OncoCyte Annual Report 2006

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FY2006 Annual Report · OncoCyte

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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

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

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%

286%

23%

US$ 8,471

US$ 1,208

US$ 1,758

C$ 491

US$ 584

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

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.

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

U.S.
Canada
Europe
Other

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

U.S.
Canada
Europe
Other

–
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

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

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

460

–(a)

US$ 1,695

US$

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

2005

$ 806

(333)

144

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

(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)

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

138

–

426

118

(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

(1)

170

$ 28

–

(5)

$ (5)

427

(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-

(6)

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

–

560

191

$ 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

2005

$ 193

$ 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)

103

(915)

2005

$ 53

(44)

–

(16)

(1)

(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

(176)

1,307

1,110

(24)

(1)

–

(11)

(7)

(16)

921(b)

894

(70)

–

(4)

(174)

108

(794)

(295)

operating companies

(830)

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

$ –

–

(2)

–

(15)

(3)

–

2005

Onex’ share
of earnings
(loss)

Gain, net
of tax

Total

–

$ (67)

(1)

(3)

–

(7)

–

(1)

(3)

–

(7)

–

Total

$ 615

–

(5)

–

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)

(6)

(93)

(6)

–

(3)

(10)

(72)

–

(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)

(88)

–

Operating earnings

$ 327

$ 205

Foreign exchange gain (loss)

Stock-based compensation

Amortization of intangible assets

and deferred charges

(470)

(33)

(94)

–

(8)

(22)

(67)

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)

Earnings before income taxes,

non-controlling interests and

discontinued operations

$ 936

$ 55

Recovery of (provision for) income taxes

Non-controlling interests

(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

(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

2006

$ 30

121

2005

Change ($)

$ 61

$ (31)

–

$ 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

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%
–
–
–
–

70%
–
26%
2%
2%

–
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

(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

$ 185

169

–

$ 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

$ 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]

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

6,486

2,623

3,798

1,818

1,050

324

16,169

4,594

1,815

$ 3,141

–

970

4,164

–

3,618

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

(634)

–

1,307

(292)

–

(10)

(3)

1,110

(24)

(830)

256

746

2005

$ 15,451

(13,732)

(913)

806

(333)

(81)

(223)

144

(35)

(44)

921

(252)

(6)

(3)

(5)

894

(70)

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%

97%

89%

100%

–

13%

27%

68%

90%

22%

20%

29%

22%

–

85%

30%

–

77%

79%

100%

89%

100%

97%

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

–

214

(59)

(101)

(37)

–

799

817

(13)

(688)

116

(16)

–

125

–

116

288

(79)

(38)

171

–

$ 116

1,219

1,511

615

373

2,714

6,569

(2,827)

(3,164)

578

(10)

–

116

(3)

(8)

105

–

Interest in net assets acquired

$ 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

111

251

(28)

–

(117)

106

(18)

609

111

311

466

1,516

(304)

–

(940)

272

(6)

168

642

–

743

1,591

(140)

–

(987)

464

–

198

317

622

(87)

(353)

(61)

121

(113)

451

345

932

(69)

–

(602)

261

(18)

–

113

198

(26)

(143)

(28)

–

(6)

(23)

(1)

–

Interest in net assets acquired

266

464

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

–

288

197

–

584

–

211

203

–

744

–

2006

Onex’ Share
of Earnings
(Loss)

$ –

–

(15)

(3)

–

Gain (Loss),
Net of Tax

$ 19

615

–

(2)

–

2005

Onex’ Share
of Earnings
(Loss)

Gain, Net
of Tax

Total

–

$ (1)

(1)

(67)

(3)

–

(7)

–

(67)

(3)

–

(7)

–

Total

$ 19

615

–

(5)

–

$ 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)

(39)

–

(39)

–

147

211

(14)

(1)

(16)

(162)

(1)

(18)

112

138

(71)

(1)

(7)

(79)

(91)

–

(13)

Total

139

223

394

(86)

(2)

(8)

(96)

(292)

(1)

(31)

(181)

(104)

(324)

(3)

$ 43

$ 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

–

(8)

–

(8)

(53)

–

(8)

(61)

–

122

263

–

286

–

(71)

(783)

(7)

(861)

–

(12)

(13)

–

(25)

(129)

–

127

–

(6)

–

(6)

(67)

–

(43)

–

(110)

–

$ (607)

–

(3)

–

(3)

–

(2)

–

(2)

–

155

226

–

(23)

(2)

(1)

(26)

(158)

(1)

(35)

(8)

(202)

–

101

–

132

(1)

(62)

(4)

–

(67)

(20)

–

(16)

(70)

(106)

(3)

Total

126

100

294

312

200

305

832

(1)

(172)

(789)

(8)

(970)

(298)

(13)

(110)

(86)

(507)

(132)

$ (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

–

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

–

$ 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

514

673

313

510

671

$ 1,654

$ 1,647

(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

234

247

–

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

Intangible assets comprised the following:

As at December 31

2006

2005

Intellectual property with limited life,

net of accumulated amortization

of $152 (2005 – $143)

Intangible assets with limited life,

net of accumulated amortization

of $266 (2005 – $193)

