management Incentive Plan (the “MIP”) in place pension funds, banks, insurance companies and endow- that requires its management members to invest in each of ment funds from the United States, Canada, Europe and the operating companies acquired by Onex. The funds Asia. This substantial pool of committed funds enables required for investments under the MIP are neither loaned Onex to be more ﬂexible and timely in responding to to the management members nor guaranteed by Onex or investment opportunities. At December 31, 2005, Onex the operating companies. Partners, including Onex and other co-investors, had During 2005, there were investments of $4 million invested $1.1 billion in investments or acquisitions com- under the MIP compared to $2 million in 2004. Manage- pleted in 2005. The available uncalled committed capital of ment members participated in the realizations Onex Onex Partners, excluding Onex, totalled $478 million at achieved on Magellan, CVG and CGG, receiving under December 31, 2005. 40 Onex Corporation December 31, 2005 the MIP $11 million in 2005. This compares to $35 million in realizations under the MIP relating to the sales of Loews Cineplex and Armtec in 2004. Notes 1 and 24 to the audited annual consolidated ﬁnancial statements provide additional details on the MIP. 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 Members of management and the Board of Onex does not guarantee the debt on behalf of its Directors of Onex can invest limited amounts in partner- operating companies, nor are there any cross-guarantees ship with Onex in all acquisitions outside of Onex Partners between operating companies. Onex will invest in the debt at the same cost as Onex and other outside investors. of its operating companies, which amounted to $206 mil- During 2005, approximately $21 million in investments lion at December 31, 2005 compared to $204 million at were made by Onex management and Onex board mem- December 31, 2004. Note 9 to the audited annual consoli- bers; this compares to $9 million in investments made by dated ﬁnancial statements provides information on the management and the Onex board in 2004. debt of operating companies held by Onex. Note 24 to the The Onex Partners’ fund structure requires Onex audited annual consolidated ﬁnancial statements describes management to invest a minimum of 1 percent (US$16.5 mil- related party transactions. lion) in all acquisitions. Onex management and directors have committed to invest an additional 3 percent of the total capital invested by Onex Partners. This structure applies to those acquisitions completed through Onex Pending transactions at December 31, 2005 Acquisition of Town and Country Trust In December 2005, Onex announced that a joint venture Partners. The total amount invested in 2005 by Onex man- investment vehicle formed by afﬁliates of Onex Real Estate agement and directors on acquisitions and investments and Morgan Stanley Real Estate had entered into an agree- completed through Onex Partners was $30 million. ment to acquire The Town and Country Trust (“TCT”) During the investment period of Onex Partners (NYSE: TCT) in an all-cash transaction totalling approx- (up to six years), Onex will receive a management fee of imately $1.5 billion, including the assumption of debt. 2 percent on the US$1.25 billion of committed capital pro- The agreement is subject to approval by two-thirds of vided by third-party investors. Thereafter, a 1 percent TCT’s common shareholders and certain other customary management fee is payable to Onex on invested capital. closing conditions. Competing offers have subsequently Onex Partners’ General Partner will also receive a carried been made for TCT and it is not known at this time what interest of 20 percent on the realized gains of the third- the outcome of the process will be. TCT is a multi-family party limited partners, subject to an 8 percent compound real estate investment trust that owns and operates annual preferred return to such limited partners on all 39 apartment communities with 13,330 apartment homes amounts contributed to Onex Partners. This carried inter- in the Mid-Atlantic States and Florida. est will be based on the overall performance of Onex Partners and includes typical catch-up and clawback provisions. Consistent with market practice, Onex, as Controls and procedures The Chief Executive Ofﬁcer and Chief Financial Ofﬁcer sponsor of Onex Partners, will be allocated 40 percent of have evaluated our disclosure controls and disclosures as the carried interest with 60 percent allocated to the Onex at December 31, 2005 and have concluded that such con- principals. During 2005, Onex received a carried interest of trols and procedures are effective. $11 million on the realized gains of Magellan and CGG, which is deferred from inclusion in income for accounting purposes until there is certainty that the targeted return Other matters Onex Corporation’s ﬁnancial ﬁlings, including its 2005 for the overall performance of Onex Partners has been Annual Report and interim quarterly reports, Annual achieved. Management of Onex received a carried interest Information Form and Management Circular, are available of $17 million on these realized gains. on the Company’s website at www.onex.com or on the Canadian System for Electronic Document Analysis and Retrieval (“SEDAR”) at www.sedar.com. Onex Corporation December 31, 2005 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 P A R E N T C O M P A N Y OUTLOOK Aerostructures Spirit AeroSystems Onex entered 2006 with a substantial amount of capital Spirit AeroSystems, Inc. (“Spirit AeroSystems”) expects rev- either available or committed for investment in attractive enues to advance in 2006 based on a solid order backlog businesses and other asset classes. These funds include and higher production rates on key programs. The strong $1.5 billion in cash and near-cash equivalents in Onex, the order intake achieved during 2005 will lead to increased parent company, and $478 million in remaining capital production from 2006 through 2008, especially on Boeing’s commitments from Onex Partners for investment in Onex- 737 Next Generation and 777 platforms. Moreover, Spirit sponsored acquisitions. It is Onex’ objective to invest AeroSystems will continue its efforts to win new mandates a signiﬁcant portion of these funds during 2006. Despite from other OEMs and to augment its business in after- the very competitive nature of North American private market spares and repair support. equity markets, Onex believes it can continue to ﬁnd those The company intends to seek further reductions in unique situations to invest its capital to achieve appro- costs through productivity improvements and global supply priate returns and limit its downside risk. sourcing. While capital management will remain a key Onex has also created new vehicles for invest- focus of management, capital expenditures will increase ment that leverage its private equity experience and pro- substantially in 2006 due to spending for the 787 platform, vide new opportunities to invest its capital. In 2005, the which is scheduled to go into production during 2007, and Company launched OPMG with US$400 million in capital the initial implementation of the new enterprise resource for investment in publicly traded North American equi- planning software. ties. Onex also established Onex Real Estate Partners, a Overall, Spirit AeroSystems has a very strong US$200 million partnership with the objective of acquiring foundation on which to grow. Not only is it the industry and improving real estate assets in North America. These leader in independent complex aerostructures manufac- initiatives should provide attractive opportunities for Onex turing, the management team is also creating a market- to invest capital in 2006. O P E R A T I N G C O M P A N I E S Electronics Manufacturing Services Celestica driven mindset throughout the company that will enhance its substantial competitive strengths. In late January 2006, Spirit AeroSystems agreed to acquire BAE Systems’ aerostructures business with opera- tions in Prestwick, Scotland and Samlesbury, England in a transaction valued at $162 million. BAE Systems’ aero- Celestica Inc. (“Celestica”) entered 2006 with a strong book structures business produces wing and other structural of new business wins. These wins will add additional end- components, primarily for Airbus airplanes, which include market diversiﬁcation to Celestica’s customer base in end the A320 family, the A380, the A330 and the A340. Once markets such as consumer electronics and aerospace. Con- acquired, the new business will be known as Spirit Aero- tinuing improvements in the company’s sales organization Systems (Europe) Ltd. This acquisition will enhance Spirit and processes will remain a key priority in the coming year. AeroSystems’ manufacturing operations, add important Celestica expects to take approximately US$115 mil- new customers and further the company’s leadership in lion in pre-tax restructuring charges in 2006 as it com- the global industry. Spirit AeroSystems will ﬁnance the pletes the program announced in early 2005. Management entire acquisition, which is expected to close in the ﬁrst will seek to improve operating margins beyond the quarter of 2006. levels achieved in 2005 by completing its shift in manu- facturing capacity to low-cost geographies and continuing to drive greater manufacturing efﬁciency throughout its organization. 42 Onex Corporation December 31, 2005 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 Entertainment ensure the health and safety of their citizens and patients. With its strong value proposition and market leadership, The announced slate of new ﬁlms, which includes Mission EMSC is very well positioned to take advantage of these Impossible 3, The DaVinci Code, Pirates of the Caribbean II trends. EMSC management will also explore opportunities and the new Pixar animated feature, Cars, is expected to to provide additional services, such as radiologist or hos- lead to more robust box-ofﬁce performance at Cineplex pitalist stafﬁng and management, to its existing base of Entertainment Limited Partnership (“Cineplex Entertain- hospital customers. ment”) theatres during 2006. Late in 2005, the business converted all of the acquired Famous Players theatres to Center for Diagnostic Imaging the Cineplex Galaxy model of theatre-based pricing, a Center for Diagnostic Imaging, Inc. (“CDI”) expects an realignment that is expected to add incrementally to total improvement in performance during 2006 as startup cen- box-ofﬁce revenues during 2006. tres opened in St. Louis and Chicago in 2005 are expected The acquisition of Famous Players delayed the to add to earnings. The company’s successful negotiation launch of a new loyalty program that had been planned for of a hospital partnership agreement in Kansas City and 2005. During the ﬁrst half of 2006, Cineplex Entertainment the addition of an experienced radiologist in Seattle are expects to launch a new integrated website and link its expected to improve CDI’s results in those previously point-of-sale systems to create Canada’s leading online underperforming markets. The company also intends to entertainment portal and loyalty program. open up to six centres during the year in both new and Healthcare Emergency Medical Services existing markets, which are expected to fuel growth over the longer term. CDI management believes that several industry Emergency Medical Services Corporation (“EMSC”) will trends will also continue to evolve in its favour. The aging continue to focus on organic growth in 2006. EMSC of the U.S. population and the disproportionate consump- management plans to integrate the sales and marketing tion of radiology services by the elderly should continue to operations of AMR and EmCare to improve the effective- drive demand for diagnostic imaging services. Demand is ness and efﬁciency of those areas, to broaden its product offering to serve the “episodic” patient and to expand its also expected to be fuelled by the increasing use of diag- nostic imaging for preventative screening and the increased public/private 911 partnerships with ﬁre departments. acceptance of non-invasive diagnostic procedures like the EMSC management also expects to explore selective virtual colonoscopy. The company expects unit pricing to acquisitions in markets adjacent to current operations. decline over time as government and private payors seek A focus on seeking further reductions in oper- to reduce imaging outlays. ating costs will remain a priority. EMSC intends to share administrative services between AMR and EmCare and to Skilled Healthcare consolidate billing and collection centres. These initiatives Management of Skilled Healthcare Group, Inc. (“Skilled are expected to add to proﬁtability during 2006. Healthcare”) is optimistic that recent systemic modiﬁ- Longer term, Onex believes that EMSC has an cations to Medicare per diem rates for skilled nursing excellent opportunity for substantial value creation. The facilities will add to total revenues in the coming year. use of both ambulance transport and emergency depart- New Medicare rates took effect January 1, 2006, reﬁning ments is expected to increase steadily with the aging of the 14 rehabilitation-intensive categories of care and adding U.S. population, as it has over the past several years. More- nine categories for acute care patients. Nearly 20 percent over, it is anticipated that the trend to outsource emergency of Skilled Healthcare’s patient-days, and 55 percent of its medical services to private providers will continue as revenues, are derived from Medicare patients, a signiﬁcant communities and hospitals increasingly focus on providing percentage of whom will likely be affected by new reim- reliable, cost-efﬁcient emergency medical services to bursement classiﬁcations. Management also believes the Onex Corporation December 31, 2005 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 effect of a full year of recent Medicaid rate increases in In December 2005, one of ClientLogic’s clients several of the states in which it operates will have a posi- announced its plans to terminate a portion of its contract tive impact in 2006. Management expects these rate with the company with the transition being completed increases, as well as operational improvements in several during the ﬁrst half of 2006. This termination will reduce of the company’s facilities, to result in increased operating annual revenues by approximately US$75 million. In spite income during 2006. of the loss of revenues under this contract, ClientLogic Skilled Healthcare intends to enhance its organic expects improved ﬁnancial performance associated with growth through tuck-in acquisitions in existing markets, as revenues from new customers in 2006 as well as higher well as through larger strategic acquisitions in new mar- average margins from improved customer mix and oper- kets in the western United States, if opportunities can be ating performance. found at attractive valuations. The company will also con- tinue to promote the rapid growth of its rehabilitation services with third-party facility operators. Skilled Health- Automotive Products J.L. French Automotive care’s rehabilitation division currently manages 145 con- In February 2006, J.L. French Automotive Castings, Inc.’s tracts, 56 of which are for afﬁliated facilities, and employs (“J.L. French Automotive”) U.S. entities ﬁled under Chap- more than 670 full-time equivalent therapists. Manage- ter 11 for bankruptcy protection in the United States, and ment also intends to expand the company’s new hospice its U.K. entity under Administration in the U.K. This ﬁling care business into the Los Angeles area early in 2006 and was necessary as the company was in default on a num- possibly into other markets later in the year. ber of its obligations to lenders. J.L. French Automotive ResCare has reached an agreement with certain of its lenders on a proposed ﬁnancial restructuring. The proposed agreement Res-Care, Inc. (“ResCare”) is one of the United States’ would signiﬁcantly reduce J.L. French Automotive’s debt leading special needs providers. The long-term social and levels, as well as position the company to increase its demographic factors that have driven the growth of the investment in its core business. J.L. French Automotive company should continue to provide a solid foundation for plans to continue to operate as usual with debtor-in- growth in revenues and earnings in the years ahead. Among possession ﬁnancing while under bankruptcy protection. these factors are aging family caregivers of the develop- It is currently anticipated that Onex will have little mentally disabled, growing waiting lists for services and the or no ownership interest in J.L. French Automotive as a trend to privatization of state-run services. As a result, there result of the bankruptcy restructuring process. Accord- is a large demand for services and high occupancy rates ingly, in the ﬁrst quarter of 2006 Onex will likely record for in existing homes. This is making the provision of periodic accounting purposes a disposition or abandonment of its in-home services – a small but growing core capability of interest in J.L. French Automotive. This would result in ResCare – an attractive option for state governments. an accounting gain being recorded of $607 million due Customer Management Services ClientLogic to J.L. French Automotive’s recorded losses exceeding Onex’ investment. Onex’ previously reported results would be adjusted to show J.L. French Automotive as a discontin- ClientLogic Corporation (“ClientLogic”) began 2006 with ued operation and no further operations are likely to be a very robust pipeline of new business. Management included for 2006. intends to add scale by opening three new customer contact facilities as well as expanding another call centre Performance Logistics Group during 2006. This will provide additional capacity in In January 2006, Performance Logistics Group, Inc. (“PLG”) domestic near-shore and offshore markets. Management ﬁled for bankruptcy protection under Chapter 11 of the also expects to strengthen its technology solutions for Bankruptcy Code in the United States. Onex ceased to clients in order to provide a more comprehensive package have voting control of PLG in 2004, and had been carrying of value-added solutions. 44 Onex Corporation December 31, 2005 its investment at a cost of nil. As a result of the bankruptcy proceedings, Onex does not expect any future value from this investment. 