OncoCyte Annual Report 2006

Plain-text annual report

Management’s Discussion and Analysis and Financial Statements December 31, 2006 ONEX CORPORATION Onex makes private equity investments through the Onex Partners and ONCAP family of Funds. Through these Funds, which have third-party capital as well as Onex’ capital, Onex generates annual management fee income from third-party capital and is currently entitled to a carried interest on more than $4.0 billion of that capital. It also has a real estate fund and a public markets fund. Onex’ operating companies had 2006 annual revenues of $19 billion, assets of $23 bil- lion and 167,000 employees worldwide. These companies are in a variety of industries, including electronics manufacturing services, aerostructures manufacturing, healthcare, ﬁnancial services, theatre exhibition, customer support services, personal care products and communications infrastructure. Onex works in partnership with the management teams of our subsidiaries to build the value of these businesses. Onex is listed on the Toronto Stock Exchange under the symbol OCX. Table of Contents 4 Management’s Discussion and Analysis 56 Consolidated Financial Statements 99 Summary Historical Financial Information 100 Shareholder Information Throughout this report, all amounts are in Canadian dollars unless otherwise indicated. 2006 HIGHLIGHTS Onex’ share price was up 50 percent to $28.35 per share. Onex raised Onex Partners II LP, a $4.0 billion private equity Fund. • This new Fund enables Onex to continue to pursue larger acquisitions. • Onex has a 41 percent participation in Onex Partners II, which will enable Onex to put more of its cash to work. • The new Fund will signiﬁcantly increase the management fee income to Onex and the potential for Onex to earn a carried interest on the gains of the third-party investors. There were 17 acquisitions completed in the year by Onex and its operating companies, of which the following were the most signiﬁcant: • The Warranty Group, one of the world’s largest providers of extended warranty contracts, acquired by Onex for $800 million in November; • Spirit AeroSystems purchased BAE Systems’ aerostructures business (now operating as Spirit Europe), a supplier of structural components primarily for the Airbus aircraft, in April; • Town and Country Trust, a real estate investment trust that owns and operates apartment communities in the Mid-Atlantic States and Florida, was a $1.7 billion acquisition completed by Onex Real Estate Partners, in a joint venture with Morgan Stanley Real Estate and Sawyer Realty Holdings, in March. • ONCAP completed two investments – CSI Global Education and Environmental Manage- ment Solutions. Onex completed a public offering for Spirit AeroSystems at US$26.00 per share (NYSE: SPR) in November, a value eight times Onex’ initial investment. Onex realized $390 million of proceeds on the sale of a portion of its ownership in the business, received $49 million for its share of the carried interest and continues to own 17.1 million shares, which have a value of $668 million at the end of 2006. Onex reported excellent ﬁnancial results due in large part to the acquisitions completed in 2005: • Revenues grew 21 percent to $18.6 billion; • Operating earnings increased 86 percent to $1.2 billion; • Net earnings rose 4 percent to $1.0 billion; • Cash ﬂow from operations was up 10 percent to $896 million; • Assets climbed 52 percent to $22.6 billion. Onex Corporation December 31, 2006 1 Onex repurchased 9.2 million Subordinate Voting Shares under its Normal Course Issuer Bids for a total cost of $203 million, or an average cost per share of $22.17. Over the past ﬁve years, Onex has repurchased 32.4 million Subordinate Voting Shares at a total cost of $563 million. Onex believes that repurchasing its Subordinate Voting Shares when they are trading below their intrinsic value is a good opportunity to build value for shareholders. Onex ended 2006 with four committed signiﬁcant acquisitions that are expected to close during the ﬁrst half of 2007. We believe that these acquisitions, which will put a further $724 million of Onex’ cash to work, show excellent promise for value creation. 2 Onex Corporation December 31, 2006 This report includes Onex Corporation’s Management’s Discussion and Analysis and Financial Statements for the year ended December 31, 2006. 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 for- mat, 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. Onex Corporation December 31, 2006 3 MANAGEMENT ’S DISCUSSION AND ANALYSIS The Management’s Discussion and Analysis (“MD&A”) of the ﬁnancial condition and results of operations analyzes signiﬁcant changes in the consolidated statements of earnings, consolidated balance sheets and consolidated statements of cash ﬂows of Onex Corporation (“Onex”). It should be read in conjunction with the audited annual consolidated ﬁnancial statements and notes found on pages 56 to 98 of this report. The MD&A and the Onex con- solidated ﬁnancial statements have been prepared to provide information on Onex on a con- solidated basis and should not be considered as providing sufﬁcient information 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 13, 2007. The Board of Directors carries out its responsibility for review of this disclosure through its Audit and Corporate Governance Committee, comprised exclusively of independent 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: Significant Events in 2006 Consolidated Operating Results 5 Onex Business Objective and Strategies The Onex Operating Companies 8 9 Industry Segments 11 Financial Review 11 15 33 36 44 50 50 51 Outlook 52 Risk Management Fourth-Quarter Results Consolidated Financial Position Liquidity and Capital Resources Recent Accounting Pronouncements Disclosure Controls and Procedures and Internal Controls over Financial Reporting Onex Corporation’s ﬁnancial ﬁlings, including its 2006 MD&A, Financial Statements and interim quarterly reports, Annual Information Form and Management Circular, are available 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. Forward-Looking/Safe Harbour Statements This MD&A may contain, without limitation, statements concerning possible or assumed future results preceded by, followed by or that include words such as “believes”, “expects”, “anticipates”, “estimates”, “intends”, “plans” and words of similar connotation, which would constitute forward-looking statements. Forward-looking statements are not guarantees of future performance. They 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 limitation, those discussed on pages 11 through 15 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. All forward-looking statements attributable to Onex are expressly qualiﬁed by these cautionary statements. 4 Onex Corporation December 31, 2006 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 BUSINESS OBJECTIVE AND STRATEGIES Onex makes private equity investments through the Onex Partners and ONCAP family of Funds. Through these Funds, which have third-party capital as well as Onex’ capital, Onex generates annual management fee income from third-party capital and is entitled to a carried interest on more than $4.0 billion of that third-party capital. It also has a real estate fund and a public markets fund. Onex’ business objective is to create long-term value for shareholders by acquiring and building industry-leading businesses and to have that value reﬂected in Onex’ share price. The Onex team has consistently applied a set of core skills in its pursuit of value creation for shareholders and partners. We seek to acquire attractive businesses at a reasonable cost and ﬁnance the acquisitions in a manner that will allow those companies to continue or accelerate their growth. We work with their management teams on strategies designed to build those businesses into industry leaders. We have structured Onex’ operations to pursue new opportunities in a manner designed to create value for Onex shareholders. The private equity fund structure that Onex ﬁrst established in 2003 to raise third-party capital generates signiﬁcant management fees to offset operating costs and provides the opportunity to earn a carried interest on the gains of limited partners. 1. Acquire attractive businesses We believe that large-scale acquisitions are the most efﬁcient means for Onex to deploy capital and create long-term value. We seek to manage the risk and optimize the returns of these acquisitions by adhering to key operating principles: Financial strength for acquisitions. Onex, the parent company, maintains a strong ﬁnancial position with substantial liquidity in order to be responsive to new acquisition opportunities and to support the growth of existing operating companies. At December 31, 2006, we had approximately $1.5 billion of cash. Onex also has committed capital through its private equity Funds: • Onex Partners Funds – Onex Partners LP (“Onex Partners I”) is a $1.9 billion (US$1.655 billion) fund and Onex Partners II LP (“Onex Partners II”) is a $4.0 billion (US$3.45 billion) fund. Onex controls the General Partner and Manager of the Onex Partners Funds. As at December 31, 2006, the uncalled committed capital avail- able through the Onex Partners Funds from other limited partners was $2.5 billion. • ONCAP Funds – ONCAP has raised two private equity Funds – ONCAP L.P. (“ONCAP I”), a $400 million fund and ONCAP II L.P. (“ONCAP II”), a $574 million fund – both of which are focused on acquiring and building value in North American mid-cap companies. Onex has committed 45 percent of ONCAP II’s total capital; Onex controls the General Partner and Manager of the ONCAP Funds. The uncalled committed cap- ital available from other limited partners in the ONCAP II Fund was approximately $286 million at December 31, 2006. ($ millions) I N V E S T E D C A P I TA L 1,803 1,062 749 724 The adjacent chart shows Onex’ ability to put funds to work by year since 2004. 540 132 312 330 04 05 06 Committed 07 (a) Onex’ portion of total invested capital Total invested capital (a) Represents committed and/or completed investments as of February 13, 2007. Onex Corporation December 31, 2006 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 Industry leadership. Onex looks to acquire companies that have not only exhibited leadership or the potential for leader- ship within their own industry but also offer a clear opportunity, in our view, to create value for shareholders. Oppor- tunities for signiﬁcant growth may be in rapidly growing industries where there is the scope to build a leadership position through consolidation. Management ownership. Each member of Onex’ management team has a very meaningful personal ﬁnancial interest in the Company and its operating companies. We believe this personal commitment aligns Onex management’s personal objectives with Onex’ overall value creation objective. Onex also believes that management of the acquired companies should share in the risks and rewards of owner- ship. 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. Diversiﬁcation of capital. Onex deliberately diversiﬁes its private equity capital across a variety of companies and indus- tries 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. In addition, Onex established Onex Real Estate Partners (“OREP”) in partnership with an experienced and dedicated management team. The objective of the partnership is to acquire and to improve real estate assets in North America. Onex also established Onex Capital Management to invest in securities of publicly traded North American companies in order to generate long-term capital appreciation. 2006 Performance against objective • We completed the acquisition of The Warranty Group, Inc. in a transaction valued at approximately $800 million. Onex and Onex Partners invested $568 million, of which Onex’ share was $179 million. • ONCAP acquired CSI Global Education and Environmental Management Solutions. • OREP, in a joint venture, acquired Town and Country Trust in a transaction valued at approximately $1.7 billion. As well, OREP made three investments in Camden properties, which are residential apartment communities in the United States. • We made four major investment commitments at the end of 2006 – Tube City IMS, Raytheon Aircraft Company, Qantas Airways and Kodak Health Group – that have a combined anticipated investment of $1.8 billion. Onex’ portion of these investments is expected to be $724 million. We expect these transactions to close during the ﬁrst half of 2007. • Onex’ management team and board of directors invested $37 million in the acquisitions completed by Onex in 2006. The Onex management team also invested $15 million in Onex shares in 2006. 2. Build acquired businesses into industry leaders A guiding philosophy of Onex’ business is assisting the management teams of our operating companies to deal with the strategic, ﬁnancial and operating issues they face in building the value of their companies. We accomplish this through active ownership and careful monitoring of key performance indicators. Active ownership. We believe that if a business is good enough to buy, it is good enough to be vigorously developed. Onex works closely with the management teams of our operating companies to set strategies, assist in evaluating acquisitions and in implementing ﬁnancing arrangements that will build the value of their business. As partners with its operating companies’ management teams, Onex’ management team offers its depth and breadth of experience in acquisitions, inte- gration, strategy, negotiations and ﬁnancing that spans more than 20 years and 185 companies. Key performance indicators. Onex does not get involved in the day-to-day activities of its businesses. While Onex management provides its support in areas such as strategy, acquisitions and ﬁnancing, Onex believes that each operating company’s management team is most familiar with its industry and therefore is the best manager of its business. It is for this reason that a key strategy for Onex is to acquire a business in partnership with that company’s management team. Onex management monitors the performance of each of its businesses by evaluating the important leading indica- tors of each operating company’s performance and prospects. 6 Onex Corporation December 31, 2006 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 2006 Performance against objective • Three of our operating companies – Spirit AeroSystems, Emergency Medical Services and Skilled Healthcare – completed follow-on acquisitions valued at a total of about $250 million. • Spirit AeroSystems strengthened its balance sheet with a portion of the proceeds from its initial public offering. • Improved revenues and operating earnings at most of the Onex operating companies. 3. Expand third-party capital Onex believes that the private equity fund structure provides substantial value for Onex shareholders through the manage- ment fees and carried interest it earns. We plan to continue to raise new funds as existing Funds become fully invested. We may also look for other asset classes where we believe we can create value, such as our real estate initiative. Earn management fees. The third-party investors in our Funds acknowledge Onex’ active role in building the value of the Funds. As the General Partner in our Funds, we receive a management fee of 2 percent on committed capital from third- party investors in Onex Partners II and ONCAP II. As Onex Partners I and ONCAP I were fully invested at the end of 2006, Onex receives a 1 percent management fee calculated on remaining invested capital of third-party investors. Earn carried interests. The private equity fund structure recognizes the skills of the Onex professional team in creating and realizing value on behalf of the limited partners. The Funds give Onex the ability to earn a carried interest on the returns of the limited partners based on the performance of the individual Onex Partners Funds. The General Partner earns a carried interest of 20 percent on the realized gains of the third-party limited partners, subject to an 8 percent compound annual preferred return to the limited partners on the entire Fund. Consistent with market practice, Onex, as sponsor of the Onex Partners Funds, is allocated 40 percent of the carried interest, with the balance being allocated to the Onex man- agement team. 2006 Performance against objective • We closed our second large-cap private equity fund with total capital commitments of approximately $4.0 billion, of which $2.5 billion was from third-party limited partners. • Onex received $35 million in management fees in 2006 and expects to receive approximately $60 million in 2007. • Onex earned a carried interest of $49 million on the realizations of the other limited partners. 4. Have the value created reﬂected in Onex’ share price Onex believes that its focus on building high-quality businesses creates signiﬁcant value and multiple exit opportunities. Over the past 23 years, the value Onex has built through its active ownership in its operating companies has been realized through many forms, including initial public offerings of shares, sales to strategic buyers, secondary offerings of shares and assets sales. During that period, Onex has generated a compound annual rate of return of 28 percent on realized investments. Onex’ objective is to have the value created reﬂected in Onex’ share price. 2006 Performance against objective • Spirit AeroSystems completed a US$1.7 billion initial public offering of shares at a value of eight times Onex’ cost. • The ONCAP I Fund sold two of its operating companies for an average of 3.7 times its original invested capital. • OREP realized a net after-tax gain of $45 million on the sale of a portion of the Town and Country properties and continues to hold the balance of the properties, which it believes have a signiﬁcant value. At December 31, 2006, Onex Subordinate Voting Shares were valued at $28.35 per share, a 50 percent increase for the year. Onex Corporation December 31, 2006 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 THE ONEX OPERATING COMPANIES Direct 8 Onex Corporation December 31, 2006 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 INDUSTRY SEGMENTS At December 31, 2006, Onex had seven reportable industry segments. A description of our opera- ting companies, excluding discontinued businesses, by industry segment, and Onex’ economic and voting ownership in those businesses, is presented below. Industry Segments Electronics Manufacturing Services Aerostructures Companies Celestica Inc. (TSX/NYSE: CLS), one of the world’s largest electronics manufacturing services companies for original equipment manufacturers (“OEMs”). (website: www.celestica.com) Revenues: $10 billion Assets: $5.4 billion Ownership (Onex Owns/ Onex Votes) 13%/79% Spirit AeroSystems, Inc. (NYSE: SPR), the largest independent non-original equipment manu- facturer (“non-OEM”) designer and manufacturer of aerostructures in the world. (website: www.spiritaero.com) 13%/89% Revenues: $3.6 billion Assets: $3.2 billion Healthcare Emergency Medical Services Corporation (NYSE: EMS), a leading provider of emergency med- ical services in the United States. (website: www.emsc.net) 29%/97% Revenues: $2.2 billion Assets: $1.5 billion Center for Diagnostic Imaging, Inc., a leading provider of diagnostic and therapeutic radiol- ogy services in the United States. (website: www.cdiradiology.com) 19%/100% Revenues: $123 million Assets: $227 million Skilled Healthcare Group, Inc., a leading operator of skilled nursing and assisted living facili- ties in the United States, speciﬁcally in California, Texas, Kansas, Missouri and Nevada, that is focused on treating patients who require a high level of skilled nursing care and extensive reha- bilitation therapy. (website: www.skilledhealthcare.com) 21%/100% Revenues: $603 million Assets: $1.0 billion Res-Care, Inc. (NASDAQ: RSCR), a leading U.S. provider of residential, training, educational and support services for people with disabilities and special needs. (website: www.rescare.com) 6%/26% Financial Services The Warranty Group, Inc., one of the world’s largest providers of extended warranty contracts. (website: www.thewarrantygroup.com) 31%/100% Revenues: $118 million(1) Assets: $6.6 billion (1) Represents one month of revenues following its November 2006 acquisition. Theatre Exhibition Cineplex Entertainment Limited Partnership (TSX: CGX.UN), Canada’s largest ﬁlm exhibi- tion company operating 130 theatres with a total of 1,305 screens under the Cineplex Odeon, Famous Players and Galaxy Entertainment brands. (website: www.cineplex.com) 22%/100%(a) Revenues: $741 million Assets: $893 million (a) Voting is with respect to Cineplex Entertainment Limited Partnership. Customer Management Services ClientLogic Corporation, a leading global call centre company providing customer support and business process outsourcing. (www.clientlogic.com) 67%/89% Revenues: $749 million Assets: $256 million Onex Corporation December 31, 2006 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 Industry Segments Other Businesses • Personal Care Products Companies Ownership (Onex Owns/ Onex Votes) Cosmetic Essence, Inc., a leading provider of outsourced supply chain management services, including manufacturing, ﬁlling, packaging and distribution, to the personal care products industry. (website: www.cosmeticessence.com) 21%/100% Revenues: $292 million Assets: $352 million • Mid-Cap Opportunities ONCAP, a private equity fund focused on acquiring and building the value of mid-sized capital- ization companies based in North America (website: www.oncap.com), which actively manages investments in CSI Global Education Inc. and Environmental Management Solutions, Inc. (TSX: EMS) 45%/100% Revenues: $27 million(2) Assets: $207 million(3) (2) Represents only revenues of CSI. (3) Represents combined assets of CSI and Environmental Management Solutions. • Communications Infrastructure Radian Communication Services Corporation, a North American wireless communications infrastructure and network services company. (website: www.radiancorp.com) 89%/100% Revenues: $132 million Assets: $60 million • Real Estate Onex Real Estate Partners LP, a partnership dedicated to acquiring and improving real estate assets in North America. 85%/100% 10 Onex Corporation December 31, 2006 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, 2006 compared to those for the year ended December 31, 2005 and, in selected areas, to those for the year ended December 31, 2004. S I G N I F I C A N T E V E N T S I N 2 0 0 6 Acquisition of The Warranty Group At the end of November 2006, Onex completed the ac- A number of signiﬁcant events occurred during the year quisition of The Warranty Group, Inc. (“The Warranty that affected Onex’ consolidated results for 2006 and their Group”), one of the world’s largest providers of extended comparability to results for 2005. These events are dis- warranty contracts, in a transaction valued at approxi- cussed below. These signiﬁcant events are presented with mately $800 million. Onex, Onex Partners I and Onex the most recent events ﬁrst. ONCAP to sell CMC Electronics In late January 2007, ONCAP signed an agreement to sell Partners II collectively invested $568 million of equity for an approximate 98 percent initial ownership interest. Of the total equity, Onex’ share was $179 million for a 31 percent ownership interest. its interest in CMC Electronics Inc. (“CMC Electronics”) for The Warranty Group operates in 33 countries and proceeds of approximately $340 million, of which Onex’ has more than 2,150 employees. The company underwrites share would be approximately $140 million. Onex has pre- and administers extended warranties on a wide variety of sented CMC Electronics’ results as discontinued since consumer goods, including automobiles, consumer elec- management of ONCAP determined that it would sell its tronics and major home appliances. The company also holdings in CMC Electronics and began the sale process provides consumer credit and other specialty insurance during the fourth quarter of 2006. The sale is expected to products in connection with consumer loans. close in the ﬁrst half of 2007. The Warranty Group’s operations have been con- Note 3 to the audited annual consolidated ﬁnan- solidated and reported in a new reportable segment – cial statements discloses the assets and liabilities in the Financial Services – from the date of acquisition. Note 2 December 31, 2006 and 2005 balance sheets that have to the audited annual consolidated ﬁnancial statements been restated to be shown as discontinued. provides additional information on this acquisition. ONCAP to sell WIS International In December 2006, ONCAP signed an agreement to sell WIS International (“WIS”) to a third party in a transaction Spirit AeroSystems completes US$1.7 billion initial public offering In late November 2006, the parent of Spirit AeroSystems, valued at $445 million. As a result of the signed agreement, Inc. (“Spirit AeroSystems”), the largest independent non- the operating results of WIS have been reclassiﬁed as dis- OEM designer and manufacturer of aerostructures in the continued in the audited annual consolidated ﬁnancial world, completed an initial public offering of 63.4 million statements for the year ended December 31, 2006; the shares of class A common stock (NYSE: SPR); the offering comparative ﬁscal 2005 results of WIS were also reclassi- was priced at US$26.00 per share for gross proceeds of ﬁed as discontinued operations. In January 2007, ONCAP US$1.7 billion. As part of this offering, Spirit AeroSystems completed the sale of WIS with ONCAP receiving a total issued approximately 10.4 million new shares while Onex, of $222 million compared to an investment of $30 million. Onex Partners I and certain limited partners sold 48.3 mil- Onex’ portion of the proceeds was $75 million. lion shares. Onex, Onex Partners I and certain limited part- Note 3 to the audited annual consolidated ﬁnan- ners received total net proceeds of $1.4 billion for their cial statements discloses the assets and liabilities in the shares sold. December 31, 2006 and 2005 balance sheets that have been restated to be shown as discontinued. Onex Corporation December 31, 2006 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 Onex’ portion of the net proceeds was $390 million, which resulted in Onex recording a pre-tax gain of $314 mil- lion on the net sale of those shares. In addition, Onex received $49 million as its portion of the carried interest. Emergency Medical Services acquires air ambulance services and inpatient services providers In July 2006, Emergency Medical Services Corporation The effect of the new shares issued by Spirit AeroSystems (“EMSC”) completed its acquisition of Air Ambulance resulted in an additional non-cash accounting dilution gain Specialists, Inc. (“Air Ambulance Specialists”) in a transac- of $100 million, of which Onex’ share was $29 million. Onex, tion valued at US$12 million. Air Ambulance Specialists is a Onex Partners I and certain limited partners continue to leader in the management of domestic and international hold 64.2 million shares of Spirit AeroSystems’ common air ambulance transportation. This acquisition is a natural stock for an approximate 46 percent ownership interest. Of complement to American Medical Response’s extensive the total shares held, Onex holds 17.1 million shares for a ground ambulance service network. 13 percent ownership interest. In November 2006, EMSC acquired Clinical Stafﬁng These gains are reported as gains on sales of Solutions (“CSS”) in a transaction valued at US$12 million. operating investments in Onex’ audited annual consoli- CSS provides hospitalist and specialty unit coverage in dated ﬁnancial statements. Onex closes second private equity fund, Onex Partners II LP In August 2006, Onex closed its second large-cap private equity fund, Onex Partners II, with total capital commit- 14 hospitals or outpatient facilities in Pennsylvania and New Jersey. This purchase expands EmCare’s existing inpa- tient services division. Cineplex Entertainment secondary unit offering In June 2006, Cineplex Entertainment Limited Partnership ments of approximately $4.0 billion. Virtually all of the (“Cineplex Entertainment”) and Cineplex Galaxy Income existing investors in Onex Partners I committed to par- Fund (“CGIF”) completed a treasury and secondary offer- ticipate in Onex Partners II and several signiﬁcant new ing of trust units. The offering consisted of the issuance investors were added. Onex has committed to a 41 percent and sale of 2 million trust units from treasury and the sale participation in Onex Partners II, a much larger portion of 3.2 million trust units controlled by Onex, the parent than the 24 percent it had committed to Onex Partners I. company. In conjunction with Onex’ sale of its units, Onex This will enable Onex to put its cash resources to work at a entered into a forward contract to acquire beneﬁcial own- faster pace than before. ership of 1.4 million units already controlled by it through We believe that the fund structure provides sub- Cineplex Odeon Corporation. The forward contract may stantial beneﬁts for Onex shareholders. Onex will beneﬁt be settled in or after January 2007 at a price computed from management fees paid by other investors in Onex with reference to the secondary offering. Partners II; the annualized amount of management fees to Onex received net proceeds of $28 million and Onex that will be generated from the Onex Partners I and recorded a $25 million pre-tax gain on the net sale of those II Funds, as well as the ONCAP II Fund, is expected to total trust units. Cineplex Entertainment received net proceeds approximately $60 million in 2007. Additionally, the Gen- of $30 million for its 2 million treasury unit offering. The eral Partner is entitled to earn a carried interest on the effect of the additional units being issued resulted in a overall gains of the investors in each of these three Funds, non-cash accounting dilution gain of $12 million being which has the potential – given Onex’ track record of value recorded, of which Onex’ share was $6 million. Cineplex growth – to provide a meaningful amount of value to Onex. Entertainment used its net proceeds from the offering to indirectly repay indebtedness under the company’s senior secured revolving credit facility. Onex’ ownership in Cineplex Entertainment was reduced to 22 percent from 27 percent as a result of the above transactions. These gains are reported as gains on sales of operating investments in Onex’ audited annual consoli- dated ﬁnancial statements. 12 Onex Corporation December 31, 2006 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 Spirit AeroSystems acquires BAE Systems’ aerostructures business On April 1, 2006, Spirit AeroSystems acquired the aero- For the remaining 10 properties that were not sold at year-end, OREP determined that due to a change in mar- ket conditions, seven of those properties would not be sold structures business unit of BAE Systems plc in a transac- in the near future. Therefore, the operations of those seven tion valued at $171 million. This purchase was fully funded properties have been reclassiﬁed and reported as continuing by Spirit AeroSystems, and this business now operates as operations in the Other segment of Onex’ audited annual Spirit AeroSystems (Europe) Ltd. (“Spirit Europe”). Spirit consolidated ﬁnancial statements. Europe has operations in Prestwick, Scotland and Samles- bury, England. Its largest customer is Airbus, which pro- vides approximately 80 percent of Spirit Europe’s revenues. Skilled Healthcare completes three acquisitions In early March 2006, Skilled Healthcare Group, Inc. The business produces structural components, primarily (“Skilled Healthcare”), a leading skilled nursing and for wings, for such Airbus aircraft as the A320 family, the assisted living facility operator in the United States, A330, the A340 and the A380. In addition, the company expanded its operations with the purchase of a group of supplies components for The Boeing Company’s (“Boeing”) three long-term care facilities in the state of Missouri. This 767 and 777, as well as the Raytheon Hawker 850XP. This acquisition added 436 skilled nursing and assisted living acquisition enhanced Spirit AeroSystems’ manufacturing beds and broadened Skilled Healthcare’s operations operations and added important new customers. beyond the company’s existing operations in the states of Onex Real Estate acquires Town and Country Trust In March 2006, Onex Real Estate Partners (“OREP”), in a California, Texas, Kansas and Nevada. In June 2006, Skilled Healthcare purchased the leasehold interest of one skilled nursing facility with 100 beds in Nevada. joint venture with Morgan Stanley Real Estate and Sawyer In December 2006, Skilled Healthcare completed Realty Holdings LLC, acquired Town and Country Trust its third acquisition with the purchase of a skilled nursing (“Town and Country”) in an all-cash transaction valued at facility in Missouri. This acquisition expanded Skilled approximately $1.7 billion, including the assumption of Healthcare’s operation by adding 130 skilled nursing and debt. OREP invested approximately $116 million for a assisted living beds. These purchases, which were funded 48 percent equity interest in the Town and Country joint entirely by Skilled Healthcare, have been consolidated and venture. Onex’ share of that investment was $100 million, reported in the healthcare segment from their dates of representing a 41 percent equity interest. acquisition. Skilled Healthcare’s subsidiaries now operate Town and Country is a real estate investment trust 73 skilled nursing and assisted living facilities and also that owned and operated 37 apartment communities in provide hospice and rehabilitation therapy services in its the Mid-Atlantic States and Florida. Note 2 to the audited afﬁliated facilities and for third parties. annual consolidated ﬁnancial statements provides addi- tional information on this acquisition. During the second quarter of 2006, OREP reor- ganized the Town and Country assets into ﬁve regional ONCAP’s sale of Canadian Securities Registration Systems In mid-March 2006, ONCAP I completed the sale of its oper- components and determined that it would divest the assets ating company, Canadian Securities Registration Systems in those components. As a result of a plan to sell the assets, Ltd. (“CSRS”), to Resolve Business Outsourcing Income the results of Town and Country’s operations have been Fund (“Resolve”). ONCAP I received cash proceeds of accounted for as discontinued. $90 million compared to its investment of $29 million in CSRS made in April 2004. In addition, as part of this sale, ONCAP I received one million units of Resolve for a 3 per- cent equity interest. As a result of this sale, Onex received proceeds of $30 million and recorded a pre-tax gain of Onex Corporation December 31, 2006 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 $25 million. Following this sale, ONCAP I ceased to have in J.L. French Automotive resulted in an accounting gain control of CSRS and therefore, for accounting purposes, the of $615 million being recorded by Onex. This gain arises as gain on the sale and CSRS’ results are reported as earnings Onex had recorded in prior years, for accounting pur- from discontinued operations in Onex’ audited annual con- poses, losses of J.L. French Automotive that were in excess solidated ﬁnancial statements. of Onex’ investment in J.L. French Automotive. A signiﬁ- The comparative 2005 full-year results of CSRS cant portion of these prior year losses was due to the have been reclassiﬁed to be presented as discontinued. write-off and amortization of goodwill. The accounting Note 3 to the audited annual consolidated ﬁnancial state- gain is included in earnings from discontinued operations. ments discloses the assets and liabilities in the December 31, Onex’ prior period consolidated ﬁnancial results have 2005 balance sheet that have been restated to be shown been restated to report those operations of J.L. French as discontinued. Automotive as discontinued. Cineplex Entertainment completes sale of seven theatres In late March 2006, Cineplex Entertainment completed the sale of seven theatres with 78 screens located in the province of Quebec in a transaction valued at approxi- mately $2 million. Onex’ share of the gain on those theatres Note 3 to the audited annual consolidated ﬁnan- cial statements discloses J.L. French Automotive’s assets and liabilities in the December 31, 2005 balance sheet that have been restated to be shown as discontinued. ONCAP II completes two acquisitions In early January 2006, ONCAP’s second fund, ONCAP II, was nominal. These seven theatres were required to be sold completed its acquisition of CSI Global Education Inc. as a condition of the regulatory approval obtained for the (“CSI”), Canada’s leader in interactive investment educa- Famous Players acquisition in mid-July 2005 under which tion for the securities and ﬁnancial services industries. Cineplex Entertainment agreed to sell a total of 34 theatres. In March and November 2006, ONCAP II invested in The company sold the other 27 theatres in 2005. Environmental Management Solutions Inc. (“Environ- The comparative results for the year ended Decem- mental Management Solutions”), a leading environmental ber 31, 2005 of the theatres that have been sold have been services company in the management, treatment and re- reclassiﬁed and presented as discontinued. Note 3 to the use and disposal of organic waste and contaminated soil. audited annual consolidated ﬁnancial statements discloses ONCAP II invested $55 million in the equity and those assets and liabilities in the December 31, 2005 bal- debt of these two acquisitions. Onex’ portion of these ance sheet that have been restated as discontinued. investments was $25 million. ONCAP II has a 90 percent Accounting gain recorded on J.L. French Automotive J.L. French Automotive Castings, Inc. (“J.L. French equity interest in CSI and holds a 62 percent equity owner- ship in Environmental Management Solutions on an as- converted basis. CSI’s operations have been consolidated from the date of acquisition and reported with other Automotive”) was unable to meet the ﬁnancial require- ONCAP investments in the Other segment. Environmental ments under certain of its lending agreements as a result Management Solutions’ ﬁnancial results from the date of of the difﬁcult market