Fair Value

Intangible assets with indefinite life

925

105

288

$ 1,036

359

484

753

273

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

492

874

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

350

–

154

103

257

140

225

264

291

557

687

–

687

308

232

543

233

581

291

872

244

100

346

159

–

258

155

232

289

291

–

580

810

839

301

231

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

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

199

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

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

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)

409

(34)

2005

$ (318)

(1)

184

(98)

(24)

(70)

(72)

(24)

(79)

(70)

2006

2005

939

975

311

135

172

(27)

166

(1,101)

683

(267)

(14)

(678)

(101)

(1,060)

$ (377)

224

459

(10)

(1,050)

$ (377)

–

123

–

(983)

277

(51)

(19)

(639)

(22)

(731)

$ (454)

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:

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

173

634

2005

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

–

560

191

$ 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

193

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

–

(13)

–

166

(12)

–

(1)

–

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

Cash payments

Charges

Other adjustments

Closing balance – December 31, 2006

(122)

131

(a)

(b)

Includes Celestica $391 and Spirit AeroSystems $74.

Includes Celestica $357 and Spirit AeroSystems $70.

(8)

–

(42)

(1)

Non-cash
Charge

373

–

Non-cash
Charge

Total

$ 1,027(a)
1,027(a)

(26)

Total

485(a)
446(b)

229

(172)

175

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

(3)

–

(12)

(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

Cash payments

Charges

Other adjustments

Closing balance – December 31, 2006

(138)

141

190

189

(20)

–

145

138

(55)

–

Non-cash
Charge

472

471

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

Total

61(a)
59(b)

(15)

Total

$ 1,573

1,532

292

142

(213)

201

133

2005

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

–

Fair Value/
(Unwind Costs)

Carrying
Amount

Fair Value/
(Unwind Costs)

$ 3,889

(14)

$ 3,654

–

$ 3,665

(8)

(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

12%

48%

20%

15%

26%

11%

68%

91%

–

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

–

(13)

–

651

–

(11)

–

(15)

(2)

(651)

–

(17)

(29)

(39)

734

–

(1)

(7)

–

(7)

(2)

–

(24)

–

(10)

(4)

(13)

–

$ 910

$ 160

418

$ 976

$ 120

$ 135

$ 169

$ 147

885

$ 203

125

–

(13)

208

659

–

(11)

–

(15)

–

(659)

(1)

(17)

(32)

653

(8)

–

(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%

100%

2005

58%

40%

–

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)

–

$ (124)

$ (91)

$ (120)

$ (135)

110

(22)

(6)

(11)

–

(12)

–

Deferred benefit amount – asset (liability)

$ 241

(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

(124)

(17)

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

–

$ (26)

–

(21)

(9)

(1)

–

(67)

(29)

(1)

–

(2)

(1)

–

(19)

–

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

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

1% Increase

2005

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)

–

(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)

–

(438)

–

(31)

–

(93)

(23)

(113)

–

(3)

–

(7)

(5)

–

(60)

(25)

–

(11)

(1)

–

(594)

(33)

114

(60)

(6)

(46)

–

(1)

–

(1)

(453)

(212)

(31)

(1)

(30)

–

(3)

–

(334)

(174)

(29)

(20)

(13)

(19)

(170)

1,307

(11)

(5)

–

(16,161)

(1,087)

1,372

(370)

(91)

(339)

131

(634)

1,307

(292)

(10)

(3)

discontinued operations

(160)

(22)

105

$ 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

111

901

233

373

380

893

350

–

186

256

$ 3,266

$ 22,578

196

–

324

$ 3,841

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)

–

(28)

–

(193)

–

(1)

(19)

(2)

(28)

–

(11)

–

(42)

–

207

(72)

(19)

(66)

–

(2)

–

(2)

–

491

(392)

(28)

(41)

(3)

(25)

–

(8)

–

(4)

–

(4)

686

(420)

(194)

(36)

(12)

(22)

–

(2)

–

(9)

–

(2)

–

Other

455

(343)

(144)

(32)

(19)

(11)

(14)

–

(34)

921

(6)

–

Consolidated
Total

$ 15,451

(13,732)

(913)

806

(333)

(81)

(223)

144

(35)

(44)

921

(252)

(6)

(3)

(5)

interests and discontinued operations

(39)

(1)

(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)

827

138

965

5,637

872

185

1,005

1,966

839

169

–

2,753

1,196

873

848

860

346

198

191

260

206

–

3,369

$ 14,845

195

–

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

$ 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

(634)

–

1,307

(292)

–

(10)

(3)

1,110

(24)

(830)

256

746

(13,732)

(11,671)

(913)

806

(333)

(81)

(223)

144

(35)

(44)

921

(252)

(6)

(3)

(5)

894

(70)

827

138

(643)

276

(294)

(63)

(81)

101

(8)

(130)

(55)

108

(195)

(3)

(393)

(86)

(794)

(295)

841

(248)

283

(9,669)

(672)

268

(317)

(84)

(56)

–

(116)

–

129

(147)

(2)

(188)

(78)

(497)

(53)

269

(281)

(51)

(12,689)

(749)

769

(408)

(168)

(52)

–

142

–

(640)

(14)

(425)

–

(689)

132

575

(163)

Net earnings (loss) for the year

1,002

965

(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

1,152

0.11

5.95

6.95

227

0.11

(1.75)

0.25

293

0.11

(1.83)

(2.16)

1,044

0.11

(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