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 Mid-Cap Opportunities ONCAP Communications Infrastructure Radian Radian Communication Services Corporation (“Radian”) With an expanded team of nine professionals, ONCAP entered 2006 with a more efﬁcient operating base, positive intends to look at a greater number of potential invest- industry dynamics and a good order book in each of its ments during 2006. The team’s excellent results with its ﬁrst segments. In January 2006, Radian announced its inten- fund have helped it establish a strong reputation as a good tion to close the Canadian manufacturing operations and partner for management teams and a responsive, creative move those operations to Peoria, Illinois. This move is acquirer for sellers and their advisors. Overall, it is expected anticipated to be completed by the end of the ﬁrst quarter that ONCAP’s pace of acquisitions will increase as it ﬁnds of 2006 and should result in improved utilization and attractive candidates for ONCAP II LP (“ONCAP II”), which lower operating costs. Proceeds from the planned sale has $500 million of targeted committed capital for new, of the Canadian properties will be used to reduce bank standalone investments in small- and mid-cap companies. indebtedness. Management expects improved revenues ONCAP expects its current operating companies and proﬁtability based on its awarded contracts from the to continue to grow in 2006. Under the terms of the ﬁrst installation of large towers in Jakarta during the ﬁrst half of fund, ONCAP I, these companies and ONCAP may pursue the year. Capital spending has improved in the wireless add-on acquisitions that will add to their ability to create infrastructure business in the United States as larger con- value. New acquisitions by ONCAP II are also expected to solidated carriers vie for market share by upgrading speed add to total revenues. In early January 2006, ONCAP com- and data transmission on their networks. The West Coast is pleted the ﬁrst purchase for its second fund. ONCAP II a focal point for this work, a region in which Radian has its acquired CSI Global Education Inc. (“CSI”), Canada’s strongest presence. With operational issues now largely leader in interactive investment education for the securi- resolved and a good order book in hand, Radian believes ties and ﬁnancial services industries. ONCAP II invested that its U.S. broadcast business will make a positive con- $25 million in this transaction, of which Onex’ share was tribution in 2006 as broadcasters work to meet the FCC $14 million. Personal Care Products Cosmetic Essence mandate to convert from analog to digital transmission. Overall, Radian management expects strong revenues over the next 12 months, accompanied by an improvement in operating earnings. Cosmetic Essence, Inc. (“CEI”) began 2006 with a very robust research and development pipeline. Projects in active development and testing represented a 30 percent increase over a year earlier. CEI expects that new product introductions from its research and development activities will be a strong impetus to revenue growth in 2006. Growth from major customers is also expected to remain strong. At the end of 2005, CEI management was imple- menting a variety of initiatives to reduce its cost structure. Head count and ﬁxed overheads are being reduced and information systems upgraded to provide more visibility to CEI’s increasingly complex business. During 2006, CEI will also implement high-return capital projects that will reduce labour content and improve the company’s cost structure. CEI’s management is conﬁdent that it can suc- cessfully grow the business in 2006 while improving its overall proﬁtability. Onex Corporation December 31, 2005 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 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 for business and strategic planning, and ﬁnancial reporting, while an operating company builds these capabilities apply common-sense business principles to the manage- in-house. In almost all cases, Onex ensures there is over- ment of the Company, the ownership of its operating com- sight of its investment through representation on the panies and the acquisition of new businesses. Each year acquired company’s board of directors. detailed reviews are conducted of many opportunities to Operating companies are encouraged to reduce purchase either new businesses or add-on acquisitions for risk and/or expand opportunity by diversifying their cus- existing businesses. Onex’ primary interest is in acquiring tomer bases, broadening their geographic reach or prod- well-managed companies with a strong position in growing uct and service offerings, and improving productivity. industries. In addition, diversiﬁcation among Onex’ oper- In certain instances, we may also encourage an operating ating companies enables Onex to participate in the growth company to seek additional equity in the public markets in of a number of high-potential industries with varying busi- order to continue its growth without eroding its balance ness cycles. sheet. One element of this approach may be to use new As a general rule, Onex attempts to arrange equity investment, when ﬁnancial markets are favourable, as many factors as practical to minimize risk without to prepay existing debt and absorb related penalties. hampering its opportunity to maximize returns. When a Speciﬁc strategies and policies to manage busi- purchase candidate meets Onex’ criteria, for example, typ- ness risk at Onex and its operating companies are dis- ically a fair price is paid, though not necessarily the lowest cussed below. price, for a high-quality business. Onex does not commit all of its capital to a single acquisition and will have equity partners with whom it can share the risk of ownership, Business cycles Diversiﬁcation by industry and geography is a deliberate especially on large-scale transactions. Onex Partners LP strategy at Onex to reduce the risk inherent in business and the proposed Onex Partners II LP funds streamline cycles. Onex’ practice of owning companies in various indus- Onex’ process of sourcing and ﬁnalizing commitments tries with differing business cycles reduces the risk of holding from such equity partners. a major portion of Onex’ assets in just one or two industries. An acquired company is not burdened with more Similarly, the Company’s focus on building industry leaders debt than it can likely sustain, but rather structured so that with extensive international operations reduces the ﬁnancial it has the ﬁnancial and operating leeway to create as much impact of downturns in speciﬁc regions. long-term growth in value as possible. Finally, Onex buys in ﬁnancial partnership with management. This strategy not only gives Onex the beneﬁt of experienced managers Operating liquidity It is our view that one of the most important things Onex but also ensures that an operating company is run entre- can do to control risk is to maintain a strong parent com- preneurially for the beneﬁt of all shareholders. pany with an appropriate level of liquidity. Onex needs to Onex maintains an active involvement in its be in a position to support its operating companies when, operating companies in the areas of strategic planning, and if, appropriate. Maintaining liquidity is important ﬁnancial structures and negotiations, and acquisitions. In because Onex, as a holding company, generally does not the early stages of ownership, Onex may provide resources have guaranteed sources of meaningful cash ﬂow. 46 Onex Corporation December 31, 2005 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 completing acquisitions, it is generally Onex’ Onex and major institutional co-investors. During 2004 and policy to ﬁnance a large portion of the purchase price with 2005, we successfully deployed a substantial portion of this debt provided by third-party lenders. This debt is assumed capital in a variety of attractive businesses. by the company acquired and is without recourse to Onex, the parent company, or its other operating companies or partnerships. The foremost consideration, however, in Financial and commodity risks In the normal course of business activities, Onex and its developing a ﬁnancing structure for an acquisition is iden- operating companies may face a variety of risks related to tifying the appropriate amount of equity to invest. In ﬁnancial management. Individual operating companies may Onex’ view, this is the amount of equity which maximizes also use ﬁnancial instruments to offset the impact of antici- the risk/reward equation for both shareholders and the pated changes in commodity prices related to the conduct of acquired company. In other words, it allows the acquired their businesses. In all cases, it is a matter of Company pol- company not only to manage its debt but also to have icy that neither Onex nor its operating companies engage in signiﬁcant ﬁnancial latitude for the business to vigorously derivatives trading or other speculative activities. pursue its growth objectives. Interest rate risk As noted above, Onex generally While Onex seeks to maximize the risk/reward ﬁnances a signiﬁcant portion of its acquisitions with debt equation in all acquisitions, there is the risk that the taken on by the acquired operating company. An impor- acquired company will not generate sufﬁcient proﬁtability tant element in controlling risk is to manage, to the extent or cash ﬂow to service its debt requirements and/or possible, the impact of ﬂuctuations in interest rates on the related debt covenants or provide adequate ﬁnancial debt of the operating company. ﬂexibility for growth. In such circumstances, additional It has generally been Onex’ policy to ﬁx the inter- investment by the equity partners, including Onex, may est on some or all of the term debt or otherwise minimize be required. In severe circumstances, the recovery of the effect of interest rate increases on a substantial por- Onex’ equity and any other investment in that operating tion of the debt of its operating companies at the time of company is at risk. Timeliness of investment commitments Onex’ ability to create value for shareholders is dependent in acquisition. This is achieved by taking on debt at ﬁxed interest rates and entering into interest rate swap agree- ments or ﬁnancial contracts to control the level of interest rate ﬂuctuation. part on our ability to successfully complete large acquisi- The risk inherent in such a strategy is that, should tions. Our preferred course is to complete acquisitions on an interest rates decline, the beneﬁt of such declines may not exclusive basis. However, we also participate in large acqui- be obtainable or may only be achieved at the cost of penal- sitions through an auction or bidding process with multiple ties to terminate existing arrangements. There is also the potential purchasers. Bidding is often very competitive for risk that the counterparty on an interest rate swap agree- the large-scale acquisitions that are Onex’ primary interest, ment may not be able to meet its commitments. Guide- and the ability to make knowledgeable, timely investment lines are in place that specify the nature of the ﬁnancial commitments is a key component in successful purchases. institutions that operating companies can deal with on In such instances, the vendor often establishes a relatively interest rate contracts. short time frame for Onex to respond deﬁnitely. Currency ﬂuctuations The majority of the activi- In order to improve the efﬁciency of Onex’ internal ties of Onex’ operating companies were conducted outside processes on both auction and exclusive acquisition Canada during 2005. As discussed, approximately 37 per- processes, and so reduce the risk of missing out on high- cent of consolidated revenues and 41 percent of consoli- quality acquisition opportunities, during 2003 we created dated assets were in the United States. Approximately Onex Partners LP, a $2.1 billion pool of capital raised from 49 percent of consolidated revenues were from outside Onex Corporation December 31, 2005 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 North America; however, a substantial portion of that business is actually based on U.S. currency. This makes the Integration of acquired companies An important aspect of Onex’ strategy for value creation is value of the Canadian dollar relative to the U.S. dollar the to acquire what we consider to be “platform” companies. primary currency relationship affecting Onex’ operating Such companies typically have distinct competitive advan- results. Onex’ operating companies may use currency tages in products or services in their respective industries derivatives in the normal course of business to hedge that provide a solid foundation for growth in scale against adverse ﬂuctuations in key operating currencies and value. In these instances, Onex works with company but, as noted above, speculative activity is not permitted. management to identify and purchase attractive add-on Onex’ results are reported in Canadian dollars, and acquisitions that would enable the platform company to ﬂuctuations in the value of the Canadian dollar relative to achieve its goals for growth more quickly than by focusing other currencies can have an impact on Onex’ reported solely on the development and/or diversiﬁcation of its results and consolidated ﬁnancial position. During 2005, customer base, which is known as organic growth. Growth the net increase in shareholders’ equity reﬂected a $7 mil- by acquisition, however, carries more risk than organic lion decrease in the value of Onex’ net equity in those oper- growth. While as many of these risks as possible are con- ating companies that operate in U.S. currency. sidered in the acquisition planning, in Onex’ experience Onex holds a substantial amount of cash and our operating companies also face risks such as unknown marketable securities in U.S.-dollar-denominated securi- expenses related to the cost-effective amalgamation of ties. The portion of securities held in U.S. dollars is based operations, the retention of key personnel and customers, on Onex’ view of funds it will require for future invest- the future value of goodwill paid as part of the acquisition ments in the United States. Onex does not speculate on the price and the future value of the acquired assets and intel- direction of exchange rates between the Canadian dollar lectual property. Onex works with company management and the U.S. dollar when determining the balance of cash to understand and potentially mitigate such risks as much and marketable securities to hold in each currency, nor as possible. does it use foreign exchange contracts to protect itself against translation loss. Commodity prices Certain of Onex’ operating Dependence on government funding During the past two years, Onex has acquired businesses, companies are vulnerable to price ﬂuctuations in major or interests in businesses, in various segments of the U.S. commodities. The most signiﬁcant of these is Celestica, healthcare industry. The revenues of these companies are which purchases a substantial volume of electronic com- partially dependent on funding from federal, state and ponents that could be viewed as commodity in nature and local government agencies, especially those responsible subject to ﬂuctuations in price. Celestica manages its for federal Medicare and state Medicaid funding. Bud- exposure in this area by purchasing components only for getary pressures, as well as economic, industry, political speciﬁc customer contracts and by having those sale con- and other factors, could inﬂuence governments to not tracts include terms or pricing provisions that pass any increase and, in some cases, to decrease appropriations product cost ﬂuctuations on to the customer. for the services offered by Onex operating subsidiaries, which could reduce their revenues materially. Future revenues may be affected by changes in rate-setting struc- tures, methodologies or interpretations that may be pro- posed or are under consideration. 48 Onex Corporation December 31, 2005 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 While each of Onex’ operating companies in the U.S. healthcare industry is subject to reimbursement risk Environmental considerations Onex has an environmental protection policy that has directly related to its particular business segment, it is been adopted by its operating companies. Senior ofﬁcers unlikely that all of these companies would be affected by of each of these companies are ultimately responsible for the same event, or to the same extent, simultaneously. ensuring compliance with this policy. They are required to Ongoing pressure on government appropriations is a nor- report annually to their company’s board of directors and mal aspect of business for these companies, and all seek to Onex regarding compliance with this policy. to minimize the effect of possible funding reductions Environmental management by the operating through productivity improvements and other initiatives. companies is accomplished through: the education of employees about environmental regulations and appropri- Signiﬁcant customers Onex has acquired major operating companies and ate operating policies and procedures; site inspections by environmental consultants; the addition of proper equip- divisions of large companies. As part of these purchases, ment or modiﬁcation of existing equipment to reduce or the acquired company has often continued to supply its eliminate environmental hazards; remediation activities as former owner through long-term supply arrangements. required; and ongoing waste reduction and recycling pro- It has been Onex’ policy to encourage its operating com- grams. Environmental consultants are engaged to advise on panies to quickly diversify their customer bases to the current and upcoming environmental regulations that may extent practicable in order to manage the risk associated be applicable. with serving a single major customer. Celestica primarily Most of the operating companies are involved in relied on one major customer at the time of its acquisition the remediation of particular environmental situations by Onex; the company now has a broadly diversiﬁed global such as soil contamination. In almost all cases, these situ- base of signiﬁcant customers. ations have occurred prior to Onex’ acquisition of those Certain Onex operating companies have major companies. The estimated costs of remedial work and customers that represent more than 10 percent of annual related activities are to be provided for either under agree- revenues. Spirit AeroSystems primarily relies on one ment by the vendor of the company or through provisions major customer, Boeing, at the time of its acquisition by established at the time of acquisition. Manufacturing Onex. The table in note 23 to the audited annual consoli- activities carry the inherent risk that changing environ- dated ﬁnancial statements provides information on the mental regulations may identify additional situations concentration of business the operating companies have requiring capital expenditures or remedial work, and asso- with major customers. ciated costs to meet those regulations. Onex Corporation December 31, 2005 49 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. 