conditions affecting the North acquisition in November 2006 are not signiﬁcant to Onex’ American automotive supply sector. Consequently, in consolidated results, and therefore, are not consolidated February 2006, J.L. French Automotive ﬁled a voluntary in the audited annual statement of earnings for the year petition for reorganization under Chapter 11 in the United ended December 31, 2006. As at December 31, 2006, Envi- States. In July 2006, the restructured company emerged ronmental Management Solutions’ balance sheet has been from bankruptcy following the U.S. Bankruptcy Court’s included in the audited balance sheet. Note 2 to the approval of J.L. French Automotive’s plan of reorgani- audited annual consolidated ﬁnancial statements provides zation. Onex no longer has an ownership interest in additional information on these investments. J.L. French Automotive. The disposition of Onex’ interest 14 Onex Corporation December 31, 2006 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 Futuremed In early January 2006, Futuremed Health Care Products 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 Limited Partnership (“Futuremed”), an operating company This section should be read in conjunction with Onex’ of ONCAP I, completed a $120 million initial public offering. audited annual consolidated statements of earnings and In that offering, ONCAP I sold all of its Futuremed shares, the corresponding notes thereto. receiving $74 million in net proceeds. Including prior distri- butions, ONCAP I has received net proceeds of $100 million compared to its investment in Futuremed of $25 million Critical accounting policies and estimates Onex prepares its ﬁnancial statements in accordance made in February 2004. Onex’ share of those proceeds was with Canadian generally accepted accounting principles $32 million. At the time of ﬁling Futuremed’s registration (“GAAP”). The preparation of the ﬁnancial statements in statement in December 2005, management of ONCAP had conformity with Canadian GAAP requires management to determined that it intended to sell the majority of its make estimates and assumptions that affect the reported holdings in Futuremed. As a result, Onex presented Future- amounts of assets and liabilities, disclosures of contingent med’s results as discontinued operations in the audited assets and liabilities, and the reported amounts of rev- annual consolidated ﬁnancial statements for the year ended enues and expenses for the period of the consolidated December 31, 2005. ﬁnancial statements. Signiﬁcant accounting policies and Note 3 to the audited annual consolidated ﬁnan- methods used in the preparation of the ﬁnancial state- cial statements discloses the assets and liabilities in the ments are described in note 1 to the audited annual con- December 31, 2005 balance sheet that have been restated solidated ﬁnancial statements. Onex and its operating to be shown as discontinued. companies evaluate their estimates and assumptions on a regular basis, based on historical experience and other rel- Share repurchases under Onex’ Normal Course Issuer Bids During 2006, Onex repurchased 9,176,300 Subordinate evant factors. Included in Onex’ consolidated ﬁnancial statements are estimates used in determining allowance for doubtful accounts, inventory valuation, the useful lives Voting Shares under its Normal Course Issuer Bids at an of property, plant and equipment and intangible assets, average cost per share of $22.17, for a total cost of $203 mil- revenue recognition under contract accounting, pension lion. Onex’ shareholders’ equity at December 31, 2006 has and post-employment beneﬁts, restructuring costs and been reduced for the effect of Onex’ repurchases of Subor- other matters. Actual results could differ materially from dinate Voting Shares under its Normal Course Issuer Bids. those estimates and assumptions. The assessment of goodwill, intangible assets and long-lived assets for impairment, the determination of income tax valuation allowances, contract accounting, development costs and losses and loss adjustment expenses reserves require the use of judgments, assumptions and esti- mates. Due to the material nature of these factors, they are discussed here in greater detail. Goodwill, intangible assets and long-lived assets impairment tests The impairment tests of goodwill, intangible assets and long-lived assets involve consideration of future cash ﬂows and fair values of individual assets, groups of assets or reporting units. The process of determining fair value and future cash ﬂows is subjective and requires manage- ment of the particular operating companies to exercise Onex Corporation December 31, 2006 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 judgment in making assumptions about future results, Development costs including revenues, operating expenses, capital expendi- Included in deferred charges in Onex’ audited annual con- tures and discount rates. When an impairment test is solidated balance sheet are capitalized development costs undertaken, the underlying assumptions are re-evaluated of Spirit AeroSystems primarily associated with that com- and could give rise to future impairment charges. pany’s product development on Boeing’s 787 aircraft. These development costs will be amortized over the anticipated Income tax valuation allowance number of production units to which such costs relate. An income tax valuation allowance is recorded against future income tax assets when it is more likely than not Losses and loss adjustment expenses reserves that some portion or all of the future income tax assets The Warranty Group records losses and loss adjustment recognized will not be realized prior to their expiration. expenses reserves, which represent the estimated ultimate The reversal of future income tax liabilities, projected net cost of all reported and unreported losses on warranty future taxable income, the character of income tax assets, contracts. The reserves for unpaid losses and loss adjust- tax planning strategies and changes in tax laws are some of ment expenses are estimated using individual care-basis the factors taken into consideration when determining valuations and statistical analyses. These estimates are the valuation allowance. A change in these factors could subject to the effects of trends in loss severity and fre- affect the estimated valuation allowance and income tax quency claims reporting patterns of The Warranty Group’s expense. Note 14 to the audited annual consolidated third-party administrators. While there is considerable ﬁnancial statements provides additional disclosure on variability inherent in these estimates, management of income taxes. Contract accounting The Warranty Group believes the reserves for losses and loss adjustment expenses are adequate, and they continu- ally review and adjust those reserves as necessary as expe- In the aerostructures segment, the contract method of rience develops or new information becomes known. accounting requires that revenues from each contract be recognized in accordance with the percentage-of- completion method of accounting. As a result, contract Variability of results Onex’ audited consolidated operating results may vary accounting uses various estimating techniques to project substantially from year to year for a number of reasons, costs to completion and estimates of recoveries asserted including some of the following: acquisitions or disposi- against the customer for changes in speciﬁcations. These tions of businesses by Onex, the parent company; the estimates involve assumptions of future events, including volatility of the exchange rate between the U.S. dollar and the quantity and timing of deliveries and labour perfor- the Canadian dollar; the change in market value of stock- mance and rates, as well as projections relative to material based compensation for both the parent company and its and overhead costs. Contract estimates are re-evaluated operating companies; changes in the market value of periodically and changes in estimates are reﬂected in the Onex’ publicly traded operating companies; and activities current period. at Onex’ operating companies. These activities may During 2006, Onex’ operating company Spirit include the purchase or sale of businesses; ﬂuctuations in AeroSystems recognized revenues under the contract customer demand and materials and employee-related method of accounting, using the units-of-delivery method. costs; changes in the mix of products and services pro- The company follows this method of accounting as a duced or delivered; and charges to restructure operations. signiﬁcant portion of its revenues are under long-term, The discussion that follows identiﬁes some of the material volume-based pricing contracts that require delivery of factors that affected Onex’ operating segments and Onex’ products over several years. audited annual consolidated results for the year ended December 31, 2006. 16 Onex Corporation December 31, 2006 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 statement of earnings for the year ended December 31, 2005 has been restated from that previously Consolidated revenues Consolidated revenues were reported in accordance with required accounting policies $18.6 billion, up 21 percent for discontinued operations of those businesses that were from $15.5 billion in 2005 and disposed of or planned to be disposed of in 2006. These up 23 percent from $12.6 billion include the operations of: • J.L. French Automotive; • CSRS; in 2004. A percentage break- down of total revenues by in- • ClientLogic’s warehouse management business; dustry segment is provided in • Town and Country; • WIS International; and • CMC Electronics Inc. the charts below for the years ended December 31, 2006, 2005 and 2004. T O TA L R E V E N U E S ($ millions) 18,620 15,451 12,590 06 05 04 41% 11% 11% 28% 9% 36% 13% 13% 31% 7% 18% 20% 21% 35% 6% U.S. Canada Europe Asia Other(a) (a) Other includes primarily operations in Central and South America and Australia. Segmented Total Consolidated Revenue Breakdown 20 06 20 0 5 2 0 0 4 a. 54% b. 19% c. 16% d. 1% e. 4% f. 4% x. 2% a. 66% b. 9% c. 14% e. 3% f. 5% x. 3% a. 91% e. 3% f. 5% x. 1% a. Electronics Manufacturing Services b. Aerostructures c. Healthcare d. Financial Services e. Theatre Exhibition f. Customer Management Services x. Other (1) (1) 2006 other includes CEI, Radian, ONCAP, Onex Real Estate and parent company. 2005 other includes CEI, Radian and parent company. 2004 other includes Radian and parent company. Onex Corporation December 31, 2006 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 Table 1 presents revenues in Canadian dollars and in the evaluating the performance of those businesses year- functional currency of the companies in 2006, 2005 and over-year since it eliminates the impact of foreign cur- 2004 and the percentage change in revenues for those rency translation on revenues. The discussion that follows periods. Onex believes that reporting revenues in the will review the factors that affected the change in rev- operating companies’ functional currencies is useful in enues by industry segment. Changes in Revenues by Industry Segment TABLE 1 ($ millions) Canadian Dollars Functional Currency Year ended December 31 2006 2005 Change (%) 2006 2005 Change (%) Electronics Manufacturing Services $ 9,982 $ 10,257 Aerostructures Healthcare Financial Services Theatre Exhibition Customer Management Services Other (a) Total 3,631 2,920 118 741 749 479 1,436 2,126 – 491 686 455 $ 18,620 $ 15,451 (3)% 153 % 37 % – 51 % 9 % 5 % 21 % US$ 8,812 US$ 3,208 US$ 2,575 US$ 103 C$ 741 US$ 660 C$ 479 US$ 8,471 US$ 1,208 US$ 1,758 – C$ 491 US$ 584 C$ 455 4 % 166 % 46 % – 51 % 13 % 5 % Results are reported in accordance with Canadian generally accepted accounting principles. These results may differ from those reported by the individual operating companies. (a) 2006 other includes CEI, Radian, ONCAP and parent company. 2005 other includes CEI, Radian and parent company. ($ millions) Canadian Dollars Functional Currency Year ended December 31 2005 2004 Change (%) 2005 2004 Change (%) Electronics Manufacturing Services $ 10,257 $ 11,480 (11)% Aerostructures Healthcare Theatre Exhibition Customer Management Services Other (a) Total 1,436 2,126 491 686 455 – – 318 674 118 $ 15,451 $ 12,590 – – 54% 2% 286% 23% US$ 8,471 US$ 1,208 US$ 1,758 C$ 491 US$ 584 C$ 455 US$ 8,840 – – C$ 318 US$ 541 C$ 118 (4)% – – 54 % 20 % 286 % Results are reported in accordance with Canadian generally accepted accounting principles. These results may differ from those reported by the individual operating companies. (a) 2005 other includes CEI, Radian and parent company. 2004 other includes Radian and parent company. 18 Onex Corporation December 31, 2006 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 E R O S T R U C T U R E S ($ millions) 3,631 1,436 06 05 92% – 8% – 100% – – – U.S. Canada Europe Other Electronics Manufacturing Services Celestica reported revenues of $10.0 billion in 2006 (54 per- Aerostructures For the year ended December 31, 2006, cent of Onex’ total consolidated revenues in 2006), a 3 per- Spirit AeroSystems reported revenues cent decline from $10.3 billion in 2005 (66 percent of Onex’ of $3.6 billion (19 percent of Onex’ total consolidated revenues in 2005). In the company’s func- total consolidated revenues in 2006) tional currency, Celestica reported US$8.8 billion in 2006, compared to $1.4 billion for 2005 up 4 percent from US$8.5 billion in 2005. Celestica’s growth (9 percent of Onex’ total consolidated was primarily from new customers in the consumer elec- revenues in 2005). In the company’s tronics sector that more than offset the declines in its functional currency, Spirit AeroSys- telecommunications and computing sectors resulting from tems reported revenues of US$3.2 bil- demand weakness and program disengagements. Revenues rose 14 percent in Celestica’s Asia region, which represents more than half of the company’s total business, due primarily to higher volumes and new customers. Partially offsetting the revenue increase in Asia was a decline in revenues in Celestica’s Europe region, which fell 18 percent, due to continued weak demand. Revenues for the Americas were essentially flat compared to 2005. In addition, revenues from ac- quisitions were not signiﬁcant in 2006 and 2005. Celestica reported rev- enues of $10.3 billion in 2005, an 11 percent decline from $11.5 bil- E L E C T R O N I C S M A N U FA C T U R I N G S E R V I C E S ($ millions) 11,480 9,982 10,257 lion for 2006, up signiﬁcantly from US$1.2 billion for the year ended December 31, 2005. Of Spirit AeroSys- tems’ total revenues in 2006, approxi- mately US$1.6 billion, or 49 per- cent, were from fuselage systems, US$888 million, or 28 percent, from propulsion systems, US$720 million, or 22 percent, from wing systems and the balance from after-market spares and repair support. The aerostructures segment was a new reportable segment in 2005 following Onex’ acquisition of Spirit AeroSystems in mid-June 2005. The 2006 results represent a full year of operations compared to six-and-a-half months of revenues reported in 2005. This is the major reason for the signiﬁcant increase in revenues in 2006. In addition, the acquisition of Spirit Europe in April 2006 added rev- enues of $355 million for the balance of 2006. 06 05 04 7% 11% 14% 51% 17% 13% 14% 18% 46% 9% 17% 18% 21% 38% 6% U.S. Canada Europe Asia Other(a) (a) Other includes primarily operations in Central and South America and Australia. Healthcare The healthcare segment revenues lion in 2004 (91 percent of Onex’ total consolidated rev- enues in 2004). In the company’s functional currency, include the operations of Emergency Celestica reported revenues of US$8.5 billion in 2005, down Medical Services, Center for Diag- 4 percent from US$8.8 billion in 2004. Revenues declined nostic Imaging (“CDI”) and Skilled H E A LT H C A R E ($ millions) 2,920 18 percent in the Americas and 17 percent in Europe, while Healthcare. The healthcare segment 2,126 revenues in Asia increased 14 percent. The decline in the reported consolidated revenues of Americas and Europe was due primarily to lower volumes $2.9 billion in 2006 (16 percent of and the transfer of programs to lower-cost geographies. Onex’ total consolidated revenues in Asia beneﬁtted from its expanded manufacturing capabili- 2006), up 37 percent from $2.1 billion ties, improved demand, new customers and the transfer of in 2005 (14 percent of Onex’ total programs from higher-cost geographies. consolidated revenues in 2005). The revenue increase in the healthcare segment was primarily due to the in- clusion of Skilled Healthcare in 2006. This business was acquired in late 06 05 U.S. Canada Europe Other 100% – – – 100% – – – Onex Corporation December 31, 2006 19 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S December 2005. Table 2 provides revenues by operating company in the healthcare segment for 2006 and 2005 in both Canadian dollars and the companies’ functional currencies. There are no comparative revenues for 2004 since all of the businesses in the healthcare segment were acquired in 2005. ResCare is accounted for by the equity method and thus the company’s revenues are not consolidated. Healthcare Revenues TABLE 2 ($ millions) Year ended December 31 Emergency Medical Services Center for Diagnostic Imaging Skilled Healthcare Canadian Dollars Functional Currency 2006 2005 2006 2005 $ 2,194 $ 2,002 123 603 124 –(a) US$ 1,934 US$ 109 US$ 532 US$ 1,656 US$ 102 –(a) Total $ 2,920 $ 2,126 US$ 2,575 US$ 1,758 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 for the four days from the date of 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’ audited consolidated statement of earnings for the year ended December 31, 2005. Emergency Medical Services EmCare is a leading provider of outsourced emer- During 2006, Emergency Medical Services Corporation gency department stafﬁng and management services in (“EMSC”) reported revenues of $2.2 billion, up 10 percent, the United States. The company generates income from or $192 million, from $2.0 billion in 2005. In the company’s hospital contracts for emergency department stafﬁng, functional currency, EMSC’s revenues grew 17 percent to hospitalist and radiology services and other management US$1.9 billion in 2006 from US$1.7 billion in 2005. EMSC services. EmCare contributed US$745 million of EMSC’s operates its business under two subsidiaries: American total revenues in 2006, up 25 percent from US$596 million Medical Response, Inc. (“AMR”) and EmCare Holdings Inc. in 2005. Several factors contributed to EmCare’s revenue (“EmCare”). growth: approximately US$42 million was from new hos- AMR is a leading provider of ambulance transport pital contracts in 2006; an approximate 5 percent increase services in the United States. AMR provides emergency 911 in new patient visits from existing contracts; higher rev- ambulance transport services and non-emergency ambu- enue per patient visit of approximately 7 percent; as well lance transport services, including critical care transfer, as the inclusion of a full 12 months of revenues in 2006 wheelchair transports and other inter-facility transports. compared to 11 months in 2005 following the acquisition. It also offers training, dispatch centres and other services to communities and public safety agencies. AMR generated Center for Diagnostic Imaging approximately US$1.2 billion of EMSC’s total revenues in Center for Diagnostic Imaging, Inc. (“CDI”) operates 2006. This compares to US$1.1 billion in 2005. The 12 per- 39 diagnostic imaging centres in 12 markets in the United cent, or US$130 million, growth in AMR’s revenues was due States, providing imaging services such as MRI, CT, diag- primarily to the inclusion of a full 12 months of revenues nostic and therapeutic injection procedures and other compared to the 11 months of revenues in 2005 following procedures such as PET/CT, conventional x-ray, mammog- Onex’ acquisition of EMSC in February 2005 and to the addi- raphy and ultrasound. Reported revenues for CDI totalled tional revenues generated from AMR’s acquisition of Air $123 million in 2006, down slightly from $124 million in Ambulance Specialists in July 2006 (US$12 million). 2005. Excluding the impact of foreign currency translation, CDI’s revenues grew 7 percent to US$109 million in 2006 from US$102 million in 2005 due primarily to new centres opened in 2006. 20 Onex Corporation December 31, 2006 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Skilled Healthcare Skilled Healthcare Group, Inc. (“Skilled Healthcare”) has Theatre Exhibition The theatre exhibition segment includes the operations two segments for revenues: long-term care services and of Cineplex Entertainment and Cineplex Odeon Corpo- ancillary services. The majority of its revenues are from ration, which owns a small long-term care services, which include skilled nursing care number of theatres and real and integrated rehabilitation therapy services to residents estate properties not included T H E AT R E E X H I B I T I O N ($ millions) in the company’s network of 73 skilled nursing facilities. in Cineplex Entertainment. We 741 In addition, the company earns ancillary service revenue refer to Cineplex Entertainment by providing related healthcare services, such as rehabili- and Cineplex Odeon Corpora- tation therapy services to third-party facilities and hospice tion collectively as Cineplex. 491 care. For the year ended December 31, 2006, Skilled Health- Cineplex generates revenues care reported revenues of $603 million, or US$532 million primarily from box-ofﬁce and 318 in the company’s functional currency. Long-term care concession sales that are affected service revenue accounted for US$470 million of total 2006 by attendance levels and changes revenues while US$62 million of revenues were from in the average per patron admis- ancillary services. Included in Skilled Healthcare’s rev- sion and concession revenues. enues for 2006 is acquisition revenue growth from the Attendance levels are affected three acquisitions that the company completed in the year by the commercial appeal of the (US$9 million). ﬁlms released and the successful The company’s ﬁnancial results for the four days marketing and promotion of 06 05 04 U.S. Canada Europe Other – 100% – – – 100% – – – 100% – – from its December 27, 2005 acquisition date to Decem- those ﬁlms by the ﬁlm studios and distributors. Theatres ber 31, 2005 were not significant to Onex’ consolidated opened or closed and acquisitions or dispositions of the- results and accordingly, Skilled Healthcare’s revenues are atres in the year will also affect revenues. Cineplex not included in the healthcare segment of Onex’ consoli- reported revenues of $741 million for 2006 (4 percent of dated revenues for the year ended December 31, 2005. Onex’ total consolidated revenues in 2006), up 51 percent Financial Services The ﬁnancial services segment is a new reportable segment from revenues of $491 million reported in 2005 (3 percent of Onex’ total consolidated revenues in 2005). The growth in revenues in 2006 was due primarily to the acquisition of in 2006 following Onex’ acquisition of The Warranty Group Famous Players in July 2005 ($219 million), new theatre on November 30, 2006. Reported 2006 revenues for The openings ($16 million), an increase in box-ofﬁce and con- Warranty Group represent one month of revenues from the cession revenues per patron ($10 million), and higher time of its acquisition, which totalled $118 million (1 percent other revenues ($6 million), partially offset by the impact of Onex’ total consolidated revenues in 2006). In the com- of disposed theatres ($1 million). pany’s functional currency, The Warranty Group reported Reported revenues for Cineplex were $491 million revenues of US$103 million. The company underwrites and for the year ended December 31, 2005, up $173 million, or administers extended warranties on a wide variety of con- 54 percent from $318 million in 2004 (3 percent of Onex’ sumer goods, including automobiles, consumer electronics total consolidated revenues in 2004). The acquisition of and major home appliances. It also provides consumer Famous Players in July 2005 accounted for $183 million of credit and other specialty insurance products in connection the total revenue growth and new theatre openings in 2005 with consumer loans. The Warranty Group operates in provided $7 million in box-ofﬁce and concession revenues. 33 countries through more than 2,150 employees. Excluding acquisition growth from Famous Players, box- ofﬁce revenue decreased $13 million in 2005 as a result of lower attendance and a decline in average box-ofﬁce rev- enue per patron. Onex Corporation December 31, 2006 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 Customer Management Services ClientLogic Corporation (“ClientLogic”) reported revenues (2 percent of Onex’ total consolidated revenues in 2006), down 4 percent from $304 million in 2005 (2 percent of $749 million in 2006 (4 percent of Onex’ total consoli- of Onex’ total consolidated revenues in 2005). In the dated revenues in 2006), up $63 million, or 9 percent, from company’s functional currency, CEI’s revenues were $686 million in 2005 (5 percent of Onex’ total consolidated US$257 million in 2006, up US$4 million, or 2 percent, revenues in 2005). Excluding the impact of foreign cur- from US$253 million in 2005. The growth in revenues in rency translation, ClientLogic’s revenues grew 13 percent 2006 was primarily from new customers and the inclusion to US$660 million in 2006 from US$584 million in 2005. of a full year of revenues from Hauer Custom Manufac- Customer contact management revenue grew by US$76 mil- turing, Inc. (“Hauer”), acquired in April 2005. lion due primarily to new customers of US$86 million, par- During 2005, CEI reported revenues of $304 mil- tially offset by lower revenues of $10 million from existing lion. Excluding foreign currency translation, CEI’s revenues customers who did not continue or renew their contracts. For the year ended De- cember 31, 2005, revenues for ClientLogic were up $12 million to $686 million from $674 mil- lion in 2004 (5 percent of Onex’ total consolidated revenues in 2004). In the company’s local currency and under Canadian GAAP, ClientLogic’s revenues grew 20 percent to US$584 mil- lion in 2005 from US$541 million in 2004. Customer contact man- agement revenue grew US$43 mil- lion due to the expansion of business from existing custom- ers of US$31 million and from new customers of US$44 million. Partially offsetting this growth C U S T O M E R M A N A G E M E N T S E R V I C E S ($ millions) 749 686 674 06 05 04 U.S. Canada Europe Other(a) 42% 11% 34% 13% 41% 11% 38% 10% 43% 10% 40% 7% (a) Other includes primarily operations in Central and South America, Asia and Australia. totalled US$253 million in 2005. There are no comparative revenues for 2004 since the company was acquired in December 2004. The company recognized revenues from several new customers and achieved increased revenues from many existing customers in 2005; however, partially offsetting this growth was a reduction in orders from some other existing customers largely as a result of them entering 2005 with excess inventory. In addition, CEI’s acquisition of Hauer in April 2005 contributed US$14 million of the total revenues in 2005. Hauer manufactures, packages and dis- tributes household and consumer products. The acquisition brought new customers to CEI and enabled the company to beneﬁt from the application of Hauer’s high-speed equip- ment and excess capacity that CEI has adapted for the pro- duction of certain of its products. Mid-Cap Opportunities ONCAP reported revenues of $27 million in 2006 (less than 1 percent of Onex’ total consolidated revenues in 2006). CSI Global Education Inc. (“CSI”), acquired in January was the loss of business from two customers in the fourth 2006, accounted for substantially all of the revenues quarter of 2004, which provided US$32 million of revenues in 2006. Environmental Management Solutions’ ﬁnancial in 2004. Other Businesses Personal Care Products results from the date of acquisition in November 2006 were not material to Onex’ consolidated results. There are no comparative revenues for 2005 and 2004 since ONCAP completed its investments in CSI and Cosmetic Essence, Inc. (“CEI”) is a provider of outsourced Environmental Management Solutions in 2006. The reported supply chain management services to the personal care results for 2006, 2005 and 2004 of ONCAP’s businesses – products industry, including formulating, manufacturing, WIS and CMC Electronics – were reclassiﬁed in 2006 and filling, packaging and distribution. For the year ended reported as discontinued since ONCAP had made the deci- December 31, 2006, CEI generated revenues of $292 million sion prior to December 31, 2006 to sell those businesses. 22 Onex Corporation December 31, 2006 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 Radian Communication Services Corporation’s (“Radian”) Consolidated cost of sales Consolidated cost of sales was $16.2 billion in 2006 com- services include wireless network design, installation, man- pared to $13.7 billion in 2005. A breakdown of the percent- agement and optimization, tower engineering and man- age of total cost of sales by industry segment is provided in ufacturing and broadcast systems. During 2006, Radian the charts below for the years ended December 31, 2006 reported revenues of $132 million (less than 1 percent of and 2005. Onex’ total consolidated revenues in 2006), down slightly from $134 million in 2005 (1 percent of Onex’ total consoli- Segmented Total Consolidated Cost of Sales Breakdown dated revenues in 2005). Approximately $7 million of the 2 0 06 2 0 0 5 revenue decline in 2006 was from a weakening in the broadcast tower manufacturing market and a delay in the start of some large customer contracts in the United States. Partially offsetting these factors was higher rev- enues from the company’s Peoria (ROHN Industries) man- ufacturing facility ($4 million). Revenues at Radian totalled $134 million in 2005, up from $113 million in 2004 (1 percent of Onex’ total consoli- dated revenues in 2004). During 2005, telecommunications carriers began to implement a number of capital spending programs, particularly in the U.S. market, which contributed much of the increase in revenues in the year. In addition, Radian’s purchase of the operations of ROHN Industries, which commenced production in May 2004, incrementally added $14 million to revenues in 2005 over 2004. a. 58% b. 18% c. 15% d. 1% e. 3% f. 3% x. 2% a. 69% b. 9% c. 13% e. 3% f. 3% x. 3% a. Electronics Manufacturing Services b. Aerostructures c. Healthcare d. Financial Services e. Theatre Exhibition f. Customer Management Services x. Other (1) (1) 2006 other includes CEI, Radian, ONCAP, Onex Real Estate and parent company. 2005 other includes CEI, Radian and parent company. Table 3 provides a detailed breakdown of reported cost of sales by industry segment for 2006 and 2005 and the percentage change in cost of sales from those periods in both Canadian dollars and the functional currencies of the companies. Cost of sales is provided in the companies’ functional currencies to eliminate the impact of foreign exchange translation on cost of sales. Changes in Cost of Sales by Industry Segment TABLE 3 ($ millions) Canadian Dollars Functional Currency Year ended December 31 2006 2005 Change (%) 2006 2005 Change (%) Electronics Manufacturing Services $ 9,378 $ 9,537 Aerostructures Healthcare Financial Services Theatre Exhibition Customer Management Services Other (a) Total 2,919 2,423 60 594 453 334 1,232 1,808 – 392 420 343 $ 16,161 $ 13,732 (2)% 137 % 34 % – 52 % 8 % (3)% 18 % US$ 8,277 US$ 2,579 US$ 2,135 US$ 52 C$ 594 US$ 399 C$ 334 US$ 7,876 US$ 1,034 US$ 1,495 – C$ 392 US$ 369 C$ 343 5 % 149 % 43 % – 52 % 8 % (3)% Results are reported in accordance with Canadian generally accepted accounting principles. These results may differ from those reported by the individual operating companies. (a) 2006 other includes CEI, Radian, ONCAP, Onex Real Estate and parent company. 2005 other includes CEI, Radian and parent company. Onex Corporation December 31, 2006 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 Table 4 provides additional details on cost of sales as a per- charge consisted of additional inventory provisions recorded centage of revenues by industry segment for 2006 and 2005. in Mexico to cover excess inventory created by demand Cost of Sales as a Percentage of Revenues addition, gross proﬁt was adversely affected by the con- reductions and weak inventory management processes. In by Industry Segment tinued inefﬁciencies at its Mexican facilities associated with supporting program transfers and ramping up new TABLE 4 2006 2005 customers, and under-utilization of its European facilities. Electronics Manufacturing Services Aerostructures Healthcare Financial Services Theatre Exhibition Customer Management Services Other(a) Total 94% 80% 83% 51% 80% 60% 70% 87% 93% 86% 85% – 80% 61% 75% 89% Results are reported in Canadian dollars and in accordance with Canadian generally Partially offsetting these declines were lower costs due to the various restructuring programs and margin improve- ments in Asia. Aerostructures Cost of sales at Spirit AeroSystems was $2.9 billion in 2006 compared to $1.2 billion in 2005. Excluding the impact of foreign currency translation, Spirit AeroSystems booked cost of sales of US$2.6 billion in 2006 compared to US$1.0 billion in 2005. The primary factor for the signiﬁcant increase in accepted accounting principles. These results may differ from those reported by the cost of sales in 2006 was the inclusion of a full year of cost of individual operating companies. (a) 2006 other includes CEI, Radian, ONCAP, Onex Real Estate and parent company. 2005 other includes CEI, Radian and parent company. Electronics Manufacturing Services Celestica’s cost of sales was $9.4 billion in 2006 compared to $9.5 billion in 2005. In the company’s functional currency, cost of sales increased 5 percent to US$8.3 billion in 2006 from US$7.9 billion in 2005, while revenues were up 4 per- cent. Cost of sales as a percentage of revenues was 94 per- cent in 2006, up slightly from 93 percent in 2005. Celestica reported gross proﬁt in 2006 of US$535 million, a 10 per- cent decline from US$595 million in 2005 due primarily to net inventory charges of US$36 million taken at two of its facilities in the Americas. The majority of the inventory sales in 2006 compared to six-and-a-half months in 2005 fol- lowing Onex’ acquisition of Spirit AeroSystems in mid-June 2005. Cost of sales was 80 percent of revenues in 2006, down from 86 percent in 2005 due primarily to lower employee beneﬁt costs and the effect of the strike at Boeing in September 2005 that increased costs associated with a reduced number of shipments. Healthcare The healthcare segment reported cost of sales of $2.4 billion in 2006 compared to $1.8 billion in 2005. Table 5 provides cost of sales by operating company in the healthcare seg- ment for 2006 and 2005 in both Canadian dollars and the companies’ functional currencies. Healthcare Cost of Sales TABLE 5 ($ millions) Year ended December 31 Emergency Medical Services Center for Diagnostic Imaging Skilled Healthcare Canadian Dollars Functional Currency 2006 2005 2006 2005 $ 1,923 $ 1,766 40 460 42 –(a) US$ 1,695 US$ 36 US$ 404 US$ 1,461 US$ 34 –(a) Total $ 2,423 $ 1,808 US$ 2,135 US$ 1,495 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 for the four days from the date of 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’ audited consolidated statement of earnings for the year ended December 31, 2005. 24 Onex Corporation December 31, 2006 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 $1.9 billion in 2006 com- Financial Services For the one-month period following Onex’ acquisition of pared to $1.8 billion in 2005 for the period of Onex’ owner- The Warranty Group, that company reported cost of sales ship from February 2005. In the company’s functional of $60 million, or US$52 million, in the company’s func- currency, cost of sales for EMSC was US$1.7 billion in tional currency. Cost of sales was 51 percent of revenues. 2006 compared to US$1.5 billion in 2005. Cost of sales recorded by AMR was US$1.1 billion in 2006 compared to US$927 million in 2005. EmCare reported cost of sales of Theatre Exhibition Cineplex reported cost of sales of $594 million in 2006, a US$644 million in 2006 compared to US$534 million in 52 percent increase from $392 million reported in 2005. 