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 February 16, 2006 Donald W. Lewtas Vice-President Finance 50 Onex Corporation December 31, 2005 AUDITORS’ REPORT To the Shareholders of Onex Corporation: We have audited the consolidated balance sheets of Onex Corporation as at December 31, 2005 and 2004 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, 2005 and 2004 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 February 16, 2006 Onex Corporation December 31, 2005 51 CONSOLIDATED BALANCE SHEETS As at December 31 (in millions of dollars) 2005 2004 Assets Current assets Cash and short-term investments $ 3,115 $ 2,866 2,170 1,992 465 18 7,760 2,690 1,279 519 2,540 57 1,577 1,437 441 708 7,029 1,542 659 271 1,450 858 $ 14,845 $ 11,809 $ 1 3,305 $ 13 2,603 850 8 4,164 3,863 77 – 1,115 767 64 10,050 3,643 1,152 227 482 3,325 1,968 23 156 1,093 691 938 8,194 3,388 227 $ 14,845 $ 11,809 Accounts receivable Inventories (note 5) Other current assets Current assets held by discontinued operations (note 2) Property, plant and equipment (note 6) Investments and other assets (note 7) Intangible assets (note 8) 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 9) Obligations under capital leases of operating companies, without recourse to Onex (note 10) Exchangeable debentures (note 11) Other liabilities (note 12) 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 10 and 24. Signed on behalf of the Board of Directors Director Director 52 Onex Corporation December 31, 2005 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 14) Interest and other income Equity-accounted investments Foreign exchange loss Stock-based compensation Derivative instruments Gains on sales of operating investments, net (note 15) Acquisition, restructuring and other expenses (note 16) Debt prepayment (note 17) Writedown of goodwill and intangible assets (note 18) Writedown of long-lived assets (note 19) Earnings (Loss) before income taxes, non-controlling interests and discontinued operations Provision for income taxes (note 20) Non-controlling interests Earnings (Loss) from continuing operations Earnings from discontinued operations (note 2) 2005 $ 16,559 (14,524) (1,089) 946 (409) (96) (332) 145 1 (31) (50) 4 921 (266) (6) (3) (5) 819 (72) 5 752 213 2004 $ 13,639 (12,449) (765) 425 (370) (72) (195) 102 (8) (116) (55) 29 107 (204) (8) (393) (94) (852) (278) 891 (239) 274 Net Earnings for the Year $ 965 $ 35 Net Earnings (Loss) per Subordinate Voting Share (note 21) Basic and Diluted: Continuing operations Discontinued operations Net earnings $ $ $ 5.41 1.54 6.95 $ $ $ (1.69) 1.94 0.25 Onex Corporation December 31, 2005 53 CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (in millions of dollars except per share data) Balance – December 31, 2003 Dividends declared(a) Issue of shares – dividend reinvestment plan Purchase and cancellation of shares Currency translation adjustment Net earnings for the year Balance – December 31, 2004 Dividends declared(a) Issue of shares – dividend reinvestment plan(b) Purchase and cancellation of shares Currency translation adjustment Net earnings for the year Share Capital (note 13) Retained Earnings (Deficit) Cumulative Translation Adjustment Total Shareholders’ Equity $ 618 $ (195) $ (135) $ 288 – 1 (37) – – 582 – – (4) – – (15) – (113) – 35 (288) (15) – (14) – 965 – – – 68 – (67) – – – (7) – (15) 1 (150) 68 35 227 (15) – (18) (7) 965 Balance – December 31, 2005 $ 578 $ 648 $ (74) $ 1,152 (a) Dividends declared per Subordinate Voting Share during 2005 totalled $0.11 (2004 – $0.11). (b) In 2005, shares issued under the dividend reinvestment plan amounted to less than $1. 54 Onex Corporation December 31, 2005 CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended December 31 (in millions of dollars) 2005 2004 Operating Activities Net earnings (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-cash component of restructuring Non-controlling interests Future income taxes (note 20) Stock-based compensation Derivative instruments Gains on sales of operating investments, 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 (decrease) in cash due to changes in working capital items Discontinued 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 Distributions by operating companies Repurchase of share capital by operating companies Increase (decrease) due to other financing activities Discontinued operations Investing Activities Acquisition of operating companies, net of cash in acquired companies of $263 (2004 – $35) (note 3) Purchase of property, plant and equipment Proceeds from sales of operating investments Decrease due to other investing activities Discontinued operations 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(a) Cash and Short-term Investments – End of the Year(a) (a) Includes cash from discontinued operations of $444 at December 31, 2004 (note 2). $ 752 $ (239) 409 96 3 5 18 (5) (14) 50 (4) (921) (28) 361 300 (59) (54) 34 229 150 – 811 1,360 (1,041) (15) (18) 962 (506) (273) 94 – 563 (1,490) (550) 405 (73) 201 (1,507) (133) (62) 3,310 $ 3,115 370 72 393 94 45 (891) 244 55 (29) (107) 189 196 49 (325) 68 (205) (31) (493) 384 136 2,369 (1,511) (14) (150) 464 – (405) (42) (103) 608 (301) (308) 60 (132) 644 (37) 707 (197) 2,800 $ 3,310 Onex Corporation December 31, 2005 55 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”). All amounts are in Canadian dollars unless otherwise noted. 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 represent the accounts of the Company and its subsidiaries, including its controlled operating companies. All signiﬁcant intercompany balances and transactions have been eliminated. The Canadian Institute of Chartered Accountants (“CICA”) issued Accounting Guideline 15, “Consolidation of Variable Interest Entities”, which was applicable for Onex beginning in January 2005. Variable interest entities (“VIEs”) are entities that have insufﬁcient equity and/or their equity investors lack one or more speciﬁed essential characteristics 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 adoption of this guideline did not have a material effect on these audited annual consolidated ﬁnancial statements. The principal operating companies and the Company’s ownership and voting interests in these entities are as follows: December 31, 2005 December 31, 2004 Ownership Voting Ownership Voting Celestica Cineplex Entertainment(a) ClientLogic J.L. French Automotive Radian Cosmetic Essence Center for Diagnostic Imaging Emergency Medical Services Spirit AeroSystems Skilled Healthcare ONCAP Magellan 13% 27% 68% 77% 90% 22% 20% 29% 29% 22% 30% – 79% 100% 89% 100% 100% 100% 100% 97% 100% 100% 100% – 18% 31% 68% 77% 89% 21% – – – – 84% 100% 88% 100% 100% 100% – – – – The voting interest includes shares that Onex has the right to vote through contractual arrangements or through multi- ple voting rights attached to particular shares. In certain circum- stances, the voting arrangements give Onex the right to elect the majority of the board of directors. In addition to the above, investments over which Onex exercises signiﬁcant inﬂuence but does not control at Decem- ber 31, 2005 are accounted for by the equity method and include Res-Care, Inc. (“ResCare”) and Cypress Property & Casualty Insur- ance Company. Joint ventures, which are not variable interest entities, are accounted for using the proportionate consolidation method. The consolidated ﬁnancial statements include revenues of $8 (2004 – $6), net assets of $1 (2004 – nil) and net earnings before income taxes of nil (2004 – nil) with respect to joint ventures. 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 Foreign currency translation The Company’s operations conducted in foreign currencies, other than those operations that are associated with investment-holding subsidiaries, are considered to be self-sustaining operations. Assets and liabilities of self-sustaining operations conducted in 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 operations conducted in foreign currencies are shown as a separate component of share- holders’ equity. The Company, including investment-holding subsidiaries, 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. 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 approxi- mates market value. 30% 6% 100% 50% Inventories (a) Voting is with respect to Cineplex Entertainment Limited Partnership. The ownership percentages are before the effect of any potential dilution relating to the Management Investment Plans (the “MIP”) as described in note 24(e). Inventories are recorded at the lower of cost and replacement cost for raw materials, and at the lower of cost and net realizable value for work in progress and ﬁnished goods. For inventories in the aerostructures segment, raw materials are stated based on the average cost method. For substantially all other inventories, cost is determined on a ﬁrst-in, ﬁrst-out basis. 56 Onex Corporation December 31, 2005 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 Property, plant and equipment Property, plant and equipment are recorded at cost less accumu- Investments and other assets Investment company lated amortization and provision for impairments, if any. For In 2005, the Company formed OPMG LP (“Onex Public Markets substantially all property, plant and equipment, amortization Group” or “OPMG”) to invest in public companies without the is provided for on a straight-line basis over the estimated useful intent of obtaining inﬂuence over its investees. OPMG is consid- lives of the assets: 18 to 40 years for buildings and up to 20 years ered an Investment Company under Accounting Guideline 18, for machinery and equipment. The cost of plant and equipment “Investment Companies”. As a result, the investments of OPMG is reduced by applicable investment tax credits more likely than are recorded at fair value and are included in investments and not to be realized. other assets in the audited annual consolidated balance sheets. Leasehold improvements are amortized over the terms For the year ended December 31, 2005, included in income is $10 of the leases. of net realized gains and nil net unrealized gains. Leases that transfer substantially all the risks and beneﬁts The Company does not control or have signiﬁcant inﬂu- of ownership are recorded as capital leases. Buildings and equip- ence over any of OPMG’s investments. ment under capital leases are amortized over the shorter of the term of the lease or the estimated useful life of the asset. Amortization of Deferred charges assets under capital leases is on a straight-line basis. Costs incurred to develop computer software for internal use Deferred charges, which primarily represent 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, if earlier. Also included in deferred charges are capitalized The Company capitalizes the costs incurred during the application development costs. development stage, which include costs to design the software conﬁguration and interfaces, coding, installation and testing. Costs incurred during the preliminary project stage, along with post-implementation stages of internal use computer software, are expensed as incurred. For the year ended December 31, 2005, the Company capitalized computer software costs of $31. Amorti- zation has not begun as of December 31, 2005 as the computer software has not been placed in service. 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 projected undiscounted future net cash ﬂows expected from its use and dis- posal, and is measured as the amount by which the carrying amount of the asset exceeds its fair value. Assets must be classiﬁed as either held for use or available- for-sale. Impairment losses for assets held for use are measured based on fair value, which is measured by discounted cash ﬂows. Available-for-sale assets are carried at the lower of carrying value and expected proceeds less direct costs to sell. Other long-term investments 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 a provision is recorded. Goodwill and intangible assets Goodwill represents the cost of investments in operating com- panies in excess of the fair value of the net identiﬁable assets acquired. Essentially all of the goodwill and intangible asset amounts that appear on the audited annual consolidated balance sheets were recorded by the operating companies. The recov- erability of goodwill and intangible assets with indeﬁnite lives is assessed annually or whenever events or changes in circum- stances indicate that the carrying amount may not be recoverable. Impairment of goodwill is tested at the reporting unit level by comparing the carrying value of the reporting unit to its fair value. When the carrying value exceeds the fair value, an impairment exists and is measured by comparing the carrying amount of goodwill to its fair value determined in a manner similar to a pur- chase price allocation. Impairment of indeﬁnite-life intangible assets is determined by comparing their carrying values to their fair values. Intangible assets, including intellectual property, are recorded at their allocated cost at the date of acquisition of the related operating company. Amortization is provided for intangible assets with limited life, including intellectual property, on a straight- line basis over their estimated useful lives, which range from ﬁve to 25 years. The weighted average period of amortization at Decem- ber 31, 2005 was approximately seven years (2004 – 11 years). Onex Corporation December 31, 2005 57 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 1. B A S I S O F P R E PA R AT I O N A N D given vehicle’s production cycle. Once such agreements are 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 ( c o n t ’d ) entered into by the company, fulﬁllment of the customers’ pur- Pension and non-pension post-retirement benefits The operating companies accrue their obligations under employee beneﬁt plans and related costs, net of plan assets. The costs of deﬁned beneﬁt pensions and other retirement beneﬁts earned by employees are accrued in the period incurred and are actuarially determined using the projected beneﬁt method pro-rated on service, based on management’s best estimates of items, including expected plan investment performance, salary escalation, retirement ages of employees and expected healthcare costs. Plan assets are valued at fair value for the purposes of calculating expected returns on those assets. Past service costs from plan amendments are deferred and amortized on a straight-line basis over the average remaining ser- vice 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 the beneﬁt obligation and the fair value of plan assets are amortized over the average remaining service period of active employees. The average remaining service period of active employees covered by the signiﬁcant pension plans is 11 years (2004 – 11 years) and for those active employees covered by the other signiﬁcant post-retirement beneﬁt plans is 18 years (2004 – 19 years). Income taxes Income taxes are recorded using the asset and liability method of income tax allocation. Under this method, assets and liabilities are recorded for the future income tax consequences attributable to dif- ferences 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 dif- ferences are estimated based on the current tax legislation and the Company’s interpretation thereof. The Company records a valuation allowance when it is more likely than not that all of the future tax assets will not be realized prior to their expiration. Revenue recognition Revenues are principally comprised of product sales and ser- vice revenues. Revenue from product sales, primarily in the electronics manufacturing services and automotive products segments, is recognized upon shipment, when title passes to the customer. Companies in the automotive segment enter into agreements to manufacture products for their customers at the beginning of a 58 Onex Corporation December 31, 2005 chasing 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 manufacture such products. In such situations, the operating company records a liability for the estimated future amount of the losses. Such losses are recognized at the time that the loss is probable and reasonably estimable and are recorded at the minimum amount necessary to fulﬁll the company’s obligation to the customer. Revenue from product sales in the aerostructures seg- ment is primarily recognized under the contract method of accounting. Revenue and proﬁts are recognized on each contract in accordance with the percentage-of-completion method of accounting, using the units-of-delivery method. The number of units is determined using a multi-year estimate; for the third quarter an annual period was used. The effect of this change in estimate in the fourth quarter was $25. The contract method of accounting involves the use of various estimating techniques to project costs to completion and includes estimates of recoveries asserted against the customer for changes in speciﬁcations. These estimates involve various assumptions and projections relative to the outcome of future events, including the quantity and timing of product deliveries. Also included are assumptions relative to future labour performance and rates, and projections relative to material and overhead costs. These assumptions involve various levels of expected performance improvements. Contract estimates are re-evaluated periodically and changes in estimates are reﬂected in the current and future periods. The cumulative catch-up method of accounting is used for revi- sions in estimates of total revenue, total costs or extent of progress on a contract. A signiﬁcant portion of revenue in the aerostructures segment is under long-term volume-based pricing contracts, requiring delivery of products over several years. Depending on the terms under which the operating companies supply product, they may also be responsible for some or all of the repair or replacement costs of defective products. The companies establish reserves for issues that are probable and estimable in amounts management believes are adequate to cover ultimate projected claim costs. The ﬁnal amounts determined to be due related to these matters could differ signiﬁcantly from recorded estimates. In the electronics manufacturing services segment, Celestica has contractual arrangements with certain customers that require the customer to purchase certain inventory that Celestica has acquired to fulﬁll forecasted manufacturing demand provided by that customer. Celestica accounts for purchased material returns to such customers as reductions in inventory and does not record revenue on these transactions. 