2005. The overall increase in EMSC’s cost of sales in 2006 This compares to a 51 percent increase in revenues for the was due primarily to the inclusion of a full 12 months of same period. A full year of operations from Famous cost of sales compared to 11 months in 2005 following Players, acquired in July 2005, added $183 million to cost its acquisition. AMR’s expansion into Medicaid managed of sales in 2006. Cost of sales as a percentage of revenues transportation and the purchase of Air Ambulance Spe- was 80 percent for both 2006 and 2005. Approximately cialists, an air medical transportation services business, 40 percent and 7 percent of the total cost of sales were also added cost of sales in 2006. Cost of sales as a percent- attributable to ﬁlm and concession costs, respectively. age of revenues of 88 percent in 2006 remained essentially During 2006, ﬁlm costs increased by $77 million due pri- unchanged from 2005. Center for Diagnostic Imaging marily to the inclusion of a full year of ﬁlm costs from the July 2005 Famous Players acquisition. As a percentage of box-ofﬁce revenue, ﬁlm costs were 52 percent in 2006, Cost of sales for CDI was $40 million in 2006 and $42 mil- essentially equal to 2005. Cost of concessions increased lion in 2005. Excluding the impact of foreign currency $17 million to $44 million in 2006 due primarily to the translation, reported cost of sales for CDI was US$36 mil- inclusion of a full year of cost of concessions associated lion in 2006 and US$34 million in 2005. Cost of sales was with Famous Players. Cost of concessions was 20 percent up slightly in 2006 compared to 2005 due primarily to new of concession revenues in 2006, essentially unchanged centre openings and the overall 7 percent increase in rev- from 2005. enues. Cost of sales was 33 percent of revenues in 2006, unchanged from 2005. Skilled Healthcare Customer Management Services ClientLogic reported cost of sales of $453 million in 2006, up $33 million from cost of sales in 2005. In ClientLogic’s Skilled Healthcare reported cost of sales of $460 million, functional currency, the company reported cost of sales or US$404 million in the company’s functional currency, of US$399 million in 2006 compared to US$369 million in 2006. A comparison to 2005 is not available because in 2005, an increase of 8 percent. This compares to an the company’s ﬁnancial results for the four days from increase of 13 percent in revenues in the company’s func- its December 27, 2005 acquisition date to December 31, tional currency for the same period. ClientLogic’s cost of 2005 were not signiﬁcant to Onex’ consolidated results; sales as a percentage of revenues was 60 percent in 2006, accordingly, Skilled Healthcare’s cost of sales is not compared to 61 percent in 2005. The decline in cost of included in the healthcare segment of Onex’ consolidated sales as a percentage of revenues was driven primarily by a cost of sales for the year ended December 31, 2005. favourable shift in business to higher-margin geographies and better management of low-margin business. Onex Corporation December 31, 2006 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 Other Businesses Personal Care Products Operating Earnings Reconciliation CEI reported cost of sales of $214 million, or US$189 mil- TABLE 6 ($ millions) 2006 lion in the company’s functional currency, in 2006. This Earnings before the undernoted items $ 1,372 compares to cost of sales of $229 million, or US$190 million Amortization of property, plant in the company’s functional currency, in 2005. Cost of sales and equipment was 73 percent of revenues in 2006, down from 75 percent Interest and other income in 2005. The decrease in CEI’s cost of sales in its functional Equity-accounted investments (370) 131 17 2005 $ 806 (333) 144 1 currency was primarily from lower manufacturing over- head achieved through cost management initiatives. Operating earnings $ 1,150 $ 618 Mid-Cap Opportunities ONCAP reported cost of sales of $2 million in 2006. As was the case with revenues, substantially all of the cost of sales was associated with CSI. There is no comparative cost of sales for 2005 since all of ONCAP’s reported businesses were acquired in 2006. The cost of sales for ONCAP for 2005 was restated to report as discontinued operations for CSRS, WIS and CMC Electronics. Communications Infrastructure Foreign exchange gain (loss) Stock-based compensation Amortization of intangible assets and deferred charges Interest expense of operating companies Derivative instruments 22 (634) (91) (339) – Gains on sales of operating investments, net 1,307 Acquisition, restructuring and other expenses (292) Debt prepayment Writedown of goodwill and intangible assets Writedown of long-lived assets – (10) (3) (35) (44) (81) (223) 4 921 (252) (6) (3) (5) Radian’s cost of sales was $114 million in 2006 compared Earnings before income taxes, to $113 million in 2005. As a percentage of revenues, the non-controlling interests and company’s cost of sales was 86 percent in 2006, up from discontinued operations $ 1,110 $ 894 84 percent in 2005 due to higher costs on certain larger projects resulting from inefﬁciencies at Radian’s U.S. and Canadian operations. Operating earnings Operating earnings is deﬁned as EBIAT, or earnings before interest expense, amortization of intangible assets and deferred charges and income taxes. As Onex’ objective is to achieve an operating earnings measurement of our busi- nesses, the Company also excludes foreign exchange gain (loss), stock-based compensation charges, non-recurring items such as acquisition and restructuring charges, as well as non-controlling interests and discontinued oper- ations. Table 6 provides a reconciliation of the audited annual consolidated statements of earnings to operating earnings for the years ended December 31, 2006 and 2005. Onex uses EBIAT as a measure 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-recurring 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 per- formance measure under Canadian GAAP and should not be considered either in isolation of, or as a substitute for, net earnings prepared in accordance with Canadian GAAP. 26 Onex Corporation December 31, 2006 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Consolidated operating earnings of $1,150 million • an improvement in insurance claims costs at EMSC, in 2006 were up 86 percent, or $532 million, from $618 mil- as well as the inclusion of a full 12 months of that lion in 2005. Table 7 provides a breakdown of and the company’s results in 2006 compared to 11 months of change in operating earnings by industry segment for the operating earnings from the time of the company’s years ended December 31, 2006 and 2005. acquisition in February 2005 ($30 million). $ 201 $ 285 $ (84) higher costs from inefﬁciencies at its facilities in Mexico Operating Earnings by Industry Segment TABLE 7 ($ millions) 2006 2005 Change ($) Electronics Manufacturing Services Aerostructures Healthcare Financial Services Theatre Exhibition Customer Management Services Other (a) Total 508 256 44 55 55 31 82 138 – 33 40 40 426 118 44 22 15 (9) $ 1,150 $ 618 $ 532 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) 2006 other includes CEI, Radian, ONCAP, Onex Real Estate and parent company. 2005 other includes CEI, Radian and parent company. Partially offsetting the impact of these factors was a decline in operating earnings of $84 million at Celestica resulting principally from net inventory charges of US$36 million at two of the company’s facilities in the Americas, as well as and Eastern Europe, partially offset by restructuring bene- ﬁts and margin improvements in Asia. Stock-based compensation During 2006, stock-based compensation expense was $634 million compared to $44 million in 2005. Table 8 provides a breakdown of and the change in stock-based compensation by industry segment for the years ended December 31, 2006 and 2005. Stock-based Compensation Expense (Income) by Industry Segment During 2006, Onex’ operating earnings growth was driven by several factors: • a $426 million increase in Spirit AeroSystems’ operating earnings in 2006 resulting from: the inclusion of a full 12 months of operating earnings from Spirit AeroSys- tems, acquired in mid-June 2005 ($250 million); lower cost of sales in 2006 due to favourable cost trends and higher production rates ($67 million) and the effect of TABLE 8 ($ millions) 2006 2005 Change ($) Electronics Manufacturing Services Aerostructures Healthcare Theatre Exhibition Customer Management Services Other (a) $ 23 438 3 1 (1) 170 $ 28 11 2 8 – (5) $ (5) 427 1 (7) (1) 175 the Boeing strike in September 2005 that had resulted Total Stock-based Compensation in a reduced number of shipments in that prior period ($38 million); and Spirit AeroSystems’ purchase of Spirit Europe in April 2006 ($11 million). Spirit AeroSystems’ operating earnings exclude development costs of $100 million in 2006 (2005 – $55 million) that were capi- Expense $ 634 $ 44 $ 590 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) 2006 other includes CEI, Radian, ONCAP, Onex Real Estate and parent company. talized under Canadian GAAP and that Spirit AeroSys- 2005 other includes CEI, Radian and parent company. tems expensed under U.S. GAAP; • Onex’ acquisitions of Skilled Healthcare ($91 million) in December 2005 and of The Warranty Group in late November 2006 ($44 million); and Onex Corporation December 31, 2006 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 The increase in stock-based compensation expense in 1.1630 Canadian dollars at December 31, 2005. Since Onex, 2006 was driven by: the parent company, holds a signiﬁcant portion of its cash • Spirit AeroSystems, which contributed $427 million of the in U.S. dollars, it recorded a $10 million foreign exchange increase in stock-based compensation expense due pri- gain as a result of the exchange rate movement on the marily to charges related to Spirit AeroSystems’ Union value of the U.S. cash held. There was a net foreign ex- Equity Participation plan following the company’s initial change loss of $35 million recorded in 2005. The parent public offering of shares; the total value of the Union company accounted for $31 million of the total foreign Equity Participation plan was $343 million, of which exchange loss due to the weakening of the U.S. dollar com- $196 million was paid in cash and $147 million is to be pared to the Canadian dollar to 1.1630 Canadian dollars settled in shares in March 2007. Additionally, Spirit Aero- at December 31, 2005 from 1.2020 Canadian dollars at Systems also recorded stock-based compensation charges December 31, 2004. Note 27 to the audited annual consoli- associated with the revaluation of prior common stock dated ﬁnancial statements provides a breakdown of for- purchases and restricted stock awards to other employees eign exchange gains (loss) by industry segment. of Spirit AeroSystems as a result of the initial public offering and the rise in value of its stock plans; and • the growth in value of Onex’ stock options and invest- Interest and other income Interest and other income was down $13 million, or 9 per- ment rights from their value at December 31, 2005, cent, to $131 million in 2006 from $144 million in 2005. which added $169 million in stock-based compensation The decrease was due primarily to: expense; the 50 percent growth in value of Onex shares • $35 million of other income recorded by Onex, the par- during 2006 resulted in a $113 million increase in the ent company, in 2005 on the realization of non-strategic unrealized value of Onex stock options; and approxi- market-related investments; and mately $49 million of the growth in value was associated • $17 million of other income recorded by Celestica in with the unrealized value of the investment rights under 2005 associated with the repurchase of its Liquid Yield the MIP of Spirit AeroSystems. Option™ notes (“LYONs”). Partially offsetting these factors was a $7 million decline in Partially offsetting the above factors were: stock-based compensation expense at Cineplex due to a • higher interest and other income at Spirit AeroSystems one-time $8 million stock-based compensation charge of $19 million resulting from the inclusion of a full recorded in 2005 as a result of units issued to management 12 months of interest and other income in 2006; as part of the Famous Players acquisition that year. • $11 million of interest and other income from The Foreign exchange gain (loss) The foreign exchange gain (loss) reﬂects the impact of changes in foreign currency exchange rates, primarily on the Warranty Group, acquired in late November 2006; and • higher interest income of $13 million at Onex, the parent company. U.S.-dollar-denominated cash held at Onex, the parent com- pany. While changes in foreign currency exchange rates may Interest expense of operating companies Onex has a policy to structure each of its operating apply to multiple currencies, the primary impact of foreign companies with sufﬁcient equity in the company to enable currency translation on Onex’ consolidated results is due it to self-ﬁnance a signiﬁcant portion of its acquisition to the conversion of the U.S. dollar to the Canadian dollar. cost with a prudent level of debt. The level of debt For the year ended December 31, 2006, a net assumed is commensurate with the operating company’s foreign exchange gain of $22 million was recorded due available cash ﬂow, including consideration of funds primarily to the slight increase in the value of the U.S. required to pursue growth opportunities. It is the responsi- dollar relative to the Canadian dollar; the exchange rate was bility of the acquired operating company to service its own 1.1654 Canadian dollars at December 31, 2006 compared to debt obligations. 28 Onex Corporation December 31, 2006 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 interest expense was up $116 mil- lion to $339 million in 2006 from $223 million in 2005. Equity-accounted investments Onex reported earnings on equity-accounted investments Table 9 details the change in consolidated interest expense of $17 million in 2006 compared to $1 million in 2005. The from 2005 to 2006. Change in Interest Expense TABLE 9 ($ millions) Reported interest expense for 2005 Additional interest expense in 2006 due to: A full year of Spirit AeroSystems interest expense A full year of Skilled Healthcare, acquired on December 27, 2005 Cineplex Entertainment Interest expense reductions due to: EMSC’s repayment of debt from initial public offering Other Reported interest expense for 2006 $ 339 2006 earnings from equity-accounted investments primar- ily represents Onex’ share in the net earnings of Res-Care, Inc. (“ResCare”), Cypress Property & Casualty Insurance Company (“Cypress”), a Florida homeowners insurance company, and OREP’s investment in the Camden partner- $ 223 ships, which are multi-unit apartment community devel- 26 52 21 (6) 23 opment projects in the United States. Onex’ share of Cypress’ earnings accounted for $12 million of the growth in equity-accounted investments in 2006. Cypress reported strong proﬁtability in 2006 largely due to reduced claims resulting from a mild hurricane season. Approximately $2 million of the earnings on equity-accounted invest- ments represents Onex’ share of ResCare’s net earnings. Gains on sales of operating investments Consolidated gains on sales of operating investments totalled $1,307 million in 2006 compared to $921 million Spirit AeroSystems added $26 million in interest expense in 2005. Table 10 details the nature of the gains recorded in in 2006 as a result of the inclusion of a full 12 months of 2006 compared to 2005. that company’s interest expense compared to six-and-a- half months in 2005. Skilled Healthcare contributed a fur- ther $52 million in interest expense in 2006 since the Gains on Sales of Operating Investments company was acquired in late December 2005. In addition, TABLE 10 ($ millions) 2006 2005 Cineplex Entertainment added $21 million in interest Gains on: expense in 2006 over 2005 due to the inclusion of a full Sale of shares of Spirit AeroSystems $ 1,146 $ – year of interest expense on the additional debt taken on as Dilution gain on issue of shares by a result of the July 2005 acquisition of Famous Players, Spirit AeroSystems which included that company’s issuance of $105 million of Sale of units of Cineplex Entertainment convertible debentures and other third-party ﬁnancing. Dilution gain on June 2006 issue of units Partially offsetting these expenses was lower reported by Cineplex Entertainment interest expense at EMSC of $6 million in 2006 due pri- Close of exchangeable debentures marily to its $114 million debt repayment following its on Celestica shares initial public offering in December 2005. Close of forward sales agreements on Celestica shares Sale of CGG convertible bonds Dilution gain on July 2005 issue of units by Cineplex Entertainment Dilution gain on issue of shares by EMSC Other, net Total 100 25 12 – – – – – 24 – – – 560 191 41 53 40 36 $ 1,307 $ 921 Onex Corporation December 31, 2006 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 In late November 2006, Spirit AeroSystems completed a Acquisition, Restructuring and Other Expenses US$1.7 billion initial public offering of common stock. As part of that offering, Spirit AeroSystems issued 10.4 mil- TABLE 11 ($ millions) lion new shares; Onex, Onex Partners I and certain limited Celestica partners sold 48.3 million shares. The gain that was Spirit AeroSystems recorded has two components: a gain on the shares sold ClientLogic 2006 $ 240 31 3 18 2005 $ 193 42 9 8 $ 292 $ 252 Other Total Celestica incurred approximately $240 million of these expenses in 2006 compared to $193 million in 2005. Many of the costs were recorded in connection with Celestica’s restructuring plans, which were spread over several reporting periods. These plans, which include reducing workforce and consolidating facilities, are intended to improve capacity utilization and accelerate margin improvements. Included in Celestica’s 2006 acquisition, restructuring and other expenses was a $69 million charge associated with the sale of its manufacturing facilities in Italy. Note 19 to the audited annual consolidated ﬁnancial statements details the nature of the acquisition, restruc- turing and other expenses, such as employee termination costs, facility and exit costs and other charges, by the year in which the activity was initiated. Spirit AeroSystems recorded $31 million in acqui- sition, restructuring and other expenses for 2006 related to the continued transition to and set-up of a stand-alone business following the separation of the company’s opera- tions from Boeing, as well as the integration of the April 2006 purchase of Spirit Europe from BAE Systems. Income taxes During 2006, the consolidated provision for income taxes was $24 million compared to a provision of $70 million in 2005. Spirit AeroSystems accounted for much of the provi- sion for income taxes in 2006. Included in the 2005 income tax provision was a $158 million current income tax expense recorded by Onex, the parent company, relating to the gain on the early settlement of its Celestica ex- changeable debentures and the Celestica forward sales agreements. Offsetting this was a recovery of income taxes resulting from the application of previous years’ loss carry- forwards for which a full valuation allowance had previ- ously been provided. Note 14 to the audited annual and an accounting dilution gain resulting from the new share issuance at a value above the net book value per share. The gain on shares sold by Onex, Onex Partners I and certain limited partners was $1.1 billion, of which Onex’ share was $314 million. The non-cash accounting dilution gain recorded from the new share issuance was $100 mil- lion, of which Onex’ portion was $29 million. Onex, the parent company, recorded a $25 million pre-tax gain as a result of the sale of some of its Cineplex Entertainment trust units as part of a secondary offering completed in June 2006. In conjunction with its sale of units, Onex also entered into a forward contract to acquire beneﬁcial ownership of 1.4 million units already con- trolled by it through Cineplex Odeon Corporation. The for- ward contract may be settled in or after January 2007 at a price computed with reference to the secondary offering. In addition, a $12 million non-cash accounting dilution gain was recorded relating to Cineplex Entertainment’s issuance of 2 million trust units from treasury, the pro- ceeds from which were used to indirectly repay indebted- ness under the company’s revolving credit facility. Onex’ share of that gain was $6 million. Acquisition, restructuring and other expenses Acquisition, restructuring and other expenses are consid- ered to be costs incurred by the operating companies to realign organizational structures or restructure manufac- turing capacity to obtain operating synergies critical to building the long-term value of those businesses. During 2006, acquisition, restructuring and other expenses totalled $292 million, up 16 percent from the $252 million reported in 2005. Table 11 details acquisition, restructuring and other expenses by operating company. 30 Onex Corporation December 31, 2006 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 ﬁnancial statements provides a reconcilia- tion of the statutory income tax rates to the Company’s Earnings (loss) from continuing operations Onex’ consolidated earnings from continuing operations, effective tax rate and also provides an analysis of the including gains on sales of operating investments, was future income tax assets and liabilities. $256 million ($1.93 per share) in 2006 compared to earn- Non-controlling interests in earnings (losses) of operating companies In the audited annual consolidated statements of earnings, ings from continuing operations of $827 million ($5.95 per share) reported in 2005 and a loss of $248 million ($1.75 per share) reported in 2004. Table 13 details the earnings (loss) from continuing operations by industry segment the non-controlling interests amounts represent the inter- before income taxes and non-controlling interests. ests of shareholders other than Onex in the net earnings or losses of Onex’ operating companies. During 2006, the Earnings (Loss) from Continuing Operations non-controlling interests amount in Onex’ operating com- panies’ net earnings was $830 million compared to a TABLE 13 ($ millions) 2006 2005 2004 $3 million interest in net losses in 2005. Table 12 details the Earnings (loss) before income taxes losses (earnings) by industry segment attributable to non- and non-controlling interests: controlling shareholders in our operating companies. Electronics Manufacturing Non-controlling Interests in Losses (Earnings) of Operating Companies TABLE 12 ($ millions) Electronics Manufacturing Services Aerostructures Healthcare Financial Services Theatre Exhibition Customer Management Services Other(a) Minority interest of gains on sales of operating investments 2006 $ 153 (99) (45) (15) (6) (6) 103 (915) 2005 $ 53 15 (44) – (16) (1) 76 (80) Services Aerostructures Healthcare Financial Services Theatre Exhibition Customer Management Services Other(a) Gains on sales of operating investments Provision for income taxes Non-controlling interests of $ (160) $ (39) $ (752) (22) 105 32 1 23 (176) 1,307 1,110 (24) (1) 47 – (11) (7) (16) 921(b) 894 (70) – – – 28 (4) (174) 108 (794) (295) operating companies (830) 3 841 Earnings (loss) from Total $ (830) $ 3 continuing operations $ 256 $ 827 $ (248) (a) Includes CEI, Radian, ONCAP, Onex Real Estate and parent company. The signiﬁcant change in the non-controlling interests (a) 2006 other includes CEI, Radian, ONCAP, Onex Real Estate and parent company. 2005 other includes CEI, Radian and parent company. 2004 other includes Radian and parent company. (b) Includes a $560 million pre-tax gain on the close out of the Celestica exchange- amount in 2006 was due to the interest of the other limited able debentures and a $191 million pre-tax gain on the close out of the Celestica partners of Onex Partners I in the gain recorded as a result forward sales agreements. of the Spirit AeroSystems initial public offering. Approx- imately $832 million of that gain was on the shares sold by other limited partners in the offering, while $71 million resulted from the portion of other limited partners in the non-cash accounting dilution gain recorded as a result of Spirit AeroSystems’ new share issuance at a per share value above the per share net book value. Onex Corporation December 31, 2006 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 Earnings from discontinued operations Earnings from discontinued operations were $746 million Table 14 provides a breakdown of earnings (loss) by com- pany, including the net after-tax gains (loss) on sales of oper- ($5.62 per share) in 2006 compared to earnings from discon- ating investments as well as Onex’ share of earnings (loss) of tinued operations of $138 million ($1.00 per share) in 2005. those businesses that were discontinued in 2006 and 2005. Earnings (Loss) from Discontinued Operations TABLE 14 ($ millions) J.L. French Automotive Sale of Futuremed Sale of CSRS Cineplex Entertainment theatre divestitures Sale of Town and Country ClientLogic’s warehouse management business Sky Chefs Planned sale of WIS Planned sale of CMC Electronics Sale of InsLogic Sale of Magellan Sale of CVG 2006 Onex’ share of earnings (loss) Gain (loss), net of tax $ 615 $ – 19 21 – 45 (2) 50 – – 2 – – – – – (15) (3) – 7 7 – – – 2005 Onex’ share of earnings (loss) Gain, net of tax Total $ – – – 2 – – – – 45 73 22 68 $ (67) $ (67) (1) (3) – – (7) – 1 1 – 2 2 (1) (3) 2 – (7) – 1 46 73 24 70 Total $ 615 19 21 – 30 (5) 50 7 7 2 – – Earnings (loss) from discontinued operations $ 750 $ (4) $ 746 $ 210 $ (72) $ 138 As discussed in the signiﬁcant events section on page 11 In addition to those operations that were discon- of this report, the operations of J.L. French Automotive, tinued in 2006, Onex recorded a $50 million recovery of Futuremed, CSRS, ClientLogic’s warehouse management taxes related to the sale of Sky Chefs in 2001 in earnings business, certain of Town and Country’s assets, WIS and from discontinued operations. This recovery resulted from CMC Electronics were classiﬁed as discontinued in 2006. the resolution of items associated with a previously In addition to these operations, included in the 2005 recorded provision for tax indemnities under the agree- earnings from discontinued operations were the operations ment for the sale of Sky Chefs. of Futuremed, Cineplex Entertainment’s theatre divestitures, Magellan Health Services, Inc. (“Magellan”) and Commercial Vehicle Group, Inc. (“CVG”). Note 3 to the audited annual consolidated ﬁnancial statements provides additional dis- closure on earnings (loss) from discontinued operations. 32 Onex Corporation December 31, 2006 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 Consolidated net earnings in 2006 were $1,002 million F O U R T H - Q U A R T E R R E S U L T S compared to $965 million in 2005 and $35 million in 2004. Table 17 presents the statements of earnings for the fourth Table 15 identiﬁes the net earnings (loss) by industry seg- quarters ended December 31, 2006 and 2005. ment as well as the contribution from net after-tax gains on sales of operating investments and discontinued operations. Fourth-Quarter Statements of Earnings Consolidated Net Earnings (Loss) TABLE 17 ($ millions) 2006 2005 TABLE 15 ($ millions) 2006 2005 2004 Revenues Cost of sales Onex’ share of net earnings (loss): Electronics Manufacturing Services Aerostructures Healthcare Financial Services Theatre Exhibition Customer Management Services Other(a) Net after-tax gains on sales $ (23) $ (13) $ (202) (2) 19 6 (6) 4 (93) (6) 10 – (3) (10) (72) – – – 7 (4) (157) of operating investments 351 921 108 $ 4,992 $ 4,148 (4,282) (3,637) (247) Selling, general and administrative expenses (324) Earnings before the undernoted items $ 386 $ 264 Amortization of property, plant and equipment Interest and other income Equity-accounted investments (114) 48 7 (88) 29 – Operating earnings $ 327 $ 205 Foreign exchange gain (loss) Stock-based compensation Amortization of intangible assets and deferred charges 47 (470) (33) (94) – (8) 1 (22) (67) 1 51 Earnings (loss) from continuing operations Earnings from discontinued operations 256 746 827 138 (248) Interest expense of operating companies Derivative instruments 283 Gains on sales of operating investments, net 1,249 Consolidated net earnings $ 1,002 $ 965 $ 35 (a) 2006 other includes CEI, Radian, ONCAP, Onex Real Estate and parent company. 2005 other includes CEI, Radian and parent company. 2004 other includes Radian and parent company. Table 16 presents the earnings (loss) per share from continuing operations, discontinued operations and net earnings (loss). Acquisition, restructuring and other expenses (82) (102) Debt prepayment Writedown of goodwill and intangible assets Writedown of long-lived assets – (5) (3) (2) (1) (1) Earnings before income taxes, non-controlling interests and discontinued operations $ 936 $ 55 Recovery of (provision for) income taxes Non-controlling interests 34 (759) (21) (5) Earnings (Loss) per Subordinate Voting Share Earnings from continuing operations $ 211 $ 29 TABLE 16 ($ per share) 2006 2005 2004 Basic and Diluted: Continuing operations Discontinued operations Net earnings $ 1.93 $ 5.62 $ 7.55 $ 5.95 $ 1.00 $ 6.95 $ (1.75) $ 2.00 $ 0.25 Earnings (loss) from discontinued operations 33 (37) Earnings (Loss) for the Period $ 244 $ (8) Onex Corporation December 31, 2006 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 revenues were $5.0 billion for the fourth quar- in the fourth quarter of 2005. Table 18 provides a breakdown ter of 2006, up 20 percent, or $844 million from the same and change in fourth-quarter revenues and operating earn- quarter of 2005. Operating earnings were $327 million in ings by industry segment. the fourth quarter of 2006, up 60 percent from $205 million Fourth-Quarter Revenues and Operating Earnings by Industry Segment TABLE 18 ($ millions) Revenues Operating Earnings Electronics Manufacturing Services $ 2,580 $ 2,431 $ 149 2006 2005 Change ($) Aerostructures Healthcare Financial Services Theatre Exhibition Customer Management Services Other (a) Total 966 763 118 196 206 163 642 578 – 193 180 124 324 185 118 3 26 39 2006 $ 30 121 73 44 20 16 23 2005 Change ($) $ 61 $ (31) 73 36 – 20 11 4 48 37 44 – 5 19 $ 4,992 $ 4,148 $ 844 $ 327 $ 205 $ 122 Results are reported in accordance with Canadian generally accepted accounting principles. These results may differ from those reported by the individual operating companies. (a) 2006 other includes CEI, Radian, ONCAP, Onex Real Estate and parent company. 2005 other includes CEI, Radian and parent company. Fourth-quarter revenues rose primarily due to: Partially offsetting the above factors was a $31 million • Celestica’s revenues increased $149 million as a result decrease in operating earnings at Celestica primarily of revenue growth in most of its market segments; in resulting from net inventory charges taken in the Americas particular, the company’s consumer segment grew more and continued higher than expected costs in Mexico and than 50 percent compared to the fourth quarter last year Europe, which more than offset the strong performance due to new customer wins; in Asia. • Spirit AeroSystems’ growth in revenues of $324 million During the fourth quarter of 2006, Spirit Aero- was due primarily to the inclusion of a full quarter of Systems completed an initial public offering of common revenues of Spirit Europe, acquired in April 2006, as well shares. As part of this offering, Spirit AeroSystems issued as higher production rates and the negative impact of approximately 10.4 million new shares while Onex, Onex the 2005 Boeing strike on that prior period; Partners I and certain limited partners sold 48.3 million of • Onex’ acquisition of Skilled Healthcare in late December their shares. Onex, Onex Partners I and certain limited 2005 added $159 million in revenues; and partners received total gross proceeds of $1.4 billion for • the acquisition of The Warranty Group in late November their shares sold, of which Onex’ share of the net proceeds 2006 boosted revenues by $118 million in the quarter. was $390 million. A pre-tax gain of $1.2 billion was recorded in the fourth quarter of 2006 as a result of the initial public Operating earnings grew in the fourth quarter of 2006 offering. The gain had two components: a $1.1 billion pre- compared to 2005 as a result of several factors: tax gain on the net sale of shares by Onex and Onex • the acquisitions of The Warranty Group ($44 million) Partners I and a $100 million non-cash accounting dilution and Skilled Healthcare ($25 million); and gain on the new share issuance at a value above the net • a $48 million growth in operating earnings at Spirit Aero- book value per share. Onex’ portion of the pre-tax gain was Systems due to favourable cost trends, the inclusion of a $343 million. Onex, Onex Partners I and certain limited full quarter of results of Spirit Europe, higher production partners continue to hold 64.2 million shares of Spirit rates and the negative impact of the 2005 Boeing strike on AeroSystems. that prior period. 34 Onex Corporation December 31, 2006 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 the fourth quarter of 2006, stock-based Acquisition, restructuring and other expenses totalled compensation expense was $470 million compared to $82 million for the fourth quarter of 2006 compared to income from stock-based compensation of $1 million $102 million for the same quarter of last year. Approx- recorded during the fourth quarter of 2005. The increase imately $68 million of the total fourth-quarter acquisition, in the stock-based compensation expense recorded in the restructuring and other expenses was recorded by Celes- fourth quarter was due to: tica and $7 million by Spirit AeroSystems. • a stock-based compensation charge of approximately The 2006 fourth-quarter earnings from discontin- $369 million recorded by Spirit AeroSystems in the quar- ued operations of $33 million include a net after-tax gain ter primarily relating to the value of its Union Equity of $45 million on the sale of certain Town and Country Participation plan following the company’s initial public properties, acquired in March 2006. Partially offsetting this offering in November 2006; and was Onex’ share of the after-tax operating losses of those • Onex, the parent company, recording $97 million of the properties of $15 million. This compares to a $37 million total stock-based compensation expense as a result of loss from discontinued operations in 2005, which pri- the increase in the value of Onex’ stock options and the marily represents Onex’ share of the operating loss of J.L. unrealized value under the MIP of the investment rights French Automotive. that are now being recorded in regard to Spirit Aero- Systems following the sale of shares in the initial public offering of that company ($49 million). S U M M A R Y Q U A R T E R L Y I N F O R M A T I O N Table 19 summarizes Onex’ key consolidated ﬁnancial information for the last eight quarters. The summarized results pre- sented in this table may differ from those results previously reported in 2006 and 2005 as a result of operations that have been discontinued and reclassiﬁed as discussed above. TABLE 19 ($ millions except per share amounts) 2006 2005 Dec. Sept. June Mar. Dec. Sept. June Mar. Revenues $ 4,992 $ 4,810 $ 4,624 $ 4,194 $ 4,148 $ 4,083 $ 3,849 $ 3,371 Earnings (loss) from continuing operations $ 211 $ (35) $ 47 $ 33 $ 29 $ (55) $ 233 $ 620 Net earnings (loss) $ 244 $ 31 $ 48 $ 679 $ (8) $ 13 $ 239 $ 721 Earnings (loss) per Subordinate Voting Share Basic and Diluted: Continuing operations Net earnings (loss) $ 1.64 $ (0.27) $ 0.35 $ 0.24 $ 0.21 $ (0.40) $ 1.68 $ 4.46 $ 1.89 $ 0.24 $ 0.36 $ 4.95 $ (0.06) $ 0.09 $ 1.72 $ 5.19 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. Onex Corporation December 31, 2006 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 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 $22.6 billion at Decem- This section should be read in conjunction with the ber 31, 2006 from $14.8 billion at December 31, 2005. 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, 2006, 2005 and 2004. Segmented Total Consolidated Assets Breakdown 20 06 20 0 5 2 0 0 4 a. 24% b. 14% c. 13% d. 29% e. 4% f. 1% x. 15% a. 38% b. 13% c. 18% e. 6% f. 2% x. 23% a. 50% e. 3% f. 3% x. 44% a. Electronics Manufacturing Services b. Aerostructures c. Healthcare d. Financial Services e. Theatre Exhibition f. Customer Management Services x. Other (1) (1) 2006 and 2005 other includes CEI, Radian, ONCAP, Onex Real Estate and parent company. 2004 other includes CEI, Radian, ONCAP and parent company. Consolidated assets grew in 2006 due primarily to: Table 20 outlines the more signiﬁcant acquisitions com- • Onex’ acquisition of The Warranty Group in late Novem- pleted by Onex and its operating companies in 2006, 2005 ber 2006 ($6.4 billion). The primary components of the and 2004. Note 2 to the audited annual consolidated ﬁnan- assets are current and long-term portions of ceded claims cial statements provides additional disclosure on the recoverable ($1.5 billion); current and long-term prepaid acquisitions completed in 2006 and 2005. premiums ($0.9 billion); investments held ($1.2 billion); property, plant and equipment and other assets ($1.8 bil- lion); and goodwill and intangibles ($1.0 billion); • the capitalization of development costs for the Boeing 787 program at Spirit AeroSystems ($100 million) in 2006, as well as the inclusion of assets from Spirit Aero- Systems’ purchase of Spirit Europe ($288 million); and • ONCAP II’s purchase of CSI and Environmental Manage- ment Solutions ($189 million). 36 Onex Corporation December 31, 2006 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 20 Operating company and total assets at time of acquisition 2006 Acquisitions Spirit AeroSystems – $288 million Spirit AeroSystems’ acquisition of BAE Systems’ aerostructures business unit, with operations in Prestwick, Scotland and Samlesbury, England. The company now operates as Spirit AeroSystems (Europe) Ltd. The Warranty Group – $6,569 million Onex’ acquisition of The Warranty Group, one of the world’s largest providers of extended warranty contracts Town and Country – $817 million(1) Onex Real Estate’s acquisition of Town and Country Trust, a real estate investment trust that owns and operates 37 apartment communities in the Mid-Atlantic States and Florida ONCAP – $214 million Two acquisitions in 2006: • CSI Global Education Inc., Canada’s leading provider of financial education and testing services • Environmental Management Solutions, a leading environmental services company in the management, treatment and re-use and disposal of organic waste and contaminated soil (1) A significant portion of Town and Country was recorded as a discontinued operation as at December 31, 2006. Operating company and total assets at time of acquisition 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 Onex’ acquisition of Emergency Medical Services Corporation, a leading provider of emergency medical services, operating through American Medical Response, the leading U.S. provider of ambulance transport services, and EmCare, the leading provider of outsourced services for hospital emergency department physician staffing and management Spirit AeroSystems – $1,591 million Onex’ acquisition of Spirit AeroSystems, Inc., the world’s largest Tier 1 aerostructures manufacturer 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, focusing on treating elderly patients who require a high level of skilled nursing care and extensive rehabilitation therapy Cineplex Entertainment – $622 million Cineplex’ purchase of the Famous Players movie business, a film exhibition company operating 80 theatres with 785 screens across Canada ONCAP – $198 million Two acquisitions in 2005: • 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 • 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 Onex Corporation December 31, 2006 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 TABLE 20 Operating company and total assets at time of acquisition Celestica – $832 million Two acquisitions in 2004: 2004 Acquisitions • Manufacturers’ Services Limited – a full-service global electronics manufacturing and supply chain services company • 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 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 • Canadian Securities Registration Systems Ltd.