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 Revenue from services is primarily in the customer to the market value of a subordinate voting share at the redemp- management services, theatre exhibition and healthcare seg- tion date. The DSU Plan enables Onex directors to apply directors’ ments. Service revenue is recognized primarily as services are fees earned to acquire DSUs based on the market value of Onex performed and is net of contractual discounts. For the theatre shares at the time. Grants of DSUs may also be made to Onex exhibition segment, revenue is recognized when admission and directors from time to time. The DSUs vest immediately, are concession sales occur at the theatres. redeemable only when the holder retires and must be redeemed 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. During 2005, $60 (2004 – $46) in research and development costs were expensed and $56 of devel- opment costs (2004 – nil) were capitalized. Capitalized develop- ment costs related to the aerostructures segment are included in deferred charges, and will be amortized over the anticipated number of production units to which such costs relate. Stock-based compensation The Company follows guidance in the Canadian Institute of Char- tered Accountants Handbook (“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. There are four types of stock-based compensation plans. The ﬁrst is the Company’s Stock Option Plan (the “Plan”) described in note 13(e), which provides that in certain situations 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, 2005 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 audited annual consolidated statement of earnings. The fourth type is employee stock option plans in place for employees at various operating companies, under which, on payment of the exercise price, stock of the particular operating company is issued. The Company records a compensation expense for such options based on the fair value over the vesting period. 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. the Company has the right, but not the obligation, to settle any Hedging relationships exercisable option under the Plan by the payment of cash to Effective January 1, 2004, the Company adopted Accounting the option holder. The Company has recorded a liability for the Standards Board Accounting Guideline 13 (“AcG-13”), “Hedging potential future settlement of the value of vested options at the Relationships”, which addresses the identiﬁcation, designation, balance sheet date by reference to the value of Onex shares at that documentation and effectiveness of hedging relationships for the date. On a quarterly basis, the liability is adjusted up or down for purpose of applying hedge accounting. AcG-13 also establishes the change in the market value of the underlying shares, with the certain conditions for applying hedge accounting and deals with corresponding amount reﬂected in the audited annual consoli- discontinuance of hedge accounting. The Company also adopted dated statements of earnings. Emerging Issues Committee Abstract 128 (“EIC-128”), “Accounting The second type of plan is the MIP, which is described in for Trading, Speculative or Non-Hedging Derivative Financial note 24(e). The MIP provides that exercisable investment rights Instruments”. This EIC abstract requires that any derivative ﬁnan- may be settled by issuance of the underlying shares or, in certain cial instrument that is not designated as a compliant hedge under situations, by a cash payment for the value of the investment AcG-13 be measured at fair value, with changes in fair value rights. Under the MIP, once the targets have been achieved for the recorded in current year income. exercise of investment rights, a liability is recorded for the value of Under this pronouncement, the Company’s hedge rela- the investment rights under the MIP by reference to the value of tionships for its exchangeable debentures and forward sales con- underlying investments, with a corresponding compensation tracts no longer qualiﬁed for hedge accounting and thus, on a expense recorded in the audited annual consolidated statements prospective basis, the changes in fair values of these instruments of earnings, classiﬁed as either discontinued operations or gains from January 1, 2004 have been reﬂected in the audited annual con- on sales of operating investments for realized investments. solidated statements of earnings under “Derivative instruments”. The third type of plan, which began in 2004, is the Previously deferred gains on these instruments, which at January 1, Deferred Share Unit Plan. A Deferred Share Unit (“DSU”) entitles 2004 amounted to $549 for the exchangeable debentures and $181 the holder to receive, upon redemption, a cash payment equivalent for the forward sales contracts, were deferred until the instruments were settled in June 2005 and February 2005, respectively. Onex Corporation December 31, 2005 59 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 1. B A S I S O F P R E PA R AT I O N A N D and losses on hedged forecast transactions are recognized in 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 ( c o n t ’d ) earnings immediately when the hedge is no longer effective or the Derivative financial instruments forecasted transactions are no longer expected. The Company’s operating companies use foreign currency con- Financial instruments – presentation and disclosure tracts and interest rate swap agreements as derivative ﬁnancial In December 2004, the Company adopted the amendment to CICA instruments to manage risks from ﬂuctuations in exchange rates Handbook Section 3860, “Financial Instruments – Presentation and and interest rates. When determined to be compliant hedges Disclosure”. The amendment requires obligations of a ﬁxed amount under AcG-13, the carrying value of the ﬁnancial instruments are that may be settled, at the issuer’s option, by a variable number of not adjusted to reﬂect their current market value. The current the issuer’s own equity to be presented as liabilities. Any securities market values of these instruments are disclosed in note 22. issued by an enterprise that give the issuer unrestricted rights The Company and its operating companies formally to settle the principal amount in cash or the equivalent value of document relationships between hedging instruments and hedged its own equity instruments are no longer presented as equity. items, as well as the risk management objective and strategy for This standard was applicable on a retroactive basis with restate- undertaking various hedge transactions. This process includes ment of prior periods. As a result of adopting this standard, as at linking all derivatives to speciﬁc assets and liabilities on the bal- December 31, 2004 the Company reclassiﬁed $149 of the principal ance sheet or to speciﬁc ﬁrm commitments or forecasted trans- component of convertible debt held by one of its operating compa- actions. The Company also formally assesses, both at the hedge’s nies from non-controlling interests liability to long-term debt. inception and at the end of each quarter, whether the derivatives that are used in hedged transactions are highly effective in off- Use of estimates setting changes in the cash ﬂows of hedged items. The preparation of consolidated ﬁnancial statements in conformity Gains and losses on hedges of ﬁrm commitments are with Canadian generally accepted accounting principles requires included in the cost of the hedged transaction when they occur. Gains and losses on hedges of forecasted transactions are recognized in earnings in the same period and on the same line item as the underlying hedged transaction. Foreign exchange translation gains and losses on forward contracts used to hedge foreign currency- denominated amounts are accrued on the audited annual consoli- dated balance sheets as current assets or current liabilities and are management of Onex and its operating companies to make esti- mates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the audited annual consolidated ﬁnancial state- ments 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 recognized currently in the audited annual consolidated statements segment. Actual results could differ from such estimates. of earnings, offsetting the respective translation gains or losses on the foreign currency-denominated amounts. The forward premium or discount is amortized over the term of the forward contract. Gains Comparative amounts Certain amounts presented in the prior year have been reclassi- ﬁed to conform to the presentation adopted in the current year. 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 revenue and net after-tax results from discontinued operations. CMC Electronics(a) InsLogic(b) Magellan(c) Commercial Vehicle Group(d) Cineplex Entertainment(e) Futuremed(f) Dura Automotive Loews Cineplex Group Armtec 2005 2004 Revenue $ – – 744 – 47 94 – – – $ 129 13 2,199 241 38 78 635 702 50 2005 Onex’ Share of Earnings (Loss) Gain, Net of Tax $ 45 73 22 68 2 – – – – $ – $ – 2 2 – (1) – – – Total 45 73 24 70 2 (1) – – – Gain, Net of Tax $ 49 – – 69 – – 1 135 9 2004 Onex’ Share of Earnings (Loss) $ 3 (9) $ 6 3 2 – 1 5 – Total 52 (9) 6 72 2 – 2 140 9 $ 885 $ 4,085 $ 210 $ 3 $ 213 $ 263 $ 11 $ 274 60 Onex Corporation December 31, 2005 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 a) During 2005, CMC Electronics Inc. (“CMC Electronics”) sold its interest in NovAtel Inc. (“NovAtel”) for net proceeds of $153. Onex’ e) In July 2005, Cineplex Entertainment Limited Partnership (“Cineplex Entertainment”), formerly known as Cineplex Galaxy accounting gain on the disposition was $45, before a tax provision Limited Partnership, completed the acquisition of the Famous of nil. Also included in CMC Electronics’ results from discontinued Players movie exhibition business, as described in note 3. In con- operations is the December 2004 sale of Cincinnati Electronics. nection with the acquisition, Cineplex Entertainment entered into Under the terms of the MIP, as described in note 24(e), a consent agreement with the Commissioner of Competition that management members, including ONCAP LP (“ONCAP I”) man- required the divestiture of 34 theatres. In addition, Cineplex agement, participated in the realizations the Company achieved Entertainment intends to sell the remainder of its Alliance Atlantis on its sale of CMC Electronics’ Cincinnati Electronics business brand theatres. The results of operations for those theatres have unit in 2004 and NovAtel in 2005. Amounts accrued to be paid on been reclassiﬁed as discontinued operations. During 2005, Cine- account of these transactions related to the MIP totalled $6 and plex Entertainment sold 29 theatres (including 27 theatres sold have been deducted from earnings from discontinued operations. pursuant to the consent agreement referred to above) for proceeds b) In January 2005, the Company sold its interest in InsLogic Corporation (“InsLogic”) for net proceeds of $22 against a cost of of $86. The pre- and post-tax accounting gain on the disposition was $15, of which Onex’ share was $2. $52. The accounting gain on the disposition of $73, before a tax provision of nil, was comprised of the proceeds as well as the f) In December 2005, Futuremed Healthcare Products L.P. (“Future- med”), an ONCAP operating company, ﬁled a registration state- reversal of losses of InsLogic previously recognized by the Com- ment with the Ontario Securities Commission for an initial public pany. There was no MIP distribution regarding InsLogic as the offering of income trust units. The offering was completed required performance targets were not achieved. in January 2006 with 92% of ONCAP I’s ownership being sold c) In May and June 2005, Onex and Onex Partners LP (“Onex Partners”) sold 56% of their investment in shares of Magellan Health Services, Inc. (“Magellan”) through a secondary offering of and the remaining portion sold in February 2006. Through the offering, ONCAP I received net proceeds of $71, of which Onex’ share was $23. common stock. Proceeds received were $176, of which Onex’ The results of operations for the businesses described above have share was $47, including $6 for Onex’ portion of the carried inter- been reclassiﬁed in the audited annual consolidated statements est. The pre-tax gain was $83, of which Onex’ share was $20, of earnings and audited annual consolidated statements of cash before a tax provision of $5. As a result of these transactions, ﬂows for the years ended December 31, 2005 and 2004 as discon- Onex’ and Onex Partners’ equity ownership in Magellan was tinued operations. The amounts for operations now discontinued reduced to 11% and the Company began recording its remaining that were included in the December 31, 2005 and December 31, investment at cost. 2004 audited annual consolidated balance sheets are as follows: In November 2005, Onex and Onex Partners sold their remaining investment in Magellan for proceeds of $126, of which As at December 31, 2005 Cineplex Entertainment Futuremed Total Onex’ share was $34, including $4 for Onex’ portion of the carried interest. The pre-tax gain was $52, of which Onex’ share was $10, before a tax provision of $3. Amounts paid on account of these transactions related Current assets held by discontinued operations $ 1 $ 17 $ 18 Long-lived assets held by discontinued operations 3 – 54 (8) 57 (8) to the MIP totalled $3 and have been deducted from earnings Current liabilities held by from discontinued operations. Amounts received on account of discontinued operations these transactions related to the carried interest as described in Long-term liabilities held by note 24(d) totalled $24, of which Onex’ portion was $10 and man- discontinued operations (3) (61) (64) agement’s portion was $14. Net assets of discontinued operations $ 1 $ 2 $ 3 d) In July 2005, Onex sold its remaining investment in Commer- cial Vehicle Group, Inc. (“CVG”) as part of a public offering by CVG for net proceeds of $81. The pre-tax gain was $79 before a tax pro- vision of $11. Due to the sale occurring within one year of Onex’ August 2004 initial disposition of CVG shares, CVG’s results of operations have been reclassiﬁed as discontinued operations. Amounts paid on account of these transactions related to the MIP, as described in note 24(e), totalled $7 and have been deducted from earnings from discontinued operations. Onex Corporation December 31, 2005 61 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 ( c o n t ’d ) As at December 31, 2004 Cash Accounts receivable Other current assets Current assets held by discontinued operations Property, plant and equipment Goodwill Intangibles and other assets Long-lived assets held by discontinued operations Accounts payable and accrued liabilities Current portion of long-term debt and obligations under capital leases, without recourse to Onex Current liabilities held by discontinued operations Long-term debt and obligations under capital leases Other liabilities Non-controlling interests and cumulative translation adjustment Long-term liabilities held by discontinued operations InsLogic CMC Electronics Magellan Cineplex Enter- tainment(a) Futuremed Total $ – 1 1 2 2 – – 2 (5) – (5) (52) – – (52) $ 23 11 5 39 4 4 – 8 (11) – (11) – – (16) (16) $ 421 $ 66 162 649 147 472 155 774 (363) (90) (453) (366) (3) (462) (831) – – – – 15 – – 15 – – – – – – – $ – 12 6 18 1 12 46 59 (9) (4) (13) (31) – (8) (39) $ 444 90 174 708 169 488 201 858 (388) (94) (482) (449) (3) (486) (938) Net assets (liabilities) of discontinued operations $ (53) $ 20 $ 139 $ 15 $ 25 $ 146 (a) Includes only those theatres that have been or are intended to be divested. 3 . C O R P O R AT E I N V E S T M E N T S During 2005 and 2004 several acquisitions 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 5 A C Q U I S I T I O N S a) In January 2005, the Company completed the acquisition of Center for Diagnostic Imaging, Inc. (“CDI”). CDI owns and oper- ates diagnostic imaging centres in nine markets in the United States. The total equity investment of $88 for an 84% equity own- ership interest was made by Onex and Onex Partners. Onex’ net investment in this acquisition was $21 for a 20% equity ownership equity ownership interest was made by Onex and Onex Partners. Onex’ net investment in this acquisition was $100 for a 36% equity ownership at the time of acquisition. Onex has effective voting control of EMSC through Onex Partners. c) In April 2005, Cosmetic Essence, Inc. (“CEI”) completed the acquisition of Hauer Custom Manufacturing, Inc. (“Hauer”). Hauer is a full-service manufacturer of household products. The total purchase price of the acquisition was $23, which was ﬁnanced with $23 of borrowings, which are without recourse to Onex. d) In June 2005, the Company completed the acquisition of the Wichita-Tulsa Division of The Boeing Company (“Boeing”). The at the time of acquisition. Onex has effective voting control of CDI purchase included Boeing’s commercial aerostructures manu- through Onex Partners. b) In February 2005, the Company completed the acquisition of American Medical Response, Inc. (“AMR”) and EmCare Holdings Inc. (“EmCare”). AMR is a leading provider of ambulance trans- port services in the United States. EmCare is a leading provider of outsourced hospital emergency department physician stafﬁng and management services in the United States. The combined entity now operates under Emergency Medical Services Corpo- ration (“EMSC”). The total equity investment of $266 for a 97% 62 Onex Corporation December 31, 2005 facturing facilities in Wichita, Kansas and Tulsa and McAlester, Oklahoma. The business, now operating as Spirit AeroSystems, Inc. (“Spirit AeroSystems”), has entered into long-term agree- ments with Boeing to supply components for all of Boeing’s existing 737, 747, 767 and 777 platforms, as well as the new 787 platform. Spirit AeroSystems will also seek business from cus- tomers other than Boeing. The total equity investment of $464 for a 100% equity ownership interest was made by Onex and Onex Partners. Onex’ net investment in this acquisition was $134 for a 29% equity ownership at the time of acquisition. Onex has effec- tive voting control of Spirit AeroSystems through Onex Partners. 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 e) In July 2005, Cineplex Entertainment completed the acquisition of the Famous Players movie exhibition business in a transaction g) During 2005, two of ONCAP’s operating companies, Western Inventory Service Ltd. (“WIS”) and Canadian Securities Regis- valued at $473. To provide ﬁnancing for the acquisition, various tration Systems Ltd. (“CSRS”) completed acquisitions. In April debt and equity transactions were entered into, as described 2005, WIS acquired Washington Inventory Service (“Washington”), in note 9(b). In connection with the acquisition, Onex received a leading provider of inventory counting services in the United 248,447 units as a transaction fee but did not sell or purchase any States. After the acquisition, WIS and Washington merged to form additional units in the equity offering. As a result, Onex’ owner- the second largest inventory counting service provider in the ship interest in Cineplex Entertainment was diluted to 27% from world. In May 2005, CSRS acquired Corporate Research and 31% and Onex recorded a dilution gain, as described in note 15. Analysis Centre Ltd., a provider of corporate and legal searches in Onex will continue to control and consolidate Cineplex Enter- Canada. The total purchase price of these acquisitions was $144 tainment subsequent to the transaction. and was ﬁnanced with $143 of borrowings, which are without In connection with the acquisition, Cineplex Entertain- recourse to Onex or ONCAP, and $1 of equity. Onex’ net invest- ment entered into a consent agreement with the Commissioner of ment in these acquisitions was less than $1. Competition to divest itself of 34 theatres. Accordingly, the ﬁnan- cial results for those theatres have been included in discontinued operations, as described in note 2. During the fourth quarter of 2005, Cineplex Entertain- ment entered into a Media Sales Governing Agreement, which allowed for the termination and windup of Famous Players Media Inc. and the acquisition of three Famous Players branded enter- tainment magazines in a transaction valued at $1. f) In December 2005, the Company completed the acquisition of Skilled Healthcare Group, Inc. (“Skilled Healthcare”). Skilled Healthcare operates skilled nursing and assisted living facilities in California, Texas, Kansas and Nevada. The total equity invest- ment of $243 for a 93% equity ownership was made by Onex and Onex Partners. Onex’ share of the investment in this acquisition was $57 for a 22% equity ownership at the time of acquisition. Onex has effective voting control of Skilled Healthcare through Onex Partners. Details of the 2005 acquisitions are as follows: h) Other includes acquisitions completed by CDI and Celestica Inc. (“Celestica”). The purchase prices of the acquisitions described above were allocated to the net assets acquired based on their relative fair values at the date of acquisition. In certain circumstances where estimates have been made, the companies are obtaining third- party valuations of certain assets, which could result in further reﬁnement of the fair-value allocation of certain purchase prices. The results of operations for all acquired businesses are included in the audited annual consolidated statement of earnings of the Company from their respective dates of acquisition. 2005 Acquisitions CDI(a) EMSC(b) CEI(c) AeroSystems(d) Entertainment(e) Healthcare(f) ONCAP(g) Other(h) Spirit Cineplex Skilled Cash Current assets $ Intangible assets with limited life Intangible assets with indefinite life Goodwill Property, plant and equipment and other long-term assets Current liabilities Acquisition financing Long-term liabilities(1) Non-controlling interests in net assets $ 14 21 39 3 111 63 251 (28) – (117) 106 (18) $ 18 609 111 1 311 466 1,516 (304) – (940) 272 (6) Interest in net assets acquired $ 88 $ 266 $ – 4 1 – – 20 25 (2) (23) – – – – (1) Included in liabilities is $2,268 raised in connection with the original acquisitions. $ 168 $ 642 38 – – 743 1,591 (140) – (987) 464 – $ 20 14 40 33 198 317 622 (87) (353) (61) 121 (113) $ 43 73 3 17 451 345 932 (69) – (602) 261 (18) $ 464 $ 8 $ 243 $ – 32 44 – 113 9 198 (26) (143) (28) 1 – 1 $ $ – 3 8 – 2 1 14 (4) – (1) 9 – 9 Onex Corporation December 31, 2005 63 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 3 . C O R P O R AT E I N V E S T M E N T S ( c o n t ’d ) facilities. CSRS, headquartered in British Columbia, Canada, is a 2 0 0 4 A C Q U I S I T I O N S a) In January 2004, the Company completed an investment in Magellan. Headquartered in Connecticut, United States, Magellan is a behavioural managed healthcare organization in the United States. The total equity investment was $131 for a 24% ownership interest. This was provided through Onex and Onex Partners. Onex’ net investment was $30 for a 6% equity ownership. Onex had effective voting control of Magellan through Onex Partners. 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 national provider of Personal Property Security Act registration and search services in Canada. The total purchase price of the acquisitions of $208 was ﬁnanced with $133 of borrowings, which are without recourse to Onex or ONCAP, and $75 of equity. Onex’ net investment in these acquisitions was $17. Onex had indirect voting control of Futuremed and continues to have indirect voting control of CSRS. d) In December 2004, the Company completed the acquisition of CEI. CEI, headquartered in New Jersey, United States, is a provider of outsourced supply chain management services to the personal care industry. The investment 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. Celestica. The value of the shares was determined based on the The purchase prices of the acquisitions were allocated to the net average market price of the shares for a reasonable period before assets acquired based on their relative fair values at the dates of and after the date on which the terms of the acquisition were acquisition. In certain circumstances where estimates had been agreed to and announced. In April 2004, Celestica paid approx- made, there were no material adjustments as a result of further imately $10 in cash to acquire certain assets located in the reﬁnement of the fair-value allocation of certain purchase prices. Philippines from NEC Corporation. c) During 2004, ONCAP completed the acquisitions of Futuremed and CSRS. Futuremed, headquartered in Ontario, Canada, is a supplier of medical supplies and equipment to long-term care The results of operations for all acquired operations are included in the audited annual consolidated statements of earnings of the Company from their respective dates of acquisition. 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)(1) Celestica(b) ONCAP(c)(1) 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 (1) Magellan and Futuremed, a subsidiary of ONCAP, were recorded as discontinued operations as at December 31, 2005, as described in note 2. The cost of acquisitions made during the year includes restruc- liabilities include $138 and $3, respectively (2004 – $96 and $2), for turing and integration costs of $15 (2004 – $25). As at December 31, these and earlier acquisitions. 2005, accounts payable and accrued liabilities and other long-term 64 Onex Corporation December 31, 2005 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 4 . J . L . F R E N C H A U T O M O T I V E The difﬁcult conditions affecting the North American automotive supply sector have rendered J.L. French Automotive Castings, Inc. The following amounts for J.L. French Automotive are included in the December 31, 2005 and December 31, 2004 con- solidated balance sheets: (“J.L. French Automotive”) unable to meet the ﬁnancial require- As at December 31 2005 2004 ments under certain of its lending agreements. Management of Cash and short-term investments $ J.L. French Automotive has been working with the senior debt Accounts receivable holders and other creditor groups to arrange a restructuring of Inventories J.L. French Automotive’s debts. In February 2006, J.L. French Auto- Other current assets motive ﬁled for protection under Chapter 11 of the Bankruptcy Code in the United States. It is contemplated that Onex will have a minimal to no ownership interest in and will cease to control J.L. French Automotive following the restructuring. The debt of J.L. French Automotive has been recorded as current and Onex does not guarantee any of the debt or liabilities of J.L. French Property, plant and equipment Investments and other assets Intangible assets Accounts payable and accrued liabilities Current debt, without recourse to Onex Obligations under capital leases Long-term debt, without recourse to Onex Automotive. No adjustments, other than those described above, Other liabilities have been made to the carrying amount of the assets or liabilities Cumulative translation adjustment 15 38 48 21 263 5 18 (71) (783) (19) – (13) (129) $ 5 52 52 15 302 5 20 (105) (22) (28) (698) (10) (123) of J.L. French Automotive in the audited annual consolidated Net liabilities $ (607) $ (535) balance sheets. The net book value of the investment in J.L. French Automotive recorded in the audited annual consolidated ﬁnancial statements as at December 31, 2005 is negative $607. If Onex’ equity ownership in J.L. French Automotive were disposed of or abandoned in its entirety for no value, Onex would recognize an accounting gain of $607. For statements of earnings information regarding J.L. French Automotive, see note 27, “Information by Industry and Geo- graphic Segment” under the segment “Automotive Products”. 5 . I N V E N T O R I E S Inventories comprised the following: As at December 31 Raw materials Work in progress Finished goods 2005 $ 1,033 $ 689 270 2004 939 236 262 $ 1,992 $ 1,437 6 . 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 2005 Land Buildings Machinery and equipment Construction in progress Cost Accumulated Amortization Net $ 137 $ 1,278 2,888 256 – 236 1,633 – $ 137 $ 1,042 1,255 256 2004 Accumulated Amortization $ – 236 1,323 – Cost 104 825 2,143 29 $ Net 104 589 820 29 $ 4,559 $ 1,869 $ 2,690 $ 3,101 $ 1,559 $ 1,542 The above amounts include property, plant and equipment under capital leases of $346 (2004 – $137) and related accumulated amortization of $103 (2004 – $80). As at December 31, 2005, property, plant and equipment included $17 (2004 – $43) of assets held for sale. Onex Corporation December 31, 2005 65 e) In connection with the acquisition of Spirit AeroSystems from Boeing, Boeing will make quarterly payments to Spirit Aero- Systems beginning in March 2007 through December 2009. The fair value of the receivable was recorded as a long-term asset on the opening balance sheet. The fair value is being accreted to the principal amount over the term of the agreement. The carrying value of the receivable as at December 31, 2005 was $247. 8 . I N TA N G I B L E A S S E T S Intangible assets comprised the following: As at December 31 2005 2004 Intellectual property with limited life, net of accumulated amortization of $165 (2004 – $156) $ 47 $ 53 Intangible assets with limited life, net of accumulated amortization of $230 (2004 – $193) Intangible assets with indefinite life 417 55 194 24 $ 519 $ 271 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 obtained in the acquisition of certain facilities. 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 7. 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) Marketable securities – at cost(b) Public entities held by OPMG – at market(c) Equity-accounted investments(d) Deferred charges Derivative instruments (note 22(b)) Future income taxes (note 20) Boeing receivable(e) Other 2005 2004 $ 41 123 140 136 221 – 235 247 136 $ 35 111 – 135 99 186 51 – 42 $ 1,279 $ 659 a) The market value of the private entities is not readily deter- minable with a sufﬁcient degree of precision. b) The market value of the investments held by the Company as at December 31, 2005 was $118 and $149 at December 31, 2004. The December 31, 2004 market value included $128 for an investment in Compagnie Générale de Géophysique (“CGG”) that was pur- chased at a cost of $102 in November 2004. The investment in CGG was sold in 2005. c) As at December 31, 2005, marketable securities held by OPMG include $13 of unrealized gains and $13 of unrealized losses. d) Included in equity-accounted investments is the investment in ResCare. In June 2004, the Company and Onex Partners com- pleted a $114 equity investment in ResCare for a 28% effective ownership interest. Onex’ portion of the investment was approx- imately $27, representing an initial 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. 66 Onex Corporation December 31, 2005 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 9. 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 Entertainment(b) 7.875% subordinated notes due 2011 7.625% subordinated notes due 2013 Liquid Yield Option™ notes, due 2020 $ Revolving credit facility and term loans due 2009 Revolving credit facility and term loans due 2006 Galaxy Entertainment notes due 2028 Other ClientLogic(c) Revolving credit facility due 2005 Revolving credit facility and term loans due 2010 and 2012 Other, including debt denominated in foreign currencies J.L. French Automotive(d) Revolving credit facility and term loans due 2011 and 2012 Mandatorily redeemable preferred shares 11.5% subordinated notes due 2009 Other Radian(e) Revolving credit facility and term loan due 2007 Subordinated secured debentures due 2007 Other Cosmetic Essence(f) Revolving credit facility and term loans due 2010 and 2011 Subordinated secured notes due 2014 Center for Diagnostic Imaging(g) Revolving credit facility and term loan due 2010 Emergency Medical Services(h) Revolving credit facility and term loan due 2011 and 2012 Subordinated secured notes due 2015 Spirit AeroSystems(i) Revolving credit facility and term loan due 2010 and 2011 Other Skilled Healthcare(j) ONCAP companies (k) Revolving credit facility and term loan due 2010 11.0% subordinated notes due 2014 Other Term loans due 2006 to 2011 Subordinated notes due 2009 and 2010 Other Less: long-term debt held by the Company Current portion of long-term debt of operating companies 2005 2004 581 291 – 872 244 – 100 2 346 – 159 99 258 535 239 33 20 827 32 16 – 48 155 77 232 81 289 291 580 810 29 839 301 231 3 535 224 51 1 276 (206) 4,688 (825) $ 601 – 149 750 – 126 – 3 129 142 – 96 238 490 209 35 33 767 31 16 10 57 152 72 224 – – – – – – – – – – – 166 46 1 213 (204) 2,174 (206) Consolidated long-term debt of operating companies, without recourse to Onex $ 3,863 $ 1,968 Onex Corporation December 31, 2005 67 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 9. 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 , Class C LP Units through the issuance of 6,835,000 units and the W I T H O U T R E C O U R S E T O O N E X ( c o n t ’d ) issuance of $105 convertible extendible unsecured subordinated Onex does not guarantee the debt of its operating companies, nor are there any cross-guarantees between operating companies. The ﬁnancing arrangements for each operating company typically contain certain restrictive covenants, which may include limitations or prohibitions on additional indebtedness, payment of cash dividends, redemption of capital, capital spending, making of investments and acquisitions and sale of assets. In addition, certain ﬁnancial covenants must be met by the operating companies which have outstanding debt. Future changes in business conditions of an operating company may result in non-compliance with certain covenants by the company. No adjustments to the carrying amount or classi- ﬁcation of assets or liabilities of any operating company has been made in the audited annual consolidated ﬁnancial statements with respect to any possible non-compliance. a) Celestica In June 2004, Celestica amended its credit facility to US$600 and extended the maturity from October 2004 to June 2007. There were no borrowings outstanding under this facility at December 31, 2005. The facility has restrictive covenants relating to debt incur- rence and sale of assets and also contains ﬁnancial covenants that require Celestica to maintain certain ﬁnancial ratios. Based on the required minimum ﬁnancial ratios, at December 31, 2005, Celestica was limited to approximately US$250 of available debt incurrence. In June 2004, Celestica issued senior subordinated notes due 2011 with an aggregate principal amount of US$500, and a ﬁxed interest rate of 7.875%. In connection with the 2011 notes offering, Celestica entered into interest rate swap agreements that swap the ﬁxed interest rate on the notes with a variable interest rate based on LIBOR plus a margin. The average interest rate on the notes was 6.4% for 2005 (2004 – 4.9%). The 2011 notes may be redeemed on July 1, 2008 or later at various premiums above face value. A portion of the proceeds was used in the second quarter of 2004 to repurchase Liquid Yield OptionTM notes (“LYONs”). In June 2005, Celestica issued senior subordinated notes due 2013 with an aggregate principal amount of US$250 and a ﬁxed interest rate of 7.625%. The 2013 notes may be redeemed on July 1, 2009 or later at various premiums above face value. A por- tion of the proceeds was used in the third quarter of 2005 to repurchase the remaining LYONs. b) Cineplex Entertainment To fund the July 2005 acquisition of Famous Players, Cineplex Entertainment issued indirectly to Cineplex Galaxy Income Fund (“CGIF”) 6,835,000 Class A LP Units for gross proceeds of approxi- mately $110 and 5,600,000 Class C LP Units for gross proceeds of $105. CGIF ﬁnanced the acquisition of the Class A LP Units and 68 Onex Corporation December 31, 2005 debentures. The above resulted in Onex no longer consolidating CGIF but continuing to consolidate Cineplex Entertainment. Galaxy Entertainment Inc., a subsidiary of Cineplex Entertainment, has notes outstanding in the amount of $100, which are due indirectly to CGIF. The notes bear interest at a rate of 14%, are payable monthly with principal due November 2028 and are subordinate to the amended credit facilities described below. As a result of Onex no longer consolidating CGIF, these notes, which were previously eliminated on consolidation, are now reﬂected as long-term debt. The new Class C LP Units issued by Cineplex Enter- tainment are redeemable by CGIF under certain conditions and as such they have characteristics of both debt and equity. As a result, an amount of $98 is classiﬁed as a liability and is included in other liabilities. An amount of $9 is recorded in non-controlling interest. In connection with the acquisition, Cineplex Enter- tainment entered into an amended and restated credit agreement with a syndicate of lenders pursuant to which it has available: (i) a 364-day $50 extendible senior secured revolving credit facility; (ii) a four-year $315 senior secured non-revolving term credit facility; and (iii) a four-year $60 senior secured revolving credit facility. The amended credit facilities bear interest at a ﬂoating rate based on the prime business rate, or bankers’ acceptance rate, plus an applicable margin. As at December 31, 2005, nil and $9 were outstanding on the 364-day and four-year revolving facili- ties and $235 was outstanding on the term facility. Effective July 22, 2005, Cineplex Entertainment entered into interest rate swap agreements to pay interest at a ﬁxed rate of 3.8% per annum, plus an applicable margin, and receive a ﬂoating rate. The swaps have terms of four years and an aggregate