(2) – a leading Canadian provider of registration and search services to financial institutions and auto acceptance and leasing companies CEI – $383 million Onex’ acquisition of Cosmetic Essence, Inc., a leading provider of outsourced supply chain man- agement services to the personal care products industry including formulating, manufacturing, filling, packaging and distribution services (1) These investments were recorded as discontinued operations as at December 31, 2005. (2) This investment was recorded as a discontinued operation as at December 31, 2006. 38 Onex Corporation December 31, 2006 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Chart 1 shows Onex’ consolidated assets by industry and geographic segments. Asset Diversiﬁcation by Industry and Geographic Segments CHART 1 ($ millions) E L E C T R O N I C S M A N U FA C T U R I N G S E R V I C E S A E R O - S T R U C - T U R E S H E A LT H C A R E F I N A N C I A L S E R V I C E S T H E AT R E C U S T O M E R E X H I B I T I O N M A N A G E M E N T O T H E R (a) T O TA L 5,925 5,637 5,449 3,212 2,887 2,753 6,615 893 860 1,966 368 S E R V I C E S 303 256 260 5,213 22,578 3,266 3,369 14,845 11,809 06 05 04 06 05 06 05 U.S. Canada Europe Asia Other(b) 4% 9% 13% 56% 18% 7% 13% 16% 51% 13% 12% 10% 24% 47% 7% 89% – 11% – – 100% – – – – 100% – – – – 100% – – – – 06 70% – 26% 2% 2% 06 05 04 06 05 04 06 05 04 06 05 04 – 100% – – – – 100% – – – – 100% – – – 51% 5% 33% 8% 3% 54% 5% 29% 6% 6% 36% 6% 44% – 14% 16% 83% 1% – – 24% 71% 5% – – 41% 55% 4% – – 50% 18% 13% 14% 5% 41% 27% 8% 19% 5% 25% 33% 15% 23% 4% (a) Includes Radian, ONCAP, CEI, Onex Real Estate and parent company. Includes discontinued operations of $531 million, $1,114 million and $2,596 million for 2006, 2005 and 2004, respectively. (b) Other includes primarily operations in Central and South America, Asia and Australia. Included in the December 31, 2006 consolidated assets in The December 31, 2005 consolidated assets have been the Other segment are: restated from those originally presented to show the assets • $198 million of investments made by Onex Capital Man- of J.L. French Automotive, CSRS and ClientLogic’s ware- agement, an Onex company established in 2005 to house management business as discontinued. The assets invest in North American public securities; and of WIS and CMC Electronics are also presented as discontin- • Onex and Onex Partners’ $114 million investment in ued as the determination was made prior to December 31, ResCare (Onex’ portion was $27 million, representing 2006 to sell these businesses. a 6 percent ownership interest). ResCare is a leading At December 31, 2005, total consolidated assets provider of residential, training and educational support were up $3.0 billion to $14.8 billion from $11.8 billion at services for people with disabilities and special needs. December 31, 2004 due to the inclusion of the assets of The asset growth from acquisitions and investments was added $1.5 billion in assets, $2.0 billion in assets from the partially offset by: acquisition of Spirit AeroSystems and $925 million from • the elimination of the assets of J.L. French Automotive, the December 2005 purchase of Skilled Healthcare. CDI, which added $237 million in assets, EMSC, which which was no longer consolidated at December 31, 2006 due to Onex no longer controlling that business fol- lowing its emergence from bankruptcy in July 2006; J.L. French Automotive represented $408 million of the total consolidated assets at December 31, 2005. Onex Corporation December 31, 2006 39 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Warranty reserves and unearned premiums Onex’ consolidated balance sheet as at December, 31, 2006 includes The Warranty Group’s gross warranty and prop- erty and casualty reserves, as well as gross warranty Consolidated Long-term Debt, Without Recourse to Onex (net of amounts held by Onex) TABLE 21 ($ millions) 2006 2005 2004 unearned premiums, which combined total $4.9 billion. Electronics Manufacturing The current portion is $2.3 billion, while the long-term Services $ 874 $ 872 $ 750 portion is $2.6 billion. Gross warranty and property casu- Aerostructures alty reserves of $1.7 billion represent the estimated future Healthcare losses on warranty contracts and property and casualty Financial Services insurance policies. The property and casualty reserves Theatre Exhibition component of $1.4 billion has been ceded 100 percent to Customer Management Services third-party reinsurers, which has created a ceded claims Other(a) 687 1,177 233 350 196 324 839 1,196 – 346 206 195 – – – 129 192 190 recoverable asset. Approximately 80 percent of the reserves have been ceded to a subsidiary of Aon Corporation (the former parent of The Warranty Group). The Warranty Group’s liability for gross warranty and property and casu- alty unearned premiums totalled $3.2 billion. Approxi- mately 92 percent of the unearned premiums are warranty Current portion of long-term debt of operating companies (43) (36) (97) 3,841 3,654 1,261 Total $ 3,798 $ 3,618 $ 1,164 (a) 2006 other includes CEI, Radian, Onex Real Estate and ONCAP. 2005 other business related and represent the portion of the revenue includes CEI and Radian. 2004 other includes Radian. received that has not yet been earned as revenue by The Warranty Group on extended warranty products sold by The increase in long-term debt at December 31, 2006 from multiple distribution channels. Typically, there is a time year-end 2005 resulted primarily from the acquisition of delay between when the warranty contract starts to earn The Warranty Group, which has debt of $233 million. and the contract effective date. The contracts generally During the third quarter of 2006, ClientLogic com- commence earning after the original manufacturer’s war- pleted a US$170 million debt reﬁnancing of its credit facility. ranty on a product expires. Note 10 to the audited annual The new facility consists of a US$40 million senior secured consolidated ﬁnancial statements provides details of the loan and a US$130 million senior secured revolving credit gross warranty and property and casualty reserves for loss facility. Proceeds from the new facility were used to repay and loss adjustment expenses and warranty unearned pre- US$157 million outstanding under the prior debt facility. In miums as at December 31, 2006. Consolidated long-term debt, without recourse to Onex Onex, the parent company, has no debt. It has been Onex’ late January 2007, ClientLogic closed a new credit facility that provides for total ﬁnancing of US$760 million. The new facility consists of a US$675 million term loan that matures in 2014 and a US$85 million revolving credit facility that matures in 2013. ClientLogic used the proceeds from this policy to preserve a ﬁnancially strong parent company that new facility to repay its US$170 million credit facility, as well has funds available for new acquisitions and to support the as funding for its acquisition of SITEL Corporation that was growth of its operating companies. This policy means that completed in January 2007. all debt ﬁnancing is within our operating companies and Spirit AeroSystems reduced its long-term debt each company is required to support its own debt. at December 31, 2006 to $687 million from $839 million Total long-term debt (consisting of the current at December 31, 2005 primarily by repaying a portion of portion of long-term debt and long-term debt) was $3.8 bil- its debt with proceeds from its November 2006 initial pub- lion at December 31, 2006, $3.7 billion at December 31, 2005 lic offering. and $1.3 billion at December 31, 2004. Table 21 summarizes consolidated long-term debt by industry segment. 40 Onex Corporation December 31, 2006 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 liabilities Other liabilities increased $774 million to $1.8 billion at The limited partners in the Onex Partners Funds invested a total of $424 million primarily for the acquisition of The December 31, 2006 from $1.0 billion at December 31, 2005. Warranty Group. The increase in other liabilities in 2006 was due primarily to: Spirit AeroSystems’ initial public offering added • Spirit AeroSystems, which received cash advance pay- $622 million to non-controlling interests during 2006 as ments of US$400 million from Boeing relating to the a result of new shareholders acquiring a combination of Boeing 787 program development costs; the cash advances new Onex, Onex Partners and certain limited partners are to be settled against payments due to Spirit Aero- shares in the public offering ($475 million) and the issu- Systems on future delivery of 787 components to Boeing; ance of shares to the Union Equity Participation plan by and Spirit AeroSystems ($147 million). Offsetting this were dis- • an increase in stock-based compensation liability at tributions to the limited partners of $974 million relating Onex, the parent company, of approximately $160 million primarily to the sale of a portion of their interests in Spirit due to the $98 million increase in value of Onex’ stock AeroSystems. options as a result of the 50 percent increase in the Onex share price at December 31, 2006 from December 31, 2005; and the balance was primarily associated with the value Shareholders’ equity Shareholders’ equity increased to $1.8 billion at Decem- of the unrealized investment rights under the MIP on ber 31, 2006 from $1.2 billion at December 31, 2005 due Spirit AeroSystems. Non-controlling interests The non-controlling interests liability in Onex’ audited consolidated balance sheet as at December 31, 2006 pri- primarily to $1.0 billion of net earnings reported for the year ended December 31, 2006. Table 23 provides a recon- ciliation of the change in shareholders’ equity from Decem- ber 31, 2005 to December 31, 2006. marily represents the ownership interests of shareholders Change in Shareholders’ Equity other than Onex in Onex’ consolidated operating compa- nies. At December 31, 2006, the non-controlling interests TABLE 23 ($ millions) balance amounted to $4.6 billion compared to $3.6 billion Shareholders’ equity as at December 31, 2005 at December 31, 2005. Table 22 details the change in the Regular dividends declared non-controlling interests balance from December 31, 2005 Shares repurchased and cancelled to December 31, 2006. Change in Non-controlling Interests TABLE 22 ($ millions) Currency translation adjustment on self-sustaining foreign operations Net earnings for 2006 Shareholders’ equity as at December 31, 2006 $ 1,815 Non-controlling interests as at December 31, 2005 $ 3,565 Non-controlling interests in net earnings of operating companies in 2006 Onex’ audited consolidated statements of shareholders’ 830 equity also show the changes to the components of Investments by shareholders other than Onex in: shareholders’ equity for the years ended December 31, 2006 Onex Partners Funds Other operating companies Distributions to limited partners of Onex Partners I Spirit AeroSystems’ initial public offering Foreign currency translation Other 424 115 (974) 622 51 (39) Non-controlling interests as at December 31, 2006 $ 4,594 and 2005. Onex Corporation December 31, 2006 41 $ 1,152 (15) (203) (121) 1,002 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 Shares outstanding Cash dividends At January 31, 2007, Onex had 128,928,039 Subordinate During 2006, Onex declared dividends of $0.11 per Sub- Voting Shares issued and outstanding. Table 24 shows the ordinate Voting Share, which were paid quarterly at a rate change in the number of Subordinate Voting Shares out- of $0.0275 per Subordinate Voting Share. The dividends are standing from December 31, 2005 to January 31, 2007. payable on or about January 31, April 30, July 31 and Octo- Change in Subordinate Voting Shares Outstanding from that of 2005 and 2004. Total payments for dividends ber 31 of each year. The dividend rate remained unchanged TABLE 24 have decreased with the repurchase of Subordinate Voting Shares under the Normal Course Issuer Bids as discussed Subordinate Voting Shares outstanding on page 43. at December 31, 2005 138,079,031 Shares repurchased and cancelled under Dividend Reinvestment Plan Onex’ Normal Course Issuer Bids (9,176,300) Onex’ Dividend Reinvestment Plan (the “Plan”) enables Issue of shares – Dividend Reinvestment Plan Issue of shares – Stock options exercised 5,308 20,000 Subordinate Voting Shares outstanding at January 31, 2007 128,928,039 Canadian shareholders to reinvest cash dividends to acquire new Subordinate Voting Shares of Onex at a market- related price at the time of reinvestment. During 2006, Onex issued 4,404 Subordinate Voting Shares under the Plan at an average cost of $22.12 per Subordinate Voting Share, creating cash savings of less than $1 million. During Onex also has 100,000 Multiple Voting Shares outstanding, 2005, 2,865 Subordinate Voting Shares were issued under which have a nominal paid-in value, and 176,078 Series 1 the Plan at an average cost of $19.69 per Subordinate Senior Preferred Shares, which have no paid-in amount Voting Share, creating cash savings of less than $1 million. reﬂected in Onex’ audited annual consolidated ﬁnancial During 2004, Onex issued 72,166 Subordinate Voting statements. Note 15 to the audited annual consolidated Shares under the Plan at an average cost of $15.08 per ﬁnancial statements provides additional information on Subordinate Voting Share, creating cash savings of approx- Onex’ share capital. There was no change in the Multiple imately $1 million. In January 2007, Onex issued an addi- Voting Shares and Series 1 Senior Preferred Shares out- tional 904 Subordinate Voting Shares under the Plan at an standing during 2006. average cost of $28.36 per Subordinate Voting Share. Stock Option Plan Onex, the parent company, has a Stock Option Plan in place that provides for options and/or share appreciation rights to be granted to Onex directors, ofﬁcers and employees for the acquisition of Subordinate Voting Shares of the Company for a term not exceeding 10 years. The options vest equally over ﬁve years. The exercise price of the options is not less than the market value of the Subordinate Voting Shares on the business day preceding the day of the grant. The options are not exercisable unless the average ﬁve-day market price of Onex Subordinate Voting Shares is 25 percent greater than the exercise price. 42 Onex Corporation December 31, 2006 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S At December 31, 2006, Onex had 13,095,100 options redeemable once the holder retires from the board of direc- outstanding to acquire Subordinate Voting Shares, of tors and must be redeemed by the end of the year following which 6,409,700 options were vested and all of those the year of retirement. Additional units are issued equiva- vested options were exercisable. Table 25 provides a lent to the value of any cash dividends that would have detailed reconciliation of the options outstanding at been paid on the Subordinate Voting Shares. Onex, the par- December 31, 2006. Change in Stock Options Outstanding TABLE 25 Number of Options Outstanding at December 31, 2004 13,961,700 Granted Exercised or surrendered Expired – (110,600) (416,500) Outstanding at December 31, 2005 13,434,600 Granted Exercised or surrendered Expired 435,000 (758,000) (16,500) Weighted Average Exercise Price $ 15.71 $ – $ 8.10 $ 18.19 $ 15.69 $ 26.01 $ 8.80 $ 20.02 Outstanding at December 31, 2006 13,095,100 $ 16.43 ent company, has recorded a liability for the future settle- ment of DSUs at the balance sheet date by reference to the value of underlying shares at that date. The liability is adjusted up or down for the change in the market value of the underlying Subordinate Voting Shares, with the corre- sponding amount reﬂected in the consolidated statements of earnings. During 2006, Onex issued 40,000 DSUs to its directors (2005 – 45,000) with a cost of $2 million (2005 – $1 million) being recorded as stock-based compensation expense. At December 31, 2006, Onex had 177,134 DSUs outstanding. Normal Course Issuer Bids Onex had Normal Course Issuer Bids (the “Bids”) in place during 2006 that enable it to repurchase up to 10 percent of its public ﬂoat of Subordinate Voting Shares during the period of the relevant Bid. Onex believes that it is advanta- geous to Onex and its shareholders to continue to repur- During 2006, 758,000 options were exercised or surrendered chase Onex’ Subordinate Voting Shares from time to time at an average exercise price of $8.80. Approximately 738,000 when the Subordinate Voting Shares are trading at prices options were surrendered for cash consideration aggre- that reﬂect a signiﬁcant discount to their intrinsic value. gating $14 million and 20,000 options were exercised for During 2006, Onex repurchased 9,176,300 Subordinate Subordinate Voting Shares of Onex at a total value of less Voting Shares under the Bids at a total cost of $203 million. than $1 million. This compares to 110,600 options exercised Under similar Bids, Onex repurchased 939,200 Subordi- or surrendered in 2005 and 8,345,800 options in 2004. Of nate Voting Shares at a total cost of $18 million during 2005 the total options exercised, no options were exercised for and 9,143,100 Subordinate Voting Shares at a total cost of Subordinate Voting Shares in 2005 and 71,000 were exercised $150 million in 2004. for shares in 2004 at a total value of $1 million. Currency translation adjustment Deferred Share Unit Plan The currency translation component decreased share- Onex, the parent company, established a Deferred Share holders’ equity by $121 million in 2006 compared to a Unit Plan (“DSU Plan”) in 2004, which allows Onex direc- decline of $7 million in 2005. Changes in the currency tors to apply directors’ fees to acquire Deferred Share Units translation adjustment primarily represent the cumulative (“DSUs”) based on the market value of Onex shares at the effect of changes in foreign currency rates on the value of time. Grants of DSUs may also be made to Onex directors Onex’ ownership in U.S.-based operating companies from from time to time. Holders of DSUs are entitled to receive, their respective acquisition dates. During 2006, the decline for each DSU upon redemption, a cash payment equivalent in the currency translation adjustment was due primarily to the market value of a Subordinate Voting Share at the to the elimination of J.L. French Automotive. redemption date. The DSUs vest immediately, are only Onex Corporation December 31, 2006 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 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 Cash from (used in) ﬁnancing activities Cash used in ﬁnancing activities was $690 million in 2006. This section should be read in conjunction with the The cash used in ﬁnancing activities was from: audited annual consolidated statements of cash ﬂows and • cash spent of $203 million by Onex, the parent company, the corresponding notes thereto. to repurchase its Subordinate Voting Shares under the Onex believes that maintaining a strong ﬁnancial Company’s Normal Course Issuer Bids; and position at the parent company with substantial liquidity • $961 million of cash paid by Onex Partners to limited enables the Company to pursue new opportunities to cre- partners, other than Onex, on the partial sale of shares ate long-term value and support Onex’ existing operating of Spirit AeroSystems as part of that company’s initial companies. public offering. Major Cash Flow Components TABLE 26 ($ millions) 2006 2005 Partially offsetting the cash used in ﬁnancing activities were: • Spirit AeroSystems’ initial public offering of 10.4 million new shares that brought in $283 million of cash; Cash from operating activities Cash from (used in) financing activities $ 896 $ (690) $ 811 $ 563 • cash received of $424 million from the limited partners of Onex Partners primarily for the acquisition of The Cash used in investing activities $ (376) $(1,507) Warranty Group, which was completed in late Novem- Consolidated cash from continuing ber 2006; and operations $ 2,944 $ 3,089 • $30 million of cash received by Cineplex Entertainment Cash from operating activities Cash from operating activities totalled $896 million in 2006 compared to cash from operating activities of $811 million in 2005. Cash generated from operations was up 10 percent over the last year due primarily to the inclu- sion of Skilled Healthcare, acquired in December 2005; a full year of results for Spirit AeroSystems, acquired in mid-June 2005; and the acquisition of Spirit Europe in April 2006. A detailed discussion of the consolidated oper- ating results can be found under the heading “Consoli- dated Operating Results” on page 15 of this MD&A. Included in cash from operating activities is cash from non-cash working capital, warranty reserves and unearned premiums and other liabilities and discontin- ued operations of $38 million. Cash advance payments of US$400 million received by Spirit AeroSystems from Boeing in 2006 relating to the funding of development costs for the 787 program were partially offset by cash of $293 million used to fund working capital requirements at Spirit AeroSystems as a result of inventory held as part of the 787 program. In addition, Celestica used $91 million of cash to fund working capital, primarily inventory. 44 Onex Corporation December 31, 2006 as a result of the company’s secondary unit offering in June 2006. This compares to cash from ﬁnancing activities of $563 mil- lion in 2005. Included in 2005 cash from ﬁnancing activi- ties were: • US$250 million of gross proceeds received by Celestica on its 7.625 percent senior subordinated notes offering that was completed in June 2005; • cash received by Cineplex Entertainment on its issuance of convertible debentures of $105 million and the $110 mil- lion unit issuance for its Famous Players acquisition; and • cash received from the limited partners of Onex Partners I primarily for the acquisition of EMSC, completed in February 2005, Spirit AeroSystems, purchased in mid-June 2005, and Skilled Healthcare, acquired in late Decem- ber 2005. Partially offsetting these amounts was cash spent of $273 mil- lion by Celestica to repurchase the equity component of its LYONs; $384 million of cash used for distributions by CMC Electronics relating to the earlier sales of its Cincinnati Electronics subsidiary in 2004 and a portion of its NovAtel shares in January 2005, as well as cash payments by Onex Partners I to limited partners other than Onex on the sale of its Compagnie Générale de Géophysique convertible bonds and Magellan shares. 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 used in investing activities Cash used in investing activities totalled $376 million in Celestica recorded $215 million in property, plant and equipment expenditures related primarily to the 2006 compared to cash used of $1,507 million in 2005. expansion of manufacturing capabilities in lower-cost The decline in cash used in investing activities was due geographies, including China, the Czech Republic, Roma- primarily to less cash spent on acquisitions and higher nia, Thailand and Mexico. Spirit AeroSystems recorded proceeds from sales of operating investments in 2006 com- $394 million in property, plant and equipment expendi- pared to 2005. tures primarily on capital expenditures for the 787 pro- Acquisitions completed in 2006 used cash of gram and tooling enhancements for its other programs. $850 million compared to $1,346 million spent on acquisi- Cineplex Entertainment recorded $70 million in capital tions in 2005. Onex’ purchase of The Warranty Group and expenditures primarily for new theatre construction. Spirit AeroSystems’ acquisition of Spirit Europe accounted EMSC recorded $69 million in property, plant and equip- for $623 million of the cash spent on acquisitions in 2006. ment expenditures relating primarily to the purchase This is net of cash in the acquired business. Note 2 to of new ambulances and medical equipment. CDI spent the audited annual consolidated ﬁnancial statements dis- $17 million in property, plant and equipment expenditures closes the amount of cash invested in each acquisition associated with the purchase of equipment for new cen- completed during 2006 and 2005. Table 20 provides more tres, the upgrade of equipment in its existing centres and details of acquisitions completed in 2006 and 2005. for operating lease buyouts. ClientLogic recorded $19 mil- Proceeds from sales of operating investments lion in capital expenditures mainly for expansions to its brought in cash of $1,391 million in 2006, up $986 million near-shore and offshore call centre capacity in 2006, as from proceeds received of $405 million in 2005. The 2006 well as technology and telephony upgrades to improve call proceeds from sales of operating investments are primarily centre efﬁciencies. from Onex and Onex Partners’ sale of shares in the Spirit AeroSystems initial public offering in November 2006. In addition, there was $100 million of cash used Consolidated cash resources At December 31, 2006, consolidated cash with continuing in other investing activities by Spirit AeroSystems on operations was $2.9 billion compared to $3.1 billion at 787 development costs that were capitalized by Spirit December 31, 2005. Onex, the parent company, repre- AeroSystems. sented approximately $1.5 billion of cash on hand and Onex’ operating companies spent $823 million on Celestica had approximately $0.9 billion of cash at property, plant and equipment during 2006 compared to December 31, 2006. No amount of cash of the other limited $495 million in 2005. Table 27 details property, plant and partners of Onex Partners is included in the Onex consoli- equipment expenditures by industry segment. dated cash amount. At December 31, 2006 the other limited Property, Plant and Equipment Expenditures provide $2.5 billion of funding for future Onex-sponsored partners in Onex Partners had remaining commitments to acquisitions. Onex has a conservative cash management policy that limits the investment of its cash to short-term low-risk money-market products. TABLE 27 ($ millions) 2006 2005 Electronics Manufacturing Services Aerostructures Healthcare Financial Services Theatre Exhibition Customer Management Services Other(a) Total $ 215 394 111 3 70 19 11 $ 185 169 82 – 33 18 8 $ 823 $ 495 (a) 2006 other includes CEI, Radian, ONCAP, Onex Real Estate and parent company. 2005 other includes CEI, Radian and parent company. Onex Corporation December 31, 2006 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 A D D I T I O N A L U S E S O F C A S H largest domestic and international airline, serving 142 des- Commitments At December 31, 2006, Onex and its operating companies had total commitments as follows: Commitments TABLE 28 ($ millions) Corporate investments Capital expenditures tinations in 39 countries. If completed as planned, Onex would hold a 12.5 percent economic interest in Airline Partners Australia. Of the total investment planned to be made by Airline Partners Australia, Onex Partners II would contribute $408 million, of which Onex’ portion would be approximately $167 million. This investment is subject to certain conditions, including the acceptance of the offer by holders of 90 percent or more of the outstanding Qantas $ 1,384 shares. The independent members of the Qantas board of 181 directors have unanimously recommended that sharehold- Letters of credit, letters of guarantee and surety ers accept the offer in the absence of a superior competing and performance bonds Total commitments Corporate investments 459 offer. It is anticipated that the transaction would be com- $ 2,024 pleted in the ﬁrst half of 2007. This acquisition, if completed, will be accounted for using the cost method of accounting in Onex’ consolidated ﬁnancial statements. The corporate investment commitments of $1.4 billion noted Acquisition of Raytheon Aircraft Company in table 28 primarily include Onex’ commitments to pending In December 2006, Onex Corporation announced that transactions that were not completed as of December 31, it was joining with GS Capital Partners, an afﬁliate of 2006 as discussed below. Pending or recent transactions Acquisition of Tube City IMS Corporation Goldman Sachs, to acquire Raytheon Aircraft Company (“Raytheon Aircraft”), the business aviation division of Raytheon Company (NYSE: RTN). The transaction is val- ued at approximately $3.8 billion (US$3.3 billion) and will In early November 2006, Onex announced that it had be completed by Hawker Beechcraft Corporation, a com- agreed to acquire Tube City IMS Corporation (“Tube City pany newly formed by Onex and GS Capital Partners. IMS”), a leading provider of outsourced services to steel Raytheon Aircraft is a leading manufacturer of business mills, in a transaction valued at approximately $730 mil- jet, turboprop and piston aircraft through its Hawker and lion. This acquisition was completed in January 2007 with Beechcraft brands and is the ﬁfth-largest business jet Onex Partners II investing $234 million in the equity to producer in the world. The company also manufactures complete the purchase. Onex’ share of that investment was military training aircraft for the U.S. Air Force and Navy, $92 million. Third-party lenders to Tube City IMS provided and for a small number of foreign governments. Onex the balance of the funding for this acquisition. Tube City Partners II and GS Capital Partners will equally split the IMS provides raw materials procurement, scrap and mate- total equity investment of $1.2 billion (US$1.06 billion). rials management and slag processing services, through its Onex’ share of Onex Partners II’s equity investment will be Tube City and IMS divisions, which operate in 67 steel mills approximately $239 million (US$205 million). This acqui- throughout the United States, Canada and Europe. This sition is subject to regulatory approvals and is expected to business will be consolidated and reported from the time close in the ﬁrst half of 2007. This business, if acquired, will of its acquisition in the Other segment of Onex’ consoli- be accounted for using proportionate consolidation. dated ﬁnancial statements for 2007. Acquisition of the Health Group of Kodak Investment in Qantas Airways Limited In early January 2007, Onex announced that it had reached In mid-December 2006, Onex announced that, together with an agreement to acquire the Health Group of Eastman its partners in Airline Partners Australia, it had entered into Kodak Company (the “Health Group”) in a transaction an agreement with Qantas Airways Limited (“Qantas”) (ASX: initially valued at approximately $2.8 billion (US$2.4 bil- QAN) to acquire 100 percent of that company for a total lion). The Health Group is a leading provider of medical equity purchase price of $10.2 billion. Qantas is Australia’s imaging and healthcare information technology solutions. 46 Onex Corporation December 31, 2006 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 Its offerings include digital x-ray systems, molecular ica, Europe, Africa and Asia Paciﬁc. This acquisition was imaging systems and x-ray ﬁlm, as well as dental imaging ﬁnanced entirely by ClientLogic through that company’s products, software and services. Onex will also acquire new US$760 million credit facility that closed in late Kodak’s non-destructive testing business, which sells x-ray January 2007. At the time of closing, ClientLogic had drawn ﬁlm and digital x-ray products in the non-destructive US$450 million on its new credit facility to complete the testing market. It is planned that Onex Partners II will acquisition. The merged entity will be consolidated and make an equity investment of approximately $550 million reported in the customer management services segment (US$475 million), of which Onex’ share will be approxi- in Onex’ consolidated ﬁnancial statements for 2007. mately $225 million (US$195 million). This acquisition is subject to customary approvals and is expected to close in Capital expenditures the ﬁrst half of 2007. Upon completion of the acquisition, Capital expenditure commitments are essentially those of the business is to be named Carestream Health, Inc. and Onex’ operating companies. Those capital expenditure Onex will consolidate the operations of this business. commitments were principally attributable to: • Spirit AeroSystems, which had $162 million of capital As the timing for the completion of these transactions can- commitments, principally for property, plant and equip- not be determined with any precision, the impact of the ment and tooling expenditures to support its contracts above acquisitions on Onex’ 2007 consolidated ﬁnancial with Boeing and other aircraft manufacturers; and condition, results of operations and cash ﬂows cannot • Cineplex Entertainment, which had capital commitments be forecasted. of $19 million associated primarily with the construction of new theatre properties that will be completed and ClientLogic Acquisition of SITEL Corporation opened at various times during the periods 2007–2009. In October 2006, ClientLogic entered into a deﬁnitive agree- ment to purchase SITEL Corporation (“SITEL”) (NYSE: SWW). Contingent liabilities in the form of letters of credit, letters This acquisition was completed in late January 2007 with of guarantee, and surety and performance bonds are ClientLogic having paid approximately US$450 million in provided by certain operating companies to various cash for all of the outstanding common stock of SITEL third parties and include certain bank guarantees. As at following approval by SITEL’s shareholders in early January December 31, 2006, the commitments with respect to 2007. ClientLogic merged with SITEL and the merged com- these guarantees collectively totalled $459 million. These pany has more than 67,000 employees across 28 countries. guarantees are without recourse to Onex. In addition, cer- The merged company, now operating as SITEL Worldwide tain operating companies have also made guarantees with Corporation, provides world-class solutions from more respect to employee share purchase loans. than 145 facilities throughout North America, South Amer- Contractual obligations Table 29 presents the aggregate amount of future cash outﬂows for contractual obligations as at December 31, 2006 for the Onex operating companies. Contractual Obligations TABLE 29 ($ 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 Purchase obligations Total contractual obligations $ 3,841 2,209 181 $ 6,231 $ 43 292 172 $ 507 $ 481 440 9 $ 930 $ 569 332 – $ 901 $ 2,748 1,145 – $ 3,893 Onex Corporation December 31, 2006 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 A breakdown of long-term debt by industry segment is pro- Private Equity Funds Commitments vided in table 21. Note 11 to the audited annual consoli- dated ﬁnancial statements also provides detailed long-term debt disclosure by operating company. In addition, note 12 As at December 31, 2006 to the audited annual consolidated ﬁnancial statements provides further disclosure on capital and operating leases. Underfunded post-retirement beneﬁt plans During 2006, Onex’ operating companies made cash contri- butions of $122 million to various pension and non-pension post-employment beneﬁt plans. As at December 31, 2006, some of Onex’ operating companies had underfunded lia- bilities of $146 million (2005 – $102 million) with deﬁned beneﬁt pension plans and $120 million (2005 – $135 million) for non-pension post-retirement plans. A D D I T I O N A L S O U R C E S O F C A S H Private equity funds Onex has additional sources of cash from its private equity Funds. During 2006, Onex Partners I concluded its invest- ment period, having completed nine investments or acquisitions with $1.6 billion of equity being put to work. While Onex Partners I has uncalled committed capital available, this capital is reserved for possible future fund- ing for any of the Fund’s existing businesses. During 2006, Onex raised a second fund, Onex Partners II, a $4.0 billion private equity fund. Onex Part- ners II will provide capital to Onex-sponsored acquisitions that are not related to Onex’ operating companies that existed prior to the formation of Onex Partners II and that are not allocated to ONCAP. This substantial pool of com- mitted funds in Onex Partners II will enable Onex to con- tinue to be more ﬂexible and timely in responding to investment opportunities. In addition, Onex has a mid-cap private equity fund, ONCAP II, with total committed capi- tal of $574 million. Onex controls the General Partner and the Man- ager of all its private equity Funds. The Onex Partners Funds have a diverse group of investors, including public and private pension funds, banks, insurance companies and endowment funds from the United States, Canada, Europe and Asia. Table 30 presents the total capital commitments under the Onex Partners and ONCAP Funds, and the avail- able uncalled committed capital at December 31, 2006. 