principal amount outstanding of $200. c) ClientLogic At December 31, 2004, ClientLogic Corporation (“ClientLogic”) had US$118 outstanding under the terms of a revolving credit facil- ity due in March 2005. In March 2005, ClientLogic entered into a new credit agreement that provides up to US$157, consisting of a ﬁrst lien revolving facility of up to US$30, due 2010, a ﬁrst lien term facility of up to US$77 and a second lien term facility of up to US$50, both due in 2012. At December 31, 2005, amounts out- standing under these facilities were US$11, US$77 and US$50, respectively. The proceeds from this facility were used to repay all amounts owing under the former credit facility. The facilities bear interest at a rate of either LIBOR or the federal funds rate, plus an applicable margin. As a term of this facility, the demand note of US$38 held by Onex, as described below, was converted to manda- torily redeemable preferred shares. The ﬁrst lien facility is due March 2012, with quarterly payments required beginning in 2005. The second lien facility is due September 2012, with no principal 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 payments due until maturity. ClientLogic is also required to pre- Interest on the senior secured credit facilities, depending pay certain amounts under the ﬁrst and second lien facilities on the type and amount of the borrowings under these facilities, can should ClientLogic initiate speciﬁed transactions, including the range from prime rate plus 3.5% to 6.0% per annum, the LIBOR rate issuance of equity, sale of certain assets, additional debt issuance plus 4.5% or the Eurocurrency rate plus 7.0% per annum. Interest or the maturity of certain notes held by a separate party, if not payments are due quarterly. otherwise extended. Borrowings under the credit facility are collat- Borrowings under the credit facilities are secured and eralized by substantially all of ClientLogic’s assets. guaranteed by a ﬁrst priority lien on substantially all of J.L. At December 31, 2005 ClientLogic had US$59 (2004 – French Automotive’s assets, including a pledge of all of the capital US$52) in other debt instruments with varying terms. Included in stock of each of the company’s directly owned domestic sub- this amount are mandatorily redeemable preferred shares held sidiaries and 65% of the capital stock of directly owned foreign by Onex of US$51, which were converted from a demand note of subsidiaries. An element of the credit facilities is secured and US$38 in 2005. guaranteed by a second priority lien on substantially all of J.L. ClientLogic has US$25 (2004 – US$27) of loan notes French Automotive’s assets. outstanding denominated in pounds sterling which bear interest Also outstanding at December 31, 2005 was US$29 (2004 – at 6.5% and are repayable in June 2008. Interest compounds and US$29) of subordinate notes originally due 2009. is added to the notes. The amount of accrued interest at Decem- ber 31, 2005 was US$5 (2004 – US$5). e) Radian ClientLogic has entered into an interest rate swap agreement that effectively ﬁxes the interest rate on US$70 of borrowings under the credit facility. The interest rate swap agree- ment expires in 2006. d) J.L. French Automotive Radian’s credit agreement has a revolving credit facility of $20 and a term loan of $15. Borrowings under the credit agreement are due in June 2007. Both the revolving credit facility and term loan bear interest at short-term borrowing rates plus a margin. The out- standing borrowings at December 31, 2005 on the revolving credit facility and term loan were $17 and $15 (2004 – $16 and $15), As described in note 4, J.L. French Automotive ﬁled for bank- respectively. The weighted average interest rate for borrowings ruptcy protection in February 2006. As a result, as at December 31, under the credit agreement was 7.0% in 2005 (2004 – 6.9%). Bor- 2005, the debt of J.L. French Automotive is classiﬁed as current rowings under the credit agreement are collateralized by substan- as the company has not met its requirements under its lending tially all of the assets of Radian. agreements. The debt of J.L. French Automotive is without In October 2003, Radian issued $15 in subordinated recourse to Onex. secured convertible debentures to Onex. The debentures are con- In August 2004, J.L. French Automotive completed a vertible at any time at the option of the holder or at Radian’s series of reﬁnancing transactions. As part of the reﬁnancing, the option, under certain circumstances, into Class A multiple voting company’s former Class P shareholders surrendered their out- shares of Radian. The debentures bear interest at a rate of 7% per standing shares in exchange for Class A non-voting shares. The annum and mature in 2007. Class P shares were previously shown as liability in these audited annual consolidated ﬁnancial statements. This contribution to the equity of the company by the non-controlling interests has been reﬂected in 2004 as an income item representing the funding of the non-controlling interest of past losses. The recov- ery of losses of other shareholders of J.L. French Automotive recorded in 2004 totalled $43 and is included in non-controlling interests in the audited annual consolidated ﬁnancial statements. Also issued was US$164 of mandatorily redeemable preferred stock, US$38 of which was purchased by the Company. In connection with the 2004 reﬁnancing, J.L. French Automotive entered into new senior secured credit facilities, which provide for total borrowings of US$465. Under their original terms, the facilities were due in 2011 and 2012. At December 31, 2005, US$67 (2004 – US$13) was drawn on the revolving facility, US$223 (2004 – US$225) was outstanding on the ﬁrst lien term loan and US$170 (2004 – US$170) was outstanding on the second lien term loan. f) 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; a ﬁrst lien term loan with borrowings of US$99; and a second lien term loan with borrowings of US$34. 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, 2005, CEI had US$133 (2004 – US$129) outstanding under the agreements. 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. Onex Corporation December 31, 2005 69 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 9. 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 , US$500 of the term loan. The agreements, which range from three W I T H O U T R E C O U R S E T O O N E X ( c o n t ’d ) to ﬁve years, swap the ﬂoating interest rate with a ﬁxed interest CEI also has a promissory note outstanding in the amount of US$66 (2004 – US$60), of which US$61 (2004 – US$55) is held by the Company. The note is due in 2014, with interest of 9.55% per year, payable in additional notes due in 2014. g) Center for Diagnostic Imaging In January 2005, a US$95 credit agreement was executed by CDI. This agreement consists of a US$75 term loan with principal payments due through 2010 and interest at LIBOR plus 3.5%, secured by the assets of CDI. At December 31, 2005, US$69 was outstanding under the term loan. In addition, the credit agreement provides for up to US$20 of revolving credit loans. At December 31, 2005, there were no funds outstanding under the revolving line. Future borrowings against this revolving line bear interest at LIBOR plus 2.5% to 3.5%, depending on CDI’s leverage ratio. h) Emergency Medical Services In February 2005, EMSC issued US$250 of senior subordinated notes and executed a US$450 credit agreement. The senior subor- dinated notes have a ﬁxed interest rate of 10%, payable semi- annually, and mature in February 2015. The credit agreement consists of a US$350 senior secured term loan and a US$100 senior secured revolving credit facility. The senior secured term loan matures in February 2012 and requires quarterly principal repayments. The revolving facili- ty requires the principal to be repaid at maturity in February 2011. Interest is determined by reference to a leverage ratio and can range from prime plus 1.0% to 2.0% and LIBOR plus 2.0% to 3.0%. As at December 31, 2005, US$248 and nil were outstanding under the senior secured term loan and the senior secured revolving credit facility, respectively. Substantially all of EMSC’s assets are pledged as collat- eral under the credit agreement. i) Spirit AeroSystems In June 2005, Spirit AeroSystems executed a US$875 credit agree- ment that consists of a US$700 senior secured term loan and a US$175 senior secured revolving credit facility. The senior secured term loan requires quarterly principal instalments of US$2, with the balance due in four equal quarterly instalments of US$165 in 2011. The revolving facility requires the principal to be repaid at maturity in June 2010. As at December 31, 2005, US$697 and nil were out- standing under the term loan and revolving facility, respectively. The borrowings under the agreement bear interest based on LIBOR or a base rate plus an interest rate margin of up to 2.75%, payable quarterly. In connection with the term loan, Spirit AeroSystems entered into interest rate swap agreements on 70 Onex Corporation December 31, 2005 rate that ranges between 4.2% and 4.4%. Substantially all of Spirit AeroSystems’ assets are pledged as collateral under the credit agreement. In connection with the acquisition, the seller, Boeing, has provided Spirit AeroSystems with a line of credit of up to US$150. The line of credit bears interest at a rate of LIBOR plus 6.0% and is subordinate to the borrowings under the credit agree- ment. The line may be drawn upon any time up to December 31, 2008 and any such borrowings would mature in June 2013. As at December 31, 2005, no amounts were outstanding under this line of credit. j) Skilled Healthcare In December 2005, Skilled Healthcare issued unsecured senior subordinated notes in the amount of US$200 due in 2014. The notes bear interest at a rate of 11.0% per annum and are redeemable at the option of the company at various premiums above face value beginning in 2009. At December 31, 2005, US$199 was outstanding under the notes. Skilled Healthcare’s ﬁrst lien credit agreement consists of a US$260 term loan and a US$75 revolving loan. The term loan is due in 2010, with annual principal instalments of 1% of the balance. Both the term loan and the revolving loan bear interest at the prime rate or LIBOR, plus a margin. At December 31, 2005, US$259 and nil were outstanding under the term loan and revolving loan, respectively. The ﬁrst lien credit agreement is secured by the real property of Skilled Healthcare. k) ONCAP companies ONCAP’s investee companies include CMC Electronics, WIS, and CSRS. Each has debt that is included in Onex’ audited annual con- solidated ﬁnancial statements. There are separate arrangements for each of the investee companies with no cross-guarantees between the companies or by Onex. Under the terms of credit agreements, combined revolving credit facilities of $24 and term borrowings of $250 are available. The available facilities bear interest at various rates based on prime, U.S. base or LIBOR plus a margin. During 2005, interest rates ranged from 4.6% to 10.7% (2004 – 3.9% to 8.2%) on borrowings under the revolving credit and term facilities. Quarterly repayments of a portion of the term loans commenced in June 2002, while the remainder of the credit facilities are repayable between 2009 and 2011. Borrowings under these credit facilities at December 31, 2005 were $224 (2004 – $166). The companies also have subordinated notes of $51 (2004 – $46), due in 2009 and 2010, that bear interest ranging from 16% to 18% (2004 – 16% to 18%), of which the Company owns approximately $25 (2004 – $22). 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 One of the companies has entered into an interest rate 11. E X C H A N G E A B L E D E B E N T U R E S swap agreement that effectively ﬁxes the ﬂoating rate on $60 (2004 – $23) of variable rate loans over periods ranging from three to ﬁve years. In 2000 Onex issued 25-year debentures exchangeable for subor- dinate voting shares of Celestica. The debentures had an aggre- gate principal amount of $729, average interest rate of 1.6% and The annual minimum repayment requirements for the next an average exchange rate on the principal amount of 12.64 shares ﬁve years on consolidated long-term debt are as follows: per thousand dollars. In February 2005, Onex redeemed all of the 2006 2007 2008 2009 2010 Thereafter 10 . L E A S E C O M M I T M E N T S The future minimum lease payments are as follows: $ 825 90 254 289 333 2,897 outstanding exchangeable debentures through the delivery of 9,214,320 Celestica subordinate voting shares. As a result of the redemption, Onex recorded a gain, as described in note 15. The debentures were exchangeable, at the request of the holder, into a ﬁxed number of subordinate voting shares of Celestica or, at the option of the Company, it could deliver the cash equivalent based on the market price of the shares at $ 4,688 the time of exchange, or a combination of shares and cash. The debentures were redeemable at any time by the Company. Upon redemption Onex could, at its option, repay the principal amount by delivering Celestica subordinate voting shares based on the ﬁxed exchange rate or pay the cash equivalent, or a combination Capital Leases Operating Leases of shares and cash. The market value and deferred amount of the exchangeable deben- For the year: 2006 2007 2008 2009 2010 Thereafter $ 29 22 16 14 6 44 $ 255 219 194 170 157 1,177 Total future minimum lease payments $ 131 $ 2,172 Less: imputed interest Balance of obligations under capital leases, without recourse to Onex Less: current portion Long-term obligations under capital (29) 102 (25) leases, without recourse to Onex $ 77 Essentially all of the lease commitments relate to the operating companies. tures were as follows: As at December 31 Carrying amount (cost) Deferred amount, included in other liabilities (note 12) Change in fair value Market value 2004 $ 729 (549) (24) $ 156 The market value of the exchangeable debentures at December 31, 2004 was 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. Interest expense related to the exchangeable debentures amounted to $1 (2004 – $11) and was netted against interest and other income. Onex Corporation December 31, 2005 71 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 . O T H E R L I A B I L I T I E S Other liabilities comprised the following: As at December 31 Reserves(a) Deferred revenue and other deferred items Boeing advance(b) Convertible debentures (note 9(b)) Pension and non-pension post-retirement benefits (note 25) Stock-based compensation Exchangeable debentures (note 11) Derivative instruments (note 22(b)) Other(c) 2005 2004 $ 210 159 233 98 220 53 – – 142 $ 1 36 – – 117 58 549 181 151 $ 1,115 $ 1,093 a) Reserves consist primarily of US$144 established by EMSC for automobile, workers compensation, general liability and pro- fessional liability. This includes the use of an offshore captive insurance program. b) Pursuant to the 787 long-term supply agreement, Boeing will make advance payments to Spirit AeroSystems. As at December 31, 2005, US$200 in such advance payments had been made and will be settled against future sales of Spirit AeroSystems’ 787 units to Boeing. c) Other includes acquisition and restructuring accruals as well as amounts for anticipated liabilities arising from indemniﬁcations. 13 . 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. 72 Onex Corporation December 31, 2005 The Multiple Voting Shares and Subordinate Voting Shares are subject to provisions whereby, if an event of change occurs (such as Mr. Schwartz, Chairman and CEO, ceasing to hold, directly or indirectly, more than 5,000,000 Subordinate Voting Shares or related events), the Multiple Voting Shares will there- upon be entitled to elect only 20% of the Directors and otherwise will cease to have any general voting rights. The Subordinate Voting Shares would then carry 100% of the general voting 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 2005, under the Dividend Reinvestment Plan, the Company issued 2,865 (2004 – 72,166) Subordinate Voting Shares at a total value of less than $1 (2004 – $1). In 2005, no Subordinate Voting Shares were issued upon the exercise of stock options. In 2004, 71,000 Subordinate Voting Shares were issued upon the exercise of stock options of the Company at a value of less than $1. The Company repurchased and cancelled under Normal Course Issuer Bids 939,200 (2004 – 9,143,100) of its Subordinate Voting Shares at a cash cost of $18 during 2005 (2004 – $150). The excess of the purchase cost of these shares over the average paid-in amount was $14 (2004 – $113), which was charged to retained earnings. Onex renewed its Normal Course Issuer Bid in April 2005 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 approxi- mately 11 million shares. c) At December 31, 2005 the issued and outstanding share capital consisted of 100,000 (2004 – 100,000) Multiple Voting Shares, 138,079,031 (2004 – 139,015,366) Subordinate Voting Shares and 176,078 (2004 – 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, 2005, there were 116,301 (2004 – 40,000) units outstanding, for which $1 (2004 – $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 10 years may be granted to Directors, ofﬁcers and employees for the acquisition of Subordinate Voting Shares of the Company at a price not less than the market value of the shares on the business 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 day preceding the day of the grant. Under the Plan, no options or All options vest at a rate of 20% per year from the date of share appreciation rights may be exercised unless the average grant. When an option is exercised, the employee has the right to market price of the Subordinate Voting Shares for the ﬁve prior request that the Company repurchase the option for an amount business days exceeds the exercise price of the options or the equal to the difference between the fair value of the stock under share appreciation rights by at least 25% (the “exercisable price”). the option and its exercise price. Upon receipt of such request, the At December 31, 2005, 15,632,000 (2004 – 15,632,000) Subordinate Company has the right to settle its obligation to the employee by Voting Shares were reserved for issuance under the Plan, against the payment of cash, the issuance of shares or a combination of which options representing 13,434,600 (2004 – 13,961,700) shares cash and shares. were outstanding. The Plan provides that the number of options issued to certain individuals in aggregate may not exceed 10% of the shares outstanding at the time the options are issued. Details of options outstanding are as follows: Outstanding at December 31, 2003 Granted Exercised or surrendered Expired Outstanding at December 31, 2004 Granted Exercised or surrendered Expired Outstanding at December 31, 2005 Number of Options Weighted Average Exercise Price 12,259,000 10,205,000 (8,345,800) (156,500) 13,961,700 – (110,600) (416,500) 13,434,600 $ 9.66 $ 16.54 $ 7.78 $ 18.56 $ 15.71 – $ 8.10 $ 18.19 $ 15.69 During 2005, the total cash consideration paid on options surrendered was $1 (2004 – $71). 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. In January 2006, the Company issued 140,000 options at an exercise price of $19.25 per share. Options outstanding at December 31, 2005 consisted of the following: Number of Options Outstanding Exercise Price Number of Options Exercisable Exercisable Price Remaining Life (years) 568,000 1,171,600 624,000 655,000 625,000 7,260,000 2,531,000 13,434,600 $ $ 7.30 8.62 $ 20.23 $ 20.50 $ 14.90 $ 15.87 $ 18.18 568,000 1,171,600 – – 250,000 – – 1,989,600 $ 9.13 $ 10.78 $ 25.29 $ 25.63 $ 18.63 $ 19.84 $ 22.73 2.1 2.3 4.0 6.5 7.1 8.2 8.9 Onex Corporation December 31, 2005 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 14 . 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 Year ended December 31 2005 2004 Interest on long-term debt of operating companies Interest on obligations under capital leases of operating companies Other interest of operating companies $ 311 $ 168 6 15 2 25 Interest expense of operating companies $ 332 $ 195 Cash interest paid during the year amounted to $221 (2004 – $180). 15 . G A I N S O N S A L E S O F O P E R AT I N G C O M PA N I E S , N E T During 2005 and 2004, 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: b) In June 2005, the Company settled all of its outstanding forward sales agreements through the delivery of approximately 1.8 mil- lion Celestica subordinate voting shares, for which it received pro- ceeds of $222. In connection with the delivery, the Company con- verted approximately 0.2 million of the Celestica multiple voting shares it held into Celestica subordinate voting shares. As a result of the settlement, the Company’s equity ownership in Celestica was reduced to 13% from 14%; however, the Company continues to have voting control of Celestica. The Company recognized a gain of $191 on the redemption, which consists of a previously deferred gain of $181 and the difference between book value and market value at the time of settlement. The forward sales agree- ments were originally entered into in 2000. c) During 2005, through three separate transactions, Onex and Onex Partners sold their investment in bonds of CGG for proceeds of $145, of which Onex’ share was $34. Onex’ share of the pre-tax gain was $9. Amounts paid on account of these transactions related to the MIP, as described in note 24(e), totalled $1, and have been 2005 2004 deducted from the gain. Year ended December 31 Gains on: Close of exchangeable debentures on Celestica shares(a) $ 560 $ Close of forward sales agreements on Celestica shares(b) Sale of CGG convertible bonds(c) Issue of units by Cineplex Entertainment(d) Issue of shares by EMSC(e) Performance Logistics Group(f) Issue of shares by Celestica(g) Sale of Tower Automotive(h) Other, net(i) 191 41 53 40 – – – 36 – – – – – 58 9 6 34 $ 921 $ 107 a) In February 2005, the Company redeemed all of its outstanding exchangeable debentures and satisﬁed the debenture obligation Amounts related to the carried interest, as described in note 24(d), totalled $4, of which Onex’ portion was deferred. d) In July 2005, in connection with Cineplex Entertainment’s acquisition of Famous Players, Cineplex Entertainment issued additional units to provide a portion of the ﬁnancing. Onex’ own- ership interest was diluted from 31% to 27% as a result of the issuance of additional units by Cineplex Entertainment to unitholders other than Onex. As a result of the dilution of the Company’s investment in Cineplex Entertainment, a non-cash dilution gain of $53 was recorded, of which Onex’ share was $30. This reﬂects Onex’ share of the increase in the book value of the net assets of Cineplex Entertainment due to the issue of addi- tional units. Onex did not sell or purchase any additional units in the unit offering. through the delivery of 9,214,320 Celestica subordinate voting shares. In connection with the delivery, the Company converted e) In December 2005, EMSC completed a US$113 initial public offering of common stock (NYSE: EMS). The offering resulted in approximately 9,214,320 of the Celestica multiple voting shares EMSC receiving net proceeds of approximately US$102, which it held into Celestica subordinate voting shares. As a result of were used to reduce outstanding indebtedness and for general the redemption, the Company’s equity ownership in Celestica corporate purposes. Onex did not receive any proceeds from the was reduced to 14% from 18%; however, the Company continued transaction. As a result of the offering, Onex’ economic ownership to have voting control over Celestica. The Company recognized in EMSC decreased from 36% to 29%. As part of the transaction, a gain of $560 on the redemption, which consists of a previously Onex converted its shares held into Multiple Voting shares and its deferred gain of $549 and the difference between book value voting interest decreased from 100% to 97%. and market value at the time of redemption. The cash for these As a result of the dilution of the Company’s economic exchangeable debentures was received by the Company when it interest, a non-cash dilution gain of $40 was recorded, of which originally entered into these arrangements in 2000. Onex’ share was $15. This reﬂects Onex’ share of the excess of the proceeds from the offering over minority interests’ share of the net assets. 74 Onex Corporation December 31, 2005 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 f) In March 2004, Performance Logistics Group, Inc. (“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 in PLG was diluted from 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 Year ended December 31 2005 2004 a controlling 50% interest to a non-controlling 26% interest as a Celestica $ 193 42 9 8 14 $ 184 – 5 7 8 $ 266 $ 204 result of the additional shares issued. Since Onex ceased to con- trol 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, in 2004 Onex recorded a non-cash gain of $58, reﬂecting the net liabilities of PLG, which are now accounted for under the equity method. This gain is comprised of a non-cash dilution gain of $22 and the reversal of $36 of losses of PLG previ- Spirit AeroSystems ClientLogic J.L. French Automotive Other Costs incurred relate to the restructuring activities, implementa- tion of business processes, infrastructure and information systems ously recognized by Onex that were in excess of the other share- for operations acquired. holders’ equity in PLG. g) In March 2004, Celestica acquired MSL and issued approxi- mately 14.1 million Celestica subordinate voting shares as part of The operating companies record restructuring charges relating to employee terminations, contractual lease obligations and other exit costs when the liability is incurred. The recognition of these charges requires management to make certain judgments the consideration paid. Onex recorded a dilution gain of $9 as a regarding the nature, timing and amounts associated with the result of the reduction in Onex’ ownership through the share planned restructuring activities, including estimating sublease issuance. Onex’ ownership after the dilution was 18% and it income and the net recovery from equipment to be disposed of. retained voting control of Celestica. h) In February 2004, Onex completed the sale of its remaining interest in Tower Automotive, Inc. for net cash proceeds of $8. i) Included in 2005 was a gain of $32 (2004 – $23) from the interest in Ripplewood, a U.S.-based acquisition fund. At the end of each reporting period, the operating companies evaluate the appropriateness of the remaining accrued balances. In January 2005, Celestica announced plans to further improve capacity utilization and accelerate margin improve- ments. These restructuring actions will include facility closures and a reduction in workforce, primarily targeting our higher-cost geographies where end-market demand has not recovered to the levels management requires to achieve sustainable proﬁtability. The tables below provide a summary of restructuring activities undertaken by the operating companies detailing the components of the charges and movement in accrued liabilities. This summary is presented by the year in which the restructuring activities were initiated. Years prior to 2004 Total estimated expected costs Cumulative costs expensed to date Expense (recovery) for the year ended December 31, 2005 Reconciliation of accrued liability Closing balance – December 31, 2004 Cash payments Charges Other adjustments Closing balance – December 31, 2005 $ Employee Termination Costs $ 338 338 (6) 20 (3) (6) – 11 Lease and Other Contractual Obligations Facility Exit Cost and Other $ $ 160 160 6 48 (14) 6 (2) $ 38 $ 37 37 1 3 (2) 1 – 2 Non-cash Charge $ 339 339 – $ Total 874(a) 874(a) 1 71 (19) 1 (2) $ 51 (a) Includes Celestica $847, J.L. French Automotive $18, ClientLogic $5 and Radian $4. Onex Corporation December 31, 2005 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 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 ( c o n t ’d ) 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, 2005 Reconciliation of accrued liability Closing balance – December 31, 2004 Cash payments Charges Other adjustments 139 138 18 25 (37) 18 (2) Closing balance – December 31, 2005 $ 4 $ 13 13 2 6 (2) 2 (1) 5 (a) (b) Includes Celestica $197, J.L. French Automotive $7, ClientLogic $3, Radian $4 and CMC $3. Includes Celestica $197, J.L. French Automotive $7, ClientLogic $3, Radian $4 and CMC $2. $ $ 13 13 3 8 (6) 3 (1) 4 Initiated in 2005 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, 2005 Reconciliation of accrued liability Cash payments Charges 255 150 150 (95) 150 Closing balance – December 31, 2005 $ 55 $ $ 26 19 19 (1) 19 18 $ $ 62 55 55 (39) 55 16 (a) (b) Includes Celestica $287, Spirit AeroSystems $43, ClientLogic $8, Radian $7, WIS $5, EMSC $2, CMC $1 and Other $3. Includes Celestica $167, Spirit AeroSystems $43, ClientLogic $8, Radian $4, WIS $5, EMSC $2, CMC $1 and Other $3. 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, 2005 Reconciliation of accrued liability Closing balance – December 31, 2004 Cash payments Charges Other adjustments 732 626 162 45 (135) 162 (2) $ 199 192 27 54 (17) 27 (3) $ 112 105 59 11 (47) 59 (1) Non-cash Charge $ 49 49 9 Non-cash Charge $ 13 9 9 Non-cash Charge $ 401 397 18 $ Total 214(a) 213(b) 32 39 (45) 23 (4) $ 13 $ Total 356(a) 233(b) 233 (135) 224 $ 89 Total $ 1,444 1,320 266 110 (199) 248 (6) Closing balance – December 31, 2005 $ 70 $ 61 $ 22 $ 153 76 Onex Corporation December 31, 2005 17. D E B T P R E PAY M E N T Year ended December 31 Cineplex Entertainment J.L. French Automotive Celestica Other 2005 2004 $ $ 4 – – 2 6 $ $ – 5 2 1 8 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 2005 2004 Celestica(a) ClientLogic(b) $ $ 1 2 3 $ 388 5 Other $ 393 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 to lower-cost geographies whereby these actions reduced the forecasted revenue and net cash ﬂows for many facilities. b) In 2005, ClientLogic performed its annual impairment tests of goodwill and intangible assets and determined that a writedown of $2 was required as a result of its early termination of the tech- nology infrastructure services agreement with British Telecom. In 2004, the impairment tests resulted in a writedown of $5 in intangible assets due to the loss of certain client contracts. 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 Celestica(a) J.L. French Automotive(b) 2005 2004 $ $ 1 – 4 5 $ $ 84 8 2 94 a) During the fourth quarter, Celestica performed its annual impairment tests of goodwill and intangible assets and deter- a) In 2005, Celestica recorded an impairment of $1 (2004 – $84) against property, plant and equipment. mined that writedowns of nil (2004 – $351) in goodwill and $1 (2004 – $37) in other intangibles was required. The majority of the writedowns in 2004 were due to restructuring plans and the continued transfer of major customer programs from higher-cost 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. 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 (provision) at statutory rates Increase (decrease) related to: Decrease (increase) in valuation allowance(1) Amortization of non-deductible items Income tax rate differential of operating investments Non-taxable accounting gains Other, including permanent differences Provision for income taxes Classified as: Current Future Provision for income taxes 2005 $ (295) 70 (1) 75 185 (106) 2004 $ 308 (435) (126) (48) 32 (9) $ (72) $ (278) $ (86) 14 $ (72) $ (34) (244) $ (278) (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. Onex Corporation December 31, 2005 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 2 0 . I N C O M E TA X E S ( c o n t ’d ) 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 investments 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 sales of operating investments Other 2005 2004 $ 986 $ 1,031 – 250 – 97 4 89 5 28 (1,172) 287 (106) (22) (639) – (767) 45 172 9 117 16 91 11 4 (1,428) 68 (52) (20) (617) (2) (691) Future income tax liabilities, net $ (480) $ (623) Classified as: Current asset Long-term asset Long-term liability Future income tax liabilities, net $ 52 235 (767) $ (480) $ 17 51 (691) $ (623) The Company and its investment-holding companies have tax-loss carryforwards of $267 available to reduce future income taxes to the year 2014. At December 31, 2005, 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 $3,010, of which $592 had no expiry, $846 were available to reduce future taxes between 2006 and 2010, inclusive, and $1,572 were available with expiration dates of 2011 through 2025. Cash taxes paid during the year amounted to $114 (2004 – $30). 78 Onex Corporation December 31, 2005 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 21. N E T E A R N I N G 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 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 a) Fair values of ﬁnancial instruments 2005 139 139 2004 142 142 The estimated fair values of ﬁnancial instruments as at December 31, 2005 and 2004 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 liabilities 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 2005 2004 Financial liabilities: Long-term debt (i) Foreign currency contracts Interest rate swap agreements Carrying Amount $ 3,863 $ $ – – Fair Value/ (Unwind Costs) Carrying Amount Fair Value/ (Unwind Costs) $ 3,873 $ $ (7) 14 $ 1,968 $ $ – – $ 1,968 $ $ (44) (25) (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 sales agreements In 2000, the Company entered into the following forward sales agreements relating to subordinate voting shares of Celestica. In June 2005, the Company settled the forward sales agreements and recorded a gain, as described in note 15. As at December 31, 2004, the fair value of the forward sales agreements was included in investments and other assets (note 7). Changes in market value of the forward contracts up to the date of settlement have been recorded in the audited annual consolidated 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 December 31, 2004 Fair Value 472,840 1,284,627 $ 111.24 $ 128.47 $ $ 44 142 The reference price approximated the market value of a Celestica subordinate voting share at the time the forward sales agreements were entered into. The reference prices under the contracts have increased 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 for the number of shares under the contract. Onex Corporation December 31, 2005 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 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 ClientLogic J.L. French Automotive Radian CEI CDI EMSC Spirit AeroSystems 2005 Number of Significant Customers Percentage of Revenues 2004 Number of Significant Customers Percentage of Revenues 2 1 2 1 3 1 2 1 26% 22% 82% 10% 49% 12% 73% 99% 2 1 2 1 3 – – – 26% 22% 83% 13% 59% – – – Accounts receivable from the above signiﬁcant customers at December 31, 2005 and 2004 totalled $860 and $236, 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, 2005, the amounts payable in respect of these guarantees totalled $153. Certain oper- ating companies have guarantees with respect to employee share purchase loans that amounted to $2 at December 31, 2005. These guarantees are without recourse to Onex. The Company has commitments in the total amount of approximately $440 in respect of corporate investments, including the commitments to Onex Real Estate Partners LP and ONCAP II as indicated in note 26. The Company and its operating companies have also 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. c) The operating companies are subject to laws and regulations concerning the environment and to the risk of environmental provided certain indemniﬁcations, including those related to liability inherent in activities relating to their past and present businesses that have been sold. The maximum amounts from operations. As conditions of acquisition agreements, certain oper- many of these indemniﬁcations cannot be reasonably estimated ating companies have agreed to accept certain pre-acquisition at this time. However, in certain circumstances, the Company and liability claims on the acquired companies after obtaining indem- its operating companies have recourse against other parties to niﬁcation from prior owners. mitigate the risk of loss from these indemniﬁcations. The Company and its operating companies also have The Company and its operating companies have com- insurance to cover costs incurred for certain environmental mat- mitments in respect of real estate operating leases, which are ters. Although the effect on operating results and liquidity, if any, disclosed in note 10. The aggregate capital commitments as at cannot be reasonably estimated, management of Onex and the December 31, 2005 amounted to $246. 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. 