48 Onex Corporation December 31, 2006 Total Committed Capital Onex Committed Capital Available Uncalled Committed Capital (excluding Onex) US$ 1,655 US$ 400 US$ 204 US$ 3,450 US$ 1,407 US$ 1,980 $ 574 $ 258 $ 286 TABLE 30 ($ millions) Onex Partners I Onex Partners II ONCAP II Related party transactions Related party transactions are primarily investments by the management of Onex and of the operating companies in the equity of the operating companies acquired. Management Investment Plan Onex has a Management Investment Plan (the “MIP”) in place that requires its management members to invest in each of the operating companies acquired by Onex. The aggregate investment by management mem- bers under the MIP is limited to 9 percent of Onex’ interest in each acquisition. The form of the investment is a cash purchase for 1⁄6th (1.5 percent) of the MIP’s share of the ag- gregate investment and investment rights for the remaining 5⁄6ths (7.5 percent) of the MIP’s share at the same price. Amounts invested under the 1 percent investment require- ment in Onex Partners transactions are allocated to meet the 1.5 percent of Onex’ investment requirement under the MIP. The investment rights to acquire the remaining 5⁄6ths vest equally over four years. If Onex disposes of 90 percent or more of an investment before the ﬁfth year, the investment rights vest in full. The investment rights related to a particu- lar acquisition are exercisable only if Onex earns a minimum 15 percent per annum compound rate of return for that acquisition after giving effect to the investment rights. The funds required for investments under the MIP are neither loaned to the management members nor guaranteed by Onex or the operating companies. During 2006, there were investments of $2 million under the MIP compared to $4 million in 2005. Management members received $28 million under the MIP related to the realiza- tions Onex achieved primarily on Spirit AeroSystems in 2006. This compares to $11 million in realizations under the MIP on sales of Magellan, Commercial Vehicle Group, Inc. and CGG in 2005. Notes 1 and 23 to the audited annual consolidated ﬁnancial statements provide addi- tional 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 The Onex Partners Funds received under the MIP and carried interests toward the The structure of both Onex Partners Funds requires Onex purchase of Onex Subordinate Voting Shares until they management to invest a minimum of 1 percent in all individually hold at least 1,000,000 Onex Subordinate acquisitions. Onex management and directors have com- Voting Shares. Under this program, approximately $15 mil- mitted to invest an additional 3 percent of the total capital lion of Onex management’s realizations under the MIP and invested by the Onex Partners Funds. This structure applies carried interest were invested in the purchase of Subor- to those acquisitions completed through Onex Partners II dinate Voting Shares during 2006. up to April 21, 2007, the anniversary date of the Fund’s ﬁrst Members of management and the Board of Direc- closing. A new commitment is to be made for the subse- tors of Onex can invest limited amounts in partnership with quent fund year. The total amount invested in 2006 by Onex in all acquisitions outside of Onex Partners I and II at Onex management and directors on acquisitions and the same cost as Onex and other outside investors. During investments completed through the Onex Partners Funds 2006, approximately $13 million in investments were made was $22 million. Carried interest by Onex management and Onex board members; this com- pares to $21 million in investments made by management and the Onex board in 2005. The Onex Partners Funds’ General Partner will also receive a carried interest of 20 percent on the realized gains of Management fees the third-party limited partners in each Fund, subject to an During the investment period of the Onex Partners Funds 8 percent compound annual preferred return to such lim- (up to six years), Onex receives a management fee of 2 per- ited partners on all amounts contributed to the relevant cent on the committed capital of the relevant Fund Fund. This carried interest will be based on the overall per- provided by third-party investors. Thereafter, a 1 percent formance of each of Onex Partners I and II, independently, management fee is payable to Onex based on invested cap- and includes typical catch-up and clawback provisions. ital. During 2006, the investment period of Onex Partners I Consistent with market practice, Onex, as sponsor of the was completed and Onex, therefore, will receive a 1 percent Onex Partners Funds, will be allocated 40 percent of the management fee on Onex Partners I’s remaining invested carried interest with 60 percent being allocated to the Onex capital, which was approximately $877 million at Decem- management team. ber 31, 2006. That amount will decline over time as realiza- During 2006, Onex received a carried interest of tions occur. $49 million on the realized gain of Spirit AeroSystems. This Management fees received by Onex from third- amount, while received in cash, is deferred from inclusion party investors in the Onex Partners Funds totalled $30 mil- in income for accounting purposes until such time as there lion in 2006 (2005 – $24 million). is no potential for repayment. The total deferred carried interest for Onex at December 31, 2006 was $60 million. Debt of operating companies Management of Onex received a carried interest of $74 mil- Onex does not guarantee the debt on behalf of its operating lion on the realized gain of Spirit AeroSystems in 2006. companies, nor are there any cross-guarantees between There were no realized gains on investments or acquisitions operating companies. Onex will hold the debt of certain completed by Onex Partners II. operating companies, which amounted to $175 million at December 31, 2006 compared to $137 million at Decem- Investment in Onex shares and acquisitions ber 31, 2005. Approximately $18 million of the increase in During 2006, Onex adopted a program designed to further debt of operating companies was Onex’ purchase of subor- align the interests of the Company’s senior management dinated notes of CSI as part of that company’s acquisition and other investment professionals with those of Onex by ONCAP II. These notes bear interest at 15 percent and shareholders through increased share ownership. Under mature in 2012. Note 11 to the audited annual consolidated this program, members of senior management of Onex ﬁnancial statements provides information on the debt of are required to invest at least 25 percent of all amounts operating companies held by Onex. Onex Corporation December 31, 2006 49 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S R E C E N T A C C O U N T I N G P R O N O U N C E M E N T S about the effectiveness of those disclosure controls and Financial instruments, hedges and comprehensive income The Canadian Institute of Chartered Accountants issued procedures at the end of the period covered by the relevant annual ﬁlings have been disclosed by the issuer. Onex’ CEO and CFO have evaluated the effective- ness of the Company’s disclosure controls and procedures three new standards: Financial Instruments – Recognition as at December 31, 2006 and have concluded that those and Measurement, Hedges and Comprehensive Income. disclosure controls and procedures were effective for the These standards will apply to Onex in the ﬁscal year begin- year then ended. ning on January 1, 2007. The Financial Instruments section prescribes when a ﬁnancial asset, liability or non-ﬁnancial derivative Internal controls over ﬁnancial reporting Multilateral Instrument 52-109 also requires CEOs and is to be recognized in the balance sheet and the mea- CFOs to certify that they are responsible for establishing surement of that amount. It also speciﬁes how ﬁnancial and maintaining internal controls over ﬁnancial reporting instrument gains and losses are to be presented. The for the issuer, that those internal controls have been Hedges standard is applicable for designated hedging rela- designed to provide reasonable assurance regarding the tionships and builds on existing Canadian GAAP guidance reliability of ﬁnancial reporting and the preparation of by specifying how hedge accounting is applied and what ﬁnancial statements in accordance with Canadian gener- disclosures are necessary when it is applied. The Compre- ally accepted accounting principles, and that the issuer hensive Income section introduces new standards for pre- has disclosed any changes in its internal controls during sentation and disclosure of components of comprehensive its most recent interim period that has materially affected, income. These components include unrealized gains and or is reasonably likely to materially affect, its internal con- losses on ﬁnancial assets that will be held for sale, unreal- trol over ﬁnancial reporting. ized foreign currency translation amounts arising from During 2006, Onex management, including its self-sustaining foreign operations and changes in fair value CEO and CFO, evaluated the Company’s internal controls of cash ﬂow hedging instruments. Onex is currently evalu- over ﬁnancial reporting to ensure that they had been ating the impact of these new standards. D I S C L O S U R E C O N T R O L S A N D P R O C E D U R E S A N D I N T E R N A L C O N T R O L S O V E R F I N A N C I A L R E P O R T I N G Disclosure controls and procedures Multilateral Instrument 52-109, “Certiﬁcation of Disclosure designed to provide reasonable assurance regarding the reliability of ﬁnancial reporting and the preparation of ﬁnancial statements in accordance with Canadian gener- ally accepted accounting principles. While no changes occurred during the last ﬁscal quarter of 2006 that, in the view of Onex management, have materially affected, or that are reasonably likely to materially affect, Onex’ inter- nal control over ﬁnancial reporting, the Company regularly in Issuers’ Annual and Interim Filings”, issued by the acquires new businesses, many of which were privately Canadian Securities Administrators (“CSA”) requires Chief owned or were divisions of larger organizations prior Executive Ofﬁcers (“CEOs”) and Chief Financial Ofﬁcers to their acquisition by Onex. The Company continues (“CFOs”) to certify that they are responsible for establishing to assess the design of internal controls over ﬁnancial and maintaining disclosure controls and procedures for the reporting in its most recently acquired businesses, including issuer, that disclosure controls and procedures have been in particular those acquired during the last ﬁscal quarter. It designed to provide reasonable assurance that material has not identiﬁed in that review any weakness that has information relating to the issuer is made known to them, materially affected, or that is reasonably likely to materially that they have evaluated the effectiveness of the issuer’s dis- affect, Onex’ internal control over ﬁnancial reporting. closure controls and procedures, and that their conclusions 50 Onex Corporation December 31, 2006 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S OUTLOOK As discussed in the Onex Business Objective and Strategies The fund structure also recognizes the skills of section of this discussion, which begins on page 5, the Onex’ professional team in building and realizing value by Onex team has consistently applied a set of core skills in providing Onex the opportunity to earn a carried interest on its pursuit of value creation for shareholders and partners. the returns of our limited partners based on the perfor- In pursuit of Onex’ objective of acquiring and mance of each Onex Partners Fund and ONCAP Fund. The building industry-leading businesses, we believe that large- General Partner earns a carried interest of 20 percent on the scale acquisitions are the most efﬁcient means to deploy realized gains of the third-party limited partners in each capital and create long-term value. As discussed in detail on Fund, subject to an 8 percent compound annual preferred page 46, we also entered 2007 with commitments to com- return to the limited partners. Consistent with market prac- plete four sizeable transactions, with a combined potential tice, Onex, as sponsor of the Onex Partners Funds, is allo- investment totalling $1.8 billion, in Tube City IMS, Ray- cated 40 percent of the carried interest, with the balance theon Aircraft Company, Qantas Airways and Kodak Health being allocated to the Onex management team. Group. Onex’ share of the investments in those businesses It is not possible to estimate the number or is expected to be approximately $724 million. amount of our value realizations, and so it is not possible Given the nature of the private equity business, it to estimate what Onex’ carried interest might be in its is not possible to determine whether these purchases, Funds in a given year. One fact is clear, however: from 1984 which we expect to close in the ﬁrst half of 2007, will be through December 31, 2006, Onex has achieved an annual followed by additional investments in 2007. We do believe, compound return on its invested capital of approximately however, that the ready access we have to investment cap- 28 percent. If this magnitude of return can be achieved on ital through our fund structure, and the skill our team has the current, and any future companies held by the Onex demonstrated in deploying it, have established Onex as Partners Funds, the potential return on Onex’ invested cap- a valued acquirer of large-scale businesses. We intend ital and the carried interest that Onex can earn will be sub- to continue to be an important force in these markets. stantial. Thus, we believe it is in the best interests of Onex, At year-end 2006, Onex, directly and through its Funds, its shareholders and its partners to remain clearly focused had $4.3 billion in cash and commitments that can be on our primary business objective: to create long-term deployed to take advantage of attractive opportunities to value by acquiring and building industry-leading busi- create future growth, not only in value but also in revenues nesses and controlling and managing ancillary funds. We and operating income for Onex. believe that the pursuit of that objective will be reﬂected in As the General Partner in our Funds, we earn man- the price of Onex Subordinate Voting Shares. agement fees for our work with our operating companies. The management fees that are expected to be received in 2007 should amount to approximately $60 million, substan- tially offsetting Onex’ corporate ofﬁce costs. Onex Corporation December 31, 2006 51 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S 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 Onex maintains an active involvement in its oper- ating companies in the areas of strategic planning, ﬁnan- apply common-sense business principles to the manage- cial structures and negotiations and acquisitions. In the ment of the Company, the ownership of its operating com- early stages of ownership, Onex may provide resources for panies and the acquisition of new businesses. Each year business and strategic planning and ﬁnancial reporting, detailed reviews are conducted of many opportunities to while an operating company builds these capabilities in- purchase either new businesses or add-on acquisitions for house. In almost all cases, Onex ensures there is oversight existing businesses. Onex’ primary interest is in acquiring of its investment through representation on the acquired well-managed companies with a strong position in growing company’s board of directors. Onex does not get involved industries. In addition, diversiﬁcation among Onex’ oper- in the day-to-day operations of acquired companies. ating companies enables Onex to participate in the growth Operating companies are encouraged to reduce of a number of high-potential industries with varying busi- risk and/or expand opportunity by diversifying their cus- ness cycles. tomer bases, broadening their geographic reach or prod- As a general rule, Onex attempts to arrange as uct and service offerings, and improving productivity. In many factors as practical to minimize risk without ham- certain instances, we may also encourage an operating pering its opportunity to maximize returns. When a pur- company to seek additional equity in the public markets in chase opportunity meets Onex’ criteria, for example, order to continue its growth without eroding its balance typically a fair price is paid, though not necessarily the sheet. One element of this approach may be to use new lowest price, for a high-quality business. Onex does equity investment, when ﬁnancial markets are favourable, not commit all of its capital to a single acquisition and to prepay existing debt and absorb related penalties. does have equity partners with whom it shares the risk Speciﬁc strategies and policies to manage busi- of ownership. Onex Partners LP and Onex Partners II LP ness risk at Onex and its operating companies are dis- streamline Onex’ process of sourcing and drawing on cussed below. commitments from such equity partners. An acquired company is not burdened with more debt than it can likely sustain, but rather is structured so Business cycles Diversiﬁcation by industry and geography is a deliberate that it has the ﬁnancial and operating leeway to maximize strategy at Onex to reduce the risk inherent in business long-term growth in value. Finally, Onex buys in ﬁnancial cycles. Onex’ practice of owning companies in various partnership with management. This strategy not only gives industries with differing business cycles reduces the Onex the beneﬁt of experienced managers but also is risk of holding a major portion of Onex’ assets in just one designed to ensure that an operating company is run or two industries. Similarly, the Company’s focus on entrepreneurially for the beneﬁt of all shareholders. building industry leaders with extensive international operations reduces the ﬁnancial impact of downturns in speciﬁc regions. 52 Onex Corporation December 31, 2006 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 liquidity It is our view that one of the most important things Onex In order to improve the efﬁciency of Onex’ internal processes on both auction and exclusive acquisition can do to control risk is to maintain a strong parent com- processes, and so reduce the risk of missing out on high- pany with an appropriate level of liquidity. Onex needs to quality acquisition opportunities, during 2003 we created be in a position to support its operating companies when, Onex Partners LP (“Onex Partners I”), a $1.9 billion pool and if, it is appropriate and reasonable for Onex, as an of capital raised from Onex and major institutional co- equity owner, to do so. Maintaining liquidity is important investors. During 2004, 2005 and 2006, we successfully because Onex, as a holding company, generally does not deployed this capital in a variety of attractive businesses have guaranteed sources of meaningful cash ﬂow. with the result that Onex Partners I’s investment period was In completing acquisitions, it is generally Onex’ completed in 2006. Onex raised a second fund, Onex Part- policy to ﬁnance a large portion of the purchase price with ners II LP, in 2006. Onex Partners II, a $4.0 billion pool of debt provided by third-party lenders. This debt is assumed capital, completed its ﬁrst investment in November 2006. by the acquired company 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 operating companies may face a variety of risks related identifying the appropriate amount of equity to invest. In to ﬁnancial management. Individual operating compa- Onex’ view, this should be the amount of equity which nies may also use ﬁnancial instruments to offset the maximizes the risk/reward equation for both shareholders impact of anticipated changes in commodity prices and the acquired company. In other words, it allows the related to the conduct of their businesses. In all cases, it is acquired company not only to manage its debt but also to a matter of Company policy that neither Onex nor its have signiﬁcant ﬁnancial latitude for the business to vigor- operating companies engages in derivatives trading or ously pursue its growth objectives. other speculative activities. While Onex seeks to optimize the risk/reward Interest rate risk As noted above, Onex generally equation in all acquisitions, there is the risk that the ﬁnances a signiﬁcant portion of its acquisitions with debt acquired company will not generate sufﬁcient proﬁtability taken on by the acquired operating company. An impor- or cash ﬂow to service its debt requirements and/or tant element in controlling risk is to manage, to the extent related debt covenants or provide adequate ﬁnancial ﬂexi- reasonable, the impact of ﬂuctuations in interest rates on bility for growth. In such circumstances, additional invest- the debt of the operating company. ment by the equity partners, including Onex, may be It has generally been Onex’ policy to ﬁx the inter- required. In severe circumstances, the recovery of Onex’ est on some of the term debt or otherwise minimize the equity and any other investment in that operating com- effect of interest rate increases on a portion of the debt of pany is at risk. Timeliness of investment commitments Onex’ ability to create value for shareholders is dependent its operating companies at the time of acquisition. This is achieved by taking on debt at ﬁxed interest rates and entering into interest rate swap agreements or ﬁnancial contracts to control the level of interest rate ﬂuctuation. in part on our ability to successfully complete large acqui- The risk inherent in such a strategy is that, should sitions. Our preferred course is to complete acquisitions interest rates decline, the beneﬁt of such declines may not on an exclusive basis. However, we also participate in large be obtainable or may only be achieved at the cost of penal- acquisitions through an auction or bidding process with ties to terminate existing arrangements. There is also the multiple potential purchasers. Bidding is often very com- risk that the counterparty on an interest rate swap agree- petitive for the large-scale acquisitions that are Onex’ pri- ment may not be able to meet its commitments. Guide- mary interest, and the ability to make knowledgeable, lines are in place that specify the nature of the ﬁnancial timely investment commitments is a key component in institutions that operating companies can deal with on successful purchases. In such instances, the vendor often interest rate contracts. establishes a relatively short time frame for Onex to respond deﬁnitively. Onex Corporation December 31, 2006 53 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Currency ﬂuctuations The majority of the activi- Commodity prices Certain of Onex’ operating ties of Onex’ operating companies were conducted outside companies are vulnerable to price ﬂuctuations in major Canada during 2006. As discussed, approximately 41 per- commodities. cent of consolidated revenues and 50 percent of consoli- Aluminum, titanium and composites represent dated assets were in the United States. Approximately the principal raw materials used in Spirit AeroSystems’ 48 percent of consolidated revenues were from outside manufacturing operations. The company has more than North America; however, a substantial portion of that 850 active suppliers of its raw materials with no one sup- business is actually based on U.S. currency. This makes the plier representing more than 4 percent of its cost of sales. value of the Canadian dollar relative to the U.S. dollar the Spirit AeroSystems has entered into long-term supply con- primary currency relationship affecting Onex’ operating tracts with substantially all of its suppliers of raw materi- results. Onex’ operating companies may use currency als, which limits the company’s exposure to rising raw derivatives in the normal course of business to hedge material prices. Most of the raw materials purchased are against adverse ﬂuctuations in key operating currencies based on a ﬁxed pricing or at reduced rates through but, as noted above, speculative activity is not permitted. Boeing’s or Airbus’ high volume purchase contracts. Spirit Onex’ results are reported in Canadian dollars, AeroSystems continues to seek ways to further reduce raw and ﬂuctuations in the value of the Canadian dollar rela- material costs and recently, began a sourcing initiative to tive to other currencies can have an impact on Onex’ increase the amount of material sourced from low cost reported results and consolidated ﬁnancial position. countries in Asia and Central Europe. During 2006, shareholders’ equity reﬂected a $121 million decrease in the value of Onex’ net equity in those oper- ating companies that operate in U.S. currency, as well as Integration of acquired companies An important aspect of Onex’ strategy for value creation the elimination of J.L. French Automotive. is to acquire what we consider to be “platform” compa- Onex holds a substantial amount of cash and nies. Such companies often have distinct competitive marketable securities in U.S.-dollar-denominated securi- advantages in products or services in their respective ties. The portion of securities held in U.S. dollars is based industries that provide a solid foundation for growth in on Onex’ view of funds it will require for future invest- scale and value. In these instances, Onex works with com- ments in the United States. Onex does not speculate on the pany management to identify and purchase attractive add- direction of exchange rates between the Canadian dollar on acquisitions that would enable the platform company and the U.S. dollar when determining the balance of cash to achieve its goals for growth more quickly than by focus- and marketable securities to hold in each currency, nor ing solely on the development and/or diversiﬁcation of its does it use foreign exchange contracts to protect itself customer base, which is known as organic growth. Growth against translation loss. by acquisition, however, carries more risk than organic Insurance claims The Warranty Group under- growth. While as many of these risks as possible are con- writes and administers extended warranties and credit sidered in the acquisition planning, in Onex’ experience insurance on a wide variety of consumer goods including our operating companies also face risks such as unknown automobiles, consumer electronics and major home appli- expenses related to the cost-effective amalgamation of ances. Unlike most property insurance risk, the risk associ- operations, the retention of key personnel and customers, ated with extended warranty claims is non-catastrophic the future value of goodwill paid as part of the acquisition and short-lived, resulting in predictable loss trends. The price and the future value of the acquired assets and intel- predictability of claims, which is enhanced by the large vol- lectual property. Onex works with company management ume of claims data in the company’s database, enables The to understand and potentially mitigate such risks as much Warranty Group to appropriately measure and price risk. as possible. 54 Onex Corporation December 31, 2006 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 Dependence on government funding Since 2005, Onex has acquired businesses, or interests in Environmental considerations Onex has an environmental protection policy that has businesses, in various segments of the U.S. healthcare been adopted by its operating companies; many of these industry. The revenues of these companies are partially operating companies have also adopted supplemental dependent on funding from federal, state and local gov- policies appropriate to these industries or businesses. ernment agencies, especially those responsible for U.S. Senior ofﬁcers of each of these companies are ultimately federal Medicare and state Medicaid funding. Budgetary responsible for ensuring compliance with these policies. pressures, as well as economic, industry, political and They are required to report annually to their company’s other factors, could inﬂuence governments to not increase board of directors and to Onex regarding compliance. and, in some cases, to decrease appropriations for the Environmental management by the operating services offered by Onex operating subsidiaries, which companies is accomplished through: the education of could reduce their revenues materially. Future revenues employees about environmental regulations and appro- may be affected by changes in rate-setting structures, priate operating policies and procedures; site inspections methodologies or interpretations that may be proposed or by environmental consultants; the addition of proper are under consideration. While each of Onex’ operating equipment or modiﬁcation of existing equipment to companies in the U.S. healthcare industry is subject to reduce or eliminate environmental hazards; remediation reimbursement risk directly related to its particular busi- activities as required; and ongoing waste reduction and ness segment, it is unlikely that all of these companies recycling programs. Environmental consultants are engaged would be affected by the same event, or to the same to advise on current and upcoming environmental regula- extent, simultaneously. Ongoing pressure on government tions that may be applicable. appropriations is a normal aspect of business for these Many of the operating companies are involved in companies, and all seek to minimize the effect of possible the remediation of particular environmental situations funding reductions through productivity improvements such as soil contamination. In almost all cases, these situ- and other initiatives. ations have occurred prior to Onex’ acquisition of those companies and the estimated costs of remedial work and Signiﬁcant customers Onex has acquired major operating companies and divi- related activities are managed either through agreement with the vendor of the company or through provisions sions of large companies. As part of these purchases, the established at the time of acquisition. Manufacturing acquired company has often continued to supply its for- activities carry the inherent risk that changing environ- mer owner through long-term supply arrangements. It has mental regulations may identify additional situations been Onex’ policy to encourage its operating companies to requiring capital expenditures or remedial work, and asso- quickly diversify their customer bases to the extent practi- ciated costs to meet those regulations. cable in order to manage the risk associated with serving a single major customer. Certain Onex operating companies have major customers that represent more than 10 percent of annual revenues. Spirit AeroSystems primarily relied on one major customer, Boeing, at the time of its acquisition by Onex. The table in note 22 to the audited annual consolidated ﬁnancial statements provides information on the concen- tration of business the operating companies have with major customers. Onex Corporation December 31, 2006 55 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. [signed] [signed] Ewout R. Heersink Chief Financial Oﬃcer February 14, 2007 Donald W. Lewtas Vice-President Finance 56 Onex Corporation December 31, 2006 AUDITORS’ REPORT To the Shareholders of Onex Corporation: We have audited the consolidated balance sheets of Onex Corporation as at December 31, 2006 and 2005 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 con- solidated 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, 2006 and 2005 and the results of its operations and its cash ﬂows for the years then ended in accordance with Canadian generally accepted accounting principles. [signed] PricewaterhouseCoopers LLP Chartered Accountants Toronto, Canada February 14, 2007 Onex Corporation December 31, 2006 57 CONSOLIDATED BALANCE SHEETS As at December 31 (in millions of dollars) 2006 2005 Assets Current assets Cash and short-term investments Marketable securities Accounts receivable Inventories (note 4) Other current assets (note 5) Current assets held by discontinued operations (note 3) Property, plant and equipment (note 6) Investments (note 7) Other assets (note 8) Intangible assets (note 9) Goodwill Long-lived assets held by discontinued operations (note 3) Liabilities and Shareholders’ Equity Current liabilities Accounts payable and accrued liabilities Current portion of warranty reserves and unearned premiums (note 10) Current portion of long-term debt, without recourse to Onex (note 11) Current portion of obligations under capital leases, without recourse to Onex (note 12) Current liabilities held by discontinued operations (note 3) Long-term portion of warranty reserves and unearned premiums (note 10) Long-term debt of operating companies, without recourse to Onex (note 11) Long-term portion of obligations under capital leases of operating companies, without recourse to Onex (note 12) Other liabilities (note 13) Future income taxes (note 14) Long-term liabilities held by discontinued operations (note 3) Non-controlling interests Shareholders’ equity Commitments and contingencies are reported in notes 12 and 23. Signed on behalf of the Board of Directors [signed] Director [signed] Director 58 Onex Corporation December 31, 2006 $ 2,944 $ 3,089 1,129 2,586 2,345 1,694 139 10,837 2,899 1,822 2,894 1,036 2,696 394 – 2,054 1,898 425 294 7,760 2,382 440 825 359 2,247 832 $ 22,578 $ 14,845 $ 4,066 2,246 43 35 96 6,486 2,623 3,798 70 1,818 1,050 324 16,169 4,594 1,815 $ 3,141 – 36 17 970 4,164 – 3,618 64 1,044 731 507 10,128 3,565 1,152 $ 22,578 $ 14,845 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 16) Interest and other income Equity-accounted investments Foreign exchange gain (loss) Stock-based compensation (note 17) Derivative instruments Gains on sales of operating investments, net (note 18) Acquisition, restructuring and other expenses (note 19) Debt prepayment Writedown of goodwill and intangible assets Writedown of long-lived assets Earnings before income taxes, non-controlling interests and discontinued operations Provision for income taxes (note 14) Non-controlling interests Earnings from continuing operations Earnings from discontinued operations (note 3) 2006 $ 18,620 (16,161) (1,087) 1,372 (370) (91) (339) 131 17 22 (634) – 1,307 (292) – (10) (3) 1,110 (24) (830) 256 746 2005 $ 15,451 (13,732) (913) 806 (333) (81) (223) 144 1 (35) (44) 4 921 (252) (6) (3) (5) 894 (70) 3 827 138 Net Earnings for the Year $ 1,002 $ 965 Net Earnings per Subordinate Voting Share (note 20) Basic and Diluted: Continuing operations Discontinued operations Net earnings $ $ $ 1.93 5.62 7.55 $ $ $ 5.95 1.00 6.95 Onex Corporation December 31, 2006 59 CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (in millions of dollars except per share data) Balance – December 31, 2004 Dividends declared(a) Purchase and cancellation of shares Currency translation adjustment Net earnings for the year Balance – December 31, 2005 Dividends declared(a) Purchase and cancellation of shares Currency translation adjustment(b) Net earnings for the year Share Capital (note 15) Retained Earnings (Deficit) Cumulative Translation Adjustment Total Shareholders’ Equity $ 582 $ (288) $ (67) $ 227 – (4) – – 578 – (37) – – (15) (14) – 965 648 (15) (166) – 1,002 – – (7) – (74) – – (121) – (15) (18) (7) 965 1,152 (15) (203) (121) 1,002 Balance – December 31, 2006 $ 541 $ 1,469 $ (195) $ 1,815 (a) Dividends declared per Subordinate Voting Share during 2006 totalled $0.11 (2005 – $0.11). (b) Included in currency translation adjustment is a negative $129 relating to the discontinued operations of J.L. French Automotive Castings, Inc., as described in note 3. In 2006, shares issued under the dividend reinvestment plan amounted to less than $1 (2005 – less than $1). 60 Onex Corporation December 31, 2006 CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended December 31 (in millions of dollars) Operating Activities Net earnings for the year Earnings from discontinued 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 (note 19) Non-controlling interests Future income taxes (note 14) Stock-based compensation (note 17) Derivative instruments Gains on sales of operating investments, net (note 18) Other 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 Increase in warranty reserves and unearned premiums and other liabilities Cash from 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 Cash used by discontinued operations Investing Activities Acquisition of operating companies, net of cash in acquired companies of $144 (2005 – $263) (note 2) Purchase of property, plant and equipment Proceeds from sales of operating investments Decrease due to other investing activities Cash from discontinued operations Decrease in Cash for the Year Increase (decrease) in cash due to changes in foreign exchange rates Cash, beginning of the year – continuing operations Cash, beginning of the year – discontinued operations Cash, end of year Short-term investments Cash and short-term investments Cash held by discontinued operations (note 3) 2006 2005 $ 1,002 (746) $ 965 (138) 370 91 10 3 91 830 72 438 – (1,307) 4 858 (128) (619) 7 258 (482) 520 – 896 543 (792) (15) (203) 822 (1,036) – (9) – (690) (850) (823) 1,391 (266) 172 (376) (170) 10 3,089 26 2,955 – 2,955 (11) 333 81 3 5 18 (3) (9) 44 (4) (921) (32) 342 (75) (62) 35 273 171 286 12 811 988 (830) (15) (18) 958 (337) (273) 166 (76) 563 (1,346) (495) 405 (77) 6 (1,507) (133) (62) 2,642 668 3,115 – 3,115 (26) Cash and Short-term Investments Held by Continuing Operations $ 2,944 $ 3,089 Onex Corporation December 31, 2006 61 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 businesses. The consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles (“Canadian GAAP” or “GAAP”). All amounts are in millions of 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 compa- nies. All signiﬁcant intercompany balances and transactions have been eliminated. The principal operating companies and Onex’ ownership and voting interests in these entities are as follows: Celestica Inc. (“Celestica”) Cineplex Entertainment(a) ClientLogic Corporation (“ClientLogic”) Radian Communication Services Corp. (“Radian”) Cosmetic Essence, Inc. (“CEI”) Center for Diagnostic Imaging, Inc. (“CDI”) Emergency Medical Services Corporation (“EMSC”) Spirit AeroSystems, Inc. (“Spirit AeroSystems”) Skilled Healthcare Group, Inc. (“Skilled Healthcare”) The Warranty Group, Inc. (“TWG”) Onex Real Estate Partners (“OREP”) ONCAP I ONCAP II J.L. French Automotive Castings, Inc. (“J.L. French Automotive”) (a) Voting is with respect to Cineplex Entertainment Limited Partnership. December 31, 2006 December 31, 2005 Ownership Voting Ownership Voting 13% 22% 67% 89% 21% 19% 29% 13% 21% 31% 85% 30% 45% – 79% 100% 89% 100% 100% 100% 97% 89% 100% 100% 100% 100% 100% – 13% 27% 68% 90% 22% 20% 29% 29% 22% – 85% 30% – 77% 79% 100% 89% 100% 100% 100% 97% 100% 100% – 100% 100% – 100% The ownership percentages are before the effect of any potential Onex also controls and consolidates the operations of dilution relating to the Management Investment Plans (the “MIP”) Onex Partners LP (“Onex Partners I”) and Onex Partners II LP as described in note 23(f ). The voting interests include shares (“Onex Partners II”), referred to collectively as “Onex Partners” (as that Onex has the right to vote through contractual arrangements described in note 23(d) and 23(e)). At December 31, 2006, Onex or through multiple voting rights attached to particular shares. and Onex Partners I have invested in CEI, CDI, EMSC, Spirit In certain circumstances, the voting arrangements give Onex the AeroSystems, Skilled Healthcare, ResCare and a portion of TWG. right to elect the majority of the board of directors. Onex Partners II has invested in TWG. In addition to the above, investments over which Onex Joint ventures, which are not variable interest entities exercises signiﬁcant inﬂuence but does not consolidate at (“VIEs”), are accounted for using the proportionate consolidation December 31, 2006 are accounted for by the equity method and method. The consolidated ﬁnancial statements include revenues include Res-Care, Inc. (“ResCare”), Cypress Property & Casualty of $21 (2005 – $6), net assets of $54 (2005 – nil) and net earnings Insurance Company and certain real estate partnerships as before income taxes of $63 (2005 – nil) with respect to joint ven- described in note 25. tures. Included in net earnings before income taxes from joint ventures is a gain relating to the sale of certain Town and Country Trust (“Town and Country”) properties as described in note 3. 