80 Onex Corporation December 31, 2005 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 with funding commitments totalling approximately $2,100. e) Under the terms of the MIP approved in June 1996, manage- ment members of the Company invest in all of the operating entities Onex Partners is to provide committed capital for future Onex- acquired by the Company. sponsored acquisitions not related to Onex’ operating companies The aggregate investment by management members at December 31, 2003 or to ONCAP. As at December 31, 2005, approximately $1,400 has been invested of the total approxi- mately $2,100 of capital committed. Onex has funded $316 of its $480 commitment. Onex controls the General Partner and Manager of Onex Partners. Onex management has committed, as a group, to invest a minimum of 1% of Onex Partners, which may 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 be adjusted annually up to a maximum of 4%. As at December 31, of an investment before the ﬁfth year, the investment rights vest 2005, management and directors had committed 4%. The total in full. The investment rights related to a particular acquisition amount invested in Onex Partners investments by Onex manage- are exercisable only if the Company earns a minimum 15% per ment and directors for the year ended December 31, 2005 was $30. annum compound rate of return for that acquisition after giving Onex receives annual management fees based upon 2% effect to the investment rights. of the capital committed to Onex Partners by investors other than Under the terms of the MIP, the total amount paid by Onex and Onex management. The annual management fee is management members for the interest in the investments in 2005 reduced to 1% of the net funded capital at the earlier of the end of was $4 (2004 – $2). Investment rights exercisable at the same price the commitment period, when the funds are fully invested, or if for 7.5% (2004 – 7.5%) of the Company’s interest in acquisitions Onex establishes a successor fund. Onex is entitled to receive a were issued at the same time. Realizations under the MIP including carried interest on the overall gains achieved by Onex Partners the value of units distributed were $11 in 2005 and $35 in 2004. investors other than Onex to the extent of 20% of the gains, pro- vided that Onex Partners investors have achieved a minimum 8% return on their investment in Onex Partners over the life of Onex Partners. The investment by Onex Partners investors for this pur- pose takes into consideration management fees and other amounts paid in by Onex Partners investors. The returns to Onex Partners investors other than Onex and Onex management are based upon all investments made through Onex Partners, with the result that initial carried interests achieved by Onex on gains could be recovered from Onex if subsequent Onex Partners investments do not exceed the overall target return level of 8%. Consistent with market practice, Onex, as sponsor of Onex Partners, 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 Onex Partners is closed. For the year ended December 31, 2005, $11 has been received by Onex as carried interest and deferred while management received $17 with respect to the carried interest. f) Members of management and the Board of Directors of the Company invested $21 in 2005 (2004 – $9) in Onex’ acquisitions at the same cost as Onex and other outside investors. Those invest- ments 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, 2005 was $12. h) Onex and its operating companies are subject to tax audits by local taxing authorities. In connection with ongoing tax audits relating to Celestica, taxing authorities have asserted that Celes- tica’s United States subsidiaries owe a signiﬁcant amount of tax, interest and penalties arising from inter-company transactions all within Celestica’s various operations. Celestica’s management has evaluated the assessment and believes they have substantial defences to the asserted deﬁciencies and have adequately accrued for any likely potential losses. However, there can be no assur- ance as to the ﬁnal resolution of these asserted deﬁciencies and any resulting proceedings, and if these audits and proceedings were determined adversely to Celestica the amounts Celestica may be required to pay could be material. Onex Corporation December 31, 2005 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 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 2005 for deﬁned contribution pension plans were $61 (2004 – $30). The Company measures its accrued beneﬁt obligations and the fair value of the plan assets for accounting purposes at or around December 31 of each year for the largest plans. The most recent actuarial valuation of these pension plans for funding purposes was as of June 2005 and December 2005, and the next required valuation will be as of January 2006. In 2005, total cash payments for employee future beneﬁts, 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 $79 (2004 – $63). 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 (gain) loss in year Foreign currency exchange rate changes Acquisitions during the year Discontinued operations Plan amendments Settlements/curtailments Settlement benefits Reclassification of plans Other 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 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 2005 2004 2005 2004 2005 2004 $ 131 $ 144 $ 476 $ 637 $ 105 $ 164 2 8 – (11) 21 1 1 – – – – 7 – 1 8 – (9) 10 (2) – (3) – 2 – (20) – 9 46 1 (26) (12) (48) 734 – 3 (3) 2 (7) – 13 25 2 (18) 24 (3) 1 (215) – (12) – 20 2 10 6 1 (11) 17 (4) 38 – (13) – – – – 15 5 – (18) 5 (2) – (48) – (17) – – 1 $ 160 $ 131 $ 1,175 $ 476 $ 149 $ 105 $ 147 $ 152 $ 350 $ 459 $ 17 5 – (11) 2 1 – – 8 14 4 – (9) (3) – (8) – (3) 87 29 1 (26) (40) 653 – – (8) 28 31 2 (18) – 1 (144) (12) 3 – – 10 1 $ – – 18 – (11) (18) – – – – – – – – – – – – $ Closing plan assets $ 169 $ 147 $ 1,046 $ 350 $ 82 Onex Corporation December 31, 2005 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 2005 58% 39% – 3% 100% 2004 50% 45% 2% 3% 100% Equity securities do not include direct investments in the shares of the Company or 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 Other unrecognized amounts Reclassification of plans Pension Plans in which Assets Exceed Accumulated Benefits Pension Plans in which Accumulated Benefits Exceed Assets Non-Pension Post-Retirement Benefits 2005 2004 2005 2004 2005 2004 $ 169 (160) $ 147 $ 1,046 (131) (1,175) $ 350 (476) $ – (149) $ – (105) $ 9 – 45 – 11 $ 16 – 31 – 22 $ (129) $ (126) $ (149) $ (105) (1) 55 (5) (11) (5) 125 – (22) (12) 32 – – – 16 – – Deferred benefit amount – asset (liability) $ 65 $ 69 $ (91) $ (28) $ (129) $ (89) The deferred beneﬁt asset is included in the Company’s balance sheet under “Investments and other assets”. The deferred beneﬁt liabilities are included in the Company’s audited annual consolidated balance sheets under “Other liabilities”. 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 Difference between expected return and actual return on plan assets for period Actuarial (gain) loss Difference between actuarial loss (gain) recognized for period and actual actuarial loss (gain) on the accrued benefit obligation for period (19) (9) Plan amendments (curtailment/settlement (gain) loss) Difference between amortization of past service costs for period and actual plan amendments for period Settlement benefits Net periodic costs – – – 2 $ 2 – – 2 $ Pension Plans in which Assets Exceed Accumulated Benefits Pension Plans in which Accumulated Benefits Exceed Assets Non-Pension Post-Retirement Benefits 2005 2004 2005 2004 2005 2004 $ 2 8 (17) 7 21 $ $ 1 8 (14) 4 10 9 46 (87) 28 (12) 25 2 (2) 2 $ 13 25 (28) 5 24 (18) (12) 8 6 $ 10 $ 15 6 – – 17 (20) – – – 5 – – 5 (5) (17) 8 – $ 11 $ 23 $ 13 $ 11 Onex Corporation December 31, 2005 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 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 ( c o n t ’d ) The following assumptions were used to account for the plans: Year ended December 31 Pension Benefits Non-Pension Post-Retirement Benefits 2005 2004 2005 2004 Accrued benefit obligation Weighted average discount rate 4.23%–6.00% 5.20%–6.50% 5.25%–5.75% 5.75%–6.10% Weighted average rate of compensation increase Benefit cost Weighted average discount rate Weighted average expected long-term 0.00%–4.80% 0.00%–3.75% 0.00%–3.50% 4.23%–6.25% 5.20%–6.50% 5.25%–6.10% rate of return on plan assets 5.00%–9.25% 6.40%–8.00% n/a Weighted average rate of compensation increase 0.00%–4.80% 0.00%–4.80% 0.00%–4.00% 4.00% 6.40% n/a 4.00% 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 2005 2004 8.00%–10.00% 3.25%–5.00% 6.60%–10.00% 3.25%–5.00% Between 2008 and 2011 Between 2008 and 2011 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 2005 $ 2 $ 18 1% Increase 2004 $ $ 3 14 1% Decrease 2005 2004 $ (1) $ (15) $ (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. 84 Onex Corporation December 31, 2005 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 6 . S U B S E Q U E N T E V 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 Onex and certain operating companies have entered into agree- G E O G R A P H I C S E G M E N T ments to acquire or make investments in other businesses. These Onex’ reportable segments operate through autonomous compa- transactions are subject to a number of conditions, many of which nies and strategic partnerships. Each reportable segment offers are beyond the control of Onex or the operating companies. The different products and services and is managed separately. effect of these planned transactions, in addition to those described The Company had seven reportable segments in 2005 and below, if completed, may be signiﬁcant to the consolidated ﬁnan- ﬁve in 2004: electronics manufacturing services; aerostructures; cial position of Onex. healthcare; theatre exhibition; customer management services; In late 2005, ONCAP completed its ﬁrst closing of capital automotive products; and other. The electronics manufacturing commitments for its second fund, ONCAP II LP (“ONCAP II”). services segment consists of Celestica, which provides manufac- It is planned that ONCAP II will have total committed capital of turing services for electronics original equipment manufacturers approximately $500, of which Onex’ portion would be approxi- (“OEMs”). The aerostructures segment consists of Spirit AeroSys- mately half. The investment parameters and objectives remain tems, which manufactures aerostructures. The healthcare segment essentially unchanged from those of the ﬁrst fund. In January consists of EMSC, a leading provider of ambulance transport ser- 2006, ONCAP II acquired CSI Global Education Inc., Canada’s vices and outsourced hospital emergency department physician leader in ﬁnancial services education, for an equity investment of stafﬁng and management services in the United States; CDI, which $25, of which Onex’ initial share was $14. owns and operates diagnostic imaging centres in the United States; In late January 2006, Spirit AeroSystems agreed to and Skilled Healthcare, which operates skilled nursing and assisted acquire BAE Systems’ aerostructures business with operations in living facilities in United States. The theatre exhibition segment Scotland and England in a transaction valued at $162. BAE Sys- consists of Cineplex Odeon, and Cineplex Entertainment. The cus- tems’ aerostructures business produces wing and other structural tomer management services segment consists of ClientLogic, components, primarily for Airbus airplanes. Spirit AeroSystems which provides services for telecommunications, consumer goods, will ﬁnance the entire acquisition, which is expected to close in retail, technology, transportation, ﬁnance and utility companies. the ﬁrst quarter of 2006. The automotive products segment consists of J.L. French Auto- motive, a leading manufacturer of high-pressure aluminum die-cast parts. Other includes Radian, CEI, Onex Real Estate, OPMG, ONCAP, ONCAP II and the parent company. Onex Corporation December 31, 2005 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 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 G E O G R A P H I C S E G M E N T ( c o n t ’d ) 2005 Industry segments Electronics Manufacturing Services Aero- structures Healthcare Customer Theatre Management Services Exhibition Automotive Products Other Consolidated Total $ 10,257 $ 1,436 $ 2,126 $ 491 $ 715 $ 584 $ 950 $ 16,559 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 Equity-accounted investments Foreign exchange gains (loss) Stock-based compensation Derivative instruments Gains on sales of operating investments, net (9,537) (313) 407 (146) (34) (68) 24 – 1 (28) – – Acquisition, restructuring and other expenses (193) Debt prepayment Writedown of goodwill and intangible assets Writedown of long-lived assets – (1) (1) Earnings (loss) before income taxes, non-controlling interests and (1,232) (123) 81 (19) (2) (28) 20 – – (11) – – (42) – – – (1,808) (111) 207 (72) (19) (66) 2 1 – (2) – – (2) (2) – – (392) (28) 71 (41) (3) (25) 3 – – (8) – – – (4) – (4) (444) (205) 66 (37) (12) (22) 4 – (2) – – – (9) – (2) – (484) (22) 78 (55) – (83) – – – – – – (8) – – – (627) (287) 36 (14,524) (1,089) 946 (39) (409) (26) (40) 92 – (30) (1) 4 921 (12) – – – (96) (332) 145 1 (31) (50) 4 921 (266) (6) (3) (5) discontinued operations $ (39) $ (1) $ 47 $ (11) $ (14) $ (68) $ 905 $ 819 Provision for income taxes Non-controlling interests in operating companies Earnings from continuing operations Earnings from discontinued operations Net earnings Total assets(a) Long-term debt (b) Property, plant and equipment additions Goodwill additions (72) 5 752 213 965 $ $ $ 5,637 $ 1,966 $ 2,753 $ $ $ 872 185 2 $ $ $ 839 $ 1,196 169 – $ $ 82 873 $ $ $ $ 860 346 33 198 $ $ $ $ 260 206 18 – $ $ $ $ 410 $ 2,959 $ 14,845 783 43 – $ $ $ 446 $ 4,688 20 $ 550 113 $ 1,186 (a) Theatre exhibition and other include discontinued operations as described in note 2. (b) Long-term debt includes current portion and excludes capital leases. 86 Onex Corporation December 31, 2005 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 2004 Industry segments Revenues Cost of sales Selling, general and administrative expenses Earnings (loss) 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 Equity-accounted investments Foreign exchange gains (loss) Stock-based compensation Derivative instruments Gains on sales of operating investments, net Acquisition, restructuring and other expenses Debt prepayment 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 $ 11,480 $ (10,913) (358) 209 (223) (45) (56) 49 – (8) (20) – – (184) (2) (388) (84) $ 318 (241) (18) 59 (24) – (8) 1 – – – – – – – – – 730 (458) (196) 76 (41) (15) (19) 7 – 3 (1) – – (5) – (5) (2) $ 691 (551) (18) 122 (59) – (95) – – 3 – – – (7) (5) – (8) $ Other 420 (286) (175) (41) (23) (12) (17) 45 (8) (114) (34) 29 107 (8) (1) – – Consolidated Total $ 13,639 (12,449) (765) 425 (370) (72) (195) 102 (8) (116) (55) 29 107 (204) (8) (393) (94) interests and discontinued operations $ (752) $ 28 $ (2) $ (49) $ (77) $ (852) Provision for income taxes Non-controlling interests of operating companies Loss from continuing operations Earnings from discontinued operations Net earnings Total assets(a) Long-term debt (b) Property, plant and equipment additions Goodwill additions (a) Theatre exhibition and other include discontinued operations described in note 2. (b) Long-term debt includes current portion and excludes capital leases. Geographic segments (278) 891 (239) 274 35 $ $ $ $ $ $ 5,925 750 180 298 $ $ $ $ 368 129 23 – $ $ $ $ 303 192 43 – $ $ $ $ 452 721 52 – $ $ $ $ 4,761 $ 11,809 382 10 267 $ $ $ 2,174 308 565 2005 2004 Canada U.S. Europe Other Total Canada U.S. Europe Other Total Revenue $ 2,370 $ 6,163 $ 2,219 $ 5,807 $ 16,559 $ 2,793 $ 2,855 $ 2,838 $ 5,153 $ 13,639 Property, plant and equipment Intangible assets Goodwill $ $ $ 639 $ 1,441 186 $ 305 399 $ 1,187 $ $ $ 277 5 – $ $ $ 333 $ 2,690 23 $ 519 954 $ 2,540 $ $ $ 496 67 178 $ $ $ 349 143 223 $ $ $ 343 24 – $ $ $ 354 37 1,049 $ $ $ 1,542 271 1,450 Revenues are attributed to geographic areas based on the locations of manufacturing facilities for the electronics manufacturing services, aerostructures and automotive products segments; and of operating facilities for the healthcare, 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, 2005 87 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) 2005 2004 2003 2002 2001 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 sales of operating investments, net Acquisition, restructuring and other expenses Debt prepayment Writedown of goodwill and intangible assets Writedown of long-lived assets Earnings (loss) before income taxes, non-controlling interests and discontinued operations Recovery of (provision for) income taxes Non-controlling interests of operating companies Earnings (loss) from continuing operations Earnings (loss) from discontinued operations (a) Net earnings (loss) for the year Total assets Shareholders’ equity Dividends declared per Subordinate Voting Share Earnings (loss) per Subordinate Voting Share: Continuing operations Net earnings (loss) Fully diluted $ 16,559 $ 13,639 $ 11,639 $ 15,356 $ 17,895 (14,524) (1,089) 946 (409) (96) (332) 145 1 (31) (50) 4 921 (266) (6) (3) (5) 819 (72) 5 752 213 965 $ $ (12,449) (10,488) (13,562) $ (765) 425 (370) (72) (195) 102 (8) (116) (55) 29 107 (204) (8) (393) (94) (852) (278) 891 (239) 274 $ (716) 435 (393) (91) (173) 81 – (122) 14 – 129 (151) (11) (402) (88) (772) (57) 266 (563) 231 $ (838) 956 (495) (171) (132) 69 – 18 142 – 21 (673) (25) (425) – (715) 73 568 (74) (71) (15,833) (986) $ 1,076 (440) (286) (173) 121 – 16 – – 164 (433) – (427) – (382) 17 234 (131) 929 $ 35 $ (332) $ (145) $ 798 $ 14,845 $ 11,809 $ 14,621 $ 19,890 $ 20,870 $ $ $ $ $ 1,152 0.11 5.41 6.95 6.95 $ $ $ $ $ 227 0.11 (1.69) 0.25 0.25 $ $ $ $ $ 293 0.11 (3.67) (2.16) (2.16) $ $ $ $ $ 1,044 0.11 (0.46) (0.90) (0.90) $ $ $ $ $ 2,219 0.11 (0.81) 4.95 4.95 (a) The earnings from discontinued operations for 2001 include the sale of Sky Chefs. The earnings from discontinued operations from 2001 to 2003 include the sale of Lantic Sugar/Rogers Sugar and MAGNATRAX. The earnings from discontinued operations from 2001 to 2004 include the sale of Dura Automotive, Loews Cineplex Group, Armtec and InsLogic. The earnings from discontinued operations from 2001 to 2005 include the sale of CVG and the discontinued operations of CMC. The earnings from discontin- ued operations from 2002 to 2005 include the discontinued operations of Cineplex. The earnings from discontinued operations from 2004 to 2005 include the sale of Magellan. Previously reported consolidated revenues and earnings figures for 2001 to 2004 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 88 Onex Corporation December 31, 2005 2005 2004 2003 2002 2001 $ 18.92 $ 19.75 $ 14.69 $ 16.00 $ 22.45 SHAREHOLDER INFORMATION Shares Registrar and Transfer Agent Duplicate communication The Subordinate Voting Shares of the CIBC Mellon Trust Company Registered holders of Onex Corporation Company are listed and traded on P.O. Box 7010 The Toronto Stock Exchange. Share symbol OCX.SV 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, 2005 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. Adelaide Street Postal Station Toronto, Ontario M5C 2W9 (416) 643-5500 or call toll-free throughout 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 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 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 11, 2006 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

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