62 Onex Corporation December 31, 2006 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 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 Leasehold improvements are amortized over the terms of the leases. Leases that transfer substantially all the risks and beneﬁts than those operations that are associated with investment-holding of ownership are recorded as capital leases. Buildings and equip- subsidiaries, are considered to be self-sustaining operations. Assets ment under capital leases are amortized over the shorter of the term and liabilities of self-sustaining operations conducted in foreign of the lease or the estimated useful life of the asset. Amortization of currencies are translated into Canadian dollars at the exchange rate assets under capital leases is on a straight-line basis. 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’s integrated operations, including invest- ment-holding subsidiaries, translate monetary assets and liabili- ties 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 Cash includes liquid investments such as term deposits, money market instruments and commercial paper that mature in less than three months from the balance sheet date. The investments are carried at cost plus accrued interest, which approximates market value. Costs incurred to develop computer software for internal use The Company capitalizes the costs incurred during the application 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, 2006, the Company capitalized computer software costs of $18 (2005 – $31). 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 carry- ing 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. Short-term investments Short-term investments consist of liquid investments such as Assets must be classiﬁed as either held for use or available- for-sale. Impairment losses for assets held for use are measured based money market instruments and commercial paper that mature in on fair value, which is measured by discounted cash ﬂows. Available- three months to a year. The investments are carried at cost plus for-sale assets are carried at the lower of carrying value and expected accrued interest, which approximates market value. proceeds less direct costs to sell. Inventories Inventories are recorded at the lower of cost and replacement cost for raw materials, and at the lower of cost and net realizable value Investments and other assets Investment company The Company’s subsidiary, Onex Capital Management LP for work in progress and ﬁnished goods. For inventories in the (“OCM”), formerly “Onex Public Markets Group”, invests in public aerostructures segment, raw materials are stated based on the companies without the intent of obtaining inﬂuence over its average cost method. For substantially all other inventories, cost investees. OCM is considered an Investment Company under is determined on a ﬁrst-in, ﬁrst-out basis. Accounting Guideline 18 (“AcG-18”), “Investment Companies”. As Property, plant and equipment Property, plant and equipment are recorded at cost less accu- mulated amortization and provision for impairments, if any. For substantially all property, plant and equipment, amortization is provided for on a straight-line basis over the estimated useful lives of the assets: ﬁve to 40 years for buildings and up to 20 years for machinery and equipment. The cost of plant and equipment is reduced by applicable investment tax credits more likely than not to be realized. a result, the investments of OCM are recorded at fair value and are included in investments and other assets in the audited annual consolidated balance sheets. For the year ended December 31, 2006, included in income is $9 of net realized gains (2005 – $10) and $4 of net unrealized gains (2005 – nil). At December 31, 2006, Onex’ carrying value in OCM was $235 (2005 – $134) and its eco- nomic ownership percentage was 92% (2005 – 92%). OCM does not control or have signiﬁcant inﬂuence over any of its investments. Onex Corporation December 31, 2006 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 1. B A S I S O F P R E PA R AT I O N A N D Intangible assets, including intellectual property, 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 ) recorded at their allocated cost at the date of acquisition of the Deferred charges Deferred charges include costs incurred by the operating com- panies relating to the issuance of debt and are deferred and amor- tized over the term of the related debt or as the debt is retired, if earlier. Other long-term investments Other long-term investments are accounted for at cost unless it is determined by management that an impairment that is other than temporary has occurred, at which point a provision is recorded. Acquisition costs relating to the financial services segment Certain costs of acquiring warranty business, principally com- missions, underwriting and sales expenses that vary, and are primarily related to the production of new business, are deferred and amortized as the related premiums and contract fees are earned. The possibility of premium deﬁciencies and the related recoverability of deferred acquisition costs is evaluated annually. Management considers the effect of anticipated investment income in its evaluation of premium deﬁciencies and the related recoverability of deferred acquisition costs. Certain arrangements with producers of warranty con- tracts include proﬁt-sharing provisions whereby the underwriting proﬁts, after a ﬁxed percentage allowance for the company and an allowance for investment income, are remitted to the producers on a retrospective basis. At December 31, 2006, $711 of unearned premiums and contract fees were subject to retrospective com- mission agreements. 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. 64 Onex Corporation December 31, 2006 related operating company. Amortization is provided for intangi- ble assets with limited life, including intellectual property, on a straight-line basis over their estimated useful lives, which range from two to 25 years. The weighted average period of amortiza- tion at December 31, 2006 was approximately eight years (2005 – seven years). Losses and loss adjustment expenses reserves Losses and loss adjustment expenses reserves relate to TWG and represent the estimated ultimate net cost of all reported and unre- ported losses incurred and unpaid through December 31, 2006. The company does not discount losses and loss adjustment expenses reserves. The reserves for unpaid losses and loss adjust- ment expenses are estimated using individual case-basis valua- tions and statistical analyses. Those estimates are subject to the effects of trends in loss severity and frequency and claims report- ing patterns of the company’s third-party administrators. Although considerable variability is inherent in such estimates, manage- ment believes the reserves for losses and loss adjustment expenses are adequate. The estimates are continually reviewed and adjusted as necessary as experience develops or new information becomes known; such adjustments are included in current operations. 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 post-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 escala- tion, 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 service period of employees active at the date of amendment. Actuarial gains (losses) arise from the difference between the actual long-term rate of return on plan assets and the expected long-term rate of return on plan assets for a period or from changes in actuarial assumptions used to determine the beneﬁt obligation. Actuarial gains (losses) exceeding 10% of the greater of the beneﬁt obligation or the fair market 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 (2005 – 11 years) and for those active employees covered by the other sig- niﬁcant post-retirement beneﬁt plans is 18 years (2005 – 18 years). 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 Income taxes Income taxes are recorded using the asset and liability method of at the time of shipment. Revenues earned from providing main- tenance services, including any contracted research and devel- income tax allocation. Under this method, assets and liabilities opment, are recognized when the service is completed or other are recorded for the future income tax consequences attributable contractual milestones are attained. to differences between the ﬁnancial statement carrying values of assets and liabilities and their respective income tax bases. These future income tax assets and liabilities are recorded using sub- stantively enacted income tax rates. The effect of a change in income tax rates on these future income tax assets or liabilities is included in income in the period in which the rate change occurs. Certain of these differences are estimated based on the current tax legislation and the Company’s interpretation thereof. The Company records a valuation allowance when it is more likely than not that the future tax assets will not be realized prior to their expiration. Revenue recognition Electronics Manufacturing Services Revenue from the electronics manufacturing services segment consists primarily of product sales, where revenue is recognized upon shipment, when title passes to the customer. 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. Aerostructures A signiﬁcant portion of Spirit AeroSystems’ revenues are under Healthcare Revenue in the healthcare segment consists primarily of service revenue related to EMSC’s healthcare transportation and emer- gency management service businesses and CDI’s patient service revenue. Revenue is recognized at the time of the service and is recorded net of provisions for contractual discounts and esti- mated uncompensated care. Financial Services Financial services segment revenue consists of revenue on TWG’s warranty contracts primarily in North America and the United Kingdom. The company records revenue and associated unearned revenue on warranty contracts issued by North American obligor companies at the net amount remitted by the selling dealer or retailer “dealer cost”. Cancellations of these contracts are typically processed through the selling dealer or retailer, and the company refunds only the unamortized balance of the dealer cost. However, the company is primarily liable on these contracts and must refund the full amount of customer retail price if the selling dealer or retailer cannot or will not refund their portion. The amount the company has historically been required to pay under such circum- stances has been negligible. The potentially refundable excess of customer retail price over dealer cost at December 31, 2006 was approximately $1,481. The company records revenue and associated unearned long-term, volume-based pricing contracts, requiring delivery of revenue on warranty contracts issued by statutory insurance products over several years. Revenue from these contracts is rec- companies domiciled in the United Kingdom at the customer ognized under the contract method of accounting. Revenues and retail price. The difference between the customer retail price and proﬁts are recognized on each contract in accordance with the dealer cost is recognized as commission and deferred as a compo- percentage-of-completion method of accounting, using the units- nent of deferred acquisition costs. of-delivery method. The contract method of accounting involves The company has dealer obligor and administrator obligor the use of various estimating techniques to project costs at com- service contracts with the dealers or retailers to facilitate the sale pletion and includes estimates of recoveries asserted against the of extended warranty contracts. Dealer obligor service contracts customer for changes in speciﬁcations. These estimates involve result in sales of extended warranty contracts in which the deal- various assumptions and projections relative to the outcome of er/retailer is designated as the obligor. Administrator obligor ser- future events, including the quantity and timing of product deliv- vice contracts result in sales of extended warranty contracts in eries. Also included are assumptions relative to future labour which the company is designated as the obligor. For both dealer performance and rates, and projections relative to material and obligor and administrator obligor, premium and/or contract fee overhead costs. These assumptions involve various levels of revenue is recognized over the contractual exposure period of the expected performance improvements. contracts. Unearned premiums and contract fees on single-pre- The company reevaluates its contract estimates periodi- mium insurance related to warranty agreements are calculated to cally and reﬂects changes in estimates in the current period, and result in premiums and contract fees being earned over the period uses the cumulative catch-up method of accounting for revisions at risk. Factors are developed based on historical analyses of in estimates of total costs or the extent of progress on a contract. claim payment patterns over the duration of the policies in force. For revenues not recognized under the contract method All other unearned premiums and contract fees are determined of accounting, Spirit AeroSystems recognizes revenues from the on a pro rata method. sale of products at the point of passage of title, which is generally Onex Corporation December 31, 2006 65 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 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 ) Reinsurance premiums, commissions, losses and loss adjustment expenses are accounted for on bases consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. Premiums ceded to other companies have been reported as a reduction of revenue. Expense reimbursement received in connection with reinsurance ceded has been accounted for as a reduction of the related acquisition costs. Reinsurance receivables and prepaid reinsurance premium amounts are reported as assets. Theatre Exhibition Box ofﬁce and concession revenues are recognized when sales are received at theatres. Other revenues include those from adver- tising, games and theatre rentals and are recognized as services are provided. Customer Management Services The customer management services segment generates revenue primarily through its customer contact management services by providing customer service and technical support to its clients’ cus- tomers through phone, e-mail, online chat and mail. These services are generally charged by the minute or hour, per employee, per sub- scriber or user, or on a per item basis for each transaction processed and revenue is recognized at the time services are performed. A por- tion of the revenue is often subject to performance standards. Revenue subject to monthly or longer performance standards is rec- ognized when such performance standards are met. The company is reimbursed by clients for certain pass- through out-of-pocket expenses, consisting primarily of telecom- munication, postage and shipping costs. The reimbursement and related costs are reﬂected in the accompanying audited annual consolidated statements of earnings as revenue and cost of ser- vices, respectively. Other Other segment revenues consist of product sales and services. Product sales revenue is recognized upon shipment when title passes to the customer. Service revenue is recorded at the time the services are performed. 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. 66 Onex Corporation December 31, 2006 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 2006, $130 (2005 – $52) in research and development costs were expensed and $266 of devel- opment costs (2005 – $55) were capitalized. Capitalized develop- ment costs relating to the aerostructures segment are included in deferred charges. The costs will be amortized over the anticipated number of production units to which such costs relate. Stock-based compensation The Company follows the fair value-based method of accounting, which is 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 15(e), which provides that in certain situations the Company has the right, but not the obligation, to settle any exercisable option under the Plan by the payment of cash to the option holder. The Company has recorded a liability for the potential future settlement of the value of vested options at the balance sheet date by reference to the value of Onex shares at that date. 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 statements of earnings. The second type of plan is the MIP, which is described in note 23(f ). The MIP provides that exercisable investment rights may be settled by issuance of the underlying shares or, in certain situations, by a cash payment for the value of the investment rights. Under the MIP, once the targets have been achieved for the exercise of investment rights, a liability is recorded for the value of the investment rights under the MIP by reference to the value of the underlying investments, with a corresponding expense recorded in the audited annual consolidated statements of earnings. The third type of plan is the Deferred Share Unit Plan. A Deferred Share Unit (“DSU”) entitles the holder to receive, upon redemption, a cash payment equivalent to the market value of a subordinate voting share at the redemption date. The DSU Plan enables Onex directors to apply directors’ fees earned to acquire DSUs based on the market value of Onex shares at the time. Grants of DSUs may also be made to Onex directors from time to time. The DSUs vest immediately, are redeemable only when the holder retires and must be redeemed within one year following the year of retirement. Additional units are issued for any cash dividends paid on the subordinate voting shares. The Company has recorded a liability for the future settlement of the DSUs by reference to the value of underlying subordinate voting shares at the balance sheet date. On a quarterly basis, the liability is adjust- ed up or down for the change in the market value of the under- lying shares, with the corresponding amount reﬂected in the audited annual consolidated statement of earnings. N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S The fourth type of plan is employee stock option and other stock-based compensation plans in place for employees at Use of estimates The preparation of consolidated ﬁnancial statements in conformity various operating companies, under which, on payment of the with Canadian generally accepted accounting principles requires exercise price, stock of the particular operating company is management of Onex and its operating companies to make esti- issued. The Company records a compensation expense for such mates and assumptions that affect the reported amounts of assets options based on the fair value over the vesting period. and liabilities, the disclosure of contingent assets and liabilities at 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. Derivative financial instruments The Company’s operating companies use foreign currency con- tracts and interest rate swap agreements as derivative ﬁnancial instruments to manage risks from ﬂuctuations in exchange rates the date of the audited annual consolidated ﬁnancial statements and the reported amounts of revenues and expenses during the reporting period. This includes the liability for claims incurred but not yet reported for the Company’s healthcare and ﬁnancial services segments. Actual results could differ from such estimates. Comparative amounts Certain amounts presented in the prior year have been reclassi- ﬁed to conform to the presentation adopted in the current year. and interest rates. When determined to be compliant hedges under Accounting Standards Board Accounting Guideline 13 Future accounting changes The CICA has issued three new standards: Financial Instruments – (“AcG-13”), the carrying values of the ﬁnancial instruments are Recognition and Measurement, Hedges and Comprehensive Income. not adjusted to reﬂect their current market values. The current These standards will be effective for the Company on January 1, market values of these instruments are disclosed in note 21. 2007, and require the following: The Company and its operating companies formally document relationships between hedging instruments and hedged items, as well as the risk management objective and strat- egy for undertaking various hedge transactions. This process includes linking all derivatives to speciﬁc assets and liabilities on the balance sheet or to speciﬁc ﬁrm commitments or forecasted transactions. The Company also formally assesses, both at the hedge’s inception and at the end of each quarter, whether the derivatives that are used in hedged transactions are highly effec- tive in offsetting changes in the cash ﬂows of hedged items. Gains and losses on hedges of ﬁrm commitments are included in the cost of the hedged transaction when they occur. Gains and losses on hedges of forecasted transactions are recog- nized 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 cur- rency-denominated amounts are accrued in the audited annual consolidated balance sheets as current assets or current liabilities and are recognized in the audited annual consolidated statements 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 and losses on hedged forecast transactions are recognized in earnings immediately when the hedge is no longer effective or the forecasted transactions are no longer expected. Financial Instruments – Recognition and Measurement All ﬁnancial assets and liabilities will be carried at fair value in the consolidated balance sheet, except the following, which will be carried at amortized cost unless designated as held for trading upon initial recognition: loans and receivables, certain securities and non-trading ﬁnancial liabilities. Realized and unrealized gains and losses on ﬁnancial assets and liabilities that are held for trading will be recorded in the audited annual consolidated state- ment of earnings. Unrealized gains and losses on ﬁnancial assets that are held as available-for-sale will be recorded in other com- prehensive income until realized, when they will be recorded in the audited annual consolidated statement of earnings. All deriva- tives, including embedded derivatives that must be separately accounted for, will be recorded at fair value in the audited annual consolidated balance sheet. Hedges In a fair value hedge, the change in fair value of the hedging deriv- ative will be offset in the audited annual consolidated statement of earnings against the change in the fair value of the hedged item relating to the hedged risk. In a cash ﬂow hedge, the change in fair value of the derivative, to the extent effective, will be recorded in other comprehensive income until the asset or liability being hedged affects the audited annual consolidated statement of earnings, at which time the related change in fair value of the derivative will also be recorded in the audited annual consolidated statement of earnings. Any hedge ineffectiveness will be recorded in the audited annual consolidated statement of earnings. Onex Corporation December 31, 2006 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 1. B A S I S O F P R E PA R AT I O N A N D Beginning in the second quarter of 2006, a portion of 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 ) the results of Town and Country has been recorded as discontin- Comprehensive Income Unrealized gains and losses on ﬁnancial assets that will be held as available-for-sale, unrealized foreign currency translation c) In April 2006, Spirit AeroSystems completed the acquisition of the aerostructures business unit of BAE Systems plc, with opera- amounts arising from self-sustaining foreign operations and tions in Prestwick, Scotland and Samlesbury, England. The total changes in the fair value of cash ﬂow hedging instruments will be purchase price of the acquisition was $171 for a 100% equity own- recorded in a statement of other comprehensive income until rec- ership, which was ﬁnanced by Spirit AeroSystems using its avail- ued operations, as described in note 3. ognized in the consolidated statement of earnings. Other compre- able cash. hensive income will form part of shareholders’ equity. d) In November 2006, the Company completed the acquisition of the Aon Warranty Group division of Aon Corporation. Upon clos- ing, the division was renamed The Warranty Group, Inc. (“TWG”). TWG underwrites and administers extended warranties on a vari- ety of consumer goods and also provides consumer credit and other specialty insurance products primarily through automobile dealers. The total equity investment was $568 for an initial 98% ownership interest, provided through Onex and Onex Partners. Onex’ net investment was $179 for a 31% equity ownership. Onex has effective voting control of TWG through Onex Partners. e) Other includes acquisitions made by Celestica, Skilled Health- care, EMSC and Onex Real Estate Partners. The purchase prices of the acquisitions described above were allocated to the net assets acquired based on their relative fair values at the dates 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. Transitional impact The transitional impact of these new standards is still being evaluated. 2 . C O R P O R AT E I N V E S T M E N T S During 2006 and 2005, 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 6 A C Q U I S I T I O N S a) In January 2006, ONCAP II completed the acquisition of CSI Global Education Inc. (“CSI”). CSI is Canada’s leading provider of ﬁnancial education and testing services. In March and November 2006, ONCAP II invested in Environmental Management Solu- tions Inc. (“Environmental”). Environmental is a leading envi- ronmental services company in the management, treatment and re-use and disposal of organic waste and contaminated soil. The total investment made by ONCAP II was $55 in debt and equity. Onex’ net investment in these acquisitions was $25. Onex has indirect voting control of CSI through ONCAP II. ONCAP II has a 90% equity ownership in CSI and, on a converted basis, ONCAP II has a 62% equity ownership interest in Environmental. b) In March 2006, the acquisition of Town and Country was com- pleted through a joint venture with Onex Real Estate Partners LP (“OREP”), Morgan Stanley Real Estate and Sawyer Realty Holdings LLC. Town and Country owned and operated 37 apartment com- munities in the United States. The total equity investment by the joint venture was $244 for a 100% equity ownership interest. The equity investment by OREP was $116 for a 48% equity ownership interest. Onex’ net investment in this acquisition was $100 for a 41% equity ownership at the time of acquisition. Onex accounts for Town and Country as a joint venture, applying the proportion- ate consolidation method. 68 Onex Corporation December 31, 2006 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S Details of the 2006 acquisitions are as follows: 2006 Acquisitions Cash Marketable securities Other current assets Intangible assets with limited life Intangible assets with indefinite life Goodwill Property, plant and equipment and other long-term assets Current liabilities Long-term liabilities(1) Non-controlling interests in net assets ONCAP II(a) Country(b) AeroSystems(c) TWG(d) Other(e) Town and Spirit $ 18 – 53 39 26 40 38 214 (59) (101) 54 (37) $ 9 – 2 7 – – 799 817 (13) (688) 116 (16) $ – – 125 35 – 12 116 288 (79) (38) 171 – $ 116 $ 1,219 1,511 615 21 373 2,714 6,569 (2,827) (3,164) 578 (10) 1 – 13 11 – 41 50 116 (3) (8) 105 – Interest in net assets acquired $ 17 $ 100 $ 171 $ 568 $ 105 (1) Included in long-term liabilities of ONCAP II is $17 of acquisition financing provided by ONCAP II related to the acquisition of CSI, of which Onex’ share is $8. 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 CDI. CDI owns and operates diagnostic imaging centres in the c) In June 2005, the Company completed the acquisition of the Wichita-Tulsa Division of The Boeing Company (“Boeing”). The purchase included Boeing’s commercial aerostructures manufac- United States. The total equity investment of $88 for an 84% equity turing facilities in Wichita, Kansas and Tulsa and McAlester, ownership interest was made by Onex and Onex Partners. Onex’ Oklahoma. The business, now operating as Spirit AeroSystems, net investment in this acquisition was $21 for a 20% equity owner- has entered into long-term agreements with Boeing to supply ship at the time of acquisition. Onex has effective voting control of components for all of Boeing’s existing 737, 747, 767 and 777 plat- CDI 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 forms, as well as the new 787 platform. Spirit AeroSystems will also seek business from customers 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 effective voting control of Spirit AeroSystems through Onex Partners. entity now operates under Emergency Medical Services Cor- poration (“EMSC”). The total equity investment of $266 for a 97% d) In July 2005, Cineplex Entertainment completed the acquisition of the Famous Players movie exhibition business in a transaction equity ownership interest was made by Onex and Onex Partners. valued at $474. To provide ﬁnancing for the acquisition, various Onex’ net investment in this acquisition was $100 for a 36% equity debt and equity transactions were entered into, as described in ownership at the time of acquisition. Onex has effective voting note 11(b). In connection with the acquisition, Onex received control of EMSC through Onex Partners. 248,447 units as a transaction fee but did not sell or purchase any additional units in the equity offering. As a result, Onex’ owner- ship interest in Cineplex Entertainment was diluted to 27% from 31% and Onex recorded a dilution gain, as described in note 18. Onex continued to control and consolidate Cineplex Entertain- ment subsequent to the transaction. Onex Corporation December 31, 2006 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 2 . C O R P O R AT E I N V E S T M E N T S ( c o n t ’d ) In connection with the acquisition, Cineplex Enter- tainment entered into a consent agreement with the Commis- sioner of Competition to divest itself of 34 theatres. Accordingly, the ﬁnancial results for those theatres have been included in dis- continued operations, as described in note 3. e) In December 2005, the Company completed the acquisition of Skilled Healthcare. Skilled Healthcare operates skilled nursing and assisted living facilities in California, Texas, Kansas, Nevada and Missouri. The total equity investment 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 owner- ship at the time of acquisition. Onex has effective voting control of Skilled Healthcare through Onex Partners. f) During 2005, two of ONCAP’s operating companies, Western Inventory Service Ltd. (“WIS”) and Canadian Securities Regis- tration Systems Ltd. (“CSRS”) completed acquisitions. In April 2005, WIS acquired Washington Inventory Service (“Washington”), a leading provider of inventory counting services in the United States. After the acquisition, WIS and Washington merged to form the second-largest inventory counting service provider in the world. In May 2005, CSRS acquired Corporate Research and Analysis Centre Ltd., a provider of corporate and legal searches in Canada. The total purchase price of these acquisitions was $144 and was ﬁnanced with $143 of borrowings, which are without recourse to Onex or ONCAP, and $1 of equity. In 2006, the opera- tions of WIS and CSRS were reclassiﬁed as discontinued opera- tions, as described in note 3. g) Other includes acquisitions completed by CEI, CDI and Celestica. Details of the 2005 acquisitions are as follows: 2005 Acquisitions 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 CDI(a) EMSC(b) AeroSystems(c) Entertainment(d) Healthcare(e) ONCAP(f) Other(g) Spirit Cineplex Skilled $ 14 21 39 3 111 63 251 (28) – (117) 106 (18) $ 18 609 111 1 311 466 1,516 (304) – (940) 272 (6) $ 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) – 32 44 – 113 9 198 (26) (143) (28) 1 – 1 $ $ – 7 9 – 2 21 39 (6) (23) (1) 9 – 9 Interest in net assets acquired $ 88 $ 266 $ 464 $ 8 $ 243 $ (1) Included in liabilities is $2,268 raised in connection with original acquisitions. The cost of acquisitions made during the year includes restructuring and integration costs of nil (2005 – $15). As at December 31, 2006, accounts payable and accrued liabilities and other long-term liabilities include $2 and nil, respectively (2005 – $138 and $3) of restruc- turing and integration costs, for these and earlier acquisitions. 70 Onex Corporation December 31, 2006 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 . 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. Futuremed(a) J.L. French Automotive(b) CSRS(c) Cineplex Entertainment(d) Town and Country(e) ClientLogic warehouse(f) Sky Chefs(g) WIS International(h) CMC Electronics(i) InsLogic Magellan Commercial Vehicle Group 2006 2005 Revenue $ – – – 8 46 22 – 288 197 – – – $ 94 584 81 47 – 29 – 211 203 – 744 – 2006 Onex’ Share of Earnings (Loss) $ – – – – (15) (3) – 7 7 – – – Gain (Loss), Net of Tax $ 19 615 21 – 45 (2) 50 – – 2 – – 2005 Onex’ Share of Earnings (Loss) Gain, Net of Tax Total $ – – – 2 – – – – 45 73 22 68 $ (1) $ (1) (67) (3) – – (7) – 1 1 – 2 2 (67) (3) 2 – (7) – 1 46 73 24 70 Total $ 19 615 21 – 30 (5) 50 7 7 2 – – $ 561 $ 1,993 $ 750 $ (4) $ 746 $ 210 $ (72) $ 138 a) In January 2006, ONCAP I’s operating company, Futuremed Health Care Products Limited Partnership (“Futuremed”), com- c) In March 2006, ONCAP I’s operating company, CSRS, was pur- chased by Resolve Business Outsourcing Income Fund (“Resolve”) pleted an initial public offering, with 92% of ONCAP I’s ownership concurrent with Resolve’s initial public offering. ONCAP I received being sold and the remaining portion being sold in February 2006. convertible units of Resolve and net cash proceeds of $90, of Through the offering, ONCAP I received net proceeds of $74, of which Onex’ share was $30. Onex’ gain on the transaction was which Onex’ share was $25. Onex’ gain on the transaction was $25, before a tax provision of $4. $23, before a tax provision of $4. Under the terms of the MIP, management members par- Under the terms of the MIP, as described in note 23(f ), ticipated in the realizations the Company achieved on its sale of management members participated in the realizations the Com- CSRS. Amounts paid on account of these transactions related to pany achieved on the sale of Futuremed. Amounts paid on account the MIP totalled $1 and have been deducted from earnings from of these transactions related to the MIP totalled $2 and have been discontinued operations. deducted from earnings from discontinued operations. In addition, management of ONCAP I received $5 as its In addition, management of ONCAP I received $6 as carried interest from investors other than Onex on those inves- its carried interest from investors other than Onex on those tors’ proceeds of $60. investors’ proceeds of $49. b) The difﬁcult conditions affecting the North American automo- tive supply sector rendered J.L. French Automotive unable to meet the ﬁnancial requirements under certain of its lending agreements. In February 2006, J.L. French Automotive ﬁled for protection under Chapter 11 of the Bankruptcy Code in the United States. At that time, Onex ceased all involvement with the com- pany and expected little to no proceeds from the bankruptcy process. As a result, Onex recorded the operations of J.L. French Automotive as discontinued and recorded an accounting gain of $615, which consists primarily of the reversal of losses previously recorded in excess of the Company’s investment in J.L. French Automotive. In July 2006, J.L. French Automotive emerged from bankruptcy and Onex has no further economic interest in the company. There was no MIP distribution regarding J.L. French Automotive as the required performance targets were not met. d) In 2006, Cineplex Entertainment disposed of the remaining seven theatres that were part of its consent agreement pursuant to its 2005 acquisition of Famous Players. e) In the second quarter of 2006, OREP undertook steps toward the divestiture of all of the assets from the acquisition of Town and Country, as described in note 2. At December 31, 2006, 27 of the 37 properties had been sold by the joint venture for proceeds of $1,520, resulting in a pre-tax gain of $196. Onex’ share of this gain was $77, before a tax provision of $32. After using a signiﬁcant por- tion of the proceeds to repay debt relating to the properties sold, the joint venture distributed approximately $130 to OREP in the fourth quarter of 2006. Three properties are to be sold in the ﬁrst quarter of 2007. The results of these properties, together with the result of the 27 properties sold, have been included in earnings from discon- tinued operations. Onex Corporation December 31, 2006 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 3 . 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 ) h) In December 2006, ONCAP I entered into an agreement to sell its interest in WIS International. The sale closed in January 2007 with ONCAP I receiving proceeds of $222, of which Onex’ share Due to a change in market conditions, the remaining was $75. seven properties are no longer being actively marketed for sale and therefore are no longer considered discontinued operations. The results of these seven properties are included in the Other seg- i) In the fourth quarter of 2006, ONCAP I undertook steps to sell its interest in CMC Electronics. In January 2007, ONCAP I entered ment in continuing operations for the period since acquisition. into an agreement to sell its interest in CMC Electronics for pro- f) During 2006, ClientLogic disposed of its warehouse manage- ment business and therefore that business has been classiﬁed as discontinued. g) In June 2001, Onex sold its remaining interest in Sky Chefs, Inc. (“Sky Chefs”) and recorded the operations of Sky Chefs as discon- tinued operations at that time. In conjunction with the sale, a provision for tax indemnities under the purchase and sale agreement was recorded. In September 2006, these matters were resolved and, as a result, Onex has recorded a recovery of taxes related to the Sky Chefs sale in the amount of $50 in the results from discontinued operations. ceeds of approximately $340, of which Onex’ share would be approximately $140. The sale is expected to be completed in the ﬁrst half of 2007. The results of operations for the businesses described above have been reclassiﬁed as discontinued in the audited annual consoli- dated statements of earnings and audited annual consolidated statements of cash ﬂows for the years ended December 31, 2006 and 2005. The amounts for operations now discontinued that are included in the December 31, 2006 and December 31, 2005 audited annual consolidated balance sheets are as follows: As at December 31, 2006 Cash Accounts receivable Inventories Other current assets Current assets held by discontinued operations Property, plant and equipment Other assets Intangibles Goodwill Long-lived assets held by discontinued operations Accounts payable and accrued liabilities Current portion of long-term debt, without recourse to Onex Current portion of obligations under capital leases, without recourse to Onex Current liabilities held by discontinued operations Long-term debt, without recourse to Onex Current portion of obligations under capital leases, without recourse to Onex Other liabilities Long-term liabilities held by discontinued operations Cumulative translation adjustment Net assets of discontinued operations 72 Onex Corporation December 31, 2006 Town and Country ClientLogic warehouse WIS Interna- tional CMC Electronics $ $ – 1 – – 1 45 – – – 45 (1) – – (1) (39) – – (39) – 6 $ $ – 2 – – 2 – – – – – – – – – – – – – – 2 $ 1 21 – 2 24 14 6 44 147 211 (14) (1) (1) (16) (162) (1) (18) $ 10 40 48 14 112 28 8 26 76 138 (71) (1) (7) (79) (91) – (13) $ Total 11 64 48 16 139 87 14 70 223 394 (86) (2) (8) (96) (292) (1) (31) (181) (104) (324) 5 (3) 2 $ 43 $ 64 $ 115 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 Futuremed J.L. French Automotive CSRS Cineplex Enter- tainment ClientLogic warehouse WIS Interna- tional CMC Electronics As at December 31, 2005 Cash Accounts receivable Inventories Other current assets Current assets held by discontinued operations Property, plant and equipment Other assets Intangibles Goodwill Long-lived assets held by discontinued operations Bank indebtedness, without recourse to Onex Accounts payable and accrued liabilities Current portion of long-term debt, without recourse to Onex Current portion of obligations under capital leases, without recourse to Onex Current liabilities held by discontinued operations Long-term debt, without recourse to Onex Current portion of obligations under capital leases, without recourse to Onex Other liabilities Non-controlling interests Long-term liabilities held by discontinued operations Cumulative translation adjustment Net assets (liabilities) of discontinued operations $ $ – 10 6 1 17 1 1 40 12 54 – (8) – – (8) (53) – – (8) (61) – 2 $ $ 15 38 48 21 122 263 5 18 – 286 – (71) (783) (7) (861) – (12) (13) – (25) (129) $ 4 4 – 4 12 2 3 60 62 127 – (6) – – (6) (67) – (43) – (110) – $ (607) $ 23 $ – – – 1 1 3 – – – 3 – – – – – – – (3) – (3) – 1 $ $ – 4 – – 4 4 – – – 4 – (2) – – (2) – – – – – – 6 $ 7 20 – 10 37 14 6 51 155 226 – (23) (2) (1) (26) (158) (1) (35) (8) (202) – $ – 50 46 5 101 25 – 31 76 132 (1) (62) (4) – (67) (20) – (16) (70) (106) (3) Total $ 26 126 100 42 294 312 15 200 305 832 (1) (172) (789) (8) (970) (298) (13) (110) (86) (507) (132) $ 35 $ 57 $ (483) Onex Corporation December 31, 2006 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 4 . I N V E N T O R I E S 5 . O T H E R C U R R E N T A S S E T S Inventories comprised the following: Other current assets comprised the following: As at December 31 Raw materials Work in progress Finished goods 2006 2005 As at December 31 2006 2005 $ 1,044 $ 868 433 994 662 242 $ 2,345 $ 1,898 Current portion of ceded claims recoverable held by TWG (note 10) $ Current portion of prepaid premiums of TWG Current deferred income taxes (note 14) Other 600 395 224 475 $ – – 43 382 $ 1,694 $ 425 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 Land Buildings Machinery and equipment Construction in progress 2006 Cost Accumulated Amortization $ 187 $ 1,345 2,837 293 – 267 1,496 – Net Cost 2005 Accumulated Amortization $ 187 $ 127 $ 1,078 1,341 293 1,119 2,369 225 – 189 1,269 – $ Net 127 930 1,100 225 $ 4,662 $ 1,763 $ 2,899 $ 3,840 $ 1,458 $ 2,382 The above amounts include property, plant and equipment under capital leases of $247 (2005 – $283) and related accumulated amortization of $114 (2005 – $64). As at December 31, 2006, property, plant and equipment included $7 (2005 – $6) of assets held for sale. 7. I N V E S T M E N T S Investments comprised the following: As at December 31 Marketable securities(a) Public entities held by OCM(b) Equity-accounted investments(c) Investments held by TWG(d) Other $ 2006 180 198 174 1,170 100 $ 2005 123 140 136 – 41 $ 1,822 $ 440 a) Marketable securities are recorded at cost, less provision for impairment that is other than temporary. The market value of these securities at December 31, 2006 was $180 (2005 – $118). b) Public entities held by OCM are recorded at market. At Decem- ber 31, 2006, the securities held by OCM include $26 (2005 – $13) of unrealized gains and $27 (2005 – $13) of unrealized losses. c) Equity-accounted investments consist primarily of investments in ResCare and three real estate partnerships. The Company and Onex Partners had an initial $114 equity investment in ResCare for a 28% effective ownership interest. Onex’ portion of the invest- ment was approximately $27, representing an initial 7% owner- ship interest in ResCare. The current carrying value of the ResCare investment is $119 (2005 – $117). ResCare is included in the Healthcare segment in note 27. In 2006, the Company formed three real estate partner- ships to develop residential units in the United States. At Decem- ber 31, 2006, Onex’ share of these partnerships had a carrying value of $23. 74 Onex Corporation December 31, 2006 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) The table below presents the amortized cost and fair value of all investments in ﬁxed maturity securities held by TWG at December 31, 2006. 8 . O T H E R A S S E T S Other assets comprised the following: Amortized Cost(1) Fair Value As at December 31 Deferred charges U.S. government and agencies $ States and political subdivisions Foreign governments Corporate bonds Mortgage-backed securities Asset-backed securities Current portion(2) Long-term portion 314 40 514 673 79 34 $ 313 40 510 671 79 34 $ 1,654 $ 1,647 (484) (484) $ 1,170 $ 1,163 Deferred development charges Future income taxes (note 14) Boeing receivable(a) Deferred pension Long-term portion of ceded claims recoverable (note 10) Long-term portion of prepaid premium Other 2006 2005 $ 116 329 459 223 241 874 476 176 $ 94 55 234 247 65 – – 130 $ 2,894 $ 825 (1) Amortized cost represents cost plus accrued interest and accrued discount or premium, if applicable. (2) The current portion is included in marketable securities on the consolidated balance sheet. a) In connection with the acquisition of Spirit AeroSystems from Boeing, Boeing will make quarterly payments to Spirit AeroSystems beginning in March 2007 through December 2009. The fair value of the receivable was recorded as a long-term asset on the opening Fair values generally represent quoted market value prices for balance sheet of Spirit AeroSystems. The fair value is being accreted securities traded in the public marketplace or analytically deter- to the principal amount of US$277 over the term of the agreement. mined values using bid or closing prices for securities not traded The carrying value of the receivable as at December 31, 2006 was in the public marketplace. $273 (2005 – $247), of which the current portion of $50 is included Management believes that all unrealized losses on individ- in accounts receivable. ual securities are the result of normal price ﬂuctuations due to market conditions and are not an indication of other-than-tempo- 9. I N TA N G I B L E A S S E T S rary impairment. Management further believes it has the intent and ability to hold these securities until they fully recover in value. These determinations are based upon the relatively small level of losses in relation to total fair value and an in-depth analy- sis of individual securities. The amortized cost and fair value of ﬁxed-maturity securi- ties owned by TWG at December 31, 2006, by contractual maturity, are shown below: Years to maturity: One or less After one through five After five through ten After ten Mortgage-backed securities Asset-backed securities Amortized Cost $ 484 757 276 24 79 34 Intangible assets comprised the following: As at December 31 2006 2005 Intellectual property with limited life, net of accumulated amortization of $152 (2005 – $143) $ 6 $ 16 Intangible assets with limited life, net of accumulated amortization of $266 (2005 – $193) Fair Value Intangible assets with indefinite life 925 105 288 55 $ 1,036 $ 359 $ 484 753 273 24 79 34 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, customer relationships and contract rights obtained in the acquisition of certain facilities. $ 1,654 $ 1,647 Expected maturities differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. At December 31, 2006, ﬁxed-maturity securities with a carrying value of $372 were on deposit with various state insur- ance departments and Canadian insurance regulators, respectively, to satisfy U.S. domestic and Canadian regulatory requirements. Onex Corporation December 31, 2006 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 10 . W A R R A N T Y R E S E R V E S A N D U N E A R N E D P R E M I U M S The following describes the reserves and unearned premiums liabilities of TWG, which was acquired in November 2006. Reserves The following table provides details of TWG’s ending reserves for losses and loss adjustment expenses (“LAE”), net of ceded claims recov- erable, as at December 31, 2006: Net reserve for losses and LAE, December 31, 2006 Add current portion of ceded claims recoverable (note 5) Add long-term portion of ceded claims recoverable (note 8) Total ceded claims recoverable(1) Gross reserve for losses and LAE, December 31, 2006(2) Current portion of reserves Long-term portion of reserves Property and Casualty(a) Warranty(b) Total Reserves $ – $ 194 $ 194 492 874 1,366 1,366 (492) 108 – 108 302 (302) 600 874 1,474 1,668 (794) $ 874 $ – $ 874 (1) Ceded claims recoverable represent the portion of reserves ceded to third-party reinsurers. (2) Reserves for losses and LAE represent the estimated ultimate net cost of all reported and unreported losses incurred and unpaid through December 31, 2006, as described in note 1. a) Property and casualty reserves represent estimated future losses on property and casualty policies. The property and casualty Unearned Premiums The following table provides details of the unearned premiums as reserves and the corresponding ceded claims recoverable were at December 31, 2006: acquired on the acquisition of TWG. The property and casualty business is being run off and new business is not being booked. The reserves are 100% ceded to third-party reinsurers, with approx- Unearned premiums imately 80% of the reserves having been ceded to a subsidiary of Current portion of unearned premiums Aon Corporation, the former parent of TWG. Long-term portion of unearned premiums 2006 $ 3,201 (1,452) $ 1,749 b) Warranty reserves represent future losses on warranty policies written by TWG. Due to the nature of the warranty reserves, sub- stantially all of the ceded claims recoverable and warranty reserves are of a current nature. 76 Onex Corporation December 31, 2006 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 11. 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) 7.875% subordinated notes due 2011 7.625% subordinated notes due 2013 $ Cineplex Entertainment(b) Revolving credit facility and term loans due 2009 Galaxy Entertainment notes due 2028 Other ClientLogic(c) Revolving credit facility and term loans due 2010 and 2012 Revolving credit facility and term loan Other, including debt denominated in foreign currencies Radian(d) Revolving credit facility and term loan due 2008 Subordinated secured debentures due 2008 Cosmetic Essence(e) Revolving credit facility and term loans due 2010 and 2011 Subordinated secured notes due 2010 Center for Diagnostic Imaging(f) Revolving credit facility and term loan due 2010 Emergency Medical Services(g) Revolving credit facility and term loan due 2012 Subordinated secured notes due 2015 Other Spirit AeroSystems(h) Revolving credit facility and term loan due 2010 and 2013 Other Skilled Healthcare(i) Revolving credit facility and term loan due 2010 and 2012 11.0% subordinated notes due 2014 Other The Warranty Group(j) ONCAP II companies (k) Term loan due 2012 Revolving credit facility and term loans due 2011 Subordinated notes due 2012 Onex Real Estate Partners companies(l) Term loans due 2008 Other Less: long-term debt held by the Company Current portion of long-term debt of operating companies 2006 2005 583 291 874 248 100 2 350 – 154 103 257 36 19 55 140 85 225 77 264 291 2 557 687 – 687 308 232 3 543 233 57 21 78 72 8 80 $ 581 291 872 244 100 2 346 159 – 99 258 32 16 48 155 77 232 81 289 291 – 580 810 29 839 301 231 3 535 – – – – – – – (175) 3,841 (43) (137) 3,654 (36) Consolidated long-term debt of operating companies, without recourse to Onex $ 3,798 $ 3,618 Onex Corporation December 31, 2006 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 11. 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 ( c o n t ’d ) 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 com- pany typically contain certain restrictive covenants, which may include limitations or prohibitions on additional indebtedness, payment of cash dividends, redemption of capital, capital spend- ing, making of investments and acquisitions and sale of assets. In addition, certain ﬁnancial covenants must be met by the oper- ating companies that 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 have been made in the audited annual consolidated ﬁnancial state- ments with respect to any possible non-compliance. a) Celestica Celestica has a credit facility for US$600 that matures in June 2007. There were no borrowings outstanding under this facility at December 31, 2006. The facility has restrictive covenants relating to debt incurrence 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 Decem- ber 31, 2006, Celestica was limited to approximately US$60 of available debt incurrence. Celestica also has uncommitted bank overdraft facilities available for operating requirements that total US$48 at December 31, 2006. Celestica’s senior subordinated notes due 2011 have 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 8.2% for 2006 (2005 – 6.4%). The 2011 notes may be redeemed on July 1, 2008 or later at various premiums above face value. 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. 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 Class C LP Units through the issuance of 6,835,000 units and the issuance of $105 in convertible extendible unsecured subordinated 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 in 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 reﬂected as long-term debt. The Class C LP Units issued by Cineplex Entertainment are redeemable by CGIF under certain conditions and as such have characteristics of both debt and equity. As a result, at December 31, 2006 an amount of $100 (2005 – $98) is classiﬁed as a liability and included in other liabilities. An amount of $9 (2005 – $9) is recorded in non-controlling interest. In connection with the acquisition, Cineplex Entertain- ment 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, 2006, nil and $13 (2005 – nil and $9) were outstanding on the 364-day and four- year revolving facilities and $235 (2005 – $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 princi- pal amount outstanding of $200. 78 Onex Corporation December 31, 2006 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 c) ClientLogic At December 31, 2005, ClientLogic had US$137 outstanding under e) Cosmetic Essence CEI has entered into credit agreements that provide for a a March 2005 credit facility. In August 2006, ClientLogic complet- revolving line of credit with maximum borrowings of US$25, ed a debt reﬁnancing and repaid the amounts outstanding under maturing in 2010; a ﬁrst lien term loan with borrowings of US$110; the March 2005 credit facility. The August 2006 credit agreement and a second lien term loan with borrowings of US$34. The ﬁrst consists of a US$40 term loan, due in 2011, and a US$130 revolving lien term loan is repayable through quarterly instalments of prin- credit facility. At December 31, 2006, US$40 and US$92 were out- cipal and interest to be made through December 2010. The second standing on the term loan and revolving facility, respectively. lien term loan pays interest only until its maturity in December On January 29, 2007, in connection with its acquisition 2011. At December 31, 2006, CEI had US$120 (2005 – US$133) out- of SITEL Corporation (“SITEL”) as described in note 26, Client- standing under the agreements. Logic closed a new credit facility consisting of a US$675 term Interest on the borrowings is based, at the option of CEI, loan, maturing in January 2014 and a US$85 revolving credit facility, upon either a LIBOR rate or a base rate plus an interest rate mar- maturing in January 2013. The term loan and revolving facility gin. Substantially all of CEI’s assets are pledged as collateral for bear interest at a rate of LIBOR plus an applicable margin. The the borrowings. proceeds from the new facility were used to repay the previous CEI has entered into an interest rate swap agreement facility and fund the SITEL acquisition. that effectively ﬁxes the interest rate on borrowings under the At December 31, 2006 ClientLogic had US$57 (2005 – credit agreement. The amount of principal covered under the US$59) in other debt instruments with varying terms. Included in swap agreement declined to US$70 in 2006, and declines annually this amount are mandatorily redeemable preferred shares held by until expiry in 2009. Onex of US$53 (2005 – $51). In connection with the acquisition of CEI also has a promissory note outstanding in the SITEL in January 2007, these preferred shares were converted into amount of US$72 (2005 – US$66), of which US$66 (2005 – US$61) common shares of ClientLogic. is held by the Company. The note is due in 2014, with interest of ClientLogic has US$31 (2005 – US$25) of loan notes out- 9.55% per year, payable in additional notes due in 2014. standing, denominated in pounds sterling, which bear interest at 8.35%. The notes were repaid in January 2007 in connection with the SITEL acquisition. d) Radian Radian’s credit agreement has a revolving credit facility of $23 and f) 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 pay- ments due through 2010 and up to US$20 of revolving credit loans. Loans under the agreement bear interest at LIBOR plus a a term loan of $14. Borrowings under the credit agreement are due margin and are secured by the assets of CDI. At December 31, in April 2008. Both the revolving credit facility and term loan bear 2006, US$66 and nil (2005 – US$69 and nil) were outstanding interest at short-term borrowing rates plus a margin. The out- under the term loan and revolving loans, respectively. standing borrowings at December 31, 2006 on the revolving credit CDI has entered into an interest rate swap agreement facility and term loan were $22 and $14 (2005 – $17 and $15), that effectively ﬁxes the interest rate on US$50 of borrowings respectively. The weighted average interest rate for borrowings under the credit agreement. The interest rate swap agreement under the credit agreement was 8.5% in 2006 (2005 – 7.0%). Bor- expires in 2008. rowings under the credit agreement are collateralized by substan- tially all of the assets of Radian. In October 2003, Radian issued $15 in subordinated secured convertible debentures to Onex. The debentures are con- vertible at any time at the option of the holder or at Radian’s option, under certain circumstances, into Class A multiple voting shares of Radian. The debentures accrue interest at a rate of 7.0% per annum and mature in 2008. Onex Corporation December 31, 2006 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 11. 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 ( c o n t ’d ) g) 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, 2006, US$226 and nil (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. h) 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. In November 2006, Spirit AeroSystems used a portion of the proceeds from its initial public offering to permanently repay US$100 of the senior secured term loan and amended its credit agreement. The signiﬁcant components of the amendment were to extend the maturity of the senior secured term loan from 2011 to 2013, increase the amount available under the senior revolving credit facility to US$400 from US$175 and reduce the applicable interest rate margins by 0.5%. At December 31, 2006, US$590 and nil (2005 – US$697 and nil) were outstanding under the term loan and revolving facility, respectively. The senior secured term loan requires quarterly prin- i) 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 redeem- able at the option of the company at various premiums above face value beginning in 2009. At December 31, 2006, US$199 (2005 – $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 2012, with annual principal instalments of 1% of the balance. Outstanding amounts on the revolving loan are due in 2010. Both the term loan and the revolving loan bear interest at the prime rate or LIBOR, plus a margin. At December 31, 2006, US$256 and US$9 (2005 – US$259 and nil) were outstanding under the term loan and revolving loan, respectively. The ﬁrst lien credit agree- ment is secured by the real property of Skilled Healthcare. In compliance with its lien agreement, Skilled Health- care has entered into an interest rate cap agreement. The agree- ment has a principal amount of US$148, a cap rate of 6.0% and expires in 2008. j) The Warranty Group In November 2006, TWG entered into a US$225 credit agreement consisting of a US$200 term loan and up to US$25 of revolving credit loans and swing line loans. The amounts outstanding on the credit agreement bear interest at LIBOR plus a margin based on TWG’s credit rating. The term loan requires annual payments of US$2, with the balance due in 2012. Revolving and swing loans, if outstanding, are due in 2012. At December 31, 2006, US$200 and nil were outstanding on the term loan and the revolving and swing loans, respectively. The debt is subject to various terms and conditions, including TWG maintaining a minimum credit rating and certain ﬁnancial ratios relating to minimum capitalization levels. cipal instalments of US$1, with the balance due in four equal quarterly instalments of US$139 beginning on December 31, 2012. k) ONCAP II companies ONCAP II’s investee companies consist of Environmental and CSI. The revolving facility requires the principal to be repaid at matu- Each has debt that is included in Onex’ audited annual consoli- rity in June 2010. dated ﬁnancial statements. There are separate arrangements for The borrowings under the agreement bear interest each of the investee companies with no cross-guarantees between based on LIBOR or a base rate plus an interest rate margin of up the companies or by Onex. to 2.75%, payable quarterly. In connection with the term loan, Under the terms of the credit agreements, combined term Spirit AeroSystems entered into interest rate swap agreements on borrowings of $57 are outstanding and combined revolving credit US$500 of the term loan. The agreements, which mature in two to facilities of $16 are undrawn and available. The available facilities four years, swap the ﬂoating interest rate with a ﬁxed interest rate bear interest at various rates based on a base ﬂoating rate plus a that ranges between 4.2% and 4.4%. margin. During 2006, interest rates ranged from 6.5% to 7.5% on Substantially all of Spirit AeroSystems’ assets are borrowings under the revolving credit and term facilities. The term pledged as collateral under the credit agreement. loans have quarterly repayments and mature in 2011. The compa- nies also have subordinated notes of $21, due in 2012, that bear interest at 15%, of which the Company owns approximately $18. 80 Onex Corporation December 31, 2006 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 l) Onex Real Estate Partners companies Long-term debt held by Onex Real Estate Partners companies consists of long-term debt of US$62 due in 2008 relating to the seven Town and Country properties that are considered contin- uing operations, as described in note 3, and long-term debt of US$6 relating to other Onex Real Estate Partners investments. The annual minimum repayment requirements for the next ﬁve years on consolidated long-term debt are as follows: 2007 2008 2009 2010 2011 Thereafter $ 43 114 367 203 366 2,748 $ 3,841 12 . L E A S E C O M M I T M E N T S The future minimum lease payments are as follows: 13 . 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) Boeing advance(b) Deferred revenue and other deferred items Convertible debentures Pension and non-pension post-retirement benefits (note 24) Stock-based compensation Other(c) 2006 2005 $ 207 685 349 100 137 211 129 $ 210 233 120 98 199 53 131 $ 1,818 $ 1,044 a) Reserves consist primarily of US$150 (2005 – US$144) estab- lished by EMSC for automobile, workers compensation, general liability and professional liability. This includes the use of an off- shore captive insurance program. b) Pursuant to the 787 aircraft long-term supply agreement, Boeing will make advance payments to Spirit AeroSystems. As at For the year: 2007 2008 2009 2010 2011 Thereafter Capital Leases Operating Leases December 31, 2006, US$600 (2005 – US$200) in such advance pay- ments had been made and will be settled against future sales of $ 42 26 14 7 5 40 $ 250 215 185 171 149 1,105 Spirit AeroSystems’ 787 aircraft units to Boeing. US$13 of the pay- ments have been recorded as a current liability. c) Other includes the long-term portion of acquisition and restructuring accruals as well as amounts for anticipated liabili- ties arising from indemniﬁcations. Total future minimum lease payments $ 134 $ 2,075 Less: imputed interest Balance of obligations under capital leases, without recourse to Onex Less: current portion Long-term obligations under capital (29) 105 (35) leases, without recourse to Onex $ 70 Substantially all of the lease commitments relate to the operating companies. Operating leases primarily relate to leased premises. Onex Corporation December 31, 2006 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 14 . 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 provision at statutory rates Increase (decrease) related to: Decrease (increase) in valuation allowance Amortization of non-deductible items Income tax rate differential of operating investments Non-taxable gains Other, including permanent differences Provision for income taxes Classified as: Current Future Provision for income taxes 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 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 Deferred revenue Other Less: valuation allowance(1) 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 Future income tax liabilities, net Classified as: Current asset Long-term asset Current liability Long-term liability Future income tax liabilities, net 2006 $ (401) (49) (5) 56 409 (34) 2005 $ (318) 86 (1) 77 184 (98) $ (24) $ (70) $ 48 (72) $ (24) $ $ (79) 9 (70) 2006 2005 $ 939 $ 975 1 311 135 2 172 (27) 166 85 (1,101) 683 (267) (14) (678) (101) (1,060) $ (377) $ 224 459 (10) (1,050) $ (377) – 123 82 4 45 – – 31 (983) 277 (51) (19) (639) (22) (731) $ (454) $ 43 234 – (731) $ (454) (1) Future tax assets are recorded based on their expected future tax value. The valuation allowance claimed against the future tax assets primarily relates to non-capital losses of Celestica, Cineplex Entertainment and parent company. A valuation allowance on non-capital losses is recorded where it is more likely than not that the non-capital losses will expire prior to utilization. 82 Onex Corporation December 31, 2006 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 At December 31, 2006, Onex and its investment-holding compa- nies have tax-loss carryforwards of $391 available to reduce future b) During 2006, under the Dividend Reinvestment Plan, the Com- pany issued 4,404 (2005 – 2,865) Subordinate Voting Shares at a income taxes to the year 2026. total value of less than $1 (2005 – less than $1). In 2006, 20,000 At December 31, 2006, certain operating companies in Subordinate Voting Shares were issued upon the exercise of stock Canada and the United States had tax-loss carryforwards available options at a value of less than $1. In 2005, no Subordinate Voting to reduce future income taxes of those companies in the amount Shares were issued upon the exercise of stock options. of $2,955, of which $696 had no expiry, $874 were available to Onex renewed its Normal Course Issuer Bid in April reduce future taxes between 2007 and 2011, inclusive, and $1,385 2006 for one year, permitting the Company to purchase on the were available with expiration dates of 2012 through 2026. Toronto Stock Exchange up to 10% of the public ﬂoat of its Sub- Cash taxes recovered during the year amounted to $53 ordinate Voting Shares. The 10% limit represents approximately (2005 – cash taxes paid of $114). 10.5 million shares. 15 . 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. 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 The Company repurchased and cancelled under Normal Course Issuer Bids 9,176,300 (2005 – 939,200) of its Subor- dinate Voting Shares at a cash cost of $203 during 2006 (2005 – $18). The excess of the purchase cost of these shares over the average paid-in amount was $166 (2005 – $14), which was charged to retained earnings. After these purchases, at December 31, 2006, the Company had the capacity under the current Normal Course Issuer Bid to purchase approximately 3.4 million shares. c) At December 31, 2006, the issued and outstanding share capital consisted of 100,000 (2005 – 100,000) Multiple Voting Shares, 128,927,135 (2005 – 138,079,031) Subordinate Voting Shares and 176,078 (2005 – 176,078) Series 1 Senior Preferred Shares. The Series 1 Senior Preferred Shares have no paid-in amount reﬂected in these audited annual 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, 2006, there were 177,134 (2005 – 116,301) units outstanding, for which $2 (2005 – $1) has been recorded as compensation expense. Details of DSUs outstanding are as follows: Shares or related events), the Multiple Voting Shares will there- Outstanding at December 31, 2004 upon be entitled to elect only 20% of the Directors and otherwise Granted 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. Additional units issued in lieu of directors’ fees and cash dividends Redeemed Outstanding at December 31, 2005 iii) An unlimited number of Senior and Junior Preferred Shares Granted issuable in series. The Directors are empowered to ﬁx the rights to Additional units issued in lieu of directors’ fees be attached to each series. There is no consolidated paid-in value for these shares. and cash dividends Redeemed Outstanding at December 31, 2006 Number of DSUs 40,000 45,000 31,301 – 116,301 40,000 24,833 (4,000) 177,134 Onex Corporation December 31, 2006 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 15 . S H A R E C A P I TA L ( c o n t ’d ) Details of options outstanding are as follows: 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 Outstanding at December 31, 2004 13,961,700 $ 15.71 Number of Options Weighted Average Exercise Price the acquisition of Subordinate Voting Shares of the Company at a Granted price not less than the market value of the shares on the business Exercised or surrendered day preceding the day of the grant. Under the Plan, no options or Expired – (110,600) (416,500) share appreciation rights may be exercised unless the average Outstanding at December 31, 2005 13,434,600 market price of the Subordinate Voting Shares for the ﬁve prior Granted business days exceeds the exercise price of the options or the Exercised or surrendered share appreciation rights by at least 25% (the “hurdle price”). Expired 435,000 (758,000) (16,500) – $ 8.10 $ 18.19 $ 15.69 $ 26.01 $ 8.80 $ 20.02 At December 31, 2006, 15,612,000 (2005 – 15,632,000) Subordinate Voting Shares were reserved for issuance under the Plan, against which options representing 13,095,100 (2005 – 13,434,600) 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. Outstanding at December 31, 2006 13,095,100 $ 16.43 During 2006, the total cash consideration paid on options surren- dered was $14 (2005 – $1). 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 All options vest at a rate of 20% per year from the date of under the Plan. grant. When an option is exercised, the employee has the right to request that the Company repurchase the option for an amount equal to the difference between the fair value of the stock under the option and its exercise price. Upon receipt of such request, the Company has the right to settle its obligation to the employee by the payment of cash, the issuance of shares or a combination of cash and shares. Options outstanding at December 31, 2006 consisted of the following: Number of Options Outstanding Exercise Price Number of Options Exercisable Hurdle Price Remaining Life (years) 329,000 694,000 610,000 628,400 625,000 7,260,000 2,513,700 140,000 295,000 13,095,100 $ $ 7.30 8.62 $ 20.23 $ 20.50 $ 14.90 $ 15.87 $ 18.18 $ 19.25 $ 29.22 329,000 694,000 610,000 500,200 375,000 2,904,000 997,500 – – 6,409,700 $ 9.13 $ 10.78 $ 25.29 $ 25.63 $ 18.63 $ 19.84 $ 22.73 $ 24.07 $ 36.53 1.1 1.3 3.0 5.5 6.1 7.2 7.9 9.1 9.9 84 Onex Corporation December 31, 2006 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 . 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 18 . G A I N S O N S A L E S O F O P E R AT I N G Year ended December 31 2006 2005 Interest on long-term debt of operating companies Interest on obligations under capital leases of operating companies Other interest of operating companies I N V E S T M E N T S , N E T During 2006 and 2005, Onex completed a number of transactions by selling all or a portion of its ownership interests in certain $ 317 $ 210 companies. The major transactions and the resulting pre-tax gains are summarized and described as follows: 8 14 4 9 Year ended December 31 2006 2005 Interest expense of operating companies $ 339 $ 223 Gains on: Sale of shares of Spirit AeroSystems(a) $ 1,146 $ Cash interest paid during the year amounted to $319 (2005 – $221). 17. S T O C K - B A S E D C O M P E N S AT I O N Year ended December 31 Spirit AeroSystems(a) Celestica Other(b) $ 2006 438 23 173 $ 634 2005 11 28 5 44 $ $ a) In 2006, Spirit AeroSystems recorded stock-based compensa- tion charges, primarily relating to its November 2006 initial public offering. Included in the expense is a $343 charge relating to the Union Equity Plan. Of this amount, $196 was paid in cash at the time of the offering, with the remaining to be settled in shares in March 2007. b) Other includes $113 relating to Onex’ stock option plan, as described in note 15(e), and $49 from MIP units relating to the November 2006 Spirit AeroSystems initial public offering. The amount related to the Onex stock option plan is primarily due to the 50% increase in the market price of Onex shares during 2006. Dilution gain on issue of shares by Spirit AeroSystems(b) Sale of units of Cineplex Entertainment(c) Dilution gain on June 2006 issue of units by Cineplex Entertainment(d) Close of exchangeable debentures on Celestica shares(e) Close of forward sales agreements on Celestica shares(f) Sale of CGG convertible bonds(g) Dilution gain on July 2005 issue of units by Cineplex Entertainment(h) Issue of shares by EMSC(i) Other, net(j) 100 25 12 – – – – – 24 – – – – 560 191 41 53 40 36 $ 1,307 $ 921 a) In November 2006, Spirit AeroSystems completed an initial public offering of common stock. As part of the offering, Onex, Onex Partners I and certain limited partners sold 48.3 million shares, of which Onex’ share was 13.9 million shares. Net proceeds of $1,351 were received by Onex, Onex Partners I and certain lim- ited partners, resulting in a pre-tax gain of $1,146. Onex’ share of the net proceeds and pre-tax gain was $390 and $314, respectively. Onex recorded a tax provision of $55 on the gain. Amounts paid on account of these transactions related to the MIP totalled $19 and have been deducted from the gain. Addi- tional amounts received on account of the transactions related to the carried interest totalled $123, of which Onex’ portion was $49 and management’s portion was $74. As described in note 23(d), Onex’ portion of the carried interest is deferred from inclu- sion in income. b) In November 2006, as part of Spirit AeroSystems’ initial public offering, Spirit AeroSystems issued 10.4 million new common shares. As a result of the dilution of the Company’s ownership interest in Spirit AeroSystems from the issuance, a non-cash dilu- tion gain of $100 was recorded, of which Onex’ share was $29. This reﬂects Onex’ share of the increase in book value of the net assets of Spirit AeroSystems due to the issue of additional shares. Onex Corporation December 31, 2006 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 18 . G A I N S O N S A L E S O F O P E R AT I N G I N V E S T M E N T S , N E T ( c o n t ’d ) As a result of the dilutive transaction above and Onex’ sale of shares as described in note 18(a), Onex’ economic ownership in Spirit AeroSystems was reduced from 29% to 14% and Onex’ voting interest was reduced from 100% to 90%. Onex continues to control and consolidate Spirit AeroSystems after these transactions. c) In June 2006, Onex sold 3.2 million units of Cineplex Enter- tainment as part of a secondary offering. In conjunction with the sale of units, Onex entered into a forward contract to purchase 1.4 million units in or after January 2007 at a price computed with reference to the secondary offering. Onex received net proceeds from these transactions of $28 and recorded a pre-tax gain of $25. Amounts accrued on account of these transactions related to the MIP (as described in note 23(f )) totalled $2 and have been deducted from the gain. d) In June 2006, Cineplex Entertainment issued 2.0 million units from treasury and used the proceeds to indirectly repay indebted- ness under its development facility of its senior secured revolving credit facility. As a result of the dilution of the Company’s ownership interest in Cineplex Entertainment from the treasury issue, a non- cash dilution gain of $12 was recorded, of which Onex’ share was $6. This reﬂects Onex’ share of the increase in book value of the net assets of Cineplex Entertainment due to the issue of additional units. As a result of the dilutive transaction above, and Onex’ sale of units as described in note 18(c), Onex’ economic owner- ship was reduced from 27% to 22%. Onex continues to control and consolidate Cineplex Entertainment. e) In February 2005, the Company redeemed all of the out- standing exchangeable debentures and satisﬁed the debenture obligation through the delivery of approximately 9.2 million Celestica subordinate voting shares. In connection with the deliv- ery, the Company converted the approximately 9.2 million Celes- tica multiple voting shares it held into Celestica subordinate voting shares. As a result of the redemption, the Company’s equity ownership in Celestica was reduced; however, the Company con- tinued to have voting control of Celestica. The cash for these exchangeable debentures was received by the Company when it originally entered into these arrangements in 2000. 86 Onex Corporation December 31, 2006 f) In June 2005, the Company settled all of its outstanding forward sales agreements through the delivery of approximately 1.8 million 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 continued to have voting control of Celestica. The forward sales agreements were originally entered into in 2000 and 2001. g) During 2005, through three separate transactions, Onex and Onex Partners sold their investment in bonds of Compagnie Générale de Géophysique (“CGG”) for proceeds of $145, of which Onex’ share was $34. The total pre-tax gain on the sales was $41, of which Onex’ share was $9. Amounts paid on account of these transactions related to the MIP, as described in note 23(f ), totalled $1 and have been deducted from the gain. Amounts related to the carried interest, as described in note 23(d), totalled $4, of which Onex’ portion was deferred. h) In July 2005, in connection with Cineplex Entertainment’s acqui- sition of Famous Players, Cineplex Entertainment issued additional units to provide a portion of the ﬁnancing. Onex’ ownership inter- est was diluted from 31% to 27% as a result of the issuance of addi- tional 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 additional units. Onex did not sell or purchase any additional units in the unit offering. i) In December 2005, EMSC completed a US$113 initial pub- lic offering of common stock. The offering resulted in EMSC receiving net proceeds of approximately US$102, which were used to reduce outstanding indebtedness and for general corpo- rate purposes. Onex did not receive any proceeds from the trans- action. As a result of the offering, Onex’ economic ownership in EMSC decreased from 36% to 29%. As part of the transaction, Onex converted its shares held into Multiple Voting Shares and its voting interest decreased from 100% to 97%. As a result of the dilution of the Company’s economic inter- est, a non-cash dilution gain of $40 was recorded, of which 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. j) Included in “Other” is a gain of $12 (2005 – $32) from the inter- est in Ripplewood, a U.S.-based acquisition fund. 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 19. 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 Acquisition, restructuring and other expenses are typically to pro- O T H E R E X P E N S E S Year ended December 31 2006 2005 Celestica(1) Spirit AeroSystems ClientLogic Other $ 240 $ 31 3 18 193 42 9 8 vide for the costs of facility consolidations, workforce reductions and transition costs incurred at the operating companies. 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 regarding the nature, timing and amounts associated with the planned restructuring activities, including estimating sublease (1) Included in 2006 acquisition, restructuring and other expenses for Celestica is a loss of $37 relating to the sale of its plastics business and a loss of $69 relating to the sale of one of its production facilities in Europe. At the end of each reporting period, the operating companies evaluate the appropriateness of the remaining accrued balances. $ 292 $ 252 income and the net recovery from equipment to be disposed of. The tables below provide a summary of acquisition, restructuring and other 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 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, 2006 Reconciliation of accrued liability Closing balance – December 31, 2005 $ Cash payments Charges Closing balance – December 31, 2006 $ (a) Includes Celestica $1,017 and ClientLogic $7. 449 449 – 14 (13) – 1 $ $ $ 166 166 4 43 (12) 4 35 $ $ $ 39 39 – 4 (1) – 3 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, 2006 307 275 131 Reconciliation of accrued liability Closing balance – December 31, 2005 $ 51 Cash payments Charges Other adjustments Closing balance – December 31, 2006 $ (122) 131 2 62 (a) (b) Includes Celestica $391 and Spirit AeroSystems $74. Includes Celestica $357 and Spirit AeroSystems $70. $ $ 24 23 7 16 (8) 7 – $ $ 92 87 37 14 (42) 37 (1) $ 15 $ 8 Non-cash Charge $ 373 373 – Non-cash Charge $ 62 61 54 Total $ 1,027(a) 1,027(a) $ $ $ 4 61 (26) 4 39 Total 485(a) 446(b) 229 $ 81 (172) 175 1 85 $ Onex Corporation December 31, 2006 87 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S 19. 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 2006 Total estimated expected costs Cumulative costs expensed to date Expense for the year ended December 31, 2006 Reconciliation of accrued liability Cash payments Charges Other adjustments Closing balance – December 31, 2006 Employee Termination Costs Lease and Other Contractual Obligations Facility Exit Cost and Other $ $ $ 10 10 10 (3) 10 1 8 $ $ $ – – – – – – – $ $ $ 14 12 12 (12) 12 1 1 (a) (b) Includes Celestica $38 and Spirit AeroSystems $3. Includes Celestica $38 and Spirit AeroSystems $2. 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, 2006 766 734 141 Reconciliation of accrued liability Closing balance – December 31, 2005 $ 65 Cash payments Charges Other adjustments Closing balance – December 31, 2006 $ (138) 141 3 71 $ $ $ 190 189 11 59 (20) 11 – 50 $ $ $ 145 138 49 18 (55) 49 – 12 Non-cash Charge $ 37 37 37 Non-cash Charge $ 472 471 91 2 0 . 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 2006 133 133 Total 61(a) 59(b) 59 (15) 22 2 9 $ $ $ Total $ 1,573 1,532 292 $ 142 (213) 201 3 $ 133 2005 139 139 88 Onex Corporation December 31, 2006 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. F I N A N C I A L I N S T R U M E N T S Fair values of ﬁnancial instruments The estimated fair values of ﬁnancial instruments as at December 31, 2006 and 2005 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 2006 2005 Financial liabilities: Long-term debt (i) Foreign currency contracts Interest rate swap agreements Carrying Amount $ 3,841 $ $ 4 – Fair Value/ (Unwind Costs) Carrying Amount Fair Value/ (Unwind Costs) $ 3,889 $ $ 3 (14) $ 3,654 $ $ – – $ 3,665 $ $ (8) 13 (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. 2 2 . S I G N I F I C A N T C U S T O 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. As at December 31 CDI CEI Celestica ClientLogic EMSC Radian Skilled Healthcare Spirit AeroSystems 2006 Number of Significant Customers Percentage of Revenues 2005 Number of Significant Customers Percentage of Revenues 1 3 2 1 1 1 2 1 12% 48% 20% 15% 26% 11% 68% 91% 1 3 2 1 1 1 – 1 12% 49% 26% 22% 26% 10% – 99% Accounts receivable from the above signiﬁcant customers at December 31, 2006 totalled $758 (2005 – $672). Onex Corporation December 31, 2006 89 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S 2 3 . 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 The Company and its operating companies also have R E L AT E D PA R T Y T R A N S A C T I O N S insurance to cover costs incurred for certain environmental mat- 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, 2006, the amounts potentially payable in respect of these guarantees totalled $459. Certain operating companies have guarantees with respect to employee share purchase loans that amounted to less than $1 at ters. Although the effect on operating results and liquidity, if any, cannot be reasonably estimated, management of Onex and the operating companies believe, based on current information, that these environmental matters should not have a material adverse effect on the Company’s consolidated ﬁnancial condition. d) In February 2004, Onex completed the closing of Onex Partners I with funding commitments totalling approximately US$1,655. December 31, 2006. These guarantees are without recourse to Onex. Onex Partners I is to provide committed capital for future Onex- The Company, which includes the operating companies, sponsored acquisitions not related to Onex’ operating companies has commitments in the total amount of approximately $1,384 in at December 31, 2003 or to ONCAP. As at December 31, 2006, respect of corporate investments, including amounts as described approximately US$1,342 has been invested of the total approxi- in note 26. mately US$1,655 of capital committed. Onex has funded US$315 The Company and its operating companies have also of its US$400 commitment. Onex controls the General Partner provided certain indemniﬁcations, including those related to and Manager of Onex Partners I. Onex management has commit- businesses that have been sold. The maximum amounts from ted, as a group, to invest a minimum of 1% of Onex Partners I, many of these indemniﬁcations cannot be reasonably estimated which may be adjusted annually up to a maximum of 4%. The at this time. However, in certain circumstances, the Company and total amount invested in Onex Partners I by Onex management its operating companies have recourse against other parties to and directors in 2006 was $11 (2005 – $30). Due to the establish- mitigate the risk of loss from these indemniﬁcations. ment of Onex Partners II, the unfunded commitment of Onex The Company and its operating companies have com- Partners I can only be used for add-on acquisitions to their cur- mitments in respect of real estate operating leases, which are rent investments. disclosed in note 12. The aggregate capital commitments as at Onex received annual management fees based upon 2% December 31, 2006 amounted to $181. b) The Company and its operating companies may become parties to legal claims, product liability and warranty claims arising from 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 companies. The operating companies have recorded lia- bility provisions 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 circumstances 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 lia- bility inherent in activities relating to their past and present oper- ations. As conditions of acquisition agreements, certain operating companies have agreed to accept certain pre-acquisition liability claims on the acquired companies after obtaining indemniﬁca- tion from prior owners. of the capital committed to Onex Partners I by investors other than Onex and Onex management. The annual management fee was reduced to 1% of the net funded commitment at the end of the initial fee period in November 2006, when Onex established a successor fund, Onex Partners II. A carried interest is received on the overall gains achieved by Onex Partners I investors other than Onex to the extent of 20% of the gains, provided that Onex Partners I investors have achieved a minimum 8% return on their investment in Onex Partners I over the life of Onex Partners I. The investment by Onex Partners I investors for this purpose takes into consideration management fees and other amounts paid in by Onex Partners I investors. The returns to Onex Partners I investors other than Onex and Onex management are based upon all investments made through Onex Partners I, with the result that initial carried interests achieved by Onex on gains could be recovered from Onex if subse- quent Onex Partners I investments do not exceed the overall target return level of 8%. Consistent with market practice, Onex, as spon- sor of Onex Partners I, is allocated 40% of the carried interest with 60% allocated to management. Onex defers all gains associated with the carried interest to such time when there will be no potential for repayment. For the year ended December 31, 2006, $49 (2005 – $11) has been received by Onex as carried interest and deferred while management received $74 (2005 – $17) with respect to the carried interest. At December 31, 2006, the total amount of carried interest that has been deferred from income was $60 (2005 – $11). 90 Onex Corporation December 31, 2006 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 August 2006, Onex completed the closing of Onex Partners II with funding commitments totalling approximately US$3,450. Onex Partners II is to provide committed capital for future Onex- sponsored acquisitions not related to Onex’ operating companies Partners transactions are allocated to meet the 1.5% Onex invest- ment requirement under the MIP. The investment rights to acquire the remaining 5⁄6ths vest equally over four years. If the Company disposes of 90% or more of an investment before the ﬁfth year, the at December 31, 2003 or to ONCAP or Onex Partners I. As at investment rights vest in full. The investment rights related to a December 31, 2006, approximately US$248 has been invested of particular acquisition are exercisable only if the Company earns the total approximately US$3,450 of capital committed. Onex has a minimum 15% per annum compound rate of return for that funded US$98 of its US$1,407 commitment. Onex controls the acquisition after giving effect to the investment rights. General Partner and Manager of Onex Partners II. Onex manage- Under the terms of the MIP, the total amount paid by ment has committed, as a group, to invest a minimum of 1% of management members for the interest in the investments in 2006 Onex Partners II, which may be adjusted annually up to a maxi- was $2 (2005 – $4). Investment rights exercisable at the same price mum of 4%. As at December 31, 2006, management and directors for 7.5% (2005 – 7.5%) of the Company’s interest in acquisitions had committed 4%. The total amount invested in Onex Partners II were issued at the same time. Realizations under the MIP including investments by Onex management and directors in 2006 was $11. the value of units distributed were $28 in 2006 (2005 – $11). Onex receives annual management fees based upon 2% of the capital committed to Onex Partners II by investors other than Onex and Onex management. The annual management fee is reduced to 1% of the net funded commitment at the earlier of the end of the commitment period, when the funds are fully invested, or if Onex establishes a successor fund. A carried inter- est is received on the overall gains achieved by Onex Partners II investors other than Onex to the extent of 20% of the gains, pro- vided that Onex Partners II investors have achieved a minimum 8% return on their investment in Onex Partners II over the life of Onex Partners II. The investment by Onex Partners II investors for this purpose takes into consideration management fees and other amounts paid in by Onex Partners II investors. The returns to Onex Partners II investors other than Onex and Onex management are based upon all investments made through Onex Partners II, with the result that initial carried inter- g) Members of management and the Board of Directors of the Company invested $13 in 2006 (2005 – $21) in Onex’ acquisitions at the same cost as Onex and other outside investors. Those investments by management and the Board are subject to voting control by Onex. h) Each member of Onex management is required to reinvest 25% of the proceeds received related to their share of the MIP and car- ried interest to acquire Onex shares in the market until the man- agement member owns one million Onex shares. During 2006, Onex management reinvested $15 million to acquire Onex shares. i) 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, 2006 ests achieved by Onex on gains could be recovered from Onex if was $11 (2005 – $12). subsequent Onex Partners II investments do not exceed the overall target return level of 8%. Consistent with market practice and Onex Partners I, Onex, as sponsor of Onex Partners II, will be allocated j) Onex and its operating companies are subject to tax audits by local taxing authorities. In connection with ongoing tax audits 40% of the carried interest with 60% allocated to management. relating to Celestica, taxing authorities have asserted that Onex defers all gains associated with the carried interest until such Celestica’s United States subsidiaries owe a signiﬁcant amount of time as there is no potential for repayment. As at December 31, tax, interest and penalties arising from inter-company transac- 2006, no amount has been received as carried interest. tions all within Celestica’s various operations. A signiﬁcant por- f) Under the terms of the MIP approved in June 1996, manage- ment members of the Company invest in all of the operating enti- ties acquired by the Company. The aggregate investment by management members under the MIP is limited to 9% of Onex’ interest in each acquisition. The form of the investment is a cash purchase for 1⁄6 th (1.5%) of the MIP’s share of the aggregate investment and investment rights for the remaining 5⁄6ths (7.5%) of the MIP’s share at the same price. Amounts invested under the 1% investment requirement in Onex tion of these asserted deﬁciencies were resolved in favour of Celestica in the fourth quarter of 2006. Celestica’s management has evaluated the assessment and believes it has substantial defences to the remaining asserted deﬁciencies and has ade- quately accrued for any likely potential losses. However, there can be no assurance as to the ﬁnal resolution of these asserted deﬁ- ciencies 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, 2006 91 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S 2 4 . 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 2006 for deﬁned contribution pension plans were $89 (2005 – $56). Accrued beneﬁt obligations and the fair value of the plan assets for accounting purposes are measured 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 January 2006, and the next required valuation will be as of January 2007 and December 2008. In 2006, total cash payments for employee future bene- ﬁts, consisting of cash contributed by the operating companies to their funded pension plans, cash payments directly to beneﬁcia- ries for their unfunded other beneﬁt plans and cash contributed to their deﬁned contribution plans, were $122 (2005 – $65). Included in the total was $18 (2005 – $4) contributed to a multi- employer deﬁned beneﬁt plan. 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 Plan amendments Settlements/curtailments 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 Reclassification of plans Other Pension Plans in which Assets Exceed Accumulated Benefits Pension Plans in which Accumulated Benefits Exceed Assets Non-Pension Post-Retirement Benefits 2006 2005 2006 2005 2006 2005 $ 160 $ 131 $ 976 $ 291 $ 135 $ 3 46 – (13) 38 4 15 – 2 651 4 2 8 – (11) 21 1 1 – – 7 – 11 17 1 (15) 15 43 22 1 (2) (651) – 7 36 1 (17) (29) (39) 734 – (1) (7) – 7 6 – (7) (2) 1 2 – (24) – 2 92 10 5 1 (10) 16 (4) 38 (13) – – – $ 910 $ 160 $ 418 $ 976 $ 120 $ 135 $ 169 $ 147 $ 885 $ 203 $ 125 10 – (13) 5 208 659 3 17 5 – (11) 2 1 8 – 21 31 1 (15) 31 – (659) (1) 67 18 1 (17) (32) 653 (8) – – – 7 – $ – – 9 1 (7) (10) – – – – – – – – – – $ Closing plan assets $ 1,166 $ 169 $ 294 $ 885 $ 92 Onex Corporation December 31, 2006 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 2006 59% 34% 3% 4% 100% 2005 58% 40% – 2% 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, excluding discontinued operations, was as follows: As at December 31 Deferred benefit amount: Plan assets, at fair value Accrued benefit obligation Plan surplus (deficit): Unrecognized transitional obligation and past service costs Unrecognized actuarial net (gain) loss Reclassification of plans Pension Plans in which Assets Exceed Accumulated Benefits Pension Plans in which Accumulated Benefits Exceed Assets Non-Pension Post-Retirement Benefits 2006 2005 2006 2005 2006 2005 $1,166 (910) $ 169 $ 294 (160) (418) $ 885 (976) $ – (120) $ – (135) $ 256 $ (5) (32) 22 9 – 45 11 $ (124) $ (91) $ (120) $ (135) 1 110 (22) (6) 25 (11) (11) 29 – (12) 31 – Deferred benefit amount – asset (liability) $ 241 $ 65 $ (35) $ (83) $ (102) $ (116) The deferred beneﬁt asset is included in the Company’s audited annual consolidated balance sheets under “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: Pension Plans in which Assets Exceed Accumulated Benefits Pension Plans in which Accumulated Benefits Exceed Assets Non-Pension Post-Retirement Benefits 2006 2005 2006 2005 2006 2005 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 (gain) loss recognized for period and actual actuarial (gain) loss on the accrued benefit $ 3 46 (124) 45 38 $ $ 2 8 (17) 7 21 obligation for period (35) (19) Plan amendments (curtailment/settlement (gain) loss) Difference between amortization of past service costs for period and actual plan amendments for period Settlement benefits Other Net periodic costs 1 – – – $ (26) $ – – – – 2 $ 11 17 (21) 6 15 (9) 1 (1) – 1 7 36 (67) 25 (29) 35 (1) – 2 – 8 $ 7 6 – – (2) 3 1 (1) – 1 $ 10 5 – – 16 (19) – – – – $ 15 $ 12 $ 20 $ Onex Corporation December 31, 2006 93 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S 2 4 . 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 Accrued benefit obligation Weighted average discount rate 4.47%–5.75% 4.23%–6.00% 5.25%–5.60% 5.30%–5.75% 2006 2005 2006 2005 Weighted average rate of compensation increase Benefit cost Weighted average discount rate Weighted average expected long-term 0.00%–4.00% 0.00%–4.80% 0.00%–3.58% 0.00%–3.50% 4.47%–6.00% 4.23%–5.75% 5.25%–5.75% 5.25%–6.10% rate of return on plan assets 5.00%–8.25% 5.00%–9.25% n/a n/a Weighted average rate of compensation increase 0.00%–4.00% 0.00%–4.80% 0.00%–3.50% 0.00%–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 2006 2005 3.50%–14.00% 3.50%–5.00% 9.30%–10.00% 4.50%–5.00% Between 2007 and 2015 Between 2010 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 2006 $ $ 2 17 1% Increase 2005 $ $ 2 17 2006 $ (1) $ (14) 1% Decrease 2005 $ (1) $ (14) 2 5 . VA R I A B L E I N T E R E S T E N T I T I E S 2 6 . S U B S E Q U E N T E V E N T S In 2006, the Company formed three real estate partnerships with Onex and certain operating companies have entered into agree- an unrelated third party. These partnerships were formed to devel- ments to acquire or make investments in other businesses. These op residential units on property in the United States. The partner- transactions are subject to a number of conditions, many of which ships are considered variable interest entities under Accounting are beyond the control of Onex or the operating companies. The Guideline 15 (“AcG-15”). However, the Company is not the primary effect of these planned transactions, in addition to those beneﬁciary of these VIEs and, accordingly, the Company accounts described below, if completed, may be signiﬁcant to the consoli- for its interest in the partnerships using the equity-accounting dated ﬁnancial position of Onex. method. The partnerships have combined assets of $227 as at December 31, 2006. The Company has a maximum exposure to loss of $178, which includes the carrying value of $23. 94 Onex Corporation December 31, 2006 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) In January 2007, the Company completed the acquisition of Tube City IMS Corporation (“TCIMS”), a leading provider of out- e) In January 2007, the Company entered into an agreement to purchase the Health Group division of Eastman Kodak Company sourced services to steel mills. Headquartered in Glassport, (“Kodak”). The Health Group, which will be renamed Carestream Pennsylvania, TCIMS provides raw materials procurement, scrap Health, Inc. (“Carestream Health”), is headquartered in Rochester, and materials management and slag processing services at New York and is a leading provider of medical imaging and 67 steel mills throughout the United States, Canada and Europe. healthcare information technology solutions. The equity invest- The total equity investment of $234, for a 91% equity ownership ment of approximately US$475 will be made through Onex and interest, was made through Onex and Onex Partners II. Onex’ net Onex Partners II. Onex’ share is expected to be US$195. The acqui- investment in the acquisition was $92, for a 36% equity ownership sition agreement provides that if Onex Partners II realizes an interest. Onex has effective voting control of TCIMS through Onex internal rate of return in excess of 25% on its investment, Kodak Partners II. b) In January 2007, ClientLogic completed the acquisition of SITEL Corporation, a global provider of outsourced customer support will receive payment equal to 25% of the excess return up to US$200. The transaction is subject to customary regulatory approvals and closing is anticipated in the ﬁrst half of 2007. services. The total purchase price of the acquisition of US$450 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 was ﬁnanced by ClientLogic, without any additional investment G E O G R A P H I C S E G M E N T by Onex. The new combined entity will operate as SITEL World- wide Corporation. Onex continues to control the combined entity subsequent to the transaction. c) In December 2006, the Company, together with its partners in Airline Partners Australia, entered into an agreement to acquire Onex’ reportable segments operate through autonomous compa- nies and strategic partnerships. Each reportable segment offers different products and services and is managed separately. The Company had seven reportable segments in 2006 (2005 – six): electronics manufacturing services; aerostructures; Qantas Airways Limited (“Qantas”) for a total purchase price of healthcare; ﬁnancial services; theatre exhibition; customer man- approximately $10,200. Qantas is Australia’s largest domestic and agement services; and other. The electronics manufacturing international airline. The Company’s 12.5% economic investment services segment consists of Celestica, which provides manufac- in Airline Partners Australia is expected to be approximately $408 turing services for electronics original equipment manufacturers and will be made through Onex and Onex Partners II. Onex’ share (“OEMs”). The aerostructures segment consists of Spirit Aero- is expected to be approximately $167. The offer is subject to cus- Systems, which manufactures aerostructures. The healthcare seg- tomary conditions, including receipt of required regulatory ment consists of EMSC, a leading provider of ambulance transport approval and acceptance by holders of at least 90% of the out- services and outsourced hospital emergency department physi- standing Qantas shares. d) In December 2006, the Company, together with GS Capital Partners, an afﬁliate of The Goldman Sachs Group, Inc., agreed to acquire Raytheon Aircraft Company (“RAC”), the business avia- tion division of Raytheon Company. RAC, headquartered in Wichita, Kansas, is a leading manufacturer of business jet, turbo- prop and piston aircraft through its Hawker and Beechcraft brands. It is also a signiﬁcant manufacturer of military training aircraft for the U.S. Air Force and Navy, and to a small number of foreign governments. The equity investment of approximately US$1,060 will be split equally between the Company and GS Capital Partners. The Company’s investment will be made through Onex and Onex Partners II. Onex’ investment is expected to be approximately US$205. The transaction is subject to regula- tory approvals and closing is anticipated in the ﬁrst half of 2007. cian stafﬁng and management services in the United States; CDI, which owns and operates diagnostic imaging centres in the United States; and Skilled Healthcare, which operates skilled nursing and assisted living facilities in the United States. The ﬁnancial services segment consists of TWG, which underwrites and administers extended warranties on a variety of consumer goods and also pro- vides consumer credit and other specialty insurance products primarily through automobile dealers. The theatre exhibition segment consists of Cineplex Odeon and Cineplex Entertainment. The customer management services segment consists of Client- Logic, which provides services for telecommunications, consumer goods, retail, technology, transportation, ﬁnance and utility com- panies. Other includes Radian, CEI, Onex Real Estate, ONCAP I, ONCAP II and the parent company. Onex Corporation December 31, 2006 95 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S 2 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 ) 2006 Industry segments Electronics Manufacturing Services Aero- structures Healthcare Financial Services Customer Theatre Management Services Exhibition Other Consolidated Total $ 9,982 $ 3,631 $ 2,920 $ 118 $ 741 $ 749 $ 479 $ 18,620 Revenues Cost of sales Selling, general and administrative expenses (9,378) (291) (2,919) (194) (2,423) (158) Earnings (loss) before the undernoted items 313 518 339 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 Stock-based compensation Gains on sales of operating investments, net (117) (30) (76) 5 – 10 (23) – Acquisition, restructuring and other expenses (240) Writedown of goodwill and intangible assets Writedown of long-lived assets – (2) Earnings (loss) before income taxes, non-controlling interests and (49) (7) (54) 39 – – (438) – (31) – – (93) (23) (113) 5 5 – (3) – (7) (5) – (60) (25) 33 – (11) (1) 11 – – – – – – – (594) (33) 114 (60) (6) (46) 1 – – (1) – – – (1) (453) (212) 84 (31) (1) (30) 2 – 1 1 – (3) – – (334) (174) (29) (20) (13) (19) 68 12 11 (170) 1,307 (11) (5) – (16,161) (1,087) 1,372 (370) (91) (339) 131 17 22 (634) 1,307 (292) (10) (3) discontinued operations $ (160) $ (22) $ 105 $ 32 $ 1 $ 23 $ 1,131 $ 1,110 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 Goodwill (24) (830) 256 746 $ $ 1,002 $ 5,449 $ 3,212 $ 2,887 $ 6,615 $ $ $ $ 874 215 – 984 $ $ $ $ 687 $ 1,177 394 12 7 $ $ $ 111 40 901 $ $ $ $ 233 3 373 380 $ $ $ $ $ 893 350 70 – 186 $ $ $ $ $ 256 $ 3,266 $ 22,578 196 19 – – $ $ $ $ 324 $ 3,841 11 41 $ $ 823 466 238 $ 2,696 (a) Customer Management Services and Other include discontinued operations as described in note 3. (b) Long-term debt includes current portion and excludes capital leases. 96 Onex Corporation December 31, 2006 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 2005 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 Aero- structures Healthcare Customer Theatre Management Services Exhibition $ 10,257 $ 1,436 $ 2,126 $ (9,537) (313) (1,232) (123) (1,808) (111) 407 (146) (34) (68) 24 – 1 (28) – – (193) – (1) (1) 81 (19) (2) (28) 20 – – (11) – – (42) – – – 207 (72) (19) (66) 2 1 – (2) – – (2) (2) – – 491 (392) (28) 71 (41) (3) (25) 3 – – (8) – – – (4) – (4) $ $ 686 (420) (194) 72 (36) (12) (22) 4 – (2) – – – (9) – (2) – Other 455 (343) (144) (32) (19) (11) (14) 91 – (34) 5 4 921 (6) – – – Consolidated Total $ 15,451 (13,732) (913) 806 (333) (81) (223) 144 1 (35) (44) 4 921 (252) (6) (3) (5) interests and discontinued operations $ (39) $ (1) $ 47 $ (11) $ (7) $ 905 $ 894 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 Goodwill (70) 3 827 138 965 $ $ $ $ $ $ $ 5,637 872 185 2 1,005 $ $ $ $ $ 1,966 839 169 – – $ $ $ $ $ 2,753 1,196 82 873 848 $ $ $ $ $ 860 346 33 198 191 $ $ $ $ $ 260 206 18 – 4 $ $ $ $ $ 3,369 $ 14,845 195 8 – 199 $ $ $ $ 3,654 495 1,073 2,247 (a) Theatre Exhibition, Customer Management Services and Other include discontinued operations as described in note 3. (b) Long-term debt includes current portion and excludes capital leases. Onex Corporation December 31, 2006 97 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S 2 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 ) Geographic segments 2006 2005 Canada U.S. Europe Asia Other Total Canada U.S. Europe Asia Other Total Revenue $ 2,010 $ 7,716 $ 1,958 $ 5,208 $ 1,728 $ 18,620 $ 2,051 $ 5,526 $ 2,077 $ 4,760 $ 1,037 $ 15,451 Property, plant and equipment $ 633 $ 1,593 $ 262 $ 316 $ 95 $ 2,899 $ 608 $ 1,277 $ 166 $ 308 $ 23 $ 2,382 Intangible assets $ 118 $ 568 $ 284 $ 37 $ 29 $ 1,036 $ 88 $ 243 $ 5 $ 23 $ – $ 359 Goodwill $ 219 $ 1,361 $ 105 $ 1,003 $ 8 $ 2,696 $ 209 $ 1,084 $ – $ 952 $ 2 $ 2,247 Revenues are attributed to geographic areas based on the locations of manufacturing facilities for the electronics manufacturing services and aerostructures segments; and of operating facilities for the healthcare, ﬁnancial services, customer management services and theatre exhibition segments. Other includes primarily operations in Mexico, Central and South America and Australia. Signiﬁcant customers of operating companies are discussed in note 22. 98 Onex Corporation December 31, 2006 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) 2006 2005 2004 2003 2002 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) $ 18,620 $ 15,451 $ 12,590 $ 10,609 $ 14,207 (16,161) (1,087) $ 1,372 $ (370) (91) (339) 131 17 22 (634) – 1,307 (292) – (10) (3) 1,110 (24) (830) 256 746 (13,732) (11,671) (913) 806 (333) (81) (223) 144 1 (35) (44) 4 921 (252) (6) (3) (5) 894 (70) 3 827 138 $ (643) 276 (294) (63) (81) 101 (8) (130) (55) 29 108 (195) (3) (393) (86) (794) (295) 841 (248) 283 $ (9,669) (672) 268 (317) (84) (56) 80 – (116) 14 – 129 (147) (2) (188) (78) (497) (53) 269 (281) (51) $ (12,689) (749) 769 (408) (168) (52) 68 – 18 142 – 21 (640) (14) (425) – (689) 132 575 18 (163) Net earnings (loss) for the year $ 1,002 $ 965 $ 35 $ (332) $ (145) Total assets Shareholders’ equity Dividends declared per Subordinate Voting Share Earnings (loss) per Subordinate Voting Share: Continuing operations Net earnings (loss) Fully diluted $ 22,578 $ 14,845 $ 11,809 $ 14,621 $ 19,890 $ $ $ $ $ 1,815 0.11 1.93 7.55 7.55 $ $ $ $ $ 1,152 0.11 5.95 6.95 6.95 $ $ $ $ $ 227 0.11 (1.75) 0.25 0.25 $ $ $ $ $ 293 0.11 (1.83) (2.16) (2.16) $ $ $ $ $ 1,044 0.11 0.11 (0.90) (0.90) (a) The earnings from discontinued operations from 2002 to 2003 include the sale of Lantic Sugar/Rogers Sugar and MAGNATRAX. The earnings from discontinued operations from 2002 to 2004 include the sale of Dura Automotive, Loews Cineplex Group and InsLogic. The earnings from discontinued operations from 2002 to 2005 include the sale of Commercial Vehicle Group. The earnings from discontinued operations from 2004 to 2005 include the sale of Magellan. The earnings from discontinued operations from 2002 to 2006 include the disposition of J.L. French Automotive, the discontinued operations of Cineplex Entertainment, the discontinued operations of ClientLogic and the discontinued operations of certain ONCAP companies. The 2006 earnings from discontinued operations also include the 2006 recovery of taxes relating to the 2001 sale of Sky Chefs and the discontinued operations of Town and Country. Previously reported consolidated revenues and earnings figures for the years 2002 to 2005 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 2006 2005 2004 2003 2002 $ 28.35 $ 18.92 $ 19.75 $ 14.69 $ 16.00 Onex Corporation December 31, 2006 99 SHAREHOLDER INFORMATION Shares The Subordinate Voting Shares of the Registrar and Transfer Agent CIBC Mellon Trust Company Company are listed and traded on P.O. Box 7010 The Toronto Stock Exchange. Share symbol OCX Adelaide Street Postal Station Toronto, Ontario M5C 2W9 (416) 643-5500 or call toll-free throughout Duplicate communication Registered holders of Onex Corporation shares may receive more than one copy of shareholder mailings. Every eﬀort is made to avoid duplication, but when shares are registered under diﬀerent names and/or addresses, multiple Dividends Dividends on the Subordinate Voting Shares are payable quarterly on or about January 31, April 30, July 31 and October 31 of each year. At December 31, 2006 the indicated dividend rate for each Subordinate Voting Share was $0.11 per annum. Shareholder Dividend Reinvestment Plan The Dividend Reinvestment Plan provides shareholders of record who are resident in Canada a means to reinvest cash divi- dends in new Subordinate Voting Shares of Onex Corporation at a market-related price and without payment of brokerage commissions. To participate, registered shareholders should contact Onex’ share registrar, CIBC Mellon Trust Company. Non-registered shareholders who wish to participate should contact their invest- ment dealer or broker. Corporate governance policies A presentation of Onex’ corporate governance policies is included in the Management Information Circular that is mailed to all shareholders and is available on Onex’ website. Canada and the United States mailings result. Shareholders who 1-800-387-0825 www.cibcmellon.ca or inquiries@cibcmellon.ca (e-mail) All questions about accounts, stock certiﬁcates or dividend cheques should be directed to the Registrar and Transfer Agent. Investor information Requests for copies of this report, quarterly reports and other corporate communications should be directed to: Investor Relations Onex Corporation 161 Bay Street P.O. Box 700 Toronto, Ontario M5J 2S1 E-mail: info@onex.com Website: www.onex.com Auditors PricewaterhouseCoopers llp 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 10, 2007 at 10:00 a.m. (Eastern Daylight Time) at Scotiabank Paramount Toronto Theatre 259 Richmond Street West Toronto, Ontario. Typesetting and copyediting by Moveable Inc. www.moveable.com Printed in Canada 100 Onex Corporation December 31, 2006

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